The three bills significantly reform the extractive industry in Tanzania.
As the tax reforms brought by the Finance Act, 2017 were about to take effect, three other bills were published on 28th June 2017, including the Written Laws (Miscellaneous Amendment) Bill, 2017 (“WLMA 2017”).
The three bills significantly reform the extractive industry in Tanzania. In this article, I will only highlight two major tax reforms introduced by the WLMA 2017, whose implications will certainly go beyond the extractive industry.
Taxing the benefit of shifting of tax obligation
The value of any benefit obtained from shifting tax obligation to another person under any contractual arrangement will be taxed at 100 percent.This reform may help to counteract double non-taxation in contractual arrangements where prices are agreed on a “net of tax” basis or where tax burden is explicitly shifted to another person, without that other person recognizing the tax benefit as income. However, it is not clear whether, for the purpose of this reform, the phrase “tax obligation” is intended to have a wider meaning to also include “tax burden” or not.
Tax obligations may not necessarily include bearing the tax burden. For example, for taxes payable by withholding (e.g. tax on rent, interest and service fee), a customer (withholding agent) has an obligationto deduct the tax and remit the same to the tax authority, but the actual tax burden mainly falls on the supplier (withholdee) who, after the tax deduction, would receive a less amount of cash from his customer.
Restriction of Exporters’ VAT credits and refunds
The general VAT rule is that VAT paid on purchases of goods for the purposes of making an onward taxable supply of goods (e.g. exports) is creditable. That is, if you paid VAT of 10million shillings on purchase of inputs to make products for exports for which you are legally obliged to charge zero VAT then you, generally, have a right to claim a refund from tax authority for the VAT paid on purchase (i.e. 10 million shillings in this example). This rule works on the “destination principle”, a widely accepted international VAT principle. The principle essentially requires VAT to be collected by jurisdiction where consumption happens (e.g. importing country). In fact, the Tanzania’s new VAT law which came in 2015 was built around this same principle.
But, the proposed VAT reformsdepart from this principle. Input tax in respect ofexportation of prescribed products will no longer be creditable. The prescribed products fall the flowing five categories (i) raw minerals products; (ii) raw agricultural products;(iii) raw forestry products; (iv) raw aquatic products; and (v) raw fauna products. For raw minerals products, the changes will be effective from 20th July 2017 and for raw agricultural products the effective date is 20th July 2019 (two years later). It is not immediately clear if these two effective dates were strictly meant for the two products or it is an inadvertent omission. In the absence of specific effective date, the WLMA 2017, once assented, becomes effective on the date of its publication.
The reform will increase the cost of the listed products (due to the additional VAT cost) which may act as an incentive for local processing. It may also reduce the current problems around VAT refunds (e.g. evasions, delays etc.). However, the products have not been defined which creates uncertainties on the intended scope. For example, would agricultural products also include horticulture products? What exactly will be considered as “raw”? What would amount to a ‘raw fauna product’ – a packed but uncooked beef or a live cow? Referencing to specific HS Codes for the five products would be more helpful.