MANAGING TAX RISKS : Withholding tax system in Tanzania

Businesses and in particular, any person managing the day-to-day payments and accounts of a business, should understand their withholding tax obligations, and the cost of non-compliance. When this is not done, the business may be exposed to various tax risks including interest and penalties.

Withholding tax refers to the amount of tax retained by one person when making payments to another person in relation to goods supplied or services rendered by the payee. A person who receives or is entitled to receive a payment from which income tax is required to be withheld is a withholdee.

The person required to withhold income tax from a payment made or to be made to a withholdee is known as the withholding agent.

Withholding Tax Mechanism

Withholding tax is a mechanism by which a payer of an amount subject to withholding tax is obliged to collect an amount of income tax by applying a specified rate of tax. The person whose income tax is withheld is deemed to have paid income tax equal to the amount of tax withheld.

The Income Tax Act, 2004, CAP 332, provides a definition of the term “payment” to includethetransferofassetsor money,thetransferor decreaseofa liability,the provisionofservices,the use or availabilityforuseofmoneyoranassetandthecreationofanasset inanotherperson. The term payment is widely defined in the Income Tax Actto include other items other than transfer of money modes of payment.

Remittance of Withholding Tax and Issuance of Certificate

The withholding agent is required to remit the tax withheld within seven days from end of the calendar month in which the tax was withheld. In return the withholding agent shall provide the withholdee with a withholding tax certificate and the later will use the certificate as an evidence of tax paid by way of withholding tax.

Advantages and Importance of Withholding Tax System

i) Persons Not Required to File a Return

Withholding tax system suits a tax collection system where a payment is made toa person who is not required to file a tax return by virtue of exclusion from the requirement to file a tax return. For instance a case with employees in respect of payment of employment income.

ii) Payments Made to Non-Residents

Withholding tax is a good income tax collection system for a payment made to a non-resident whose payment is sourced from United Republic of Tanzania and who is not obliged to file a tax return.

It is thus important for a person managing various payments to be conversant with source of payments rules as provided for under the Income Tax Act as well as by way of decided cases.

iii) Preventing Tax Evasion

Withholding tax is way of combating tax evasion especially income tax on payments whose recipient thereof may not or are not required to file a tax return. The withholdee is tasked to collect the tax and remit to the tax authority.

In the absence of withholding tax agent the tax may end up not being collected.

Mr Makundi is a Partner with Auditax International