The self-assessment system (SAS) used by most modern tax administration systems (including Tanzania), inherently, tends to push operational costs of the tax system more to the taxpayers. But under certain conditions, SAS can optimize tax collections while minimizing administration costs and taxpayer compliance costs.
We discoursed the conditions in the preceding two articles. In case, you missed the first two articles in this series, tax compliance costs (TCCs) are the expenses that a taxpayer incurs to fully accomplish his tax obligations but excluding the tax liability itself.
The TCCs may include salaries paid to employees handling tax affairs and the costs of purchasing tax-related equipment (e.g. EFD machine).
How much do you incur as a cost to handle a tax audit by the tax authority (say TRA)? Or worse, handling tax disputes from the objection stage with the tax authority to the court of appeal? The value of your time, the legal fees you may pay, and the cost of deposits or provisions.
These are the money and time that, in the absence of tax laws, would have gone into your core business, right? In this and the next article, we explore some of the business aspects that may influence TCCs.
Legal status: Are you an individual in business or a company? The choice of vehicle for doing business may affect your compliance costs. Not least your TCCs.
The income tax law, for example, requires entities (non-individuals) to have their books of accounts prepared on accrual basis (as opposed to cash basis that individuals may opt to use).
Now, the accrual basis of accounting may not be as palatable to non-accountants (think of small private companies which cannot afford to hire an accountant).
Also, unlike individuals (sole proprietorships), entities cannot account for their income tax on a presumptive basis even when their annual turnover is below 100 million shillings.
Nature of your business: What you sell (goods and services) and how you sell them (distribution model) may affect tax compliance costs. If you the goods and services that you supply are VAT exempt, there is no requirement to register for VAT.
Most businesses engaged in agriculture may fall under this category.
A telecom supplying mobile money services using agents (“wakala”) on commission basis attracts withholding tax obligations as the commissions paid to the agents are subject to a 10 per cent withholding tax. The choice of your distribution model may also affect the geographical spread of your business which may, in turn, affect your compliance footprint (see comments on location).
Location of your business: Your presence (physical or even mere digital) may trigger tax compliance obligations in the jurisdiction or area.
Cross-border supply of goods and services is a good example. Businesses operating in multiple tax jurisdictions are likely to have higher TCCs. Imagine a business (say a bank or a telecom company) operating in both Mainland Tanzania and Zanzibar.
VAT and excise tax are not among the Union matters and hence each side of the Union has its own set of tax laws.
A bank or telecom operating in both sides of the Union is likely to incur more TCCs than those operating on one side of the Union only.
Also, think of local government taxes such as a service levy. Businesses operating across Tanzania (again some banks and the telecoms) must comply with service levy obligations in almost each local government authority (LGAs) (district, town, municipal or city council) in which they have some presence (e.g. towers, ATMs, branches, etc.).
When there are over 100 LGAs in which a service levy must be paid and some documents manually filed, the TCC for service levy may be extremely punitive.