Thu Nov 16 17:36:00 EAT 2017
MANAGING TAX RISKS: Will sugar escrow account work?
Sugar has over the years remained one of the topical areas in Tanzania. In 2014, Tanzania’s sugar industry was in a crisis of oversupply, specifically the supply of cheap and illegal sugar imports.
The problem left local sugar producers holding tonnes of stock. In 2016, the situation reversed and sugar became scarce forcing the prices up.
Sugar has over the years remained one of the topical areas in Tanzania. In 2014, Tanzania’s sugar industry was in a crisis of oversupply, specifically the supply of cheap and illegal sugar imports. The problem left local sugar producers holding tonnes of stock. In 2016, the situation reversed and sugar became scarce forcing the prices up.
This year, the minister for Finance and Planning amended the tax administration regulations (The Tax Administration (General) Regulations, 2016). The amendments came through the Tax Administration (General)(Amendment) Regulations, 2017 published on June 29, 2017 and became effective from 1st July 2017.
The new regulations require the Tanzania Revenue Authority (TRA) to establish and maintain an escrow account at the Bank of Tanzania (BoT). Under these new regulations, importers of industrial sugar which qualifies for import tax exemption (i.e. a duty remission) are required to deposit 15 per cent additional import tax upon the importation of industrial sugar.
Additional import tax
The import tariff book (The East African Community Common External Tariff) list sugar as one of the sensitive items. In Tanzania, importation of industrial sugar qualifies for a duty remission. However, to curb possible abuse of industrial sugar imports, an additional import tax of 15 per cent was introduced in the past. The additional import tax is refundable if the importer subsequently proves to TRA that the imported sugar was actually used for the intended industrial purpose.
One of the reasons for the duty remission for industrial sugar was to provide relief to manufacturers who use industrial sugar as part of their inputs. Logically, this augurs well with the industrialisation drive. The use of additional import tax as a control over exemption abuse negates the intended relief to the industrialists because tax refunds take time to get.
Can the new regulations speed up refunds?
Broadly, there are two reasons TRA may delay the refund to eligible importers. Firstly, the lengthy verification and approval process. And secondly, the unavailability of money for TRA to pay back the eligible importers. The establishment of the escrow account will only be able to address this second problem but not the first. The account will ensure money is always available for refund to importers.
To address the first problem, TRA needs to put in place an effective verification and approval strategy. The law requires TRA to make a refund decision within three months but practically, it takes significantly more time to get tax refunds in Tanzania. The recent tax collection statistics published in TRA website for the period July to September 2017 indicate that no tax refund has been paid. From a financing point of view, even this three-month statutory period is still painful to the taxpayers as they may have to bridge the gap with short-term finances which do not come for free.
What happened to the Tegeta Escrow Account and the famous EPA scandal should serve as good lessons to Tanzania. As per the regulations, the importers who paid additional import tax to the escrow account are entitled to refund only to the extent of the amount of industrial sugar actually used in manufacturing the intended finished product. This is fine. The regulations, however, fall short of prescribing modalities for TRA to deal with the unclaimed amounts or the amounts that for one reason or the other will never be refunded to the importers. When should TRA recognize the unclaimed amounts in the escrow account as tax revenue? What criteria will be used to determine the unclaimed amounts?
Mr Maurus is a Partner with Auditax International