Our group company, through its Tanzanian subsidiary, would like to acquire land and set up a Liquefied Petroleum Gas (LPG) storage and bottling facility in one of Tanzania’s port cities. The cost of this facility will be more than $40 million and the construction of the same will be outsourced to a main contractor under Engineering, Procurement and Construction (EPC) terms. Tanzanian local firms will be involved, assisting with the associated civil works around the site. Under what investment regime/s may we have the LPG facility registered by the Government of Tanzania so as to be eligible for tax and other non-fisical incentives thereunder?
Tanzania offers three investment regimes under which investors may register their businesses in order to take advantage of the available tax and other non-fisical incentives.
However, you may wish to note that in view of the budgetary deficits that the Government of Tanzania is experiencing, the International Monetary Fund (IMF) advised the Government to cut back on the tax incentives given to investors.
A huge cloud hangs over the thinking and attitude of relevant regulatory bodies in granting licenses with these incentives in the future.
Be that as it is, under the Export Processing Zones Act, 2002 (“EPZ Act”), investors receive the most generous incentives compared to other investment regimes in Tanzania.
A key incentive is the corporation tax holiday for ten years in respect of the profits earned by the business. But there is a critical requirement for eligibility under the EPZ Act and that is the ability of the business to export a minimum of 80 percent of the goods produced. This investment regime is easily the first choice for investments that satisfy the licensing requirements stipulated under the EPZ Act.
The second regime under which investments may be licensed in Tanzania is provided for under the Special Economic Zones Act, 2006 (“SEZ Act”). Investment that meet, inter alia, the capital threshold requirements qualify for the license to produce goods or services for the Tanzanian local market.
Although this license does not provide for the corporation tax holiday, it exempts qualifying investors from payment of interest on foreign sourced loans from withholding tax for a period of 10 years.
The third investment regime is that which relates to investments that are issued with certificates of incentives under the Tanzania Investment Act 1997 (“TIA”). It is important to note that the certificate of incentives does not necessarily provide for any additional tax benefits apart from those already provided for under the Income Tax Act, 2004 (“ITA”); the Value Added Tax 2014 (“VAT Act”); and the Customs Act. This is contrary to the expectations of investors. In its absence, the business would still qualify for the common tax incentives under the above-mentioned tax laws.
It is useful, however, in view of the entitlement to an initial immigration quota of five persons during the set up phase of the business. The Tanzania Investment Act 1997 was enacted 22 years ago; it is an outdated law that must be revised to reflect the functions of a modern investment legal, regulatory and institutional framework.
The ITA, the VAT Act, and the Customs Act provide for a number of tax incentives applicable to all businesses in Tanzania, regardless of whether they hold the certificate of incentive, the EPZ license or the SEZ license.
Such incentives include the entitlement of all capital items purchased by the business to capital allowances, also known as tax depreciation, which reduce the taxable profits of any business entity.
Specific depreciation rates are set out in the ITA. In addition, capital goods imported into Tanzania are chargeable to import duty at the rate of zero percent.
As the construction of the LPG facility will be outsourced to a main contractor under Engineering, Procurement and Construction (EPC) terms, it is vital to note that payments made for foreign services, interest, and dividends have withholding tax implications under section 69 of the ITA.
There are also Value Added Tax (VAT) implications on payments for foreign services that are imported into Tanzania.
Unless specifically listed in the exempt supplies schedule to the VAT Act, VAT must be accounted for on the imported services by the local recipient in Tanzania.
The domestic sale and importation of LPG and LPG cylinders is exempt from VAT. Domestic sales of the same will be exempt from VAT while export sales will be taxed at the rate of zero percent.
Thus, more export sales will improve the ability of the investment to claim the input VAT in respect of imported services. But more domestic sales will limit the input VAT claims.
We hope these comments suffice for your question and we advise that you keep abreast of any relevant changes in the law.
Paul Kibuuka (firstname.lastname@example.org) is a tax and corporate lawyer, tax policy analyst and chief executive of Isidora & Company.