Q&A with Isidora & Company Advocates: Taxation of charitable entities in Tanzania

Saturday August 31 2019



PAUL KIBUUKA

tax@paulkibuuka.com

PAUL KIBUUKA tax@paulkibuuka.com 

Question: What does the recent decision of the Court of Appeal of Tanzania in The School of St. Jude Limited v The Commissioner General TRA Civil Appeal No. 21 of 2018 mean for executives, managers and funders of charitable organizations in Tanzania?

Answer: Executives and managers in the non-profit sector should monitor developments in the taxation of charitable organizations registered in Tanzania in light of the recent Court of Appeal of Tanzania’s decision in The School of St. Jude Limited v The Commissioner General TRA Civil Appeal No. 21 of 2018 which reiterated the position in the tax law regarding the taxation of charities in Tanzania

Background

A non-profit organization may be exempt from income tax if it issued with a ruling by the Commissioner General under section 11 of the Tax Administration Act, 2015 (“the TAA 2015”) stating that it is a charitable organisation or religious organisation. Also, donors of tax-exempt charitable organizations may be able to take a tax deduction for their donations to the organization.

It is important to note that not all non-profit organizations are ‘charitable’ organizations within the meaning of the tax law in Tanzania.

Non-profits that wish to become recognized under section 11 of the TAA 2015 as tax-exempt charitable organizations must meet the conditions provided for under section 64(8) (a)-(c) of the Income Tax Act, 2004 (“the ITA 2004”).

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According to this provision, the non-profit must be “a resident entity of a public character” established and working to relieve poverty or distress of the public, to advance education, or to provide general public health, education, water or road construction or maintenance.

If, however, the non-profit does not meet these conditions, it will be considered as carrying on business with a view of generating and distributing profits.

In The School of St. Jude Limited case, the Appellant was dissatisfied with the decision of the Tax Revenue Appeals Tribunal (TRAT) that it was not conducting charitable business, in spite of being registered as a company limited by guarantee under the Companies Act, 2002 and providing free education to the majority of the students enrolled in the school. Accordingly, the Appellant appealed to the Court of Appeal of Tanzania (“the Court”).

The appellant argued that this decision was not in keeping with its conduct of charitable business since, first, it is registered as a company limited by guarantee not having a share capital, and second, it provides free education to 96 percent of the enrolled students using donation and sponsorships.

Therefore, the Appellant submitted that its surplus income is not profits subject to tax.

On the other hand, the Respondent, argued that the Appellant’s income is chargeable to tax because, first, the Appellant was engaging in the business of providing education to students whose tuition fees is paid for by third parties through donations, sponsorships, visitors’ contributions and other income, and second, the Appellant earns other income from bank interests and fees from a few tuition-paying students.

Having observed that the Appellant is a company limited by guarantee with no tax-exempt status ruling from the Commissioner General TRA, the main issue that the Court of Appeal of Tanzania dealt with was whether the Appellant was not carrying on its business with a view to generating profit.

The Court agreed with the argument of the Commissioner General TRA and upheld the finding of the TRAT that the Appellant was not conducting charitable business and therefore its surplus income from free education paid for by third parties and indicated in the Appellant’s bank statement was a profit from business that is chargeable to tax.

What the decision means

The Court of Appeal of Tanzania’s decision in The School of St. Jude Limited is in accordance with the existing tax law in Tanzania, and it is a clear reminder that not all non-profit organizations are charitable organizations for tax purposes.

Executives and managers of non-profit organizations in Tanzania should comply with section 11 of the TAA 2015 and meet all the conditions stipulated under section 64(8) of the ITA 2004 if their organizations are to be granted tax-exempt charitable status. It is advisable for non-profits seeking such status to seek professional help.

Because the tax-exempt charitable status may be revoked for many reasons, it is also advisable that non-profits granted with the status continue to comply with the tax law, always.

Paul Kibuuka is the managing partner of Isidora & Company Advocates. Email: paul.kibuuka@isidoralaw.co.tz Twitter: @tzpaulkibuuka