This form is dominant among lawyers, accountants, architects, engineers and similar professions. Broadly, a partnership is a relationship or association of more than one person.
A business can be organized in various forms. In Tanzania, sole proprietorships and corporates are probably the most common forms of business. A partnership is another form. This form is dominant among lawyers, accountants, architects, engineers and similar professions. Broadly, a partnership is a relationship or association of more than one person. The partners. The partners can be individuals or corporate bodies.
When starting a business venture, structure or form of the business is probably one of the first decisions to be made. The structure of a business can have several implications. Tax is one of them. This article examines briefly basic issues in the taxation of partners and partnerships engaged in business in Tanzania. Both the income tax and the value-added tax.
A partnership has a dual nature. It has features most often identified with sole proprietorships. For example, a partnership essentially lacks a separate legal personality. For instance, partners are personally, jointly, and severally liable for the partnership’s debts. It has the features commonly associated with corporations. A partnership has the ability to do business in its own name and thus to enter into transactions with third parties. The partnership keeps books and records and may sue or be sued in its own name. Property may be held in the name of the partnership. This dual nature is also reflected in the way that partnerships are subjected to tax.
Value-added tax
The VAT law takes an entity approach towards partnerships. It treats partnerships as separate legal entities from its partners. So, the obligation to register for VAT lies with the partnership, if the registration requirements are met. If registered for VAT, it is the partnership that will be filing the monthly VAT returns and VAT payments (if any). Therefore, in this respect, there is no major difference between a partnership and corporate entity. The rights and obligations under the VAT law lie with the partnership, not the partners.
Income tax
For income tax purposes, partnerships can generally be viewed as fiscally transparent. They serve as mere conduits through which the partners derive their taxable income. Thus, a partnership is not taxable. But the proportionate incomes of partners in the partnership are taxable in the hands of the partners. Hence, it is the partners and not the partnership who are obliged to file income tax returns. This is unlike corporations. Corporations are obliged to file income tax returns separate from their shareholders.
This pass-through approach under the income tax law, emphasizes the partnership’s characteristic as a mere aggregation of its partners. The income tax is computed, reported, and audited solely at the partner level as though he were operating as a sole proprietor. The partnership’s sole purpose is to determine each partner’s respective share of income.
However, despite being not taxable in their own right, partnerships may have other obligations under the income tax law.
Partnerships have obligations to deduct income tax when it makes certain payments. Also, the obligations to file withholding tax returns, remit withholding tax to the tax authority and issue withholding tax certificates to customers. As an employer, a partnership will have obligation to deduct tax from its employees and remit to the tax authority. In this respect, a partnership is not different from a corporate entity.
In practice, there are cases where partnerships have filed income tax returns and apparently, the tax authority accepted the returns.
This sort of confusion probably emanates from the dual nature of partnerships. Therefore, for compliance and administrative purposes, understanding the different approaches a tax law adopts towards partnerships is paramount.
