Although VAT is not charged on the services by the supplier, under this reverse charge mechanism the Tanzanian importer of services is required to step into non-resident service provider’s shoes, self-charge the VAT and declare it as if he had provided the services. PHOTO | COURTESY (FILE)
What you need to know:
While many countries around the world are trying to harmonise VAT systems to encourage cross border investments, Tanzania seems to go on a tangent.
A new VAT law is about to be introduced by the government which shall repeal the current VAT Act 1997.
The draft Bill was first issued for public and stakeholders comments towards the end of 2013 and was tabled in Parliament on the 4th of June 2014.
As it has always been the case in the past, most stakeholders’ comments about the Bill seem to have fallen on deaf ears which means that the Bill as-is presently drafted has certain provisions that will negatively impact international trade and to a great extent the Tanzanian economy.
One of the key areas which stakeholders and the business community believe the government should re-evaluate and make appropriate amendments before the VAT Act is passed by the Parliament is VAT on imported services.
Imported services refer to services received by a resident person from any place outside Tanzania.
Principally the non-resident service provider does not have a place for business in Tanzania and therefore not obliged to charge Tanzanian VAT on the services provided.
However, based on accepted international best practices most countries including Tanzania (under the current VAT Act 1997) adopt a reverse charge mechanism for accounting for VAT on such services.
Although VAT is not charged on the services by the supplier, under this reverse charge mechanism the Tanzania importer of services is required to step into non-resident service provider’s shoes, self-charge the VAT and declare it as if he had provided the services.
He is then allowed to claim that VAT as part of his input hence creating a VAT neutral effect position.
Some countries have modified reverse charge mechanism where they require the person importing the services to first pay the VAT before being allowed to claim it.
This approach has cash-flow implications for the local entity procuring the services with no real tax costs since they are allowed to claim the VAT.
While many countries around the world are trying to harmonise VAT systems to encourage cross border investments, Tanzania seems to go on a tangent.
The reverse VAT mechanism proposed in the new VAT law will result in additional tax costs of 18 per cent for persons who import services.
The requirement to declare VAT on imported services as output VAT and input VAT by the Tanzania entity procuring the services means that the Tanzania entity procuring the services will be in a VAT neutral position.
In addition with the requirement to pay output VAT on imported services before being allowed to claim it means that Tanzania entities will be forced to dig into their pockets for the 18 per cent VAT due to TRA.
This coupled with the 15 per cent withholding tax applicable on imported services makes procuring services from outside a very expensive affair.
At first glance the proposed mechanism seems to be similar to the provision under the current VAT Act.
However there are some differences. Even though under both Acts there is the requirement to account for the VAT as output and input, the current Act does not impose a requirement to first pay the output VAT before being allowed to claim it.
The requirement to treat the VAT on imported services as output VAT and the requirement to pay are mutually exclusive; a reverse charge VAT system cannot have both elements.
Having both elements means that much needed services provided by non-residents to Tanzania entities will become unaffordable.
In other jurisdictions where there is the requirement to first pay the VAT before being allowed to claim it, there is no requirement to account for the VAT as output on the VAT return.
What this means is that the Tanzania entity procuring the service reflects a VAT refund position on its VAT return which mirrors the VAT refund owed to him by the Government, and which is in keeping with accepted international best practice.
In fact Kenya used to require payment of VAT on imported services first before taxpayers can be allowed to claim it.
The requirement to pay has since been changed and only those making exempt supplies are required to pay the VAT.
Tanzania seems to be moving toward the unfortunate position in Uganda which prohibits claiming VAT on imported services and VAT becomes a cost for the local entity.
In view of the implication of this change, stakeholders and the business community at large strongly believe the Government’s intention on this is not to deny the taxpayers input tax but rather it is the wording of the provision which creates the problem.
This inadvertent error calls for the Government to evaluate the implications and amend the provision accordingly.
The requirement to treat the VAT on imported services as output VAT and the requirement to pay are mutually exclusive; a reverse charge VAT system cannot have both elements.
Basic VAT principles are generally the same across jurisdictions insofar as they are designed total final consumption in the jurisdiction where it occurs according to the destination principle.
Against the background of the strong growth of international trade in services, evidence grew that tax issues needing attention are not confined to just electronic commerce but that VAT could distort cross-border trade in services and intangibles more generally and that this situation create obstacles to business activity, hindering economic growth and distorting competition.
To avoid burdens on global trade, tax authorities and the business community have to recognise that VAT rules require greater coherence.
