Tax on retained earnings spurs heated fiscal debate in Tanzania

The minister for Finance, Dr Mwigulu Nchemba, while tabling the national budget in Parliament last week, defended the move as necessary to plug a long-standing tax gap, saying that some companies have long used reinvestment claims as a means to delay or avoid profit distribution — and consequently, tax liability.

“The measure is expected to increase government revenues by Sh130.62 billion,” Dr Nchemba told Parliament, framing the reform as an important lever for boosting domestic resource mobilisation.

To allay fears of fiscal overreach, Dr Nchemba took to social media and posted that withholding tax on retained earnings is not double taxation on the same income.

“It is an anti-avoidance rule aimed at addressing the equity principle of taxation whereby dividends are taxed, while retained earnings are not.”

Indeed, supporters of the new tax see it as a means of compelling greater transparency and accountability in corporate governance.

By discouraging indefinite profit hoarding under the guise of reinvestment, the government hopes to compel companies to justify how earnings are being used and to ensure reinvestments are both genuine and productive.

Special Seats MP, Neema Lugangira, echoed this sentiment, arguing that too many companies exploit reinvestment claims for unrelated or extravagant expenses.

“Few companies claim to be reinvesting but they are putting money in luxury cars, international vacations, and executives’ children’s school tuitions,” she said.

She called on the Tanzania Revenue Authority (TRA) to issue detailed guidelines on what constitutes valid reinvestment. She further proposed extending the six-month window for applying the tax to one year, allowing businesses adequate time to adjust.

Her call was underscored by the broader policy conversation that this tax initiative has sparked.

At the Tanzania National Business Council (TNBC), executive secretary, Dr Goodwill Wanga, welcomed the measure, noting that it aligns with the government’s broader ambition to strengthen equity in the tax regime and close regulatory loopholes.

“The President has consistently insisted on the payment of taxes on an income basis,” he said, arguing that retained earnings should not remain outside the purview of fiscal responsibility.

Dr Wanga also pointed to the ongoing work of the Presidential Commission on Tax Reforms, chaired by Amb Ombeni Sefue, as evidence of the government’s commitment to systemic tax reform.

The commission, appointed by President Samia Suluhu Hassan, has been tasked with proposing actionable recommendations to overhaul the national tax landscape in pursuit of fairness and administrative clarity.

The principle behind taxing retained earnings is not new globally.

In the United States, the Internal Revenue Service levies an Accumulated Earnings Tax to discourage profit hoarding.

South Korea and other jurisdictions have introduced similar fiscal tools to prevent unfair advantages between companies that distribute earnings and those that accumulate capital while avoiding tax.

A post by the online account @Taifareports, reshared by Dr Nchemba, summed up the rationale behind the measure: “Let’s separate political spin from fiscal design. Equity in taxation requires consistency in how profit is taxed whether distributed or hoarded.”

However, despite such affirmations, concerns have mounted over the likely ramifications of the policy, particularly among financial sector experts and seasoned policymakers.

Vunjo MP, Dr Charles Kimei, a veteran banker with over four decades of experience, issued a stern caution during parliamentary debates, warning that the tax could compromise the ability of financial institutions to accumulate capital for long-term lending.

“We should focus on building the financial system to attract current banks to open a subsidiary for long-term lending, but for that to be effective, banks must have sufficient capital,” he said.

He underlined that retained earnings are a cornerstone of bank capital and an essential buffer for future growth.

“Now, what surprises me is that we have put a 10 percent tax on retained earnings,” he added.

He warned that the cumulative income tax burden could reach 40 percent, a figure he described as unprecedented in the region.

“Our peers in the community have reduced corporate tax, going down to 25 percent or even 15 percent. We will completely remove ourselves from investment competition.”

Dr Kimei’s fears resonate strongly with many in the private sector, where retained earnings are considered vital for both internal reinvestment and bolstering financial stability.

For capital-intensive industries, in particular, such reserves are a key pillar for future expansion and resilience.

Tax advisory firms are also adopting a cautious stance. In its National Budget Bulletin, PricewaterhouseCoopers (PwC) Tanzania acknowledged the potential for fiscal tightening and administrative confusion.

The firm’s Tax and Legal Services Partner, Mr Rishit Shah, said that implementation challenges could emerge, particularly in tracking the cumulative retained earnings subjected to the new withholding tax.

“This change will potentially bring a lot of challenges from a practical perspective,” Mr Shah said, warning that unless clear mechanisms are instituted, companies may struggle with accurate reconciliations and risk future double taxation.

“We await the wording of the law in the Finance Bill to get more clarity on this change,” he added, suggesting that legislative drafting will be critical in determining whether the policy proves effective or cumbersome.