Implications of residence status on income taxation

Wednesday October 13 2021
Taxation PIC
By Evelyn Manu

Tax is the main source of most governments’ revenue. It is through such revenue that governments can afford expenditures that foster both developmental activities and the daily running of various government bodies.

Income tax is a category of tax which includes business income, investment income and employment income. This, however, does not imply that every income that is derived from business, investment or employment is subject to income tax. Determination of income that needs to be subject to tax is based on the “residence status” of an individual or corporation.

When evaluating for income tax purposes, “Residence” status differs from “Citizenship” status. An individual could be a non-citizen and yet a resident for income tax purposes. Both a resident and a non-resident individual or company are subject to income tax but using different bases and rates.

Determination of residence status differs between that of an individual and a company. While the ordinary determination of residence status is a straight-forward matter, the tax-oriented evaluation process used is quite intricate.


Company versus individual residence status

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Companies would be regarded as resident in Tanzania if they are incorporated or formed under the laws of the United Republic of Tanzania (URT) or if the place of effective management and control of the company for a particular year was performed in the United Republic of Tanzania. On the other hand, an individual is regarded as resident in Tanzania if he or she has a permanent home in the URT and is present in the URT at any time of the year; is an employee or URT government official posted abroad; or meets the required number of days. The latter happens where one is in the URT during the financial year of income for a total of 183 days or more, or for each of the two previous financial years for days that average up to more than 122 days in each such financial year.


Taxation of residents versus non-residents

Income that forms basis for calculations of tax differs between a resident and a non-resident. While residents (both individuals and companies) are taxed based on all their incomes regardless of the place where it is earned, non-residents are taxed only on income that is earned in the URT.

One interesting area to understand relates to taxation of resident companies that have continuous losses for three consecutive years. While such companies report no profits hence nothing to tax from the income received, local tax laws require them to compute tax on their total revenue. In this case, tax laws introduce an alternative tax on revenue instead of the traditional tax imposed on profit.

In addition, looking at globalization which constantly necessitates new ways of conducting business, our local tax laws also particularly recognize the concept of “representative assessee” for income tax.


Who is a representative assessee?

A representative assessee is an agent of a non-resident individual, a non-resident company or a beneficial owner. The below two illustrations help to further clarify this concept.

As the first example, let’s use a tractor dealer. A common practice is where a local supplier of tractors derives his revenue from a commission for selling tractors that are single sourced from a foreign brand with no presence in Tanzania. In some cases, the local supplier would not stock tractors locally and only import upon a purchase order. Under such circumstances, invoices for sale of tractors are issued by a foreign vendor directly to a local customer and the local supplier earns a commission for obtaining a client and facilitating the sale. Revenue from the sale of tractors would then not be recognized in the URT rather in the foreign country. Only revenue from commissions earned would be recognized in the URT.

Another common example can be fetched from the tourism sector where a foreign tour guide with no presence in the URT earns income from a foreign tourist who is planning to visit the URT. In turn, the foreign tour guide enters an arrangement with a local tour guide for a portion of income out of total income received by themselves.


Taxation of a representative assessee for income tax purposes

Drawing from the above scenarios and other similar cases where a foreign supplier with no presence in the URT earns income in the URT, the person or company that acts as an agent to facilitate the transaction is assumed to be a representative of the foreign supplier on the revenue made in the URT and paid to the foreign supplier. This is to say, if a tourist paid a total of $20,000 to the foreign tour guide for a tour in the URT, even though the local tour guide is paid say $5,000, for purposes of calculating income tax, the local tour guide will be taxed on the revenue of $20,000 and not $5,000.

To sum it up, income tax is calculated on both resident and non-resident individuals and companies; and the bases for such calculations differ depending on the evaluation of residence status; profit status; and representative-assessee status.