MANAGING TAX RISKS : Tax incentives provided by law

Last week we covered some aspects of tax incentives including the fact tax incentives in Tanzania are not consolidated into one tax law but rather spread into various laws including the Income Tax Act, 2004; Value Added Tax Act, 2014; East African Community Customs Management Act, 2004; Zanzibar Investment Promotion and Protection Act, 2004 and Special Economic Zones Act, 2006.

We also discussed the tax incentives provided by the Value Added Tax Act, 2014. In this article, we focus on tax incentives offered by the Income Tax Act, 2004.

Incentives provided by the Income Tax Act, 2004

Corporate Tax

Although the income tax rate for resident and non-resident companies is 30% on total income, a 25% rate is charged for three years to newly listed companies with Dar es Salaam Stock Exchange.

To qualify, a company must have at least 35% of equity share issued to the public. Total income is calculated as a sum of income from business and income from investment less allowances, expenses and losses. Expenses are allowable only to the extent that they were incurred wholly and exclusively in the production of income.

Allowances

Investors in agriculture enjoy 100 per cent capital allowance on expenditure incurred on plant and machinery, including windmills, electric generators and distribution equipment used solely in agriculture.

Other allowances include, 50 per cent initial allowance granted on expenditure of plant and machinery that is used in manufacturing and installed in the factory or providing services to tourists and fixed in a hotel.

Normally, expenditures that are capital in nature are not allowable for deduction but instead the income tax law allows deduction of depreciation allowance on ‘depreciable assets’ the annual rate of which is dependent on the class of capital expenditure.

A depreciable asset is an asset employed wholly and exclusively in the production of income of a business, which has a benefit to the business lasting more than one year, and which is likely to lose value because of wear and tear, obsolescence or the passing of time.

For tax purposes depreciable assets are categorized into eight classes.

The rates for capital allowances in the eight classes range from 37.5% for items like computers and earthmoving equipment to 5% for buildings dams, water reservoir etc.

Withholding tax exemption

The 2004 Income Tax Act requires that for certain classes of incomes, income tax is paid to the tax authority by way of withholding tax mechanism. Under the withholding tax mechanism, the income tax law places an obligation to deduct and account for income tax on the registered resident entity (“withholding agent”) making payment (including accruals) in certain business transactions such as rental, services, dividend, interest and royalty.

However, the Act grants exemption of withholding tax chargeable by foreign banks on interests payable to strategic investors as defined by Tanzania Investment Act to promote investment in Tanzania.

Tax credit

Under the Income Tax Act 2004, total income sourced in Tanzania is taxed at a rate of 30 per cent. However, the income tax Act grants tax credit to a resident person in case the tax was paid abroad on the same income.