Can Tanzania tackle tax challenges of a digitalised global economy?

What you need to know:

Tanzania, like many other countries, is witnessing a digital transformation reflected by the rapid rise in the number of people connected to mobile services

Interestingly, there already is legislation in place to apply VAT on electronic communication services provided by non-resident companies to Tanzanian customers that are not VAT registered (therefore including private consumers). Where such companies make taxable supplies in excess of the VAT registration threshold (TZS100m), then they should appoint a tax agent (VAT representative) to account for the VAT (on behalf of the non-resident). However, although this legislation has been in place for a number of years, it has not been applied due to administrative challenges - in particular, because prior to VAT registration, an entity must first obtain a Tax Identification Number (TIN) which automatically triggers income tax registration, which is a registration these companies can not accept as they do not have a taxable presence for income tax purposes. Unlocking this administrative hiccup could deliver immediate revenue results. As for taxation on the provider, if the relevant online business is a non-resident company then income tax can only apply if either (i) it has a permanent establishment (PE) in Tanzania, or (ii) is subject to withholding tax (deducted by customers from payments). However, in practice unless the business has a place of business in Tanzania, it will not have a PE. That leaves the withholding tax as the only practical basis to generate tax - however the withholding tax obligation only applies to payments made by a corporate entity or unincorporated business, but not to payments by individuals. We all agree that the taxation of a digital economy is not only a challenge to developing countries like

On the multilateral front, recently the OECD have developed the BEPS “pillar 1” proposal that aims to address this challenge by creating a mechanism to require certain multinational enterprise (MNE) groups to pay taxes in the countries where they have users, even if they have no physical presence there. Pillar 1 applies to multinational entities (MNE) with revenue of 20 billion euros or above and profitability of above 10% which would capture some of the well known names (such as Apple, Google etc). The allocation mechanism is to identify the MNE’s residual profit (being profit in excess of the 10% base profit amount) and reallocate 25% of this to countries other than the home country using a revenue-based allocation key. However, to qualify for such allocation the relevant MNE must have recorded in-country revenue of at least 1 million euros (or 250,000 euros for countries with a GDP lower than 40 billion euros). It is unclear in practice what adoption of this approach might mean for revenues of developing countries such as Tanzania.

Can Tanzania tackle tax challenges of a digitalised global economy?

What you need to know:

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