Tanzania in International Tax Law: The basic framework of Tanzania international taxation
If you’re undertaking cross-border transactions (such as financing, mergers and acquisitions, reorganisations, etc) - and also working abroad, or earning income from a foreign source (e.g. buying an investment in the Bahamas) - you probably have no less than a general insight into the international tax architecture.
But even if you’re intrigued by the possibility of gaining a better understanding of the tax implications in relation to managing profit repatriation and group intellectual property and other intangible assets or gaining a better understanding of the possible effect of the Base Erosion and Profit Shifting (BEPS) initiatives on your operations and transactions, you may not know how the international tax system will affect your economic decisions.
This is a sensitive topic in the development of effective business planning for Tanzanian individuals and entities that are looking to expand overseas or for foreign individuals and entities that are adding the Tanzanian and East African marketplace to their business strategy (see Kibuuka, Paul. ‘Why East Africa is on global investors’ radar.’ The Citizen. March 7 2018).
While tax incentives (i.e. aspects of Tanzanian tax laws offering exemptions, tax holidays, credits, investment allowances, special tax rates, and deferral of tax liability) can make investing in Tanzania more attractive, many research surveys show that, in a broad sense, tax incentives are not seen by investors as a key factor to attract inbound investment (other important issues are market characteristics, relative production costs, resource availability, and quality of the banking regulatory regime). Even so, the Tanzanian Income Tax Act, 2004 (ITA-2004) and other tax laws governing cross-border transactions are both esoteric and complex, and they entail a number of traps for the incautious investor, demanding awareness of the fundamental tax rules that apply to Tanzanian and foreign individuals and entities.
Added to that, the Tanzania Revenue Authority (TRA) and other tax administrators worldwide are more closely securitizing cross-border transactions, targeting transfer pricing and supply chains. Thus, disregarding the impact of Tanzanian tax laws and tax treaties on the taxation of cross-border transactions is foolhardy.
A simple definition of “international taxation” involves considering domestic tax laws and tax treaties to determine how transactions that implicate the taxing rights of more than one sovereign state (read: ‘cross-border’) will be taxed.
This body of law illuminates the timing of tax payments and to which sovereign state will these payment be made - and the quantum of the tax payments to be made.
Tanzania has entered into double tax agreements with other countries including Zambia, South Africa, and India in order to remedy double taxation, and the UN and the OECD have set out models in this respect.
The ITA-2004 contains standard provisions for taxing cross-border transactions. However, by virtue of section 128(1) of the ITA-2004, a tax treaty between Tanzania and the home country of a foreign investor, or a country in which a Tanzanian taxpayer does business or generates incomes, prevails over the standard provisions.
But in order to qualify for benefits under the tax treaty, a foreign individual or entity must satisfy the ‘Limitation-on-Benefits’ (LoB) provision stipulated under section 128(5) of the ITA-2004.
Therefore, casting an eye over the impacts of the international tax system on foreign individuals and companies in Tanzania (i.e. inbound transactions) and Tanzanian individuals and companies abroad (i.e. outbound transactions) requires a general understanding of how the Tanzanian tax system interacts with the systems of other countries and of the intricacies of any applicable tax treaty as well as the standard provisions set forth in the ITA-2004.
I think this is especially important, since the question of source and residence is one of the main problems in international taxation.
In Tanzania, there is a fusion of two systems: taxing worldwide income for resident persons and taxing non-resident persons on a source basis.
Accordingly, some inbound income of a non-resident individual is not taxed in Tanzania unless the individual, in any tax year, has a permanent home in Tanzania and visits Tanzania in the year or has no permanent home but is present in Tanzania for either 183 days in the year or an average of 122 days per year in the relevant year and the preceding two years.
As international tax issues rise to prominence and as tax authorities upwardly revise their tax assessments, it behooves any foreign individual or entity to request for a private ruling under section of 13(1)(a) of the Tanzanian Tax Administration Act 2015 from the TRA with regard to any transaction in Tanzania before undertaking such transaction. Such private rulings unambiguously apply to the parties of the ruling and the relevant tax authorities, and they help in limiting future tax disputes and liabilities.
Paul Kibuuka ([email protected]) is a tax and corporate lawyer, tax policy analyst and the chief executive of Isidora & Company.
