Introduction of electronic filing (e-filing) system
The Revenue Authority has introduced an e-filing system for submission of various tax returns effective August 2020. The relevant returns are as follows:
(a) Statement of estimated tax payable (for both entities and individuals);
(b) Income tax returns (for both entities and individuals);
(c) Skills and Development Levy returns for employers; and
(d) PAYE returns for employers.
The e-filing system will also include submission of Value Added Tax returns which we expect to go-live soon. In line with this development there is a requirement to upgrade or purchase new Electronic Fiscal Devices which can issue invoices/receipts that can be automatically verified in the new VAT return e-filing system. The new system will only be able to detect and accept invoices which include QR codes.
For the time being, the e-filing system does not apply to taxpayers in the extractive sector. This is indeed a great development in easing the process of tax compliance in Tanzania.
Finance Act 2020
Some of the significant changes brought in by the Finance Act 2020 are:
- New taxing right on a “resident representative” applies to an agent of (i) a non-resident person or (ii) of a “beneficial owner”
- Amended definition of “associate”, including
- Reduction of the existing threshold (for control or right to income) to 25% (from 50%). There is also a room for the Commissioner, upon consideration of the nature of business or investment of a person, determine the prescribed minimum percentage.
- The part of definition which refers to ‘reasonable expectation that one party may be expected to act (other than as an employee) in accordance with the intentions of the other’ is amended to include ‘whether or not they are in a business relationship and whether such intentions are communicated or not’.
- Income tax exemption no longer applies to special economic zone operators who produce for 100% local supply.
- The turnover for primary cooperative societies eligible for exemption from income tax is now increased to TZS100m (previously TZS 50m).
- Relief for foreign exchange losses on an interest free loans is capped at a maximum of 70%.
- There is a restriction on timing of offset of brought forward tax losses after the fourth consecutive year recording tax loss.
- Contribution by entities to the AIDS Trust Fund and towards the Government’s fight against the COVID-19 pandemic qualify for full deduction for corporate income tax purposes (until when the Government announces end of COVID-19 pandemic for the contributions made towards such cause).
- A distribution by a resident trust is included as taxable income of the recipient (the trust beneficiary), and an interest in such a trust is now an “investment asset”.
- Tax free monthly threshold for employees is increased from TZS 170,000 to TZS 270,000. The tax bands have also been widened with the top tax rate of 30% now applying on income exceeding TZS 1,000,000 per month (previously TZS 720,000). The effect of these changes is to reduce tax in the current bands with the maximum cumulative tax savings of TZS 51,600.
- The SDL rate is reduced to 4% (from 4.5%) with the intention of providing relief to employers on cost of employment.
- Capital gains tax is imposed on the net gains from the realisation of licence or concessional right on a reserved land.
- Withholding tax at a rate of 10% is applicable on payment of commission to banks and digital payment agents. This is aimed at creating a level playing field to all bank operators, electronic and money transfer service operators.
- The restriction on claiming of input VAT by exporters of raw products is now removed. The purpose of this is to make such products cheaper and enhance their competitiveness in the international markets.
- Introducing a new VAT exemption on agricultural crop insurance. This measure is intended to reduce costs on agricultural crop insurance and enable farmers to insure their agricultural crops from unforeseen tragedies such as droughts and floods.
- A time limit of six months is set for the Commissioner to determine an objection.
- The following have been excluded from mandatory listing:
- Telecommunication Companies owned by Government by at least 25%. The intention is to prevent dilution to the Government interest in the telecommunication companies
- Telecommunication tower leasing companies
The above changes are effective 1 July 2020.
The Transfer Pricing Guidelines, 2020
The Transfer Pricing Guidelines 2020 (“the Guidelines”) issued on 1 July 2020 provide TRA's interpretation of the Tax Administration (Transfer Pricing) Regulations, 2018 (“the Regulations”) that were released on 21 November 2018. Some of the key considerations include:
The Guidelines seek to constrain the right to request a corresponding adjustment to be made within one month from the date of an adjustment (done by a foreign tax authority) or such time allowed in a tax treaty. In practice most of Tanzania’s double tax treaties provide a time limit of either two or three years of the first notification of the action which gives rise to taxation not in accordance with the treaty; however some treaties do not expressly state a limit.
Advance Pricing Agreements
There is now an opportunity to enter into an APA with the TRA - the Guidelines have provided the relevant procedures to follow.
Basis of charging for intercompany services
For service charges, fees should be charged by reference to actual costs incurred; and where actual costs cannot be directly determined, such costs can be determined by use of appropriate allocation keys. The Guidelines explicitly reject intercompany service fees based on budgeted costs or a percentage of turnover.
Special considerations for Intangible Properties (“IP”)
When incurring expenses or performing any development, enhancement, maintenance, protection and exploitation (DEMPE) functions which may relate to the IP owned by another company, a taxpayer needs to be compensated for such expenditures. Taxpayers need to be able to substantiate any marketing expenses they have incurred and separate “above the line” costs (i.e. those which add value to the IP) and “below the line” costs (i.e. those which directly benefit the taxpayer).
Special considerations for commodity transactions
For commodity transactions, the arm’s length price is the daily quoted spot price of the day on which the goods are shipped (as evidenced by the bill of lading or equivalent document depending on the means of transport).
Documentation requirements - information to be provided
Regulation 7 of the Regulations sets out requirements in relation to the information to be provided in the transfer pricing documentation. The Guidelines provide further detail on the expectations in this regard including in relation to: ownership and organisational structure; nature of business or industry and market conditions; controlled transactions; pricing policies; other comparability information and appropriateness of documentation.