July 13, 2023 Tanzanian Finance Act, 2023 analysis
Executive summary On 26 June 2023, the Tanzanian Parliament passed the Finance Bill, 2023 (the Bill). On 30 June, the President assented to the Bill, which then became the Finance Act, 2023 (the Act). All changes introduced by the Act are effective from 1 July 2023, unless indicated otherwise. This Alert summarizes the key changes included in the Act as well as modifications from the Bill and the budget speech presented by the Minister for Finance and Planning. Detailed discussion Income Tax Act Change-in-control rules The Act has amended the change-in-control rules by excluding from taxation a change in underlying ownership that is either
The amendment has now excluded from tax capital investments made in a resident entity that result in a change in the underlying ownership of an entity by reason of the issuance of new shares. This is a welcome change as it should foster investment in the country. However, the amendment does not clearly address the outcome if new shares are allotted in other group entities that indirectly own the Tanzanian entity. A change is also made regarding the transfer of a membership interest. The amendment has eliminated the potential effect of double taxation in circumstances involving the direct disposal of shares in a resident entity that results in a change in the underlying ownership of the entity. However, the change does not cover shares transferred to nonresident persons. The direct transfer of shares to nonresident persons in a resident entity may still trigger change-in-control consequences where other conditions are met. Digital service tax (DST) Income tax is imposed on payments made to nonresident persons by individuals other than in the conducting of business in respect of electronic services. Further, the Act has extended the time for a nonresident person to file a tax return to the twentieth day of the month after the end of the month to which the return relates. Payments that nonresident persons receive in respect of electronic services consumed by or attributable to an individual in Tanzania are sourced in Tanzania regardless of the place of payment, provided that the consumption of the electronic services by an individual is not for business purposes. Previously, the scope of DST covered services rendered through a digital marketplace (i.e., a platform that enables direct interaction between buyers and sellers of electronic services). In addition, a nonresident person falling under the DST was required to file a return not later than the seventh day after the end of the month. The amendments will enhance a proper implementation of the DST by clarifying the scope of DST. Payments made by individuals for business purposes are excluded from DST. Income tax on realization of interest in land or building The Act introduces a 3% single installment tax on the greater of the incomings (i.e., amount derived or to be derived in realising an asset) or approved value of an asset when a resident person who lacks records showing the costs of the asset disposes of an interest in land or building. The amendment will speed up certain transactions and reduce the time typically spent in discussions with the revenue authority pertaining to costs of the assets. However, the change may also produce high tax liabilities by charging a 3% tax on the incomings or the approved value of the asset without ascertaining the cost an asset. Withholding tax The following changes have been made in relation to withholding tax requirement.
Income tax exemption The following are exempted from income tax:
Presumptive tax regime Entities engaged in the business of transporting passengers and goods are now taxed under the normal corporate income tax rules. Individuals whose turnover does not exceed 100 million Tanzanian shillings (TZS 100 million) will be taxed in accordance with the prevailing presumptive income tax rates. The Act has revised presumptive income tax rates for transporters of passengers and goods applicable to individuals whose turnover in a year do not exceed TZS 100 million. New presumptive income tax rates have also been introduced for tour service and private hire vehicles.
Value-Added Tax (VAT) Invoice requirements The following changes have been made with respect to invoice requirements:
VAT deferment on capital goods The following changes have been made with respect to VAT deferment on capital goods:
Electronic services The definition of "electronic services" has been extended to include online intermediation and online advertisement services. Zero-rated supplies A supply of locally manufactured garments made from locally grown cotton is zero rated for a period of one year from 1 July 2023 to 30 June 2024. This amendment will promote local production of cotton and manufactured garments. However, implementing the amendment may pose a challenge as it could be difficult to distinguish between garments that are locally manufactured from locally grown cotton and other garments. The period for zero rating of supplies of locally manufactured fertilizers is extended until 30 June 2024. The amendment will boost the local manufacture of fertilizers and lower the costs of farming through reduced prices of fertilizers. Input tax credit The Value Added Tax (VAT) Act has been amended to provide clarity on the timing of input tax credits. Previously, Section 69 of the VAT Act contained a reference to Section 70, which provides for computation of partial input tax credit by a taxable person who supplies both taxable and exempt supplies. However, the proper reference should have been Section 68 of the VAT Act (as currently amended by the Act), which provides for a credit for input tax. VAT exemptions Exemptions upon application to CG The CG is empowered to grant VAT exemptions on importation of the following:
Those entitled to apply for the above VAT exemptions must be local manufacturers of packaging materials of pharmaceutical products or engaged in poultry farming in mainland Tanzania and have performance agreements with the Government. Exemptions on imports and local supplies Imports and supplies of the following items are exempted from VAT:
The Act has also amended the existing exemptions in the VAT Act to align the H.S. codes with the current version of the H.S. Codes as set out in the East African Community Common External Tariff, 2022. Tax Administration Act Primary data server A "primary data server" is now defined to mean a physical, virtual or any other server that stores data created or collected by a taxable or liable person in the ordinary course of business. However, this definition contradicts the law with respect to virtual server. All persons who store data in electronic form are now required to maintain a primary data server in Tanzania effectively from 1 January 2024. The amendment has now provided some clarity that will assist in its implementation. In addition, the amendment will be effective from I January 2024 to give businesses some time to prepare and invest in Information Communication Technology (ICT) infrastructures. However, there are still uncertainties. While the Tax Administration Act requires maintaining in Tanzania a primary data server for storage of data in electronic form, the definition's reference to a virtual server suggests the possibility that the server could be outside Tanzania. Application for refund The time limit to apply for a tax refund has been extended to cover the date a tax decision or other decision giving rise to a tax overpayment is made. Previously, the time limit for an application for refund was three years from the date of payment of tax in excess. Through the above changes, the date of a tax decision or other decision (e.g., determination of objections, decisions of Tax Revenue Appeals Board, Tax Revenue Appeals Tribunal or Court of Appeal of Tanzania) that results in a tax overpayment shall be considered in determining the three-year time limit on submitting an application for refund. Storage facility The following definitions are provided with respect to a storage facility.
The above definitions provide clarity on the requirement for registering storage facilities, the kinds of storage facilities that are required to be registered, and the persons who are required to comply. After becoming law through the Finance Act, 2022, the requirement to register a storage facility was sometimes difficult to implement because definitions like these were lacking. Fine for failure to use fiscal device The following fines now apply with respect to failure to acquire or use a fiscal device or failure to demand a fiscal receipt.
Disclosure of information on contracted services An entity engaged in construction or extractive industry is now required to disclose to the CG the names of all persons contracted and subcontracted during performance of their duties or business or carrying out of any project within 30 days of executing the contract for contracted or subcontracted services. Previously, no timeline was provided for submission of the information to CG. However, the CG has not prescribed any forms or manner of submission of the information. Excise (Management and Tariff) Act Periodic adjustments Excise duty rates may be adjusted every after a period of three years from 2023/24 financial year. Previously, excise duty rates were adjusted annually depending on inflation rate or other key macro-economic indicators. The amendment will help provide certainty around the application of excise duty rates; in the previous system, the rates were adjusted annually. Adjustment of excise duty rate The Fourth Schedule to the Act has been amended to adjust excise duty rates on a variety of goods, including the following.
Vocational Education and Training Act The following changes have been made with respect to Skills Development Levy (SDL).
The above changes will reduce costs to employers. In addition, the removal of the obligation to file SDL returns for an employer who is not required to pay the levy will reduce an administrative burden for these employers. Changes in other laws The Act has also amended the following laws: Mining Act The following changes are made in the Act
Gaming Act The following terms have been defined in the Act.
Gaming licenses for operating commercial gaming undertakings are now issued to companies that have at least 5% paid-up share capital owned by Tanzanian citizens. Export Tax Act An investor whose commercial undertaking in an Export Processing Zone is the export of meat shall not be liable for an export tax on exported raw hides or skins. Electronic and Postal Communications Act The airtime levy has been removed. National Payment Systems Act The Act is amended to remove a levy on electronic transfer of money. The levy is now only applicable on electronic money withdrawal transactions. Local Government Finance Act The following changes have been made.
Local Government Authorities (Rating) Act The following changes have been made.
Road and Fuel Tolls Act The rate of road and fuel toll has been increased from TZS 413 to TZS 513 per liter of petrol and diesel. Foreign Vehicles Transit Charges Act The transit charge for a foreign-registered vehicle from a country that charges a higher rate than the one set out in the Act shall be charged at the rate applicable in that respective country. ——————————————— For additional information with respect to this Alert, please contact the following: Ernst & Young (Tanzania), Dar es Salaam
Ernst & Young Société d'Avocats, Pan African Tax — Transfer Pricing Desk, Paris
Ernst & Young LLP (United Kingdom), Pan African Tax Desk, London
Ernst & Young LLP (United States), Pan African Tax Desk, New York
Published by NTD’s Tax Technical Knowledge Services group; Carolyn Wright, legal editor | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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