TANZANIA: FINANCE ACT 2023 – HIGHLIGHTS
The Finance Act, 2023 (FA 2023) was passed by the National Assembly on 26 June 2023 and came into operation on 1 July 2023. The FA 2023 follows the National Budget Speech for the financial year 2023/24 (Budget Speech) delivered by the Minister for Finance (Minister) in Dodoma, Tanzania on 15 June 2023. This overview provides additional observations and information on the FA 2023 and key legal amendments following the Budget Speech (our review of which is available here).
Income Tax Act (CAP 332)
The FA 2023 amends the Income Tax Act (ITA) as follows:
- Change in control provisions under section 56 – In July 2012, section 56 was amended to tax transactions involving disposals of overseas entities with direct or indirect interest in Tanzanian entities resulting in a change in control of more than 50% in a period of three consecutive years. This understanding is based on the objects and reasons set out in the Finance Bill 2012, which is stated as follows: ‘Part VII proposes amendment to the Income Tax Act, Cap. 332 with a view or widening tax base by including in tax net gains on sale of shares or securities held in a resident entity to counteract the current tax avoidance practice of selling local companies through overseas holding companies......’
Due to what seemed like ambiguous wording of section 56, the provision has been the subject of dispute between taxpayers and the Revenue Authority, specifically on whether or not direct disposals of membership interest resulting in a change in control of Tanzanian entities falls within the scope of this section – especially because such transactions are already taxed under another provision of the ITA.
The FA 2023 now excludes the following transactions from the scope of section 56: (i) ‘allotment of new membership interest of a local entity’ and (ii) transactions where the change of underlying ownership is ‘a sole result of transfer of membership interest of a resident entity to another resident entity’.
- Allotment of new membership interest – The FA 2023 intends to clarify that allotment of new shares in a Tanzanian entity resulting in more than a 50% change in control should not trigger the application of section 56 on the local entity. While this is a commendable change for an entity that is already incorporated, it is often preferable to transfer membership interest rather than issue new shares to the incoming investor due to the quantum of the amount often being offered.
- Transfers between residents – While the provision could have been more clear, the indication is that it intends to cover transfers between resident persons due to the use of the words ‘to another resident entity’. If this is the case, then the question is whether direct transfers between non-residents or between non-resident and resident persons will trigger the application of section 56 in addition to the capital gains tax payable under section 90 of the ITA. An additional observation is on the use of the words ‘is a sole result of ...’ which appears to indicate that, for the exclusion to apply, the relevant change in underlying ownership will need to have resulted entirely from transfers between residents. For instance, where there is a 51% change in underlying ownership made up of both transfers between residents and transfers between non-residents, the question is whether this exclusion will still apply to the transfer between residents, following which the only change to be considered for purposes of applying section 56 will be that relating to transfers between non-residents.
- Non-resident providers of electronic services – The FA 2023 has amended sections 69 and 90A to align with the VAT scope which covers ‘electronic services’. Prior to this amendment, these provisions made reference to services rendered through a digital marketplace. In addition, the due date for filing returns and making payment by non-resident suppliers of electronic services has been amended to the twentieth day of the following month of return – previously the due date was the seventh day of the following month. The definition of ‘gross payment’ has also been amended to clarify that it covers payments made by individuals that are not conducting business.
- Exemption on internal restructuring of mining companies – Gain derived from internal restructuring of mining companies pursuant to the requirements of a framework agreement entered between the Government and investor to form a partnership entity are exempt from income tax.
- Disposal of land and buildings without evidence of costs incurred – A person realising an interest in land or buildings who is unable to provide evidence of costs incurred will be subject to 3% income tax on the consideration or approved value of the asset, whichever is higher. This means the standard 10% tax on gain (i.e. the difference between income and cost) will not apply.
- Withholding tax on payments made to artisanal miners and holders of primary mining licences – 2% final withholding tax will apply on payments made to holders of primary mining licences and artisanal miners.
- Withholding tax on payments made in respect of verified carbon emission reduction – 10% final withholding tax will apply on payments made to a resident person in respect of verified carbon emission reduction.
- Reinstatement of the exemption for individuals to withhold tax from investments returns – The requirement for individuals to withhold tax from investments returns (i.e., dividends, interest, natural resources, rent and royalty) that was removed by the Finance Act 2022 has now been re-introduced.
- Revision of income tax regime on individual transporters – Section 65T of the ITA on taxation of individuals engaged in transportation businesses has been repealed. These individuals will now be taxed under the presumptive tax regime at fixed tax amounts.
- Exemption of NHIF investment returns – Income derived by NHIF from investment returns (i.e. interest from fixed deposits, treasury bonds, treasury bills and dividends) is now exempt from income tax.
The FA 2023 amends the Vocational Education and Training Act (CAP 82) as follows:
- Reduction of Skills Development Levy (SDL) – The rate for the SDL has been reduced from 4% to 3.5%. This is a welcome amendment as it is likely to reduce employment costs.
- Removal of filing requirement to certain employers – Employers who are not obligated to pay SDL (i.e. employers with less than 10 employees) will not be required to file monthly SDL returns.
- Minister may exempt certain employers – The Minister has been granted powers to exempt any person from the requirement to pay the levy, provided that the exemption is in the interest of the public.
Value Added Tax Act (CAP 148)
The FA 2023 amends the Value Added Tax Act as follows:
- Non-resident suppliers of electronic services – The definition of ‘electronic services’ under section 51 has been expanded to include online intermediation services and online advertisement services.
- VAT deferment on capital goods – As proposed in the Budget Speech, VAT deferment has been extended to locally manufactured ‘capital goods’. Previously, this relief was available on imported ‘capital goods’. In addition, the VAT deferment relief on imported capital goods will cease on 30 June 2026.
- Zero rating of goods – To apply a zero rate on the supply of locally manufactured garments made from locally grown cotton for one year from 1 July 2023 to 30 June 2024.
- Exemption under section 6 – Expanding the scope of VAT exemption upon application on importation of raw materials (Heading 39.02 and 39.07) used to manufacture packing materials of pharmaceutical products and importation of prefabricated structures (HS Code 9406.20.90) for use in poultry farming, to the extent that there are performance agreements with the Government.
- Exemptions under the Schedule to the VAT Act – Various items have become exempt form VAT including the sale of a house not exceeding TZS 50 million by a real estate developer; the supply of aircraft, aircraft engine, aircraft parts and aircraft maintenance to a local operator of air transportation; the supply of automobile accessories used in the conversion of motor vehicle fuel systems to natural gas or electricity to persons engaged in the conversion of such motor vehicles; and precious metals, gemstones and other precious stones at refineries, buying stations or mineral and gem houses designated by Mining Commissioner.
Excise (Management and Tariff) Act (CAP 147)
The FA amends the Excise (Management and Tariff) Act as follows:
- Inflation adjustments on specific rates – Specific rates to be adjusted for inflation and other macroeconomic indicators after a three-year period to provide stability. Previously, the Act allowed for an annual adjustment of these rates.
- Filing of excise returns by service providers – The Act has been amended to include an explicit requirement for service providers to file monthly returns. In practice, however, most services providers have been filing such returns.
- Adjustment of the specific excise duty rates of non-petroleum products – A general increase in duty rates by 20% on beer (except beer from locally grown barley) and tobacco products, and by 10% on other non-petroleum products.
- Introduction of excise duty – Amendment to introduce excise duty on some items such as: excise duty of TZS 20/kg on imported and domestically manufactured cement; excise duty of 30% on locally manufactured and imported water pipe tobacco (famously known as shisha); excise duty of 30% on locally manufactured and imported electronic cigarettes and similar personal electric vaporising devices; and excise duty of 30% on smoking pipes and cigar or cigarette holders and parts thereof.
- Reduction of excise duty – Amendment to reduce the excise duty rate on various items such as vodka.
Tax Administration Act (CAP. 438)
The FA 2023 amends the Tax Administration Act as follows:
- Penalties in relation to issuance of fiscal receipts – Amending the penalty imposed on failure to use fiscal devices to 20% of the value of sales or TZS 1 500 000 whichever is higher. Prior to this change, the penalty was between TZS 3 000 000 and TZS 4 500 000. In addition, the FA 2023 has amended the penalty for failure to demand a fiscal receipt or reporting a failure of issuing fiscal receipts to the higher of 20% of the tax evaded or TZS 30 000. Prior to this change, the penalty was between TZS 30 000 and TZS 1 500 000. The concern remains on whether the penalty of 20% of the value of sales is punitive and the possible implementation challenges due to the use of the term ‘tax evaded’, in the event of inadvertent non-compliance.
- Disclosure of contractor information by construction and extractive sectors – Entities engaged in the construction and extractive industries are now required to disclose the names of all persons contracted and sub-contracted within 30 days from the date of executing a contract. Prior to this amendment, there was no timeline within which such information should be disclosed to the Commissioner.
- Maintenance of storage facilities – The Amendment has introduced two definitions as follows: (i) ‘storage facility’ to mean warehouse, godown or any other storage facility, which is used to keep own or other persons’ goods for business purposes, provided that such warehouse, godown or other facility is not part of a shop, factory, industry or farm; and (ii) ‘owner’ to mean a person who establishes or operates and is in control of the facility and in possession of the storage facility or a person to whom the storage facility has been leased or sub-let. This amendment appears to provide clarity that on-site facilities owned for purposes of storing manufactured products do not fall within the scope of registration with the Commissioner.
- Requirement to maintain a primary data server – Amendment of section 35 to include physical, virtual or any other server under the definition of ‘primary data server’. In addition, the requirement to maintain the primary data server has been extended to 1 January 2024. There remain challenges in terms of costs associated with acquiring and maintaining the servers as well as uncertainties as to how access to such servers can be granted to the Commissioner General as required under this section.
- Application for refund of tax – The timeline to apply for a tax refund now includes the date a tax decision or other decision giving rise to a tax overpayment is made. This change will now allow taxpayers to claim confirmed overpaid tax relating to prior years within three years of the decision confirming the overpayment. Prior to this change, the timeline to apply for a refund of tax was three years from the date of overpayment, which may have been impractical where the tax position is confirmed after the expiry of three years of payment of the tax.
- Bed night levy returns – Such returns as filed under the Tourism (Tourism Development Levy) Regulations will now be subject to the provisions of the Tax Administration Act.
Gaming Act (CAP 41)
The FA 2023 amends the Gaming Act as follows:
- Licensing condition to have 5% paid up share capital owned by Tanzanians – The Gaming Act has been amended to include a requirement for the applicant of a gaming licence to have not less than 5% of its paid-up share capital owned by Tanzanians.
- Definition of gross gaming revenue (GGR) – Defining GGR to mean ‘amount of wagering or stalking placed by the players minus the collective amount of winnings paid to players’. Prior to the amendment, the Gaming Act did not provide the definition of GGR for the purpose of calculating gaming tax.
- Definition of commercial gaming undertaking – This term has been defined to mean any gaming activity that is subject to gaming tax.
National Payment Systems Act (CAP 437)
The FA 2023 amends the National Payments System Act as follows:
- Electronic money transactions levy – Removing from the scope of electronic money levy, transactions involving the transfer of electronic money and limiting the application of the levy to withdrawal transactions. The amendment is likely to boost the financial inclusion agenda in the country.
Electronic and Postal Communications Act (CAP 306)
The FA 2023 amends the Electronic and Postal Communications Act as follows:
- Development levy on airtime – Section 164A has been repealed to remove the levy that was imposed on airtime.
The Roads and Fuel Tolls Act (CAP 220)
The FA 2023 amends the Roads and Fuel Tolls Act as follows:
- Roads and fuel tolls – Increasing the roads and fuel tolls payable on diesel and petrol by TZS 100 per litre. The increased amount will be allocated the Consolidated Fund for implementation of strategic projects.
Export Tax Act (CAP 196)
The FA 2023 amends the Export Tax Act as follows:
- Export tax – The removal of export tax on raw hides and skin by exporters of meat under an Export Processing Zone.
Local Government Authorities (Rating) Act (CAP 289)
The FA 2023 amends the Local Government Authorities (Rating) Act as follows:
- Property rate – To increase property tax from TZS 12 000 to TZS 18 000 for ordinary buildings and TZS 60 000 to TZS 90 000 for each storey in a multi-storey building.
Local Government Finance Act (CAP 290)
The FA 2023 amends the LGFA as follows:
- Service levy for communications industry – The FA 2023 includes holders of electronic money issuance licences in the scope of the centralised system for the payment of a service levy.
- Collection of property rate – TRA mandate to collect the tax to cease on 31 December 2023, after which the Local Government Authorities will.
- Collection of advertisement fees – The mandate to collect and account for advertisement fees for billboards, posters and hoardings is vested in the Local Government Authorities.
Mining Act (CAP 123)
The FA 2023 amends the Mining Act as follows:
- Reduction of royalty rate – The Mining Act has been amended to lower the royalty rate imposed on salt minerals from 3% to 1% of the gross value.
- Exemption from inspection fee – The Mining Act has been amended to exempt refineries from payment of inspection fee of 1%.
Copyright and Neighbouring Rights Act (Cap 218)
The FA 2023 amends the Copyright and Neighbouring Rights Act as follows:
- Copyright levy – The FA 2023 expands the scope of 1.5% copyright levy to include vinyl, mini disc, compact disc, digital versatile disk and SD Memory.
Food Security Act (CAP 249)
The FA 2023 amends the Food Security Act as follows:
- Import and export permits for certain products – Issuance of import and export permits for wheat, barley and grape concentrate is now subject to approval by the Minister of Agriculture.