TANZANIA: INCOME TAX AND VALUE-ADDED TAX ON ELECTRONIC SERVICES – REGULATIONS
In July 2022, the Minister of Finance and Planning (Minister) published the Income Tax (Registration of Non-Resident Electronic Service Providers) Regulations 2022 (Income Tax Regulations) and the Value Added Tax (Registration of Non-Resident Electronic Service Suppliers) Regulations, 2022 (VAT Regulations) (collectively Regulations). The Regulations are applicable to non-resident service providers of ‘electronic services’ following the amendment of the Income Tax Act [Cap. 332 R.E. 2019] (ITA) and the Value Added Tax Act [Cap. 148 R.E. 2019] (VAT Act) through the Finance Act 2022 (FA 2022).
Key highlights of the Regulations, which do not provide a registration threshold and will therefore apply irrespective of the turnover generated by non-resident suppliers of ‘electronic services’, follow below.
Income Tax Regulations
In alignment with the Income Tax Regulations, the ITA has been amended to:
- Introduce the following new definitions:
- ‘digital market place’ means a platform that enables direct interaction between buyers and sellers of electronic services; and
- ‘electronic service’ has the meaning ascribed to it under section 51 (2) of the VAT Act; and
- Expand the definition of the term ‘business’ by including ‘a transaction or activity carried out through the internet or an electronic means including an electronic service or transaction conducted in the digital market place regardless of the manner in which such transaction is carried out’.
Scope of services covered by the Income Tax Regulations
The ITA amendments introducing 2% income tax on non-resident suppliers of “electronic services” and the Income Tax Regulations appear to suggest that the services covered include ‘electronic services’ provided directly to consumers and indirectly through digital marketplaces. Further, the Income Tax Regulations provide a specific list of services that fall within the scope of ‘electronic services’, whose headings are identical to those provided under section 51 (2) of the VAT Act.
These services are now deemed to have a source in Tanzania and are therefore subject to income tax to the extent that respective payments are made by individuals (other than in the course of conducting business) provided that the recipient of the services is deemed to be in Tanzania as further stipulated in the Income Tax Regulations.
The Income Tax Regulations require non-resident suppliers of these services to register with the Tanzania Revenue Authority (TRA) and obtain a Taxpayer Identification Number (TIN) for the purpose of filing returns.
Non-residents who were supplying electronic services in Mainland Tanzania prior to 1 July 2022 are required to register within six months from this date, that is, before 1 January 2023.
Filing of returns and payment of tax
Returns are due for filing in a prescribed form, on or before the seventh day of the month following the month to which the return relates. Payment of tax is due on the same day. The Income Tax Regulations provide that payment should be made to a bank account designated by the Commissioner General of TRA, in Tanzania Shillings or its equivalent convertible currency using the Bank of Tanzania exchange rate prevailing on the date of payment.
Exemption from acquiring fiscal devices
Regulation 8 of the Income Tax Regulations exempts registered non-resident suppliers of ‘electronic services’ from a requirement to acquire and use Electronic Fiscal Devices (EFDs).
Interest, penalties and offences
The Income Tax Regulations set out the following penalties for non-compliance:
- Failure to pay tax on the due date is liable to interest at the statutory rate compounded monthly;
- Making false or misleading statements or omitting material facts in statements made to tax officers is liable to a penalty prescribed under section 79 of the Tax Administration Act, Cap 438, R.E 2019 (TAA) that is currently 50% of the tax shortfall where the statement or omission is made without reasonable excuse or 75% of the tax shortfall if the statement or omission is made knowingly or recklessly – this penalty may be increased on repeated non-compliance; and
- Regulation 11 of the Income Tax Regulations imposes a general offence for failure to comply with the Income Tax Regulations which is liable, upon conviction, to a fine under section 88B of the TAA that is currently between TZS 3 million and TZS 4,5 million or imprisonment for a term not exceeding three years or to both.
The VAT Regulations contain similar provisions in terms of the scope of ‘electronic services’ (type and place of supply), registration requirements, filing and payment timelines, EFD exemption and interest, offence and penalties for non-compliance. Therefore, our analysis below covers requirements that, in addition to those that are similar under the Income Tax Regulations, would apply to non-resident suppliers of ‘electronic services’ from a VAT perspective.
Scope of services covered by the VAT Regulations
Unlike the Income Tax Regulations which apply in Mainland Tanzania and Zanzibar, the VAT Regulations apply in Mainland Tanzania only. While the VAT Regulations provide a list of specific services that is similar to those provided in the Income Tax Regulations, the VAT scope as per section 51 (2) of the VAT Act covers ‘electronic services’ provided to unregistered persons – this includes both individuals and entities that are not registered for VAT in Mainland Tanzania.
Prior to the issuance of the VAT Regulations, the VAT Act required non-resident suppliers of ‘electronic services’ to register for VAT through resident VAT representatives. The FA 2022 amended the VAT Act by introducing section 64(5) in line with Regulation 4 of the VAT Regulations which now enables non-residents to register for VAT without appointing a representative. The option to register for VAT without a representative is applicable irrespective of whether or not the annual registration threshold of TZS 100 million (approx. USD 43 000) has been or will be reached.
Correction of errors
The VAT Regulations allow registered non-resident suppliers to correct errors on submitted returns pursuant to section 78 of the VAT Act. However, we note that this section deals with adjustment of minor errors, that is, errors for which the resulting net amount of VAT payable/repayable is less than TZS 1 million (approx. USD 430) and therefore it is unclear whether other errors above this threshold can also be corrected through section 78 of the VAT Act.
Input tax credit
The VAT Regulations restrict a registered non-resident electronic service supplier from claiming input tax.