How fringe benefits are taxed?

Shabu Maurus, Tax Partner, Auditax International.There are various ways employees can be remunerated for the employment services they offer to their employers. The most common is a salary and allowances paid in monetary form. But it is also common for employers to provide some other non-monetary benefits to their employees in addition to the salaries. It is also possible (particularly in the informal sector) for employees to be purely remunerated in non-monetary terms.

Where an employer makes a payment for the personal needs of an employee through providing the employee with rights, goods or services (as opposed to money) these are called “benefits in kind”. Taxable benefits in kind typically include those benefits which are for the personal use or consumption needs of the employee.

The benefits in kind can take various forms including a housing, a company car for personal use by an employee, and an interest-free loan or a loan at an interest rate way below the market rates. It could also be airtime, data or cell phones for both business and personal use. Most of this kind of benefits are taxable but because no money goes to the employee, it is an area that some employers can easily overlook and forget their obligation to account for the pay-as-you-earn (PAYE). Of course, some employers and employees may not aware that those benefits in kind are taxable.

Not accounting for PAYE on the benefits in kind presents a tax risk to the employer and to some extent the employee. If the non-compliance is subsequently uncovered by the tax authority, the employer is likely to be assessed on the unpaid tax plus interest and penalties. To the employee, the risk is that his employer may, later on, seek to recover the amount of tax that was previously not deducted (assuming the employee is still with the same employer).  Depending on the amounts and the mode of recovery, this can be very frustrating to employee’s cash flow plans.

If PAYE is to be accounted for on the benefits in kind given to employees, first, the benefits need to be quantified in monetary terms. In general, the value of a benefit in kind is quantified according to a market value of the benefit. The market value means the amount that an independent person would have to pay in the market to receive the same good or service that the employee receives from his employer.

If for example, a manufacturer of plastic chairs decides to give each employee five chairs in a particular year, the benefit in kind to each employee will be determined by the market value of the chairs received. If a plastic chair is sold at shillings 100,000 to independent customers, then that is the market value. Hence, in this example, the benefit in kind to the employees will be quantified as shillings 500,000 and this amount needs to be included as part of employee’s income and PAYE deducted accordingly.

However, some special quantification rules apply to the provision of motor vehicles, provision of subsidized loans and provision of housing to employees. 

By Shabu Maurus, Tax Partner, Auditax International.

10 Tips for Managing TRA Tax Audit

  • Undertake tax health check/housekeeping exercise before TRA tax audit
  • Effective communication with tax officers e.g. provide information requested timely, do not provide information without thorough explanation, avoid confrontation etc.
  • Mind the timelines for responding to TRA as per tax laws
  • Ensure formal response to TRA audit findings
  • Schedule meetings to clarify on areas with disagreement
  • Resolve issues at audit findings stage before assessments are issued
  • Ensure a discussion is made with TRA on your responses
  • Ensure a final audit report is issued by TRA before assessments are issued
  • Know your rights and tax officers’ rights as per the tax laws
  • Involve a Tax Consultant

If you require support before, during or after a TRA tax audit or investigation, write to us through info@auditaxinternational.co.tz or call through +255 719878490 or +255747185156

How the corona pandemic may impact tax collections

Tanzania has recently reported cases of people with the deadly coronavirus (COVID-19). Like other countries hit by the pandemic, Tanzania is already taking several necessary steps to combat the spread of the deadly virus. Schools have been closed for a month. Social distancing and personal hygiene are highly being emphasized.  Likely, further steps will be taken. Probably depending on the rate of spread and mortality. The economic impacts of the pandemic are far-reaching. Even to countries with no reported corona cases. The pandemic is likely to affect Tanzania’s 135 trillion shillings economy. But how the economy and hence tax revenue will be affected may be difficult to accurately predict. It will depend on several factors, including measures taken locally and globally in fighting the virus.

In this fiscal year (2019/2020), Tanzania expects to collect and expend 33.1 trillion shillings. The economy (GDP) is expected to grow by 7.1 per cent this year. But it is unlikely that this budget factored in the impact of the current pandemic. And out of this budget, 19.1 trillion shillings (almost 60 per cent) is to come from tax. The total tax collected for the first half of the fiscal year is 9.2 trillion shillings. An impressive 96 per cent tax collection performance. But if the economy is affected, tax collections will also be affected. There are several ways the pandemic may affect tax revenue including the following.

International trade: The pandemic will negatively impact international trade. Movement of goods and people become more restricted as one of the measures to combat the spread of the coronavirus.  The tax collection statistics show that around 40 per cent of tax is collected from importers. It is the biggest source of tax revenue. Accordingly, the extent of decrease in the imports will determine the impact on tax revenue.

Local consumption: VAT and excise duty are the biggest consumption taxes. Mainly coming from the use of mobile phones, beverages (particularly alcoholic drinks), cigarettes and petroleum products. How will the ‘social distancing’ measure impact consumption of these products? Well, I think it will depend on the extent of social distancing. A total lockdown (which I hope is unlikely), will have more impact. With less social events and similar gatherings, consumption of beverages may go down. The use of telecoms products (data, airtime) may go up for both individuals and corporates. Whether staying at home may make smokers take more cigarettes may be difficult to tell. Consumption of fuel may also go down. But staying at home may raise the consumption of other products.

Tax compliance: The pandemic and the measures taken against it will affect individuals and businesses in several ways which may impact both the amount of tax that can be paid and the extent of tax compliance. A complete lockdown, for example, would mean no business at all and hence no tax to pay. With social distancing, filing of tax returns may be affected. If due to, say quarantine, people are unable to go to the banks or if the bankers are not working then tax-paying will be a challenge.

Tax administration: What happens if tax collectors are restricted to work or meet taxpayers? Efficient digital tax administration platforms would have been so helpful. But even in the digital world, tax administration involves people. Social distancing may hence affect tax administration.

By Shabu Maurus, Tax Partner, Auditax International.

Handling Tax Uncertainties

Shabu Maurus, Tax Partner, Auditax InternationalAdam Smith, the father of modem political economy, argued that "the tax which each individual is bound to pay ought to be certain and not arbitrary. The time of payment, the manner of payment, the quantity to be paid all ought to be clear and plain to the contributor and to every other person". Uncertainty or absence of certainty is an undesirable characteristic of a good tax system.

There are various sources of tax uncertainties. Some stem from the practices of the tax authority, including their interpretations and applications of the tax laws. Some uncertainties may come from the dispute resolution processes, such as inconsistencies in decisions and also the length of time the courts take to decided tax cases. Other uncertainties may emanate from international transactions and interactions of different tax jurisdictions with differing tax laws and principles. Legislative and tax policy design issues can also be a major source of tax uncertainty, mainly through complex and poorly drafted tax legislation and the frequency of legislative changes.

It may be practically difficult to completely avoid tax uncertainties in the tax system. So, as a taxpayer, you will most likely have to deal with tax uncertainty. In Tanzania, there are various approaches, a taxpayer may deal with tax uncertainties. Of course, the approach will depend on the nature of the specific tax uncertainty that a taxpayer wants to address. One such approach is for the taxpayer to request a private ruling from the Tanzania Revenue Authority (TRA).

In the context of tax administration in Tanzania, a private ruling is a decision of the Commissioner-General of TRA on tax issues raised by a person (normally a taxpayer or a potential taxpayer). The conditions, modalities, and the legal status of a private ruling are provided for under the tax administration law (The Tax Administration Act, Cap 438) and the accompanying regulations. The objective of a private tax ruling system which is to provide certainty to taxpayers in connection with the application and interpretation of the tax laws in Tanzania.

A private ruling properly issued binds TRA. That is, TRA cannot make subsequent tax decisions that are inconsistent with the private ruling in respect of that taxpayer for an arrangement that is a subject of that ruling. For TRA to issue a binding private ruling, a taxpayer needs to apply in writing making full disclosure of all aspects of an arrangement and ensure that arrangement, materially, proceeds as described in the application. The ruling will only be effective for the period stated in that ruling or shorter if TRA decides to revoke it. A private ruling has no binding effect to TRA with respect to other taxpayers other the one who applied for it. Most importantly, a private ruling does not have a binding effect to the taxpayer who requested it and hence that taxpayer is also restricted from challenging the ruling unless the challenge is made in respect of a tax decision made in relation to an arrangement which is the subject of the ruling.

Timely issuance of private rulings increases predictability and consistency of tax administration, which in turn provides tax certainty to taxpayers. Without certainty, neither governments nor taxpayers can effectively budget or plan for their future actions. The state benefits from tax certainty, because it will be able to know in advance the tax revenue to be collected and the timing. If there is an element of arbitrariness in a tax, it tends to encourage misuse of power and corruption.

By Shabu Maurus, Tax Partner, Auditax International.

 

 

Getting your 2020 income tax estimates right

In Tanzania, generally, an annual tax on business or investment income is payable to the tax authority in four instalments during the year of income based on estimates. A taxpayer whose income tax is payable by instalments is required to submit a statement of tax estimate (“provisional income tax return”) for the year of income to the tax authority and pay the first instalment by the end of the first quarter of the year of income. So, if you or your entity has 31st December as its year-end, it means for the year 2020, you have about two weeks to hand in your annual income tax estimates for the year. And if you estimate that some tax will be payable, then the first of four instalments will also be payable by 31st March 2020.

Section 75 of the tax administration law (The Tax Administration Act, Cap 438), essentially, requires that taxpayer’s estimates for income tax be at least 80 per cent accurate. There is a penalty (“interest”) for underestimation. The penalty will apply at statutory rate compounded monthly from the due date of the first instalment to the due date of the final tax return. So, the question is what happens if, for any reason, the bases for your estimate changes during the year? The answer is simple. You can always review your estimates during the year to ensure that at least 80 per cent accuracy is achieved. So, if there are reasons to amend the estimates, the tax law allows such amendments at any time during the year.

The accuracy of tax estimate, now than ever, poses a significant risk to taxpayers if it is not managed properly. In the past, underestimation interest would be computed based on the difference between 80 per cent of the correct income tax and the estimated amount paid by instalments during the year of income. That is if the correct income tax is finally determined to be shillings 100 million, but your estimate was shillings 79 million, then interest would be computed on shillings 1 million (i.e. 80 per cent of 100 million less 79 million estimates). But this was changed by the Finance Act, 2017.

From 1st July 2017, if your tax estimate is less than 80 accurate, then underestimation interest will be computed based on the difference between the correct income tax and the estimated amount paid by instalments during the year of income. That is if the correct income tax for the year 2020 will be finally determined as shillings 100 million, but your estimate is shillings 79 million, then underestimation interest will be computed on shillings 21 million (i.e. the correct 100 million less the estimate of 79 million). You will notice, as this example depicts, the interest computed on shillings 21 million will surely be significantly higher than interest computed on shillings 1 million.

Whilst the 20 per cent range of accuracy may seem so wide for you to miss, in practice, it may easily be missed if there are no adequate internal controls for tax. For example, income tax estimate is essentially a by-product of your estimates of income and expenses. If you get either or both two wrong, your tax estimate is also likely to be wrong. With a wrong tax estimate, you may end up paying a higher amount of income tax than what would have been paid if the proper estimate was done or pay less and get penalized. Overestimation will, unnecessarily, strain your cash flow. Underestimation of tax, as demonstrated above, will attract potentially huge underestimation interest. So, you need controls in place that will ensure tax estimate is at least 80 per cent accurate. So, after filing your estimates for the year 2020 by the end of March, you need to review your business and financial plans periodically throughout the year to test the validity of your financial and tax estimates. This is important even if the exercise does not lead to revising your provisional income tax return.

By  Shabu Maurus, Tax Partner, Auditax International.

Beware of the tax rules on inbound services

Shabu Maurus, Tax Partner, Auditax International.Services play an important role in businesses. The services may include consultancy, IT, management, training, and many others. A person undertaking business in Tanzania has the liberty to either import services or acquire them from local providers. Normally commercial and technical factors would influence the decisions. But are there possible tax implications? The answer is yes. Most notably are the withholding tax and VAT implications. Not assessing the tax implications at early stages may, later, prove to be costly to your business. From my experience, failure to apply tax laws properly on services by taxpayers is amongst the most featuring findings in tax audits. In this article, I highlight some of the VAT considerations.

Importation of goods is subject to customs clearance and if VAT applies it will be collected at the point of importation. Therefore, whether to import goods or purchase them locally makes no difference in terms of the VAT cost. However, importation of services is a challenge. Services are intangible and the traditional customs controls cannot be applied. The VAT on services cannot be collected by customs. Therefore, it may be cheaper to import services than purchasing locally. However, the VAT law (The VAT Act, Cap.148) has been designed with rules that serve to achieve some degree of neutrality. And failure to conform to the rules poses a significant VAT risk to your business.

Taxable imported services: These refer to services consumed locally but supplied by a foreign supplier and that had the same services been supplied by a local supplier VAT would have been charged at a rate other than zero. I will give two examples to illustrate this, rather, simplified definition. Imported medical services would not qualify as taxable imported services because a local supply of medical services is VAT exempt. However, local supply of IT services is taxable and hence their importation would qualify as taxable imported services. I should, perhaps, also point out that the actual definition (of imported services) in the VAT law is much more detailed with some exclusions.

VAT Registration threshold: This is the level of annual taxable turnover (taxable supply) at which registration for VAT becomes compulsory. Generally, the VAT registration threshold in Tanzania is 100 million shillings. The VAT law requires that the value of taxable imported services be considered as part of turnover when determining if a person has reached the threshold. Therefore, importation of services may trigger VAT registration. This calls for proper internal controls to track imported services and assess their implications on your VAT registration status.

VAT representative: If you are not a VAT registrant and have acquired services from a foreign supplier who is also not registered for VAT in Tanzania, then the foreign supplier is required to appoint a VAT representative in Tanzania who would charge and collect the VAT on those services. However, if the foreign supplier regularly supplies services in Tanzania, then the supplier is obliged to register for VAT.

Reverse charge procedure: If you are a VAT registrant (taxable person) and have acquired taxable imported services, then you may have to declare and account for VAT on the services using the "reverse charge procedure". Where a reverse charge applies for the services acquired, the person must act as if he is both the supplier and the recipient of the services. Failure to account for imported services properly may have costly implications. After six months has elapsed, the tax authority is likely to assess VAT on imported services as out tax and restrict the deduction of it as input tax.

 

By Shabu Maurus, Tax Partner, Auditax International

 

 

Handling taxman’s questions

Shabu Maurus, Tax Partner, Auditax International.As a taxpayer, tax-related enquiries from the Tanzania Revenue Authority (TRA) to you may come in many forms. An enquiry can be a question or request for information through a phone call, a text message, an email, a letter or even a one to one conversation. But some tax enquiries can be more serious. For example, audit, investigation, verification exercise, inspection, or even search of premises or your home. But, unlike enquiries from your other stakeholders, say your customers or suppliers, enquiries from a tax authority need to be handled with extra care.

Your obligations: You have various legal obligation obligations under the tax laws. The obligation to keep documents and information pertaining to your business for at least five years. The obligation to provide accurate and complete information. The obligation to grant free access, facilities and assistance to TRA. Providing false or misleading information to TRA is an offence. Failure to provide information, access, facilities or assistance may be charged as an offence for impeding tax administration.

TRA powers: You may decide not to, voluntarily, cooperate with TRA. But that may not be as helpful. Apart from your legal obligations and the possible sanctions thereof, tax laws give TRA massive powers to gather information from taxpayers or third parties. And TRA can exercise most of their powers without court orders. TRA have powers to access any of your assets, information or premises any time. The only exception is dwelling houses where a court order is required for access between 6 pm and 9 am. TRA can also use experts or officers from other government institutions such as police. TRA can also seize, retain and restrain assets or documents. TRA can also restrain persons.

Consequences: Simple tax enquires may also extend to more serious tax enquiries like a tax audit or even a tax investigation if a tax crime is suspected. Tax enquiries may not necessarily end in a tax liability. But most of the enquiries will do. Especially if they are not handled carefully. Either a new tax liability or an amended one. Even in cases where TRA is unable to gather information from you, TRA can use third-party information or use their best judgment to estimate tax liability. Again, TRA has massive powers to collect taxes. They have various tools at their disposal to collect the tax directly from you the taxpayer. In this respect, TRA can create a charge over your assets, sell your charged assets, restrain your assets or even restrain you if you are likely to flee. TRA is also empowered to collect from third parties. If you are an entity, TRA can collect the outstanding tax from managers or directors of the entity. TRA can also collect your debtors, guarantors, receivers or liquidators and agents.

Your rights: Despite the massive powers given to TRA, as a taxpayer you also have some rights. TRA, with limited exceptions, is obliged to treat information collected from you as “secret and confidential”. In the course of a tax enquiry, you may decide to be represented or assisted by your tax consultant. You may decide not to cooperate with TRA officials if they fail to properly identify themselves. You also have a right to reasonable compensation for lost or damaged documents, assets or sample retained by TRA. There is also a statute of limitation where TRA is barred from amending your tax return after five years.

By Shabu Maurus, Tax Partner, Auditax International.

Of the stamp tax on tenancy

Shabu Maurus, Tax Partner, Auditax International.Managing tax risks is an important part of business or organization management. And understanding the various tax risks facing your business or organization is a key step in managing the risks. To understand the task risks, you need to understand at least the basics of the various taxes that are applicable in the jurisdiction(s) you are operating.  In this article, I highlight some of the basics of the stamp duty applicable in Tanzania. Specifically, as it applies to lease agreements.

Stamp duty applies to instruments specified in the stamp duty law (The Stamp Duty Act, Cap 189). The stamp duty law defines an “instrument” to include every document by which any right or liability is, or purports to be, created, transferred, limited, extended, extinguished or recorded. The law requires the specified instruments to be stamped within 30 days from the date of signing (execution).

Lease or rental agreements for residential or commercial buildings are probably the most common type of instruments that are subject to stamp duty. However, it is not uncommon to find most of these agreements are not stamped. From my experience, in most cases, the parties to those agreements are not aware of the stamp duty requirements. Even in cases where the parties are aware of the requirements, there is a problem of procrastination.

Who is liable to pay stamp duty on lease agreements? A rental agreement would normally have two parties, the landlord, and the tenant. The question is who, between the two, should pay the stamp duty? The stamp duty law provides flexibility on the two parties to decide who should pay. For parties that are aware of the stamp duty requirement, normally they would put a clause in the agreement to specifically assign the obligation to pay stamp duty. If the rental agreement does not specify who should pay, the stamp duty law places that obligation to the tenant. The penalty for failure to pay stamp duty can range from 25 per cent to 1,000 per cent. That is ten times the principal amount of stamp duty that was due but not paid on time!

The process: For rental agreements, the stamp duty is 1 per cent of the annual rental amount. In practice, before stamp duty is paid, TRA requires a copy of a rental agreement to be sent to the TRA offices so that they can assess the tax. TRA also requires the rental agreements to be signed and certified by an advocate or a similar legal officer (notaries). Once the assessed stamp duty has been paid, relevant copies of the rental agreement are sent to TRA for stamping. This process needs to happen within 30 days from the date the rental agreement was signed.

As a tenant of the building, you need to ensure that the rental agreement is stamped. The risk of not stamping the rental agreement is more on the tenant than the landlord, as in most cases rental agreements do not specifically assign the responsibility to the landlord.

A call for reforms: The discretional range (i.e. from 25% per cent to 1,000 per cent) the stamp duty law appears to give TRA on the amount of penalty is too wide. And the 1,000 per cent cap is extremely punitive to taxpayers. There is a need to align the penalty regime under stamp duty law with the Tax Administration Act, Cap 438.

By Shabu Maurus, Tax Partner, Auditax International.

 

Extension Period for Commenting on the Revised Tanzania Financial Reporting Standard No. 1 Governance Report

The National Board of Accountants and Auditors (NBAA) has extended period for receiving comments on the Revised Tanzania Financial Reporting Standard No. 1 Governance Report to 31 March 2020 at 1600 hours. Previously, the deadline for receiving comments was 29 October 2019.  

The proposed standard aims at building foundation on the existing best practice by providing a framework within which those responsible for Governance to not only discuss and assess the financial structure and review future prospects of the entity, but also to discuss the main factors underlying an entity’s operations, financial performance, financial position and cash flows of the entity.

The following emails Mohamed.msimu@nbaa.go.tz or saimon.kiondo@nbaa.go.tz are to be used to send comments before the due date.

Read more here.

 

Pages