The Constitution of the United Republic of Tanzania recognizes two parties under the union, namely Tanzania Zanzibar and Tanzania Mainland. With regards to tax administration, the Constitution identifies union taxes and non-union taxes. The Tanzania Revenue Authority (TRA) collects Union taxes, while the Zanzibar Revenue Board (ZRB) collects all non-union taxes in Zanzibar.
These are taxes on income imposed under the Income Tax Act 2004 and Custom duties under the East African Customs Management Act 2004. These include direct taxes e.g. employment taxes (PAYE and Skills Development Levy (SDL)), Corporate Income Tax, Individuals and withholding taxes, indirect taxes on importation regarding international trade such as import duty, Excise, VAT and other non-tax revenue administered by the Customs and Excise department.
These are taxes on domestic consumption, including Value Added Tax (VAT), Excise Duty (Local), Hotel Levy, Restaurant Levy, Tour Operation Levy, Stamp Duty, Airport Service Charge, Seaport Service Charge, Road Development Fund, Petroleum Levy, Fuel Sector Development Fund, Road License Fees, Motor Vehicle Registration fees, Driving license fees, Ministry Collections and Parastatal Contributions.
Councils under the Ministry of Local Governments and Regional Administration administer and collect tax revenue for the local systems including trade licenses, crop cess, rents, fees, fines, and penalties, etc. within their jurisdiction.
Operating a business in Zanzibar will be subject to the following taxes (which also apply to mainland Tanzania)
The entity will be required to submit to the TRA a statement of estimated tax payable for the year within 3 months from the beginning of the accounting period. This is currently being done through the online system. By strict interpretation of the law, estimates are only applicable to instalment payers (i.e. persons who expect to generate taxable income during a particular year of income). The TRA has however taken a different interpretation and any attempt not to file an estimate (if one is not expecting to generate taxable income) would be subject to penalties for late filing. To avoid issues with the TRA, taxpayers should submit nil estimates to maintain the compliance level and to avoid costs to defend a dispute with TRA on this area. A nil estimate cost nothing. Underestimation of tax is subject to interest e.g. if one estimates nil and tax becomes due at the time of submitting a relevant tax return.
Final income tax returns are mandatory in Tanzania unless specifically exempted under the Income Tax Act, 2004. In general, a final corporate income tax return is due for filing with TRA within 6 months after the end of the accounting period, with 30 days extension period subject to Commissioner’s approval. The tax rate applicable in Tanzania is 30% and late payment of taxes is subject to interest. Filing and assessments are currently being done through the online system.
A branch of a foreign company is subject to tax on repatriated income at 10%. This is in addition to the normal tax on profit (30%) corporate income tax. Branch profit tax only applies if the entity operates as a branch of a foreign entity.
If a commercial entity registers tax loss for three consecutive years, then the law imposes an AMT of 0.5% on turnover payable as alternative corporate income for the third and subsequent years showing tax losses.
Tanzania has in place Transfer Pricing (TP) regulations that govern transactions with related parties. The law requires all entities with related parties to have a transfer pricing documentation which must be available at the time of submitting a tax return. This is to support the arm’s nature of the transactions. This requirement does not apply if the entity is not commercial (e.g. a society would not generally require this). A branch is considered a separate legal entity for tax purposes so all transactions with head office must be tested if the same are at arm’s length. The penalty for non-compliance is TZS 52.5 Million.
This applies on all payments to staff (cash or benefits in kind) including staff who are paid as consultants/contractors but the substance of their relationship with the company is that of employer-employee relationship. The tax is due to TRA within 7 days after the end of the month of deduction. Late payment is subject to interest. PAYE semi-annual returns should be filed with TRA 30 days after the end of the six months calendar period. This is very important to remember due to punitive penalties on failure to comply. There has been changes to the employment tax bands in Mainland since 1 July 2020, however Zanzibar is yet to announce the changes. Given this, we still recommend that Zanzibar continues to use the old bands until further notes. This is irrespective of the fact that PAYE is a union tax matter. In mainland, PAYE compliance is done through the e-filing system.
This applies on all cash payments to staff and this is employer’s cost. This is applicable where a company has 4 or more employees. The current SDL rate is 5% and the due date to pay this to TRA is 7 days after the end of the month just like PAYE. The rate is Zanzibar is different from the one in mainland (4%). There are monthly SDL returns whose due date is same as payment date. SDL semi-annual returns have a similar compliance regime as PAYE semi-annual returns (above). Likewise, compliance on this area is through the e-filing system.
This applies at 1% on all cash costs to staff which is a cost to employer in Tanzania Mainland. WCF is not applicable in Zanzibar.
All payments to local service providers of professional services or consultancy in nature – like consultants, lawyers, auditors, etc. should be subject to WHT at 5%. This is payable to TRA 7 days after the end of the month of payment. All payments for all services to non-residents should be subject to WHT at 15% unless the rate is reduced by a double taxation treaty (DTA) that is available between Tanzania and the country where the supplier is resident. Payment to directors (directors’ fee) other than full time directors are subject to WHT at 15%. This will equally apply on payment of any fees to founder members of the society. WHT tax table below covers various payments subject to withholding tax at applicable withholding tax rates.
|TYPE OF PAYMENT||RESIDENT WHT RATE||NON-RESIDENT WHT RATE|
|Dividend||5 or 10||5 or 10|
|Natural resource payment||15||15|
|Director fees (other than full time service)||15||15|
|Money transfer commission paid to money transfer agent||10||n/a|
|Payments for goods by Government institutions||2||n/a|
Companies operating in Zanzibar are subject to Zanzibar Social Security Fund (ZSSF) for all its employees. The law requires employer to contribute 13% of employee’s basic salary and the employee contributes 7%. Non-compliance is subject to penalties.
The law in Tanzania requires that everyone should demand an EFD receipt on purchase of goods or services and one should issue an EFD receipt on sale or supply of goods or services. Zanzibar has recently introduced this requirement as this has always been applicable in mainland Tanzania. In essence, expenses not supported by EFD receipts are not recognized as deductible expenses therefore this aspect should be considered seriously to avoid losing out genuine expenses. Likewise, it is an offence to trade without issuing EFD receipts to customers.
Please note that the registrar of companies in Zanzibar has recently introduced a requirement that all entities must migrate their information into the online registration system. This is something that the entity must consider in ensuring compliance (unless the entity is registered under a registrar other than BPRA). As you may be aware, there are annual returns to be filed with the registrar every year. A copy of the audited financial statements must also be filed with the registrar of companies every year.
Loans sourced from related parties are restricted to 70% of total funding from related parties in an entity. Interest on the excess is not deductible for tax purposes. Loans from commercial banks or third parties are not restricted. However, the following must be considered for all foreign loans:
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