Finance Bill Update

No clarification Introduction Mining Ring-fencing on thin capitalisation or Our Budget newsletter of 9 June was Likewise, it was anticipated that mining ring- based on the speech of the Minister for amendments would be made to ring- fencing Finance. We now summarise some fencing provisions for mining additional points arising out of our companies introduced in 2010, which review of the Finance Bill 2011. Please as drafted do not appear to achieve the note that the Bill may be subject to intended result. However, the Finance further change before it is enacted as Bill does not include any such the Finance Act 2011. amendment.

Withholding tax Exemption on allowances to now apply to Special Economic Zones all payments The Budget announced an exemption

made to non- for allowances paid to employees of Several exemptions (income tax, resident Government or institutions funded by suppliers of withholding tax, stamp duty, local the Government. In relation to the communication taxes) introduced to align tax latter the Bill refers to any institution services legislation with tax reliefs set out in “whose budget is fully or substantially Export Processing Zones Act 2002 and paid out of Government budget Special Economic Zones Act 2006. subvention”. In addition, the Bill

extends the exemption on allowances

Income Tax to any “allowance payable to an employee who offers intramural

Time limit for private services to patients in a public Thin capitalisation VAT input tax hospital”.

claim reduced It was anticipated that an amendment from 12 months to 6 months would be made to the thin Withholding Tax capitalization provision introduced in

Finance Act 2010. The Finance Bill 2011 has not included any such Communication Services amendment and therefore, if not remedied before the bill becomes the There is a change to the source rules Finance Act 2011, the ambiguity as to for taxing non-resident businesses Excise duty the interpretation of the provision that supply the service of transmitting introduced on introduced in 2010 remains. messages by cable, radio, optical fibre mineral water, or satellite or electronic cider and energy communication. Previously such drinks

Tanzania Budget Review: Finance Bill Update 1

income only had a Tanzanian source if domestic source and therefore no the non-resident had apparatus tax credit can be claimed for such established in Tanzania. The Finance withholding tax. Bill removes this condition by amending the legislation to refer to Unless reversed, this change will result apparatus whether inside or outside in a significant adverse impact for the Tanzania. telecommunications sector. It will also adversely impact other businesses This change appears to have been that incur significant communications motivated by a Tax Revenue Appeals costs with non-resident entities (for Board ruling against the Tanzania example financial institutions). Revenue Authority (“TRA”) in February 2011 in the case of National International best practice is to Microfinance Bank Plc v minimise the incidence of double Commissioner General (Case No 32 of taxation so as to encourage rather 2010). than discourage cross border business. The change made is inconsistent with The effect of the change now such best practice and will increase introduced will be as follows: the cost of doing business in Tanzania. Overall, it appears to be an example of • An overseas provider of short term revenue considerations communications with no outweighing what should be longer presence or physical asset in term policy objectives. Tanzania providing such services to Tanzanian customers will now be subject to Tanzania Excise Duty withholding tax (to be deducted by his customer), and the Mineral water, cider and energy overseas provider will normally drinks now subject to excise not be able to claim credit for duty such tax in his home jurisdiction. As such the likely consequence The following items will now be will be that this additional cost subject to excise duty: will be passed back to the Tanzanian customer. Goods Old New Rate Rate The inability to claim a tax credit TZS TZS will normally arise in the scenario Per ltr Per ltr above because a common feature Mineral 0 69 of most income tax legislation is waters and that if a tax credit is to be given aerated waters for tax suffered overseas, then Cider 0 1,345 such credit will only be allowed Other 0 420 where the income in question is fermented “foreign source” income. Where beverages the income is not “foreign source” including then no tax credit is allowed. energy drinks and non- • A Tanzanian provider of alcoholic communications to overseas beverages customers using apparatus established outside Tanzania will Late payment penalty not be able to claim a tax credit for withholding tax deducted by Introduction of a late payment penalty an overseas customer as the of Bank of Tanzania lending rate + 5% change to the source rule means (consistent with basis applied to late that any such income can never payment of income tax and VAT). be foreign source income – it will now always be income with a

Tanzania Budget Review: Finance Bill Update 2

Extended time limit for TRA demands It is however disappointing to see the retention (in paragraph 8(2)) of the Previously where excise duty on goods restriction on special relief to mining was short levied or refunded in error, companies to those companies with the TRA could demand payment / mining development agreements repayment within a 12 month period. entered into before 1 July 2009. Given This right of the TRA is now extended the well publicized challenges in to excise duty on services and the time timely repayment of VAT refunds to limit is extended to 36 months. the mining sector during the period when special relief was abolished, the absence of such a relief for future Value Added Tax projects could pose a significant question mark as to their viability, Reduced time limit for input tax particularly so for large scale mining claims projects.

The time limit for claiming credit for Special relief restricted for VAT input tax is now reduced from 12 NGOs months to 6 months. The “objects and reasons” section of the Bill seeks to The Budget speech announced the justify this change on the basis that “it limitation of special relief to a narrow is … intended to check conspiracy group of NGOs. For these NGOs between auditors and taxpayers as requirements for such special relief to well as fraudulent issuance of apply will include (1) provision of a certificates of genuineness”. (The letter from the relevant District Finance Bill also provides for the Commissioner or umbrella disqualification from tax auditing of organization confirming the existence an auditor “proved to have conspired of the project or projects in question with a taxpayer to fraudulently issue (2) submission of “proof that the a certificate of genuineness”.) goods or services relieved are to be used exclusively for the purpose of the Our concern is that the likely result of project”. the reduced time limit is that taxpayers with genuine VAT input tax VAT exemption on pension credits to claim may inadvertently fall contributions victims of the time limit and thereby lose their right to claim such credits. A VAT exemption is introduced for “the payment of contributions by Mining special relief employees and employers to a social security fund or scheme”. The Paragraph 8 of the Third Schedule purpose of the exemption is unclear as (“Special Relief”) is amended to read such payments would in any case be as follows: “8(1) The importation by outside the scope of VAT. or supply to a registered and licensed explorer or prospector of goods or services to be used exclusively for Road Traffic Act exploration or prospecting activities. (2) The importation by or supply to a According to the Finance Bill the road registered and licensed mining traffic fine is to increase to TZS company which has a mining 300,000. Although this is consistent development agreement with the with the published version of the Government executed before 1st July Budget speech, the Minister when 2009”. reading the speech actually referred to a figure of TZS 50,000. We will await The effect of paragraph 8(1) is that the Finance Act 2011 for final special relief will apply to exploration confirmation on the position. or prospecting activities, whether in mining or oil and gas.

Tanzania Budget Review: Finance Bill Update 3

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Tanzania Budget Review: Finance Bill Update 4