TAX ADMINISTRATION IN TANZANIA

1.0. Introduction
1.1. Tax structure comprises:
 Tax policy;
 Tax laws;
 Tax administration

1.1.1. Tax Policy

A tax policy is a structure of taxes devised to promote the economic policies of
the Government or to prevent them working out of harmony with government
objectives

Taxation policy is aimed at:

 Promoting economic growth;
 Creating an investment friendly environment;
 Generating sufficient finances to fund government services

1.1.2. Tax administration

The role TRA in tax administration

The authority is an autonomous agency of the government of Tanzania formed in

1996 to bring efficiency in revenue administration and collection. The
establishment was a response to pressures from the IMF and World Bank for the
Government to increase its income levels by collecting more income from tax-
payers .It is a single authority which was established in order to coordinate the
efficient administration of all taxes and act as a tax policy advisor to the
Government. Therefore, taxation system in Tanzania is consolidated through the
TRA.

Structure of the TRA

The TRA is currently headed by the Commissioner General, supported by
Commissioners responsible for the three main tax areas, viz: Customs and Excise;
VAT and Income Tax. There are also other supporting commissioners for Audit
and Investigation; Information Technology and Finance and Human Resources

Functions (role) of TRA

a) To administer tax laws through:
 Assessing tax liability of companies and individuals;
 Collection;
 Accounting of the revenue
b) To monitor, oversee and coordinate all tax administration activities to ensure:
 Fairness;
 Efficiency; and
 Effective tax management

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 c) To advice the government on tax laws and administration;
d) To promote voluntary tax compliance;
e) To take effective steps to counteract fraud and tax evasion

1.2 Tax Compliance

1.2.1 Introduction
One of the problems for any tax authority is the minimization of tax evasion. This
is a particular problem in developing countries like Tanzania, as there is not a
culture of payment of taxes. Therefore, tax authority is responsible in ensuring
that tax administration environment achieves maximum revenue yield

Concept of tax compliance

In order to maximize revenue yield, tax compliance is very important, i.e. where
taxpayers either voluntarily or involuntarily abide by the requirements of the tax
laws (these tax laws are intended to achieve either revenue objectives or non-
revenue objectives of taxation)

1.2.2. Aspects of tax compliance

(i) Filing various returns and documents by the statutory due dates,
- Accompanied by reporting correct income or tax due
- Avoid understatement
(ii) Payment of the correct tax on or before the statutory due dates;
- Filing without payment is not sufficient
(iii) Tax avoidance, mitigation and planning form non-compliance
- Should be discouraged by setting accurate legal provisions

1.2.3. Types of Tax compliance

i. Voluntary compliance;
ii. Forced compliance

Voluntary compliance
Situation whereby taxpayers and their advisors faithfully abide by the
requirements of the tax laws without compulsion

Benefits:
 Saves the government the costs of revenue collection;
 Promotes the realization of other tax policy, i.e. non-revenue goals;
 Guarantees/ensure steady flow of revenue for development;
 Taxpayers avoid unnecessary penalties

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Forced tax compliance
Less superior to voluntary compliance, and may result into high cost of tax
administration

Achieving maximum voluntary compliance

 Education to taxpayers through interview; radio; TV's;

seminars/workshops/training; publications, etc.
 Assist the tax payers, e.g. tax consultants may assist in the completion of the
returns; identifying the due dates and related penalties, etc
 Cooperation of other governmental agencies, departments, etc.

Seminar Question
Discuss the role of the professional accountant in promoting voluntary
compliance in Tanzania

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 BASIC THEORY AND PRACTICES OF TAXES

Concept
Taxation comes from compulsory contributions from the targeted incomes or
consumption. The following features characterize the concept:

 A compulsory levy;
 Imposed by governments;
 It is not imposed exclusively on the country's own citizens;
 It is payable in monetary terms and currency of the state concerned;
 No direct equivalent benefits (quid pro quo relationship)

Aim of taxation
Basically, taxation is concerned with two problems:
 Financing the provision of public services such as health, education, defense,
administration of justice, etc. which a market economy cannot easily provide
 Financing various programmes which will eliminate the side effect
(imperfections) of the market economy, e.g. poverty; unemployment, etc

It is in this spirit that we need taxation for two main purposes as follows:

a) Revenue goal;
b) Non-revenue goals

Revenue goal
Taxation is a source of revenue to the government:
 Government represents the public interests and thus it is responsible on the
provision of any social and economic facilities it considers desirable and
beneficial to society
 Increased social responsibility of the government to its people inevitably calls for
stable, reliable and sustainable source of financing

Non-revenue goals
Taxation is not restricted to generating sufficient funds to fund government services.
A tax policy can be designed to achieve a number of objectives, e.g. to promote
economic growth and to create investment friendly environment.

Taxation for non-revenue goals:

i. Correction of market imperfections:
 Government provides social goods and merit goods because some of these
goods have characteristics which make them less suitable for market provision
 Government spends money on supporting the poor (market operations are
driven by profit motive)

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  Government takes steps to make up for certain failures of the market to act
successfully as a planning mechanism

ii. Income redistribution

 Taxation is needed as an attempt to raise the share of national income going to
the poor

iii. Promoting economic growth

 Through tax policies devised to promote economic policies of the government,
e.g. by creating investment friendly environment by granting favourable tax
incentives to potential investors in priority sectors
iv. Instrument of economic stabilization
 Market system (private sector) is subjected to trade cycles e.g. successive
periods of inflation, interest rate fluctuations and unemployment;
 In such periods of turbulence/crisis, market will tend to shake, and thus leaving
majority unattended
 Through taxation policy, government provides machinery for smoothing out
such cycles to avoid inflation, unemployment, etc
v. Balancing device (balance of payment)
 Attempt to achieve favourale balance of payment (Exports should be grater or
equal to Imports)
 Imposition of deliberately high customs duties on imported goods to
discourage importation while encouraging consumption of home produced
goods
 Imposition of favourable excise or export duties on goods produced in
Tanzania, but for the purpose of exportation (to encourage exportation)
vi. Instrument of changing consumption behaviour
 The ultimate impact is on economic growth
 Thus, imposition of indirect tax (VAT) can result into shifting of the behaviour
of consumers on the goods involved (e.g. one is likely to invest in agricultural
sector in order to enjoy VAT exemptions)
vii. Instrument for discouraging consumption of harmful (demerit or luxurious) goods
 These goods are over consumed because of ignorance in the community
(separation in time between point of consumption and the final effect, e.g. .gap
between time of smoking and possibility of cancer may lead to ignorant
decisions)

The attributes of a good tax policy

Ideally, a modern tax system should have the following attributes:
a) Equitable(fairness) in its distribution of the tax burden
 Ideally, taxes should be accepted by the taxpayer
 Therefore, taxes should be levied on the basis of 'fairness' principle
 Inequalities should be minimized by a progressive rates structure and the
minimum exemption policy
 Fairness or equity may either be vertical or horizontal

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 Under vertical equity, unequal taxpayers should be treated with the appropriate
degree of inequality (e.g. by using progressive tax system)
 Horizontal equity requires individuals earning the same income to pay the same
proportion of tax

b) Produce revenue
All taxes cost money to collect and are unpopular; the yield of tax therefore should at
least cover the cost of collection. Note that it is better to have a single tax with a high
yield rather than a number of taxes each having a small yield, as this will make taxes
complicated and not easily understood

c) Difficult to evade
Not only should the taxpayer know exactly when and where to taxes should be paid,
but also he should find it difficult to evade payment. Indirect taxes are easier to
collect, or difficult to evade

d) Simplicity
 Taxpayer should understand the tax system as a whole
 Tax base should be easy to identify
 Taxpayer should be able to compute the tax payable (with minimum difficulties)
 Taxpayer should be able to identify the statutory due dates and pay tax on or
before these dates

e) Convenient to the taxpayer

Evasion/non-compliance and bad debts are reduced if the time and manner of tax
payment are related to how people receive and spend their incomes. Thus it is
convenient to pay income tax through the PAYE system, and indirect taxes when
goods are bought

f) Certainty
 Imposition of any tax should yield the expected revenue in order to assist future
planning
- Certainty of tax liability assessment, e.g. where a property, car etc. is used for
business or employment and personal purpose, we need to be certain of
percentage or proportion of such property/car upon which tax will be charged

- Certainty of collecting expected revenue from those who are liable, in which
case, extent of evasion should also be taken into consideration
 Note that taxes on inelastic demand commodities (necessary/basic goods) would
be a 'certain' or 'sure' source of revenue. However, possible adverse social and
political implications from the affected people may marginalise it as a certain
source
g) Impartial between one person and another
All persons similarly placed should pay the same tax

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 h) Adjustable
A tax should be capable of variation, both up and down, according to changes in
policy

i) Automatic in stabilizing the economy

Varying the relationship between government expenditure and revenue is one of the
main tools the government uses to keep the economy on an even keel

j) Unharmful to effort and initiatives

 Government must balance its policies and direct tax levies carefully
 High rates of tax for instance may induce taxpayers to turn down paid overtime or
reduce willingness to undergo training to seek promotion
 Where there is no incentives for individuals or companies to increase their
income, the government will lose out as its tax revenues will fall
k) Consistent with government policy
 While the tax structure should not be subject to frequent change, individual taxes
must be constantly reviewed to see how they could be used to promote
government policy
 In order to reach taxation decision, government must consider the balance of
advantage, setting off any losses of revenue against expected gains
 Such issues as what tax relief should be given to exporters, whether income from
work should be taxed at lower rate, types of incentives to certain sectors etc.
should be considered

l) A minimum effect on optimum allocation of resources (neutrality)

 The imposition of an indirect tax on a particular can result in the change in
behaviour of consumers
 In the long term this will result in a distribution of consumer expenditure, and
therefore the industries producing that good
 This will in turn have an impact on employment levels and the government will
lose out in terms of income tax collected from the employees of that industry

m) Evidence
Taxpayers should be made aware of his/her tax money. Thus benefits accruing from
the tax money should be made obvious and justified accordingly

Classification and types of taxes

Taxes are classified on the basis of incidence and impact. Thus, where does the burden
finally falls, i.e. possibility of shifting the burden

a) Direct taxes
 A tax which individuals or economic entities, such as companies suffer
directly
 The burden of tax falls directly on the individual

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 Types of direct taxes:
Income taxes:
- PAYE
- Corporation tax

 PAYE
Important (stable) source of revenue to the government and is charged
progressively

 Corporation tax
Charged on the profits of companies (local and foreign) at a rate of 30%.
There are also a number of withholding taxes for those which do not pay
corporation taxes, e.g. investment incomes such as dividends; rent; interest etc

Advantages of income taxes:

- Easy to collect
- Allows an element of redistribution of income/wealth because it is progressive
in nature

Limitations
- It can be expensive to capture all employees especially those in informal
sector
- Costs of preventing evasion can be high if the system is to be effective

Local authority taxes:

- Essentially to fund local services

Type(s)

 Property taxes
This is significant urban areas (rural districts have few buildings which where
non-governmental) and the taxable base is the value of the property

b) Indirect taxes
- Tax which is not levied on an economic entity but on the activities of the
individual entity and the burden of tax may fall on the final consumer.
- Charged on the consumption of goods and services
- Tax yield depends directly on the level of consumption on the particular
commodity

Types

 Value Added Tax

- A tax on consumer expenditure

 Customs duties

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 - Levied on imported goods on an ad valorem basis (as a percentage of the
value of the good)
- May be divided into protective duties ( designed to protect home
industries from foreign competitors) and revenue duties (designed to raise
revenue for the government)
- Payable on cars, trucks, tyres, beers and other drinks

 Excise or export duties

- Charged on home produced goods
- Excise duties are both ad valorem and charged at specific rates depending
on the product
- Payable on petrol, diesel, new four wheel drive vehicles, beer, soft drinks
- Also assessed on cigarettes and a few other items that are considered
luxurious

Revision Questions

1. „However unpopular taxation may be, governments today are compelled to

impose them‟

Required:
(i) Identify various reasons as to why the Tanzania Government is
compelled to impose tax on its citizens
(ii) For each reason so identified explain:
- The tax which is used to achieve the stated objective
- How such a tax is expected to achieve the identified reason

Identify and discuss the arguments for and against indirect form of taxation CPA
REVIEW COURSE

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TOPIC: TAX AVOIDANCE AND EVASION

1.0 Tax Avoidance

1.1. Concept of tax avoidance

Is the practice and technique whereby one so arranges his business affairs such
that he pays little or no tax at all but without contravention of the tax law

 Involves those measures which reduce, postpone or relieve any liability

to income tax or alter the incidence of income tax
 Avoidance takes advantage of any weaknesses and loopholes, deficiencies
and loose clauses or vague clauses in the tax legislation
 When detected by the tax authority the only solution is to amend the law
to eliminate the weaknesses and loopholes which allow the possibility of
avoidance
 It is legally allowed/accepted, but it does not mean that the tax authority
will allow the practice
 Where an arrangement is void, the Commissioner is given power under
section 35 of the Income Tax Act, 2004, to adjust the assessable income
of any person so as to counteract any tax advantage obtained by that
person
 If a tax avoidance scheme relies on misrepresentation, deception and
concealment of the full facts, the avoidance is misnomer; and the scheme
would be more accurately described as fraud

1.2. Tax Avoidance arrangements

1.2.1. Concept and practices
Section 35 (3) of the ITA, 004 define tax avoidance arrangements to include
arrangements for the following purposes:
i) Avoidance or reduction of tax liability for any year of income
ii) Prevention or obstruction in collecting tax
iii) The benefits expected to accrue in the three years following the completion
of arrangement will result in to (i) and (ii)

Arrangements/Practices include:
 Claiming the maximum permissible deductions in any particular year [e.g.
clearing or clearing and planting permanent crops (section 15); depreciation
allowances under class I under the 3rd schedule, etc)]

 Change of form of business, e.g. from sole proprietorship to partnership or limited

liability company (directors fees/salaries are allowable expenses for income tax
purpose while partners‟ salaries are not allowable)
 Legitimate tax planning through leasing of assets instead of ownership (higher
lease rent is allowable over shorter period instead of the smaller amount of
depreciation allowances over a longer period of time)

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  Income splitting or asset transfer arrangements between person [among/to family
members (spouse, others)]

 Transfer pricing
Refers to the allocation of profits for tax and other purposes between parts of a
multinational corporate group. It is price for goods and services charged to other
entities in the same corporate structure

Etc.

1.2.2. Avoidance techniques by Multinationals/Non-residents

Multinational Corporations commonly use the following methods:

a) Transfer pricing
Involves understating selling prices or overstating purchase prices in order to
reduce taxable profits

b) Thin capitalization
Artificially increasing the debt-equity ratio so as to reduce corporate taxable
profits by reporting higher interest payments and/or converting dividend
income into interest income

c) Allocation of Central Management costs

Allocating inflated head office expenses to a subsidiary or branch in Tanzania
with an intention to benefit from intercountry tax differentials

d) Overcharging intangible assets

Overcharging intangible assets acquired from inter-related companies located
abroad

e) Charging inflated fees

Multinationals may route profits from a branch in a country with higher rates
through another branch in another country with more favourable tax rates
/incentives, i.e. a company may enjoy reduction of withholding tax on
dividends from the parent/host country to the other

f) Abuse of tax treaties("tax shopping")

e.g. remuneration splitting where one part of salary is paid separately abroad
for a job done in the host/parent country

g) Evasion on behalf of employees working abroad/Income splitting

1.3.0 Anti Tax Avoidance Provisions under ITA, 2004

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 a) Section 35: General anti-tax avoidance provision
Section 35 (1) empowers the Commissioner to make adjustment to any
arrangement where he is of the opinion that the arrangement is a tax
avoidance arrangement

b) Section 12 (2): Anti-Thin capitalization Provision

Intended to limit the amount of interest to be deducted in computing
taxable income in cases of exempt controlled resident company

c) Section 29: Indirect Payments

Commissioner is empowered to adjust payment arrangements between
associates that are difficult to identify the beneficiary, payee or payer of
such payments

d) Transfer Pricing : Section 33

Commissioner is empowered to apportion and allocate expenditure
incurred and charged between associates (arms length transactions)

e) Income Splitting : Section 34

The section empowers the Commissioner to adjust income-splitting
arrangements between persons, especially associates, which have, in his
opinion, been in order to lower the tax liability

Types of income splitting arrangements and their anti-avoidance

provisions:
 Section 43: Transfer of assets to spouse or former spouse
 Section 44: Transfer of asset to an associate for no consideration
 Section 55: Asset dealings between entities and members
 Section 57: Income or dividend stripping

2.0. Tax Evasion

Deliberate contravention of the tax law(s) in order to minimize or eliminate tax
liability (i.e. pay no or little tax by breaking the law). It involves the application of
fraudulent practices in order to minimize or eliminate tax liability; therefore it is
illegal

The starting point is always that a liability has already arisen, so concern is how to
eliminate or reduce it

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2.1. Tax evasion practices
 Making a false return of income by omitting or understating income or
overstating expenses

 Making a false statement in return affecting tax liability, e.g. false declaration

 Giving false information on any matter affecting tax liability

 Preparation or maintenance of false books of accounts or records (parallel

books)

 Application of fraud, e.g. manipulation of stock sheets and valuations,

destruction of accounting records, non-issue of receipts, etc

3.0 Major Causes of tax avoidance

Among others, the major ones are tax concessions, incentives and loopholes
existing in the tax statutes

4.0 Consequences of tax avoidance and evasion

(a) Loss of government revenue leading to non realization of budget plans and
objectives for economic and social development

(b) Non realization of other non revenue goals of taxation, e.g. inequality in
taxation (progressive versus regressive tax structures)

5.0. General causes of tax avoidance and evasion

(a) High marginal tax rates and frequent changes in tax rates

(b) Administrative inefficiency, collusion with taxpayers and bribery of tax

officials

(c) Inadequate training and experience of tax administrators coupled with lack
of exposure to business practices may limit their abilities to analyse
complex issues, e.g. international schemes

(d) Multiplicity of taxes

(e) It is difficult to comply correctly with too many taxes, e.g. due to lack of
knowledge of the detailed provisions of all the laws; too many statutory
due dates; too many returns to complete, etc.

(f) Low prospect of detection and punishment

(g) When the chance of detection is very low the more likely the taxpayers
will join the game. Ensure sufficiently deterrent punishment

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 (h) Deficiencies in the legal structure of the tax laws and complexity which
allow tax avoidance

(i) Traditional and cultural tendency to hate and evade tax (low tax morality)

(j) Wasteful manner in which the revenue is spent and lack of clear benefits
to taxpayers through improved social services

6.0. How to minimize tax avoidance and evasion

(a) Keep the marginal tax rates low, realistic and not subject to frequent
changes

(b) Promote administrative efficiency, e.g. by providing better tools,

motivating staffs, etc.

(c) Technical staff training, e.g. tax laws; accountancy; exchange visits with
other countries

(d) Avoid multiplicity of taxes by retaining the major taxes only

(e) Serious punishment to evaders and corrupted tax officials

(f) Judicious expenditure of revenue by the government because where tax

monies are well spent, may improve voluntary compliance

7.0. Revision Questions

1. Define and explain the nature of tax avoidance, and tax evasion

2. Identify general practices through which a taxpayer can eliminate or

minimize tax liability through avoidance and evasion

3. Identify any five provisions under the Income Tax Act 2004 that are
designed to combat tax avoidance, clearly stating the type of avoidance
which is intended to be fought by the said provisions

4. Identify and describe different practices that a Multinational company can

use in avoiding or evading tax in Tanzania and explain how the ITA,
2004 can be used to combat those practices (i.e. relevant provisions)

5. Explain how multinationals can use transfer pricing to evade tax

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CPA REVIEW
P. 15 TAXATION

TRANSFER PRICING UNDER THE INCOME TAX ACT, 2004

What is Transfer Pricing

Transfer pricing refers to the allocation of profits for tax and other purposes between
parts of a multinational corporate group. It is price for good and services charged to other
entities in the same corporate structure

Objectives of Transfer Pricing

a) To help multinational enterprises to identify those parts of the enterprise that are
performing well and not so well
b) Multinational enterprise could suffer double taxation on the same profits without
proper transfer pricing
c) Competition is another factor that forces multinational enterprises to engage in
transfer pricing. Thus, in order to compete MNC‟s are required to make necessary
transfer pricing arrangements in order to ensure that the entities within the
corporate structure are not only profitable but can also compete
d) It is said that this is one of the basic business requirements if they really want to
survive irrespective of the negative tax perspective it creates

Taxation perspective of transfer pricing

a) It could be used to shift profits in to low tax jurisdictions even if the MNC‟s carry
out little business activity in that jurisdiction. This leads to trade distortions, as
well as tax distortions
b) Transfer pricing can deprive governments of their fair share of taxes from global
corporations

Transfer pricing is not tax avoidance

 Transfer pricing is guided by certain laid down rules
 Only when these rules are violated the transfer pricing becomes a tax
avoidance arrangement
 For tax purpose, transfer pricing is a highly regulated business activity
that ensures that it does go beyond the acceptable levels of practice and
cause tax avoidance problems

Transfer pricing under OECD

To avoid problems associated with transfer pricing, the Organization for Economic Co-
operation and Development (OECD) countries have international guidelines on transfer
pricing that are based on the arm‟s length principle- that a transfer price should be he
same as if the two companies involved were independent, and not part of the same
corporate structure

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Note however that abuse of transfer pricing may be particular problem for developing
countries like Tanzania, as companies may take advantage of it to get round exchange
controls and to repatriate profits in a tax free form (currently, OECD Transfer Pricing
Guidelines not operational in Tanzania)

Transfer pricing and Arm‟s length principle

For taxation purpose, business transactions by MNC‟s are required to reflect the price
paid at arm‟s length, i.e. price paid to independent suppliers, those who are not part of
the corporate structure

Arm‟s Length Price

Section 33 of the ITA 2004 has adopted the arm‟s length price to be applied by associates
in all dealings between them

Arm‟s length prince is the internationally accepted transfer pricing standard which must
be applied for tax purpose by multinational enterprises and tax administrations. Basically,
it is the price at which a person would sell to another if the two persons were not
connected or related to each other

Arm’s length principle requires:

 Any income arising from an international transaction shall be compounded having
regard to arm‟s length price
 Allowance for any expenses or interest shall be determined with regards to the
arm‟s length price while determining taxable income of a subsidiary of a
multinational enterprise
 The cost or expense allocated or apportioned between two or more associated
enterprises shall be at arm‟s length price

Arguments for arm’s length principle

 Avoids the creation of tax advantages or disadvantages that would otherwise
distort the relative competitive position of the entity
 Promotes growth of international trade and investment by separating tax
considerations from economic decisions

Arguments against arm’s length principle

 MNC‟s are dealing in the integrated production of highly specialized goods
and/ or in the provision of specialized services
 Associated enterprises may engage in transactions that independent
enterprises would not undertake, e.g. sale or license of intangibles
 The principle may result into administrative burden through evaluating
significant numbers and types of cross border transactions, and verification of
the same
 Far placed geographical locations and confidentiality may cause difficulty in
obtaining comparable data.

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  Note that application of arm‟s length principle is generally based on a
comparison of the conditions in a controlled transaction with the
conditions in transactions between independent entities
 Application is also dependent of economic circumstances. The
principle may vary if the markets in which the independent and
associated enterprises are operating are not comparable

Transfer Pricing under ITA 2004

 Section 33 of ITA 2004, deals with transfer pricing arrangements
 The section requires associates to quantify, apportion and allocate amounts to
be included or deducted in calculating income between the persons as is
necessary to reflect the total income or tax payable that would have arisen for
them if arrangements were conducted at arm‟s length
 Where a person fails to apportion, quantify or allocate the said amounts, the
Commissioner has been given the power under s.33 to apportion, quantify or
allocate in the manner which he thinks is appropriate

Revision Questions
1. What is transfer pricing? Discuss how can a multinational corporation
use transfer pricing to avoid tax
2. Identify ITA provision that is intended to counter transfer pricing
arrangements. Explain the operationalization of the this provision
3. Discuss „arm‟s length principle‟ in the context of transfer pricing

CPA REVIEW
P. 15 TAXATION

TRANSFER PRICING UNDER THE INCOME TAX ACT, 2004

What is Transfer Pricing

Transfer pricing refers to the allocation of profits for tax and other purposes between
parts of a multinational corporate group. It is price for good and services charged to other
entities in the same corporate structure

Objectives of Transfer Pricing

e) To help multinational enterprises to identify those parts of the enterprise that are
performing well and not so well
f) Multinational enterprise could suffer double taxation on the same profits without
proper transfer pricing
g) Competition is another factor that forces multinational enterprises to engage in
transfer pricing. Thus, in order to compete MNC‟s are required to make necessary
transfer pricing arrangements in order to ensure that the entities within the
corporate structure are not only profitable but can also compete

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 h) It is said that this is one of the basic business requirements if they really want to
survive irrespective of the negative tax perspective it creates

Taxation perspective of transfer pricing

c) It could be used to shift profits in to low tax jurisdictions even if the MNC‟s carry
out little business activity in that jurisdiction. This leads to trade distortions, as
well as tax distortions
d) Transfer pricing can deprive governments of their fair share of taxes from global
corporations

Transfer pricing is not tax avoidance

 Transfer pricing is guided by certain laid down rules
 Only when these rules are violated the transfer pricing becomes a tax
avoidance arrangement
 For tax purpose, transfer pricing is a highly regulated business activity
that ensures that it does go beyond the acceptable levels of practice and
cause tax avoidance problems

Transfer pricing under OECD

To avoid problems associated with transfer pricing, the Organisation for Economic Co-
operation and Development (OECD) countries have international guidelines on transfer
pricing that are based on the arm‟s length principle- that a transfer price should be he
same as if the two companies involved were independent, and not part of the same
corporate structure

Note however that abuse of transfer pricing may be particular problem for developing
countries like Tanzania, as companies may take advantage of it to get round exchange
controls and to repatriate profits in a tax free form (currently, OECD Transfer Pricing
Guidelines not operational in Tanzania)

Transfer pricing and Arm‟s length principle

For taxation purpose, business transactions by MNC‟s are required to reflect the price
paid at arm‟s length, i.e. price paid to independent suppliers, those who are not part of
the corporate structure

Arm‟s Length Price

Section 33 of the ITA 2004 has adopted the arm‟s lenth price to be applied by associates
in all dealings between them

Arm‟s length prince is the internationally accepted transfer pricing standard which must
be applied for tax purpose by multinational enterprises and tax administrations. Basically,
it is the price at which a person would sell to another if the two persons were not
connected or related to each other

Arm’s length principle requires:

18
  Any income arising from an international transaction shall be compounded having
regard to arm‟s length price
 Allowance for any expenses or interest shall be determined with regards to the
arm‟s length price while determining taxable income of a subsidiary of a
multinational enterprise
 The cost or expense allocated or apportioned between two or more associated
enterprises shall be at arm‟s length price

Arguments for arm’s length principle

 Avoids the creation of tax advantages or disadvantages that would otherwise
distort the relative competitive position of the entity
 Promotes growth of international trade and investment by separating tax
considerations from economic decisions

Arguments against arm’s length principle

 MNC‟s are dealing in the integrated production of highly specialized goods
and/ or in the provision of specialized services
 Associated enterprises may engage in transactions that independent
enterprises would not undertake, e.g. sale or license of intangibles
 The principle may result into administrative burden through evaluating
significant numbers and types of cross border transactions, and verification of
the same
 Far placed geographical locations and confidentiality may cause difficulty in
obtaining comparable data.
 Note that application of arm‟s length principle is generally based on a
comparison of the conditions in a controlled transaction with the
conditions in transactions between independent entities
 Application is also dependent of economic circumstances. The
principle may vary if the markets in which the independent and
associated enterprises are operating are not comparable

Transfer Pricing under ITA 2004

 Section 33 of ITA 2004, deals with transfer pricing arrangements
 The section requires associates to quantify, apportion and allocate amounts to
be included or deducted in calculating income between the persons as is
necessary to reflect the total income or tax payable that would have arisen for
them if arrangements were conducted at arm‟s length
 Where a person fails to apportion, quantify or allocate the said amounts, the
Commissioner has been given the power under s.33 to apportion, quantify or
allocate in the manner which he thinks is appropriate

Revision Questions
1. What is transfer pricing? Discuss how can a multinational corporation
use transfer pricing to avoid tax
2. Identify ITA provision that is intended to counter transfer pricing
arrangements. Explain the operationalization of the this provision

19
 3. Discuss „arm‟s length principle‟ in the context of transfer pricing
CPA REVIEW COURSE

TOPIC: TAX PLANNING

1.0. Concept of tax planning

Is the art and technique of careful structuring one's future business transactions in
order to realize tax savings (minimization of tax liability) but without
contravention of the tax statutes

Tax planning is more closely related to tax avoidance rather than tax evasion, i.e.
both aim at minimization or realization of tax savings or the elimination of tax
liability altogether but within legal requirements

Tax planning is a continuous process during the whole year rather than a decision
to be made at the beginning or middle of the year and left to work itself out (a
series of actions or decisions may be necessary before the actual tax savings are
realized)

2.0. Tax Planning Checklist

The following guidelines are useful to any successful tax planning to minimize
tax liability

(i) Postponing the Receipt of Income

For example, membership in to tax deferral schemes (usually received in
the future) such approved pension funds, provident funds, employment
contract gratuity and other pension schemes, because future income may
be taxed at lower preferential tax rates or zero rates (exemption)

(ii) Income Splitting within family members

Through family partnership, trusts (partners are taxed at lower individual
marginal rates)

(iii) Claiming all available deductions and exemptions

Investment on bank deposits generates interest which is partly tax free.
Also dividends from a company in which the investor holds more than
25% share are tax-free

(iv) Consider the form of business organisation

There are different tax consequences for sole proprietorship, partnership
and limited liability company interms of rates, basis of charge to tax, claim
of deductions/allowances, etc

(v) Converting non deductible expenses in to tax allowable ones or

taxable income to non taxable income

20
 Where a partnership is converted to a limited liability company the
partners' salary or interest on loan will be allowed in the company as
directors fees and interest. Also, hiring instead of ownership (rent is
allowable for tax purpose)

(vi) Choosing an investment that provides a better after tax yield

Where rates are not uniform, an investor may choose the appropriate
investment, e.g. rates for small companies and large companies, different
rates between industrial sector and agricultural sector, etc. In such
circumstance, investor may choose project that offers substantial capital
deductions/allowances in the initial years of investment such as mining.
(However, other factors such as availability of capital and complexity of
investment may affect the choice)

(vii) Minimization of the taxable income through:

- Creation of company subsidiaries to take advantage of the 25% share
control to enjoy dividend exemption under section 54 of ITA 2004;
- Hiring assets instead of ownership;
- Investments which realize tax free interest

Etc.
(viii) The use of Tax Shelters
A „tax shelter‟ is a capital investment or expenditure on which the investor
(taxpayer) is entitled to claim substantial capital allowances for tax
purposes

The cost of the capital investment is normally written off within a short
period of time

Tax shelter is more applicable in the industrial, mining and manufacturing

sectors where heavy plant and machinery are required (see class I of
depreciable assets under the 3rd schedule of the act)

Note that tax shelter merely defers the tax liability in to future when the
write off of the capital cost through capital deductions claims/allowances
is exhausted, i.e. does not quite result in to complete tax exemption or
saving

(ix) Use of „Tax Havens‟

Concept
Tax havens are geographical regions or countries where the tax rates are
deliberately kept very low or zero in order to attract investors and savings
(these are disadvantaged areas due to factors such as drought, chaotic
countries/political instability, etc.). For example, Central Tanzania
regions/Dodoma, Rwanda, Sudan, etc

21
 Facilities offered
- Free remittance, i.e. transfer of cash in to and out of the
region/country is unrestricted
- Provision of efficient financial (banking and insurance), legal and
consultancy services
- No or little control or restrictions on investments
-
3.0. Revision Questions
a) What is tax planning?. Explain why tax planning is not tax
evasion
b) Explain how tax planning may be achieved through the use
of “tax shelters”
c) With practical examples, explain what is tax haven
d) “Every successful tax planning will strive to produce one of
the following: Either a deferral of tax or a saving of tax or a
combination of the two”

Explain any two planning schemes that may attain either:-

(i) Deferment of tax or
(ii) Saving of tax under any tax law of Tanzania

TOPIC: IMPOSITION OF INCOME TAX ACT

1.0. The charge to tax

Section 4 of ITA 2004 is the main charging section but not the only one. By
definition, 'charging' means imposition of income tax; or levy or subjection of
particular source of income or person to income tax

Charge to tax under section 4 is limited to:

a) Total income for a year of income
b) Repatriated income of a domestic permanent establishment (defined under
section 3) for a year of income
c) Final withholding tax/payments during the year (those which satisfies the
needs of the Commissioner and thus needs no further assessment, i.e. are
regarded as final, e.g. interest from savings bank account)

2.0. The concept of total income

Subsection (1) of section (5) of the act defines 'total income' as the sum of the
person's chargeable income from business, investment and employment, less any
deduction under section 61(i.e. retirement contribution to approved retirement
fund)

22
2.0. Points to note
a) Tax is charged for any year of income, which for tax purpose means the
'calendar year' period of 12 months commencing from 1st January running to
31st December in the same calendar year

b) Where financial /accounting period starts/ends on dates other than 1st

January/31st December, the financial period is taken as the year of income (in
this case what determines the year of income is ending date/last date of the
calendar year)

c) Not all sources of income listed under section 4 may be taxed (it is not
advisable to tax all the sources of income for various reasons, e.g. investment
purposes, political consideration, social issues, etc.)

3.0. Exemption from income tax

Not all sources of income under section 4 of the act are taxed.

3.1. Purposes of exemptions

a) To promote investment and economic growth

b) To promote social and political objectives(i.e. to enable availability/provision

of social services and political consideration s such as exempting diplomats)

c) Philanthropic considerations (welfare matters and charitable issues, e.g. where

the objective of the activity is to help disabled)

d) Public interest argument

e) Unofficial or unintended exemptions as the law is unable to reach and every

taxpayer or income due to practical difficulties (shortage of manpower, low
yield of revenue, determination of income difficulties, lack of reliable
addresses, etc)

Note: Casual workers, street vendors/petty traders (Wamachingas) and

subsistence farmers are common person who enjoy this type of
exemption

3.2. Machinery (Provisions) for exemptions under ITA 2004

The general machinery for exemptions is provided in sections, 3; 10; 52; 54; and
2nd Schedule of the Act (note that the general provisions are section 10 and 2nd
schedule)

Section 3(3): Exemption of value of domestic services

23
 Exemption on value of domestic services from members of the family, self
consumed value of agriculture produce and other specified services under this
section are meant to avoid administrative enforcement difficulties

Section 10: Minister may exempt income from tax

The Minister, by notice in the gazette may exempt any income from tax/ or amend
the 2nd schedule

Section 52: Distribution of trust income

Distribution of a resident trust or unit trust is exempted on the
recipient/beneficiary of that trust (if it is a non resident trust, such beneficiary will
not be exempted)

Section 54:Distribution of dividends

A dividend distributed by a resident corporation to another resident
corporation is exempted if the corporation receiving the dividends holds 25
percent or more of the shares in the corporation distributing, and controls either
directly or indirectly, 25 percent or more of the voting power in the
corporation

2nd Schedule under the Act

Examples
- Amounts derived by the President of URT as duty allowances, entertainment,
etc
- Amounts derived by diplomats
- Amounts derived by East African Development Bank
- Income of a Primary Co-operative Society
- Scholarship or education grant payable as tuition fee for full time training
- Amounts derived by way of alimony, maintenance or child support under a
judicial order or written agreement
- Gratuity granted to Members of Parliament at the end of each term

(the list is not exhausted, see 2nd schedule for more exempted items)

Exemption arising from inflation and deferral of payment liabilities

If tax liability is deferred in to the future, one enjoy paying less in real terms due
to inflation (time value of money)

3.3. Arguments against exemptions (a critique)

a) Source of inequality in the tax system because they are granted on selective or
discriminatory basis, and thus violate the most important equity and simplicity
principles of a good tax system

24
 b) May cause serious revenue losses to the government

c) Source of complexities in the tax legislation

4.0. Revision Questions

a) Define 'permanent establishment' (see section 3 of the act)

b) Section 4 of the ITA 2004 is referred to as the 'main charging section'. Why is
this the case?

c) Discuss the various purposes of exemptions from income taxation with

reference to the specific exemption clauses in the Income Tax Act 2004

d) Petty traders cum street vendors are generally not in the Income Tax or local
government tax roll. Recent efforts have been made to try to tax these petty
traders by using presumptive tax rates

What difficulties will the tax authorities encounter in their tax assessment and
collection campaign?

e) "The government should abolish exemption provisions immediately". Do you

agree?. Give reasons for your answer

Suggested Answers

Answer for (d)-Possible difficulties

- Shortage of manpower
- Low yield revenue
- Determination of income (lack of records)
- Lack of reliable location/addresses, i.e. they are mobile

Answer for (e)-Abolition of exemption provisions

YES: Although there are good reasons for granting exemptions for both
income and persons, there are serious reasons which justify their abolition
Arguments to support:
- Exemptions are discriminatory
- Cause revenue losses to the government
- Source of administrative complexities

More explanation/arguments
- Most exemption privileges are not enjoyed by the majority poor masses
but by the fairly well to do individuals who do possess the greater ability
to pay the tax
- Complete or partial abolition is likely to:

25
  Save revenue losses which will in turn make possible the
implementation of more social and economic development
programmes
 Make easier administration of the Act, particularly where there is a
shortage of manpower(it will be easier, simplified and economical)
 Save considerable time taken by the administration of the exemption

However, a complete abolition of exemption is not feasible, what is important

currently is to make that only a minimum number of carefully selected exemptions
should be granted
CPA REVIEW COURSE

TOPIC: RESIDENCE OF PERSONS FOR INCOME TAX PURPOSES

1.0. Who pays tax?

According to ITA 2004, taxis paid by a 'person'. This can be natural persons
(individuals), or legal persons [Corporations and body of persons (partnerships
and trusts)]

Therefore, residence of person is defined in relation to individuals, corporation

and body of persons (section 66)

2.0. Determination of residential status

2.1.0 Significance of residential status

It is important to determine residential status of a person because affects:-

a) The scope of the charge to tax

Section 6 of ITA 2004 specifies that:

(i) Resident person will be charged tax from employment, business or
investment (total income) for a year of income irrespective of source,
i.e. worldwide

(ii) Non resident person will be tax on his total income, but only the
income that has a source in the United Republic of Tanzania

b) The grant of personal reliefs, e.g. children reliefs

2.2.0 Important features/indicators

(i) Year of income

Residence is determined in relation to a year income. Therefore a person
may be resident in one year and not be resident in another year

26
 (ii) Physical presence
An individual must be physically present in the united republic of tanzania
for however short a period

2.3.0 Conditions for residence (Section 66)

1. Individual:

(a) If he has permanent home in the URT and is present in URT during
any part of the year
(b) Is present during the year of income for period or periods amounting in
aggregate to 183 days or more

(c) Is present during the year of income and in each of the two preceding
years of income for periods averaging more than 122 days in each
such year of income

(d) He is an employee or an official of the Government o the URT posted

abroad during the year of income

2. Corporation:
(a) If it is incorporated/formed under the laws of URT; or

(b) If at any time during the of income the management and control the
affairs of the corporation are exercised in the URT, i.e. meetings

3. Partnership:
If at any time during the year of income a partner is a resident of URT

4. Trust:
(a) If it was established in the URT;

(b) If at any time during the year of income, a trustee of the trust is a
resident person; or

(c) If at any time during the year of income a resident person directs or
may direct senior managerial decisions of the trust

Note:
The word 'permanent home' is not defined in the Act. Therefore it is defined
technically as a place of residence where a person lives habitually though not
necessarily permanently or even constantly. It does not necessarily means a
house, bungalow or flat (it may be an hotel room, friend's house, etc.); and
further, an individual may have more than one permanent home.

2.4.0 Revision Questions

27
 (a) What is the significance of classifying a person as resident in the URT for
Income tax purposes?

(b) State the conditions for residence of a 'person' as specified under section
66 of the Act

(c)What is the meaning of "Management and Control" as used under the

determination of the residential status of a body of persons under ITA
2004?
CPA REVIEW COURSE

Revision Questions on Employment Income

Question One
What is the distinction between the terms “total income” and “chargeable income” as
used in the ITA 2004?

Question Two
a) Define employment for tax purposes, clearly identifying necessary conditions for
employment to arise as opposed to business

b) Identify receipts/incomes/benefits which are not taxable as employment income

as provided under subsection 3 of section 7 of the ITA 2004. Give reasons (where
applicable) for such exemptions

Question Three
“Where the employer provides his employee with a house for residential purposes, the
employee is liable to tax on the housing benefit” (Section 27 of ITA 2004)

State the formula for the determination of the value of housing benefit for income tax
purposes

Question Four
Mr. K is employed as the Chief Accountant of A&B Hardware Co. Ltd at a salary of
shs.720,000 per annum. He is provided with fully furnished house since 1.1 2004, which
was leased by his employer at shs.2,400,000 per annum. Commissioner has also
established that this the true market rental value for this particular house. Mr. K agreed to
pay shs.720,000 per annum as rent. He is also entitled to unlimited use of the employer‟s
car. The car provided to him is fully used by his wife for domestic purposes and shuttling
children to school. This is a new edition, Toyota RAV 4 with 2500 cc. and was bought
brandy new two years ago. Other incomes from other sources during the year are as
follows:

- He received a dividend of shs.720,000 from Katani Ltd, a resident company

where he held 3600 ordinary shares

28
 - He received interest amounting to shs.250,000 from his savings account with
NMB Morogoro branch

Required:
(i) Calculate his total taxable income for the year 2004
(ii) Assume that one of the room in the house (which forms 1/3rd of the
total house) was used by him for office works and also that he left to
his own house at the end of September 2004, re-calculate his housing
benefits (value of premises) to be included in his taxable income

Question Five
Mr. Madaraka is employed by International School of Arusha from 1.1.2003

The following terms, conditions and particulars relate to his employment during the year
of income 2004:

(i) His salary per month 1s shs.1,300,000

(ii) He was entitled gratuity equivalent to his basic salary for each successful
completed year of service

(iii) The School provided him with the following benefits:

- Free use of school‟s motor vehicle, bought six years ago (Toyota Corolla,
1000cc).The Commissioner for Income tax has accepted three quarte of
the use as representing free use of the car
- One night security guard who is on the school‟s payroll at monthly wage
of shs.25,000
- Electricity, gas, telephone and water bills amounting to shs.300,000. All
these benefits were paid directly to the utility companies since they were
addressed to the name of employer
- A residential house for the whole year for which he paid a token rent
amounting to shs.10, 000 per month. It is estimated that the market rental
value of this house is shs.60,000 per month

(iv) Other sums met by the employer during the year included:
- Shs. 50,000 per month as entertainment allowance. He however was not
required to account for the amount

- Monthly duty allowance dhs.20,000

- Shs.30,000 per month to meet his traveling expenses. He was spending

about 25% of such for performing his official duties

29
 - Free medical services under the arrangement that required the employer to
pay medical bills for Mr. Madaraka, his wife and up to four children. For
the year of income 2004, this bill amounted to 300,000

- Shs. 30,000 per month to an insurance company for policy covering his
life

(v) He had two children who are enrolled at the same school. During the year, the
school subsidized the school fees and board expenses of the two children
amounting to shs.2,000,000 in total

(vi) During the New Year 2004, School organized a party in which among other
issues, staff were provided with food and drinks of which they were not required
to contribute anything. Mr. Madaraka attended such party, and in addition to food,
he managed to four beers. The price of one beer by then was shs.700

(vii) After successful of year 2004, his contract was not renewed due to employer‟s
financial crisis. To this effect, he was paid a lump sum of shs.2,000,000 as
compensation

Required:
Calculate his total taxable income for the year of income 2004

Question Six
From the following information, calculate the total taxable income Mr. Leo for the year
income 2004 as stipulated in the ITA, 2004

(i) Mr. Leo, a resident employee was employed by ABC Ltd. since 1st January 2004
as an Accountant. He is provided with a house whose rental market value was
shs.400, 000 per month. The company was claiming rental expenditure to the
commissioner of Income Tax to the tune of shs300, 000 per month. During the
year he was provided a brand new private car (3000cc). The car use was 1/3rd
official use 2/3rd private use

(ii) The company contributed 15% of his basic salary every month to NSSF
(approved) and the employee wa contributing 5% of his basic salary to NSSF

(iii) The employer paid Mr. Leo scholarship fees of shs. 2,000,000 which was for full
time course

(iv) He is also holding a part-time consultancy work to private firm belonging to his
father in law, where he is being paid a monthly salary of shs.200,000

(v) The term of his service agreement with the Company provided for payment to to
him, so as not to work for any competitor after his retirement. In return for this
covenant, the company paid him shs. 2,000,000 in December 2004.

30
(vi) He is holding Savings Account with CRDB Bank. On 130th July, 2004 he
received shs.1,370,000 as interest from his savings account

(vii) His monthly salary was fixed at shs.1,200,000

(viii) The employer also met the following bills during the year:

- Electricity shs.700,000
- Gas 420,000
- Water 243,900

All these bills were paid directly to the utility companies

Question Seven
Professor Van Deer has been a Professor of Marketing and head of the marketing
development Programme of the University of Arusha. The University has a
housing scheme, under which it provides accommodation to its staff who then
suffer a 10% deduction on their salaries as rent

a) Professor Van Deer was however employed under expatriate terms which
provided for among other things a salary of shs 4,000,000 per month and
free housing. The total bills in this house for the year 2004 (electricity,
telephone and water) was shs.1,360,000

b) He was appointed by the Centre for the promotion of Exports from

Developing countries to carry out a market survey in Tanzania on the
market for developed countries and products for exports to Europe. He
was paid the full costs of the study and an additional fee of shs. 5,000,000.
This study was carried out during the months of March and April, 2004

c) On a part time basis, h e was offering consultancy services to Njiro

Business and Management Consultants firm. For this, he was paid
shs.200, 000 per hour. During 2004 he spent 22 hours with Njiro firm

d) His birthday coincided with Easter, 2004. During the 2004 easter
celebrations, the University awarded him a birthday present worth
shs.920,000. In addition, another present was given to him by his fellow
workers. This was valued at shs.420,000

e) He was required to appear in the quarterly meetings of the University

Senate. The University paid him shs.600, 000 for attendance of such
meetings. During 2004, he attended all such meetings held while he was
still in employment

31
 f) A distribution of surplus made from short courses an consultancy carried
out at the University during 2003 was made in May 2004 to all the
workers. Professor Van Deer received shs.3,000,000 from this distribution
during 2004

g) He was provided with a car (4500cc) which was wholly used for domestic
purposes by his wife. This car was purchased by the University for shs.
12,000,000 in year 2003

h) As part of the contract of employment, the employer was required to

contribute an amount equivalent to shs.150, 000 per month to a private
pension scheme established in the Netherlands. The scheme was not
approved by the Commissioner

i) He received interest from the NBC of shs. 1,600,000 and a dividend from
a local company of shs.1, 200,000. No withholding tax was deducted at
source

j) Upon completion of his contract, university met the expenses of 4milion

for transporting him and his belongings back home to the Netherlands

Required:
Calculate the total taxable income of Professor Van Deer for the year of income 2004

32
(MU)
MZUMBE UNIVERSITY
FACULTY OF COMMERCE
DEPARTMENT OF ACCOUNTING AND FINANCE

Seminar on Business Income

BAF III 2004/2005 ACC 391-Taxaxtion

Question 1
The general principle of allowability is based on phrase “wholly and
exclusively incurred….”

Explain the meaning of this phrase

Question 2
With reasons, identify and explain on any items of expenditure that are
necessary but not recognized by the general principle of allowaability, and any 3
unnecessary but obeyed by the principle

Question 3

The following is the profit and loss account of Mr. Ndekule who is engaged in
manufacturing business for the period from 1st January 2003 to 31st December
2003.

Shs. Shs.
Gross profit 20,000,000
Other income
Bank saving interest 225,000
Insurance compensation
- Loss of profit 1,000,000

Trade bad debts recovered 425,000

Gross rent from residential house 750,000
22400,000

Less expense
Salaries and wages 2,400,000
General expenses (Note 1) 1,800,000
Telephone and electricity 450,000
Depreciation 400,000
Income tax 500,000

33
Motor car expenses (Note 2) 2,500,000
Bad and doubtful debts (Note 3) 250,000
Repairs (Note 4) 425,000
Promotion and advertisement (Note 5) 350,000 9,075,000
Net profit 13,325,000

Additional information

(1) General expenses include the following:

(i) Travel expenses for Mr. Ndekule to Nairobi for holiday shs.
250,000
(ii) Medical expenses for Mr. dekule shs. 50,000
(iii) Legal costs and stamp duty on acquistion of a godown in
October, 2003 shs. 450,000.

(2) Mr. Ndekule estimates that 20% of the motor car expenses
represented personal and private use.

(3) Bad and doubtful debts:

The whole amount represented a general provision for bad and
doubtful debts.

(4) Repairs :
The amount was incurred on a used building purchased for use in
the business as a godown .

(5) Promotion and advertising:

The amount includes shs. 50,000 being the cost of advertising sign
board installed along Madaraka Road.

Required:
Compute his total taxable income in the year of income

Question 4

ABACOMBI Tours Ltd runs a tourist trade in Manyara. The following information has
been extracted from the company‟s books and is made available to you for scrutiny as a
tax expert

I. Expenses deducted during the period:

- Salaries and wages Shs.1,840,000
- Telephone and electricity 120,000

34
 - Insurance 1,000,000
- Repairs and maintanence 2,000,000
- Advertising and promotion 280,000
- Depreciation 316,000
- Professional charges 800,000
- Management and consultancy fees 2,400,000
- Travelling and transport 1,600,000
- Motorvehicle expenses 2,600,000
- General administration 140,000

II. Net loss during the same period after deducting deductions under I above was
(3, 096,000/=)

III. Additional information relating to the period:

(a) Telephone and electricity
- Local and international calls Shs.24,000
- Purchase of second hand swithboard 80,000
- Repairs of intercom 16,000

(b) Repairs and maintenance

- Cost of fire extinguisher 1,000,000
- Uniforms for staff 400,000
- Cost of fire alarm system 500,000
- Repairs of shed and painting 100,000

(c) Advertising and Promotion

- Newspaper advertising 40,000
- Tourist sightseeing 160,000
- Large Neon sign: Hotel name 80,000

(d) Depreciation charges

- Loos tools 16,000
- Fixed assets 300,000

(e) Professional charges

- Audit and Accountancy fees 200,000
- Registration of Property 500,000
- Tax Penalty 100,000

(f) General and Administration

- Bad debts written off 40,000
- Donation to a political party 30,000
- Provision for uncollectible accounts 24,000
- Exchange loss on foreign loan 46,000

35
 (e) The 3rd schedule depreciation allowances for depreciable assets have been
agreed at 2,400,000

Required:
Calculate the company‟s business income for tax purpose for the accounting
period covered by this information

CPA REVIEW (MZUMBE UNIVERSITY)

P.15 Taxation

Question on Total Income (Business Income, Employment Income and Investment

Income)

Mr. Kipute has recently passed his CPA-final examinations. After his 3 years of relevant
working experience he was registered by the NBAA as an authorized Auditor

Mr. Kipute commenced an Audit and Accountancy practice firm on 1.1.2004. The
following particulars relate to his new practice for the year ending 31.12.2004

Income:

Professional fees Shs.28,100,000

Bank interest 300,000
Sale of private car 15,000,000
Insurance compensation 1,000,000
Bad debts recovered 500,000
Gross rent from residential house 1,730,000

Expenditure:
Stationery Shs.3,500,000
Salary of wife 1,800,000
Registration fee of the practice 600,000
Other wages and salaries, secretarial fees 6,000,000
Contributions and donations 150,000
Business license 100,000
Rent and rates 7,500,000

36
Repairs and maintenance 2,000,000
Interest paid 4,000,000
Insurance 2,150,000
Motor car expenses and transport 2,600,000
Provision for bad debtors 1,600,000
Depreciation on assets 4,800,000
36,800,000
Net Profit 9,830,000

The following additional information is provided to you

(a) Rent and rates:
- Rent for office Shs.5,000,000
- Rent and rates for private residence 2,500,000

(b) Repairs and maintenance :

- General office repairs, painting 1,300,000
- Repairs of private residence 700,000

(c) Interest paid:

- On business bank over-draft 600,000
- On mortgage loan for private residence 3,400,000

(d) Insurance expenditure:

- Professional indemnity 600,000
- Personal accident 300,000
- Own life assurance premium 1,250,000

(e) Mr. Kipute has agreed with the Principal Assessor that 50% of the motor car
expenses and transport should be disallowed

(f) Mr. Kipute purchased purchases the following assets for practice during the year
of income 2004
- One Toyota Hilux Pickup at cost of Shs.12,000,000
- Office furniture and fittings cost 7,000,000

(g) Provisions:
- Provision for leave pay 1,500,000
- General provision-bad debts 20,000
- Specific bad debts 80,000

(h) PAYE deducted on the wife's salary for the whole year 2004 amounted to
Shs.221,440

(i) Contributions:
- NPF Membership (for employees) Shs.100,000

37
 - NBAA/TAA-membership and journals 30,000
- Oysterbay Club-membership 20,000

(j) Mr. Kipute is also a full time employee Mango Juice (T) Limited, a resident
company since 1.1.2003. The following particular for year of income2004 are
made available to you:

- A monthly salary of 600,000/= was paid to him

- Employer allowed him to a bungalow for residential purpose. He used this

bungalow for residential purpose to the extent of 80%, and other portion was
used as an office with the company's approval. Mr. Kipute was contributing
shs.20, 000 p.m. as monthly rent. The annual economic value of the bungalow
is shs.4,600,00

- The company also made the following arrangements which were effected
during the year 2004:
 Paid shs. 2,400,000 to an insurance company as annual premiums for a
policy covering Mr. Kipute's life

 Free medical services under an arrangement that required his employer to

pay his medical bills (including his wife and up to four children). During
2004, such bill amounted to shs.600,000

 He was provided with a car which was used for office work to the extent
of 1/4. This is Toyota Mark II, Bolloon, 2500cc which was purchased
2003 for shs. 3,500,000

 As part of the contract of the employment, employer was contributing 5%

of Kipute's salary to NSSF (Approved) as member's contribution. Kipute
was also contributing the same. Employer was also contributing for him
shs.20,000 per month to another private(unapproved) scheme

- Mr. Kipute held ordinary shares in Top Industries Ltd. on which he received a
gross dividend of shs.100,000

Required:
Using ITA 2004 relevant provisions, compute:

a) Mr.Kipute's total taxable income for the year of income 2004

b) The total tax liability paid by Mr.Kipute in the year of income 2004

CPA REVIEW

38
SEMINAR QUESTION ON INVESTMENT INCOME

During the year 200X, Alpha Company Ltd. conducted the following transactions:-

(i) Received dividend, from ABC Ltd., a resident corporation, Tshs. 5,500,000.
Alpha Ltd. owns 40% of the shares of the ABC Ltd.

(ii) Dividends amounting to Tshs. 2,500,000 were received from Beta Ltd., which is
listed on the DSE, and is owned 20% by JOFU Ltd. a non resident corporation

(iii) Dividend amounting to Tshs. 1,550,000 received from Mloka Company Ltd., a
resident corporation

(iv) The office of Alpha Company limited is underutilized. The company decided to
rent the front part of its office to John Said a shop businessman, who used it as a
shop. Mr. John Said paid Tshs. 800,000 as rent

(v) During the year the company received Tshs. 300,000 as rent from Mr. Anwar, a
Tanzanian with respect of a house occupied by him

(vi) Also the company received a royalty from Gamma Ltd. amounting to Tshs.
4,500,000 out of lease of videotapes used for promotion

(vii) During the year, Alpha Ltd. sold 5 hectars of land, which was at Boko and
received Tshs. 20,000,000. This land was purchased for Tshs. 3,000,000 in 1980.
Three (3) years prior to its sale, this land had been used as agricultural land

Required:
By applying the relevant provisions of the ITA 2004, compute investment income for the
company for the year 200X
CPA REVIEW COURSE

WITHHOLDING TAX SYSTEM (DEDUCTION AT SOURCE)

Concept and operation of the system

Withholding tax system is a tax collection method whereby the tax is collected at the
source of payment and remitted to the tax authorities within 30 days of the deduction.
The recipient gets the net income only.

Failure to deduct or remit the tax on the statutory due dates attracts penalty and the tax
may be recovered from the defaulter

Scope and Operation of the System

Withholding tax applies on various categories of incomes paid to both resident and
nonresident persons without permanent establishment in Tanzania on specific categories
of income

39
a) Amount received by a non resident person not having permanent establishment in the
URT in respect of management fee, professional fee which is not a fee for the
provision of technical services, any rent, premium or like consideration for use or
occupation of property, any dividend, any interest, any pension or retirement annuity,
branch dividend, insurance commission, and the provision of the technical services to
a person carrying on mining operation (tax is deducted at the appropriate non-
resident tax rates)

b) Amount received by resident person or non resident person having permanent

establishment in the URT in respect of dividend, interest on a loan or deposit (except
a loan with a Co-operative Society), insurance commission, rent, technical services to
any person carrying on mining operation (tax is deducted at the appropriate
resident withholding tax rates)

Withholding tax also applies on transport fees for the carriage of goods by road (not by
rail or sea) and on purchase of any goods or services rendered (note that the goods and
services tax has considerable practical implementation difficulties)

In practice, tax is calculated on the total income of a person. Where tax has been
deducted at source the amount may be set off against the total tax assessed (i.e. tax
already suffered at source may be deducted from the tax finally assessed). The tax
deducted at source on dividend, interest and rent constitute the final tax, i.e. final
withholding tax (it is not available for set off/no further assessment)

Withholding tax on goods and services (2%)

Where a person makes payments exceeding Tshs. 100,000 to another person (whether
resident or non resident) in respect of any fee, charge, or like consideration for goods or
services rendered which is chargeable under the Act, is required to deduct tax at 2% on
the gross amount payable

Note however that the requirement of deducting tax on rent, goods and services at 2%
only applies to payments made by Government agency, Local government authorities,
Parastatal organisations and companies, Financial Institutions and Co-operative
Societies.

Payments by individuals are not subject to deduction

Practical difficulties of the goods and services tax

(i) Some companies are not liable to tax by virtue of Tanzania Investment Act, 1997
or other exemption certificates or loss making

(ii) Tax is paid in advance by the quarterly provisional tax payments, thus the 2%
withholding tax is unnecessary and leads to excessive repayment claims

40
Advantages of withholding tax system

(i) Minimises collection costs (payer hands over the tax to tax authority instead of
numerous individual recipients);

(ii) Realises immediate revenue;

(iii) Minimises tax evasion (the owner of the income has no access to the income
before payment of tax)

Disadvantage

(i) Repayment of claims;

Where more tax has been deducted than the circumstances of the taxpayer

(ii) In lieu of the above, system may be expensive (where a country is characterised
with a low standard of income) in terms of work caused by repayments, i.e. may
outweigh any advantage;
(iii) Tanzania has extended the system to too many payments some of which, are not
administratively efficient

Revision Questions

1. What do you understand by "withholding tax system" or "taxation at source"?

What are the advantages and disadvantages of the withholding tax system?

2. Discuss the practical difficulties of the 2% withholding tax on goods and services

CPA REVIEW COURSE

P.15 TAXATION

DEPRECIABLE ASSETS, ALLOWANCES AND INCLUSIONS

1. Provisions
The machinery for the deduction of depreciation allowances for depreciable assets
is provided by section 17 and Third Schedule of ITA 2004

Section 17 provides for deduction of depreciation allowances for depreciable

assets owned and employed by the person during the year of income wholly and
exclusively in the production of the person‟s income as detailed under the 3rd
schedule

41
2. Classification and pooling of depreciable assets
There are eight (8) classes (pool) of depreciable assets as follows:

2.1. Classification

Class Depreciable assets Rate

1 Computers and data handling equipments, automobiles, buses and 37.5%
minibuses with sitting capacity less than 30 passengers, goods vehicles with
load capacity of less than 7 tonnes, construction and earth moving
equipment
2 Buses with sitting capacity of 30 passengers or more, specialized trucks, 25%
trailers, locomotives and equipment, other self propelling vehicles, etc (see
3rd schedule)
3 Office furniture, fixtures and equipment 12.5%
4 Natural resource exploration and production rights 20%
5 Buildings, dams, structures and similar works of permanent nature used in 20%
livestock or fishing farming
6 Buildings, structures, etc other than those in 5 5%
7 Intangible assets other than those in 4 1/useful
life of the
asset
8 Plant and machinery including windmills, electricity generators and 100%
distribution equipment used in agriculture

Pooling

At the time the asset is first owned and so employed is placed in a pool as
follows:

a) Assets of the same classes under 1,2,3,4,5,6 or 8 owned and employed in

the business are placed in the same pool except:
- Those referred to in paragraph 1(2) (c), i.e. any asset under this
paragraph forms pool of its own separately from other assets of
classes mentioned
b) Expenditure incurred in respect of natural resources prospecting,
exploration and development shall be treated as if it were incurred in
securing of an asset that is used in that class (see class 4)

c) Class 7 (Intangible assets other than class 4)-Treated as a pool of its own
separately from other assets of that class or any other class

3. Initial allowance
3.1. Qualification
Granted for each item of plant or machinery:
 Used in manufacturing processes and fixed in a factory;
 Used in agriculture, livestock or fish farming;
 Used for providing services to tourists and fixed in a hotel
 Added to classes 2 or 3 according to paragraph 1 (2)
3.2. Rate

42
 Fifty (50%) percent of the cost of the asset (for each asset) at the time it is added
to the pool (available only in the year of income in which the asset is
added/purchased)

4. Depreciation allowances
4.1.Methods
Classes 1, 2, 3 pools on the basis of Diminishing Value Method
Classes 4, 5, 6, and 7 according to Straight Line Method using the following
formula:

AxBxC/365
Where-
A is the depreciation basis of the pool at the end of the year of
Income;

B Depreciation rate applicable to the pool; and

C Number of days in the person's year of income

5. Realisation of depreciable assets

- The excess of sales value over the depreciation basis of the pool at the end of
the year (applicable to classes 1,2,3 pools which use diminishing value
method) or written down value (class 4,5,6 pools, which use straight line
method) is taxable business income in that year of income

- Where the assets in a pool are all realised, the pool will be dissolved and the
amount will be included as ether taxable business income or will be granted as
allowance to the taxpayer, i.e. where the difference is positive, it is taxable
where as deficit/negative difference is an allowance

6. Purchase under hire purchase agreement

The difference between purchase price that would have been paid on cash basis
and the price on hire purchase basis reflects an interest, which for tax purpose is
an allowable expense. Therefore, allowance is granted on down-right purchase
price (i.e. cash price)

7. Expenditure on Road Vehicle (Motor Vehicle cost restriction)

There is restriction of expenditure incurred to acquire a road vehicle other than a
commercial vehicle to the extent the expenditure in excess of 15,000,000 shall not
be recognized

For the purpose of this, commercial vehicle means a road vehicle designed to
carry loads of more than half a tonne or more than thirteen passengers or a vehicle
used in transportation or vehicle rental business, i.e. constructed or adapted for
use and used for conveyance of goods in the course of trade or agriculture or for

43
 the conveyance in the course of transporting employees in the employment of the
owner

CPA REVIEW

QUESSTIONS ON DEPRECIATION ALLOWANCE UNDER THE 3RD

SCHEDULE

QUESTION ONE
SAPA Company Limited is a newly formed carrying out agricultural business. During the
first year of its operations 200X, it purchased the following depreciable assets:

(i) Computers and data handling equipments, which were used by the company
secretary and accountants, 2 computers were purchased at Tshs. 900,000 each

(ii) Three seater minibuses which were used to shuttle staff were purchased, each at
Tshs. 15,000,000; and two more 50 seater buses were added during the year at the
value of Tshs. 80,000,000 in total

(iii) Two bulldozers each costing Tshs. 10,000,000; one second hand Dustan pick up
for Tshs. 5,000,000; one brand new saloon car for Tshs. 18,000,000; furniture and
fittings costing in total Tshs. 7,500,000 were required during the same year of
business

(iv) The company also purchased two lawn mowers, which were used in keeping the
surroundings clean at Tshs. 450,000 each

(v) During the year, the following agricultural equipments, which arrived at Mtwara
port, were cleared immediately and transported to Songea to commence farming
work:

- One CAT Comatus Caterpillar Tshs. 40,000,000; five Ferguson tractors

each Tshs. 12,000,000

- Harrows and one planter all costing Tshs. 6,000,000; three heavy-duty
Isuzu trucks costing Tshs. 180,000,000 in total

- A grain storage warehouse and rice milling building were construct ed and
completed at a cost of Tshs. 5,000,000 and Tshs. 2,000,000 respectively
and were put into use on 15th May, 200X

- One helicopter for taking tourist to the Mountain Kilimanjaro was

purchased for Tshs. 40,000,000

- The adjusted income from business without depreciation allowance for

SAP Company Limited for year 200X was Tshs 253,206,180

44
REQUIRED
By applying the relevant provisions of the ITA 2004, compute for the company for year
200X the following:

a) Depreciation allowance
b) Tax payable

QUESTION TWO

Your tax client Kibanga Company Ltd. a resident company engaged in farming business,
seeks your advice on tax incentives (allowances) available to him on each of the
following transactions. Support your answer with relevant calculations were necessary.
The company prepared and closed its accounts on 31st December 200X:

a) The company made substantive expansion of its existing agricultural production

processing plant at total cost of Tshs. 12,000,000. The expansion programme is an
approved enterprise for the purpose of Tanzania Investment Act, 1997
b) The company made purchases of machinery and operating equipments to the old
factory as follows:

(i) On 1st May 200X purchased one Scania lorry for Tshs. 10,530,000, out
of which Ths. 2,530,000 is a cost of trailer

(ii) On 15th May 200X, the company received a coffee roasting machine
costing Tshs. 1,500,000 from a Brazilian company as a grant. The
company paid clearing and other charges amounting to Tshs450,000

(iii) On 1st June 200X, the company purchased and installed machinery at a
total cost of Tshs. 6,450,000 as follows:

- Central cooling machinery 2,600,000

- Boiler 2,000,000
- Leather machine 1,200,000
- Automatic hacksaw machine 400,000
- Hand drilling Macon 250,000
6,450,000

However, the machinery were first put into use on 30th December
200X

45
 (iv) On 1st October 200X a saloon car was purchased for the Marketing
Manager at a total cost shs.15,000,000

(v) A motorised fork lift truck was purchased f on the same date
(1/10/200X) for Tshs 7000,000 on hire purchase basis. The company
deposited Tshs. 1,000,000 on the 1st October 200X and paid Tshs.
550,000 for 12 months installments. The forklift was put in to use on
the same date.

c) The company incurred additional expenditure in its farm on 1st November 200X
for the plantation of permanent crops as follows:

(i) Land clearing for the planting of coffee Tshs. 450,000

(ii) Construction of a bore hole for water supply at Tshs. 2,100,000
(iii) Construction of a godown to store animal feeds for Tshs 12,560,000
(iv) Construction of farm house on the agricultural land in which the owner
lives with his family

d) Other transactions during the year:

(i) A used ship of more than 500 tons at a total cost of Tshs. 15,160,000. On
15th November 200X the company incurred a total cost of Tshs. 3,670,000
for refitting the ship. The ship started operations of transporting coffee to
Comoro Island on the same date
(ii) Alight aircraft was purchased on the same date to assist in transportation
of coffee Tanga port at a total cost of shs.6,150,000

QUESTION THREE

TWENDEPAMOJA Company Limited is a resident company, which carries on business

in the country as a class I Building contractor

The depreciation basis of the pools of depreciable assets as at 1st January, 200X were as
follows:

Class I Class II Class III Class IV Class V Class VI Class VII

2,000,000/= 500,000/= 1,000,000/= NIL NIL NIL NIL

During January 200X, it acquired:

 Two caterpillar tractors for shs. 50 million each
 A second hand pick-up for shs.3.5 million
 Fixtures and fittings shs. 79 million
 Constructed a building for the storage of imported building materials for sh. 100
million. This was built parallel (mutually) to another building to be used as an office,
where the cost of the office was estimated at 20% of the total cost of the storage
building. Commissioner, by exercising his discretionary power to the best of his
judgement estimated the cost of constructing the office at shs 15 million

46
All these assets were used from 31st January 200X

In 1st June, 200X the company decided to expand its business by establishing the plant for
the manufacture of glass for windows and doors as well as tiles to be used in the
company's business and for sale. For this purpose it purchased a new building for shs.200
million on 1st July 200X from PENCOS, a construction company, whose cost of
construction was shs.150 million

Plant and Machinery to be installed in the building arrived on the same date and it was
immediately installed in the building. The new factory plant and machinery had cost the
company shs.60 million. The new factory commenced production on the 1st August 200X

In 1st September 200X, the company acquired and used the following immediately:
 Two new lorries at a cost of shs. 300 million in total
 A used Cessna Aircraft for business for shs. 20 million
 Mowers for cleaning the compound of the business premises for shs. 90 million
 An air condition system set for the storage building and the office for shs. 60 million
in total
 Three (3) computers and their accessories to be used in the office, each 3 million

The following assets of the pool were sold during the month of December 200X
 Second hand pick-up for shs. 15 million
 Both caterpillars tractors for shs. 160 million
 Lorries for shs. 420 million
 A used Cessna air craft for shs. 100 million

Required:
Compuuute depreciation allowance admissible to TWENDEPAMOJA Co. Ltd. for the
year of income 200X as required under the Third Schedule of ITA, 2004

47
QUESTION FOUR
Identify categories of depreciable assets qualifying for 'initial allowance'

CPA REVIEW (MU)

P.15 Taxation

Question on Depreciation Allowance under 3rd Schedule of ITA 2004

PORORO Hotel (T) had constructed a modern eleven-storey tourist hotel building for 400mill/=.
The construction of this hotel was completed on the 31.12.200X1, and it was formally opened and
certified by the Minister for Finance on the 1.1.200X2, when it started operating at full capacity

In addition to the main building, the hotel had during the same time constructed:
- A car park adjacent to the hotel structure for 3,000,000/=
- A swimming pool for 7,000,000/=
- Small huts for 1,000,000/=
These were used from the same date as the main hotel building

The hotel had the following assets, which were used from the day of its inception:
- Automatic laundry machine, installed in the basement for 2,200,000/=
- A cold storage plant for 2,000,000/=
- An air-conditioning plant for 2,150,000/=
- Cookers and other permanent kitchen wares 800,000/=
- Mobile serving wheel trays 800,000/=
- Cups, tools and other implements for 400,000/=
- Furniture 9,000,000/=

To keep the small huts clean three mowers costing 50,000/= each were purchased

In addition, during the year 200X2, the hotel acquired and used the following:
- A Scania bus for 2,600,000/=. This was purchased on the 2nd April, but was used from the
1st of June
- A second hand delivery van was purchased for 900,000/= during May
- A new Rolls Royce for the General Manager was acquired for 80,000,000/= which was
wholly used for his private purposes. While on duty, he used the hotel Range Rover,
which was purchased for 40,000,000/=
- In order to encourage the hotel industry, and hence tourism, the Ministry of Tourism
awarded a hotel a twin otter aircraft, which was purchased for 70,000,000/=
- Tupendane Orchestra was officially inaugurated on the 15th July 200X2. This was solely
for the entertainment of the hotel guests, in Banana High Classic Hotel. The music
instruments had cost the hotel 1,240,000/=

As a control against frequent power cut by TANESCO, a generator was purchased for
10,000,000/= during August. This was installed in the hotel on 15th August 200X2

The General Manager's Rolls Royce was sold on 10.11.200X2 for 30mill/=

Required:

48
Calculate depreciation allowance admissible to POPORO Hotel (T) under the 3 RD Schedule of
ITA 2004 for the year of income 200X2

CPA REVIEW
P. 15 Taxation

Business Income/Depreciation allowance

Mikumi 1 Safari Lodge is a newly formed company to carry out hotel and tour business.

During year 200X1, the company incurred the following capital expenditures:

I. Machinery, equipment and furniture:

Tshs
1. General
 Generator 6,400,000
 Telephone Exchange 7,200,000

2. Hotel and rooms

 Office furniture 8,000,000
 Beds 14,400,000
 Mattresses 3,456,000
 TV Sets 16,800,000
 Carpets 3,600,000

3. Kitchen
 Fridges and Freezers 2,880,000
 Equipment 15,008,291*

4. Laundry
 Washing machine 7,572,667
 Irons 100,000

5. Swimming pool
 Pump 800,000

6. Workshop
 Implements(tools) 4,000,000
 Tour radios 10,000,000

II. Motor vehicles:

 Staff bus 28,000,000

49
  Shopping van 16,000,000
 Tour landrovers 240,000,000

III. Buildings:
 Brick huts (purchased old and used) 60,000,000
 Brick huts (new) 48,000,000
 New restaurant/bar/kitchen 64,000,000
 New swimming pool 20,000,000
 New laundry building 10,600,000
 Road construction to hotel 11,000,000

IV. Pre-operational expenses:

 Blankets 10,000,000
 Bed sheets 1,800,000
 Bed covers 2,880,000
 Project write up 1,000,000

*Cost of equipments includes shs.7, 000,000 for cutlery

During the year 200X1, the following transactions took place:

1) During January, the company's Board of Directors adopted an accounting policy of

writing off linen in the year of purchase and cutlery and tools over period of two
years

2) During July, laundry machinery was replaced by new machinery worth shs.26
million. The old machinery was donated to Hindu Mandal Hospital. The hospital
valued this machinery at shs.8 million

3) A light aircraft was bought on credit for shs.300million and was put into use from
August. The loan was to be repaid after four years. Meanwhile, the creditor retained
the right of repossessing the aircraft in case of default on the part of the company

4) Gross profit for the first year was shs.560 million

5) On the 2nd of December, the Minister for Finance certified the construction of the
hotel

Required:
Determine the net taxable income for the year of income 200X1

P.15 Taxation

50
REVISION QUESTIONS

Theory of Taxation

1. "There is no need for the Government of Tanzania to raise revenue for the provision
of goods or services for economic development through taxation. These activities
should be left to the private sector, since the price mechanism is the best device in
providing goods and services for development"

Do you agree with the above statement? . Give any four reasons to support your
answer.

2. "There are a number of differences between accounting concept of income and tax
concept of income. In fact, much of the study of taxation is devoted to the study of
the areas where commercial accounting and income tax accounting fail to coincide"

Identify any five such areas in Tanzania

Depreciation Allowance

The November Sitta Limited (NSL) is a resident company with business interests in a
number of sectors, including manufacturing, farming, hotel and transport

The following assets were either owned and used by the company in its business for the
year of income 200X2

A: At Mwanza it had beer manufacturing factory. For this purpose it had the
following assets:

(i) A factory building which was purchased new and unused from a building
contractor 6 years ago for shs. 400 million/=

(ii) A building for bottling plant. This is an old building constructed and used by the
company for the past 25 years at a total cost of shs.600 million/=. However it is
still in good working condition

(iii) Towards the end of July 200X2, a bottling machinery worth shs.700 million/=
was installed in the old building. With effect from the 3rd of August the new
bottling plant became operational

B: Farming business:-

For this business it possessed the following assets:-

51
 Land of 500 acres used for barley farming. In this land it incurred the following
expenditures during 200X1:-
 Clearing of land, 300 acres, 15 million/=. This was followed by planting
thereon barley during January 200X2
 Fences for 20 million/=
 Water supply canals for 40 million
 A building for storage of barley for 60 million/=
 A barley milling plant consisting of a mill building for 30 million/= and a
milling plant of 35 million/=
 A garage for the storage of agricultural machinery for 20 million/=
All these assets were used from 1st February, 200X2

C: Hotel business:-
During 200X1 it purchased a new building from A-Z Ltd. for 400 million which
was constructed for 300. This was used as hotel from 1st April 200X2 after being
inaugurated by the Minister for Finance on 31st March 200X2. Machinery
installed in the hotel cost 420 million/=

Required:
Using relevant provisions in the ITA 2004, calculate depreciation allowance
admissible to NSL for the 200X2 year of income

State the treatment of clearing land and planting thereon barley in this case

RETURNS OF INCOME

Introduction
Subdivision A of Division IV of Part VII of the Act consisting of sections 91 TO 93 (both
inclusive) deals with returns of income

The term 'return of income' is defined in section 3 of the Act to mean the 'meaning'
ascribed to it by section 91

Returns of Income [section 91]

This section requires (subject to sections 92, 93, and 95) every person to file with the
Commissioner a return of income for the year of income not later than six months after
the end of each year of income. This is the final or regular or actual return of income, i.e.
after the end of the accounting period and final/books of accounts are completed

Section 88 of the Act deals with Income tax payable by quarterly installments (whether
from a business, investment or employment provided employer is not required to
withhold tax under section 81). This necessitates the first type of return of income which
should be submitted as „provision‟ before the final return. This is what is called
„statement of estimated tax payable/provisional return‟ as required under section

52
89 (1). Note that, once a taxpayer furnishes provisional return of income, he is
automatically assessed and therefore the due dates for submitting provisional return
and paying provisional tax are the same.

Due date(s) for submitting/paying Provisional return/tax excluding withholding taxes by

employees:
(i) Where a year of income of a person is twelve month period and coincides with the
calendar year:
 On or before the third, sixth, ninth and twelfth months of the year of
income (i.e. 31st March, 30th June, 30th September and 31st December)

(ii) In any other case (where does not coincide with calendar year):
 At the end of each three-months commencing at the beginning of the year
of income

Note:
 Year of income for every person means 'calendar year' [section 20]
 Provisional return is submitted as the total estimated chargeable income for the
year of income but provisional taxes for the year of income are payable on four
(quarterly) equal installments

Returns of Income Requirements [s.91 (2)]

A return of income of a person for a year of income is required to specify:

(i) Chargeable income (employment, business and investment)
(ii) Total income and the income tax payable with respect to that income
(iii) For domestic permanent establishment of a non-resident person, the permanent
establishment‟s repatriated income and the income tax payable
(iv) Any income tax paid by withholding, installment or assessment for which a tax
credit is available under sections 87, 88, 90, or 95
(v) Amount of tax still to be paid calculated from above as [(ii) + (iii)] – (iv)
(vi) Any information as may be prescribed by the Commissioner

Notice by the Commissioner [s. 91 (3)]

A Commissioner may, by notice in writing serve a notice on the person requiring him to
file a return of income by the date specified in the notice for the year of income or the
part of the year of the income

This occurs where, prior to the date for filing a return of income the following situations
exists:
- A person becomes bankrupt, is wound up or goes into liquidation;
- Person is about to leave URT indefinitely;
- A person is about to cease activity in URT;
- Commissioner otherwise considers it appropriate

53
Return of Income excludes:

(i) An income of resident individual who has no income tax payable;

(ii) Income of resident individual whose income is either from employment (where
employer is required to withhold tax under s.81) or derives a gain in conducting
an investment from the realization of an interest in land or buildings situated in
URT [“Single installment at time of realization or receipt”-sections 90(1) and 92
(a) (bb)]
(iii) A return of income of a non-resident person (other than one with a domestic
permanent establishment) who has no income tax payable under s. 4 (1) (a) or
consists exclusively of gains under s.90 (1)

Extension of time to file a return of income (s.93)

Subject to a written application from the taxpayer, Commissioner may grant multiple
extensions but the extensions shall not in total exceed 60 days from the original date
where the estimate/returns were to be filed

ASSESSMENT OF TAX

Introduction

Subdivision B of Part VII of the Act consisting of sections 94 to 97 (both inclusive) deals
with assessments. The term 'Assessment' is defined in section 3 of the Act to mean "an
assessment under sections 94,95, 96 or 103 of the Act"

Note however that the term assessment is capable of several interpretations. It may mean:
 Computation of income of a taxpayer; or
 Determination of the amount of income tax payable; or
 Entire procedure for imposing liability on the taxpayer as laid down in the Act
But briefly, in widest sense the term assessment covers the whole process of scrutiny of
the return of income, if any, submitted by the taxpayer, examination of his books of
account, if necessary, and if any, up to the last step of issuing a notice of assessment
showing the income assessed, the tax payable and the due date for payment

Thus, entire procedure for imposing liability on the taxpayer requires three (3) steps to
be completed:

(i) Computation of the income assessable /taxable income;

(ii) Computation of the income-tax payable by taxpayer on the basis of computed
income in (i) and the appropriate rate; and
(iii) To issue a notice of assessment intimating the fact of assessment made on
him(this notice shows details of income assessed, gross tax payable, the reliefs, if

54
 any, given the set-off or credit of tax deducted at source or already paid, net
amount of tax payable and the due date of payment)

Types of Assessment under the Act

a) Statement of estimated tax payable or Provisional assessment [Section 89]
b) Self assessment [Section 94]
c) Jeopardy or Accelerated assessment [Section 95]
d) Adjusted assessment [Section 96]
e) Best judgement assessment [Section 94 (4) (a)]

Basis of Classification
Types of assessments may be classified on the basis of the following:
(i) Assessments by the Commissioner and assessment by taxpayer himself; or
(ii) Returns submitted by the taxpayer or without such returns; or
(iii) Acceptance of the income returned or amendment (or rejection) of the income
returned by the taxpayer, i.e. best judgement assessments; or
(iv) Assessments made to save possible loss of revenue on account of the occurrence
of some event or accelerated due to certain peculiar circumstances of the taxpayer
(i.e. Jeopardy or accelerated assessments); or
(v) Regular assessments made for the first time; or
(vi) Exceptional or irregular assessments made after completion of the original
assessments (i.e. additional or amended assessments)

(a) Statement of estimated tax payable (Provisional Assessment)

The statement of estimated tax payable (provisional assessment) is required to be
submitted by a taxpayer under sub-section (1) of section 89 of the Act

When a taxpayer has furnished a statement of estimated tax payable he is

automatically deemed to have been provisionally assessed on the basis of
estimates contained in such in such statement as provided in sub-section (3) of section
89 of the Act.

Thus, the responsibility of the taxpayer is over once he submits a statement of

estimated tax payable. The Commissioner is not required to inquire into the
correctness or accuracy of the estimates of the income stated by the taxpayer though
he will obvious watch the payment of tax required from such statement of income. As
such, no formal order of assessments is required to be made by the
Commissioner in these types of assessments, i.e. where the taxpayer submits a
Statement

Section 89 (5) gives room to person who has submitted a statement of estimated tax
payable to revise/amend a previously submitted statement of estimated tax payable
under section 89 (1)

Where, however, the taxpayer fails to comply with section 89(1) of the Act and fails
to submit a statement of the estimated tax payable, sub-section (8) of section 89 of the

55
 Act authorises (empowers) the Commissioner to estimate the income of such person
and tax payable accordingly. Note that the Commissioner makes such assessments
when he considers that such taxpayer has or will have income chargeable to tax for
such year of income, and such estimate is based on the best judgement of the
Commissioner

(b) Self assessment

Sub-section (1) of section 94 of the Act deals with self-assessments. Where an entity
(individuals are excluded) files a return of income for year of income an assessment
shall be treated as made on the due date for filing the return of the income tax payable
on total income (in this case, business income and investment income) and repatriated
income

Entities are therefore required to include in the return and accounts submitted to the
Commissioner the computation of tax payable from the taxable income reflected in
such returns. Note that the said tax computation is referred to as a self-assessment for
income tax purpose, and the amount of tax shown as payable in the return is referred
to as the tax payable on the assessment

The concept of self-assessment, however, does not apply to individuals. Section 94

(4) requires the Commissioner to assess an individual upon filing the return of
income. If he has accepted the return, then he should assess such person basing on
such return. Here the Commissioner will make the normal add back disallowable and
deduct allowable by using the return figures

c) Best judgement assessment

If Commissioner is satisfied that the return of income submitted by an individual is
true and correct, he may accept the income returned and make an assessment under
section 94 (4) (a)

If the Commissioner is not satisfied that the return of income is correct and complete,
he has the power to estimate income of the taxpayer to the best of his judgement and
make an assessment accordingly

A best judgement assessment under the Act can be made with or without a return of
income; with or without the regular books of accounts; with or without the irregular
or incomplete books of accounts; or with or without the presence of the taxpayer. A
best judgement assessment is comparatively easy when the taxpayer has submitted a
return of income and it is necessitated due the omission on the part of the taxpayer or
due to return not being true and correct. A return may not be true and correct if the
taxpayer has not maintained any books of accounts at all, or even if he has
maintained them, they are not reliable or acceptable to the Commissioner

56
 Note further that sub-section (5) of section 94 of the Act also deals with regular
assessments, which are made on a best judgement assessment basis. It deals with
those cases of individuals who do not submit returns of income as required under
section 91 of the Act. According to this provision, it is immaterial whether the
Commissioner has required the taxpayer to submit a return of income or not. Once the
Commissioner is satisfied that an individual has income which is chargeable to tax
and it is proved that the individual has defaulted in submitting his return of income in
the year of income, Commissioner has the right to estimate his income to the best of
his judgement and make an assessment accordingly

d)Jeopardy or Accelerated Assessment

Section 95 of the Act deals with persons (both, individuals and entities), who are
about to leave the United republic permanently; be bankrupt, wounding up or going
into liquidation; or cease an activity in the United Republic, and sometimes if the
Commissioner considers it appropriate

The section is specifically enacted to safeguard revenue by authorising the

Commissioner to make an accelerated assessment

Note that if normal time for filing return is allowed and normal procedures are
followed (as specified under section 94 of the Act), it will be very difficult for the
Income Tax Department to locate the taxpayer or collect the due income tax from a
taxpayer who has already or is about to leave the jurisdiction of the United Republic
(e.g. follow up may be restricted by general principles of private internal law)

e) Adjusted Assessment
Section 96 of the Act empowers the Commissioner to adjust any assessment made
under section 94 and 95, that is, self assessment, regular assessment made to an
individual and jeopardy assessment in such manner as, according to the
Commissioner's best judgement and information reasonably available

To adjust here, implies that the Commissioner may amend or issue an additional
assessment where there is existing assessment made to any person. The section is is
giving powers to the Commissioner to lower or increase the already existing tax
liability of any person

Section 96 (2) limits the time of making adjustment to be within three years after
the due date of filing the return to which the assessments relate or in those cases
where the Commissioner has required the submission of those returns

Sub-section (3) of section 96, however, empowers the Commissioner to adjust any
assessment even after the expiry of three years if the person whose assessment is
being adjusted failed to file a return of income as required under section 91 where the

57
 Commissioner believes that the assessment to be adjusted is inaccurate by reason of
fraud by or on behalf of the assessed person

Cases which will be the subject of additional assessment

(i) Gains or profits from any source of income liable to income tax should have
been under-assessed; or
(ii) Have been assessed at too low a rate of income tax; or
(iii) Have been made the subject of excessive relief; or
(iv) Excessive deficit(loss) has been computed; or
(v) Excessive deductions under the third schedule of the Act have been allowed

NON-COMPLIANCE
Introduction
The provisions on non-compliance are found in Part XIII of the Income Tax Act
2004, which runs from section 98 through section 124. The scope of our discussion is
on Divisions I and II of this part of the Act which deal with interest and penalties, and
offences for non-compliance. These divisions run from section 98 through section
109

Types of failure or non-compliance

a) Failure to maintain proper documents or file a statement of estimate for year of
income or file a return of income as per sections 80, 89(1) and 91 (1);
b) Understating tax payable by installment;
c) Failure to pa tax on or before due date;
d) Making false or misleading statements;
e) Aiding and abetting

Interest and Penalties [Division I of Part XIII]:

a) Penalty for failure to maintain proper documents or file statement or return of

income [S. 98]

For each month and part of a month during which such failure continues the
HIGHER of:
 2.5% of the difference between the income tax payable for year of income
and the amount of that tax that has been paid at the start of the month; OR
 Tshs.10,000 in the case of an individual or Shs. 100,000 in the case a
corporation

b) Understating tax payable by installment [S. 99]

In instances where a taxpayer pays taxes in installments, and that his estimate of
income tax payable for a year of income under section 89 (which will be used to
calculate income tax installments payable under section 88) is less than 80% of the
income tax payable for a year of income as 'correct amount', such taxpayer will be
liable for interest for each month or part of the month from the date the first

58
 installment for the year of income is payable until the due date by which the person is
required to file a return of income under section 91 (1)

Amount of interest payable is calculated as statutory rate, compounded monthly

applied to the excess of-
 Total amount that would have been paid by way of installment to the start of the
period on 'correct amount' basis; over
 Amount of income tax paid by installments to the start of the period

c) Failure to pay tax on or before due date [S. 100]

Liable for interest for each month or part of a month ('the period') for which tax
remain outstanding at the start of the period, calculated as the statutory rate,
compounded monthly applied to the amount outstanding at the start of the
period

d) Penalty for making false or misleading statements [S. 101 (1)]

 Where a statement or omission is made without reasonable excuse:
50% of the underpayment of the tax that, in the CIT's view would have resulted if
the inaccuracy had gone undetected
 Where a statement or omission is made knowingly or recklessly:
100% of the underpayment, where the views of CIT are as above

e) Penalty for aiding and abetting [S. 102]

Where a person willfully or negligently aids, abets, conceals or induce another person
to commit any offence under Division II of Part XIII of the Act, in the first place,
itself is an offence
 Penalty equal to 100% of the underpayment given similar view as in (d) above

Assessment of Interest and Penalties

The imposition of interests and penalties is in addition to any other tax imposed by the
Act. Under S. 103 (3) a person is not relieved from criminal proceedings under Division
II of Part XIII, which deals with offences.
S. 103 (4) provides for notice requirements where assessment for interest or penalty is
made. The Commissioner is required to serve a written notice of assessment on the
person setting out the assessment, the mode of calculation of the assessment, reason for
the assessment, date of payment, and the time, place and manner of objecting to the
assessment

Offences [Division II of Part XIII]

Introduction
The Act, apart from providing for interests and penalties as sanctions for contravention, it
also criminalizes certain conduct. Thus, one may be liable for interest/penalty and
criminal proceedings for the same failure or offence

Offences

59
a) Failure to comply with the provisions of the Act is an offence under section 104,
and the provision provides for the penalty for the person being summarily convicted

b) Failure to pay tax on or before due date without a reasonable excuse is an offence and
such person will become criminally liable upon summary conviction as stipulated in
section 105The section also provides for the penalties

c) The offence of making false or misleading statements is provided for section 106,
which also provides for the punishment upon summary conviction

d) Impeding tax administration is an offence under section 107. The offence is

committed by obstructing or attempting to obstruct an officer of the TRA to carry out
his/her duties under the Act or through failure to comply with a notice issued under
section 139 (which empowers the Commissioner to inquire any information from the
taxpayer)

e) Section 108 creates offences on the part of TRA officers, other authorized and
unauthorized officers. The section deals with asking or taking any payment or reward
(bribe/corruption) by officers in the course of their duties and conduct that may cause
the Government to be defrauded such as concealing information, etc. in the case of
unauthorized officers. The section also deals with unauthorized offices who collect or
attempt to collect taxes

Section 108 (2) creates an offence out of breach of confidentiality, i.e. reveling
information contrary to section 140 (requires authorized officers under or instructed
with the Act to keep official secrecy)

f) Aiding, abetting, concealing, aiding or inducing a person willfully or negligently to

commit an offence under the Act is an offence

CPA REVIEW
P.15 Taxation

REVISION QUSTIONS ON RETUNS OF INCOME

1. A Commissioner, may by notice in writing serve a notice on the person requiring

him to file a return of income by the date specified in the notice for a year of
income or the part of the year of income

Under what circumstances is the Commissioner for ITA allowed to exercise this
power?

2. What is the distinction between terms “charge” and “assess” as used under ITA
2004?

3. Discuss different types of assessments under ITA 2004

60
 Under what circumstances will the Commissioner for ITA issue the following
assessment?
 An additional assessment
 An amended assessment
4. Why the employees are generally exempt from being formally issued with
notices of assessments?

State the circumstances under which an assessment may be raised on an employee

5. The twelve months accounting period of the Mwagalla Trading Company

normally ends on the 31ST October of the calendar year. For the year of income
2004, the company did not furnish its provisional; returns despite repeated
reminders from the Commissioner.

The company finally decided to furnish the final returns for 2004 on 15th June
2005 for income of Tshs. 200 million. The Commissioner made best judgment
assessment for the year on 30th September 2005 of an income of Tshs 400 million

Assuming the company intends to liquidate the full liability for the year of income
2004 on the 8th November 2005

Required:
Compute the total tax due and payable on that date (Quote the relevant sections of
the ITA 2004 in answering the questions)

6. ABC Ltd was provisionally assessed to tax of shs.5,850,000 on the 15th April
200X1 for the 200X1 year of income, after having failed to furnish such a return
despite having been required to do so by the Commissioner. The company‟s
twelve months accounting period normally runs from 1st September of each
Calendar year

On 1st December 200X1 the Commissioner served the Company with notice
requiring it to furnish the regular return of income for the year 200X1 within 40
days of that date

The company paid the full taxes on the provisional return for the year 200X1 on
15th June 200X1. However it furnished the final return for the year on the 20th
may 200X2, which declared an income attracting tax of shs. 12,000,000

On 30th July 200X2 Commissioner made an assessment on the Company for the
year 200X1 of shs. 26,540,000

Required:

61
 On the basis of ITA 2004 provisions, calculate the tax payable by the Company
(including the penalties) for the year of income 200X1 (Ignore section 100
interest in respect of the provisional taxes)

7. The Accountant of SETEBE Milling Company Ltd. finalized the preparation of

the company‟s proforma draft accounts within two months of the commencement
of the year 200X1 accounting period that ended on 31st of March. He was then in
a position to furnish the provisional return for the year but he did not do so

On the 15th March 200X1 Commissioner made a best judgement estimated

provisional assessment for the accounting period of a tax of shs.8,000,000. The
full taxes on the provisional return were paid on 29th March 200X1

On the 1st September 200X1 the Commissioner served a notice on the Company
requiring it to furnish the regular return of income for the year of income 200X1
within 30 days of the date of service of notice. The Company‟s accountant
however, did not comply with this notice. As a result, on the 15th June 200X2, the
Commissioner made presumptive regular assessment on the company which was
50% of the income estimated in the provisional return

Required:
Assuming the Company pays the full taxes due on the final return for the 200X1
year of income on 10th July 200X2

a) Determine the provisional taxes paid on 29th March 200X1

b) Determine the taxes paid on 10th July 200X2

P.15 Taxation

Returns of Income (Questions ctd…)

1. The Morotex Company Ltd was served with a notice from the CIT on 15.4.200X1,
requiring it to furnish a provisional return of income for the 200X1 year of income.
The firm however, did not respond to the CIT's call.

The CIT therefore made a best judgement assessment for the 200X1 year of income
on 30.5.200X1 on 40 million/= income. The firm's accountant came to pay the total
provisional taxes on 30.6.X1

Required:
Calculate the total taxes paid by the firm as at that date

62
Underestimation of provisional taxes payable by installments (section 99)

2. For he year of income 200X2, Kinjekitile Co. Ltd managed to furnish provisional
returns and paid the provisional taxes within the due dates on 200million/=

On 31st July 200X3, it received a notice from the CIT, requiring it to furnish a regular
return for the year of income 200X2 within 60days of the date of service of notice of
assessment which was dated 15th July 200X3 an posted on the same date

The firm however, submitted the return on 31.12.200X3 declaring income of

300million/= and paid the total tax due on the same date

Required:
(i) Total tax liability paid on that date
(ii) Total tax liability paid on that date assuming that firm declared an income of
250 million/=

CPA REVIEW
P.15 Taxation

RETURN OF INCOME

ABC Company Limited's main line of business is milling. The company's 12 months
accounting period ends on 30th June of the calendar year

For the year of income 2004, the company did not furnish provisional return despite
being reminded to do so. Consequently on 31st December 2003, the Commissioner made
a best judgement provisional assessment for the year of an income of 200 million/=

On 20th April 2004, the company paid the total provisional tax due as at that date. The
remaining installment was also subsequently paid on its due date.

On 30th September 2004, the company was served with a notice from Commissioner
calling for the final return for 2004, on or before the 15th of November 2004.The
company however, submitted the final return on the 28th February 2005 declaring an
income of 400million/=

The commissioner made an assessment on the furnished final return and accounts on 11th
May 2005 of an income of 300million/=

Required:

63
Calculate the tax payable
a) On the provisional returns on 20th April 2004
b) On the final return on the date the final assessment was made

CPA REVIEW
P.15 Taxation
RETURN OF INCOME

ABC Company Limited's main line of business is milling. The company's 12 months
accounting period ends on 30th June of the calendar year

For the year of income 2004, the company did not furnish provisional return despite
being reminded to do so. Consequently on 31st December 2003, the Commissioner made
a best judgement provisional assessment for the year of an income of 200 million/=

On 20th April 2004, the company paid the total provisional tax due as at that date. The
remaining installment was also subsequently paid on its due date.

On 30th September 2004, the company was served with a notice from Commissioner
calling for the final return for 2004, on or before the 15th of November 2004.The
company however, submitted the final return on the 28th February 2005 declaring an
income of 400million/=

The commissioner made an assessment on the furnished final return and accounts on 11th
May 2005 of an income of 300million/=

Required:
Calculate the tax payable
c) On the provisional returns on 20th April 2004
d) On the final return on the date the final assessment was made

Value Added Tax

The following purchases and payments relate to Mr. K, a taxable person for the m,onth of
January 2004

1) He purchased live cattle at 1,875,000/=

2) He purchased cans for packing processed meat at 654,000/=
3) Heavy duty mincing machine 800,000/=
4) Salt 80,000/=
5) Cooking oil 80,000/=
6) Transportation of live cattle 230,500/=
7) Transportation of canned beef and sausages to customers 100,000/=

64
8) Transportation of smoked (unprocessed) beef to customers 45,000/=
9) Tax invoice books 85,000/=
10) He paid electricity, telephone and water bills amounting to 158,000/=, 37,800/= and
69,000/= respectively
11) He purchased two weighting machines at a total cost of 150,500/=
12) Two deep freezers from Mr. Abdi 950,000/=

During the same perid he made the following supplies to his customers:

CPA REVIEW
P.15 Taxation

Value Added Tax

The following purchases and payments relate to Mr. K, a taxable person for the m,onth of
January 2004

13) He purchased live cattle at 1,875,000/=

14) He purchased cans for packing processed meat at 654,000/=
15) Heavy duty mincing machine 800,000/=
16) Salt 80,000/=
17) Cooking oil 80,000/=
18) Transportation of live cattle 230,500/=
19) Transportation of canned beef and sausages to customers 100,000/=
20) Transportation of smoked (unprocessed) beef to customers 45,000/=
21) Tax invoice books 85,000/=
22) He paid electricity, telephone and water bills amounting to 158,000/=, 37,800/= and
69,000/= respectively
23) He purchased two weighting machines at a total cost of 150,500/=
24) Two deep freezers from Mr. Abdi 950,000/=

65
During the same period he made the following supplies to his customers:

1) Unprocessed meat 965,000/=

2) Sausages 720,000/=
3) Canned minced beef 1,600,000/=
4) Minced beef (not canned) 540,000/=
5) Smoked beef 380,600/=

Additional information:
 In return of the two deep freezers from Mr.Abdi, he supplied to him sausages and
canned beef valued at 250,000/= and 150,000/= respectively. These were not included
in the value of supplies made by him above
 During the same period, he held a birthday party for his son. For this purpose, he took
from his business minced beef (not canned) 320,000/= and 275,950/= respectively
 On 28th January 2004, he supplied smoked beef 75,000/= and sausages 50,000/= on
credit to Mr. John Said on an agreement that payment will be paid on 15th February
2004

Required:
Calculate the amount of VAT paid by Mr. K for the month of January 2004

TOPIC 7

INTERNATIONAL TAXATION

There is no doubt that double taxation is partly due to international co-operation.

International co-operation is of crucial importance in order to achieve rapid economic
and social development by: -

 Establishing bilateral and multilateral regional economic groupings to promote trade

and investment, e.g. COMESA, SADC, EAC.
 Formulation of competitive investment incentive packages in order to attract both
local and foreign capital.
 Concluding as many International double taxation relief agreements as possible with
major trading partner nations. These agreements are intended to allow cooperation in
training and tax administration to promote:
- Free flow of capital
- Free flow of technology
- Free flow of skilled technical personnel.

Double taxation

66
 Meaning
Phenomenon whereby the same income is taxed in two or more tax jurisdictions.
- In the same year of income
- By the same tax payer

Effect of Double taxation (Economically and Socially)

Economically :
- Discourages the free flow of resources and investment.
- Possibility of tax avoidance and evasion, resulting into loss of government
revenue.

Socially :
Financial hardship (disposable income becomes very small).

Circumstances under which International Double taxation arise:

i. Income partly earned in Tanzania and partly outside

Overlapping tax jurisdictions due to conflicting source rules among different
nations (different rules)

- Each country has the right to tax her nationals in whatever manner.
- Likewise, non-residents who derive income from another country are taxed as
well in that particular country.
- In case of URT – resident person is chargeable on his income accruing or derived
world wide. Under such circumstances, double taxation will arise.

ii. Non – residents with Tanzania Income

- All incomes which arise in URT is taxable whether it accrues to resident
person or non resident person.

- Therefore, where a non resident person is liable to Tanzanian tax and also
liable to comparable tax in his country, double taxation will arise

iii. Trust income

- Case law has established that the source of a beneficiary‟s share of the trust
income is the trust itself.

- Therefore, share of the trust income from Tanzania trust could include foreign
sources of income, and thus attracting double taxation.

Approaches to problems of double taxation

a) Granting relief

67
 (i) International Double taxation relief
(ii) Domestic Double tax relief

International Double Taxation relief

Refers to International tax relief granted through taxation agreement negotiated
between Tanzania and other countries. (being international calls for a need of
cooperation between these countries in granting relief).

The purpose is to give relief by way of exemption, credit and set offs, for tax suffered
on income originating in these countries.

It is very important because it may promote flow of trade, investments and encourage
capital formation

Domestic Double Taxation Relief

Relief which relates to double taxation within the same tax jurisdiction/country.

- Relief mechanism is easier

- Does not require any international formal treaty or convention

Can be granted in the form of personal allowances or relief e.g. portion of

chargeable income being treated as free, reducing tax burdens of married person by
predetermined margin.

Note that both individuals and non-individual (i.e. persons) can claim international
double taxation relief while domestic relief is claimed and granted to individuals
only.

Significance of International cooperation and relief from double taxation:

Double taxation relief has positive impact to both, taxpayer and economy

Due to high rates in most countries, double taxation may give rise to
financial hardship, harmful effects on the exchange of goods and services, and may
affect movement of capital, technology and skilled personnel

b) Alternative approaches

(i) The Laissez Faire Approach:

Whereby a country avoids administrative difficulties by ignoring taxation of
international transactions.

68
 Problem
- Loss of revenues, which deprive economy (financial and other resources are
lost)
- Adversely affects country‟s investment pattern because local investors will
feel that they are discriminated against foreign investors.
- Ignores equity principle.

(i) Agreement Relief and International cooperation

Unilateral Relief:
- Granting relief for foreign tax without regard to whether the other taxing
country is prepared to do so in similar circumstance.
- The relief is given by the country in which the claimant is resident.

Problem
- Not favoured because interferes with foreign tax jurisdiction and national
sovereignty.
- It may be very expensive and yet most ineffective e.g. it may force tax official
to travel outside the country to enforce tax legislations on some defaulters
who have escaped the country (loss of time, money).

Bilateral and Mutual Agreement Relief.

This is formal mutual international co-operation between different taxing
jurisdictions.

Treaty negotiation (Concluding international double taxation relief)

It is a complex and tedious but a necessary process in order to conclude efficient treaties.
It involves use of Organization for Economic Co-operation and Development (OECD)
and United Nations‟ models as a basis for treaties

Criticisms and Comments (Problems arising in treaty)

(a) Taxation of specific sources of incomes and persons should be outlined e.g. Rent,
shipping, royalty, students,
(b) Permanent Establishment (PE)
It should be noted that not all permanent establishments are subjected to tax. e.g.
– PE for use of facilities for storage, a fixed place of business solely for
purchasing goods and collecting information.

(c) The method of the foreign tax relief should be specified.

Two methods are available:
- Credit method
- Exemption method

69
(d) Computation of the credit relief.
The computation may require information from the other state hence the
significance of the exchange of information clause.

(e) Arbitration or resolution of disputes

- Dispute is inevitable in any treaty.
- Therefore, efficient machinery should be established in order to deal with such
disputes quickly and effectively.

Methods of Arbitration.
(Machinery to solve disputes)

(a) The authority

(b) Technical standing committee.

The Authority.
The Presidents of the two contracting states constitute the Authority.

Problem
- Presidents are unlikely to be experts in law and accountancy.
- Hence, not able to decide on technical issues, as a result they will tend to delegate
technical issues and causing delays in decision making.
- Presidents have limited time for regular non political meetings.
- Possibility of developing political „impasse‟ that may paralyze and cripple the whole
process of arbitration.

Technical Standing Committee

More desirable because:

- Committee is composed of technical experts (lawyers, tax consultants, accountants),

hence competent in deciding on technical issues.
- They (technicians) have enough time to deliberate on the disputes quickly (not
constrained by political considerations).

The methods of granting relief

a) Credit Method (Set-off)

b) Exemption

Credit method:
A Relief is affected by way of deduction of set offs from the total tax liability. Credit
relief can only be granted to resident persons who have paid foreign income tax or

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comparable tax on the same income which is derived from another foreign country. The
credit method is more preferred

REVISION QUESTIONS
1. What do you understand by the phenomenon 'double taxation?'
2. Identify two types of double taxation and their possible causes
3. It is argued that conclusion of many international double taxation agreements is very
important for the economic and social development of a country

Appraise this argument

4. Identify and discuss various approaches to the problem of double taxation

5. Identify methods of granting double taxation relief, state which is more preferred and
why
6. Discuss two methods (machinery) of arbitration in the course of disputes arising from
treaty negotiation

P. 15
Taxation

General Revision

1. Explain how you would treat the following transactions for taxation purposes/taxation
implications under ITA 2004:
a) A sum of 200,000/= was distributed as dividend by ABC Ltd, a resident
corporation to another resident corporation, Katani Ltd which owns 26% of
the shares in ABC Ltd

b) A sum of 100,000/= paid to the Education Fund established under Education

Fund Act, 2001.Income from business for that year of income is 5,000,000/=

c) Shs. 500,000/= spent by the company as expenditure in improving processing

capacity of a plant during the year

d) Shs. 30,000/=representing monthly benefits derived from the use of residential

premises by employee of Mzumbe University

e) Shs.3,000,000/=, being gain on sale of premises (land and its building)

included in the accounts as an income

f) Shs. 200,000/= paid to Mr. Baraka as interest from a resident bank with
respect to a deposit held with the bank during the year

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 g) During the month of September 200X1, Mr. Abihudi received 200,000/=
representing capital gains from his shares in ABC Ltd. During the same month
he realized a loss of 100,000/= from his shares in Beta Ltd

h) A sum of 1,000,000/= paid to Mzee Kokola on the completion of 25 years of

services on the anniversary held by Mshiko Ltd, the employer

i) Amount of 1,220,000/= shown as Skills and Development Levy (SDL) in the

payroll of Changanyikeni College of Management for the month of September
2005. September gross wage bill is 30,500,000/=

j) Change in the accounting period

k) Income received or expenditure incurred after cessation of business

l) Income from a foreign company without permanent establishment in Tanzania

m) Shs.200,000/= as tax paid on taxable supply in Tanzania Zanzibar at the same

rate as the rate applicable in Mainland Tanzania

n) Tax paid on taxable supply in Tanzania Zanzibar at the lower rate than the rate
applicable in Tanzania Mainland

o) Depreciation basis of Class I at the end of the year of Income after reducing
by the respective depreciation allowance results in to 937,500/= (Hint: See
Additional depreciation)

2. The government has now accepted the principle of "leave business to businessmen"
in order to concentrate on its traditional role of government

(i) What is the traditional role of government?

(ii) What are the causes for the change of government attitude?

3. Relatively little investment has taken place in Dodoma in spite of the Dodoma
Special Investment Area Act, 1989

Explain possible reasons for the slow pace of economic investments in Dodoma, the
proposed capital of Tanzania

4. Luck Co. Ltd is registered for VAT since July 2004. The company submitted the
returns for November 2004 to March 2005 on 1st April 2005. The VAT due for each
month wee as follows:

November, 2004 Shs. 400,000

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 December, 2004 800,000
January, 2005 10,000,000
February, 2005 14,000,000
March, 2005 11,000,000

Required:
(i) Specify the due date for each return
(ii) Calculate the total penalty due

5. ABC Ltd is a resident corporation with branch in Zambia. For the 2004 year of
income it had the following figures as business income:
- From Tanzania establishment Shs. 25,000,000
- From Zambia branch 1,200,000

Required:
Compute the qualifying foreign tax credit on ABC Ltd under the following conditions:

(i) ABC Ltd paid an equivalent of shs. 120,000/= as income tax in Zambia
(ii) ABC Ltd paid 40% as tax in Zambia

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