It’s time to reform PAYE

Shabu Maurus, Tax Partner, Auditax International.If you are an employee and are to pull out your latest payslip, chances are, you would see two important lines among the list of deductions taken out of your salary – the pension contribution and the PAYE. In most cases, it is the PAYE that makes the biggest chunk of the statutory deductions. And for those who have outstanding higher education loans, the statutory loan deduction can also be significant.

In aggregate, employees in Tanzania pay more income tax than all businesses combined (corporations and sole proprietors). The average PAYE contribution (to the total tax collections) for the past ten years stands at around 16 per cent while the average for businesses is around 12 per cent. The average PAYE collections are even higher than the average for domestic VAT (i.e. excluding VAT on imports), with the latter being around 15 per cent. Looking at these statistics, there is still a room to relieve employees of the income tax burden.

PAYE stands for Pay-As-You-Earn. It is a tax on employment income payable to the government by way of a withholding system. Under this system, an employer is required by law to deduct income tax from employee’s taxable income at various rates from 9 to 30 per cent and remit to the government. If, for example, your monthly gross salary is 1,000,000 shillings, your employer deducts and remits 100,000 shillings to your pension fund and 152,100 shillings as income tax to TRA. If there are no other deductions (like higher education loan and medical insurance) that your employer is obliged to deduct, only 747,900 shillings may reach your wallet! The more your employer deducts other repayments and contributions, the lesser the amount going into your wallet.

The remaining amount (after deductions by employer) needs to foot the bills for your other obligations - including food, rent, school fees (if you have kids), electricity bills, water bills, transport to and from work, cooking gas, and not to forget airtime. In addition, consumption of some these attracts further taxes such as VAT and excise duty. To many employees, this makes savings almost impossible. Savings (the amount you remain with after all your expenditure) are important to individuals and to the economy. Savings, basically, are the source of borrowings by the businesses to increase their production of goods and services. With the financial sector (banks, stock market) playing a facilitator role. So, when an employee cannot save, it tends to affect the capital formation in the economy and hence growth.

In recent years, the focus appears to have been only on the tax rate of the second band of the taxable income. Over the past ten years, the rate for this band has gone down from 15 per cent (the year 2008) to the current 9 per cent. However, most of the employees may not have felt any relief because the rates for the other bands remained unchanged. As an example, when the rate for the second band changed from 11 per cent to the current 9 per cent, the amount of relief to employee brought by the change was only 3,800 shillings per month! Also, the bands have not been significantly restructured since 2008 despite the changes in inflation rates and the depreciation of our currency (shilling). For example, the highest taxable band (taxed 30 per cent) starts at the monthly taxable income of 720,000. This has been the case for over ten years or so. In 2008, the amount 720,000 shillings was equivalent to around USD 600. But today, USD 600 is close to 1,400,000 shillings. The current band structure is clearly outdated and needs some reforms to provide some relief to employees.

By Shabu Maurus, Tax Partner, Auditax International.

The Bank of Tanzania has issued guidance on application for licence to carry out non-deposit taking microfinance business (tier 2) by entities/companies

The Bank of Tanzania (BOT) has issued guidance on application for licence to carry out non-deposit taking Microfinance for Tier 2 microfinance service providers which include credit companies, financial organizations, housing microfinance companies, individual moneylenders and digital microfinance lenders. The guidance includes categories for general information and documents required for application.

Read the guidance here.

Why proper record-keeping is crucial

Lack of proper business records is one of the major hindrances to a successful tax administration in Tanzania. This problem is acute in the informal sector, but it is also a common occurrence in the formal sector. Lack of proper business records may be inadvertent or deliberate or both.  The tax administration law in Tanzania (The Tax Administration Act, Cap. 438), requires taxpayers to keep records about their businesses in accordance with the generally accepted accounting principles and the requirement of a tax law. Broadly, the law requires taxpayers to maintain documents, either in paper or electronic form which contain information that can enable an accurate determination of tax liability under any tax law. Taxpayers are also obliged to retain such information for a period of at least five years.

The normal rules for determination of income tax liability are reliant on proper accounting records of a taxpayer. In the absence of taxpayer’s proper accounting records, an accurate determination of the income tax liability using the normal tax rules (of establishing a taxable profit) becomes a nightmare. However, the tax laws give Tanzania Revenue Authority (TRA) extensive powers to determine and collect tax on a presumptive basis. TRA may also penalize taxpayers who fail to keep proper documents.

Presumptive taxation involves the use of indirect means to ascertain tax liability, which differ from the usual rules based on the taxpayer's accounting records. The term "presumptive" is used to indicate that there is a legal presumption that the taxpayer's income is no less than the amount resulting from an application of the indirect method. There are various reasons a presumptive tax approach can be adopted. One is a simplification of both tax compliance and tax administration. A presumptive approach can also be used to curb tax evasion.

Resident individuals earning their incomes solely from business in Tanzania are, by default, taxed on their income under a presumptive income tax scheme provided their annual turnover is 100 million shillings or less. Presumptive income tax rates are based on a level of turnover and also whether the individual keeps proper records or not. The tax rates for individuals not keeping proper records are specific (i.e. the amount of tax is specified) whilst those keeping proper records the rates are ad valorem (a percentage of the turnover amount). The tax rates, whether proper records are kept or not, increases with turnover (progressive). But, generally, the income tax tends to be higher for those not keeping proper records.

In the absence of proper business records, apart from the presumptive income tax which may only apply to individuals with an annual turnover not exceeding 100 million shillings, the tax administration law empowers TRA to make "jeopardy assessments" based on the available information and "best judgment". Conceptually, this is another form of presumption except that the tax base is not prescribed which effectively gives TRA a wider scope to determine tax liability as long as it is based on the best judgment.

Once TRA issue a tax assessment to a taxpayer, the burden of proof as to the incorrectness of the assessment lies with the taxpayer. In the absence of proper records, a taxpayer may not be able to, successfully, challenge any tax assessment including the jeopardy assessments. Therefore, withholding of information that may assist TRA to determine proper tax liability may not be the best strategy to reduce income tax liability especially if the chances of a tax audit are higher. So, you can make proper record-keeping among your top-five resolutions for the year 2020.

By Shabu Maurus, Tax Partner, Auditax International.

 

 

 

Are you happy with the tax system?

Either directly or indirectly, we pay taxes. We pay taxes when we buy fuel for our cars, generators or lanterns at home. There are taxes on electricity. We pay taxes when we buy clothes and shoes. There are several taxes embedded in the prices we pay for the foodstuffs. There are also taxes on the water we drink, specifically the bottled water. You probably have heard this old phrase several times: "In this world, nothing can be said to be certain, except death and taxes". With the prevalence of consumption taxes such as VAT around the world, the phrase is even truer now than before. Of course, the government needs tax revenue to be able to deliver public services. Maintaining peace and security, construction of roads, provision of health services and provision of free education just to name a few.

But there are several aspects of the tax system that can affect you or your economic activities. It could be the tax rate. It could also be the tax base. That is what or who to tax. Should the SMEs be taxed? How should the informal sector be taxed? Another aspect that can affect you is how a tax is administered or collected. You may not be happy with some of these tax aspects or you probably believe that there is a better way more tax revenue can be collected in Tanzania. And, maybe, somehow you are not directly affected by taxes. However, as a good citizen, the fact our budgeted tax revenue cannot fully fund the budgeted recurring expenditure probably should be enough to concern you. In the budget year 2019/2020, the budgeted tax revenue (19.1 trillion shillings) cannot fully cover for the budgeted recurrent expenditure (20.9 trillion shillings).

So, the question is whether you, either as an individual or organization, can influence the tax reforms.  Yes, you can influence the tax system and there are several ways to do it. Directly and indirectly. Also, formally and informally. In this article I briefly highlight one of the formal channels, as we start the new year 2020, you can resolve to use. It is through the Task Force on Tax Reform.

Task Force on Tax Reform

There is a Task Force on Tax Reform (“Task Force”) organized at the Ministry of Finance and Planning. Task Force receives, hears and deliberates on various tax reform proposals from across the range of stakeholders and thereafter makes recommendations to the Minister of Finance and Planning.

Normally, the Task Force receives tax reforms proposals from around December each year to around mid-February of the following year. So, now is the time to write and submit your proposals for the fiscal year 2020/2021. In the notice issued by the Permanent Secretary - Treasury, recently, stakeholders (including you, of course!) are invited send their tax reform proposals to the Task Force by 10th February 2020 (within the next 30 days from now). Your proposal should, among other things, state the regions or taxpayers who will be affected and the way they will be affected (positively or negatively), the impact to the economy and government revenue both short and long term and how your proposal will help the government achieve its overarching objectives. And in case your proposal entails a reduction of government tax revenue, you must also indicate how the government can offset the resulting shortfall. After receiving proposals, the Task Force also invites stakeholders to make presentations and discuss their submissions. Again, this interactive stage is a good opportunity to make your case for tax reforms you proposed.

Shabu Maurus, Tax Partner, Auditax International.

The Ministry of Finance and Planning invites all stakeholders to participate in the upcoming proceedings of the Task Force on Tax Reform, in preparation for 2020/21 Budget

The Task Force invites the participation of officials from the Government, the private sector, civil society, religious organizations, academic community, research institutions and other specialists in public sector economics for discussion of the various issues related to tax policy and administration for 2020/21 Budget.

The proceedings of the Task Force on Tax Reform in preparation for 2020/21 Budget are scheduled to get underway in February 2020.

Read more here.

Have you resolved to manage your tax affairs?

Shabby Maurus, tax partner, Auditax InternationalHappy New Year 2020 and I hope you're looking forward to a successful year ahead! As we start the year 2020, most of us have a multitude of resolutions. It is normal. Some would write them down and some may not. Some resolutions may be about money, business or money-related. This, of course, depends on the activities you are engaged in. The tax landscape in Tanzania has significantly changed during the last few years. The tax laws are changing. The tax authority (TRA) is also becoming very aggressive in their interpretation of tax laws as well as the actual tax collection. Also, several tax cases have been decided (in the tax courts) that have changed the way some aspects of tax laws are interpreted.

Setting resolutions may be easy but accomplishing them may be quite difficult. Several challenges can come on your way. And tax is likely to one of them. This is especially true if you are in business and you are not actively managing your tax affairs. Handling of your tax affairs can no longer be business as usual.The consequences for not managing your tax affairs are numerous. And most of these are likely to come as a surprise. TRA can demand tax from you based on their best judgement if you have not supplied them with sufficient business information. Some of the demands can be very frightening to your business. Penalty and interest can also be demanded. Your business premises can be closed leading to losses as business operations stop. The tax authority can also recover tax directly from your bank accounts. TRA can also recover tax from some or all your customers who buy from you on credit. Any of these can be enough to paralyze your well-crafted resolutions!

Tax compliance broadly may involve registration, de-registration, filing of tax returns, making tax payments, or giving the tax authority business information. The question is: is your organisation aware of these various obligations as they relate to its business? Not doing any of those actions within the prescribed timelines may attract unexpected penalties. If the inaction amounts to an offence, a fine or jail term or sometime both may apply. And as predicate offences, tax offences caneasily lead to money laundering charges.

Sometimes non-compliance with tax can happen due to the organisation's failure to apply tax laws, regulations and decisions to routine business operations. For example, selling a product to a sister company may have different tax implications from selling the same product to the un-related company. Non-compliance can also come from failure to correctly apply the relevant tax laws to specific transactions. This is especially likely for unusual or non-routine transactions. It can be a sale of fixed or capital assets, sale of business or part of a business or a restructuring project. For example, sale of building, land or share is subject to specific tax treatment. 

Tax management is a systematic process within an organisation. A process to identify, assess, prioritize and respond to the tax risks facing your organisation. Does the board of directors or management of the organisation know all taxes that their organisation is obliged to comply? Ultimately, it’s the board that is responsible for actions or inactions of their organisation. It is not uncommon to find out that some organisations do not even know all the taxes that they are required to comply.                                                                                                                                                  Shabu Maurus, Tax Partner, Auditax International

Beware of the 80pc accuracy tax rule

In Tanzania, generally, an annual tax on business or investment income is payable to the tax authority in four instalments during the year of income based on estimates. Section 75 of the tax administration law (The Tax Administration Act, Cap 438), essentially, requires that entity’s estimates for income tax be at least 80 per cent accurate. If your entity has 31st December as its year-end, then it means for the year 2019, you still have a window of two weeks to perfect the income tax estimates. You probably filed the original estimates sometime in March 2019 and made some revisions later. But now, with actual outcomes for 11 months (January to November 2019), you probably stand a better chance to estimate even more accurately. Periodic reviews of your financial plan need to happen to test the validity of your financial and tax estimates. This is important even if the exercise does not lead to revising your provisional income tax return.

A taxpayer whose income tax is payable by instalments is required to submit a statement of tax estimate for the year of income to the tax authority and pay the first instalment by the end of the first quarter of the year of income. The income tax estimate should be at least 80 per cent accurate short of there is a penalty (underestimation interest). The interest will apply at statutory rate compounded monthly from the due date of the first instalment to the due date of the final tax return.

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

From 1st July 2017, if your tax estimate is less than 80 accurate, then underestimation interest will be computed based on the difference between the correct income tax and the estimated amount paid by instalments during the year of income. That is if the correct income tax for the year 2019 will be finally determined as shillings 100 million, but your estimate is shillings 79 million, then underestimation interest will be computed on shillings 21 million (i.e. the correct 100 million less the estimate of 79 million). You will notice, as this example depicts, the interest computed on shillings 21 million will surely be significantly higher than interest computed on shillings 1 million.

Whilst the 20 per cent range of accuracy may seem so wide for you to miss, in practice, it may easily be missed if there are no adequate internal controls for tax. For example, income tax estimate is essentially a by-product of your estimates of income and expenses. If you get either or both two wrong, your tax estimate is also likely to be wrong. With a wrong tax estimate, you may end up paying a higher amount of income tax than what would have been paid if the proper estimate was done or pay less and get penalized. Overestimation will, unnecessarily, strain your cash flow. Underestimation of tax, as demonstrated above, will attract potentially huge underestimation interest. So, you need controls in place that will ensure tax estimate is at least 80 per cent accurate.

By Shabu Maurus, Tax Partner, Auditax International.

Are you doing business in leased premises?

Shabu Maurus, Tax Partner, Auditax internationalAre you doing business in leased premises? If yes, then this article may be a good read for you. There is a new accounting standard (“new rule”) that require a different way of accounting for leased assets including your office premises. The new rule is called “IFRS 16 Leases” or simply “IFRS 16”. The acronym IFRS stands for “International Financial Reporting Standards”. IFRS 16 applies for entities for accounting years started 1st January 2019 or after.  IFRS 16 has come with some tax uncertainties or risks that need to be managed. However, this article is not intended to discuss the technical details of how to account for leases under the new rule or tax purposes. Just a reminder that there is a new accounting rule that needs your closer attention as the year 2019 closes, and it may impact on your income tax liability and disclosure.

A decision whether to buy an asset or lease from others can be critical to the business. It is also critical for tax. The decision can make a difference as to the amount as well as the timing of tax liability. While building or purchasing your office building can be expensive and may take time, renting is relatively faster, and the periodic rental payments may not be as painful. So, doing business in rented premises is quite a normal business practice.  Other assets (like equipment or vehicles) can also be accessed by way of a lease rather than purchasing.

Under a lease transaction, a tenant (or lessee) enters into a lease agreement with the landlord (or lessor). The lease agreement, essentially, creates rights (assets) and obligations (liabilities) for the parties involved. At the start of a lease a lessee obtains the right to use an asset for a period and, if payments are made over time, incurs a liability to make lease payments. The new rule is meant to ensure more transparency on these rights and obligations. The old rule (“IAS 17 Leases”), did not require specific disclosure of these rights and obligations in the balance sheet by entities. The absence of information about leases on the balance sheet meant that investors and analysts were not able to properly and easily compare companies that borrow to buy assets with those that lease assets.

Under the new rule, the distinction between operating leases and finance leases disappears for the lessee. Instead, a right-of-use asset and lease liability are recognized in respect of all leased assets including assets leased under what would be an operating lease under IAS 17. Under the new rule also, rental expenses are no longer reported in the income statement. Instead, two new expense items will be reported. An interest expense (reflecting, in substance, the financing aspect of the lease to the lessee) and a depreciation charge (for the right-of-use asset). Unfortunately, the income tax law has not changed. The tax rules, essentially, still reflect the old accounting rule (IAS 17). How taxpayers should now reconcile the two sets of rules is likely to be challenging and a new source of future tax disputes between taxpayers and the tax authority (TRA).

Will these new expense items be acceptable for tax deduction? Maybe not! But then, what will and how the same can be reflected in financial statements? Unfortunately, on this matter, there are no specific guidelines to taxpayers from TRA that I am aware of. For businesses with a significant amount of leased assets such as banks (leased branches) and telecoms (leased towers), one option is to seek a private or class ruling from TRA.

By Shabu Maurus, Tax Partner, Auditax International.

What does it take to pay taxes? - (7)

Shabu Maurus, Tax Partner, Auditax InternationalThe previous two articles in this series shed some light on some aspects of the taxpayer’s business that tend to affect tax compliance costs (TCCs). Aspects such as the legal vehicle for business, types of goods and services and the way these are supplied (the distribution model), the business location(s) chosen, the business size, how business leverages on ICT, and the tax management approach. But there are external factors that either alone or in conjunction with the business aspects, may also influence the level of TCCs of taxpayers.

Tax administration practices

The way a tax authority administers tax laws tend to affect the level of compliance burden on taxpayers. Efficient tax administration is important in reducing tax compliance costs. The taxpayer audit function of the tax authority plays a critical role in the administration of tax laws. Its primary role is detecting and deterring non-compliance. The tax audit work demands that auditors can interpret the complex laws and carry out intensive examinations of, sometimes also complicated, books and records pertaining to the businesses of taxpayers. And, by necessity, through their several interactions with taxpayers, the tax auditors are the "public face" of a tax authority.

How long does it take for the tax authority to undertake and close a tax audit? The longer it takes to finish a tax audit, the more a taxpayer will incur as cost. That is more time is spent by the taxpayer to support the tax audit work instead of spending that time for his core business or production of income. How well tax auditors plan their audit work? What kind of information do they require or request from a taxpayer for the audit? What is the scope of the audit? Unprepared tax auditors are likely to be unfocused during the audit and may request information that is irrelevant for the tax audit or information that the taxpayer had already submitted to the tax authority with the tax returns, for example. Poor coordination of the tax audit work tends to disrupt the taxpayer's business operations. Also, taxpayers who are frequently audited tend to have higher compliance costs.

The complexity of tax laws

Tax complexity can come from design features of the tax (“design complexity”) - for example, the number of different tax rates, exemption rules and expense deduction rules. Or from the operation of the tax law. How easy/costly it is for an honest taxpayer to comply with the informational, filing and payment requirements or obligations of the tax system. A taxpayer is likely to take more time to understand and comply with complex tax rules. For example, where tax return forms are very complex, taxpayers may incur additional cost to engage a tax consultant (payment of consultancy fee). Or risk making errors in the tax return with potential penalties or even worse, overpayment of tax. Cumbersome tax procedures may also induce taxpayers to pay bribes to tax officials.

Just like other laws, tax laws are also subject to changes. There are several reasons a tax law may be changed. It could be to reflect a new tax policy on the tax rate or tax base. However, when the changes are frequent, it becomes expensive for taxpayers. Changes may necessitate taxpayers to learn new rules, change or update their systems or even change their business plans or strategies. These and other similar reactions to tax changes may mean additional cost to the taxpayers involved.

By Shabu Maurus, Tax Partner, Auditax International.

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