TAXATION
By: Greyson Nyantamba
TOPIC ONE: IMPOSITION OF INCOME AND TAX BASE
INTRODUCTION
What is tax?
Adam Smith defines tax as a
compulsory payment levied by the government on individuals or companies to meet
the expenditure which is required for public welfare
Characteristics of taxes
Taxes share common
features; the common features of taxes are sometimes known as characteristics
of taxes which are
1. Taxes are mandatory charges; not contributions, donations or gifts to
the state, it is legally imposed and non compliance results into statutory
civil and criminal penalties
2. Only Government and other statutory body has the power to levy taxes
3. Depending on the tax laws all persons regardless of their citizenship
pay taxes though non citizens now get a refund of VAT paid in Tanzania for
goods that will be spent outside of Tanzania
4. Taxes are usually paid and collected in monetary terms either coins or
paper money
5. Not all payments to the government are taxes, when payment is done for
certain service that payment is not tax. Thus in order for a payment to amount
to tax, there must be no “quid pro quo” relationship i.e. taxpayers should not
expect equal returns from the tax paid
6. Though individuals and legal persons pay taxes to government, the
government does not have an obligation to provide an individual account of how
tax is utilized; in most cases however the governments account to parliaments
on behalf of taxpayers
Therefore tax is defined as a compulsory levy,
charged by the government on her citizens and non citizens that is usually
payable in monetary form for which the government need not to offer equivalent
direct compensatory services or render an individual account on how it utilized the revenue.
The unique factors
which distinguish a tax from the other sources of government revenue are as
follows:
(a) Taxes are mandatory charges; they are compulsory payment made to the
government. People on whom a tax is imposed must pay the tax. Taxes are not
voluntary contributions, donations or gifts to the state. Furthermore, refusal
to pay the tax is a punishable offence.
(b) Only government or other taxing body has power to levy taxes, therefore
other non government bodies like sports clubs, churches, political parties can
not charge taxes.
(c) Depending on tax laws all person regardless of their citizenship pay
taxes though non-citizens now get refunds of VAT paid in Tanzania for goods
that will be spent outside of Tanzania. On the other hand, the non-government
revenue are received from either individuals or corporate(depending on the type
of revenue)
(d) A payment of tax, does not involve a “quid pro quo” status i.e.
taxpayers cannot expect equal returns for the tax paid. On the other hand
generally the non-tax government revenue like user fees has the characteristic
of ‘quid-pro-quo’.
(e) Though individuals and legal persons pay taxes to government, the
government does not have an obligation to provide an individual account of how
tax is utilized; in most cases; however governments account to parliaments of
behalf of taxpayers.
(f) Taxes are usually paid and collected in monetary terms either coins or
paper money.
(g) Every tax involves some sacrifice on part of the tax payer.
(h) A tax is not levied as a fine or penalty for breaking law
OBJECTIVES/USES OF TAXATION
1. The main reason for taxation is to collect revenue to finance public
expenditure such as provision of public goods and merit goods. Therefore tax is
the main source of the government revenue
2. Redistribution of income. It is the role of the government to reduce the
gap between poor and rich which has been a political agenda in our country. In
addition to taxing the rich more than the poor, government can use cash
transfer system to reduce poverty and promote social equality
3. It is used as regulation tool to protect environment
4. It is used as a tool to discourage people from using harmful product by
taxing them a high tax rate
5. It is used as tool to protect infant domestic industries by taxing high
the imported products and taxing low the domestically products to make the
competitive in terms of price.
6. Using to promote export by charging zero rate of VAT on exports
CLASSIFICATION OF TAXES
Taxes may be
classified into different types according to various criteria like:
1. Tax base
2. Tax incidence shift ability
3. Quantities or values (Unit or ad-valorem based taxes)
4. Distribution of tax burden
Classification
according to tax base
Tax base means what
is being taxed and what is not i.e. from which item/person the tax is charged.
Under this basis we have the following classes:
(a) Income tax
Tax based on the quantum of income earned or received by taxpayers at
specific period e.g. corporate tax, PAYE for employee etc. Income base taxes
are most popular taxes all over the world but as we shall see, what constitutes
income is highly debatable.
(b)
Wealth tax
Tax based on wealth accumulated by taxpayers. In this category we have
capital gain tax, property taxes, etc. From those two bases we have income tax.
Sometimes wealth taxes can be easily measured and administered, for
example land rent taxes which are based on square meters. Also wealth tax can
be used to tackle tax avoidance in the tax system, for instance, if you buy
shares in corporate entity you will only be taxed when you sell or receive
dividends. On the other hand some of wealth taxes are difficult to administer;
issue such as inflation, valuation of properties without being sold for council
taxes make the wealth tax complex.
(c) Expenditure tax
Tax based on taxpayers spending their income or wealth accumulated. For
example value added taxes and excise duties on purchase of alcohol and
cigarette. Expenditure taxes, unlike income and wealth taxes relate to taxes on
consumption from an economy. Thus, we do not have to worry about valuation of
income in expenditure taxes; and since taxpayers are taxed only if they spend
the income or wealth, they are somehow encouraged to save. However, if we
depend only on expenditure tax base, some income or wealth [savings] will not
be taxed so we may end up paying high tax rate.
Classification
according to ability to shift the tax incidence
Tax impact or formal incidence is legal requirement to pay tax. It refers to who is required by tax
law to pay taxes while tax incidence is
the actual effect / burden of paying taxes by the one who actually pays
taxes. Basing on this basis we have two
types
a) Direct tax
b) Indirect tax
Direct tax
It is a tax levied
directly on tax payers (individuals and non individuals) who are required to by
tax laws to pay taxes with no possibility of shifting the incidence to another
person. In this case the tax impact and incidence falls on the same person.
Thus the tax is levied on and paid by the same person.
Examples of direct
taxes include:
i.
Income taxes
ii. Corporate tax - 30% of all companies (whether resident or none resident)
carrying on a business in Tanzania.
iii. Individual Income Tax - non-corporate resident tax payers including sole
proprietors and salaried employees are taxed at progressive individual income
tax rates
iv. estate duty, property tax and capital gain tax
v. Skills and development levy - a tax on the gross monthly emoluments paid
by an employer to employees.
vi. Game of chance and Gambling Tax - charged to casinos, private lotteries
and slot machines.
vii. Withholding taxes - a scheme, that is basically not a tax source in
itself that is operated on a number of payments made by persons in course of
doing businesses/investments. [e.g. investment income, etc].
Advantages of Direct Taxes
(i)
It is to know in advance the amount of tax to be
paid and collected tax from individuals and firms because it is deducted
directly from incomes
(ii)
Useful in reducing gaps between the rich and poor
(iii)
Helpful in controlling demand pull inflation, since
when direct tax is imposed, the disposable incomes of income earners decline
which leads to decrease in the purchasing power hence control of demand pull
inflation
(iv)
Cost of collection is relatively low compared to
the revenue collected
Disadvantages of direct tax
(i)
High direct taxes can discourage people to work
hard
(ii)
It discourage savings because it reduces the
disposable incomes
(iii)
Administrative difficulties and inefficiencies
(iv)
Direct tax in inconvenience in the sense that they
involve several procedures and formalities in filing returns
(v)
High possibility of tax evasion
INDIRECT TAX
Is a tax whose incidence can easily be shifted to another person from a
person who is required to pay it. In other words tax incidence falls on another
person from a person who is required to pay it. Most consumption taxes e.g. VAT
are direct indirect taxes
Examples of indirect taxes include:
a. Excise duty on locally manufactured goods - levied on locally
manufactured goods which include beer, wines, whiskeys, spirits, soft drinks,
smoking tobacco, cigarettes, and petroleum products.
b. Stamp duty - certain legal instruments attract payment of stamp duty for
the purpose of authenticating them.
c. Value Added Tax (VAT) - a consumption tax charged on VAT registered
traders for goods and services at a standard rate of 18%.
d. Other Internal Taxes such as fees, levies and user charges, which are
collected from various sources. For example taxes and charges on motor
vehicles, port and airport departure services.
Advantages of Indirect tax
(i)
Convenient. Indirect tax is convenient to both the Government
and the taxpayer.
(ii)
Wide coverage. They reach a pocket of all income groups; low,
middle and high.
(iii)
Elastic. Indirect taxes are also elastic in nature. The
government can reduce or increase the rates of any tax
(iv)
Economical. These taxes are economical in sense that they involve
little cost of collection because the producers and sellers themselves deposit
with the government
(v)
Less Evasion. There is less possibility of evasion in the case
of indirect taxes because they are included in the prices of commodities
Disadvantages of Indirect tax
(i) Uncertain Revenue: the revenue from indirect taxes in uncertain because it is not
possible to accurately estimate the effect of such taxes on the demand for
products
(ii) Regressive. Indirect taxes on necessaries, which are consumed by the poor; are
regressive in nature
(iii)Feed inflation. Imposition of these taxes tend to raise the prices of commodities,
thereby leading to high cost, higher wages and again higher prices
Classification according to quantities or values
There are two types of taxes under this category: us unit and ad-valorem
taxes.
a)
A unit or specific tax
This is levied on
the physical measures of what is being taxed e.g. volume, weight, square meters
like land and property taxes etc.
b)
Ad-valorem tax
This is levied on the
value of the tax base, for example income tax is charged on the level of income,
VAT on consumer expenditure and import duty.
Classification according to distribution of tax burden fairness
According to the rate of tax in relation to income of the person, tax
systems have been classified into three classes. These are
I.
Progressive tax systems
II.
Proportional tax system
III.
Regressive tax system
Progressive tax system
This is the tax system whereby the rate of taxation increases as the
income increases. E.g. Pay As You Earn
(PAYE)
Advantages:
1. Proper Distribution of money: Since progressive taxation allows income-based taxes, a person with low
income will pay much less than a person with a high income. This is the effect
way of wealth distribution
2.
Protects lower income group: This is by allowing the lower income earners to pay less in taxes
3.
Stable income stream: progressive
taxation also allows the government to have a stable income stream even in
times of depression
PROPORTIONAL TAX SYSTEM
Is the types of tax system whereby the rate of tax are equal so that the
same proportion of tax is taken from all incomes, however large or small.
Example is corporation taxes whereby most of the companies are taxed at 30% of
their profits
REGRESSIVE TAX SYSTEM
This is the tax system where the proportion of income taken in tax falls
are the income raises, the rate of tax decreases as the income of the taxpayers
increases. A good example is VAT. Some
of indirect taxes especially those charges on necessities tend to be regressive
because consumption of some commodities depends more on the size of the family
than on incomes.
IMPOSITION OF INCOME AND INCOME TAX BASE
Income tax shall be
charged and is payable for each year of income by every person;
a)
Who has total income for the year of income or is a corporation which has a
perpetual unrelieved loss determined under Section 19 for the year of income
and the previous two consecutive years of income.
b)
Who has a domestic permanent establishment that repatriated income for the year
income or
c) Who receives final withholding
payments during the year of income
The tax payable by a
personal for a year of income shall be the sum of tax payable under all items
listed above. However tax on repatriated income is exclusively payable by a
domestic permanent establishment of a non- resident person. The tax on its
repatriated income is payable additional to tax on the permanent
establishment’s total income and or final withholding taxes.
Example
ABC is a branch of a non- resident corporation (a domestic permanent
establishment) which earned the
following income during a year of income:-
Income from business Shs. 624.0m
Dividends form TBL Shs. 4.0m
TBL is a DSE listed company and the dividends suffered 5 percent final
withholding tax deduction. The brach’s repatriated income for the year was
determined to be Shs . 62.0m. ABC Income tax for the year was calculated as
follows.
Corporation tax on Shs. 624.0m at 30% - Shs. 187.2m
Tax on repatriated income Shs. 62,0m at 10% - Shs
6.2m
Final withholding tax on dividends Shs. 4.0m at 5%- Shs 0.2m
Total tax shs. - Shs 193.6m
The total tax of the branch for
the year of income is Shs 193.6m
TOTAL INCOME
Section 5 of the Act
provides that the total income of a person for a year of income shall be the
sum of the person’s chargeable income for the year of income from each
employment, business and investment less any reduction allowed under section 61
relating to retirement contributions to approved retirement funds,
NOTE:
The total income of
each person shall be determined separately.
Income tax is
charged on a person’s total income for a year of income. A person’s total
income for a year of income shall be calculated by aggregating the income, from
each employment, business and investment, separately calculated in accordance
with the rules provided for under the Act in respect of each of the income
sources.
For example, the
total income of a person who received employment income of Shs. 36.0 million,
business income of Shs 24.0million and investment income of Shs 4.0 million
during of income will be-
Employment income Shs 36.0m
Business income Shs 24.0m
Investment income Shs 4.0m
Total income Shs 64.0m
WITH HOLDING
PAYMENTS
Definitions
These are payments or income tax income is deducted
at the source before reaching the tax payer. Example is interests, royalties
and rent
Withholding tax
is the amount of tax retained by one person when making with holding payments
to another person in respect of goods supplied or services rendered by the
payee. A person receiving or entitled to receive a
payment from which income tax is required to be withheld is a withholdee while a person required to
withhold income tax from a payment made to a withholdee is referred to as the Withholding Agent.
Payments subject to Withholding
Tax
Withholding tax applies to
specific payments including payment
that is to be included in calculating the chargeable income of an employee from
the employment, payment of investment return including dividend, interest, natural resource payment,
rent or royalty, payment in respect to service fee and contract
payments and payment in respect to supply of goods to the government and its
institutions.
Statement and Time for payment of tax
withheld.
Every withholding agent shall pay to the Commissioner
within seven days after the end of each calendar month any income tax that has
been withheld.
Every withholding
agent shall file with the Commissioner within 30 days after the end of each
six-month calendar period a statement in the manner and form prescribed
specifying payments made by the agent during the period that are subject to
withholding tax, the name and address of the withholdee, income tax withheld
from each payment; and any other information that the Commissioner may
prescribe.
Withholding Tax Certificate
A
withholding agent shall prepare and serve on a withholdee a withholding
certificate setting out the amount of payments made to the withholdee and
income tax withheld from those payments. A withholding certificate shall cover
a calendar month and shall be served within 30 days after the end of the month.
However, in case of withholding tax from employment tax the certificate shall
cover the part of the calendar year during which the employee shall be employed
and shall be served by 30 January after the end of the year or, where the
employee has ceased employment with the withholding agent during the year, no
more than 30 days from the date on which the employment ceased.
Withholding Tax rates
Description
of Payment
|
Rate
for Resident
|
Rate
for Non Resident
|
(i)Dividends from the Dar es salaam Stock Exchange listed corporations
(ii)
Dividend from resident
corporation to another resident corporation where the corporation receiving
the dividend holds 25% or more of the shares in the corporation
|
5%
5%
|
5%
NA
|
Dividends from other corporations
|
10%
|
10%
|
Interest
|
10%
|
10%
|
Royalties
|
15%
|
15%
|
Other Withholding payments from Investment
Returns.
|
15%
|
15%
|
Rental Income
|
10%
|
15%
|
Technical services fees (mining)
|
5%
|
15%
|
Transport (Non-resident operator/ charterer
without permanent establishment).
|
NA
|
5%
|
Insurance Premium
|
0%
|
5%
|
Natural Resources Payment
|
15%
|
15%
|
Service Fees
|
5%
|
15%
|
Directors Fee (Non full time Directors)
|
15%
|
15%
|
Commission to agents by service providers on money
transfer through mobile phones.
|
10%
|
10%
|
Payments for goods supplied to Government and its institutions by any
person.
|
2% of gross payment
|
N/A
|
TYPES OF WITHHOLDING PAYMENTS
There
are two types of withholding payments, these are
a) Final
with holding payments
b) Non
final with holding payments
FINAL WITH HOLDING PAYMENTS
These are withholding payments in
which tax is deducted at the source and the withholding tax so deducted
satisfies the tax liability of that payments. The tax deducted becomes final
and conclusive. This tax is referred to
Final withholding tax. Withholdee cannot claim any tax credit when
calculating the income tax payable for a year of income.
Note:
Because
tax deducted satisfies tax liability of those payments, there no more tax is required
to be deducted and hence that payment should be excluded in calculating taxable
income of that person
FINAL
WITH HOLDING PAYMENTS ITEMS
The following payments are final withholding payments as per
section 86.-(1):
a)
Dividends paid by a resident
corporation or non-resident corporation to a resident individual resulting from
investment activities.
b)
Interest paid by financial
institution to a resident individual where the interest is paid with
respect to a deposit held with the institution, other than interest received by
the individual in conducting a business; or foreign source interest paid to
non-resident individual.
c)
Rent paid to a resident individual under a
lease of land or a building and associated fittings and fixtures, other than
rent received by an individual in conducting a business; or foreign source rent
paid to non-resident individual.
d)
Service fees paid to a resident
person who is conducting a mining business in respect of management or
technical services provided wholly and exclusively for the business by another
resident persons and money transfer commission to a resident money transfer
agent.
e)
Payments made to non-resident persons other
than through a domestic permanent establishment of the person) that are subject
to withholding taxes.
f)
Interest paid to a unit trust.
g)
Dividends distributed by a resident
corporation not in a virtue of its ownership of redeemable shares (section
54(1)).
NON FINAL WITH HOLDING PAYMENTS
These are withholding payments in
which tax is deducted at the source and the withholding tax so deducted does
not satisfy the tax liability of those payments. The tax deducted is final and
conclusive. This tax is referred to non
final withholding tax. Withholdee is entitled for a tax credit an amount
equal to the tax treated as paid for the year of income in which the amount is
derived.
Note:
Because
tax deducted does not satisfy tax liability of those payments, those payment
should be included in calculating taxable income of that person
CHARGEABLE INCOME
(SCOPE OF CHARGEABILITY)
a)
Resident person
Chargeable income of the resident person is the person’s income from
employment, business or investment for the year of income irrespective of the
source of the income. It is the person’s worldwide income
b)
Non- resident person
Chargeable income is the person’s income from the employment, business
or investment for year of income but only to the extent that the income has a
source in the United Republic.
c)
Loss making resident corporation
For the case of a resident corporation which has perpetual unrelieved
losses, chargeable income is the turnover of such corporation for a year of
income.
EXCEPTION TO GENERAL RULE ABOVE
A resident individual deemed non- resident for a particular year
Chargeable income of a resident individual who at
the end of the year of income has been resident in the United Republic for a
period of two years or less in total during the whole of the individual’s life
shall be only the individual’s income that has a source in the United Republic.
This provides an exception to the general rule of
taxation of income has been resident in the United Republic for two years or
less in total during the whole of the individual’s life. Such person will be
treated as non- resident and charged to tax on the individual’s income that
only has a source in the United Republic, notwithstanding that a resident
personal is ordinally charged tax on the person’s income irrespective of the source
that is worldwide income.
The points to note here are:
(i)
The aggregate sum of days the individual has been
resident in the Untied Republic is two years or less during the whole of the
individual’s life time.
(ii)
For the purposes of application of this provision”
resident in the United Republic” means physical presence in the United Republic
and
(iii)
The period of two years considered in section 6(2)
is equivalent to seven hundred and thirty days including the days of the
individuals arrival into and departure from the United Republic.
It is firmly
established that the Act imposes territorial limits with respect to income
taxation. As a general rule, either the source for which the chargeable income
is derived must be located in the United Republic or the person who is to be
taxed must be resident. If neither of these tests is satisfied, there will be none
or the person who is to be taxed must be resident. The importance attached to residential status
varies amongst the income heads that
is employment, business and investment cases. Generally, residence becomes more
important where the territorial source of the income is less readily
ascertainable.
The key point in
these provisions is that they bring into the chargeable net items which are
income, excluding exempt income items. Capital gains, except where they are
deemed income under the Act, are not income for the purposes of the Act. Key
features of common law income are:
Ø
It “comes
in” the recipient beneficially.
-
Income must “come in” to the recipient in the sense
that generally the receipt is a realized gain derived beneficially by the
recipient. Normally a gain must be realized to constitute income.
Ø
It is money’s worth
-
This element required that there has been a receipt
of money or something capable of being turned into money.
Ø
It must be
receive as income
-
The receipt is characterized at the moment of
derivation, and is characterized objectively and form perspective of the
recipient.
Ø
It will often exhibit periodicity, recurrence and
regularity.
-
The characteristic of periodicity, recurrence and
regularity are prima facie indicators that an amount is of income character.
Ø
The normal proceeds of personal exertion, property
or business of income.
-
Receipts which are the “products” of personal
exertion, property or business activities will usually be income.
DETERMINATION OF
RESIDENTIAL STATUS OF A PERSON
Test of residence of an
individual
Individual’ means a natural person
An individual is resident in the United Republic
for a year of income
a)
If the individual has a permanent home in the United Republic and is
present in the United Republic during
any part of the year of income,
b)
Is present in the United Republic during the year of income for a period
or periods amounting in aggregate to 183 days or more;
c)
Is present in the United Republic 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; or
d)
Is an employee or an official of the Government of the United Republic
posted abroad during the year of income
Note:
A permanent home is any form of accommodation
(owned or rented) which is continuously available to you for your
personal use
Example
1.
Mr. Tarimo who maintains a permanent home in Tanzania was abroad between
1.1.2012 and 8.12.2013 came back to Tanzania between 8.12.2013 and 25.12.2013.
Required:
Determine the residential status of Mr. Tarimo
for the year of income 2013.
Solution:
Since he maintains a permanent home in Tanzania
and was present for the period 8.12.2013 and 25.12.2013. Mr. T will be regarded
“resident” in Tanzania for the year of income 2013.
2.
Mr. Amos who was abroad, returned to Tanzania on 11.6.2013 and again
left Tanzania on 31 January 2014.
Required:
Determine the residential status of Mr. Amos for
the year of income 2013.
Solution:
Since his stay in Tanzania during the year 2013
was of over 183 days, he will be regarded “resident” in Tanzania during the
year of income 2013.
3.
Mr. Benjamin has not maintained a permanent home in Tanzania. He came to
Tanzania on 1.4.2013. He left Tanzania on 15.8.2013 i.e after stay of over 122
days. Prior to 1.01.2013 he was in Tanzania in years 2011 and 2012 for 126 and
123 days respectively.
Required:
Determine the residential status of Mr. Benjamin
for the year of income 2013.
Solution:
Since Mr. Benjamin was present in Tanzania for
more than 122 days for each of the year 2013 and the two preceding years i.e
years 2012 and 2013 he is treated as resident for the year 2013 although he was
present for a period of less than 183 days.
4.
Mr. Chaula is employed by Tanzania Government and has been posted at the
Tanzania Embassy in Geneva Switzerland since 1.8.2012. Mr. Chaula did not come
to Tanzania during the year of income 2013.
Required:
Determine the residential status of Mr. Chaula
for the year of income 2013.
Solution
Since Mr. Chaula is an official of the
Government of the United Republic posted abroad he is treated as resident in
Tanzania during the year of income 2013.
Test of residence of a
partnership.
Partnership means any
association of individuals or bodies corporate carrying on business jointly,
irrespective of whether the
association is recorded in writing
A partnership is a resident partnership for a
year of income if at any time during the year of income a partner is a resident
of the United Republic. So the residential statuses of partnerships are
determined by residential status of individual partners.
Example
Consider the
following Undugu partnership’s
information:
a. Undugu partnership had four partners in 2014 one of them was resident in
Tanzania for the year ending 31st December 2014.
b. Undugu partnership had four partners in 2014; all of them were
non-resident in Tanzania for the year ending 31st December 2014.
Required:
Determine the
residential status of Undugu partnership for the year ending 31st
December 2014.
Solution
a. Since one of its partners was resident in 2008, the partnership would
also be resident partnership.
b. Since all of the partners were non-resident partners, the partnership
would also be non-resident partnership
Tests of residence of a
trust
Trustee means an individual
or body corporate holding assets in a fiduciary capacity for the benefit of identifiable persons or for some
object permitted by law and whether or not the assets are held alone or jointly
with other persons or the individual or body corporate is appointed or
constituted trustee by personal acts, by will, by order or declaration of a
court or by other operation of the law; and includes:
any executor,
administrator, tutor or curator; any liquidator, receiver, trustee in
bankruptcy or judicial manager; any person having the administration or control
of assets subject to a usufruct, fidei commissum or other limited interest; any
person who manages the assets of an incapacitated individual; and any person
who manages assets under a private foundation or other similar arrangements.
A trust
is a resident trust for a year of income if
a)
it was established in the United Republic;
b)
at any time during the year of income, a trustee of the trust is a
resident person; or
c)
at any time during the year of income a resident person directs or may
direct senior managerial decisions of the trust, whether the direction is or
may be made alone or jointly with other persons or directly or through one or
more interposed entities.
Example
1.
Mwambao Trust which was registered in Tanzania on 02.03.2014 has four
trustees. During the year 2014 only one trustee was resident in Tanzania and
the other three were non resident.
Required:
Determine the residential status of Mwambao
Trust for the year of income 2014.
Solution:
Since the trust was established in Tanzania, by
registration under a Tanzania law, and one of the trustees was resident in
Tanzania during the year of income the trust is treated as a resident trust for
the year of income 2014
2.
Mlima Trust was registered in Tanzania on 15.04.2014 with four foreign
based trustees all of whom were not resident in Tanzania during the year of
income 2014. In the absence of the trustees the Chief Executive Officer, who
was resident in Tanzania during the year of income, directed the affairs of the
trust including making senior managerial decisions of the trust.
Required:
Determine the residential status of Mlima Trust
for the year of income 2014.
Solution:
Since the trust was established in Tanzania and
a resident person, though not a trustee directed the trust, the trust is
treated as a resident trust during the year of income 2014
3.
Bara Trust was registered in Kenya in 2013 with three trustees who were
all resident in Tanzania during the year 2014. The trust conducted business in
Tanzania during the year of income.
Required:
Determine the residential status of Bara Trust
for the year of income 2014.
Solution:
Since the trust was not established in Tanzania
the trust is treated as non resident for the year 2014 though all its trustees
were resident in Tanzania during the year. In fact the trust will always remain
non resident as long as it was not established in Tanzania
Tests of residence of a
corporation
Corporation means any company or body corporate established, incorporated or
registered under any law in force in the United Republic or elsewhere,
an unincorporated association or other body of persons, a government, a
political subdivision of a government, a parastatal organization, a public
international organization and a unit trust but excludes a partnership
A corporation is a resident corporation for a
year of income if
a)
It is incorporated or formed under the laws of the United Republic; or
b)
At any time during the year of income the management and control of the
affairs of the corporation are exercised in the United Republic.
Note:
It is board of
directors of a corporate who manage and control the affairs of the corporate,
so it is only when the meeting of board of directors is held in Tanzania the
income the management and control of the affairs of the corporation are said to
have been exercised in the United Republic
REVIEW QUESTIONS
QUESTION ONE
a) With reference to the Income Tax Act, Cap 332 R.E. 2008, Explain the
significance of classifying a person as resident in the resident in the United
Republic for income tax purposes
b) With examples, discuss the concept of tax incidence and impact with
respect to direct tax and indirect taxes?
QUESTION TWO
a) Analyze the nature and the objectives of taxation
b) Explain the incidence of taxation
QUESTION THREE
The following claims
were raised during the year 2013 by a representative of a small and
inexperienced tax firm who was seeking advice from a renowned tax consultancy
firm.
“I have for very
long time now noted with much concern the manner in which the income tax
officials are deliberately harassing us. Their methods of assessment are based
on fear and coercion!. The ignorance of these officials on the various legal
provisions, as well as on the other current economic developments which have
great influence toward interpretation of the status accounts for much of what
is happening I have the following cases in point:
i.
Firstly, in order to collect more revenue, and thus
justify their targets, the officials always and arbitrarily tend to classify
corporations as non residents. The ABC Co, Ltd is registered under Companies
Act of Tanzania, though its head office is in Kampala, Uganda. Though the law
provides that once a corporation has been registered under the Companies Act or
any other government law in Tanzania it is a resident corporation, the tax
officials argue that because the management and control of the corporation was exercised
in the head office in Kampala, then it is not a resident corporation.
ii.
Secondly, a football coach from Qatar came in the
country in February last year and signed a contract with Uzunguni, a football
player, offering Uzunguni to play for a team in Qatar for a period of 5 years,
at a monthly salary equivalent to TZS 2 million. The player agreed and both
left to Qatar after the contract was enforced. To my surprise my client
Uzunguni while on his annual two weeks leave, after completing one year of the contract
period in Qatar was served with a tax demand notice requiring him to pay income
tax in respect of the salary earned in Qatar.
iii.
Thirdly, Mr. Plata is a Tanzanian working in
France, where he lives with his whole family. He has not been in the united Republic
of Tanzania (URT) for the past ten years. However, during 2011, he came in the
country (URT) on a business trip and stayed for 4 weeks. I therefore advised
him to claim for the income tax personal relief (which are basically granted to
resident individuals only) for the year of income 2011. My basis of advice was
that being a citizen of Tanzania and keeping in mind that he was present in the
URT during the part of 2011, he was therefore a resident individual for the
year of income and he was therefore entitled for the relief. The assessor,
however, refused to grant the relief on ground that Mr. Plata was not a
resident individual for 2011, since he had no permanent home in the URT.
iv.
Lastly, I am missing the rationale for the
treatment of lunch subsidies and coupons provided to employees of some
companies. I have similar concerns on medical services. In both cases, taxation
treatment depends on whether such benefit was offered on discriminatory or non
discriminatory basis. The criterion is that the benefits are taxable if were
offered on discriminatory basis. In my opinion these benefits fall under the
broad area of employees’ motivation. The intent of motivating employees is to
increase productivity. As such, taxing such benefits surely goes contrary to
the country’s policies including health policy. It is confusing and
disappointing to see the tax policy is working against other state policies”
Advise on the four issues raised above.
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