LECTURE 6:

TAX PLANNING, AVOIDANCE AND EVASION

Objectives

 At the end of this lecture you will be able:

 Distinguish between tax avoidance and tax evasion and explain their causes and consequences
 Identify general practices through which a taxpayer (including a multinational company) can
eliminate or minimize tax liability through tax avoidance and evasion
 Identify any provisions under Income Tax Act (2004) that are designed to combat tax avoidance
 Explain the ways that can be employed to minimize tax avoidance and evasion
 Explain the aspects of tax planning

Content

 Meaning of tax planning, avoidance and evasion

 Tax avoidance and evasion practices
 Combating and minimization of tax avoidance and evasion
 Meaning and aspects of tax planning

6.1 Meaning of tax planning, avoidance and evasion

Introduction

The problem of tax avoidance and evasion is common in all tax systems. All tax authorities have
to contend and live with the problem. While the evil practice cannot be eliminated it can only be
minimized because it is planned and undertaken in secrecy by the taxpayer and sometimes with
the cooperation of tax consultant and auditor. Otherwise the tax authorities would have pre-
emptied any tax evasion and avoidance practices. A high degree of tax avoidance and evasion
may result into serious Government revenue shortfalls leading into non-realization of
government and economic and social development programmes, and bring inequality in the tax
system that may necessitate higher tax rates to compensate for the revenue loss than what the
rates would otherwise have been. It is therefore in the interest of the country to keep the level of
tax avoidance and evasion to as the minimum as possible.

Tax Avoidance
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 laws. Tax
avoidance takes advantage of any loopholes and weaknesses, deficiencies and loose
or vague clauses in the tax legislations to minimize or eliminate tax liability altogether.
Tax avoidance is not punishable in law. Where the tax authorities detect the practice, the only
solution is to amend the law in order to plug the loopholes and weaknesses in the laws that allow
the possibility of tax avoidance. It is for this reason that the practice of tax avoidance is
sometimes considered as legally allowed. However, this does not mean that the tax authorities
will allow the practice. For example, the taxpayer who claims the maximum permissible
deductions in any particular year(s) of income such as through acquisition of assets that allow the
highest capital deductions (e.g. clearing or clearing and planting permanent or semi-permanent
crops, acquisition of class I or class 8 assets for depreciable allowances/wear and tear purposes
etc.) constitute tax avoidance.
Similarly, there is no law that prevents anyone from changing his business organization from a
sole proprietorship into a partnership or limited liability company. Whereas tax consideration
may influence the change in the form of business organization, there may be other good reasons
to justify the change such as the need to raise more capital for business expansion or attract
necessary skills etc. It may also constitute legitimate tax planning where assets are leased instead
of ownership because the higher lease rent is allowable over a shorter period instead of the
smaller amount of depreciation allowance claims over a longer period of time. In all these cases
there is no contravention of any law. The taxpayer merely looks at the existing legal framework
to structure his business transactions to realize the maximum tax savings.

Tax Evasion
Tax evasion on the other hand involves a taxpayer’s deliberate contravention of the tax law(s) in
order to minimize or eliminate tax liability altogether (pay no or little tax respectively by
breaking the law). Tax evasion is the application of fraudulent practices in order to minimize or
eliminate tax liability.

Typical examples of tax evasion:

 Making a false return of income by omitting or understating income or overstating

expenses.
 Making a false statement in a return affecting tax liability
 Giving false information on any matter affecting tax liability
 Preparation or maintenance of false books of accounts or records
 Application of fraud e.g. manipulation of stock sheets and valuation, destruction of or
defacing of accounting records, non-issue of sales receipts etc.

Where such acts are made with intent to evade tax or assist another person to evade tax it
constitutes fraud or gross neglect, which is heavily punishable by law.

Proof of fraud
It is essential that before such heavy penalties are imposed proof of fraud or gross (willful)
neglect have to be established by the commissioner. Not all acts by a taxpayer may constitute
evasion. It all depends on the amount involved and the prevailing circumstances. The omission
of an item of income, false claim of expenditure or the wrong total amount by design but a
genuine error of omission or arithmetic: the frequency of such errors, the amounts involved, the
seniority and experience of staff or person who caused the error/false statement and other
considerations should all be considered to establish the existence of fraud.
Where fraud is not established simple or minor omissions/errors are resolved by simple sanctions
such as under:
· Section 98 (imposition of penalty for failure to maintain documents or failure to file statement
or return of income),

 section 100 (imposition of late payment interest),

 section 99 (penalty for underestimation of estimated tax/making misleading statements),
 etc

Tax planning

 Logical analysis of a financial situation or plan from a tax perspective, to align financial
goals with tax efficiency planning. The purpose of tax planning is to discover how to
accomplish all of the other elements of a financial plan in the most tax-efficient manner
possible. Tax planning thus allows the other elements of a financial plan to interact more
effectively by minimizing tax liability.
 INVESTOPEDIA EXPLAINS 'Tax Planning'
 Tax planning encompasses many different aspects, including the timing of both income
and purchases and other expenditures, selection of investments and types of retirement
plans, as well as filing status and common deductions. However, while tax planning is an
important element in any financial plan, it is important to not let the "tax" tail wag the
financial "dog." This can ultimately be counterproductive, as virtually all courses of
financial action will have some tax consequences, and they should not be avoided solely
on this basis.

Causes of Tax Avoidance and Evasion

Any attempt to avoid or evade tax may be caused by any one or combination of the following
factors: -

i. High marginal tax rates and frequent changes in tax rates such as ales tax and import
duty, withholding tax etc. because taxpayers may consider distribution of their incomes
unfair and may attempt to make a unilateral adjustment for equity by non-compliance
through tax evasion.
ii. Administrative inefficiency, collusion with taxpayers and bribery of tax officials.
Financial constraints, inadequate working tools and lack of staff motivation do not
encourage tax compliance. Income may go untaxed and tax collection is delayed for
various reasons.
iii. Inadequate training and experience of tax administrators coupled with lack of exposure to
business practices may limit tax officials’ ability to expose complex international and
intercom any tax avoidance schemes and check on stock manipulations or proper
accounting in long term contracts.
iv. Too many taxes (multiplicity of taxes) are difficult to comply with correctly due to lack
of knowledge of the detailed provisions of all the tax laws, too many due dates and too
much return to complete, accounting staff shortages and different complexities in the
 laws etc. There are more than 30 tax laws in Tanzania. There is a need to rationalize the
tax regime further.
v. Low prospect of detection and punishment of tax evaders. The more tax evaders a person
know who are not caught and punished, the more likely he will also join the band wagon
of tax evaders (induced evasion). Where tax evaders are caught the penalty should be
sufficiently deterrent. That is why a selective prosecution policy is necessary. However
w.e.f.1/7/1997 the penalties for non-compliance appear too harsh and arbitrarily enforced.
vi. Deficiencies in the legal structure of the tax laws (poor draftsmanship) and complexity
allow tax avoidance.
vii. Traditional and cultural tendency to hate and evade taxes (low tax morality): In Tanzania
tax evasion seems to generate some sense of cheap heroism to the evaders. The practice is
generally not seen by the society as a stigma.
viii. The wasteful manner in which the Government departments spend the revenue and lack
of clear benefits to taxpayers through improved social services has some negative
influence on tax compliance.

Effects (consequences) of Tax Avoidance and evasion

Although the concepts of tax avoidance and tax evasion are different, the purpose and net effect
of these concepts are exactly the same i.e. the reduction or elimination of tax liability resulting
into:
Government revenue loss leading to non-realization of budget plans and objectives for economic
and social development;
Non-realization of other non-revenue goals of taxation e.g. inequality in taxation, as some law
abiding citizens or those with no opportunity to evade tax such as employees, bear a
disproportional heavier tax burden than others;
Alternative sources of government revenue such as the running of government budget deficits is
inflationary and foreign loans/grants dependency causes heavy foreign debt burden (loan
repayment with interest drains foreign reserves) and may be politically undesirable.

How to Minimize Tax Avoidance and Evasion

It becomes relatively easier to design effective ways and means of fighting tax avoidance and
evasion if we know the causes. All efforts should go towards minimizing or containing the
causes.
In the light of the above causes of tax avoidance and evasion the following should be undertaken.

 Keep the marginal tax rates low, bearable and not subject to frequent changes.
 Promote administrative efficiency by providing better tools (e.g. computers, transport
etc.), adequate financial resources and staff motivation (good salaries, housing,
promotions etc.).
 Carry out technical staff training on accountancy, tax laws, exchange visits with other
countries, practical business exposure and taxpayer education especially for small
businessmen to encourage voluntary compliance.
 Carry out a major selective prosecution policy and punishment particularly on major
taxpayers with a view to punish them for deterrence effect. Tax officials may be punished
for corruption and inefficiency.
  Avoid multiplicity of taxes by retaining a few major productive taxes only to make easier
administration and compliance.
 Design clear and simple tax laws and avoid ambiguity (better legal draftsmanship of the
laws)
 Judicious and rational expenditure of revenue by the government. If taxpayers see that
their taxes are well spent, voluntary compliance is likely to improve.

Government policy towards tax avoidance and evasion

On the basis of the above negative implications arising from tax avoidance and evasion the
government policy will fight against and discourage both practices of tax avoidance and evasion
(e.g. s. 33 to s.35 – tax avoidance arrangements). Some other provisions against tax avoidance
and evasion are under sections 98 to 124 of the ITA 2004. The other tax policy tool particularly
against tax avoidance is to enact timely amendments of pensive of the tax acts wherever it is
detected those certain provisions of the law allow tax avoidance in a major scale. The timely
amendment of the law is in the nature of preventive tax maintenance to pre-empt possible
avoidance and evasion.

Tax planning

The goal of tax planning is to arrange your financial affairs so as to minimize your taxes. There
are three basic ways to reduce your taxes, and each basic method might have several variations.
You can reduce your income, increase your deductions, and take advantage of tax credits.

Reducing Income

Adjusted Gross Income (AGI) is a key element in determining your taxes. Lots of other things depend on
your AGI (or modifications to your AGI)-- such as your tax rate and various tax credits. AGI even impacts
your financial life outside of taxes: banks, mortgage lenders, and college

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financial aid programs all routinely ask for your adjusted gross income. This is a key measure of your
finances.

Because your adjusted gross income is so important, you may want to begin your tax planning
here. What goes into your adjusted gross income? AGI is your income from all sources minus
any adjustments to your income. The higher your total income, the higher your adjusted gross
income. As you can guess, the more money you make, the more taxes you will pay. Conversely,
the less money you make, the less taxes you will pay. The number one way to reduce taxes is to
reduce your income. And the best way to reduce your income is to contribute money to a 401(k)
or similar retirement plan at work. Your contribution reduces your wages, and lowers your tax
bill.

You can also reduce your Adjusted Gross Income through various adjustments to income.
Adjustments are deductions, but you don't have to itemize them on the Schedule A. Instead, you
take them on page 1 of your 1040 and they reduce your Adjusted Gross Income. Adjustments
include contributions to a traditional IRA, student loan interest paid, alimony paid, and
classroom related expenses. A full list of adjustments are found on Form 1040, page 1, lines 23
through 34. The best way to boost your adjustments is to contribute to a traditional IRA.

As you can see, two of the best ways to reduce your taxes is to save for retirement, either through
a 401(k) at work or through a traditional IRA plan. Contributions to these retirement plans will
lower your taxable income, and lower your taxes.

Increase Your Tax Deductions

Taxable income is another key element in your overall tax situation. Taxable income is what's left over
after you have reduced your AGI by your deductions and exemptions. Almost everyone can take a
standard deduction, and some people are able to itemize their deductions.

Itemized deductions include expenses for health care, state and local taxes, personal property
taxes (such as car registration fees), mortgage interest, gifts to charity, job-related expenses, tax
preparation fees, and investment-related expenses. One key tax planning strategy is to keep track
of your itemized expenses throughout the year using a spreadsheet or personal finance program.
You can then quickly compare your itemized expenses with your standard deduction. You should
always take the higher of your standard deduction or your itemized deduction.
Your standard deduction and personal exemptions depends on your filing status and how many
dependents you have. You can increase your standard deduction and personal exemptions by
getting married or having more dependents.

The best strategies for reducing your taxable income is to itemize your deductions, and the three
biggest deductions are mortgage interest, state taxes, and gifts to charity.

Take Advantage of Tax Credits

Once we've tweaked our taxable income, we are ready to focus our attention on various tax credits. Tax
credits reduce your tax. There are tax credits for college expenses, for saving for retirement, and for
adopting children.

The best tax credits are for adoption and college expenses. Not everyone is in a position to adopt
a child, but everyone could take some college classes. There are two education-related tax
credits. The Hope Credit is for students in their first two years of college. The Lifetime Learning
Credit is for anyone taking college classes. The classes do not have to be related to your career.

You may also want to avoid additional taxes. If at all possible, avoid early withdrawals from an
IRA or 401(k) retirement plan. The amount you withdraw will become part of your taxable
income, and on top of that there will be additional taxes to pay on the early withdrawal.

One of the best, and most abused, tax credit is the Earned Income Credit (EIC). Unlike other tax
credits, the EIC is credited to your account as a payment. And that means the EIC often results in
a tax refund even if the total tax has been reduced to zero. You may be eligible to claim the
earned income credit if you earn less than a certain amount.

Increase Your Withholding

You can avoid owing at the end of the year by increasing your withholding. More money will be taken
out of your paycheck throughout the year, but you will get bigger refund when you file your taxes.

Tax planning

Tax Planning is closely related to tax avoidance and evasion. Therefore a discussion on tax
planning must inevitably begin from the definition and distinction between tax avoidance
and evasion. As discussed earlier, tax avoidance is the legal way to minimize tax liability
without contravention of the law in order to minimize tax liability.

Definition
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 laws.) The concept of tax planning is thus more
closely related to tax avoidance rather than tax evasion.

Objectives of Tax Planning

The main objective of tax planning and tax avoidance is tax minimization or the
realization of tax savings or the elimination of tax liability altogether but within the legal
requirements.

However, the other objective of tax planning is to ensure the availability of adequate
funds to meet any tax obligations when it falls due for payment to avoid late payment
penalties.

It is of primary importance to carefully interpret and apply the tax laws. Proper planning
leads to tax minimization or avoidance, which is acceptable. Tax evasion , which is not
acceptable , cannot and should not be tolerated. However, it is necessary to quantify the
expected tax gain or saving before indulging in the exercise of tax planning. It is advisable
not to engage in blind tax planning schemes, which may be more expensive than an
anticipated imaginary gain. Any tax planning must be based on the cost-benefit analysis.

Guides to Tax savings

There are certain guideposts that can be used in tax planning. These will assist in achieving
the objective of tax planning: tax savings. The road to tax savings has at least ten main
branches. They point the direction tax-saving efforts should take. The following are some
of these guideposts:

Keep income stable to avoid top rate brackets.

Speed up or defer income and expenses to take advantage of anticipated higher or lower
tax rates
 Spread income among several taxpayers.

Spread income over several years to keep out of higher tax brackets and postpone tax.

Transform ordinary income into long-term capital gain.

Take full advantage of all exemptions and deductions

Take advantage of elections e.g. when to claim specific deduction.

Use tax-free money to expand business operations.

Select the best form of your business operations.

Set up business deals along lines that make overall use of tax rates, earning potential,
losses and assets that can be depreciated.

The art and technique of tax planning

Successful tax planning may sometimes realize significant tax savings. However, it requires
a thorough knowledge of the tax legislation in both theory and practice. This is a clear
reference to the technical and practical competence of the tax consultant.

While intelligent and imaginative tax planning may result into substantial tax savings, the
tax planner should not ignore the significance of sound business management and
corporate financial planning and discipline. The two must go hand in hand. It should also
be noted that tax planning is a continual 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.

Tax planning and avoidance is possible through two main areas:

Taking advantage of existing legal provisions that allow tax minimization.

 Examples include tax shelters (capital expenditure that attracts favorable capital
deductions), indefinite loss carry forward provision, election when to claim specific
deductions e.g. Investment deduction, claim of capital expenditure against revenue income
allowed specifically by law e.g. Cost of clearing land and clearing and planting permanent
and semi-permanent crops etc.

Favorable interpretation of the statute especially on vague clauses, words and phrases
that have more than one meaning; e.g. “heavy industrial machinery” for the purposes of
wear and tear deduction.

The use of tax shelters in tax planning:

A tax shelter is a capital investment or expenditure on which the investor (taxpayer) is

entitled to claim capital allowances for tax purposes.

The cost of the capital investment is normally written off within a short period of time. Tax
sheltering is particularly applicable in the industrial, mining and manufacturing sectors,
which require heavy capital investment on plant, machinery and research and
development.

Tax sheltering is not relevant in the service and retail trading investment where heavy
plant and machinery is generally not required.

However, a tax shelter does not quite result into complete tax exemption or saving. It
merely defers the tax liability into future years when the write off of the capital cost
through capital deductions claim is exhausted. It is therefore important to provide for the
deferred tax. Alternatively the investor may ensure continued tax deferral by sustaining
the capital investment by periodic business expansion programmes and diversification. Yet
such sustained investment may not be easy in practice.

Pitfalls (dangers) in tax sheltering

Before any investment is undertaken to take advantage of a tax shelter, the investor may
wish to consider and guard against the fallowing pitfalls:

The certainty of the allowability of the capital deduction or write-off; The reliability of
the forecasts (data used) particularly on the profitability of the investment. Where the
investor makes losses the capital deductions are not immediately of any benefit; The
reliability, reputation and technical competence of the tax consultant undertaking the tax-
planning scheme. Is he infact capable of planning a successful tax-planning scheme? Is
there any resent evidence of previous successful tax planning scheme in a similar industry
and on a similar scale? If the answer is no, the end result may as well be a disaster!

The liquidity position of the investment project i.e. the investor should not tie up
substantial working capital into fixed assets to jeopardize the liquidity of the company. In
most such heavy investments loans are contracted hence the repayment schedule must be
carefully watched otherwise default in repayment may increase indebtedness by way of
interest.

Use of tax havens in tax planning

An investor may also resort to the use of tax havens in his planning efforts. 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. Remember that taxation is one of the major
considerations in investment decision-making process.

Features of tax haven:

Low tax rates

No exchange control restrictions. Transfers of cash into and out of the region or country
are completely free and unrestricted.

Complete secrecy of investments and finance particularly banking.

Provision of efficient and effective financial, (e.g. banking and insurance services), legal,
consultancy services and communication facilities.
 No or little control on investments.

Some examples of tax havens are the Channel Islands, Liberia, Switzerland, Mauritius,
etc

Example of tax planning:

A plan of a tax efficient employee’s remuneration package.

The tax consultant is often required to advice on employees remuneration package that
attracts the minimum tax liability. The objective being to recruit and retain competent
employees by maximizing the take home pay (net salary) as one form of staff motivation for
increased efficiency. A lowly paid employee is inevitably inefficient and not committed to
his employment.

Although the scope of employees remuneration tax planning is limited (i.e. All allowances
are required to be consolidated for tax purposes), a possible tax efficient remuneration
package may explore the following areas: -

Provide free medical services (not taxable)

Provision of house by the employer- the maximum taxable benefit is 15% of the salary.

LECTURE 8

IMPOSITION OF INCOME TAX

Objectives

At the end of this lecture you will be able to:

 Distinguish between total income and chargeable income

 Determine repatriated income
 Distinguish between final withholding tax and non-final withholding tax``
 Test residence of an individual, a partnership, trust and corporation
 Determine scope of chargeability (scope of income liable to tax)

Content

 Meaning of income tax, total income

 Chargeable income vs. scope of chargeability
 Repatriated income
 Final withholding payment
 Test of residential status of an individual, a partnership, trust and corporation

Section 3 defined the word "income" as income from an employment, business or investment
has the meaning ascribed in sections 7, 8 or 9, as the case requires; and when used without a
reference to employment, business or investment, means a person's income from any
employment, business or investment and an aggregation of such income as calculated in
accordance with this Act, as the case requires;

"income tax" has the meaning ascribed to it by section 4 that Income tax shall be charged and is
payable for each year of income in accordance with the procedure in Part VII by every person -
(a) who has total income for the year of income;
(b) who has a domestic permanent establishment that has repatriated income for the year of
income; or
(c) who receives a final withholding payment during the year of income.

The amount of income tax payable by a person for a year of income shall be equal to the sum of
the income tax payable with respect to section 4 subsection (1)(a), (b) and (c). Subject to the
provisions of section 4 subsections (4) and (5), the income tax payable by a person with respect
to subsection (1)(a) is calculated by applying the relevant rates of income tax determined under
paragraph 1 or 3(1) of the First Schedule, as the case requires, to the person's total income for the
year of income; and subtracting from the resulting amount any tax credit that the person may
claim for the year of income under section 77.

Total income

"total income" has the meaning ascribed to it under section 5 that is the total income of a person
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 for the year of income under
section 61 relating to retirement contributions to approved retirement funds. The total income of
each person shall be determined separately.

Chargeable income and scope of chargeability

chargeable income" has the meaning ascribed to it by section 6 that` is Subject to the provisions
of section 6(2), the chargeable income of a person for a year of income from any employment,
business or investment shall be-
(a) in the case of a resident person, the person's income from employment, business or
investment for the year of income irrespective of the source of the income; and
(b) in the case of a non-resident person, the person's income from the employment, business or
investment for the year of income, but only to the extent that the income has a source in the
United Republic.
section 6(2) The chargeable income of a resident individual who at the end of a year of income
has been resident in the United Republic for two years or less in total during the whole of the
individual’s life shall be determined under 6(1)(b).

Repatriated income

"Repatriated income" has the meaning ascribed to it under section 72 that is Subject to the
provisions of 72 (2), the repatriated income of a domestic permanent establishment of a non-
resident person for a year of income shall be calculated according to the following

formula A + B – C

Where

A . is the net cost of assets of the permanent establishment at the start of the year of income plus
the market value of capital contributed to the permanent establishment by the owner during the
year.
B. is net total income of the permanent establishment for the year of income; and
C. is the net cost of assets of the permanent establishment at the end of the year of income plus,
where the establishment has no total income for the year of income, any unrelieved loss for the
year of income referred to in section 19(4).
section 72(2) The repatriated income shall not exceed -
(a) the net total income of the permanent establishment for the year of income plus the balance of
the permanent establishment's accumulated profits account referred to in subsection (3) at the
end of the previous year of income after the adjustments referred to in that subsection, less
(b) where the permanent establishment has no total income for the year of income, any
unrelieved loss for the year of income referred to in section 19(4) for the year of income.

For the purposes of calculating repatriated income, a domestic permanent establishment shall
maintain an accumulated profits account which, at the end of each year of income, shall be -
(a) credited with the net total income of the permanent establishment for the year of income; and
(b) debited with the repatriated income and, where the permanent
establishment has no total income, any unrelieved loss referred to in section 19(4) for the year of
income.

Withholding payment.

Those are payment which before the recipients (payees/with-holdee) has received it; payer (the
withholding agent) is required to deduct income tax. Example include salary, wages, interest,
dividends and rent. Withholding tax is the amount of tax obtained from withholding payment
as specific amounts or by applying the specific rates to the give n specific amount .

Final withholding payment (S.86) are the payments of which no father tax is charge upon
them where by non- final withholding payment are the payment from which a further tax is
levied upon them if they are not exempt

Go through section 84 85 86 and 87 of ITA 2004 RVD 2006

Withholding taxes

The first schedule paragraph four (4) requires that income tax to withheld from payment under
Division II shall be withheld at these rates:

a) Payment to which section 81 applies-

i) In the case of a resident withholdee - at the rates prescribed in regulation ;or
ii) In the case of a non- resident withhold-15 percent;
b) Payment to which section 82 applies-
i) In the case of in dividends –

(aa) of a corporation listed on the Dar es salaam stock Exchange -5 percent; or

(bb) In the case of other corporation -10 percent ;

(ii) In case of other interest, ret or commuted pension paid to resident withholding or
interest paid to a non resident withholdee -10 percents; or
 (ii) In the case of other payment -15 percent; and

c) Payment to which section 83 applies

i) In the case of service fees referred to in section 83(1) (a) -5 percent;

ii) In the case of service fees referred to in section 83(1) (b) -15 percent; and

In the case of insurance premiums referred to in section 83 (1) (b) -5 percent.

Rate of withholding tax summary

Withholding taxes schemes are operated for a number of payment to residents and non-
resident, Example PAYE, rental taxes, tax on managements fees;

Table 1: withholding Tax Rates

Withholding tax on Resident rate (%) Non- resident rate (%)

Divided from DSE listed Resident Non resident

Company 5 5
Divided from other 10 10
companies
Other withholding payments 15 15
Technical service fees 5 15
Insurance premium 0 5
Service fees N/A 15
Natural resource payment 15 15
Royalties 15 15
Interest 10 10
Dividends to company
controlling
25% of share or more 0 10
Source: Income Tax Act, 2004.

Rate of income tax for entities

The first schedule paragraph 3 required that the total income of a corporation, trust
unapproved retirement fun or domestic permanent establishment of a non resident person for a
year of income shall be taxed at the rate of 30%.

A newly listed company with the Dar es salaam stock Exchange with at reduced corporate
rate of 25% for three consecutive years from the date of listing .The repatriated of income of
domestic permanent establishment of a non-resident person for a year of income shall be
taxed at the rate of 10% Tax is levied on profits, from companies running business in Tanzania
whether resident or non-resident .The law required all companies to file returns and play taxes.

Resident individual withholding tax (PAYE)

The first schedule paragraph (1) required that sole traders and salaried people who are taxed at
progressive individual income tax rates which vary from the lowest marginal rate of 14% to the
top marginal of 30% as provided in the table below:

Table 2: withholding tax for Residential individual

Monthly income (sh) Tax rate and amount

Tsh 0.0001-170,000 Nil

Tsh. 170,001-360,0000 14% of the amount in excess of Tshs.
170,000
Tsh. 360,001-540,000 Tshs. 26,600 +20% of amount in excess
of
Tshs.360,000
Tsh. 540,001-720,000 Tsh. 62,600+ 25% of revenues in excess
of Tsh.540,000
Tsh. 720,000-Nth Tshs Tshs. 107,600+30% of revenues of
excess of Tsh. 720,000
Source :income Tax Act,2004

Note:

For non- resident employees of resident the income is subject to withholding tax at the rate of
15% However the total income of a non- resident individual is charged at rate of 20%.

Withholding tax payment procedures

Withholding by employers

According to section 81,a resident employer who make a payment that is to be included in
calculating the chargeable income of an employee from the employment shall withhold income
tax from the payment at the rate provided for in paragraph 4(a) of the first schedule.

Withholding from investment returns

Section 82 requires that where a resident person pays a divided ,interest, natural resource
payment ,rent or royalty; and the payment has a source in the united Republic which is not
subject to withholding under at the rate provided for in paragraph 4(b) of the first schedule.
However, this is not applicable when the;

a)Payment made by individual unless made according a business;

b)Interest paid to a resident financial institution ;or

c) Payment that are except amount or paid to an approved retirement fund and

d)Rent paid a resident person for the use of an asset other than land or buildings.

Statement and payments of tax withheld

Section 84 provided that 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 during the
month .Every withholding agent shall be file with the commissioner within 30 days after the
end of each six –month calendar period a statement in the manner and from prescribe
specifying

a) Payment made by the agent during the period that are subject to withholding Tax.
b) The name address of the withholdee;
c) Income tax withhold from each payment; and
d) Any other information that the commissioner may prescribe.

Note: A withholding agent who fails to withhold income tax must nevertheless pay the that
should have been withheld in the same manner and at the same time as if tax is withheld.

A withholding agent who fails to withhold income tax but pays the tax that should have bee
withhold to the commissioner shall be entitled to recover an equal amount from the
withholdee.

Where withholding agent fails to withhold income payment as it is required;

a) The withholdee agent shall jointly and severally, be liable with the withholding agent for
the employment of the tax to the commissioner; and
b) The tax shall be payable by the withholdee within seven days after the end of the calendar
month in which the payment is received

A withholding agent who withholds income tax and pays the tax to the commissioner shall be
treated as having paid the amount withheld to the withholdee for the purposes of any claim
by the withheld of the amount withheld.

Withholding certificates

Section 85 provides that a withholding agent shall prepare and serve on a withholdee-
 a) Separately for each period covered,
b) At the referred to in those subsections; and
c) In the form prescribed a withholding certificate setting out the amount of payment
made to the withholdee and income tax withheld from those payment by the agent
during the period.

A withholding certificate shall cover a calendar month and shall be served within 30 days after
the of the month. In the case of income tax withheld under section 81 a withholding certificate-

a) Shall caver the part of the calendar year during which the employee shall be employed;
and
b) Shall be served by 30 January after the end of the year or, where the employee has ceased
employee with the withholding agent during the year ,no more than 30 day from the date
on which the employment ceased.

Residential status of persons

Residential status of an individual

Section 66(1) provides that individual is resident in the United Republic for a years of
income if the income –

a) Has a permanent home( a place where an individual habitually come and stay ,it can be a
Guest house, Hotel ,a friend house or parent house )in the united Republic and was
present in the united Republic during any part of the year of income;
b) Is present in the united Republic during the year income for a period or period
amounting in aggregate to 183 days or more ;
c) Is present in united Republic during the year of income and in each of the two preceding
year of income for period 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

Residential status of a partnership

Section 66(2) provides that 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.

Residential status of a trust

Section 66(3) provides that 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

At any time during of income a resident person directs may direct senior managerial
decisions of the trust , whether the direction is or may be made alone or jointly with
other person directly or through one or more interposed entities.

Resident status of a corporation

Section 66(4) provides that a corporation is resident corporation for a year of income if-

a)It is incorporated or formed under the law of the United Republic; or

d) At any time during the year of income the management and control of the affairs of the
corporation are exercised in the United Republic