If you conduct cross-border transactions, work overseas, or generate money from a foreign source, you most likely have at least a basic understanding of the international tax system.
Even if you’re interested in learning more about the tax implications of managing profit repatriation or the potential impact of the base erosion and profit shifting (BEPS) initiatives on your transactions, you may not know how the international tax system will affect your economic decisions.
This is a delicate topic in creating successful business planning for Tanzanian individuals and companies intending to expand abroad, as well as foreign persons and entities looking to enter the Tanzanian market.
While tax advantages can make investing in Tanzania more appealing, several studies demonstrate that tax incentives are not considered a key factor in attracting inbound investment in general.
Market dynamics, relative manufacturing costs, resource availability, and the quality of the banking regulatory framework are all essential factors that investors examine.
Even so, Tanzania’s Income Tax Act of 2004 (ITA-2004) and other cross-border tax laws are esoteric and complex, with a variety of traps for the unwary investor, necessitating knowledge of the fundamental tax principles that apply to Tanzanian and foreign persons and businesses.
Furthermore, the Tanzania Revenue Authority secures cross-border transactions more rigorously and focuses on transfer pricing and supply chains. As a result, it would be foolish to ignore the impact of Tanzanian tax laws and tax treaties on the taxation of cross-border transactions.
A simple definition of “international taxation” is the examination of domestic tax laws and tax treaties to establish how transactions involving the taxing powers of one or more sovereign states would be taxed.
The date of tax payments, the sovereign state to which tax payments will be paid, and the amount of tax payments to be made are all covered by this body of law.
Tanzania has signed double tax treaties with other nations such as Zambia, South Africa, and India to avoid double taxation. The United Nations (UN) and the Organisation for Economic Cooperation and Development (OECD) have established models.
Standard provisions for taxing cross-border transactions are included in the ITA-2004. However, a tax treaty between Tanzania and a foreign investor’s home nation, or a place where a Tanzanian taxpayer does business or generates revenue, takes precedence over the regular requirements. This is in compliance with ITA-2004 section 128(1).
A foreign individual or entity must, however, satisfy the limitation on benefits (“LOB”) clause stated under section 128(5) of the ITA-2004 in order to qualify for benefits under the tax treaty.
As a result, examining the effects of the international tax system on foreign individuals and companies in Tanzania (i.e. inbound transactions) as well as Tanzanian individuals and companies abroad (i.e. outbound transactions) necessitates a broad understanding of how the Tanzanian tax system interacts with other countries’ systems as well as the complexities of any applicable tax treaty.
This is particularly important because the issue of source and residence is one of the most serious issues in international taxation. Tanzania combines two taxation systems: taxing worldwide income for resident persons and taxing non-resident persons on a source basis.
As a result, some non-resident individual inbound income is not taxed in Tanzania unless the individual has a permanent home in Tanzania and visits Tanzania during the year, or has no permanent home but is present in Tanzania for 183 days in the year or an average of 122 days per year in the previous two years.
As international tax issues gain traction and the Tanzania Revenue Authority and other national tax authorities revise their tax assessments upward, any foreign individual or entity conducting business in Tanzania should seek a private ruling under section 13(1)(a) of the Tax Administration Act, 2015 before proceeding.
The private ruling contributes to preventing future tax disputes and liabilities, but it only applies to the ruling parties and the applicable tax authorities.
Shikana Group understands East African economies’ increasingly complex regulatory and commercial frameworks.
Thanks to our unequaled experience of 15 years on the ground, Shikana Tax and Regulatory services provide efficient and transparent legal and investment advisory support to our clients. Contact us for advice you can trust.