In Summary

According to the Act, an economic activity by a foreign person is regarded to have been supplied in Mainland Tanzania, where it is supplied to a non VAT registered person (herein “non-registered person”) and; (a) the services are performed and enjoyed in Mainland Tanzania (b) the services are received for radio or TV broadcasting in Mainland Tanzania (c) the services are “electronic services” delivered to a person who is in Mainland Tanzania at the time when the service is delivered.

The Value Added Tax Act 2014 (also known as the New Value Added Tax Act) that came to effect on 1st July, 2015 introduced a requirement to have non-resident entities registered for VAT in circumstances where the non-residents (herein referred to as “foreign persons”) carry out taxable economic activities in Mainland Tanzania without having a fixed place in the same.

According to the Act, an economic activity by a foreign person is regarded to have been supplied in Mainland Tanzania, where it is supplied to a non VAT registered person (herein “non-registered person”) and; (a) the services are performed and enjoyed in Mainland Tanzania (b) the services are received for radio or TV broadcasting in Mainland Tanzania (c) the services are “electronic services” delivered to a person who is in Mainland Tanzania at the time when the service is delivered.

The term “electronic services” is used in the act to include services that are provided or delivered through a telecommunication network, for example, websites, webhosting or remote maintenance of programmes and equipment, software and updates, images, access to databases, self-education packages, music, films and games etc.

The above implies, where a foreign person carries out such services in Tanzania, the supplier of such services will be required to account for and charge VAT in Tanzania. As a consequence, such foreign service providers or businesses are liable to register and account for VAT as a vendor pursuant to the provisions of the VAT Act.

The Act goes further to require these foreign persons to appoint a local representative who will be responsible for “doing all things required to be done under the VAT Act” on behalf of the non-resident, which are highlighted in the Act to include but not limited to applying for registration or cancellation, paying any VAT or fine/penalty etc. on behalf of the principal (foreign person).

Previously under the Old Act (VAT Act 1997), such services were subject to mere disclosures where they were supplied to registered persons under what is known as reverse charge mechanism (as input VAT and output VAT in the same period). However, with this introduction, the suppliers will be required to account for VAT on such services as any other local supply of goods and services.

This is a commendable effort by the government in trying to widen the tax net by reducing the over dependency in PAYE, corporate tax and other taxes in contributing to the national budget. Nonetheless, we foresee a great challenge in enforcement and in compliance with the existing law.

One of the major challenges is faced by both tax payers and the TRA, is on the implementation of the requirement to register foreign persons for VAT in Tanzania. The Act and its respective regulations require such persons to appoint a VAT representative who will assist with compliance of VAT in Tanzania. But against all odds, the person required to register under the VAT Act is the foreign person as opposed to the appointed representative.

Hence posing a number of key questions i.e. what will be deemed as sufficient procedure for the registration? Would the TRA make special allowance for foreign persons to have VAT Registration Number without having to register for TIN (Tax Identification Number)? Will the system of TRA accept registration, payment and online filing of returns without having a TIN? Does the current legislation allow obtaining a TIN without registration with Business Registration and Licensing Authority (Brela)?

Notwithstanding the above, there is recently a decided case at the Tax Revenue Appeals Tribunal of The Commissioner General vs African Barrick Plc. where it was ruled in favour of the Commissioner that the latter who is a foreign person pay taxes on income derived in Tanzania by virtue of its registration and exercise of management in Tanzania. The ruling was based on the Income Tax Act 2004 which regards a corporation to be resident and hence taxed on its worldwide income if it is incorporated or formed under the laws of Tanzania and/or management and affairs of the company were carried out in Tanzania.

An obvious cause for concern for foreign persons would be willingness to register for VAT in light of these circumstances. This would be avoided with an inclusion of a clause in the Income Tax Act or issuing a government notice to exclude registration for VAT purposes from creating a presence/residency Tanzania.

Another challenge for the enforcers from the current provision is, whilst VAT registration in principle, is based on the reaching a minimum amount of taxable revenues of Sh100 million, the same is not the case with regards to the registration of foreign persons. Judging by the definition of an economic activity, even a lone supply of a service by foreign persons would trigger the registration requirement. This not only imposes unwanted administrative burden but also an impossible task to administer.

In conclusion, whilst we understand and commend the decision to only limit the application of the law to include only services charged to consumers (non-registered persons) as opposed to services to businesses registered for VAT, we urge that the law be revisited to address the above issues.

The rule of thumb in taxation is that the simpler and more convenient the tax structures are, the more likely the taxpayers will be inclined to comply. The success of such a tax requires a great deal of transparency by the service providers, who if the above concerns are not addressed will be dis-incentivised to comply voluntarily. This said, it will be interesting to see how many foreign persons register as vendors over the coming months.

Amani Michael is a tax manager at Basil & Alred. The views expressed do not necessarily represent those of Basil & Alred.