WHEN taking advantage of Covid-19 pandemic to increase revenue collections tax residency, may be a key area of focus yet unforgotten by business investors and Authorities. When one thinks of payment of taxes the two critical questions that come to mind are whether the person is a resident, and the income has a source in the united republic of Tanzania.
The country in which you are a tax resident is usually where you are liable to pay income tax, even if you are not required to pay any income tax if, for example you are unemployed or a student and have no income that is subject to income tax. The criteria for residence for tax purposes vary considerably from one tax jurisdiction to another tax jurisdiction.
Tax residence is mainly determined under the domestic tax laws of each jurisdiction. There might be situations where a person qualifies as a tax resident under the tax residence rules of more than one jurisdiction, and therefore is a tax resident in more than one jurisdiction.
The residential status of a person is relevant to Income Tax in two major ways. It affects first, the scope of the charge to tax; and secondthe grant of personal reliefs
What is residence?
Your tax residence helps determine the scope of your tax liability in Tanzania. Tanzania taxes its residents on their worldwide income and gains. Nonresidents are usually liable to tax on their Tanzania sourced income only. The rules for residence are set out by the Income Tax Act, 2019.
According to Section 66 of the Income Tax Act, 2019 you are likely to be treated as a Tanzanian resident under the statutory residence test for either an individual or a partnership or a trust or a corporation as set out below:
An individual is resident in the United Republic for a year of income if the individual meets the below tests: (a) has a permanent home in the United Republic and is present in the United Republic during any part of the year of income; - whether an individual has a permanent home in the United Republic is a question of fact.
The word permanent home is not defined in the Income Tax Act. Its technical meaning should be construed in its ordinary dictionary sense. The normal connotation is that of a place where the person lives habitually though not necessarily permanently or even constantly. An individual may certainly have more than on permanent home.
A permanent home does not necessarily mean a house, bungalow or a flat. In a particular case it may be a hotel room. An indication of how the courts would interpret permanent home was given in the East African Tax Case C.G.I.T vs Muraddin Hassanali Noorani Civil Appeal No. 29 of 1969 and R.B Jessop vs Commissioner General 1971. (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 (six months); (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 (four months) in each such year of income.
This definition may not be clearly worded but it is construed to mean NOT average annual periods in excess of four months but an aggregate over the three years in excess of four months combined with physical presence in the United Republic in each of those three years.; or (d) is an employee or an official of the Government of the United Republic posted abroad during the year of income. You could also be treated as a Tanzania resident even if you do not meet any of the above tests. This will be determined in part by how much time you spend in Tanzania in a tax year.
The restrictions on movement caused by the Covid -19 pandemic has given rise to new ways of working and organising activities of business. Working from home has become a permanent feature for many organisations and reduced the importance of people’s geographic location. It has been a common phenomenon for individuals to be forced by the pandemic to spend longer than they originally are scheduled in each country. Video calls have replaced face to face board meetings for companies and several construction projects have had to extend because workers could not be brought to site.
An individual’s physical location, the place where a company’s decisions are made, or the length of certain projects in Tanzania are main statutory tests for determining taxability of individuals, partnerships, trust, or corporations. To what extent has the Tanzania Revenue Authority been keen to make an analysis and bring into the tax net those persons who by virtue of the pandemic have been forced into the tax net remains to be a question to be answered.
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.
A trust is a resident trust for a year of income if -
• it was established in the United Republic;
• 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.
For a Corporation
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.
The determination of the pace of management and control is a question of fact, the normal test is to consider where the meetings of the board of Directors are usually held because management control of a company is normally vested in its Directors. Management and control are usually not separated, and it should be noted, in this context “control” is not interpreted to mean ultimate company control which lies in the hands of the shareholders.
There are several tax cases on this, and the common tax case is the case of Bullock vs The United Construction Co. Ltd, 38 TC 712. The case makes it clear that a place of residence is where de facto the management and control of the company is exercised even though the construction of the company may require that it be exercised elsewhere.
A claim that a company is resident outside the United Republic even if the other country has admitted the claim, does not preclude the tax authorities (TRA) from contending that it is resident in the United Republic because apart from other considerations the law relating to residence in that country may be different from the law in Tanzania.
For legal entities, the other important key factor that should always be thought of under residency is whether the entity falls under the definition of a foreign permanent establishment. According to the ITA, 2019, a permanent establishment has been defined to mean: • a place where a person carries on business and includes-
• a place where a person is carrying on business through an agent, other than a general agent of independent status acting in the ordinary course of business as such;
• a place where a person has used or installed, or is using or installing substantial equipment or substantial machinery; and • a place where a person is engaged in a construction, assembly, or installation project for six months or more, including a place where a person is conducting supervisory activities in relation to such a project; The Income Tax Act, 2019 has also extended the definition to define a foreign permanent establishment which means all permanent establishments of an individual, partnership, trust or corporation that are situated in any one country that is not the country in which the individual, partnership, trust, or corporation is resident but excludes a domestic permanent establishment.
It is important to note that the effective place of management and control are key principles to watch out for in establishing one’s residency and therefore where to account for tax.
The concept of Permanent Establishments (PEs) for foreign companies and entities is key as it triggers the requirement for foreign companies to be liable for tax on their income attributable to their branches or PEs.
Tanzania has not adopted any special rule on calculating the period after which a person may be treated tax resident because of COVID-19. This implies that a strict application of the residency principles may bring several companies to Tanzania tax net. Common Mistakes by Foreign Investors:
To make it easy to understand let’s look at an example. Companies with global operations can unknowingly establish a permanent establishment in Tanzania and therefore need to timely account for taxes on income sourced in the United Republic to avoid any potential interest and penalties.
According to the criteria laid down by the OECD, the permanent establishment as a legal dependent part of the company based in the domestic market is defined as a fixed place of business which is used to fulfil or partly carry out the business operations of a company. This includes, for example, the location of the management, a branch office or the execution of a construction or assembly work as far as the latter is conducted for a period of six months or more.
Let’s assume a Chip technology Company is incorporated in Singapore. Chip Ltd (note real name) wins a tender with the Government of Tanzania for supply of electronic passport chips. Chip Company Ltd decides to establish a Branch in Tanzania and obtains a certificate of compliance. The main manufacture of the electronic chips is done by Chip Ltd in Singapore.
The Branch established in Tanzania only performs support services. On supply of the electronic passport chips, Chip Ltd in Singapore receives a payment for the services and supply of the electronic chips. Chip Ltd decides to apportion the revenue on the supply of the electronic chips between her Branch in Tanzania in the ratio of 30% for the Branch and 70% for Chip Ltd Singapore.
In this example, the tax authority will subject the entire contract price to tax in Tanzania and will subject the Branch to 10per cent withholding tax on any repatriated income. Chip Ltd Singapore will also trigger a PE in the United Republic of Tanzania. Another scenario is where an offshore company without any business presence in Tanzania sends her technicians to Tanzania to conduct an installation and maintenance of high-tech machinery parts at a Cement factory in Tanzania and the project extends over a prolonged period of over six months.
The technical services will trigger a PE and the offshore company will qualify to become a foreign permanent establishment, since the revenue can be attributed to the services conducted by the foreign permanent establishment and the period of the project is six months and above.
The Company should therefore consider complying to all the tax filing and local tax payments requirements as per the Income Tax Act, 2019 failure of which penalties and interest will apply.
Businesses should note that tax residency is an important area to consider if one is to be compliant to local tax legislation. Some specific reliefs and exemptions may apply where there are double taxation treaties between Tanzania and the country of the foreign permanent establishment, and it is always important to get a professional advise from your tax advisors.
• The writer, Godvictor Lyimo, is the President of Tanzania Association of Accountants (TAA), reachable via email@example.com, Phone: 0787514014.