THE NITTY-GRITTY

Tanzania 2014 | EXECUTIVE GUIDE | REVIEW: ACCOUNTANCY

TBY talks to Joseph Sheffu, Country Managing Partner of Ernst & Young (EY) Tanzania, on opportunities, benefits, challenges, and the inner workings of investment in Tanzania.

This is certainly an exciting time for Tanzania, with its economy recording annual growth of about 7%, which is well ahead of most regional peers. The 2013 Ernst & Young (EY) Africa Attractiveness Survey has ranked Tanzania among the top 10 African FDI destinations since 2003, while the World Bank's Doing Business 2013 report placed the country at number 134, ahead of the regional average (Sub-Saharan Africa) of 140.

The remarkable economic growth recorded in Tanzania over the past two decades reflects sound socio-economic policies, able leadership, increased private sector participation, and a friendly investment climate, as well as sustained peace and improved democracy. The government sees enhanced infrastructure and policies as catalysts of further economic growth, and hence, major ongoing reforms.

Tanzania is an attractive destination because of its growing infrastructure, which comprises ports, roads, and cross-country rail networks. There is also considerable energy potential due to the discovery of vast natural gas deposits, while conducive investment policies allow for increased investment in its extensive arable land. The Port of Dar es Salaam is a major gateway to surrounding countries like Zambia, Malawi, Rwanda, Burundi, and the Democratic Republic of Congo. Arusha, the second largest city and center of the tourism industry, hosts the headquarters of the East Africa Community, the International Court on Rwanda Genocide, and the World Heritage sites of the Ngorongoro Crater and the Serengeti National Park.

Tanzania is a signatory of several multilateral and bilateral agreements on the protection and promotion of foreign investment, which safeguard foreign investors against the nationalization and expropriation of their investments in Tanzania. Among other international agreements and memberships, Tanzania is a member of the Multilateral Investment Guarantee Agency (MIGA), and International Centre for Settlement of Investment Disputes (ICSID), as well as being a signatory to the New York Convention on the recognition and enforcement of Arbitration Awards.

TANZANIA'S VISION 2025

The government's blueprint for the years 1999 to 2025 aims to transform Tanzania into a newly industrialized, “middle-income country providing a high quality of life to all citizens." The plan also aspires to achieve the country's Millennium Development Goals (MDG) by 2015. Anchored to economic, social, and political governance, it seeks to achieve and sustain an annual economic growth rate of at least 8% until 2025. Growth is widely distributed, covering all economic and social sectors, resulting in the eradication of abject poverty by 2025. Key sectors identified in the plan include: tourism; agriculture; mining; oil and gas; manufacturing; wholesale and retail trade; and financial services.

OPPORTUNITY TO ACCESS EAST AFRICAN & SADC MARKETS

Tanzania ratified the 2010 East Africa Common Market Protocol, which promotes regional integration through the adoption of common tariffs and allowing free movement of goods, services, capital, labor, and rights of establishment within the member states of Tanzania, Kenya, Uganda, Rwanda, and Burundi. Tanzania is also a member of Southern Africa Development Community (SADC), which gives it added advantages. Investors in Tanzania can, therefore, leverage the country's membership of the trading blocs to access markets and opportunities in the member countries.

LEGAL STRUCTURE FOR FORMATION OF BUSINESS IN TANZANIA

Given the country's history, Tanzanian commercial laws are largely based on English and Common Law principles. Common forms of business organizations are incorporated companies, registered branches of overseas companies, sole proprietors, and partnerships.

The Memorandum and Articles of Association must be completed and filed with the Business Registrations and Licensing Agency (BRELA) in order to incorporate a company. Currently, a company must have at least two shareholders of any nationality/citizenship. Following the recently approved changes in the Companies Act, 2002, which have yet to be regularized, it will shortly be possible for a company to have just one shareholder of any nationality/citizenship.

A company must also obtain a Tax Payer Identification Number (TIN), Value-Added Tax (VAT) registration (where relevant), and a business license before commencing operations. Regulated companies, such as banks, insurance, telecommunication, and construction companies, require additional regulatory approval prior to commencing their businesses.

Corporate Tax

Companies are subject to corporate tax on their worldwide taxable income at a corporate tax rate of 30% or at a reduced rate of 25% if at least 30% of the company's equity is listed on the Dar es Salaam Stock Exchange. The taxation principle of wholly and exclusive use in the production of income is applied in determining deductibility of expenditure.

Companies may choose their preferred accounting period, which can be for a maximum period of 18 months in their first year of operation and, thereafter, consistent periods of 12 months. Provisional corporate tax returns are filed in Tanzania shillings (TZS) by the end of the first quarter of any accounting period when the first installments of the estimated total corporate tax is also payable, with payments of three further installments due by the end of every subsequent quarter.

VAT

VAT is charged at 18% on the supply of goods and services, and companies can utilize the output VAT against input VAT and remit or claim the difference from the tax authority.

Land & Property Tax

In Tanzania, all land belongs to the state, which may be granted to its citizens or legal bodies with leasehold rights of up to 99 years. Procedures for obtaining a lease or certificate of occupancy can be complex and lengthy, both for citizens and foreign investors. Non-citizen investors may occupy land for investment purposes through a government-granted right of occupancy, derivative rights, or sub-leases through a government-granted right of occupancy. Rights of occupancy and derivative rights may be granted for periods of up to 99 years and are renewable. Proposed reforms to allow for land ownership, particularly foreign land ownership, remain unpopular. Despite the ownership challenge, foreign investors are granted security of tenure through the relevant investment laws. Land rates are minimal and paid to the government annually. In addition to land rents, property owners are obliged to pay property tax to the local authority on an annual basis.

Employee Taxes & Social Security

Taxation of individuals in Tanzania is on the basis of both residence and source. Individuals are classified either as resident or non-resident taxpayers. Whereas resident taxpayers are taxed on their worldwide income, non-resident taxpayers are taxed on income accrued in, or derived from, Tanzania. Individual income tax is covered under the Pay-As-You-Earn (PAYE) system whereby PAYE is withheld by the employer from all remunerations, including bonuses, allowances, and benefits in kind made in respect of employment. PAYE is calculated by applying a progressive tax rate scale from 0% up to a maximum of 30%.

Social security regulations mandate that every employer must register their employees with the social security schemes. The rate of contribution is 20% (i.e., 10% employer portion and 10% employee portion) and is based on the gross salary of the employee.

Mining Tax

Tanzania is the fourth largest gold producer in Africa after South Africa, Ghana, and Mali, with major players being Africa Barrick and Anglo Gold. Major legislation governing the industry is the Mineral Policy, 1997, Mineral Act, 1998 and Mineral Act, 2010. Incentives for mining companies include 100% capital deduction on prospecting and development capital expenditure, customs duty free on the import of capital goods for prospecting, development, and early production. The standard royalty rate on most minerals is currently 4%. Normally, when mining companies progress to the development phase, they may enter into a Mining Development Agreement with the government, which may provide specific incentives beyond those stipulated by relevant laws.

Capital Gains Tax

Capital gains realized on the disposal of land properties located within Tanzania are subject to capital gains tax, paid by way of a single installment, at the rate of 10% in the case of a resident, and 20% in the case of a non-resident. Capital gains on business and investment assets are subject to tax at the applicable income tax rate, at 30% for corporations and graduated rates for individuals.

Withholding Tax

Tanzania operates a withholding tax system whereby companies making certain payments to both resident and non-resident persons are obliged to withhold a certain percentage of the payments and remit the same to the tax authority. Withholding tax rates relating to payments to non-resident persons are: employment services 15%, dividends 10%, service fees 10%, rent 15%, commuted pension 15%, insurance premium 5%, interest 10%, and royalties 15%.

DOUBLE TAX TREATIES & TRANSFER PRICING

Currently, Tanzania has signed double taxation treaties with Canada, Denmark, Finland, India, Italy, Norway, Sweden, Zambia, and South Africa. According to UNCTAD, Tanzania has bilateral investment treaties with the UK, Canada, Switzerland, the Netherlands, Germany, South Africa, Germany, Sweden, Finland, Denmark, Italy, Mauritius, Oman, Turkey, Zimbabwe, Egypt, and South Korea.

CHALLENGES TO INVESTING IN TANZANIA

Similar to other fast-growing economies, the country's underdeveloped infrastructure may pose challenges to business growth and cost structure. Structural issues that are currently being addressed include the inadequate capacity of government actors, such as the tax and regulatory authorities.

INVESTMENT PROMOTION & INCENTIVES

Qualifying local and foreign investors may register their businesses with the Tanzania Investment Centre (TIC) to benefit from a range of incentives, such as import duties relief on capital goods, relaxed immigration requirements, and guarantees against nationalization and expropriation. Similar incentives are offered to investors in Zanzibar through the Zanzibar Investment Promotion Authority (ZIPA).

LABOR

Economic growth has outpaced the development of human capital, and consequently Tanzania faces persistent shortages of experienced and skilled labor. As an incentive to foreign investment, the government may provide work permits for management and technical staff where these skills are unavailable locally.

The government regulates minimum wages for labor engaged in the industries of construction, transport, mining, telecommunication, and agriculture. Labor disputes are regulated and resolved by mediation through the Commission for Mediation and Arbitration under the Ministry of Labor, or can progress to the labor or commercial court.

EXCHANGE CONTROL

The Foreign Exchange Act, 1992, permits any person, resident or not, to hold any amount of foreign currency, open and maintain a foreign currency account with any bank, and sell any amount of specified foreign currency to an authorized dealer.

Furthermore, the Investment Act, 1997, guarantees investors unconditional transferability (through any authorized dealer in freely convertible currency) of net profits, foreign loan services, royalties, fees and technology transfer charges, emoluments of foreign personnel, and repatriation of capital, after taxes on the sale of the investment.

Tanzania offers great investment opportunities in the following sectors and industries:

Agriculture and agro-processing:

• Horticulture

• Large-scale commercial farming

• Livestock and poultry industry

• Food processing

• Agro-processing

• Aquaculture, marine, and freshwater

Mining, oil, and gas:

• Mining, oil, gas, and upstream

• Services to the mining and oil and gas sector

• Oil and gas downstream

• Gemstone processing

Manufacturing:

• Consumer products

• Building and infrastructure materials

• Pharmaceutical and cosmetic products

• Packaging products

• Agricultural inputs and equipment

• Wood-based products

• Animal and leather-based products

Financial services in the telecommunications and banking sectors:

• Investment and merchant banking

• Banking services

• Mobile money transfer

• Mobile banking

• Inbound remittances

• Micro-finance industry

• Shared services

• ICT and communications

AUDITING REQUIREMENTS

The Companies Act, 2002, requires all companies of whatever size to prepare financial statements for each financial period that comply with International Financial Reporting Standards (IFRS), and which should be audited by an independent auditor licensed to operate in Tanzania. This requirement is echoed by the Income Tax Act, 2004, which requires all companies to file their annual corporate tax returns based on their audited financial statements.