INVESTING IN TANZANIA

Tanzania 2015 | EXECUTIVE GUIDE | REVIEW: ACCOUNTANCY

Joseph Sheffu, Country Leader of EY Tanzania on the ins, outs, and opportunities to be had by investing in Tanzania.

Tanzania's GDP grew from 6% to 7% between 2010 and 2013, and is expected to reach 7.2% in 2014. This is above the Sub-Sahara African average growth rate of 4.7 % recorded in 2013. The UNCTAD World Investment Report 2014 has ranked Tanzania among the top-10 Sub-Sahara African FDI destinations.

Continued strong economic fundamentals reflect Tanzania's sound socio-economic policies, improving governance and democracy, private sector participation, friendly investment climate, and sustained peace and security. The government sees enhanced infrastructure and policies as catalysts of further economic growth, and, hence, major on-going reforms.

EHY INVEST IN TANZANIA?

Walking around Dar es Salaam, and indeed countrywide, one is struck by the sheer number of earth moving trucks and construction cranes, as well as the mushrooming of high rise buildings confirming a growing infrastructure sector. The Port of Dar es Salaam is a major gateway to surrounding countries like Zambia, Malawi, Rwanda, Burundi, and the Democratic Republic of the Congo. Arusha, the second largest city, and center of the tourism industry, hosts the headquarters of the East African Community (EAC), the International Court on the Rwanda Genocide, and the World Heritage sites of the Ngorongoro Crater and the Serengeti National Park.

Tanzania has ratified 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. Furthermore, Tanzania has concluded double-taxation agreements with several countries. Among other 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 its citizens." The plan also aspires to achieve the country's Millennium Development Goals (MDG) by 2015. Anchored on 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: agriculture, tourism, mining, oil and gas, manufacturing, wholesale, retail trade, and financial services.

OPPORTUNITY TO ACCESS EAST AFRICA, COMESA, AND SADC MARKETS

Tanzania ratified the 2010 EAC Common Market Protocol, which promotes regional integration through the adoption of common tariffs and allowing of free movement of goods, services, capital, labor, and rights of establishment within 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 blocks to access to 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 laws principles. Common forms of business organisations are incorporated companies, registered branches of overseas companies, a sole proprietors and partnerships.

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

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 whole 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 instalments of the estimated total corporate tax is also payable, with payments of three further instalments due by the end of every subsequent quarter. Final corporate tax returns based on actual audited financial results are filed within six months of closure of an accounting period.

VAT

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

LAND AND PROPERTY TAX

In Tanzania all land belongs to the state, which may grant to its citizens or legal bodies 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, through derivative rights, or through sub-leases through a government-granted right of occupancy. Rights of occupancy and derivative rights may be granted for periods 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 relevant investment laws. Land rates are minimal and paid to the government annually. In addition to the land rents, the property owners are obliged to pay property tax to the local authority on an annual basis.

EMPLOYEE TAXES AND 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 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 AngloGold. Major legislation governing the industry is the Mineral Policy, 1997, the 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 import of capital goods for prospecting, development and early production. The standard royalty rate on most minerals is currently at 4%. Normally, when mining companies' progress into the development phase, they may enter into a Mining Development Agreement with the government, which may provide specific incentives beyond those stipulated by the relevant laws.

CAPITAL GAINS TAX

Capital gains realized on the disposal of land properties located within Tanzania are subject to capital gains tax, paid in a single instalment, at a 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 of 30% for corporations and at graduated rates for individuals. Since 2012, capital gain tax is charged on net gains on the direct or indirect sale of shares or securities held in a Tanzanian resident entity.

WITHHOLDING TAX

Tanzania operates a withholding tax system whereby companies making certain payments to both resident and non-resident persons are obliged to withhold 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 AND 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 the Republic of Korea.

In early 2014, Tanzania issued its OECD-based transfer pricing rules and regulations, which require that transactions between related parties must be conducted at arm's-length prices.

CHALLENGES TO INVESTING IN TANZANIA

Similar to most 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 inadequate capacity by state actors such as the tax and regulatory authorities.

INVESTMENT PROMOTION AND INCENTIVES

Qualifying local and foreign investors may register their businesses with the Tanzania Investment Centre (TIC) to benefits from range of incentives such as import duties relief on capital goods, relaxed immigration requirements and guarantees against nationalisation and expropriation. Similar incentives are offered to investors in Zanzibar through the Zanzibar Investment Promotion Authority (ZIPA). Special Economic and Export Zones have also been set up to provide fiscal incentives to export sector investors.

LABOR

Economic growth 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 such as 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 labour 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 authorised 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.

WHAT ARE THE SECTOR INVESTMENT OPPORTUNITIES IN TANZANIA

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 and oil and gas upstream

• Services to the mining and oil and gas industry

• 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 including mortgage and financial leasing

• Mobile Banking and money transfer

• Inbound remittances

• Micro-finance industry

• Shared-services

• ICT and communication

AUDITING REQUIREMENTS

The Companies Act, 2002 requires all companies of whatever sizes to prepare financial statements in each financial period, which comply with the International Financial Reporting Standards (IFRS) and, which should be audited by an independent auditor who is 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.