THE INCOME TAX ACT, CAP.332 PRACTICE NOTE INCOME FROM INVESTMENT

Transcription

1 ISO 9001:2008 CERTIFIED THE INCOME TAX ACT, CAP.332 PRACTICE NOTE INCOME FROM INVESTMENT PRACTICE NOTE NO. 06/2013. DATE OF ISSUE 1 st NOVEMBER,

2 Permanent Note No. 06. /2013. Income from Investment for Corporations date of issue 1 st November 2013 Contents Pages 1.0 TAX LAW INTERPRETATION THE PURPOSE OF THIS PRACTICE NOTE HOW THE LAW APPLIES REVOCATION TAX LAW. This Practice Note applies in respect of the taxation of income of corporations from conducting an investment. 2.0 INTERPRETATION. 2.1 In this Practice Note, unless the context requires otherwise Act mans the Income Tax Act, Cap Definitions and expressions used in this Practice Note that are used in the Act have, unless the context requires otherwise, the same meaning in this Practice Note as have in the Act. 3.0 THE PURPOSE OF THIS PRACTICE NOTE. This Practice Note considers the taxation of a person s gains or profits from conducting an investment for a year of income as provided for under section 9 of the Act and considers the following: 3.1 Investment 2

3 3.2 What constitutes investment income. 3.3 Payments subject to final withholding tax 3.4 Deductible investment expenses 3.5 Realisation of investment assets 3.6 Losses from investment. 4.0 HOW THE LAW APPLIES Investment "investment" means the owning of one or more assets of a similar nature or that are used in an integrated fashion, on similar terms and subject to similar conditions, including as to location and includes a past, present and prospective investment, but does not include a business, employment and the owning of assets, other than investment assets, for personal use by the owner; "investment asset" means shares or securities in a corporation, a beneficial interest in a non-resident trust and an interest in land and buildings but does not include i. business assets, depreciable assets and trading stock; ii. business assets, depreciable assets and trading stock; iii. private residence of an individual that has been owned continuously for three years or more and lived in by the individual continuously or intermittently for a total of three years or more, other than a private residence that is realised for a gain in excess of 15,000,000 shillings; iv. an interest in land held by an individual that has a market value of less than 10,000,000 shillings at the time it is realised and that has been used for agricultural purposes for at least two of the three years prior to realisation; v. shares or securities listed on the Dar es Salaam Stock Exchange that are owned by a resident person or a non-resident person who either alone or with other associate controls less than 25% of the controlling shares of the issuer company; 3

4 4.2 Investment income A person whose activities consist wholly or partly in making or managing investments is treated as conducting an investment. The principal overheads of conducting an investment which are annually termed as management expenses are deductible except those denied deduction under the tax law. A person s income from an investment for a year of income is the person s gains or profits from conducting the investment for that year of income Amounts to be included in calculating gains or profits from conducting an investment In calculating a person's gains or profits from conducting an investment for a year of income the following amounts derived by the person from conducting the investment during that year of income shall be included, namely i. any dividend, distribution of a trust, gains of an insured from life insurance, gains from an interest in an unapproved retirement fund, interest, natural resource payment, rent or royalty; ii. net gains from the realisation of investment assets. iii. Amounts derived as consideration for accepting a restriction on the capacity to conduct the investment; and iv. other amounts required to be included under section 55, 56 and 57 of the Act Amounts to be excluded in calculating gains or profits from investment. In calculating a person s gains and profits from conducting an investment, the amounts shall be excluded, namely i. exempt amounts and final withholding payments; and ii. amounts that are included in calculating the person s income from any employment or business 4.3 Payments subject to final withholding tax The following payments derived by a person in conducting an investment shall be taxed in the hands of the person in the form of a final withholding tax, whereby the payer withholds tax from the payment and remits the tax to the Commissioner. The payments subjected to final withholding shall be excluded from calculation of income from the investment as the 4

5 total tax liability of that income has already been satisfied and such payments do not form part of total income under section 4(1)(a):- (a) Dividends paid by a resident corporation (b) Dividends paid by a non-resident person to a resident individual other than dividends received by an individual in conducting a business (c) Interest paid by a financial institution to a resident individual where the interest is paid with respect to a deposit with the institution; other than interest received by an individual in conducting a business or foreign source interest (d) Interest paid to a unit trust (e) Rent paid to a resident individual under a lease of land or a building and associated fittings and fixtures other than business rent or foreign source rent paid to an individual. 4.4 Deductions In calculating a person's income for a year of income from conducting an investment, there shall be deducted all expenditure incurred during the year of income, by the person wholly and exclusively in the production of income from the investment. In calculating a person's income from an investment, no deduction shall be allowed of - (i) Consumption expenditure incurred by a person conducting an investment. Consumption expenditure means an expenditure incurred by a person in the maintenance of himself, his family or establishment or for any other personal use. (ii) Expenditure of a capital nature incurred by the person conducting an investment. An expenditure of a capital nature mean expenditure that services a benefit lasting longer than twelve months or incurred in respect of natural resource prospecting, exploration and development. (iii) Excluded expenditure including tax payable under the Act, bribes and expenditure incurred in corrupt practice, fines and similar penalty s payable to any government of any country for breach of any law. (iv) Repair and Maintenance expenditure that is otherwise granted under section 14 of the Act. (v) Any depreciation allowance under section 17. 5

6 Interest Expenses. Interest incurred by a person in conducting an investment during a year of income under a debt obligation shall be incurred wholly and exclusively in the production of income from the investment i. where the debt obligation was incurred in borrowing money, the money is employed during the year of income or was used to acquire an asset that is employed during the year of income wholly and exclusively in the production of income from the investment; or ii. in any other case, the debt obligation was incurred wholly and exclusively in the production of income from the investment. Interest expense incurred by an exempt controlled entity. The total amount of interest that an exempt-controlled resident entity may deduct for a year of income shall not exceed the sum of interest equivalent to debt-to-equity ratio of 7 to 3. For the purpose of interest expenses of an exempt-controlled resident entity the following apply: exempt-controlled resident entity is an entity which is resident during the year of income and at any time during the year of income 25 per cent or more of the underlying ownership of the entity is held by entities exempt under the Second Schedule, approved retirement funds, charitable organisations, non-resident persons or associates of such entities or persons. Example 2. Illustration The debt balances of an exempt controlled resident entity for a year of income was TZS 800,000,000 and TZS 750,000,000 at the end of January and March respectively, and for each of the remaining ten months the debt balance was TZS 640,000,000. The average balance at the end of the year is computed as follows: Debt balance for ten months ( X10) TZS 6,400,000,000 Debt balance for January(800,000,000x1) TZS 800,000,000 Debt balance March(750,000,000x) TZS 750,000,000 Total 7,950,000,000 6

7 Divide by 12 The average debt balance at the end of the year 662,500, Losses incurred from conducting an investment. If a person has unrelieved loss from investment in the current or previous years, the loss can be carried forward and deducted from the corporation s current year investment income. Losses can be carried forward in this way from year to year indefinitely. However loss carry forward is subject to the following conditions: - i. If a person makes a loss from any investment, the person can offset income from other investments but cannot offset income from any business or employment. ii. Foreign investment losses can offset only foreign investment income; Example 3. A corporation C Ltd made during the year of income 2010 business loss of TZS. 1,200,000/= and investment loss of TZS. 2,800,000/=. During the year 2011 the corporation made business profit of TZSs. 4,200,000/= and Investment gain of TZS. 2,000,000/=. The corporation s taxable income from business and investment in year 2012 will be calculated as follows: - Business income Business profits TZS 4,200,000 Less Loss carried forward from year 2011 TZS 1,200,000 Net profit TZS 3,000,000 Investment income Gains from Investment TZS 2,000,000 Investment loss carried forward from year2011 TZS (2,800,000) Net loss carry forward to year 2011 TZS (800,000) Taxable income of C Ltd for the year 2011 is as follows: - Business income TZS 3,000,000 Investment loss TZS 800,000 C Ltd will pay tax on business profits of TZS 3,000,000 and carry forward unrelieved investment loss of TZS 800,000 to year

8 5.0 REVOCATION Pursuant to the provisions of section 130(2) of the Act, the Practice Note No. 05/2004 issued on 15th December, 2004 is hereby revoked. Signed... Commissioner 1 st November,