Tax Alert Withholding tax on services TRA Practice Note 01/2013 September 2013

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Martha Webb
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1 TRA Practice Note 01/2013 Withholding tax on services

2 Withholding tax on services A recent development is the publication by the Tanzania Revenue Authority ( TRA ) of a practice note (Practice Note 01/2013), which seeks to clarify (i) certain aspects of the implementation of the new 5% withholding tax on payments to residents, and (ii) the interpretation of the source rules regarding payments to non-residents. The practice note can be accessed at In this tax alert we summarise the contents of the practice note under the following headings: Administrative Requirements Payments to Residents Payments to Non-Residents 2

3 Administrative Requirements Actions required by withholders The practice note reminds taxpayers of the following administrative requirements imposed by the Income Tax Act (ITA) 2004 in relation to anyone who has an obligation to withhold tax, namely: Due date for payment being 7 days after the month end (Section 84(1) ITA 2004) Monthly withholding tax certificate to be issued to each withholdee within 30 days of the month end (Section 85 ITA 2004) Six monthly withholding tax return to be filed with the TRA within 30 days of each 6 month period (Section 84(2) ITA 2004) The forms for the monthly withholding tax certificate and for the six monthly withholding tax return can be downloaded from: (where you will see links for "ITX E - Withholding Tax Certificate on Service Fees" and "ITX E - Withholding Tax Statement"). Actions required by withholdees The practice note does not provide guidance to withholdees in relation to the process for claiming withholding tax credits something that is of particular importance in relation to the new 5% withholding tax. However, in terms of the law, where tax has been withheld at 5%, then the withholdee is entitled to claim a credit for such withholding tax. This is on the basis of Section 87 ITA 2004 which provides that the withholdee of a payment that is not a final withholding payment shall be treated as having paid any income tax withheld.and the withholdee is entitled to a tax credit in an amount equal to the tax treated as paid for the year of income in which the payment is derived. To ensure that tax credits are claimed on a timely basis, withholdees need to ensure that withholding tax certificates are obtained from their customers on a timely basis, and then that the tax credit claim is also made on a timely basis. Bearing in mind that tax payments are due on a quarterly basis, we would recommend that withholding tax certificates are also filed on a quarterly basis so that credit is immediately claimed for the withholding tax. This process will cause significant administrative challenges both for taxpayers and TRA. 3

4 Payments to Residents Background In our Finance Bill newsletter (issued on 21 June 2013), we highlighted our concerns with regard to the new 5% resident withholding tax on services (which is to be deducted by businesses when making payments to suppliers of services) which as drafted appeared to apply to: All types of services without restriction All types of payee without restriction (for example, it is irrelevant whether the payee is VAT or TIN registered) All payments no matter how small As advised in our Finance Act 2013 newsletter (issued on 22 July 2013), the Finance Act itself did not include any changes to the wording set out in the Finance Bill. However, the new practice note does give further guidance on the nature of payments subject to the new withholding tax. Payments covered The practice note clarifies what is included by stating that the service fee should be for provision of professional or consultancy services or other such services of an independent business character i.e. other than remuneration for employment. The services include scientific, literary, artistic, educational or training activities as well as activities of physicians, surgeon, lawyers, engineers, architects, surveyors, dentists, accountants and auditors. Payments excluded from withholding The practice note also confirms that amongst the payments excluded are the following: Water and electricity Services ancillary to acquisition of goods Medical services Certain services related to agricultural products: marketing, auctioneering, extension services, processing Service fee charged by a bank or a financial institution Insurance premium, insurance agency or brokerage services etc. Transport services, except the commission and fees thereon General cleaning or sanitation services Transmission of messages by any apparatus As with any other withholding tax there is also no obligation to withhold where: Payments are made of amounts that are exempt from income tax (Section 82(2)(c) ITA 2004) Payments are made by individuals unless made in conducting a business (Section 82(2)(a) ITA 2004) Payment in respect of services provided by the Government including Government Agencies and Local Authorities related to their statutory functions of the Government, except amounts derived from business activities that are unrelated to the functions of government (Paragraph 1(b) of Second Schedule to ITA 2004) 4

5 Payments to Residents (Cont d) Our comments Our Finance Bill newsletter had highlighted a number of concerns with this new withholding tax including: Administrative inconvenience and cost (both to the taxpayer and the tax collector), Cash flow cost to many taxpayers where not sufficiently profitable to absorb the withholding tax credits, Absolute costs (and therefore double tax) where administrative difficulties (for example, in obtaining withholding tax certificates from payers) result in withholding tax credits not being claimed. Our suggestion had been that such a withholding tax be limited to certain defined types of services (where there is a genuine concern as regards loss of revenue) and should not apply to payments is made in respect of a fiscal receipt generated by an electronic fiscal device (as the Tanzania Revenue Authority will already have a record of the transaction). The practice note does help in identifying payments covered and payments excluded, but in our view does not go far enough as there is no automatic exclusion for fiscal receipts. In addition, the practice note is not completely unambiguous, in particular: If the subject matter of the withholding tax is limited to professional or consultancy services or other such services of an independent business character, then the question arises as to why there is a need to make reference to the extensive list of exclusions of items that do not fall within this description. In other words, is the correct approach to look at what is specifically included / mentioned in the practice note and not withhold from anything else, or does one withhold from everything other than items listed as specifically excluded? It is not completely clear how wide some of the exclusions are to be interpreted as being. For example, does the term transmission of messages cover all electronic communication services, and where does one draw the borderline as to when a service is and is not ancillary to the acquisition of goods? Where there are clear cases of doubt, taxpayers may wish to seek formal confirmation from TRA as to whether particular types of payment are subject to this withholding. 5

6 Payments to Non-Residents: source rules Services Source rules A non-resident (without a permanent establishment) is subject to withholding tax on income that has a source in Tanzania. Where the payment to a non-resident is in respect of services, then the general rule regarding the source of payments for services is set out in section 69(i) ITA 2004 which refers to the following: payments, including service fees, of a type not mentioned in paragraphs (g) or (h) for or attributable to employment exercised, service rendered or a forbearance from exercising employment or rendering service - (i) in the United Republic, regardless of the place of payment; or (ii) where the payer is the Government of the United Republic, irrespective of the place of exercise, rendering or forbearance; Commentary in practice note The practice note includes narrative referring to source rules, but the narrative in this regard is wider than the legislative provisions cited above. In particular, in addition to referring to place of performance in determining source, the note also states that a payment will have a source in Tanzania where the results of the activities are directed to or utilized or benefitted by residents of the United Republic. The basis for this statement is unclear, but is consistent with TRA s more recent approach of disputing that the source of services is determined by the place of performance. Case law In February 2011 in the case of National Microfinance Bank Plc V Commissioner General (Appeal No 32 of 2010), the Tax Revenue Appeals Board had confirmed that place of performance was the determinant of source for services supplied from overseas and therefore withholding tax was not applicable in relation to the services in question. In February 2012, on further appeal to the Tribunal (Appeal No 7 of 2011) this ruling was overturned but the ground for this reversal was not a differing opinion with regard to the general source rule applicable to withholding tax on services (section 69(i) ITA 2004) but rather a finding that the source rules relating to transmission of messages (section 69(h) ITA 2004), and which refer to location of apparatus used for transmission, were applicable. More recently in December 2012 the Tax Revenue Appeals Board ruled in the case of Tullow Tanzania BV v Commissioner General (Appeal No 10 of 2011), a decision which appears to have cast doubt on the relevance of place of performance of services in determining source (at least in the specific circumstances of that case). This decision was arrived at without any clear explanation as to why one should disregard the clear wording in section 69(i) ITA 2004 referring to the place of performance of services. The narrative in the practice note may be a consequence of this ruling. An appeal against the ruling was made to the Tax Revenue Appeals Tribunal, and its written ruling is anticipated in the near future. 6

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TANZANIA REVENUE AUTHORITY. Withholding Tax on Payments of Service Fee to a Resident Person under Section 83(1) (c) of the Income Tax Act Cap.

TANZANIA REVENUE AUTHORITY. Withholding Tax on Payments of Service Fee to a Resident Person under Section 83(1) (c) of the Income Tax Act Cap. Practice Note No. 01/2013 Date of Issue: August 2013 TANZANIA REVENUE AUTHORITY Withholding Tax on Payments of Service Fee to a Resident Person under Section 83(1) (c) of the Income Tax Act Cap. 332 1.0