Tanzania’s new Digital Tax law needs reform

Digital Tax

The development of the internet has significantly altered the ways in which we learn, communicate, and shop. This trend is not new to Africa, where eCommerce sales are expected to exceed USD 33 billion in 2022. For many tax authorities across the continent, this has created a new dilemma. How can you collect taxes from a company that offers digital services to your population but has no physical presence there?

The digital services tax and value added tax (“VAT”) on digital services, which went into effect in July 2022, are Tanzania’s response to this. The VAT is applied at the prevailing rate (currently 18%) on the same services, and the digital services tax is applied at a rate of 2% to the “gross payment” made for a digital service offered in Tanzania. This means that digital tax and VAT must be paid to the Tanzania Revenue Authority whenever a Tanzanian bank account or mobile money account makes a payment for a digital service, such as for music streaming.

According to the new rules, starting in July 2022, any organisation that offers digital services in Tanzania must register with the TRA and start collecting and remitting these digital taxes. These taxes are imposed on non-resident corporations, unlike traditional taxes, hence there are less safeguards in place to assure compliance.

Most of the time, non-digital services—those that are already subject to tax—are sold with digital services as a package. With the current definition of the digital tax law, income from these services could be subject to both the new digital tax and the ongoing non-digital taxes levied in Tanzania and elsewhere. Tanzania’s digital development is hampered by this double taxation, which creates an unfavourable, unworkable and unfair tax environment for companies providing digital services to Tanzanians.

By barring payments received for non-digital products and services from being considered in “gross payments,” the Act must define the specifics of the phrase “gross payment.” These non-digital goods and services are almost certainly offered domestically, and it is anticipated that they will be subject to the proper taxes.

Only those who are not registered for VAT are subject to paying VAT while purchasing digital services. Determining these buyers’ VAT registration status presents a challenge. Value added tax registration numbers (“VRN”) might be gathered as a quick fix, but they are now unable to be verified. The TRA might put in place a VRN validation system to deal with this issue. By doing so, taxpayers will be able to verify a VRN’s legitimacy and apply the correct VAT rate to the transaction.

In comparison to Tanzania’s major island, Zanzibar, there is further uncertainty on how the VAT on digital services would be handled there. This is due to the fact that Zanzibar and mainland Tanzania both impose separate VAT rates. Digital service providers might not know what to do next in the semi-autonomous archipelago because there are still no regulations defining how this tax will function.

Dion Kapfumvuti a Tax Associate with Deloitte Consulting Ltd, says that to ensure each side can comply and successfully collect tax from digital service providers, it is imperative that law makers in Zanzibar create legislation on digital taxes and come to an agreement with the authorities on the mainland.

Dion explains that the law as it stands allowed digital service providers six months from July 2022 to apply for registration to pay digital tax. The legislation, however, is silent on whether taxes need to be filed for this period, and if penalties and interest will apply for this unpaid tax. No infrastructure was available to allow non-resident service providers to comply.

The authorities to resolve this issue will need to change to the tax law and make a decision regarding the treatment of taxes on these retroactive transactions. After completing the registration process, the government should inform taxpayers of the start date for submitting and making payments for DST and VAT on digital services.

Non-Resident Digital Service Suppliers

By July 2023, every taxpayer must maintain a primary data server in Tanzania to keep tax-related records, according to Section 35 of the Tax Administration Act, 2015. Because they don’t have a physical presence in the nation and it can be costly to maintain a server of this kind, this presents a problem for non-resident digital service providers. This issue isn’t covered by the present digital tax regulations. Given that digital taxes are targeted at entities that are not headquartered in Tanzania, it might be necessary to exempt non-resident digital taxpayers from complying with this clause. The strategy might result in countrywide permanent institutions, contradicting the goal of taxing digital service providers who are not citizens.