Tanzania 2014

BUDGET BRIEF

KPMG BUDGET BRIEF

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Economic Growth

Commercial production of gas set to spur economic growth.

Tanzania’s Gross Domestic Product (GDP) has been fairly constant from 2012 to date. The main economic growth drivers are communication, transport, financial services, construction, agriculture and manufacturing.

Tanzania’s constant growth in GDP is attributable to:

- Ongoing investments in infrastructure;

- The discovery of large gas reserves;

- Increase in foreign direct investments associated with oil and gas exploration

- Low inflation rate of approximately 6.5%.

Comparative GDP growth for the period 2012 - 2015:*projected

Growth in 2012 2013 2014* 2015*

Real GDP (%) 6.9 7.0 7.2 7.0

Real GDP per capita (%) 3.9 3.9 4.2 4.1

Despite this impressive and sustained performance, Tanzania’s GDP growth has been held back by:

- High poverty levels especially in rural areas;

- Dependency on agriculture for growth; and

- Poor weather conditions.

Fiscal PolicyIn 2013/14, the government’s fiscal policy aimed at strengthening tax administration, improving expenditure and debt management. Estimated expenditure in the 2013/14 budget was TZS 18.2 trillion. However, projected revenue collections may not cover these estimates. The deficit had grown from 5% in 2011/12 to 6% in the 2012/13 financial year.

Though the deficit will be bridged by aid and commercial loans, this brings the total external debt to approximately 42% of GDP.

Monetary PolicyThe economy has recorded a drop in inflation rate from 12.1% in December 2012 to 6.5% in the first quarter of 2014. This is attributable to implementation of a prudent monetary policy resulting in growth in money supply coupled with improved food supply.

However, the decline in inflation has not resulted in a corresponding adjustment in nominal interest rates. Consequently, businesses have not realized the benefit of lower inflation in form of easier and cheaper access to financing.

External Sector PerformanceTanzania has experienced a 3% decline in international trade. The decline in exports has affected all sectors of the economy, with the exception of the transportation and travel services sector, which posted an impressive 15% growth.

The decline was largely driven by decrease in the value of capital goods, especially of machinery. By contrast, the total value of intermediary imports increased by more than 17%, largely driven by increases in the value of imports of oil and fertilizers.

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Tax ChangesIncome tax changes

A reason to smile?Over the years, Tanzania has offered the most preferential tax rates to individual and employees in the East Africa region. The lower Pay As You Earn tax rate has been reduced by further by 1% to a rate of 12%.

The reduction in the rates is a welcome move, although compared to the current inflation rate of 6.5%, this may be insignificant.

Skill enhancers?In what seems to be a follow up to 2013 legislative amendments, the Minister has now ‘confirmed’ exemption from Skills and Development Levy for the following entities:

1) Diplomatic Missions;

2) The United Nations and its organizations, international and other foreign institutions dealing with technical assistance but which do not undertake any business activities;

3) Religious Institutions whose employees are solely employed to administer places of worship, to give instructions or to administer religious activities only;

4) Charitable organizations which do not perform any business activities;

5) Local Government Authorities; and

6) Education and training institutions that offer free services, save for institutions that provide business oriented services.

Accessing cheap creditIncome and gains earned by holders of bonds issued by the African Development Bank in the Tanzania

Lowest Pay As You Earn rate reduced by 1%

domestic capital market are now exempt.

This measure is intended to enhance the Bank’s ability to offer low cost loans for investment in various development projects such as infrastructure projects. Infrastructure bonds have been a favourite in Kenya and this is likely to spur infrastructure development and economic growth.

Flying incomeThe Minister has proposed to eliminate exemption of withholding tax on lease rental charges paid to non-resident aircraft lessors by a person engaging in air transport business. The new rate is now 10%.

While boosting revenue collection for the government, the move may result in increased operational costs for the affected air transport companies. Based on international practice, these costs are likely to be passed on to passengers, making air travel more expensive in the longer term.

Clear now…Taxation of Directors’ fee has always been ambiguous and created uncertainty. The Minister has finally confirmed that the Directors’ fee will be subject to 15% withholding tax as the final tax.

Further, Directors whose only income

arises from director fees will not be required to file tax returns thus easing the compliance burden.

Game over!In 2012, gaming companies were exempted from income tax, and only subjected to gaming tax under the Gaming Act.

It now appears that these gaming companies will be subject to income tax as well as gaming tax, in a move that aligns Tanzania to tax regimes on games of chance in Uganda and Kenya.

Presumptive tax increasedBusinesses with an annual turnover of between TZS 4 million and TZS 7.5 million, and who maintain proper accounting records, will now be subject to presumptive income tax of 4% up from 2%.

For businesses with the same turnover range but do not maintain accounting records, the current presumptive tax of TZS 100,000 will increase to TZS 200,000, a move that seeks to encourage low-turnover businesses to maintain accounting records. This is undoubtedly the first step towards bringing taxpayers into the net and preparing to broaden the tax base in the medium to long term.

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Value Added TaxThe government has published a Value Added Tax Bill, 2014 for debate and is expected to replace the current Value Added Tax Act.

The VAT Bill will introduce clarity and completely overhaul the current VAT regime. This appears to align to other East African Community member states that have overhauled or are in the process of overhauling their tax laws starting with VAT.

Excise duty changes:

Item Proposed(TZS per litre)

Current(TZS per litre)

Carbonated soft drinks (soda) 100 91

Locally produced fruit juices 10 9

Imported fruit juices 121 110

Beer made from local un-malted cereals 375 341

Other beers 635 578

Wine produced using more than 25% imported grapes 1,953 1,775

Wine produced using more than 75% local grapes 176 160

Spirits 2,894 2,631

Local tobacco content cigarettes without filter tip TZS 11.289/ cigarette TZS 9.031/ cigarettes

Local tobacco content cigarettes with filter tip TZS 26.689/ cigarette TZS 21.351/ cigarette

Imported tobacco content cigarettes TZS 48.285/ cigarette TZS 38.628/ cigarette

Cut rag or cut filter TZS 24,388/ kg TZS 19,510/ kg

Imported seats (HS 94.01) 15% -

Money transfer charges

10% of fees and levy collected on money transfer services, to be paid by banks, telecommunication companies, and their agencies

0.15% on transfers exceeding TZS 30,000, borne by customers

Vehicle Age (yrs) Proposed (%) Current (%)

Non-utility

0 to 8 00

8 to 10 25

10 and above 25 25

Non-passenger utility

0 to 8 00

8 to 10 5

10 and above 5 5

Passenger utility

0 to 5 00

5 to 10 5

10 and above 5 5

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Show me the money!Foreign investors seeking to be recognised as strategic investors (and thus be eligible to negotiate tax incentives) will now be required to have a threshold capital of USD 50 million, up from the current USD 20 million.

Pay immediatelyThe government has proposed to collect taxes on petroleum products immediately the taxes are assessed, as opposed to the current situation where the taxes are payable within 45 days of being assessed by the Tanzania Revenue Authority (TRA). While exerting financing challenges on oil marketing companies, TRA will benefit from upfront payment of taxes.

Review of business license fees The Minister has indicated intention to revise business license fees. These fees were revised in 2012/ 2013, and it now seems that businesses will soon face increased license fees.

Clipped wingsThe Minister for Finance will soon be unable to grant exemptions to investors in projects relating to expansion and rehabilitation. Currently, investors in such projects, who possess Certificates of Incentives issued by the Tanzania Investment Centre, are eligible to obtain income tax exemptions from the Minister.

The Minister will also be restricted from granting excise duty and fuel levy exemptions on petroleum products. However, it appears that the Minister will be able to Gazette exemptions that are granted through agreements signed between the government and development partners to finance development projects such as construction of roads and water supply infrastructure.

EAC Proposals

Others

Item Proposed Current

Buses for more than 25 passengers 10% 25%

Paper (Fluting and wrapping) 10%25%

Paper (Kraft paper and paperboard) 25%

Electronic Fiscal Devices 0% 25%

Inputs used for manufacturing of gas cylinders

0% VariousMachinery, spares and inputs used for the development and generation of wind and solar energy

Petroleum-based aerosol spray 25% 10%

Splints used to manufacture matches Dutiable Exempt

Item Proposed Current

Export levy on raw hides and skins 60% or TZS 600/ kg 90% or TZS 900/ kg

The following items have been declassified as capital goods, and will therefore not be eligible for relief from import duty and VAT:

» Cement; and

» Telecommunication towers and their accessories, generators, tower fences, vehicles, base station accessories, earthing, surge, and lightening protection system imported by telecommunication companies.

Telecommunication sector taking a hit.

The budget proposals included in this BudgetBrief may be amended significantly before enactment of the Finance Act. Please note that our interpretation of tax legislation may differ from that of the various Revenue Authorities. Similarly, the content of this BudgetBrief is intended to provide a general guide and should not be regarded as a basis for ascertaining tax liability or as a substitute for professional advice. If you would like specific advice on the contents of this publication, please get in touch with your regular contact at KPMG

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