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November, 2011 Publication TLT-01 Questions & Answers: Tax Laws in Tanzania. The use of this publication is subject to the same terms and conditions of Tax Laws in Tanzania site. Click here for the terms and conditions. Contents Question 01: Employment Income ................................. 2 Answer 01: ............................................................................... 2 Question 02: Employment Income ................................. 2 Answer 02: ............................................................................... 2 Question 03: Employment Income ................................. 3 Answer 03: ............................................................................... 3 Question 04: Employment Income ................................. 3 Answer 04: ............................................................................... 3 Question 05: Employment Income ................................. 4 Answer 05: ............................................................................... 4 Question 06: Investment Income .................................... 4 Answer 06: ............................................................................... 5 Question 07: Investment Income .................................... 5 Answer 07: ............................................................................... 5 Question 08: Depreciation Allowance ........................... 5 Answer 08: ............................................................................... 5 Question 09: Depreciation Allowance ........................... 6 Answer 09: ............................................................................... 6 Question 10: Business Income - Partnership ............. 6 Answer 10: ............................................................................... 7 Question 11: Investment Income .................................... 7 Answer 11: ............................................................................... 7 Question 12: General ............................................................ 7 Answer 12: ............................................................................... 7 Question 13: Business Income - Corporation............. 7 Answer 13: ............................................................................... 8 Question 14: General ............................................................ 8 Answer 14: ............................................................................... 8 Question 15: Business Income - Partnership ............. 8 Answer 15: ............................................................................... 8 Question 16: Double Taxation .......................................... 8 Answer 16: ............................................................................... 9 Question 17: Permanent Establishment....................... 9 Answer 17: ............................................................................... 9 Question 18: Double Taxation .......................................... 9 Answer 18: ............................................................................... 9 Question 19: NonCompliance ......................................... 9 Answer 19: ............................................................................... 9 Question 20: NonCompliance ......................................... 9 Answer 20: ............................................................................... 9 Question 21: Business Income Sea Transport ........ 9 Answer 21: ............................................................................... 9 Question 22: Special Industries - Charities .............. 10 Answer 22: ............................................................................ 10 Question 23: Remission & Refund Income Tax ... 10 Answer 23: ............................................................................ 10 Question 24: Business Income - Corporation.......... 10 Answer 24: ............................................................................ 10 Question 25: Foreign Controlled Corporation ........ 11 Answer 25: ............................................................................ 11
Transcript
Page 1: Tax Laws in Tanzania: Taxation Questions & Answers

November, 2011

Publication TLT-01

Questions

&

Answers:

Tax Laws

in

Tanzania.

The use of this publication is subject

to the same terms and conditions of

Tax Laws in Tanzania site. Click here

for the terms and conditions.

Contents

Question 01: Employment Income ................................. 2

Answer 01: ............................................................................... 2

Question 02: Employment Income ................................. 2

Answer 02: ............................................................................... 2

Question 03: Employment Income ................................. 3

Answer 03: ............................................................................... 3

Question 04: Employment Income ................................. 3

Answer 04: ............................................................................... 3

Question 05: Employment Income ................................. 4

Answer 05: ............................................................................... 4

Question 06: Investment Income .................................... 4

Answer 06: ............................................................................... 5

Question 07: Investment Income .................................... 5

Answer 07: ............................................................................... 5

Question 08: Depreciation Allowance ........................... 5

Answer 08: ............................................................................... 5

Question 09: Depreciation Allowance ........................... 6

Answer 09: ............................................................................... 6

Question 10: Business Income - Partnership ............. 6

Answer 10: ............................................................................... 7

Question 11: Investment Income .................................... 7

Answer 11: ............................................................................... 7

Question 12: General ............................................................ 7

Answer 12: ............................................................................... 7

Question 13: Business Income - Corporation ............. 7

Answer 13: ............................................................................... 8

Question 14: General ............................................................ 8

Answer 14: ............................................................................... 8

Question 15: Business Income - Partnership ............. 8

Answer 15: ............................................................................... 8

Question 16: Double Taxation .......................................... 8

Answer 16: ............................................................................... 9

Question 17: Permanent Establishment ....................... 9

Answer 17: ............................................................................... 9

Question 18: Double Taxation .......................................... 9

Answer 18: ............................................................................... 9

Question 19: Non–Compliance ......................................... 9

Answer 19: ............................................................................... 9

Question 20: Non–Compliance ......................................... 9

Answer 20: ............................................................................... 9

Question 21: Business Income – Sea Transport ........ 9

Answer 21: ............................................................................... 9

Question 22: Special Industries - Charities .............. 10

Answer 22: ............................................................................ 10

Question 23: Remission & Refund – Income Tax ... 10

Answer 23: ............................................................................ 10

Question 24: Business Income - Corporation .......... 10

Answer 24: ............................................................................ 10

Question 25: Foreign Controlled Corporation ........ 11

Answer 25: ............................................................................ 11

Page 2: Tax Laws in Tanzania: Taxation Questions & Answers

©Tax Laws in Tanzania Publication Number :: TLT-01

Kessy Juma :: http://www.taxation-tz.com Page 2

Question 1.

Peter is employed by The Consultancy Ltd as a fashion designer. The

following information is available for the tax year 2009.

(1) During the tax year 2009 Peter was paid a gross annual salary of

Tshs. 12,000,000/= by The Consultancy Ltd.

(2) In addition to his salary, Peter received two bonus payments from

The Consultancy Ltd during the tax year 2009. The first bonus of

Tshs. 444,300 was paid on 30 April, 2009 and was in respect of the

year ended 31 December, 2008. Peter became entitled to this first

bonus on 10 April, 2009. The second bonus of Tshs 333,600 was paid

on 31 March 2009 and was in respect of the year ended 31

December, 2009. Peter became entitled to this second bonus on 25

March, 2009.

(3) Throughout the tax year 2009 The Consultancy Ltd provided Peter

with a diesel powered motor car which has a list price of Tshs

22,500,000/=. The motor car cost The Consultancy Ltd Tshs

21,200,000/=, and it has 1500cc and was first registered in Tanzania

on 2 March, 2007. The Consultancy also provided Peter with fuel for

private journeys and does not claim capital allowance for this

vehicle.

(4) The Consultancy Ltd has provided Peter with living accommodation

since 1 January, 2007. The company had purchased the property in

2006 for Tshs 16,000,000, and it was valued at Tshs 18,000,000/= on

1 January, 2008. Improvements costing Tshs 2,013,000/= were made

to the property during June 2009. The annual value of the rental in

that area is Tshs 3,600,000/=, and the company claim Tshs

1,000,000/= as capital and maintenance toward the house.

(5) Throughout the tax year 2009 The Consultancy Ltd provided Peter

with two mobile telephones. The telephones had each cost Tshs

250,000/= when purchased by the company in January 2009 and

20% of telephone uses were private. It is the company’s policy to

provide mobile telephones to all employees.

(6) On 5 January 2009 The Consultancy Ltd paid a health club

membership fee of Tshs 510,000/= for the benefit of Peter and all

employees of the company were covered by the same programme.

(7) During February 2009 Peter spent five nights overseas on company

business. The Consultancy Ltd paid Peter a daily allowance/per diem

of Tshs 100,000/= to cover the cost of personal expenses such as

telephone calls to his family.

(8) The company contributes 15% of basic salary to PPF on behalf of

Peter and does not include in taxable employment income.

(9) Peter received a loan of Tshs 1,000,000/= during the year 2009 and

is payable over three years. The company charges 2% pa on gross

loan while the current statutory rate was 17% pa.

Required:

(a) Calculate the income tax payable from employment income by Peter

for the tax year 2009.

(b) Calculate the Employment income of Peter for the year 2009.

Suggested Solution

(b) Computation: Employment Income

Tax Payer: Peter

Year of Income: 2009

Residential Status: Resident Individual

Annual Salary 12,000,000 Bonus (444,300 + 333,600) 777,900 Car Benefit (No expenditure claimed) Nil Mobile phones (20% x 250,000 x 2) 100,000 Health club membership fee (Non-discriminatory) Nil Allowance for personal expenses on business trip Nil PPF Contribution (Not included in income) Nil Loan Interest Benefit (LIB) – Note 1 150,000 Total Income before Housing Benefit 13,027,900 Housing Benefit (HB) – Note 2 1,954,185 Taxable Employment Income 14,982,085

Note 1:

If (i) Loan amount is less than or equal to 3months basic salary and

(ii) Loan period is less than 12months,

then the Loan Interest Benefit (LIB) is exempt, otherwise taxable.

Here LIB = (Statutory rate - Loan interest rate) x Loan amount.

Statutory rate = BOT’s discount rate at the start of the year.

Since the loan given to Peter doesn’t satisfy the condition(s), then the LIB

thereon is taxable and it is computed as follows.

LIB = (17% - 2%) x 1,000,000 = 150,000

Note 2:

If an employer provides residential housing to the employee, and the

employer claims deduction in relation to capital and maintenance of the

house, then the House Benefit is taxable and is calculated as:

The lesser of:

(i) Annual market rental value of the house and

(ii) The greater of:

(a) 15% of employee’s total income for the year of income excluding

House Benefit

(b) Expenditure claimed as deduction by the employer.

Reduced by the employee’s rental contribution.

So, for the case of Peter

Loan Benefit is the lesser of:

(i) 3,600,000; and

(ii) the greater of:

(a) 15% x 13,027,900 = 1,954,185

(b) 1,000,000

Here the greater of 1,954,185 and 1,000,000 is 1,954,185; and the lesser

of 3,600,000 and 1,954,185 is 1,954, 185. Hence the Housing Benefit is

1,954,185.

Note that, we only consider the chargeable income in computing total

income for the purpose of calculating 15% of total income. This is the

ruling of section 5(1) which specifies that total income is the sum of

chargeable income. In this case if an amount such as the transport

allowance to father, mother and 4 children staying more than 20

miles from the employment base is not chargeable income and hence

excluded.

(a) Tax payable from Employment Income of Peter is calculates as

follows.

Peter’s monthly income from the employment

= 1,248,507 (i.e. )

With this income peter falls under the last bracket of the Individual

Income Tax Brackets (i.e. the bracket with total income

exceeding 720,000 per month)

The Monthly tax payable = A + r (B – C)

= 112,500 + 30% x (1,248,507 – 720,000)

= 271,052

And hence the annual tax payable = 271,052 x 12 = 3,252,625

Question 2. Mr. Hamnazo is a resident employee of Tatua Company Ltd from 1st January 2004. The following information relates to his affairs: (i) His monthly receipts include basic salary, transport, lunch and

medical allowances to the tune of TAS 500,000, TAS 425,000, TAS 175,000 and TAS 50,000 respectively.

(ii) Transport allowance of TAS 425,000 for nine people totaled TAS 3,825,000 has been given to Mr. Hamnazo including each child and his spouse because he lives more than 45 km from the place of employment.

(iii) Self driven car of above 3000 cc was given to him for private use. Expenditure on the car is claimed against taxable income of Tatua Company Ltd.

(iv) Mr. Hamnazo was given an interest free loan of TAS 4,000,000 payable in two calendar years on monthly installments (assume statutory interest rate of 15% p.a).

(v) Other per month benefits enjoyed by Mr. Hamnazo includes electricity and water amounted to TAS 300,000 and TAS 240,000 respectively.

Required: Calculate the monthly taxable employment income for Mr. Hamnazo.

Suggested Solution

Computation: Monthly Employment Income of Mr. Hamnazo for 2004

Residential Status: Resident Individual

Monthly Salary 500,000 Transport allowance for 3 people 1,275,000 Lunch allowance 175,000 Medical allowance 50,000 Car benefit 125,000 Loan Interest Benefit (Note 1) 50,000 Water & Electricity 540,000 Taxable Employment Income 2,715,000

Page 3: Tax Laws in Tanzania: Taxation Questions & Answers

©Tax Laws in Tanzania Publication Number :: TLT-01

Kessy Juma :: http://www.taxation-tz.com Page 3

Note 1:

If (i) Loan amount is less than or equal to 3months basic salary and

(ii) Loan period is less than 12months,

then the Loan Interest Benefit (LIB) is exempt, otherwise taxable.

Here LIB = (Statutory rate - Loan interest rate) x Loan amount.

Statutory rate = BOT’s discount rate at the start of the year.

Since the loan given to Hamnazo doesn’t satisfy these two conditions, then

the LIB thereon is taxable and it is computed as follows.

LIB = (15% - 0%) x 4,000,000

= 600,000 per year = 50,000 per Month

Question 3.

Ms Glory was employed for the first time by Fruto International Ltd, a

private resident company since 1st January, 2005. As a company’s

Marketing Manager, Ms Glory was given a range of responsibilities. She

has been resident of the United Republic of Tanzania solely in the years

2004 and 2005. Her duties are well balanced by a good package of

remuneration which is made up of the following:

(i) Basic salary of Tshs. 800,000 per month and medical service

insurance of Tshs. 30,000 per month as per the company’s policy to

its employees.

(ii) Mobility allowances for use when on duty trips within her duty

station of Tshs. 100,000 per month coupled with life insurance of

Tshs. 50,000 each month paid directly by the company to the

Insurance Company. It is estimated that Ms Glory is spending only

50% of the mobility allowance for the performance of her official

duties.

(iii) It is the policy of the company to pay all of its employees lunch

allowances of Tshs. 2,000 each per day for 22 days each month.

(iv) Travelling allowances for home-office-home trips of Tshs. 100,000

per month.

(v) The company pays school fees and uniforms for its employees as its

contribution as per the National Education Policy. Ms Glory received

Tshs. 500,000 which the employer ensured that the sum is spent

according to agreed terms.

(vi) A fully furnished residential quarter where the value of furniture

itself amount to Tshs. 2,000,000. The company normally recognizes

Tshs. 120,000 per month as expense for the provision of the house

while the market rent of a house of the same status is Tshs. 150,000

per month. The cost of the house to the company was Tshs. 10

million.

(vii) During 2005, Ms Glory travelled to her home country, Uganda, for an

annual leave where she provided consultancy for one month for the

following remuneration: Consultancy fees amounting to Tshs. 40,000

per day for 20 days; Upkeep allowance of Tshs. 200,000 for the

period of consultancy and free accommodation with market value of

Tshs. 150,000.

(viii) During her trip to Uganda, the company paid Tshs. 450,000 for her

return air ticket, since the location of the company is Dar es Salaam.

(ix) Ms Glory acquired a car at a cost of Tshs. 6,000,000 which was fully

used in the employment duties.

(x) Ms Glory also received interest from her Banker on fixed deposit

account, Tshs. 200,000.

(xi) Retirement contributions are made to the Social Security Fund where

the employer contributes 10% and the employee 10% of the gross

monthly salary.

REQUIRED

On the basis of the above information, compute Ms Glory’s taxable income

for the year of income 2005 (assume today is 31st December 2005).

Suggested Solution

Computation: Taxable Income of Ms Glory for 2005

Residential Status: Resident Individual (for two years)

Annual Basic Salary (800,000 x 12) 9,600,000 Medical service insurance Nil Mobility allowance (100,000 x 50% x 12) 600,000 Life insurance (50,000 x 12) 600,000 Lunch allowance (2,000 x 22 days x 12) 528,000 Travelling allowance (100,000 x 12) 1,200,000 School fees & Uniforms 500,000 13,028,000 Consultancy fee (Uganda ) - See Note 1 Nil Upkeep allowance (Uganda) – See Note 1 Nil

Free accommodation (Uganda) – See Note 1 Nil Trip to Uganda (more than 20 miles) Nil Interest from NBC (non-final) 200,000 Retirement Contributions (Note 2) – Add employer’s 1,302,800 Retirement Contributions (Note 2) – Less allowable (2,400,000) 12,130,800 Housing Benefit (Note 3) 1,800,000 Taxable amount for 2005 13,930,800

Note 1:

The chargeable income of a resident individual who at the end of a year of

income has been resident in the United Republic for two years or less in

total during the whole of the individual’s life shall be determined the same

way as the income of a non-resident person, whereby the person's income

from the employment, business or investment for the year of income that

has a source in the United Republic is included. Income derived from other

countries is excluded [Section 6(2)]

Note 2:

The lesser of the total contribution made or statutory contribution (i.e.

2,400,00 p.a.) can be deducted from total income.

For the purpose of deducting employer’s contribution, the contribution

must have been included in employee’s income.

So we first include employer’s contribution, then we less the lesser of total

contribution and statutory contribution.

Total gross cash emoluments 13,028,000 Employer’s contribution (10%) 1,302,800 Employee’s contribution (10%) 1,302,800 Total contribution 2,605,600

Note 3:

If an employer provides residential housing to the employee, and the

employer claims deduction in relation to capital and maintenance of the

house, then the House Benefit is taxable and is calculated as:

The lesser of:

(i) 1,800,000 (i.e. 150,000 x 12); and

(ii) the greater of:

(a) 15% x 12,130,800 = 1,819,620

(b) 1,440,000 (i.e. 120,000 x 12)

. . Housing Benefit = 1,800,000.

Question 4.

(a) Mr. Juakali is a resident employee who is employed by the ABC Co.

Ltd. effective from 1st January, 2004. The facts relating to his

employment are as follows:

(i) Monthly receipts:

Tshs. Basic Salary 1,000,000/= Transport Allowance 850,000/= Lunch Allowance 350,000/= Medical Allowance 100,000/=

(ii) Mr. Juakali was given residential house free of charge but the

Company claimed expenditure of Tshs. 150,000/=. The rental

market value of the house was Tshs. 700,000/= of which Mr. Juakali

contributed Tshs. 100,000/= as rent.

(iii) Mr. Juakali was given a new self driven car of above 3000cc that was

used for private use. This car claims expenditure on the maintenance

and ownership against taxable income.

(iv) Mr. Juakali was given an interest free loan of Tshs. 4,000,000/=

payable in 24 monthly installments (assume the statutory interest

rate in relation to the calendar year was 12% p.a.)

(v) Other benefits which were enjoyed by Mr. Juakali included:

Electricity Tshs. 150,000 p.m Water Tshs. 120,000 p.m

Additional information was given as follows:

(i) Transport allowance of Tshs. 850,000/= @ 7 = Tshs. 5,950,000 has

been given to Mr. Juakali including each child and his spouse because

he is domiciled more than 45 km from the place of employment.

(ii) Mr. Juakali was given Tshs. 400,000 cash to be paid as tuition fee to

Makerere University by the IFDA Scholarship where he is enrolled

for a Master’s degree course.

REQUIRED:

(i) Calculate the Housing Benefit and Car Benefit enjoyed by Mr. Juakali

per month.

(ii) Calculate the monthly taxable income for Mr. Juakali.

Page 4: Tax Laws in Tanzania: Taxation Questions & Answers

©Tax Laws in Tanzania Publication Number :: TLT-01

Kessy Juma :: http://www.taxation-tz.com Page 4

(b) Briefly explain the meaning of “employment” in line with the Income

Tax Act 2004.

Suggested Solution

(a)

(i) Computation of Car Benefit [CB]:

With 3000cc vehicle, monthly CB = 1,500,000/12 = 125,000

Computation of Housing Benefit [HB]:

First step: Compute total income of Mr. Juakali without the HB.

Monthly Salary 1,000,000 Transport allowance for 1 person 850,000 Lunch allowance 350,000 Medical allowance 100,000 Water & Electricity 270,000 Car benefit 125,000 Loan Interest Benefit (Note 1) 40,000 Total Income before HB 2,735,000

Housing Benefit:

Lesser of

(i) Market Value = 700,000

(ii) Greater of

(a) 15%*2,735,000=410,250 or

(b) 150,000

. . Housing Benefit = 410,250

(ii) Computation of Monthly Taxable Income:

Total Income before HB 2,735,000 Housing Benefit 410,250 Monthly Taxable Income 3,145,250

(b) By virtue of section 3 of the Income Tax Act 2004, employment

means:

(a) A position of an individual in an employment of another person,

(b) A position of an individual as a manager of an entity other than

as a partner in a partnership,

(c) A position of an individual entitling the individual to a periodic

remuneration in respect of services performed, or

(d) A public office held by an individual and includes a past, present

and prospective employment.

Question 5.

From the given information calculate the total taxable income of Mr.

Mambo for the year of Income 200X as stipulated in the Income Tax Act,

2004

(i) Mr. Mambo, resident employee was employed by ZMK Ltd. since 1st

January, 200X as an accountant. He is provided with a house along

Mbezi Beach area whose rental market value was Tshs. 200,000 per

month. The Company was claiming rental expenditure to the

Commissioner of Income Tax to the tune of Tshs. 150,000 per month.

(ii) During the year Mr. Mambo was provided with a brand new private

car (3000cc). The Company was claiming expenditure for the

maintenance of the car. The car use was 1/3 official use, and 2/3

private use.

(iii) During the year, the Company advanced Mr. Mambo Tshs. 3,000,000

as a loan payable in 24 equal installments and free of interest

(Assume statutory rate of interest is 12% p.a. charged on total loan).

(iv) The company contributed 15% of Mr. Mambo’s basic salary every

month to NSSF (Approved) at the same time the employee was

contributing 5% of his basic salary to NSSF.

(v) The employer also paid for Mr. Mambo scholarship fees of Tshs.

1,000,000 which was for full time course ending August 200X.

(vi) Mr. Mambo is also holding a part-time marketing consultancy to a

private firm belonging to his mother in law, where he is being paid a

monthly salary of Tshs 100,000.

(vii) The term of his service agreement with the Company provided for

payment to him, so as not to work for any competitor after his

retirement. In return for this covenant, the company paid Mr.

Mambo Tshs. 1,000,000 in December 200X.

(viii) Mr. Mambo is holding Saving Account with CRDB Bank. On 15th July,

200X, Mr. Mambo received Tshs 685,000 as interest from his savings

account.

(ix) His monthly salary was fixed at Tshs 600,000.

(x) The employer also met the following bills during the year.

Electricity Tshs 350,000

Gas Tshs 210,000

Water Tshs 121,950

All these bills were paid directly to the utility Companies.

Suggested Solution

Computation: Total Taxable Income of Mr. Mambo for 200x

Residential Status: Resident Individual

Basic salary (600,000 x 12) 7,200,000 Other Benefits (Electricity, Gas, & Water) 681,950 Salary from consultancy work (100,000 x 12) – Note 1 1,200,000 Amount received for accepting restriction 1,000,000 Scholarship fees Nil Interest from CRDB (Final) Nil Loan Interest Benefit (Note 2) 360,000 Car Benefit (Note 3) 1,000,000 NSSF (Employer) – Note 4 Nil NSSF (Employee) – Note 4 360,000 11,801,950 Housing Benefit (Note 5) 1,800,000 Total Taxable Income 13,601,950

Note 1:

This salary is from secondary employment and the rules regarding

secondary employments is:

All secondary employers must withhold tax at the maximum individual

rate, which is 30%. However, if employee’s total income is less than the

top band threshold (Tshs 8,640,000 per annum), the employee may apply

to TRA Income Tax Department to have a lower rate applied to the

secondary employments.

Note 2:

Loan Interest Benefit = (12% - 0%) x 3,000,000 = 360,000

Note 3:

With 3,000cc, car benefit = 1,500,000 : : 2/3 private = 1,000,000 taxable

Note 4:

NSSF Contribution:

Employer (15%) 1,080,000

Employee (5%) 360,000

Total 1,440,000

Since it is less than the statutory amount of 2,400,00 all employees

contribution of 360,000 is deductible.

Note 5:

(i) Market rental = 2,400,000

(ii) 15% of total income before HB = 1,770,292.5

(iii) Deduction claimed = 1,800,000

(iv) Higher of (ii) and (iii) = 1,800,000

(v) Lesser of (i) and (iv) = 1,800,000

HB = 1,800,000

Question 6.

AADU is a newly formed company carrying out fishing business. During

the first year (2008) of operation it made the following transactions:-

(i) Received dividend from SHIDUSA Ltd a resident corporation

amounting to TZS 6,000,000. AADU owns 40% of the shares of

SHIDUSA Ltd.

(ii) Dividends amounting to TZS 3,500,000 were received from KWENU

Ltd, which is listed on the DSE, and owned 22% by TABU Ltd a non-

resident company.

(iii) Dividends amounting to TZS 1,550,000 received from CHUCHUMA

Company Ltd a resident company.

(iv) AADU has its office along Ali Hassan Mwinyi Road, the office was

underutilized. The company decided to rent the front office to Juma

Bakari a shop businessman, who used it as a shop after paying TZS

800,000 as rent.

(v) During the year the company received TZS 400,000 as rent from Mr.

James a Tanzanian, with respect of a house occupied by him situated

at Changanyikeni-Dar es Salaam.

(vi) Also the company received royalty from Madengu Ltd amounting to

TZS 400,000 out of lease of Video tapes used for promotion.

(vii) During the year, AADU sold 6 hectares of land which was at

KUNDUCHI and received TZS 300 million. This land was purchased

for 2,000 in 1970. Three years prior to its sale, this land has been

used for as agricultural land.

In addition to those transactions it earned business profit of TZS 100

million.

REQUIRED:

Page 5: Tax Laws in Tanzania: Taxation Questions & Answers

©Tax Laws in Tanzania Publication Number :: TLT-01

Kessy Juma :: http://www.taxation-tz.com Page 5

By applying the relevant provisions of the ITA, 2004 compute the

Investment Income, Total Income and Tax Payable of the company for the

year ending 2008.

Suggested Solution

A thorough analysis of each item:

(i) Dividend from SHIDUSA (6,000,000) –

AADU’s Investment Income (Nil) – Final Withholding – S. 86 (1) (a)

SIDUSA’s withholding tax (Nil) – Exempted – S. 54 (2)

(ii) Dividend from KWENU Ltd (3,500,000) –

AADU’s Investment Income (Nil) – Final Withholding – S. 86 (1) (a)

KWENU’s withholding tax (5% x 3,500,000) – 1st Schd para 4 (b) (i)

(iii) Dividend from CHUCHUMA Ltd (1,550,000)

AADU’s Investment Income (Nil) – Final Withholding – S. 86 (1) (a)

KWENU’s withholding tax (10% x 1,550,000)– 1st Schd para 4 (b) (i)

(iv) Rent from Bakari (800,000)

AADU’s Investment Income (800,000) – S. 9 (a)

J. Bakari’s withholding tax (10% x 800,000) – S. 82(1) & (2)(a)

Tax credit to AADU (10% x 800,000) – S. 87

(v) Rent from Mr. James(400,000)

AADU’s Investment Income (400,000) – S. 9(a)

Mr. James‘s withholding tax – Not a withholding payment

(vi) Royalty from MADENGU Ltd (400,000)

AADU’s Investment Income (400,000) – S. 9(a)

MADENGU’s withholding tax (15% x 400,000) – 1st Schd para 4 (b)

Tax credit to AADU (15% x 400,000) – S. 87

(vii) Gain from sale of land at KUNDUCHI (300,000,000)

AADU’s Investment Income (300mil – 2,000 = 299,998,000)

AADU shall pay 10% x 299,998,000 as a single instalment on

disposal as required by S. 90(1)(a)

Tax credit to AADU (10% x 299,998,000) – S. 90(7)

Computation: Investment Income, Total Income & Tax Payable by AADAU

Residential Status: Resident Corporation for 2008

Dividend fro SHIDUSA Nil Dividend from KWENU Nil Dividend from CHUCHUMA Nil Rent from Bakari 800,000 Rent from Mr. James 400,000 Royalty from MADENGU 400,000 Gain from sale of land at KUNDUCHI 299,998,000 Income from Investment 301,598,000 AADU’s Business Income 100,000,000 AADU’s Total Income 401,598,000 Tax thereon (30%) 120,479,400 Less: Tax credit available: Tax withheld from rent by Bakari (80,000) Tax withheld from royalty by MADENGU (60,000) Single instalment tax paid on sale of land (29,999,800) Tax payable by AADU 90,339,600

Question 7.

The following information refers to Peter for the tax year 2009.

(1) Peter owns two properties, which are let out. Both properties are

freehold houses, with the first property being let out furnished and

the second property being let out unfurnished.

(2) The first property was let from 6 April 2009 to 31 August 2009 at a

monthly rent of Tshs 500,000/= payable in advance in each month.

On 31 August 2009 the tenant left owing two months’ rent which

Peter was unable to recover and the Commissioner for Domestic

Revenue had accepted the amount as bad debt. The property was not

re-let before 5 April 2010. During March 2010 Peter spent Tshs

200,000/= repairing the roof of this property.

(3) The second property was purchased on 1 July 2009, and was then let

from 1 August 2009 to 1 April 2010 at a monthly rent of Tshs

820,000/= payable in advance in every month. During July 2009

Peter spent Tshs 200,000 on advertising for tenants. For the period

of 1 July 2009 to 1 April 2010 he paid loan interest of Tshs

1,000,000/= in respect of a loan that was taken out to purchase this

property.

(4) Peter insured both of his rental properties at a total cost of Tshs

660,000/= for the year ended 31 December 2009, and Tshs

900,000/= for the year ended 31 December 2010. The insurance is

payable annually in advance.

(5) Peter Sold his investment of 100 shares in Twiga Cement (Pty) Ltd

costing 12,228,500/= were sold for 21,025,260/= in February 2009.

(6) Peter also received a dividend of Tshs 2,000,000 during the year

from Twiga Cement where he owns 5% of all shares and withholding

tax of Tshs 100,000/= was deducted.

(7) During the tax year 2009 Peter received bank interest of Tshs

1,000,000/= from DECI a financial institution based in Dar es Salaam.

Required:

Calculate the Investment Income of Peter for the year 2009.

Suggested Solution

Computation: Employment Income

Tax Payer: Peter

Year of Income: 2009

Residential Status: Resident Individual

Rent from properties (Final) Nil Bad Debt for the rent Nil Advertising expenditure for tenants Nil Loan interest paid Nil Insurance premium paid Nil Gain on sale of shares (21,025,260 – 12,228,500) 8,796,760 Dividend received (Final) Nil Interest earned from DECI (Final) Nil Taxable Investment Income 8,796,760

Question 8.

The Union Bearing manufacturing company Ltd. (UBMC) is a firm

manufacturing UNIMOG trucks, bases and spare parts. It has been in

Tanzania as a branch of the Scania Ltd. of Kenya, for the past 20 years.

UBMC has the following classes of depreciable assets pools with their

respective tax written down values as at 1st January 2005:

Class I : 2,550,000 Class II : 6,000,000 Class III : 2,583,700/=

In July 2004, the company had attended the International trade fair

organized by the BET, which was held at Kurasini, Dar es Salaam. UBMC

won the 2nd prize – a valmet tractor, worth by then 3,600,000/=. This

tractor was ordered by the government from the Valmet plant in DSM.

However, the delivery of the tractor was delayed, pending a price review.

Prices were reviewed to 10 mill/= per tractor during August 2005. The

UBMC received the tractor on 16/8/2005 and used it from the same date.

Part of the plant and machinery was sold for 3 mill/= on 3/2/2005. UBMC

decided to purchase a new aircraft on 3/3/2005 for 50 mill/= to enable it

coordinate with the head office at Mombasa where its Board of Directors

met since 2000 to-date. It also purchased a new ship of 500 tons for 60

mill/=. Both were used from the same date.

A new boiler was purchased for 600,000/= for the glass manufacturing

section. A concrete foundation was constructed for 300,000/= to install

the boiler. This was used from mid December 2005. On the 15/8/2005,

the ship, the market value of which was estimated at 20 mill/= was stolen

at DSM harbour.

The company was using tyres manufactured by the General Tyre (EA) Ltd.

of Arusha Tanzania and radiators manufactured by the Afro Cooling

Company Ltd. (ACCL) of Pugu Road DSM. Since these major sources of raw

materials had financial problems, the UBMC advanced a 6mill/= loan to

the ACCL for purchase of plant and machinery; and 10mill/= loan to

General Tyre (EA) Ltd. for the purpose of purchasing a lorry to transport

rubber from Iringa rubber farms. Part of the office furniture was sold

during December 2005 for 1.2 mill/=. While the purchaser took the

furniture during the same month, payment was to be made during March

2006.

Required: Calculate the depreciation allowance that UBMC is eligible to

claim from TRA according to the ITA, 2004 as at 31st December 2005.

Suggested Solution

Tax Payer: Union Bearing Manufacturing Company Ltd. (UBMC)

Year of Income: 2005

Computation: Depreciation Allowances

DEPRECIABLE ASSETS DEPRECIABLE ASSETS POOLS

CLASS I (Tshs.) II (Tshs.) III (Tshs.)

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RATE – A 37.5% 25% 12.5%

TWDV 1st Jan 2005 2,550,000 6,000,000 2,583,700

Additions: Air craft 50,000,000

Ship 60,000,000

Boiler (initial allowance) -

2,550,000 116,000,000 2,583,700

Incomings: P & M (3,000,000)

Ship (stolen) (20,000,000)

Office furniture (1,200,000)

DEP. BASE – B 2,550,000 93,000,000 1,383,700

DEPRECI. ALLOWANCES

Initial allowance:

Boiler (price + instal)

50% * (600 + 300) 450,000

Annual allowance: A * B 956,250 23,250,000 172,963

TOTAL ALLOWANCES 956,250 23,700,000 172,963

TWDV 31st Dec 2005 1,593,750 70,200,000* 1,210,738

*(93,000,000/= + 900,000/=) less 23,700,000/= or (93,000,000 –

23,250,000) + 450,000

Question 9.

ABC Co. Ltd. commenced a business of assembling computer hardware on

1st May 2005. The company acquired the following assets from XYZ, which

was winding up its business in the URTon 30th April 2005:

a) A house, which was used by the XYZ’s director, for Tshs. 15,000,000.

This was converted by ABC Co. Ltd. into a factory building after

incurring additional alterations cost of Tshs. 4,500,000.

b) Factory building was acquired for Tshs. 24 million. One fifth of this

building houses the head office. The office was air-conditioned with air

conditioners worth Tshs. 2 million.

c) Factory plant and machinery worth Tshs. 180 million. The tax written

down value (TWDV) of the machinery was Tshs. 60 million in the

vendor’s books.

d) Two five-ton Lorries worth Tshs. 40 million in total. Their total TWDV

was Tshs. 32 million and their total book value (BV) was Tshs. 28

million.

e) A saloon car costing Tshs. 23 million. This car had a nil BV and TWDV

in the books of the vending company. ABC Co. Ltd. used the car purely

for business purposes.

f) Processors, Data key boards, Printers, which were semi – assembled,

were also acquired for Tshs. 20 mill.

g) Office furniture was purchased for Tshs. 4.2 million. This asset had a

TWDV of Tshs. 1,800,000/= and accumulated depreciation of Tshs.

400,000.

h) Office stationery and some operational guides were also purchased for

Tshs. 1,900,000/=

After the commencement of the business, the following transactions

took place:

i) One of the lorries was gutted by fire. Tshs. 8 million as insurance

compensation was received from National Insurance Corporation for

the loss.

ii) On 1st November 2005 an eight-ton trailer was purchase for Tshs. 38

million.

iii) BBA sold to ABC Co. Ltd. a godown building constructed for Tshs. 15

million at Tshs. 175 million. It was used for storage of ABC Co. Ltd.

finished products from 1st January 2006.

iv) The remaining lorry was exchanged for a new one on 1st March 2006.

ABC Ltd. had to pay an additional Tshs. 10 million for the new lorry,

the total cost of which was Tshs. 24 million.

Required: Compute depreciation allowances to be granted to ABC Co. Ltd.

for the year of income 2006 under the Income Tax Act, 2004.

Suggested Solution

Tax Payer: ABC Co. Ltd.

Year of Income: 2006

Computation: Depreciation Allowances

DEPRECIABLE ASSETS DEPRECIABLE ASSETS POOLS (‘000)

CLASS I (Tshs) II (Tshs) III (Tshs) VI (Tshs.)

RATE – A 37.5% 25% 12.5% 5%

COST:

2 lorries, P&M (initial

allow.), AC

40,000 2,000

Saloon,OF, factory

building

15,000 4,200 24,000

Factory building 15,000

Factory building

alterations

4,500

55,000 0 6,200 43,500

Additions: exchanged

lorry,godown 24,000

175,000

Trailer 38,000

79,000 38,000 6,200 218,500

Incomings: one lorry-fire (8,000)

Exchanged

lorry (14,000)

DEP. BASE – B 57,000 38,000 6,200 218,500

DEPRE. ALLOWANNCES

Initial allowance:

P&M (50% * 180,000) 90,000

Annual allowance: A * B 21,375 9,500 775 10,925

TOTAL ALLOWANCES 21375 99,500 775 10,925

TWDV 31st Dec. 2005 35,625 118,500* 5,425 207,575

* (38,000/= + 180,000/=) less 99,500/=

Question 10.

Bush, Bushek and Michapo are partners in one enterprise dealing in

transport business. Their business income statement for the year 2004,

has the following results:

Revenue 208,000,000

Other income 400,000

Total Income 208,400,000

Less: Operating Expenses

Depreciation allowance 10,800,000

Fuel and Oils 90,000,000

Spares, repairs & maintenance 14,000,000

Licenses 300,000

Interest 5,600,000

Salaries and wages 26,000,000

Stationery 800,000

Tyres and tubes 55,500,000

Miscellaneous expenses 8,000,000 211,000,000

Net loss for the year 2,600,000

Additional information is given as follows:

(i) The partners equally spent 10% of fuel and oils used for office

vehicles for private purposes.

(ii) Analysis of salaries and wages:

=> Drivers shs. 7,000,000

=> Office Attendant shs. 3,000,000

=> Bush shs. 8,000,000

=> Bushek shs. 4,000,000

=> Michapo shs. 4,000,000

(iii) Analysis of miscellaneous expenses:

=> Office cleaning shs. 350,000

=> Weigh bridge fines shs. 3,500,000

=> Total tax paid by partners shs. 3,300,000

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=> Office electricity shs. 250,000

=> Tip to Police to allow speeding car shs. 600,000

(iv) The Partners share profits/losses equally

(v) Other Income:

This represents interest on drawings paid by Michapo

(vi) Interest analysis:

Interest on bank overdraft shs. 5,000,000

Interest on loan paid to Bush shs. 600,000

(vii) Bushek’s personal account showed Tshs. 2,000,000/=, 3,000,000/=

and 5,000,000/= as income received from Royalty, Dividend and

Realization respectively. A non-resident corporation paid dividend,

realization is part payment of sale of a building for Tshs.

20,000,000/=. The building that costed Tshs. 4,000,000/= in year

2000 and used for residence was sold to Mr. John in 2004.

(viii) Asset acquisition during the year were:

Land rover Tshs. 10,000,000/=1

Tractor Tshs. 40,000,000/=2

Pick up Tshs. 7,500,000/=1

Land cruiser Tshs. 35,000,000/=1

All these were used in the partnership business. The depreciation basis as

at 31/12/2003 after pooling assets based on the Income Tax Act, 2004

showed the following:

Class I II

Value 50,000,000/= 123.000,000/=

Required:

(i) Determine the partnership profits/losses

(ii) Determine the partners taxable income

Suggested Solution

(i) Computation of partnership profit/loss

Profit/(Loss) per accounts (2,600,000) ADD BACK: 10% fuel & oils 9,000,000 Partners’ salaries 16,000,000 Depreciation allowance 10,800,000 Interest on loan 600,000 Weight Bridge fines 3,500,000 Total tax paid 3,300,000 Tip to Police 600,000 43,800,000 Subtotal 41,200,000 Deduct Interest on drawings (note v) 400,000 Depreciation – Note 1 79,187,500 79,587,500 Adjusted Distributable Loss (38,387,500)

Note 1:

Computation of Depreciation Allowance:

DEPRECIABLE ASSETS DEPRECIABLE ASSETS POOLS

CLASS I (Tshs.) II (Tshs.)

RATE – A 37.5% 25%

TWDV – 1 Jan 2004 50,000,000 123,000,000

Additions:

Land Rover 10,000,000

Tractor 40,000,000

Pick Up 7,500,000

Land Cruiser 35,000,000

DEPRECIATION BASE – B 102,500,000 163,000,000

DEPRECIATION ALLOWANCES 38,437,500 40,750,000

TWDV – 31 Dec 2004 64,062,500 122,250,000

(ii) Computation of partners’ taxable income

Bush Bushek Michapo Total Salaries 8,000,000 4,000,000 4,000,000 16,000,000 Fuel & Oils 3,000,000 3,000,000 3,000,000 9,000,000 Interest on loan 600,000 - - 600,000 Inter on drawings (400,000) (400,000) Share of loss 12,795,833 12,795,833 12,795,833 38,387,500

Subtotal -1,195,833 -5,795,833 -6,195,833 -13,187,500

Add: Inv. Income

Royalty 2,000,000

Dividend FWP- Sec 86

Realization 5,000,000

Total -1,195,833 1,204,167 -6,195,833

Question 11.

What are investment assets under the Income Tax Act 2004?

Suggested Solution

According to section 3 of the Income Tax Act 2004; Investment Assets are:

(i) Shares and securities other than shares:

By a resident parent in its resident subsidiary, or

Listed on Dar es Salaam Stock Exchange, or

By a non resident controlling less than 25% of the controlling

shares of the company.

(ii) A beneficial interest in a non resident trust.

(iii) Interest in land and buildings other than:

A private residence in use for three years or more other than such a

residence that realizes a gain of more than 15,000,000,

An individual’s land that has been used for purposes for agricultural

purposes for the past two years and whose market value does not

exceed 10,000,000 at the time of realization.

Question 12.

What is the difference between an investment company and a finance

company for tax purposes?

Suggested Solution

Investment company – a company whose activities consists mainly in the

making and holding of investments whether in land and buildings for the

purpose of receiving rents or in securities for the purpose of receiving

interest or dividend and a major part of whose income is derived there

from.

Finance company – a company whose activities consists mainly in dealing

in securities, land or buildings. It is an essential feature of the business of

such a company to vary its investments and turn them to account and

investments are its stock in trade, to be bought and sold. Finance company

also deals with provision of loans to individuals and businesses.

Question 13.

In year 200X, the commissioner for Large Tax Payers received a return of

income of KK Ltd showing a net profit of Tshs 214,136 computed as

follows:

Tshs Sales 273,970,710 Cost of sales 150,000,355 Gross Profit 123,970,355 Operating Expenses 27,000,000 Other expenses 96,756,219 Net Income 214,136

Included in other expenses item is a list of the following:

(i) Exchange Loss of Tshs 42,143,000 on the importation of raw

materials,

(ii) Compensation of Tshs 618,500 to terminated employees,

(iii) Amortized amount to replace a roof – Tshs 4,733,000,

(iv) Payments made to remove erroneous terms of a loan contract – Tshs

821,000,

(v) Penalties for VAT – Tshs 3,500,000,

(vi) Managing Directors personal visitors entertainment expenses – Tshs

3,880,000,

(vii) Political parties contributions – Tshs 1,007,450,

(viii) Board meetings expenses – Tshs 4,753,205,

(ix) Incentives – Tshs 1,473,741,

(x) Treasury Loan used by Director to go abroad on vacation – Tshs

3,543,123,

(xi) Cost to prepare revised accounts – Tshs 1,232,456,

(xii) Construction cost of a new laboratory – Tshs 13,520,620,

(xiii) Cancellation of contract – Tshs 8,326,124,

(xiv) Salaries for future services – Tshs 6,577,000,

(xv) Legal cost for unsuccessful recovery of salaries from terminated

employees – Tshs 627,000.

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Assume that you are in charge of one of the Audit Teams at the Large

Taxpayers Department and the Commissioner for Large Taxpayers has

assigned you the tax file of KK Ltd.

REQUIRED:

Apply the provisions of the Income Tax Act 2004 to determine the taxable

income for, and tax payable by, KK Ltd.

Suggested Solution

Computation of taxable income of, and tax payable by, KK Ltd.

Tshs Net Income as per accounts/return 214,136 ADD: Amortized amount to replace a roof 4,733,000 Penalties for VAT 3,500,000 MD’s personal visitors entertainment expenses 3,880,000 Political parties contributions 1,007,450 Treasury Loan used by Director 3,543,123 Construction cost of new laboratory 13,520,620 Salaries for future services 6,577,000 Adjusted Taxable Income 36,975,329 Tax thereon (30%) 9,928,599

Question 14.

What is blended Loan for the purpose of Income Tax Act 2004?

Suggested Solution

By virtue of section 32(7) of the Income Tax Act 2004, a blended loan

means a loan under which payments by the borrower represent in part a

payment of interest and in part a repayment of capital where the interest

part is calculated on capital outstanding at the time of each payment and

the rate of interest is uniform over the term of the loan.

Question 15.

Kibwe Traders is a made up of three partners, i.e. Sindi, Sinda, and Sindika

with profit sharing ratios of 45%, 15% and 40% respectively. The

following details were obtained in their Financial Statements as at 31st

December 2005:

Tshs Tshs Gross Profit 173,900,000 Interest on Sindika’s overdrawn 7,750,000 Profit on sale of machine 2,210,000 183,860,000 Operating Expenses: Salaries and Wages 7,300,000 Sundry expenses 7,900,000 Office rent 725,000 Medical expenses 7,250,000 Accounting fees 7,650,000 Charity and donations 7,625,000 Entertainment 7,500,000 Salaries to partners (equally) 50,890,000 96,840,000 Interest on share Capital: Sindika Sindi 745,000 Sinda 755,000 1,500,000 Interest on Loan: Sinda 725,000 Sindi 715,000 Sindika Nil 1,440,000 Depreciation: Factory Building 7,500,000 Processing Machinery 7,450,000 Saloon car 7,200,000 22,150,000 Net Profit 61,930,000

Additional Information:

1. In march, 2005 office rent was paid to Sindika,

2. Half of the medical expenses were in respect of treatment of partners

and their families equally; donation was paid to Rombo Orphans

Center,

3. Entertainment includes Tshs 230,000 in respect of entertainment to

Sindika,

4. Legal fees in respect of traffic offence to Sindi – Tshs 760,000,

5. In april, 2005, there was a capital sum paid to MD Motors Ltd for

acquiring patent right that has been put into use from 1st January

2005 to manufacture car chases – Tshs 230,000. The useful life of the

right is 5 years and 8 months,

6. Tshs 725,000 had been paid to Tax Consultant in respect of an appeal

made against assessment by TRA,

7. In February 2005, there were expenses of three-fold: Motor

Expenses – Tshs 850,000, Bank Interest on Loan – Tshs 125,000 and

Sundry Expenses – Tshs 190,000. However, in September 2004 there

was a capitalized interest of Tshs 6,000,000,

8. In 31st December 2004, owned the factory worth Tshs 700,000,000;

Machinery Tshs 10,000,000 and Motor Vehicle Tshs 600,000,000

where as accumulated depreciation for a factory was tshs

800,000,000; Machinery Tshs 13,640,000 and Motor vehicle Tshs

7,700,000. [The depreciation rate is 15% on reducing balance

method].

REQUIRED:

Compute adjusted partnership income and partners’ income for the year

ending 31st December 2005.

[Note: The profit on sale of Machinery is from Sindika domestic tailoring

machine and interest on overdraft is not related to business].

Suggested Solution

KIBWE TRADERS ADJUSTED PARTNERSHIP INCOME STATEMENT FOR

THE YEAR ENDED 31ST DECEMBER 2005.

TSHS TSHS Profit as per accounts 61,930,000 Add: Non Allowable Deductions Charity & Donations 7,625,000 Entertainment to Sindika 230,000 Legal fee – Sindi 760,000 Patent right 230,000 Depreciation 22,150,000 Salaries to partners 50,890,000 Interest on share capital 1,500,000 Interest on loan 1,440,000 Medical expenses 3,625,000 88,450,000 150,380,000 Less: Allowable Deductions Interest on overdraft 7,750,000 Profit on sale of machine 2,210,000 Depreciation – Note 1 193,414,583 203,374,583 Adjusted partnership income 52,994,583

Note:

Class II: Cost [10,000,000+13,640,000+600,000,000+7,700,000] 631,340,000 Depreciation (2004) – 25% 157,835,000 WDV (31st December 2004) 473,505,000 Depreciation (2005) – 25% 118,376,250 WDV (31st December 2005) 355,128,750 Class VI: Cost [800,000,000+700,000,000] 1,500,000,000 Depreciation – 5% 75,000,000 Class VII: Cost 230,000 Depreciation (1/6) 38,333 Total Depreciation 193,414,583

Partners’ Income from Partnership:

Sindi Sinda Sindika Ratio 45% 15% 40% Loss (23,847,562) (7,949,187) (21,197,833) Medical Expenses 1,208,333 1,208,333 1,208,333 Entertainment - - 230,000 Salaries 16,963,333 16,963,333 16,963,333 Interest on capital 745,000 755,000 - Interest on loan 715,000 725,000 - Total Share (4,215,896) 11,702,479 (2,796,167)

Question 16.

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Paying tax more than once on the same tax base is a serious problem for

taxpayers generally. This is why double taxation has been termed as “the

central problem of international taxation” and its handling causes much of

complexity in the international tax system.

REQUIRED:

(a) Define theterm “International Double Taxation”.

(b) Illustrate the occurrence of international double taxation as a result

of clashes between tax jurisdiction principles.

(c) Describe the two main methods used to eliminate double taxation.

Suggested Solution

(a) International double taxation may be loosely defined as the

imposition of comparable taxes in two (or more) states on the same

taxpayer in respect of the same subject matter and for identical or

overlapping periods.

(b) Double taxation can occur whenever any of the following three

phenomena happen:

(i) Concurrent full liability to tax (inconsistent residency rules or

Dual Residence Clash).

(ii) Conflict of residency against source or situs (Source Vs

Residence Clash). One state may tax a person on his worldwide

income because he is resident (i.e. full liability to tax) while

another state may tax the same person because he derives

income from that state (i.e. limited liability to tax).

(iii) Concurrent limited liability to tax (dual source clash).

One person may be subjected to limited liability to tax in two

states. In this case, two or more countries claim source-taxing

rights e.g. a company incorporated in country A having a

permanent establishment in country B which derives income in

country C. Both B and C will have limited liability to tax the

income.

(c) International double taxation can be eliminated by:

(i) Exemption Method

Under this method, the investor’s country of residence exempts

from taxation income from foreign sources. The exemption may

be integral or may occur with progression. In the former case,

the exempted income is not taken into account in determining

the tax rate to be applied on the domestic income. In the later

case the exempted income is actually taken into account in

determining the applicable tax rate.

(ii) Credit Method

The investor’s country of residence treats the foreign tax,

within certain statutory limitations, as if it were a tax paid to

itself.

Question 17.

Distinguish between the terms “Domestic Permanent Establishment” and

“Foreign Permanent Establishment”.

Suggested Solution

“Domestic Permanent Establishment” means permanent establishments of

non-resident individual, partnership, trust or corporation situated in the

United Republic of Tanzania.

“Foreign Permanent Establishment” means all permanent establishments

of an individual, partnership, trust or corporation that are situated in any

one country that is not the country in which the individual, partnership,

trust or corporation is resident but excludes a domestic permanent

establishment.

Question 18.

Outline five benefits that Tanzania may get from Double Taxation Treaties.

Suggested Solution

Benefits that Tanzania may get from Double Taxation Treaties include:

(i) Minimizing the negative impact of loss of revenue to the government,

(ii) Reducing distortions to investment flows, by providing good

governance and transparency,

(iii) Enhancing the competitiveness of domestic businesses,

(iv) Promoting domestic compliance with respect to income arising

outside the country,

(v) Allowing for the exchange of information between countries and

hence providing a country with means of accessing information

otherwise not available.

Question 19.

The Income Tax Act 2004 specifies a certain statutory time limit for

making adjustment on assessments by the commissioner of Income Tax.

Suggested Solution

Section 96(2) and (3) provides a time limit for the commissioner for

Income Tax (CIT) to make adjustment on assessment as follows:

(i) In case of a self assessment (under S.94) or jeopardy assessment, the

CIT may adjust assessment within three years after the date for filing

the return of income which relates to such assessment,

(ii) In case of best judgment assessment (under S.95(2)), the CIT may

adjust the date on which the notice of assessment is served on the

person assessed,

(iii) For a person who fails to file a return of income with the intent of

evading or delaying payment of tax, the CIT may make adjustment on

assessment at any time,

(iv) For inaccurate assessment by reason of fraud by or on behalf of the

assessed person, adjustment on assessment can be raised at any time

by the CIT.

Question 20.

Timago Co. Ltd is engaged in manufacturing of different types of leather

bags and cases. Its total number of employees is 100 for which the

company paid 15,540,000 to TRA as PAYE collections for the period

beginning January 2006 to June 2006. The company filed the statement of

withholding taxes for th period on 30th September 2006.

REQUIRED:

Compute the penalty (if any) with regard to filing a statement of

withholding taxes as per section 98(2) of the Income Tax Act 2004.

(Where applicable, the statutory interest rate is 20% per annum).

Suggested Solution

Due date for filing statement of withholding taxes by Timago for the

period beginning January to June 2006 is: 30th June 2006.

The date on which Timago filed the statement: 30th September 2006.

Failure Duration: 3 months.

Interest computations – S.98(2)

Statutory interest rate = 20% (or 1.67% per month)

Interest = 15,540,000 x 1.6667% = 259,000

Compare with 100,000 and take the greater.

Therefore interest = 259,000 x 3 = 777,000

Question 21.

Yuhang Ltd is a company registered in China and has no permanent

establishment in the United Republic of Tanzania. The company operates a

sea transport business. During the year of income 2006, the company

carried out the following transactions:

(i) Received Tshs 400 million for carriage of cargo from Tanzania to

China,

(ii) Received Tshs 100 million for transport of passengers from Tanzania

to South Africa.

(iii) Received Tshs 1,000 million for transport of cargo from China to

United Kingdom.

(iv) Received Tshs 300 million for rental of containers for carrying cargo

from Tanzania to India.

REQUIRED:

Advise Yuhang Ltd on Income tax consequences of the above transactions.

Suggested Solution

Since Yuhang is a non-resident sea transport business operator, tax rules

applicable are those provide by section 90(3) and (4).

Taxable Income of Yuhang Ltd:

Carriage of cargo to China 400 mil Transportation of passengers to S.A 100 mil Transportation of cargo [China to U.K] Nil Rent of containers to India 300 mil 800 mil

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Single Installment tax payable thereon

= 5% x 800 mil

= 40 mil

Also the company is entitled to a tax credit for the year of income in an

amount of single installment as above.

Question 22.

Define a Charitable Organization as per section 64 (8) of the Income Tax

Act 2004.

Suggested Solution

Charitable Organization means a resident entity of a public character that

satisfies the following conditions:

(i) The entity was established and functions only as an organization for

relief of poverty or distress of the public or the provision of general

public health, education, water, or road construction or

maintenance and

(ii) The entity has been issued with a ruling from the commissioner

stating that it is a charitable organization.

Question 23.

What are the conditions to be fulfilled by a taxpayer with regard to refund

of overpayment of income tax as per section 126(3) of the Act.

Suggested Solution

Section 126(3) requires a person who claims a refund from the

commissioner to apply to the commissioner in writing within three years

of the later of:

(i) The end of the year of income during which the events occurred

that gave rise to the payment of the excess tax or

(ii) The date on which the excess was paid

Question 24.

Kigongo Company Limited was incorporated in Tanzania and commenced

its business on 1st February 2005 as a retailer of audio-visual products in

Tanzania. It has drawn up its first accounts to 31st December 2005, the

draft of which together with the additional information was as follows:-

Notes “000”

Tshs.

“000”

Tshs.

Sales 1 950,000

Dividends 2 5,000

Interest income 3 12,000

Contractual penalties 4 5,000 972,000

Expenses:

Directors fees 5 320,000

Salaries 300,000

Interest expenses 6 80,000

Rent and rates 220,000

Legal and professional fees 7 20,000

Contributions to retirement fund 8 15,000

Depreciation 9 120,000

Travelling and entertainment 22,000

Provisions 10 28,000

Insurance 18,000

Sundries 11 10,000 1,153,000

Loss for the year (181,000)

Additional notes:

1. Sales figure includes Tshs. 1,000,000 for sale of furniture which was

used by the company.

2. The company had bought some shares from City Stock Exchange.

These were shares of Sungura Cement Company which distributed

dividends during the period.

3. The Company earned Tshs. 8,000,000 as interest from its bank

deposits and another Tshs. 4,000,000 from a director to whom the

company had extended a personal loan. The Director used the loan

to acquire a building in Kenya.

4. The amount was received as a result of a business contract which the

other party breached it.

5. Directors fees were paid to the following persons:-

Mr. A. 200,000,000

Mrs. A (wife of Mr. A) 50,000,000

Mr. B. (Mr. A’s brother) 70,000,000

320,000,000

6.

Interest paid to bank on overdraft 20,000,000 Finance charge on hire purchase agreements 50,000,000 Interest on failure to pay previous years Vat 10,000,000 80,000,000

7. Audit fees 10,000,000

Legal fees for staff contracts and retirement funds 6,000,000

Amount paid to Tender Board members to facilitate

winning a bid

4,000,000

20,000,000

8. Employees contributions 7,500,000

Employer’s contributions 7,500,000

15,000,000

The contributions were made to an approved retirement fund.

9. The company acquired the following assets:

On 15th February 2005 – Furniture and equipment 100,000,000

On 15-02-2005 – Computers and accessories 300,000,000

On 1st September 2005 – Motor car (station wagon) 200,000,000

The computers were acquired on hire purchase terms for 12 months.

The down payment of Tshs. 120,000,000 was made on 15th February

2005 and the first monthly instalment of Tshs. 20,000,000 was due on

15th February 2005 and the first monthly instalment of Tshs.

20,000,000 was due on 15th March 2005. The cash price of the

computers was Tshs. 300,000,000.

10. Provision for debtors (specific) 11,000,000

Provision repairs (estimated) 8,000,000

Provision for stock obsolescence 9,000,000

28,000,000

11. Sundries included a traffic fine of Tshs. 3,500,000. The balance was

general consumables used by the office.

REQUIRED

Based on the information available, determine the taxable income of

Kigongo Company Limited and its tax liability for the year of income 2005.

Suggested Solution

Computation of taxable income of Kigongo Company for the year of

income 2005:

Net loss for the year (181,000,000) Add: Non Allowable Deductions: Directors fees Nil Penalties (VAT) 10,000,000 Tender Board Expenses 4,000,000 Employees Contributions 7,500,000 Depreciation 120,000,000 Provisions 28,000,000 Traffic fine 3,500,000 173,000,000 8,000,000 Deduct: Allowable Deductions: Sales of furniture 1,000,000 Dividends (FWP) 5,000,000 Interest Income Nil Business contract penalties Nil Depreciation allowances (Note 1) 130,500,000 136,500,000 Tax Loss 144,500,000

No tax liability and the loss can be carried forward as an expense for next

year of income.

Note 1:

Computation of depreciation allowances

Class I Class III Total 37.5% 12.5% Computers 300,000,000 Motor cars 15,000,000 Furniture & Equipments 100,000,000 315,000,000 100,000,000

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Less: Incomings Furniture (1,000,000) Depreciation Basis 315,000,000 99,000,000 Depreciation allowance (118,125,000) (12,375,000) 130,500,000 WDV (31st Dec 2005) 196,875,000 86,625,000

Question 25.

The Mwanamboka Company Ltd is a parent company that is based in

Tanzania. It has two foreign subsidiaries; one in Zambia named

ZAMAFRICA Ltd having 51% shares and another in South Africa named

SAHI having 60% shares. The Zambian company has invested in a SAHI

which has similar business with that of the parent company,

Mwanamboka Company Ltd.

SAHI paid an interest of USD 150,000 to ZAMAFRICA. ZAMAFRICA does

not tax interest but tax dividends at a rate of 5%. The ZAMAFRICA Ltd

paid dividends to the parent company to the tune of USD 120,000 and

realized a business profit of USD 1,100,000 during the tax year of income

2005.

REQUIRED:

(i) Calculate the unallocated income and taxable income for the ZAMAFRICA Ltd

that is based in Zambia.

(ii) Determine the tax payable.

Suggested Solution

(i) Determination of unallocated income and total taxable income

Total Income – S. 74(2)

USD USD Interest 150,000 Business profit 1,100,000 1,250,000 Less: Distributions – S. 74 (1) (120,000) Unallocated Income 1,130,000

Company’s share (S. 75(1)) = 1,130,000 x 51% = USD 576,300

Taxable Income

Distribution (S.75(3))

Investment income = 150,000/1,250,000 x 576,300 = 69,156

Business income = 1,100,000/1,250,000 x 576,300 = 507,144

(ii) Determination of net tax payable (S. 75(4))

Tax on unallocated income = 576,300 x 30% = 172,890

Less: Tax on dividend for foreign company

(120,000 x 5%) 6,000

Total tax payable 166,890

Foreign tax relief (S.77(1)) Nil

Net tax payable 166,890

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This publication has been prepared by Juma Kessy – B. Com Hons (Accounting), UDSM

Let him be aware of any errors in this edition and send corrective suggestions, if any.


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