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The Finance Act, 2022 (the Finance Act) was published on 30 June 2022 to make amendments to a raft of laws in Tanzania including the Income Tax Act and the Value Added Tax Act.
One of the key changes introduced by the Finance Act in the Income Tax Act (ITA) is the introduction of a Digital Services Tax (DST) on digital services provided by non-residents to Tanzanian resident individuals through a digital marketplace. Section 90A of the ITA introduced DST on payments made by an individual other than payments made in conducting a business with respect to a service rendered by a non-resident through a digital marketplace. A digital marketplace is defined as a platform which enables direct interaction between buyers and sellers of electronic services.
Pursuant to the DST provisions, a non-resident providing electronic services to a Tanzanian individual (who is not undertaking business in Tanzania) will be required to pay this tax by way of a single instalment each calendar month at the rate of 2 percent of the gross payments made to the non-resident service provider by the Tanzanian individual customers.
Scope of Digital Service Tax
Following the introduction of DST, the Minister of Finance and Planning introduced the Income Tax (Registration of Non-Resident Electronic Service Providers) Regulations, 2022 (the DST Regulations) which provide a broad list of services that are subject to the DST.
The services subject to DST include Electronically Supplied Services (ESS), which are set out in the VAT Act. These services include (a) websites, web-hosting, or remote maintenance of programmes and equipment;(b) software and the updating thereof; (c) images, text, and information;(d) access to databases; (e) self-education packages; (f) music, films, and games, including gaming activities; and (g) political, cultural, artistic, sporting, scientific, and other broadcasts and events including broadcast television. The DST Regulations also set out a detailed list of services which will be subject to DST, in essence expanding the scope of services on which this tax is applicable.
Source of Payment
Pursuant to the DST Regulations, payment for electronic services shall be deemed to have a source in Tanzania, where the recipient of the service is in the country. The recipient of the service shall be deemed to be in Tanzania if (a) the payment proxy including credit or debit card information and bank account details of the recipient of the electronic services is in Tanzania or (b) the resident proxy including the billing or home address or access proxy including internet address, mobile country code of the SIM card of the recipient in Tanzania.
Therefore, where payment is sourced in Tanzania as ascribed above from supplying electronic services to a Tanzanian individual who is not undertaking business, such payment will be subject to DST at 2 percent and the non-resident will be required to pay DST to the Tanzanian Revenue Authority (TRA) within the timelines described above.
Scope of VAT on Electronically Supplied Services
VAT in Tanzania is chargeable on taxable supplies including ESS, at the rate of 18 percent. The Minister of Finance and Planning introduced the Value Added Tax (Registration of Non-Resident Electronic Service Suppliers) Regulations, 2022 (the VAT Regulations) with an effective date of 1 July 2022. The VAT Regulations provide a broad list of ESS which are subject to VAT. The scope of ESS in the VAT Regulations is the same as the scope of services subject to Digital Service Tax pursuant to the ITA Regulations.
The Finance Act also amended Section 64 of the VAT Act to introduce a simplified VAT registration framework, pursuant to which non-resident providers of ESS in Tanzania will be required to make an application to the TRA for VAT registration for the purpose of compliance with VAT obligations on ESS. Upon registration, the non-resident person will be issued with a VAT Registration Number (VRN) which will be used for purposes of paying VAT and filing VAT returns.
Before the Finance Act amendments, Section 64 of the VAT required non-resident persons making a taxable supply in Tanzania without having a fixed place in the country to appoint resident persons as their VAT representatives for purposes of compliance with VAT obligations. The simplified VAT registration framework will reduce the administrative challenges that arose with the mandatory requirement of appointing a tax representative.
Place of Supply
According to the VAT Regulations, a supply of electronic services by a non-resident shall be treated as a supply made in Tanzania when supplied to an unregistered person if (a) the payment proxy including credit or debit card information and bank account details of the recipient of the electronic services is in mainland Tanzania; or (b) the resident proxy including the billing or home address or access proxy including internet address, mobile country code of the SIM card of the recipient is in Tanzania.
Under the DST Regulations and the VAT Regulations (the Regulations), a non-resident person who provides electronic services to a resident individual who is not undertaking business will be required to apply online for a Tax Identification Number (TIN) and VAT Registration Number (VRN) from the TRA respectively, through a prescribed form set out in the Regulations. Once the TIN and VRN are issued, the non-resident provider of electronic services can start complying with the obligations under the regulations including paying taxes and filing returns with the TRA on or before the seventh day of the month following the month that the income is received.
Mode of Payment and Payment Currency
A person registered under the Regulations will be required to pay tax to a bank account designated by the Commissioner General of the TRA in Tanzanian Shillings or its equivalent convertible currency using the Bank of Tanzania’s prevailing exchange rate on the date of payment.
Exemption from using Electronic Fiscal Device
Notwithstanding that the Tax Administration Act requires a person who receives payment in respect of services rendered to issue fiscal receipt using an electronic fiscal device, the Regulations exempt a non-resident service provider of electronic services from acquiring and using an Electronic Fiscal Device (EFD).
The Regulations have provided a grace period of six months, which expires on 31 December 2022, for non-residents to comply with the DST and VAT provisions on ESS, failure to which penalties and interest will be applicable. Non-compliance with the Regulations may result in the imposition of a fine not exceeding TZS 4.5 million (USD 1,930) or imprisonment for a term not exceeding three years or both.
It is therefore paramount that non-resident providers of electronic services assess whether their services are within the scope of DST and (or) VAT and commence the registration process before the deadline.
Tanzania follows other jurisdictions such as Kenya which have introduced unilateral DST regimes as well as a simplified VAT regime for ESS. It would have been expected that the TRA would have provided a longer timeline for stakeholder engagement as well as registration, to enable non-resident service providers to reconfigure their systems and to assess the impact that the new taxes will have on their business models.
Juliana Mosha- Senior Associate