Tax Laws in Tanzania: Taxation Questions & Answers

Publication TLT-01

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 The use of this publication is subject Answer 25: ............................................................................ 11 to the same terms and conditions of Tax Laws in Tanzania site. Click here for the terms and conditions.

Questions &

Answers:

Tax Laws in

Tanzania.

November, 2011

©Tax Laws in Tanzania 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.

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

Publication Number :: TLT-01 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 1 st 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

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©Tax Laws in Tanzania 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 Kessy Juma :: http://www.taxation-tz.com

Publication Number :: TLT-01 Free accommodation (Uganda) – See Note 1 Trip to Uganda (more than 20 miles) Interest from NBC (non-final) Retirement Contributions (Note 2) – Add employer’s Retirement Contributions (Note 2) – Less allowable

Nil Nil 200,000 1,302,800 (2,400,000) 12,130,800 1,800,000 13,930,800

Housing Benefit (Note 3) Taxable amount for 2005 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.

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©Tax Laws in Tanzania (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 1 st 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 Kessy Juma :: http://www.taxation-tz.com

Publication Number :: TLT-01 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) Other Benefits (Electricity, Gas, & Water) Salary from consultancy work (100,000 x 12) – Note 1 Amount received for accepting restriction Scholarship fees Interest from CRDB (Final) Loan Interest Benefit (Note 2) Car Benefit (Note 3) NSSF (Employer) – Note 4 NSSF (Employee) – Note 4

7,200,000 681,950 1,200,000 1,000,000 Nil Nil 360,000 1,000,000 Nil 360,000 11,801,950 1,800,000 13,601,950

Housing Benefit (Note 5) Total Taxable Income 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 nonresident 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:

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©Tax Laws in Tanzania 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.


Publication Number :: TLT-01 (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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©Tax Laws in Tanzania RATE – A TWDV 1st Jan 2005 Additions: Air craft Ship Boiler (initial allowance)

Publication Number :: TLT-01 37.5% 2,550,000

2,550,000 Incomings: P & M Ship (stolen) Office furniture DEP. BASE – B DEPRECI. ALLOWANCES Initial allowance: Boiler (price + instal) 50% * (600 + 300) Annual allowance: A * B TOTAL ALLOWANCES

2,550,000

956,250 956,250

25% 6,000,000 50,000,000 60,000,000 116,000,000 (3,000,000) (20,000,000) 93,000,000

450,000 23,250,000 23,700,000

12.5% 2,583,700

2,583,700

(1,200,000) 1,383,700

172,963 172,963

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 CLASS RATE – A COST: 2 lorries, P&M (initial allow.), AC Saloon,OF, factory building Factory building Factory building alterations

DEPRECIABLE ASSETS POOLS (‘000) I (Tshs) II (Tshs) III (Tshs) VI (Tshs.) 37.5% 25% 12.5% 5% 40,000

2,000

15,000

4,200

15,000 4,500 55,000

Additions: exchanged lorry,godown Trailer

24,000

0

6,200

43,500

24,000 79,000 (8,000)

Incomings: one lorry-fire Exchanged (14,000) lorry DEP. BASE – B 57,000 DEPRE. ALLOWANNCES Initial allowance: P&M (50% * 180,000) Annual allowance: A * B 21,375 TOTAL ALLOWANCES 21375 TWDV 31st Dec. 2005 35,625 * (38,000/= + 180,000/=) less 99,500/=

175,000 38,000 38,000

6,200

218,500

38,000

6,200

218,500

90,000 9,500 99,500 118,500*

775 775 5,425

10,925 10,925 207,575

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 => Weigh bridge fines => Total tax paid by partners

shs. 350,000 shs. 3,500,000 shs. 3,300,000

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©Tax Laws in Tanzania

Publication Number :: TLT-01

=> Office electricity => Tip to Police to allow speeding car

shs. 250,000 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 Interest on loan paid to Bush

shs. 5,000,000 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 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 Subtotal Deduct Interest on drawings (note v) 400,000 Depreciation – Note 1 79,187,500 Adjusted Distributable Loss

(2,600,000)

43,800,000 41,200,000

79,587,500 (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 Kessy Juma :: http://www.taxation-tz.com

Subtotal Add: Inv. Income Royalty Dividend Realization Total

-5,795,833

-6,195,833

2,000,000 FWP- Sec 86 5,000,000 -1,195,833 1,204,167

-6,195,833

-1,195,833

-13,187,500

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.

5.

REQUIRED:

6.

Apply the provisions of the Income Tax Act 2004 to determine the taxable income for, and tax payable by, KK Ltd.

7.

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

Net Income as per accounts/return ADD: Amortized amount to replace a roof Penalties for VAT MD’s personal visitors entertainment expenses Political parties contributions Treasury Loan used by Director Construction cost of new laboratory Salaries for future services Adjusted Taxable Income Tax thereon (30%)

Tshs 214,136 4,733,000 3,500,000 3,880,000 1,007,450 3,543,123 13,520,620 6,577,000 36,975,329 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 31 st 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, Kessy Juma :: http://www.taxation-tz.com

8.

In april, 2005, there was a capital sum paid to MD Motors Ltd for acquiring patent right that has been put into use from 1 st January 2005 to manufacture car chases – Tshs 230,000. The useful life of the right is 5 years and 8 months, Tshs 725,000 had been paid to Tax Consultant in respect of an appeal made against assessment by TRA, 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, 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 Profit as per accounts Add: Non Allowable Deductions Charity & Donations Entertainment to Sindika Legal fee – Sindi Patent right Depreciation Salaries to partners Interest on share capital Interest on loan Medical expenses Less: Allowable Deductions Interest on overdraft Profit on sale of machine Depreciation – Note 1 Adjusted partnership income

7,625,000 230,000 760,000 230,000 22,150,000 50,890,000 1,500,000 1,440,000 3,625,000

7,750,000 2,210,000 193,414,583

TSHS 61,930,000

88,450,000 150,380,000

203,374,583 52,994,583

Note: Class II: Cost [10,000,000+13,640,000+600,000,000+7,700,000] Depreciation (2004) – 25% WDV (31st December 2004) Depreciation (2005) – 25% WDV (31st December 2005) Class VI: Cost [800,000,000+700,000,000] Depreciation – 5% Class VII: Cost Depreciation (1/6) Total Depreciation Partners’ Income from Partnership: Sindi Ratio 45% Loss (23,847,562) Medical Expenses 1,208,333 Entertainment Salaries 16,963,333 Interest on capital 745,000 Interest on loan 715,000 Total Share (4,215,896)

Sinda 15% (7,949,187) 1,208,333 16,963,333 755,000 725,000 11,702,479

631,340,000 157,835,000 473,505,000 118,376,250 355,128,750 1,500,000,000 75,000,000 230,000 38,333 193,414,583

Sindika 40% (21,197,833) 1,208,333 230,000 16,963,333 (2,796,167)

Question 16. Page 8

©Tax Laws in Tanzania 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,


Publication Number :: TLT-01 (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 Transportation of passengers to S.A Transportation of cargo [China to U.K] Rent of containers to India

400 mil 100 mil Nil 300 mil 800 mil Page 9



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. 950,000 5,000 12,000 5,000

“000” Tshs.

Sales 1 Dividends 2 Interest income 3 Contractual penalties 4 972,000 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 Finance charge on hire purchase agreements Interest on failure to pay previous years Vat

7.

20,000,000 50,000,000 10,000,000 80,000,000

Audit fees Legal fees for staff contracts and retirement funds Amount paid to Tender Board members to facilitate winning a bid

10,000,000 6,000,000 4,000,000 20,000,000

8.

Employees contributions Employer’s contributions

7,500,000 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 On 15-02-2005 – Computers and accessories On 1st September 2005 – Motor car (station wagon)

100,000,000 300,000,000 200,000,000

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) Provision repairs (estimated) Provision for stock obsolescence

11,000,000 8,000,000 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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©Tax Laws in Tanzania Less: Incomings Furniture Depreciation Basis Depreciation allowance WDV (31st Dec 2005)

315,000,000 (118,125,000) 196,875,000

Publication Number :: TLT-01 (1,000,000) 99,000,000 (12,375,000) 130,500,000 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

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 that is based in Zambia. Foreign tax relief (S.77(1)) Nil (ii) Determine the tax payable. Net tax payable 166,890 ======================================================================================================================

====================================================================================================================== 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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Tax Laws in Tanzania: Taxation Questions & Answers

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