May 2021

Get in touch with our Indirect Taxes (“ITX”) team

Joseph LyimoPartner/Director - ITXE: joseph.lyimo@pwc.com

Miriam SudiSenior Manager - ITXE: miriam.sudi@pwc.com

Jafari MbayeManager - ITXE: jafari.x.mbaye@pwc.com

Fadhila TiisekwaSenior Associate - ITXE: fadhila.t.tiisekwa@pwc.com

Elijah SangaSenior Associate - ITX (Arusha)E: elijah.sanga@pwc.com

Tax AlertPre-Budget Tax Briefing 1: Indirect TaxesIn brief• Customs: A new EAC common external

tariff (aligned to the 2022 version of the Harmonised System) is expected to apply from January 2022

• Value Added Tax: To support exporters a solution is required to ensure timely payment of VAT refunds.

• Fuel: Fuel taxes, which are fixed tariffs, have only increased three times since 2007 (namely 2013, 2015, 2017); some element of increase in these taxes could be on the cards this year.

• Goods: In many years fixed excise duties on non petroleum goods (alcohol, tobacco, soft drinks) have been adjusted (normally for inflation); but not in the most recent three years reflecting concerns as to the ability of the market to absorb increases, and these concerns may also make it a challenge to justify an increase this year.

• Services: A reduction in excise duty on electronic communication services and removal of VAT from financial services could help widen access to these services. Currently, indirect taxes on these services are: » Electronic communications services

(including telecommunications): 17% excise duty rate, the highest in the region, which taken together with 18% VAT and other taxes / imposts (royalty to TCRA, levy to USCAF, Service levy) results in total turnover taxes of 40.2% on pre-tax turnover.

» Financial services: 10% excise duty rate and 18% VAT

BackgroundIndirect taxes (namely, taxes on imports, and consumption taxes (VAT / excise duty) on local supplies) are an area of significant interest at budget time for two reasons:

1. Indirect taxes comprise a significant component of collections (generally, around 60% of tax revenue); and

2. A number of indirect tax tariffs are fixed TZS amounts based on quantity (i.e. not value based (“ad valorem”)) and so are frequently but not always adjusted (in particular, to adjust for inflation).

As part of the pre-Budget stakeholder engagement process, in February 2021 we sent a pre-Budget submission with certain suggestions on potential tax issues for consideration.

This newsletter summarises some of the indirect tax issues, and potential changes, that we highlighted. This newsletter also references observations in relation to indirect taxes in recent publications by the World Bank (Feb 2021 Tanzania Economic Update) and GSMA (March 2021 report).

General Observations / ConclusionsGiven the significance of indirect taxes to the overall collections, any efforts to increase revenue collections must by definition include focus on indirect taxes. However, an increase in Tanzania’s VAT rate (which mirrors Rwanda and Uganda, but is higher than Kenya) would seem unlikely.

Accordingly, more focus is likely to be on the scope for adjustment of excise duty in those cases where tariffs are fixed (as opposed to

This publication has been prepared as general information on matters of interest only, and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice.

© 2021 PricewaterhouseCoopers Limited. All rights reserved. In this document, “PwC” refers to PricewaterhouseCoopers Limited which is a member firm of PricewaterhouseCoopers International Limited, each member firm of which is a separate legal entity.

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ad valorem1 ). However, as in the most recent years, given the concerns as to the narrow market wallet and in particular, the ability of the market to absorb tax increases in these discretionary purchases, and with inflation remaining low, it may be difficult to justify tariff increases on non petroleum goods (alcohol, tobacco, soft drinks). If anything, a more likely target for an adjustment might be fixed tariffs on fuel bearing in mind that these tariffs have been infrequently adjusted.

CustomsIn pursuit of its efforts to implement the 2022 version of the Harmonized System in a timely manner, earlier this year the East African Community (EAC) held a regional meeting of tariff experts with the objective of transposing the EAC Common External Tariff (CET) to the 2022 version of the HS.

Aside from considering the HS 2022 amendments and incorporating these in the draft EAC CET 2022, a comprehensive review of the CET was carried out to ensure that the draft includes all recently gazetted amendments. The meeting concluded by recommending EAC policy organs to adopt the EAC CET 2022, with the entry into force from 1 January 2022.

Value Added TaxVAT RateOn the introduction of VAT in 1998, the standard rate of VAT was set at 20% and then in 2009 it was reduced to the current 18%. Although this 18% rate is higher than (Kenya 16%), it aligns with Rwanda and Uganda. We do not believe that a VAT rate reduction is the highest priority issue as compared to rationalisation of other taxes (for example, high taxes on communication costs (see below), or taxes on employment).

Of importance to note is that for VAT registered businesses, VAT is a pass through amount as input tax is recoverable against output tax, and therefore should be tax neutral; and so, in principle should not result in any increased costs. This is in contrast to irrecoverable taxes such as excise duty on fuel or communication costs, or employment taxes / imposts (including skills and development levy, workers compensation fund and employer social security contributions).

However this statement on VAT neutrality for businesses comes with significant qualifications as follows:• Tourism - Given that VAT is charged on certain services supplied

to tourists, an increased rate would impact competitiveness of the tourism industry

• Exports - An increase VAT rate would exacerbate the existing challenges with VAT refunds (see comments below)

• Exempt businesses (for example, certain financial services) - a VAT rate increase would increase the costs for exempt businesses as they can not recover VAT incurred on their expenses.

Global experience following the 2009 financial crisis was a trend for many countries to shift their revenue collection focus more towards consumption taxes, in particular by increasing VAT rates. Arguably an increase in this rate which is applied to broad based consumption would be the most efficient mechanism to increase collection, and as highlighted above Tanzania has in the past applied a higher VAT rate. However, given the disadvantages outlined above, and the intention to align with regional rates, we believe that a VAT rate increase is unlikely - or certainly, not unless it is accompanied by some rationalisation of other taxes.

VAT registration thresholdSome may feel it is premature to discuss an increase in the annual VAT registration threshold, which was increased from 1 July 2015 to TZS100m pa (from TZS40m pa)². However, if one assumes say 300 business operational days in a year, then TZS100m equates to daily turnover of only TZS300k (approximately USD145).

An increase in the threshold - say to TZS 200m - would make the compliance process simpler for businesses no longer above the threshold (as they would no longer have to carry out VAT accounting), but these businesses would still be contributing some VAT (as they would no longer be able to recover input tax). It would also benefit TRA in saving them from devoting resources in reviewing VAT returns from businesses whose VAT contribution is relatively small.

VAT refundsThe major current concern as regards VAT relates to pending VAT refunds - particularly so, as the primary adverse impact of delayed refunds is felt by exporters. Measures to expedite such refunds (including pending backlogs) are urgently needed - and whilst the Government has recognised the importance of this issue, the practical challenge remains as to how to fund such payments. Given the situation, one approach might be to have a temporary increase (say for one year) of the VAT rate (say by 1% or 2%) with such additional funds being ring fenced to ensure the payment of refund backlogs.

Resolving this issue is critical for export businesses, including the manufacturing sector that we are seeking to nurture, and in doing so will help boost the country’s foreign exchange earning capacity.

PwC Africa VAT Guide - seventh editionFor a comparison with VAT regimes elsewhere in Africa, do refer to the recently released seventh edition of the PwC Africa VAT Guide, “Moving towards a united Africa”.

Fuel taxesTaxes on imported fuel are a significant contributor to tax collections - typically, in previous years representing approximately one third of total taxes on imports, or around 13% or 14% of total tax revenue.

The taxes on fuel (excise duty, road toll, petroleum levy) are calculated on a specific rather than ad valorem basis – in other words, fixed TZS amounts per quantity rather than percentage of value. Ordinarily, specific tariffs should be adjusted on an annual basis for inflation so as to maintain the real value of these taxes. However, unlike other fixed tariffs (eg excise on alcohol, tobacco, soft drinks) in recent years there has been a reluctance to adjust fuel taxes – the only recent exception being a TZS40 excise duty increase in 2017, mainly to compensate for the loss in revenue resulting from the abolition of the annual motor vehicle licence fee.

In fact since 2007, and prior to 2017, the only changes were in 2013 (introduction of petroleum levy at TZS 50/litre and TZS 63/litre increase in road toll) and in 2015 (increase in petroleum levy to TZS 100/litre and additional TZS 50/litre in road toll). So if one compares the position now with 2007, then taxes on fuel are much lower in real terms. For further detail see the summary of the history of fuel taxes attached at the end of this newsletter.

Given that fuel is a necessity, its demand is not as elastic as other consumer products and so in principle such tax rises will normally generate additional revenue. A key question will be whether this budget will see a change to fuel taxes to adjust for inflation, and whether in so doing it would make sense to incorporate an automatic mechanism to index these taxes going forward (perhaps on a quarterly basis).

One approach to rebasing taxes on fuel would be to subject them to VAT, and if so then some element of downward adjustment on fixed tariffs so as to not have too excessive an impact on the pump price. The approach of incorporating VAT as opposed to upward adjustment of fixed tariffs would be one that would be more beneficial for VAT registered businesses (as they can recover the VAT as input tax).

Excise Duty - consumer goodsExcise duty on consumer goods has typically been applied to goods seen as discretionary or luxury spend, or with adverse health or environmental impact (hence the term “sin tax”). In particular, apart from application to fuel (discussed above), it has been levied for many years on alcohol and tobacco products, soft drinks (mostly at specific rather than ad valorem tariffs) and certain vehicles (ad valorem basis); these items remain the main sources of excise on non-petroleum goods, albeit recent years have seen an extension of the scope of excise duty to a wider scope of goods.

The practice in many (but not all) years has been to adjust fixed excise duties on non-petroleum products, and normally by an amount equivalent to inflation (see analysis in the appendix to this newsletter). However, the trend has not been consistent - for example, the last three budgets have seen no increase on specific excise duties on local goods. The challenge this year in considering an increase in such excise duty, if any, is what is a very much constrained consumer wallet. Against this background, the concern is whether an increase in such taxes will result in increased revenue or not (once any impact on demand is considered); and indeed, this is presumably the thinking that informed the decision not to increase rates in the most recent years.

Excise Duty - servicesThe extension of excise duty to services is a relatively recent phenomenon - having been first applied to telecommunication services in 2002, and financial services in 2015³.

Electronic communication servicesIndirect taxes on electronic communication services (excise duty, VAT) are amongst the major contributors to tax collections. However, the concern remains that the excise rate at 17% (as compared to 5% when introduced in 2002) is much too high - being the highest in East Africa. Importantly, excise duty is just one component of turnover taxes on electronic communication services; if cumulated together these taxes (excise, VAT, service levy,TCRA, UCAF) come to a staggering 40.2% of pre-tax turnover. Alternatively, if taken as a proportion of the tax inclusive price, it represents 28.7% (i.e. 40.2 divided by 140.2).In its March 2021 report⁴ (Tanzania: Driving social and economic value through mobile-sector tax reform) the GSMA⁵ commented that “the tax contribution of the mobile sector in Tanzania is considerably higher than the average for Sub-Saharan Africa and also above other regional averages; this could limit the country’s transition to a digital economy”, noting that the 17% excise duty rate on mobile services is the second highest in Sub-Saharan Africa. It noted that “in Tanzania, consumer taxes represent a significant share (32%) of the total cost of mobile ownership (TCMO)⁶” .

Historically, excise duty primarily targeted the consumption of luxury or discretionary purchases (such as alcohol, cigarettes, etc.) - and perhaps at the time of extension to electronic communication services, such services (which had started life purely in a post paid format) were seen more as a luxury item rather than mainstream. However, electronic communication services are certainly now a mainstream consumption item - and in many cases used for business, financial services or education rather than leisure use. As such there is a question as to the appropriateness of the level of taxation on electronic communication services. On the other hand, given that so much of the consumer wallet is spent on these services it is not surprising that the Government seeks to maximise its take. But at what expense in terms of accessibility?

So what to do? Well, consideration could be given to an immediate reduction in the excise duty rate from 14.5% - being the rate applicable prior to the change in July 2014 to 17%. At the time the increase to 17% was stated to be a temporary measure (to compensate the Government for the loss of revenue resulting from removal of sim card tax of TZS 1,000 in the FY 2013/14), with the intention that the rate revert to 14.5% in subsequent years. However, no amendment has been made since then and so seven years later the 17% rate remains!

Financial servicesExcise duty applies at the rate of 10% on charges or fees payable by a person to • a financial institution for service provided by such institution; or• a telecommunication service provider for money transfer and

payment service.

The excise duty charge on services from financial institutions should also be considered against the background of extension of VAT to many financial services under the new VAT Act 2014 which became effective from 1 July 2015. As a result you now have excise duty and VAT both charged on financial services - resulting in an increased cost of such services. If the objective is to minimise the cost of financial services, and therefore accessibility, then arguably one or the other tax should apply but not both - and of the two, the more logical to remove would be VAT given that traditionally the financial services sector is exempt from VAT.

A conundrum in relation to money transfer is that the imposition of excise duty on both transfer and withdrawal means the same money is taxed twice, which may be regarded as inconsistent with principles set out in the Excise Duty Act. More importantly, by increasing transaction costs it may disproportionately impact that part of the population that does not have access to formal banking services. Perhaps a rate reduction could be considered from 10% to 5%, with a view of increasing affordability of these services, encouraging growth of these sectors, and promoting financial inclusion.

World Bank Tanzania Economic Update February 2021 - indirect tax recommendationsThe most recent World Bank (“WB”) Tanzania Economic Update⁷ (“Raising the Bar - achieving Tanzania’s development vision”), issued in February 2021, stated that VAT reforms could increase gross tax revenue by 2.5 percent of GDP, while reforming excise taxes could boost revenue by 1-1.2 percent of GDP. Their recommendations in relation to indirect taxes⁸ included the following:

VAT - WB recommendations: • Protect the VAT base:

» Extend VAT to cover on-site piped water services, improved water sources, and petroleum products;

» Limit access to VAT exemptions to goods exempted by health and safety codes; and

» Improve coverage of the digital economy.

• Simplify and modernise the VAT refund process: » Clear the VAT refund backlog, which will encourage

investment, exports, and compliance while strengthening confidence in the tax system;

» Reduce VAT fraud through enhanced refund administration.

• VAT administration - various measures to modernise

Excise Duty - WB recommendations: • Imported goods:

» Phasing out the use of excise taxes to discriminate against imported goods

» Application of a single excise duty rate to all categories of goods irrespective of their origin or domestic content;

• Tobacco: Establishing a single per-kilogram rate for all tobacco products and increasing the rate to a level comparable with those of regional peers;

• Alcohol: Application of a single excise tax rate to each type of alcoholic beverage (e.g. beer, wine, distilled spirits) and aligning these rates with those of regional peers;

• Fuel: Indexation of the excise tax rate for petroleum products to the annual inflation rate;

• Administrative: Introducing a “fit and proper” standard that applies to new licenses and license renewals; and creating a field-audit program to support the introduction of tax stamps.

1 Ad valorem rates will by definition automatically adjust as prices adjust and so do not require an adjustment for inflation2 At the time of introduction of VAT in Tanzania in 1998 the annual registration threshold was TZS20m pa. From July 2004 this was increased to TZS40m and from July 2015 to TZS100m.3 On the entry into force of the VAT Act 20144 https://www.gsma.com/publicpolicy/resources/tanzania-driving-social-and-economic-value-through-mobile-sector-tax-reform. ⁵ The GSM Association (commonly referred to as ‘the GSMA’ or Global System for Mobile Communications, originally Groupe Spécial 5

Mobile) is an industry organisation that represents the interests of mobile network operators worldwide6 Refer pages 4 and 5 of the report7 https://documents.worldbank.org/en/publication/documents-reports/documentdetail/803171614697018449/Tanzania-Economic-Update- Raising-the-Bar-Achieving-Tanzania-s-Development-Vision8 These are set out on page 39 of the report9 Beer10 Imported excisable products11 Respective TCRA and UCAF charges are 1.1% and 0.9% (up to 2017, were 0.8% and 0.3%)

Footnotes

01/07/07 to 30/06/11 01/07/11 to 30/06/13 01/07/13 to 30/06/15 01/07/15 to 30/06/16 01/07/2017 25/02/2021

TZS / litre TZS / litre TZS / litre TZS / litre TZS / litre TZS / litre

Excise - diesel 314 215 215 215 255 255

Excise - petrol 339 339 339 339 379 379

Road Toll 200 200 263 313 313 313

Petroleum Levy 0 0 50 100 100 100

Total taxes - diesel 514 415 528 628 668 668

Total taxes - petrol 539 539 652 752 792 792

Exchange rate 1,275 1,582 1,601 1,970 2,230 2,318

Total taxes - diesel US$

0.40 0.26 0.33 0.32 0.30 0.29

Total taxes - petrol US$

0.42 0.34 0.41 0.38 0.36 0.34

INDIRECT TAXES - HISTORY / REGIONAL COMPARISONFuel Taxes - History

Excise Duty (Fixed Tariffs) - History - Non Petroleum Excisable Products Products on which excise duty is charged by reference to fixed tariffs include alcohol and tobacco products, soft drinks (carbonated, juice), bottled water. The table below sets out the recent history of percentage change increase in such tariffs:

Jul 2010 Jul 2011 Jul 2012 Jul 2013 Jul 2014 Jul 2015 Jul 2016 Jul 2017 Jul 2018 Jul 2019 Jul 2020

Fixed tariff increase

8% 20%, 25%⁹ 10% 10% 10% 0% 5% 5% 0%, 5%10 0% 0%

Excise duty - ad valoremCertain product are subject to ad valorem (percentage rate) rather than fixed tariffs including: certain motor vehicles, cigars, carpets, leather suitcases, leather apparel and clothing, guns and ammunition, yacht and boats for pleasure, aircraft and helicopters of an unladen weight exceeding 2,000kg; imported furniture. As such tariffs are value based there is no need for an annual inflation adjustment.

Appendix

Excise duty rate on telecommunication services - 2002 to 2020:

Finance Act 2002 Finance Act 2006 Finance Act 2008 Finance Act 2010 Finance Act 2012 Finance Act 2013 Finance Act Supplement - Dec 2013

Mobile phone services

Mobile phone services

Mobile phone services

Airtime Airtime Electronic communication services

Electronic communication services

5% 7% 10% 10% 12% 14.5% 17%

Excise duty rate on telecommunication services - EAC comparison:Within the EAC, it is Tanzania that has the highest excise duty rate on electronic communication services - see table below.

Burundi Rwanda Uganda Kenya Tanzania

0% 10% 12% 15% 17%

Taxes on telecommunication servicesTotal taxes on turnover

2013/14 2014/15 2017/18 to date

Gross charge before tax 100 100 100.0

Excise Duty 14.5% 14.5 14.5 17% 17 17.0 17% 17.0 17.0

114.5 117.0 117.0

VAT 18% 20.6 20.6 18% 21.1 21.1 18% 21.1 21.1

Gross charge / sub-total 135.1 35.1 138.1 38.1 138.1 38.1

Local tax - service levy 0.3% 0.3 0.3% 0.3 0.3% 0.3

TCRA;UCAF11 1.1% 1.1 1.1% 1.1 2.0% 2

Total tax and levies on gross income 36.5 39.5 40.4

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This publication has been prepared as general information on matters of interest only, and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice.

© 2021 PricewaterhouseCoopers Limited. All rights reserved. In this document, “PwC” refers to PricewaterhouseCoopers Limited which is a member firm of PricewaterhouseCoopers International Limited, each member firm of which is a separate legal entity.