Global Tax Alert | 23 April 2013
Tanzania amends Capital Gains Tax rules to include change in control and single installment tax payment
Following the President of Tanzania's assent of the Finance Bill, various amendments to the legislation came into effect on 19 October 2012. Of the amendments passed, two were passed with the intention of capturing Capital Gain Tax (CGT) on disposal of shares in a Tanzanian resident entity. According to the Bill Supplement, the objective of these amendments was, “…widening the tax base by including in tax net gains on the sale of shares or securities held in a resident entity to counteract the current tax avoidance practice of selling local companies through overseas holding companies…”
The Tanzania Revenue Authority (TRA) has historically viewed indirect share transfers as a form of tax avoidance hence seeking an avenue for collecting tax on the gain. An example of this is the pending tax case at the Tax Revenue Appeals Board (TRAB) regarding the transfer of shares involving two non-resident entities where the TRA attempted to impose CGT on the transaction based on the argument that it is realization of a domestic asset; to date the tax case is still pending.
Section 56 of the Income Tax Act, 2004 (ITA) has been amended to apply in all cases where the underlying ownership of a Tanzanian entity changes by more than 50 percent within a period of three years (change of control) Upon said change, the local entity will be deemed to have realized its assets and liabilities and thus be required to pay any CGT arising from the transaction, a practice which has been noted to be unfavorable to the local entity since it's the shareholders that stand to benefit from the sale, not the local entity transferred.
There are some challenges in connection with Section 56 of the ITA one of them being that should the same transaction bear tax consequences in another jurisdiction double taxation is likely to occur. It appears the tax consequences and tax point obligation is the burden of the resident entity. It is not clear how the resident entity will arrange for the funds to meet its tax obligation. The amendment has not made any clarifications when it comes to cases where the shares are listed and traded on a stock exchange on a regular basis, thereby potentially triggering a change in control as result of regular trading. Also, unlike other jurisdictions, no limitation has been provided for under the amendment with respect to companies which are land rich or own natural resources which were/are the main target of taxation. This lack of limitation to those cases may be due to Section 56 previously being applicable to the acquisition of shell companies, i.e., those cases in which the entity was acquired to utilize losses carried forward from another business.
Furthermore, despite the fact that the existing tax provisions provided for taxation of direct share transfers in Tanzania, there was no specific mechanism in place to enforce collection of the tax on the gain. This has now changed following the amendments made to Section 90 of the ITA whereby a single installment tax payment will be required with respect to gains arising from direct share transfers or interest derived from Tanzanian entities. The installment rate applicable is ten percent for resident shareholders and twenty percent for nonresident shareholders. A point to note is that the said installment will be available to the taxpayer as a tax credit for the given year of income at the time of the final tax payment.
One of the points of concern regarding this amendment is that with respect to nonresident shareholders transferring their interest, the amendment provides for only collectability of twenty percent of the tax and not thirty percent (as per the provisions of the Tanzanian tax legislation on taxation of companies whereby the tax rate is thirty percent similar to the CGT rate). How the shareholders will pay the remaining ten percent is still a gray area and poses a question as to whether the single installment paid will be the final tax.
With the amendment, should the shareholders decide to register the change in shareholding with the appropriate authorities, the local entity will be required to provide a certificate from the Commissioner of the Tanzania Revenue Authority confirming payment of the single installment tax or otherwise a certificate, indicating that there is no tax payable. Previously, only the stamp duty had a clear collection mechanism however going forward it appears that at the point of paying the stamp duty the CGT element will also be assessed and payment demanded.
In conclusion, to date there has not been guidance from the revenue authorities regarding the issues raised above. Due to the uncertainties, the TRA may decide to deal with these transactions on a case by case basis rather than have a general practical approach set out. This therefore, calls for the various stakeholders to take note of the above-mentioned considerations.
For additional information with respect to this Alert, please contact the following:
EY (Tanzania), Dar es Salaam
- • Silke Mattern
+255 22 266 6853
- • Laurian Justinian
+255 22 266 7227
EY (China) Advisory Services Limited, Pan African Tax Desk, Beijing
- • Rendani Neluvhalani
+86 10 5815 2831
Ernst & Young LLP, Pan African Tax Desk, New York
- • Dele Olaogun
+1 212 773 2546
Ernst & Young LLP (United Kingdom), Pan African Tax Desk, London
- • Leon Steenkamp
+44 20 7951 1976
EYG no. CM3378