What analysts, business leaders say on corporate tax

DAR ES SALAAM: IN the second phase of our series on rethinking corporate taxation, the ‘Daily News’ presents transformative strategies rooted in global best practices.

These strategies are informed by insights from policymakers, financial analysts and business leaders, with the goal of attracting investment, enhancing competitiveness and driving sustainable growth in Tanzania.

Tanzania’s proposed corporate tax reforms prioritise sector-specific incentives, serving as a foundation to drive innovation and promote sustainable development. Export Processing Zones Authority (EPZA) Director General, Mr Charles Itembe, told the ‘Daily News’ that by prioritising industries such as technology and renewable energy, Tanzania has the opportunity to diversify its economy and attract substantial investments. Singapore’s experience with R&D tax credits demonstrates the immense potential of such measures.

Over a decade, Singapore doubled its technological contributions to GDP, with private R&D spending increasing by 50 per cent, from approximately 15 billion US dollars to 22.5 billion US dollars.

If Tanzania invests 1 per cent of its GDP (1 billion US dollars) into similar R&D tax incentives, it could stimulate a 50 per cent growth in private sector R&D spending, leading to a 500 million US dollars annual increase in technological outputs. Likewise, research further shows that Kenya’s renewable energy policies underline the effectiveness of strategic tax incentives.

Tax holidays and VAT exemptions helped Kenya achieve over 70 per cent renewable energy production. Tanzania, with renewable energy at 37 per cent, could realistically aim for 50 per cent within the next decade by adopting similar policies.

Assuming a growth rate of 1.3 per cent annually, investments in green technology could attract 3 billion US dollars (based on 200 US dollars per kW installation costs for renewable projects), reducing energy costs by 20 per cent and creating thousands of jobs in green sectors.

Simplifying and Harmonising Tax Codes A lecturer at the Institute of Tax Administration, Mr Sinda Mwita, commented that simplifying and harmonising Tanzania’s complex tax codes is a crucial reform aimed at improving the investment climate.

He underscored that streamlined tax laws reduce administrative burdens, lower compliance costs and offer businesses clear and consistent guidelines—promoting transparency and building trust. Building on this, we examined evidence from Mauritius.

After implementing a flat corporate tax rate of 15 per cent, Mauritius experienced a 15 per cent annual increase in foreign direct investment (FDI), which grew from 250 million US dollars in 2010 to 540 million US dollars in 2021.

Additionally, GDP per capita rose from 7,500 US dollars to 9,000 US dollars during the same period. If Tanzania simplifies its tax regime and attracts a similar 15 per cent annual FDI growth, its FDI could grow from 1 billion US dollars to 1.2 billion US dollars annually within five years, adding 5 billion US dollars to GDP over a decade.

Supporting startups and SMEs The Head of Policy and Research at the Tanzania Startup Association, Mr Innocent Mathias, highlighted the critical role startups and small and medium-sized enterprises (SMEs) play in Tanzania’s economic growth, contributing 35 per cent of GDP and employing over 50 per cent of the workforce.

He noted that targeted tax reductions and simplified regulations could significantly lower entry barriers and encourage entrepreneurship.

Supporting this, research in India revealed that tax exemptions for startups during their first five years resulted in an 80 per cent survival rate, compared to the global average of 50 per cent. These policies also contributed to 15 billion US dollars in additional startup funding between 2015 and 2020.

If Tanzania reduces capital gains tax to 5 per cent and exempts startups from the Alternative Minimum Tax, it could encourage the establishment of 1,000 new startups annually, generating 2 billion US dollars in economic activity (assuming 2 million US dollars per startup annually).

Modernising tax administration A senior executive from one of the globally renowned “Big Four” audit firms, which also operates in Tanzania, noted that modernising tax administration through digitalisation is of paramount importance.

This transformation is critical for enhancing efficiency and compliance, particularly as 40 per cent of businesses currently face challenges with timely tax filings.

Rwanda’s e-tax system reduced compliance time from 200 to 88 hours annually, increased compliance rates by 25 per cent and boosted tax revenues by 18 per cent, adding an estimated 200 million US dollars annually.

Kenya’s iTax system achieved a 30 per cent increase in compliance, generating an additional 500 million US dollars between 2016 and 2020.

If Tanzania integrates AI and data analytics, it could see a 15 per cent revenue increase, adding 300 million US dollars annually while reducing filing errors by 50 per cent.

Graduated Corporate Tax Rates Introducing graduated corporate tax rates can promote fairness by reducing the tax burden on SMEs, which constitute 90 per cent of businesses and contribute 35 per cent of GDP, while ensuring that larger corporations contribute proportionately.

Germany’s graduated tax system increased overall tax revenue by 5 per cent annually, equivalent to 15 billion US dollars. For Tanzania, this could translate into a 100 million US dollars annual increase from SMEs and 400 million US dollars from larger corporations.

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Strategic sector incentives Strategic tax incentives targeting key sectors such as agriculture, manufacturing and technology are vital for economic diversification.

Ireland attracted 70 billion Euros (77 billion US dollars) in foreign investment over a decade through targeted incentives, increasing FDI inflows by 12 per cent annually, creating 140,000 jobs and contributing to a 15 per cent GDP rise.

If Tanzania adopts similar policies and increases sector-specific FDI by 10 per cent annually, it could grow inflows from 1 billion US dollars to 1.6 billion US dollars within five years, adding 4 billion US dollars to GDP and creating over 100,000 jobs.

Efficient dispute resolution mechanisms Efficient tax dispute resolution mechanisms are essential for enhancing investor confidence. South Africa reduced dispute resolution times by 40 per cent, recovering 1 billion US dollars annually in disputed revenues.

Tanzania’s FDI inflows, currently at 1 billion US dollars, could increase by 20 per cent (200 million US dollars annually) through improved certainty and reduced business disruptions.

Regular reviews of tax policies are crucial for maintaining relevance and adaptability. Singapore’s practice of annual updates has sustained GDP growth of between 3 and 5 per cent over the past decade.

If Tanzania adopts a similar approach, it could achieve a 2–3 per cent annual increase in GDP—equivalent to approximately 2 billion US dollars in additional output. Sustainability-focused tax reforms can position Tanzania as a leader in renewable energy.

Denmark increased renewable energy production from 22 per cent to 30 per cent within five years, reducing carbon emissions by 15 per cent annually. Tanzania, currently at 37 per cent, could reach 50 per cent within a decade.

This could attract 3 billion US dollars in investment and create over 50,000 jobs. Enhancing Tax Education A certified financial educator from the Bank of Tanzania (BoT) highlighted that improving tax education could significantly enhance compliance.

In South Africa, such programmes increased compliance among SMEs by 10 per cent, generating 200 million US dollars annually.

In Tanzania, formalising 25 per cent of the estimated 3 million informal businesses could yield similar gains. Strengthening anti-avoidance measures Robust anti-avoidance legislation is essential to prevent profit shifting.

Australia’s measures have recovered over AUD 10 billion since 2016, improving compliance among multinational corporations by 30 per cent. Tanzania could generate an additional 300 million US dollars annually through similar reforms.

Tax incentives for the digital economy can unlock new growth. Nigeria’s digital economy grew by 15 per cent annually after introducing tax holidays, contributing 10 billion US dollars to GDP over five years.

Tanzania’s digital economy, currently valued at 1 billion US dollars, could generate an additional 1 billion US dollars annually within five years and create 20,000 high-skilled jobs.

Simplified tax regimes for SMEs can increase compliance and participation. Zambia’s turnover-based tax led to a 20 per cent increase in compliance and generated 50 million US dollars annually.

In Tanzania, formalising 600,000 SMEs could generate 300 million US dollars in additional revenue. Encouraging FDI through tax treaties Serengeti Breweries Limited Corporate Relations Director, Mr John Wanyancha, emphasised the importance of tax treaties in reducing double taxation.

Ethiopia’s agreements increased FDI inflows by 30 per cent, adding USD 2 billion over five years. Tanzania could increase FDI from 1.3 billion US dollars to 1.69 billion US dollars annually through similar agreements.

Promoting PPPs Through Tax Incentives Tax incentives for public-private partnerships can accelerate infrastructure development.

India’s PPP model increased infrastructure investment by 12 per cent annually. For Tanzania, this could translate into an additional 600 million US dollars annually.

Epilogue Through insights from analysts and officials across institutions, it is evident that corporate tax reform is a pivotal tool for unlocking Tanzania’s economic potential.

By advancing policies that balance equity, simplicity and strategic incentives, the reforms can empower local enterprises, foster innovation and drive sustainable growth—positioning Tanzania as a rising economic leader in Africa.