Redefining personal tax in Tanzania: A path to innovation and inclusion (Part 2)

BUILDING on the foundation laid in the 27th December publication, this article dives deeper into the urgent need to reform Tanzania’s personal tax system.

Challenges such as widespread tax evasion, underrepresentation of rural populations and the growing yet untaxed digital economy highlight the necessity for innovative and forward thinking solutions.

Imagine a tax system where transparency is standard, compliance is widespread and every citizen feels equally valued and represented – this vision is within reach through well-implemented reforms.

Strengthening international cooperation

In discussing reforms to Tanzania’s personal tax system, Mr Christopher Kalokoala of REMM Associates in Kagera emphasised that enhancing international tax cooperation is a critical strategy.

He noted that Tanzania, like many developing countries, suffers significant revenue losses due to tax evasion, often linked to assets held abroad or income generated by multinational corporations.

These losses, he explained, can be addressed through stronger mechanisms for international collaboration in tax matters.

Mr Kalokoala further highlighted that improving international tax cooperation would enable Tanzania to achieve more accurate and comprehensive reporting of foreign-sourced incomes earned by its residents.

This would involve sharing information and aligning tax policies with other nations to effectively monitor and tax such incomes.

According to him, these measures would not only boost transparency in the tax system but also promote a fairer distribution of tax responsibilities while curbing the offshore concealment of wealth.

To illustrate the potential benefits of such reforms, Tanzania can draw a leaf from other more efficient tax system reforms, such as India’s implementation of the Automatic Exchange of Information (AEOI) which has been instrumental in uncovering undeclared foreign assets, contributing significantly to tax revenue gains.

According to the Hindustan Times, this initiative has led to the identification of approximately 21.8bn Euro in additional revenue from 2009 to 2023, underscoring its effectiveness in enhancing tax compliance and transparency across several countries.

South Africa’s active participation in the Global Forum on Transparency and Exchange of Information for Tax Purposes has significantly boosted its tax administration’s efficiency.

This engagement has enabled South Africa and other African nations to collectively recover over 1.69 billion Euros in additional revenue from compliance initiatives, such as voluntary disclosure programmes and offshore income investigations.

These results, detailed in reports by the South African Revenue Service and the OECD, underscore the financial benefits of committed international tax cooperation and adherence to global transparency standards.

Enhancing international tax cooperation as part of Tanzania’s personal tax system reform would protect domestic revenue, crucial for public services and development.

It would also align Tanzania with global tax standards, improving its international standing and contributing to a fairer taxation environment.

Such reforms would equip Tanzania with the necessary tools to upgrade its tax system in line with successful international practices.

Offer advocacy services

Ms Florida James, a financial analyst with the United States Agency for International Development (USAID) Tanzania country office, underscored the transformative potential of introducing taxpayer advocacy services to reform Tanzania’s personal tax system.

Drawing from the successful model of the US Taxpayer Advocate Service (TAS), she highlighted how such services can demystify complex tax processes, alleviating frustrations and challenges faced by taxpayers.

According to Ms James, taxpayer advocacy plays a pivotal role in guiding individuals through the system, helping them understand their rights and responsibilities, resolving disputes efficiently and fostering effective communication between taxpayers and tax authorities.

Ms James elaborated with examples of TAS’s impactful interventions.

In one instance, a taxpayer received an Offset Bypass Refund to cover urgent medical travel expenses, demonstrating the value of personalised assistance.

In another case, TAS expedited the processing of amended tax returns to correct a significant tax liability, enabling the removal of a travel restriction that was critical to the taxpayer’s employment.

These examples, she explained, illustrate how taxpayer advocacy services could foster trust, improve compliance, and create a more inclusive tax environment in Tanzania.

Additionally, TAS’s annual reports highlight that the service resolves hundreds of thousands of taxpayers’ issues each year, with a high success rate in reducing taxpayers’ liabilities and navigating complex disputes.

ALSO READ: Expert insights on Tanzania’s personal, business income tax systems

Such services in Tanzania could potentially improve taxpayer compliance and satisfaction significantly, leading to a more inclusive and equitable taxation environment.

By adopting similar advocacy services, Tanzania could enhance trust and engagement among taxpayers, mirroring the successes of TAS, where targeted support has led to substantial benefits for individuals and businesses alike, ensuring fair treatment and understanding within the tax system.

Update laws for digital economy

As the digital economy continues to grow, developing countries like Tanzania face the pressing challenge of losing taxable income unless their tax systems evolve.

Ms Rebecca Lianga, Managing Partner at Rebbla Attorneys in Dar-es-Salaam, highlighted the urgency of modernising tax laws to address digital transactions.

She stressed that updating these laws is essential to safeguarding the tax base amid ongoing economic transformation.

According to Mr Lianga, effectively capturing revenue from digital platforms and e-commerce not only prevents tax base erosion but also fosters a fairer and more sustainable taxation framework, aligning with the realities of an increasingly digitalised economy.

Research further underscores this need, citing the success of the European Union’s One-Stop-Shop (OSS) system, a cornerstone of the VAT in the Digital Age (ViDA) initiative.

This system has streamlined VAT processes for cross-border transactions, with projections of increasing VAT revenues by up to 18 billion Euros annually, including 11 billion Euros from anti-fraud measures.

Supporting this perspective, Mr Deogratius Diu from PricewaterhouseCoopers pointed to Australia’s introduction of GST on digital services provided by non-residents in 2017, which has significantly boosted tax revenues, generating an estimated 350 million AUD annually.

Together, these examples illustrate the potential of modernising tax systems to capture digital economy revenues effectively.

These measures reflect a global trend where countries implement digital services taxes or VAT regulations requiring international digital companies to register locally.

Such initiatives not only safeguard the tax base but also create a level playing field between foreign digital entities and local businesses, promoting fair competition and equitable taxation.

This approach has proven effective in enhancing revenue from sectors that traditional tax structures often leave under-taxed.

Ms Phillipina Assenga, a lead accountant for Tanzania’s 50bn/- “Maji Bombani” project, currently underway in Rukwa, highlighted research demonstrating how African nations are successfully adapting VAT policies to tax digital transactions.

She noted that countries like Nigeria, Ghana and Kenya are leveraging existing legal frameworks to streamline administration and effectively capture revenue from the rapidly expanding digital economy.

In Nigeria, non-resident digital service providers are now required to register for VAT, targeting key sectors such as e-commerce and online advertising.

Ghana has similarly mandated VAT registration for foreign digital service providers to tap into the revenue potential of digital platforms.

Kenya, through its Finance Act 2020, introduced a digital service tax on digital marketplaces, complementing its VAT regulations to ensure that digital transactions contribute equitably to national development.

These initiatives reflect a regional shift toward modernising tax systems to effectively harness the opportunities presented by the expanding digital economy, all while maintaining the integrity of existing frameworks.

Implementing these changes in Tanzania requires careful consideration of the global digital economy’s dynamics, ensuring that tax laws are both comprehensive and compliant with international standards to avoid double taxation.

This modernisation would not only secure revenue but also reflect a forward thinking approach to taxation that aligns with global economic trends.

Increase service automation

Mr Victor Tesha, from Isale Group, who also serves as the Vice President of the Tanzania Small Miners Association and the Board Chairman of the Copyright Society of Tanzania, underlined the importance of tailoring tax automation in Tanzania to the country’s rural demographics and varying levels of digital literacy.

He explained that mobile-friendly tax platforms integrated with mobile money services like M-Pesa could make tax registration, filing and payment far more accessible to rural communities.

To enhance usability and outreach, Tesha stressed the need for education campaigns in local languages and decentralised digital kiosks equipped with internet access and trained staff.

He further suggested linking tax accounts to the National ID system to streamline processes and improve compliance, while SMS and USSD technologies could bridge accessibility gaps in areas with limited internet connectivity.

According to Victor Tesha, leveraging data analytics and AI tools to identify untapped taxpayer segments and improve enforcement would further strengthen the system.

Additionally, he advocated for expanding digital infrastructure through partnerships with telecom providers and rolling out pilot programmes to refine and scale these systems.

These initiatives, he concluded, could significantly broaden Tanzania’s taxpayer base, enhance compliance and drive sustainable economic growth.

Further research reinforces the recommendation by examining South Korea’s transition to an e-tax system, a model that holds significant potential for Tanzania as it seeks to automate its tax services.

Starting in the late 1990s, Korea’s National Tax Service (NTS) introduced a comprehensive electronic tax system designed to modernise processes, enhance compliance, and boost administrative efficiency.

The results of this transformation have been remarkable.

By 2020, over 96 per cent of corporate taxpayers and 95 per cent of individual taxpayers in Korea were filing taxes electronically, ensuring greater accuracy and timeliness.

This digital shift also contributed to a substantial increase in tax revenue, which rose from 110 billion US dollars in 2000 to over 230 billion US dollars by 2015.

The system’s transparency and operational efficiency played a pivotal role in achieving these outcomes, demonstrating how strategic automation can drive both fiscal growth and improved compliance.

Automation in Korea’s tax system also reduced administrative costs, with the cost of collecting taxes dropping from 0.91 US dollars per 100 US dollars collected in 2000 to just 0.45 US dollars by 2015.

Additionally, e-invoicing and real-time transaction monitoring significantly curtailed opportunities for tax fraud and evasion by crosschecking transactions and flagging discrepancies.

The system was designed to be user-friendly, with multi-channel access via online platforms, mobile apps and help centres, ensuring widespread adoption even among small businesses and individuals with limited technical skills.

Tanzania can learn from Korea’s success in digital tax administration, emphasising the significant benefits that automation can bring to developing economies.

This transformation underscores the potential for substantial economic returns through digital innovation in tax systems.

Call to action

Tanzania is on the brink of transformative change, with the opportunity to create a personal tax system that fosters equity, trust, and growth.

Strengthening international tax cooperation, modernising laws for the digital economy and embracing automation are essential steps toward building a transparent and inclusive framework that benefits all.

As today, we bid farewell to 2024 and step into 2025, we send our warmest wishes for a joyful New Year’s Eve and a year filled with success, unity and progress.

Let this be a time to reflect, recharge and look forward to the opportunities ahead. Join us on 3rd January for the next issue, where we’ll delve into the recently released IMF report on Tanzania and explore its implications for the country’s ongoing tax reforms.

Until then, Happy New Year! Here’s to a brighter, stronger future for all.