ABCs of withholding tax system in Tanzania

WITHHOLDING tax is a system of tax collection, under which a payer of a specified type of payment is legally required to deduct a specified portion of the amount entitled to the payee and remit that portion to the Tanzania Revenue Authority (TRA).

The person who is legally required to deduct the amount and remit to TRA is called a withholder or withholding agent, whereas the person whose amount is deducted is called a withholdee. In this regard, the withholding agent is technically an agent of the TRA for tax revenue collections and remittances to TRA in a specified manner and timing.

Withholding tax system in Tanzania is governed by the provisions of the Income Tax Act, 2004 (“the ITA”) as revised from time to time. The ITA provides the specific type of payments for which withholding tax should apply. These payments include but not limited to payments for dividend, rent, royalties, professional services fees, interest on loans and insurance premiums paid to non-resident insurance providers.  In addition, the ITA stipulates the withholding tax rates to be applied for each type of payment. The rates range from two percent (2per cent) to fifteen percent (15 per cent), depending on the type of payment and the tax residential status of the payee.

Though technically, the burden of the withholding tax falls on the withholdee (payee), the withholding agent bears the responsibility of computing the correct amount of tax and remitting the same to the TRA within the time stipulated by the law. Where the withholding agent fails to withhold the correct amount tax and remit to TRA, the tax is demanded from him as though the tax was due and payable by him in the first instance. In addition, any failure by the withholding agent to compute and remit to TRA the correct amount of taxes within the statutory time, exposes him to statutory interests and penalties.

When the withholding and payment process is done correctly, the withheld amount is treated as an advance tax payment in the hands of the withholdee. The withholdee shall deduct the withholding tax amount from his annual income tax liability, together with any other advance income taxes paid, in order to arrive at the balance of tax payable for that year. A document known as withholding tax certificate is required to support the withholding tax paid.

It is also worth noting that some payments attract what is technically referred as final withholding tax. Final withholding tax refers to a type of withholding tax under which once the correct amount of tax is withheld and remitted to TRA, such payment should not be subjected additional income taxation in the hands of the recipient. That is to say, the withholding process satisfies the income tax obligation for that income in the hands of the recipient.

Tax matters can be very complicated and can keep you sleepless. To manage your entity’s tax risks properly and sleep soundly, you need the support of competent and experienced tax consultants.

The writer an experienced Tax Consultant, working as a Managing Director for Rook Consultants Ltd and a member of Tanzania Association of Accountants.