The growth of the internet has dramatically changed how we communicate, learn, and shop. Africa is no stranger to this trend with eCommerce revenues reaching USD 33 billion in 2022. This has brought a new challenge for many tax authorities in the continent. How do you tax a business that sells digital services to your citizens whilst lacking any presence in your country?
Tanzania’s answer to this is the digital services tax and value added tax (“VAT”) on digital services, introduced in July 2022. These taxes were accompanied by regulations outlining how entities will comply. Digital taxes are not novel in the region or the world – they have been introduced in Kenya, the United Kingdom, France, and India to name a few countries.
The digital services tax imposes a 2% tax on the “gross payment” made for a digital service sold in Tanzania, with VAT imposed at the prevailing rate (currently 18%) on the same services. What this means is that when a Tanzanian bank account or mobile money account makes a payment for a digital service, such as for music streaming, digital tax and VAT must be paid to the Tanzania Revenue Authority. Digital services that are offered without payments, like the use of the WhatsApp platform, are not affected by this tax.
The tax is imposed on entities, without any establishment in Tanzania, that sell digital services to Tanzanians. The new regulations require any entity selling digital services in Tanzania to register with the TRA and begin filing and paying these digital taxes from July 2022.
Making digital tax work is not easy. Unlike conventional taxes, these taxes are imposed on entities that are non-resident, so the measures to ensure compliance are limited. So let us explore the ways we can make digital tax work for Tanzania.
Digital services are usually sold as a package that includes non-digital services – services that are already taxed. The current definition may lead to income received for these services being charged twice: through both the new digital tax and existing non-digital taxes charged in Tanzania and beyond. This double taxation creates an unfair tax environment for businesses selling digital services to Tanzanians, hindering digital development in the country.
To address this challenge, the legislation needs to clarify the parameters of the term “gross payment” by excluding payments received for non-digital goods and services from being considered in “gross payments”. It is most likely that these non-digital goods and services are provided in the country, and it is expected that these items will be taxed appropriately.
VAT is only charged on digital service purchasers who are not registered for VAT. A problem arises in determining the status of VAT registration for these purchasers. A quick solution is to collect value added tax registration numbers (“VRN”), but these VRNs cannot be validated at present. To address this problem, the TRA may implement a VRN validation system. This will allow taxpayers to confirm the validity of a VRN provided and charge the VAT appropriate for the transaction.
There is added ambiguity as to how VAT on digital services will be treated in Zanzibar in contrast to mainland Tanzania. This is because VAT is charged separately in Zanzibar and mainland Tanzania. Since we still lack regulations on how this tax will operate in the semi-autonomous archipelago, digital service providers may not know what to do next.
It is vital for lawmakers in Zanzibar to introduce regulations on digital taxes and reach a consensus with the authorities in the mainland to ensure each side can effectively collect this tax from digital service providers.
The legislation allowed digital service providers six months from July 2022 to apply for registration to pay digital tax. The legislation, however, is silent on whether taxes need to be filed for this period, and if penalties and interest will apply for this unpaid tax. Likewise, VAT on digital services was introduced in July 2015, but no infrastructure was available to allow non-resident service providers to comply.
The authorities can solve this matter by amending the legislation and issue a determination on the status of taxes on these retrospective transactions. The government should make it clear to taxpayers on the effective start date for filing and making payments for DST and VAT on digital services after completing the registration process. This will encourage compliance.
Section 35 of the Tax Administration Act, 2015 will require every taxpayer to maintain a primary data server in Tanzania to store tax related documents by July 2023. This poses a challenge for non-resident digital service providers as they lack a presence in the country and maintaining a server of this kind can be expensive. The current regulations on digital tax does not address this issue.
It may be necessary to exempt non-resident digital taxpayers from complying with this provision, as digital tax targets entities that are not based in Tanzania. In addition, this practice might trigger permanent establishments in the country defeating the purpose of taxing non-resident digital service providers.
Digital tax is a salient opportunity to gain revenue that is due from digital service providers not based in the country. As Tanzania continues to grow, so too will its digital economy. It is imperative that the Government tackles these obstacles to encourage compliance.
Dion Kapfumvuti is a Tax Associate with Deloitte Consulting Ltd. He can be reached at firstname.lastname@example.org.
The views explained herein are those of the author and do not necessarily represent the views of Deloitte.