Overpayment of taxes: A dilemma between Utilization and Refund

We have a self-assessment system in Tanzania. Our tax system is set in a way which allows for taxpayers to voluntarily comply with the tax rules. This involves filing of tax returns and payment of taxes. For corporate income tax, taxpayers must first estimate their taxes for the relevant year of income within the three months of its commencement and pay quarterly instalment taxes (if any) across four quarters.

Secondly, the taxpayer will be required to file a final corporate income tax return within six (6) months after the end of the respective year of income. During the preparation of this final corporate income tax return, the taxpayer can claim a tax credit for installment taxes already paid during the year. In case the instalment taxes paid during the year are less than 80% of the final corporate income tax liability, the taxpayer will be penalized for underestimating his income tax liability.

Due to the voluntary compliance nature of our tax system, particularly regarding installment tax payments, there are situations where taxpayers overestimate their tax liabilities, even though they are allowed to revise their estimates quarterly. This in essence leads to overpayment of taxes. This is just one of the instances which can cause an overpayment of tax. There are other many instances which can led to an overpayment of taxes such as an error when making payment, availability of withholding tax credits etc.

What happens when a taxpayer has overpaid taxes?

Section 71 of the Tax Administration Act, Cap 438 RE 2019 (“TAA”) requires a taxpayer who has paid tax in excess to apply for a refund within three years from the date of the overpayment. Therefore, whenever there is an overpayment of taxes a simpler route is for application of a refund. However, this process is not as straightforward as it appears. Section 73 of the TAA requires for the Commissioner General (CG), once satisfied that there is actually tax paid in excess to do the following; firstly, if there are any taxes due from the taxpayer, the CG is required to offset the excess tax against any tax due; and secondly, refund the balance
plus interest. But what if a taxpayer wishes to use the excess tax payment to
cover other tax liabilities instead of receiving a cash refund?

Section 73(1) of the TAA provides for two separate events. They are the utilization of tax paid in excess against any tax due and refund of tax paid in excess. Although these events are separate, they are interconnected since utilization precedes refunds. Another important point illustrating their distinction is the process of setting in motion of each event. Section 71 of the TAA provides for the processes one has to follow in order to set in motion the second event (i.e., application for refund of tax paid in excess). Unfortunately, neither the TAA nor any other tax laws as defined by TAA provides procedures for initiating the first event (i.e., utilization of tax paid in excess).

In the absence of specific guidelines, one must turn to and closely examine section 73 of the TAA. Section 73(1) of the TAA requires a Commissioner General (“CG”) to be satisfied first, before allowing or applying the tax paid in excess to offset any tax due. An important question arises, how will the CG be satisfied? There can be several ways for the CG to be satisfied and allow utilization of tax paid in excess, however, the crucial one is that when the CG has conducted an audit on the Company and issued a notice of adjusted assessment which confirms the additional tax liability or tax paid in excess.

Another key way is through the use of a reasonable step whereby one can by notifying a CG through a letter that there is a tax paid in excess and request the same to be utilized against any tax due.

In practice, when a taxpayer notifies the CG for the utilization of the excess tax paid, they are informed that the taxpayer has to apply for a refund first. This becomes a problem when the three years limit has lapsed. A taxpayer will be slapped with a response that the application is time barred and cannot be refunded. However, the taxpayer will argue that they do not want a “refund” which has been limited by section 71 of the TAA but utilization of the excess tax paid in accordance with section 73 of the TAA.

While the three-year time limit for refund applications makes sense from a government cash flow perspective, it’s important to note that the law doesn’t impose any time limitation on the utilization of excess tax payment. What is restricted is the concept of a “refund,” usually referring to a cash reimbursement of overpaid taxes. Thus, merging these two events—utilization and refund, as commonly practiced—can lead to unintended outcomes when a taxpayer wishes to apply their excess tax payment against other tax liabilities. Despite their apparent interdependence, utilization and refund are distinct events. In order to achieve clarity as one of the principles of good taxation as stated by Adam Smith, the law could be amended and provide for procedures where a taxpayer wants to utilize his excess tax.

Charles Kitali is a Tax Manager at Deloitte Consulting. He can be reached at ckitali@deloitte.co.tz.The views explained herein are those of the authors and do not necessarily represent the views of Deloitte.