The core nature of Not-For-Profit Organizations operating for social or philanthropic purposes has raised ambiguity on the tax laws applicable to them. They often assume that they are automatically tax exempt, which is a mistake. Tanzania has specific tax laws that govern not-for-profit organizations. These laws outline the exemptions and concessions that NGOs may be eligible for, as well as the reporting and compliance requirements that they must meet.
As directed by the Income Tax Act, for an NGO to be eligible for tax relief, it needs to apply for a charitable status and further be granted this exemption by specific tax law, provision of the law or by an order published in the government’s gazette. The first point to note is therefore that a ‘charitable status’ for income tax purposes is not automatic because an organization does charitable work.
Section 64 of the Income Tax Act, 2004 necessitates that for an NGO to be considered a charitable business they must be organized and operated exclusively for the relief of poverty or distress of the public, the advancement of education and the provision of general public health, education, water, road construction or maintenance. This section further states that NGOs have to be issued with a ruling by the Commissioner General stating it is a charitable organization or a religious organization.
Charitable status is obtained by making an application for private ruling to the Commissioner General. The applicant must make a full and true disclosure of all aspects of the arrangement to which the ruling applies. The arrangement proceeds in all material respects as described in the application for the ruling (Section 11(4) of TAA). Any deviation from information provided in the application may result in revocation of the ruling by the Commissioner even if the ruling is operational. Organizations that do not meet these requirements may still be organized as non-profits, but they will not be treated as a charitable business.
But even a charitable status does not provide one a tax exemption. Section 64 of the Income Tax Law provides that a charitable organization is treated as conducting a business with respect to its functions referred to as a charitable business. Therefore, regardless of whether Not-For-Profits has charitable status ruling, it will be obligated to pay income tax if it ends up in a tax payable position after necessary adjustments are made to the tax computation.
In a nutshell, NGOs, just like for-profit companies, are required to determine their taxable income by subtracting all tax-deductible expenses and including all non-tax-deductible expenses from their gross income. NGOs with a charitable status are allowed an extra deduction of twenty five percent (25%) of the organisation's income from its charitable business calculated without any deduction. This is really the only benefit of having a charitable status. Usually, NGOs find themselves in a tax loss (or in a tax NIL position) after making these adjustments and hence aren’t subjected to paying any taxes. This should not be confused with having an automatic exemption.
Though a Not-For-Profit Organization may not be required to pay income tax by reasons that they are charitable organizations or any other reason, they are required to file Statement of Estimate Tax Payable (SETP) and final return of income summarizing their annual income tax position and may be subject to regular audits by the Tanzania Revenue Authority.
It is important to note that an organisation’s tax exemption does not exempt its employees from taxation. Accordingly, NGOs are required to properly account for all employee related costs such as PAYE and SDL, as well as social security and Worker’s Compensation Fund obligations. This is of course unless there is an express exemption that is specific to such payroll taxes.
In summary, NGOs in Tanzania are subject to various tax laws that govern their registration, operation, and tax obligations. To ensure compliance with these laws, NGOs should work closely with their legal and tax professionals to understand their obligations and to take advantage of any available tax reliefs, exemptions or other benefits.
Louise Mhada is a Tax Associate at Deloitte Consulting Limited. The views expressed are her own and not necessarily those of Deloitte. She can be reached at email@example.com