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Tax Alert
TRA
Practice
Note
01/2013

Withholding tax
on services
September 2013

Withholding tax on services

A recent development is the publication by the Tanzania Revenue Authority (TRA) of a practice note (Practice Note 01/2013), which seeks to
clarify (i) certain aspects of the implementation of the new 5% withholding tax on payments to residents, and (ii) the interpretation of the source
rules regarding payments to non-residents. The practice note can be accessed at http://www.tra.go.tz/index.php/publications.
In this tax alert we summarise the contents of the practice note under the following headings:

Administrative Requirements

Payments to Residents

Payments to Non-Residents

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September 2013
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Administrative Requirements
Actions required by withholders

Actions required by withholdees

The practice note reminds taxpayers of the following administrative

requirements imposed by the Income Tax Act (ITA) 2004 in relation
to anyone who has an obligation to withhold tax, namely:
Due date for payment being 7 days after the month end
(Section 84(1) ITA 2004)
Monthly withholding tax certificate to be issued to each
withholdee within 30 days of the month end (Section 85
ITA 2004)
Six monthly withholding tax return to be filed with the
TRA within 30 days of each 6 month period (Section 84(2)
ITA 2004)

The practice note does not provide guidance to withholdees in relation

to the process for claiming withholding tax credits something that is
of particular importance in relation to the new 5% withholding tax.
However, in terms of the law, where tax has been withheld at 5%, then
the withholdee is entitled to claim a credit for such withholding tax.
This is on the basis of Section 87 ITA 2004 which provides that the
withholdee of a payment that is not a final withholding payment
shall be treated as having paid any income tax withheld .and the
withholdee is entitled to a tax credit in an amount equal to the tax
treated as paid for the year of income in which the payment is
derived.

The forms for the monthly withholding tax certificate and for the six
monthly withholding tax return can be downloaded from:
http://www.tra.go.tz/index.php/forms/151-domestic-revenue-forms
(where you will see links for "ITX 234.01.E - Withholding Tax
Certificate on Service Fees" and "ITX 230.01.E - Withholding Tax
Statement").

To ensure that tax credits are claimed on a timely basis, withholdees

need to ensure that withholding tax certificates are obtained from
their customers on a timely basis, and then that the tax credit claim is
also made on a timely basis. Bearing in mind that tax payments are
due on a quarterly basis, we would recommend that withholding tax
certificates are also filed on a quarterly basis so that credit is
immediately claimed for the withholding tax. This process will cause
significant administrative challenges both for taxpayers and TRA.

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September 2013
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Payments to Residents
Background

Payments excluded from withholding

In our Finance Bill newsletter (issued on 21 June 2013), we

highlighted our concerns with regard to the new 5% resident
withholding tax on services (which is to be deducted by businesses
when making payments to suppliers of services) which as drafted
appeared to apply to:
All types of services without restriction
All types of payee without restriction (for example, it is
irrelevant whether the payee is VAT or TIN registered)
All payments no matter how small

The practice note also confirms that amongst the payments excluded
are the following:
Water and electricity
Services ancillary to acquisition of goods
Medical services
Certain services related to agricultural products:
marketing, auctioneering, extension services, processing
Service fee charged by a bank or a financial institution
Insurance premium, insurance agency or brokerage
services etc.
Transport services, except the commission and fees
thereon
General cleaning or sanitation services
Transmission of messages by any apparatus

As advised in our Finance Act 2013 newsletter (issued on 22 July

2013), the Finance Act itself did not include any changes to the
wording set out in the Finance Bill. However, the new practice note
does give further guidance on the nature of payments subject to the
new withholding tax.
Payments covered
The practice note clarifies what is included by stating that the service
fee should be for provision of professional or consultancy services or
other such services of an independent business character i.e. other
than remuneration for employment. The services include scientific,
literary, artistic, educational or training activities as well as
activities of physicians, surgeon, lawyers, engineers, architects,
surveyors, dentists, accountants and auditors.

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As with any other withholding tax there is also no obligation to

withhold where:
Payments are made of amounts that are exempt from
income tax (Section 82(2)(c) ITA 2004)
Payments are made by individuals unless made in
conducting a business (Section 82(2)(a) ITA 2004)
Payment in respect of services provided by the Government
including Government Agencies and Local Authorities
related to their statutory functions of the Government,
except amounts derived from business activities that are
unrelated to the functions of government (Paragraph 1(b)
of Second Schedule to ITA 2004)
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Payments to Residents (Contd)

Our comments
Our Finance Bill newsletter had highlighted a number of concerns
with this new withholding tax including:
Administrative inconvenience and cost (both to the
taxpayer and the tax collector),
Cash flow cost to many taxpayers where not sufficiently
profitable to absorb the withholding tax credits,
Absolute costs (and therefore double tax) where
administrative difficulties (for example, in obtaining
withholding tax certificates from payers) result in
withholding tax credits not being claimed.
Our suggestion had been that such a withholding tax be limited to
certain defined types of services (where there is a genuine concern as
regards loss of revenue) and should not apply to payments is made in
respect of a fiscal receipt generated by an electronic fiscal device (as
the Tanzania Revenue Authority will already have a record of the
transaction).
The practice note does help in identifying payments covered and
payments excluded, but in our view does not go far enough as there is
no automatic exclusion for fiscal receipts.

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In addition, the practice note is not completely unambiguous, in

particular:
If the subject matter of the withholding tax is limited to
professional or consultancy services or other such
services of an independent business character, then the
question arises as to why there is a need to make reference
to the extensive list of exclusions of items that do not fall
within this description. In other words, is the correct
approach to look at what is specifically included /
mentioned in the practice note and not withhold from
anything else, or does one withhold from everything other
than items listed as specifically excluded?
It is not completely clear how wide some of the exclusions
are to be interpreted as being. For example, does the term
transmission of messages cover all electronic
communication services, and where does one draw the
borderline as to when a service is and is not ancillary to the
acquisition of goods?
Where there are clear cases of doubt, taxpayers may wish to seek
formal confirmation from TRA as to whether particular types of
payment are subject to this withholding.

September 2013
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Payments to Non-Residents: source rules

Services Source rules

Case law

A non-resident (without a permanent establishment) is subject to

withholding tax on income that has a source in Tanzania. Where the
payment to a non-resident is in respect of services, then the general
rule regarding the source of payments for services is set out in section
69(i) ITA 2004 which refers to the following:

In February 2011 in the case of National Microfinance Bank Plc V

Commissioner General (Appeal No 32 of 2010), the Tax
Revenue Appeals Board had confirmed that place of performance was
the determinant of source for services supplied from overseas and
therefore withholding tax was not applicable in relation to the services
in question. In February 2012, on further appeal to the Tribunal
(Appeal No 7 of 2011) this ruling was overturned but the ground for
this reversal was not a differing opinion with regard to the general
source rule applicable to withholding tax on services (section 69(i) ITA
2004) but rather a finding that the source rules relating to
transmission of messages (section 69(h) ITA 2004), and which refer to
location of apparatus used for transmission, were applicable.

payments, including service fees, of a type not mentioned in

paragraphs (g) or (h) for or attributable to employment
exercised, service rendered or a forbearance from exercising
employment or rendering service (i) in the United Republic, regardless of the place of
payment; or
(ii) where the payer is the Government of the United
Republic, irrespective of the place of exercise, rendering or
forbearance;
Commentary in practice note
The practice note includes narrative referring to source rules, but the
narrative in this regard is wider than the legislative provisions cited
above. In particular, in addition to referring to place of performance in
determining source, the note also states that a payment will have a
source in Tanzania where the results of the activities are directed to
or utilized or benefitted by residents of the United Republic. The
basis for this statement is unclear, but is consistent with TRAs more
recent approach of disputing that the source of services is determined
by the place of performance.
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More recently in December 2012 the Tax Revenue Appeals Board

ruled in the case of Tullow Tanzania BV v Commissioner
General (Appeal No 10 of 2011), a decision which appears to have
cast doubt on the relevance of place of performance of services in
determining source (at least in the specific circumstances of that case).
This decision was arrived at without any clear explanation as to why
one should disregard the clear wording in section 69(i) ITA 2004
referring to the place of performance of services. The narrative in the
practice note may be a consequence of this ruling. An appeal against
the ruling was made to the Tax Revenue Appeals Tribunal, and its
written ruling is anticipated in the near future.

September 2013
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About PwC

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About PwC
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