Introduction

The rapid evolution of technology has fundamentally transformed business operations, shifting from traditional physical methods to dynamic digital platforms. Today, an increasing number of transactions and interactions occur online, with businesses and individuals engaging in digital commerce without any physical contact. This transformation presents significant challenges for revenue collection as it introduces a new tax base associated with online transactions. The Organisation for Economic Co-operation and Development (OECD) has highlighted this shift as a critical challenge for modern tax regimes, particularly the difficulty of taxing transactions that occur across jurisdictions without having a physical presence. This article explores the current state of taxation on digital services in Tanzania, examining the emerging challenges and the strategies being employed to address them.

Taxation of electronic services in Tanzania

Like many other countries, Tanzania has undertaken significant efforts to ensure that revenues generated through online transactions are properly taxed. These efforts have involved updating the existing legal framework to integrate digital transactions into the current tax system.

The year 2022 was a turning point toward taxation of transactions conducted on digital platforms following the introduction of digital service tax by the Finance Act, 2022. This law introduced key amendments to the Value Added Tax Act, Cap. 148 R.E. 2019 and the Income Tax Act, Cap. 332 R.E. 2019, broadening the scope of taxation to encompass transactions conducted on digital platforms. Specifically, the amendments expanded the definition of the term "business" to include activities and transactions in the digital marketplace, thereby recognising them as electronic services. Following these amendments, section 51 of the VAT Act provides the definition of "electronic services" to include any services provided or delivered via the internet. This includes, but is not limited to, services such as website hosting, remote maintenance of programs and equipment, software and its updates, digital content like images, text and information, access to databases, self-education packages, music, films, games, and various types of broadcasts and events. The definition also covers online intermediation services, online advertising services and online data services. Under the current framework, electronic services are subject to both income tax and value added tax (VAT), in the form of digital service tax (DST) and withholding tax under the Income Tax Act, and VAT under the VAT regime.

The DST targets the gross income that non-resident suppliers of electronic services generate from Tanzanian consumers. The objective of this tax is to ensure that income earned from Tanzania by these suppliers is taxable. The Income Tax Act imposes a 2% DST on non-resident suppliers. Additionally, a withholding tax of 3% applies to owners of digital platforms facilitating the exchange of electronic services when making payments to resident persons.

Under the VAT regime, electronic services are classified as taxable supplies subject to VAT at a rate of 18%. A provider of electronic services to a Tanzanian resident user that is not registered for VAT purposes is responsible to remit VAT to the Tanzania Revenue Authority (TRA). Where the user is VAT-registered, the law requires the provider of electronic services to account for VAT under the reverse charge mechanism. This means that the Tanzanian user must charge VAT to the non-resident service provider and remit the same to the TRA. 

Administration of taxes associated with electronic services

In ensuring effective administration of the above taxes, two regulations were enacted: the Income Tax (Registration of Non-Resident Electronic Service Providers) Regulations, GN No. 478U of 2022 and VAT (Registration of Non-Resident Electronic Service Providers) Regulations, GN No. 478Q of 2022. These regulations impose various obligations to providers of electronic services.

Registration requirement

These regulations require providers of electronic services to register with the Commissioner General of TRA for income tax and VAT. Regulation 4 of the Income Tax (Registration of Non-Resident Electronic Service Providers) Regulations requires non-resident electronic service providers providing electronic services to residents in Tanzania to apply for registration as taxpayers for the purposes of paying DST and remit DST at a rate of 2% of the gross value or revenue generated from Tanzania and withholding tax at the rate of 3% on every payment made to a resident person. 

For VAT, regulation 4 of the VAT (Registration of Non-Resident Electronic Service Providers) Regulations requires a non-resident electronic service provider to apply for VAT registration. VAT is computed at a rate of 18% with no right to claim input tax.

Requirement to file returns

The requirement to pay taxes for electronic services providers comes with the obligation to file returns, in which case the registered non-resident electronic service provider is required to file an online return on a monthly basis stating the tax payable (DST and withholding tax) in respect of electronic taxes, as well as VAT returns. 

Payment of tax

According to regulation 9 of GN No. 478Q of 2022 and regulation 7 of GN No. 478U of 2022, payment of tax by non-residents is to be made to a bank account designated by the Commissioner General in Tanzanian shillings or its equivalent convertible currency at the prevailing exchange rate as published by the Bank of Tanzania on the date of payment. Payment of tax is to be carried out on the date of filing returns.

The two regulations impose penalties and interest for non-compliance with the above requirements. The penalty for false or misleading statements is 50% of the tax shortfall where the statement or omission is made without reasonable excuse and 75% of tax shortfall where the statement or omission is made knowingly or recklessly. Additionally, failure to comply with the registration requirements under the regulations is an offence and could lead to a fine of no less than 200 currency points and no more than 300 currency points, or to imprisonment for a term not exceeding three years, or to both a fine and imprisonment, in addition to imposing interest on the unpaid taxes. 

Enforcement

Tanzanian tax laws apply to any revenue sourced from within Tanzania. For electronic services, the source of payment is considered to be Tanzania if the recipient of the services is based in Tanzania. This determination is made based on several factors, including the recipient's payment proxy (such as credit or debit card information and bank account details) being registered in Tanzania, or their resident proxy (such as billing address or home address) and access proxy (such as internet address or mobile country code) being located in Tanzania.

Implementing and enforcing taxation on electronic services presents several challenges. A major issue is ensuring compliance among non-resident service providers, given the borderless nature of the digital economy. Ensuring that every provider of electronic services registers for income and VAT as well as ensuring that all taxes are paid may be challenging tasks to the TRA. The TRA must rely on international cooperation and information exchange to identify and pursue non-compliant providers, which can be complex and resource-intensive.

Another challenge is the potential impact on consumers. Following the administration difficulties in taxation of electronic services which lead to additional costs, the additional tax cost may be passed on to consumers, leading to higher prices for digital services. This could potentially limit access to certain services, particularly in a developing country like Tanzania, where affordability is a key concern to consumers.

Conclusion

The taxation of electronic services in Tanzania represents a critical step in adapting the country's tax system to the realities of the digital economy. While challenges remain in enforcing compliance and managing the impact on consumers, the framework provides a foundation for capturing revenue from a growing sector of the economy. For businesses, understanding and complying with Tanzania's VAT requirements is essential to avoid penalties and ensure smooth operations in the market.