Retained earnings tax: Policy shift brings relief, but doubts remain

Initially included in the 2025/26 national budget as part of strategic amendments to the Income Tax Act (CAP 332), the proposal sought to impose a 10 percent withholding tax on retained earnings not utilised within six months.

Although the government argued the measure would broaden the tax base and increase revenue collection, it was met with alarm from businesses nationwide.

Stakeholders warned that taxing retained profits would penalise firms that reinvest earnings in expansion, innovation, and job creation—activities that underpin long-term economic development.

Many saw it as counterproductive to the government’s stated goal of stimulating growth.

In response to the backlash, Finance Minister Dr Mwigulu Nchemba, during the closure of the Finance Bill, 2025 debate in Parliament, announced a revision: extending the holding period to 12 months to accommodate investment timelines and reduce pressure on businesses.

Despite the amendment, concerns persist across sectors.

Experienced tax consultant and entrepreneur, Mr Amani Michael, welcomed the government’s flexibility but argued that the tax should be abolished altogether.

“Yes, the 10 percent withholding tax on retained earnings should be completely removed. More dialogue is needed because this will only harm investments,” he said, reflecting a widely held view among local investors.

The Tourism Confederation of Tanzania (TCT) executive director, Ms Lathifa Sykes, said the proposed tax echoed a broader pattern of unpredictable fiscal policy.

She warned that such measures erode investor confidence and could reverse progress made under initiatives championed by President Samia Suluhu Hassan to attract investment.

Ms Sykes said the introduction of the tax without adequate consultation was symptomatic of policy volatility that discourages long-term business planning.

Adding to the discussion, PricewaterhouseCoopers (PwC) Tanzania’s Tax and Legal Services Partner, Mr Rishit Shah, said the one-year extension “provides some comfort” but stressed the need for clarity around implementation.

“There are still issues of reconciliation... the government must provide more clarity on how this will be handled practically,” he said.

He also flagged potential foreign exchange implications, particularly for multinationals operating in Tanzania.

“This policy could lead to a mass issuance of dividends. If several international companies declare and remit dividends simultaneously, it could trigger movements in the shilling,” he explained.

Mr Shah further questioned the policy’s retrospective nature, urging the government to ensure the measure only applies going forward.

“It should not include earnings from previous financial years,” he said.

Ernst & Young Partner and Head of Tax, Mr Nsanyiwa Donald, also acknowledged the revised timeframe as an improvement but warned it may still fall short of giving businesses adequate room to reinvest profits strategically.

“Twelve months is better than six, but it still may not give businesses enough time to adequately plan and reinvest,” he said.

He suggested that if the tax is retained, it should be applied more selectively.

“Perhaps only 30 or 50 percent of the retained earnings should be taxed. That would strike a fair balance between the government’s need for revenue and the private sector’s need for growth capital,” noted Mr Donald.

He, too, stressed that applying the policy retrospectively would be unfair and damaging.

Despite these concerns, the government's willingness to amend the initial proposal is being seen as a signal that it is open to constructive dialogue and is committed to fostering a more enabling business environment.

However, leading voices in the private sector say the issue is far from settled.

They argue that if Tanzania is to attract and retain investment, it must adopt a more predictable, pro-growth tax regime.

The retained earnings tax proposal has triggered a broader debate about the direction of fiscal policy in Tanzania—one that goes beyond short-term revenue goals to address the structural needs of a growing economy.

In the view of many stakeholders, tax policies should support business development, job creation, and reinvestment—not deter them.

As Tanzania seeks to solidify its place as an attractive investment destination in the region, calls are growing louder for a more strategic and consultative approach to tax reform.