Balancing Act: Can the Golden mean guide agency notices?

Ancient Greece left us enduring ideas about balance. The most profound is Aristotle's Golden Mean—the desirable middle between extremes. Aristotle argued that every virtue balances between two vices: one of excess, the other of deficiency. Too much courage becomes recklessness - too little, cowardice. True virtue, he argued, lies in the middle.

The Golden Mean has influenced much throughout history: Renaissance art and architecture, mediaeval Christian morality, and even modern lawmaking.

Today, these ancient lessons find new life in Tanzania's tax landscape. The Tanzania Revenue Authority (TRA) walks a tightrope, balancing effective tax collection with fair treatment of businesses.

As the TRA confronts the challenges of tax collection, we see a contemporary reflection of Aristotle's age-old question: How do we find the right balance between extremes?

To illustrate, let us consider TRA agency notices. First, some background. The TRA employs two main approaches towards tax collection: self-assessments and tax audits. In self-assessments, taxpayers declare their income and file tax returns by specified deadlines according to relevant tax legislation.

For instance, under the Value Added Tax (VAT) Act 2014, monthly VAT returns must be filed and the corresponding VAT liability paid by the 20th of the following month. Tax audits, on the other hand, involve TRA auditors evaluating whether businesses have properly accounted for their taxes at the time of self assessment.

Following audits, the TRA issues findings for taxpayers to address. Once addressed, assessments are issued where the TRA believes there is an additional liability. Taxpayers then have two options: pay the assessed liability within 30 days if they agree, or file an objection within 30 days, including a minimum tax deposit, if they disagree.

If the original assessment is upheld upon determination of objections, taxpayers can appeal to appellate bodies: the Tax Revenue Appeals Board (TRAB) and the Tax Revenue Appeals Tribunal (TRAT). Once the dispute is settled, the TRA issues an amended assessment, where the assessed tax (if any) is due within 30 days.

It's within this framework of tax compliance that taxpayers encounter the more extreme measures of tax collection, including agency notices. If a taxpayer fails to pay assessed taxes or file objections/appeals within the stipulated time frame (as explained above), the TRA can adopt alternative recovery measures.

These measures typically begin with a demand notice and if the taxpayer doesn't respond or pay within the specified time, an agency notice may be issued to the taxpayer's bank or other third parties holding funds on their behalf.

Agency notices act as directives to third parties, typically banks, to transfer funds from a taxpayer's account to settle outstanding tax liabilities. Authorised under Section 67 of the Tax Administration Act 2015, these notices provide a means of recovering unpaid taxes when standard collection methods have failed.

However, recent practices have raised concerns as the TRA’s use of agency notices has become increasingly aggressive, often straying from the Golden Mean.

Agency notices are frequently issued in contentious situations such as when taxes are still under dispute, before demand notice deadlines have lapsed, sometimes without issuing demand notices or in most cases without taking into account the proof of payments provided by taxpayers.

While agency notices have a role in tax collection, their use should reflect a more balanced approach, as their impact on businesses can be severe and immediate - often freezing taxpayer bank accounts and disrupting daily business operations.

The long-term implications are equally challenging, affecting financial planning and overall business stability. Recently, in cases where agency notices involve matters under dispute at the TRAB or TRAT, taxpayers have typically applied for a stay of execution. However, the time-sensitive nature of agency notices makes it difficult for businesses to prevent their execution, even when they may be unwarranted.

Importantly, this is not a call for leniency from the revenue authority, but for balance. Leniency has its own detriments. You may know the cautionary tale of Icarus from Ancient Greece. His father made him wax-wings and warned him: fly neither too low, where sea spray could dampen them, nor too high, where the sun could melt them.

Ignoring this, Icarus flew too close to the sun and fell to his death in the sea. He needed to find his Golden Mean—not too low (lenient measures) nor too high (strict measures). Balance.

So, how can the TRA find its Golden Mean in tax collection? One approach is to amend the Tax Administration Act to provide taxpayers with a platform to dispute these notices through a formal resolution process.

Additionally, the TRA should implement more checks and balances in the issuance of agency notices, including strict adherence to compliance procedures, to avoid unwarranted actions. Enhancing dialogue with taxpayers could also help as in most cases the Tax Account has not been updated despite the proof of payment provided (in some cases several times).

The goal should be to create a tax environment that encourages compliance while supporting business growth. By recalibrating its approach to agency notices, the TRA can balance the need for revenue with the imperative of fairness, ensuring that the investment climate is not harmed by aggressive tax collection measures but one that is rather based on the correct and fair amount of tax collected.

Anna Lawi is a Senior Associate, Tax Services at PwC Tanzania