Tanzania International Tax Law: Understanding the import taxation regime (4)

This fourth and second last part of our mini-series on the Tanzanian import taxation regime seeks to explain the significance of Incoterms (or International Commercial Terms) in international trade—in essence, the export and import of goods and services—and particularly for Tanzania, given its strategic geographical location epitomized by the major seaport of Dar es Salaam that provides access to markets globally.

As Tanzania’s trade and economic relations with Canada, China, Germany, India, Japan, Kenya, South Africa, the United Arab Emirates, the United Kingdom and other partners have continued to expand, it’s crucial for businesses to understand Incoterms clearly and their tax implications.

Let’s start off with a hypothetical but relatable example. Blasts took place at a storage yard located at a container terminal in the deep port of Mina Jebel Ali in Dubai last month. A Tanzanian importer who had two containers at the port told his broker that the marine cargo underwriter could pay him $225,000 for loss of the containerized goods. The broker asked the importer about the Incoterms used when purchasing the goods.

The importer, who had obtained the necessary marine insurance, stated that he purchased the goods ‘Free on Board (FOB)’. Now, recapture the blasts took place prior to loading the containerized goods on the ship. Here, liability for loss of the goods is assumed by the importer’s supplier (seller)—not the importer (buyer).

This example illustrates the needs to take care when using Incoterms since they deal with specific transportation and delivery modes. Other Incoterms are Cost, Insurance and Freight (CIF), Ex Works (EXW), Delivery Duty Paid (DDP), and Free Carrier (FCA).

FOB and CIF are used exclusively for ocean bound freight. FCA can be used for any mode of transport, including multimodal transportation. Under FOB, the seller retains title and risk until the goods are loaded on the ship, but under FCA the seller retains title and risk until the goods are delivered at a destination hitherto outlined by the buyer (importer).

DDP is used if the seller is responsible for delivering the goods and, thus, paying import duties and other levies and fees related to importation of the goods. In comparison with EXW—under which the seller assumes no liability for the loss of the goods after producing and delivering the same to buyer’s (importer’s) warehouse—DDP embodies minimum obligations for the seller.

As can be easily discerned from the above, Incoterms are a set of pre-determined commercial terms. Developed and published by the International Chamber of Commerce (ICC), Incoterms have gained worldwide acceptance for use in international commercial transactions.

The justification for using Incoterms is to prevent confusion around how to interpret shipping terms by clarifying precisely the responsibilities and obligations of sellers and buyers for the delivery of goods under sales contracts.

It’s advisable for businesses to reference in every sales contract a specific version of Incoterms; as of today, Saturday 1 March 2020, the latest version is the Incoterms 2020 rules.

Tax implications

When goods exported from say India (origin country) arrive at the seaport of Dar es Salaam in Tanzania (destination country), the Tanzania Revenue Authority will, subject to exceptions stipulated in the tax laws, impose import duties on the goods before allowing such goods to be freely ‘distributed’ in Tanzania.

In the first three parts of this mini-series, we learnt that the import duties include customs duty, excise duties, and import VAT. In addition to import duties, the importer of record will be responsible for paying other levies and fees (e.g., railway development levy (RDL) and customs processing fees).

Including an erroneous Incoterm in an international sales contract can result in surprising costs and tax liabilities, especially if the goods have been sold to a Tanzanian importer on the DDP Incoterm.

As earlier noted, the use of the DDP Incoterm means that the Indian seller is the importer of record and, consequently, responsible for customs clearance in India (exporting, origin country) and in Tanzania (importing, destination country). This situation may necessitate VAT registration for the Indian seller in Tanzania since the Value Added Tax Act, 2014 would treat the sale of goods as occurring in Tanzania, thereby requiring local VAT to be charged.

The Incoterms 2020 rules came into force on 1 January 2020. Therefore, it is time for businesses in Tanzania and worldwide to review their international sales contracts and the set of Incoterms to evaluate potential risks and to ensure that the chosen Incoterms rules are consistently indicated in the order form, purchase order, sales contract, and invoice.

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Paul Kibuuka ([email protected]), a tax and corporate lawyer and tax policy analyst, is the chief executive of Isidora & Company and the executive director of the Taxation and Development Research Bureau.