Tax reform can widen the tax base and improve the business environment

In July 2015 the World Bank issued the 7^th edition of its Tanzania Economic Update publication, with the theme “Why Should Tanzanians Pay Taxes? The unavoidable need to finance economic development”.  The publication argued that higher tax revenues will only come if a comprehensive approach is adopted to taxation.  It noted that on the one hand the tax system has to be affordable, fair, simple and transparent, but on the other hand the Government has to be accountable for the money it is receiving.

In February 2016 media reports quoted the UK High Commissioner to Tanzania, Ms Dianne Melrose, as passing on Prime Minister David Cameron’s commendation for the Government “walking the talk” with regard to efforts to strengthen revenue collections, institute austerity measures in public spending and curb corruption.  So what has happened?

Well, so far as the expenditure side a number of steps to ensure a greater focus on accountability including restrictions in relation to foreign travel, public celebrations, workshops and seminars in hotels. 

On the revenue side the immediate priority has been to increase collections. A year ago collections for the 10 months to April 2015 were only 6% up on the previous year and were 11% short against budget. By contrast collections for the 10 months to April 2016 are up 25% on prior year and broadly on budget.  All three departments of the Tanzania Revenue Authority (“TRA”) have achieved good collection increases on prior year including: 29% for Customs & Excise (responsible for taxes on imports), 19% for Large Taxpayers Department, and 24% for Domestic Revenue Department. 

Nevertheless, the tax base remains narrow with Domestic Revenue Department generating only 18% of total collections, with the remaining 82% generated in broadly equal measure by taxes on imports and taxes generated by large taxpayers (who number less than 500).  In addition, the significant increase in recent collections (in terms of Tanzania shillings) also has to be contextualized (especially in relation to taxes on imports) against the devaluation of approximately 25% against the USD in the 2014/15 financial year, with much of the devaluation coming in the second half of that year. 

Some controversy has been generated by the views expressed in a recent article in the Economist magazine in relation to the business environment in Tanzania.  The article included references to “….little interest in wider reforms aimed at spurring economic growth. If anything …… making it tougher to invest in a country that already scores dismally on the World Bank’s ease of doing business index”.  As this Government only took office late last year, it is too early to call out the jury on progress on business enabling policy reforms.  But what is clear is that such policy reforms are a major priority given Tanzania’s current business environment ranking - including 139th out of 189 countries in the World Bank Doing Business Report 2016 (“WB DBR”), and 120^th out of 140 countries in the World Economic Forum’s Global Competitiveness Report 2015/16 (“WEF GCR”).

Pertinently, of the 10 indicators considered to arrive at the overall WB DBR ranking, the second worst performing indicator for Tanzania is the “Paying Taxes” indicator where it ranks 150th out of 189 countries - and ranks worst within the East Africa Community (with Rwanda 48^th, Kenya 101^st, Uganda 105^th and Burundi 111th).  Consistent with this the WEF GCR’s ranking of the most problematic factors for doing business in Tanzania ranks “tax rates” as 4^th, and “complexity of tax regulations” as 7^th.

An improved rating in these indices should certainly be achievable.  In particular, in Rwanda we have an example of a neighbouring country that performs exceptionally both in the WB DBR (62^nd out of 189) and the WEF GCR (58^th out of 140). And with Rwanda being round the corner, no need for a distant study tour!

As stated in the World Bank’s July 2015 Economic Update publication, one foundation to ensure higher tax revenues is a tax system that is affordable, fair, simple and transparent.  This Wednesday’s Budget will be the new Government’s first opportunity to demonstrate its commitment to bringing about such a tax system.

David Tarimo, Country Senior Partner – PwC Tanzania.  The views expressed do not necessarily represent those of PwC.  For updates from PwC on tax and other matters, follow @pwc_tz.