Tax reforms: A glimmer of hope for a promising future

July 1st, 2023 marked the commencement of the new fiscal year 2023/24 (“year”). The year coincides with the endorsement of the Finance Act, 2023 (“Act”) constituting a raft of tax amendments in relation to direct and indirect taxes i.e., income tax, value-added tax (VAT) and excise duty.

Considering all efforts undertaken for the purpose of championing a conducive business environment over the past years, all attention was on the pro-business tax reforms that would be endorsed for the year.

Specifically, on tax reforms that would likely champion the flow of investment capital towards the country, clarify the ambiguous tax provisions, facilitate the ease of tax administration in the country, set the foundation for an expansion of the tax base and address the inflationary pressure triggered by the unprecedented set of events such as the ongoing Russia-Ukraine conflict.

A few weeks after the start of the year, it is high time for a verdict on whether the same has been delivered in terms of pro–business tax reforms and to what extent.

In a nutshell, it is time to analyze the relevancy of the endorsed tax reforms against the prevailed wishes of tax stakeholders prior to the start of the year.

Though tax stakeholders had fronted several proposed tax amendments aiming to clear hurdles impeding the flow of investment capital towards the country, the recurring tax proposal on the same has been on “change in control provisions specifically section 56 of the Income Tax Act, 2004 (ITA).”

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

Historically, the provisions of section 56 had intended to capture the indirect/overseas share disposals that had an effect on the underlying ownership of the resident entities. However, the wording of the said provisions had unintended consequences as the same was capturing domestic share disposals as well as allotment of new shares in resident entities.

The Act has now amended the said provision to the extent that the allotment of new shares in resident entities and domestic share disposals in resident entities will be excluded from such application.

Regarding ambiguous tax provisions, tax stakeholders had hoped for the Act to embody clarity and avert unnecessary tax disputes between taxpayers and the taxman attributed to unclear tax provisions.

To appreciate the significance of clarity in tax provisions, it is relevant to revisit the recent events that transpired in Uganda. In the past few weeks, Uganda made headlines as its parliamentarians (MPs) rejected the proposed introduction of digital services tax at a rate of five percent (5%). The rationale behind rejecting such a proposal was lack of clarity in terms of scope of its applicability.

The essence of clarity when it comes to tax laws should never be underestimated. Lack of clarity has given rise to a multitude of tax disputes between taxpayers and revenue authorities. For instance, several stakeholders opine that clarification against ambiguous tax provisions might aid a ton in addressing tax case backlogs marring our appellate machinery (Tax Revenue Appeals Board, Tax Revenue Appeals Tribunal and the Court of Appeal).

Thus, the Act’s efforts to clarify ambiguous tax provisions in form of special taxation for players in the transportation sector (as well as a downward revision of the applicable income tax rates) and a requirement on contractors to submit the names of all persons contracted and subcontracted during the performance of their business or carrying out any project (introducing a window of thirty (30) days to do that), have been well appreciated.

Further clarity has been in form of technical interpretation of the terms “storage facility” and “owner” (a requirement for the establishment of storage facility with regards to goods stored for business purposes) and timeline in relation to the institution of tax refund (including the date a tax decision giving rise to a tax refund is communicated).

The Act’s endorsed proposal of adjusting inflation on excise duty prospects on a three (3) year modality has been widely commended by the tax stakeholders as the same will champion fiscal policy predictability and stability.

In my view, the Act has to a greater extent tried to stimulate a pro-business / investment environment through the endorsed tax reforms which will help to champion clarity against ambiguous tax provisions, spur the flow of investment capital towards the country, facilitate the ease of tax administration in the country (operationalization of the tax ombudsman) and set the foundation for addressing inflationary pressure in future.

However, there is still much to be done to ensure tax policy truly becomes a cherry on the pro-business/investment cake meaning there are still several tax provisions that need to be reviewed and amended. To mention a few, the provisions on a controlled foreign corporation (CFC), loan – write-offs, and tax refund upon lapse of ninety (90) days from Commissioner General (CG) of the TRA receipt of tax refund application.

Though the provisions of tax law stipulate that the CG should determine the submitted refund application within ninety (90) days, there is no clarity in terms of the next steps for taxpayers upon the CG’s failure to abide by such requirement (whether the failure should give rise to automatic approval on such refund).

In terms of the loan write-offs, clarifying the term “all reasonable steps taken” with regards to pursuing debt claims will be a welcoming move specifically based on the size of the financial institution as well as the nature of the credit disbursed, for example, what suffices as all reasonable steps taken with regards to digital mobile loans.

The deeming of the resident corporations with non–resident shareholders as controlled foreign corporations (CFC) pursuant to the provisions of section 75(6) of the Income Tax Act (ITA), 2004 is derailing the investment growth efforts. The deeming provisions results in the taxation of unallocated income (retained earnings) of such resident corporations through imposing withholding tax (WHT) on deemed distributions from the unallocated income.

In conclusion, the Government should maintain its pace of engagement with the private sector to discern tax provisions that are pain points to the business community and devise the best way forward to address ambiguous tax provisions.

Benedict Kombaha is a Tax Supervisor with KPMG in Tanzania ([email protected]). The views and opinions are those of the author and do not necessarily represent the views and opinions of KPMG.