Q&A – 16 December 2013
Permanent establishment in Tanzania
We are going to start servicing some companies in Tanzania but do not want to be registered locally since we will end up paying double taxes. Is there a way we can exist in Tanzania not having to register here for example by supplying from outside the country? We want the minimum tax burden in Tanzania. Please guide.
GY, Dar
You have not specified the kind of business you intend to carry on in Tanzania, but generally speaking you will have to register locally here to be able to continue to operate from Tanzania. You can either incorporate a newly registered entity under certificate of incorporation, or register a branch office under certificate of compliance.
From a tax angle, a foreign entity without a head office or effective place of management in Tanzania is automatically deemed to be carrying out a taxable activity in Tanzania, provided that it is deemed to have a permanent establishment in the country. This deemed presence can arise where you carry on business having an agent (to avoid registering locally), or are using or installing substantial equipment or machinery, or conducting supervisory work at a construction, assembly or installation site for more than six months.
It must be noted that should your employees or representatives stay in the country for more than 183 days per year, that will also trigger their and likely your tax presence in Tanzania.
The permanent establishment concept is trying to curb exactly what you are trying to achieve ie not to pay any taxes in Tanzania. We must also state that TRA has come down very hard on such moves aimed at avoiding local taxes.
Once you are found to have a permanent establishment, whether you are registered or not, you will be obliged to pay local taxes. Your tax consultant can guide you further.
Renegotiate oil and gas agreements
I am a veteran civil servant and have been involved in the oil and gas sector for many years now and want to know why the government has entered into such loose agreements with these oil companies and whether the government can renegotiate the terms of such contracts. I am told Qatar took over some assets of private companies when gas was discovered. This is our gas and why should we be denied access to it? Why should the citizens not benefit from the discoveries of the gas in Tanzania? On a different note, I believe that oil has been discovered but the companies are hiding the truth from the government. Please guide on both the above.
GJ, Dar
The agreements that the Government and TPDC have entered into with the oil and gas companies are called Production Sharing Agreements (“PSA”) which are provided for under the Petroleum (Exploration and Production) Act of 1980. These PSAs are special type of agreements that, from the outset and even before the companies start exploration activities, have terms agreed on sharing of the resource, tax exemptions, employment, training, level of investment, profit sharing to mention a few. These agreements have a very strong force of law as they are made under a specific provision of the PEPA.
It is based on these terms that the oil and gas companies, as contractors under the PSA, invest their hundreds of millions of dollars. What you are suggesting is a possibility but only, and only if these companies agree to renegotiate. If these companies refuse to renegotiate, which is likely, then the Government has no right to strip them off the PSA.
Only because there have been huge discoveries, does not mean the goal post be changed for these companies. In fact, the Tanzania Investment Act provides for in section 22 against such kind of expropriation and states: (l) Subject to subsection (2) and (3) of this section- (a) no business enterprise shall be nationalised or expropriated by the Government, and (b) no person who owns, whether wholly or in part, the capital of any business enterprise shall be compelled by law to cede his interest in the capital to any other person. (2) There shall not be any acquisition, whether wholly or in part of a business enterprise to which this Act applies by the State unless the acquisition is under the due process of law which makes provision for- (a) payment of fair, adequate and prompt compensation, and (b) a right of access to the Court or a right to arbitration for the determination of the investor’s interest or right and the amount of compensation to which he is entitled. (3) Any compensation payable under this section shall be paid promptly and authorisation for its repatriation in convertible currency, where applicable, shall be issued.
From the above, the investor is given full protection when on Tanzanian territory. Any expropriation moves such as the ones you are suggesting will cost the country dearly in terms of reputation and funding.
As for oil discoveries, at the time of writing this question, we have not heard of any such discoveries. However, should there be any oil that is discovered, both the PEPA and PSA provide for such information to be relayed within 30 days to the Minister for Energy and Minerals. You will have also noted that the Ministry of Energy and Minerals is transparently handling such matters with the public, and we believe should there have been such a discovery, it would have been in the public domain by now.
If you are hinting that it is the oil and gas companies that are hiding such information from the Government, this would amount to a breach of the PEPA and the PSA, which could lead to huge problems for these companies.
Lastly, we are not aware of Qatar having taken over assets of such private oil and gas companies. What we know that in all the areas where the government has conducted such expropriation, e.g. South America, it has landed the government in big problems. As a veteran civil servant, we are quite shocked at your hard-core approach to the PSAs. You might want to reconsider your stand otherwise your proposal can be very costly for Tanzania.