Over the many years, I have contributed to a charitable institution in Dar, which the Tanzania Revenue Authority (TRA) says has been improperly registered. I was a major donor of food items to the institution. I also supply these food items to the market, which is my main line of my business. The TRA has now disallowed the entire donation I have made over the last three years, claiming that I have been oversupplying. My second question is if I transfer an asset for free, I do not understand why I should be paying tax on that transaction. Tanzania is the only country that taxes such a transaction. Is this the correct interpretation of the law?
19 March 2012
The Income Tax Act of 2004 allows you to donate to charitable institutions. However, the Act caps the amount you are allowed to deduct from your profit and loss statement. The law states clearly that, for the purpose of calculating a person’s income for a year of income from any business, there shall be deducted: (a) amounts contributed during the year of income to a charitable institution or social development project; and (b) any donation made under Section 12 of the Education Fund Act, 2001.
Subsection 2 of this law further states that the deductions claimable shall not exceed 2% of a person’s yearly income from a business. Any amounts donated in excess of 2% can be donated, but not deducted as an expense.
Your second question is fascinating in the sense that you have suddenly decided to give away your asset to someone, for free, and expect there to be no taxation. Your intentions might be honest, but the TRA have no ways of determining your honesty in such a transaction. There is no ‘honesty meter’ that can be plugged in to determine the motives behind your actions. Hence the law has categorically provided that, where a person transfer the ownership of an asset to an associate, including by way of a gift, that person shall be treated as if they realised a value equal to the market value of the asset, or the net cost of the asset immediately before it was disposed of. Similarly, the person who acquires ownership of the asset shall be treated as if they have incured expenditure.
You are also misguided about Tanzania being the only country that taxes such transactions. We took the liberty of looking at tax statutes of Uganda, Kenya, South Africa, India, the United Kingdom and Canada. All the tax statutes from these countries also tax, some even more rigorously than Tanzania, such transactions. Hence, your claim that Tanzania is the ‘only’ country that taxes this way is unfounded.
Taxes are important for national development. If such transactions are not taxed, everyone will claim a free transfer to a friend, associate, cousin etc, so as to avoid taxation. Where can a line then be drawn? For further guidance, you should consult your tax consultant.