- Whether Non-Governmental Organizations are taxable organizations.
- What it takes for a Non-Governmental Organization to be exempted from paying certain taxes.
- How can a Non-Governmental Organization acquire a charitable status?
- The benefits enjoyed by a Non-Governmental Organization with a charitable status.
There is an assumption that Non-Governmental Organizations (NGOs) are tax free entities due to their nature of work. NGOs are known to promote righteous causes to targeted groups in the community. Generally, NGOs focus is to improve quality of life for persons by promoting social, political and economic welfare of the community.It is further assumed that NGOs are free from tax because, they are “not for profit entities”. Unfortunately, this assumption is wrong. You might be wondering what has brought about this uncertainty?
Our Corporate Commercial and NGOs department at Breakthrough Attorneys has prepared the following overview to give an insight on questions regarding the taxation of NGOs.
2.0 Are NGOs taxable?
YES, NGOs are taxable organizations. In an eye of the Income Tax Act [CAP. 332 R.E 2019], NGOs are able to conduct business which creates taxable income just like any other business. However, NGOs may be relieved from paying income (corporate) tax and other taxes upon being exempted from paying such taxes in accordance with the law.
NGOs are subject to pay or remit to the TRA the following taxes;
- Pay As You Earn (PAYE)
NGOs have a legal duty to deduct PAYE from an employee’s salary at the rates specified in the law. Employees of NGOs create taxable income from the remunerations and benefits that the employer (NGO) pays them. So like any other employer, an NGO is required to deduct employees’ income tax and remit the same to the Tanzania Revenue Authority (“TRA”). Thus, if an NGO fails to deduct PAYE from its employees’ salaries, the liability of paying PAYE will go back to it.
- Skills Development Levy (SDL)
If an NGO employs more than four (4) personnel it shall be required to pay Skills Development (SDL) at the rate of 4.5% of gross emoluments of all employees as provided under Section 14 of the Vocational Education and Training Act [CAP. 82 R.E. 2019]. However, the Government has tabled the Finance Bill, 2021 for discussion by the Parliament which among other things, the Finance Bill, 2021 impose changes on Section 14 of the Vocational Education and Training Act [CAP. 82 R.E. 2019] by increasing a number of employees to ten (10). Should the Finance Bill passed by the Parliament and assented by the President of Tanzania as such, all NGOs which have a total number of more than ten (10) employees will be subject to pay SDL. The Finance Bill will be effective from 1st July, 2021 and we will update on this point if the section will be amended as proposed.An NGO may be exempted from paying SDL, if the same is either exempted to pay tax (including SDL) or falls under Section 19 (b)(c)(d) of the Vocational Education and Training Act [CAP. 82 R.E. 2019] which excludes from paying SDL:- Diplomatic Missions; United Nations and its organizations; and International and foreign institutions dealing with aid or technical assistance. The Finance Bill, 2021 has propose to amend Section 19 (b)(c)(d) of the Vocational Education and Training Act [CAP. 82 R.E. 2019] by exempting religious health institutions from paying SDL altogether.
- Withholding Tax
Equally, NGOs are under statutory duty to deduct Withholding tax when making payments for goods and services such as consultancies, rents, and services awarded to individuals, contractors, and suppliers and remit the same to the TRA.
- Value Added Tax (VAT)
If an NGO is VAT registered, it must also pay VAT on goods and services consumed, except those which are zero-rated or exempted under the Value-Added Tax Act [CAP.148 R.E. 2019]. Goods such as food, clothing, and shoes donated to NGOs for free distribution to orphanages or schools for children with special needs in Mainland Tanzania are exempted from VAT.
- Corporate Tax
The overall income of an NGO from its business and or investments is taxable unless the NGO is exempted. Corporate tax is charged at the rate of 30% of the NGOs’ taxable income. An NGO is required by the law to file annual tax return to TRA as a declaration of estimated income and tax payable. It is through annual tax return where an NGO may chargeability to corporate tax may be established or not. It has to be emphasized that what is being charged to tax is income. Thus, where the returns show nil income there will be no tax chargeable.
3.0 Exemption of taxes for NGOs
NGOs may be exemption from tax chargeability. To this end therefore, tax exemption is not automatic. NGOs must apply for tax exemption to the Minister responsible for Finance. Upon being satisfied with the application, the Minister will grant the exemption, and publish names of the applicant in the Government Gazette as exempted from paying tax. An exemption order ( Government Notice) shall specify the scope of type, goods, or services that are eligible for exemption alongside the respective commencement and expiry date of the exemption.
Also, It is important to note that a mere agreement with the Governemt or Government agency alone does not grant income tax exemption. There has to be a Government Notice from the Minister for Finance published in the Government Gazette. Section 10 of the Income Tax Act [CAP. 332 R.E 2019] empowers only the Minister for Financeto grant tax exemption. Many NGOs have found themselves in tax debts due to their reliance on the agreements with government agencies or ministries which at times promise to process tax exemption for NGOs and usually turn out fruitless.
4.0 Other tax benefits available for NGOs
An NGO may be entitled to the deduction of income tax afforded to all charitable organizations under Section 64 of the Income Tax Act [CAP. 332 R.E 2019]. There is always a misconception when it comes to the concept of a charitable organization.
One would simply conclude that since an NGO does charitable activities then it is a charitable organization. This concept is not always true, looking at NGOs from a tax angle under the laws of Tanzania. In Tanzania, charity is not only the activities, it is the status granted by the Commissioner-General of TRA. It is important, therefore, for an NGO to consult its legal or tax consultant for tax status assurance.
5.0 How does an entity become a charitable organization?
The term Charitable organization is defined under section 64(8) of the Income Tax Act [CAP. 332 R.E 2019] as follows;
charitable organization” means, a resident entity of a public character that satisfies the following conditions;
- The entity was established and functions solely as an organization for (i) the relief of poverty or distress of the public; (ii) the advancement of education; or (iii) the provision of general public health, education, water or road construction or maintenance; and
- The entity has been issued with a ruling by the Commissioner under Section 11 of the Tax Administration Act [CAP. 438 R.E 2019] and section 131 the Income Tax Act [CAP. 332 R.E 2019].
As per the definition above it is clear that apart from its charitable functions, there must be a ruling of the Commissioner-General confirming that the NGO has a charitable status. This means an NGO which is in need of tax treatment, as a ‘charitable organization’ should make an application for charitable status ruling, to the Commissioner-General of TRA .
Application for a charitable status must be accompanied by all shreds of evidence proving that it conducts charitable business including its Constitution, financial statements, previous projects reports, and all previous income records.
6.0 What effect does a charitable status has on the taxation of an NGO?
Once an NGO has acquired a charitable status, it will be entitled to deduction of all amounts applied in the pursuit of its charitable activities to the public. That is to say, in the calculation of an NGO’s taxable income, all income that was used by the NGO exclusively in the pursuit of its charitable activities(i.e the relief of poverty or distress of the public; the advancement of education; the provision of general public health, education, water or road construction or maintenance) shall be deducted.
Also, twenty-five (25) percent of its income will be deducted in the calculation of its taxable income for the year of income as per Section 64(2)(b)(ii) of the Income Tax Act [CAP. 332 R.E 2019].
Therefore one can simply say that if an NGO uses 75 percent of its income in the pursuit of its activities for benefit of the public, its income may not be taxable at all.
Our Tax Department at Breakthrough Attorneys recommends a charitable status ruling as the best method to reduce the income tax burden to NGOs.
7.0 What happens when an NGO with a charitable status conducts income-generating business
An NGO should at all times be compliant with tax laws and good tax compliance records (before and after obtaining a charitable status). An NGO should make sure that it has cleared all previous tax obligations and must continue to be a complying taxpayer. It is so advised because any abuse to the status may cause the Commissioner-General to revoke the charitable status ruling, in which the NGO shall no longer be eligible for the deduction of respective income tax.
Where an NGO conducts business apart from its charitable business, the NGO shall be treated as conducting income-generating business. The income to be obtained from such other business other than that coming from its charitable activities, shall be treated as income of the organization whose source is in Tanzania. Income from such other activities of the NGO shall appropriately be taxable.
Sometimes, NGOs expect to be automatically exempted from paying tax through strategic agreements or Memorandum of Understanding that exist between them and the Government or Government agencies. However, it is important to be aware that, tax exemption occurs only upon application to and approval by the Minister for Finance. Upon his satisfaction, the Minister for Finance shall issue a Government Notice and publish the name of the NGO and applicable tax exemptions in the Government Gazette. TRA will only exempt an applicable income from tax chargeability upon receiving or being served with the said published Government Notice. In any case, on rare occasions the tax court system would rule otherwise as was in the case between MSPH Tanzania LLC vs The Commissioner General of TRA, Tax Appeals No. 327, 328, 329, 330, 335, and 336 of 2019 where we successfully appeared for the Appellant, MSPH.
You can read more of the decision here.
This publication has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication, and, to the extent permitted by law, Breakthrough Attorneys, its members, employees and agents do not accept or assume any liability, responsibility or duty of care for any consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.