TAX LAW AND NGO’S PRACTICE UPDATE: THE TAX REVENUE APPEALS BOARD HOLDS THAT NOT FOR PROFIT ORGANIZATION IS EXEMPTED FROM TAX WHEN THERE IS AN AGREEMENT FOR EXEMPTION OF TAXES WITH THE GOVERNMENT OF TANZANIA
- An agreement between the taxpayer and the government for purposes of tax exemption bind the TRA.
- Employees of Organizations covered by the bilateral treaty between the United States of America and the United Republic of Tanzania on Economic and Technical Cooperation are exempted from PAYE.
- Employers who are Non Profitable Organizations are exempted from Skills Development Levy.
- The Minister of Finance must publish an order in the gazette for exemption to apply, but failure to do so does not take away the right to exemption granted under a Treaty or an agreement with the Government of Tanzania.
On 28th December 2020 the Tax Revenue Appeals Board decided that the appellant in Consolidated Tax Appeals No. 327, 328, 329, 330, 335 and 336 of 2019, a Non-profitable Organization is exempted from paying PAYE and Skills Development Levy. The purpose of the Appeal was to challenge the assessment issued against the said Non Profitable Organization for SDL and PAYE taxes. The Appeal focused on one issue, whether or not the said Non Profitable Organization was exempt from paying SDL and PAYE taxes.
1.0 Background of the case;
The background of this Appeal go back to the tax assessment issued by the Respondent (TRA) following an audit conducted on the tax affairs of the Appellant (MSPH Tanzania LLC) in 2018. TRA issued assessment specifically on Pay As You Earn (PAYE) and Skills Development Levy (SDL) covering years of income 2013 to 2018. The Appellant filed objections against the said assessment based on the ground that TRA did not take into consideration the exemption status of the Appellant.
The Appellant is a Non Profitable Organization operating in Tanzania since 2004. The Appellant receives funds for its not-for-profit activities from the government of the United States of America through the Centre for Disease Control.
The Appellant relied on the existence of a bilateral agreement (Lexis Treaty) between the United States of America and United Republic of Tanzania on Economic and Technical Cooperation, 1968 which exempted the Appellant from the objected taxes.
The Tax Revenue Appeals Board sat to discuss the following issues which are core to this appeal;
- Whether the Appellant was exempted from tax
- To what reliefs are the parties entitled
3.0 Arguments for the Appeal;
The Appellant based their argument on the existence of a bilateral treaty (Lexis Treaty) between the United States of America and the United Republic of Tanzania on Economic and Technical Cooperation. Among other things, this Treaty provides for exemption of income tax to all beneficiaries of funds from the government of USA. It further exempts all personnel of the said beneficiaries from paying income tax for income that its source is the USA government funds. It is for this reason the Appellant argued that it was exempted from withholding PAYE on its employees.
The Appellant further argued that since it is a Non-Profitable Organization it was exempted from Skills Development Levy imposed upon employers under Section 14 of the Vocational Education and Training Act. Section 19(1) of the Vocational Education and Training Act exempts Non-profit Organization from the said tax. On the other hand the Respondent disputed that the Appellant is not covered under the said provision.
The Appellants also argued their case basing on the existence of a Memorandum of Understanding (MoU) between the Appellant and the Ministry of Health and Social Welfare. The said MoU recognize the Appellant as a Non Profitable Organization. In the MoU the Ministry of Health and Social Welfare undertakes to facilitate exemption of tax for the Appellant.
The Appellant argued that according to Section 10(3) (b) (i) of the Income Tax Act, CAP 332, an an agreement with the government on exemption of tax on a strategic project and public policy is effective as an order for exemption. Thus, this provision qualifies the Appellant’s exemption due to existence of such agreements.
On the other side, the Respondent argued against all grounds submitted by the Appellant. TRA insisted that the Appellant did not have a Ruling or Government Notice for which granted them exemption. Main argument from the respondent was that only the Minister for finance have power to grant tax exemption basing on Section 10(1) of the Income Tax Act.
4.0 Decision of the Board;
The Board allowed the Appeal in its entirety. The decision of the Board is based on the following reasoning;
- That the parties are not at issue with regards to the existence of the Lexis Treaty. The Board agreed with the Appellant’s argument that Article 5(b) of the Lexis Treaty has the effect of exempting MSPH from paying Income Tax (PAYE) for its employees with respect to income which is paid from funds of the government of USA or its agencies
- Further, the Board stated that activities conducted by MSPH fall within Section 19(1) of the Vocational Education Training Act. The said provision exempt employers whose functions are to provide relief of poverty or distress of the public, provision of education or public health. For that reason the Board decided that MSPH is exempted from paying Skills Development Levy (SDL).
On this the Board stated that Section 19(1) of the Vocational Education and Training Act exempts Non-Profit Organizations from Skills Development Levy regardless of their charitable status.
- Lastly the Board gave its decision regarding the Memorandum of Understanding between MSPH and the Ministry of Health and Social Welfare. The Board’s position is that the fact that the Ministry did not fulfill its obligation to facilitate tax exemption in a timely manner does not mean that MSPH is not exempted from paying tax.
- The Board emphasized that in such circumstances, “demanding taxes from the appellant is like giving it on one hand taking it away through another hand.” On that the Board went further to remind the Ministry of Health and Social welfare to fulfill its obligation under Article 3.2.3 of the Memorandum of Understanding.
5.0 Implication of the decision.
- The decision cements the position of the law regarding exemption status of Non Profitable Organizations in Tanzania.
- With this decision all Organizations, which are covered by the Lexis Treaty between Tanzania and USA, are exempted from PAYE. This will also apply to other similar Treaties or Agreements with the Government of United Republic of Tanzania in which exemption is granted.
- The decision also implies that the government through its Ministries can enter into agreements with taxpayers for purposes of tax emption and such agreements will bind the government and its agencies (TRA inclusive) as per Section 10(3) of the Income Tax Act, CAP332.
- Section 19(1) of the Vocational Education and Training Act exempts Non-Profit Organizations from Skills Development Levy regardless of their charitable status.
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.