PAYE reforms, laudable!

Last week, the Minister of Finance unveiled Tanzania’s 34.9tr shillings budget for the fiscal year 2020/21. Through the budget speech, several tax reforms were announced by the Minister. Tax revenue will fund almost 60 per cent of the budget. This is going to be uphill for both the tax administration and the taxpayers in Tanzania. Especially if one considers the negative economic impacts of the pandemic, COVID-19. Nevertheless, this time around, employees will see a big relief as the PAYE tax bands are reformed. 

For most employees, PAYE that makes the biggest chunk of the statutory deductions. In aggregate, employees in Tanzania pay more income tax than all businesses combined (corporations and sole proprietors). The average PAYE contribution (to the total tax collections) for the past ten years or so stands at around 16 per cent while the average for businesses is around 12 per cent. The average PAYE collections are even higher than the average for domestic VAT (i.e. excluding VAT on imports), with the latter being around 15 per cent. Looking at these statistics, it is indeed logical to relieve employees of the income tax burden. Hence reforms to reduce PAYE timely and welcome. 

PAYE stands for Pay-As-You-Earn. It is a tax on employment income payable to the government by way of a withholding system. Under this system, an employer is required by law to deduct income tax progressively from employee’s taxable income at various rates from 9 to 30 per cent depending on the prescribed ranges of income (i.e. bands). In recent years, the focus appears to have been only on the tax rates and not bands. Especially the tax rates for the lower bands. Over the past 12 years, the tax rate for the second-lowest band has gone down from 15 per cent (in the year 2008) to the current 9 per cent. However, most of the employees may not have felt any relief because the rates for the other bands remained unchanged and also the bands themselves remained unchanged. The bands have not been significantly restructured since 2008 despite the changes in inflation rates and the depreciation of our currency (shilling). For example, the highest taxable band (taxed 30 per cent) started at the monthly taxable income of 720,000. In 2008, the amount 720,000 shillings was equivalent to around USD 600. But today, USD 600 is close to 1,400,000 shillings. So, the band structure was outdated and needed some reforms to provide some relief to employees. If you have followed this column for the last three years, you may recall this as one of the areas I have repeatedly written on. 

With the current tax reforms, the five bands structure is changing. For example, from 1st July 2020, the first 270,000 shillings of employee monthly income will not be taxed at all. Before the reforms, only 170,000 was not taxed. The second band, taxed at 9 per cent, will now range from 270,001 to 520,000 shillings. The third band will start from 520,0001 shillings to 760,000, taxed at 20 per cent. Taxed at 25 per cent, the fourth band will now start from 760,001 to 1,000,000 shillings. The fifth band, with the highest tax rate of 30 per cent, now starts from 1,000,001. Previously, the upper band started from 720,000 shillings. 

Although cumulatively, with these changes the monthly tax savings for individuals is around 50,000 shillings (about 600,000 shillings annually), in aggregate this is a significant reduction from the government coffers. Think of all the employees in Tanzania, both in the public and private sectors. It is indeed a very bold move and laudable.

By Shabu Maurus, Tax Partner, Auditax International. 

Resuscitating the tourism sector

The pandemic, Covid-19, continues to hit almost all economic sectors in Tanzania. This is despite the official reports that the pandemic is now subsiding in Tanzania. Tourism is among the worst-hit sectors so far. The United Nations World Tourism Organization (UNWTO) estimates a decline of between 20-30 per cent in global international tourist arrivals in 2020. Before the pandemic, a 3-4 per cent growth was estimated for 2020. According to UNWTO, this may mean a loss of US$30-50 billion in spending by international visitors.

Early May 2020, the government (through the Minister for Natural Resources and Tourism) projected that 76 per cent (i.e. from 623,000 to 146,000 jobs)  of the total direct employment in tourism will be lost as the number of tourists estimated to visit Tanzania during that Covid-19 period declines to 437,000 (from 1.9 million tourists recorded by end of 2019). The earnings from the sector are expected to shrink from US$2.6 billion to US$598 million by the end of 2020. The sector is the leading foreign exchange earner for Tanzania’s economy. It has been a positive contributor to economic growth and employment. With tourism’s multiplier effect, several related sectors or subsectors are, by implication, also severely affected. Think of tourists spending on, for example, hunting, accommodation, meals and drinks, shopping, transportation (charters, car hire), tours, communication, travel agency business, recreation, cultural and sporting activities. These have all been affected.

UNWTO claims that tourism is a sector with a proven capacity to bounce back and multiply recovery to other sectors of economies. But obviously, some measures need to be taken. Measures that would attract again tourists and stimulate their spending while in Tanzania. Also, measures that would encourage most players in the sector to revive their businesses and attract new investments into the sector. Tax is among the areas that can be reformed to help the sector resuscitating.  Even before COVID-19, already, tax was one of the most problematic areas in the tourism sector in Tanzania. Both, from the perspectives of taxpayers as well as tax administration (TRA). In 2015, Jacques Morisset, the World Bank lead economist for Tanzania, in his report a report titled “The Elephant in the Room: Unlocking the Potential of the Tourism Industry for Tanzanians” identified several challenges in the sector. Morisset argued that multiple taxes and levies inhibit tourism, discourage investors, and create room for corruption. In 2018, similar sentiments were echoed by the Blueprint for Regulatory Reforms to Improve Business Environment, a report authored by the Ministry of Industry and Trade.  

So, as we near the Budget day for 2020/21, one would reasonably expect some tax stimulus for the tourism sector. The economic outlook suggests the need for policies that would stimulate the tourism sector in the short run. But, the long-run revenue impact of stimulus policies should be projected and limited, to avoid exacerbating long-term fiscal challenges.

Any thoughts? As a short-term measure, operators (employers) in the tourism sector can be exempted from both the Skills and Development Levy (SDL) and Workers Compensation Fund (WCF), say, for up to three years. Currently, SDL rate stands at 4.5 per cent and WCF is 1 per cent of the employment cost. The exemption will reduce the cost to employers in the sector and may encourage new jobs, job retention and probably also translate into even better pays to employees.  Another area is the VAT. VAT is a tax on consumption. Reduction of this tax is likely to stimulate consumption. If the VAT refund system could be made to work, one option would be to zero-rate some services that are supplied to international tourists. Another option is to exempt the services, although this is less likely to reduce prices. But given the current complexities and controversies in accounting for the VAT by most players in the sector, the exemption will be received with jubilation. Also, income tax reforms can be made to encourage new investments. Temporary provisions can be made to provide accelerated depreciation allowance, expensing, or tax credits for new investments in the tourism sector.

By Shabu Maurus, Tax Partner, Auditax International.

Tough rules for remission of tax penalties

Shabu Maurus, Tax Partner, Auditax International.A fortnight ago (8th May 2020), the Minister of Finance and Planning issued new tax regulations to govern remission of tax-related interest and penalties in Tanzania. The regulations have been issued to operationalize section 70 of the Tax Administration Act, Cap 438. The regulations may partly clear the lacuna tax existed in this area for some time now. The tax administration law (the Tax Administration Act, Cap 438) gives powers to the Commissioner-General of TRA to waive interest and penalties subject to the regulations made by the Minister. And the relevant regulations were lacking since 1st December 2018.

Remission of interest and penalties is one of the useful tax administration tools. This is especially so for a self-assessment tax administration system where taxpayers are expected to self-assess their tax liabilities and pay their tax dues to the tax authority. The self-assessment system implies that taxpayers can make mistakes in determining their tax liabilities. After all, tax laws have never been a cup of tea to everybody! Also, the self-assessment tax administration system is premised on the expectation that most taxpayers are likely to be faithfully most of the time. But there are unfaithful taxpayers or the would-be taxpayers.

Remission interest and penalties give honest taxpayers relief when they, for example, inadvertently have failed to abide by some provisions of the tax laws. Non-compliance with tax laws could be due to financial hardship, either temporary or long term. Non-compliance could also be due for reasons beyond the taxpayer's control. Take for example the social and economic impacts of the current pandemic facing Tanzania and the world, the COVID-19. Under the current environment, it may not surprise me if some taxpayers fail to fulfil some of their tax compliance obligations.

Remission of interest and penalties can cautiously be used to appeal to the noncompliant taxpayers. Think of the tax amnesty tax was offered back in the year 2018. It helped collect taxes. Taxes that, I think, could not have been collected in the absence of the firm assurance that voluntary disclosure of tax liabilities is something that is welcomed by the tax authority. The amnesty assured taxpayers that no interest or penalties would be charged if they voluntarily disclosure their “hidden” tax liabilities. With the prevalence of the informal sector in Tanzania, the remission can be a good bargaining tool for the tax administration.

The new regulations (the Tax Administration (Remission of Interests and Penalties) Regulations, 2020) now provides some guidelines on how remission interests and penalties should work. The regulations set out the manner for applying for the remission. A specific (prescribed) form must be used and a taxpayer shall disclose the reasons for the imposition of interest or penalty and justification for the remission. There are five eligibility criteria that all must be met by the taxpayers seeking remission. The Commissioner-General (“CG”) can accept or reject an application for remission. But the regulations require the CG to adduce reasons for rejection.  Unlike in the tax amnesty where remission was 100 per cent, the regulations gives the CG discretion on the amount of remission. The regulations put very stringent criteria to prove financial hardship. This is essentially akin to excluding prove financial hardship as one of the reasons for the CG to grant remission. The CG can remit the whole or only part of the interest and/or penalty. Also, the regulations disqualify several categories of interest or penalty. No remission if non-compliance is deliberate (fraudulent evasion of tax) or is in respect of VAT, withholding taxes, EFDs or failure to keep documents. Also, no remission if the interest or penalty arises from tax liability established as a result of tax audit or investigation. I will discuss these regulations in detail in my next articles.

By Shabu Maurus, Tax Partner, Auditax International.

The Need for Taxpayers to Undertake Tax Health Checks

Introduction

Matters related to someone’s survival and paying taxes have historically drawn comparison.  For instance, in his letter to Jean-Baptise Leroy, 1789, Benjamin Franklin earmarked that “in this world nothing can be said to be certain, except death and taxes”.

The importance of regular medical check-ups to track someone’s health has been told over and over again by doctors and other health experts. These check-ups enable identification of potential health problems at early stages and ensure prevention of long-term health illness which can sometimes lead to loss of life. Similarly, regular tax health checks can ensure the survival of a taxpayer’s business or organization.

Tax health check refers to the review of taxpayer’s tax and accounting records to establish the degree of compliance with applicable tax laws. Tax health check can lead into a number of benefits to a taxpayer which are discussed below.

Why Tax Health Checks?

With the increased tax risks i.e. (audit risk, compliance risk, operational risk etc.); frequent changes in tax laws, complexities of tax laws; ambitious revenue targets by the Government; recent rulings on tax cases etc. the need for tax health checks cannot be overemphasized.  Tax health checks can help taxpayers to achieve the following:

i) Preparation for a Potential TRA Audit

Taxpayers can undertake a tax health check as part of preparation for a potential tax audit by the revenue authority. This is a house keeping exercise to identify areas of non-compliance with tax laws e.g. returns not filed, taxes not paid, reconciliations not being done etc. and correct them before a visit by tax officers to avoid interests and penalties or manage cash flows on tax payments. For instance, the recently issued Tax Administration (Remission of Interest and Penalties) Regulations, 2020 exclude interest or penalty established from a tax audit or investigation from remission. Thus, identifying areas of non-compliance before a TRA audit may enable application of remission of qualifying interest or penalty.

ii) Identification of Tax Risks and Instituting a Robust Tax Risk Management Framework

Tax risks refers to the risk of losses resulting from overpayment of taxes (principal taxes, interest and penalties) or failure to take advantage of tax savings opportunities in the tax laws. Tax health check can identify areas of high-risks so as controls can be instituted to mitigate the risks. These can be on areas of non-compliance with tax laws e.g. on corporate income tax, withholding taxes, VAT, excise duty etc.  weak tax controls on tax management e.g. lack of policies, adequate staff etc. This can provide an opportunity to strengthen tax internal controls by evaluating the effectiveness of the existing tax risks management framework and instituting a robust framework. This will enable systematic identification, assessment and mitigation of tax risks.

iii) Opportunities for Tax Savings

Tax health check can identify areas where the organization is not fully exploiting tax saving advantages. These can for instance be failure to take advantage of tax benefits in tax laws e.g. on incentives, allowances etc.

iv) Done as part of Tax Due Diligence

Tax health check can save as a tax due diligence for cases where a potential investor is intending to acquire an entity. It will help to identify potential tax liabilities of the acquiree business and form one of the considerations in deciding whether to acquire the entity or not.

v) Assist in VAT and other Tax Refunds

Tax health checks can be undertaken as part of a process to obtain tax refunds. The health check will confirm whether the amount the entity expects to be refunded is genuine in terms of being fully supported and in compliance with the requirement of tax laws regarding refunds. Measures can be taken to ensure missing evidences are obtained to ensure appropriate refund is obtained.

Conclusion

Just as regular medical checkups for a person before illness is important, proactive regular tax health checks for taxpayers to avoid or minimize the costs associated with financial losses and missed tax savings opportunities are as important. The recently issued Tax Administration (Remission of Interest and Penalties) Regulations, 2020 which exclude interest or penalty established from a tax audit or investigation from remission has also raised the importance for taxpayers to regularly undertake tax health checks to avoid paying unnecessary interest and penalties among other advantages.

Mr Straton Makundi is a Partner with Auditax International

The Bank of Tanzania announces monetary policy measures to respond to impact of COVID-19 in Tanzania

The Bank of Tanzania (BOT) has announced monetary measures to be taken to offset the impact of corona virus and boosting the economy of the country. These measures come after the central bank’s monetary policy committee met and approves various policy measures to cushion the economy from adverse effects of COVID-19 to safeguard the financial sector stability. The measures taken includes the following:

  • Reduction of statutory discounting rate from 7% to 5% with effect from 12th May 2020.
  • Lowering statutory minimum reserves requirements from 7% to 6% to be applied effective from 8th June 2020.
  •  Allowing banks to borrow from the Bank of Tanzania with less collateral by reducing haircuts on government securities by 50% effective from 12th May 2020.
  • Allowing commercial banks to consider restructuring of loans and loan repayment rescheduling after having thorough discussion with their borrowers who are adversely affected by COVID-19 impact.
  • Encourage the usage of digital payment system by allowing Mobile money operators to increase daily transaction limit to their customers to TZS 5 million and daily balance to TZS 10 million. This is about 50% uplifting of maximum limit.

Conclusion

With these measures at place, BOT expect banks to have increased liquidity, additional space for banks to borrow from them, reduces congestion of customers in banking premises and increase usage of digital payment system and hence neutralize the impact of COVID-19

Read more here.

COVID-19 Tax Measures: A case for tax return delays

As the coronavirus (COVID-19) crisis continues to ruin economies around the world, countries are implementing various emergency tax and non-tax measures to support their economies during this crisis and ease the impact on both the businesses and individuals. Apart from the various administrative measures that TRA are taking, there are no emergency tax reforms that I am aware of in Tanzania (so far!). But what sort of tax relief measures other countries are taking? Various measures are being taken to suit individual countries situation. Some may seem overly expensive to implement and yet some are quite simple.

In response to the pandemic one of our closest neighbours, Kenya, has taken bold steps in reducing the tax rates for taxpayers. There is a 100 per cent tax relief for taxpayers earning a gross monthly income of up to KES 24,000 (around TZS 500,000). The upper band employment income tax (PAYE) rate has been reduced from 30 per cent to 25 per cent. Similarly, the resident corporate income tax rate is reduced from 30 per cent to 25 per cent. And the VAT rate from 16 per cent to 14 per cent.

Some countries have taken simpler steps but certainly helpful such as extending the time for filing tax returns. In Ghana, for example, the time for filing annual income tax return has been extended by 60 days. Also, Nigeria has extended the deadline for filing VAT and withholding tax returns from the 21st day to the last working day of the month, following the month of deduction. In Mauritius, taxpayers that are unable to submit returns or pay their tax due to the lockdown will not be charged any penalty or interest for late submission or payment. Amid the COVID-19 crisis, the extension of time to file returns makes a lot of sense.

It is no longer business as usual. There is a slowdown in business and processes. Given the various preventive measures that are taken to fight COVID-19 such as the full or partial lockdowns, it is likely to take longer for some business and individuals to get their tax returns prepared on time. In Tanzania, for example, monthly VAT returns are due 20 days after the month-end. What if this time is extended to 30 days (or to the last working day of the month)? Due to the pandemic, the collection of VAT from customers takes longer. An alternative to a blanket extension, reform can be made to allow those severely affected to apply for an extension - say up to some 90 days.

Also, the annual income tax return is due 6 months after the year-end. But annual income tax returns (for companies at least), must be accompanied by audited financial statements. statutory audits are likely to take longer than normal. There is already a provision to allow the extension, but this is currently capped at only 30 days. Probably 90 days cap would be much more helpful. 

By Shabu Maurus, Tax Partner, Auditax International.

Q4 tax collection an uphill task

The coronavirus pandemic (COVID-19) continues to hit Tanzania and other countries.  According to the recent (April 22, 2020) reports, Tanzania has already recorded 284 coronavirus cases. Not yet as bad, if these numbers are compared to other countries that have been severely hit by the pandemic. The pandemic has now reached a community transmission stage. Like other countries, the authorities in Tanzania have taken various measures to stop or slow down the spread. Emphasis on general hygiene, wearing of appropriate masks, social distance, and avoidance of unnecessary gatherings, just to name a few. So far, Dar es Salaam appears to have been badly hit by the disease compared to other parts of Tanzania. I think it is for this reason, stricter measures are being taken in Dar es Salaam. For example, it is now mandatory to wear a mask in Dar es Salaam. But what does it mean, in terms of tax revenue, if the pandemic situation in Dar es Salaam gets worse?

Dar es Salaam is the commercial hub. It accounts for almost 90 per cent of tax collections in Tanzania (if tax from imports and tax collected by the Large Taxpayers Department are factored in). So, Dar es Salaam is, unfortunately, the main source of tax revenue for Tanzania. Going forward may be some efforts need to be made to start addressing this regional imbalance. This same message was echoed in the Economic Update report by the World Bank Group back in 2015 (Tanzania Economic Update, July 2015, 7th Edition - “Why Should Tanzanians Pay Taxes?”).

Around 60 per cent of Tanzania's budget for 2019/20 (33.1 trillion shillings) is expected to come from tax revenue.  That is 19.1 trillion shillings. In the first half of the fiscal year (when Tanzania had not recorded any COVID-19 case), tax collections reached 9.2 trillion shillings. In the third quarter (January to March 2020), tax collections reached 13.5 trillion shillings.  This makes an average collection per quarter of about 4.5 trillion shillings. To meet the 19.1 trillion shillings target, in the fourth quarter 5.6 trillion shillings needs to be collected. This is way above the quarterly average so far.

A month ago, I wrote about how the corona pandemic (COVID-19) may impact on tax collection in Tanzania. The pandemic impacts businesses differently. As social gatherings are banned, businesses and sectors stand to be badly hit. And this will translate into tax revenues. Also, some sectors like tourism, are unlikely to return to normal quickly when this pandemic subsides. Given that Dar es Salaam is the main source of tax revenue and the extent the pandemic is likely to affect businesses, the tax revenue target is very unlikely to be met. Already, there are several calls for some fiscal reforms or some sort of stimulus package to help businesses. These may be difficult to implement unless the government gets some funding from sources other taxes or some major projects postponed.

By Shabu Maurus, Tax Partner, Auditax International.

Q4 tax collection an uphill task

The coronavirus pandemic (COVID-19) continues to hit Tanzania and other countries.  According to the recent (April 22, 2020) reports, Tanzania has already recorded 284 coronavirus cases. Not yet as bad, if these numbers are compared to other countries that have been severely hit by the pandemic. The pandemic has now reached a community transmission stage. Like other countries, the authorities in Tanzania have taken various measures to stop or slow down the spread. Emphasis on general hygiene, wearing of appropriate masks, social distance, and avoidance of unnecessary gatherings, just to name a few. So far, Dar es Salaam appears to have been badly hit by the disease compared to other parts of Tanzania. I think it is for this reason, stricter measures are being taken in Dar es Salaam. For example, it is now mandatory to wear a mask in Dar es Salaam. But what does it mean, in terms of tax revenue, if the pandemic situation in Dar es Salaam gets worse?

Dar es Salaam is the commercial hub. It accounts for almost 90 per cent of tax collections in Tanzania (if tax from imports and tax collected by the Large Taxpayers Department are factored in). So, Dar es Salaam is, unfortunately, the main source of tax revenue for Tanzania. Going forward may be some efforts need to be made to start addressing this regional imbalance. This same message was echoed in the Economic Update report by the World Bank Group back in 2015 (Tanzania Economic Update, July 2015, 7th Edition - “Why Should Tanzanians Pay Taxes?”).

Around 60 per cent of Tanzania's budget for 2019/20 (33.1 trillion shillings) is expected to come from tax revenue.  That is 19.1 trillion shillings. In the first half of the fiscal year (when Tanzania had not recorded any COVID-19 case), tax collections reached 9.2 trillion shillings. In the third quarter (January to March 2020), tax collections reached 13.5 trillion shillings.  This makes an average collection per quarter of about 4.5 trillion shillings. To meet the 19.1 trillion shillings target, in the fourth quarter 5.6 trillion shillings needs to be collected. This is way above the quarterly average so far.

A month ago, I wrote about how the corona pandemic (COVID-19) may impact on tax collection in Tanzania. The pandemic impacts businesses differently. As social gatherings are banned, businesses and sectors stand to be badly hit. And this will translate into tax revenues. Also, some sectors like tourism, are unlikely to return to normal quickly when this pandemic subsides. Given that Dar es Salaam is the main source of tax revenue and the extent the pandemic is likely to affect businesses, the tax revenue target is very unlikely to be met. Already, there are several calls for some fiscal reforms or some sort of stimulus package to help businesses. These may be difficult to implement unless the government gets some funding from sources other taxes or some major projects postponed.

By Shabu Maurus, Tax Partner, Auditax International.

Tax Tips for Ensuring Compliance with Tax Laws during COVID -19 (Coronavirus) Pandemic

1. Correspondences with TRA

      For taxpayers who have closed their offices and working from home, there is a need to ensure that a dedicated person regularly follows up with the postal office to check whether there are any correspondences from TRA. These can be on audit findings; tax decisions e.g. assessments, demand notes etc. Failure to respond timely may lead into significant tax exposures as paper documents serving rules by the Commissioner under section 33 of the Tax Administration Act, 2015 will apply when documents are posted rather than hand delivered. Under the rules, a document is considered to have been received by the taxpayer when posted to an address within the United Republic, ten days after posting.

2. Returns Filing

      As most taxpayers accounting period ends 31 December, the final tax return due date is 30th June.  While it is important to ensure that the audit process is fast-tracked, there is a possibility that the close of offices may hinder timely conclusion of audit so as to have certified financial statements. Taxpayers who would be unable to meet the deadline can use section 39 of the Tax Administration Act, 2015 to apply for extension of up to 30 days to file tax returns. However, application for extension must be made within fifteen days before the due date for filing the returns.

3. Tax Payments

     For entities which have been significantly affected by COVID -19 (Coronavirus) Pandemic thus unable to pay their taxes timely they can use section 55 of the Tax Administration Act, 2015 to apply for extension of time for payment of taxes or spread the payments to manage cashflow challenges. However, for the application to be accepted by TRA it must be supported by evidences of cashflow challenges.

4. Audits

      As Government activities are still ongoing including those of TRA, there is a possibility of an audit to be undertaken for your entity. While it is important to ensure fully cooperation with tax officers, if there are circumstances which can hinder your entity’s ability to effectively participate in the audit process due to COVID -19 (Coronavirus) Pandemic, an extension can be applied using regulation 14 of the Tax Administration Act, 2015. When findings have been issued and a taxpayer has genuine reasons hindering the ability to respond timely, regulation 21 of the Tax Administration (General) Regulations, 2016 allows for application of extension of time to respond to TRA audit findings.

5. Assessments

      Assessments may be issued by TRA during the COVID -19 (Coronavirus) Pandemic. These can be jeopardy assessments, adjusted assessments etc. If a taxpayer is aggrieved by assessments issued, an objection can be made. Section 51 of the Tax Administration Act, 2015 allows for application to file notice of objection out of time.

If you require support kindly write to us through info@auditaxinternational.co.tz or call through +255 719878490 or +255747185156

How fringe benefits are taxed?

There are various ways employees can be remunerated for the employment services they offer to their employers. The most common is a salary and allowances paid in monetary form. But it is also common for employers to provide some other non-monetary benefits to their employees in addition to the salaries. It is also possible (particularly in the informal sector) for employees to be purely remunerated in non-monetary terms.

Where an employer makes a payment for the personal needs of an employee through providing the employee with rights, goods or services (as opposed to money) these are called “benefits in kind”. Taxable benefits in kind typically include those benefits which are for the personal use or consumption needs of the employee.

The benefits in kind can take various forms including a housing, a company car for personal use by an employee, and an interest-free loan or a loan at an interest rate way below the market rates. It could also be airtime, data or cell phones for both business and personal use. Most of this kind of benefits are taxable but because no money goes to the employee, it is an area that some employers can easily overlook and forget their obligation to account for the pay-as-you-earn (PAYE). Of course, some employers and employees may not aware that those benefits in kind are taxable.

Not accounting for PAYE on the benefits in kind presents a tax risk to the employer and to some extent the employee. If the non-compliance is subsequently uncovered by the tax authority, the employer is likely to be assessed on the unpaid tax plus interest and penalties. To the employee, the risk is that his employer may, later on, seek to recover the amount of tax that was previously not deducted (assuming the employee is still with the same employer).  Depending on the amounts and the mode of recovery, this can be very frustrating to employee’s cash flow plans.

If PAYE is to be accounted for on the benefits in kind given to employees, first, the benefits need to be quantified in monetary terms. In general, the value of a benefit in kind is quantified according to a market value of the benefit. The market value means the amount that an independent person would have to pay in the market to receive the same good or service that the employee receives from his employer.

If for example, a manufacturer of plastic chairs decides to give each employee five chairs in a particular year, the benefit in kind to each employee will be determined by the market value of the chairs received. If a plastic chair is sold at shillings 100,000 to independent customers, then that is the market value. Hence, in this example, the benefit in kind to the employees will be quantified as shillings 500,000 and this amount needs to be included as part of employee’s income and PAYE deducted accordingly.

However, some special quantification rules apply to the provision of motor vehicles, provision of subsidized loans and provision of housing to employees. 

By Shabu Maurus, Tax Partner, Auditax International.

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