28 Oct 2019
Section 4: Regulations & Tax Incentives in Tanzania
Fitch Solutions Trade and Investment Risk Index
- Firms continue to face challenges in the form of higher taxes, burdensome red tape and increased operational and legal risks. Increased government intervention and growing localisation policies are constraining operating capacity and pressurising profit margins.
- Businesses in need of affordable loans, such as small- and medium-sized enterprises, face persistently high borrowing costs in the banking sector. Investors' inability to hedge against domestic shocks due to limited access to international financial markets further erodes Tanzania's investment attractiveness.
- As a result, Tanzania receives a low score of 37 out of 100 for Trade and Investment Risk, ranking fifth out of 11 states in East Africa behind Rwanda, Kenya, Djibouti and Uganda.
Trade and Investment Risk Index: Methodology and Components
- Trade and Investment Risk Index quantitatively compares the challenges of operating in 201 countries worldwide. The index scores each country on a scale of 0-100, with 100 being the lowest risk. Each country has a headline Trade and Investment Risk Index score, which is made up of three categories, further broken down into sub-categories. The individual categories and sub-categories are also scored out of 100, with 100 the best. The overall Trade and Investment Risk Index score is calculated using the average of the Economic Openness, Government Intervention and Legal sub-component scores.
- Economic Openness: Analyses a country's openness to foreign investment and international trade. This is generated from indicators such as import, export and foreign direct investment (FDI) values as a percentage of GDP, which are used as a barometer of openness. A country that is more open to private and foreign businesses will score more highly on this indicator.
- Government Intervention: This score is composed of information on taxation and the availability of financing. The scoring system favours countries which offer lower taxation and open, sophisticated financial markets with easy access to loans.
- Legal: This score reviews the strength, transparency and efficiency of the legal system and bureaucracy in a given country. It measures the extent to which the rule of law is upheld, the prevalence of corruption, and the delays and costs involved with the bureaucratic procedures required to set up a business.
Foreign Investment Climate Overview
A deteriorating business environment may hinder future foreign direct investment (FDI) inflows into Tanzania. The deteriorating business environment has, for now, been mainly confined to mineral extraction industries. The government passed a number of laws on the mining sector, including a ban on exports of unprocessed minerals, higher taxation, greater government intervention and restrictions on foreign ownership of mines.
More generally, external funding may become harder to access for all industries given that relations with international financial institutions are also deteriorating. In recent quarters, Tanzania has had disagreements with the World Bank and the European Union.
A further risk to Tanzania's investment environment in the short term will come from general elections due to take place in October 2020. There have been multiple reports of opposition politicians and activists being arrested or being victims of violence in recent quarters.
Tanzania's tax environment is relatively unattractive within the East African region, mainly due to the burden of red tape. Taxpayers must make 60 payments per year to pay taxes, relative to an average of 37 payments in Sub-Saharan Africa and 11 payments in member countries from the Organisation for Economic Cooperation and Development (OECD). Companies face increased risk of rising corporate tax in the short-to-medium term as recent domestic revenue mobilisation policies (such as increased taxes on the tourism, transport, telecoms and mining sector) are likely to continue.
Incentives for Manufacturing Relocation
The Tanzanian government has taken steps towards setting up policies and incentives to attract more foreign investment. The Tanzania Investment Centre (TIC) is the country's primary investment promotion agency offering investment services, assistance with work permits, licences and certificates, online registration with multiple entities and administration.
Investment benefits are available to investors that satisfy the following capital requirements. Locally owned firms need a minimum of US$100,000 whereas foreign-owned or joint venture firms need a minimum of US$500,000.
A number of tax incentives in the form of reduced corporate tax (standard corporate income tax is 30%) are in place to encourage investment. New manufacturers of pharmaceutical products and leather products face a 10% reduction in the first five years of operation. Newly listed companies have a three-year grace period of paying lower taxes amounting to 25%, provided at least 30% of their shares are issued to the public. New assemblers of vehicles, tractors and fishing boats will experience the largest tax deduction. In their first five years of operation, tax is reduced to 10%. With these tax breaks, new passenger-transport equipment firms in particular will enjoy lower operating costs, allowing them to divert funds for production expansion.
Investors also benefit from proactive government efforts to promote the country's SEZs and EPZs. The aim of the zones is to grow a strong industrial base in the country. EPZs promote investment and growth mainly aimed at manufacturing firms. Within the zones, 80% or more of goods produced need to be exported, favouring the heavy manufacturing companies. These companies may operate in designated industrial zones or as stand-alone factories at any suitable geographical site. SEZs promote the development of many sectors, not just manufacturing. There are no export requirements for firms in these zones.
Free Trade Agreements
Trade has been facilitated by a number of agreements, including membership to the EAC, the SADC as well as the World Trade Organization (WTO). As a result, businesses operating in Tanzania benefit from preferential access to member economies, notably to key neighbours including Kenya, Rwanda and Uganda. Other major economies include Ethiopia, Angola, South Africa, Namibia and the Democratic Republic of the Congo.
The country is also a signatory to global investment instruments such as the International Centre for Settlement of Investment Disputes Convention, the New York Convention, the United Nations Guiding Principles on Business and Human Rights and the Multilateral Investment Guarantee Agency.
Currency and Finance
Credit Availability: Accessing affordable credit is challenging in Tanzania. The average bank lending rate over 2008 to 2016 was 15.6% and is estimated to remain at 15.5% from 2017 to 2023.
Capital Control: Tanzanian regulations permit unconditional transfers through any authorised bank in freely convertible currency of net profits, repayment of foreign loans, royalties, fees charged for foreign technology and remittance of proceeds. The only official limit on transfers of foreign currency is on cash carried by individuals travelling abroad, which cannot exceed US$10,000 over a period of 40 days. Shortages of foreign exchange are rare. Bureaucratic hurdles continue to cause delays in processing and effecting transfers. Delays may range from days to weeks. Investors rarely use convertible instruments.
Remittance Policies: The United States Department of State reports no issues with US firms remitting or repatriating funds out of Tanzania. In fact, the Tanzanian government uses easy repatriation of funds, with guaranteed remittance for foreign investors, as an incentive for investment.