This document contains a student's responses to exam questions on investment incentives in Tanzania and international double taxation relief. Regarding investment incentives in Tanzania: 1) Various tax incentives under statutes like the Income Tax Act stimulate investment in priority sectors like agriculture and export zones. 2) Incentives encourage economic growth but can reduce government revenues. Regarding double taxation relief: 1) Agreements reduce barriers to cross-border investment and trade. 2) They increase tax certainty and cooperation between countries. 3) Relief measures like exemptions and credits aim to avoid taxpayers being taxed twice on the same income in different countries.

1. MZUMBE UNIVERSITY
SCHOOL OF BUSINESS
DEPARTMENT OF ACCOUNTING AND FINANCE
NAME: EINOTH .G.JOHN
REG: 9649/T.09
COURSE: Bacc.LGAF III
SUBJECT: ACC 391
DATE: 5th JUNE, 2012
QUESTION ONE
(a)Discuss the applicability of provisions under the various statutes in Tanzania for investment
incentives.
(b) Discuss the arguments for against investment incentives in Tanzania
QUESTION TWO
Discuss the rationale behind international double taxation relief and agreement.

2. INTRODUCTION
INCENTIVES OFFERED BY TANZANIA
Tanzania offers a variety of incentives. According to Tanzania Investment Centre (TIC, 1998),
the incentives have been devised to compensate and reward investors for their entrepreneurship;
to match the changing needs of the country; to channel investments in the direction most need for
economic development and to ensure growth with social equity.
Section 19 and 20 of the Tanzania Investment Act 1997 referred above does not categorically
mention the types of incentives offered by the country. These are more clearly mentioned in
Investor’ Guide to Tanzania 1998, which is published by the TIC. The incentives mentioned in
the Investors’ Guide to Tanzania 1998 (pp. 14-19) are mainly various tax rates for different
sectors. For example the mining sector and export processing zones, have a 0% tax rate on the
following ; custom duty on capital goods, sales tax on capital goods and withholding tax on
interest.
QUALIFYING BUSINESS IN TANZANIA
Incentives in Tanzania are granted to holders of Certificate of Incentives issued by TIC .Other
approved investors too are eligible. The qualifying threshold for foreign investors is US$
300,000 , down from US$ 500,000 in 1996. Local investors face a threshold of US$ 100, 000.
Investment in rehabilitation should exceed US$ 250,000 for foreign investors (and joint
ventures) and US$50,000 for local investors.
DEFINITION OF KEY TERMS
Tax incentives
Tax incentives can mean many things. It can mean tax reduction intended to encourage business
operations, Foreign Direct Investment being one of them. They are special provisions intended to
encourage certain kinds of behaviour in response to tax benefits. It can also mean any tax
provision which include certain behaviour because, objectively and irrespective of the original
rationale of the provisions this behaviour has more favourable tax consequences than the
alternative forms of conduct.

3. Types of Tax Incentives
Tax incentives are of many types, some of which are as follows. Tax holidays, Investment
allowances and tax credits, Investment credit is tied directly to fixed investments. Timing
differences and General tax reductions.
INVESTMENT INCENTIVES:
These are the benefits offered by host economies to foreign investors so as, combined with other
Foreign Direct Investment determinants, may help to attract more Foreign Direct Investment s
and/or retain those already present in a country.
Double Taxation: Phenomenon whereby the same income is taxed in two or more tax
jurisdictions. In the same year of income; By the same tax payer.
International Double Taxation relief: Refers to International tax relief granted through taxation
agreement negotiated between Tanzania and other countries. (being international calls for a need
of cooperation between these countries in granting relief).
Incentives under TIA 1997.
a) A holders of certificate of investments are entitled under 3rd schedule no.2 of TIA 100%
deduction of capital expenditure incurred in the year of income and preferential withholding
tax rates on dividend and interest on loans for both resident and non resident person carrying
on business on priority sectors (dividend 10%; interest 0).
b) Assistance from TIC in processing statutory licenses, registration, permits and approvals and
other clearances.
c) Guarantees on remittances of profits, dividends and others against nationalization without
proper compensation.
Incentives under ITA (as revised), 2008
a) Full deduction of agriculture, research, development and environment expenditures.
b) Depreciation allowances for depreciable assets under 3rd schedule of the ITA, 2008 (s.17).

4. c) Full deduction of losses on realization of business assets and liabilities (s.18).
a) Unrelieved loss from any business or investments for any year of income may offset against
profits of the current year of income or against other businesses or investments (s.19).
b) Full deduction of expenditure incurred in clearing land and planting thereon permanent crops.
Incentives under VAT (as revised), 2006
a) Exports of goods or services are zero rated.
b) Essential or basic goods are exempted like agricultural inputs, health supplies and the like.
c) Special relieves for specific individuals like importation under technical aid agreements,
importation of mining equipment.
QUESTION ONE
a) The applicability of provisions under the various statutes in Tanzania for investment
incentives.
 Today agricultural investors in Tanzania are enjoying 100% capital allowance as per 3rd
schedule of the ITA (as revised), 2008.For example in cotton production in Mwanza and
shinyanga, Cashew nuts in Mtwara, Coffee production in Bukoba and Arusha; on the
other side capital allowances has stimulated the Japanese and Chinese to invest in rice
production in some areas like the Arusha municipal and some parts of the morogoro
mainly at Kilosa.
 They have stimulated developed in some priority geographical areas. The Export
Processing Zone which was established by the Act no 11 of 2012 has encouraged
development of some small industries like Quality Foam Limited, and Dodoma Wine
industry in Dodoma.
 It has stimulated development in communication networks in the country. Through tax
relief network provider are given tax holidays for the first five (5) year after their

5. establishment in Tanzania. For example Vodacom, Airtel, Tigo, radio stations and
television broadcasting.
(b) Discuss the arguments for and against investment incentives in Tanzania
The argument for investment incentives in Tanzania.
 They have encouraged rapid economic growth: The fiscal and tax incentives are
necessary in achieving rapid economic development which is the major concern of all
countries, the resultant effect of this concern is the regional economic groupings, trade
liberalization among nations and formulation of competitive investment incentives.
 They are major factors in decision making: Tax incentives are considered to be major
factor in the investment decision process as a result it is necessary to review fiscal and tax
legislation to see to what extent investments are either encouraged or discouraged by
taxation.
 Tax incentives are necessary to speed up the level of investment by maximizing the profit
after tax; high tax rate lower the profit of the investment and hence discourage the
investors at a respective country and Tanzania in particular. By providing tax incentives
the investors will be encouraged to invest in the priority areas such as Dodoma, Rufiji,
Mererani, Bagamoyo, Tanga Port and other among many in Tanzania.
 Grating tax incentives act like a bonus which eventually increases the level of the
retained earning to the investors. This is among the approaches taken by countries to
attract more Domestic and Foreign Direct Investment includes a general improvement in
the investment/Business environments in these countries. Tax incentives granted in
Tanzania are clearly provided in the 3rd schedule of the ITA (as revised), 2008. On top of
these incentives come three types of wear and tear deductions allowed by Tanzania.
Tractors, combines, and self-propelled heavy equipment qualify for class 1 deduction and
earn a 37.5% annual deduction. Light self-propelled equipment is entitled to a class 2
deduction of 25% annually. Class 3 deductions amount to 12.5% annually on office
furniture and Class 8 deduction of 100% annually on agricultural plant and machines.
 Investment incentives accelerates establishment of new enterprises and hence creates
employment opportunities in the respective country as Tanzania is concerned. This can

6. be stimulated by tax holidays probably the most known and widespread tax incentive is
tax holidays. These are mainly targeted to new firms and may not be available to existing
operations. They are more linked to the establishment of enterprises than to the level of
investment. New firms are allowed a period of time after some initial point when they are
relieved from the burden of income taxation. The period can be extended to a subsequent
period of taxation at a reduced rate of tax.
 Businesses can start enjoying tax holidays at different times of investments’ life. It can be
when the production starts; the first year of profit; first year of firms’ positive cumulative
profit on its operations. For large projects with huge start-up costs, tax holidays, which
start, when production occurs may actually increase the tax paid over the life of the
project. Therefore, tax holidays may occur when no taxes would have been paid in any
event and taxes may be increased following the holiday because no losses are available to
offset the profits.
 Firms and projects which make substantial profits in the early years of operation
potentially enjoy tax holidays. These include the trade sector, and short-term construction
or service sector in real estate; restaurants; hotels and short-term market exploitation
firms.
The argument against investment incentives in Tanzania.
 On the Investment allowances and tax credits this type of tax incentive presents some
problems. It is difficulty to define the eligible expenditures and to choose the rate of
allowance or credit. It is also a problem to set a restriction on their use. This is of little
benefits for the quick profit types of firms, which can take best advantage on tax
holidays. Tax allowances are of greatest benefit for firms within income from existing
operations. Firms with low income or start-up firms cannot begin to take advantage of the
incentive until income is earned. Investment allowance is usually made in the year of
acquisition or the first year of use of an asset. It does not reduce the basis for write-off in
later years. It is common in connection with different kinds of capital expenditure,
particularly in respect to industrial undertakings. It reduces the taxable income.
 On the taxholday’s incentives among the problems that this incentive present is that it
can be used to shelter income ( from existing domestic operations) from taxation through

7. transfer pricing and the transfer of operations from existing firms to new ones that qualify
for the holidays and major capital intensive projects are not likely to benefit from this
incentive, as they do not normally make profits in the early years of operation. For tax
holidays, revenue impact is tied to the degree of new activity. Therefore revenue impact
is relatively low in the early years of the program and grows over time as more firms
become eligible.
 Loss of government revenues. Tax is the major source of the government revenues as a
result Investment incentives creates some possibility of tax avoidance hence reduces
government revenues this can be viewed as discussed above through tax exemptions, tax
holiday’s and any other allowable deduction under the various provision on the ITA (as
revised), 2008, TIA 1997, VAT (as revised) 2006.A good example is a change in
ownership which makes the new one gain a revised tax holiday’s from the outgoing
ownership of the respective firm in the country as Tanzania is concerned.
QUESTION TWO
The rationale behind international double taxation relief and agreement.
 To encourage free flow of resources, investment, trade and encourage capital formation.
The double taxation treaties are intended to allow cooperation in training and tax
administration to promote free flow of capital, free flow of technology and free flow of
skilled technical personnel that promotes formulation of competitive investment incentive
packages in order to attract both local and foreign capital.
 To reduce possibility of tax avoidance and evasion. With many taxes investors are
discouraged in the whole course of paying taxes as a result they practice and use the
available techniques whereby one so arranges his business affairs such that he pays little
or no tax at all but without contravention of the tax law which eventually lower
government revenues.
 To certainty for tax payers and tax authorities in their international dealings. A country
avoids administrative difficulties that arise in through taxation of the international

8. dealings where on the other side for the local people or local investors sometimes may
feel that they are discriminated against foreigners.
 To reduce socially financial hardship that lead to lower disposable income. Double
taxation relief enhance international co-operation which is crucial importance in order to
achieve rapid economic and social development where by establishing bilateral and
multilateral regional economic groupings to promote trade and investment like
COMESA, SADC, EAC.
 To protect investors from multiple taxes or double taxation that is aimed to give relief by
the way of exemption, credit and setoffs for tax suffered on income originating in these
countries.

9. BIBLIOGRAPHY
Bergsman, J. (1999) Advice on Taxation and Tax Incentives for Foreign Direct Investment.
Price Waterhouse Coopers (1999). Tanzania Investor Road Map. Dar-es-salaam.
Tanzania Investment Act, 1997.
Tanzania Investment Centre (1998). Investors’ Guide to Tanzania. Printing Colour Print (Ltd),
Dar-es-salaam.