MOSHI CO-OPERATIVE UNIVERSITY

(MOCU)
FACULTY: FBIS

PROGRAMME: BACHELOR IN LAWS (LL.B III)

COURSE ANTE: LAW 324

COURSE NAME: TAX LAW

INSTRUCTOR: MR. MWIGAMBA J.

REGISTRATION NUMBER: MoCU/LL.B/1481/21

STUDENT NAME: MERCY THOMAS

TASK: INDIVIDUAL ASSIGNMENT

SUBMISSION DATE: 7TH JUNE 2024

QUESTION:
In the evening of 15th May, 2024 while navigating in different online platforms, you landed on an
online advert from International Journal of Tax Law (IJTL). The advert appears to be a call by
the journal for submission of short scholarly articles for its 3 rd volume to be published in
December 2024. Specifically, they are looking for contributions of scholarly piece of
approximately 3500-4000 words (exclusive of footnotes) proving a critical treatment on
emerging tax law issues particularly on taxation of digital economy in Tanzania perspectives.

Amused by the call, you quickly framed a title of your intended Article that reads;
“Taxation of the digital economy: Navigating Tanzanian Policies and Legislative Environment.”
Required:
Based on the above facts, prepare a scholarly article to be submitted to the Journal’s
Chief Editor not later than Sunday, 26th May 2024.

Abstract
The digital economy has revolutionized the way we conduct business and consume goods and
services. However, this rapid transformation has challenged traditional tax regimes, creating a
complex landscape for taxing digital transactions in Tanzania. This article critically examines the
current policies and legislative environment surrounding the taxation of the digital economy in
Tanzania. It analyzes the limitations of the existing framework and explores potential avenues
for reform to ensure a fair and efficient tax system in the digital age.

Keywords: Digital Economy, Taxation, Tanzania, Policy, Legislation

Introduction
Taxation meaning is the process by which a governing body, typically a government, imposes a
compulsory financial responsibility on its populace or inhabitants. Throughout history, the
payment of taxes to governmental entities or representatives has remained an enduring fixture of
civilization. The concept of taxation encompasses various forms of obligatory assessments,
encompassing income, capital gains, and estate taxes, among others. The digital economy refers
to the economic activities that are driven by digital technologies, the internet, and the use of data.
It encompasses a wide range of sectors and activities that rely heavily on digital technologies and
connectivity. In the digital economy, businesses and individuals engage in various online
activities, such as e-commerce, digital services, digital media, online advertising, cloud
computing, and data analytics. It involves the production, distribution, and consumption of goods
and services that are facilitated or conducted through digital platforms, networks, and devices.
The digital economy has transformed traditional business models,

The digital economy encompasses all economic activity facilitated by information and
communication technologies (ICTs). It has grown exponentially in recent years, driven by factors
like increased internet penetration, mobile phone usage, and the rise of e-commerce platforms.
While the digital economy presents numerous opportunities for economic growth and
development, it also presents unique challenges for tax authorities.

Traditionally, tax systems have been designed to capture value generated through physical goods
and services. However, the digital economy operates largely in a virtual space, blurring
geographical boundaries and making it difficult to identify taxpayers and determine taxable
income. This has led to concerns about lost tax revenue and unfair competition between
traditional businesses and digital players.
Background of Taxation in Tanzania
Taxation in Tanzania has a historical background that dates back to the colonial era. The country
initially adopted and periodically reformed the colonial tax systems, starting with the
introduction of the poll tax by the British in the early 20 th century. Post-colonial reforms included
the introduction of sales tax in 1969, new income tax legislation in 1973, amendments to existing
tax legislation to revise bases and rates, abolition of certain excise duties in 1979 and export
duties in 1985 to 1986, and re-introduction of excise duties in 1989. In 1989 a Tax Commission
was appointed by the Tanzanian government. The Commission’s mandate was to study and
review both central and local government tax systems and administration.

Value Added Tax Act

In the Value added tax act has many challenges example it faces complexity in pertaining to tax
codes which can either be due to their absence, intricacy, or incorrect mapping, can hinder
accurate VAT determination also wrong VAT determination and the last is frequent regulatory
changes in which the VAT regulations are subject to frequent updates and amendments by tax
authorities, making it challenging for businesses to stay abreast of the latest requirements.
Continuous changes in tax laws can result in compliance gaps, errors, and noncompliance issues
for organizations.

Current State of Taxation of the Digital Economy in Tanzania

Tanzania, like many developing countries, is still grappling with how to effectively tax the
digital economy. The current tax framework primarily relies on:

 Corporate Income Tax (CIT): This tax applies to the profits of resident companies
regardless of the source of income. However, for digital businesses with limited physical
presence in Tanzania, it can be challenging to establish taxable presence and determine
the portion of profits attributable to the Tanzanian market.

 Value Added Tax (VAT): VAT is levied on the supply of goods and services within
Tanzania. However, the application of VAT to digital transactions can be complex,
especially for cross-border transactions.

Limitations of the Existing Framework

Several limitations hinder the effectiveness of the current tax framework for the digital economy
in Tanzania:

 Lack of Clear Definitions: The Tanzanian tax code lacks clear definitions of key terms
like "digital services" and "permanent establishment" in the context of the digital
economy. This ambiguity creates uncertainty for both taxpayers and tax authorities.

 Limited Scope of Existing Taxes: The existing tax framework is not well-suited to
capture the specific characteristics of digital businesses. For example, traditional profit-
based taxes might not accurately reflect the value generated by digital platforms that rely
heavily on intangible assets and user data.

 Administrative Challenges: The Tanzanian Revenue Authority (TRA) may face

challenges in identifying and registering digital businesses, particularly those operating
from outside the country. Additionally, enforcing tax collection on cross-border digital
transactions can be complex.

Challenges Faced by Taxpayers in the Digital Economy

The digital economy brings a wave of innovation and convenience, but it also presents
unique challenges for taxpayers. Here’s a breakdown of some key difficulties individuals and
businesses face in the digital landscape:

Unclear Tax Rules

Rapid Evolution: The digital economy is constantly evolving, and tax regulations often
struggle to keep pace. This can lead to ambiguity and uncertainty for taxpayers regarding
their tax obligations in the digital sphere.

Lack of Clear Definitions: Key terms like “digital services” or “permanent establishment”
in the context of the digital economy might not be clearly defined in tax codes. This
ambiguity can make it difficult for taxpayers to determine their tax residency and the
applicable tax rate.

Administrative Burdens
 Recordkeeping: Digital transactions often involve complex data trails and intangible assets.
Keeping accurate records for tax purposes can be challenging, especially for smaller
businesses or individuals unfamiliar with digital record-keeping practices.

Multi-Jurisdictional Issues: The digital world transcends geographical boundaries.

Businesses operating online might sell to customers in multiple countries, creating
complexities in determining tax residency, source of income, and potential double taxation.

Security Concerns
Data Privacy: Storing and transmitting financial data electronically raises concerns about
data security breaches. Taxpayers might be hesitant to share sensitive financial information
online for tax filing purposes.

Cybercrime Risks: The digital environment is susceptible to cybercrime. Taxpayers might

be vulnerable to phishing scams or malware attacks targeting their tax information.

Significance of Taxation in Tanzania’s Digital Economy

Taxation plays a crucial role in Tanzania’s digital economy for several key reasons;

Revenue Generation: It captures a fair share of the value created in the growing digital sector,
generating funds for vital public services and infrastructure development.

Level Playing Field: A clear tax framework creates a fair competitive environment for both
traditional and digital businesses.

Economic Growth: Predictable tax rules attract foreign investment and foster digital sector
growth, leading to job creation and innovation.

Social Equity: Tax revenue can be used to fund social programs that bridge the digital divide
and ensure everyone benefits from the digital revolution.

Effective taxation of the digital economy unlocks its full potential, contributing to Tanzania’s
overall development and prosperity.
Potential Reforms for Effective Digital Taxation in Tanzania
To unlock the full potential of the digital economy and ensure a fair and efficient tax system,
Tanzania can consider several potential reforms;

 Introducing a Digital Services Tax (DST): A DST could be levied on the gross revenue or
profits earned by digital businesses from Tanzanian users. This approach would be
simpler to administer and more effective in capturing the value generated by digital
activities compared to traditional profit-based taxes. Additionally, a DST could be
designed with tiered rates to lessen the burden on smaller digital businesses.
 Expanding the Definition of Permanent Establishment: The definition of permanent
establishment could be broadened to include a significant digital presence, even without a
physical office in Tanzania. This would ensure that digital businesses with a substantial
economic connection to Tanzania, such as those generating significant revenue from
Tanzanian users, are subject to tax. The definition could consider factors like user base,
data storage location, and the level of interaction with the Tanzanian market.
 Improving International Cooperation: Tanzania can collaborate with other African
countries and international organizations like the OECD (Organization for Economic Co-
operation and Development) to develop harmonized approaches to taxing the digital
economy. This would help to avoid double taxation, where businesses are taxed on the
same income in multiple countries, and create a more level playing field for businesses
operating across borders. Additionally, international cooperation could facilitate the
exchange of information between tax authorities, making it easier to identify and register
digital businesses.
 Strengthening Tax Administration Capacity: The TRA needs to invest in technology and
expertise to effectively identify, register, and audit digital businesses. This could involve
developing specialized units within the TRA dedicated to digital taxation, training
existing staff on digital tax issues, and implementing sophisticated data analytics tools to
track and assess digital transactions.
 Raising Awareness: Raising awareness among taxpayers about their tax obligations in the
digital economy is crucial. The TRA can develop educational campaigns and resources to
help businesses understand the new tax landscape and ensure compliance.
Looking Forward: Embracing the Digital Future

The digital economy presents both challenges and opportunities for taxation in Tanzania. By
critically evaluating the limitations of the existing framework and implementing targeted
reforms, Tanzania can create a tax system that is fair, efficient, and fosters the growth of the
digital economy. Continuous monitoring of emerging trends in the digital landscape and adapting
tax policies accordingly will be essential for Tanzania to navigate the complexities of taxing the
digital economy in the years to come. Additionally, Tanzania’s experience can be valuable for
other developing countries grappling with similar challenges. By taking a proactive approach,
Tanzania can harness the potential of the digital economy to generate revenue, promote
innovation, and ensure inclusive growth in the digital age.

Based on the analysis of the significance and challenges surrounding digital taxation in Tanzania,
here are some key recommendations:

Policy and Legislative Reforms

Introduce a Digital Services Tax (DST)

 Design a DST with a clear and transparent structure, potentially levying a tax on the gross
revenue or profits earned by digital businesses from Tanzanian users.
 Consider tiered rates to lessen the burden on smaller digital businesses while ensuring a
fair contribution from larger players.

Expand the Definition of Permanent Establishment

Broaden the definition to include a significant digital presence, even without a physical office in
Tanzania. This could consider factors like:

 User base size and engagement in Tanzania.

 Location of data storage related to Tanzanian users.
 Level of interaction with the Tanzanian market (e.g., advertising, customer support).

International Cooperation
Collaborate with African nations and organizations like the OECD to:
  Develop harmonized approaches to digital taxation.
 Avoid double taxation of businesses operating across borders.
 Facilitate information exchange between tax authorities for efficient identification and
registration of digital businesses.

Strengthening Tax Administration Capacity

Invest in Technology and Expertise

 Develop specialized units within the Tanzania Revenue Authority (TRA) dedicated to
digital taxation.
 Train existing staff on digital tax issues and data analysis tools to track and assess digital
transactions.
 Implement robust IT infrastructure to manage a growing digital tax environment.

Raising Awareness
 Develop educational campaigns and resources for businesses in the digital economy,
clarifying their tax obligations and ensuring compliance.
 Partner with industry associations and chambers of commerce to reach different segments
of the digital business landscape.

Additional Considerations

Addressing Informal Sector Challenges

 Develop effective strategies to integrate informal digital businesses into the tax system,
promoting formalization and broadening the tax base.
 Consider simplified registration processes and minimal tax burdens to incentivize
participation.

Protecting User Privacy

Implement data privacy regulations that balance the need for tax collection with protecting user
data and ensuring trust in the digital ecosystem.

Monitoring and Adapting

Continuously monitor trends in the digital economy and adapt tax policies accordingly to remain
effective in a rapidly evolving landscape.

By implementing these recommendations, Tanzania can create a more robust and efficient tax
framework for the digital economy. This will ensure a fair contribution from digital businesses,
generate much-needed revenue for development, and foster a thriving digital ecosystem that
benefits all stakeholders.

Conclusion
The digital economy presents both challenges and opportunities for taxation in Tanzania. By
critically evaluating the limitations of the existing framework and implementing targeted
reforms, Tanzania can create a tax system that is fair, efficient, and fosters the growth of the
digital economy. Continuous monitoring of emerging trends in the digital landscape and adapting
tax policies accordingly will be essential for Tanzania to navigate the complexities of taxing the
digital economy in the years to come.

The theme of navigating Tanzanian policies and legislative environment in relation to taxing the
digital economy is both timely and relevant, considering the rapid advancements in technology
and the increasing importance of digital transactions in today’s global economy. The proposed
article titled “Taxation of the Digital Economy: Navigating Tanzanian Policies and Legislative
Environment” aims to contribute to this discourse by providing a comprehensive analysis of the
challenges and opportunities associated with taxing digital activities in Tanzania. By exploring
key concepts such as digital presence, value creation, and profit attribution in the context of the
digital economy, the article seeks to shed light on how tax laws and regulations can be adapted to
effectively capture revenue from digital transactions while ensuring fairness and compliance.