What is the ‘wholly and exclusive’ principle?
Under Section 11(2) of Tanzania’s Income Tax Act (2004), employers may deduct expenses from their corporate tax return if those expenses are incurred in a capacity relating to the ‘production of income’ for their business. More specifically, expenses that qualify for the tax deduction must have been incurred ‘wholly and exclusively’ in work-related contexts, where ‘wholly’ refers to the amount of the expense, and ‘exclusively’ refers to its purpose.
There is no definition of ‘wholly and exclusive’ in Tanzanian law, but previous tax arbitration cases have helped to frame the principle. Notable amongst those cases was Appeal No. 89 & 90 of 2015, between the Buryanhulu Gold Mine and the Tanzania Revenue Authority, which established the following 7 tests to determine whether work-related expenses qualify as tax deductible:
- Assessee’s capacity: The expense must have been incurred in the taxpayers’ capacity as a trader (or in a similar work-related capacity).
- Commercial expenditure: The expense must have been incurred for commercial purposes in service of the taxpayer’s business.
- Reasonableness: The expense must be reasonable in the sense that it is in keeping with common business practices and other applicable circumstances. A parking garage, for example, would not be able to reasonably claim landscape gardening costs.
- Business purpose: The expense must be incurred for the direct purpose of facilitating trade for the business and with the goal of producing profit. Legal expenses paid to protect business assets, for example, would be permissible, while legal expenses paid to protect an employer’s personal assets, would not.
- Incidental third-party benefit: The expense tax deduction cannot be disallowed because a third-party also benefits from it. If a farmer pays for a well to be dug, for example, the subsequent expense deduction would not be disqualified if locals also used the well to meet their needs.
- Production of taxpayer’s income: Expense tax deductions must be incurred in the production of income for the taxpaying business rather than the employer. If an employer uses a personal car for work purposes, for example, they must appropriately apportion the work-related expense of running the car.
- Expenditure for future income: Deductible expenses incurred do not have to result in profits for that tax year in order to qualify as deductible.
While expenses can be assessed against the 7 tests above, certain expenses are not deductible from corporate income tax payments, including:
- Any tax payable under Tanzania’s Income Tax Act.
- Fines, interest and bribes paid to government entities or to governments of other countries.
- Expenses incurred in the process of calculating tax exemptions or final withholding payments.
- Distributions such as dividends from stocks and shares.
- Withholding tax paid by the withholder.
It is important to remember that all expenses should be documented with a fiscalised tax invoice or tax receipt including the following information:
- Date of issuance
- Description, quantity, or any relevant specification of the expense
- Total payable consideration for supply of the expense along with VAT amount
- Supplier name, TIN, and VRN
- Name, address, TIN, and VRN of customer claiming input VAT (if the expense value exceeds Tzs 100,000)
- QR code (if applicable)
For more information on Tanzania’s tax and payroll system, browse activpayroll’s Tanzania Global Insight Guide.