Adam Smith, also known as the father of modern economics, argued that, taxation should follow the four principles of equity, certainty, convenience and efficiency.
Equity in that, taxation should be compatible with taxpayers’ conditions, including their ability to pay. Certainty should mean that taxpayers are clearly informed about why and how taxes are levied. Convenience relates to the ease of compliance for the taxpayers: how simple is the process for collecting or paying taxes? Finally, efficiency touches on the collection of taxes: basically put, the administration of tax collection should not negatively affect the allocation and use of resources in the economy, and certainly should not cost more than the taxes that are being collected.
Adam Smith’s principles of good taxation form a sound basis for taxation today, however they are not always followed. Sometimes tax systems hit certain categories of taxpayers or kinds of consumption while leaving others relatively untouched. Today, I would like to touch base on the principle of equity to the taxation of corporate social responsibility (CSR) for mining and petroleum sectors against other sectors.
Our Income Tax Act, 2004 (ITA 2004) CAP 332 under section 16, gives rights to all taxpayers that are doing business in Tanzania to claim tax deduction on: (a) amounts contributed during the year of income to a charitable institution referred to in subsection (8) of section 64 or social development project; (b) any donation made under section 12 of the Education Fund Act; and (c) amount paid to local government which are statutory obligations or government directives to support community development projects. The provision further stipulates that, these deductions for a year of income shall not exceed two percent of the taxpayer's income from the business calculated without a deduction under that subsection.
The ITA 2004 has defined charitable organisation to mean a resident entity of a public character that satisfies the following conditions: (a) the entity was established and functions solely as an organisation for: (i) the relief of poverty or distress of the public; (ii) the advancement of education; or (iii) the provision of general public, health, education, water or road construction or maintenance; and that entity has been issued with a ruling by the Commissioner under section 11 of the Tax Administration Act, 2015 currently in force stating that it is a charitable organisation or religious organisation.
Also, other laws of the land, such as the Mining Act, 2010 (R.E 2019) under section 105, requires a mineral right holder on annual basis to prepare a credible corporate social responsibility plan jointly agreed by the relevant local government authority or local government authorities in consultation with the Minister responsible for local government authorities and the Minister responsible for Finance. The CSR plan shall be submitted by a mineral right holder to a local government authority for consideration and approval before implementation.
Whilst CSR is mandatory under the Mining Act 2010, things are different under the ITA 2004. Both sections 65E(2)(a) and 65N(2)(a) on taxation of mining operations and petroleum operations respectively, clearly states that, no deduction shall be allowed in calculating income from a separate mining operation or from a separate petroleum right under section 16 of the ITA 2004.
This is where the question on equity arises. One may ask, why should other sectors be allowed to claim tax deduction on the contribution they make to support community development projects, advancement of education, health or construction of roads and the same rights denied to the mining and petroleum sectors? Clearly, our current tax law on corporate social responsibility contravenes with the principle of equity by Adam Smith.
As we approach the government’s fiscal budget for the year 2021/22 in the next coming month, I would like to put this matter forward to the legislators to think about amending our income tax law, first to encourage the mining and petroleum sectors to involve themselves more on community development projects; second to be consistent with other laws of the land; and third, to ensure that our laws are in line with the principle of equity.
Frank Mughwai is a Tax Manager at Shanta Mining Company Limited in Tanzania ([email protected]). Views expressed herein are those of the author and do not represent those of Shanta Mining.