Introduction

Zanzibar is one of the greatest tourist destinations in Africa and the world at large. Recently, the travel magazine named Zanzibar as a top destination for those seeking relaxation and pleasure during the 2023 summer. It is in this regard, the Commission for Tourism is working very hard to ensure there are attractive environments for establishing tourism business in Zanzibar.

The Situation Before Changes

Zanzibar Tourism Act provides, inter alia, no tourism business shall be established in Zanzibar unless there is a valid license granted by the Zanzibar Commission for Tourism. Also, the Act provides that, the Director General upon the applicant’s fulfilment of the conditions set under the Act shall grant the license, and the license shall be valid for a period of one year. Practically a period of one year is defined to mean a traditional calendar year. In that essence, all people doing tourism business in Zanzibar were required to renew their license at the end of the traditional calendar year.

The Instigation of changes

On July 14, 2023, the Zanzibar Commission for Tourism issued a press release announcing the significant change in the validity period of licenses issued to tourism-related businesses. It provides, all licenses issued by the Zanzibar Commission for Tourism shall be valid for a duration of 12 months rather than following the traditional calendar year.  According to the press statement, the policy change is part of the ongoing commission’s commitment to promote ease of doing business and to accommodate the evolving needs of tourism businesses in Zanzibar.

Also, a point worthy noting is, the changes in the licensing policy will allow those who desire to engage in the tourism business to obtain their licenses at any time throughout the year, with subsequent renewals falling on the anniversary of the original issuance. This manifests the changes intended to promote ease of doing tourism business in Zanzibar.

Implications of the Licensing Policy Change

The change in licensing policy is expected to have the following implications;

• Streamline administrative processes; The policy change will simplify the administrative process because the application for renewal will be determined and granted at different times.
• Reduce bureaucratic hurdles; one of the noted challenges of investing in African countries is, the bureaucracy of the government institutions responsible for providing necessary documentation and licenses. In that regard, the changes of the policy to allow the validity of the license to be valid for 12 months rather than a traditional calendar year eliminates the unnecessary back and forth caused by the simultaneous renewal of licenses.
• Allow businesses to operate without interruption; the changes set a relief for the investors to continue with their business for a longer period of time without interruption by the commission. In that essence, eliminating the simultaneous license renewal promotes smoother operation for all stakeholders involved.

Conclusion

The licensing policy change is going to benefit both tourism operators and the government of Zanzibar as Ms. Hafsa Mbamba, the Executive Secretary of the commission quoted saying, interalia “We believe that this change will provide our valued tourism operators with more flexibility, enable them to focus on delivering exceptional experiences to visitors and contribute to the growth of Zanzibar’s tourism industry”.

Important Notice:

This publication has been prepared for information purposes only, and it does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication, and, to the extent permitted by law, Cymbell Attorneys, its members, employees and agents do not accept or assume any liability, responsibility or duty of care for any consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.

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Transfer Pricing as a concept is about transferring and/or manipulation of price which leads to tax avoidance in a transaction with the aim of reduction of tax liability. The price that is involved in these sorts of transactions is referred to as “Transfer price” as it is the price charged in the transaction between related or associated entities with the aim to avoid tax. Transactions of multinationals tend to be highly scrutinized for transfer pricing as they are taken to be more likely to carry out these forms of transactions.

Transactions between associated entities are termed as “Controlled transactions” as provided for under Regulation 3 of the Tax Administration (Transfer Pricing) Regulations, 2018 and these are defined as transactions between associates e.g., entities in same corporate structure.

An example of a Transfer Pricing arrangement can be observed where a multinational corporation in a high-tax country will sell its products to its subsidiary in a low-tax country at a price that is below the market value . Hence, where the product is sold at below the market price then the profits that the multinational corporation records are much lower than they would have been had the products been sold at the fair market value. This overall reduces the taxable income that may be charged at its home country.

After the subsidiary company in the low-tax country purchases the products at a discounted price it will proceed to sell the same product at a much higher price thus maximizing the profits gained and losing little to the tax regimes in the respective country due to the lower taxes compared to the home country of the multinational corporation.

Transfer Pricing Compliance

For related/associated parties, the law as under Regulation 7 requires that  where such transactions are being carried out there must be provided an extensive Transfer Pricing documentation by the parties to the transaction.

This documentation must provide complete organizational structure of all related parties, nature of the business, descriptions of these transactions and so on. The purpose of these extensive documentations as per Regulation 7(2) is to capture and scrutinize all transactions that meet the 10-billion-shilling (and above) threshold so as to determine compliance with transfer pricing rules and the arm’s length principle.

The law, however, under Regulation 7(3)b also provides that the Commissioner General may also require the transfer pricing documentations to be provided even by controlled entities who do not meet the 10-billion-shilling threshold.

Regulation of Transfer Pricing in Tanzania

If the Tanzania Revenue Authority determines that a transfer pricing arrangement has taken place the Commissioner General has the discretion to exercise his statutory authority under the Tax Administration (Transfer Pricing) Regulations, 2018 to analyze the level of tax avoidance in order to reverse the tax benefits realized. A local example can be observed in the Court of Appeal case: ALLIANCE ONE TOBACCO TANZANIA LIMITED V. COMMISSIONER GENERAL (TRA) [CIVIL APPEAL NO. 118 OF 2018]. In this case we can observe how the TRA exercises its authority in detecting transfer pricing arrangements and proceeding to issue adjusted assessments to eliminate the tax benefits created.

Adjustment of Transfer Pricing Transactions

In the recharacterization of a price used in transactions deemed to involve transfer pricing the concept that comes about is one termed as “Arm’s Length Price”.

Regulation 3 of the Tax Administration (Transfer Pricing) Regulations, 2018 defines an arm’s length price as the price that is charged between independent persons. This basically means that the price that one entity would charge another when they are unrelated is regarded as the arm’s length price and anything considerably higher or lower is regarded as going against the arm’s length principle.

Methods of Determining the Arm’s Length Price

In the determination of whether a transaction involved an arm’s length price or not Regulation 5(1) of the Tax Administration (Transfer Pricing) Regulations, 2018 provides six (6) ways to determine the arm’s length price that is involved in a transaction among controlled entities.

1. Comparable Uncontrolled Price Method

Compares the prices of goods and services between related parties to the prices of identical goods or services between unrelated parties. For the sake of clarity pricing for related entities is referred to as uncontrolled price or pricing for related entities has referred to as controlled price. This method is applied by taking the prices of transactions which was similar between independence parties and the aim is to determine whether the transfer prices differ from the prices between unrelated prices. This is regarded as the most reliable method of determining the arm’s length price.

2. Resale Price Method

The arm’s length price is obtained by deducting the resale margin from the resale price. After deduction of gross margin and other expenses of transferring the goods or services between associated entities the transaction can be regarded as arms-length transaction of the supplied goods or services if the gross margin is similar to that of uncontrolled transactions. This is considered as a very useful approach in determining arm’s length prices for distributors.

3. Cost Plus Method

This method is used to calculate production related direct and indirect costs incurred by a supplier of goods or services in producing the goods or services. The method starts with the supplying associate and not with the buying associate. The markup is what is used to determine the arm’s length price however this method is mostly applicable to manufacturers of semi-finished goods who do not incorporate intangible assets or service providers who did not provide unique services.

4. Transactional Net Margin Method

This determines the arm’s-length price by using the net profit that was obtained following the controlled transaction. The net profit that is observed is then compared to the net profit earned from uncontrolled transactions. If a non-profit is similar in both transactions then it is taken that the control transaction used an arms-length price.

5. Profit-Split Method

This method is applied where the transactions of controlled entities are extremely integrated in a way that they cannot be extracted separately from the activities of controlled entities. What happens here is that the profits that are split between the entities are observed in comparison to independent entities following a similar business arrangement and the economic validity of the split and the apportionment is used to determine whether the profit-split was at an arm’s length.

6. Finally, the Commissioner General can also apply any other method that is deemed fit.

CONCLUSION

Business entities, therefore, must always take transfer pricing regulations into account whenever they intend to take part in considerable business transactions with associated entity/entities. Rigorous compliance with the laws and regulations will help to ensure that no unexpected tax liability will arise due to non-compliance.

Contact Person and Contributors

Comfort Mugisha Blandes- Managing Partner

blandes@cymbellattorneys.com

Harry Godfrey Mbise- Associate

hmbise@cymbellattorneys.com

Disclaimer:

This publication has been prepared for information purposes only, and it does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty is given as to the accuracy or completeness of the information contained in this publication, and, to the extent permitted by law, Cymbell Attorneys, its partners, employees and agents do not accept or assume any liability, responsibility or duty of care for any consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.

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Silicon Zanzibar is a recent initiative that has been announced in Zanzibar by the Ministry of Investment & Economic Development within the Fumba Special Economic Zone. The aim is to pull tech-based businesses, their workers, specialists, and investors. The goal is to place Zanzibar as an attractive location for the growth of an African technological hub.

Silicon Zanzibar was announced on Tuesday, August 3^rd, 2022. Companies such as Wasoko (originally headquartered in Kenya) have already relocated to Zanzibar and are currently enjoying the incentives provided under the private-public initiative. The initiative has captured global attention and is attracting more tech firms, workers and enthusiasts to the island.

To build the tech industry in Zanzibar, the following incentives have been placed forward by the Government of Zanzibar:

Direct Incentives

1. Work Visa Availability

This is a common pain point for most relocating workers as work visas and permits tend to take an inconveniently long time to process due to the bureaucratic procedures involved. The initiative is geared towards streamlining and simplifying the application and grant process in order to accelerate the ability of tech firms to quickly onboard foreign workers.

2. Corporate Income Tax Exemption

Exemption from payment of corporate tax for an initial period of ten years and thereafter a corporate tax, shall be charged at the rate specified in the Income Tax Act. The purpose for this is to allow investors to recoup the amounts and expenses incurred in establishing and operating the business (as stated under the Zanzibar Investment Promotion and Protection Authority Act, 2018).

This exemption, however, can only be applied for by an Approved Investor who invested not less than seventy five percent of the capital specified in the Business plan or Feasibility study approved by the Zanzibar Investment Promotion Authority, and has already started business operation.

Application is to be made in writing to the Authority for a Corporate Income Tax exemption and it is to be accompanied with;

1. Audited final accounts filed by the Zanzibar Business and Property Registration Agency;
2. Progress report of the investment made;
3. Tax Clearance Certificates from tax authorities; and
4. Valid business license.

3. Strategic Investment Incentives existing under Zanzibar’s Free Economic Zone Program

Since investment in tech is regarded as an innovative investment, tech firms can apply to the Zanzibar Investment Promotion Authority to be granted the status of being a Strategic Investment as provided under Section 6(c) and the Third Schedule to the Zanzibar Investment Promotion and Protection Authority Act, 2018.

The Incentives for Strategic Investments in Tech are as follows;

Benefits, Incentives and Allowances during Implementation of the Approved investment.

1. Exemption from all duties and taxes on importation and local purchases of construction goods and materials during the project construction;
2. Exemption of income tax on interest on capital borrowed from foreign banks;
3. Five years grace period on payment of land lease;
4. Hundred percent foreign ownership is allowed; and
5. Engagement of foreign contractors is allowed.

Benefits, incentives and allowance during operation of the approved investment

1. Fifty percent exemption of the prevailing rate for corporate income tax;
2. Fifty percent exemption of profit tax for repatriated profit;
3. Fifty percent exemption o for accelerated depreciation for five years;
4. Fifty percent exemption of income tax on interest on capital borrowed from foreign banks;
5. Hundred percent allowance on research and development expenditure;
6. Hundred percent retention of all profits after tax; and
7. Hundred percent foreign ownership is allowed.

Note: The Zanzibari government is likely going to modify and/or improve these incentives as the project is still receiving recommendations and comments from investors.

Indirect/Supplemental Incentives

1. Education and Training

Silicon Zanzibar is also gearing the government and investors towards the introduction of IT studies in schools and learning institutions. Wasoko, for instance, is working on developing an education curriculum to develop new technology experts.

This will help to create interns and employees that can be sourced directly from Zanzibar and thus helping to curb the global shortage of coders, programmers and tech professionals that is plaguing various countries.

2. Residential and Commercial Properties (Fumba Town)

Currently, residential and commercial properties are under construction in order to meet the growing demand for space in the area, offering proximity to the sea shore and the airport.

The target initial housing capacity for residents is 20,000 and this will help to give convenient, beautiful and safe housing to workers and owners of tech firms.

3. Private Operation of Zanzibari Fiber Optic Cable Network (to attract companies such as Facebook (Meta) and Google to invest in the same).

This is a recommendation given by the Founder and CEO of Wasoko. Zanzibar is surrounded by fiber optic cable networks. Daniel Yu suggests that privatization of the networks will help to boost connectivity and greatly facilitate the operation of tech firms in Zanzibar.

Regardless of whether this privatization takes place or not, the presence of the fiber optic cable networks around the Island is a positive sign towards eased and rapid connectivity.

4. Government supported infrastructure

Section 36(a)(i) of the Zanzibar Investment Promotion and Protection Authority Act provides that the Government will work towards development of integrated infrastructure facilities. This can be observed on aerial views of the Fumba Area which has seen rapid construction and setting up of various necessary and convenient infrastructure.

Expanding existing infrastructure as well as construction of new networks will greatly aid in facilitation and growth of Silicon Zanzibar.

Note:

Fumba Zone

Silicon Zanzibar has been established in the Fumba Zone. This zone was granted the status of an Export Processing Zone (EPZ) in 1992 and has been recognized and declared as a Free Economic Zone as provided under Section 35(1) of the Zanzibar Investment Promotion and Protection Authority Act, 2018.

It is located in the southwest coast of Unguja Island, 24 kilometers from the Seaport of Malindi and 10 kilometers from Zanzibar’s Abeid Amani Karume International Airport.

Important Notice:

This publication has been prepared for information purposes only, and it does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication, and, to the extent permitted by law, Cymbell Attorneys, its members, employees and agents do not accept or assume any liability, responsibility or duty of care for any consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.

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