1. INTRODUCTION

Tanzania’s population is increasingly interested in digital assets and services. This is evident in the 2023 Tanzania Finscope Report by Financial Sector Deepening Tanzania which is a report based on a comprehensive financial sector demand-side survey. The report highlights that cryptocurrency awareness among adults sits at 9.7% and actual uptake in cryptocurrency stood at 1.7%. Notably, the uptake of cryptocurrency in Tanzania surpasses investment in traditional options like UTT Funds which stood at 1.4% and government bonds/bills which stood at 0.2%. The report is available at https://www.fsdt.or.tz/finscope/.

Due to the growing trend of ownership of digital assets, the Tanzania government has decided to take the opportunity to expand the tax base in this fiscal year by introducing a tax on digital assets and income generated by digital content creators. Last week, the Minister for Finance issued the Finance Bill of 2024 which proposes to amend various laws. The proposed changes in the Bill are likely to have a significant impact on digital transactions and arrangements. In this legal alert, we focus on analyzing the Amendments of the Income Tax Act, (CAP. 332) which introduce taxation of digital assets and digital content creators.

2. TAXATION OF DIGITAL ASSETS

The bill proposes to amend Section 3 of the Income Tax Act to include digital assets in the definition of Asset. The bill also introduces a new section 83C to impose an obligation to a non-resident person who owns a platform or facilitates the exchange or transfer of digital assets to withhold tax at a rate of three per cent when making payments to a resident person as a result of transfer or exchange of digital assets.  The proposed additional Section 83C (1) of the Income Tax Act states; –

A non-resident person who owns a digital asset exchange platform or facilitates the exchange or transfer of a digital asset and makes payment to a resident person in respect of the exchange or transfer of the digital asset shall withhold income tax under paragraph 4(c)(ix) of the First Schedule.

The stated withholding tax rate of 3% is provided under paragraph 4(c)(ix) of the First Schedule. We have endeavoured to dive deep into the discussion on what is envisioned to be digital assets under the Income Tax Act.  Section 83(C) (2)(a) &(b) of the bill state that; –

(a) For purposes of this section- “digital asset” includes- (a) anything of value that is not tangible including crypto-currencies, token codes, number held in digital form and generated through cryptographic means or any other means, by whatever name called, providing a digital representation of value exchanged with or without consideration that can be transferred, stored or exchanged electronically; or

(b) a non-fungible token or any other token of similar nature; and

“payment” means the gross fair market value considered received or receivable at the point of exchange or transfer of a digital asset.

2.1 Analysis of the scope and definition of digital assets

1. The definition is Broad & comprehensive: The given definition of digital assets in the Bill seems to be very broad in the sense that any digital form representing value, regardless of the method of generation or name, is eligible for taxation. This definition is meticulously drafted in a comprehensive manner to cover a wide range of digital representations of value, from cryptocurrencies, and NFTs to any other. This broad scope of definition guarantees that the applicability of the law remains relevant amid rapid technological developments and the advancement of digital asset space. Nevertheless, it also poses a challenge in legal interpretation and taxation as the definition is too far-reaching.
2. Tax will apply to exchange with or without consideration: The definition has the phrase “…. value exchanged with or without consideration….” This means that the taxation of digital assets does not necessarily depend on a transaction involving consideration (payment or exchange). This concept indicates that digital assets hold value intrinsically or through market perception therefore regardless of whether the exchange is a gift or through any other means without payment, the withholding tax would equally apply.
3. Transferability of digital asset: The definition has included a key feature of digital assets which is transferability. Digital assets can easily be transferred, stored, or exchanged electronically. The definition has explicitly explained what the transfer of digital assets entails which is the ability to transfer, store, and exchange these digital assets electronically.
4. Digital Asset Value The bill has clearly stated that the value of digital assets for purposes of tax is to be the gross fair market value considered received or receivable at the point of exchange or transfer of a digital asset. In practice, keen attention will have to be paid as digital assets such as cryptocurrency are highly volatile and prone to market risk which might bring challenges in determining the standard value of the digital assets in the market.

2.2     Implications of the proposed changes

1. Recognition of digital assets: The bill has given legal recognition of digital assets in Tanzania. This will encourage people to own and transfer digital assets in the country unlike in previous times when there was much scepticism on digital assets such as cryptocurrency when the Bank of Tanzania issued a circular warning the public that such currencies are not recognized by the government.
2. Taxation and Accounting: Entities dealing with digital assets must now recognize them in financial statements and may be subject to tax treatments in case of exchanges. Failure to properly report digital asset transactions can result in significant penalties, fines, and legal consequences as the same might be treated as tax evasion.

2.3 Legal Concerns

1. Lega status of digital assets: In November 2019, the Bank of Tanzania issued a public notice cautioning members of the public to beware of involvement in virtual currencies, as they are not legally authorized in Tanzania. The notice further advises members of the public against trading, marketing and usage of virtual currency because doing so is contrary to existing foreign exchange regulations. The introduction of a tax on cryptocurrency and other virtual currency raises the question of whether the government of Tanzania now recognize virtual currencies as legal tenders in Tanzania for the public to trade and use virtual currencies.
2. Consumer Protection: The introduction of a tax on digital assets is going to increase the growth and trading of digital assets in Tanzania. Nonetheless, the lack of a clear regulatory framework on consumer protection of digital assets especially cryptocurrencies might result in numerous hurdles such as misinformation of asset value, unfair fees or other charges on digital assets transactions, and lack of authority to investigate and resolve consumer complaints. There is most likely a need to review existing legal frameworks on consumer protection to ensure that consumer rights and protections extend to transactions involving diverse digital assets.
3. Intellectual Property: Digital assets being intangible in nature attract IP protection. For instance, the buying and selling of NFTs or similar tokens often adds another layer of legal complexity to IPRs. If the government intend to tax digital assets such as NFT, then it is incumbent upon the government to review intellectual property laws and legal frameworks to ensure that they afford sufficient protection of IP to safeguard digital assets from digital piracy, counterfeits, copyright infringement or ownership disputation. Creating a strong legal protection of IP on digital assets will boost inventiveness, investment and innovation in the digital sphere resulting in the creating of more digital assets.
4. Digital Asset inheritance: Digital assets like traditional assets can be inherited however inheritance of digital assets might face hurdles since the estate planning and probate laws that govern the transfer of assets were established before the advent of digital assets and their applicability may be challenging. It is therefore important for the legal and regulatory framework on inheritance to be amended to cover the transfer of digital assets. Some jurisdictions have updated their laws to explicitly include digital assets within the scope of estate planning and probate regulations. You can read more on digital inheritance at https://pollicy.medium.com/whats-mine-is-yours-figuring-out-your-digital-inheritance-in-the-african-context-ca083eaf5fc5
5. Cross-Border Transactions: Digital asset transactions can have aspects of across borders which might result in the transaction being subjected to multiple tax jurisdictions or double taxation if both the country of residence and the country where the transaction occurs claim tax jurisdiction over the same transaction.

3. TAXATION OF DIGITAL CONTENT CREATORS

Globally, digital content creators are seen as part of a fairly latest profession of self-employed individuals who can earn a living through content monetization such as sponsored content, online posts, online campaigns, or ad revenue from platforms such as Instagram, YouTube, TikTok, Facebook and others. The 2024 finance bill of Tanzania proposes the introduction of taxation of digital content creators. The bill proposes a definition of digital content and digital content creator as stated below:

Digital content means electronic content that may be downloaded, streamed or accessed in any manner, which is not simultaneously broadcasted over any conventional radio or television network in the United Republic. A Digital Content Creator is a person who produces digital content in formats that can be shared using a digital medium or platform over the internet.

The bill has proposed the introduction of 5% WHT on payments made by non-resident or resident persons to resident digital content creators by adding Section 83B which states.

A resident or non-resident person who makes payment to a resident digital content creator shall withhold income tax at the rate provided under paragraph 4(c)(viii) of the First Schedule.

Reading the above provision, it is clear that any entity or person that engages a digital content creator shall have to WHT on paying the content creator. This proposed tax on digital content creators has sparked a debate in the public. Creators seem to argue for a lack of recognition, support and facilitation by the government in the digital content space. Further, the digital content space in Tanzania being nascent it has been argued that the proposed tax could place Tanzanian creators at a disadvantage compared to those in countries without such a tax burden as it might lead brands to work with foreign creators, limiting opportunities for domestic talent. Nonetheless, it contended by others that the tax could be a form of recognition for the digital content sector and could help to formalize the industry to push for digital entrepreneurship in the country.

4. PRACTICES IN OTHER JURISDICTION

Tanzania is not the first country to tax digital-related services or assets. Kenya has a Digital Service Tax which was introduced in the Finance Act 2020 and became effective from 1st January 2021. The tax is payable on income derived or accrued in Kenya from services offered through a digital marketplace paid at the rate of 1.5% of the gross transaction value. The tax is payable by both residents and non-residents who are either digital service providers or digital marketplace providers. Similarly, in Ugandan, the tax authority implements a  5% digital services tax (DST) that was introduced by the Income Tax Amendment Act of 2023 effective 1 July 2023. The DST is imposed on non-residents deriving income from the provision of digital services to customers in Uganda.

5. CONCLUSION

It is undisputed that businesses and transactions are increasingly moving to the digital place necessitating the need for government to expand the collection of tax from digital services or assets. However, in doing so the government should likewise focus on creating or amending laws and legal framework to support and facilitate the expansion of digital services and assets in the country. For instance, the Bank of Tanzania should consider recognizing and regulating digital currencies as that will ensure more protection for participants in digital asset marketplaces and prevent deceptive, unfair or misleading practices.

Article written by

Fatma Haruna Songoro

Head of Technology Department

Victory Attorneys & Consultants,

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Ohio Street/Garden Avenue,

1. O. Box 72015, Dar es Salaam.

0752 255 494

https://victoryattorneys.co.tz/

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