BAD tax laws in Tanzania are adversely affecting non-profit organisations and institutions in a way that is likely to hamper social welfare in education and health sectors.
For many years since the country’s independence in 1961, Tanzanian institutions, religious organisations and communities have been major development partners through owning schools, colleges, clinics and hospitals that are run in a way that mainly provides service rather than making a profit.
However, the existence of tax laws that justify collecting corporate tax from such institutions may force some of them to close operations until further notice.
The most recent of such cases is the Schoo of St Jude based in Arusha – run on voluntary donations – which is closing business following an endless battle with the government over tax, resulting to an unprecedented move by the Tanzania Revenue Authority (TRA) to ruthlessly seize the school’s accounts and collect Tsh 500 million ($216,000) alleged to be tax arrears related to corporate tax.
Withdrawals of such large sums of money have caused the school’s management to suspend classes. Students have been repatriated to their homes. Staff have been retrenchment. The risk of permanent school closure is looming.
Basically, the withdrawal is based on the existence of an income tax law which does not distinguish between corporate profits made by companies which are limited by share capital, on one hand and corporate profits made by voluntary organisations and companies that are limited by guarantee, on the other.
According to the current tax law, any surplus generated from business done by these corporations must be taxed regardless of the difference in their capital structure and the fact that they are non-profit sharing entities.
The School of St. Jude, which was registered by the government through BRELA as a company limited by guarantee having no share capital. It does not allow her directors to share any profit from the school’s activities. Yet, the government has directed the school to pay corporate tax, as if the school is doing business and its profits are shared amongst the directors.
The source of the dispute
The tax dispute between TRA and the School of St. Jude started in 2012 when the government directed the school to start paying taxes to the government. In previous communications, the school administration and TRA could not reach a consensus on this matter.
On 23 August 2012, the school management received from the TRA Commissioner General, a statement showing the assessment of taxes levied on the income of the business entity.
The school was directed to pay corporate taxes amounting to Shs. 4,243,328,159 due to surplus revenues in their bank accounts after deducting all expenditure in 2009 and 2010.
According to the school audit books, the bank account had a deposit of Shs. 3,006,347,431 for the year ending in 2009 with an additional deposit of Shs. 4,114,741,021 for the year ending in 2010.
Therefore, in those two years, the school was required to pay corporate tax which is equivalent to 60 per cent of the deposit found in the bank accounts owned by the school. The school administration objected to the instructions from the TRA Commissioner-General.
On 28 August 2012, the school administration filed a formal complaint against the TRA Commissioner’s decision, asking the Commissioner to investigate and issue a verdict confirming two things.
Under the first reason, the school administration claimed that, in accordance with its constitution, they are a company which is limited by guarantee and having no share capital, but having an authority to collect gifts, donations and charities for providing services to the community, with a special focus on educational services to poor children.
And under the second reason, the school administration claimed that, in view of the kind of the activities that are being performed in their school, there is ample evidence that they are carrying out non-commercial activities.
This application was made in accordance with the guidelines of section 131 of the Income Tax Act No. 11 of 2004.
In response, the TRA Commissioner rejected both reasons and insisted that the School of St. Jude should pay corporate tax as previously instructed.
Regarding the first ground, the TRA Commissioner claimed that, in accordance with the school’s constitution, St. Jude School is an institution that is registered as a company limited by guarantee and having no share capital, but it has the authority to collect gifts, donations and charities that are sources of taxable income in accordance with the law.
And concerning the second reason, the TRA Commissioner claimed that St. Jude School was doing a profitable business by teaching students whose taxes are paid through gifts, donations and courtesy from a third party instead of being paid by the parents of the said students.
St. school administration disputed the TRA Commissioner’s decision and appealed before the Tax Referral Appeal Board. Their appeal was dismissed by the Board, and the decision of the TRA Commissioner was confirmed. The school administration appealed again before the Commercial Court. The appeal was dismissed by the Commercial Court. Finally, the school administration appealed before the Court of Appeal at Dodoma. This appeal, too, was dismissed, and the decision of the TRA Commissioner was confirmed.
The school management lost their appeals as a result of the legal interpretation provided with respect to the following clauses: the meaning of the word “business” in accordance with the definition found in Article 3 of the tax law; the type of taxable incomes as defined under articles 8 (1), 8 (2) (f) and 8 (3) of the tax law and section 1 (k) in the second schedule to the tax law. The law interpreting organs established that, in accordance with Articles 8 (1) and 8 (2) (f) of the tax law, income in the form of gifts, donations and grants are taxable.
“We agree with the Tribunal that free education provided by the appellant is paid by third parties and so the surplus shown in the appellant’s bank statement is a profit derived from the business. The same is therefore chargeable to tax. In the final analysis, we do not find merit in the appeal. The same is hereby dismissed with costs,” the Court of Appeal at Dodoma stated (p.18).
This ruling was delivered on 7 July 2018 under three Judges, namely: Chief Justice L.H. Juma, Justice of Appeal A.G. Mwarija and Justice of Appeal R.E Mziray.
Ambiguity in the tax law
The Court of Appeal judgment related to the appeal filed by St. Jude School against the TRA commissioner was delivered one year before the enactment of the Written Laws (Miscellaneous Amendments) Act, No. 03 of 2019.
This law made a number of changes in the company law and the NGO Act, aiming at resolving some of the problems that arose in the dispute between the TRA and the school.
For example, the new provided new definitions for the words “company,” “investment activity,” “commercial activity,” and “business.” According to this law, a “company” is an entity that seeks to either do business or investment activity or commercial activity. This law also amended several provisions in the Companies Act.
For example, in accordance with the changes made through new articles 3(3), 3A and 14 (6) in the companies Act, in order for an entity to be registered under BRELA it must meet at least three criteria. One, it must intend to either do business, or engage in commercial activities, or engage in investment activities or do some other activities that will be approved by the relevant minister. Second, it must be an institution having a share capital. And three, one of the goals of its founders must be to seek and share the profits that will be made.
If these criteria are not met, the institution must be registered elsewhere. That is, either at the Ministry of Home Affairs, at the Ministry of Health and Social Welfare, at the Ministry of Education or elsewhere. The Ministry of Home Affairs registers institutions that intend to serve her members only and not otherwise. A good example here is the registration of religious institutions.
However, if religious institutions want to provide services to the wider community in health, education or other sectors, such services must be registered under the authority that coordinates the respective sectors.
For example, the Ministry of Health and Social Welfare registers institutions that intend to serve the community regardless of whether they are members of the service providing entity or not. Registration of hospitals run by religious institutions takes place here, and not via BRELA, as the owners of these hospitals do not intend to share the surplus that will be available after deducting institutional expenses.
And the Ministry of Education registers all institutions that provide education and training services. Registration of schools providing educational services such as St. Jude School is done here, and not via BRELA, as the owners of these schools do not intend to share the surplus that will be available after deducting institutional expenses.
However, the recent Written Laws (Miscellaneous Amendments) Act, No. 03 of 2019, the tax law, and the company law do not address the question related to the disputed taxability of the surplus which is generated by voluntary associations which use grants and donations to do business with a view of recycling the profit so generated into further free service provisioning, instead of distributing the profit amongst the directors. This is the origin of the dispute between the School of St. Jude and TRA.
TRA forcibly drains the school accounts
The Tanzania Revenue Authority (TRA) decided to withdraw large sums of money from St. Jude School allegedly based on the ground that the school had not paid corporate tax for many years.
The TRA leadership in Arusha Region, on 03 November 2020, “by force” withdrew Shs. 500 million from the bank accounts owned and operated by the school which provides free education to Tanzanian children.
Speaking to the media recently, the TRA Arusha Regional Manager, John Mwigura, admitted that TRA had ordered the forcible withdrawal of the money, but defended the decision using the argument that, TRA made the decision in accordance with the court ruling.
After the money was withdrawn by TRA, St. Jude accounts remained with Shs. 5,777,658 Tanzanian shillings only, while the budget for running a school for one day is Shs. 35,229,752 Tanzanian shillings. Thus, the remaining funds are equivalent to 16 per cent of the regular budget, which is equivalent to saying that the TRA leadership has closed St. Jude School.
After realizing that it is difficult to run a school in this environment, the St. Jude School Board members, who met on November 13, 2020, decided that all elementary school students should be sent home; that, all Form Four students return home on December 8, immediately after completing their National Examinations; that, Form Six students who are expected to take their mock exams return home on December 14, 2020, immediately after completing the examinations; and that, all other students who do not have examinations should return home by 18 November 2020.
In addition, the school board made a decision on the fate of the 307 staff at the school. The board decided that 199 employees should be given unpaid leave and vacate the school premises before December; that, 101 employees should be retrenched by being denied new contracts as soon as their current contracts expire; and that, 62 staff members should remain at school to continue with important and necessary responsibilities.
The school board’s decision did not end there. Some 116 Form Six graduates who volunteered to teach various subjects in 34 government schools, were also given unpaid leave. Similarly, the payments of shillings 68,997,205 to more than 50 service providers for October and November 2020 were suspended.
Also, major educational grants, such as food, soap and other essentials for the 90 special students who are served when they are at home during the holidays, and which were to be released later this year, were suspended.
Similarly, the benefits of 101 employees who were retrenched via the denial of new contracts were suspended until when the school will have funds.
Finally, the school board decided that, if TRA did not return the money and continued requiring the school to pay corporate tax, while this school is not a profit-making and profit-sharing business, 340 students were selected from government schools to join St. Jude in January 2021, should neither have opportunity to study at the school bor be given a scholarship because St. Jude will have to be completely closed.
This decision on the possibility of school closure supports the position of the Australian institution which is the main sponsor of the school. The School of St. Jude is a project funded by a charitable organization based on charity and called “The East African Fund Limited,” which is registered in Australia and was given a registration certificate number CFN 1612. This donor supports the annual budget of school by 90%. The annual school budget is worthy Shs. 12,682,710,722.
On 4 November 2020, the Chairman of the Board of The East African Fund Limited, wrote a letter informing the leadership of St. Jude School that they are not ready to send any donation money that is collected as gifts and donations from good Samaritans, and then let the money be used to pay corporate tax as if the school of St. Jude is a company that trades, makes a profit and distributes profits amongst its directors.
For all these reasons, the school report which was circulated after TRA forcibly accessed the school accounts stated that TRA’s decision would directly affect the life and quality of the three St. Jude Schools, just as it would indirectly affect the quality of the education sector as a whole, in various ways.
The profile of St. Jude
The School of St. Jude was registered with the government through BRELA as a non-profit making and a non-profit sharing company since 2002, after an Australian citizen, Gemma Sisia, saw that free quality education for talented poor children was the cure for poverty in Africa if Africans co-operated with the external world.
St. Jude School has excellent academic infrastructure scattered across three campuses. The school provides free education to talented children and from poor families in Arusha region. There are students from standard one to form six.
There is a primary school campus, an international guests centre, and an administration building in Mshono village; dormitories for primary school students in Moivoro village; a secondary school campus with its dormitory located in the Usa River area. The school has 27 buses for full-time students, two libraries with more than 30,000 books, CDs and DVDs. There are science labs, playgrounds, computer labs and a sports equipment room.
All the children eat lunch at school. Boarding students get breakfast and dinner as well. On average the school offers one million meals a year. There are about 300 employees and several volunteers from abroad. About 96% of all children in the school are drawn from poor families in Arusha district, after careful screening, and their full education is paid for by the school.
In addition to paying all the education costs for about 2000 children from poor families, the school also provides assistance to 326 students in 53 colleges located in various parts of the world, including Tanzania.
In addition, the school has a program that includes 116 Form Six graduates who volunteer to teach various subjects in 34 government schools. These graduates are given a subsistence allowance of 170,000 shillings each per month, for food and transport. Now they have all been given unpaid leave.
For running these programs, the daily school budget is Sh.35,229,752; the monthly budget is Sh. 1,056,892,560; and the annual budget is Sh. 12,682,710,722.
According to its website, the School of St. Jude is a Company having nine Directors on the School Board. They are Gemma Sisia, Father Festus Mangwangi, Dr Richard Masika, Professor Patrick Ndakidemi, Bibiana Mardai, Mary Maeda, Nicholaus Duhia, Modest Akida, and Mark Cubit.