Hogan Lovells Publications | November 2017
"Change in control" tax – Tanzania
Along the lines of the Indian Vodafone case on indirect share disposals, Tanzania has followed suit with its own version of a “change in control” tax. Section 56 of Tanzania's tax legislation applies if there is a change in the underlying ownership of the Tanzanian entity of more than 50%. The definition of “underlying ownership” makes it clear that it matters not that the change in ownership may take place many levels up in the overall group structure – one looks through to the highest level of ownership.
Once the provisions of section 56 are invoked, the Tanzanian entity is deemed to realise its assets and liabilities on the date of change of control, and such entity is treated as disposing of all of its assets and liabilities owned by it immediately before the change. Such sale is deemed to take place at market value. Immediately after the change, the Tanzanian entity is also treated as having re-acquired the assets and liabilities deemed to have been sold at market value.
The Tanzanian entity is required to notify the Tanzanian Revenue Authority (TRA) of the change in control before and after the change in control, and ignorance of the law in the eyes of the TRA is no excuse. The assumption by the TRA is that appropriate advice would have been obtained at the time of the transaction. Accordingly, where it has been calculated that the tax is indeed payable arising from the change in control, it is considered wise to make an offer of the tax payable to the TRA. The tax is levied at 30%. Underestimation or late payment will result in substantial interest and penalties.
Section 56 requires a split of accounting periods into two periods, being that before the change in control and that after the change in control. These two periods will be treated as two separate years of income, and the Tanzanian entity will generally be required to file a revised statement of estimated tax payable to take into account any additional tax payable to the TRA.
It is important to note that the tax is not a withholding tax and the legislation does not provide for a “clawback” from the transacting parties up the chain of companies. Double Taxation Agreement relief will also not be available. In a group transaction involving multiple jurisdictions, there is also much debate with the TRA on the valuation methods that may be used to value the Tanzanian entity and how much of the group proceeds should be allocated to the Tanzanian entity and on what basis. Given that the tax will ultimately impact the (ultimate) purchaser of the Tanzanian entity, this should form part of the negotiations and consideration may be given to dealing with the tax in the warranties of the sale purchase agreement.
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