ANALYSIS OF TANZANIA’S CONTROLLED FOREIGN COMPANY RULES
1. INTRODUCTION
To address tax deferral as one of tax avoidance scheme, many countries
implement Controlled Foreign Company (CFC) rules. Tanzania established its
CFC rules in 2004 under The Income Tax Act, 2004. This research paper aims to
analyze Tanzania's CFC rules, identify their key weaknesses and propose
recommendations to enhance their effectiveness.
2. THE CURRENT CFC RULES
This section offers overview of Tanzania’s CFC rules as provided under sections
73 to 76 of the Income Tax Act, 2004 (ITA-2004), using OECD's six building
blocks for designing effective CFC rules.
i. Definition of a CFC
CFC is defined as a non-resident trust or corporation in which a resident person
whether directly or through one or more interposed entities, controls or may
benefit from 25% percent or more of the rights to income or capital or voting
power of the entity. This definition aligns with OECD recommendations for
defining CFCs and control tests.
ii. CFC exemptions and threshold requirements
Tanzania’s CFC rules does not provide for exemptions or threshold regarding
application of CFC rules. Normally, CFC rules only apply after the application of
provisions such as tax rate exemptions, anti-avoidance requirements, and de
minims thresholds. The OECD’s recommended that, CFC rules should apply only
to foreign companies with effective tax rates significantly lower than those in the
parent Jurisdiction.
iii. Definition of income
Tanzania’s CFC Rules treats all the income of a CFC as CFC income. The law
applies to passive income and active income of the CFC. This is consistence with
the OECD’s recommendations regarding inclusion of a definition of CFC income.
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iv. Computation of income
The attributable income of a CFC for a year of income shall be its total income for
the year of income calculated as if the trust or corporation were resident. This
approach aligns with the OECD's recommendations 1 .
v. Attribution of income
According to Tanzania's CFC rules, at the end of a year of income, a CFC is
deemed to distribute its unallocated income to its members in proportion to their
respective shares. This approach aligns with OECD recommendations 2 .
vi. Prevention and elimination of double taxation
Tanzania's CFC rules allow a credit for any foreign taxes actually paid or treated
as paid by the corporation with respect to the amount treated as distributed by a
CFC to an associated shareholder. This is consistency with OECD’s
recommendation 3 .
3. KEY WEAKNESSES AND RECOMMENDATION
Absences of Threshold Requirements 4 is the key weakness identified in the
Tanzania CFC rules. Likewise, apart from the Income Tax Act, there is no any
regulation or practice note regarding application of CFC rule. In order to ensure
effectiveness of CFC rules, this paper recommends: Inclusion of CFC threshold
requirement 5 ; and Issuance of practice notice on application of CFC rule 6 .
1 OECD recommends, the application of the parent jurisdiction's tax rules in determining the CFC income
to be attributed to shareholders.
2 Regarding attribution of income, OECD recommends that, the attribution threshold should correspond
with the control threshold, and that the income attributed should be determined based on the members'
proportional ownership or influence.
3 For the purpose of preventing and eliminating double taxation, OECD recommends that jurisdictions with
CFC rules should allow a credit for foreign taxes actually paid, including any tax assessed on
intermediate parent companies under a CFC regime.
4 Threshold Requirements is used to limit the scope of CFC rules by excluding companies that are likely
to pose little or no risk of base erosion and profit shifting and instead focusing attention on cases that are
higher-risk because they exhibit some characteristic or behaviors for greater chance of profit shifting.
Thresholds can therefore help make CFC rules more targeted and effective and also reduce the overall
level of administrative and compliance burden.
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4. CONCLUSION:
Designing effective CFC rules is essential to ensure that a country cannot only
protect its tax base more effectively but also alleviate the compliance burden on
taxpayers, fostering a more equitable and efficient tax system.
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