The higher your salary, the higher your taxes, that is why it is called P.A.Y.E that is Pay-As-You-Earn. You earn more, you pay more, its that simple, or is it.
Apparently it is not that simple. Companies are giving the top management and expatriates leeway to weasel out of the earning tax. You see, PAYE is a function of your earning that is, it is tax deducted from your monthly salary.
The way it works is that you earn a gross amount from which taxes are deducted and your pension contribution is also deducted as well. What remains after these deductions is your take home salary otherwise called net salary.
Legal consultant for corporate law in Tanzania Mr. Peter Makinda told a press conference that to keep their salaries up, top management in many companies under report their gross earnings for themselves on the one hand and to attract expatriates on the other.
When you increase the salary amount, the gross amount that is, then subsequently, the taxes due for payment are a function of this increase and so the tax amount also increases. So, unscrupulous businesses are tip toeing around this ‘would be’ increase of taxes.
A basic salary amount is awarded and PAYE is calculated based on that basic gross amount, so what companies are doing s under reporting this gross amount to keep the PAYE deductions (and pension) down to a minimum. Then they turnaround and pay their top management and expatriates a net amount that is higher than it would have had they not under declared the salaries.
Government has warned against the practice which amounts to tax evasion, a charge considered economic sabotage and attracts high penal charges.
“The government is losing millions to these unscrupulous business elements, they are pocketing money that would have gone for community development to benefit the whole community and not individuals,” said a Tanzania Revenue Authority (TRA) official.
Withholding money that is due to be paid in tax through under declaration of salaries is itself under reported. While other forms of tax evasion are well known and reported, it is difficult to tell whether an employee is getting paid what the company is actually claiming.
The two are in cohorts, the employer and the employee. The employer is happy to pay salaries under the table so to speak and the employee is happy to receive the salary, higher than they would get if it was properly taxed.
The employer stands to benefit because the amount they pay under the table is less than what would be paid if taxes were included.
That is one way to look at it, tax evasion here can also be done through simply increasing the net, take home amount or what experts refer to as grossing up the value. The employee is paid an amount equal to the gross value allowing them to pocket sums equal to the taxable gross amount. This means then, the additional amount is a sum that is taxable but goes unreported and untaxed.
As you can imagine, this is for top management, CEOs and expatriates all of whom amass the extra, unreported money to keep their earnings high. In other words, they steal from the government taxes by evading the actual amounts that should be paid.
Under the Income Tax Act, Tanzania’s Revenue Authority (TRA) has taken several companies to court over grossing up and under reporting of salaries or not reporting salaries all together. Among them includes Pan African Energy Tanzania (PAET), which fought the allegation all the way to the Tax Revenue Appeals Tribunal (TRAT) in appeals. The company won the appeal in part after TRAT ruled that it did not ‘knowingly or willfully’ avoid or neglect to pay taxes.
The practice of providing undocumented or mis-documented monetary benefits to employees is perverse and difficult to uncover because both parties are willful participations. As mentioned, the employee is happy to receive the benefits untaxed, and the employer is equally happy to pay higher net salaries so long as it means not paying the higher cost of taxes.
Should the employer decide to pay the due taxes, they would be forced to pay less net salary and the top management, and expatriates would not be willing to work with them. So to keep these key staff happy, companies over pay their net amounts outside the tax books.
Mr. Makinda, the Legal consultant for corporate law in Tanzania admits that companies are tempted to this practice to keep their operating costs down. “It is not unwitting for companies to do this (under declare salaries) because these amounts represent higher costs for them,” he explains.
What the expert is really saying is that, to keep their profits up, companies are not only willing, they actively seek ways to dance around taxes to keep costs down and profits high. Further still, he appealed for review of the law to explicitly address the grossing up of salaries to leave no wiggle room and ensure that the government gets its due taxes.