By Daniel Maganga
An often-repeated quote attributed to Benjamin Franklin is “In this world, nothing can be said to be certain, except death and taxes.” For taxpayers, compliance with the latter remains key to reducing exposure risks. With the Tanzania Revenue Authority (TRA) strengthening its compliance and enforcement mechanisms by relying on electronic data systems, a taxpayers’ internal controls become a critical defense to mitigating tax exposure.
Internal controls are the policies, processes, operational checks, and governance frameworks that organizations put in place to ensure that every transaction is properly authorized, accurately recorded, and fully aligned with applicable regulatory and tax requirements. In a tax context, their purpose is to prevent, detect, and correct errors and irregularities before they result in financial losses, additional assessments, penalties, or reputational damage.
Examples of tax internal tax controls include reconciling tax returns to accounting records, enforcing approval procedures for deduction and remittance of withholding taxes, maintaining supporting documentation for expenses, ensuring accurate payroll tax calculations and remittances, and assigning clear tax review responsibilities within the finance function.
In Tanzania’s increasingly digitized tax environment, these controls have become more crucial with businesses with weak processes standing out, making them vulnerable to tax risks such as additional assessments, penalties, and interest resulting from errors that could otherwise have been prevented.
The paragraphs below highlight the key exposure points for different tax types where strengthened internal controls can materially reduce risk and protect business continuity.
Value Added Tax (VAT)
VAT is one of the most prominent areas where weak internal controls create substantial risk. When businesses fail to maintain proper documentation, verify supplier invoices, or correctly classify supplies, they risk overstating input VAT or understating output VAT.
TRA often disallows input VAT claims that lack genuineness on the type of good or service purchased or are not supported by fiscalized invoices as required under the VAT Act, 2014. Recently, TRA has become increasingly strict about reconciling revenue figures in VAT returns with Electronic Fiscal Device Management System (EFDMS) and the audited financial statements, meaning any discrepancies are easily detected and lead to additional VAT and corporate tax assessments. These inconsistencies lead to taxpayers facing rejected VAT claims, additional VAT assessments, disrupted cash flow due to rejected refunds, revocation of VAT exemptions, and heightened audit scrutiny. These outcomes not only increase tax liabilities but also consume management time and resources as businesses attempt to resolve disputes that a stronger internal control system would likely have prevented.
Corporate Income Tax (CIT) and Record-Keeping
Record keeping weaknesses further cause potential CIT exposure during TRA audits. Section 43 of the Tax Administration Act, 2015, requires taxpayers to maintain all records for at least five years, and TRA has the authority to disallow expenses that are not properly supported, even if the cost was legitimately incurred. Poor documentation for capital expenditures and other significant business costs creates a substantial risk of audit adjustments.
Furthermore, transactions involving related parties carry a heightened evidentiary burden under the Transfer Pricing (TP) regulations. Taxpayers are required to maintain contemporaneous TP documentation demonstrating that such transactions are conducted at arm’s length. Failure to do so may result in TP adjustments, where TRA revises taxable income to reflect what it considers to be the arm’s length position.
In addition to primary TP adjustments, taxpayers may be exposed to TP penalties, interest on underpaid tax, and increased audit scrutiny in subsequent years. Where internal controls over documentation are weak, businesses face significant exposure to tax reassessments that could otherwise be mitigated through structured, contemporaneous, and defensible documentation practices.
Withholding Tax (WHT)
WHT is another area where TRA consistently identifies errors during audits. Tanzania’s Income Tax Act (Revised Edition 2023) imposes WHT obligations on payments including professional fees, rent, management fees, dividends, interest paid to residents and non-residents. When businesses lack robust payment review procedures, they often fail to deduct WHT at the correct rate, omit WHT entirely, or delay remitting withheld amounts. Because TRA holds both the withholders and withholdees liable for unwithheld or improperly withheld tax, companies end up bearing the tax burden themselves.
Payroll taxes and other statutory contributions
Payroll tax is another sensitive area where inadequate controls can result in assessments. Employers in Tanzania must manage payroll taxes such as PAYE, SDL, WCF contributions, and social security obligations (NSSF/PSSSF) with accuracy. Weak payroll governance whether through understating taxable benefits, misclassification of employees whether temporary or permanent, or mishandling allowances and benefits often results in underpaid taxes. Any understatement of payroll taxes becomes a direct liability for the employer, and statutory bodies such as NSSF, PSSSF, and WCF can impose backdated contributions and penalties thereon. In many cases, these liabilities accumulate over several years before detection, making the resulting financial burden significant.
Conclusion
Weak internal controls expose businesses to additional tax assessments, penalties, interest, cashflow strain, increased audit scrutiny resulting to significant financial liabilities.
Beyond the monetary impact, such weaknesses damage credibility and consume management time in resolving avoidable disputes, underscoring the importance of strong and disciplined internal control systems
In today’s environment of increased electronic monitoring, strong internal controls is no longer optional but essential. As TRA expands its use of electronic data matching, third party information, and targeted risk-based audits, taxpayers must move beyond reactive approaches to compliance.
Organizations should invest in well-defined tax policies, structured approval processes, continuous staff training, and regular internal compliance reviews. These systems are essential for reducing potential tax exposure, strengthening audit readiness, and maintaining financial integrity.