Dodoma, Tanzania – September 25, 2024
From September 23rd to 25th, 2024, Policy Forum hosted a transformative training on Illicit Financial Flows (IFFs), Tax Justice, and Domestic Resource Mobilization (DRM). This pivotal event brought together Civil Society Organizations (CSOs) and stakeholders, igniting a critical conversation on enhancing Tanzania’s tax system, bolstering revenue collection, and addressing the detrimental effects of IFFs. The session underscored the pressing need for tax justice and equitable economic reforms.
A cornerstone of the discussions was the need to expand the tax base on employment income, a key step in creating a more robust and equitable tax system. Given the size of Tanzania’s growing private sector, formalizing employment is critical to ensuring that all individuals contribute their fair share.
Formalization of Employment
A major hurdle in Tanzania's tax system is informal employment, where many individuals and businesses operate outside the formal system. This limits the government's ability to collect taxes effectively. Simplifying procedures for formalizing the private sector will foster greater compliance and accountability. Furthermore, educating citizens on their tax obligations—particularly when issuing Taxpayer Identification Numbers (TINs)—will enhance transparency and improve tax compliance.
Automatic Exchange of Information
By utilizing automated systems that enable institutions to exchange financial data seamlessly, the government can gather more accurate information on individuals' earnings and wealth. This system will help identify those with taxable income, particularly company beneficiaries, ensuring that everyone eligible contributes to employment taxes. Such measures not only broaden the tax base but also ensure that no potential taxpayers slip through the cracks.
Minimum Tax Threshold & Taxing Allowances
The training also highlighted the need to introduce a minimum tax threshold for employment income, ensuring that even those earning modest wages contribute fairly. Additionally, participants recommended that all allowances, such as sitting allowances, be taxed. This would close loopholes that allow certain income streams to escape taxation, promoting a more comprehensive and just tax system.
Enhancing Tax Justice in Tanzania
Tax justice in Tanzania remains a significant challenge. Despite progress, the current system is often criticized for being opaque and imbalanced, exacerbating inequality and undermining the trust between taxpayers and the government.
Lack of Transparency
One of the fundamental issues is the lack of transparency in how taxes are assessed, collected, and allocated. Many Tanzanians feel disconnected from the process, as they are not provided with enough information about how their taxes are used. This has led to widespread distrust in the system, which ultimately diminishes tax compliance and undermines the effectiveness of tax collection efforts.
Informal Sector Challenges
Tanzania’s informal sector represents a large portion of the economy, and its size complicates accurate tax collection. With much of the economy operating outside the formal tax system, authorities face significant challenges in collecting data on economic activities. This hampers efforts to ensure that businesses and individuals pay their fair share of taxes, leading to lost revenue that could otherwise be invested in public services and infrastructure.
Ineffective Tax Treaties
Another major concern is the ineffective enforcement of tax treaties, particularly those involving multinational corporations. Some foreign companies have exploited loopholes in these treaties, allowing them to avoid paying their fair share of taxes in Tanzania. This not only benefits foreign investors but also comes at the expense of local development, as the government is deprived of critical revenue.
Non-enforcement of Tax Laws
While Tanzania has strong tax regulations, a recurring issue is the lack of enforcement. Powerful actors often evade taxes due to weak application of the laws, such as those supporting beneficiary ownership transparency. As a result, profits are often shifted or concealed, enabling tax evasion and avoidance. Addressing this issue is crucial for ensuring a fair and equitable tax system.
Linking Domestic Resource Mobilization (DRM), Tax Justice, and IFFs
The relationship between DRM, tax justice, and IFFs is critical to Tanzania’s path towards sustainable development. Each of these elements plays a unique role in enhancing government revenue and driving economic growth.
Tax Justice Enhances DRM
A fair and transparent tax system ensures that all citizens and corporations contribute their rightful share. This, in turn, enhances DRM by increasing the government’s ability to generate revenue internally, reducing the need for external loans or aid. Closing tax loopholes that allow for evasion will enable Tanzania to better fund its essential public services, from healthcare to education, and invest in long-term development.
Curbing IFFs is Vital for DRM and Tax Justice
Illicit Financial Flows (IFFs) drain vital resources from Tanzania’s economy, depriving the government of the revenue needed for development. IFFs allow wealth to escape taxation, particularly among multinational corporations and wealthy individuals. By curbing IFFs, Tanzania can retain more of its wealth within the country, boosting its ability to finance public services and infrastructure projects. Addressing IFFs is, therefore, not just a matter of tax justice but also a critical strategy for enhancing DRM.
Closing Loopholes and Expanding DRM
Expanding Tanzania’s tax base to ensure that all eligible individuals and corporations pay taxes will increase domestic revenue. This is essential for reducing the country’s reliance on external loans, which often come with high-interest rates and conditions. By strengthening DRM through internal resource collection, Tanzania can maintain greater financial stability and pursue its development goals more sustainably.
How Do IFFs Relate to DRM?
IFFs directly undermine DRM by siphoning off critical resources that could be used to fund public services and development projects. When businesses or individuals evade taxes or move money illegally across borders, the government loses valuable revenue. This lost revenue could otherwise be invested in healthcare, education, infrastructure, and poverty alleviation. As a result, IFFs contribute to deepening inequality, poverty, and underdevelopment—especially in regions already struggling with limited resources.
The Interplay Between IFFs, DRM, and Tax Justice
Tackling IFFs is central to promoting tax justice and strengthening DRM. By closing loopholes and enforcing stronger tax regulations, Tanzania can ensure that corporations and individuals pay their fair share. This, in turn, empowers the country to generate the resources needed for sustainable development without relying heavily on foreign aid or debt.
Reinforcing tax justice principles by curbing IFFs will enable Tanzania to mobilize domestic resources more effectively. This will lead to a more equitable tax system, where wealth and income are fairly redistributed, creating a stronger foundation for economic growth. In doing so, Tanzania can reduce income inequality, improve living standards, and lay the groundwork for long-term prosperity.
Addressing the challenges of IFFs, enhancing tax justice, and expanding DRM are critical to Tanzania’s economic future. The recent training in Dodoma provided a vital platform for CSOs and stakeholders to explore solutions and set the stage for meaningful reforms. These reforms will promote fairness, transparency, and sustainable development, ensuring that Tanzania can harness its domestic resources for the betterment of all its citizens.
By taking decisive action to reform its tax system, crack down on IFFs, and promote tax justice, Tanzania can chart a new course towards economic self-reliance, equitable growth, and long-term prosperity. The steps taken today will shape a future where all citizens contribute to, and benefit from, the nation's progress.