BE AWARE , MANAGE TAX RISKS
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Are you Director of a company in Tanzania? If yes then this Article may be very pertinent to you. Among the major advantages of operating a business as a Company is the limited liability feature. A company is a separate legal entity to its Shareholders and Directors. And as such, Shareholders and Directors have no personal liability for the debts of the company. The importance of limited liability was expressed in Senkinv Pharmaceutical Society of GB (1921) 1 Ch. 392.  Limited liability is the offspring of a proved necessity that, men should be entitled to engage in commercial pursuit without involving the whole of their fortune in that particular pursuit in which they are engaged.

This is often termed as a ‘corporate veil’. The human ingenuity however, started using this veil of corporate personality blatantly as a crack for fraud or improper conduct. However, there are circumstances where the corporate veil can be lifted and Directors may become personally liable. It became necessary for the Courts to break through the corporate veil and look at the persons behind the company who are the real beneficiaries of the corporate fiction. One such circumstance is when a Company fails to pay the tax on time or for protection of Revenue the Court may ignore the corporate entity where company is used for tax evasion

The tax administration law (The Tax Administration Act, Cap 438) empowers the tax authority (TRA) to collect unpaid taxes from the Directors of the Company. This is so scaring isn’t it? The corporate veil does not seem to assist when it comes to tax liabilities. TRA is entitled to pierce the corporate veil if the Company has been used as a device or façade to conceal the true facts, thereby avoiding or concealing any liability of a specific individual.

Section 65 of The Tax Administration law deals liability of managers of entities. Most tax laws gave the words ‘‘manager’’ and ‘‘entity’’ their-broad meaning. For tax purposes Companies are entities and Directors are managers. A Manager of an entity is any person who participates alone or jointly with other persons in making senior management decisions on behalf of entity essentially, any person whose directions and instruction affect the entity.

So, provided you fit the definition as a Manager of the entity the tax administration Act (section 65) empowers TRA to collect unpaid taxes of your company from you (regardless of your given title) in practice, it has been uncommon to set TRA exercising this power. But this may now change.

Before the change the Directions liability would fall on persons who were Director of the entity ‘‘within a period of the twelve months prior to the entity default’’ Recently, through the Finance Act, 2018 changes were made and now Section 65(1) of the tax administration law reads as follows. ‘‘Where an entity fails to pay tax on time, a Manager or a Person who was the Manager of that entity during the occurrence of default shall be jointly and severally liable with that entity for payment of the tax.

One may ask what the mischief the change is set to cure was. ‘‘Objects and Reasons’’ part of the bill to the Finance Act, 2018 makes intentions very clear. The bill states that ‘section 65 is amended to provide for liability and accountability on managers entities. Under this amendment managers of entities shall be held liable and accountable during the time of occurrence of the tax offense.

The changes send a signal that TRA may start involving their powers under this provision. But the good news is that the tax administration law prevents TRA from exercising their powers to collect unpaid taxes from a manager (director) if such a Director has exercised the degree of cure, diligence and skill that would have been exercised in preventing the failure to pay tax. Whilst this is an important condition it is very subjective. What sort of things would TRA consider as cure, diligence and skill exercised by a Director in preventing a failure to pay tax?

The company law (The Companies Act Cap 212) is a bit clearer on what is expected from Directors, Section 65 states that a ‘Director owes the company a duty to exercise the cure, skill and diligence which would be exercised in the same circumstances by a reasonable experience that may reasonably be expected of a person in the same position as the Director and any special knowledge and experience which the Director has ‘Arguably, it also has elements of subjectivity.

Adv. Revocatus T. Mathew is a Managing Partner at Kikabuzi Attorneys.