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Political Risk and Legal Restrictions in Tanzania Research Paper


Introduction

Business development and growth in a region strongly depends on the socio-economic and political climate which exists in the country. It is critical to assess policy and legislation in regard to any aspects that may influence domestic and international business operations. The United Republic of Tanzania is a developing country that is actively reforming its economy and seeking investors. However, various challenges and concerns from the international community remain over the stability and economic risks of investment. This report will investigate the political, labor, trade, and taxation factors influencing the business climate in Tanzania.

Political Stability

Tanzania has remained politically stable since the early 1990’s. The government has focused its macroeconomic policies towards structural reform and establishing resiliency from external shocks. There is also a gradual progression towards debt relief for the country. Despite being located in a volatile region, Tanzania has not experienced any major political turmoil or military conflicts. Recent elections were held peacefully, with transparency and legitimate transfer of power. However, in recent years the government has aimed to crackdown on the population, including business activity.

There are increasing limitations to political activity and open debate. The private sector is concerned with the arbitrary enforcement of rules. Despite the moderate economic growth of 6-7% GDP annually, more than 28% of the population lives below poverty, and there is a rise in nonperforming loans by banks (Bureau of Economic and Business Affairs, 2018). Furthermore, the country’s government is burdened by bureaucracy and high levels of corruption which pose risks for the business environment. With the election of President John Pombe Magufuli in 2015, there has been a strong focus on eliminating corruption, improving public administration, and managing of public resources towards the betterment of social outcomes (The World Bank, 2018).

Labor Laws

A critical priority for African economies is to provide access to low-cost labor for domestic and international investors. Tanzania offers trained skilled labor for lower costs than other countries in the region. Furthermore, the government has committed to investing in training and education for the population to produce specialists, increasing the country’s budget for education. There are inherent reforms in place to ensure efficiency in the labor market and improve industrial relations (Musiba, n.d.).

The country faces a persistent shortage of skilled labor due to low levels of tertiary education that creates challenges for business to fill even basic administrative positions. Minimum wage in Tanzania varies by industry, with agricultural workers receiving 100,000 Tsh (approximately $45), while mineral and mining works receive 400,000 Tsh ($180) per month (State Department’s Office of Investment Affairs, 2016a).

Tanzania shares interregional agreements, allowing specialists to practice within a number of jurisdictions in the area, including Uganda, Kenya, and Zanzibar. However, each holds unique labor laws. While the government can provide permits for workers if local specialists are unavailable, the Non-Citizens Employment Regulation Act passed in 2015 introduced strict regulations that have created significant challenges to hire foreign workers. Tanzania allows for independent trade unions and collective bargaining in the private sector. Strikes are permittable as well within legal requirements (State Department’s Office of Investment Affairs, 2016a).

Trade Barriers and Investment

Tanzania is part of the East African Customs Union (EAC) and imposes a common tariff up to 10% on any goods from outside the union. Non-EAC imports may also face a value-added tax of 18% and higher for sensitive goods (“Tanzania – Import tariffs”, 2016). There are no tariffs within the EAC trade network. Domestic and businesses in Tanzania face challenges, but it is gradually improving in the context of government-led transition of the economy to become more open.

Currently, an investor or business owner must undergo a long and bureaucratic procedure to receive any permits and fees. For example, to receiving a construction permit, three regulatory agencies must provide permissions, and each charges a significant fee. The country is currently ranked 162nd globally for starting a business and 182nd for trading across borders which poses barriers to any potential business owners and investors (Kamndaya, 2018).

Foreign Investment

The government has a positive attitude towards attracting foreign direct investment. A specialize Tanzania Investment Center (TIC) exists that is meant to promote and facilitate foreign investment in Tanzania’s economy and businesses. An optional registration with the TIC and joint ventures with Tanzanian businesses provide various incentives for foreign investors. These incentives include exemption from VAT and import duty, as well as 100% repatriation of profits and capital after tax.

High level investors receive a special “strategic investor” status. In 2014, Tanzania has attracted over 2.142 billion in foreign direct investments, which is a tremendous 14% increase over the previous year and represents one of the highest rates in East Africa (State Department’s Office of Investment Affairs, 2016b). While major investors note that the economic climate has improved in Tanzania, there are still prevalent socialist attitudes which limit trust and decision-making. Global financial organizations recommend for the country to drive its policy towards rationalization of investor rights and obligations as well as enhance the security of investments in land, infrastructure, and business.

Taxation

Tanzanian residents are taxable on any income received globally, and non-residents must pay tax on any source of income in Tanzania. The income tax for a Tanzanian corporation is a flat 30% with a 5% additional tax for management service in mining, oil, and gas sectors. The country offers a wide variety of tax incentives. A reduced rate of 25% is available for three years to companies recently listed on the Dar es Salaam Stock Exchange. Companies in the agriculture, mining, manufacturing, and tourism sectors are eligible for various capital deduction provisions (PWC, 2018).

Investors in the EAC are granted significant tax incentives as well. This includes a 10-year tax holiday and a rate of 25% for the ten years after that (Tanzania Revenue Authority, n.d.). A 10-year withholding tax holiday on dividends to non-residents is also available. There is also exemption from import duty and VAT, for both importers and exporters. Tax credit on payments made abroad as well as withholding tax exemptions on tax chargeable by foreign banks is an option open to strategic investors. Tanzania is currently in the process of amending the tax bill for the purpose of increasing compliance, boosting revenues, and fostering investment. It is proposed to introduce a six-month amnesty on interest and penalties for all businesses.

Conclusion

Tanzania is an East African developing country which is gradually becoming open to international markets and business. Conduct business in Tanzania is a high-risk enterprise, but the government is creating an environment that is fostering growth and investment. There is evidence of relative political and economic stability with a progressive government in place to implement business-friendly measures. Through modifications to its tax and labor laws, while eliminating corruption and bureaucracy, Tanzania can accomplish a status of a risk-free region in the international business community.

References

Bureau of Economic and Business Affairs. (2018). Tanzania. Web.

Kamndaya, S. (2018). How Tanzania’s new business blueprint will change things. The Citizen. Web.

Musiba, E. (n.d.). . Web.

PWC. (2018). Tanzania: Corporate – Tax credits and incentives. Web.

State Department’s Office of Investment Affairs. (2016a). Tanzania – Labor. Web.

State Department’s Office of Investment Affairs. (2016b). Tanzania – Openness and restriction on foreign investment. Web.

Tanzania – Import tariffs. (2016). Web.

Tanzania Revenue Authority. (n.d.). Tax incentives. Web.

The World Bank. (2018). The world bank in Tanzania. Web.

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IvyPanda. (2020, December 24). Political Risk and Legal Restrictions in Tanzania. Retrieved from https://ivypanda.com/essays/political-risk-and-legal-restrictions-in-tanzania/

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"Political Risk and Legal Restrictions in Tanzania." IvyPanda, 24 Dec. 2020, ivypanda.com/essays/political-risk-and-legal-restrictions-in-tanzania/.

1. IvyPanda. "Political Risk and Legal Restrictions in Tanzania." December 24, 2020. https://ivypanda.com/essays/political-risk-and-legal-restrictions-in-tanzania/.


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IvyPanda. "Political Risk and Legal Restrictions in Tanzania." December 24, 2020. https://ivypanda.com/essays/political-risk-and-legal-restrictions-in-tanzania/.

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IvyPanda. 2020. "Political Risk and Legal Restrictions in Tanzania." December 24, 2020. https://ivypanda.com/essays/political-risk-and-legal-restrictions-in-tanzania/.

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IvyPanda. (2020) 'Political Risk and Legal Restrictions in Tanzania'. 24 December.

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