MWE Correspondent
The Tanzanian government’s recent proposal to introduce a 10 percent withholding tax on retained earnings has ignited wide-ranging debate, drawing both support and skepticism from economic analysts, Members of Parliament, and the private sector.
Announced as part of the 2025/2026 national budget, the measure is one of several amendments to the Income Tax Act (CAP 332). It is intended to curb corporate tax avoidance and strengthen domestic resource mobilisation, according to Finance Minister Dr. Mwigulu Nchemba.
“This measure is expected to raise TSh130.62 billion in revenue,” Dr. Nchemba said in Parliament, citing cases where companies indefinitely delay dividend payouts while claiming to reinvest earnings—thereby avoiding additional tax obligations.
The Minister later clarified on social media that this is not a case of double taxation. He likened it to global anti-avoidance standards, such as the U.S. Accumulated Earnings Tax, which discourages excessive profit hoarding.
“We are simply applying a fairness principle,” he said, emphasizing that shareholders benefit from reinvested profits just as they would from distributed dividends—and therefore taxation should be equitable.
Lawmakers and Watchdogs Applaud the Reform
Among the most vocal supporters is Neema Lugangira, a Special Seats MP, who called out companies that mask luxury and leisure spending under the pretext of reinvestment.
“Some firms claim to reinvest while buying luxury cars, paying for international flights, and even footing school fees abroad,” she said, urging the Tanzania Revenue Authority (TRA) to release clear reinvestment criteria.
Pro-tax analysts also argue that retained earnings are often used to hide profits, limiting fiscal transparency and corporate governance.
Critics Fear It Will Hurt Growth
However, some economic experts warn the new tax could hamper business confidence and limit investment—especially in industries where long-term capital reinvestment is crucial.
Prominent economist and former banker Dr. Charles Kimei, criticized the move, calling it “shortsighted” and likely to hurt companies relying on retained earnings for expansion.
“We risk undermining the financial base that supports business credit, especially in the banking sector,” he warned.
Zitto Kabwe, leader of the opposition ACT-Wazalendo, described the policy as “double taxation in disguise,” cautioning it may send negative signals to both local and international investors.
Global Perspectives and Regional Comparisons
Globally, most countries tax distributed profits through dividends or capital gains but do not typically impose direct tax on retained earnings. In contrast, Tanzania’s policy stands out in East Africa. In Kenya and Uganda, companies can hold profits as long as they choose—provided they comply with corporate tax rules.
Amid the ongoing discussion, many are calling for a more nuanced approach. Suggestions include exemptions for SMEs, grace periods, or defining legitimate reinvestments under specific thresholds.
“No one is against tax justice,” said Prof. Anna Tibaijuka, a renowned economist and former cabinet minister. “But policy must walk hand in hand with economic growth.”
