Taxation without Borders: Tanzania’s Response to the Digital Economy

The digital economy is a significant and revolutionary transformation in the global economy that is radically altering the ways in which we produce, trade, and consume value. The internet, cloud computing, big data analytics, artificial intelligence, blockchain, and countless other digital technologies form the foundation of this economic system, which is smoothly incorporated into almost every industry and aspect of daily life. Ultimately, the digital economy is not a distant future concept, but rather a reality of the present, stimulating innovation, encouraging new forms of entrepreneurship, and presenting both unique opportunities and complex challenges for businesses, governments, and society at large. This rapid evolution, however, has fundamentally challenged traditional regulatory and policy frameworks, which were designed for a brick-and-mortar world.  

Therefore, the necessity of modifying national and international taxation systems to efficiently and equitably capture the value created in an increasingly borderless digital landscape is one of the most urgent concerns arising from this new economic model. This article examines Tanzania's digital economy taxation, including its administration, enforcement, challenges faced, and possible solutions towards those challenges, so as to spread awareness to the general public and enhance compliance.

The rapid rise of the digital economy has fundamentally challenged the core principles of the international tax system, which was designed for a 20th-century, brick-and-mortar economic model. Traditional tax rules, particularly those governing nexus (the right to tax) and the allocation of taxing rights between source and residence countries, are strained by businesses that can generate significant value and engage with customers in a jurisdiction without any physical presence. The global response to this challenge has been a complex, multi-layered process, spearheaded by the OECD/G20 and its landmark BEPS Project, specifically Action 1 “Addressing the Tax Challenges of the Digital Economy” which recommended short term measures such as VAT and Digital Service Tax (DST) collection mechanisms in which platforms are liable to collect and remit taxes in the consumer’s country as well as proposing long term solutions that set a stage for broader subsequent discussions and work.
In October 2021, an agreement was reached on a "Two-Pillar Solution" to address the tax challenges arising from the digitalisation of the economy. Pillar One focuses on reallocating taxing rights for a portion of the profits of the largest multinational enterprises to the countries where their users and customers are located, while Pillar Two introduces a global minimum corporate tax rate of 15% for large multinational companies. While the Two-Pillar Solution is being implemented (which may be a complex process facing delays), many countries, including Tanzania, grew impatient and introduced their own Digital Services Taxes on revenues from specific digital activities earned by large foreign tech companies as a means to address the ongoing revenue collection gap while waiting for the global solutions.

Tanzania has proactively adapted its tax system to address the challenges and opportunities presented by the digital economy. The journey towards implementing taxation of the digital economy began as a direct response to the global challenge of taxing the digital economy. The foundation was laid with the Finance Act of 2022, which came into effect on July 1, 2022, requiring non-resident electronic service providers to register and remit VAT at the rate of 18%, with no right to claim input tax and exempted from using Electronic Fiscal Devices (EFD) when issuing invoices, also remit Income tax set at a 2% rate on the gross payment received from transactions conducted through digital marketplace. 
According to Section 89(m) of the Income Tax Act, Cap. 332 payments made by individuals (who are not engaged in business) for services provided by non-residents create a source of income within the United Republic. Furthermore, non-resident persons are required by Section 90 A of the Income Tax Act, Cap 332, to pay income tax at the rate of 2% on payments received from individuals (who are not engaged in business) for services supplied through a digital marketplace. Section 116 (1) of the Income Tax Act, Cap 332, broadens the definition of services to encompass all electronic services, and not just those offered through digital marketplaces. This being the case, the Value Added Tax (Registration of Non-resident Electronic Service Providers/Suppliers) Regulations, 2022, and the Income Tax (Registration of Non-resident Electronic Service Providers/Suppliers) Regulations, 2022 were introduced to offer comprehensive guidance to facilitate the implementation of these provisions.

Taxpayer registration with relevant tax authorities is one of the mandatory compliance requirements for entities to legally conduct business in any jurisdiction. To comply with the income tax imposed on electronic services, non-resident electronic service providers who provide electronic services to residents in Tanzania must apply to register as taxpayers under Regulation 4 of the Income Tax (Registration of Non-Resident Electronic Service Providers) Regulations of 2022. Additionally, to comply with the VAT imposed on electronic services, a non-resident electronic service provider must apply for VAT registration under Regulation 4 of the VAT (Registration of Non-Resident Electronic Service Providers) Regulations of 2022.

As part of the tax payment requirements for electronic service providers, the registered non-resident electronic service provider must submit an online return each month detailing the amount of tax owed in respect to VAT and Income tax on the electronic services provided. The due date for filing the returns and paying taxes for the VAT and Income tax on electronic services is the 20th day of the subsequent month, as stipulated by Section 116(2) of the Income Tax Act, Cap. 332, and Regulation 6 of the Value Added Tax (Registration of Non-resident Electronic Service Providers/Suppliers) (Amendments) Regulations, 2023. Additionally, a specific appointed bank account shall be used when making payment, which may be in Tanzanian shillings or an equivalent convertible currency, based on the prevailing exchange rate on the date of making payment as stipulated by the Bank of Tanzania.

The two regulations impose penalties and interest for non-compliant practices by non-resident electronic service providers/suppliers against the above-prescribed requirements. The penalty for making false or misleading statements is 50% of the tax shortfall if the statement or omission is made unknowingly, and 75% of the tax shortfall if it is made knowingly or intentionally. Additionally, it is an offense to violate the registration requirements under the regulations, in addition to interest on the unpaid taxes, which is charged and compounded monthly at the statutory rate, noncompliance can result in a fine of at least 200 currency points and up to 300 currency points, a maximum sentence of three years, or both.

Furthermore, new provisions were added to the Income Tax Act, Cap. 332, by the Finance Act of 2024, being the continued efforts of broadening the scope of digital economy-related taxes. Section 83B was introduced, requiring that 5% withholding tax be applied to payments made by residents or non-residents to resident digital content creators. In addition, residents or non-residents who own digital asset exchange platforms or facilitate digital asset exchanges or transfers are required by section 83C to withhold 3% of payments made to residents for the exchange or transfer of digital assets.

A public notice was released by the Tanzania Revenue Authority (TRA) on August 11, 2025, informing the public of the requirement for local online enterprises to register for tax purposes. Per the public notice that was released, online traders that generate more than TZS 4,000,000/= in gross revenue annually must register for tax purposes, even if they do not have a physical office, store, or warehouse in the country.

The property owners and individuals (even those without a registered business address) who offer short-term rentals through platforms like Airbnb, Booking.com, and other online booking services, small and medium-sized businesses that engage in e-commerce through their own websites or other people's digital marketplaces, and individuals who sell goods or services through platforms such as Facebook, Instagram, TikTok, WhatsApp, and similar platforms are among the targeted online businesses for this purpose.

The compliance period for small and medium-sized online traders has been extended to December 31, 2025, giving ample time for education and awareness-raising to support this newly established system and improve compliance once implementation starts. The compliance period for large traders who rent out houses through online platforms was set at August 31, 2025.  TRA remains dedicated to its facilitative tasks of providing education, guidance, and any other support required to facilitate compliance once implementation begins, despite the public's opposition to the announcement.

Tanzanian tax laws use residence-source rules for income taxation, just like those in many other countries. For electronic services, if the recipient of the electronic services is based in Tanzania, the payment is therefore deemed to have been sourced in Tanzania. Factors such as the recipient's payment proxy (credit or debit card details and bank account information) or resident proxy (home address or billing address), or access proxy (internet address or mobile country code), being located in Tanzania, are used to determine whether the recipient is in Tanzania. 
For the Tanzania Revenue Authority (TRA), enforcing taxes on electronic services has posed several administrative challenges. Given the borderless nature of the digital economy, a significant issue is identifying and ensuring compliance among non-resident service providers, who may not willingly comply with the prevailing legal provisions. What happens when electronic service providers that are non-residents without physical presence and generate significant income in Tanzania refuse to willingly register for digital service taxes? This is an issue for which there are currently no obvious answers. TRA must, however, rely on global collaboration and information exchange to locate, identify, and target non-compliant providers, which can be difficult and come with significantly higher administrative expenses.

The challenge presented by the digital economy is not an impossible obstacle for Tanzania, but rather a catalyst for innovation and international cooperation. By strategically building upon its existing framework, Tanzania may establish a path that ensures a fair contribution from multinational digital giants and other medium and small-sized participants while fostering a conducive environment for its own digital entrepreneurs. The most effective solution lies in a multi-layered approach, domestically, through the continued improvement and assertive implementation of the fair digital service taxes, and internationally, by actively participating in global dialogues to support the implementation of the OECD's Two-Pillar Solution. Through this balanced and proactive strategy, Tanzania may successfully secure its rightful share of revenue, broaden its tax base, thereby funding essential public services and building a more inclusive, fair, resilient, and self-reliant digital future for all its citizens.

By
Gaudensia Malulu
Tax Associate