Tanzania Faces Diplomatic Pressure Over Taxation Issues, Threatening Foreign Investment

By Adonis Byemelwa

Tanzania, aspiring to emerge as a leading beacon for foreign direct investment (FDI) in East Africa, finds itself at a crossroads amidst a mounting diplomatic standoff with major Western nations and Korea. This pivotal moment underlines the country’s ambitious strides to foster economic growth while navigating critical challenges in its regulatory environment.

In a joint letter dated June 27, 2024, ambassadors and high commissioners representing the United States, United Kingdom, Netherlands, France, Belgium, Canada, Sweden, Germany, Korea, and Ireland voiced grave concerns over what they termed as "significant disruptions" caused by Tanzania Revenue Authority's (TRA) taxation practices.

This coalition of diplomats, entrusted with safeguarding their countries' economic interests abroad, highlighted troubling trends that threaten to undermine Tanzania's recent successes in attracting global capital.

Tanzania's recent economic trajectory has been marked by efforts to attract and expand international investments, with reported increases in business registrations from $3 billion in 2022 to $5 billion in 2023, a testament to its ambitions and perceived progress.

 However, amidst these gains lies a stark reality faced by many foreign investors operating within Tanzania's borders: mounting challenges arising from TRA's handling of tax assessments and enforcement.

The joint letter outlines a litany of grievances voiced by businesses operating in Tanzania. It details instances where TRA issued demands for retroactive tax payments and account reconciliations dating back as far as 15 years, often without substantiated evidence or legal foundation.

 Such actions, according to the diplomats, have resulted in sudden freezes of bank accounts and seizures of company assets, causing severe operational disruptions and financial uncertainties.

"Companies have adhered to tax concession agreements sanctioned by Tanzanian authorities, only to face TRA's refusal to honor these agreements citing procedural irregularities," the diplomats highlighted, highlighting a critical breakdown in regulatory consistency and adherence to contractual obligations.

The impact on investor confidence has been profound. Numerous businesses, ranging from multinational corporations to local enterprises, have been compelled to halt operations or face imminent bankruptcy due to inflated or unsubstantiated tax assessments.

This uncertainty has not only jeopardized livelihoods and supplier relationships but has also prompted foreign shareholders to reconsider their investment strategies in Tanzania.

"We respectfully request a high-level meeting with Tanzanian government officials to urgently address these pressing issues," the diplomats implored in their letter, proposing direct engagement with key stakeholders including the Minister of Finance, Minister of Investment and Planning, Minister of Industry, Trade, and the Commissioner General of TRA.

In response to the diplomatic pressure, Tanzania's Ministry of Foreign Affairs and East African Cooperation acknowledged the gravity of the situation and pledged swift action to facilitate a resolution.

 Emphasizing Tanzania's commitment to fostering a conducive business environment, the Ministry assured, "Our government is steadfast in upholding principles of good governance and protecting investments crucial to our national development agenda."

The diplomatic engagement highlights Tanzania's proactive stance in navigating challenges to foreign investment amid ongoing economic reforms.

As the country aspires to elevate its economic status to an upper-middle-income country, the government faces intensified scrutiny over its regulatory frameworks and operational transparency.

"This juncture demands Tanzania's unwavering commitment to international standards of governance," remarked one ambassador, reflecting broader sentiments among the diplomatic community.

Tanzania finds itself at a critical juncture, grappling with diplomatic challenges that intersect with its economic ambitions. Amid efforts to bolster foreign direct investment (FDI) and economic growth, Tanzania faces mounting scrutiny from major Western nations and Korea over issues impacting investor confidence.

In a joint statement, foreign ambassadors have issued a resounding call urging Tanzania to swiftly tackle regulatory inconsistencies and rebuild trust in its business environment. This unified message highlights international concerns and emphasizes the critical need for decisive action to safeguard investor confidence and foster sustainable economic growth in the country.

Foreign ambassadors emphasized, "Tanzania must swiftly tackle regulatory inconsistencies to rebuild trust and foster sustainable economic growth."

President Samia Suluhu Hassan recently expressed dissatisfaction with diplomatic performance, noting, "Some ambassadors are a burden to the state. They are not delivering as expected."

Her decision to sack Foreign Affairs Minister Liberatha Mulamula, renowned for her conflict resolution skills in the Lake Zone and past ambassadorship to the US, signals a proactive stance towards reforming Tanzania's diplomatic corps.

Reflecting on diplomatic lapses, President Hassan revealed frustrations on August 16, 2023, stating, "In other countries, our ambassadors don't know what they are doing; they are just there."

Her interactions with a fellow Southern African Development Community (SADC) president accentuated concerns over ineffective representation, prompting calls for reform within Tanzania's Ministry of Foreign Affairs.

President Hassan's commitment to overhaul the ministry through a dedicated committee reflects proactive governance. "I've tasked the committee to identify and rectify shortcomings," she affirmed, highlighting a strategic approach to enhance Tanzania's diplomatic efficacy and international standing.

These developments mark a pivotal moment for Tanzania's foreign policy and economic strategy. As the nation navigates diplomatic challenges, Hassan's reforms aim to align diplomatic efforts with national development goals.

 "We must enhance our diplomatic effectiveness to attract sustainable investments," she emphasized, underscoring Tanzania's commitment to fostering a conducive business environment.

Successful diplomatic representation and FDI in African nations like Ghana, Kenya, and Rwanda illustrate the transformative impact of effective governance and transparent regulatory frameworks.

These countries have leveraged stability and reforms to attract significant FDI, demonstrating the role of proactive diplomacy in driving economic growth across Africa.

President Hassan's decisive actions to address diplomatic shortcomings and streamline operations seek to bolster Tanzania's reputation as a reliable investment destination. "We're committed to restoring investor confidence," she affirmed, signaling Tanzania's proactive stance in global economic integration.

Tanzania's efforts to reform its diplomatic corps and address regulatory challenges are fundamental for sustaining economic growth. President Hassan's leadership highlights a commitment to effective governance and responsiveness, laying a foundation for renewed confidence and investment in Tanzania's economic future.