The relevant law for this discussion is the Export Processing Zones Act, 2002 (“the EPZ Act”), which provides for the EPZ investment scheme under which investors may register their business to take advantage of the tax and non-tax incentives that the scheme offers. The COVID19 novel coronavirus pandemic has triggered severe budget deficits for governments around the world, and the wisdom of the International Monetary Fund (IMF) for developing country governments has been to reduce on the tax incentives offered to investors. Only time will tell whether this IMF wisdom actually influences the thinking and attitude of Tanzania’s Export Processing Zones Authority (“the Authority”) in granting EPZ licenses, particularly given that President Samia Suluhu Hassan has called for the creation of more industrial parks in the country.
2002 is the year when the government of Tanzania introduced the EPZ investment scheme in the country through the enactment of the EPZ Act. The idea of this scheme is to promote export-oriented investments within areas designated as economic processing zones to create international competitiveness in support of export-led economic growth in Tanzania.
Investors must be licensed in order to carry on business or activity in an EPZ industrial park. The EPZ Act envisages that the Authority would consult other relevant regulatory bodies in order to have a coordinated approach to investors in Tanzania. Industrial parks designated as EPZs include Global Industrial Park, Hifadhi EPZ, Millennium Business Park, Kisongo EPZ, and Karmal Industrial Park. In her TBC-televised address on 22 April 2021, President Samia Suluhu Hassan encouraged the creation of more industrial parks in Tanzania. The Export Processing Zones Authority is empowered under section 3(3) of the EPZ Act to gazette a developed, partly developed or undeveloped areas as an EPZ industrial park. It takes at least month for the Authority to finalise this process.
Types of licenses under the EPZ Act. There are three types of licenses that investors can apply for, namely the Developer’s License, the Operator’s License, and the Service Provider’s License. The Developer’s License is applicable to investors who develop EPZ industrial park infrastructure, including building a factory. The Operator’s License is applicable to investors who undertake manufacturing operations as well as value-addition processing activities. And the Service Provider’s License is applicable to investors who provide services and utilities such as, banking, insurance and ICT services to EPZ investors within the industrial parks.
A focus on the Operator’s License. Investors looking to apply for the Operator’s License should ensure that the proposed investment satisfies the following conditions: (a) the investment undertakes manufacturing operations; (b) the investment is new; (c) at least 80 percent of goods produced or processed should be exported; and (d) investment has a minimum annual export turnover of US$500,000 for foreign investors and US$100,000 for local Investors.
Undertaking manufacturing operations. Defined under section 2 of the EPZ Act, manufacturing means “any operations or processes to change the form of any material for value use and includes assembling, processing, packaging and repackaging. A prospective investor needs to find out if the planned manufacturing operations fit this statutory definition of manufacturing. Some of the operations that have been licensed by the Authority involve converting raw materials into secondary products. From the Authority’s perspective, the key concern will be whether the manufacturing operations creates ‘value’. In my experience of helping investors to obtain licenses from the Authority, it helps to articulate the procedures for the Authority that would entail such operations.
The investment must be new. The Operator’s License is issued in respect of new investments only. But what actually signifies a new investment? Is it when the corporate entity applying for the license to undertake the new investment is a newly registered entity? Would using an existing corporate entity to undertake such investment prejudice the grant of the license? These are pertinent questions. The EPZ Act is glaring silent on what is meant by ‘new investment’. From the Authority’s perspective, there are intricacies around offering incentives if a business or activity in an EPZ is carried on together with a business outside the EPZ. A newly registered corporate entity to manage the new investment is preferred by the Authority to ring-fence incentives stipulated under the EPZ Act. Consequently, this affords an opportunity for investors to choose the best corporate structure for undertaking investments in EPZs.
Minimum capital. There is a requirement that the new corporate entity must have a minimum share capital of US$500,000 for foreign entities) and US$100,000 for local entities. Being locally incorporated in Tanzania does not necessarily make the entity to be regarded as a local entity. What matters is the composition of the shareholding; thus, if the majority shareholding is held by non-Tanzanian nationals, the entity will be regarded as a foreign entity. Conversely, if the majority shareholding is held by Tanzanian nationals, the entity will be regarded as a local entity.
80 percent rule on exports. To qualify for the Operator’s License, prospective investors need to demonstrate to the Authority that at least 80 percent of the goods produced or processed will be exported.
Annual export turnover. A further requirement is that the annual turnover of export sales of the holder of an Operator License should exceed US$ 500,000 for foreign investors and US$100,000 for local investors. Contravention of the requirement can result in withdrawal of the Operator’s License. There is a view that the Protocol on the Establishment of the EAC Customs Union, 2004 designated East Africa as a single customs territory and, therefore, sales from Tanzania to other EAC member states do not amount to exports. The EPZ Act does not define the word ‘export’. From common parlance, shouldn’t all goods that are sold to another country and actually delivered to that country amount to exports?
Other requirements. Environmental issues are given great weight in licensing decisions of the Authority. A prospective investor is obliged to assure the Authority that the intended investment will be environmentally-friendly and it will deploy modern production processes and new machinery.
Documentation. The following documents must be provided to the Authority as part of the EPZ investment application form for the Operator’s License: (a) duly completed application form; (b) certificate of incorporation of the corporate entity to undertake the investment; (c) memorandum and article of association; (d) export business plan; and (e) environmental impact assessment report; and (f) brief application letter forwarding the above documents. This is in addition to paying the application fees prescribed by the Authority.
The EPZ scheme offers the most generous incentives compared to the Special Economic Zones Act, 2006 (“SEZ scheme”) and the Tanzania Investment Act, 1997 (“TIC scheme”). The most important incentive is the 10-year corporate tax holiday in respect of profits earned by the EPZ business. An important eligibility requirement for the EPZ license is the business’s ability to export at least 80 percent of the goods produced. Do sales from Tanzania to other East African Community member states constitute exports? I believe they do, though a prospective investor should seek written clarification, if possible, from the Economic Processing Zones Authority. If a proposed investment meets the requirement to export a minimum of 80 percent of the goods produced or processed and the other conditions of eligibility for licensing under the provisions of the EPZ Act, the EPZ scheme should rank at the top for many investors. Next up on the agenda of this blog will be discussions on the SEZ scheme and the TIC scheme.
• • •
If you would like further information on any issue raised in this blog post, send me a message via this online contact form.
• • •
This blog post is intended as a general overview and discussion of the topics and issues dealt with. The information is not intended to be, and should not be used, as a substitute for seeking legal advice or other professional advice in relation to any particular situation.
Follow Tanzania Law Blog – Paul Kibuuka‘s insights into Tanzanian law and the legal issues relating to doing business or investing in Tanzania.
Tanzania Law Blog - Paul Kibuuka's insights into Tanzanian law and the legal issues relating to doing business in Tanzania. 