As companies seek to reduce their operational costs, consultancy agreements present viable options to fill staffing gaps instead of hiring full-time employees. Consultancy agreements offer more flexibility since businesses can control their costs, contracts durations, terms and conditions among other contractual obligations. Additionally, consultancy agreements reduce company’s regulatory burden as an employer. 

Prior to contracting for work, it is important that parties understand, among other things, their tax responsibilities and likely consequences of nonadherence to applicable tax laws. Businesses should determine whether the contract being entered is a contract of service or a contract for service. There should be clarity on whether the individual is being engaged to provide services as an independent contractor on their own account, or as an employee? This means defining the working relationship between the individual and the entity contacting for the service

Employees and independent contractors are taxed differently in Tanzania. Employers withhold and pay taxes up to 30% on employment income and are required to make other employer statutory contributions such as Skills and Development Levy (4%), and contributions to both the Workers Compensation Fund (1%) and the National Social Security Fund (10%). On the other hand, companies are required to withhold tax at the rate of 5% on payment of a service fee to resident independent contractors. Where a misclassification of a contractor by a company occurs and the contractor is later deemed to be an employee, the company is likely to face additional employment taxes, interest and penalties for failing to withhold correct taxes to the TRA.