When employment is terminated for an employee in Tanzania and a lump sum payment becomes due, employers must follow a specific process before any final settlement can be made. Understanding the requirements of the Tanzania Revenue Authority (TRA) and planning accordingly can help avoid delays, compliance risks and employee dissatisfaction.
Where a terminated employee is entitled to a lump sum payment, such as severance pay, gratuity, leave pay, notice pay, ex gratia payments or outstanding commissions, a tax directive must first be obtained from the TRA.
Historically, this was a manual process. However, employers can now submit applications through the IDRAS portal, which facilitates the directive request and generates the result electronically.
Importantly, employers may not proceed with the final payment until the tax directive has been issued by the TRA.
Many employers assume that Pay As You Earn (PAYE) can be calculated based solely on the lump sum amount payable to the employee. This is not the case.
The TRA determines the PAYE to be withheld after reviewing the relevant information and supporting documentation submitted with the application. The directive issued by the TRA confirms the tax treatment and amount that must be withheld before payment is made to the employee.
This requirement applies to termination agreements and mutual separation agreements where lump sum payments are being made.
One of the most important considerations is timing.
The application process requires extensive supporting documentation and the TRA generally requires a minimum of 14 working days to process and issue a directive.
Employers should therefore build sufficient time into their termination process and avoid committing to payment dates before understanding the statutory requirements.
Advance planning is particularly important where employees expect prompt payment following the termination of employment.
A recent case highlighted the importance of aligning payment commitments with contractual obligations and legislative requirements.
The employer verbally advised the employee that payment would be made on the company’s standard payroll date.
However, the signed Mutual Separation Agreement stated that payment would be made within seven days of the tax directive being issued by the TRA.
The written agreement remains the governing document and should always be aligned with applicable legislation and regulatory requirements.
Where verbal commitments differ from documented terms, misunderstandings and disputes can arise.
To reduce risk, organisations should:
Before submitting an application through the TRA portal, ensure that the following documentation is available:
In addition, employers should ensure they have access to the correct TRA portal login credentials before initiating the application process.
Obtaining a tax directive is a mandatory step when making qualifying lump sum payments to terminated employees in Tanzania. Employers who understand the process, prepare the necessary documentation and allow sufficient time for TRA processing are better positioned to meet their compliance obligations and manage employee expectations effectively.
A well-planned approach helps ensure that final payments are processed correctly, tax obligations are met and termination arrangements are completed in accordance with both the signed agreement and Tanzanian legislation.
If this article raised questions or highlighted areas you’d like to understand better, let’s talk.Our team can walk through the details, implications, and practical considerations for your business.
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