On May 16 the Tanzania Court of Appeal dismissed a TZS3.5 billion appeal lodged by the commissioner general of the Tanzania Revenue Authority against PanAfrican Energy (Tanzania) Limited (PAE), finding that withholding tax does not apply to payment for services rendered outside Tanzania.
PAE is a Tanzanian-registered limited liability company engaged in exploration, production, distribution and marketing of natural gas at the Songo Songo gas fields in Tanzania's Lindi Region.
It contracts technical service providers, both resident and non-resident, to provide services that fall into three categories: services performed in Tanzania; services performed abroad by technical service providers who do not come to Tanzania; and technical services performed partly in and partly outside Tanzania.
The dispute at the centre of the court case related to an analysis of drilling samples and the preparation and issuing of a report, which was done by service providers in the United Kingdom (UK). PAE did not withhold tax on the payments for these technical services, on the basis that these were obtained from non-resident service providers based in the UK who performed the services in the UK.
In terms of the Income Tax Act, a resident who pays a service fee with a source in Tanzania to a non-resident must withhold the relevant withholding tax. Section 69(i) provides that fees from services rendered in Tanzania, regardless of the place of payment, are deemed to be from a source in Tanzania. Where the payer is the government of Tanzania, the source is deemed to be in Tanzania, regardless of the place of exercise or rendering of the service.
After conducting a tax audit on PAE, the Tanzania Revenue Authority demanded payment of tax that should have been withheld on the payments for technical services. PAE disputed the demand and appealed to the Tax Revenue Appeals Board, which decided in favour of the revenue authority.
PAE then appealed to the Tax Appeals Revenue Tribunal, which reversed the board's decision and stated that, as the service providers were not resident in Tanzania and the services were performed outside Tanzania, PAE had no obligation to withhold tax on the payment of the service fees in terms of section 69 of the Act.
The revenue authority appealed to the Court of Appeal, arguing that the payments were subject to withholding tax, regardless of where the services were performed, based on the principle that the payment was made from, and the samples were drilled in, Tanzania by a resident of Tanzania.
PAE argued that, in terms of section 69(i), only payments made by the Tanzanian government were deemed to be sourced in Tanzania, regardless of where the service was exercised or rendered, but payments made by anyone else were subject to withholding tax only if the services were rendered in Tanzania. According to PAE's lawyers, it was clearly never the legislature's intention for the source rule to apply to services that were not rendered in Tanzania for anyone other than the government, otherwise there would have been no need to have two subsections.
The court held that section 69(i), read with section 83(1)(c), of the Act did not impose a liability to withhold tax where the payment was made by a person (other than the government) in relation to services rendered outside Tanzania. Also, as the payments were not liable to withholding tax, PAE could not assume liability for payment of tax not so withheld.
The court suggested that the best way to remedy the perceived loss of income to the government was to amend the law to cater for the charging of withholding tax on payments for services rendered outside Tanzania.
However, until such time, the Tanzania Revenue Authority is obliged to apply the Act as it currently reads, which clearly does not impose a liability on a non-government entity to withhold tax where a service fee is paid for services rendered out of Tanzania, regardless of whether it is made by a company registered and doing business in Tanzania.
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About the author
Celia Becker is an executive at ENSafrica, and an expert in Africa regulatory and business intelligence. She specialises in large multi-nationals expanding into Africa in terms of investment and business regulations.