Court: Court of Appeal of Tanzania, Dar es Salaam
Subject matter: Input VAT deduction on imported goods intended for a proposed business project that was never concluded.
The appellant, Aggreko International Projects Limited, operated in Tanzania as a branch of a company based in the United Kingdom. Its principal business in Tanzania involved generating emergency electricity, with Tanzania Electric Supply Company Limited (TANESCO) as its sole customer.
In 2011, Aggreko successfully completed a project for the installation of a 100 MW emergency power generation facility for TANESCO. Subsequently, the parties entered into negotiations for an additional 50 MW power generation project, which was expected to serve Morogoro, Arusha and Dodoma.
Believing that the negotiations were progressing positively and anticipating the conclusion of the additional project, Aggreko imported generators and other equipment into Tanzania. It paid input VAT amounting to TZS 3,560,042,981.
However, TANESCO cancelled the proposed 50 MW project before the parties concluded a contract. The cancellation occurred when the imported equipment had already arrived at the port of Dar es Salaam.
In 2014, the Tanzania Revenue Authority (TRA) audited Aggreko's tax affairs for 2011 and 2012 and disallowed the input VAT claim on the ground that the imported equipment was not intended for business carried on or to be carried on by the company.
Aggreko challenged the decision before the Tax Revenue Appeals Board (TRAB) and subsequently the Tax Revenue Appeals Tribunal (TRAT), but both appeals were unsuccessful. It then appealed to the Court of Appeal.
The appeal raised three principal grounds, which the Court considered together through the interpretation of section 16(1)(b) of the Value Added Tax Act, 1997.
1. Whether the Tribunal misapprehended the evidence by finding that the imported generators were not intended for business purposes and therefore did not qualify for input VAT deduction.
2. Whether the timing of importation was material in determining entitlement to input VAT deduction under section 16(1)(b) of the VAT Act.
3. Whether TRA was justified in disallowing the input VAT claim when the equipment had been imported in anticipation of a proposed business project that was subsequently cancelled.
The central legal question was whether a taxpayer could claim input VAT on imported goods based on anticipated business activity where the proposed commercial arrangement had not been concluded.
The Court of Appeal dismissed the appeal with costs, upholding the concurrent findings of the TRAB and TRAT.
The Court interpreted section 16(1)(b) of the VAT Act, 1997, which permitted the deduction or crediting of input tax paid on imported goods or services used, or to be used, for the purposes of business carried on or to be carried on by a registered taxable person.
The Court agreed with the Tribunal that the statutory requirement had not been satisfied. The original 100 MW project had already been completed, while the additional 50 MW project remained at the negotiation stage and was ultimately cancelled.
Consequently, the Court found that there was neither an existing business arrangement nor sufficiently established prospects of business between Aggreko and TANESCO in respect of the additional project.
Aggreko argued that it had imported the generators in good faith because negotiations were progressing positively and it reasonably expected the additional contract to be concluded.
The Court rejected this argument in the circumstances of the case. The negotiations were intended to culminate in a contractual arrangement, but that arrangement never materialised.
The Court held that reliance on the anticipated outcome of the negotiations, which were subsequently frustrated, had wrongly formed the basis of Aggreko's decision to mobilise resources for the project.
The Court distinguished between the legal obligation to pay VAT on taxable imports and the statutory entitlement to deduct input VAT.
It explained that the obligation to pay VAT arose by operation of law when the taxable goods were imported. Payment of that tax did not, by itself, entitle the importer to claim an input tax credit.
Since the imported generators did not satisfy the business-purpose requirement under section 16(1)(b), TRA was justified in disallowing the deduction.
The Court found no error in the Tribunal's interpretation of section 16(1)(b) and held that Aggreko was not entitled to the claimed input VAT credit.
The appeal was therefore dismissed with costs.
The decision establishes an important distinction between two separate tax questions:
Whether VAT is legally payable when goods are imported.
Whether the VAT paid qualifies for deduction or credit against the taxpayer's VAT liability.
A taxpayer may be legally required to pay import VAT without necessarily being entitled to deduct it. The deduction depends on compliance with the statutory conditions.
The judgment demonstrates that a taxpayer's commercial intention to undertake a future project does not automatically establish entitlement to an input VAT credit.
In this case, the Court was not persuaded by Aggreko's reliance on positive negotiations because the proposed commercial arrangement had not been concluded. The decision highlights the importance of demonstrating a sufficiently established connection between imported goods and the taxpayer's business activities.
However, the judgment should not be read as establishing that a signed contract is invariably necessary for every input VAT claim. Its conclusion arose from the particular facts, including the completed original project, the unfinalised negotiations and the cancellation of the proposed additional project.
The decision illustrates the tax risks associated with committing substantial resources before a proposed project has been finalised. Businesses that import equipment in anticipation of future contracts should carefully assess the tax implications if the expected transaction does not materialise.
From a commercial perspective, this supports careful project planning, contractual risk allocation and contemporaneous documentation of the intended business use of imported goods.
For tax practitioners and businesses, the case underscores the importance of evidence demonstrating the intended use of imported goods. Relevant evidence may include contracts, purchase orders, project approvals, correspondence, business plans and records linking the imports to taxable business activities.
Such documentation must be assessed against the applicable statutory requirements; documentation of commercial intention alone may not be sufficient in every case.
The Court reaffirmed a distinction between a taxpayer's expectation of future commercial activity and the statutory conditions governing input VAT deduction. It also upheld the tax appellate bodies' assessment that the circumstances did not establish the required business purpose.
The decision is particularly relevant to businesses operating in project-based industries, including energy, infrastructure, engineering and equipment supply, where significant expenditure may precede the execution of a final contract.
The principal lesson from Aggreko International Projects Limited v Commissioner General (TRA) is that paying VAT on imported goods does not automatically confer a right to deduct that VAT. The taxpayer must independently satisfy the statutory requirements for input tax deduction.
Businesses importing substantial equipment for anticipated projects should assess the strength of the commercial arrangements, document the intended business use and evaluate the tax consequences of cancellation before committing to importation.
Overall conclusion: The Court of Appeal upheld TRA's disallowance of TZS 3.56 billion in input VAT because Aggreko had not established the requisite business purpose for the imported generators under section 16(1)(b) of the VAT Act, 1997.
Speak directly with our advocates. We turn precedent into actionable advice for your matter.