Civil Reference No. 7 of 2004
BP Tanzania Ltd, a licensed oil marketing company, underwent a tax audit by the Tanzania Revenue Authority's Large Tax Payers Department covering, among other things, withholding tax for the 2007–2008 financial years on payments made to non-resident group companies (BP International in London and BP South Africa) for: ISP Global Charges for an accounting package hosted on a London server accessed via satellite from Tanzania; Application System Support provided remotely from South Africa; Application System Licence fees for software hosted in London; and Information Technology service fees for a globally accessible internet system hosted in London. The appellant also paid consulting professional fees to AON South Africa for administering a Provident Fund into which its employees contributed, which was managed in South Africa. The Commissioner General assessed withholding tax on these payments, treating them as royalties sourced in Tanzania. The appellant's objection was rejected, and its appeal to the Tax Revenue Appeals Board and then the Tax Revenue Appeals Tribunal was dismissed, the Tribunal holding that the relevant 'asset' for source purposes was BP Tanzania itself. BP Tanzania appealed to the Court of Appeal.
(1) Whether the Tribunal's judgment was invalid for non-compliance with Rule 21(1) of the Tax Appeals Rules (signing and certification requirements) — raised as a preliminary objection. (2) Whether payments made by the appellant to non-resident companies (BP International and BP South Africa) for IT-related services constituted 'royalty' within the meaning of section 3 of the Income Tax Act, 2004. (3) Whether such royalty payments had a 'source in the United Republic' under section 69(e) of the Income Tax Act, 2004, so as to obligate the appellant, as a resident taxpayer, to withhold tax under sections 82–83 of the Act, notwithstanding that the servers/assets from which the services were rendered were physically located outside Tanzania (in London and South Africa). (4) Whether withholding tax was properly imposed on consulting professional fees paid to AON South Africa in respect of the BP Provident Fund managed in South Africa.
The appellant (through counsel Ms. Karume) argued preliminarily that the Tribunal's judgment was invalid because it was not properly signed and certified by all members as required by Rule 21(1) of the Tax Appeals Rules. On the merits, she contended that under section 81–83 and section 69(e) of the Income Tax Act, four conditions must be met before withholding tax liability arises, including that the payment must have a source in Tanzania; she argued that because the servers/assets from which the services were rendered were physically situated in London and South Africa (not Tanzania), and relying on section 69(e), no asset was 'situated' in Tanzania, and hence the payments had no Tanzanian source and the appellant was not obliged to withhold tax. She contended the Tribunal erred in treating BP Tanzania itself as the relevant 'asset'. She also argued the Tribunal erred by dismissing the entire appeal despite acknowledging that withholding tax on the Provident Fund consulting fees (managed in South Africa) was not properly demandable, a point conceded by the respondent's official. The respondent (through Mr. Beleko) argued that the appellant received and enjoyed services from BP International and BP South Africa, for which royalty was charged, and that under section 82(1)(c) the appellant was obligated as agent to withhold tax on payments made to foreign companies for services rendered to and consumed by it in Tanzania, and that failure to withhold obliged the appellant to pay the unwithheld tax itself. In rejoinder, the appellant maintained that section 69(e) required the asset to be situated in Tanzania for the payment to have a Tanzanian source.
The Court dismissed the preliminary objection, holding that Rule 21(1) was substantially complied with because the Tribunal's judgment was signed and certified by all members, and the decree was signed by all members even though not separately certified; this did not affect the competence of the appeal. On the substantive appeal, the Court held that payments for ISP Global Charges, Application System Support, Application System Licence fees, and IT Service Fees constituted 'royalty' as defined in section 3 of the Income Tax Act, 2004, being payments for the use of or right to use intangible assets/software and related technical assistance. Construing section 69(e), the Court held that, unlike section 69(c) and (d) which expressly require the asset to be 'situated' in Tanzania, section 69(e) contains no such requirement; therefore, physical presence of the servers/assets in Tanzania is not necessary for the royalty payment to be treated as sourced in the United Republic. What matters is whether the services were utilised in Tanzania for business or income-earning purposes, irrespective of where the service provider or asset is physically located. The Tribunal erred in identifying BP Tanzania itself as the relevant 'asset'; rather, the assets are the servers in London and South Africa which the appellant accessed and used to conduct its business in Tanzania. Consequently, the payments had a source in Tanzania, and the appellant, as a resident taxpayer, was obliged under sections 82(1) and 83(1) to withhold tax on those payments, and having failed to do so, must pay the unwithheld tax. The two grounds of appeal challenging this liability were dismissed. However, regarding the consulting professional fees paid to AON South Africa for the Provident Fund managed in South Africa, the Court held that since the respondent had conceded before the Tribunal that withholding tax was not properly demandable on this payment (as the Fund's investment income only becomes taxable once it is remitted into or utilised within Tanzania), the Tribunal erred in dismissing the entire appeal without giving effect to this concession. The Court held it improper to withhold tax on the Provident Fund payment and allowed the appeal to that limited extent. The appeal was therefore partly allowed: the appellant must pay withheld tax on the IT-related royalty payments, but the assessment on the Provident Fund consulting fees was set aside.
The judgment clarifies the interpretation of 'source' rules for royalty payments under section 69(e) of the Tanzania Income Tax Act, 2004, establishing that the statutory source test for royalties does not require the underlying intangible asset or its physical infrastructure (e.g., servers) to be situated within Tanzania, in contrast to the explicit 'situated' requirement found in section 69(c) and (d) for natural resource and rental payments. The Court applied the plain-meaning canon of statutory construction (citing US authorities and prior Tanzanian precedent) to hold that where statutory language is unambiguous, courts must not read in additional words such as 'situated' that the legislature deliberately omitted. The decision establishes that the decisive factor for source-based withholding tax liability on royalties is whether the payment is for services utilised or consumed within Tanzania for business or income-earning purposes, regardless of the physical location of the non-resident service provider's assets. This has significant practical implications for multinational corporate groups with Tanzanian subsidiaries who procure centralized IT, software licensing, or technical support services from foreign affiliates, confirming that such cross-border intra-group service payments may attract Tanzanian withholding tax obligations on the resident payer even though the technical infrastructure is hosted abroad. The case also affirms that procedural compliance with signing/certification requirements under Rule 21(1) of the Tax Appeals Rules is satisfied by certification of the judgment and signature of the decree, without invalidating tribunal decisions for minor procedural gaps.
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