Civil Reference No. 7 of 2004
The respondent, Pan African Energy Tanzania Limited, is a Tanzanian-registered company engaged in exploration, production, distribution and marketing of natural gas at Songosongo, and operates a gas processing plant for Songas Limited. In the course of its operations it engaged various technical service providers, some resident and some non-resident. A dispute arose when, during an audit, the appellant (Commissioner General, TRA) discovered that the respondent had not withheld tax on fees paid to non-resident consultants in the United Kingdom who analysed samples drilled in Tanzania and produced reports. The appellant demanded payment of withholding tax of Tshs. 3,640,903,416/=, contending that because the samples were drilled in Tanzania and payment originated from Tanzania, withholding tax was due. The respondent maintained that no withholding tax applied because the services were performed entirely outside Tanzania. The Tax Revenue Appeals Board, by majority, sided with the appellant, holding that the UK analysis could not be dissociated from the Tanzanian drilling activities. On further appeal, the Tax Revenue Appeals Tribunal reversed, holding—relying on section 69(1)(i) of the Income Tax Act 2004 and the Indian case of Ishikawajima-Harima Heavy Industries v Director of Income Tax—that since the consultants were UK residents and performed the work wholly in England, no withholding tax obligation arose. The Commissioner General appealed to the Court of Appeal.
(1) Whether payments made by the respondent to non-resident consultants for services performed outside Tanzania are liable to withholding tax under the Income Tax Act, 2004. (2) Whether the respondent was liable to pay the withholding tax that it had not withheld. Resolution of these issues turned on the proper interpretation of sections 69(1)(i) and 83(1)(c) of the Income Tax Act, 2004, specifically whether a payment has a 'source' in Tanzania where the underlying activity (sample drilling) occurred in Tanzania and payment was made from Tanzania, even though the service (analysis and report-writing) was rendered entirely abroad by a non-resident.
The appellant argued that section 69(1)(i), read with section 83(1)(c), imposes withholding tax liability wherever payment originates from Tanzania and relates to samples drilled in Tanzania, regardless of where the analytical work was actually performed; the place of performance of the service was said to be immaterial once the underlying transaction had a Tanzanian nexus. Counsel invoked the principle of 'territorial nexus' fastening tax liability to income sourced within Tanzania's borders and argued the Tribunal failed to distinguish between private payers under section 69(1)(i) and government payers under section 69(1)(ii), for whom source is irrelevant. The respondent countered that section 69(1)(i) explicitly requires that the service be 'rendered' in Tanzania for the payment to have a Tanzanian source, and that where the payer is a private company (unlike government under 69(1)(ii)), the source rule does not apply to services rendered wholly abroad. It relied on the pre-amendment Indian case of Ishikawajima-Harima Heavy Industries, which required that services be both rendered and utilised in India for tax to attach, and distinguished the post-amendment Indian case of Ashapura Minichem Ltd, arguing Tanzanian law still mirrored the pre-amendment Indian position. The respondent also urged strict construction of tax statutes, citing Cape Brandy Syndicate v IRC, Commissioner General and Another v Mac Arthur and Baker International, and Attorney General v Nasoro Athumani Gogo, contending that courts should give effect to what the legislature actually said, not what it might have intended to prevent tax avoidance.
The Court of Appeal dismissed the appeal, holding that the Tax Revenue Appeals Tribunal correctly construed sections 69(1)(i) and 83(1)(c) of the Income Tax Act, 2004. The Court found that section 69(1)(i) makes a payment's source in Tanzania depend on the service being 'rendered' in Tanzania; the place of drilling or payment is not determinative for private (non-government) payers. Since the services—analysis of samples and report writing—were rendered wholly in the United Kingdom by UK-resident consultants, the payments did not have a source in Tanzania, and thus the respondent had no obligation under section 83(1)(c) to withhold tax on those payments. The Court distinguished section 69(1)(ii), applicable only where the government is the payer, under which tax is chargeable regardless of where services are rendered—a distinction the Tribunal correctly recognised. Applying established principles of strict interpretation of tax statutes (Cape Brandy Syndicate; Mac Arthur and Baker International), the Court declined to read into section 69(1)(i) a broader source rule not enacted by the legislature, even though it acknowledged this interpretation could create a loophole for tax avoidance. Consequently, since the payments were not subject to withholding tax, the respondent could not be held liable for the assessed tax that was not withheld.
The judgment clarifies that under section 69(1)(i) of the Income Tax Act, 2004, the 'source' of a service fee payment made by a private (non-government) resident payer to a non-resident depends on where the service is actually rendered, not merely on where the underlying transaction originates or where payment is made from. It draws a clear statutory distinction between private payers under section 69(1)(i), for whom the place of rendering the service is determinative, and government payers under section 69(1)(ii), for whom source is irrelevant. The Court reaffirmed the principle of strict construction of tax statutes, declining to expand withholding tax obligations beyond the plain wording of the law even where this created a potential avenue for revenue loss or tax avoidance. Recognising this gap, the Court recommended that the Attorney General consider legislative amendment—paralleling changes made in India (as reflected in Ashapura Minichem Ltd)—to close the loophole and ensure that payments connected to Tanzanian-sourced activities but performed abroad could be brought within the tax net if the government so intends. The decision thus stands as authority on the interpretation of source rules for withholding tax on cross-border service payments under Tanzanian tax law prior to any such amendment.
Speak directly with our advocates. We turn precedent into actionable advice for your matter.