In 2021, the Tanzania Revenue Authority (TRA) conducted an audit of GAPCO Tanzania Limited's tax affairs for the 2020 year of income. During the audit, TRA questioned the storage charges of USD 5 per cubic metre per metric ton that GAPCO charged its associated entities in relation to the use and operation of fuel filling stations.
TRA considered the charges to be below the fair market value and inconsistent with the arm's length principle. Consequently, it adjusted the storage rate from USD 5 to USD 7 per cubic metre per metric ton and imposed VAT on the adjusted value.
Following the adjustment, TRA issued a VAT assessment amounting to TZS 487,371,133, comprising:
Principal tax: TZS 465,581,798.
Interest: TZS 21,789,335.
GAPCO objected to the assessment, arguing that the USD 5 rate reflected the fair market value and that its arrangements with associated dealers were business arrangements rather than lease agreements. It further contended that other industry players charged even lower rates, demonstrating that its pricing was commercially reasonable.
TRA maintained that the transactions constituted taxable supplies and that the adjusted rate represented the appropriate fair market value.
GAPCO's appeals before the Tax Revenue Appeals Board and subsequently the Tax Revenue Appeals Tribunal were unsuccessful. It therefore appealed to the Court of Appeal, challenging the interpretation and application of sections 2 and 18 of the Value Added Tax Act and the imposition of interest.
The Court principally considered the following issues:
1. Whether TRA was justified in adjusting the storage charges from USD 5 to USD 7 per cubic metre per metric ton on the basis of the fair market value principle under sections 2 and 18 of the Value Added Tax Act.
2. Whether the transactions between GAPCO and its associated entities constituted lease arrangements or merely business arrangements, and whether the consideration charged complied with the arm's length principle.
3. Whether the interest of TZS 21,789,335 imposed on the delayed payment of VAT was legally justified.
It is worth noting that GAPCO abandoned its first ground of appeal during the hearing. The Court consequently concentrated on the second and third grounds.
The Court interpreted sections 2 and 18 of the Value Added Tax Act and established that the adjustment of consideration involving connected persons must satisfy two essential conditions:
The taxable supply must have been made to a connected person within the meaning of section 2 of the Act.
The consideration charged must be lower than the amount that independent and unconnected persons would pay in an open and uncontrolled market.
The Court observed that GAPCO had failed to demonstrate that the USD 5 charge represented the applicable fair market value. Although it argued that other industry players charged lower rates, it did not sufficiently establish the contractual and commercial circumstances supporting its own pricing.
The Court further noted that GAPCO had, in certain instances, charged rates as high as USD 8 per cubic metre per metric ton. This weakened its argument that USD 5 was necessarily the appropriate market rate.
Consequently, the Court found that TRA was justified in adjusting the rate to USD 7, particularly in view of the different rates GAPCO had charged other industry players.
The Court rejected GAPCO's argument that its arrangements with associated entities were merely gratuitous business arrangements rather than lease agreements.
It reasoned that a lease ordinarily constitutes a binding bilateral agreement involving rental consideration, whereas a mere business arrangement may amount to a non-binding understanding between parties.
Since GAPCO charged storage fees for the use of the filling stations, the Court concluded that the arrangements were essentially lease agreements and not gratuitous business arrangements.
The Court emphasised that GAPCO ought to have produced the relevant agreements to establish the contractual terms, agreed charges and commercial circumstances underpinning the transactions.
The Court held that GAPCO had failed to discharge its burden of proof under section 110 of the Evidence Act.
Although GAPCO maintained that the agreed rate was USD 5, it failed to produce the relevant lease agreements or business arrangements to substantiate that position.
The Court stressed that a taxpayer challenging a tax assessment must provide sufficient evidence to support its allegations. It was not enough to merely dispute the assessment or assert that the tax authority's valuation was arbitrary.
The Court also observed that taxpayers possess the relevant information and documentation concerning their commercial transactions and should therefore maintain adequate records to substantiate their tax positions.
Regarding the interest of TZS 21,789,335, the Court held that since GAPCO had failed to establish that the underlying assessment was unjustified, the interest imposed under section 76 of the Tax Administration Act was also justified.
Accordingly, the Court dismissed the third ground of appeal.
Final decision: The Court dismissed the entire appeal with costs, upholding the TRA assessment.
This decision is significant in Tanzania's tax jurisprudence for several reasons.
1. Clarification of the fair market value principle under section 18 of the VAT Act
The decision provides useful judicial guidance on the application of section 18 of the VAT Act in transactions involving connected persons. It confirms that where taxable supplies are made to connected persons for consideration below fair market value, TRA may substitute the consideration with the fair market value.
Importantly, the Court emphasised that fair market value is relative and must be determined on a case-by-case basis.
2. Reinforcement of the arm's length principle in related-party transactions
The decision reinforces the obligation of businesses undertaking transactions with associated entities to ensure that their pricing reflects commercially justifiable market conditions.
A taxpayer cannot simply rely on the existence of an agreed price between related entities as proof that the transaction reflects fair market value. The commercial basis of that price must be demonstrable.
3. Strengthening the taxpayer's evidential burden in tax disputes
The judgment reinforces the application of section 110 of the Evidence Act and the responsibility of taxpayers to substantiate their objections to tax assessments.
It establishes the practical importance of maintaining and producing underlying commercial agreements, invoices and supporting documentation when challenging TRA's valuation of transactions.
4. Recognition of the importance of contractual substance in tax characterisation
The Court looked beyond GAPCO's description of its arrangements as business arrangements and examined their actual commercial characteristics.
The decision demonstrates that the terminology adopted by contracting parties is not necessarily conclusive when determining the legal and tax character of a transaction. The nature of the rights, obligations and consideration involved remains important.
5. Reinforcement of the importance of proper tax record-keeping
The Court highlighted three underlying objectives of section 18:
It presupposes that taxpayers maintain relevant information and adequate records to facilitate tax self-reporting.
Taxpayers ordinarily possess the relevant information and evidence concerning their commercial transactions.
The provision seeks to prevent tax avoidance through non-arm's-length transactions between connected entities.
6. Implications for VAT assessments and tax interest
The decision confirms that where an underlying VAT assessment is successfully sustained, the consequential interest on delayed payment may also be upheld in accordance with section 76 of the Tax Administration Act.
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