Civil Reference No. 7 of 2004
Pan African Energy Tanzania Ltd (the appellant) is a company producing and supplying natural gas, including compressed natural gas for motor vehicles, in Dar-es-Salaam. Before April 2013, the Tanzania Revenue Authority (TRA) audited the appellant's tax affairs, including Pay As You Earn (PAYE), and found that the appellant used a 'grossing up' method — paying PAYE to TRA from its own funds on behalf of employees rather than withholding it from employees' taxable income. TRA issued a demand notice, which the appellant objected to unsuccessfully, resulting in certificates of tax liability totaling TZS 1,166,197,808 (principal TZS 677,194,295 plus interest TZS 489,003,513). The appellant appealed to the Tax Revenue Appeals Board (TRAB), which held that the grossing up method was not recognized under Tanzanian tax law but waived the interest, finding no willful neglect or tax evasion. The appellant then appealed to the Tax Revenue Appeals Tribunal (TRAT), which dismissed the appeal, holding that the grossing up method conferred a taxable benefit on employees (since they were relieved of a tax burden they would otherwise have borne), which was not exempted under section 7(3)(a)-(i) of the Income Tax Act, and that the employer was obliged to withhold this benefit under section 81(1) and (2). The appellant then appealed to the Court of Appeal of Tanzania.
The central issue was whether the grossing up method used by the appellant to compute and pay PAYE — whereby the appellant paid the tax from its own resources rather than withholding it from employees' salaries — was lawful under the Income Tax Act, 2004, and whether this method resulted in a taxable benefit to employees not exempted under section 7(3)(a)-(i) of the Act.
The appellant argued that the TRAT erred in concluding that the grossing up method conferred a taxable benefit on employees, contending that since it had entered into net-salary employment contracts, grossing up was a legitimate and internationally accepted practice not expressly prohibited by Tanzanian law, and did not adversely affect employees' PAYE liability. It relied on Hartland v Diggins [1926] AC 286 and practices in Kenya, South Africa, Ireland and the UK, arguing these jurisdictions permit similar arrangements despite lacking specific legislation on grossing up. It further contended that the TRAT's approach produced an absurd marginal tax rate exceeding the statutory maximum, and that the total amount paid (including the withheld portion) was legitimate business expenditure wholly incurred in production of income, citing Commissioner General TRA v Kilombero Sugar Limited, Tax Appeal No. 32 of 2013, and admitted that though the mode of collection resembled withholding tax, it was not legally prohibited.
The respondent (TRA) argued that sections 6(1) and 7(1) of the Income Tax Act create the chargeable income, while section 81(1) makes the employer a statutory withholding agent obliged to deduct and remit PAYE from employees' earnings; the appellant's failure to withhold, and its net-of-tax employment contracts, contravened section 7(1) and (3) and section 81(2), which provides that the employer's withholding obligation cannot be extinguished by any other arrangement. TRA distinguished Hartland v Diggins as inapplicable to Tanzania's statutory scheme and argued that foreign Employer's Tax Guides (South Africa, Kenya) actually supported TRA's position, since they treat employer-paid tax on behalf of an employee as a taxable benefit (tax-on-tax).
The Court of Appeal dismissed the appeal and upheld the TRAT's decision, ordering the appellant to pay the demanded tax with costs. The Court held that under sections 7(1)-(2), 81(1)-(2) and 84 of the Income Tax Act, an employer is mandatorily required to withhold PAYE from an employee's chargeable income and remit it to TRA; this obligation cannot be reduced or extinguished by any contractual arrangement, including a net-of-tax employment contract. The appellant's use of the grossing up method — paying PAYE from its own funds rather than withholding it from employees' pay — contravened these statutory obligations and was not justified merely because the practice is not expressly prohibited in the Act; the Court held that tax statutes must be strictly and literally construed, and courts cannot read into clear statutory language rights or exemptions not expressly provided (citing Cape Brandy Syndicate v Inland Revenue Commissioners and Charles Herbert Withers Brothers-Payne v Commissioner of Income Tax). The Court found Hartland v Diggins inapplicable because, unlike in that English case, the appellant's payroll and employment letters clearly specified salary and benefits from which PAYE could be calculated. It also found that the Employer's Tax Guides from South Africa and Kenya, rather than supporting the appellant, confirmed that tax paid by an employer on behalf of an employee constitutes a taxable 'benefit in kind' (tax-on-tax), consistent with Tanzania's own Employer's Guide on PAYE. The Court further relied on its own precedent in Mbeya Cement Company Limited v Commissioner General, holding that paying tax from sources other than proper withholding amounts to impermissible grossing up. Consequently, the appellant's obligation to withhold PAYE remained intact and was breached, and the TRAT correctly treated the tax paid by the employer as a taxable benefit in the employees' hands.
The judgment reinforces the strict, literal approach to construing taxing statutes in Tanzania, affirming that courts will not read into tax legislation exemptions, permissions or interpolations not expressly stated by Parliament, relying on established authorities such as Cape Brandy Syndicate v Inland Revenue Commissioners. It clarifies that an employer's statutory obligation under section 81 of the Income Tax Act to withhold PAYE from employees' earnings cannot be avoided, reduced, or extinguished through private contractual arrangements such as net-of-tax employment contracts or the grossing up method, regardless of international practice in other jurisdictions. The decision also confirms, consistent with the Court's earlier ruling in Mbeya Cement Company Limited v Commissioner General, that where an employer pays tax due from an employee out of its own resources instead of withholding it, this constitutes an impermissible grossing up arrangement and gives rise to an additional taxable benefit in the hands of the employee. The case is significant for employers operating in Tanzania as a caution against adopting foreign tax practices, such as net salary or tax equalization arrangements, without express statutory sanction under Tanzanian law.
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