Tax Appeal No. 4 of 2007
1. Facts
The appellant, SEACOM Tanzania Limited, is a Tanzanian company engaged in providing network facilities. It owns part of the SEACOM fibre-optic cable situated within Tanzania's territorial waters, extending to a landing point in Tanzania.
In 2021, the Tanzania Revenue Authority (TRA) conducted an audit of the company's tax returns and accounts for the 2018 year of income. During the audit, TRA examined intercompany transactions and discovered that SEACOM Tanzania had received funds amounting to TZS 5,442,324,239 from a related company.
TRA considered these funds to constitute intra-group financing in the nature of a loan rather than ordinary operational support, as argued by the taxpayer.
Consequently, TRA invoked section 33(2)(a) of the Income Tax Act, Cap. 332, read together with Regulation 10(3) of the Tax Administration (Transfer Pricing) Regulations, 2018, and imposed withholding tax on deemed interest at the rate of 10%.
SEACOM challenged the assessment, arguing that the funds were not loans, advances or interest-bearing trade credits and that no interest had actually been paid or accrued.
However, the objection was unsuccessful. The Tax Revenue Appeals Board upheld TRA's assessment, and subsequently, the Tax Revenue Appeals Tribunal dismissed the company's appeal.
Dissatisfied with the Tribunal's decision, SEACOM appealed to the Court of Appeal on three grounds.
The Court considered three principal issues:
i. Whether TRA was legally justified in re-characterising the intercompany balances as intra-group loans.
The issue was whether TRA could treat funds received from a related company as intra-group financing and consequently determine deemed interest under section 33(2)(a) of the Income Tax Act and Regulation 10(3) of the Transfer Pricing Regulations, 2018.
ii. Whether TRA was justified in imposing withholding tax on deemed interest that had not actually been paid.
The issue was whether withholding tax could be imposed on interest arising from re-characterised intra-group financing, notwithstanding the taxpayer's argument that no actual interest payment had occurred.
iii. Whether the imposition of interest for late payment of tax was justified.
The issue was whether TRA was entitled to impose late payment interest under sections 76(1) and 81(1) of the Tax Administration Act following the principal withholding tax assessment.
Ground dismissed
The Court held that TRA was legally empowered to re-characterise the funds received by SEACOM Tanzania as intra-group financing.
The Court distinguished between section 33(2)(a) and section 33(2)(b) of the Income Tax Act.
Section 33(2)(a): Empowers the Commissioner to re-characterise the source and type of income, loss, amount or payment where a taxpayer has failed to comply with the arm's-length principle under section 33(1).
Section 33(2)(b): Deals with apportionment and allocation of expenditure between associated enterprises based on comparability analysis.
The Court found that SEACOM had failed to provide contemporaneous transfer-pricing documentation demonstrating that the intercompany transactions complied with the arm's-length principle.
Accordingly, TRA was entitled to invoke section 33(2)(a), classify the funds as intra-group loans and determine an appropriate arm's-length interest rate.
The Court further upheld TRA's authority to apply best-judgment assessment under section 48(3) of the Tax Administration Act.
Holding: The Commissioner was not required to undertake the comparability analysis contemplated under section 33(2)(b) in the circumstances of this case.
Ground dismissed
The Court rejected SEACOM's argument that withholding tax could only arise where interest had actually been paid.
It held that Regulation 10(3) of the Transfer Pricing Regulations requires persons involved in controlled transactions involving intra-group financing, whether directly or indirectly and with or without consideration, to determine an arm's-length interest rate.
The Court further relied on its earlier decision in Commissioner General, Tanzania Revenue Authority v Vodacom Tanzania PLC, Civil Appeal No. 485 of 2023, [2025] TZCA 343.
In that decision, the Court emphasised that corporations are required to account for income tax on an accrual basis rather than a cash basis.
Therefore, the absence of actual payment of interest did not automatically extinguish the withholding tax obligation arising from the deemed interest.
An additional important consideration was that SEACOM had not proposed an alternative arm's-length interest rate during the objection proceedings or before the Tax Revenue Appeals Board.
The Court treated the challenge to the applicable interest rate as a new matter that could not be introduced for the first time at the appellate stage.
In relying on Singita Trading Store (EA) Limited v Commissioner General, Tanzania Revenue Authority, Civil Appeal No. 57 of 2020, [2021] TZCA 179, the Court reiterated that a taxpayer challenging an interest rate should have proposed an alternative during the administrative objection process.
Holding: Withholding tax on deemed interest was legally justified, and the taxpayer's failure to propose an alternative interest rate during the administrative proceedings weakened its challenge.
Ground dismissed
The Court upheld the imposition of late payment interest under sections 76(1) and 81(1) of the Tax Administration Act.
It reasoned that once the principal tax assessment had been upheld, the resulting interest for late payment was consequential.
The Court further observed that SEACOM had not demonstrated that the principal tax had been paid within the prescribed period.
It therefore concluded that late payment interest was compensatory in nature and statutorily mandated.
Holding: TRA was justified in imposing late payment interest because the principal tax remained unpaid after its due date.
The Court of Appeal dismissed the entire appeal for lack of merit and ordered SEACOM Tanzania Limited to pay costs.
All three grounds of appeal were unsuccessful.
This decision is significant to Tanzanian tax jurisprudence, particularly in the administration of transfer pricing, intra-group financing and withholding tax.
1. Strengthening TRA's powers of re-characterisation
The decision confirms that under section 33(2)(a) of the Income Tax Act, TRA has the power to re-characterise transactions between associated enterprises where the taxpayer fails to demonstrate compliance with the arm's-length principle.
This provides an important basis for challenging arrangements presented as operational support where their actual economic nature suggests intra-group financing.
2. Importance of contemporaneous transfer-pricing documentation
The judgment reinforces the importance of maintaining proper transfer-pricing documentation.
A taxpayer dealing with related parties cannot merely assert that funds received constitute operational support. It must maintain sufficient documentation to demonstrate the nature, purpose and arm's-length character of the transaction.
Failure to do so exposes the taxpayer to re-characterisation and best-judgment assessments.
3. Withholding tax on deemed interest
Perhaps the most important aspect of the decision is its treatment of withholding tax on deemed interest.
The Court recognised that an actual cash payment of interest is not necessarily a prerequisite where intra-group financing has been established and the applicable tax rules require accounting on an accrual basis.
This has significant implications for multinational companies and Tanzanian subsidiaries receiving financial assistance from related foreign entities.
4. The importance of raising objections at the administrative stage
The decision reinforces the principle that taxpayers should raise all substantive objections during the administrative tax objection process.
In particular, a taxpayer disputing the arm's-length interest rate should propose an alternative rate and support it with appropriate evidence.
Failure to do so may prevent the taxpayer from successfully introducing that issue at the appellate stage.
5. Confirmation of consequential late payment interest
The decision confirms that where the principal tax assessment is upheld, statutory late payment interest may follow as a consequential liability under the Tax Administration Act.
The central jurisprudential contribution
A taxpayer cannot avoid transfer-pricing adjustments and withholding tax merely by describing funds received from an associated enterprise as operational support rather than a loan. Where the taxpayer fails to provide contemporaneous documentation establishing the true nature and arm's-length character of the transaction, TRA may invoke section 33(2)(a) of the Income Tax Act to re-characterise the transaction, determine deemed interest and impose the resulting tax liability.
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