Misc Application No. 77 of 2022
Mac Arthur and Baker International (Inc.) ("MBI"), a foreign company incorporated in Delaware, USA, entered into a debt collection agreement with the then National Bank of Commerce (NBC) on 15 May 1997, at a time when MBI was not yet registered in Tanzania. MBI was subsequently registered under sections 320A and 321 of the Companies Ordinance (Cap. 212) on 25 August 1997, although registration fees were paid only on 29 August 1997 and the registration documents were approved by the Registrar only on 2 September 1997. Under the agreement, fees for MBI's services were wired directly to the USA. The first instalment of Shs.147,865,625.00, paid on 31 May 1997 (before registration), was remitted without deduction of management fees withholding tax. On discovering this, the Commissioner of Income Tax, acting under section 34(1) of the Income Tax Act 1973, served notice on and recovered withholding tax from NBC in respect of this and five further instalments paid between 2 October 1997 and 19 May 1998 (i.e., after registration). MBI applied to the High Court for prerogative orders of certiorari and prohibition, contending it was a "resident" company and thus not liable to withholding tax. The High Court (Mapigano, J.) granted certiorari, prompting the Commissioner General and Commissioner of Income Tax to appeal.
(1) Whether MBI was a "resident" company within the meaning of section 2(2)(b)(i) of the Income Tax Act 1973, such that it was not liable to pay non-resident withholding tax under section 34(1); (2) if MBI attained resident status only upon registration under sections 320A and 321 of the Companies Ordinance, whether that status applied retroactively to fees paid before registration; and (3) whether the trial court erred by granting certiorari without specifying the reliefs to which the respondent was entitled.
For the appellants, Mr Songoro argued that registration under sections 320A and 321 of Cap. 212 (which merely permits a foreign company to conduct business in Tanzania) did not confer resident status under section 2(2)(b)(i) of the Income Tax Act; that the word "registered" in that provision should be construed ejusdem generis with "incorporated" and "established," meaning only incorporation under sections 14 and 15 of Cap. 212 could confer residence; and that since MBI was never so incorporated, it remained non-resident and liable for withholding tax on all instalments. For the respondent, Mr Kibuta and Dr Mapunda argued that the word "registered" should be given its literal meaning, so that the certificate of compliance issued under sections 320A and 321 amounted to registration conferring de jure resident status on a foreign company; that this residence, once obtained within the year of income, applied for the whole year, making MBI liable only to ordinary corporation tax rather than withholding tax, even for the instalment paid before formal registration; and they pointed to a subsequent legislative amendment (enacted shortly after this dispute arose) requiring incorporation under Tanzanian law for residence, arguing this showed the original provision was not intended to require full incorporation.
The Court of Appeal held that tax statutes must be construed strictly and words given their natural meaning; it rejected the ejusdem generis construction and agreed with the respondent that registration under sections 320A and 321 of Cap. 212, without more, was sufficient to confer resident status under section 2(2)(b)(i) of the Income Tax Act for a foreign company. The court noted that the subsequent legislative amendment (requiring incorporation under Tanzanian law) reflected recognition of a loophole enabling tax evasion, promptly remedied after this dispute arose, but this did not affect the original provision's meaning as applied to MBI. However, the court held that residence could only arise once registration had actually occurred; MBI was not registered until 25 August 1997, so at the time it received the first instalment (31 May 1997) it was unregistered and non-resident, and thus liable for withholding tax on that instalment under section 34(1), which imposes the deduction obligation at the time of payment. The court rejected the argument that subsequent registration within the year of income retroactively exempted the earlier payment, reasoning that such an interpretation would enable tax evasion by companies that received payment and then failed to register. All instalments paid after MBI's registration were correctly found non-taxable as withholding tax, since MBI was by then resident. On the final ground, the court found no merit in the argument that the trial court failed to specify reliefs, since granting certiorari against the unlawful demand and collection implicitly required refund of the unlawfully collected sum. The appeal was allowed only to the limited extent of restoring the Commissioner's right to retain withholding tax on the first instalment; in all other respects the appeal was dismissed with costs, and the collections on the later instalments were held unlawful and refundable.
The judgment clarifies the interpretation of "resident" and "registered" under section 2(2)(b)(i) of the Income Tax Act 1973, establishing that registration of a foreign company under sections 320A and 321 of the Companies Ordinance (rather than full incorporation under sections 14 and 15) suffices to confer resident status for tax purposes, applying strict/literal construction to taxing statutes. It further establishes that resident status for a foreign company arises only from the date of actual registration and does not operate retroactively to exempt payments made prior to registration from non-resident withholding tax under section 34(1), the obligation to deduct such tax attaching at the time of payment. The decision also illustrates judicial recognition of legislative amendments enacted to close loopholes discovered through litigation, without allowing such amendments to be read into the pre-amendment law. Practically, it confirms that certiorari quashing an unlawful tax demand carries an implicit obligation to refund unlawfully collected sums, even without express specification of relief by the trial court.
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