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Subject: Tax law — Withholding tax on service fees paid to non-resident entities . Double Taxation Agreement (DTA) Interpretation of business profits in Tanzania–South Africa tax treaty.
TPC Limited, a Tanzanian company engaged in sugarcane cultivation and sugar production, was audited by the Tanzania Revenue Authority (TRA) in 2016 for the years of income 2013 to 2016.
Following the audit, TRA issued TPC Limited with a withholding tax certificate in 2017, assessing tax liability of TZS 198,673,477, comprising principal tax and interest for late payment. The assessment arose from payments TPC Limited had made to South African companies for services rendered in Tanzania.
TPC Limited challenged the assessment, arguing that the payments constituted business profits under Article 7 of the Double Taxation Agreement between Tanzania and South Africa. Under that provision, business profits of an enterprise are generally taxable in its country of residence unless the enterprise operates in the other contracting state through a permanent establishment.
TPC Limited maintained that the South African companies had no permanent establishment in Tanzania and, consequently, the service fees could not be taxed in Tanzania.
TRA disagreed, maintaining that the payments were not business profits protected by Article 7 but fell under Article 20 of the DTA, concerning other income, and were therefore subject to withholding tax under section 83(1)(c)(i) of the Income Tax Act, 2004.
Both the Tax Revenue Appeals Board and the Tax Revenue Appeals Tribunal upheld TRA's position. TPC Limited subsequently appealed to the Court of Appeal.
The principal issues before the Court were:
Whether service fees paid by TPC Limited to South African entities constituted business profits within the meaning of Article 7 of the Tanzania–South Africa DTA.
Whether the absence of a permanent establishment in Tanzania exempted the service fees from withholding tax.
Whether section 128 of the Income Tax Act gave the DTA overriding effect in the circumstances.
Whether the Court should follow the later decision in Kilombero Sugar Company Limited v Commissioner General TRA, Civil Appeal No. 443 of 2020, rather than the earlier decisions in Kilombero Sugar Company Limited No. I and Mantrac (Tanzania) Limited.
What reliefs the parties were entitled to.
The appellant abandoned its first ground of appeal, which directly challenged the obligation to withhold tax under section 83(1)(c)(i) of the Income Tax Act.
The Court upheld the Tribunal's conclusion that the service fees paid to the South African entities did not constitute business profits within the scope of Article 7 of the DTA.
It relied on the earlier decisions in Kilombero Sugar Company Limited No. I and Mantrac (Tanzania) Limited, which had treated service fees as falling outside Article 7 and subject to withholding tax under the applicable provisions of domestic law and the DTA.
The Court accepted that business profits are ordinarily determined after deducting the costs and expenses incurred in generating income. It distinguished such profits from service fees paid for services rendered.
Although Article 7 generally protects business profits from taxation in the other contracting state where there is no permanent establishment, the Court held that this protection did not exempt the service fees in question.
TPC Limited, as a resident company carrying on business in Tanzania, was required to withhold tax on payments to the non-resident service providers under section 83(1)(c)(i) of the Income Tax Act.
The Court therefore upheld the withholding tax assessment, although it did so on a different reasoning from that adopted by the Tribunal.
Section 128 provides that an international agreement prevails over the Income Tax Act to the extent of an inconsistency between them, subject to the statutory exceptions specified in that section.
The Court held that no such inconsistency had been demonstrated. The disagreement over whether service fees qualified as business profits under Article 7 was a matter of legal interpretation, rather than an inconsistency between the treaty and domestic legislation.
Accordingly, section 128 could not be invoked to defeat the withholding tax obligation.
An important aspect of the judgment was the Court's treatment of Kilombero Sugar Company Limited No. II, Civil Appeal No. 443 of 2020, decided on 19 October 2022.
In that later decision, the Court had treated management fees paid to a Zambian entity as commercial profits derived from business activities. The Court of Appeal in the present case acknowledged that this decision came after Mlimani Holdings Limited, which had been decided on 18 July 2022.
Ordinarily, the later decision would prevail where conflicting decisions exist. Nevertheless, the Court did not depart from the earlier line of authorities because the proper procedure for overruling previous Court of Appeal decisions had not been followed.
It explained that departure from an earlier decision requires consideration by a full bench of five Justices, rather than an ordinary bench.
The Court dismissed TPC Limited's appeal with costs and upheld the withholding tax assessment.
The decision is significant for Tanzanian businesses engaging foreign consultants, technical service providers, management companies and other non-resident service providers.
It reinforces the need to examine withholding tax obligations before remitting service fees abroad. The absence of a permanent establishment in Tanzania should not, by itself, be treated as sufficient grounds for exemption.
The judgment illustrates that treaty protection depends on the proper interpretation of the particular DTA and the category of income involved. A taxpayer cannot assume that every payment forming part of a foreign enterprise's business revenue automatically qualifies as protected business profits under Article 7.
The applicable treaty provisions must be examined alongside the relevant domestic tax legislation.
The Court clarified that section 128 of the Income Tax Act does not automatically displace domestic tax provisions whenever a taxpayer invokes a DTA. An actual inconsistency between the treaty and the Act must be established.
This is important in tax disputes where taxpayers seek to rely on international agreements to challenge assessments imposed under domestic legislation.
The case demonstrates the importance of the doctrine of precedent within Tanzania's judicial system. Even where a later decision appears to adopt a different legal interpretation, a court must observe the applicable procedure for departing from an earlier binding decision.
The Court's discussion also highlights the practical difficulty created by conflicting judgments on the interpretation of tax treaties.
For companies operating in Tanzania, the decision supports the need to:
Review foreign service agreements for withholding tax implications before payment.
Determine whether the relevant DTA covers the particular category of income.
Verify the applicable withholding tax rate and statutory requirements.
Maintain appropriate tax documentation and assess interest exposure where withholding tax has not been remitted.
The judgment reveals a tension between two approaches to interpreting service fees under double taxation agreements. The earlier authorities treated service fees as outside Article 7 and taxable under the provisions governing other income, while Kilombero Sugar Company Limited No. II recognised management fees as commercial profits derived from business undertakings.
Although the Court acknowledged the later decision, it maintained the existing approach because the procedural requirements for departing from precedent had not been satisfied. This leaves an important interpretive question concerning the relationship between Articles 7 and 20 of the Tanzania–South Africa DTA.
Practical qualification: The decision should not be read as establishing that every payment to a non-resident service provider is automatically taxable in Tanzania. The nature and source of the payment, the wording of the applicable treaty, and the relevant statutory provisions must still be examined.
TPC Limited v Commissioner General of TRA reinforces the withholding tax obligations of Tanzanian resident companies making payments to non-resident service providers. Its central lesson is that the absence of a permanent establishment does not necessarily exempt service fees from Tanzanian withholding tax. The judgment also underscores the importance of treaty interpretation, the limits of section 128 of the Income Tax Act, and compliance with the doctrine of precedent when courts confront conflicting decisions.
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