The Court of Appeal, in this case, echoed its earlier decision on the DTA whereby a similar stance was taken by the Court in the case of Kilombero Sugar Company Limited v. Commissioner General, Tanzania Revenue Authority, Civil Appeal No. 218 of 2019. (“the case of Kilombero”).

Stay with us as Our Tax Department at Breakthrough Attorneys analyzes in this Article the meaning, implications and significance of the case to Tanzanian taxpayers with suppliers in South Africa.

2.0 What does the decision mean to Tanzanian taxpayers/Entities?

The Court of Appeal is the highest in the land, its interpretation is binding and has a force of law, thus in the Tanzanian context Article 7 of the DTA does not apply to service fees made by Tanzanian taxpayers to their South African suppliers. This means Tanzanian entities making payments to suppliers of services in South Africa should not rely on Article 7 of the DTA and instead deduct withholding tax at the rate of fifteen percent (15%) as required under section 83 of the Income Tax Act.

From a business perspective, it is prudent for taxpayers to look for opportunities where they can re-negotiate the service fees and accommodate the withholding tax element in the same fees without increasing the operational costs. This being the straight solution, in this case, the agreements will need to be amended to avoid the net of tax clauses which will prevent them from deducting the withholding tax (WHT) element in their income tax returns/computation. In simple terms, the amounts referred in the amended contracts must be gross, that is inclusive of withholding tax in order for the total cost of services to be tax deductible.

Further for tax planning purposes, on entering new agreements with South African suppliers, Tanzanian entities should negotiate fees factoring in the requirement to withhold 15% of tax as a result of the decision. Notwithstanding this business decision, the taxpayers must continue to challenge the case until a different outcome is obtained at the Court of Appeal.

3.0 What does the decision mean to South African taxpayers/Entities?

We understand that this decision of the Court of Appeal and any approach taken by Tanzanian companies receiving services from suppliers in South Africa have adverse effects and will create challenges on the South African side since the South Africa Revenue Service (SARS) will not allow the non-resident supplier to claim the WHT as a tax credit. This is so because SARS maintains the interpretation of Article 7 of the DTA to cover service fees, hence South African companies cannot deduct the foreign tax from their tax liability in South Africa. In fact, SARS, as indicated in its published practice notes, considers the WHT to be improperly imposed in violation of the provisions of the DTA. Further, the South African companies will be subject to tax at the rate of 28% in South Africa on the same payment received from Tanzania and that has been subject to WHT of 15 percent in Tanzania. This will result in double tax (i.e. 15 percent WHT in Tanzania and 28% in South Africa without any relief ).

Thus, any stance taken by their Tanzanian customer base will affect them because of the decision of the Court of Appeal. That said any measure to amend the existing arrangements and new agreements between South African suppliers and Tanzanian customers must be looked at from a business perspective as a pure business decision.

4.0 Our take and Wayforward?

Generally, the Agreement for Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income aims at eliminating Double Taxation of taxpayers in Tanzania and South Africa as provided under Article 7 of the same. The decision of the Court of Appeal on Article 7 defeats the very purpose of the DTA as it creates a double taxation situation for South African entities receiving service fees from Tanzania as they are subject to be taxed in both Tanzania and South Africa.

The Court of Appeal is the highest court in the Tanzania court system, there are not many options for the Appellant and other taxpayers who will be directly affected by the interpretation of Article 7 of the DTA. We understand that private companies with a significant number of suppliers from South Africa are currently working together in requesting the relevant authorities in both jurisdictions to review the DTA and add more clarification on contentious issues. In this case, we emphasize that the private sector expedite the process through active engagement with both authorities in Tanzania and South Africa.

In addition, we propose the following as a way forward;

1. Petition for review of the decision by the full bench of five Justices of Appeal.
   As we have noted above, the Court did not go much into discussing the merits of the submissions of the Appellant in Mlimani Holdings Limited v. Commissioner General Civil Appeal No. 265 of 2021 and relied solely on its previous decision in the case of Kilombero. The Court refused to depart from its decision stating that only the full bench of the Court can do that. However, the Court of Appeal has in previous cases stated that a bench of three Justices of Appeal can depart from a previous decision of three Justices of the Court as was stated in the case of Chiriko Haruni David  v. Kangi Alphaxard Lugora and 2 Others; Civil Appeal No 36 of 2012:  Court of Appeal of Tanzania at Dar es Salaam (Full Bench) (Unreported).Therefore since the Kilombero case was determined by three Justices of Appeal, we are of the view that the Court in the Mlimani Holdings could have departed from its earlier decision and decide the appeal in light of the arguments before it.

    

   However, that is already unfortunate for the parties at this moment, the only solution for the parties in the Court system is to seek for review of the decision of the Court and move the Court to refer the matter before a full bench of the Court of Appeal. The Court can review its own decision as allowed under Rule 66 of the Court of Appeal Rules.

2. Renegotiation of terms with South African suppliers
   It is unfortunate that the Court of Appeal’s decision at the moment is the correct position of the law and it affects the very important aspect of any business transaction which is price. Withholding tax must be deducted from the amount that a person pays as service fees, hence since Tanzanian taxpayers are required to withhold 15 percent, it means there will be a reduction of 15 percent of the service fee that was agreed.This will affect the arrangement to that extent which is why renegotiation of terms considering the requirement to withhold 15 percent is vital. However as much as it is a decision that has been influenced by a legal procedure, negotiations must be done from a business perspective to maintain the existing business relationships. Further, in entering new arrangements in which service fees are payable to South African suppliers, withholding tax must be considered in pricing.

Breakthrough Attorneys calls upon the respective Authorities i.e the TRA, and the Ministry of Finance to work on the harmonization of the DTA by working and agreeing on the proper application of the DTA and specifically Article 7 with their South African counterparts. This is to ensure that the purpose of the DTA is itself not defeated whereas currently it exposes South African suppliers to double taxation on service fees, but affects their customers in Tanzania as well because withholding tax will have to be considered in service fees. In most instances, the imposed WHT is not recoverable from South African suppliers and therefore it becomes an additional business cost to Tanzanian businesses.

Further, we believe that a purposive approach to interpreting Article 7 is required, and the above reasons are sufficient to justify the intervention of the Full Bench of the Court of Appeal to be convened to depart from a previous decision in the case of Kilombero.

As the legal process is pursued, we strongly recommend that the government on both sides renegotiate the DTA on an urgent basis. The private sector in South Africa should lobby the SA government to initiate the DTA renegotiations and on the other hand, the private sector in Tanzania should lobby the Tanzanian government to initiate the renegotiate the DTA.

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