In Tanzania, the issue of when withholding tax is due has been a subject of debate and interpretation for businesses, tax practitioners, and regulators alike. The principal issue to this discussion is whether withholding tax on interest is due on “actual payment” or on “accrual” of the same.
The distinction between the two has significant implications for cash flow management, financial reporting, and compliance for entities operating in Tanzania.
In October 2021, the Tax Revenue Appeals Board (the Board) delivered a judgment on an appeal by Vodacom Tanzania (Vodacom) against an assessment by the Commissioner General, Tanzania Revenue Authority (TRA), relating to late payment interest for withholding tax on interest. The Board ruled in favour of Vodacom stating that withholding tax is due when interest is paid and not when it accrues.
Aggrieved by the Board’s decision, the TRA appealed the decision that the Tax Revenue Appeals Tribunal (the Tribunal) which recently delivered a judgment on the appeal.
Brief Facts of the Appeal
Vodacom had taken loans from its affiliate shareholder companies on which it was required to pay interest annually. It did not however pay the interest annually as agreed but deferred the interest payment to subsequent periods. A few years later when it paid the interest to the shareholders, Vodacom held back withholding tax and remitted to the TRA.
The TRA undertook an audit on Vodacom and issued an assessment and demand for late payment interest in respect of withholding tax on interest by Vodacom for the years of income 2011/2012 on the basis that the withholding tax obligation arose when the interest was accrued in during this period. Vodacom maintained that the obligation to withhold tax arose when actual payment of interest was made in 2017.
Upon appeal to the Board, the key issue for determination was whether withholding tax on interest was due when the interest was paid or when it accrued. The Appellant argued that it is a cardinal principle relating to interpretation of tax statutes, which has been settled over centuries, that taxing statutes must be interpreted strictly. The Appellate cited various cases and precedents to support this argument.
Section 82 (1) of the Income Tax Act, states that “Where a resident person – (a) pays a dividend, interest, natural resource payment, rent or royalty… the person shall withhold income tax from the payment at the rate provided…” The term “payment” is defined in Section 3 of the Income Tax Act to include “the transfer of assets or money, the transfer or decrease of a liability, the provision of services, the use or availability for use of money or an asset and the creation of an asset in another person.” The Appellant argued that the word ‘pays’ and ‘payment’ must be interpreted strictly and should be accorded their natural meaning.
Secondly, Vodacom argued that the words “creation of an asset into another person” must be interpreted subject to the ejusdem generis rule, that is, they must be interpreted in the context of discharge of a debt obligation and nothing else. Vodacom stated that at the time the tax assessment was issued, Vodacom had not transferred or reduced the interest due on the loan or its liability to the shareholders and therefore had complied with the law by withholding tax when actual payment was made.
On the contrary, the TRA argued that tax statutes should be interpreted with a purposive approach. That section 23 of the Income Tax Act provides that a person who accounts for income tax on an accrual basis derives an amount when it is receivable and incurs expenditure when it is payable by the person. Therefore, even if actual payment of interest is not made, the company has to account for withholding tax since withholding tax by its nature is corporate tax paid in advance.
The TRA further argued that the word “pay” can validly be construed as creating an entitlement to receive an amount under section 23 of the Income Tax Act as opposed to actually receiving the amount.
The Board by a majority of two members, against one dissenting member, issued a judgment in favour of Vodacom in which it concurred with Vodacom’s arguments that withholding tax on interest is due and payable when it is paid and not when it accrues.
Appeal at the Tribunal
The TRA, being aggrieved with the decision of the Board, appealed to the Tribunal.
At the Tribunal, the TRA emphasised that pursuant to section 23 of the Income Tax Act, where a person accounts for income tax on an accrual basis, the actual transfer of assets or cash is immaterial, and for related companies, such transfer may not occur at all. The TRA argued that the Board’s decision would render the law nugatory and create loopholes for taxpayers to avoid payment of withholding tax on interest, which is not the intention of the legislature.
Vodacom reiterated its arguments that tax statutes should be interpreted strictly and there should be no room for intendment. It challenged the TRA’s submissions that the words “creation of an asset in another person” to presume when an interest is accrued, it should be presumed that it is paid. Vodacom submitted that the words should be interpreted in the context of the discharge of a debt obligation.
Vodacom further submitted that section 23 of the Income Tax Act provides that an amount is treated as ‘payable’ in respect of interest on a loan when the person makes payment in full satisfaction of the liability. This therefore means that interest would be said to be due and payable for withholding tax purposes when it is actually paid.
The Tribunal, in upholding the Board’s decision that withholding tax on interest is due and payable upon actual payment, noted the following:
- that courts in Tanzania are bound to interpret statutes in their plain and ordinary meaning to give effect to the intention of the legislature;
- that the provision relating to charging of withholding tax has no ambiguity whatsoever and a plain meaning of the provision is that withholding obligation arises where interest is actually paid and not on accrual basis; and
- the provision that provides for accrual basis accounting is a general provision in nature as opposed to the provision relating to withholding tax which is a specific provision and therefore the specific provision overrides the general provision.
In its orbiter dictum, the Tribunal noted the TRA’s concerns about transactions between related parties which may have tax leakages: that under the law, corporations are required to account for income tax purposes on accrual basis and not on actual payment. Where deductions are made on accrual basis (thus reducing the tax payable) but withholding tax is made on actual payment, then there would be a mismatch which would lead to tax leakage. The Tribunal however noted that it is not upon it to remedy the situation but the duty of the legislature.
The Tribunal’s decision has brought to the fore a significant aspect of taxation law that tax statutes must be interpreted strictly and there should be no presumptions as to tax.
While judicial bodies have the authority to interpret tax statutes, clarifying ambiguities and ensuring just application of tax laws, they cannot overstep their bounds and venture into the realm of making laws or modifying them, which is a reserve of the legislature.
We note that some jurisdictions such as Uganda also provide that withholding tax on interest on loans should be due on interest when it is paid and not when it accrues. In other jurisdictions such as Kenya and South Africa, withholding tax on interest is due and payable on accrual.
Noting the observations made by the Tribunal on the need for legislative intervention, we expect that in the coming budget cycles, the provisions of the Income Tax Act relating to withholding tax may be amended to provide the much-needed clarity to both the TRA and the taxpayers.