By Bernard James
Dar es Salaam. Upstream oil and gas exploration company Ophir Tanzania (Block 1) Limited has to pay the Tanzania Revenue Authority (TRA) Sh18.3 billion after losing a lawsuit to challenge its 2014 tax liability.
That follows the decision of the appellate court, which on Friday upheld two previous rulings dismissing the company’s attempts to break away from tax liability.
Judges Ferdinand Wambali, Lugano Mwandambo and Lilian Mashaka have insisted that the oil and gas exploration company is required to withhold taxes on payments to non-resident service providers.
Withholding tax is the amount of tax that is withheld from one person when making payments to another person for goods or services supplied by the payee.
The ruling answered the legal question among investors and tax law experts as to whether companies are required to withhold tax for payments to non-residents who provide services outside of Tanzania for services used in Tanzania.
The company had been involved in the tax dispute with the tax office since 2014, when the national tax collector examined the company’s tax matters for the income years 2010 to 2013 against the information in the withholding tax returns.
Several efforts to amicably settle the dispute proved in vain, prompting the tax officials to issue the Ophir with a withholding tax invoice of Sh18.3 billion, which is the main tax and interest due.
Ophir lost the first attempt to challenge the tax bill with the Tax Revenue Appeals Board (Trot) before his second appeal against the tax debt was also dismissed by the Tax Revenue Appeals Tribunal (Trat).
The root of Ophir’s appeal to the Court of Appeal was that Trat misinterpreted Section 69 (i) (ii) in conjunction with Sections 6 (1) (b) and 83 (1) (b) of the Income Tax Act (ITA). This allegedly led to the erroneous finding that she was responsible for making payments to non-residents to withhold taxes.
The oil and gas company argued that Trat erroneously assumed that the payments it made to non-residents, regardless of the place of supply of the withholding tax under sections 6 (1) (b), 69 (1) (i) and 83 (1) (b) ITA, 2004.
She also alleged Trat made a mistake in confirming Trab’s decision that Ophir was required to withhold taxes on payments to its non-resident service provider outside Tanzania for services used in Tanzania.
The lawyer representing Ophir, Wilson Mukebezi, described Trat’s interpretation of as completely wrong as it relates to the place where the recipient resides and where the services are consumed contrary to the intended meaning of the law.
He argued that Section 6 (1) (b) of the ITA made non-resident income taxable only to the extent that it had a source in Tanzania.
He also referred to Section 69 (1) (ii) ITA, arguing that the main condition for the payment of the service fee is a source in Tanzania, that it is due to services provided in Tanzania.
The lawyer also took into account Section 83 (1) (b) ITA, which in his opinion only provides for the obligation to withhold tax on the service fee if the source requirement under Section 69 (i) (ii) of the Income Tax Act is satisfied.
He claimed that the payment of the service fee could only have a source in Tanzania if it was due to services offered in Tanzania.
On the contrary, in the present case the services were provided outside Tanzania.
The chief prosecutor representing the TRA, Ms. Gloria Achimpota, supported Trat’s view that Ophir was required to withhold income tax from payments to non-residents for the services provided.
It alleged that the payments made by the appellant had a source in Tanzania.
“Since the service for which the payments were made was consumed by the complainant (Ophir) in Tanzania in order to generate income in Tanzania, the payments made for these services had a source in Tanzania, so that the complainant withheld taxes in accordance with Section 83 had to (1) (b) the ITA, “said the attorney.
She further stated that since the payments were made in Tanzania, they are subject to withholding tax under Section 83 (1) (c) ITA in conjunction with Section 6 (1) (b) of the same law.
In their ruling, Judges Ferdinand Wambali, Lugano Mwandamba and Lilian Mashaka sided with the tax officer that Ophir was required to withhold taxes on payments made to non-residents.
It is important at this point, not that Trat’s decision was heavily influenced by the previous decision in Civil Appeal No. 24 of 2018 between Tullow Tanzania Bv VS The Commissioner General, Tanzania Revenue Authority.
Mr. Mukebezi sharply criticized the application of the case on the grounds that the court erroneously relied on an incorrect definition of the word “transferred” to conclude that payments to non-residents for services provided outside of Tanzania are subject to withholding tax.
The attorney also complained that the court in Tullow Tanzania BV found that the word “rendered” was synonymous with the words “delivered” or “delivered” under Section 69 (i) (ii) ITA.
Ms. Achimpota from TRA supported Trat’s confidence in the Tullow Tanzania Bv case, saying that there was evidence that the services were provided and performed in Tanzania and that the complainant failed to prove otherwise when making the payment occurred to a non-resident.
In their ruling, the judges said: “We must state that we have thoroughly scanned the appeal record and are convinced that the facts and circumstances of the present appeal are similar to those in Tullow Tanzania BV.
“Given the circumstances, we are convinced that Trat made the right decision and duly followed the decision of the court in Tullow Tanzania Bv.”