Court of Appeal Rules in Favor of the Taxpayer: Withholding Tax on Rent

In a landmark ruling delivered in April 2023, the Court of Appeal of Tanzania (CoA) issued a judgment in Civil Appeal No. 380 of 2021, favoring a taxpayer—a mining company—in a dispute with the Tanzania Revenue Authority (TRA) over the imposition of Withholding Tax (WHT) on payments made under Strategic Alliance Agreements (SAAs) to hunting companies. The case highlights the importance of correctly interpreting contractual arrangements and their tax implications.

Overview

The dispute originated from payments made by the mining company (the Appellant) to hunting companies under SAAs. The Appellant contended that these payments were compensation for the hunting companies’ loss of business, while the TRA argued that the payments were, in fact, rent subject to WHT. This disagreement led to a prolonged legal battle.
After unsuccessful attempts to challenge the TRA’s decision at the Tax Revenue Appeals Board (TRAB) and later at the Tax Revenue Appeals Tribunal (TRAT), the Appellant escalated the matter to the Court of Appeal. The primary issue before the court was whether a lease agreement existed between the Appellant and the hunting companies that would justify treating the payments as rent and subjecting them to WHT.

Arguments from the Appellant and the TRA

The Appellant’s position was rooted in the definitions of “rent” and “lease” as provided in the Income Tax Act, 2004, the Land Act, and the Mining Act. The Appellant argued that the payments did not qualify as rent but were instead compensation for the loss of business suffered by the hunting companies. The company pointed to clause 9(b) of the SAAs, which clearly indicated that the payments were compensatory in nature, rather than rental income.
Conversely, the TRA did not dispute the definitions of “rent” and “lease” but maintained that the SAAs were structured as a tax avoidance scheme. The TRA argued that the payments were not genuine compensation but a disguised lease agreement aimed at avoiding WHT. They emphasized that compensation typically depends on the extent of loss or injury, which should be assessed on a case-by-case basis. The TRA asserted that a fixed payment, as outlined in the SAAs, was inconsistent with the concept of compensation and more aligned with rent.

Court of Appeal’s Decision

In making its ruling, the Court of Appeal outlined three key features that must be present for an arrangement to be classified as a lease agreement, and thus subject to WHT:

Exclusive Possession: The lessee or tenant must have exclusive possession of the property for a specified period in exchange for rent.
Clear Duration: The lease must have a defined or specific term, making the duration clear and certain.
Proper Creation of the Lease: The formalities and procedures for creating a valid lease, including registration and other legal requirements, must be observed.

The court found that none of these essential features were met in the case at hand. The CoA concluded that the payments made under the SAAs did not constitute rent, and therefore, the Appellant was not obligated to withhold tax on those payments. As a result, the decisions made by both the TRAB and the TRAT were quashed.

This ruling underscores the importance of accurately interpreting contractual terms and their tax implications. It also highlights the need for taxpayers and tax authorities alike to carefully consider the nature of agreements and the substance of transactions when determining tax liabilities. For expert knowledge and compliance guidance, reach out to our team today!