Interpretation Of Service Fees Under The Tanzanian-South Africa Double Tax Agreement

• Published date: 07 April 2021
• Subject Matter: Tax, Income Tax, Tax Authorities, Withholding Tax
• Law Firm: Anjarwalla & Khanna
• Author: Mr Daniel Ngumy, Shemane Amin, Juliana Mosha and Priscilla W. Githinji

Introduction

On 22 September 2005, the Tanzanian and South African (SA) Governments concluded a Double Tax Agreement (DTA), whose purpose was to ensure resident persons and resident companies avoid double taxation and prevent fiscal evasion with respect to income taxes. The DTA entered into force on 15 June 2007 and subsequently became effective on 1 August 2007.

Article 2 of the DTA provides the types of taxes covered under the DTA which include in case of SA: the normal tax, the secondary tax on companies and withholding tax on royalties while in the case of Tanzania, the DTA covers income tax and withholding taxes covered under the Income Tax Act, 2004. Pursuant to the DTA, companies which are resident of the Contracting states (SA and Tanzania) enjoy various treaty benefits which include reduced withholding tax rates on specific payments made in a contracting state.

Over the years, tax disputes have increasingly emerged between various taxpayers and the Tanzania Revenue Authority in relation to the interpretation of the SA- Tanzania DTA. The disputes have been centered upon interpretation of Articles 7 and 20 of the DTA which provide for taxation of business profits and other income respectively.

Primarily, the key issue for determination in the aforementioned tax disputes has been whether service fees derived by a SA entity for provision of services to a Tanzanian entity should form part of business profits as provided for under Article 7 of the DTA which is not taxable in Tanzania or whether the fees fall under Article 20 of the DTA and thus subject to withholding tax.

The Tax Revenue Appeals Tribunal (the Tribunal) has in two different cases namely, Kilombero Sugar Company Limited versus Commissioner General, 2016 (Kilombero case) and Tullow Tanzania BV Versus the Commissioner General, 2018 (Tullow case) now pronounced itself on this issue holding that service fee paid by a Tanzania resident entity to a SA entity should be subject to tax pursuant to Article 20 of the DTA and not Article 7 of the DTA.

For purposes of this tax alert, we will focus on the determination of the Tribunal in the Kilombero case.

Brief facts of the case

Kilombero Sugar Company Limited (hereinafter referred to as Kilombero) is a company incorporated in Tanzania whose principal activity is sugar cane farming and sugar production. In furtherance of its business, Kilombero entered into an agreement with Illovo Project Services Limited (IPS), a South African Company for provision...