Tax Revenue Appeals Tribunal Clarifies on the Timing and Applicability of Withholding Tax on Loan Interest

Recently, the Tax Revenue Appeals Tribunal (the Tribunal) issued its judgment in the case of Commissioner General (TRA) vs. Vodacom Tanzania Plc., Tax Appeal No. 6 of 2022. In its decision, the Tribunal provides answers to two germane questions, namely at what time does the obligation to withhold and remit tax arise; and what is the treatment of accrued payments for withholding tax purposes.

1. Background of the Case
The Respondent, Vodacom Tanzania Plc., had instituted Tax Appeal No. 50 of 2018 at the Tax Revenue Appeals Board (the Board) challenging the decision of the Commissioner General (the Commissioner) to demand payment of interest allegedly for late payment of withholding tax on loan interest. The Commissioner was of the view that the Respondent was supposed to withhold and remit the tax when the loan interest became due and payable. On the other hand, the Respondent maintained the position that the liability to withholding tax arises when the loan interest is actually paid. So, the controversy between the parties for which the tax courts were invited to determine is whether withholding tax is due on accrual or actual payment of loan interest.

In October 2021, the Board delivered its decision in favour of the Respondent and held that the liability to withhold tax on loan interest arises when the actual payment of the said interest is made. The Commissioner was aggrieved by this decision of the Board, hence filed Tax Appeal No. 6 of 2022 at the Tribunal. In its appeal to the Tribunal, the Commissioner relied on two grounds of appeal, namely the Board was wrong to hold that withholding tax on loan interest falls due when the interest is actually paid; and that the Board erred in law and fact when it held that imposition of late payment interest was incorrect.

2. Arguments Raised
From the outset, the Commissioner invited the Tribunal to apply the purposive approach of statutory interpretation in determining the matter. The justification for this request was based on the fact that the persons involved in the loan arrangements are related companies which can decide not to pay the loan interest in order to circumvent the tax incidence, hence defeating the whole purpose of the law.

Further, it was submitted that the points of contention between the parties revolved around the interpretation of sections 3, 4, 21, 23 and 82 of the Income Tax Act, 2004 (as they were by then). Also, since the loan whose interest was the subject of the dispute was between related parties, the Commissioner was of the view that section 35 of the Income Tax Act, 2004 (the ITA) was relevant too.
Regarding the liability to withhold tax, the Commissioner submitted that section 21 of the ITA requires corporations to account for their income and expenditure on accrual basis. This requirement, therefore, implies that a person who is liable to pay another person must account for such obligation when the same arises or accrues, and the same applies to the person who is entitled to receive payments, which is in line with section 23 of the ITA. It is based on the above position the Commissioner further submitted that actual movement of cash/asset is immaterial, for between related companies actual movement may not even happen at all.
Further to the above, the Commissioner submitted that the wording of section 82 of the ITA does not suggest that the obligation to withhold tax arises when loan interest is actually paid. Instead, the duty to withhold tax arises when the loan interest is accrued as an expense by the borrower. Based on the above submissions, the Commissioner prayed for the Tribunal to reverse the decision of the Board and hold that withholding tax on loan interest was due when the interest was accrued, and that imposition of late payment interest was correct.
On the other hand, the Respondent strongly opposed the arguments raised by the Commissioner. The Respondent argued that sections 3, 21 and 23 of the ITA are misconceived. The Respondent, therefore, maintained that section 82 of the ITA is a specific and relevant provision in so far as the obligation to remit withholding tax on loan interest is concerned. Further, the Respondent prayed for the Tribunal to adopt strict interpretation approach of tax statutes as cherished in a plethora of cases. The Respondent’s position was supported by various cases on strict interpretation of tax statutes; the principle that specific provisions of a statute override general provisions in interpretation of the same; and a lesson from the Uganda Tax Appeals Tribunal which held that withholding tax on loan interest is due when the interest is paid, and not when it accrues. Finally, the Respondent prayed for the Tribunal to hold that withholding tax in the current dispute was due on actual payment.

3. Determination of Issues and Decision of the Tribunal
Having considered the arguments by the parties, the Tribunal observed that its reading of the provisions of section 82 of the ITA shows that there is no ambiguity whatsoever and a plain meaning of such provisions is that the withholding obligation arises where loan interest is actually paid and not on accrual basis. According to the Tribunal, the word “pays” as used in section 82 of the ITA connotes the doing of an act, such as discharging a liability.
Further, regarding the applicability of sections 3, 21, and 23 against section 82 of the ITA, the Tribunal held that since section 82 of the ITA is a specific provision on imposition of withholding tax on loan interest, it is a cardinal principle of statutory interpretation that a specific provision overrides a general one. It is based on the above reasoning that the Commissioner’s first ground of appeal was dismissed for being unmeritorious. Furthermore, the Tribunal held that since the second ground (legality of the late payment interest) was hinged on the first ground, its determination is consequential to the first ground. The imposition of late payment was adjudged to have no legs to stand on, for the imposition of withholding tax based on accrual of loan interest was incorrect.

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