Court of Appeal Confirms Applicability of Withholding Tax Upon Accrual of Interest

Background
In October 2021, the Tax Revenue Appeals Board (the Board) delivered its decision in favour of Vodacom Tanzania PLC (Vodacom) in a dispute concerning the imposition of late payment interest on WHT on interest. The crux of the matter was the timing of WHT payment—whether it is due when interest is accrued or upon actual payment. The Board held that WHT is due upon payment, not accrual.

Dissatisfied with this outcome, the TRA appealed to the Tax Revenue Appeals Tribunal (the Tribunal), which upheld the Board’s decision. The TRA then escalated the matter to the Court of Appeal.

Appeal at the Court of Appeal
The appeal is centered on the interpretation of Section 82(1) of the Income Tax Act (ITA), in particular, the definition of the term “payment.” Section 82 requires a resident person who pays interest to a resident or non-resident to withhold tax at the rate of 10%.

The key question before the CoA was whether WHT should apply at the time of interest accrual or only upon actual payment.

TRA argued that WHT on interest becomes due upon accrual, while Vodacom maintained that Section 82 only applies to actual payments of interest. Vodacom based its position on the wording of the statute and had accordingly paid WHT at the time of making actual payments.

The Court was therefore faced with two competing interpretations: the purposive/harmonious interpretation of the statute advanced by the TRA, and the strict literal interpretation adopted by Vodacom.

Judgment of the Court of Appeal
The CoA made the following key findings:

1. On the Definition of “Pay” in Section 82 of the ITA
   The CoA found Vodacom’s interpretation of the term “payment” as referring only to “actual cash transfers” to be unduly restrictive and inconsistent with legislative intent underpinning Section 3 of the ITA. The CoA emphasised that, under Section 3 of the ITA, the definition of “payment” includes not only the transfer of money but also the creation of an asset in another person. The law further defines an “asset” to encompass both tangible and intangible assets, including rights to current or future income.

   The CoA also determined that, Section 23 of the ITA requires a corporation to account for income tax purposes on an accrual basis. As such, since WHT is one of the taxes that Vodacom is obligated to pay, they should follow the same principle and apply WHT on accrual basis.

   The CoA further determined that by accruing interest, Vodacom effectively created an asset (interest receivable) in the books of the lenders i.e., Vodacom Group and Mirambo. Given that the ITA broadly defines an asset to include a right to income or future income, the interest accrued by Vodacom should be subject to WHT.

2. Reliance on Kenyan Jurisprudence
   The CoA referred to the Kenyan Court of Appeal decision in Kenya Revenue Authority v. Republic (Ex Parte: Fintel Ltd), Civil Appeal No. 311 of 2013, and the supporting case of Engineers Board of Kenya v. Jesse Waweru Wahome & Others, Civil Appeal No. 240 of 2023. These cases affirmed that “payment” may be deemed to have occurred even in the absence of an actual cash transfer, reinforcing the principle that WHT may be due upon accrual.

   The Tanzanian Court of Appeal considered these decisions persuasive, particularly because the Kenyan precedent remains unchallenged at the Supreme Court level.

3. Interpretation of Section 82(1)
   The CoA held that Section 82(1) of the ITA does not exempt WHT on accrued interest. The section explicitly lists exceptions in paragraphs (a) to (e), and none of these provide relief for accrued interest. The CoA stressed that had the legislature intended such an exemption, it would have said so explicitly.

   In concluding, the Court departed from the reasoning of the Board and Tribunal, emphasising that tax statutes should be interpreted to give effect to their purpose, particularly where corporations follow the accrual basis in their accounting practices. WHT obligations must therefore align with that standard.

Conclusion
This judgment marks a significant setback for taxpayers, reversing the more lenient interpretations previously adopted by the Board and Tribunal. It also contrasts with the approach taken in some other jurisdictions—such as Uganda, where WHT is triggered by actual payment rather than accrual.

Given that taxpayers had relied on the Tribunal’s decision as the basis for their compliance with withholding tax obligations, the recent CoA ruling is likely to have significant financial implications particularly if the TRA seeks to retrospectively assess interest and penalties on the late payment of withholding tax on accrued interest. Such an approach could expose taxpayers to substantial liabilities, despite their prior good faith reliance on the Tribunal’s interpretation of the law at the time.

Businesses in Tanzania must now take heed of this precedent. Going forward, WHT should be accounted for within seven days after the end of the calendar month in which the expense is accrued, in order to avoid penalties and interest for late payment.

Should you have any questions on this legal alert, please do not hesitate to contact Shemane Amin, Geofrey Dimoso or Daniel Ngumy.

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Contributors
1. Juliana Mosha – Senior Associate
2. Anwaar Katakweba – Associate