Tanzania in International Tax Law - Grossing Up Expatriates' Net Pay

Some investors in Tanzania's key economic sectors, including oil and gas and mining have for many years entered into net of tax contracts with their expatriate employees. In the simplest way possible, 'net of tax' refers to the amount left after taxes have been deducted. These investors would withhold and remit the correct amount of pay-as-you-earn (PAYE), with the net amount grossed up (i.e. increasing the net salary to account for deductions) and consequently subjected to PAYE.

In accordance with its tax audit mandate--now section 45 of the Tax Administration Act, 2015--the Tanzania Revenue Authority (TRA) conducted a tax audit in 2013 on the tax affairs of the appellant, Pan African Energy Tanzania Limited, in Civil Appeal No. 81 of 2019. After conducting the audit, the TRA issued a demand for additional PAYE and interest thereon, for the years 2008 to 2010.

It was the TRA's understanding that the appellant's act of grossing up gave its employees benefits which are taxable under the Income Tax Act, 2004. Aggrieved by the demand, the appellant vainly moved respectively, the Tax Revenue Appeals Board (TRAB) and the Tax Revenue Appeals Tribunal (TRAT) in appeals. In both the TRAB and the TRAT, the principal tax was adjudged as payable. However, the interest thereon was waived because of the appellant was found not to have wilfully neglected to pay tax.

So, the appellant, unfettered in its quest to seek justice, appealed to the highest court of land, the Court of Appeal of Tanzania ('the Court'). This appeal intended to challenge the TRAT's decision treating the net of tax payments as taxable benefits for the purpose of PAYE under the Income Tax Act. The twin complaints were that the TRAT erred in law to hold that the grossing up method is unjustified under Tanzanian law in law and that the method provided taxable benefits to the appellant's employees.

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Legal arguments

The appellant clearly stated that there is no law in Tanzania that restricts grossing up as long as the approach leads to correct PAYE that must be paid. The appellant maintained that it arrived at the correct PAYE when it based this tax on the highest grossed up amounts, with the result that no benefit accrued to the appellant and the employees. Moreover, aside from appellant honouring the withholding obligation in respect of PAYE, the TRA did not suffer any revenue loss.

Therefore, the appellant contended that the TRAT was misconceived to conclude that the invocation of the gross up method availed taxable benefits to employees, adding that, the method is commonly used in neighbouring Kenya and other commonwealth countries, including South Africa and the United Kingdom.

Basing on the maximum tax rate of 30 percent that's provided for under the Income Tax Act, the appellant also argued that by imposing additional PAYE on the grossed-up amounts, the tax rate rose to 35.7 percent--above the maximum rate.

That's not all. The appellant reminded the Court that in two previous cases involving Kilombero Sugar Company Limited and Resolute Tanzania Limited, the TRAT confirmed that the practice of grossing up of net pay is legally applicable in Tanzania.

For its part, the TRA reasoned that the failure by the appellant to withhold on what accrued as benefits to its employees in accordance with the Income Tax Act was improper. Furthermore, the TRA claimed that grossing up shifted the obligation of the employees to pay tax from chargeable income which is in contradiction of the tax law. Finally, the TRA maintained that net of tax contracts was against the law.

Decision and practical consequences

The appellant's complaints were dealt with by the Court, which ruled in the TRA's favour by upholding the decision of the TRAT in that there was no legal justification for the appellant to gross up, and that the same provided taxable benefits in the hands of employees.

Instructively, the Court relied on the Income Tax Act (sections 7, 81, and 84), together with the 2017 Employers' Guide to Pay as You Earn issued by the TRA after the assessed years of 2008-2010.

By virtue of the doctrine of precedent, the decision is binding upon all lower courts and tribunals in Tanzania, but investors and expatriate employees alike will find it unsatisfactory. Is the doctrine becoming a fundamental constraint to judicial decision-making at the TRAB and the TRAT?

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