TAX ALERT

12thMarch, 2020

Court of Appeal of Tanzania rules against grossing up method on PAYE

On 06 March, 2020, the Court of Appeal of Tanzania (“CAT”), delivered a remarkable decision in
the case of Panafrican Energy Tanzania Ltd v Commissioner General (TRA), Civil Appeal No. 81
of 2019, on the grossing up method on the pay as you earn (“PAYE”).

Facts of the case

The Appellant, Panafrican Energy Tanzania Ltd (PAET), is a producer and supplier of natural gas
to both industrial and commercial customers in Tanzania. In 2013, the Respondent, Tanzania
Revenue Authority (TRA), conducted an audit on the Appellant and discovered that the Appellant
had used grossing up method in calculating PAYE of her employees. The Respondent
subsequently served the Appellant with a PAYE certificate indicating a liability of TZS
1,166,197,808/= comprising of the principal sum of TZS 677,194,295/= and interest thereon TZS.
489,003, 513/=.

Aggrieved by the said certificate, the Appellant preferred an appeal to the Tax Revenue Appeals
Tribunal (“TRAB”). The crucial issue for determination before the TRAB was the propriety or
otherwise of the Respondent’s decision to disallow the grossing up method on PAYE and
imposition of interest on the assessed tax.
Guided by the provisions of sections 81(1)&(2), 7(2)(a)-(g), 100(1) and 103(1) of the Income Tax
Act, 2004 (“ITA” 2004), the TRAB ruled in favour of the Respondent on ground that grossing up
method is not recognized under the tax laws of Tanzania. On interest, the Board held that there
was no justification to penalize the Appellant because she had not wilfully neglected or attempted
to evade tax.
Dissatisfied with the decision of TRAB on grossing up method, the Appellant appealed to the Tax
Revenue Appeals Tribunal (“TRAT”).The TRAT, based on the provisions of sections 7(1), (3)(a)
to (i) and 81(1) &(2) of ITA 2004, dismissed the appeal. Discontented with the decision of the
TRAT, the Appellant lodged an appeal to the CAT, on the grounds that:
1. The TRAT grossly erred in law by holding that the grossing up method used by the
Appellant for purposes of computation of PAYE for its employees is not justifiable in law.

2. The TRAT grossly erred in law by holding that the grossing up of PAYE applied by the
Appellant provided tax benefits to its employees which are not exempted under section
7(3)(a) to (i) of the ITA 2004.

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Arguments by Counsel for Appellant (PAET)

Before the CAT, counsel for the Appellant submitted that, it was a misconception on the part of
the TRAT to hold that grossing up method invoked by the Appellant in computing PAYE for its
employees, eventually provided taxable benefits to those employees. It was further submitted that
the Appellant had entered into employment contracts on net salary basis and thus applying
grossing up method of calculating PAYE was justifiable. The counsel for Appellant was also of
the view that, grossing up method was justified because the practice is internationally accepted
(applied in Kenya, South Africa, Ireland and United Kingdom), and it is not prohibited by the law
in Tanzania as it does not adversely impact on the employees’ liability to PAYE regardless of the
modality of withholding the tax. To them, by using grossing up method, the total amount paid and
withholding portion deducted was a genuine and legitimate expenditure incurred wholly and
exclusively in the production of the Appellant’s income.

Arguments by Counsel for TRA

The counsel for Respondent, in opposition of the appeal, submitted that chargeable income from
employment earnings is a creature of section 6(1) and 7(1) of the ITA 2004, and section 81(1), of
the Act, this makes the employer an agent of the Respondent and is duty bound to withhold tax
from the employee’s earnings and remit the same to the Respondent. In that regard, the grossing
up method applied by the Appellant, shifted the employees’ obligation to pay tax from chargeable
income on their employment earnings, which is against the law. This is because the grossing up
method on PAYE does not feature in the ITA 2004. The counsel submitted further that, the net of
tax contracts of employment was contrary to the ITA 2004.

Court’s decision

The major issue for determination before the CAT was the legality of computation of the taxable
income of the employees by grossing up method and the Appellant’s option to pay PAYE to the
Respondent, without deducting and withholding it from employee’s earnings.

The Court of Appeal held that:

 In terms of section 81 of the ITA 2004, the Appellant (employer), was mandatorily obliged
to withhold PAYE from the employees’ salary and other benefits and remit the same to
the Respondent. Thus, the Appellant was not justified to invoke the grossing up method
on PAYE on the basis of the employment contracts which cannot in any way supersede
the law regulating chargeable tax from individual’s gain and profit from employment.

 In view of the clear language used in the provisions of sections 7, 81 and 84 of the ITA
2004, that the employer is mandatorily required to withhold the employees’ chargeable
tax from the employment earnings and remit the same to the TRA, the Appellant’s
suggestion on non-prohibition of the grossing up under the ITA 2004, will amount to
interpolations of what is not stated in the law.

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  The Appellant’s argument on there being no harm on the Appellant using own sources to
pay the PAYE on behalf of the employee, in effect, is reading what is not stated in the law
and it negates the principle of giving full effect to the language used in the law.

 We are satisfied that the appellant contravened the provisions of section 7(1)(2) and 81(1)
and (2) of the Income Tax Act, under which she is obliged to deduct and withhold PAYE
and remit the same to the Respondent. Thus, TRAT was justified to treat tax paid by the
employer on behalf of the employees as benefit in kind in the hands of the employee and
it was subject to tax.

 The decision of TRAT is upheld and the appellant is ordered to pay the tax demanded.

Disclaimer: This tax alert has been posted for information purposes only. The information and/or
observations contained in this alert do not constitute legal advice and should not be acted upon
in any specific situation without appropriate legal advice. Should you need further details please
contact:
Dr. Boniphace Luhende
Managing Partner
bluhende@lunolaw.co.tz

Makanja Manono
Partner
mmanono@lunolaw.co.tz

Catherine Mokiri
Associate
cmokiri@lunolaw.co.tz