A Permanent Establishment (PE) in Kenya of MAN Diesel and Turbo SE Germany (MAN) entered into a consortium with a firm called MPG Services to engineer, procure and construct an 87 MW generating capacity thermal power plant on behalf of Thika Power Ltd. The role of MAN’s Kenyan PE in the project was mobilization, engineering and design, reservation of the diesel sets, and steam turbine and other start-up costs associated with its part of the works which included supervision of the assembly and installation of engines and commissioning the engines. MAN Germany was to provide for the materials up to the port of export and the PE was to assist in the onshore part which included supervision of the assembly and installation work as well as commissioning the work but did not include supply of equipment. In 2015, the tax authorities initiated an audit which resulted in a final tax assessment issued in 2017. According to the assessment MAN’s Kenyan PE owed additional taxes on undeclared income (income resulting from the imports of Equipment), penalty and interest in an amount of Kshs 347,518,798.00. MAN filed an appeal with the Tax Appeals Tribunal (TAT) premised on the grounds that the tax authorities erred in fact and in law in its demand for additional tax for FY 2012 and 2013. According to MAN, income from offshore supply of equipment by MAN DT Germany is not attributable to MAN’s Kenyan PE under Article 7 of the DTA by virtue of the Force of Attraction Rule. The Tribunal allowed the appeal and set aside the assessment. The tax authorities then filed an appeal with the High Court. Judgement of the High Court The High Court dismissed the appeal of the tax authorities and decided in favor of MAN’s Kenyan PE. According to the High Court, income from the supply of equipment by MAN DT Germany is not attributable to MAN’s Kenyan PE under Article 7 of the DTA by virtue of the Force of Attraction Rule. Excerpts “44. Identifying the Commissioner’s true case is important because of the nature of his statutory mandate which involves the exercise of an extraordinary administrative power enabling the Commissioner to apply the laws. The exercise of that power involves his ‘determining’ a tax liability. An appeal in this context is against the Commissioner’s ‘decision’ namely his determination of a tax liability and its amount. The basic jurisdictional requirement for the exercise of the power is that the Commissioner is ‘satisfied’ of the various requirements. Once the Commissioner reaches the requisite level of satisfaction, an appeal must, of necessity go to whether he justified in being so satisfied. He must stand or fall by his reasons for exercising the power.” 45. The reason offered by the Commissioner is that the Respondent failed to avail documents to support the income from the imports. This argument sounds attractive. But, the challenge is, the Respondent was not the importer and his role was clearly defined in the documents provided. That being the case, the Commissioner’s decision that stands on shaky ground and the TAT correctly declined to uphold it. 46. Closely tied to the above ground is the appellant’s argument that the Respondent did not produce some documents as required by section 23 of the TPA. Whereas the said section obliges a tax payer to avail records, the flip side of this position is that a party can only produce documents in his possession. It could not have been the intention of the law to compel tax payers to produce documents in the hands of a third party and more so, if the transactions were undertaken by third parties. The Respondent persuaded the TAT that it was not the importer and it could not produce documents in the hands of a third party. To expect the Respondent to produce import documents in the hands of a third-party amounts to overly overstretching the ambit of sections 23, 56(1) and 30 of the TPA. On this ground, the appellant argument collapses. 47. The evidence on record on this particular issue leaves no doubt that the Respondent discharged the burden of proof. As Lord Denning held in Miller v Minister of Pensions,[20] ‘The…{standard of proof}…is well settled. It must carry a reasonable degree of probability…if the evidence is such that the tribunal can say: ‘We think it more probable than not’ the burden is discharged, but, if the probabilities are equal, it is not.’ 48. The burden placed upon the Respondent by the law was to establish by evidence that it was not the importer and to confirm its role under the contract. Simply put, it was required to demonstrate that the tax was not due. The test is whether the Respondent established a prima facie case and having done so, the evidential burden shifted to the appellant to persuade the TAT on the contrary. It never did so. … 56. In conclusion, I find no basis at all upon which I can interfere with the TAT’s decision. The upshot is that the appellant’s appeal fails. The appeal is hereby dismissed with costs to the Respondent.” Click here for other translation Income_Tax_Appeal_E125_of_2020 ...

This case concerned deductibility of notional interest paid in 2003-7 by two permanent establishments in the UK to their Irish HQs. The loans – and thus interest expenses – had been allocated to the PEs as if they were separate entities. The UK tax authorities held that interest deductibility was restricted by UK tax law, which prescribed that PE’s has such equity and loan capital as it could reasonably be expected to have as a separate entity. The UK taxpayers, refered to  Article 8 of the UK-Ireland tax treaty. Article 8 applied the “distinct and separate enterprise” principle found in Article 7 of the 1963 OECD Model Tax Convention, which used the language used in section 11AA(2). Yet nothing was said in the treaty about assumed levels of equity and debt funding for the PE. In 2017, the First-tier Tribunal found in favour of the tax authority, and in October 2019 the Upper Tribunal also dismissed the taxpayers’ appeals. Judgement of the UK Court of Appeal The Court of Appeal upheld the decision of the Upper Tribunal and dismissed the appeal of Irish Bank Resolution Corporation and and Irish Nationwide Building Society. Click here for other translation UK vs Irish Bank Resolution Corp. Ltd Aug 2020 case no A3-2019-3060 ...

Mantra Limited is engaged in mineral exploration in Tanzania. In carrying out its business, it procured services from non-resident service providers mostly from South Africa. In 2014, Mantra Limited wrote to the tax authorities requesting for a refund of withholding taxes of USD 1,450,920.00 incorrectly paid in relation to services that were performed outside Tanzania by non-resident service providers for the period between July, 2009 and December, 2012. The tax authorities refused the request maintaining that, the services in question were rendered in Tanzania and Article 7 of the DTA was irrelevant in as much as it was limited to business profits and not business transactions. Unsuccessfull appeals were filed by Mantra and in 2020 the case ended up in the Court of Appeal where Mantra argued based on the following grounds:- 1. That the Tax Revenue Appeals Tribunal grossly erred in law by holding that the Board was correct in holding that payments for services rendered/ performed abroad by non-resident suppliers had a source in the United Republic of Tanzania; 2. That the Tax Revenue Appeals Tribunal grossly erred in law by holding that Article 7 of the Double Taxation Agreement does not apply on the Appellant’s case; and 3. That the Tax Revenue Appeals Tribunal erred in law by holding that the Appellant was not justified to claim refund o f incorrectly paid withholding tax. Judgement of the Court of Appeal The Court of Appeal decided in favor of the tax authorities. On the first ground “On our part, we fully subscribe to this recent position of law and differ with the previous position in Pan African Energy Tanzania Limited (supra) for two main reasons. First, as correctly held in Tullow Tanzania BV (supra), the respective authority, much as it was based on an Indian decision construing a statute which is not worded similarly to ours, is istinguishable and thus inapplicable in the instant case. Second and more importantly is the fact that, the position in Tullow Tanzania BV (supra) is the more recent position. The settled position as it stands today is such that, where there are two conflicting decisions of the Court on the similar matter, the Court, unless otherwise justified, is expected to follow the more recent decision. … In view of the foregoing discussion therefore, we dismiss the first ground of appeal. “ On the second ground “Guided by the above authority therefore, it is our firm opinion that the Tribunal was right in holding that the exemption under Article 7 of the DTA was not applicable to the appellant’s business transactions. We thus dismiss the second ground for want of merit.” On the third ground “Since we have held in relation to the first and second grounds that, the charging of withholding taxes was correct, there is consequently nothing to refund and, therefore, the third ground becomes redundant because there remains no withholding tax to refund.” Mantra Tanzania Ltd vs The Commissioner General Tanzania Revenue Authority (Civil Appeal No 430 of 2020) 2021 TZCA 657 (5 November 2021) ...

This case concerned deductibility of notional interest paid in 2003-7 by two permanent establishments in the UK to their Irish HQs. The loans – and thus interest expenses – had been allocated to the PEs as if they were separate entities. The UK tax authorities held that interest deductibility was restricted by UK tax law, which prescribed that PE’s has such equity and loan capital as it could reasonably be expected to have as a separate entity. The UK taxpayers, refered to  Article 8 of the UK-Ireland tax treaty. Article 8 applied the “distinct and separate enterprise” principle found in Article 7 of the 1963 OECD Model Tax Convention, which used the language used in section 11AA(2). Yet nothing was said in the treaty about assumed levels of equity and debt funding for the PE. In 2017, the First-tier Tribunal found in favour of the tax authority, and in October 2019 the Upper Tribunal also dismissed the taxpayers’ appeals. Irish_Nationwide_Building_Society_and_anor_v_HMRC ...

This  case is about the interpretation of Article 7 (the business profits rule) and Article 12 (the royalties provision) of the Agreement between the Government of Australia and the Government of India for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income. The issue was misuse of the provision in article 12 about cross-border royalties and article 7 about business profits. The case was brought before the Supreme Court, where special leave to appeal was refused 10 March 2017. Australia-vs-TECH-MAHINDRA-LIMITED-September-2016-Federal-Court-case-no-2016-ATC-20-582 ...