The transaction involved Coffee Exporters Limited, a Tanzanian company which, between 2009 and 2011, received cash advances from Taggart S.A., a Swiss company, to facilitate coffee procurement. The company treated the advances as liabilities rather than sales income unless coffee was delivered.
The tax authorities accepted that Coffee Exporters Limited was neither a domestic nor a foreign permanent establishment, and that the advances were not taxable sales. However, they treated the dealings as controlled transactions, determining that the parties were associates under section 3(d) of the Tanzanian Income Tax Act. They also applied transfer pricing adjustments under section 33(2) and disallowed foreign exchange losses.
Coffee Exporters Limited challenged the assessments before the Tax Revenue Appeals Board and the Tribunal, arguing that there was no associate relationship between the parties, that OECD concepts should apply and that the disallowance of foreign exchange losses was incorrect. Coffee Exporters Limited also argued that the 2009 assessment was time barred. The Board only allowed the appeal in respect of the 2009 assessment, and the Tribunal upheld the remaining assessments. Coffee Exporters Limited then appealed to the Court of Appeal.
Judgment
The Court of Appeal dismissed the appeal. It held that only points of law were appealable, so it excluded the challenge regarding foreign exchange losses as a matter of fact. The Court found no error in the refusal to admit additional evidence, ruling that the associate relationship had been correctly inferred from the facts without reliance on an unadmitted contract. The court confirmed that the statutory definition of “associate” took precedence over OECD concepts and that the taxpayer had the burden of proof.
Excerpt
“As we said above, imposition of tax is, as a general rule, within the domain of domestic law. The assessment of tax under scrutiny was based on section 33 (2) of the Income Tax Act. The basis of the assessment was existence of an associate relationship between the appellant and the foreign company. Determination of the relationship was based on statutory definition under section 3 (b) of the same Act. Though ordinarily, an associate relationship exists where a non-resident permanent establishment or an individual whether directly or through one or more interposed entities, controls or is likely to benefit from fifty percent or more of the rights of income or capital or voting power of the domestic permanent establishment; under the provisions just referred, existence of such relationship can be implied where the relationship between the two is such that “one may reasonably be expected to act, other than as employee, in accordance with the intention of the other”.
Mr. Lugaiya thinks that the respondent should have been guided by the OECD definition of the term associate. No evidence has been provided that Tanzania is a party to that agreement. Besides, the agreement does also not fall under section 128 of the Income Tax Act which could have, in case of conflict, prevailed over our domestic laws. Neither does it fall under any of the agreements envisaged under section 10 (3) of the Income Tax Act. Therefore, much as the definition can be relevant as an additional tool of interpreting the phrase “associate” for the purpose of transfer pricing, it cannot prevail over the definition set out in our statute or subsidiary legislation. In our view, therefore, the Tribunal cannot be faulted for construing the term associate based on the statutory definition even if such definition could be contradictory to the said agreement. It is for those reasons that, we dismiss the first and second grounds of appeal.”