Tanzania in International Tax Law: Wrestling the ‘substance over form’ doctrine
“When someone calls a dog a cow and then seeks a subsidy provided by statute for cows, the obvious response is that this is not what the statute means. It may also happen that rich people who would not otherwise have cows buy them to gain cow subsidies.”— Isenbergh, J., Musings on Form and Substance in Taxation: Federal Taxation of Incomes, Estates, and Gifts, 49 U. Chi. L. Rev. 859, 865 (1982).
This quote drives home the point by Judge Learned Hand in the oft-cited case of Gregory v. Helvering that: “Any one may so arrange his affairs that his taxes shall be as low as possible; he is not bound to choose that pattern which will best pay the Treasury; there is not even a patriotic duty to increase one’s taxes.”
In this context, the influx of anti-avoidance provisions in the tax laws of Tanzania and other countries in the world has become controversial. This article discusses, albeit briefly, how taxpayers, the Tanzania Revenue Authority (TRA) and the tax tribunals might wrestle with the doctrine of ‘substance-over-form’ when the Commissioner General (CG) challenges certain transactions innovatively structured by taxpayers seeking to minimise their tax.
The doctrine focuses on the general anti-avoidance rule (GAAR) codified under the Tax Administration Act 2018. Using this rule, the CG can void, as against himself, an avoidance transaction designed solely to generate tax benefits and consequently reconstruct the transaction and assess tax as if the avoidance transaction had not been entered into or carried out.
The GAAR is augmented by specific anti-avoidance rules (SAARs) including, inter alia, the rule under section 33(2)(a) of the Income Tax Act, Cap 332 permitting the CG to “re-characterise the source and type of any income, loss, amount or payment”.
To clarify, the venerable substance-over-form doctrine maintains that the ‘substance’, and the not the form, of a transaction is what governs the tax effects of a transaction. Its usage by the CG and the tax adjudication bodies generally produces a different tax result than that which would attach to the form.
With that being said, the recurring question of the limits of the substance-over-form principle reverberates in the tax world. It’s a question that won’t go away.
The US Court of Appeals for the Sixth Circuit in Summa Holdings, Inc. v. Commissioner 848 F.3d 779 (2017) rejected the substance-over-form doctrine, holding that a transaction entered into mainly for tax avoidance is permissible, as long as the statutory tax law does not prohibit the result.
In that case, the Commissioner sought to re-characterise payments of commissions into a domestic international sales corporation (DISC) which were shielded from income tax when the DISC contributed funds to special retirement accounts (Roth IRAs) that offer tax-free withdrawals in retirement.
Handing down victory for the taxpayer, the Circuit Judges said: “Because Summa Holdings used the DISC and Roth IRAs for their congressionally sanctioned purposes-tax avoidance-the Commissioner had no basis for recharacterizing the transactions and no basis for recharacterizing the law’s application.” Apropos of this reasoning, does the constitutional principle of separation-of-powers ring a bell? Well, yes, I hope.
The substance-over-form doctrine raises concern for the constitutional principle, as noted by the US Court of Appeals: “If the government can undo transactions that the terms of the Code expressly authorize, it’s fair to ask what the point of making these terms accessible to the taxpayer and binding on the tax collector is. “Form” is “substance” when it comes to law. The words of law (its form) determine content (its substance). How odd, then, to permit the tax collector to reverse the sequence—to allow him to determine the substance of a law and to make it govern “over” the written form of the law—and to call it a “doctrine” no less.”
The Summa Holdings decision, though not binding upon the tax adjudication bodies of Tanzania, is persuasive. Even so, in terms of African Barrick Gold Plc v. Commissioner General (TRA) Tax Appeal No. 16 of 2015, the idea that tax avoidance can be allowed provided it follows the tax law (‘Duke of Westminster principle’) is no longer sacrosanct. There is an increasing application of a purposive interpretation of the law to defeat avoidance transactions.
This, combined with the Commissioner General’s sweeping powers under the GAAR that gives legal recognition to the substance-over-form doctrine to challenge transactions in preservation of tax base erosion, means that wrestling the doctrine is not easy and investors should tread lightly in carefully orchestrated tax planning.
----------------------------------------------------------------------
Paul Kibuuka ([email protected]), a tax and corporate lawyer and tax policy analyst, is the CEO of Isidora & Company and the Executive Director of the Taxation and Development Research Bureau.
