Introduction

Banks and financial institutions often find themselves in a delicate balancing act with tax authorities, navigating the complexities of compliance while facing intense regulatory scrutiny. On the one hand, they must adhere to stringent tax laws, including withholding tax obligations, transfer pricing rules and reporting requirements. On the other, they contend with evolving regulations, operational risks and potential ambiguities in tax enforcement. This ongoing dynamic creates a challenging landscape where financial institutions must proactively manage compliance while mitigating regulatory and reputational risks.

A recent legal battle between Diamond Trust Bank Tanzania Limited (DTB or the Appellant) v. Commissioner General, Tanzania Revenue Authority (TRA or the Respondent) (Civil Appeal No. 413 of 2022) [2025 TZCA 126] brought this intricate relationship into sharp focus and highlighted the complexities financial institutions face in balancing tax compliance and regulatory scrutiny. The case underscored key issues surrounding the interpretation and application of tax laws, particularly regarding withholding tax obligations and cross-border transactions. The Court of Appeal (the Court) decision provided key insights into the evolving tax landscape for banks, reinforcing the need for financial institutions to adopt robust tax compliance frameworks while remaining vigilant against regulatory uncertainties. Notably, the case serves as a crucial reminder of how tax laws impact financial institutions, especially in relation to bad debts and interest in suspense.

Background of the case

The dispute originated from a tax audit conducted by the TRA in 2015, examining DTB's financial records for the period from 2012 to 2014. The audit uncovered discrepancies, leading the TRA to issue tax assessments against the Appellant. These assessments related to corporate income tax, VAT, withholding tax, employment taxes, excise duty and stamp duty. At the heart of the dispute were two contentious issues, namely, the taxation of interest in suspense and the disallowance of written-off loans as bad debts. The TRA's position is that interest in suspense should be subject to taxation, arguing that it constitutes taxable income regardless of whether it has been received. Additionally, the TRA contends that written-off bad debts should not be deductible for tax purposes unless strict conditions are met, such as demonstrating exhaustive recovery efforts and compliance with specific regulatory requirements.

The Appellant, on the other hand, argued that interest in suspense should not be subject to taxation until it is realised and maintained that taxing unrealised interest would contradict both international financial reporting standards and established banking practices. However, the TRA took a different stance, arguing that interest in suspense should be taxed on an accrual basis and not on a cash basis and, this being the case, was subject to taxation regardless of whether or not it had been collected.

Regarding written-off debts, the TRA argued that such amounts should not be deductible for tax purposes unless DTB could demonstrate that all reasonable steps had been taken to recover the debts in accordance with the requirements set out under tax laws. The TRA maintained that writing off a debt in the bank's books does not automatically qualify it for tax deductibility. The TRA's position is that the Appellant had to provide sufficient evidence of exhaustive recovery efforts, including legal action taken against the debtors and providing a board resolution to prove the write-offs.

DTB contended that the written-off loans were uncollectable and were eligible for tax deductions as bad debts. DTB's position was that the written-off debts were genuine losses incurred in the ordinary course of banking operations and argued that disallowing such deductions would unfairly penalise financial institutions managing credit risks. DTB also argued that the requirement to provide sufficient evidence of exhaustive recovery efforts came into force in 2014, and therefore should not be applied retrospectively to claim taxes for the years 2012 to 2014.

Tax Revenue Appeals Board and Tax Revenue Appeals Tribunal analysis

The Appellant initially challenged TRA's decision by filing an appeal at the Tax Revenue Appeals Board (the Board), which ruled in favour of the Respondent. DTB escalated the matter to the Tax Revenue Appeals Tribunal (the Tribunal), which upheld the Board's findings. The Tribunal reaffirmed TRA's position that interest in suspense is subject to taxation on an accrual basis, as stipulated under section 21(3) of the Income Tax Act, 2004. Additionally, the Tribunal held that the Appellant had failed to sufficiently demonstrate that the written-off loans were absolutely uncollectable and upheld TRA's requirement that, beyond merely writing off bad debts, the Appellant needed to provide a resolution of the board of directors approving the write-offs, along with supporting evidence proving that all necessary recovery efforts had been exhausted before classifying loans as bad debts.

Dissatisfied with these decisions, the Appellant filed a further appeal to the Court challenging inter alia the Tribunal's reliance on case precedents and interpretation of the law, and argued that the Tribunal and the Board had misapplied legal principles in reaching their decisions. The Appellant also contested the taxation of interest in suspense and the disallowance of written-off debts, maintaining that the Tribunal had failed to properly consider industry practice and accounting standards applicable to banks and financial institutions.

The Court's decision

After reviewing the arguments presented before it, the Court delivered its judgment, upholding the decision of the Tribunal. The Court ruled that the law requires the Appellant to account for interest in suspense on an accrual basis and, regardless of whether or not such interest is realised, the law explicitly requires that it is recognised making it subject to tax, even if the actual cash has not been received. The Court stated that, as long as a loan is not treated as a bad debt, the interest earned therefrom ought to be recognised, in which case it is subject to taxation.

With respect to the written-off debts, the Court's position was that, before writing off any debt, a bank is required to get approval from the Bank of Tanzania and, in terms of regulation 19(c) of the Banking and Financial Institutions (Management of Risk Assets) Regulations, 2004 (the “Regulations”), the Appellant had the burden of proving that the loans were truly uncollectable, which, in the Court's view, the Appellant failed to do convincingly. Additionally, the Court pointed out that a board resolution, along with other documentation such as communication between the bank and the borrower and documents confirming legal action taken by the bank against the borrower, were necessary in justifying bad debt write-offs. The Court emphasised that these documents were essential to demonstrate that the Appellant had taken all reasonable efforts to recover the debts before classifying them as irrecoverable. The Court further reinforced the proper evidence of recovery measures must be presented to support claims that loans are indeed irrecoverable and qualify for write-off.

Based on the above, the Court dismissed DTB's appeal in its entirety for lack of merit.

Implications of the decision for banks and businesses

This decision carries significant ramifications, not only for DTB, but for all financial institutions and businesses dealing with bad debts and interest in suspense. It underscores the importance of strict compliance with tax laws, even when sector-specific regulations such as the Regulations appear to suggest otherwise.

For banks, the decision emphasises the importance to properly document bad debts, providing solid proof of recovery efforts. Financial institutions must also ensure they obtain board resolutions before writing off loans and align financial reporting with tax laws, even when these seem to conflict with industry-specific regulations. The decision serves as a wake-up call for financial institutions to ensure that their financial practices not only meet industry standards, but also comply with the demands of tax laws. Failure to do so could result in legal challenges similar to the one faced by DTB.