Bank wins important tax appeal 11 February 2011

Banks now have a greater chance of success in tax appeals after a landmark decision by the Tax Appeals Board this week. Barclays Bank, represented by Kibuta Ongwamuhana of Ako Law, successfully overturned a ruling by the tax authority (TRA) to allow a tax deduction for bad and doubtful debts approved as such by the Bank of Tanzania (BOT) for inclusion in the accounts.

The dispute point is of acute interest to all banks and financial institutions as several have been hit with tax claims by the TRA based on the same issue.

The tax authority (TRA) had rejected deduction claims for provisions made against impairment losses saying that a non-performing loan can be only be allowed as a deduction for income tax purposes when it is written off.

In the ruling on February 7, the Tax Appeals Board clarified that once provision for bad and doubtful debts has been approved by the BOT, as required under the banking laws and the BOT Regulations, the TRA should allow the provision against the assessable income of the bank. The Tax Appeals Board has said that the TRA position is contrary to banking industry practice and is also contrary to the prescribed guidelines issued by the BOT under the Management of Risk Assets Regulations. It has directed that, in relation to banks and financial institutions, the Income Tax Act should be read together with the banking laws.

Kibuta said: “This landmark decision is significant because it has the potential to wipe out very substantial tax claims made by the TRA in 2009 against several banks following a wide-ranging tax audit of the banking industry.

“For Barclays the dispute amount assessed in 2009 for the 2005 and 2006 income years was in excess of 12 billion Tanzania shillings (approximately US $8 million). The decision is also significant because it clarifies the proper accounting treatment for bad or doubtful loans for the banking sector, enabling banks to proceed with confidence in the way they account for income.

“I am confident that following the ruling, tax appeals by the other banks which I am representing now have a greater chance of success.”