The facts
Diamond Trust Bank Tanzania Ltd (DTB) is a Tanzanian commercial bank. TRA conducted a tax audit for 2012–2014, challenging two positions. First, DTB had treated interest on non-performing loans (‘interest in suspense’) on a cash basis, consistent with Bank of Tanzania prudential regulations; TRA said accrual was required. Second, DTB had claimed deductions for loans written off as bad debts; TRA said the write-offs were insufficiently documented. Both the Tax Revenue Appeals Board and the Tribunal upheld TRA. DTB appealed to the Court of Appeal on eight grounds.
This case does not involve an intercompany transaction at the company level — it concerns a bank’s loans to third-party customers. But the legal framework it confirms, and the documentation discipline it illustrates, applies equally to groups writing off intercompany loans or forgiving debt owed by a related party.
The decision
Interest in suspense — accrual prevails over banking regulation
DTB argued that BOT Regulation 30(2), which requires banks to account for interest on non-performing loans on a cash basis, created an exception to the ITA’s mandatory accrual rule for corporations under section 21(3). The Court rejected this. The ITA is the governing statute for tax purposes. Banking prudential regulations serve a different purpose — they manage risk and liquidity in the financial system — and cannot override tax legislation. Section 21(3) ITA is clear and mandatory: corporations account on an accrual basis. DTB was required to bring interest in suspense into its taxable income as it accrued, regardless of whether it had been received.
This finding is consistent with the Court’s same-day ruling in Vodacom Tanzania (Civil Appeal No. 485 of 2023, also in this library), which reached the same conclusion on the primacy of the accrual basis from a different angle. Together the two cases confirm that accrual governs corporate income tax in Tanzania regardless of what other regulatory frameworks say.
Bad debt write-offs — documentation requirements
DTB’s second challenge was to the disallowance of loans written off as bad debts. Section 39(d) ITA allows a deduction for a debt that is bad, provided recovery measures have been taken and the debt is absolutely uncollectable. The Court identified three requirements DTB had not met:
- The debt must be absolutely uncollectable, not merely impaired or difficult to recover. Regulatory classification as a non-performing loan under BOT rules does not automatically satisfy this standard.
- Recovery steps must be documented. The requirement to demonstrate recovery measures existed under the pre-2014 ITA even without an itemised checklist. DTB could not rely on the absence of a specific prescribed list to avoid the requirement entirely. Evidence of written-off debt in client accounts, written communications, and formal recovery action would all have been relevant.
- Board resolutions authorising write-offs are required. Internal authorisation for write-offs — evidenced by board resolution — is necessary. DTB had argued this was a post-2014 requirement applied retrospectively; the Court rejected this.
ajiho commentary
What this means for intercompany debt forgiveness
Groups writing off intercompany loans face the same three-part test, transposed to an intragroup context. The debt must be genuinely uncollectable — not merely impaired because the subsidiary is loss-making or has negative equity. Recovery must have been attempted: for intercompany debt that typically means a formal demand, consideration of restructuring options, and documented analysis of the subsidiary’s financial position. And the write-off must be formally authorised by the appropriate governance body. A journal entry alone is not sufficient.
There is a further TP dimension. When a group entity forgives a debt owed by a related party, the forgiveness itself may constitute a deemed dividend, an informal capital contribution, or a non-arm’s length benefit depending on the jurisdiction and the direction of the forgiveness. Diamond Trust Bank does not address this directly — it is a domestic third-party lending case — but the documentation discipline it requires is a minimum baseline for any group seeking to deduct a written-off intercompany loan. Meeting the tax deductibility requirements and managing the TP characterisation of the forgiveness are separate tasks, both of which need to be addressed.
Cross-reference: the Luxembourg AA SARL case addresses the TP consequences of reducing the interest rate on a distressed intercompany loan without a fresh TP analysis. The two cases together give a picture of the risks on both sides of a distressed intercompany lending situation — the Luxembourg case shows what happens when you reduce the rate without analysis; Diamond Trust Bank shows what documentation you need to actually write the debt off.
What this means for your business
Two operational points follow. For any Tanzanian corporate — and banks in particular — interest that has accrued must be brought into taxable income even if it has not been received and even if a prudential regime permits a cash-basis treatment for regulatory reporting; the tax and regulatory accounting bases are separate. And for any group planning to write off or forgive an intercompany loan, put the evidence in place before the write-off: demonstrate the debt is absolutely uncollectable, document the recovery steps taken, and obtain a board resolution authorising the write-off. A bare accounting entry will not sustain the deduction, and the TP characterisation of the forgiveness must be managed as a separate question.
Case reference
Diamond Trust Bank Tanzania Ltd v Commissioner General Tanzania Revenue Authority · Court of Appeal of Tanzania at Dodoma · Civil Appeal No. 413 of 2022 · 28 February 2025
Judgment in English. Available on TANZLII (tanzlii.or.tz).