A Tanzanian branch of Aggreko International Projects Limited, a company incorporated in the United Kingdom, operated in Tanzania in the business of electric power generation, transmission and distribution. For the years of income 2018 and 2019, head office and regional hub costs incurred in Dubai was allocated to its Tanzanian operations on a pro rata basis by reference to revenue generated in each country. These costs were claimed as deductible expenses in computing corporate income tax.
Following a audit conducted in 2022, the Revenue Authority disallowed the claimed head office expenses on the basis that the appellant failed to provide documentation demonstrating a clear and verifiable allocation of the costs and failed to prove that the expenses were incurred wholly and exclusively in the production of income in Tanzania as required by section 11(2) of the Income Tax Act. Assessments were issued for both years, together with interest for late payment and late filing penalties, resulting in significant additional tax liabilities for 2018 and 2019.
Aggreko objected to the assessments and argued that the costs were incurred wholly and exclusively for income generation and that the allocation methodology complied with section 71(6) of the Income Tax Act and the Transfer Pricing Regulations. The objection was rejected and the matter proceeded to the Tax Revenue Appeals Board, which upheld the disallowance of the head office costs, the interest, and the penalties. An appeal to the Tax Revenue Appeals Tribunal was also dismissed, with the Tribunal holding that reliance on transfer pricing rules could not override the statutory requirement that deductible expenses must be incurred wholly and exclusively in Tanzania and that a mere allocation of pooled head office costs was insufficient without evidence of a direct nexus to the Tanzanian business. On further appeal to the Court of Appeal, the appellant challenged the interpretation of section 11(2), the treatment of the cost sharing arrangement, the imposition of interest and penalties, and alleged a failure by the Tribunal to properly evaluate the evidence.
Judgment
The appeal of Aggreko was dismissed in its entirety and the decision of the Tribunal was upheld with costs awarded to the respondent.
The Court of Appeal held that the first and second grounds of appeal raised factual or mixed questions of law and fact and were therefore incompetent under section 26(2) of the Tax Revenue Appeals Act, which confines appeals to questions of law only. On the remaining grounds, the Court found that the Tribunal had properly analysed and evaluated the evidence and correctly applied section 11(2) of the Income Tax Act. The Court emphasised that for head office costs to be deductible there must be proof that the expenditure was incurred during the year of income and was incurred wholly and exclusively in the production of income from the Tanzanian business, and that a cost allocation methodology alone does not satisfy this requirement.