On June 30, 2025, the Tax Revenue Appeals Board (TRAB) delivered a landmark judgment that significantly impacts the tax treatment of foreign exchange losses in Tanzania. The case,Income Tax Appeal No. 41 of 2024, involved CMCAutomobiles Limited (the Appellant) and the Tanzania Revenue Authority (TRA). The core issue was the taxability of unrealized foreign exchange losses, a matter that has long been a source of contention between taxpayers and tax auditors.
The Dispute: Double Taxation on Notional Losses
The Appellant, CMC Automobiles Limited, incurred unrealized foreign exchange losses in 2020 and, in its self-assessed tax return, correctly added these losses back for purposes of calculating its Corporate Income Tax (CIT)4. In the subsequent year (2021), the company allowed the 2020 losses as a deduction and added back the new unrealized foreign exchange losses for 2021.
However, during a tax audit of the 2021 financial year, the TRA took note of the 2020 losses that were allowed in 2021 and disallowed them6. This action resulted in the same loss being added back twice: first in 2020 and again in 20217. The TRA’s justification was that the loss resulted from the translation of closing balances, which they argued was contrary to Section 39(g) of the Income Tax Act (ITA), 2004.
The TRA’s position was that Section 39(g) is the sole basis for recognizing all foreign exchange losses, and since this section only deals with foreign currency debt claims “when such debt is actually paid,” any unrealized loss was not allowable.This interpretation led to the permanent disallowance of unrealized losses, effectively taxing notional gains.
TRAB’s Analysis and Key Findings: A Cohesive Legal Framework
The TRAB judges sided with the Appellant, rejecting the TRA’s narrow interpretation of the law. The Board emphasized that the provisions of the ITA should be read together as a “cohesive legal framework” and that no single provision should be considered subordinate or overriding unless explicitly stated by legislative intent.
The Board’s key findings were:
- Section 39(g) is Not All-Encompassing: The TRAB contended that the wording of Section 39(g) does not “foreclose, preclude nor restrict the realization of other assets”. The Board found that the TRA was “misguided to assume that Section 39(g) of the ITA caters for all foreign exchange losses in asset realizations and valuations”. Not all foreign currency-denominated monetary assets and liabilities are “debt” in totality.
- Business Operations vs. Debt Claims: The Board distinguished between foreign exchange differences arising from debt claims and those from general business operations. The losses recorded by the Appellant stemmed from “business balances in the course of trading,” such as debtors, creditors, and bank accounts, and not solely from debts.
- The Role of International Accounting Standards (IAS 21): The TRAB noted that the recognition of foreign exchange losses is embedded in the financial reporting framework of IAS 21. Taxpayers in Tanzania are required to present their financial statements using approved frameworks like International Financial Reporting Standards (IFRS). IAS 21 mandates that foreign currency monetary items be translated at the closing rate at the end of each reporting period, a process that gives rise to unrealized gains and losses. This is a recurring cycle for any active business.
- Taxation of Notional Gains: The ruling affirmed that unrealized foreign exchange gains and losses are “simply notional values and not actual profit/loss”. The TRAB agreed with the Appellant that permanently disallowing these losses would lead to the taxation of notional gains and would violate the equitable principles of fair taxation.
The Board ultimately found the Appellant’s appeal to have merit, concluding that the Appellant had complied with the ITA provisions and had not viewed accounting principles as superseding the tax law.
Implications for Taxpayers: A Path to Fair Taxation
This landmark decision provides a crucial precedent for taxpayers in Tanzania. It confirms that the standard tax treatment of adding back current year’s unrealized foreign exchange loss and allowing the deduction of the prior year’s unrealized loss is the correct approach. This practice ensures that no tax is paid on notional gains or losses.
The ruling underscores the importance of a clear distinction between realized and unrealized foreign exchange differences for tax purposes. A realized loss on a settled balance is a true business expense, and a realized gain is a true profit that must be taxed. However, unrealized gains and losses are notional and require yearly adjustments to avoid double taxation and ensure the tax base is accurate.
To facilitate this, taxpayers are strongly advised to segregate realized and unrealized foreign exchange gains and losses in their chart of accounts and income statement. This practice will simplify the tax calculation process and align with the TRAB’s ruling.
Disclaimer
This legal update has been prepared by RIVE & Co. and is for general guidance and informational purposes only. It does not constitute legal or professional advice. The information is subject to change based on any future amendments to Tanzanian Tax Laws and Regulations. While care has been taken to ensure accuracy, RIVE & Co. and its staff will not be liable for any errors, omissions, or any loss incurred by a reader acting or refraining from acting based on this information.
Prepared by: Sunday Ndamugoba, Partner at RIVE & Co.