Head Office Cost Allocation Fails to deduct Without Local Substantiation in Tanzania

Overview of the Resolution

On 12 December 2025, the Court of Appeal of Tanzania dismissed Civil Appeal No. 182 of 2025, confirming that head office costs allocated to a Tanzanian permanent establishment are not deductible unless the taxpayer strictly complies with the substantive requirements of domestic tax law. The Court upheld the decisions of the Tax Revenue Appeals Board and the Tax Revenue Appeals Tribunal, thereby consolidating a consistent judicial position on the limits of transfer pricing arguments in the context of local deductibility rules.

Facts of the Case

Aggreko International Projects Limited operated in Tanzania through a branch, constituting a permanent establishment of a UK-incorporated entity. Following a comprehensive tax audit for the 2018 and 2019 years of income, the Tanzania Revenue Authority disallowed head office expenses allocated from Aggreko’s regional hub in Dubai. The disallowance was grounded on the taxpayer’s failure to provide clear and verifiable documentation demonstrating that the expenses were incurred wholly and exclusively in the production of income in Tanzania, as required under section 11(2) of the Income Tax Act. The taxpayer’s objections were rejected at the administrative level and by both the Board and the Tribunal, leading to the appeal before the Court of Appeal.

Core Legal Findings and Transfer Pricing Allocation Methods

The Court reaffirmed that deductibility under section 11(2) of the Income Tax Act is a substantive test that requires proof that expenditure was incurred during the relevant year of income and that it was incurred wholly and exclusively for the purposes of the Tanzanian business. Crucially, the Court held that the existence of a cost allocation mechanism, even if consistent with transfer pricing concepts, does not in itself satisfy these statutory requirements. A mere allocation of pooled head office costs is insufficient where the taxpayer cannot demonstrate a direct and exclusive nexus between the expenditure and the income-generating activities of the permanent establishment.

In this context, the judgment carries important implications for the use of direct and indirect allocation methods for transfer pricing purposes. Direct-charge methods, which link specific services to identifiable beneficiaries and trace costs accordingly, are inherently better aligned with domestic deductibility standards. They allow taxpayers to evidence the nature of the services rendered, the timing of the expenditure, and the direct connection to local income production, thereby facilitating compliance with statutory requirements such as those under section 11(2).

Procedurally, the Court also emphasized its limited jurisdiction under section 26(2) of the Tax Revenue Appeals Act, rejecting grounds of appeal that sought to re-evaluate evidence or raised mixed questions of law and fact. This reinforced the finality of factual findings made by the Tribunal, particularly in relation to the sufficiency of evidence supporting the claimed deductions.

Advisory Implications

From a practical standpoint, the decision underscores the need for multinational groups to ensure that their transfer pricing policies are designed with local deductibility rules firmly in mind. Where possible, direct allocation methods supported by granular documentation should be preferred. Where indirect methods are unavoidable, enhanced substantiation is essential to demonstrate a clear and exclusive link between the allocated costs and the local income-producing activities. Failure to meet this evidentiary standard exposes taxpayers not only to disallowance of deductions but also to interest and penalties, with limited scope for effective appellate relief.

How can MCORE Law help?

MCORE LAW assists multinational enterprises in structuring, documenting, and defending intra-group cost allocations with a clear focus on local tax deductibility and transfer pricing alignment. The firm advises on the design of direct and indirect allocation methodologies that are consistent with OECD Transfer Pricing Guidelines while ensuring compliance with domestic income tax requirements, including “wholly and exclusively” tests applicable to permanent establishments.