April 24, 2018
In a business world fraught with financial and operational risks, individuals and corporate entities are increasingly enmeshed in situations where invoices issued for goods sold or services rendered are either never paid for or remain unpaid over an extended period of time.
Recognising the incidence of bad or doubtful debt as a practical reality of the business world, tax legislations in many jurisdictions allow individuals and companies to take tax deductions for bad debts or debts with the likelihood of becoming bad at some point in the future. The tax treatment of bad and doubtful debt, appears to follow the generally accepted accounting practices for trade receivables classed as bad or doubtful. Under the International Financial Reporting Standard(‘IFRS’) 9: Financial Instruments, entities are required to objectively assess their trade receivables for impairment at a balance sheet date, while charging any loss thereon to the income statement for the period. The rationale for this global convention on bad and doubtful debt is to provide prudent guidelines to entities reporting revenue for a certain period and perhaps, to ensure that these entities are not burdened with paying taxes on uncollected revenue.
The Companies Income Tax Act (CITA), Personal Income Tax Act (PITA) and Petroleum Profit Tax Act (PPTA), all specify bad and doubtful debts as allowable deductions for income tax purposes.
For example, in section 24(f) of the CITA, corporate taxpayers are allowed to take a deduction for:
bad debts incurred in the course of a trade or business proved to have become bad during the period for which the profits are being ascertained, and doubtful debts to the extent that they are respectively estimated to the satisfaction of the Board to have become bad during the period, notwithstanding that such bad or doubtful debts were due and payable before the commencement of the said period.
While it is not contestable that taxpayers in Nigeria can validly deduct bad and doubtful debt from the income or profit to be taxed in a given year, some Nigerian tax authorities have relied on the confirmatory powers specified in section 24(f) of the CITA i.e. “… satisfaction of the Board”, to impose stringent conditions as the prerequisite for companies to take a tax deduction for bad and doubtful debts. What is to the “satisfaction of the Board” is nebulous and dependent on the discretion of the tax officials reviewing the books of the taxpayer and appear interpreted to make the taxpayer unable to claim a deduction on these debts.