Depreciation and depletion
Depreciation of depreciable assets in the accounts of a business is not an allowable deduction in computing taxable profits. It is instead replaced by capital allowances at prescribed statutory rates, as follows:
||Assets pooled (allowance calculated on a reducing-balance basis). Mainly computers and data handling equipment together with peripheral devices.
||Assets pooled (allowance calculated on a reducing-balance basis). Mainly automobiles, buses, mini buses, construction and earth-moving equipment, trailers and trailer-mounted containers, plant and machinery used in manufacturing.
||Assets pooled (allowance calculated on a reducing-balance basis). Mainly railroad cars, locomotives and equipment, vessels and similar water transportation equipment, aircraft, public utility plant and equipment, office equipment and fixtures, and any other depreciable asset not elsewhere classified.
||Buildings, structures, and similar works of a permanent nature (allowance calculated using the straight-line method).
||Mining and petroleum expenditure (allowance calculated using the straight-line method).
||Machinery and equipment imported in order to affix the excise tax stamp on excisable goods by an importer or manufacturer of excisable goods (allowance calculated using the straight-line method).
Allowances are granted only on the following conditions:
- The taxpayer must own the asset.
- Capital expenditure must be incurred.
- The asset must be used in the trade.
- The asset must be in use up to the end of the basis period.
- Capital allowances are granted for every year in which the asset is in use. Balancing allowances and charges are made, as the case may be, on disposal of the asset.
For intangibles, such as goodwill, patents, trademarks, and copyrights, the law allows for capital allowance deduction over the useful life of the asset.
Start-up expenses and pre-operating costs
Although the tax law does not specifically mention start-up expenses or pre-operating costs, generally a deduction is allowed for start-up and pre-operating costs incurred by a business, provided such expenses are wholly, exclusively, and necessarily incurred in the production of income of the taxpayer.
Interest incurred on loans used to generate the income of a business is ordinarily deductible. Restrictions apply on interest payments on related loans. See Thin capitalisation in the Group taxation section
Deductions for financial costs other than interest are limited to the sum of:
- financial gains derived by the person that are to be included in calculating the income of the person from the investment or business for the year of assessment, and
- 50% of the chargeable income of the person for the year from the business or investment calculated without including financial gains derived by the person or financial costs incurred by the person.
A deduction is allowed for bad debts incurred in the normal course of business, other than advances made on capital accounts. A bad debt is allowed as a deduction if the C-G is satisfied that the taxpayer has taken all reasonable steps to pursue payment and the person reasonably believes payment will not be made.
Any amounts recovered in respect of a bad debt previously written off should be included in income and subject to tax accordingly.
An existing debt that becomes a bad debt after a 50% or more change in underlying ownership is not allowed as a bad debt deduction after the change in ownership has taken place.
The following contributions/donations are allowable as deductions in ascertaining the taxable income of a person:
- Contributions made to a charitable institution or fund approved by the government.
- Payments towards a scholarship scheme approved by the government for a technical, professional, or other course of study.
- Donations made for the purpose of any rural or urban area and approved by the government.
- Donations for the purpose of sports development approved by the government.
- Donations to the government for worthwhile government causes approved by the C-G.
Fines and penalties
Fines and penalties arising as a result of non-compliance with the provisions of the tax law are generally not allowable deductions.
Any income taxes, profit taxes, or other similar taxes are not deductible in determining taxable income.
Other significant items
No other special deductions are allowed. Principal non-deductible expenses include the following:
- Domestic or private expenses, including cost of travel between residence and place of business or employment.
- Any disbursement or expense not being wholly and exclusively paid or expended for the purpose of acquiring income.
- Capital withdrawn or any sum employed or intended to be employed as capital.
- Capital employed in improvement.
- Any sum recoverable under an insurance contract of indemnity.
- Rent of or any expense in connection with premises or a part of premises not occupied or used for the purpose of producing business income.
- Any payment to a savings or other society or fund unless specifically allowed by the C-G.
Net operating losses
Tax losses can be carried forward for all sectors and deducted from assessable income for the three years immediately following the year in which the loss was incurred. Specified priority sectors can carry forward their tax losses for up to five years.
Carryback of losses is permitted for persons deriving income relating to a long-term contract (except where there is a more than 50% change in underlying ownership within a period of three years).
A long-term contract of a business includes a contract for manufacture, installation, or construction that is not completed within the company's accounting year in which it is commenced.
Payments to foreign affiliates
The Transfer Pricing Regulations 2012, (LI 2188) require that payments or transactions between persons in a controlled relationship are conducted at arm's length. A transaction is conducted at arm’s length between persons in a controlled relationship if the terms of the transaction do not differ from the terms of a comparable transaction between independent persons. The C-G may disregard or disallow transactions if they are deemed to be fictitious or do not have a substantial economic effect and the form does not reflect its substance.