In calculating taxable profit, deductions are allowed for revenue expenditures incurred wholly and exclusively in the production of income, with some statutory exceptions. For capital expenditures, there are specific tax depreciation allowances.
There are special rules with regard to the valuation of trading stock and long-term contracts and in relation to the treatment of instalment sales and finance leases.
There is ring-fencing of mining or petroleum operations by reference to the relevant mining or petroleum licence area.
The categories of depreciable assets and their tax depreciation rates are set out in the table below.
Expenditures on plant and machinery are generally written off on a reducing-balance basis at rates of 37.5%, 25%, or 12.5%, depending on the category of the asset. Certain plant and machinery for manufacturing, fish farming, and tourist hotels benefit from a 50% allowance in the first year, with the normal rates applying to the remaining balance in subsequent years. There is an immediate write-off of expenditures on plant and machinery used in agriculture.
Expenditures on buildings qualify for a depreciation allowance of 5% per year on a straight-line basis. For intangible assets, the write-off is over the useful life of the asset.
Apart from the immediate write-off of plant and machinery, agricultural businesses also benefit from the immediate write-off of agricultural improvement expenditures (including the costs of clearing land, excavating irrigation channels, and planting perennial crops or tree bearing crops). Buildings, structures, dams, water reservoirs, fences, and similar works of a permanent nature used in agriculture, livestock, or fish farming are written off on a straight-line basis over five years.
A 100% capital deduction applies to capital expenditure (i) by mining companies on prospecting, exploration, and development and (ii) on petroleum prospecting and exploration.
Depreciation allowances rates
||Computers and data handling equipment, together with peripheral devices; automobiles, buses, and minibuses with a seating capacity of less than 30 passengers; goods vehicles with a load capacity of less than seven tonnes; construction and earth-moving equipment.
||Buses with a seating capacity of 30 or more passengers, heavy general purpose or specialised trucks, trailers, and trailer-mounted containers; railroad cars, locomotives, and equipment; vessels, barges, tugs, and similar water transportation equipment; aircraft, other self-propelling vehicles; plant and machinery (including windmills, electric generators, and distribution equipment) used in agriculture or manufacturing; specialised public utility plant, equipment, and machinery or other irrigation installations and equipment.
||Office furniture, fixtures, and equipment; any asset not included in another class.
||Buildings, structures, dams, water reservoirs, fences, and similar works of a permanent nature used in agriculture, livestock farming, or fishing farming.
||Buildings, structures, and similar works of permanent nature other than those mentioned in Class 5.
||1 divided by the useful life of the asset in the pool and rounded down to the nearest half year
||Plant and machinery (including windmills, electric generators, and distribution equipment) used in agriculture and electronic fiscal devices purchased by a non-VAT-registered trader; equipment used for prospecting and exploration of minerals or petroleum.
Interest in land
Interest in land does not qualify for depreciation allowance as it is excluded from the definition of 'depreciable asset'.
Goodwill does not qualify for depreciation allowance as it is excluded from the definition of 'depreciable asset'.
Start-up expenses are deductible to the extent that they meet the general deduction criteria (i.e. they are revenue in nature and were incurred wholly and exclusively in the production of income). The definition of 'business' includes a prospective business.
Interest expenses are deductible on an accrual basis, subject to thin capitalisation rules as detailed in the Group taxation section.
In order to claim relief for a bad debt, it is necessary to demonstrate that all reasonable steps have been taken to pursue payment and that there is a reasonable belief that the debt claim will not be satisfied.
The Income Tax Act allows deduction for contributions made:
- to charitable institutions (approved by the Commissioner to operate as such) and social development projects
- under Section 12 of the Education Fund Act 2001, or
- to local government authorities under statutory obligations to support community developments projects.
The deduction available under item (i) above is restricted to 2% of the company's taxable income before such deduction.
Fines and penalties
Fines and similar penalties payable to a government or a political subdivision of any country for the breach of any law or subsidiary legislation are not deductible.
Taxes payable under the Income Tax Act 2004 are not deductible.
WHT paid by withholder
WHT paid by withholder is not deductible.
Net operating losses
There is no limit on the carryforward period for tax losses. However, there is ring-fencing of tax losses as follows:
- Losses from agricultural business can only be offset against profits derived from agricultural business.
- Losses from one mining licence area can only be offset against profits from the same mining licence area.
- Losses from one petroleum licence area can only be offset against profits from the same petroleum licence area.
- Foreign-source losses can only be offset against foreign-source profits.
- Losses on investments can only be offset against investment income.
- Foreign-source losses on investments can only be offset against foreign-source investment income.
- Losses incurred on speculative transactions can only be offset against income derived from speculative transactions.
In addition, the deductibility of the losses carried forward is restricted (for holders of a petroleum exploration licence, mineral licence, and licence in respect of midstream and downstream activities) such that only 70% of the taxable profits of the company can be sheltered by losses brought forward (with any excess losses carried forward to future years).
In certain circumstances, tax losses may be forfeited on a change in the underlying control of an entity.
Tax losses can be carried back only in long-term contracts in a case where a contract is completed and a person has unrelieved losses for that period or a previous period that is attributable to the long-term contract. These losses can then be carried back to a previous year of income and treated as unrelieved loss for that year.
Payments to foreign affiliates
Payments to foreign affiliates are deductible to the extent they are wholly and exclusively incurred in the production of the company's income. The deduction is subject to transfer pricing provisions as detailed in the Group taxation section.