Malawi

Taxable income is calculated by deducting allowable items from assessable income. Section 28 of the Taxation Act defines tax-allowable deductions as any expenditures and losses (not being of a capital nature) wholly, exclusively, and necessarily incurred by the taxpayer for the purpose of trade or in the production of income.

Capital allowances

Capital allowances (i.e. depreciation allowances) are applicable as stipulated in the Taxation Act at various rates.

Capital allowances, which are available to companies and individuals in business, are allowed as follows:

Notes

1. The 100% investment allowance is available only on new and unused qualifying assets, as indicated above, belonging to and used by a manufacturer or farmer. The rate for used qualifying assets is 40%. The investment allowance is claimable only in the first year of use.
2. Where an investment allowance is claimed, the initial allowance is not allowed to be claimed on the same asset. The initial allowance is claimable only in the first year of use.
3. Annual allowances at the above rates are based on cost less investment and initial and annual allowances previously granted.
4. Investment allowance on plant and machinery excludes motor vehicles intended or adapted for use on roads.
5. A 20% annual allowance is standard, but the Commissioner General may vary the amount.
6. No initial allowance is granted on private motor vehicles. These include saloons, sedans, station wagons, and double cabin pickups. However, the restriction does not apply where the motor vehicle is used for hiring purposes.
7. The building must be newly constructed at a cost of no less than MWK 100 million.

On disposal, assets are subject to balancing charges (capital gains) or balancing allowances.

If an asset is subject to extensive use, such as machinery working double shifts, so that its expected economic life is reduced, the Commissioner General may agree to increase the rates of annual allowances.

Lease, patent, trademark, and copyright premium

The tax-deductible amount of a premium paid for the right of use or occupation of land or buildings, plant or machinery, patent design, trademark, copyright, or any other property of a similar nature is one of the following:

• The amount of premium or consideration divided by the number of years for which the right of occupation or use is granted.
• Where the period for which the right of occupation or use is granted exceeds 25 years, the deduction is one-twenty-fifth of the premium or consideration.

The premium is tax deductible only where the asset or right with respect to which the premium or consideration is paid is used for the generation of income. If a taxpayer acquires ownership of the asset or right, no further deduction of the premium or consideration is allowed from the date ownership is acquired.

Goodwill

The legislation does not prescribe treatment for goodwill. It has been the practice that goodwill is not deductible for tax purposes.

Pre-operating expenditures

A manufacturer may claim as a deduction any expenditure incurred in the course of establishing the business, provided that the following are true:

• The expenditure was incurred not more than 18 months before commencing business.
• The expenditure would have been allowed as a deduction if it had been incurred after commencing business.

Interest expenses

Interest that arises out of financing operations is allowable, while interest due to late payment of a debt is not allowable. Due to thin capitalisation rules, interest is deductible for up to a debt-to-equity ratio of 3:1.

Bad debt

Specific bad debts provisions are tax deductible and taxable in the following year. Bad debts written off are allowable and taxable upon eventual recovery.

Charitable contributions

Donations to approved charities and approved non-profit institutions formed for the purpose of social welfare, civic improvement, educational development, or other similar purposes are deductible. The maximum sum of donations allowable is MWK 5 million.

Social contributions

50% of social contributions towards construction of hospitals and schools, and sponsorship of school sports activities, are tax deductible.

Allowance for employing a person with disability

An employer can claim an allowance equal to 50% of an amount paid as basic salary to an employee with disability as defined by the Disability Act.

Export allowance

An exporter of non-traditional goods is granted an export allowance as follows:

• 30% of taxable income for processed goods.
• 10% of taxable income for unprocessed goods.

Research and development (R&D) expenditures

Research expenditures are fully allowable as a deduction if they are for 'experiments and research relating to trade'.

Pension contributions

The tax-allowable amount of ordinary pension contributions made by an employer to an approved pension fund is subject to limitations. The limit with respect to each employee is the lowest of one of the following per annum:

• The actual contribution.
• Up to 15% of employee's annual salary.

Fines and penalties

Fines and penalties are not tax deductible in any way.

Taxes

Taxes are not allowed as deductible expenses, except where they are local taxes.

Net operating losses

Current taxable income may be offset against net operating losses brought forward, and current operating losses may be increased by net unexhausted trading losses brought forward. Losses may be carried forward for six years. Net operating losses may not be carried back.

Payments to foreign affiliates

A deduction is allowed for payments to foreign affiliates if such payments are expended wholly, exclusively, and necessarily for the production of income or for the purposes of trade, and it can be demonstrated that the transaction is at arm's length.