Taxable business profits are determined on the basis of net profit for financial accounting purposes in accordance with International Financial Reporting Standards (IFRS), subject to certain modifications in the Tax and Duties Act (TDA). In general, income is assessable when 'receivable', while expenses are deductible when 'payable'. A taxpayer with turnover of less than USD 100,000 may, however, elect to pay tax on a cash basis.
Gross income is defined widely to mean “any realised increase in economic capacity in whatever name or form which can be used for consumption or to increase the wealth of the taxpayer other than wages that are subject to Wages Income Tax (WIT)".
The gross income for a tax year is the total amount earned by the taxpayer, including, but not limited to, business income, property income, lottery prizes or awards, and refunds of tax payments previously deducted as an expense.
There are no specific provisions dealing with inventory valuation in Timor-Leste. This is because a deduction is allowed for the cost of inventory incurred during the tax year even if the inventory is on hand at the end of the year.
Gains and losses arising from the alienation of assets are generally assessable and deductible as ordinary income and subject to tax at the standard CIT rate.
Dividends are tax exempt in the hands of Timor-Leste residents.
Interest income is generally assessable as ordinary income and subject to tax at the standard CIT rate.
Royalty income is subject to a 10% WHT.
If the royalty payment is to a resident non-individual, the WHT is creditable for income tax purposes.
If the royalty payment is to an individual, the 10% WHT constitutes a final income tax.
The following income is tax exempt:
- Any aid or donations, provided that the donor and recipient do not have any business or control relationship.
- Gifts received by a religious, educational, or charitable organisation, provided that the donor and recipient do not have any business or control relationship.
- Assets (including cash) received by a resident in exchange for shares or a capital contribution.
- Any amount paid by an insurance company to a resident in connection with accident or life.
Under the worldwide income principle, a resident taxpayer is required to calculate income that is not only Timor-Leste sourced but also foreign sourced. In the case that the foreign-sourced income is taxed at source, Timor-Leste allows a foreign tax credit for the particular tax year (see Foreign tax credit in the Tax credits and incentives section).
With regard to profits retained in controlled foreign companies (CFCs), Timor-Leste does not currently have any arrangements to otherwise deem the repatriation of the profit.