For the first time in Trinidad and Tobago (and in the Commonwealth Caribbean), the Tax Appeal Board of Trinidad and Tobago permitted a taxpayer to claim a tax deduction for a provision made in respect of “doubtful” debts. In lay terms, a provision for doubtful debts is a taxpayer’s estimate as to the quantum of debts (receivables) it is unlikely to receive in any given year. This is distinguishable from a bad debt, which is a debt that has been written off by the taxpayer as uncollectible (usually following the taxpayer’s unsuccessful attempts to collect the same from the debtor).
Facts & Argument
The subject matter of the appeal was the taxpayer’s corporation tax return in which a claim was made for both bad and doubtful debts pursuant to section 11(1)(c) of the Income Tax Act. The Board of Inland Revenue allowed the claim for bad debts, but disallowed the claim for doubtful debts on the basis that:
(a) The calculation is a general provision and is not specific to any particular debtor;
(b) The debts that became bad during the year of audit were specifically written off as bad in the Profit and Loss Account.
(a) Does the Income Tax Act have a regime for doubtful debts deductions as distinct from bad debts?
(b) What is the meaning of “general” and “specific” provision?
(c) What does ‘respectively estimated’ mean?
This case has significant implications for any company, which in the course of business, extends credit terms to its customers (e.g. financial institutions or companies that sell products on hire purchase terms). It demonstrates that in the appropriate circumstances a company may make a provision for questionable accounts, which is deductible for tax computation purposes, without having to wait until the debt is written off as bad or uncollectible.
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