Calculation of Income – Deductible Expenses

Under the new Income Tax Law, all legitimate business expenses directly or indirectly related to earning, collecting, or maintaining income are deductible from the assessable income to calculate the taxable income. These expenses include but are not limited to:

1. Expenses that are directly or indirectly related to business activity such as:

•   Material expense;
•   Salary, wages expense;
•   Interest, dividend and royalty;
•   Traveling expense;
•   Insurance premium;

2. Depreciation and amortization expense;

Promotion and selling expenses, provided that a nominative list in a required format is available and the expenses constitute the cumulative amount of the following costs:

• Costs of advertising in electronic media, print media, and/ or other media;
• Costs of product exhibition;
• Costs of introducing new products;
• Costs of sponsorship associated with product promotion;

3. Losses from the sale or transfer of assets that are owned and used in a company or that are owned to obtain, collect and maintain income;

4. Contributions to a pension fund approved by the MoF;

5. Write-off of uncollectible receivables for certain transactions, provided that the following conditions are met:

• The write-off must have already been booked as expense in the commercial income statement of the creditor;
• The taxpayer must submit a list of uncollectible receivables to the DGT; and
• The collection case has been brought to the District Court or the government or there is written agreement on nullification of accounts receivables/ debt release and discharge between the creditor and debtor concerned; or it has been announced in general or special publications; or the debtor acknowledges that its debts have been nullified for a certain amount;

6. Donations and expenses for handling national disasters, research and development, educational facilities, sports development, and construction of social infrastructure, as long as the fund/donations are made directly through the relevant authorized institution and the following requirements are met:

• The previous year’s corporate income tax return of the taxpayer that  claims such donation expense must be in a fiscal profit position;
• The donation is supported with sufficient supporting documentation;
• The institution that receives the donation must be registered as a taxpayer, except for those that are exempted by Law and is not a related party of the contributor;
• The total donations or expenses for one fiscal year should not exceed 5% of the previous year’s fiscal profit.

 

There are also certain requirements that must be fulfilled in terms of type or form of donation and how to value the donation that is not made in the form of cash.

7. Compulsory Tithe (―Zakat) or religious contribution, provided that valid supporting evidence is available and certain requirements are met;

8. Non-creditable input VAT that has been paid and incurred from a transaction that is related to the activity of generating, collecting, and maintaining income.  If the input VAT relates to an asset that has useful life of more than 1 (one) year, it must be capitalized and expensed through amortization or depreciation.