On 5 March 2021 the Minister of Finance, Funds and Regional Policy issued a public tax ruling regarding the quantification of tax-deductible costs attributable to sale of own receivables under factoring contracts.
The ruling applies where a taxpayer (principal) uses a factoring contract to assign to another party (factor) so-called “own receivables”, meaning claims under taxpayer’s earlier sales of goods or services to some third party (debtor).
Previously there was no uniform line of authority on how the taxpayer should recognise tax-deductible costs on such a transaction. The interpretation split arose from Article 16(1)(39) of the CIT Act, which says that losses on sale of receivables for a consideration are not tax-deductible, except where the receivables have been wholly or partly accounted for as income receivable, in which case so much of the receivables as has been so accounted for may be deducted for tax purposes
The subject ruling resolves the interpretation split to confirm two essential points:
• the amount to be taken into account in the calculation of tax-deductible costs in such a situation is the gross amount receivable (i.e. the full amount, including VAT); and
• the limit under Article 16(1)(39) of the CIT Act applies only to losses which are deductible up to what has been previously recognised as income receivable in the net amount.
The ruling ends construal disputes about how to calculate tax-deductible costs in those situations and in this sense it is favourable. It also shows the taxpayers what to do to properly calculate those costs:
• Determine whether and how much cost has been incurred for the purposes of the CIT Act; this will generally be the nominal gross amount of the sold receivables.
• Determine if the sale of receivables has generated a loss.
• If no loss is involved, then the cost will be tax-deductible in full.
• If there is a loss, and the sold receivables have been accounted for as income receivable, then it is necessary to determine the proportion of the loss to that income.
• If the loss is higher than the income, the difference should be deducted from the cost and it is only the cost so decreased that may be deducted for tax purposes.
• If the loss is lower than or equal to the income, then the cost is tax-deductible in full.
The ruling also makes it clear that taxpayers assigning their own receivables to factors pursuant to factoring contracts should recognise income “again” because this is a transaction separate from the original sale of goods or services.
If this issue pertains to your business and you are interested in our assistance, please contact your WTS&SAJA consultant.
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