Changes To Irrecoverable Debts

The Department of Direct Taxes has given the following clarification concerning irrecoverable debts in a recent letter:

With effect from 1 January 1997, there now exists the possibility of recognising debt written off as irrecoverable as a revenue earning cost.

This may occur where the cost of legal proceedings relating to the collection of the debt would exceed the amount of the debt itself. Article 16.125 of the Tax Code states that a provision against a bad debt will only be deductible if it is probably irrecoverable and certain criteria have been already satisfied, such as initiating legal proceedings. The changes now allows tax deductibility where theses criteria have not been met. Hitherto, a provision could be created, but it would not be tax deductible.