Re: Bad and doubtful Debts – Guyana Association of Bankers Inc. & The Institute of Chartered Accounts of Guyana

Georgetown, Friday, March 1, 2019:   

The mission of the Guyana Revenue Authority (GRA) is to promote compliance with Guyana’s Tax laws, administer tax legislation in a fair, transparent and consistent manner, and deliver quality services to all taxpayers. We also aim to achieve confidentiality in taxpayer’s affairs in executing our mandate.

Recently, the governing bodies of the Banking Sector and the Institute of Charter Accountants of Guyana (ICAG) expressed by way of press statements and releases, responses to national media articles and attributed to the Commissioner General, over the treatment of certain expenses and the application and relevance of the Income Tax Act in the determination of Chargeable Profits/Income for companies and business which they manage or audit.

On the issues raised by the Banking Association, the GRA has noted that stated therein that they sought and received opinions from the legal and accounting professions. Being no stranger to either profession, I will not comment thereon since the said association and the GRA had and continue to have discussions with a view of devising a way in which records can be kept to satisfy compliance with the relevant legislation. However, on the issues raised by the ICAG, of which I have been a member for the past 26 years, I hasten to respond only on the basis of ethical responsibility and “the public interest principle” by which the Accounting professionals should be guided.

An accountant in public practice has a responsibility to his clients, investors and creditors, as well as regulatory bodies such as the Guyana Revenue Authority. They are statutorily responsible to give an objective opinion on the reliability and objectivity of the financial statements of their clients and to provide reasonable assurance that such are free of material misstatements and errors and are in accordance with all relevant laws, applicable accounting principles, conventions and standards.  

The public interest principle dictates that “Members should accept the obligation to act in a way that will serve the public interest, honor the public trust, and demonstrate a commitment to professionalism”. This means that the public who relies on the accounting profession expect them to discharge their responsibilities with integrity, objectivity, independence, due professional care and consideration and a genuine interest in serving the public.

Further, in discharging their professional responsibilities, members may encounter conflicting pressures from various stakeholder groups. In resolving possible clash of conflicts, members should act with integrity, guided by the precept that when they fulfill their responsibility, the interest of the public and all other stakeholders are best served.
That being said, the release by the ICAG is deceptive and apparently intended to deliberately mislead the general public and the clients that they serve, since they have taken selective excerpts of the Income Tax Act and the IFRS standards and deliberately chose to omit or made minimal or no mention to other relevant sections of the said Act, which must be read contextually and to give rise to the obvious nexus.  Further, the ICAG as a body or individual influential members who comprised the Council, never engaged (or seemed inclined to) the GRA on this matter with an aim to have a meaningful discourse and attain clarity.

The GRA wishes to unequivocally restate that its actions and or inactions are always   guided by and supported by legislation and other regulatory framework as well as accounting principles, conventions and standards such as the applicable   IFRS /   IAS in its treatment of bad debts and in its request for additional information to determine the validity and veracity of the expense claimed. Section 16 (e) of the Income Tax Act states as follows:

“bad debts incurred in any trade, business, profession or vocation, proved to the satisfaction of the Commissioner-General to have become bad during the year immediately preceding the year of assessment and doubtful debts to the extent that they are respectively estimated to the satisfaction of the Commissioner-General to have become bad during that year notwithstanding that the bad or doubtful debts were due and payable prior to the commencement of the year, provided that all sums recovered during that year on accounts of amounts previously written off or allowed in respect of bad or doubtful debts be treated for the purposes of this Act as receipts of this trade.”

The four (4) points articulated by the ICAG are correct! However, with one caveat, they have failed to advise the public that the “bad debts claimed or the doubtful debts provided for must be proven/estimated to the satisfaction of the Commissioner General to have become bad”, this, it appears is a deliberate omission with the intent to mislead and or misinform.

These very words “bad debts claimed or the doubtful debts provided for must be proven/estimated to the satisfaction of the Commissioner General to have become bad” dictate that the Revenue Authority must be satisfied that the expenses claimed were reasonable, not excessive and incurred in the production of income. Additionally, many institutions have related party lending / loans, whereby they lend to their shareholders and friends. Surely, any associated write-offs from these transactions should not be provided for and if it is, would not be allowed.

Further, in today’s world of diversification and portfolio investment, businesses have income from various sources (I sincerely hope that all such sources are declared), some of which however, are exempt from taxation by virtue of the applicable law. It would therefore be against all accounting and legal principles for bad debts associated with exempt income be allowed as a deduction against taxable income. In view of this, the Authority requested additional information to determine the basis for the provision for doubtful debts, or the allowance for doubtful accounts, the rationale for writing off the debt and the steps taken, including the specific factors considered before the debts were deemed irrecoverable or uncollectible.

Note should be taken that in order for a debt to be written off, the business must prove that it occurred in the operation of the specific trade or the business. These include, but is not limited to, Loans to clients and suppliers, Credit sales to customers or Business loan guarantees. Bad debts can be deducted in part or in full, using either the specific charge-off method or the non-accrual-experience method. Debts become worthless or un-collectible when the surrounding facts and circumstances indicate there is no reasonable expectation of payment, or the cost of collection exceeds the amount to be collected. To show that a debt is worthless, the lender must establish that they have taken reasonable steps to collect the debt, but were unable to do so. The deduction should be taken only in the year the debt becomes worthless, and the businesses applying the prudent concept, do not have to wait until a debt is past due to determine that it is worthless / unrecoverable.

Financial Statements of companies are usually prepared in accordance with the relevant guidelines and accounting standards, albeit, there is a requirement to convert accounting profits stated therein into taxable income using the relevant tax laws. Every Accountant is privy to IAS12 which advises on the methods used when “Accounting for Income Taxes”. Basically, this standard advises on the conversion of a company’s financial profits into taxable profits by utilising temporary and permanent differences based on tax legislation. Consequently, notwithstanding the increase in the reserve and provision requirements of the Bank of Guyana, these have no relevance in arriving at taxable income. A doubtful debt, like depreciation (temporary differences, favorable / unfavorable) is an account receivable that might become a bad debt at some point in the future, while an actual bad debt is an account receivable that has been clearly identified as not being collectible. Since a provision is an amount that is put  aside in the accounts to cover a future liability, the higher the provision that is determined by management of the business,  and if accepted by the GRA, the less taxes payable by the taxpayer. Hence the rationale that any provision for doubtful debts must be estimated to the satisfaction of the Commissioner-General to have become bad during the year.

During a recent press conference on February 1, 2019, I explained in response to a question from the press on the subject of the provisions for bad debts in the banking sector, that Commercial Banks must indicate what actions were taken to recover the debts before they were considered bad. More importantly, in computing the bad debts, the value of the underlying collateral must be considered and provisions for bad and doubtful debts should not be claimed for tax purposes.

The GRA admits that unfortunately it was contributory negligence where bad and doubtful debt provisions were allowed/accepted without question for year. This will be taken into account when resolving this issue with all companies, and not only the Financial Institutions. We are in the process of improving the administration of taxes hence all taxpayers are reminded to comply with the tax laws, as this takes precedence over the guidelines and accounting standards.

Godfrey Statia
Guyana Revenue Authority