The disconnect between tax laws and accounting treatment – A Botswana and Rwanda context
Monday, November 25, 2019

Should tax laws be in sync with the International Financial Reporting Standards (IFRS)? While the IFRS adopts a universal approach, tax laws are often jurisdiction specific. The tax computation does not reflect the real financial performance of a company but rather shows a result of taxation which is to determine the tax payable/tax due for a company.

Even so, to what extent do tax laws contradict the IFRS. According to the report by the World Bank Centre for Financial Reporting Reform, the fundamental purpose of IFRS consolidated accounts is not to support computations prepared for taxation purposes but rather to meet the needs of investors as providers of risk capital to an entity.  This article makes a comparison of accounting treatment (IFRS based) versus tax treatment in the companies’ books.

To comply with Income Tax Act, companies adjust profit before income tax (determined in terms of IFRS) to arrive at assessable income and eventually income tax expense and income tax due or receivable from the tax authorities.

Usage of assets

International Accounting Standard (IAS 16) Property, Plant and Equipment provides that assets be depreciated over period of use in a systematic manner. The depreciation recognises value derived by the entity from usage of the asset and the depreciation charge is recognised in profit and loss. When companies in Rwanda are preparing the books of accounts, the depreciation charge will be based on the organisation’s practice with regard to the timeline given on the use of the asset. For the purposes of the corporate income taxes computation however, the deprecation charge is added back and a computation is done based on the rates given by the Rwanda Revenue Authority. For instance Article 24 of the compilation of the fiscal laws provides that computers and accessories, information and communication systems, software products and data equipment depreciated at 50 % and all other business assets depreciated at 25%. These rates could ultimately differ from the rates used during preparing the books of accounts. IAS 16 Property Plant and Equipment additionally provides that where a Revaluation model is applied, any revaluation loss be recognised in the profit and loss except to the extent that it reverses the previous revaluation gain recognised in other comprehensive income.

These treatments are not recognised in the tax law and therefore to arrive at assessable income, any amount recognised in profit and loss arising from the above is added back to profit or loss before income tax.

Capital allowances

The Botswana Income Tax Act recognises value derived from use of assets through provision of deductible capital allowances. The act provides a schedule for determination of capital allowances across different assets classes. These allowances are deducted from profit before tax. Given that carrying amount of assets for accounting purposes would at any point in time vary from tax value of the same asset, at the date of asset disposal gain or loss would be adjusted for in profit before tax to determine tax expense. The Botswana Income Tax Act recognises balancing charge and balancing allowance as excess of proceeds over tax value and excess of tax value over proceeds respectively. From a Rwanda perspective, an investment allowance of 40% of the invested amount in new or used assets may be depreciated excluding motor vehicles that carry less than eight persons, except those exclusively used in a tourist business is deductible for a registered investor in the first tax period of purchase and/or of use of such an assets if: the amount of business assets invested is equal to thirty million Rwandan francs and the business assets are held at the establishment for at least three tax periods after the tax period in which the investment allowance was taken into consideration. The investment allowance becomes 50% if the registered business is located outside Kigali or falls within the priority sectors determined by the Investment Code of Rwanda. The investment allowance reduces the acquisition or construction cost, as well as the basic depreciation value of pooled business assets.

Provision for doubtful debts

While general provision for doubtful debts are allowed for accounting purposes, Income Tax Acts in both Botswana and Rwanda provide that bad debts can only be provided for the extent that they are specific i.e. known customers and amounts, as opposed to percentages of trade debtors. Specifically, article 31 of the Rwanda’s Income Tax Law Official Gazette nº16 of 16/04/2018 states that in the determination of business profit, a deduction is allowed for bad debts if the following conditions are fulfilled: if an amount corresponding to the debt was previously included in the income of the taxpayer; if the debt is written off in the books of accounts of the taxpayer and if the taxpayer has taken all possible steps in pursuing payment and has shown a court decision declaring the insolvency of his/her debtor. However, commercial banks and leasing entities duly licensed as such are allowed to deduct from taxable income, any increase of the mandatory reserve for non-performing loans as required by the directives related to management of bank loans and similar institutions of the National Bank of Rwanda

Foreign exchange gains and losses

From both the Rwanda and Botswana perspective, for accounting purposes, both realised and unrealised forex gains and losses are recognised. Unrealised forex gains and losses are disallowed for income tax purposes.

Donations and citizen training

According to the Botswana Income Act, any donations and training provided by an entity are recognised as normal operations expenses in accordance with accounting treatment. For tax purposes, only approved donations to educational Institutions and to sport clubs and association above set threshold are allowable. The Income Tax Act allows 200% deduction in ascertaining assessable income any amounts incurred by companies for citizen training.

On the other hand, the Article 26 of the income tax law of Rwanda includes donations as among the non-deductible expenses while computing the corporate income tax. An exemption is however made for donations given to non-profit making organisations the value of which does not exceed 1% of the turnover.

In conclusion, the differences between the accounting treatment and tax laws require adjustment in order to prevent a distortion of book income. While each revenue authority sets its tax laws depending on the country’s economic objective, it would perhaps be ideal for tax policymakers to accommodate existing international accounting standards and the IFRS so as to allow consistency in the audited financial statement and the declared taxes.

Mosireletsi M. Mogotlhwane, from Botswana, and Aimee Dushime from Rwanda, are Chartered Accountants and Mandela Washington alumni from Andrew Young School of Policy Studies (AYSPS). The opinion is of the authors and does not necessarily represent the views of AYSPS nor the organisations they work for.