This write up, seeks to provide guidance on what qualifies as financial cost for the purposes of Section 16 of Act 896.
Per Section 9 of the Income Tax Act, 2015 (Act 896), all expenses which are wholly, exclusively and necessarily incurred in the generation of income from business or investment are deductible in determining the chargeable income from the business or investment. This is a general rule which is subject to any specific rule provided in the Act.
Financial cost in most cases, qualify as an expenditure that has been wholly, exclusively and necessarily incurred in the generation of income.
A person incurs financial cost when that person incurs losses with respect to a financial instrument with the exception of interest. However, Section 16 of Act 896 places a limitation on how much of financial cost other than interest can be deducted in calculating the chargeable income of a person from an investment or a business.
Latest CJEU, EFTA and ECHR
CJEU decisions on progressive tax on turnover and fines related to advertising tax
On March 3, 2020, the Court of Justice of the European Union (CJEU) rendered its decisions in three cases, (C-482/18), (C-323/18) and (C-75/18), each of which concerned aspects of Hungarian law. The CJEU decided that the EU freedom of establishment does not preclude Member States from levying a progressive tax on turnover, the actual burden of which is mainly borne by companies controlled from another Member State. The Court also ruled that Hungarian advertisement tax penalty regime disproportionately affected companies located in another EU Member State and was therefore contrary to the EU principle of freedom to provide services.
For more information, please refer to Euro Tax Flash Issue 426.
Rules in Respect of Deduction of Financial Cost
- Financial cost does not include interest.
- The quantum of financial cost that can be allowed for tax deduction in the year in which it is incurred is limited to the sum of financial gain and fifty percent (50%) of chargeable income from the business or investment without the financial cost or gain.
- Financial cost that has been disallowed for tax deduction can be carried forward for the following five (5) years of assessment.
- Financial costs that are carried forward shall be used in the order in which they were incurred