For a long time, a main concern of banking and financial institutions, the tax deductibility of losses on debts, had finally been enshrined in Senegal by decision of the Minister of Finance No. 01719/MEFP/CAB/CT JK of 4 March 2019.
However, to provide more legal certainty to the actors and especially to comply with community legislation, in particular the 2020 WAEMU Directive on the harmonisation of the tax regime of credit losses, the Initial Finance Law for the year 2023 (IFL) adds a point 10 to Article 10 of the GTC, enshrining the deductibility of losses on debts recorded by lending institutions.
This reform allows, at least with regard to this issue, the reconciling of the prudential standards in the banking sector with those of tax, since the provisions of the instruction of the BCEAO No. 026-11-2016 of 15 November 2016 have always stipulated to banking companies to write off debts classified as doubtful or disputed at the end of the fifth accounting period from the transfer to the doubtful debts account.
However, for the benefit of the tax deductibility of credit losses enshrined in the IFL 2023, banking and financial institutions are required to meet certain substantive and formal requirements:
Substantive requirements
- The debt must be granted in compliance with the prudential framework to which credit institutions are subjected;
- The debt must be qualified as doubtful or litigious, in accordance with the provisions of the Banking Chart of Accounts (BCA);
- The debt must remain uncollected at the end of the fifth accounting period from the date of its transfer to the doubtful or disputed debt account.
Formal condition
- A detailed statement of loss must be attached to the corporate tax return, specifying the identity of the debtor, the date the loan or credit was granted, the original amount, the amount still to be recovered, the amount written off, the nature and value of the collateral, the date the debt was transferred, and the stage of the collection procedure.
Exceptions
However, it should be noted that this deduction does not apply to:
- debts against the state, public bodies and debts granted to related parties as defined by the banking regulations.
- debts for which no collection action has been taken as well as those for which collection actions, although carried out, have been abandoned without failure recorded by a ministerial officer, either because a settlement agreement, in whole or in part, has been reached between the creditor and their debtor, or for any other reason resulting from the desire of the credit institution to put an end to the legal proceedings.
In a nutshell, this new measure is very consolidating for the taxation of banking institutions, but it is deplorable that it has not been extended to the institutions in the microfinance sector (IMF), which are confronted with the same problems as the banking institutions on the issue of credit losses. Indeed, in the same way, the IMF is also obliged to write off certain bad debts but without benefiting from this preferential tax regime.
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