Brief: How Does the Tax Administration in Cameroon Treat Losses Arising from Misappropriated Funds and Fraud
Fraud, misappropriation or embezzlement of funds in businesses especially public corporations is not new in the ears of Cameroonians. In fact Cameroon has climbed the podium several times as one of Transparency International Corruption Perception Index’s number one.
Now what many do not know is that money that is embezzled, used fraudulently or misappropriated are non-deductible expenses in the taxable income. This came into effect in the 2018 Finance Law where a clause was added into Section 7 of the General Tax Code of Cameroon:
Section 7: “Net taxable profit shall be established after deduction of all costs directly necessitated by the exercise of activities subject to assessment in Cameroon, in particular:
C – Losses
The following shall be deductible from profit:
“losses on items of fixed or realizable assets, except losses resulting from misappropriation by a partner or a manager of the enterprise, or where misappropriation is a result of negligence on the part of managers.”
In effect, the above section in the General Tax Code of Cameroon makes it clear on the non-deductibility of embezzled or misappropriated funds. This means losses linked to these are reinstated to the taxable income. The 2018 Finance Law therefore was put in place to regulate the rules governing the deductibility of transactions related to fraud or misappropriation and how they are determined in the company tax.
In my opinion, this law came in too late. Cameroon has lost a lot of money from the embezzlement and misappropriation of funds. I am sure if such a law had been put in place, managers of public enterprises in particular won’t have had a free hand in running things. This is because the law provides that the misappropriated funds are non-deductible in the taxable income and is attributed directly or indirectly to the managers or wrongdoer.
It should be noted that when business funds are used for unauthorized purposes, the financial position of those using it normally improves. Their wealth increases even though they have no plans of paying the debt. Let’s what Section 7 (C) of the tax code got for us.
In other to implement the change, a Ministerial Circular No. 003/MINFI/DGI/LRI/L of 15 January 2018 outlines the application modalities of the 2018 Finance Law. It brought modalities on how to implement in the case of losses arising from fraud or misappropriation when accounting for company tax.
The circular defines misappropriation as “the fraudulent appropriation of a company’s assets by various means”. The means listed includes theft, fictitious acquisitions, extra-billing, false invoices, misuse of means of payment or checks, fake loans and so on.
In this case, the loss due to embezzlement is a non-deductible expenses if it is directly or indirectly attributable to either the partners or managers (directors) of the company. The misappropriation is directly attributable to the managers or associates in the case where it is committed by them or when they assisted in committing it.
Managers or directors are those who assume positions of responsibility within the company. This include the likes of Managing Directors, Managers, Directors, Deputy Director General and other corporate managers.
The circular also states that the manager is indirectly responsible in the case where misappropriation is due to negligence. Negligence comes in when there is obvious deficiency in the organization of the company or in the implementation of the audit procedure aimed at limiting the risk of fraud. For example, when a business that is bound by the law to recruit an auditor but doesn’t do so. In such a case, the manager is indirectly attributable to misappropriation.
Also, a manage can be liable if the embezzlement is done by an employee, This means it may be indirectly attributable to the manager if proper audit procedures are absent.
However, the company alone can decide whether the manager is non-attributable to misappropriation. This of course must be ascertained by the auditors, external auditors or courts in the case where a complaint was lodged against the company’s managers.