Section 7 General Tax Code: Determining Net Taxable Profits

Section 7 of the General Tax Code outlines the process for calculating net taxable profits. It details the deductions and allowable charges directly linked to business operations. Understanding these provisions is crucial for businesses aiming to optimize their tax liabilities.

Key Provisions for Net Taxable Profits

Net taxable profit is determined after deducting all charges directly incurred from activities subject to taxation in Cameroon. These include:

A. Overhead Expenses

Overhead expenses cover all types of expenditures necessary for business operations, including:

1. General Overheads:
   • Expenses related to staff, labor, offices, equipment, and furniture.
   • Includes sundry and exceptional expenditure as well as insurance premiums.
2. Sundry Remunerations and Provision of Services:
   • Staff Pay:
     • Salaries and wages paid to employees are deductible, provided they are reasonable in comparison to the services rendered.
     • Deductions apply to direct and indirect payment, including:
       • Compensations.
       • Allowances.
       • Benefits in kind.
       • Reimbursement of expenses.
     • Note: A deduction of 15% is applied to the basic salary (excluding other social welfare contributions) paid abroad for the mandatory pension of expatriates.
   • Attendance Fees:
     • Fees granted to members of the board of directors are deductible only if they represent compensation for actual work done.
   • Fixed Allowances:
     • Fixed allowances for managerial or senior staff as entertainment and travel expenses are non-deductible. They must correspond to actual business expenses. Allowances that do not show real expenses will be reinstated into operating results.
   • Non-Business Expenses:
     • Expenses related to hunting, angling, pleasure boats, tourist planes, and pleasure homes are not deductible.
3. Acts of Liberality, Gifts, and Subsidies:
   • Such expenses are deductible only if they are documented and justified. Payments to philanthropic or research organizations in Cameroon must not exceed 0.5% of turnover.
4. Head Office Overheads and External Services:
   • Payments for head office overheads or technical assistance services are deductible, capped at 2.5% of taxable profit. For firms in continuous deficit or new companies, this cap applies to 1% of turnover.

B. Financial Costs

1. Interest on Loans:
   • Interest on sums made available by partners is deductible only if:
     • It does not exceed the Central Bank rate plus two percentage points.
     • The sums do not exceed 1.5 times the company’s equity.
     • Interest does not surpass 25% of pre-tax profit before deductions for interest and depreciation.
2. Rental Expenditure:
   • Rentals are deductible as long as they are not exaggerated compared to similar market properties. Rentals paid to partners holding at least 10% of company shares are subject to extra scrutiny.

C. Actual Losses

1. Deductible Losses:
   • Losses on fixed or realizable assets, excluding those due to mismanagement.
   • Losses from bad debts where recovery efforts have been exhausted.
   • Losses due to damages validated by tax officials under specific conditions.
2. Brewing Sector Losses:
   • Companies in the brewing sector can deduct losses at a flat rate of 1% of total production volume.

D. Depreciation

1. Depreciation Rules:
   • Depreciation is calculated based on the probable usage period of assets. It must adhere to the rates fixed by the tax administration.
   • Deferred depreciation must be used within 10 years.
2. Small Equipment and Tools:
   • Small equipment valued under 500,000 CFAF can be expensed instantly.

E. Provisions

1. Provisions for Losses:
   • Provisions for clearly specified losses or charges are deductible if they are in the annual accounts. They must meet the conditions outlined in the General Tax Code.
2. Provisions for Bad Debts:
   • Must involve receivables recorded in the balance sheet and not covered by real guarantees.

F. Currency Conversion Margins

1. Short-Term Claims:
   • Conversion losses on short-term foreign currency debts are deductible in the year they occur.
2. Long-Term Claims:
   • Deduction applies progressively based on actual repayments.

Importance of Proper Deductions

1. Reduces Tax Liability:
   • Accurate deductions lower the taxable profit, minimizing the overall tax burden.
2. Ensures Compliance:
   • Properly documented and justified expenses protect businesses during tax audits.
3. Optimizes Financial Planning:
   • Understanding allowable deductions aids in effective budgeting and resource allocation.

Steps for Compliance

1. Maintain Accurate Records:
   • Ensure all deductible expenses are well-documented with proper invoices and receipts.
2. Adopt Technology:
   • Use tools like Kola Business Manager to track and organize expenses effectively.
3. Engage Experts:
   • Work with tax professionals to ensure compliance and maximize allowable deductions. Our Accounting Services can assist you.

Section 7 of the General Tax Code provides a clear framework. It helps in determining net taxable profits by deducting justified business expenses. By adhering to these provisions, businesses can improve their tax strategy, stay compliant, and focus on growth.

For a detailed guide on taxable profits and other provisions, download your copy of the 2024 General Tax Code here.