THE INCOME TAX ACT, CAP.332 PRACTICE NOTE BASIS PERIOD FOR BUSINESS AND NON- BUSINESS SOURCES (ENTITIES)

Transcription

1 ISO 9001:2008 CERTIFIED THE INCOME TAX ACT, CAP.332 PRACTICE NOTE BASIS PERIOD FOR BUSINESS AND NON- BUSINESS SOURCES (ENTITIES) PRACTICE NOTE NO. 02/2013. DATE OF ISSUE 1 ST NOVEMBER,

2 Basis Period For Business And Non-Business Sources (Entities) Practice Note No. 02 /2013 Issued on 1 st November, 2013 Contents Pages 1.0 TAX LAW INTERPRETATION THE PURPOSE OF THIS PRACTICE NOTE: HOW THE TAX LAW APPLIES REVOCATION TAX LAW. This Practice Note applies in respect of tax accounting and timing requirements under section 20 of the Income Tax Act, Cap It considers the meaning and determination of a year of income of an entity, approval, reasons and conditions for changing a year of income, the basis period. 2.0 INTERPRETATION. 1.1 In this Practice Note, unless context requires otherwise- Act means the Income Tax Act, Cap basis period means a period coinciding with the year of income. operations include an activity, which consists of: (i) (ii) (iii) (iv) the conducting a business; the conducting an investment; both the conducting of a business and investment; the conducting of investment prior to commencement of a business or cessation of a business. 1.2 Definitions and expressions used in these Notes that are used in the Act have, unless the context requires otherwise, the same meaning in this Practice Note as they have in the Act. 3.0 THE PURPOSE OF THIS PRACTICE NOTE: This Practice Note considers the determination of the basis period for: 2

3 1.3 an entity commencing its operations; 1.4 an entity changing the accounting date of its existing operations; and 1.5 a company joining a partnership. 4.0 HOW THE TAX LAW APPLIES. 4.1 Year of income calendar year An entity is chargeable to income tax in respect of its income from a business or investment for a year of income. The income from all sources is determined in relation to a year of income. Except where a change in the entity s year of income has been approved by the Commissioner or otherwise provided for in the Act, the calendar year is the year of income in relation to all sources of income of an entity. An entity, which has business and investment income, prepares its accounts from to The twelve-months period ending is the basis period for the year of income 2012 for all of the entity s sources. 4.2 Commencement of operations In opening and closing years special rules are applied so that new taxpayers can start to be taxed quickly and retiring or ceasing traders do not have to wait to be taxed long after ceasation Accounts made up for 12 months not ending on 31 st December Where accounts of an entity are made up for 12 months ending on a date other than 31 December, that accounting period is the basis period for the year of income for all its sources of income. It commences from the date the business commences. An entity makes up its accounts from to Its sources of income are business, rental and interest. The period from to is the basis period for the year of income 2012 for all its sources of income. 3

4 4.2.2 Accounts prepared for less than or more than 12 months ending on 31 December Where an entity commences operations and its first accounts are prepared for a period of less or more than 12 months ending on 31 December its first year of income ends on 31 st December of that calendar year. An entity commences operations on and the first accounts are closed on , the accounting period to is the basis period for the year of income An entity commences operations on and the first accounts are closed on , the period from to is the basis period for year of income 2011 and the period from to is the basis period for year of income Accounts prepared for less than or more than 12 months and not ending on 31 December Where an entity commences operations and its first accounts are made up for a period of less or more than 12 months not ending on 31 December, the basis period for the year of income is the period ending on 31 December each year until accounts are made up for a 12 month accounting period. An entity commences operations on and accounts are made up to (less than 11 months), and subsequently to The basis period of the year of income 2011 is to The basis period for the year of income 2012 is to The basis period for the year of income 2013 is to

5 An entity commences operations on and accounts are made up to (less than 15 months), and subsequently to The basis period for the year of income 2011 is to The basis period for the year of income 2011 is to The basis period for the year of income 2013 is to An entity with existing operations commencing new operations Where an entity, which is already carrying on one or more operations, commences a new operation, the basis period for the existing operations is also the basis period for the new operation. An entity has been in operation for several years and makes up its accounts ending on 30 September each year. The company starts a new operation on The basis period for its existing operations is the accounting year ending on 30 September. The basis period for the new operation for the Y/I 2012 is therefore to Change in Accounting Date (Year of Income) A taxpayer may change the date to which he prepares accounts for various reasons. On change of accounting date there may be:- one set of accounts covering the period of less than twelve months. one set of accounts covering period of more than twelve months. no accounts; or two sets of accounts ending in a year of income; ending on a year of income. Subject to the prerequisites below an entity may apply, in writing, to the Commissioner for approval to change the entity s year of income from (a) the calendar year; or (b) a twelve month period previously approved by the Commissioner to another twelve month period. 5

6 Where an entity s year of income changes, the period between the end of the previous year of income and the beginning of its new year of income shall be another year of income of length of up to twelve months or eighteen months subject to approval by the Commissioner. The initial year of income of a person shall be the period of twelve months or less or subject to the approval of the Commissioner eighteen months or less from the time the person starts to exist until the end of the person s year of income as demonstrated above. 4.4 Revocation of an approval for change of year of income. The Act empowers the Commissioner by a written notice to revoke an approval previously granted to an entity for change of an entity s year of income where: The entity has not complied with the conditions prescribed in the notice of approval of the change; The change was intended to evade or delay payment of tax; or for any other reasonable cause 4.5 Prerequisite for change of year of income. The entity shows a compelling need to change the entity s year of income which may include the following:- (i) (ii) (iii) the year of income of a person s foreign permanent establishment shall be the same as the year of income of the owner; The requirement to have the same accounting date as that of the entity at its place of incorporation; the year of income of every non-resident partnership, trust or corporation shall be the period not exceeding twelve months, for which it makes accounts or if it has no such period the calendar year Foreign permanent establishment has same accounting date as owner Where an entity establishes a foreign permanent establishment, the accounting date of the foreign permanent establishment may be approved to be the same as of the owner. An entity resident in the United Republic commences new operation through a permanent establishment situated in Rwanda on 15 th April, The resident entity s accounting date is 30 th November, hence the foreign permanent establishment s year of income will be the period ending on 30 th November. 6

7 The basis period for the year of income 2012 is 15 th April, 2012 to 30 th April, The basis period for the year of income 2013 is 1 st December, 2013 to 30 th December, Same accounting date as related companies in a group Where an entity commences an operation and makes up accounts to the same day as that of the other related companies in a group, the first basis period for the company is from the date it commences the operation to the date the accounts are closed. A company, being a member of a group of companies, commences operations on and closes its first accounts on to coincide with the financial year ending for the group of companies, and subsequently closes its accounts on 30 September each year. The basis period for the year of income 2012 is to The basis period for the year of income 2013 is to Requirement under the law of place of incorporation Where an entity commences operations in the United Republic, and the law of the place where it is incorporated, requires it to close its accounts on a particular date; the entity may apply for approval such that the period from the date of commencement to that accounting date be the basis period for its first year of income. A company commences operations on and makes up its first accounts to as required by the law of the place of its incorporation. 7

8 The basis period for the year of income 2012 is to There is no basis period for the year of income Various Scenario of changes in basis period Normal accounts ending on 31 December Where accounts are normally closed on 31 st December and there is a change of accounting date, the basis period is the year ending 31 December. The basis period for the subsequent year of income will also be the twelve month period ending on 31 st December unless there is another 12 month accounting period ending in that year, in which case that accounting period will be the basis period. Thereafter, the 12 month accounting period will be the basis period. An entity which normally closes its accounts on 31 st December changes its accounting date to 30 th September and prepares accounts as follows: to , and subsequently to 30 September each year. The basis period for the year of income 2012 is to The basis period for the year of income 2013 is to The basis period for the year of income 2014 is to An entity which normally closes its accounts on 31 December changes its accounting date to 31 March and prepares accounts as follows: to and subsequently to 31 March each year. The basis period for the year of income 2012 is to The basis period for the year of income 2013 is to

9 The basis period for the year of income 2014 is to Normal accounts not ending on 31 December and new accounts prepared for less than 12 months. A. New accounts ending in the following year Where the accounting period is changed such that the period ends the following year the new accounting period is the basis period for the year of income of the new basis period. An entity s accounts are normally prepared ending on 30 September. The entity changes its accounting date and the accounts are now closed on 31 March the following year. Accounts are prepared as follows: to (6 months), and to 31 March for subsequent years. The basis period for the year of income 2012 (the failure year) is to (6 months). The basis period for the year of income 2013 is to B. New accounts and the last accounts ending in the same year When two period of accounts end on the same year of income the basis period for the year ends on the new accounting date. It begins immediately following the previous basis period. This means the basis period will exceed 12 months. This will produce an overlap. The period comprising the new accounting period together with the following accounting period is the basis period for the year of income. 9

10 An entity s accounts are normally prepared ending on 30 th June. The company changes its accounting date and the accounts are now closed on 31 st December. Accounts are prepared as follows: to , to (6 months), to and to 31 December for subsequent years. Since both the new accounting period to and the last accounting period to end in the same basis period: The basis period for the year of income 2012 is to (12months). The basis period for the year of income 2013 (the failure year) is to (18 months). This means the basic period exceeds 12 months and there is an overlap. The basis period for the year of income 2014 is to Accounts prepared for more than 12 months not ending on 31 st December C New accounts ending in the following year The new accounting period is the basis period for the new year of income. An entity s accounts are normally prepared ending on 31 July. The entity changes its accounting date and the accounts are now closed on 31 October. Accounts are prepared as follows: to (15 months), and to 31 October for subsequent years. 10

11 The basis period for the year of income 2012 is to (15 months). The basis period for the year of income 2013 is to D. New accounts ending in the third year If the new accounting period spans 3 basis years, it is apportioned into 2 periods, and these 2 periods will be taken to be the basis periods for the first 2 years of income commencing in the first year of the new accounting period. An entity s accounts are normally prepared ending on 30 November. There is failure to close accounts to its normal accounting date and accounts are prepared for a period of more than 12 months from to (15 months), and to 28 February for subsequent years. The accounting period to (15 months) is apportioned into 2 periods, so that: The basis period for the year of income 2012 is the period to (8 months). The basis period for the year of income 2013 is the period to (7 months). 11

12 (In determining the basis periods for the situations in paragraphs and above, no accounting period or year of assessment should be left out and there should be no overlapping of basis periods. Any fraction of a month should be treated as falling into the first period.) 4.7 Company joining a partnership If a company joins a partnership, the partnership will be regarded as a new operation of the company. The basis period for its existing operations is also the basis period for the partnership source (see paragraph 4.5.4). Example 16 A company whose accounts are closed on 30 June, joins a new partnership, which commences business on The first accounts of the partnership are prepared to and accounts are subsequently prepared to 30 September each year. Notwithstanding the accounting period of the partnership, the basis periods for the company in respect of its partnership source are: Year of income 2012: to Year of income 2013: to A company whose accounts are closed on 30th June joins an existing partnership on The accounts of the partnership are normally made up to 31 March. The accounts for the partnership continue to be made up to , and to 31 March for subsequent years. 12

13 Notwithstanding the accounting period of the partnership, the basis period for the company in respect of its partnership source for the Y/I 2012 is to ABC Ltd. whose accounts are closed on 30 June, and D Ltd (whose accounts are closed on 30 September) start a joint venture. The accounts of the joint venture are made up as follows: to and to 31 December for subsequent years. Notwithstanding the accounting period of the joint venture, the basis periods for the company ABC Ltd. and D Ltd. in respect of the joint venture source are as follows: Y/I ABC Ltd D Ltd (Note: In all the situations in Examples 1, 2 and 3 above, the adjusted income from the partnership source for the relevant accounting periods should be apportioned accordingly.) 4.8 Treatment of adjusted income / loss in overlapping periods Where accounts are prepared for a period of more than 12 months result in an overlapping of two basis periods (see illustration in paragraph and in paragraph 4.6.1), the adjusted income or adjusted loss common to both basis periods is ignored in the second basis period. 13

14 An entity commences a business on and accounts are prepared as follows: to , and subsequently to 31 March. The adjusted income of the company s business is as follows: Accounting period Adjusted income to (A) shs.15, 000m to (B) Shs.24, 000m Applying paragraph 4.2.3, the basis periods for the entity are: Y/I Basis periods (6 months) (12 months)* (12 months)* (*Overlapping period: ) The adjusted income of the business should be apportioned as follows: Y/I & Basis period Apportionment Adjusted income : 6 / 9 x (A) ( ) 000m.) (6 / 9 x Sh.15, Sh.10, 000m 2013 ( ) : 3 / 9 x (A) (3 / 9 x Sh.15, 000) : 9 / 12 x (B) Sh.5, 000m. 14

15 2014 ( ) 9 / 12 x Sh.24, 000) Total Adjusted income of overlapping period ( ) ignored in second basis period: (Sh24, 000m Sh.18, 000m) Sh.18, 000m Sh.23, 000m Sh. 6, 000m 5.0 REVOCATION Pursuant to the provisions of Section 130(2) the Practice Note No. 01/2004 issued on 15 th December, 2004 is hereby revoked. Signed... Commissioner 1 st November,