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            Deduction of Non-Repaid Credit (January 26th, 2010)

            1.Factual Background


            1.1Within the framework of its business the taxpayer extends credit to its customers to cover fees, taxes and other payments related to the taxpayer’s business.


            1.2The credit bears interest.


            1.3The taxpayer uses the accrual method of accounting but files income tax returns on a cash basis.


            1.4Part of the credit extended by the taxpayer to its customers was not repaid despite collection attempts including the retaining of lawyers and resort to the execution of judgments ("Unpaid Credit”).


            2.Question Posed


            Should the Unpaid Credit be deducted in computing the taxable income of the taxpayer?


            3.Opinion’s Conclusions


            3.1The question under consideration was not dealt with, as such, by the Income Tax Ordinance or by the judicial precedents. Resort to the general principles of taxation applicable to the deduction of expenses, including the principle of allowing deductions for the preservation of capital and the rule of allowing incidental expenses, leads to the conclusion that the Unpaid Credit is deductible as an ordinary expense.


            3.2Our conclusion was reinforced by generally accepted according principles; English precedents on similar (although not identical) matters; the rules applicable to the deduction of payments under a monetary guaranty and losses incurred as a result of theft or disasters. These precedents and rules lent weight to our conclusion that the Unpaid Credit was an ordinary deductible expense.


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