MBABANE – The Revenue Appeals Tribunal Eswatini (RATE) has ruled that Eswatini Revenue Service (ERS) acted on a flawed process in disallowing a E3.47 million bad debt deduction claim.
The ruling relates to a dispute involving a chartered accountant firm that sought to deduct E3 470 239 in unpaid professional fees for the 2022 tax year after its client, a large investment company in Eswatini, allegedly failed to settle invoices despite repeated demand notices and the initiation of civil litigation proceedings.
The Tribunal found that the tax service’s disallowance of the deduction and subsequent enforcement steps were not preceded by a valid notice of assessment as required under the Income Tax Order, 1975, rendering the process procedurally defective.
The Tribunal found that while ERS had disallowed the deduction and adjusted the taxpayer’s taxable income, the process leading to enforcement action was not preceded by a valid notice of assessment as required by law, rendering subsequent recovery steps procedurally defective.
The appellant in the matter is a chartered accountant firm, which had rendered professional services to a major investment company in Eswatini. The firm had declared the income from those services in prior tax periods, in line with normal tax accounting practice.
However, during the 2022 tax year, the firm claimed that a portion of that income, amounting to E3 470 239, had become irrecoverable.
According to the firm, the client had refused to pay for services rendered despite repeated payment demands and the commencement of legal proceedings aimed at recovering the outstanding amount.
On that basis, the firm treated the amount as a bad debt and claimed a deduction in its 2022 income tax return, arguing that since the income had already been taxed in previous years, it was only fair and lawful to allow a deduction once it became clear that recovery was unlikely.
The firm further submitted that written communications from the debtor, confirming refusal to pay, together with ongoing civil litigation, demonstrated that the debt was irrecoverable.
It maintained that these factors satisfied the requirements for recognising a bad debt for tax purposes.
ERS rejected the deduction, arguing that the requirements for a bad debt under Section 14(1)(q) of the Income Tax Order, 1975 had not been met.
The revenue service contended that the debt could not be regarded as ‘bad’ while litigation proceedings against the debtor remained pending and had not reached final determination.
According to ERS, the existence of ongoing recovery efforts indicated that the debt had not been conclusively proven irrecoverable.
ERS further argued that the taxpayer had not formally written off the debt in its accounting records and had failed to provide key supporting documentation, including a detailed sales ledger, which ERS considered necessary to substantiate the claim.
On that basis, ERS disallowed the deduction and adjusted the taxpayer’s taxable income upwards in respect of the 2022 assessment period.
Beyond the substantive dispute over whether the bad debt deduction was allowable, the matter ultimately turned on a preliminary legal challenge raised by the chartered accountant firm.
The firm argued that ERS had failed to comply with the statutory requirements governing the issuance of a notice of assessment. It contended that although ERS disallowed the deduction and revised taxable income, it never issued or served a formal notice of assessment reflecting that revised position.
Instead, the firm stated that it only became aware of the adjustment through an audit outcome letter dated July 3, 2023, and its ERS account statement. The firm maintained that such communication could not substitute for a valid notice of assessment in law.
According to the appellant, a tax liability only becomes enforceable once a proper notice of assessment has been issued and served on the taxpayer. The firm argued that this instrument is what legally crystallises liability and activates the right to object within the prescribed statutory timeframe.
The firm further argued that in the absence of such notice, any demand or enforcement action taken by ERS was premature, unlawful and without legal foundation.
ERS defence on procedure
MBABANE - Eswatini Revenue Service (ERS) disputed the procedural challenge, arguing that its audit outcome letter constituted sufficient communication of the revised tax position.
The ERS relied on correspondence issued on July 3, 2023, which indicated that the audit review had been completed, that the bad debt deduction had been declined and that taxable income had been revised to E2177 379.
ERS argued that this communication clearly informed the taxpayer of the outcome of the audit and its right to object and, therefore, met the requirements of notification under the tax framework.
The revenue service maintained that any communication gaps alleged by the taxpayer, including issues relating to email address changes, did not invalidate the assessment process. The Tribunal was required to determine three central issues arising from the preliminary point: Whether ERS failed to issue and serve a valid notice of assessment in respect of the revised 2022 tax position
Whether ERS was entitled to institute demand and collection proceedings in the absence of such notice; and Whether any procedural defect was sufficient to dispose of the appeal in its entirety.
Tribunal’s stance on notice of assessment
MBABANE - In its ruling, the Tribunal emphasised that a notice of assessment is a fundamental statutory instrument under the Income Tax Order, 1975.
It is the mechanism through which a taxpayer’s liability is formally quantified, determined and communicated.
The Tribunal noted that Section 42(2) of the Income Tax Order places a mandatory obligation on the ERS commissioner general to issue and serve a notice of assessment once an assessment has been made.
The Tribunal further observed that this requirement is not merely procedural, but central to the tax system, as it triggers both the obligation to pay and the right to object.
In examining the July 3, 2023 correspondence, the Tribunal found that while the letter confirmed completion of an audit review and communicated the disallowance of the bad debt deduction, it did not expressly constitute a notice of assessment.
The letter, the Tribunal noted, was framed as an audit outcome communication rather than a formal assessment instrument. It did not clearly identify itself as a notice of assessment, nor did it set out a comprehensive breakdown of tax liability, computation methodology or final tax payable.
The Tribunal also observed that the correspondence referred to the possibility of lodging an objection within 30 days ‘after service of the notice of assessment’, suggesting that a formal assessment notice was envisaged as a separate document.
The Tribunal held that a valid notice of assessment must clearly communicate a final and enforceable determination of tax liability. It must not only indicate adjustments to taxable income, but also provide clarity on the resulting tax payable and the legal consequences thereof.
In this case, the Tribunal found that the correspondence lacked the essential features of such a notice and therefore, could not be elevated to the status of a statutory assessment.
The Tribunal further held that without a valid notice of assessment, there could be no enforceable tax debt capable of lawful recovery. Any enforcement steps taken in its absence were, therefore, procedurally defective.
Effect on enforcement proceedings
MBABANE - The Revenue Appeals Tribunal concluded that ERS lacked a lawful basis to institute demand and collection proceedings arising from the revised tax position.
This is after having found that no valid notice of assessment was issued.
It held that the statutory framework requires strict compliance with the sequence of assessment, notification, objection and enforcement.
“Deviation from this sequence undermines the legality of the entire process,” said the Tribunal.
The Tribunal, therefore, upheld the taxpayer’s preliminary objection and set aside the enforcement action taken by ERS in relation to the disputed deduction.
The Tribunal further ruled that the procedural defect was dispositive of the matter, meaning it was sufficient to determine the appeal without considering the substantive question of whether the bad debt deduction itself was allowable under tax law.
As a result, the appeal succeeded on preliminary grounds alone.
On the issue of costs, the Tribunal found that ERS had not acted unreasonably within the meaning of the Revenue Appeals Tribunal Act, 2019.
It noted that the revenue service had relied on audit processes and correspondence which it believed constituted proper notification of its assessment position.
While the Tribunal disagreed with that interpretation, it found no evidence of bad faith or deliberate disregard of legal obligations.
The Tribunal also found that the taxpayer had not suffered irreparable prejudice, as it was able to fully participate in the proceedings and challenge both procedural and substantive issues.
Each party was, therefore, ordered to bear its own costs.
Revenue Appeals Tribunal Eswatini Registrar Nelisiwe Hlophe. (File pic)