NAVARRA: Know which provisions are deductible

Can I deduct any provision that is accounted for?

In general, accounting provisions are an expense that your company can deduct in Corporation Tax. However, a negative list is established for which the following expenses for provisions are not deductible:

• Derived from implicit or tacit obligations.
• Related to long-term employee benefits.
• Related to costs of compliance with onerous contracts.
• Derived from restructurings, except if they refer to legal or contractual obligations and not merely tacit.
• Related to the risk of sales returns.
• Employee benefits through formulas based on equity instruments that are settled in cash.

What about the provision for liabilities?

One of the most common provisions is the one made for liabilities, which your company must account for if there is any litigation that may arise from them (for example, due to a customer's claim, a disputed Tax Office settlement, etc.). In these cases, you can account for the provision for the amount claimed and deduct it as an expense, without waiting for the judgment. Keep in mind that the claimed concept must be deductible: thus, provisions for penalties are not deductible.

And what about the provision for warranties?

Likewise, if your company provides guarantees for repair and review in its sales of goods or services, when closing the accounts for the year, you can account not only for the amount actually incurred for this reason as an expense, but also for a provision to cover the risk of incurring these expenses in the future.

In this case, the deductible amount of the provision is calculated by multiplying the balance of live warranty sales at the end of the year by the percentage resulting from the following quotient:  

Expenses for warranty of the current year and the two previous years / Warranty sales of the current year and the two previous years

This also applies to provisions for covering incidental expenses for sales returns.

And what about environmental actions provision?

The provision for environmental actions is only deductible if it corresponds to a plan formulated by the taxpayer and accepted by the Tax Office.

Our professionals will clarify any doubts related to the accounting and tax deductibility of your provisions.