Treatment of Damages and Bad Debt for Uncollected Payments due to Export Claims (Quality Defects)
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The goods exported by our company were determined to be defective in quality during the local inspection process, which we confirmed and acknowledged during a business trip to the site. Since shipping back the defective goods would incur additional costs such as freight, we reached an agreement with the buyer to accept payment for only 30% of the original export price. The buyer has issued a debit note claiming damages for the quality defects.
1. Can the uncollected 70% amount be treated as damages?
2. Besides the debit note, what additional documents are required to process this as damages?
3. If processing it as damages is not possible, can it be treated as bad debt?
Answer 1
- 1✓1. Since the timing for recognizing damages as a deductible expense is the business year in which the obligation to pay is finalized, the business year in which the final agreement was reached should be considered the attribution period. 2. There are no specifically prescribed documents required for the tax deduction of damages; rather, any documents that can verify the facts, such as relevant contracts or settlement agreements, are acceptable. 3. Regarding bad debt processing for external receivables, it is possible only when it is objectively recognized that export proceeds cannot be recovered, supported by verification from local commercial banks, notary offices, or public institutions that can prove the counterparty's insolvency.Machine translated
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