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Other Provisions for Liabilities

8.66. A number of submissions have been received requesting allowance of a deduction for provisions for other liabilities made in arriving at commercial profits. Firstly, there is the matter of the provision for a liability arising under a warranty given when a product is sold: for example, a manufacturer may undertake to replace defective parts for a specific period. The major difficulty in the case of provisions for warranty is in determining, in objective fashion, what constitutes a reasonable provision at any year end.

8.67. Several years ago income tax legislation in the United States was amended to allow a deduction for a provision for product warranties. However, the amounts claimed in the first year of operation proved so high and the effect on revenue so great that the deduction had to be abandoned, with retroactive effect. Because of the difficulty of assessing a reasonable provision for any business at each year end, the Committee does not favour an amendment of the law in respect of provisions for warranties. This is in line with the recommendation of the Ligertwood Committee.

8.68. The second liability or contingency for which a deduction has been sought concerns a possible loss under an impending law suit. The legal proceedings may not be resolved for several years and the decision may give rise to a substantial loss. Here too the impossibility of making any objective assessment of the amount that might be


  ― 90 ―
claimed as an appropriate provision appears to the Committee sufficient reason for not allowing a deduction.

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