In separate interviews with The Guardian, bankers have appealed upon the harmonization of the Income Tax Act Cap 332 R.E 2019 so that it aligns with the BoT’s Banking and Financial Institutions (Management of Risk Assets) Regulations 2014, particularly Interest in suspense tax accounting and on writing –off loans hence to give relief to commercial banks that have been victims of the contradicting laws for several years now.
The conflict in regulations is proving to be a double whammy for banks, on one hand, banks need to take losses on defaulted loans, write off these loans and create impairments as per BoT regulations.
Further, they are forced to pay tax on written off loans and impairments thus further hurting the profitability and capital of the banks. This is ultimately resulting in an adverse impact on the capital of the banking sector and thus impediment for credit growth of the economy.
Unfortunately, the legal system is quite cumbersome, and recovery of loans is quite delayed and after years of pursuing legal cases banks recoveries are insignificant whilst the banks must take the losses upfront and pay tax on these losses.
Bankers say that scenario has a severe impact on credit growth and the cost of borrowings.
Explaining how the ‘impairment charges or loan provision requirements’ have posed contradictions henceforth taxes on banks due to defaulted loans by borrowers, Issa Hamisi, Deputy Chief Finance Officer, Exim Bank (Tanzania) Limited started by explaining how the requirements apply.
He said, “Let’s for example assume that the commercial bank has registered annual revenue of 100million/- whereby its operating costs stand at 40million/-;
This means that the bank’s profit before tax (PBT) stands at 60million/- of which 30 percent is taxed by TRA as Corporate Tax. The 30 percent of 60mn/- is 18mn/-. Therefore, the net profit of the bank is 42mn/-,” said Hamisi adding;
BoT regulations require commercial banks to cede away loans impairment charges on loan portfolio as impairment or loan provision to align with International Financial Reporting Standard (IFRS) and Management of Risk Assets) Regulations 2014, which the banks are mandatorily required to charge these impairment charges on loan to its profit before tax (PBT).
He said that if we assume the total impairment charges as computed through the loan impairment module, let say sum up to one percent of the total loans, the addition of these impairment charges reduces the PBT by one percent as well.
The charging of loans Impairment by banks is a mandatory requirement to align with IFRS and BOT norms and banks have no choice and hence the base for banks demanding the charges being recognized by TRA through the Income Tax Act 2019 as allowable deductions for tax purposes as well.
TRA is however not allowing these charges through its Income Tax Act as allowable deduction and hence collect 30 percent corporate taxes from their tax assessment to Banks.
“Let’s further assume that the commercial bank has ceded an annual loan portfolio of 500million/-. The one percent impairment or loan provision will be 5million/-. If the 5mn/- is added to the previous 40mn/- the total charges including operating cost will total to 45mn/-.
By subtracting 45mn/- from the 100mn/- annual revenue, profit before tax drops to 55mn/-. Considering the loan impairment charges to the profit before tax, the 30 percent corporate tax of 55mn/- could have been 16.5mn/- which leaves the bank with a net profit of 38.5mn/- down from the previous 42mn/-,” However, TRA ignore the impairment charges and collect 30 percent tax on a PBT of 60mn/- which keep the tax payable at 18mn/- instead of 16.5mn/-, he explained.
Hamisi asserted that this is the point where TRA’s through the Income Tax Act enacted by the parliament doesn’t align with the central bank’s regulations leading to banks paying billions in taxes of defaulted loans by borrowers.
Write-off loans have a process according to the central bank’s ‘Banking and Financial Institutions (Management of Risk Assets) Regulations, 2014’. According to Regulation 13, BoT states that when a borrower fails to repay the loan from day one to 90 days is qualitatively considered as an especially mentioned borrower and therefore subjected to the special watch list.
The regulation states that if a loan goes beyond 90 days without being repaid, is then subjected to the non-performing loan category which has three stages to go through:
The number of days past due 91 to 180 is classified as substandard, 181 to 360 days is classified as doubtful and 361 days and more, the loan is therefore considered as a loss.
“At the loss stage, the bank is required by BoT to take aggressive recovery measures for four consecutive quarters that means 360 days. Adding with the first 360 days it is summed up to almost 720 days and if the client’s loan is still not paid and the days go outstanding beyond 720days then the bank is required to write-off the loan.
It is very clear that beyond 720 days or when the loan is outstanding beyond 360 days and further remains outstanding subsequently for the four consecutive quarters, BoT requires that a bank writes off the loan and if it doesn’t it is punished in relation with Regulation 35. Whilst the Bank of Tanzania requires the banks to write off these outstanding loans and non-compliances to this requirement call huge penalties.
The Income Tax Act stipulates that the bank should keep on making follow-ups to the borrower to repay the defaulted loan instead of writing it off. It however doesn’t identify the time limit of doing so,” said Hamisi.
At this point, Hamisi said bankers are left without the option of which law they should abide by from the two regulators.
Juma Kimori, Chief Internal Auditor, NMB Bank Plc said that: “We are calling for harmonization of the TRA’s Act to central bank’s regulations so that we don’t pay taxes that are however an outcome of defaulted loans.
The central bank has made it clear in its regulations on the process of writing off loans but TRA’s Act is not precise on when to write-off. This is a long-time problem that we have been seeking to reach a mutual solution with the two regulators,” said Kimori.
Regulation 35 (1) of the Banking and Financial Institutions (Management of Risk Assets) Regulations 2014, impose sanctions to commercial banks that will not write-off non-performing loans after a period of 720 days.
The regulation reads: “Without prejudice to the penalties and actions prescribed by the Act, the Bank may impose on any bank or financial institution any of the following sanctions for non-compliance:
(a)A penalty of the amount to be determined by the Bank; (b) Prohibition from declaring or paying dividends; (c) Suspension of the privilege to issue letters of credit or guarantees; (d) Suspension of access to the credit facilities of the Bank; (e) Suspension of lending and investment operations.
(f) Suspension of capital expenditure; (g) Suspension of the privilege to accept new deposits; (h) Revocation of banking license; (i) Suspension from office of the defaulting director, officer, or employee; and (j) Disqualification from holding any position or office in any bank or financial institution under the supervision of the Bank.
Part (2) reads: The penalty referred to in paragraph (a) of sub-regulation (1) shall apply to directors, officers or employees of the bank or financial institution.
On impairment or loan provision issues, TRA pose directives on its Income Tax Act Cap 332 R.E 2019 that are contrary to the central bank’s regulations.
Section 25(5) of the Act states that: A person may disclaim the entitlement to receive an amount or write-off as a bad debt claim of the person-
(a)In the case of a debt claim of a financial institution, after the debt claim has become a bad debt as determined in accordance with the relevant standards established by the Bank of Tanzania; and that such institution has taken all reasonable steps in pursuing payment and the institution reasonably believes that debt claim will not be satisfied.
(b)In any other case, only after the person has taken all reasonable steps in pursuing payment and the person reasonably believes that the entitlement or debt claim will not be satisfied.
“What are those reasonable steps demanded by TRA that are supposed to be taken by commercial banks apart from those stipulated in the central bank’s regulations?” questioned Hamisi.
TRA Commissioner General Alphayo Kidata recently admitted that: “I am aware of that challenge, and I am calling upon bankers to be patient as we look into a mutual way of going about it;
We intend to consult both parties involved in the matter that is TRA itself, the central bank, and commercial banks. It is a long-time problem but since I am new in the office, I promise to soon start working on it”.