In separate interviews with The Guardian, bankers appealed against the harmonization of the Income Tax Act Cap 332 RE 2019, so that it would be adapted to the BoT’s Banking and Financial Institutions (Management of Risk Assets) Regulations 2014, in particular to write off interest in the floating tax balance sheet and in loans, to relieve commercial banks that have been victims of contradicting laws for several years.
The regulatory conflict turns out to be a double blow for banks: on the one hand, banks have to take on losses from defaulted loans, write off these loans and make value adjustments in accordance with BoT regulations.
In addition, they are forced to pay tax on loans written off and depreciation, which further affects banks’ profitability and capital. This ultimately has a negative impact on the banking sector’s capital and thus impedes the credit growth of the economy.
Unfortunately, the legal system is quite cumbersome and credit recovery is delayed, and after years of prosecuting legal cases, the banks’ recoveries are insignificant, while the banks have to take the losses up front and pay tax on those losses.
Bankers say this scenario has a severe impact on credit growth and borrowing costs.
Issa Hamisi, Deputy Chief Financial Officer of Exim Bank (Tanzania) Limited, first explained how the requirements for impairment or loan loss provisions for banks due to defaulted loans from borrowers are conflicting.
He said, âFor example, let’s say the commercial bank has annual sales of / $ 100 million with an operating cost of / $ 40 million;
This means the bank’s pre-tax profit (PBT) is / – 60 million, of which 30 percent is taxed by the TRA as corporate income tax. The 30 percent of 60 million / – is 18 million / -. Therefore, the bank’s net profit is / 42mn, âsaid Hamisi, adding;
The BoT regulations require commercial banks to cede credit allowances on loan portfolios as impairment or loan provisions in order to comply with the International Financial Reporting Standard (IFRS) and the Management of Risk Assets Regulations 2014, on which banks are required to make these allowances on loan to its profit before taxes (PBT).
He said that if we take the total allowance charge, as calculated by the credit impairment module, to add up to one percent of total loans, for example, then adding these impairment charges also reduces the PBT by one percent.
The Debt Debt Depreciation by banks is a mandatory requirement to adapt to IFRS and BOT standards and banks have no choice and therefore the basis for banks that require the fees from the TRA through the Income Tax Act 2019 to be allowed as well Deductions are recognized for tax purposes.
However, the TRA does not allow these fees as a permissible deduction under its Income Tax Act and therefore levies 30 percent of corporate income tax from its tax assessment to the banks.
“Let us further assume that the commercial bank has ceded an annual loan portfolio of / 500 million. The one percent impairment or loan provision is 5 million / -. If the 5 million /- are added to the previous 40 million /-, the total costs including the operating costs amount to 45 million /-.
If you subtract 45 million / – from the 100 million / annual income, the profit before tax drops to 55 million / -. In view of the loan value adjustments on the profit before tax, the 30 percent corporate income tax could have been 55m / – 16.5m / -, giving the bank a net profit of 38.5m / – compared to the previous 42m, TRA ignore the impairment charge and levy 30 percent tax on a PBT of $ 60 million.
Hamisi claimed that this is the point where TRAs are inconsistent with central bank regulations through parliament-enacted Income Tax Law, causing banks to pay billions in taxes on defaulted loans from borrowers.
Loan write-offs are subject to a procedure under the Central Bank’s Banking and Financial Institutions (Management of Risk Assets) Regulations, 2014. According to Regulation 13, BoT applies that if a borrower does not repay the loan from the first day up to 90 days, qualitatively it is considered a specially named borrower and is therefore subject to the special watch list.
The regulation states that a loan that exceeds 90 days with no repayment falls into the non-performing loan category, which goes through three stages:
The number of days past due 91 to 180 is classified as inferior, 181 to 360 days as doubtful, and 361 days and more, so the loan is considered a loss.
âIn the losing phase, the BoT calls on the bank to take aggressive restructuring measures for four consecutive quarters, that is 360 days. Adding the first 360 days together gives almost 720 days and if the customer’s loan is still unpaid and the days go beyond 720 days, the bank will have to write off the loan.
It is very clear that after 720 days, or if the loan is outstanding for more than 360 days and then outstanding for four consecutive quarters, the BoT requires a bank to write off the loan and if it does not, it will be penalized under the regulation 35 While the Bank of Tanzania requires banks to write off these outstanding loans, failure to comply with this requirement can result in severe penalties.
The Income Tax Act provides that the bank will continue to follow up the borrower to repay the defaulted loan rather than write it off. However, the deadline for this is not set, âsaid Hamisi.
At this point, Hamisi said that bankers have no choice as to which law to comply with by the two regulators.
Juma Kimori, Chief Internal Auditor of NMB Bank Plc, said: âWe are calling for the TRA law to be harmonized with central bank regulations so that we do not pay taxes that are due to defaulted loans.
The central bank has clarified in its rules on the loan write-off process, but the TRA Act does not specify the exact timing of the loan write-off. This is a long-standing problem and we are working with the two regulators to find a solution, âsaid Kimori.
Regulation 35 (1) of the Banking and Financial Institutions (Management of Risk Assets) Regulations 2014, sanctions commercial banks for failing to write off bad loans after a period of 720 days.
The ordinance reads: “Without prejudice to the penalties and measures prescribed by law, the bank may impose one of the following sanctions on any bank or financial institution in the event of non-compliance:
(a) A penalty equal to the amount to be determined by the Bank; (b) Prohibition on declaring or paying dividends; (c) suspension of the privilege to issue letters of credit or guarantees; (d) suspension of access to the Bank’s credit facilities; (e) Suspension of Loan and Investment Business.
(f) suspension of capital expenditures; (g) suspension of the privilege to accept new deposits; (h) Revocation of the banking license; (i) suspension from the position of defaulting director, officer or employee; and (j) exclusion from 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) applies to directors, officers or employees of the bank or financial institution.
In the case of impairment or loan provision issues, the TRA issues guidelines on its Income Tax Act Cap 332 RE 2019, which contradict the regulations of the central bank.
Section 25 (5) of the Act states: A person may refuse to claim an amount or write off as a bad debt of the person.
(a) In the event of a claim by a financial institution, after the claim has become a bad debt in accordance with relevant standards set by the Bank of Tanzania; and that that institution has taken all reasonable steps to pursue the payment and that the institution reasonably believes that the claim will not be satisfied.
(b) In all other cases, only after the person has taken all reasonable steps to pursue the payment and the person reasonably believes that the claim or demand will not be satisfied.
“What are the reasonable steps required by the TRA for commercial banks to take apart from the measures required by the central bank’s rules?” Asked Hamisi.
TRA Commissioner General Alphayo Kidata recently admitted: âI am aware of this challenge and I urge bankers to be patient as we examine a common path;
We intend to consult both parties involved in the matter, i.e. the TRA itself, the central bank and the commercial banks. It’s been a longstanding problem, but since I’m new to the office I promise to start soon. “