Gov’t closes bond loophole on loans from banks

Stabroek News

August 31, 2003

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Interest on bank loans secured by bonds will now be taxed at a rate of 45% as a result of the Fiscal Enactments Act which was passed last Monday in the National Assembly.

But observers are warning that the move could have an effect on the earnings of banks and put a damper on the new stock exchange given that banks will be less inclined to buy bonds issued by companies if they have to pay the new tax rate.

The amendment of Section 39 (11) of the Income Tax Act came after the Fiscal Amendment Bill was sent to the Select Committee after its second reading in the Nation-al Assembly on August 13.

Before the amendment, loans secured by bonds attracted withholding taxes of 15% per annum (revised to 20% in this year’s budget). The new rate is to come into effect tomorrow (September 1).

Income from interest on conventional bank loans is taxed at 45 per cent. However, Khursid Sattaur, Commissioner-General Designate of the Guyana Revenue Authority (GRA) told Stabroek News last week that commercial banks had used creative measures to avoid paying the 45% rate by securing loans with bonds to benefit from the lower tax rate. He explained that other institutions and individuals would only be charged a 20% withholding tax on bonds offered through the stock exchange or privately, as the 45% rate only applied to commercial banks. However, the banks are now in the position of having large amounts of cash and few loan or investment opportunities. A bond market was seen as a way of mopping up this liquidity and offering lower interest rates to companies. This avenue would now appear less attractive to the banks.

It has also been observed that by virtue of the fact that it has been deemed necessary to introduce this amendment it is an admission that historically loans secured by “bonds and other similar instruments” were subject to withholding tax at the prevailing rate of 20 per cent. Therefore it follows that historically the banks, in respect of income from debentures (defined as ‘other similar instruments’), have been overpaying as they have been charged the corporation rate of 45 per cent. This means that they could be entitled to a rebate from the government were a case to be made, observers say.

The amendment was one of many tax raising measures instituted by the government in the recently passed act as it grapples with a large budget deficit for this year.

Meanwhile Managing Director of the Guyana Americas Merchant Bank, Dr Graham Scott told Stabroek News on Friday that the provision would have a major negative effect for the development of the country’s capital market and of the business sector which is the wealth creating sector of the economy. He said that the largest capital market lay with the banking sector and this had to be nurtured. He pointed out that in the Caribbean and overseas, laws provided for the issuing of bonds to raise capital. “It’s an opportunity to raise finance at a more reasonable rate. This provision of the act [will cause] dislocation in the operation of the financial market in Guyana,” he said. If any company was in the process of being restructured or in receivership this provision was certainly going to stop them, he warned.

Scott stated that coming at a time when the country was not enjoying economic growth, the new tax would impact negatively on the stock market. “In order to have a buoyant stock market you have to have a buoyant debt market,” and he added that at the end of the day it was the consumer who would suffer the most as the interest rates of banks might now go up.

It is not clear what proportion of loans have been secured by bonds, but it has been growing in the last few years as bankers have seen the benefit to their bottom lines. Stabroek News was told that the bond loophole had also been used by several of the commercial banks to restructure the loans of large rice farmers facing bankruptcy.

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