Fi­nance Min­istry, FEB will de­cide tax ac­count­ing on gov­ern­ment debt in­stru­ment Wed­nes­day

Dis­cus­sions on by­laws and method­ol­ogy of im­ple­ment­ing de­ci­sion, says CBE

The Daily News Egypt - - Front Page - By Hos­sam Mounir and Fatma El Kholousy

The Min­istry of Fi­nance and the Fed­er­a­tion of Egyp­tian Banks (FEB) will de­cide on Wed­nes­day on the amend­ment of the method of tax ac­count­ing paid by banks on in­vest­ment in gov­ern­ment debt in­stru­ments.

On Wed­nes­day last week, the Cab­i­net ap­proved a draft law sub­mit­ted by the min­istry of fi­nance to amend one of the ar­ti­cles of the In­come Tax Law to sep­a­rate rev­enues from trea­sury bills (T-bills) and bonds (T bonds) in a sep­a­rate pot, from the rest of the other rev­enues of banks and com­pa­nies.

Fol­low­ing this de­ci­sion, the FEB formed a spe­cialised com­mit­tee to study this de­ci­sion and its im­pact on the banks’ prof­its.

The FEB pre­pared a me­moran­dum on the out­come of this meet­ing and sent it to the Deputy Gover­nor of the Cen­tral Bank of Egypt (CBE) Mo­hamed Aly Has­san.

In the memo, which Daily News Egypt ob­tained a copy of, the FEB con­firmed its sup­port to the min­istry of fi­nance in find­ing ob­jec­tive so­lu­tions to in­crease state re­sources.

How­ever, it stressed, at the same time, the im­por­tance of tak­ing into con­sid­er­a­tion that the pro­posed amend­ments of the min­istry of fi­nance are ap­plied to new is­sues of bonds and bills, and to ac­ti­vate the new amend­ment start­ing from the tax pe­riod which shall com­mence af­ter the date of the amend­ment.

Last Sun­day, rep­re­sen­ta­tives of the min­istry of fi­nance and the FEB held a joint meet­ing, dur­ing which the new method of cal­cu­lat­ing the trea­sury bills and bonds tax was agreed upon to come into ef­fect, start­ing from the new ten­ders to be floated by the min­istry soon, with­out the cur­rent out­stand­ing bal­ances.

The two sides also agreed to hold an­other meet­ing on Wed­nes­day to dis­cuss the pro­pos­als of banks on how to cal­cu­late the tax, and to re­solve this mat­ter.

This de­ci­sion has caused great con­fu­sion in banks, es­pe­cially those that in­vest a large part of their liq­uid­ity in T bills and bonds.The de­ci­sion also neg­a­tively im­pacted the shares’ value of the banks listed on the Egyp­tian Ex­change (EGX).

Ac­cord­ing to fig­ures of the CBE,banks op­er­at­ing in the Egyp­tian mar­ket are hold­ing about 56.587% of to­tal out­stand­ing bills bal­ances by the end of Septem­ber 2018.

The CBE said that to­tal out­stand­ing bills have reached EGP 1305.319bn at the end of Septem­ber 2018, of which the banks hold EGP 738.644bn.

Ac­cord­ing to the CBE,state-owned banks, in­clud­ing the Na­tional Bank of Egypt, Banque Misr, and Banque du Caire, hold about EGP 380.405bn, while pri­vate banks, in­clud­ing the Com­mer­cial In­ter­na­tional Bank (CIB), hold EGP 309.155bn.

He added that the share of spe­cialised banks, in­clud­ing the Agri­cul­tural Bank of Egypt (ABE), the Egyp­tian Arab Land Bank, the In­dus­trial De­vel­op­ment Bank, and the Ex­port De­vel­op­ment Bank hold EGP 13.646bn. Branches of for­eign banks op­er­at­ing in Egypt own some EGP 35.438bn.

This comes as the min­istry of fi­nance re­vealed that the out­stand­ing bal­ances of T-Bonds and T-Bills amount to EGP 693.864bn by the end of Oc­to­ber 2018.

Banks are the big­gest in­vestors in T-Bonds, di­rect­ing a large part of their long-term sav­ings ves­sels into bond in­vest­ment.

For his part, the CIB said that there is an open chan­nel of com­mu­ni­ca­tion be­tween the FEB, the min­istry of fi­nance, and the Egyp­tian Tax Author­ity on this de­ci­sion.

The bank said in a state­ment to the EGX that there are dis­cus­sions and pro­pos­als on the fi­nal word­ing of the ex­ec­u­tive reg­u­la­tions and the mech­a­nism of im­ple­men­ta­tion of this de­ci­sion, and how to cal­cu­late the tax and the date of im­ple­men­ta­tion. The bank will study this amend­ment and its im­pact on the fi­nan­cial state­ments.

Ac­cord­ing to a trea­sury of­fi­cial at a pri­vate bank, banks will com­pen­sate the ex­cess amounts that will be paid as taxes to the min­istry of fi­nance, as a re­sult of this de­ci­sion, by re­quest­ing a greater re­turn on in­vest­ments in debt in­stru­ments in the com­ing pe­riod.

Some banks have al­ready done so, ask­ing for a re­turn of 23.6% on the T-Bills floated by the min­istry of fi­nance on Sun­day.The min­istry turned down the of­fer and cut the size of the ten­der to only ac­cept of­fers with a re­turn of 19.9%.

Nancy Farid, sec­tor head of fi­nan­cial ser­vices at Bel­tone told The Daily News that the dif­fer­ence be­tween the old tech­nique and the new one is that the old one is that the tax­a­tion was on the rev­enues only, but af­ter these changes the tax­a­tion will be on costs and rev­enues which will in­crease tax rates.

More­over, she said that the banks will try to de­crease this loss by in­creas­ing the re­turns on the gov­ern­men­tal debt in­stru­ments.

She also added that the drop that hap­pened in the stock mar­ket was not more than a re­sponse. How­ever, she is ex­pect­ing that this tech­nique of tax­a­tion will be changed af­ter Wed­nes­day’s meet­ing.

Ac­cord­ing to Shuaa Cap­i­tal re­port, the con­se­quences of that de­ci­sion are that the prof­itabil­ity of banks will be neg­a­tively af­fected as­sum­ing that all of the fac­tors are sta­ble. So ,the prof­its of the banks may de­crease by a 17% rate. More­over, the rate of re­turns that the banks ask for from gov­ern­men­tal debt in­stru­ments that the CBE is­sues on be­half of the min­istry of fi­nance will in­crease. This will help banks to re­gain their prob­a­bil­ity rate.

Shuaa also added that in case the re­turns of gov­ern­men­tal debt in­stru­ments did not in­crease, banks will re­sort to di­rect­ing the ex­cess liq­uid­ity to as­sets and loans be­tween banks in­stead of gov­ern­men­tal debt in­stru­ments, in ad­di­tion to lend­ing ac­tiv­ity. How­ever, most prob­a­bly for­eign in­vestors will ben­e­fit the most from these tax ad­just­ments, as they will en­joy higher re­turns.

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