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.