High level tax considerations for the banking sector

Carmen Fransman - The value-added tax implications for the banking sector is regulated Schedule IV(2)(a) of the VAT Act, 2000, with the definitions.

This schedule should be studied in detail to ensure expenses incurred in making exempt supplies are not erroneously deducted as input tax.

Unlike the VAT Act, there are no specific provisions in the Income Tax Act that regulates the banking sector exclusively and the same general provisions will apply for banking entities.

In this article we will try to simplify some of the general points for banks from a tax perspective.

* It is normal for banks to trade with the instruments and hence the returns earned (trading profits) by the banks as part of their trading portfolio will be subject to income tax.

The flipside is also true for the realised losses. To the extent the trading profits/losses are unrealised, then these will not be taxable/deductible.

* IFRS accounting adjustments are very common in banks especially on financial instruments, and the tax implications of these should be carefully considered.

* Loans written off will in most cases be regarded as “bad debt” whereas this will not likely be the case for other operating entities.

* Banks have an added responsibility of withholding 10% on all interest it pays to “any person, other than a Namibian company”.

* VAT apportionment: The turnover apportionment method is applied to provide a consistent, equitable and measurable basis for the recovery of input tax.

In terms of the VAT Act, where a registered person makes supplies of goods and services in a mix of taxable and exempt supplies, input tax may be claimed to the extent that the goods and services supplied result in taxable supplies being rendered, i.e. if the input tax to be claimed relates directly to the making of taxable supplies, the full amount of input tax may be claimed, but if it only relate to the making of exempt supplies, the input tax may not be claimed.

If input tax was incurred for both exempt and taxable supplies, an apportionment formula must be used as prescribed in the VAT Act.

CURRENT PRACTICE

It is current practice that the apportionment ratio must be completed and submitted to Inland Revenue for formal approval within nine months after the financial year end.

The newly calculated actual percentage for the previous year is to become the new provisional percentage for the remainder of the current year. This year-end adjustment constitutes a correction of actual amounts claimed and does not represent a change in use.

The tax considerations for banks can get quite complex and the tax calculation and VAT review can be among the most technical any accountant, financial manager or tax advisor may encounter.

The points discussed above are by no means the only considerations when it comes to the tax implications for the banking sector. We recommend businesses to consult with a tax expert if uncertainties may arise.

Carmen Fransman is the manager: indirect tax at PwC Namibia. Contact her at [email protected]

This article was co-authored by Anneri Luck, the senior manager: corporate and international tax at PwC Namibia.