-the portions of the additional tax payable recorded during tax audits.
Over the years, financial institutions in Tanzania have witnessed a controversial treatment of written off loans during the unprecedented period of the COVID-19 pandemic, most financial institutions have implemented several measures to combat the expected rapid increase in non-performing loans (NPLs) such as rearrangement of payment terms with affected clients. The Bank of Tanzania (BoT), in an effort to protect the economy from the adverse effects of COVID-19, has chosen to reduce the bank rate from 7% to 5% to provide more space for banks to borrow from of the BoT. Despite the efforts, financial institutions have witnessed the surge in NPLs due to several reasons such as reduced business operations and reduced consumption, which has made it difficult for most clients to repay their loans. . The Covid-19 pandemic and the increase in non-performing loans present a demanding situation and an opportunity for the TRA to offer clear and fair guidelines as to reasonable measures and when the financial institution can reasonably believe that the debt will fail. will not be satisfied
Through this article, I have proposed four approaches that can be adopted as guidelines for dealing with loans written off by financial institutions. The suggestions aim to improve tax compliance, reduce the number of disputes and improve the business environment for financial institutions from an income tax perspective. The TRA often withheld a deduction for write-offs when calculating taxable income, although the loans qualified for write-off in accordance with prudential guidelines established by the Bank of Tanzania (BOT).
Before I dwell on the subject, it is crucial to remember that in most cases, if not always, financial institutions decide to cancel a loan after the loan has become a non-performing loan (NPL). An NPL is a bank loan that is subject to late repayment or is unlikely to be repaid in full by the borrower. NPLs represent a major challenge for financial institutions as they reduce their profitability and are often seen as an obstacle to the ability of financial institutions to lend more to customers, which in turn slows economic growth.
The controversy between financial institutions and TRA is due to the wording of the Income Tax Act, 2004 (ITA), which sets additional requirements in addition to the BoT requirements for financial institutions to complete the loan as written off (bad). The additional requirements are that the financial institution has taken all reasonable steps to pursue the payment and that the institution considers them to be the key enabler of a sustainable economy.
Below are four proposed approaches that, if considered, could help resolve the controversial issue of the amicable treatment of non-performing loans:
â¢ Where there is no form of collateral or guarantee that can be realized by the financial institution, the TRA should align with the BoT regulations. Thanks to this, banks and especially microfinance institutions will be able to reduce disputes with TRA since the majority of their loans are unsecured.
â¢ Where a collateral exists, the assignment of that collateral should be taken as a reasonable step taken to collect the loan, and when the proceeds are insufficient to cover the debt in full, the difference should be written off and accepted by the TRA as a deductible fees.
â¢ When the specific borrower has been identified and has presented evidence of inability to pay, the TRA should accept this as a reasonable action taken. Evidence could be reasonably convinced that the claim will not be satisfied
Unfortunately, there is no definition or guidance from the TRA on what constitutes reasonable measures and when should financial institutions believe the loan will not be collected. This in turn has led financial institutions and TRA to have different interpretations on the issue. For example, financial institutions are of the opinion that once the loan is eligible for write-off, in accordance with BOT regulations, and the loan is at the judicial stage, they have taken whatever action they can, and they reasonably believe that debt is bad. However, this is not the case from a TRA perspective. For TRA, bad debts are only recognized when the financial institution loses its lawsuit. At this point, all actions are considered to have been taken and the institution must now classify the debt as bad. Given the practicalities of the business environment for financial service providers, it is common for court cases to go on for several years before they are concluded and during this time the institution can do nothing more than treat the loan as bad. That is, the TRA approach can ignore the practicalities of the business environment, business closure / liquidation, bankruptcy, etc.
â¢ Where debt is low to the extent that the cost of collection exceeds the debt itself, follow-up evidence such as phone calls and email correspondence should suffice. This is because it is a loss for the financial institution to incur more costs than it can recover.
Notwithstanding the above and given that efforts are being made to encourage the TRA to establish guidelines in the spirit of removing the ambiguity that accompanies loan write-off requirements, I encourage financial institutions to put in place proactively all relevant documents justifying the write-off loans before the decision to write off from an income tax point of view. This will allow them to support a TRA audit.
Nsanyiwa Donald ([emailÂ protected]) is an associate director at KPMG in Tanzania.
The opinions expressed here are those of the author and do not necessarily represent the views and opinions of KPMG