Special tax treatment on loan moratorium gives banks a soft landing

THE special tax treatment given to banks for the moratorium on loans they offer to customers will cushion the impact on their income, say bankers and analysts. On Monday, Finance Minister Tengku Datuk Seri Zafrul Abdul Aziz estimated that the banking sector would suffer losses of RM 6.4 billion during the six-month moratorium period from April to September.

Two days later, Prime Minister Tan Sri Muhyiddin Yassin granted a further three-month extension of the moratorium for borrowers who lost their jobs this year and are still unemployed. For those who have seen their wages drop, their monthly loan payments – such as mortgages and personal loans – may be lowered along with the drop in wages.

Extending the moratorium and targeted aid on certain loans is expected to impact banks, but the actual amount will depend on the respective banks and the makeup of clients’ loan portfolios, according to bankers and analysts.

Some impacts – of the general six-month moratorium and the three-month extension granted to some borrowers – will likely be mitigated by the special tax treatment on interest income / loan profits accrued during the moratorium period. Interest / profit does not need to be recognized as income during that valuation year, but only when actual money is received at the end of the loan moratorium.

Bank analysts say this provides banks with a buffer to some extent. “What this means is that the banks will have space in terms of cash flow,” said an analyst at a foreign research house.

Tax experts agree.

Koh Leh Kien, partner at Ernst & Young Tax Consultants Sdn Bhd (EY), says special tax treatment on default interest is part of government effort to ease the cash burden on banks by taxing interest on a receipt basis .

The amount of buffer the tax treatment will offer banks depends on the bank’s loan portfolio and how many customers have loans that have benefited from the moratorium, she told The Edge.

“We understand that, for some loans like mortgages, default interest can be spread over the remaining term of the loan term, which can be up to 20 years,” she notes.

Jennifer Chang, tax associate at PwC Malaysia, said that although borrowers do not need to make payments to banks during the moratorium period, financial institutions continue to accumulate interest income – even though these income has not been received – and such accrued interest income will be taxable.

“This has an impact on banks as payments are not made by eligible customers during the loan moratorium period. On top of that, banks have to charge deferred interest. So, to be fair to the banks, the government subsequently announced tax relief for banks on the moratorium on loans, ”she explains.

Chang adds that the main purpose of the tax break is to allow banks to defer taxation of interest income on these loans until they have received interest income from customers. “Therefore, deferral is a timing mechanism that allows banks to tax interest income on tax-deferred loans only when payments are received from customers.”

“This is a tax payment deferral, not a tax holiday,” says a C-level banker.

Practical challenges

Although the government makes a good concession to the banks, Chang points out that it would be difficult to administratively track each customer and determine exactly when their payments would be made.

“What is important to note is that the banks potentially have thousands of customers, and it is difficult to say whether each of these customers would be able to pay the banks promptly once the moratorium period ends. on loans. “

She says it is important that the government also consider a simple mechanism for banks to administer so that deferred interest is taxed.

She adds that the government may consider allowing banks to accumulate interest income on deferred loans over a period of a few years so that they can easily administer this tax break.

She also referred to recent guidelines issued by tax authorities on tax relief, where it was noted that all expenses related to deferred interest income should be disallowed for tax deduction purposes.

“Again, it is important not to unnecessarily burden the banks with administrative tasks, as it would be difficult to track these expenses, if they occur,” she says.

Koh of EY agrees, noting that special tax treatment is difficult for banks, “as they are likely to incur a considerable amount of additional administrative and compliance costs.”

“Banks face practical challenges in separating and tracking default interest, due to the complexity of calculating interest for a range of loan products with different interest rates; the options available for clients to opt out of the deferral program in whole or in part; and also options given to clients on how they prefer to repay deferred payments.

“Given these complexities, banks’ IT infrastructure will need to be configured to track late interest separately, and additional resources will be needed to monitor this, resulting in additional costs for banks,” she said.

In addition, Koh notes that under Malaysian Financial Reporting Standard 9 (MFRS 9), overdue interest on deferred loan payments canceled by banks will result in a one-time fair value change impact on first day.

“Since fair value has been recognized as income, theoretically, the impact of the change in fair value on day one should be deductible for banks,” she says.

Bank Negara Malaysia told bank analysts in a recent briefing that day one change losses are a one-time adjustment due to accounting requirements and are not expected to affect banks’ long-term profitability.

Affin Bank Bhd last Monday estimated that it would incur a RM 80 million change loss on day one in fixed rate funding assumptions caused by the six-month moratorium on lease-hire loans.

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