Billions have been lent to businesses using the bond mechanism and the 125% increase in the tax rate on interest income on bonds will only penalise businesses, says Managing Director of the National Bank of Industry and Commerce Limited (NBIC), Michael Archibald.

In an interview with Stabroek News last week, Archibald explained that because of the reorganisation, difficulties and competitive pressures facing many businesses, commercial banks had structured debts using three-year and five-year bonds under the provisions of the Income Tax Act available to businesses to secure debt at a cheaper rate.

“Some of the companies who have benefited from this might have gone out of business otherwise. They have now shut off a source of funding at a preferential rate to the business community,” says Archibald.

The government amended the tax laws recently and one of the provisions included removing interest income on bonds for commercial banks from the withholding tax regime and applying the 45% corporation rate of tax on profits to that income. Withholding tax had been earlier increased from 15% to 20%.

But a government source says the net effect of the measure would be negative or revenue neutral because rates are coming down and banks will be forced to charge normal rates for loans at the 45% tax rate. Additionally, banks will increasingly seek to benefit from double taxation agreements in their bond investments in the region, which carry more favourable tax benefits. What this means, the source argues, is that the amendment to the tax law will not produce higher revenues.

Archibald notes that the commercial banking system is the repository of the largest monetary reserves and the Income Tax Act provision for bond financing at withholding tax rates had to be meant for the banks’ use, from which they would now be excluded.

He told this newspaper that NBIC had applied interest rates of between 9% and 10% on bond debt; a significant reduction from the 17% that companies would ordinarily have had to pay and it was this measure which allowed many businesses to survive and be competitive. However, he notes that as these bonds are paid off, companies wishing further capital will have to pay the higher interest rate. While, Archibald says, the banks did benefit from a lower tax rate on their interest income, it was businesses, which got the biggest break.

“In order to penalise the commercial banks for doing something legal, he [the policymaker] has penalised the business community,” says Archibald.

The Guyana Bank for Trade and Industry (GBTI) has also come out against the tax measure: “We view this amendment not only as a retrograde step, but a discriminatory measure, as it constrains the banking sector, by far the largest repository of domestic savings, from participating in the domestic capital market. It is also noteworthy that bond financing has been used successfully in other countries to spur the development of the money and capital markets and the commercial banking sector participates on a level ground with other investors. As a result, our country may have inadvertently subdued the development of its capital market,” says GBTI’s chief executive, RK Sharma.

Sharma says GBTI got involved in bond financing to help manufacturing companies so that they would improve their investment and productive efficiency.

In recent remarks at the recommissioning of GBTI’s Regent Street branch, Sharma said that fundamental to the growth and development of business is the structure of its financing for investment and expansion. He said that the cost of financing was one of the key ingredients that affect the profitability of businesses, the others being small markets and external competitive pressures.

“In today’s economy, the capital market functions as an economical source of financing for investment and expansion activity of businesses. In the Caribbean and North America, there exists a fully developed capital market in which businessmen can choose from a competitive array of financing solutions that are available including venture capital, bond financing, equity participation etcetera that enable them to minimize the cost of capital and operate successful businesses,” Sharma said.

He added that the efficiency of capital markets was associated with some form of government intervention but mainly through legislation.

Noting the low trading volumes on the local stock exchange, Sharma said this related to the nature of the business community in Guyana. “What is required therefore are appropriate incentives that would encourage the formation of public companies who can utilize the stock market to raise low-cost capital for investments.” In the absence of a vibrant capital market, a development banking institution and other long-term alternatives, he said, the commercial banks have had to play that important financing role and in order to meet the gap in the need for cheaper capital below short-term lending rates, used the provision of the Income Tax Act.

“It is our view that this provision was instituted in order to provide the opportunity for companies to raise the capital required for long-term investment projects,” Sharma said.

The Guyana Association of Bankers had recently met as a group to discuss the implications of the new tax measure and was to have issued a statement on the issue.

However, the banks could not agree on the wording, some feeling the statement might be too strong.