Banks will pay significantly more taxes under gov’t proposal that they account separately for their investments in state debt: The state treasury expects to net as much as EGP 10 bn in additional taxes from a proposed change to how banks account for their income from government debt, unnamed sources in the Finance Ministry told the domestic press over the weekend. The news comes after the Madbouly cabinet signed off last week on proposed amendments to the Income Tax Act that would force banks and financial institutions to separately account on their income statements for returns from their investments in government.

What’s at stake? A double-digit increase in the effective tax rate for some institutions. Shuaa Securities Egypt ran the numbers on a hypothetical bank (pdf) with income of EGP 33 bn, split as EGP 14.5 bn from investments in treasuries and EGP 18.5 bn from all other activities. If the change is implemented, the bank would have an effective tax rate of nearly 37% against 24% under the system now in effect.

How does this work? In brief: “The proposed new tax method will require accounting for income from Treasuries as part of taxable income, which would result in banks having to reallocate costs to match revenues. The process of reallocation will cause banks’ other operating costs to shrink (theoretically), further amplifying banks’ income from operations (other than Treasuries) and resulting in a higher effective tax rate for banks.”

Is there still room to talk, or is it done? In a research note out overnight (pdf), CI Capital reports that after talks with key bank officials, “we understand that discussions are still ongoing between the MoF and the Federation of Egyptian Banks regarding the mechanism of applying the amendments.” CI Capital says “market chatter” suggests it is unlikely the change in accounting standards would be applied retroactively, meaning “this would not affect current profitability, and make the implementation more feasible, in our view.”

The Federation of Egyptian Banks has made a counter proposal, it said in a statement picked up by Al Mal. According to CI Capital, bankers are suggesting breaking down costs on the income statement in a way that could “render a lower impact, particularly for the more efficient [banks], in terms of an additional tax burden, as opposed to the MoF’s initial proposal, where banks’ total expense-to-income ratios are to be used to calculate treasury costs.”

Maait says this is not a tax increase: Finance Minister Mohamed Maait insists the move is not a tax hike, but rather is fairer (to society and the wider economy, if we’re reading this right) way to go. Semantics aside, Maait added that the amendments were proposed after consultation with banks and the CBE.

Market reaction: Six-month and one-year treasury bill auctions saw low turnout and high yields on Thursday, CBE data showed, signaling a loss of appetite among banks and financial institutions after the cabinet decision. The CBE was looking to raise EGP 9.5 bn at the auction, but accepted bids for just EGP 1.3 bn in one-year T-bills at an average yield of 19.920%, up from 19.778% at the last similar auction. The central bank also accepted bids of for c. EGP 757 mn worth of six-month T-bills at an average yield of 19.893%, up from 19.676% at the last similar auction.