Press Releases

Tax on Assets of Credit Unions

Announcement of Tax on Assets of Credit Unions

The Minister of Finance in a Ministerial Statement during his contribution to the 2014/2015 Estimates of Revenue and Expenditure announced that all financial institutions, inclusive of credit unions, will be required to pay a tax on their assets at the rate of 0.20% of assets for a defined period.

Particulars Relative to Payment of Tax

The start date for the payment of this tax for Credit Unions is unclear.

What we do know is that Parliament passed into law the Banks (Tax on Assets) Act, 2013 which identified the financial institutions on which the tax would be levied as banks licensed under Part II of the Financial Institutions Act (FIA), Cap. 324A.

Particulars of the Computation as per Bank (Tax on Assets) Act, 2013

The rate of tax payable on the average domestic assets of a bank is 0.20% per annum provided that the said tax shall be pro-rated and paid every 3 months commencing September 1, 2013.

The Act came into force on September 1, 2013 and shall end on August 31, 2015.  Further, the legislation states that no tax shall be levied under Act for any period after March 31, 2015.

Analysis of Impact of Tax on the Credit Union Movement

Approximately $3.6 million will be extracted from the movement.

Several credit unions may experience losses and or have their capital depleted further below the required capital adequacy ratio of 10% of assets.

Credit unions are already impacted by increasing Non Performing Loans (NPLs) for which provisions have to be made as well as increasing levels of expenditure to comply with new regulatory requirements, so the payment of this tax will have a further negative impact on their balance sheets.

Reasons not to Tax Credit Unions

Credit unions were created to provide financial services in a democratic, not-for-profit manner – that is with membership and control.  These characteristics are the foundation of the tax exemption.

Credit unions, if taxed, would have to take the money from reserves – the cushion that protects members’ savings and the credit union from economic shifts.

Taxing credit unions will compromise their ability to serve the needs of those at the lower end of the social spectrum.

Credit unions will either be forced to pass on these taxes to members in the form of fees, higher loan rates, lower rates on deposits; or absorb the expense to the detriment of their capital. The first three options are very unlikely, as credit unions’ tend to shield their members from these types of costs.  Therefore absorption is the most likely route with its unfortunate implications. 

Credit unions that borrow to increase their lending capacity, in effect would have to pay both interest on funds borrowed, and then on top of that, a tax on the asset created. Credit unions are not in the business of “leveraging”.

Taxing the assets of credit unions is in effect a tax on the loans since loan business is approximately 76% of the assets of credit unions in the aggregate.

Taxing the assets of credit unions is ultimately a tax on the after tax savings of members deposited in the credit union.

 

A tax on assets of credit unions is potentially detrimental to the financial health of the institutions since the tax has to be paid whether or not the institution has adequate surpluses to cover such taxes. 

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Barbados Co-operative & Credit Union League Ltd.
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