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Interest, Interest, Interest, Interesting.

Byline: Daniel Steinmann

"Interest" is not defined in the Act. Generally, interest is the consideration payable for the use of borrowed money (although other consideration is possible, such as the free occupation of the debtor's property).

Other amounts, such as discounts on bankers' acceptances or promissory notes, are not interest since there is no underlying debt. The application of the withholding tax to such amounts is therefore problematic." Practical Guide to Tax in Namibia, p53. Published by LexisNexis

Last year at a posh function to mark 20 years of the Legal Assistance Centre, one of the drafters of the Namibian Constitution, Justice Arthur Chaskelson in a spirited address, pressed upon us the difference between Rule of Law and rule by law.

Taking us through the sad travails of Mugabe in Zimbabwe, he demonstrated, citing numerous examples, how the law was changed continuously, to suit the ruling party, thereby inevitably forcing the country closer and closer to the precipice. The rest is history of which, sadly, we are all aware.

For me, the essence in the learned Justice's plea was that you cannot have Rule of Law when it suits you and override the law when it does not.

I am glad to say that local events in the financial services industry dispelled my fears that we may become banana growers. I was told, in what must certainly be a landmark decision, the Ministry of Finance this week reached a compromise with the unit trust industry, dropping its hastily concocted interim regulations of last year, and reverting to what the law, as announced in December 2007, intended to achieve.

It is supposed to be announced today, that the Ministry has backed off from its hardline stance on Withholding Tax on interest from unit trusts, for the period 1 March 2008 to 28 February 2009. Since this announcement is due only after the Economist has hit the streets, there is still the chance the ministry may renege and out of fury, pull away from the compromise.

Two weeks ago I alerted the broader public that a not insignificant conflict is looming in the financial world. This all pertained to Withholding Tax and what to do about it for the just-ended financial year. As I said earlier, in two separate announcements in the first half of last year, the finance ministry out of the blue, declared that for the period under dispute, a Withholding Tax of 35% for corporate investors, and of the applicable personal income rate for private individuals, will be levied on all interest income derived from unit trusts. I do not want to repeat the technical detail here. Suffice to say, these arbitrary regulations met with fierce resistance, and also a bit of machination as several institutions "restructured" their funds to get past the common notion of interest. Matters were complicated when Namfisa approved these funds and the ministry was infuriated beyond description. Another aspect of which few people are aware is that the managers of these funds have already gone back to their investors telling them everything was hunky dory and there will be no Withholding Tax for the year in dispute. When this transpired not to be the case, a run on unit trusts was feared, and as a source in one of the banks so delicately put it: We simply do not had the cash on hand to refund all of the big guys at the same time, were they to withdraw their investments and take them somewhere else. This conflict had the potential to destroy a large part of the Namibian unit trust industry.

But as in any compromise, concessions have to come from both sides. If my sources are correct, the ministry will drop its nonsense of a 35% and a PAYE-related Withholding Tax and charge a flat 10% on all unit trust interest income. For their part, the legal engineering by the industry must be brushed aside, and all so-called roll-up funds must also pay the standard 10% Withholding Tax.

Exactly what the minutiae of the compromise further entail I do not know, but I am anxiously awaiting the announcement later today.

It is easy to apportion blame and point fingers at investment managers and at the ministry for the mess the unit trust industry had to face. All of this could have been avoided, were there better consultation between the ministry and the industry.

One thing that upset me is the fact that there is not a single individual in the industry that I talked to, that is not scared stiff of the ministry. One more outspoken investment manager, who still threatened to murder me if I divulge its identity, said it cannot understand this fear of the ministry. We are the reason for their existence, not the other way around, was all I got.

Which just underscores my point how glad I am the Rule of Law came out the winner.

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Publication:Namibia Economist (Windhoek, Namibia)
Date:Mar 6, 2009
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