Tax incentives for capital market advancement
by D. S. K. Amarasekera ACA, BSc (Bus. Adm)

Activities of our capital market have been dynamic during the recent past and due attention may not have been given by the relevant authorities and the players in the capital market to the possible tax implications that might arise through some complex capital transactions. This short article would discuss some of the tax implications to the capital market and it is expected that the related institutions will take note of these tax implications, especially when making their submissions to the relevant authorities in asking for further tax exemptions for their purpose of capital market advancement.

Take overs and mergers
As defined by the take over and merger code, ''take over'' means a transaction or series of transactions whereby an individual or a company acquires control over the assests of a company either directly by becoming the owner of those asets or indirectly by obtaining control of the management of he company and ''merger'' means a transaction whereby the assets of two companies become vested in or under the control of one company (which may or may not be one of the original two companies) which has its shareholders all or substantially all the shareholders of the two companies following points can be noticed.

1.1. In case of take over, if this is effected through sale of shares, shareholder of acquire company, which is a Q.P.C., will be exempted from tax. However, if it is effected through sale of assets, acquiree company (in case of capital gain arisen through sale of assets) and the shareholders of that company (in case of capital gain arisen through liquidation of company) will be liable for tax.

1.2 In case of merger of two companies, where a person was a shareholder of any of those companies, any money received by such shareholder in consequence of such merger will be liable for capital gain tax. As the capital gain through sale of shares in QPC's is already exempted from tax, it is better to exempt the capital gain in whatever form accrued to the shareholder of QPC's through a merger.

Tax losses of acquiree company
Presently, our Inland Revenue Act does not permit to absorb the tax losses of acquiree company against the total statutory income of acquiror company. If it can be allowed it will be a good motivating factor for acquisition of loss making companies.

3. Capital losses on sale of QPC shares
Today, because of various socio-economic factors, our capital market is depressing. As a rsult the majority of the shareholders of QPC's are incurring losses through sale of shares and they are not enjoying any benefit on the tax exemption given for the capital gain on sale of QPC shares. As provided in our Inland Revenue Act to deduct a capital loss from the total statutory income mainly two conditions should be satisfied:

a. Total statutory income shall include capital gain and the loss be deducted only to the extent of capital gain included in the total statutory income.

b. That capital loss might not have arisen through an exempt source. i.e. if it had beena profit, it should have been assessable under the Inland Revenue Act.

Because of the condition (b) stated above no one can claim the loss on sale of QPC shares against its total statutory income. Therefore, under the present circumstances while maintaining the exemption for capital gain on sale of QPC shares, there must be some sort of specific concession (say a qualifying allowance) for the capital losses on sale of QPC shares too and it will help in boosting the volume of transaction in the equity market.

Dividends received by companies on investments
As provided by the Inland Revenue Act, presently, dividend does not form a part of the assessable income of the receiving company. Also the receiving company has been restricted from claiming the A.C.T. paid by the dividend paying company. As the A,C,T, rate has been increased to 54%, in the case of dividens declared by QPC's, it would be better to give the option to investors to decide whether the dividends should form a part of their assessable income or not in case they decide to treat it as a part of their assessable income, their tax liability on dividend will be equal to the A.C.T. (ie 100+54 x 35%=54). But what is important here is that where the receiving company has accumulated tax losses, it can claim the dividend income to be set off against that accumulated tax losses and ask the A.C.T. to be refunded.

Dividends declared by Unit Trusts and Mutual Funds
Where a Unit Trust or Mutual Fund of which the profit is exempted from income tax, pays a dividend, such dividend does not form part of the assessable income of the recipient unit holder (i.e. he is not liable for tax for those dividends) and therefore such unit holder is not entitled to (as provided by the section 38(4) of Inland Revenue Act) credit either for the withholding tax or for the A.C.T. if any, paid by such resident company in respect of the dividend paid to the Unit Trust or Mutual Fund. This inability of gaining or transferring W.H.T. and A.C.T. included in the dividends received is a major disadvantage these Unit Trust and Mutual Funds are facing because of the so called tax exemption and some times it would be advantageous (for shareholders) to forego the tax exemption. In these circumstances, it is necessary to bring the relevant amendments to the related provisions of the Inland Revenue Act, so that the unit holders of Unit Trust and Mutual Funds enjoy the true benefit of imputation credit system and withholding tax.

Redemption of units in Units Trusts and Mutual Funds
Units in mutual funds and units trusts generally be redeemed upon the request of the unit holder and redemption price of unit is calculated on each subscription day by reference to the asset value of the fund at the close of the redemption day Gain arisen to these unit holders on the redemption of units is liable to income tax and it has not been exempted as yet. (Please note that what has been exempted under the Inland Revenue Act is the sale of units and nothing has been stated about the redemption of units, which is not a sale). However, this would conflict with the government policy of exempting the gain on sale of QPC shares as the unit price of a mutual fund which has invested in shares in QPC's would necessary be a reflection of the market price of QPC shares.

Conversion of convertible debentures into shares
Capital gain through sale of quoted bonds debentures and other debt instruments has already been exempted by the last budget. What is the position of the capital gain to the debenture holders at the conversion of convertible debentures into shares? Conversion of debentures into shares does not constitute a sale of debentures and therefore, the above exemption cannot be applied to the gain. The debenture holder will have to pay 25% tax on the difference between the market value of the shares (as at the date of conversion) received and the cost acquisition of debentures. As the issue of debentures has become a very popular way of raising capital, especially during the last few years, it is necessary to grant exemptions for capital gain on quoted debentures arising in any manner.

Withholding Tax on interest of quoted debentures
Dividends declared by QPC's are not subjected to witholding tax. However, interest on quoted debentures are subject to 10% withholding tax at present. Withholding tax concessions given to the dividends of QPC should be extended to interest on quoted debentures too. Cash flows of institutional investors will be benefited from this and also it will stimulate more individual investors to come to the debentures market.

Standard Chartered in Beijing

Standard Chartered is delighted that in conversation between China's Premier Zhu Rongji and Britain's Prime Minister Tony Blair, the Premier indicated that Standard Chartered would receive a branch licence in Beijing. Prime Minister Tony Blair announced this in Beijing today.

Standard Chartered has applied to the Peoples' Bank of China for this licence and subject to normal consents and conditions, expects to receive formal approval from the Peoples' Bank of China soon.

"This is an important step forward for everyone at Standard Chartered," said Sir Patrick Gillam, Chairman of Standard Chartered PLC. "This year we are celebrating our 140th anniversary in China. We are the longest established foreign bank in China and have the largest network of branches and representative offices. We look forward to opening the branch in Beijing which will enable us to be an even more effective partner in China's economic development."

Standard Chartered has operated a Beijing Representative Office since 1982. As one of the key offices in north China, Standard Chartered's Beijing Representative office has played a key role in the business development of this area, especially in supporting the business of its Tianjin Branch.

Once the branch licence has been received, the Beijing branch will provide premium services to Chinese and foreign enterprises, and will participate and assist in China's economic construction. It will be the eighth branch for Standard chartered in China and will oversee the Bank's North China business, including the Tianjin branch and Dalian and Qingdao representative offices.

The Central Bank's Spot Rates for transactions with Commercial Banks announced on the morning of October 09, 1998 were as follows:

The approximate middle exchange rates of following currencies calculated on the basis of cross rates quoted by Gulf International Bank, Bahrain as it appeared in Reuters Financial Information System on October 09, 1998 were as follows:

Average rates at which the following currencies were quoted by Commercial Banks in Colombo for Telegraphic Transfers at mid-day on October 09, 1998 were as follows:

Average Weighted Prime Lending Rate (AWRP) and Lowest Prime Rate (LPR)
The Average Weighted Prime Lending Rate (AWPR) during the week ended October 2nd,1998 was 15.9 per cent for all banks. The Lowest Prime Rate among banks during this week was 11.9 per cent.

Average Weighted Deposit Rate of Commercial Banks (AWDR)
The Average Weighted Deposit Rate (AWDR) of Commercial Banks for the month ended September 30th, 1998 was 9.6 percent.