PAYE on staff loans used to be determined using the prime lending rate which was issued by the Bank of Botswana (BOB).
However, the central bank has since changed its position on this and commercial banks determine their prime lending rates whilst the BOB only prescribes the Monetary Policy Rate (MPR). On the other hand, the Income Tax Act prescribes that PAYE must be paid on any loan which is issued at a rate lower than the ‘commercial rate’ as at any particular time. We will show you why the MPR of 2.65 percent is the current rate to be used for PAYE on staff loans. We have not seen anything contrary from the tax authorities, hence our assertion that the rate to be used is 2.65 percent. In this article, words importing the masculine shall be deemed to include the feminine.
Enter interest free loans
As alluded to above, employers may actually grant their employees loans whether for capital acquisitions or to cater for personal expenses without charging any interest. However, the taxman recognises that, in actual fact, the employee would have derived some form of benefit that would otherwise not be available to them had the employee not been employed by that employer.
Fundamentally, an employee’s taxable remuneration includes salary and any other valuable benefit, including non-monetary advantages enjoyed by the employee as a direct consequence of his or her employment. Specifically, and in verbatim, the Income Tax Act prescribes that, ‘The employment income of any person for any tax year shall include the value of any other benefit or advantage granted to an employee in respect of his or her employment, included in which may be the difference in the amount of any preferential rate of interest granted to the employee by the employer in respect of any loan made by the employer to the employee, and the normal commercial rate currently prevailing.’
Put in other words, employees who enjoy interest free loans from their employers are liable to tax for not paying any interest on the loans. The same principle applies to those who pay interest at a rate lower than the ‘commercial rate’ on such loans. Therefore, employees are taxed on the positive difference between the prevailing monetary policy rate of interest and the interest charged by the employer. Assuming that an employee gets an interest-free loan of P1m from his employer over 2 years, the employer would have to determine PAYE as follows: (2.65 percent*P1m), giving a taxable annual benefit of P 26 500. This would then be taxed on a monthly basis.
As stated above, since we have not seen anything written contrary to the use of the MPR from the tax authorities, then the MPR becomes the default rate to be used on taxable loans.
If an employee pays interest on a loan which is lower than the MPR, then the difference between that rate and the MPR is used for tax. As an example, PAYE will be determined at 1.65 percent on staff loans bearing interest of 1 percent. However, no taxable benefit arises where the loan is provided by a financial institution under an arrangement facilitated by the employer. We are also aware that some employers grant their employees salary advances which are repaid over say 2 years. Such advances technically become taxable loans as they are payable over a long period.
Well folks, we hope that was insightful. As us the two Yours Truly say goodbye, remember to pay to Caesar what belongs to him. If you want to consult, join our free Tax WhatsApp group or to know about our 9 Tax e-books, send a text to +267 7181836. You can read more tax articles on our website, www.aupracontax.co.bw under the ‘Tax articles’ tab.