P2P Lending & Taxation
19 Aug 2021
What all lenders need to know about P2P lending taxation
Fundkiss P2P SME loans are a fast-growing asset class in Mauritius. Lenders must be aware of the tax implications of interest earned through lending on the Fundkiss platform. Income earned through lending on the Fundkiss platform is subject to the taxation laws of Mauritius. The Mauritius Revenue Authority (MRA) requires all P2P lenders to declare their earnings from P2P lending in their annual tax returns.
To simplify the taxation aspect of P2P lending, Fundkiss partnered with Bakertilly Mauritius for a webinar on P2P lending & taxation. Bobby Yerkiah, the Tax partner at Bakertilly Mauritius, has over 20 years of experience in local and international corporate taxation. Bobby took us through the must-knows of P2P taxation that all lenders must be familiar with.
Based on key takeaways from the webinar and FAQs from our lenders, we bring you the following aspects of P2P lending and taxation.
1. What earnings do I receive from P2P Lending through Fundkiss?
Lenders receive monthly repayments comprised of the principal component and interest earned from lending on a project.
2. Do I need to pay tax on the income I earn from P2P Lending?
Yes. However, P2P lending benefits from tax exemptions. Only 20% of the interest received from P2P lending is subject to income tax.
The principal amount received back is not taxed.
3. How is such tax computed?
The tax incentives and exempted rates make P2P lending with Fundkiss an attractive asset class.
It should be noted however that the incentives only apply to projects from the 1st of April 2021 onwards, when Fundkiss received its FSC P2P Lending license.
Only 20% of interest income is taxable – Income interest from P2P lending is entitled to an 80% partial tax exemption. Essentially, making only 20% of the income earned taxable.
Tax rate set at 3% – The 20% taxable income is then subject to a tax rate of 15%. Your effective tax rate will be only 3% of all the interest income received after all the tax incentives.
For instance, if you receive MUR 10,000 in earnings from interest through P2P lending, only MUR 2000 would be considered taxable income.
At a tax rate of 15%, the tax amount paid would be MUR 300. Therefore your effective tax rate is of 3%, which means that of the MUR 10,000 earned as interest, you shall pay only 3% of it as taxes.
4. Is tax deducted at source on income earned?
P2P lending platforms work to connect prospective lenders with relevant borrowers, thus, their primary role is that of a facilitator. At Fundkiss for instance, we exist to ensure that there is a viable marketplace for SME lending, for which we conduct the activity of monitoring the flow of repayments from the borrower to the lender.
However, we do not deduct tax at source as it is the responsibility of lenders to file their income through interest earned in their income tax returns to MRA.
In other words, there is no TDS or deduction at source on interest, and it is the gross interest that is received by the lender as taxable income on P2P loans.
5. How is P2P interest income filed in the MRA returns sheet?
The interest income earned from P2P loans need to be declared while filing tax returns.
These are declared under Section 4 of the MRA returns sheet, with reference to Note 6, as “Interest derived from income money lent” (Section 4.2.1).
Elaborating on these provisions, Note 6 reads as follows:
“Where a person is deriving interest from P2P lending, 80% of such amount is exempted from tax. Any amount lent which has become bad may be deducted from the interest received through the P2P lending platform. Any debt on interest which cannot be fully relieved may be carried forward and set off against interest received on the same P2P platform in the succeeding income years.”
But more on bad debts below.
6. What happens in case of bad debts?
At times, businesses face unforeseen circumstances which could result in their inability to make repayments. When a borrower is unable to make their repayments, we have a recovery process in place. You can read more about it on our blog here.
Bad debts are investments in a project where the borrower is unable to make its repayments and is under a legal recovery process. In case of bad debts, the principal amount or interest that is proved to become bad may be set off against interest income from P2P lending. The excess balance is to be carried forward indefinitely and set off against future P2P interest income.
A lender can be eligible for bad debt offset as soon as the borrower is served a legal Mise en Demeure (Demand letter).
An important point to note here is that if the interest is received from another P2P platform, a bad debt from the first P2P platform cannot be set off against the same. However, the same bad debt can be carried forward indefinitely and can be relieved against interest received from the concerned P2P platform over subsequent years.
It should also be noted that if the outstanding amount is recovered after the legal process, it would be considered gross income and taxed at 15%.
How Fundkiss helps lenders with their tax filings
While filing tax returns might be the responsibility of a lender, providing our lenders with the Investment Summary and Tax Certificate is entirely ours.
The investment summary provides details of all your investments in P2P loans with Fundkiss. The summary is provided to lenders at the end of every quarter. With our upgraded platform, this information is also readily available in the lender dashboard.
Tax Certificate provides you with all the necessary information to help you file your MRA returns. Fundkiss provides this document to all lenders at the end of every financial year.
We also believe that we are best placed to support our lenders on the tax front with educational initiatives such as P2P lending & taxation webinar held on July 29 in collaboration with Bakertilly.
We would like to thank Bobby from Bakertilly Mauritius for sharing his expertise with our lender community. For those who missed this webinar, please find the recording below:
We hope the expert insights shared during this webinar serve to answer most, if not all, of your questions, and if there are any other ways we could help you on the tax front, please let us know.
We remain available on 218 2195 or [email protected].
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