Tax clearance: Forex buyers opt for parallel market

Several foreign exchange (forex) buyers have shifted their demand and purchases to the parallel market because of the zero documentation requirement to conclude transactions.

The scramble for dollars at the parallel market followed the implementation of a new dollar purchase rule mandating buyers to present Tax Clearance Certificates to banks and other authorised dealers.

With most forex buyers not having Tax Clearance Certificates to buy at the Investors and Exporters (I&E) window- official market- the demand curve has now tilted to the parallel market where the only requirement to complete a purchase is cash availability or funds transfer.

The naira rate at the parallel market weakened to N792/$ at the weekend, N16 weaker than the N776/$ traded at the I&E window.

The stringent forex purchase rules have made the parallel market the hub of transactions, especially with the declining rate gap between the official and parallel markets.

Analysis of transactions at the FMDQ Exchange portal showed declining turnover at the official window, from nearly $280 million daily to between $70 million and $90 million. The transaction volume in the market stood at $73.4 million last Friday.

The increased pressure at the parallel market has been linked to stringent forex request guidelines announced and implemented by banks, including the demand for a Tax Clearance Certificate for dollar purchases based on the Central Bank of Nigeria (CBN) directive.

In an emailed note to customers, Access Bank said: “Following our earlier communication regarding the CBN directive on Form A and Form Q applications, we write to inform you of the detailed requirements for Foreign Exchange (FX) transactions.”

“The Personal Income Tax Act now requires that individual applicants upload a valid Tax Clearance Certificate (TCC) on the Trade Monitoring System (TRMS) for requests including but not limited to: International School Fees Payment; Personal Travel Allowance (PTA); Personal Home Remittances (PHR); Medical Bill Payments; Accommodation payments; Upkeep payments and all other individual FX requests”.

Continuing, it said both pending and future applicants are required to choose the ‘upload’ option to attach a valid TCC which must have a Tax Identification Number, Tax expiry details, Information on tax paid within the last three years and the holder’s name must match the name of the applicant on the Trade Monitoring System (TRMS).

Forex purchase applicants are also required to attach a bid instruction indicating their maximum preferable FX purchase rate and a timeline given to the Bank to source funds on their behalf.

“The bank will then source for funds within this timeline and at your quoted rate in the Investors & Exporters window. Where documentation is incomplete your quoted rate is lower than the prevailing market rate, the request will be rejected, and a new request with a new quoted rate will be required.”

“You may also cancel your request to source for FX at any time by logging into the TRMS portal and choosing the ‘cancel” option,” the bank said.

“Successful applications with proper documentation will be processed and disbursed subject to FX availability, and if the account to be debited is sufficiently funded to cover the Form A charge and other processing fees,” it stated. Other banks are also implementing the same rule based on regulatory directives.”

Speaking on the new trend, Forex Dealer and President of the Association of Bureaux De Change Operators of Nigeria (ABCON), Dr. Aminu Gwadabe, said there is growing speculation and forex holding position among major players in the market.

Former Executive Director, Keystone Bank Limited, Richard Obire, said a key attraction of the alternative market is its “hassle-free”, almost zero documentation feature.

He said it would always have that edge over the formal market for certain types of buyers and sellers. “When supply increases sufficiently to bring forex trade prices down to a stable range, then we may see more people moving into the formal segment of the market. At this point, buyers will probably place reduced value on the “no documentation” feature of the alternative market and see more attraction in the better price they can get in the official market,” he said.

Obire said he suspected that there will continue to be a good number of buyers who will continue to value the speed and hassle-free nature of the alternative market.

“For this profile of buyers, forex price will continue to play a limited role in the decision of where to go for their forex needs. So long as we have these types of buyers, we may not see a convergence of rates in both markets.

“The best we may hope for is a gap in forex pricing in both markets that is not too wide to keep significant arbitrage opportunities alive and well,” he stated.