By KYIV. Nov 29 (Interfax-Ukraine) – The law on increasing the bank profit tax from 18% to 50% in 2023 and to 25% in subsequent years, adopted without discussion with banks, is discriminatory and has long-term negative consequences for the investment and business climate in Ukraine, Board Chairman of Raiffeisen Bank (Kyiv) Oleksandr Pysaruk said.
“It is impossible to determine the excessive profits of banks based on the results of one year. Retrospective taxation of excessive income for 2023, as well as an increase in taxes on bank profits in the future, is unreasonable and deprives bank shareholders of the desire to invest in this business,” the head of Ukraine’s largest bank with foreign capital said in an interview with Interfax-Ukraine.
Pysaruk emphasized that he supports the need to temporarily increase the bank profit tax in the current conditions and has publicly stated this. According to him, the option adopted at the first reading to increase the tax to 36% for 2024-2025 was discussed with banks and was fair.
According to the banker, retrospective taxation approved without discussion at the end of the year creates a very dangerous precedent and tax uncertainty for all economic agents, especially for foreign investors. “Hindsight is bad in itself, but when hindsight is associated with 50% instead of the existing 18%, it is a shock,” he added.
Commenting on the rate of 50%, Pysaruk explained it by the desire to collect an additional 0.3% of GDP from banks as part of a review of the program with the IMF in conditions where state-owned banks are already paying large dividends.
“In fact, the payers of this record high tax are private banks, of which the largest tax burden falls on banks with foreign capital. And retrospective taxation is accompanied by a disproportionate and discriminatory attitude towards private shareholders of the banking system,” the banker said.
He said that the problem is also the unfair singling out of banks from the entire economy via increasing their income tax to 25% on a permanent basis in subsequent years.
“Why are they the only ones getting a tax increase? Why actually 25% and why forever? Why not 28%, not 22% or 20%? … This is an example for investors and business in general: if you are transparent, then you will be taxed even more. And at the same time, you leave a bunch of the economy that doesn’t pay taxes or pays little,” Pysaruk said.
In his opinion, the tax on banks from 2024 should have been the subject of discussion as part of the preparation of the National Revenue Strategy prescribed in the program with the IMF, which the Ministry of Finance is obliged to present by the end of this year and which declares the expansion of the tax base.
The head of Raiffeisen Bank also emphasized that banks are a cyclical business, and an assessment of its profitability should be given over a fairly long period of time, on average 7-10 years. According to him, for the period from 2013 to 2023, the total profit of shareholders of Ukrainian banks (with the exception of PrivatBank and its nationalization) reached 69%, that is, approximately 6% per annum in hryvnia, while the cost of capital in any year after 2013 exceeded 20% per annum.
“That is, for banking shareholders, the last ten years have been unprofitable. For foreign shareholders of Ukrainian banks, who calculate the total income in euros, the situation is much worse. Over the past ten years, the banking system has received a total loss of 52%, approximately -8% per annum in euros,” Pysaruk said.
He explained this by the large losses of Ukrainian banks in 2014-2016, the almost fourfold devaluation of the national currency and the impossibility of receiving dividends for several years.
“Currently, the banking business in Ukraine is unprofitable. Because the cost of capital is very high due to high inflation and very high risks in the country. And I’m not even talking about war,” the board chairman of Raiffeisen Bank said.
In his opinion, the adopted law will discourage strategic banking investors from participating in the privatization of state-owned banks, which is necessary given their high market share.
“We may be left with a banking system that is over-represented by state-owned banks for a very long time,” Pysaruk said.
He added that this approach also does not stimulate foreign direct investment in other sectors. “This is a very bad story for a country that needs external assistance both during the war and afterwards for development,” the banker said.
Commenting on the impact of the increased tax directly on Raiffeisen Bank, the board chairman said that in the short term there will not be a significant impact, because the bank has excess capital and liquidity. “We will pass the NBU’s stress testing without any problems and will continue to support our clients,” Pysaruk said.
At the same time, in his opinion, some other banks that are not so capitalized may have problems.
“The National Bank will probably have to, because it was a consenting party to this decision, soften bank recapitalization plans. Because taxing banks in such a cruel, unfair way and then demanding capital is an additional horror story for investors,” the banker said.
He added that, coupled with a further increase in the NBU’s capital buffer requirements in line with EU standards, the higher income tax would reduce the ability of banks to generate capital to meet the increased demand for loans during Ukraine’s post-war development.
Pysaruk also admitted that some banks may appeal to an international court due to the fact that the adoption of such a law violates the provisions of intergovernmental agreements on the protection of investments, citing as an example Spain, where banks challenged the windfall tax.
The board chairman of Raiffeisen Bank, who was previously the first deputy governor of the National Bank of Ukraine and then worked for three years at the IMF, also expressed regret that the Fund agreed to such a tax increase. According to Pysaruk, this is due to the program’s basic assumptions of ending the war in mid-2024 and a certain level of international assistance being under threat.
“The IMF must create a macroeconomic model and calculate the ability of the debtor … to repay the loan. And this tax was probably required for such a model to take shape. But the price of the issue is precisely this: to save this program and extend it, laws are being introduced that reduce Ukraine’s already low investment attractiveness and can interfere with plans to attract private foreign capital to restore Ukraine after the war,” the banker believes.
According to the National Bank of Ukraine, as of October 1, 2023, Raiffeisen Bank ranked fourth in terms of assets (UAH 196.35 billion) among 63 banks operating in the country. Its net profit in January-September 2023 was UAH 6.14 billion compared to UAH 2.39 billion in January-September 2022.
Since October 2005, the bank has become part of the Austrian banking group Raiffeisen Bank International AG. Currently, the Raiffeisen group owns 68.21% of the bank’s shares, and the European Bank for Reconstruction and Development holds 30%.
