Government rejects proposal to tax banks

The government on Monday poured cold water on a proposal to tax the interest earnings of banks, arguing that such a step would adversely impact the financial system.

Officials and MPs were debating a legislative proposal tabled by Akel which provides for a temporary or ad hoc levy on bank’s interest earnings. The communist party says the tax is warranted as it aims to give something back to struggling borrowers after successive hikes in lending rates.

But Giorgos Panteli, the permanent secretary at the finance ministry, said the proposed tax could potentially put at risk the robustness of the banking system.

Healthy banks are key to the economy and growth, and also to attracting investment, which all lead to prosperity. Any action disrupting this would be wrong, Panteli asserted.

Citing data, he said banks’ solvency ratio currently stands at 26.8 per cent, compared to 7.3 per cent in 2012. And their liquidity ratio is now 328 per cent, up from 216 per cent in 2016.

Meantime new loans to small and medium-sized businesses remain at high levels. Taxing banks might jeopardise their ability to continue doing so.

According to Panteli, between 2016 and 2022 banks suffered aggregate losses of around €670 million. In addition, lenders have contributed some €900 million to state coffers since 2011 when the special bank fee was imposed.

For his part, the head of the Fiscal Council said a more permanent arrangement would be preferable to the ad hoc tax being proposed by Akel. For example, a tax on the earnings of banks could be part of the reform of the tax system overall.

Weighing in, the attorney-general’s office said it has misgivings about Akel’s proposal as it appears to interfere with functions reserved to the state.

Likewise the Central Bank was against the idea.

Michalis Kronides, representing the Association of Cyprus Banks, submitted a memo to parliament that asks that Cyprus seek the opinion of the European Central Bank (ECB) before taking such action.

MPs took his recommendation on board, and asked the finance ministry to initiate the process of querying the ECB.