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Cabinet sets special levy on banks

ENACTING a special tax levy on banks has been a pet project of Robert Fico and his Smer party. That passion never resulted in legislation when Fico and his coalition were in power between 2006 and 2010. But it is now the cabinet of Prime Minister Iveta Radičová that has approved a special levy on domestic banks and subsidiaries of international banks in the hope of bringing an additional €51 million to the state coffers next year.

ENACTING a special tax levy on banks has been a pet project of Robert Fico and his Smer party. That passion never resulted in legislation when Fico and his coalition were in power between 2006 and 2010. But it is now the cabinet of Prime Minister Iveta Radičová that has approved a special levy on domestic banks and subsidiaries of international banks in the hope of bringing an additional €51 million to the state coffers next year.

The amount of the levy approved by the current centre-right government is not nearly as hefty as a proposal that Smer, the strongest opposition party, pursued last November or the amount it is now proposing, but the banks are demanding a much lower levy, arguing that Slovakia’s banking sector did not need to receive any financial assistance from taxpayers during the dark days of the 2009 financial and economic crisis.

The special bank levy is one part of the government’s plan to boost state revenues in response to lowered estimates for the country’s future economic growth: in early September the Finance Ministry’s Institute of Financial Policy trimmed its prognosis for economic growth in 2012 from 4.4 percent to 3.4 percent. The International Monetary Fund (IMF) has predicted Slovakia’s GDP will grow by only 3.3 percent in both 2011 and 2012.

The Finance Ministry has been seeking additional revenue sources to cover the shortfall that is expected to reach €240 million because of the smaller economic growth. The ministry has already decided to take €95 million from reserves it had planned to create to help cover the gap, the Sme daily reported.

The government thinks it can get the remaining €145 million from three sources: the special bank levy; an earlier hike in excise taxes on cigarettes; and higher fees paid by Slovenské Elektrárne, the electricity generator, to the National Nuclear Fund. The ministry also assumes some extra revenue may come from the sale of digital broadcast licenses and better financial results by some state-owned companies.

“Today we concluded the debate on revenue and now during the upcoming weeks we will discuss the draft budget and continue talking about spending,” Finance Minister Ivan Mikloš stated, as quoted by SITA newswire, adding that government ministries are still hoping to get €1.5 billion more than what is in his draft budget.

Mikloš said keeping the country’s public finance deficit at the proposed level of 3.8 percent for 2012 remains as the government’s top priority.

The bank levy

The special bank levy will be based on a bank’s total liabilities, less the bank’s equity capital and the deposits it has that are covered under Slovakia’s deposit protection system. The cabinet passed the draft legislation on September 21 and set the rate for the special levy at 0.2 percent for next year, the SITA newswire reported. Smer has called for the rate to be set at 0.7 percent, arguing that it would bring an extra €189 million to the state.

The Slovak Banking Association, however, said that it envisions a rate of 0.02 percent, arguing that this was the rate used in Germany, a country that was forced to shore up its banks during the turmoil in the financial markets.

The Finance Ministry stated that even though the rate is higher in comparison with other EU countries which have imposed such a levy, the levy would take only 7.9 percent of the expected profits of the banking sector. The ministry argued that the proposed rate is low enough to not cause negative impacts and that banks can shift the cost of the levy to customers through higher fees, SITA wrote.

In June the Slovak Banking Association stated that the rate proposed by the Finance Ministry would be the highest among all the EU countries which have such a levy and that it is 10 times higher than the levy in some countries of the EU. The SBA predicted that the levy “will get reflected in lower profitability for the banks but could also have potentially negative impacts on the stability of the sector”.

“Currently, no relevant reason exists in Slovakia for mandating the levy,” the SBA wrote, adding that it is not timely before final agreement is reached over the elements of the so-called system for crisis management of the European banking system. The SBA continued that “Slovakia did not have to rescue its banking sector, which was one of the reasons for instituting the levies in some of the other EU countries”.

Banks paid €266.90 million in direct and indirect taxes to the state in 2010, the SBA reported on April 26, of which €173.40 million was from income tax and the rest came from indirect taxes and VAT.

“This money ends up in the state budget as available income,” Ladislav Unčovský, the SBA’s executive director, told the TASR newswire. “The higher the sector's profits, the more taxes we pay into the budget. So, we don't understand Finance Minister Ivan Mikloš's initiative to introduce another special tax on banks.”

After parliament approved the legislation, the SBA objected that the law lacked a specific single-purpose fund to receive the levy as well as clear rules for how the funds would be used, TASR wrote on September 21.

The bankers’ association stated that it is ironic that the Slovak government referred to the European Commission’s proposal on bank crisis management in its rationale for the levy, saying that according to the European Central Bank (ECB), any such legislation should specifically exclude the possibility of using the funds from a bank levy for any purpose other than tackling crisis situations in the banking sector, TASR wrote.

Cigarettes to cost more

Smokers will soon pay more for their cigarettes if parliament approves the cabinet’s proposal to increase the excise tax in February 2012, rather than as originally planned in March 2013. That specific tax would increase from €55.70 to €59 per 1,000 cigarettes with the maximum tax rate rising from €85 to €90 per 1000 cigarettes.

The draft on the cigarette excise tax does not currently have the support of all MPs from the ruling coalition, especially those members who have said they will oppose all tax hikes but MP Jozef Kollar, the chair of Freedom and Solidarity (SaS) party’s parliamentary caucus, commented that “as far as cigarettes are specifically concerned, SaS will not have any fundamental problem with that,” the TASR newswire wrote. Kollar added that Slovakia is applying one of the EU’s directives, albeit one year earlier than required.

Deputies from the Civil Conservative Party (OKS) who came to parliament on the Most-Hid slate said they are open to discussing the excise tax hike on cigarettes. But OKS also has said that it would present proposals for further savings in public expenditures.

Smer targets €330 million

Smer stated that it opposes any higher taxation on personal consumption and will submit two tax-related proposals soon: a change in Slovakia’s income tax law and a draft bill imposing special levies on certain financial institutions, with Fico stating that his party’s plans would bring revenues of over €330 million.

Smer has previously made attempts to enact a special bank levy but the ruling coalition rejected the idea twice. Nevertheless, Fico has called for a substantially higher bank levy than the one approved by the cabinet on September 21, arguing that the banking sector has record-high profits.

Smer is also expected to propose another version of what had been called a ‘millionaire’s tax’, based on income in Slovak crowns, with a 25-percent tax rate on individuals who have a gross annual income of more than €33,000 rather than the current tax rate of 19 percent. Smer’s MP Peter Kažimír said that instituting this higher income tax rate might impact about 25,000 taxpayers.

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