SLOVAKIA is a small country which rarely tops international rankings. However, it now has the highest special bank levy in the European Union, and the International Monetary Fund (IMF) is calling on the government to lower it.
“Bank taxes have risen at a time when the operating environment is weak and credit to firms is declining,” an IMF mission concluded in its report published on June 4. “The staff team encouraged a lowering of the bank levy, which will decrease over time but is nonetheless high compared with others in Europe.”
The IMF repeated its call to lower the bank levy in mid-August, writing that the levy should be lowered to be more in line with other countries in Europe.
In Slovakia banks pay a special levy of 0.4 percent on corporate and private individuals’ deposits. While banks firstly paid the levy only on corporate deposits, as of the start of 2012, parliament extended this duty to private individuals’ deposits starting September 1, 2012.
The special bank levy was designed to be a temporary measure and will end once banks have paid a total of €1 billion. The level of the levy is set to drop as the amount raised increases. The 0.4-percent rate of the bank levy will be halved once €500 million has been paid into the fund, called the National Bank Stabilisation Fund. Furthermore, a rate of 0.1 percent will apply once €750 million is deposited in the fund. The fund is under a special account, state financial assets, by which the government formally reduces the budget deficit, the Sme daily wrote.
The Slovak government does not plan to reduce the levy and is resolved to follow the earlier agreed-upon plan.
“Banks in Slovakia generate especially to foreign investors much higher profits than their mother banks are to able achieve at home,” Radko Kuruc, the spokesperson of the Slovak Finance Ministry, told The Slovak Spectator in response to the IMF’s call. “Since the introduction of the special bank levy there was collected a total of more than €222 million. If the total levy collected reaches €500 million, the rate of the levy will be halved. We assume that this may happen as of 2015.”
The Institute of Economic and Social Studies (INESS), an economic think tank, has criticises the levy.
“The bank levy reduces the attractiveness of the Slovak banking sector for current as well as foreign investors,” Radovan Ďurana, analyst with INESS, told The Slovak Spectator when assessing the impacts of the levy. “The result will be less investment in the sector and higher fees for banking services.”
In response to the IMF’s call for the fee to be lowered, Ďurana said that this is not the first time when international institutions have commented on the levy. He added that banks already today contribute the biggest share of corporate income tax in Slovakia. He does not see any reasons why to create any additional funds to secure the health of the banking sector as banks in Slovakia are already overseen by the banking supervision.
Maroš Ovčarik, who runs the www.financnahitparada.sk website, which compares prices of financial, banking and insurance products in Slovakia, perceives the IMF’s call as a warning towards the Slovak government that the high bank levy endangers the economy and may simultaneously shrink the room for Slovak banks to provide loans.
“It is not good when Slovak banks have significantly higher levy than banks in other countries because this deforms the market and puts Slovak banks at disadvantage,” said Ovčarik, adding that in his opinion the bank levy also has an impact on the reduction of interest rates on bank deposits, which also touches ordinary people who keep their savings in banks.
The Slovak Banking Association (SBA) has criticised the levy since its inception and believes that it burdens banks in Slovakia more than anywhere else in the EU.
Currently, 15 countries within the EU have bank levies or similar fees. The rate as well as the basis from which the levy is calculated differs between countries, Marcel Laznia, analyst with SBA, writes on its website. The common feature is that this type of tax depends neither on the activity of its subjects nor their economic performance. Because of this SBA finds it impossible to compare levies based on rates. It compares proceeds to the total assets of the sector. Based on available data, banks in Slovakia had the highest levy within the EU in 2012 even though the exact rate of the levy in Hungary was higher. But here banks were able to deduct losses from housing loans.
In 2012, banks in Slovakia paid €3,059 in the levy on every €1 million of the bank’s assets. In Germany this was only €92, in Great Britain €185 and in Hungary €596.
According to Laznia, banks in Slovakia paid in 2012 more in the special bank tax than in the corporate tax. While banks paid a total of €169.8 million in the special bank tax and an additional one-off levy of €50 million, they paid €96.7 million in corporate income taxes. This increased the effective tax rate for the banking sector from 19 percent to 36 percent. Laznia also noted that last year four banks of 14 banks operating in Slovakia closed 2012 in the red and thus did not pay any corporate tax. Nevertheless, they had to pay the special bank tax of almost €16 million. One bank ended in the red because of the high bank levy, what negatively influenced its capital position in a direct way.
“One of the risks of the high bank levy is the negative influence on the capital of the bank,” Laznia wrote.