Windfall tax on banks heading for rejection

Banks as well as government officials on Monday all but gave the thumbs-down to the idea of taxing the windfall profits of commercial lenders, a proposal brought by opposition party Akel.

The objections were heard during the opening debate on the bill tabled by Akel, which would see a 5 per cent ad hoc tax imposed on banks’ so-called windfall profits during 2024 and 2025. These profits are described as deriving from the high interest rates on loans charged by banks – a result of the European Central Bank’s monetary policy to fight inflation.

The proposal envisages creating a ‘social solidarity fund for the support of borrowers’ – into which the proceeds from the windfall tax would go. The fund itself would be run by a management committee, not by the state.

According to Akel leader and MP Stefanos Stefanou, over 2024 and 2025 the fund would accumulate some €100 million. In turn, this money would then be used for support schemes for vulnerable borrowers and households.

Citing data, Stefanou said that last year banks altogether made €973 million in profits from interest. Total income from charging interest came to €2 billion. Overall profits (from all sources) amounted to €1.3 billion.

He said research carried out by Akel showed that four EU member states have imposed a windfall tax on banks – Spain, Latvia, Lithuania and Hungary.

“We felt that the model best suited to us is the Spanish model, where they imposed a temporary fee [on banks],” the lawmaker said.

This model also contained safeguards and fines to deter banks from transferring any costs to consumers.

Stefanou also harangued Finance Minister Makis Keravnos for snubbing a summons to attend the parliamentary discussion.

He recalled that the first rumblings of such a windfall tax had come from the government. But because the government never followed through, Akel was “forced” to draft a relevant bill.

But a senior official with the finance ministry cautioned that Akel’s bill might breach provisions of the constitution, such as the separation of powers – given that the proposal overlaps with plans already promulgated by the government.

Avgi Chrysostomou-Lapathioti recalled that the government in October last year approved a scheme to subsidise interest, and that funds for the scheme were incorporated into the state budget for 2024.

The government scheme in question concerns households with an annual income of up to €50,000 and with a mortgage of up to €400,000.

“We hope that by October we will receive the first applications. We anticipate around 5,000 applicants,” she said.

The official also pointed out that whereas four other European countries did impose a windfall tax on banks, the difference is that – unlike Cyprus – lenders in those countries do not impose a special levy on bank deposits.

“This special levy is imposed [in Cyprus] whether banks turn a profit or not,” she added.

Danis Kokoularides of the Central Bank of Cyprus warned that introducing a temporary windfall tax might spook bank investors.

He said that, unlike Spain, Cyprus needs to keep attracting foreign investment in order to tackle the negative balance of payments.

“It would be unwise to jeopardise our relationships with foreign or local investors by introducing a certain degree of uncertainty over their investments.”

Chiming in, the Banks Association argued that lenders here are already burdened with two taxes – one on profits, the other being the special levy on deposits.

According to a memo submitted to parliament, between 2017 and 2023 banks paid €854 million in income tax plus €395 million for the special deposits fee.

Michalis Kronides, manager of the Banks Association, noted that the banking sector in Cyprus shrank considerably over the past decade, in the wake the 2013 financial meltdown. In order to bounce back, lenders had to write off debt and raise their capital provisions.

“So the profits are not thanks to the ECB’s interest rates, but rather to the decisions made by bank management.”

Discussion of the Akel bill is set to resume at another date at the House finance committee. But Akel’s Stefanou did acknowledge that probably there is not enough time to take the bill to the plenum before the summer recess.