Bank profit tax's hike to 50% in Ukraine in 2023 justified, but 25% in subsequent years may cause volatile situation - NABU association head

MOSCOW. Nov 22 (Interfax) - The temporary upsurge of the tax on bank profits from the current 18% to 50% in 2023 will not affect the banking system's stability in Ukraine, but the increase in this tax up to 25% in subsequent years brings about a volatile situation, Chairman of the Council of the Independent Association of Banks of Ukraine (NABU) and Chairman of the Board of OTP Bank Vladimir Mudry said.

"Setting the tax for the banking system at 50% for 2023 will provide much-needed additional revenue to the budget at approximately UAH 24 billion (or an equivalent of $650 million)," he said in a statement to Ukrainian media.

Almost the entire amount of the additional fiscal effect will be shaped by privately owned commercial banks, Mudry said.

This year's tax hike of up to 50% will not affect the stability and reliability of the banking system, as the National Bank of Ukraine (NBU) has already assessed the quality of banks' assets, finding no risks critical to the system, and the book of loans to legal entities has been growing since July, which means that banks stand ready for lending, the head of the NABU board said.

At the same time, the new tax rates will affect small banks the most, "which will continue to have to invest hundreds of millions in IT and infrastructure (almost at the level of systemic banks), but pay higher taxes at the same time," he said.

"The situation when only one industry has an increased rate is unstable, so we can expect additional amendments to the tax legislation in the near future," Mudry said, commenting on the new 25% tax rate on bank profits set on a permanent basis.

The National Bank of Ukraine (NBU) said in response to a request from Ukrainian media that it is also backing the possibility of a discussion on the feasibility of revising the tax rate for banks on a permanent basis. "This discussion, taking into account the integration of the banking and financial system into the European Union, had to take place one way or another," the NBU said.

The best time for a substantive discussion on this subject could be a joint discussion on drafting the National Revenue Strategy, the regulator said.

"An integrated approach, a comprehensive assessment of risks and long-term effects of fiscal solutions is exactly what the National Bank strives for when it comes to the development track of the financial market. We understand the logic of extraordinary measures caused by exceptional circumstances. The decision to change the taxation terms of the banking industry on a permanent basis is a strategic solution, their quality depends on full-fledged modeling, analysis and in-depth communication," the NBU statement said.

As reported, the Verkhovna Rada passed a bill temporarily increasing the rate of tax on bank profits from the current 18% to 50% for 2023 and raising it to 25% on a permanent basis in subsequent years, on Tuesday, November 21. The initial bill passed in the first reading on October 19 called for temporarily raising the profit tax to 36% in 2024 and 2025.

The bill was amended on the insistence of the International Monetary Fund (IMF), the Finance Ministry and the NBU, and this provision will be included in the updated memorandum with the IMF on the Extended Fund Facility (EFF) program, MP Yaroslav Zheleznyak said.

The passed law bars banks from applying past losses to profit in 2023, but this will again be possible starting in 2024.

"The Finance Ministry estimates this will bring in UAH 24 billion-25 billion for 2023 alone. Subsequently it will be UAH 6 billion-7 billion," Zheleznyak said, commenting on the fiscal effect.

Ukraine's solvent banks saw their net profit surge to a record UAH 109.9 billion in the first nine months of 2023 from UAH 7.4 billion in the same period last year. The profit tax for the period grew to UAH 19 billion from UAH 4.3 billion a year earlier.

The most profitable bank by far was state lender Privatbank, with UAH 43.37 billion, or 39.5% of the whole banking sector's net profit for the period.

Profits totaled UAH 14.18 billion at Oschadbank, UAH 6.14 billion at Raiffeisen Bank, UAH 5.68 billion at First Ukrainian International Bank, UAH 5.66 billion at Ukrsibbank, UAH 5.58 billion at Sense Bank, UAH 4.75 billion at OTP Bank, UAH 4.23 billion at Citi and UAH 3.6 billion at Ukreximbank.

The 12 banks whose net profit for the first nine months of 2023 exceeded UAH 2 billion also included Ukrgazbank with UAH 2.92 billion, Universal Bank with UAH 2.86 billion and Credit Agricole with UAH 2.29 billion.