28 Nov 2023 11:13

Raiffeisen Bank Ukraine CEO sharply criticizes law raising bank profit tax

MOSCOW. Nov 28 (Interfax) - Legislation increasing the bank profit tax from 18% to 50% in 2023 and setting it at 25% for the following years was passed without being discussed with banks, is discriminatory and entails long-term negative implications for the business climate in Ukraine, Raiffeisen Bank Ukraine CEO Alexander Pisaruk said.

"Banks' excessive profits cannot be determined based on the results of just one year. Retrospective taxation of excessive profits in 2023 and a rise in bank profit taxes in the future is unreasonable and discourages banks' shareholders from investing in this business," Pisaruk, who heads Ukraine's largest bank with foreign capital, said in an interview with Ukrainian media.

At the same time, Pisaruk reiterated that he supports the need to temporarily increase the bank profit tax in the current circumstances. A version of the law that proposed setting the tax at 36% for 2024-2025 was discussed with banks and was fair, he said.

Retrospective taxation approved at the end of the year without consultations sets a very dangerous precedent and creates tax uncertainty for all economic agents, especially for foreign investors, he said.

"A retrospective option is bad in itself, but when the retrospective measure involves a 50% rate instead of the existing 18%, it is a shock," he said.

The authorities chose to impose a 50% rate as they seek to collect an additional 0.3% of GDP from in taxes from banks as part of the review of the program with the International Monetary Fund, when state-owned banks are already paying large dividends, Pisaruk said.

"Actually, those paying this record high tax are private banks, and banks with foreign capital bear the largest tax burden. And retrospective taxation is now compounded by a disproportionate and discriminatory treatment toward the banking system's private shareholders," he said.

The decision to raise the profit tax to 25% on a permanent basis in the following years for banks alone, rather than for the entire economy, is also unfair, he said.

"Why are they the only ones to get the tax increase? Why is it 25% and why permanently? Why not 28%, 22% or 20%? [...] This is an example for investors and business in general: if you are transparent, you will be taxed even more. But, at the same time, there is a bunch of economic sectors that do not pay taxes or pay little," Pisaruk said.

The taxes to be levied on banks from 2024 should have been discussed as part of the drafting of the National Revenue Strategy, an element of the program with the IMF, that declares the expansion of the tax base and is to be unveiled by the Finance Ministry before the end of the year, he said.

Banks are a cyclical business, whose profitability should be assessed over a rather long period of time - 7-10 years on average, Pisaruk said. From 2013 to 2023, the total return on equity of Ukrainian banks, except for PrivatBank and its nationalization, was 69%, i.e. approximately 6% per annum in hryvni, whereas the cost of capital in any year after 2013 topped 20% per annum, he said.

"In other words, the past ten years have been unprofitable for bank shareholders. And the situation has been far worse for Ukrainian banks' foreign shareholders, who calculate their total income in euros. Over the past decade, the banking system has suffered a total loss of 52%, around -8% per annum in euros," Pisaruk said.

That was due to the large losses sustained by Ukrainian banks in 2014-2016, the almost fourfold devaluation of the national currency and the inability to receive dividends for several years, he said.

"The banking business in Ukraine is unprofitable today, because the cost of capital is very high due to high inflation and the presence of very high risks in the country," Pisaruk said.

The adopted law will discourage strategic banking investors from participating in the privatization of state-owned banks, which is necessary given these banks' large market share, he said.

"We could be left with a banking system where the share of state-owned banks will be excessive for a very long period of time," he said.

An approach like this one does not encourage foreign direct investments in other sectors either, Pisaruk said.

"It is a very bad story for the country that requires external assistance both during the crisis and for development in the post-crisis period," he said.

When commenting on the impact of the tax rate increase directly on Raiffeisen Bank Ukraine, Pisaruk said that there will not be any considerable impact in the short term, because the bank has excess capital and liquidity.

"We will pass the stress test from the National Bank of Ukraine [NBU] without any problems and will continue to support our clients," he said.

However, some other banks that are not well capitalized may encounter problems, he said.

"The National Bank [of Ukraine], which agreed to this decision, will probably have to mitigate its plans to recapitalize banks, because taxing banks in such a cruel, unfair way and then demanding capital is an additional horror story for investors," Pisaruk said.

Combined with the NBU's further stepping up of the capital buffer requirements in line with EU standards, the higher bank profit tax will dent banks' ability to generate capital to meet the heightened demand for loans as Ukraine develops after the crisis, he said.

Individual banks with foreign capital may even go to international courts, because this law violates the provisions of intergovernmental agreements on investment protection, Pisaruk said, citing the situation in Spain, where banks have contested the windfall tax.

Pisaruk, who previously held the post of NBU first deputy governor and then worked for the IMF for three years, said he regrets the IMF's approval of the tax increase. Pisaruk believes the IMF agreed to the measure because the basic assumptions of its program with Ukraine that the crisis will end in mid-2024 are in danger and also due to a certain level of international assistance.

"The IMF has to work out a macroeconomic model and calculate the debtor's ability [...] to pay off the loan. And this tax was probably needed for such a model to take shape. But the price of the issue is exactly as follows: in order to save this program and continue it, laws are being introduced to reduce the already low investment appeal of Ukraine, and they could hinder plans to attract private foreign capital to rebuild Ukraine after the crisis," he said.

Data from the National Bank of Ukraine shows that as of October 1 2023, Raiffeisen Bank Ukraine was the country's fourth largest bank by assets (196.35 billion hryvni) among the 63 banks operating in Ukraine. It posted net profit of 6.14 billion hryvni in January-September 2023, up from 2.39 billion hryvni reported for the same period in 2022.

The bank joined Austrian banking Group Raiffeisen Bank International AG in October 2005. Raiffeisen Group currently owns 68.21% of the bank's shares, and the European Bank for Reconstruction and Development 30% of its shares.