Ukraine’s parliament wants to take $270m from banks with a windfall tax

In the first six months of the year, Ukrainian banks saw a record profit of UAH 67.6 billion (USD 1.84 billion). Now, the Verkhovna Rada, the parliament, wants them to pay their share with a new additional tax.

On Monday, MPs from the parliamentary financial committee, chaired by Danylo Hetmantsev, from the ruling Servant of the People party, submitted a bill proposing that banks pay an additional five percent tax on excess profits — a so-called windfall tax — to the state budget.

LIGA.net found out what bankers think about the initiative and how it might affect their customers.

Why did MPs decide to introduce an additional tax for banks?

Mr Hetmantsev says that the bill proposes to tax banks’ net interest income at a rate of five percent, in addition to the corporate income tax, which is currently 18 percent.

The key reason behind the move is the excessive profits that banks are making despite the full-scale war in Ukraine.

The chair of the parliamentary financial committee claims that the banks' own interest income has reached UAH 141 billion (USD 3.84 billion), including UAH 73.5 billion from transactions with government securities.

Their net interest income has amounted to UAH 93.6 billion — a 75-percent increase compared to the first six months of 2021, the most successful year for bankers so far. Those profits were generated by investments in government-guaranteed securities.

"The increase in transactions with government securities has led to record profits for banks," said Mr Hetmantsev.

The same argument is laid out In an explanatory note to the windfall tax bill.

"That is why the question arose of finding the optimal instrument for taxing those one-time excess profits in order to strike a balance between maintaining the stability of the banking system and the needs of the budget of the country at war," it reads.

A similar approach with windfall taxes has been introduced in many EU countries since last year, including Czech Republic, Hungary, Lithuania, Spain, and, most recently, Italy.

That is why, the MPs behind the bill say, other countries’ experience can be used to tax the excess profits of Ukrainian banks — as a temporary measure to increase budget revenues to meet defence needs.

They propose that the windfall tax be temporary, effective from 1 January 2024 to 31 December 2026 inclusive.

The new tax, to be paid quarterly, is estimated to turn around UAH 10 billion (USD 272.4 million) to the state budget by the end of the year.

What do bankers think about the tax?

The National Bank of Ukraine (NBU), the country’s central bank, is yet to opine on the windfall tax proposal. An NBU official told LIGA.net the "discussions are ongoing," while its deputy governor, Serhii Nikolaichuk, earlier said that "this is not an easy issue".

The bankers, however, are already critical.

Oleg Gorokhovskyi, co-founder of monobank, Ukraine’s first mobile-only bank, says that the additional tax on banks’ net interest income will lead to a proportional, five-percent increase in loan rates.

"Banks are so kind that they are used to giving away their money to customers. Isn’t it obvious? I dislike banks even more than I dislike MPs," Mr Gorokhovskyi noted ironically.

Some economic experts agree that a five-percent windfall tax on banks’ interest income will clearly have a negative impact on their willingness to lend, which is already low.

However, according to the NBU’s June report, interest income from business loans accounted for only about a quarter of all interest income that month — and even then, more than 20 percent of them were actually provided from the state budget, through the Affordable Loans programme.

The MPs in the parliamentary financial committee believe that the initiative may well become a law — given that it includes both the ruling party and opposition members. One of the committee’s members, Yaroslav Zhelezniak from the Holos [Voice] faction, told LIGA.net that he thinks "the chances are high".