Extra bank tax risks harming investor confidence, says Keve

The Cyprus Chamber of Commerce and Industry (Keve) on Thursday released a statement outlining its position against the proposed imposition of additional taxation on banks, arguing that such a measure would not constitute a sound economic choice.

The chamber stated that “any form of taxation cannot under any circumstances serve as an instrument of social policy”.

It pointed out that “the banking sector has already paid significant tax burdens during the period 2017 to 2024″.

According to the chamber, banks contributed €285 million in corporate tax and €470 million in special levy on deposits over that period.

It added that the total contribution amounted to €755 million, “providing the state with substantial resources to support borrowers and vulnerable groups without the need to impose further taxation”.

Moreover, the chamber expressed concern that additional taxation would deal a blow to the stability and predictability of the tax and institutional framework.

It warned that such a move “would send a negative message to international investors and undermine the country’s credibility”.

It further cautioned that there is a risk the cost could be passed on to borrowers, as has been highlighted by the European Central Bank (ECB).

This is in reference to an opinion published by the ECB in December of the previous year on an increase in a tax imposed on credit institutions.

The ECB stated that raising taxation on banks based on customer deposits could have implications extending beyond fiscal policy and into the functioning of monetary policy.

The ECB underlined that credit institutions play a key role in ensuring the smooth transmission of monetary policy measures to the wider economy.

An increase in tax pressure on Belgian credit institutions, which the ECB used as an example, calculated on deposits made by their customers other than credit institutions, would affect banks differently depending on their business models and would raise their overall tax burden.

This, the ECB warned, could create distortions and greater heterogeneity in the transmission of monetary policy both in Belgium and across the euro area.

Although Belgian banks remain well capitalised and profitable, the opinion explained, the current easing phase of monetary policy has placed downward pressure on their net interest margins.

In that context, the draft law could have pro cyclical effects, particularly at a time when bank lending to households is still recovering.

The ECB cautioned that higher taxation based on deposit volumes could incentivise banks to reduce the remuneration and attractiveness of deposits for households and firms, shifting towards alternative funding sources.

It also warned that increased taxes could lead banks to tighten financing conditions, either indirectly through weaker profitability affecting capital positions or directly by passing part of the cost to borrowers.

Even with legal prohibitions and fines preventing banks from formally passing on the tax, the ECB stressed that banks’ financial conditions ultimately determine the terms under which they finance the economy.

The ECB added that preserving banks’ ability to maintain adequate capital, build provisions and set lending and deposit conditions in line with monetary policy is essential to safeguard credit provision and economic growth.

Back in Cyprus’ case, Keve also stressed that targeting a specific sector in this manner could create a dangerous precedent with adverse consequences for future investment activity.

It argued that the proposal would represent a deviation from the guiding recommendations of the International Monetary Fund and the European Stability Mechanism.

The chamber observed that European Union member states with high credit ratings, such as Germany and the Netherlands, do not apply similar extraordinary charges.

While reaffirming its support for social support measures, the chamber maintained that “these must be designed in a way that safeguards financial stability, investor confidence and the international competitiveness of Cyprus”.

It concluded that “it expects all businesses in the country to return part of their profitability to society through appropriate corporate social responsibility (CSR) tools“.