Bank of Estonia's supervisory board not planning to discuss additional tax

The Bank of Estonia building in Tallinn.
The Bank of Estonia building in Tallinn. Source: Siim Lõvi /ERR

The supervisory board of the Bank of Estonia discussed whether the record profits reported by commercial banks earlier this month should be subject to an extra tax. The council did not take a stance on the subject.

Tuesday, council member Jaanus Karilaid (Center) recommended adding the subject to the council's agenda.

At the meeting, the council discussed the topic of bank profits but did not take a stance on it and it has no further plans to pursue the topic.

"The council did not take a stance and cannot do so. My position and that of the Reform Party is that we do not think the imposition of such a tax to be in any way reasonable or necessary," Andres Sutt (Reform) said.

Karilaid said that the central bank would be unable to make this political decision, which this issue requires. "Such political actions are taken by the parliament and the government. The bank's supervisory board did not decide on anything, especially since there was a lack of consensus," se said.

Sutt thinks that Estonia's tax system is stable and does not need to be changed.

"This is extremely detrimental to the overall business climate and investment environment," he said.

Sutt pointed out that during the previous economic crisis, banks' capitalization was high precisely because their profits were not subject to increased taxation, meaning that they did not require more governmental support during bad times.

Sutt said that additional taxes will be passed on to commercial bank clients, so raising loan margins and working against the interests of the people. He said that there is room for banks to reduce margins and increase deposit interest rates in a rising interest rate environment. However, the market itself will correct this issue. "The customer has to be demanding," Sutt added.

Karilaid said that as this is a political issue, the Center is ready to make appropriate choices in the Riigikogu.

"Personally, I believe that the banks operating in Estonia should give more to Estonian society, either through increased contributions to the national treasury or increased participation in social programs. I also recommended a more comprehensive summary of how banks work in their home nations. In 2022, banks generated a profit of €490 million, over 20 percent more than the previous year," Karilaid added.

Müller: extraordinary tax on profits could make borrowing more expensive

The head of the Bank of Estonia (Eesti Pank), Madis Müller, said that the imposition of an extraordinary tax on profits could make it less attractive for bank clients to deposit and borrow funds in the future.

Müller said that we need to first consider what societal expectations are there of banking.

"If the objective is to provide banking services to Estonian borrowers and depositors on the best possible terms, i.e., higher deposit rates and more favorable loan rates, then additional special taxation of banks will work against this objective."

Müller also emphasized that, for the banking system to function, a substantial portion of revenues gained during prosperous times must be saved as capital. Slowly rising deposit rates, Muller said, should make bank customers more demanding.

"When we are moving the spare money into term deposits, we look at what different banks are offering. The same care should be taken when taking out new loans and refinancing old ones. More demanding customers will lead to better services," he said.

However, Müller added that it may be asked whether, during periods of higher bank profits, a larger proportion of profits than usual could be funneled into the guarantee fund to finance the deposit guarantee fund in advance. Such measure could increase the Estonian government's preparation for potential future banking crises.

The only sector in Estonia that pays a 14 percent income tax is the banking industry.

Müller said that it would be worthwhile to review if this tax exemption has achieved its purpose, given that it is essentially a tax exemption for dividends paid abroad.

The supervisory board of the Bank of Estonia is not entrusted with developing policy, but rather with ensuring that the central bank is doing its assigned duties, the chair of the board, Mart Laar, said.


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Editor: Barbara Oja, Kristina Kersa

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