Isamaa chair Urmas Reinsalu says Tuesday's between the coalition and the mostly foreign-owned banks in Estonia will clearly harm the Estonian economy further and take revenues out of the country.
Commercial banks in Estonia are expected to see significantly higher profits this year than last year, thanks in no small part to the increase in the Euribor rate.
A deal struck Tuesday will see high street commercial banks such as Swedbank and SEB, both Scandinavian-owned, escape a new bank tax proposed by the Social Democrats, (SDE), but by paying more dividends next year.
Subsequent government explanations of the deal, so far panned by the head of the central bank, state that the high street banks pledged to pay larger dividends than planned this year, effectively supporting the state budget since these dividends are subject to commercial income tax.
On the other hand, this year's rate is 20 percent – whereas next year's will be 22 percent, meaning the banks have gotten out of the higher rate by paying their income tax early, but a lower amount.
In other words, at a time of consistent calls for more revenues to be found, the coalition government, including the Social Democrats – whose leader has hailed the development as a limited gain, since it brings around €120 million to state coffers – has found a way to reduce those same revenues.
Urmas Reinsalu says the deal was worked out at the local level rather than with the banks' head offices in Sweden or the other Scandinavian nations (in most cases – LHV, for instance, is Estonian-owned).
Reinsalu told ERR Wednesday that the compact will "Worsen Estonia's economy. There is no doubt about the situation. This government does not have a positive vision when it comes to economic policy. All the steps the government has been taking are anti-economic in their nature. The government's pressure that banks should withdraw capital out of Estonia now, if we are talking about Swedish banks, does not meet the interests of the Estonian economy."
"Currently, the government is only dealing with tactical budget policy, i.e., how to draw up the state budget. However the government has no idea how to create the conditions needed to soften the economic downturn," he went on.
The outflow of financial capital from Estonia has already been a problem up to now, but in the conditions of economic recession, it is certainly not in the interest of the economy to reduce the lending capacity or capitalization of domestic banks, Reinsalu said.
"Second, it is obvious that with this agreement the banks are rubbing their hands with glee in the sense that the government has legitimized their massively withdrawing money at a cheaper income tax rate, since the income tax rate for dividends is currently 20 percent, but from next year it will stand at 22 percent," Reinsalu added.
Reinsalu said that the €120 million referenced may not an additional component of the withdrawal of dividends, but rather the government interprets it as an obligation to pay income tax on a consolidated basis for the withdrawal of dividends, - something which Reinsalu said was "clearly misleading the public."
Reinsalu expressed his incredulity that banks opted to withdraw their profits after a half-year in which the sector took in around half-a-billion euros, with profits of over a billion forecast for the whole year.
"I am skeptical that an agreement like this was reached. My assumption is, looking at these numbers, that this is not the part of the additional income tax received from dividends, but the government is displaying it as part of the entire income tax that banks must pay," he went on.
Presenting the move as a "revenue win" for the Estonian state additionally was pointless, Reinsalu added, as banks pay their income tax in advance in any case.
"Consequently, this number is significantly lower to improve the position of the state budget," he concluded.
Banks must in the current economic situation direct as much of their capital as possible to keeping the Estonian economy running.
"This is actually the basic logic behind the goal, not to open a big sluice gate through which to start pumping this money out of Estonia, to Sweden, with the current cheaper income tax rate."
Reinsalu added that Prime Minister Kaja Kallas should have negotiated, not with the local branch managers of the banks in question, but with the boards and directors of their parent banks, in Sweden.
Withdrawing this money is already cooling the Estonian economy; the decision to withdraw these funds under the conditions of a lower income tax rate was made at the request of the Estonian government itself, Reinsalu noted.
Kallas: Agreement will not worsen Estonia's economic situation
Reinsalu asked Prime Minister Kaja Kallas on Wednesday at the Riigikogu question time whether the €120 million received by the state budget from the banks is the full income tax revenue or is it only the revenue from the additional part of the dividend, which is in addition to the advance income tax?
"And according to the information you have, how much money is being then removed from Estonia, and how is it broken down by banks?" Reinsalu asked.
According to Kallas, the tax act stipulates that the new taxes would be introduced six months earlier, i.e. they could not have been introduced by 2024 anyway.
"The years 2024 and 2025 stand out in terms of the excessive earnings of banks. In this particular case, we sat down with the banks to discuss how to get a larger portion of these profits into the state budget, and the amount that they promised is in addition to the projected advance income tax or income tax that the banks will pay."
Kallas recalled that banks are the only business sector that is subject to income tax in the classical sense, while others do not pay tax on reinvested profits.
"And this amount represents an increase of €80 million over our projections for 2024. I believe €136 million was the number we projected. And in 2025, an additional €42 million on top of €193 million," Kallas said, advising Reinsalu to use this information for his own calculation of how much dividends banks withdraw.
"If you know the percentage and amount of income tax, it is straightforward to calculate the amount of additional profit. The competition act prohibits the exchange of such accounting information between institutions, bank-to-bank. It means that they provided their data to the banking union, which in turn provided us with aggregated data. These institutions' separate accounts are unknown, but I believe this is also irrelevant. Important to us is the amount of additional taxation we receive for the national budget," Kallas said.
She added that the agreement would not worsen the economic situation in Estonia.
"The question now is whether or not it [funds] will be taken out from the Estonian economy. Clearly, banks stimulate the economy by providing credit and access to capital to many businesses; they do all of these things. Banks pay interest on deposits, etc. This agreement does not worsen the situation of the Estonian economy, and it does not worsen the banks' capital requirements or the reserves that are needed in case the economy deteriorates."
The government and commercial banks signed an agreement on Tuesday that will exempt commercial banks from the bank tax by paying higher dividends this year.
"There will be no bank tax, banks are willing to contribute to society in solidarity. This will give banks three years of tax relief," Prime Minister Kaja Kallas said on Tuesday after a meeting with bank managers.
According to later explanations, commercial banks promised to pay more dividends than planned this year, which would support the state budget as they are subject to income tax. At the same time, the income tax rate would be higher next year, which means that banks would effectively have to pay less income tax.
Editor: Andrew Whyte, Kristina Kersa, Aleksander Krjukov