Bank of Estonia: Bank tax could undermine stability of financial system

Ardo Hansson (left) and Madis Müller (right).
Ardo Hansson (left) and Madis Müller (right). Source: (Postimees/Scanpix)

According to the Bank of Estonia, the 14-percent advance income tax on dividends for credit institutions planned by the government could result in the weakening of the financial system, cause unwanted consequences and go against the rules of the EU.

"As [Estonia's] central bank, we are cautious about all changes to the legal environment that could increase risks to financial stability," Madis Müller, deputy governor of the Bank of Estonia, said in his comments on the amendment bill. "This is why we see risks in the amendment described in the bill, which would decrease banks' motivation to raise capital in Estonia."

According to the central bank, focusing on the budget poliy goal in the way suggested in the bill could in the future weaken the stability of the financial system and decrease the ability of credit institutions to fund investments necessary for the economy.

The Bank of Estonia believes that in the event of loss, banks should be able to restore their capital buffers as soon as possible at the expense of next years' profit, Müller said. The rapid restoration of the banks' capital after crisis allows for the necessary offering of funding for businesses to invest and for the general economy to be restored.

According to the central bank, the bill should be changed so that credit institutions' losses could be covered with profit from the following periods without this generating a tax liability for the credit institution.

Müller also said that it was not clear for the central bank why the government is planning to impose the new tax system only on credit institutions, but not the whole financial sector. If the liability of advance taxes is imposed only on credit institutions, it would likely result in a situation in which a considerable part of activity would be put into other legal persons of the group, such as leasing companies, which are not affected by the planned law.

As a result, the ownership relations of business operators operating as financial groups could become an even more complex network, which would impair surveillance and crisis management, Müller noted. This could become a problem during a possible financial crisis, when rehabilitation plans for the financial sector business operators must be implemented. Additional obstacles set for the crisis resolution and rehabilitation of banks can in turn hinder the funding of investments necessary for the restoration of the economy.

The Bank of Estonia believes it is necessary to apply the amendment to the Income Tax Act to all business operators within the financial sector.

The central bank also highlights the fact that, according to a decision made by the Council of the European Union, authorities of the EU should consult with the European Central Bank when changing rules that apply to financial institutions, as these notably influence the stability of financial institutions and markets.

Considering the fact that the bill is aimed towards influencing the dividend policy of credit institutions, which could in turn influence their capitalization, and the fact that the bill does not influence business operators in the financial sector in the same way, the Bank of Estonia believes consulting with the European Central Bank in this case to be justified.

Editor: Aili Vahtla

Source: BNS

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