Cyprus employers say bank tax plans are ‘inconceivable’ and ‘punitive’

The Employers and Industrialists Federation (Oev) has issued a warning against renewed efforts to impose additional extraordinary taxes on bank profits, arguing that such measures would harm the economy and undermine investor confidence.

The federation expressed deep concern over the reintroduction of discussions on further taxation beyond the special levy on banks that has been in place since 2011, stressing that bank profits are being inaccurately described as unexpected.

It stated that “the only unexpected development during the collapse of Cyprus’ financial system and the state’s fiscal bankruptcy in the 2011 to 2014 crisis was the confidence shown by international investors, who took on significant risk and played a decisive role in rescuing the banking sector and, by extension, the wider Cypriot economy”.

“These investors supported this strategic sector with billions and for years had no return, no dividend and no benefit, yet they saw the prospect and demonstrated confidence in the stability of the legal and tax framework,” Oev said.

“Through a strict policy of cost containment, extensive use of technological applications and a dramatic reduction of staff by more than 50 per cent, they managed to achieve profitable results for the first time after a decade”, it added.

It also described as inconceivable the idea of penalising a sector that restored order through prudent policy and returned to profitability.

“The federation considers it inconceivable for a sector to be punished for its prudent policy, through which it was reorganised and became profitable,” Oev said.

“Furthermore, such a move is dangerous, as no serious investor will trust our country in the future. If additional extraordinary taxation is imposed on banks today, tomorrow it could be imposed on any other sector or economic activity”, it added.

The federation pointed out that the interventions under discussion may be unconstitutional and are directly contrary to the recommendations of the International Monetary Fund (IMF) and the European Stability Mechanism (ESM).

It warned that “such measures could negatively affect the credit rating not only of the banking sector but of the economy as a whole”.

What is more, it called on “political forces to abandon initiatives that, if adopted, would in the medium term harm those they seek to benefit”.

The federation stressed that from 2017 to 2024 banks paid a total of €755 million into public coffers.

This includes €285 million in corporation tax and €470 million in special levy on deposits.

In this context, the federation argued that the state can utilise part of these funds for social solidarity purposes without side effects.

It maintained that “safeguarding investor confidence, preserving the stability of the legal and tax framework, and protecting the credibility of the country are essential for sustainable growth and competitiveness”.

Meanwhile, similar concerns were also expressed by the Cyprus Chamber of Commerce and Industry (Keve).

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”.

The chamber warned that additional taxation would undermine the stability and predictability of the tax and institutional framework and “would send a negative message to international investors and undermine the country’s credibility”.

It cautioned that the cost could be passed on to borrowers, referring to an opinion of the European Central Bank (ECB), which highlighted risks to the smooth transmission of monetary policy.

In that opinion, the ECB explained that raising taxation on banks based on customer deposits could create distortions, pressure profitability, reduce the attractiveness of deposits, tighten lending conditions and ultimately affect economic growth across the euro area.

The chamber further argued that targeting a specific sector could create a dangerous precedent, diverge from the recommendations of the International Monetary Fund and the European Stability Mechanism, and differ from practices in highly rated European Union member states such as Germany and the Netherlands.

While supporting 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 tools”.