Voluntary income tax proposed for banks

Tõnis Oja
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Photo: montaaž

For years, the banks haven’t paid a cent of income tax on their giant profits. Aivar Sõerd, former Tax Board chief and Minister of Finance, wants to change this.

Successfully recovered from financial crisis, the banks have turner into money machines, again. In 2010 to 2012, the four biggest acting in Estonia (Swedbank, SEB, Danske Bank and Nordea) totalled over €1bn of net profit.

Swedbank, with its quarter of a billion euro profit, heads Postimees’ largest companies profit top list. The other three banks are also at the topmost echelon of the list. The 2013 figures not yet known, the «grant quartet’s» first three quarters profit amounted to €269m.

These are very big figures.

The figures have also caught the eye of Aivar Sõerd, Riigikogu’s Finance Committee member and Estonia’s former finance minister. Mr Sõerd took notice that, despite the tremendous profits, the banks aren’t to be found among the country’s top tax payers.

No dividends

As confirmed by Tax and Customs Board, the local banks haven’t paid a cent of corporate income tax over the past five years. In Estonia, companies must not pay the 21 per cent income tax if they do not take out the profits. Indeed, the banks have paid no dividends.

True, they have paid income tax on fringe benefits, gifts, donations and costs of entertaining guests, but compared to profits these sums are fractional.

According to Eesti Pank statistics, in the last year but one, all local banks together paid a bit under €14m of income tax, all together. At the same time, their net profits amounted to €350m, meaning that only 3.8 per cent of net profit went for income tax.

Over the same period, Eesti Energia paid the state €65m in dividends, and €17m in income tax on these i.e. more than all local banks put together.

Mr Sõerd underlines that, according to the spirit of Income Tax Act, company profits shall be taxed as these are distributed and not taxed as the profits are ploughed in as investments. «But I have not noticed, lately, that the banks would be making any larger investments,» says the Riigikogu member and continues: «Why is it not favourable to Swedbank or SEB to pay dividends through Estonia? Do we have unfavourable tax conditions, like too high income tax?»

Mr Sõerd adds that the profits made in Estonia are involved in creating share value for large foreign banking groups. Danske’s and Nordea’s Estonian branches are indeed tiny, as compared to their parent banks; meanwhile, with Swedbank and SEB, Estonian subsidiaries contributed 15 and 5 per cent, respectively, of the groups’ total 2012 profits. 

According to Mr Sõerd, the state and representatives of local banks might sit down together and discuss whether the group dividends might be distributed through the local Estonian subsidiaries. The dividends would go to shareholders, the taxes paid on these – to Estonian state.

This is an unexpected idea. Such distribution of profits is not allowed, by law. An enterprise may pay dividends to owner only, not to owner of owner. In other words, a subsidiary may only pay to parent company, not to owners of parent company.

It’s another matter with branches (read: Danske Bank and Nordea), which are not independent companies. These have paid income tax as they have taken out the profits; meagrely, though – also. «In 2012, we paid €6.7m of income tax to Estonian state,» said Aivar Rehe, head of Danske Bank’s Estonian branch.

While the banks do not distribute profits in Estonia, their headquarters across the Baltic Sea do. Since 2010, Swedbank and SEB groups have paid ever increasing dividends to shareholders. Nordea bank’s parent company pays proprietary income since 2000, at least, also doing that during the depths of the financial crisis. Only Danske Bank has not gladdened heart of owners with dividends, over these past years.

Swedbank’s share is appreciated among Estonians as well. As revealed by LHV bank homepage, for instance, the Swedbank share is No 4 with their clients favourite holdings – more popular than the well-known Nokia.

When offering banks a free-will income tax, Mr Sõerd flaunts the example set by the world leading cafe chain Starbucks which, last year, decided to pre-pay £5m of income, in the UK.

A year ago, at the World Economic Forum at Davos, the British Prime Minister David Cameron attacked the payers of low taxes. Among others, he did use the word «coffee», while abstaining to name definite companies. The public, however, did understand who he had in mind.

Starbucks thereafter sensing that the British customers may start to shun them, opted to pay a half of the predicted income tax in advance – even though not under legal compulsion to do that. Over the previous 15 years, the cafe chain had paid a total of £8.6m of corporate tax, and nothing at all during the last three. The company’s total turnover in the UK, for the past three years, amounted to £3bn.

According to Priit Raudsepp, a sworn advocate specialised in tax law at Sorainen, Starbucks and the banks in Estonia do not compare well. «Starbucks, Google and some other companies came under limelight due to allegedly pursuing a very aggressive tax planning strategy, where the profits were directed offshore,» says Mr Raudsepp. «I doubt if the local banks can afford use of such aggressive planning.»

Money could be asked back

According to Mr Raudsepp, local companies theoretically could pay voluntary income tax; even so, there would be not much good, technically. «The sum would go to the prepayment account, at Tax Board, and the bank might ask it back any moment,» explains Mr Raudsepp. «That the rather theoretical free-will payments would make any sense, the legislation should be changed as well.»

As also assessed by Swedbank, free-will income tax would be complicated, technically and legally.

«Amending taxation regulation in one field of economy alone, with a definite moment in time in mind, is not sustainable. It would be wiser to make more complex decisions, with the big picture and sustainable development in mind,» says Andreas Laane, who will head the Nordea branch starting next week.

«Principles and practice in taxation of corporate profits, in Estonia, have remained stable for a long time and this has a certain competitive advantage. By law, the state has granted the option of tax deferral, which cannot be taken back on a whim,» explains Aivar Rehe who, before becoming a bank chief, served as director-general of Tax Board. «Separate taxation of banking is unfair, as it is a part of business and there is the principle and expectation of equal treatment.»

SEB’s CEO Riho Unt, however, raises the sceptre of a change without proposal made by Mr Sõerd. The big banks having had excellent financial results and having abundance of capital, this very year they may start paying dividends. «It’s quite likely that in near future SEB bank will start paying dividends and that would mean tax profits, from those dividends, to Estonian state,» he states.

On sales few years back, Swedbank paid no income tax

Three years ago, Swedbank Eesti sold its Latvian and Lithuanian units to the parent company in Sweden. Due to the transaction, Swedbank’s Estonian branch paid parent company over €240m in dividends and shrunk share capital by close to €520m. From the giant transaction, not a cent fell to Estonian state as income tax.

As explained by the Sorainen lawyer Priit Raudsepp: when an Estonian company’s division earns profit in Latvia, Lithuania or another country, the profit will be taxed in these countries.  When these dividends move into an Estonian company and, from there, on to Sweden, for instance, then, in principle, the Estonian company has nothing to do with the profit made and Estonia’s Income Tax law lets the dividends pass through Estonia without extra tax obligation. «Otherwise, double taxation would occur, which would contradict the EU mother-daughter directive,» underlined Mr Raudsepp.

Siim Kallas suggested volunteer spending

Aivar Sõerd is not the first in propagating freewill income tax. In 2003, one of Estonia’s best-known politicians – Siim Kallas – suggested something similar while head of Reform Party.

True: he never said companies should voluntarily pay part of profits to the state; rather, he offered that they should spend, during a couple of decades, a tenth of their profits on research and development.

Back then, Mr Kallas declared: «The corporate net profit is about €12bn; thus, it would be possible to collect €1.2bn a year to finance science and research.»

His idea found no broad support.