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The future of a special tax on bank deposits paid to the state may be heading for a shift, though a final decision is not guaranteed.
According to Panayiotis Rougalas' article published in Kathimerini Cyprus in Greek, the proposed change involves redirecting the 0.15% tax, which banks have paid into the Republic’s Fixed Fund since 2011, towards social policy and addressing punctuality issues. The matter now rests with Parliament, where a majority will need to approve the shift, followed by government approval if the measure passes.
However, AKEL’s push to increase this tax due to perceived bank over-profits could complicate the plan. If AKEL’s proposal raises the rate from 0.15% to between 0.20% and 0.30%, banks’ annual contributions could jump from €69.5 million in 2023 to nearly €100 million. Such an increase might create challenges for banks to sustain these payments, particularly as their profitability, bolstered by rising interest rates, is expected to diminish with forthcoming rate cuts from the European Central Bank (ECB). Since 2017, banks have paid a total of €400 million in special taxes on deposits.
The shift of the 0.15% tax to fund social programs is seen as a practical solution that could garner widespread support in Parliament, aside from possible opposition from the Democratic Rally (DISY) party.
At the same time, AKEL has proposed taxing banks’ super-profits to generate €50 million annually. This sum aligns with what AKEL initially envisioned to support vulnerable groups, assuming part of the €70 million paid to the Single Resolution Fund (SRF) last year is redirected. The SRF, an emergency fund for resolving failing banks, has reached its target level of at least 1% of covered deposits across the 21 EU member states in the banking union by the end of 2023. It is now uncertain whether the SRF will continue to collect funds from states, with the potential introduction of a "backstop" fund, managed by the European Stability Mechanism, to supplement the SRF.
The ECB’s opinion on AKEL’s proposal is still awaited. The ECB has previously cautioned against windfall taxes on banks in other countries, like Spain, warning that such taxes could undermine banks’ ability to build capital buffers, making them more vulnerable to economic shocks. It could also reduce credit availability and increase costs for customers, potentially harming economic growth.
Cypriot banks argue that any additional taxation would be unfair, citing that they have been paying a special tax on deposits since 2011, which was initially intended to last two years. Banks also point out that they continued to pay this tax despite recording significant losses following the 2013 financial crisis.
While AKEL’s proposal targets the banks, the party highlights that citizens continue to face high prices despite falling inflation. The Harmonised Index of Consumer Prices rose by 2.2% in August 2024 compared to the same month last year, with notable increases in leisure, culture, restaurants, and hotels. AKEL emphasizes the need for action to alleviate the financial burden on citizens, especially in areas where prices remain elevated despite a drop in inflation.
