It's ‘Permanent Donations’ Instead of Tax as Czechs Target Banks

(Bloomberg) -- After a raft of countries across eastern Europe put the squeeze on banks to help fill gaps in their budgets, the Czech Republic is taking a different approach: asking for "permanent donations" from their annual income.

For most of this decade, governments in the region have slapped special levies on the financial industry, rocking markets and triggering verbal brawls between officials and bankers. The first such tax in Hungary helped wipe out half the value of biggest lender OTP Bank Nyrt. in 2011, while a plan for a “tax on greed” in Romania hammered the stock exchange last year.

So it was no surprise that banking shares tumbled in the Czech Republic when Prime Minister Andrej Babis reportedly said in April he was willing to discuss new taxes. Hours later he vehement denied the report. Now his plan for a National Development Fund has won initial approval from banks eager to avoid a direct tax on their assets.

“The topic of the banking tax has been resonating here lately, and we want to avoid it,” Industry and Trade Minister Karel Havlicek said in an interview last week. “We want to convince the strong players that prosper and make decent profits here that they should also contribute on a voluntary basis.”

Taxing lenders is a political lightning rod in a country that has run one of the most stable economies in Europe for much of this decade. Now Babis’s minority coalition partners, the Social Democrats, are pushing for him to pressure banks to contribute more to state coffers so the government can raise spending on public-sector wages and welfare.

The proposed fund should receive an initial total of 5 billion to 10 billion koruna ($216 million to $432 million) in donations from banks and other companies next year, according to Havlicek. The government then plans to leverage that into as much as 50 billion koruna, via private-sector financing, to allocate for projects.

While the government is expecting contributions every year, banks are viewing them as more voluntary and are saying the transactions can be considered investments. Still, the asking price is well below the 14 billion koruna a year the Social Democrats were seeking in a bank-asset tax.

The discussion between the government and the private companies that would participate in the fund are underway but it’s too early to predict the result, Czech banking association Managing Director Pavel Stepanek said. The main focus right now is how the new tool will fit into the legislation and what status it should have.

The biggest lenders -- the Czech units of Societe Generale SA, Erste Group Bank AG, KBC Groep NV and UniCredit SpA -- have all agreed in principle to the fund and said last month that they were ready to "invest" billions of koruna. The Czech banking association welcomed the proposal as “more progressive and innovative” than a special levy.

Czech banking stocks underperformed their European peers. Komercni Banka AS, the unit of Societe Generale, fell 0.7% on Tuesday in Prague, while Moneta Money Bank AS was up 0.5%.

According to Havlicek, a total of six lenders and two energy companies that he didn’t name are in talks about contributing to the fund, and the details are still being hammered out by both sides.

“We would like to see the initial payment repeated on a regular basis,” he said. “But obviously since it is on a voluntary basis, there would be no way of enforcing it.”

©2019 Bloomberg L.P.

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