In July 2014, the President signed Bill No. 401 “On Amendments to the Tax Code,” which changed the procedure for taxing profits on deposits. Let us consider in more detail the new calculation procedure.
A bit of history
For the first time, banks spoke about the tax on deposits back in 2010. Different numbers were mentioned, but 5% were prescribed in the Tax Code, which were levied on deposits in excess of 200 thousand UAH. The next time the deposit tax was revised in 2012. The rate was not changed, as this was fraught with a deterioration in social policy.
Changes 2014-2015
The deposit tax of 2014 introduced a cardinal innovation: banks became tax agents. Deductions are carried out at the time of interest calculation. Now, banks monthly transfer to the budget withheld amounts without decoding by depositors, deposit amounts and accrued income. This is done in order to preserve bank secrecy. Taxpayers themselves in the declaration will need to reflect only investment income. The tax on deposits in Ukraine in 2014 was 15%, which was withheld from the deposit amount of less than 17 living wages (UAH 19.99 thousand). The new scheme extended to all income accrued after 08/01/14. The most “affected” were depositors whose contract expired after the indicated date: the deposit tax increased three times. Feedback from depositors confirms that even attempts to early terminate the contract were unsuccessful. Banks immediately cut interest rates.
Tax principles
This time, the target was: interest on deposits, current accounts, certificates and deposits in credit unions, mutual funds, income paid by AMC. In case of early termination of the contract, the bank recounts the tax amount and reduces the interest rate to a minimum. In monetary terms, the client practically does not notice the changes. To understand how much depositors will have to transfer to the budget, consider a simple example.
The client invested 20 thousand UAH. at 22% per annum with interest at the end of the term. That is, by the end of the contract the bank will accrue: 20 x 0.22 = 4.4 thousand UAH. From this amount 660 UAH. (4.4 x 0.15) will be withheld and transferred to the budget. The client will receive an initial 20 thousand UAH to the account. and 3.74 thousand UAH as interest income.
There is no loophole in the law to avoid paying these percentages.
Unjustified expectations
It was assumed that the new tax on deposits in Ukraine will hardly affect demand, since there is no alternative source of income in the country. However, since 2016, citizens of Ukraine began to pay 18% of personal income tax and 1.5% in the form of a military duty. Since interest income from deposits is included in the tax base, it is also subject to personal income tax and military levy.
Capital outflow
Today, experts say that if you cancel the tax on deposits in Ukraine, then customers will begin to carry funds to the banking sector. As an additional incentive, the NBU Council recommends that the CMU increase the guaranteed deposit amount. The last time such a measure was taken in 2012, when the maximum insurance contribution was increased from 150 thousand UAH. up to 200 thousand UAH., or 25 thousand dollars. Due to inflation, the hryvnia today, this amount is equivalent to 7.69 thousand. e.
A 15% deposit tax was introduced in 2014. Initially, a progressive scale was envisaged, but first they accepted the rate of 15%, in 2015 they increased it to 20%, and in 2016 they reduced it to 18%. Thus, the abolition of tax should accelerate the flow of capital into the banking sector. Today, the fiscal burden on the deposit is 19.5%.
Is it really?
Current tax rates make deposits almost “zero” in profitability, as the average percentage of return is 14-15%, which do not exceed the 2016 inflation rate. From an economic point of view, it is more advisable to tax income during the stability of the banking market. But in Ukraine, the reform engine is often a crisis. And the introduced tax on interest on deposits helped prevent a financial catastrophe. The state budget received 2 billion UAH in 2014 and another 8 billion UAH in 2015. Although according to preliminary estimates, it was planned to replenish the budget by 0.5 billion per month.
The situation was aggravated by the general economic background: bankruptcy of banks whose depositors were forced to take their 70 billion UAH through the Deposit Guarantee Fund, and a three-fold depreciation of the hryvnia. The massive outflow of capital from banks could be stopped only by administrative restrictions.
Some statistics
Increased tax on deposits also affected capital outflows. In 2015, after changing the rate to 20%, the amount of savings in Ukrainian banks decreased by 36%: from 198 billion UAH. up to 163 billion UAH Then there was a gradual recovery of deposits. Already in 2016, Ukrainians invested UAH 193 billion, of which Privatbank accounted for 73 billion, and UAH 202 billion for the first quarter of 2017. Unfortunately, more than 81% of deposits are attracted for up to 6 months, which threatens an instant liquidity crisis.
The average rate on hryvnia deposits is 15%. The consumer price forecast for 2017 was 11%. Given the absence of deflation in June, inflation could reach 14%. In this case, the real return on deposits (after the deposit tax is deducted) is reset. The same goes for currency rates. On average, banks attract dollar deposits at 4.1% per annum. If the real inflation rate is 14%, and devaluations - 10%, then the yield of the deposit will become zero.
In the absence of the stock market and non-state PFs in the Ukrainian market, deposits are virtually the only instrument for attracting public funds.
Can the abolition of taxation stimulate the flow of capital?
Today, investors evaluate banking products by the level of inflation and reliability of the bank. In conditions of systemic instability, there will be few investors. If the state abolishes the tax on deposits, then the population will have an additional factor of choice, but not the main one.
By exempting deposits from taxation, the state, as it were, shows how money can be earned in the country. In EU countries, the state takes about 40% of income from deposits in the form of taxes; in Switzerland, rates are generally negative. Amid depositors' confidence in banks, such a system only stimulates the flow of capital. In addition, in order to make a major purchase, a European needs to spend the amount through financial monitoring. In such a situation, it is easier to keep money in the bank at a meager interest, so that you do not report to the tax then.
If we analyze the revenues to the state budget, it turns out that the amounts transferred in the form of personal income tax are almost comparable to the income in the form of income tax. However, the revenue side of the budget is VAT. The state does not yet trust the population. Tax agents are the employer in the payment of salaries, the notary in the sale of real estate and the bank in the payment of interest income. None of the listed entities is required to do this, but none of them will be able to escape from the tax.
Options for solving the problem
If Ukraine is striving for the European community, then fiscal policy should be built according to European standards. In order for taxpayers to independently declare their income and pay taxes on all proceeds, including from transactions in the securities market, tax rates should be as unified as possible.
Following the experience from the United States, the state can establish a list of costs by which income can be reduced at the time of declaration. Such expenses include the costs of training, treatment, rehabilitation, retraining, energy saving, etc. Now there is another scheme: if the taxpayer has a reason to reduce the amount of tax, he first charges and pays the full amount of the fee, and then applies for a refund overpayments. Moreover, in the EU, the accrual mechanism applies to both the family and the individual taxpayer.
In such a system, a tax on deposits will become one of the fees for passive operations, and each taxpayer will be able to choose sources for investment based on their priorities.