On Taxing Second-Tier Banks at 25%
Translated from Russian with the help of AI. Original: Russian version
Raising the corporate income tax rate for banks to 25% would treat the symptoms rather than the causes: the banks' excess profits stem from market imbalances and tax exemptions created by state policy, not from the tax rate.
Amid the second-tier banks' high profits, there is now much discussion about raising the CIT rate to 25%. Raising rates without analyzing the causes of these high earnings is like treating the symptoms without diagnosing the disease. The elevated profits in the banking sector have arisen largely at the expense of the state and through state policy in this area, which I have written about many times.
Against the backdrop of a high base rate and high interest rates generally, imbalances have emerged in the banks' favor, allowing them to earn excess profits without risk:
The ban on paying interest on current accounts gives banks free funding, which they then reinvest in government securities at a risk-free 13-14%. The main source of this liquidity is government bodies, which by law cannot hold their balances in deposit accounts. The result is a paradox: the state gives banks free liquidity, which they place in government securities, on which the state then pays them interest.
The 1% cap on interest rates on foreign-currency deposits, while banks can reinvest the funds on the international market at a risk-free 4-5% per annum, also provides banks with additional income.
The absence of new banks in the sector narrows the field of competition and gives certain banks a monopoly position in various segments. Opening a bank in Kazakhstan is difficult and requires enormous capital; starting one from scratch is practically impossible. After the cleanup of the banking sector and the exit of the banks that came under sanctions, the competitive field has become very limited.
Russian money has flowed in since Russian banks came under sanctions. Many Russians use Kazakhstani banks to make payments for their companies, which generates additional profit.
Tax exemptions on CIT for income from securities. As a result, banks earn tax-free income from placing their surplus liquidity in government securities, while the state's budget deficit grows.
All these factors have led to elevated profits in the sector. The Russian factor carries no risks and is a positive trend for us, but the other factors reduce the income of other economic agents. Companies, individuals and the state are all losing out on profits and income. Once the base rate is lowered, the banks' profitability will most likely begin to fall, but that does not solve the broader problem.
Therefore, rather than raising the CIT rate, it is better to eliminate the market imbalances that boost some players' profits at the expense of others. To that end, we should lift the ban on paying interest on current accounts, link the rate on foreign-currency deposits to the US Federal Reserve rate, liberalize the entry of new second-tier banks into the Kazakhstani market, and abolish the CIT exemption on government securities. Overall, this would raise the profitability of other economic agents and reduce that of the banks.
Moreover, it should be understood that if the rate is raised, banks will optimize their income through subsidiaries and affiliated companies.