Tax on deposits in Ukraine

2024 Author: Howard Calhoun | [email protected]. Last modified: 2023-12-17 10:16

In July 2014, the President signed draft law No. 401 “On Amendments to the Tax Code”, which changed the procedure for taxing profits from deposits. Let's take a closer look at the new settlement procedure.

A bit of history

For the first time, banks started talking about the tax on deposits back in 2010. Various figures were given, but 5% was prescribed in the Tax Code, which was levied on deposits exceeding UAH 200,000. The next time the tax on deposits was revised in 2012. The rate was not changed, as this was fraught with a deterioration in social policy.

Changes 2014-2015

The 2014 deposit tax introduced a cardinal innovation: banks became tax agents. Withholdings are made at the time of interest accrual. Now banks monthly transfer deducted amounts to the budget without decoding by depositors, deposit amounts and accrued income. This is done in order to maintain bank secrecy. Taxpayers themselves will only need to report investment income. The tax on deposits in Ukraine in 2014 was 15%, which was withheld from the amount of the deposit, which is less than 17 living wages (UAH 19.99 thousand). The new scheme applied to allincome accrued after 08/01/14. Most of all, depositors whose contract expired after the specified date “suffered” the most: the deposit tax increased three times. Feedback from depositors confirms that even attempts to terminate the contract ahead of schedule were unsuccessful. Banks immediately cut interest rates.

Principles of taxation

This time the target was: interest on deposits, current accounts, certificates and contributions to credit unions, mutual funds, income paid by AMC. In case of early termination of the contract, the bank recalculates the amount of tax, and reduces the percentage fee to a minimum. In terms of money, the client hardly notices any changes. To understand how much contributors will have to transfer to the budget, consider a simple example.

The client has invested 20 thousand UAH. at 22% per annum with payment of 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. Of this amount, 660 UAH. (4.4 x 0.15) will be withheld and transferred to the budget. The client will receive the initial UAH 20,000 on his account. and 3, 74 thousand UAH. as interest income.

There is no loophole in the law to avoid paying this interest.

Unmet expectations

It was assumed that the new tax on deposits in Ukraine will have little effect on 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 tax. Since interestincome from deposits is included in the taxable base, then it is also subject to personal income tax and military tax.

Capital flight

Today, experts say that if the tax on deposits in Ukraine is canceled, then customers will begin to carry funds to the banking sector. As an additional incentive, the NBU Council recommends the Cabinet of Ministers to increase the guaranteed deposit amount. The last time such a measure was taken was in 2012, when the maximum insurance deposit was increased from UAH 150,000. up to 200 thousand UAH, or 25 thousand dollars. Due to hryvnia inflation today, this amount is equivalent to 7.69 thousand USD. e.

A 15% deposit tax was introduced in 2014. Initially, a progressive scale was envisaged, but at first they adopted a rate of 15%, in 2015 they increased it to 20%, and in 2016 they reduced it to 18%. Thus, the abolition of the tax should accelerate the inflow of capital into the banking sector. Today, the fiscal burden on the deposit is 19.5%.

Is this really true?

The current tax rates make deposits practically “zero” in terms of profitability, since the average percentage of profitability is 14-15%, which does not exceed the inflation rate of 2016. From an economic point of view, it is more expedient to tax income during the stability of the banking market. But in Ukraine, the crisis is more often the driving force behind reforms. And the imposition of a tax on interest on deposits helped avert financial disaster. The state budget received UAH 2 billion in 2014 and another UAH 8 billion in 2015. Although, according to preliminary estimates, it was plannedreplenishment of the budget by 0.5 billion per month.

The situation was aggravated by the general economic background: the bankruptcy of banks, whose depositors were forced to withdraw their UAH 70 billion through the Deposit Guarantee Fund, and the threefold depreciation of the hryvnia. The massive outflow of capital from banks could only be stopped by administrative restrictions.

Some statistics

Increased tax on deposits also affected the outflow of capital. In 2015, after changing the rate to 20%, the amount of savings in Ukrainian banks decreased by 36%: from UAH 198 billion. up to UAH 163 billion. Then there was a gradual recovery of deposits. Already in 2016, Ukrainians invested UAH 193 billion, of which UAH 73 billion came from Privatbank, and UAH 202 billion in 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, the inflation rate could reach 14%. In this case, the real return on deposits (after the tax on deposits is deducted) is reset to zero. The same goes for foreign exchange rates. On average, banks attract dollar deposits at 4.1% per annum. If the real inflation rate is 14%, and the devaluation is 10%, then the return on the deposit will become zero.

In the absence of a stock market and non-state PFin the Ukrainian market, deposits are actually the only instrument for attracting funds from the population.

Will de-taxing stimulate capital inflows?

Today, depositors evaluate banking products in terms of inflation and bank reliability. In conditions of systemic instability, there will be few depositors. If the state cancels the tax on deposits, then the population will have an additional choice factor, but not the main one.

By exempting deposits from taxation, the state, as it were, shows how you can make money in the country. In the EU countries, the state takes about 40% of the income from deposits in the form of taxes, in Switzerland the rates are generally negative. Against the backdrop of depositors' confidence in banks, such a system only stimulates capital inflows. In addition, in order to make a large 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 percentage, so as not to report to the tax authorities later.

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 revenues in the form of income tax. However, the revenue side of the budget is formed by VAT. The state does not yet trust the population. The tax agents are the employer when paying salaries, the notary when selling real estate and the bank when paying interest income. None of the listed entities is obliged to do this, but none of them will be able to escape from the tax.

Optionsproblem solving

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 receipts, including from transactions on the securities market, tax rates should be as unified as possible.

Following the experience from the USA, the state can establish a list of expenses for which income can be reduced at the time of declaration. Such expenses can include expenses for education, treatment, rehabilitation, retraining, energy saving, etc. Now there is a different scheme: if the taxpayer has grounds for reducing the amount of tax, he first calculates and pays the full amount of the fee, and then applies for a refund overpayments. Moreover, in the EU, the accrual mechanism applies both to the family and as an individual taxpayer.

In such a system, the 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.