Minister of Finance Bezalel Smotrich is promoting a plan to increase the tax on bank profits. The Ministry of Finance last night submitted the plan which would see the tax on bank profits rise from its current rate of 17% to 26% in 2024 and 2025.
The proposal, attached to the state budget, says, "As part of the government's steps to make adjustments in order to meet with the fiscal frameworks for 2024 and beyond for expenses caused by the Swords of Iron War (we decided) that according to the instructions of the VAT Law 1975, in tax years 2024 and 2025, a salary tax at a rate of 17% and profit tax at a rate of 26% will be imposed."
The Ministry of Finance forecasts that the increase in the tax rate will result in additional revenue of about NIS 1.4 billion in each of the next two years.
"In 2022 and 2023, Israeli banks recorded an unusual increase in profitability, both compared with previous years and compared with banks in other countries," explained the Ministry of Finance.
Aggregate net profit of the banking system in 2022 totaled NIS 24 billion, up 30% from 2021. By the end of the third quarter of 2023, the net profit of the banking system totaled NIS 20 billion, even after the banks set aside for credit losses due to the effects of the war that broke out in October 2023. Return on capital in the banking system increased from 8% between 2010-2020 to 14% in 2021 and 16% in 2022, and it will amount to an even higher rate in 2023. "These trends created very high excess liquidity and capital for the banks, and allowed them to strengthen their equity capital and enhance their financial stability," the proposal states.
The Bank of Israel headed by Governor Prof. Amir Yaron is not enthusiastic about the Ministry of Finance proposal. The Bank of Israel said that a tax targeting profits of a specific sector contradicts the principles of the taxation policy, creates uncertainty and might even deter investors.
"These things are certainly true in the case where the tax is imposed only on some of the companies in a certain sector. To the extent that such a step is taken due to a budgetary need, one must at the very least make sure that it applies to the entire financial sector, that it is proportionate and consistent with other measures in the government's taxation field, and that it is for a limited time," noted in the Bank of Israel.
The first time the Minister of Finance brought up the idea was in May of last year, when he announced at the Eli Hurvitz Conference on Economy and Society his plan to tax the growing profits of the banks, following the interest rate hikes. "In the context of the fight against centralization and the cost of living, it is impossible not to talk about the banks' surplus profits as a result of the increase in interest rates. Profits they receive from the large interest gaps between credit and deposits, and cannot be attributed to hard work and efficiency," Smotrich said at the time.
Published by Globes, Israel business news - en.globes.co.il - on January 14, 2024.
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