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I refer to the letter from Mr Frans van Avendonk (14 May 2006). In my opinion 7 May I did not advocate an increase in tax on ordinary profits.
I advocated a windfall tax – windfall by definition, a bonanza of huge and often unexpected profits, made in this instance by most banks in Malta in recent years.
Let your readers remember that whilst our economy contracted by 1.5% in 2004 and expanded by a reasonable 2.5% in 2005, some banks registered an increase in profits of more than 90%-92% to be exact.
Now that is no ordinary decent profit.
BOV has just announced another astounding record of Lm18 million profit (pre-tax) for the first 6 months of this financial year – that is nearly doubling its profit over its already record profit for last year.
HSBC made a record profit before tax of Lm36.7 million in 2005, an increase of 11.7 per cent on the previous record profit of 2004.
One well may ask how these profits are being generated. A large part of these profits came from net interest income – the difference between the miserly interest paid to account holders in credit and the interest charged to borrowers.
Net interest income for the two major banks in 2005 was an incredible Lm91 million! – (HSBC Lm46.9 million, and Bank of Valletta Lm44.5 million for 2005).
Is that a fair profit?
All this at a time when most households, pensioners and the business community are struggling hard to make ends meet, particularly with the added burden of the surcharge on electricity and fuel bills due to the rising cost of oil.
So much of these enormous profits for the banks came from all those who hold bank accounts in credit and who essentially supplied the banks with their deposits receiving paltry interest rates when compared to the interest rates being charged to borrowers.
One should also note that most of these profits do not belong to pensioners as is being implied – most of the profits belong to foreign shareholders at least 70% in the case of HSBC. With these profits HSBC recouped the price they paid for the Mid Med Bank in a period of approximately two years! Nearly Lm17 million in 2005 (some EUR40 million) went to foreign shareholders in HSBC – money which was promptly taken out of the local economy.
I believe that the Government should intervene to remedy the situation and bring in a balance of fair play with benefits to society as a whole.
That is why I proposed that the Government should impose a windfall tax on these huge bank profits, and that in my view this should be in the region of 30%.
This would be a good tax; it would create immediately a fund of around Lm25 million. How this fund would be used would of course be a Government decision and my proposal that it could be used to reduce or abolish the energy charge for it is based on the fact that this would benefit the economy as a whole. It would help safeguard jobs and stimulate the economy to grow.
Incidentally pensioners do not pay 35% on profits from bank or other shareholding dividends – unless of course they have other income on top of their pension, which brings their tax liability to the 35% band.
Windfall taxes are nothing new. Many countries have imposed windfall taxes when corporations make huge profits compared to the rest of the economy.
My proposal of a windfall tax would immediately alleviate the hardship on the business community as well as on the ordinary household; it would also ensure that this money is injected back into the economy at this much-needed time.
I am convinced from the feedback I have received that a windfall tax on banks profits would be well endorsed by the electorate.
Dr Frank Portelli
Attard
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