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11 Aug 2023

Econ Digest

How is the windfall tax on Italian banks different from Thailand?

•    The Italian government plans to impose a windfall tax on commercial banks that have benefited from the recent acceleration of interest rate hikes by the European Central Bank (ECB). This tax is similar to taxes imposed on banks in other European countries such as Spain, Hungary, the Czech Republic and Lithuania.
Although the details of the windfall tax may need to be finalized again in the future, it is clear that the income on which the banking sector will be subject to an additional windfall tax will be “net interest income”, which has recovered strongly due to widening interest rate differentials. Initially, the windfall tax will be collected once at a rate of 40% of net interest income that exceeds the specified level compared to net interest income in 2023 (for example, the portion of 2022 net interest income that exceeds 5% when compared with 2021 net interest income, or the portion of 2023 net interest income that exceeds 10% when compared with 2021 net interest income). The additional windfall tax will be capped at no more than 0.1% of total assets. However, even with a clear collection ceiling, banks in Italy may need to adapt and gradually announce higher interest rates on deposits in the remainder of the year to reduce the impact of the tax.
•    In the case of Thailand, even though the rising interest rate trend has helped to support the net interest income of the Thai banking system, it is still not possible to directly compare the situation of Thailand with Italy in terms of the numbers alone. This is because the environmental factors, debt relief measures and banking system are different. There are at least 3 additional issues to consider:

  1. The ECB’s policy rate has accelerated faster than Thailand’s policy rate. The ECB has raised its policy rate to 4.25% (from 0.00% in June 2022 to 4.25% in August 2023), while Thailand’s policy rate has been gradually raised by a total of 1.75% (from 0.50% in July 2022 to 2.25% in August 2023). This trend has helped to boost net interest income in Italy by nearly twice as much as in Thailand. In 2022, the net interest income of Italian banks increased by about 22%, while Thai banks grew by only 12%.
  2. The purpose of the windfall tax on Italian banks is to use the proceeds to support debt relief measures for borrowers. Thailand has also established debt relief and restructuring mechanisms for borrowers. As of May 2023, there are 2.14 million accounts of borrowers who have received assistance from banks and non-banks, with total debt of about THB1.88 trillion, or 12.2% of total loans. In addition, in April 2023, both banks and non-banks will have additional measures to address the long-term debt problems of personal loan borrowers.
  3. The legal issue is that the context of the windfall tax in Thailand is different from that of other countries. Therefore, it may not be possible to directly compare such tax measures of this type between Thailand and other countries. The key provisions of the draft bill on Taxation of Proceeds from the Development of Basic Public Infrastructure for National Transportation (Draft Bill on Windfall Tax) are to collect taxes from the real estate sector, including individuals, juristic persons and real estate developers that benefit from the development of basic infrastructure, which does not cover other types of businesses.

•    In addition, the mechanism by which Thai banks raise interest rates in the current round is different from previous rounds. The number of rounds of bank interest rate hikes is less than the number of rounds of policy rate hikes (excluding the round of interest rate hikes in early 2023 after the FIDF deposit collection returned to the normal rate). In some rounds, to help retail borrowers, the MRR has been raised less than the MLR and MOR. In addition, the net interest income in the Thai banking system is also the net of fees that banks must contribute to the Fund for the Rehabilitation and Development of the Financial System and the Deposit Protection Fund, which are currently collected at 0.46% and 0.01% of the average balance of deposit accounts, respectively. The sum of these two contribution rates remains below the ceiling of 1% under the Emergency Decree on Improving the Management of Loan Made by the Ministry of Finance for Assisting Financial Institutions Development Fund. If there is an increase, it will be used to repay the principal or interest of the Fund for Rehabilitation and for no other purpose. However, a faster reduction of the Fund for Rehabilitation's debt will enable the Thai government to allocate more financial resources to develop and strengthen the Thai economy in the future.

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