Darius Buta, spokesman for the State Tax Inspectorate, explains that final decision on the profit tax paid by SEB might still be a long way ahead: “SEB bank can present its own position. We won't be able to talk about any possible violations committed by the bank before the ruling comes into force. And when that happens is still unclear – if the bank disagrees with the position of the State Tax Inspectorate, it can dispute it in court – this way the process can be prolonged for several years.”
Suspiciously small profit tax
Last year, SEB and Swedbank, two biggest banks in the Lithuanian market, paid only 3 thousand litas (870 euros) in profit taxes. The parliamentary Budget and Finance Committee turned to the State Tax Inspectorate to investigate the situation. One investigation, on SEB's profit tax, has been concluded, another one, on all the banks, is still open.
Lithuanian laws allow banks to form provisions and not pay profit tax before clients pay back bad loans. These were not in short supply during the recent recession – in 2009-2010, all Lithuanian banks reported combined losses of 3.9 billion litas (1.1 billion euros) due to bad loans.
Over the last two years, banks in Lithuania got back in the black and made 1.8 billion litas (0.52 billion euros) in profit. However, it still does not cover the losses incurred by SEB and Swedbank over the recession years, therefore these banks are not obliged to pay any profit tax.
In order to form provisions to cover bad loans, banks must get a capital injection – either to issue share emissions or to borrow directly from their mother companies.
According to Stasys Kruopas, head of the Lithuanian Banks Association, Scandinavian banks that own SEB and Swedbank in Lithuania lent 4.22 billion litas (1.22 billion euros) to their Lithuanian subsidiaries.
Fictitious loans make no sense?
The parliamentary Budget and Finance Committee has voiced suspicions that Lithuanian-based subsidiaries of foreign banks took out loans from their mother companies at interest rates well above those in the market at the time. Paying above-market interest rates to foreign owners would have resulted in these banks making less profit and therefore paying less in profit tax to the Lithuanian state.
The parliamentary committee alleges that the Lithuanian budget was thus deprived of tens of millions of litas.
Kropas claims, however, that it would make no sense for Scandinavian banks to give loans to their Lithuanian subsidiaries at above-market interest rates, because even if they thus avoided paying profit tax in Lithuania, they would still have to do it in Scandinavia, where the rates are higher. In Lithuania, profit tax currently stands at 15 percent.
“There is little economic sense in that, because our tax environment is more favourable,” says Kropas.
However, Kęstutis Glaveckas, deputy chairman of the Budget and Finance Committee, is unconvinced, saying that higher profit tax rates in Scandinavia do not prove that there was nothing wrong with the loans: “There are many variables in finance. There are many ways to avoid paying taxes, as evidenced by recent global practices.”
Different accounting
Chairman of the parliamentary Budget and Finance Committee Bronius Bradauskas of the Social Democratic Party previously stated that his suspicions were raised by the fact that other banks in Lithuania, DNB and Nordea, paid 11.2 million litas in profit tax, while much bigger SEB and Swedbank, only 3 thousand litas each.
Kropas explains that the difference might be due to different calculating methods used by banks or unequal numbers of bad loans: “Differences appear depending on whether or not banks have finished covering losses from previous years with provisions. Those banks that have, start paying profit tax. You will be seeing banks' profits next year. They employed different calculation strategies, some banks moved bad loans to other companies, while others kept them in their balance sheets.”
Kropas notes that Snoras bank and Ūkio Bankas, both now defunct, hardly had any provisions.
