How other nations treat credit unions' tax status
April 24, 2018 10:00 PM
A brewing battle
Credit unions in the U.S. have successfully defended efforts — both in Congress and in the courts — to keep their exemption to federal taxes.
But the battle extends well beyond this country, and elsewhere, credit unions haven’t been so fortunate. From Canada to Eastern Europe to Australia, the credit union movement’s tax exemption has been under fire.
In some cases, credit unions have lost. In others, the fight continues — and in still others, the tax exemption never existed in the first place. Still, according to the World Council of Credit Unions, roughly 70% of the world’s credit unions do not pay corporate income taxes.
Following is a look at how different parts of the world have handled the credit union tax exemption:
But the battle extends well beyond this country, and elsewhere, credit unions haven’t been so fortunate. From Canada to Eastern Europe to Australia, the credit union movement’s tax exemption has been under fire.
In some cases, credit unions have lost. In others, the fight continues — and in still others, the tax exemption never existed in the first place. Still, according to the World Council of Credit Unions, roughly 70% of the world’s credit unions do not pay corporate income taxes.
Following is a look at how different parts of the world have handled the credit union tax exemption:
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Australia
Credit unions in Australia won their tax-exempt status in 1974, only to lose it two decades later in 1995. According to the World Council of Credit Unions, the tax rate is tiered from 30% to 45%, based on the size of the institution.
“The Australian credit unions and other mutual depository institutions, such as mutual banks and building societies, have not grown very much in recent years in large part because it is difficult to build retained earnings when the institution has to pay taxes with its earnings rather than retain them,” said Michael S. Edwards, vice president of advocacy and general counsel for the World Council of Credit Unions, the industry’s international trade association, based in Madison, Wis.
“The Australian credit unions and other mutual depository institutions, such as mutual banks and building societies, have not grown very much in recent years in large part because it is difficult to build retained earnings when the institution has to pay taxes with its earnings rather than retain them,” said Michael S. Edwards, vice president of advocacy and general counsel for the World Council of Credit Unions, the industry’s international trade association, based in Madison, Wis.
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Canada
Canadian credit unions have been subject to federal taxation since 1972, but at a much lower rate than other entities until 2013, when that discount was rescinded, according to Marc-Andre Pigeon, assistant vice president at the Canadian Credit Union Association.
But he added that some small credit unions are eligible for what is referred to as the “small business deduction” and therefore pay a lower tax rate.
But he added that some small credit unions are eligible for what is referred to as the “small business deduction” and therefore pay a lower tax rate.
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Mexico
Like their counterparts in the U.S., credit unions in Mexico are exempt from the corporate income tax, according to the World Council.
United Kingdom
Credit unions in the United Kingdom do get some special tax treatment, but they are still subject to certain taxes, according to Matt Bland, head of policy and communications at the Association of British Credit Unions.
“They get a significant benefit from mutual trading tax exemptions which mean that their business done with members is tax exempt, so the income they receive from interest on lending to members" — their primary source of income — "goes untaxed. On the other hand, they do pay corporation tax on interest income received from investments" (deposits with banks, for instance).
Interestingly, they do have one notable tax disadvantage: they are subject to the Value Added Tax (VAT) on certain purchases but cannot reclaim VAT paid in the way that other companies do, Bland said.
“Overall, we believe that the tax settlement for UK credit unions presents a positive balance which should incentivize credit unions to maximize their member lending activities and, where this happens, provides a significant benefit to offset their less favorable treatment in respect of investment income and VAT,” he said.
“They get a significant benefit from mutual trading tax exemptions which mean that their business done with members is tax exempt, so the income they receive from interest on lending to members" — their primary source of income — "goes untaxed. On the other hand, they do pay corporation tax on interest income received from investments" (deposits with banks, for instance).
Interestingly, they do have one notable tax disadvantage: they are subject to the Value Added Tax (VAT) on certain purchases but cannot reclaim VAT paid in the way that other companies do, Bland said.
“Overall, we believe that the tax settlement for UK credit unions presents a positive balance which should incentivize credit unions to maximize their member lending activities and, where this happens, provides a significant benefit to offset their less favorable treatment in respect of investment income and VAT,” he said.
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Republic of Ireland
With the largest credit union system in Europe, Irish credit unions enjoy an exemption from corporate income tax, much the same as their counterparts in the U.S. Membership stands at just over 3 million. But credit unions are feeling the squeeze from bank competition, so much so that Ireland’s central bank warned those institutions last week that they need to consider the future of their business model. Irish officials are considering allowing credit unions to expand their offerings, including mortgages.
Netherlands
Credit unions in the Netherlands pay a corporate tax, as well as the Value Added Tax, but they do enjoy at least one advantage, according to Roland Lampe, director of the Association of Credit Unions in the Netherlands. They are allowed to pay extra interest to their members prior to determining their yearly taxable income.
Still, as U.S. credit unions have been known to point out, members do pay taxes on their total income, including interest on their credit union accounts.
Still, as U.S. credit unions have been known to point out, members do pay taxes on their total income, including interest on their credit union accounts.
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Poland
In keeping with much of Eastern Europe, Poland’s credit unions are subject to a 19% corporate income tax and also pay taxes related to property, civil and legal action, and the Value-Added Tax.
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Bulgaria
Like a number of former Eastern Bloc nations, Bulgaria requires credit unions to pay some form of corporate income tax, according to the World Council of Credit Unions.
Credit unions here also pay a payroll tax. "In Eastern Europe, I believe that they had to pay corporate income tax since the fall of communism or not long after,” said Michael S. Edwards, vice president for advocacy and general counsel at the council. "In those jurisdictions, they often only extend tax-exempt status to charities."
Credit unions here also pay a payroll tax. "In Eastern Europe, I believe that they had to pay corporate income tax since the fall of communism or not long after,” said Michael S. Edwards, vice president for advocacy and general counsel at the council. "In those jurisdictions, they often only extend tax-exempt status to charities."
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Republic of Macedonia
The last remaining Macedonian credit union, FULM Savings House, is subject to a 10% corporate income tax, according to the World Council’s Edwards. All other credit unions in this nation either converted to bank charters or were liquidated over the last five years.
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Estonia
Unlike their counterparts in the Baltics and Eastern Europe, Estonian credit unions are exempt from a corporate income tax. They are, however, subject to an 18% sales tax.
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Latvia
Credit unions in this Baltic State are subject to a 15% tax on net income, according to the World Council of Credit Unions, and also must pay property taxes.
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Lithuania
Like their Baltic neighbors in Latvia, Lithuanian credit unions are assessed a 15% tax on net income and also pay a property tax, according to the World Council of Credit Unions.
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Romania
Romanian credit unions stand out as one of the few systems in the region that do not pay a corporate income tax. They do pay a 1.5% property tax, as well as a 32% payroll tax, according to the World Council of Credit Unions.
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Ukraine
Ukrainian credit unions pay among the highest of corporate taxes in the Eastern European region at 18%, according to the World Council of Credit Unions’ Edwards, who added that as the nation continues to struggle with a civil war, credit unions there are being assisted through the World Council's USAID-funded project Credit for Agricultural Producers.
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United States
Though the credit union tax exemption at home has largely enjoyed third-rail status in Congress, recent letters from Sen. Orrin Hatch, the influential Utah lawmaker who has announced he will not run again, have given bankers hope the debate isn’t a lost cause.
The fight has occasionally broken out at the state level, as well, most recently in Iowa. Credit unions in states with suffering budgets that have them contemplating tax reforms are keeping a close eye on it.
The fight has occasionally broken out at the state level, as well, most recently in Iowa. Credit unions in states with suffering budgets that have them contemplating tax reforms are keeping a close eye on it.
