Spain brings forward extraordinary tax on banks and energy groups

Spain on Thursday moved forward with a controversial plan to impose an extraordinary tax on banks and energy companies after lawmakers approved the move despite concerns from international institutions.

The Socialist-led government proposed in July to introduce temporary taxes to raise 7 billion euros as it seeks funds to ease the painful effects of high energy costs and inflation, particularly on low-income households.

The windfall taxes have also become a source of controversy in other parts of Europe since Spain first announced its plan, straining relations between governments that say taxes on windfall profits are justified and businesses that say violating them harms the wider economy.

Late on Thursday evening, the Congress, the lower house of the parliament, accepted the bill on the Spanish extraordinary tax, which is now sending it to the Senate for a final vote.

Spain’s prime minister, Pedro Sánchez, said taxes could help big companies “lend out a helping hand” as many Spanish families suffer from a sharp rise in the cost of living.

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Spain wants a total of 3 billion euros from big banks over the next two years through a 4.8 percent tax on their interest and commission income. They want to collect 4 billion euros from utility service providers in the same period, with a sales tax of 1.2 percent.

Teresa Ribera, Spain’s energy and environment minister, told the Financial Times that the taxes raised a “quite technical” question about how to determine which incomes should be taxed.

The plan has been heavily criticized by the groups that pay the biggest taxes, including lenders Santander and BBVA, as well as power producer Iberdrola.

This week, the IMF considered that “it will be important to monitor the impact of the levies on credit availability, credit costs and bank flexibility, as well as investment incentives for energy companies”.

The IMF highlighted that in both sectors, Spanish taxes are levied on revenues, not profits. Although income from bank interest payments rises as interest rates rise, the fund noted that costs could also rise if an economic slowdown led to more loan defaults.

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Earlier this month, the European Central Bank criticized the bank tax, warning in a non-binding opinion that it could damage the capital position of lenders and disrupt monetary policy. He also questioned Spain’s requirement that banks not pass on the cost of the tax to customers, which is against ECB policy.

Ignacio Galán, executive chairman of Iberdrola, told the Financial Times that the energy tax is “arbitrary”. He said the idea that his company was making windfall profits thanks to record high energy prices was false because it sold most of its electricity under long-term contracts at a fixed rate.

Utility groups benefit from an amendment introduced in recent weeks, which stipulates that the tax does not apply to income from regulated activities, which include the operation of electricity and gas distribution networks.

Spain’s plan is separate from the EU’s proposal for an extraordinary tax, which would only apply to oil and gas companies. Eurelectric, the trade body for the European electricity industry, on Thursday condemned Spain’s attempt to target a wider group of companies.

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According to a further amendment, at the end of 2024 the Spanish authorities must evaluate whether the taxes should be made permanent. According to the IMF, these measures should remain temporary and should not be seen as a substitute for the necessary medium-term tax reform.

Alicia Coronil, chief economist at Singular Bank, a Madrid-based private bank, said the government should do more to reduce public spending and broaden the country’s tax base, including attracting investment and fighting the black economy. “We shouldn’t always put more pressure on those who already pay taxes,” he said.

Additional reporting by Alice Hancock in Brussels

Source: https://www.ft.com/content/6988ef5b-21b6-4443-b603-d4ee4be57048