Spain pushes ahead with unexpected tax on banks and energy groups

Spain pushes ahead with unexpected tax on banks and energy groups

Spain pushes ahead with unexpected tax on banks and energy groups

Spain pressed ahead with its controversial plan to impose windfall taxes on banks and energy companies on Thursday as lawmakers approved the move despite concerns from international institutions.

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

Windfall taxes have become a source of contention elsewhere in Europe since Spain first announced its plan, straining relations between governments that say taxes on windfall profits are justified and businesses that say damaging them would hurt the broader economy.

Late on Thursday, Spain’s unexpected tax law was approved by Congress, the lower house of parliament, which will now send the bill to the Senate for a final vote.

Pedro Sánchez, Spain’s prime minister, has said the taxes are a way for big business to “help out” while many Spanish families are suffering a sharp rise in the cost of living.

Spain wants to raise a total of 3 billion euros from big banks over the next two years via a 4.8 percent tax on income from interest and commissions. From utilities, it aims to raise 4 billion euros in the same period with a 1.2 percent tax on their sales.

Teresa Ribera, Spain’s energy and environment minister, told the Financial Times that the taxes raised some “quite technical” questions about how to identify what income would be taxed.

The plan has been strongly criticized by the biggest groups that have to pay the taxes, including lenders Santander and BBVA and power producer Iberdrola.

This week, the IMF weighed in, saying it “will be important to monitor the impact of the levies on credit availability, credit costs and banks’ resilience, as well as on incentives for energy companies to invest.”

The IMF highlighted the fact that in both sectors, Spain’s taxes are spent on revenues rather than profits. Although bank income from interest payments increases as interest rates rise, the fund noted that costs could also increase if an economic downturn led to more loan defaults.

Earlier this month, the European Central Bank criticized the bank tax, warning in a non-binding statement that it could damage the capital position of lenders and disrupt monetary policy. It 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 was “arbitrary”. He said the idea that his company was generating windfall profits thanks to record energy prices was false because it sold much of its electricity via long-term contracts at fixed prices.

The utility group will benefit from an amendment added in recent weeks which states that the tax shall not apply to income from regulated activities, which include the operation of electricity and gas distribution networks.

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

A further amendment states that by the end of 2024, Spanish authorities should consider whether to make the taxes permanent. The IMF said: “These measures should remain temporary and should not be considered substitutes 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 cut public spending and expand the country’s tax base, including by attracting investment and fighting the underground economy. “We shouldn’t always put more pressure on those who already pay taxes,” she said.

Additional reporting by Alice Hancock in Brussels

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