Spain pushes windfall tax on banks and energy companies

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

The Socialist-led government proposed the temporary taxes in July to raise $7 billion

Windfall taxes have become a source of contention elsewhere in Europe since Spain first announced its plan, straining relations between governments who say taxes on extraordinary profits are justified and companies who say a Violating these taxes will harm the overall economy.

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

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

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

Teresa Ribera, Spain’s energy and environment minister, told the Financial Times that the taxes raise some “rather technical” questions about how to determine which revenues are taxed.

The plan has been heavily criticized by the biggest groups who have to pay the taxes, including lenders Santander and BBVA and electricity producer Iberdrola.

This week, the IMF chimed in, saying it was “important to monitor the impact of the levy on credit availability, borrowing costs and bank resilience, as well as energy companies’ incentives to invest.”

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

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

Ignacio Galán, CEO of Iberdrola, told the Financial Times the energy tax was “arbitrary”. He said the notion that his company is making unexpected profits thanks to record-high energy prices is wrong because it sells much of its electricity through long-term, fixed-price contracts.

Utilities will benefit from a change added in recent weeks that says the tax won’t apply to revenue from regulated activities, which include the operation of electricity and gas distribution networks.

Spain’s plan is independent of an EU proposal for a windfall tax that would only apply to oil and gas companies. Eurelectric, the trade association for Europe’s electricity industry, on Thursday condemned Spain’s attempt to target a broader group of companies.

Another change says that by the end of 2024, Spanish authorities should consider making the taxes permanent. The IMF said: “These measures should remain temporary and 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 cut public spending and broaden the country’s tax base, including by attracting investment and tackling the informal economy. “We shouldn’t keep putting more pressure on those who are already paying taxes,” she said.

Additional reporting by Alice Hancock in Brussels

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