The International Monetary Fund (IMF) warns Spain that extraordinary taxes on banks, energy companies and large fortunes should be “limited and temporary.” These have served to obtain significant revenue, of around 3.5 billion euros in fiscal year 2023, and have helped finance measures to combat the energy and price crisis, the IMF admits. However, the Washington-based institution considers that these tax figures, if maintained in their current format, could be “particularly distorting and create uncertainty,” which in turn “could discourage investment that is already weak.”
The Fund explains that these taxes arose to respond to the inflation crisis that arose as a result of the war in Ukraine: “The question of who should bear the cost of the measures came to the fore,” it points out. In this context, energy companies have benefited from skyrocketing prices. And the banks have increased their margins with the rate increases that were approved to tame inflation: they have transferred the rates to the loans they grant, but they have not passed them on with the same intensity to their depositors. This has been concluded by a study by the Bank of Spain cited by the IMF. All this has justified the Government’s reaction. However, such exceptionality cannot last forever: “Extraordinary taxes do not constitute a fiscal consolidation strategy favorable to growth,” the Fund’s economists say in their annual report on the Spanish economy, the so-called Article IV. And they add that they do not represent a solid alternative to measures that raise income structurally. In the long term, collection should be complemented with initiatives to contain the increase in spending, especially for pensions, they conclude.
If these taxes are made permanent, the IMF explains, the extraordinary benefits should be clearly defined. It would be advisable to align the bases of the tribute with that definition to minimize distorting effects, he says. They could also be redesigned to seek other objectives: according to the Fund, the banking tax could be redirected so that countercyclical capital buffers that accumulate can be deducted. In fact, the Bank of Spain has just demanded an increase in these because it understands that it is time to gear up.
That is, the tax could be used to make banks better capitalized. The entities in Spain show low levels of capital in European comparison. Although they would hold up well in an adverse scenario, they would do so at the cost of a substantial credit contraction, according to the IMF’s stress analysis. “A withholding of bank profits today could pay off if the risks materialize,” he says. So using the tax to bolster capital would be a way to strengthen the financial system and prepare it for future crises. This position of the IMF is the same one defended by the Bank of Spain.
The Government has announced its intention to make these figures permanent. He will use them to justify to Brussels that he is approving the tax reform that he has committed to in exchange for European funds. When the head of the Treasury was asked if she would allow a capital improvement to be deducted, María Jesús Montero responded that the tax is designed to collect and not to improve the solvency of the bank. The Treasury has admitted that renewable investments are deducted from the energy tax after negotiating with the PNV.
The tax on banking is 4.8% of the net interest and commission margin of entities that operate in Spanish territory with income exceeding 800 million. The IMF remembers that the ECB has already criticized it. Based on 2022, 1.2 billion were raised. According to the Fund’s calculations, it represents 10% of the profit linked to its activity in Spain in 2023: “A fairly small fraction but not trivial.” “Although it does not appear to have had a significant negative effect on the financial sector, its magnitude is sufficient that it could influence the future decisions of banks if it is prolonged,” the report indicates.
In the opinion of the agency, the design of the tax has “important limitations.” The interest margin is taxed and not the profit. Consequently, it does not take into account the possibility that entities have a high margin but a low profit, and vice versa. “Risk credit could be particularly diminished, since its higher returns would be taxed while its higher provisions will not be deductible,” points out the institution directed by Kristalina Georgieva. Even so, he recognizes that identifying extraordinary profits is not easy: the return on capital of Spanish banks did not experience significant increases compared to their European peers in 2022 and 2023. However, profitability in the domestic market increased to its highest level. since the financial crisis, due, according to the Bank of Spain, to the fact that they paid less on deposits than in the euro zone and than in other periods with similar economic conditions. The limitation to 800 million leaves out institutions regardless of their profitability, she adds.
The IMF considers that only current factors should be included in the tax base, which would reduce the collection capacity. In any case, even without the redesign, the Fund expects that in the coming years the income it provides will decrease as margins narrow because rates are lowered and because these are transferred to remunerate depositors.
The energy tax
The extraordinary tax on energy companies is 1.2% of their turnover. In 2023, 1.6 billion were deposited for the 2022 activity. The Fund recalls that several of these companies threatened to take their investments to other countries if the tax was extended. It has been extended until 2025. But it was announced, after an agreement with the PNV, that investments in renewable energy projects will be deducted. Although there are no Budgets, these deductions are not in force.
Like the banking tax, the energy tax does not necessarily capture the companies’ profits and lacks a clear definition of excess profits, the Fund assures. By not differentiating between types of energy, it cannot be considered an environmental tax. Although he concedes that the deduction for green investments can work as an incentive. Like the banking levy, the energy levy should have a limited duration with the current design, he emphasizes.
If made permanent, the tax would have to stick to a clear definition of excess profit rather than the operating balance, he stresses. And this definition should distinguish between those high profits that are due to price fluctuations marked by external factors and those that are inherent to domestic market competition. The former are the ones that should be taxed, he reasons.
Furthermore, the IMF says that Spain already stands out for its wide variety of taxes on energy, such as VAT, production taxes or the special tax on electricity, among others. The interaction between all taxes should be taken into account, he argues. If the tax is strictly restricted to those benefits that are not due to competition, revenue collection will decline. In any case, it will decrease as energy prices have normalized.
Tax on large fortunes
On the other hand, the IMF analyzes the solidarity tax on large fortunes that was announced in December 2022. It explains that wealth taxes can be an instrument to collect and achieve redistribution. But he points out that if the differences in the tax are very large between regions, it can also have distorting effects: it could lead to residence decisions dictated by taxes. And if the estate tax is left at the state level, it collides with the autonomy of the communities. Cooperation to establish a minimum wealth tax is a more viable path, he concludes.
The report highlights that of the 623 million collected in 2023, 555 came from the Community of Madrid, which historically has not taxed assets. And remember that this autonomy has announced a change in the tax to redirect income towards the regional government and, in exchange, has communicated a series of tax benefits to compensate individuals with high net worth, such as tax incentives to create companies, invest or hire in the region. These initiatives would deactivate the net collection, he warns.
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