Spain’s upper house passed two major tax bills today: the financial transaction tax (FTT) and the digital service tax (DST). Both taxes will go into effect in January 2021, three months after their publication in the Spanish Official Gazette.
The FTT is a 0.2 percent tax on the purchase of shares of Spanish companies with a market capitalization of more than €1 billion (US $1.17 billion). In general, FTTs are levied on the trade of financial instruments such as stocks, bonds, or derivatives. Under a FTT, a percentage of the asset’s value is paid in taxes when it is traded. For example, if an investor sells an asset worth $1,000, they would be charged $2 on the transaction under a 0.2 percent FTT.
The Spanish government expects this new tax to generate additional revenue of €850 million ($1 billion) annually, while the Independent Authority for Fiscal Responsibility (IAFR) has a lower estimate of €420 million ($492 million).
The FTT’s adverse effects on the capital market may end up costing more than its collection. FTTs can introduce a variety of distortions into capital markets. These include increased transaction costs, lower trading volumes, lower asset prices, and higher capital costs, which will favor operations outside regulated markets. It will reduce owners’ returns to capital, and the burden of the FTT would fall on small investors and families who cannot find alternative trading routes, at a time when saving rates in Spain are at an all-time low.
Additionally, Spanish financial institutions already pay a corporate tax rate of 30 percent, above the 25 percent general corporate tax rate, as the Savings Banks Foundation in Spain highlights in a recent report that predicts negative effects of the FTT on the Spanish economy.
On the other hand, the DST places a 3 percent tax on earnings from online ads, deals brokered on digital platforms, and sales of user data by tech companies with at least €750 million ($883 million) in total annual worldwide revenues and Spanish revenues of €3 million ($3.53 million). The Spanish government expects to raise additional income of €968 million ($1.139 million) annually from the levy, while the IAFR estimated tax revenue between €546 million ($643 million) and €968 million.
The Spanish DST is complex, distortionary, opaque, and requires businesses to pay taxes not only on income but also separately calculate their tax liability based on revenues under the DST. Unlike a corporate tax, even low DST rates can translate into high tax burdens.
As both taxes will go into effect in January, these three months may be too short for the financial intermediaries to adapt their operations and IT systems to the FTT. The same will happen with the DST. Additionally, if an FTT and DST are approved at the EU level or if the OECD reaches a global agreement on digital taxation, Spain would need to amend its own domestic policies.
Additionally, the Spanish government has just approved an unprecedented increase of over 50 percent in the spending ceiling, which will set the government spending at €196 billion. Both new taxes will only raise between 0.49 percent and 0.93 percent of the newly approved government spending for the next year.
The two major taxes that Spain has adopted will have little or no impact on budgetary stability and will increase fiscal uncertainty as they might need to be amended shortly. They have the potential to negatively impact capital formation, growth, and economic recovery. Additionally, the current economic challenges could be prolonged as these policies make it more difficult for Spain to recover from the current crisis. Spain should focus on economic stability and fiscal certainty and work to avoid disputes that could undermine recovery efforts.
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