The International Monetary Fund (IMF) warns Spain about this extraordinary taxes on banks, energy companies and large fortunes they must be 'limited and temporary'. These have generated significant revenues, of around 3.5 billion euros in the 2023 budget year, and helped finance measures to combat the energy and price crisis, the IMF admits. However, the Washington-based institute believes that these tax figures, if left in their current form, could be “extremely distorted and create uncertainty,” which could in turn “discourage investment that is already weak.” .
The Fund explains that these taxes arose in response to the inflation crisis that arose as a result of the war in Ukraine: “The question of who should bear the costs of the measures came to the fore,” the Fund points out. In this context, energy companies have benefited from skyrocketing prices. And the banks have expanded their margins with the rate hikes approved to curb inflation: they have transferred interest rates to the loans they make, but they have not passed them on to their savers with the same intensity. This is evident from a study by the Bank of Spain cited by the IMF. All this has justified the government's response. However, such exceptionalism cannot last forever: “Extraordinary taxes are not a growth-friendly fiscal consolidation strategy,” say the Fund's economists. in its annual report on the Spanish economy, the so-called Article IV. And they add that they are not a solid alternative to measures that structurally increase incomes. In the long term, collections must be supplemented with initiatives to limit the increase in expenditure, especially for pensions, they conclude.
If these taxes are made permanent, the IMF explains, the extraordinary benefits must be clearly defined. It would be advisable to align the tax bases with that definition to minimize distortive effects, he says. They could also be redesigned to pursue other objectives: according to the Fund, bank taxes could be reoriented so that countercyclical capital buffers that build up can be deducted. In fact, the Bank of Spain has just demanded an increase in this, as it understands that it is time to move up a gear.
This means that the tax could be used to make banks better capitalized. The entities in Spain show low capital levels in European comparison. While they would hold up well in an adverse scenario, they would do so at the cost of a significant credit contraction, the IMF's stress analysis shows. “Retaining bank profits today could yield good results if the risks materialize,” he points out. Using the tax to strengthen capital would thus be a way to strengthen the financial system and prepare it for future crises. This position of the IMF is the same as that of the Bank of Spain.
The government has announced that it wants to make these figures permanent. He will use them to justify to Brussels that he approves the tax reform he committed to in exchange for European funds. When the head of the Treasury was asked whether she would allow a capital improvement to be deducted, María Jesús Montero replied that the tax is intended to collect the bank's solvency and not to improve it. After negotiations with the PNV, the Ministry of Finance has admitted that sustainable investments will be deducted from the energy tax.
The banking tax amounts to 4.8% of the net interest and commission margin of entities operating in Spanish territory and having an income of more than 800 million euros. The IMF recalls that the ECB has already criticized it. Based on 2022, 1.2 billion was raised. According to the Fund's calculations, this represents 10% of the profits related to its activities in Spain in 2023: “A fairly small part, but not trivial.” “While it does not appear to have had a significant negative impact on the financial sector, its magnitude is sufficient to potentially influence banks' future decisions if it is extended,” the report said.
According to the agency, the design of the tax has “important limitations.” The interest margin is taxed and not the profit. Consequently, the possibility of entities having high margins but low profits, and vice versa, is not taken into account. “The risk credit could be particularly reduced, because its higher returns would be taxed, while the higher provisions would not be deductible,” emphasizes the institution headed by Kristalina Georgieva. Yet he acknowledges that identifying extraordinary profits is not easy: Spanish banks' returns on capital did not see significant increases in 2022 and 2023 compared to their European counterparts. However, profitability in the domestic market rose to the highest level in the financial crisis, which, according to the Bank of Spain, is due to the fact that they paid less on deposits than in the Eurozone and than in other periods with comparable economic conditions. The limitation to 800 million leaves out institutions regardless of their profitability, he adds.
The IMF believes that only current factors should be included in the tax base, which would reduce collection capacity. Be that as it may, even without the restructuring, the Fund expects that the income it generates will decrease in the coming years because margins will become smaller because interest rates are lowered and these are transferred to compensating savers.
The energy tax
The extraordinary tax for energy companies amounts to 1.2% of their turnover. In 2023, 1.6 billion was deposited for 2022 activity. The Fund recalls that several of these companies threatened to transfer their investments to other countries if the tax was extended. It has been extended until 2025. But that was announced after agreement with the PNV investments in sustainable energy projects are deducted. Although there are no budgets, these deductions are not in effect.
Like the bank tax, the energy tax does not necessarily include company profits and there is a lack of a clear definition of excess profits, the Fund assures. By not distinguishing between types of energy, it cannot be considered an environmental burden. Although he admits that the deduction for green investments can have a stimulating effect. Just like the bank levy, the current design of the energy levy should have a limited duration, he emphasizes.
If the tax were made permanent, it would have to adhere to a clear definition of excess profit and not the operating balance, he pointed out. And this definition should distinguish between the high profits resulting from price fluctuations characterized by external factors and the profits inherent to competition in the domestic market. The first are those who should be taxed, he reasons.
Moreover, the IMF says that Spain already stands out for its great diversity energy taxes, such as VAT, production tax or special tax on electricity. The interaction between all taxes must be taken into account, he argues. If the tax is strictly limited to those benefits that do not result from competition, revenue collection will decrease. In any case, this will decrease as energy prices normalize.
Tax on large fortunes
On the other hand, the IMF analyzes the solidarity tax on large fortunes which 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 tax differences between regions are very large, this could also have distorting effects: it could lead to residence decisions dictated by taxes. And leaving inheritance taxes at state level conflicts with the autonomy of communities. Cooperation to introduce a minimum wealth tax is a more feasible path, he concludes.
The report highlights that of the 623 million raised in 2023, 555 came from the Community of Madrid, which historically has not taxed assets. And don't forget that this autonomy has announced a change in tax to shift revenues to the regional government and in return has communicated a series of tax benefits to compensate for HNWIs, as tax incentives to establish, invest or hire companies in the region. These initiatives would deactivate net collection, he warns.
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