Somewhat unexpectedly, Spanish authorities have tabled proposals for a Spanish Financial Transactions Tax (FTT) that, on the surface, resembles the French FTT model. Meanwhile, discussions about an European Union (EU) FTT continue at an EU level. While there are many technicalities to resolve at the EU level, one key issue is whether any proposal will be able to achieve the 70% support among EU members necessary for the "enhanced cooperation" threshold to become law in some member states.
The Spanish development shows that member states might not wait for the EU political wheel to turn, instead considering their own versions.
For the financial services (FS) industry, an EU FTT is unwelcome, because it a places significant administrative burden on the industry at a time of extreme stress on many groups. However, a patchwork of different FTTs in certain member states would be even worse. Given the need to raise tax revenues and the lack of clear direction from the EU, this FTT patchwork could be what the FS industry will end up with.
According to the press, the draft law would have been sent to the "troika," i.e., European Commission, International Monetary Fund (IMF) and the European Central Bank (ECB), for comments in the context of the Memorandum of Understanding signed between Spain and these bodies with respect to the Spanish banking reform.
Our initial views on the Spanish proposals are set out below.
The tax would apply to:
- the acquisition of certain equities;
- certain high-frequency trading operations on equities; and
- the acquisition of credit default swaps (CDSs) on EU sovereign debt when the beneficiary is not the holder of the debt.
The taxable event in this respect is defined as the acquisition for consideration of shares that:
- are admitted to negotiation in any regulated market, either Spanish, European or foreign, of companies of Spanish nationality; and
- have a market capitalization exceeding a threshold (to be established) as of December 1 of the year preceding the acquisition year.
Negotiable securities equivalent to the shares or granting acquisition rights over them, as well as securities representing the former, are assimilated to shares, whenever the issuer of these securities is established.
Exemptions are granted to:
- the issue of the shares in primary markets;
- transactions made by the clearing and settlement entity of the market where the shares are traded;
- market makers;
- transactions conducted within the group under tax neutral restructuring transactions;
- temporary assignment of shares made under article 2.10 of the EC Regulation 1287/2006; and
- convertible bonds representing a financing. The base of the tax would be the higher of the price agreed or the market value. The tax rate is not yet proposed.
The taxpayer would be the entity executing the purchase order, either in its own name or for the account of a third party. If there were multiple intermediaries, only the one receiving the order from the final purchaser would be taxed.
The taxable event is the cancellation or modification of high-frequency operations (as defined) referencing shares of Spanish companies or shares listed in a Spanish official market, if the operations:
- exceed certain thresholds, yet to be defined; and
- are realized for their own account by Spanish residents or by non-residents established in Spain (i.e., they are not on behalf of a third party).
Market makers would be exempt.
The tax rate has not yet been proposed, and the tax base would be the daily excess of cancellation and modification orders over the total of transmission and modification orders, of shares of a single company.
In the case of a CDS, the taxable event is the purchase of a CDS on sovereign debt issued by an EU member country, realized by a:
- Spanish resident; or
- a non-resident established in Spain when the beneficiary of the CDS is not the holder of the sovereign debt at hand (i.e., speculative transactions).
Market makers would be exempt.
The tax base would be the notional amount of the contract, and again, the tax rate has not yet been included in the draft proposal.
What happens next?
The circulation of the draft, at a minimum, clearly indicates political willingness to introduce an FTT in Spain. Particular attention should be paid to the comments of the EU Commission, IMF and ECB with respect to the potential impact of the introduction of this tax in the current Spanish economic context and banking system restructuring.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.