In a classic case of “better late than never,” Spain has caught up to France and Italy by instituting the Financial Transactions Tax in January. While the Spanish Parliament approved the measure, known as Act 5/2020 (“FTT”), back in October 2020, the reporting and payments are not in effect until next month: April 2021.
Tax collectors going back centuries have struggled to ensure that all taxes are collected. The FTT Act is an update whose purpose is to tax transactions that are not currently subject to any current indirect taxation. This is a new indirect tax, implemented at a national level in Spain, similar to the levies in France (2012) and Italy (2013) mentioned above.
The FTT is levied on acquisitions for consideration of shares in certain applicable companies – with exemptions available. However, the FTT has a much broader scope because it is based on the “principle of issue” rather than the more common “principle of residence.” This means that the tax is levied regardless of the site of the transaction or residence of the parties undertaking the transaction.
The exemptions apply to certain market entities managing the stock markets and certain transactions related to the primary market. The tax is levied on shares with a market capitalization greater than EUR 1 billion on 1 December of the preceding year. The shares must be listed in Spain or another European Union State or on a market considered equivalent in a third country.
In addition, the acquisition of certificates of deposit representing those shares and any acquisitions derived from the exchange or conversion of bonds are also subject to the tax. Finally, acquisitions that are a result of the settlements of derivatives leading to the purchase of the underlying security and acquisitions that result from the settlement of any financial instruments or contracts that are not covered in any of the previous issues.
As mentioned, there are numerous exemptions available. The main exceptions relate to the acquisition of shares in the primary market. Other exemptions include:
- Acquisitions necessary for the market’s proper functioning, like those in accordance with Regulations (EU) 596/2014 on Market Abuse.
- Acquisitions carried out by market makers or Central Clearing Parties
- Those done in the context of restructuring (subject to certain conditions being met).
- Acquisitions made between companies of the same corporate group
- Purchases of treasury stock covered by a repurchase program.
As a general rule, the tax base is the total amount paid, excluding transaction costs, intermediary fees, and any expense related to the acquisition, such as brokerage fees. However, if the acquisition results from the execution of a settlement of derivatives instruments, the tax base would be the exercise price previously agreed to. If the shares’ acquisition is derived from the conversion of bonds, then the tax base would be the value established in any such bonds’ issuance.
The tax accrues when the relevant shares or securities are registered in favor of the purchaser and taxed at a self-assessed rate of 0.2 percent. The tax period will be paid monthly, and the payment of FTT can’t be deferred or paid in installments. The FTT law has provided a transitional regime from its 14January 2021 implementation through the end of the calendar year.
The lengthy transition period is vital as the infrastructure to monitor, calculate, collect, and follow-up on the FTT will take additional time to stand up. In the 2012/13 time period in which France and Italy imposed their FTT, banks deployed project teams to handle it. Nearly a decade later, these teams will have been disbanded, and operational strain is largely inevitable.
Every country is looking for ways to raise revenue as we begin to come out of the pandemic. The introduction of another FTT is part of a growing trend towards transaction taxes, with countries and states looking to fill the gaping holes in their budgets. Currently, other EU countries such as Portugal and Hungary are examining the idea of FTT, and the US is looking at potential FTTs at the federal level.
With the idea of more FTTs being imposed, banks simply could not maintain treating these as singular taxes. They need a holistic approach to avoid operational challenges or capacity strain by automating processes and implementing systems that can easily facilitate another FTT or something similar. In doing so, they would limit potential errors in calculation or reporting and have strong oversight of costs across all FTTs. The way forward would be dedicated processes around tax, limiting compliance errors through robust automation and employee knowledge.
Written by: Nicola Hunter, Consultant