This week in tax: Spain plans windfall tax
This week the Spanish government announced its plans to impose windfall taxes on banking and energy, while the OECD has set itself a new deadline for pillar one.
Investors are shocked by unexpected windfall taxes on the banking and energy sectors that could cost corporate taxpayers $7 billion over two years.
The Spanish government announced temporary windfall taxes on banks and energy companies on Tuesday, July 12, to raise an estimated €7 billion ($7 billion) in tax revenue by end of 2024.
Prime Minister Pedro Sánchez said his government will work on the legislation to tax the windfall profits of power companies, starting next year in 2023.
“We are asking big companies to ensure that any exceptional benefits obtained during the current circumstances are channelled back to workers,” said Sánchez.
The tax will generate an estimated €3.5 billion a year, including an estimated €1.5 billion per year from the financial sector and more than €2 billion per year from the energy industry.
This move makes Spain the largest EU country to impose a windfall tax on both sectors to limit their gains from rising interest rates and high gas prices. Banco Bilbao Vizcaya Argentaria (BBVA), Santander and other banks in Spain alongside energy companies like Repsol traded lower following the news.
The unexpected bank tax drew strong criticism from stakeholders. Santander and BBVA – the country’s two biggest banks by market cap – traded nearly 4% down in the market.
“This is a crude form of populism. The government argument is that banks are benefitting from rising interest rates,” said José Ramón Iturriaga, an analyst at Abante Asesores, according to reports from the Financial Times. “But there was no state compensation during the long period when rates were negative.”
The Sánchez government plans to use the tax revenue to lower transportation costs and alleviate the impact of rising inflation. The levies on both financial institutions and energy firms will last for just two years, but businesses are concerned about the fallout for their industries.
OECD delays pillar one until mid-2023
A report released by the OECD on Monday, July 11, shows that there has been progress made on settling the technical details of pillar one, but the original aim of implementing the proposals in 2023 has been dropped.
“We have made good progress towards implementation of a new taxing right under pillar one of our international tax agreements,” said OECD secretary-general Mathias Cormann.
“We will keep working as quickly as possible to get this work finalised, but we will also take as much time as necessary to get the rules right. These rules will shape our international tax arrangements for decades to come. It is important to get them right,” he added.
The report includes technical model rules that present a taxing right that enable jurisdictions to tax the digital profits of multinational companies derived from their markets. This is a move away from traditional tax rules based on physical presence.
The OECD aims to finalise the multilateral convention by mid-2023 before it comes into effect in 2024. Originally pillar one was supposed to come into force in 2023.
Cormann said the deadline would allow more time for citizens, businesses, and parliamentary bodies to engage with the pillar one proposals.
The new deadline could add pressure on jurisdictions to adopt pillar one, and failing to do so could mean a loss in tax revenue.
The OECD has opened a public consultation, which will end on August 19.
Disclosure rules revisions create TP issues for Indian-listed companies
As ITR reported this week, transfer pricing issues persist for listed companies in India as amendments in April to the Securities and Exchange Board of India’s listing obligations and disclosure requirements make it difficult to identify related party transactions.
“Taxpayers need to have additional approval from shareholders for inter-company transactions. The problem now is in case there are transactions between subsidiaries, they also need to be approved,” says a manager at a big four advisory firm in Mumbai.
Introduced in 2015, SEBI LODRS were amended this year to strengthen corporate governance in India. However, amendments have considerably widened the scope of RPTs, which has created a variety of TP challenges for listed companies.
Sagar Wagh, international tax and TP expert at advisory firm EY in Mumbai, says companies are even exploring automation opportunities to locate RPTs to prevent an “unwanted compliance leakage”.
Subsidiaries involved in the controlled transactions must ensure these transactions are in line with the arm’s-length principle or could risk facing questions by the tax authority.
The revisions made to SEBI LODRs will bring further certainty and protect shareholders against risks, but this means listed firms will have to create a separate report for shareholders.
The amendments made to disclosure requirements present just one challenge when it comes to TP in India.
In-depth audits and delays in advance pricing arrangements are other issues companies face, while the increase in global capability centres has brought additional TP complexities.
CJEU opens door for companies to recover overpaid VAT
In other ITR news this week, companies could be in line to pursue challenges against the Polish tax authority to recover overpaid VAT following an EU court ruling, according to experts.
It follows a July 7 judgment by the Court of Justice of the EU (CJEU) in a Polish case (C-696/20) involving chain transactions.
The court held that the National Revenue Administration (KAS) was wrong to apply a double taxation rate of 46% on chain transactions. This was against the principles of neutrality and proportionality in the application of Article 41 of the VAT Directive (2006/112/EC).
Although the court found that there was no element of fraud in the case, it held that member states may pass stringent anti-fraud legislation similar to Article 25(2) of the Polish law on VAT. But these regulations should not violate the EU’s principles of neutrality and proportionality.
Tax professionals have welcomed the court ruling as providing some much-needed clarity and security to businesses when conducting cross-border chain transactions while opening the door to potential claims to recover excess VAT payments.
Other headlines this week include:
Next week in ITR
ITR will be looking at how pharmaceutical AbbVie resorted to profit shifting arrangements to avoid paying corporate income tax in the US.
At the same time, the tax team will be looking at the investment advantages of tax transparent funds for post-Brexit trading and if this is a new trend in European trading.
In other news, ITR will analyse how UK businesses could have realised an additional £5.2 billion ($6.1 billion) from exports had the EU e-commerce VAT reforms been implemented six months earlier.
Readers can expect these stories and plenty more next week. Don’t miss out on the key developments. Sign up for a free trial to ITR.