Keys to the tax on financial transactions (Tobin Tax)

The keys to the FTT (financial transaction tax) must be known by securities purchasers and financial intermediaries. Mainly by the latter, since they will be the ones who, in general, will have to pay the tax.

What does the ITF tax?

In this part we will look at four key concepts of the tax: the taxable event, the taxable base, the accrual and the tax rate.

Taxable Case

The FTT is an indirect tax and therefore taxes consumption. In this case, the FTT taxes very specific trading operations in the stock market. Operations that comply with the following issues:

• The company’s shares must be Spanish.
• That the stock market capitalization of said company is bigger than 1,000 million euros. In order to know this data, the Public Prosecutor’s Office will draw up a list of companies to which the tax will be applied every year. This list will contain the companies which exceed the mentioned threshold on December 1st of the previous year. Therefore, the first list will be as of 1st December 2019.
• These must be shares of companies listed on the Spanish market or on another market in the European Union. They are also allowed to be listed on a third country market as long as it is considered equivalent by MiFID
• The shares must be admitted to trading on a regulated market, which in Spain is the “Bolsa” (Spanish Stockexchange Market). This excludes shares admitted to trading on the MAB, the Spanish alternative stock market. However, it will not matter if the operation is executed in a trading platform. The latter implies that it will also apply to trading operations made through systematic internalisers. Likewise, the tax on sales and purchases made by direct agreements between the contracting parties will be applied.
• It will also be applied to the certificates of deposit representing the above-mentioned shares.

In addition, it should be noted that the legislation excludes certain operations from the application of this tax. These transactions are those of the primary market, corporate restructuring, intra-group transactions or temporary assignments.

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Taxable income

The taxable income for the FTT is the amount of the consideration, excluding any of the associated expenses. Although special rules are established for some transactions such as intraday transactions or those resulting from the execution of derivative instruments.

Payable

The FTT will be accrued when the values acquired onerously are recorded in favor of the taxpayer. The place where such annotation occurs is indistinct. Thus, it may be recorded in a securities account or books of the depositary financial institution. However, it may also be recorded in the register of a central securities depositary or in the registers of its participating entities.

Rate of taxation

FTT will tax the operations of the taxable transaction with 0,2 %.

Who should perform the Tax Liquidation?

Taxpayer

The taxpayer of this tax is the person who acquires the securities. However, two situations must be distinguished, the acquisition on one’s own account or by third parties. Since in order to be able to execute an order in the financial market, financial intermediaries and market members are necessary. Because only intermediaries that are market members can transfer and execute orders. When the financial intermediary transfers or executes the order on behalf of a third party, it will be considered a substitute for the taxpayer.

Passive subject

The person liable for this tax will depend on the type of operation. The following will be considered as taxpayers:

• An investment services firm (ISF) or a credit institution when acquiring for its own account
• The market member when executing the transaction on behalf of a third party. In the event that there are several financial intermediaries in this transaction, the first one will be liable. The one who received the order directly from the purchaser of the securities.
• The systematic internaliser when the operation is carried out outside the trading platforms. The same happens if there are several financial intermediaries in the operation.
• The financial intermediary that receives the order or delivers the securities to the acquirer resulting from the execution of a financial contract. This is only contemplated when acting outside of the trading platforms, but without systematic internalization.
• For all other cases, the taxpayer will be the depositary of the securities on behalf of the acquirer.

Self-assessment

The person who must make the self-assessment will be the taxpayer. These subjects will present the self-settlement and pay the amount due through a central securities depository. In addition, the regulatory development of the central securities depository’s obligation to make a self-settlement is foreseen. Currently, the obligation to submit a self-assessment in the name and on behalf of each taxpayer is mentioned. Thus, an attempt is being made to automate the entire settlement process through IBERCLEAR (the central securities depositary in Spain).

Finally, it is necessary to mention that this tax is governed by the principle of issuance and not residence. This means that it applies regardless of the residence or place of establishment of the financial intermediary. This has been highly criticized by the current bodies of the Spanish stock market such as BME. This means that the effects of this tax are projected to other Member States.

What is the objective of the Tobin Tax?

This tax is known as the Tobin Tax because it is based on the approach of the Nobel Prize. However, it is curious that its original author is not in favor of how it has been implemented by several European states. These states are the ones that in 2013 agreed on reinforced cooperation to impose a common Tobin Tax. These are: Spain, Germany, France, Italy, Slovenia, Austria, Portugal, Slovakia, Greece and Belgium. The agreement between these countries was made after the refusal of a directive on this tax by the European Union. Apart from the ten mentioned countries, other European countries such as Poland or Ireland also have similar taxes.

The legislation states that the objective of the FTT is the consolidation of public finances and the principle of tax equity. In practice, the Government plans to collect up to 850 million Euros per year to finance pensions.

This tax, although new, is already being heavily criticized by operators in the Spanish stock market. They argue that it damages both large Spanish companies, including the IBEX 35, and investors. To companies because it harms their competitiveness against other foreign capital markets. For investors because it means a higher cost of acquisition and consequently a reduction in profitability. Furthermore, it will harm investors who invest in investment funds and pension plans that invest in Spanish listed companies. So critics maintain that this will alienate both the large domestic and foreign investor from the Spanish market.

When will it start to be applied?

The law has been published this month in the BOE. However, this legislation is of deferred application. Therefore, the tax will start to be applied from January 16, 2021.

Conclusions

From January 2021, this 0.2% tax will be applied to acquisitions of securities of the most relevant Spanish listed companies. This will mean that investors will have to take this cost into account for their possible profitability calculation. It will also be necessary for all financial intermediaries and taxpayers to learn how and to what to apply it. They will be responsible for carrying out the self-assessment.

If this article has been of interest, we also suggest you to read the following article published on our website: The taxation of “carried interest”: a global controversy