Government Unfazed as Multisector ‘Windfall Tax’ Draws Ire of Spanish Banks

As European economies seek shelter from inflation, governments across the continent are turning to windfall taxes — aimed at an industry that is perceived to have profited from a sudden increase in income — as a way to fund initiatives and alleviate some of the pressure from rising prices.

Even fiscally conservative governments like that of the U.K. have been forced to impose the measure on certain sectors such as energy, although not without controversy.

The energy sector is also on the radar of other governments including Italy, Spain and Greece, although Spain’s coalition government recently went a step further to include banks within the remit of its own windfall tax scheme. A similar multisector approach is also being pursued in Hungary, with the government’s eyes set on profitable banks, insurers, retail chains, the energy industry and trading firms, as well as telecoms companies and airlines.

The taxes in Spain, announced in July, will include a 1.2% levy on local power utilities’ sales and a 4.8% charge on banks’ net interest income and net commissions. The government expects these measures to raise €3 billion and €4 billion from banks and energy companies, respectively.

However, the move has drawn the ire of some of the key players in the country’s banking sector.

“It’s clearly the wrong idea. It’s unfair, it’s distortionary and it’s counterproductive,” Gonzalo Gortázar Rotaeche, the CEO of Spain’s largest domestic lender, CaixaBank, said during their second-quarter earnings call. He added that “this is weakening the banks […] It makes no sense.”

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The proposed tax will impact CaixaBank the most, Gortazar said, estimating that the bank will have to fork out between €400 million and €450 million in additional tax in 2023 based on current income forecasts.

On the other hand, multinational conglomerate Santander has been more reserved in its public response to Spain’s windfall levy, yet analysis by S&P Global suggests that the group will be the second hardest hit with an additional tax payment of around €311 million if the government goes ahead with current plans.

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Perhaps this is already a major concern within the institution, as the bank’s website points to an article published by the global accountancy firm KPMG that is highly critical of the plans.

That piece argues that the move “constitutes a threat from the point of view of financial stability and may limit [Spanish banks’] ability to lend at a time when families and companies may need such financing.”

Regional Governments Watch Closely

Ultimately, arguments for and against a windfall tax on banks’ profits are taking a similar shape not just in Spain, but in other countries also considering the measure.

Proponents of the taxes argue that rising interest rates are leading to greater profits and that the additional money governments are able to raise more than outweigh the effects on investor confidence created by lower bank profits.

Critics, on the other hand, make the case that banks are already charged higher corporation tax in Spain and elsewhere, and that the record profits reported by the likes of Santander should not be seen as banks raking it in while families are struggling. Instead, it should rather be viewed as a return to normal growth after years of negative interest rates in the eurozone.

To complicate matters further, Reuters reported last month that banks may pursue an unprecedented legal challenge to the tabled legislation.

But Spanish Prime Minister Pedro Sanchez seemed unfazed by the backlash from financial institutions, reportedly saying, “If [President of Banco Santander, Ana Botín and Chief Executive of energy company Iberdrola, José Ignacio Sánchez Galán] protest, then we are going in the right direction.”

With the Czech Republic, Italy and Poland eyeing their own windfall levies on the financial services sector, the rest of Europe will be watching how events in Spain unfold in the coming months.

When asked to comment on Spain’s windfall tax during a press conference last month, European Central Bank (ECB) Vice President Luis de Guidos was cautious to avoid specifics, noting that Madrid had yet to reveal details as to how the levy would be imposed.

“Tax should not impair credit extension [or] credit growth, because this is important for economic activity. Second, […] we should try to avoid any sort of tightening of financing conditions for households and corporates. Finally, […] the tax should not damage the solvency of the banking industry,” de Guidos reportedly said at the time.

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