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The
Spanish Ministry of Finance has announced its intention to propose to
the Spanish Government the submission to the Spanish Parliament of a
Draft Law on the Financial Transaction Tax, which broadly follows the
lines of a similar tax introduced in France earlier this year. The Spanish
Ministry of Economy now needs to confirm its agreement to this new tax.
They have announced that they will first speak with the other European
partners on this. No formal announcement has yet been made and there
is current uncertainty as to whether the FTT will, effectively be approved.
It is a fact that its approval will not, in any case, be as immediate
as expected.
However,
considering the relevance of the this topic, we send you these comments
based on the text of the preliminary draft of the law (the Draft
FTT Law), which lacks clarity on certain aspects and contains inconsistencies.
It outlines the main features in the following terms:
i.
Taxable event: the following transactions will trigger the FTT:
a.
the acquisition of shares traded on a Spanish, EU or other qualifying
market (in accordance with the Spanish Securities Market Act) in Spanish
companies that exceed a certain market capitalization threshold (the
amount of the threshold is not yet defined in the Draft FTT Law).
For
this purpose, the FTT will also consider as ‘shares’ any
equivalent negotiable securities (this paragraph likely refers to ADRs)
and traded instruments that allow to acquire them (eg options, forwards,
etc), irrespective of whether or not the issuer is established in
Spain.
b. the modification or cancellation of high-frequency trading transactions
(HFT) over shares in Spanish entities or shares traded on a Spanish
secondary market, carried out for their own account by Spanish-resident
entities or by non-Spanish-resident entities acting through a permanent
establishment in Spain.
Such
transactions will be taxable under the FTT if their amount during
a trading day reaches a certain percentage threshold (to be defined),
which will take into consideration the total amount traded in respect
of the relevant share on such trading day. The Draft FTT Law defines
HFT in broad terms, as transactions consisting of habitually entering
into – through an automated trading system and based on an algorithm – successive
orders of different types over a given share over a very brief period
of time (to be determined).
c. the acquisition of credit default
swaps (CDS) corresponding to EU
sovereign debt carried out by a Spanish-resident entity or by a non-Spanish-resident
entity acting through a permanent establishment in Spain, when the
beneficiary of the CDS is not hedging a long position on such sovereign
debt (ie ‘speculative sovereign CDS’). In addition,
a CDS agreement will be subject to the FTT if the beneficiary transfers
the underlying sovereign debt prior to the maturity date of the CDS,
when the acquisition of the CDS was not taxed at inception.
ii. Exemptions:
Transactions
mentioned in paragraph i.a above are exempt from the FTT in the following scenarios:
a. acquisitions made in relation to the issuance of shares, including through placement, with or without a firm commitment or underwriting.
b. acquisitions made by market makers, clearing houses or central depositories to the extent that they are undertaken in the context of their regulated activities.
c. acquisitions made between companies which are part of the same corporate group within the meaning of article 42 of the Spanish Commercial Code (Código
de Comercio) or eligible for the Spanish special tax rules for reorganisations (that follow the EU Merger Directive).
d. temporary transfers of securities listed by article
2.10 of the Regulation 1287/2006 of the EU Commission, dated 10 August 2006
(eg stock loans or repurchase agreements).
e. acquisitions of bonds, debentures and other similar contracts, convertible into or exchangeable for shares.
In relation to the transactions indicated in paragraphs i.b and i.c above, market makers are exempt from the FTT in the course of their market-making activities.
iii.
Triggering event: the FTT will fall due on the date on which any of the transactions defined above is effected.
iv.
Taxable income: the taxable income levied with the FTT will depend on the type of transaction:
a. in relation to the transactions mentioned in paragraph i.a above,
the taxable income will generally amount to the price agreed, provided
that it is higher than the fair market value of the shares at the time
the FTT falls due. The fair market value will be the price of the relevant
share on the most relevant stock market in liquidity terms.
b. in relation to the transactions mentioned in paragraph i.b above, the taxable income will amount to the positive difference, on the same trading date and in relation to the same entity, of the following amounts:
• the total amount of cancellations and modifications of HFT transactions; and
• a certain percentage of the total amount of HFT sending orders or modification orders.
c. in relation to the transactions mentioned in paragraph i.c above, the taxable income will be the notional amount of the relevant CDS agreement.
v.
Taxpayers: the Draft FTT Law defines the taxpayer in each scenario, in the following terms:
a. in relation to the transactions mentioned in paragraph i.a above, the taxpayer will be the entity executing the purchase order in the name of a third party, or for its own account, wherever it is established. In the case that more than one intermediary is engaged in the transaction, the taxpayer will be the entity receiving the buy order from the final purchaser.
b. in relation to the transactions mentioned in paragraphs i.b and i.c above, the taxpayer will be the Spanish-resident entity, or non-Spanish-resident entity acting through a permanent establishment in Spain, that carries out such transactions.
vi.
Tax rate: the Draft FTT Law does not include the tax rates applicable to each of the transactions referred to.
vii.
Entry in force: the Draft FTT Law envisages that the tax will
enter into force on the 1 of January 2013.
The current reading of the Draft FTT Law contains certain unclear aspects which are very relevant in assessing the impact of this new tax. By way of example, there are inconsistencies regarding the territorial scope of application of the tax: on one side, article 2 defines Spain as the territorial scope, while on the other side, the taxable events cover transactions clearly carried out outside Spain.
If
the Spanish Government confirms its intention to go ahead with the
FTT, during the following weeks the Draft FTT Law will be subject
to Parliamentary discussion, which should clarify its inconsistencies.
As
always, we will keep you posted on any further developments on this
topic.
Best
regards,
Silvia
Paternain |
