February 18, 2020

SPAIN: The waiting game

BY Antonio Barroso

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( 4 mins)
  • The approval of the 2020 budget, which will determine whether the government of Prime Minister Pedro Sanchez can survive the next 12 months, continues to be entangled with the Catalonia issue.
  • While the government had suggested it would adopt the draft budget and send it to parliament in March, the timing of the proposal is contingent on the ongoing talks between the Catalan regional authorities and the Spanish government.
  • While the recently proposed financial transaction tax (FTT) and digital services tax (DST) will probably be approved by parliament, the DST will not be effectively implemented until the end of the year to avoid immediate retaliation by the US government.

The announcement by Catalan First Minister Quim Torra that he would call early regional elections in the coming months has intensified the competition between the ruling pro-independence parties, Together for Catalonia (JxCAT) and the Republican Left of Catalonia (ERC). Both parties want to become the hegemonic force amongst the pro-independence electorate. But while ERC has moderated its stance by enabling Sanchez’s re-election and showing its willingness to negotiate the 2020 national budget, JxCAT remains wedded to a hardline strategy.

Gaining time

Rather than publicly criticizing ERC’s pragmatism, however, JxCAT is trying to present itself as the true defender of secessionism and recover some momentum in the polls ahead of the regional election. For instance, Torra is complicating the ongoing talks between the Catalan authorities and the Spanish government by asking that a “mediator” be part of the talks, a red line for Sanchez and an unnecessary demand for ERC. The Catalan first minister is also gaining time by delaying the negotiations, as he wants to go for elections at the right moment for JxCAT – he has so far refused to clarify when the snap poll will take place.

Torra’s control of the Catalan political tempo is, in turn, affecting national politics. The ruling coalition of the Socialist Workers Party (PSOE) and Unidas Podemos had planned to adopt the draft budget in March. But the exact date for the presentation of the accounts remains unclear, as the government might be wary of approving them without having secured the necessary support of ERC in the Congress of Deputies. While ERC has shown a stronger willingness than in the past to back the budget, the competition with JxCAT and the uncertainty surrounding the talks with the Spanish government make ERC’s support far from clear.

Faced with the uncertainty around the budget, the Sanchez administration has decided to move forward with some of the planned fiscal measures. The government presented today, 18 February, the long-planned financial transaction tax (FTT) and the digital services tax (DST). The FTT will impose a levy of 0.2% on transactions of shares of listed companies whose market capitalization is higher than EUR 1bn, while the DST will impose a 3% levy on large digital companies with annual global revenues larger than EUR 750mn and more than EUR 3mn in Spain.

It is likely that both taxes will be approved by parliament in the coming months, since the government will probably be able to garner at least the abstention of a sufficient amount of parties in parliament. However, the DST will not be effectively implemented until the end of the year since Sanchez wants to avoid the potential immediate retaliation by the US on the trade front. Spain is following the French approach, which consists of trying to negotiate an internationally-coordinated solution via the Organization for Economic Co-operation and Development (OECD) first. Short of such an agreement, the government will then make effective the implementation of the proposed DST.

In addition to helping avoid the imposition of tariffs by the US, letting the OECD negotiations unfold also allows the Spanish government to wait for a potential change of administration in the US, which could lead to a less aggressive stance by Washington. Regardless, Spain’s determination to get such a levy approved confirms the risk of a scattered approach to digital taxation in advanced economies underlined in our recent piece on the topic.

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