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As 2021 unfolds, the topic of tax is set to dominate headlines. Tax to recoup the costs of Covid, tax on large, high profit companies, and new areas of tax to generate revenue and influence changes in society, such as environmental social and governance (ESG). One tax that has gone live without much of a splash, though, is the new Spanish financial transaction tax (FTT). While the reporting and payment for this new tax start in April, the calculations must be done from 16th of January 2021. Its entry into force may have passed without fanfare, but banks would do well not to sleep on this significant new rule set.
A company must have a market capitalisation of over €1bn for the tax to apply, which counts out all but Spain’s largest publicly listed companies, but this new tax regime is significant for two key reasons.
The first is that the Spanish FTT is not the first to be introduced and adds to others established in two of Europe’s financial hubs. Both France in 2012 and Italy in 2013 introduced FTTs on equities, and in Italy’s case on equities and equity derivatives. Initial solutions deployed by banks to manage each of these taxes individually were introduced by now disbanded project teams, with limited subsequent reviews or improvements, and are still in place for many. These low-tech and often manual solutions were barely up to the task back in 2013, but with the addition of another stream of data from a new set of taxable securities, treating each FTT individually and not as a whole is both inefficient and costly.
The second is that it reflects a growing trend towards the introduction of transaction taxes globally as countries, regions and states look at ways to raise revenue to plug budget gaps, most notably those arising from the effects of the pandemic. At this moment in time, FTTs are being discussed as possible solutions in the US at a federal level, in states such as New Jersey, as an EU-wide tax and in individual EU nation states including Portugal and Hungary. If one or a combination of these regions decide to implement a tax of their own, the sharp rise in the volume of securities in scope would cause significant operational headaches for those firms still relying on tactical solutions to manage their tax processing operations and the related compliance obligations.
Instead, firms should be taking a more holistic approach and managing their tax operations through a centralised, automated system that can be easily configured to process any new tax data that is required for additional tax regimes as they come into force. This will not only minimise the operational lift required to process their transaction taxes but also, through this single pane of glass, provide them with clear oversight of their obligations and costs across the entire organisation. In a clear demonstration of the difference, those customers working with Meritsoft that are deploying a strategic all-in-one solution for transaction taxes have been able to significantly reduce the cost of tax overpayments that are typically an issue for those still deploying a tactical workaround for the many different taxes.
The addition of more taxes, such as the Spanish one, will cause far greater headaches for banks still treating them individually. As they face intense and ongoing costs pressures, banks should be looking to create a center of excellence around tax, built on powerful automation and analytics to ensure both efficiency and compliance in a way that can also be mirrored for other operational challenges related to other regulations such as CSDR.