Pros and cons of the two legal channels that divide the Government to raise taxes on electricity companies

The latest disagreement in the Government is being experienced in recent days regarding the taxation of extraordinary profits of energy companies due to rising prices. The two souls of the Executive share that these companies must pay more taxes, but the big difference is in how and when: now through a Royal Decree, or in the General Budgets. The messages between both parties, PSOE and United We Can, show differences not only political but also legal.

The socialist wing has stated that the way for this modification should not be a Royal Decree, but in the law that formulates the public accounts for next year. This was stated by the Third Vice President and Minister of Ecological Transition, Teresa Ribera. The Minister of Finance, for her part, has not specified the appropriate method, although she has asked that the best possible way of applying it be sought without lengthening it over time.

In contrast, the Second Vice President and Minister of Labor, Yolanda Díaz, has indicated this Thursday that a new tax cannot be created in the Budget Law and that the urgent procedure would justify the approval of a Royal Decree. "We believe that we must act promptly to mitigate its negative effects [de la inflación] and what we are saying is that we act now, that we legislate and set this mechanism in motion," said Díaz in Luxembourg.

These words were also answered by Ribera. “Yolanda Díaz says something that is part of the approach of the coalition government and that is that we must respond to this situation in a more balanced and fair way to the needs of citizens, so that the costs are distributed equitably. But when it comes to designing the tax system, it is obvious that the leadership is taken by the Ministry of Finance. In addition to that political will that binds us to the coalition government, it requires a technical assessment. Therefore, you have to be more aware of what Montero says than Yolanda Díaz, ”he assured.

There are, therefore, two publicly open debates in the Government. The first is the how. United We Can defend a new tax, but they also propose raising Societies. The PSOE is cautious about the best way. "We are exploring what the formula is," Montero defended this Thursday. The second is when. The wing led by Díaz bets that it be now, in the extension of the decree of measures against the crisis, while in the socialist wing they speak of meditating well how to apply it, without setting a deadline.

In this way, three ways are opened that the Government could take advantage of to raise taxes on electricity companies. The first of them is practically ruled out: the bill. This would be the classic legal measure and the one that would raise the fewest legal doubts, the Government proposes a text, takes it to Congress and after a parliamentary process that may last until next year, it comes into force. "The processing of bills has a long term. We want them to come into force as soon as possible," Montero said. This is the way that the Government has used to approve new taxes such as the one on financial transactions or the one known as the 'Google tax'.

The second and most urgent is the Royal Decree Law. The Government approves it in the Council of Ministers and enters into force the following day, with the need to subsequently validate it in Congress. It would be the way in which this tax increase is applied as soon as possible. It is the measure proposed by United We Can, who recalls that in this legislature four modifications of the Corporation tax have already been made in this way. Tax experts consulted raise, however, doubts about the constitutionality of this route. They recognize that there is no clear doctrine of the Constitutional Court, but that in the past already knocked down a change introduced by Cristóbal Montoro, former Minister of Finance, through this tool. Thus, they warn of the risk that the electricity companies could appeal the text, whether it is about raising Companies or creating a new tax. Over time, it could end up lying in court.

Despite this, this route has been used multiple times by the coalition Executive. A well-known case is that of capital gains tax. The local tax, of state regulation, had been knocked down a week before by the Constitutional Court and the Ministry of Finance of María Jesús Montero modified by this urgent means the method of calculating the tax so that it could continue to be collected by the municipalities. Several VAT reductions have also been made by way of royal decrees, such as those that affected masks or electricity. Another Royal Decree, in October, approved personal income tax deductions for those households that undertook renovations in their homes.

The third way has been the one indicated by Ribera, the General State Budgets. The experts consulted defend that it is the safest way, shielded from resources. The Corporation Tax Law contemplates that it can be modified by means of this law, which marks the public accounts for the coming year. This is the method that the Government has used several times during this legislature. Thus, the VAT on sugary drinks was raised or the tax benefits for contracting private pension plans were modified. This route has also been used to make at least two reforms in the Corporation Tax in the last two years. The first, in the 2021 Budgets, reduced the bonus that companies had on repatriated profits from foreign subsidiaries, from 100% to 95%. The second, in this year's accounts, applied a minimum rate of 15% on the tax base, agreed between the two government partners.

Of course, this alternative would have two problems. The first is that the Constitution does not allow new taxes to be created in the General Budgets, such as Vice President Yolanda Díaz has already warned. Article 134 of the Magna Carta at point seven states "the Budget Law cannot create taxes. It may modify them when a substantive tax law so provides." The other is that the tax increase would be applied to the benefits of next year, and not to those of this course, delaying its impact on collection. Experts point out that one way to make the impact appreciate earlier would be through installment payments.

Corporate tax already contemplates different rates for some sectors. In 2014, the Government of Mariano Rajoy approved a tax reform that lowered this tax for most companies from 30% to 25%. The benefit of the banking entities and that of the oil companies remained at the original level. That modification was made by a bill. When the Government applied the new minimum tax base rate of 15% in the last budgets, it was raised to 18% for these two sectors.

In Spain there has already been a case of a government, in this regional case, which raised a specific tax for energy companies. It was Extremadura, which in 1997 approved a tax on facilities that affect the environment, which specifically affected these companies. The sector was against and took it to court. Also the Government, then of José María Aznar. The case ended up in the Constitutional Court, which in 2019 ended up endorsing this tax and that the Junta de Extremadura did not have to return the more than 1,000 million received in ten years from the electricity companies.

If a measure to increase taxes on energy companies materializes, Spain would not be an exception in Europe. The Italian government, led by Mario Draghi, has already announced a tax increase on the windfall profits of electricity companies to 25%, compared to the 10% it had applied a few weeks earlier. Although it was announced this year, it applies to extra benefits earned since October of last year. The United Kingdom, with a conservative government, also approved a 25% tax on the extra profits of these companies for the next 12 months, also preventing past investments or losses from being deducted. They aspire to raise 5,000 million pounds (5,860 million euros). Greece is another of the countries in which this idea has permeated. The Greek regulator estimated the extra benefits of energy companies in the country at 590 million and the Ministry of Energy advanced in May its intention to tax this amount by 90% to compensate households for the increase in the electricity bill.

This tax increase on extraordinary profits obtained by energy companies due to price increases comes supported by international organizations who have endorsed this decision. "Given the benefits of energy companies -associated with the sharp increase in prices-, there is capacity to increase the level of taxes that companies in this sector are paying and redirect part of that money to measures that cushion the impact," he defended, Already in March, Mathias Cormann, Secretary General of the OECD.

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