The Government shields itself from a legal battle with the electricity companies for the new tax on their benefits

Faced with the judicial battle that is looming, the Government has finally chosen to approve the new tax by urgent means of a law proposal to tax the extraordinary profits obtained by the energy companies in the face of the enormous rise in prices. Executive sources have assured that the new measure will enter Congress to begin processing in July and they trust that it will be approved before the end of 2022.

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During the last few weeks there was a doubt as to whether the measure could be implemented, as a faster alternative, through a surcharge on the corporate tax of ten points, as initially proposed by United We Can. Although between the two wings of the coalition government there was a certain consensus on the need for companies to pay more for these benefits, and thus finance aid for vulnerable families and companies, there were numerous doubts about the paths to follow. Finally, the parliamentary groups of PSOE and United We Can jointly present the measure as a bill.

Countries like United Kingdom either Italy, Greece or Romania have moved quickly to put in place a windfall tax on energy companies. Government sources have explained to that “the new imposition had to be carried out with all legal certainty. A new tax, a new law; there is no other way and the Government is determined to apply it to company profits this year. You have to do it the right way."

"To court"

“We are absolutely sure that companies are going to take the new tax to court. Italy and the United Kingdom do not have the Constitutional Court that we have in Spain”, explains a government source when given as an example the speed with which these countries have approved the new tax rates for energy companies.

During the presentation of the new measures of the shock plan against inflation that has caused the war in Ukraine, the head of the Executive has not hesitated to draw attention to the difficulties that will be found on the way to implement certain measures. “This is a very uncomfortable government for certain economic powers, which have their media and political terminals. This is a reality that we have been suffering for four years now, first with the motion of censure and later with the formation of the first progressive coalition government”, assured Sánchez.

“It is true that this government is beaten a lot by some powers. But we are autonomous, we are going to make a fair distribution of burdens: those who are benefiting more, should pay more. This Government knows very well for whom it governs. I think we are doing a more than reasonable job, with our successes and our mistakes, but always without forgetting who we govern for, which is for the working class of our country and we already know that this annoys certain economic powers, but we are going to continue that roadmap”, he concluded.

The Government has taken into account to legislatively develop the new tax the latest decisions of the High Court, which has overthrown both the first As the second state of alarm decreed by the Executive to fight the coronavirus pandemic. Precisely the Government is promoting a legal reform to unblock the renewal of the Constitutional Court in July through a bill by way of urgency that will allow the General Council of the Judiciary to appoint the magistrates even if their mandate has expired, and the Executive to designate the two positions that correspond to it.

At the close of this information, the electricity companies or their employers had not commented on the announcement of the new tax, but they had already reported during the week that their legal departments supported by important law firms were preparing strategies to bring down the new rate according to the instrument that the Government had decided for its approval.

The formula to approve the new tax

The route finally chosen will be the following. The PSOE and United We Can parliamentary groups will present "in the coming weeks" a bill in the Congress of Deputies to approve this new tax. The President of the Government has not advanced the amount or how these extraordinary benefits will be calculated, for which reason the estimate of collection that can be expected from it has not been specified either.

The Executive has opted for the proposal of law by way of urgency instead of a Royal Decree or a bill approved in the Council of Ministers for two reasons: one legal and the other due to time. As far as timing is concerned, the Finance Minister, María Jesús Montero, has already assured that the bill could take too long. She trusts the Government that the path of the proposal of law by the parliamentary groups is more agile and reduces the processing.

The objective that is handled in the Ministry of Finance is that this new rule can be completed before the end of the year. It must be before the end of 2022 in order to set the accrual date —when the benefit to which it will be applied is calculated— at December 31 of this year. In this way, the Executive would manage to tax the profits that energy companies have obtained in an extraordinary way this year, even if it was paid throughout 2023. The dates are important for the measure to be successful and the profits of 2022 can be taxed. Government sources assure that the commitment between PSOE and United We Can is that the new tax rule enters Congress in July.

Faced with this, Banco Santander analysts point out "many chances of success" for electricity companies in a legal dispute if the tax affects the results of companies this year. "The possibility of success of legal challenges is high, particularly if the implementation is retroactive", add the analysts of the entity chaired by Ana Botín.

The other reason is legal. From the Ministry they have repeatedly insisted that the figure of the Royal Decree could not be used to create a new tax. Sánchez himself has said it again this Saturday: "it is a measure that is not in the Royal Decree -of anti-crisis measures- because it cannot be". During the legislature, the Executive has avoided using this normative tool to approve new taxes, due to the legal doubts that exist in this regard. Taxes such as the 'Google rate' or the financial transaction tax were made by bill.

Yes, the Royal Decree has been used to modify a tax. It happened in 2021 after the ruling of the Constitutional Court that knocked down the method of calculating the urban capital gains tax. The Government, not without criticism for this, opted for this route of the Royal Decree to approve a new formula for calculating the tax. It has also been used to modify aspects of different taxes, although never to create a new one.

Experts consulted by this means in recent weeks explained that there is no clear doctrine on the part of the Constitutional Court on the use of the Royal Decree to modify or create new taxes. The Constitution states, in its article 86, that the Royal Decree “may not affect (...) the rights, duties and freedoms of citizens regulated in Title I”. This open expression is the one that leaves legal doubts about the legal fit of far-reaching fiscal modifications and the interpretation of the Constitutional Court. These experts consulted pointed out that there was a high risk of the creation of a tax by Royal Decree being declared unconstitutional if it was appealed by the electricity companies themselves.

In fact, several analysis services of different financial entities had included in their investment and stock market reports the low probability that a tax approved by Royal Decree would have a chance in court. Analysts at the Royal Bank of Canada (RBC) pointed out that if this tax is approved by Royal Decree "it is likely that the Constitutional Court will declare it contrary to the Constitution."

What was totally ruled out was creating a tax through the next General State Budgets, something that is clearly vetoed by the Constitution in its article 134 point 7, as Vice President Yolanda Díaz warned the PSOE: “The Law of Budgets cannot create tributes. You can modify them when a substantive tax law so provides.” Only the Corporation tax could have been raised, but the benefits of this course could not have been taxed, but those of next year.

At a tumultuous time for economic news, it is more important than ever to be well informed. All the repercussions of the Ukraine war on the world economy, explained from a rigorous and different point of view.

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