Spain Banks Avoid Billions in Costs After Stamp Duty Ruling - EcoFinBiz Blog

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Spain Banks Avoid Billions in Costs After Stamp Duty Ruling

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(Bloomberg) -- Spain’s largest banks escaped paying billions of euros in back taxes after the Supreme Court said they aren’t liable for mortgage stamp duty payments in a case that roiled lenders and split public opinion.

After two days of deliberations, the court reversed an earlier ruling that lenders should foot the bill for the tax, which had typically been passed on to customers. The vote was 15 in favor and 13 against, with the decision sparking immediate fury across the Spanish political spectrum and consumer groups, while providing relief to the nation’s lenders.

Banco Santander SA and Banco Bilbao Vizcaya Argentaria SA -- the nation’s two biggest lenders -- gained in New York after the ruling, which followed weeks of uncertainty about the potential costs if the court decided to apply the tax retroactively. The initial decision on Oct. 18 caused bank shares to slump and the court froze the sentence a day later, citing concerns about the “enormous economic and social impact” of the decision.

Santander’s American depositary receipts in New York rose 0.8 percent to $4.89 per share, while BBVA’s ADRs climbed by 1.2 percent.

“This is very good news for the banks -- they have won their argument in a dramatic way,” said Ricardo Wehrhahn, managing partner at Intral Strategy Execution, a business and banking consulting firm in Madrid. “A vote the other way could have been disastrous.”

Eat Profits

A ruling against the banks threatened to eat into profits of a sector that has struggled to generate revenue in a low-interest environment. A decision to make banks pay the tax retroactive over four years would have cost lenders 5 billion euros ($5.71 billion), Budget Minister Maria Jesus Montero said in Madrid on Tuesday.

The duty, which varies according to region but averages about 1.1 percent, also threatened to generate deficits in regional government budgets since customers would initially have made claims with local tax agencies which in turn would have sought to recoup costs from banks.

The banks and Spain’s judicial system faced an immediate backlash in public opinion after the decision. The anti-establishment Unidos Podemos, an ally of the Prime Minister Pedro Sanchez’s minority government, immediately called for a protest outside the Supreme Court on Nov. 10.

“The banks win and citizens lose,” Podemos Secretary General Pablo Iglesias wrote on Twitter. “The independence of the Supreme Court is called into question; democracy is weakened.” The Spanish cabinet will analyze the ruling at its meeting on Thursday, a spokesman said.

Sanchez’s Socialist party said it respected the decision of the court. The next step will be for the government to examine the judgement and “take decisions,” the party said on its Twitter account. El Pais newspaper reported that one option could be for the government to make legal changes so that banks pay the tax on new mortgages.

“The decision adopted today by the Supreme Court preserves the legal security needed for the good functioning of the market,” the Spanish banking association said on its website.

--With assistance from Macarena Munoz.

To contact the reporter on this story: Charlie Devereux in Madrid at cdevereux3@bloomberg.net

To contact the editors responsible for this story: Dale Crofts at dcrofts@bloomberg.net, Ross Larsen

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