October 28, 2009 6:09 pm

Spain must scrap corporate tax break

The European Commission has demanded that a tax break that fuelled a spate of Spanish international mergers and acquisitions during the credit bubble be abolished and some of the money refunded.

Brussels claims that a corporate tax provision that allows Spanish companies to reduce their tax bills by writing off part of the acquisition costs is illegal under EU state aid rules.

Neelie Kroes, the competition commissioner, ruled against the tax break after an 18-month investigation. She ordered the Spanish government to collect the savings from some of the companies involved.

Under the tax rules adopted in 2002, Spanish companies could write off the difference between the price they had paid for a European company and the value of its underlying assets, an accounting procedure known as amortising goodwill.

Wednesday’s ruling was widely expected by Spanish companies after recent comments by Elena Salgado, finance minister, that none would have to pay back large sums in deducted tax. 

In a concession to the Spanish, Mrs Kroes ruled that only those companies making acquisitions after December 2007 would be liable to refund the tax break.

The cut-off exempts all the most important foreign deals by Spanish companies, including Santander’s £9.5bn takeover of Abbey in 2005 – 60 per cent of which was accounted as goodwill – Telefónica’s €27bn acquisition of O2 in 2006, and Iberdrola’s €17bn purchase of Scottish Power in 2007. 

Those three deals catapulted Spain’s first, second and fourth biggest companies by market capitalisation into the global league at a time of cheap credit and overcrowding in the domestic market.   

The way Spanish authorities treated goodwill in foreign takeovers during the credit bubble was much more generous than its European neighbours, leading to complaints that Spanish companies had an unfair advantage when bidding for European rivals.

Deutsche Telekom, the Germany telecommunications group, made a formal complaint to Brussels after Telefónica’s knock-out offer for O2, which it had also been eyeing.  

The Iberdrola deal upset several Scottish politicians, while bidders in a French government auction of toll road concessions in 2006 also complained about the Spanish advantage. 

But Wednesday’s ruling will claim at least one victim: Santander, which last year paid £1.26bn ($2.1bn, €1.4bn) for Alliance & Leicester, the UK bank, will probably be forced to return any tax deducted under the old rules.

Alfredo Saenz, chief executive of the Spanish bank, said on Wednesday that the impact would be negligible, even though €464m ($685m, £415m) of goodwill was booked at the time. 

The Spanish government said it was happy with the ruling.

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