As part of the last dramatic reform effort in Prime Minster Mariano Rajoy’s Government, Spain’s tax system is currently facing a sweeping overhaul to further the country’s economic recovery.
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It comes after a renewed market confidence in Spain’s economy, which has witnessed a substantial increase in foreign investment within the Madrid stock market, and follows similar restructuring of the country’s labour market and pension system.
It is also part of Rajoy’s play for re-election in the 2015 general election.
Inefficient tax system
Whilst Spain emerged from the recession in 2013, the country continues to suffer from large levels of debt and unemployment.
This is compounded by the current tax structure, which has been branded by experts as cumbersome – simultaneously holding some of the highest taxes in Europe with one of the lowest tax takes.
In particular, tax exemptions for large companies within the country have been repeatedly flagged by the International Monetary Fund and European Commission.
Whilst the official corporate tax rate stands at 30%, a plethora of tax breaks – including on interest payments – means many of the largest businesses and companies end up paying as little as 4% – 8%.
“For corporates, the difference between the nominal and the effective rate is huge,” notes Economy Minister Luis de Guindos.
“We need to reduce the nominal rate and increase the effective rate by reviewing exemptions.”
Yet the scrapping of these exemptions is only the begging of a much wider renovation.
Details of the new tax structure and yet to be revealed, but the Government has made clear Madrid will both simplify the system and ensure tax collection is made more efficient.
At its core, the system overhaul will include the election-friendly move to decrease the marginal rates on both corporate and income tax.
These headline reductions are to be balanced out with a renewed focus on broadening the tax base; achieved by eliminating exemptions and deductions from the current system.
“In Spain we have a system with high nominal rates but we collect only a small amount of taxes in relation to our gross domestic product and the overall wealth of the country,” notes Spain’s budget minister Cristóbal Montoro.
He consequently promised to “improve tax revenues while lowering tax rates.”
“We want to have a fiscal system that makes it more attractive to invest and makes the country more competitive”.
Timeline
Penned to begin later this month, a Government-appointed panel of experts will soon unveil a reform plan for the overhaul.
Officials say the reform should come into force in the summer of 2014, most probably making it a key component of the re-election strategy in time for 2015.
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