Tax reforms on way as Spain PM eyes re-election

Will a more streamlined taxation system help along Spain's economic recovery?

Spain’s inefficient tax system – which boasts some of Europe’s highest rates but lowest levels of collection – is set for a drastic overhaul this summer, with changes introduced early next year as Mariano Rajoy redraws the battlelines for the 2015 election.

After pushing through recent reforms in the labour market and pensions sector, Rajoy is aiming for a third successful overhaul; economists having praised the government’s initiatives for helping Spain emerge from recession at the end of 2013…However, amid improved consumer and investor confidence, unemployment is still far too high, wages have fallen and the average Spaniard feels far less financially secure than they have done in years.

Although concrete details about the tax reforms have yet to be revealed, the government in Madrid has stressed that the overhaul is intended to make tax collection more efficient, enabling Rajoy’s government to introduce lower marginal rates on income tax and corporate tax – which is sure to prove a vote-winner in the run up to the election.

However, ‘Lower Taxes’ has long been the battle-cry of politicians the world over. Rajoy believes, though, that a fairer, broader tax base will enable lower taxes for the masses, and the PM hopes to achieve this by closing loopholes and eliminating a number of the deductions and exemptions that make the current system easily undermined by those with the wherewithal to do so.

“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,” said Spain’s Budget Minister, Cristóbal Montoro. “There is a problem with efficiency in the system. Fraud is an issue but it is also about the way the system works.”

The minister has pledged to use improved tax revenues to lower tax rates, thus making Spain a more attractive country in which corporations can invest.

The first steps of the overhaul are due to begin this month, following consultation with a panel of taxation experts. The reform guidelines are set to be finalised and passed through Parliament in the summer, ready to come into force at the turn of the year – an election year.

The current tax regime is widely regarded across Europe as one of the continent’s most cumbersome. Official corporate tax rates stand at 30 per cent, but thanks to a number of tax breaks, the average large company based in Spain pays an average of eight per cent tax.

A study by think-tank Fedea found that between 2007 and 2012, Spain’s tax revenue as a percentage of its GDP fell from 41 per cent to 37 per cent. On average, EU member states recoup more than 45 per cent of their GDP in taxes, which shows just how inefficient the Spanish system has become.

“Spain has a hole of more than €40 billion in its budget and if the country does not solve this problem soon, debt is going to explode,” Juan Rubio-Ramírez, professor of economics at Duke University in North Carolina told the Financial Times.