Fiscal Closing After 12 Months of Reforms
IESE Continuous Education Program
Spanish government reforms are on now track to maintain public accounts and curb the public deficit. Measures taken to meet these goals include raising taxes (VAT, income tax, corporation tax) and fighting tax fraud. These were among the issues discussed during the session "Tax Planning 2012," which was part of the IESE Continuous Education Program.
During the session, IESE Prof. Enrique Chinchilla analyzed new fiscal laws approved this year, provided commentary from a tax perspective, reflected on the so-called "tax amnesty" and offered some tips for planning the closing of the fiscal year.
"I don’t think the crisis signals the end of the capitalist system, but it will certainly redirect the welfare state," he said. During his presentation, Chinchilla reviewed trends in government tax revenue collection in recent years. Hardships that plague the Spanish government today, he said, were initially triggered by a "dramatic collapse" in tax collection that began in 2009.
"To this problem, we must add the incredible extravagance and waste by administrations during the boom years and Keynesian measures taken by the Zapatero government, such as Plan E, which were useless and increased spending," he said.
The rise in public spending brought about an increase in taxes and debt, with a consequent rise in risk premiums. This critical situation expanded to the private sector. By 2010, almost six out of 10 companies were suffering losses.
Chinchilla also traced the evolution of the fiscal deficit, which he called "unsustainable."
"The deficit of yesterday and today are tomorrow's taxes," he said. Although the budget for 2013 represents the most austere budget in Spain’s democratic history, it "has a hole of 50,000 million euros."
"Budgets have grown year after year in good times and no one has been able to cut them. We have a big problem here," he said.
Chinchilla discussed new tax measures approved by the government as of December 2011, such as the new supplementary personal income tax, the increase in the progressive withholding table, the increase in installment payments for corporate taxes and a reduced tax rate for small companies.
Spain is "at the forefront of the tax burden in Europe and is among the worst in job creation," he said
He also discussed exceptional measures approved in recent months, such as the expansion of tax loss compensation to 18 years, the deductibility of goodwill from 5% to 1%, the lowering of limit tax credit limits from 35% to 25%, the elimination of accelerated depreciation, the deductibility of interest expense and the so-called tax amnesty.
"With all these measures, the government is defending itself against the fall in revenues as best it can," he said.
He also addressed recent fiscal adjustment measures adopted by the government, such as the value added tax increase, the 30% limitation of interest expense deductibility on corporate tax, the special 10% tax on income from foreign payroll, the tax increase on professional activities, the elimination of the deduction for a home purchase and the 21% levy on lottery prizes.
"Why do they say that the VAT tax penalizes consumption and the income tax hike on payrolls does not?" he said. After calculating the tax collection generated by new tax measures, a number of around 4,000 million euros, the conclusion is clear, he said: there will be more cuts because they are inevitable.
Regarding tax planning, businesses should keep in mind issues of property and credit deterioration, deterioration of investees, provision responsibilities, remuneration to directors and deductible expenses. Recent announcements made by bodies such as the National Court, the Supreme Court and the Tax Office should also be taken into account.
Fight Against Fraud
Another part of the talk focused on the prevention of tax fraud and elimination of the underground economy, which in Spain constitutes almost 20% of GDP. Chinchilla discussed measures approved by the government in this area (cash payment limited to 2,500 euros, obligation to report foreign accounts, more guarantees to ensure the collection of tax debts, exclusion of some types of professions).
He also discussed key aspects of tax regularization (known as the tax amnesty), the applicability of undeclared income and reform of the Penal Code, which affects the threshold of tax offenses and makes penalties harsher.
In spite of this scenario, he revealed some positive data: Spain is currently ranked the12th largest economy in the world, according to the World Economic Forum. The country comes in at 36th place, out of 144 countries, in terms of global competitiveness, due to strengths such as market size, transportation infrastructure and the quality of its higher education institutions, including business schools.
But there are worrying factors for Spain, such as the government deficit and debt control, the labor market and access to finance, taxation and government bureaucracy. It is no coincidence that unemployment, economic problems and political conflict are Spain’s three main problems, according to the September edition of the CIS Barometer, he said.