Spain has announced wide-ranging tax reforms in an attempt to boost revenues, which have dropped by some €50bn since 2008 to just 36.4 percent of GDP, way below EU averages, according to Jorge Sarró, Head of Tax at Rousaud Costas Durán.
The reform is the most important since 1995, he adds. While the Government plans to modify corporate taxes and increase those on goods such as fuel, alcohol and tobacco, it also aims to homogenise the fiscal model across Spain’s 17 autonomous regions, whose lack of uniformity has long created confusion among foreign investors.
“One benefit of the reform is the simplification of that ‘jungle’ of taxes for foreign investors,” says Sarró. “The reform plans to get rid of corporation tax and simplify the regime for smaller businesses, gradually lowering the rate paid from 30 percent – a much higher rate than in most EU nations – by around five percent.”
The reform also seeks to close loopholes created by tax breaks that have led to Spain’s tax revenue being such a small portion of the country’s GDP. Those breaks allowed Spanish firms to expand overseas through an affiliate or acquisitions and generate more of their taxable profits overseas, explains Sarró. “The reform aims to modify this, as Spanish companies making acquisitions abroad had an unfair advantage as they could deduct the acquisition value over a period of 20 years.”
A negative aspect of the reform is the legal uncertainty created among investors regarding their long-term tax obligations. “This is like changing the rules of the game halfway through the match,” says Sarró. Therefore, while the reform is overdue and will bring benefits in the long term, further modifications to the framework could potentially scare away investors and impede economic growth.