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Spain opts for temporary tax reform to achieve deficit reduction

Spain opts for temporary tax reform to achieve deficit reduction

Spain has joined France in introducing a package of austerity measures in the last seven days, but how does the Spanish government's approach to cutting the deficit differ from France's?


Spanish measures

In Spain, the major tax changes contained in the austerity budget included VAT reductions and a raft of measures aimed at advancing the payment of corporate income tax for large Spanish companies, whereas French austerity efforts have focused on increasing capital gains tax and repealing various tax breaks.

"On VAT, [there is] a temporary reduction of the rate applicable to first supplies of residential units, from 8% to 4%, provided they are delivered before the end of 2011," said Eduardo Gracia, partner of Ashurst, the law firm, in Madrid.

Spanish companies with an annual turnover of more than EUR20 million ($29 million) will have to pay more corporation tax in advance in the three instalments paid to the Treasury every April, October and December before they settle their final bill.

"The advance will increase from 21% to 24% when the company's turnover ranges from EUR20 million to EUR60 million, and to 27% when the turnover of the taxpayer was in excess of EUR60 million in the previous fiscal year," said Gracia.

These companies will also be restricted from carrying forward the same amount of tax losses as before.

"Companies with a turnover from EUR20 to EUR60 million will be entitled to use only 75% of said amount to offset against the taxable income of the ongoing year," said Gracia.

Furthermore, companies with a turnover exceeding EUR60 million will be entitled to use only 50% of the accumulated tax losses.

The other measure introduced by Spain to address the corporate contribution of large companies was a reduction on the financial goodwill on acquisitions of foreign companies.

"Financial goodwill on the acquisition (prior to December 21 2007 and pursuant to the EC decision on state aid) of foreign companies will be depreciable only by 1% in the fiscal years 2011, 2012 and 2013, instead of by 5%," said Gracia.

Divergent tactics

It appears that Spain's approach to reducing its deficit is through temporary measures, while France has acted by implementing permanent reform.

One specific difference is in the treatment of real estate. Spain has tried to stimulate this market through tax advantages such as the VAT reduction, while, conversely, France has elected to increase the taxes on real estate.

"Spanish authorities plan to bring forward corporate tax payments by large enterprises, until 2013, to provide a short-term boost to the government's cash flow," said Nicolas Jacquot of Taxand France. "It thus appears that French steps to reduce deficits are opposed to the Spanish approach."

"Measures in Spain are temporary and exceptional, but not in France. Companies must contribute in both countries, but there are compensations in Spain, and there is an increase of the taxable base in France," he added.

France also introduced a wealth tax on the highest earning individuals, while Spain, after deliberating the idea, has decided against this option. Silvio Berlusconi, the Italian Prime Minister, also decided to drop a tax on high earners, though it was initially part of his government's austerity plan.

"Eventually, the Government stepped back from the announcements made in the media during the past week about their intention to re-establish a wealth tax, so last Friday there were no new tax measures submitted to the Parliament," said Gracia.

Gracia is sceptical about the Spanish package.

"These measures alone are not [sufficient], because they are only of a financial nature. In combination with a number of public expenditure savings that have been approved by the Government on the same day, they might be able to meet the deficit goal of this year."

"But generally speaking, the way out from the financial crisis must come basically through the implementation of structural changes in the administration giving rise to public expenditure savings and the implementation of new economic and employment policies triggering new taxable income," he added. "In my view, there is little room for further tax increases, which can be counter-productive to the pursued increase in tax collections."

Of course, the two countries are addressing different concerns given their tax structures and other economic differences, but it will still be intriguing to see which of the two packages will prove to have helped with deficit reduction more. This is likely to hinge on how successful Spain's temporary measures are in stimulating the desired reactions.

Nicolas Jacquot, Taxand France

First published on the ITR, 30 August 2011

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