Finance Focus

Salvador Espinosa de los Monteros Garde www.garrigues.com

Tax Reform in Spain

“The latest tax rate hikes have brought to light the inefficiency of the Spanish tax system”

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alvador Espinosa de los Monteros Garde is a partner at Garrigues. He had pursued his professional career in the area of tax law and is an expert on personal income tax. Since its creation in 1998, he has

been in charge of Garrigues’ Human Capital Services professional services line, encompassing areas such as the design and implementation of compensation systems and remuneration formulas for senior managers and employees, international staff transfer management and the implementation of companies’ employee welfare programs.

What more can you tell us about your firm?

Garrigues is the Iberian Peninsula’s leading tax and legal services firm in terms of professional headcount and billings. We know the industry inside out and provide value added to each and every one of our clients.

At present, our team is made up of more than 2,000 people and offers advice the world over on the whole range of business law-related matters.

Prior landscape?

In the initial years of the financial crisis, the Spanish state saw its budget affected in terms of both revenues and expenses:

• In the expense area, there was a sharp increase in the cost of financing due to the lack of trust shown by the markets, which led to an increase in the government deficit.

52 www.finance-monthly.com to the recent changes, what characterised Spain’s taxation

• From the standpoint of revenues, the increase in unemployment and the decrease in consumption led to a sharp fall in tax revenues.

This situation gave rise to the adoption of transitional measures for fiscal years 2012 and 2013, ultimately extended along broad lines for fiscal year 2014, aimed at increasing tax revenues by raising tax rates.

Q

What are the latest amendments in relation to the taxation of Individuals in

Spain?

The latest personal income tax reforms have been mainly aimed at raising tax rates, both as regards the standards rates which affect, for example, earned income, and as regards the rates for savings income and, in particular, for speculative investments (investments lasting less than a year) which are now treated like income subject to the standard rates, that is, they have gone from being taxed at a flat rate of 18% to being subject to a tax scale that may reach 56% in certain autonomous communities in a few years.

Nonetheless, the latest tax rate hikes have brought to light the inefficiency of the Spanish tax system, and within it, those of the personal income tax, given that the latest rate increases have had no significant impact on tax revenues.

A telling example of this is the fact that Spain, while having the highest nominal rates in the EU, is among the members of the EU with the lowest tax revenues relative to GDP.

The insufficiency of the above reforms has led to the need to consider a structural reform of the tax which

will, based on the latest information available, revolve around increasing the taxable income levels and reducing the tax rates, bringing the maximum rate into line with that of Spain’s neighboring countries and placing it in any event below 50 percent.

These changes will streamline and simplify the Spanish income tax, which is currently very complex, with seven distinct brackets in the tax scale and a large number of tax credits and reductions, which mean that the (currently high) tax rates are applied to taxable income that is considerably reduced due to the application of such credits and reductions.

Besides the above-mentioned reduction in rates, the reform will likely entail a decrease in the number of brackets and the elimination of certain exemptions and credits related to socio-political aims, which should be implemented via expenditure policies (aid and subsidies) that allow for discretionary control of the state aid and of their actual impact.

Q

What is on offer as an alternative to those individuals who are affected by an

increase in the tax burden as a result of the proposed reform in Spain 2014?

According to the information that has been made available to date, the reform may encourage supplementary provident systems of both an employment nature, that is, those implemented by companies, and of a personal nature. Therefore, these systems may become more appealing as an alternative for optimizing the tax treatment of employee and executive compensation, adding to the tax deferral that they currently enjoy, some additional tax advantage when it comes to redeeming vested rights or collecting the benefit.