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Wealthy, Big Tech Targets in Spain’s Post-Virus Tax Overhaul

June 15, 2020, 8:45 AM

The debate over broad tax reform in Spain will likely heat up after the country recovers from the coronavirus—with plans to make companies and high earners pay more tax taking center stage.

Both the ruling Socialist party and its junior coalition partner, Unidas Podemos have been vocal since taking office in January about plans to overhaul the tax system to increase receipts, lower the fiscal deficit, and make taxation more progressive.

But the path to reaching those goals may prove difficult because of opposition to reform within Spain’s parliament, tensions within the coalition government over the details, and the devastating economic losses from the coronavirus pandemic.

Some of the options on the table include tax hikes for high earners, anti-tax evasion measures, a minimum corporate tax rate, and a financial transactions tax.

Minister of Economy and Business Nadia Calvino said tax reform proposals will take a back seat while the focus is on recovery. “Once we recover the path of strong and solid growth, we will also have to return to fiscal consolidation,” she told Spanish national television May 28.

“Tax collection in Spain is 7 percentage points below the Eurozone average. There is a clear margin for improvement in collection,” Finance Minister Maria Jesus Montero said in a Budget Commission session in Spain’s Upper House May 28.

Coalition Tax Proposals

A financial transaction tax bill won a vote in the Lower House on June 11, in an early sign of parliamentary support for the left-leaning governments efforts to increase tax collection. The bill proposes taxing at 0.2% the purchase of shares of Spanish companies with a market capitalization more than 1 billion euros ($1.1 billion).

The coalition government also proposes introducing a minimum corporate tax rate of 15%, rising to 18% for banks and oil companies, and an increase in marginal tax rates for high earners in its 2021 budget, which it hopes to unveil before October.

Increasing rates for diesel, a proposal the Socialist party first announced last year, is also on the table, the Finance Ministry told Bloomberg Tax June 9.

Businesses, however, oppose tax hikes, particularly as they struggle to recover from pandemic-related losses.

Increasing tax on companies could be “counterproductive,” said a spokesman for the Confederation of Employers’ Organizations, Spain’s largest business lobby in a May 29 email.

“In the case of the corporation tax, establishing a minimum effect will have little impact on collection while so many companies are making losses, but it will disincentivize investment.”

“The tax paid by large petrol companies probably already reaches 18% so it would be unlikely to have a significant effect,” Álvaro Navarro, an equity research analyst specializing in the utility market at Mirabaud Securities LLP, said June 9.

Coronavirus Recovery

Like many countries, Spain has allowed some companies to delay paying taxes to help them endure the economic damage brought on by the response to the coronavirus crisis.

But at some point a fiscal overhaul is all but certain. On May 18, the governor of the Bank of Spain, Pablo Hernandez de Cos, said structural reform will need a broad consensus among parties, and, once passed, should ideally remain in place for several terms.

Earlier last month, Spain’s Fiscal Authority, an independent government institution tasked with overseeing public finances, issued a similar warning. Spain’s economy could shrink by 9.2% in 2020, according to the government, while the deficit may exceed 10% and the debt-to-GDP could spike from 95% to 115%, it said.

Spain’s anemic tax collection is less a result of its marginal rates, which on most counts resemble those of its European peers, but rather generous exemptions and a reduced tax base as a result of the significant informal economy, Jorge Onrubia, an analyst at economic think tank Fedea, said May 29.

One viable option would be to increase personal income tax, known as IRPF, above a certain threshold. But he cautioned that increasing tax collection significantly will necessarily mean increasing the burden not only on very high earners but also middle classes.

“Regarding structural reform, I’d argue for slow gradual changes. With an economic situation like the one we face now, a sharp increase in fiscal pressure in the near future runs a significant risk of harming demand but also supply,” Onrubia said.

Political Tensions

European countries face tough questions on who should pay for the coronavirus crisis. But in Spain, the calculation is complicated further by tensions within the coalition government and fragmentation in parliament that saw Spain hold four elections from 2015-2019.

The coalition government lacks a majority in Spain’s lower house and will need to win the support of several small, regional parties to pass a budget. Last year, Prime Minister Pedro Sanchez called a snap election after failing to win support for his 2019 budget.

The urgency of the pandemic-driven economic slump has also highlighted differences within the government over how and when to enact other long-planned economic reform.

For example, Unidas Podemos last month proposed a wealth tax starting at 2% for net wealth over 1 million euros, which it said could bring in 10 billion euros every year. This would replace an existing form of wealth tax collected at the regional level, which Unidas Podemos says is often ineffective because some regional governments have reduced rates to almost zero.

Finance Minister Montero didn’t explicitly back the proposal, suggesting last month that reforms of existing taxes and a minimum corporate tax rate could help make collection more progressive.

There is also disagreement outside of the coalition, for example, over the financial transactions tax bill working its way through Parliament. Three opposition parties that opposed the bill on June 11 will need to win the support of other groups to defeat the proposal in upcoming votes in both the Lower House and the Senate, where they collectively lack a majority.

Passing a budget will be a “significant challenge” both in terms of reaching an agreement within the coalition government then securing the majority needed to pass it in parliament, said Raymond Torres, chief economist of think tank Funcas.

“Some will want to begin the fiscal adjustment next year, as the Bank of Spain has advocated, while others may prefer to delay it,” Torres said May 29.

There are areas of broad agreement. Last week, a proposal to impose a 3% digital services tax on revenue earned by large technology companies won a parliamentary vote, defeating opposition parties concerned about the bill’s unilateral character, the timing of its introduction given the pandemic, and the impact U.S. trade sanctions could have on key Spanish industries. The bill will now continue to the Lower House Budget commission, which will discuss partial amendments.

To contact the reporter on this story: Sam Edwards in Norwich, U.K., at correspondents@bloomberglaw.com

To contact the editors responsible for this story: Meg Shreve at mshreve@bloombergtax.com; Vandana Mathur at vmathur@bloombergtax.com