The latest reform proposals are a mixed bag for large corporates. While the headline corporate tax rate will be reduced, this will be offset by the repeal of certain provisions including tax credits that mainly benefit big businesses.
“For corporates, the difference between the nominal and the effective rate is huge and we need to reduce the nominal rate and increase the effective rate by reviewing exemptions,” said Luis de Guindos, Spain’s Economy Minister, in a joint interview with news agencies Cinco Dias, El Economista and Expansion.
“The message is a good one for probably 95% of companies as they will be paying less,” said Eduardo Gracia, partner at Ashurst. “Those paying more benefit at the moment from low effective tax rates (ETRs) due to taking advantage of exemptions and credits in the tax law. Many of them have an ETR that is probably too low compared with the nominal rate of 30%.”
“So by lowering the nominal rate, most companies will benefit from a reduction in their payments on profits. This will be offset by a small number of companies with big profits paying more,” said Gracia. “These will be the usual suspects – mainly the IBEX 35.”
Shifting a greater burden onto large companies has already been a central theme of Spanish tax reform. Such companies are already paying more because of the reforms of the past few years including the deductibility of financial expenses being cut in 2012 and the restrictions to the deductibility of portfolio provisions due to subsidiaries’ losses enacted in 2013.
With the reform process already underway, Gracia said now is the time for a corporate tax cut.
In terms of a specific nominal rate, Gracia said it should be “closer to 20% than 25%” and “by no means higher than 25%”. He favours adopting the UK model of gradually reducing the rate to increase certainty and attractiveness for investors.
“It’s a phasing-in process. There should be an immediate cut to 25% accompanied by a signalling that there will be further cuts to 20% over, say, five years,” he said.
With the repeal of certain exemptions being used to offset the cost of these reform measures, Gracia said it is important to keep the exemptions for dividends and capital gains earned abroad, which he views as vital for retaining profits and keeping employment in Spain.
Consumer and property levies will be hiked and energy taxes will also rise, but the main VAT rate is not likely to be altered – though bracketed rates for the provision of certain goods and services may be tweaked.
Authority amicability
One area that is likely to be overlooked during the reform process, but one which taxpayers and their advisers would like to see progress in, is the relationship between taxpayers and tax authorities.
“It would be interesting to see an overall reform of the procedures governing relationships between taxpayers and authorities in Spain,” said Gracia. “Greater cooperation would be beneficial for various reasons, including reducing the volume of disputes.”
He said something akin to the enhanced cooperation procedures available in the Netherlands, which operates a horizontal monitoring regime, would be ideal.
“Such a provision would be a strong instrument to enhance the attractiveness of Spain,” said Gracia.
