An OECD economic report on Spain has highlighted the need for the country to continue with reforms to its fiscal framework and tax system.
The jurisdiction has already passed a substantial package of tax reforms, which were praised in the report as being a strong step in the right direction.
"The tax base is too narrow and over reliant on labour taxes, which are among the most detrimental to activity," said the report, which shows Spain to have the seventh-highest labour tax burden in the OECD.
One of the report's key recommendations to reduce debt and increase competitiveness is to: "Shift the balance from labour to indirect taxes by cutting employer social security contributions for low-skilled workers, increasing environmental and real estate taxes and narrowing exemptions to VAT, corporation and income taxes."
Spain currently has the sixth-lowest level of environmental taxation and ninth-lowest VAT rates in the OECD.
The report criticises the country's regressive flat rate of employer social security contributions, despite the rate being temporarily cut for two years to €100 ($129) per employee per month in March.
"At the heart of future tax reform should be a permanent cut in employer social security contributions focussed on lower-paid workers, where the need to stimulate labour demand is the most acute," said the report.
Reforms recently enacted in Spain will cut the corporate tax rate from 30% to 25% by 2016, as well as well as halting some tax credits but increasing those available for R&D.
The overall aims of the package were to boost job creation, improve and incentivise companies' competitiveness and improve tax fairness.
"The courageous reforms enacted over the past two years are paying off," said OECD Secretary-General Angel Gurría." It is now crucial to build on these accomplishments with new efforts to enhance growth, boost productivity, further improve competitiveness and get people back to work.
When the package was introduced earlier this year, taxpayers reacted positively. Though they were reluctant to pre-judge the impact of the slated tax cut, other areas of the reform package were praised.
"I understand this [corporate tax cut to 25%] is sufficient to improve the business tax environment and attract investment," said Maribel Mendez, group tax manager at BMW. "Good news is that the use of loss carry-forwards will be limited to 60% of the taxable income rather than the current temporary limit of 25% and financial goodwill amortisation will be back to 5% in 2016."
To build on those already announced measures, another OECD suggestion is to increase the VAT base, which is one of the narrowest in the OECD. Concerns, however, exist about the effect this could have on the tourism industry, which currently has some special rates. The rate was increased by 3% to 21% in September 2012, so another rise is unlikely before next year's general election.
The report praises the recent reforms for further incentivising R&D spending with tax credits, but comments that "the credit, while apparently generous, is not widely used, particularly by smaller firms", and recommends that the authorities speed up the process of certification for eligibility of tax credits.
Luis Antonio Esteban, of Altadis (Imperial Tobacco Espana) confirmed the credit is not much of an incentive for Spanish taxpayers.
"The retention of the R&D tax credit is not significant at all as this incentive has been of little use in Spain so far."
