The government announced on June 20 that it is introducing reform measures including the reduction of the corporate tax rate to align its regime more closely with declining rates elsewhere in Europe and beyond.
From January 1 2015, the rate will drop to 28%, before being cut again to 25% from the beginning of the following year. The 25% rate will already be available in 2015 for companies with a taxable base of less than €300,000 ($410,000).
Alvaro de Juan Ledesma, tax manager at Repsol, said it is difficult to form an accurate opinion on the reforms until more information is provided on the specifics of the changes.
While a corporate tax rate reduction is, on the face of it, good news for taxpayers, the corporate tax burden may not be reduced if other measures introduced to fund the cut remove available tax credits and exemptions. This means that effective tax rates will not necessarily drop.
“In previous years several changes to the corporate income tax were made that increased the tax burdens on companies and the new reform seems to reduce the corporate tax rate while broadening the tax base,” said Ledesma. “Therefore we need to wait and see if cuts in tax rates introduced by this reform will lead to an actual fall in the corporate tax burden for companies or whether such a cut would be, in general, counterbalanced by the repeal of allowances.”
Jose Luis Migoya Vargas, tax director at Iberdrola, is also reserving judgment on how generous the reform package is.
“I think the measure itself will not mean a reduction in taxation, as far as other measures other than tax rate are also in the proposed legislation and will mean a higher increase in effective taxation, [such] as [through] limitations in deductions of financial expenses, or changes in tax credits,” said Vargas.
Maribel Mendez, group tax manager at BMW, said the rate cut is, broadly speaking, a positive development for taxpayers, and that it will help the country to attract investment. She also praised the government’s expansion of loss carry-forward limits.
“I understand this is sufficient to improve the business tax environment and attract investment. 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,” said Mendez.
She also praised the reform for the certainty it will provide.
“The tax reform will give us more legal certainty, the rules of the game will be clearer,” said Mendez. “The temporary measures will be replaced by permanent measures which implies more opportunities for tax planning.”
Other aspects of the reform include a capital reserve, which Ledesma says is being introduced to “promote financing and reduce leverage”. Under this proposal, a company would be able to allocate 10% of its profits to be exempt from taxation.
However, the inclusion of this measure at the expense of others has not pleased everyone.
“The cut in tax credits is not well perceived by Spanish corporations,” said Luis Antonio Esteban, of Altadis (Imperial Tobacco España). “Especially the reinvestment relief, which has been a very efficient measure to promote reinvestments in the past few years. A new tax incentive has now been created to replace this, consisting of a reduction of the taxable base associated with the generation and increase of the so-called ‘capitalisation reserve’ that will be separately shown in the balance sheet and cannot be distributed of reduced within a period of five years.”
R&D tax credit
Though certain tax exemptions and credits may be repealed to finance the corporate tax rate reduction, the R&D tax credit available to taxpayers operating in Spain will be protected from repeal and reinforced.
A 25% tax credit is available for expenses from R&D activities. If the expenses are higher than the average R&D expenses incurred by the company during the previous two years, the tax credit is 42% for the excess amount.
“Regarding the R&D tax credit, the good news is the government’s looking-forward commitment regarding this credit, which could be regarded as a cost-effective policy that stimulates private sector investment in this sector,” said Ledesma. “Without knowing the small print of the reform, it would be desirable that when the government refers to “reinforcement” of this credit it means that the reform would increase the certainty and effectiveness of this credit.”
Not all taxpayers value the credit as highly, though.
“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,” said Esteban.
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