A VAT increase is one of a number of non-binding recommendations the IMF has made to help Spain get its economic house in order.
The IMF predicts Spain will miss its budget deficit reduction targets And so a VAT increase, remains likely. Advisers believe that the rate will go up two percentage points to 20%.
“I would say that the present rates of 4%, 8% and 18% should be raised to 5%, 10% and 20% minimum,” said Jose Ignacio Alemany of Alemany Abogados.
“As the Spanish VAT revenue is one of the lowest of the EU, it could be foreseen an increase of the standard rate up to 20% or even 21%,” said Javier Martin of Ernst & Young. “No plans have been made public on the reduced rates, however, a correlative increase could not be ruled out.”
Spain last raised its rate in July 2010, which brought in an annual €5 billion ($6.7 billion). A further rate increase will be an attractive prospect for the government, which has already indicated that that indirect taxes will be raised 0.8% [as a proportion of public revenues] next year, and it will be easier to achieve politically than public spending and wage cuts.
“While this constitutes an easy way to increase the public revenue and try to improve the situation, an increment of VAT rates would have also negative effects,” said Martin. “Businesses having to choose between reducing their benefit or increasing the prices of their products.”
“Taking into account the current economic environment, businesses would not presumably be able to increase the prices of their products with an elastic demand, thus, the already low margin could be reduced,” Martin added.
