Key Things To Know About Spain’s Fiscal Reform

Key Things To Know About Spain's Fiscal Reform

Key Things To Know About Spain’s Fiscal Reform

The Spanish government has begun a major overhaul of the country’s tax system to stimulate the economy and create jobs. The measures are also expected to reignite foreign investor interest, seen as one of the key drivers of sustained growth. The fiscal shake-up is part of the National Reform Plan submitted to the European Union earlier this year.

The government has pledged that main taxes such as personal income tax or VAT will not be raised. This is good news for Spaniards, who were knocked sideways by a 3 percentage point increase in VAT on most goods and services in September 2012. The man in the street will also benefit from reductions in personal income tax after two years of tough deficit-cutting austerity.

CORPORATE TAX CUT OVERDUE

Spain has one of the highest corporate tax rates in the European Union so the planned reduction from 30 per cent to 25 per cent over two years has been a long time coming. The International Monetary Fund said in May that Spain had “turned the corner” and there was room to cut corporate tax to promote growth. And the move is sure to attract overseas investors.

Incentives to boost foreign investment flows in Spain were already included in The Entrepreneurs LawThe new fiscal reform will maintain that law’s tax incentives for companies reinvesting profits, as well as tax breaks for R&D investment. But in line with its policy of broadening Spain’s income tax base, the government will practically eliminate other tax breaks previously enjoyed by large companies.

On the personal tax side, the reform will cut the the number of tax brackets to a maximum of five from the current seven. The lowest rate will be below 24 per cent and the highest below 50 per cent.

JOB CREATION INCENTIVES

So is the timing right for these tax cuts?

Spain exited a long, employment-destroying recession in the second half of last year. But a jobless rate of 26 per cent remains a stumbling block. Some economists argue the economic recovery is not strong enough to justify easing the tax burden. The government, however, is keen to optimise the upturn. Creating jobs will take time, but the fiscal reform includes measures to boost hiring and encourage more self-employed workers:

• A 3 percentage point cut in the amount of social contributions, such as for health and pensions, that firms pay on top of salaries.

• The self-employed tax rate will be cut to 19 per cent from 21 per cent.

According to business bodies’ forecasts, about 300,000 self-employed who are working in the black economy could be lured back into the tax system by lower contributions.

For information on Spain’s fiscal reform, contact corporate law firm Argali Abogados.

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