IMF calls on Spain to raise VAT and lower corporate taxes

Higher consumer taxes, lower corporate rates and few changes to income tax. Those were the proposals for the Spanish economy presented by the International Monetary Fund in Madrid on Tuesday, in the latest report issued by its mission in the country.

“There is room for increasing indirect revenues,” the report reads. “Raising excise duties and environmental levies, and gradually reducing preferential treatments in the VAT, would bring Spain’s collection effort more in to line with its European peers. This should be combined with clearly identified measures to protect the most vulnerable.

“There is scope for gradually cutting corporate income tax rates to promote growth (though not to 20 percent, which is below the EU average),” the report continues. “However, given the imperative to sustain revenues and preserve progressivity, there is less scope for significantly cutting top personal income tax rates.”

The IMF’s recommendations for Spain come two days after European elections that saw the country’s two main political forces, the Popular Party (PP) and Socialist Party (PSOE), suffer greatly at the polls. The two parties have been responsible for introducing a number of severe spending cuts in recent years under the mandate of the so-called “troika” of the IMF, the European Central Bank (ECB) and the European Commission (EC).

The IMF has suggested that companies have greater means to cut salaries when facing economic difficulties

But while the IMF, which is led by director Christine Lagarde, was one of the key supporters of giving the Spanish government more time to bring down its deficit – so that austerity measures would not weigh too heavily on economic growth – it is also a powerful voice in favor of yet more reforms to Spain’s labor market.

This time around, it is suggesting that companies should have greater means to reduce salaries when facing economic difficulties, which would entail going further in the changes that have already been made to collective negotiation in Spain. “Striking a better balance between highly protected permanent contracts and precarious temporary contracts would increase hiring on permanent contracts, and thus encourage firms to invest more in their workers,” the report says. “Further enhancing the ability of individual firms to adapt remuneration to their specific conditions would better align productivity to wages and help struggling firms stay in business. These changes would help ensure any future downturns result in fewer job losses.”

What’s more, the report calls for fiscal incentives to encourage firms to hire unskilled workers – a major issue in Spain given the collapse of the construction sector and the unemployment it has caused.

The IMF has also called for more measures that would allow companies to restructure their debts, thus avoiding their going out of business. The report wants the government to go further than it already has in this respect, calling on the Spanish Tax Agency and the Social Security system to forgive a proportion of outstanding debts. “Given the broader public interest in unleashing the growth potential in such firms, the government should also participate, for example, by allowing outstanding tax and social security claims of such firms to be restructured to sustainable levels if other creditors do the same, without undermining tax compliance,” the report reads.

Consideration could be given to introducing a personal insolvency framework”

However, sources from the Economy Ministry explained at the time of the previous reforms that a firm’s ability to meet its tax and social security obligations was usually a good sign of whether it was operationally viable or not.

The IMF has also made requests regarding personal insolvency, in particular with regard to the owners of small businesses, so that they could “wipe the slate clean” and start new ventures. “Consideration could be given to introducing a personal insolvency framework that would allow insolvent debtors to have a fresh start after having given up their non-exempt assets and a substantial period of good faith efforts to pay the outstanding debt,” the report says. “Experience in other European countries has shown that such a framework can be designed to be in the interests of the financial sector and preserve Spain’s strong payment culture.”