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Spain eyes corporate tax rate in bid to boost ailing revenues

Popular Party in talks with Ciudadanos about best way to raise income as Brussels calls for cuts

Spain’s minority Popular Party (PP) government is in preliminary talks with the center-right party Ciudadanos about the possibility of beefing up the country’s corporate tax regime, sources have told EL PAÍS. With Spain’s tax coffers in bad shape and Brussels demanding €5.5 billion in cuts to reduce the country’s structural deficit, the two parties are thrashing out ways to bring in some much-needed revenue.

Impuesto de sociedades
Spain's Deputy Prime Minister Soraya Sáenz de Santamaría and Finance Minister Cristóbal Montoro. EFE

But with Prime Minister Mariano Rajoy and Economy Minister Luis de Guindos insisting the government will not increase sales tax (VAT) or income tax, it is the corporate tax rate – currently set at 25% – that has come under the spotlight. Therefore, maximum tax collection for minimum political damage is the order of the day.

Spain’s corporate tax rate, which differs depending on the type of business, has seen the gap between company profits and tax paid spiraling upwards through the country’s crisis. In 2007, Spain raked in €44 billion in corporate tax, or 4.1% of GDP. By 2015, however, company tax totaled only €20.65 billion or 1.9% of GDP.

This growing gap has several causes, including exemptions on overseas earnings, a generous regime of tax write-offs for losses incurred during the crisis years, and a controversial scheme that allows companies to bundle together subsidiaries so that profits in one enterprise can be offset against losses.

The government is prepared to look at higher taxes for tobacco but not gasoline

Ciudadanos has stated in the past that the country could earn an extra €3 billion in tax by making changes to the corporate tax regime – an assertion that was included in a deal that saw the emerging party help the PP back into government.

Sources say the two parties are now at the negotiating table with a deal on reducing write-offs for previous years. Figures from the Spanish Tax Agency show that businesses have availed themselves of such deductions to the tune of €20 billion, representing €5 billion less in total taxes for the government. A tweak of the current regime could bring in a substantial amount of money, the thinking goes.

Also on the cards are changes to a system that allows for tax deductions for overseas investment and exemptions on overseas earnings.

But there is a catch. Tax authorities have yet to become involved, which means all measures remain theoretical only.

The clock is ticking, too. Spain must present a package of measures to Brussels by the beginning of December, and this is complicating the dialogue between the government and Ciudadanos. In an attempt to ramp up the pressure, Ciudadanos wants the upcoming budget plans to include elements of the deal it hammered out with the PP in exchange for its support in returning Mariano Rajoy to the prime minister’s office. But the time-frame makes that difficult.

Ciudadanos believes that social spending could be boosted by €5 billion by making changes to corporate tax and launching a frontal attack on fraud. After GDP growth – predicted to be a healthy 3.1% according to IMF forecasts –  that would leave Spain in need of making cuts of only €3 billion to fall in line with EU austerity targets.

The gap between corporate profit and taxes paid has risen during the crisis

The government, which also believes the cuts demanded by Brussels could be avoided – would have to find that extra money by raising taxes on sources such as vehicle emissions, tobacco, sugary drinks or alcohol.

But the government is taking a steady-as-she-goes approach, arguing that the first step is to agree on which reforms could raise revenues before establishing how much the total sums could be. Only after that would the PP be ready to take a closer look at Ciudadanos’ proposals, such as a wage supplement for low-income earners.

“The deal [between the PP and Ciudadanos] has an asterisk that prevents us from committing to spending on items that don’t meet deficit targets,” a government source told EL PAÍS.

There is another spanner in the works, too. While De Guindos is in talks with Ciudadanos, Finance Minister Cristóbal Montoro and his team are locked in their own room looking at ways to boost tax revenue.

The government has previously said it is reluctant to raise taxes on gasoline while indicating that tobacco could be a target, as could sugary drinks – as long as this was on health grounds and not as a purely revenue-raising measure.

English version by George Mills.

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