Perspectives on Spanish VAT

Spanish Value Added Tax, as well as many other tax regulations in Spain, will face several changes in 2014. We still don’t know where it is heading –we will know by March- but many authorized opinions have made their point about the way it should take.

 A flat tax system -which has been proposed by some groups- would be unfair, taking into consideration the proportional and indirect nature of the tax. Also, in a flat tax system, it would be difficult to use the VAT as a tool to achieve social goals and redistribute wealth, as the Law stands, even considering exemptions.

The current three-rate tax can be a bit complex, but also fairer. It is specially suitable in Spain: as a major holidays destination, drinks and food, as well as hotels, shouldn’t be taxed with a sky-high general rate. Otherwise, it would be great loss of competivity for a sector which represents over a 10% of the Spanish GDP. Note that Italy, France, Malta and Turkey act the same way.

   Another hot topic as far as VAT is concerned is the newly introduced cash based accounting, optional only for small companies and self-employed workers. The Government has extended the deadline to subscribe it to 31 March, a hint that shows that it might not be as convenient as it seems at first glance.

 It has some drawbacks, but there is one that stands out: the fact that the company doesn’t have to pay output VAT until the invoice is actually paid, implies that the client of the company can’t deduct their input VAT until the invoice is paid.

  Clients which are big companies are not very happy with this situation; providers which are small companies know it, and they won’t risk their commercial relationships, so things stay pretty much the same.

 This measure was taken to lighten the tax burden on small companies and self-employed workers, and it is not working out.

I wonder if it wouldn't have been easier just to low taxes.

Personal Contributions: Then and Now

Although this is a blog about taxes, let’s start with what are not taxes. Along with these well-known and massively studied tributes, we can also find a distant, often-forgotten relative: personal contributions.

Whereas the global tendency since the WWII has been a steady rise in economic contributions, personal contributions have shrunk, and they are considered as a remain from the past.

There are jury duty, poll duty, work done by inmates, ecc. But there is one that stands out among the others, because of its special characteristics: military service. To my mind, it can provide useful things to a society; however, the fact of giving away some months of your life to your country is too burdensome.

 The  1978 Spanish Constitution mentions personal contributions, and its article 31 reads:

(…) 3. Personal or property contributions for public purposes may only be imposed in accordance with the law.

This shows that both types of contributions are equally treated in terms of  legal reservations.

I can think of some reasons that have led us to the current situation:

 In the last 60 years, the loss of power by sovereign States has been more acute, due to the rise of international organizations such as the EU, the UN or the NATO. This has created a double effect: the sense of a more united world, where a large national Army is no longer necessary, and also, the forementioned loss of power prevents Governments from using them, since they would be highly unpopular and considered as a authoritarian mesure.

 Linked to the last idea, individual rights have become stronger, and the idea of “doing something because your country tells you to do it” seems outdated. What JFK said about “what you can do for your country” only makes sense if something extraordinary would happen, such a war or a catastrophe, when the idea of “nation” and “duty” becomes  stronger. Until then, the average citizen prefers to periodically pay a substantial sum to the Tax Agency and forget about the rest.

Let’s see an example: in France workers have to work for free on a bank holiday, usually on the day of Pentecost, in order to finance social benefits to the elderly and the disabled. It is called “la journée de solidarité”. No wonder this measure was taken after the death of hundreds of elderly citizen during a heat wave in 2003.

Fun fact: during WWI, the U.S. War Industries Board asked women to stop buying corsets and hand the authorities their old ones (corsets with metalic pieces were the custom) to free up metal for war production.  It is estimated that they freed up about 28,000 tons of steel, enough to build two battleships.  So next time you think the Tax Agency is so greedy that they would even take your underwear, be aware that the Government  has already done it before.