SEAT: a nation on wheels

 Carmakers have always been a relevant part of the life of each country, historically, economically and socially speaking, and they tend to represent the development, and even the character of their citizens. Spain underwent critical changes in the second part of the last century, and its principal carmaker represents accurately this evolution.

  SEAT (Sociedad Española de Automóviles de Turismo) was founded in 1950. Its first stakeholders were the Spanish Government (51%), seven Spanish banks (42%) and FIAT, who owned a 7% of the share capital, as a technological partner.

 FIAT deeply influenced SEAT; even the acronym SEAT is the Spanish equivalent of FIAT, which stands for “Fabbrica Italiana Automobili Torino”. Nevertheless, decisions were taken from Madrid, something that, as we will see, FIAT would regret. Back then, it was the custom that technological partners did not take part in the decision-making. This is easy to understand, since the Spanish Government leaded by Franco, wanted SEAT to represent the development and progress of Spain, in a time when the country was politically isolated and still pulling itself together from the not-so-distant Civil War.

 The parts were built in Italy, and shipped to the factories of Zona Franca, in Barcelona, where they were assembled as SEAT. They were mostly outdated models, allowing FIAT to sell them in the international market, and, simultaneously, hindering the possibilities of internationalization of the Spanish manufacturer. Later on, as a result of the experience gained, the whole production of the engines and chassis took place in Spain, as well as some Italian models which were subsequently exported to Italy.

  This technological partnership was not even exclusive, since FIAT licensed some of their model to FSO, a Polish car-maker.

  Years went by, and democracy was established, as well as a heavy set of economic measures which affected directly the industrial sector. This implied that the Spanish Government had to get rid of their share in SEAT, and make it a company owned by private shareholders. After such a long partnership, FIAT was expected to purchase it, and both parties agreed for a take-over in the summer of 1980.

 But in May 1980, when the managers of FIAT were granted permission to audit the financial statements of the company, previously to the purchase, they were surprised to find a 120-million-euro debt, which came from the Franco-administration, when the accounts were balanced according to political reasons and were unaware of external audits. When the Agnelli family knew about this, they flew from Torino to Madrid in their Dassault Falcon 20 and personally back out from the purchase contract. As a result, the Italians sold their share to the Spanish Government for the symbolic price of 1 peseta (0,006€).

  But such an operation in cannot be completed overnight. In order to make the transition easier to SEAT, and avoid letting them without technology, a new contract was signed, stating that SEAT was allowed to produce and export FIAT cars, as long as they were facelifted and modified, in both the interior and the external panels, that is, transformed into SEAT, at least esthetically. Thus, the FIAT Ritmo became a SEAT Ronda, as a good example of this situation.

 Soon, the Italians claimed that the contract had been violated, arguing that the car was practically the same. The Italian lawyers assured that previous designs by FIAT had been used, but failed to present any evidence. Still, their main argument was that the changes were not significant, and there had been an infringement of the contract. Finally, the Spanish lawyers presented this picture, which would be a coup de grâce:

 This was the ultimate evidence; the parts in yellow are the ones that were renovated by SEAT. The tribunal considered that the changes were significant and the claim was dismissed. The brilliant move executed by the Spanish lawyers is studied today in business schools specialized in IP.

  After the Italians bailed out, the Spanish Government was the principal shareholder, as opposed to their original porpoises of privatizing the company. Finally, they were able to sell it in 1986 to Volkswagen.

 To sum up, SEAT  represents the effort of Spain to catch up technologically, due to the industrial delay of Spain, a problem that has its roots in the 19th century, whereas countries like France or Italy (specially the latter, due to their similar characteristics) started developing cars in the first decades of the 20th century –actually, when cars started to be mass-produced in Europe. As a result, SEAT has always been under the shadow of a more powerful partner, a situation that has some advantages, but it is mostly undesired, as it puts the company in a situation of uncertainty and subject to changes in case the dominant company decides to leave, as it happened with FIAT in the early 80s.

Lessons from Property Tax

 In a time when tax collections are hitting low as a consequence of the economic breakdown, there is one tax that, unlike any other, has steadily grown. How is that possible?

 As has been recently unveiled, in spite of a situation where the economic activity has been severely damaged, Real Estate Tax in Spain is getting more and more relevant, and collects more money now, than it used to do in 2007. It is playing a major role financing local administration, and it is one of the main reasons that keeps them from bankruptcy, as opposed to Autonomic Regions or the central Administration itself. In fact, it works so well, that some experts have demanded to transfer this tax to the local administrations, to the central Administration.

 However, I would like to stress one characteristic of this tax: it is very difficult to evade.

 This can be explained due to the essence of the tax, since it is reasonable easy to levy real estate property: you know it is there, and it is not going to vanish to a tax haven destination. Also, we should mention the Spanish Cadastral Office: although it has been said that it should be merged with the Property Registry (something that may eventually happen) it works reasonably well, and has been a key part of Spanish economic life over two centuries.

 Two lessons can be taught from the Property Tax:

       - Taxes are taxes, and the citizen’s duty is to complain about how high they are, and eventually pay them. But property tax is not among the most unpopular taxes, its taxable event is considered rather fair –there are few expressions which show economic capacity stronger than owning real estate assets-, and their rate, in spite of recent increases, is not considered abusive, like in VAT or Personal Income Tax, but it is usually ignored.

      - The key of its effectiveness seems to lay on its “reliability” and simplicity. Evasion is marginal, and that allows to keep the rate low. This is also a distinctive sign of fairness, which is perceived by the taxpayer.

How can we apply all the abovementioned to the tax system, or more specifically to the Personal Income Tax and Corporate Tax? Note that the collection of those two was about 9 times higher than the Property Tax collections (2009).

 Essentially, both aforementioned taxes are harder to audit; something which was easy in Real Estate Tax, now it can only be achieved by increasing personal and technical resources, but putting aside some collection-related incentives for auditors, something which can be tricky. Also, keeping the Tax Office away from political interferences and corruption (basically they are the same thing) is something that has to be done, specially after the last scandals involving the Royal Family and, besides this the Cemex issue.

 This should be done by fewer, simpler and more comprehensive laws. At the same time, this would benefit the fairness of fiscal law; we all know that specific provisions for a determined field or economy sector, are in many cases, a battle won by lobbies.

The influence of banks in state legislation

 Banks play a key role in any developed country, managing money and financing operations and businesses which make the economy flourish. They are also relevant since they employ thousands of people in their countries. As a consequence, bankers are usually among the most rich and powerful people in any country.

 The banking sector, as well as any other professional sector, is concerned about how the world develops and how changes could affect its P&L account, so when a new and unwanted change -of any type- is introduced, they will use all their possible resources to keep their statu quo. Financial entities do this, as well as doctors, Bars associations or the pulp and paper industry.

                                              Spanish Central Bank Façade, Madrid

 However, the strength of the banking sector is outstanding. After all, they make things possible in a country, and without their support, most of the Governments in any determined country, would fall. So, it is easy to understand that Governments do not want to make the banks upset.

 This is known and accepted by the average taxpayer, as a generic characteristic of our society. Besides, these measures are usually taken in a very subtle way, because they are unpopular and put politicians under the shadow of doubt.

 Related operations: to sum up, the 2006 Spanish Personal Income tax Law (according to Corporate Income Tax Law) states that related operations should be assessed at market value, considering related operations, amongst others, the financing relationship between a bank and its Directors. That entails levying the banker’s money kept in his own bank as general income, whereas in normal circumstances it would be taxed as savings income, as a capital gain.

 Of course, the banking sector was not pleased with such a decision, but it did not last too long, because in 2008, the Personal Income Tax Regulation changed the Law, and made a sloppy exception for bankers in its Seventh Additional Provision.

 Financial leasing is a widely used contract by companies, since it provides some financial and tax benefits. The Corporate Income Tax clearly states that is has to be done through a financial entity, something which can alter the normal functioning of the market.

 Competition is not welcome: in September 2013, the Spanish Tax Agency issued a tax ruling which sets limits to crowdfunding, establishing a maximum of 6.000.-€ per investor and  year and a maximum of 3.000.-€ per investor for a single project. There is also a limit of 1.000.000.-€ for a single project. This measure is specially harmful for start-ups and entrepreneurs, since it is a new and innovative way to finance projects and ideas, and more importantly, with a great potential. This potential source of finance has now been hindered.

  Most of banking contracts are unregulated, i.e., they cannot be defined in any specific category of contract, and are usually regulated by general principles and the terms and conditions stipulated by the bank in an unilateral way. It is argued that they unregulated due to their special characteristics, but, as a matter of fact, that gives financial entities Public Entity-like power, since they act with a presumption of legality. In many cases, terms and conditions have been declared void, but after years of lawsuit.

 Corporate social responsibility is spreading its word, and financial entities should be caring about it, specially when their popularity has hit an all-time low due to recent scandals. Also, it is necessary a tighter control by national central banks, something that can be done by making them more independent. Trust is the main factor in the banking business, and banks have to regain it by leaving behind past mistakes.

Auditing The Simpsons

  As far as I can remember, I have always been a big fan of The Simpsons -yes, new generations of tax advisors are kicking in- and I specially enjoy watching how an American middle-class family of the 90s is depicted through the lens of satire. Of course, as the important part of life they represent, taxes are often mentioned, generally from a critical point of view.

  Obviously, due to the necessary informal tone of the show, legal terms and actual legal procedures are usually incorrectly depicted, if not ignored.

   But, how would it be a tax advisor-tailored episode? It is also a good excuse to point out some differences and similarities between the Spanish and American system.

   To sum up, Krusty the Clown, a well-known celebrity, is audited by the IRS to find he is one of the biggest tax cheats in American history, as he had secret bank accounts in the Cayman Islands.

 Even though the episode was first aired on February 11, 1996, cases are examined in the light of current legislation.

CASE ONE

 A bank clerk finds out that Krusty is storing his wealth in the Cayman Islands. He immediately communicates the IRS, and Krusty is arrested.

Comments:

  Cayman Islands are currently a tax haven in Spain, but exchange information treaties are being processed. Spanish taxpayers must declare their global income; in case their debts with the Tax Agency exceed 120.000.-€, they could face up to 4 years in prison.

  In the USA, if you talk about tax evasion and tax havens, there is one word that comes to mind straightaway: FATCA. This act, passed in 2010, requires American citizens -regardless of residency- to report their bank accounts from outside the USA. It also requires foreign financial institutions to provide the IRS with information about their US customers. Having failed to do such thing, Krusty could be heavily fined and imprisoned a maximum of 5 years.

  One more thing about this: the Whistleblower Office, that pays money to people who blow the whistle on persons who fail to pay the tax that they owe. So, by making a claim using IRS form 211, the bank clerk could be awarded with a maximum of the 30% collected.

CASE TWO

(During the IRS audit)

Krusty: I can't go to jail, I'm used to the best.

Taxman 1: Krusty, this is America.  We don't send our celebrities to

jail.  We're just going to garnish your salary.

Taxman 2: It simply means we'll be taking a small portion of your salary until your debt is repaid.  Say, 75% for 40 years.

Krusty: But I don't plan to live that long.

Taxman 1: All right.  Better make it 95%.

Krusty: Ah!  Oh!  Oy...

Comments:

  Wage garnishment is a common economic resource for Tax Agencies. Under Spanish Law, it is framed in an enforcement procedure which must be adequately notified. Previously to this, guarantees provided by the taxpayer should be executed, in most cases. Cash or bank accounts, and credits, stocks, shares and rights which can be disposed of at the time or in the short term are preferred to wage garnishment.

  Also, Spanish Law sets a different garnishment percentage. Being the minimum wage (SMI) 645,30.-€ per month (year 2014):

1º SMI: cannot be garnished

2º SMI: 30%

3º SMI: 50%

4º SMI: 60%

5º SMI: 75%

6º SMI and higher: 90%

According to what the Taxman says, Krusty the Clown earns around 25.000-€ net, monthly. Although the 95% is represented to sound exaggerated, it is not far from the 90% that would be applied to revenues that exceed 3.871,8.-€

 Although it is not very clear in which state The Simpsons live, it has been always said that they are from Oregon, so in this case we will apply the Beaver State Law.

 Federal law places limits on wage garnishment amounts. While states are free to impose stricter limits, Oregon has not done so. Oregon’s limits are almost identical to the federal wage garnishment limits. Here are the rules:

Creditors are allowed to garnish the lesser of:

·         25% of your disposable earnings (wage after deductions), or

·         the amount by which your disposable earnings exceed $218 per week, $435 per two-week period, $468 per half-month period, and $936 per month.(source: nolo.com)

   E.g., if an individual earns 2000.-$ per month (net), the garnished amount in Spain would be 554,7.-$, whereas in the US it would be 600.-$

CASE 3

  After completing the winding up of his assets, the IRS manages the fast food chain owned by Krusty and his TV show, his two main assets. They change their commercial, well-known and profitable registered trade names for new IRS-related names, and they are managed badly.

Comments:

 Concerning seized companies, Spanish Law states that if the continuity of the director/s could affect the taxpayer’s solvency, the Tax Agency may appoint a new director to monitor the company’s operations. However, in any case, they are interested in collecting, so profitability of companies is a key point. In this situation, the Tax Agency may apply some of the principles contained in the Bankruptcy Law, in terms of keeping the company running and authorizing the necessary acts for its day-to-day activity. Having said that, it would have been more adequate to keep the original trade name and know-how.

  In the USA, the Fourth Amendment protects two fundamental liberty interests: the right to privacy and the right to freedom from arbitrary invasion, drawing a red line to “search and seize” procedures. Officers must obtain a valid search warrant from a Judge, a document that describes in detail the place they will search and the items they will seize.

  Here is a link to Fiscal Year 2013 Review of Compliance With Legal Guidelines When Conducting Seizures  of Taxpayers’ Property

CASE 4

(At the Burger Restaurant)

Homer: Let me see, I'll have four tax burgers, one IRS-wich, withhold    the lettuce, four dependent-sized sodas, and a FICA-ccino.

Waiter: Fill out schedule B.  You should receive your burgers in six to eight weeks.

Comments:

  Ok, no problems here, I just found this hilarious.

CASE 5

  At the IRS auction, a leather suitcase is sold for 40 dollar cents, twelve boxes of old magazines for 12 dollar cents, and Krusty’s bed for 50 cents.

Comments:

 In the light of Spanish Law, assets and rights which bid price is under the cost of execution, will not be seized. Furthermore, it would be against the Law to seize the bed, and possibly the suitcase, since they are considered household items.

 In both jurisdictions, non-seizable assets are basically the same: the portion of salary necessary to cover family needs, furniture, clothing, dishes and goods required to exercise a profession, as long as they do not have an extraordinary value (i.e., a cutlery made of gold). Spanish Law specifically mentions sacred and cult-related items.

When the taxman gets crafty

                                                                                               

                                                                                      “Knowledge is power”

                                                                                       Sir Francis Bacon  († 1616)

I don’t know if Sir Francis Bacon was ever involved in a tax inspection, but his quote describes the situation of any Tax Agency in a developed country. Basically, all those huge (and usually quite ugly) public buildings and relentless workers are put together to gather and analyze information from citizens.

 Most of the information is provided by the citizens, and then verified by the Tax Agency: the classical image of a Tax Agency worker, going through piles of papers and documents on his desk. The most boring and unimaginative job to many.

However, it is not always like this.

 Some other times, the taxman has to hit the streets, or make up a new and unexpected way to get the precious information. This is highly feared by non-complying taxpayers, and regarded as something funny by most of the rest.

Here is a short list of some examples around the world:

-  The Spanish Tax Agency has a specific model for electric consumption. It is requested to electric companies about individuals, and aims mostly at non declared real estate rents. (link)

- The Israel Tax Agency calls a citizen who travels overseas ten times a year, but reports a minimum wage (link)

- IRS using Google Maps to spy on taxpayers (link)

- Sweden’s telecos hand over spying powers to tax authority (link)

- Campaign to raise awareness of tax compliancy for kids in Italy (link)

- Italian tax authority checking phone bills (link)

- British HMRC spying on Facebook and Twitter and also examining school soirées to find out whether children attend public or private school (link)

- Israel tax authority to request information to cabbie app, in order to obtain information about the number of customers they have (link)

- Italian Police stopping luxurious cars, and sending their owners’ data to Tax Agency to check if they had declared enough income (link)

As we can see, this kind of procedures are on the rise. In fact, if Tax Agencies had more technical and staff resources, they would be much more common. It also helps the fact that these days, penny-pinching governments won’t miss the chance to collect money no matter how, as well as the current tendency where fraudsters are badly considered by the average taxpayer (see ‘’tax shaming’’)

However, it is not going to be that easy for Tax Agencies. Eventually, most of this procedures end up in court, where the judge will decide if, for instance, any individual right has been violated, and as a consequence, many of them are dismissed. Every case is different: they range from absurd law and intimacy violation, to brilliant and effective law-abiding methods to catch infractors. Going off the beaten track of the audit procedure is tough; it is easy to make mistakes, and the taxman will have to be cautious, specially in terms of evidence. Also, it costs a lot of money and effort to carry them.

 To my mind, the key factor here is not what you collect from one or two fraudsters, but the fear and constant awareness created among the population. The idea of getting hit out of nowhere by the taxman in case you break the law. Something like a Tax Agency State, that will gently yet insistently remind you - via mass media- what will happen to you if you misbehave.

That wouldn’t be necessary to be mentioned, but sometimes, over-zealously taxmen create havoc in compliant taxpayers, something which deeply harms the idea of fairness.

Corporate resolutions and majorities in a LLC

Voting is the main right of a member of a LLC. It allows the company to develop and reach its goals. It represents the democratic idea of "one person, one vote", but instead of people, here we have member units. 

Voting rights are necessarily escorted by two other rights: information and the right to attend the meetings. The information right provides the member knowledge about a certain situation, and motivates the direction of his vote, whereas the right to attend a meeting makes voting possible, even with a proxy.

 However, there is one more important thing than voting: how we count votes.

 According to Spanish Law, LLCs (called SL) have the following system:

 In opposition to Public Limited Companies, it is not mentioned any initial attendance quorum or specified minimum for LLCs. Corporate resolutions are approved with the valid votes of a third of the authorized share capital, so the Law implies that, at least, the same quorum is necessary to hold the meeting.

  This percentage can be raised by LLCs in their Articles of Association, but with the express prohibition of unanimity, and this is when problems arise.

Given a certain LLC, where each partner owns a 25% of the share capital and the Articles of Association read that corporate resolutions must be approved with, at least, a 76% of the share capital. In this situation, even though unanimity has not been established, it is necessary that all partners agree (de facto unanimity); otherwise, the corporate resolutions will not be approved, which could eventually become a cause of dissolution of the company, if the situation has paralyzed the corporate bodies. This is an unwanted situation for everyone, especially for the partners, considering that a whole functioning company is more valuable than a separate 25% of it.

  In my opinion, the most pragmatic thing would be to state the standard quorum for most of the resolutions, and rise it specifically for some key resolutions, (in case of a merger, e.g.), but it is clear that due to the huge variety of LLCs, the most appropriate measure will depend on the particular case.

 Also, include in the Articles of Association an arbitration clause. This is not very common yet, but I am sure it will gain ground.

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.