The new tax proposals from the government

The Government has now published proposals for new taxes to cover the rapidly increasing deficit, which will be included in the state budget for 2010, although they will first have to be negotiated with some of the minority parties. Prime Minister Rodriguez Zapatero has no absolute majority in the parliament and needs the support of some of the smaller parties, however, to get this support, the Government will have to offer important concessions. The tax proposals may still see changes and negotiations may well extend into the New Year.

Increases in the VAT

VAT (IVA in Spanish) is an indirect tax on purchase and consumption. It is divided into 3 classes, General, Reduced and Super Reduced.   For the General group (comprising what is not especially included in the two other groups) the Government proposes an increase from 16 to 18%, whilst the Reduced group may see an increase of between 7 to 8% whilst the Super Reduced,  goods and services will remain at 4%.

The ‘Reduced Group’ includes the sale of a new dwelling.   The promoters have calculated the increase will mean an extra 1,924 euros on the purchase of a new dwelling. There is no VAT on the purchase of re-sale dwellings, but there is  Impuesto de Transmisiones Patrimoniales (ITP). This tax is collected by the Regional Governments and, with the precarious financial situation of the Regions, we expect the ITP will be increased to the level of VAT on a new dwelling.

The Reduced VAT also applies to restaurants, travels, visits to cinemas and theatres, hairdressers as well as funerals.

The Government will impose the VAT increases from 1st July next year. The reason for the delay is for sure the fear that the increase may affect an upswing in the economy which the Government hopes is coming.  With the increases on VAT the Government expects to collect 5,150 million euros.

Higher taxes on savings

Another tax proposal will hit those with savings.  Tax on income from capital will rise from 18% to 19% on the first 6,000 euros and 21% on the remainder. This increase will be effective from 1^st January and will be reflected in the Income Tax Returns to be presented in the spring of 2011.

The Government is also proposing to drop the reduction of 400 euros on Income Tax they introduced a short time ago.

Expect regional tax hikes

The Regions may increase taxes collected by them. This will certainly lead to an increase in purchase tax on re-sale dwellings (ITP) up from 7 to 8%, but may also affect other taxes. The Regions will be tempted to abandon the reductions most of them allowed on Inheritance Tax over the past years.

We shall inform and comment as the picture unfolds.

The tax increases proposed by the National Government could mean a transfer of 11,000 million euros from the pockets of taxpayers in Spain to the State Treasury. Even so, this is still a small contribution towards mending the many holes in the public accounts. City bank is sceptical of the Government’s tax proposals saying, “Spain needs a massive fiscal increase if it wants to bring the deficit down to 3% of the Gross Interior Product.”