Spanish taxpayers are facing several taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. hikes in addition to the two major taxes—a financial transactions tax (FTT) and a digital services tax (DST)—approved by Spain’s upper house less than two weeks ago. The coalition government this week presented the 2021 budget which includes a 53 percent increase in non-financial public spending from last year, up to the historic amount of €236 billion (US $274 billion). Public revenues are estimated to grow by €33.4 billion ($38.9 billion) next year relative to this year due to an estimated 7.2 to 9.8 percent rebound in the 2021 Gross Domestic Product (GDP) and €6.1 billion ($7.11 billion) in tax hikes, while the budget deficit will reach 7.7 percent of GDP.
When compared with the fiscal reforms agreed by Spain’s coalition government by the end of 2019, the 2021 budget entails more moderate tax reforms. However, while countries around the world are working to reduce taxes, Spain is hitting taxpayers and households with eight tax hikes—including four new taxes.
The Spanish government expects that the FTT and the DST, which will go into effect on January 16, 2021, will generate additional revenue of €1.818 billion ($2.1 billion) annually, while the Independent Authority for Fiscal Responsibility (IAFR) has a lower pre-pandemic estimate of €966 million ($1.1 billion).
The budget raises income tax by 2 percentage points for those with an annual income greater than €300,000 ($349,700). This will push the top statutory tax rate to 50 percent in Catalonia and Asturias and to 51.5 percent in La Rioja. Furthermore, tax on capital gains above €200,000 ($233,000) would increase by 3 percentage points to 26 percent. These two measures will bring in, according to the government’s forecast, €144 million ($168 million) next year.
The VAT rate on sugary drinks and those using artificial sweeteners will more than double, from the current 10 percent applied to food and beverages to the 21 percent standard VAT rate, generating additional revenue of €340 million ($466 million) next year. The higher tax on sweetened beverages promises to improve public health outcomes, but it generates equity concerns because of its regressive nature, as revenues are mainly derived from middle- and low- income households. Nevertheless, taxing all goods and services at a standard lower VAT rate would reduce complexity and potentially increase compliance.
Households and businesses will also be required to support other tax increases. An increase in the excise taxAn excise tax is a tax imposed on a specific good or activity. Excise taxes are commonly levied on cigarettes, alcoholic beverages, soda, gasoline, insurance premiums, amusement activities, and betting, and typically make up a relatively small and volatile portion of state and local and, to a lesser extent, federal tax collections. on diesel from 30.7 cents to 34.5 cents per liter and an increase in the insurance tax premium from 6 to 8 percent will generate over €900 million ($1.05 billion) in additional revenue. Nevertheless, transport companies will be able to get a refund for the excise diesel tax as long as they use trucks that are heavier than 7.5 metric tons.
Large multinational businesses headquartered in Spain will also face higher taxes as the new budget reduces tax exemptions from 100 percent to 95 percent for dividends and capital gains from overseas subsidiaries. This measure will bring in €473 million ($551 million) in additional revenue but at the same time will make corporations in Spain less competitive relative to their European and international counterparts, creating incentives to shift their activities elsewhere. This exemption of both foreign dividends and capital gains was one of the few strengths of the Spanish tax system in our 2020 International Tax Competitiveness Index (ITCI).
The budget also modifies the wealth taxA wealth tax is imposed on an individual’s net wealth, or the market value of their total owned assets minus liabilities. A wealth tax can be narrowly or widely defined, and depending on the definition of wealth, the base for a wealth tax can vary. which is collected and administered by the regional governments. The wealth tax rate on wealth above €10.7 million ($12.5 million)—the top wealth bracket—will increase by 1 percentage point from 2.5 percent to 3.5 percent. The government forecasts that this change will bring in additional revenue for the regional budgets of €339 million ($395 million). Since 2001, each region in Spain can amend the general framework of the wealth tax and establish different tax rates and deductions. Therefore, this tax hike will only impact six out of the 17 regions in Spain as only Aragon, Canarias, Castilla La Mancha, Castilla y Leon, Galicia, and La Rioja haven’t established specific tax rates and brackets for their regional wealth tax. If they do, the tax increase won’t affect their taxpayers.
The 2021 budget tax revenue foresees the introduction of two green taxes, one on single-use plastic packages and another on waste that will generate additional tax revenue of €1.35 billion ($1.57 billion).
Lastly, the budget includes a fiscal measure that sets a minimum tax rate of 15 percent on retained earnings for real estate investment trusts.
In the 2021 budget, both direct and indirect taxAn indirect tax is imposed on one person or group, like manufacturers, then shifted to a different payer, usually the consumer. Unlike direct taxes, indirect taxes are levied on goods and services, not individual payers, and collected by the retailer or manufacturer. Sales and Value-Added Taxes (VATs) are two examples of indirect taxes. es are expected to raise more revenue when compared to their 2019 counterpart. The exception is the corporate tax revenue that is expected to drop by 8.5 percent between 2019 and 2021.
While other countries in Europe are working towards introducing tax cuts and stimulating economic recovery by supporting business investment and employment, Spain is putting more fiscal pressure on households and businesses. In the 2020 ITCI Spain ranks 27th; however, the introduction of the financial transaction tax, the increase in the capital gains taxA capital gains tax is levied on the profit made from selling an asset and is often in addition to corporate income taxes, frequently resulting in double taxation. These taxes create a bias against saving, leading to a lower level of national income by encouraging present consumption over investment. and the top individual income taxAn individual income tax (or personal income tax) is levied on the wages, salaries, investments, or other forms of income an individual or household earns. The U.S. imposes a progressive income tax where rates increase with income. The Federal Income Tax was established in 1913 with the ratification of the 16th Amendment. Though barely 100 years old, individual income taxes are the largest source of tax revenue in the U.S. rate, and the lower exemption for foreign-earned dividends and capital gains will directly impact Spain’s international tax competitiveness. These tax hikes and newly introduced taxes have the potential to negatively impact capital formation, growth, and economic recovery. Spain should focus on economic and budgetary stability, as the current economic challenges could turn into a long-term recession as public spending, debt, and taxes are increased.
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