Spain’s COVID-19 Economic Response

March 27, 2020

Countries around the world are implementing emergency tax measures to support their economies under the coronavirus (COVID-19) threat. On March 12, the Spanish Prime Minister announced a €200 billion ($231 billon) package, around 20 percent of the Spanish GDP, to help companies and protect workers and vulnerable groups affected by the coronavirus crisis. That’s €117 billion to be mobilized by the state, with the difference expected to be covered by the private sector.

As Spain continues to navigate this difficult crisis, policymakers should follow some simple principles when designing tax relief measures:

  • Tax relief should be broad-based.
  • Tax relief should be in keeping with good long-term policy. Distorting markets today will undermine the long-term recovery.
  • Using refundable tax credits today should be designed to bring forward future credits or deductions.
  • Policymakers should also use this opportunity to fix distortive tax policies that could impede recovery efforts.

Among other actions, here is a list of the most important economic measures implemented so far by the Spanish government.

Tax Deferrals

According to the Royal Decree Law of March 12, small and medium-sized businesses (SMEs) with a trading volume of €6 million or less may defer the payment of tax amounts due not exceeding €30,000 for up to six months, with no interest penalties to be applied during the first three months.

Liquidity Provision

On March 18, the Royal Decree Law 8/2020 implemented several economic measures. The most important is the provision of liquidity for businesses and the self-employed through loans secured by the central government or backed by CESCE (Spanish export credit agency).

Even though, initially, €100 billion was announced, on March 24th, the Council of Ministers approved the release of €20 billion. The government spokesperson pointed out that half of this amount will go to SMEs and the self-employed; that is, €10 billion. Large companies will be able to request financing with a 70 percent government guarantee for new operations and a 60 percent guarantee for the renewal of existing contracts. Each bank will set the interest rate for the new guaranteed loans according to the solvency and risk of each company.

Employment and Unemployment Benefits

The decree makes it easier for people to be temporarily suspended from work, rather than laid off, and to retain all of their benefits. Any workers affected by a temporary collective layoff procedure (ERTE) will receive unemployment benefits, including those that would not normally be eligible. In cases of temporary contract suspensions or reduced working hours an exemption has been granted for 100 percent of employer social security contributions for companies with less than 50 employees, and 75 percent for the rest. The condition to access these benefits is for the employers to maintain the positions for six months once the activity is resumed.

The self-employed that cease their activity or see their revenues fall by at least 75 percent will be able to access the self-employed unemployment benefit for the period that the state of emergency is in place, even when the minimum period required has not been met.

Moratoriums

While the state of emergency is in place a moratorium will be implemented on home mortgages for vulnerable borrowers, and debt claims are non-enforceable.

A similar moratorium was set for utility bills, guaranteeing the provision of essential services, such as telecommunications, water, electricity, and gas for vulnerable groups.

Other Measures

The regime for the liberalization of foreign (non-EU) direct investment in Spain’s strategic industries is suspended until further administrative notice.

Postponement and Interruption of Deadlines

The following changes to time periods are relevant to tax policy:

  • Terms of administrative and court procedures have been suspended and deadlines interrupted.
  • The statute of limitation and expiration periods for tax purposes have been suspended during the time that the state of emergency is in effect.
  • The time limit for debt payments as a result of tax assessments has been extended, including payments which are already in their enforcement period or due under deferral or split payment resolutions.
  • The time period to reply to requests, seizure orders, and to submit statements in different tax proceedings has also been extended, but this does not affect the time limit for submitting statements in economic-administrative proceedings.

Nevertheless the Royal Decree 465/2020 of March 17 clarifies that the suspension of the statutory periods envisaged for administrative procedures does not apply to tax-related deadlines; that the deadlines for submitting tax forms are not affected by these changes; and taxpayers and companies must continue to submit their tax forms and pay any tax due in accordance with the applicable deadlines.

Budgetary Impact

While the Spanish government’s initial focus should be on maintaining liquidity, in the long run Spain needs to focus on fiscal consolidation once the pandemic subsides.

The Bank of Spain estimates that the economic measures approved so far, including the support for health care, with 0.3 percent of GDP, adds up to 1.4 percent of the Spanish GDP,  around €17.43 billion. The report clarifies that of this total amount, 0.5% of GDP (€6.22 billion) represents a direct increase in spending, while the rest is intended to provide guarantees and credit lines to companies.

City Councils and Autonomous Regions

In addition to the above measures, certain regions and city councils have approved measures to the terms and deadlines of the regional and local taxes they coordinate.

For example the Madrid City Council approved a 25 percent reduction in Real Estate and Business Activity Tax for assets and businesses in commercial, leisure, or hospitality, if employees are retained. Payment of other local taxes can be deferred..

Also, during the emergency period, the Madrid region approved to delay the payment of inheritance, stamp duty, and gambling tax.

Looking Forward

Providing tax relief to the people and companies that are most affected, until the emergency abates, is welcome. Taxes that require regular payments will impact the liquidity of businesses and households. Therefore, Spain should consider fiscal relief as a way of minimizing the economic impact from the health crisis.

The OECD issued recommendations regarding possible emergency tax policy responses to the Covid-19 pandemic. Some of these measures could be considered by the Spanish policymakers. These include delaying payroll taxes and social security contributions. These measures could help businesses retain workers. In Spain today, the Council of Ministers agreed to ban layoffs due to COVID-19. Tax relief is necessary to support businesses that no longer have the option to lay workers off.

Spain is under the threat of a serious health crisis and an economic crisis to follow. The policy response needs to be broad and in keeping with long-term objectives. It is paramount that the short-term harm caused by this outbreak does not turn into a long-term economic downturn.

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