Tax Law

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It’s still early in the year and many will be wondering what new tax recipes the Spanish Government has cooked up to delight us. Indeed, after the 20 December elections, many might wonder which Government we have….? Any Government….? Offers please?

You can choose from the many political flavours on offer today and finish up with all sorts of odd collations, including such unlikely ingredients as the PSOE, PP, Podemos, Ciudadanos, ERC-CATS, IU, plus many regional party spices. Truly indigestible!

No logical coalition of political parties has a majority in Spain’s main national assembly, the Congreso de los Diputados, which today consists of 350 representatives from 10 political parties.

In the Senate, things are simpler with the PP retaining a majority, but this only allows the PP power to veto and amend law originating from Congress, which can in any case override the Senate. The Senate does not promote new law.

If a coalition is not established with a sufficient majority by the middle of March, the King will call a new election.

Now to the taxing truth about Spain.

Last year, Mr Rajoy’s Government strung out its mandate to the maximum of four years plus a month and, using its majority in Congress, passed the budget for 2016 with meagre changes to the personal tax system.

– Wealth tax would continue unchanged for 2016 but 100% exempted for 2017 onwards. We will believe that when we see it.

– Income tax rates reduced by between 0.5% and 1% in all the income bands.

Not a lot, but this is not the whole story. Spain, in fact, has 18 tax systems!
Each of the 17 Autonomous Communities has the right to modify the basic system set by central Government and you can imagine how irresistible this temptation must be for politicians. So we have the national system plus the 17 separate regional systems.

Some would say, playing with taxes is almost as irresistible as dipping fingers into the public purse!

In March, May and September of 2015, the various regions or naciones as some prefer, also had their parliamentary elections. Some strange coalitions have already emerged.

A few examples: The Balearics dumped the PP for a coalition of the left comprising PSOE, Podemos and the regional MES. The PP lost out in Valencia to a coalition comprising PSOE and the regional party Compromís.

In Andalucía the PSOE remains dominant (now 35 years in power!), but only with the support of the new centre right party Ciudadanos. Very odd.

We can be certain that these political marriages will produce changes to taxation. Even if the swing left has not been determinant, the influence of Podemos (Reportedly of neo-Trotskyist flavour) and the populist regional parties (mostly friends of Podemos) will not be good news for the tax system.

This has already influenced inheritance tax in the Balearics, which was 99% exempt for family members. Now inheritances over €700.000 will be taxed at up to 20%.

In Valencia, the nationally set €700.000 Wealth Tax exemption has actually been reduced to €600.000. A glaring example of left wing tokenism that will generate virtually nothing in extra tax.

So the illustrious naciones of Spain will tweak taxes so that the politicians can puff up their chests and announce to the world that they are fulfilling their sacred promises.

What is the real effect of all this messing about with taxes? Chaos and negativity, upsetting more foreigners who will chose tax residence in Portugal, UK, Gibraltar, etc. In other words, less tax revenue for Spain.

For Spanish citizens who do not have the advantage of being able to move country, it’s not surprising that the favourite sport is not actually football but tax errmmm… planning.

So where in Spain is it best to live? Madrid, undoubtedly, as has been the case for many years. Wealth tax remains 100% exempt, inheritance tax 99% exempt for families, and the income tax system is the best in the country.

Which is the worst place to live? With the recent political changes, it’s now looking like Valencia, the Balearics and Andalucía will be jostling for this honour.

Which areas of Spain need residential tourism most? Why, of course, Valencia, the Balearics and Andalucía!

You have to ask yourself whether politicians live in our universe. I wish they didn’t!

For details on Spain’s 18 tax systems, I point readers to our webpage spenceclarke.com/taxtables/2016/

Words Alistair Spence Clarke, FCA Spence Clarke & Co

www.spenceclarke.com

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