Spain’s lower house has given the green light for 2022 budget proposal, which comes with a new corporate minimum 15 percent tax rate for large companies with annual sales exceeding 20 million euros (US $ 23 million), while banks and energy companies must pay a minimum of 18 percent. The goal is to prevent businesses from using tax deductions and loopholes to pay much less than the current official corporate tax rate of 25%. In addition, tax credits for large real estate rental companies would be reduced from 85% to 40%.
Until the global minimum tax of 15% is implemented, this measure could lead to a loss of competitiveness of Spanish companies compared to their European and international counterparts. Spain already has one of the least competitive corporate tax systems in the Organization for Economic Co-operation and Development. In just one year, Spain has lost six places in the corporate tax component of our 2021 International tax competitiveness index, from 26e to 32e.
The Spanish government expects this minimum corporate tax rate generate additional income 50 million euros ($ 58 million) in 2022 and 400 million euros ($ 462 million) per year starting in 2023.
This is not the first time that the Spanish government has introduced new taxes in the hope of generating more revenue. Spain’s 2021 budget came with two new taxes, a digital services tax (DST) and a financial transaction tax (FTT), which went into effect on January 16, 2021. At that time, the government Spain expected the TTF and DST to generate additional revenues of 1.818 billion euros ($ 2.1 billion) per year. The digital tax should now pay off under 184 million euros ($ 213 million) and preliminary FTT figures have been reduced to 372 million euros ($ 430 million). As a result, the two taxes are now expected to collect only 31 percent of their original estimates. Moreover, given the new political agreement, Spain will have to offer a corporate tax credit for the amount collected under the DST which will be subject to corporate tax under pillar 1.
Besides the introduction of the DST and the FTT, last year Spain also increased capital gains, dividends and the highest personal income tax rates, and reduced the participation exemption for dividends and capital gains earned abroad. Overall, in 2021, tax collection was supposed to raise an additional 3.23 billion euros ($ 3.732 billion). However, in this year’s budget proposal, the 2021 revenue increase has been reduced to 1.45 billion euros ($ 1.676 billion), representing less than 55% of the additional amount that was to be collected in 2021.
Even though these policies did not meet their revenue targets, these new taxes and tax hikes reduced the country’s overall score in our 2021. ITCI, dropping Spain’s ranking by 26e to 30e.
The 2022 draft budget brings government spending to the historic 239 billion euros ($ 276 billion), while government revenue is expected to increase by 8.1% next year compared to this year and reach 232.3 billion euros ($ 269 billion) due to an estimated rebound of 7% of gross domestic product (GDP) in 2022. The budget deficit will reach 5% of GDP.
The macroeconomic scenario on which this budget was drawn up seems overly optimistic. At the start of last week, the Bank of Spain lowered its forecasts for the Spanish economy, expecting GDP to grow 6.3% in 2021 and 5.9% in 2022. This comes after the International Monetary Fund also examined its forecasts, concluding that in 2021, Spain’s GDP will grow by 5.7%.
While other countries in Europe are struggling to introduce tax cuts or dilatory the introduction of new taxes to stimulate economic recovery by supporting business investment and employment, Spain is putting increased tax pressure on businesses. Unrealistic estimates of tax collection, inflation, and economic growth and further tax hikes have the potential to negatively impact capital formation, economic growth and recovery.
Spain is expected to focus on economic and fiscal stability, offering tax breaks instead of tax hikes. Current economic challenges could turn into a long-term recession as government spending, debt and taxes rise.
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