Everyone’s tax bill is going up in Spain this year, and now your cost of living is about to increase too. The EU may have granted Spain more time to reduce its public deficit, but this will not make life any easier for either the government or Spanish residents. It is the opposite, in fact, as the conditions mean more austerity for Spain, including another tax rise. Income and savings tax were targeted in December 2011; this time it is VAT.
If you have not already done so, this is the time to look to protect your assets from tax.
The battle to control the deficit
When Mariano Rajoy’s government took over in December 2011, it was immediately faced with an uphill battle to control the budget deficit. The previous administration was tasked with reducing it to 6% of gross domestic product (GDP) by the end of 2011, but the final figure was 8.51%.
Under EU targets, Spain was meant to reduce the deficit to 4.4% this year, but in March the EU compromised with a target of 5.3%. The government remained confident it would reach the 2013 target of 3%.
However economic stagnation and recession, unemployment at almost 25% and falling tax revenue have made this target increasingly unrealistic. On 10th July EU finance ministers agreed to grant Spain some breathing space, and the targets have been eased to 6.3% this year, 4.5% next year and then 2.8% by the end of 2014.
Latest tax rise and austerity measures
This however came at a price, and in return Sr. Rajoy had to commit to more tax increases and austerity measures. On 11th July he unveiled details of a fresh wave of fiscal consolidation measures, totalling €65 billion over the course of the next two and a half years.
The key tax measure is an increase in VAT. The standard rate will jump from 18% to 21%, while the reduced rate will increase from 8% to 10%. At the same time some services and products benefiting from the reduced rate will start being taxed at the much higher standard rate. This includes heath and optical products, cleaning services, hairdressing, nightclubs and cinemas. The special reduced rate for basic necessities remains 4%.
The latest reports are that the VAT increases will come into effect on 1st September. Additionally, in 2013 the 4% VAT that applies to the purchase of residential property will increase to 10%.
This was quite a U-turn for Sr. Rajoy who had pledged not to increase VAT during his electoral campaign last year: "I said I would lower taxes and I am actually raising them”, he admitted, adding: “Circumstances change and I have to adapt to them."
Other austerity measures include: environmental tax reform to comply with the “polluter pays” principle; increasing tobacco tax; Christmas bonuses suspended for top public officials; unemployment benefit to be cut from sixth month; 30% cut in local councillors and 20% cut in subsidies for political parties and unions.
The Prime Minister acknowledged that the measures “are not pleasant”, but explained that Spain is "facing an extraordinarily serious situation that must be urgently corrected". Public spending currently exceeds income by tens of billions of Euros.
Tax increases already applying this year
As announced at the end of 2011, income taxes have increased across the board this year. This ranges from an additional 0.75% for income below €17,007, to an extra 7% on income over €300,000. The top rate of tax is now 52%. In Andalucia and Cataluña it is higher at 54% and 56% respectively.
Tax on savings income was also hiked to 21% for income up to €6,000, then 25% on the next €18,000 and 27% on the excess over €24,000. In 2009 the tax rate for all savings income was 18%, so the tax bill for savings income over €24,000 has jumped 50% in less than three years.
These higher tax rates were only meant to apply for 2012 and 2013, but this was until the deficit reached 3%. It therefore seems more than likely now that they will be extended to cover 2014 income. Wealth tax, which was also reintroduced as a temporary measure, may need to continue for another year as well.
Taxpayers in Spain may be relieved that the latest measures did not include another income tax rise, but we cannot rule out the possibility down the line if Spain still struggles to reduce its deficit. A European Commission document says that even the easier deficit reduction targets will be difficult to reach. If taxes do have to rise further, the government may well target higher earners.
The VAT rise will also affect your cost of living, and inflation is a significant threat to your wealth over the longer term (10 years or more), along with tax. You cannot mitigate indirect taxes like VAT, so it is now even more important to protect your capital, income and wealth from unnecessary taxation wherever possible.
Blevins Franks has substantial experience advising British expatriates in Spain on their tax planning and wealth management. Your local Partner can talk you through the opportunities available to lower your tax liabilities in Spain, as well as on investment strategies for your capital to keep pace with inflation.
16th July 2012
The tax rates, scope and reliefs may change. Any statements concerning taxation are based upon our understanding of current taxation laws and practices which are subject to change. Tax information has been summarised; an individual must take personalised advice.