Would Your Spanish Tax Planning Stand Up To Scrutiny?


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Taxpayers are facing higher tax liabilities in Spain, sometimes considerably higher, depending on how much worldwide income and gains you receive. More people will be looking for way

Taxpayers are facing higher tax liabilities in Spain, sometimes considerably higher, depending on how much worldwide income and gains you receive. More people will be looking for ways to reduce their tax bills, but you need to be very careful about the methods you use and be sure your tax planning is compliant in Spain.

Tax evasion used to be pretty much a way of life in Spain, but this has been changing. So far many people have not taken the government?s tougher stance on tax evasion that seriously, but we are beginning to see increasing evidence that the authorities mean business and more and more people will be caught out and faced with large tax bills, interest and penalties.

Property ownership and tax declarations

The Spanish tax authority now uses external information such as land registry records and utility bills, and cross references them with tax returns to find discrepancies. After studying land registry records last year it began writing to Spanish property owners who it believes have not submitted tax declaration for 2007, 2008 and 2009.

This is in relation to income, savings and wealth taxes (the latter just for 2007). It is therefore a major issue and would have very costly repercussions.

Non-resident property owners are also being targeted if they have not submitted their non-resident tax return and paid the ?la renta? income tax due on their property.

The official Agencia Tributaria (AEAT) letter informs recipients that they can regularise their affairs by filing the missing tax returns and paying the taxes due, before the agency proceeds with an enquiry which is likely to entail penalty charges.

The tax authorities also now receive information from electricity companies on electricity usage in every property in Spain. This enables them to calculate if a property is supposedly owned by a non-resident is in fact occupied all year, or if a property declared as being empty is in fact being rented out.

Overseas bank interest

We are hearing more evidence that the Spanish tax authorities are beginning to actively target Spanish residents who have interest bearing bank accounts in the UK or its offshore islands and have not declared this interest on their local tax returns.

Under the EU Savings Tax Directive the UK and all EU member states (except Luxembourg and Austria) have been automatically exchanging information on the interest earnings of EU residents since 2005. It is then up to the Spanish authorities to compare the information received on an individual to what they supplied on their tax returns.

When it comes to the Channel Islands and the Isle of Man, until July 2011 clients had a choice of their information being exchanged or having a withholding tax deducted. In both cases the interest earnings should still have been declared in Spain each year. Last July the Isle of Man and Guernsey stopped offering the withholding tax option and now automatically exchange information with Spain on all interest earnings by Spanish residents. So the Spanish tax authority will now have more information to compare to local tax returns. Since it knows that accounts could easily have been previously undeclared, it will be rather suspicious if it suddenly receives information on large cash deposits that did not appear to exist before.

There are people in Spain who have not been declaring their offshore bank accounts, and it is now even more likely they will be found out.

New crackdown for 2012

At the beginning of this year the new Spanish government announced that it was turning its attention to a new crackdown on tax evasion to help reduce its budget deficit. This is part of the austerity measures that include tax increases and which the government has warned are just ?the beginning of the beginning?.

The administration hopes that its wide ranging plan against fiscal fraud and tax evasion will bring in additional revenue of ?8.2bn this year alone.

The planned measures include more tax inspectors; greater scrutiny applied to personal and corporate tax returns; more workplace inspections and applying a ceiling on the use of cash payments for certain financial transactions.

It has also been reported that the authorities will engage more with territories no longer considered to be tax havens (presumably places like the Isle of Man and Channel Islands) to get more information to aid their efforts against tax evasion. There will be more resources for detecting large scale fraud and measures to curb the black economy and money laundering. The government may also be considering a voluntary plan for the payment of tax arrears.

In Spain, surcharges of between 5% and 20% are applied to late tax payments if the taxpayer voluntarily makes the payment. Interest is charged if the payment is more than a year late. Tax offences are graded and penalties range from 50% to 150% of the unpaid tax. The penalty can be reduced by co-operation.

All this does not mean it is impossible to lower your tax bill on your savings, investments, pensions and wealth, because there are still compliant and legitimate arrangements available in Spain that could help you do this. You need to seek personalised advice for your circumstances from a professional adviser like Blevins Franks.

By Bill Blevins, Managing Director, Blevins Franks

17th February 2012

Summarised tax information is based upon our understanding of current laws and practices which may change. Individuals must take personalised advice.

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; individuals should seek personalised advice.