Spanish taxes plummet as firms leave country

MADRID - Reuters

A fruit vendor weighs produce at a market in Madrid. Cash-strapped Spanish consumers and small business owners adjust on the first day of a higher value-added tax imposed to cut the public deficit while the country’s second recession drags on. REUTERS photo

pain’s corporate tax take has tumbled by almost two thirds from pre-crisis levels as small businesses fail and a growing number of big corporations seek profits abroad.

Attractive tax benefits face firms expanding overseas, but for Prime Minister Mariano Rajoy’s government, which now seems resigned to accepting a European financial rescue, the income flow is reversed.
 
Rajoy has passed 65 billion euros ($84 billion) of austerity measures including public sector wage cuts and consumer tax hikes but has been reluctant to lean on businesses that are key to maintaining jobs when one in four Spaniards is unemployed.

Despite its domestic woes, Spain is home to globally successful corporations such as banks Santander and BBVA, telephone operator Telefonica, retailer Inditex and oil company Repsol.

Those five generated net profit of 17.8 billion euros in 2011, outstripping the 16.6 billion euros the government raised in corporate tax from a total 1,400 Spanish businesses that year. In 2007, the corporate tax take was 44.8 billion euros.

“Big corporations are paying less and less in taxes. Their profits have not fallen at the same pace that their [Spanish] tax contribution has fallen,” said Carlos Cruzado, chairman of Treasury Ministry trade union GESTHA.

That the companies have continued posting profits at all is largely thanks to earnings abroad, but as foreign profits are generally taxed where they are made, Spain’s coffers have seen less and less.

Spain receives a smaller proportion of corporate income than personal income, with businesses paying 11.6 percent of total group profits in Spanish taxes compared with 12.4 percent for individuals, according to 2011 data from the Spanish Tax Agency.

Spanish firms’ heightened search for foreign markets to cushion weak domestic business has come with an added bonus for their bottom line in more favourable tax regimes.

In 2010, 30 of Spain’s 35 blue chip companies had subsidiaries in territories considered tax havens, according to the latest report by Spain’s Observation Group for Social Corporate Responsibility.

The organization, which is partially subsidized by the Labor Ministry, put the number at 18 before Spain’s economic crisis began.

 “Not only tax reasons justify this trend, but also the internationalisation of Spanish groups and the search for new markets, especially in the context of the crisis seen in Spain,” said Josep Serrano, Senior Manager of Transfer Pricing & International Tax at Deloitte in Spain.

The use of subsidiaries in tax havens to reduce tax bills has been a rising global trend in recent decades, tax campaigners said.

In Spain, companies also benefit from exemptions on dividends from foreign subsidiaries, Deloitte’s Serrano said.

Corporate tax rate 30 pct
Spain has a headline corporate tax rate of 30 percent, broadly in line with other large European economies. Switzerland, however, has a headline rate of 8.5 percent, and lawyers say deductions can be made to reduce this further.

“A fundamental right of EU law is the freedom of establishment. All firms and taxpayers look after their tax affairs, and if they can pay a lower rate somewhere else, it’s better for their business and natural that they would do so,” a global tax lawyer based in Spain said.