Madrid: For Spanish companies, it may be time to pay up again.
Executives in Spain, who’ve seen their profits shielded by write-offs since the economic crisis ended, are bracing for a round of tax increases as Prime Minister Mariano Rajoy seeks to narrow the budget deficit without hitting the consumers helping to drive the recovery.
The government plans changes to the corporate tax system alongside increases in some indirect taxes in order to meet European Union deficit targets. Ministers are also considering scaling back the social security rebates given as an incentive for hiring and planning an increase in the minimum wage.
Serial budget offender Rajoy is trying to rein in the government’s shortfall after narrowly avoiding a fine for flouting EU deficit demands last year in the run-up to a general election. But he has to avoid squeezing companies too hard — he’s also promised voters half a million new jobs a year and economic growth is already slowing.
“Rajoy is facing pressure from Brussels to present a credible budget that can reduce the deficit, but he doesn’t have the majority in parliament to do it,” said Angel Talavera, an economist at Oxford Economics in London. “Targeting companies, rather than going after taxes that affect the middle class, is the easiest and least damaging option.”
Loss of majority
The 61-year-old premier has never delivered on his annual pledges to honour Spain’s budget commitments and this year’s spending plans were delayed by the 10-month struggle to form a government after he lost his majority in December. Now at the head of a minority government, the prime minister will need cross-party support to pass a budget.
With the Spanish economy expanding for a third straight year, Rajoy has ruled out further increases in the sales tax or income tax, which are unpopular among Spaniards and could hurt consumption. Instead, he’s looking to companies to foot the bill.
While operating earnings have almost doubled to €168 billion (Dh657 billion, $178 billion) since 2012, the government’s revenue from corporate levies has stagnated because tax breaks allow firms to set their losses from the crisis years off against their current liabilities. In the past, companies in Spain contributed roughly twice as much to government revenue as those in other Euro-area nations. While the effects of the crisis helped bring Spain into line with France and Germany, Rajoy’s latest plans suggest that may prove a temporary respite for executives. In a further hit to profit margins, the government agreed a deal with the Socialists in parliament to increase the minimum monthly wage to about €708 from €655, El Mundo newspaper reported. The increase is set to be approved by the cabinet Friday.
“The government is changing the rules halfway through the game,” said Enrique Chinchilla, professor of Financial Management at the Barcelona-based IESE Business School. “You can argue some companies resort to fiscal loopholes to pay less, but you can’t deny the fact that many companies have disappeared as a result of the crisis and others still carry massive tax losses. You can’t squeeze out taxes if there is no business.”
Budget deficit
Corporate tax revenue in the first ten month of the year was €19.1 billion compared with €17 billion a year earlier, according to the Tax Agency. Spain’s 2016 budget estimates the revenues from the corporate tax at €24.8 billion.
In August, the European Commission ordered Rajoy to bring Spain into line with the EU’s 3 per cent limit on budget deficits by 2018, a two-year extension on previous demands, and set targets of 4.6 per cent for 2016 and 3.1 per cent for next year. Rajoy says this year Spain will meet its goal.
The latest effort to narrow the deficit is adding to executives’ frustration with prime minister. While companies welcomed the 2012 labour reform which made it easier to hire and fire staff, the same year the prime minister imposed restrictions on tax deductions linked to interest payments with companies struggling at the height of the crisis. In September, he rushed through a rule bringing back an accelerated timetable for corporate tax payments which had been scrapped just a year earlier.
“These last-minute decisions, without any consultation, are a drag on competitiveness and an extra burden,” Bernando Soto, head of tax policy at the main Spanish business lobby, the CEOE, said in an interview. “This is not only unfair, it’s self-defeating if we look at the jobs companies create and the fact that many small- and medium-sized companies are still absorbing losses from the crisis.”
