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Second conference on tax reform: “Treatment of business income, specially regarding to Corporate Tax”

Today the Fundación Impuestos y Competitividad held the second conference of its cycle on “The reform of the tax system: its analysis from the perspective of the company and the goal of competitiveness.” In organising it, it had the support the Wolters Kluwer publishing group and the Spanish Confederation of Savings Banks (CECA), at whose head offices the event was held.

Today the Fundación Impuestos y Competitividad brought together some of the most highly-reputed experts in Tax Law at the head offices of the CECA to discuss the guidelines of the tax reform in regard to Corporation Tax. This was the second conference of the cycle on “The reform of the tax system: its analysis from the perspective of the company and the goal of competitiveness” organised by the Foundation.

The event was opened by Mr. Antonio López Poza in representation of CECA, who expressed his satisfaction at hosting a meeting of this nature in a house with a long tradition in the study of tax matters: it is no coincidence that several of the members of the Commission of Experts for the Study of the Reform of the Tax System formed part of the CECA’s taxation area in previous years.

Mr. López was followed by Ms. Pilar González de Frutos the Vice-President of the Spanish Employers’ Association CEOE, who was invited to chair the event by the Fundación Impuestos y Competitividad, and who, before calling upon the speakers, described how the uncertainty of the current economic situation could represent an opportunity for changing the tax system and making it an instrument for overcoming the crisis and constituting a new, stable framework for the future, with the obligation of fostering development, growth, competitiveness and the international projection of Spanish companies.

The event consisted of three presentations and a concluding debate. The first presentation, by Professor Emilio Albi Ibáñez, Head of Department of the Complutense University of Madrid, discussed “The general approach: the doctrinal currents, the search for homogeneous treatment?” Professor Albi, who recently published a book on Tax Reform, began his presentation by emphasising the need for a tax reform which will substitute the recent tax measures, characterised basically as emergency solutions and not as coherent reforms of a tax system, highlighting the negative economic impact of those measures in the opinion of the IMF. He recognised, however, the need for an increase in overall tax pressure in view of Spain’s low position in this respect in comparison with the countries of its own economic sphere, but rejecting a general and undifferentiated increase. In this respect, he expressed his clear rejection of a rise in the reduced rates of VAT throughout the services sector linked to the tourism industry, which in his opinion would be seriously prejudicial for the sector.

Entering into considerations of taxation techniques, Professor Albi analysed in the first place the treatment of capital yields, emphasising the need to correct the impact of progressive taxation on yields of capital and savings, and making an extensive review of the various solutions proposed to that effect: those now in force, with dual systems such as those established in the Scandinavian countries, or quasi-dual like the current Spanish system, or formulas suggested by the doctrine, such as that incorporated into the Mirrlees report, which, with a single rate, make it possible to reduce the tax base, deducting the normal return on an investment by updating the acquisition value of the various financial assets when calculating taxable earnings.

Within the scope of corporate earnings, from the point of view of Personal Income Tax (IRPF), Professor Albi drew attention to the obligatory abandonment of regimes of objective assessment, and in general the need to eliminate tax incentives in favour of business activity without the use of the corporate formula. In the matter of Corporation Tax (CT), he set out the arguments in favour of a reduction of the tax rate, which in his opinion should be fixed between 25% and 27%, assuming that the collection cost of this measure could be offset with the reduction of some deductions: Professor Albi believes it is necessary to conduct a “cost-benefit” analysis of the deductions currently in force, in particular those established for R&D activities.

He also proposed reviewing the regime of SMEs, reducing tax rates and eliminating other current advantages, and in general reviewing the special regimes, in search of the desirable simplification of this tax.

Professor Albi also argued for a profound transformation of CT which will increase corporate investment, suggesting an alternative system of determination of the tax base by means of a single tax incentive permitting a deduction for the use of corporate equity as a source of financing (that is, CT with ACE, allowance for corporate equity), calculated at around 2-2.5% of that equity –

a solution which, in his view, permits excluding from taxation the normal yield of capital and taxing only economic revenue and the components of return on risk. The Professor recognised that this measure would represent a reduction in tax collection, which could be alleviated with a gradual implantation of the model, in the style of the solution applied in Italy, admitting the deduction only for the new creation of corporate equity following the passing of the pertinent regulations. He also recalled that the essential aims of Corporation Tax never included the collection function.

The second presentation was given by Mr. Eduardo Sanz Gadea, a tax inspector who for many years was the deputy director of Corporation Tax in the Taxation Board of the Finance Ministry, and who is a figure of obligatory reference in the matter. His presentation was entitled “The solutions of Corporation Tax: the relationship between tax base and accounts and other questions.” After denying that was qualified to suggest to any official body criteria for a possible reform, he declared himself, from this experience as an “old civil servant,” willing to make, before an audience of experts and friends, a number of possibly unorthodox reflections on the “traditional model” of Corporation Tax.

In historical perspective, he recognised that for a long time he had been dazzled by the relationship between accounts and tax base, which he believed to be an essential aspect of this tax. However, he now saw clearly that this was an adjectival aspect of the tax, and that the essential factor is whether the tax satisfies the worthiest goals of taxation: neutrality, efficiency, competitiveness, fairness and simplicity.

Mr. Sanz Gadea then stated that the current regulations of the tax do not satisfy those principles, insofar as it is not neutral, pointing to the disparities in the treatment of financing, depending on whether this is carried out with own or external capital, emphasising in particular the excessive tax burden currently borne by dividends as against interest, following the elimination in the IRPF of the deduction for receipt of dividends after the passing of Act nº 35/2006. Moreover, the tax is not efficient, it does not foster competitiveness, and it is unfair because its complexity and the possible abusive recourse to some of its solutions – in particular by companies with more possibilities and greater presence in the international markets – means that not everyone pays in conditions of equality, it being clear that it is not simple and its current regime “complicates our life.”

Mr. Sanz Gadea then expanded on the idea that this complexity can lead to some essential values being neglected, and that, along with possible excesses of aggressive tax planning by some companies, administrative excesses may occur, with a possible breach of legal certainty. He recapitulated this first evaluation with the conclusion that this complexity of the tax has evolved not so much from accounting as from the tax’s own regulations, and that in his opinion the abandonment of accounting for the calculation of the tax base, which some people postulate, will not help to simplify the tax.

Within the analysis of this complexity, Mr. Sanz Gadea referred to two areas that are especially prone to it. Firstly, the financial result, since at present certain dividends or capital gains obtained by companies fall outside the tax base, a part of the financial expenses following the reforms introduced in this respect, and the impairment of stockholdings, or a part of the negative results for transfer of stockholdings, or those linked to permanent establishments abroad: he pointed out the rejection by the European Commission of solutions of financial structures determining double or non-taxation, and the confirmation by the National Court of the situation in that line and the rejection of those structures by the Spanish Inland Revenue Service (AEAT).

Mr. Sanz Gadea also highlighted the enormous complexity of derivatives, the insecurity of their treatment, and the enormous possibilities of transfer of revenues which they entail. In the face of this accumulation of difficulties, he suggested that it would be good to create a tax which will limit all of those possibilities, suggesting the CBIT (Comprehensive Business Income Tax) model as a possible solution, by excluding the components of the financial result, making the tax base coincide with the operating result, which in his opinion respects the principle of economic capacity.

Mr. Sanz Gadea supports similar treatment being given to dividends and interest, such as remuneration of the capital applied to production processes, and although he recognised that this model would entail, in principle, a broadening of the tax base which would have to be accompanied by a reduction of the tax rate, he agreed with Professor Albi that this tax does not have to have great collection potential, and in this respect, even though the very difficult current situation has restricted the most recent reforms passed, he said that in normal conditions many of those measures would have been rejected as technically inappropriate.

Linked operations were identified as the other area of special complexity, denounced by the OECD’s studies on “BEPS,” there being an evident concern over these operations and the possibilities of profit shifting which they offer, a reality which gives rise to a twofold conflictiveness, between multinational groups and tax jurisdictions and between different tax jurisdictions, on the basis of the existence of substantial shifting of profits by multinational corporate groups to jurisdictions with low taxation, or by the adoption of provisions by the different jurisdictions which, for example, by means of regimes like the “patent box,” permit solutions of attenuated taxation by introducing an element of tax competition between jurisdictions.

In the face of these difficulties of application of the principle of the independent company, Mr. Sanz Gadea suggests a distribution of tax bases according to the markets of activity, distant from the solutions of the European model of a consolidated common tax base and more in line with the so-called “one-way tax system” which establishes the tax assessment on account of the controlling company on the group’s worldwide consolidated tax base, subjecting the subsidiaries to taxation in their own jurisdiction and arbitrating a system of tax credits between the companies and jurisdictions involved.

Mr. Sanz Gadea ended with a final consideration on the role of accounting in the tax and the great advances made in the matter of the “culture” of accounting, and in particular of accounting consolidation, which in his opinion makes it possible to consider the model just mentioned, acknowledging, however, that it is unthinkable in the short term for the reform under study to endorse this model, which to a large extent would signify a leap in the dark.

The series of presentations was concluded by Mr. Ricardo Gómez Acebo, a partner of Deloitte – one of the member organisations of the Foundation’s Board – who discussed “The internationalisation of business activity: its appropriate tax treatment.” In his presentation, he rejected the use of Corporation Tax as an instrument of short-term economic policy, as this is not the best way of achieving the goals of short-term economic policy and at the same time it produces a breach of the expectations of stability that international investors need and a clear breach of the legal certainty of projects which are already under way.

From the point of view of the attraction of foreign capitals to Spain, Mr. Gómez Acebo highlighted the importance of nominal rates, to which the international analysts attribute more continuity and certainty than actual rates, saying that he believes it advisable to reduce the nominal rate of the tax to a percentage which could be 25%. This measure would favour neutrality, in eliminating disparities between different types of companies, would restrict the effectiveness of illegitimate tax planning solutions and would reduce the margin for short-term measures of modification of the tax.

In any case, he emphasised the risk which this measure represents for many companies, due to the effect of the reduction of the rate on the abundant tax credits associated with expenses already posted in accounts but not yet included in the declared tax bases, advising a careful transition in relation with that possible change.

In relation with the foregoing, Mr. Gómez Acebo expounded the need for a methodologically solvent study on actual rates, in order for the predisposition of the AEAT to be indispensable for providing the statistical data of exploitation of the tax. He also explained the error of considering as tax incentives – which could be eliminated – mechanisms which are not incentives at all, in particular the rules of avoidance of double internal and international taxation, the rules on offsetting negative tax bases, or those on deductibility of book impairments of holdings in other companies. These are not incentives, but simply rules of good functioning of a healthy Corporation Tax, the breach of which gives rise to undesirable situations of excess taxation.

Mr. Gómez Acebo then censured how the application of the tax policy of the EU, in the search for a guarantee of equal rules for European competitors, represents in practice a very prejudicial result for their action outside of Europe’s frontiers in conditions of equality with companies of third-party countries, and said that in Spain this policy has proven to be particularly harmful in measures such as that of the deduction for export activities or that of financial goodwill.

Mr. Gómez Acebo also expressed his rejection of the anachronism represented by the regime of modules for SMEs within the framework of the IRPF, and he categorically denied the affirmation that large companies do not pay taxes, when the statistics of the AEAT itself proclaim the contrary, since the 1,000 largest companies in the country pay more than 50% of the liabilities for Corporation Tax and VAT.

Mr. Gómez Acebo insisted on distinguishing, within the framework of international tax planning, between legitimate planning – which assists compliance with the Law in the best possible conditions and is completely necessary – and illegitimate planning, which must preferably be combated with regulatory changes as soon as the loopholes or failings of the current rule are detected, and not by applying forced interpretations of rules which have become unsuitable. In any case, fast administrative action is required, giving rapid dissemination to the Administration’s criterion in the application of the new rules

Mr. Gómez Acebo postulated the advisability of creating new instruments for resolving discrepancies which avoid having to wait for the pronouncements of the Supreme Court, which take so long to arrive and do not provide an appropriate solution to those discrepancies. He finished by expressing a wish for the passing of an attractive Corporation Tax, free of short-term dirigisme and with the consensus of the broadest possible spectrum of political groups.

Once the presentations were completed, the panel debate was opened, with the presence of the three speakers plus Ms. Pilar González de Frutos and two other representatives of the Foundation’s Board: Mr. Jesús López Tello (Uría y Menéndez Abogados) and Mr. Alberto Estrelles (KPMG Abogados). Mr. López Tello, from his perspective as “applier of taxes,” commented firstly that the treatment of corporate earnings is not only a question of Corporation Tax, as there are also earnings whose obtainment falls outside the scope of that tax, such as those obtained by individual entrepreneurs and professionals and by non-residents.

In regard to the former, which are subject to IRPF, Mr. López Tello rejected the application of the current modules, which was established at the time as a mechanism for facilitating the management of the tax but has not served to align economic capacity and contributory effort. He proposed its elimination and a return to direct assessment, or its maintenance but with an intention of dynamic management and adaptation to the economic reality by means of permanent updating.

As for corporate earnings obtained by non-residents, he pointed out that the digital economy and commerce have fractured the traditional criteria of linkage between taxation and territory, which must be revised. As for linked operations, he declared their inevitable complexity, which must be assumed, shedding the fear of legislating on the matter but without setting aside the national interests, with the obligation of accepting Spain’s condition as an essentially service-providing jurisdiction, seeking to stimulate the competitive advantages of our most dynamic sectors in the international scenario. Mr. Alberto Estrelles praised the attractive exposition made by Mr. Sanz Gadea and the innovative nature of the solutions he proposed, even if they may not be very viable – as Mr. Sanz Gadea himself acknowledged – but nevertheless they have constructive aspects such as the search for greater neutrality between the various sources of financing.

Mr. Estrelles declared, in general, the need for a reform of the tax which will act in a stable and anti-cyclical manner. As for the relationships between accounts and tax base, he considered that the rules of fiscal adaptation to the New General Accounting System have proved to be insufficient, it being possible to identify 68 motives for off-account adjustments included in the tax return form. Mr. Estrelles believes greater convergence to be advisable, although not in a radical manner.

He referred to certain cases, by way of example and without claiming to be exhaustive, in which a careful review must be made of that relationship between accounts and tax, perhaps seeking new solutions: in regard to the yields on financial instruments held for trading, book impairments in portfolio holdings, reviewing the most recent reform of Article 12.3 of the Taxation Act, the treatment of earnings obtained as a consequence of shareholder-company relationships, or, finally, establishing the restrictions on borrowing and the deductibility of financial expenses by reference to the consolidated corporate group, as occurs in Germany. There followed an open debate between the members of the panel and the public attending until the closing time of the event, which was declared closed by Ms. Pilar González de Frutos, thanking everyone present for their attendance and participation.

Presentations: unfortunately, the full text of the presentations is only available in Spanish.