The tax reform of 2014, for various reasons, did not address the review of wealth tax and inheritance tax despite the heavy criticism of the current regime from both a revenue and a technical viewpoint. The need to revise these taxes in depth was already mentioned in the Report by the Expert Committee for the Reform of the Spanish Tax System published in February 2014 and is on the priority list of almost all the political parties.
It is to be expected that, following the general elections scheduled for 20 December 2015, the Government emerging from the elections will look into the need to make changes in these two taxes, probably in the context of the review of the financing scheme for the Autonomous Regions.
The impact of wealth tax on competitiveness and its potential distorting effect on economic decisions prompted the Tax and Competitiveness Foundation to create a working group to analyse these two taxes as they are currently structured and make proposals for their reform, in relation to their regulatory design and their place in the Spanish tax system and the financing of the Autonomous Regions, and also with regard to the more technical aspects of the legislation.
The result of this analysis is the report titled “Proposals for the REFORM OF WEALTH TAX AND INHERITANCE TAX IN SPAIN” brought out by the Foundation in October 2015, reflecting a collective effort by professionals from the Foundation’s different patrons, academics and specialists from the Tax Administration, coordinated by a team of professionals from Baker & McKenzie.
By means of this report and the specific proposals which the report concludes, the Foundation wishes to take part in the debate on the two taxes under consideration, contributing to the revision and improvement of our tax system particularly in terms of improving competitiveness.
Executive report
General proposals
- To harmonise, through central government legislation approved in accordance with the established coordination procedure with the Autonomous Regions, the substantive elements of inheritance tax and wealth tax,, if the decision is taken to maintain this tax in opposition to the second General Proposal, setting a band of tax rates that allows a margin of political action for the Autonomous Regions and ensuring, to the extent possible, that it is applicable to all the Autonomous Regions, including the Basque Country and Navarre.
- Supress wealth tax in the Spanish State formally and permanently, in line with the recommendation made by the Committee of Experts in 2014, preventing the space left thereby from being occupied by any other similar tax on any level of the Spanish financial administration.
In parallel, the multiple current obligations to provide information to the public authorities on personal assets should be revised, in order to unify their content and means of presentation, avoiding the duplications and inefficiencies of the current situation and ensuring the prevalence of the principles of proportionality and non-discrimination which, in the view of many professionals and of the European institutions, are not always respected by the complex Spanish system.
- If the choice is made to maintain wealth tax, establish a framework applicable throughout Spain in order to:
- Objectify the valuation methods to avoid the legal uncertainty and inequality entailed by assessing similar assets differently and to facilitate compliance with and the administration of the tax;
- Reduce tax exemptions and incentives, except when their elimination could have a significant negative impact on growth and employment, such as in the case of those granted to family businesses;
- Establish a higher exempt minimum than the current figure, mandatory for all Autonomous Regions;
- For the entire Spanish state, set a range of minimum and maximum marginal tax rates within which the Autonomous Regions could freely choose, with a maximum that should not exceed the 1.5% set in France because it is the broadest of those established in neighbouring countries. It is also recommended that the maximum rate should be limited every year based on a reference index (for instance the interest rate on 1-year Spanish Government Bonds) to prevent the tax from exceeding the potential return on the assets.
- Maintain the joint limits on tax payable for income tax and wealth tax, so that the personal tax burden to be borne by taxpayers cannot exceed a percentage of the income earned by them in the fiscal year.
- Retain the inheritance tax, regulating the structural aspects of the tax through mandatory central government legislation on the basis of the following criteria:
- Elimination or reduction of tax benefits, except when their reduction or elimination would have a negative impact on growth and job creation, such as those granted to family businesses, offsetting the reduction in incentives eliminated or reduced by setting a minimum exempt figure which is higher than the current figure.
- Replace the progressive tax rate by proportional rates applicable to each group of family relations, reducing these to three: (I) the nuclear family (spouse, parents and descendants), (ii) relatives to the fourth degree and (iii) others.
- Establish a minimum level of taxation applicable in all the Autonomous Regions with very low fixed rates on transfers between members of the nuclear family and lower than 15% in all other cases, envisaging that the Autonomous Regions may increase the tax rate up to a maximum that should not exceed (i) 5% in relation to the nuclear family and (ii) the rate applicable to capital gains for personal income tax purposes in acquisitions not involving family members.
Specific technical proposals
Together with the general proposals, the report addresses a list of specific proposals for technical improvement, in the event that the taxes continue to exist, in order to increase legal certainty, facilitate the administration of the taxes, avoid distortions in tax treatment and avoid conflicts between regions. Specifically, it is recommended, although certain technical improvements are proposed, that the protection provided for family businesses under the legislation currently governing both taxes should be maintained, bearing in mind the need to guarantee that businesses of this kind can pass from one generation to the text in order to ensure economic development, job creation and steady employment.