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Earned income: Proposals for the energization of the tax regime

Following almost 9 years of research sponsored by Fundación Impuestos y Competitividad since its formation, it was time that attention be turned to Personal Income Tax. It was therefore unsurprising that the Foundation’s Plan of Action for 2019 should include a project relating to this tax.

The specific project in question is based on a partial analysis – very partial one might even say – since it focuses on the treatment given to Earned Income and does so from a perspective which is intentionally biased, since not all the issues relating to this component of income are analysed.

The general objective of the Foundation is to offer a critical review of the tax system, ultimately with a view to possibly improving it, with particular emphasis being placed on the competitiveness of our economy. And it is that particular vision – which is consistent with the Foundation’s commitment to serve the general interest – which has predominated in this research project.

The research set out in this analysis has focused in particular on those aspects of the tax regime applicable to earned income whose reinforcement could do most to improve the competitiveness of our system, because they affect different aspects of international mobility, the forms of compensation which are most effective in attracting and retaining talent, and the long-term economic decisions made by employees, including the all-important “senior management” sector by which efforts to promote business activity and growth are led.

The result of this work, which has been coordinated by professionals from CUATRECASAS – the firm to which the authorship of the study is attributed – is the book entitled “Rentas del Trabajo: propuestas de dinamización de su régimen fiscal” (Earned income: Proposals for the energization of the tax regime)

The book, which has benefited from the traditional collaboration between professionals from the firms of which the Foundation’s Board of Trustees is made up and academics, has two parts. The first part focuses on general considerations, combining:

  • an interesting outline of the challenges facing the labour market and its outlook for the future, which provides some answers but poses an even greater number of questions regarding the solutions the tax system can provide;
  • a general assessment of the taxation of employment, which is difficult issue, but one which clearly needed to be addressed;
  • finally, a statistical analysis, which is essential in order to reflect the importance of earned income, which is the main source of revenues from Personal Income Tax, the tax in the Spanish fiscal system with the greatest tax collecting capacity.

Alongside these general considerations, the second part of the book analyses specific aspects of the tax regime applicable to earned income to which the competitiveness of our economy is particularly sensitive. This includes chapters on:

  • severance payments
  • income from work performed abroad
  • directors’ remuneration
  • payments in kind and multi-year remuneration
  • the regime applicable to inbound expatriates
  • the treatment given to welfare plans, and
  • withholding tax on multiple remuneration in multi-national groups.

The discussion of these issues, in addition to the contributions made by the authors of each chapter, includes input from representatives of the tax administration, other academics and representatives from the private sector. The aim has been to take a pragmatic approach and find points of agreement which can provide the basis for a future review of the tax regime in question, which is ultimately the purpose for which the Board of Trustees hopes this work will serve.

Finally, we have to thank the Asociación Española de Directivos (Spanish Association of Senior Managers), whose contribution to this project – under the terms of the pertinent Collaboration Agreement – also deserves a mention.