Tax Advisers - Deloitte

Spain
Tax reforms keep pace with
economic growth
Ángel Calleja
Garrigues
Madrid
It has been said that you can only successfully reform a tax
system during periods of economic expansion and growth
and that changes implemented during periods of recession
simply come too late. If this is the case, then Spain’s tax
regulators have certainly done their job during the last ten
years.
Over the last decade, Spain’s economy has done extremely
well, outperforming that of its EU partners and growing at
roughly twice their average rate. This prosperity has brought
our economy straight to the front line of the international
business arena, with our multinational enterprises becoming,
for the first time, real actors on the global stage, completing
very significant deals in almost every part of the world.
In the meantime, since 1994, intense behind-the-scenes work by our tax legislators has
been carefully aimed at bringing our tax system into line with, and even beyond, that of
more modernized countries. Thus, for example, the drive towards economic globalization
set to engulf every developed economic system was well anticipated by our lawmakers,
who, among other measures, effectively regulated such tax vehicles as ETVEs – foreignsecurities
holding companies – in a very competitive manner; a highly attractive
exemption method for qualifying foreign-source dividends and gains, where expenses are
deductible regardless of the tax exemption applicable to the main income; an additional
exemption for profits earned by Spanish taxpayers from foreign-operating permanent
establishments; an ambitious and well-targeted expansion of our international tax treaty
network; and a provision enabling the tax deduction of goodwill on certain types of
foreign acquisitions. One could well argue that the main driver behind all these changes
was our legislators’ conviction that, since the times of Columbus, whenever the country
has chosen to finance any form of ambitious major international expedition, a period of
economic growth and prosperity in Spain has followed.
New income tax law
2006 has been no exception to the trend of recent years and tax reforms were once
again on the agenda until, in November, the parliament finally approved highly
significant new tax measures, including a new Personal Income Tax Law introducing
a reduction and simplification of the rates, plus rules for a more neutral treatment of
savings income. The new law is effective from January 1 2007.
If we focus our attention on the taxation of corporate profits, the amendments now
approved, set to enter into force in 2007 and beyond, are again of great relevance
since, for the first time ever, they influence essential aspects of the calculation of
corporate income tax, such as the rate and the system of existing tax credits.
In this connection and particularly worthy of note, Spain’s general corporate income
tax has now fallen by five points from 35% to 30% in only two years, while so-called
non-technical tax credits and incentives, mainly aimed at the promotion of certain
activities by Spanish corporations, such as export activities, are suppressed, either
gradually or with immediate effect. The end result of all these measures, engendered
by international competition for tax bases as well as the harmonization measures
implemented to date in Brussels and Luxembourg, should be a more balanced and
competitive tax system, effectively consolidating a framework which is attractive to
both foreign concerns investing in Spain and Spanish entrepreneurs wishing to pursue
a solid expansion of their operations abroad.
Finally, transfer pricing is the undisputed star of this year’s reform. For the first time
ever, relevant changes have been introduced in this field, which had previously merely
adhered to general OECD principles. From January 1 2007, the burden of proof will
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