A last chance to declare - tax amnesty and an end to tax fraud in Spain?
Spanish taxpayers have been given their last chance to clean up their tax affairs.
New measures, just introduced by Rajoy's Government, provide taxpayers with an amnesty for tax fraud. They can now declare previously hidden income and assets by paying a flat 10% one off tax charge. The deadline for the amnesty is 30 November 2012.
This is the carrot.
The stick is a change in the tax rules that will eliminate the current four year tax prescription rule.
Spain has one of the largest 'grey' economies in the EU.
It has been estimated by analysts that as much as 25% of the Spanish economy goes undeclared and that the amount of tax evaded is 83 billion Euros each year. To put this into context, the reports estimate that this is 85% of Spain's healthcare budget.
Spain is not alone in having this problem and even countries with a reputation for social responsibility have high levels of tax evasion. The same report lists Germany (15%), Denmark (18%) and the UK (13%). No surprise that amongst the bad performers are Greece (28%) and Italy (27%).
The new tax amnesty
New tax controls designed to streamline tax fraud counter measures were announced in January 2012 by the vice president of the Government Soraya Sáenz de Santamaría.
In 2011, tax fraud investigations raised 10.4 billion Euros for Spain and the Government hopes to raise from the amnesty a further 2.5 billion Euros this year from taxpayers making voluntary disclosures.
It is speculated that the 2.5 billion Euros estimate arises from the fact that the Spanish tax office now has information that reveals Spanish residents who have squirreled away 25 billion in Liechtenstein bank accounts.
The tax office has just issued the amnesty tax forms and has responded to concerns expressed by tax professionals on how the system will work.
A simple tax filing and a 10% one off tax payment is all that is needed to bring hidden capital into the light of day.
This is a seriously good deal when you consider that income tax is now as high as 57% in Spain and that when tax fraudsters are caught they have to pay fines as high as 150% of tax defrauded, plus interest.
This generous amnesty is justifiable because the Government will be able to raise 2.5 billion Euros with almost no effort at all, which, in these times of civil servant staff cutbacks, will be a major benefit to the Spanish economy.
An end to tax prescription for tax fraud
The changes to the tax law relating the current four or five year prescription are profound. Tax prescription is the limit in the number of years that the tax office must act, after which no legal action is possible against a tax offender.
The text of the new rules, expected to come into force on 1 December 2012, has been released in draft. The new rules eliminate tax prescription completely for tax fraud.
Added to this, the new rules indicate that some kind of annual declaration of foreign assets will be required for all tax payers, perhaps similar to the annual wealth tax declaration. This will close the circle definitively on hidden foreign assets.
When hidden capital is discovered, the tax office will be able to treat the total amount discovered as an unjustified capital gain and apply maximum tax rates, i.e. up to 57%, plus fines and interest.
Legitimate tax planning in Spain has never been a well-developed science because it has been so easy to simply not declare, take the risk for four or five years and then crack open a bottle of champagne when the tax prescription period ended.
People will think more than twice in future, in the knowledge that the law will not let them get away with tax fraud.
Act now or look over your shoulder forever!
The tax amnesty procedure is straightforward and recent statements from the tax office have removed most of the doubts of the professional community. There are still a few details that have to be cleared up so care is still needed and a few more months delay is advisable before making the declaration.
From the perspective of the not-so-diligent taxpayer, this is a golden opportunity to clean up the past and must not be ignored.
By the way, the age old practice of not declaring an inheritance and then waiting for four years. Forget it!
These are profound changes and are likely to produce a significant effect on the behavior of businesses and individuals in Spain.
Alistair Spence Clarke FCA