Wednesday, May 18

The Budgets still foresee 42,000 million in tax deductions that the Government has promised to reduce

Little is known for now about the future tax reform that the Government plans to propose next year, once it receives the report of the committee of experts that works on the basic lines to form a new tax system in Spain. However, it can be ventured that one of the objectives will be to review all those tax benefits (deductions, exemptions, etc.) that reduce the State’s income and do not meet the objectives that were initially set. For the year 2022, the bill for these benefits will amount to 42,000 million euros, as shown in the draft of the General State Budgets registered in Congress.

Budgets point to record collection with VAT and personal income tax at record highs

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The Government made a commitment to Brussels in the Transformation, Recovery and Resilience Plan with which European funds were requested to analyze a fortnight of these benefits because “they distort progressivity and redistribution.” “It is proposed to carry out an exhaustive review of the existing tax benefits in order to verify if they meet the objectives for which they were approved and if the cost that they entail, in terms of revenue reduction, is justified,” the document pointed out. sent to the community authorities.

The Minister of Finance, María Jesús Montero, once again directed her eyes on the presentation of the Budgets towards a future reform of the Corporate Tax focused on reducing the exemptions and reductions that have been implemented in the past. “The Corporation tax is now providing half the yield it did years ago, we must analyze the bonuses, exemptions, which make it a Gruyère cheese that behaves in a non-progressive way,” he added, pointing to tax policy of the PP.

The Executive set as a guide to review tax benefits the ‘Spending Review’ of the Independent Authority for Fiscal Responsibility, a report presented in 2020 that analyzed the use of certain tax deductions and benefits and concluded that some were regressive and did not comply with their initial goal. Recently, the president of the body that oversees public accounts, Cristina Herrero, took up this issue and pointed out that the future tax reform should be more aimed at reviewing these tax benefits than at creating new taxes or raising those that already exist. “If it is limited to that, it does not explain why it has taken so many years to address the tax reform,” said Herrero.

This does not mean that they will be eliminated completely, many of them have redistributive functions or seek different objectives that can be met. Both the Treasury and Airef have set their sights on those that do not meet the objectives that were set. With this, the plan is for the Spanish tax system to reach a higher level of efficiency and to be closer to the data of other EU countries, one of the pending tasks contained in the Recovery Plan.

The biggest benefits, in VAT

The 41,939 million euros – 9.7% more than expected for 2021 – that the Government has included in the Tax Benefits Budget for 2022 quantify only those that depend on the State. The figure would be much higher if the data from the autonomous communities and town councils were added, which have the capacity to apply deductions and bonuses in the different taxes over which they have powers. To put it in context, the State foresees in 2022 a tax collection of 232,000 million euros.

This is how the tax benefits are distributed in the 2022 PGE

Amount of fiscal benefits budgeted for 2022 in the General State Budgets, broken down by tax. Click on each tax for more details

Source: Ministry of Finance

The tax that contains the highest budgeted fiscal benefits for next year is VAT. It accumulates 22,400 million euros, more than half of the total. For this calculation, tax benefits are considered for products that are at a reduced rate (10%), the main section being more than 9,600 million, super-reduced (4%) or exemptions. Some of these reductions have clear social objectives, such as basic necessities, and on others there are open debates to reduce them even more, as in the case of feminine hygiene products. However, the Airef concluded in the report that serves as a reference for the Government to study the different tax credits that reduced rates benefit the highest incomes more, because they consume more and criticized that Spain has too broad a catalog with respect to other countries of discounted products at reduced rates. For this reason, he advocated a “gradual” revision and compensate it when necessary with spending policies. A first measure proposed by Airef, which has already been approved in the 2021 budgets, was the increase in VAT on sugary drinks.

The VAT, which is budgeted for next year to collect 75,000 million euros, being its historical record, is one of the pending tasks that Spain has to approach the tax burden of the European Union. The weight of this income over GDP, 6.5%, places Spain in 23rd place out of 27 EU countries and below 7.2% on average.

Another large item of tax benefits is that which refers to personal income tax. They represent 11,220 million euros for next year, compared to an expected collection that will exceed 100,000 million euros for the first time in history. In the income statement, the deduction that subtracts the most income from the State is that of large families, which represents 1,885 million euros. Other measures such as exemptions for disability pensions or deductions for maternity also account for more than 1,000 million annually. The reduction for joint taxation, questioned by Airef and which caused a small fire in the Government when the plan was sent to Brussels, reaches 964 million.

Incentives for investment in a habitual residence, reduction in income from work, or contributions to private pension plans are other main tax benefits that operate in terms of income. This last point has been another of the tax incentives that have been reduced. In 2021 the money that could be invested – and therefore reduced in personal income tax – in an individual private plan per year was reduced from 8,000 to 2,000 euros, and in 2022 it will be reduced again to 1,500 euros. Although, part of this tax benefit will be redirected to employment-related plans, the complementary alternative to the public pension that the Government wants to encourage. In total, there are about twenty tax benefits that operate in the field of personal income tax.

The third of the great taxes is that of Companies, which taxes the results of the companies. The Budget estimates the tax benefits at 5,600 million euros. The most important of these items are all those that produce adjustments to the companies’ tax base, which amounts to slightly more than 1,000 million euros. Deductions for investment in R + D + i add another 891 million. Another important item is the one that affects those companies that have a lower tax rate than the general regime. This is the case of the Socimis, whose tax benefits “cost” the State 235 million, or the 565 million that investment companies, such as Sicav, stop paying.

The Corporation tax contains the biggest fiscal novelty of this year, the inclusion of the minimum rate at 15%. However, this regulatory change has been decaffeinated and will only contribute 50 million in 2022, its main impact being in 2023. Montero acknowledged in the presentation of the Budgets that it was a “retouch” and that the reform of this tax should be “more ambitious “, pointing to the open international debate around this tribute. Montero pointed, precisely to the deductions that allow that the collection by Societies is not what it should or what it came to have in the years prior to the financial crisis.

Tax benefits grow with recovery

The 2022 tax benefit budgets project that those applied to VAT will increase by more than 1.8 billion euros over the next year in relation to what is expected for 2021, especially due to the reduced rate of 10%. This growth appears justified in the detail of the Budgets due to the improvement in economic activity, which boosts consumption. To this are added other factors such as the effects that are maintained by the reduction of VAT on surgical masks or on electricity, changes that have been presented as temporary.

The most notable increase occurs in the profits in Corporation Tax. They shoot up 51% compared to the budget for 2021. The Budget report attributes it to the increase in profits for investment companies, which had a better year than the one produced in 2020, or the increase in the results of companies for the improvement of the economy, which in turn causes an increase in the tax benefits to which they can be benefited. Despite the fact that in the 2021 budgets the result not distributed by the Socimis began to be taxed with 15%, this benefit also shoots up in 2022.

Personal income tax is the field where the forecast for tax benefits remains most stable for 2022, with a growth of just 1.7%. Only the deductions for large families stand out, which grew by 220 million, or those referred to income from work, which grew by a similar figure.