Tax rises that deter investment

Spain – unlike many countries in our region – has one of the highest proportions of foreign investment. Being trusted by foreign investors speaks volumes about our “credibility” as a country.

For their savings and capital, investors are looking for the same things as any of us: security and profitability.
However, foreign investors have something special that their Spanish counterparts do not: “the possibility of choice.” If a foreign investor does not perceive that investing in Spain will provide them with a return or security that they deem reasonable, they will simply seek better options elsewhere.

Therefore we should not be surprised if investment in Spain falls, since the PSOE and UP agreement includes no measures designed to attract foreign investment. Instead, they have announced a widespread increase in tax for both Spanish and foreign investors, targeting “big estates”, large corporations, financial institutions and oil and gas companies with particular ruthlessness.

Many of the measures announced were already included in the failed Budget law that led to new elections; others were even prepared by the PP government that was unable to approve them due to lack of time.

A minimum tax of 15% Companies Tax has been announced. In its application, the agreement seems to distinguish between “good” (SMEs) and “bad” (large corporations); while the former enjoy a 25% to 23% tax reduction, the latter can expect a minimum taxation, “no matter what they do”.
This kind of over-simplification not only fails to support the growth of Spanish companies (very few SMEs will want to become a “big corporation”), it also dampens any entrepreneurial or investment spirit. We believe that a company - be it a “big corporation” or SME - that invests, grows, generates wealth, creates employment, and is socially responsible should not be treated the same way those that do completely the opposite. Our constitutional system requires those with greater economic capacity to contribute more, but that cannot lead to a “one size fits all,” mentality, and for this duty of contribution to go unmoderated while wealth and/or employment is being generated.

Another “old acquaintance” that was announced is the increase in taxation on dividends and profits from sales of shares. It is very easy to disguise the profit reduction measure for the “bad guys” when what is really being pursued is “making you pay twice for the same benefits”. The unfairness of this measure is easily understood if we consider that, in the same way that we want foreign investors to pay taxes in Spain, when Spanish companies invest abroad (fortunately, each time more) they also pay taxes in those countries. It can’t be right that Spanish companies “come back” to pay taxes (i.e. pay twice for the same profits) when income from overseas is sent back to Spain in the form of dividends. It is not a matter of tax benefits, but tax justice. The proposed measure establishes double, triple or quadruple taxation when, in addition, the current regulations prevent deduction from losses that occur, i.e., if you “win” you pay, and if you “lose” you also pay. The worst thing is that this “double taxation” also seems likely to be established for Spanish dividends and capital gains, which casts doubt on the constitutionality of the proposed amendment.

The French example

Other measures announced relate to the establishment of a tax on financial transactions and the so-called digital tax. Both measures were also already announced by the PP government. Setting these taxes makes sense only if done in a coordinated manner by all EU or OECD countries. Being among the first to establish this can only lead us from bad to worse. Take, for example, what happened to our French neighbours. By rushing to establish a similar tax on technology companies, they motivated the US to consider approving a 100% tax on French wines.

When it comes to applying a tax to financial transactions, we also believe that the EU should be expected to make its own, otherwise our economy would suffer to the benefit of other community countries. Let’s not forget that there is such thing as freedom of capital movement.

Individuals are not immune to the tax increase: the agreement announces an increase of between 2 and 4 points on incomes over €130,000 and €300,000 respectively. After this increase, the marginal rate in personal income tax for those taxpayers would be around 50%. These increases can hardly be expected to attract talent and/or new companies to set up in Spain.

Ultimately, the vast majority of the measures are “old acquaintances” that were already present in the Budget law that led to new elections. Unfortunately none of them have a clear focus on generating growth by attracting new investors. The total opposite applies. When all the economic indicators predicted lower growth in 2020, the approach doesn’t appear to be an advisable one.