"Reconsider the exemption of internal capital gains and exemptions for double taxation that do not strictly respond to avoid double taxation". The PSOE introduced this convoluted statement of principles in its Alternative Budgets of 2018, when it was in opposition only half a year ago. Now in the Government, Pedro Sánchez intends to comply with the spirit of that proposal. It wants companies to pay more for the benefits they get from their foreign affiliates. For this, he values limiting the exemption for double taxation on foreign dividends, as confirmed by government sources.
This exemption comes basically from bilateral agreements that Spain has signed with other countries to prevent companies from paying twice for the same tax. The government wants the exemption to drop from the current 100% to the 95% environment to raise 1 billion more in corporate tax.
The annual tax collection report of the Tax Agency shows that the exemption of double taxation is the item that most affects the calculation of the tax base of corporate tax and, therefore, the one that contributes the most in large companies to the great difference between the effective rate (6.14%) and the nominal rate (25%).
77% of the profits come from outside
The figures of the Agency reveal that the companies registered a positive accounting result of 198,202 million euros during 2016, the last year with available data. Of this amount, companies subtract 105,332 million dividends and benefits they have received from their subsidiaries in other countries to avoid double taxation. If the government only allowed 95% of that amount to be reduced, Spanish companies would have to recognize 5,267 million more in their tax base. As the effective rate of corporation tax is around 20%, companies would spend 1.057 million more for this tax.
Hacienda also offers the same data for consolidated groups (multinationals). And the figures are more illuminating: of the 111,788 million profits declared by these corporations in Spain, 77% came from abroad. And that's why the effective rate on the accounting result is so low, at 6.14%. Something that serves as ammunition to the leftist parties, such as Podemos, to criticize the aggressive tax planning of the multinationals.
Some corporations take advantage of the fact that other countries offer a more advantageous tax system to transfer a part of their more lucrative businesses to those countries, where they pay a much lower corporation tax.
This tribute is precisely one of the most worrying among policy makers. While the rest of tax figures are at maximum, the corporate tax is the only one that still remains well below the amount collected in 2007, before the crisis. The increasing internationalization of Spanish companies as a result of the crisis and, above all, the fact that banks and real estate companies reap results very far from those obtained in 2007, before the Great Depression, partly explain this fiscal imbalance. It also contributes to the slow awakening of the collection in companies the amount of negative tax bases accumulated during the crisis (past losses generated rights to reduce taxation in the future).
Two ways to subtract foreign benefits
José Ignacio Alemany, president of the association of tax advisors (Aedaf), explains the operation of the double taxation exemption. It specifies that in reality there are two ways for companies to subtract the results of their subsidiaries. On the one hand, there is the double taxation exemption, which reduces the accounting result. And on the other hand, the deduction for foreign dividends that is applied in the installment payable. Both figures pursue the same objective and differ in the requirements they demand. The Tax Agency also describes it in its annual report: "Until 2014 a part of the income from abroad was considered exemptions that were subtracted from the accounting result and another part were canceled by deductions in the quota". With the tax reform of the PP that was applied as of 2015, practically all these rents are treated as exemptions to the accounting result. This measure applies to companies with shares of more than 5% of capital or that have invested at least 20 million in the capital of another company. These companies do not pay since 2015 for the dividends of their foreign subsidiaries or for the capital gains obtained from the sale of these shares.
This fiscal change caused the distance between the declared result and the tax base to be extended. "In the first year of application, the tax base decreased despite increasing corporate profits," says the Tax Agency.
Notice from the experts
Some tax experts warn that the measure could have a perverse effect: that the companies decide not to repatriate the profits of the subsidiaries and that the collection will be reduced. Another problem that this measure may encounter is that some double taxation agreement signed by Spain stipulates that the exemption must be total. In that case, there could be some legal obstacle. Finally, they warn that companies can appeal the measure before the courts, alleging that the principle of double taxation is violated.