TAX REFORM 2014

TAX REFORM

Dear friend readers and clients,

The Spanish government has just approved a limited, progressive reduction on taxation which will come into effect in 2015 and 2016 and I would like to comment broadly on it:

1)      The number of progressive income tax brackets is reduced from seven to five, the maximum tax rate is cut from 52% to 45% and the minimum tax rate will be 19%. Professional withholdings and rental income taxation is cut from 21% to 19%. Reduction to 5 tax brackets and reduction of tax rates

 

taxable income	tax rate
	2015	2016
Up to 12.450,00 euros	20%	19%
From 12.450,00 to 20.200,00 euros	25%	24%
From 20.200,00 to 35.200,00 euros	31%	30%
From 35.200,00 to 60.000,00 euros	39%	37%
From 60.000,00 euros onwards	47%	45%

 

1)      Savings will be taxable at a minimum rate of 19% (now 21%) and a maximum rate of 23% (now 27%). Lower tax rates, but progressiveness remains:

taxable income	tax rate
	2015	2016
Up to 6.000 euros	20%	19%
From 6.000 to 24.000 euros	22%	21%
From 24.000 to 50.000 euros	22%	21%
From 50.000  euros onwards	24%	23%

2)      The tax rate of the companies’ tax is reduced from 30% to 25%, on the profit, which can even go down to 20% if 10% of the profit is taken to the account of reserves for capitalization, among others; the tax rate for entrepreneurs remains 15%.

 

Findings:

 

1.       The reduction is partial and insufficient. It is partly understandable because our deficit still needs to be curtailed and the present reduction of taxes entails an approximate cost of two billion euros. This cost can partly be compensated with the expected positive effects on consumption –therefore, on our GDP- by the increase of available income caused by the lower taxes. In fact, Brussels does not seem very happy with such measures which are contrary to the reduction of deficit because they would rather hear of an increase of V.A.T. and cuts in social contributions.

 

2.       As usual, there will be small sprint in the reform, since it seems that certain deductions are going to disappear, likewise the maximum reduction on contributions to pension plans is going to be cut although it is going to be compensated with the no taxation on saving or insurance products invested over at least five years

 

3.       Most companies already pay a reduced companies’ tax because they are very small companies –micro PYMES- so the cut in the tax rates is not going to affect them.

Summing up, this reform is, in some aspects, an improvement which has more to do with election propaganda rather than with effectiveness, nonetheless, cuts in taxes are always very welcome.