UPDATE 2-Spain tax proposal calls for company rate cuts, VAT hike

Fri Mar 14, 2014 3:36pm EDT

* Govt-appointed committee presents tax recommendations

* Corporate rates should be cut, loopholes closed

* Govt hopes for economic boost before 2015 elections

By Paul Day

MADRID, March 14 (Reuters) - Spain must cut individual and business tax rates and increase levies on consumer items including alcohol and fuel to repair one of Europe's lowest tax takes, according to proposals presented to the government on Friday.

The government will use the non-binding recommendations from a group of experts to create a tax reform bill that will go to parliament by June, Deputy Prime Minister Soraya Saenz de Santamaria said.

Prime Minister Mariano Rajoy of the centre-right People's Party hopes a major tax overhaul will energize an incipient economic recovery and create jobs as he heads into an election year next year.

A 26 percent jobless rate - one of the highest in Europe - and painful austerity measures and tax hikes to rein in a steep fiscal deficit over the past two years, have hit his popularity.

Many elements of the proposal, such as income tax reduction for lower earners, were already unveiled by the government.

The new tax rules will come into effect from the beginning of 2015.

The reform aims to widen the tax base to make the most of an economic turnaround, rather than directly increase tax revenue, which fell to 36.4 percent of economic output in 2012.

The 444-page proposal from the experts contains 125 reform proposals and 270 tax changes which they claim would boost gross domestic product by 0.2 percent and employment by 0.3 percent over three years.

"The experts are agreed that comprehensive reform of the fiscal system should allow growth and creation of employment, accelerate fiscal consolidation and contribute to the reduction of the high levels of external debt of the Spanish economy," said Manuel Lagares, head of the committee that wrote the report.

Spain's economy has been declining for most of the last five years, hitting revenues and leaving the government struggling to reduce one of the highest public deficits in the euro zone.

LOOPHOLES, EXEMPTIONS AND BLACK ECONOMY

Spain's tax take, over-reliant on revenue from a property boom which turned to bust in 2008, has fallen almost 50 billion euros ($69.64 billion) in the last six years and is plagued by complicated loopholes, exemptions and a massive black economy.

Commissioned by the Treasury Ministry last year, the report calls for cuts to income taxes and reduction of the corporate tax rate and a progressive reduction of social security payments by companies.

A corporate tax rate cut to 20 percent from 30 percent would be accompanied by the removal of numerous tax breaks which have permitted most large companies to pay an effective rate of less than 5 percent.

Meanwhile, the report includes a call for some products and services to be moved out of the reduced value-added tax (VAT) bracket of 10 percent and put into the standard 21 percent category. Reduced tax rates should be maintained for the tourism sector, which generates more than 10 percent of GDP, it said.

Housing and public transport would also continue to be taxed at a reduced rate, though the report did not list the items which would suffer a tax hike.

The proposal stopped short of removing items from the 4 percent bracket, aimed at basics such as bread, milk and school books and was careful to note that any hikes would not have a substantial effect on private consumption.

It also called for increases to environmental, alcohol and electricity levies as well as measures against tax fraud. The underground economy is believed to be worth around a quarter of Spain's economic output.