MADRID (Reuters) - Spain increased taxes on spirits and tobacco and eliminated some corporate tax deductions on Friday, but the measures fall short of calls for deeper changes to a system with one of the lowest revenue rates in Europe.
The tax changes are part of the government’s battle to raise public income hit by an economic slump and will boost revenues by around a half a percentage point of gross domestic product, per year, a spokesman for the Treasury Ministry said.
Spain’s tax revenue has been battered by a five-year off-and-on recession after a decade-long property bubble burst leaving the country with one of the highest public deficits in the euro zone.
“We’re talking about having a tax system that is comparable to those of countries that have the world’s most competitive companies,” Treasury Minister Cristobal Montoro said at a news conference on Friday where he announced the changes.
“In terms of revenue the tax system will be more equitable.”
The previous and current governments have focused mostly on spending cuts to balance the books.
Spain’s 2008 property crash practically wiped out revenue stemming from land development and real estate, dragging tax income as a percentage of GDP to 36.4 percent from 41.1 percent in 2007. The drop of over 50 billion euros put the tax take far below the European Union average of 45.4 percent.
“The revenue loss is what is unique and particularly acute in the Spanish case because of the high dependence of government revenues on activity in the real estate sector,” said Jose Manuel Campa, who was economy secretary under the previous Socialist government.
Spain also raised the central government’s spending ceiling for 2014 by 2.7 percent and marginally increased overall economic growth expectations for 2015 and 2016.
On Friday afternoon, the government repeatedly changed its estimates for the total impact on revenue from the new tax measures, finally settling on a yearly revenue boost of just under 5 billion euros ($6.5 billion).
The measures include a 10 percent rise in the alcohol tax, which does not affect wine or beer and therefore covers only a small proportion of the alcohol bought in Spain each year.
The tobacco and spirit hikes go into effect immediately.
Montoro said the government would scrap corporate tax breaks for losses in foreign operations or investment portfolios, which a spokesman from the ministry said were worth 3.1 billion euros of revenue a year.
This change would go in to effect retroactively from January 1.
Once all corporate tax deductions are taken into account, large Spanish companies pay much lower rates than the official 30 percent corporate rate, sources within the tax system said.
In fact, few of Spain’s blue-chip companies pay more than 10 percent of earnings, according to the sources.
Spain will also raise taxes on so-called greenhouse gases following a direct petition by Brussels to introduce higher environmental taxes.
A property tax hike, due to be removed at the end of 2013, will be extended for two more years, raising 700 million euros extra a year, according to a Treasury Ministry source.
The European Union and International Monetary Fund have been pressuring Spain to reform its tax system, specifically eliminating a super-reduced value added tax band of 4 percent and ditching a range of corporate and income tax deductions.
Only 42 percent of Spanish goods are charged at the full sales tax rate compared to 82 percent in Germany and 71 percent in France.
Treasury Minister Montoro said mid-June he would create a panel of experts before the end of the year to advise on fiscal reform amid pressure to increase the country’s tax base.
Economy Minister Luis de Guindos has denied, however, that the government is considering raising sales tax on items that enjoy the ultra-low rate, which is rare in Europe and includes such items as bread, milk and wheelchairs.
Moving these items into baskets which attract a higher rate could increase revenue by 8.7 billion euros according to estimates from Spanish think tank Fedea.
Spending cuts in government ministries, health, education and other areas have reduced the public deficit but focus is now on how to increase tax revenue to shrink the deficit further.
Attacks on fraud which have drawn in the likes of the King’s son-in-law and Barcelona footballer Lionel Messi belie the fact that Spain’s tax take is still one of the lowest in Europe.
“The tax office has focused its efforts on high-profile cases, which provide headlines on their crackdown,” head of tax-inspector union GESTHA, Jose Maria Mollinedo said. ($1 = 0.7691 euros)
Additional reporting by Sonya Dowsett; Editing by Fiona Ortiz and Toby Chopra