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SPAIN: An Introduction to Tax: Indirect Tax

Spanish VAT Services. Fernando Matesanz (Managing Director)

The global situation generated by the COVID-19 crisis has shaken the foundations of economies around the world, putting even the world's most solvent economic systems to the test. The severe economic recession that practically every country in the world is suffering is generating very high levels of stress in fiscal systems all over the world. Spain, of course, is no stranger to all this. Indeed, the impact on the Spanish economy and other southern European countries is particularly significant as a result of their high dependence on tourism and the restaurant and leisure services sector.

In order to make good on the famous phrase "we will emerge stronger", there is still time to do things right. In this sense, we strongly believe that VAT and all consumption taxes in general—the so-called Goods and Services Taxes (GST)—are an important tool to overcome the current global situation.

Today, more than 130 countries around the world have a value-added tax or GST and this number rises constantly, so when this article sees the light, this figure is likely to have increased.

All this means that VAT—in all its forms and aspects—is a fast-moving and constantly changing tax that requires consulting companies and VAT professionals in general to make a major effort to adapt thereto. Therefore, VAT can be said to have an exciting and promising future ahead.

Spain, as a Member State of the European Union, has a privileged position in this regard. Our common VAT system—with all its room for improvement—is replicated by a large number of countries in the world that aim to have a system for indirect taxation. We have many years’ experience and extensive knowledge that we can export to these countries, which undoubtedly generates major business areas, not only for expert VAT advisors, but also to encourage a large number of activities such as institutional relations between different countries, trading goods and services between economic operators or expanding upon existing VAT reciprocity agreements. We must be aware of this and take advantage of all these current opportunities which will undoubtedly continue to arise in the future.

Notwithstanding all of the above, our current VAT system can be improved and must be adapted to the new economic reality (digital economy, fintech, relocation of activities, etc.). Within the European Union, Spain, as one of its main economies, must lead these changes and be at the forefront of the new common VAT system.

In our view, the following areas must lead the modernisation of the current European VAT System.

(i) Digital economy and delocalisation of activities.

The sharing economy has entered our lives with force and all signs indicate that it is here to stay. This type of economy will certainly continue to grow in the future. The current VAT systems worldwide have proven to be old fashioned when it comes to the digital economy. Our current rules do not solve the main issues and problems regarding the taxation of this type of activities that, unlike other traditional business, are carried out with minimal interaction between the parties involved in the transactions. Nowadays, a huge number of services are supplied electronically and in an automated way (finance, learning, insurance, medical, events, healthcare etc.). The fact that all these services are provided in an automated way through information technologies cannot lead us to ignore the nature of the service itself and how they should be taxed for VAT.

Moreover, nowadays it is possible to carry out all kinds of services in a delocalised way. With the simple help of a computer and an internet connection it is possible to offer the world all kind of services.

Spain, with its privileged location and natural conditions, can clearly benefit from this trend of delocalisation of activities. For this reason, Spain should lead the debate on how to deal with this new way of operating in the field of VAT. The debate should be moderate but rigorous, providing legal certainty for operators and, of course, ensuring fair and reasonable taxation of the parties who carry out this type of activity. Spanish companies and advisors are in the best situation to do all this.

(ii) Tackling fraud. 

At the heart of all measures taken in the field of VAT must always be the idea of stamping out VAT fraud. The level of VAT fraud is still too high. It is everyone’s duty to tackle this problem. We must assume that fraudsters are smart, true multinationals whose sole aim is fraud. For this reason, measures must be rigorous but at the same time reasonable. All measures must go in the direction of encouraging co-operation between organisations and administrations. The easy way of overburdening the taxpayer with additional obligations can never be the general rule.

(iii) The disappearance of traditional returns and the modernisation of VAT management.

Spain has been at the forefront of real-time declarations with the implementation of the so-called SII back in year 2017. Although the measure can represent an excessive administrative burden for certain taxable persons, Spain has managed to reduce its VAT Gap in recent years. It is difficult to determine with certainty whether this reduction refers only to real-time declarations. Spain has been a pioneer in this type of reporting; our companies and advisors have been able to adapt in record time to this new way of sending information to the tax administration, and we believe that in the coming years this will be the trend in other countries.

Any such measures must always be duly considered and respect the principles of proportionality and neutrality of VAT. We must accept that the way we interact with tax administrations must change. Nevertheless, this change must not become an overly burdensome, unjustified and disproportionate requirements. Otherwise, the supposed efficiency that we hope to achieve will turn into an insurmountable barrier especially for smaller companies.

In this respect, we cannot forget that VAT is a tax, which is governed by a number of complex regulations that need to be interpreted in a proper manner. Therefore, while we must admit that automation and real time reporting is the future, we remain convinced that not all aspects of VAT can be part of such automation. For this reason, we strongly continue to call for the fundamental role of the VAT advisor as a crucial part for a correct and proper interpretation of the existing VAT rules, giving legal certainty to stakeholders.

We would like to finish this article saying that we strongly believe that VAT and all consumption taxes have a great future ahead and that they can be a game changer to the current global economic situation. Spain cannot miss this train and, as one of Europe's leading economies, its businesses and advisors must be at the forefront of all changes in the VAT field that will take place in the coming years.