tax

The move would help mop up the glut of new holiday-homes on the coast, argue developers.

The G-14 association of Spain’s leading developers says it will ask the Government to introduce mortgage interest tax relief on holiday-homes to stimulate demand and deal with Spain’s problematic over-supply of empty new holiday homes on the coast.

The Government has just reintroduced mortgage interest tax relief on main homes, despite that fact that it favours owner-occupiers at the expense of those who rent, and makes it harder for Spain to reach its stated goal of increasing the rental market. Developers want a similar tax break for holiday-homes.

Some industry voices like Antonio Carroza of Alquiler Seguro – a rental company – have wasted no time in describing the request as “irresponsible”. He believes it is wrong to use public money to subsidise “large developers so they can sell second homes that should never have been built,” he said, quoted in the Spanish press.

In any event the tax relief would only apply to Spanish residents, not foreigners buying holiday-homes in Spain.

The G-14 has also called on the Government to reduce the ITP sales tax on resale properties.

The move would help mop up the glut of new holiday-homes on the coast, argue developers.

The G-14 association of Spain’s leading developers says it will ask the Government to introduce mortgage interest tax relief on holiday-homes to stimulate demand and deal with Spain’s problematic over-supply of empty new holiday homes on the coast.

The Government has just reintroduced mortgage interest tax relief on main homes, despite that fact that it favours owner-occupiers at the expense of those who rent, and makes it harder for Spain to reach its stated goal of increasing the rental market. Developers want a similar tax break for holiday-homes.

Some industry voices like Antonio Carroza of Alquiler Seguro – a rental company – have wasted no time in describing the request as “irresponsible”. He believes it is wrong to use public money to subsidise “large developers so they can sell second homes that should never have been built,” he said, quoted in the Spanish press.

In any event the tax relief would only apply to Spanish residents, not foreigners buying holiday-homes in Spain.

The G-14 has also called on the Government to reduce the ITP sales tax on resale properties.

Lawyer Raymundo Larraín Nesbitt argues the wealth-tax is a desperate and counter-productive measure from a flailing government.

By Raymundo Larraín Nesbitt. Lawyer – Abogado

In 2007 Spain’s Socialist President, Mr. Jose Luis Rodriguez Zapatero (pictured above), was mulling over a second term in the upcoming presidential elections of 2008. He was on the prowl for some landmark tax concession that would confidently enable him to coax the middle class vote giving him the key to a landslide re-election. Despite being previously briefed, by his well over six hundred in-house presidential advisors, regarding the unfairness of Spain’s wealth tax (patrimonio) and how its goal of taxing the “super-rich” was self-defeated, as in truth no affluent taxpayer had ever paid it, he remained largely unconvinced.

A prisoner of his deeply embedded political beliefs, he set about on a campaign of his own and privately contacted, one by one, Spain’s upper crust. Much to his surprise, but not to that of tax experts, none of Spain’s Forbes’ list billionaires was liable to pay for this tax for a number of different legal reasons. Convinced at last he had an ace up his sleeve; he decided to play this trump card and announced the abolition of Wealth tax stealing the limelight only three months ahead of national elections.

“Wealth tax falls on the middle class but not on the higher class who easily find (legal) mechanisms to elude it”

“The suppression of Wealth tax will be a stimulus for savings in this country as this tax, by definition, curtails it”

“Wealth tax is unjust and it is only just to abolish it”

Mr. Jose Luis Rodriguez Zapatero, 2007.

The fact is Wealth tax was never abolished; it was merely suspended as from the 1st of January 2008. Which means it was “put on hold” by the Government until an appropriate time came for it to be reintroduced. Erm, now?

Fast-forward a few years and only two months ahead of this year’s national election this tax is restored by the same president who only three years ago claimed it was unfair and taxed middle classes’ savings. By Royal Decree 13/2011, of 16th September, Spain’s Wealth tax has been formally restored being published in Spain’s Official Law Gazette on Saturday the 17th September 2011. As from 2012 it will be enforced merely as a “temporary” measure lasting only two years and will be affecting an estimated 160,000 taxpayers. In Spain temporary legal measures have been known to last over a century, so I advise this is taken with a pinch of salt. Wealth tax itself was formally introduced in 1977 as a temporary tax and has been going on strong for over three decades now; the irony.

Personally, I would not object to this exceptional temporary measure if the super-rich were truly taxed by it. But in my professional career I’ve seldom come across an affluent person paying for this tax. In my experience it is the middle class, and of course non-residents at large, who pay for it.

The reason given is that the tax-free allowance has now been significantly tweaked raising it six-fold to avoid levying unnecessarily the middle class (besides other generous provisions). The middle class are no longer going to pay for this tax; that much is true. The super-rich never paid it and somehow I doubt they’ll be paying for it now, so nothing new.

But don’t take my word for it. Mr. David Taguas, former Head of Mr Zapatero’s Economic Office, has made revealing public declarations this very week on the matter:

“The rich have never paid Wealth tax (in Spain). At a time in which we are undergoing a savings crisis, it will only assist thwarting (much-needed) savings…bringing it back makes no economic sense. In 2007 there were only 130,000 taxpayers with estates ranging from €700,000 to €2,5mn; among them there were no rich”.

He went on to add this tax contributed slightly over €1bn which may, on paper, sound like a considerable amount but it is peanuts in fiscal terms. Its hasty reintroduction has, clearly, not been carried out with the purpose of propping up Spain’s dwindling coffers, but rather as a wink to the left-wing establishment on the wake of hugely unpopular, albeit much-needed, financial reforms to bring Spain’s unchecked deficit under control. It is delusional to label it as a deficit-reducing measure. This amount will scarcely dent a spiralling deficit and its real impact in the overall picture will be negligible. But it serves nicely, mind you, its purpose of drawing the media’s attention ahead of November’s national election.

It is Mr Zapatero’s appointed successor, Mr Alfredo Perez Rubalcaba (former Minister for the Interior Presidency up until July this year) who, with a view on this fall’s election, has pushed -very- hard for it to be restored so as to win the vote of the socially discontent; its ranks swelling day by day. The latest strategy is to focus on the “rich” as suitable scapegoat for Spain’s financial maelstrom.

This action is the latest in a continued string of demonizing social elements, dividing society upon itself creating unnecessary tension, lifting smokescreens (i.e. smoking ban, air-traffic controllers’ wages, bullfighting prohibition in Catalonia, abortion law, Civil War Historical Memory law, religion issues and now the super-rich) so as to deflect the attention of the real problems at stake; shifting blame on others, all the while not being held accountable for one’s own serious flawed judgements.

The wealth tax, (patrimonio in Spanish), was eliminated by Zapatero (pictured above, flanked by Rubalcaba and Salgado) at the start of 2008, bringing Spain in line with the rest of Europe in not punishing the middle classes with a tax on property and savings. The same Government is now resurrecting the tax, arguing the wealthy should pay more to dig Spain out of the fiscal hole this Government did more than anyone to put it in.

According to last week’s decree re-instating the tax, patrimonio will have to be paid on net assets above 700,000 Euros, with a main-home allowance of 300,000 Euros not relevant to holiday-homes.

Because this tax is devolved to the autonomous governments, tax-free allowances for residents vary by region, so if you are a resident, you need to check the situation with a local tax specialist.

Need I point out this tax will make Spanish property less attractive to foreign investors at a time when the Government should be doing everything to make it more attractive (say by reducing the costs of owning property in Spain)? In the light of this tax-increase, the Government’s road-shows to promote Spanish holiday-homes to European buyers will be even more ineffectual.

Electioneering

The real reason the tax is being introduced now, just before a general election, is to mollify the left-wing of the PSEO Socialist party and fire up the base. But the tax is bad for Spain as a whole, not least because:

• In the medium run tax revenues will fall as Spaniards take their savings elsewhere
• As a result, the taxes on consumption like VAT will have to rise, hitting the poorest hardest
• It’s a tax on savings, not income, that punishes prudence at a time when Spain needs to encourage it
• It raises the cost of owning a holiday-home in Spain, which will make it harder than ever to deal with the coastal-home glut that is one of the biggest problems facing the Spanish economy
• It is an unfair tax that you have to pay even if you don’t have the money

Zapatero claims that only the rich will pay, but it simply isn’t true. The very rich pay very little tax in Spain, leaving the middle-class to foot the bill, which will now include the patrimonio wealth-tax.

Farce

To make matters worse, the re-introduction of the tax has been surrounded by farce, with senior ministers contradicting each other as to who will have to pay and how much it will raise.

José Blanco, Minister of Public Works (Fomento) first said only 90,000 people would have to pay, but Rubalcaba, Minister of the Interior – and presidential hopeful – raised that to 200,000 to 300,000 people before Elena Salgado, Minister of Finance, popped up with a new figure of 160,000. Nor could they agree how much money it will raise this year, with Rubalcaba saying 1.4 billion Euros and Salgado saying 1 billion. Confidence-inspiring stuff.

The resurrection of patrimonio is a temporary measure, say the Socialists, but as they are almost certain to lose the General Election in November, it doesn’t really matter what they say. What matters is what the opposition Partido Popular (PP) will do. So far Mariano Rayo, PP-leader, has made it clear he doesn’t like the tax, but he appears to be keeping his options open. My guess is he will keep the tax in place whilst pinning the blame for it on the Socialists.

+ The official decree bringing back patrimonio (pdf in Spanish)
+ A guide to Spain’s wealth-tax (patrimonio)