Tax Avoidance in Spain: Scale, Methods and Responses

Tax avoidance in Spain is a significant phenomenon that affects tax revenue and fairness in the tax system. It involves the use of legal strategies by companies and individuals to minimise their tax burden, within the boundaries of the law. This differs from tax evasion, which involves non-compliance with tax obligations.

1. Background and figures on tax avoidance

• Recent estimates put Spain’s shadow economy at between 15% and 20% of GDP, equivalent to estimated tax revenue losses of €60 billion a year.

• A significant share of tax avoidance is associated with:

  • The use of complex corporate structures.

  • Aggressive tax planning.

  • The use of tax havens and favourable tax regimes.

Sectors most affected:

1. Large corporations: through strategies such as base erosion and shifting profits to low-tax jurisdictions.

2. Self-employed workers and SMEs: use of fictitious invoices, under-reporting of income and improper use of tax deductions.

3. High-net-worth individuals: use of legal loopholes to minimise income, wealth and inheritance taxes.

2. Main tax avoidance mechanisms

International tax planning

• Transfer pricing: manipulating prices for goods and services in transactions between related companies to shift profits to countries with lower tax burdens.

• Subsidiaries in tax havens: Spanish companies establish subsidiaries in jurisdictions such as Ireland, Luxembourg or the Cayman Islands to benefit from tax advantages.

• Shell companies and trusts: opaque structures used to conceal profits or assets.

Weaknesses in the domestic tax system

• Special tax regimes: regimes such as SICAVs (open-ended investment companies) allow profits to be taxed at a reduced rate of 1%.

• Corporate income tax relief: large companies can significantly reduce their effective tax rate through deductions, exemptions and the offsetting of tax loss carryforwards.

• Personal income tax avoidance: use of financial instruments such as stock options and benefits in kind to minimise the taxable base.

3. Impact of tax avoidance

1. Loss of public revenue:

   • It reduces the State’s ability to fund essential services such as healthcare, education and social protection.

2. Economic inequality:

   • Tax avoidance tends to benefit taxpayers with greater resources, widening inequality.

3. Unfair competition:

   • Companies that aggressively avoid tax gain a competitive advantage over those that meet their tax obligations.

4. Measures taken to combat tax avoidance

Spain has introduced various initiatives to mitigate this problem, both nationally and in cooperation with other countries:

Legislative reforms

• Law 11/2021 of 9 July on measures to prevent and combat tax fraud:

  • Restricts the use of tax depreciation and aggressive tax-planning mechanisms.

  • Prohibits the granting of tax amnesties.

  • Reduces the cash-payment limit from €2,500 to €1,000 for transactions with businesses and professionals.

International cooperation

• Participation in the OECD and its BEPS Plan (Base Erosion and Profit Shifting) to prevent profit shifting and international tax avoidance.

• Automatic exchange of financial information under the CRS (Common Reporting Standard).

• Implementation of European directives against abusive tax practices, such as the ATAD.

Strengthening tax audits

• SEPBLAC (the Executive Service of the Commission for the Prevention of Money Laundering and Monetary Offences) and the Tax Agency have stepped up audits in high-risk sectors.

• Digital tools and artificial intelligence are used to detect tax avoidance patterns.

5. Outstanding challenges

1. Simplifying the tax system: close legal loopholes that facilitate aggressive tax planning.

2. Greater transparency:

   • Require multinational companies to publish country-by-country reports on profits, taxes paid and operations.

3. Regulating tax intermediaries: more closely supervise advisers, law firms and consultancies that promote avoidance schemes.

4. Strengthening international cooperation: especially to combat the use of tax havens and opaque corporate structures.

6. Notable tax avoidance cases in Spain

• Apple, Amazon and Google (GAFA):

  • These multinational companies have been criticised for paying very low effective tax rates in Spain by using international tax structures. For example, reporting Spanish sales as income earned in Ireland.

• SICAVs:

  • For years, open-ended investment companies allowed large fortunes to pay tax at 1% on the profits generated. Although the regime has been restricted, it remains a focus of criticism.

• Messi, Ronaldo and other footballers:

  • Several elite athletes have been investigated for using offshore structures to minimise tax on image rights.