IVA changes in the pipeline

Speaking to the General Assembly of Employers’ associations
Rajoy speaking to the General Assembly of Employers’ associations

Mariano Rajoy’s government are preparing a package of anti-crisis reforms which will include an increase in sales tax (IVA).

Tax agency sources revealed that they are discussing an increase in IVA which was demanded by the European Commission and International Monetary Fund (IMF). However, the first step is to move some products that are currently subject to a reduced rate into the general 18% band.

On Monday Rajoy said that more “difficult” economic measures would be coming “soon” and are needed in order to “grow and create employment”.

He didn’t say much more and didn’t reveal details but tax agency sources confirmed the government is revising a list of products that attract reduced rates of four and eight per cent. This would increase state income from IVA by applying the full 18% to more items.

At present 18% IVA is applied to the majority of consumer goods and services. The prime minister is reluctant to increase the general rate (he slammed the two per cent hike introduced by Zapatero in 2010) as he fears heavy criticism as well as a slump in consumer spending.

The EU suggested expanding the top band without formally increasing the rates would be a good way to increase income without a general increase. This is more a lesson in semantics. Call it “expand” rather than “increase” and the public backlash will be reduced. Interesting politics.

Some of the items that currently enjoy a reduced rate of 8% include some food products, glasses and contacts, catering and tourism, cultural events, newspapers, hairdressing, funeral services and certain health and farming equipment.

The further reduced rate of 4% is applied to products considered as basic essentials, such as bread, milk, eggs, fruit and vegetables, cheese, books, medicines, and ‘protected’ housing.

Rajoy warned that there are more “difficult” measures to come during his speech to the General Assembly of the CEOE, the Spanish Confederation of Employers’ Organisations.

Rajoy provided no further details as to what is to come. However, experts suggest that measures could affect public administration, public sector salaries, pensions and possibly unemployment benefits.

Some experts predict worse things to come in Spain if the government move tourism into the 18% band. Many parts of the country depend on tourists and worry that any increase could seriously damage the sector.

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