Thursday, December 22, 2011

Spanish tax office delivers 300,000 nasty letters

The Spanish tax office began sending out letters headed “comunicacion” to foreign property owners a couple of months ago.  They have been causing a lot of concern to people who don’t understand what they say (they are in Spanish) or do understand but are worried by the implications.

To explain briefly to anyone who hasn’t come across this issue yet, these letters are notifications from Spain’s equivalent of the Revenue (Agencia Tributaria).  In essence they are saying  that they know the recipient owns a property but have not received tax returns from them.  They are not tax demands as such and do not require a response but they do suggest further action will be taken if the property owner receiving the letter really does have tax returns due.

It has been quoted that 300,000 letters have been sent  out.

I won’t go into detail about the matter as there is already some information about them out in the blogosphere and  I have posted a detailed Question and Answer guide on our main website:

I would like to clear up a couple of specific points which I haven’t read about elsewhere –

The letter claims that help will be available at your local branch of the Agencia Tributaria (Google your nearest).  I don’t know how true that will be in practice but it does open up the possibility of being able to resolve the situation without recourse to a professional i.e. paying a lawyer or accountant to catch up your taxes for you. 

If you want to take a DIY approach to the problem, firstly read up on the tax (our website has several articles on non resident tax – see the Advice page and use the drop down box).  The visit the tax office with all your documentation and see what they have to say.

Also you might wonder why the letter is asking for tax returns from 2007-2010.  There is a technical reason for this – the equivalent of a statute of limitations which prevents the tax office collecting unpaid taxes four years after they were due.  For example 2006 resident taxes were due by 30 June 2007 i.e. more than 4 years ago so not collectable. 

They didn’t ask for 2011 returns because they are not yet due.  2011 resident returns are due next June and non resident returns next December.

Thursday, December 15, 2011

Would you prefer to live in an Indian slum or Middlesbrough?

This article on Sky News caught my eye. Anyone who has seen “Slumdog Millionaire” or one of countless documentaries about India’s slums will be amazed that shacks in Mumbai’s Dharavi slums are changing hands for upwards of £50,000.

My first flat in London (Hampstead 1994) didn’t cost that much more than 50k and my first flat in Spain (Valencia 1999) cost considerably less. Even now a quick search reveals over 600 properties in and around Middlesbrough for £50,000 or less.

What’s going on? Aren’t Indian slum dwellers among the poorest and most wretched people in the world? Didn’t I see kids in the movie swimming in human excrement? Less of that sort of thing in Boro than there used to be.

The Sky article gave part of the answer to the riddle of the pricey shacks: the slums are not quite the ramshackle hellholes that you might think. The Dharavi slum is a highly organized, functioning community with thriving businesses and properties that have housed the same families for generations. Over time the authorities have recognized their legitimacy and hooked up utilities. Most of all it is very close to the commercial heart of Mumbai (“location, location, location”).

But nevertheless India is a poor country despite rapid growth recently. How can people afford to bid up slum dwellings to such levels? The average wage is so low that Reebok recently announced that it was planning to sell a pair of trainers for $1 to get into the market. That does not suggest that India’s boom has yet created enough spending power to justify slum dwellings at UK prices.

The real explanation may lie in recent Indian interest policy. Rates have been as low as 3% and even now, with inflation needing to be reined in, Indian interest rates are only 7%. As is usually the case with these amazing property price stories, the root cause is lax monetary policy. We in Britain have seen such house price booms so many times before; they make everyone from the Finance Minister to the shack owner feel like they are economic geniuses until they end, as they always do, in tears and a painful bust.

Thursday, December 8, 2011

Euro doubters are being proved doubly right

It seems absurd now but a decade or so the UK was very close to joining the Euro. Tony Blair’s Labour government, popular and trusted (yes, it was a long time ago), was pushing for it and only some stubborn resistance from Gordon Brown kept Britain out.

One of the key “pro” arguments was that interest rates would be lower. The pro camp was obviously hoping to sell the Euro with a bribe of lower mortgage rates. I remember thinking at the time that this was a hollow and short-sighted argument.

Lower interest rates are not a good thing necessarily. Interest rates need to be high enough to balance saving and spending. Set too low and the risk is of unsustainable booms and horrible busts.

The euro-sceptics pointed out that a single interest rate for Europe would be bound to leave some parts too high or too low rates with nasty consequences. Events have proved the doubters right of course but there is more to the story.

The arguments against joining were not wholly economic. Indeed the dangerous economic consequences of joining were a side issue for most opponents who feared the political logic more: the Euro was an irrevocable step towards a European superstate which rendered national governments almost powerless on the things that matter.

Pro-Euro campaigners either played down the loss of sovereignty as scare-mongering or argued that it would be a good trade off – slough off your little-Britain hang ups and reap the economic benefits, they said.

Now the Eurozone threatens implosion that position looks ridiculous: all 17 members face the prospect of ruin and disaster unless they join together in a fiscal union. Exactly what the Euro’s opponents predicted and the Euro-enthusiasts perhaps secretly hoped for.

What will this Eurozone superstate look like, if indeed it gets off the ground? Again you don’t need a crystal ball to see the shape of things to come. It will be hugely wasteful of public money, highly bureaucratic, damaging to business and most of all grossly undemocratic.

The citizens of the Eurozone must already feel like they are helpless onlookers watching their political elites flounder in the crisis that they themselves created. They can now look forward to permanent Euro hell as the price for preventing economic meltdown.

From our website: A guide to Spain's autonomo system

Thursday, November 24, 2011

Spain tax form 210 deadline nears

Where did 2011 go? It was just a few weeks ago since I was enjoying a late Autumn swim in the Med and now we are hurtling towards Christmas. One consequence is that end of year deadline for Spanish non resident tax declarations is also approaching rapidly. This is the tax that all Spanish holiday home owners are supposed to pay.

I have written about this Spanish tax, often called modelo or form 210 tax after the forms you have to submit, many times so I will link to rather than bore you with the details: Spanish tax form 210

You have until 31.12.11 to get the form in. We offer a service where we do it for the taxpayer but this is only available up to the end of November.

I have had a few clients recently who have received letters from the Agencia Tributaria (Spanish tax office) asking to see tax returns going back to 2007 so they do check up. They have access to both local tax records and utility company computer systems so they know who has property in Spain and can cross-check to the returns they have received.

Thursday, November 17, 2011

Is there any point to the Spanish Elections?

Spain goes to the polls on Sunday to elect a new government and, yes, my question is facetious. Of course the elections are not pointless; no democratic election ever is. Apart from anything the people will get their chance to pass judgment on the record of Prime Minister Zapatero and his Socialists. Polls point to a big thumbs down and the election of the PP and their leader Mariano Rajoy who has tried and failed to win twice before.

But will it make much difference whatever happens? Spain is so close to the eye of the Eurozone storm that any new government will be powerless against the combined forces of the bond markets and the Eurozone. The PP are talking tough about bank reforms (which will surely send Spanish property prices down further – How the bailout could send Spanish property crashing) and labour market reform but it will be Germany and the ECB that decides Spain’s fate.

Look at the way that Berlusconi was finally forced from power. The Italians are well rid of him but it took Eurozone threats to do the job. It is notable that the new Italian government contains not a single elected minister.

Over in Greece the call for a referendum to get popular support for austerity measures was taken as a “breach of trust” by France and Germany; Papandreou was kicked out and Greece was effectively blackmailed into cancelling the vote.

I don’t subscribe to the theory that the Southern European countries are being drawn into a German super state but they certainly have lost control of their destiny. Either Spain and the others will be rescued by Germany or it will be forced to crash out of the Euro. It’s that simple and Sunday’s vote will not change a thing.

Latest article: Spanish holiday property UK and Spain tax considerations

Friday, November 11, 2011

The taxman wants some of your Spanish rental income

If you live in Britain but own a home abroad which you rent out you can’t fail to have seen the recent headlines like this one:

Taxman pursues Britons hiding holiday rent on overseas homes

Apparently the Revenue have set up a special unit to go after “the rich” (defined as those paying 50% tax i.e. earning over £150,000 pa) and one of their tasks is to recover £560 million in unpaid tax on foreign rental income.

With the stern promise that there is “no hiding place for tax cheats” they will look at things like land registers and letting adverts to catch people earning income from their properties but not declaring it.

I don’t know how worried I would be if I was renting out my holiday home and hadn’t declared the tax. These kind of campaigns have been launched before and you sometimes get the impression its more about the publicity and scary newspaper headlines than anything of real substance.

It also wasn’t abundantly clear whether the campaign is purely about the holiday homes of “the rich” or whether it is anyone with a holiday home that is under threat.

By coincidence I got a reminder of how brutal the Spanish taxman can be when it comes to foreigners (and locals to be fair) when it comes to undeclared rental income. I got an email from someone asking what they could do about €6,000 that the Spanish tax office (la Agencia Tributaria) had taken from his bank account, with no warning or even a letter to say they had done it.

It turned out he had two holiday homes and he let out one through an agency for several years without declaring a cent for tax purposes, not even completing the non resident tax return which surely every Spanish property owner knows about by now (if you don't see this post 'Tis the Season to Pay Spanish Taxes).

We have to assume that the rental agency were asked for their records by the hungry Spanish tax wolves. I have some sympathy for the guy but then again a lot of people do things properly and pay their taxes, so why should the non-payers get away with it?

If you want to be one of those who declare their income then here is a link to an article on our main website which explains what to do:

UK and Spanish tax implications of renting out a holiday home in Spain

Thursday, November 3, 2011

The Greek bail-out could send Spanish property crashing

Last week’s Eurozone bail-out involved some debt relief for Greece, more firepower for the EFSF (the bailout fund for other crisis countries) and a bank recapitalisation plan. Quite apart from the fact that most market observers think the plan is flawed and inadequate, the last bit that should have Spanish property owners worried.

In theory, topping up the capital buffers of the banks, particularly Spanish ones which are among Europe’s weakest, should be a positive development. The banks will be safer in the event of a new crisis and there should be less fear in the interbank market, a key feature of the original “credit crunch”.

There are two ways for a bank to boost its capital adequacy ratio: raising more capital or slimming down in size to make its existing capital look proportionally bigger.

Investors are rightly suspicious of banks so raising fresh capital by selling shares is not going to be easy. Higher capital ratios themselves imply lower profitability for the banks, making it harder for them to raise capital.

Perversely Government and EU officials are making it even harder for the banks to raise capital by demanding that they pay less in dividends and pull out of certain areas of business. The proposed financial transaction tax is also depressing bank share prices.

So banks are more likely to choose to go on a diet – desperately reduce in size to meet the new adequacy ratios without raising more capital. But how do banks reduce in size? There are a few ways, all of which are negative for growth and asset prices. They can sell non-core businesses like insurance or overseas subsidiaries. They can reduce the size of their loan portfolios by slashing the amounts they are willing to lend to households and businesses. They can also sell off other assets like the properties they have repossessed.

This is what Santander intends to do according to this article in the FT: Santander seeks to offload €3bn of Spanish property If all the Spanish lenders do the same then there will be a flood of new property on the market at knock-down prices. At the same banks will be trying to cut down on lending to businesses and homebuyers.

Throw in further austerity measures by the government and falling demand in most export markets and it’s hard to feel optimistic about the Spanish economy right now.

Wednesday, October 26, 2011

The quiet revolution in internet search

I saw a survey recently proclaiming the popularity of search engines - "92% of internet users search", it said, beating email into second place as the most common online activity. The only surprise is the 8% of people who go online and somehow avoid using search at all. How is that possible?

For the rest of us search engines have been a constant part of our lives online right from the start, helping us make sense of the deluge of data that would otherwise be impenetrable and bewildering.

Search (which means Google for 2/3 people). Type in a term, hit return and within a few nanoseconds get thousands of suggested links with the most promising at the top of the first page of results. Apart from a few superficial changes (no longer needing to hit return) nothing much has changed except that, under the hood, everything has. Many times and, some say, with profound implications.

Google is constantly evolving the algorithms which drive the ranking of results. When I was trying to get a high ranking for our website a couple of years ago, links to the site from other websites, particularly those anchored in the search term, were said to be the key. Now these links can result in your site being banished to the "also ran" pages as Google suspects you are trying to game the system.

Some of the factors that are said to improve your rankings were barely on the radar two years ago:

  • Social factors - the rising influence of Facebook and Twitter with "shares" on Facebook being given particular weight
  • Speed of the website
  • Penalties for low quality content (e.g. content farms)
  • The growing importance of location particularly in mobile search
  • Use of Google's own data from searches, sites favourited (or blocked), paid search etc
  • More sophisticated assessment of quality of page's content, structure, layout
The key messages I got reviewing the latest trends are that it is getting harder for site-owners to game the system and it is better to focus on quality content, constantly improving the usefulness of your site and trust that Google will find it. Some kind of social media strategy would appear to be a must though.

And what of personalised search: results tailored and filtered to reflect your preferences, location, search history etc? Google says it is personalising results to make them more useful but some people fear that its getting too Big Brotherish and may result in users getting a distorted view of the internet that filters out important material such as political views that your own. If you are worried about Big Google watching you then maybe try logging out of your Google account while searching.

Thursday, October 20, 2011

Now IS the time for a referendum on Europe

Over 100,000 signatures collected by volunteer groups and some brave Conservative MPs have forced a vote in Parliament over UK membership of the EU. All the main party leaders are forcing their MPs to vote against a referendum. Strange bed-fellows Cameron and Miliband are effectively saying the same thing: now’s not the time.

They are wrong. It’s the perfect time for the British people to be given a say on the EU. After all they have not been consulted for over 35 years. They have never had the chance to say whether they want to be part of what the EU has grown into since those seemingly innocuous origins of six countries in a Common Market.

Since then, with barely a nod to democratic process, the EU has grown into a 27 state behemoth that reaches into every legislative area, slaps down our courts and parliament, dictates who we can let in to the country and claims to speak for us in the world.

It also soaks up enormous sums of money, a net £12 billion of which comes from the UK taxpayer. As we wrestle with a massive fiscal deficit, now is most definitely the time to consider whether we can afford to pay this massive subsidy to our neighbours and debate what we get in return.

Many other economic issues are tied up with the EU from the burden of regulation on industry to the effects of unchecked immigration and the impact of EU schemes to undermine the City. Far from a referendum being a distraction in a time of economic crisis, it may be a pre-requisite of recovery. We should at least be able to debate the arguments rather than remain permanently shackled to the Euro project which has never looked so tarnished and dysfunctional.

Some argue that the sovereign debt crisis should be given priority at the moment and that a referendum is an irrelevance we could do without. On the contrary, the Euro crisis is the most compelling reason for a debate on continued membership. For one thing it has undermined one of the principal claims of the Euro-enthusiasts: that Europe does things better and we would be better off inside the club.

Also, however the crisis is resolved, it is sure to presage enormous changes in the way the euro area and EU are run. We deserve to be consulted before the UK government has to decide how to respond to the crucial choices that are bound to result.

Fundamentally the Euro crisis has exposed the dearth of democratic legitimacy in the rotten core of Europe. The political elites have pushed the project along hard and fast ignoring popular doubts and look what a mess has resulted. Just think of how the German electorate must think about their politicians’ promises about no bail outs and pooled debt.

With the sole exception of the Euro and one or two opt-outs, UK governments have gone along with the lot and have never put the issues to the people. Now is the time to remove that stain on our democratic heritage and have a referendum on this vital topic.

If you feel the same way you can make your voice heard (in a small way!) by signing the People's Pledge here.

On our website this week Spain is bringing back the wealth tax

Wednesday, October 12, 2011

10 reasons why stimulus is the problem not the solution

Last week I wrote that calls for more economic stimulus should be rejected because such measures demonstrably make things worse rather than deliver the boost they are supposed to. I listed 13 separate fiscal or monetary efforts made to stimulate the US economy since 1993 which have left it in a worse state than any time since the War.

Other countries which have run even bigger government deficits and run easy money policies for longer, like Greece and Japan, are in an even worse state.

Despite this dismal record policymakers (most recently the Bank of England with its QE3 programme) persist on trying to shove stimulus down our throats. Few commentators ever seem to question whether these “boosts” actually do more harm than good.

So, in no particular order, here are ten reasons why I think unfunded public spending, super-low interest rates and money printing are economically damaging and preventing recovery:

Sugar rush - stimulus only creates a temporary boost to demand at the cost of storing up demand-destroying effects for the future. One reason why most countries are suffering marked slow-downs now is that the effects of the 2008/9 stimulus packages have worn off.

Prolonging the agony – these false demand rushes do not just benefit healthy parts of the economy, they allow unhealthy, over-indebted and unsustainable parts to limp on: zombie banks, companies and, dare I say it, consumers.

Bad habits die hard – if you look at the way stimulus is supposed to work, it is in ways that are completely contrary to the long term interests of the countries being “helped”: encouraging consumption rather than investment; more borrowing rather than savings. Bank of England policy has been likened to “war on savers” which is just about the last thing the UK needs with a pensions timebomb ticking.

So now Inflation's a good thing? – the monetary authorities are expressly trying to create inflation with their policies and seem to be quite pleased with themselves when they create it. I am less sanguine. The BoE reckoned its first bout of QE generated up to 2% extra inflation. One reason why private sector demand is so depressed this year is high fuel prices which have been particularly affecting retailers. A lot of government spending is indexed to inflation so it makes the deficit reduction harder. Contrary to commonly stated opinion, high inflation doesn’t automatically erode debt. It may do this if wages rise faster than general prices but this has not been the case in recent years.

Leakage – A lot of the demand supposedly created by these stimulus measures leaks abroad in the form of increased imports or by encouraging investment capital to flee to emerging markets in search of better returns. The Chinese bubble that may be about to burst was made in Washington.

Moral hazard – The financial sector knows that every time the markets weaken, the fiscal and monetary taps will be turned on and they will be rescued. This has been done so many times - the term that describes the phenomenon, the Greenspan Put, was coined as long ago as 1987 – that the financial sector has a strong incentive to take ever greater risks because the downside is so limited. Stimulus is one of the main reasons for the “too big to fail” phenomenon.

Confidence trick – QE, fiscal stimulus and lower interest rates are all supposed to encourage business investment, which creates jobs and thus more consumer spending and thus more investment in a virtuous cycle. But if you were in charge of a business, would stimulus policy incentivise you to invest for the long term? Maybe a decade or so go but these kinds of measures have been tried and have failed so many times now that they are counterproductive and cause cynicism and confusion in the business community.

Bucking the market – True free-market believers are a dying breed these days. How else do you explain the lack of criticism, even from supposedly right wing politicians, for probably the biggest and most damaging example of state interference there is - central banks holding down interest rates below their market level. Interest rates are a price mechanism like any other: if you set the price of credit too low you will upset the delicate balance between saving and investing, investment now and consumption later. See this article to understand the theory of intertemporal misallocation which explains a lot of the current crisis: What Spanish Pigs Can Tell Us About Economics

Pensions vandalism – One common aim of stimulus measures of the QE variety is to lower bond yields which also has some nasty side effects for pension funds and retirees buying annuities. Is it really going to help our companies to have to increase the contributions to their pension funds? Will it help demand to impoverish pensioners? See this article from the telegraph There’s Another Fine Mess QE Has Got Us Into

Big Spenders – if you believe that governments spend (and then tax and borrow) too much, then take a look at stimulus as one of the main reasons for this. Look at Spain where low interest rates over-stimulated the economy, falsely inflating GDP and tax revenues thus encouraging the government to spend too much. And when the stimulus wears off, governments have a great excuse to spend and borrow even more to “support” the economy. One Nobel prize-winning idiot even claimed that an imaginary war against aliens would be a good thing because it would encourage the US government to spend even more trillions it didn’t have – Paul Krugman: An Alien Invasion Could Fix the Economy

OK, so this is a mish-mash of ideas and I haven't tried to distinguish between the different types of stimulus. Maybe different countries which might benefit from certain measures at particular times. But in general I believe that governments would be better to concentrate on balancing their budgets, cutting taxes and regulation and leave the economy, including interest rates, to the markets.

From our website: guide to Spain's Autonomo (self employed) system

Tuesday, October 4, 2011

It's a case of Good News, Bad News for Spain

Mixed headlines about the Spanish economy this week as the tourist sector delivers the goods, but unemployment continues to rise to an agonising 4.2 millions.

New figures reveal that Spain's travel sector experienced a very good Summer season. Visitor numbers hit a record high of 7.64 millions in August (up 9.4% on the previous year).

A separate survey showed Spain remains the number 1 choice in Britain (Spain's top market) for family holidays. Some have speculated that the Arab Spring and rising flight costs have caused some Europeans to choose Spain over more exotic and far-flung destinations.

Great news for the economy as tourism is Spain's biggest industry and employer. It is also the main source of export income which injects foreign demand into the stagnant domestic economy.

That's the good news. The bad news came from unemployment stats showing a net increase of 95,000 on the unemployment rolls to record another new high of 21%. The two bits of news are probably connected as tourist jobs are inevitably seasonal and some will have already been laid off last month.

Another component of the jobs woe however is more worrying. Reports say that there were heavy job losses in the public sector as local government in particular sheds employees. Teachers are being laid off for example and are going on strike in some areas.

Many local authorities which profited from high property-related taxes in the boom (and spent accordingly) are now deep in debt and some are not settling their bills and being taken to court by contractors such as rubbish collectors and cleaners.pp

It's all a reminder that austerity isn't painless and that, although Spain has made decent progress in getting the deficit under control, that very process may deepen the economic crisis.

Friday, September 30, 2011

Is Ryanair's latest move so bad?

Ryanair and its boss, the charming Michael O'Leary (left), are hardly ever out of the news. Recently its their debit and credit card charges that have been in the news.

I posted about about ways to avoid Ryanair's card charges but it seems the goalposts have moved and now you can only avoid the £6 each way charge (per passenger) by using a Ryanair prepaid debit card.

These have to be charged up prior to use and there is a monthly £2 charge on them if they are not used. Well worth getting though if you book Ryanair a lot like me. The full story if you missed it is here:

Much of the press was negative focusing on the £2 charge and the fact that everyone who got one of the cards that previously avoided the charge is now left high and dry. One article talked about "fury" and another "hefty" fees.

But is this fair? Lots of other sites and not just airlines charge fees for card use and by getting this free card you can avoid them on The monthly charge can easily be avoided by occasional use and they are free to load up with money.

I ordered one and it was all very straightforward except that ironically enough there was a hidden "card purchase fee" of £6 added to the bill.

There is a strong antipathy toward the airline. The internet is full of "hate ryanair" groups and "ryanair evil" blogs. I liked the Facebook group where someone was so incensed they said "they should have all of their planes' tires slashed". Slightly odd thing to hope for.

I have had my run ins with them but they have done more than anyone else to make air travel cheap and their money-making schemes often work in the customers' favour - like online check in. Give them a break?

Sunday, September 18, 2011

Stimulus is the problem not the solution

As the world's main economies slow, and in some cases grind to a halt, the calls for governments and Central Banks to stimulate their economies are growing louder and they are starting to respond.

With interest rates already on the floor (in the West at least) and public finances dangerously stretched, it is not clear how governments and central banks can provide much of a lift. But even if they could, isn't it time we accepted that there are limitations to what fiscal and monetary stimulus can achieve?

The idea is very simple: extra government spending, tax cuts, lower mortgage rates and quantitative easing (money printing) all are supposed to create fresh demand in the economy and set off second round effects as companies hire and invest to meet the new demand.

But if that's the cure, why are the patients who have been prescribed it (many times) still stuck in hospital with doctors anxiously looking at the graphs zigzagging downwards at the end of their beds?

Never has a "solution" been tried and failed so often as stimulus. Just looking at the American experience alone we have had, and it's worth listing them, multiple attempts to pep up the economy during the last two decades:

1993 : response to the recession that followed the Gulf War oil price spike
1997: response to the Asian currency crisis
1998: monetary easing following Russian crisis and consequent LTCM hedge fund collapse
1999: open market operations to inject liquidity ahead of anticipated Y2K bug problems
2001-3: Fed funds rate cut multiple times to 1%
2001: Economic Growth Act - Bush tax cuts
2001 (end): Fed injects $100bn of credit post 9/11
2007/8: Fed funds rate cut to effectively 0%
2008: Bush stimulus package
2008/9: QE $1.1tn
2009: Obama stimulus
2010/11: QE2 $600bn
2011: Operation Twist and 2 year guarantee on Fed funds rate
2011: American Jobs Act 447bn stimulus package

Every one of these policies was expressly designed to stimulate the economy and was reported (uncritically for the most part) in the press as a "boost" or as "aid". And every one had a future price in terms of higher debts, either public or private.

After all that boosting the economy should be soaring but as we all know the US, Japan, Europe and the UK are stuck in the mire with massive debts, barely any growth, shockingly high unemployment and banks teetering on the brink.

I will write next time on why I think stimulus does more harm than good but will sign off with some stats from the crisis before this one: going back to 2002 after the dot com bust. The year the Fed stoked up a consumer credit binge and private sector credit grew at an annual rate of $695 billion. A massive debt increase that sowed the seeds of the next downturn and under which the US is still languishing. And what did that buy? GDP growth of $110 billion. Every $6 debt produced a measly $1 of growth. The debts are still with us but the growth long gone.

moral hazard

Zapatero's parting shot at the rich

At the end of last month I posted about the possibility of Spain's socialist government reintroducing the wealth tax ("Spain targets the rich"). At the time the move was just "under discussion" and some press reports categorically stated that it wouldn't happen. But unfortunately those reports were wrong and it is on the way back, with big implications for property owners.
The Zapatero government announced the return of the wealth tax on Friday. It's a tax on assets including property, investments, cash, cars etc completely separate and on top of income tax. Fortunately the government has reintroduced the extra tax with a big threshold (700,000€) that make it payable mainly by the very rich only. In addition there is a 300,000€ allowance versus your own home. The rate will be 0,2-0,25%.

As my original post showed the main losers could be foreigners who own holiday homes in Spain. They already pay, or should do, non residents income tax (see our article Spanish taxes for non residents) and this could double or treble that liability. When the wealth tax previously was levied in Spain (2007) non residents could not claim exemptions or allowances and paid quite heavily. We will have to wait for the details this time.

The policy looks similar to Gordon Brown's 50% tax rate. There is an election due this November and the Zapatero government may simply be playing a political game. They know that the opposition PP will hate this tax and indeed some regions governed by the PP have said that they will not collect the tax. But like Brown, Zapatero will know that sympathy for the rich is in short supply and that PP's opposition to the tax will simply make them look like a party for the wealthy.

Sunday, September 11, 2011

Can a tax cut breathe life into the Spanish property market?

An emergency meeting of Spanish government ministers announced a cut in the rate of IVA (Spanish VAT) on new build houses from 8% to 4%. The tax had only been raised from 7% thirteen months ago. The abrupt change of policy is aimed at reviving the housing market.

Something certainly needs to be done if Spain is to start to grow its economy. Before the crash the construction sector accounted for more than 15% of economic output; now it seems to be dead on its feet. Recent figures showed Spanish construction activity fell 43% in the year to June, a steeper fall than anywhere else in Europe. Will the tax cut help?

The idea is that this will help banks and property developers offload a lot of the new build properties that have lain empty since the housing crash hit hard in 2008. Estimates vary but their could be up to a million empty and unsold units weighing down on the whole market. New building will remain depressed until the backlog is at least partly cleared.

4% is a chunky reduction - around €5-8,000 off the purchase price for an average property. The reduction is temporary - just until the end of the current year - which may have the effect of bringing forward some activity and creating some momentum.

But there are doubts - transfer tax on existing home sales remains at 7-8% (depending on the area). Furthermore house prices still appear high in relation to incomes; "stratospherically" so according to one economist who produced a graph showing that average prices are more than 6 times annual average incomes in Spain; much higher than the UK and US: Spanish house prices still high

Banks don't have much of an incentive to shift properties while they hold them on their books at cost; selling them at current market prices would crystalise their losses and actually make their balance sheets look worse.

The tax cut may be helpful to those with property deals in the pipeline but don't expect it to trigger a wider revival in the Spanish property market.

Related on our website:

Tuesday, August 30, 2011

Spain targets rich taxpayers

Or does it? Spain's government was reported to be looking at ways of getting more tax from its wealthiest citizens last week. It's looking at ways of getting its budget deficit down to 6% this year. The inspiration is said to have come from France where a 3% tax surcharge was imposed on incomes over €500,000 recently.

One idea being mooted is a return of the wealth tax ("Patrimonio") abolished in 2008. This was an extra tax based on assets like investments and houses rather than income.

Because of reasonably generous tax allowances the tax didn't raise very much money - about €2.1 billion in its final year - and was quite an intrusive and inefficient tax. Its abolition was widely celebrated even though most of the wealth tax was paid by the very wealthy at the top of the pile.

One group that would be badly hit by a return of the wealth tax in its old form would be non resident property owners. Holiday home owners are already obliged to submit a tax return and pay income tax based on the rateable value of their house or apartment (see Spanish Tax Form 210 for details). Up until 2008 they also paid wealth tax which doubled or trebled their liability partly because they were not entitled to the same deductions as residents.

Hopefully it won't come to that. Spanish newspaper La Razon in an article entitled "The government parks taxes on high incomes" is pretty sure plans were discussed but then shelved due to differences of opinion within the governing PSOE. It categorically ruled out the return of the wealth tax or an increase in taxes on very high incomes (Spanish tax rates are already rising to 45% this year) although some other newspapers hedged their bets. Other articles this week have talked about the wealth tax returning but with a much higher threshold for paying it e.g. minimum assets of €600,000 or €1,000,000.

Monday, August 22, 2011

Spain slams the door on Romanian immigrants

In a surprise move last week the EU said it would allow Spain to restrict the number of job-seeking immigrants from Romania. This is the first time any EU country has sought to keep out workers from another EU country since Europe introduced an open borders policy. This is hardly "Fortress Spain" - the nearly 900,000 Romanians already in the country will be unaffected and the restrictions will last only until 2012. Is Spain right to take this step? Should Britain follow?

The justification given for the move is that the number of Romanians "was distorting the labour market". Spain's unemployment rate is now 21% and its job market cannot supply enough jobs for locals never mind the 5 million foreigners in the country legally plus who knows how many illegally. Already 30% of the Romanians in Spain are unemployed.

Sounds like an open and shut case but there is more to it. During the boom years immigrants were welcomed with open arms by the construction and agricultural sectors particularly when they were doing jobs Spanish nationals were turning their noses up at. They were not exactly "stealing" Spanish jobs. Also there is more than a hint of scapegoating about the move. Spanish unemployment has always been high because of a dysfunctional system which discourages legal job creation and because of the disastrous consequences of joining the euro, not because immigrants came to make an honest living during the boom.

While I think it is a classic case of “too little too late” I think Spain is right to seek to limit the inflow of Romanian jobseekers. By all accounts the benefit system is very sketchy and ungenerous in Romania and wages for those in work very low. That explains why so many are prepared to travel throughout Europe in search of a better deal but it is hardly fair to local jobseekers in countries where jobs are scarce anyway. And Spain has no right to send back any surplus migrant workers so as their economy has soured they have been left with hundreds of thousands of foreigners on benefits at a time when they are under massive pressure to reduce state spending.

As for Britain similar questions have been asked for years about how this free movement of labour through the EU is supposed to work when some countries have much more generous welfare systems and more open labour markets than others. The result for the UK has been that almost all jobs created in the last decade have gone to foreigners, mainly Eastern Europeans, and there has been a massive strain on public services and housing.

But the answer isn’t to blame immigrants or necessarily to place limits on their numbers particularly when they are often taking up jobs that locals will not do. Root and branch reform of the benefits system should come first, particularly the areas that are most abused and reduce the willingness of people to work, like housing benefit and incapacity benefits.

From our website: Spanish non resident tax

Monday, August 15, 2011

How to ease the pain of rising energy prices

The last few years have been very unkind financially to anyone with savings in building societies or bank deposits. With rates slashed to the 2-3% mark (before tax) the value of these savings has steadily declined as inflation has risen. This mix of rock bottom returns and high inflation is set to continue for years.

Worse for many people who rely on these savings has been the rising cost of energy - petrol prices and domestic fuel bills have risen much faster than inflation. What to do?

Ever helpful the big 6 energy suppliers have been offering fixed price deals which fix your tariffs for up to two years. A bit rich when they have just raised them 20% - "we're putting up your bills and would you like to lock into paying these rates for two years?". You would rue this if there is a recession and energy prices fall again even if just temporarily (and they have been falling recently).

A better option might be to buy shares in a couple of energy companies. An example would be Royal Dutch Shell B shares (RDSB:LSE). The share price has fallen recently below £20 (it has been as low as £17.68) at which levels the dividend yield is nearly 6% which could be received tax free if you open a self-select ISA. That yield is likely to grow in the coming years as Shell benefits from rising prices for oil and natural gas (which makes up half its output) and a growth program of investment in such areas as unconventional oil extraction and liquefied natural gas projects. The company's most recent set of results show profits up 74% with strong enough cashflow to support the dividend, finance the investment program and leave a very strong balance sheet with little debt.

Double the returns of a deposit account with potential for inflation-beating growth sounds too good to be true. But what of the risk to capital? Protecting the value of the original investment is the deposit account saver's key priority. No one can deny the risk of share price falls. We have just seen some recent market mayhem (though Shell recovered very quickly) and Shell may fall again in the coming months as the oil price softens. Also who can forget the BP oil leak which halved the share price practically overnight (Shell is dealing with a North Sea oil spill as we speak although thankfully on a much smaller scale).

All true but I would argue that the deposit account capital is not as safe as it looks. In fact savings there are suffering rapid erosion is real term and likely to continue to do so as interest rates are held below inflation for several years. At least by buying Shell or similar shares with a proportion of their capital the investor has benefiting in some way from rising energy prices. The risks can be reduced in two ways - buying up shares in stages so that the buying prices are averaged out and diversifying (buying a mixture of shares) through a energy fund or energy ETF, though watch out for charges.

Monday, August 8, 2011

Can you avoid Ryanair debit card charges?

I asked in my last post (Ryanair's new policy) if anybody had a way round the handling fees they charge on debit and credit card transactions. To recap these are the "sting in the tail" - the £6 fees they charge when you get to the end of the booking process and which are payable for each and every flight. So when I am booking a flight to an from Spain with my kids the charge is £48 for the privilege of paying for the flights I have booked.

Well one reader does not pay the charges because he has a Caxton FX debit card. He just pays Caxton a single fee of £1.50 per booking. I am sure most readers who use budget airlines are on the ball with this option and I am slightly embarrassed that it has taken me so long to get round to it particularly as I book a lot of flights with Ryanair.

On the face of it it definitely looks worth getting one of these cards or something similar. Looking at Caxton's site however it appears that new applicants will be issued with Visa cards and the Ryanair website it says their £6 fee is waived for "Mastercard prepaid debit cards". It would thus appear that Caxton cards, although good in lots of other respects, will no longer be good for saving the handling charges.

Searching online for these reveals a lot of alternatives to Caxton's card:

But all of these have their own fee structures and pros and cons. Do your research.

One thing to be aware of is that Ryanair will only accept payment in the currency the fare is quoted in. So if you are buying in the UK, you will be quoted in sterling and your card will have to be denominated in sterling (a lot of prepaid cards are in € or $ for travelling).

Is it that simple? Well Ryanair are famous for their extra charges and I can't see them happily watching everyone switch over to paying by prepaid cards. They have moved the goalposts once already (the Visa Electron always used to be their "free" option for payment). Also I have read some blog posts about Ryanair refusing Mastercards that meet their stated criteria:

Someone suggested this could be because the card name did not match the name of the lead passenger. Others suggest logging out of Ryanair, deleting your cookies (internet options) and starting again. So if you get a pre-paid Masrercard (and I think I will because the savings are so great for a regular booker) be prepared to continue to have to outwit our friends at Ryanair.

Monday, August 1, 2011

Ryanair's new policy (it's good for once)

We’ve all been wound up by Ryanair over the years haven’t we? The luggage Nazis who patrol the queues looking for oversized hand-luggage, the unseemly stampedes for a seat, the grinning mug of Michael O’Leary as he announces some other way of making his customers suffer and those enticing low fares that balloon when the extras start totting up.

A typical example: Ryanair criticised over New Year advert. Ryanair ads suggested we all spend New Year’s Eve celebrating in Dublin using their super low £7 fares. Just one problem with that – the fares were for January and February so the earliest a reveller could arrive in Dublin would be as the clearing up began.

But now for something completely different. In praise of Ryanair! They now quote their fares with taxes and charges included. There are a few extras like the “EU 261 levy” and an online check-in fee but basically a flight of £50 costs more or less £50. Actually there is the other hidden charge which is a complete wind-up – the charge for using a credit or debit card which multiplies with every flight you book and bears no relation to Ryanair’s actual transaction costs. But all the airlines do that don’t they (and some other online merchants).

I use a Ryanair a lot and there are good reasons – they are in my experience less prone to delays than other airlines and, even when all the extras are added in, they are often the cheapest. One thing I have noticed is that it does NOT always pay to book a long way in advance. It is often the case that waiting until nearer the time (but not too near) is cheaper. I am also told that it is also wise to delete your cookies that track your previous searches and also affect the prices you are quoted (anyone know if that’s true?).

A final plus point for Ryanair – they make it free to print out your own boarding pass and skip check-in at the airport. Judging by some of the long and slow-moving queues I have seen at Malaga and London recently , that is a blessing.

From our website this week: Guide to Spanish Double Tax Treaty

Tuesday, July 26, 2011

Spanish taxman says "Stand and deliver"

What an absurd song that was! Good fun video though. Certainly more fun than the tax nightmares that have been visited on innocent property owners in the Valencia province recently.

I read about this story on the Costa Blanca News website and am indebted to their reporter Tom Cain for his diligent reporting of this unpleasant situation which seems to be confined to Valencia at the moment. According to the article, property buyers are being hit with back tax demands, sometimes running into the thousands of euros.

Click on the link for the full story - Expats hit hard by property tax probe - but in essence it relates to the tax you pay on purchase of a Spanish home. This is commonly called "stamp duty" by expat buyers and does work like UK stamp duty except that the % you pay is higher - between 7-8% of the purchase price depending where you are buying.

Another difference with the UK is that tax avoidance is rife on property transactions where the sale price in the contract often bears no relation to the actual price agreed. This allows the buyer to save on stamp duty and the seller to reduce their capital gains tax liability. The difference is usually made up in cash and can run into tens of thousands of Euros.

The tax authorities have always known about this practice (it would be impossible not to being completely routine in some areas) but have usually been content to accept it so long as the declared contract price is not too much lower than expected market value. But in recent years some cash-strapped regional governments have sought to levy extra stamp duty on transactions they think have been falsely undervalued.

The article here talks about highly retrospective charges though running into the thousands with very little apparent justification in terms of valuations being too low. Hopefully it will be just something that applies to Valencia and will spread no further but it certainly should give property buyers cause to think twice before committing. Not exactly what Spain needs right now - another reason for foreigners to lack the confidence to buy property here.

See also on our main website - Spanish property taxes for non-residents

Wednesday, July 20, 2011

The finest generation?

If I were asked to name the public figures I most admire it would be sure to include David Attenborough. Not only do I enjoy his work but he speaks a lot of sense about the environment and population growth. Here are some of the other people I most admire in the world today:

The Queen - for retaining her dignity and barely putting a foot wrong during a lifetime under intense pressure and scrutiny

Clint Eastwood - can't remember a film of his I didn't like either as actor or director. A rare independent talent in Hollywood.

Warren Buffett - the greatest investor of all time who is giving away his fortune (all $50 billon of it!)

Richie Benaud - peerless cricket commentator

The remarkable thing is not that all these folk are in their 80s but that I don't think about their age when I see or read about them; they are just admirable people who are much the same now as when I first began to appreciate them. Of course not everyone living into their 80s shrugs off the passing years: giants of recent decades like Nelson Mandela, Margaret Thatcher, Dickie Attenborough and Alan Greenspan are still around but are shadows of their former selves.

But just think of how many people are still major players in their spheres at 80 years and beyond:

Stirling Moss
Robert Duvall
Christopher Plummer
Lee Kuan Yew
Duke of Edinborough
Rupert Murdoch (mmm?)
George Soros
Sean Connery
Bernie Ecclestone
William Rees Mogg
Christopher Lee
Mikhail Gorbachev
Gene Hackman
Ronnie Corbett
Bruce Forsyth
Ginger McCain

I am sure you will have your own names to add to this list. A US website publishes a list of the 80 most powerful 80 year olds every year.

UPDATE: oddly enough another octogenarian superstar came to my attention the day after publishing this piece: Peter Munk, Chairman and Founder of Barrick Gold, now the biggest gold miner in the world and a great investment potentially (but that's another post).

Longevity and retaining vigour well into old age is nothing new (Gladstone was British Prime Minister at 84) but it is inevitable that better healthcare, changing attitudes and other advances mean that increasingly we will see many more great careers extended and more stars lingering in the spotlight. A great thing of course but another thought springs to mind - is this particular generation of octogenarians special? I think so.

Go back to people like Attenborough and the Queen and think of their qualities: unfussy and unflappable, motivated by goals other than fame and money, a keen sense of duty, practical, uncomplaining, self-reliant and responsible. I may have kept my rose tinted specs on too long but I think we are seeing not just a triumph for good diet and medicine but evidence that growing up before the war instilled some of the best of human qualities in a generation.

Tuesday, July 12, 2011

Ignore the media storm. BSkyB's a steal.

It's has to count as a heartening week for democracy and for standards in public life when some (very) bad journalistic practices brought a global empire to its knees. Although bringing NewsCorp to book over the phone-hacking allegations should have happened years ago, it shows yet again why public companies should value their reputation for integrity as their most prized asset.

But as an investor I have been almost as interested in the sideshow surrounding NewsCorp's bid for the 61% of BSkyB they don't currently own. Just to recap they offered 700p a share for the company in June last year; the bid was delayed as it had to clear various regulatory hurdles. In the interim the share price rose to around 850p as the market expected Murdoch would have to pay 900p or more for the big prize.

Now, just as the finishing line was in view, the whole bid is off and may not be revived. The arbitrage specialists who had bid up the share price in anticipation of a quick killing have fled to nurse their losses and the share price is now 705p (BSY:LSE) having gone as low as 660p. Shades of the BP gulf spill and another blue chip share meltdown but this is completely different and a great buying opportunity.

For one thing the BP spill seriously undermined the fundamental value of the company, plaguing it with uncertainty, eating up cash and forcing it to cancel the dividend and sell prize assets. B Sky B may suffer a temporary "guilt by association" reputational knock but its core business is not affected. And what a core business...

Murdoch did not scheme and plan for years to get the bid through for sentimental reasons. He knows the company is superbly well -placed to capitalise on its position as the UK's leading broadcaster. A lot of the hard work has already been done - winning 10 million paying subscribers and investing in its technology, programming and new products. There cannot be a more consistently successful large corporate innovator in the UK. Goldman Sachs agrees that this already profitable company is about to enter a phase of improved cashflow and improved earnings: Goldman rates BSkyB a buy.

There are risks. Some have speculated that News Corp may have to sell even its 39% stake but I find that alarmist. Also the pre-scandal price took account of cost-cutting synergies between Sky and NewsCorp. Longer term there may be a threat to Sky's business model from internet piracy as I discussed recently here We're going to pay for all this free stuff. But the strengths are too numerous to ignore.

The company already yields 3% and trades around 14 times earnings which is very low for a company in this sector, with next to no debt and considerable competitive advantages. What is more, as this article explains, there is the potential for the end of the bid to result in the board of BSB making a huge special dividend to shareholders of up to 20% of the current market value: BSkyB investors expect special dividend if NewsCorp bid fails. Buyers will soon be circling again and the share price is likely to rise in the short and long term.

OctoFinder Blog and ping Spanish Insight - Blogged