Cornered Spain gets desperate

Desperate times call for desperate measures and, as far as country's economies go, things can't get much more desperate than Spain right now.  So it's no surprise to see some government measures being announced that would ordinarily never see the light of day.

Spain's plight is well known - a seemingly endless "crisis" (pronounced cree-see in Spanish) which has resulted in mass unemployment and a shrinking economy.

The immediate problem however is avoiding default. Spain has to sell bonds to finance its deficit and the fear is that if the interest rate on those bonds rises to 7% the government will have to seek a bailout from the EU and the IMF.

Last week's bond auctions saw demand for Spanish debt at 6% so there is not much margin for error.

This is why the government is trying all sorts of things to raise money which are causing massive controversy in Spain.  No one wants to end up being the next Greece but there is widespread anger at some of the measures:

- an amnesty for tax dodgers who can get repatriate funds hidden offshore no questions asked and just pay 10% in tax.  The government thinks it can raise €2.5 billion but everyone else thinks it's unfair.  The opposition want to block it in the courts as "unconstitutional" because it undermines the right to equality among citizens.

- making pensioners pay 10% of the cost of their previously drug prescriptions has caused a huge outcry even though the amount they pay has been capped at €8 - €18 a month depending on their level of income and non-pensioners pay far more (up to 60%).

- As I predicted in February (Spanish electricity bills set to soar) the government has hit energy costs with electric bills up 7%.  They now stand 60% higher than they did in 2007 when the crisis first began.

Will all this keep the bond markets happy?  Probably not as all the pain inflicted by the government just makes it harder for the economy to grow which in turn will push the deficit targets further out of the reach.

That is so obvious it hardly needs stating but what else is the government supposed to do?  Imagine if it just shrugged at the deficit and carried on regardless (which is more or less what the French seem to be doing).

Spain is chasing its tail and it's hard to see it ending in anything other than a bailout.

From our website:  Taxation of rental properties in Spain

Spanish tax strategies for married couples

A little while allow the firm's website published a guide to the calculation of tax for married couples (Spanish Taxation of Married Couples) and it has prompted quite a lot of couples - or at least the half of the couple who do the tax stuff - to send in their queries.

Apart from the mechanics of the calculations, there have been a few proposals for cutting the overall tax bill by some restructuring of the couple's fiscal affairs. Often the question is "I've had this idea for reducing our tax bill; will it work?". People can get quite creative. I just wanted to comment on a couple of ideas:

Income sharing - often a retired or semi-retired couple will have a very uneven skew of income with one spouse earning almost everything. If some of the income could be shifted to the other spouse then that could save tax either by using up more of their personal allowances or shifting some of the couple's income out of higher rate tax. Obviously some sources of income are very specific to the person - like a pension or salary - but some deposit accounts and investments could be put in both names to divide the resulting income up between spouses.

Similarly couples where one spouse owns a business may be able to legitimately transfer some income to the other either by employing them in some capacity or, in the case of a limited company, paying a dividend to them.

A very specific idea I came across was the proposal to form a Spanish business partnership - Sociedad Civil (description of legal form here) - to take the place of a simple autonomo set-up. The husband was self-employed and earning a high and regular income; the wife earned nothing. The idea was that if they formed a partnership then they could say the partnership earned the money and then divide the proceeds between them as income. This could work, with two provisos:

- the partnership will cost more than a single autonomo to run thus taking away some of the tax savings from increased use of allowances and less higher rate tax. Primarily this is because both husband and wife will have to sign up for autonomo social security ( see Autonomo Guide) and also because there is more reporting to do. While a Sociedad Civil only has to submit one IVA declaration, each of the partners has to do quarterly income tax returns.

- the partnership has to be legitimate or at least not demonstrably illegitimate. For example if a lawyer sets up a partnership to practice law with his wife, who is not a lawyer, then that would clearly not be acceptable. If, on the other hand, the couple is doing an activity which both could plausibly be contributing to then setting up a Sociedad Civil is a perfectly acceptable route to follow. But the tax savings would have to be considerable to make it worthwhile which is probably why it is still quite rare.

New guide on our website - Spanish non resident taxes