Is Spain nuts to tax online gaming?

The Spanish government is to start taxing online gaming which has up until now got off extremely lightly. Do they risk driving the industry underground or offshore?

The Spanish Gambling Act pulls no punches and covers all forms of online gaming: poker, bingo, sports betting and football pools. Considering that these activities have not formerly been taxed at all, the proposed tax rates are extremely punitive. The rates vary between 10% (for poker played between individuals) and 30% for certain sweepstakes. Most activities are taxed at 20% of the gambler's stake.

The online gaming industry is most upset that these rates apply to the GROSS amounts wagered; they had lobbied for a tax only on net income after winnings had been paid out. The government turned a deaf ear to their requests (Internet gambling must also pay tax) more concerned about the loss of an estimated 315 million € tax than the feelings of the profitable website owners.

Of course the move could backfire in more ways than one. Experience of other countries, including Britain, shows that taxing online gambling portals drives the business offshore to places like Gibraltar. Also the government risks gaining a reputation for being "anti gambling" or "anti business" just when a big new casino investment is being proposed: Sands bonanza likely to prove a mirage.

What is it with governments these days? Can they not see that the correct way to deal with deficits is spending cuts and not tax increases. If tax levels were not sky high to begin with I could see the sense in it perhaps, but at the actual levels we have in the West most tax rises (certainly on incomes and corporations) is bound to prove counterproductive i.e. reduce revenues by destroying economic activity. As the UK government is now discovering with the 50% tax band and the "fee" on non doms which is driving away taxable wealth from Britain every day.

New article on our website Spanish tax rates for 2011

Trouble down at the Ayuntamiento

We have all heard about Spain's debt crisis at a national level and the proposed austerity drive, but I have been reading an interesting article in The Telegraph which suggests things may be even worse locally. According to this article - Spain Relying on Short Term Funding as Councils go bust - there is trouble brewing down at the Ayuntamiento (Spanish town hall) in the form of:

- tax revenues down 30% because of the property bust

- 20% cuts in central government funding for municipal councils

- 400 councils across the country not paying water, electricity or phone bills

- "most" councils in Andalucia bankrupt or surviving day to day

A mayor was quoted as saying:

"I am deeply ashamed to know that I won't be able to pay our staff. They have got mortgages, children. What am I supposed to do? We were not able to cover our payroll in June. Neither I nor our councillors have received anything for two years. I've had two heart attacks. My health is cracking. If we cannot solve this, I'm resigning."

Not only are council staff living in fear of not getting paid they are having more work to do. Once council (San Sebastian) has seen a 68% jump in applications for financial assistance in 4 years. Managers are calling for more resources and staff although everyone else is calling for councils to shed staff and costs as part of the solution.

Little surprise then that the councils have their begging bowls out. FEMP (the local government association) has demanded 3 billion € from the government to see cash-strapped authorities through. This would be in the form of easy credit. Councils already had racked up debt of €35 billion by the end of 2009.

Is debt the Spanish national disease? Or is it an addiction that is proving painful to kick? The truth is that Spain's position is similar to most of the rest of the Western world from Washington to London to Tokyo. The "solution" to the original economic crisis was more borrowing at national level, and we now seeing this false comfort slipping away.

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Contracting in Spain

Getting a Spanish tax refund

There aren't many nice things about being a tax accountant. It's not a great ice-breaker at parties and you sometimes feel a bit like a dentist or a doctor delivering bad news when you have reckoned up someone's liability and have to tell them. But then there are those lovely occasions when your client gets some money back and you get the "shoot the messenger" syndrome in reverse ("hug the messenger"?) because they are so surprised and grateful.

This scenario is particularly rewarding when you have come up with the idea that got the tax refund in the first place and the recent Spanish tax reporting season threw up some good examples of this.

Refunds can only occur when someone has paid too much tax during the year and they have submitted an annual tax return after the year is over which proves as much: the Agencia Tributaria will credit their bank account with the difference. What I mean by "paying too much tax during the year" is that the Spanish government take automatic retentions of tax from people's income as it arises and, as this is done on a flat rate taking no account of people's personal circumstances, too much can be taken. Examples of such retention payments taken by the government are:

- % deductions of bank interest

- retentions from salary (like PAYE in England)

- deductions from dividends paid by companies

- retentions paid on self employed earnings

- rental income retentions

The most common reason why people find they have paid too much out in retentions is that they have low income overall compared to their personal allowances (tax free income allowance). This often happens when people start work or start a business part way through the year so they get a full year's personal allowances to use against a part year's income. Also a married couple can claim the higher Spanish married couples allowance when only one of them is earning.

Such refunds are one good reason why it can often pay to do a tax return particularly if you take advantage of all the allowances available to you. There are allowances such as for young children (under 3) and against rent paid that can lead to a tax refund in the right circumstances.

Anyone wanting more details of how the Spanish tax system works should check out the Advoco page Spanish Income Tax 2010.

Don't get trapped by Spanish tax penalties

When I first got interested in Spain and bought a holiday flat here (in Valencia) I never even thought about annual tax returns. Nobody told me about non resident tax returns and I didn't know to ask. I blithely went years without submitting a return until a few years ago when I had been a resident for a year or so and had some income to declare. I sold the Valencia flat in 2006 and there were no nasty consequences.

Some clients have not been so lucky. One had a nasty shock recently when they tried to recover the 3% capital gains tax retention taken by Agencia Tributaria when they sold an apartment in Spain. The amount of the retention was 3.000€ and despite making the proper claim for release of the money, the client was told that they had to produce tax returns for every year they had owned the property. It is possible to catch up taxes in these situations and do Form 210 returns in arrears and that is what they will have to do.

It is not just non-residents tax that can come back to bite you. Another case we are currently dealing with involves an autonomo who had been invoicing their clients for years without making quarterly or annual returns. Correcting this will be difficult as there are quarterly business tax and IVA returns to catch up and annual "renta" declarations. Worse of course there are penalties and interest payable on late returns.

The system is complicated and circumstances vary but this is the sort of extra expense that can be incurred:

late return penalty - less than 3 months late 5% surcharge

less than 6 months late 10% surcharge

less than 1 year late 15% surcharge

more than a year 20% surcharge

PLUS interest on amount owed - 5% in 2009 - for amounts paid more than 1 year late

If there is no tax to pay then the fine is a flat 100€

These are all assuming that the returns are made late by the taxpayer voluntarily(they have four years to do so), not because the citizen has been caught out by the Tax Office and ordered to pay tax. In this case the bill rises depending on the gravity of the offence uncovered:

Not serious: 50% extra payable on all interest and penalties

Serious: 100%

Very serious: 150%

The penalty for returns with no tax to pay rises to €200 if not made voluntarily.

Finally another consequence of not making Spanish tax declarations that can trap the unwary is that documentation gets lost. This makes it much harder to complete the returns and in particular difficult to claim any deductions that might have been allowed if things had been done on time.

If you have back tax issues or think you might have they are best tackled sooner rather than later however grim the prospect seems.

Social Security exemption for autonomos

A lot of people living in Spain and thinking of starting their own business are put off going self employed by the high fixed social security contributions. Anyone registering as “autonomo” with the Tax Office is also obliged to sign up for self-employed social security which costs a minimum of €250 a month. If you are starting a small business with uncertain revenues or if it is only a minor concern where you know the income is going to be pretty minimal this is very offputting.

The situation is worse when you do not need the social security because, for example, your family has private health insurance or you do not need to make any more state pensions contributions (e.g. because you paid the maximum already in the UK).

There is a possible exemption which may make a small business viable in this position. If your are registered autonomo but this is not a full time regular income generating occupation then you can be exempt from joining autonomo social security (known as “RETA” or Regimen Especial Trabajadores Autonomo ). The law does not give a hard and fast definition of how an “occasional” autonomo should be classified but case law has suggested that, in the absence of any other factors, earning less than the annual minimum wage would suffice.

The minimum wage, or the “salario minimo” or “salario minimo interprofesional” (“SMI”), is €7,599.60 for 2010. It is most commonly referred to as a monthly amount ( currently 633,30), and is changed annually by the Bank of Spain.

Once someone earns more than this monthly amount they won’t be able to claim the exemption from social security. It should also be noted that they won’t be able to claim any benefits or benefits from social security while they are not making payments.

More information can be found at the new Autonomo page of the Advoco website which also includes a video guide to the autonomo.