According to the latest news, it appears that, following a report from the Spanish Independent Fiscal Accountability Authority (Airef) on tax incentives, the Spanish Government is considering the possibility of eliminating the VAT exemption for private health and education services as part of the General State Budget for 2021.
The Spanish Government is currently negotiating the approval of the General State Budget for 2021. These negotiations should be followed to see whether this measure is, ultimately, introduced, as the process for passing the General Budget Law is not an easy one.
Due to the instability in Spanish politics in recent years, the Government has not been able to pass a General Budget Law since 2018. But, considering the current economic situation and ongoing public health emergency, the Government has decided to seek the necessary support to approve a General State Budget for 2021 that will tackle the problems deriving from the COVID-19 crisis.
The Airef report
It is anticipated that the General Budget Law will include specific tax measures to increase the State’s resources.
In this regard, the Airef issued a report in July 2020 analysing some of the tax incentives associated with personal income tax, corporate income tax and VAT. It now appears that the Spanish Government may be looking to eliminate some of the VAT incentives that were analysed.
So, this posts focuses on Airef's analysis of reduced VAT rates, the VAT exemption for private health education services, and the VAT exemption for financial services.
The Airef report states that the way to increase Spanish tax revenues would be to remove the reduced VAT rates. Eliminating the VAT exemption for health and education services does not produce as clear a result. But, according to the latest news on the negotiation of the General Budget Law for 2021, it seems that the Government is going to opt for the second option.
Reduced VAT rates
The Airef report concludes that Spain collects relatively little VAT revenues due to extensive use of reduced VAT rates and recommends to raise the reduced VAT rates to the general rate of 21%. But it does so without considering the effects of such an increase in the midst of the COVID-19 crisis
Although the EU has standard rules on VAT, each Member State is responsible for setting its own rates. According to the VAT Directive, there are various types of VAT rates that may be applied in EU Member States:
- a standard rate which cannot be less than 15%
- a reduced rate which cannot be less than 5%
- special rates i.e. super-reduced, zero or parking rates.
Unlike most EU countries with two reduced rates, Spain chose to have reduced and super-reduced tax rates. As shown in the below table, the standard and reduced VAT rates have been increased twice in a row over the last ten years, while leaving the super-reduced VAT rate intact.
|Super-reduced rate||Reduced rate||Standard rate|
|Rate (after increase)||Change||Rate (after increase)||Change|
|July 2010||4%||8%||↑ by 1||18%||↑ by 2|
|September 2012||4%||10%||↑ by 2||21%||↑ by 3|
The Airef report concludes that, despite the tax reforms, Spain collects relatively little VAT revenues in comparison to other EU countries, due to extensive use of reduced VAT rates. In addition, it concludes that while, on average, the reduced VAT rates do have some progressive effect, which is almost entirely due to foodstuffs, they have a regressive effect for many items such as restaurants, tourist packages, hotels and transport.
In line with these conclusions, the Airef report proposes that raising the reduced VAT rates to the general rate of 21% would improve the distributive efficiency of taxes in the long run provided that simultaneously additional compensatory benefits for those on the lowest incomes are introduced and targeted plans for the promotion and improvement of strategic sectors of the Spanish economy (i.e. tourism and catering) are designed and implemented.
One drawback is that the Airef report neither mentions nor measures the effects of such tax increase or reform in the midst of the COVID-19 crisis which, clearly, will affect consumption and families – the main beneficiaries of the reduced VAT rates - and e.g. Spanish key tourism and catering sectors (which are strategic to Spanish economy).
VAT exemptions for private social services: health and education
Airef analysed the VAT exemption applicable to health and education services provided by the private sector without reaching a clear conclusion that the elimination of this exemption would have a positive impact on the State's accounts.
According to the VAT Directive private health and education services may be exempted from VAT. The rationale for this is to make such services more accessible and therefore reduce the burden on the public health and education systems.
Airef analysed the impact of removing the VAT exemption, noting that health services could be taxed at a reduced rate, but the standard rate would have to be applied to education services given that, unlike health services, education services are not among those that can be taxed at a reduced rate according to the VAT Directive.
It could not be clearly concluded that eliminating the exemption would have a positive impact on the State’s accounts. This is due to the fact that the higher revenue obtained by the State through VAT could or could not be offset by the higher costs of providing the service via the public system, as the increase in the cost of such services in the private sector will probably cause greater demand for the services in the public sector.
Moreover, if the Spanish government decided to eliminate the exemption, it would be necessary to evaluate the adequacy of the measure from all Spanish, EU and international law angles.
VAT exemption for financial services
Lastly, the Airef report analyses the VAT exemption for financial services. The VAT Directive establishes that Member States may exempt specific financial services from VAT The rationale for this exemption is to make more commonly used financial services more accessible to citizens.
After analysing the impact of the exemption, the Airef report concludes that removing the VAT exemption would increase prices of financial products and directly affect consumption and families – but not companies (as they could deduct the input VAT). As such, it does not recommend any measures that should be taken in this respect.
It is anticipated that the Spanish General Budget Law for 2021 will include tax measures to increase the State’s resources. In particular, it appears that the Spanish Government is considering the elimination of some existing VAT benefits.