Tuesday 5 June 2012

Spain's Fiscal Fraud Amnesty.

plural am·nes·ties, 
2. Law: an act of forgiveness for past offenses, especially to a class of persons as a whole.
(...) (See here)

Resolute to cut the fiscal deficit by 13.4bn euros, the Rajoy government found Spanish tax fraudsters (literal translation from Spanish defraudador) evaded taxes on about 25bn euros, accumulated as of December 31, 2010, presumably kept in tax havens overseas. (See here. Spanish)

At current top marginal rates (52% persons; 30% corporations) that amount could yield between 7.5 and 13.0bn euros in taxes, not including penalties and interests.

In a very unusual move and even though the ruling "People's" Party controls Parliament since last year, the Rajoy government decided to decree a fiscal fraud amnesty (March, 31). (Official text, in Spanish)

Scree capture. Click on image to enlarge.

For readers not familiar with the terminology: decrees are regulations by fiat of the Executive. Unlike bills and acts, which are discussed and approved by Parliament, decrees bypass parliamentary discussion. This particular decree grants amnesty to tax evaders declaring undeclared incomes earned before December 31, 2010, in exchange for a 10% fine. (See here. Spanish)

In strict money terms, the Rajoy Government unilaterally exchanged a 7.5-13.0bn debt (not including penalties or interests) for an expected 2.5bn. The idea, allegedly, is (1) to accelerate debt collection, and (2) to allow the immediate repatriation and investment in Spain of these capitals (i.e. euro 25.0bn).

I won't draw the readers' attention to this economically questionable rationale, or to the unorthodox legislation by decree, but to something much more basic and elemental.

Regardless of language, amnesties, by definition, refer to past offenses, as can be seen in the quote opening. This should apply to the proposed Rajoy tax fraud amnesty, too. However, it appears, this elemental fact is ignored by the Rajoy goverment.

El País, after consulting taxation experts, identified a remarkable loophole in the decree. (See here. Spanish)

According to the official text of the decree, tax fraudster/evaders don't need to demonstrate their incomes' provenance or the date when they were earned, provided those incomes were kept in cash.

Drug traffickers, for instance, could take the proceeds of deals and deposit them in a bank. By doing so, claiming the transaction took place before December 31, 2010, and paying 10% of the amount as "regularization fee", the deposit would become to all practical purposes legitimate.

As a side note, they might still be liable to a criminal prosecution (for drug smuggling/dealing, for instance), if an eventual police investigation were ordered and found evidence the money deposited was illegally earned.

Further and much more meaningful from the critically important point of view of fiscal policy, the decree provides strong incentive to evade taxes in even perfectly legal transactions. As would-be tax fraudsters/evaders don't need to present evidence of the fiscal year when the income was earned and the decree allows them to use this procedure until November 30, otherwise perfectly legal transactions could avoid taxes, by the simple expedient of claiming they took place before 31/12/2010 (as mentioned, corporate income tax top marginal rate is 30%, and personal income tax, 52%).

In other words, unless remedies are found (and it's unclear whether they exist) the Rajoy tax fraud amnesty would not apply only to past offences. An amnesty with a vision of the future!

Among other effects, opposition PSOE is studying a possible constitutional challenge.

More immediately, this amnesty can potentially affect severely fiscal revenue for the current financial year; liquidity preference could jump real soon, too, at a moment when Spanish banks are already under pressure.


If I were the Spanish banks, I'd have plenty cash at hand, just in case.

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