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To be used in conjunction with the new anti-fraud law

Spanish Treasury adopts new measures to combat international tax evasion

Tuesday 20 November 2012
Miguel Ferre

On Tuesday, the State Secretary for the Treasury, Miguel Ferre, highlighted the significant progress achieved on international tax affairs and the elimination of tax havens, and announced new measures that will be used to enhance efforts on the exchange of information with the signing of a whole host of agreements and increased human and material resources to combat international tax evasion.

Miguel Ferre announced the signing of an agreement with the United States that represents another step towards a global system of automatic information exchange, a key issue for the discovery of hidden assets and income in overseas locations.

Agreement signed with US to develop FATCA

On Tuesday, Miguel Ferre announced that Spain and the United States have signed an agreement aimed at improving compliance with international tax law and at enforcing the Foreign Account Tax Compliance Act, also known as the FATCA. This agreement and those that the US will soon sign with other countries and jurisdictions are based on a model that was jointly negotiated and drafted in July of this year by the United Kingdom, Germany, Italy, France, the United States and Spain.

Under this agreement, financial entities in Spain and the United States will be required to provide their tax authorities with information on taxpayers from the other signatory country. This information will then be exchanged between those tax authorities in an automatic fashion and via a standardised procedure. For example, the United States will provide Spain with the information given to it by the financial entities in the US on the interest earned by Spanish taxpayers.

Companies will be able to avoid withholdings

Furthermore, the agreement also significantly simplifies compliance by Spanish financial entities with the Foreign Account Tax Compliance Act by obtaining more favourable treatment than provided for by the general text of the US legislation. Among other important advantages, they will become exempt from the 30% withholding on payments they receive from US sources without the need to have signed a bilateral agreement with the United States.

Miguel Ferre underlined the importance of these agreements "as they constitute a significant milestone in the coordinated fight against tax evasion at an international level". By signing this agreement, Spain is once again positioning itself "on the front line" in this fight, alongside other major EU countries (the United Kingdom, Germany, Italy and France) and such non-EU countries as Canada, Australia and Mexico.

In short, this process represents another step towards an international system of automatic tax information exchange that will be key to the discovery of assets and income in overseas locations. The United States recently announced that it has already made a firm commitment with over 50 countries and jurisdictions to negotiate agreements of this nature and will continue to establish contact with more interested parties.

Close relations

The signing of this agreement strengthens the already close economic ties that exist between Spain and the United States of America. In June, the two governments announced the signing of another agreement between the two countries to avoid double taxation that will help boost both bilateral trade and investment by US companies in Spain and by Spanish companies in the US.

Trade exchanges between Spain and the United States were valued at 18 billion euros in 2011. The flow of direct investment from Spain to the US amounted to 6.22 billion dollars last year, while the investment stock stands at approximately 42 billion dollars. In turn, the United States is consistently one of the two top overseas investors in Spain. The flow of direct investment from the US into Spain amounted to 5.9 billion dollars last year, with an overall investment figure of approximately 58.6 billion dollars.

New national office for international tax affairs

The State Secretary for the Treasury also announced the creation of a department specialised in international tax affairs that will be aimed at strengthening the material and human resources used to combat international tax fraud in a similar way to the efforts being made in other neighbouring countries. The National Office for International Tax Affairs will be run under the Tax Inspection Department of the Spanish Tax Authority. It will have powers throughout Spain and will employ civil servants with the necessary qualifications in a field that requires a high level of specialisation.

The new office will enable the centralised planning of any action to be taken, will increase the support provided to all central and regional units run under the Tax Inspection Department and will establish uniform criteria for action and working methods in common for those units.

The State Secretary for the Treasury highlighted the areas that international tax control should preferably be targeting, such as the cost of transfers established between entities belonging to a single multinational business group and the taxation in Spain of income earned by non-residents.

Declaration of overseas assets

Furthermore and in line with the progress achieved on the global system of tax information exchange, the State Secretary highlighted the importance of the measures included in the new anti-fraud law in Spain, which came into force recently, including that which requires the declaration of any assets located overseas. Pursuant to the Royal Decree approved on Friday by the Council of Ministers that develops this new law, taxpayers will be required to declare all assets and rights they hold overseas in the first quarter of 2013.

The declaration form will be approved shortly by ministerial order. Both deposit accounts held with financial entities overseas and all kinds of property assets and rights over property assets must be declared, as well as securities, rights, insurance and income deposited, managed or obtained overseas.

As regards deposit accounts held with financial entities overseas, the information to be provided will include the balance of such accounts at 31 December and the average balance over the last quarter of the year. This information must relate to current accounts, savings accounts, agreed-term deposits, credit accounts and any other currency accounts or deposits regardless of their nature or structure, whether or not they provide a return.

As regards real estate, information must be provided on the acquisition date and value, and the date of issue or cancellation. As regards securities, rights, insurance and income deposited or managed overseas, the information to be provided will consist of the balance at 31 December of each year. Any assets that are discovered but have not been included on the overseas income declaration form will be considered in the most recent tax period still applicable by law.

The system of penalties applied to any failure to comply with these obligations is also increased. A reform of the Criminal Code, which is currently being passed through Parliament, will establish a new aggravated form of tax offence that raises the maximum possible jail sentence.

Fewer opportunities to hide information

Furthermore, Miguel Ferre underlined the intensive application of the new regulatory and organisational measures that have been encouraged by an environment in which fewer opportunities remain to hide information. In particular, he referred to the recent information exchange agreements and double taxation agreements.

Among them, he highlighted those signed with Andorra and the Bahamas in recent years, those signed with Panama and Luxembourg, those that are currently being renegotiated or are pending formalisation (such as those with Austria, India and the US) and especially those signed with low-taxation territories such as Singapore and British Crown Dependencies like the Isle of Man, Jersey and Guernsey.

He also referred to the recent update applied to Article 26 of the OECD Model Agreement that will enable increases to both the relevant information that may be requested under an Agreement and those affected by the request as the update will enable information requests to be made regarding groups of taxpayers without the need for them to be identified individually. Within the framework of the new information, it will also be possible to include the negotiation of a new, more comprehensive protocol with Switzerland regarding the exchange of information.

Mutual assistance

Miguel Ferre also spoke about the transposition of the EU directive on administrative cooperation, which was partially undertaken via a Royal Decree on mutual assistance that was approved by the Council of Ministers last week. This directive strengthens cooperation in the settlement of taxes within the EU and lays the groundwork for a broad automatic exchange of information on numerous types of income. This will also be applicable in Gibraltar.

Aggressive planning by multinationals

The State Secretary also highlighted the meeting of the Bureau of the OECD Committee on Fiscal Affairs, held in Paris last week, that examined the erosion of taxable bases with regard to corporate income tax and the transfer of profits from developed countries through fiscal planning strategies. The meeting undertook to study proposals to minimise the "aggressive fiscal planning practices" of many multinationals that use the differences to be found in the national legislation of different countries to eliminate or significantly reduce the amount of taxes they pay.