SPAIN Overall trends in taxation Structure and development of tax revenues The tax-to-GDP ratio in Spain amounted to a 30.

4% of GDP. This value ranks 20th in the EU and is the lowest among the western Member states, alongside with Ireland. Spain collects revenues almost equally from social contributions, direct taxes and indirect taxes (respectively 12.4, 10.0 and 9.0 % of GDP). Compared to other Member States, Spain has the lowest indirect taxes collection in percentage of GDP in the EU (some 4.4 percentage points lower than the EU27 average). This can be attributed partly to the sharp decline in GDP in the last year. Another reason is that standard VAT rates are lower than the EU-27 average, even after the recent increase from 16 % to 18 %. In the last years, the share of VAT revenues in GDP fell from a high of 6.4 % in 2006 to 4.1 % in 2009, following the decline in GDP and thus reduced average available income to the average Spanish citizen. Compared to this drop in revenues, the share of excise duties in GDP remains stable at 2.2 %. The share of direct taxes and of social contributions in GDP are approximately at the same level as the EU-27 average. The decline in tax revenues from direct taxation is mainly due to the drop in tax on corporate income. The impact of the economic crisis on this type of tax revenues was bigger in Spain than in other EU Member States, and tax revenues fell from 4.8 % in 2007 to only 2.3 % in 2009 (EU-27: from 3.5 % to 2.7 %). Social security contributions have remained impressively stable over the period, with the lion's share of the burden resting on employers. Spain has a quasi-federal tax system, with three levels of government. Traditionally, the central government and the social security funds collected the majority of the revenues. However, this has changed over the last two decades. Firstly, following the reform of the financing system of the regions (Comunidades Autnomas, 'State' in the table) in 1997, the share of regional taxes as a percentage of total taxation practically quintupled from less than 5 % before 1997 up to 24.0 % in 2009. This increase in the share of regional taxes was mirrored in a similar sharp decrease in revenues collected by the central government, from 48.7 % in 2000 down to 29.0 % in 2009. The shares of tax revenues collected by central and regional governments, respectively, are thus converging. Secondly, to tackle the impacts of the economic crisis, the increase in the share of social security funds since 2007 from 32.0 % to 39.7 % also took place at the expense of revenue collection by the central government. Between 2000 and 2007, Spain enjoyed a booming economy, with annual growth rates between 2.7 and up to 5 %, boosting also tax revenues until 2007. Coming from the low range compared to EU-27, the total tax-to-GDP ratio in Spain peaked in 2007 at 37.1 %, the EU-27 arithmetic average. In 2008 and 2009, Spain experienced a strong impact from the economic crisis; GDP growth crashed from an increase of 3.6 % in 2007 down to a 3.7 % fall in 2009. Tax revenues dropped thus from 37.1 % of GDP in 2007 and 33.2 % in the previous year, to a new low of only 30.4 % in 2009. The steep decline of almost 7 percentage points between 2007 and 2009 compares to a more limited decline of tax revenues at the level of EU-27 of only 1.4 percentage points over the last two years. This implies that after having reached the EU-27 average in 2007, within two years the distance from this average became again

rather big: the total tax ratio in Spain is now some 5.4 percentage points lower than the EU-27 arithmetic average. Taxation of consumption, labour and capital; environmental taxation The decline in the ratio of consumption taxes in proportion to GDP has further accelerated and dropped to only 7.2 % in 2009, although it already was the lowest in the EU-27 (11.7 % in EU-27). The implicit tax rate on consumption dropped to 12.3 % in 2009, the lowest in the Union. This development mimics VAT collection in percentage of GDP. The ratio of taxes on labour income to GDP stood at 16.7 % in 2009, 0.8 percentage points below the EU-27 average (17.5 %). Throughout the years 2000 2009, Spain has displayed an average implicit tax rate (ITR) on labour slightly below the EU-27, although this difference has decreased from slightly more than five percentage points in 2000 to slightly more than one percentage point in 2009. It now stands at 31.8 %. While the ratio of capital taxes on GDP has increased slowly but monotonously during the previous two decades until 2007, it dropped in the last two years very fast as a consequence of the economic crisis from 11.2 % in 2007 to only 7.4 % in 2009 a share last seen in the early nineties. The sharp decline in the last two years is all due to a drop in tax collection on income of corporations and on stock of capital and wealth. Similarly, the Implicit Tax Rates on capital experienced a large decline from a peak of 43.3 % in 2007 to 27.2 % in 2009. The Implicit Tax Rates on corporations collapsed from 63.1 % in 2007 to 24.5 % in 2009, partly due to the cut in Corporate Income Tax rates and partly to lower taxable profits following the economic crisis. Environmental taxation remained constant albeit at the lowest in the EU-27 (1.6 % of GDP). As in the majority of Member States, it is mostly concentrated on energy (1.3 % of GDP). Current topics and prospects; policy orientation Since 2008, several measures have been taken in order to alleviate the consequences of the global financial and economic crisis. Tax credits have been introduced to support household purchasing power of working and self-employed taxpayers; for small and medium sized enterprises (SME), the thresholds have been lifted to widen the group of companies that can benefit from the special regime and a reduced corporate income tax rate. Companies that grow out of the group of SMEs are allowed to continue applying the special regime for three years. To cut the budget deficit, the general VAT rate was increased by 2 percentage points to 18 % from July 2010 while the reduced VAT rate of 7 % was increased to 8 %. Moreover, a number of tax credits have been abolished to this end, for instance tax credits for the acquisition or restoration of the taxpayer's primary residence. Finally, savings income is taxed at the progressive system of 19 % and 21 % (above 6 000) from 2010 instead of a flat 18 % rate.

Main features of the tax system Personal income tax The personal income tax system has been further simplified in 2007 and reduced the tax scale applicable to the general component of taxable income from five brackets to four (24 %, 28 %, 37 % and 43 %). However, with the Budget bill for 2011 which will in general apply from 1st January 2011, the central government created now yet two additional tax bands for high personal income between 120 000 and 175 000 raising current central government top PIT marginal rate (21.5 %) by 1 and 2 percentage points, respectively. Regional governments are free to follow (or not) central government policy in setting their own regional PIT schedules applied to the general taxable base. Savings, including capital gains, are taxed at a progressive system of 19 % on the first 6 000, and 21 % on 2010 income above. Personal and family allowances are included since 2007, as a general rule, in the first income bracket, which is taxed at a zero rate. In the context of measures taken to alleviate the consequences of the global financial crisis, Spain has in the past increased and newly introduced tax credits like the additional tax credit of 400 to working and self-employed taxpayers to support household purchasing power. In order to cut the public deficit, this approach was complemented in 2010 by measures that cut tax credits in other areas. For instance, the 15 % tax credit for the acquisition or restoration of the taxpayer's primary residence has been abolished from 1 January 2011 if taxable income exceeds 24 107. Similarly, the tax credit for each child born or adopted has been repealed. Corporate taxation The tax rate has been reduced from 35 % to 32.5 % in 2007 and to 30 % in 2008 (from 40 % to 37.5 % and 35 % for 2007 and 2008, respectively, for entities engaging in oil exploration, research, and exploitation). New measures to encourage investment and employment extend from the 1st January 2011 the special tax regime for small and medium sized enterprises (SMEs): firstly, the annual turnover threshold to be included within the scope of the special regime increases from 8 million to 10 million. Secondly, the taxable amount taxed at the reduced tax rate has been increased from 120 202.41 to 300 000. Companies that have less than 25 employees and a turnover below 5 million are taxed at 20 %. Furthermore, these companies are allowed to free depreciate their assets during 2009-2010. Companies that do no longer qualify for the SME special tax regime will nevertheless be able to apply the regime for three years following the loss for the SME qualification. Free depreciation is granted for all companies up to 2015. Some tax credits, including those for exports, are to be gradually phased out by 2011, 2012 or 2014. The rules regarding tax credits for reinvestment have also been revised, in particular with reference to the kind of assets involved. Finally, the R&D tax credit, which projected phase-out will not take place, has been expanded to companies with more than 25 % of their research activity in another EU Member State or member of the EEA. VAT and excise duties The standard VAT rate is 18 % as from 1st July 2010 (from 16 %). Two reduced rates of 8 % (up from 7 % from July 2010) and 4 % apply to specific categories of goods. The recent reform introduced a special

VAT consolidation regime applicable to corporate groups, and the possibility of claiming immediate VAT refunds. Tax rates for tobacco and hydrocarbons had been slightly increased in June 2009 and once more tobacco tax rates were raised again in December 2010. Wealth and transaction taxes Inheritance and gift taxes are levied on behalf of the 17 autonomous regions, which set their own tax rates within certain limits. A tax on wealth transfers applies to rights and assets located in Spain. Since 2011, a stamp duty tax exemption applies in case company formation, capital raising, partner contributions, and move to Spain of Head Offices from countries outside the EU. For the transfer of real estate, this tax is levied depending on the Autonomous Community where the land is located. If no specific rate is set, a 7 % rate is levied on the value of real estate. A 100 % tax rebate has been introduced in the tax on wealth in 2008, abolishing it in practice. Local taxes Regional governments received a significant share of total tax revenue (33 % of personal income tax; 35 % of VAT; 40 % of excise duties on hydrocarbons, tobacco, beer and alcohol; 100 % of excise duties on electricity and car registration). Indirect tax revenues are transferred according to a territorial consumption index. Statutory personal income tax rates can be modified by the regional governments provided the structure retains progression and the number of tax brackets is unchanged. Taxes on inheritance and gift tax, registration duties and fees on lotteries and gambling are wholly assigned to territorial governments with almost complete jurisdictional powers. Under the system applied since 2009, 90 % of all autonomous communities resources will come from taxes. In this regard, autonomous communities will benefit form an increased share in the ceded taxes (50 % of Personal Income Tax and VAT and 58 % of Excise Taxes), as well as increased discretionary powers. Social contributions Each professional category has minimum and maximum contribution bases. For 2011, the maximum monthly base is 3 230.10; the minimum varies depending on the type of work (ranging from 748.20 to 1 045.20 /month). The total rate for the general regime (including general risk, unemployment insurance and professional education training) is 4.7 % of covered earnings for the employees and 23.6 % for employers for a total contribution of 28.3 %. Self-employed persons contribute between 26.5 % and 29.8 % of their earnings, with a minimum payment of 250 per month.