Sniffing out tax evasion

In 2007, before the crisis broke, Spanish companies obtained record profits. These increased by 14.9 percent over the previous year. Even in the first quarter of 2008, with the crisis coming down, the profits of non-financial companies rose by eight percent, while those of financial firms fell, for the first time, by 1.5 percent. With this data in hand, the Finance Ministry expected revenue from company taxes greater than that of 2006, or at least similar. But, in fact, company tax revenue fell sharply, by 18 percent.

This data was released by the Tax Agency as early as September 2008. The only possible explanation for this sharp drop in revenue, the inspectors said, was an increase in tax evasion.

In just two years, 2008 and 2009, company tax and value-added tax (VAT) revenues fell by 46 billion euros. VAT recovered, but not company tax, as was explained last week by Francisco de la Torre, secretary of the Professional Organization of Tax Inspectors (IHE).

The first explanation normally offered for such a spectacular drop in revenue, he says, is that it is inevitable, because millions of jobs have been destroyed in Spain, and because the proportion of the under-the-counter economy has increased. Yet this does not explain what happened in 2008. Besides, destruction of employment essentially diminishes not revenue from company income, but that from income tax and Social Security contributions.

Tax evasion in Spain has risen, and is concentrated in large corporate groups, international companies and large personal fortunes

In short, tax evasion in Spain has risen, and, according to the experts, is concentrated in large corporate groups, international companies and large personal fortunes. The liberal and service professions, which have a poor public reputation in this respect, account for 10 to 20 percent of the total - which, while more than a little, is less relevant.

The reason why Spanish legislation has always been so timid and inefficient in the struggle against tax fraud is a question to be answered by the successive governments that have ruled Spain in recent decades. Why does Spain devote fewer resources to revenue inspection than any comparable neighboring country? Why has it been possible to accumulate such a huge quantity (some 50 billion euros) of tax debt pending collection, without any reform of the laws that permit this?

The answer to some of these questions is in the Law for Measures against Fiscal Fraud, approved last Wednesday in the Senate. It includes some necessary reforms, long demanded by the tax inspectors, but unfortunately leaves some big problems unresolved.

For example, the collection of pending tax debts. True, a reform of the Penal Code is required to avoid the present surprising situation, in which the Tax Agency can collect a pending tax debt of 1,000 euros by automatic, administrative means, while a debt of hundreds of thousands passes into the limbo of "pending collection" for years, while the case goes before the courts.

It just so happens that the Penal Code reform, which would enable the Agency to proceed to an administrative embargo without waiting for a final court ruling, is still being delayed. And of course, it will not retroactively affect the well-known 50 billion euros that now sleep under a shadow, in major law offices.

Nor is the new law going to clear up a long-standing headache for tax inspectors: the generally applicable obligation to conclude any fiscal investigation within a term of 12 months. Obviously, tax evasion is a very complicated thing to investigate. However, either the inspectors find sufficient proof in the space of a year, or they are obliged to close the case. The investigation of the Chinese money-laundering network recently discovered in Madrid took three years, but that was because it began as a police investigation and not a fiscal one. If the tax inspectors alone had been scrutinizing the accounts of the companies involved in this massive racket, they would have had to shelve the case long before obtaining any solid results.