News / Europe

Spanish Businesses Fret Over VAT Hike

Tourists walk past Spain's former Banco Espanol de Credito in Madrid, August 28, 2012. Tourists walk past Spain's former Banco Espanol de Credito in Madrid, August 28, 2012.
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Tourists walk past Spain's former Banco Espanol de Credito in Madrid, August 28, 2012.
Tourists walk past Spain's former Banco Espanol de Credito in Madrid, August 28, 2012.
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Caroline Arbour
SEVILLE — Spain’s standard value-added tax will jump from 18-21 percent on September 1, and the reduced rate will rise two percent, the sharpest increase in the country’s history. The hike is expected to plunge Spain deeper into recession - at least initially - and opposition to the measure is widespread.

Braving the economic storm, Fernando Vázquez Rojas opened three restaurants in the past four years in Seville, where clients can dine for under 20 euros per person - a bit more than $25.

Business has been especially good at the location on Torneo Street, but he has felt the pinch of decreased consumer spending, with revenues falling since April by "15-20 percent, depending on the moment,” said Rojas.

Tax on a meal in a restaurant is set to increase two percent, from 8-10 percent, on September 1. Rojas is not worried. He said, “I am lucky. I increase the prices with the taxes and the price is two percent more. Maybe 20 cents, 50 cents per person. It is not a significant increase in prices.”

But the change in the reduced VAT rate will also apply to housing, transportation, eyeglasses, tickets to museums and hotel stays, among other things. The standard VAT rate, which is added on to the price of most products and services, will rise from 18-21 percent.  

Some items, like school supplies, will now fall into another category and be taxed 13 percent more. And that is certainly a significant difference for a country that once had one of the lowest tax rates in Europe.

Economist Javier Díaz-Giménez, of IESE Business School in Madrid, said "the highest rates are 23 percent in Greece, Portugal and Ireland, and now Spain is certainly moving above the average and getting closer to the maximum.”

Part of the austerity package announced in July by Spanish Prime Minister Mariano Rajoy, the tax increase is expected to bring about $25 billion into government coffers during the next two years - money Madrid desperately needs to hit tough European deficit targets.

Hike runs into opposition

But the measure has been met with fierce opposition.

The president of the national association of financial advisers, Antonio Durán-Sindreu, told Spain’s public television that the tax increases will mean "death by asphyxiation" for business, and that the government should have tried to stimulate consumption.

Instead, Spanish consumers will spend less, said Javier Díaz-Giménez. "I do not think anybody will win. I think some people will lose more than others. The tax burden, of any tax, is not borne equally by everybody."

Díaz-Giménez said higher taxes affect the poor disproportionately, and the tax burden increases by age.

Cutting corners

Pensioner Manuel Chaparro said he will cut back where he can, by eating out and driving less often.

And that is bad news for businesses.

Spain's tourism industry foresees losses of about $2.5 million annually, affecting tens of thousands of jobs.

The automotive sector vehicle sales during the remaining months of this year will drop by 25,000.

Many retailers, like the clothing chain Mango, have announced they will lower prices and absorb the cost of the higher tax to avoid losing sales.

Fernando Vázquez Rojas believes that for his restaurant the impact will be temporary, lasting maybe two months.

Vázquez Rojas is somewhat of a rarity - a risk-taking optimist in a country where hope and confidence in the future right now is in short supply.

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