Spain: Tax reform and employment implications

In July 2013 the Spanish government commissioned an Expert's Committee for Tax Reform to conduct an analysis of the Spanish tax system. In February 2014 the Experts' Committee published a report detailing its findings. If they are implemented, a number of the proposals outlined in the report could have significant implications for employers.

The report analyses certain labour and social security aspects of the current tax system and proposes, amongst other things, the following changes:

• that the maximum income tax bracket rate is reduced from 54-56% to 50%;
• that the tax exemptions on employers' contributions to pension schemes are reduced to bring them in line with other European countries;
• that the current cap on employer and employee social security contributions is removed, with contributions being calculated as a fixed percentage of the employee's full monthly salary;
• that the percentage rate of employers' social security contributions is reduced; and
• that the corporate income tax rate is reduced from 30% to 20%, such reduction to be implemented in gradual phases.

These amendments, if implemented, would have an impact on employers' staffing costs. The removal of the social security contribution cap, for example, would increase the staffing costs associated with employees on high salaries. However, the reduction in employers' social security contribution rates would reduce the staffing costs associated with employees on lower salaries.

The proposals could also make pension benefits a less attractive option for employees because the tax exemptions on those benefits would be reduced. They may opt for other fringe benefits instead.

It is expected that the government will finalise its proposed tax reforms by the end of June 2014 and that the reforms will be implemented later this year.