On a Sunday, a client sends me a message with an article from the Dutch newspaper “De Telegraaf”. In it, the Spanish tax authorities are described by an American lawyer as “mafia”. According to the article, they operate “ruthlessly and corruptly” outside the law.
I am familiar with the report referred to in the article. I also know Spanish tax inspectors, tax judges and the day-to-day reality of tax litigation. About half of the cases in our practice are tax-related. That means we not only know the theory, but also see the practice from the inside.
The reality from our practice
In the comments under the article I mainly read unnuanced reactions. There is a lot of resentment towards the so-called “fortune seekers” in Spain. As the saying goes: people judge others by their own standards, I often think.
Almost everyone who consults us about taxation in Spain simply wants to follow the rules. They do not move to Spain to pay less tax or to avoid taxes.
The problem described in the article does exist. And it does not only affect foreigners living in Spain, but in reality every resident of Spain — especially entrepreneurs.
A system with the wrong incentives
In Spain there is a well-known saying: “Quien hace la ley, pone la trampa.” He who makes the law also sets the trap.
Anyone who has the misfortune of encountering the wrong tax official in their case will soon discover that referring to legislation or even plain common sense often has little effect. That official has only one objective.
Within the Spanish tax administration — commonly referred to simply as “Hacienda” — there is a bonus system. Inspectors are rewarded based on the amount assessed in additional tax claims. Whether the assessment later holds up in court does not matter.
If a court later cancels the assessment — which according to the tax authorities’ own statistics happens in most cases — the bonus does not have to be repaid.
This system naturally invites abuse. Any objection from the taxpayer can be turned around and used against them. We even know cases where having a different opinion was labelled as “obstruction”, followed by an additional penalty.
If the taxpayer’s accounts are fully in order and no concrete irregularities are found, an additional assessment may still be based on suspicion. The amount is then estimated. The reasoning is that it is “unlikely” that an entrepreneur fully complies with all rules, because that supposedly rarely happens in Spain.
In short: if you do everything correctly as an entrepreneur, you become suspicious.
First pay, then litigate
For taxpayers this often means that a long and expensive legal procedure is the only way out.
I regularly explain to clients that in practice the Spanish tax authorities often operate according to the principle: shoot first, ask questions later.
An additional assessment usually has to be paid immediately. Only afterwards can the discussion take place in objection or appeal proceedings.
Even if the taxpayer ultimately wins the case, the tax authorities may correct their mistakes and issue the same assessment again. The long legal circus then starts all over again.
This leads to great frustration among taxpayers and strong criticism from various professional groups, including judges, tax advisers, lawyers and academics.
Litigation is not popular in Spain
Spaniards — rightly or wrongly, but that is a topic for another article — generally have little confidence in the courts.
In practice, many entrepreneurs therefore prefer to pay the additional tax and penalties rather than start a legal battle. This creates a perverse incentive. Officials who mainly focus on their bonuses see their approach confirmed and rewarded.
In this way the system reinforces itself and keeps going.
Not every tax official supports this system
It is important to emphasise that not every tax inspector supports these practices.
Within the Spanish tax authorities there are different views on the matter. There are tax officials — unfortunately a minority — who believe the system is fundamentally unjust.
The problem for this group is that internal resistance is not without risk. Criticism of the system can be seen as a lack of loyalty. The critics threaten the “bread and butter” of their colleagues, and that is not accepted.
I know of a case in which several critical tax officials requested a transfer to another region in Spain. This was a direct result of verbal aggression from colleagues and an untenable working environment.
One of my clients recently said: “Still, it is hard to understand how something like this can exist in such an important and large EU country.”
That is true. The problem is that nowadays very few people are willing to fight structural problems like this in the public interest. Society has become more individualistic.
Many people focus on their own lives and are limited to the reach of their own social media. Other issues remain outside their field of vision.
Until they are confronted with them themselves, of course.
Fortunately, Lex Foris is there when the time comes to take on Hacienda.
Roeland van Passel