Spain is likely to increase the value-added taxes (VAT) shortly, as recommended by its international partners, which would be one of the first consequences of the rescue that will be noted among the citizens.

The Spanish government sent the formal request for financial aid for its troubled banking sector by up to €100bn to the Eurogroup on Monday. Finance Minister Cristóbal Montoro now looks into how to comply with the road map created by Brussels.

The increased taxes on consumption, which was one of several recommendations by the European Commission and the International Monetary Fund, may affect several sectors, such as the food, hotel and housing construction industries. 

It may also lead to higher taxes on, for instance, health products and entries to cultural events such as cinemas, theatres, concerts, libraries, museums and exhibitions.

Increasing reduced VAT levels

The government is looking into increasing VAT for goods and services that now have reduced VAT levels at 4 or 8 percent. These may be increased up to a regular level of 18 percent. This means that for some goods and services, the VAT could be increased by as much as 125 percent, while for other by 100 percent.

According to ministry sources, the government is analyzing the current VAT levels: the regular level of 18 percent –which is one of the lowest in Europe–, the reduced level of 8 percent and the ‘super-reduced’ level of 4 percent.

The government's economic team looks into which products and services that fall under each category in order to “widen the tax bases,” thus following the recommendations by the EC and the IMF, who also suggested that Spain should reduce salaries for public officials and increase retirement age.

No decisions yet

This does not mean, however, that the government has taken decisions on specific measures yet, nor on specific goods, sectors or services that will be affected by changes of VAT levels.

“There has not been a decision yet and the reduced and super-reduced levels will continue to exist,” said Miguel Ferre, state secretary for the Ministry for the Treasury on Monday.

He admitted, however, that the government is revising the VAT structure, but he said this does not necessarily lead to a “modification of the current tax levels.”

Recommendations by Brussels

The decision, however, does not only depend on the Spanish government, but also on the conditions that Brussels will define for the financial aid it will provide to the Spanish banking sector. This will be included in a memorandum of understanding that will be signed at the latest on July 9.

Despite the fact that the government has insisted that the injection of €62bn, which could add up to €100bn, will not mean conditions for the rest of the economy, the revision of the VAT structure is directly linked to the recommendations a few weeks ago by the EC. They are also similar to those of the IMF that points at a number of measures that remain to be implemented, such as changes of retirement age and social benefits.

The European Commissioner Joaquín Almunia on Monday went even further, saying that “the recommendations by Brussels are obligations for Spain.”

This article was translated and edited by Stina Lunden.