At the height of Spain’s construction boom it was not uncommon for a briefcase of €500 bills to be offered as part payment for property by buyers striving to save on taxes.
The black economy is now worth around 23 per cent of the GDP
That culture of ducking the taxman is deeply engrained in Spain and is becoming a headache for Prime Minister Mariano Rajoy, threatening to force him to go back to the drawing board on budget plans which are crucial to the future of the euro.
The government made a three-point hike of valued-added tax the main thrust of the €65 billion package of spending cuts and tax increases put on the table in July. The VAT rise alone was designed to raise €22 billion and put Spain on track to meet its EU-agreed deficit targets until 2014.
But in a country where undocumented cash transactions with restaurants, garages and builders are the norm and more than €18 billion a year is believed to be lost due to VAT fraud, it looks far too optimistic.
“In Germany, if you saw your neighbour defrauding the tax office, you’d report them. In Spain, they are heroes,” one small businessman told Reuters standing in his company warehouse in the southern city of Seville, asking to remain anonymous.
Almost one in four taxable euros is hidden from the authorities in Spain, according to tax inspectors union Gestha.
Those are vital sums for a government fighting to deflate one the eurozone’s highest deficits and facing a 20 per cent drop in revenue since the 2008 financial crash; the Treasury collected only €161 billion in tax last year, compared to around €200 billion in 2007.
Some of that is naturally due to the stagnation of Spain’s economy over the period, but off-the-books trade has also risen as businesses and consumers seek to squeeze costs or the price they actually pay for goods and services.
The black economy is now worth around 23 per cent of the gross domestic product, compared to an average of around 13 per cent across the European Union’s 27 members and that may only increase as Spain’s economy sinks deeper into recession.
“Sadly, the current economic situation means fraud is on the rise, while the measures will just lead to new kinds of fraud,” says Gertrudis Alarcon, head of the Spanish arm of tax consultancy i2 Integrity, authors of a new report on the black economy.
“The new measures ... won’t necessarily produce the revenue increase hoped for.”
Transparency International ranks Spain in the middle of Europe’s table of most corrupted countries, below Greece and Italy, but above northern countries many of which are the least corrupt in the world.
Around one in six of all €500 notes, the highest euro denominated bill in circulation in the monetary union, were issued by the Bank of Spain, evidence of their use in off-the-book property acquisitions.
More than 15 per cent of drivers don’t ask for, or are not offered, a receipt for work done by a mechanic in order to knock VAT off the bill, according to one study by industry associations GT Motive and Cetraa.
In hotels and restaurants, it has been a normal practice for years to have a “caja B”, a parallel cash register where undeclared revenues are kept. People talk openly about it and restaurant owners say upping VAT will only increase the financial pressure that makes them do it.
“We have no other choice than to issue some bills with the new VAT and others in ‘caja B’,” said Alfredo Gomez, who owns a restaurant in the centre of Madrid.
Jesus Lizcano, head of Transparency International in Spain, says the country’s position on the corruption tables slipped during the years of the property boom, precisely because of transactions related to housing speculation, but has stabilised in the last few years.
But he says tax avoidance also reflects the same underlying distrust of central authority in Spain that lies behind what is one of Europe’s most decentralised Federal political systems.
In an attempt to raise extra cash from the dodgers, the conservatives have banned cash transactions worth over €2,500 and introduced a fiscal amnesty for offshore accounts, among other measures.