Catalonia Referendum Showdown Brings Tax Uncertainty

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By Brett Allan King

Companies in the Spanish region of Catalonia are caught in the middle as the state and regional governments clash over an unauthorized independence referendum scheduled for Oct. 1.

A “yes” result would portend regional government moves toward an independent Catalan republic with full control over corporate, personal income and value-added taxes. The Spanish state has acted vigorously to thwart the referendum after it was declared illegal by the Constitutional Court—the country’s top arbitrator on constitutional matters.

While even a unilateral proclamation of independence following the referendum would likely have little effect on business in the short term, some companies have contingency plans to change their tax domiciles to other Spanish regions in the event Catalonia were to leave Spain, and thus the European Union, experts told Bloomberg BNA.

“This is like the contingency plans before Brexit for some companies to move their headquarters to Europe, with the difference being that in Spain the move from one region to another is cheap and extremely easy,” Jaime Malet, president of the U.S. Chamber of Commerce in Spain, told Bloomberg BNA Sept. 21.

Malet said any changes wouldn’t likely alter investments or jobs in the short term, though companies of all sizes—be they local, national or multinationals from any country—have contingency plans in place to avoid the threat of dual taxation. In Spain, companies would just need to give their supervisory boards the ability to change their corporate address to another Spanish region, he said.

Illegal Referendum

Independence from Spain is a long-standing demand by a significant portion of Catalonia’s 7.5 million inhabitants—16 percent of Spain’s population. Strong Catalan nationalist parties with representation in the Spanish parliament have long been dealmakers at the national level, supporting coalition governments on the left and the right.

The secessionist agenda took new turns in early September when pro-independence parties in the regional parliament approved a self-determination referendum ( Law 19/2017) and a proto-constitution governing the region’s transitional “disconnection” from Spain ( Law 20/2017)—which could also be triggered if the regional parliament determines that the Spanish state has blocked the referendum.

Spain’s Constitutional Court has suspended both the referendum and the transition law as a precautionary measure.

“This is an illegal referendum because it fulfills none of the conditions required by any type of vote,” government spokesman Inigo Mendez de Vigo said Sept. 22. Mendez de Vigo criticized among other things the lack of ballots, ballot boxes, and polling places—all of which the Spanish state itself has acted to suppress.

One element of the independence project is expanded taxation powers through the Tax Agency of Catalonia (ACT) as the proposed “Catalan state succeeds the Kingdom of Spain” in economic and financial matters. Similar powers for the ACT were overruled by the Constitutional Court in 2016.

“In this scenario there are no taxation consequences for companies, since they are only beholden to already existing taxes,” with state taxes paid to the Spanish state tax administration and regional taxes going to Catalan tax authorities as has happened for years, Javier Gomez Taboada, tax partner at Maio Legal, told Bloomberg BNA by email Sept. 21.

According to Gomez, the independence movement has no legal standing, with no legally recognized “right to decide” or right to taxation other than that emanating from the Spanish Constitution of 1978. “There is a single legality,” which is “Spanish, and as such is in conflict with nothing, as there is no ‘parallel’ Catalan legality,” Gomez told Bloomberg BNA.

Even with the Constitutional Court’s suspension of the referendum, the arrest of Catalan government ministers, the closure of referendum websites, imposed state control over regional government finances, and police intervention to ostensibly disarticulate the referendum organizing apparatus, the regional government has vowed to proceed with the referendum in some form.

“First of all, we won’t know what is going to happen on October 2 [the day after the referendum],” Salvador Guillermo, economic director at the Foment del Treball Nacional, Catalonia’s largest business organization, told Bloomberg BNA Sept. 22.

Even in the “hypothetical” event of independence, with the inherent challenges to international recognition of a new state, it would remain to be seen how taxes would be collected, and what payment methods and forms would apply, Guillermo said.

Competing Tax Agencies?

Spanish constitutional law notwithstanding, one conceivable scenario is that companies could find themselves faced with two competing taxation agencies, neither of which recognizes the legitimacy of the other.

“What really worries companies in Catalonia—and not just multinationals—is that there will be an attempt to create a dual legality, with uncertainty over which is the correct and applicable legislation,” Malet told Bloomberg BNA.

The Catalan regional government, currently controlled by pro-independence parties, announced an aggressive expansion of the ACT Sept. 4, bringing what regional president Carles Puigdemont called “a structure necessary to make possible the will expressed by the Catalans in the Oct. 1 referendum.”

The regional government, or Generalitat, said in a statement Sept. 4 that the expanded ACT would as of October be prepared to handle payment of existing local taxes, those already transferred from the central government (such as gaming, wealth and inheritance taxes) and—most importantly—2.5 billion euros ($2.9 billion) in taxes currently collected by the Spanish state agency (income, value-added, and corporate).

“It could happen that letters start arriving from the two administrations demanding payment for the same taxable event here or there,” Malet told Bloomberg BNA, adding that this would be an extreme case that the central government wouldn’t allow.

The Spanish treasury said in a statement Sept. 4 that payment of state taxes to any agency other than the Spanish State Taxation Agency could bring criminal charges and would be considered as not filed and constitute tax debt in arrears.

The Catalan transition law, which says the “Catalan state succeeds the Kingdom of Spain” in economic and financial matters, promises in Article 81 that the Generalitat will adopt measures to protect taxpayers from “negative economic consequences” from third parties.

At present, Spain’s General Tax Act of 2003 states that the discharge of payment obligations occurs only when it’s done before the appropriate taxation administration.

This means companies “will have to decide whether they want to take the risk or non-risk when the appropriate administration” comes claiming unpaid taxes with corresponding penalties, Guillermo said.

“This is all a matter of which is going to offer you the most guarantees to have fewer problems,” Guillermo said.

“Companies that have a lot to risk in these circumstances establish contingency plans,” Guillermo said. Some have decided that the only thing necessary is “to change the company’s legal headquarters, but not the physical one.” This is particularly of interest to financial entities, he said, “because if you’re not in the euro zone, the Central Bank can’t give you loans.”

Corporate Silence

A spokesperson for the Barcelona-based CaixaBank, S.A. wouldn’t confirm that the company had a contingency plan to change its corporate address, “because we have never spoken of this matter, which is why an interview will not be possible.”

Banco de Sabadell, S.A. didn’t respond to a request to confirm any contingency plans to change its legal headquarters.

The Barcelona-based construction multinational FCC, S.A. also didn’t respond to a request to confirm reports that it had altered its statutes to allow the company to move its headquarters to another part of Spain.

Likewise, several large Spanish legal firms that regularly comment on issues of taxation declined to touch the issue.

One company widely reported as the first to leave Barcelona for Madrid under pressure of the independence process was the Spanish multinational Naturhouse Health S.A., which nonetheless told Bloomberg BNA its move was coincidental to the referendum and “fundamentally for operational reasons.”

“It had no influence and is something that was going to happen regardless,” Maria Pardo, director of investor relations at Naturhouse, told Bloomberg BNA Sept. 25.

While it’s not unusual for Spanish companies to avoid commenting on controversial issues and to channel any grievances through business associations, Malet said few people or organizations are willing to speak openly about the referendum, given powerful organized grassroots organization by independence activists on social media and elsewhere.

“There is an impressive network of bloggers and digital newspapers, such that every time someone dares say something they are crushed badly and subjected to a brutal media lynching,” Malet told Bloomberg BNA.

Mendez de Vigo said the current environment in Cataloniaa has led to “harassment, coercion, intimidation and threats” against opponents by “extremist, radical, anti-system, anti-capitalist” elements of the independence movement. Puigdemont has publicly rejected the central government’s accusations of violence.

Despite the apparent simplicity of changing a corporate address to avoid the specter of dual taxation, Spanish businesses have expressed other concerns regarding the independence process.

“There is an immensely serious political problem that must be addressed with the greatest possible urgency and in a constructive way so as not to affect social and economic prosperity,” said the Spanish Confederation of Business Organizations (CEOE) in a statement sent to Bloomberg BNA Sept. 20.

In that statement, the CEOE expressed its support for “all actions considered necessary” to ensure strict compliance with the Spanish Constitution, as well as Spanish and EU law.

Article 155

If the central government has a “nuclear option,” it is Article 155 of the Constitution, which could endanger self-rule in Catalonia. When a self-governing community fails to follow the Constitution or other laws in serious detriment to the “general interest of Spain,” the article allows the central government—with approval of an absolute senate majority—to take “all measures necessary” for force compliance.

The referendum crisis comes amid ongoing debate about the future of the Spanish state and its system of self-governing communities. While the Spanish right has long been associated with a united and centralized Spain, politicians on the left have been more willing to talk of constitutional modifications toward a more federal model or even a “plurinational state.”

According to Gomez, the only course for those who don’t like the current reality is “to win more seats in the elections to try and change the rules, not provoke illegal referendums like in some circus act.”

The more likely scenario following the referendum date, said Guillermo, would be to “build bridges, sit down and negotiate, and come to agreements.”

Malet said that no tax agreement between the state and Catalonia is going to solve the greater issues at hand.

Regardless of what happens, in the long term, “the tax model, be it Spain or a hypothetically independent Catalonia, is not going to change” and will essentially be the same as in Europe or the United States, said Guillermo.

To contact the reporter on this story: Brett Allan King in Madrid at correspondents@bna.com

To contact the editor responsible for this story: Penny Sukhraj at psukhraj@bna.com

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