The Catalan Government practically eliminates the Inheritance Tax for close relatives, which means 102 million euros less in 2012

Barcelona (ACN). - After weeks of speculation, announcements, clarifications and pressure from the rest of the parties, the Catalan Government officially announced the almost total elimination of the Inheritance Tax for first and second-degree relatives. The Government, ruled by the Centre-Right Catalan Nationalist Coalition, Convergència i Unió (CiU), decided to keep its electoral promise and adopt a measure largely criticised in the last number of weeks by Left Wing parties and trade unions. Opponents have questioned the logic of reducing public expenditure in basic services such as healthcare and education while at the same time eliminating a tax that is currently only applicable to the richest beneficiaries. Following what many other Autonomous Community Governments have done, the Catalan Executive has set a fiscal bonus of 99% on the tax amount, which in practical terms corresponds to almost the total elimination of the Inheritance Tax. This tax cannot in fact be completely eliminated, as technically the Catalan Government can only manage fiscal bonuses, tax base deduction and the types of relatives affected, but not the existence of the tax itself. The President of the Catalan Government Artur Mas stated that this modification of the Inheritance Tax means “the end of discrimination”. The measure adopted will affect inheritance among married couples, between parents and their children, and between grandparents and grandchildren. Siblings, nephews, cousins, other relatives or friends are excluded from this bonus. The measure will come into force retroactively from January 1^st 2011. The previous Catalan Government had already approved a gradual reduction of the Inheritance Tax in 2009, which will completely come into force on July 1^st 2011. Today’s decision adds to the previous reduction, which focused on reaching a minimum base amount to pay the tax. With current forecasts, today’s decision means that the Catalan Government will not receive 150 million euros in 2011 and 102 million in 2012. In 2008, before the previous Government modification, the Inheritance Tax was adding more than 800 million euros per year to the budget. In 2011 it would have brought in 258 million. After the today’s modification, it will still bring in some 150 million euros.

Tension with the Spanish Government

Catalonia’s public deficit needs to be reduced from 3.86% of Catalonia’s GDP in 2010 to 1.3% in 2011. This means reducing expenditure or increasing revenue, or a combination of both. The Catalan Government has already committed to cut 10% of its spending in 2011. In addition, it claims the Spanish Government owed Catalonia 3.3 billion euros, 1.4 billion euros of which corresponds to the Competitiveness Fund. However, the Spanish Government has refused to pay and has put pressure on the Catalan Government to reach the 1.3% public deficit target by increasing taxes or cutting public expenditure further, a reduction that could reach 22% in only one year. Since Catalonia gives more than 18 billion euros to the rest of Spain each year through the inter-regional solidarity concept, Catalonia is already making a very important fiscal effort. In addition, it is the only Autonomous Community fully disclosing its numbers and presenting an ambitious austerity plan reducing public expenditure by 10%.  The Catalan Government has refused to go beyond a 10% expenditure reduction. In addition, according to its Liberal ideology, in times of recession taxes do not have to be increased, on the contrary. Therefore the Catalan Government, which is ruled by the Centre-Right Catalan Nationalist Coalition (CiU), decided to keep its electoral promise and continue with its plan to practically eliminate the Inheritance Tax in Catalonia, despite losing 150 million euros in the 2011 budget and 102 millions in the 2012.

“The end of discrimination”

The President of the Catalan Government Artur Mas also justified the decision saying it represents “the end of the discrimination” that Catalan citizens are forced to deal with compared with other Autonomous Communities in Spain in relation to the Inheritance Tax. The Madrid and Valencian Communities had already applied a 99% bonus on the Inheritance Tax several years ago; other Communities also reduced it but in those two beneficiaries were paying less. On the contrary, Catalonia was two years ago, one of the regions where they paid the most. This was pushing for a transfer of fortunes among Autonomous Communities in order to avoid this tax, and Catalonia suffered from a “fortune drain” effect.

The second modification in a few years

The previous Left-Wing Catalan Government already modified this tax and lowered inheritance amounts. For instance, if a father leaves an inheritance worth less than 500,000 euros to his daughter, the daughter did not pay the tax. Beyond 500,001 euros, she would start paying on everything above that amount. These fiscal bases were different considering how close the relatives were. This modification made that for the vast majority of inheritances the Tax was not applicable. However, the richer ones still had to pay. From a budget perspective, the Catalan Government was getting some 800 million euros in 2008 and after the modification in 2011it would have received some 250 million euros.

The current modification adds to the previous one, therefore it takes into account the previous deductions and now the 99% bonus, as the Catalan Minister for Finance, Andreu Mas-Colell, explained. This is why Catalan citizens will be in a better position than those in Madrid and Valencia, who only get the 99% bonus but not the initial deduction.

Left-Wing protests

The main opposition party, the Catalan Socialist Party (PSC) has been vocal against this measure, saying that it was not the time to reduce taxes and that the modification it had planned in 2008 and 2009 was enough. The PSC Chairman in the Catalan Parliament, Joaquim Nadal, stressed that the practical elimination of the Inheritance Tax by the current Catalan Government is a measure that puts the 2011 budget in jeopardy and the commitment to reach the 1.3% of public deficit. Besides the votes from CiU, the Catalan Government needs the votes or the abstention of other political forces in order to pass the 2011 budget in the Catalan Parliament; a budget that still needs to be approved due to the elections held in late November. The PSC was one of the main candidates to negotiate this budget; however, the PSC has considered this measure as a means of breaking the negotiations. “A door has been closed”, stated Nadal.

The Catalan People’s Party celebrated the approval of the measure. The PPC spokesperson in the Catalan Parliament, Enric Millo, explained that the PPC has wanted to suppress this tax in Catalonia since 1999. Millo said to Mas “welcome to common sense”. The PPC said that today’s measure helps to pursue negotiations with CiU to reach an agreement on the 2011 budget. The PPC also does not want the suppression of the Inheritance Tax but also of the Donation Tax.

Taxes will not be raised

President Mas has not discarded further tax reductions, especially those increased by the previous Left-Wing Government, such as the Fuel Tax. However, he said that all this needs further evaluation and it will not be done in the short-term. What Mas wanted to emphasise though is that his Government will not raise taxes, as the Spanish Government suggested.