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Financial adjustments for Value Added Tax and for Excise Duties

From an economic approach, the place where a wide range of goods and services are produced doesn’t have a real connection with the territory where the economic events which are liable to taxation take place, such as consumption or investments.

The tax and financial problem lies in the distorsion between the collection effectively obtained in accordance with the allocating factors and the theoretical revenue imputable to the territory where the event liable to taxation occurs.

In the Value Added Tax the economic event is consumption but the taxable event according to law is the supply of goods or the provision of services. The final consumer is the one who bears the taxation but the taxpayer is the one who supplies goods or provides services and who has to pay in the Treasury the tax which corresponds to the added value by him.

In the case of the Excise Duties the problem is of similar nature. The final consumer is the one who bears the taxation but the allocating factor laid down for its payment is the place of the accrual of the tax, which is determined by the Community legislation concerning the circulation of the different taxable products, which can remain in deferred payment regime, while they are not carried out of factories in which they have been produced or from the tax warehouse where they are kept or while they are being transported between factories or warehouses, even if the transport happens between different Member States. The accrual of the tax will occur when the deferred payment regime is over.

The same applies to the Excise Duty on Non-Reusable Plastic Packaging and the Tax on Fluorinated Greenhouse Gases, where the taxable event is the manufacture, importation or intra-Community acquisition, or even the irregular introduction into the territory of application of the tax, of the products subject to the tax.

When there are tax borders among different tax administrations, the solution lies in setting up exemptions for export activities and taxing import activities. However, in a situation without tax borders, it becomes necessary to reallocate the revenue for the purpose of assigning it to the corresponding Treasury. The solution set up by the Economic Agreement is the practice of a financial adjustment, not in accordance with the real transactions but with some macroeconomic variables, which measure the unbalance.

Given that in the case of VAT, Excise Duties or the Fluorinated Greenhouse Gas Tax the taxable economic event is consumption and this has to be the parameter which assigns the revenue to one territory or to the other. This is why the first variable of reference is the consumption of the residents in the Basque Country relative to the total of the State for each of the taxed products. In the VAT, being a general tax. the variables should also be general, whereas in the case of the Excise Duties, taxing specific consumption, the variables of consumption should be fixed for each of the taxed products.

So, the index of relative consumption set in the five-year period currently in force and used for the practice of the adjustments for indirect taxation are as follows:

TAX FIGURE TO BE ADJUSTED

RATE OF RELATIVE CONSUMPTIOM

Value Added Tax

6,875 %

Excise Duties

on Alcohol and Alcoholic Beverages, Intermediate Products

7,130 %

on Beer

7,130 %

on Mineral Oils

6,560 %

On Manufactured Tobacco

4,400 %

Excise Duty on Non-Reusable Plastic Packaging

4,337 %

Tax on Fluorinated Greenhouse Gases

6,875 %

On the other hand, the real State income comes from two different sources:

  • the one from Customs, deriving from Duties on imports of products, which are of the exclusive competence of the State.
  • the one from the internal market, pderiving form the taxation on transactions and activities which take place within the territory of the State and which can be either competence of the State or of the Basque Country, by virtue of the Agreement and the fixed allocating factors.

So, the establishment of new parameters which indicate the revenue capacity of the Basque Country is required, taking into consideration, for each case, the applicable allocating factor. Obviously, in the case of Customs revenue, the rate of revenue capacity of the Basque Country is zero as it is a competence assigned exclusively to the State and, as a result, Basque Treasuries cannot obtain any income deriving from this concept. However, the settlement of parameters of revenue capacity is indeed necessary in the case of the revenue concerning internal transactions.

In the case of the Value Added Tax, rate of revenue capacity is the result of applying the following mathematical equation, which expresses the potentially and theoretically obtained revenue:

GAV – GCF – Exp + IA

where,

GAV is the gross added value of the Basque Country at factor cost

GCF is the gross capital formation of the Basque Country

Exp is the exports

IA is the Intra-community acquisitions of goods

From the comparison of the value of these variables in the Basque Country to the value of the total of the State, the rate of revenue capacity of the Basque Country for the Value Added tax is obtained, that is, 5.756%.

In the case of the Excise Duties, lthe revenue capacity was fixed in 1997 in the parameters which are in the following chart. In the case of the Duty on manufactured Tobacco, the percentage is annually fixed in the basis of the relative supply to Tobacco and Stamp outlets in the Basque Country, being subject to revision in case amendments are made to the current system of manufacture and sale of tobacco products; therefore, the adjustment on the Duty on Manufactured Tobacco is different from the rest since it doesn’t distinguish Imports from Internal operations and, in addition, there is not a fixed participation rate of the Basque Country Autonomous Community in the global adjustment.

The rates for the Special Tax on Non-Reusable Plastic Packaging and the Tax on Fluorinated Greenhouse Gases have been set in Law 10/2023 of 3 April, which approves the quota methodology for the five-year period 2022-2026.

TAX FIGURE TO BE ADJUSTED

RATE OF REVENUE CAPACITY

Value Added Tax

5,765 %

Excise Duties

on Alcohol and Alcoholic Beverages, Intermediate Products

1,932%

on Beer

1,731%

on Mineral Oils

8,260%

on Manufactured Tobacco

– –

Excise Duty on Non-Reusable Plastic Packaging

1,745 %

Tax on Fluorinated Greenhouse Gases

3,994 %

This way the adjustments to be made concerning indirect taxation are quantified by the application of the following percentages:

TAX FIGURE TO BE ADJUSTED

CONSUM.

REV. CAPACITY

ADJUSTMENT

Cust.

Int. O.

Cust.

Int. O.

Value Added Tax

6,875%

0 %

5,765%

6,875%

1,110%

Excise Duties

on Alcohol and Alcoholic Beverages, Intermediate Products

7,130%

0 %

1,932%

7,130%

5,198%

on Beer

7,130%

0 %

1,731%

7,130%

5,399%

on Mineral Oils

6,560%

0 %

8,260%

6,560%

-1,700%

on Manufacture Tobacco

4,400%

0 %

– –

Actual % of supplies

Excise Duty on Non-Reusable Plastic Packaging

3,657%

0 %

1,745%

3,657%

1,912%

Tax on Fluorinated Greenhouse Gases

4,337%

0 %

3,994%

4,337%

0,343%

While in the case of customs revenue, the percentages indicated are applied to the revenue actually obtained by the State treasury in the exercise of its exclusive competence, in the case of internal operations, they are determined taking into account the efficiency in the management of the different treasuries, always using that corresponding to the one with the lowest collection efficiency. For each tax figure, the respective collections are raised at State level in relation to the relative collection capacity that determines the approved rates and, in each case, the lower of the two amounts is used to calculate the adjustment. In the case of VAT, it should be borne in mind that the actual revenue obtained by the State treasury from the special schemes applicable to distance sales and certain domestic supplies of goods and services, characterised by taxation at destination and implemented through the one-stop-shop mechanism, is also subject to adjustment. These are the amounts received by the AEAT from the rest of the tax administrations of the European Union and paid into them through the one-stop shop mechanism for these transactions when Spain is the Member State of consumption. The adjustment of these operations is instrumented in a similar way to the collection obtained in customs, since the totality of the corresponding quotas are paid by the AEAT.

Certain limits are also established, the exceeding of which determines a correction of the corresponding adjustment index, in the same percentage as the variation by which the actual collection exceeds the limits established for the collection capacity indexes, which are 7% for the Special Tax on Hydrocarbons and 10% for the Tax on Alcohol, derived beverages, intermediate products and Beer.

Finally, it should be recalled that the First Additional Provision of the Quota Law maintains in force for the five-year period of its application the provisions of the First Additional Provision of Law 37/1997, of 4 August, which approved the methodology for determining the Quota of the Basque Country for the five-year period 1997-2001. The latter established certain “financial compensations” justified in the search for neutrality assumed at the time of the agreement of the Special Manufacturing Taxes. Their amount is determined by applying the difference between the imputation rate (6.24%) and the respective consumption percentages estimated for the Basque Country (7.13% for Alcohol and Derivative Drinks, Intermediate Products and Beer, 6.56% for Hydrocarbons and 4.40% for Tobacco Products) to the collection of each of these taxes.