1876 - 1978
Birth of the Economic Agreement
"The chartered councils became provincial councils, and were charged with collecting certain agreed taxes: this was the birth of the Economic Agreement"
In 1876 Spanish Prime Minister Antonio Cánovas del Castillo made it compulsory for all provinces to contribute funds to the Spanish Exchequer and conscripts to the armed forced. The Basque "chartered councils" resisted falling in line with these provisions, and in 1877 the Prime Minister changed their status from chartered councils to provincial councils like all the rest. However there was no administrative structure in place to collect taxes, so an agreement had to be reached: the councils would collect taxes as agreed and would take responsibility for passing on to the Spanish Exchequer "the amount that it was assumed that the Ministry of the Exchequer would have been able to collect on its own account". This was the birth of what is now known as the Economic Agreement (in Spanish Concierto Económico).
Mining and Railways
"Under the Agreement mining and international trade provided a boost for economic development, ushering in a prosperous industrial society"
The fact that the Basque councils held these prerogatives led to a period of demographic development and economic prosperity. Following the Second Carlist War there was a boom in the mining industry. This brought a need to build new infrastructures, especially to improve the ports to handle international trade in ore and to build railway lines. The Triano Mine Railway was a pioneering project in Spain: it was publicly owned, and thus brought in copious amounts of revenue at a time when industrial expansion was in full swing. It was at that time that trade with neighbouring countries began, and the local iron and steel manufacturing concern that was to grow into Altos Hornos de Vizcaya was started up.
The Boom Years and the Changes
"The Agreement was beneficial to all parties involved: these were boom years for the Basque economy and culture"
The Economic Agreement was originally intended to run just for a few years, but it turned out to be beneficial to both parties: the state for its part received immediate, guaranteed revenue at no expense to itself, and the Basque councils enjoyed wide-ranging autonomy and authority. They controlled town halls and highways, they had their own police forces (known as miñones and miqueletes), they could approve farms, chairs at academic institutions and a huge variety of projects, all built on the economic boom. Changes of government had no substantial effect on the health of the system.
Changes in the workings of the Exchequer led to changes in the Agreement, but the system proved flexible enough to withstand them. In 1886 and 1893 modifications were introduced, and in 1894 the Ministry of the Exchequer explicitly acknowledged "the economic and administrative independence of the councils".
Even such upheavals as the war in Cuba (1898) failed to change the system significantly: a special donation was agreed for that year and everyone was happy.
The early years of the 20th century were a good time for Basque businesses: by law they paid taxes only to the Basque authorities. The economy of Bizkaia grew even bigger and more dynamic. Ever closer relations began to be forged with firms elsewhere in Spain, which led to a certain amount of friction with the Spanish Exchequer, which attempted to collect taxes from them that it was not authorised to levy by law. This was solved by renegotiating the quota payable to the state under the Agreement in 1906 for a 20-year term – somewhat longer than usual – with a slight increase ten years into that term.
The Basque economy did exceptionally well out of World War I. Spain remained neutral in the war, so Basque industry was able to supply products to the warring powers. Prices rose exponentially, and the shipbuilding and steel industries made huge profits. In the years that followed schools were set up, roads were improved and organisations such as Eusko Ikaskuntza (Association of Basque Studies) and Euskaltzaindia (Royal Academy of the Basque Language) were founded.
The Civil War and the Abolition of the Agreement
"Following his victory in the Civil War, General Franco repealed the Economic Agreement in Vizcaya and Guipúzcoa, which he saw as "traitorous provinces".
The 1906 Agreement quickly became obsolete, and in the 20 years before it was due for renewal in 1926 the political scene changed radically: the councils could no longer justify their traditional argument that the "land was poor" in renegotiating the quota to be paid. This resulted in friction between the councils and the Ministry of the Exchequer, especially during the years of the Second Republic and the discussions that ensued concerning a statute of autonomy.
The Civil War began in July 1936, and lasted until 1939. The Basque exchequer continued to collect its own taxes after the outbreak of hostilities, and economic policy was decided by the Basque government. However, on 19 June 1937 Franco's troops took Bilbao. This was the beginning of the end for the Economic Agreement: just a few days later a decree was passed that repealed the Agreement in Vizcaya and Guipuzcoa (though not in Álava or Navarra) on the grounds that they were "traitorous provinces".
The Dark Years
"During the long years of the Franco regime, the rights conquered via the Agreement were lost"
The abolition of the Economic Agreement resulted in road maintenance being neglected to the point of abandonment, in the closing down of schools and in the disbanding of the provincial police forces, among other things.
During the Franco years timid attempts were made to renegotiate a "special status" for Vizcaya and Guipúzkoa, especially in the 1960s, but they were doomed to failure by the unwaveringly centralist outlook of Franco's apparatus of government.
Franco died in 1975, and in 1978 political reforms were completed by which there was a transition to democracy, with the approval of a new constitutions under which the Basque Country was recognised as an Autonomous Community in its own right. This marked a new beginning.
1979 - Present
The 1978 Constitution
"The new framework provided by the Constitution of 1978 created a climate favourable to a renewed Economic Agreement"
The new constitution came into force on 29 December, 1978. Provision One declared "protection and respect for the historical rights of the chartered communities". It envisaged the creation of "autonomous communities", with distinctions between historical and non historical communities.
The Statute of Autonomy of the Autonomous Community of the Basque Country was approved in 1979. It set out how the taxation system was to work and reinstated the old "chartered council" system.
So since 1981 the Basque Country has, by law, once again had its own Economic Agreement, envisaged as the mainstay of its autonomy. An overall quota was set for the Autonomous Community as a whole, based on contributions from the councils of what were now to be called its "Historical Territories". Thus, after lengthy negotiations the funding to be provided by each council to the general coffers was set as follows: Vizcaya was to pay around 50%, Guipúzcoa 35% and Álava 15%.
The calculation of the new quota is radically different to that of 1878. In this case, "the payment is for the costs that, as the relevant powers have not been devolved, that Central Government continues to have in the Basque Autonomous Community, both for services based inside its territory and implemented outside it (for example, diplomatic service or the armed force), together with the contribution of the Community to the Interterritorial Compensation Fund".
Its amount is calculated on the basis of three items: the spending of the central Spanish state in areas of authority not devolved, funds collected from revenues not included in the Agreement, and the deficit. These items are measured via an attribution index calculated on income in the Historical Territories relative to income in the state. The figure currently used is 6.24%.
Since 1981 the Agreement has been amended to bring it into line with changing times: e.g. in 1986 VAT was incorporated into it, and in 1997 the special taxes levied on tobacco, alcohol, etc. This period was not without its tensions, due mainly to problems of political coexistence between the central state and the chartered councils.
The Economic Agreement of 2002
"Since 2002 the term of validity the Economic Agreement has become indefinite"
The latest amendment to the Economic Agreement was approved on 23 May 2002 and remains in force. The most striking change introduced was certainly that of making the term of validity of the Agreement indefinite.
The areas of authority of the central government were reduced and those of the Historical Territories were increased in regard to taxes on oil products, electricity, certain forms of transport, etc.
In recent years the Agreement has had to face legal challenges, especially from neighbouring regions. It has emerged unscathed from all the resulting processes, and can be said currently to enjoy excellent health in legal terms.
One of the main landmarks in the current Agreement is the setting up of a Board of Arbitration. The main job of this body is to settle any disputes concerned with the Economic Agreement that may arise between the central government and the chartered councils, with no need to resort to the courts of the justice system. The Board was convened for the first time on 30 July 2007.
The European Courts and the Ring-fencing of the Agreement
"The European Court of Justice has recognised the unique nature of the Economic Agreement in several Europe-wide rulings"
In recent years several rulings from European courts have recognised the unique status of the tax relationship between the central Spanish government and Basque institutions.
Landmark rulings include that of 6 September 2006 by the European Court of Justice on the Azores case, which admits the existence in the framework of the Community of regional tax frameworks. The ruling by the same court dated 11 September 2008 acknowledged that the Economic Agreement and regional regulatory authority were admissible within the European Union.
These European rulings, along with others handed down by domestic courts, have given the Basque Economic Agreement a greater degree of legal certainty than ever before.
In 2010 the Economic Agreement was internally ring-fenced by amending the basic legislation governing the Constitutional Court and the Judiciary. This amendment means that appeals against the details of the Agreement an now only be filed with the Constitutional Court and not with the Contentious-Administrative Courts as was the case previously.
2014: Inclusion of new taxes in the Agreement
"A number of changes have been approved in 2014 that will increase the number of taxes included in the Economic Agreement"
Act 7/2014 of 21 April introduced certain one-off modifications into the Economic Agreement and also extended its scope to the collection of six more taxes now levied in the area controlled by the central government: three that tax certain operations in the electricity sector, the Tax on Fluorinated Greenhouse Gases, the Tax on Deposits at Credit & Loan Institutions and the Tax on Gambling Operations.
2017: Further amendment to the Economic Agreement
"2017 saw the approval of a number of amendments to the agreed wording to include further connection points, eliminate constraints on areas of authority and include regulations on coordination and collaboration".
Act 10/2017 of 28 December amended more than 20 articles of the Economic Agreement, entailing improvements in the ability of the provincial councils to manage taxation and in coordination between administrations, incorporated into the Economic Agreement. Thus, a connection point has been established for the new tax on the value at extraction of gas, oil and derivatives, and changes have been made in the connection points for certain withholdings and payments on account.
In corporation tax and VAT the threshold value for operations beyond which the tax is payable has been updated from €7 million to €10 million, thus making it simpler for small firms to pay taxes to only one administration. In both taxes, Euskadi also takes over authority over taxpayers whose residence for tax purposes is in the common administrative territory but who have carried out 75% of their operations or more in Euskadi. This eliminates the asymmetry that had hitherto led to these taxpayers only paying taxes in Euskadi if all their operations took place there.
From now on tax on inheritances and donations payable by the Basque heirs of deceased persons not resident in Spain will be paid in Euskadi. Tax on donations of real-estate properties located abroad will also be payable there.
Measures have also been taken to improve coordination and collaboration between the Basque and Spanish administrations and three new procedures have been drawn up in the area of the Board of Arbitration.