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Study of the agreement

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 distortion 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.

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.

As in the cases of the Value Added Tax and of the Excise Duties 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 %

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, deriving 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, the 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.

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

- -

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 %

- -

- -

- -

Whereas in the case of the revenue obtained in Customs the fixed percentages are applied to the real revenue amount obtained by the State Treasury in the execution of its exclusive competence, in the case of the internal operations, it is determined taking into account the efficiency in tax administration of the different Treasuries, taking always as a reference the one which show less revenue efficiency. For each tax figure, the respective revenues in relation to the relative revenue capacity, fixed by the approved rates, are raised to the State level and, in each case; the lowest amount between the both is used to calculate the adjustment.

Some limits are also fixed and above them a correction of the corresponding rate is applied, in the same percentage as the variation in which the real revenue exceeds over the limits fixed for the revenue capacity rates. These limits are 7 per cent for the Duty on Mineral Oils and a 10 per cent for the Duty on Alcohol and Alcoholic Beverages, Intermediate Products and on Beer.

Finally, as noted above, the First Additional Provision of the Quota Law keeps in force for the five-year period 2017-2021, the First Additional Provision laid down in the 37/97 Law, August 4, which approves the methodology for determining the Quota of the Basque Country for the five-year period 1997-2001. In the latter, certain "financial compensations" were established to meet the neutrality principle which inspired the negotiation to agree on the Excise Duties in 1997. The compensation amount is calculated by applying to the expected revenue (in the provisional quota) or actual revenue (in the final quota) for each product taxed in the Excise Duty, the difference between the attribution rate (6.24%) and the estimated percentage of consumption for the Basque Country (7.13% for Alcohol and on Alcohol and Alcoholic Beverages, on Intermediate Products and Beer, 6.56% on Mineral Oils and 4.4% on Manufactured Tobacco)