The Economic Agreement also sets the application of certain adjustments, which affect the direct and the indirect taxation, in order to perfect the attribution of the estimated income to the Basque Country., which affect both direct and indirect taxation.

Adjustments to direct taxation

The adjustments established for improving the attribution of direct taxation are based on the requirement to compensate the effects on the collection of the Historical Territories produced by the application of some exceptions to the general criteria related to the allocation rules, concerning withholding taxes on wages and salaries and on mobile capital income. These exceptions aim at assuring that the administration which receives the income and the administration which pays the salaries and wages from its budget is the same one.

Therefore, in the case of withholding taxes on wages and salaries, the Economic Agreement establishes that the State Administration shall collect withholding taxes on active or passive income paid by the State to civil servants and employees of the State, regardless of the fact that the income is generated by work performed in the Basque Country or the tax residence of the payments receiver is in the Basque Country.

In the case of withholding taxes on mobile capital, interest and other revenues on bonds and debentures issued by the State and other administrations in the Common Territory, these shall be collected by the State, even when paid in the Basque Territory.

Adjustments to direct taxation are implemented via a subtraction in the Quota to be paid to the State, whereas adjustments to indirect taxation are independent financial flows complementary to the Quota flow.

Adjustments to indirect taxation

The establishment of the allocating factors as stated in the Economic Agreement, in a situation of absence of territorial borders within the territory of the Spanish state, provokes the lack of a correct correspondence between the territory where the economic transfers are produced and the territorial scope where the tax obligations result of such transfers are to be complied.

The distortion between the collection effectively obtained in accordance with the allocating factors and the theoretical one imputable to the territory where the taxable event occurs arises mainly in indirect taxation.

In the Value Added Tax and in the Excise Duties as well, the economic event is consumption but the fiscal event effectively taxed is the supply of goods the provision or services or, as in the case of the second ones, the import or the abandonment of the deferred payment tax regime. These taxes ultimately bear on the final consumer but the liability is on the supplier of goods or on the provider of services, who has to pay the tax to the corresponding Treasury.

The same applies to the Special Tax on Non-reusable Plastic Packaging, which is levied on the use of such packaging, while the taxable event is the manufacture, import or intra-Community acquisition, or even the irregular introduction into the territory of application of the tax, of the products subject to the tax.

In the case of the tax on fluorinated greenhouse gases, following the amendment made by Law 14/2022 of 8 July, the tax is now levied on the use of such gases in Spanish territory, while the taxable event is the manufacture, importation, intra-Community acquisition or irregular possession of such gases.

In order to perfect the allocation of revenue from Value Added Tax, Excise Duties and the Tax on Fluorinated Greenhouse Gases, an adjustment mechanism is established between the index of the collection capacity of the respective tax figures and the consumption index of the residents of the Basque Country for each of the taxed products. In all of them, the adjustment has two components, the first relating to the actual collection of each figure obtained by the State for imports and the second which relates the collection of each of the tax administrations, central and Basque, with their respective collection capacity, also taking into account the collection efficiency of one and the other, for the purpose of taking into consideration that of the administration which is less efficient.

If you would like to get into the cases and methodology for practicing the adjustments to indirect taxation in depth, press the following link: Adjustements to Indirect taxation.