From new tax office, Catalonia hopes to grab billions from Madrid

In a glass building overlooking Barcelona’s port, empty desks and computers wait for new workers of Catalonia’s tax agency.

As in other Spanish regions, the agency already collects some taxes on wealth, inheritance, gambling and transport.

But the regional government has spent 18 million euros expanding the agency in the hope that it will gain independence from Madrid in an Oct. 1 vote that the Spanish government considers illegal.

From the shiny port office with a 20 year lease, it is hoping to wrestle control of the rest of the region’s finances, claiming billions of euros of income tax and corporate revenue currently going to the Spanish government.

Catalonia has increased the agency’s staff by 75 percent to 700 since January and plans to fill the empty desks by the end of the year if the vote goes through. It has also opened a dozen new regional offices.

This is Catalonia’s most tangible investment in the institutional infrastructure needed for a fledgling state and highlights its government’s determination to secede. It says it will declare independence within 48 hours of a “yes” vote.

It also shows that they are likely to keep pushing for independence, even if they lose the vote.

“In a future transition, it would not be acceptable for them to keep our taxes, because they are ours and they keep a lot,” said Catalan Treasury Secretary Josep Lluis Salvado.

Madrid has declared the vote unconstitutional so there are widespread doubts about whether Catalonia can even stage a credible vote.

It may also not go in the Catalonian government’s favour. Polls show less than half of Catalonia’s 5.5 million voters want self-rule although most want the chance to vote on the issue.

It is also not clear that companies would pay up: Barcelona’s business lobby says no private firms would obey Catalan tax demands unless approved by Madrid.

But the Spanish government appears to be rattled.

On Wednesday police entered the Catalonia tax office as part of a raid on regional government offices, seizing documents and cutting off phone lines, according to a department official. Police also arrested Catalonia’s junior economy minister Josep Maria Jove. It was the latest step in Madrid’s campaign to prevent the referendum from going ahead.

Catalonia’s resolve also worries some investors in Spanish bonds and the tax agency’s expansion suggests an early post-independence flashpoint with Madrid could be a financial one.

OLD GRIEVANCE

Catalonia, with an economy larger than Portugal’s, says it receives an unfair redistribution of tax revenues from Madrid.

Each year, it pays about 10 billion euros ($12 billion) more in taxes to Madrid than it gets back, or around 5 percent of regional economic output, according to data from the Spanish Treasury. In contrast, Spain’s poorest region, Andalusia, receives almost 8 billion euros more than it pays in.

“The money issue is one of the roots of the problem, the feeling that Catalonia is being ripped off,” said Angel Talavera, a Catalan economist at consultancy Oxford Economics.

If its agency took over all forms of taxation, it would also collect income, company and value-added taxes, bringing total receipts to 42 billion euros, Salvado said. The agency collected about 3 billion euros last year, according to a spokeswoman for the Catalan economy and budget department.

To avoid financial collapse, an independent Catalonia would need those tax revenues, economists say. It has 75 billion euros in public debt, 35 percent of its economic output, one of the highest of all Spain’s regions, and its government bonds are already classified as “junk” by credit rating agencies.

Investors are growing nervous as the referendum nears: the additional yield that Catalan bonds pay over Spanish short-term debt is at close to a nine-month high of about 300 basis points.

The Catalan government last issued a bond in 2012, two years ahead of a previous failed independence referendum. It is not currently considering any bond issues, a spokeswoman said.

‘IT’S IMPOSSIBLE’

Upon a declaration of independence, Salvado said Catalonia would seek to open talks with Madrid to take over all taxation in phases. It would start in October by pocketing 2.5 billion euros in taxes from about 700 public Catalan firms that currently goes to Madrid.

Later, the agency would collect tax from private firms and individuals. It could take years and the agency would need at least another 4,000 employees, Salvado added.

“The principal challenge is to make sure the taxpayer does not perceive a change,” he said.

Spain’s Treasury has told Catalan businesses that paying taxes to the regional tax agency could constitute a crime. Madrid also took legislative steps last week to prevent the Catalan government from using Spanish public funds to pay for the ballot.

“At the moment companies view it as impossible, they don’t consider it,” Jordi Alberich, director of Barcelona-based business association Cercle d’Economia, told Reuters.

The Catalan government also lacks the database needed to correctly collect personal income and company taxes, according to Carlos Cruzado, the head of the Spanish Treasury’s workers union.

Salvado said the agency had sufficient data on taxpayers’ inheritance and wealth taxes to make a start on taking over other forms of taxation, but they would seek to negotiate access to Spain’s historical tax records.

He did not expect a positive response. “The Spanish state is going to use its preferred word – ‘No’.”