Areas of Strength

• Spain’s tax administration shows good results in terms of digitalisation. Advanced IT tools used by the tax administration help manage compliance, prevent fraud and assist taxpayers efficiently. Digitalisation also contributes to enhancing transparency, streamline compliance and strengthening control over tax collection. Among others, it allows the tax administration to generate pre-filled tax returns, cross-check declarations, detect fraud and provide taxpayers with guidance, personalized information and assistance programs aimed at simplifying compliance, such as free online filing tools, pre-filled tax returns or in person assistance.
• Despite recent increases, Spain’s VAT compliance gap remains comfortably below the EU average. Spain has traditionally outperformed other Member States with regards to the VAT compliance gap, on the back of the efforts of the tax administration to combat fraud, facilitate compliance and digitalise its tools and procedures. However, the fast-growing trend since 2021 raises some concerns and needs to be monitored.

Areas for Improvement

• Monitoring of tax expenditures (TEs) is fragmented and, at central government level, discontinued since 2022. Monitoring of TEs in Spain is done ex ante, through estimates of expected foregone revenues, in the TEs report accompanying the draft budget. The production of the report at central government level responds to a constitutional mandate, but the latest public report dates back to 2022. Although regional governments prepare their own monitoring reports, there has been an attempt to coordinate the structure and quantification of all TEs in the country through the creation of a working party where the central and regional authorities share common practices. Nevertheless, the total number of TEs is not known, at aggregate level, which contributes to the rather poor ranking of Spain in the Tax Complexity Index. Despite some recent evaluations (notably, from the Independent Fiscal Institution, AIReF), there is no systematic approach to assess the effectiveness of TEs. 
• Spain has the largest VAT policy gap in the EU. Despite part of the high policy gap is explained by the special regime in Canarian Islands, Ceuta and Melilla, the extensive use of reduced VAT rates is a policy option that plays a crucial role. Overall, there is room to streamline the use of tax benefits in the country, by improving evaluation, transparency and targeting. Tax reforms in the context of the Recovery and Resilience Plan could contribute to delivering results.
• Spain’s efforts to monitor compliance gaps are so far focused on the area of VAT and, to a lesser extent, PIT. Spain does not produce, for the moment, gap estimates in the area of corporate income tax (CIT), while those on personal income tax (PIT) are not public.

Tax Complexity

Spain ranks 24^th out of the 27 Member States in the Tax Complexity Index (‘TCI’), where a higher rank corresponds to lower tax complexity. The TCI is based on the Global MNC Tax Complexity Project, a joint research project of Deborah Schanz (LMU Munich) and Caren Sureth-Sloane (Paderborn University). The TCI 2024 places Spain 14^th among the Member States with regards to Tax Framework Complexity, and 25^th with regards to Tax Code Complexity. This suggests a poor performance of Spain both in terms of the tax processes carried out by the tax authorities (notably in the area of appeals, according to the authors), and specially in terms of the structure of the tax regulations (particularly in the area of group treatment, according to the authors).

The full Commission Staff Working Document of the Mind the Gap Report - Challenges and opportunities for tax compliance and tax expenditure in the EU regarding Spain can be found here.

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