ANALYSIS: Why Spain must fix its ‘unfair’ tax system for self-employed workers

Is the strange world of Spain's tax system for freelancers about to be made better or worse? Graham Keeley, one of those many foreign workers in Spain embroiled in the scheme, explores the issue.

Published: 16 October 2020 10:05 CEST
Updated: 17 October 2020 12:15 CEST

ANALYSIS: Why Spain must fix its 'unfair' tax system for self-employed workers

Photo: Avi Richards/Unsplash

If you have moved to Spain for work, the chances are that you may have entered the strange world of the autonomo, otherwise known as the self-employed.

One in ten self-employed workers in Spain is from abroad or about 175,000 of the total autonomo population, according to 2019 data from the National Statistics Institute.

Indeed, foreign residents here are registering as self-employed at five times the rate of Spaniards, which shows that foreigners prefer to be in charge of their own destinies.

But, hold on a minute, why is it such a 'strange world'?

Well, ponder this for a moment; under the Spanish system you can choose how much you pay towards the social security system every month.

That, in itself, struck me as strange when I entered the system, way back when.

Javier Díaz, an economist at the IESE Business School, was more forthright.

“What kind of tax system is it where you choose how much you want to pay? Spain has the strangest tax system in the world,” he said.

What it means in practical terms is most people choose to pay the lowest rate which still brings access to the health system and a pension in the future.

However, what you quickly realise is that even if you pay the bottom rate, the system itself does not work in your favour.

Why? Well, you pay a tarifa plana – or flat rate – regardless of how much you earn.

So even if you are earning less than €20,000 a month you pay the same as a freelancer who is taking home €200,000 per year.

Worse still, this minimum rate was raised about two years ago to about €285 a month. I should know, I am paying it.

READ MORE:

Just to put it into perspective, working as a freelance in Spain puts you at a major disadvantage compared to doing the same job, elsewhere in Europe.

According to a report by the Circulo de Empresarios, a business group, in comparison with Spain, self-employed workers in the UK pay the equivalent of €14 per month (for the minimum fee) while in the Netherlands the charge is €50 a year and in the fee in Germany is €140 for those earning more than €1,700 a month.

Now, Spain's left-wing government wants to reform the social security payments for freelancers, so the payments reflect what people actually earn.

For many foreigners and Spaniards alike, the self-employed represent about 16 per cent of the workforce so they are a substantial lobbying group.

More importantly, perhaps, in the wake of the economic ravages caused by the Covid-19 pandemic, they have been one of the groups which have suffered most.

As thousands of companies have nosedived since coronavirus arrived, so have the freelancers who work for them.

In essence, the proposal by the Social Security ministry and the tax office is that payments will vary according to what you earn under a new mandatory system. The idea is to make it more like the income tax system.

For Alyssa McMurtry, a freelance writer from Oviedo, it could not come soon enough. She is no fan of the current system.

“It sucks. The flat rate is totally discriminatory to those who make less. Yes it is for benefits but some people don't have the luxury to think about their pension when they are making €900 per month but paying €300 just to work plus other taxes,” she said.

She is not alone. Changing the system for the self-employed has been a long-standing demand by associations which represent this sector.

The move is part of a wider push by Unidas Podemos (UP), the far-left party which is the junior partner in the coalition, to make the tax system fairer.

It is no surprise, then, that José Luis Escriva, the social security minister, is a senior figure in Unidas Podemos.

The party has long said it wants to raise taxes for listed companies and the richest in society. Removing an unfair tax for those earning less would also seem to make sense.

Associations representing the self-employed are divided over the proposed reforms.

Lorenzo Amor, president of the self-employed workers association ATA, is opposed to changing the system because he believes it could mean some freelancers who are currently paying the lowest grade, end up paying higher amounts.

The Spanish economy is expected to implode by 11.2 per cent this year, meaning life is not going to get easier in the short run for anyone.

Imposing more complicated tax reforms right now might worsen freelancers' already difficult situation, said Mr Amor recently.

“This is not the right time, and the self-employed are really struggling,” he told El País newspaper.

However, two other associations, the UATAE and the UPTA, support the government initiative.

“The current system is unfair, since those with lower incomes are harmed, as they have to make a contributive effort that is above their possibilities,” said Eduardo Abad, president of UPTA.

So what is the right course for the self-employed?

Undoubtedly, the present system is unfair and should be changed.

It is hard enough to be a freelancer in any field right now but it makes things even tougher if you are paying the same in social security as someone earning much more than yourself.

However, what matters is that the state gets this right and does not make a hash of it so the self-employed are forced to navigate yet more chambers in the already labyrinthine bureaucracy.