Monday, 11 November 2013

Is Black money indicative in the Spanish purchase market

How did Spain look a few years ago.
Black money, so money passed in cash for the purchase of a property which was then not recorded on the deeds, was epidemic in Spain a few years ago.
Most sellers would look for anything up to 30% to not be recorded officially, and would encourage buyers to participate by telling them they would also save on purchase taxes.
What sellers and their lawyers failed to explain to the buyer was that at sale capital gains tax would be worked out based on the lower recorded level on the deeds and sale price not the actual price paid.
Notaries, Banks and lawyers all turned a blind eye to the activity and it was not unknown for large suitcases full of money to openly taken to Notary and counted out in the office.
What is different now
Spain, since the economic crisis began, has started to come down heavily on tax evasion across the board. A number of high profile court cases involving Lawyers and Notaries caught in participation of tax fraud hit the headlines making it clear that the Spanish authorities would no longer suffer its professional bodies knowingly being involved in such activities.
Aside from trying to clean up the purchase market and ensure full taxes were paid the Spanish Government also needed to show the international communities, it not only paid lip service to money laundering regulations, but enforced them. Notaries are now required to evidence the legitimate source of any cash deposits for the buying of property in Spain, and to clearly record how the full monies for the purchase was sourced.
How do the authorities in Spain check no black money passes hands
Whilst it is impossible to be 100% sure that outside the formal transaction black money has not been passed the Spanish authorities now undertake a number checks after completion to minimize the possibility.
The most relevant and most controversial of these is checking the deed price against the Catastral value which is the minimum price of the property as recorded at the Town Hall and used for purposes such as calculating IBI. If a property is recorded as being sold at a price below the Catastral value this will highlight the file as one to be looked at in more detail.
The issue with this practice has been that whilst, at one point, the values recorded at Town Halls were much lower than the prices being paid for property, on many occasions this is not now true. With prices in some areas falling by 50% it is often the case the minimum value is in fact higher than the price being legitimately paid by a buyer.
In some regions AndalucĂ­a, being one of them the tax authorities are blindly using the recorded minimum value to calculate the tax payable.
What is happening to buyers in Spain who bought at a price below the Town Hall level
Many buyers in Spain have had nasty surprises after completion when a letter drops on their mat demanding further purchase taxes be paid. This can happen even though the buyer has in fact paid full taxes on the true purchase price. There is however no arguing the tax bill with the tax office and it will have to be paid if the tax authorities pick up on the transaction, even though this is clearly unfair on anyone who was lucky enough to buy a property at a steal.  
A good Lawyer in Spain will always make one of their first checks Town Hall recorded value and advise a client that purchase tax should be reflected against this price even if the purchase price is lower. If the amount paid in tax is finally to be against the purchase price the lawyer will warn that it is possible at a later date that further taxes and possibly fines may be applicable.
This situation is a backlash to what happened in the past as the authorities use this particular measure to monitor tax evasion, without perhaps taking into account the significant and real drop in purchase prices.
What is happening where investment funds or buyers buy from SAREB
A good question to ask is what is happening in terms of tax when the bad bank SAREB sells large portfolios of property at massive discounts to investors, or when another Bank in Spain does so direct. One assumes that in these circumstances it is agreed, at point of deal, with the tax authorities that the price being paid is the price on which tax will paid. This would seem somewhat unfair on those buyers caught out by the way in which the tax is normally applied. On the other hand, who knows perhaps these investment funds may find they have problems a little way down road where a regional tax authority rather than the national one decides further tax should be paid.
The Future
It is important for property sales and recovery in the future that the Spanish tax authorities find a more transparent and fair way of ensuring full taxes are paid. As part of the tax overhaul promised by the government next year the practice of making it up as you go along has be stopped and regional tax authorities prevented from deciding black money took place without any real evidence this was the case.

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