The Changing Relationship between Tax and Financial Reporting in Spain

Abstract

The operational connection between tax and financial reporting has been reported on in detail for a few countries but not for Spain. However, the literature suggests that there was a great reduction in the influence of tax in Spain in the early 1990s. This paper applies the methodology of earlier researchers in order to measure the tax/reporting linkages for Spain at three different dates. We find that Spain is intermediate between France/Germany and USA/UK in the degree of tax influence on financial reporting. We also find that the common belief in a major reduction in tax influence over time can be refuted.

Acknowledgements

We are grateful for assistance throughout this project from Christopher Nobes; for help of various types from Josep Lluis Boned, Joan Borges, Jordi Bueno, Anselm Constans, Emili Gironella, Francesc Gómez, Carme Jover, Miriam Moya, Albert Sagués and Antonio Torrente; and for comments on an earlier draft from Oriol Amat and two referees of this journal.

Notes

¹We use the word ‘proposition’ rather than ‘hypothesis’ in order to avoid the implication that it will be subject to statistical testing.

²We interviewed: Jordi Bueno from PricewaterhouseCoopers, Carme Jover, independent consultant; Albert Sagues, independent consultant; Anselm Constans, a former auditor from PricewaterhouseCoopers; Emili Gironella, Gironella Velasco Auditores; Joan Borges and Antonio Torrente, Gabinete Rocafort Asesores Asociados.

³Royal Decree Law 7/1996.

⁴The 1996 revaluation was very complex, conditioned to the finance structure of the company, and a 3% tax was required. The previous one had been shortly before, in 1993. For these reasons, many companies decided not to make use of this revaluation opportunity. Further information taken from an article from a consulting company, J. Olano Associats (www.olano-associats.es/articulos.html?art11.htm).

⁵Tax Law 26/1988 (Seventh Additional Disposition) elaborated this for banks and similar institutions.

⁶The PGC of 1973 was not compulsory but was the most detailed guidance on financial reporting.

⁷Tax Law 1992, Article 13 (e) and Tax Law 1995, Article 128.5, 128.6 and 128.7.

⁸For example, Royal Decree 2/1985, Article 1.

⁹According to Carme Jover, specialist in small companies, no difference was made. According to Anselm Constans and Jordi Bueno medium and large companies accounted differently for accounting and tax purposes.

¹⁰For which, the percentage method is compulsory when certain criteria are met.

¹¹Law 43/1995, Article 19.1.

¹²Incidentally, Royal Decree 4/2004 allows for a maximum of 20 years to amortise, so this has since become a Case I.

¹³Part 5. Valuation rules.

¹⁴Royal Decree 2631/1982.

¹⁵Article 57.

¹⁶Law 19/1989.

¹⁷For example, the subsidiary must be Spanish and held 75% or more.

¹⁸We expressed this as a ‘proposition’ rather than as a ‘hypothesis’ because statistical testing is not appropriate for this small number of this type of observation.

¹⁹The extra topic is the measurement of financial assets. We score this: I for the UK and the USA because revaluations have no tax effect; III^† for France because there are no tax rules but impairments below cost are tax deductible; and V for Germany because financial reporting followed the tax law that allowed a value lower than cost or market to be retained (HGB, §280).