Basque Economic Agreement

The Economic Agreement is a juridical instrument that regulates the taxation and financial relations between the General Administration of the State of Spain and the Autonomous Community of the Basque Country.

History

The origin of the Economic Agreement lay in the need to reach agreement on some type of system by which the Vascongada provinces (Álava, Guipúzkoa and Biscay) would pay taxes to the State following the approval of the Law of July 21st 1876, which obliged the citizens of these provinces to pay taxes according to their means, in the same way as other Spaniards.

The process of discussing this obligation was a highly complex one, due to these provinces having their own Fueros, or territorial statutes, and their own bodies for provincial representation (Juntas Generales – the Representative Assemblies) which regulated their own internal tax systems, which derived from their Fueros.

Following fruitless contacts between Antonio Cánovas del Castillo, the President of the Government, and the representatives of the Provincial Councils (Diputaciones Forales - the provincial governments), the former dissolved the Juntas Generales and the Provincial Council of Biscay. Between the end of November and early December 1877, he did the same with the Provincial Councils of Álava and Guipúzkoa.

However, the immediate problem was how to collect taxes in provinces where there had been only scarce activity by the State Treasury (since 1841 only the collection of Customs duties had been of any importance). This led to Antonio Cánovas negotiating with the Government-appointed Provincial Councils over the form in which these provinces would enter the “Economic Agreement” of the Nation.

Between December 1877 and February 1878 the representatives of the Provincial Councils and the Government attempted to reach an agreement. This took the form of a first Decree, dated February 28th 1878, by which the provinces would pay taxes to the State in a specific manner for a transitional period of eight years. The Provincial Councils were to be responsible for collecting the agreed taxes (impuestos concertados); they would then pay the State Treasury the equivalent of what the latter calculated it could collect, while employing for their own expenses the difference between the sum collected and the sum paid to the State Treasury through the Quota.

One important aspect was that the State would not be involved in the collection of the agreed taxes, leaving it to the Provincial Councils to decide whether or not to collect them. The Provincial Councils could collect those taxes, or continue employing their own tax system, which was essentially based on taxes on consumption (surcharges on the prices of food products, fuels, alcoholic drinks, etc.).

This agreement, which should have ended in 1886 given its provisional character, has been renewed continually up until the most recent agreement in the year 2007.

After the Decree of February 28th 1878, the Economic Agreement was renewed in 1886 since the Provincial Councils had promptly paid the Quota to the State Treasury without any problem; the Provincial Councils had kept many of the powers deriving from the earlier Fueros, and had their own means for tax collection. The Treasury Ministry did not collect the agreed taxes, but State investments in the Basque Country were very limited since the bulk of public investment was carried out by the Provincial Councils. The taxes that were initially agreed were the most important of those collected by the State Treasury, except for Customs duties: the five original taxes were the Territorial Tax, Industrial Tax, the Tax on Capital Transfer (Impuesto de Derechos Reales), Stamp Tax and Consumption Tax. Starting from these five original taxes, the number of taxes subjected to the agreement was extended in successive renewals, with the result that the sum to be paid to the State (the Quota) increased.

As the taxes subjected to the agreement were extended, and the economy of the provinces prospered - especially that of Biscay due to the strong development of mining, metalworking and ship building - the Quota increased:

Agreed Liquid Quota. 1878-1937

Year	Biscay	Guipúzcoa	Álava	Total
1878	857,8	655,8	529,6	2.043,2
1887	1.286,6	983,7	529,6	2.799,9
1894	2.557,0	1.446,1	597,7	4.600,8
1898	3.006,0	1.706,3	693,7	5.406,0
1899	2.617,0	1.486,3	602,7	4.706,0
1900	2.703,7	1.490,6	603,7	4.797,9
1904	2.553,1	1.373,9	548,1	4.475,1
1906	4.984,0	2.066,5	623,2	6.988,1
1913	4.388,4	2.066,5	623,2	7.078,1
1916	4.709,4	2.226,5	642,1	7.578,1
1920	6.999,4	2.411,5	667,1	10.078,1
1926	28.380,0	10.050,0	1.570,0	40.000,0
1932	28.734,0	10.177,0	1.589,0	40.500,0

Thousands of Pesetas.

These quantities were invariable between one agreement and the next. Hence the Provincial Councils were able to maintain their own tax system (within the agreed taxes and with a generic State authorisation); they could collect, or not collect, the taxes subject to the agreement, or even other taxes that had no equivalent in the rest of the country (such as the Hoja de Hermandad in Álava, or the tax on bars in Biscay). After paying the Quota to the Treasury Ministry, they could carry out their own policy of expenditure without prior permission from the Government. In short, they enjoyed a broad margin of administrative autonomy.

The system changed in 1937 in the cases of Biscay and Guipúzcoa. Following the fall of Bilbao to the “National” troops on July 19th 1937, and the end of the Civil War in the Basque Country, the Technical Board of Burgos (Junta Técnica de Burgos), by the Decree of June 23rd 1937, abolished the Economic Agreement with Biscay and Guipúzcoa. This was because these provinces had repaid the privilege of having an Agreement that gave their inhabitants so many facilities with “treason”. However, the system was continued in Álava, while in Navarre the Economic Contract (Convenio Económico) also continued to be in effect.

Second Stage: 1937-1980. The Agreement in Álava

Between 1937 and 1980 the system of the Economic Agreement only continued to be in effect in the province of Álava.

The renewals of the Agreement with Álava, as in the previous phase, responded to two main causes. The first was the expiry of the period of the agreement (the case in 1952 and 1976), and the second was the need to modify the agreement to adjust it to changes in State regulations (the case in 1940 and 1967).

By the Decree of May 9th 1942, the tax reforms of December 1940 and October 1941 were incorporated into the Agreement with Álava. In brief, the Agreement included the Tax on Luxury Consumption, the Tax on Use and Consumption (a revival of the taxes on consumption abolished in 1911) and the Exceptional Tax on extraordinary profits. Besides, the collection of Income Tax was transferred to the Provincial Council of Álava, although with the same regulation as in other Spanish territories.

In February 1952, with the completion of the previous period of 25 years, the Agreement was renewed for a further 25 years. As had been the case in the agreement of 1925, a five yearly increase was established so that the Quotas would not remain frozen. This revision would be carried out in equal proportion to the variation in budgeted State income for the year of reference. From 1967 onwards an annual revision was carried out.

The Royal Decree of November 26th 1976 approved another renewal of the Agreement with Álava, once again to be in effect for 25 years. However, the new period ushered in by the death of Franco and the beginning of the Transition resulted in a clear and radical change in the Agreement.

Third Stage: 1981-2008. The Present-day Agreement

Following the death of general Franco and the start of the Democratic Transition, the demands for Autonomy Statutes were revived in Catalonia and the Basque Country, and this process spread to the rest of the State.

The 1st Additional Regulation of the 1978 Constitution recognised and protected the Historical Rights of the Foral Territories. One of these historical rights was the Economic Agreement, which is why in the negotiation of the Autonomy Statute of the Basque Country the Agreement was extended once again to cover all of the Autonomous Community.

Indeed, Article 41.1 of the Autonomy Statute of the Basque Country of 1979 (Organic Law 3/1979 of December 18th) states: “The relations of a tax character between the State and the Basque Country will be regulated through the traditional foral system of Economic Agreement or Contracts”. Article 41.2 establishes the foundations of its content, with the definition of the Quota as the most innovative aspect: “d) The contribution of the Basque Country to the State will consist in a global Quota, made up of those corresponding to each of the Territories, as a contribution to all of the costs of the State that are not assumed by the Autonomous Community”. That is to say, the conception of the Quota changed from the traditional conception of the hypothetical income of the Treasury, to payment of State expenditure on costs not assumed by the Autonomous Community.

On the basis of these principles, the negotiation of the Economic Agreement entered its definitive phase in the last months of 1980. A final agreement was reached on December 29th 1980, although for conjunctural reasons (the resignation of President Suárez, the attempted coup of February 23rd…) final approval had to wait until May 1981, when it was approved by a Single Article Law (Law 12/1981 of May 13th).

Basic Characteristics of the Economic Agreement of 1981

The Economic Agreement was approved by a Single Article Law, which allowed for no amendment to its content that had been previously agreed upon between the parties; it could either be approved or not approved, but it could not be amended, following the pattern of international treaties. Thus, when mention is made of an article of the Law of the Agreement, it is understood that reference is being made to an article of the annex, and not to the Law which only has one article. The text of the Agreement of 1981 is divided into two fundamental parts: the section corresponding to taxes and the section corresponding to the Quota. This structure was derived logically from the prior existence of the Agreement with Álava. Article 1 of the text approved in 1981 established its duration, which was to be for 20 years. This 20 year period was not out of synchronisation, since it fitted in with the 25 years agreed with Álava in 1976, and thus maintained the traditional rhythm of 25 year periods established in 1925.

The content of the Law was distributed in two chapters, the first dedicated to general principles and the tax section itself, and the second dedicated to the Quota (the financial part). The first chapter contains the general regulations, the distribution of powers with the State and the regulation of agreed taxes.

Normative powers and the powers of exaction, management, liquidation and collection correspond to the Historical Territories, the Representative Assemblies (Juntas Generales) and the Provincial Councils respectively (article 2). Amongst the principles to be respected by the Basque tax system are found: solidarity, respect for the tax structure of the State, internal and external coordination with the State, tax harmonisation, respect for International Agreements and Treaties, and the interpretative criteria of the General Tax Law (articles 3 to 6).

The State reserves to itself Customs Duties, Tax Monopolies and the tax on alcohols, as well as issues relating to the income of non-residents and the tax system of businesses whose activities extend beyond the Basque territory or which are subjected to different tax legislation (article 6). The agreed taxes subjected to autonomous regulations, whose exaction corresponds to the Foral Treasuries, cover the main direct taxes and some indirect ones: Personal Income Tax (IRPF), the Extraordinary Wealth Tax, Corporation Tax (with autonomous regulations for companies operating exclusively in the Basque Country; State regulations are applied to those also operating outside the Basque Country, without detriment to the payment of taxes in the Basque Country due to the so-called “relative volume of business”), and the Inheritance and Gift Tax. Amongst the indirect taxes agreement was reached on the Capital Transfer Tax, Stamp Duty, the Tax on Company Traffic (Impuesto de Tráfico de Empresas) and the Luxury Tax, Special taxes (telephones and refreshments) and taxes on gaming. Finally, the following were also recognised as taxes falling under autonomous regulation, in collaboration with the municipal treasuries: Rural and Urban Territorial Contribution, as well as the Tax Licence for Professional and Industrial Activities.

Chapter II deals with the regulation of the Quota. The principal difference between the Quota of 1878 and that of 1981 is that in the first case it was understood that the Quota was to be the equivalent of what the Treasury Ministry would have collected if it had applied the common system. However, from 1981 onwards, it is the payment corresponding to the expenditure that the central government continues making in the Basque Autonomous Community, whether directly for services situated here, or for others that benefit its inhabitants (for example the diplomatic service or the army), together with the contribution of the Autonomous Community to the Inter-territorial Compensation Fund. The part to be paid by the Autonomous Community is basically established according to its proportional weight within the national income.

To reach this figure a more general formula is employed that simplifies its calculation. The starting point is a basis that takes account of: State expenditure in Spain on untransferred powers; what the State collects due to income not included in the agreement; and, in order to avoid the quota representing an extra burden over and above the generation of effective resources of the State, the deficit. A proportion of this expenditure and income had to be assigned to the Basque Country. Through an approximate calculation, which takes account of the weight of the income and population within the Spanish total, it was stipulated that the proportion was 6.24%. The Quota has a five-yearly periodicity, although there is an annual adjustment of the quantity on the basis of the figures budgeted for and liquidated by the State. This is an essential difference from the design of the Quota up until that time, inasmuch as it involves the unilateral risk represented for the Basque Country of assuming a part of the expenditure on powers that have not been transferred and that depend exclusively on the State, independent of how the conjuncture of the country evolves or whether the tax collection increases or not.

Besides these agreements, it was also decided to set up Peer Commissions: one of these concerned the Quota and was responsible for an annual review of the Quota and a five-yearly review of the index of imputation (which has not altered since 1981); an Arbitration Board; and a Coordinating Commission (neither of which have ever met).

The evolution of the agreed Quotas has followed a logical course insofar as agreed taxes have increased and untransferred costs have fallen. frame|100px|Cupos concetados con el País Vasco. 1981-2008

Figures in thousands of Euros. Tax year