Spain’s tax hike threatens La Liga’s appeal

One of the first moves by Spain’s new Mariano Rajoy-lead Partido Popular government has been to increase the maximum personal income tax (IRPF) rate by seven percentage points to 52 percent for annual salaries over €300,000. Given the shocking state of the Spanish government finances this should not really have been a difficult decision to take, especially considering the small percentage of Spanish tax-payers affected. For most Spanish citizens the most visible losers (of this particular increase) will be the football teams they follow.

Spain’s politicians have traditionally been keen to be seen to support football, and a past PP tax ‘incentive’ aimed at attracting higher earners from other countries to Spain was named the ‘Ley Beckham’ after its most famous beneficiary. That loophole could not survive the current crisis and in January 2010 the then Socialist government of Jose Luis Zapatero tweaked it so that only those earning under €600,000 could take advantage. This was a blow for La Liga clubs, but only applied to non-Spanish players. The new tax hike, however, will affect almost everyone in their squads, as about 90 percent of Primera División players earn more than €300,000, with most taking home far more.

You might think that such high-rollers would not or should not be too worried at having to contribute a bit more to the societies they live in, but that question does not arise in the singular world of high-level soccer, where agents typically negotiate salaries net of tax. So Spanish clubs, especially middling and smaller ones, many of whom already have enormous debts including huge sums owed to the taxman, will have to pay most of the extra taxes levied. A recent story in Madrid sports tabloid AS argued that clubs throughout the league were currently weighing up just how bad things were about to get.

Belt tightening for the ‘galácticos’

“The rise in the IRPF for 2012 has frightened the life out of the football clubs,” wrote Javier Hernández. “The budgets of the 20 teams in la Primera have been thrown out of sync and all clubs are urgently revising their accounts. Contract renewals are paralysed, salaries and transfers fees are being cut, hundreds of contracts must be revised. Clubs and players are going to have to tighten their belts.”

This belt tightening (for those that take their tax obligations seriously anyway) will see clubs offering contract extensions to players on reduced terms. Club presidents looking to go a step further and renegotiate existing contracts will face challenges as players at many sides are already in dispute over wages and bonuses due. The row which saw the entire Rayo Vallecano squad refuse to attend the club’s Christmas party last December was largely over who should pay the IRPF. And of course this season, Spain’s top two divisions kicked off a week late because of a players’ strike over €50 million in unpaid wages due to over 200 players at first- and second-division clubs.

While things could therefore get very serious for clubs at the middle and bottom of the Spanish league table, the two who dominate at the top will also have to be careful. As argued in meticulously researched football finances blog The Swiss Ramble the Beckham Law allowed Spain’s clubs to offer higher net salaries and attract top players from the English and Italian leagues. Many of La Liga’s excellently paid non-Spanish footballers – such as Madrid’s Cristiano Ronaldo and Kaká, who both reportedly earn €9m a year – therefore pay tax at the same rate as someone on the national average wage. While the 2010 change did not apply retroactively (so anyone signed earlier will only have to pay an extra 0.75 percent), income taxes for all new galácticos will be levied at the full highest rate.

In an interview published by AS last Thursday, José María Gay, professor of economics at the Universidad de Barcelona and a globally-renowned expert on Spanish football finances, opined that the recent changes in the Spanish tax laws would be disastrous for the competitiveness of the Spanish league.

The end of the haven

“The repeal (of the Ley Beckham), alongside the rise in the IRPF, is a bad joke,” said Gay. “Now foreign players will become more expensive because previously there was a ‘haven’ and they could contribute just 24 percent with the bargain of the Ley Beckham. (Spain) was among those that took the least tax in this area, now we are among those that take the most.”

The first big departure looks likely not to be at Madrid, but at rivals Barcelona, where negotiations to extend the contract of defender Eric Abidal remain deadlocked. Any new deal for Abidal will not have the support of the Beckham Law. Local taxes in Catalonia make the overall rate there the highest in Spain at 56 percent, so Barça will have to increase significantly their outlay to even match the defender’s current wages.

With Abu Dhabi backed Manchester City reportedly interested in signing Abidal, the wider economic crisis could be about to claim its first La Liga casualty. More are sure to follow.