The commissioner of the Economic and Fiscal Regime (REF) of the Canary Islands, José Ramón Barrera, has presented a proposal to include a new tax incentive in the island's jurisdiction that seeks to improve and make local companies more competitive with a Canarian Capitalization Reserve.
This reserve was created in 2015 by the central government to strengthen the financial muscle of companies, allowing them to have their own funds derived from their profits to expand, innovate, face unforeseen events or overcome economic crises, such as the one caused by the Covid-19 pandemic.
The incentive is linked to corporation tax and can be used for operating expenses, such as paying payroll, buying merchandise, improving equipment or simply gaining liquidity. It is not required to make investments, although it gives freedom to make those that are considered productive.
At the local level, the commissioner is convinced that "promoting this tool within the REF would be a great opportunity for the productive sector, made up of 98% SMEs and micro-SMEs, which need financial solvency to assume essential expenses of their activity."
As defined at the national level, capitalization reduces the taxable base of corporation tax by 15%, which reduces the bill to 21.25%. The REF commissioner hopes to increase the incentive in the Canary Islands to 60%, which would lower the final tax to 10%. The proposal has been defined by Barrera taking as a reference the differential that the Canarian regime already has for film productions and that has given such good results for the development of the audiovisual industry.
The inclusion of a Canarian differential in the Capitalization Reserve "would mean that the island fact is recognized and the original spirit of our jurisdiction is recovered," says José Ramón Barrera and adds that "it could also compensate at the collection level a possible deduction of the Personal Income Tax for workers and self-employed, making the REF more social and companies pay a little more and workers, less."
In comparison with the Canary Islands Investment Reserve (RIC), which is the most powerful incentive available to the REF, the application of the Capitalization Reserve is simpler and its interpretation has not generated litigation. It also does not require investment and, therefore, it is not necessary to resort to debt to comply with legal deadlines. However, the tax incentive is lower. The RIC reduces corporation tax to 2.5%, while capitalization would reach a maximum of 10% if it were included in the REF.
Therefore, it would be a matter of adding an alternative so that more Canarian companies improve their results. Barrera estimates that it would also benefit public coffers with an increase in tax collection, which could compensate for the investment of an income tax deduction in the REF to bring island salaries closer to the national average.
If so, it would undoubtedly pave the way for the change of model pursued by the regional government. "The Canary Islands needs a more flexible, modern REF with counter-cyclical measures so that companies are more resilient," the commissioner stresses.
