Speaking at a press conference following a meeting of the Cabinet of Spain on January 5th, the deputy Prime Minister of Spain Soraya Saenz de Santamaria confirmed that in 2012 the government will look to significantly cut public spending, and begin a renewed crack down on tax evasion carrying out a higher number of inspections of business places and closely scrutinizing businesses’ financial records.

The investigations conducted by tax authorities will pay particular attention to the payroll records of businesses, hoping to catch out employers paying employees in cash. Spain currently has an unemployment rate of approximately 21 percent, and tax authorities are expected to find a high number of individuals who claim to be unemployed but are taking on unrecorded work.

Soraya Saenz de Santamaria said that the ruling Spanish People’s Party expects that the new measures will lead to the recovery approximately EUR 8.17 billion previously unpaid personal income taxes and corporate income taxes.

The government will also look at reducing the size of the underground economy in Spain by instating restrictions on the use of cash in transactions exceeding a preset threshold. It is hoped that such a change will reduce the number of purchases and payments that are not recorded or taxed. Current estimates indicate that the underground economy in Spain may be worth as much as 25 percent of the official GDP.

Soraya Saenz de Santamaria also said that the government will look at reducing the country’s high budget deficit by closing a number of government owned companies. She did not reveal which entities will be closed, but said that 505 government companies are currently being considered for closure.

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On December 20th the Organization for Economic Cooperation and Development (OECD) released its annual Economic Survey of Spain, which outlines the country’s economic standing and suggests several steps that could potentially improve future growth prospects. The report stated that throughout the financial crisis, Spain underwent similar economic declines as other developed nations. At the same time, the country is now experiencing unusually high unemployment levels, which are hampering the financial recovery. The unemployment figure is estimated to heave peaked this year at a level of 20 percent .

According to OECD research, the unemployment level will remain high for several years. Unemployment is expected to drop marginally to 19.1 percent in 2011, and 17.4 percent in 2012. In order for the Government to maintain adequate tax revenue levels, the OECD is advising that Spain must now shift its taxation focus away from corporate and personal income taxes. The report also pointed to the fact that the Spanish Government currently holds a 9.2 percent budget deficit.

The OECD claims that the taxation system in Spain is currently too focused on corporate income taxes and personal income taxes, which were classified as labor taxes for the purpose of the report. It was suggested that the Government might experience greater revenues and sustainability in future economic growth if greater focus was given to consumption and property taxes, as labor taxes are too closely tied to the employment levels.

Spain’s aging population is also a concern for the OECD. The Organization recommended that measures be taken to ensure that tax reforms be carried out to minimize upcoming pension system costs. It was encouraged that a gradual increase to the legal retirement age be implemented, alongside tax penalties for early withdrawal from the labor market.

It was also advised that entry requirements for youth’s upper secondary vocational training should be eased, in order to quickly fill shortages in skilled labor. Additionally, greater incentives should be given to unemployment benefit recipients.

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Following an investigation initiated in 2007, the EC concluded on the 28th of October that tax breaks received by Spanish companies completing corporate takeovers of non-Spanish entities within the European Union, are illegal. Instated in 2002, the law allowed Spanish companies to deduct the goodwill element of a takeover transaction. The EC has decided that it will require any instances of the tax break being utilized after the commencement of the investigation to be reversed. All transaction involving the tax scheme that occurred before December 21st, 2007, will not be altered.

The Spanish Government has made it clear that it is fully prepared to cooperate with the decision. Reportedly, the number of Spanish firms taking advantage of the tax opportunity had greatly dwindled in recent times, with the majority of instances occurring before the December 2007 deadline.

Neelie Kroes, EC Competition Commissioner, commenting on the announcement of the decision said, “This tax provision gives a discriminatory advantage to Spanish companies when acquiring shares in other European companies,” and “To preserve a level playing field in the single market, Spain must put an end to this measure and recover unlawful aid given since December 2007″.