The IRPF offsetting regime as an instrument of fiscal pressure
IRPF is presented to us as a tax levied on the income obtained by an individual during the fiscal year. However, the obligation to pay tax can sometimes arise when the individual in question has made no net gain. This is due to the strict rules in place with respect to the offsetting of gains and losses, which can be difficult to understand.
When calculating IRPF, the income obtained by the taxpayer in the year is divided up into two categories, namely:
1) General income, which is basically made up of earned income, income from economic activities, and income from rentals of real estate.
2) Savings income, which is essentially income from investment capital (i.e. interest, dividends, etc.) and capital gains and losses (on sales of shares, investment funds, real estate, etc).
This division is important for two reasons: firstly because the rate at which the income is taxed depends on the category to which it belongs (it is higher in the case of general income); and secondly—but no less importantly—in view of the offsetting mechanisms in place, by which we refer to the rules on the offsetting of gains obtained against losses incurred which are of a different kind or correspond to a different year. The imposition of such mechanisms, in practice, increases the fiscal pressure.
In the case of IRPF for fiscal year 2015—for which we are currently in the period allowed for the voluntary filing of returns—unlimited offsetting of the different items included in general income is permitted. Such income, however, cannot be offset against savings income. Traditionally, the offsetting of savings income has only been permitted in the case of profits and losses of the same kind. This strict compartmentalization has been relaxed to a very limited extent (10%) in 2015 to allow some offsetting of positive income (i.e. interest on a bank account) against the loss made on the sale, for example, of an investment fund.
In addition, special provisions are envisaged for losses deriving from fiscal years prior to 2015, and for investors in certain financial products, the aim of which is to make the rules applicable to investors of this kind less rigid.
While it is quite clear that our IRPF bill will depend on the flexibility allowed in the offsetting of gains and losses, the fact is that challenges and opportunities are emerging which we would do well to take full advantage of.
Garrigues Tax Department