Basque Economic Agreement

The origin of the Economic Agreement lay in the Third Carlist War defeat of 1876, with 40,000 Spanish troops occupying the Basque Provinces, and held under martial law.

[1] There was a need to reach an agreement of some type by which the Basque Provinces (Álava, Gipuzkoa and Biscay) would pay taxes to the State following the approval of the Law of July 21, 1876, which obliged the citizens of "these provinces to pay taxes according to their means, in the same way as other Spaniards," as put by the fueros abolition law pushed by the Spanish premier Canovas del Castillo.

The process of discussing this obligation was highly complex, due to these provinces having up to that point their own jurisdiction, territorial statutes, and their own bodies for political representation (the Juntas Generales or "Representative Assemblies"), which regulated their own internal tax systems, according to their Fueros (Charters).

This led to Antonio Cánovas to negotiate with the Government-appointed Provincial Councils over the form in which these provinces would enter the "Economic Agreement" of the Nation.

This took the form of a first Decree, dated February 28, 1878, by which the provinces would pay taxes to the State in a specific manner for a transitional period of eight years.

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: Thousands of Pesetas.

Following the fall of Bilbao to the Nationalist troops on July 19, 1937, and the end of the Civil War in the Basque Country, the military rebel Technical Board of Burgos (Junta Técnica de Burgos), by the Decree of June 23, 1937, abolished the Economic Agreement with Biscay and Gipuzkoa.

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.

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.

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.

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.

In fact, in 1996 the Quota fell to minimum levels and it was necessary to introduce a reform in the Economic Agreement to agree on new taxes (mineral oils, alcoholic drinks) in order to increase it.

However, due to this greater breadth, it has also encountered problems inherent in the development of the European framework, something that was unforeseeable to those who initially negotiated it.

For this reason, the concrete application of the system by the Provincial Councils has recently been the subject of judicial arguments and lawsuits.

In essence, this imitates the model of the Quota with the State since article 16 mentions that “the Historical Territories will contribute to the maintenance of all the general costs of the Basque Country that they have not assumed, to which end the Provincial Councils will make their contributions to the General Treasury of the Basque Country”.

It had previously been of indefinite duration in 1886, but periods of expiry had been set that had given rise to friction in the months prior to the renewals.

This argument had been one of the points on which the Provincial Councils had held a firm position from the beginning of the system, since in their understanding it was the contingent element (the agreed taxes and the Quota) that was variable but not the agreement itself.

The second chapter deals with Financial Relations on the basis of some general principles: the fiscal and financial autonomy of the institutions of the Basque Country and respect for solidarity in the terms envisaged in the Constitution and the Autonomy Statute; coordination and collaboration with the State on questions of budget stability and the assignment of the financial tutelage of the Municipal Councils to the Institutions of the Basque Country without their having any less autonomy than the municipal councils of the rest of the State.

This Board is made up of experts with recognised prestige, appointed for six years, responsible for resolving any conflicts between the State and Basque Administrations.

Since the modification carried out in 2014, other novelties had been introduced in the tax system which made it necessary to adapt the Agreement, as required by its second additional provision.

On the other hand, improvements have been introduced in tax management and coordination between Administrations by stablishing, among other measures, a new procedure for the regularization of VAT refunded installments corresponding to liquidation periods prior to the moment in which the taxpayer's operations began to be carried out, agreeing on the rules for the assignment and revocation of the Taxpayer Identification Number, regulating the collaboration between Administrations in relation to the actions of verification and investigation and of obtaining information in order to levy taxes and introducing new rules for the coordination of tax collection and inspection competences between Administrations in cases of regularization of transactions between related persons or entities and the classification of transactions differently from the way they have been declared by the taxpayer when this implies a modification of the taxes borne or charged in indirect taxes in which the charging mechanism has been established.

Note: The provisional valuation of the cost associated with the public programs and actions in the field of labor, employment and vocational training transferred to the Basque Country by Royal Decree 1441/2010, of November 5th (Section G.2) is not included in this amount as an Assumed Charge.

And for this, as happened with the Popular Party in 2017, the Economic Agreement was modified by incorporating new taxes and a new Five-Year Quota Law was approved.

Although the approved methodology is markedly similar to that contained in the previous five-year period, some novelties are introduced in relation to the adaptation of the VAT consumption adjustment methodology, that of the Special Tax on Non-Reusable Plastic Containers and that of the Tax on Fluorinated Greenhouse Gases.

(*) This amount does not include the provisional valuation of the cost associated with the public programs and actions in the field of labor, such as employment and vocational training transferred to the Basque Country by Royal Decree 1441/2010, of November 5th (Section G.2).