VAT tax
IVA is the Spanish name for VAT tax. When consumers buy goods and services, they pay VAT to the merchant or company. The merchant then pays the IVA to the tax office every quarter by filing a quarterly tax return.
What is recargo de equivalencia?
The IVA tax refund mechanism is cumbersome and requires accounts to be made. It will be more troublesome for retail stores, because they have to record the amount of each customer’s purchase as well as the IVA tax. Therefore, the law states that instead of filing quarterly IVA tax returns to pay the tax received to the tax office, retail merchants are required to pay Recargo de equivalencia (often abbreviated as R.E. ). Recargo de equivalencia can be translated as “equivalent tax charge”.
By paying Recargo de equivalencia (self-emploted) retailers are not obliged to file VAT tax returns.
Rearcago de equivalencia only applies to self-employed retailers (autónomo), but not liability limited companies.
How recargo de equivalencia works
Rearcago de equivalencia should be paid to the supplier in proportion to the amount of goods purchased, and then the supplier will in turn give it to the tax office.
For example, if I have a food store and and buy goods to a wholesaler, then R.E. should be paid to that wholesaler.
The tax rate of R.E. depends on the tax rate of the VAT:
21% VAT corresponds to 5.2%
10% VAT corresponds to 1.4%
4%VAT vs. 0.5%
What are the penalties for not paying R.E.?
Retailers are obliged to pay R.E. to wholesalers or suppliers. If you don’t pay, in reality the wholesaler may not care about you, but if you are caught by the tax office, you will be fined. In addition to the fine, you have to pay the unpaid tax.
By law, it is the responsibility of the wholesaler or supplier to ask for a tax return (036 or 037) to determine if R.E. should be collected, and the merchant should declare the situation truthfully and say if he needs to pay it. If a wholesaler knows that a merchant is required to pay R.E. and does not collect it from the merchant, it may be subject to penalties.
For the merchant, the penalty is 50% of the amount of the tax evasion. If I underpay by 1000 euros, the penalty is 500 euros. Nonetheless, the law states that the minimum fine for each unpaid invoice is 30 euros. Therefore, if people make a lot of purchases, the total amount of the fine should not be underestimated, even if the tax underpayment is small each time.
