In January of each year, employers calculate the annual Payroll withholding tax rate on the employment income that employees are expected to receive. This includes any foreseeable variable payment in favour of the employee as well as the fixed salary.

It goes without saying that, in the actual global scenario, many of the variable remunerations that were foreseeable at the beginning of the year (such as sales commissions deriving from the employee’s activity or overtime hours) will most likely fail to materialise.

Payroll withholding taxes

In such a case, are there any options for employers to benefit their employees’ payroll cash flow?

✔ Spanish tax regulations establish that the annual Payroll withholding tax rate on account of the final tax must be determined yearly based on the personnel and family circumstances of the employee, the eventual reductions applicable as well as the fixed and predictable variable remunerations of the employee.

In relation to these latter ones, the rules qualify as predictable variable remunerations, at least, those obtained in the previous year, except if there are circumstances that permit objectively justifying a lower amount.

✔ The rules also permit regularizing the annual Payroll withholding tax and modify the applicable one going forward, when the circumstances taken into account at its initial determination change.

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Between such cases, a new withholding tax rate must be calculated if the retributions or deductible expenses initially considered change within the calendar year. The rules do not specify if the change must necessarily refer to a remuneration increase.

Hence, if throughout the year there are circumstances that permit proving, in an objective manner, an amount of variable retributions lower than those considered when initially calculating the withholding tax, it will have to be regularized on the date in which the variation takes place; or, at the employer’s election, in the months of April, July and October. Such should be the case in which, objectively, the company could evidence that, due to the current context, variable remunerations will reduce in 2020 in respect to those considered in January this year.

✔ Notwithstanding this, we must distinguish between the reduction of the foreseeable variable remunerations and the absence of payment of the amounts due that were taken into consideration when initially calculating the withholding tax rate (for example, in the absence of payment of an ordinary payroll). In this latter case, the Spanish General Directorate of Taxes, based on the applicable rules, follows the criterion that such absence of payment cannot justify the withholding tax rate regularisation. When, at a later time, the employee is paid the amounts due, he will have to file a complementary tax return of the fiscal year in which they were due, considering the withholding tax on the late payment.

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Publicado el 04-2020 por PBS