Sunday, February 17, 2013

Black money and cost of doing things legally in Spain

If you want to run a profitable business in Spain, the use of black money is the grease that makes the gears go round. The crazy amounts of paperwork and high taxes (especially with IVA now at 21%) make efficient cheating a competitive advantage for businesses. If your competition is paying their paying their suppliers half in black money without IVA and their customers pay half in cash, it’s impossible to stay in the game unless you cheat as well.

There was a recent article in El Pais about the complexities of doing something a simple as creating a company. In many countries, it can be as simple as going to a website, entering your information and you are good to go in a day. In Spain, it takes one to three months with a minimum of eight trips to various government agencies.

My feeling is that Spain is in a destructive feedback loop where the government adds more regulation in order to prevent cheating, but the regulation backfires and adds so much cost that it only makes cheating more profitable.

For example, now with IVA at 21%, anytime we spend a significant amount of money on a service, we always get asked “How much of that do you want to pay IVA on?”

Sure, the government can get super tough and start sending people to jail for fraud, but the problem is that the black economy is one of the few things that actually works well in Spain. It’s the citizens last ditch solution to the crazy rules that make it impossible to do businesses here.

The funny thing is that there’s actually more trust and honesty here in cash transactions than with official invoices. Sure, someone could legally not pay the “black money” part of a transaction and the business couldn’t legally go after them, but in practice that’s surprisingly rare.

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