The Basque Economic Agreement is the legal instrument that regulates tax and financial relations between the General Administration of the State of Spain and the Basque Autonomous Community. The Basque provinces of Álava, Bizkaia and Gipuzkoa (in addition to the uniprovincial Community of Navarre) are outside the common system (financing system that applies uniformly to the rest of Spanish Communities) and constitutes what is known as “Foral Regime”, which gives them a unique financing scheme that endowed them with a broad fiscal and financial power.

Historical origin

The origin of the Basque Economic Agreement dates back to the late 19th century. Until then, Basque provinces had enjoyed broad self-government under the foral jurisdiction system, which included political-institutional, judicial, administrative and fiscal autonomy. With the arrival of the Restoration regime under the presidency of Antonio Cánovas del Castillo, a uniform and unitary state was established, and the foral system was abolished. However, due to the inability of the Central Treasury to collect taxes in the Basque provinces, the Economic Agreement regime was established.

Basque Economic Agreement

Under this institutional arrangement, Basque tax authorities would be responsible for collecting the taxes, and then they would transfer to the Spanish Treasury the amount of revenue that “it could have supposedly raised by its”. Initially, it was a temporary system, but it was perpetuated in time until the present, being only interrupted during Francoism in the so-called “traitorous provinces” of Bizkaia and Gipuzkoa, where it was repealed as a punishment for remaining loyal to the Republican order.

With the arrival of Democracy after Franco’s death, the Basque Economic Agreement was endorsed by the First Additional Provision of the 1978 Constitution, which protects and respects the historical rights of Foral Territories. Subsequently, the Statute of Gernika (1979) and the Economic Agreement Law (1981) gave legal support and material development to the Concert regime. The current Economic Agreement law was renewed an enforced in 2017.

The Economic Agreement also received the approval of the European courts. The Court of Justice of the European Union acknowledged this in its judgment of the 11th ofSeptember 2008, when it considered that the Economic Agreement complies with the unilateral risk  and tax autonomy principles, required since the “Azores Case” as the criteria to meet in order to declare a subcentral differentiated tax regime compatible with State Aid regulations. Likewise, in 2010 the law on the “shielding” of the Basque Economic Agreement was approved in the General Courts, so that the Basque tax regulations can only be appealed to the Constitutional Court (TC), and not to the ordinary ones, as until then. This Law was endorsed by the TC itself in 2016 before the unconstitutionality appeals filed.

The Agreement

According to the Economic Agreement, the Basque Provincial Councils and their treasuries have the power to regulate the main direct taxes (IRPF, Heritage, Societies, Donations and Successions), being able to establish their tax rates, reductions, deductions and other essential elements, and to collect them. In the case of indirect taxes (VAT and excise duties), their regulatory capacity is limited, but they are responsible for collecting them.

However, the Economic Agreement has its limitations and obligations too. First, it must respect inter-territorial solidarity by contributing to the Interterritorial Compensation Fund. In addition, the historical territories commit to maintain an effective overall tax burden equivalent to that existing in the rest of the State, and to cooperate and coordinate with the State regarding fiscal and financial matters. Finally, the legal framework of the Economic Agrement must comply with international treaties signed by Spain.

Quota

But above all, Basque institutions commit to pay the Quota, the contribution that must be made annually to sustain the general public expenditure of the Spanish State. The Basque Country must pay 6.24 % of the State expenditure on the competences not taken over by the Autonomous Community nor provincial and local Councils (army, Crown, public debt of the State, foreign relations…). The imputation rate (6.24 %) was calculated according to the relative weight of the Basque economy in 1981 compared to Spain as a whole. Therefore, the quota do not represent a share of the State in the collection of historical territories, but a payment to the central administration for the powers and services it provides to Basque citizens. This is a characteristic of the “Basque federal system”, where Basque institutions, instead of the central State, transfer funds to, finance their share of State-coffers. The methodology to calculate the “Quota” is renewed every five years.

Coordinating bodies with the State

The Economic Agreement Law creates three bodies to manage the flow of relations between the Basque administrations and the State, since, due to the bilateral and negotiated nature of the regime, agreements must be taken in a consensual manner.

  • The Joint Economic Agreement Committee: It is the highest body for relationships between Spanish and Basque governments. The Joint Committee is composed by twelve members, six representing the central administration and the same amount for the Basque side. It is responsible, among others duties, for agreeing on the methodology for the appointment of the “Quota” and the renewals of the Agreement.
  • The Board of Arbitration of the Economic Agreement: It is the body for deliberation and resolution of jurisdictional conflicts that arise between the State Tax Administration and the Provincial Councils. It is composed of three members to be appointed by the Joint Economic Agreement Committee.
  • The Law Coordination and Evaluation Commitee: It is the technical body of the Economic Agreement. Its aim is to facilitate cooperation and ensure compliance with the collaboration principle between central and Basque administrations, as prescribed by the Economic Agreement.

Renovación Concierto Económico 2017

Internal relations between Basque administrations

In addition to the financial relations with the State, the specificity of the foral tax regime of the Economic Agreement and the quasi-federal organisation of the Basque Autonomous Community also requires internal cooperation bodies between the Basque administrations, since it is the Provincial Councils of the Historical Territories of Álava, Bizkaia and Gipuzkoa who collect taxes, but it is the Basque Government that spends most of revenue.

For them, the Basque Council of Public Finance, an inter-institutional body that coordinates financial activity of the Historical Territories and their public sector with the General Treasury of the Basque Country, emerges, and its central function is to determine and establish the distribution of funds between institutions. The Council is composed by 9 members: 3 appointed by the Basque Government, 3 representatives of Provincial Councils (one for each of them), and 3 representatives of the municipalities (one for each Historical Territory).

In accordance with the Contributions Law, the Council must determine vertical and horizontal input rates in a consensual manner:

  • Vertical input: Determines the share of the revenue raised by Foral Treasuries transferred to the Basque Government. As it has been said, the Basque Government does not raise as much revenue so as to cover its expenditure needs. The vertical input is currently the 70.04 % (it will soon be increased to 70.81 %) while the deputations and municipalities will have the remaining 29.16 %.
  • Horizontal contribution: On the other hand, the horizontal contribution is the proportional calculation corresponding to each historical territory to contribute to the Basque Government. That is, the contribution of each historical territory over the 70.04 % received by the Basque Government. It is currently distributed as follows: Biscay 50.29 %, Gipuzkoa 33.49 %, Álava 16.22 %.

For internal financial relations it also exists the Basque Tax Coordination Body of a more technical nature than the Basque Public Finance Council, and the Finance Councils of Álava, Biscay and Gipuzkoa (in the framework of the financing of local authorities it is regulated at provincial level and the financial supervision of the local finances is vested in the Provincial Councils).

To sum up, the Basque Economic Agreement regime represents a unique case of fiscal federalism. Not only because of its asymmetrical nature and the wide autonomy it provides with to treasuries of each historical territory; but because they are subcentral entities the ones responsible for providing resources to the central administration ,and not the other way around.

The Association for the Promotion and Diffusion of the Economic Agreement, “Ad Concordiam”, a private non-profit organisation, produced the following videos about the Economic Agreement and the Quota that summarise the information gathered here.

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