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History of the Economic Agreement

History of Basque Economic Agreement

Origins of the Agreement

The Basque region extends on both sides of the Pyrenees, divided by the Pyrenean border between Spain and France. The northern Basque Country (in Basque, Iparralde) is part of France and includes the three provinces of Lapurdi, Baja Navarra, and Zuberoa. The southern Basque Country (in Basque, Hegoalde) is part of Spain and is divided into the four provinces of Álava, Bizkaia, Gipuzkoa, and Navarra. Despite being politically divided by the border established in the Pyrenees, the seven provinces that make up this plurinational region share close historical, political, and cultural ties, including the use of a common language: Basque.

While the three provinces of the northern Basque Country are fully integrated into the uniform administrative structure of France as part of the Department of Pyrénées-Atlantiques, the four provinces of the southern Basque Country enjoy a unique position within the asymmetrical territorial organization model of the Spanish State.

The most distinctive feature of this asymmetrical arrangement is its extensive fiscal and financial self-governance, contrasting with the rest of the territories of the State. The current financing system for Autonomous Communities in Spain is governed by two differentiated regimes: the common regime and the foral regime.

The common regime is uniformly applied in all Autonomous Communities on the mainland, except for the Basque Autonomous Community and the Foral Community of Navarra. Based on the historical and political circumstances referenced throughout the article, both territories maintain a singular and exclusive financing regime that grants them extensive fiscal and financial power. Although the legal basis and scope of fiscal self-governance in both territories are not exactly the same, the structure and functioning of their financing systems are broadly similar.

The Origins of Foral Self-Governance

The roots of Basque self-governance extend from the Ancien Régime to the present day. Unlike other peninsular territories of the Spanish Monarchy, where self-governing systems based on the Fueros were eliminated or diminished in favor of a uniform organizational model, the foral self-governance system remained intact in the provinces of Álava, Bizkaia, Gipuzkoa, and Navarre until the 19th century. Hence, the terms “foral self-governance” and “foral provinces or territories.”

Under the foral regime, the Basque provinces enjoyed extensive self-governance. The Charters structured the governing system of each Basque province, regulating “all kinds of public and private situations and relationships, both individual and social.” In the liberal conception of the 19th century, the foral system was equated with a constitutional system, where each province had its own “foral constitution” that regulated the political and institutional system organized around the Councils (executive power) and the General Assemblies (legislative power).

Focusing on the fiscal realm, key aspects included the extensive freedom each province had to structure its own treasury and tax system, the exemption from paying taxes to the Crown, the freedom of trade, and the application of a distinctive customs regime until 1841. It can be summarized that the integration of Basque territories within the Spanish Monarchy had a confederal character.

Foto de la comisión Vascongada que se encargó de la negociación por la Renovación del Concierto Económico en 1925
Foto de la comisión Vascongada que se encargó de la negociación por la Renovación del Concierto Económico en 1906

Renewals of the Basque Economic Agreement

The Renewal of 1894

The Basque Commission was responsible for negotiating the renewal of the Economic Agreement in 1894. This is the oldest photograph located to date of the negotiators involved in the Basque Economic Agreement.

Standing from left to right: Eliodoro Ramírez Olano (Secretary of the Álava Provincial Council), José F. Epalza (Provincial Deputy of Bizkaia), Justino Iradier (Provincial Deputy of Álava), José Machimbarrena (Provincial Deputy of Gipuzkoa), Leonardo Moyua (Provincial Deputy of Gipuzkoa), Fernando Olascoaga (Provincial Deputy of Bizkaia), and Bernardo Unda (Accountant of the Bizkaia Provincial Council).

Seated from left to right: Juan José Elorza (Vice President of the Gipuzkoa Provincial Council), Cosme Palacio (Vice President of the Bizkaia Provincial Council), Juan Cano (President of the Álava Provincial Council), José María Arteche (President of the Bizkaia Provincial Council), Ramón María Lilí (President of the Gipuzkoa Provincial Council), and Benito de Guinea (Vice President of the Álava Provincial Council Commission).

Image provided by María Jesús Ramírez de Olano.

Foto de la comisión Vascongada que se encargó de la negociación por la Renovación del Concierto Económico en 1894
Foto de la comisión Vascongada que se encargó de la negociación por la Renovación del Concierto Económico en 1894

The Renewal of 1906

The Basque Commission responsible for negotiating the renewal of the Economic Agreement in 1906. Standing from left to right: Eliodoro Ramírez Olano (Secretary of the Álava Provincial Council), Joaquin Carrión (Provincial Deputy of Gipuzkoa), Isidoro León (Provincial Deputy of Bizkaia), Pedro Chalbaud (Provincial Deputy of Bizkaia), and Benito de Guinea (Vice President of the Álava Provincial Commission).

Seated from left to right: Francisco Gascue (Vice President of the Gipuzkoa Provincial Council), Braulio Montejo (Provincial Deputy of Álava), Ramón María Lili (President of the Gipuzkoa Provincial Council), and Adolfo G. de Urquijo (President of the Bizkaia Provincial Council).

In the last image, the Bizkaian commissioners who participated in the renewal of the Economic Agreement in 1906. Number 1: Adolfo G. de Urquijo (President of the Bizkaia Provincial Council). Number 2: Pedro Chalbaud (Provincial Deputy of Bizkaia). Number 3: José Joaquín Ampuero. Number 4: Isidoro León (Provincial Deputy of Bizkaia).

Foto de la comisión Vascongada que se encargó de la negociación por la Renovación del Concierto Económico en 1906
Foto de la comisión Vascongada que se encargó de la negociación por la Renovación del Concierto Económico en 1906

The Renewal of 1925

The process for this renewal began with the Royal Decree from the interim President of the Military Directory on June 9, 1925, which appointed a mixed commission (State-Foral Councils) to draft the Economic Agreement. Complicated negotiations took place with Admiral Antonio Magaz y Pers and the Minister of Finance, José Calvo Sotelo, but ultimately, the agreement was formalized in the Royal Decree of December 24, 1926.

This institution then experienced regulatory development that affected various agreed-upon figures, accompanied by improvements to technical aspects and adaptation to the current tax system. It explicitly affirmed the authority of the Foral Councils to establish the tax system they deemed appropriate. The only limitations were the prohibition against adopting provisions that could contradict international agreements signed by Spain or that referred to contributions, income, or taxes reserved for the State. The regulation established the execution mechanism for the Agreement and created a Mixed Utilities Jury. This last entity, both provincial and central in nature, would set the tax bases concerning the benefits of movable wealth on which companies operating both within and outside the agreed provinces had to directly pay taxes to the State. A validity period of twenty-five years was anticipated, divided into five-year intervals, during which the quotas would progressively increase from 40 million pesetas annually to 50 million by 1951.

Foto de la comisión Vascongada que se encargó de la negociación por la Renovación del Concierto Económico en 1925

The Foundations of Foral Autonomy from 1979

Following the death of Francisco Franco in 1975, and in the context of the so-called “Spanish democratic transition,” a constituent process was initiated to redesign the model of State organization. This process culminated in the approval of the Constitution of 1978, which established the foundations for the construction of the autonomous State, facilitating a profound process of asymmetrical decentralization. The Spanish model of decentralization is based on the Statutes of Autonomy developed and approved by each autonomous entity. These Statutes regulate the competences and the political, administrative, and institutional autonomy of each of the Autonomous Communities established after 1978. Currently, Spain is divided into 17 Autonomous Communities and the autonomous cities of Ceuta and Melilla.

Firstly, the Derogatory Provision repeals the laws that abolished the system of foral autonomy that survived in Álava, Bizkaia, Gipuzkoa, and Navarra until the 19th century. Secondly, through the recognition of “historical rights” in the First Additional Provision, the “old foral autonomy” is linked to the “updated foral autonomy.” This provision, certainly exceptional in comparative law due to its recognition of pre-constitutional rights, provided legal support for the asymmetrical integration of the “foral territories” of Álava, Bizkaia, Gipuzkoa, and Navarra within the new model of territorial organization.

The Basque Economic Agreement of 1981

In 1981, the process of updating the foral autonomy system was completed, based on the Spanish Constitution of 1978, the Statute of Autonomy of the Basque Country of 1979, and the Law of the Basque Economic Agreement of 1981. Under the umbrella of “historical rights,” the Autonomous Community of the Basque Country not only enjoys broad political, institutional, and administrative autonomy derived from the Statute of Autonomy, but also exercises extensive fiscal and financial self-government as a result of the Economic Agreement.

Firma del Concierto Económico de 1981 en el Congreso de los Diputados
Firma del Concierto Económico de 1981 en el Congreso de los Diputados

The Renewal of 2002

After a complicated negotiation process that began in the summer of 2001 and following a unilateral extension by the State due to a lack of agreement in the Joint Cup Commission, an agreement was reached on March 6, 2002. This agreement was formalized in Law 12/2002 of May 23.

This law, also consisting of a single article, introduced significant changes compared to previous texts, the most notable being the establishment of the Agreement as indefinite. Thus, while the agreement is indefinite, it includes mechanisms for modification by mutual agreement in the Joint Economic Agreement Commission. Additionally, under the new agreement, the State’s tax competencies were reduced (import duties or levies related to Special Taxes and VAT), with the High Inspection (a concept that has never been clearly defined) reserved for the application of the Agreement. Another structural novelty of the Agreement itself is that while the 1981 version contained two parts—taxes and the quota—it now distinguishes three: taxes, financial relations (not just the quota), and a new section for the Commissions and Arbitration Board.

The 2007 modification

After the first five years of validity, the Basque Economic Agreement was reformed following an agreement in July 2007 and approved by Law 28/2007, of October 25, which amends Law 12/2002 of May 23, approving the Economic Agreement with the Autonomous Community of the Basque Country. In addition to renewing the Five-Year Quota Law, the Basque and State administrations agreed on a formula to address the tax requirements of the European Commission. The Economic Agreement was adapted regarding budgetary stability, and the composition of the Arbitration Board provided for in the Agreement, which had not been activated until that point, was also agreed upon.

The 2014 modification

The Basque Government and the central Government signed the reform of the Economic Agreement on January 16, 2014, which allowed the Foral Treasuries to collect seven new tax figures approved in recent years by the Spanish State. The Joint Commission of the Economic Agreement officially ratified the agreement between both parties.

The agreed taxes included those related to lotteries, deposits in credit institutions, electricity production, nuclear energy production and storage, hydrocarbons, fluorinated gases, and gambling activities. In the case of the lottery tax, the Basque administrations agreed with the State that the transfer would take place retroactively from January 1, 2013

The 2017 modification

In the spring of 2017, parliamentary support for the General State Budgets was agreed upon with the Basque Nationalist Party, leading to various reforms in the Economic Agreement and the approval of a new Quota Law. Modifications were made to the Economic Agreement to adapt to legislative changes, including updates to provisions related to fiscal groups, the Electricity Tax, options for non-residents to pay Personal Income Tax, and the adaptation of tax crime regulations in accordance with the new regime established in the Penal Code. Additionally, the taxation of the value of gas, oil, and condensates extraction was agreed upon.

Improvements in tax management and coordination between administrations were also introduced, establishing a new procedure for the regularization of VAT quotas returned for periods of settlement prior to the initiation of the taxpayer’s regular operations. Provisions regarding the regulation of connection points in various tax figures, such as Personal Income Tax, Corporate Tax, VAT, and Income Tax for Non-Residents, were also modified.

Ituna Center for Basque Economic Agreement and Fiscal Federalism Studies

History of the Basque Economic Agreement

Introduction to the Economic Agreement for Students

This working document provides a general introduction to the history, legal framework, and economic-financial functioning of the Economic Agreement, aimed at the students of the UPV/EHU.

Documents on the Basque Economic Agreement

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