A Tax With A Different Name
Part of Spain is not on a lower VAT rate. It is outside Spanish VAT entirely, paying a different tax with a different name — and a name is a thing a system either holds or does not.
Here is a sentence that appears in a great many otherwise careful summaries of Spanish tax: "VAT is 21%, with a lower rate in the Canary Islands." It sounds precise, it is nearly right, and it is wrong in the way that costs somebody money. The Canaries do not charge a lower rate of Spanish VAT. They sit outside Spanish VAT territory, and what they charge is a different tax called IGIC, whose general rate happens to be 7%.
The word "happens" is doing real work there. If IGIC were a reduced Spanish VAT rate, then Spanish VAT rules would apply and only the percentage would change. It is not, so they do not. Different tax, different administration, different legal basis, different rules about what is charged and what can be recovered. Ceuta and Melilla are a third case again, levying IPSI, set by each city.
Why "different rate" and "different tax" are not degrees of the same thing
A rate is a number and a system stores numbers well. A tax is an identity: it has a name that appears on documents, an authority that administers it, a registration that a business either holds or does not, and a body of rules that either applies or does not. A system that models the number and not the identity will produce arithmetic that is correct and documents that describe a business as registered for something it is not.
The failure has no symptom
This is the part worth dwelling on. A wrong tax name does not make a total wrong. It does not throw, it does not fail validation, and it does not look odd on screen. It is discovered by somebody outside your organization reading a document, which is the most expensive place for anything to be discovered.
What our own system does, which is where this came from
Our country profile holds one instrument name and one rate per country. For Spain that is Value Added Tax at 21% — correct for the mainland and the Balearics, and describing the wrong tax entirely for a business in the islands. The rate is configurable per organization, so the arithmetic can be made right. The name cannot, because an organization's tax type is chosen from a fixed list of ten and IGIC is not on it. We wrote separately about what those ten are, because the list turns out to be the more interesting half.
Spain is unusual, and it is not unique
It is tempting to treat this as a Spanish curiosity and file it away. The general pattern is common enough to be worth carrying: a country is not always one tax jurisdiction. Sometimes the exception is a territory, sometimes an island group, sometimes a free zone, sometimes a city. The shape is the same each time — one row per country cannot express it — and the failure is the same each time, which is a document that is quietly about the wrong thing.
- Ask what your tax is called in the system, not what it costs. Find the tax type field and read the list. If your regime is not on it, that is structural and you have learned it in thirty seconds.
- Ask what happens at provisioning. If a new entity is given a rate on the strength of its country alone, the system has assumed a territory. That assumption is right for most of a country and wrong for the parts that need it most.
- Ask how two regimes coexist. If you have branches under different systems, establish concretely whether that is one entity or two, and what it does to consolidated reporting. It is an architectural question and it is usually discovered late.
Which regime you are actually under is a question for your adviser rather than for a vendor — it turns on where you are established and what you supply, and getting it wrong has consequences no software choice improves. What a system should do is hold the answer you were given, along with when it was decided. Producing that answer is not a job software should want.
