Spain Cash-Transaction Ban Begins as Rajoy Targets Tax Fraud

Spain began prohibiting consumers from paying cash to settle bills of 2,500 euros ($3,190) or more in legislation designed to curb tax evasion.

The ban, which became effective today, will be applied when at least one party to a transaction acts in a professional or commercial capacity, according to a law published Oct. 30 that contains a series of measures it says are “designed to prevent and fight against tax fraud.”

“The social and economic reality in a situation of crisis and budgetary austerity makes tax fraud today even more reproachable than ever,” the law’s preamble says.

Outlawing certain cash transactions that are commonplace across the country, such as paying a carpenter for home remodeling, is the latest in a series of revenue and spending changes that Prime Minister Mariano Rajoy has pushed in a bid to close the budget deficit and avert the need for a second bailout.

Article 7 of law 7/2012 targets the custom of paying cash for goods and services to avoid value-added and income taxes. Economists say the practice is particularly widespread in Spain, a country tax inspectors estimate is one of the European Union’s largest generators of undeclared earnings.

Prime Minister Mario Monti reduced Italy’s cash-transaction limit to 1,000 euros from 2,500 euros last year as part of a government crackdown on tax evasion.

Spain’s underground economy is worth about 245 billion euros, or 23 percent of gross domestic product, according to a report this month from the Spanish tax inspectors union Gestha. That’s about 10 percentage points more than the EU average, it said.

Second-Hand Cars, Homes

While the new cash ban doesn’t affect purely personal transactions, such as buying a second-hand car or home from another private individual, it does extend to non-commercial transactions when the payer is someone whose tax home is in another country. In that case the cash limit is 15,000 euros.

Both buyers and sellers must keep receipts for five years. Violations, including dividing a deal up into pieces smaller than 2,500 euros, will be considered “serious” infractions of administrative law, not criminal acts.

The ban won’t be applied to the repayment of principal and interest to banks.

To contact the reporter on this story: Todd White in Madrid at twhite2@bloomberg.net.

To contact the editor responsible for this story: Timothy Coulter at tcoulter@bloomberg.net.