Why the Spanish can't be entrepreneurs

BARCELONA -- Beyond culture and education, Spanish entrepreneurs are fighting against overwhelming bureaucracy and a distrust of their own government.
Written by Jennifer Riggins, Contributor

BARCELONA -- By the first quarter of 2013, Spain had hit two grim milestones: 27 percent unemployment and more than a million families completely jobless. With numbers like these, why are still so few people trying to start their own businesses?

The Global Entrepreneurship Monitor found in their annual global study of entrepreneurship that there was a decline of new business creation at the start of the crisis from 2008 to 2010, but that 2011 saw an increase by 35 percent, meaning about six percent of Spain's working age population is considered entrepreneurs. However, the GEM report states this jump was due to people creating businesses out of necessity, after their two years of paro (unemployment) checks had dried up. GEM also said that more than half that six percent are self-employed individuals, like architects who, without job prospects, are trying to snatch up what they can.

In February, SmartPlanet published a piece about why the Spanish aren't entrepreneurs, written after talking to about 100 Spain-based start-ups and hearing the same refrain: it's incredibly difficult to start your own business here, you feel alone and odd, and nothing in your life has told you to think differently. Then, we focused simply on education and culture, but today, we tackle what many entrepreneurs say is the biggest obstacle for los emprendedores en España: the government.

Spain ranks 44th on the World Bank's Ease of Doing Business Index, well behind most European countries, except for Greece and Italy. It is expensive and patience-prohibitive to be an entrepreneur in Spain. Before you even start, you have to jump through an absurd number of hoops, fill out tons of paperwork, wait for signatures, and pay fees and taxes, long before a profit is even envisioned. The World Bank also ranks Spain as 136th worldwide for ease of starting a business, with a cost of about €1,000 in public paperwork that takes more than a month to process.

"It is actively penalized by the tax and bureaucracy systems to be an entrepreneur or self-employed in Spain and the start-up costs are huge compared with most other countries," said Graham Hunt, a Brit who has spent his adult life working as an autonomous real estate broker in Valencia. "Therefore, most budding businesses are strangled even before birth because the initial setup costs too much in both time and money."

First, the country almost punishes entrepreneurs with heavy taxation from the get-go. If anyone earns the Spanish minimum wage of €645.30 a month for a regularly waged job, they are required to pay Social Security tax. However, autonomos must pay taxes, no matter what. Social Security -- the bulk of taxes that go into one pot to fund universal healthcare, pension and unemployment -- is decided not based on income or profit, but on what you do, with different tax rates allotted for different sectors. The average payment starts at between 260 and 300 euros a month. Keep in mind that 60 percent of Spain's employed population are Mileuristas, earning about a thousand a month. In addition, these businesses must pay value-added tax, which, in September 2012, went from as low as eight percent to the 21 percent it is today, although this number also varies by sector. This means that, in the last year, most freelancers and small businesses had to pass that sizable increase onto their clients during this economically unstable time.

Both social security and VAT tax have to be paid, whether or not a business makes any profit, with one in three Spanish start-ups failing within the first year, according to Regus, the international business center supplier. Also, under current law, companies often have to put up the money to pay their quarterly VAT, since Spain's invoicing period is typically more than 60 days and VAT is paid based on invoiced not received. However, Prime Minister Mariano Rajoy has stated that starting in January 2014, small and medium-sized businesses and the self-employed can defer their VAT payment until they have banked the invoices.

The current tax law also doesn't consider the irregular income of freelance and cyclical jobs. If an individual or business, like those in the tourism industry, has higher profits one month, the next month its RPF, or income tax, will be higher, even if the earnings drop to the previous rate. For reasons such as these, many choose to do at least part of their business under the table; the Spanish black market is predicted to be underestimated at around 20 percent of the total economy. Unemployed entrepreneurs are entering this informal economy in droves as they offer companies less expensive services; however, a year ago, the government started fighting back, by limiting cash transactions with "at least one professional entrepreneur" to €2,500.

Spain also lacks flexibility in employment categories -- you can either have a full-time job or be autonomo (freelance), but not both. This means that people that do work on the side of their day job either do it under the table or they are getting creative with the system in order to invoice. For example, graphic designers, architects and other creatives who tend to do extra work on the side will list themselves as a regular employee of a company 11 months a year and, on their one month of vacation, they'll change their employment status to autonomo so they can invoice their clients. With that 60-day invoice period, someone trying to start his or her own business on the side could potentially not get paid for services up to 14 months later. It makes for an impossibly slow return on investment that leads to many entrepreneurs working partly under the table.

Spain, along with Italy, has the most expensive and challenging set of patent laws in Europe. While the rest of the E.U. signed off last year to allow companies and individuals to apply to patent inventions and ideas within a common European system, Spain and Italy declined, saying it wasn't fair that applications couldn't be filed in Spanish or Italian. The consequence? The two countries continue to have patent laws that cost inventors 18 times that of the United States and 60 times more than China.

Through numerous interviews with entrepreneurs and polls like this asking what is the most challenging part of being an entrepreneur in Spain, this SmartPlanet writer has found that start-up founders have a myriad of answers -- the challenge of finding business partners, the negative attitude, lack of support, and so forth -- but, about half the respondents say the laws are too complicated and the taxes are too high, with about another quarter voting that they distrust the government.

"Long live the fight against corruption," youth protest, Puerta del Sol, Madrid

It has been theorized that corruption has a significantly negative impact on entrepreneurship, raising the cost and challenges of doing business even more -- and recently Spain has seen its share of high-level corruption. Rajoy and a number of the ruling Popular Party have been accused of not paying taxes on upward of 36 million euros. The royalty's not any better, with, most recently, the king's daughter Infanta Cristina getting subpoenaed to testify about her husband Iñaki Urdangarin, who is accused of embezzling six million euros from his so-called charity. (Let's not even talk about the king going elephant hunting last year.)

Spain is known for having a culture of amiguismo or cronyism, which The Guardian's Madrid-based columnist John Carlin refers to as the Spanish disease -- doing business is not about experience or even what you know, but about who you know. Recently, the majority of Spanish media has been pointing to amiguismo and unmotivated politicians as a major cause of the seemingly endless recession.

This distrust in the nation's leaders has been passed down to Spain's uninspired youth, who are now being called Generation Zero or the "ni-nis," referring to how they have neither full-time jobs nor are in school, living at home well into their thirties. Last year, 70 percent of the Spanish youth said they'd consider moving abroad, while the Spanish National Statistics Institute found that twice as many of Spain's youth are currently emigrating than were in 2010, heading toward an imminent brain drain.

"This is the least hopeful and best-educated generation in Spain," said Publico newspaper columnist Ignacio Escolar. "It's like a national defeat that they have to travel abroad to find work."

With about 60 percent unemployment for youths 30 and under, parliament is working to help this age group. Laws are making it less costly for men 30 and under and women 35 and under to be entrepreneurs. Similarly, the government is offering incentives to hire the same group. As a result, older, more experienced people are being turned down for jobs.

Only time will tell if the Rajoy administration will change legislation to make Spain more open to entrepreneurs.

Cartoon: Luis Gonzalez; Photos: La Moncloa, Flickr Creative Commons

This post was originally published on Smartplanet.com

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