A complete tax adjustment needs to cover statute-barred years also
Madrid High Court argues that a complete tax adjustment requires the tax authorities to include statute-barred years also, to avoid double taxation.
The complete adjustment principle has now been reiterated and settled by the courts. This principle determines that the tax authorities must seek to ensure that an adjustment to the tax liability of the party with tax obligations must be done “for better or for worse”. This means, for example, if a company has deducted an expense in a year before the year it fell due and the auditors make a tax adjustment by increasing the tax base for that year, the complete adjustment obligation requires to be modified also the tax base for the following year in which, according to the auditors, that expense should have been reported. This is the only way to avoid double taxation.
In a judgment rendered on April 10, 2019, Madrid High Court has now gone further by arguing that this complete adjustment must also include non-statute barred years.
In the case examined by the court:
- The taxpayer had deducted an expense in 2008 in respect of a provision for dismissals which, according to the auditors, should have been deducted in 2009, the year those dismissals took place.
- Moreover, the party with tax obligations had depreciated assets at 30% in 2008 because it classed them as tools. According to the auditors, the assets qualified as machinery, and so their depreciation rate was 12%.
During the audit the company produced documents and accounting entries to support that the dismissal costs had only been deducted once (in 2008) and that the assets had been depreciated on a straight-line basis at 30% since they were purchased. And it so happened that, when the assessment was issued in 2008, the company was no longer able to start refund procedure for incorrect payments in relation to 2009, because that year had become statute-barred.
The court held that the tax authorities should have broadened their work to the years following 2008 (including statute-barred years) to make a complete tax adjustment. Otherwise, a double taxation scenario would occur which is not allowable.
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