Surcharges cannot be imposed if the supplementary returns were filed directly or indirectly as a result of previous administrative tax assessments

Under article 27.1 of the General Taxation Law (LGT), a voluntary and spontaneous filing of a tax return outside the time limit (if no prior request has been received from the authorities) means that surcharges may be imposed rather than penalties. According to this article, the authorities usually impose these surcharges automatically regardless of the reasons behind the late filing of a tax return.

In many cases, however, the only purpose for filing these types of returns is to apply the methods determined in an earlier tax audit to later years not falling within the items or time period reviewed in the audit. 

Picking up on these special scenarios, in its recent decisions on September 17, 2020 and October 27, 2020, TEAC changed the method adopted in a decision on September 21, 2017 (summarized in our Newsletter in October 2017) by concluding as follows:

1. The term “prior request” is defined in the General Taxation Law (LGT) in a broad way and it is not restricted to one made with respect to the same tax and period as the self-assessment filed outside the time limit. 
2. A return filed outside the time limit to apply a method determined in an audit of earlier years is not spontaneous, in that it is stems from an earlier adjustment made by the tax authorities.
3. Therefore surcharges cannot be imposed if the taxable person files a supplementary self-assessment that is directly and or indirectly the result of an assessment made by tax auditors in relation to an earlier period, although this does not prevent late-payment interest (not penalties) becoming payable.

TEAC clarified however that this case only arises where the following circumstances are met:

1. Where the tax authorities have all the necessary information as a result of the earlier audit (namely, the late self-assessment does not provide any information not known to the tax authorities).
2. Where the tax authorities could extend the adjustment to the second year without carrying out new audit work, avoiding the need to file a late return. In other words, this requirement is not satisfied, for example, where it involves the classification of income from the provision of computer services by a nonresident entity. In the audited fiscal year, the authorities found that the income related royalties not to business profits and as a result nonresident income tax had to be withheld on it. According to TEAC, the conclusion reached in one fiscal year cannot automatically be transferred to later years, because this requires verification that the agreements under which the income was paid or the circumstances or even the services actually supplied are the same. In fact, TEAC underlined, if the auditors themselves extended the conclusions from one fiscal year to another without any further verification in a case such as that described, they could be blamed for making unsupported changes.

It must be remembered that several cassation appeals have been admitted by the Supreme Court and are awaiting a decision precisely in relation to interpretation of the definition of prior request contained in article 27 LGT. 

Another relevant point to recall is that the bill on measures to prevent and fight against tax evasion expressly states that surcharges may not be imposed on anyone who regularizes their tax affairs in line with the methods determined in an earlier administrative adjustment (on the same item and with identical circumstances, but for different periods), on condition that the administrative adjustment was not accompanied by a penalty.