Tax Newsletter - November 2019 | Judgments

Tax on increase in urban land value

Municipal capital gains tax is unconstitutional where tax liability is higher than capital gain

Constitutional Court. Judgment of October 31, 2019

As explained in our Tax Alert dated November 14, 2019 the Constitutional Court set aside the request for a ruling on unconstitutionality submitted by Madrid Judicial Review Court number 32 and held unconstitutional article 107.4 of the Revised Local Finances Law in cases were the amount of tax payable is higher than the capital gain obtained by the taxpayer.

Tax on increase in urban land value

Anyone who has assumed the cost of the tax on increase in urban land value is entitled to appeal

Supreme Court. Judgment of October 30, 2019

The taxable person for the municipal capital gains tax (tax on increase in urban land value) is the transferor, if the transfer is for consideration, and the transferee, if there is no consideration. It is common practice, however, for the parties to agree that the cost of the tax must be assumed by the party that is not the taxable person.

In this judgment, the Supreme Court recognized a legitimate interest in appealing against assessments of local taxes for anyone other than the taxable person who agrees to pay the tax by covenant or contract. The court accepted this option only for local taxes, and expressly rejected it for any other tax.

Tax on increase in urban land value

Supreme Court appears to recognize the option to claim damages from the legislating state in relation to the tax on increase in urban land

Supreme Court. Judgment of October 3, 2019

The Supreme Court appears to support in this judgment the option to claim financial liability from the legislating state as a mechanism for recovering amounts incorrectly paid in respect of the tax on increase in urban land value.

In this specific judgment, however, the court set aside the appellant’s claim because it did not consider that evidence had been provided of the absence of an increase in land value and therefore held that there was no loss capable of being indemnified through the financial liability of the state.

Tax on increase in urban land value

Not taking into account public deeds of acquisition and sale as a means of proving the absence of an increase in value of the land breaches the right to an effective remedy

Constitutional Court. Judgment of September 30, 2019

According to the taxpayer in this proceeding, the tax on increase in urban land value did not have to be paid because the value of the land for the transferred property had not increased between its acquisition and its sale. To evidence this fact it produced the deeds of acquisition and sale. In the proceeding however these documents were not taken into account as proof of variation in the value of the land.

The Constitutional Court upheld the appeal lodged for protection of constitutional rights. It concluded that the failure to consider the deeds of acquisition and transfer of a property as proof evidencing the absence of an increase in value of the land breaches citizens’ fundamental rights to an effective remedy.

As a result, it ordered the proceedings to be rolled back for the lower court judge to rule on the produced evidence.

Tax procedure

If the deduction of VAT is questioned on the basis of conclusions reached in other related proceedings, the taxpayer should have access to the documents in those proceedings

Court of Justice of the European Union. Judgment of October 16, 2019. Case C-189/18

The Hungarian tax authorities considered that a taxpayer had incorrectly deducted an amount of VAT, because it had been charged on transactions made with its suppliers that were part of VAT fraud.

The taxpayer submitted that the tax authorities had breached the principle of respect for the right of defense, in that only the tax authorities had been able to access the file relating to the audits performed on the suppliers and the decisions in the criminal proceeding conducted against them.

The reference for a ruling by the CJEU concerned whether in a scenario of the type described the right of defense and the right to a fair proceeding were breached. The court concluded that these rights are breached if the tax authorities are relieved of the need to make evidence known to the taxable person including evidence used against that person because this deprives them of the right to effectively call into question the proposed adjustment. Unless objectives based on public interest warrant restricting that access.

Additionally, the court ruling on the appeal lodged by the taxable person must be able to assess the lawfulness of collecting and using the evidence against them and all the findings made in the authorities’ decisions adopted in relation to the suppliers which are decisive to the outcome of the action.

Administrative procedure

For taxes payable through assessment, late-payment interest owed to the taxpayer must be calculated on the total liability in the voided assessment

Supreme Court. Judgment of October 09, 2019

Some taxes are payable through assessment by the tax authorities, including real estate tax or the tax on economic activities. In relation to these taxes, at issue was the method of calculating the late-payment interest owed to the taxpayer where part of the assessment has been voided.

In the case examined in this judgment the cadastral values of various properties of a company had been voided, and those values had been used as the basis for calculating the tax on economic activities. As a result of this partial voiding of the assessment, the taxpayer applied for a refund of the tax incorrectly paid (the difference between the debt paid and the debt that should have been paid based on the correct cadastral value) with late-payment interest.

The Supreme Court concluded that this late-payment interest owed to the company must be calculated by reference to the aggregate amount of the assessments issued by the tax authorities instead of the amount in those assessments that was incorrectly paid.

Audit procedure

Principle of complete adjustment must prevail in audits

Supreme Court. Judgments of September 10 and October 17 2019

In the cases giving rise to these judgments, the auditors had concluded that various invoices issued to the taxable person were not for real transactions. They therefore considered that the input VAT recorded on these invoices was not deductible. The taxable person pleaded that, despite this fact, the VAT had not been paid over to the tax authorities and so the auditors were required to recognize simultaneously the right to a VAT refund. The auditors rejected this option, because they considered that the refund had to be requested by the taxable person in a separate procedure.

The court concluded, against this argument, that, under the principle of complete adjustment and the principles of procedural efficiency and effectiveness in steps by the authorities and proportionality in implementation of the tax system, the auditors should have recognized the right to a VAT refund the deduction of which had been denied, all in the same procedure.

This simultaneous adjustment should have been made even if at the same time it is considered that the taxable person’s actions were subject to a penalty.

Audit procedure

A dawn raid at the taxpayer’s address is only possible if necessary, useful and proportionate in relation to the subject-matter of the audit

Supreme Court. Judgment of October 10, 2019

Observance of the requirements related to the reduction for the depletion factor under the mining tax regime was reviewed in a partial audit. The auditors examined in particular whether the expenses incurred and investments made to create the depletion reserves were directly related to the mining activities specified in the Corporate Income Tax Law. To complete this analysis, the auditors decided to carry out a dawn raid at the company’s address.

In this judgment the Supreme Court examined whether that procedure was suitable. The court said that assessing the appropriateness of a measure of this type requires a three-fold judgment:

• On suitability of the measure: it must be useful for the audit work.
• On necessity: there must not be a more moderate measure.
• On proportionality strictly speaking: the benefits to be obtained must be weighed against the sacrifice of the fundamental right to the inviolability of premises.

The court concluded that, in the examined case, there was no need for the auditors to enter the entity’s premises and sacrifice that fundamental right to ensure satisfaction of all the requirements laid down by the law in relation to the tax benefit at issue. That same aim could have been achieved by requesting the information from the taxpayer and, if need be, denying the suitability of the reinvestments by making the appropriate assessment.

It therefore voided authorization for the dawn raid and ordered the return to the taxpayer of the documents obtained from the raid.