Tax Newsletter - October 2020 | Decisions

Transfer pricing.- Not all transfer pricing adjustments require a secondary adjustment

Central Economic-Administrative Tribunal. Decision of July 21, 2020

It was concluded in an audit that certain legal services billed by a company had been provided personally and directly by its majority shareholder and sole director (an individual). For that reason the auditors found that salary income had to be attributed to that shareholder, for which an adjustment was added to the controlled transaction (primary adjustment).

In a later claim, the individual applied for a secondary adjustment to be made as allowed in article 16.8 of the revised Corporate Income Tax Law.

Under that article, where the connection is defined by a relationship between shareholder and company, the difference between the agreed and  market value must be treated (in a proportion relative to the ownership interest in the company) as (i) a share in income (if that difference benefits the shareholder or partner), or (ii) shareholder or partner contributions to the company's capital (if the difference benefits the company).

TEAC concluded, however, that this secondary adjustment is not mandatory in that:

TEAC had taken the same view in a decision delivered on September 11, 2017 (RG. 6224/15).

Corporate income tax.- Quantification of tax credit base for R&D&I activities is not binding on tax authorities

Central Economic-Administrative Tribunal. Decision of July 21, 2020

The Corporate Income Tax Law allows taxpayers to apply for a reasoned report from the Ministry of Economy and Competitiveness (or any attached body), in relation to satisfaction of the scientific and technology requirements to classify the taxpayer’s activities as research and development or technological innovation, for the purposes of the credit for activities of this type.

In this decision, TEAC reiterated the principle adopted in a decision dated April 9, 2019 and concluded that this reasoned report is only binding for the tax authorities in relation to classification of the project, but not for determining the base of the tax credit.

After looking at the facts, TEAC concluded that, despite the project being classified as technological innovation in the report concerned, none of the reported expenses qualify for inclusion in the tax credit base, so it denied the right to the tax credit.

Personal income tax.- Termination of co-ownership of a principal residence with attribution of the whole residence to only one of the co-owners can entitle that owner to claim the whole tax credit for purchase of their principal residence

Central Economic-Administrative Tribunal. Decision of October 1, 2020

Before January 1, 2013, the Personal Income Tax Law allowed taxpayers to deduct a percentage of amounts paid to purchase or renovate their principal residences. Following removal of this tax credit, starting on that date, a transitional regime came into force allowing taxpayers who had purchased their principal residences before that date to continue claiming the tax credit (if they had been claiming the tax credit before January 1, 2013).

TEAC held in this decision that observing the rights acquired in relation to the tax credit cannot mean a broadening of those rights.

The facts related to termination of co-ownership of the principal residence carried out after January 1, 2013, under which one of the parties obtained 100% of the residence. In this case, TEAC affirmed, the right to claim the tax credit in respect of the portion acquired to bring its share up to that percentage must always be determined by the conditions that governed the tax credit for that portion before termination of co-ownership.

In short, any co-owner that on or after January 1, 2013 obtains 100% ownership of the residence cannot claim the credit for the portion that it acquires to bring its ownership share to 100% above and beyond what the other co-owner would have been entitled to deduct following termination of the co-ownership if that termination had not taken place.

Or in other words: claiming the tax credit for purchase of the taxpayer's principal residence in relation to the portion acquired to bring their ownership share to 100% of full ownership of the property will always be conditional on whether the co-owner had claimed that tax credit in a year before 2013 in the percentage relating to its co-ownership share (provided it had not used up its right to continue claiming the tax credit before the date of termination of the co-ownership).

Administrative procedure.- Right to a refund of tax incorrectly paid can be tolled as a result of activities carried out on other parties

Murcia Regional Economic-Administrative Tribunal. Decision of November 22, 2019

Father and son terminated co-ownership of a property, transferring 100% of the assets to the father, which was documented in a public deed. Although the taxable person for transfer and stamp tax purposes was the father (as the person who increased his ownership share), it was the son who filed a self-assessment.

The tax authorities initiated a review procedure on the father because he had not filed a self-assessment. During this procedure, it was submitted and evidenced that the tax had been paid over by the son. In response to which the tax authorities found that one taxable person's debt cannot be offset with a payment made by another person and issued an assessment for the tax to the father.

For that reason, the son requested the correction of his self-assessment and a refund of the tax incorrectly paid. The tax authorities denied the refund due to being statute-barred.

Murcia Regional Economic-Administrative Tribunal (TEAR) concluded, in light of the clear connection between the son’s refund procedure for incorrectly paid taxes and the limited review procedure against the father, that the latter tolled the statute of limitations for the son’s right to request a refund.

Audit procedure.- Tax auditors must give proper reasons for using indirect assessment method

Murcia Regional Economic-Administrative Tribunal. Decision of December 20, 2019

The General Taxation Law allows the tax authorities to use the indirect assessment method to determine the tax base in any of the following circumstances: (i) failure to file returns or filing incomplete or inaccurate returns, (ii) resistance, obstruction, excuses or refusal in relation to the auditors’ work, (iii) material breach of accounting or registration obligations; and (iv) disappearance or destruction of accounting books or records or of transaction receipts.

Murcia TEAR recalled however that the existence alone of any of these circumstances does not allow the indirect assessment method to be used. The auditors also have to give reasons why the data and background information obtained in their work do not allow the tax base to be determined using the direct assessment method.

Collection procedure.- An application for deferred or split payment of charged taxes cannot be admitted if it is not based on failure to collect charged tax and no documents are produced to substantiate this fact

Central Economic-Administrative Tribunal. Decision of September 23, 2020

The taxpayer filed an application for deferred/split payment of the tax reported on a VAT return due to a temporary liquidity problem, stating that the amount it was asking to be split or deferred related to tax that had been charged but not collected. For these purposes, they attached a document containing a list of the issued invoices identifying the ones that had been collected and those that had not.

The authorities issued a request for information to examine whether the charged amounts had indeed not been collected. Even though the taxpayer replied to the request, the tax authorities failed to admit the application on the basis that the interested party had not evidenced that point.

Valencia TEAR held that the correct response in these cases was to deny the application, not fail to admit it, because the admission requirements were met. Moreover, it recalled that the reasons for denial must always be given, expressly mentioning the requested documents that had not been produced and their effect on the adopted decision.

In the subsequent appeal, TEAC concluded as follows:

Review procedure.- The right to late-payment interest in cases of late refunds of VAT by the person who charged it incorrectly cannot be reviewed in the economic-administrative jurisdiction

Central Economic-Administrative Tribunal. Decision of July 22, 2020

A company considered that it had been charged incorrect amounts of VAT. For that reason, it did not deduct them and applied for a refund of excess amounts charged. The authorities resolved to uphold its application partially and noted (under article 89.five. b) of the VAT Law) that it was the seller (the party who charged the VAT) who had to correct the invoice and refund the amount incorrectly charged to the company.

In the appeal filed with TEAC, the company acknowledged that it had obtained a refund from the person who had charged it incorrectly. It nevertheless requested late-payment interest due to delay in the refund.

TEAC concluded that, in these cases, the person who paid the incorrect charge is entitled to request late-payment interest from the person who made that charge, if the refund is made with a delay. And if they do not obtain payment, they may initiate legal proceedings, which do not include an economic-administrative claim, because it is not a tax matter.

Enforcement procedure.- The period for issuing a second assessment after a decision fully upheld is the general statute of limitations

Central Economic-Administrative Tribunal. Decision of July 22, 2020

The tax authorities issued an assessment decision. In the appeal brought against that assessment decision, the company's petitions were upheld, which meant the administrative decision was set aside, although the authorities could issue a new assessment. Later, the authorities issued a second assessment.

The appellant company considered that their right to assess had become statute-barred, resulting from failure to observe the six-month period required in article 150.5 of the General Taxation Law (now article 150.7 LGT) for cases where the authorities issue a second assessment to enforce a judicial or economic-administrative decision upholding a claim.

Adopting the Supreme Court’s principle, TEAC acknowledged that the six-month period applies where the decision being enforced partially upholds a claim (for procedural or substantive reasons). Whereas if the claim is upheld in full (as with this case), enforcement only involves invalidating the challenged decision, which must be done within that six-month period.

Once the challenged decision has been invalidated, a second assessment becomes subject, once more, to the statute of limitations. In other words, following the setting aside of the first assessment, as long as the tax obligation continues to exist, the authorities have the option of issuing a new assessment by carrying out a new procedure, within the statute of limitations (bearing in mind in that case the restriction preventing a repeat of the defect present in the invalidated decision).