Javier Montes Urdín

Great strides have been made in Spanish transfer pricing legislation and audit practice in the past three years. Indeed, until December 2006, Spain was viewed by transfer pricing practitioners as a transfer pricing heaven where the scarce legislation existing at that time lay the burden of proof with the tax authorities, who were unable to audit the transfer pricing policy of Spanish or foreign multinationals operating in Spain in a proper manner, due to the lack of specific documentation and training.

As an exception to the above, specific formal requirements applied to the deductibility of management fees and those audited in a strict manner by tax auditors, only in a few cases did the authorities manage to raise transfer pricing reassessment –mostly in relation to finance transactions.

Nowadays, the situation has evolved dramatically: the burden of proof has been shifted to the taxpayers, new prescriptive transfer pricing documentation rules have been established in line with the EU code of conduct and significant risk assessment tools have been put in place (for instance under the new corporate income tax return, a significant amount of information must eb reported on transactions exceeding €100,000 ($145,000)).

Furthermore, the guidelines of the general plan on tax control published in January of this year include transfer pricing among the areas which inspectors should consider a priority and on which they should perform rigorous scrutiny.

In view of this, it is no surprise that inspection work covering related-party transactions has increased considerably with respect to other years.

Furthermore, in the context of the recession, which is affecting the Spanish economy in a particularly hard way, the need to increase tax collection is encouraging the authorities to become particularly strict with respect to tax erosions linked to the application of aggressive transfer pricing policies within multinationals. Under these premises, the growth of litigation on transfer pricing matters seems to be inevitable in the upcoming months/years in Spain.

Considering the complexity of most transfer pricing issues, this increase in litigation will likely derive in higher taxation for multinational companies operating in Spain. In this context, dealing with controversy during the tax audit process with the assistance of transfer pricing specialists is crucial in order to avoid lengthy and uncertain litigation procedures, often leading to effective double taxation.

The areas which the tax auditors are specifically analysing include: a) the valuation of financial transactions where, apart from the interest rate, inspectors are examining the degree of leverage and transactions; b) ongoing (licensing) or one-off (transfers) involving valuable intangible assets and c) intra-group services supplied by companies operating as shared service centres, procurement companies, headquarters or R&D and technology pools.

Special attention is also being paid to business restructuring processes, entailing delocalisation of functions, risks or personnel out of Spain. Finally, Spanish tax authorities are creating specialised teams, centralising extensive knowledge and experience on transfer pricing matters.

This has resulted in more rigorous inspections in which the field tax inspector challenges the values applied by the taxpayer on the basis of comparative economic analyses drawn up by the aforementioned transfer pricing specialised team of tax auditors.

As a consequence of the above, multinational companies operating in Spain should consider transfer pricing in a different light.

In the future the preparation and keeping of extensive transfer pricing documentation will likely not be enough to avoid controversy and onerous tax adjustments.

Indeed, transfer pricing may no longer be viewed as a simple matter of compliance but rather as an integrated process, which must be consistently in line with the whole business operative of the company, encompassing commercial, accounting, financial and internal audit policies and procedures.

In this way, companies will need to prove that their IT systems duly reflect and apply the approved arm's length transfer pricing policies, thus, complying with the terms of their corresponding documentation.

Javier Montes Urdín (javier.montes@garrigues.com)