Spanish corporate income tax legislation established in 1996 the opportunity for Spanish taxpayers (either resident or non-resident with a permanent establishment in Spain) to request an advance pricing agreement (APA) from the Spanish tax authorities in relation to the pricing of their transactions with related parties. However, the Spanish APA programme has not been popular with taxpayers in the past, as transfer pricing matters have traditionally not been a critical issue in tax audits. Recent changes in the Spanish transfer pricing legislation, along with a new draft regulation of APA procedures, still pending to be approved, may foster the use of APAs as a more universal tool for achieving certainty and avoiding potential disputes on intra-group valuation matters.
In this context, it is noteworthy that under current legislation, if properly planned, the binding effects of an APA procedure can be extended for a compounded period of six fiscal years (that is the APA may be applied with respect to transactions carried out in the year in which it is approved, plus in the four following years, plus in the previous year if, at the date of approval, the return of the previous year has not yet been filed).
With respect to the procedure itself, the most relevant new features proposed under draft regulations are as follows:
The pre-proposal documentation and information phase existing to date would be eliminated. Pursuant to the draft wording, the taxpayer would file the proposed pricing arrangement and the tax authorities would be entitled to reject it under the circumstances set forth in the Regulations.
The grounds on which the authorities would be able to reject the proposed arrangement would be the following:
The pricing arrangement proposed clearly lacks a basis for determining normal market value.
Proposed pricing arrangements which were substantially the same as the arrangement proposed have already been rejected.
No risk of double taxation is deemed avoided through proposed pricing arrangement.
Any other circumstance deemed relevant for denying the proposed pricing arrangement.
The information that must be submitted to the authorities would be very similar to that required under transfer pricing documentation rules. In this regard, taxpayers may evaluate whether it would be worthwhile to seek certainty in their pricing arrangements by applying for an APA, taking into consideration that this documentation will have to be prepared in any case.
A relevant issue to consider is that in the draft regulations there is no longer an express reference to the duty of the public officials involved in the procedure to observe strict secrecy and confidentiality with respect to documents and other information that may become known to them during the procedure. The reason for eliminating this clause may be that there are already general provisions assuring this secrecy under the Spanish General Tax Law. However, bearing in mind the sensitivity of this matter for tax payers it would have been preferable not to eliminate the provision. In any case, in our opinion the use of secret comparables by the tax authorities for the purpose of supporting a potential assessment would not be acceptable under current legislation.
The draft regulations also contain the obligation for taxpayers obtaining an APA to submit a letter annually along with their corporate income tax return, informing on the application of such agreement. This letter, which is also compulsory under existing legislation, must contain information on:
transactions carried out during the period referred to in the return in which the APA was applied;
the prices or values applied;
a description of any significant variations in the economic circumstances that are regarded as basic to the application of the APA;
transactions carried out during the tax period to which the APA refers, prices applied and a description of any existing differences with respect to the transactions included within the scope of the APA.
Regarding the termination of the procedure, it is expressly stated that in case of approval of the proposal filed by the tax payer, the latter will be obliged to expressly manifest its acceptance of the terms agreed with the Tax administration in the APA.
With respect to the duration of the procedure, the proposed wording of the regulations maintain a six-month deadline for completing the procedure although reference to the time as from which this period should commence has been eliminated. Furthermore, no reference is expressly made anymore to the impossibility to file an appeal against the express or tacit denial of the APA proposal (although such impossibility shall be presumed in any case under Spanish general tax rules).
The draft reinforces the possibility, already mentioned in the new legislation, of asking the tax authorities to extend the period of validity of an approved APA. This request must be made at least six months prior to the end of the initial period of validity.
Lastly, a more detailed procedure than that existing to date in respect of bilateral or multilateral APAs is set forth in the draft regulations. This procedure was notably inspired by recent work carried out by the OECD on mutual agreement procedures under tax treaties.
In summary, the regulation of APAs in Spain has been notably clarified in certain essential aspects and the Spanish tax administration are showing a clear interest in this procedure for the purpose of avoiding potential disputes with tax payers on transfer pricing matters. In this context, filing an APA aiming at covering critical transfer pricing matters can be a useful alternative for Spanish tax payers; specially, taking into consideration that, in any case, they will be obliged to describe their transfer pricing policy in the documentation required under the current Spanish legislation and that, if approved, the APA would be valid and enforceable for a rather long period (up to six years).
