Laws 26/2014 and 27/2014 will have a significant impact on some of the most important Spanish tax laws, including transfer pricing.
Changes to TP legislation
Changes to Spanish transfer pricing rules include:
· Simplification of the documentation requirements for groups with a net turnover lower than €45 million;
· An entity and the members or investors of another entity where both entities belong to the same group will not be considered related;
· Non-resident entities will not be considered related to their permanent establishments in Spain (important to note this has not been included in the non-resident Income Tax Law);
· Required ownership percentage for parties to be related has been increased to 25% participation threshold from 5%; and
· Suppression of the order established for the use of the valuation methods.
“The five transfer pricing methods continue to be used to support the arm’s-length price in controlled transactions. Nevertheless, the primacy of the CUP, cost plus or resale price methods against the profit-based methods (TNMM and profit split) has disappeared,” said Alejandro del Barrio of Deloitte. “In this sense, in order to select the most appropriate method, as it is prescribed in the OECD TP guidelines, factors as the characteristics, the availability of reliable information and the degree of comparability must be taken into account.”
It is also now possible for advance pricing agreements (APAs) to be backdated within the statute of limitation period.
Penalties
“The penalty regime is less burdensome in the new legislation,” saiddel Barrio.
The penalties incurred by the taxpayer will depend on whether or not a valuation assessment was raised during an audit.
· When a valuation assessment has not been raised during a tax audit, failing to provide documentation or producing incomplete or false information will be punished with €1,000 ($1,100) for each piece of false or omitted data (previously €1,500) and with €10,000 for each set of data (previously €15,000).
“It is relevant to mention that the term “inaccurate” has been removed in the new penalty regime, thus discouraging the widespread controversy that this term created,” said del Barrio.
· When a valuation assessment has been raised during a tax audit, the penalty amounts to 15% of the value adjusted by the tax administration if:
(a) A taxpayer fails to provide documentation or produces incomplete or false information; and/or
(b) The declared arm’s-length value differs from the prices reported by the taxpayer in the corporate income tax/non-resident income tax returns.
Introduction of CbCR
The Spanish government recently announced that the new Corporate Income Tax Regulations will include a country-by-country reporting (CbCR) obligation. This is consistent with Action 13 of the OECD’s BEPS project.
“No official form or report has been disclosed yet, but there is expected to be a comprehensive report which will include the activity and taxes paid in every country where the Spanish-headquartered multinational groups operate. It is supposed that companies exceeding a certain turnover will have to file it with the respective tax return,” said del Barrio.
The corporate income tax regulations are not yet in place. However, they are expected to be implemented in the first half of 2015.
Taxpayer reaction
“Taxpayers do welcome the changes in some sense. The effort required for transfer pricing compliance in Spain will not change much with the exception of CbCR. We are expecting it to have a real impact. The closest example is that of France where there is an obligation to provide certain documentation six months after a tax filing. This has been burdensome for Spanish companies with business in France,” said del Barrio.
Advice for taxpayers
Although Laws 26 and 27 are unlikely to increase taxpayers’ compliance burdens significantly, CbCR is another story.
“In house tax advisers are not yet fully aware of what is coming. My advice to taxpayers is to update transfer pricing documentation and see CbCR, not as a compliance burden, but as an opportunity to have their house in order and have their transfer pricing supported,” said del Barrio. “Taxpayers should ready themselves for a huge amount of tax audits coming in Spain and abroad.”
