Spain: the proportionality of VAT penalties and EU law
International Tax Review is part of the Delinian Group, Delinian Limited, 4 Bouverie Street, London, EC4Y 8AX, Registered in England & Wales, Company number 00954730
Copyright © Delinian Limited and its affiliated companies 2024

Accessibility | Terms of Use | Privacy Policy | Modern Slavery Statement
Local Insights

Spain: the proportionality of VAT penalties and EU law

Sponsored by

euro-870757 resized.jpg

Fernando Matesanz of Spanish VAT Services considers the legitimacy of Spain’s VAT law on VAT penalties in light of EU principles.

It is well known that for acquisitions of goods or services subject to the reverse charge rule, the recipient of the transaction is responsible for the VAT due, which results in a simultaneous self-assessment and deduction of said VAT. For taxable persons whose right to deduct input VAT is not limited, this transaction does not involve any financial burden. The same happens for the tax administration which, on the basis of the mechanism of self-assessment and deduction, does not have to collect any VAT. This means that where VAT is not correctly declared in those cases of reverse charge, there is no revenue shortfall for the tax authorities and therefore no financial loss.

Despite this, some member states impose penalties in cases where such transactions are not correctly declared. Spain is one of these countries. The Spanish VAT law establishes a single penalty equivalent to 10% of the VAT amount not included in the tax return. As mentioned, this is a single penalty that does not allow the non-existence of economic damage to be considered to determine the level of the penalty. In other words, it does not consider the proportion of the penalty and cannot be modulated in light of the circumstances.

In this regard, the Spanish Supreme Court, in a judgment handed down at the end of July and made public recently, stated that this type of penalty is not admissible under EU law because it does not respect the principle of proportionality which must govern any power to impose penalties. The Spanish Supreme Court points out that, irrespective of the fact that the penalty regime is not harmonised at EU level, member states do not have unlimited powers to legislate without reference to EU law. Because the penalty is not adjustable according to the conduct of the taxable person and does not consider the absence of economic loss for the administration, the principle of proportionality is not respected.

Notably, the Spanish tax penalty regime already provides for a penalty for non-compliance with formal obligations (e.g. failure to correctly file a VAT return) where there is no financial loss to the tax administration up to €200, which seems reasonable. However, for non-declaration of VAT amounts due to reverse charges, the penalty would be 10% of the VAT not correctly entered in a VAT return. The result for the tax administration is the same in both situations (no financial loss), however, the penalties are completely different. Depending on the VAT amounts involved, even though in neither case would there be any financial loss for the administration, the difference between one penalty and the other could be enormous. It is precisely this disparity that led the Spanish Supreme Court to consider that the sanction does not respect the principle of proportionality.

It is important to highlight that in a study carried out by the EU VAT Forum some years ago it was concluded that the principle of proportionality has been a key topic for the Court of Justice of the European Union (CJEU). The CJEU has always highlighted that said principle must be respected insofar as the penalties do not go beyond what is strictly necessary to achieve the objectives they pursue. Indeed, respecting the principle of proportionality is seen by the CJEU as a requirement for respecting the principle of VAT neutrality (cases C-210/91; C-284/11; C-259/12; C-272/13).

According to the above, the imposition of an excessively heavy penalty on the taxable person could fail to respect the principles of proportionality and neutrality. This seems to be the case with the penalty provided for in Spanish legislation.

Penalties that do not consider neither the behaviour of the offender nor the result for the administration have no place in EU law. In fact, for the Spanish Supreme Court, the question has been clear, and it has not deemed it necessary to refer the matter to the CJEU for a preliminary ruling.

The Spanish case is not unique. There are member states that impose penalties that in some cases can reach 50% of the VAT amounts. These cases would also likely feature penalties that can hardly respect the principle of proportionality. It becomes increasingly difficult for member states to maintain these types of sanctions.

We are aware that the power to impose penalties is the sole responsibility of the member states, but even in these cases, certain provisions of EU community law must be respected.

more across site & bottom lb ros

More from across our site

Luis Coronado suggests companies should embrace technology to assist with TP data reporting, as the ‘big four’ firm unveils a TP survey of over 1,000 professionals
The proposed matrix will help revenue officers track intra-company transactions from multinationals
The full list of finalists has been revealed and the winners will be presented on June 20 at the Metropolitan Club in New York
The ‘big four’ firm has threatened to legally pursue those behind the letter, which has been circulating on social media
The guidelines have been established in the wake of multiple tax scandals and controversies that have rocked the accounting profession
KPMG Netherlands’ former head of assurance also received a permanent bar and $150,000 fine; in other news, asset management firm BlackRock lost a $13.5bn UK tax appeal
The new, fully integrated office will also offer M&A, dispute resolution, IP and corporate tax services
The new guidance concerns a recent 1% excise tax on the repurchases of corporate stock for both US and certain foreign companies
Interpath has hired a managing partner from rival accounting firm BDO to lead the new operation
Survey results of over 28,000 in-house lawyers reveal that American in-house counsel place a higher value on the reputation of external advisers than their peers elsewhere
Gift this article