On 18 May 2020, Spain’s Supreme Court has ruled that the Tax Administration can apply the penalty regime provided for in the General Tax Law (GTL) in cases of transfer pricing adjustments to related-party transactions carried out by taxpayers who are exempt from the documentation requirements. This resolution confirms the interpretative criterion of the previous one dated 15 October 2018.
The analyzed cases
In the 2018 ruling, the case under consideration concerned an individual who carried out transactions with a related company for an amount below the threshold of €250,000 per year and was therefore exempt from the obligation to prepare and keep the documentation relating to such related-party transactions.
The new 2020 ruling refers to a similar case —related-party transactions between an individual and a related company— but carried out in 2007 and 2008, before the entry into force of the regulations stating the content of the transfer pricing documentation requirements.
In both cases, taxpayers were, for one reason or another, totally exempted from preparing transfer pricing documentation.
Reason for the dispute
The Spanish transfer pricing (TP) regulations establish a specific TP penalty regime. This TP penalty regime includes a case of exemption from liability when the taxpayer has fully complied with the TP documentation requirements.
The reason for the controversy settled in these Supreme Court rulings is:
- whether such exemption from penalties extends to cases in which the taxpayer is exempted from preparing such documentation, or
- whether the penalties provided for in the General Tax Law can be applied in these cases.
New Case Law
The new Supreme Court ruling establishes the following jurisprudential criteria:
- The exemption from penalties provided for in the TP regulations requires that the taxpayer be obliged to prepare transfer pricing documentation, and therefore does not apply to those taxpayers who are exempted from such formal obligation.
- In order to apply the exemption from penalties, the following requirements must be met:
- That the transfer pricing documentation requirements have been complied with
- That the declared value coincides with that derived from said documentation (within the arm’s length range);
- That, notwithstanding the above, the Tax Administration has made a transfer pricing adjustment because it considers a different value.
- When the taxpayer is exempted from the transfer pricing documentation requirements, the Tax Administration may scrutinize the arm’s length value of related-party transactions and, if appropriate, apply the general penalty regime provided for in the General Tax Law.
A pending issue
The wording of the above-mentioned judgments refers to taxpayers who are fully exempted from transfer pricing documentation obligations. However, it leaves pending clarification the application of the penalty regime to a very common situation: when the taxpayer is obliged to prepare transfer pricing documentation because the established thresholds are exceeded and also carries out transactions that are exempt from being included in such documentation, can the penalty regime of the General Tax Law be applied if the tax authorities correct the value of the related-party transactions excluded from the documentation?