The Spanish Tax Administration has published the guidelines for the tax audit plan for 2019, and the actions affecting the transfer prices of multinational groups will be particularly affected by the practical implementation of the measures approved in the OECD’s BEPS Project. The exchange of tax information (Country by Country Report, aggressive tax planning, etc.), simultaneous tax audits and the control of permanent establishments will mark the outlook for international taxation in Spain during 2019.
Yesterday’s edition of the Official State Gazette published the Resolution of January 11, 2019, of the General Directorate of the State Tax Administration Agency, approving the general guidelines of the 2019 Annual Tax and Customs Control Plan.
This resolution acknowledges that international experiences highlight the complexity of the tax fraud phenomenon, so that it cannot be combated only with a posteriori control measures, but requires a combination of preventive measures aimed at improving tax compliance, through transparency of information, promotion of assistance, actions aimed at intensifying census purging, collection policy or the development of the Code of Good Tax Practices.
The lines of action that affect the transfer pricing of multinational groups and, in general, issues relating to related-party transactions are marked by the effective implementation of the measures agreed in the OECD’s BEPS Project.
How will Country by Country Report be used?
In June 2018, the Spanish Tax Administration received the first dispatch of Country by Country Information reported by the large multinational groups in the countries of residence of their parent companies. The year 2019 is expected to be a key year for the development of models for the analysis of this information aimed at detecting tax base erosion practices that must be combated in accordance with the new international standards derived from the BEPS project.
These analytical models will have a special impact on the identification of situations of “potential profit diversion” derived from transfer pricing practices, and will have an impact both on the selection of taxpayers to be subject to tax inspection, as well as on the allocation of specialized resources for such inspection tasks to review that transfer pricing policies conform to the Arm’s Length Principle.
An Inconvenient Novelty: Reporting on Aggressive Tax Planning Schemes
Another of the novelties highlighted in this resolution is the appearance of an obligation to provide information on aggressive planning mechanisms and other techniques for concealing the ownership of income and assets, resulting from the transposition of Directive 2011/16/EU (DAC 6), which affects the so-called “tax intermediaries”.
Strengthening of the Advanced Pricing Agreeements Programme and the Mutual Agreement Procedures
During 2019, the Tax Administration will continue the effort, initiated in previous years, to promote the use of the mechanism of Advanced Pricing Agreements (APA’s), both unilateral and bilateral/multilateral, as an instrument to prevent tax avoidance. For the Tax Administration, this mechanism provides legal certainty and avoids costly controversies and litigation for both taxpayers and the Administration itself. These APA negotiation procedures have been centralized in teams of specialists to guarantee the application of uniform criteria.
Also noteworthy is the significant growth in the number of Mutual Agreement Procedures (MAP’s), based both on bilateral double taxation agreements and on the EU Arbitration Convention on transfer pricing. The significant increase in the number of these procedures shows the intensity of international transfer pricing inspection activities in Spain and a large number of transnational regularisations.
The Spanish Tax Administration values positively the development of the procedures for the negotiation of APA’s and MAP’s, which allow it to obtain a better knowledge of the internal functioning of multinational groups and the usual practices in the different economic sectors.
Simultaneous tax controls
Another novelty announced for fiscal year 2019 is the greater frequency of the so-called “simultaneous tax controls”. That allow better information to be obtained on large groups.
They refer to simultaneous tax audits on the multinational group entities located in several countries, which allows to compare information on international transfer pricing policies from the point of view of the different countries, identify inconsistencies in the information provided, especially in the transfer pricing documentation.
We should outline that the EU Joint Transfer Pricing Forum recently issued a report aimed at enhancing such controls in transfer pricing.
Selection of taxpayers to inspect
During 2019, the Tax Administration will improve the selection processes of companies and groups to inspect, making use of the new tools derived from the BEPS Project (country by country reporting, transfer pricing documentation and reporting form 232, etc.).
The specialized staff of the National International Tax Office will be directly involved in these tasks, issuing technical criteria based on their greater experience and collaborating directly in the verification of multinational groups.
Areas of special interest in transfer pricing
During the year 2019, the Tax Administration will pay attention to the compliance with transfer pricing documentation requirements.
Spanish Tax Administration will also focus on identifying new areas of risk in transfer pricing, in addition to those that are of special interest in transfer pricing inspections:
- Financial transactions between group companies and levels of indebtedness;
- Business restructuring;
- Activities carried out through low-risk function structures, both in manufacturing and marketing;
- Intra-group services; and
- Fees for assignment of use of intangibles.
Finally, the Spanish Tax Administration will continue its efforts to identify situations that give rise to undeclared permanent establishments (PE’s) in Spain. An specific mention is made of the implementation of the new criteria for interpretation of the PE definition derived from the BEPS Action 7 Report.
Also as a novelty, the Tax Administration will pay special attention to the calculation of the profit attributable to declared permanent establishments, in order to avoid circumvention situations consisting of the declaration of the existence of a permanent establishment, but involving a minimum taxation not in accordance with the Principle of Free Competition. Therefore, the attribution of profits to permanent establishments will be another area of special attention by the transfer pricing teams of the Spanish Tax Administration.