On 21 January 2020 the General Directorate of the Spain’s Tax Administration Agency approved the general guidelines of the 2020 Tax and Customs Control Programme. Below we present the main measures of interest in the transfer pricing area.
AUDIT PROGRAMME FOR COMPANIES REPORTING RECURRING LOSSES
An important novelty of the 2020 Tax Audit Programme consists of a new special audit plan for those companies that have repeatedly reported tax losses to be offset in future years in the Corporate Income Tax.
While there may be business reasons and circumstances that justify these recurring losses, on occasion, the Tax Administration has tried to attribute their existence to one of the following: (i) an inadequate transfer pricing policy, in which the method selected is not aligned with the company’s functional profile, (ii) an incorrect policy of intra-group charges for management fees or royalties, or (iii) an inadequate intra-group financing structure.
In the recent past, group subsidiaries with recurring operating losses have been subject to a scrupulous review of the transfer prices applied and whether they are consistent with the functions performed and the risks assumed by the Spanish subsidiary. In this regard, the lack of risk-taking functions at the subsidiary level has led to the subsidiaries being classified as «limited risk» and the transfer pricing method used or the basic criteria for selecting comparables being challenged by the Tax Authorities. These have given rise to significant transfer pricing adjustments.
Consequently, those Spanish subsidiaries of multinational groups with significant related-party transactions must review that their transfer pricing policies are in line with the arm’s length principle and that the selection of the valuation methods is supported by an adequate and updated functional analysis.
On the other hand, losses may be due to an incorrect financing structure of the Spanish company. For some time now, the tax authorities have been particularly careful in reviewing the financing from related entities, questioning not only the interest rate applied but also whether the loan amounts are consistent with the subsidiary’s repayment capacity.
Consequently, it is crucial that highly-geared companies have adequate and complete support for intra-group financial transactions.
INCREASING INTERNATIONAL COOPERATION
The second major development in 2020 is the ongoing demonstration in the European Union of the obligation to declare aggressive planning mechanisms, derived from Directive 2011/16/EU (DAC 6).
Thus, any intermediary, consultant or advisor will be obliged to report certain structures defined in the annex to the directive, so that the EU Tax Administrations will have more and better information on this type of structures.
This measure joins the reinforcement of the so-called simultaneous controls and coordinated inspections (joint-audits) in which the Tax Administrations of several countries participate against subsidiaries of the same multinational group, exchanging the information obtained in each country and eventually reaching coincident solutions to the same transfer pricing problems, which avoids future controversies. Likewise, during 2020, the promotion of bilateral and multilateral Advance Pricing Agreements (APA’s) programs will be maintained, as well as the processing of Mutual Agreement Procedures (MAP’s) on transfer pricing disputes.
In addition to these dispute resolution mechanisms, the arbitration mechanism derived from Directive (EU) 2017/1852 should be added in 2020, which will strengthen the options available for resolving disputes that may arise between EU Member States and eliminating double taxation.
NEW RISK ASSESSMENT MODEL
In 2020, a new automated transfer pricing risk analysis system will be implemented based on the full set of information available on related-party transactions currently held by the tax administration: automatic exchanges of information on various income sources, those referring to unilateral agreements with tax administrations, information derived from the Country-by-Country report, better knowledge of international groups and the industries in which they operate thanks to the information derived from simultaneous controls, APA’s, MAP’s and exchanges of information derived from DAC 6.
Increasing specialization in international tax matters will enable the Administration to better analyze risks through the development of indicators, indices and models, and to identify patterns of behavior with high risk. The new IT tool will assist the Tax Administration in the assessment of taxpayers’ transfer pricing risk, which will facilitate the allocation of specialized resources to those taxpayers with a higher risk profile.
TRANSFER PRICING COMPLIANCE PROGRAMME
In this area, particular attention will be paid in 2020 to the compliance with the transfer pricing documentation and reporting obligations, without prejudice to the substantial analysis of the valuation of functions, assets and risks contained in such documentation.
In this respect, the areas that will receive special attention in 2020 in transfer pricing are the following:
- business restructurings;
- the valuation of intra-group transactions with intangible assets;
- royalty payments;
- intra-group service payments;
- the existence of recurring losses;
- low-risk functional structures (commissionaires, limited-risk distributors, toll/contract manufacturers);
- lack of declaration of income from services or use of intangible assets not charged on by Spanish companies to foreign subsidiaries;
- structures abroad in which profits to be taxed in Spain are remitted; and
- the correct attribution of profits to permanent establishments.
Finally, as in previous years, the use of corporate forms and their relations with shareholders, employees, directors or related persons to them, as well as with other companies controlled by the same persons, will also be analysed in order to verify whether the correct taxation of the activity carried out is being improperly reduced.
In short, the interposition of legal entities whose main economic significance is to serve as an instrument for channelling the income of individuals whose taxation is irregularly reduced by the current difference in tax rates will continue to be monitored in general, without prejudice to addressing other irregularities such as the improper inclusion in the results of the activity of personal expenses of shareholders not related to the activity.