Tax Newsletter

Corporate Tax (IS) Related party transactions

• National Court ruling of 31 May 2023 Related party transactions. Valuation.

• The question at issue in this case is whether the lowest price in the arm's length range determined by the administration should be used for the valuation of certain related-party transactions or whether, on the contrary, the administration's argumentation is sufficient for the application of the median pursuant to the provisions of rule 3.61 of the OECD Guidelines. The deductibility of certain expenses and the imposition of tax penalties are also in dispute, albeit less relevant.
• The National Court partially upheld the appeal, considering that the contested decision failed to justify the grounds for the decision, since the application of the median rule to assess related-party transactions, as the National Court noted, requires the absence of other comparable transactions. In this case, the National Court ruled that the justification for using the median to assess the related-party transaction is totally inadequate, since alleging that the margins are very broad is not a valid argument. Therefore, the Administration's decision, subsequently endorsed by the Central Economic-Administrative Court, lacks the reasoning required to consider that the burden of explaining the reasons for the application of the median has been met, as required in rule 3.61 of the OECD Guidelines, due to the persistence of comparability defects.
• Consequently, since the reason for applying the median was not properly justified, the plea raised by the appellant on this point is upheld and the application of the lowest point in the arm's length range determined by the tax administration, which in the present case is 3%, is allowed.

Value Added Tax (VAT):

• Ruling of the Supreme Court of 26 July 2023. Non-application and reversal of tax penalty. Violation of the proportionality principle. Need to refer a question for a preliminary ruling.
  • A penalty was imposed on the appellant for the commission of a tax offence under Article 170(2)(4) of the VAT Law, specifically the failure to include the amounts in respect of which the recipient of the transactions is the taxable person in the self-assessment to be submitted for the period in question.The question before the court on appeal is whether a court can reverse a penalty imposed for the commission of a violation regulated in Article 170(2)(4) of the VAT law on the grounds that the proportionality principle was violated, since Article 171(1)(4) of the VAT law quantifies the penalty as a fixed percentage of the amount not included in the self-assessment, so there is no possibility of assessing whether or not there is economic damage to the Treasury, nor of modulating the penalty.
  • The Supreme Court considers, firstly, that a court can reverse a punitive act even if it entails the non-application of the legal rule on which the act itself is based when the competent judge or court finds that the national law violates the proportionality principle established in European Union law. In this case, the Court ruled that the violation contained in Article 171(1)(4) of the VAT Law, which assesses a fixed percentage of 10% of the amount of the tax not paid as a penalty, without the possibility of considering the absence of economic loss which would modulate the penalty, is an omissive conduct in which no such loss is caused to the Treasury and is alien to the idea of tax fraud.
  • Secondly, the Supreme Court considers that, as a general rule, the competent court or tribunal has the obligation to refer a question to the Court of Justice of the European Union for a preliminary ruling if it believes that a decision on the matter is necessary in order to issue a judgment. However, according to the CJEU's own doctrine, cases in which a referral for a preliminary ruling is unnecessary if the CJEU has already ruled on the question at issue are exempt from that obligation.

• Judgment of the CJEU of 7 September 2023. VAT. Directive 2006/112/EC. Principle of VAT neutrality. Principle of effectiveness. Too high VAT rate on a purchase invoice. Reimbursement of the amount levied in excess. Direct action against the administration. Effect of the risk of a double reimbursement of the same VAT.
  • The CJEU has heard Case C-453/22 which concerns a reference for a preliminary ruling from the German Tax Court in relation to the right to obtain, for reasons of equity, an exemption from the VAT claimed ex post by the German tax authorities and interest on the amount of that tax.
  • The CJEU resolves the question referred by the German court in such a way that, in the VAT Directive 2006/112/EC, as amended by Council Directive 2010/45/EU of 13 July 2010, the principle of VAT neutrality and the principle of effectiveness must be interpreted as requiring that a receiver of supplies of goods has a direct right to claim from the tax authorities the reimbursement of improperly invoiced VAT paid to his or her suppliers and paid by those suppliers to the public purse, together with related interest, in circumstances where the requirements are met. The first requirement is that the receiver cannot be accused of fraud, abuse or negligence.Secondly, the receiver cannot claim that reimbursement from those suppliers due to the limitation period stipulated by national law and, finally, there must be a procedural possibility of those suppliers subsequently claiming reimbursement of the overpaid tax from the tax authorities after having adjusted the invoices that were issued initially to the receiver of those supplies.
  • Finally, the CJEU considers that failing reimbursement of the VAT improperly charged by the tax authorities within a reasonable time, the damage suffered on account of the unavailability of the amount equivalent to that improperly charged VAT must be compensated by the payment of default interest.

Other decisions of interest

• National Court ruling of 19 April 2023 Procedure. Termination. Resolution. Effects.
  • The disputed issue in the present case is whether, in situations where a tax assessment is reversed for non-formal or substantive reasons, the administration is entitled to complete the proceedings in order to reissue a tax assessment, or whether, on the contrary, the administration may only take into consideration the data already collected.
  • The National Court upheld the appeal and reversed the contested decision on the grounds that when a tax assessment is reversed for substantive reasons the tax authority cannot complete the subsequently reversed proceedings, nor can it commence new verifications or set new requirements to integrate its actions, without prejudice to the fact that it may issue a new tax assessment as long as its powers have not lapsed.
  • Similarly, the Court considers that the taxpayer is harmed if the Administration does not limit itself to the facts or data already collected in the initial proceedings, placing the taxpayer back to square one, as if nothing had happened after the reversal of the first settlement agreement.