Taxing authority and tax law
Tax authority: State Agency of Tax Administration (AEAT) and General Directorate of Taxation (DGT)
Tax law: Spanish Consolidated Corporate Income Tax Law (CCITL) Article 16
Relevant regulations and rulings
On 18 November 2008, by Royal Decree, the Spanish Government has approved and published regulations that specify transfer pricing documentation requirements (Royal Decree 1793/2008) applicable to persons or entities participating in related-party transactions.
Transfer pricing documentation requirements have been in effect in Spain since 2006 (following Law 36/2006, applicable to tax periods beginning as from 1 December 2006). This includes a shift of the burden of proof to the taxpayer, and penalty regime. However, the law did not include a detailed description of what the documentation should contain, except that the transfer pricing documentation had to reflect the arm’s length principle and the arm’s length test should be based on one of the methods specified in the law (i.e., CUP, Cost Plus, Resale Minus, TNMM and Profit Split). The new regulations provide more details regarding the information that should be included in the documentation. Spanish taxpayers engaged in related-party transactions are now required to prepare two sets of documentation:
- a “master file” related to the group as a whole, and
- a “local” file for each taxpayer containing specific information on the description, analysis and valuation of the controlled transactions
Regarding transfer pricing penalties, the Royal Decree-Law 6/2010 (approved on 9 April 2010) introduces amendments modifying the penalty quantities for companies that meet certain criteria. The Royal Decree 897/2010 (approved on 9 July 2010) and the Royal Decree-Law 13/2010 (approved on 3 December 2010) introduce certain amendments consisting on exemptions in Transfer Pricing documentation requirements.
OECD guidelines treatment
Spanish Transfer Pricing legislation follows the OECD guidelines and those of the European Union Transfer Pricing Forum.
Priorities/pricing methods
The law establishes that, in order to determine the market value, one of the following methods should be applied: CUP, Cost Plus or Resale Minus. These methods are on the same preferential level in the valuation method hierarchy.
When due to the complexity or to the information relating to the transactions, the above methods may not be applied properly, TNMM or Profit Split may be used.
Transfer pricing penalties
Failure to comply with the documentation requirements specified in the new regulations may result in major penalties. These penalties can result from not having correct documentation and/or from not applying the arm’s length principle (market value).
When the assessment does not produce a tax adjustment, the penalty will be EUR 1,500 per fact, or EUR 15,000 per group of facts omitted, inaccurate or false.
In the case of entities whose net sales do not exceed EUR 10m in the period but related-party transactions exceed EUR 100,000, the amount of the penalty will have as a maximum limit the lesser of the two following quantities:
- The 10% of the related-party transactions
- The 1% net sales
When the tax authorities adjust the pricing of a transaction, the penalty may add up to 15% of the gross adjustment.
There will be no penalties where the obligation to document has been complied with, even if the tax authorities reassess the value of transactions.
In addition to the above, the new regulations also include the applicability of “secondary adjustments” (i.e., in those transactions where both values will have for the related parties the tax treatment that corresponds to the nature of the profit realized). The law makes a clarification for cases where the link is defined in light of the relationship between the shareholder and the entity, the difference shall (proportionally to the participation in the entity) be considered as:
- dividends whenever such difference is in favor of the shareholder, or
- contributions by the shareholder to the entity’s equity whenever the difference is in favor of the entity
The above sanctions are compatible with aggravating circumstances such as resisting, obstructing, excusing or negating the tax authorities’ actions.
Penalty relief
Some reductions are applicable to penalties. Penalties should not apply with the fulfillment of the documentation requirements.
Documentation requirements
The documentation requirements are in line with those of the EU Joint Transfer Pricing Forum (JTPF). Accordingly, two types of documentation must be maintained: one global document for the group (master file) and one document for each group entity (local file).
The documentation will cover domestic and international transactions. However, transactions within the same fiscal unit are exempted from the documentation requirements. The master file documentation requirements establish the necessity of:
- General description of the organizational, legal and operative group structure, and any change thereof
- Identification of the group entities that enter into related-party transactions to the extent that they affect the operations of the Spanish corporate taxpayer, directly or indirectly
- General description of the nature, amounts and flows of related-party transactions completed by corporate group entities, to the extent that they affect the operations of the Spanish corporate taxpayer, directly or indirectly
- General description of the functions performed and the risks assumed by the different group entities, to the extent that they affect the operations of the Spanish corporate taxpayer, directly or indirectly, including any changes since the last fiscal year
- List of intangibles (including patents, trade marks, commercial brands) owned by the group, to the extent that they affect the operations of the Spanish corporate taxpayer, directly or indirectly, as well as the considerations derived from the use of these intangibles
- Description of the group’s transfer pricing policies, including the pricing methodology used to justify the group policy’s compliance with the arm’s length principle
- List of cost-sharing and services agreements between group entities relevant to the Spanish corporate taxpayer
- List of APAs and agreements entered into, as relevant to the Spanish corporate taxpayer, and
- Corporate group’s Annual Report or equivalent
On the other hand, the local documentation requirements establish the necessity of:
- A detailed description of the taxpayer’s business and business strategy, including changes in the business strategy compared to the previous tax year
- A description and explanation of the specific controlled transactions, including the transactions (tangible and intangible assets, services, financial, etc.), invoices and amounts of the transactions
- A comparability analysis, including:
- Amounts of the transactions
- Characteristics of property and services
- Functional analysis (functions performed, assets used, risks assumed)
- Contractual terms
- Economic circumstances
- Specific business circumstances
- An explanation about the selection and application of the transfer pricing methods, why the methods were selected and how they were applied
- Any other relevant information used by the taxpayer to value related-party transactions, as well as any agreement entered into with shareholders that may affect the transaction valuation
Further information could be required by the tax administration during a tax audit in regards to the related-party transactions.
There are some exemptions for documenting related-party transactions.
- Exemptions by volume:
- For those corporate income tax taxpayers whose transactions carried out with the same related party do not exceed EUR 250,000 at market value (taking into account the total transactions carried out with the same related party)
- Entities whose net sales do not exceed EUR 10m in the period and related-party transactions do not exceed EUR 100,000 (excluding tax havens)
- Exemptions by transaction characteristics:
- Performed between entities within tax consolidation groups
- Performed between Economic Interest Groupings or Temporary Business Alliances, and their shareholders
- Carried out within the scope of an IPO
- Carried out between Saving Banks integrated in a vehicle approved by the Bank of Spain
Documentation deadlines
Documentation will have to be kept by companies once the corporate income tax return is filed.
Statute of limitations on transfer pricing assessments
A general statute of limitations of four years applies. The term will be interrupted in case of a tax audit. If a new income tax return is filed with the tax authorities, the four-year period is suspended and a new one begins.
Return disclosures/related-party disclosures
Specific disclosure rules exist for transactions with “tax havens,” even with unrelated parties (as per a black list).
Audit risk/transfer pricing scrutiny
High risk — the tax authorities have stated that Transfer Pricing audits will be a priority from 2009 on forward.
APA opportunity
Taxpayers may request the tax authorities value related-party transactions before they are carried out. This request has to be filed with a proposal based on the arm’s length principle. On the other hand, the tax authorities may also settle agreements with other tax authorities in order to determine the market value of the transactions jointly (i.e., bilateral APAs).
The new regulation has improved the previous regime on APAs by extending the valid term from a three-year period to a six-year period (e.g., the previous year, when the time limit for filing the tax return has not yet expired, the current year and the next four years).
Return to the "Transfer pricing country guide" page
