Global Tax Alert (News from Transfer Pricing) | 6 August 2013
Spanish Constitutional Court ratifies transfer pricing penalty regime
On 11 July 2013, the Spanish Constitutional Court ruled, after a question of constitutionality presented by the Spanish Supreme Court, that the Spanish transfer pricing penalty regime1 does not breach Article 25.1 of the Spanish Constitution, which establishes the principle of legality.
Article 16.2 of the Spanish Corporate Income Tax Law (CIT Law) sets forth that a Spanish taxpayer must make transfer pricing documentation available to the Spanish Tax Authorities upon request, but does not determine the specific contents that said documentation must include. Article 16.2 references the CIT Regulations, where these requirements are detailed. Accordingly, Royal Decree 1793/2008 (RD 1793/2008) develops and details the requirements that a Spanish taxpayer must comply with in preparing its transfer pricing documentation.
Article 16.10 of the CIT Law sets forth the penalties that may be imposed when a Spanish taxpayer fails to comply with the transfer pricing documentation requirements governed by Article 16.2. These penalties can result from not having correct documentation and/or from not applying the arm's length principle (market value), as follows:
- • When the assessment issued by the tax authorities does not include a tax adjustment, a penalty of €1,500 per fact, or €15,000 per group of facts omitted, inaccurate or false, may be imposed.
- • When the tax authorities adjust the pricing of a transaction the penalty may add up to 15% of the gross adjustment.
- • Penalties may, however, not be imposed where the obligation to document has been complied with, even if the tax authorities reassess the value of transactions.
A Spanish professional association, the Consejo Superior de Colegios Oficiales de Titulares Mercantiles filed a lawsuit which ultimately resulted in a question, presented by the Spanish Supreme Court to the Spanish Constitutional Court, regarding the constitutionality of the above described Spanish transfer pricing penalty regime, based on Article 25.1 of the Spanish Constitution.
The main question surrounding this case results from the fact that, in accordance with this article of the Spanish Constitution, penalties may only be applied for infringements that are determined under a provision that ranks as a Law. As the transfer pricing documentation requirements are not specifically regulated by the Spanish CIT Law but rather by its Regulations, the constitutionality of the penalty regime was questioned on the basis of the principle of legality.
The Spanish Constitutional Court decision
The Spanish Constitutional Court considered that, despite the fact that the specific transfer pricing documentation requirements are determined by Regulations, the CIT Law (i) contains a basic definition of the facts that may lead to the imposition of penalties, (ii) determines the scope and purposes of the penalty regime, (iii) identifies to whom it applies, and (iv) sufficiently describes the situations that may lead to the application of such penalties.
In light of the above, the Spanish Constitutional Court considered that the Spanish transfer pricing penalty regime is not considered unconstitutional as it does not breach the mandate contained in Article 25.1 of the Spanish Constitution.
As the Spanish transfer pricing penalty regime has now been sanctioned by the Constitutional Court, the decision emphasizes the importance, for all Spanish taxpayers, of having correct transfer pricing documentation in place. Failure to comply with transfer pricing documentation requirements may result in severe penalties.
1. The Spanish transfer pricing penalty regime is included in Article 16.10 of the Spanish Corporate Income Tax Law.
For additional information with respect to this Alert, please contact the following:
Ernst & Young Abogados, Madrid
- • Ramón Palacin
+34 915 727 485
- • Javier Montes Urdín
+34 915 727 301
- • Joao Cunha Guimaraes
+34 915 727 454
Ernst & Young LLP, Spanish Tax Desk, New York
- • Inigo Alonso Salcedo
+1 212 773 8692
EYG no. CM3706