Tax Newsletter - June 2020 | Judgments
Personal income tax.- Employers have to evidence that the paid per diems relate to trips for work, even if the recipient is the company’s director
Supreme Court. Judgment of May 18, 2020
The Personal Income Tax Law states that certain per diems for traveling, subsistence and accommodation expenses are not taxable. One of the requirements to be eligible for the exemption for certain per diems is to be able to prove the date and place of travel, and reason for traveling. If the per diems are not taxable, the payer does not have to withhold tax.
In this judgment, the Supreme Court confirmed the interpretation settled in its judgments of January 29 and February 6 2020, examined in our Tax Newsletter - February 2020. Under that interpretation, the burden of proving that the per diems are taxable lies with the tax authorities. And if the tax authorities do not have the necessary proof, then they need to contact the employer, who is required to substantiate that the amounts paid in respect of per diems relate to trips made for work reasons.
This judgment also examined for the first time whether the rules on distribution of the burden of proof in this respect have to be altered where the recipient of the per diems is a director of the company paying them. The Supreme Court concluded that the fact of the taxpayer being director of the company does not determine in itself that the employer is responsible for substantiating the trips or the subsistence and accommodation expenses. One of the elements that needs to be verified is whether the requests made to the director mentioned the position in which those requests were made to him, or whether he knew the importance of the legal requirements when making the relevant decisions on the need for the trips.
VAT/Right to be heard.- Taxpayers’ rights are breached if they are not given access to the complete case file and are denied their rights to deduct VAT due to simple suspicions over the substance of the transaction
Court of Justice of the European Union. Judgment of June 4, 2020. Case C-430/19
An audit on a Romanian company was suspended because of the performance of certain criminal investigations which were ultimately set aside. In the resumed audit, however, the auditors concluded that the business transactions between the company and two of its suppliers were fictitious. The company challenged the auditors’ report and requested access to the complete administrative case file, which was denied.
The CJEU concluded that a private party should be given the opportunity to be provided, if it so requests, with the information and documents included in the administrative case file that the public authority has taken into consideration for adopting its decision, unless the restriction of access to the information is justified by public interest objectives.
In relation to the facts of the case (denial of the right to deduct VAT for the customer on the invoice where it cannot provide any other proof of the substance of the economic transactions performed), the CJEU acknowledged that, in relation to a taxpayer’s right to deduct input VAT, the authorities and the national courts may deny that deduction, if they evidence, using objective elements, that there was fraud or abuse in relying on that right. In view of the absence of European legislation on taking evidence in cases of VAT fraud, the CJEU specified that the national tax authority must evidence these factual elements, and the taxpayer cannot be required to produce additional documents that are not required in the VAT Directive.
The CJEU concluded therefore that, in cases involving simple suspicions (with no proof) over the actual performance of transactions giving entitlement to the right to a deduction, the common system of value added tax precludes the competent tax authority from denying that right where the taxpayer cannot produce more than the invoice evidencing that transaction.
VAT.- Supreme Court examines how the proceeds of a sale of shares and of transactions with derivative hedging instruments carried out by holding companies affect the deductible proportion
Supreme Court. Two judgments delivered on May 19, 2020 (appeal 4855/2018 and appeal 34/2018)
These judgments examine the cases of two holding companies primarily engaged in holding, acquiring and transferring shares. Among other activities, they are responsible for the group’s strategic planning, the provision of loans and other corporate services to group companies. The tax authorities made an adjustment to lower the deductible proportions of the two companies, by including in their denominators the capital gains obtained from transferring shares and from entering into financial derivative contracts. According to the tax authorities, these were financial transactions carried out regularly, which entailed a direct and permanent extension of the company’s activity, in other words, they were non-ancillary activities.
The Supreme Court concluded as follows:
a) The sale of shares in group companies does not qualify as ancillary in the specific circumstances present in the examined cases because the holding companies provide financial support, accounting, legal, technical and sales services to their subsidiaries, through permanent advisory, consulting and intermediary tasks and providing loans, from which it may be concluded that that sale of shares is indeed a direct, permanent necessary extension of the company's primary activity. The authorities’ adjustment is therefore correct regarding inclusion of the proceeds of that sale of shares in the denominator for the distributable proportion.
b) Conversely, the transactions with financial derivative instruments do not entail the performance of taxable transactions and therefore do not have to be included for calculating the deductible proportion. The reason is that besides providing a service when the derivative product is obtained, (with that contract) the holding company simply guarantees that certain risks are hedged which could endanger the success of its own activities. In short, entering into derivative instruments in these cases does not amount to the performance of transactions attributable to the company as part of its business activity and therefore does not have to be included for calculating the distributable proportion.
Transfer and stamp tax.- The release of co-borrowers from a mortgage recorded in a public deed is subject to stamp tax
Supreme Court. Judgment of May 20, 2020
The court examined a case in which several co-owners of a mortgaged property dissolved the condominium, resulting in both the property and the mortgage loan being assigned to two of the co-owners, and release of the other borrowers.
The Supreme Court concluded that stamp tax is payable on the release of co-borrowers in a mortgage recorded in a public deed because (i) an amendment of the originally arranged mortgage and (ii) a redistribution of the mortgage liability have to be entered at the registry.
Transfer and stamp tax.- Any transactions that are not unavoidable for compliance with an urban development plan are subject to stamp tax separately
Supreme Court. Judgment of May 19, 2020
A taxpayer joined and redivided a number of properties and dissolved the joint property entity existing in relation to one of them. All these transactions were recorded in a single public deed. The taxpayer filed as many self-assessments as legal transactions it had performed. It later challenged them by arguing that what had taken place was a single overall transaction with a single aim (to enable the transfer of development rights under the urban development plan), and therefore stamp tax only fell due once.
The Supreme Court clarified that, although the transactions were performed for a single aim, the joining and redivision of the properties and the dissolution of the condominium, they were not indispensable transactions to comply with the urban development plan. These are therefore different legal transactions, each subject to stamp tax separately.
Transfer and stamp tax.- The formation of a company by contributing mortgaged properties is subject to capital duty and transfer tax
Supreme Court. Three judgments dated May 18, 2020 (appeals 3205/2017, 6263/2017 and 5194/2017)
Several mortgage properties were contributed in the formation of a company and the new company assumed the whole of the unpaid debt. The taxpayer self-assessed capital duty on the formation of the company. The tax authorities took the view, however, that it should also have been subject to transfer tax (as a transfer for consideration), because the assignment of properties with the assumption of debts is a taxable event.
The Supreme Court concluded in this judgment that two perfectly separate conventions are present in this case, each indicative of economic capacity: the subscription to capital by contributing mortgaged properties, which is subject to capital duty, and the assumption of the mortgage loan by the newly created company, which is subject to transfer tax.
Transfer and stamp tax.- Public deeds for mortgage novations involving amendment of the repayment system are exempt from stamp tax
Valencia High Court. Judgment of January 29, 2020
The transfer and stamp tax legislation allows an exemption from stamp tax for the public deeds for any novations amending mortgages covenanted by mutual accord between lender and borrower, if the lender is a financial institution and the amendment relates to the originally covenanted or currently valid interest rate terms, to altering the term of the mortgage, or to both.
In the examined case, the repayment system for a mortgage was amended, by lengthening the grace period and postponing repayment of the loan until the maturity date and allowing it to be paid in a lump sum. The tax authorities took the view that in this case the novation public deed was not exempt because it did not amend either the interest rate or the term, only the repayment method.
Valencia High Court concluded, against this, that it is clear that the covenanted novation impacted the term of the loan and therefore the exemption was fully applicable.
Real estate tax.- If an appraisal has been voided by a final decision, any real estate tax assessments that have used that appraisal must be rendered invalid
Supreme Court. Judgment of May 18, 2020
The Supreme Court concluded that, after the cadastral value has been fully or partially voided by a final decision, the authority responsible for managing real estate tax must render invalid all assessments issued on the basis of the voided cadastral value, even if a new cadastral value has yet to be approved.
This is so even if, after the new cadastral value has been issued, the tax authorities re-issue real estate tax assessments using the new value, as long as their right to assess the tax has not become statute-barred.
Cadastral values.- The new cadastral value notified by the cadaster as a result of a correction procedure cannot take effect retroactively
Supreme Court. Judgment of May 28, 2020
The legislation governing the cadaster states that, where the cadaster initiates a procedure for correcting discrepancies as a result of a lack of consistency between a property description in the cadaster and the property’s actual characteristics, any new appraisal notified for the purposes of the cadaster will be effective from the date following that of the decision to correct it.
In the case examined in this judgment, the appellant argued that the aim behind the cadaster rules determining that the procedure for correcting discrepancies can only be effective in the future is so as not to be detrimental to the owner registered in the cadaster where the new value in the cadaster does not benefit it. In other words, this limit on the timing of its effects does not affect acts in which the correction determines a favorable or less costly effect for the owner registered in the cadaster.
The Supreme Court concluded, however, that, under an interpretation based on the letter and spirit of the law, retroactive effects cannot be allowed under any circumstances for the new cadastral values arising from a procedure for correcting discrepancies.
Cadastral values.- The tax authorities must commence by their own decision a procedure for correcting discrepancies over the cadastral value if the owner registered in the cadaster provides evidence that those discrepancies exist
Castilla y León High Court. Judgment of April 22, 2020
The cadastral legislation states that the procedure for correcting discrepancies must be initiated by the authorities, by their own decision, if an inconsistency between the description of the properties in the cadaster and their actual characteristics comes to their attention by any means.
Although this procedure is initiated by the tax authorities’ own decision, this does not allow them to refuse to initiate the procedure without grounds. As the Castilla y León High Court concluded in this judgment, if the owner of a property informs the tax authorities that there are discrepancies between the description of the property in the cadaster and its actual characteristics and evidence of those discrepancies is provided also, the tax authorities are required to initiate, by their own decision, the relevant procedure to examine and conclude as to whether the correction is justified.
Collection procedure.- If deferral is requested, but the debt is paid before a decision is issued on the request, the reduction to the surcharge for late returns applies
Supreme Court. Judgment of May 18, 2020
The General Taxation Law states that where a return is filed voluntarily outside the time limit (in other words without a prior request by the tax authorities), a surcharge for late filing may be sought. This surcharge is reduced by 25% if the remaining 75% is paid within the voluntary payment period commenced on its notification, if the whole amount of the debt determined in the late self-assessment is paid when the return is filed; or, if deferred or split payment is requested secured by a guarantee or surety bond certificate, within the time period determined in the deferral decision.
In the case examined in this judgment, a taxpayer had filed his personal income tax self-assessment outside the time limit, requested deferred payment and offered a property as security. Before the tax authorities had issued a decision on the requested deferred payment, the taxpayer paid the full amount determined in his self-assessment. Because the payment had been made outside the voluntary payment period, the surcharge for late payment was sought; and since it had been made before a decision was issued in relation to the deferred payment, the taxpayer took the view that it had to be reduced by 25%.
The tax authorities considered, however, that the 25% reduction was not applicable under an interpretation based on the letter of the law, because (i) no guarantee or security bond certificate had been provided and, additionally, (ii) the deferred payment had not yet been granted when the payment was made.
Against this, the Supreme Court concluded that the authorities’ view places taxpayers paying before a decision has been issued on their petitions for deferred payment in a worse position than those not paying the debt until later because they have been granted the right to deferred payment. It concluded therefore that the 25% reduction applies where, after requesting deferred payment of the amount determined in his self-assessment return filed outside the time limit (even if by providing security other than the guarantee or surety bond certificate), the taxpayer pays over the full amount of the tax debt before the tax authorities issue a decision on the requested deferred payment.
Verification of reported information procedure.- The verification of reported information procedure cannot be used to make complex legal interpretations
Supreme Court. Judgment of May 19, 2020
The Supreme Court examined whether it is allowed in a verification of reported information procedure to audit satisfaction of the requirements to claim the personal income tax exemption for reinvestment in the taxpayer’s principal residence.
In its judgment, the court concluded that the verification of reported information procedure may only be initiated in relation to a taxpayer’s return or self-assessment and for the purpose of (i) clarifying any information on that return or self-assessment, (ii) clarifying any contradictions with the data on other returns; (iii) correcting formal defects or errors of arithmetic, or (iv) correcting an instance of incorrect application of the law, where the error is patent.
The following conclusions may be drawn from this:
a) This procedure cannot be used to audit any facts other than those reported by the taxpayer; and the accuracy of those facts can only be confirmed from the taxpayer’s other returns or self-assessments.
b) Nor can this procedure be used to question the legal characterization of the facts made by the taxpayer, where that characterization may be controversial or may not be clear and evident from the analysis and commentary and case law.
The court therefore set aside that the verification of information procedure may be used to decide (as the tax authorities had done in the case that gave rise to this judgment) whether the taxpayer’s marriage and the birth of his first child shortly after the sale of his previous residence qualify for an exception to the obligation to reside in it for three years for the property to be regarded as the principal residence.
Audit and penalty procedure.- Taxpayers’ pleadings have to be considered in assessment and penalty decisions
Supreme Court. Judgment of May 18, 2020
After carrying out an audit, the tax authorities issued the assessment and penalty decisions before receiving the written pleadings filed by the taxpayer against the auditors’ report and the proposal to impose a penalty. After the pleadings had been received, they issued new administrative decisions ratifying their earlier decisions, while replying to those pleadings; these second decisions were issued after the maximum auditing period under the General Taxation Law had ended.
The Supreme Court likened the failure to consider the pleadings to omission of the period for submissions, and determined different consequences depending on the procedure:
a) In an audit, failure to consider the taxpayer’s pleadings is not a ground for invalidity of the assessment, instead simply for its voidability if it is justified that it caused denial of the taxpayer's due process rights.
The decision bringing the audit to an end is not the first assessment decision, but the second, in which they replied to the pleadings. Because that decision was issued after the end of the maximum auditing period, the tax authorities’ right to assess in relation to several of the audited periods had become statute-barred.
b) In the penalty procedure, omission of the period for submissions (or failure to consider the pleadings) is an invalidating defect in the penalty, which cannot be deemed corrected by the reply given by the tax authorities in the decision issued later. The penalty proceeding is therefore invalid ab initio.
Enforcement procedure.- Discrepancies over an enforcement decision must be resolved by the reviewing body that issued the decision
Supreme Court. Judgment of May 19, 2020
The tax authorities issued provisional VAT assessments not allowing certain deductible amounts of input VAT. In the decision on the later economic claim the assessments were voided because the tax authorities had made annual assessments and should have issued them in relation to the (monthly or quarterly) assessment periods determined in the law. In the enforcement process for the decision, the tax authorities delivered a decision removing the earlier assessments and confirming new assessments based on the proper assessment periods.
It was examined whether the issues raised in relation to the new assessments issued to enforce the economic-administrative tribunal's decision fall within the scope of enforcement of decisions or within that of economic-administrative claims. The Supreme Court concluded as follows:
a) It recalled, firstly, that after an assessment has been voided on substantive grounds, the tax authorities may issue a lawful assessment in relation to the same issue. It also recalled, however, that this option must be rejected in cases of (i) expiry of the statute of limitations, (ii) the tax authorities repeating or staying stubbornly in their error, (iii) reformatio in peius, and (iv) duplicate penalties in which the same subject, facts and grounds are found (non bis in idem principle).
b) Following on from this conclusion it added that any discrepancies over the new assessments will have to be handled in an ancillary enforcement proceeding which will have to be resolved by the economic-administrative tribunal that delivered the decision being enforced; and that in that ancillary proceeding it is allowed to examine both procedural arguments relating to the new assessments and substantive arguments that had not been examined or decided in the decision being enforced.
