Spain’s annual guidelines on tax and customs controls focus on transfer pricing issues

The Spanish tax agency on January 31 published a decision approving the general guidelines for the 2022 Annual Tax and Customs Control Plan, which may be of interest to multinational groups with a presence in Spain.

As it does every year, the Spanish tax agency disclosed the main performance lines it will be following in its examination of taxpayers, paying particular attention to monitoring multinationals’ taxation and the field of transfer pricing.

The tax agency pointed out that a large and varied range of information sources on multinational groups is now available, which will enable it to identify the highest base erosion and profit shifting risk areas, and to focus its audit work on transactions with the greatest impact on revenue.

It also underlined the huge amount of information the agency is receiving and compiling, coming from exchanges of information the OECD sponsored, such as the country-by-country report or the Forum on Harmful Tax Practices, as part of the OECD/G20 base erosion profit shifting (BEPS) project.

The European Union is also an ongoing source of information, like that obtained from tax intermediaries on aggressive tax practices (DAC6).

Additionally, the new international agreement on tax and the protection of financial interests between Spain and the United Kingdom regarding Gibraltar has broadened the existing exchange of information by including enhanced cooperation following Brexit.

In addition to all of these accords is the exchange of information on financial accounts under the FATCA agreement, or in relation to the Common Reporting Standard.

Elsewhere, the fight against tax fraud will strengthen from the inclusion in Spanish legislation of the EU directives related to hybrid instruments (ATAD2) and by the implementation starting in 2022 of the multilateral convention, which, in Spain, involves the amending of 49 bilateral tax treaties.

With all of this information at hand and the new legislation in force, the Spanish tax agency will put the spotlight on transactions and structures that give rise to base erosion, while trying to tackle double non-taxation and tax evasion scenarios, as well as applying the general principle of EU law aimed at prohibiting abusive practices.

Transfer pricing area

Specifically in the transfer pricing area, the tax agency announced that it will increase its management and monitoring activities by conducting new audits (including those carried out simultaneously with other tax authorities), mutual agreement procedures, and advance pricing agreements.

Drawing on the experience and maturity gained in this field, the tax agency will roll out its so-called 360º strategy, aimed ultimately at avoiding disputes and ensuring that the arm’s length principle is observed in the pricing of controlled transactions.

At the center of this strategy is the new automated transfer pricing risk system, which will be fed with all of the currently available information on controlled transactions the tax authorities have obtained either from earlier procedures or from the above information sources.

This system will improve their risk analysis by producing indicators, indexes, and models, as well as by identifying high tax-risk conduct patterns.
In addition, the tax agency will focus on verifying compliance with the transfer pricing documentation obligations (local file and master file) and examining the functions, assets, and risks reported in these documents, as well as on monitoring compliance with reporting obligations for those transactions (which currently are on the so-called form 232).

Special attention also will be paid to business restructurings, the pricing of intra-group transfers or licensing of assets (intangibles mainly), and deduction applied, which may produce base erosion–such as royalty payments for intangibles licensing, intra-group services, or the existence of reiterated losses.
The tax agency also will focus on situations in which a lack of declared income may be detected–for example, the use of intangible assets, such as brands or know-how, that Spanish entities make available to foreign-related parties without any charge.

Financial transactions and activities conducted by entities availing themselves of functional structures reporting a low operational risk and having a large presence in the economy (in manufacturing and in distribution) also will be on the spot, together with the right application of the pricing methods, and the suitability of the parameters used when applying them.

Attention will focus particularly on situations involving the existence of a permanent establishment in Spain, or in which, although the permanent establishment existence is recognized, income is not correctly attributed (including financial income).

Correct reporting of nonresident income tax withholdings—in particular, by large companies making dividend, interest, and royalty payments to nonresidents without a permanent establishment in Spain—also will be a top priority in 2022. In this area, the tax agency will verify whether the recipient of these amounts has the beneficial owner status to assess whether an abuse has taken place of the European legislation aimed at enabling the free movement of capital within the EU.

Lastly, in relation to non-cooperative jurisdictions and preferential tax regimes, audit work will oversee the correct application of existing anti-tax haven rules. Those rules will stay focused on identifying structures and conduct patterns that allow taxpayers to unduly benefit from low tax regimes, and which allow multiple taxpayers to replicate or standardize them for their use.

All the above makes it imperative for taxpayers in Spain (particularly multinational groups) to review their value-creation structures, income streams, and transfer pricing policies to reduce their risk of going through a tax assessment procedure–or at the very least, to minimize the impact of it.

Source: MNE Tax