The rules governing transfer pricing in Spain are included in Article 18 of the Spanish Corporate Income Tax Act 27/2014 and have also been developed in Articles 13 et seq of the Royal Decree 634/2015 on Corporate Income Tax Regulations. Spanish tax authorities also follow the principles established in the OECD Guidelines.
The transfer pricing regime was introduced in 2006 through amendments to the former Corporate Income Tax Act 36/2006. At this point, the taxpayer became responsible for demonstrating that related-party transactions were carried out at fair market value. In addition, the obligation to prepare contemporaneous transfer pricing documentation justifying the arm's-length nature of related-party transactions was also introduced.
In 2009, both the Corporate Income Tax Act 36/2006 and the Corporate Income Tax Regulations were amended by the introduction of a specific penalty regime for a lack of transfer pricing documentation. In practice, Spanish taxpayers started preparing transfer pricing documentation as a result of this specific penalty regime, which was applicable for fiscal years ending as of 19 February 2009.
New measures, which came into effect on 1 January 2015, were introduced through the current Corporate Income Tax Act and Corporate Income Tax Regulations, including certain provisions to align Spanish practice with the OECD's approach to base erosion and profit shifting (BEPS) (eg, broader requirements for group and taxpayer documentation or the obligation for country-by-country reporting).
Transfer pricing rules apply to any type of transaction between related parties.
Definition of Related Party
As summarised below, Article 18 of the Corporate Income Tax Act includes a definition of "related party" for transfer pricing purposes.
Transactions under Scope
The following transactions between related parties are exempt from documentation obligations:
However, transactions carried out with companies resident in tax havens must be documented in any case.
Spanish legislation lists five different transfer pricing methods than can be used by taxpayers:
The use of methods other than those listed in 3.1 Transfer Pricing Methods, and valuation techniques is allowed, provided that they respect the arm's-length principle (eg, discounted cash flow method).
Spanish regulations do not foresee a hierarchy of methods.
Spanish regulations do not specifically require the use of ranges or statistical measures. However, in practice, the Spanish tax authorities follow the OECD approach and use the interquartile range of values. They mostly tend to consider the median as the point of reference of the range.
The use of comparability adjustments is allowed in Spain in order to eliminate significant differences between comparable transactions.
There are no specific rules in Spain relating to the transfer pricing of intangibles. The Spanish tax authorities mostly follow the approach laid out in the 2017 OECD Guidelines.
Please see 4.1 Notable Rules.
There are specific rules in Spain regarding cost sharing arrangements:
There is no legal provision on year-end adjustments and retroactive adjustments in the Spanish transfer pricing rules.
However, in practice, it is quite common for multinational groups of companies to apply transfer pricing adjustments before and after the year-end – mostly before closing the books (that is to say, before the end of March in those cases in which the fiscal year corresponds with the calendar year) and, therefore, before filing tax returns.
However, a tax ruling from 2010 sets out that any adjustment should be recorded in the annual accounts of the relevant entities (ie, the taxpayer cannot just reflect the adjustment in the corporate income tax return).
Spain is a signatory to a broad network of double tax treaties and tax information exchange agreements.
Spain is also a signatory to the OECD Multilateral Instrument, in order to enable the modification of bilateral treaties, when applicable. However, Spain has not yet ratified the Multilateral Instrument.
Spain has an advance pricing agreement (APA) programme available in order for taxpayers to discuss transfer pricing policies, which have been applied in related-party transactions, with the tax authorities.
The APA programme is administered by the Oficina Nacional de Fiscalidad Internacional (ONFI), based in Madrid.
In Spain, the ONFI is in charge of negotiating both the APA process and the mutual agreement procedures. Although, in practice, the relevant persons involved correspond to different teams, there is a considerable degree of co-ordination between them.
There are no limits on which taxpayers or transactions are eligible for an APA.
There is no specific deadline for filing an APA application.
Normally, the APA has effect for the next four fiscal years following the date of its approval. However, the taxpayer can file an APA covering the past four years, which are covered by the statute of limitations period.
Taxpayers do not have to pay a fee for entering into an APA procedure.
Please see 7.5 APA Application Deadlines.
APAs can have retroactive effect. Please see 7.5 APA Application Deadlines.
Taxpayers are obliged to prepare documentation (although the thresholds explained in 8.2 Taxpayer Obligations under the OECD Transfer Pricing Guidelines apply). The documentation must be prepared contemporaneously and must be available upon the request of the Spanish tax authorities as of 25 July of the following year (the date on which the corporate income tax return is filed for companies with a fiscal year which ends on December 31st). In Spain, the content of the master file and the local file mainly follows the 2017 OECD Transfer Pricing Guidelines.
The Spanish transfer pricing regime includes penalties that are very much linked to non-compliance with the documentation requirements. If taxpayers do not comply with such documentation obligations, specific transfer pricing penalties can be imposed by the Spanish tax authorities.
If there is no transfer pricing adjustment carried out by the Spanish tax authorities on the value of the transaction, a penalty of up to EUR1,000 for each non-documented "single relevant piece of data" or EUR10,000 for each non-documented "group of relevant data" is imposed. However, the amount of this penalty should not exceed the lesser of 10% of the amount of the transactions carried out by the company in a given year, or 1% of the turnover of the company.
If there is a transfer pricing adjustment, a penalty of 15% of the adjustment will be imposed if any of the following facts are demonstrated:
Please note that the regulations specifically define what is considered a "group of relevant data" for transfer pricing purposes.
Spanish legislation requires a taxpayer to prepare all of the files and reports contemplated by the OECD Transfer Pricing Guidelines (ie, master file, local file and country-by-country report). However, there are some particularities, which are described below.
Master File and Local File
Only taxpayers belonging to a group with a turnover of at least EUR45 million must prepare a complete master file and a local file.
Taxpayers belonging to a group with a turnover below EUR45 million are exempt from preparing the master file but are obliged to prepare a simplified local file, including a comparability analysis.
Taxpayers that are small-sized entities (where the turnover of the group is below EUR10 million) can prepare an even more simplified local file through a template provided by the tax authorities (named a Formulario de Operaciones Vinculadas), which does not include a comparability analysis and should be filed as an appendix to the corporate income tax return.
However, some listed transactions are not eligible for such simplified documentation. Examples of these include:
This is only applicable to Spanish taxpayers that form part of a group of companies with a worldwide consolidated group net turnover in the preceding fiscal year of at least EUR750 million.
Spanish transfer pricing rules follow the OECD Guidelines, including the arm's-length principle, according to which transactions with related parties must be valued using the same conditions that would be agreed upon between non-related parties under the same or similar market conditions.
The arm's-length principle has been agreed as the international transfer pricing standard by OECD member countries. As a result of this, and of Spain's application of OECD standards, this principle applies to Spanish-related transactions.
Generally, Spanish rules do not depart from the arm's-length principle. However, for professional services, Article 18(6) of the Corporate Income Tax Act allows the taxpayer to treat the agreed value of the transaction as meeting the market value in cases of services rendered by (individual) professional partners to a related entity, provided that the following conditions are met;
In order to introduce modifications to the transfer pricing documentation requirements, Spain implemented regulations based on BEPS Actions 13. Accordingly, broader master file and local file requirements should be prepared by taxpayers. Country-by-country reporting based on the OECD's recommended template is also required.
Spanish legislation is aligned with the measures published in the BEPS Action Plan. For instance, some of these measures include hybrid instruments, limitations on the deductibility of financial expenses and controlled foreign corporation (CFC) rules.
In the context of international co-operation and exchange of information, Spain is committed to fighting tax fraud and implementing multilateral control mechanisms through co-ordinated proceedings with other countries in order to avoid base erosion and profit shifting.
Spain permits one entity to bear the risk of another entity's operation by guaranteeing the other entity a return. There are no general regulations preventing this. However, the tax authorities place a special interest on the review of limited risk entities in transfer pricing audits.
The UN Practical Manual on Transfer Pricing does not have any significant impact on Spain's transfer pricing practice. Spanish law only refers to the OECD Guidelines and the European Union Joint Transfer Pricing Forum as the main sources of practical and interpretative assistance regarding transfer pricing.
Documentation Obligation Exemption for Small-Sized Entitles
Spain has certain rules that could be regarded as equivalent to transfer pricing safe harbours, which are provisions of a law or regulations that specify that certain acts do not violate a rule. Simplified documentation requirements of the local file for small-sized entities are an example of these safe harbours. Entities with a turnover of less than EUR10 million are released from preparing a master file and must prepare a simplified local file, which does not need to include a comparability analysis and can be prepared using a template (Formulario de Operaciones Vinculadas, or FOV) provided by the tax administration. The FOV should be filed as an appendix to the CIT return. See 8.2 Taxpayer Obligations under the OECD Transfer Pricing Guidelines for further details.
Professional Services and Other Simplifications to Transfer Pricing Rules
Other examples of safe harbours include the rules for professional services (see 9.2 Arm's-Length Principle for more details). Other simplifications of the transfer pricing rules could be categorised as safe harbours, including cases where transactions are not subject to documentation obligations. These include:
As regards low value services, Spain does not have any specific regulations and follows the OECD and EU Transfer Pricing Joint Forum criteria.
There is also no regulation allowing exceptions to the penalty regime for transactions deemed immaterial.
Spain does not have specific rules governing savings that arise from operating in the country.
There are not any notable rules or practices in Spain applicable in the transfer pricing context, which are unique to Spain, except in the case of transactions with residents in a tax haven territory that must be valued at arm's length irrespective of whether or not they are related parties.
Tax Authority Adjustments
On a separate note, the tax authorities may adjust the price or compensations agreed by related parties and include in their taxable base in Spain the profits or taxable income that would have accrued if the conditions that the related parties agreed are considered not to be at arm’s length. Transfer pricing rules also establish the possibility of a second-tier adjustment when the relationship between parties is defined as a shareholder-company relationship, which could lead the adjustment to be in the form of equity remuneration if made to a shareholder and as a contribution to equity if made to the company. These rules, previously set in the Regulations, were introduced in the Corporate Income Tax Act in 2015. It should be noted, however, that this second-tier adjustment can be avoided if, at the end of the tax audit, the taxpayers involved agree to recognise and repair the effect of the adjustment.
Additionally, Spanish rules regulating cost-sharing agreements for goods or services signed between related persons or entities, involve the following requirements:
There are no co-ordination requirements between transfer pricing and customs valuation. The Spanish Corporate Income Tax Act Law 27/2014 establishes that the market value used for Corporate Income Tax purposes will not produce effects with respect to other taxes, unless expressly provided otherwise. This legal provision also establishes that the value in terms of any tax will not produce effects regarding the arm's-length value of related operations.
Where a tax audit procedure leads to a transfer pricing adjustment, the concerned taxpayers may appeal the final tax assessment by means of an ordinary appeal filed against the tax administration. In this regard, the taxpayer may file a petition for the review of the issue before a tax tribunal (Tribunal Económico-Administrativo), which is an independent unit of the tax administration. The petition must be filed within 30 calendar days from the date of notification of the assessment.
Once the administrative appeal procedure has been completed, the rulings of the tax tribunals may always be appealed before an ordinary judicial court (Tribunal Contencioso-Administrativo). This application for judicial review must be filed within two months from the date of notification of the tax tribunal's decision. The court's judgment may be appealed before the Supreme Court by means of a specific appeal (Recurso de casación), depending on the amounts involved and in those cases where the Supreme Court considers that there is a general interest.
One of the main problems/difficulties in transfer pricing matters revolves around the complexity of determining market value. For this purpose, the weighting of comparability factors, the choice of the valuation method, the selection of comparables, as well as the application of comparability adjustments, etc, makes conflict resolution tremendously casuistic, which, at least to date, has resulted in the absence of pronouncements that have allowed the consolidation of a clear doctrine on these aspects.
The Spanish Supreme Court (Tribunal Supremo) has recently issued several judgments including its reasoning regarding the interpretative value of the OECD Guidelines. It has concluded that the OECD Guidelines are merely recommendations that bind the tax administration, but not the courts. An area that has traditionally been a source of conflict in transfer pricing matters is that of intra-group services, although in this area the cause of dispute has not generally been the valuation of the transaction, but rather how to prove of the reality of the benefits obtained by the relevant party.
There have also been a significant number of resolutions and judgments in the field of financing operations that have been quite casuistic and even contradictory as to qualification issues, and which have brought into play the application of anti-abuse regulations. Some relevant court cases are briefly described below.
Adjustments to Transactional Net Margin Method Transfer Pricing
In a Supreme Court judgment dated 6 March 2019, Spain's National Court of Justice issued an important judgment regarding transfer pricing adjustments made by the tax auditors when taxpayers applied the transactional net margin method (TNMM). This judgment concluded that an adjustment to the median should only be made if comparability defects exist. If this is not the case, the court held that the adjustment should be made to the lowest value of the arm's-length range (lower quartile) if the tax auditors have not proved any comparability defects in the benchmarking provided by the taxpayers.
Different Penalty Regimes Applicable to Related-Party Transactions
On 15 October 2018, the Spanish Supreme Court issued a judgment covering the different penalty regimes that are applicable to related-party transaction disputes. The Supreme Court clarified that where the taxpayer has no transfer pricing documentation obligations, the specific transfer pricing penalty regime will not apply, but the general tax penalty regime may apply. The obligation of the taxpayer to comply with the arm's-length principle is relevant even when no documentation obligation exists.
The Status of the OECD Guidelines
In a Supreme Court judgment dated 19 October 2016, issued in the Zeraim case, the appellant company denounced the infringement of the OECD Guidelines, to the extent that secret comparables had been used in determining the market value of certain related transactions consisting of acquisitions of raw materials from its Dutch parent company by the Spanish recurring company. The court stated that it is not possible to substantiate a plea in breach of the OECD Guidelines, given the lack of its legal nature. The court also pointed out that in previous judgments (eg, one dated 18 July 2012, issued by the Spanish Supreme Court in the BICC case), it had already concluded that such guidelines are considered to be merely recommendations to states, which are given an interpretative value.
Valuing Private Businesses
The Supreme Court stated, in a judgment dated 27 September 2013 regarding the transfer of non-listed businesses or shares, that the underlying book value of the company can be considered its market value despite its limitations, bearing in mind that this value does not consider the existence of tacit capital gains or losses but that these could be considered if they were proved.
There are no restrictions in Spain regarding outbound payments on uncontrolled transactions.
There are no restrictions in the country regarding outbound payments on controlled transactions.
Spain does not have rules regarding the effects of other countries' legal restrictions that are relevant from a transfer pricing perspective.
As a result of taxpayers' concerns about providing a large volume of confidential information, the Spanish tax administration prohibits the publication of information on APAs or transfer pricing audit outcomes submitted by taxpayers.
Certain court rulings in Spain prohibit the use of information or data about the taxpayer by the tax authorities, also known as secret comparables, in order to prevent competitors accessing that information.
The COVID-19 pandemic has affected the Spanish transfer pricing landscape similarly to other OECD member countries. The strict measures implemented by the government, which are essential to prevent the spread of the virus, may lead to great economic uncertainty. Spanish companies may face situations of reduced profitability, revenues and cash flows. This can undoubtedly have a direct impact on transfer pricing and how entities within the same group transact with each other. Although Spain has not implemented any guidelines that refer to this unprecedented situation, the country follows OECD specifications in this matter. These particular indications focus on how the arm's-length principle and the OECD TPG apply to issues that may arise or be exacerbated in the context of the COVID-19 pandemic.
The stagnation of economic activity due to COVID-19 has led the government to relax payment obligations through the renegotiation of leasing contracts for premises in some of the most affected sectors, such as the hotel and restaurant industry. The applications of the tenants, who claim force majeure, refer to rental income deductions or allowances and the establishment of accrual grace periods.
It is important to note that these renegotiations have tax implications, even though the Corporate Income Tax Act does not regulate these types of negotiations. Thus, the tax implications will depend on the accounting rules, which state that incentives should be distributed over the lease term on a straight-line basis over the remaining term of the leasing contract.
During the strictest part of the lockdown, tax audits stalled. However, the tax administration has gradually resumed its activities. In addition, tax audits by videoconference have been implemented for the first time and seem to have a great advantage in terms of saving time on long or unnecessary journeys to the taxpayer's offices.
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The atmosphere in Spain in terms of transfer pricing obligations is – due to recent global, European and local legal developments – currently tense. The present transfer pricing documentation obligations have been in place for the last eleven years. In that time, we have seen increasing interest from the Spanish Tax Authorities, not only in assessing taxpayers' levels of compliance in preparing this documentation, but also in increasing tax audits carried out in order to review (i) compliance with the arm's-length principle in related party transactions, and (ii) the profit obtained by the group's Spanish subsidiaries.
This means that the Spanish Tax Authorities are having to become more and more specialised to deal with the complex business structures typically found in the global economy.
Actions Implemented by the Spanish Tax Authorities
A good example of the Spanish Tax Authorities' involvement can be observed by simply glancing at the objectives of the General Tax Control Plan, in which every year the Spanish Tax Authorities establish both preventing and prosecuting tax fraud as being fundamental and permanent strategic objectives.
The General Tax Control Plan for 2021 is based on a number of pillars, some of them specifically aimed at transfer pricing transactions carried out in Spain.
Most of the actions to be taken by the Spanish Tax Authorities are focused on using new technologies to become more effective. For example, it is worth noting the development of the new automated transfer pricing risk analysis system, to be completed in 2021, based on all the information on related party transactions currently available to the Spanish Tax Authorities and using information now available as a result of the BEPS project in both the OECD and the European Union. This includes the automatic exchange of information on different types of income, unilateral agreements with tax administrations, as well as any information taken from country-by-country reports.
This, coupled with greater knowledge of international corporate groups and the sectors in which they operate, will allow for better risk analysis through the preparation of indicators, indexes and models, and the identification of high-tax risk behaviour patterns, which will boost the standing of the Spanish Tax Authorities vis-a-vis taxpayers.
Examining these patterns of behaviour will also be facilitated using information on the potentially aggressive cross-border tax planning mechanisms referred to in Directive (EU) 2018/822 of 25 May 2018 (DAC 6). The new automatic exchange of information measures between EU member states through DAC 6 – to be operational as of 2021 – set minimum standards on reporting potentially aggressive cross-border tax planning arrangements that meet at least one of the so-called Hallmarks, some of which are to be assessed linked to a main benefit test. The Directive includes a specific section devoted to transfer pricing arrangements, involving:
reporting on the use of unilateral safe harbour rules;
transfer between associated enterprises of hard-to-value intangibles; and
intra-group transfer or functions, risks and/or assets whereby projected annual EBIT of the transferor drops more than 50% during the three-year period after the transfer.
Transposing this Directive into Spanish law in December 2020 will undoubtedly have a considerable impact on the information available with respect to large multinational groups' operations.
In addition, to foster voluntary compliance and fraud prevention, the Spanish Tax Authorities will implement preventive actions aimed at guaranteeing tax bases and providing taxpayers with legal certainty. A continuation is therefore envisaged of the policy promoting advance pricing agreements (APAs) on transfer pricing and cost or profit sharing, both unilateral and multilateral, in line with what is happening in other countries. The purpose of this type of action is to give certainty to international legal-tax relations, avoiding costly inspection actions and future controversies, not only with taxpayers in the Spanish courts, but also with the tax administrations of other countries. In the specific case of APAs, the Spanish Tax Authorities are working with the other members of the international community on initiatives to improve the development of these procedures and, in particular, those aimed at speeding up the resolution of bilateral and multilateral APAs, to the extent that available resources allow.
Impact of the Current Economic Situation Resulting from the COVID-19 Pandemic
However, the legal certainty obtained by the taxpayers in an APA could be challenged due to the special economic conditions resulting from the COVID-19 pandemic and the responses that different states have had to it.
It is clear that 2020 will be particularly affected by the COVID-19 pandemic. This presents significant challenges from a practical point of view – for taxpayers and tax authorities alike – in applying the arm's-length principle.
The world is facing a unique and unprecedented situation and we have seen governments around the world passing legislation enacting measures to support their citizens and businesses, due to the uncertainty and the tax challenges caused by this situation. For example, over the course of 2020, the Spanish government published a series of measures to help Spanish companies and entrepreneurs that had been hit hardest by the pandemic. For example, approving temporary layoffs and allowing renegotiations of rental agreements, deferrals in municipal tax payments or postponements in paying some taxes without providing guaranties.
In this scenario, it would appear that multinational groups will have to pay close attention and revisit the transfer pricing policies they had previously implemented.
To address these challenges, in 2021, the recently approved OECD Guidance on the transfer pricing implications of the COVID-19 pandemic will be taken into account by the Spanish Tax Authorities. This paper was published with the aim of helping both the tax authorities and taxpayers, and is based on the following issues:
However, there is a great deal of uncertainty about how taxpayers and tax authorities should address such issues. For example, what happens with limited risk companies? The paper indicates that it is not possible to establish a general rule on whether or not those entities should incur losses derived from the economic circumstances of the market. Should they be remunerated in line with the group's current policy or can it be argued that incurring losses is, in fact, at arm's length? Taxpayers may also experience problems due to the lack of public information for the comparability analysis of 2020 or the evaluation of the impact of the government-assistance programmes on the set of comparables.
These and other issues would need to be considered by taxpayers, be they due to or aggravated as a result of the COVID-19 pandemic, as well as the consistency of the group's overall pricing policy. An in-depth analysis of the impact of the crisis, the contractual conditions agreed by the entities of the group (in particular, the risk assumption) as well as other factors, will need to be revisited.
What is clear is that the Spanish Tax Authorities will pay special attention to compliance with the documentation and reporting obligations for transfer pricing, placing equal emphasis on the functional analysis contained in said documentation. Stakeholders will need to wait and see the practical approach taken by the Spanish Tax Authorities to manage the difficulties arising from the COVID-19 pandemic and also whether they will ultimately follow the Guidelines published by the OECD.
In practice, despite the state of emergency, tax officers have continued working from home in 2020 and this has triggered a general deferral of tax proceedings. In turn, actions that the Spanish Tax Authorities had planned to carry out in 2021 could be affected depending on how the epidemiological situation evolves. What is certain is that the tax audits will continue focusing on areas such as corporate restructurings; valuations of intra-group transfers of different assets, particularly intangible assets; and deductions of items that can significantly erode tax bases, such as royalty payments derived from the transfer of intangibles or for intra-group services, or the existence of repeated losses.
Potential Risk Structures under Scrutiny
Similarly, the Spanish Tax Authorities will continue to review the activities carried out by entities operating under limited risk arrangements (or routine functional and risk profiles) and which represent a significant presence in the economy, both in the areas of manufacturing and distribution. They will also be reviewing how appropriate the choice of valuation methods is in these scenarios and the suitability of the parameters used in their application.
Moreover, pending the results of the G20/OECD project on the Digitalisation of the Economy, we have seen an increasing monitoring of new highly digitalised business models' taxation in Spain. This has also been affected by the entry into force in 2021 of the Tax on Certain Digital Services in Spain.
Based on the above, it seems that in the coming years we will continue to see the Spanish Tax Authorities playing an active role that, with the aid of new technologies, will give them a comprehensive and global profile to match those of taxpayers. This, in line with recent OECD and EU transfer pricing developments, and together with the exchange of information with other EU countries, will lead to an increase in the oversight of transfer pricing policies. That is to say, not only of compliance with the arm's-length principle and transfer pricing documentation obligations, but also of all relevant cross-border agreements that might fall under "aggressive tax planning" or structures in place that lead to an erosion of the taxpayer's tax base in Spain.
In addition, all of this will be exacerbated by the current COVID-19 pandemic situation, which has triggered economic uncertainty for taxpayers as to how to value related party transactions, how to prepare the comparability analysis or whether the allocation of losses should affect entities in Spain, in those cases in which the business model in Spain entails low risk functions.
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