Spain vs EPSON IBÉRICA S.A.U., March 2021, Supreme Court, Case No 390:2021

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The SEIKO EPSON CORPORATION is a multinational group of Japanese origin active in among others areas, production and sale of computer products. The group is present in Spain, EPSON IBÉRICA, but has its European HQ in the Netherlands, EPSON EUROPE BV.

The main shareholder and sole director of EPSON IBÉRICA S.A.U. was initially Mr. Jose Augusto.

However, following a capital increase on 24 April 1986, EPSON IBÉRICA SAU became the subsidiary of the EPSON Group in Spain and Mr. Jose Augusto became a member of its Board of Directors. Mr. Jose Augusto held positions in both EPSON IBERICA and the Dutch parent company EPSON EUROPA until he left on 31 August 2007.

As part of his emoluments, EPSON IBERICA made contributions to a pension plan since 1999, totalling EUR 2,842,047.55, including an extraordinary contribution of EUR 2,200,000.00, which was agreed by its Board of Directors on 22 September 2004 and paid to the insurance company managing the pension plan on 25 May 2005, and another contribution of EUR 132,074.67 on 31 July 2007, which was passed on to the Dutch parent company.

The accounting expenses entered in the accounts by EPSON IBERICA in this connection amounted to EUR 2 709 972.88 (EUR 2 842 047.55 – EUR 132 074.67), which the entity entered off the books and which, consequently, were not deducted fiscally.

In particular, the accounting expense computed in FY 2004 and 2005 for the amount of the commitment assumed (2.2 million euros) was not deducted in that year, in accordance with the provisions of Article 13.3 “Provision for risk and expenses”, of the Consolidated Text of the Corporate Income Tax Law

However, when the beneficiary (Mr. Jose Augusto) of these contributions receives the amounts from the retirement plan, the corresponding contributions made are deductible at EPSON IBERICA.

In 2009, Mr. Jose Augusto exercised his right to receive the benefits provided for in that pension plan and, therefore, the entity made a negative adjustment of EUR 2,709,972.89 in its tax return for that year, an adjustment which, in the Inspectorate’s opinion, should have amounted to only EUR 473,477.59, since not all the contributions made to the aforementioned pension plan were deductible.

The contributions made after that date, which amounted to 263,174.45 euros (10 % of 2,631,744.41 euros). The remaining 90 % of the contribution from 1 January 2002 is deemed to have been made by the parent company in the Netherlands, EPSON EUROPE.

– The settlement agreement acknowledges that the adjustment should have been bilateral, since the expenditure actually occurred, but considers this provision inapplicable because EPSON EUROPA is resident in the Netherlands, and Article 9 of Spain’s double taxation agreement with the Netherlands does not provide for bilateral adjustment.

– In its tax return for 2010, EPSON IBERICA offset in full, for an amount of EUR 1 359 101.07, the negative tax base which it had claimed to have from the previous year (2009), but which it no longer had following the audit carried out.

EPSON IBERICA did not agree with the aforementioned settlement agreements and the imposition of the penalty relating to the FY 2009 and 2010 and filed economic-administrative claims against them before the Central Economic-Administrative Court.

The claims were resolved by the Central Economic-Administrative Tribunal on 4 February 2016, rejecting them.

EPSON’s legal representatives then filed a contentious-administrative appeal against the above decision, which was processed under case number 314/2016 before the Second Section of the Contentious-Administrative Chamber of the National High Court, and a judgment rejecting the appeal was handed down on 22 February 2018.

The appellant filed a writ requesting a supplement to the previous judgment, and the Chamber issued an order on 14 May 2018, in which it declared that there was no need to supplement the judgment.

The High Court also decided in favour of the tax authorities, and this decision was then appealed by EPSON to the Supreme Tribunal.

At issue before the Supreme Tribunal was whether or not the tax authorities should have taken into account the disallowed deduction – resulting in a higher income – when determining the arm’s length remuneration of EPSON IBÉRICA which was based on the transactional net margin method (TNMM).

Judgement of the Court

The Supreme Court dismissed the appeal of EPSON IBÉRICA and decided in favour of the tax authorities.

The key issue in the present appeal is, in fact, the apportionment of costs between EPSON EUROPA and EPSON IBERICA. The judgment under appeal has chosen to consider the apportionment made by the tax inspectorate to be correct, in the light of the circumstances and the evidence in the proceedings. It is not an arbitrary assessment; it is coherent and reasonable and, therefore, we must abide by its result. The assessments under appeal are therefore in accordance with the law, and the adjustment sought by EPSON IBERICA is not appropriate.
Lastly, there is nothing to be said in relation to the penalties, since that issue is not covered by the order for admission.
In view of the foregoing, in circumstances such as those described, the answer to the appeal is as follows: ‘the Tax Inspectorate is not obliged to take into consideration the transfer pricing policy of the corporate group, in particular where it is based on the Transactional Net Margin Method (TNMM), when regularising transactions involving companies in the same multinational group, where it is not possible to make the relevant bilateral adjustment, in order to proceed to a full regularisation of the taxpayer’s situation.

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Spain v Epson STS_1111_2021

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