An adjustments had been made by the tax authorities to a series of loans granted by GOLDEN ARCHES OF SPAIN SA (GAOS), domiciled in Ireland, to RESTAURANTES MC DONALDS, S.A. (RMSA), throughout the period 2000/2004 for amounts ranging between 10,000,000 and 86,650,000 €, at interest rates between 3,450% and 6,020%.
The tax administration held that GAOS “has no structure or means to grant the loan and monitor compliance with its conditions … it does not have its own funds to lend, it receives them from other companies in the group”. The Administration refers to a loan received by GAOS from the parent company at a rate of 0%, which is paid in advance to receive another with an interest rate of 3.3%. The Administration indicates that “nobody, under normal market conditions, cancels a loan to constitute another one under clearly worse conditions”.
The arm’s length interest rate was determined by reference to the interest rate RMSA would have paid to an independent bank. In 2005 there were external bank loans in the same company for more than 100,000,000 euros at an average interest rates of 2.57%.
Judgement of the Court:
“As regards the valuation at market price of the interest rate on the loans or lines of financing …, it has already been shown above that the loans were granted throughout the period 2000/2004 for amounts between 10,000,000 and 86,650,000 euros, with different interest rates ranging between 3.450% and 6.020%. These rates are notably higher than those demanded from RMSA by the banks – independent third parties – that granted it loans, so that in the financial year 2005 there are credit lines of more than 100,000,000 euros at average rates of 2.57% (credit lines for one year and renewable).
“This being so, the reasonableness of the judgment cannot be disputed in appealing to the credit obtained by RMSA from independent entities, even though the conditions were different in some of their distinctive features to those of the loans received from GAOS, especially when the Court of First Instance rightly expresses the reasons why such alleged differences are irrelevant.”
“…As regards the OECD Guidelines cited as infringed in the plea, this Court has already held that they are not sources of law and therefore cannot be relied on in cassation. Moreover, the reference in Article 16 TRLIS to them as rules inspiring application was introduced in Law 36/2006, which is not applicable ratione temporis to this case.
Indeed, as we have recently stated (judgment of 19 October 2016, handed down in appeal no. 2558/2015), article 88.1.d) of the Law of this Jurisdiction allows for the complaint of defects in iudicando in which the contested judgment may have incurred, stating that “1. The appeal must be based on one or some of the following grounds: …d) Infringement of the rules of the legal system or case law that were applicable to resolve the issues under debate”.
The infringement invoked in cassation, therefore, must refer precisely to the rules of the legal system, that is to say, to the formal sources which comprise it and which are set out in Article 1.1 of the Civil Code, which establishes that “…the sources of the Spanish legal system are the law, custom and the general principles of law”. Within the material concept of law expressed in the precept, it is possible to include the different manifestations, hierarchically ordered, of normative power (Constitution, international treaties, organic law, ordinary law, regulations, etc.). ), but it is not possible to base a ground of appeal on the infringement of the aforementioned OECD Guidelines, given their lack of normative value, that is to say, of a binding legal source for the Courts of Justice that can be predicated on them, and which this Supreme Court had already declared previously (thus, the Judgment of 18 July 2012, handed down in appeal no. 3779/2009 ), in which such guidelines are considered as mere recommendations to the States and, elsewhere in that judgment, it assigns them an interpretative value. Such a function, that of interpreting legal rules, derives, moreover, from the very role assigned to them by the Explanatory Memorandum to Law 36/2006, of 29 November, on measures for the prevention of tax fraud, which states the following:
“…As far as direct taxation is concerned, this reform has two objectives. The first refers to the valuation of these operations according to market prices, thus linking them to the existing accounting criteria applicable to the recording in individual annual accounts of the operations regulated in article 16 of the Consolidated Text of the Corporate Income Tax Law, approved by Royal Legislative Decree 4/2004, of 5 March. In this respect, the acquisition price at which these transactions must be recorded for accounting purposes must correspond to the amount that would be agreed by independent persons or entities under conditions of free competition, understood as the market value, if there is a representative market or, failing that, the amount derived from applying certain generally accepted models and techniques and in harmony with the principle of prudence.
In short, the tax regime for related-party transactions is based on the same valuation criterion as that established in the accounting field. In this sense, the tax administration could correct the book value when it determines that the normal market value differs from that agreed by the related persons or entities, with regulation of the tax consequences of the possible difference between the two values.
The second objective is to adapt Spanish transfer pricing legislation to the international context, in particular to the OECD guidelines on the subject and to the European Transfer Pricing Forum, in the light of which the amended legislation must be interpreted. In this way, the actions of the Spanish tax authorities are brought into line with those of other countries in the region, while at the same time providing greater security for verification procedures by regulating the obligation of the taxpayer to document the determination of the market value agreed in the related-party transactions in which it is involved…”.
It is a necessary conclusion from the foregoing that, if such guidelines do not form part of our legal system, their hypothetical infringement cannot be challenged in cassation under Article 88.1.d) LJCA.
Even accepting, therefore, this interpretative function, which the legislator includes, their lack of characterisation as rules of the legal system, for the purposes of validly basing an appeal on their infringement by the Judgment, precludes any other consideration in this regard.
Nevertheless, it should be added that the OECD Transfer Pricing Guidelines, as set out in the Explanatory Memorandum to Law 36/2006, entail a mandate addressed to the tax administration which, in the context of verification proceedings – as the law expressly states – must comply with the technical criteria and guidelines set out therein, but they do not commit the Courts of Justice, when ruling on the legal proceedings for which they are competent, to assess the procedural evidence with full subordination to those Guidelines, which do not condition or qualify their powers of free assessment of the evidence.
Moreover, the first article of Law 36/2006, entitled Modification of the Consolidated Text of the Corporate Income Tax Law, approved by Royal Legislative Decree 4/2004, of 5 March, stipulates in a clear manner that “…. With effect for tax periods commencing as from the entry into force of this Act – the day after its publication on 30 November 2006, final provision five – the following amendments are made to the Consolidated Text of the Corporate Income Tax Act, approved by Royal Legislative Decree 4/2004, of 5 March:…”, among which is the reform of the regime of transfer pricing or related-party transactions, which affects the inspiration, with interpretative and, therefore, complementary character, in the OECD Guidelines.
Therefore, the innovations introduced by the TRLIS through Law 36/2006 are only applicable, by express legal mandate, to financial years beginning on or after 1 December 2006, a date subsequent to the period in question here, and their retroactive use is not admissible, due to express legal prohibition – in accordance, moreover, with the general rule of non-retroactivity established, in the absence of any provision, by article 2.3 of the Civil Code, which states that “3.
Apart from the foregoing, the invocation of paragraphs 1.12 and concordant paragraphs of the Guidelines, which refer abstractly to technical criteria and guidelines for the determination of the principle of free competition, is materially misguided, as we have already reasoned at length on the observance of that principle in the judgment handed down in the proceedings from which this appeal arises.”
The Court declared the appeal lodged by McDonald’s inadmissible.
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Spain vs McDonalds 020317 Tribunal Supremo 961-2017