Spain v. CITRICOS Y REFRESCANTES, S.A., Oct. 2016

SUPREME COURT

Contentious-Administrative Chamber Second Section

Judgement no. 293/2017

Honourable Members

D. Manuel Vicente Garzón Herrero, President

D. Nicolás Maurandi Guillén

D. Emilio Frías Ponce

Mr. José Díaz Delgado

Joaquín Huelin Martínez de Velasco

José Antonio Montero Fernández

D. Francisco José Navarro Sanchís

Juan Gonzalo Martínez Micó

D. Rafael Fernández Montalvo

In Madrid, 21 February 2017.

This Chamber has heard appeal no. 2970/2015, brought by Ana Rayón Castilla, on behalf of and representing the company CITRICOS Y REFRESCANTES, S.A., against the judgment of 16 July 2015 handed down by the Administrative Chamber (Second Section) of the National High Court in administrative appeal no. 267/2012. The State Attorney, on behalf of and in representation of the GENERAL STATE ADMINISTRATION, appeared as respondent.

The appellant was Mr. Francisco José Navarro Sanchís.

 

FACTUAL BACKGROUND

FIRST - On 16 July 2015, the Contentious-Administrative Chamber of the National High Court (Second Section) handed down a ruling in contentious-administrative appeal no. 267/2012, brought by the trading company CITRICOS Y REFRESCANTES, S.A., against the decision of the Central Economic-Administrative Court of 26 April 2012, rejecting the claim by said company, in its capacity as parent company of the consolidated group 26/93, against the resolutions of liquidation of the Corporate Income Tax, fiscal years 2003, 2004, 2005 and 2006 (months of January and February).

SECOND.- The Court of First Instance handed down a judgement on 16 July 2015, the ruling of which is word for word as follows:

"...WE RULING: That we dismiss the contentious administrative appeal brought by the representation of the entity CITRICOS REFRESCANTES

(CITRESA) against the decision of the Central Economic-Administrative Tribunal of 26/04/2012, which we uphold as being in accordance with the law. As for the costs, they should be imposed on the plaintiff as its claims have been dismissed in their entirety...".

THIRD - The parties having been notified of the judgment, the procedural representation of the company CITRICOS Y REFRESCANTES, S.A. (CITRESA, hereinafter referred to as CITRESA), hereinafter referred to as CITRESA, was notified to the parties. (CITRESA, hereinafter referred to as CITRESA) filed with the Court of First Instance a brief in preparation of the appeal, which was deemed to have been prepared by order of 15 September 2015, in which it was agreed that the appeal would be lodged with the Court of First Instance.

2015, in which it was agreed to summon the parties so that, within thirty days, they could appear before this Supreme Court.

FOURTH.- Once the parties had been summoned, the lawyer Ms. Rayón Castilla, in the representation indicated, appeared in due time and form before this Supreme Court, filing on 29 October 2015 a written appeal in cassation, in which, after adducing the appropriate grounds, she requested the Court: "...to issue a Judgment by which, upholding the grounds for cassation set out in this brief, to uphold and annul the Judgment under appeal, issuing another that is more in line with the Law...".

FIFTH. Once the appeal had been admitted for processing by order of the First Section of this Court on 14 December 2015, it was agreed to refer the proceedings to this Second Section for substantiation, in accordance with the rules for the distribution of cases, and by order of 22 December 2015, a copy of the appeal brief was sent to the respondent so that, within a period of thirty days, they could lodge their opposition to the appeal, This was done by the Abogado del Estado, in a letter dated 21 January 2016, requesting that the appeal be dismissed, on the grounds that the contested court decision was in accordance with the law, with costs being imposed on the opposing party.

SIXTH.- By order, the vote and ruling on this appeal was scheduled for 11 October 2016, and the deliberation of the case continued on successive dates until 7 February 2017, when it was actually deliberated, voted on and ruled on, with the result that is now expressed.

 

GROUNDS OF LAW

FIRST.- This appeal challenges the judgment handed down on 16 July 2015 by the Administrative Chamber of the National High Court (Second Section), rejecting the contentious-administrative appeal no. 267/2012, brought by the entity that is now the appellant against the decision of the Central Economic-Administrative Tribunal of 26 April 2012 referred to above.

The adjustments carried out in the inspection proceedings gave rise to the following changes in the tax debt:

In the parent company CITRESA, the tax base declared for the years 2003 to 2005 is increased as a result of the value verification file no. 11/2009, in order to determine the market price in transactions between related entities, relating to the supply of certain fruit and other components by Citresa to Schweppes International Limited, an agreement communicated to the company on 30 July 2009.

In the subsidiary SCHWEPPES, S.A. (SSA), the tax base declared for the years 2003 to 2006 was increased (the latter year, only January and February), as a result of the value verification file no. 10/2009 - also in relation to related transactions on the valuation of the supply of concentrates and extracts by the entity Schweppes International Limited, resident in Holland, to SSA.

The proposed tax debt, later ratified in the settlement agreement, amounted to 9,822,023.60 euros (financial year 2003); 14,781,475.51 euros (financial year 2004); 10,417,421.41 euros (financial year 2005) and 3,403,588.34 (financial year 2006), comprising tax and late payment interest.

SECOND - The appellant brought an appeal in cassation against the judgment, raising the following grounds of appeal:

1) Under Article 88(1)(d) of the Law on Jurisdiction, for improper application of the rules on extinctive prescription (with regard to the periods 2003 and 2004), as the judgment infringes the rules governing the extension of the deadline for tax audits, in particular Article 150 of the General Tax Law and Article 184 of the General Regulations on Tax Administration and Inspection Actions and Procedures - Royal Decree 1065/2007, of 27 July 2007 - as well as case law; as well as the case law of this Chamber on the motivation of the agreement to extend the deadline for tax audits, as set out, among others, in its judgments of 12 March 2015 (appeal 4074/2013), 29 January 2014 (appeal 4649/2011), 28 February 2013 (appeal 2320/2010), 12 June 2012 (appeal 327712009), 11 October 2012 (appeal 712/2010) and 13 December 2012 (appeal 251/2010); and the rules on tax statutes of limitation, set out in Articles 66 et seq. of the General Tax Law, as well as the case law on the same (e.g. Judgment of 5 November 2012, appeal no. 2347/2010). ° 2347/2010).

2) On the basis of Article 88(1)(d) of the Law on Jurisdiction, for infringement of Article 49 of the Treaty on the Functioning of the European Union, relating to the Community principle of freedom of establishment, and of the case-law of the Court of Justice of the European Union in relation to that freedom, represented, inter alia, by the judgments of 12 December 2002 (Case C-324/00), 13 March 2007 (Case C-524/04) and 17 January 2008 (Case C-105/07).

3) Also on the basis of Article 88(1)(d) of the Law on Jurisdiction, for infringement of Articles 3 and 16 of the Consolidated Text of the Law on Corporation Tax (TRLIS) (as well as Articles 3 and 16 of Law 43/1995 on Corporation Tax); Article 16 of the Regulation on Corporation Tax, Royal Decree 1777/2004, of 30 July 2004 (and 16 of Royal Decree 537/1997, of 14 April 1997); Articles 31, 3 and 133 of the Spanish Constitution, and Articles 31, 3 and 133 of the Spanish Constitution. 3 and 133 of the Spanish Constitution, Article 8 of the General Tax Law, and Article 3 of the Civil Code; Article 9 of the Convention to Avoid Double Taxation signed between Spain and the Netherlands on 16 June 1971, in relation to Article 96 of the Spanish Constitution, the OECD Model Convention to Avoid Double Taxation, the Commentaries and the Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations published by the OECD in 1995 (hereinafter, the OECD Guidelines).

4) Under Article 88.1.d) of the Jurisdictional Law, for violation of Article 16 of the TRLIS (and the same article of the LIS of 1995) in relation to Articles 24 of the Spanish Constitution, Articles 105.1 and 106. 1 of the LGT and 217 of the Ley de Enjuiciamiento Civil, as well as the case law interpreting them (Supreme Court judgments of 20 September 2010, appeal no. 3971/2005, and of 13 May 2011, appeal no. 3408/2007) and the third transitional provision of Royal Decree 1793/2008, of 3 November, which amends Royal Decree 1777/2004, the Corporate Income Tax Regulations.

5) Under Article 88.1.d) LJCA, it is alleged that the judgment infringes Articles 9.3 and 24 of the Spanish Constitution, and 106. 1 of the Ley General Tributaria, 60 and 61 of the LJCA, and 317 to 327 of the Ley de Enjuiciamiento Civil (in particular, articles 319 and 326), as well as the case law that interprets them, due to the lack of assessment of the documentary evidence or the assessment according to unreasonable or arbitrary criteria incompatible with sound criticism and which lead - the appellant claims - to implausible results.

6) Under Article 88.1. d) of the Law on Jurisdiction, for infringement of the same precepts as in the previous plea and the applicable case-law (Judgments of the Supreme Court of 20 September 2010, appeal No 3971/2005, and of 13 May 2011, appeal No 3408/2007) in relation to the assessment of the expert opinions and the statements of the experts in the act of ratification, according to criteria which the party considers unreasonable or arbitrary, incompatible with sound criticism, and which lead to implausible results.

7) Infringement of Articles 3 and 16 of the TRLIS (as well as Articles 3 and 16 of the LIS) and Article 16 of the RIS (as well as Article 16 of Royal Decree 537/1997, of 14 April, approving the Corporation Tax Regulations), in conjunction with Article 24 of the EC.

THIRD.- In relation to the first ground of appeal, which raises the question of exceeding the maximum duration of the inspection procedure - due to insufficient reasoning of the agreement to extend the inspection proceedings, with effects on the alleged limitation period, the judgment under appeal states the following:

"...] SECOND. The first allegation made by the plaintiff in her claim is that no reasons were given for the extension agreement by the inspection of 16 December 2008 based on the grounds for which art. 150 of the LGT authorises the extension of the initial period for the duration of the inspection proceedings, and consequently, when the settlement agreements were issued (notified on 1 December 2009), the Administration's right to settle the IS for the years 2003 and 2004 was time-barred, Therefore, the tax debts arising therefrom should be annulled, and the plaintiff cannot be reproached, as the TEAC does, for not having raised the same issue before the inspection and only in the administrative economic claim, where there is no obstacle whatsoever that it can also be assessed, as is now the case in the jurisdictional phase.

With regard to this issue, it is worth recalling the chronological iter from which the extension agreement derives:

Proposal for extension of the deadline of 15 December 2008 (on 28/12/08 the entity was notified of the assessment of the circumstances and on 15/12/08, after the deadline for allegations had passed, the proposal for extension was submitted to the Chief Inspector), after collecting the 13 diligencia de constancia de hechos extended until then, the specific volumes of operations declared by CITRESA in the financial years 2003, 2004, 2005 and 2006 (from 1/01 to 28/02) are cited, which amount respectively to 11. 908,876.02 €, 13,302,232.24 €, 12,354,006.16 € and 1,854,281.47 €i, amounts far higher than those required by commercial regulations for the obligation to audit its accounts. It is also stated that the company forms part of the Group of Companies no. 26/93 as the parent company, a group under the consolidated taxation regime for which the extension of that period is also being requested, with emphasis on other circumstances (expressly referred to on page 15 of the TEAC's resolution).

Despite the express indication in the resolution of the ten-day time limit available to the plaintiff, the plaintiff did not oppose the proposal to extend the time limit for the proceedings.

On 19 December 2012, it was agreed to extend the time limit for the proceedings, the minutes and the extension report being dated 22 September 2009 (folio 2258 to 2336).

At this point, due to its parallelism, we must cite the Supreme Court ruling of 9 February 2012, Appeal 3276/2008, in its Third Ground of Law:

"Therefore, the fact that we are dealing with a Consolidated Group, that merger operations had taken place within the Group and that the investigation covered a general tax concept, are sufficient reasons, in the opinion of the Chamber, to understand that the extension of the deadline for carrying out the inspection activities is appropriate. These reasons were already included in the Agreement of 25 May 2000 on the extension of the inspection period, in which it was stated that some of the circumstances that allow for the extension of the period to be extended, considering that there is a particular complexity, were already present: "The volume of operations in all the financial years is greater than that required for the obligation to audit the companies' accounts", "being a Group of Companies under the Tax Consolidation Regime", and that "the volume of invoicing is directly related to the documentation to be examined by the Inspectorate, having verified after six months of proceedings the advisability of extending the initial period, due to the volume of documentation to be checked and the difficulty of obtaining some supporting documents, in addition to the merger operations carried out between companies in the group". A doctrine that we have reiterated in the judgments of the same date, also referring to the now appellant entity".

In the present case, not only did the notification of the start of the inspection notified to the parent company state that the inspection will be of a general nature, but it also states that the significant volume of operations of the taxpayer is much higher than those required for the obligation to audit its accounts, the existence of operations between related companies (the members of that group), requires not only the simultaneous performance of actions against them, but also the need to value such operations, which led the Inspectorate to calculate them at a price different from the agreed price, as it did not correspond to the normal market value.

On the basis of the aforementioned Supreme Court doctrine on the reasoning of the extension agreement - especially when we are dealing with a group under the tax consolidation regime - and the specific circumstances that the Tax Inspectorate states in this case in the extension agreement, it must be confirmed that there is sufficient reasoning for the extension of the time limit, and that the circumstances are present to allow it, which excludes the existence of a limitation period, and consequently the ground of appeal must be rejected [...]".

This first ground of appeal, whose possible procedural success would only affect two of the years subject to adjustment, those of 2003 and 2004, must be rejected, as the judgment does not infringe the rules of law with which it is charged, but rather correctly and appropriately interprets our case law in relation to the requirement to state reasons for the inspection agreement extending the maximum period for the inspection proceedings, provided for, in this case, in article 150.1 of the General Tax Law of 2003.

The first section of the aforementioned provision, under the general heading of "time limit for tax audits", states that:

"1. The inspection proceedings must be concluded within 12 months from the date of notification to the taxpayer of the commencement of the procedure. The proceedings shall be deemed to end on the date on which the administrative act resulting therefrom is notified or deemed to have been notified. The rules contained in Article 104(2) of this Act shall be applicable for the purposes of understanding that the obligation to notify has been fulfilled and of calculating the deadline for resolution.

However, this period may be extended, with the scope and requirements to be determined by regulation, for another period that may not exceed 12 months, when any of the following circumstances apply to the proceedings:

When they are particularly complex. This circumstance shall be understood to exist in view of the volume of operations of the person or entity, the geographical dispersion of its activities, its taxation under the tax consolidation system or under the international tax transparency system and in those other cases established by regulation.

When, during the course of the same, it is discovered that the taxpayer has concealed from the tax authorities any of the business or professional activities carried out.

Decisions to extend the legally prescribed time-limit shall, in any event, be reasoned, with reference to the facts and legal grounds.

In this first plea, the appellant company submits, contrary to what is stated in the judgment under appeal, that in the case under examination the Chief Inspector of the acting unit did not justify why the volume of transactions of the tax group in the years under examination, in amounts far in excess of those required by commercial law for the obligation to audit its accounts, or the fact that the company formed part of the tax group in the years under examination was not subject to the obligation to audit its accounts; or the fact that the company formed part of Company Group no. 26/93 as the parent company, meant that in this specific case the audit was particularly complex, justifying the extension of the maximum period for the duration of the inspections.

The appellant also considers irrelevant the fact that no allegations were made in response to the proposal to extend the maximum duration of the inspection and asserts that the contested judgment did not take into account the fact that ".... in this case, both the Acting Inspector and the Chief Inspector issuing the agreement limited themselves to automatically equating the concepts "high volume of operations" and "belonging to a consolidation group" to "special complexity", without explaining how and why, in this specific case, the high volume of turnover or the existence of a consolidation group led to the understanding that there was a particularly complex action which justified that the maximum period of 12 months was insufficient to understand that there was a particularly complex action which justified that the maximum period of 12 months was insufficient to justify the extension of the maximum period of 12 months".

However, contrary to the appellant's opinion, it is easy to see, in order to undermine the effectiveness of the plea, how, for the Court of First Instance, the volume of operations of the inspected company or its membership of the tax group indicated are only indications or signs which, in accordance with the law, reveal the particular complexity of these proceedings, since it relates them to other objective circumstances, which it transfers to the reasoning of the act, such as the fact that the verification was general - not only on isolated elements of its tax situation - and that it covered several taxes and financial years, adding to these initial data that ". ...the existence of transactions between related companies (the members of that group), requires not only simultaneous actions to be carried out against them, but also the need to value those transactions, which led the Inspectorate to calculate them at a price different from that agreed, insofar as it did not correspond to the normal market value".

Consequently, the contested judgment does not contravene the doctrine established by this Court on the grounds for extending the maximum duration of inspection proceedings (see, for example, the judgments of 31 May 2010 (cassation 2259/05, FJ 3º) and 2 February 2011 (cassation 57/07, FJ 3º), as well as several other subsequent judgments), according to which the mere existence of any of the circumstances set out in Article 29. 1 of Law 1/1998 - later Article 150.1 of the LGT of 2003 applicable here - is not sufficient for the extension of the time limit to be applicable. On the contrary, it is also necessary to justify the need to extend it in view of the details of the case, externalising the reasons that impose the extension and its expression in the agreement in which it is decreed. It must be a reasoned decision, without the mere citation of the precept and the apodictic affirmation that the requirements mentioned in the legal precept are met being sufficient for this purpose.

The correctness of the National Court's decision on this point is also confirmed when examining the agreement to extend the maximum duration of the inspection proceedings in relation to the proposal made by the head of the inspection team that precedes it, in compliance with the aforementioned article 150.1 LGT, in relation to article 184 of the Regulation that regulates, among others, the inspection procedure - Royal Decree 1065/2007, of 27 July -.

These documents clearly show the particular complexity of the inspections examined, not only due to the volume of operations of the inspected entity and the fact that it belongs to a consolidated group - as abstract data considered - but also due to the tax items inspected [corporate income tax, periods 01/2003 to 02/2006; withholdings/receipts on account of income from movable capital, personal work and professional activities, periods 01/2004 to 12/2005; or value added tax, periods 01/2004 to 12/2005]; by the general scope of the proceedings; and by the sequence of inspection procedures documented until then, of which there is a record with their respective dates - 13 procedures in a period of eight months. It also indicates (point 5 of the proposal) "...the existence of business restructuring operations, such as mergers by absorption carried out in the years under review, carried out by some of the companies in the tax group".

That reasoning leads to the rejection of the first ground of appeal.

FOURTH - The second ground of appeal alleges that the judgment at first instance infringed Article 49 of the Treaty on the Functioning of the European Union, relating to the principle of freedom of establishment, and the case-law of the Court of Justice of the European Union (CJEU) in relation to that freedom, as represented, inter alia, by the judgments of 12 December 2002 (Case C-324/00), 13 March 2007 (Case C-524/04) and 17 January 2008 (Case C-105/07).

Apart from any other consideration, the fact remains that, in the proceedings at first instance, there was not the slightest reference to the scope of that freedom of establishment or, in general, to any infringement of European Union law, so that it cannot now be pleaded that it has been infringed. None of that was discussed, nor was it even mentioned in the course of the proceedings, so that it is a new issue which it is now wrongly sought to introduce on appeal.

In short, it is not just that some new precepts and arguments have been put forward in the appeal, but that, by means of the second ground of appeal under consideration, CITRESA is attempting to introduce into the debate an issue that was not raised in the lower court proceedings and on which, of course, the judgment did not, and could not, make any pronouncement. And as we have repeatedly pointed out - our judgement of 26 April 2012 (appeal no. 857/2009) citing others of 12 June 2006 (cassation 7316/2003), 22 January 2007 (cassation 8048/2005) and 7 February 2007 (cassation 9707/2003) - the introduction of new issues has no place in cassation. In the same vein, it is worth reiterating the citation of the recent judgment of 5 May 2014 (cassation appeal no. 6222/2011).

As stated in the judgement of this same Chamber and Section of 20 May 2008, handed down in appeal in cassation no. 6453 /2002:

"... FOURTH. The plea must be dismissed because it raises a new issue in the appeal, which was not raised at first instance or addressed by the contested judgment.

It is settled case-law of this Court that it is not possible for new issues not raised at first instance to be introduced in an appeal in cassation (inter alia, judgments of 5 July 1996, 3 February 1998 and 23 December 2004). This case law is set out in detail in the judgement of 5 July 1996, in which it is stated that a plea in cassation is prohibited which, under art. 95.1. 4º of the previous Law on Jurisdiction, involves "the appellant raising a new issue that has not been raised in the trial and which, consequently, has not been the subject of controversy or of a decision in the judgement under appeal; This is for two reasons, on the one hand, because the purpose of the appeal is to assess whether the Court <<a quo>> infringed applicable rules or case law (as well as whether the essential forms of the trial were breached by violating the rules governing the judgment or those governing procedural acts or guarantees, provided that in the latter case there has been a lack of defence), and it is impossible to do so, not even as a hypothesis that such an infringement could occur in relation to an issue that was not even considered and on which, therefore, there was no pronouncement in the judgment - an omission which, if it were understood to be improper, would have its appropriate means of review in the case of omissive inconsistency -, and on the other hand, because such a singular mutatio libelli would affect the right of defence of the appellant ( art. 24.1 CE ), in the event that, without the possibilities of allegation and evidence that correspond to the instance, the examination and decision of a supervening question through the appeal in cassation would be understood to be admissible with the limitations that its regime entails with respect to those means of defence ( SSTS of 16 and 18 January , 11 and 15 March 1995 , all of which reject the raising of new questions in cassation)".

In the present case, the question now raised could have been raised both before the TEAC and before the Chamber, but the party did not do so, so it is logical that there is no answer to this issue.

The plea must therefore be rejected. ".

This general doctrine is reflected in numerous other judgments of this Supreme Court.

In any event, even leaving aside such an insurmountable procedural stumbling block, we can add, for the mere purposes of argument, that there can be no doubt as to the conformity with European Union Law of the regime of related-party transactions in Spain, in the terms in which this infringement is proposed to us, which is what is strictly speaking being postulated in cassation for the first time, it being sufficient to support this assertion to record some elementary considerations, such as that the censure is projected indiscriminately on the whole of the law (that is to say, on the legal regime of related-party transactions), which is to say, on the legal regime of related-party transactions, on the legal regime of related-party transactions regulated by Article 16 of Law 43/1995, of 27 December 1995, on Corporate Income Tax, and then Article 16 of Royal Legislative Decree 4/2004, of 5 March 2004, which approves the revised text of the Law on Corporate Income Tax - TRLIS), while, at the same time and in open contradiction, it advocates the application of the precept to resolve the case, thus starting from its compliance with European Union Law.

On the other hand, the premise underpinning the doubt that has arisen is based on a premise that is not entirely certain, which is that the regulation in Article 16(1), which states that "1. The tax authorities may value, within the limitation period, at their normal market value, transactions carried out between related persons or entities when the assessment would have determined, considering all the related persons or entities as a whole, a taxation in Spain lower than that which would have corresponded by application of the normal market value or a deferral of such taxation' (emphasis added), means an indiscriminate difference in treatment between Spanish companies and non-resident companies, since it is only in the latter, in alleged violation of the freedom of establishment, that the legal hypothesis enabling the adjustment to market price would apply exclusively.

However, such an assumption is not, in general terms - as is the rule, in itself abstract and potentially aimed at regulating a very diverse multiplicity of situations of different natures - certain and necessary, as it may well be the case of persons or entities resident in Spain in which this overall result of lower or deferred taxation occurs.

Apart from the foregoing, the imputation to the legal rule of contradiction with the freedom of establishment recognised in Article 49 TFEU does not take into consideration that, in addition to the domestic legal authorisation, the system for applying market value to related-party transactions also has the added support of bilateral agreements and, in this particular case, of the Agreement between the Spanish Government and the Spanish State, the Agreement between the Spanish Government and the Government of the Kingdom of the Netherlands for the avoidance of double taxation in the field of income tax and wealth tax, which the appellant does not call into question from the point of view of the claimed freedom of establishment, since that agreement provides that in the case of associated companies, that is to say, when ". (b) the same persons participate, directly or indirectly, in the management, control or capital of an enterprise of one Contracting State and of an enterprise of the other Contracting State, and in either case the two enterprises are bound together in their commercial or financial relations by conditions accepted or imposed which differ from those which would be agreed upon by independent enterprises", that "the profits which one of the enterprises would have made in the absence of such conditions, and which have not in fact arisen by reason of them, may be included in the profits of that enterprise and taxed accordingly".

Palpable proof that we have no doubts - those that are brought to the case in the abstract - about the alleged infringement is that this Supreme Court has been interpreting, in numerous judgments and for years, the legal regime of transfer prices, without having raised, even hypothetically, this alleged infringement.

FIFTH - It is now necessary to examine the third ground of appeal. To that end, the appellant begins the arguments of the plea by stating that '[...] one of the clearest breaches of the law of transfer pricing is the fact that the transfer pricing regime was infringed. one of the clearest violations of the rules of the legal system applicable to resolve the issues at issue at first instance derives from the criterion maintained by the Administrative Chamber of the Audiencia Nacional, as the essential premise on which its interpretation is based, of the possibility that in the financial years 2003, 2004, 2005 and 2006 (January and February), the so-called net margin of all operations (hereinafter, TNMM) could be applied as a valuation method even though it was not provided for in the applicable rules, such as Article 16. 3 of the TRLIS in the wording in force in the years to which the audit refers, and its counterpart in Law 43/1995, of 27 December, on Corporate Income Tax, in force in 2003".

We can advance that the Court of First Instance recognises that the Administration applied a valuation method to determine the market value of the related-party transactions carried out between January 2003 and February 2006, namely the net margin of the transactions as a whole, which did not come into legal force until Law 36/2006, of 29 November, on measures for the prevention of tax fraud. The reasons given in the judgment to justify the appropriateness of this method are transcribed below:

"[...] FOURTH.... In the case in question, article 16.4 point 1 of the TRLIS provides for the following methods:

Comparable free price method, by which the price of the good or service in a transaction between related persons or entities is compared with the price of an identical good or service or one with similar characteristics in a transaction between independent persons or entities in comparable circumstances, making, if necessary, the necessary corrections to obtain equivalence and taking into account the particularities of the transaction.

Cost plus method, by which the usual margin in identical or similar transactions with independent persons or entities or, failing this, the margin that independent persons or entities apply to comparable transactions is added to the acquisition value or production cost of the good or service, making, if necessary, the necessary corrections to obtain equivalence and take into account the particularities of the transaction.

Resale price method, whereby the margin applied by the reseller himself in identical or similar transactions with independent persons or entities or, failing this, the margin applied by independent persons or entities to comparable transactions is subtracted from the sale price of a good or service, making, if necessary, the necessary corrections to obtain equivalence and to take into account the particularities of the transaction.

Alternative methods.

Following the reform of Law 36/2006, this is expressly included in section b) of art. 16.4.2º of the TRLIS.

When, due to the complexity or information relating to the transactions, the above methods cannot be adequately applied, the following methods may be applied to determine the market value of the transaction:

Profit distribution method, whereby each related person or entity that jointly carries out one or more transactions is allocated the share of the common profit or loss arising from such transaction or transactions, based on a criterion that adequately reflects the conditions that would have been entered into by independent persons or entities in similar circumstances.

Net margin method of the set of transactions, whereby transactions carried out with a related person or entity are attributed the net result, calculated on the basis of costs, sales or the most appropriate amount depending on the characteristics of the transactions, that the taxpayer or, where appropriate, third parties would have obtained in identical or similar transactions carried out between independent parties, making, where necessary, the necessary corrections to obtain equivalence and taking into account the particularities of the transactions.

In an attempt to gather a consensus from the different studies consulted, focusing on their economic aspect and except for the best judgement, we can conclude the following basic points:

Comparable Uncontrolled Price (CUP) or Comparable Uncontrolled Price Method:

The OECD defines it as the most directly applicable method, and it would be characterised by: price. Its complexity lies in the fact that, firstly, it is difficult to find sufficiently reliable information for the application of the method, and secondly, it does not facilitate the aggregation of similar operations.

The CUP method requires a high degree of comparability with respect to those transactions that are to be taken as an indicator of the normal market value of the transaction.

Article 16 of the TRLIS prior to the 2006 reform included the implementation of this method as preferential to the other methods. Following the amendment of the article, this preference has disappeared and a new one has been adopted that is more in line with OECD principles.

- Total Net Margin Method (TNMM) applied by the government.

This method was not expressly admitted by Spanish regulations prior to the 2006 reform.

The TNMM reconstructs the price at which related entities should perform transactions by determining a net market margin, but requires a lower quality of comparables in terms of product and functions. The reason is that by measuring net returns based on operating earnings (before interest and taxes), differences in functions, assets, and risks are diluted.

The TNMM is frequently used when valuing related-party transactions because, when we lack appropriate information that would allow us to use other methods, the most efficient and safe way to calculate the market value is through a search for comparables in databases, which should result in entities that perform similar functions, use similar assets and run similar risks and for a similar product or service to the one we are going to value in the transaction to be analysed.

The latter is the method used by the Administration and is what the OECD in its Transfer Pricing Guidelines calls the "net transaction margin method" and is included within the methods based on transactional profit; in section 3.26 of these Guidelines it is defined as follows:

"The net transaction margin method determines, on an appropriate basis (e.g. costs, sales, assets), the net profit margin that a taxpayer derives from a controlled transaction,.... In particular, this implies that the net margin that a taxpayer earns on a controlled transaction (...) should ideally be set by reference to the net margin that the same taxpayer earns on comparable uncontrolled transactions. Where this is not possible, the net margin that would have been obtained in comparable transactions in an independent company may be indicative.

FIFTH.- Net margin method for all transactions (TNMM).

The tax administration justifies its application in the following points:

- Article 9 of the Spanish-Dutch Agreement (When dealing with the market valuation of related-party transactions carried out between a resident entity with an entity resident in the Netherlands). In either case, where the two Enterprises are, in their relations, bound together by accepted imposed conditions, which differ from those which would be agreed by independent Enterprises, profits which one of the Enterprises would have made in the absence of these conditions and which have not in fact arisen because of them, may be included in the profits of this Enterprise and taxed accordingly.

The OECD Guidelines referred to in the Commentaries to the OECD Model Convention as provided for in Art. 3 of the LIS (Art. 3 TRLIS), according to which the provisions of this law shall be understood without prejudice to the provisions of international treaties and conventions that have become part of the domestic legislation, in accordance with Article 96 of the Spanish Constitution.

The application of this method is justified in the present case taking into account the object of the valuation and the circumstances of the case (absence of reliable comparables given the existence of the trademark; the basic extract must be acquired from whoever is exclusively in a position to offer it and accept the price indicated by the latter, different flavours and packaging formats...).

The Explanatory Memorandum to Law 36/2006, on Measures for the Prevention of Tax Fraud, on the reform of the regime of related-party transactions has two objectives:

The first is to link the tax criterion with the accounting criterion regarding the valuation of these operations according to market price.

The second is to adapt the related-party transactions regime to the OECD Guidelines and the Report of the European Union Joint Transfer Pricing Forum, approved on 21 June 2005, in the light of whose provisions the new regime must be interpreted.

This new regime will be applicable for tax periods starting on or after 1/12/2006, the date on which Law 36/2006 comes into force, Final Provision Five Entry into force This Law shall enter into force on the day following its publication in the Official State Gazette.

The preferential nature of the comparable free price method is eliminated, establishing the application of this method together with the cost plus method and the resale price method on an equal footing.

The net mark-up method is introduced. This method is introduced together with the profit distribution method, which was already provided for in the previous legislation.

Both methods are considered as subsidiary methods to the three previous methods. This is not so new if we take into account that it has been considered that in the case of the existence of a Double Taxation Agreement, the net margin method could also be applied under the previous legislation, even though it was not expressly provided for in Article 16 of the TRLIS. In fact, in this regard, cite the judgment of the Supreme Court of 18 July 2012, Appeal 3779/2009, which supports, as will be seen, the position of the Administration, whose Fifth Ground of Law states: "The second plea has the following content: "For infringement of the rules of the legal system or of the case law that were applicable to resolve the issues under discussion under Article 88. 1.d) LJCA: Infringement of Article 9 of the Double Taxation Agreement between Spain and the United States and Article 105 of the Spanish Constitution and the applicable case-law'. The appellant argues in the plea, citing a large number of doctrinal citations, that it is impossible to apply the Model Agreement directly. First of all, a distinction must be drawn between the Model Convention and the conventions actually concluded. Just as the application of the former will require domestic legislation, there is no doubt as to the application, in our law, of the conventions concluded, for the elementary reason that they form our domestic legislation. In any case, it is clear that the Administration has made use of the anti-avoidance rules contained in article nine of the Double Taxation Convention, which constitutes our domestic law".

SIXTH.- We must remember that the regularised tax years cover the period from January 2003 to February 2006. Article 16.3 of Law 43/1995, in the wording applicable to the case, and the same provision of the TRLIS, in its original version, established the following:

"In order to determine the normal market value, the tax authorities shall apply the following methods:

Market price of the good or service in question or of others of similar characteristics, making, in this case, the necessary corrections to obtain equivalence, as well as to consider the particularities of the transaction.

The following shall be applicable on a supplementary basis:

The sale price of goods and services calculated by increasing the acquisition value or production cost of the goods and services by the margin normally obtained by the taxable person in comparable transactions entered into with independent persons or entities or by the margin normally obtained by companies operating in the same sector in comparable transactions entered into with independent persons or entities.

Resale price of goods and services established by the purchaser, reduced by the margin normally obtained by the aforementioned purchaser in comparable transactions arranged with independent persons or entities or by the margin normally obtained by companies operating in the same sector in comparable transactions arranged with independent persons or entities, considering, where applicable, the costs incurred by the aforementioned purchaser in order to transform the aforementioned goods and services.

Where none of the above methods are applicable, the price derived from the distribution of the joint result of the transaction in question shall be applied, taking into account the risks assumed, the assets involved and the functions performed by the related parties".

This hierarchical list exhausts the possible methods available to the administration for establishing the market value of the transactions to which it has been applied. It consists of four methods: one of them, which we can call direct or primary, that of the market price of the good or service in question (art. 16.3.a) LIS); two others that the law itself declares to be supplementary, that of the increase in acquisition value and that of the resale price (art. 16.3.b) of the legal text itself); and finally, as a residual or supplementary second degree method, that of the distribution of the joint result of the operation in question (art. 16.3.c) LIS). These obviously do not include the valuation method used by the tax inspectorate in this case, that of the net margin of all transactions, introduced ex novo by Law 36/2006, of 29 November, on measures for the prevention of tax fraud.

Article 1 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 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 system of transfer prices or related-party transactions, which regulates the net margin method for all transactions.

Therefore, this innovative method introduced by the TRLIS through Law 36/2006 is only applicable, by express legal mandate, to financial years beginning on or after 1 December 2006, a date subsequent to that of the periods in question here, and its 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, in article 2.3 of the Civil Code, according to which "3.

Such a conclusive normative mandate should have been sufficient for the Court of First Instance to invalidate the contested assessments, as they were the result of the retroactive use of a valuation method not yet in force at the time of the respective tax accruals. However, we must make some additional considerations or obiter dicta in order to provide an adequate response to the appeal and to highlight the lack of consistency of the arguments put forward by the Court of First Instance in order to save the administrative acts in question from being null and void. Those arguments are, in essence:

(1) Article 9 of the Spanish-Dutch Convention (being the market valuation of related transactions carried out between a resident entity with an entity resident in the Netherlands), allows the taxation of the profits which one of the companies - the one resident in Spain - would have obtained in the absence of those non-market conditions, so that such market prices may be included among the profits and be taxed accordingly.

However, the invocation of Article 9 of the Convention with the Netherlands implies a reciprocal empowerment of both signatory States to tax the income as a consequence of the appropriate adjustment that the Convention enables, but with reference to the domestic system of sources, without that provision being suitable for replacing such sources with others outside our legal system.

2º) appeal is made to the OECD Guidelines referred to in the Commentaries on the OECD Model Convention in accordance with the provisions of Article 3 of the LIS (Article 3 TRLIS), according to which the provisions of this law shall be understood without prejudice to the provisions of international treaties and conventions that have become part of the domestic legal system, in accordance with Article 96 of the Spanish Constitution.

However, this reference to Article 3 - in relation to the spatial scope of application of the TRLIS - is again specific to the normative provisions which, in accordance with the Constitution, have been integrated into our domestic legislation (international treaties and conventions), without the OECD guidelines having such a normative nature, which this Chamber has already declared are not sources of law nor, as such, invocable in cassation (thus, the judgment of 19 October 2016, handed down in cassation appeal no. 2558/2015).

Even less so, the methods of valuation at market price provided for and defined in such recommendations or rules cannot be imposed in the use of taxation powers if they have not been assumed by the States, in the exercise of their sovereignty, either by domestic legislation or by international agreement. Nor can they operate as subsidiary methods of last resort in the absence of those legally applicable ratione temporis in each case, since, apart from any other effect, such a conclusion would mean accepting the existence of a legal loophole where there is none.

3) The application of this method would be justified in the present case in view of the purpose of the assessment and the circumstances of the case (absence of reliable comparables given the existence of the trade mark; the basic extract must be purchased from the person who is exclusively in a position to offer it and accept the price indicated by that person, different flavours and packaging formats, etc.).

The justification offered in this respect by the Court of First Instance conflicts with the principles of legality and reservation of tax law (art. 8 LGT, in conjunction with articles 31.1 and 133.1 EC and, more generally, articles 9.1 and 103 EC). Although it could be acceptable, in principle, to resort to a valuation method other than the main one, that of the comparable price, given the difficulties that seemed to exist in finding sufficiently reliable comparable magnitudes, article 16 of the TRLIS in force until the legal reform of 2006 offered other alternative methods, up to three hierarchically arranged, to which the Inspectorate could resort to determine the market value of the transactions and correct the taxable base declared, which it refrained from doing within the proper channel for the exercise of the power defined in the law applicable to the case.

SEVENTH.- The consequence of the above is the declaration that the appeal is admissible, given that the judgement has infringed articles 16 of Law 43/1995 and 16 of the TRLIS, in their respective wording applicable in the periods in question. This determines, on the one hand, that it is superfluous to examine the fourth to seventh grounds of appeal; on the other hand, the need for the Chamber to resolve what is appropriate within the terms in which the debate was raised (art. 95.2.d) of the LJCA), which determines, for the reasons expressed, also the upholding of the contentious-administrative appeal and the annulment, due to their lack of conformity with the law, of the administrative acts challenged in the proceedings at first instance.

EIGHTH - We do not have to make a pronouncement on the order to pay the costs of the cassation - article 139.2 LJCA -, nor with regard to those of the appeal, given that it is a common rule to assume that there are reasons for waiving them, in accordance with the exception in paragraph 1 of the precept, in the fact that the losing party in the litigation as a result of the cassation appeal would have been victorious in principle, according to the ruling of the cassation judgment.

 

JUDGMENT

For all the foregoing reasons, in the name of the King and by the authority vested in it by the Constitution, this Court has decided :

That we must declare and declare that the appeal no. 2970/2015, brought by the Attorney Ana Rayón Castilla, on behalf of the commercial entity CITRICOS Y REFRESCANTES, S.A., against the judgment of 16 July 2015 handed down by the Administrative Chamber (Second Section) of the National High Court in administrative contentious appeal no. 267/2012, is upheld and annulled.

Upholding contentious-administrative appeal no. 267/2012, we declare the nullity of the decision of the Central Economic-Administrative Tribunal of 26 April 2012, rejecting the claim filed by said entity, as the parent company of the consolidated group 26/93, against resolutions of liquidation of the Corporate Income Tax, fiscal years 2003, 2004, 2005 and 2006 (months of January and February), nullity that extends to said liquidations.

 

Not to impose the costs of the appeal or of the proceedings at first instance on any of the parties to the proceedings.

The parties shall be notified of this decision and it shall be inserted in the legislative collection. So ordered and signed.

Manuel Vicente Garzón Herrero Nicolás Maurandi Guillén Emilio Frías Ponce José Díaz Delgado Joaquín Huelin Martínez de Velasco José Antonio Montero Fernández Francisco José Navarro Sanchís Juan Gonzalo Martínez Micó Rafael Fernández Montalvo

 

DISSENTING OPINION

BY MR Manuel Vicente Garzón Herrero TO THE JUDGMENT REFERRED TO IN APPEAL NO. 2970/2015

My disagreement with the majority judgment lies in the fact that I do not agree with the argument that the procedure created by Law 36/2006 and applied by the contested decision violates "... the principles of legality and reservation of tax law (art. 8 LGT, in relation to articles 31.1 and 133.1 EC and, more generally, articles 9.1 and 103 EC). Although it might be acceptable, in principle, to resort to a valuation method other than the main one, that of the comparable price, given the difficulties that seemed to exist in finding sufficiently reliable comparable magnitudes, article 16 of the TRLIS in force until the 2006 legal reform offered other alternative methods, up to three hierarchically arranged, to which the Inspectorate could resort to determine the market value of the transactions and correct the tax base declared, which it refrained from doing within the proper channel of the exercise of the power defined in the law applicable to the case".

The rule analysed is a procedural rule and not a substantive rule, as can be clearly inferred from the heading of Chapter V, Title I of Royal Decree 1777/2004, of 30 July, approving the Corporate Income Tax Regulations (BOE, 6 August), in its original wording, which is entitled "Procedure for carrying out the valuation at normal market value in related-party transactions". The word "procedure", which initially describes the valuation activity, excludes any discussion of the nature of the rule analysed.

This being so, it is clear that the principles of legality and reservation of tax law are not applicable to procedural rules, as in this case, in the terms of the majority ruling, and consequently neither are articles 9.1 and 103 of the EC, and even less so in the manner in which they are applied.

Indeed, as the valuation methods are procedural rules, the rules governing the temporal validity of procedural rules in time must be applied. These rules are different from those governing the facts whose assessment is sought.

And they are different on the basis of basic rules that operate differently in each case. The principle of tax legality requires the existence of a prior legal rule, with the status of a law, which regulates certain aspects of the tax liability, for the basic consideration that there cannot be a tax liability without the parameters that generate it having been previously established. In the procedural sphere, things happen differently, based on two assumptions: a) that the procedural rules that continue over time are neutral, and do not generate or increase citizens' obligations, and, b) that a very careful distinction must be made between the facts being prosecuted and the prosecution itself. For the prosecution itself, all that is required is that the rules governing it are in force when the prosecution takes place, not when the prosecuted facts occurred, which is what the majority judgement states.

As far as the prosecution rule is concerned, it is clear that Article 1 of Law 36/2006, of 29 November, on measures for the prevention of tax fraud, establishes that this text will be in force from 1 January 2007. This is what happens in the valuation procedure followed, which takes place after 1 January 2007. Therefore, the principle of procedural legality has not been infringed since the procedural rules applied have the status of law and were in force when they were applied.

It should be borne in mind that the judgment with which I disagree makes no mention, nor does the appeal, of any infringement of fundamental rights arising from the procedural modification of the assessment methods established in the previous and current legislation, the only case in which a procedural change would not be possible, and the procedure in force when the events took place would be applicable.

Consequently, I believe that it is of considerable importance to confine the principle of legality of taxation to the facts and not to the rules governing the prosecution of the facts, and, in my opinion, the delimitation made in this appeal is erroneous, since that principle, the principle of legality of taxation, has been applied to procedural rules, which are undoubtedly governed by other parameters.

I would also like to emphasise that the appellant's conduct, by refusing to provide information to the file, either because he was not interested in providing it, or because he did not have it (although it should have been in his possession), is not conduct that deserves to be rewarded, or even described as the use of legitimate rights of defence of the taxpayer; on the contrary, in my opinion, it is clearly reprehensible conduct, which does not deserve the support of the courts as is clearly inferred from the case law which proclaims that no one can benefit from his own errors, omissions and infringements, the citation of which is useless because it is well known, and which constitutes a general principle of law.

Indeed, by failing to provide the documentation which it should have provided, the party succeeded in preventing the application of any of the procedures in force at the time of the events in question, and then, when the new procedures were applied, it invoked in its favour the impossibility of the new procedural rules governing the facts established, since they were not in force at the time of the events in question.

I consider that such conduct did not merit the Chamber's endorsement.

Lastly, it should be pointed out that the issue of the timing of the procedural rules is not an issue raised by the Abogado del Estado in his opposition to the appeal, but is an issue which the TEAC has already addressed in its decision, and is therefore an element which has been part of the dispute from the outset.

In my opinion, therefore, the appeal should have been dismissed. Manuel Vicente Garzón Herrero

PUBLICATION - The above judgment was read and published by the Judge-Rapporteur, Mr. Francisco José Navarro Sanchís. Francisco José Navarro Sanchís, the Chamber being constituted in open court, of which I hereby certify.