Central Economic-Administrative Tribunal
FIRST ROOM
DATE: 24 October 2022
PROCEDURE:
00-03631-2020; 00-03636-2020; 00-00598-2021; 00-05845-2021
CONCEPT: CORPORATION
TAX. I.SDES.
NATURE: GENERAL
SINGLE INSTANCE COMPLAINT
COMPLAINANT: XZ SA
- NIF ....
REPRESENTATIVE: ... -
VAT NUMBER ---
ADDRESS: ...- Spain
In Madrid , the Tribunal has been constituted as
indicated above, to rule in sole instance on the above-mentioned complaint, which
is being dealt with under the general procedure.
The present claims have been heard against the following
settlement agreements issued by the Tax and Customs Control Unit (DCTyA) of the Central Delegation for Large Taxpayers (DCGC)
of the State Tax Administration Agency (AEAT), against the entity XZ SA,
parent company of the group .../85 for Corporate Income Tax (IS) for the years
2013, 2014, 2015 and 2016.
FACTUAL
BACKGROUND
FIRST.- The following complaints have been lodged with
this Court, which are resolved cumulatively:
|
F. Inter. |
F. Enter. |
|
|
00-03631-2020 |
24/07/2020 |
28/07/2020 |
|
00-03636-2020 |
24/07/2020 |
28/07/2020 |
|
00-00598-2021 |
19/01/2021 |
30/01/2021 |
|
00-05845-2021 |
28/07/2021 |
31/07/2021 |
The most relevant milestones of the dossier are set out
below.
SECOND.- On 04/12/2017 inspection and investigation
proceedings were initiated, by means of notification of the notice of
initiation, by the entity XZ SA, in its capacity as parent company of
the group .../85 which is taxed under the tax consolidation regime, and in its
capacity as representative of the same, with regard to the IS for the financial
years 2013 to 2016. The proceedings had a general scope.
The main activity of the interested party, classified
under IAE822, is health and risk insurance.
XZ SA is a listed company, being
the parent company of a group of companies engaged in insurance activities in
its various branches, both life and non-life, finance, investment property and
services.
As a result of the aforementioned inspection activities,
the following non-conformity assessments were issued on 11/03/2020 in relation
to the IS:
- With regard to the adjustments for related-party
transactions from 2013 to 2016: A02-...53.
- With regard to adjustments other than related-party
transactions, for the years 2013 to 2015: A02-...93.
- With regard to adjustments other than related-party transactions,
for the financial year 2016: A02-...11.
THIRD - On 26/06/2020 the corresponding settlement
agreements were issued in relation to the aforementioned acts.
Firstly, in relation to report A02-...53, the resolution
is issued rectifying the settlement proposal included in the report with
respect to the income tax for the years 2013 to 2015 and confirming the
proposal with respect to the income tax for the year 2016, corresponding to the
adjustments to be made for the application of the regime of related-party
transactions. Specifically, two
types of adjustments are regularised:
- The first for the provision of certain services by tax
group entities .../85 to their permanent establishments abroad, pursuant to the
provisions of article 22 of Royal Legislative Decree 4/2004, of 5 March,
approving the revised text of the Corporate Income Tax Law (hereinafter, TRLIS)
(article 22 of Law 27/2014, of 27 November, on Corporate Income Tax (LIS) for
2015 and 2016).
- The second on the existence of a transfer of use of the
XZ trademark by XZ ESPAÑA to other entities of the group, both
national and foreign, and the valuation at market value of the same.
The aforementioned agreement results in a total amount to
be paid of ... euros (... euros of instalments and ... euros of interest for
late payment), which is detailed as follows:
|
Financial year
2013 |
Financial
year 2014 |
Financial
year 2015 |
Financial
year 2016 |
|
|
Quota |
.... euros |
.... euros |
.... euros |
.... euros |
|
Interest for
late payment |
.... euros |
.... euros |
.... euros |
.... euros |
|
Total debt |
.... euros |
.... euros |
.... euros |
.... euros |
Secondly, in relation to report A02 ...93, which included
the proposal for regularisation that included the
adjustments to be made other than those resulting from the application of the
regime of related-party transactions, in relation to the IS for the years 2013
to 2015, a resolution was issued, the grounds of which, in those cases where
the entity does not agree, were as follows:
- The appropriateness of the classification of the PAÍS_1
own capital Juros received by different group
entities as interest for the purposes of the Spain-PAÍS_1 CDI.
- The non-deductibility of the remuneration received by a
series of directors with executive functions in the parent company and
subsidiaries, as they did not meet the requirements of commercial legislation;
specifically, the Inspectorate pointed out that the requirement of certainty in
the determination of the remuneration system in the bylaws was not met.
- That, by virtue of the PGCEA's Registration and
Valuation Rule no. 11, it would be appropriate to allocate higher income for
the assignment of the use of the trademark by the parent company to different
subsidiaries of the group, which also determines a higher deductible input VAT.
- The inappropriateness of the provision made by certain
Group entities for technical provisions (provision for benefits).
- That the calculation of the excess of the limit of the equalisation reserve by certain entities of the Group was
incorrect; specifically, the controversy refers to the limit of 35% regulated
in the regulations.
- The regularisation of the capitalisation reserve applied as a consequence of the
adjustment deemed appropriate in respect of the equalisation
reserve.
- The offsetting of negative tax bases (BINS) of
companies before their integration into the tax group .../85
(pre-consolidation) is incorrect, as it is also subject to the percentage
limits of the general system.
- Finally, the deduction for research and development and
technological innovation is regularised,
reclassifying the basis for the deduction, as there are expenses that are not
included in the activities mentioned in this respect in the regulations
governing the tax benefit.
The above adjustments resulted in a total debt of ....
(... of instalments and ... of interest for late payment), as follows:
|
Financial
year 2013 |
Financial
year 2014 |
Financial
year 2015 |
|
|
Quota |
.... euros |
.... euros |
.... euros |
|
Interest for
late payment |
.... euros |
.... euros |
.... euros |
|
Total debt |
.... euros |
.... euros |
.... euros |
FOURTH - On 22/12/2020, the Technical Office issued two
administrative acts in relation to act A02-...11:
- On the one hand, a provisional settlement, rectifying
the proposal contained in the aforementioned report, in relation to the 2016
income tax. In said settlement, the following adjustments were included, in
relation to the aforementioned financial year, most of them being substantially
identical to those included in the settlement agreement derived from the
A02...93 report referring to the IS of previous financial years (2013 to 2015),
which have been referred to in the previous FACTUAL BACKGROUND:
- It would be appropriate to classify the PAÍS_1 own
capital Juros received by different group entities as
interest for the purposes of the Spain-PAÍS_1 DCI.
- Pursuant to PGCEA Registration and Valuation Rule 11,
it would be appropriate to allocate higher income for the assignment of the use
of the trademark by the parent company to different subsidiaries of the group,
which would determine a higher deductible input VAT.
- The inappropriateness of the provision made by certain
group entities for technical provisions (provision for benefits
- The regularisation of the
deduction for research and development and technological innovation to be taken
into account in the year, recalculating the base of the deduction, as there are
expenses that are not included in the activities mentioned in the regulations
governing the tax benefit.
- The loss related to the cancellation of a loan granted
to an employee is also adjusted and considered non-deductible, as it should
have been classified as a donation.
The above settlement agreement results, for the IS for
the 2016 tax year, in a debt to be repaid for a total amount of .... euros (...
of tax and ... of late payment interest).
- On the other hand, a resolution was issued ordering the
completion of the proceedings, in accordance with article 157.4 of Law 58/2003,
of 17 December, General Tax Law (LGT) and 188.4 of Royal Decree 1065/2007, of
27 July, approving the General Regulations on tax management and inspection
actions and procedures and on the development of the common rules for tax
application procedures (RGAT), in relation to this tax (IS) and financial year
(2016) in order to verify the tax deductibility of the remuneration of
directors with executive functions paid by the entity in said financial year.
Specifically, it was stated in the aforementioned agreement:
"The remuneration of the directors of the entities
of the tax group .../85, of which XZ SA is the parent company, paid in
2016, in order to verify whether they meet the legal requirements, both tax and
commercial, established by the TEAC doctrine issued in interpretation thereof,
as well as the case law of the Supreme Court, for the purposes of their tax
deductibility".
Once these complementary proceedings were concluded,
which were resumed on 11/01/2021, a new tax assessment A02-...66 was issued for
the tax and financial year (IS for 2016), which included a settlement proposal
based on an adjustment corresponding to the non-deductibility of the
remuneration received by the directors with executive functions in the
aforementioned period. Finally, on 02/07/2021, the corresponding settlement
agreement was issued, confirming the settlement proposal contained in the minutes,
resulting in a total amount to be paid in the amount of .... euros (.... of tax
and ... of late payment interest).
FIFTH.- Dissatisfied with the aforementioned settlement
agreements, the claimant filed, on 24/07/2020, 19/01/2021 and 28/07/2021,
before this TEAC, the following economic-administrative claims, processed under
the following numbers:
- RG 3631/2020 against the settlement agreement deriving
from the A02-...53 act, relating to the regularisation
of related-party transactions in respect of IS for the 2013 to 2016 financial
years.
- RG 3636/2020 against the settlement agreement deriving
from the A02-...93 report, which includes the adjustments other than
related-party transactions, in respect of the IS for the financial years 2013
to 2015.
- RG 598/2021 against the settlement agreement deriving
from the A02-...11 report, relating to adjustments other than related-party
transactions, in respect of IS for the 2016 financial year.
- RG 5845/2021 against the settlement resolution derived
from minute A02-...66, which includes the adjustment relating to the
deductibility of the remuneration received by certain directors in 2016.
Once the file was brought to the attention of the
interested party, it submitted the corresponding written submissions within the
period allowed for that purpose. In summary, she alleges the following:
With regard to the adjustments made in relation to
related party transactions:
- The inappropriateness of the settlement for the
application of the mark-up on the cost of the services provided by XZA's
technical department and XZR's underwriting department to its permanent
establishments.
- Inappropriateness of the assessment of the payment of a
fee for the use of the trade mark XZ to XZ ESPAÑA. Specifically,
concerning the non-existence of a transfer of the use of the trade mark and the
incorrect valuation of the trade mark by the Inspectorate, on the basis of a
report drawn up by ONFI.
With regard to the adjustments made, other than those
resulting from the application of the regime for related party transactions:
- Qualification of JSCP as a dividend in accordance with
the Spain-PAIS_1 CDI and not as interest.
- Deductibility of the remuneration received in the years
2013 to 2016 by XZ executives who are members of the Board of Directors.
- The adjustment made in the subsidiary XZ SPAIN,
in accordance with the VAT provisions of Value Added Tax Nr. 11 PCEA, is
inappropriate.
- The origin of the allocation made by XZ SPAIN and
XZS of certain technical provisions (provisions for benefits).
- The inappropriateness of the calculation of the excess
over the limit of the equalisation reserve made by
the Inspectorate and the non-application of its purpose due to excess claims,
in relation to the entities XZ SPAIN and XZS.
- The Inspectorate's calculation of the minimum amount of
the equalisation reserve but endowed by the XZR entity
is inappropriate.
- Disagreement with the calculation of the Capitalisation Reserve made by the Inspectorate, insofar as
it does not agree with the adjustment made in the calculation of the equalisation reserve, which has an impact on the present
issue.
- Inappropriateness of the adjustment of the
pre-consolidation tax losses of certain subsidiaries, applied by the controlled
entity, insofar as the only limitation on the offsetting of the aforementioned
BIN's is the amount of the positive tax base of the entity to which the BIN
corresponds, without taking into account the percentage limits that apply to
the general system.
- The adjustment made by the Tax Inspectorate in respect
of the deduction for technological innovation (TI) applied by Group XZ is
inadmissible, in so far as the Tax Inspectorate does not have the power to
change the classification of the expenses which form the basis of that
deduction.
- The waiver by XZR of a loan in favour of one of
its employees cannot be qualified, as the Inspectorate does, as a liberality.
- Right to the effective payment of late payment interest
on the amounts unduly paid in respect of the second and third instalments for
2016, due to the unconstitutionality of RDL 2/2016.
- Inappropriateness of the adjustments made to the IS tax
base for 2016, by application of section 3 of the Sixteenth Additional
Provision of the LIS, in respect of the reversal of tax-deductible impairments
in 2012 and prior years, due to the unconstitutionality of RDL 3/2016.
- In relation to the supplementary proceedings relating
to IS 2016, the inappropriateness of the agreement to complete the proceedings.
THE
LEGAL BASIS
FIRST.- This Court is competent to rule in accordance
with the provisions of Law 58/2003, of 17 December, General Taxation Law (LGT),
as well as the General Regulations for the development of Law 58/2003, of 17
December, General Taxation Law, in matters of administrative review (RGRVA),
approved by Royal Decree 520/2005, of 13 May. None of the grounds of
inadmissibility provided for in article 239.4 of the LGT are present.
SECOND.- The aforementioned claims are resolved
cumulatively in accordance with the provisions of article 230 of the LGT.
THIRD - This Court must rule on the following:
Whether or not the contested winding-up resolutions are
in accordance with the law.
FOURTH - First of all, we will analyse the allegations
against the resolutions issued, in relation to the financial years 2013 to
2016, for the application of the regime of related-party transactions, raised
in the complaint with reference number RG 3231/2020.
FIFTH.- The first question that arises concerns the qualification
and valuation of the services provided by the Technical Department of XZA SA
(hereinafter XZA) and the Underwriting Department of XZR SA (hereinafter
XZR) to its permanent establishments (hereinafter PEs).
According to the file, these group entities - XZA and
XZR - have, in the years audited, provided certain services for the
benefit of their foreign PEs, which can be grouped as follows:
- General administrative and general services (IT
development, legal, auditing, IT, finance, human resources, etc.). These
services have been regularised as indirect cost
allocations, in accordance with article 7.3 of the various agreements, with the
entity's agreement (in Minute A01-...43).
- Services inherent to the insurance activity developed,
on the one hand, by the Technical Department of XZA, to which
approximately 10 people are assigned, in charge of risk underwriting, product
pricing and the drafting of technical notes, among other functions. And, on the
other hand, by XZR's Underwriting Department, in charge of the technical
structuring of products, pricing, among other functions. These activities were carried out at the request of the
EPs.
For the purposes of eliminating double taxation of income
generated by the PEs located abroad, the aforementioned entities applied the
exemption method, regulated in article 22 of the TRLIS (article 22 LIS for 2015
and 2016) in the years audited.
The cost of such services was invoiced to the SOEs
without any mark-up, except for the services provided by XZR in 2013,
which were not invoiced to the SOEs (this issue has already been regularised in the above-mentioned compliance report).
The issue in dispute now centres
on the valuation of the services provided by XZA's Technical Department
and XZR's Underwriting Department to its PEs.
The Inspectorate, in the settlement agreement, concluded
that, insofar as the aforementioned services were to be classified as related
"internal operations", they should be valued at market price. To this
end, applying the Net Operating Margin Method, it considered that it was
market-adjusted to apply a margin of 8.50% to the cost of the services
rendered.
However, the complainant, disagreeing with this criterion
and, therefore, with the adjustment made, argues that, contrary to the interpretation
made by the Inspectorate of comments 31, 32 and 35, 36 and 37 of the MCOCDE,
the provision of services by the aforementioned Departments of the entities to
their PEs does not fall within the classification of an internal operation but
rather of an allocation of expenses. Thus, it states that the purpose of the
services is to rationalise the company's overhead
costs or to increase its sales in general. Furthermore, from the analysis of
the abovementioned services, it stresses that they do not belong to the type of
operations that entities would provide to independent third parties, in the
normal course of their business. In fact, it emphasises
that these entities do not provide these services, including pricing, to any
unrelated entity or individual. In short, the complainant argues that the
services analysed form part of the general administration services, being a
common pricing system provided by these entities to the companies of the group,
both for the head office and for their subsidiaries and PEs, and therefore, in
accordance with comment 37, these services should be considered as cost
allocation, and therefore valued without any additional margin.
SIXTH - Applicable regulations.
The transactions under analysis are carried out between
related entities, insofar as articles 16 of the TRLIS and 18 of the LIS (for
2015 and 2016), in section 3.j), grant related party status to a company
resident in Spain and its SPs located abroad.
For the purpose of valuing transactions between related
entities, paragraph 1 of the above-mentioned Articles establishes the
obligation to apply the arm's length principle:
"Transactions
between related persons or entities shall be valued at their market value.
Market value shall be taken to be the value that would have been agreed by
independent persons or entities under conditions that respect the arm's length
principle".
The regulations that allow for the elimination of double
taxation of income generated by PEs located abroad are as follows: firstly,
article 22 TRLIS, applicable to 2013 and 2014.
"Exemption
of certain income obtained abroad through a permanent establishment.
1.
Income obtained abroad through a permanent establishment located outside Spanish
territory shall be exempt when the following requirements are met:
a)
That the income of the permanent establishment derives from the carrying on of
business activities abroad, in the terms provided for in Article 21(1)(c) of
this Law.
b)
That the permanent establishment has been taxed by a tax of an identical or
similar nature to this tax, in accordance with the terms of the previous
article, and that it is not located in a country or territory classified by
regulations as a tax haven.
2.
The amount of negative income deriving from the transfer of a permanent
establishment shall be reduced by the amount of the net positive income
previously obtained from the permanent establishment.
3.
For these purposes, an entity shall be deemed to operate through a permanent
establishment abroad when, by whatever title, it has outside Spanish territory,
on a continuous or habitual basis, facilities or places of business in which it
carries out all or part of its activity. In particular, permanent
establishments shall be understood to be those referred to in paragraph a) of
section 1 of article 13 of the revised text of the Non-Resident Income Tax Act,
approved by Royal Legislative Decree 5/2004, of 5 March. If the permanent
establishment is located in a country with which Spain has signed an agreement
for the avoidance of double international taxation, which is applicable to it,
the provisions of that agreement shall apply.
4.
The system provided for in this Article shall not apply where the circumstances
set out in paragraph 3 of the preceding Article apply in respect of the taxable
person or the income obtained abroad. The option referred to in paragraph c) of
that paragraph shall be exercised for each establishment situated outside
Spanish territory, even where there are several in the territory of a single
country."
For the 2015 and 2016 tax periods, the LIS establishes
the following:
"Article
22. Exemption of income obtained abroad through a permanent establishment.
1.
Positive income obtained abroad through a permanent establishment located
outside Spanish territory shall be exempt when the same has been subject to and
not exempt from a tax of an identical or analogous nature to this Tax with a
nominal rate of at least 10 per cent, in accordance with the terms of paragraph
1 of the preceding Article.
Negative
income obtained abroad through a permanent establishment will not be included
in the tax base, except in the case of transfer of the permanent establishment
or cessation of its activity.
2.
Positive income deriving from the transfer of a permanent establishment in
respect of which the requirement for taxation under the terms of the preceding
Article is met shall also be exempt.
The
amount of the negative income derived from the transfer of a permanent
establishment or cessation of its activity shall be reduced by the amount of
the net positive income obtained previously which has been entitled to the
exemption provided for in this Article or to the double taxation deduction
provided for in Article 31 of this Law, derived therefrom.
3.
An entity shall be deemed to operate through a permanent establishment abroad
when, by whatever title, it has outside Spanish territory, on a continuous or
habitual basis, premises or places of business in which it carries on all or part
of its activity, or acts therein through an agent authorised to contract, in
the name and on behalf of the taxpayer, who habitually exercises such powers.
In particular, management headquarters, branches, offices, factories,
workshops, warehouses, shops or other establishments, mines, oil or gas wells,
quarries, agricultural, forestry or livestock farms or any other place of
exploration or extraction of natural resources, and construction, installation
or assembly work lasting more than 6 months shall be deemed to constitute a
permanent establishment. If the permanent establishment is located in a country
with which Spain has signed an agreement to avoid international double taxation
that is applicable to it, it will be subject to the provisions of that agreement.
4.
A taxpayer shall be regarded as operating through separate permanent
establishments in a particular country where the following circumstances are
present:
(a)
They carry out clearly distinguishable activities.
(b)
that they are managed separately.
5.
The income of a permanent establishment shall be deemed to be the income which
the permanent establishment would have derived if it had been a separate and
independent entity, taking into account the functions performed, the assets
used and the risks assumed by the entity through the permanent establishment.
For
these purposes, estimated income from domestic transactions with the entity
itself shall be taken into account in those cases in which this is established
in an applicable international double taxation avoidance treaty.
6.
The system provided for in this Article shall not apply where the circumstances
set out in paragraph 8 of the preceding Article apply in respect of income
obtained abroad. The option referred to in point (c) of that paragraph shall be
exercised for each permanent establishment outside Spanish territory, even
where there are several in the territory of a single country.
7.
In no case shall the provisions of this Article apply where the permanent
establishment is situated in a country or territory qualified as a tax haven,
unless it is a Member State of the European Union and the taxpayer proves that
it is established and operates for valid economic reasons and that it is
engaged in economic activities.
As far as international regulations are concerned, the
double taxation treaties (DTC) signed by Spain with each of the States where
the PEs are located determine what is to be understood by PEs and, in turn,
determine the way in which business profits are attributed to them.
In this respect, Article 5 of the OECD Model Tax
Convention on Income and on Capital, versions (2008), (2010) and (2014)
(hereinafter, MCOCDE) is often reproduced, which states:
"For
the purposes of this Convention, the term 'fixed place of business' means a
fixed place of business through which an enterprise carries on all or part of
its business.
2.
The term "permanent establishment" includes, in particular: (a) head
offices; (b) branches; (c) offices; (d) factories; (e) workshops; and (f)
mines, oil or gas wells, quarries or any other place of extraction of natural
resources.
...
5.
Notwithstanding paragraphs 1 and 2, where a person other than an independent
agent (to whom paragraph 6 applies) acts on behalf of an enterprise and has and
habitually exercises in a Contracting State powers enabling him to conclude
contracts on behalf of the enterprise, that enterprise shall be deemed to have
a fixed place of business in that State in respect of the activities which that
person carries on for the enterprise, unless the activities of that person are
limited to those referred to in paragraph 4 and which, if they had been carried
on through a fixed place of business, would not have qualified such fixed place
of business as a permanent establishment under the provisions of that
paragraph.
6.
An enterprise is not considered to have a permanent establishment in a
Contracting State merely because it carries on business in that State through a
broker, general commission agent or any other independent agent, provided that
such persons are acting in the ordinary course of their business.
7.
The fact that a company which is a resident of a Contracting State controls or
is controlled by a company which is a resident of the other Contracting State
or which carries on business in that other State (whether by means of a
permanent establishment or otherwise) does not of itself make either of these
companies a permanent establishment of the other".
Article 7 of the Conventions also generally overlaps with
Article 7 MCOCDE (2008 version), which states:
"Article
7 Business benefits.
1.
The profits of an enterprise of a Contracting State may be taxed only in that
State unless the enterprise carries on business in the other Contracting State
through a permanent establishment situated therein. If the enterprise carries
on business in such a manner, the profits of the enterprise may be taxed in the
other State, but only to the extent that they are attributable to that
permanent establishment.
Without
prejudice to the provisions of paragraph 3, where an enterprise of one
Contracting State carries on business in the other Contracting State through a
permanent establishment situated therein, there shall be attributed in each
Contracting State to that permanent establishment the profits which it would
have made if it had been a separate and distinct enterprise carrying on the
same or similar activities, under the same or similar conditions and dealing
entirely independently of the enterprise of which it is a permanent
establishment.
3.
In determining the profit of the permanent establishment, a deduction shall be
allowed in respect of expenses incurred for the purposes of the permanent
establishment, including management and general administrative expenses
incurred for the same purposes, whether incurred in the State in which the
permanent establishment is situated or elsewhere".
It follows from the above that transactions between an
entity (also referred to as Head Office, HQ) and its PEs can be classified as
either internal transactions (Article 7(2)) or expense allocations (Article
7(3)). This distinction is relevant because, although both types of
transactions are marked to market, traditionally a different way of valuation
has been established.
Article 7 is to be interpreted in the light of the
Commentary to the 2008 version of the MCOCDE, which incorporates the findings
of the 2008 OECD Report "Attribution of Profits to Permanent
Establishments" (hereinafter IABEP), Part I "General
Considerations" and Part IV "Specific Considerations for the
Application of the OECD Authorised Approach to Permanent Establishments of
Insurance Entities". In turn, the IABEP refers to the OECD Transfer
Pricing Guidelines (2010), (hereinafter "Guidelines"), insofar as a
transfer price has to be determined for the purpose of valuing domestic
transactions between the CC resident in Spain and PEs located abroad.
Specifically, Comments 17 and 18 to Article 7 of the
MCOCDE refer to the attribution of profits to PEs, pointing out the need to
carry out a functional and factual analysis; and to this end, they highlight
the need to analyse whether a given relationship between the CC and PEs should
be considered an internal transaction -Article 7.2 - or an indirect allocation
of expenses -Article 7.3.
These comments are reproduced below:
"In
order to determine the need for the adjustment under paragraph 2, it is
necessary to determine the profits that would have been realised
if the permanent establishment had been a distinct and separate enterprise
carrying on the same or similar activities, under the same or similar
conditions, and dealing entirely independently with the rest of the enterprise.
Paragraphs D-2 and D-3 of Part I of the "Report on Attribution of Profits
to Permanent Establishments" describe the two-step analysis by which such
a determination is made. This analysis allows the calculation of profits
attributable to all activities carried out through a permanent establishment,
including transactions with independent enterprises, transactions with associated
enterprises and internal transactions with other parts of the enterprise to
which they belong (e.g. internal transfer of goods or capital, or internal
provision of services - see, for example, paragraphs 31 and 32) with other
parts of the enterprise (following the second step of the above), according to
the pattern outlined in paragraph 2.
Comment
18. The first step in this analysis requires the identification of the
activities carried out through the PE. This should be done by applying a
functional and factual analysis (for which the guidelines contained in the
Transfer Pricing Guidelines for Multinational Enterprises and Tax
Administrations may be used). During the first phase, the economically
significant activities carried out by the PE and the responsibilities assumed
by the PE are identified. To the extent relevant, this analysis will consider
the activities and responsibilities of the permanent establishment in the
context of the activities and responsibilities of the enterprise as a whole, in
particular those parts of the enterprise that have internal transactions with
the permanent establishment. During the second phase of the analysis, the
consideration for such internal transactions should be determined by analogy
with the principles developed for the application of the arm's length principle
between associated enterprises (principles articulated in the Transfer Pricing
Guidelines for Multinational Enterprises and Tax Administrations) by reference
to the functions performed, assets used and risks assumed by the enterprise
through the permanent establishment and through the rest of the
enterprise".
In order to establish the distinction between which
charges imputed to PEs could correspond to internal transactions carried out
between the CC and the PEs and which charges would be identified with indirect
imputations of expenditure incurred by the CC for the purposes of the PEs, it
would be necessary, in accordance with the rules set out above, to carry out a
factual and functional analysis of the entities involved. Comments 14 to 17 and
19 to 22 on Article 7(2) of the MCOCDE and Comments 27 to 40 on Article 7(3) of
the MCOCDE elaborate on this distinction, providing the basis for the
assessment of internal transactions and relationships that cannot be classified
as such.
These comments are further reinforced by the criteria set
out in the OECD IABEP (2008); thus, in Part I, "General Considerations",
paragraphs 36 to 41 and 207 to 217 of this report, the keys or criteria for
verifying the existence of internal transactions and their treatment in general
are indicated.
Specifically, Paragraph 213 states:
"For
this purpose it will be necessary to determine whether there has been a
transfer of risks, liabilities and rewards with economic significance as a
result of the "internal transaction". To determine the transfer of
risk, liabilities and rewards in transactions between independent enterprises
it will normally be necessary to analyse the contractual terms of the
transaction. This analysis will follow the guidelines contained in paragraphs
1.28 and 1.29 of the Guidelines".
Part IV of the IABEP "Specific Considerations for
the Application of the OECD Authorised Approach to Permanent Establishments
(PEs) of Insurance Entities" discusses internal operations in the
insurance field; in particular Paragraphs 84/89 reproduced below refer to this
issue.
"Acceptance
of internal operations
84.
The acceptance (or not) of internal transactions between the PE and the rest of
the company of which it is part involves several aspects. Firstly, a PE is not
the same as a subsidiary, and is in fact not legally or economically separate
from the rest of the company of which it is part. It is understood as follows:
-
all parts of the insurance entity have the same credit rating, except where due
to host country regulation certain assets are placed in a fiduciary structure
so that they can only be used to cover claims arising in that country. This
means that internal transactions between the PE and the rest of the enterprise
of which it is a part should generally be valued on the basis that they share
the same credit rating; and
-
it is not possible for the rest of the undertaking to guarantee the credit
rating of the PE, or for the PE to guarantee the credit rating of the rest of
the undertaking of which it is a part.
85.
Secondly, internal transactions between a PE and the rest of the enterprise of
which it is part do not have legal consequences for the enterprise as a whole.
This implies that internal transactions between a PE and the rest of the
enterprise of which it is part need to be examined more closely than
transactions between two associated enterprises. It also implies a closer
scrutiny of the documentation that may exist (in the inevitable absence of, for
example, legally binding contracts) and an assessment of the uniqueness of the
event, whereby countries may require taxpayers to provide evidence of the
appropriateness of accepting the internal transaction.
86.
This need for further analysis means that a certain threshold has to be crossed
before an internal transaction can be accepted as equivalent to a transaction
that could have been carried out by independent companies at arm's length. Only
once that threshold has been crossed can the internal transaction be counted
for the attribution of profits under Article 7(2). The functional and factual
analysis will determine whether a real and identifiable event has occurred, and
whether it should be considered as an economically significant internal
transaction between the PE and another part of the business.
87.
Thus, for example, an accounting record and supporting documentation of an
internal transaction involving the transfer of economically significant risks,
liabilities and rewards is a useful starting point for profit attribution
purposes. Taxpayers are encouraged to prepare such documentation as it can
substantially reduce the possibility of controversy over the application of the
OECD approved approach. Tax administrations will give credit to such
documentation even if it has no legal value, insofar as:
-
is consistent with the economic nature of the undertaking's activities, as
determined by the functional and factual analysis;
-
the documented actions related to the domestic transaction, when viewed as a
whole, do not differ from those that would have been agreed upon by comparable
independent enterprises exhibiting commercially rational behaviour
or, if they differ, that the structure contained in the documentation provided
by the taxpayer does not prevent the tax administration from making a practical
determination of the appropriate transfer price; and
-
the internal transaction set out in the documentation provided by the taxpayer
does not contravene the principles underlying the authorised OECD approach,
e.g. by purporting to transfer segregated risks of the functions.
See
paragraphs 1.48 to 1.54 and 1.64 to 1.69 of the Guidelines, by analogy. See
also paragraph C-1(vi) of this Part IV in relation to domestic reinsurance.
88.
It is important to note, however, that the approach authorised by the OECD is
not intended, in general terms, to increase documentation requirements for
domestic transactions as compared to those for transactions between associated
enterprises. Moreover, as in the case of transfer pricing documentation
required under the Guidelines, documentation obligations should not result in
costs and burdens on the taxpayer that are disproportionate to the
circumstances.
89.
Thirdly, where internal transactions qualify for acceptance, their price should
be assessed on an arm's length basis, assuming that EP and the rest of the
company of which it is part are independent from each other, which should be done
by analogy with the Guidelines, following a functional and factual analysis.
Part IV also discusses, in some detail, the specific
functions and services of the insurance industry, including those set out in
paragraphs 26-47; in particular, paragraphs 34-37 deal with the underwriting
function and the activities necessary for its successful completion: (i) underwriting policy formulation, (ii) risk
classification and selection, (iii) pricing, (iv) risk retention analysis and
(v) acceptance of the insured risk.
Paragraph 35 provides an overview of this function, as
can be seen:
"35.
The objective of underwriting is not to select insured risks that will not
generate losses, but to avoid misclassification of the insured risk from the
point of view of policy pricing. Defining the conventions or practices to be
followed by underwriters is part of risk management and should be tailored to
the technical competencies and capabilities of the insurer's staff.
Underwriting policy can set general or precise parameters for determining the
amount of risk to be assumed, determine the nature and size of an insurer's
business, and, depending on the facts and circumstances of the contributor, be
one of the most important factors affecting the profitability of insurance
operations. Factors that particularly influence underwriting policy are as follows:
(1)
the financial capacity of the institution, in particular its surplus;
(2)
the regulatory framework for maximum risk-taking;
(3)
the technical competence and capacity of the staff;
(4)
the possibility of reinsurance by third parties and its cost; and
(5)
the strategic objectives of the insurer".
Comments 31 and 32 to Article 7 of the MCOCDE provide
clarification as to when a mark-up or profit should or should not be applied
to the cost of services:
"31.
In applying these principles to the practical determination of the profits of
the permanent establishment, the question arises whether certain costs incurred
by an enterprise can actually be regarded as expenses incurred for the purposes
of the permanent establishment, having regard to the separate and independent
enterprise principles of paragraph 2. Although independent enterprises
generally seek in their mutual relationships to realise
profits and, in transmitting goods or supplying services to other enterprises,
will charge normal market prices, there are circumstances in which certain
goods or services could not be purchased from an independent enterprise or in
which independent enterprises may agree to share the costs of certain
activities carried out jointly for their mutual benefit. In such circumstances
it may be appropriate to treat the costs incurred by the enterprise as if they
were expenses of the permanent establishment. The difficulty is to distinguish
between such circumstances and cases where the costs incurred by the enterprise
should not be treated as permanent establishment expenses but transfers of
goods or services between the head office and the permanent establishment
should be computed under the separate and independent enterprise principle at
prices which include an element of profit. The question is whether the
internal transfer of goods or services, whether temporary or permanent, belongs
to the type of transactions that the company, in the normal course of its
business, would charge to third parties at the normal market price, including
in the selling price the appropriate profit.
32.On
the one hand, the answer to that question will be in the affirmative if
the expenditure arises in the performance of a function having as its direct
object the sale of particular goods or services and the realisation
of profits through the permanent establishment. On the other hand, the answer
will be in the negative if, having regard to the facts and circumstances
of each individual case, the expenditure arises in the performance of a
function whose purpose is to rationalise the general
costs of the undertaking or to increase its sales generally."
SEVENTH - Application to the specific case.
Firstly, before analysing the main issue under
discussion, the claimant raises other interpretative issues, in relation to the
Agreements applicable to the case and the National Court Ruling of 10 July
2015. In relation to these, reference should be made to what was said by the
Inspectorate in the settlement agreement. Firstly, with regard to the
interpretation of the agreements and the regulatory changes they have
undergone, it should be noted that the analysis of the applicable regulations
shows that the internal and bilateral rules governing transactions between CCs
and PEs have not undergone any formal or substantial variation in the years
audited, nor have the comments incorporated in the OECD Model Agreement (2008)
undergone any alteration in their content with respect to the comments of the
previous versions.
Moreover, the above is corroborated by the DGT's
consultations of 2002 and 2017, to which the complainant herself refers,
insofar as both are coincident, among other things, because the Comments to
Article 7 in this respect have not been altered by the successive versions of
the MCOCDE.
Therefore, existing internal and bilateral regulations
have been respected at all times.
On the other hand, the Claimant refers to the NA's
judgment of 10 July 2015, which it has already done before the Inspectorate.
That judgment resolves a completely different issue from the one at issue here,
since it deals, specifically, with the attribution of free capital to a
financial PE, an issue closely related to the allocation of interest to the PE
for the use of outside capital, whereas, in this case, what is at issue is to
specify whether certain services provided by the CC to the PE should be
classified as internal operations or imputation of expenses.
In short, the
question to be resolved, in view of the claimant's allegations, is whether the
provision of rating services, typical of the insurance activity, carried out by
the aforementioned Departments of the entities to the PEs, should be classified,
as the Inspectorate points out, as internal operations, or as cost allocations,
as the claimant alleges.
As the
Inspectorate rightly points out, the distinction between an internal
transaction and an allocation of expenses is not without its difficulties,
which are further amplified in the case of activities involving the provision
of services, as is the case here. This distinction must be made on the basis of
an analysis of the regulations cited in the preceding legal grounds, and taking
into account the circumstances and peculiarities of each specific case.
In the
present case, it should be noted that this TEAC shares the Inspectorate's view
that the pricing activities analysed should be differentiated, in terms of
their nature, from the rest of the services provided by group entities to their
PEs, which can be referred to as general or administrative in nature. This is
because these are functions specific to the insurance sector.
A detailed description of the functions carried out by
the Technical Department and the Underwriting Department of the group entities
to which we are referring, which are provided for the benefit of the PEs, as
acknowledged by the entities themselves, is included in the file (diligence no.
3, file "DOCUMENTATION PT 7Z"):
"6.6.3.2.
Technical Direction
The
Technical Directorate has a staff of around 10 people organised
around the following four areas: pricing, underwriting, reinsurance and
underwriting.
Pricing
It
comprises the centralisation of information and
databases of subsidiaries to create policies and detect risk factors. This area
works "on demand" for the Group's entities.
Subscription
It
represents the bulk of the Technical Division's workload. This area is
responsible for underwriting risks, pricing products and drafting technical
notes.
The
Company's units request through the corporate website that the subscription
area determine the price of a specific product. The underwriting area analyses
the product and replies within days. Approximately 120 quotations are requested
each month.
The
more experienced units sometimes make their own quotations. The units in
France, COUNTRY_1, UK, COUNTRY_2 have significant technical area and autonomy.
The
main markets for which quotations are issued are the automotive, insurance,
financial and tourism sectors (banks, tour operators, insurance companies,
etc.). In general terms, the following policy is followed for quotations:
a)
For B2B transactions: individual quotations are made.
b)
For B2C and retail transactions (e.g. car dealerships), given the high volume
of requests, the Technical Directorate establishes general underwriting
guidelines (limits, risks, discounts, etc.) and the staff in the DDRR define
the rates to be applied in each case.
Rates
designed by the Technical Directorate can be adjusted to suit local markets.
Business units usually close 25% of quotations affirmatively.
Reinsurance
- Decisions are made on reinsurance or retention Decisions are made on reinsurance
or retention of underwritten risks. If the subsidiary needs to reinsure certain
operations, a reinsurance contract is offered by XZR or a third party.
In this case, the reinsurance contract and the reinsurance slip are prepared.
The control of reinsurance settlements is also carried out.
Issuance:
This includes drafting the technical aspects of the policy contract and
managing the traceability to track the profitability of the product/risk (an
internal code is assigned). Tracking is usually done by the relevant Regional
Directorate.
"1.7.
Underwriting Department
The
Underwriting Department also carries out certain activities on behalf of the
Company's branches. It is assigned the following functions and
responsibilities:
1.7.1.
Internal Policies and Standards
This
area is responsible for drawing up and issuing internal policies and rules on
the underwriting of contracts. The limits established for the underwriting of
transactions vary depending on the branch and the staff of each branch. It also
performs control and review functions for transactions exceeding the
established materiality thresholds.
Within
the Underwriting Department there is staff specialised
in the technical structuring (setting of conditions, pricing, etc.) of products
related to agricultural risks (i.e. those that may affect farms, livestock,
forestry, etc.) and life products".
The pricing services provided are core activities of both
CCs and PEs and are services that are essential to the successful completion of
insurance and reinsurance assistance activities vis-à-vis specific customers
and insurers and do not at any time fall within the scope of the EU Joint
Transfer Pricing Forum and the Guidelines as routine or low value-added
services.
The services under scrutiny contributed decisively and
essentially to increasing EP's sales, in particular by underwriting insurance
or covering the insured in reinsurance operations. This is a key aspect in
distinguishing so-called 'internal operations' from 'cost allocation', insofar
as the latter cannot be directly linked to a specific sale of the PE, but
contribute to rationalising the overall costs of the
company and to increasing sales in general.
Moreover, these functions are performed at the request of
the PEs and, if not performed by the complainant entities, the PEs would have
had to outsource such services to third parties.
By way of example: in order for the client/insured to
take out an insurance policy, the EP needs to price the premium, and it is this
premium pricing function that it asks the CC entity to perform.
Moreover, the provision of these services requires specialised personnel, such as insurance actuaries, among
others; and as regards the risks assumed, any incorrect decision in this area
has a considerable impact on the profit and loss account of PEs. On the other
hand, the performance of general or administrative services requires generally
qualified personnel and the risks assumed in their execution are less relevant.
It should be noted that it is true that, as the
complainant points out, the entities of the group are not exclusively dedicated
to pricing policies for independent third parties, among other issues because
those third parties would be their competence, but it is no less true that they
are qualified to perform this function since they have, as we have pointed out,
qualified personnel to do so (staff that the PEs do not have) and that in the
event that the entities were to perform them on behalf of third parties they
would obviously invoice such services at market value, i.e. including them in
the price of the policy, qualified staff to do so (staff that EPs do not have)
and that in the event that the entities were to perform them on behalf of third
parties, they would obviously invoice such services at market value, i.e.
including an appropriate profit in the sale price, and would not invoice at
cost, as is the case here.
Finally, the above considerations are reinforced by the
fact that, in the case of XZA, it has also provided this type of
services to its subsidiaries resident abroad, which have been classified as
internal operations, in accordance with the regularisation
carried out by the complainant in accordance with the A01-...43.
Therefore, this TEAC considers that the direct purpose
of the transactions carried out was the provision of services or sales by the
SOEs, and the realisation of profits through them, so
that, in accordance with the authorised approach of the OECD, deduced from
IABEP (2008) Part IV, this type of transaction between the CC and the SOEs can
be classified as an internal transaction, in the same terms as the
Inspectorate, rejecting the present allegation made by the claimant.
EIGHTH: The
second disputed issue with respect to the adjustments made for the application
of the regime of related-party transactions focuses on determining whether
there has been a transfer of the use of the XZ trademark by the entity XZ
España to other entities of the group. In
this regard, the claimant states that the existence of such a transfer of use
of the trademark that should be remunerated has not been established in the
contested settlement agreement and that, furthermore, in any event, the
valuation of the royalty that should have been paid by group entities is incorrect,
being contrary to the regulations for reasons of both a legal and economic
nature and for purely valuation reasons.
It is clear
from the facts of the case that the company XZ ESPAÑA is the owner of
the trade mark 'XZ', a trade mark used by certain companies in the
group, both national and foreign, as well as by certain permanent
establishments abroad, for the purposes of marketing insurance products in the
territories in which they operate.
As the complainant acknowledged to the Inspectorate,
despite this, there are no trademark and logo assignment contracts with the
different entities that used them. Furthermore, insofar as we are dealing with
related entities, the complainant provided the documentation on Transfer
Pricing that had been requested by the Inspectorate. There is no mention
therein of any amount having been paid to the trademark owner for the use of
the trademark by the different entities and branches of Group XZ which,
nevertheless, clearly used it.
On the basis of the above, the Inspectorate has concluded
that there was a transfer of the use of the "XZ" trademark to
the different entities of the group, insofar as the latter have been using this
trademark for the purpose of marketing the group's products in other countries,
thereby obtaining the corresponding profit. The justification and determination
of the market value of the fee payable to XZ Spain by the related
entities and their branches is contained in the Report on the valuation of the
income derived from the use of the XZ trademark, prepared by the
National International Taxation Office (hereinafter the ONIF Report).
However, as mentioned above, the complainant denies
before the TEAC that such assignment of the use of the trademark has taken
place and, in the alternative, in the event that the assignment is confirmed,
it points out that the assessment made in this regard by the ONFI, and shared
by the Inspectorate, would not be in accordance with the law.
We will now proceed to answer the various questions put
forward by the complainant in relation to the issue under discussion here.
NINTH.- First question: the existence or not of the
assignment of the use of the trademark.
The first
question that this TEAC must clarify is whether, in the case in question,
taking into account the characteristics of the insurance sector, and
particularly those of the Group under examination here, it can be concluded that,
as the Inspectorate stated, we are dealing with a transfer of the use of the
"XZ" trademark by XZ ESPAÑA to different entities of
the group and branches.
From the
facts in the file, this TEAC shares, a priori, the consideration put forward by
the Inspectorate that the group entities and branches are making use of an
internationally recognised trademark, the "XZ" trademark,
which, as we will see below, undoubtedly brings them a series of benefits.
The
complainant, in the statement of allegations, includes a series of reasons in
the section it calls "economic issues" with which it tries to
argue, in summary, the limited importance of the trademark in the insurance
sector (it considers that there are other variables of greater importance, such
as human capital and the capacity to offer competitive prices) and its limited
impact on the generation of the group's profit. These aspects are used to deny
the existence of the assignment of the use of the brand between group entities.
We now proceed to reply to the reasons put forward by the
complainant.
1. First of
all, the complainant alleges that it is unusual in the insurance sector to recognise identifiable intangibles in the form of a trade
mark. However, this assertion has already been refuted by the Inspectorate,
which, in the settlement agreement, showed that the annual accounts of a
relevant company in this sector (TW Group, one of the main competitors
of XZ Group), reported a trademark amount at the end of the 2016
financial year of almost 500 million euros. The above leads this TEAC to think
that if a company of such size, with similar characteristics to the
complainant, operating in the same sector as the latter and its main
competitor, owns a trademark valued in those terms, it is not so unusual to recognise such intangibles and entity XZ should also
have recognised it.
It is clear, and this is the TEAC's understanding, that
the brand is important in the insurance sector. In this case, the products are
marketed by the different entities of the group under a certain brand, the XZ
brand, which is of recognised prestige in the insurance sector (according
to the ONFI report, the XZ brand has been valued by specialised
companies such as ...; in particular, this company values the "XZ"
brand at .... million in 2013 and EUR ... million in 2015).
2. Another determining aspect of the importance of the
trademark is the investment in advertising, sponsorship and public relations
expenses. The complainant argues that such expenditure is modest and that,
moreover, it is borne by each of the entities of the group, so that the "XZ"
trademark would have been developed locally in the respective countries and
requiring a fee for its use would imply a duplication of expenditure for the
entities obliged to do so.
Firstly, the analysis of the file shows that XZ Spain
does incur significant advertising, sponsorship and public relations expenses
in order to maintain the relevance, differentiation, esteem and awareness of
its image and, thus, its brand. Specifically, section 2.4.2 of the 2016 Master
File states that: "The objective pursued by the Image and Corporate
Social Responsibility Department is to help create/develop a brand that
customers can associate with the idea of trust (the main driver of the
business). To this end, a global brand plan has recently been launched. This
plan has a time horizon of 3 to 5 years and aims at homogenising
content (i.e. common and global content)".
It is recorded in the file that the balance of the
accounting account 627 "Advertising, propaganda and public relations"
amounted to 19,323,605.76, 23,453,027.12, 41,101,058.14 and 45,157,933.43
in the financial years 2013, 2014, 2015 and 2016, respectively.
It is clear from the documents in the file that XZ
ESPAÑA has incurred significant advertising expenditure on events and persons
with international impact; for example, it has incurred expenditure on sports
sponsorship at the event ... and on sponsorship of sportsmen and women such as
.... These advertising expenses have a direct impact on its brand image and,
therefore, on all the markets in which the company is present, so it would be
logical for the owner of the brand to recover the investment in the
aforementioned advertising via royalties, at least in the proportional part of
the aforementioned investment that benefits the other entities of the group.
The ONFI Report, based on the study of the documents
provided by the complainant, states that "(...), the comparison of
advertising investment with the premiums received by geographical areas shows
that Spain is the territory that assumes the greatest advertising effort in
absolute terms and, in general, in relative terms, as well as being the origin
and the effective management headquarters of this multinational group".
By virtue of the above, we agree with the Inspectorate
that it would make no sense for the group to invest significant amounts of
money in advertising if it did not consider it relevant to look after its
brand, as it is undoubtedly the brand that allows the consumer to associate the
Group's strengths and virtues with the service offered.
3. BENEFIT OF THE GROUP. Notwithstanding the above, the
complainant stresses in the allegations made that what leads users to contract
an insurance service is not so much the brand, but other factors such as human
capital, the number of offices available or the adoption of competitive prices.
We consider that what has been said so far about the
importance of the brand, as a consequence of the investments in advertising,
does not mean that the favourable evolution of the
business and its profit is exclusively due to the use of the brand. The other
important factors mentioned by the claimant are also relevant variables to be
taken into account, which undoubtedly have an impact on the greater or lesser
demand for services in the insurance sector as a whole, and for the services of
Group XZ in particular, but such consideration does not lead to the
conclusion, as the claimant does in its statement of allegations, that the
trademark is an accessory or irrelevant asset or element for these purposes.
On the other hand, as is to be expected and from a
qualitative point of view, the use of a well-known and internationally
established brand, such as the "XZ" brand, which makes it
possible to identify the purchase of a service, such as taking out insurance,
with a prestigious and well-known group, which advocates quality of service and
trust, is beneficial, from a business point of view, for the group entities
that make use of it, which has a clear effect on their profit and loss account.
On this issue, it is worth pointing out an idea that the
complainant uses recurrently in its written submissions. The complainant
considers that if there is no growth in the number of policies and premiums, it
should not be argued that the use of the XZ brand generates a profit in
the subsidiaries. However, as the Inspectorate has already replied, it is not
possible to identify the increase in the profit of the brand with the increase
in premiums, nor that the growth, in certain countries, of the entities is exclusively
due to the value of the brand. Logically, increases and decreases in premiums
are due to multiple factors, including the disposable income of the inhabitants
of each country, tax regulations, civil liability legislation, among others,
and we cannot share the complainant's view that the brand does not generate a
profit in the event of a decrease in premiums in the market.
Furthermore, insofar as the enforceability of the royalty
is conditioned by the fact that the assignment produces a profit for the company
using the brand, there is greater evidence as to the usefulness of the brand in
the main markets in which the group operates and in which it is most relevant:
Spain, COUNTRY_1, Latin American countries, COUNTRY_2, COUNTRY_3, COUNTRY_4 and
COUNTRY_5.
Finally, one aspect that draws the attention of this TEAC
is the contrast between what the complainant demands that the administration
should do and the attitude of the administration in the inspection procedure.
On the one hand, it demands that the administration carry out a detailed
analysis of the valuation of the profit generated by the trademark for the
group, but, on the other hand, there is a total lack of contribution on the
part of the entity in providing specific information on the valuation of the
trademark that could facilitate the task it demands of the administration. In
fact, this information was requested by the Inspectorate, to which it replied
that "there are no studies available on the value or awareness and
relevance of the XZ brand in the years under inspection":
4. OWNER OF THE TRADE MARK. As to who is the owner of the
trademark, it should be noted that this is not a matter of debate, since it is
clear that the legal owner of the trademark is XZ ESPAÑA. However, in
this respect, the complainant argues that the economic ownership of the
trademark would be shared between all the different entities of the group,
insofar as it is directly related to the contributions that they may make to
the development of the intangible asset. In this way, what the entity seeks to
justify is that it would not be appropriate to establish, for XZ SPAIN,
a right to receive income derived from a possible royalty linked to the use of
that trade mark, to the development of which all the entities contribute.
It should be recalled, at this point, that article 105 of
the LGT states that the burden of proof lies with the party seeking to assert
its right. In this case, the claimant points out that the economic ownership of
the trademark is shared with the foreign group entities, but, nevertheless, it
does not provide evidence that would allow the Inspectorate to reach the same
conclusion. Specifically, only a list of advertising expenditure amounts by
country since 2014 has been provided, the complainant having indicated, in
response to the request of the Inspectorate in relation to the 2013 financial
year, that it does not have this detail.
Moreover, from the information in the file, it cannot be
concluded that each entity of the group made the alleged contribution or
contribution, nor does it make it possible to quantify it. Below, we share the
following considerations on this issue set out by ONFI in the report included
in the file:
"(...),
the analysis of the functions performed by each group entity is not conclusive
as an element determining the relative participation of each company in the
creation of value, but the exercise of a coordination function by the parent
company can be seen, which should not be underestimated".
It follows from the above that it has not been proven
that the different entities of the group made direct contributions or
contributions that would determine that, effectively, the economic ownership of
the trademark should be shared. Therefore, this TEAC must consider, given the
existing evidence, that both the legal and economic ownership of the trademark
corresponds to the entity XZ ESPAÑA.
In short, it is clear from the facts set out above that
certain entities of the group used, and use, for the marketing of their
services and products, a relevant and internationally established trademark,
the "XZ" trademark, which gives them a prestige in the market
that directly and undoubtedly has an impact on their sales figures, with the
consequent increase in their economic profit.
It is clear from the above that there was, in the years
audited, a transfer of use of an established, international brand, valued by
independent third parties (according to the ONFI report, according to ...,
between ... and .... million euros in the years under review) and maintained
from a maintenance point of view (relevant advertising and promotional
expenses). Therefore, it is reasonable to conclude, as does the Inspectorate,
that, in a transaction of this type - the assignment of the "XZ"
trademark - carried out at arm's length, a payment for the use of the
intangible asset would have been made to its owner, without prejudice to the
fact that the value assigned to the assignment of use of the aforementioned
trademark may be disputed; but what seems clear, and this is what the TEAC
states, is that it is an intangible asset whose assignment of use has value.
In conclusion, the TEAC considers that the entity
owning the trademark (XZ SPAIN) had an intangible asset and transferred its
use, for which it should receive income; by transferring the use of the asset
to group entities, both domiciled in Spain and abroad, it is appropriate to
calculate that income for XZ SPAIN by applying the regime for related-party
transactions.
TENTH: Second question: Valuation of the royalty.
Having determined the existence of an assignment of the
use of the trade mark by the proprietor of the trade mark XZ, XZ
ESPAÑA, to certain entities of the group, that entity should have received
remuneration for that assignment, under conditions of free competition, as we
have concluded in the preceding GROUNDS OF LAW.
In order to determine the amount of such rent or
remuneration, and as mentioned above, the Inspectorate requested the valuation
of the royalty that should have been received by XZ Spain from ONFI. As
a result, ONFI issued a report, included in the file, in which it reached the
following conclusions:
"As
a summary of the above, the following key points can be highlighted:
1º.
Brands are valuable assets of companies insofar as they are capable of
generating future profits.
2º.
Trademarks are subject to valuation, both in a hypothetical transfer and in the
assignment of use, with said value resting on the cash flows or profits they
generate.
3º.
Paragraph 6.82 of the OECD Guidelines (2017 version) provides that where a
group member is the owner of a trademark or other intangible asset bearing the
group name, and the use of that name confers an economic benefit for group
members other than the legal owner of the intangible asset, it is reasonable to
conclude that an arm's length payment for that use would have been made in
arm's length transactions.
4º.
The XZ brand is an intangible that has been subject to valuation by specialised firms such as ..... In particular, this firm
values the "XZ" brand at .... million euros in 2013 and in ...
million in 2015. XZ Spain, the legal owner of this brand, is also the
insurance company of the XZ group in Spain in the Non-Life branch.
5º.
In view of the group's transfer pricing documentation for the 2016 financial
year, the subsidiaries of the XZ group generally operate on their own
account, issuing the corresponding premiums and assuming the specific risks and
benefits of the insurance business, without prejudice to the coordination tasks
inherent to any multinational group, and therefore cannot be classified as
limited risk entities. In the exercise of these functions, they control assets
and assume risks, among others, those arising from the assignment of the right
to use the trademark, permitted by the owner of intangibles, and it is also
clear from the transfer pricing documentation that this assignment of the use
of the trademark is not subject to remuneration, either directly or indirectly.
6º.
It is understood that the fact that PAÍS_2r is a relevant and internationally
established trademark confers an economic benefit to its users, who will
undoubtedly be in better conditions in the marketing of their services under
the protection of this trademark than in the absence of it and, therefore, in
transactions carried out under arm's length conditions, a payment would have
been made for this use.
7º.
There are databases containing licensing contracts for the assignment of
intangibles in which market references for the remuneration of intangibles can
be obtained. The application to a specific case of royalties derived from other
contracts made by third parties requires that the object of valuation and the
contracts found are comparable.
8º.
The estimate of the remuneration that XZ Spain should receive for the
assignment of the right to use the trademark has been carried out in two
stages, in the absence of internal market comparables within the XZ group
itself.
Firstly,
a search for external comparables of other brand assignment contracts in the
insurance and financial sector was carried out. The results are shown in
Section 6.1. Free Comparable Prices Methodology.
The result obtained from this
market approach is not considered significant due to the limited comparability
of the contracts that have been located (whose fees generally range between 5%
and 10% of premiums or revenues), a circumstance that has led this Valuation
Team, in a second stage, to estimate the fee based on the methodologies
analysed in section 6.2. Other generally accepted valuation methods and
techniques.
9º. From an economic point of
view, the profits generated by a brand are included in the overall profit
obtained by the business as a whole, the valuation consisting of a delimitation
of the profits generated by the brand with respect to those derived from the
rest of the assets with which the business operates.
10º. As stated in paragraph 6.153
of the OECD Guidelines, valuation techniques may be used to quantify a royalty.
In particular, those based on income or profit that relate the value of an
asset to the cash flows or profits from its operation or sale at the end of a
specified period.
11º.
To this end, estimates must be made of the value of the assets or the evolution
of the company's financial figures and, in certain cases, also of the
appropriate discount rate for an alternative investment in terms of
profitability and risk, based on data observable on the market or that can be
inferred in view of comparable situations.
12º.
The two approaches used in this dossier lead to similar magnitudes of the
market fee, the average of the results obtained being as follows:
|
2013 |
2014 |
2015 |
2016 |
|
|
INCOME
APPROACH |
0.54% |
0,43% |
0,54% |
0,53% |
|
ENFORQUE
BENEFITS |
0,43% |
0,43% |
0,48% |
0,52% |
|
AVERAGE |
0,49% |
0,43% |
0,51% |
0,53% |
On the basis of the above data,
it is considered that the application of an average royalty of 0.43% on
the premiums for the assignment of use of the XZ brand would be in line
with the financial data available and would comply with the arm's length
principle.
13º. In any case, the
remuneration to be received by the owner of a trademark should not be less than
the advertising expenses incurred to maintain the value of the asset, because
the opposite would be equivalent to considering the trademark to be worthless,
as the owner does not recover the advertising investment made in support of the
intangible asset.
14º.
Finally, it should be remembered that the enforceability of the royalty is
conditioned by the fact that the assignment produces a profit for the company
using the trademark. And in this sense, it seems reasonable to consider that it
is in the main markets in which the group operates and in which the brand is
most relevant: Spain, COUNTRY_1, Latin American countries, COUNTRY_2,
COUNTRY_3, COUNTRY_4 and COUNTRY_5, where there is greater evidence as to the
benefit to the assignees of the use of this brand.
Furthermore, it seems reasonable
to consider that between independent parties a suspension of the royalty could
be agreed in initial situations (to develop the market) or subsequent
situations maintained over a reasonable period of time (such as three years),
of losses derived from normal business operations, i.e. not due to exceptional
situations or improper to the orderly management that should be required of the
licensee.
Finally, with the information
available, the fee should be quantified on the basis of the premiums obtained
by each entity, after introducing the relevant consolidation adjustments
("Reinsurance" and "Global Risk" areas), in order to
prevent internal operations between group entities in these segments from
distorting the reiterated financial benefit and, therefore, the economic value
that the intangible contributes to the transferee company.
However, the complainant does not accept the valuation
made by ONFI in the aforementioned report, considering that it does not comply
with the transfer pricing regulations in force, and in the allegations
submitted a list of legal, economic and valuation issues that justify this
assertion.
We will now proceed to answer the various questions
raised by the complainant with regard to the assessment made by ONFI, for the
purposes of determining whether or not it is in accordance with the law.
Eleventh - Applicable regulations.
Firstly,
reference should be made to the regulations governing the valuation of
related-party transactions, in this case, the assignment of the use of a
trademark to entities resident in Spain and their branches abroad and to
entities resident abroad belonging to the same group.
Therefore, with regard to the first group of entities,
for the purposes of valuing the transaction, the provisions of article 16 of
Royal Legislative Decree 4/2004, of 5 March, approving the revised text of the
Corporate Income Tax Act (TRLIS) and 18 of Corporate Income Tax Act 27/2014, of
27 November (for the 2015 and 2016 financial years) must be applied.
"Article
16. Related transactions.
Transactions
carried out between related persons or entities shall be valued at their normal
market value. The normal market value shall be understood to be that which
would have been agreed by independent persons or entities under conditions of
free competition.
2.º
The tax authorities may check that transactions carried out between related
persons or entities have been valued at their normal market value and, where
appropriate, make the necessary valuation adjustments (...)
2.
(...)
3.
The following shall be considered to be related persons or entities:
(a)
an entity and its members or participants.
(b)
an entity and its directors or managers.
(c)
an entity and the spouses or persons related by blood or marriage up to the
third degree of consanguinity or affinity to the partners or participants,
directors or administrators.
(d)
two entities belonging to a group.
(e)
an entity and the members or venturers of another entity, where both entities
belong to a group.
(f)
an entity and the directors or managers of another entity, where both entities
belong to a group.
(g)
an entity and the spouses or persons related by blood or marriage up to the
third degree of consanguinity or affinity to the partners or participants of
another entity when both entities belong to a group.
(h)
an entity and another entity in which the former has an indirect holding of at
least 25 per cent of the share capital or own funds.
i) Two entities in
which the same shareholders, participants or their spouses, or persons related
by blood or marriage up to the third degree, directly or indirectly, directly
or indirectly, hold at least 25 per cent of the share capital or equity.
j)
An entity resident in Spanish territory and its permanent establishments
abroad.
k)
An entity not resident in Spanish territory and its permanent establishments in
Spanish territory.
(l)
Two entities forming part of a group taxed under the cooperative group system
In
cases where the relationship is defined on the basis of a shareholder or
unit-holder-entity relationship, the shareholding must be equal to or greater
than 5 per cent, or 1 per cent in the case of securities admitted to trading on
a regulated market. The reference to directors shall include both de jure and
de facto directors.
A
group exists when an entity has or may have control over one or more other
entities according to the criteria established in Article 42 of the Commercial
Code, regardless of their residence and regardless of the obligation to prepare
consolidated annual accounts.
4.
1. In order to determine the normal market value, one of the following methods
shall be applied:
a)
The comparable free price method, which compares the price of the good or
service in a transaction between related persons or entities with the price of
an identical or similar good or service in a transaction between independent
persons or entities in comparable circumstances, making, if necessary, the
necessary corrections to obtain equivalence and to take into account the
particularities of the transaction.
b)
Cost plus method, whereby the margin customary 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 to take into
account the particularities of the transaction.
c)
Resale price method, which subtracts from the selling price of a good or
service the margin applied by the reseller itself in identical or similar
transactions with independent persons or entities or, failing this, the margin
applied by independent persons or entities to comparable transactions, making,
if necessary, the necessary corrections to obtain equivalence and to take into
account the particularities of the transaction.
2.
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:
(a)
the profit or loss apportionment method, which allocates to each related person
or entity that jointly enters into one or more transactions the share of the
common profit or loss arising from that transaction or transactions on a basis
that appropriately reflects the terms that would have been entered into by
independent persons or entities in similar circumstances.
b)
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 to take into account the particularities
of the transactions.
(..)"
Article 18.4 of the LIS refers to the following valuation
methods:
"For
the determination of the market value, any of the following methods shall be
applied:
a)
The comparable free price method, which compares the price of the good or
service in a transaction between related persons or entities with the price of
an identical or similar good or service in a transaction between independent
persons or entities in comparable circumstances, making, if necessary, the
necessary corrections to obtain equivalence and to take into account the
particularities of the transaction.
b)
Cost plus method, by which the usual mark-up on identical or similar
transactions with independent persons or entities or, failing this, the mark-up
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 to take into
account the particularities of the transaction.
c)
Resale price method, which subtracts from the selling price of a good or
service the margin applied by the reseller itself in identical or similar
transactions with independent persons or entities or, failing that, the margin
applied by independent persons or entities to comparable transactions, making,
if necessary, the necessary corrections to obtain equivalence and to take into
account the particularities of the transaction.
(d)
the profit or loss apportionment method, which allocates to each related person
or entity that jointly enters into a transaction or transactions the share of
the common profit or loss arising from that transaction or transactions on a
basis that appropriately reflects the terms that would have been subscribed to
by independent persons or entities in similar circumstances.
e)
Net operating margin method, whereby transactions with a related person or
entity are attributed the net result, calculated on the basis of costs, sales
or the most appropriate amount based on the characteristics of identical or similar
transactions between independent parties, making, where necessary, the
necessary corrections to obtain equivalence and to take into account the
particularities of the transactions.
The
choice of valuation method shall take into account, inter alia, the nature of
the related party transaction, the availability of reliable information and the
degree of comparability between related and unrelated transactions.
Where
it is not possible to apply the above methods, other generally accepted
valuation methods and techniques that respect the arm's length principle may be
used".
The Explanatory Memorandum of Law 36/2006 (which revised
Article 16 of the TRLIS) and the LIS provide for the use of the OECD Transfer
Pricing Guidelines to interpret the domestic transfer pricing regulations, to
the extent that they do not contradict what is expressly stated therein and in
their implementing regulations.
Chapter II of the Guidelines regulates the methodology to
be used for the determination of transfer prices; we highlight the following
precepts:
"The
selection of a transfer pricing method always aims at selecting the most
appropriate method for the particular circumstances under consideration. For
this to be the case, the selection process must weigh the advantages and
disadvantages of the methods accepted by the OECD, the appropriateness of the
method under consideration in view of the nature of the controlled transaction
(as determined by a functional analysis), the availability of reliable
information (in particular on unrelated comparables) necessary to apply the
selected method or other methods, and the degree of comparability between
controlled and unrelated transactions (including the reliability of
comparability adjustments necessary to eliminate material differences between
them). There is no single method appropriate for all situations, nor is it necessary
to demonstrate that a particular method is not appropriate in the
circumstances".
"2.8
The guideline in paragraph 2.2 that the selection of a transfer pricing method
should always aim at the most appropriate transfer pricing method in each case does
not mean that all transfer pricing methods should be thoroughly analysed or
tested until the most appropriate transfer pricing method can be selected. As a
matter of good practice, the selection of the most appropriate method and
comparables should be properly substantiated and be part of a standardised search process as proposed in paragraph
3.4".
2.9
In addition, multinational groups remain free to apply methods not
described in these Guidelines (hereinafter referred to as "other
methods") to determine their prices, provided that they satisfy
the arm's length principle as described in these Guidelines. However, these
other methods should not be used as a substitute for OECD-recognised methods
where the latter are more appropriate in view of the facts and circumstances of
the case. Where the other methods are used, their choice should be supported by
an explanation of why the OECD-recognised methods are considered to be less
appropriate or impracticable in the particular circumstances, and why the other
method selected is considered to provide a more satisfactory solution.
Taxpayers should retain the information relating to their transfer pricing and
be prepared to provide it. See Chapter V for documentation.
2.16
In considering whether related and unrelated transactions are comparable,
account should be taken of the effect on prices of other broader functions of
the firm and not just the degree of comparability of the product (i.e. the
factors determining comparability discussed in Chapter I). Where there are
differences between the tied and the untied transaction or between the
companies involved in such transactions, it may be difficult to arrive at
sufficiently precise adjustments to eliminate the price effects of these
differences. The difficulties encountered in attempting to make such precise
adjustments should not automatically rule out the possibility of applying the
comparable free price method. Practical reasons lead to a more flexible
approach allowing the use of the comparable free price method, supplemented if
necessary by other appropriate methods to be assessed according to their
relative accuracy. Every effort should be made to adjust the data so that they
can be used appropriately in the comparable free price method. As with any
other method, the relative reliability of the comparable free price method is
conditional on the degree of precision with which adjustments can be made to
achieve comparability."
On the other hand, they devote Chapter V to a series of
specific considerations applicable to intangible assets, as is the case here,
of which the following paragraphs are worth highlighting:
"6.13.
The general indications given in Chapters I, II and III for the application of
the arm's length principle are also valid for the determination of transfer
prices between associated enterprises in the case of intangible assets.
However, this principle may seem particularly difficult to apply in related
party transactions involving intangible assets, because such assets may have a
specific character that complicates the search for comparables and sometimes
makes it difficult to determine the value at the time of the transaction. In
the same vein, for commercial reasons that are entirely legitimate in view of
the relationships between them, associated enterprises may structure their
transactions, in certain cases, according to a formula that independent
enterprises would not consider (see paragraphs 1.11 and 1.64).
(...)
6.20
When applying the arm's length principle to related party transactions
involving intangible assets, specific factors affecting comparability between
related and unrelated transactions should be taken into account. These
factors include the expected benefits to be derived from the intangible asset
(which may be determined by means of a net present value). Other
factors include: any limitations on the geographic scope in which the rights
may be exercised; restrictions on the export of goods by reason of the transfer
of rights; the exclusive or non-exclusive nature of the rights transferred;
capital expenditure (to build new plant or acquire special machinery), start-up
costs and development work required by the market; the assignability of the licence obtained, the licensee's distribution network, as
well as whether the licensee is entitled to participate in further development
of the asset by the licensor."
(...)
6.26
When high-value intangible assets are involved, it can be difficult to identify
comparable transactions between independent enterprises. Therefore, traditional
transaction-based methods and the net operating margin method will be difficult
to apply, particularly when both parties to the transaction have valuable
intangible assets or unique assets used in the transaction that distinguish it
from the operations of potential competitors. In such cases, the profit split
method may be appropriate, although its application may pose problems."
The body of standards contained in the aforementioned
Guidelines has been endorsed and reinforced by the 2017 version, incorporating
new guidelines to be taken into account in the valuation of intangible assets.
"6.33
Applying the provisions of Chapters I to III to address these issues can be
very difficult for a variety of reasons. Depending on the facts of the
particular case involving intangible assets, the following factors, among
others, may pose difficulties:
I.
Lack of comparability between transactions involving intangible assets carried
out between associated enterprises and those that can be identified between
independent enterprises.
II.
Lack of comparability between the intangible assets in question
III.
Ownership or use of different intangible assets by different associated
enterprises within the multinational group
IV.
The difficulty of isolating the effect of a particular intangible asset on the
multinational group's income
V.
The fact that different members of the multinational group may engage in
activities related to the development, improvement, maintenance, protection and
operation of an intangible asset, often to a degree and with a level of
integration not observed among independent enterprises.
VI.
The fact that the contributions made by different members of the multinational
group to the value of the intangible asset are made in periods other than those
in which the return associated with the intangible asset is realised;
and
VII.
(...)
Despite
these potential challenges, the application of the arm's length principle and
the provisions of Chapters I to III within an established framework can, in
most cases, allow for an appropriate allocation of the benefits obtained by the
multinational group from the exploitation of intangible assets.
6.34
The framework for analysing transactions in intangible assets between
associates requires the following steps, consistent with the guidelines for
identifying business or financial relationships contained in Section D.1 of
Chapter I:
i) Specifically
identify the intangible assets used or transferred in the operation and the
specific economically significant risks associated with the development,
enhancement, maintenance, protection and operation of the intangible assets;
ii)
Identify the totality of contractual arrangements, paying particular attention
to determining the legal ownership of intangible assets based on the terms and
conditions of the legal agreements, including relevant registrations, licence agreements and other appropriate contracts, as well
as other indicators of legal ownership and contractual rights and obligations,
including the risks contractually assumed in the relationships between the
associated companies.
iii)
Identify the parties that perform the functions (in particular the significant
functions described in paragraph 6.56), use assets and manage risks related to
the development, enhancement, maintenance, protection and operation of
intangible assets through functional analysis, and in particular which parties
control outsourced functions and control specific economically significant
risks.
(iv)
confirm the consistency between the terms of the relevant contractual
arrangements and the parties' behaviour, and
determine whether the party assuming the economically significant risks under
step 4(i) of paragraph 1.60 controls the risks and
has the financial capacity to assume the risks related to the development,
enhancement, maintenance, protection and operation of the intangible assets.
v)
Define the actual related party transactions related to the development,
enhancement, maintenance, protection and operation of intangible assets, taking
into account the legal ownership of the intangible assets, the other
contractual relationships arising from the relevant registrations and
contracts, and the behaviour of the parties,
including their relevant contributions of functions, assets and risks, taking
into account the framework for risk analysis and allocation developed in
Section D.1.2.1 of Chapter I.
(vi)
Where possible, determine arm's length prices for such transactions that are
consistent with each party's contribution to the functions performed, assets
used and risks assumed, unless the guidelines in Section D.2 of Chapter I
apply.
Section B2 of that Chapter discusses the application of
the arm's length principle to situations involving intangible assets and
focuses on the functions, assets and risks related to intangible assets
(paragraphs 6.47 to 6.72).
Here are some other paragraphs that we consider important
in relation to the case at hand:
"6.137.
When the comparability analysis identifies reliable information relating to
comparable unrelated transactions, the determination of the arm's length price
of the transfer of intangible assets or rights to intangible assets may be
based on such comparables after making appropriate and reliable comparability
adjustments.
6.138.
However, comparability analysis (including functional analysis) for
transactions involving the transfer of intangible assets or rights to intangible
assets will often reveal that there are no unrelated transactions for which
comparability is reliable for determining price and other arm's length
conditions. This may occur if the intangible assets under consideration have
unique characteristics, or if they are of such significance that they are
transferred only between associated enterprises. It may also occur because of
the unavailability of data on potentially comparable transactions or because of
other factors. Regardless of the lack of reliable comparables, it is usually
possible to determine the arm's length price and other terms of a related party
transaction.
...;
6.153
In situations where reliable comparable unrelated transactions cannot be
identified from the transfer of one or more intangible assets, it is also
possible to use valuation techniques to calculate the arm's length price of
intangible assets transferred between associated enterprises. In particular,
the application of income-based valuation techniques, and more specifically valuation
techniques based on the calculation of the present value of expected future
cash flows or income streams from the operation of the intangible asset being
valued, can be particularly useful if applied correctly. Depending on the
facts and circumstances, both taxpayers and tax administrations may use
valuation techniques as part of one of the five OECD transfer pricing methods
described in Chapter II, or as a useful tool for determining arm's length
prices.
6.156.
It is not the intention of these Guidelines to provide an exhaustive summary of
valuation techniques used by valuation practitioners. Nor is it intended to
endorse or reject one or more valuation standards used by professional
accountants or valuers, or to specifically categorise
or endorse one or more particular valuation techniques as particularly
appropriate for use in the context of a transfer pricing analysis. However,
where valuation techniques are applied with due regard to these Guidelines, the
specific facts of the case, recognised valuation practices and principles and
with due consideration of the validity of the assumptions underlying the
valuation and the consistency of those assumptions with the arm's length
principle, these techniques may be useful tools for transfer pricing
analyses where reliable comparable uncontrolled transactions are not available.
However, see paragraphs 6.142 and 6.143 for a discussion of the reliability
and application of valuation techniques based on the development costs of intangible
assets.
6.157.
Valuation techniques that calculate the present value of expected future
cash flows from the operation of the transferred asset(s) can be particularly
useful when applied correctly. These valuation techniques have many
variants. Broadly speaking, they involve calculating the value of an
intangible asset based on the estimated value of the cash flows that the
intangible asset is expected to generate over its expected remaining useful
life. This value can be estimated by calculating the present value of the
expected cash flows17. According to this approach, valuation requires, inter
alia, the realistic and reliable definition of financial forecasts, growth
rates, discount rates, useful life periods of intangible assets and tax
consequences of the transaction. It also requires, where appropriate, taking
into account terminal values. Depending on the facts and circumstances of each
case, the calculation of the present value of the expected cash flows from the
operation of the intangible asset must be evaluated from the perspectives of
both parties to the transaction to arrive at an arm's length price. This arm's
length price will be somewhere in the range of present values calculated from
the perspective of the transferor and the acquirer. Examples 27-29 in the Annex
to Chapter VI illustrate the contents of this section.
...;
6.162.
The following sections identify some sensitive issues that should be taken into
account in assessing certain important assumptions underlying the calculations
made in a valuation model based on discounted cash flows. These issues are
important in determining whether a particular valuation technique has been
applied reliably. Notwithstanding the various sensitive issues mentioned above
and detailed in the following paragraphs, depending on the circumstances, the
application of this valuation technique, either as part of one of the
five OECD transfer pricing methods or as a useful tool, may be more reliable
than the application of any other transfer pricing method, especially where
there are no reliably comparable unrelated transactions."
The analysis of the applicable legal framework shows that
the valuation of a trademark is a complex exercise that allows for a variety of
methods to be used by both the taxpayer and the administration.
Next, having limited the legal framework to which we must
refer, we will respond to the issues raised by the complainant, essentially
those relating to legal and valuation aspects, with respect to ONFI's valuation
of the licence fee.
As we have already mentioned, the complainant focuses the bulk of its
allegations on arguing that the valuation of the transfer of the use of the
trademark carried out by ONFI, at the request of the Inspectorate, is not in
accordance with transfer pricing regulations, because it does not respect the
valuation contemplated in articles 16 of the TRLIS and 18 of the LIS, nor the
procedure contemplated in the OECD Guidelines.
TWELFTH - Answer to the questions raised.
First - Methodology used.
The first issue to be resolved relates to the methodology
used by ONFI for the valuation. On this issue, the claimant alleges that the
body arbitrarily ruled out the application of traditional methods to the case,
based on incorrect premises, without following the mandatory hierarchy of
methods for the 2013 and 2014 financial years and without adequately justifying
its choice for the 2015 and 2016 financial years.
In view of
the Report prepared by ONFI on the valuation of the rents derived from the use
of the trademark XZ, included in the file, we note that ONFI made a
first attempt to determine the royalty value using the Comparable Free Price
method (detailed in point 6.1 of the Report):
"In
the determination of the comparable free price, following the OECD Transfer
Pricing Guidelines (Chapter III: Comparability analysis) it is indicated that
the use of commercial databases is allowed to obtain external comparables.
In
accordance with this criterion, a search for market comparables was carried out
in RoyaltyStat, which is a database of SEC
(Securities Exchange Commission) licence agreements
and other sources. This first stage is described in this section of the Report
and in the Annex to the Report entitled "CUP "28.
Thus,
searches were carried out on 25 July 201929 using the following criteria:
In
the first search, the industry selected was insurance, in order to
obtain comparables that were as close as possible to XZ's business.
With
regard to the type of contract, only the subtypes "copyright",
"trademark", "brand", "trademark",
"modification" and "sub-licensing" were marked. In
addition, to avoid distortions, the exclusion of the subtypes
"patent", "technology", "software",
"franchising", "know-how", "services" and
"purchase of assets" was marked.
Finally,
contracts involving related parties were also excluded from the search.
The
search with the above criteria yielded only 7 contracts, which can be consulted
in the Excel file "search 1 insurance".
From
this initial set of potentially comparable contracts, a manual review process
was carried out, in which all are considered to be rejected. The reasons for
rejection are as follows:
Contracts
L15838 and L12427 are rejected as they are royalty-based contracts expressed in
monetary units.
-Contract
L10707 is rejected for documenting the assignment of the use of cartoon
characters in the promotion of pet insurance.
-Contract
L10734 is rejected as a modification of the previous contract L10707.
-Contract
L19543 documents the agreement between an Association of Physicians of ... and
an insurance company to use the name of the former in the marketing of
professional liability policies in the state of ..... It entails another set of
commitments between the parties. To the extent that the users appear to be
physicians (the policy appears to cover professional liability, not health
insurance) from the same state as the Association, the royalty appears to
resemble a discount on policies channelled through
the Association, and thus does not appear to be a comparable contract.
-Contract
L18225 is also ruled out on the grounds of its subject matter, since what is
assigned is the use of a firearms trademark, the licensor being a private
security company. Finally, contract L6599 would be questionable because it
falls within the framework of a joint venture agreement.
Given
the lack of valid comparables resulting from the previous search limited to the
insurance sector, specific to the case under analysis, a second search for
comparables was carried out, broadening the sectoral scope in order to obtain a
wider sample of contracts. Thus, this time the financial services industry was
selected as a filter.
The
parameters of this new RoyaltyStat search were the
same as those selected for the first search.
Firstly,
with regard to the type of contract, the only sub-types of
"copyright", "trademark", "trademark",
"modification" and "sub-licensing" were marked.
Again,
in order to avoid distortions, the exclusion of the sub-types
"patent", "technology", "software",
"franchising", "know-how", "services" and
"purchase of assets" was marked.
Finally,
contracts involving related parties were also excluded from the search.
As
can be seen in the attached Excel "Search 2 financial", using these
parameters the sample of contracts obtained amounts to 14 results.
However,
having carried out a manual review, it can be concluded that none of the
contracts resulting from the search is considered valid as comparable. The
reasons for this are as follows:
-Contracts
L35061, L30855, L25110 and L16368 are rejected because the royalty base is the
average of the assets traded daily (or the aggregate of these). All of them
concern trademarks related to credit rating agencies or investment selection
systems, except contract L35061, which concerns the use of a foundation's
trademark by a fund.
-Contracts
L16545 and L12234 are also not considered valid for comparability purposes on
the ground that the royalty is expressed in monetary units in relation to loans
distributed by the licensee. Similarly, contracts L16343 and L10209 are
rejected as they concern monetary royalties in relation to accounts, cards and
other financial products marketed by the licensee.
-Contract
L6630 is rejected on the grounds of its subject matter, as it concerns a licence to use the trademark and web domain of a luxury
real estate agency.
-We
would also reject contracts L4810 and L33227 as they only concern copyright.
The former concerns intellectual property to produce and market financial
seminars, while the latter concerns the image right of a sportsman to promote
certain educational products.
-Contract
L21140 is rejected because its forms of remuneration include payment in shares.
Finally,
contract L16665 is a sub-licence to COUNTRY_2r for
the branding of an investment selection method ("CAN SLIM Select") to
operate, advertise and market an investment fund. The royalty rate is variable
and there are annual caps based on fund assets and sales charges.
The
last contract, L316, concerns a licence to use the trademark, trade name,
copyright and logo of "coolsavings.com", a promotional codes website
with commercial discounts, to sell credit cards. The
royalty base is the purchases made by users with the credit cards (Royalty
0.10%).
In
the absence of comparable contracts it is not feasible to apply the comparable
free price method, nor are the other "traditional" transfer pricing
methods (cost plus, resale price, net operating margin and profit sharing)
considered applicable to the case at hand, so it is necessary to estimate the
value of the royalty using the alternative methods of determining market
value".
The analysis
carried out by ONFI showed that there were neither valid internal nor external
comparables available, which led it to conclude that it was not appropriate to
apply the Free Comparable Price method or the other traditional methods, as it
was not possible to approximate a reliable value of the market royalty. By
virtue of the foregoing, the Commission therefore decided that it was
appropriate to apply alternative methods, provided that the arm's length
principle was complied with:
"In order to estimate the
market royalty, the first aspect to be studied is the existence of an internal
comparable or comparable trademark assignment contracts. And we have already
stated that the absence of valid internal and external comparables has led us
to resort to the use of other generally accepted valuation methods and techniques.
In this respect, it should be noted that this situation is frequent when
valuing transactions related to intangibles, and the Guidelines have expressly
echoed this situation (in particular, in paragraphs 6.138, 6.153, 6.156, 6.157
and 6.162, which are transcribed in section 6.2 of this Report).
At
this point, it is worth remembering that brand valuation, far from being an
exact science, is framed by the existence of multiple methodologies, which give
rise to the existence of disparate magnitudes. Nevertheless, there is a broad
consensus in attributing a large part of business valuation to the value of
intangibles, including brands. Likewise, and although it is obvious, it should
be stressed that assets have value insofar as they are capable of generating
cash flows, and their value is calculated precisely on the basis of these
flows.
Hence
the difficulty of valuing intangibles, brands being no exception, given that it
is necessary to delimit or isolate the flows to be attributed to the brand, as
distinct from those attributed to other assets (tangible or intangible).
One
of the generally accepted methods of trademark valuation is known as the Relief from Royalty Method.
It is based on the assumption that the ownership of a trademark avoids the
payment of royalties that would have been incurred if the trademark had to be
licensed. Attributing a market royalty (usually on sales) results in a stream
of cash flows attributable to the brand which, minus the costs associated with
maintaining the value of the brand, leads to pre-tax Royalty Savings. Taxes are
subtracted from these amounts, and the projected after-tax Royalty Savings over
the estimated useful life of the brand must be discounted at an appropriate
rate considering the specific risk of the asset.
Another
approach that could be considered is the Excess Earnings Method, which would consist of
identifying the value of the brand by allocating to it a portion of the total
profits earned by the economic unit in which the intangible is integrated. The
use of a methodology inspired by this approach would imply assuming a certain
return for the asset being valued, or allocating to the owner of the brand a
share of the profit obtained by the group on the basis of a distribution key.
The
purpose of this report is not to value the XZ brand, but rather the
percentage of the royalty for the transfer of the right to use the intangible
asset. Furthermore, it should be noted that the XZ mark has been valued
by specialised firms such as ..... In particular,
this firm values the "XZ" trademark at .... million euros in
2013 and in ... million in 2015."
Section 6.2 of the report details the specific
application for the XZ group of the most appropriate royalty
quantification methodologies based on the information available. This section
describes the advertising expenses incurred by the entity, expenses directly
related to the maintenance of the brand and the income obtained by the entities
that PAÍS_2n the brand analysed.
Finally, section 6.2.3 calculates the royalty, pointing
out that the estimate of the profitability derived from the use of the brand
could be made using the following approaches: income approach (Relief from Royalty
Method, which is part of the income methodology based on the discounted cash
flow technique, converting estimated future cash flows based on certain
hypotheses into a present value by applying a discount rate appropriate to the
risk of the asset being valued) and profit approach (the royalty would be
obtained from the profit of the insurance business, which proportionally brings
a return on the use of the brand [Fair value of the Brand/Fair value of the
company]).) and profit approach (the royalty would be obtained from the profit
of the insurance business that proportionally brings caPAÍS_2 from the
exploitation of the brand [Fair value of the Brand/Fair value of the company; a
sort of economic profitability or contribution rate of the "Brand"
asset to the operating profit). Below is the calculation made by ONFI:
"In
action no. 25, the Inspection Team has requested the following information:
"3.9.4.-
The value that Group XZ considers the "XZ" brand to
have in the years subject to inspection shall be provided, as well as any
studies it may have on the awareness and relevance of the brand in the
different markets in which it operates.
3.9.5.-
The Business Plans (worldwide) considered by the group at the close of the 2013
financial year are requested, with forecasts of sales/revenues and expenses
related to the brand, and for the following years, as well as the value
considered by the group at that date of its weighted average cost of capital
(differentiating between remuneration of the cost of equity and borrowed funds),
tax rate and growth in perpetuity, all in terms of global business".
In
diligence no. 27, the taxpayer states that "there are no studies available
on the value or awareness and relevance of the XZ brand in the years
under inspection".
On
8 November 2019, the taxpayer was reminded that the information requested in
Diligence No. 25 on the value of the XZ brand, the aforementioned
business plan and the rest of the economic management variables on which its
position had been requested had not been provided, and the taxpayer reiterated
that it did not have the aforementioned information.
In
this context, this Valuation Team is of the opinion that the estimation of the
profitability derived from the use of the brand could be carried out following
the approaches detailed below, after discarding the traditional methods and in
particular the comparable free price, as it has not been possible to
approximate a reliable value of the market royalty according to the latter
method.
a)
Income approach.
With
this denomination we refer to the approach that would consist of inferring an
implicit royalty from the valuation of the brand by means of an approach based
on the so-called Relief from Royalty method applied on a perpetual income
(considering that the useful life of the brand is indefinite, a common
assumption in relevant and consolidated brands).
The
so-called Relief from Royalty method is commonly used in practice to determine
the value of these intangibles. This method identifies the value of the
trademark with the present value of the royalties that the trademark owner
saves by not having to license it. Within the generally accepted valuation
approaches (cost, market and income), the Royalty Savings Method falls within
the income methodology, which is based on the discounted cash flow technique,
converting future cash flows estimated on the basis of certain hypotheses into
a present value by applying a discount rate appropriate to the risk of the
asset being valued.
This
approach is supported by the following financial equivalence:
Value
of brand XZ = [Normalised cash flow/(Discount
rate - g) ] x TAB
Where,
Value of brand XZ is the valuation obtained by ... weighted on the ratio
of the premiums obtained by the companies operating under brand XZ,
according to the amounts provided by the taxpayer, and the total premiums of
the XZ group according to the information included in the consolidated
annual accounts.
The
normalised cash flow is the amount of premiums of the
entities operating under the XZ53 brand x Royalty rate x (1- t).
Royalty
rate: magnitude to be calculated in order to arrive at the above-mentioned
brand value.
-
t: Tax rate.
-g:
Perpetual growth rate.
-
TAB54 (Tax Amortisation Benefit). It is generally accepted that intangible
assets valued using discounted cash flows increase in value to the extent that
they are susceptible to tax amortisation by the acquirer, a circumstance that
has been introduced into the valuation models by determining the TAB factor
that represents the present value of the tax savings derived from the tax
deductibility of the amortisation of the intangible asset. However, the
application of this adjustment is not automatic as it depends on the tax
deductibility of the intangible asset. The quantification of the TAB factor is
a function of the tax rate, the discount rate and the amortisation period and
methods.
From
this approach, the implicit canon55 results from solving the following
equation:
(...)
And
the market value of the royalty would be obtained from the following figures:
(...)
b)
Benefit approach.
Under
this approach, the royalty would be obtained from the profit of the insurance
business that proportionally brings caPAÍS_2 from the exploitation of the brand
[Fair value of the Brand/Fair value of the company (set of operating assets)];
a sort of economic profitability or contribution rate of the "Brand"
asset to the operating profit.
The
share of that profit attributable to the brand would be determined by applying
the ratio: Premiums of the companies operating under the brand/Total premiums
consolidated accounts. The purpose of using this ratio to weight the value
attributed to brand XZ is to prevent the amount of the royalty in
absolute terms from including the profit to which the companies that do not
exploit brand XZ have contributed.
Under
this method, the royalty57 for the right to use the trademark that group
companies must pay to the owner of the intangible would be calculated according
to the following methodology:
-
We start from the value attributed to brand XZ by .....
-
This amount is weighted by the ratio of the premiums earned by the companies
operating under the XZ brand, according to the amounts provided by the
taxpayer, and the total premiums of the XZ group according to the
information included in the consolidated annual accounts.
-
This result is compared to the market value of XZ Group's operating
assets resulting from the sum of the value of its equity and the value of the
net financial position (debt minus cash).58
-
Finally, the fee is obtained by applying this percentage to the ratio of the
result of XZ group's insurance business vis-à-vis third parties to XZ
group's total premiums vis-à-vis third parties, both obtained from the
consolidated accounts.
The
methodology can be formulated as follows:
Under
this approach, the total royalty would be as follows:
(...)
Conclusion
On
the basis of these data, it can be seen that the two approaches lead to similar
magnitudes of the market fee, the average of the results obtained being as
follows:
|
2013 |
2014 |
2015 |
2016 |
|
|
INCOME
APPROACH |
0.54% |
0,43% |
0.54% |
0,43% |
|
APPROACH
BENEFITS |
0,43% |
0,43% |
0,48% |
0,52% |
|
AVERAGE CANON |
0,49% |
0,43% |
0,51% |
0,53% |
On
the basis of the above data, it is considered that the application of an
average royalty of 0.43% on the premiums for the assignment of use of the XZ
trademark would be in line with the financial data on file and would comply
with the arm's length principle.
However,
as discussed in section 3 of this Report, in order to determine the amount of
payment to be charged for the assignment of the right to use the trademark, it
is important to take into account, among other factors, the financial benefit
to the user of the intangible.
And
in this regard, as described above, the XZ brand does not have the same
notoriety in all markets, being mainly in Spain, COUNTRY_1 and Latin America
where it has the largest market shares. In the Master File, on the other hand,
the markets of COUNTRY_2, COUNTRY_3, COUNTRY_4, COUNTRY_1 and COUNTRY_5 are
grouped after Spain, with a varied level of awareness of the XZ brand.
All of them are important markets in terms of presence reflected in premium
volume and brand awareness.
In
line with this fact, it seems reasonable to consider that it is in these
markets that there is most evidence of the usefulness to assignees of the use
of this mark.
On
the other hand, the financial benefit provided by the XZ brand to the
transferee entities can be measured indirectly on the basis of the
profitability of the holding's operations on the premium volume, to the extent
that the return from the use of the brand will be included in this
profitability.
From
this perspective, the contributor has provided a breakdown by entities (in some
cases, subgroups), with their main financial aggregates (premiums, insurance
business income, insurance business expenses and insurance business results, to
cite the most relevant). This information has not been presented with a
detailed consolidated view beyond reflecting consolidation adjustments at
segment level. In any case, this information shows different situations by segment
and geographic area as regards results and operating margins. Along with
situations of retained earnings, there are also certain cases of losses, some
of which are recurrent in the years for which information has been available.
In
this sense, it seems reasonable to consider that between independent parties a
suspension of the royalty could be agreed in initial situations (to develop the
market) or subsequent situations maintained over a reasonable period of time
(such as three years), of losses derived from normal business operations, i.e.
not due to exceptional situations or situations that are improper to the
orderly management that should be required of the licensee.
Thus,
a possible conservative approach, to the benefit of the taxpayer's position, and
without prejudice to the burden of proof on the taxpayer on this point, could
exclude from the fee requirement those entities in such a loss-making
situation.
Finally,
with the information available, in our opinion the fee should be quantified on
the basis of the premiums obtained by each entity, once the relevant
consolidation adjustments have been introduced ("Reinsurance" and
"Global Risk" areas), in order to prevent internal operations between
group entities in these segments from distorting the reiterated financial
benefit and, therefore, the economic value that the intangible contributes to
the transferee company".
From what has been said so far and from the analysis of
the ONFI report, it must be anticipated that this TEAC cannot accept the reasoning
of the entity that opposes it, because, as has just been transcribed, the
Inspectorate has justified why one of the methods specifically indicated in
article 16 TRLIS and, more specifically, that of the comparable free price,
could not be applied without further ado. In short, on the one hand, because
there is no market and there are no usual transactions that can be used as
comparable.
Therefore, although the method chosen by the Inspectorate
to carry out the valuation is not one of those specifically indicated in
article 16.4 of the TRLIS, there can be no doubt that the aim pursued is the
same: to determine the market value of the transactions analysed, in view of
all the information gathered, and that it is suitable for that purpose.
Furthermore, contrary to the claimant's allegation,
paragraph 2.9 of the OECD Guidelines provides for the possibility of using
"other methods" to determine the market value of related-party
transactions, provided that they respect the arm's length principle. This has
also been recognised by the TEAC in various resolutions (RG 617/2019 and RG
608/2012).
Paragraph 2.8 of the OECD Guidelines states:
"2.8
The guideline in paragraph 2.2 that the selection of a transfer pricing method
should always aim at the most appropriate transfer pricing method in each case does
not mean that all transfer pricing methods should be thoroughly analysed or
tested until the most appropriate transfer pricing method can be selected for
each case. As a matter of good practice, the selection of the most
appropriate method and comparables should be properly substantiated and be part
of a standardised search process as proposed in
paragraph 3.4".
As the case law of the Supreme Court has indicated, once
the tax authorities have exercised the power conferred on them by article 16 of
the TRLIS, what must be checked and required, above all, is that the valuation
is carried out using an appropriate and duly justified method. Thus, in its
ruling of 6 February 2009, in appeal 5856/2002, the Supreme Court analysed the
mechanism followed by the tax inspectorate to determine the corresponding
transfer price. And it states that "the challenge to this valuation
should focus, in any case, on the inappropriateness or inaccuracy of the prices
used by the Inspectorate to set the amount of these operations, as well as the
determination of the costs by which it proceeds to increase the market price,
in order to adjust this market price more objectively...".
In the same sense, the High Court affirmed, in a
judgement handed down in appeal 7117/2004, that:
"Article
169 of the RIS clarifies the different indicative methods that the
administration can use to carry out the valuation, distinguishing the
application of different methods depending on the factual situation to which
they are to be applied.
(...)
For
its part, the second paragraph lists other methods, ending with a closing
clause which admits "any other method based on well-founded presumptions,
provided that there is a precise and direct link between the proven fact and
that which is deduced according to the rules of human judgement". The
transcribed provision lists possible indicative methods of application, but it
is by no means a closed list of methods to be used. The administration may
apply not only the combination of several of the methods listed, regardless of
whether they are listed in the first or second paragraph, but may also use any
other method that achieves the same results.
In
view of the foregoing, and given that the appellant is challenging the
appropriateness of the price determined by the Inspectorate, this Chamber
considers that, since the Inspectorate used the margin at which the appellant
sold the chemical products to its usual customers as the most appropriate
method (...)".
In the case
analysed, ONFI makes an initial attempt to estimate the royalty that XZ Spain
should receive (section 6.1 of the Report). To this end, it carried out a
search for external comparables of other brand assignment contracts in the
insurance and financial sector, but the results of this comparability examination
were: contracts that were not very comparable, with high royalties, in general,
which it would not be logical to apply in the context of the profits generated
by the group. Nor did it obtain valid internal comparables for this purpose, as
no assignments of brand use between group entities were identified.
Therefore,
the absence of suitable comparables to determine an appropriate market value
led the Inspectorate to conclude that the comparable free price method was
inappropriate and, for the same reasons, the other traditional transfer pricing
methods were also inappropriate.
Under these
circumstances, in which traditional methodologies could not be applied, it was
logically necessary to try to approximate the arm's length price, because the
contrary would lead to a breach of the fundamental mandate of article 16 of the
TRLIS: to value the transaction linked to its market value. In short, the arm's
length price must be estimated as reliably as possible in light of the facts
and circumstances of the case, including the availability of information and
the feasibility of the analysis. To this end, ONFI, in this case, correctly
resorted to two methods traditionally used in brand valuation: one by the
"income approach", based on the Royalty Savings Method, and the other
with a "profit approach", based on the benefit that the use of the
brand brings to the business. Both approaches lead to similar magnitudes of the
market royalty, as stated in the Report prepared by ONFI and transcribed in
this resolution.
In view of
the foregoing, this TEAC must reject the allegations made by the complainant
on this issue, insofar as we consider that ONFI gave adequate and sufficient
reasons as to why it was not appropriate, in this case, to apply the
traditional methods, specifically the comparable free price, and proceeded to
apply, in order to value the related transaction, other methods that it
considered, based on the information available, more appropriate for
determining the price at which the use of the XZ trademark by related entities
should be remunerated.
Second - Comparability analysis.
Next, another issue raised by the complainant relates to
the comparability analysis required by the OECD Guidelines in order for the
valuation of the intangible asset to be in accordance with the Guidelines.
Specifically, the entity alleges that the ONFI does not include a separate,
prior and mandatory comparability process (including the functional analysis)
required for transfer pricing.
It also notes that the DEMPE functional analysis required
by the 2017 OECD Guidelines is not included, the relationships between the
legal owner of the XZ brand and the other entities of the group are not
covered, nor is the contribution of these entities to the development,
improvement, maintenance, protection and exploitation of the asset.
The first
thing that draws the attention of this TEAC is the fact that the claimant
demands that the Administration carry out a detailed study of all the aspects
identified (functions, characteristics, relationships between entities,
contribution of each one of them in relation to the trademark, among others),
when, throughout the entire inspection procedure, the claimant's failure to
provide the required information relating to the related-party transaction analysed
(information that is not made available to the TEAC in this instance) is
noteworthy, even though the claimant is obliged to provide it to the
Administration.
On this issue, the complainant argues that in the years
audited it was not obliged to provide information on related-party transactions
(Masterfile).
In relation to the reporting obligation, Article 16(2) of
the TRLIS states that "Related persons or entities must keep at the
disposal of the tax authorities the documentation established by regulations".
In the same vein, Article 18(3) of the LIS (for 2015 and
2016) provides that:
"In
order to justify that the transactions carried out have been valued at their
market value, related persons or entities must keep at the disposal of the tax
authorities, in accordance with the principles of proportionality and
sufficiency, the specific documentation established by regulations.
The documentation required is set out in Articles 18 to
20 of the RIS, as amended by Royal Decree 1793/2008, of 3 November, and Articles
13 to 16 of the RIS, as amended by Royal Decree 634/2015, of 10 July (for the
2015 and 2016 financial years).
Specifically, Article 18.1 of the RIS, in the wording
given by Royal Decree 1793/2008 established that "For the purposes of
the provisions of Article 16.2 of the Tax Law, and for the determination of the
market value of transactions between related persons or entities, the taxpayer
must provide, at the request of the Tax Administration, the documentation
established in this section, which must be available to the Tax Administration
from the end of the voluntary return or settlement period. This obligation is
established without prejudice to the power of the Tax Administration to request
any additional documentation or information it deems necessary in the exercise
of its functions, in accordance with the provisions of Law 58/2003, of 17
December, General Tax Law, and its implementing regulations.
Subsequently, Articles 19 and 20 of the aforementioned
RIS distinguished between the obligations to provide documentation relating to
the group to which the taxpayer belongs and that specific to the taxpayer.
Therefore, the regulations in force in the first year checked already imposed
an autonomous obligation to document the information relating to the group,
independently of that required specifically for the taxpayer.
"Article
19. Documentation obligation of the group to which the taxpayer belongs.
1.
The documentation relating to the group comprises the following:
(a)
a general description of the organisational, legal
and operational structure of the group and any relevant changes thereto.
b)
Identification of the different entities which, forming part of the group,
carry out related-party transactions insofar as they directly or indirectly
affect the transactions carried out by the taxpayer.
(c)
A general description of the nature, amounts and flows of related party
transactions between group entities in so far as they affect, directly or
indirectly, the transactions carried out by the taxpayer.
(d)
a general description of the functions performed and the risks assumed by the
different entities of the group in so far as they affect, directly or
indirectly, the transactions carried out by the taxpayer, including changes
with respect to the previous tax or settlement period.
e)
A list of the ownership of patents, trademarks, trade names and other
intangible assets insofar as they affect, directly or indirectly, the
transactions carried out by the taxpayer, as well as the amount of the
consideration derived from their use.
(f)
a description of the group's transfer pricing policy, including the pricing
method(s) adopted by the group, justifying its compliance with the arm's length
principle.
g)
A list of cost-sharing agreements and service contracts between group entities,
insofar as they directly or indirectly affect the transactions carried out by
the taxpayer.
h)
A list of prior valuation agreements or amicable procedures concluded or in
progress relating to group entities insofar as they directly or indirectly
affect the transactions carried out by the taxpayer.
(i) the group's annual report or, failing that, the
equivalent annual report.
(...)
Article
20. Documentation obligations of the taxpayer.
1.
The documentation specific to the taxable person shall comprise:
a)
Name and surname(s) or company name(s) or full name(s), tax domicile and tax identification
number of the taxpayer and of the persons or entities with which the
transaction is carried out, as well as a detailed description of its nature,
characteristics and amount.
Likewise,
in the case of transactions with persons or entities resident in countries or
territories considered to be tax havens, the persons who, on behalf of such
persons or entities, have intervened in the transaction must be identified and,
in the case of transactions with entities, the directors of such entities must be
identified.
b)
Comparability analysis in the terms described in Article 16.2 of this
Regulation.
(c)
an explanation of the selection of the valuation method chosen, including a
description of the reasons for the choice of valuation method, how it was applied,
and a specification of the value or range of values derived therefrom.
d)
Criteria for the apportionment of costs for services provided jointly to
several persons or related entities, as well as the corresponding agreements,
if any, and cost-sharing arrangements referred to in Article 17 of this
Regulation.
e)
Any other relevant information available to the taxpayer to determine the
valuation of its related-party transactions, as well as the shareholders'
agreements entered into with other shareholders.
(...)"
Likewise, the third transitional provision of Royal
Decree 1793/2008 of 3 November provides that the documentation obligations
established in Section 3 and Section 6 of Chapter V of Title I of the RIS shall
be enforceable from three months after the entry into force of the RIS, which
came into force on 19 November 2008. Therefore, the documentation
obligations for related-party transactions will become due as from 19 February
2009. The seventh additional provision of Law 36/2006, of 29 November, on
measures for the prevention of tax fraud, provides that "The
documentation obligations referred to in section 2 of article 16 of the
Consolidated Text of the Corporate Income Tax Law, approved by Royal
Legislative Decree 4/2004, of 5 March, as amended by this Law, shall be
enforceable as from 3 months following the entry into force of the regulation
implementing them. Until that date, the provisions in force on the entry into
force of this Act regarding documentation of related-party transactions and penalties
shall apply, and the valuations made by taxpayers when they correctly apply any
of the valuation methods provided for in section 4 of article 16 of the
aforementioned consolidated text, as amended by this Act, shall not constitute
a tax infringement.
It follows from the above that during the years audited,
the claimant was indeed obliged to have documentation on related-party
transactions, both for the group and specifically for the entity itself. In the
case analysed, the Inspectorate repeatedly requested the provision of this
information/documentation in the course of the actions carried out.
However, it appears from the file that the complainant
had not prepared the required documentation according to the aforementioned
articles. Or, at least, it did not make it available to the Inspectorate.
Specifically, the ONFI Report highlights that, in the case in question, the
complainant did not provide information on the following points:
- A list of the ownership of patents, trademarks, trade
names and other intangible assets insofar as they affect, directly or
indirectly, the transactions carried out by the taxpayer, as well as the amount
of the consideration derived from their use.
- A general description of the functions performed and
the risks assumed by the various entities of the group in so far as they
affect, directly or indirectly, the transactions carried out.
- A description of the group's transfer pricing policy,
including the pricing method(s) adopted by the group, justifying its compliance
with the arm's length principle.
Nor has the complainant provided, at any time, the
informative detail that could be considered with the differentiated analysis
that it claims. Notwithstanding all of the above, ONFI, contrary to what the
complainant alleges, does carry out an adequate comparability analysis,
identifying the different aspects required by the regulation, which we analyse
below.
Paragraph 4 of the ONFI Report refers to the characteristics
of the brand, i.e. the asset which is the subject of the controlled
transactions analysed, stating that:
"It
is well known how important intangible assets are in today's world from an
economic point of view, as resources without physical appearance that are
controlled by companies, capable of generating future economic benefits and
therefore of being valued. These intangible assets are sometimes the greatest
generators of value for companies.
With
specific reference to the concept of "trade mark", our legislation
defines it as (Article 4 of Law 17/2001, of 7 December, on Trade Marks):
"A
trade mark means any sign capable of being represented graphically and serving
to distinguish the goods or services of one undertaking on the market from
those of other undertakings.
2.
Such signs may, in particular, be:
(a)
Words or combinations of words, including words used to identify persons.
(b)
images, figures, symbols and drawings.
(c)
letters, numbers and their combinations.
(d)
three-dimensional shapes including packaging, wrapping, containers and the
shape of the product or its presentation.
e)
Sound.
(f)
any combination of the signs mentioned, by way of example, in the preceding
paragraphs".
As
defined by the Marketing Science Institute (1998), branding is "the
strong, sustainable and differentiated competitive advantage over competitors
that translates into higher volume or margin for the company relative to where
it would be without the brand".
Some
authors establish the relationship between the brand and the consumer in the
areas of relevance, differentiation, esteem and knowledge. The brand is said to
have esteem when the consumer appreciates and respects it;
familiarity/knowledge consists of the consumer's knowledge of the brand;
differentiation and relevance refer, respectively, to the degree to which it is
distinguished from the rest and the extent of its importance. These factors
must be present for a brand to have value.
In
short, trademarks or signs that distinguish products are assets (intangible) in
themselves, differentiated from the products (goods or services) that are
marketed with them, presenting value when the perception that they generate in
the consumer has an impact on the demand for the product; that is, when this
would be significantly affected if the same product were sold without the
protection of the characteristics that allow the user to distinguish it from
other products of the same type.
At
this point, it is appropriate to mention the legal protection that Law 17/2001,
of 7 December 2001 on Trademarks, offers to trademark owners, even quantifying
the minimum compensation that must palliate the economic damage suffered by the
owner of a trademark that has been infringed. According to Article 43(5) of
this law: "the owner of the trademark whose infringement has been
judicially declared shall, in any case and without the need for any proof, be
entitled to receive, as compensation for damages, 1 percent of the turnover
achieved by the infringer with the unlawfully marked goods or services. The
trademark owner may also claim higher compensation if he proves that the
infringement of his trademark has caused him greater damage or loss, in
accordance with the provisions of the preceding paragraphs.
In section 2 of the report, an analysis is made of
the ownership of the trademark, the agreements on the assignment of the right
of use and other aspects of the group's transfer pricing policy:
In
diligence no. 10, issued to the company XZ, S.A., the following
was requested: "List of non-resident entities, subsidiaries and branches
belonging to the XZ commercial group which, in the exercise of their
economic activity, act under the "XZ" brand name". In
diligence no. 11, issued to XZ, S.A., the file called
"ENTIDADES DENOMINACIÓN SOCIAL XZ 2016 XLSX" was provided.
The
list of entities by tax jurisdiction is set out in Annex I to this
diligence and Annex II includes the "Madrid Agreement Concerning
the International Registration of Marks" and "Protocol Relating to
the Madrid Agreement Concerning the International Registration of Marks",
which as of 4 December 2018 lists the states or organisations
that are included therein.
In
relation to the above, the Inspection Team requested4 the taxpayer to confirm
that all the entities listed in the aforementioned Annex I, in the
exercise of their economic activity (insurance company or whose main activity
involves the extension of the insurance business), act under the "XZ"
trademark, and to provide certification from the trademark office of those
states in which a company of GROUP XZ listed in Annex I operates,
certifying the ownership of the "XZ" trademark in that state,
provided that the state is not included in the list of the "Protocol
relating to the Madrid Agreement".
In
response to this request, the company provided5 a pdf document entitled "3
1 1 XZ brand products" which contains the list of entities that
include XZ in their name or company name, to which jurisdiction they
belong and whether they have XZ brand products (yes/no), but states that
"Considering the delay involved in issuing said certification, it is
agreed to deliver the aforementioned document '3.1.1.
Finally,
in relation to mark "XZ" the Inspection Team requested6 ,
inter alia, the following information:
"Transfer
pricing documentation.
-
Trademark and logo assignment contracts (...;)".
In
response to the latter request, the taxpayer provided7 an extract8 from the
2016 Group Master File in English, entitled Functions performed, risks assumed
and assets used by Group entities, which is summarised
below. As described below, the taxpayer states that it does not have the Group
Transfer Pricing Documentation for the years prior to 2016, which is a very
relevant information limitation.
In
terms of activities, the following areas are described: (i)
Insurance and reinsurance units (ii) QR unit [underwriting of
multinational companies' risks (aviation and space, maritime and energy)] (iii)
Assistance, Services and Special Risks unit.
In
addition to these core activities, the Group entities receive certain support
services in the development of their activities:
-
Direct insurance entities and XZR and QR receive IT9 services
provided by XZF and XZT.
-
XZR and QR branches receive
management services from the head office.
-
XZI is responsible for providing
discretionary and individualised management services
for the portfolio of securities, cash and other financial instruments made
available by the various entities of the Group.
In
particular, the reference to the BRAND is made in section 2.4.2 of the Master
File under the heading "Intangible assets developed by the Group", in
the terms reproduced below:
"Branding
The
"XZ" brand is developed in each market by each of the
insurance companies present in that market under the Group's global vision,
solely for homogeneity and strategic purposes, as described below.
The
objective pursued by the Image and Corporate Social Responsibility Department
is to help create/develop a brand that customers can associate with the idea of
trust (the main driver of the business). To this end, a global brand plan has
recently been launched. This plan has a time horizon of 3 to 5 years and aims
to homogenise content (i.e. common and global
content).
In
the past, subsidiaries enjoyed a great deal of autonomy in terms of marketing
and advertising. Each country chose the advertising agency it wanted to hire,
following the general guidelines set by the parent company. The parent company
did not carry out extensive monitoring and control of activities in this area.
The
development of XZ's corporate image is fundamentally articulated through
two pillars: advertising and sponsorship.
The
initial situation is that of an organisation in which
several brands coexist in each segment (life, automobile, etc.), but the
casuistry is varied. In this respect, three groups should be distinguished:
1.
Spain: market in which the XZ brand has high visibility, awareness and
recognition.
2.
COUNTRY_2, COUNTRY_3, COUNTRY_4, COUNTRY_1, COUNTRY_5: these are markets where
the level of awareness of brand XZ varies, some of which (especially in
COUNTRY_2) coexist until recently with other brands of the companies that were
acquired at the time.
3.
In the rest of the world, awareness of the XZ brand is more limited.
"WR"
is the brand name used by XZA subsidiaries selling online travel and
insurance products. For the Spanish online insurance market, the brand used is
"LM".
CCI
S.p.A. and LMV AG (formerly CCV
AG) were acquired by the Group in 2015 and sell their products under the CC
and LM brand names, respectively."
With
regard to the assignment of trademarks, the taxpayer10 states that there are no
contracts for the assignment of trademarks and logos.
In
view of the partial nature of this information, the Inspection Team requested
the full Master File to be sent again.
On
21 November 2019, the taxpayer provided the document XZ GROUP MASTER
FILE. Transfer Pricing Documentation 2016, with the logos of Deloitte and XZ
on the first page, but without signature or date (the document is 41 pages
long). In addition, the taxpayer, which has not provided the group's
documentation for 2013, 2014 and 2015, states that 2016 is the first year in
which the company is obliged to prepare it.
(...)
With
respect to reinsurance, XZR negotiates the best possible terms and
conditions with third party reinsurers in the market and offers the same
conditions to Group entities seeking reinsurance. In reinsurance operations
involving several reinsurers, the negotiation is carried out with the leading
reinsurer.
XZR, XZQR
and XZA provide certain support services to their respective
permanent establishments. XZA also provides them to its subsidiaries.
The policy is to identify and allocate the costs of these services without
adding any margin.
On
the other hand, it is reported that claims arising from the travel and roadside
assistance insurance portfolios reinsured by XZA are handled by local
service companies of the group. The structure of the remuneration for these
services varies from country to country, but generally consists of one of the
following arrangements: (i) Reimbursement of all
expenses generated by the claim plus a fixed fee; (ii) A percentage of
premiums; or (iii) A fixed fee per policy, insured or vehicle.
With
regard to IT services, companies providing these services to other group
entities determine the price on the basis of the internal costs incurred plus a
margin of 3%. When the service is purchased from a third party, it is invoiced
without margin to the group company.
On
the basis of this information, it appears that the subsidiaries of the XZ group
are not low-risk entities, but operate in the different jurisdictions assuming
for their own account the risks and benefits arising from the management of the
factors of production and the substantive processes they carry out.
As
part of the aforementioned production factors, there is no doubt that the XZ
brand is identified, an intangible with an obvious value in the Spanish
insurance market, as will be highlighted later on, established internationally
and with a relevant notoriety in most of the markets in which it operates, with
the areas of Spain, COUNTRY_1 and Latin America standing out, as will be noted
later on.
In
particular, the documentation provided does not include a transfer pricing
policy consisting of analysing the functional operations of the subsidiaries
with a view to guaranteeing their profitability, but instead mentions a series
of related-party transactions, mainly involving the provision of services, in
which the criterion followed in setting the prices of each type of transaction
is briefly described.
Consequently,
the result obtained by the subsidiaries derives from reducing their income by
the expenses they incur, including those arising from intra-group operations.
This assumption of the risks and benefits specific to the insurance business,
without prejudice to the co-ordination tasks inherent in any multinational
group, means that they cannot be classified as limited risk entities. In the
exercise of these functions, they control assets and assume benefits and risks,
including those arising from the assignment of the right to use the trademark,
and it is also clear from the transfer pricing documentation that there is no
direct or indirect remuneration for the assignment of the right to use the
trademark.
And
to the extent that the trademark has value and its use generates a benefit for
its users (which will be developed in sections 3 and 4), the owner of the
trademark is entitled to receive remuneration from the other companies of the
group that own the asset, on the terms analysed below.
Section 3 includes a legal analysis of the tax
implications of the assignment of the right to use the trademark, analysing
issues such as the identification of the intangible asset that is the object of
the assignment, study of the functions, assets and risks related to its
exploitation (DEMPE analysis referred to in the 2017 Guidelines):
"The
first step in the analysis of a related party transaction involving an
intangible is to identify the asset to which the related party transaction
relates, which in our case is not in doubt because it involves the use of a
trademark, the XZ brand.
Moreover,
it is also clear that the asset owner should receive remuneration for the
functions performed, assets contributed and risks assumed in connection with
the development, enhancement, maintenance, protection or exploitation of the
intangible, and not merely for the fact of being the legal owner.
Guidance
on the application of this principle to the particular case of the assignment
of a trade mark or other intangible asset with the group name is set out in
paragraphs 6.81 to 6.85 reproduced above. It follows that the trade mark owner
should receive remuneration for the use of that name by other group members if
the assignment confers a financial benefit on the assignee, because in that
case it is reasonable to conclude that in arm's length transactions a payment
for that use would have been made.
In
particular, according to paragraph 6.83 of the OECD Guidelines, in order to
determine the amount of the payment in such an exchange of value, it is
important to quantify the following aspects:
-
The financial benefit to the user of using the name,
-
The costs and benefits that would be associated with other alternatives, and
-
Contributions relating to the value of the name made by the legal owner and the
entity using the name, in the form of functions performed, assets used and
risks assumed.
Furthermore,
it is specified that special attention should also be paid to the functions
performed, the assets COUNTRY_2two and the risks assumed by the name user in
creating or increasing the value of the name in its jurisdiction. And that
factors that would play an important role in the context of a licence of that name to an independent company in
comparable circumstances should be taken into account in applying the
principles contained in Chapters I to III.
In
the case at hand, it is indisputable that the owner of the trademark assigns
the use of the intangible to other companies in the group. And from a rational
economic perspective, it is also clear that if the assignee obtains, through
the amount charged for the provision of a service, the remuneration for all the
items included in the service (including the trademark), the assignee must pay
remuneration for the assignment of the right to use the trademark, in
accordance with its market value.
The
financial benefit provided by the XZ trademark to the transferees will
become apparent to the extent that the perception of the intangible by the
customers has an impact on the demand for the product; this aspect is clearly
related to the revenues (premiums) received by the transferees for the services
marketed under the trademark. Therefore, in most contracts between unrelated
parties on the assignment of the use of trademarks and other commercial
intangibles, it is common to establish as the basis for calculating the
corresponding royalty the figure for sales or provision of services. This
profit should also be materialised within the
operating margins of the assignees, analysed from an appropriate time horizon
and, in this regard, the situation in which a licensee company finds itself in
a situation of recurring losses should be analysed with particular care.
In order
to determine the amount to be received by the brand owner, it is necessary to
know the contributions to the value of the name made by the legal owner and the
entity using the name, in the form of functions performed, assets used and
risks assumed.
The
Group's Master File states that the "XZ" brand is developed in
each market by each of the insurance companies present in that market under the
Group's global vision, solely for homogeneity and strategic purposes. It is
also pointed out that until 2016, the homogenisation
of content by means of a global brand plan has not been further developed. In
this regard, it is stated in the transfer pricing documentation that in the
past the subsidiaries enjoyed a great deal of autonomy in terms of marketing
and advertising. That each country chose the advertising agency it wanted to
hire, following the general guidelines set by the parent company. And that the
parent company has not carried out a thorough monitoring and control of the
activities in this area.
With
this information, the analysis of the functions performed by each group entity
is not conclusive as a determinant of the relative participation of each
company in the creation of value, but it does reveal the exercise of a
coordination function by the parent company that should not be underestimated.
In
this context, a determining aspect in quantifying the degree of contribution of
the brand-owning company is the amount of assets contributed to the maintenance
of the value of the intangible, which in the case of intangibles such as brands
is strongly correlated with investment in advertising.
In
this regard, the group reports in the Master File that the development of XZ's
corporate image is fundamentally articulated through two pillars:
advertising and sponsorship.
However,
in order to appreciate this circumstance, it is logical to consider that the
relative share cannot be determined on the basis of the contribution that all
the companies in the group currently make, ignoring the fact that the XZ brand
is a valuable intangible whose value creation can only be properly analysed on
the basis of the historical evolution of the group, to which we will refer
later.
Notwithstanding
the above, a comparison of advertising investment with the premiums received by
geographical area shows that Spain is the territory that makes the greatest
advertising effort in absolute terms and, in general, in relative terms, as
well as being the origin and the effective management headquarters of this
multinational group.
As
indicated above, the correct identification of the group member(s) bearing the
risks related to the development, enhancement, maintenance, protection and
exploitation of intangible assets is also an important element of the pricing
of related party transactions.
In
the particular case of a brand, the main risk is reputational risk. That is,
the danger that the image of the company or its products will be damaged by certain
behaviour attributable to the group. The management
of this risk can be complex due to the multitude of factors involved, but it is
obvious that the planning, direction and coordination of the company owning the
asset in this area is essential, not only in the case of XZ, but also in
any multinational group.
On
the basis of these arguments, the company that owns the trademark should demand
a consideration from the entities and branches of the group that use the
intangible, whether they are domiciled in Spain or abroad.
However,
it should be noted that this reasoning is supported by the fact that the use of
the asset is understood to confer a financial benefit for the members of the
group other than the legal owner of the intangible asset, a situation which is
particularly evident in markets where the trademark enjoys presence and
notoriety, and it is reasonable to conclude that in arm's length transactions a
payment for such use would have been made".
Furthermore, contrary to the claimant's allegations, the
quantification of the fee does not appear to have disregarded the perspective
of the assignee, since the conclusions reached in the report analysed indicate
the following:
"14º.
Finally, it should be remembered that the enforceability of the royalty is
conditioned by the fact that the assignment produces a profit for the company
using the trademark. And in this sense, it seems reasonable to consider that it
is in the main markets in which the group operates and in which the brand is
most relevant: Spain, COUNTRY_1, Latin American countries, COUNTRY_2,
COUNTRY_3, COUNTRY_4 and COUNTRY_5, where there is greater evidence of the
utility that the use of this brand brings to the assignees.
Furthermore,
it seems reasonable to consider that between independent parties a suspension
of the royalty could be agreed in initial situations (to develop the market) or
subsequent situations maintained over a reasonable period of time (such as
three years), of losses derived from normal business operations, i.e. not due to
exceptional situations or improper to the orderly management that should be
required of the licensee".
It follows from the above that, in determining the
royalty, the situation of the assignee has been considered, insofar as the
royalty has only been required in the Act in respect of entities operating in
the territories in which the trademark is most relevant, as well as including
scenarios of sustained losses or the commencement of activity to develop the
market.
The complainant points out that the contractual terms
from which the operations derive have not been correctly analysed either. This
aspect is surprising to the TEAC insofar as it is the complainant itself that
fails to comply with the reporting obligations regarding related-party
transactions, without providing a contract on the transfer of the use of the
trademark.
Section 5 of the report contains an analysis of the
economic circumstances of the insurance sector and the relevance of the XZ
group in the market.
"The
most relevant features of the global economic environment in 2013 were the mild
economic recovery in most developed economies, as well as the slowdown in
growth in emerging economies, which nevertheless continued to grow at a higher
rate than developed economies.
Against
this backdrop, the volume of premiums in the global insurance market increased
by 1.4% in real terms in 2013, having slowed down compared with the previous
year, when growth was 2.5%. The slowdown was due to stagnation in advanced
markets, which grew by only 0.3% compared with 7.4% in emerging markets.
In
2014 and 2015, the world economy grew by 3.1%. Its evolution was characterised
by moderate growth in the advanced economies and an increasing intensity in the
performance of the emerging economies. In particular, in 2015 the advanced
economies grew by 1.9% overall, with COUNTRY_2 above average (2.4%) and the
euro area below average (1.6%), while the emerging economies grew by 4%,
affected by the slowdown in China and the entry into recession of COUNTRY_1 and
Russia.
The
total premium volume of the insurance market grew by 3.8% in real terms in 2015
to USD 4.6 trillion, registering a slight acceleration in growth compared with
2014. As in 2014, growth occurred in both advanced and emerging markets.
However, their performance was different: the former showed a slowdown to a
growth rate of 2.5%, while the latter reached a growth rate of 9.8%. Growth in
the global insurance industry was recorded in both Life (4.0%) and Non-Life
business (3.6%). In both segments, the most important drivers came from
COUNTRY_2 and Japan in advanced markets and from China in emerging markets.
2016
confirmed the turning point that marked the still incipient acceleration of the
global economic momentum. The world grew by around 3.1%, slightly more than the
previous year, although with a composition marked by heterogeneity. In this
context, the developed economies grew by 1.9% while the emerging economies grew
at a rate of 4.6%.
Estimates
of global insurance market growth available at that date put it at 2.9% in
2016, in nominal terms reaching a value of USD 4.7 trillion. Global premium
volume was expected to continue to grow in both nominal and real terms in the
coming years, driven by strong growth in emerging countries. The global premium
volume of the Non-Life segment, which represents around 43% of total premiums,
would have increased by 3.7% in 2016, in real terms, with emerging markets
growing by around 9.6%, driven mainly by emerging Asia and in particular China.
Growth in Life insurance, which accounts for around 57% of total premiums, was
around 2.5% in real terms globally. The increase was slightly lower than the
growth of Non-Life premiums, despite strong growth in savings insurance
premiums in emerging markets and particularly in Asia.
XZ,
S.A. and its Group
The
XZ brand was born in Spain in ... and according to the information
provided on the entity's corporate website, the main milestones of the business
to date have been the following:
-In
... the motor insurance business starts.
-
In ... the insurance group is created.
-
In ... XZR is created.
-
In ... the leadership of the insurance market in Spain is achieved.
-
In ... expansion into Latin America begins.
-
In ... XZA is created.
-
In ... the company became the leading company in Latin America in the Non-Life
sector.
-
In ... the acquisition of FFG (COUNTRY_3) takes place.
-
In ... GGR (COUNTRY_2) is acquired.
-
In ... XZQR was born.
-
In ... CC is acquired (COUNTRY_6 and COUNTRY_7).
-
In ... takes control of HH (COUNTRY_8).
At
present, and in the years under review, the XZ group is present on all
five continents, is the leading insurer in the Spanish market, the third
largest insurer in Latin America and one of the 10 largest European insurance
groups by premium volume.
XZ Spain,
the company that owns the XZ brand, is the insurance company of the XZ
group in Spain in the non-life insurance business.
From
the information contained in the management reports accompanying the annual
accounts, the following information on the development of the XZ group's
business in the insurance market can be deduced for each of the years subject
to audit.
The
XZ Group has its own distribution networks with offices in the countries
in which it operates, which it combines with the use of other distribution
channels. In addition, it has the collaboration of Mediators, insurance
distribution professionals who, with different positions (Delegates, Agents and
Brokers) play an important role in the marketing of operations and attention to
policyholders.
The
Group's distribution capacity through its own networks is complemented by
distribution agreements with various entities, particularly bancassurance
companies.
Of
particular note are the bancassurance agreements (..., among others). For
example, in 2014, XZ distributed its products through 9,484
bancassurance offices (of which 3,861 in Spain, 5,493 in COUNTRY_1 and 130 in
COUNTRY_9).
XZ also
has a total of 2,364 distribution agreements, including those with financial
institutions (200), car dealers (2,043), and shopping centres
and service companies (89).
Geographical
areas
(...)
XZ
brand and position in the insurance industry
At
the end of 2013, XZ had a solid leadership position in Spanish
insurance, with a market share of 15.32% in the Non-Life business and 9.60% in
the Life business, according to the annual accounts.
Internationally,
at the end of 2013, XZ ranked sixth in the European non-life insurance
ranking and first in this segment in Latin America, with a market share of
around 6.8%, a region in which it is the third largest insurance group in the
world.
In
addition, the Group's professional reinsurer (XZR), which operates
worldwide, is among the top 20 reinsurers in the global reinsurance ranking.
At
the end of 2014, XZ led the Spanish insurance market, with a market
share of 15.15% in the Non-Life business and 10.64% in the Life business. It
was also the tenth largest insurer in Europe, and had a presence in all Latin
American countries - a region in which it was the second largest insurance
group and the leader in Non-Life insurance, with a market share of 7.1%. The
Group's reinsurer (XZR) was also among the top 15 companies in the world
reinsurance ranking, and in Assistance, XZ was the third largest company
in the world in the sector.
(...)"
Finally, with regard to this last factor, the specific
factors affecting comparability between related and unrelated transactions, it
should be recalled that the OECD Guidelines themselves assume that on occasions
the work to be done may be limited by the lack of comparability of the
transaction or the uncertainty of the estimates, especially in the case of the
valuation of intangible assets. And that is what happens in the present case.
In section 6 of the report, as we have already analysed,
ONFI attempts to find external comparables, insofar as there are no internal
comparables within the group, reaching the conclusion that they cannot be
identified in the market analysed. Consequently, it proceeds to estimate the
royalty that XZ Spain should receive, by applying other methodologies
that allow an approximation to the arm's length price, based on the present
value of the revenue generated by the asset and the relative contribution of
the brand to the group's profit (section 6.2).
By virtue of the foregoing, it can be concluded that,
contrary to the claimant's allegations, in the Report, ONFI carries out a
comparability analysis, with the different factors required by the OECD
Guidelines and following the procedure contemplated therein, and therefore the
allegations made by the entity in this respect cannot be accepted.
Third - Other comparability issues. The existence of
comparables.
Following on from the comparability issues, the
complainant proposes two searches for external comparables with the objective
of extending and verifying the Price Free Comparable analyses incorporated in
the ONFI report (search in the entity ... and another one in the private
database, ...).
However, as the Inspectorate points out in the contested
settlement agreement, the contracts identified by the complainant as comparable
are between related entities and therefore cannot be taken into consideration
as an indicator of what two companies would agree under conditions of free
competition.
It also proposes, for the purposes of determining the
existence of internal comparables, to take account of the characteristics of
the banking-insurance channel and argues that in that channel there are
contracts between financial institutions and the institution in which no
consideration is required for the use of the brand name. However, from the
description given for the banking-insurance channel, it seems to be inferred
that it is an agency relationship, in which it is usual to agree on a payment
for the distribution of products under a given trademark, and not the transfer
of the right to use the trademark.
On the other hand, the complainant points out that the
reference made by the Inspectorate to a resolution of the TEAC is not
appropriate, as it is a secret comparable. The reference to which the
complainant refers is detailed below:
"However,
as a mere reference, mention should be made of an administrative
precedent of payment by a Spanish taxpayer of brand fees in the insurance
sector. These fees, which had been set at 0.5% of net reinsurance premiums
since 2002, were modified in 2006, increasing the fee from 0.5% to 0.75% on the
same calculation basis. From 2010, the 0.75% fee was applied to gross premiums.
The
Resolution of the Central Economic Administrative Court (RG 5049/2016, of 7
June 2018), annulled the adjustment made by the Inspectorate to regularise the differences arising from changes in
quantification that it considered unjustified, because such remuneration was
included in the ranges reached by means of a comparability study of the
taxpayer. But what is relevant, from the perspective of the present case, is
that it confirms the obligation to charge remuneration for the assignment of
the use of a trademark in the insurance sector.
This
precedent is not published because it is not yet a settled doctrine of the
Court".
It is clear from the foregoing that at no time is this
information used as a comparable, but merely as a reference to an existing
fact, which in no case has been involved in the setting of the fee and,
consequently, cannot be labelled as a secret comparable or cause any defencelessness whatsoever.
Fourth - Criticisms of the valuation.
Finally, the complainant includes in its statement of
allegations, in the so-called "valuation issues", a series of
criticisms of the valuation of the royalty set out in the ONFI report.
Specifically, it criticises the fact that the value
of the trademark attributed by ... is taken as a reference, as well as a series
of issues that determine that the valuation carried out is not appropriate.
Thus, firstly, with regard to the value obtained from
..., it must be assumed that, as we have already pointed out, the valuation of
goods or rights is not an exact science and, therefore, it is common that, in
practice, the companies and professionals dedicated to carrying out valuations
hold different opinions (as is the case of the figure obtained by the
Inspectorate of ... and the one provided by the claimant on the basis of the
opinions of ... and by ...) and criteria.... and that provided by the claimant
on the basis of opinions of ...and by ...) and criteria, and that the
discrepancy is more accentuated when the valuation does not depend on
observable market data, as is particularly the case in the valuation of
intangible assets.
For this reason, section 6 Valuation criteria of the
Conceptual Accounting Ntx of the General
Accounting Plan, approved by Royal Decree 1514/2007, of 16 November, in
relation to the procedure to be followed to obtain the fair value of an asset
and liability item, states the following:
"For
those items for which there is no active market, fair value shall be derived,
where appropriate, by applying valuation models and techniques. Valuation
models and techniques include the use of references to recent arm's length
transactions between knowledgeable, willing parties, if available, as well as
references to the fair value of other assets that are substantially the same,
discounted estimated future cash flow methods and models generally used to
value options. In any case, the valuation techniques used must be consistent
with accepted market pricing methodologies, and the valuation technique used by
the market that has been demonstrated to produce the most realistic estimates
of prices, if available, must be used.
The
valuation techniques employed should maximise the use
of observable market data and other factors that market participants would
consider in setting the price, limiting as much as possible the use of
subjective considerations and unobservable or untestable data".
The use of these generally accepted valuation methods and
techniques in determining market value is also included in very similar terms
in the current Corporate Income Tax Regulation (RIS), approved by Royal Decree
634/2015 (article 16.2). Well, at this point it should be recalled that the
Royalty Savings Method is the most widely used methodology in practice for
valuing trademarks, and that it is no less usual for professionals and
companies dedicated to this task to use the valuations of a reference entity in
this regard, such as ..., as a widely accepted benchmark in the market. This
does not mean that other opinions of value may not exist.
Indeed, any valuation process involves the use of
professional judgement and the use of sometimes subjective assumptions. There
is, so to speak, no single, unquestionable value for these assets, the brands.
It is a reality that, for the same brand, there are different positions among
prestigious valuers. However, this difficulty has not prevented international
taxation from renouncing the application of the principle of free competition
in transactions involving intangible assets.
Secondly, the complainant sets out a series of reasons
why she considers that the assessment made by ONFI is inadequate. These reasons
have already been presented to the Inspectorate in the inspection procedure.
Firstly, because the calculations have been applied to a perpetual income, when
the accounting regulations foresee a defined useful life for intangible assets.
The General Accounting Plan approved by Royal Decree 1514/2007, in the NRV 5ª2
stated that: "An intangible asset will have an indefinite useful life
when, based on an analysis of all relevant factors, there is no foreseeable
limit to the period over which the asset is expected to generate net cash
inflows for the company".
However, it should be borne in mind that, although, as
the complainant points out, article 39.4 of the Commercial Code, as amended by
Law 22/2015, states that "Intangible assets are assets with a finite
useful life", this is an accounting criterion that is relevant for the
purposes of drawing up the annual accounts.
Logically, the underlying economic reality has not
changed, assets can have a definite or indefinite life. And for these purposes,
the ONFI Report points out that considering that the useful life of the
trademark is indefinite is a common premise in relevant and consolidated
trademarks -page 54-. It is a different matter whether, for accounting
purposes, a registration rule is established that delimits the procedure for
these purposes.
In any event, it should be noted that the implicit
royalty that would have resulted from considering a limited lifetime for the
brand would have been even higher than the one obtained under the indefinite
lifetime scenario.
Secondly, it points out that the inflation rate chosen
for the purpose would not be appropriate, as it would be better to compare it
with the real rate of the group. On this issue, we agree with the Inspectorate,
insofar as the entity proposes a comparison exercise that it does not develop
or clarify. Therefore, in this case, ONFI carried out the valuation on the
basis of estimates based on the best information available to it at the time.
Furthermore, the entity claims that the discount rate
used is not correct, as it does not take into account the cost of capital at
the group level. Furthermore, it points out that ONFI contradicts the approach
proposed by ..., which consists of using the average cost of capital (WACC) as
the effective discount rate to obtain the brand's revenues. On this issue, reference
is made to the reply given to the same question by the Inspectorate, which we
quote (and which we agree with):
"According
to the methodological notes included in the documents included in the file (...
Best Spanish Brand 2013 and ... Best Spanish Brand 2015), ... uses the average
cost of capital (WACC) to determine the Economic Profit from which the profits
that can be attributed to the brand are obtained, but to obtain the value of
the brand it uses a discount rate specific to each brand.
The
clarifications provided by the taxpayer on the procedure followed by ...
clearly state that the WACC is used for this sole purpose.
(...)
The
valuation of the brand must consider the specific risk level of the asset and
not that of the business as a whole. As already indicated in the valuation
report, it is commonly accepted that intangible assets have a higher risk than
the business and therefore discount rates higher than the weighted average cost
of capital (WACC) are usually associated with them.
Thus,
it is worth mentioning the content of the OECD Transfer Pricing Guidelines
(July 2017) which contain a further development of this matter, in line with
generally accepted valuation practices:
"6.171.
There is no single measure of a discount rate that is appropriate for transfer
pricing purposes in all cases. Neither taxpayers nor tax administrations should
assume that a discount rate that is based on the weighted average cost of
capital (WACC) approach or any other measure should be used systematically in
transfer pricing analyses where the determination of appropriate discount rates
is important. Instead, the specific conditions and risks associated with the
facts of each case and the specific cash flows should be examined to determine
the appropriate discount rate.
6.172.
In determining and assessing discount rates, it should be recognised that in
some cases, particularly those associated with the valuation of intangibles
still under development, intangibles may be some of the riskiest components of
a taxpayer's business. It should also be recognised that some activities are
inherently riskier than others and that some cash flow streams are inherently
more volatile than others. For example, the probability that a projected level
of research and development expenditure will be incurred may be greater than
the probability that a projected level of revenue will ultimately be generated.
Discount rates should reflect the level of risk of the activity as a whole and
the expected volatility of the various projected cash flows in the
circumstances of each individual case."
More
specifically, the Technical Information Paper 3: The Valuation of Intangible
Assets (INTERNATIONAL VALUATION STANDARS COUNCIL), indicates that (free
translation):
"8.2
If the intangible asset in question is the principal asset of the enterprise,
it is common practice to estimate the discount rate for an intangible asset by
reference to the weighted average cost of capital (WACC) applicable to that
enterprise. However, the WACC rate may not be appropriate if the intangible
asset in question has a different risk profile from the other assets and
liabilities used in the enterprise or if there is other evidence that indicates
an alternative discount rate.
8.3
Due to limitations in deriving an appropriate discount rate from market data,
the Capital Asset Pricing Model is commonly used to value intangible
assets."
In
this respect, it should be noted that the Capital Asset Pricing Model (CAPM) is
the most widely used model for determining the cost of equity (Ke), which is the criterion used in the ONFI Report.
Having
defended the inappropriateness of the use of the WACC in the case under
analysis, the taxpayer's claim to recalculate the royalty based on the WACC of
the insurance industry included in the pleadings falls.
In
any case, it should be recalled that the discount rates reported in the
consolidated annual accounts of XZ Group for the years 2013 to 2016 show
higher values than those provided by the taxpayer."
The entity then argues that the profit approach
methodology is inappropriate because, on the one hand, it points out that the
amount of the royalty would be correlated to the cost structure of the entity
and not to the value of the brand, which is what is being assessed.
However, as the Inspectorate has already pointed out,
there is no doubt that profits are the result of reducing the entity's revenues
by the costs incurred, in which the remuneration of all the factors of
production is located, over and above the recovery of the accounting costs that
determine the profit. This remuneration will be determined by the margins that
the business is capable of generating, so that if the business is very
profitable, the brands associated with it will have a higher remuneration than
others associated with lower margins.
Finally, the claimant argues that the payback period for
the value of the trademark should be taken into account, being very relevant to
analyse in how many years it is estimated to recover its value and compare it
with the useful life of the intangible. If the payback period is shorter than
the useful life, a higher value would be paid for the trademark than that
provided by ..., which would make no sense.
On this issue, it is striking that the complainant
proposes or demands that the Administration carry out calculations and
verifications that she herself has ignored and for which she does not provide
any type of information.
In this case, in the settlement agreement, the
Inspectorate proceeded to carry out the calculation proposed by the entity,
with the following result:
"Strictly
following the allegation raised by the taxpayer, according to the information
included on page 86 and following of the Non-conformity Report A02 / ...53, the
fee that XZ Spain would receive from the rest of the Non-Resident
Entities would be the following amount:
|
2014 |
2015 |
2016 |
|
|
... |
... |
... |
... |
For
its part, the value of Brand XZ considered by the Inspectorate in each
of these years is as follows:
|
2014 |
2015 |
2016 |
|
|
... |
... |
... |
... |
The
average of the two amounts would be ... euro and ... and the recovery period
referred to by the taxpayer of 21.1 years, which is much longer than the 10
years conventionally established in the Commercial Code as the useful life of
intangible assets for which this parameter cannot be reliably estimated, and
even longer than the useful life of 15 years as stated in Her Majesty's
Revenues and Customs, Corporate Intangibles Research and Development manual,
section CIRD30540, which states that the useful life (it is understood that in
the absence of a maintenance investment), should not exceed more than 20 years
for any intangible.
However,
in our opinion, where appropriate, this comparison should be made considering
the total royalties (not only those from non-resident entities), but also the
amounts of international impact advertising that are not borne by the other
entities of the group should be deducted. Even without including the latter,
the period required to recover the value attributed with the total royalties
would amount to 13.95 years (the average royalty amounts to ... euros and the
average brand value amounts to ... euros)".
In short, the claimant's allegations regarding the
assessment made by ONFI are dismissed, and we consider that it is in accordance
with the law.
Conclusion
Consequently, the TEAC has been able to verify the
existence of a valuation procedure in which all the steps followed by the
Inspectorate in order to determine the fee as remuneration that should have
been received by the entity for the transfer of the use of the XZ trademark to
the different related entities are set out in a reasoned and substantiated
manner.
The allegations presented to this TEAC have not
undermined either the correct use by the Tax Inspectorate of the procedure of
art. 16 TRLIS, nor the choice of the specific valuation methods, nor have they
accredited the existence of substantial errors or inconsistencies in their
effective application. Nor do they undermine the reliability of the results
obtained within the framework of discretion, not arbitrariness, which is
inherent to this type of procedure.
THIRTEENTH.- We will now reply to the allegations made
against the adjustments made by the Inspectorate, other than those related to
related-party transactions, in the framework of the claims processed under
numbers RG 3636/2021, RG 598/2021 and RG 5845/2021.
Beforehand, it is appropriate to address a procedural
issue raised by the claimant in the framework of the complaint processed under
RG 5845/2021 against the settlement agreement A23 ...66, with respect
to the proceedings specifically referring to the IS for the 2016 tax year.
Specifically, the entity alleges the inappropriateness of the agreement to
complete the tax group's tax group's tax audit proceedings, in respect of the
aforementioned financial year.
According to the file, the inspection carried out actions
in the framework of which it was checking, among other matters, the
deductibility of the remuneration of the directors of the parent company and of
the subsidiaries; on the basis of these checks, report A02, no. ...93 relating
to 2013, 2014 and 2015 income tax was issued, which included a proposal for
adjustment which, on this point, established the non-deductibility of the
remuneration of the directors paid in 2013 and 2014. The proposal consisted,
more specifically, of not admitting the tax deductibility of all the executive
directors' remuneration paid during the aforementioned periods because it did
not comply with the requirements established by tax and commercial legislation
and the case law of the Supreme Court interpreting it for its tax
deductibility. The Technical Office confirmed the Minutes and pointed out the
following:
"Since
2015, having analysed the new Articles of Association of the companies approved
in 2015, this Technical Office has found that they do not comply with the
commercial requirements, in accordance with the criteria established by the
Supreme Court in its ruling of 26 February 2018, (rec. 3574/2017), which
analyses the requirements set forth in the new wording of articles 217 to 219
and 249 of the TRLSC and which establishes that for the remuneration of
Directors with executive functions to comply with commercial law, it is not
sufficient for the existence of the delegation approved by the Board of
Directors and the contract, both requirements regulated in art. 249 TRLSC, but
it is also necessary to comply with the requirements for the remuneration of
the remaining directors in articles 217 to 219, i.e. the Articles of
Association must establish the remunerated nature of the post and the
remuneration system within those envisaged in article 217, and the maximum
amount of the annual remuneration of all the directors must be approved by the
General Meeting".
Therefore, on the same date on which the provisional
settlement agreement was also issued with respect to the IS for the 2016
period, it was ordered to complete the file in relation to that period in order
to verify the tax deductibility of the remuneration of the directors with
executive functions paid in that year. Specifically, in this resolution to
complete the proceedings, the following was ordered:
"...;
FIFTH.
In view of the foregoing, in accordance with the
provisions of Article 157.4 of Law 58/2003, of 17 December, General Taxation,
and Article 188.4 of the regulation on the application of taxes, IT IS AGREED
to order the completion of the file by carrying out complementary actions in
relation to:
-
The remuneration of the directors of the entities of the tax group .../85, of
which XZ, S.A. is the parent company, paid in 2016, in order to
verify whether they meet the legal requirements, both tax and commercial,
established by the TEAC doctrine issued in interpretation thereof, as well as
the case law of the Supreme Court, for the purposes of their tax deductibility.
If,
as a result of the complementary actions, it is considered necessary to formalise a new assessment, this will take into
consideration all the previous provisional corporate income tax assessments for
the 2016 period, both the assessments resulting from A01, no. ...76, A01 ... 43
and A02, no. ... 53, as well as the assessment resulting from A02, no. ... 11,
issued provisionally by this Technical Office today, on the part of the
Technical Office, for the part of the taxpayer that has not yet been assessed.43
and A02, no. ...53, as well as the settlement resulting from A02, no. ...11,
issued provisionally by this Technical Office today, for the part of the regularisation not affected by the adjustments in respect
of which it is ordered to complete the proceedings by means of this resolution.
If,
on the other hand, it is considered that no regularisation
is appropriate, the taxpayer will be granted a period of 15 days, starting from
the day following the day after the notification of the opening of said period,
in which to inspect the file and make the allegations that he/she deems
appropriate, and the appropriate settlement will be issued once the allegations
have been received or the period for making them has ended, in which the
settlements resulting from the two A01 and the two A02, mentioned above, will
also be taken into account.
No
appeal or complaint may be lodged against this resolution as it is a mere
formality, without prejudice to the appeal or complaint that may be lodged
against the settlement resolution that is finally issued.
This
is hereby communicated for your information and effects.
...;"
The claimant alleges that the Inspectorate was not
authorised, once the maximum period for the duration of the inspection
proceedings had expired (as was the case in the present case), to agree to
extend such proceedings in relation to the same tax year and tax concept for
which there was already a provisional assessment (the one derived from
assessment A02-...11). Even more so when the issue justifying the extension of
the proceedings had already been previously verified by the Inspectorate, the
claimant having provided all the relevant documentation. The complainant
considers that the agreement to extend the proceedings is only valid in two
circumstances: i) when it is necessary to carry out
complementary actions and ii) to complete the file. However, neither of these
prerequisites is met in the case in question.
Firstly, with regard to the excessive duration of the
proceedings, art. 150.6 LGT states in this respect that:
"Failure
to comply with the time limit for the duration of the procedure referred to in
paragraph 1 of this Article shall not result in the procedure lapsing, which
shall continue until its termination, but shall have the following effects with
regard to the tax liabilities pending settlement:
(a)
The limitation period shall not be deemed to be interrupted as a result of the
inspection activities carried out during the period referred to in paragraph 1.
The
limitation period shall be understood to be interrupted by the carrying out of
proceedings after the end of the period referred to in paragraph 1. The
taxpayer shall have the right to be informed of the items and periods covered
by the proceedings to be carried out.
b)
Payments made from the start of the procedure up to the first action taken
after the deadline for the duration of the procedure provided for in paragraph
1 has been exceeded and which have been attributed by the taxpayer to the tax
and period subject to the inspection proceedings shall be considered
spontaneous for the purposes of Article 27 of this Law.
(c)
No default interest shall be charged from the time of such non-compliance until
the end of the procedure".
It follows from the foregoing that, for the purposes that
interest us here, as a result of non-compliance with the maximum duration
period, the limitation period would not be interrupted by any action taken from
the start, but the procedure must continue, in any case, until an act is issued
that puts an end to it. The only limit for issuing this act of tax assessment
is the 4-year limitation period (which, in the case of IS 2016, ends on
25/06/2021).
Next, with regard to the development of complementary
actions, art. 157.4 LGT states that:
"Before
issuing the settlement decision, the competent body may decide to carry
out complementary actions under the terms to be established by
regulation".
For its part, art. 188.4 of the RGAT provides:
"The
body competent to assess may agree to complete the file in any of its
aspects. This agreement shall be notified to the taxpayer and shall proceed as
follows:
a)
If, as a result of the complementary actions, it is considered necessary to
modify the settlement proposal, the initiated report shall be annulled and a
new report shall be drawn up, which shall replace the previous one for all
purposes and shall be processed accordingly.
b)
If the settlement proposal contained in the statement of disagreement is
upheld, the taxpayer shall be granted a period of 15 days, starting from the
day following the day after notification of the opening of this period, in
which to inspect the file and make such representations as he/she deems
appropriate. Once the allegations have been received or the time limit for
making them has expired, the body responsible for assessment shall issue the
corresponding administrative act, which must be notified.
It follows from both precepts that in no case is the
Chief Inspector's power to order the completion of proceedings limited with
respect to an obligation included in the scope of the procedure, even if a
prior settlement has been or could have been issued in respect of that
obligation and in that same procedure, which will always be provisional in that
case. Therefore, the agreement to complete proceedings must specify the facts
that determine its adoption, the legal grounds that justify the Chief
Inspector's action, and the rest of the formal requirements, and must be
notified to the taxpayer to whom the proceedings refer.
On the other hand, contrary to the allegations made by
the entity, in the complementary or additional actions carried out, due to the
facts and arguments set out, it was necessary to obtain new information and
documentation from the Inspectorate. This is recorded in the notification of
the resumption of proceedings, notified on 11/01/2021, included in the file. In
fact, the entity itself, in response to the request made by the Inspectorate,
provided the required documentation, as well as other documentation not
required but which it considered appropriate to provide, together with a
written statement that was assessed by the inspectorate in the new report
initiated.
The claimant also alleges that the Inspectorate's actions
would be contrary to the provisions of article 148 of the LGT, insofar as it is
not possible to re-regulate the object of a previous procedure that had ended
with the corresponding settlement. Thus, it points out that, in the face of a
single procedure, there should be a single tax assessment and a single
settlement agreement (in this case, for IS 2016). Thus, the aforementioned
provision states that:
"Article
148. Scope of the actions of the inspection procedure.
(...)
3.
When the proceedings of the inspection procedure have ended with a provisional
assessment, the object of the same may not be regularised
again in an inspection procedure initiated subsequently, unless any of the
circumstances referred to in paragraph a) of Article 101(4) of this Act apply,
and exclusively in relation to the elements of the tax liability affected by
said circumstances".
However, the aforementioned article, relating to the
scope of the proceedings, what limits the scope of the proceedings is a new
verification by means of a new procedure that refers to or concerns the same
facts. However, in the present case, it has always been the same procedure,
initiated on 4/12/2107, with the act initiated on 11/03/2020 (A02-....11) is a
mere proposal by the instructor on the issues to be regularised
which, in no case, as we have seen and as is set out in the applicable
regulations, limits the powers of the Chief Inspector to rectify said proposal
for reasons of fact or law that he may appreciate in the exercise of his
competence to assess taxes, or based on the estimation of the allegations made
by the obligor. Likewise, as we have already pointed out, he is fully empowered
by law, ex-article 157.4 of the LGT, to order additional proceedings, which is
what has occurred in the present case.
The fact that the initial proposal of the instructor A02
...11, dated 11/03/2020, did not include a proposal regarding the remuneration
of the company directors of the entities in the period 2016, does not mean that
the inspector-Chief is bound by this proposal if he considers that it is
appropriate to make such an adjustment on the basis of both the tax and
commercial regulations applicable to this period of 2016.
Furthermore, contrary to the claimant's allegations, it
should be recalled that the TEAC has recognised the possibility of
disaggregating the elements of the obligation that determine the scope of the
proceedings, as well as the possibility of initiating different assessments and
settlement agreements within the framework of a single procedure, in accordance
with the provisions of both art. 176.3 RGAT and 190.4 of the same.
"Article
176. Inspection reports.
(...)
3.
In respect of each tax liability, a single statement may be drawn up for the
whole of the time period being audited so that the resulting debt is determined
by the algebraic sum of the assessments for the different periods
audited".
"Article
190. Types of settlements derived from inspection reports.
(...)
4.
In accordance with the provisions of Article 101.4.b) of Law 58/2003, of 17
December, General Taxation, the settlements derived from an inspection
procedure may be provisional, in addition to the cases provided for in the said
paragraph, in the following cases:
b)
When the verification and investigation procedures are concluded in relation to
part of the elements of the tax liability, provided that this can be
disaggregated. The inspection procedure shall continue in respect of the other
elements of the tax liability.
Finally, with regard to the regulatory change, the
complainant alleges that the approval of the LIS was a sufficient and
unavoidable argument for not regularising the expenses
accounted for in 2015 and 2016. Therefore, it is unacceptable that the
inspections were extended, without further justification, in respect of the
2016 financial year.
However, this TEAC cannot agree with the above, since,
following the approval of the LIS, with regard to the remuneration of
directors, it is a published criterion, constituting binding doctrine for the
entire Tax Administration, in accordance with the LGT, that the tax
deductibility of such expenses continues to be linked to compliance with the
requirements established by commercial legislation for the aforementioned
remuneration to be considered in accordance with the law, It is not sufficient,
for the purposes of such tax deductibility, for the new law to expressly
exclude them from the concept of liberalisation,
because, in the opinion of this TEAC, in order for them to be considered as
deductible items in the IS, it is still necessary to comply with the commercial
regulations governing the matter, as we will see later on.
By virtue of the above, this TEAC considers that the
defects denounced by the claimant have not occurred since, as we have already
pointed out, the inspection has the power to disaggregate part of the elements
of the tax obligation that are the object of the verification actions, and,
with this, to issue a provisional settlement, continuing the procedure with
regard to some elements of the tax obligation, without prejudice to the fact
that it must comply with the formal and procedural obligations that the current
regulations impose on it. And this is what has happened in the present case,
since the settlement agreement issued on 22/12/2020, which included certain
elements of the 2016 IS, did not include the deductibility of the remuneration
paid in 2016 to certain directors, and a resolution was issued ordering the
completion of the proceedings with regard to this issue. In short, no
irregularity was detected, the inspection having acted in accordance with the
legally established procedure.
Furthermore, it should be noted that, according to
settled case law, any irregularities in the processing of administrative files
will only lead to the annulment of the contested agreements when the
irregularity has caused the interested party to be unable to defend himself
(STS of 6 May 1987). And in this case there is no lack of defence
as the interested party has been notified of the agreement ordering the
completion of the file and the settlement agreement, both of which state the
reasons for the order to complete the file and issue a provisional settlement
which does not include the consequences arising from the order to extend the
file.
FOURTEENTH.- The FIRST QUESTION raised regarding the
substance of the adjustments made, not linked to the adjustments referring to
the related-party transactions that we have already analysed, refers to the classification
of the juros de capital propio
(JSCP) in accordance with the Spain-PAIS_1 DTA.
According to the facts in the case file, the entities XZN,
SA; XZR, S.A. and XZAN, S.A. obtained, in 2015
and 2016, a series of income linked to the collection of JSCP from
different group entities located in PAÍS_1, obtained, in 2015 and 2016, a
series of income linked to the collection of JSCP from different group entities
located in PAÍS_1. On understanding that these amounts were considered
dividends, the entities applied, for them, the exemption provided for in
article 23.3 of the Double Taxation Agreement (DTA) signed between Spain and
PAÍS_1 and in article 21 LIS, applying, for tax purposes, the corresponding
negative adjustments to the accounting result of the aforementioned years.
The inspection admits that, until 2014, in accordance
with the doctrine of the Supreme Court, judgments of 16/03/16 (rec 1030/2014)
and 15/12/16 (rec 3949/2015), the juros have the
legal nature of dividends (following what the High Court points out, it must be
taken into account that they do not remunerate loans, that they are not
calculated on the principal of a credit, that they come from the existence of
profits and that the title of entitlement is partner, that they are not
calculated on the principal of a credit, that they arise from the existence of
profits and that the title that gives entitlement is that of shareholder, and
it is also relevant that companies with losses cannot deduct the amount of the juros but can deduct the interest). The Inspectorate does
not dispute that that case-law also states that PAÍS_1 tax legislation admits
the deductibility of interest income, but without equating it to the tax regime
for interest. And, therefore, juros must be
understood as a distribution of profits as dividends, falling within the scope
of application of Article 21 of the TRLIS. However, the Tax Inspectorate also
points out that, since 2015, with the entry into force of the LIS, Article 21
has included and established an "anti-juros
clause", since it provides that the exemption will not be applied in
respect of dividends whose distribution generates a tax-deductible expense in
the paying entity. Furthermore, it is also highlighted in the settlement
agreement that article 32 of the same legal text, referring to the
"deduction to avoid international economic double taxation:
dividends", provides that when dividends paid by a non-resident entity are
computed in the BI, the tax effectively paid by the latter will be deducted.
Finally, in the settlement agreement, the inspection
refers to the consultations of the Directorate General of Taxes V2960-16 and
V2962-16 of 27/06/16, in which the aforementioned Management Centre takes into
account the STS of 16/03/16, reaching conclusions which, however, allow it to
maintain that, for the years in which the LIS is applicable, 2015 and 2016 of
those verified - the case law of the SC refers to the LIS - the negative
extra-accounting adjustments made by XZN, XZR and XZA for
double taxation exemption of dividends were not applicable.
The claimant, on the contrary, defends the classification
of the Juros, for the purposes of both the DTA signed
between PAÍS_1 and Spain and the domestic regulations, as dividends, based on
the case law established by the Supreme Court. The fact is that classification
as a dividend for the purposes of the IDC would lead to the automatic
application of the exemption provided for in art. 23.3 of the IDC, which
determines the exemption of these JSCPs in Spain.
The question is therefore whether the JSCPs can be
qualified as dividends or interest for the purposes of the Spain-PAIS_1 JSCP
for the purposes of the SPAIN-PAIS_1 DTC.
This TEAC must first refer to the case law of the Supreme
Court on this issue, cited by both the Inspectorate and the claimant. Thus,
firstly, in the Judgment handed down in the appeal in cassation .../2014
(.../2016), in which the High Court concluded the following (the underlining is
ours):
"First
of all, the term 'interest on equity' is contradictory. This terminology is
possibly explained by the tax purpose of the PAÍS_1 regulation which created
them (Federal Law No 9.249 of 26 December 1959): to encourage the capitalisation of PAÍS_1 companies by granting tax
treatment similar to the ways in which companies are financed, either by
increasing their capital or by borrowing. It thus grants a tax advantage to
such capitalisation by granting a reduction in tax
payable up to a limit set in proportion to the equity of the PAÍS_1 companies.
In
any case, what is decisive is to determine their legal nature, from the
perspective of Article 21 of the TRLIS.
For
these purposes, the JSCPs are equivalent to a distribution of profits and
cannot be considered as interest, since they do not remunerate amounts on loans
and are not calculated on the outstanding principal of a loan. On the
contrary, they derive from the existence of profits of the subsidiary PAÍS_1
and the entitlement to receive them is based on the shareholder's participation
in the share capital through the holding of shares. Moreover, the tax
deductibility of JSCPs is subject to certain conditions that do not apply to
interest: the existence of sufficient profit for the year or accumulated
reserves. Thus, companies with losses or negative results cannot deduct amounts
for JSCP, but they can deduct amounts for interest. In other words, PAÍS_1
tax legislation allows the deductibility of JSCP, but does not put the tax
regime for JSCP on the same footing as that for interest.
Consequently,
the Court of First Instance was right to understand that, as a distribution of
profits, they are included in the concept of dividends or shares in profits
referred to in the aforementioned article 21 of RDLeg.
4/2004 (TRLIS).
(...)
The
income received as JSCP has been effectively subject to taxation in PAÍS_1 at
the headquarters of the PAÍS_1 subsidiaries in the years in which the
distributed profits were obtained, or, in any case, the requirement -of a
subjective nature- regarding the taxation of the investees required by article
21 of the TRLIS is met, and the presumption established in section 1.b) of that
provision is applicable.
Indeed,
according to this rule, in cases where, as in the case of PAÍS_1, there is an
agreement to avoid double taxation, it must be presumed that the tax has been
levied by foreign tax of an identical or similar nature to corporate income
tax".
In the judgment handed down in the appeal in cassation
.../2015 (.../2016), the High Court upheld the judgment handed down by the
Audiencia Nacional in which the latter concluded that:
- The legal nature of the juros
is that of a dividend.
- According to the country_1-Spain
IDC, the bonds are to be classified as dividends under Art. 10.4 of
the IDC and not as interest under Art. 11,
- The bonds are subsumable under the exemption of art. 21
LIS.
The Supreme Court ruled, in the above-mentioned judgment,
as follows:
"The
plea raised in his appeal by the Abogado del Estado - formulated in similar
terms to the one raised against the judgment of the Audiencia Nacional of 27
February 2014 also relating to the nature of the PAÍS_1 own capital bonds,
which was rejected by the judgment of this Chamber of 16 March 2016 (appeal
113072014) - cannot be accepted for the reasons we gave then and which we must
now reiterate for the sake of the principle of unity of doctrine (...).
Although
the name "interest" of the income in question may be misleading as to
its legal nature, it is certain that from its regulation and operation it is
clear that this figure corresponds to the nature of dividends and that the
legal treatment of the same from the perspective of national regulation must be
the same as that of such dividends.
In
short, the 'juros or equity capital' is equivalent
to a distribution of profits and cannot be regarded as interest, in so far as
it does not remunerate entities in loans and is not calculated on the
outstanding principal of a loan. On the contrary, they derive from the
existence of profits of the subsidiary PAÍS_1 and the title giving entitlement
to them is the shareholder's participation in the share capital through the
holding of shares.
(...)
Consequently,
the Court of First Instance was right to understand that, as a distribution of
profits, they are included in the concept of dividends or shares in profits
referred to in the aforementioned article 21TRLIS".
From the above, it is clear, and this is affirmed by the
TEAC, that the case law handed down by the SC has held that JSCPs should be
classified as dividends, both for the purposes of the PAÍS_1-Spain DTC and for
the purposes of our domestic regulations, since, in the aforementioned
judgments, the High Court refers to the characteristics and conditions of
payment and distribution of JSCPs by PAÍS_1 entities, which lead it to conclude
that they are those of dividends and not of interest.
The Inspectorate does not reject such consideration, but
relies on criteria extracted from the binding replies given by the Directorate
General for Taxation to consultations, V2960-16 and V2962-16 of 27/06/16, in
which the aforementioned Directorate General, taking into account the case law
of the High Court, the STS of 16/03/16, nevertheless says (emphasis added):
Reply
Article
11 of the Agreement between the Spanish State and the Federative Republic of
PAÍS_1ia for the avoidance of double taxation and the prevention of fiscal
evasion in the field of income taxation, done at PAÍS_1ia on 14 November 1974
(BOE of 31 December 1975), provides:
"Interest
from a Contracting State paid to a resident of the other Contracting State may
be taxed in that other State.
However,
such interest may be taxed in the Contracting State from which it derives and
in accordance with the laws of that State, but the tax thus charged may not
exceed 15 per cent of the gross amount of the interest.
(...;)
5.
The term "interest" as used in this Article includes income from
government securities, bonds or debentures, whether or not secured by mortgage
and whether or not carrying a right to participate in profits, and debt-claims
of every kind, and any other income which the taxation laws of the State from
which the interest derives treat as income from sums lent.
6.
(...;)".
In
the light of the above article, the first question to be answered is whether
JSCPs fall within the definition of interest which, for the purposes of the
application of the Convention, is set out in Article 11(5) of the SPAIN-PAIS_1
Double Taxation Convention or whether, on the contrary, they have the status
of dividends.
This
Article 11(5), together with a detailed list of the different categories of
debt claims which would be considered as interest, incorporates as a closing
clause that any other income which the tax legislation of the source State
treats as income from sums lent shall be considered as interest.
Therefore,
it is the tax law of the source State that determines the qualification of
income generated by JSCPs for the purposes of the application of the DTAA.
For
these purposes, according to the information provided in the consultation
letter, while PAÍS_1 accounting regulations seem to consider that JSCPs
derive from a distribution of profits, its tax legislation, on the contrary,
would assimilate them to income from sums given as a loan. This
classification can be understood on the basis of the following arguments:
-
PAÍS_1 tax regulations allow the deductibility of the remuneration of JSCPs for
the purpose of determining the tax base for PAÍS_1 tax.
-
PAÍS_1's withholding tax on JSCP distributions made to a resident in Spain is
15 per cent.
Both
elements allow PAÍS_1 to consider that the remuneration of the JSCPs qualifies
as interest. Specifically, the withholding tax rate of 15 per cent is that set
out in Article 11(2); This is in contrast to the provisions of Article 10(2) on
dividends, in which case and in accordance with the Resolution of 22 September
2003 of the General Technical Secretariat of the Ministry of Foreign Affairs
for the purpose of interpreting certain clauses of the Agreement (BOE of 2
October 2003), the withholding would be 10 per cent in the case of dividends
received by residents in Spain who hold at least 25 per cent of the capital of
the company PAÍS_1.
Consequently,
and on the basis of the above, it could be concluded that the remuneration
of the JSCPs is, for the sole purposes of the application of the SPAIN-PAIS_1
Convention, considered as interest, and therefore, by virtue of Article 11(1)
and (2) of the Convention, may be taxed in COUNTRY_1 in accordance with its
domestic legislation, but with a limit of 15% of the gross amount, may be taxed
in PAÍS_1 in accordance with its domestic regulations, but up to a limit
of 15% of the gross amount, with Spain being responsible for eliminating any
double taxation that may arise in accordance with the provisions of Article 23
of the Agreement and the corresponding corporate income tax regulations.
This
article provides:
"Where
a resident of a Contracting State derives income which, according to the
provisions of this Convention, may be taxed in the other Contracting State, the
first State shall, subject to the provisions of paragraphs 2, 3 and 4, deduct
from the tax which it levies on the income of that resident an amount equal to
the income tax paid in the other Contracting State.
However,
the amount deducted may not exceed that part of the income tax, calculated
before deduction, corresponding to the income which may be taxed in the other
Contracting State.
The
provisions of this paragraph apply in Spain to both general taxes and taxes on
account.
2.
For the purposes of the deduction referred to in paragraph 1, tax on interest
and royalties shall always be deemed to have been paid at the rates of 20 per
cent and 25 per cent respectively.
3.
(...;)."
Pursuant
to the provisions of Article 23.2 of the Convention,
given that, for the purposes of the Convention, the remuneration of JSCPs is
classified as interest, they will be entitled, in any event and
independently of the classification they may have for the purposes of Spanish
domestic legislation, to a deduction of 20 per cent for the elimination of
double taxation.
On
the other hand, for the purposes of the application of Spanish domestic
legislation, the legal nature of this income must be analysed,
regardless of the classification of the income obtained that may correspond for
the purposes of the Double Taxation Avoidance Convention.
In
this regard, the Supreme Court ruling number 1130/2014, of 16 March 2016,
classifies the remuneration of JSCPs as dividends,
on the understanding that they are income derived from the participation in the
share capital of an entity.
Therefore,
regardless of the classification of the income obtained as interest for the
purposes of the SPAIN-PAIS_1 Agreement, this Centre shares the
classification given by the Supreme Court in relation to Spanish domestic
legislation, so that the remuneration of the JSCPs will have the legal nature
of profit shares, and it is therefore necessary to analyse whether Article 21
of the LIS should be applied.
Article
21.1 of the LIS states that:
"1.
(...;.)
The
exemption provided for in this section shall not apply to the amount of
dividends or shares in profits the distribution of which generates a
tax-deductible expense for the payer.
(...;.)".
In
accordance with the aforementioned provision, the remuneration
received from the JSCPs will not be entitled to the exemption provided for in
article 21 of the LIS, as its distribution generates a tax-deductible expense
for the paying entity, and must therefore be included in the taxable base for
corporate income tax purposes.
Moreover,
since, in accordance with the DTAA, the remuneration of JSCPs is treated
as interest, a deduction of 20% should be made for the purposes of Article 23
of the DTAA.
I
hereby inform you of the above with binding effect, in accordance with the
provisions of Article 89(1)
of Law 58/2003 of 17
December 2003 on General Taxation.
This criterion issued by the Directorate General for
Taxation leads the Inspectorate, in this case, to issue the regularisation,
on this point, in the following terms:
* To consider the interest income received by the
entities of Group XZ as interest for the sole purpose of applying the
Spanish-country DTA1; thus, in application of Article 23.2 of the DTA (methods
for avoiding double taxation), as the interest income is classified as
interest, regardless of the classification it may have for Spanish domestic
purposes, a deduction of 20% is allowed in order to eliminate double taxation
(tax sparing clause).
* Consider the dividends as dividends for the purposes of
applying Spanish domestic legislation, although the non-application of the
exemption provided for in article 21 of Law 27/2014 must be taken into account
as they are dividends whose distribution generates a tax-deductible expense in
the payer PAÍS_1 and, therefore, the amount of the PAÍS_1 dividends received
must be included in the IS tax base for the 2015 and 2016 financial years.
It should be noted that this TEAC, in view of the Supreme
Court judgments already cited, judgments of 16 March (appeal no. 1130/2014) and
15 December 2016 (appeal no. 3949/2015), changed what had been its criterion,
assuming that the "juros or capital
proprio" are equivalent to a distribution of profits, without being
considered interest, insofar as they do not remunerate amounts in loans nor are
they calculated on the outstanding principal of a credit. We took up this
change of criterion in our ruling of 12/01/2017, RG 5865/2013 DYCTEA in which
we stated that the JSCP came from the existence of profits of a subsidiary
PAÍS_1 which, given that the title that gives the right to receive them was the
shareholder's participation in the share capital through the holding of shares,
the exemption ex article 21 TRLIS should be applied to them.
Notwithstanding the above, this TEAC shares the criterion
of the DGT on which the Tax Inspectorate based its decision to issue the
settlement agreement we are examining. And, as the agreement correctly points
out, the DGT does not deviate one iota from the classification made by the
Supreme Court of the PAÍS_1 juros, which is logically
a binding criterion emanating from the High Court. They are undoubtedly
dividends for the purposes of Spanish legislation, but, logically, as such,
they must receive the tax treatment determined by domestic legislation on this
type of income, without prejudice to Spain's obligation to eliminate possible
double taxation on this income.
And, for the years in question, 2015 and 2016, that
internal rule regulating the taxation of this income (dividends received
abroad) is article 21 of the LIS, which, in general, establishes and indicates
the exemption, as did article 21 TRLIS, but, unlike the latter, has
established, as an exception, and, therefore, the non-application of the
exemption, when the distribution of these dividends is a deductible expense in
the paying entity.
We agree with the following statements in the tax
assessment notice:
This
is a novel rule which, precisely in the context of avoiding abusive practices,
limits the application of a mechanism to avoid double taxation to cases, such
as the present one, in which double taxation does not take place, insofar as,
in PAÍS_1, these bonds are tax-deductible.
It
is an established fact and has not been disputed that the income received by
the entities of group XZ affected by this regularisation
has been a deductible expense in the country of the source, for these purposes
it does not matter what requirements or restrictions there are in the country
of the source for deductibility to occur, what is relevant is that in this case
they have been a deductible expense, therefore, it goes without saying that in
Spain, according to the regulations in force as of 2015, they cannot enjoy the
exemption.
It
remains, therefore, to determine how double taxation is eliminated, because
what is also a fact is that they have been taxed in the source country at a
rate of 15% and that, according to article 21 of the LIS, they must also be
taxed in Spain as they are not exempt.
If
they had been treated for tax purposes as dividends in the source country, the
applicable tax rate would have been 10% according to the Spanish-country
agreement_1.
Now,
it is an established fact that in the country of source they have been taxed at
15% and it is also a fact that the SPAIN-PAIS_1 agreement establishes this tax
rate for "interest", therefore, accepting this tax classification by
the PAIS_1 tax administration, i.e. that it is interest and therefore taxed in
the country of source at the rate of 15%, this would be the maximum deduction
applicable in accordance with Article 31 of the LIS, unless the agreement for
the avoidance of double taxation establishes this tax rate for
"interest", that it is interest and therefore taxed in the source
country at the rate of 15%, this would be the maximum deduction applicable in
accordance with Article 31 of the LIS, unless the agreement to avoid double
taxation establishes otherwise, as in fact happens in this case, given that
Article 23.2 of the DTAA establishes a deduction of 20%, which is what the tax
inspectorate has applied in the regularisation.
The
allegations are therefore rejected and the proposed regularisation
is confirmed.
Therefore, we agree with the Inspectorate's criteria and
consider that the allegations made to this effect by the complainant should be
rejected.
FIFTEENTH.- The following ISSUE in dispute concerns the
(non)deductibility of the remuneration paid, in the financial years 2013 to
2016, to the directors of XZ who formed part of the Board of Directors.
The tax authorities considered the aforementioned remuneration to be
non-deductible, given that the requirements set out in the case law applicable
for such purposes regarding the "statutory reversal" and the
"degree of certainty" in the setting of the remuneration system were
not met.
Before analysing the merits of the case, it is worth
considering a series of allegations by which the claimant seeks to defend the
deductibility of the expenditure analysed.
1. It is alleged, initially, that this action by the
Spanish Tax Inspectorate violates the doctrine of actos
propios, insofar as there were previous inspection
actions in relation to various entities of the same group XZ, in which
the question of the deductibility of the remuneration of managers who were also
directors of those entities was raised. The claimant entity emphasises
that the aforementioned proceedings ended with reports that made no express
reference to what now appears to be the Inspectorate's criterion in this
regard, which means, according to the claimant, that these proceedings had an
implicit content that must affect the regularisation
that is now the subject of review, insofar as, being in a position to regularise such income, the Inspectorate itself decided not
to do so.
However, it should be noted that the Supreme Court has
ruled on several occasions on the circumstances that must be present in order
for the existence of a proper act to be appreciated, which, as such, binds the
Administration in its actions; thus, in a judgment of June 2016 (rec.
2218/2015) it was stated that:
"Thus,
in the judgement of 15 April 2002, (appeal no. 77/1997), in this line, the
Chamber stated that the principle of protection of legitimate expectations,
related to the more traditional ones, in our legal system, of legal certainty
and good faith in relations between the Administration and the public
administration, is the same as the principle of legitimate expectations.
77/1997), the Court stated that the principle of protection of legitimate
expectations, related to the more traditional principles, in our legal system,
of legal certainty and good faith in relations between the Administration and
individuals, entails, according to the doctrine of the Court of Justice of the
European Union and the case law of this Court, that the public authority may not
adopt measures that are contrary to the expectations induced by the reasonable
stability of its decisions, and on the basis of which individuals have adopted
certain decisions. Or, to put it another way, the virtuality of the principle
invoked may entail the annulment of an act of the Administration or the
recognition of the latter's obligation to respond to the alteration (produced
without prior knowledge, without sufficient transitional measures to enable the
subjects to adapt their conduct and proportionate to the public interest at
stake, and without the due corrective or compensatory measures) of the usual
and stable circumstances, which generate well-founded hopes of maintenance (Cfr. SSTS of 10 May , 13 and 24 July 1999 and 4 June 2001).
But this is on the understanding that the necessary assumptions for the
application of the principle invoked cannot be assessed in the mere expectation
of unchanging circumstances, and that neither the principle of legal certainty
nor that of legitimate expectations guarantee that situations of economic
advantage involving an enrichment that is considered unjust must remain
irreversible.
In
that sense, the fact that the regularisation of the
tax situation has not been activated in other previous years cannot be an obstacle
to the fact that, once the Administration has established that the irregular
practice has been carried out, it can proceed to regularise
it thereafter. Furthermore, the conduct of one of the parties without at the
same time assessing that of the other party cannot be considered to be contrary
to the doctrine of actos propios
or to good faith.
(...)
The
tax administration may be obliged to observe the conduct of previous years in
the future, but this must be unequivocal and definitive prior acts.
According
to the jurisprudence of this Chamber, the protection of legitimate expectations
and the obligation to act on the basis of one's own acts requires the presence
of two presuppositions:
-)
The proper act must be the consequence of a fully developed inspection
activity, actual or potential, so that when classifying a transaction, the
administration has all the data, without there being any unknown or hidden
elements.
-There
must be no relevant new data that has arisen ex post facto.
The
protection of legitimate expectations and own acts do not apply if the tax
administration's verification activity is partial, if decisive elements for the
correct legal classification of the business or set of businesses are missing.
In the present case, as has been said, the Administration did not expressly or
tacitly state, in the tax assessment made to Ms
Emilia, the set of transactions that would give rise to the declaration of
fraud, which is not, as the claimant maintains, the isolated purchase and sale
of 204 shares in KARESPAIN S.L., but the set of business transactions carried
out with the related companies referred to above".
For its part, in its judgment of 13 June 2018 (rec.
2800/2017), the High Court ruled that:
"It
goes without saying that it is impossible, in our view, to answer this question
in an absolute, general or universally applicable way to all situations of that
nature. Again, we must continue as we began when analysing the principle under
consideration: its effectiveness will depend on the specific circumstances of
each case.
We
can, however, state that the Tax Administration will not be able to demand the
tax in relation to a certain type of transaction (or, in general, taxable
events), in respect of previous periods that are not time-barred, when external
acts or signs of that same Administration can be identified that are
sufficiently conclusive to suggest that the tax in question should not be
demanded in accordance with the regulations in force or the applicable case
law. In other words, the express and precise declaration that the transaction
is not subject or the performance of unequivocal acts that reveal a criterion
clearly contrary to its subjection will prevent the Administration from
demanding the tax retroactively, that is, in relation to times prior (not
affected by the statute of limitations) to that in which the criterion that had
previously been expressly or tacitly expressed was changed and which led the
interested party to adjust its conduct to those acts of its own.
To
that it should be added, reiterating here our case-law, that the fact that
the competent administration has not previously regularised
the taxpayer's situation, or has not initiated in relation to the corresponding
taxable events any procedure (management or inspection) does not ineluctably
determine that there is a tacit act of recognition of the taxpayer's right,
since that circumstance - the absence of regularisation
- does not constitute, if it is not accompanied by a tacit act of recognition
of the taxpayer's right, or inspection) does not ineluctably determine that
there is a tacit act of recognition of the taxpayer's right, since such a
circumstance - the absence of regularisation - does
not constitute, if it is not accompanied by other conclusive acts, an act of
its own that gives the interested party the confidence that his conduct is
supported by the competent body of the Administration. These statements, in
short, are no more than the application to the case of our jurisprudence on the
principle of legitimate expectations since, we reiterate, this principle (i) cannot protect the subjective beliefs of the
administrated parties, (ii) or rest on mere expectations of the invariability
of factual or legal circumstances, nor, finally, (iii) can it be applied with
annulling effectiveness without acts or external signs sufficiently conclusive
to generate a reasonable conviction in the citizen that there is an unequivocal
will of the Administration in the corresponding sense".
In the same sense, the High Court has ruled in other
judgments, such as the one cited by the Tax Inspectorate in the settlement
agreement (STS 22/11/2013, rec. 2008/2013), in which it concluded that the Tax
Inspectorate may regularise a legal tax situation
when it deems it appropriate, without being bound by what was done previously
in the sense of not having regularised the situation
beforehand, despite knowing the facts.
This TEAC has also ruled on this issue; thus, in RG
6392/2018 of September 2020, we concluded that in order to admit the violation
of the doctrine of actos propios,
an effective, clear and prior action carried out in full by the Administration
was required, involving an unequivocal manifestation of will regarding the
application of a specific rule, as well as the fact that in the current
situation, the permanence, in equal terms, of all the factors that affect the
application of a tax and that determine the administrative criterion in this
regard is evident.
In the present case, there is no clear and unequivocal
manifestation of intent resulting from a previous inspection procedure in which
the remuneration of the aforementioned administrators was verified; on the
contrary, there is no pronouncement in this regard, and therefore, the
infringement of the doctrine of actos propios alleged by the claimant cannot be assessed.
2. The claimant seeks to defend the deductibility of the
remuneration paid to the aforementioned directors, as these items are
considered an accounting expense and, therefore, a tax expense, given that
there is no specific rule in the applicable IS regulation that excludes their
deductibility. Specifically, in a summary of the evolution of the regulations
applicable to the deductibility of directors' remuneration, the claimant refers
to the requirements for deductibility of the expense in Law 61/1978, i.e. the
necessity of the expense, and in Law 43/1995, the requirements of accounting
expense and correlation with income, emphasising that
there is no need to analyse the requirements set out in the commercial
regulations.
It is not a matter of dispute that the deductibility of
remuneration received by company directors has been a controversial issue; an
example of this is the constant and repeated judicial pronouncements on the
matter.
Regarding the discussion of the requirements of Law
61/1978 and Law 43/1995 indicated by the claimant, these have been examined by
the Supreme Court and have been clearly rejected. Thus, in its ruling of
02/01/2014 (rec.4269/2012), the High Court made it clear that the entry into
force of Law 43/1995 did not entail any modification with regard to the tax
regime for directors' remuneration and stated, with regard to the requirement
of the necessity of the expense that:
"...
The
question, therefore, does not focus on the "necessity" of the
expense, as is sometimes claimed, but on its "legality", which must
be inferred from the rules governing directors' remuneration in the respective
texts that regulate them. Such legality must be understood as referring, as we
have also pointed out, not only to the Articles of Association but also to the
limits that can be inferred from the whole of the legal system in view of the
concurrent circumstances.
For
this reason, as we have already said on some occasions, any interpretation that
maintains that in this matter, scrupulous compliance with commercial
legislation is not demandable or scrupulous".
For its part, the High Court in its ruling of 05/02/2015
(rec.2795/2013) pointed out, with regard to what interests us here, that:
"(...)
To
the above should be added what was stated by the High Court in its ruling of 28
December 2011 , handed down in appeal No. 6232 / 2009, among others, in which
it points out the following.
"(...)
The
special feature of the appeal that we are now deciding on is the legal text
applicable to this question, because while Law 61/78 was applicable to the
1995/96 financial year, Law 43/95 is applicable to the 1996/97 and 1997/98
financial years.
The
different treatment of the problem posed by the different applicable
legislation must be rejected if it is borne in mind that it is the appellant
entity's articles of association that require the adoption of a resolution on
the remuneration of the directors, a resolution that has not been adopted here
and which makes the adjustment made appropriate.
Finally,
the difference that the appellant entity formulates between article 13 ñ) of
Law 61/78 and 10.3 of Law 43/95, which would give rise to a different solution to
the problem raised, is non-existent, as the former refers to the
administrators' shares in profits, while article 10.3 regulates the formation
of the taxable base".
The claimant also alleges that, in the DGT report of 12
March 2009, the DGT concluded that directors' remuneration would be tax
deductible, according to the TRLIS, when the remunerated nature of the position
is established in the company's articles of association, even when not all the
requirements established by commercial legislation for each type of
remuneration are scrupulously complied with.
Notwithstanding the above, this TEAC has already ruled on
this issue, specifically in resolution RG 9996/15 - DYCTEA, in which we pointed
out that:
"However,
in contrast to the aforementioned position of the DGT, the Supreme Court in its
ruling of 2 January 2014 (appeal for the unification of doctrine number
4269/2012 filed by a public limited company) expressly contradicts the DGT's
statement, pointing out that both Law 43/1995 and the TRLIS continue to require
scrupulous compliance with commercial legislation (a ruling that had not yet
been issued in the years in which the regulation of the 2004 to 2007 financial
years took place), and that it is therefore necessary to specify the
remuneration system, which is why the tax authorities regulated the directors'
remuneration for 2008 and were unable to do so for previous years.
And
it should not be lost sight of the fact that the case law of the Supreme Court
is binding and must take precedence over the criteria established by
administrative bodies. In this sense, Article 1.6 of the Civil Code
(hereinafter CC):
6.
Case law shall complement the legal system with the doctrine that the Supreme
Court has consistently established in interpreting and applying the law, custom
and general principles of law.
The
interpretation of this precept is clarified by the Supreme Court itself, which
in the fifth ground of law of its judgment of 25 January 1988 stated:
...for
the doctrine of the Supreme Court to be considered case law, the following
requirements must be met: a) it must be a doctrine reiterated in at least two
judgments; b) it must be established when applying or interpreting the Law,
Custom or General Principles of Law; c) such doctrine must have been used as
the basic reason for adopting the decision contained in the judgments; d) there
must be identity between the specific cases or, at least, an extraordinary
similarity or analogy.
All
these circumstances are present in the present case.
Article
1.6 CC also obliges the Inspectorate which, therefore, is apparently compelled
to comply with the divergent criteria of two different bodies, one judicial
(the Supreme Court) and the other administrative (the DGT). This dilemma can
only be resolved by giving primacy to the jurisprudence of the Supreme Court,
the final judicial instance of our rule of law and generator of binding
jurisprudence which, evidently, takes precedence over administrative
doctrine".
Therefore, in order to determine the deductibility of
the directors of an entity, it is necessary to take into account its legality,
i.e. compliance with the requirements of commercial law to recognise
the deductibility of the expense for directors' remuneration.
4. On the other hand, there is a continuous reference by
the claimant throughout the statement of allegations to the SC ruling of 8
February 2021, by virtue of which the deductibility of the remuneration
received by the directors of an entity should be recognised. However, after
analysing this ruling, it resolves the following question: "to
determine whether, for corporate income tax purposes, late payment interest,
whether it is required in the settlement made in a verification procedure or
accrued due to the suspension of the execution of the contested administrative
act, is or is not considered a tax-deductible expense, given its legal nature
and with what scope and limits". Therefore, the question that arises,
and on which the Supreme Court ruled, is the deductibility of late payment
interest, as it is an expense correlated with income. This question cannot be
extrapolated to this case, insofar as here we are studying the tax treatment of
another item of expenditure, the remuneration of directors, without, in this
case, questioning the correlation of this item of expenditure with the
company's income, the key, in this respect, being compliance with the
requirements demanded by commercial legislation to determine whether, if
applicable, they should be treated as a liberality or expenditure contrary to
the legal system, non-deductible expenses in accordance with article 14 TRLIS
and 15 LIS.
SIXTEENTH.- Having answered the above allegations, it is
now time to resolve the merits of the matter at hand, i.e. to determine the
deductibility of the directors' remuneration. To do so, it is necessary to
begin by specifying whether or not the so-called "link theory" is
applicable to the case and, if so, whether or not the remuneration paid meets
the requirements of commercial legislation to allow it to be treated as a
tax-deductible expense.
1. Summary of the facts.
First of all, it is worth summarising
the facts of the case, with regard to the functions performed by the executive
directors whose remuneration has been questioned:
D. Btz:
Business relationship: Chairman of the Board of Directors
of XZ SA (as recorded in the documentation submitted to the
Directorate-General for Insurance and Pension Funds and in the Commercial
Register).
Employment relationship: in 2013 and 2014 he held the
position of chairman of XZ, assuming the highest executive
responsibility of the Group. According to the documentation provided by the
entity:
"Communication
from XZM dated 1 January 2005, in which it states, in the first clause,
that Mr Btz has
had a special senior management employment relationship with XZM since
that date.
-
In the recital III of the contract of 4 May 2015, concluded between Mr. Btz and XZ SA, it is stated that Mr. Btz was appointed Executive Chairman of the
Board of Directors of XZ, dated 10/3/2012.
-
In the recital III of the contract entered into between Mr. Btz
and XZ SA, on 1 July 2016, as Executive Director, it is stated that
Mr. Btz was appointed Chairman of the Board
of Directors of XZ S.A., on 10/3/2012, in addition to holding the
position of Chairman of the XZ Group, which reports to the Board of
Directors of XZ S.A."
D. Axy: (XZ SPAIN)
Business relationship: Chairman of the Board of Directors
(according to documentation submitted by the company to the Directorate-General
for Insurance and Pension Funds).
Employment relationship: President of the company. The
following contracts were submitted to the Inspectorate:
"Contract
dated 4 May 2015, which regulates the conditions of Mr. Axy
as Executive Director of the entity and member of the Board of Directors,
Fourth Vice-Chairman of XZ and Territorial CEO of IBERIA, reporting to
the Chairman of XZ.
Contract
dated 1 July 2016, which regulates the conditions of Mr. Axy
as Executive Director, member of the Board of Directors of XZ, S.A.
and Vice President 30 of XZ, S.A. and Chairman of the Board
of Directors and the Management Committee of XZA , Services and Special
Risks reporting to the Chairman of XZ".
In the XZV entity, he holds the following
positions:
Commercial relationship: Member of the Board of
Directors. Signs the Annual Accounts of the company, as Chairman of the Board
of Directors, for the financial years 2013, 2014 and 2015.
Employment relationship: Managing Director (2005-2010)
and Vice-President of the company (in the years audited). The following
contracts have been provided:
"Contract
dated 1 January 2005 (and annex No 1), which regulates the conditions of Mr Axy on the occasion
of his appointment as CEO of XZV.
-
Annex No 1, dated 1 January 2013, to the Letter Agreement dated 1 January 2005
(and Annex) as partially amended by documents dated 14 January 2005, 31 October
2009 and 31 November 2010, regulating the conditions of Mr
Axy as Fourth Vice-President of XZ,S.A.,
First Vice-President of XZN and XZE, President of the Insurance
Division of Spain and COUNTRY_5 and President of XZV and XZZ,
reporting to the President of XZ.
-
Annex No 1, dated 1 January 2014, to the Letter Agreement dated 1 January 2005,
as partially amended by documents dated 14 January 2005, 31 October 2009 and 31
November 2010, governing the terms and conditions of Mr
Axy as Fourth Vice President of XZ and
Chief Territorial and Regional Executive Officer of XZW reporting to the
Chairman of XZ and YXZ.
-
Contract dated 4 May 2015 (and annex) regulating the relationship of Mr. Axy as Executive Director of XZ in his
capacity as Fourth Vice-Chairman of XZ, S.A. and Territorial CEO
of Iberia.
-
Contract dated 1 July 2016 (and Annexes I and IV) regulating the relationship
of Mr. Axy as Executive Director of XZ,
in his capacity as member of the Board of Directors of XZ, S.A. Third
Vice-Chairman of XZ, Chairman of the Board of Directors and of the
Management Committee of XZA, Services and Special Risks, reporting to
the Chairman of XZ".
In XZ SA he holds the position of Vice-Chairman of
the board of directors (as stated in the documentation provided to the
Directorate General for Insurance and Pension Funds and in the Companies
Register). With regard to the employment relationship, the following contracts
are provided:
"Communication
from XZV dated 1 January 2005, which states in clause one, paragraph
one, that Mr. Axy has had a special
senior management employment relationship with that entity since 2 January 1998.
-
Contract of 4 May 2015 entered into with XZ S.A., where it is stated in
section II that Mr. Axy has maintained
a special senior management employment relationship with XZ since 2
January 1998, and in section III it is stated that Mr. Axy
is a member of the Board of Directors of XZ S.A., and that he has
the status of Executive Director.
-
Contract of 1 July 2016 entered into with XZ SA, where in the expository
II it is stated that Mr. Axy has
maintained a special senior management employment relationship with XZ,
since 2 January 1998, and in the III it is stated that, Mr. Axy
is a member of the Board of Directors of XZ S.A., and that he has
the status of Executive Director in addition to holding the position of 3rd
Vice President of XZ and Chairman of the Board of Directors and the
Management Committee of XZA, Services and Special Risks, reporting to
the Chairman of XZ Group".
D. Cvs: (XZN)
He appears as an executive director of the entity in the
years audited, signing the annual accounts in that capacity. Among the
documentation provided to the Inspectorate, as a result of the order to
complete the proceedings, the following stand out:
"Contract
dated 4 May 2015, for an executive with a special employment relationship
dependent on an executive director, entered into between the aforementioned
person and XZ S.A. acting in the name and on behalf of XZN, in
which the following matters, among others, are included:
"That
since 29 June 2006, Mr. Cvs has had a
special senior management employment relationship with XZ".
"Mr.
Cvs will serve as Chief Executive
Officer of the International Insurance Business Unit of XZ, assuming the
executive responsibilities of his position ...;".
-
Executive Director Agreement dated 21 October 2016, entered into between the
aforementioned person and XZ S.A. acting in the name and on behalf of XZN,
in which the following matters, among others, are included:
"That
Mr. Cvs (hereinafter the Executive) is
a member of the Board of Directors of XZN, has the status of executive
director and holds the position of Territorial CEO of XZN, reporting to
the President of the XZN Group".
"The
Director shall render the services proper to the post to which he/she has been
appointed, assuming the responsibilities deriving from the post and performing
his/her duties with the powers vested in him/her...;".
D. Dqp: (XZN)
He is listed as an executive director of the entity
during the years audited, and as Chairman of the Board of Directors of the
entity. As a result of the order to complete the proceedings, the following
contracts were provided:
"Executive
director contract dated 4 May 2015, entered into between the aforementioned
person and XZQ S.A., in which the following matters, among others, are
included:
"That
since 1 January 2003, Mr. Dqp has had a
special senior management employment relationship with XZ.
That
Mr. Dqp is a member of the Board of
Directors of XZ S.A., Chairman of the Board of Directors of XZQ S.A. and
has the status of executive director in both entities".
"Mr.
Dqp will serve as President of XZQ and
Chief Territorial Executive Officer of XZL, assuming the executive
responsibilities of his position ...;".
-
Executive Director Agreement dated 1 July 2016, entered into between the
aforementioned person and XZ S.A. acting for and on behalf of XZN,
which contains, among other matters, the following:
"That
since 1 January 2003, Mr. Dqp has had a
special senior management employment relationship with XZ".
"That
Mr. Dqp (hereinafter the Director) is a
member of the Board of Directors.
of XZ
S.A., Chairman of the Board of Directors of XZQ S.A., is an executive
director and holds the position of Chief Territorial Executive Officer of XZL
reporting to the Chairman of XZ Group".
D. Oml: (XZA)
Business relationship: Chairman of the Board of Directors
since 27/02/2006 (according to documentation submitted by the company to the
Directorate General of Insurance and Pension Funds)
With regard to the employment relationship, the following
contracts have been provided:
"Communication
of 17/03/2004 with XZA and annex. In the first clause, paragraph one, of
this communication, it is stated:
"This
contract governs the rights and obligations arising from your employment
relationship with the company, consisting of:
The
special employment relationship of senior management, by which you have been
linked to the entity since 31 May 2002, and to which you have gained access by
internal promotion".
-
Contract of 4/05/2015 with XZA, in which in expository II it states:
"That
since 31 May 2002, Mr. Oml has had a
special senior management employment relationship with XZ".
Stipulation
one, paragraph one, of the contract states:
"Mr Oml will serve
as Chief Executive Officer of the XZ Assistance Business Unit and will
assume the executive responsibilities of his position...;".
-
Executive officer contract with common employment relationship dependent on
executive director of 3/05/2016 with XZ SA."
D. Ubj: (XZR)
Corporate relationship: Chairman of the Board of Directors
from 2013 to 2015 (according to documentation submitted by the company to the
Directorate General of Insurance and Pension Funds).
With regard to the employment relationship, the following
contracts have been provided:
"Communication
of 17/03/2004 appointing him as General Director of XZR. Paragraph 1 of
the same states:
"He
shall perform the duties of that high representative office...;".
-
Communication of 17/03/2004 of the special senior management employment
relationship with XZR and common employment relationship in a
suspended situation. Paragraph 3, clause 1 of the first clause of the
communication states:
"As
long as he holds the position of high representation for which he has been
appointed, his special employment relationship with the entity will remain
suspended, so that the appointment to the position of high representation does
not imply a novation of the special employment relationship nor does it
interrupt the computation of his seniority as an employee".
-
Executive contract with a special employment relationship dependent on
the executive director, dated 4 May 2015. In section II of the explanatory
section it is stated that:
"Since
10 September 2002, Mr. Ubj has had a special
senior management employment relationship with XZ".
Stipulation
one, paragraph one, of the said contract reads:
"Mr Ubj will serve
as Chief Executive Officer of the Reinsurance Unit of XZ...;".
D. Ixt: (XZ SA)
Business relationship: Vice-Chairman of the Board of
Directors as stated in the documentation submitted to the Directorate-General
for Insurance and Pension Funds and in the Commercial Register).
With regard to the employment relationship, the following
contracts have been provided:
"Communication
from XZMC (Holding of insurance companies) dated 17 March 2004, which
states in clause one, paragraph one, that Mr. Ixt
has had a special senior management employment relationship with
that company since 1 September 2000.
-
Contract of 4 May 2015 entered into with XZ S.A., where it is stated in
the second paragraph that Mr. Ixt has
maintained a special senior management employment relationship with XZ since
1 September 2000, and in the third paragraph it is stated that Mr. Ixt is a member of the Board of Directors of XZ
S.A., and that he is an Executive Director.
-
Contract of 1 July 2016 entered into with XZ SA, where in the expository
II it is stated that Mr. Ixt has
maintained a special senior management employment relationship with XZ,
since 1 September 2.000, and in the III it is stated that, Mr. Ixt is a member of the Board of Directors of XZ
S.A., and that he has the status of Executive Director in addition to
holding the position of 1st Vice President and General Manager of the Corporate
Financial and Investment Areas of XZ".
D. Eyh: (XZ SA)
Business relationship: Vice-Chairman of the Board of
Directors as stated in the documentation submitted to the Directorate-General
for Insurance and Pension Funds and in the Commercial Register).
With regard to the employment relationship, the following
contracts have been provided:
"Communication
from XZM dated 17 March 2004, which states, in the first clause, that Mr Eyh has had a special
senior management employment relationship with XZM since 15/3/2001.
-
In the Executive Director contract, dated 4 May 2015, between Mr. Eyh and XZ SA, it is stated that Mr. Eyh is a member of the Board of Directors of XZ
S.A., and has the status of Executive Director.
-
In the contract entered into on 1 July 2016, with XZ SA, as Executive
Director, it is stated, in the expositive III that, Mr.Eyh
is a member of the Board of Directors of XZ S.A., has the status of
Executive Director, and holds the position of 2nd Vice President of XZ,
reporting to the Chairman of the XZ Group".
D. Ekb:
The only thing that appears in the file is that he is a
director exercising executive functions in XZ SA.
D. Msp: (XZS)
Business relationship: Managing Director of the company XZS,
in the financial years audited, signs the annual accounts for those financial
years, in that capacity (according to documentation submitted by the company to
the Directorate-General for Insurance and Pension Funds).
Employment relationship: The claimant provided the
following documentation:
"-
Dated 1 January 2013, Annex Nos. 1 and 2 to the Letter-Contract dated 1
September 2005 regulating the employment conditions, for 2013, of Mr. Msp as Managing Director of XZS and
Third Vice-President of the Insurance Division of Spain and COUNTRY_5,
reporting to the Fourth Vice-President of XZ, First Vice-President of XZN
and XZE, President of the Insurance Division of Spain and COUNTRY_5
and President of XZV and XZZ".
In
Annex No. 1 referred to in the previous paragraph it is stated, in section I
"POSITION AND FUNCTIONS":
Position:
Chief Executive Officer of XZS and Vice President 30 of the Insurance
Division Spain and COUNTRY_5.
Duties
and dependence: You will continue to perform the duties of the aforementioned
position, reporting directly to Vice-President 40 of XZ, S.A.,
Vice-President 1 0 of XZN and XZE, President of the Insurance
Division Spain and COUNTRY_5 and President of XZV and XZZ".
Ms Pcv: (XZ SPAIN)
Commercial relationship: Member of the Board of Directors
(according to documentation submitted by the company to the Directorate General
for Insurance and Pension Funds).
Employment relationship: Deputy General Manager of the
Non-Life Benefits Area of XZ ESPAÑA in 2013 -2016, reporting directly to
the General Manager, Mr. Ntx. In the course of
the inspection, the complainant pointed out:
"Pcv, NIF. ... has held
the following positions in XZ ESPAÑA during the inspection period:
Between 29 June 2012 and 31 December 2017 he held the position of Member of the
Board of Directors of the entity. The following documentation is attached to
this letter: Annex No 1, dated 1 January 2013, to the Letter-Contract dated 17
March 2004 regulating the employment conditions, for 2013, of Ms.Pcv as Deputy General Manager of XZ
SPAIN (Non-Life Benefits Area) reporting to the Vice-President 1 0 of the
Insurance Division of Spain and COUNTRY_5, Vice-Chairman/CEO of XZZ and
Chairman of XZE.
Annex
No 1, dated 1 January 2014, to the Letter-Contract dated 17 March 2004, which
regulates the employment conditions of Ms. Pcv
for 2014 as Deputy General Manager of XZ SPAIN (Non-Life Benefits
Area) reporting to the Vice-President and General Manager of XZ SPAIN...;'.
In
addition to the above, the inspection notes that the following contracts
concluded with Pcv and Ntxs
have been provided (diligence no. 24, section 1.5):
-
26/10/2015. In the expository II of this contract it is stated that:
"Ms.
Pcv is a member of the Board of
Directors of XZZ and has the status of executive director (the
bold is ours)". That in the first stipulation of said contract, in
paragraphs one and two, it is stated: "Ms. Pcv
will provide her services as Deputy General Manager of XZ Spain
(Non-Life Benefits Area), assuming the executive responsibilities derived from
her position and performing her duties with the powers conferred upon her and
subject to the provisions of the Articles of Association and the applicable
legal provisions, all with the rigour and diligence
befitting her rank and subject to the requirements of good faith and the
obligations derived from this contract.
The
provision of services to other XZ Group companies or collaboration with
them or with other entities with which they maintain relations, when required
to do so, without additional remuneration, shall be deemed to be included among
its obligations.
Ms Pcv
will perform the duties of her post, reporting directly to the Regional CEO
for Spain and COUNTRY_5 of XZ.
The
second stipulation of the contract reads:
"This
contract shall be governed:
a)
By the will of the parties, expressly stated therein.
b)
By the applicable regulations in force from time to time.
c)
As established in the Articles of Association".
- From
27/7/2016. The contract is entitled "EXECUTIVE ADVISER WITH COMMON LABOUR
RELATIONSHIP". In the second paragraph of the contract it is stated:
"That
she is a member of the Board of Directors of XZ ESPAÑA, holds the
position of Deputy General Manager of XZ ESPAÑA (Non-Life Benefits
Area), reporting to the Territorial CEO of XZW, and has her place of
work at the headquarters of XZ in ...;". The second clause of said
contract states: "This contract regulates the rights and obligations
derived from the employment relationship of the Directive with the Company, of
a common nature and Indefinite duration, which began with her incorporation
into the XZ Group on the date indicated in section I of this document
and which determines her seniority in the company. In the event that a date
prior to the date of incorporation is indicated as the seniority date, it shall
be understood that the Company recognises the
employment rights corresponding to the Director with effect from that seniority
date".
D. Ntx: (XZ SPAIN)
Business relationship: Member of the Board of Directors
from September 2008 to January 2015
Employment relationship: Managing Director of the audited
financial years (according to documentation submitted by the company to the
Directorate General of Insurance and Pension Funds). The complainant provided
the following documentation:
"Annex
No 1, dated 1 January 2013, to the Letter-Contract dated 1 February 2007,
regulating the conditions of Mr.Ntx as
Vice-President 1 0 of the Insurance Division Spain and COUNTRY_5,
Vice-President-Chief Executive Officer of XZZ and President of XZE,
reporting to the Fourth Vice-President of XZ S.A. and First
Vice-President of XZA and XZE, President of the Insurance
Division Spain and COUNTRY_5 and President of XZV and XZZ.
Annex
No 1, dated 1 January 2014, to the Letter-Contract dated 1 February 2007, which
regulates the conditions of Mr. Ntx as
Vice-President and General Manager of XZ ESPAÑA No Vida, reporting to
the Fourth Vice-President of XZ and Chief Territorial and Regional
Executive Officer of XZW.
-Contract
dated 4 May 2015 (and annexes I and IV) for an executive officer with a common
employment relationship reporting to the Executive Director, which regulates
the conditions of Mr. Ntx as General
Manager of the Corporate Business Support Area of XZ, reporting directly
to the Chairman of XZ.
-Contract
dated 1 July 2016 (and annexes) for an executive with a common employment
relationship reporting to the Executive Director as General Manager of the
Corporate Business Support Area of XZ, reporting to the Chairman of XZ".
D. Fgo: (XZV SA)
Business relationship: member of the company's Board of
Directors (since 2005)
Employment relationship: Chief Executive Officer of the
company since 2011 and Vice-Chairman of the company (since 2012) He signs the
annual accounts of the company, in his capacity as Chief Executive Officer:
Annex
No 1, dated 1 January 2013, to the Letter-Contract dated 1 January 2005, which
regulates the relationship of Mr Fgo
as First Vice-President and CEO of XZV and Second Vice-President of
the Insurance Division of Spain and COUNTRY_5, reporting to the Fourth
Vice-President of XZ S.A., First Vice-President of XZN and XZE,
President of the Insurance Division of Spain and COUNTRY_5 and President of XZV
and XZZ.
-
Annex number 1, dated 1 January 2014, to the Letter-Contract dated 1 January
2005, which regulates the relationship of Mr. Fgo
as General Manager of XZV reporting to the Fourth Vice-Chairman of XZ
S.A. and Chief Territorial and Regional Executive Officer of XZW.
-
Contract dated 26 October 2015 (and annexes I and IV) regulating the
relationship of Mr.Fgo as Executive
Director of XZ in his capacity as CEO of XZV and General Manager
of XZV reporting to the Regional CEO for Spain and COUNTRY_5.
-
Contract dated 27 July 2016 (and annex) regulating the relationship of Mr.Fgo as Executive Director of XZ in
his capacity as Chief Executive Officer of XZV and Managing Director of XZV
reporting to the Territorial CEO of XZW".
D. Gde: (XZR)
Commercial relationship: he appears as a Member of the
Board of Directors in the 2013/2014 financial years and as Chief Executive
Officer in the 2015/2016 financial years. (according to documentation submitted
by the company to the Directorate General of Insurance and Pension Funds).
With regard to the employment relationship, the following
documents have been provided by the complainant:
"Contract
of 1/1/2009 between Mr Gde
and XZR in which he is appointed Deputy General Manager and Chief
Operating Officer (in the first clause of the contract, paragraph 2, Mr Gde is described
as a "senior manager").
-
Contract of 29/09/2015 between Mr Gde
and XZR (section II of the contract states that Mr
Gde is a member of the Board of
Directors of the company and has the status of executive director; in the first
stipulation, section 1, of the contract, it is stated that "Mr Gde will provide
his services as General Manager of XZR");
-
Executive director contract of 28/09/2016 between Gde
and XZR (in the second paragraph of the contract it is stated that Mr Gde "has
maintained since 3 December 2015 a special senior management employment
relationship with XZ"- in the contract, XZR is referred
to as XZ, the Company, or the Company).
In
the third paragraph, it is stated that Mr. Gde
"is a member of the Board of Directors of XZR, has the status
of Executive Director, and holds the position of CEO of XZR and Chairman
of its Board of Directors...;".
Mr. Jws
(XZA) 2016
According to the documentation submitted by the company
to the Directorate General of Insurance and Pension Funds, he has been a
Director since 01/01/2016 and is the General Manager of the Company. The
following contracts are provided by the claimant:
"From
1/01/2008 with XZG; from 1/01/2008 with Group XZ, in which it is
stated in clause one, paragraphs one and two:
"This
contract regulates the rights and obligations deriving from your employment
relationship with the company, of a common nature, which began when you joined
Group XZ on 23 May 2002, the date which determines your seniority in the
company. As a senior manager, you will be classified in the highest employment
category (Group O) provided for in the Collective Bargaining Agreement in force
and you will carry out the duties that correspond to that status, under a title
that is appropriate to those duties".
-
Of 4/05/2015 with XZ SA, in which its first stipulation reads:
"Mr Jws will provide
his services as Deputy General Manager of the Corporate Area of Business and
Clients of XZ, assuming the executive responsibilities derived from his
position...;". The second clause of this contract states, "this
contract shall be governed: a) by the will of the parties, expressly set out in
this contract, b) by the applicable labour
regulations".
-
From 15/09/2016, executive director's contract in which clauses II and III of
the expository of said contract state:
"That,
since 1 January 2016, he has had a special senior management employment
relationship with XZ.
That
Mr. Jws (hereinafter, the Manager) is a
member of the Board of Directors of XZA, has the status of executive
director and holds the position of General Manager and Chief Operating Officer
(COO) of the ASISTENCIA Unit, reporting to the Chairman of said entity".
The first clause of the said contract states, "The Manager shall provide
the services inherent to the position for which he has been appointed, assuming
the responsibilities derived from the position by performing his duties with
the powers conferred on him, subject to the applicable legal provisions, the
Company's Articles of Association and the internal regulations of the XZ Group,
all with the rigour and diligence appropriate to his
rank and subject to the obligations derived from the present contract and the
requirements of good faith".
It follows from the above that all the aforementioned
persons have a business relationship with the aforementioned entities of the
group, i.e. they hold the positions of Chairman, Vice-Chairman or Member of the
Board of Directors. With regard to the employment relationship, we must specify
whether it is a common one or, on the contrary, whether it should be classified
as senior management or special. This is a relevant question, insofar as it is
decisive for the purposes of concluding whether or not the "employment
relationship theory", which we will analyse below, is applicable to this
case.
2. Qualification of the employment relationships that
linked these persons with the entities of GROUP XZ.
According to the contracts provided by the claimant
itself, most of the members of the Board of Directors identified have a senior
management employment relationship with the aforementioned group entities,
notwithstanding the fact that, according to some of the contracts, some of them
are apparently classified as "ordinary employment contracts".
However, on this point we should refer to the need to comply with the principle
of qualification, enshrined in article 13 of the LGT, which states:
"Article
13. Qualification.
Tax
obligations shall be demanded in accordance with the legal nature of the fact,
act or business carried out, whatever the form or denomination given to it by
the interested parties, and disregarding any defects that may affect its
validity".
Thus, in this case, despite the fact that some of the
employment contracts provided by the claimant are not expressly referred to by
the parties as senior management contracts, they merely reflect the
stipulations of a relationship of this nature, without forgetting her status as
a director of the entity.
In accordance with the explanatory memorandum of Royal
Decree 1382/1985 of 1 August 1985, which regulates the special employment
relationship of senior management personnel:
"...the
relationship established between the senior manager and the contracting Company
is characterised by the reciprocal trust that must exist between both parties,
derived from the unique position that the manager assumes within the Company in
terms of faculties and powers. These characteristics are reflected in the legal
regime established by this regulation, which firstly determines the concept of
senior management personnel, in order to delimit the scope of the regulation,
thus eliminating situations of legal vagueness, and even a regulatory vacuum,
which had been occurring due to this lack of regulatory treatment".
Article 1.2 defines, in line with the above, what is to
be understood by senior management personnel:
"Two.
Senior management personnel are considered to be those workers who exercise
powers inherent to the legal ownership of the Company, and relating to
the general objectives of the same, with autonomy and full responsibility only
limited by the criteria and direct instructions emanating from the person or
from the higher governing and administrative bodies of the Entity that
respectively occupies that ownership".
From what is set out in the case file, it is clear that
the functions corresponding to the aforementioned directors are, in all cases,
strategic, managerial functions, based on trust and responsibility, and, in
short, those of senior management. Therefore, in this case, it can be concluded
that we are dealing with persons who have a commercial relationship with the
aforementioned group entities (chairman, vice-chairman, member of the Board of
Directors), on the one hand, and a senior management employment relationship,
on the other.
3. The LINK THEORY.
It should be borne in mind that the Supreme Court, in
reiterated case law, of which the Judgment of 13 November 2008 is an example,
considers, with respect to the directors of a company who, in turn, have
entered into a senior management employment contract with the company, which
entails the performance of the activities of management, administration and
representation of the company inherent to that position (i.e., representation
and management of the company), that it must be understood that their
relationship with the company is exclusively of a commercial nature and not of
an employment nature, as those functions are understood to be subsumed within
those inherent to the position of director, that their relationship with the
company must be understood to be exclusively of a commercial nature and not of
an employment nature, as those functions are understood to be subsumed under
those of the post of director, "because the legal nature of the
relationship is defined by its very essence and content, not by the concept
that has been attributed to it by the parties". Furthermore, the
Social and Civil Chambers of the Supreme Court, and in the labour
and commercial spheres, have been constructing this "theory of the
link" - see, for example, the judgement of the Social Chamber of
28-09-2017 (appeal for unification of doctrine no. 3341/2015) - according to
which, in the labour and commercial spheres, this
"theory of the link" has been constructed. 3341/2015) - according to
which those activities of management and administration of the company,
provided in the framework of employment or professional relationships by those
who, in turn, are directors, are subsumed and absorbed by those that these
persons must provide due to their commercial obligations as directors of the
company. In other words, in essence, the commercial relationship - which links
an entity through the person who holds the position of director -
"absorbs" the special employment relationship which, as a senior
management employee, may exist between those same persons. Consequently, and from
a tax point of view, when a company has simultaneously paid remuneration to a
person to whom it is linked in this dual capacity as a senior manager and as a
Director or member of a Board of Directors, all this remuneration must be
classified for tax purposes as income derived from the exercise of the
commercial position.
Below, we cite some of the many judgments in which the
High Court expounds the theory we are analysing:
Thus, the judgment of 17/04/2015 (Appeal 2181/2013):
<<
The consequence of this doctrine is that in order to understand as justified
and legitimate the receipt by the company director of a remuneration paid by
the company despite the position being free of charge according to the articles
of association, the concurrence of what the aforementioned judgment 893/2012
(sic), of 19 December 2011 , calls the "objective element of distinction
between activities owed for one reason and another", must be proven, which
must be precise and certain, and ambiguous situations in which the director
carries out activities that are not sufficiently precise and that fall within
the scope of the management, administration and representation of the company
cannot be used for this purpose, because this is incompatible with the
aforementioned system of transparency and clarity required by company
regulations.
As
we recalled in judgments nos. 412/2013, of 18 June , and 411/2013, of 25 June,
in the case where a senior management contract has been entered into between
the company and the member of the administrative body, the assessment of this
objective element of distinction encounters the added difficulty that "the
duties of directors are practically all-encompassing - Article 79 of the 1951
Public Limited Companies Act referred to the performance of the post with the diligence
"of an orderly businessman and loyal representative", Article 127 of
the revised text of the Law on Public Limited Companies refers to that of
"an orderly businessman and loyal representative", Article 225 of the
revised text of the Law on Capital Companies refers to that of "an orderly
businessman" and Article 226 of the same text states that "[d]irectors shall perform their duties as a loyal
representative in defence of the company's interest,
or, in other words, the rule does not discriminate between the political or
deliberative and decision-making "corporate" functions, on the one
hand, and those of "business" execution and management - in this
sense, ruling 450/2007, 27 April, states that it is a clear error "to conceive
of the "mere director" as a purely decorative or symbolic figure,
devoid of any significant activity and lacking in any significant activity or
activity of any kind", devoid of any significant activity and therefore
not deserving of remuneration, so that as soon as a director carries out any
real activity for the company, he or she would be performing work as an
employee deserving of remuneration other than that provided for in the articles
of association for directors and in addition to it" - " (Judgment of
this Chamber no. 893/2012, of December 2012). 893/2012, of 19 December 2011).
>>
And in the same sense, the subsequent ruling of
26/02/2018; it is interesting to note that this ruling, which focuses on
analysing the new framework inaugurated by the commercial reform for 2015, also
ratifies, in the Third FD, all its previous doctrine emanating from the
regulatory framework previously in force:
<<
As a consequence of the aforementioned doctrine, this court considered that in
order to understand as justified and legitimate the receipt by the company
director, generally through the signing of a contract with the company, of a
remuneration paid by the company despite the position being free according to
the articles of association, or not in accordance with the system set out therein,
the concurrence of the "objective element of distinction between
activities owed for one reason or another" had to be proven, that is, for
the organic position of director and for the contractual title.
The
case law considered that the rules governing commercial companies did not
discriminate between "corporate" political or deliberative and
decision-making functions, on the one hand, and "corporate" executive
and management functions, which is why it was not permissible for the executive
functions of the director, or of certain members of the administrative body, to
be remunerated through the conclusion of a contract when they lacked support in
the legal regime provided by the company rules, which gave a primordial role to
the articles of association and to the resolutions of the general meeting.
>>
It is also worth mentioning a recent ruling of the AN
of 18 November 2020 (rec. no. 429/2017), which applies the case law of the
Spanish Supreme Court to the case in question relating to the financial
years 2009 to 2011. In its Eighth FD it states:
<<The
last plea in law in the application refers exclusively to the deduction made in
respect of Mr Maté and Mr Gimeno, members of the board of directors, and denies the
appropriateness of applying the theory of the link.
(...)
In
relation to this issue, it should be noted that the commercial nature of the
relationship of company directors has been recognised in the consolidated case
law of the Social Division of the Supreme Court, inter alia, in the judgement
of 26 February 2014 (unification of doctrine 1684/13), in the ruling of 24
February 2014 (unification of doctrine 1684/13) - which recalls what has been
said by others, such as that of 26 December 2007 (unification of doctrine
652/06), 20 November 2002 (unification of doctrine 337/02), 16 December 1991
(cassation 810/90), 22 December 1994 (cassation 2889/93) -. And it states that
the "typical function of these persons who form part of the company's
governing body is the representation and supreme management of the company,
without their relationship arising from an employment contract but from a designation
or appointment by the highest governing body, so that their relationship is of
a commercial nature"; although it admits that the members of the
administrative body "may at the same time have an employment relationship
with their company, but this would only be possible for work that could be
classified as ordinary or common, but not when it is a question of
simultaneously holding the position of director and senior management jobs
(Manager, General Manager, etc.), given that in such cases the employment
relationship is of a commercial nature".) given that in such cases the
dual relationship has the sole purpose of the supreme management and
administration of the company, i.e. the position of director or adviser
includes in itself the functions of senior management".
Also
illustrative in this regard are the judgments of the Social Division of the
Supreme Court of 24 May 2011 and 9 December 2009, Appeal No. 0000429/2017,
respectively in appeals for the unification of doctrine numbers 1427/2010 and 1156/2009,
to which reference is made in the TEAC decision under challenge. Thus, the 2011
decision, which refers to the previous one, and in relation precisely to the
relationship of an employee linked to the company by a special senior
management relationship who goes on to hold a corporate position as a member of
the Board of Directors, states the following:
"It
must be borne in mind that the activities of direction, management,
administration and representation of the company are the typical and specific
activities of the administrative bodies of commercial companies, whatever form
these may take, whether it be a Board of Directors, a sole administrator or any
other form permitted by law (...)....) It is therefore wrong and contrary to
the true essence of the company's administrative bodies to understand that they
should be limited to carrying out merely consultative or merely advisory or
guidance functions, since, on the contrary, they are responsible for direct and
executive action, the exercise of the management, direction and representation
of the company. Consequently, all these actions involve the performance of
tasks inherent" to the status of company directors, and fully fit in with
the "performance of the position of director or member of the administrative
bodies in companies that have the legal form of a company", which is why
they are included in the aforementioned article 1.3.c) of the Workers' Statute.
Bearing the above argument in mind, this Chamber has repeatedly resolved the
question that arises, in the sense assumed by the referenced judgement. The
judgments have established that in cases of simultaneous performance of
activities on the Board of Directors of the Company and senior management of
the company, what determines the classification of the relationship as
commercial or employment, is not the content of the functions performed but the
nature of the link, hence in the present case, it is irrelevant that the extent
of the powers is different in the case of the appealed judgment and in that of
the referential judgment, as both claimants have acted according to the link
that as members of the Board of Directors united them with the respondent
companies; Therefore, if there is a relationship of organic integration, in the
field of company administration, whose powers are exercised directly or through
internal delegation, the relationship is not an employment relationship, but a
commercial one, which means that, as a general rule, only in cases of
employment relationships, under a dependency regime, but not classifiable as
senior management but as common, would it be acceptable to simultaneously hold
positions of administration of the company and an employment
relationship".
What
can be deduced from this case law, in short, is that the Supreme Court admits
the compatibility between the simultaneous performance of the posts of
administrator and an ordinary employment relationship, but requires that the
latter be for work or functions that can be described as "common or
ordinary" in which the existence of a relationship of dependence is clear
and which, unlike those of "senior management", are not absorbed by
the performance of higher functions corresponding to the status of
administrator - the theory of the link, which excludes the duality of commercial
and employment regimes - that is, only in cases of employment relationships
under a dependency regime which cannot be classified as senior management, but
rather as ordinary. Returning to the present case, the description of the
functions performed by Mr. Maté and Mr. Gimeno prior
to their appointment as members of the Board of Directors, in comparison with
those they continued to perform afterwards, are far from being merely ordinary
or common, as they can also fit perfectly well within the list of senior
management duties.
Furthermore,
and as the plaintiff itself points out, it should be noted that according to
that case law the inclusion or exclusion of the employment relationship is not
based on the content of the activity carried out - which in some cases may be
totally or partially coinciding - but on the nature of the relationship; so
that if that relationship consists, for example, of an organic relationship
through integration into the company's administrative body, the consequence is
that the relationship, at least predominantly, will be of a commercial nature
and not an employment relationship. In other words, the theory of the
relationship excludes the duality of the commercial and employment regimes, and
it is only possible to combine the conditions of administrator and ordinary
worker when "common" or "ordinary" tasks are carried out,
other than those of "senior management" and which are not absorbed by
the performance of higher functions corresponding to the condition of
administrator.
In
that regard, it should be noted that, for the purposes of determining whether
or not to apply the tax exemption and/or reduction, the Administration has
broken down the period in which the employees were subject to a common
employment relationship from the subsequent period in which they were promoted;
in particular, with regard to the two employees referred to in this plea, since
they were appointed members of the Board of Directors.
As the Tax Inspectorate points out in the settlement
agreement, the incompatibility of the special employment relationship (senior
management) and the commercial relationship (as a member of the entity's Board
of Directors) is a criterion that has also been included in numerous
resolutions of this TEAC; certainly, together with those indicated by the Tax
Inspectorate, reference should be made to resolutions RG 4054/2021, 5168/2020,
RG 3226/2019 (21/11/2021), in the latter, available for consultation in DYCTEA,
we point out the following in its SIXTH FD:
"In
accordance with the aforementioned case law theory, in the event of the
concurrence of a commercial relationship (Chairman, Vice-Chairman or member of
the Board of Directors) with a senior management employment relationship (as
explained in the preceding Ground), the commercial relationship displaces the
special senior management employment relationship. For all these reasons, it is
worth citing the judgement of the Administrative Chamber of the Supreme Court
of 22 December 2011 (appeal no. 6688/2009), which states:
...
on the possibility of combining the status of member of the administrative
bodies of a company with that of senior management personnel, subject to labour law, the Civil and - in particular - Labour Chambers of this Court have made the following
statements, ... :
e)
Fifthly, with regard to the question of whether the dual activity, as Chairman,
Vice-Chairman or Managing Director and as General Manager, determines "a
dual relationship - the organic commercial one and the special employment
relationship of senior management - or whether, on the contrary, one of them
must prevail", the Fourth Chamber of this Court has stated that, "In
principle and from an objective perspective, it is difficult to assess the
duality of relationships, because, unlike what happens with ordinary
employment, the functions of senior management insofar as they correspond to
the ownership of the company are normally those attributed to the company's
administrative bodies" (Judgement of 13 May 1991, cit., Second FD).
For this reason, "when functions of this kind are carried out, the
inclusion or exclusion from the sphere of employment cannot be established
according to the content of the activity, but must be based on the nature of
the relationship and the position of the person who carries it out in the
company's organisation, so that if it consists of an
organic relationship due to the integration of the agent in the company
administration body whose powers are those that act directly or through
internal delegation, this relationship will not be an employment
relationship" [Judgments of 21 January 1991, cit,
FD Second; of 3 June 1991, cit., FD Fifth; of 22 December 1994, cit., FD Fifth
, and of 16 June 1998, cit., FD Third; in almost identical terms, Judgments of
13 May 1991, FD Second; of 20 December 1999 (appeal for unification of doctrine
No. 1904/1999), FD Second; of 20 November 2002, cit,
FD Eighth; and of 26 December 2007, cit., FD Second; in the same sense,
Judgment of 18 June 1991 (appeal for infringement of the law No. 1080/1990, FD Third).
Thus, "the basis for exclusion from the sphere of employment does not lie
in the type of duties performed by the subject, but in the nature of the
relationship by virtue of which they are performed"; or, "in other
words, for the special employment relationship mentioned to exist, it is not
enough that the activity performed is that of a senior official, as defined in
the regulatory provision, but that it is performed by a worker, as the same
provision mentions, and not by a director in the exercise of his office"
(Judgments of 29 September 1988, cit, Second FD; and
of 22 December 1994, cit., Sixth FD, in fine, citing the previous one).
f)
Sixthly, and in connection with the foregoing, the Fourth Chamber has stated
that, as is clear from art. 141 of the L.S.A .and, insofar as "all
Managing Directors must belong to the Board of Directors", that "the
Managing Directors are true organs of the commercial company", "the
link between the Managing Director and the company is not of an employment
nature, but of a commercial nature" [Judgment of 22 December 1994, cit, Sixth FD, citing, among those which maintain the same
criterion, those of 14 December 1983, 27 March 1984, 6 February 1985, 24
September, 30 September and 14 October 1987, 29 September 1988, Third FD, and
18 March 1989] ....
In
the light of the abovementioned doctrine, in so far as the Chairman, the
Vice-Chairman and the Managing Director in the 1994 financial year obviously
belonged to the Board of Directors of that entity and carried out only the 'activities
of direction, management, administration and representation of the company'
proper to that office (i.e, as the plaintiff
claims, the representation and management of the company in relation to all the
acts included in the corporate purpose), it must be understood that their
relationship with the appellant company was exclusively of a commercial nature
and not of an employment nature" (underlining incorporated in the
present decision)."
On
the other hand, if we were to maintain that we are in the presence of an
ordinary employment relationship, as the claimant asserts, this could subsist
with the commercial relationship derived from the taxpayer's status as a member
of the Board of Directors, Chairman of the Board and Managing Director.
However, as the aforementioned judgment states, this alleged ordinary
employment relationship "would only be possible for work that could be
classified as common or ordinary", work which, in no case, has been
accredited by the interested party, on the contrary, as stated in the previous
Ground, from the functions assigned, the remuneration received and the special
conditions set out in the contract, it can be deduced that the employment
contract by which the claimant was appointed Senior Vice-President (....), is an
ordinary employment contract...), is a contract regulating a special employment
relationship of a senior management nature.
Thus,
it is stated in the aforementioned case law that:
"g)
Seventh, ... the Fourth Chamber has not closed the door to the possibility that
the director of the company "may in turn carry out other activities within
the business organisation itself, which by their
nature constitute a genuine employment relationship" .... . In even more
precise terms, although case law admits that the members of the Board of
Directors "may at the same time have an employment relationship with their
company", "this would only be possible for work that could be
described as common or ordinary; not so when it is a question of carrying
out both the position of director and senior management work (Manager, General
Manager, etc.), given that in such cases the double employment
relationship is not possible".) given that in such cases the dual
relationship has the sole purpose of the supreme management and administration
of the company, i.e., the position of director or advisor includes in itself
the functions of senior management" (Judgment of 26 December 2007,
cit, Second FD) (the underlining is incorporated in
the present resolution)".
On
the basis of the above, we endorse the conclusion reached by the contested
Settlement Agreement on this issue (page 36):
"In
conclusion, in the present case, taking into account the proven facts set out
in the background facts of this agreement, the regulations set out above and
the applicable doctrine and case law, given that the taxpayer's employment
relationship with (...) is senior management and not ordinary, and also coincides
with his status as a director, the taxpayer cannot be taxed under the special
tax regime applicable to workers posted to Spanish territory provided for in
Article 93 of the Spanish Tax Code.) is senior management and not ordinary, and
also coincides with his status as a director, the taxpayer cannot be taxed
under the special tax regime applicable to workers posted to Spanish territory
provided for in Article 93 of Law 35/2006 on Personal Income Tax, in breach of
the provisions of letter b) of the aforementioned provision, since we are
dealing with a business relationship and not an employment relationship with
(....) in 2013, and all of his worldwide income listed in point 3.6 of section
FIFTH of the Background of this resolution must be included in the taxable
income for personal income tax in 2013".
In the resolution of 6 February 2014 (RG 6/2014), also
published in DYCTEA, we noted that:
"(...)
both relationships (commercial and employment) are incompatible, with the
commercial relationship prevailing, and remuneration may only be received for
this function when the remunerated nature of the position is provided for in
the articles of association".
In RG 3759/2013, dated 06/11/2014, we reiterated the
following doctrine:
"It
is impossible to reconcile the status of special senior management employment
relationship with that of Director or member of the Board of Directors of the
company. In accordance with reiterated case law of the Civil and Labour Courts of the Supreme Court, given the identity of the
functions performed by both (senior management personnel and members of the
Board of Directors / Administrators), the delimitation cannot be based on the
activity carried out, but must take into account the nature of the link between
them and the company, giving priority to the organic relationship, of a
commercial nature, that links the Administrators and members of the Boards of
Directors with the company". Consequently, given the free nature of the
position established in the articles of association and the fact that the
remuneration, fixed as established in the regulations, has not been proven for
Mr. ...; for the exercise of executive functions, we understand that the
amounts paid are non-deductible, and we must therefore confirm the resolution
passed on this point".
As recalled in the Resolution of the Plenary of this TEAC
of 17 July 2020 (RG. 3156/2019), the Social and Civil divisions of the Supreme
Court maintain the validity of the so-called "theory of the link" or
"unitary treatment", according to which those activities or functions
of management and administration or senior management of a company provided
within the framework of special employment relationships by those who, in turn,
are administrators or directors of the company, are subsumed and absorbed by
those that those persons must provide as a result of their commercial
obligations as administrators or directors of the company, are subsumed and
absorbed by those that these persons have to provide as a result of their
commercial obligations as administrators or directors of the company, emphasising, however, that this doctrine has always left
out of the "absorption" the services that the commercial
administrators may provide to a company as employees of the company with
ordinary functions or in the framework of a professional activity. It was
stated in that decision:
<<In
the aforementioned terms, the theory of the link supposes that the management
and administration or senior management activities of a company provided within
the framework of labour relations by those who, in
turn, are administrators or directors of the company, are subsumed and absorbed
by those that those persons have to provide due to their commercial obligations
as administrators or directors of that company.
Article
209 "Competence of the Board of Directors", the first article of
Chapter I "General Provisions" of Title VI "The Administration
of the Company" of the revised text of the Capital Companies Act (approved
by R.D. Leg. 1/2010 and hereinafter the revised text of the LSC) stipulates
that:
"The
directors are responsible for the management and representation of the company
under the terms established in this law.
It
is clear that the commercial administrators of a company, organised
under the different formulas that art. 210 of the T.R. contemplates, are
responsible for the management of the company in an all-encompassing manner,
since the management of the company is entrusted to them, to the
administrators, without any restriction whatsoever.
4. Application of the link theory to the case.
By virtue of the aforementioned doctrine, established by
this TEAC, based on the reiterated case law of the SC in this respect, insofar
as we are dealing with a relationship between the aforementioned directors,
both of a commercial and senior management employment nature, the aforementioned
"theory of the link" is fully in force and applicable to the case,
which means that the commercial relationship prevails over the special
employment relationship, the latter being subsumed in the former.
Consequently, the relationship of the aforementioned
persons with the entities of the corresponding group was limited to a strictly
commercial relationship and, therefore, when determining the deductibility of
the remuneration derived from this relationship, it is necessary to check
whether they meet the requirements for this purpose.
The claimant alleges, citing some decisions of the High
Court, the possibility that the employment relationship for management and
administration functions may be compatible with that of a commercial nature for
the position of administrator, when the functions carried out for the former
are different from those carried out for the latter position.
However, from the facts in the file and the checks
carried out by the Inspectorate, it is clear that the functions performed by
these directors were, in any case, functions connected with the organisation, direction and management of the company.
Indeed, as the complainant points out, these functions are also part of senior
management, but it cannot be overlooked that it is precisely for these cases
that the SC has developed the aforementioned theory of the link, because in
these cases the double link has a single purpose, which is the supreme
management and administration of the company, because the position of
non-director director does not in itself include the functions of management.
Therefore, all the remuneration received by these directors must be
understood to have been paid on the basis of the link that united them with the
entities, which was of a commercial nature, and their tax deductibility will be
subject to compliance with the binding doctrine that we maintain in this
respect.
SEVENTH.- Having clarified the fact that the remuneration
analysed was for their status as directors, i.e., derived from their commercial
relationship with the company, it is necessary to analyse whether such
remuneration meets the requirements to be admitted as deductible expenses.
1. Applicable case law and doctrine.
Procede comenzar el análisis sobre esta cuestión
remarcando que el Tribunal Supremo, en su Sentencia de fecha 02/01/2014 (rec. Casación unificación de doctrina n.4269/2012), expressly confirmed that, in the
field of corporate income tax, whether under Law 43/1995 or the TRLIS, in
order for the remuneration paid to the person holding the position of director
of the company to be deductible, scrupulous compliance with commercial
legislation is required; it is therefore necessary to analyse the
provisions of this legislation regarding the remuneration of directors and, in
particular, the requirements established therein.
The judgment of the Civil Chamber of the Supreme Court of
26 February 2018 (appeal number 3574/2017) analyses the requirements set out in
the new wording of articles 217 to 219 and 249 of the Consolidated Text of the
Capital Companies Act made by Law 31/2014, in the following terms:
"16.-
As a consequence of the above, the system designed in the TRSLC, after the
reform operated by Law 31/2014, is structured in three levels.
The
first is constituted by the articles of association, which in accordance with
the provisions of art. 217.1 and 2 and 23.e TRLSC must establish whether the
position is free (either expressly or because there is no provision in this
respect) or remunerated and, in the latter case, they must establish the
remuneration system, which will determine the item or items of remuneration to
be received by the directors in their capacity as such and which may consist,
among others, of one or several of those provided for, by way of example, in
art. 217.2 TRLSC.
17.-
The second level is made up of the resolutions of the general meeting, which is
responsible for establishing the maximum amount of annual remuneration for
directors in unlisted companies (art. 217.3 TRLSC, first paragraph), without
prejudice to the possibility of the general meeting adopting a resolution with
a broader content, establishing a remuneration policy, as can be seen in
articles 249.4.II and 249.bis.i TRLSC, which provide for this resolution on an
eventual basis ("where appropriate") in unlisted companies. 249.4.II
and 249.bis.i TRLSC, which contemplate this resolution on a possible basis
("where appropriate") in unlisted companies, since in the case of
listed companies the resolution establishing the remuneration policy is
mandatory (art. 529 novodecies TRLSC). This maximum
limit set by the general meeting "shall remain in force until its
modification is approved" (art. 217.3 TRLSC, first paragraph).
Likewise,
unless otherwise provided in the bylaws, the general meeting may issue
instructions to the board of directors or submit for its authorisation
the adoption by the board of decisions or resolutions on the remuneration of
directors, and specifically, of managing or executive directors (art. 161
TRLSC).
In
addition to these more general resolutions, articles 218.1 and 219 TRSLC also
provide for the intervention of the general meeting. In the first case, only
when the provision in the articles of association for profit-sharing as a
remuneration item contains a maximum percentage, in which case the general
meeting will determine the applicable percentage within the maximum established
in the articles of association.
In
the case of art. 219 TRSLC, when there is a provision in the articles of
association that establishes as a system of remuneration for directors (alone
or together with other items of remuneration) the delivery of shares or share
options, or remuneration indexed to the value of the shares, its application
will require a resolution of the general shareholders' meeting, which must
include the maximum number of shares that may be allocated in each financial
year to this system of remuneration, the exercise price or the system for
calculating the remuneration, its application shall require a resolution of the
general meeting of shareholders, which must include the maximum number of
shares that may be allocated in each financial year to this remuneration
system, the exercise price or the system for calculating the exercise price of
the share options, the value of the shares, if any, taken as a reference and
the duration of the plan.
The
third level of the system is determined by the decisions of the directors
themselves. Unless the general meeting determines otherwise, pursuant to art.
217.3 TRLSC, they are responsible for the distribution of remuneration among
the different directors, which shall be established by agreement of the
directors and, in the case of the board of directors, by decision of the board,
which must take into consideration the functions and responsibilities
attributed to each director.
19.-
When the board of directors appoints one or more managing directors or
executive committees from among its members and establishes the content, limits
and methods of delegation, the determination of all the items for which these
directors may obtain remuneration for the performance of executive duties
(including, where applicable, any compensation for early termination of such
duties and the amounts to be paid by the company as insurance premiums or
contributions to savings schemes) should be made by means of a contract to be
signed by the company, where appropriate, any compensation for early
termination of such duties and the amounts to be paid by the company as
insurance premiums or contributions to savings schemes) must be made by means
of a contract that must necessarily be entered into between the director to
whom executive powers have been delegated and the company.
This
contract must first be approved by the board of directors with the favourable vote of two thirds of its members. The director
concerned must abstain from attending the deliberation and from voting. The
approved contract was annexed to the minutes of the meeting.
This
is provided for in arts. 249.3 and 4 TRLSC.
The
conclusion of this contract not only makes it possible to specify the different
items of remuneration of the managing or executive directors (which could be
done by a simple agreement of the board of directors), but also proves to be
the appropriate means of expressing the consent of the managing or executive
director not only to accept the post but also to be bound by the specific
remuneration terms and all other terms of remuneration negotiated for his
appointment, which are sufficiently developed and detailed.
The
relationship between the managing or executive director and the company is
substantiated not only by the organic appointment in a resolution of the
general meeting (which appoints him/her as director) and of the board (which
delegates certain functions to him/her) but also by a bilateral legal
transaction in which the particular terms and conditions under which the
function of managing the company is to be carried out by the person holding the
position of managing or executive director can be detailed, thus completing the
shortcomings of the legal status of the organic position, in such a way that
both parties are bound by the terms of the contract".
In the same sense, the solid doctrine that this TEAC has
been maintaining (for example, Resolution RG 3295/16 of 09/04/2019 - DYCTEA) on
the deductibility of the remuneration paid to directors is based, in essence,
on considering, as a necessary condition for this, the full and complete
respect and compliance with the commercial regulations on the matter, that is,
with the provisions of Article 217 of the TRLSC, which derives, to be more
specific, in that they are conditions for deductibility that:
1. the office of director is remunerated in accordance
with the company's articles of association
2) and that, in addition, in these same statutes, the
remuneration system is designed with a sufficient degree of certainty.
In this resolution of 09/04/2019 this TEAC set out the
essential features of the doctrine in this respect, highlighting the
pronouncements that the Supreme Court has been making on this issue and which
serve as a basis for us:
"(...)
there are essentially two requirements that must be met for the remuneration
paid to the company's directors to be a deductible expense for the company in
its corporation tax: that the possibility of remunerating them is expressly
provided for in the articles of association and that this provision makes it
possible to know the amount to be paid with certainty.
Indeed,
it is appropriate to begin the analysis of this issue by pointing out that the
Supreme Court, in its Judgment of 2 January 2014 (Appeal for Unification of
Doctrine No. 4269/2012), expressly confirmed that in the field of corporate
income tax, whether under Law 43/1995 or Legislative Royal Decree 4/2004, of 2
March, which approves corporate income tax.No.
4269/2012) expressly confirmed that in the field of corporate income tax,
whether under Law 43/1995 or Legislative Royal Decree 4/2004, of 5 March,
approving the Consolidated Text of the Corporate Income Tax Law (hereinafter,
TRLIS), in order for the remuneration paid to the person holding the position
of director of the company (IS taxpayer) to be deductible, scrupulous
compliance with commercial legislation is required; It is therefore necessary
to analyse the provisions of this commercial legislation on directors'
remuneration and, in particular, the requirements established therein. In this
respect, it should be recalled that the Inspectorate, in the resolution, has
already highlighted what, in its opinion, are these requirements: 1) that the
position of director be remunerated in accordance with the company's articles
of association and 2) that the amount of such remuneration be known with
sufficient certainty, as provided for in the articles of association.
Beginning
by studying the requirement for statutory proof of the remunerated nature of
the position of director, it should be pointed out that this is a requirement
that has been repeatedly stated in the case law of the SC, citing, for these
purposes, the judgments of 6 February 2008 (Appeal. 7125/2002), 13 November
2008 (Appeals Nos. 2578/2004 and 3991/2004), 21 January 2010 (Rec. 4279/2004)
and 11 March 2010, which, although referring to the previous legislation,
contain criteria applicable to financial years regulated under the TRLIS in
accordance with the criteria of the SC itself expressed in the aforementioned
Judgment of 2 January 2014.
(...)
The
provisions of Law 1/2010, of 2 July, which approved the Consolidated Text of
the Capital Companies Act (hereinafter, TRLSC), repealing the aforementioned
TRLSA and LRSL, which came into force on 1 September 2010, can also be cited,
and which, in the original wording of its article 217, established that:
1.The
office of director is free of charge, unless the articles of association
provide otherwise by determining the system of remuneration.
2.
In the case of a limited liability company, where the remuneration is not based
on a share in profits, the remuneration of the directors shall be fixed for
each financial year by resolution of the general meeting in accordance with the
provisions of the statutes.
The
following articles of the TRSLC regulate the special features of directors'
remuneration in the form of profit-sharing, both in limited liability companies
(§ 218 para. 1) and public limited companies (§ 218 para. 2), and remuneration
in the form of shares (§ 219).
It
should be noted that all these precepts have been amended by Law 31/2014, of 3
December, which came into force on 1 January 2015 (so these changes are not
applicable to the present case, taking into account which years were the
subject of the audit).
Returning
to the issue of interest here (the deductibility of the remuneration paid to
the directors of an entity), it is worth highlighting the Supreme Court ruling
of 21 January 2010 (Appeal No. 4279/2004) in which, regarding the relevance of
stating in the articles of association the remunerated nature of the position
of director and the certainty that must be demanded of the remuneration system
established therein, the following was stated (the underlining is ours):
In
conclusion, as we pointed out in our judgments of 13 November 2008 (Fifth and
Ninth FFDD), "for tax purposes, by virtue of commercial and tax
regulations, the possibility of remunerating the directors of public limited
companies and, as a consequence, considering the obligatory nature of such
payments, depends in any case on the latter being provided for in the articles
of association. The leading role that the L.S.A. claims for the articles of
association on this specific point, as the Directorate General for Registers
and Notaries (D.G.R.N.), in what is already a style clause, is "in harmony
with its nature as a guiding rule for the structure and operation of the entity
and with the requirement of completeness and specification in its
determinations and to guarantee the legitimate interests of current and future
members" (among others, Resolutions of 20 February 1991 (BOE of 5 March
1991), FD 3; and of 26 July 1991 (BOE of 5 September 1991), FD 2). From a
strictly fiscal point of view, it is only interesting to note that it is the
provision in the articles of association which makes it possible to determine
that for the company that remuneration - and no other - is obligatory, or, to
put it more precisely, that the expense, in accordance with art. 13 of the
L.I.S., can be classified as necessary for the exercise of the activity and not
- wholly or partially - as a liberality".
FIFTH
Since,
as we have said, the need for directors' remuneration to be determined in the
company's articles of association in order for it to be considered tax
deductible is not questionable, the question revolves around specifying when
such remuneration can be considered to be effectively fixed and, therefore,
must be considered obligatory. In this regard, we began by stating in the
aforementioned judgments of 13 November 2008 (Sixth and Tenth FFDD) that, in
order for directors' remuneration to be considered an obligatory expense for
the purposes of deductibility for corporate income tax purposes, it is not
enough for the company bylaws to mention it, but, in addition, as the First
Chamber of this Court stated on 21 April 2005 (appeal no. 249/2005), it is also
necessary for the company's bylaws to mention it as a compulsory expense. cas. no. 249/2005), "the remuneration of the
directors must be stated in the articles of association with certainty and not
be contrary to the provisions" of art. 130 of the T.R.L.S.A. [FD
Third; this statement is echoed in the Judgement of the First Chamber of 12 January
2007 (rec. cas. no. 494/2000), FD Third; and the
Judgement of this Chamber of 6 February 2008 (cit., FD Third], and cannot be
"modified by the Board of Directors, since to do so it is necessary to
modify the Articles of Association at the General Meeting" (Judgments of
21 April 2005, cit., FD Third; of 12 January 2007, cit., FD Third; and of 6
February 2008 , cit.) And for it to be considered that the Articles of
Association establish the directors' remuneration "with certainty",
at least three requirements must be met, which we specified in the Judgments of
13 November 2008 (Sixth and Tenth Rulings), only two of which must now be
highlighted for the resolution of these proceedings. The first of these is
that, as the aforementioned Judgment of 21 April 2005 warned, the articles
of association "must specify the specific remuneration system", such that
"[i]t is not sufficient for the company
regulations to provide for several remuneration systems for the directors,
leaving it to the shareholders' meeting to determine which of them is to be
applied at any given time" (Third FD; the Resolutions of the Directorate
General of Registers of 18 February and 26 July 1991 are cited; in the same
sense, Judgments of 12 January 2007, cit., FD Third; and of 6 February 2008 ,
cit., FD Third). "The Articles of Association -in effect- cannot include
the different legal systems of remuneration and leave it to the general meeting
to determine which of them is to be applied at any given time, but must specify
the remuneration system to be applied so that its alteration will require prior
amendment of the Articles of Association" (FD Third; the Resolutions of
the Directorate General of Registers of 25 March and 4 October 1991 are cited;
in the same terms, Judgment of 6 February 2008, cit.)
This
has also been made clear by the D.G.R.N. when it states, for example, on the
basis of articles 9.h), in fine, and 130, both of the T.R.L.S.A., that
"when remuneration is envisaged for the directors", the articles of
association "must specify the specific remuneration system, so that its
alteration will require the appropriate prior amendment of the articles of
association" (Resolution of 20 February 1991, cit,
FD 3); that "[i]t is not sufficient to merely
provide in the Articles of Association for several alternative systems, leaving
it to the discretion of the General Meeting to determine which of them is to be
applied at any given time" (Resolution of 26 July 1991, cit, FD 2); and that "what is inexcPAIS_2ble, if these
posts are to be remunerated, is the clear and unequivocal statutory
determination of the specific remuneration system that could be applied,
defined in a precise and complete manner and adjusted to the legal limits"
(Resolution of 17 February 1992 (BOE of 14 May 1992), FD 3). In short, in the
first place, although public limited companies may opt for different
remuneration systems, whatever the modality chosen - a fixed remuneration, a
variable amount, or a mixed system combining the above - this must be clearly
reflected in the company's articles of association.
However,
as we also emphasised in the oft-cited judgments of
13 November 2008 (FFDD Sixth and Tenth), it is clear that the mere designation
in the Articles of Association of the "form of remuneration" does not
comply with the legal mandate. Furthermore, secondly, in the event that the
system chosen is the variable system, and is specified in a share in the
company's profits, contrary to what the legal representation of XXX, S.A.
maintains (p. 3 of its notice of opposition), it is not sufficient to set a
maximum limit for that share, but rather the percentage must be perfectly
determined in the articles of association. This has been stated in strong
terms by this Section when, in the judgments of 17 October 2006 (Fourth Ruling)
and 6 February 2008 (Third Ruling), cited several times, it has made it clear
that "when the remuneration is based on a share in the profits, the bylaws
must specifically determine the share, with the deduction being conditional on
the coverage of certain services". In this sense, and for the strictly
commercial sphere, the D.G.R.N. has indicated that it is not "sufficient
to merely foresee a maximum limit of remuneration without indicating what the
content of this will be" ( Resolution of 20 February 1991 ( cit, FD 3); and that "the measure of directors'
remuneration consisting of a share in profits, that is to say, the percentage
in which it is calculated, must be stated in the articles of association with
complete certainty, and its basis must also be clearly determinable",
because, otherwise "the uncertainty of the fixing, on its own variability,
could be to the detriment of the directors", "as well as to the
shareholders themselves - and especially to the minority shareholders, whose
shareholding could eventually be affected by the decision of the majority to
attribute a high shareholding to the directors", "in addition to the
fact that the precautions introduced by the law, by requiring that certain
services that it considers preferential be covered (cfr.
art. 130 of the Texto Refundido
de la Ley de Sociedades Anónimas)
would not be complete without an exact fixing of the share in the profits"
[Resolution of 6 May 1997 (BOE of 30 May 1997), FD 2].
These
two requirements (statutory constancy and certainty of the remuneration system
established in the articles of association) have already been highlighted by
other resolutions of this Central Court, such as the Resolution of 5 April 2018
(RG 9996/15) or that of 10 May 2018 (RG 3319/16); according to the case law of
the Supreme Court, this is a (double) requirement which, although it also
protects the interests of the directors, has the primary purpose of providing
maximum information to the shareholders of the entity in order to facilitate
control of the directors' actions in a particularly sensitive matter.
(...)
The
Supreme Court itself, moreover, in its ruling of 30 October 2013 (appeal
131/2012), states that directors' remuneration will only be deductible when it
has complied with the legal and statutory provisions, expressing itself in the
following terms:
Directors'
remuneration is a deductible expense when it meets the legal requirements for
such a deduction.
These
legal requirements are those derived from the entire legal system and expressly
from the statutes of the entity making the deduction.
The
scope of the above statement is that directors' remuneration cannot betray the
rules that govern the life of the entity that pays the remuneration, i.e. its
Articles of Association. Consequently, as the Articles of Association establish
that the office of director is free of charge, it is obligatory to reject the
deduction of remuneration that directly infringes the Articles of Association
of the paying entity.
Secondly,
neither can the aforementioned remuneration be in breach of the rules governing
the proper conduct of an orderly businessman, in the terms required by the
Commercial Code, since few things are more contrary to such orderly conduct
than those that grant remuneration of the amount contemplated here to a
loss-making company. To assert that as the company is practically owned by the
director, the effect of the directors' remuneration on the company's results is
irrelevant, ignores the fact that formally it is an entity with its own legal personality,
distinct from that of the director, and that the economic, commercial and
loyalty requirements owed to the entity making the remuneration cannot be
identified with those of the person who holds the securities representing the
entity.
Finally,
and as we have already highlighted in our judgment of 22 December 2011, the
principles that we stated there and that we now reiterate apply in matters of
freedom of will. In that judgment we stated in the last paragraph of the
seventh ground: "It is true that article 1.255 of the Civil Code
establishes the freedom of pacts, but it is also clear that this precept sets
limits to these pacts: that of not being contrary to morality, public order and
prejudice to third parties. When these agreements exceed socially acceptable
parameters, it is clear that such payments cannot be considered as remuneration
but as mere liberalities, which do not generate a deductible expense. The
determination of when such payments exceed these limits is a problem to be
resolved in the light of the circumstances of each case, firstly by the
administration and ultimately by the courts.
In
other words, an entity may remunerate its directors as it sees fit, but such
payments, by way of remuneration, may not exceed the socially admissible limits,
otherwise they become gifts that prevent the entity making them from deducting
them, which means that they must be taxed on the recipient as gifts made by a
stranger.
In
the same sense, the Supreme Court in its ruling of 2 January 2014 (Appeal for the
Unification of Doctrine No. 4269/2012) reiterates that the interpretation of
the question of the deduction of directors' remuneration must be carried out in
strict compliance with commercial legislation. In the Fifth Ground of Law of
said ruling, the following is stated:
The
question, therefore, does not focus on the "necessity" of the
expense, as is sometimes claimed, but on its "legality", which must
be inferred from the rules governing directors' remuneration in the respective
texts that regulate them. Such legality must be understood as referring, as we
have also pointed out, not only to the Articles of Association but also to the
limits that can be inferred from the whole of the legal system in view of the
concurrent circumstances.
This
Central Court understands that when the provision in the Articles of
Association (of the remunerated nature of the directors) stipulates a fixed
amount to be determined each year by the General Shareholders' Meeting of the
entity, the deductibility of the corresponding expense in the financial year
must be admitted, provided that the resolution of the Meeting approving such
allocation is on record. This is what we stated in our aforementioned
Resolution of 10 May 2018 (RG 3319/16), essentially based on the provisions of
FD 3 of the Judgment handed down by the Civil Division of the Supreme Court on
9 April 2015 (Appeal No. 1785/2013) (emphasis added):
(...)"
2. Qualifying conditions: remunerated nature of the
position and certainty.
As regards the requirement for statutory proof of the
remunerated nature of the position of director, it must be said that this is a
requirement that has been repeatedly stated in the case law of the Supreme
Court, citing, for these purposes, the judgements of 06/02/2008 (appeal no.
7125/2002), 13/11/2008 (appeals no. 2578/2004 and no. 3991/2004) and 21/01/2010
(appeal no. 4279/2004) which, although referring to previous legislation,
contain criteria applicable to financial years regulated under the TR.No. 2578/2004 and No. 3991/2004) and 21/01/2010 (appeal
No. 4279/2004) which, although referring to the previous legislation, contain
criteria applicable to years regulated under the TRLIS in accordance with the
criteria of the Supreme Court itself expressed in the ruling of 02/01/2014, as
well as the binding doctrine of this TEAC.
It is essentially based on the provisions of article 217
of Royal Legislative Decree 1/2010, of 2 July, approving the revised text of
the Capital Companies Act (TRLSC), which establishes, with regard to the
remuneration of directors, that:
<<1.
The office of director is free of charge, unless the articles of association
provide otherwise by determining the system of remuneration.
2.
In a limited liability company, where remuneration is not based on a share in
profits, the remuneration of the directors shall be fixed for each financial
year by resolution of the general meeting in accordance with the provisions of
the articles of association>>.
Article
218. Remuneration through profit-sharing:
<<1.
In a limited liability company where the remuneration is based on a share in
the profits, the articles of association shall specifically determine the share
or the maximum percentage thereof, which may in no case exceed ten per cent of
the profits distributable among the partners.
2.
In the case of a public limited company, where the remuneration consists of a
share in profits, it may be deducted from the net profits only after the legal
and statutory reserves have been covered and the shareholders have been paid a
dividend of four per cent, or such higher rate as the articles of association
may provide for>>>.
The above precepts have been amended by Law 31/2014, of 3
December, which came into force on 01/01/2015, so these changes are applicable
to the financial years 2015 and 2016:
"Article
217. Remuneration of directors.
1.
The office of director is free of charge, unless the articles of association
provide otherwise by determining the system of remuneration.
2.
The remuneration system established shall determine the item or items of
remuneration to be received by the directors in their capacity as such, which
may consist, inter alia, of one or more of the following:
(a)
a fixed allowance,
(b)
attendance allowance,
(c)
profit-sharing,
(d)
variable pay with general indicators or benchmarks,
(e)
share-based or performance-linked remuneration,
(f)
severance payments, provided that the termination was not caused by the failure
to perform the duties of a director; and
(g)
such savings or pension schemes as may be considered appropriate.
3.
The maximum amount of the annual remuneration of all the directors in their
capacity as such shall be approved by the general meeting and shall remain in
force until such time as it is amended. Unless the general meeting
determines otherwise, the distribution of remuneration among the different
directors shall be established by agreement of the directors and, in the case
of the board of directors, by decision of the board, which shall take into
account the functions and responsibilities attributed to each director.
4.
Directors' remuneration should in any case be in reasonable proportion to the
size of the company, its financial position at any given time and the market
standards of comparable companies. The system of remuneration established
should be geared to promoting the long-term profitability and sustainability of
the company and incorporate the necessary safeguards to avoid excessive
risk-taking and the rewarding of unfavourable
results".
Article
218. Remuneration through profit-sharing:
<<1.
Where the system of remuneration includes a share in profits, the articles of
association shall specifically determine the share or the maximum percentage
thereof. In the latter case, the general meeting shall determine the applicable
percentage within the maximum laid down in the articles of association.
2.
In the case of a limited liability company, the maximum percentage of
participation may in no case exceed ten per cent of the profits distributable
among the members. 3. In the case of a public limited company, the holding may
only be deducted from the net profits and only after the legal reserve and the
statutory reserve have been covered and the shareholders have been paid a
dividend of four per cent of the nominal value of the shares or such higher rate
as the memorandum and articles of association may provide for.
Having set out the criteria followed by this TEAC and the
SC on this issue, in this case, Article 19 of the claimant entity's Articles of
Association states, for the 2013 and 2014 financial years, that:
"Directors
who do not perform executive functions in the company or companies in its group
(external directors) shall receive as basic remuneration a fixed allowance,
which may be higher for persons holding positions on the Board itself or
chairing the Management Committee or the Delegated Committees of the Board.
This remuneration may be supplemented by other non-monetary compensation (life
or health insurance, bonuses, etc.) which are generally established for the
company's staff. When such non-executive directors are members of the
Management Committee or Delegate Committees of the Board, they shall also
receive an allowance for attending their meetings".
"The
members of the Board of Directors who perform executive functions in the
Company or in companies of its Group (executive Directors) shall receive the
remuneration assigned to them for the performance of their executive functions
(salary, incentives, complementary bonuses, etc.) in accordance with the policy
established for the remuneration of senior management, in accordance with the
terms of their respective contracts, which may also provide for the appropriate
indemnities in the event of termination of such functions or termination of
their relationship with the Company. They
shall not receive the remuneration assigned to external Directors.
Irrespective
of the remuneration set out in the two preceding paragraphs, all Directors
shall be compensated for travel, travelling and other expenses incurred in
attending meetings of the Company or in the performance of their duties.
The same article stated, for the financial years 2015 and
2016, the following:
"The
position of Director is remunerated.
The
remuneration of the Directors for their status as such shall consist of a fixed
allowance for membership of the Board of Directors and, where appropriate, of
the Delegated Commission and Committees. This remuneration shall be
supplemented by other non-monetary compensation (life or health insurance,
bonuses on products marketed by XZ Group companies) that are generally
established for the Company's staff.
The
maximum amount of the annual remuneration of the Directors in their capacity as
such shall be fixed by the General Meeting and shall be distributed by the
Board of Directors in such manner as it may decide, taking into account the
criteria set out in the preceding paragraph.
Directors
with executive duties in the Company or
its Group shall be excluded from the system of remuneration established in the
preceding paragraphs and shall be entitled to receive remuneration only for the
performance of such executive duties. Such remuneration shall be established
by the Board of Directors and shall be detailed, in all its items, in the
corresponding contract between the company and the Directors concerned, which
must be approved by the Board of Directors.
Irrespective
of the remuneration set out in the preceding paragraphs, all Directors shall be
compensated for travel, travelling and other expenses incurred in attending
meetings of the Company or in the performance of their duties".
The above-transcribed provisions of the Articles of
Association show that the remuneration system for directors varied depending on
whether they were classified as executive or non-executive. With respect to
executive directors, in financial years 2013 and 2014, it was specified that
they would receive the corresponding remuneration in accordance with the policy
established for the remuneration of senior officers, in accordance with the
provisions of their respective contracts. In financial years 2015 and 2016, it
is already contemplated that the remuneration of the aforementioned directors
will be set by the Board of Directors.
In view of the above, this TEAC concludes, with the
Inspectorate, that the claimant's bylaws do not meet the requirements of
certainty demanded by the High Court, as there is no way of knowing, either in
amount or in form, what the remuneration of the directors will be, for the following
reasons:
- No general criteria are indicated that would make it
possible to perfectly determine the fixed amount.
- While it is left to the General Meeting to determine
the amount of remuneration of the Board of Directors, the remuneration of
executive directors escapes the control of the General Meeting, as it is
decided by the Board of Directors itself.
Therefore, by virtue of the foregoing, the directors'
remuneration does not meet the requirements of company law.
EIGHTEENTH.- Lastly, the fact that the remuneration
analysed is contrary to commercial regulations, as it does not comply with the
aforementioned requirements, means that such expenses cannot be considered as
tax deductible in the IS in the years audited.
This has been recognised by the Supreme Court, firstly,
before the modification of the regulations introduced in the 2014 financial
year, which established as a criterion the non-deductibility of expenses
incurred in contravention of the legal system. As an example, in its ruling of
11/02/2010 (appeal no. 9779/2004) it ruled that:
"The
judgment of the lower court does not introduce anything new, it merely
clarifies that obviously unlawful expenses cannot be deducted due to their
inappropriateness".
There is reiterated case law of the SC in this regard,
collected in a series of judgments such as those of 30/10/2013 (Appeal No.
131/2012), of 02/01/2014 (Appeal for the Unification of Doctrine No.
4269/2012), of 05/02/2015 (Appeal No. 2448/13) which confirmed the decision of
this Central Court of 16/06/2010 (R.G. 4323/08), and of 28/10/2015 (Appeal No.
2547/2013), which confirmed the decision of this Central Court of 16/06/2010
(R.G. 4323/08). Appeal no. 2448/13) which confirmed the decision of this Central
Court of 16/06/2010 (R.G. 4323/08), and of 28/10/2015 (Appeal no. 2547/2013),
from which -of the last one- we transcribe the following:
<
The question, therefore, does not focus on the "necessity" of the
expense, as is sometimes claimed, but on its "legality", which must
be inferred from the rules governing directors' remuneration in the respective
texts that regulate them. Such legality must be understood as referring, as we
have also pointed out, not only to the Articles of Association but also to the limits
that can be inferred from the whole of the legal system in view of the
concurrent circumstances.
For
this reason, any interpretation that maintains that scrupulous compliance with
commercial legislation is not required in this area is unusual, as we have
already said on some occasions". >
Thus, in order to be tax deductible, accounting expenses
must not be expenses contrary to the legal system. Therefore, in order for
the amounts that a company may pay to its administrators or directors to be tax
deductible, the possibility of paying such remuneration should be expressly
stated in the company's articles of association, in which - ex. art. 217 of the
T.R. LSC in its original wording - the corresponding system of remuneration
should be established, in addition to complying with all the provisions of
commercial law in relation to such remuneration.
This is the criterion that this Central Court has been
upholding, also repeatedly, as stated in various resolutions, some of which
have already been cited, such as that of 06/02/2014 (R.G. 6/2014), that of
16/06/2010 (R.G. 4323/08), or that of 05/04/2018 (R.G. 9996/2015), among many
others.
It should be noted that, with effect from 01/01/2015, the
TRLIS was repealed and replaced by Law 27/2014, of 27 November, on Corporate
Income Tax, currently in force, which introduced an important novelty with
regard to the matter in question, since Article 15 of the legal text, which has
the same title as Article 14 of the repealed TRLIS, "Non-deductible
expenses", in its letter e) and f) provides that:
"They
shall not be considered as tax-deductible expenses:
(...)
e)
Gifts and donations.
This
point (e) shall not include expenditure on services to customers or suppliers,
nor expenditure in accordance with customary practice in respect of company
staff, nor expenditure incurred to promote, directly or indirectly, the sale of
goods and the provision of services, nor expenditure correlated with income.
However,
expenses for services to customers or suppliers are deductible up to a limit of
1 per cent of the net turnover for the tax period.
Nor
shall remuneration to directors for the performance of senior management
functions, or other functions derived from an employment contract with the
entity, be understood to be included in this point e).
(f)
the costs of actions contrary to the law.
With regard to the deductibility, since 01/01/2015, of
the amount paid by a company to its commercial administrators, when these also
carry out management functions or activities for the company, this TEAC has
been maintaining the following criteria, as set out in our Plenary Resolution
of 17/07/2020 (RG 3156/19):
"Although
according to article 15 e) of the Corporate Income Tax Law in force in 2015
(Law 27/2014), remuneration to directors for the performance of senior
management functions shall not be understood to be included among the
liberalities, so that the deductibility of such expenses cannot be denied in
accordance with the provisions of this letter e), this must necessarily be
integrated with the non-deductibility for tax purposes of expenses that violate
the legal system as a whole, now expressly included by Law 27/2014 in letter f)
of its article 15. Thus, the requirements established by commercial law
regarding the setting of such remuneration cannot be ignored, requirements
which, with regard to the statutory record provided for in article 217 of the
Consolidated Text of the Capital Companies Act, as drafted by Law 31/2014, the
Judgment of the Civil Chamber of the Supreme Court of 26 February 2108 (rec.
3574/2017) specifies that this requirement is applicable, not only to directors
who do not perform executive functions, but also to those who do perform them
and receive the corresponding remuneration for them".
Criterion based on the case law already established by
the SC, cited above.
In the case in question, as we have explained, the
expenses corresponding to the remuneration paid to the aforementioned executive
directors do not meet the requirements of commercial legislation in any of the
years audited, and are contrary to the legal system.
Therefore, this ACAB cannot admit the deductibility of
the expenses analysed, given that in the payment of said remuneration, the
requirements demanded by commercial regulations have been ignored, and in
particular, with regard to the statutory record and compliance with the
requirements reflected in the Company's Articles of Association. Such failures
to comply with the requirements set out in article 217 of the TRLSC, as
recognised by the SC in its ruling of 26/02/2018 (appeal no. 3574/2017). The
claimant's allegations in this regard are therefore dismissed.
NINETEENTH.- The NEXT ISSUE discussed by the claimant
refers to the adjustment made in the dominated company, by virtue of the
Registration and Valuation Rule (R&V) no. 11 of the Accounting Plan for Insurance
Entities (PCEA), consisting of computing greater income or greater expenses
in the IS, as a consequence of the adjustment of the deductible input VAT for
the financial years 2014, 2015 and 2016. The issue affects the entity XZ Spain.
Thus, PCEA NR&V 11 states:
"11th
Value Added Tax (VAT), Canary Islands General Indirect Tax (IGIC) and other
indirect taxes.
The
non-deductible input VAT shall form part of the purchase price of the assets,
as well as of the services, which are the subject of the taxable transactions.
In the case of in-house consumption, i.e. own production for the fixed assets
of the entity, the non-deductible input VAT shall be added to the cost of the
respective assets.
Corrections
to the amount of non-deductible input VAT resulting from the adjustment arising
from the definitive apportionment, including the adjustment for capital goods,
shall not alter the initial valuations.
Output
VAT shall not form part of the revenue derived from transactions subject to
output VAT or of the net amount obtained on disposal in the case of
derecognition of assets.
The
rules on non-deductible input VAT shall apply, where applicable, to IGIC and
any other indirect taxes borne on the acquisition of assets or services, which
are not recoverable directly from the tax authorities.
The
rules on output VAT shall apply, where applicable, to IGIC and to any other
indirect tax levied on transactions carried out by the entity and received on
behalf of the tax authorities. However, those taxes which, in order to
determine the amount to be paid, take as a reference the turnover or other
related magnitude, but whose taxable event is not the transaction by which the
assets are transferred or the services are rendered, shall be recorded as
expenses".
According to the same, according to the Inspectorate, the
non-deductible input VAT will form part of the acquisition price of the assets,
as well as of the services that are the subject of the taxable transactions, so
that the adjustment resulting from the verification of the 2014 to 2016 VAT
will entail the recognition of a higher or lower deductible expense, as the pro
rata rule has been adjusted, as follows:
|
Deducted REGE |
Deduc NO REGE |
Total |
Deducted |
Difference |
|
|
|
880.482,10 |
3.133.559,54 |
4.014.041,64 |
2.221.915,44 |
1.792.126,20 |
|
|
Higher VAT
due |
1.478,19 |
|
|
|
|
|
Higher
deductible VAT |
-1.792.126,20 |
NRV 11TH PCEA |
|
|
|
|
|
-1.790.648,01 |
|
|
|
|
|
|
|
|
|
|
|
2015 |
Deducted REGE |
Deduc NO REGE |
Total |
Deducted |
Difference |
|
|
8.277.516,94 |
13.068.104,58 |
21.345.621,52 |
19.582.347,61 |
1.763.273,91 |
|
|
Higher VAT
due |
0.00 |
|
|
|
|
|
Higher
deductible VAT |
-1.763.273,91 |
NRV 11TH PCEA |
|
|
|
|
|
-1.763.273,91 |
|
|
|
|
|
|
|
|
|
|
|
2016 |
Deducted REGE |
Deduc NO REGE |
Total |
Deducted |
Difference |
|
|
648.303,91 |
2.461.655,45 |
3.109.959,35 |
2.312.205,71 |
797.753,64 |
|
|
Higher VAT
due |
0.00 |
|
|
|
|
|
Higher
deductible VAT |
-797.753,64 |
NRV 11TH PCEA |
|
|
|
|
|
-797.753,64 |
|
|
|
Therefore, the origin of the adjustment under analysis is
to be found in the regularisation carried out by the
Tax Inspectorate, which has already been confirmed by the TEAC in this ruling,
regarding the existence of a transfer of the use of the XZ trademark by
the entity to different subsidiaries. In the aforementioned regularisation,
we concluded that XZ Spain should have received remuneration for the
assignment of the use of the trademark to the subsidiaries of the group,
passing on the cost of the aforementioned services to the different
subsidiaries that benefited from it.
This additional income to be taken into account in the
transferring entity leads to VAT adjustments, namely a higher deductible input
VAT and changes in the calculation of the pro-rata.
By virtue of the facts set out above, this TEAC shares
the conclusion reached by the Inspectorate, insofar as it would be appropriate
to increase the entity's taxable base by the following amounts:
|
2014 |
2015 |
2016 |
|
|
XZ Spain |
1.792.126,20 |
1.763.273,91 |
797.753,64 |
The claimant's allegations in this respect are therefore
dismissed and the adjustment made by the Inspectorate is confirmed.
TWENTY-FIFTH - The NEXT QUESTION refers to the appropriateness
of the allocation made by the entities XZ SPAIN and XZS of
certain technical provisions. According to the file, the entities XZ
SPAIN and XZS made the corresponding provision for benefits,
calculated using statistical methods, in the years audited.
1. Applicable legislation.
In relation to the deductibility of technical provisions,
article 13.4 of Royal Legislative Decree 4/20004 of 5 March (TRLIS) for 2013
and 2014:
"The
expenses related to the technical provisions made by the insurance companies shall
be deductible up to the amount of the minimum amounts established by the
applicable regulations. Within the same limit, the amount of the allocation
in the financial year to the equalisation reserve
shall be deductible in the determination of the tax base, even if it has not
been integrated in the profit and loss account. Any application of the equalisation reserve shall be included in the tax base for
the tax period in which it is made.
(...)."
Article 14.7 of the LIS, for the 2015 and 2016 financial
years, is in the same sense.
The provision for benefits is regulated in general terms
in Royal Decree 2486/1998, of 20 November, which approves the Regulation on the
Organisation and Supervision of Private Insurance
(hereinafter, ROSSP) for the financial years 2013 to 2015. Specifically, in
Article 39, which states:
"The
provision for benefits shall represent the total amount of the insurer's
outstanding obligations arising out of claims which have occurred prior to the
end of the financial year and shall be equal to the difference between the
total estimated or actual cost of those claims and the aggregate of the amounts
already paid in respect of those claims.
This
cost shall include both external and internal expenses for the management and
processing of the files, whatever their origin, produced and to be produced
until the total settlement and payment of the claim. The recoveries or amounts
to be recovered for the exercise of the actions that correspond to the insurer
against the persons responsible for the claim cannot be deducted from the
amount of the provision. Notwithstanding the foregoing, where the provision for
benefits is calculated using statistical methods in accordance with Article 43,
payments may be computed net of recoveries.
The
provision shall take into account all factors and circumstances influencing its
ultimate cost and shall at all times be sufficient to meet the obligations
outstanding at the dates when payments are due.
2.
For the purpose of determining the amount of the provision, claims shall be
classified by year of occurrence, and the calculation shall be made at least by
class of insurance.
3.
Each claim shall be subject to an individual assessment, irrespective of the
fact that, in addition, the institution may use statistical methods for the
calculation of the provision of benefits in accordance with the provisions of
Article 43 of this Regulation.
(...)
6.
The provision for benefits shall consist of the provision for benefits still to
be settled or paid, the provision for claims still to be reported and the
provision for internal claims settlement expenses.
For
accepted reinsurance operations, a single lump-sum benefit provision may be
calculated.
Article 43 provides for the use of statistical methods
for their calculation:
"1.
Insurance undertakings may use statistical methods for the calculation of the
provision for benefits which include both claims remaining to be settled or
paid and claims remaining to be reported, in which case it shall not be
necessary to make a breakdown of the provision between the two components.
Statistical methods may also be used only for the calculation of the provision
for claims outstanding. The statistical methods to be used and the hypotheses
contemplated for them, as well as the modifications of the methods or
hypotheses used, accompanied by a detailed justification of the tests of their
validity and the period for obtaining information, must receive authorisation from the Directorate General for Insurance
and Pension Funds, which shall be understood to have been granted if within
three months of the institution's request no express decision has been taken.
When the institution ceases to use these statistical methods, it must notify
the Directorate General of Insurance and Pension Funds.
2.
The estimate of the final amount of the provision shall be made by taking into
account the results of at least two methods belonging to different groups of
statistical methods. Methods which are based on the same assumptions or which
derive their results from the same quantities or variables shall be considered
to belong to the same group.
(...)"
The Third Additional Provision then regulates what the
minimum amount of the provision for benefits by statistical methods should be:
"Third.
Allocation of technical provisions. Minimum amount.
1.
The allocations to be made to the technical provisions in accordance with the
methods provided for and permitted by this Regulation, as well as any
additional allocations made to adapt to the provisions of this Regulation, shall
be considered for all purposes as a minimum amount for the establishment of the
said technical provisions.
2.
Notwithstanding the foregoing, the technical provision of benefits estimated by
statistical methods, as referred to in Article 43 of this Regulation, shall be
considered as a minimum amount in the lesser of the following amounts:
The
provision resulting from the application of the statistical method for the
year.
The
technical provision for benefits at the end of the current financial year
"x" estimated by statistical methods weighted by the quotient
existing between: in the numerator, that part of the technical provision for
benefits at the end of the current financial year "x" estimated by
statistical methods, and corresponding to claims incurred prior to financial
year "x", plus payments in years "X-2", "X-1" and
"x" for claims incurred in years "X-3" and prior years,
plus payments in "X-1" and "x" for claims incurred in "X-2",
plus payments in "X-1" and "x" for claims incurred in
"X-2", plus payments in "x" for claims incurred in
"X-1", and in the denominator, the sum of the technical provisions
for benefits estimated by statistical methods for the financial year
"X-3", plus the provision for the financial year "X-2"
corresponding only to claims incurred in "X-2", plus the provision
for the financial year "X-1" corresponding only to claims incurred in
"X-1".
(...)
Where:
X
and X-i: are the current financial year and each of
the respective prior financial years X-i.
PTPx :
is the PTP of exercise x estimated by statistical methods.
PTPxx-1
: is the PTP in year x for claims incurred in year x-1 and previous years
estimated by statistical methods.
PTPx-3x-n
: is the PTP in year x-3 corresponding to the claims incurred in year x-3 and
in the previous "n" years estimated by statistical methods.
PTPx-2x-2
: is the PTP in year x-2 for claims incurred in year x-2 estimated by
statistical methods.
PTPx-1x-1
: is the PTP in year x-1 corresponding to the claims incurred in year x-1
estimated by statistical methods.
Paymentsx-ix-3
: these are payments in respect of claims occurring in the financial year x-3
and prior years, but made in the financial years x-2, x-1 and x.
Paymentsx-ix-2
: these are payments in respect of claims occurring in year x-2, but made in
years x-1 and x.
Paymentsxx-1
: these are the payments corresponding to claims incurred in year x-1, and made
in year x.
3.
Without prejudice to the provisions of the preceding paragraph, in the first
three financial years for which a statistical method referred to in Article 43
of this Regulation is applicable at the date of closure of the accounting
statements, the minimum amount of the technical provision for benefits shall be
considered to be the amount which ensures that the claims incurred in the
financial year does not exceed the result of applying to the amount of the
premiums accrued for the financial year, the percentage determined by the ratio
of the claims incurred in the five financial years immediately preceding the
tax period, in relation to the premiums accrued in the five financial years in
question. For the aforementioned calculation, no account shall be taken of data
that have been excluded in the application of the statistical method".
For the 2016 financial year, the Sixth Additional
Provision of Royal Decree 1060/2015, of 20 November, on the regulation,
supervision and solvency of insurance and reinsurance companies (hereinafter,
ROSEAR):
"Sixth
additional provision. Allocation of technical provisions. Minimum amount.
1.
The allocations to be made to the technical provisions in accordance with the
methods provided for and permitted for accounting purposes, as well as any
additional allocations which, where appropriate, are made in order to adapt to
the provisions of this Royal Decree for such purposes, shall be considered for
all purposes as the minimum amount for the establishment of the said technical
provisions.
2.
Notwithstanding the above, the technical provision of benefits estimated by
statistical methods, as referred to in Article 43 of the Regulations for the
Regulation and Supervision of Private Insurance approved by Royal Decree
2486/1998, shall be considered as a minimum amount in the lower of the
following amounts:
(a)
the provision resulting from the application of the statistical method for the
financial year.
(b)
the technical provision for benefits at the end of the current financial year
"x" estimated by statistical methods weighted by the quotient
existing between: in the numerator, that part of the technical provision for
benefits at the end of the current financial year "x" estimated by
statistical methods, and corresponding to claims incurred prior to financial
year "x", plus payments in years "X-2", "X-1" and
"x" for claims incurred in years "X-3" and prior years,
plus payments in "X-1" and "x" for claims incurred in
"X-2", plus payments in "X-1" and "x" for claims
incurred in "X-2", plus payments in "x" for claims incurred
in "X-1", and in the denominator, the sum of the technical provisions
for benefits estimated by statistical methods for the financial year
"X-3", plus the provision for the financial year "X-2"
corresponding only to claims incurred in "X-2", plus the provision
for the financial year "X-1" corresponding only to claims incurred in
"X-1".
Where:
X
and X-i: are the current financial year and each of
the respective previous financial years X-i.
PTPx:
is the PTP for exercise x estimated by statistical methods.
PTPxx-1:
is the PTP in year x for claims incurred in year x-1 and prior years estimated
by statistical methods.
PTPx-3x-n:
is the PTP in year x-3 for claims incurred in year x-3 and in the previous
"n" years estimated by statistical methods.
PTPx-2x-2:
is the PTP in year x-2 for claims incurred in year x-2 estimated by statistical
methods.
PTPx-1x-1:
is the PTP in year x-1 for claims incurred in year x-1 estimated by statistical
methods.
Paymentsx-ix-3:
are payments for claims incurred in the financial year x-3 and prior years, but
made in the financial years x-2, x-1 and x.
Paymentsx-ix-2:
are payments for claims occurring in year x-2, but made in years x-1 and x.
Paymentsxx-1:
are payments corresponding to claims incurred in year x-1, and made in year x.
3.
Without prejudice to the provisions of the previous section, in the first three
financial years in which a statistical method referred to in Article 43 of the
Regulations for the Organisation and Supervision of
Private Insurance is applicable on the closing date of the financial
statements, the following shall be considered as the minimum amount of the
technical provision for benefits, the minimum amount of the technical provision
for benefits shall be considered to be the amount that ensures that the claims
ratio for the financial year does not exceed the result of applying to the
amount of the premiums accrued for the financial year, the percentage
determined by the proportion of the claims ratio of the five financial years
immediately prior to the tax period, in relation to the premiums accrued in the
aforementioned five financial years.
For
the above calculation, data which have been excluded in the application of the
statistical method shall not be taken into account".
Having developed the legal framework applicable to this
issue, it is now time to analyse what is happening in the case at hand
2. Analysis of the specific case.
In the course of its verification activities, the
Inspectorate requested the aforementioned institutions to provide, among other
documentation, justification of the statistical methods used to calculate the
aforementioned provision and the calculations made to comply with the limit
established in the third additional provision of the ROSSP and the sixth
additional provision of the ROSEAR (for the 2016 financial year). The inspected
institutions provided documentation on the statistical methods used to
calculate the provision and their authorisation by
the Directorate General of Insurance and Pension Funds in 2008.
The Inspectorate again expressly requested the entities
to provide "where appropriate, the calculations made by the entities to
verify the minimum amount of the endowment in accordance with the procedures
established in the Third Additional Provision of the ROSSP". With respect
to this request, the entities indicated, as recorded in proceedings no. 14 and
15:
"(...)
my client states that it does not carry out the calculation regulated in the
aforementioned Third Additional Provision of the ROSSP, given that it
calculates the provision of benefits according to the statistical methods
approved by the Directorate General of Insurance (...)".
It is recorded in the file that the aforementioned
institutions provided the Inspectorate with the reports on the calculation of
technical provisions by statistical methods for previous years. Based on the
data in the reports provided by these entities, the Inspectorate proceeded to
apply the rule contained in section 2 of the Third Additional Provision of the
ROSSP and the Sixth of the ROSEAR, in order to verify whether the amount
provided by the entity, resulting from the statistical methods it claims to
use, was lower or higher than the result of the same, thus establishing the
minimum amount deductible for tax purposes.
The complainant, who disagrees with the adjustment made
by the Inspectorate, seeks to demonstrate that the content of the
abovementioned provision is unlawful, emphasising
that it is contrary, in particular, to several constitutional principles. In
this way, firstly, it points out that the limitation contained in the
aforementioned precepts is contrary to the principle of legal certainty, given
that it is only envisaged for the provision for benefits when it is calculated
by the method contemplated in Article 43 of the ROSSP and not for the other
provisions.
However, this TEAC cannot accept the aforementioned
argument, as the aforementioned provisions are fully applicable to this case,
and it is not up to this Court to declare their illegality. Moreover, as we
shall see below, the SC has already ruled on the conformity of the limitation
with constitutional principles. Therefore, the aforementioned provisions are
fully in force and, therefore, are binding on the claimant, which cannot act as
if they did not exist.
According to the file, the Inspectorate found that the
institutions concerned used the statistical method, as provided for in art. 43
of the ROSSP, to calculate the technical provision for benefits, and then
verified that they had been authorised to do so by the Directorate General of
Insurance since the 2008 financial year. By virtue of the above, it concluded
that the limitation set out in paragraph 2 of the third additional provision of
the ROSSP (sixth additional provision of the ROSEAR, for the 2016 financial
year) was fully applicable to the case, for the purposes of determining the
maximum amount deductible for the provision.
In order to verify that the entities concerned had
complied with this limitation, it requested information in this regard from
them. However, the entities concerned stated, as stated in measures 14 and 15
included in the file, that they had not carried out the calculations referred
to in paragraph 2 of the third additional provision of the ROSSP. Consequently,
the inspectorate was obliged to obtain the data necessary to make those
calculations itself, in order to determine the amount deductible for tax
purposes. Once the calculations had been made, they were brought to the
attention of the entities concerned so that they could present their arguments
as appropriate to their rights, as was the case, as stated in the background
information; finally, the calculations initially made by the actuary were
corrected in accordance with part of the arguments that were upheld. Once the corrections
had been made, the calculations made by the inspectorate showed amounts lower
than the provision calculated by the institutions using their statistical
method, so that the inspectorate, in compliance with paragraph 2 of the ROSSP
provision, only accepted the tax deductibility of the lower of the two amounts.
3. Response to the allegation: infringement of certain
constitutional principles.
As we have said, the main argument put forward by the
claimant to oppose the regularisation carried out is
that the precept applied, the third additional provision of the ROSSP, is
contrary to several constitutional principles.
First, it alleges infringement of the principle of
economic capacity, enshrined in Article 31(3) EC. However, it should be
noted that this ground of opposition by the obligor in relation to the rules
applicable to technical provisions is not new. In this regard, it is worth
mentioning the STS of .../2010 (rec. .../2005), also referring to the XZ group,
although the dominant entity at that time was BXZ, S.A.
See, in this regard, the summary made by the Supreme
Court in the second factual background of that judgment of the issues raised by
the obligor (emphasis added):
"SECOND
- XZ prepared the present appeal and,
having been summoned to appear before this Court, actually brought it by
application lodged on 22 April 2005, in which he raised three grounds of appeal
under Article 88(1)(d) of Law 29/1998 of 13 July 1998, which regulates this
jurisdiction (BOE of 14 July 1998).
(...;./...;)
3. The
last plea alleges infringement of Article 13 of Law 61/1978, Article 10 of the
General Tax Law of 1963 and Article 51 of Law 30/1992 of 26 November 1992 on
the legal regime for public administrations and the common administrative
procedure (BOE of 27 November 1992), on the ground that it is unlawful to
increase the taxable amount for the years 1991 to 1993 by a non-deductible
allocation to the provision for claims pending declaration.
This
plea starts with the assertion that, in accordance with Article 24.1 of Law
33/1984 of 2 August 1984 on the regulation of private insurance (BOE of 4
August 1984), it is undisputed that the provision for claims not yet reported
is a genuine provision, defined in the Ministerial Order of 30 July 1981, which
approved the rules for the adaptation of the General Accounting Plan to
insurance, reinsurance and capitalisation
institutions, as those constituted at the closing date of the financial year to
meet the obligations incurred as a result of the insurance and reinsurance contracts
underwritten. Article 59.1 of the Private Insurance Regulations, in the wording
given by Royal Decree 1042/1990, of 27 July (BOE of 10 August), clearly refers
this provision to the coverage of claims occurring in each financial year and
which have not been declared before the closing of the accounts of the
financial year. In this context, it understands that it cannot be maintained,
as is done in the amplifying report, that the claims for which provision is
sought do not exist for the insurance company.
After
citing Article 13 of Law 61/1978, Article 36.1 of the Corporate Tax Regulation
and Article 1 of Royal Decree 1042/1990, it raises the following questions:
(a)
Failure to state reasons for the adjustments made by the
Inspectorate to the provisions for claims outstanding for "XZP"
and "XZU". It points out that it provided, at the verification
stage and in the context of the allegations in the report, details of the
calculation of the technical provisions for claims outstanding and of the
statistical methods used for their calculation. However, the Inspectorate did
not justify the origin of the adjustments made in this matter. The
administrative file does not contain a sufficient explanation of the
calculations made by the Inspectorate, which is why it is surprising that the
Court of First Instance found that the inspector had recorded, inter alia, the
various items and amounts to which the proposed adjustment was made in order to
increase the tax base as a result of the allocations in the various financial
years of the technical provisions, especially in the additional report.
(b)
The invalidity of Article 3(1) of Royal Decree 1042/1990
, alleging infringement of the principle of the reservation of the law and of
rules of legal rank.
It
points out, in the first aspect, that it disregards the requirement, contained
in Article 10(a) of the General Tax Law of 1963, that the tax base of taxes
must be regulated by a rule of legal rank. Royal Decree 1042/1990 encroaches on
an area in which there is an absolute legal reserve. Articles
13 and 14 of Law 61/1978, the only articles intended to regulate deductible and
non-deductible items, make no mention whatsoever of the technical provisions of
insurance companies. This violation of the principle of legal reserve was
tacitly endorsed by Law 43/1995, which expressly incorporated in its text the deductibility
of the technical provisions of insurance companies.
On
the second point, it infringes Article 51(1) of Law 30/1992. It explains that
Article 13 of Law 61/1978 establishes the deductibility of expenses necessary
to obtain income, a general rule which is supplemented by the closed list of
non-deductible expenses contained in Article 14, which does not include
allocations made by insurance companies to technical provisions. In contrast
to this legal regulation, Article 3.1 of Royal Decree 1042/1990 limits
deductibility to the minimum compulsory amount established by the Private
Insurance Regulation. It also specifies that this minimum compulsory amount
according to article 59 of the aforementioned Regulation not only does not
necessarily coincide with the sum necessary in each case, but will normally be
lower than it, given the important technical deficiencies in the methods
established by it for its determination.
In
their view, the inadequacy of the methods for calculating the provision
contained in Article 59 of the Regulation, and in particular the residual
provision set out in Article 59(2), which appears to have been applied in the
case in question, is clear.
(c)
The 'necessary expense' nature of the allocations to the
provision for undeclared claims. XZ states that, irrespective of the
abovementioned invalidity, the principle of economic capacity and the deduction
of expenses necessary to obtain income require the conclusion that the
provision in question is fully deductible, provided that its necessary nature
is justified. It submits that the provisions whose deduction was refused by
the administration with the support of the Audiencia Nacional were not only
necessary but also insufficient, a conclusion which is supported by the opinion
of independent experts, since the administrative file contains two reports
issued by Ernst & Young, Auditores y Asesores, at
the request of 'XZP' and 'XZU'.
(d)
The existence of experience at consolidated group level.
In this point, it explains that in the case of both companies, the necessary
assumption for the application of article 59.2 of the Private Insurance
Regulation does not exist, as the group has the necessary experience for the
application of article 59.1 in relation to most of the insurance branches in
which these entities operate.
(...;/...;)"
Although the regularisation
examined in that judgment referred to the periods 1991, 1992 and 1993, it
should be noted that it is the same as the present regularisation
and the grounds put forward by the obligor, because "mutatis mutandi", i.e. by changing the then applicable
provisions, both of corporation tax and of the regulations governing private
insurance, for the current ones, it is possible to appreciate the identity.
For this reason, it is also worth reproducing here what
the Supreme Court said in this regard, in the fifth legal basis of that
judgment (emphasis added):
"...;.
FIFTH
- Having overcome the formal obstacle with which the
appellant company began its last ground of appeal, we can now turn our attention
to the heart of the appeal, which consists of the arguments set out in points
(b), (c) and (d) of paragraph 3 of the first ground of appeal. These are: (1)
the alleged infringement of the principle of reserve of law in tax matters
and of Article 13 of Law 61/1978 by Article 3(1) of Royal Decree 1042/1990, (2
) the condition as a necessary expense of the provision for claims pending
declaration and (3) the existence of experience in the consolidated
group, so that the criteria laid down in Article 59(1) of the Private Insurance
Regulation should have been applied, and not, as the Inspectorate did, those of
paragraph 2.
Under
Article 13 of Law 61/1978, certain items were to be deducted in order to
calculate the taxable amount for corporation tax purposes, among which the
technical provisions of insurance companies were not mentioned expressis verbis (literally).
However, the 1982 Corporation Tax Regulation, as announced in its explanatory
memorandum ('[it] includes a generous recognition of provisions'), regulated as
deductible items [Article 100.2(g)], which included provisions to cover
liabilities for duly justified outstanding payments (Article 84), the abstract
and generic wording of which included the technical provisions of insurance
companies. At the same time it announced the possibility of their limitation by
considering provisions in excess of the fiscally authorised limits (Article
85(1)).
This
is the starting point for the analysis of Article 3.1 of Royal Decree
1042/1990, which authorised the deduction, for the determination of the taxable
base for corporation tax, of the allocations to the technical provisions that
insurance companies had to set up, provided that their amounts did not exceed
the minimum amounts required annually as compulsory by the Regulations for the
Regulation of Private Insurance. This Regulation (Chapter V, Section 1) listed
and defined (Article 55) several technical provisions that insurance companies
had to create as an obligatory accounting reflection of the obligations
contracted with policyholders, determining the procedures for their
calculation: mathematical provisions (Article 56); provisions for risks in
progress (Article 57): for benefits or claims pending settlement, payment or
declaration (Articles 58 and 59); for claims deviation (Article 60) and for
premiums pending collection (Article 61).
Provisions
for benefits or claims pending reporting, settlement or payment consisted of (1)
life insurance, annuity or pension capital sums and policyholders'
benefits, due and payable; (2) the final amount of completed claims,
less only the settlement to policyholders or beneficiaries; (3) the estimated
amount of claims in process; (4) the amount of claims which occurred during the
financial year or previous financial years and which had not been reported at
the end of the financial year; (5) the amount of claims which had not been
reported at the end of the financial year; (6) the estimated amount of claims
which had not been reported at the end of the financial year; (3) the
estimated amount of claims in process; (4) the amount of claims which
have occurred during the financial year or previous financial years and which
have not been reported at the end of the financial year; and (5) the
costs of settling claims (Article 55(5)).
Article
58 described the method of calculating the provisions for claims pending
settlement and payment, which, in the non-life classes, consisted of the final
amount of unpaid claims pending settlement and payment, plus the related
expenses, as well as the estimated amount of claims in progress and the amount
of other claims for which processing had not yet begun at the end of the
financial year, including the expenses that their settlement would give rise
to. Also included were the estimated or final amounts of all claims which,
having occurred in the financial year then closed, were reported after the end
of the period but before the accounts were closed (paragraphs 3 and 4).
With
regard to the provisions for claims not yet reported, Article 59, drafted by
Article 1 of Royal Decree 1042/1990, stipulated in paragraph 1 that they should
be allocated separately for each type of insurance for the amount estimated in
accordance with the experience of each institution with regard to claims
occurring in each financial year and which had not been reported before the
closure of the accounts for that year. The provision went on to state that such
experience should be derived from the following parameters: (a) all
claims were attributed to the year in which they occurred; (b) each year
the number of claims which, having occurred in the previous financial year,
were reported after the closing of its accounts was determined; (c) the
average amount of such claims was calculated by reference to the last financial
year; and (d) the provision for outstanding claims was obtained by
multiplying the arithmetic mean of the number of claims for the last five years
referred to in (b) above by the average amount in (c) above, by reference to
the latest year. New institutions, which had not been in business for the time
necessary to make the calculation in accordance with the above criteria, in
accordance with Article 59 (2), made the assessment by applying 5 per cent to
the provision for outstanding claims for the financial year in direct
insurance, and 10 per cent in the case of accepted reinsurance.
As
far as this appeal is concerned, the following conclusions can be drawn from
this discipline, which coincide with the points raised by the appellant:
(1)
Article 3.1 of Royal Decree 1042/1990, which considered
the provisions as deductible items for determining the taxable income for
corporation tax purposes in the amount not exceeding the minimum amounts
required annually by the Private Insurance Regulation, was not acting in a
vacuum, but within the mechanism provided for by the Law and the Corporation
Tax Regulation for determining the taxable income by means of the interactive
interplay of the various items, positive and negative, which make up the income
of companies, of the computable income and of the deductible items.
Two
other ideas derive from this idea.
The
first is that the provision of Article 3.1 of Royal Decree 1042/1990 does not
disregard the principle of legality in tax matters (Articles 31.3 and 133.1 of
the Spanish Constitution), since it is Law 61/1978 (Articles 11 and following)
which defines the basic parameters for determining the tax base:
which elements are included in the positive pole and which in the negative pole
to determine the taxable income in the tax period. Article 3.1 cited is
limited to disciplining one of those elements provided for in the Law, without
encroaching on the legislator's own field, which, as the Constitutional Court
has declared, extends to determining the criteria or principles according to
which tax matters are to be governed and, more particularly, to the ex novo
creation of taxes and the determination of the essential or configuring components
of the same (judgments 37/1981, FJ 4º; 6/1983, FJ 4º; 179/1985, FJ 3º; and
233/1999, FJ 9º), which do not include the singular treatment of a deductible
item in a specific area such as provisions in the insurance sector. It should
be remembered that, in the opinion of the Constitutional Court itself, the
reservation of law does not affect all elements of the tax in the same way;
thus, the maximum degree of specificity is required when regulating the taxable
event, with flexibility in the case of other elements, such as the tax rate and
the tax base (judgments 221/1992, FJ 7; and 233/1999, FJ 9). See in this sense
our judgement of 10 February 2010 (cassation 4277/04, FJ 8º ).
The
other idea is that Article 3.1 of Royal Decree 1042/1990 does not contradict Article
13 of Law 61/1978, without, therefore, disregarding the principle of hierarchy
of legislation (Articles 9.3 of the Constitution and 51.1 of Law 30/1992),
since the deductible expenses are those necessary to obtain the income, without
there being any objection to the fact that, in the insurance sector, only
allocations to compulsory provisions are considered as such up to the limit set
as a minimum in the regulation. Technical provisions are instruments for
ensuring the financial stability of insurance undertakings in the course of
their business, like the solvency margin, the guarantee fund and the limitation
of activities (regulated in Title V, Section 2 of the Regulation); they are not
"by their nature" expenditure which is essential to obtain income,
but are outlays required by the legislator in order for a company to be able to
operate in the sector. From this perspective, they do appear as unavoidable
items in order to obtain those returns, since if they want to operate in the
sector they have to set aside provisions in the minimum amount determined by
the regulation and, therefore, it is not surprising that the aforementioned
Article 3.1 considers them to be deductible within that limit. It should be
borne in mind that, as a general rule, items that have the nature of estimated
expenses are not deductible, except for annual allocations to fiscally
authorised provisions (Article 351(d) of the Corporation Tax Regulation), such
as those at issue in this dispute.
In
view of the above, the argument that, in the discipline of Article 59 of the
Private Insurance Regulation, the minimum compulsory amount does not
necessarily coincide with the amount necessary in each case, in many cases
being lower than it due to the technical deficiencies of the methods established
in that precept, since the notions of "necessity" and "minimum
amount" of the provisions are co-extensive here, loses all force.
(2)
That being understood in this way, the necessary nature
of the allocations to the technical provisions does not in any way affect the
principle of economic capacity, since, for tax purposes, only the minimum
required by the legislation is of that nature.
The technical opinions submitted by the appellant, which consider the
provisions the deduction of which was refused by the authorities to be not only
necessary but also insufficient, are therefore irrelevant. It should have
sought to establish that the administration erred in its calculation of the
minimum provisions required, not that, from an economic and business stability
point of view, the provisions should have been higher. Indeed, in the
appellant's own words, 'allocations to technical provisions must be neither
maximum nor minimum for any purpose, but necessary and sufficient for all
purposes', but, as far as corporation tax is concerned, only the minimum
allocations are deductible, which no company may, by virtue of the rules,
avoid.
(3)
As we indicated in the judgment of 15 February 2010
(cassation 6587/04, FJ 7) consolidated groups are a fiction for tax purposes.
The companies that comprise them have separate legal personality and separate
assets, although for corporate tax purposes they are not considered as
independent entities that take decisions and obtain results with individual
consequences. Instead, they are regarded as sections or departments of a single
entity (the taxpayer of the consolidated group) that makes decisions and
obtains overall results. For this reason, the profits of some companies are
offset against the losses of others, eliminating the tax consequences of
intra-group transactions. This was inferred from the rules contained in Royal
Decree 1815/1991 of 20 December 1991, which approved the rules for the
formulation of consolidated annual accounts (BOE of 27 December), and is now
even clearer from Chapter VII of Title VII of the revised text of the Corporate
Income Tax Act currently in force, approved by Royal Legislative Decree 4/2004
of 5 March 2004 (BOE of 11 March).
However,
this fiction only operates in the tax field; in the other fields, the companies
that comprise them must be considered as independent. Therefore, in order to
assess the experience referred to in article 59 of the Private Insurance
Regulation in the wording of Royal Decree 1042/1990, it is necessary to take
into account, as the provision itself indicates, the experience of "each
entity", it not being admissible, as the appellant claims, to resort to
the experience of the group.
As
the claim that 'XZP' and 'XZU' did not prove the required
experience was not contested, it was appropriate to apply the calculation
method provided for in Article 59(2), as the Inspectorate did.
...;"
In the light of the foregoing, the alleged infringement
of the principle of economic capacity can be dismissed.
Secondly, the claimant alleges infringement of the
principle of legal reservation, as it is a regulatory rule that specifies
the concept of minimum amount. However, this is an issue that has already been
raised, not only by the claimant, but also by other entities before the Supreme
Court, and which the latter has resolved. Thus, for example, in STS of
21/05/2012 (rec. 5673/2004) in its second Legal Ground, the High Court
reiterates that the principle of legal reserve is not infringed (emphasis
added):
"...;
SECOND
- Caja Madrid claims in the
first ground of appeal that, contrary to what the Audiencia Nacional held in
the judgment under appeal, Article 3(1) of Royal Decree 1042/1990 was null and
void.1 of Royal Decree 1042/1990 was null and void: (a) for
infringing the principle of hierarchy of legislation, since, on the basis
of the authorisation contained in the first
additional provision of the 1982 Corporation Tax Regulations for the Minister
for Finance to issue rules for the development, application and adaptation of
partial aspects of those Regulations, it could not validly develop the
provisions of Article 13 of Law 61/1978, which lists the deductible expenses
for the calculation of the tax base; and (b) for infringing the
principle of legal reservation, given that the taxable base of the tax must
be regulated by a regulation with legal rank, without Articles 13 and 14 of Law
61/1978 including any mention of the tax deductibility of the technical
provisions of insurance companies and without there being a legal provision
enabling the regulatory development of this issue, since it was not Law
61/1978, but the first additional provision of the 1982 Corporation Tax
Regulation, which empowered the Minister of Finance and not the Council of
Ministers, to issue the rules for the development and application of partial
aspects of the said Regulation, given that neither the empowered body nor the
enabling rule allowed it to be understood that Article 3.1 of Royal Decree
1042/1990 validly implemented Articles 13 and 14 of Law 61/1978."
This complaint was also raised by "Caja Madrid" in appeal 4277/04, which it brought
against the judgment handed down on 18 March 2004 by the Second Section of the
Administrative Chamber of the Audiencia Nacional in appeal 649/01. Therefore,
in order to preserve legal certainty and ensure the unity of doctrine, we must
reiterate the reasons that led us to reject it in the eighth ground of law of
the judgment of 10 February 2010:
"First
of all, the alleged infringement by Article 3(1) of Royal Decree 1042/90 of the
principle of hierarchy of norms must be rejected.
Indeed, this principle cannot be understood in the way the appellant puts it.
Our judgement of 27 September 2005, among others, has stated on this point:
"The scope of the principle of legality in tax matters cannot be
understood as the appellant does in the sense that there is an absolute
reservation of law in this area, which is supported by the judgements of the
Constitutional Court, in which it states: judgement 19/1987, 17 February
<<.... art. 31.1 establishes a general reservation of law in taxation, on
which this Court has previously had occasion to make important clarifications.
We have said, in effect, that when art. 31.3 EC proclaims, as far as we are
concerned here, that public economic benefits can only be established in
accordance with the Law, the Basic Law does not provide for an absolute tax
legality - since it does not impose there that the establishment must
necessarily be made by means of a Law, but rather, with greater flexibility,
the requirement that the establishment must be made by means of a Law, with
greater flexibility, to the requirement that the Law establishes the criteria
or principles according to which tax matters must be governed and,
specifically, the 'ex novo' creation of the tax and the determination of its
essential or configuring elements ( SS 6/1983 of 4 February , 37/1981 of 16
November and 179/1985 of 19 December).> >, and in judgement 185/1995, of
14 December "This Court has already said that the reservation of law in
tax matters requires that 'the ex novo creation of a tax and the determination
of its essential or configuring elements' must be carried out by means of a law
( SSTC 37/81 , 6/83 , 179/85 , 19/87 ). We have also warned that this is a
relative reservation in which, although the criteria or principles that must
govern the matter must be contained in a law, the collaboration of the
regulation is admissible, provided that 'it is indispensable for technical
reasons or to optimise compliance with the aims
proposed by the Constitution or by the law itself' and provided that the
collaboration takes place 'in terms of subordination, development and
complementarity' (among others, SSTC 37/81 , 6/83 , 79/85 , 60/86 , 19/87 ,
99/87 ). The scope of the collaboration will depend on the different nature of
the legal concepts of taxation and the different elements thereof ( SSTC 37/81
and 19/87 ).>>".
With
regard to empowerment, it is true that the Third Final Provision of Law 61/78
authorised the Ministry of Finance and, where appropriate, the Government, to
issue the necessary provisions for the development and application of this Law.
From
this perspective, it is clear that the limitations in Article 3.1 of the
aforementioned Decree in accepting the consideration of a deductible item for
the purposes of determining the taxable base for Corporation Tax corresponding
to the financial year in which such provisions were made (among others, provisions
for claims pending declaration), provided that their amounts did not exceed the
minimum amounts required annually as compulsory by the Private Insurance
Regulations, The provisions in
question were issued by virtue of the powers granted by the First Additional
Provision of the Corporate Income Tax Regulations approved by Royal Decree
263/1982, do not infringe either the principles of hierarchy of norms or the
principle of legal reservation, as they operate within the scope authorised by
the legislator, making legitimate use of the powers conferred on him by law,
covering the hypothetical gaps contained in the law. It cannot be accepted
from the parameters set out above regarding what the new law is, that the
determination of the "quantum" of a specific technical reserve
constitutes the infringement invoked. There being no doubt that Caja Madrid Seguros Generales, S.A. and Caja Madrid
Vida, S.A. did not comply with the time limits established in article 59.1 of
the Private Insurance Regulations, it is clear that the correction made in the
provision discussed in the contested decision is in accordance with the
law".
We
have detailed these same reasons further in the judgment of 7 June 2010
(cassation 1909/05 , FJ 5º):
"[...]"
The claim is therefore dismissed and the proposed
adjustment is confirmed. It should be added, with regard to the last part of
your argument, that, as the Supreme Court has pointed out in its ruling of
29/09/2010 (Rec. 3698/2005) FD 2, non-deductibility is not an actuarial issue,
but a tax issue:
"It
should be made clear that the problem raised is not an actuarial question but a
tax question. It is not a question of determining the amount of the provision
in question in actuarial terms, but rather the amount of the provision which is
a deductible expense, since the wording of Article 3 of Royal Decree 1042/1990 recognises that the amount of the provision, on the one
hand, and the deductible expense, on the other, may not coincide, which can be
deduced from the fact that the deductible amount of the provision cannot exceed
the minimum amounts set.
Finally, it is alleged that the constitutional
principles of coordination of public administrations (art. 103 EC), legal
certainty and legitimate expectations (art. 9.3 EC) have been infringed.
With regard to the principle of coordination of public
authorities, the respondent submits that the Directorate-General for
Insurance and the tax authorities should act in a unified manner. In defence of his claim, he refers not only to Article 103 of
the EC, but also to various rules of general administrative law, such as
Article 2.2 of Law 6/1997 of 14 April 1997 on the Organisation
and Functioning of the General State Administration; Article 3.4 of Law
40/2015, of 1 October, on the Legal Regime of the Public Sector; Article 18.2
of Law 30/1992, of 26 November, on the Legal Regime of the Public
Administrations and Common Administrative Procedure; and Article 39.4 of Law
39/2015, of 1 October, on Common Administrative Procedure of the Public
Administrations. The obligor considers that these rules are infringed by
actions such as that of the Tax Inspectorate of the Central Delegation for
Large Taxpayers of the State Agency for Tax Administration, which considers the
partial non-deductibility of the technical provision of benefits calculated by
the entity by applying statistical methods by applying an alternative method,
without respecting the fact that another administrative body, in this case the
DGSFP, has analysed, supervised and, finally, authorised a method of compulsory
application, for exclusively tax collection purposes, and affected by technical
shortcomings, as it claims to have shown. Finally, he referred to the binding
consultation of the Directorate General of Taxes (hereinafter, DGT) of 29 May
2014 (V1430/2014), in which, according to the obligor, the criteria of the Tax
Administration and the supervisory Administration of the insurance entities
could have clashed, but in which the former assumed the consequences of the
actions of the DGSFP's Inspection.
With regard to this allegation, it should be reiterated,
firstly, that the application of section 2 of DA 3 of the ROSSP is not a whim
or an arbitrary decision of the inspection services of the DCGC. The
modification of the said paragraph 2 was made by Royal Decree 239/2007, of 16
February, which the taxpayer is not unaware of, as evidenced by the explanation
of the regulatory developments on this issue in the following allegation. It
should also be reiterated that the fact that the taxpayer does not like this
provision does not exempt him from complying with it.
Secondly, with regard to the coordination of criteria
between the DGSPF and the tax administration in relation to technical
provisions, it should be pointed out that this is also a classic point of
disagreement between taxpayers in this sector and the tax administration. In
this respect, emphasis has always been placed on the different spheres of
competence of the two administrative bodies, and on the different control
functions exercised by each, with the DGSPF being responsible for ensuring the
solvency of the insurance companies for the protection of policyholders and
shareholders, and the Tax Administration for the interests of the Public
Treasury. For this reason, the regulations that both supervise are aimed at
these ends: those of insurance regulation to guarantee solvency, for which
technical provisions play a fundamental role, so that the higher the amount of
these, the more favourable the DGSFP will be in their
assessment, and those of taxation to ensure adequate taxation, which in the
area of technical provisions is manifested in the fact that only the minimum
amount of their provisioning is admitted as tax deductible.
On the other hand, as has already been said, the
discrepancy between the Tax Administration and the DGSPF on this issue is not
new and has also been raised before the Courts of Justice, which have backed
the Tax Administration's criterion and have highlighted this different sphere
of competence. Thus, in the STS of 10/06/2010 (rec.4907/2008), although it
referred to a question of classification, the fifth ground of law states the
following, for the purposes that are of interest here (the underlining is
ours):
"...;
FIFTH
- In view of the substantive arguments set out in the
assessments and in the supplementary reports, and which are reiterated in the
Resolutions of the T.E.A.R. of Madrid and of the T.E.A.C., the plaintiff, as
has been pointed out, focuses its arguments on the fact that, the Directorate
General of Insurance having classified the Provision for Benefits in Training
as a Mathematical Provision, the Tax Inspectorate cannot consider it for tax
purposes as an internal Investment Fund, given that this Directorate General is
the only "competent body, where appropriate, to raise any question
relating to the classification of the provisions constituted by the insurance
companies". In short, for the applicant Mutualidad,
"once the competent body, i.e. the Directorate General for Insurance, has
classified a given provision as a mathematical provision, the immediate
consequence of that classification is that the allocations made to it will be
tax deductible" (p. 23 of the notice of appeal).
It
is clear, however, that, put in these terms, the plea cannot succeed for two
reasons. On the one hand - the least important - (....;./...;)
(...;/...;)
But
above all, secondly, even if we were to admit, for mere dialectical
purposes, the contradiction alleged by the appellant Mutualidad,
the plea could not succeed because, as the Court of First Instance rightly
points out, it is not true that the legal classification made on this point by
the Directorate General of Insurance binds the tax inspection bodies when it
comes to determining whether art. 13.2 of Law 43/1995 is applicable when it
declares deductible "[t]he allocations to the technical provisions
made by the insurance companies, up to the amount of the minimum amounts
established by the applicable rules" [letter e)].
This
Chamber and Section has already ruled on this issue on several
occasions. In particular, in the Judgment of 2 November 2002 (appeal no.
9712/1997 ), in relation to the so-called "one-year deferred insurance
with reimbursement of the premium", the so-called deferred capital
insurance or "insured capital", and that which was put into
circulation under the name of "Eurobao insured
capital" or "deferred capital insurance or technically Mixed
Insurance on a zero basis", we firstly reached the conclusion that, due to
their characteristics, they could not be classified as insurance contracts, but
rather as contracts on income from movable capital:
(...;./...;.)
And
having pointed this out, we noted, in a reasoning that can be transferred here
mutatis mutandi:
"This
prohibition makes it possible to overcome the argument of the appellant, which
uses the approval, by the Directorate General of Insurance, of the Technical
Notes that accompanied the proposals for approval of the operations in
question, as a guarantee of legitimacy that cannot now be challenged by the Tax
Administration, given that we are dealing with completely different
administrative acts, and that the tax classification is outside the powers and
responsibilities of the Directorate General of Insurance.
The
latter unquestionably acted on the basis of an appearance artificially created
by the appellant, so that it is necessary to agree with the judgment under
appeal that the settlement carried out by the administration was correct and
that there was no infringement of any of the precepts on which the present plea
is based' (seventh ground of appeal).
We
also used the same reasoning in the subsequent Judgment of 5 March 2008 (rec. cas. núm. 3262/2002 ), in which
we stated the following:
(...;/...;)"
Finally, the same doctrine is found in the judgments of
31 May 2006 (appeal no. 6532/2001), FD Thirteenth, of 7 June 2006 (appeal no.
5240/2001), FD Twelfth, of 11 December 2006 (appeal no. 5001/2001), FD Seventh,
and of 4 June 2007 (appeal no. 6532/2001), FD Thirteenth, in which we affirm:
"Nor
does the Resolution of the Directorate General of Insurance of 23 January 2001
affect the above conclusion, since, as stated in the Judgement of 2 November
2002, it cannot be a guarantee of legitimacy, given that we are in the presence
of completely different administrative acts, and that the tax classification is
outside the powers and responsibilities of the aforementioned Management Centre.
Finally, it is also of no particular significance in this respect that the
appellant entity obtained the necessary administrative authorisation
to carry out this type of operation, since nobody disputes that they are
formally included as an insurance operation, although for the reasons set out
above they are converted into a principal capital imposition operation with an
ancillary insurance operation to cover the minimum existing risk".
...;.".
In the same vein, it is worth citing the Judgment of the
Audiencia Nacional of 4/12/2007 (appeal 871/2004), which was subsequently
confirmed by the Supreme Court in its judgment of 1/12/2011 (case 411/2008).
Thus, in the fifth ground of law, the NA states the following (emphasis added):
"FIFTH:
The Administration is right, as we have already had occasion to affirm in
similar cases (judgments of 30 June 2004 (appeal 110/02, f.j.
9) and 20 January 2005 (appeal 593/02, f.j. 8)).
The
deductibility of technical provisions for claims pending declaration, the
amount of which does not exceed the minimum annual requirement, is not disputed
(Article 3(1) of Royal Decree 1042/1990, in conjunction
with Article 351(d) of the Corporate Income Tax Regulations, approved by Royal
Decree 2631/1982 of 15 October 1982 (BOE of 21 October 1982)), nor should the
method of calculation be questioned, given the clarity of the provision.
Article
59 of the Private Insurance Regulation aims to combine reality and fiction by
introducing certainty into uncertainty, which is essential for the proper
functioning of an economic system and its legal superstructure. As a rule,
operating expenses are allocated to the financial year to which they relate, so
that the accounting results are as close as possible to those actually obtained.
And since it is a question of providing for claims that are unknown (they have
not yet occurred or their occurrence is unknown), there is nothing better than
to draw on the experience of each individual company, taking into account the
guidelines provided by previous years. To this end, Article 59(1), after
stipulating that all claims are attributed to the financial year in which they
occurred (point (a)), indicates that each year the number of claims which
occurred in the previous financial year but were reported after the closure of
the accounts (point (b)) must be determined. Thus, in year N, claims occurring
in year N-1 and reported in year N are to be taken into account (in other
words, on 31 December 1991, claims from 1990, reported after the closure of the
accounts for 1990, are taken into account). Once this information is known, the
amount of these claims is calculated on the basis of the average amount of
claims during the year N-1 (point (c)). Once these two factors have been
obtained, the provision for claims outstanding for a given year is obtained by
multiplying the arithmetic mean of the number of claims in the last five years
by the average amount of claims in the last year (paragraph (d)).
As
can be seen, there is nothing to support the plaintiff's argument that, for
five years, each year that passes, claims declared to have occurred in the
first year of the five-year period must be taken into account. From the outset,
this formula introduces an undesirable element of uncertainty in this area. On
the other hand, it breaks the coherence of the system, since in order to
calculate the necessary provision on 31 December of year N, claims occurring in
year N-5 and declared during the following five-year period are taken into
account, but the figure for year N-4 only takes into account a four-year
period, in year N-3 a three-year period, and so on.
The
defendant administration's argument, which has already been endorsed by this
Court, therefore appears to be more rigorous, even though the Directorate
General for Insurance maintains the plaintiff's view, which is respectable, but
which departs from the wording of the provision and its purpose. That
management centre has the power to develop the rules
and procedures laid down in the Reglamento de Ordenación del Seguro Privado for the calculation of
technical provisions (Article 55(2)), but it has no power to interpret them in
a manner contrary to their wording, even if it is supported by an alleged
'expert opinion' of a chartered
actuary, which offers an opinion, also respectable, but which in no way binds
this Chamber, which is sovereign, subject exclusively to the Constitution and
the law, to interpret and apply the legal system and to review the legality of
administrative action (Article 106(1) of the Constitution).
With
regard to this opinion, it is necessary to recall that, in accordance with
Article 335, paragraph 1, of Law 1/2000, of 7 January, on Civil Proceedings,
the purpose of expert evidence is to assist the judicial body in the assessment
of facts that require non-legal knowledge (scientific, artistic, technical or
practical), without it being their role to propose, and even less so in a
binding manner, the interpretation of legal rules.
As
regards the Directorate-General for Insurance, like all administrative bodies,
it is fully subject to the law and the legal system (Article 103(1) of the
Constitution) and cannot therefore propose interpretations contrary to the
rules to which it is subject, and even less so with the power to bind other administrative
bodies. It is therefore clear that the principles whose infringement is alleged
in the application (venire contra factum proprium and administrative
coordination) do not suffer because the tax administration maintains a
different interpretation, which, moreover, this Court considers to be correct.
With regard to the principles of good faith and legitimate expectations, we
will only make a note: both principles, which revolve around the world of legal
certainty, protect the taxpayer who, prompted by the administration itself,
engages in behaviour which he believed to be
legitimate and which, nevertheless, is not protected by the legal system; Well,
such a scenario is not the case of GERLING, who, far from filing his corporate
tax returns under the protection of the interpretation of the Directorate
General of Insurance, did so at his own risk, and was surprised to find that
the tax inspection did not share his criteria, at which point he filed a query
with the aforementioned Directorate General to validate his understanding of
the rule a posteriori.
In
short, the applicant company is free to make technical provisions in accordance
with different criteria, which result in a higher volume, but in so far as they
exceed the minimum required, they lose the status of deductible expenditure for
the purposes of determining the taxable amount for corporation tax,
as provided for in Article 3(1) of Royal Decree 1042/1990, read in conjunction
with Article 13 of Law 61/1978 of 27 December 1978, which governs that tax.
This approach to the question at issue does not ignore the principle of
economic capacity proclaimed in Article 31(1) of the Constitution, which
obliges the legislator to tax wealth where it is manifested, by defining
taxable events indicative of that capacity (the income of companies in the case
of the tax at issue here), from this perspective, it is constitutionally
legitimate for the legislator to limit the expenses that the taxpayer may
deduct in order to determine the taxable base, provided that this is done in
accordance with the principles of equality and progressivity proclaimed by the
constitutional precept itself, as well as the principle of generality implicit
in the same.
In
sum, this first plea in law - the main plea in law - must be rejected.
...;."
With regard to the DGT consultation cited by the obligor,
V1430/2014, dated 29-05-214, it should be pointed out that it has nothing to do
with the present case, since there it asks about the application of section 1
of the DA-3rd of the ROSSP and in the present case, it should be insisted, what
is applicable is section 2 of that provision. In any case, the DGT's answer
does not deviate from the provisions of section 1 of DA 3, because it states
that any additional provisions that may be made to adapt to the provisions of
the regulation are deductible.
"1.
The allocations to be made to the technical provisions in accordance with the
methods provided for and permitted in this Regulation, as well as any
additional allocations which may be made in order to adapt to the provisions of
this Regulation, shall be considered for all purposes as the minimum amount
for the establishment of the said technical provisions.
This TEAC understands, as does the Inspectorate, that if
the DGSFP, in the exercise of its functions, determines a shortfall in
technical provisions and orders, or recommends, an increase, it is because the
provisions were below the minimums resulting from the application of the
articles of the ROSSP. The DGSFP is also an administrative body and as such
subject to the law and the law, so it is only feasible for it to order
compliance with the provisions of the ROSSP, not others that it deems
appropriate at its discretion. It is clear that when the technical provisions
are higher than those resulting from the regulation, the DGSFP does not make
observations or qualifications, but when they are lower, it is within its
powers to order their increase and, as the aforementioned section 1 of DA 3 of
the ROSSP states, these amounts, as long as they do not exceed those resulting
from the regulation, are considered minimum amounts. And, therefore, the DGT
responds in the sense of the consultation referred to by the obligor.
With regard to the principle of legal certainty and
legitimate expectations, the complainant refers to the amendment made by
Royal Decree 239/2007, the wording applicable to the periods subject to
verification, which, in principle, came into force on 20 February 2007.
However, a transitional period was established for its application, the scope
of which raised doubts, and proof of this is consultation V2602-07 of 4
December 2007, in which the DGT clarified that the system previously in force
would be applied to the 2007, 2008 and 2009 financial years, since 2010 would
be the first year in which the data relating to the three previous financial
years, necessary to calculate the coefficient provided for in the new wording
of the aforementioned additional provision, would be available, even if the authorisation of the statistical method had been obtained
in 2007.
The claimant adds that in this context it was subject to
inspection in 2008 and 2009, in which the Inspectorate reviewed the technical
provisions, validating its criteria for calculating the provision for benefits
by statistical methods, with a limitation on the deductibility of the same
being less reasonable, which, however, did not lead to any adjustment.
Well, as the taxpayer indicates, the new system provided
for in sections 2 and 3 of DA 3 of the ROSSP, as amended by Royal Decree
239/2007, of 16 February, would not be applied until 2010, as interpreted by
the DGT in the binding consultation mentioned by the taxpayer, V2602-07, dated
4 December 2007, therefore, it would have been difficult for the inspection to
check whether or not the taxpayer was applying the aforementioned Sections 2
and 3 of DA 3-ª, according to the new wording, in that verification, which
affected the periods 2008 and 2009.
It should be added that the Tax Administration must regularise a legal tax situation when it deems it
appropriate, without being bound by the fact of not having regularised
said situation beforehand, despite being aware of the facts, as stated by
the Supreme Court in its ruling of 22/11/2013 (Rec. 2008/2013), and as we have
already remarked in this Resolution, in previous GROUNDS OF LAW. Let us recall
that, in this regard, in relation to the existence of the Administration's own
act, on this issue the SC has established several requirements, among others,
in its judgment of 22/06/2016 (Rec. 2218/2015), in which it pointed out that
the Tax Administration may be obliged to observe the conduct followed in
previous years in the future, but it must be unequivocal and definitive prior
acts and, likewise, it has pointed out that the protection of legitimate
expectations and the binding nature of own acts requires the presence of two
assumptions: 1) The own act must be the consequence of an inspection activity
carried out in full, real or potential, so that when classifying a transaction,
the Administration has all the data, without there being unknown or hidden
elements and 2) There must be no relevant new data arising a posteriori, to
conclude that the protection of legitimate expectations and, also, that own
acts do not operate if the verification activity of the Tax Administration is
partial, if there are missing elements that are decisive for the correct legal
classification of the business or set of businesses.
In view of the foregoing, the claimant's allegations must
be dismissed. The principle of legality obliges the Inspectorate to apply the
regulations governing the tax deductibility of this provision, and therefore,
having verified that the claimant had failed to comply with the provisions of
section 2 of the Third Additional Provision of the ROSSP, the response can only
be to confirm the regularisation of this situation.
This Central Court is aware of a recent National Court
Ruling of 27/09/2022 (Appeal Number 0782/2019) which analyses the tax treatment
of some provisions with certain similarities to the ones we are analysing here;
Specifically, this ruling analyses a provision made by an insurance company for
death insurance (specifically, death policies taken out prior to the entry into
force of the Regulation on the Regulation and Supervision of Private Insurance
approved by Royal Decree 2486/1998, of 20 November, i.e. policies in the
portfolio prior to 1 July 1999). In that case, the Inspectorate's adjustment
consisted in allowing only the deduction of a provision equivalent to 7.5% of the
premiums earned, since it concluded that, even if for the purposes of greater
technical solvency the institution set aside an additional amount to that
provided for the provision of the death insurance of the portfolio prior to
Royal Decree 2486/1998, the "maximum limit" for the "maximum
limit" of 7.5% of the premiums earned, the "maximum limit" for
the provision of 7.5% of the premiums earned is the same as the "maximum
limit" for the provision of 7.5% of the premiums earned, the "maximum
limit" by which this provision is deductible cannot be other than the
"minimum amount" required by the regulatory rule, TD 3 of the
aforementioned Royal Decree, i.e. 7.5% of the premiums accrued for said
portfolio. The NA has concluded, with regard to this adjustment, that it was
confirmed by this TEAC:
But
it so happens that the essential precept for resolving the present question is
article 13.4 of Royal Legislative Decree 4/2004, which establishes:
"4.
Expenditure relating to technical provisions made by insurance undertakings
shall be deductible up to the amount of the minimum amounts established by the
applicable rules.
Within
the same limit, the amount of the year's allocation to the equalisation
reserve will be deductible in determining the tax base, even if it has not been
included in the profit and loss account.
Any
use of this reserve shall be included in the tax base for the tax period in
which it is used.
Impairment
adjustments for premiums or contributions receivable shall be incompatible, for
the same balances, with the provision for the coverage of possible debtor
insolvencies".
Therefore,
it is not about the adaptation of technical provisions to the new
regulation, but about the amount of technical provisions that can be
deducted, and they are deducted up to the amount of the minimum amounts
established by the applicable rules.
The
appellant has never disputed that it was subject to DT3ª of Royal Decree
2486/1998. It is true that the Supreme Court has repeatedly held, inter alia in
its judgment of 19 February 2003, RC 2629/1998:
"b),
the appeal starts from the premise that Article 13 of Law 61/1978 only
considers necessary and, therefore, deductible - for the purposes of
determining the taxable base of the IS - only those expenses which are
deductible by legal mandate, and ends with the conclusion that the judgment of
the Court of First Instance infringes Article 13 of Law 61/1978 because it
considers as deductible expenditure only that which is not compulsory, BUT such
assertions must be rejected because, FIRST, it is not only what the Law imposes
that is compulsory, as there are other sources of obligations, SECOND,
deductible expenditure for IS purposes is not the same as compulsory
expenditure by legal mandate, since Article 13 of Law 61/1978 considers deductible
expenses or concepts that are not imposed by any legal rule and Article 14 of
the same Law considers non-deductible expenses or concepts that are compulsory
by legal mandate, THIRD, the aforementioned comparison is not correct, either,
because Law 61/1978 considers necessary expenditure to be that which is
necessary for the taxpayer to obtain full income (as indicated in Article 13.1
of that Law), and the allocations to the Self-financing Fund are necessary in
order for Santa Lucía S.A. FOURTH, in order to determine the taxable amount of
the IS accrued by that company on 31 December 1985, it is necessary to start
from Article 11 of Law 61/1978 and the system of direct assessment - translated
into an algebraic sum - indicated therein, and, consequently, to take into
account the concept of deductible expenses, as indicated in Article 13(1) of
Law 61/1978, taking into account the concept of deductible expenses (first
paragraph of Article 13), the list of deductible expenses (various letters of
Article 13) and the list of non-deductible expenses (various letters of Article
14), and that, according to the latter provision, the list of non-deductible
expenses is exhaustive ('they shall not be considered deductible items for the
determination of income ...."), the provisions of the Fund are deductible
expenses insofar as they are not included in the list of the aforementioned
provision and are necessary to obtain the full yield (according to the Opinion
on the obligatory nature of the Provision for Claims Deviation and its fiscal
consideration issued by an Insurance Actuary and Professor of Financial
Economics - attached as Annex 5 to the application at first instance).
c),
there has been no infringement of Articles 100 and 116.1 and 2 of RD 2631/1982,
because, FIRST, the determination of the taxable amount for IS must be carried
out by a rule with legal rank and not by a regulatory rule - which, moreover,
in the case of Article 116, is contrary to the provisions of the higher legal
rule which it is supposed to implement -, SECOND, Article 100, in its first
paragraph, considers, like Article 13 of Law 61/1978, that the necessary nature
of the expenditure lies in the fact that it is necessary to obtain the full
income or revenue and not in the fact that it derives from a legal mandate,
and, in the enumeration of its second paragraph, it indicates that necessary
expenses are - to be deduced from the law - necessary, THIRD, an examination of
the two paragraphs of Article 116 determines that it is erroneous to state that
only those allocations to the Fund which are not expressly mentioned in the
first paragraph of that provision are deductible, since this provision
regulates one of the elements of the taxable base of the IS, the necessary
expenses, contrary to the provisions of Articles 13 and 14 of Law 61/1978, it
is null and void (as it infringes the principle of legal reserve).
d),
the alleged infringement of Article 30 of the 1957 LRJACE cannot be valid,
because, FIRST, it is not the only ground invoked by the judgment of the Court
of First Instance to declare the allocations to the Fund deductible (since
reference is made therein to all the provisions regulating the Regulation of
Private Insurance), SECOND, the judgment acknowledges that the resolution of
the Directorate General of 1971 was issued in response to a consultation which
was not binding, THIRD, the value acknowledged to that resolution in the
judgment is none other than to differentiate between the 'Technical Stabilisation Reserve' (referred to in the above-mentioned
judgments of the Supreme Court of 1977 and 1979) and the 'Technical Stabilisation Reserve' (referred to in the above-mentioned
judgments of the Supreme Court of 1977 and 1979) and the 'Technical Stabilisation Reserve' of 1977 and 1979, the value
recognised in the judgement is none other than that of differentiating between
the 'Technical Stabilisation Reserve' (referred to in
the aforementioned Supreme Court judgements of 1977 and 1979) and the
'Technical Guarantee Fund for Death Insurance', and, FOURTH, it is not in
dispute here whether a resolution, that of 1971, can contradict RD 2631/1982,
but whether Article 116 of said RD 2631/1982 can regulate a matter (taxable
base) subject to the principle of legal reserve in a different sense to what is
provided for in two rules that have legal rank (Articles 13 and 14 of Law
61/1978). (...;)
Technical
Provisions that have been replacing the said Fund and, more specifically, more
recently, in relation to the "Claims Deviation Provision", the same
conclusion has been reached (despite the fact that the latter Provision does
not require administrative authorisation, in
accordance with Article 24.5 of Law 30/1995, of 8 November 1995, on the
Regulation and Supervision of Private Insurance, except in the exceptional and
specific cases indicated in the same precept), due to the following
considerations: (A), in development of Article 16 of the aforementioned Law
30/1995, the Third Transitory Provision of the Regulation on Regulation and
Supervision of Private Insurance approved by RD 2486/1998, of 20 November, has
established, normatively, the obligation to create the 'Provision for Death
Insurance' for the portfolios of policies existing at the entry into force of
the Regulation (i.e., for the death insurance policies to which the insurance
companies had endowed the aforementioned Provision, since, precisely, the
Provision refers to all those existing when, on 1 January 1999, the
aforementioned RD 2485/1998 came into force); (B) despite the name of the Death
Insurance Provision, it is obvious that the same constitutes, both by its
nature and by its structure and operation, a genuine 'Loss Deviation Provision'
or, in other words, according to the respectively prevailing regulatory
regulations, a 'Stabilisation Provision', a 'Stabilisation Provision' - since the entry into force of
Law 30/1995 - or a 'Technical Guarantee Fund for Death Insurance' - prior to
that law and to the regulatory group derived from Law 33/1984 - the latter
Fund, which, under that name, had been endowed by the appellant; (C) although
Royal Decree 2486/1998 does not have retroactive effect, in order to make
compulsory a Provision which, prior to its entry into force, did not have,
under either name, such a character, this is no obstacle to the compulsory
nature of the provision or of the Fund, when, as has already been indicated,
being technically justified, (thus, the new Royal Decree ratifies the
interpretative criterion that upheld the obligatory nature, previously by
virtue of administrative approval and now, by virtue of the regulatory
regulations, of the provisioning of the corresponding Provision or Fund); and,
(D), a conclusion which is confirmed by the fact that, in paragraph 3 of the
aforementioned Third Transitional Provision, it is specified that the insurance
companies that must comply with the aforementioned obligation must integrate
its amount with "the Aging Provision or with the Loss Deviation or Stabilisation Provision referring to the death branch"
(as a ratification of the obligation to endow the Provision or the Fund,
provided that, appearing in the Technical Notes or Bases, it has been
administratively approved by the control authority)."
The
ruling cited above, although issued applying a different regulatory framework
to the one in question, contains an essential ratio decidendi to resolve our
appeal, a ratio that is reiterated in many other rulings of the High Court. Provisions
can not only be deducted in application of article 13.4 of Royal Legislative
Decree 4/2004 (or its equivalent in the previous regulation), but also when
they are linked to expenses necessary to obtain the income.
In
the same sense, and among others, the judgement of this Chamber of 7 December
2005, appeal 607/2003. Therefore, an adjustment based solely on the fact
that the provisions exceed the minimum legal requirement is not admissible,
without analysing whether the provisions are justified as necessary expenses
for the development of the activity.
The
TEAC itself points out the applicable regulation, as follows: "For death
insurance, Article 46 ROSSP states: 'Entities operating in the death insurance
branch shall constitute the provision for death insurance in accordance with
the actuarial approach of the operation, although the technical interest rate
to be used shall be, in any case, that determined in section 1 of Article 33 of
these Regulations. This Article 33 ROSSP refers to the interest rate applicable
for the calculation of the life insurance provision. For its part, Article 79
ROSSP refers to the peculiarities of the technical bases of death insurance:
The technical bases of death insurance must reflect the modifications in the
insurer's cover in the face of changes in the cost of the service. Taking into
account the above, a technique analogous to that of life insurance shall be
used to determine the premium and the provision for death insurance, and the
principles of collective capitalisation may be
applied". Therefore, it is not sufficient to state, as has been done, that
by application of Provision T 3ª, it is not possible to admit the deduction
beyond the minimum established, precisely because even in Royal Decree
2486/1998 itself, other parameters are contemplated to which the plaintiff
claims to have been subjected. We must annul the regularisation
in this respect.
However, this is a judgment that is not final and
therefore does not constitute a criterion that this TEAC must assume, if it
does not share it, as is the case here.
4. Incorrect use of the formula for calculating the
minimum amount deductible by the Inspectorate.
In the alternative, the claimant alleges that the
Inspectorate would have incorrectly applied the formula for calculating the
minimum deductible amount of the aforementioned provision, as it would not have
taken into account either the provision for internal claims settlement expenses
(PGILS) or the expenses attributable to benefits (GIPS).
With regard to this question, this TEAC shares the
consideration set out by the Inspectorate in the settlement agreement,
answering this question. When the Third Additional Provision of the ROSSP
refers to the "provision of benefits estimated by statistical methods,
as referred to in Article 43 of these regulations", only the provision
referred to in the aforementioned article should be taken into account. And
Article 43.1 of the ROSSP states that "insurance companies may use statistical
methods for the calculation of the provision of benefits that include both
claims pending settlement or payment and claims pending declaration, in which
case it shall not be necessary to make a breakdown of the provision between the
two components. Likewise, statistical methods may be used only for the
calculation of the provision for claims outstanding", without at any
time referring to the expenses referred to by the claimant.
In short, the obligor's allegations are dismissed
insofar as the inspection has limited itself to complying with the provisions
of section 2 of DA 3 of the ROSSP, which the claimant had completely ignored.
TWENTY-FIRST.- The NEXT ISSUE alleged by the claimant
refers to the equalisation reserve set aside by the
entities XZ ESPAÑA and XZS (in the financial years 2013 and 2014
until their merger with XZ España).
As part of the adjustment of the equalisation
reserve, the adjustments proposed by the inspectorate concerned certain issues,
some of which were accepted by the taxpayer.
Article 45 of the ROSSP, approved by Royal Decree
2486/1998 of 20 November 1998, provides as follows:
"Article
45. Equalisation reserve.
1.
The purpose of the equalisation reserve, which shall
be cumulative in nature, is to achieve the technical stability of each class or
risk. It shall be calculated and endowed for those risks which, because of
their special nature, level of uncertainty or lack of experience, so require,
and shall consist of the amount necessary to cover unfavourable
random deviations in the loss ratio.
2.
insurance undertakings shall set up equalisation
provision for at least the following risks and up to the following limits:
a)
Civil liability arising from nuclear risks. 300 per cent of the premiums of own
retention rate, accrued in the financial year.
(b)
Risks included in the Combined Agricultural Insurance Plans: the limit
established by Article 42 of the Regulation approved by Royal Decree 2329/1979
of 14 September 1979.
(c)
Credit insurance: 134 per cent of the average of the premiums for own retention
tariffs earned in the last five financial years.
(d)
motor vehicle liability insurance, professional liability, product liability,
building damage insurance, industrial multi-risk insurance, surety insurance,
environmental risk insurance and catastrophic risk cover: 35 per cent of own
retention risk premiums.
The
latter limit shall be increased when this is derived from the institution's own
experience. For this purpose, within each risk or class, the limit of the equalisation reserve shall be taken as the result of
multiplying the own retention risk premiums corresponding to the financial year
closed by twice the quasi-standard deviation of the quotient formed by: in the
numerator, the own retention claims ratio, the claims being allocated according
to the financial year of occurrence; in the denominator, the own retention risk
premiums corresponding to the financial year.
However,
the limit shall not be increased if the quotient has always been less than one
during the ten-year period in question.
3.
The equalisation reserve shall be set up each
financial year for the amount of the security surcharge included in the premiums
written, subject to the minimum limit laid down in the technical bases. Except
in the case of credit insurance, for the cases listed in paragraph 2 above, the
minimum limit may not be less than two per cent of the commercial premium.
In
the case of credit insurance, the minimum allocation shall be 75 per cent of
the positive technical result of the line, this being understood as the
difference between technical income and expenses, as established in the
Accounting Plan for Insurance Companies.
4.
Where the procedure laid down in Article 31 leads to an insufficiency of
premium, the basis to be taken into account for the purposes of paragraphs 2
and 3 above shall be increased by the corresponding percentage.
The
calculation of the magnitudes referring to own retention shall include direct
insurance and accepted reinsurance business net of ceded and retroceded
reinsurance.
5.
The equalisation reserve shall be applied to offset
any excess of claims arising in the financial year over the own retention risk
premiums due for the financial year in the class or risk concerned.
The allocation and application of the equalisation
reserve shall be made by class or risk, without any compensation between them
being admissible". Account should also be taken of the third additional
provision of the ROSSP, "Allocation of technical provisions. Minimum
amount" (2013, 2014 and 2015 periods), and the sixth additional provision
of the ROSSEAR (2016 period),
1. Description of the facts.
According to the file, the following calculations were
made by the above-mentioned entities with respect to the limit for the
provisioning of the above-mentioned reserve, as recorded in the file:
"the
entity calculates the own retention risk premium, as shown in the files
"DETAIL JUSTIFICATIVE OF THE INSURANCE PERCENTAGE_201X" provided telematically on 17 October 2018, based on the net premiums
charged for reinsurance, from which it subtracts certain amounts for management
expenses, as well as the security surcharge, obtaining the amounts indicated below:"
|
60 Decennial |
79 Small
enterprise |
72 Comb.
industrial |
|
|
Reinsurance
net premiums earned (1) |
... |
... |
... |
|
Management
fees (2) |
... |
... |
... |
|
Security
surcharge (3) |
... |
... |
... |
|
own retention
risk premiums ((1)-(2) -(3)) |
... |
... |
... |
|
|
|
|
|
|
2014 |
60 Decennial |
79 Small
enterprise |
72 Comb.
industrial |
|
Reinsurance
net premiums earned (1) |
... |
... |
... |
|
Management
fees (2) |
... |
... |
... |
|
Safety
surcharge (3) |
... |
... |
... |
|
own retention
risk premiums ((1)-(2) -(3)) |
... |
... |
... |
|
|
|
|
|
|
2015 |
60 Decennial |
79 Small
enterprise |
72 Comb.
industrial |
|
Reinsurance
net premiums earned (1) |
... |
... |
... |
|
Management
fees (2) |
... |
... |
... |
|
Security
surcharge (3) |
... |
... |
... |
|
own retention
risk premiums ((1)-(2) -(3)) |
... |
... |
... |
|
|
|
|
|
|
2016 |
60 Decennial |
79 Small
enterprise |
72 Comb.
industrial |
|
Reinsurance
net premiums earned (1) |
... |
... |
... |
|
Management
fees (2) |
... |
... |
... |
|
Security
surcharge (3) |
... |
... |
... |
|
own retention
risk premiums ((1)-(2) -(3)) |
... |
... |
... |
In relation to the RC car branch, it is stated that:
"(....;)
the entity calculates its own retention risk premium, as shown in the files
"DET % Seguridad_aplicación Reserva
Estabiliz_2013.pdf", "DET % Seguridad_aplicación
Reserva Estabiliz_2014.pdf", "DET % Seguridad_aplicación Reserva
Estabiliz_2015.pdf" and "DET % Seguridad_aplicación
Reserva Estabiliz_2016.pdf", provided telematically on 17 October 2018 (Diligence no. 9), based
on the net imputed reinsurance premiums, from which certain amounts are
subtracted for management expenses, as well as the security surcharge,
obtaining the amounts indicated below:
|
2013 |
2014 |
2015 |
2016 |
|
|
Reinsurance
net premiums earned (1) |
... |
... |
... |
... |
|
Management
fees (2) |
... |
... |
... |
... |
|
Security
surcharge (3) |
|
... |
... |
... |
|
own retention
risk premiums ((1)-(2) -(3)) |
... |
... |
... |
... |
With regard to the explanation of the calculations made
by the entities, they stated that:
"The
institution calculates the equalisation reserve in
accordance with Article 45 of the Regulation on the Organisation
and Supervision of Private Insurance (ROSSP).
(...)
The
calculation uses information from the profit and loss account for the year in question
to obtain the own retention risk premiums for direct insurance and accepted
reinsurance net of ceded and retroceded reinsurance. As specified in Article
45.5 of the ROSSP, "The equalisation reserve
shall be applied to offset the excess of claims arising in the financial year
over the own retention risk premiums due for the year in the class or risk
concerned.
Since
the standard refers to amounts for the period, the figures reflected in the
entity's profit and loss account are used as these are those incurred in the
period, while the technical note refers to the structure of direct insurance
expenses including surcharges for management fees, reflecting in the latter an
estimate of future expenses to be incurred by the entity.
On
the other hand, as defined in Article 45.4 of the ROSSP, "The calculation
of the magnitudes referring to own retention shall include the operations
corresponding to direct insurance and accepted reinsurance net of ceded and
retroceded reinsurance".
Consequently,
because the cost structure reflected in the technical note relates solely and
exclusively to direct insurance, it is not consistent to apply that structure
to reinsurance net premiums since the reinsurance cost structure is not being
contemplated in the technical note."
The Inspectorate concluded, however, that the system for
calculating the equalisation reserve for the branches
"motor vehicle liability insurance" (hereinafter Motor Liability),
"construction damage insurance" (hereinafter Decennial Insurance) and
"industrial multi-risk insurance" (hereinafter Business Risk), which
are regulated by Article 45.2.d) ROSSP. which sets a limit of 35% of the
premiums for own retention risk, was incorrect.
In this respect, the Inspectorate has taken the view
that, given the cumulative nature of this reserve, when calculating the limit
for subsequent years, a complete recalculation should be carried out, without
taking into account the application made by the institution, bearing in mind
that, on occasions, the calculation of the provisioning limit may determine a
higher application than that made by the institution in previous years. However,
it also understands that, in this recalculation, it should also be verified
whether the equalisation reserve should also be
applied because the loss ratio has exceeded the own retention risk premiums
corresponding to the year for the corresponding risk, since, if this
application is made, it may be the case that the reserve should have been
applied for both concepts: by limit and by application for its purpose, taking
into account that, in relation to the application of this reserve, number 5 of
article 45 of the ROSSP provides that:
5.
The equalisation reserve shall be applied to offset
any excess of claims arising in the financial year over the own retention risk
premiums due for the financial year in the class or risk concerned.
The
appropriation and application of the equalisation
reserve shall be made by class or risk, without any possibility of offsetting
between classes or risks.
On the basis of this consideration, recalculations are
made on the basis of the following considerations:
"...it
is therefore necessary to verify these two aspects: 1) whether or not it should
be applied; and 2) whether or not the limit for its allocation has been
exceeded.
1)
Whether or not it should be applied:
The
inspection indicates that, in relation to the first aspect, the verification of
whether or not the circumstances foreseen in the ROSSP for its application
exist, the claims ratio for the financial year must be compared with the own
retention risk premiums corresponding to the financial year.
With
regard to the claims ratio, the inspectorate points out that the concept of the
claims ratio can be deduced from what is laid down in the PCEA, specifically in
the structure of the technical account. According to that rule, the claims
ratio is to be understood net of reinsurance, in so far as it is to be compared
with the own retention risk premiums for the financial year. According to
Section I.4. of the Technical Account for Non-Life insurance, "Claims
incurred during the financial year, net of reinsurance", this is composed
of the benefits paid for direct insurance and accepted reinsurance net of ceded
and retroceded reinsurance, adjusted by the change in the provision for
benefits during the financial year, also for direct insurance and accepted
reinsurance net of ceded and retroceded reinsurance and including expenses
attributable to benefits.
The
inspection adds that this same concept of claims incurred is contained in
Article 16 of ORDER EHA/337/2007, according to which "claims incurred is
understood to be the sum of the amount of the benefits and the expenses
attributable to the benefits paid by the entity in each financial year,
corrected by the variation in the provision of benefits". The inspection
goes on to indicate that the term for comparison of this loss ratio is,
according to article 45.5 of the ROSSP, the own retention risk premiums
corresponding to the financial year.
The
inspectorate also points out that this concept is different from the one used
in the same Article 45 to refer to the provisioning limit, which relates to
'own retention risk premiums'. The reference to 'own retention risk premiums
for the financial year' is more precise and refers to premiums charged to the
financial year, albeit net of reinsurance and, of course, only as regards the
component of the premium intended to cover the risk (risk premium).
This
clarification is consistent with the comparison, insofar as the claims incurred
is also the claims incurred for the financial year according to its definition,
since it is determined by the variation in the provision at the beginning and
end of the financial year.
The
inspection points out that, for this reason, both figures have been compared,
as calculated in the tables at the end of this section, with the result that
the provision was only applicable to the Motor Vehicles CR line of business
in 2014, 2015 and 2016.
(2)
whether or not the limit for its endowment has been exceeded.
With
regard to the application of the limit to the endowment, the inspection notes
that it has also been verified that the endowment of the equalisation
reserve in each branch does not exceed the limit set by regulation, since any
amount exceeding this limit must be considered non-deductible for tax purposes,
insofar as it represents an excess over the minimum amount as regulated in the
Third Additional Provision of the ROSSP (sixth of the ROSSEAR in 2016).
The
inspectorate points out that, in determining this limit, it is essential first
to determine what is meant by own-risk premiums. In this regard, the resolution
of the DGSFP's consultation 20/2007 is clear, when it states that:
"risk
premiums shall be understood to be that fraction of the tariff premiums that
correspond, in accordance with the technical bases, to the estimated claims
performance, and which have been earned in the financial year. Earned premiums
shall be those which, in accordance with the rules for the preparation of the
annual accounts contained in the fourth part of the Accounting Plan for
Insurance Entities, approved by Royal Decree 2014/1997, of 26 December, whether
or not issued, are generated by contracts perfected or extended in the
financial year, in relation to which the insurer's right to collect them arises
during the aforementioned period.
The
inspectorate points out that this criterion has been issued in development of
the powers of replying to enquiries made in matters of private insurance and
reinsurance attributed to the DGSFP, by virtue of the provisions that develop
the organisational structure of the Ministry in which
the aforementioned management centre is integrated.
In
application of this criterion, the Inspectorate has taken the premiums accrued
for own retention for each branch and applied to them the percentages which,
according to the technical basis of the branch or product, represent the risk
premium on the commercial premium. In this way, the own retention risk premiums
reported to the entity were determined, on which the percentage of 35%, which
acts as a limit, is applied.
This
result has been compared with the equalisation
reserve set up at the end of each year after the entity's allocation. When the
latter amount exceeds the former, the difference between the two amounts is
proposed as an adjustment to the tax base.
In
this calculation, the Inspectorate has made the following corrections:
-
The risk premium is calculated using the percentage that the risk premium
represents of the commercial premium in the technical notes in force in each
year. This percentage is applied to the amount of premiums
earned for each class or risk.
This
calculation differs from that made by the institution, which, in order to
determine the risk premium, uses information from the profit and loss account
for each year. The institution justified the use of this approach on the
grounds that these are the figures incurred in the year, whereas the technical
note, in terms of management fees, reflects an estimate of the future costs
that the institution will have to face.
With
regard to this procedure for calculating the risk premium, in the breakdown of
the expenses deducted, provided as an example in XZ SPAIN's Diligence
No. 23, specifically for the Motor Liability branch for 2015, it is clear that
among the items that reduce management expenses and, therefore, increase the
risk premium of its own retention, the entity includes both net financial
income and the result favourable to the entity of the
variation in benefits due to claims settlement agreements. Both are concepts
outside the risk component to be covered by the pure premium, according to the
statistical bases.
The
justification for the Inspectorate's use of the percentage that appears in the
technical bases is that the concept of risk premium or pure premium is
regulated in Article 77.1.f) of the ROSSP, which provides, with regard to the
calculation of the premium, that the actuarial equivalence shall be established
according to the statistical and financial bases, if applicable, to establish
the pure premium that corresponds to the risk to be covered and the expenses of
claims management.
Consequently,
the pure or risk premium of each policy is a magnitude that derives from the
application of the coefficients fixed in the technical basis, without being
affected by deviations in the expense items that may occur during the year.
In
the same sense, the reply to consultation 20/2007 clearly states that the risk
premium is the fraction of tariff premiums that correspond, in accordance with
the technical bases, to the estimated claims performance.
-
The risk premium percentage derived from the technical bases is applied to the
earned own retention premium, i.e. net of ceded reinsurance.
This
approach also differs from that used by the entity, which, in order to
determine the own retention risk premium, subtracts from the direct insurance
premiums calculated as indicated above, the premiums earned on ceded
reinsurance, also net of reinsurance commissions. The entity justifies its
calculation on the grounds that, because the expense structure reflected in the
technical note refers only and exclusively to direct insurance, it is not
consistent to apply that structure to net reinsurance premiums since the
reinsurance expense structure is not being considered in the technical note.
On
this point, in the Inspectorate's opinion, the provisions of Article 45.4 of
the ROSSP are relevant, which indicates that the magnitudes referring to the
retention itself shall include direct and accepted insurance less ceded and
retroceded.
Thus,
when calculating risk premiums, the coefficient of the technical note is
applied to the earned own retention premiums, calculated as the difference
between earned direct insurance premiums minus earned ceded reinsurance
premiums.
Again,
from consultation 20/2007, it is perfectly possible to draw this conclusion
insofar as it defines the concept of risk premium as the result of applying to
earned premiums the fraction of tariff premiums in accordance with the
technical bases. In the case of own-retention risk premiums, it is consistent
to apply these coefficients of the technical bases to the earned premiums of
own retention.
On
the other hand, it should not be forgotten that, in reinsurance cessions, the
quantification of the premium takes into account factors similar to those
considered for the quantification of the premium in direct insurance, the main
factor being, as in direct insurance, the loss ratio to be borne by the
reinsurer.
-
The earned premium, not the accrued premium or imputed premium, is used as the
basis for the own-risk premium.
Instead,
the institution uses the earned premium corrected by the change in the
provision for unearned premiums and by the change in the provision for unearned
premiums, i.e. the imputed premium, in a similar way to the claims calculation
process.
With
respect to the Inspectorate's criterion, it should be said that, once again, it
is backed up by the reply to consultation 20/2007 of the DGSFP, which expressly
refers to this magnitude as the basis for calculating the risk premiums for own
retention. Thus, the consultation states that risk premium should be understood
as that fraction of the tariff premiums that correspond, in accordance with the
technical bases, to the estimated claims performance, and which have been
accrued in the financial year.
This
criterion is emphasised by the consultation itself
when it goes on to explain specifically what accrued premiums are,
understanding that they are those which, whether issued or not, are generated
by contracts perfected or extended in the financial year, in relation to which
the insurer's right to collect them arises during the aforementioned period.
This concept does not contemplate that accrual must be taken into account.
However,
it is also clear from the combined interpretation of the whole article that
this is the criterion that follows directly from the rule, since the wording of
the limit in Article 45(2)(d) of the ROSSP is 35% of the own-retention risk
premiums. On the other hand, in order to verify whether it is applicable,
Article 45(5), insofar as a comparison must be made with the claims ratio to check
whether it exceeds the own-retention risk premium, is worded differently. This
paragraph refers to the own retention risk premiums for the financial year. We
understand this to mean accrued and imputed risk premiums, which is also
consistent with the comparison with the claims ratio, which also takes into
account the play of claims reserves at the beginning and at the end of the
year.
Given
this different wording within the same article of the ROSSP, it is not logical
that both concepts "own-retention risk premiums" and
"own-retention risk premiums corresponding to the financial year"
refer to the same magnitude. If, for the application of the 35% limit, it had
been intended that the basis should be the own-retention risk premiums corresponding
to the financial year, this would have been stated, as has been done to
regulate the application.
On
the other hand, in the application of the limit, it is not necessary to be
consistent with the claims ratio, since the latter has no bearing on the
allocation, which is based on the premiums earned, including, in this case,
those of direct insurance, since nothing is specified as to whether it is the
premiums for own retention that should serve as the basis for calculating the
allocation.
-
Lastly, it should be pointed out, with regard to the scope of the DGSFP's
consultation 20/2007, that, despite the fact that, in its approach, the
criterion is requested for the case of construction damage insurance (ten-year
insurance), nothing in the reply suggests that the DGSFP is issuing a criterion
only for this branch, since the limit established in section 2 d) of article 45
of the ROSSP is the same for this and for other branches and in no case does
the resolution of the consultation refer exclusively to the former. Rather, what
is being done is a general interpretation of the article, which can be applied
to all the branches in which this maximum amount is set at 35% of the own
retention risk premiums.
The
ten-year building damage insurance was made compulsory by Law 38/1999, of 5
November, on Building Regulation, which came into force six months after its
publication (BOE of 6 November 1999).
Although
this insurance had already been marketed previously and has peculiarities in
some aspects of its regulation, the partial and eminently technical
modification that took place in the ROSSP through Royal Decree 239/2007, of 16
February, did not introduce a change in the regulation of the equalisation reserve for this type of insurance, which, in
terms of the limit, has the same regulation as the rest of the branches
contemplated in letter d) of number 2 of article 45.
(...)"
Accordingly, an adjustment is made, the summary of which
is set out on pages 202 and 203 of the settlement agreement.
Dissatisfied with the calculation made by the
Inspectorate, the claimant formulates a series of allegations that we will now
analyse.
2. Response to the pleas in law: infringement of own
acts.
First, with regard to that question, the complainant
submits that the Inspectorate's criterion, which is set out in the settlement
agreement, and which has been transcribed above, entails a breach of the
doctrine of actos propios,
of the principle of legitimate expectations and of the constitutional principle
of legal certainty, in so far as the calculation of the equalisation
reserve has already been subject to verification in the past by the DGCFP and
by the Inspectorate in verification proceedings carried out at the expense of
the claimant in respect of the tax returns for 2002 and 2003, and in respect of
the tax returns for 2007 to 2009, in which no adjustments were made in relation
to that issue.
In view of the aforementioned allegation, this TEAC must refer
to what has already been stated in previous GROUNDS OF LAW, in which we have
stated that the Tax Administration must regularise a
legal tax situation when it deems it appropriate, without being bound by the
fact of not having regularised said situation
beforehand, despite knowing the facts, as the Supreme Court has stated in its
ruling of 22/11/2013 (rec. 2008/2013) which defended that the fact of not
having regularised "does not prevent the Tax
Administration from regularising a legal tax
situation when it deems it appropriate, without being bound by the fact of not
having regularised said situation previously, despite
knowing the facts; And also in that same judgment it is said that:
"As long as the Administration's right does not expire, the Inspectorate
may regularise a legal tax situation when it deems it
appropriate, without being bound by the fact that it may not have regularised said situation previously, despite being aware
of the facts". And, furthermore, that "...; the necessary
assumptions for the application of the principle of legitimate expectations
cannot be assessed on the mere expectation of the invariability of
circumstances. Neither the principle of legal certainty nor that of legitimate
expectations guarantees that situations of economic advantage involving an
unjust enrichment must remain irreversible.
Reference should also be made to the STS 19/07/2013 (Rec.
2352/2010) in which it is stated that: "....;.there is no prohibition
on the Administration being able to change its criteria, provided that the
administrative act that departs from the same is reasoned, with succinct
reference to facts and legal grounds, in accordance with article 54. 1. c) of
Law 3011992, of 26 November. In the aforementioned Judgment, the High Court
clearly established the requirements of a proper act and legitimate
expectations, which can be summarised as follows:
Requirements for a proper act:
- They unequivocally define the legal position of their
author with respect to the matter in dispute.
- They must be valid in law.
- which, by virtue of their relationship with the
subsequent contrary act, are of legal significance in relation to that act.
Requirements of legitimate expectations:
- The authority may not adopt measures that are contrary
to the expectation induced by the reasonable stability of the authority's
decisions and on the basis of which individuals have taken certain decisions.
In this case, in relation to the prior verification
actions referred to by the claimant, as the Inspectorate also points out in the
settlement agreement, firstly, in relation to the verification referring to the
IS for the financial years 2002 and 2003:
"In
relation to the above, it should be pointed out, firstly, that it is not a
question of whether or not in that verification the actuaries considered the
security surcharge applied by the obligor to be correct, given that it could
and can be whatever it sees fit - in accordance, of course, with its technical
basis - but of the percentage of that which is tax deductible, which was and is
2%, insofar as that is the minimum amount established and was established in
Article 45.3 of the ROSSP and that had to be put in relation to Article 13.2 e)
of Law 43/1995 then in force and of the 3rd DA of the ROSSP. This was not a
judgement by the inspectorate, as the obligor claims, but a finding of
non-compliance with the regulations, because that 2% surcharge is the minimum
and, therefore, the minimum deductible amount. Therefore, the inspection did
not make any interpretation or consideration, but simply applied the ROSSP.
This regularisation was confirmed, first, by the TEAC
in its ruling of 7/04/2011 (R.G: 2475-09), then by the Audiencia Nacional in
its ruling of 30/01/2014 (rec. 162/2011) and, finally, by the Supreme Court in
its ruling of 10/11/2015 (rec.784/2014). It should be noted that, also on that
occasion, the taxpayer claimed before the TEAC that the surcharge had not been regularised in previous verifications and that the TEAC
rejected this claim on the basis of the Supreme Court's doctrine in this
regard.
Secondly,
in the present proceedings, the inspectorate has carried out other
verifications in relation to this reserve, in order to determine whether the
amount deducted for tax purposes was correct or not. Specifically, in the present
proceedings, the inspection carried out verifications in relation to the base
on which the security surcharge is applied (art. 45.3 of the ROSSP); in
relation to the base on which the annual provision limit is applied (art. 45.2
d) of the ROSSP; and in relation to the claims rate in order to determine
whether there was an excess or shortfall in the claims rate and, as a result of
the above, whether or not this reserve should be applied (art. 45.5 of the
ROSSP)".
Concerning the audit of the financial years 2007 to 2009:
"The
obligor states that the Corporate Income Tax of XZZ (now XZ Spain)
was checked individually, and the conformity report (A01/...61) included a
single adjustment, affecting the stabilisation
provision for 2008 and 2009, due to the incorrect allocation of the same in
branches and modalities in which it is not obligatory, in the amount of
138,433.49 euros in 2008 and 192,541.38 euros in 2009. The non-conformity
report (A02/...11) only affected the deduction for Research and Development
(R&D) expenses".
It follows from the above that, in the aforementioned
verifications, the Administration did not expressly and unequivocally establish
a legal position on the facts that have been examined in the current
verification. The actions of the taxpayer could also have been different and it
is easy to understand that, in the case of large companies such as the one at
issue in these proceedings (in fact, a tax group made up of numerous
companies), the tax authorities analyse the facts that they consider at any
given time, also taking into account the relevant factual circumstances in the
years under review, which, of course, may vary substantially from one year to
another. This claim is therefore dismissed.
3. Response to the allegations: Incorrect calculation of
the excess over the limit for the allocation of the reserve.
Next, going into the substance of the matter, the
claimant points out the incorrectness of the calculation made by the
Inspectorate to determine the excess over the limit for the provisioning of the
equalisation reserve established in the ROSSP, which
was 35% of the premiums of own withholding. In order to defend that
consideration, the institution puts forward the following arguments.
One. That the
Inspectorate uses, as the basis for the risk premium, the premiums accrued, not
the accrued or imputed premiums which, according to the claimant, would
determine the correct basis.
Article 45 of the ROSSP provides with respect to the equalisation reserve that:
"Article
45. Equalisation reserve.
1.
The purpose of the equalisation reserve, which shall
be cumulative in nature, is to achieve the technical stability of each class or
risk. It shall be calculated and endowed for those risks which, because of
their special nature, level of uncertainty or lack of experience, so require,
and shall consist of the amount necessary to cover unfavourable
random deviations in the loss ratio.
2.
Insurance undertakings shall establish equalisation
reserves for at least the following risks and up to the following limits:
a)
Civil liability arising from nuclear risks: 300 per cent of the premiums of the
own retention rate accrued during the financial year.
(b)
Risks included in the Combined Agricultural Insurance Schemes: the limit
established by Article 42 of the Regulation approved by Royal Decree 2329/1979
of 14 September 1979.
c)
Credit insurance: 134 per cent of the average of the premiums at the own
retention rate accrued in the last five financial years. Notwithstanding the
foregoing, it shall not be necessary to constitute it when the premiums or
instalments accrued in the credit branch are less than four per cent of the
total premiums or instalments accrued in insurance other than life
insurance and less than 2,500,000 euros.
(d)
motor vehicle liability insurance, professional liability, product liability,
building damage insurance, industrial multi-risk insurance, surety
insurance, environmental risk insurance and catastrophic risk cover: 35 per
cent of own retention risk premiums.
4.
Where the procedure laid down in Article 31 leads to an insufficiency of
premium, the basis to be taken into account for the purposes of paragraphs 2
and 3 above shall be increased by the corresponding percentage.
The
calculation of the magnitudes referring to own retention shall include direct
insurance and accepted reinsurance business net of ceded and retroceded
reinsurance.
5.
The equalisation reserve shall be applied to offset
any excess of claims arising in the financial year over the own retention
risk premiums due for the financial year in the class or risk concerned.
The
allocation and application of the equalisation
reserve shall be made by class or risk, and no netting between classes or risks
shall be permitted".
It is clear from the cited article that in the references
made to premiums or contributions, the regulation uses "earned
premiums" and in paragraph (b) when referring to article 42 of the
regulation, it also leads to the same term.
In addition, account should be taken of the criteria
expressed by the DGCSP in consultation 20/2007, which states that:
"risk
premiums shall be understood to be that fraction of the tariff premiums that
correspond, in accordance with the technical bases, to the estimated claims
performance, and which have been earned in the financial year. Earned premiums
shall be those which, in accordance with the rules for the preparation of the
annual accounts contained in the fourth part of the Accounting Plan for
Insurance Entities, approved by Royal Decree 2014/1997, of 26 December, whether
or not issued, are generated by contracts perfected or extended in the
financial year, in relation to which the insurer's right to collect them arises
during the aforementioned period".
The complainant argues that it is not appropriate, in
this case, to refer to the aforementioned consultation, since it refers
exclusively to the valuation of ten-year insurance. However, this TEAC shares
the consideration put forward by the Inspectorate, i.e. that the criteria
established in the aforementioned consultation can be extrapolated to all the
branches listed in paragraph 2(d) because, firstly, the limit is the same for
all of them, secondly, because the calculation basis defined therein is common
to all of them "earned premiums"; therefore, if the DGCSP
understands that this expression corresponds to "earned premiums", it
must be understood that this is the case for all branches. In addition, and as
a third argument, if the regulation had wanted the basis for each of these classes
included in paragraph (d) to be calculated differently, it would not have
grouped them together in a single paragraph.
In short, this TEAC considers the Inspectorate's
interpretation and application of Article 45.2d) of the ROSSP to be correct,
especially when it is based on the criteria of the DGSFP expressed in the
aforementioned consultation. Therefore, the present allegation should be
dismissed.
Two. That the Inspectorate
has made an estimate of expenses based on the technical note, which, according
to the claimant, is less accurate than the one it had made itself based on the
profit and loss account, and without taking into account in its calculation the
impact of reinsurance.
To answer this question, reference should again be made
to the applicable regulations. Specifically, it should be recalled that, in
accordance with the provisions of Article 76.6 of the ROSSP, the pure premium
or risk premium is an integral part of the tariff premium, together with the
surcharges for expenses and security:
"6.
The tariff premium, which shall conform to the principles of indivisibility and
invariability, sufficiency, equity and equality of treatment between women and
men, shall consist of the pure or risk premium, the security surcharge, if any,
and the surcharges necessary to compensate the institution for administrative
and acquisition costs, including among the latter those for the maintenance of
the business, as well as any possible profit or surplus margin or surcharge.
Claims management expenses shall in all cases be included in the pure premium.
For its part, art. 77.1.f) ROSSP, relating to technical
bases, provides the following:
"Article
77. General rules on technical bases.
1.
The technical bases, which shall be underwritten by an insurance actuary, shall
include, in so far as is appropriate to the administrative structure and
business organisation of the institution, the
following sections:
(...)
f)
Calculation of the premium. On the basis of the statistical and financial
bases, if applicable, the actuarial equivalence shall be established in order
to fix the pure premium corresponding to the risk to be covered and the
claims management expenses. On the basis of the pure premium and surcharges,
the tariff or commercial premium shall be obtained. If fractional and
fractional premiums are accepted, the basis and the surcharge for calculating
them shall be justified, specifying that the latter are payable for the
insurance period to which they correspond".
On the other hand, the aforementioned consultation of the
DGSFP 20/2007, regarding the limit of the equalisation
reserve, states: "For the purposes of the provisions of the previous
number, risk premiums shall be understood as that fraction of the tariff
premiums which correspond, in accordance with the technical bases, to the
estimated behaviour of the claims rate, and which
have been earned in the financial year".
Moreover, the claimant itself, in its allegations,
acknowledges that the risk premium is an estimate based on actuarial
techniques, i.e. the one it determines in its technical bases:
"Specifically,
and to briefly summarise the process of modelling the
Civil Liability tariff for Motor insurance, we must clarify that the objective
of the insurance company is to predict the risk based on its experience of
recent historical claims, assessing the probabilities of occurrence and
intensity of each risk. For this purpose, the principle of sufficiency requires
that the level of premiums collected globally allows all the foreseen
obligations to be met.
Specifically,
the pure or risk premium is the estimated cost of the risk assumed by
the insurer, without taking into account his management expenses or other
concepts. That is to say, if the insured person only and exclusively paid this
part of the pure premium, this would only cover the amounts of claims that
there were.
To
determine the risk premium, the entity uses sophisticated actuarial techniques
through Generalised Linear Models (GLM'S), using
historical claims data from the last three years. The entity uses these
techniques to determine the base risk premium based on the various risk factors
(e.g. age, zone of circulation, etc.) by estimating and quantifying their
influence on the pure premium".
Finally, the complainant states that it reviews its
technical bases annually, so that if it considers that its estimates for the
previous year do not match its actual experience, it should modify the premium
structure and the tariff, so that in the following year it does adjust. In any
case, it should be noted that according to the checks carried out by the
inspection, the percentages of risk premium over commercial premium in the
technical notes have not varied in XZ in the years inspected.
Regarding the impact of reinsurance, the complainant
alleges that the Inspectorate does not take this into account; however, in this
respect it should be noted that the Inspectorate, when applying the risk
premium percentage of the technical note (77.3% in RC Automobiles) to the net
reinsurance premiums, is already considering the reinsurance structure (which would
not be considered if the technical note percentage was applied to the direct
plus accepted premium and then the ceded reinsurance premium was subtracted).
In other words, what the inspection does is as follows:
77.3% x (Insurance Premium. Direct and Accepted - Reinsurance Premium. Ceded
and Retroceded); this is equivalent to: 77.3% x Direct and Accepted Insurance
Premium - 77.3% x Ceded and Retroceded Reinsurance Premium.
It is thus clear that the structure of reinsurance is
being taken into account, although it is true that the structure of direct
insurance is being equated with that of decided reinsurance, considering the
two to be equivalent.
The entity considers that this would not be correct
because the expense structure of ceded reinsurance may not coincide with that
of direct insurance, the latter being the one reflected in the technical notes.
However, in the determination of the reinsurance premium, whether it is
proportional or not, factors similar to those considered for the quantification
of the premium in direct insurance are taken into account and, specifically,
the main factor, as in direct insurance, is the loss ratio to be borne by the
reinsurer.
What the entity proposes is to add to the risk premium of
the technical note 77.3% (RC Auto) a percentage (e.g. 1.29% in 2013) that it
calculates by dividing the ceded reinsurance commissions by the direct and
accepted insurance premiums net of ceded reinsurance premiums. The claimant
understands that doing so implies that the percentage represented by these
commissions (income for XZ) is a further component of risk premium, i.e.
of what XZ will spend to cover claims. However, ceded reinsurance
commissions are the economic remuneration paid by the reinsurer to the direct
insurer (usually in proportional reinsurance, calculated on the volume of ceded
premiums). And these ceded reinsurance commissions include the direct insurance
commission plus additional commissions, the purpose of which is to compensate
the ceding company for the expenses it has borne for the acquisition and
administration of the policies and the maintenance of the portfolio (i.e.
essentially its acquisition and administration costs). The proposal is
therefore inadmissible and this claim must be rejected.
Three. That the
Inspectorate has not taken into consideration, in the investigation of the file
in this case, certain questions introduced in the report; specifically, it
refers to the "net financial income" and the "Claims Settlement
Agreements".
On this issue, the TEAC must refer to the Inspection in
its reply to the same allegation made by the complainant:
"Regarding
the net financial or investment result, after explaining what it consists of
and why it should be included in the commercial premium, it recognises
that it is an item that has been considered to determine the percentages of
acquisition and administration costs in the cost structure of the technical
note, which the Inspectorate also deducts from the commercial premium in its
calculation to determine the risk premium. With regard to the above, this
Technical Office does not quite understand the reason for this allegation by
the obligor, because the only thing the inspectorate says in the report on this
item is that, given the method of calculation of the obligor of the own-retention
premiums, from the P&L account, subtracting these two items with their
sign, which are significant, greatly increases the own-retention risk premium
that he calculates compared to that calculated by the inspectorate from the
technical basis. The same applies to the amounts resulting from the claims
settlement agreements, which are excluded from the calculation made by the
inspectorate, but in the form of a percentage of the commercial premium,
according to the technical note. It should be added, contrary to what the obligee now claims, that the obligee
was informed of this exclusion, that of those corresponding to the claims
settlement agreement, but not as a reduction of that amount of the commercial
premium for calculating the risk premium, because, it should be insisted, that
is the method used by the obligee, but it was
informed of the exclusion of that % reflected in the technical note in relation
to the expenses attributable to benefits, which include those corresponding to
the agreement. Thus, in XZ SPAIN, in relation to the RC automobile
branch, in Diligence No. 21, the Inspection revealed the following:
"According
to the cost structure foreseen in the technical notes provided by the entity
dated 19 March 2018, the cost components of the third party liability coverage
in the motor land vehicle insurance are as follows:
acquisition
costs: 12.1%.
administration
costs: 10.6%.
expenses
chargeable to benefits: 9%.
According
to this cost structure, the risk premium represents 77.3% of the commercial
premium (100-12.1-10.6).
As
can be seen, the inspectorate did take into account the administration costs in
their entirety, but not in the same sense as the obligor, but as a percentage
to be subtracted from the commercial premium in order to determine the risk
premium (it should be borne in mind that the obligor makes the calculations on
the basis of the SME account and the inspectorate on the basis of the technical
note). Within this 10,6 % administration costs are, as the obligor says, the
net financial result. The inspection did exclude from the commercial premium
the % that these represent within the commercial premium and, within these
administration expenses are, as the obligee says, the
net financial result. And it only excluded the % of the expenses attributable
to benefits, which include those of the Claims Settlement Agreement.
With
regard to the settlement of claims (...)
(...)
(...)
argues that this result of the Conventions has a double effect on the
calculation of whether the equalisation reserve
applies:
1st:
It says that it took them into account in determining the management costs
which, according to its system of actual costs, it deducts from the premium in
order to calculate the risk premium. It considers that it should not have taken
them into account and in the calculation in annex 5.1 it rectifies that data.
Indeed,
this concept should not be taken into account as management costs, but this
aspect, from the point of view of the Inspectorate, is irrelevant, because the
inspectorate does not calculate the risk premium with the real costs, but with
the risk premium coefficient of the technical note. And this criterion is
considered, for what has already been said, to be the correct one.
In
this sense, the fact that when pricing and determining the surcharges for expenses
that it sets in its technical notes, it takes into account different elements,
such as financial income/expenses or claims settlement agreements, in the end,
the institution sets this structure of the commercial premium, which is the one
that the inspectorate considers to determine the risk premium. The factors
involved in setting these percentages and not others can vary widely. The
inspectorate follows the final coefficient that appears in the technical note.
2nd:
He also says that he did not take this concept into account when quantifying
the loss ratio with which the risk premium is compared in order to verify
whether the reserve should be applied. And he considers that he should have
taken it into account, as he understands that it is the loss ratio. Taking into
account that the result is in its favour, this means a lower claims ratio,
which in the end means that this (now lower) claims ratio may not exceed the
risk premium.
On
this point, this Technical Office cannot agree, since account 607 "variation
of benefits for payments under claims settlement agreements" does not form
part of the claims incurred, as is clear from the technical accounts. This item
is included in section VIII. 3, whereas the claims incurred is found in section
IV, both of the technical accounts of the motor liability branch.
In
this respect, it should be pointed out that the Chart of Accounts for Insurance
Entities, when defining account 607 and incorporating the most common reasons
for debits and credits, indicates that this account will include the
"negative or positive differences between the amounts actually paid or
owed by the entity to its policyholders, in execution of claims settlement
agreements, and those recovered from the insurer of the liable party. Also
included in this account shall be changes in the provisions for settlement
agreement payments included in account 496'.
On
the other hand, the PCEA, in Part Three, Rule 6 of the Annual Accounts
Preparation Rule, letter b), also states: "in principle, expenses shall be
recorded by nature, in the corresponding accounts of group 6. However, those
expenses which, initially classified by nature, must be reclassified by
purpose, must be transferred to the corresponding accounts of group 0, at a
frequency determined by the entity, but which may not exceed three months. The accounts
defining the concept to which each item refers are therefore indicated in the
margin of each of the items making up the profit and loss account. The accounts
which, while appearing in group 6 of the table of accounts, do not appear among
those shown in the margin of each item, are those which must have been
reclassified to group 0".
When
drawing up the Model Technical Account for Non-Life Insurance, within the
Profit and Loss Account, in the third part, "Annual Accounts", the
PCEA includes, within section I.8. Other Technical Expenses, the concept c)
called "Variation in benefits due to claims settlement agreements (+ or
-)". In the margin, next to this item, the accounts that define this
concept appear, in this case, the aforementioned account 607.
It
follows that the result of the change in benefits under claims settlement
agreements does not form part of the claims incurred, since the PCEA does not
include the balance of account 607, whether positive or negative, in section
I.4. of the Non-Life Technical Account, "Claims incurred during the
financial year, net of reinsurance".
This
location within the technical account is not indifferent, as the entity seems
to imply in its statements when it says "...;although in accounting terms
they are recorded in a separate line "Variation in benefits due to claims
settlement agreements", these payments/collections are actually made as a
consequence of an automobile claim...;".
In
this regard, it is very illustrative what is stated in number 5 of the
Introduction to the 1997 Accounting Plan for Insurance Entities contained in
the Correction of Errors of Royal Decree 2014/1997, of 26 December, which in
paragraph five states:
With
regard to claims settlement agreements, for example C.I.D.E. and A.S.C.I.D.E.
or any other that may be established in the future, an accounting system has
been set up using the accounts ..., ... and ..., with the intention of
resolving the confusion that arose when all incidents arising from these
agreements were recorded as claims.
It
is important to note that the way in which the change in benefits due to claims
settlement agreements is accounted for remains unchanged from the 1997 chart of
accounts to the 2007 chart of accounts. The location in the non-life technical
account is the same and the accounting treatment is identical. Therefore, the
previous justification that it made sense to include in the 1997 chart of
accounts is perfectly applicable to the 2007 plan, since it was at that time
that the accounting modification was introduced, precisely to avoid, as the
text of the plan states, the confusion that arose when all incidents arising
from claims settlements were accounted for as claims.
On
the other hand, the fact that Article 45 of the ROSSP does not establish the
elements that intervene in the calculation of the loss ratio, as indicated by
the institution in some of its statements, cannot mean that it can be
considered to include concepts other than those that should make it up,
according to the set of regulations that regulate the insurance activity, in
this case the PCEA. This is derived from the explanatory memorandum of the
ROSSP itself, which states that "...;the Regulation must be complemented
with other aspects related to private insurance, and there must be a total interconnection
and interrelation with the Accounting Plan for Insurance Entities...;".
In
short, if the PCEA contemplates a concept of accident rate, we should not
understand that, for the purposes of the ROSSP, the accident rate is something
different from what is included in that Plan, unless it is specifically stated
otherwise.
But
it should also be borne in mind that the regulations also contemplate a concept
of loss ratio, which, unsurprisingly, coincides with that derived from the
PCEA. Specifically, this concept was established with the Ministerial Order of
23 December 1998 -now repealed-, for the purposes of the provisions of the
Third Additional Provision of the ROSSP (tax deductibility limit of the
technical provision for benefits). Currently, this concept of claims is clearly
and precisely defined in Article 16 of Order EHA/339/2007, of 16 February,
which develops certain precepts of the regulations governing private insurance.
This article states that claims incurred is understood to be the sum of the amount
of benefits and expenses attributable to the benefits paid by the entity in
each financial year, corrected by the variation in the provision for benefits.
As explained above, the variation for benefits under claims settlement
agreements is not included among the items that make up the claims experience
according to the above definition of claims incurred.
The
fact is that the new calculation presented in annex 5.1, based on the criterion
set out previously in other allegations (premiums imputed with respect to
earned premiums and actual expenses versus technical note expenses), corrects
the calculation, basically calculating the variation due to agreements as
claims incurred and eliminating it from the concept of management expenses. In
doing so, it seeks to demonstrate that this concept is not the most relevant
for determining the difference between the calculations of the own-risk premium
retained by the entity and by the Inspectorate.
According
to the obligor, these new calculations also include "technical
income" and eliminate the "variation due to insolvencies". The
truth is that, in both cases, these are real magnitudes, so they do not conform
to the criteria of the inspection and confirmed by this Technical Office that
for the purposes of the calculation what must be taken into account is the
percentage of risk premium of the technical note".
Ultimately, the claimant points out that, in the years
subject to verification, and specifically with regard to the CR Automobile
branch, there have been no excess claims, neither with the calculation method
applied by the company itself nor with that considered by the Inspectorate, as
the benefits of account 607 for the variation of benefits due to Claims
Settlement Agreements have not been taken into account. However, in response to
this question, we must limit ourselves to pointing out that the claimant's
claim, linked to the fact that the benefits from the Settlement Agreement
should be taken into account in the determination of the withholding itself,
has already been rejected in the previous paragraphs, and therefore, the
present allegation should also be rejected.
In short, the claimant's allegations must be rejected
and the calculation made by the Inspectorate of the excess of the limit for the
allocation of the equalisation reserve and its
application for its intended purpose in the years audited must be confirmed.
TWENTY-SECOND.- Next, and in relation to this question of
the stabilisation reserve, a QUESTION arises
regarding the calculation of the minimum amount of the reserve, but in
this case, affecting only the entity XZR.
1. Description of the facts.
In the years audited, the aforementioned entity set aside
and applied the equalisation reserve in accordance
with the following criteria, as stated in diligence no. 14, the result of the
inspection carried out by the Inspectorate:
"The
method set out in the Regulation on Regulation and Supervision of Private
Insurance for the provisioning of a Stabilisation
Provision is not applicable to a reinsurance entity such as XZR, so the
following approach is followed:
-
If the catastrophe loss ratio for the year is lower than the historical
average, the provision will amount to the difference between the average loss
ratio and the loss ratio for the year. Ex: Loss ratio year 2010 50%; historical
average loss ratio 70%. Allocation 20% of the premiums net of commissions and
retained expenses for the year 2010.
-
If the catastrophe loss ratio for the year is higher than the historical
average, there is no provisioning.
(*)
The quasi-standard deviation is a statistical indicator used as a measure of
the dispersion of a sample with respect to the sample mean. The higher the
quasi-standard deviation, the more significant the variation in the claims
experience of an insurance line compared to its historical average.
According to the entity's accounts, the amounts set aside
for the equalisation reserve at the end of the
financial years audited amounted to
|
2014 |
2015 |
2016 |
|
|
- |
... |
... |
... |
According to the file, they are applied to compensate for
the excess of claims arising in the year on risk premiums of own retention.
Thus, the following negative (provisioning) and positive (application)
adjustments were made by the institution
|
2015 |
2016 |
|
|
... |
-... |
... |
The Inspectorate concludes, in the settlement agreement,
that the calculation of the equalisation reserve made
by the entity was erroneous, as it follows from the provisions of the
regulations (which we will analyse below) that the claimant entity should have
calculated the minimum amount of the provision for each of the years in which
the aforementioned reserve is constituted, i.e. 2% of the commercial premium,
and that this would be the tax-deductible amount.
Furthermore, for the purposes of calculating the premium,
the Inspectorate points out that only "catastrophic risks" should be
taken into account, denying such consideration or category to a number of
contracts proposed by the complainant in the present allegations and those made
against the report.
Dissatisfied with the adjustment made by the
Inspectorate, the claimant now makes a series of claims with the aim of
demonstrating the validity of its own calculations. Prior to assessing these
claims, and as mentioned above, it is worth citing and starting from the
applicable legislation in this case.
2. Applicable legislation.
With regard to the deductibility of technical provisions,
article 13.4 TRLIS (14.7 LIS as from 2015) states that:
"The
expenses related to the technical provisions made by the insurance companies shall
be deductible up to the amount of the minimum amounts established by the
applicable regulations. Within the same limit, the amount of the allocation
in the financial year to the equalisation reserve
shall be deductible in the determination of the tax base, even if it has not
been integrated in the profit and loss account. Any application of this reserve
shall be included in the tax base for the tax period in which it is made.
Next, reference should again be made to Royal Decree
2486/1998 of 20 November 1998, approving the Regulation on the Organisation and Supervision of Private Insurance
(hereinafter ROSSP), article 29 of which provides as follows:
"Article
29. Concept and enumeration of technical provisions.
1.
Technical provisions shall reflect in the balance sheet of an insurance
undertaking the amount of its obligations arising out of insurance and
reinsurance contracts. They shall be established and maintained in an amount
sufficient to cover, on a prudent and reasonable basis, all obligations arising
out of such contracts and to maintain the necessary stability of the insurance
undertaking in the face of random or cyclical fluctuations in claims or
potential special risks. The correctness of the methodology used in the
calculation of the technical provisions and their adaptation to the technical
bases of the institution and to the real behaviour of
the magnitudes that define them, will be certified by an Insurance Actuary,
without prejudice to the responsibility of the insurance institution.
Where
balance sheets are drawn up at intervals other than on an annual basis, the
calculation and establishment of technical provisions shall be carried out by
applying the criteria laid down in this Regulation with the necessary
adaptation in time.
2.
The technical provisions are as follows:
a)
Unearned premiums.
b)
Of risks in progress.
(c)
life insurance.
d)
Profit-sharing and for rebates.
e)
Benefits.
(f)
the equalisation reserve.
(g)
death insurance.
(h)
health insurance.
(i) of deviations in the operations of capitalisation
by drawing lots.
(j)
management of risks arising from internationalisation
insured on behalf of the State.
k)
Management of the risks derived from the acquisition by electricity consumers
in medium- and long-term contracts under Title III of RD-Law 24/2020 of 26
June.
3.
The technical provisions applicable to reinsurance accepted and ceded shall be
those set out in paragraphs (a) to (e) of the preceding subparagraph, except,
as regards reinsurance ceded, the provision referred to in paragraph (b). The
provision referred to in paragraph (f) above shall also apply to acceptances in
respect of reinsurance of catastrophic risks.
The
amount of the technical provisions for reinsurance accepted and ceded shall be
calculated as provided for in this Regulation, taking into account, where
appropriate, the specific conditions of the reinsurance contracts underwritten.
The
calculation of provisions for accepted reinsurance operations shall be based on
the data provided by the ceding institution and shall be increased as
appropriate in accordance with the institution's own experience.
(...)"
From the reading of the aforementioned article it can be
deduced that, in general, for the accepted and ceded reinsured, the equalisation reserve is not applicable, with the exception,
only for the accepted reinsured, of the constitution of the aforementioned
reserve, solely for the coverage of catastrophic risks.
Therefore, in accordance with the applicable regulations,
XZR, as a purely reinsurance entity, is required to set up the equalisation reserve only for catastrophic risk
acceptances.
As for the way in which the aforementioned reserve is to
be constituted, it is stipulated that it shall be constituted in the manner provided
for in the regulations. In order to establish the amount of the provision, the
maximum limit of the provision and the cases and methods of application, it is
necessary to refer to the provisions of the aforementioned article 45 of the
ROSSP:
"Insurance
undertakings shall establish equalisation reserves
for at least the following risks and up to the following limits:
(...)
(d)
motor vehicle liability insurance, professional liability, product liability,
building damage insurance, industrial multi-risk insurance, surety insurance,
environmental risk insurance and catastrophic risk cover: 35 per cent of
own retention risk premiums.
(...)
3.
The equalisation reserve shall be set up for each
financial year for the amount of the security surcharge included in the
premiums written, subject to the minimum limit laid down in the technical
bases. Except in the case of credit insurance, for the cases listed in
paragraph 2 above, the minimum limit may not be less than two per cent of
the commercial premium.
(...)"
3. Application to the case. Response to the allegations.
3.1) The Claimant states in its written pleadings that,
while it agrees with the Inspectorate that in the case of accepted reinsurance
the equalisation reserve should be set up only for
catastrophic risks, it does not agree that the reserve should be calculated
at 2% of the commercial premium as indicated in the contested settlement
agreement. In support of this argument, the complainant cites Article 29(3),
second and third subparagraphs of Article 29(3) and (4) of the ROSSP, which
refer to the fact that in reinsurance, for the purposes of technical
provisions, the specific conditions of the contracts, the experience of the
entity and the adequacy, respectively, must be taken into account in order to
demonstrate the validity of the method used.
However, on this issue it should be noted that the
discrepancy between the Inspectorate and the complainant does not lie in the
method used, but in the amount of the fiscally deductible reserve. As the
Inspectorate points out in the contested agreement, the entity can use whatever
method it sees fit, but for tax purposes it can only deduct the minimum
amount set in accordance with the ROSSP (by virtue of the provisions of art.
13.4 TRLIS), and the Inspectorate's action is focused on the calculation of
the reserve. The TEAC fully agrees with this statement.
3.2) Next, the complainant proposes that, in the case of
accepted reinsurance, the possibility of setting up the equalisation
reserve should be extended to all branches subject to the compulsory surcharge in
favour of the Insurance Compensation Consortium, which would lead to
extending the constitution of this reserve to insurance on Motor Other
Guarantees, Motor RC, Surety, Fire, Multi-risk, Other Damage, Civil Liability
and Credit.
With respect to this question, it should be pointed out
once again that the applicable regulations - as we have explained, Article 45
in relation to Article 29.3 of the ROSSP - only allow this stabilisation
reserve to be constituted on a mandatory basis for "catastrophic
risks", something that the claimant was in agreement with. These risks
are, moreover, those that the entity itself identified before the Inspectorate
(in diligence no. 22, as recorded in the file): catastrophe, hurricane,
earthquake, storm, wind and flood.
In Spain, catastrophic risks are covered by the
Consortium (CCS). To cover these risks, surcharges are established that are
incorporated in the bill as an external concept to the premium. In most cases,
these surcharges are levied on the sum insured, although in some cases they may
be levied on the premium. Only these surcharges, for which the insurance
company acts as a mere collector (it collects it from the policy holder and
pays it to the CCS) are those that cover extraordinary risks. In other words,
if a natural catastrophe occurs, the insurance company does not pay the claim,
because the coverage is provided by the CCS, which has received the
"premium" (the surcharge for extraordinary risks). The rest of the
premium charged to the policyholder, which the insurance company keeps, is the
premium that covers non-extraordinary risks. That is what the inspection said,
not that the surcharge in favour of the Consortium should be included in the
basis for calculating the equalisation reserve in
accepted reinsurance. Therefore, the premium for these generic risks (fire,
theft, flood, etc. that do not reach the category of catastrophe) will never be
the premium for catastrophic risks on which to calculate the equalisation reserve.
If the regulation had wanted a stabilisation
reserve to be set up for any risk on which a surcharge for extraordinary risks
is charged (motor, other guarantees, home, communities, etc.), it would have
established this. But the classes on which it does so (Article 45) are specific
classes and do not necessarily coincide with these. Specifically, for accepted
reinsurance, it is only established for the coverage of catastrophic risks,
which means that the reserve should only be endowed when the contract
stipulates that it covers this special type of risk (although these risks may
affect all types of property).
The surcharge for extraordinary risks that XZ charges
on its policies is not premium income for the entity, but rather the entity
acts as a mere intermediary. In fact, in the accounting of the issuance of the
receipt, this surcharge does not go through profit or loss, but is recorded in
the account .... "Taxes and surcharges on premiums receivable",
sub-account ... ... "Insurance Compensation Consortium, surcharge for extraordinary
risks", where it remains while it is pending collection. When the receipt
is collected, it is transferred from this account to the ... "Other public
entities", sub-account ... "Consorcio de Compensación de Seguros, recargo por riesgos
extraordinarios" (Insurance Compensation
Consortium, surcharge for extraordinary risks), debiting this account when the
corresponding settlement is submitted to the CCS and credited to the treasury.
As this is an external concept to the premium, which is
not considered as income, as the Inspectorate rightly states, there is no sense
in calculating an equalisation reserve for the
entity.
For the CCS, these surcharges do constitute revenue and,
consequently, the CCS does set aside the corresponding technical provisions/reserves.
In short, the TEAC must reject the claim made by the
complainant.
3.3) The complainant then states that it does not
agree with the Inspectorate's identification of "branch" and
"catastrophic risk" for the purposes of Article 45.3 of the ROSSP.
The complainant adds that, unlike the concept of "branch", defined in
the insurance legislation, there is no definition of the concept of
"catastrophic risk" in the same legislation and the Inspectorate is
referred to the regulations of the Consorcio de Compensación de Seguros
(Insurance Compensation Consortium).
The obligee indicates that the
inspection understands that the concept of catastrophic risk must be identified
with the concept of "extraordinary event" as defined in the
Consortium's regulations and that this criterion is reflected in the selection
of the contracts whose reinsurance branch in XZR is .... of the Excel
files 'Technical provisions 201X' provided in the course of the inspection. The
complainant adds that, once the contracts covering catastrophic risks have been
selected, the allocation to the equalisation reserve
is obtained by applying 2 per cent to the amount of the commercial premium. The
claimant points out that the identification of these contracts as catastrophic
risks in the files provided is, however, an internal delimitation for
accounting, regulatory and business management purposes, but that there are
other contracts, not included in this filter, which also cover catastrophic
risk, but which, nevertheless, have been rejected by the inspection for these
purposes. In this respect, it refers to the following types of contract:
proportional contracts associated with COSE classes and non-proportional
AGGREGATE and STOP LOSS contracts. It further explains what these contracts
consist of, provides, as annexes, copies of some of them and, in short,
disagrees with the reasons why the inspectorate rejected them for the purposes
of calculating the tax-deductible provision. Finally, it provides details of
the reserve to be set up if these contracts were accepted.
First of all, it should be reiterated that, as we have
already pointed out, it is not a question of whether the Inspectorate considers
the method used by the claimant to be better or worse, but rather that it did
not comply with the provisions of the ROSSP and, therefore, for tax purposes,
the reserve obtained from it was not fully deductible for tax purposes.
It should be recalled that it was the claimant who
stated, and this was recorded in diligence no. 12, that: "The
variations in the equalisation reserve are due solely
to the catastrophic risk". This categorical statement is incompatible
with the fact that it now intends to include, for these purposes, other risks
that had not been included in that category, for the mere fact that, applying
the insurance regulations to those risks, results in an excess of reserve, the
tax deductibility of which cannot be admitted.
In relation to the contracts indicated by the complainant
as those that should have been taken into account by the Inspectorate for these
purposes, it should be noted that this issue was already raised by the
complainant in the allegations against the report, and that the Inspectorate
itself, in this regard, pointed out the following:
"Crop
reinsurance contract (Annex III).
This
is an automatic agricultural reinsurance contract - 2014/2015 cycle
(proportional) written in Portuguese and signed in Sao Paulo on 1 December 2014
between XZR, S.A. as reinsurer and JJK PAÍS_1 and XZX
S/A as reinsured.
The
entity refers to the catastrophic coverage contained in the section "RISKS
COVERED". Among the risks covered in this section are fire, lightning,
downpours, strong winds, hail, excessive rain, drought, frost or excessive
temperature variation. These are risks that threaten agricultural activity and
which, in Spain, constitute the object of combined agricultural insurance,
which are listed in section one of article three of Law 87/1978 of 28 December
1978 on Combined Agricultural Insurance.
These
risks are those affecting agricultural and livestock production,
aquaculture
due to abnormal variations of natural agents, provided that the normal
technical means of preventive control could not be used by those affected for
reasons not attributable to them or have proved ineffective, and shall be:
hail, fire, drought, frost, floods, hurricane winds or hot winds, snowfall,
frost, excess humidity, pests and diseases and other climatic adversities.
These
climate-related hazards do not in themselves constitute catastrophic risks, as
their intensity need not necessarily reach that level.
Article
45 of the ROSSP also establishes the provisioning of the equalisation
reserve for these risks in paragraph 2. b), with the limit established in
Article 42 of the Regulation approved by Royal Decree 2329/1979 of 14
September. The latter provides as follows:
1.
Insurance companies, regardless of the technical reserves required by the
legislation on the Regulation of Private Insurance, shall be obliged to set up
a cumulative technical reserve at 31 December of each year, which shall be
endowed with the percentage fixed by the Ministry of Finance of the positive
difference that may exist between the risk premiums and the loss ratio
attributable to each financial year, until it reaches double the average loss
ratio recorded in the last five preceding years.
As
can be seen, the regulation of the equalisation
reserve for this type of risk is different from that established for
catastrophic risks - the only case for which an equalisation
reserve is required in accepted reinsurance - and which is set at 2% of
commercial premiums, up to a limit of 35% of own retention risk premiums.
Consequently,
this type of agricultural risk cannot be accepted as catastrophic for the
purposes of the present case.
Aggregate
reinsurance contract with KKL (Annex IV).
The
entity states that these are contracts triggered by ceding entities only when
more than one catastrophic event occurs in their portfolio regardless of the
line of business and, consequently, ceding entities seek protection in the
market. The entity states that the existence of catastrophe coverage can be
seen in Article I - Classes of Business Reinsured and Article II.F- 'Loss
Occurrence'.
It
is a 22-page document, written in English, without any signature (...)
There
is no record that this document constitutes an actual catastrophic risk
reinsurance contract accepted by XZR, nor does the alleged ceding entity
appear in the 2016 file (premiums) among the ceding entities of
non-proportional reinsurance of the "Aggregate" type.
Stop
Loss 'Crop Hail Stop Loss' Reinsurance Contract (Annex V)
The
company states that, in the same way as Aggregate contracts, Stop Loss
contracts protect cedants from excess of loss events with a generally
catastrophic component. It also states that this document shows the existence
of catastrophic cover in article 1.
It
is a 35-page document, written in English, without signatures (...)
In
relation to this allegation, it should be pointed out that stop loss contracts
are a type of reinsurance in which the ceding company fixes the maximum
percentage of the overall loss ratio that it is willing to bear in a given
branch or type of insurance, with any excess being borne by the reinsurer. This
denomination affects the operation of the reinsurance contract, without
necessarily being related to a specific type of risk, nor to catastrophic risks
in particular.
The
contract provided, in terms of the type of risk, is agricultural insurance, for
which the same can be said as above for crop insurance.
Proportional
contract without differentiated premium by type of risk with CAT component
(Annex VI)
The
entity states that certain proportional contracts insuring catastrophic risks
do not contain a breakdown of the risks covered by the premium as this is not
required by the local reinsurance market. These are contracts in which, for
internal accounting purposes, the total amount of premiums derived from them is
recorded in computerised form associated with a
single type of risk without internal differentiation of the percentage of
premium intended to cover each risk.
It
provides the proportional reinsurance contract entered into with LLM, the
premiums for which, it states, have been recorded in the accounting line
'Property', although it covers a variety of risks including catastrophe. To
this end, the entity points to Articles 1 'Business covered', 2 C-1
'Catastrophe Perils' and 14 'Loss Occurrence'.
This
is a 54-page document in English, signed on 1 July 2013 between LLM and XZR.
The
first issue to consider is that in the absence of certain information about the
catastrophic risk coverage and the associated premium, it is not possible to
determine the amount of the equalisation reserve that
may be deductible for tax purposes.
Secondly,
it should be noted that, from a reading of the clauses indicated by the
institution, it is not possible to clearly deduce the coverage of catastrophic
risks. Article 2 C-1 only contains definitions and terminological
clarifications related to the previous paragraph, which in turn defines, in
relation to Article 2(C), what are "Non-Catastrophe Perils" to the
exclusion of what are "Catastrophe Perils". Likewise, in the correct
interpretation of the same, the rest of the clauses must also be taken into account,
and specifically the articles referring to the exclusions, which also contain
references to certain catastrophic risks.
Consequently,
having assessed the allegations made by XZR in relation to the minimum
amount of the equalisation reserve, the Inspectorate
should reject them and conclude that they do not affect the adjustments
proposed by the Inspectorate".
The claimant, in the proceedings subsequent to the
report, again raised the same issue, making the same allegation to the
Technical Office, which referred to what had been indicated by the
aforementioned actuarial team. In addition, the Technical Office also made a
pronouncement on new documents provided by the claimant, reaching the following
conclusion:
"The
obligee indicates that, in order to eliminate any
uncertainty, he attaches as Annex 6.1 a copy of the signature of the Stop Loss
contract signed with KKL, in which the existence of catastrophic cover
in article 1 can be seen. In addition, contract 16375 Aggregate, associated
with the Property line, is attached as Annex 6.2, which also shows the
existence of catastrophic cover in article 9 'Loss Occurrence Definition'.
The
contract in question was not classified as an "Agregatte",
as the entity had initially stated, apparently because it had made a mistake in
its classification, and was in fact a Stop Loss contract.
Filtering
the 2016 premium file by stop loss contract, this cedent now appears. The
entity does not identify which contract number it is, but all contracts of this
type with this cedent are crop reinsurance. (...)
In
the document initially sent, XZR's name did not appear anywhere, as was
stated in the minutes. Annex 6.1 provided is the addendum to the contract
signed by XZR, as it is a pool of reinsurers, with XZ assuming
0.5% of the risk of the contract. The definition of the risk covered is the one
given in the previously provided contract, here there seems to be no change.
In
addition, send another new contract, not previously provided, from the
"aggregate" category. This contract had not been mentioned before. It
is 29 pages in English, without translation, plus two addenda. The contract
number and the assignor do appear in the 2016 premium file.
It
cannot be accepted that the commercial premiums for these contracts can form
part of the basis for calculating the equalisation
reserve for catastrophic risks for these contracts.
With
regard to the STOP LOSS contracts, the obligor points out that the actuarial
team understands that the classification of a contract as Stop Loss is a type of
reinsurance, which does not necessarily have to be related to a specific type
of risk, nor to catastrophic risks in particular. In addition, it considers
that the contract provided is an agricultural insurance, rejecting it for the
same reasons mentioned for crop insurance and also highlighting the absence of
a signature. With regard to this last point, my client again attaches the duly
signed Stop Loss 'Crop Hail Stop Loss' contract as Annex 6.3.
In
this annex, it incorporates again the contract already provided, although
including the addenda with the corresponding signatures, as it says.
As
already indicated by the inspectorate, this type of contract cannot be
identified with a particular type of risk and therefore the claim cannot be
accepted either.
With
regard to the Stop Loss, contract 13814 Stop Loss associated with the Fire line
is attached as Annex 6.4 in which, according to the obligee,
the existence of catastrophic cover can be seen in the 'Risques
Couverts' section.
This
is also a new contract, not previously provided, which appears in the premium
file, among the 2016 stop loss contracts, with MN, 16 pages long and
written in French, also untranslated.
It
should be reiterated what the inspectorate has indicated with regard to this
type of risk, and the claim is therefore not upheld.
In
addition, it provides details of the historical loss experience of contract
4789 sent by the ceding company to XZR as Annex 6.5, which shows the
list of historical claims (prior to 2013) related to the Property line of
business and covered by the contract, which arise from natural catastrophes and
have been classified as such by the PCS organisation.
This
annex 6.5 consists of an Excel workbook which lists, according to the heading,
the historical losses of occurrence 1991-2012, for XZR with respect to
the business generated by XZ PAÍS_2 Corp. No mention is included of the
contract from which they originate, so it is not possible to relate it, as the
entity says, to contract 4789, nor any mention of the name of the assignor of
the latter contract, which is LLM.
The
allegations are therefore rejected and the proposed regularisation
is confirmed".
By virtue of the foregoing, the TEAC can only agree
with the findings of the Inspectorate and, therefore, reject the allegations
made by the claimant, confirming the adjustment made by the Inspectorate for
this reason.
TWENTY-THIRD.- Next, the claimant alleges its disagreement
with the calculation of the Capitalisation Reserve made
by the Inspectorate, insofar as it does not agree with the adjustment made in
the calculation of the equalisation reserve, which
has an impact on this issue.
The regularisation consisted of
excluding the legal reserves, for the purposes of calculating the increase in
equity, in order to determine the amount of the capitalisation
reserve; and, more specifically, the Inspectorate points out that, in
accordance with the criterion expressed by the Directorate of Taxation, the equalisation reserve should be excluded from the
calculation of the increase in equity for these purposes.
In replying to this allegation, the TEAC refers to what
is set out in the preceding GROUNDS OF LAW, in which we confirm the regularisation carried out by the Tax Inspectorate with
regard to the equalisation reserve, which leads to
the rejection of this allegation.
TWENTY-FOURTH - The NEXT QUESTION refers to the compensation
of pre-consolidation BIN's of certain group entities, referring to BIN's
generated prior to incorporation into the Tax Group and pending compensation at
the time of such incorporation.
1. Description of the facts.
In the tax group tax return for 2013, 2014 and 2015, the
claimant offset the pre-consolidation BIN's (BIN's generated by entities that
were now part of the Group but which were generated in previous years in which
those entities were not part) with the only limitation being the amount of the
positive taxable income of the entity to which the BIN corresponds, without
taking into account the percentage limits that apply to the general regime.
In the settlement agreement resulting from the audit, the
tax authorities modified the amounts of the pre-consolidation BINs offset and
pending offset generated by the aforementioned entities, considering that, for
these purposes, the limits established in Royal Decree-Law 20/2012 and in Law
16/2013 for the 2013 and 2014 financial years, and in the 34th transitory
provision of Law 27/2014, of 27 November, on income tax, for the 2015 financial
year, were applicable.
Disagreeing with the aforementioned adjustment, the
claimant alleges that the applicable regulations in relation to the offsetting
in the tax group of pre-consolidation BIN`S, i.e. the TRLIS, RDL 20/2012 and
Law 16/2013, is clear and leaves no room for doubt that the limit applicable to
the offsetting of such "pre-consolidation" BIN`S is the individual
taxable base of the entity that holds them, and for the total amount thereof,
with no percentage limitation based on its volume of operations, an issue
endorsed by the DGT, according to the entity concerned.
2. Applicable legislation.
First of all, this TEAC believes it is appropriate to summarise the evolution of the normative regulation of the
compensation of BINs in the years audited.
Thus, for the 2013 and 2014 financial years, articles 25
and 74 of the TRLIS must be taken into account, relating to the general regime
on the compensation of BIN`S and the specialities in
the tax consolidation regime respectively.
"Article
25. Offsetting of tax losses.
1.
Tax losses which have been subject to assessment or self-assessment may be
offset against the positive income of the tax periods ending in the 18 years immediately
following and thereafter.
2.
The negative taxable amount subject to set-off shall be reduced by the amount
of the positive difference between the value of the members' contributions,
made by whatever means, corresponding to the holding acquired and its
acquisition value, where the following circumstances apply:
(a)
the majority of the share capital or of the rights to participate in the
results of the entity acquired by a person or entity or by a group of related
persons or entities after the end of the tax period to which the negative tax
base relates.
(b)
the persons or entities referred to in the preceding paragraph had a holding of
less than 25 per cent at the end of the tax period to which the negative tax
base relates.
(c)
the entity has not been engaged in economic activities within the six months
preceding the acquisition of the interest conferring the majority of the share
capital.
3.
Newly created entities may compute the compensation period referred to in
paragraph 1 as from the first tax period for which income is positive.
4.
The provisions of the preceding paragraph shall apply to tax losses arising
from the operation of new motorways, tunnels and toll roads carried out by the
companies holding concessions for such activities.
5.
The taxpayer must prove the origin and amount of the tax losses he is seeking
to offset, by showing the tax assessment or self-assessment, the accounts and
the appropriate documentary support, regardless of the year in which they
arose.
Article
74. Offsetting of tax losses.
1.
If, by virtue of the rules applicable for the determination of the taxable
income of the tax group, this is negative, its amount may be offset against the
taxable income of the tax group under the terms provided for in Article 25 of
this Act.
2.
The tax losses of any company pending offset at the time of its integration
into the tax group may be offset against the taxable income of the group, up to
the limit of the individual taxable income of the company itself, excluding
from the taxable income, for these sole purposes, the dividends or shares in
profits referred to in Article 30(2) of this Law".
From 2011 onwards, percentage imitations were introduced
in the offsetting of BINs from previous years by the following rules:
Article 9. Two of Royal Decree Law 9/2011, of 19 August,
provided as follows:
"Article
9. Amendments relating to corporate income tax.
Firstly,
the following amendments are made to the legal system for corporate income tax,
approved by Royal Legislative Decree 4/2004, of 5 March, with effect
exclusively for tax periods beginning in 2011, 2012 and 2013:
(...;/...;)
Two.
For taxpayers whose turnover, calculated in accordance with the provisions of
Article 121 of Law 37/1992, has exceeded the sum of 6,010,121.04 euros during
the twelve months prior to the date on which the tax periods begin in 2012 or
2013, the following special features shall be taken into consideration in the
offsetting of tax losses referred to in Article 25 of the revised text of the
Corporate Income Tax Act:
-
The offsetting of tax losses is limited to 50 per cent of the tax base prior to
such offsetting, when in those twelve months the net turnover is at least
twenty million euros but less than sixty million euros.
-
The offsetting of negative tax bases is limited to 25 per cent of the tax base
prior to such offsetting, when in those twelve months the net turnover is at
least sixty million euros. The provisions of this section shall not apply to
instalment payments for which the deadline for filing a tax return has expired
on the entry into force of this Royal Decree-Law.
(...;/...;)"
Article 26. One of Royal Decree Law 20/2012, of 13 July,
provided as follows:
"Article
26. Amendments relating to
Corporation Tax. First. With effect for tax periods beginning in 2012 and 2013,
the following amendments are introduced in the legal regime of Corporate Income
Tax:
One.
Number two of section one of Article 9 of Royal Decree-Law 9/2011, of 19
August, on measures to improve the quality and cohesion of the national health
system, to contribute to fiscal consolidation, and to increase the maximum
amount of State guarantees for 2011, is amended and shall be worded as follows:
"Two.
For taxpayers whose turnover, calculated in accordance with the provisions of
Article 121 of Law 37/1992, has exceeded the sum of 6,010,121.04 euros during
the twelve months prior to the date on which the tax periods begin in 2012 or
2013, the following special features shall be taken into consideration in the
offsetting of tax losses referred to in Article 25 of the revised text of the
Corporate Income Tax Act:
-
The offsetting of tax losses is limited to 50 per cent of the tax base prior to
such offsetting, when in those twelve months the net turnover is at least
twenty million euros but less than sixty million euros.
-
The offsetting of tax losses is limited to 25 per cent of the taxable income
prior to such offsetting, when in those twelve months the net turnover is at
least EUR 60 million.
The
provisions of this section shall not apply to fractioned payments whose
deadline for declaration has expired on the entry into force of this Royal
Decree-Law".
(...;/...;)
Article 2. Two. of Law 16/2013, of 29 October, provided
as follows:
"Article
2. Temporary measures applicable to corporation tax.
(...;/...;)
Second.
With effect for tax periods beginning in 2014 and 2015, the following
amendments are made to the legal regime for corporate income tax, approved by
Royal Legislative Decree 4/2004, of 5 March:
(...;/...;)
Two.
For taxpayers whose turnover, calculated in accordance with the provisions of
Article 121 of Law 37/1992, has exceeded the sum of 6,010,121.04 euros during
the twelve months prior to the date on which the tax periods begin in 2014 or
2015, the following special features shall be taken into consideration in the
offsetting of tax losses referred to in Article 25 of the revised text of the
Corporate Income Tax Act:
-
The offsetting of tax losses is limited to 50 per cent of the tax base prior to
such offsetting, when in those twelve months the net turnover is at least
twenty million euros but less than sixty million euros.
-
The offsetting of tax losses is limited to 25 per cent of the taxable income
prior to such offsetting, when in those twelve months the net turnover is at
least EUR 60 million.
The
limitation on the offsetting of tax losses shall not apply to the amount of
income relating to relief resulting from an agreement with creditors not
connected with the taxpayer, approved in a tax period starting on or after 1
January 2013.
(...;/...;)"
From 2015 onwards, it is worth noting the entry into
force of Law 27/2014, of 27 November, on Corporate Income Tax, in which the
regime on the offsetting of BINs is regulated in the following articles:
"Article
26. Offsetting of tax losses.
1.
Tax losses which have been subject to assessment or self-assessment may be
offset against the positive income of subsequent tax periods up to a limit
of 70 per cent of the taxable income prior to the application of the capitalisation reserve established in Article 25 of this
Law and its offset.
In
any case, tax losses may be offset in the tax period up to the amount of EUR 1
million.
The
limitation on the offsetting of tax losses shall not apply to the amount of
income corresponding to write-offs or waivers resulting from an agreement with
the taxpayer's creditors. Tax losses which are offset against such income shall
not be taken into account in respect of the amount of EUR 1 million referred to
in the preceding paragraph.
The
limit provided for in this section shall not apply in the tax period in which
the entity is wound up, unless this is the result of a restructuring operation
to which the special tax regime established in Chapter VII of Title VII of this
Law applies.
(...)
Article
66. Offsetting of tax losses.
If,
by virtue of the rules applicable for the determination of the taxable income
of the tax group, this is negative, the amount may be offset against the
taxable income of the tax group under the terms provided for in Article 26 of
this Law.
Article
67. Special rules for the incorporation of entities in the tax group.
In
the event that an entity joins a tax group, the following rules shall apply in
determining the taxable income of the tax group:
(...)
e) The
tax losses of any entity pending offset at the time of its integration into the
tax group may be offset against the taxable income of the group, up to a limit
of 70 per cent of the individual taxable income of the entity itself,
taking into account the eliminations and additions corresponding to that
entity, in accordance with the provisions of Articles 64 and 65 of this Law.
(...)"
"Thirty-fourth
transitional provision. Temporary measures
applicable in the 2015 tax period.
With
effect for tax periods beginning in 2015, the following special features shall
apply:
(...;/...;)
"(g)
The limit referred to in Article 26(1) of this Law shall not apply.
However,
the offsetting of tax losses from previous years, for taxpayers whose turnover,
calculated in accordance with the provisions of Article 121 of Law 37/1992, of
28 December, on Value Added Tax, has exceeded the amount of 6,010,121.04 euros
during the 12 months prior to the date on which the tax periods begin in 2015,
will have the following limits:
-
The offsetting of tax losses is limited to 50 per cent of the taxable income
prior to the application of the capitalisation
reserve established in Article 25 of this Law and to such offsetting, when in
those 12 months the net turnover is at least 20 million euros but less than 60
million euros.
-
The offsetting of tax losses is limited to 25 per cent of the taxable income
prior to the application of the capitalisation reserve established in Article 25 of this
Law and to such offsetting, when in those 12 months the net turnover is at
least 60 million euros.
The
limitation on the offsetting of tax losses shall not apply to the amount of
income corresponding to the income corresponding to the write-offs and waivers
resulting from an agreement with creditors who are not related to the
taxpayer".
"Thirty-sixth
transitional provision. Limit on the
offsetting of tax losses and deferred tax assets for 2016.
With
effect for tax periods beginning in 2016, for those taxpayers to whom the
fifteenth additional provision of this Law is not applicable, the limits
established in Article 11(12), in the first paragraph of Article 26(1), in
Article 62(1)(e) and in Article 67(d) and (e) of this Law shall be 60 per cent,
in the terms established, respectively, in the aforementioned precepts."
3. Application to the case. Response to the allegations.
On this issue, reference should be made to the doctrine
established by the TEAC in previous rulings (such as that of 10/02/2020, RG
356/2018 or that of 24/09/2020, RG 4359/2019) according to which, when
analysing the offsetting of BIN's within the scope of a tax group taxed under
the special consolidation regime, taking into account that these BIN's may have
been generated in the group and/or by the entities that make up the group when
said entities were taxed under the general individual regime and were not yet
part of the group, there is a double limit that must be taken into account: on
the one hand, that of Article 67.e) of the LIS applicable at the individual
level of the group entity that has those pending tax losses, taking into
account the net amount of its turnover for the purposes of determining the
possible limitation on offsetting those tax losses and, on the other hand, that
of Article 66 at group level, taking into account the net amount of turnover at
group level. It is true that this doctrine was set out for cases where Law
27/2014 was applicable, but in our Resolution of 20/07/2022, RG 1578/2020 we
also pointed out that, where the TRLIS is applicable, this "double
limit" is also applicable, since when article 74.2 of the TRLIS establishes
that the limit for offsetting pre-consolidation tax losses is "the
individual taxable income of the company itself", it must be understood
that this individual taxable income is the same that the entity could offset if
taxed individually, which is obviously affected by the limits introduced by
Royal Decree Law 9/2011, subsequently amended by Royal Decree Law 20/2012, and
by Law 16/2013.
Therefore, the double limit applicable to the offsetting
of pre-consolidation BINs in a Tax Group is as follows:
- Either the percentage of the previous tax base of the
group that, according to Article 26. One of Royal Decree Law 20/2012 (for the
2013 financial year); Article 2. Two. of Law 16/2013 (for the financial year
2014) and DT 34th LIS (for the financial year 2015), results according to the
net amount of the turnover (of the group) of the previous financial year;
- Either the amount of the individual tax base of the
entity generating the pre-consolidation BINs to be offset, or for 2015, the
percentage of the individual tax base of the entity generating the
pre-consolidation BINs according to its net turnover for the previous year.
The opposite would mean accepting that there is a limit
for offsetting BINs when the entity is taxed individually and a different limit
for pre-consolidation BINs when it is taxed as part of the group under the
consolidated tax regime.
Thus, it is worth reproducing our resolution of July
2021, RG 6363/2019, in which we set as a criterion that "the
pre-consolidation percentage limits, whether or not the company is taxed in
consolidation, must be applied to the individual BIN of the subsidiary/s
(without prejudice to the fact that, if it is taxed in consolidation, they must
also be applied by the consolidated Group, It does not seem reasonable that there
should be a limit for the offsetting of NIBs when the entity is taxed
individually and a different limit for pre-consolidation NIBs when it is taxed
as part of the group under the consolidated tax regime. In other words, if this
limit is not applied to the subsidiary, it would be allowing it to contribute
more BIN to the group than it would be able to offset if taxed individually.
In the aforementioned resolution, we referred to the
aforementioned regulations, as well as to the consultations that the DGT has
been resolving on this issue, specifically stating that:
"The
aforementioned regulations introduced a temporary modification with effect for
tax periods beginning in 2011 and subsequent years, which, as stated in the
Explanatory Memorandum to Royal Decree-Law 9/2011, consists of establishing,
for tax collection reasons and in order to strengthen public revenue, a limit
for the compensation of negative tax bases; a limit applicable to certain
corporate income taxpayers, specifically companies with a turnover in excess of
twenty and sixty million euros.
<<(...)
These are, in short, rules that only temporarily affect the largest legal
entities and that present benefits to those who, as has been justified above,
have the capacity to collaborate especially in the lifting of public burdens
and the achievement of the public deficit objectives that our country has
committed itself to. (...)>>.
We
begin by pointing out that both the TRLIS and Law 27/2014 regulate the
"Tax consolidation regime", which is of voluntary application. The
taxpayer of the tax is the tax group, therefore, all the entities, parent and
controlled, which form part of the same, are not taxed individually, the individual
taxation regime being understood as that which would correspond to each entity
in the event that the tax consolidation regime were not applicable.
Subsidiaries
are subject to the tax obligations arising from the individual taxation system,
with the exception of the payment of the tax debt; these obligations include,
inter alia, the filing of a tax return (form 200).
The
Parent, as representative of the Group, is subject to compliance with the
material and formal tax obligations deriving from the consolidation regime,
including, inter alia, the filing of the Group's tax return (form 220) and the
corresponding self-assessment tax return, determining the taxable income and,
where appropriate, offsetting any tax losses, both of the Group and of any
of the Group companies that were pending offset at the time of their
incorporation into the tax group. This offsetting is subject, as indicated
above, to a twofold requirement: (i) that the Group's
previous taxable income is positive and (ii) that the individual taxable income
of the company itself is also positive, the amount of which constitutes the
maximum limit for such offsetting. To which we must add, as we shall explain
below, a third requirement (limit) following the reform introduced by
article 9 of Royal Decree-Law 9/2011, (as we already maintained in
resolution R.G.: 5102/14 of 05-04-2018, referring to the 2012 financial year).
Article
2, point 5, second paragraph, of ORDER HAP/864/2013, of 14 May, states that:
<<The
declarations which, in accordance with the provisions of
paragraph 3 of article 65 of the TRLIS, must be made by each of the companies
making up the group, including the parent company or group head entity, shall
be made on form 200, which shall be completed in full, up to the amount of the theoretical
net amounts which, under individual taxation, would have to be paid or
received by the respective entities...>>.
The
TEAC considers, following the criteria maintained by the Technical Inspection
Office, that the limit in article 74.2 of the TRLIS (and article 67 e) of the
LIS) is the result of applying to the individual tax base the reduction
percentages established on a transitional basis - to which we have been
referring - as it does not seem reasonable that there should be a limit for
offsetting individual tax losses when the entity is taxed under the individual
regime and a different limit for pre-consolidation losses when it is taxed as
part of the group under the tax consolidation regime.
This
temporary measure cannot be understood in the sense in which the claimant
understands it because, if his interpretation is accepted, it would be
allowing more tax losses of the controlled companies - generated before forming
part of the group - to be offset at the level of the tax group than they could
themselves offset on an individual basis. And, given the tax collection
purpose of the measure, it does not seem logical to suppose that this was the
legislator's intention when introducing it, especially since until then the
regulation was identical for the company generating negative tax bases whether
it opted for individual taxation or tax consolidation.
This
interpretation would be supported, as indicated in the now contested settlement
agreement, by the DGT consultations (V4142-16 and V4055-16) for 2016,
applicable to 2015 and V2085-15, dated 3 July 2015, for 2014 and 2015.
With
regard to the 2015 financial year, we consider it appropriate to make a
clarification, given that article 26.1 of Law 27/2014 establishes a limit for
offsetting individual negative tax bases (which was not included in the
corresponding article 25 of the TRLIS):
<<1.
Tax losses which have been subject to settlement or self-assessment may be
offset against the positive income of subsequent tax periods up to a limit of
70 per cent of the taxable income prior to the application of the capitalisation reserve established in Article 25 of this
Law and its offset.
In
any case, tax losses may be offset in the tax period up to the amount of EUR 1
million.
This
precision is specified in the following:
In
consultations V4142-16, of 27-09-2016 and V4055-16, of 22-09-2016, it is stated
that the offsetting of negative pre-consolidation bases is also subject to the
limits (50/25%) provided for in the TD 34th of the LIS:
<<By
virtue of the foregoing, in accordance with a systematic and reasonable
interpretation of the rule, it should be considered that the limit of 70 per
cent of the individual taxable income, provided for in letter e) of article 67
of the LIS, will not be applicable during the tax periods commencing in 2015,
with the limit provided for in the thirty-fourth transitory provision,
letter g) of the LIS being applicable, where applicable, for the offsetting
of tax losses prior to incorporation into the tax group.
Consequently,
in line with the above, when determining the limit of article 67 e) of the LIS,
not only should the application of the reduction coefficients applicable in
each case to the individual taxable base of the company joining the group be
taken into account, but also, (article 26 of the LIS), the minimum amount to be
offset of 1,000,000 euros (as taken into account by the tax authorities in the
case of CARREFOUR ONLINE). This is the only way to avoid there being a limit
for offsetting individual negative tax bases when the entity is taxed under the
individual regime and a different limit for pre-consolidation negative tax
bases when it is taxed as part of the group under the consolidated tax regime.
Finally,
we would point out that the binding consultations invoked by the claimant,
V3626-13, of 18-12-2013 and V3546-15, of 17-11-2015, are not conclusive for the
purposes claimed by the claimant. The first of these does not mention the
application or the way to act with regard to the 50% or 25% limit; and the
second, which states that these limits should be applied, does not specify how
to do so, whether by taking into account the net turnover of the group and/or
of the subsidiary that provides the negative base to the group".
Following the aforementioned criterion which, as we have
said, already constitutes binding doctrine for the entire Tax Administration in
accordance with the provisions of article 239.8 LGT:
"8.
The reiterated doctrine established by the Central Economic-Administrative
Court shall bind the regional and local economic-administrative courts and the
economic-administrative bodies of the Autonomous Communities and Cities with a
Statute of Autonomy and the rest of the tax administration of the State and of
the Autonomous Communities and Cities with a Statute of Autonomy. The Central
Economic-Administrative Court shall expressly state in its resolutions and
agreements that this is a reiterated doctrine and shall proceed to publish them
in accordance with the provisions of Article 86(2) of this Law. In each
Economic-Administrative Court, the criterion established by its Plenary shall
bind the Chambers and that of both shall bind the single-member bodies. The
rulings and acts of the Tax Administration that are based on the doctrine
established in accordance with this provision shall expressly state this.
In short, the allegation is DISMISSED, confirming the
content of the contested agreement as it is in line with the doctrine
maintained by this Central Court on the matter.
TWENTY-FIFTH.- The next issue raised relates to the deduction
for Technological Innovation (TI) applied by Group XZ in the IS for
the years 2013 to 2015, provided for in article 35 of the TRLIS (for the years
2013 and 2014) and 35 of the LIS (for the year 2015), for the development of a
series of projects that we will mention below.
1. Description of the facts.
The claimant, on the basis of the classification of these
projects as Technological Innovation (TI) for tax purposes, considered that all
the expenses incurred in them should form part of the deduction base; however,
the Inspection, as a result of the verification actions, and on the basis of a
report requested from the DCGC's IT Support Team, concluded that there were certain
expenses that could not be conceptualised in the
activities included in article 35.2.b) as eligible to form part of the
deduction base, and the corresponding adjustment was made for this reason.
The projects analysed are, in particular, the following:
- Project ... ("New channels that optimise Business Communication and Information"), related
to the design and development of a new communication platform through a
website. A Certificate of Technological Innovation is issued, which qualifies
as "Computer Science", "Computing" and a reasoned report
from the Secretary General for Science and Innovation which qualifies it as
Technological Innovation. The expenditure for this project amounted to
8,573,904.90 euros and the Inspectorate accepted 14.72%, i.e. 1,262,490.86
euros, as the basis for the deduction.
- Project ... (New processes for the
improvement of XZ group communications"), related to the design
and implementation of a communications platform. Technological Innovation
Certificates are issued, which qualify as "Computer Science" and
"Information Systems, Component Design". ") The
expenditure associated with this project amounted to 7,916,591.04 euros, but
the Inspectorate accepted, as the basis for the deduction, 10.58%, i.e.
837,356.26 euros.
- Project ... (Project "Technological Optimisation for XZZ Services"), related to
computer development, through a platform called SIGMATRON, already existing in
the entity. A Certificate of Technological Innovation is issued, which
qualifies it as "Computer Science" and a reasoned report from the
General Secretariat for Science and Innovation which qualifies it as
Technological Innovation. The expenditure of this project amounted to
7,620,098.08 euros, and the Inspectorate accepted 12.32%, i.e. 938,904.94
euros, as the basis for the deduction.
- Project ... ("New tools and systems for
accessing the information of the company XZV"), for the design
and development of new processes for the calculation of risks and optimisation of tasks. A Certificate of Technological
Innovation is issued, which qualifies as "Computer Science" and a
reasoned report from the Secretary General for Science and Innovation. The
expenditure allocated to this project was 13,024,219.33 euros. The Inspectorate
accepted 8.15%, i.e. 1,061,968.63 euros, as the basis for the deduction.
- Project ... ("Design and development of a
global platform for policy and contract management"), related to the
design and technological development of new infrastructures, procedures,
processes, tools and applications to optimise the
(existing) Issuing System. It includes the design and development of tools that
involve technological and functional renewal in various areas. It has a
certified IT evaluation report from the Spanish Certification Agency that
qualifies it as a "Computer Science" project and a reasoned report
from the General Secretariat for Science and Innovation that qualifies it as a
Technological Innovation project. The expenditure allocated to this project was
13,668,389.19 euros, but the Inspectorate accepted only 7.51%, i.e.
1,026,440.43 euros, as the basis for the deduction.
- Project ... (Project "Design and Implementation
of New Applications and Competitive Business Tools"), related to the
design and implementation of new competitive applications and business tools. A
Certificate of Technological Innovation is issued, which qualifies as
"Computer Science", "Computer Science" and a reasoned
report from the General Secretariat for Science and Innovation which qualifies
it as Technological Innovation. The expenditure for this project was 12,020,436.63
euros, but the Inspectorate only accepted 27.90%, i.e. 3,353,742.20 euros, as
the basis for the deduction.
- Project ... ("New ICT developments for Issuing
processes and Insurance Services"), related to the development of ICT
for Issuing processes and Insurance Services. A Certificate of Technological
Innovation and a reasoned report from the Secretary General for Science and
Innovation were issued. The expenditure corresponding to this project was
10,291,521.05 euros, but the Inspectorate only admits 17.03%, i.e. 1,753,148.90
euros, as the basis for the deduction.
- Project ... ("New platform for the underwriting
and monitoring of XZ policies"), for which a Certificate of
Technological Innovation is issued, which qualifies as "Computer
Science" and "Information Systems, Design of components and Reasoned
Report of the Secretary General for Science and Innovation". 7,268,912.42
euros, but in the Inspectorate's opinion, none of these expenses can be
accepted as a basis for the IT deduction.
- Project ... ("New single platform for policy
issuance"). The expenditure allocated to this project amounted to
6,274,581.59 euros: related to the design and development of a series of new
functionalities for the entity's existing policy issuing platform.
Technological Innovation Certificates are issued, which qualify as
"Computer Science" and "Information Systems, Component
Design". The Inspectorate has accepted only 5.81% of this, i.e. 364,622.50
euros, as the basis for the deduction.
- Project ... ("Infrastructure and framework of
the XZ group information system), related to the design and
development of new tools and functionalities that facilitate the management of
documentation and information. It has a certified IT evaluation report from the
Spanish Certification Agency and a reasoned report from the General Secretariat
for Science and Innovation. "3,126,427.13, while the Inspectorate has
accepted 16.69%, i.e. 521,799.22 euros, as the basis for the deduction.
- Project ... ("Initiative for the optimisation of computer processes of XZ Sofa), related
to the design and development of improvements in the Tronweb
and Newtron systems. A Certificate of Technological
Innovation is issued, which qualifies as "Computer Science" and
"Information Systems, Design of components" and a reasoned report
from the Secretary General for Science and Innovation which qualifies it as
Technological Innovation. The expenditure for this project amounted to
6,204,402.79 euros, but the Inspectorate has not accepted any expenditure as
eligible to form part of the basis for the IT deduction.
- Project ... (Optimisation
and inclusion of innovative functionalities in the Tron system), which aims to modernise the functionalities of the Tronweb
and Newtron systems. A Certificate of Technological
Innovation is issued, which qualifies as "Computer Science" and a
reasoned report from the General Secretariat for Science and Innovation. The
expenditure associated with this project amounted to 4,458,692.72 euros. The
Inspectorate accepted 8.40% of this expenditure, i.e. 374,439.36 euros, as the
basis for the IT deduction for this project.
- Project ... (Framework for the management of online
insurance services"), related to the development of a new framework
for the management of online insurance services. A Certificate of Technological
Innovation is issued, which qualifies it as "Computer Science", and a
reasoned report from the Secretary General for Science and Innovation which
qualifies it as Technological Innovation. The expenditure incurred in this
project amounted to 6,099,661.28 euros, but the Inspectorate accepted only
18.13%, i.e. 1,105,621.03 euros, as the basis for the IT deduction.
It follows from the above that the projects were all
related to the design and development of software applications and systems used
in the management of the entity.
Dissatisfied with the regularisation
carried out by the Inspectorate, the claimant submitted a series of allegations
to the TEAC, to which we will now reply.
2. Response to the allegation: the Inspectorate exceeded
its powers.
Firstly, the complainant alleges that the Inspectorate
has exceeded its powers, insofar as it is not authorised to carry out a second
verification of the activities carried out. In this regard, she points out that
there are reasoned reports from the Ministry of Economy and Competitiveness
(MINECO), formerly the Ministry of Science and Innovation (MICINN), which
classify them as technological innovation (TI), and these reports are binding
for the Administration, both with regard to the classification of the projects
and the expenses that constitute the basis for the deduction.
Article 35 of the TRLIS, for the 2013 and 2014 financial
years, and Article 35 of the LIS, for the 2015 financial year, as we have
already mentioned, regulate the deduction for research and development and
technological innovation activities, in the following terms
"Article
35. Deduction for research and development and technological innovation
activities.
1.
Deduction for research and development activities.
(...)
2.
Deduction for technological innovation activities.
The
performance of technological innovation activities shall entitle the taxpayer
to a deduction from the gross tax liability under the conditions laid down in
this paragraph.
a)
Concept of technological innovation.
Technological
innovation shall be considered to be the activity whose result is a
technological advance in obtaining new products or production processes or
substantial improvements to existing ones. Products or processes whose
characteristics or applications, from a technological point of view, differ
substantially from those existing previously, shall be considered new.
This
activity shall include the materialisation of new
products or processes in a plan, scheme or design, the creation of a first
non-marketable prototype, initial demonstration projects or pilot projects,
including those related to animation and video games, and samples of textiles,
footwear, tanning, leather goods, toys, furniture and wood, provided that they
cannot be converted or used for industrial applications or commercial
exploitation.
b)
Basis of deduction.
The
basis for the deduction shall be the amount of expenditure for the period on
technological innovation activities corresponding to the following items:
Technological
diagnosis activities aimed at identifying, defining and guiding advanced
technological solutions, irrespective of the results they produce.
Industrial
design and production process engineering, which includes the conception and
preparation of plans, drawings and supports aimed at defining the descriptive
elements, technical specifications and operating characteristics necessary for
the manufacture, testing, installation and use of a product, as well as the
preparation of textile, footwear, tanning, leather goods, toy, furniture and
wood samples.
3.
Acquisition of advanced technology in the form of patents, licences,
know-how and designs. Amounts paid to persons or entities related to the
taxpayer shall not give entitlement to the deduction. The
base corresponding to this concept may not exceed the amount of 1 million
euros.
4.
Obtaining the certificate of compliance with the quality assurance standards of
the ISO 9000, GMP or similar series, not including the expenses corresponding
to the implementation of these standards.
Expenditure
on technological innovation is considered to be expenditure incurred by the
taxpayer in so far as it is directly related to these activities, is actually
applied to the carrying out of these activities and is specifically identified
by project.
The
technological innovation expenses that form the basis for the deduction must
correspond to activities carried out in Spain or in any Member State of the
European Union or of the European Economic Area.
Likewise,
amounts paid for the performance of such activities in Spain or in any Member
State of the European Union or of the European Economic Area, on behalf of the
taxpayer, individually or in collaboration with other entities, will be
considered as technological innovation expenses.
(...)
(c)
Percentage of deduction.
(...)
3.
Exclusions.
Research
and development and technological innovation activities shall not be considered
as research and development or technological innovation activities:
(a)
activities which do not involve significant scientific or technological
innovation. In particular, routine efforts to improve the quality of products
or processes, the adaptation of an existing product or production process to
specific requirements imposed by a customer, periodic or seasonal changes,
except for textile, footwear, tanning, leather goods, toys, furniture and wood
samples, as well as aesthetic or minor modifications of existing products to
differentiate them from similar products.
b)
The activities of industrial production and provision of services or
distribution of goods and services. In particular, the planning of production
activity: the preparation and start-up of production, including the setting of
tools and activities other than those described in point b) of the previous
paragraph; the incorporation or modification of installations, machines,
equipment and systems for production which are not involved in activities
classified as research and development or innovation; the solution of technical
problems of interrupted production processes; the quality control and
standardisation of products and processes; social science prospection and
market studies; the establishment of networks or facilities for marketing; the
training and education of personnel related to these activities.
(c)
exploration, drilling or prospecting for minerals and hydrocarbons.
4.
Application and interpretation of the deduction.
a)
For the application of the deduction regulated in this article, taxpayers may
provide a reasoned report issued by the Ministry of Economy and
Competitiveness, or by a body attached to it, on compliance with the scientific
and technological requirements laid down in paragraph 1(a) of this article to
classify the taxpayer's activities as research and development, or in paragraph
2(a) thereof, to classify them as innovation, taking into account in both cases
the provisions of paragraph 3.
(...)"
For its part, Royal Decree 1432/2003, of 21 September,
regulates the issuing by the Ministry of Science and Technology of reasoned
reports on compliance with scientific and technological requirements for the
purposes of the application and interpretation of tax deductions for
R&D&I activities. Article 2 states the following:
"The
Ministry of Science and Technology, in accordance with the provisions of
Article 33.4 of Law 43/1995, of 27 December 1995, on Corporation Tax (now
Article 35 of the TRLIS), shall issue reasoned reports on compliance with the
scientific and technological requirements laid down in section 1.a) of the said
article in order to classify the taxpayer's activities as research and
development, or in section 2.a) thereof, in order to classify them as
innovation, taking into account in both cases the exclusions established in
section 3.
Reasoned
reports may be of the following type:
a)
A reasoned report on compliance with scientific and technological requirements,
for the purposes of applying the tax deduction for research and development and
technological innovation activities, in accordance with the provisions of
Article 33 of Law 43/1995, of 27 December 1995, on Corporate Income Tax (now
Article 35 of the TRLIS).
....".
Likewise, Article 9 of RD 1432/2003, entitled
"Effects of the reports", states in section 1:
"In
the reports referred to in Article 2.a) drawn up by the Ministry of Science and
Technology, the amount of the expenses and investments actually incurred in
research and development or innovation activities, which could constitute
the basis for the deduction, must, in any case, be duly documented and adjusted
to the tax regulations in force, and the competent bodies of the tax
administration shall be responsible for the inspection and control of these
points.
In view of the aforementioned precepts, this Court has
already stated, as a settled doctrine, that the quantification of the basis for
the deduction that may be contained in the reports issued by MICINN/MINECO is
not binding for the Administration, such binding nature being limited to the
classification of the project in question as R&D or TI. The binding nature
of the report does not extend to the determination and specification of the
basis for the deduction, as this does not arise either from article 35.4 of the
TRLIS or from the provisions of Royal Decree 1432/2003.
This has been recognised by the TEAC, for example in
resolution RG 7906/2015 of 09/04/2019 (available in DYCTEA) in which we set as
a criterion:
"The
quantification of the basis for the deduction that may appear in the reports
issued by MICINN/MINECO is not binding for the Administration and is limited to
the classification of the project in question as R&D or TI. The binding
nature of the report does not extend to the determination and specification of
the basis for the deduction".
In the aforementioned resolution, we also pointed out
that:
"Although
the Tax Inspectorate cannot alter the classification of the aforementioned
projects, insofar as the classification as TI issued by the competent body
(MICINN/MINECO) is binding for the Tax Administration, the Tax Inspectorate
not only can but must verify the correct determination of the basis for the
deduction for TI activities, in the terms set out in article 35.2 b) of the
TRLIS. We refer to the previous pages of this Agreement, where we have argued
that it is the exclusive competence of the Tax Inspectorate to quantify the
basis for the deduction in accordance with the provisions of article 35.2 b) of
the TRLIS.
...In
short, the doctrine established by the DGT considers that the expenses incurred
in the development of computer applications do not form part of the IT
deduction, with the sole exclusion of expenses for the acquisition of licences,
patents, licences, know-how and designs. For its part, the actuarial team,
based on the report issued by the IT Support Team of the DCGC, also accepts,
for the purposes of quantifying the IT deduction base, that expenses
corresponding to technological diagnosis activities should be taken into
consideration, provided that they are projects developed under the wording
given by Law 4/2008 to article 35.2 b) 1 of the TRLIS.
(...)
Article
2 of Royal Decree 1432/2003 provides as follows:
"The
Ministry of Science and Technology, in accordance with the provisions of
Article 33.4 of Law 43/1995, of 27 December 1995, on Corporation Tax (now
Article 35 of the TRLIS), shall issue reasoned reports on compliance with the
scientific and technological requirements laid down in section 1.a) of the said
article in order to classify the taxpayer's activities as research and
development, or in section 2.a) thereof, in order to classify them as innovation,
taking into account in both cases the exclusions established in section 3.
Reasoned
reports may be of the following type:
a)
A reasoned report on compliance with scientific and technological requirements,
for the purposes of applying the tax deduction for research and development and
technological innovation activities, in accordance with the provisions of
Article 33 of Law 43/1995, of 27 December, on Corporate Income Tax (now Article
35 of the TRLIS)...".
Likewise,
Article 9 of RD 1432/2003, entitled "Effects of the reports" states
in paragraph 1:
"In
the reports referred to in Article 2.a) drawn up by the Ministry of Science and
Technology, the amount of the expenses and investments actually incurred in
research and development or innovation activities, which could constitute the
basis for the deduction, must, in any case, be duly documented and adjusted to
the tax regulations in force, and the competent bodies of the tax
administration shall be responsible for inspecting and controlling these matters".
In
view of the aforementioned precepts, this Court considers that the
quantification of the basis for the deduction that may be contained in the
reports issued by MICINN/MINECO is not binding for the Administration,
and is limited to the classification of the project in question as R&D or
TI. The binding nature of the report does not extend to the determination
and specification of the basis for the deduction, as this does not follow from
article 35.4 of the TRLIS or from the provisions of Royal Decree 1432/2003.
This
confirms the inspector's view that the MICINN/MINECO reports are binding on him
only as far as their classification as TI is concerned, and that this
classification is not in any way called into question.
This
is also the criterion upheld by the Directorate General of Taxes (DGT) in the
binding consultations V2093-2013 of 24-06-2013, V2698-2013 of 10-09-2013 and
V3156-2013 of 24-10-2013."
The inspector's criterion is therefore confirmed, which
considers that the MICINN/MINECO reports bind him exclusively with regard to
such classification as TI, and does not question this classification in any way
whatsoever.
It should be noted that this is also the criterion upheld
by the Directorate General of Taxes (DGT) in the binding consultations
V2093-2013 of 24-06-2013, V2698-2013 of 10-09-2013 and V3156-2013 of
24-10-2013.
Thus, in binding consultation V2093-2013, of 24-06-2013,
after citing article 35.4 of the TRLIS and the transcribed articles of RD
1432/2033, it states the following:
"In
short, in accordance with the above, the purpose of the reasoned reports
currently issued by the authorised bodies and organisations, by virtue of the
provisions of Royal Decree 1432/2003, is to certify that the activities carried
out by the taxpayer deserve to be classified as research and development and
technological innovation activities, as defined in accordance with the
provisions of Article 35 of the TRLIS. In no case do such binding reports have
the purpose of quantifying the respective deduction bases. Therefore, the
content of these reasoned reports will only bind the tax authorities with
regard to the classification of the activities carried out by the applicant as
research and development and technological innovation, but not with regard to the
amount of the deduction base, if applicable".
In the binding consultation V3156-13 of 24-10-2013 the
DGT indicates that:
"Indeed,
by virtue of the provisions of article 35.4 a) of the TRLIS, previously
transcribed, any reference to the delimitation of the deduction base or its
quantification does not constitute the proper purpose of the reasoned report,
and therefore the binding nature of such reports will not be extended to them.
In conclusion, the basis for the deduction will be constituted by the actual
expenditure included by the entity directly linked to the R&D activity,
irrespective of those included in the CDTI report'.
The High Court of Justice of Madrid has also ruled along
the same lines in Ruling number 265/2016 of 9 March 2016. In this ruling, after
reproducing the DGT's binding consultation V2093-2013, it states the following:
"Therefore,
as Article 35 of the TRLIS is worded, the reasoned report of the Ministry of
Science and Technology, now the Ministry of Economy and Competitiveness, cannot
be considered as a condition for obtaining the deduction, but rather as a means
of proof of the qualification of the activity carried out by the consultant as
an R&D&I activity, in accordance with the provisions of Article
35(1)(a) of the TRLIS.
That
report is binding on the tax authorities, and in any event its request and
submission are optional, not compulsory. Hence, the report cannot be considered
necessary to obtain the deduction, but rather as a qualified means of proof
that the regulation makes available to the taxpayer to prove that the activity
carried out by the consumer meets the definition of R&D&I set out in
Article 35 of the TRLIS".
Therefore, this TEAC understands, and so it states in its
doctrine, that the reports issued by the MICINN/MINECO for these purposes only
bind the tax administration with regard to the classification of the
activities, in this case as TI activities for the purposes of the deduction,
but not with regard to the delimitation of the basis for the deduction or its
quantification, in accordance with the provisions of Article 35.2.b) TRLIS /
LIS.
3. Response to the allegation: on the lack of
impartiality and suitability of the expert who drafted the report.
In view of the above and with regard to the basis for the
deduction, article 35.2 b) of the TRLIS establishes:
"The
basis for the deduction shall be the amount of expenditure for the period on
technological innovation activities corresponding to the following items:
Technological
diagnosis activities aimed at identifying, defining and guiding advanced
technological solutions, irrespective of the results they produce.
Industrial
design and production process engineering, which includes the conception and
preparation of plans, drawings and supports aimed at defining the descriptive
elements, technical specifications and operating characteristics necessary for
the manufacture, testing, installation and use of a product, as well as the
preparation of textile, footwear, tanning, leather goods, toy, furniture and
wood samples.
3.
Acquisition of advanced technology in the form of patents, licences, know-how
and designs No deduction shall be made in respect of amounts paid to persons or
entities related to the taxable person. The base for this item may not exceed
EUR 1 million.
4.
Obtaining the certificate of compliance with the quality assurance standards of
the ISO 9000 series, GMP or similar, not including the costs for the
implementation of these standards.
Expenditure
incurred by the taxable person in so far as it is directly related to those
activities, is actually applied to the carrying out of those activities and is
specifically identified by project, shall be regarded as expenditure on
technological innovation".
Therefore, of all the expenses incurred for activities
carried out within the framework of the project in question, which by their
nature are eligible for the tax benefit, only those which correspond to the
activities referred to in the above provision should be taken into account when
quantifying the basis for the deduction, The legislator wished to establish a
list of expenses, numerus clausus, in such a way that these expenses, and no
others, are the only ones that must be taken into consideration for the
purposes of quantifying the basis of the deduction for TI activities.
By virtue of the foregoing, the tax inspectorate, in the
exercise of its powers, checked the correct determination of the basis for the
deduction for the projects carried out by the company, all of which were
classified as TI for tax purposes, verifying which of all the expenses incurred
by the company in the development of the projects analysed met the conditions
for inclusion and formed part of the basis for the deduction as they
corresponded directly to the development of the activities indicated in the
aforementioned article 35.2.b of the TRLIS (reproduced in the LIS). 35.2.b)
TRLIS (reproduced in the LIS).
In view of the existence of technological software
projects, the Inspectorate, under the provisions of art. 173.5.c) of Royal
Decree 1065/2007 (RGAT), requested a report from the IT Support Team (EAI) of
the Central Delegation of Large Taxpayers (DCGC) of the AEAT, in order to
verify compliance with the provisions of the aforementioned article. The
aforementioned team issued a report on 29/11/2019. The aforementioned report
concludes on the expenses incurred in the terms set out above.
The Report was issued by the aforementioned EAI on
29/11/2019, and in it, after summarising the content of each of the projects,
the adaptation of the expenses incurred in them to the IT deduction base is
analysed, concluding that there were certain expenses that should not form part
of the deduction base. The regularisation carried out by the inspection is
based, as we have already said, on the aforementioned report.
With regard to this report, the claimant alleges the lack
of impartiality of the person who signed it, as he is an official of the
Administration, highlighting his lack of objectivity, as it is based on DGT
resolutions, and, in short, the lack of suitability of the expert appointed for
the purpose. However, as we shall see, none of these claims are admissible.
Firstly, with regard to the lack of impartiality of
the appointed expert, it should be noted that the Inspectorate has already
clarified that:
"(...)
the Computer Support Team (EAI) of the Central Delegation of Large Taxpayers
(DCGC) is integrated in the Tax and Customs Control Unit (DCTA) of the DCGC
under the direction of one of the Chief Inspectors of the executive area of the
Unit. The members of the EAI are not assigned to any Inspection Team or to
the Tax Information Technology Department. In general, they provide
technical support to the National Inspection Teams and perform different
functions related to their experience and professional profile, including
expert consultancy on IT issues, responding to requests made by the Unit's
Teams and Units through an internal collaboration procedure. In this specific
case, they are not part of the team that carries out the inspection procedure,
but they prepare a technical report analysing projects within the scope of
their technical and regulatory competences. All EAI officials who draw up these
reports are officials of the A1 group of the 1166 corps (Senior Corps of
Systems and Information Technologies of the State Administration) with
extensive technical and professional experience and who have been carrying out
this type of report for some time now when required, from a technical and
neutral point of view".
This TEAC agrees with the Inspectorate in considering
that the independence of the criteria of the EIA is beyond doubt and that, in
the report produced, there was no influence whatsoever on the actuarial team,
which limited itself to formulating and proposing a strict request for its
drafting, as is generally done with all reports of this type that the IT
Support Team drafts in this respect for all files for which it is required to
do so.
On the other hand, with regard to the suitability of
the appointed expert, it should be noted that the Inspectorate already
includes, in the settlement agreement, a more detailed account of his
professional experience, which, from all points of view, seems sufficient to
guarantee his ability to carry out the work entrusted to him:
"The
Master in Software Engineering referred to was taken at the École Nationale
Supérieure des Télécommunications (ENST - Télécom Paris) and officially named
"Mastère spécialisé en Ingénierie du logiciel". The course lasted a
full academic year and included subjects in all ICT disciplines (DB, SSOO,
Communications, Planning and Management, Analysis and Design, Construction,
Testing, Implementation, Security, etc.) as well as a paid internship in a
company (Oracle France, in an R&D&I department, "Projets
avancées"). ENST is a French public engineering school (Grande École),
being one of the leading French public institutions of higher education and
engineering research in France and arguably the best technology school in
France, providing training in the field of new technologies (Artificial
Intelligence, Blockchain, IoT), information technologies (electronics and
computer science) and communication (networks and telecommunications) and was
founded in 1878. It is now renamed Télécom ParisTech. It is part of the
Conférence des grandes écoles, the Institut Polytechnique de Paris and the
Institut Télécom. Among many other educational institutions around the world,
such as the Polytechnic University of Madrid, it also collaborates with the
Federal Polytechnic School of La PAIS_2na.
-
To complete the above, I would just like to add that Mr Alonso's professional
thesis for this master's degree was awarded the Louis-Leprince Ringuet
Foundation Prize by Siemens France for the best professional thesis from the engineering
schools of the Télécom group (ENST Paris, Télécom Bretagne, INT Gestion and INT
Ingénieurs). The project was based on the "X500-Web generic gateway"
and led to the creation of a start-up in France (Net@way) with the first
generic "SQL-Surfer" tool available for programming and connecting
databases of all types and manufacturers with web applications.
-
In case it is of interest, and given that negative reference is made to it,
apart from the above, it should be added that Mr. Alonso has directed the R+D+i
department in document technology at Wolters Kluwer Spain and has been an
expert consultant-analyst in the same field at the same multinational in
Canada. He has also worked for 25 years in the private and public sector on technological
innovation and systems integration projects, in contrast to the value judgement
made in the paragraph copied from the statement of allegations that
"Neither the activities that this official has developed in his
professional career, according to his curriculum, have to do with IT deduction
or with the development of innovation projects in the field of software, but
rather with the implementation of programmes and technical
maintenance...;".
Furthermore, it is emphasised that, in the detail of each
of the projects in the analysis report (section "Reasoned reports and
capacity to report"), a specific assessment is made to try to ensure that
the technical officer is capable of analysing the project within the limits
established by the information available in each project (in this specific
case, with Reasoned Assessment Reports for Technological Innovation projects)
and with the scope that said officer can analyse according to what is
available.
This TEAC has referred on several occasions to the reports
issued by experts, stating, for example, in resolution RG 5266/2010, that:
"The
issuing of a report at the request of the actuaries, carried out by technically
qualified civil servants who report to the AEAT, in relation to the
classification of certain R&D projects, provides the necessary expert
assistance in specific technical and scientific matters, as required by case
law for a correct assessment of these projects for the purposes of applying the
deductions provided for in the Corporate Income Tax regulations".
The aforementioned decision refers to the Supreme Court
ruling of 15 December 2011 (STS Recurso Casación nº 2446/2009), in which
it adds the following:
"Reference
is made to the technical discretion that governs administrative action,
although it should be specified that this takes place in matters that have to
be resolved, as in the present case, by a judgement based on elements of an
exclusively technical nature "which as such escapes legal control, which
is the only one that can be exercised by the courts and which, naturally, must
be exercised insofar as this technical judgement affects the legal framework in
which it falls, i.e. on the questions of legality that arise in the case, using
all the possibilities that have been set out in the previous paragraph, And
after affirming the presumption of certainty or reasonableness of the
administrative action, based on the specialisation and impartiality of the
bodies established to carry out the qualification. And that this presumption
"iuris tantum" can only be undermined if the infringement or
disregard of the presumed reasonable procedure of the administrative body in
question is accredited, either by misuse of power, arbitrariness or absence of
any possible justification for the criterion adopted, among other reasons,
because it is based on patent error, duly accredited by the party alleging
it".
In short, the TEAC concludes that the person who drew up
the report was fully qualified to carry out the functions entrusted to him/her,
and from this point of view, it does not appreciate the irregularity that the
complainant entity is claiming.
Finally, we do not consider that there is a lack of
rigour or objectivity in the Report for having made references to DGT
consultations, insofar as these are binding on taxpayers and, therefore, must
be taken into account by the bodies responsible for applying taxes, and it
should also be noted that on many occasions they are used by taxpayers
themselves to justify their allegations. Furthermore, as we shall see below,
the report assesses each of the technical aspects of each of the projects
presented in order to be able to deduce, subsequently, whether the expenses
fall within the scope of art. 35.2.b) of the TRLIS or LIS.
4. Response to the allegation: regularisation carried out
by the Inspectorate.
As we have pointed out, the Inspectorate issued the
contested settlement agreement on the basis of the report issued by the EAI
official. This report is based on the information and documentation provided by
the claimant entity, including the certificates and reasoned reports, and, on
the basis thereof, analyses each of the projects indicated, reaching the
corresponding conclusions, essentially with regard to which of the total
expenses incurred in each of the projects can be taken into account when
determining the basis for the deduction for the year in question.
Thus, first of all, a description of the project and the
lines of action, including economic data, as well as the planning of the
project, is given, followed by an analysis of the detailed expenses separately
for each project and activity, reviewing each of the external collaborations,
their specific contract, the invoices, the reports, etc. Finally, it ends with
the specific and detailed "valuation" section of this project, in
which it includes the valuation of the expenses incurred for its development,
for the purpose of determining the conceptualisation of the same in one of the
four types of elements that can be valued as expenses in technological
innovation, according to art. 35.2.b).
In short, what the IAC does is to analyse, in detail, the
relationship between the expenses derived from the activities of the projects
analysed, respecting in any case the global qualification of the IT project
given by the Motivated Reports that link it. In no case is a reclassification
of the activities carried out made, as the complainant would have us believe.
It can be seen, for example, that there are contracts for
which expenditure appears in the drafts but which are explicitly excluded in
the text of Art. 35.2b. Thus, for example, in the project .... (Infrastructure
and framework of the XZ group information system), whose objective is
the "design and development of new tools and functionalities to facilitate
the management of documentation and information from the different sites",
which is understood to involve the incorporation of new functionalities and
tools into an existing framework (already in use and in production). However, a
disparity of objectives materialised in the lines of action mentioned within
the same (also stated in the section on additional assessments of the Reasoned
Report) and also contracts whose work is carried out outside Spain, EU member
states or the European Economic Area, but whose expenses are included in the
total amount of the project. This is the case, for example, of the contract for
the "Outsourcing of XZ Data Processing Centres Project in
COUNTRY_2":.... And, therefore, after the detailed explanation, in the
analysis report of XZ's projects, the costs for this collaboration are
disregarded.
Or, to give another example, given that it is in this
same project, in the case of the company "NNP", a
collaboration is detected for the objective of consolidating information
technology infrastructures and it is specified in the launch in multiple
countries of the work prior to migration in each country. The following
countries are indicated in the timetable of the project with this external
collaborator: Colombia, Ecuador, PAÍS_9, Chile. Furthermore, the
"Pre-migration support" contract does not fit in with the activity
described in the project, "New data processing centre as part of the
infrastructure", since, although it is true that the start-up of a DPC
requires prior work, the reasoned report does not mention that the migration of
the current DPCs or the prior work is included in this project. On the other
hand, the activity described in this contract does not correspond to any of the
four types of elements that can be valued as deductible expenses in
Technological Innovation.
By virtue of the above, the Report concluded that certain
expenses apparently incurred in each project should not form part of the
deduction base, and the Inspectorate used this to make the corresponding
adjustment in the calculation of the deduction.
By virtue of the foregoing, and we quote the conclusions
reached in the contested settlement agreement, which we share in their
entirety:
"In
this regard, it should be stated that it is a fact that production processes do
not only refer to the production of tangible goods, but can also be extended to
the production of intangible goods and services. But this does not mean that
the extension should be made to the engineering of all the company's business
processes (in addition to production processes), nor that what is considered as
a distinct field of activity by the law, industry or academia (design
protection law, international classifications, specialised journals,
procurement experts and technology experts) should be qualified as process
engineering for these specific projects: computer science/software engineering
versus industrial design and process engineering.
If
these particular projects, in their submitted binding reports, have been
qualified by an expert as "computer science" (code ... 1203) instead
of being qualified as "process engineering" (code ... 331005) or
"process specifications" (code ... 331006), the logical conclusion is
that the expert considers the project to be a computer science project and not a
process engineering project.
The
company quotes Tomás Maldonado's definition of industrial design from a lecture
entitled Education for design presented by the designer in 1961 (almost ten
years before the term "software engineering" was first used at the
NATO conference). One could hardly infer that Maldonado's words could then
refer to a discipline that did not even exist (in 1961 software production was
still in its infancy and even the oldest programming languages known today were
barely five years old). It speaks of formal properties of industrially produced
"objects", which we might consider even more restrictive than the
definition accepted by the technical EAI (which includes, among others,
software that is embedded in mass-produced products or screens and graphical
interfaces that can be protected as industrial design according to the Locarno
classification).
(...)
With
regard to the Oslo Manual on technological innovation, it should be pointed out
that this manual applies to the definition of innovation, and that the
innovative qualification is already binding for the Inspectorate. What is in
doubt is whether or not the expenses can be conceptualised as industrial design
or production process engineering (as alleged by the entity).
(...)
With
regard to the valuation of a project, what is done has nothing to do, as
indicated in the allegations, with reclassifying what is indicated in the VMI
or not considering expenses related to industrial design and production process
engineering activities. As has already been seen above, it is up to the tax
authorities to check the basis for the deduction, so the expenses and their
conceptualisation as one of the four types of elements that can be assessed as
Technological Innovation expenses in accordance with article 35.2.b of the LIS
are checked and assessed:
1.
Technological diagnosis activities aimed at the identification, definition
and orientation of advanced technological solutions, whatever their
outcome.
2.
Industrial design and engineering of production processes, including the
conception and preparation of plans, drawings and supports intended to
define the descriptive elements, technical specifications and operating
characteristics necessary for the manufacture, testing, installation and
use of a product, as well as the preparation of sample books for textiles,
footwear, tanning, leather goods, toys, furniture and wood.
3.
Acquisition of advanced technology in the form of patents, licences,
know-how and designs. Amounts paid to persons or entities related to the
taxpayer shall not give entitlement to the deduction. The base corresponding to
this concept may not exceed the amount of 1 million euros.
4.
Obtaining the certificate of compliance with quality assurance standards of
the ISO 9000 series, GMP or similar, not including the costs for the
implementation of these standards.
Both
Royal Decree 1432/2003 and the LIS itself state that the amount of expenses
incurred that could constitute the basis for the deduction must be duly
documented, directly related to the activity and, in general, in accordance
with current tax legislation.
In
binding consultation V1521-06 of the DGT, cited in the Report analysed, it was
stated that the expenses generated in the general phases of the development of
an IT system (specification of requirements, analysis, design, construction,
testing, installation, support and maintenance) do not form part of the
deduction base for technological innovation. However, this consultation is
prior to the amendment of the article that introduced the concept of
technological diagnosis expenditure, which makes it possible to assess those
activities aimed at identifying, defining and guiding technological solutions.
In addition, on the other hand, there is also the concept of Industrial Design
and Production Process Engineering expenditure which, within the scope of both
disciplines, allows for the valuation of design activities and the preparation
of plans, drawings and supports aimed at defining the necessary descriptive
elements, technical specifications and operating characteristics. Specifically,
with the information that is available for each project, the performance of the
technological diagnosis is assessed in a broad manner, for example also
understanding as such the definition of requirements (requirements
specification documents, collection of user stories or collection of use cases)
to identify, define and guide technological solutions, as well as the part of
the design of processes that could serve exclusively to define descriptive
elements, technical specifications and operating characteristics necessary for
an information system.
In
any case, very importantly, and in this regard, it should be recalled that the
second paragraph of art.35.2.a also states the following:
"This
activity shall include the materialisation of new products or processes in a
plan, scheme or design, the creation of a first non-marketable prototype,
initial demonstration projects or pilot projects,
including those related to animation and video games and samples of textiles,
footwear, tanning, leather goods, toys, furniture and wood, provided that
they cannot be converted or used for industrial applications or commercial
exploitation".
In
other words, this IT activity will be considered as long as its results cannot
be converted or used for industrial applications or commercial exploitation in
a production environment. Evidence that the binding reasoned reports only
establish the innovative nature of projects with expenses "which could
constitute the deductible base of the project" is that in practice they
routinely include expenses that contradict the conditions of the second
paragraph of Article 35(2)(a) of the TRLIS. This happens because the reasoned
reports report on the R&D&I classification of the project, without
verifying the non-convertibility of the deliverables, at least in all cases of
this analysis.
(...)
Also
in the text of the binding consultation V0806-09 of the project for the
development of a demonstrator for advanced services on wireless networks,
mentioned in the submission, it is stated that it concerns 'all those
prototypes that the company considers necessary in the experimental
development phase (...;)'. It also states that 'Similarly, if, once the
experimental development phase is completed, the prototype is used as a normal
production unit, either directly or after conversion to the entity's production
conditions, the creation of that prototype would not give rise to the
application of the deduction for technological innovation activities provided
for in Article 35.2 of the TRLIS'. Therefore, it is understood that the
criterion used by the EAI technician that even a prototype or pilot must be
experimental, in order to obtain information and requirements and unknown data,
to use it, learn from it and not develop it (neither evolutionarily nor
incrementally) to put it into production or in conditions to put it into
production.
Therefore,
with these considerations, whether regulatory, certification or doctrinal, it
is understood that development, construction, testing, integration,
implementation, etc. activities are limited to systems that are used
corporately in production (for industrial applications or for commercial
operation), which is basically the case of XZ projects.
With
regard to the judgment of the Audiencia Nacional of 4 July 2019, (...) it
should be noted that this judgment was handed down in a case that is not
"similar" in any way to these proceedings. In that case, the
inspection did not accept the R&D&I deduction for an IT project on a
"customer management system", as it considered, based on a report by
the EAI of the DCGC, that it could not be classified as a technological
innovation. This report does not contain an assessment and verification of
detailed expenses as in the technical report in question, as the company did
not initially submit any type of reasoned report assessing the project, so that
the initial EAI report, without any link to classification as R&D or IT,
merely dismissed the IT nature of the project, limiting itself to indicating
its lack of "novelty" and the lack of "individualisation of
expenses by project". This case is in no way similar to the present case,
in which all the projects have a reasoned report and none of them has been reclassified;
on the contrary, the analysis, evaluation, conceptualisation and verification
of detailed expenditure has been carried out for each of the selected projects
submitted.
In
order to have a more complete view of the judgment, the following should also
be added:
-
At no time during the inspection did any dispute arise as to the basis for the
technological innovation deduction to be taken into account in relation to the
"Customer Management System" project, and the taxpayer is of the
opinion that it would be inappropriate for such a dispute to arise at a later
stage in the proceedings.
-
The Chamber requested a report from the Ministry of Economy and Competitiveness
on whether the project met the scientific and technological requirements for
the purposes of applying the research and development activities referred to in
Article 35.2 of the TRLIS. The judgment reproduces part of the content of this
report, highlighting the following:
"Thus,
this Directorate General can only give its opinion on the
scientific-technological qualification, but not on the expenditure (this being
the exclusive competence of the AEAT). This report is issued outside the
procedure established in the aforementioned Royal Decree, so it will not be
considered a "binding reasoned report". However, in a similar way to
the IMV's, it will only include the scientific-technological qualification, but
not the expenditure that could form part of the deductible base".
-
It should always be borne in mind, as the judgment states and as has been
indicated on several occasions throughout this text, that the assessment of the
expenditure is the exclusive competence of the AEAT and the EAI analysis report
collates, analyses and assesses such expenditure in detail COUNTRY_2 using as a
starting point the linked reasoned reports available in the case in question.
-
Once the judge accepted the innovative nature of the project, the AEAT was not
subsequently asked to assess the basis for the deduction and the expenses
provided by the taxpayer were accepted without further discussion, although the
same ruling establishes the exclusive competence of the AEAT in the analysis of
those expenses.
-
The ruling makes it clear that the binding reasoned reports must be limited to
stating the scientific-technological qualification, not the expenditure that
could form part of the deductible base".
TWENTY SIXTH.- The NEXT QUESTION raised concerns the
CONDEMNATION OF A LOAN by the entity XZR in favour of one of its
employees, Mr. ....
1. Description of the facts.
Specifically, from the facts in the file, it appears
that, on 14/04/2005, the entity XZR granted Mr. ..., an employee of the
entity in PAÍS_4, a loan in the amount of 1,500,000 Mexican pesos, for the
purchase of a home.
On 01/06/2016, a debt forgiveness agreement was provided,
stating that, at that date, a total of 938,299 Mexican pesos (equivalent to
45,923.91 euros) remained to be repaid, an amount that Mr. ... acknowledges.
According to the agreement, the institution waives the aforementioned debt to
Mr. ..., expressly exonerating him from his obligation to pay.
The remission was apparently conditional on neither of
the following two events occurring within 3 years:
(i) termination for any reason of the employment
relationship between XZR and Mr. ...,
(ii) the application by Mr. ... for a new loan from the
institution.
The occurrence of any of the above events would render
the debt condemnation null and void and, at that moment, the debt would
automatically become due and payable.
Mr. ... expressly accepted the condemnation of the
aforementioned debt and the condition on which it was granted.
With regard to the aforementioned facts, in the
settlement agreement, the tax inspectorate states that the remission of the
aforementioned debt must necessarily be classified as a donation which, in
accordance with art. 15.e) LIS, constitutes a non-deductible expense for IS
purposes.
However, the claimant argues against this conclusion
reached by the Inspectorate, insofar as it considers that the remission made
lacked the element of gratuitousness required for a gift or donation, since it
cannot be said that it arose from the unilateral will of the taxable person,
but was the result of a negotiation in which both parties benefited.
2. Applicable legislation.
On the basis of the facts set out above, it should be
noted that the TEAC agrees with the Inspectorate: it has been accredited that
the debt forgiveness carried out by the entity in favour of its employee in
2016 should be classified, for tax purposes, as a liberality, and, therefore,
its status as a deductible expense should be denied, by virtue of article 15 of
the LIS, which states:
"Article
15. Non-deductible expenses.
They
shall not be considered as tax-deductible expenses:
(...)
e)
Gifts and donations.
This
point (e) shall not include expenditure on services to customers or suppliers,
nor expenditure in accordance with customary practice in respect of company
staff, nor expenditure incurred to promote, directly or indirectly, the sale of
goods and the provision of services, nor expenditure correlated with income.
However,
expenses for services to customers or suppliers are deductible up to a limit of
1 per cent of the net turnover for the tax period.
Nor
shall remuneration to directors for the performance of senior management
functions, or other functions derived from an employment contract with the
entity, be understood to be included in this point e).
(...)"
3. Conclusion: reply to the allegation.
We have already said that we agree with the Inspectorate
in considering that the remission of a debt to an employee has to be considered
as a liberality without, in any case, being covered by the exception
contemplated in the aforementioned article 15.e) LIS, as it has not been
accredited, in any way, that it was something that "in accordance with
custom and practice" was carried out with regard to the company's staff; on
the contrary, and as is usual in this type of operation, the remission of the
debt was of an unusual or extraordinary nature, as can be deduced, moreover,
from the accounting classification of the expense that was made by the company
itself, recording it in account 679001 "Exceptional expenses and other
losses".
Although it is true, according to the Inspectorate, that
the XZ Grupo Asegurador Agreement in force for the years audited
establishes in Article 40, as a social benefit, the granting of loans for home
purchase and repair expenses, with the maximum amounts for home purchase
expenses being 6,010.12 euros, the repayment period being 5 years and the
applicable interest rate being the legal interest rate minus 25%. The granting
of the loan could fit into what would be considered "uses and customs of
the institution", but, in no case, would this correspond to the
possibility of remission of the loans granted.
Thus, in the STS of 10/02/2011 (rec.2464/2006) cited by
the Inspection, the High Court considers that:
"It
follows from elementary logic that the waiver or remission of part of the
credit is a partial free disposal of the debt in favour of the debtor, a waiver
that lacks a retributive function and for which the creditor has not obtained
any consideration, and the legal qualification is imposed, as the court ruling
rightly points out in reference to article 1187 of the Civil Code, which
"refers to the donation as a paradigmatic free business". In short,
the interpretation made by the judgement in the sense of considering it to be a
liberality is legally coherent. The references to the nature of related
entities included in the lower court judgement in no way alters the conclusions
reached, as these must be understood in more detail".
In support of her claim, the claimant refers to the DGT
consultation of 24 February 2021. The aforementioned consultation, V0328-21,
refers to the ISD and IRPF treatment of the extinction of a condominium, in
which the claimant is awarded a pharmacy office and undertakes to compensate
the other co-owners with a certain amount of money to be paid over 20 years.
"In
the transaction in question, the applicant intends to reach an agreement with
its creditors in which they will waive part of the debt in exchange for advance
payment of part of the money owed. However, it is not entirely true that part
of the outstanding debt is waived without receiving anything in return, i.e.
without consideration, and therefore for profit or as a gift. In this sense, it
seems that the waiver cannot be considered as a purely gratuitous waiver, as
the creditors are not simply waiving the debt, but waiving it as part of a
legal transaction in which they receive part of the outstanding debt in
advance. The transaction benefits both parties.
The facts described in the aforementioned consultation
have nothing to do with the facts and circumstances of the present case, so the
conclusion reached therein cannot be extrapolated, as the complainant claims,
to the issue under analysis.
In short, it is clear from the contract and from the
facts set out above that the debt was ordered on the basis of the unilateral
will of the claimant, which has at its disposal an asset, the claim against
the employee, to whom only two conditions are imposed, namely, to remain in the
company and not to apply for a new loan for the following three years.
Therefore, we agree with the adjustment made by the
tax authorities that the aforementioned remission should be classified as a
donation and, therefore, is not a tax-deductible expense in the 2016 tax year.
TWENTY SEVENTH.- LASTLY, the claimant alleges the right
to the effective payment of late payment interest derived from the amounts unduly
paid in respect of the second and third instalment payments for the 2016
financial year.
On 19/12/2018, the Seventh Section of the
Contentious-Administrative Chamber of the National High Court raised the
question of unconstitutionality 1021-2019 regarding the sole article of Royal
Decree-Law 2/2016 (which added the aforementioned DA 14ª to the LIS), for
possible violation of articles 86.1 (affecting the duty to contribute) and 31.1
(violation of the principle of economic capacity), both of the Spanish
Constitution.
On 01/07/2020, the Constitutional Court handed down
judgment no. 78/2020 declaring the unconstitutionality and nullity of Royal
Decree-Law 2/2016, of 30 September, having affected, by means of the
exceptional regulatory instrument provided for in art. 86.1 EC, the essence of
the duty to contribute to the support of public expenditure set out in article
31.1 EC. This led to the consideration as undue of the income from the
instalment payments of corporate income tax made in accordance with the
fourteenth additional provision of the LIS during the validity of said Royal
Decree-Law (those corresponding to the second and third instalment payments of
2016, and the first, second and third instalment payments of 2017). The
aforementioned judgment, however, did not rule on the other possible harm
invoked (that of the principle of economic capacity under Article 31.1 EC),
stating that the upholding of the first ground of unconstitutionality raised by
the court (the violation of the material limit provided for in Article 86.1 EC)
made it unnecessary.
Thus, the aforementioned judgment of the Constitutional
Court ruled exclusively with respect to Royal Decree-Law 2/2016, and only with
respect to the violation of the material limit provided for in Article 86.1 EC,
and did not enter into the other possible violation also invoked (that of the
principle of economic capacity in Article 31.1 EC) as it considered it
unnecessary to do so since the first ground of unconstitutionality alleged by
the court was upheld.
This is clear from Legal Basis 1:
"1.
Subject matter of the proceedings: doubt raised. As set out in the background,
for Section 7 of the Contentious-Administrative Chamber of the National High
Court, the sole article of Royal Decree-Law 2/2016, of 30 September,
introducing tax measures aimed at reducing the public deficit - which added a
new fourteenth additional provision (Modifications to the legal regime of
instalment payments) to Law 27 /2014, of 27 November, on Corporate Income Tax
(hereinafter, DA 14ª LIS) - could be contrary to arts. 86. l and 31.1, both of
the Constitution (i) for having been approved by means of a regulatory
instrument - the decree-law - which cannot affect the duty to contribute to the
support of State expenditure and (ii) for subjecting unreal economic capacities
to taxation in payments on account of corporation tax."
Also from Legal Basis 6:
"6.
Scope of the declaration of unconstitutionality. The sole article of Royal
Decree-Law 2/2016, of 30 September, establishing tax measures aimed at reducing
the public deficit, which introduced the 14th additional provision
(Modifications to the legal regime of instalment payments) of Law 27/2014, of
27 November, on Corporate Income Tax, is unconstitutional and void, having
affected, by means of the exceptional regulatory instrument provided for in
Article 86.1 EC, the essence of the duty to contribute to the support of public
expenditure set out in Article 3 1 . 1 EC.
Section
1 of Article 39 LOTC establishes that "[w]hen the judgement declares
unconstitutionality, it shall also declare the nullity of the contested
precepts, as well as, where appropriate, that of those others of the same law,
provision or act with force of law to which it should extend by connection or
consequence". This provision allows this Court, both in appeals and in
questions of unconstitutionality (SSTC 81/2003, of 28 April, FJ 7; 1 87/2004,
of 21 October; 255/2004, of 22 December, and 1 54/20 15, of 9 July, FJ 7, among
many others), to extend the declaration of unconstitutionality of a precept
made in a ruling to those other precepts of the same rule with force of law
that may be affected "by connection or consequence".
Once
the unconstitutionality and nullity of the sole article of Royal Decree-Law
2/2016, of 30 September, has been declared, the final provisions of this
regulation, by establishing the competence title under which it has been issued
(first final provision) and its entry into force (second final provision), are
devoid of purpose, and therefore the declaration of unconstitutionality and
nullity should be extended to these provisions.
Consequently,
Royal Decree-Law 2/2016 of 30 September is unconstitutional and void in its
entirety.
Prior
to the ruling, it is necessary to make two final clarifications: (i) The first
ground of unconstitutionality alleged by the court (the violation of the
material limit provided for in art. 86.1 EC) makes it unnecessary to consider
the other possible violation also invoked (that of the principle of economic
capacity in art. 3.1.1 EC). (ii) Situations cannot be considered reviewable on
the basis of this judgment, nor those decided by a judgment with the force of
res judicata (art. 40.1 LOTC), nor in this specific case, due to the
requirement of the principle of legal certainty (art. 9.3 C.E.), can they be
considered consolidated in administrative proceedings because they have not
been challenged. 40.l LOTC), nor, in this specific case, by requirement of the
principle of legal certainty (art. 9.3 C.E.), those consolidated in
administrative proceedings for not having been challenged in time and form
[SSTC 73/2017, of 8 June, FJ 6; 1 5 1 /2017, of 21 December, FJ 8; 61/2018, of
7 June, FJ 1 1 1 ; 76/201 8, of 5 July, FJ 9 and 126/2019, of 3 1 October, FJ 5
b)]."
And finally, the Judgment:
"In
view of the foregoing, the Constitutional Court, by the authority conferred on
it by the Constitution of the Spanish nation, has decided to uphold the
question of unconstitutionality no. 1021-2019, brought by the Seventh Section
of the Administrative Chamber of the National High Court, and, consequently, to
declare that Royal Decree-Law 2/2016, of 30 September, is unconstitutional and
void, with the effects set out in the sixth legal basis."
As a result of the Constitutional Court's Ruling of
01/07/2020 set out above, the rectification of the second and third instalment
payments for the 2016 tax year must be accepted as they were made while Royal
Decree-Law 2/2016 was declared unconstitutional and the refund of the financial
effect caused by such tax items, i.e, the late payment interest from the date
on which each of the instalments for that year were paid until the submission
of the IS settlement corresponding to that instalment payment or, if
applicable, until the time at which the amount resulting from that settlement
was returned, but without it being appropriate to add the late payment interest
on that interest from the day following the date on which the return of the
amounts paid is agreed until the final return of their payment is ordered.
In this regard, it should be recalled that Article 32 of
the LGT stipulates the following in relation to undue revenues
"1. The Tax Administration shall return to the
taxpayers, offenders or their successors and assignees, the revenues that have
been unduly paid into the Public Treasury on the occasion of compliance with
their tax obligations or the payment of penalties, in accordance with the
provisions of Article 221 of this law.
2.
The Tax Administration shall pay the interest for late payment regulated in
article 26 of this Law with the refund of undue payments, without the need for
the taxpayer to request it. For these purposes, late payment interest shall
accrue from the date on which the undue payment was made until the date on
which payment of the refund is ordered.
For
the purposes of calculating the interest referred to in the previous paragraph,
delays in the procedure for reasons not attributable to the Administration
shall not be calculated. In the case where a refund is agreed in an inspection
procedure, for the purposes of calculating the interest, the days referred to
in section 4 of Article 150 of this Law and the extension periods referred to
in section 5 of the said Article shall not be taken into account.
3.
When a refund is made of an undue payment derived from a self-assessment paid
in several instalments, it shall be understood that the amount refunded was
paid in the last instalment and, if there is not a sufficient amount, the
difference shall be considered to have been paid in the immediately preceding
instalments".
For its part, with regard to interest for late payment,
Article 26 of the LGT stipulates:
"1.
Interest for late payment is an ancillary benefit that will be demanded from
taxpayers and offenders as a consequence of making a payment after the deadline
or filing a self-assessment or return resulting in an amount to be paid after
the deadline established for this purpose in the tax regulations, the
collection of an unjustified refund or in the other cases provided for in the
tax regulations.
The
demand for interest on tax arrears does not require prior notice from the
Administration or the existence of a culpable delay on the part of the obligor.
2.
Interest for late payment shall be due, inter alia, in the following cases:
a)
When the period established for payment in the voluntary period of a debt
resulting from a settlement made by the Administration or the amount of a
sanction expires without the payment having been made.
b)
When the period established for filing a self-assessment or return expires
without it having been filed or if it has been filed incorrectly, with the
exception of the provisions of Article 27(2) of this Act relating to the filing
of late returns without prior notice.
c)
When the enforcement of the act is suspended, except in the case of appeals and
claims against penalties during the time that elapses until the end of the
voluntary payment period opened by the notification of the decision that puts
an end to the administrative procedure.
(d)
when the enforcement period begins, except as provided for in Article 28(5) of
this Law in respect of interest for late payment when the enforcement surcharge
or reduced enforcement surcharge is payable.
(e)
when a request for recovery of debts owed by other States or international or
supranational entities is received in accordance with the rules on mutual
assistance, unless otherwise provided for in those rules.
f)
When the taxpayer has obtained an unjustified refund, unless he voluntarily
regularises his tax situation without prejudice to the provisions of Article
27(2) of this Law regarding the filing of late returns without prior notice.
3.
Interest for late payment shall be calculated on the amount not paid within the
time limit or on the amount of the refund improperly collected, and shall be
due for the period during which the obligor is in arrears, except as provided
for in the following paragraph.
4.
Interest on late payment shall not be charged from the time when the tax
administration fails, for a reason attributable to it, to meet any of the
deadlines set in this Act for reaching a decision until the decision is issued
or an appeal is lodged against the presumed decision. Among other cases,
interest on late payment shall not be charged from the time when the maximum
periods for notifying the decision on requests for compensation, the settlement
act or the decision on administrative appeals are not met, provided that, in
the latter case, the suspension of the appealed act has been agreed.
The
provisions of this paragraph shall not apply to failure to comply with the time
limit for deciding on requests for deferment or payment by instalments.
5.
In cases where it is necessary to make a new settlement as a result of another
settlement having been annulled by an administrative or judicial decision, the
acts and formalities not affected by the cause of annulment shall be retained
in their entirety, with their content being maintained in full, and interest
for late payment shall be charged on the amount of the new settlement. In these
cases, the starting date for calculating interest for late payment shall be the
same as that which, in accordance with the provisions of paragraph 2 of this
article, would have corresponded to the cancelled settlement and the interest
shall accrue until the new settlement has been issued, and the end of the
calculation may not be later than the maximum period for executing the
resolution.
6.
The interest for late payment shall be the legal interest on money in force
throughout the period in which it becomes due, increased by 25 percent, unless
the General State Budget Act establishes a different rate.
However,
in cases of deferment, instalments or suspension of debts guaranteed in full by
a joint and several guarantee of a credit institution or mutual guarantee
company or by a surety insurance certificate, the interest payable for late
payment shall be the legal interest rate".
Therefore, late payment interest must be paid to the
obligor for the overpayments for the second and third periods of 2016 from the
date on which they were paid until the date on which the amount resulting from
the settlement of the year was returned, but without late payment interest on
such interest from the day following the date on which the refund of the
amounts paid is agreed until the final return of their payment is ordered
(anatocism).
EIGHTEENTH.- On the other hand, the claimant alleges the
inappropriateness of the adjustments made to the IS tax base for 2016, by application
of section 3 of the Sixteenth Additional Provision of the LIS, for the reversal
of tax-deductible impairments in 2012 and previous years, due to the unconstitutionality
of RDL 3/2016.
The undue income should be refunded, together with
interest for late payment in accordance with the provisions of art. 32.2 LGT,
calculated from the date on which the group's IS was filed in 2016 until the
date on which the settlement is issued.
The claimant focuses the present allegation on defending
the unconstitutionality of the aforementioned RDL 3/2016, for violating the
principles of economic capacity and equality, recognised in articles 31.1 and
14 of the Constitution, and the principles of legal certainty and legitimate
expectations of article 9.3 of the EC, among others.
Well, we must indicate, as the claimant points out in the
statement of allegations, firstly, with regard to Royal Decree-Law 3/2016, that
the National High Court, by Order dated 23/03/2021 (appeal no. 575/2017),
agreed to raise a question of unconstitutionality in relation to the same
before the Constitutional Court "for the possible violation of the
provisions of Article 86.1 in relation to article 31.1 of the Spanish
Constitution"; however, said Court has recently rejected the aforementioned
question of unconstitutionality, not being able to extend the effects of the
ruling of the Constitutional Court of 01/07/2020 referring to RD Law 2/2016 to
Royal Decree-Law 3/2016, as this regulation is not the object of said question
of unconstitutionality (number 1021-2019).
The unconstitutionality of the rules is an issue on which
this Central Court can say nothing by virtue of its reiterated doctrine
contained, among others, in its decisions of 25/07/2013, 08/05/2014 and
11/09/2014 (RG 4946/2012, 5933/2010 and 5271/2012, respectively), according to
which, in accordance with the provisions of Article 226 of the LGT, the scope
of material competence of the economic-administrative bodies is limited to
judging the acts of application of taxes, while the review of questions of
legality of the rules regulating them is attributed exclusively to the bodies
of the Contentious-Administrative Jurisdiction. Thus, the
Economic-Administrative Courts can only rule on whether or not the
administrative acts dictated in tax matters are in accordance with the legal
system, a competence which in no case includes the review of the regulations
applied to produce the contested acts, and the review of the constitutionality
of the laws corresponds to the Constitutional Court, either by means of an
appeal of unconstitutionality or amparo (Article 27 of Organic Law 2/1979 of
the Constitutional Court, in relation to Article 161 of the Spanish
Constitution), and the prosecution of the legality of general, governmental or
administrative provisions, to the contentious-administrative jurisdiction, by
means of the lodging of the appropriate appeal (Article 112.3 of Law 39/2015,
of 1 October, on the Common Administrative Procedure of Public Administrations
and Articles 25 and 26 of Law 29/1998 on Contentious-Administrative
Jurisdiction, all in relation to Article 106 of the Spanish Constitution).
Consequently, given that in the present case the company
is invoking a series of CAPAS_2s to deduce the unconstitutionality of certain regulatory
precepts, and given that this TEAC cannot pronounce on the possible illegality
or unconstitutionality of the rules it has to apply, and must abide by the
provisions of these rules until they are repealed, modified or declared illegal
or unconstitutional, we have to reject the claimant's allegations on this
point, without going into detail on this issue as we are not competent to hear
it, and the company should, if appropriate, raise the alleged
unconstitutionality of the fifteenth additional provision of the LIS and Royal
Decree-Law 3/2016, before the competent body of the contentious-administrative
jurisdiction.
Consequently, the arguments of the interested party on
this point should be rejected.
TWENTY-NINTH.- In short, and by way of a summary of the
conclusion reached by this TEAC, in accordance with what is set out in this
Resolution, we rule:
DISMISS the claims processed under RG 3631/2020 (directed
against the IS tax assessment notice 2013-2016, with reference number A23
...53), RG 3636/2020 (directed against the IS tax assessment notice 2013-2015,
with reference number A23 ...93) and RG 5845/2021 (directed against the IS tax
assessment notice 2016, with reference number A23 ...66).
TO PARTIALLY AMEND, in accordance with what is set out in
FD TWENTY SEVENTH of this decision, the claim processed under RG 0598/2021
(directed against the IS 2016 settlement agreement, with reference number A23
...11).
In the light of the above
This Economic-Administrative Tribunal agrees to AMEND IN
PART the claim in the terms indicated in this resolution.