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Transfer Pricing: Documentation & Penalties |
| 16 / 3 / 2010 |
The Spanish legislation for Transfer Pricing has undergone major changes recently. Changes were introduced by Law 36/2006 for Fiscal Fraud Prevention and developed by the Royal Decree 1793/2008, November 3rd, which modified the Corporate Tax regulation.
1. Documentation Requirements
- Documentation must be presented at the Tax Administration from the last day to file Corporate Tax onwards.
- Documentation will refer to the tax period in which transactions between related parties took place, but it can be used subsequently, with the necessary amendments.
Two types of documentation are required:
- Documentation regarding the group to which the taxpayer belongs (Master File)
- Taxpayer specific documentation (Country Specific File)
The documentation requirements will be simplified or not be requested, although the valuation will be needed, for the following transactions:
- Between entities of the same group which transactions volume is under € 8M (small size entities)
- Between entities of the same consolidated tax Group
- Between members of a Joint Venture
- Transactions carried out in takeover bids or initial public offerings
2. New Penalty Regime
Tax Offense
- Failure to deliver the required documentation in a complete and accurate manner, missing data or including false information (even if value adjustment exist)
- If the market value deducible from the documentation does not match the value declare in the Corporate Tax, Income Tax or Income Tax for Non-residents declaration.
The Taxpayer can be fined even if there is not economic damaged for the Tax Administration
Penalties
- If value adjustment is requested: fine of € 1,500 per omitted data and € 15,000 per group omitted, incomplete or false data.
- If value adjustment is not requested: fine proportional to 15% of the adjustment needed (even if there is not economic damage to the Tax Administration). With a minimum of € 3,000 per omitted data and € 30,000 per group omitted, incomplete or false data.
Summary
|
Tax Administration |
Penalty (*) |
|
|
Complete Documentation |
|
|
|
Incomplete, inaccurate or false documentation |
|
15% of adjustment with a minimum of:
|
Reduction: Art. 188.1 LGT: 50% Agreed Minutes; Art. 188.2 LGT: 30% Consent; Art. 188.3 LGT: 25% Rebate for prompt payment
Example
Minimum penalty for a group of companies unable to provide the mandatory documentation.
|
Group Mandatory Documentation (Master File) |
|
Penalty (€) |
Taxpayer Mandatory Documentation (Country Specific File) |
|
Penalty (€) |
| General description of the group organizational, legal and operating structure | GD | 15,000 | Identification of the taxpayer and the entities or people with whom he carries out the transaction | D | 1,500 |
| Identification of the different group entities | D | 1,500 | Detail description of the transaction (nature, characteristics, amount) | D | 1,500 |
| General description of transactions within the group entities | GD | 15,000 | Comparability analysis | GD | 15,000 |
| General description of the activity and risk assumed by each group entity | GD | 15,000 | Pricing method, reasons that justify the election, how it is applied and the specification of value intervals | GD | 15,000 |
| Description of intangible assets and benefits obtained from its use | D | 1,500 | Criteria followed to split the services provided by the group to related parties or persons and the corresponding agreements | GD | 15,000 |
| Description of the group transfer pricing policy | GD | 15,000 | Cost split agreements | GD | 15,000 |
| List of cost split and services agreements signed between the group entities, when they affect the taxpayer. | D | 1,500 | Any other information used by the taxpayer to determine the price of his related party transacations. | GD | 15,000 |
| List of advance pricing agreements | D | 1,500 | |||
| Group annual report | GD | 15,000 | |||
| Total Penalty | 81,000 | Total Penalty | 78,000 |
D: data GD: group data
If the Tax Administration also needs to adjust the value the penalty will be increased by 15% of the difference between the Group and Administration value.
3. Market Value
To determine market value it is mandatory to do a comparability analysis which compares related party transactions with the same type of transactions between non-related parties. The comparison takes into account the following issues:
Five factors of comparability:
- Characteristics of goods and services
- Functional analysis (functions undertaken, assets employed, risks assumed)
- Contractual terms
- Economic and commercial aspects (markets)
- Commercial strategy
The existence of:
- Internal Comparables
- External Comparables
In the case of external comparables, identification of source of information and its reliability:
- Database of financial statements (SABI, AMADEUS, ORBIS, OSIRIS)
- Database of executives and administrator’s salaries
- Database of intangibles
- Other public information
Pricing method:
- Comparable non-controlled price (CUP)
- Cost Plus
- Resale Price
- Profit split
- Transactional Net Margin (TNMM)
4. Secondary Adjustment
The Royal Decree provides two ways for a secondary adjustment where the inter-company transaction value differs from market value depending on the person that benefits from the difference (shareholder or entity).
Depending on the transaction and situation of the related parties the fiscal treatment can vary:
| Direct Related Party | Received Income | Tranfered Income |
| Society | Contribution of net equity | Benefit distribution (non deductible) |
| Partner (Inheritance Tax, Income Tax, Income Tax for Non-residents) | Dividends | Higher value of investment |
| Administrator |
Employment income; Investment income ; Deductible expenses |
Benefit distribution (non deductible) |
| Indirect related party | Received Income | Transfered Income |
| Kinship, Related party | Employment income, Capital Gain; Income | Deductible expense; Donation (non deductible) |
| Related party | Contribution of net equity | Benefit distribution (non deductible) |
| Partner (Inheritance Tax, Income Tax, Income Tax for Non-residents) | Dividends | Higher value of investment |
| Administrator | Employment income; Investment income (partner) | Deductible expense; Benefit distribution (non deductible) |
| Kinship | Employment income; Capital gain | Deductible expense; Donation (non deductible) |
Example
A society named "A" share 50% of a society named "B". "A" sales to "B" merchandise that cost €100,000 which market value price between independent parties is of € 500,000 and the its cost € 50,000. "B" sales to a third party "C" the same merchandise for € 1,000,000.
| Accounts of A | Euro | Euro | Accounts of B | Euro | Euro | ||
| 43 | Clients | 100,000 | 40 | Providers | 100,000 | ||
| 70 | Sales | 100,000 | 60 | Purchases | 100,000 | ||
| Reclasification by Tax Administration: | |||||||
| 24 | Share in Y | 200,000 | 118 | Partners contribution | 200,000 | ||
| 6 | Donation (non deductible) | 200,000 | 60 | Purchases | 400,000 | ||
| 70 | Sales | 400,000 | 7 | Income | 200,000 | ||
| Taxation of A | Euro | Taxation of B | Euro |
| Sale | 100,000 | Sale | 1,000,000 |
| Cost | -50,000 | Cost | -100,000 |
| Taxable income | 50,000 | Taxable income | 900,000 |
| Inheritance tax | 15,000 | Inheritance tax | 270,000 |
| Related party adjustment: | Related party adjustment: | ||
| Sale | 500,000 | Sale | 1,000,000 |
| Car | -50,000 | Deposit | 200,000 |
| New taxable income | 450,000 | Cost | -500,000 |
| Taxable income | 700,000 | ||
| Inheritance tax | 135,000 | Inheritance tax | 210,000 |
| Initial taxation | 15,000 | Initial taxation | 270,000 |
| Final Taxation | 135,000 | Final taxation | 210,000 |
| Over taxation | 120,000 | Over taxation | -60,000 |
5. Advance Pricing Agreements (APAs)
The Royal Decree develops the procedure for submission to the tax authorities of valuation proposals so that the Tax Administration can determine the value of the transactions between the related parties.
6. Added Value
The positive note of preparing the mandatory documentation is that it enables groups to organise their inter-company transactions in a more formal and orderly fashion.
AVAILABLE MATERIAL ON TRANSFER PRICING
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Manual de Precios de Transferencia, a book published in Spanish by UHY Fay & Co that studies in depth the Spanish legislation on transfer pricing. The book includes a comparative analysis of transfer pricing in 73 different countries (this chapter is also available in English). To order a free copy click here.
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