By Pilar Barriguete & Edland Graci, Duff & Phelps, Spain
On January 19, the Spanish tax authorities announced the government’s priorities for tax enforcement.
As in previous years, transfer pricing remains a key area of focus. The plan states that the government will direct tax enforcement efforts on the effective application of anti-avoidance measures, permanent establishments, and tax-haven regulations.
The Spanish tax authorities will focus on the fulfillment of transfer pricing documentation and information obligations, including the analysis of functions, assets, and risks.
Moreover, in 2021, a campaign will be carried out to verify adequate compliance with the information obligations on related-party transactions that, since 2016, must be declared in Model 232.
Spain’s tax focus for 2021
In 2021, the Spanish tax authorities will, in particular, scrutinize corporate restructuring; valuation of intragroup transfers of assets, especially intangibles; financial transactions; taxation of new highly-digitized business models; and attribution of profits to permanent establishments.
In addition, the Spanish tax authorities will focus on deductions that could significantly erode the tax base, such as payment of royalties or intragroup services or continuous losses; activities carried out by entities characterized as limited risk (e.g., those in manufacturing or distribution activities);
Further, the tax administration will assess relationships between corporations and partners, workers, administrators, or other related persons and other companies controlled by the same persons to determine if there is a transfer of tax base
COVID-19 implications
The Spanish tax authorities recognize significant challenges for both taxpayers and tax administrations in applying the arm’s-length principle to intragroup transactions in the current environment, given the special economic conditions associated with the COVID-19 pandemic.
The Spanish government plans to take into account the OECD’s recent guidance related to transfer pricing implications of the COVID-19 pandemic.
Additionally, for 2021, the Spanish tax authorities will focus mainly on multinational groups and large corporations that belong to sectors least affected by the pandemic.
Transfer pricing risk analysis
In 2021, the Spanish tax authorities plan to complete a new automated transfer pricing risk analysis system based on information related to intercompany transactions available through the OECD/G20 base erosion profit shifting (BEPS) project and disclosure requirements mandated by the European Union.
The main sources of information will be automatic exchanges, mutual agreement procedures, other unilateral agreements and advance price agreements, simultaneous audits, and information derived from country-by-country reporting.
Moreover, the increasing specialization of the administration in international tax matters will allow the Spanish tax authorities to conduct a better risk analysis by developing indicators, indexes and models, and identifying high fiscal risk behavior patterns.
Information on potentially aggressive cross-border tax planning mechanisms referred to in DAC 6 (Directive (EU) 2018/822 of May 25, 2018) is expected to also assist the Spanish tax authorities since the information will undoubtedly have a special impact on the data available from large multinational groups.
Under DAC 6, which will be fully effective in 2021, any intermediary (accountants, advisers, lawyers, banks, etc.) that provides advice to clients on cross-border transactions will be required to report information on the arrangement to the tax authorities of their home Member State.
The Spanish tax authority expects this new information source to grant them greater transparency and allow for more vigorous enforcement of anti-avoidance measures.
As such, going forward, taxpayers will need to be aware of existing and new legal requirements implemented in Spain and the government’s priorities for tax enforcement. Taxpayers may want to consider whether their cross-border tax planning complies with these requirements.
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