The Spanish Supreme Court has concluded that when the Tax Administration verifies credits generated in prescribed fiscal years, it must do so in accordance with the principle of complete regularization. This means that if it rejects the deductibility of certain expenses, it must also eliminate the taxation of income linked to them. The Court also understands that the ten years right to review affects events that occurred before the current General Tax Law (LGT).
Law 34/2015, of September 21, introduced a new article in the LGT, Article 66 bis, and modified the wording of its article 115. Although the four-year period for the prescription of the Administration’s right to assess or collect taxes was maintained, it introduced a new ten-year period for the prescription of the Administration’s right to initiate the procedure for verifying compensated or pending compensation bases or quotas or applied or pending deductions. On the other hand, the Tax Administration can verify and investigate facts, acts, elements, activities, operations, businesses, values, and other circumstances determining a tax obligation, even if they affect prescribed fiscal years or periods, if such verification is necessary in relation to non-prescribed rights, without prejudice to the ten-year prescription period in the cases provided for in Article 66 bis of the LGT.
This reform raised some important doubts from the outset. We cannot dwell on all of them now, but we will focus on the aspects addressed in two recent Supreme Court rulings of March 11, 2024 (appeal 8243/2022) and June 7, 2024 (appeal 7974/2022).
The second of these rulings refers to the aforementioned ten-year period and revisits an issue that was already raised in a previous ruling of the High Court, of July 22, 2021 (appeal 1118/2020): if the Tax Administration has ten years to verify negative tax bases and accredited deductions, provided that, in the verification of a non-prescribed fiscal year (according to the general period) such bases or deductions are compensated or applied or are pending compensation or application, what rights does the taxpayer have during that same period that can be exercised in their favour? The explanatory memorandum of Law 34/2015 itself proclaimed that, with this so-called imprescriptibility of verification powers, the taxpayer could also request the rectification of their self-assessments when the Administration verified aspects linked to prescribed fiscal years.
In the aforementioned 2021 ruling, the Supreme Court concluded that, although the Administration can verify that tax credits are correct, the taxpayer cannot request the rectification of their self-assessment or submit a rectifying self-assessment (to modify the amount of those credits) in that ten-year period, if the four-year prescription period of the right to assess has already elapsed. However, when it is the Administration that verifies those prescribed periods, what scope should that verification have, in view of, moreover, the principle of complete regularization?
This is the question raised in the ruling of June 7, 2024. The Administration had verified the negative bases of two prescribed fiscal years in the Corporate Income Tax, in an inspection action related to a subsequent, non-prescribed fiscal year. Such negative bases had been corrected and reduced as the Administration understood that they had been calculated considering a provision for insolvencies that was not correct, as it referred to income that had been generated as a result of a payment mediation. The entity claimed that, assuming this mediation, the correction should be complete, eliminating both the provision and the income to recalculate the correct negative base.
The High Court accepts the entity’s position, relating the verification power provided for in Article 115 of the LGT with the principle of complete regularization, to affirm that, when exercising this power, the Administration must consider all consequences, whether favourable or unfavourable to the taxpayer. When specifying its doctrine, the court indicates that, if the verification concerns negative bases, these circumstances favourable to the taxpayer must be taken into account particularly when we are dealing with deductions or subtractions linked to income, which should, therefore, be excluded.
The court emphasizes for these purposes that (contrary to what happened in the case resolved in 2021) the entity did not seek to rectify its self-assessment, but it was the Administration that had begun a verification. The ruling does not specify, however, if it is for this reason that the taxpayer could request any modification of their self-assessment on the verification initiated by the Administration or if that claim has any limit or should only prosper when it is required to take into account favourable and unfavourable items between which there is a close link. Perhaps, then, the Supreme Court should complete its jurisprudence in the future to clarify whether the Administration, when verifying those prescribed fiscal years, should make a complete verification, possibly with the limit of the initial amount of the accredited bases or deductions, or if that complete regularization only acts when there is that link between the items.
Equally important doubts arise from the reading of the other cited ruling, that of March 11, 2024. The Court faces the issue of verifying the simulated nature of a business when it took place in a prescribed fiscal year. In principle, such verification is undoubtedly possible according to Article 115 of the LGT. But, in the case resolved in the ruling, the business was carried out in 1999 under the previous LGT. The Supreme Court itself seemed to have already understood that the rules on the prescription of the verification power were not applicable to events that occurred in periods ended before the validity of the 2003 LGT. The ruling now issued admits the application of Article 115 to previous events, not on the basis that such verification was always possible, but assuming that it was not possible then but is now allowed by the single transitional provision of Law 34/2015, which addresses the existence of a subsequent verification procedure. The Court has no doubts about the validity of the retroactivity of the rule thus conceived.
But other unresolved doubts arise when it comes to knowing when a verification refers to a fact or business, without a prescription period, or to negative bases or deductions with a ten-year period. It can be thought that Article 115 of the LGT leads to imprescriptibility whenever the verification does not refer to tax credits, which would affect doubtful situations among which today stands out the very verification of the consequences of the FEAC regime (mergers, spin-offs, asset contributions and exchanges of securities), after the Central Economic-Administrative Court doctrine in this regard. Another possible interpretation, supported by the principle of legal certainty, would focus on the consequences of indefinitely keeping uncertainty open, not about a fact or business, but about the correct application of a special regime derived from a restructuring duly communicated to the Administration.
Abelardo Delgado
