The Supreme Court has confirmed that the reasoned reports are binding on the tax administration both in the classification of the activity and in the quantification of the basis for the deduction for tax years started before 2015. However, the issue is still open to discussion for deductions generated after that date, as pointed out in a recent ruling by the TEAC.
Corporate income tax regulations include a deduction for research and development (R&D) and technological innovation activities. The deduction for the former can be applied to all expenses directly related to R&D and effectively applied to its performance and to certain investments. The deduction for technological innovation activities can only be applied to four categories of expenditure defined in the tax regulations. In brief, these are expenses for (i) technological diagnosis activities, (ii) industrial design and engineering of production processes, (iii) acquisition of advanced technology in the form of patents, licenses, know-how and designs, and (iv) obtaining ISO 9000 series quality certification, GMP or similar.
On the other hand, as the incentive is based on scientific and technological requirements, different mechanisms are foreseen in order to provide legal certainty to taxpayers. The most common consists of obtaining a reasoned report from the Ministry of Economy and Competitiveness (currently the Ministry of Science, Innovation and Universities) on compliance with these requirements, which will be binding for the tax administration. It is also possible for the taxpayer to submit a binding consultation on the interpretation and application of the deduction and to request the tax administration to adopt prior agreements on the valuation of the expenses and investments corresponding to this type of activity, in both cases the taxpayer being able to provide a reasoned report.
With regard to the first of these possibilities, the tax authorities have been considering that the binding nature of the reasoned report only applies to the classification of the activity, but not to the determination of the basis for the deduction. In particular, technological innovation projects in the IT field have received special attention in recent years. Thus, on the basis of reports drawn up by the Tax Agency’s IT Support Teams, the classification of the expenses of these projects in one of the four categories mentioned above has been discussed, despite the fact that the taxpayer has binding reasoned reports.
The issue has been addressed by the Supreme Court in its rulings of 8 October (rec. 948/2023) and 9 October 2024 (rec. 1633/2023 and rec. 1635/2023). In these rulings, it is categorically concluded that the reasoned report binds the Administration both in the qualification and in the definition of the investments and expenses that have been positively evaluated. The court adds that its probative value cannot be deactivated by a report issued by the IT support team, which is subject to internal hierarchical dependence and whose competences do not allow it to give an opinion on the rightness or wrongness of the specialized report of the ministry responsible for science. To do otherwise, says the Court, would amount to a genuine reclassification of the activities, thereby rendering the binding effect of the reasoned reports null and void. Consequently, the tax administration’s powers of verification are limited to verifying the reality of the expenses, their proper accounting reflection, their relationship with the projects examined and similar questions.
Although it might seem that this doctrine would put an end to the controversy on this issue, the truth is that the rulings highlight the different wording of the rule for years commencing before and after 1 January 2015. Thus, while the previous wording indicated, without further details, that the report would be binding for the tax administration, the Supreme Court interprets that, from that date, the binding nature is exclusively in relation to the classification of the activities. In its opinion, this different wording is crucial and decisive for the decision adopted in relation to the disputes resolved in the aforementioned judgments, all of which refer to tax years prior to 2015.
This distinction, however, does not arise as such from the regulatory developments, given that, in reality, the change in the wording of the legal text has occurred exclusively with regard to the reasoned reports provided with the request for a prior valuation agreement (the third of the aforementioned mechanisms of legal certainty). In other words, the binding nature of the reasoned report obtained to accredit compliance with the scientific and technological requirements of the project for the application of the deduction (the first of the aforementioned mechanisms) has not been modified in the text of the law.
The issue becomes important because, based on this differentiation made by the Supreme Court, the Central Economic-Administrative Court, in a recent decision of 21 October 2024, has changed its criteria exclusively with regard to financial years commenced prior to 1 January 2015, accepting that the reasoned report binds the Tax Administration (in those periods) not only with regard to the classification of the project as a technological innovation, but also with regard to the basis for the deduction. On the other hand, for years commencing from 2015 onwards, it reaffirms its previous criterion and concludes that the reports issued by the competent ministry do not bind the tax administration in relation to the quantification of the expenses and investments that are subject to this tax incentive.
Consequently, it is foreseeable that litigation on this issue will continue as long as the Supreme Court does not expressly rule on the binding effects of the reasoned reports for deductions generated in years commencing on or after 1 January 2015, bearing in mind that, as indicated, the rule has not been modified in the sense interpreted by this court in its recent rulings.
