1. In your jurisdiction, are taxpayers obliged to maintain transfer pricing documentation? Does this obligation apply to all taxpayers, or only to certain categories (e.g. taxpayers with turnover or assets exceeding a particular threshold)?
Article 16 of the Spanish Corporate Income Tax Law (hereinafter, “CITL”) was amended by Law 36 / 2006, which came into force on 1 December 2006, establishing a documentation obligation for transactions carried out between related parties (as well as detailed documentation rules, penalty procedures, a tax audit transfer pricing process, provision for secondary adjustments, and a specific procedure for advanced pricing agreements). In this regard, as the modifications to the CIT Regulations came into force on 19 February 2009, this obligation applies to transactions carried out as of that date.
There are exceptions to the general obligation for transactions entered into by individuals, or by taxpayers having the benefit of the small and medium-sized entities regime established by the CITL (hereinafter, “the SME”).
This regime applies where the net turnover for the consolidated group (irrespective of residence) was less than EUR 10 million in the previous tax year. These taxpayers are excluded from the general documentation obligation up to a global threshold of EUR 100,000; although it should be noted that as a general rule documentation will be required for transactions with related entities which are resident in tax havens.
Two categories of documentation may be required depending on whether or not the taxpayer belongs to a group within the meaning of article 42 of the Spanish Commerce Code (for these purposes, there will be a group essentially when a parent company directly or indirectly controls its subsidiaries by holding a stake of over 50% or having the majority of voting rights). Where the taxpayer belongs to a group, it will be generally obliged to fulfill both the requirement for documentation relating to the group and that for documentation relating to the taxpayer itself.
In contrast, where the taxpayer does not belong to a group it will only be asked to fulfill the obligation concerning documentation relating to itself.
In this respect, the CIT Regulations develop the content of each of the obligations referred to:
- Documentation relating to the group (as long as transactions directly or indirectly affect the transactions carried out by the taxpayer):
- General description of the organizational, legal and transactional structure of the group, as well as any relevant changes;
- Identification of the related companies involved in intra-group transactions;
- General description of the nature, amounts and flows of intra-group transactions;
- General description of the functions performed and risks assumed by related entities;
- Details regarding the ownership of patents, trademarks and other intangible assets;
- Description of the transfer pricing policy followed by the group, showing compliance with the arm’s length principle;
- Details regarding any cost sharing agreements and service agreements within the group;
- Details regarding any advance pricing agreement (hereinafter, “APA”) or analogous arrangements involving the group;
- Annual report of the group (or the equivalent thereof).
None of these requirements apply to those groups benefiting from the SME regime.
Documentation relating to the taxpayer itself:
- (A) Identification details of the taxpayer, as well as a detailed description of the relevant intra-group transactions and their amounts and characteristics; these data also will be required for transactions with entities which are resident in tax havens, whether or not they are related parties;
- (B) Comparability analysis;
- (C) The valuation methods that have been chosen, the reason for their selection and the resulting values or ranges of values;
- (D) Criteria for the distribution of jointly rendered services in favour of other related parties and any services and / or cost sharing agreements related thereto;
- (E) Any other relevant information and shareholder agreements.
Notwithstanding the above, companies benefiting from the SME regime and individuals are subject only to some of these documentation requirements, depending on the transactions they are carrying out (for example: transfers of real estate or intangible assets must fulfill requirements (A), (C) and (E) from the list above).
2. What is the content of the documentation that must be prepared?
a) Which transactions must be documented (all transactions with associated enterprises, or only those which exceed a particular threshold)?
The general obligation of taxpayers to document their transactions with related parties is subject to the following exceptions only:
- Transactions between companies which are integrated in a tax consolidation group;
- Transactions between an economic interest grouping (Asociación de Interes Económico, “AIE”) or between a joint venture (Union Temporal de Empresas, “UTE”) and its members;
- Transactions carried out in the context of a takeover bid or a public stock offering;
- Transactions carried out in the context of bank integrations;
- Transactions carried out in the fiscal year with the same related party when the consideration of all transactions with such party do not exceed a market price EUR 250,000. Certain transactions are excluded from this threshold and are therefore subject to specific documentation requirements (e.g. transfers of real estate assets, transfer of non-listed shares, etc.).
b) What is the definition of “associated enterprises” for the purposes of this requirement?
Article 16.3 of the CITL contains an extensive description of cases and circumstances in which there is deemed to be an “association” between individuals and companies for the purposes of the application of the Spanish Transfer Pricing regime.
For the sake of simplicity, all companies which are part of a group under article 42 of the Spanish Commerce Code (see above), and all companies (or individuals) holding a direct participation of 5% in their subsidiaries (1% if listed) or an indirect participation of 25%, are considered to be related parties.
c) For EU countries, is the content of the documentation similar to that described in the EU Code of Conduct on transfer pricing documentation for associated enterprises (“EU TPD”)? If not, are taxpayers entitled to choose between the local requirements and the EU TPD?
The content of the documentation required is similar to the one described in the Code of Conduct on transfer pricing documentation for associated enterprises in the EU.
d) Do taxpayers which are not established in your jurisdiction need to undertake to provide any specific information upon request? Can your tax authorities require the taxpayer in your jurisdiction to provide information which is located in another state?
The Spanish Tax Authorities (hereinafter,“STA”) are entitled to require the documentation or additional information of the group which they deem necessary, specially to determine whether the transactions directly or indirectly affect the transactions carried out by the taxpayer. In this regard, foreign parent companies of a group must appoint a resident entity of the group to be responsible for storage of the documentation, although the STA can summon any taxpayer of the group to furnish such group documentation.
e) If comparable studies are to be provided, do the tax authorities generally accept regional benchmark studies (e.g. pan-European benchmark studies)?
Practically speaking, pan-European benchmark are accepted by Spanish tax authorities.
f) What language(s) are to be used by taxpayers in submitting the transfer pricing documentation?
Although no specific rule has been laid down in the Spanish legislation, the STA have informed that the documentation should be generally accepted for review in English, except in the case it is very complex and specific translation is requested. In any case, since the language of Spanish administrative procedures is generally Spanish according to law, it is always possible that translation of the documentation is requested, so it is preferable to keep the documentation in Spanish.
3. What is the deadline or timescale for providing transfer pricing documentation to the tax authorities (is it to be provided for example upon filing of the tax returns, at the beginning of a tax audit, or on the specific request of the tax authorities)?
As established in the Spanish CIT Regulations, all the documentation must be at disposal of the STA by the filing date of the annual CIT return. Therefore, the STA are entitled to request all the documentation that is to be at their disposal by the filing date of the annual CIT return, e.g. assuming the fiscal year of the company coincides with the calendar year, 25 days following the period of six months in which the annual accounts are to be approved.
4. In the event that the documentation is not provided within the applicable timescale, or is incomplete, do documentation-related penalties apply in your jurisdiction? If so, please detail the penalties and the circumstances in which they do and do not apply.
A specific penalty regime is applicable; in this regard there are two situations that should be distinguished in determining the applicable penalty:
- The taxpayer has met the documentation requirements and has valued the transactions based on the arm’s length price derived from such documentation: in this case, no penalty will be imposed, even if the taxpayer’s valuation is modified;
- The taxpayer has failed to comply with the documentation requirements: this conduct constitutes a tax infringement that is subject to penalties. These penalties are determined as follows:
- If the STA do not modify the taxpayer’s valuation, the penalty consists of a fixed amount of EUR 1,500 per data item and EUR 15,000 per group of data items with regard to each one of the documentation requirements that is not complied with or which is improperly complied with, under the CIT Regulations; and
- If the STA modify the taxpayer’s valuation, the penalty is 15% of the amounts resulting from any corrections made, with a minimum penalty of EUR 3,000 for each data item or EUR 30,000 per group of data item.
5. Does the absence or incompleteness of documentation reverse the burden of the proof as regards the arm’s length character of the transactions?
Formerly, the burden of the proof was borne by the STA, but with the recent legislative amendments regarding this issue, the burden of proof now rests with the taxpayer. In this regard, as the taxpayer must value the related-party transactions on an arm’s length basis consistent with the documentation filed, the documentation obligation has assumed primary importance in terms of providing detailed evidence and helping to reduce the likelihood of the STA proposing adjustments.
6. In the event that the tax authorities (i) impose documentation-related penalties and (ii) make a transfer pricing reassessment, does the imposition of documentation-related penalties prevent the taxpayer from initiating any mutual agreement procedure which may be contained in an applicable tax treaty (or, for EU countries, the procedure contained in the EU Arbitration Convention) with a view to eliminating any double taxation resulting from the transfer pricing reassessment?
Article 21 of Royal Decree 1794 / 2008 about mutual agreements on direct taxation establishes that a taxpayer who has been definitively sanctioned for a serious infringement is not entitled to initiate any mutual agreement procedure which may be provided for by an applicable tax treaty with the aim of eliminating any double taxation resulting from a transfer pricing reassessment.
In this regard, article 16.10 of the CITL establishes that infringements consisting of a failure to observe the documentation requirements are considered serious infringements.