The Kreston Iberaudit Transfer Pricing team, in this first publication, is providing details on key issues regarding the penalties that apply to failure to comply with documentation obligations in terms of transfer pricing, as per the regulations on Corporation Tax (Impuesto de Sociedades – IS).
IS regulations require related parties to document the market value of transactions made, which must be made available to the Tax Agency by the deadline for submitting declarations or payment of IS.
In this regard, in our professional experience, we have seen that it is common for the following question to arise:
What is the amount of tax risk arising from not making available to the Tax Agency documents supporting the market value of related-party transactions when the Tax Agency doesn’t make adjustments to the value of the operations?
It must be noted that not documenting related-party transactions is a serious infraction with the corresponding penalties, even if the value applied is considered market value by the Tax Agency.
In this regard, Art. 18.13 of the Spanish Corporation Tax Act (LIS) establishes the following:
Infractions: it is a serious tax infraction to not provide or provide incomplete or false documents that must be made available to the Tax Agency by related parties or people, when the Tax Agency doesn’t make adjustments to the value of the operations.
– The penalty is a set pecuniary fine of €1,000 for each piece of data and €10,000 for the omitted or false data as a whole, applicable to each documentation obligation for the group or for each organisation as a taxpayer.
– This penalty is limited to the lesser of the following two amounts:
– 10% of the total sum of the related-party transactions.
– 1% of net business revenue.
To answer the question, let’s look at this hypothetical situation:
Company XYZ is obliged to document its related-party transactions for the fiscal year ending on 31 December 2018 (Specific Taxpayer Information) (Art. 16.1 RLIS) and decides not to do so.
The following applies to Company XYZ for the fiscal year ending on 31 December 2018:
Number of related-party transactions: 9
Number of related-party companies operated: 3
Types of transactions: 3
(sales/acquisitions, management fees and loans)
Net business revenue: €22,900,000
Total sum of the related-party transactions: €4,700,000
As a result, we can see in the Table in Annex 1 below, the following:
A) The specific documentation on related-party transactions that Company XYZ is obliged to provide for the fiscal year ending on 31 December 2018.
B) The type of data or piece of data.
C) The units of the type of data or piece of data not documented.
D) The unit penalty for each piece of data or data as a whole.
E) The total sum of the penalty for not documenting related-party transactions, which in this hypothetical situation is €142,000 for the fiscal year in question.
We can then determine the maximum penalty, which would be the lesser of the two following: 10% of the total sum of the related-party transactions subject to IS for Company XYZ
€4,700,000 * 10% = €470,000
Or 1% of net business revenue
€22,800,000 * 1% = €228,000
We see that the lesser of the two is the 1% of net business revenue, or €228,000:
Finally, comparing the resulting penalty of €142,000, shown in the Table in Annex 1 vs the maximum penalty of €228,000, we can conclude that the amount of tax risk of not providing documents supporting the transfer pricing of related-party transactions for the 2018 fiscal year for Company XYZ is:
As a final note, we can say that there is a considerable penalty for not documenting related-party transactions for a fiscal year and companies are running a high risk these days by not documenting their related-party transactions, as we have seen overall that the various Tax Agencies in their fiscal auditing plans are prioritising those involving related-party transactions or transfer pricing under pressure from the Organisation for Economic Co-operation and Development (OECD) since its publication and implementation of BEPS actions (Base Erosion and Profit Shifting) in 2015 and the Spanish Tax Agency is no different.
If you have any specific questions or comments on the latest changes in Transfer Pricing or want more information on how they can affect your business, don’t hesitate to contact us.
Fiscal Department Partner
Transfer Pricing Manager
Transfer Pricing Consultant