The preparation of a transfer pricing documentation and its content is well-known by Spanish corporate income taxpayers, who are obliged since 2009 to make available to the tax authorities a documentation describing their related-party transactions and justifying the arm's length nature of the prices applied in them.
Spanish transfer pricing documentation requirements have traditionally been aligned with those of the EU Joint Transfer Pricing Forum's (EU JTPF) Code of Conduct and the OECD Transfer Pricing Guidelines.
Following such trend, Corporate Income Tax Law 27/2014 (CITL) and its subsequent implementation through Royal Decree 634/2015, approving the Corporate Income Tax Regulation (CITR) introduced a number of very relevant changes in the Spanish transfer pricing legislation, specifically in those provisions concerning documentation requirements, based on full implementation of OECD BEPS Action 13.
Additionally, the CITL also governs and provides some amendments regarding the penalty regime, tax audit transfer pricing process, secondary adjustments, an APA-specific procedure and the Mutual Agreement Procedure and EU Arbitration Convention (EU/90/436).
With respect to the documentation, a three-tier structure has been implemented which is made up of, on the one hand, the Group's and the taxpayer's documentations (both considerably extended in quantitative and qualitative terms compared to the previous content) and on the other hand, the new inclusion of the Country-by-Country Report (CbCR).
The new Group's and taxpayer's documentation requirements are applicable to fiscal years that commenced on or after 1 January 2015, however the CITR established a one-year grace period for entities with revenues of 45 million euros or more (i.e., the entities that must prepare the full set of documents). In practice, this means that the documentation to be prepared according to the new requirements can be required by the tax authorities as from the end of the voluntary filing period of fiscal year 2016 (that is, starting from July 26, 2017, for entities whose fiscal year coincides with the calendar year).
With respect to the new CbCR obligations, those are effective for fiscal years starting as from 1 January 2016 and will have to be filed with the tax authorities during 2017.
Since Spanish entities belonging to a multinational group and performing related transactions are currently being affected from a practical perspective by the amendments included within the CITL and the CITR, this article aims at reviewing all those changes with an impact on the preparation of the transfer pricing documentation, as well as identifying the latest proposals of the European Council and the EU Transfer Pricing Forum that could potentially have further impact on the tax treatment of related party transactions in Spain.
Master file and Local file under the new legislation
The new documentation requirements imposed under articles 15 and 16 of the CITR are aligned with the pre-existing scheme contained in the previous Regulation in force up to 2015.
As a consequence, a double set of documents, that is, the documentation of the group to which the taxpayer belongs and the documentation of the taxpayer itself, has to be prepared albeit including a series of new requirements regarding the content of both.
Concretely, it is worth mentioning the main information required for both the "Master file" and "Local File" that implies a significant change with respect to the previous legislation.
(i) Specific documentation of the group to which the taxpayer belongs ("Master File"), which should reflect the following aspects:
- Structure and organization of the group (in the same line as the requirements of previous regulations).
- Relating to the activities of the group, it should be included information on the taxpayer's main activities, a description of the main geographical markets in which it operates, its main sources of income and the supply chain of those goods and services representing at least 10% of the group's revenues in the tax period.Additionally, it is mandatory to describe the changes in the functions, risks and assets of the different group entities compared to the previous tax period, identifying the cost contribution arrangements and provision of services agreements.
- A very detailed information of the group's intangible assets is also required, such starting with a general description of its global strategy in relation to the development, ownership and operation of those assets, including the location of the main premises where research and development activities are performed and managed, as well as the transfer pricing policy applied regarding such assets.
- The group's financial activity should also be described, including firstly a general description of the form of financing of the group, the main financing agreements signed with persons or entities not related to the group.Furthermore, the group's documentation must include an identification of the group entities that carry out the group's main financing functions as well as the country where they were formed and where their place of effective management is located, as well as a general description of the transfer pricing policy relating to financing agreements between group entities.It must be highlighted that both the information on intangible assets and financing undoubtedly represent two of the most significant changes introduced by the CITR with respect to the documentation requirements.
- Finally, the group documentation must include information relating to the financial and tax position of the group, such as the annual financial statements and details regarding any advanced pricing agreements (APA) or analogous procedures involving the group and the tax authorities.
(ii) Specific documentation of the taxpayer, which should reflect the following aspects:
- Information on the taxpayer, such as the management structure, description of the activities pursued by the taxpayer, its business strategy and its participation if any in restructuring transactions or the licensing or transfer of intangible assets in the tax period, as well as its main competitors.
- Information on related party transactions, such as a detailed description of the nature, characteristics and amounts of related-party transactions, a comparability analysis, the valuation method chosen, comparables obtained and the resulting value or range of values.
- Moreover, the taxpayer documentation must include a copy (a mere list is not sufficient) of the advance pricing agreements in force and any other arrangements with any tax authorities regarding the related-party transactions mentioned previously.
- Finally, the documentation must contain economic and financial information from the taxpayer, such as the reconciliation between the data used in order to apply the transfer pricing methods and the annual financial statements or the financial data of the comparables used.
Moreover, the CITR regulates the content of simplified documentation for persons or entities whose revenues are below 45 million euros. It should also be borne in mind, however, that there are certain categories of related-party transactions (specified in article 18.3 of the CITL) for which the simplified documentation does not apply in any case.
Furthermore, small-size entities can fulfill the documentation obligations by completing a "standardized document" prepared for that purpose by the Ministry.
Country –by- Country Report (CbCR)
With the approval of the CITR in July 2015, the Spanish lawmaker also introduced the obligation for certain resident entities to prepare and supply the CbCR, and the obligation for any entity resident in Spain that belongs to a group with a nonresident parent that must submit that information, to notify the Spanish tax authorities of the identification and country of residence of the entity obliged to prepare (and file) that information. This notification is provided electronically by completing Form 231 – "Information Return".
However, it must be noted that the CbCR is an instrument that will allow the tax authorities to evaluate the risks in the transfer pricing policy of a multinational group, but such instrument is not able, in any case, to serve as a basis for the tax authorities to justify transfer pricing adjustments of the related-party transactions performed by the taxpayer.
The preparation and submission of the CbCR is mandatory for entities resident in Spain that have the status of parent of a group, exclusively where the revenues of the entities forming the group were at least 750 million euros in the 12 preceding months.
The information that must be contained within the CbCR, on an aggregated basis for each country or jurisdiction is as follows (fully aligned with Action 13 recommendations):
a) Gross income of the group, making a distinction between those obtained with related entities or with third parties;
b) Income before corporate income tax or taxes of an identical or analogous nature;
c) Corporate income tax or taxes of an identical or analogous nature paid, including withholdings borne;
d) Corporate income tax or taxes of an identical or analogous nature chargeable, including withholdings;
e) Capital figure and retained earnings existing on the last day of the tax period;
f) Average workforce;
g) Tangible assets and property investment other than cash and credit rights;
h) List of resident entities, including permanent establishments and principal activities performed by each;
i) Other information deemed relevant and an explanation of any data included in it.
The information must be presented in euros and in the 12 months following the end of the tax period, with 2016 being the first fiscal year for which it must be prepared.
Finally, as part of the new transfer pricing environment in Spain, it should be mentioned a draft Order approving Form 232, of informational return of related-party transactions and transactions and situations related to countries or territories classified as tax havens.
In this sense, some changes are made in relation to the form of filing the information which up to now has been provided in the corporate income tax return, with respect to (i) transactions carried out with related persons or entities, and (ii) transactions with related persons or entities where the reduction in the income derived from certain intangible assets applies, and (iii) information on transactions and situations related to countries and territories classified as tax havens which do not refer to related-party transactions.
Once the Order is approved, and for tax periods commencing on or after January 1, 2016, this information will no longer be included in the tables contained in that form but rather must be reported in the specific informational return which must only be filed by taxpayers that carry out this type of transactions, and with the limits to be established by the Order approving Form 232. A special new rule is also envisaged regarding the transactions that must be reported in the Form.
With respect to the period for filing this new informational return, according to the draft Order, it will be filed in November 2017 for this first year (fiscal years commencing in 2016), and in May in successive years.
Latest developments by the European Council and the EU JTPF
Finally, it is worth highlighting the latest developments on transfer pricing issues within the European Union which will surely have an impact on this area in Spain:
- On May 2017, the Council submitted a proposal for a Directive on Double Taxation Dispute Resolution Mechanisms in the European Union which would improve the mechanisms used for resolving disputes between Member States. The proposed Directive would provide harmonized and transparent procedures, as it will ensure legal certainty for the taxpayer.Among other, the draft Directive requires dispute resolution mechanisms to be mandatory and binding, with clear time limits and an obligation to reach results. It thereby sets out to secure a tax environment where compliance costs for businesses are reduced to a minimum. The Council will adopt the directive once the European Parliament has given its opinion. Member States will have until 30 June 2019 to transpose the directive into national laws and regulations. It will apply to complaints submitted after that date on questions relating to the tax year starting on or after 1 January 2018. It is foreseeable that Spain, taking into account the commitment it has shown in the past regarding the implementation of other Council initiatives, will make its best efforts to transpose the Directive into its national law.
- Concerning the latest works carried out by the EU JTPF, it is worth highlighting the report issued on October 2016, relating the use of comparables in the European Union. The report provides some recommendations for both the taxpayer and the tax administration when selecting comparables to determine an arm's length of remuneration, which would increase the objectivity and transparency of such procedure.In this sense, the EU JTPF establishes some standards and recommendation when dealing, among others, with the search strategy, the selection and use of internal and external comparables, processing and interpretation of external comparables and specific aspects of comparability adjustments.Although, there are not specific statements within the Spanish transfer pricing legislation concerning the practice of selecting comparables, it can be expected that both Spanish taxpayers and tax administration will follow such recommendations, following their trends to be aligned not only with the recommendations made in the framework of the OECD BEPS Project, but also with all the initiatives made up under the wing of the European Union.