Transfer Pricing in Spain
Transfer Pricing legislation in Spain is regulated in Article 18 of Law 27/2014 (the Law) or “Corporate Tax Act“.
It is also complemented by Articles 13 to 36 of the Regulations approved by Royal Decree 634/2015.
The formal obligations are established in this area by the latter regulation, such as the necessary documentation to prove that such transactions are at market value, taking into consideration the guidelines set forth by the Organization for Economic Cooperation and Development (OECD) in Action 13 of the BEPS (Base and Erosion and Profit Shifting) Plan.
Likewise, by the Orden HFP (Orden ministerial del ministerio de Hacienda y Función Pública) or Ordinance FPF (Ordinance of the ministry of Finance and Public Function) /816/2017 the informative affidavit on transactions with related parties and tax havens was established, which along with the rules already mentioned above establish a framework for the Transfer Pricing regime in this country.
Transfer Pricing: Definition
This is defined as those prices or values agreed upon in transactions among linked or related parties, these types of transactions are also known as intercompany transactions.
Principle of Full Competition: Concept
It is also known as the “Arm’s Length” principle, which is based on prices or values agreed in transactions among related parties being in line with market value.
Said principle is also regulated in the Transfer Pricing legislation of Spain, in numeral 1, Article 18 of Law 27/2014 or “Corporate Tax Act“.
The aforementioned paragraph states that transactions performed among related persons or entities must be valued at market value, which is taken to mean as the value agreed among independent parties.
Definition of Related Parties in Spain
According to numeral 2 of Article 18 of the Law, it shall be understood as related persons or entities, when they are in the following situations:
- The partners or participants related to the entity.
- The entity and its managers, with the exception of the remuneration they receive by the performance of their functions.
- The entity and the spouses or persons in kinship, either directly or collaterally, by consanguinity or affinity up to the third degree regarding to the partners or managers.
- Two entities as long as they belong to a group.
- One entity related to the managers of another, provided the latter belong to the same group.
- One entity related to the other, when the former indirectly owns at least 25% of the capital of the latter.
- Two entities which share the same partners or participants, or their spouses or persons in kinship as indicated in the point three above, and these participate directly or indirectly in at least 25% of the capital.
- A company resident in Spain related to its permanent establishments abroad.
With respect to the definition of “group“, the regulation states that such a group exists when an entity has or may have control over another or others, as established in Article 42 of the Spanish Commercial Code.
Transfer Pricing Methodology in Spain
According to Article 19, numeral 4 of the Law, in order to determine the market value of the transactions with related parties, one of the following five methods may be used:
- Comparable free price method.
- Incremental cost method.
- Resale price method.
- Results distribution method.
- Net operating margin method.
It should also be noted that the choice of any of the methods indicated above should take into account the circumstances, the nature of the transaction, the information available and the degree of comparability of the transactions.
To the extent that the use of any of these methods is not possible, the taxpayer may apply other valuation methods in accordance with the Arm’s Length principle.
Comparability Analysis in Spain
In order to determine whether two or more transactions are comparable, Article 17, numeral 2 of the Regulations of the Corporate Tax Act states that the following circumstances must be taken into consideration:
- The specific characteristics of the transaction.
- The functions assumed by the parties to the transaction, as well as the assets and risks involved.
- Contractual terms.
- The economic circumstances that governed the transaction.
- Business strategies.
Transfer Pricing Documentation in Spain
Article 18, numeral 3 of the Law states that taxpayers, in order to prove that the prices in the transactions with related parties have been valued according to the market, must keep the documentation established by Regulation, with the purpose it can be made available to the Tax Administration when it is required.
In this regard, articles 13 to 16 of the Regulations indicate the documentation that must be kept in accordance with the law.
Pursuant to numeral 4 of Article 16 of the Regulation, those persons or entities that do not exceed ten million euros may file a standardized document in order to comply with the specific documentation required by the aforementioned regulation.
Simplified Taxpayer Document
According to numeral 3 of article 18 of the Law, in accordance with article 16 of the aforementioned Regulation, it is stated that those taxpayers whose net turnover is greater than 10 million but less than 45 million may file the specific documentation in a simplified format.
This documentation shall have the following content:
- Description and amounts of transactions with related parties.
- Tax identification data of related parties.
- Identification of the valuation method.
- Comparable transactions obtained and intervals derived from the method used.
Specific Documentation of the Taxpayer
Article 16, numeral 4 of the Regulation states that the Specific Documentation of the Taxpayer will be applicable to taxpayers whose net turnover exceeds 45 million euros, including permanent establishments of non-resident entities in Spain.
This documentation must include information such as company structure, description of the company’s activities, main competitors, detailed information on related transactions and economic and financial information of the taxpayer.
It should be noted there are exceptions to the obligation of having such information, one of them being when the transactions are carried out with the same related party and the total consideration does not exceed the amount of 250,000 euros, according to the market value.
This documentation will be applicable, as well as the specific documentation, for those taxpayers whose net turnover exceeds 45 million euros, in accordance with numeral 2 of article 15 of the Regulation.
The information to be disclosed includes the structure and organization of the group, the activities, information related to intangible assets of the economic group and financial and tax information of the group.
Article 14, numeral 1 of the Regulations states that such report shall be applicable to the following entities:
- Entities resident in Spain that are the parent company of the group.
- Entities domiciled in Spain, directly or indirectly dependent on a company not domiciled in Spanish territory, which in turn is not dependent on another, provided that:
- There is no Country-by-Country Report requirement or its analogous in the country of residence of the foreign entity.
- There is no information exchange agreement with the country in which the foreign entity resides.
- That the aforementioned agreement has been systematically breached and that the Spanish Tax Administration has communicated this to its dependent entities.
- Breaching systematically the aforementioned agreement and is communicated by the Spanish Tax Administration to its dependent entities.
It also states that dependent entities resident in Spain will not be required to file a Country-by-Country Report when the parent company of the multinational group has appointed another entity of the group abroad, provided that the latter is resident in a European Union country.
As regards the deadline for filing the aforementioned Report, the regulation states that it will expire twelve months after the end of the tax period.
Tax Havens and Market Value in Spain
Article 19, numeral 2 of the Law states that transactions performed with persons or entities resident in countries or territories classified as tax havens or territories of low or no taxation must also be agreed at market value.
This article, in turn, states that those who carry out transactions with these entities are required to have the documentation indicated in numeral 3 of article 18 of the Law, as described in the preceding paragraphs, taking into consideration the specifications indicated in article 37 of the Regulations.
Informative Affidavit of Transfer Pricing in Spain
Ordinance FPF/816/2017 establishes the requirement to file an Informative Affidavit of transactions with related parties and transactions related to tax havens by means of Form 232.
According to article 2 of the aforementioned regulation, the following taxpayers are required to do so:
- Performing transactions with the same related party, provided that the total amount of the consideration exceeds 250,000 euros.
- Performing specific transactions provided that the total amount of each of these types of transactions in the tax period exceeds 100,000 euros.
It should be noted that in the case of transactions with tax havens, Form 232 must be filed regardless of the amount.
The filing deadline is the following month after a period of 10 months from the end of the fiscal year.
Sanctions Related to Transfer Pricing in Spain
In relation to the filing non-compliance the formal Transfer Pricing requirements or incomplete filing, the regulation states that in the case no adjustment is made, the penalty will be 1,000 € for each omitted, inaccurate or false data and 10,000 € for each set of data.
In the case of an adjustment, the fine shall amount to 15% of the correction made.
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