On many occasions, overwhelmed by the stress of complying with our tax obligations in due time and form, we do not analyse the type of information we are providing to the Spanish Tax Administration (SPA) and what they can do with it from a simple analysis.
As from the publication of the Directive of the Annual Tax and Customs Control Plan on 23 January 2018, the SPA is following a tax control strategy making intensive use of data analysis technologies. This strategy has been driven mainly by the entry into force of the Immediate Supply of Information (SII) of Value Added Tax (VAT), which is also reinforced by the rest of the returns that are mandatory for taxpayers.
In the above-mentioned publication, it is acknowledged that the SPA is developing specific risk analysis models on taxpayers based on the information provided, such as in the case of country-by-country reports (CbC report).
Regarding the Form 232, this tax control is not an exception. In fact, the information that the taxpayer submits to the tax authorities in this form discloses a lot about the ordinary activity of the company and how it is undertaken.
To begin with, the taxpayer declares its activity (CNAE code) which allows the SPA to easily sample by industry the related transactions and the methods normally used in each one, as well as the existence of intangibles with patent box or tax havens. With this information, it is easy to identify those taxpayers with an anomalous situation and carry out a limited check or initiate directly a tax audit procedure.
With only the information relating to the financial statements disclosed in the Corporate Income Tax (CIT) in the Form 200, it is enlightened both the taxpayer and its industry peers´ relevant financial ratios (gross and net profitability, return on assets, stock turnover, intangibles over total assets, among many others).
By cross-referencing this information with those declared in the Form 232, it is possible to observe the profitability of the industry, the weight of the group in the taxpayer´s activity (either by the proportion of invoicing issued by and/or received from the group with respect to income and/or expenses generated by the taxpayer itself), having with this a first approach to the risk profile of the taxpayer and especially of the potencial tax base adjustment.
Obviously, this first impression of the taxpayer’s functional characterization will have to be complemented with an in-depth analysis by the SPA during the tax audit procedure. However, complex structures or systems that are not accompanied by the results expected by the SPA will always be potentially risky.
Insofar as related-party transactions are commonly taxable events subject to both CIT and VAT, the information to be declared in the Form 232 and the VAT forms (SII, 300,390, etc.) should go hand in hand. Therefore, it is important to check that the information we are submitting to the SPA through both channels matches and, if this is not the case, to carry out a prior review in order to identify the reasons for these differences before filing the Form 232.
It is also important to ensure that the information we are submitting in the Form 232 is correct and do not fall into technical confusion as to the type of transaction or transfer pricing method used in each of them. Not only this review aims to avoid penalties but avoid reporting an anomalous situation of the taxpayer with respect to the rest of the industry, also.
Finally, another important aspect of the Form 232 is the declaration of transactions and/or relations with persons or entities in tax havens. With this declaration, the Tax Administration has visibility of the existence of countries with low or zero taxation in the context of the group’s international business and can intuit the existence of evasive of fraudulent tax structures allegedly used by the Group.
In short, the information submitted in the Form 232 does not provide the SPA with complete information on the taxpayer’s business or its relevance within its group (this must be completed with the local transfer pricing file and master file documentation and other information gathered during the tax audit procedure), but it does provide the SPA with sufficient and necessary information (based on the anomalies observed in the data declared) to be used as an instrument for picking entities among the extensive universe of taxpayers.
In view of the above, before submitting the Form 232 to the SPA, it is important to review the related-party transactions and the information included in order to identify potential contingencies and, if necessary, take mitigating measures. As far as possible, it is advisable to carry out the analysis of related-party transactions at the time they are carried out in order to anticipate and take steps to avoid inconsistencies and to ensure that such transactions are valued in line with the arm’s length principle.