A stricter approach adopted by the Spanish Tax Authorities had been supported by the courts.
Tax audit proceedings are giving rise to an ever-increasing number of disputes as the Spanish Tax Authorities are adopting increasingly strict criteria in their interpretation of tax law. This trend appears to be supported by Spanish courts, which have issued a number of decisions where the outcomes have been harsh to say the least.
One example of this trend is the decision from the Spanish National Court (Audiencia Nacional) on 20 January 2017 concerning the tax deductibility of management fees within a multinational group. The decision is surprising as it questioned the tax deductibility of management fees which, up until this decision, has not been perceived as a controversial area. The scope of such agreements and the level of fees paid will now need to be carefully considered as their tax deductibility may be challenged.
In the case in question, the parent company incurred costs and redistributed those costs among the members of a multinational group using a formula. The management services were supported by the appropriate agreements and invoices between the parties. The fees paid had been reviewed and analysed in the subsidiary’s compulsory transfer pricing documentation. The Spanish Tax Authorities, therefore, were not questioning whether actual services had been effectively provided and at no point in the Court’s decision or the Tax Authorities’ submissions does there seem to be a concern that such management fees were structured with a view to income shifting.
Instead, the Tax Authorities’ challenge hinged on a technical issue, resulting from an amendment to the relevant legal provisions which provides that management fees must afford, or must be capable of affording, a benefit to the receiving company, in order to be tax deductible. The test applied was whether the relevant services constituted services for which a third party would be willing to pay.
The decision provides a useful list of the type of expenses which multinational groups should be reviewing in light of the requirement that the services should provide a benefit for the receiving company. In the case in question, the Tax Authorities reviewed general management, finance, staffing and human resources, marketing, IT and regional costs.
For example, general management costs which were invoiced to the Spanish subsidiary reflected the functions of the group’s CEO relating to the strategic direction of the group, relations with investors and overall supervision. Financial services included overall financial control and co-ordination, accounting and administrative services (including the re-invoicing of personnel costs associated with such services), internal audit and group risk management, international legal and tax advice, treasury services, external affairs and corporate communications.
All such services are of the sort that would ordinarily be considered “standard” in terms of the services usually invoiced among group companies. However, much was made by the Tax Authorities of the fact that some services seemed to replicate services supplied in the local structure of the subsidiary (e.g. personnel and HR, finance). Very detailed arguments were required from the taxpayer in order for the Tax Authorities to accept tax deductibility of specific items of the service charge: e.g. certain financing expenses were accepted since the taxpayer could prove that better financing conditions had been obtained through negotiation via the parent; IT services were also accepted as deductible where better conditions from third party suppliers had been obtained.
This case signals a trend from Spanish Tax Authorities whereby management fees will be increasingly scrutinised and their tax deductibility questioned. Multinational groups, should consider re-evaluating their structures, particularly in relation to supplies of management services in order to develop sustainable frameworks to deal with the challenges which this area now presents.