2022 tax audit plan and CbC reporting findings released

Spain recently released two documents that are likely to impact taxpayers with operations in Spain: the Spanish Tax Administration Agency’s (Agencia Estatal de Adminstración Tributaria, or AEAT) 2022 Tax Audit Plan, and the AEAT’s country-by-country (CbC) reporting findings for fiscal year 2019.

2022 tax audit plan

The AEAT released its 2022 Tax Audit Plan earlier this year, outlining its strategy to tackle tax fraud in 2022. The AEAT identified three main areas of interest:

• Beneficial ownership
• New sources of data and the use of artificial intelligence
• Automatic reviews of certain multinationals’ group structures.

Beneficial ownership

The payment of Spanish-source income in the form of dividends, interest or royalties to multinationals that are not Spanish residents and have no Spanish permanent establishments (PEs) will be under increased scrutiny by the AEAT, specifically to determine whether these non-Spanish residents have satisfied the beneficial ownership requirements. 

The AEAT will also focus on multinationals whose controlling owners are considered to have low levels of economic activity, and those where the AEAT deems that a main purpose of the multinational’s structure is to exploit tax benefits, such as withholding tax exemptions. The AEAT will analyse whether the recipients of Spanish-source income satisfy the beneficial ownership requirements.

A related area that will be subject to increased scrutiny is the use of conduit entities, which is in line with the recent draft directive published by the European Commission on 22 December 2021, which proposes “laying down rules to prevent the misuse of shell entities for tax purposes.

New sources of data and the use of artificial intelligence

The AEAT’s Large Taxpayers Central Office and the National International Taxation Office have built an automated transfer pricing risk analysis system, which AEAT will use to identify high-risk tax behaviour patterns[1]

When processing tax data, the AEAT uses artificial intelligence (AI) and big data processes. Going forward, this will remain a key tool to collect, process and analyse new sources of data, such as DAC 6’s cross-border tax arrangement exchanges, BEPS Action 5’s automatic exchanges of information, BEPS Action 13’s CbC reporting, and FATCA’s standard international exchange of information.

Automatic reviews of certain multinationals’ group structures

The AEAT will automatically review the transfer pricing policies of multinational groups that have a presence in Spain and have certain characteristics such as transacting with, or having a presence in, tax havens; incurring recurring losses; having undeclared permanent establishments; inappropriate attribution of profit; or hybrid mismatches.  

Points to consider

The AEAT is collecting tax data in sophisticated ways, such as using AI and big data processes, to help identify cases of transfer pricing non-compliance.

Multinational entities with a presence in Spain should review their group structures, identify potential transfer pricing risk areas (such as the business rationale of their group structures) and evaluate whether they have in place sufficient transfer pricing documentation and empirical support for their transfer pricing policies that will hold up to scrutiny in the event of an AEAT audit, which are intensively time- and resource-consuming.

Country-by-country reporting findings

The AEAT published its CbC reporting findings for fiscal year 2019 on 20 April 2022. CbC reporting data had been collected on 124 multinational entity groups headed by a Spanish parent that had at least EUR 750 million of annual group turnover. CbC reporting in Spain is submitted through Form 231.

Key takeaways

The AEAT’s report states that in 2019 these 124 multinationals earned EUR 89.701 million of global profit and paid a total EUR 14.965 million in corporate tax, which equates to a global effective tax rate of 16.7%, an effective tax rate of 21.4% in non-EU countries, and an effective tax rate of 13% in Spain.[2] The AEAT reported that 66.5% of the 14,753 subsidiaries of these 124 multinationals are not based in Spain.

The AEAT found that 74 of the 124 multinationals accounted for 51% of total staff and 54% of the declared benefit, but accounted for 30% of the total declared tax paid by the 124 multinationals. The AEAT further analysed these figures, and found that of the 124 multinationals, 23 have an effective tax rate under 5%, meaning that these 23 multinationals contributed only 2.6% of the total tax paid by the 124 multinationals. However, these 23 multinationals account for 20.8% of total sales and 17.2% of total profits earned by the 124 multinationals.

While 55% of the global turnover of the 124 multinationals is recognised in Spain, only 43% of the profits is recognised in Spain, and only 33% of the global tax is paid in Spain. Almost two-thirds of the assets held by these multinationals are held in Spain.

It is important to note that there are differences between the AEAT’s published statistics and the CbC reporting information due to different methodologies used, which are explained on the AEAT website.

Implications

These findings may cause the volume of transfer pricing audits to increase as the AEAT may want to understand the reasoning behind the statistics collected from the CbC reporting.  

Why is this information important?

The information provided by an analysis of the CbC reports suggests that the AEAT may continue to focus on transfer pricing audits during fiscal year 2022.

Analysing information sources, such as the CbC reports, and utilising AI, such as the automated transfer pricing risk analysis system, may help the AEAT to obtain a clearer picture of the multinational groups that operate in Spain and identify instances of non-compliance with Spanish transfer pricing regulations, which may then result in more audits.

Robust transfer pricing policies and documentation are increasingly important for multinationals to demonstrate compliance with the Spanish transfer pricing regulations.

How can BDO Spain help?

BDO Spain offers a broad range of transfer pricing and tax services so that our clients have robust transfer pricing and tax policies in place that are compliant with Spanish transfer pricing and tax laws and regulations.
 

Flavio Sanchez Huaman
flavio.sanchez@bdo.es

William Gingell
william.gingell@bdo.es