Inland Revenue loses half of the claims in court

It is no secret that Spain’s tax authorities and taxpayers are involved in thousands of ongoing disputes, with billions of euros at stake. These include challenges by individuals and companies to tax assessments and penalties arising from tax audits, as well as claims brought because the tax authorities have rejected a taxpayer’s requests.

The procedure for a taxpayer to challenge the tax authorities begins with a mandatory first step before the economic-administrative tribunals (TEAR and/or TEAC). These proceedings are free of charge for the taxpayer. They are therefore vital, providing an opportunity to challenge a decision by the tax authorities without the risk of incurring costs. This is a fundamental avenue, since individuals and companies cannot bring proceedings before the courts without a decision from these economic-administrative tribunals.

According to Xavier Rubert, a lawyer and partner at Lullius Partners, a firm specialising in tax procedures and litigation, “most taxpayers choose not to appeal. Often this is because they are unaware that there are professionals with expertise in this field; at other times, it is because of the widespread myth that you cannot win against the tax authorities. Fortunately, the statistics tell us otherwise. The tax authorities do not always win the battle. There is no doubt that it is worth appealing.”

Another highly contentious factor is the time these economic-administrative tribunals take to reach a decision, which can be up to three years at first instance. When they do, they rule in favour of taxpayers almost half the time. Taxpayers won 44.28% of these proceedings in 2021, according to the latest annual report for 2021 published by the Ministry of Finance. The tax authorities won 46.95% of proceedings. The remaining 8.77% falls under Other, which includes withdrawals and the closure of proceedings.

Of all claims brought, most decisions in favour of taxpayers relate to Inheritance and Gift Tax (69%), Transfer Tax and Stamp Duty (57%), Value Added Tax (51%) and Tax on Economic Activities (61%).

The number of claims brought also increased in 2021, reaching a total of 212,796, an increase of 12.38% compared with 2020. According to Xavier Rubert, “the volume of litigation with the tax authorities will increase year after year, primarily because of the growing sophistication and automation of their data processing (big data), combined with the considerable drive to raise revenue imposed by the government to sustain public spending.”

Tax inspectors receive additional variable remuneration that can amount to annual bonuses of between €18,700 and €32,000.

In theory, these incentives should be distributed among officials on the basis of effectiveness and merit. However, theory is far removed from reality and, unfortunately, the system rewards the quantity rather than the quality of the work. This happens regardless of the final outcome: the tax authorities lose 50% of the claims brought by taxpayers. In other words, even if a tax dispute is decided against the tax authorities, the inspector could still receive that bonus. The paradox is so striking that “it is as if a judge earned more money the more people they sent to prison”, Xavier Rubert observes.

In Xavier Rubert’s view, “the system should ‘penalise’ those inspectors who issue assessments and penalties without a legal basis — often almost recklessly and negligently — and whose actions are overturned on review. It should be possible to recover bonuses already paid or, where appropriate, prohibit future bonus payments for ‘malpractice’, particularly given that such ‘adventures’ cost taxpayers more than €250 million a year in interest. Let us remember that, this year alone, the Supreme Court ordered the tax authorities to refund Telefónica no less than €790 million in taxes unduly paid, together with a further €526 million in late-payment interest.”