International Tax Planning and Transfer Pricing Planning: Spain from a US perspective

Autor:Professor Dr. Rainer Zielke
Cargo del Autor:Professor in business economics at Østfold University College, Halden, Norway
Actualizado a:April 2017
 
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Contenido
  • 1 Abstract tax planning
  • 2 Abstract transfer pricing planning
    • 2.1 Introduction
    • 2.2 The high tax country Spain in the OECD context
    • 2.3 Transfer pricing rules of Spain
      • 2.3.1 Arm's length principle
      • 2.3.2 Transfer pricing methods
      • 2.3.3 Scope of legislation
      • 2.3.4 Reporting requirements
      • 2.3.5 Country-by-Country reporting
      • 2.3.6 Documentation requirements
      • 2.3.7 Cost sharing
      • 2.3.8 Interaction between customs valuation and transfer pricing
      • 2.3.9 Dispute resolution
    • 2.4 Calculation of the case studies in international tax planning between Spain and the USA
      • 2.4.1 Design of the tables
      • 2.4.2 The treaty Spain-USA in brief
      • 2.4.3 BEPS Project progress
      • 2.4.4 Spain in brief
      • 2.4.5 The USA in brief
      • 2.4.6 Design of case studies
      • 2.4.7 Case study 1: Dividends from Spain to the US
      • 2.4.8 Case study 2: Interests from Spain to the US
      • 2.4.9 Case study 3: Royalties from Spain to the US
      • 2.4.10 Case study 4: Management and technical service fees from Spain to the US
      • 2.4.11 Case study 5: Capital gains with Spain as asset country to the US as seller country
      • 2.4.12 Case study 6: Dividends from the US to Spain
      • 2.4.13 Case study 7: Interests from the US to Spain
      • 2.4.14 Case study 8: Royalties from the US to Spain
      • 2.4.15 Case study 9: Management and technical service fees from the US to Spain
      • 2.4.16 Case study 10: Capital gains with the US as asset country and Spain as seller country
    • 2.5 Concluding remarks
  • 3 Notes
Abstract tax planning

According to the International Monetary Fund, Spain confirms in 2016 with a gross domestic product (GDP) of US$ 1,252,160 million the fifth-highest GDP of Europe. In Spain the general rate of corporate income tax (Impuesto de Sociedades) is 25.00%. The Spanish income tax system is a partial imputation system. Profits are initially taxed at the corporate level and then in the hands of the shareholders, but corporate shareholders may benefit from the participation exemption. Consequently, the income tax burden in the hands of individual shareholders is to be added. Thus, Spain is a high tax country. Especially for multinational enterprises, it is therefore interesting to realize profits in lower taxing countries by means of tax planning measures. Spain has introduced numerous anti-avoidance rules to avoid erosion of the taxable basis and to avoid profit shifting. According to the OECD, the Spanish economy has grown strongly in 2016, led by domestic demand spurred by easy monetary policy in the euro area and a fiscal stimulus. The expansionary phase is expected to continue in 2017 and 2018, with domestic demand leading the recovery, albeit at a slower pace as some factors that have contributed to boost consumption, such as low oil prices and lower taxes, will recede. Inflation will gradually pick up as the effects of low oil prices diminish, but pressures will remain moderate due to still high unemployment. The unemployment rate is declining, but remains high, at about 19%. While falling, high long-term and youth unemployment pose particularly acute challenges. This chapter provides a survey on the actual tax law frame conditions in Spain and practical support in international tax planning and transfer pricing planning between Spain and the US based on cross border case studies.

Abstract transfer pricing planning

With respect to transfer pricing Spain applies the arm’s length principle and the OECD Guidelines, the following transfer pricing methods are applicable: the comparable uncontrolled price (CUP), the cost-plus, the resale price method, the profit split and method and the transactional net margin method (TNMM).There are six different ways to take parties as related. There are reporting requirements and documentation requirements. Cost sharing is allowed, there is a connection between customs valuation and transfer pricing and with respect to dispute resolution advance pricing agreements are available.

Introduction

International tax planning and transfer pricing planning between Spain, a capitalist mixed economy that is the 16th largest worldwide and the 5th largest in the European Union, as well as the Eurozone's 4th largest, and the US as most important national economy of the world based on cross-border case studies is of central importance. In addition, the USA confirm with a population of 321 million inhabitants in 2015 3rd place of the most populous countries in the world (4.40% of the world population). [1] Further, Spain is one of the most populous countries in Europe.

According to the International Monetary Fund, [2] Spain confirms in 2016 with a gross domestic product (GDP) of US$ 1,252,160 million the fifth-highest GDP of Europe. In Spain the general rate of corporate income tax (Impuesto de Sociedades) is 25.00%. The Spanish income tax system is a partial imputation system. Profits are initially taxed at the corporate level and then in the hands of the shareholders, but corporate shareholders may benefit from the participation exemption. Consequently, the income tax burden in the hands of individual shareholders is to be added. Thus, Spain is a high tax country. Especially for multinational enterprises, it is therefore interesting to realize profits in lower taxing countries by means of tax planning measures. Spain has introduced numerous anti-avoidance rules to avoid erosion of the taxable basis and to avoid profit shifting.

According to the OECD, [3] the Spanish economy has grown strongly in 2016, led by domestic demand spurred by easy monetary policy in the euro area and a fiscal stimulus. The expansionary phase is expected to continue in 2017 and 2018, with domestic demand leading the recovery, albeit at a slower pace as some factors that have contributed to boost consumption, such as low oil prices and lower taxes, will recede. Inflation will gradually pick up as the effects of low oil prices diminish, but pressures will remain moderate due to still high unemployment. The unemployment rate is declining, but remains high, at about 19%. While falling, high long-term and youth unemployment pose particularly acute challenges. More effective active labor market policies and re-skilling are needed, along with a recovery in demand. Boosting living standards in the medium term hinges on increasing productivity via higher investment in innovation, strengthening skills and more intense competition. After the significant easing of fiscal policy in 2015 and 2016, the fiscal stance will provide modest support over the projection period. With public debt around 100% of GDP and the deficit still at slightly below 5% of GDP, the scope for fiscal expansion is limited. It is nevertheless important to stimulate growth by shifting spending towards growth-enhancing outlays, such as education, active labor market policies and R&D, which are all below those in peer countries after having fallen substantially since the crisis. The structure of taxation remains tilted towards labor income, which penalizes growth and employment, and the tax burden should be shifted towards consumption and environmental taxes.

According to Orbitax, [4] (Daily Tax News Digest of 5 December 2016),

on 2 December 2016, it was announced that the Spanish Cabinet has approved the submission of the 2017 Budget to parliament. According to the announcement and a summary of measures, the main tax-related aspects of the Budget include:

  • Maintaining the 25% corporate tax rate;
  • Changes in loss treatment, including: Disallowing the deduction of losses on the transfer of shares in entities eligible for exemption from tax on dividends and capital gains income; Disallowing the deduction of losses generated by participations in entities located in tax havens or territories that do not have an adequate level of taxation; and Limiting the offset of loss carryforwards to 50% for companies with net turnover between EUR 20 and 60 million, and limiting offset to 25% for companies with net turnover in excess of EUR 60 million;
  • Increasing excise taxes on certain alcohol and tobacco products;
  • Introducing measures to combat fraud, mainly in the area of VAT, including a new online settlement system for value added tax (VAT);
  • Improving administration and collection, including restricting the possibility to delay payment of certain tax debts; and
  • Introducing a tax on carbonated and sugary drinks.

Click for the Spanish Tax Reform 2017. [5]

This article had been written based on the following sources:

  • Orbitax[6], Orbitax Country Analysis Spain and USA, Orbitax Cross-Border Calculation Tools, Orbitax Transfer Pricing Tool,
  • the Spanish Corporate Income Tax Code (Impuesto de Sociedades), [7]
  • the Spanish Tax Reform 2017, [8]
  • the US Internal Revenue Code[9], and
  • the Double Taxation Convention between Spain and the USA dated 22 January 1990 and effective from 1 January 1991. [10]
The high tax country Spain in the OECD context

International tax planning and transfer pricing planning between Spain and the US based on cross-border case studies is of central importance. In Spain the general rate of corporate income tax (Impuesto de Sociedades) is 25.00%. The Spanish income tax system is a partial imputation system. Profits are initially taxed at the corporate level and then in the hands of the shareholders, but corporate shareholders may benefit from the participation exemption. Consequently, the income tax burden in the hands of individual shareholders is to be added. Thus, Spain is a high tax country. Spain has introduced numerous anti-avoidance rules to avoid erosion of the taxable basis and to avoid profit shifting.

Between OECD Member States, especially Spain and the US, and other countries and also within the OECD there exists – also in 2016 – a considerable tax differential. Here from there results the incentive to international tax planning and to shift the taxable basis into lower taxing OECD Member States and other countries outside the OECD. Primary parameters of the corporate income tax burden of any country are the...

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