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Tax compliance and international taxation: behavioural guidelines

| News | Tax

Nicolás Díaz lists a series of guidelines for complying with tax obligations for entities operating outside Spain, as well as non-resident entities operating in Spanish territory

Fulfilling tax obligations is a complex task for many reasons. To name a few, the producers of tax regulations may be local (local entities), regional (Autonomous Communities), state (General courts) or international (European Union) in scope; modifications to such regulations are frequent (for example, the Personal Income Tax Law has been amended 51 times since its publication, while the Corporate Income Tax Law of 2014 has been amended 15 times); and their interpretation is, in many cases, complex enough to offer different interpretations.

Such complexity is even more evident in the case of entities operating at an international level, subject to the regulations of different States. The risk of having to bear a higher expense than expected, either in terms of tax payments greater than those recorded or paid, or in terms of sanctions, is greater.

The UNE 19602 standard (Tax Compliance Management Systems. In its introduction, it states that tax risk "has come to be seen as one of the main risks affecting all organizations, regardless of their size, sector of activity and presence, national or international", adding that "such tax risk, however, presents specific profiles with respect to companies or taxpayers that carry out transnational operations because its implementation has opened up new possibilities for tax avoidance".

The following is a list of certain aspects (not all of them, for reasons of space) that should be included in a Manuel of Good Tax Practices for entities operating outside Spain, as well as for non-resident entities operating in Spanish territory through a permanent establishment (PE).

1. Determination of tax residence. This will generally be the first element to be checked by any organisation. Its correct determination depends not only on knowing in which country the world income should be taxed, but also on whether a convention to avoid double taxation is applicable. In this sense, the effective seat of management is the criterion chosen by the OECD Model Convention to settle cases of double residence, so the organization must be especially diligent in avoiding any hint of doubt regarding the location of its effective seat of management (understood as "the place where the key commercial decisions and management decisions necessary to carry out all the business or professional activities of the entity are taken").

2. Existence of PE. Carrying out all or part of the activity in another jurisdiction through a fixed place of business will determine that the income obtained by a company may be subject to taxation in that jurisdiction, on terms like those of a resident in the same. The organisation must not only verify whether it complies with the requirements of the general clause in Article 5 of the OECD Model Convention but must also take account of the other cases covered by that standard (e.g. in the case of activities consisting of construction or installation works or projects, if its activity exceeds that provided for in the particular agreement which is applicable in order to be considered as a PE; or, in the case of multinational groups, if the subsidiary of a company in another country has the characteristics to be qualified as a "dependent agent" and therefore as a PE).

3. Limitation of benefits clauses in double taxation treaties. States may (in fact, they should) react to abusive practices by certain taxable persons who seek to benefit unduly from the provisions of a convention to which, in principle, they are not entitled (following the English terminology for such practices, treaty shopping or rule shopping). The agreements may include certain clauses that deny the application of all or part of the benefits of the agreement to those who incur in such practices. Thus, from the beneficial owner clause to broader clauses (such as that contained in the new Article 17 of the Agreement between Spain and the United States), the organization that intends to apply an agreement must adopt as a guideline of behaviour that of verifying that no anti-abuse clause is applicable to it.

Logically, as in any compliance system, continuous monitoring will be necessary to verify that no changes requiring corrective action have occurred (for example, in the case of works with an expected duration of less than 12 months, but which ultimately exceed that duration, or in the case of amendments to agreements introducing new benefit limitation clauses).

You can sea the article in Actualidad Jurídica Aranzadi.

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