The rules governing the so-called “inspection procedures and proceedings”, which are set out in the Spanish General Taxation Law (GTL), continue to reflect the legal and administrative traditions of the Tax Inspectorate, with few changes having been made to the provisions by which such processes have long been governed. Tax management procedures have undergone a profound evolution, and tax collection procedures, despite retaining the same basic structure, have been transformed in terms of their administrative organization and the powers of the bodies involved. The regulation of tax inspections, however, continues to be based on the existence of a single procedure centered on ex-post verification using what are essentially accounting and documentary audit techniques.
There have, of course, been some changes. These include the creation of two bodies which have become essential: the Large Taxpayers’ Central Office and the National Office of International Taxation. Along these same lines, we have seen a general shift towards the internationalization of proceedings, with the mutual assistance regime now being regulated by the GTL. Inspection proceedings more often have an investigative bias, as seen from the number of cases in which the commencement of the proceedings is marked by the entity’s registered office being entered and searched. These changes, however, are often inadequately regulated, whereas in other cases, they have to co-exist alongside a basic structure consisting of single verification and investigation procedure which is different from the management verification procedure; this takes place on an ex-post basis, the objective being to carry out a complete audit, or one of general scope, covering various taxes and periods.
Perhaps the time has now come to rethink the legal bases supporting the inspection procedure, or at least to begin considering the possibility of doing so. A reform of this type will be complex and sensitive, although it has to an extent been made unavoidable by the way in which our social, economic and international reality has evolved. In any event, our aim here is merely to put out a few basic ideas, focusing more closely on certain areas in which, in our view, the possibility of such a reform could at least be considered.
Firstly, we need to look at the very essence of the current system, based on the distinction between an inspection procedure and a variety of management procedures, all of which are in any event classed as verification procedures. The existence of a variety of management procedures may give rise to artifice and prove overly contentious in relation to the suitability of the procedure chosen in each case by the acting administrative body. The separation between management procedures and inspection procedures – with the verification of accounting records being reserved for the latter – is an organizational tradition of the State Administration which is worthy of respect. The fact is, however, that the exact demarcation is unclear, giving rise to no end of problems regarding the legitimacy of actions taken by management bodies, in addition to which more relevant criteria, based on the type and size of the taxpayer and the needs of the different tax Administrations, are overlooked. One possibility to be considered would therefore be the existence of a single verification procedure of which there would be different models in terms of scope of the proceedings, depending on the way in which each Administration is organized, the type of taxpayer and the tax being verified.
Secondly, any regulations governing inspection proceedings would need to address two aspects which currently lack an adequate and precise legal basis: proceedings carried out by the tax Administration which are purely investigative, and the link between inspection proceedings and so-called cooperative compliance or other formulas deriving from comparative and international experience. In addition, there is a need to regulate the classic inspection procedure in a manner which reflects what it is in reality, i.e. a computer audit procedure carried out on accounting data which is stored in data processing equipment.
As regards the purely investigative powers of the Tax Inspectorate, it already carries out proceedings of this kind and it is logical that it should do so. What is lacking, however, is proper regulation of such powers, which takes into account the rights of taxpayers. Such regulations would need to address a variety of issues, such as the power to obtain information, or to probe or monitor a particular taxpayer prior to the actual commencement of the inspection procedure. Similarly, the entering and searching of a domicile cannot continue to be based on nothing more than the existence of a legal rule which envisages judicial authorization of such actions where necessary in order to execute an administrative decision which, in reality, does not exist in this case. There need to be regulations which establish when such investigative proceedings are legitimate, how they are to be carried out, and what subsequent monitoring is to take place, based on the doctrine of the ECHR. Tax law should also reflect the consequences of the data protection regime, since in today’s world, the processing of data affects not only the bases of international taxation but also the bases which establish the limits applicable to actions by public authorities which are intrusive or affect a person’s private life. Finally, the particular characteristics of the Customs administration and how it links up with the Tax Agency as a whole need to be addressed.
What is more urgent, however, is the groundwork required to enable the Tax administration to function in a manner which reflects adequately the concept of cooperative compliance. The inspection procedure is based on a full ex-post verification procedure carried out according to a tax control plan and a system for the selection of taxpayers, whereas we need to move towards another type of model based on on-going relations and frequent communication between the Administration and major corporations, in which the inspection proceedings carried out are sporadic, partial, and based on an assessment of the tax risks. For this transition to work, companies must be transparent, the Administration must accept that it needs to respond to companies’ consultations in a manner which is clear and objective and respects the principle of legitimate expectation; and above all, we need to cease to assess how well the Administration functions based only on the purported cases of fraud discovered and the debts settled as a result of inspection assessments. This model will also require full inspection proceedings to be carried out in some cases, and the classing of taxpayers may well prove problematic in aspects such as objectivity, transparency, equality and even competition in the market.
It must be assumed, in relation to the changes referred to above, that the foreseeable evolution of any organization over the coming years will be characterized above all by internationalization and digitalization. Regarding internationalization, we have already seen the increasing importance of procedures relating to the verification of transnational groups or transfer pricing procedures, and a spectacular increase in the amount of data being passed on through international exchanges of information. Concepts which were all but unknown not so long ago have become commonplace, as we see with mutual agreement procedures, the importance of which – if the OECD’s predictions are anything to go by – is sure to increase. Inspections taking place simultaneous to proceedings carried out by another Administration and the exchange of information with other Administrations shall become more frequent, but we shall also see a normalization of informal relations between civil servants from different Administrations, all of which shall require the establishing of clear criteria, a change in training and mentality, and that the companies themselves be involved in the process of change.
Finally, the digitalization of the economy and of organizations will be reflected in an inspection procedure in which access to systems for the digital storage of information – primarily accounting data – is essential. More precise rules are therefore required on how these systems are accessed, the data obtained, how and for how long such data is to be kept, and the conditions in which it can be examined, with the involvement of the taxpayer or its representatives and advisors. A good starting point for anyone wishing to find out more about the legal requirements to which these changes will give rise is the Judgment of the ECHR of March 14, 2013 in the case Bernh Larsen Holding and others v.
Norway, which sets out the bases required to support an inspection procedure which relies on access to data stored in digital form.