Tax penalties/fines had been issued following a transfer pricing adjustments in regards of controlled transactions exempt from Spanish TP documentation requirements. An appeal was filed by the taxpayer claiming to be excluded from the Spanish penalty regime. The appeal was dismissed by the lower courts. Judgement of the Supreme Court The Supreme Court upheld the decision of the lower courts and dismissed the appeal of the taxpayer. The Court ruled that the specific transfer pricing penalty regime in Spain is only applicable to the related-party transactions subject to transfer pricing requirements and that controlled transactions exempt from Spanish TP documentation requirements can trigger tax penalties where adjustments have been issued by the tax authorities. In cases, where the taxpayer is exempt from TP documentation requirement, art. 16.10.4 of the TRLIS (the exclusion from penalties) does not apply. The exclusion from penalties provided for in paragraph 4 of art. 16.10 TRLIS is only applicable when the following three circumstances apply: (a) the taxpayer has not failed to comply with the formal obligation to keep the corresponding documentation ex art. 16. 2 TRLIS; (b) that the value declared by him in his tax return coincides with that stated in the documentation of the related-party transaction; and (c) that, despite the existence of this documentary coincidence, the normal market value attributed to the related-party transaction is incorrect and has required a valuation correction by the tax authorities. Only where these three cumulative circumstances are met, the conduct of the taxpayer will not be punishable either in accordance with the specific penalty regime contained in art. 16.10.1 and 2 TRLIS or in accordance with the general penalty regime established in the LGT. Hence, If the taxpayer is exempt from the formal transfer pricing documentation obligations, the tax authorities may adjust the transfer price of the related-party transactions and apply the general penalty regime provided for in the General Tax Law. “The logical consequence of the foregoing can be none other than the dismissal of the appeal lodged by the legal representation of Mr. Matías, as the court decision under appeal has correctly interpreted the legal system by considering (a) that article 16.10.4 TRLIS is not applicable because the appellant is exempt from the formal obligation to keep and maintain at the disposal of the tax authorities the documentation relating to related-party transactions established in article 16.2 TRLIS and developed in article 16.2 TRLIS. 16.2 TRLIS and developed by Royal Decree 1777/2004, and (b) that, in the absence of the application of the special penalty regime established in art. 16.10 TRLIS, it is appropriate to apply the general penalty regime established in the LGT and, in particular, in this case, art. 191 LGT, provided that the objective and subjective elements of the type of offence that we have established in our case law are present, as the Court of First Instance has found and is not the subject of controversy.” Click here for English translation Click here for other translation ...