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Guide to mutual agreement procedures

Compatibility with anti-abuse clauses

  1. Mutual agreement procedure requested under the Arbitration Convention.

    In certain situations, the adjustment that, according to the taxpayer, has resulted in taxation not in accordance with the Tax Convention is carried out pursuant to an anti-abuse rule. Regarding domestic anti-abuse regulations, this would include both general anti-abuse regulations, such as those contained in Articles 15 and 16 of the General Tax Law, as well as specific regulations, such as, for example, those established in Article 15.h) of Law 27/2014, of November 27, on Corporate Income Tax.

    An example of the application of an anti-domestic abuse clause would be the case in which the Spanish tax authorities determined that financial expenses incurred for the acquisition of an entity were not deductible because it considered that the structure of operations giving rise to said financial expenses was clearly artificial or inappropriate for achieving the result obtained and there were no relevant legal or economic effects other than tax savings and the effects that would have been obtained with usual acts or businesses.

    In cases such as the one described above, what is called into question is the transaction itself and the motivation for it, without going into assessing or correcting the price or other terms of the transaction, to reflect what would have been agreed between independent companies in comparable circumstances. Therefore, even if the transaction involves related entities, these situations generally fall outside the scope of the Arbitration Convention, which aims to correct the double economic taxation that can arise when the valuation of transactions between associated entities sets conditions that do not respect the arm's length principle.

    Consequently, if a request is made to initiate a mutual agreement procedure under the Arbitration Convention regarding a situation regularized under an anti-abuse provision, the specific case will need to be analyzed to determine whether it should be accepted or rejected.

  2. Mutual agreement procedure requested under a Tax Treaty or the Directive.

    The situation is different in the case of procedures initiated under the applicable Tax Treaty or under the Directive (provided that this, in turn, is based on the applicable Tax Treaty). In these cases, provided they meet the requirements for initiating the mutual agreement procedure, the regularized cases will be granted access to it by virtue of an anti-abuse clause.

    In any event, the following circumstances must be taken into account:

    • access does not necessarily mean that the competent authorities have to reach an agreement to eliminate double taxation;

    • the competent authorities may, in any case, reach an agreement concluding that the adjustment carried out does not constitute taxation not in accordance with the applicable Tax Treaty, thereby putting an end to the mutual agreement procedure; and

    • There are Tax Conventions that expressly exclude from arbitration cases resulting from the application of anti-abuse rules, both domestic and agreed upon, such as the Double Taxation Convention with Japan or those that include an arbitration clause as a result of the application of the Multilateral Convention.