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The principles of legality, proportionality and direct primacy of European Union Law in the field of sanctioning law

Recently, the second section of the Contentious-Administrative Chamber of the Supreme Court (TS) has issued the sentences of July 25 (rec. 5234/2021) and July 26 (rec. 8620/2021) in which the principles of proportionality and legality are discussed in depth regarding the establishment and modification of tax infractions and penalties and the principle of direct primacy of European Union Law.

The Rulings we will analyse in this report are of great legal significance from two points of view: one, material or substantial, as it refers to the application of the principle of proportionality in the sanctioning procedure, due to infringing Article 170.2. 4 of Law 37/1992, of December 28, regulating the Value Added Tax (hereinafter LIVA )—, and the second, of a procedural nature, in alleged conflicts of laws national and European, on the channeling of the principle of direct primacy.

The specific purpose of the cassation appeal (in cassation No. 5234/2021), promoted by the State Attorney's Office, is to respond to the question formulated in the Admission Order, which consists, as stated in the aforementioned, of determining whether a jurisdictional body can annul a sanction imposed for the commission of the infraction provided for in article 170.Dos.4 of the LIVA , consisting of not recording in the self-assessment that must be presented for the corresponding period the amounts of which the recipient of the operations is a taxable person, based on the violation of the principle of proportionality, since article 171.One.4 of the LIVA quantifies the sanction in a fixed percentage of the amount left to be allocated without the possibility of weighing the lack of economic damage to modulate the sanction; that is, adjusting the proportion between the classified conduct and its punishment, in light of the circumstances. All of this, without the need to raise a preliminary or unconstitutional ruling on this last point.

The material, or substantial, nature is therefore posed in cases where this percentage does not enable the interpreter to adjust the sanction, that is, if the proportionality may only be considered by the law or, in other words, established at the legislator's will. In relation to the question raised, the Supreme Court resolves by affirming that such annulment of the sanctioning act and the subsequent non-application of the legal norm that determines it is possible, when the competent judge or court determines, in the national sanctioning law, a violation of the principle of proportionality established by the Law of the European Union, an infringement that can be considered concurrent in article 171, One.4 LIVA , which quantifies the sanction in a fixed percentage of 10 percent of the quota left to be recorded, without the possibility of weighing the lack of economic damage to modulate the sanction, in an omissive conduct in which, for the TS, no such damage is caused to the public treasury (quota 0), and is foreign to any idea of tax fraud.

And this is the case for the Supreme Court, regardless of the sanctioning system established for sanctions within the scope of VAT not being standardised - as opposed to the tax itself, albeit with different degrees of standardisation, in Council Directive 2006/112/EC, of 28 November, on the common system of Value Added Tax (VAT Directive), which is not understood by the Supreme Court as the domestic legislator having unlimited powers to legislate without considering the European Union Law, since it must be adapted to the principle of proportionality (which is also present in the Charter of Fundamental Rights of the EU, in Article 49.3: "3. The severity of penalties must not be disproportionate to the criminal offence"). It does not guarantee the principle of proportionality, because the imposition of sanctions "cannot reach beyond what is required to ensure the correct tax collection and avoid fraud", but the fact is that in this case it does go beyond, as according to the Supreme Court, the sanction is imposed regardless of protecting tax collection or fraud prevention.

The Supreme Court sets the general sanction provided for in Article 198 of the General Tax Act (hereinafter, "LGT") as a paradigm of proportionality for these cases, which sanctions self-settlements and filings that are not submitted on time and that do not cause economic damage as an infringement relating to the formal requisite. This infringement, considered minor, involves a fixed fine of 200 euros, whereas it considers the fine imposed in the case of orders —1,848,000 euros, that is, 970,200% more— disproportionate, beyond the fact that the LGT is not applicable to it due to being a general law that is not applicable to the sanction of the VAT Act, as a result of the aforementioned principle lex especialis derogat lex generalis .

The second of the problems raised, which arises from the first, is related to the manner in which this doctrine should be applied to the specific case: if, for it to be heard by the Judge or Court, it requires a prior ruling of unconstitutionality or disagreement with the provision applicable by European Union Law; or if the national judge can directly apply it without having to question the applicable regulation beforehand. The Supreme Court concludes in this regard and in relation to European Union Law that in spite of prevailing as the general rule the obligation of the competent judge or court to raise with the Court of Justice an issue related to the interpretation of European Union Law —Article 267 TFEU - (the question referred for a preliminary ruling), if it considers a decision in this regard necessary to be able to issue its ruling, however, it considers that the doctrine itself of the CJEU exempts from such duty the cases in which the resubmission is unnecessary, as it considers to be the case in the sanctioning case that we analyze, since there is an act clearly clarified in the sentences of April 26 of 2017 (Farkas, C-564/2015) and April 15, 2021 (Grupa Warzywna, C-935/19), applicable to the case discussed, in which relevant guidelines are given to appreciate that the sanction that quantifies the article 171.One.4 LIVA is not in accordance with the principle of proportionality.

In the aforementioned Farkas ruling and in the case we are analysing here, the sanction was imposed due to the omission of a formal requisite, purely procedural in nature, that is, as a consequence of not declaring the VAT of a subject and exempt operation, to the extent that it is adjusted in a certificate of conformity with zero tax liability. Notwithstanding the above, the comparison of the base case used by the Supreme Court to exempt the need for a statement that responds to the questioning of proportionality of the national law and the case we are dealing with here is incomplete; On the contrary, since in the Farkas case the sanction provided for in the Hungarian norm is 50 percent of the theoretical quota and in our case it is 10 percent, as a single sanction, established in art. 171.One.4 LIVA .

The Supreme Court concludes that, due to the principle of primacy, European Union Law prevails over national law; therefore, the latter may be inapplicable, whether raising a preliminary ruling or not, on the basis of the principle of acte clair or acte éclairé, which in the instance ruling upholds the decision. This allows the Spanish norm—art. 171.Uno.4 LIVA —, because it quantifies the sanction in a fixed percentage of the amount left to be allocated without the possibility of weighing the lack of economic damage to modulate the sanction, in violation of the principle of proportionality, in a context of absence of economic damage to the treasury and any idea of tax fraud.

Lastly, the Supreme Court also establishes the doctrine of case-law regarding the need or not to pose the question of unconstitutionality, stating that it is not necessary to raise this in matters of a similar nature to the one being judged here: either when the Trial Court finds no doubt that the regulation with the power of law applicable to the case, and the validity of which is dependent upon the ruling, may be contrary to the Constitution, such as in this case, it would be articles 170 and 171 of the VAT Act, in applicable sections —Article. 35 of the Constitutional Court Act—; or when if in doubt, it considers that regulation with the power of law applicable to the case could also be contrary to European Union Law, in which case, considering the Constitutional Court's recurring criteria, the appropriate course of action is to first raise a preliminary ruling -or not apply the regulation-, taking into account the doctrine arising from Court of Justice's Sentence (Grand Chamber) of 6 October 2021, Case C‑561/19, Consorzio Italian Management, and in Cilfit and others, case number C-283/81, which establish and reinforce the principle of acte clair and acte éclairé.

You can view the full text of the sentences in the following links: STS 3586/2023, dated: 25/07/2023, which resolves appeal No. 5234/2021; and STS 3509/2023, dated 26/07/2023, which resolves appeal No. 8620/2021.