BDO Corporate Tax News

Spain’s Supreme Court issued three decisions on 8-9 October 2024 in which it held that the Ministry of Science and Innovation’s classification of software and computer development projects as “technological innovation” (TI) is binding on the tax authorities (STA) when determining the expenses that qualify for the super deduction for investments in R&D and TI projects for corporate income tax purposes.

The cases before the Supreme Court concern the way the STA challenged the applicability of the tax relief for investments in TI projects, even though the taxpayers provided information relevant to reports released by the Ministry of Science and Innovation. The Corporate Income Tax Law (CIT law) —as it applied in the years at issue—allowed companies to request a report from the Ministry of Science and Innovation that set out which of the taxpayer’s technologies qualified as innovative and thus qualified for the super deduction.

The STA maintained that the expenses related to the development of software and computer applications were not appropriate for the tax relief for innovation activities. The STA supported its conclusion with a report issued by an internal unit of the STA, the Equipo de Apoyo Informático (EAI). The EAI specializes in computer-related services and assistance during tax audits in the search for “hidden tax data.”

Decision of the Court

The Supreme Court concluded that a report issued by the Ministry of Science and Innovation is binding on the STA with respect to the classification of the project and whether investments made and expenses incurred have been reviewed and analyzed. The STA may not refute or ignore the report, either with respect to the classification of a particular project as qualifying for deduction or the expenses included in the project.

In reaching its decision, the Supreme Court analysed the wording of article 35 of the former CIT law and its reference to reports issued by the Ministry of Science and Innovation, the rules that govern the issuance of these reports (i.e., which define their nature, binding force and the competence of the ministry to issue these reports) and the resolution of the Presidency of the STA that integrated the EAI as a unit of the Office for Large Taxpayers). The Supreme Court concluded as follows:

• The classification of activities as IT for purposes of the tax relief is made by persons from the Ministry of Science and Innovation who have the necessary technical and scientific skills and expertise. The law recognizes this when it states that the ministry’s reports are binding on the STA.
• Although the scope of the word “binding” in article 35.4 can be subject to nuances and differing interpretations, the STA cannot contradict a duly issued report by experts that the project falls within the scope of TI.
• The STA’s power to inspect and control in this area is limited to confirming the existence of the expenses, whether they are properly recorded in the accounting records and their relationship to the relevant projects. The STA is not authorized to challenge, directly or indirectly (by disallowing the relevant expenses), the classification of a project as TI.
• The competencies granted to the EAI are to “investigate and analyse the structure of computer systems and databases, as well as their movements” with the aim of locating hidden data. The EAI does not have the specialized knowledge to classify projects as R&D or TI projects.
• The report prepared by the EAI was requested by the tax audit team and incorporated in the audit files even though the EAI was not appointed as an expert witness by the court. Thus, the report cannot be taken into account because: (i) it was prepared by one of the parties to the dispute and thus lacks impartiality; (ii) it was not presented as expert evidence by the court; and (iii) the taxpayer did not have an opportunity to raise questions about the report or request clarifications. The EAI report, therefore, cannot be considered anything more than an internal administrative document.
• The STA’s activities are contrary to the principle of legal certainty. Where a taxpayer follows the law, invests significant amounts in documenting its legally recognized rights, obtains a binding report from the adstration, and then applies for tax relief in its corporate tax return, only for the STA to question and actually disallow the relief, ignoring the binding nature of the report issued by the Ministry of Science and Innovation. The taxpayers reasonably relied on the reports issued by the ministry.
• The principle of the “single legal personality” of the administration is compromised when different bodies (i.e., the Ministry of Science and Innovation and the Ministry of Financed in this case) reach different and contradictory conclusions.

BDO Insights

In our opinion, although the Supreme Court emphasizes that the decisions are limited to the wording of article 35.4 of the old CIT law, the court provides compelling arguments that its conclusions could apply to cases arising under the current version of the article in the 2014 CIT law, since:

• The expert bodies competent to evaluate which activities qualify as R&D or IT are those in the Ministry of Science and Innovation.
• The EAI neither is qualified nor has the legal competence to evaluate or question any classifications as R&D or TI by the Ministry of Science and Innovation.
• The STA cannot de facto wholly refute a binding report issued by the Ministry of Science and Innovation by concluding that none of the expenses incurred by the taxpayer qualify for the application of the tax relief. Instead, the STA has to limit its involvement to assessing whether the expenses are related to the R&D or TI project, are correctly registered in the accounting records and whether the expenses can be included in the tax base of the deduction.
• The STA is a party in the judicial procedure and, therefore, the reports prepared by a body in its own hierarchical structure (the EAI report) cannot be considered expert evidence in the proceedings. These reports can only be considered “party reports,” whose value is nothing more than that of an administrative document. If the STA wished to produce expert evidence, it would have to request that the EAI report be provided to an independent expert or agency, and subsequently request that the court allow the report to be admitted into evidence.

The jurisprudence established through the three Supreme Court decisions provides a certain degree of legal certainty to an area that has been subject to controversy, i.e., the binding nature of reports issued by the Ministry of Science and Innovation with respect to the deductibility of R&D costs and TI. Henceforth, it can be expected that the STA will need to establish stronger justifications for challenging expenses and/or disallowing certain expenses in the tax base of the tax relief for R&D/TI investments when the taxpayer produces evidence that they are related to the project and are correctly supported and registered in the company’s accounting records.

Eugenio García                 
Patricia Romero
BDO in Spain