According to the National High Court, the tax options regime does not apply to the offset of tax loss carryforwards (BINs)

An important judgment of the National High Court (Audiencia Nacional) of December 11, 2020 (appeal no. 439/2017) has just set aside the decision of the Central Economic-Administrative Court (TEAC) of April 4, 2017 (RG 1510/2013PDF). That decision, as readers may recall, was the first in which the TEAC clearly held that the offset of tax loss carryforwards (bases imponibles negativas, BINs) constituted the exercise of a “tax option” (opción tributaria) as defined in Article 119.3 of the General Tax Law (LGT). It distinguished four possible scenarios, together with their effects and consequences, and this doctrine (albeit with some qualifications) is the one the Spanish tax authorities have been applying ever since and the TEAC itself has reiterated.

The National High Court has now turned this doctrine completely on its head. It holds that the limitation established in Article 119.3 LGT does not apply to the offset of BINs. Under that limitation, once the taxpayer has exercised the option, it may not change it if the voluntary or regulatory filing period has already ended.

It should be recalled that, in the case under review, the taxpayer requested the rectification of its Corporate Income Tax (IS) self-assessment return for fiscal year 2011, since it had reported BINs from fiscal years 2001 and 2002 that were lower than those it was entitled to apply.

Although the National High Court’s judgment is not very generous in its legal reasoning, it upholds the appeal filed by the taxpayer and agrees with the arguments the taxpayer put forward, which it summarizes as follows:

• rejection of the view that the offset of BINs constitutes a tax option.
• the offset constitutes a right or entitlement of the taxpayer, which cannot be subject to a time limit, because there is no legal basis for doing so.
• the limitation imposed by the contested decisions is contrary to the constitutional principle of ability to pay, referred to in Article 31 of the 1978 Constitution.

The National High Court thus distinguishes between the legal regime applicable to tax returns and the regime applicable to self-assessment returns. Tax returns are governed by  Article 119 and, therefore, by the limitation laid down in Article 119.3 LGT. That limitation does not apply to self-assessment returns, which are subject to a different legal regime set out in Article 120 LGT. That article allows a taxpayer (obligado tributario) to request the rectification of a self-assessment return when it considers that the return has harmed its legitimate interests in any way, in accordance with the procedure laid down in regulations, and that procedure does not provide for the time limit established in Article 119.3 (referred to above).

Accordingly, the Chamber concludes that “it is irrelevant whether or not the offset of BINs is a tax option, within the meaning of Article 119.3 of the LGT, because that provision does not apply in cases, such as the one analyzed, involving the rectification of self-assessment returns.”

In short, it cannot be said that the National High Court has rejected outright, and in all cases, the view that the offset of BINs constitutes the exercise of a tax option. It does, however, consider it improper to apply the limitation in Article 119.3 of the LGT to cases in which the taxpayer requests the rectification of its self-assessment return by changing the BINs to be offset. In other words, it is valid to request the rectification of the IS self-assessment return in order to modify the offset of BINs initially made, even where such rectification is requested after the regulatory deadline for filing the self-assessment return has passed.