The Supreme Court holds that the offset of negative tax bases (BINS) is a right and not a tax election

This post has been taken from the original article by Ms. Eva Mª Cordero, dated December 28, published in Revista Interactiva de Actualidad no. 47/2021 of the Asociación Española de Asesores Fiscales.

In its judgment of November 30, 2021 (appeal no. 4464/2020), the Supreme Court holds that the offset of negative tax bases (bases imponibles negativas, BINS) does not constitute an election (opción) under Article 119.3 of the General Tax Law (LGT), but rather a right of the taxpayer to which the limits on rectification laid down in that provision do not apply. This is a ruling of extraordinary importance, which puts an end to the long-running controversy over the nature of this mechanism that arose following the publication of the decision of the Central Economic-Administrative Court (TEAC) of April 4, 2017. Although the cassation appeal (recurso de casación) specifically concerns the possibility of offsetting negative tax bases in late-filed self-assessment returns, the exclusion of this mechanism from the regime governing elections means that the other limitations established by the TEAC’s administrative doctrine also fall away, such as the impossibility of requesting rectification of the self-assessment return to increase the BINS offset once the voluntary filing period has ended.

The Supreme Court judgment of November 30, 2021 puts an end to a long dispute over the effects of Article 119.3 of the LGT on the offset of negative tax bases, giving priority to taxpayers’ rights and safeguards and resolutely applying the principles of tax justice and legal certainty. It is a well-reasoned and highly clarifying ruling, with a major impact not only on the offset of BINS but, more generally, on the regime governing tax elections. It establishes that the offset of negative tax bases is a right of the taxpayer excluded from the scope of Article 119.3 of the LGT. As a result, it not only permits the offset of BINS in late-filed self-assessment returns, but also their full rectification under Article 120.3 of the LGT and their use within a verification procedure, subject to the limitations arising from Article 119.4 of the LGT. The importance the Court attaches to this mechanism for achieving the principles of tax justice should preclude any attempt at legislative reform that, as has already been seen in other areas, would limit its effects.

It should be recalled, in any event, that this decision had already been annulled by the judgment of the National High Court (Audiencia Nacional) of December 11, 2020 (appeal no. 439/2017), which held that Article 119.3 of the LGT did not apply to the rectification of self-assessment returns. However, this position had not yet been adopted by the TEAC, which, in subsequent decisions (TEAC decisions of July 22 and September 22, 2021), continued to uphold its doctrine, citing the fact that the National High Court judgment was not yet final and the absence of any ruling by the Supreme Court, before which several cassation appeals were pending.

Consequences of the Supreme Court’s case law.

Although the Supreme Court judgment refers only to the offset of BINS in late-filed self-assessment returns, the clarity of its reasoning in excluding it from the regime of Article 119.3 of the LGT has consequences for the various scenarios in which the TEAC’s doctrine had established limits on its rectification:

• Thus, under Article 120.3 of the LGT, it will be possible to request rectification of the self-assessment return in order to increase the negative tax bases previously applied, regardless of the amount offset when the return was filed. The position maintained until now by the TEAC prevented the rectification of mere errors made when self-assessing, which may now be corrected through the ordinary channel of Article 120.3 of the LGT. In our view, the interpretation adopted by the Supreme Court in this judgment would also permit rectification of the self-assessment return to request a switch from the application of BINS to tax credits and vice versa, where they are incompatible.
• Likewise, reinterpreting the TEAC’s doctrine in its decision of January 16, 2019, it would be possible to request rectification of the self-assessment return in order to offset “new” BINS, even where these do not stem from improper action by the tax authorities but from their increase through rectification of the self-assessment return for the period in which they arose. In any event, for these purposes it is necessary to bear in mind the limitation established in the Supreme Court judgment of July 22, 2021 (appeal no. 1118/2020), which prevents bringing to light negative tax bases not declared in the period in which they arose once that period has become time-barred.
• Furthermore, in the context of a regularization, the taxpayer (obligado tributario) will be able to use the negative tax bases it had pending, regardless of those offset in the self-assessment return, giving full effect to Article 119.4 of the LGT, under which “in the tax assessment resulting from a tax application procedure, the amounts that the taxpayer had pending offset or deduction may be applied.” The only limitation applicable in these cases would be that set out in the last clause of this provision, under which, for these purposes, such pending amounts may not be modified by filing supplementary returns or requests for rectification after the commencement of the tax application procedure. It should be recalled, in any event, that in its judgment of November 22, 2017, on the basis of the principle of full regularization, the Supreme Court had accepted this possibility before this limitation was expressly introduced into the LGT by Law 34/2015.

Relevance of the Supreme Court’s case law for other “election” cases.

Beyond the offset of negative tax bases, the Supreme Court’s case law in this judgment is undoubtedly relevant to other cases regarded as elections, to which the limitations established in Article 119.3 of the LGT have been applied. The characterization of elections that follows from this ruling will make it possible, on the one hand, to exclude from this regime those that are not clearly defined as such by tax legislation or in which there is not, strictly speaking, a concurrence of “different and mutually exclusive” regimes.

Thus, for example, under this case law, it is particularly doubtful whether the right to deduct input VAT (IVA) under Article 99.3 of the VAT Law (LIVA) can be classified as an election; under that provision, this right may be exercised in the self-assessment return for the tax period in which the holder incurred the deductible input tax or in those for subsequent periods, provided that the four-year period, counted from the date on which that right arose, has not elapsed. Various TEAC decisions, such as those of June 21, 2011, September 16, 2014, and January 21, 2016 (the latter issued for the unification of criteria), classify this possibility as an election, holding that it cannot be exercised, nor can a deduction already made be modified, once the deadline for filing the self-assessment return for the period has expired, without prejudice to its possible exercise in subsequent periods.

Likewise, the requirement of certainty in the exercise of elections that follows from this judgment, with the impossibility of deeming them tacitly exercised by the mere expiry of the voluntary filing period without the self-assessment return having been filed, will also be relevant for other cases in which it has been held that, absent a return, the regime less favorable to the taxpayer applies automatically, as occurred in the case decided by the National High Court judgment of September 27, 2021 (appeal no. 692/2017) in relation to the accelerated depreciation regime.

In its judgment of November 30, the Supreme Court notes that, given the imperfect statutory design of tax elections, the interpretation of their legal regime must take into account “the attendant circumstances” in each case, highlighting the difficulty of establishing general case law in relation to Article 119.3 of the LGT. In any event, this interpretation must be governed by the aforementioned principle of restrictive application of the limitations contained in this provision, under which the taxpayer should not be made to bear the negative consequences arising from the provision’s poor legislative drafting. The interpretation of this article should also be guided by the principle of full regularization, so prominent in the recent case law of the Supreme Court and the National High Court, as a principle instrumental to the principles of tax justice.

These principles must also shape the application of Article 119.3 of the LGT even in those cases that, under the Supreme Court’s new case law, may be regarded as clear tax elections, because the taxpayer is offered two distinct, mutually exclusive legal regimes clearly identified by the legislation. This should be the case especially for elections exercised within a self-assessment return since, as the TEAC pointed out in its decision of December 3, 1997, “the power of election, insofar as it forms part of the duty to self-assess, entails transferring to the taxpayer a series of complex tasks proper to the Administration.” While it remains to be seen how the Supreme Court’s case law may evolve, there is no doubt that the nature of the activities carried out by the taxpayer when self-assessing (assuming functions proper to the tax authorities, interpreting rules, classifying acts and transactions, and performing quantification operations) must be accompanied by a broad possibility of rectifying any errors or omissions made, including any choice of regimes or alternatives that the taxpayer has made and that turns out to be unfavorable, in application of the substantive principles of tax justice.