The Breakdown of Bilaterality in Transfer Pricing Adjustments

This adjustment should, in principle, be made bilaterally—that is, both for the taxpayer taxed under Personal Income Tax (IRPF), such as a shareholder, and for the party taxed under Corporate Income Tax (IS). The issue arises when the State Tax Agency (AEAT) and the Central Economic-Administrative Tribunal (TEAC) process and decide the related proceedings separately, creating a disconnect between the two sides.

Analysis of the National High Court judgment of 31 January 2025, appeal No. 709/2020

The analysis is structured around several key points:

• Valuation of related-party transactions:
  Under Article 16(1)(2) of the former Corporate Income Tax Law (TRLIS), in the version applicable at the time, and Article 41 of the Personal Income Tax Law, the Administration may check whether related-party transactions were valued at market price and make the relevant adjustments if they were not. This is the legal framework under which, in principle, both the shareholder and the company should apply a common valuation criterion.
• Parallel proceedings and the breakdown of bilaterality:
  The AEAT conducted three separate tax inspection proceedings, one for each party involved—the shareholder and the related companies. However, because the appeal was limited to the shareholder’s IRPF case, the companies’ IS adjustments became final. The adjustment therefore ceased to be bilateral: the Corporate Income Tax adjustment was finalised, while the Personal Income Tax side remained under review, resulting in inconsistent tax treatment.
• Case law and the principle of good administration:
  The article cites the Supreme Court judgment of 4 October 2022, which emphasises that the Administration must act diligently and in accordance with the principle of good administration, so that individuals do not suffer harm from improper administrative action. It criticises the AEAT and the TEAC for failing to act in accordance with that principle, causing dysfunction and harming taxpayers’ right to a bilateral adjustment.
• “No one may benefit from their own wrongdoing”:
  The article invokes the maxim allegans turpitudinem propriam non valet, underlining that the Administration should not benefit from its own errors or improper actions. The proposed solution should prevent the breach of this principle in advance, rather than try to mitigate its consequences after the event.

Proposed solution

The solution is for the part of the adjustment that the AEAT allowed to become final—the companies’ Corporate Income Tax position—to determine the valuation criterion for the related-party transactions. Accordingly, the shareholder’s IRPF decision should align with the ruling on the related companies’ IS position. This would remove the discrepancy and should lead to the annulment of the challenged decision and the resulting assessments based on an inconsistent criterion.

Conclusions and critical assessment

• Why uniformity in tax adjustments matters:
  Bilaterality in related-party adjustments is essential to ensure that all parties are treated under the same criterion. Breaking that bilaterality creates legal uncertainty and harms taxpayers.
• The need for coherent and diligent administrative action:
  The AEAT’s and TEAC’s decision to limit their actions to one of the two sides—IRPF versus IS—was decisive in creating the controversy. This conflicts with the principle of good administration because it directly affects taxpayers’ rights and interests.
• Prevention versus correction:
  The final criticism is that the answer should not focus only on correcting or mitigating the consequences after they arise. It should prevent these discrepancies in the first place, ensuring consistent and fair treatment from the outset of related-party adjustments.

In short, a fragmented review of related-party transactions can break the bilaterality of an adjustment. The criterion established for Corporate Income Tax should guide the entire process, and the public administration must act consistently, diligently and in accordance with the principle of good administration.