The Principle of Full Tax Regularisation

The principle of full tax regularisation requires the Tax Administration to correct a taxpayer’s position both in the taxpayer’s favour and in the Administration’s favour.

Among the most recent rulings on this principle is the Supreme Court judgment of 28 February 2023 (appeal in cassation no. 4598/2021), which states:

“[…] As a first approach to the nature and rationale of the principle of full tax regularisation, it is a general principle of tax law developed by the courts and inspired by constitutional and statutory principles. It starts from the widespread practice of declaring taxes and calculating them through self-assessments, under which the law places on those liable to pay the virtually universal burden of declaring the taxable event and quantifying the tax debt.

In that context, the principle comes into play when the Tax Administration, exercising its statutory powers, makes a corrective adjustment to a self-assessment. Its aim is for that adjustment to be complete: all corrections and adjustments needed to rectify or establish the taxpayer’s overall position must be made during the review, whether they benefit or disadvantage the Administration.

That adjustment may, of course, affect periods, taxes or persons other than those initially covered by the review procedure. In either case, its ultimate purpose is to ensure that the taxpayer is not adversely affected by the collateral consequences of the adjustment. The concept of connected obligations is reflected in the General Tax Law (including Articles 68 and 225, following the amendment made by Law 34/2015), showing that taxes are not watertight compartments, whether considered individually or in relation to other taxes.

The Supreme Court has repeatedly applied the principle of full tax regularisation and linked it directly to substantive and procedural principles. Among the substantive principles is tax justice, through which the duty to contribute to public expenditure is fulfilled in accordance with economic capacity (Article 31.1 of the Spanish Constitution). More specifically, it serves to prevent double taxation and unjust enrichment, which follow from that principle of justice. Procedurally, the principle is also connected to effectiveness and efficiency in an organisation serving the general interest (Article 103 of the Constitution), rejecting needless complications, contrivances or flimsy excuses for failing to refund amounts overpaid, as well as to proportionality in the application of tax law (Article 3.2 of the General Tax Law).”

A practical example

The Supreme Court applies the following rule in light of this principle:

Where, following a Personal Income Tax adjustment, a company’s economic activity has been treated as non-existent and its income attributed to its individual shareholder, the principle of full tax regularisation requires the administration responsible for assessing Net Wealth Tax to take account of the consequences for the valuation of the shares (Article 16 of the Net Wealth Tax Law) if it adopts that same view to deny the exemption for those shares because the requirements of Article 4(8)(Two)(a) of that Law are not met. This must reflect the resulting change in the value of the company’s net assets.