When Compliance with the Law Is No Longer Enough

When Compliance with the Law Is No Longer Enough: An Uncomfortable Reflection on Spain’s Tax System

For many years, the basic principle of tax law was relatively easy to explain to a client: if a transaction is properly structured, complies with the rules and has a sound economic rationale, the tax risk should be limited.

Today, it is increasingly difficult to make that statement with the same confidence.

Many tax advisers perceive a gradual change in how tax rules are applied in Spain. This is not about one specific legislative change or a structural reform of the system. It is something more diffuse, but equally important: a shift in the practical approach taken in certain tax audits and inspections.

The issue is not that the tax authorities and taxpayers disagree on the law. Disagreement is inherent in any complex tax system. The problem arises when a disagreement stops being a technical debate and almost automatically becomes a tax adjustment accompanied by a penalty.

In many proceedings, a recurring pattern can be seen: the tax authority does not necessarily allege fraud or concealment of taxable income. Instead, it challenges reasonable legal interpretations, entirely valid corporate structures, or economic valuations that allow more than one technically defensible approach.

Yet the practical outcome is often the same: an assessment, interest and a penalty.

This puts tax advisers in a particularly difficult position. They must navigate three different layers:

• the legal interpretation of the rule;
• the taxpayer’s legitimate expectations; and
• the administrative position that may be applied years later.

The difficulty is that these three layers do not always align.

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Quiet legal uncertainty

One of the foundations of the legal system is the principle of legal certainty, recognised in Article 9.3 of the Spanish Constitution. It means that people should be able to foresee, within reason, the legal consequences of their conduct.

In tax matters, this means that tax planning carried out in accordance with the law should remain sustainable over time, rather than being reclassified years later as an infringement.

In professional practice, however, advisers often see situations such as:

• valid corporate structures later characterised as sham arrangements or as a conflict in the application of tax rules;
• business transactions reinterpreted after the fact on the basis of their supposed ultimate purpose; and
• real estate or corporate valuations challenged using methods different from those used by the taxpayer.

This does not necessarily mean that the tax authority has acted unlawfully. The problem lies elsewhere: certain legal concepts can be interpreted very broadly.

When concepts such as “conflict in the application of tax rules”, “simulation”, “related-party transactions” or “market value” are used under open-ended criteria, the system becomes far less predictable. And when predictability falls, legal certainty falls with it.

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The shift in tax risk

In theory, the tax system is based on a clear principle: the tax authority must prove that the taxpayer’s conduct was incorrect.

In practice, however, the legal risk seems to have shifted. Taxpayers are increasingly expected to prove that their conduct was reasonable, that their structure had a valid business purpose, or that their interpretation of the law was defensible.

This shift has important consequences for tax advisers. An adviser must do more than interpret the law. They must also anticipate how the tax authority might interpret it several years later, in a potentially different economic, political or academic context.

In other words, tax advisers do not work only with legal rules. They also work with interpretive uncertainty.

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The real problem: the cost of defending a position

One of the least examined aspects of Spain’s tax system is the real cost of defending a legal position.

A contentious tax procedure may typically involve:

1. submissions during a tax inspection;
2. an appeal for reconsideration;
3. an economic-administrative claim before a regional or central tax tribunal (TEAR or TEAC);
4. judicial review proceedings before a High Court of Justice; and
5. possibly an appeal on points of law before the Supreme Court.

This process can take between five and ten years.

During that time, the taxpayer may have to provide bank guarantees, bear financing costs and pay substantial professional fees. Even if the taxpayer ultimately wins, the financial and psychological strain can be considerable.

This creates an uncomfortable reality that is rarely stated openly: many taxpayers decide not to challenge certain assessments simply because the cost of litigation exceeds the potential benefit.

From an economic perspective, the system thereby creates a form of indirect pressure.

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The tax adviser’s role in this environment

In this setting, the tax adviser’s role is more complex than ever. The adviser is no longer just a technical specialist applying tax rules. They are also:

• a manager of legal risk;
• an interpreter of changing administrative criteria; and
• often, an advocate for the taxpayer in dealings with the tax authority.

This calls for a change in professional practice. Advisers increasingly need to ensure:

• thorough documentation of tax decisions;
• advance analysis of interpretive risks;
• a strong legal basis for the structures used; and
• a clear defence strategy in case of an audit.

Modern tax planning can no longer be based solely on what the law says. It must also account for how the tax authority may interpret the law during an inspection.

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A necessary reflection

Spain needs an effective tax system and an administration capable of tackling tax fraud. That is beyond dispute.

But effective tax collection should not be confused with an unlimited expansion of the tax authority’s interpretive discretion.

A sound tax system is measured not only by its ability to collect revenue, but also by its ability to build trust among those required to comply with it.

When taxpayers believe that following the rules may not be enough to avoid a tax dispute years later, the system loses some of its legitimacy. And when tax legitimacy weakens, so does people’s willingness to comply voluntarily.

Perhaps the most relevant question is therefore not how much revenue Spain’s tax system collects. The real question is: to what extent does the system provide genuine legal certainty to people who try to comply with the law?

In a healthy tax system, compliance with the law should be enough. It should not be merely the beginning of a legal battle that may last a decade.

Spanish original: Cuando cumplir la ley ya no basta