The mexican giant CEMEX has learnt how hard can be a Spanish tax officer. Nobody knows for sure what has happened since most media news are not technically written and the Tax Office (AEAT) has refused to comment anything, pleading that it cannot comment the affairs of a tax payer.
What we know is that CEMEX had set up a Spanish Holding company as its vehicle to hold most of its worldwide investments. Spanish Holding companies had several features which made them one of most interesting ones for international tax planning. Apart from a quite generous participation exemption regime and an extensive Tax Treaty network, these companies were allowed to deduct interest paid to fund investments in other companies and impairment losses derived thereof. These tax advantages were being used by multinational groups to reduce their overall tax burden by artificially generating debt and attributing it to a Spanish holding company. For instance, a parent company sold a subsidiary to a Spanish company which financed the acquisition with a loan granted by another group company, generally located in a low tax jurisdiction.
The related party interest expense accrued on the debt derived from these intra group reorganizations, was often challenged by the Tax Office on the grounds that it lacked economic substance, that is, that the transactions were fiscally motivated. Honestly no one can blame the tax man for having such an oppinion.
Now the Law has changed and the related party debt is always disallowed when the funds borrowed are used to invest in other group companies. See our post related party debt disallowed for tax purposes to know more about this matter.
If this is the case with CEMEX, as I believe, there are a few noteworthy comments:
- Although the “substance over form” rule is widely adopted in most tax systems, it should be applied cautiously. In any case a tax payer cannot be fined for using a tax loophole. It is understandable that the Tax Authorities may want to re-characterize a transaction and oblige to pay the due tax ( for instance, disallowing a tax deduction). But imposing a fine of EUR 450 Millions, as seems to be the case with CEMEX, is a non sense.
- Furthermore, according to the information of the press, CEMEX had previous years tax losses which could offset any tax liability derived from the tax regularization. Thus, the disallowing of these expenses did not actually imply any tax payment. No tax revenue was lost for the Spanish Treasury. So this outrageous fine seems to be based on the risk event infringement established in the Spanish Law. This rule allows the tax man to impose a fine of 15 % of the expenses disallowed even if no tax liability arises as a consequence of the tax audit, because of the existence of current or past tax losses. The rationale of this rule is that by registering these non deductible expenses, the tax payer is preparing the path for future tax elusion. Thus, the Law anticipates the reaction and hits the tax payer in the tax year when the expenses were incorrectly deducted.
Imposing a fine of EUR 450 Millions to a tax payer that used a tax loophole and that didnot actually caused any damage to the Treasury goes too far beyond common sense. It is not the way to be considered a business friendly country.