Over the last few years, we have more and more often found ourselves on the front line of a battle against the Spanish tax authorities, the Agencia Tributaria or Hacienda as it is commonly known.
Each battle is to defend our clients, in most cases Spanish resident sole traders and low/ medium-net-worth individuals who have decided to settled in Spain, against what is no less than persecution by the Spanish Tax Authorities.
The story typically goes something like this: client receives an enquiry letter from Hacienda asking for further documentation on a specific matter e.g. proof that foreign tax has already in paid on their pension. Although our clients come from a broad range of countries, we find that in the majority of cases it is UK pensions that are targeted, and I suspect that this is Brexit related- after all, if an international double tax credit is claimed in Spain for UK tax paid, then the Spanish tax authorities need to claim this back from the UK tax authorities, which will not be so straightforward after Brexit.
The client is given one month to reply to Hacienda, in person at their Tax Office or online. In this example they need to provide proof that UK tax been paid on their pension. Now this is itself is interesting. The Spanish tax authorities have the right to demand information freely from the UK tax authorities on any individual resident in Spain, and the UK responds. In a recent case, Hacienda’s letter to the client gave full details of the pension received by the client in the year- amount and name of the paying company.
So that begs the question- if Hacienda have access to details of the pension then surely they also can find out how much UK tax was paid without having to ask the client ? The answers is of course they can, but they choose not to. It’s step one in the trap to ensnare the unsuspecting client !
Let’s imagine that in this case the client chooses not to ask for our assistance and replies directly to Hacienda. They obtain from the UK tax authorities the tax certificates which cover the tax year in question- now as the UK tax year ends 5th April and the Spanish tax year ends 31st December, there will be two UK tax years to provide. The client then files their reply online with their Digital Certificate or delivers their response in person to their nearest Spanish Tax Office.
A month or so later, the client receives their next letter from Hacienda. Similar to the first letter, it is long, mostly consisting of seemingly incomprehensible or irrelevant references to Tax Law. However if you know what to the look for- it is stating that the Tax Office has decided to go ahead and issue a provisional tax assessment (Propuesta de Liquidación Provisional), on the basis that the client has not given an adequate response.
There follows a recalculation of the client’s tax due, which assumes that they paid zero UK tax on their pension. The extra Spanish tax “due” is calculated and the last page is a payment slip. The amount payable is the tax due plus a late payment surcharge. The client, unless they appeal, has around a month to make the payment or face further surcharges.
Before we go on, let’s break this down. Hacienda has sent the client a letter saying that their response has been inadequate, and on this basis judging the client to be guilty. They do not detail what is missing, and what they would like to have seen. A simple letter or email to the client requesting specific further information is what I would expect in a civilised country. It is a courtesy afforded to us by the French tax authorities, who are usually very helpful and flexible in dealings with our French resident clients.
But it is not the way that Spanish bureaucracy works. Hacienda does not reply by email. It does not attempt to resolve a situation at an early stage by effective communication with the client. Instead, it sends out long letters which prolong the process and create more bureaucracy, which I suppose perpetuates its own raison d’être.
The sinister side is that, in the case of our client, what Hacienda wants is for the client to give up and pay the extra tax “due”, faced with paying further surcharges if they do not. If this client does so, they will have paid tax twice on their pension and would need to go back to the UK tax authorities to request a refund. Would the UK Tax Office respond positively, given that legally it is Spain’s responsibility and not theirs to issue the tax credit ?
So that’s step two of the trap. Before we go on, let’s ask ourselves- what DID Hacienda want to see as proof that the client had paid UK tax on their pension ?
Firstly, the client’s UK tax certificates should have been translated to Spanish by a sworn translator (a traducción jurada). Even though a Tax Inspector with no knowledge of English and Google translate could quickly work out how much tax has been paid by the client, the attitude of Hacienda is such that any documents not in Spanish are summarily rejected with no reason except that they are “inadequate”.
Now let’s compare this to the French Tax Office. The French, who are supposedly stubborn and proud about the maintenance of their own language, to the detriment of other languages. Well not so from a tax point of view. When we register our foreign company clients for VAT in France, the Tax Office happily accept company documents in any other language (from Danish to Slovak) requesting only a brief casual translation of a few key points.
Secondly, Hacienda will not deem to waste any of their own time reconciling the figure in the client’s Spanish 31st December tax return with the combination of the two UK tax years. The client should have provided a document, for instance spreadsheet, showing the exact calculation. Completely in Spanish of course.
Did Hacienda detail in their original letter what they expected from the client ? Of course not !
We have learnt from our clients’ tough stories what Hacienda do expect. In cases like this when then client asks for our assistance to reply to the initial Hacienda enquiry, we always attach a sworn translation and reconciliation of the figures in Spanish to our response.
So if the client is in the right and the proof is sent to the Hacienda in the format which they demand, can the client expect a letter of acceptance from their Tax Office ? Sadly, the answer to this is often “no”. So step 3 in the trap- Hacienda play dumb.
Hacienda’s reply could take several forms. Firstly, they could deny having received any reply from the client to their initial letter. Yes, we have seen this before- even when we filed the response online and there is documented confirmation of filing.
Secondly, they might issue a vaguely worded letter claiming that the client did not send them sufficient proof that they had paid UK tax on their pension- with no specific details.
And thirdly (and again we have seen this more than once) they might try to use some kind of Kafkaesque response e.g. the client should not have paid UK tax originally on their pension, so it can therefore not be claimed back in Spain. All of which is wrong according to Tax law and conventions.
If the client does receive this dreaded letter of rejection, then they have the right to appeal and that is what I will deal with in my next blog post.
By now the reader will have a better idea of what this Hacienda monster is like !