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Report on 2014 Tax Reform Legal certainty, key to improving the system

Legal certainty, key to improving the system. The Fundación Impuestos y Competitividad proposes 10 concrete actions for the next Tax Reform to ensure legal certainty.

The quality of tax systems is increasingly measured by the degree of legal certainty they offer. t serves little purpose to enact tax measures addressed to favouring productive activity and the creation of employment if their capacity to generate real results is reduced due to the lack of confidence of the economic operators regarding the subsequent interpretation and effective application of those measures by the authorities and regarding their stable maintenance over time.

Legal certainty has a value in itself, in being a central element of a State of Law: but in tax matters it is also a key factor for achieving the basic taxation principles of competitiveness, fairness and sufficiency.

The association of legal certainty with competitiveness is obvious. Corporate decisions on investment, contracting or financing, including the first and basic decision (whether or not to undertake a new economic activity), are mainly long-term decisions that give great consideration to the degree of confidence offered by the tax system. In addition, legal certainty favours free competition and thereby the effective assignation of resources.

The two most important studies on a worldwide scale which measure the determining factors of competitiveness of countries are the World Competitiveness Report and the World Competitiveness Yearbook, the first drawn up by the World Economic Forum (WEF) and the second by the International Institute for Management Development (IMD). In both studies the confidence and stability of the legal system of each country is one of the basic aspects present in all the “pillars” of measurement of competitiveness.

The improvement of legal certainty also serves the principle of fairness, because it helps to avoid discriminatory or unjustified unequal treatments of persons or companies in similar objective situations.

In regard to the principle of sufficiency, in the medium and long term the collection capacity of a system based on legal certainty will always be greater – in propitiating the creation of wealth and the growth of the tax bases – than that provided by a volatile and unreliable system.

The Fundación Impuestos y Competitividad has identified those areas of the Spanish tax system to which the tax reform currently in progress should pay special attention in order to raise its quality from the perspective of legal certainty. These are the 10 proposals:

  1. To harmonise the rules, procedures and formal obligations existing in the various authorities and reinforce the obligation to coordinate, minimizing the uncertainty and cost for taxpayers arising from the multiplicity of authorities, rules and interpretations.
  2. To improve the process of creation of legislation, ensuring the technical quality of tax laws, social participation in debating them, non-retroactivity of legislative changes and the grant to taxpayers of a reasonable period to fulfil the obligations imposed by new legislation.
  3. To clearly and specifically regulate the anti-abuse measures of domestic tax legislation, avoiding the application of legal institutions unrelated to tax law and ambiguous measures which may give rise to litigation.
  4. To reduce the uncertainty existing in relation to the interpretation of tax rules, by more intensely and efficiently using the power to enact regulations and by establishing mechanisms which permit the achievement of certainty regarding the tax regime applicable to the specific case.
  5. To establish alternative systems of enhanced relations between the Authorities and companies.
  6. To establish alternative mechanisms for the resolution of disputes with the Authorities which permit the enhancement of legal certainty and reduction of litigation, such as arbitration, and adapt the procedural rules so as to speed up proceedings and quickly and effectively establish general criteria.
  7. To improve the mechanisms for resolution of disputes arising from the adoption of different positions by the public authorities of different countries when a Convention for the Avoidance of Double Taxation (“DTC”) is applicable and review efficiency and improve the existing instruments in order to provide greater legal certainty for taxpayers.
  8. To improve the regulation of some of the powers of review of the Authorities and limit them in certain areas (statute of limitations, procedure for imposing penalties, etc.) in order to avoid discretion.
  9. Review, systematisation and simplification of the countless formal obligations which are imposed on businesses/taxpayers.
  10. Modification of the system of penalties, avoiding automatic mechanisms in the imposition of penalties and ensuring that mere differences of interpretation do not have criminal repercussions.