SOLUTION: Davenport Depreciation Analysis Using the Method of Decreasing Numbers Excel Task

INTERNATIONAL CORPORATE TAX
2. CORPORATE TAX IN SPAIN
This section will provide a full explanation of the corporate tax in Spain.
2.1 CORPORATE TAX FEATURES
The corporate tax is a direct tax imposed on the companies’net income and other legal
entities. Its main features are:

It is a direct tax: it taxes a direct manifestation of the payment capacity of the
taxpayer, income.

It is a personal tax: The taxable event refers to a given person, who is the legal
person receiving the income.

It taxes the total income of the taxpayer.

It taxes the income of companies and other legal entities as well as the income
of any legal entity qualified as a taxpayer by the law that regulates it.

It is an accrued tax: it establishes tax periods to self-assess the obligations with
the revenue service.
This tax is applied to the net profit, which means that the expenses to obtain that benefit
should be deducted from the total income of the organisation. It is, therefore, structured
on the basis of accounting. The taxable income of the company will determine the tax
base and the amount payable annually. The corporate tax is applied to companies which
are headquartered within the Spanish territory. The cases of the Basque Country and
Navarra are different due to their regional tax systems, and the Canary Islands, Ceuta
and Melilla have some tax incentives.
2.1.1 Corporate tax elements
Some concepts of the corporate tax come from the General Tax Law. The most relevant
points to understand corporate tax are the following:
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INTERNATIONAL CORPORATE TAX
In article 2.1, the General Tax Law defines tax as follows:
Tax payments are public income consisting of cash benefits required by a public
administration as a result of the existence of the fact that the law binds to the
duty to pay taxes, with the primary purpose of obtaining the necessary income
to support the public expenditures.
The following article defines the three types of taxes that can be found: levies, special
contributions and taxes. According to the General Tax Law, taxes are:
tax payments required without consideration as to whose taxable event is
constituted by businesses, acts or facts that show the economic capacity of the
taxpayer.
In this case, this is the corporate tax.
Main tax liability. It seeks payment of tax liability and consists of:
▪ Taxable event. The legal concept of the taxable event is provided by Article 20 of
the General Tax Law. It states that a “taxable event is the budget established by
law to set each tax that results in tax liability.”
▪ Accrual. Article 21 of the General Tax Law defines accrual as “the moment when
the taxable event occurs and when tax liability arises”.
▪ Exemptions. It is necessary to distinguish between exemption and non-liability.
Although both mean not paying tax, they are legally distinct concepts.
Exemption means:
o Taxation rule: which defines a taxable event that involves tax liability.
o In addition, it involves an exemption rule that requires that tax liability
not occur in some cases.
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INTERNATIONAL CORPORATE TAX
On the other hand, non-liability means that assumptions are not included in the
defining regulation of the taxable event, that is, non-liability restricts the taxable
event negatively.
In its article 50.1, the General Tax Law defines tax base as “monetary or other type of
magnitude that results from the measurement or valuation of the taxable event”.
The General Tax Law also defines net tax base in its article 54 as “the magnitude
resulting from applying the reductions established by the law in the tax base”.
Tax rate is “the figure, coefficient or percentage that is applied to the tax base to obtain
the gross tax charge as a result”.
The main elements of the corporate tax law are:
The taxable event, included in the 4th article, which states that it is the income obtained
by the taxpayer, whatever its source or origin.
Estimates of income and the concept of economic activity and assets: according to the
5th article of the General Tax Lax, economic activity is the independent management of
the means of production and human resources, or of one of the two, with the aim of
being involved in the production or distribution of goods or services.
If the activity is property lease, economic activity will be considered only when there is
at least one person employed with a full-time work contract.
If there is a set of entities that are part of the same group of companies, the economic
activity will be determined taking into account all those that form part of it.
When more than half of the assets of a company consist of securities or it is not affected
by an economic activity, it will be considered a patrimonial entity. These would be the
companies whose main activity consists of managing fiscal and property assets and
which do not carry out an economic activity.
Income allocation: although corporate tax was defined as a tax that taxes the profits of
companies, some entities are exempted even though an income is attributed to them.
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INTERNATIONAL CORPORATE TAX
In these cases, taxation is subject to IRPF (Impuesto sobre la Renta de las Personas Físicas
– personal income tax).
In its 6th article, the General Tax Law (GTL) states that the income corresponding to civil
societies, entities that are not considered taxpayers of this tax, estates, joint-property
entities and other entities mentioned in article 35.4 of the GTL as well as withholdings
and income on accounts that they have borne, they will be attributed to the partners,
heirs, co-owners or participants, respectively. The entities under the regime of income
allocation will not be taxed by the Corporate Tax.
2.1.2 Taxpayers
As the article 7 of the GTL states that taxpayers are those who are domiciled in the
Spanish territory and who have legal personality, except civil companies that have no
commercial purpose.
Within the classification made by the GTL on taxpayers, there are entities that, despite
not having legal personality, are taxed by companies.
These entities are:
▪ Investment funds, regulated by Law 35/2003, of 4 November, on Collective
Investment Institutions.
▪ The temporary unions of companies, regulated by Law 18/1982, of 26 May, on
the tax regime of groups and temporary unions of companies and regional
industrial development companies.
▪ Venture capital funds and closed type collective investment funds.
▪ Pension funds, regulated in the revised text of the Law for the Regulation of
Pension Plans and Funds, approved by Royal Legislative Decree 1/2002, of 29
November.
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INTERNATIONAL CORPORATE TAX
▪ The regulation funds of the mortgage market, regulated by Law 2/1981, of 25
March, regulating the mortgage market.
▪ Mortgage Securitisation Funds, regulated by Law 19/1992, of 7 July, on the
regime of companies and real estate investment funds and on mortgage-backed
securities.
▪ Asset Securitisation Funds referred to in an additional provision 5.2 of Law
3/1994, of 14 April, on the adaptation of Spanish legislation governing credit to
the second banking coordination directive and other amendments related to the
financial system.
▪ The Investment Guarantee Funds, regulated in Law 24/1988, of 28 July, of the
Securities Market.
▪ The joint communities of owners regulated by Law 55/1980, of 11 November, on
the regime of communal lands, or in the corresponding autonomous legislation.
▪ The Bank Assets Funds referred to in the Tenth Additional Provision of Law
9/2012, of November 14, on restructuring and resolution of credit institutions.

Residence of the taxpayer
Residing in the national territory involves paying taxes. Entities that meet any of the
following requirements will be considered a resident in the Spanish territory and,
therefore, shall pay corporate tax:
a) They are established in accordance with Spanish laws.
b) Their registered office is in Spanish territory.
c) Their effective management headquarters are in the Spanish territory.
An entity will be considered to have its effective management headquarters in the
Spanish territory when the management and control of all its activities is in it.
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INTERNATIONAL CORPORATE TAX
To avoid tax fraud, Article 8.1 of the corporate tax law stipulates that the Tax
Administration may presume that an entity located in a country or no-tax territory (as
provided in section 2 of the first additional provision of the Law on Measures for the
Prevention of Tax Fraud, or qualified as a tax haven, as provided for in section 1 of the
same provision) has its residence in the Spanish territory when its main assets, directly
or indirectly, consist of assets located in the Spanish territory or rights that are fulfilled
or exercised in the Spanish territory, or when its main activity is carried out in it, unless
the entity certifies that its effective management takes place in that country or territory,
as well as that the establishment and operation of the entity is justified for valid
economic reasons and substantive business reasons other than the management of
securities or other assets. That is to say, even if the headquarters of the organisation are
in a tax haven or a no-tax country, its residence will be assumed to be in Spanish territory
to make it pay tax, unless it proves that all its activity is carried out from that place.
All the income obtained by non-resident entities will be taxed by the non-resident
income tax (IRNR, Impuesto sobre la renta de no residentes).

Tax residence
Article 8.2 of the Corporate tax law states that the tax residence of the taxpayers
resident within the Spanish territory will be the residence of their registered office,
provided that their administrative and business management is effectively centralised
in their registered office. In any other case, the place where management is carried out
will be considered.
According to the above criteria, if, for whatever reason, the location of the tax residence
cannot be established, tax residence will be where the highest value of the fixed asset
is.
The registered office is established in the bylaws of the company.

Change of tax residence
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INTERNATIONAL CORPORATE TAX
When a company changes its tax residence, taxpayers must inform the Spanish Tax
Agency.
The Spanish Tax Agency may promote the change of tax residence after hearing the
interested party in the manner determined by regulation.

Exemptions
As seen before, exemptions are given when there is no tax obligation even though the
taxpayer carries out the taxable event. Exemptions are, therefore, a tax benefit.
Exemptions can be subjective (totally or partially exempt) or objective. In the latter,
articles 21 and 22 should be highlighted, where exemptions to avoid double taxation
appear. This part will be later discussed. The most important points regarding subjective
exemptions are explained in the following list.
According to article 9.1 of the corporate tax law, the following are totally exempt from
taxes:
a) The State, autonomous communities and local entities.
b) The autonomous bodies of the State and entities of public law of similar
character of the autonomous communities and local entities.
c) The Bank of Spain, Deposit Guarantee Funds of Credit Institutions and
Investment Guarantee Funds.
d) Managing bodies and Common Services of the Social Security.
e) The Institute of Spain and the official Royal Academies and the institutions of
the autonomous communities with their own official language that have
purposes similar to those of the Royal Spanish Academy.
f) The rest of public bodies, as well as similar entities of public law of the
autonomous communities and local entities.
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INTERNATIONAL CORPORATE TAX
Some of the public bodies referred to in this section are:

Spanish Tax Agency

Economic and Social Council and Cervantes Institute

National Securities Market Commission

Nuclear Safety Council

Public administration universities

Data Protection Agency

The Consortium of the Canary Islands Special Zone

Spanish Energy Commission

Telecommunications Market Commission
g) State Agencies included in the first, second and third additional provisions of
Law 28/2006, of 18 July, of the State Agencies.
h) International Public Oversight Board in auditing standards, professional ethics
and related matters.
Partially exempt entities are:
a) Non-profit entities and institutions not included in the previous section.
b) Unions, federations and confederations of cooperatives
c) Professional associations, business associations, official chambers and labour
unions
d) Employment promotion funds constituted under Article 22 of Law 27/1984,
of 26 July, on reconversion and reindustrialization
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INTERNATIONAL CORPORATE TAX
e) Non-profit employers’ associations collaboarating with the Social Security
Agency
f) The public law entity of Ports of the State and the Port Authorities
g) Political parties
2.1.3 Tax base and tax re-assessments:
The tax base, as set out in article 10.1 of the corporate tax law, is constituted by the
amount of the income obtained in the tax period reduced by the negative tax base offset
of previous tax periods.
The tax base is determined by:
a) General direct estimation method.
b) Objective estimation method, when the law determines its application.
c) Indirect estimation method.
In the direct estimation method, the tax base will be calculated by correcting and
applying the precepts established by the law, the accounting result determined in
accordance with the regulations of the Code of Commerce, in the other laws related to
this determination and in the provisions that are dictated in the development of the
mentioned regulations.
In the objective estimation method, the tax base can be determined totally or partially
by applying the signs, indexes or modules to the activity sectors determined by the
corporate tax law.
In the case of indirect estimation, it is an extraordinary power of the Tax Administration.
It applies, for example, to companies that have not made the declaration, and so there
is no way to know their real data.
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INTERNATIONAL CORPORATE TAX
The next step is to determine the accounting profit, which is determined by the
following regulations:

Code of Commerce

Spanish Corporation Law

Limited Liability Company Act

Spanish Auditing Act

Spanish National Chart of Accounts

Audit Regulations

Ministerial Orders proposed by the Spanish Accounting and Account Auditing
Institute (ICAC).
Corporate tax is established as follows:
(+/-)
ACCOUNTING PROFIT
ACCOUNTING ADJUSTMENTS
(-)
CAPITALISATION RESERVES (ART. 25)
(-)
COMPENSATION OF NEGATIVE TAX BASES INCURRED IN
PREVIOUS YEARS (ART. 26)
(X)
TAX RATE (ART. 29)
(-)
DEDUCTIONS TO AVOID INTERNATIONAL DOUBLE
TAXATION (ART. 31 & 32)
(-)
ALLOWANCES (ART. 33 & 34)
= PRIOR TAX BASE
= TAX BASE (ART.
10)
= GROSS TAX
CHARGE (ART. 30)
= POSITIVE
ADJUSTED GROSS
TAX CHARGE
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INTERNATIONAL CORPORATE TAX
(-)
DEDUCTIONS TO ENCOURAGE CERTAIN ACTIVITIES
(Articles 35 to 39)
(-)
INSTALMENT PAYMENTS (ART. 40)
(-)
RETENTION AND ACCOUNT INCOME (ART. 128 & 129)
= NET TAX
= DIFFERENTIAL
AMOUNT PAYABLE
OR TO BE
RETURNED (ART.
125 & 127)
The corporate tax law also includes adjustments that can be carried out to obtain the
accounting profit, the so-called non-accounting adjustments. They are certain
adjustments, such as expenses, valuations, provisions or amortisations, which modify
the tax base and consequently produce a positive or negative adjustment in the
taxpayer. If these adjustments do not modify the tax base, the taxpayer should not make
any adjustment.
The following sections will discuss these corrections in detail.
A. AMORTISATIONS
Amortisations allow taking into account the process of depreciation of the elements of
fixed or non-current assets of a company, depending on its useful life. They are part of
the expenditure items to establish the accounting and tax result of the company and
provide the funds that allow financial recovery of the investments made in the elements
that are amortised.
In this way, the corporate tax law establishes the depreciation to be real and effective
as an essential condition for its deductibility. This depreciation will be observed
following one of the methods listed in article 12:
The amounts that, in concept of depreciation of tangible assets and amortisation
of intangible assets and real estate investments, correspond to the effective
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INTERNATIONAL CORPORATE TAX
depreciation undergone by the different elements due to operation, use,
enjoyment or obsolescence will be deductible.
Depreciation will be considered effective when:
a) it is the result of applying straight-line amortisation coefficients established
in the officially approved amortisation tables:
MAXIMUM
STRAIGHT-LINE
COEFFICIENT
TYPE OF ELEMENT
MAXIMUM PERIOD
OF YEARS
Civil engineering works
General civil engineering
2%
100
Land
6%
34
Infrastructure and mining works
7%
30
Plants
Hydropower plants
2%
100
Nuclear power plant
3%
60
Coal-fired power plant
4%
50
Renewable energy plants
7%
30
Other plants
5%
40
Buildings
Industrial buildings
3%
68
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INTERNATIONAL CORPORATE TAX
Dumping sites
4%
50
Warehouses and deposits (gaseous,
7%
liquid and solid)
30
Commercial, administrative, service
2%
and housing buildings
100
Installations
Substations. Energy transmission and
5%
distribution grids
40
Cables
7%
30
Other installations
10%
20
Machinery
12%
18
Medical equipment
15%
14
Transport
Locomotives, wagons and traction
8%
systems
25
Vessels, aircraft
10%
20
Elements of internal transport
10%
20
Elements of external transport
16%
14
Freight transport
20%
10
Furniture and appliances
Furniture
10%
20
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INTERNATIONAL CORPORATE TAX
Linen
25%
8
Glassware
50%
4
Tools
25%
8
Molds, dies and models
33%
6
Other appliances
15%
14
Electronic and computer equipment. Systems and software
Electronic equipment
20%
10
Data processing equipment
25%
8
Computer systems and software
33%
6
Film productions, phonographs,
33%
videos and audiovisual series
6
Other elements
20
10%
b) it is the result of applying a constant percentage of the brought forward net
value.
In this case, the taxpayer will select the period to amortise the asset, provided that the
upper limit is set by the amortisation table and the lower limit is the time in which this
asset would be amortised in case of applying the maximum coefficient that the table
indicates. After this step, the straight-line depreciation coefficient is determined by
dividing the chosen years by 100.
The constant percentage will be determined by weighting the straight-line depreciation
coefficient obtained from the amortisation period according to officially approved
amortisation tables, by the following coefficients:
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INTERNATIONAL CORPORATE TAX
▪ 1.5 if the element has an amortisation period of less than five years.
▪ 2 if the element has an amortisation period equal to or higher than five years
and lower than eight years.
▪ 2.5 if the element has an amortisation period equal to or higher than eight years.
The constant percentage cannot be lower than 11%.
Property, plants and equipment will not be eligible for depreciation by constant
percentage.
c) it is the result of applying the sum-of-the-digits method
The sum of the digits will be determined based on the amortisation period established
in the officially approved amortisation tables.
Property, plants and equipment will not be eligible for depreciation by digit numbers.
d) it is adjusted to a plan formulated by the taxpayer and accepted by the Tax
Administration.
e) The
taxpayer
justifies
the
amount.
B. AMORTISATION OF REVALUED ASSETS, PLANT AND EQUIPMENT, INTANGIBLE
ASSETS AND REAL ESTATE INVESTMENTS
The accountin …
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