The settlement of differences, a fast-track tax assessment

Foto de Andrea Moya con el titular de su último artículo "La liquidación de diferencias, un procedimiento de determinación tributaria abreviado" + logo de CorralRosales + foto de edificio de cristal

The process for settling differences provided for in the Internal Tax Regime Law is a fast-track tax assessment that should only be activated when the conditions established in the law are met and, if activated, the principles that regulate administrative procedures and the taxpayer’s rights should be respected.

Article 68 of the Tax Code defines the assessment capability of the Tax Authority as the act or set of regulated acts carried out to establish the existence of the taxable event, the taxpayer, the taxable base, and the amount of the tax.

Articles 107-A and following of the Internal Tax Regime Law establish that the Internal Revenue Service (IRS) has the power to notify the taxpayer of any differences detected in its tax returns and which generate amounts payable to the Treasury. If the taxpayer does not make the payment or justify the differences within 20 days, the IRS issues a Payment Settlement for Differences in the Tax Return, which implies a collection order for the exercise of the coercive action. 

The acts of notification and subsequent settlement of differences contemplated in the aforementioned articles are tax assessment acts, since the Tax Authority determines the existence of the taxable event, the taxable base and the amount of the tax. The process for settling differences is a fast-track assessment process; therefore, it is only applicable when the Tax Administration finds differences in the taxpayer’s returns.

According to the dictionary of the Royal Academy of the Spanish Language, difference is: “that quality or accident by which something is distinguished from something else”. Therefore, the Tax Authority can only apply the fast-track assessment process when it reaches the conclusion that there is a difference when comparing the data provided by the taxpayer in its tax returns or those declared by third parties in relation to the same taxpayer.

For example, the Tax Authority could identify a difference if the taxpayer has not applied a deductibility limit established by law in its income tax return; or, if the value declared and paid for withholding tax does not coincide with the values provided by third parties. And only if the evidence filed by the taxpayer is not sufficient to disprove such difference, the corresponding settlement may be issued.

However, there are cases in which the Tax Authority has exceeded its faculties. For example, when issuing settlements of differences based on presumptions, i.e., the Internal Revenue Service has presumed the existence of differences in the Value Added Tax rate applied to certain services, based on the activities registered by the taxpayer in the Single Taxpayer Registry.

The Internal Tax Regime Law does not allow the Tax Authority to establish differences by presumption and could not do so since it would be contrary to the nature of a direct and abbreviated assessment procedure. Therefore, the question arises, a settlement of differences issued based on presumptions made by the Tax Authority is valid? Does the Tax Authority have the power to issue a settlement of differences when the difference is presumed?  The answer is no.

The initiation of a fast-track assessment procedure without having complied with the conditions set forth in the law, breaches the principle of prohibition of arbitrariness provided in the Administrative Code and violates the taxpayer’s rights to due process and defense, recognized in the Constitution and in the Tax Code.

Faced with this circumstance, the taxpayer may exercise its right to appeal the assessment procedure – the liquidation of differences – through an administrative claim or a judicial challenge. However, within these processes the taxpayer will be obliged to rebut the presumption of legitimacy applicable to the administrative tax acts.

In conclusion, although the legislator has provided that the Tax Authority may initiate fast-track assessment procedures against taxpayers, these procedures of liquidation of differences may only be initiated when the Authority effectively determines the existence of differences, otherwise the Authority would be acting arbitrarily and, consequently, violating the taxpayer’s rights, especially his right to defense.

Andrea Moya
Partner at CorralRosales