Full Tax Adjustment and Principle of Sound Administration

Eduardo González Fernández.

29/04/2022 Uría Menéndez (uria.com)


It all started with an administrative VAT adjustment on construction contracts. The tax authority deferred VAT accrual for longer than the taxpayer and its suppliers initially expected and since the reverse charge rule was in force then, held that the taxpayer should have charged itself the VAT. All in order up to this point.

The problem came when the tax authority rejected the taxpayer’s deductions of the VAT payments the suppliers charged and did not initiate the corresponding undue income refund procedure. And what did this entail? That the taxpayer paid VAT twice –once when it paid the suppliers’ invoices and then when it charged itself–. And was this legitimate? Clearly not, since case law (and administrative practice itself) state that “the tax authority must fully adjust the taxpayer’s situation” (Supreme Court judgments dated 5 February 2015, 25 September 2019 and 2 October 2020, and Tax Appeal Board rulings of 26 June 2019 and 15 July 2019, among others). In this scenario, the taxpayer, beset by liquidity problems that this situation causes, has only two options: request the full adjustment and hope for the best in the tax appeal board proceedings (which ultimately will confirm its position, but only after a lengthy process) or start a long, complex and irrational judicial process to recover input VAT from each of its suppliers.

Even when a taxpayer’s right to full adjustment is ultimately recognised, as in this case, the question remains as to how it should be compensated for the damage (time and resources) the unlawful administrative process caused it. Had the tax authority acted as it should and fully adjusted the situation from the beginning, following the principles of good faith and sound administration, the taxpayer would not have been impaired. Surely failing to do so should have legal repercussions.  

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