On 19 and 26 February 2018, the Spanish Supreme Court issued judgments on the issue of calculating the VAT taxable amount in circumstances where the authorities discover hidden sales (and thus where VAT was not charged to the client).

Specifically, the cases involved entrepreneurs which sold fish produce to a cooperative, but which neither registered the sales on VAT books nor declared the corresponding VAT or personal income tax in their returns.

The Spanish Tax Authorities - and the lower Courts - took the position that VAT was not included in the price agreed. However, the entrepreneurs appealed the VAT and personal income tax assessments, as well as the relevant penalties, based on the argument that any VAT to be claimed by the Authorities is deemed to already be included in the price agreed.

Impact of the judgment:

In the light of the criteria set out by the CJEU in its decision of 7 November 2013 in joined cases Corina-Hrisi Tulică (C-249/12) & Călin Ion Plavoşin (C-250/12), the Spanish Supreme Court stated that the price agreed must be regarded as already including VAT in the following circumstances:

  • The parties established the price without any reference to VAT.
  • The supplier is the taxable person of the transactions.
  • The supplier is not able to recover the VAT claimed by the Tax Authorities from the purchaser.

Therefore, the amount of VAT to be regularized by the authorities is substantially lower than would be the case if it were considered that VAT was not included in the price.

The Tax Authorities and previous courts had not shared this analysis, based on the fact that the case analyzed by the CJEU was not the same, as it did not involve hidden sales. In addition, we note that this criterion is not strictly in line with the wording of the Spanish VAT Law. These circumstances imply that, in practice, the judgment leads to a change of criterion when hidden sales are discovered.

Moreover, whilst the judgment of the Supreme Court relates to hidden sales, it should be noted that the criterion set could be applicable to other cases in which the referred requirements are met as, for instance, B2C supplies where the supplier initially understood that a VAT exemption applied (incorrectly).

Other aspects to consider:

An important angle to consider is that the Authorities extend the effects of the CJEU interpretation to direct taxation, either to personal income tax (in this specific case) or potentially to corporate income tax. Therefore, the Court states that the personal income tax amounts to be regularized by the Authorities must not comprise the amount of VAT as part of the income.