The Supreme Court rejected the Tax Administration’s method of calculating fines

A new court coup tax administration. This time, by a Galician company: la arousana Embema Society of Works.

The construction company was fined in 2012 for three “very serious” tax offenses related to Income tax for 2006, 2007 and 2008. The fine was 398,000 euros, and the company decided to resort to all possible instances to condemn the malicious calculation method it uses Tax agency when imposing sanctions. Eleven years later, Supreme Court proved them right.

In the verdict of April 11, the judges of the Litigation Council decided that, in the calculation “economic damage” —the total amount that Embema should have paid in the self-assessment—, The treasury should have taken into account the deductions, bonuses, withholdings, payments on account and installments made by the company. And it wasn’t like that.

The law stipulates that if the economic damage ranges from 10 to 25 percent, the fine is increased by 10 percentage points. If the range goes from 26 to 50%, it will increase by 15 points. Between 51 and 75%, the penalty will increase by 20 points and up to 25 if the damage exceeds 75%.

How did the State Treasury calculate that damage in the case of Embem? The tax administration took as the basis for the fine the irregularly paid amount in self-taxation in 2008, which amounted to 98,669.25 euros. The construction company registered only 2,811.03, so the Administration calculated that the damage amounts to 97.23 percent. On paper, this allowed him to collect 25% more fines, the highest amount.

However, Embema appealed against this decision and requested that it be carried out in order to calculate the damages “current quota”, that is, what should have been deposited minus the amounts related to withholdings, payments to the account and installment payments made. With this, he calculated, the economic damage was limited to 61.62 percent, and the surcharge on the fine was reduced from 25 to 20 percent.

“Ignoring the installment payment for the calculation of economic damage leads to absurd results because the penalty depends on what the taxpayer enters for payments to the account, instead of taking into account his total tax effort,” argued the appellant. And the judges – two issued a separate opinion in the opposite direction – share his opinion: “It makes no sense that after paying in installments the economic damage could be 100%”they resonate.

Conclusions challenging the Administration’s textual application of the law — instead of proportionality control — go beyond this case because the same arguments could be used in other sanctioning procedures related to profit tax and even personal income tax.