Tax impact of the correction of accounting errors

With this ruling, the Spanish Supreme Court confirms the view taken by the Spanish Central Economic-Administrative Tribunal, on 26 January 2021. The Tribunal expressly stated that, should accounting errors be detected in a financial year subsequent to the year where the annual accounts were drawn, such error should be reported and amended in the financial year in which it was detected. Moreover, the Supreme Court specifically addresses the issue in the context of an accounting error amended through a restatement of the annual accounts.

In the specific case under review by the Court, a company detected in 2010 a serious accounting error (namely not having accounted for an expense corresponding to a portfolio depreciation) in relation to its 2004 annual accounts. The company, therefore, restated its 2004 annual accounts. Such accounts were deposited with and formally received by the Companies Registry. Moreover, the company requested that its 2004 corporate income tax return be rectified, as the statute of limitations had not expired. Spanish tax authorities rejected this request for rectification and this rejection was confirmed subsequently on appeal by various courts and tribunals (and ultimately by the Spanish Supreme Court).

Taking into account that the appellant had not explained the reasons for correcting this accounting error after such a lengthy period of time, the Supreme Court concluded that:

• The restatement of the annual accounts, with rectification of the accounts previously deposited, takes effect in the taxable year when the error is amended (in accordance with applicable accounting rules, namely Accounting and Valuation Rule 22 of the Spanish GAAP – Royal Decree 1514/2007, dated November 1).
• In the analysis of the deposit and receipt of the annual accounts by the Companies Registry and the subsequent record of these accounts in the Registry, the evidentiary value of the Registry's receipt and record is limited to the aspects referred to under the Registry rules. Under such rules, the Registry is only required to assess whether the documents filed are consistent with the documents required under Law, whether such documents have been validly approved by the General Shareholders' meeting, whether such documents have been duly signed…
• In relation to the Registry's assessment, the Tax Authorities may not object that such assessment is wrong or improper.
• The filing of the annual accounts – both the original and the restated accounts – does not of itself imply that such accounts must be presumed to be true or fair.
• As regards the accounting data included the annual accounts filed and recorded, the Tax Authorities can and must decide the tax year in which any amendment recorded in such accounts must take effect (in accordance with applicable laws and regulations). The assessment of the Companies Registry cannot constrain the power of the tax authorities in this regard.

Therefore, the exceptional measure of restating the annual accounts should not of itself enable the taxpayer to rectify the Corporate Income Tax return previously filed and does not imply that the "new accounting result" should be the starting point for the calculation of the taxable base in accordance with article 10.3 of the Spanish Corporate Income Tax Act (CIT Act – Law 27/2014, dated 27 November). It is worth noting, however, that the Spanish Supreme Court may still clarify or refine its ruling on this point since, in the case at hand, the premise for the ruling was that the taxpayer had not sufficiently explained the reasons for correcting such error after such a considerable lapse of time.

As a final thought, taxpayers should also take into account the timing and allocation rules established under article 11.3 of the Spanish CIT Act, although this article was not considered by the Supreme court in its ruling. Very briefly, article 11.3 is based on accrual and the need for account recording, as requirements for an expense to be tax deductible. Moreover, in the specific case of accounting errors, where accrual and account recording do not coincide, account recording should prevail in the case of expenses recorded after accrual or income recorded before accrual, and only insofar as this would not result in a reduction of the tax burden. Note, moreover, that this same rule would not apply in the reverse situation.