Supreme Court requires tax authorities to explain the reasons that justify the beginning of real-estate revaluations

Tax authorities have the obligation to explain the reasons that justify the beginning of a revaluation process in the start notice of this procedure, regardless of the verification method used, Spain's Supreme Court has established. 

The Supreme Court ruling of 23 January 2023 (appeal number 1381/2021 ) has led to a new twist in value verification procedures and how Spain's tax agency  conducts these procedures. Specifically, this ruling should entail an obligation on the tax authority to apply additional formalities when initiating these procedures.

In particular, the tax agency will have to explain the causes of discrepancy with the value declared by the taxpayer and the signs of inconsistency between this value and the fair market value ("valor real") of the property.

Previous Supreme Court decisions

The Supreme Court issued an important ruling on 23 May 2018 (appeal no. 4202/2017) regarding value verification procedures, which is related to the present decision. Specifically, the ruling established that the method to determine the real value of a property – using the cadastral value multiplied by coefficients – was not suitable because it was too generic and lacked a connection to the relevant property (except in those cases where the estimation was carried out together with a physical and individual verification of the property).

In this regard, the Supreme Court ruled out that this value estimation method is restrictive of taxpayers' rights and warranties and too beneficial to the tax administration, as it gives the power to base its assessment "on the inclusion of general, presumptive and therefore merely hypothetical data or values". This may lead to a "fictional" fair market value of the property. 

According to the Supreme Court, applying this valuation method requires the tax administration  to state the specific reasons for considering that the value declared by the taxpayer does not correspond to the real value of the property. In this respect, the court  stated that, the fact that the value declared by the taxpayer and the value resulting from the application of the value estimation method based on coefficients is different, it should not be sufficient to justify the beginning of the value verification procedure. 

Also, in the framework of the value verification procedures using the method based on the administration expert's opinion, the Supreme Court case law requires that the expert must physically verify on an individual basis the property to be valued; for example, the recent judgement of 21 January 2021, appeal 5352/2019. Or in case that the tax administration considers that such physical verification is not necessary, it should provide sufficient justification as to why is not necessary in the relevant case.

'Modus operandi' changes 

To comply with the requirements derived from the recent Supreme Court case law, the tax authority has  had to change its "modus operandi" when dealing with value verification procedures. In this regard, before these judgements, it was common practice for the tax administration to initiate the value verification procedure with a regularisation proposal based on a fair market-value estimation obtained through the application of objective coefficients or with an expert opinion based on generic benchmarks or other objective criteria that do not take into account the specific physical condition of the property.

However, after the mentioned Supreme Court judgments, the tax authority has tended to initiate the value verification procedures by requiring taxpayers to arrange a visit to the property in order to carry out a physical inspection. With this new approach, the tax administration aims to ensure compliance with the Supreme Court's requirement regarding the obligation to do a physical inspection of the property. This could also enable the tax administration to justify that the initiation of the verification procedure has not derived merely from the difference resulting between the value declared by the taxpayer and the value resulting from the application of generic and objective valuation methods that do not take into account the specific physical condition of the property.

This jurisprudence, particularly the decision of 23 May 2018, has now been completed by the judgment of the Supreme Court of 23 January 2023.

A new criterion

The most important aspect of this recent ruling is that the Supreme Court judgment of 23 January has established that the tax administration's obligation to justify, before verification, the reasons why it considers that the value declared by the taxpayer does not correspond to the real value applies to all value verification procedures, regardless of how the procedure was initiated and irrespective of the verification method used by the Administration.   Therefore, this obligation would no longer concern only the value verification procedures based on estimating the fair market value by applying coefficients but would also be required; for example, in the value verification procedures based on tax administration's expert opinions.

Specifically, the Supreme Court has stated in this ruling that the tax administration must justify, in the starting notice of the value verification procedure, the reasons that justify carrying out the procedure and the cause of the discrepancy with the value declared by the taxpayer, pointing out which are the indicative facts of the lack of concordance between said value and the real value of the property.

According to the court, the tax administration has to justify, before verification, that "there is something that deserves to be reviewed, that is, verified as to its reality or accuracy because its correspondence with reality is doubtful. [...] it has to justify why it does not accept the declared value".  

This requirement derives from the presumption of certainty of self-assessments submitted by taxpayers, as provided for in the General Tax Law (Article 108.4).

Osborne Clarke comment

The criterion derived from this ruling can be applied in different cases. For instance, taxpayers could use it when the administration has already begun a value verification procedure and has failed to justify the reasons for disagreeing with the taxpayer's declared value in the initiation notification. Also it could affect those procedures initiated after the judgment of the Supreme Court, provided that the tax administration fails to give the sufficient explanation in the starting notice of the procedure.

In addition, and although the criterion of this ruling should not, in principle, be directly applicable to transfers of properties with a reference value (all of which will be carried out as of January 2022), it could be helpful in value verifications procedures derived from the transfer of properties that have not been assigned such a reference value by the cadaster.

It remains to be seen what the practical effects will be if the tax administration fails to provide in the starting notice the reasons for initiating the procedure and the taxpayer appeals against this omission based on the new Supreme Court doctrine. Probably, taking into account the decision of the Supreme Court in this recent ruling, the consequences of the failure to comply will vary in each case, depending on the case's circumstances.

In the case judged by the Supreme Court, it dismissed the appeal filed by the taxpayer, even though the tax administration did not provide in the starting notice of the procedure a detail of the reasons that justified its beginning. This is because in this specific case, the Supreme Court understood that this omission was simply a formal breach since the valuation carried out by the tax administration did not lack the necessary individualisation  or justification. Also because the taxpayer did not provide any supporting document of the real value of the property during the verification procedure.