Key Concepts of Tax Law: Legal Nature, Retroactivity, and More
Key Concepts in Tax Law
Legal Nature of Tax Provisions
Tax revenue and expenditure are the main fields of financial activity; therefore, the laws that regulate them are key to financial ordering. Although in the past, tax provisions were considered exceptional rules, this consideration is no longer valid. Tax provisions, like all legal rules, constitute a mandate with social efficiency and an organizing purpose, possessing the characteristics of any legal rule:
- The existence of a will that derives from the organs of the state to which the rules of normative production have attributed faculties for creating law.
- The origin of an obligation.
- The imposition of a sanction if the rule is not obeyed.
Spatial Scope
Article 11 of the General Tax Law (LGT) states that compulsory contributions will be implemented in accordance with the criteria of residence and territoriality, as legislation provides in each case. Absent any such provision, compulsory contributions of a personal nature will be applied in accordance with the residence criteria, while all other compulsory contributions will be applied in accordance with the territoriality criteria that best suits the nature of its object. Therefore, the laws regulating each compulsory contribution can determine the application of spatial criteria. If the legislator doesn’t provide any precise criteria:
- In compulsory contributions of a personal nature, we will apply the residence criteria.
- In other compulsory contributions, the territoriality criteria that best suits the nature of its object will be applied.
Temporal Scope
It is regulated by Article 10.1 LGT, which states that tax provisions will enter into force 20 days after their publication in the corresponding official journal.
Retroactivity in Tax Law
Retroactivity consists of the application of a provision to situations created before the provision’s entry into force. Article 10.2 LGT establishes that tax provisions will not have retroactive effects and will apply to instantaneous taxes due after their entry into force and to periodic taxes whose tax period begins after such entry into force. Nevertheless, the provisions establishing tax infringement and penalties, as well as surcharges, will have retroactive effects in respect of decisions that are not final when its application is more favorable to its addressee.
Neither the Constitution nor ordinary legislation prohibits retroactivity of tax provisions. Retroactive tax provisions will only be unconstitutional if they are arbitrary or when they clash with other constitutional principles. This doctrine has been followed by the Supreme Court, and the European Court of Justice arrived at the same conclusion. The Constitutional Court has fixed some criteria to know when retroactivity is or is not constitutional:
According to the doctrine of the TC STC 126/87 150/90, we have to differentiate according to the grade of retroactivity:
- Absolute Retroactivity: It pretends that a provision is applied retroactively to past and consolidated situations. It will only be justified and acceptable in very limited circumstances.
- Relative Retroactivity: It affects situations that, although they were created before the entry into force of the retroactive provision.
To sum up, the Constitutional Court rejects absolute retroactivity because the impact on legal certainty will be huge, but it does admit relative retroactivity. In the case of procedural tax provisions, they apply retroactively and they can be applied from the moment they enter into force to procedures in course, to future procedures, or even regarding situations created before the entry into force of the provision. In relation to explanatory or interpretative provisions, they are applied retroactively starting with the entry into force of the provision explained or interpreted. They haven’t normative value as they can’t innovate the legal ordering. In the case of regulations, they have no retroactivity because of the principle of reserve of law.
Analogy in Tax Law
Article 4 of the Civil Code established the general principle of the admissibility of analogy. Due to the subsidiary character of the Civil Code, in principle, analogy also applies to the other branches of the legal ordering. So, although Article 14 LGT establishes that analogy will not be allowed to extend, beyond the strict meaning of the terms used, the taxable event, exemption, and any other tax benefits or incentives, we have to understand that analogy is admitted in general terms in tax law, with the exception mentioned in Article 14.
Power to Tax and Spend
The power to tax and spend is formed by the series of constitutionally given competences and the administrative powers territorial public entities have –as representatives of primary interests– to establish a system of public revenue and expenditure. The Spanish territorial public entities, when legislating financial affairs, are limited by the rules, values, and principles established in the Constitution. Given that Spain is a country with a constitutionally recognized plural structure (State and Autonomous Communities), the holders of the power to tax and spend have ample freedom to normatively configure their system of revenue and expenditure and develop their goals within their respective competencies and territorial scope (autonomy). The exercise of the power to tax and spend of a public entity cannot imply the annulment of the scope of competence of another. There must be respect to the constitutional system of distribution of competencies and their exercise without any abuse or disturbance from others, according to the principles of good faith and loyalty to the constitutional system.
This follows the principles of Tax Justice gathered in the Constitution, which guide the correct exercise of competencies.
Harmful Tax Competition
Tax competition exists when governments are encouraged to lower fiscal burdens to either encourage the inflow of productive resources or discourage their exodus. This usually means a governmental strategy for attracting foreign direct investment, foreign indirect investment (portfolio, capital, or financial investment), and high-value human resources by minimizing the overall taxation level and/or special tax preferences, thus creating a comparative advantage. This means attracting foreign wealth to increase their total revenue without increasing the burden on every tax.
There are certain types of wealth that are very sensitive to the tax regime, or responsive to tax incentives, and therefore more mobile –such as portfolio capital– and states will try, due to that response to tax incentives, to attract as much of that wealth as they can to obtain a larger amount of revenue. It forces States to make competitive offers to attract wealth and, in return, it makes them achieve good management over the resources available in their territory. Also, the offer made by the States cannot be analyzed only from a revenue perspective; it is important to analyze as well what the State offers in return, for it is a public finance offer –the revenue obtained by a State is to spend on public needs. Tax competition is harmful when a State attracts wealth and, in doing so, the harm created to 3rd countries is bigger than the benefit it obtains; when it causes a negative net result in terms of global wealth, when the effects on all States are taken into account.
“Race to the Bottom Effect”
If State A establishes a harmful provision – a provision that intends to attract wealth that, in its absence, wouldn’t be allocated there – the other states can either not react – and see the wealth allocated in their jurisdictions decreased as it shifts towards State A – or react – trying to equal or improve the offer made by State A to attract wealth as well – thus creating this race to the bottom effect in which every state will try to improve the others’ offers in order to attract as much wealth as possible.
Taxable Event
The taxable event is the set of facts for which a legal consequence is established, the consequence being subjection to the tax. The taxable event is established in a legal provision and only exists as such because a legal provision has created it. Its nature is legal, not economic. In the moment when the tax event has been fulfilled and therefore the obligation to pay arises (21.1 LGT), it is an element subject to the principle of legality. It allows the distinction between instantaneous and periodic taxes, determines which legislation is applicable for each tax event, and the elements of fact of the taxable event at the moment when the tax is due will determine the content of the obligation that arises from it.
Quantifying Elements
Tax due (Art. 56 LGT):
- Gross Amount Due: Results from applying the tax rate to the reduced tax base (GAD = RTB x TR).
- Net Amount Due: Results from subtracting deductions and tax credits from the gross amount due (NAD = GAD – deductions + tax credits).
- Balance Due: Results from reducing the net amount due in the amount of advanced payments (BD = NAD – AP).