Corporate tax: compensation of Negative Tax Bases (BIN’s)

According to tradition in the world of taxation, the month of July is the month of TAX and, as our readers know, all companies whose fiscal year coincides with the calendar year must file the Corporate Income Tax between the 1^st and 25^th of July every year.

For this reason, we want to take advantage of this period to discuss the compensation of negative taxable incomes from previous financial years, commonly known as “BIN’s” in Spanish.

Firstly, in order to define concepts, we must be clear on the origin of the calculations. Negative taxable incomes, as the name suggests, are the negative results of previous financial years for which a company has the right to compensate, following some guidelines to apply for it. Let’s discuss how the compensation works.

Firstly, we must draw up the income statement. The company’s Profit and Loss account shows its Accounting Profit, which is not the same as the Taxable Profit.

The accounting profit is determined by the provisions of the General Accounting Plan, the Commercial Code, the Capital Companies Law and the resolutions of the Accounting and Account Audit Institute (ICAC). It shows us the amount of expenses and income paid and received by the company throughout the financial year. On the other hand, the taxable profit is calculated in accordance with the Corporate Income Tax Law.

This means that our starting point will always be the accounting profit to subsequently end up with the tax result and, therefore, calculate the Corporate Income Tax. In order to do so, we must analyse and study whether Non-Accounting Adjustments are necessary, in such a way that we obtain the Taxable Income of the tax. The following table helps to clarify this:

ACCOUNTING PROFIT

+ Permanent positive differences – Permanent negative differences

ADJUSTED ACCOUNTING PROFIT

+ Temporary positive differences – Temporary negative differences – Negative taxable income from previous financial years

TAXABLE INCOME X Type of tax rate

GROSS TAX PAYABLE

– Deductions and tax credits

NET TAX PAYABLE

– Withholdings and payments on account

TAX DIFFERENCE PAYABLE

 

According to the above, and focusing on the issue at hand, let’s discuss the cases in which the compensation of BIN’s can be applied, since we must pay attention to the particularities of the Law.

The compensation of BIN’s is regulated under Article 26 of the Corporate Income Tax Law 27/2014, of 27^th November. In said Law, the cases for their application are specified, which are detailed as follows.

• The negative taxable incomes generated in previous financial years may be compensated with the positive income of the following tax periods. During this financial year of 2017, there will be a limit with regards to the application of these BIN’s. This limit will be 70% of the “taxable income prior to the capitalisation reserve”. Attention! The 70% limit is not calculated based on the BIN’s to be applied, but rather on the previous taxable income of corporate income tax that we are carrying out.
  
• In any case, we may compensate up to 1 million euros, even if the 70% limit gives a result of less than one million.
• For companies whose turnover exceeds 20 million euros, there are other limits lower than 70% that will apply as long as they have obtained a turnover of over 6,010,121.04 euros in the previous financial year^[1]. These limits are:
  • 50% of the taxable income prior to the application of the capitalisation reserve, if in the previous 12 months the INCN^[2] was at least 20 million euros but less than 60 million euros.
  • 25% of the taxable income prior to the application of the capitalisation reserve to said compensation, if in the previous 12 months the INCN was at least 60 million euros.
• For tax periods of less than one year we may apply these limits, but they must be calculated using the proportion existing between the duration of the period with regards to the year, calculated in days.
• There are more limitations: the limit will not apply in periods in which the company terminates, unless said termination is the result of a restructuring operation in which the special tax regime will apply.

Moreover, special attention must be paid to negative taxable incomes that will not be subject to compensation, which will be those meeting the following circumstances:

• When the majority of the share capital has been acquired by related persons or entities after the financial year-end corresponding to said BIN’s.
• That the related persons or entities had a share of less than 25% at the time of the financial year-end corresponding to said BIN’s.
• That the company acquired is in one of the following situations:
  • It did not carry out business within the 3 months prior to the acquisition.
  • That it carried out an activity during the 2 financial years prior to the acquisition which is different or additional to that carried out before, and that this activity accounted for more than 50% of the average turnover in the previous two years.
  • That it is a parent company in accordance with the Spanish Tax Law.
  • That the company has been removed from the Tax Authorities’ company index by failing to file a corporate income tax return for three consecutive periods.

Having seen and broken down the legislation on this subject, all we need to know is the amount of the company’s tax credit. These incomes, which must be included in the self-assessment of corporate income tax (form 200), fully broken down by year, will, where appropriate, reduce the entity’s taxable profit, ultimately resulting in a tax benefit for the entity.

Not only do we need to know where to include negative taxable incomes for their correct compensation, we must also be aware of every detail of the legislation to confirm the origin (or not) of its inclusion in the tax, as well as its application, determining whether any limit should be applied or if compensation simply does not apply.

A special mention must be made with regards to the taxpayer’s obligation to prove the reality of their claims, and that the Corporate Income Tax is filed by means of self-assessment (Form 200). However, said filing implies the assertion of the origin of the negative bases that are included. This means that the negative results must truly be in accordance with the tax legislation, otherwise they could be subject to parallel assessments by the tax authorities and penalties.

It is essential to keep all the documentation that has generated these tax losses and that at some point the entity will apply as compensation. Now, since there is no time limit for the compensation of these negative incomes, it is even more important to keep the costs and supporting documents that generated these negative bases safe, since the mere fact of not having these supporting documents would mean that the Tax Administration, in the event of a check, would have no way of determining the origin of the tax credit, thus annulling them. Remember that the Law provides that the Tax Administration has a period of 10 years to initiate a procedure to verify tax losses. However, after this period, the tax losses applied can be verified by proving the filing of accounts with the Companies Registry and by producing the Tax Form and accounting books for the corresponding period.

In light of the foregoing, we highly recommend that as taxpayers and those ultimately responsible for their companies, you seek the best possible advice on tax and commercial matters, as on most occasions good foresight and planning is the best investment for your company.

^[1] Transitional Provision 34 of Corporate Income Tax Law 27/2014

^[2] INCN: Net turnover. This amount is roughly assimilated to the turnover or volume of income.