The Statute of Limitations in Tax Law

Definition of Prescription

The generic definition of “Prescription” would be the consolidation of a factual situation by the mere passage of time, which produces the acquisition or extinction of an obligation.

This means that the right to carry out a certain action is extinguished by the passage of time, resulting in prescription.

The Statute of Limitations in Tax Law:

Prescription is the extinction of the right of the Administration or of the Administered to determine, demand, request or obtain, a tax debt or a tax, or amounts related to it.

The foundation of this legal institution lies in the principle of legal certainty, since it aims to avoid indefinite situations of pendency in the exercise of rights, as well as in the principle of economic capacity, according to which it is only appropriate to subject said capacity to taxation when it is current.

Difference with Expiration

In Tax Law it is important to distinguish between Prescription and Expiry.

Prescription always refers to a right, while Expiration refers to a procedure.

Statute of Limitations

The General Tax Law establishes the statute of limitations in Tax Law in a generic way, so that if no specific law, for any particular tax, establishes a different statute of limitations, then the General Law applies, and this indicates that, according to article 66, statute of limitations, four years must elapse for the statute of limitations to operate, so that the following rights expire within this period of time:

1. The Administration’s right to determine the tax debt through timely assessment.
2. The right of the Administration to demand payment of assessed and self-assessed tax debts.
3. The right to request refunds arising from the regulations of each tax, refunds of undue payments and reimbursement of the cost of guarantees.
4. The right to obtain refunds derived from the regulations of each tax, refunds of undue payments and reimbursement of the cost of guarantees.

There is an exception to this general rule, which is determined by article 66 bis, in force from October 12, 2015, and could be applied in the verification and investigation procedures already initiated when it came into force, provided that no settlement proposal had been formalized in said tax procedures.

This regulatory amendment extends the statute of limitations to ten years for the tax authorities to initiate proceedings to verify the tax bases or quotas offset or pending offset, or the deductions applied or pending application. Therefore, Companies and self-employed individuals wishing to offset these amounts in the future must retain the supporting documentation for as long as necessary. These documents include invoices and Deeds; therefore, they must be kept whenever they are intended to have any effect in the future, such as claiming a tax credit for negative tax bases. In such cases, it must be possible to demonstrate which invoices generated those negative tax bases.

It is important to note that this verification and, where applicable, the correction or regularization of bases or quotas compensated or pending compensation or deductions applied or pending application with respect to which prescription has not occurred, may only be carried out in the course of verification procedures relating to tax obligations and periods whose right to settle is not prescribed.

Unless otherwise established by the specific regulations of each tax, the limitation of the right to verify will not affect the obligation to provide the settlements or self-assessments in which the bases, quotas or deductions and the accounting were included on the occasion of verification and investigation procedures of non-prescribed years in which the compensations or applications indicated here occurred.

Procedurally, it is essential to know the deadlines for resolving procedures initiated by the Administration, since after this period, the procedure expires (remember that expiring is different from prescribing).

It is usual for procedures initiated by the Tax Agency to have a maximum duration of 6 months, unless it is an inspection, so the procedure expires after 6 months, but the most important thing is that the expiration does not imply the interruption of the statute of limitations.

So what does it mean for a procedure to expire? Expiration means that the procedure has ended due to the passage of time. However, the Tax Agency can initiate a new procedure for the same matter, unless the Administration’s right to determine or demand payment of the tax debt has expired. Hence the importance of distinguishing between these two concepts.

Let’s take a real-life example:

Let’s suppose we receive a letter from the Tax Agency indicating the start of a limited audit procedure regarding a tax we previously declared; let’s say it’s the 2013 income tax return, whose filing deadline is June 30, 2014. After several appeals, we reach the Economic-Administrative Court and file a claim with it as well. The Court’s response is delayed, finally arriving on September 30, 2018, in which they annul the Tax Agency’s assessment due to a procedural defect.

In this specific case, the Tax Agency could not initiate a new procedure because the right to assess again would be time-barred, since on September 30, 2018, 4 years and 3 months have passed since the declaration was filed on June 30, 2014, having elapsed more than 4 years, article 66 of the General Tax Law would apply and our Personal Income Tax declaration is consolidated by the passage of time.

NOTE: Many resources can be won by applying this statute of limitations and expiry rules, regardless of who is right on the merits of the case.