TO BE BINDING OR NOT TO BE BINDING, THAT IS THE QUESTION.

On October 8, 2024, the Supreme Court issued a transcendental ruling
reaffirming the binding nature of the reports issued by the Ministry of
Science and Innovation (MICIN) in relation to tax deductions for
technological innovation activities in corporate income tax. Although
after a first victorious reading of the ruling, some
comments that substantially lower the initial optimism are appropriate.

The ruling overturns previous rulings of the National High Court that supported a restrictive interpretation of the Tax Administration (AEAT)
, and there is no doubt
that it is an important support for the future of tax deductions for
R+D+i in Spain, and specifically for the system of issuing Motivated Reports
by the Ministry of Science and Innovation (MICIN), but leaves many bangs
to be covered that concern companies. The sentence is firm and forceful in
its statements, but it does not cover the current situation, so it is doubtful if it helps
in any way to the present projects. We will try to unpack the details and
argue that it should do so to a large extent.

In any case, regarding the possible aspects that would detract positively from the
reading of the ruling, we can refer to its short scope more than to the ruling itself, to the
which we can consider a historic achievement in the fight for the binding before
Treasury of the Reasoned Reports. If we go to the beginning of the judicial dispute,
we must bear in mind that it focused on the interpretation of article 35 of the
Texto Refundido de la Ley del Impuesto sobre Sociedades (TRLIS), approved by
Real Decreto Legislativo 4/2004, of March 5, which regulates the deductions for
research and development and technological innovation activities. Precisely
being the TRLIS, its validity is only until 2014 and the somewhat different wording
as far as we are concerned here, in order to be able to extend the victory beyond that
year.

Specifically, the controversy revolved around the binding nature of the
reports issued by the MICIN as technological innovation and its impact on the
qualification and quantification of deductible expenses in the case of projects of
software or software development, basically.

The National Court had held a limiting position, arguing that
the AEAT had the power to question and reclassify the expenses associated with
technological innovation projects, even when these had
binding reports from the MICIN, which was partly true, not for the
recast text, but for legislation that applies outside that period. This
interpretation was challenged by several cassation appeals, leading the Supreme Court
(SC) to rule on the matter.

For this reclassification of expenses, the AEAT relied on internal technical reports
that questioned the activities associated with the expenses of the software projects
. Activities contemplated by the Corporate Tax Law (LIS) and
which requires that the expenses of technological innovation projects (not those of
R&D projects) "are directly associated with the same (activities) and
are applied to the realization of these".

According to the ruling, the debate centered on whether the expenses could be included in a
of the activities contemplated, which in this case were limited to two:
'technological diagnosis' and 'industrial design and engineering of production processes
'. Subsequently, the terms were limited to whether the expenses could
be considered as belonging to activities of 'industrial design and engineering
of production processes', since computer programs are legally
excluded as an activity of 'industrial design'.

Let us pause here for a reflection: Could it be that legislation has not
advanced in the same way as society and technology?
We are
trying to fit software development activities into some
rather industrial descriptions (at least in their conception), which in the case
of some types of software can be 'defended', but in
many others the restriction is rather ridiculous. But there we are,
discussing whether or not software development is an activity of 'industrial
design and production process engineering'. Certainly, it is something that
squeaks today. Not much noise has been made about this, but isn't
also the crux of the matter here? The AEAT had grasped at a burning
nail, but that nail simply should not be there.

Finally (or perhaps for the time being, as there are still judgments pending
pronouncement), the SC rules that, under the TRLIS, the Reasoned Reports of the
MICIN are binding before the Treasury, not only in the qualification of the projects,
but also in the investments and expenses associated with such projects. And it is true
that this can be stated in the recast text, the Reasoned Reports are
binding 'period'. But this is not the case with the legislation that follows, which
leaves open the review of expenditures by the Treasury. Therefore, we are back to
the starting line and the discussion about the 'controversial' activities and the
associated expenses. And about the review of expenses by the AEAT and its
competence to do so. While it is true that we have all learned and now the
Ministry of Science issues the Reports with adequate justification of the
technological innovation expenses in the relevant activities, even when
makes no sense. The law is the law.


Continuing with the sentence, whose jurisprudence unfortunately
could extend beyond 2014, the SC rules that the technicians of the Computer Support Team (EAI) of the AEAT have neither the technical competence nor the
independence necessary to question the qualification of the projects and the
quantification of the expenses established by the MICIN in the Reasoned Report.
It establishes, therefore, that the reports issued by the EAI cannot be
considered as expert opinions that contradict a Reasoned Report and that end up
declaring a deduction null and void. In addition, it indicates that the competent Ministry in
matters of science for the issuance of the Motivated Reports is the Ministry of
Science and Innovation, which the law itself determines as binding for the
Administration.

The question that now arises is what happens for the projects of fiscal years
from 2014 onwards?
Although the ruling is based on the TRLIS, some of the
statements commented on the SC ruling could well be extended to the
current Corporate Income Tax Law (LIS), in force since 2015. Ideally,
the AEAT should adjust its inspection and control procedures to align
with an interpretation that takes into account the commented judgment, which
establishes that the competent to determine the qualification and adequacy of the
expenses of an innovative project is the Ministry of Science and Innovation. In this
way, the linkage to give complete legal certainty to the companies that
voluntarily join the scheme would be absolute. An ideal situation, which
was the one that the then Ministry of
Science and Technology initially tried to conceive. Although it is perceived as complicated, it should be taken into account that
during the process of obtaining this 'binding' report, the
companies already 'suffer' the audits, requirements, cuts and possible downgrades of
qualification that are considered appropriate by the certifiers (under
ENAC accreditation) and the Ministry of Science itself. The road is very far from
being a rosy road. All the more reason why it makes no sense for
another Administration to subsequently question a report that is not at all easy to obtain, and which requires so many filters
.

In any case, and despite not referring to the legislation in force, the sentence
mentions the obligation of coordination between the different organs of the State
that, required and regulated by the Constitution. Wouldn't that obligation apply, in
general, to all the Reasoned Reports, whatever the version of the legislation
under which they were issued? Furthermore, is it not true that, even if it refers to the recast
text, in any case we must admit that a thing cannot "be and not
be at the same time", as the sentence also states, and that if the bodies
that must be coordinated are those that respectively state that a
project is innovation and another that it is not at the same time, something is wrong? If the SC
considers that the Treasury technicians are not qualified and do not have the
independence required to annul a Reasoned Report issued by the
MICIN, wouldn't that apply to whatever the version of the LIS is, once again?

Many of the statements that are established are generic and do not depend on the
LIS to which they are linked. Let us also take into account the main purpose of
this incentive: The Motivated Report was designed to cover those
companies that voluntarily decided to submit their projects to an audit
technical and economic, exhaustive and thorough, and not exempt from considerable bureaucracy,
which would be granted a technical qualification and accept an associated expense
(simplifying the issue) to be able to apply the tax deduction in a binding way
before the Treasury. Those companies that use the Reasoned Report,
want to 'sleep easy' in the face of a possible inspection, and seek legal security
in the application of the incentive. But with all the above, in
occasions they find everything but that security that they were looking for and that was
assured to them.

Under current legislation, it is true that the Treasury can review expenses. But the
initial idea was that the Treasury could check their veracity, their
proper allocation, the accounting of the company, or the registration by project.
Is it sensible for the Treasury to review the expenses of a computer programming project
, to continue with the example that concerns us, and its adequacy from a
technical point of view (the only way to know if an expense is appropriate for a
project), contradicting a whole Ministry of Science?

It was not the objective and should not be. The Ministry of Science, over time, has been
improving and defining a robust and reliable system, a definition of which
is also part of the Treasury. All those involved in the process have been
molding and adapting, so that they currently make up a complicated but well-functioning
gear (everything can always be improved). The Ministry of
Science and the AEAT are part of the same public organization, and in this matter
(or in any other) they should not be at loggerheads, trapping in the middle of this
confrontation the companies that invest in innovation (what
so often advocates to make our country more
competitive). Meanwhile, our innovation continues to lose steam. If we do not
encourage, do not support, do not invest and continue to put sticks in the wheel
of the R+D+i of the companies, they will never grow at the pace they should. And
will continue to lose ground to their foreign counterparts.

This system was created to motivate companies to invest and continue reinvesting
in R&D&I. And it is well thought out. Let's work together to make it work.

A project cannot be and not be at the same time. If whoever has the power to
determine that a project is innovation or R&D, rules that it is, let it be
. We will all win and we will all add up as a country. Let us be aware of
that we are all part of the same boat, nobody loses. Neither does the Treasury.


Mónica Aguilar
Dir. Institutional Relations ACERTA