On October 8, 2024, the Supreme Court issued a transcendental ruling that reaffirms 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 represents an important support for the future of tax deductions for R&D&I in Spain, and specifically for the system of issuing Reasoned Reports by the Ministry of Science and Innovation (MICIN), but it leaves many loopholes to be covered that are of concern to companies. The sentence is firm and forceful in its statements, but it does not cover the current situation, so it is doubtful whether 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 rather than to the ruling itself, which we can consider a historic achievement in the fight for the binding of the Reasoned Reports before the Tax Authorities. 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 Revised Text of the Corporate Income Tax Law (TRLIS), approved by Royal Legislative Decree 4/2004, of March 5, which regulates deductions for research and development and technological innovation activities. Precisely because it is the TRLIS, it is only valid until 2014 and the wording is somewhat different as far as we are concerned here, in terms of being 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 their impact on the qualification and quantification of deductible expenses in the case of software projects or development of computer programs, basically.
The National High Court had held a restrictive 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 software project expenses. These activities are contemplated by the Corporate Income Tax Law (LIS), which requires that the expenses of technological innovation projects (but not those of R&D projects) "be directly associated with the same (activities) and be applied to the realization of the same".
According to the ruling, the debate centered on whether the expenses could be included in one 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: Is it not the case 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, arguing about whether or not software development is an activity of 'industrial design and production process engineering'. Certainly, it's something that grates today. Not much noise has been made about this, but isn't this also the crux of the matter? The AEAT had grasped at straws, but that nail simply should not be there.
Finally (or perhaps for the time being, as there are still judgments pending), the SC rules that, under the TRLIS, the MICIN's Reasoned Reports 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 affirmed in the revised text, the Reasoned Reports are binding 'period'. But the same is not true of the legislation that follows, which leaves open the review of expenditures by the Treasury. Therefore, we are back to square one and back to the discussion on the 'controversial' activities and 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 technological innovation expenses in the relevant activities, even when it does not make any sense. The law is the law.
Continuing with the sentence, whose jurisprudence unfortunately could not be extended beyond 2014, the SC rules that the technicians of the Computer Support Team (EAI) of the AEAT have neither the technical competence nor the necessary independence 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. Furthermore, 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 projects for tax 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 that way, the linkage to give complete legal certainty to companies that voluntarily avail themselves of 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 may seem complicated, it should be borne in mind that during the process of obtaining this 'binding' report, the companies already 'suffer' the audits, requirements, cuts and possible downgrades considered appropriate by the certifiers (under ENAC accreditation) and by the Ministry of Science itself. The road is far from being a rosy one. All the more reason why it makes no sense for another Administration to subsequently question a report that is not 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, which is required and regulated by the Constitution. Would that obligation not apply, in general, to all 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 revised text, in any case we must admit that something 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 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 cost (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 peacefully' in the face of a possible inspection, and seek legal certainty in the application of the incentive. But with all the above mentioned, sometimes they find anything but the security they were looking for and which was assured to them at
.
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 at hand, and its appropriateness 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. Over time, the Ministry of Science has been improving and defining a robust and reliable system, a definition of which the Treasury is also a part. All those involved in the process have been adapting and adapting, so that they now make up a complicated but well-functioning mechanism (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 odds with each other, trapping in the middle of this confrontation the companies that invest in innovation (that which we so often advocate to make our country a more competitive country). 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 R&D&I of companies, they will never grow at the pace they should. And they 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's be aware that we are all part of the same boat, nobody loses. Neither does the Treasury.
Mónica Aguilar
Dir. Institutional Relations ACERTA
