Last few days for the first tax return reporting assets and rights abroad
There are only a few days left to file the first tax return reporting assets and rights abroad (form 720). This return, which is just a formality, is causing more than a few headaches due to the difficulty for taxpayers to get hold of the data required in the form. Many foreign banks are not used to generating data such as the average balance of bank accounts in the last quarter of the year, or do not provide information on the domicile of mutual funds.
However, even if the reasons for not including these data in the form might be reasonable, the statutory enforcement regime is sufficiently draconian to warrant making every effort to obtain them in time. This is worth remembering as we all know what the consequences are.
In this regard, Additional Provision 18 of Law 7/2012 penalizes the mere fact of filing the return with inexact, incomplete or false data or even filing it late or on paper (as so happens, it is obligatory to file it electronically). In other words, this penalty can be imposed even on taxpayers who fulfill their obligation but do so late or fail to fill out the return correctly. And the minimum fines per item or set of data are hardly trifling.
However, the penalty provision that scares taxpayers the most is the one associated with the fact that late disclosure of assets can lead to their being deemed to have been obtained unjustifiably. In this regard, the Law says that if the return is filed late, the foreign assets will be deemed obtained in the earliest of the years not yet statute-barred (during which the Law has been in force), and taxed (in the case of personal income tax) at the marginal rate and with a penalty of 150%.
This could mean the virtual disappearance of the practice of filing “supplementary returns” (except for those who “dare” to file form 720 without having reported their income); thus, if an individual does not file the informational return on certain concealed assets because the income he used to acquire them was not reported in the first place, and subsequently decides to voluntarily regularize that income, this “disclosure” will theoretically allow the tax authorities to interpret that the income was obtained in the last of the periods not yet statute-barred, and tax it at the marginal rate.
Moreover, the only way of “escaping” from this consequence if ownership of the assets is detected is to be able to prove that the assets were acquired with reported income (or with income obtained when the taxpayer was not resident in Spain). This might seem simple, but it isn’t: remember that money is a fungible asset and that it is not always easy to prove the link between the income obtained and the assets acquired, except with full documentary proof (sometimes impossible and, certainly, always tedious to obtain and keep).
Having said all this, what’s important is to analyze the terms of the new reporting obligation and in order to do so, it is necessary to look at not only Law 7/2012 itself, but also Royal Decree 1558/2012, of November 15, 2012, and Order HAP/72/2013, of January 30, 2013, approving form 720. It is also advisable to go through the rulings of the Directorate-General of Taxes on this matter and the answers to the FAQs posted on the State Tax Agency’s website, which have greatly relaxed the requirements of form 720 for 2012.