It is common to fall in the mistake of downplaying to the importance of those returns that do not involve a payment, but only require to report certain data, such as Form 720.
However, there are several reasons to conclude that failure to file Form 720, late filing, or to file it with mistakes, means a relevant issue.
Among all the above referred reasons, the most relevant would be the following:
- The penalty regulation of this Informative return implies high sanctions, not only for the case of late filing but also for the case of incorrect details included in the return.
- Failure to file Form 720 or late filing, will carry out the payment of high personal income taxes and additional high sanctions. This will mean that the total amount of penalties could be higher than the value of the unreported assets.
- There is no term of the Statute of Limitation of the Personal Income Tax in the case of not filing Form 720, or in case of late filing. This situation entails a legal insecurity for the taxpayers who, by omission or ignorance, have not fulfilled their obligations in relation to Form 720.
How do these factors directly impact taxpayers? What do they mean for them? What are they exposed to?
The best way to understand the complexity and the consequences of possible penalties and/or sanctions is through an example.
We can imagine a family of four brothers, who are tax resident in Spain and who are owners of a property located in Italy. This property was an inheritance from their parents in the year 2000. The value of this property amounts to EUR 500.000. They have never considered this property for Income Tax purposes. They did not complied with their inheritance tax obligations.
To the extent that the individuals were obliged to file FORM 720 in the year 2012 (when the reporting obligation was approved by Spanish Government), we are going to explain what is the direct impact on the taxation for the four individuals on the basis of different scenarios:
(i) The individuals filed properly their Form 720 and they filed amended Personal Income Tax Returns to include the property
(ii) the individuals filed Form 720 after the deadline, but with no requirement from the Spanish Tax Authorities and they voluntary amended their Personal Income Tax Returns, and
(iii) The Tax Authorities realised that the individuals had not filed neither their 720, nor amendments of their Personal Income Tax Returns.
Scenario 1: Form 720 was filed properly and the individuals voluntary decided to amend their Personal Income Tax returns
- No consequences would arise in respect of Form 720, to the extent it was properly filed.
- In relation to the Personal Income Tax, the four individuals should amend their Personal Income Tax Returns corresponding to the four preceding tax years, to include the “imputed income” derived from the Italian property.
The total cost for each individual, derived from amending their Personal Income Tax, will be approx. EUR 1.500 (this amount could vary a little depending on the average tax rate corresponding to each individual, the late filing penalties and possible interests charge by the Tax Authorities).
Scenario 2: The individuals did not file their Form 720 within the deadline, but they voluntary decided to file it later and to amend their Personal Income Tax Returns, with no requirement from the Spanish Tax Authorities
- Under this scenario and in relation to Form 720, the following consequences would arise:
- Late filing penalties of EUR 100, per data or group of data not declared, with a minimum of EUR 1.500. Then, to the extent that the mandatory details to be reported in respect to the property are five (5), we were in front of a sanction of EUR 1.500 per individual.
- In addition, the value of the unreported asset (i.e., the value of the Property) would be included as a non- justified capital gain for Income Tax Purposes, which would mean a taxation at the corresponding marginal rate, unless it is possible to prove that the corresponding asset was acquired with income already included in the Tax Return, or at any time when the individual was not considered as a resident taxpayer (i.e. the individual was considered as non-tax resident of Spain or resident under the Special Tax Regime).
As a conclusion, under this second scenario, the Tax Authorities would include the value of the property as a capital gain in their Personal Income Tax Return, in addition with a penalty up to a 150%, or at least the corresponding late filing. This would mean a total payment (including tax payment and penalties) between approx. EUR 67.500 to EUR 145.625, depending on the final penalty imposed by the Tax Authorities.
- Personal Tax: the individuals should amend their tax returns corresponding to the four preceding years, with a total cost of EUR 1.500.
Summarizing, under this second scenario the total cost for each individual will amount approx. from EUR 70.500 to EUR 144.000.
Scenario 3: The Tax Authorities realise that the individuals had not filed neither the Form 720, nor their Personal Income Tax Returns.
- With respect of Form 720, the following consequences would arise:
- Late filing penalty amounting EUR 5.000 per data not reported, with a minimum of EUR. 10.000. As there are five (5) mandatory data to report for properties, there minimum sanction would be EUR 25.000 per individual.
- The Tax Authorities would include in their Personal Income Tax returns the value of the property as a non- justified capital gain and will impose the corresponding sanction. That means a total cost from EUR 67.000 to EUR 140.625.
- Personal Income Tax: The tax authorities would request to amend the Personal Income Tax Returns corresponding to the four-preceding year, which would imply an additional cost of EUR 1500 and additional sanctions.
The total cost for each individual will range approx. from EUR 94.000 up to a maximum of EUR 167.000 (these amounts could vary depending on average rate of the individual, the total amount of penalties and the corresponding interests).
In light of this situation, the question arising is: how we should proceed in case that we have not filed Form 720?
There are many taxpayers who must face this situation and, due to the uncertainty, are unable to make a decision on how to proceed. The consequences of both voluntary regularisation (scenario 2) or doing it after a requirement from the Spanish Tax Authorities (scenario 3) will imply high sanctions.
Although it is difficult to take the correct decision, in case of a voluntary regularisation (with the corresponding payment of taxes and sanctions) it would be possible to claim the penalties/sanctions and to wait for the response of the Spanish Government to the several resolutions issued by the European Union in respect of the penalty regime around Form 720.
In our next post we will analyse the opinion from the European Union about the penalty regime for Form 720.