Beware The Spanish Taxman

Now that the first Modelo 720 (overseas assets reporting) forms have been submitted and processed, people have started hearing from the Spanish tax inspectors. The tax authorities have also recently announced an amnesty for undeclared foreign souce pension income.

Now that the first Modelo 720 (overseas assets reporting) forms have been submitted and processed, people have started hearing from the Spanish tax inspectors. The tax authorities have also recently announced an amnesty for undeclared foreign souce pension income.

Modelo 720

Form 720 is not a tax form; it is simply a form on which a Spanish resident individual has to report their non-Spanish assets, and also their share of such assets held jointly.

However, it was always perceived by many commentators, including Blevins Franks, to be a way for the authorities to catch out people who are not reporting assets on their wealth tax returns. With asset reporting through Modelo 720, the scope for hiding assets and income from the taxman, which is tax evasion, has been very much reduced in Spain.

Most of these enquiries from the Spanish tax inspectors appear to be related to discrepancies between the assets an individual has reported on the Modelo 720 and the wealth tax return (or even the absence of a wealth tax return for the relevant year). However, the tax inspectors have also looked into previous years in some cases.

For some people, it has been easy to respond to the inspector. For example, one inspector asked the taxpayer about previous years, only to find out that the individual concerned was not resident in Spain at that time.

However, this highlights the importance of keeping records (including of where you were living and when), and declaring assets accurately and appropriately.

Even people who had no wealth taxes to pay in previous years may still have to put up with the inconvenience of the enquiry, not to mention the expenses – potential legal and accountancy fees, translation fees etc. – as well as the time involved. For those who are caught out not declaring assets, there can be unpaid tax, penalties and interest due, not to mention tax on income generated by the undeclared assets (and penalties and interest on that). It can be a very unsettling experience.

There are ways that you can legally minimise income and wealth taxes, and while this will mean that people still have to make the correct declarations, they will have peace of mind that they are declaring correctly, and do not have anything to fear from the taxman. As we have always recommended, only use legitimate means of limiting your tax liabilities, through tailored specialised advice.

Undeclared foreign pension income

On 1st August, the Spanish tax authorities announced that an amnesty will be introduced for residents of Spain who are paid a pension income from abroad. It will run for a period of six months, starting January 2015.

Exchange of information between countries has been strengthening over recent years. The local authorities have been receiving data on their taxpayers, and have discovered that a substantial number of Spanish tax residents have not declared pension income that is taxable under the terms of the double tax treaties. The Hacienda has recently opened nearly 28,000 enquiries into expatriates’ tax returns.

During the six month amnesty period, affected taxpayers may submit additional self-assessment returns for the previous four tax years. Under the provisions of the draft legislation, any penalties and surcharges would be waived but the income tax on the undeclared pension income and related interest would still be payable.

Normally an amnesty is followed up by tightening of the tax rules. This is therefore an opportunity for expatriates to check that they have been declaring their pension income according to the Spanish tax legislation, and to regularise their tax affairs if necessary. British expatriates need to understand both the UK and Spanish tax rules for their UK pensions, and the interaction between them. Seek specialist advice.

11 August 2014