Items not included in provisional settlement of tax on installations, constructions and works cannot be added in definitive settlement

The tax on installations, constructions and works (“ICIO tax”) is a municipal tax that local administrations often incorrectly request. Case law has shone a light on some incorrect practices of local administrations, which often issue provisional and definitive tax settlements without respecting the taxpayer’s rights.

The ICIO tax is levied on the completion of constructions, installations and works for which a building or urban development license is required. The tax base is the real and effective cost of the construction. However, the system for managing and requesting the tax has specific features different to other taxes.

When requesting the licenses, the council (or the institution to which the council has delegated the power of application of the tax) carries out a provisional settlement of the tax. The amount requested in this provisional settlement takes as the tax base the budget for the execution of the constructions, installations and works or the modules that the municipal regulations have approved. Subsequently, the council can carry out an administrative check and issue a definitive settlement, requesting the additional amount corresponding to the verified real and effective cost of the construction, installation or work.

From a purely theoretical viewpoint, in the definitive settlement, the council could also repay the extra amount collected. However, in real life, the conditions for this to happen rarely occur: the real and effective cost of the construction must be lower than the budgeted cost, and the council must be prepared to recognize it and repay the amounts. In practice, it is as uncommon as the passing of Halley’s Comet: with a bit of luck, it happens once every 74 years.

In a judgment of December 13, 2018, the Supreme Court delimited the council’s powers when issuing the definitive settlement and imposes limitations on the administration’s authority to request the ICIO tax, highlighting several infringements of the taxpayer’s rights that some local administrations were committing.

This Supreme Court decision is framed in a series of judgments that delimit councils’ authority to tax, increasing the legal certainty and limiting the tax burden borne by taxpayers.

To tackle incorrect settlements, the Supreme Court defines two essential limitations.

First limitation: the settlement cannot be modified to the detriment of the taxpayer, excluding the cases strictly established in the rule

The first limitation on the council’s powers is that items cannot be added to the definitive settlement that were already recorded in the budget originally provided by the interested party but were not included in the provisional settlement of the ICIO tax issued by the council. In the words of the mentioned judgment of December 13, 2018: “the items, headings, equipment and installations not incorporated in the provisional settlement cannot be rectified to the detriment of the taxable person when that rectification worsens the interested party’s legal situation.”

It is established that the parameters of the provisional settlement can be modified if an administrative check shows that the real and effective cost of the construction was higher than the tax base calculated by means of the settlement on account (case established in article 103.1of Royal Legislative Decree 2/2004, of March 5, approving the consolidated text of the Spanish Local Tax Authorities Regulation Act). In other cases, it is not possible to simply request the tax.

For example, in the case analyzed by the Supreme Court, the council had issued a definitive settlement based on the fact that the provisional settlement had not used certain items (installations of a hydroelectric project) as tax base, but only the items derived from the civil work. The council’s decision is considered incorrect, since, based on the documentation and data that actually gave rise to the provisional settlement of the ICIO tax, the parameters are modified and a definitive settlement is issued for a higher amount without justification.

There is an interesting additional reference in the judgment: provisional settlements are acts of will of the administration, which incorporate acts of encumbrance for the taxpayer. We must consider that, in the opinion of the Supreme Court, the “provisional” settlement is a “definitive” administrative act for challenge purposes. Therefore, as they are “definitive” acts, they cannot be revised ex officio in malam partem except in exceptional cases.

Thus, the administration cannot modify the parameters contained in the provisional settlements to the detriment of the taxpayer except through the mechanisms for declaration of absolute invalidity or declaration against the public interest. These absolute invalidity procedures are truly exceptional, subject to requirements that are very difficult to meet and only in certain cases that are extremely difficult for the local administration to justify. These requirements mean that the administrations resort to them in very few cases.

Second limitation: any modification made must be a result of an administrative check

The Supreme Court highlights that the completion of an administrative check is the only way to determine the real and effective cost of the work that constitutes the tax base of the definitive tax settlement. The judgment of December 13, 2018 explains this: “the administrative check referred to in section 103.1 of the Consolidated Text of the Spanish Local Tax Authorities Regulation Act is a mandatory process, as it is the only possible means of determining whether the projected work, in its development or execution, has been adapted in view of the budget presented or not, and to what degree, qualitatively or quantitatively, it has deviated from the estimates, which is a necessary operation to determine the definitive settlement.”

In conclusion, a definitive ICIO tax settlement can only be issued for a higher amount than the sum determined in the provisional settlement if the check performed by the administration shows that that increase is derived from the existence of a deviation between the original budget provided by the taxpayer and the real and effective cost of the finally existing work. The tax payable cannot be increased based on issues and parameters that were already specified in the material execution budget used to issue a provisional settlement.