Right or Option? The Legal Battle Defining Tax Rectifications

In the Spanish tax system, it is crucial to distinguish between the taxpayer's rights and options, especially when this distinction determines the possibility (or not) of rectifying a self-assessment presented by another that is more favorable or beneficial to their economic-personal interests. The protagonists of this debate are Articles 119.3 and 120.3 of the General Tax Law, through which the taxpayer can modify their decisions regarding a self-assessment, within the limitations set by the legal framework.

On one hand, according to Article 120.3 of the GTL, taxpayers can request the rectification of their self-assessments within the general prescription period (i.e., 4 years) if they believe their legitimate interests have been harmed. However, Article 119.3 of the GTL limits this right in the case of tax options, as it holds that these must be exercised when presenting the self-assessment and cannot be modified later, unless the rectification is submitted within the regulatory self-assessment period. Clearly, there is a confrontation between these provisions, creating legal uncertainty for the taxpayer.

Now, what is a tax option?

This is not a trivial question. The Supreme Court, in its ruling of November 30, 2021, referred to the Royal Spanish Academy, which defines the term “option” with several meanings, mostly based on the idea of choosing between different alternatives, such as “each of the things to choose from” or “the right between two or more things, based on a legal provision or legal transaction.”
For a tax option to exist, it must involve an objective element (i.e., an alternative choice between two different and mutually exclusive tax regimes provided by the tax law) and a volitional element, which is the act of free will. By contrast, the exercise of an autonomous right under the law, without different and mutually exclusive regulatory alternatives, cannot (nor should it) be considered an option.

This issue sparked a significant debate regarding the compensation of negative taxable bases (BINS) in the Corporate Tax, which was settled by the Supreme Court on November 30, 2021. Traditionally, the Central Economic Administrative Tribunal had defended that the compensation of BINS was a tax option, and if not exercised in the relevant self-assessment, it barred the taxpayer from including it in a later rectifying self-assessment, as well as in all self-assessments filed beyond the deadline.

Well, the Supreme Court set precedent by ruling that the ability or possibility to choose whether to compensate BINS in a given tax period, within the legally established limits, is not technically an option, as it does not involve choosing between different and mutually exclusive tax regimes. In fact, the BINS compensation mechanism is closely related to Article 31 of the Spanish Constitution, as it safeguards the contribution to the support of public expenses based on economic capacity.

Since then, the TEAC has adopted the Supreme Court's position, stating in its resolutions of February 22, 2024, and October 1, 2024, that the reduction for capitalization reserve and leveling reserve contributions also constitutes a right, as these provisions regulate the ability of taxpayers who meet certain requirements to apply a tax benefit, and the decision not to apply it cannot be seen as opting for a different and exclusive legal regime.

Recently, the Regional Economic Administrative Tribunal of Madrid also issued a similar ruling on November 26, 2024, declaring that the exemption for reinvestment in habitual housing is a taxpayer's right, which they may exercise within the four years provided by Article 120.3 of the GTL, especially when meeting all requirements.

In any case, experience shows that each factual situation requires a case-by-case analysis of the circumstances, taking into account that the broader the objective scope of Article 119.3 of the GTL, the smaller the taxpayer's right to rectify a self-assessment. Therefore, it is crucial to interpret both provisions in a way that ensures a balanced coexistence between them and to assess the implications that rectifying a self-assessment may have in future tax periods.