99.6% of Transactions Currently Validate the Reference Value. The Treasury Publishes Initial Data of the System, Effective Since 2022

Author: Pablo Sempere

Since January 1, 2022, Spain has had a new reference value for homes that establishes the taxable base for wealth taxes related to transactions such as purchases, inheritances, and donations. The aim of this fiscal valuation, which, according to the first data, has achieved its goal, was to update the real value of properties to prevent transactions from being taxed at manipulated amounts far from market value. The new reference value generated much noise and doubts about its effectiveness. However, the first six months of its implementation show a very favorable outcome: only 0.4% of the operations subject to the fiscal value have received requests for reports to determine if any adjustments were necessary.

In the first half of 2022, Spain recorded just over one million transactions based on the new reference value. However, the General Directorate of the Cadastre, under the Treasury, received only 4,186 requests for mandatory and binding reports, the method by which taxpayers ask the ministry to determine whether adjustments are needed for a specific property. This means that 99.6% of transactions have validated the fiscal value set by the Cadastre.

This outcome has two interpretations, according to Rocío García Ramírez, Technical Director of Real Estate Taxation at Euro-Funding. “Either the new reference value is higher than the market value but the difference is so small that it does not warrant a claim, or the new reference aligns with the real value, which is the most common scenario.” The consequences are the same: “The vast majority of taxpayers have accepted to settle based on the reference value in their transactions,” which “reduces under-the-table payments and resolves disputes arising from potential claims.”

The reference value is theoretically supposed to be 90% of the market value of the home. For instance, if a house costs 200,000 euros, it should be taxed at least on 180,000 euros in these transactions, which counteracts the relatively common practice of declaring below the actual value to pay less tax.

Of the 4,186 review requests, 92.6% were associated with the property transfer tax (ITP), the tax paid when buying a second-hand home. The rest were related to the inheritance and donations tax (ISD), the tax on documented legal acts (AJD), and corporate transactions, according to data released by the Treasury in its assessment of the effects of the anti-fraud law, a document recently published by the department headed by María Jesús Montero.

All these figures, according to Manuel Esclapez, member of the group of experts on local taxes and cadastral valuation at the Spanish Association of Tax Advisors (Aedaf), conceal another aspect. “It should be noted that the possibility of questioning reference values is done through the rectification of self-assessment, which has a four-year period.” In other words, he adds, “many tax advisors are waiting for a court ruling to open the door to claims favorable to the taxpayer.”

The Aedaf expert also questions the effectiveness of this measure in reducing fraud. The reason, he adds, is that if someone wants to commit fraud, they can declare the reference value, which is usually lower than the market value, and pay the rest of the transaction in cash. García Ramírez adds that by settling based on this new value, any subsequent checks are avoided. She confirms that “we have indeed seen some errors in reference values, but most are due to not reaching that 90% threshold,” she notes.

The new reference system determines the average value of homes in each area of the Spanish map. This allows, explains the Treasury in the report, any citizen to know the fiscal record at any time and, in case of disagreement, “to initiate the appropriate cadastral procedures for its modification, avoiding potential future disputes.”

The ministry also claims that the new method reduces disputes by providing objectivity to the calculation of the taxable base, reinforces legal certainty, and improves homogeneity in determining values across the country, avoiding comparative grievances.

However, the data should be taken with some caution. Sources from the Cadastre celebrate that “the number of report requests represents a very minor percentage of the number of transactions that occurred within the referred time frame.” Nonetheless, they add, “considering the short period since the reference value was implemented for use in determining the taxable base for these taxes, and the various circumstances that can arise in the tax management of autonomous communities, definitive conclusions cannot be drawn.”

The Ministry of Finance itself remains cautious in the document. “The reference value was implemented on January 1, 2022, so a full fiscal year has not yet passed since its publication and effects on the taxable base” of certain taxes. This, combined with the deadlines established in tax management procedures for potential rectification, means that “a fully conclusive evaluation of the reform cannot be made.”

In the months prior to the approval of the new value, Aedaf, the Tax and Competitiveness Foundation, and the FIDE Foundation warned of potential risks of the new method, citing concerns about tax increases, lack of specificity and consideration of real estate factors in valuations, lack of clarity in the process, and possible taxation of non-existent wealth.