Final Labor Judgments and Settlement Agreements - Liquidation or Determination and Request of Omitted Social Security Contributions

Through General Resolution No. 3739 (GR 3739), published in the Official Gazette on February 15, 2015, the Tax Authority (Administración General de Ingresos Públicos) has established the procedure to follow in cases where, by a final or executed labor judgment or by an approved labor settlement agreement, the existence of employment relationships that have not been registered or have been improperly registered is determined.

GR 3739 establishes a more efficient procedure allowing the Tax Authority to collect funds in a faster way than that applied by inspections, fines or debts.

This new rule sets forth the following:

a) It regulates the applicable procedure when the Judicial Authority informs the Tax Authority about the existence of a final or executed labor judgement or approved settlement agreement, where all of the constituent elements of the case and the tax base of the social security contributions are determined. If the employer has not submitted the relevant sworn statements – original or rectified – specifying the mentioned contributions omitted in relation to the labor relationship that is the subject of the labor claim, the Tax Authority will proceed to calculate and demand payment of the contributions owed, as well as any related amounts that may arise.

b) It regulates those cases where the Judicial Authority informs on final judgments or approved settlement agreements where a hidden employment relationship arises but there is insufficient information for the Tax Authority to proceed with the definition of the existing debt. In order to define said debt, the Court will take into account the period of the employment relationship informed by the Court, and the taxable remuneration will be estimated projecting what the Court considers appropriate to estimate the employees' compensation or basic remuneration, according to the collective bargaining agreement or the Minimum Wage, whichever is greater.

When the Court communicates the approval of a settlement agreement without acknowledging facts or rights to the Tax Authority, the Tax Authority shall take into account the circumstantial nature of the agreement and the information will be filed with the Authority.

c) It provides that if the records within the Tax Authority showed that, through misrepresentation or falsification of data regarding the employees or the employer, a taxpayer or person responsible, had in her/his social security sworn statement invoked a benefit reduction in the rates of contributions, this would result in an ex officio determination of withholdings and / or contributions omitted and the application of sanctions. Such determination shall consist in the liquidation of differences between contributions declared by the employer and those that should have been paid, according to information held by the Tax Authority, provided by the taxpayer or third parties.

Furthermore, if the employer continues to use the benefit of reduced contributions made after the liquidation of the debt, the Tax Authority will be allowed to settle differences arising plus accrued compensatory interest and penalties.

d) It regulates a new system of offenses and penalties applicable to the cases referred to in Sections 5 and 13 of that regulation, establishing severe penalties in situations such as: i) lack of registration by the employer (up to three times the amount of withholdings and contributions for the most recent staff compensation earned in the month immediately preceding the date of the infringement); ii) the underreporting of employees in the sworn statement for contributions and / or failure to retain contributions (a sum equivalent to the withholdings and contributions that should have been paid with respect to the employees involved, or its duplication, as appropriate).

In conclusion, this new procedure requires a more in-depth analysis of subcontracting or outsourcing of services and/or activities, as well as of the hiring of freelancers and the granting of perks or allowances in relation to which case law has already ruled in favor of their remunerative nature.