It is a priority to clearly explain our tax contribution

Inspections

Periods open to review by the Tax Authorities

• In Spain, at the end of 2021 period the Tax Consolidation Group to which the Endesa Group belongs (nº 572/10), is open to inspection on Corporate Income Tax for the periods 2006, 2019 and following years.  The Tax Consolidation Group nº 21/05, of which the head is Empresa de Alumbrado Eléctrico de Ceuta, S.A., as well as the rest of the dependent entities of ENDESA, have open to inspection the periods 2017 and following years for Corporate Income Tax.
• Additionally, Endesa and the majority of its controlled subsidiaries have open to review, in general, the periods 2019 and following years for all other taxes applicable.
• In Portugal, France, The Netherlands and Germany, the subsidiaries and branches controlled by the Endesa Group in these countries, in general, have open to inspection the periods 2019 and following years, 2021 and following years, 2018 and following years, and 2018 and following years, respectively.  

Inspections in Progress

• In Spain, at the start of 2022, there are 699 inspection processes open by the Bodies of Inspection of State, Autonomous Community and Local Taxes.
• Outside of Spain, a process of Inspection of Endesa Generación Portugal is open regarding VAT and Corporate Income Tax for the period 2018 and in progress in France, regarding the branch of Endesa Energía, with respect to the Tax on gas transport and distribution for the years 2019 and 2020.

Inspections Closed during 2021

• In Spain, during 2021 514 inspection processes have been closed.  The most relevant has been that related to the General Tax Inpsection for 2015 – 2018 whereby on 28^th May the assessments were signed for Corporate Income Tax, VAT and Withholdings, which have been or will be appealed as detailed in the Litigation section.  Regarding the rest of the processes (Local, Environmental and Excise Taxes), they have been finalised with the signing of assessments in disagreement for an amount of 2M€, principally linked to the Tax on Hydrocarbons, and assessments in agreement for an amount of 1.6M€, linked principally to the Tax on the Value of Electricity Production.  
• Outside of Spain, during 2021 a General Tax Inspection process was closed in France concerning the branch of Endesa Energia for the periods 2018 – 2020 with an assessment in agreement of 0.2M€ and a process in Portugal for the review of the first half of 2021 of the Hydrocarbon Tax of the branch of Endesa Energía for an immaterial amount. 

Litigations

The majority of the tax related litigation processes in the Endesa Group arise from processes of recovery of undue tax payments, whereby the Endesa Group pays the applicable taxes correctly and on time, but afterwards requests the refund of the amounts paid.  The request is generally is rejected by the Tax Authorities and the Endesa Group challenges the assessment that rejects the request giving rise the start of a judiciary process.

This generally applies in matters where the Endesa Group considers that the law in question is not in line with the Spanish Constitution o European Law, and in matters where it does not share the interpretative criteria followed by the Tax Authorities.   Following this strategy, the Endesa Group avoids the generation of contingencies in their Accounts, however, without losing the legitimate interest to defend its position in the Courts.

The most relevant processes are the following:

• The taxes regulated in Ley 15/2012 (Tax on the Value of Electricity Production, Tax on the storage of used nuclear fuel and radioactive waste in the power plant installations and the Hydraulic charges).
  With regard to the Tax on the Value of Electricity Production, the National Court, in an Appeal similar to that of Endesa, handed down a Sentence on 15^th July 2021 concluding that specific concepts partially coinciding with those appealed by Endesa should not form part of the taxable base.  Subsequently, in the month of October, the State Attorney appealed the Sentence in cassation.
  The Supreme Court Sentence of 10^th June 2021 declared legal the Tax Nuclear Fuel Spent and the inadmissibility of the elevation of the question of unconstitutionality of the same.  This Sentence, along with that of the European Court of Justice from 2019 appear to close the door to a judicial discussion of the legality of the tax.  However, it is pending resulting the judiciary via the form in which the coefficient of retroactivity should be applied as envisaged by the tax legislation.
  Regarding the Hydraulic Canon, as a result of the Supreme Court Sentence in which the tax was declared non-existent, in December 2021 a reimbursement was received corresponding to 100% of the canon paid between 2013 until 2020 by Endesa Generación.

• Certain Autonomous Community taxes with an environmental motive (Taxes on emissions, taxes on waste, hydraulic charges, wind charges, taxes on installations that impact the environment, etc.).  The appeals are pending resolution in diverse judiciary authorities. 
• Certain Excise Taxes that tax the consumption of fuel for electricity production (Mineral Oil Tax and Coal Tax) which a disputable environmental motive. On the 20^th December 2021 the National Court decided to elevate the prejudicial question to the European Supreme Court in order to analyse the legality of the Coal Tax.
• Endesa is also disputing in courts the form of calculating the taxable base of the Coal Tax and, in an appeal in which it is not a party, the Supreme Court has admitted this question to cassation.   
• Corporate Income Tax from the 2006 period due to the taxation in this exercise of income from the refund of a tax declared unconstitutional.  The refund request of undue amounts is based in the application of the Supreme Court doctrine that established the year in which the income should be computed as income for the purposes of Corporate Income Tax.  Endesa has an unfavourable Sentence from the National Court and has proceeded to present cassation appeals to the Supreme Court.
• The minimum prepayment for Corporate Income Tax regulated in the Real Decreto Ley 2/2016, along with other tax regulations included in the Real Decreto Ley 3/2016 which may suffer from defects of unconstitutionality.  In 2020, the Constitutional Court declared unconstitutional the Real Decreto Ley 2/2016, which has resulted in the end of the discussion over the periods 2016 and 2017.  In 2022, the Constitutional court has rejected the question of unconstitutionality of the Real Decreto Ley 3/2016. 

It is worth highlighting once again that for these processes, in case of loss, it would not result in a negative effect neither in terms of cash nor in terms of results for the Endesa Group, given that the taxes have been declared and paid.  Exclusively in the case of success, there would be a favourable result, both in terms of cash and in terms of results for the Endesa Group.  

Regarding the remainder of the processes, susceptible to generate a negative effect in the Group, the majority refer to procedures initiated by the Inspection bodies, which have been signed in disagreement by Endesa Group and have not been paid, the payment being suspended during the litigation process.

Before starting any litigation process of this nature, Endesa evaluates the possibility of loss in the highest court.  In those processes where it estimated that there is more probability to lose rather than win, the contingent amount in dispute is provisioned in the accounts; no provision is made in other cases.  The most relevant are highlighted below:

• A litigation regarding the proceedings initiated by the Inspection in 2017 of ENEL Green Power España, S.L.U. (EGPE) is ongoing in relation to Corporate Income Tax for the years 2010 to 2013.

The main issue under discussion concerns the applicability or otherwise of the tax neutrality regime to the merger of ENEL Green Power España, S.L.U. (EGPE) by absorption of ENEL Unión Fenosa Renovables, S.A. in 2011.

On 10 December 2019, a dismissal Resolution was obtained from the Central Economic Administrative Court on the Corporate Income Tax for 2011 (as regards the position of ENEL Green Power España, S.L.U. (EGPE) as successor to ENEL Unión Fenosa Renovables, S.A.) and it was decided to lodge an appeal with the National Court. Likewise, on 16 June 2020, a partial resolution was received for the Corporate Income Tax for the financial years 2010 to 2013, where the effects of the application of the tax neutrality regime in that period are discussed, which, in the same way, has decided to continue appealing before the National High Court.  The contingency associated with the process is not determinable a priori, insofar as the impacts associated with the asset revaluations that would occur as a consequence of the acceptance of Management's criteria must be assessed. A guarantee is available to secure the suspension of the debt.

• A litigation regarding the proceedings initiated by the Inspection in 2018 of Endesa and its principal subsidiaries in relation to Corporate Income Tax for the years 2011 to 2014.

The principal items in dispute stem mainly from the difference in criterion applied to the Corporate Income Tax deductibility of dismantling expenses, certain financial expenses, certain losses on sales derived from the transmission of shareholdings during the inspected period.

In 2018, the corresponding appeals were filed with the Central Economic-Administrative Court, which are pending resolution at the current date. 

The amounts in dispute amount to 51M€, an accounting provision of 24M€ has been made. There is a guarantee covering the suspension of the debt.

• Litigation regarding the proceedings initiated by the Inspection in 2018 of Endesa and its principal subsidiaries in relation Valued Added Tax (VAT) of the periods 2012 to 2014. 

The principal items in dispute stem mainly from the application of the pro rata rule regarding financial income from derivatives.

In 2018, the corresponding appeals were filed with the Central Economic-Administrative Court, which are pending resolution at the current date.  On 28 January 2022, a partial settlement was upheld for Value Added Tax (VAT), which it was decided to continue to appeal against before the Spanish High Court, and the part relating to Corporate Income Tax was pending resolution.

The amounts in dispute amount to 9M€, having been provisioned in the accounts.

• A litigation regarding the proceedings initiated by the Inspection in 2021 of Endesa and its principal subsidiaries in relation to Corporate Income Tax for the years 2015 to 2018. The definitive assessments have been, or will be, appealed before the Central Economic-Administrative Court.

The items under dispute originate mainly from the differing criteria regarding the deductibility of certain financial expenses during the inspected period and in the rejection of part of the documented deduction for research, development and technology innovation.

The amounts in dispute amount to 47M€, an accounting provision of 28M€ has been made.

• Litigation regarding the proceedings initiated by the Inspection in 2021 of Endesa and its principal subsidiaries in relation to Value Added Tax (VAT) of the periods 2015 to 2018. The definitive assessment has been received and has been appealed before the Central Economic-Administrative Court.

The principal issues under dispute relate to the application of the pro rata rule regarding certain financial incomes.

The amounts in dispute amount to 2M€, having been provisioned in the accounts.

• Litigation regarding the proceedings initiated by the Inspection in 2021 of Endesa and its principal subsidiaries in relation to Withholding Tax on account of Personal Income Tax of the periods 2015 to 2018.

The definitive assessments have been received and has been appealed before the Central Economic-Administrative Court.

The amounts in dispute amount to 2M€, having been provisioned in the accounts.

• Litigations regarding the proceedings initiated by various Councils related to the Public Thoroughfare Occupation Tax.

The principal issue stems mainly from requirement by certain Councils of the tax in its general modality (tax on elements) when Endesa considers that this general modality is incompatible with the special modality, for which the Company is already paying (which implies a tax of 1.5% on the invoicing of commercial and distributor entities in the Municipality where they operate).

Regarding the exigency of the tax in its general modality (tax on elements), in 2021 the Supreme Court admitted to cassation the appeal of a Local Authority given certain favourable Sentences of the High Court of Justice of Andalucía.

In relation to including the income from value added services for the determination of the taxable base, Endesa has been appealing such assessments and in 2021 the Supreme Court has admitted the preparation of the Cassation Appeal deposited.

The amounts in dispute amount to 13M€, an accounting provision of 6M€ has been made.

Transactions between Group companies

Related-party transactions carried out by ENDESA Group companies comply with the arm's length principle set out in the OECD Guidelines, the European Union Joint Transfer Pricing Forum and the regulations of the Corporate Income Tax Act.

According to the applicable regulations and recommendations, the pricing method for determining whether a transaction complies with the arm's length principle is that which, based on the facts and circumstances of the transaction, can justify that the transaction has been carried out in accordance with what would have been agreed between independent parties at arm's length.

When it is possible to identify transactions with comparable market characteristics (e.g. indices, public markets, third party contracts), the comparable uncontrolled price method (CUP) is used as it is the most direct and reliable method for applying the arm's length principle. When market comparables are not available, indirect methods such as the cost plus method are applied, which are confirmed by applying the Transactional Net Margin Method (TNMM).

When deemed advisable in view of the circumstances, the ENDESA Group promotes the signing of Advance Pricing Agreements (APA) with the tax authorities to define the methodology to be applied.