Substitute Tax Declaration Under Article 122 CIRC: Autonomous Taxation in Corporate Income Tax (IRC)

ARBITRAL DECISION

The Arbitrators José Baeta de Queiroz (Presiding Arbitrator), Nuno Cunha Rodrigues and António Martins, designated by the Deontological Board of the Centre for Administrative Arbitration to form an Arbitral Tribunal, hereby decide:

I – REPORT

1. On 4 January 2017, the following Claimants:

a) GRUPO A… SGPS, S.A., holder of NIPC…, with registered office at Rua …, nº…, …, …, …-…Viseu;

b) B…, SGPS, S.A., holder of NIPC…, with registered office at Rua …, nº…, …, …, …-… Viseu;

c) C…, SGPS, S.A., holder of NIPC…, with registered office at Rua …, nº…, …, …, …-… Viseu;

d) D…, SGPS, S.A., holder of NIPC…, with registered office at Rua…, nº…, …, …, …-… Viseu;

e) E…, S.A., holder of NIPC…, with registered office at…, nº…, in Lisbon, in its own capacity and as incorporating company of the following entities:

i. F…, LDA., holder of NIPC…;

ii. G…, LDA., holder of NIPC…;

iii. H…, LDA., holder of NIPC… .

f) I…, LDA., holder of NIPC…, with registered office at…, …-… Viseu;

g) J…, S.A., holder of NIPC…, with registered office at Rua…, nº…, …, …, …-… Viseu;

h) K…, S.A., holder of NIPC…, with registered office at Rua …, nº…, …, …, …-…Viseu;

i) L…, S.A., holder of NIPC…, with registered office at…, …-… Viseu;

j) M…, S.A., holder of NIPC…, with registered office at Rua …, nº…, …, …, …-…Viseu;

k) N…, holder of NIPC…, dissolved company represented by HH… with residence at Rua … nº…, …, …-…Viseu;

l) O…, S.A., holder of NIPC…, with registered office at Rua…, nº…, …, …, …-… Viseu;

m) P…, S.A., holder of NIPC…, with registered office at Rua…, nº…, …, …, …-… Viseu;

n) Q… S.A., holder of NIPC…, with registered office at Rua…, nº…, …, …, in Viseu, in its own capacity and as incorporating company of the following entities:

i. R… SGPS, S.A., holder of NIPC…;

ii. S…, S.A., holder of NIPC…;

iii. T… S.A., holder of NIPC…; and

iv. U…, S.A., holder of NIPC… .

o) V…, S.A., holder of NIPC…, with registered office at Rua…, nº…, …, …, …-… Viseu;

p) W… SGPS, S.A., holder of NIPC…, with registered office at Rua…, nº…, … …, …-… Viseu;

q) X…, SGPS, S.A., holder of NIPC…, with registered office at Rua…, nº…, …, …, …-… Viseu;

r) Y…, S.A., holder of NIPC…, with registered office at Rua…, nº…, …, …, …-… Viseu;

s) Z…, S.A., holder of NIPC…, with registered office at Rua …, nº…, …, …, …-…Viseu;

t) AA… S.A., holder of NIPC…, with registered office at Rua…, nº…, …, …, …-… Viseu;

u) BB…, S.A., holder of NIPC…, with registered office at Rua…, nº…, …, …, …-… Viseu;

v) CC…, S.A., holder of NIPC…, with registered office at Rua…, nº…, …, …, …-… Viseu, in its own capacity and as incorporating company of the entity:

DD…, S.A., holder of NIPC … .

w) EE…, S.A., holder of NIPC…, with registered office at Rua …, nº…, …, …, …-…Viseu;

x) FF…, S.A., holder of NIPC…, with registered office at Rua…, nº…, …, …, …-…Viseu;

y) GG…, S.A., holder of NIPC…, with registered office at …, …–…, …–…, Viseu;

y)

z) filed a request for constitution of an arbitral tribunal, pursuant to the combined provisions of articles 2 and 10 of Decree-Law no. 10/2011, of 20 January, which approved the Legal Framework for Arbitration in Tax Matters, as amended by article 228 of Law no. 66-B/2012, of 31 December (hereinafter, abbreviated as RJAT), seeking the annulment of decisions rejecting Gracious Appeals and, as a consequence thereof, the annulment of the following Corporate Income Tax (IRC) assessment acts:

in the total amount of € 6,119,594.28 (six million, one hundred nineteen thousand, five hundred ninety-four euros and twenty-eight cents), corresponding to a total amount to be paid of € 5,897,281.65 and a refund in the amount of € 222,312.63; and further

to disregard the corrections made for autonomous taxation purposes, in the amount of € 305,598.73.

2. In support of their request the Claimants allege, in summary, that:

Following various inspection actions that occurred at the end of 2015 and at the beginning of 2016, which were essentially aimed at verifying the conditions for the eligibility of the Claimants within the scope of the Special Tax Regime for Groups of Companies (RETGS), and dissatisfied with the corrections made by the Tax Authority (AT), the 33 Claimants decided to file the appropriate gracious appeals, with a view to the annulment of the IRC assessments issued.

Of this set of appeals, 32 of them were the subject of express rejection, through decisions issued by the Tax Office of…, on 25, 26 and 27 October 2016,

Whereas with regard to the remaining appeal – filed by E… – the tacit rejection occurred on 19 December 2016.

Consequently, the Claimants request the annulment of the decisions rejecting the Gracious Appeals in question and, as a consequence thereof, the annulment of the IRC assessment acts nos. 2016…, 2016…, 2016…, 2016 …, 2016…, 2016…, 2016…, 2016…, 2016…, 2016…, 2016…, 2016…, 2016…, 2016…, 2016…, 2016…, 2016…, 2016…, 2016…, 2016…, 2016…, 2016…, 2016…, 2016…, 2016…, 2016…, 2016…, 2016…, 2016…, 2016…, 2016…, 2016… and 2016…, in the total amount of € 6,119,594.28 (six million, one hundred nineteen thousand, five hundred ninety-four euros and twenty-eight cents), corresponding to a total amount to be paid of € 5,897,281.65 and a refund in the amount of € 222,312.63; and

To disregard the corrections made for autonomous taxation purposes, in the amount of € 305,598.73

On 4 January 2017, the request for constitution of the arbitral tribunal was accepted and automatically notified to the Tax Authority.

The Claimants did not appoint an arbitrator, therefore, pursuant to section (a) of no. 2 of article 6 and section (a) of no. 1 of article 11 of the RJAT, the President of the Deontological Board of CAAD designated the undersigned as arbitrators of the collective arbitral tribunal, who notified their acceptance of the appointment within the applicable period.

On 27 February 2017, the parties were notified of these designations, and neither manifested any intention to challenge any of them.

In accordance with the provision of section (c) of no. 1 of article 11 of the RJAT, the Collective Arbitral Tribunal was constituted on 16 March 2017.

On 2 May 2017, the Respondent, duly notified for this purpose, filed its response.

Taking into account the general procedural principles of procedural economy and prohibition of futile acts, pursuant to the provisions of sections (c) and (e) of article 16 and no. 2 of article 29, both of the RJAT, the holding of the hearing referred to in article 18 of the RJAT was waived, as well as the submission of arguments by the parties, and it was determined that the final decision would be rendered by 16 September 2017.

The Arbitral Tribunal is materially competent and is regularly constituted, in accordance with articles 2, no. 1, section (a), 5 and 6, no. 1, of the RJAT.

The parties have legal capacity and standing, are legitimate and are duly represented, in accordance with articles 4 and 10 of the RJAT and article 1 of Ordinance no. 112-A/2011, of 22 March.

The proceedings do not suffer from any nullities.

Thus, there is no obstacle to the examination of the case.

Given all of the foregoing, it is necessary to render

II. DECISION

A. FACTUAL MATTERS

A.1. Facts Established as Proven

1. Following multiple Service Orders – OI2015…, OI2015…, OI2015…, OI2015…, OI2015…, OI2015…, OI2015…, OI2015…, OI2015…, OI2015…, OI2015…, OI2015…, OI2015…, OI201501009, OI201501025, OI201501011, OI201501013, OI201501020, OI2015…, OI2015…, OI2015…, OI2015…, OI2015…, OI2015…, OI2015…, OI2015…, OI2015…, OI2015…, OI2015…, OI2015…, OI2015…, OI2015… and OI2015… – several tax inspection actions were initiated, all targeting the Claimants, and all relating to the tax period of 2011.

2. The inspections were aimed at conducting an analysis of the eligibility conditions for taxation under the group of companies regime, to which the Claimants belonged through the RETGS, in accordance with articles 69 and following of the Corporate Income Tax Code (CIRC) (in the version then in effect).

3. During the tax period of 2011 the Claimants were integrated in a group of companies taxed under the RETGS.

4. The dominant company of the group of companies subject to the RETGS was Grupo A…, SGPS, S.A.

5. Such group of companies was subject to various inspection actions, at the end of 2015 and at the beginning of 2016, which were essentially aimed at verifying the conditions for the eligibility of the Claimants within the scope of the RETGS.

6. Dissatisfied with the corrections made by the Tax Authority, the 33 Claimants decided to file the appropriate gracious appeals, set forth below, with a view to the annulment of the IRC assessments issued:

7. Of this set of appeals, 32 of them were the subject of express rejection, through decisions issued by the Tax Office of…, on 25, 26 and 27 October 2016.

8. Whereas with regard to the remaining appeal – filed by E… – the tacit rejection occurred on 19 December 2016.

9. The Tax Authority concluded that the company Grupo A… improperly included in 2011 the company F… in the scope of companies subject to the RETGS.

10. A fact that would determine, by itself, the cessation of the application of the RETGS to all companies integrated in the group, in accordance with section (b) of no. 8 and section (c) of no. 9, both of article 69 of the CIRC, which is why all companies forming part of the group's scope should have been taxed autonomously and individually.

11. The application of such CIRC rule resulted from the fact that Grupo A… included in 2011 the company F… in the scope of the group of companies subject to the RETGS.

12. The company F… did not satisfy the legal requirements provided for this purpose, and did not comply with the provisions of article 69, no. 4, section (c) of the CIRC, since it recorded, in the tax periods of 2008, 2009 and 2010, fiscal losses in the amounts of € 154,961.22, € 174,863.02 and € 213,827.29, respectively.

13. Furthermore, since the participation in F… was not held at 90% by the dominant company for more than two years, such company could not have been included in the RETGS, requiring the application of the provision of no. 8, section (b) of the same article 69 of the CIRC and leading to the cessation of the RETGS for all companies in the group.

14. Gracious appeals were filed by the Claimants in the period between 26 April and 19 September 2016, relating to the IRC assessment statements.

15. Appeals which would be the subject of express rejection whose legality is contested by the Claimant.

16. The only exception is the case of company E… which, in view of the silence of the Administration, resulted on 19 December 2016 in the tacit rejection of the gracious appeal filed by it.

17. All decisions of express rejection are based on the following grounds:

a) With regard to the conditions for application of the special tax regime provided for in article 69 of the CIRC in the light of the arguments presented by the Claimants:

i) F… did not record or recognize anything in its accounts following the parasocial agreement concluded with shareholder II…, in which the alleged right to receive rents is mentioned;

ii) F… approved the management reports and the respective financial statements for the fiscal year 2008, without any reservation or mention of the amounts allegedly to be received;

iii) The taxable result appearing in the income tax return form 22 for IRC for 2008, filed by F…, reflects the accounting result of that company, increased only in section 07 by the amount of € 201.82, for IRC purposes (line 211); and

iv) F… did not object to the taxable result validated by the Inspection Services of the Tax Office of …, which was notified to it during the inspection action carried out in 2010, regarding the tax period of 2008.

b) With regard to the corporate agreement itself, the Tax Authority argues as follows:

i) The corporate agreement was not presented during the inspection actions carried out in 2010;

ii) It is not enforceable against third parties, producing effects only among its parties; and

iii) It incorporates a null clause, which violates the provisions of articles 22, no. 3 of the Commercial Companies Code and 994 of the Civil Code.

c) With regard to the replacement Model 22 declaration for 2008, the Tax Authority argues as follows:

i) The replacement Model 22 declaration appears in the system as a "non-taxable document";

ii) The replacement Model 22 declaration could not be filed at any time, but rather within 60 days before the expiration of the limitation period; and

iii) The replacement Model 22 declaration would be untimely.

v) With regard to the principle of proportionality invoked by the Claimants, the Tax Authority argues that, it not being relevant whether the consequences of the cessation of the RETGS to a Group are excessively onerous or not, as far as the application of the rule is concerned, it is not for the interpreter-applier (in this case, the Tax Authority) to substitute itself for the legislator, but rather to act in conformity with the principle of legality.

18. F… did not exercise its right to be reimbursed for the rents of commercial spaces borne in 2008.

19. Not having, therefore, proceeded to properly increase the costs borne with the aforementioned rents in Section 07 of the Income Tax Return Model 22 for IRC for 2008, submitted on 26 May 2009, (that is, adjustment to the taxable result for the tax period of 2008).

20. F… thus submitted the income tax return Model 22 for IRC relating to the fiscal year 2008 without having increased the fiscal result by the cost of the rents improperly borne by it, rents which totaled € 185,755.47.

21. As a consequence, F… erroneously determined a fiscal loss in the value of € 154,961.22, when, in fact, it should have reported a taxable profit in the value of € 30,794.25, given the erroneous recognition of € 185,755.47 as a deductible tax expense.

22. Having detected the aforementioned omission by reference to the tax period of 2008, F… proceeded, on 25 November 2015, to file the replacement declaration.

23. Such replacement declaration is identified with the number 2015-…-… -… (…).

A.2. Facts Not Established as Proven

With relevance to the decision, there are no facts that have not been proven.

A.3. Justification of the Factual Matters Proven and Not Proven

With regard to the factual matters, the Tribunal does not need to rule on everything that was alleged by the parties; rather, it falls to it to have the duty to select the facts that matter for the decision and to distinguish proven from unproven matters (cf. articles 123, no. 2, of the Tax Procedure and Process Code (CPPT) and 607, no. 3 of the Civil Procedure Code (CPC), applicable pursuant to article 29, no. 1, sections (a) and (e), of the RJAT).

In this way, the facts pertinent to the judgment of the case are selected and delimited based on their legal relevance, which is established with attention to the various plausible solutions of the legal question(s) (cf. former article 511, no. 1, of the CPC, corresponding to the current article 596, applicable pursuant to article 29, no. 1, section (e), of the RJAT).

Thus, taking into account the positions assumed by the parties, in light of article 110/7 of the CPPT, the documentary evidence and the administrative procedure files attached to the case, the facts listed above were deemed proven, with relevance to the decision.

B. ON THE LAW

As mentioned above, at issue in the present proceedings is the legality of the IRC assessment acts nos. 2016…, 2016…, 2016…, 2016…, 2016…, 2016…, 2016…, 2016…, 2016…, 2016…, 2016…, 2016…, 2016…, 2016…, 2016…, 2016…, 2016…, 2016…, 2016…, 2016…, 2016…, 2016…, 2016…, 2016…, 2016…, 2016…, 2016…, 2016…, 2016…, 2016…, 2016…, 2016… and 2016…, in the total amount of € 6,119,594.28 (six million, one hundred nineteen thousand, five hundred ninety-four euros and twenty-eight cents), corresponding to a total amount to be paid of € 5,897,281.65 and a refund in the amount of € 222,312.63; and, on the other hand, the disregarding of the corrections made for autonomous taxation purposes, in the amount of € 305,598.73.

Let us proceed then.

***

i. On the Expiration of the Right to File the Replacement Declaration:

In the present proceedings it was established that a group of companies subject to the RETGS (Special Tax Regime for Groups of Companies) – Grupo A…, SGPS, S.A. - was subject to a tax inspection action, promoted by the Tax Inspection Services of …, which essentially aimed to confirm the eligibility of companies that formed part of the group's scope for purposes of applying the RETGS.

In the end, the Tax Authority concluded that the company Grupo A… improperly included, in 2011, the company F… in the scope of companies subject to the RETGS, since the company F… recorded, in the tax periods of 2008, 2009 and 2010, fiscal losses in the amounts of € 154,961.22, € 174,863.02 and € 213,827.29, respectively.

Since the participation in F… was not held at 90% by the dominant company for more than two years, such company could not have been included in the RETGS, which determines, by itself, the cessation of the application of the RETGS to all companies integrated in the group, in accordance with the terms resulting from section (b) of no. 8 and section (c) of no. 9, both of article 69 of the CIRC.

In view of this, all companies forming part of the group's scope should have been taxed autonomously and individually.

The Claimants alleged that there was an inconsistency in F…'s accounts with reference to 2008, insofar as this company should have recorded a receivable account from shareholder II…, relating to a credit in the value of € 185,755.45, which, by oversight, it did not.

Having detected the aforementioned omission by reference to the tax period of 2008, F… proceeded, on 25 November 2015, to file the replacement declaration.

The Claimants understand that the replacement declaration, relating to the tax period of 2008 and filed on 25 November 2015, could be presented at any time, in accordance with article 122, no. 1 of the CIRC.

It is necessary, therefore, to interpret the scope of this provision.

It is known that, in the interpretation of tax provisions, the general rules and principles of interpretation and application of laws must be observed (cf. article 11, no. 1, of the General Tax Code (LGT)).

According to article 9, no. 1 of the same LGT, interpretations based exclusively on the literal wording of the provisions are expressly prohibited, when it provides that "interpretation must not be confined to the letter of the law," but should rather "reconstruct from the texts the legislative thought, taking especially into account the unity of the legal system, the circumstances in which the law was drawn up and the specific conditions of the time in which it is applied."

As to the correspondence between the interpretation and the letter of the law, "a minimum of verbal correspondence, even if imperfectly expressed" suffices (article 9, no. 3, of the Civil Code), which will only prevent interpretations that cannot in any way be reconciled with the letter of the law, even acknowledging in it imperfection in the expression of the legislative intent.

For this reason, the letter of the law is not an obstacle to adopting a declarative interpretation, which clarifies the scope of the literal wording, nor even an extensive interpretation, when one can conclude that the legislator said less than what, in coherence, it would have intended to say, that is, when it imperfectly stated what it intended to say.

Let us analyze, then, the provision of article 122 of the CIRC and then subsume it to the concrete case:

Article 122

Replacement Declaration

1 - When a lower tax than due has been assessed or a greater fiscal loss than the actual has been reported, a replacement declaration may be presented, even if outside the legally established period, and payment of the outstanding tax may be made.

2 - The self-assessment from which a higher tax than due or lower fiscal loss than actual resulted may be corrected by means of a replacement declaration to be presented within one year from the expiration of the legal period.

3 - In case of a subsequent administrative decision or judgment, the period provided for in the preceding number is counted from the date on which the declarant becomes aware of the decision or judgment.

4 - Whenever the provision of the preceding number is applied, the limitation period is extended until the expiration of the period set forth therein, plus one year.

5 - When the special regime for taxation of groups of companies is applicable and any of the companies in the group presents a replacement declaration of the declaration provided for in section (b) of no. 6 of article 120, the dominant company proceeds to the replacement of the periodic declaration of the group's income provided for in section (a) of the aforementioned no. 6 of article 120.

It could abstractly be considered that this article includes a set of special rules that derogate the application of the general rule for counting periods provided for in no. 3 of article 59 of the CPPT regarding the period for replacement of declarations by taxpayers, in case of error of fact or law in the declarations.

This interpretation proves to be sound when no. 2 of article 122 of the CIRC is analyzed.

As has already been understood by the Administrative Supreme Court, precisely with respect to no. 2 of article 122 of the CIRC, in decision no. 0159/14 (13.01.2016): "the CIRC rule, which sets a 1 year period for the presentation of the replacement declaration, must be considered as a special rule (A special rule, insofar as, aiming to supplement the standard regime, it establishes a different discipline for a more limited circle of relations (Cf. BAPTISTA MACHADO, Introdução ao Direito e ao Discurso Legitimador, Almedina, 1983, pág. 95). Of interest and with extensive indication of doctrine on the subject of the distinction between general and special law, see Opinion no. 110/2003 of the Attorney General's Office, published in the Official Journal, II series, no. 28, of 3 February 2004 (https://dre.pt/application/file/a/2906437), págs. 1924 to 1934.) as against the CPPT rule, which is why it should prevail over it (Pursuant to the provision of article 7, no. 3, of the Civil Code, "[g]eneral law does not repeal special law, unless otherwise is the unequivocal intent of the legislator".)"

Concluding as to the special nature of no. 2 of article 122 of the IRC Code, this same decision affirms the following: "It being true that in article 59, no. 3, section (b), II), the CPPT permits the replacement of the declaration until the expiration of the legal period for gracious appeal or judicial challenge of the assessment act and that, pursuant to no. 1 of article 131 of the same Code, the period for the former, in the case of self-assessment, is 2 years after the filing of the declaration, the CIRC rule cited in I must be deemed special as against article 59 of the CPPT and, for this reason, prevail over it when the replacement of an IRC declaration is at issue." (emphasis added) and that "the Tax Authority should not have failed to validate the replacement declaration presented beyond the expiration of the legal period for gracious appeal and, it being the omission of that validation the only ground invoked in the judicial challenge of the supplementary assessment that replaced the self-assessment mentioned in I, the same is condemned to failure."

It so happens that, in the case sub judice, what is being disputed is the eventual expiration of the right to assessment, as a result of the filing of a replacement declaration, pursuant to no. 1 of article 122 of the CIRC (and not no. 2), which was carried out on 25 November 2015, relating to the assessment of IRC of F… for 2008.

Despite seven years having elapsed since the date of the assessment, F… understands that it could have proceeded to file the replacement declaration outside the period, since article 122, no. 1 of the CIRC would permit such filing to be done at any time.

In effect, Claimant F… understands that the legislator intended to establish, in article 122, no. 1 of the CIRC, a special period at any time for the proper correction, justifying this understanding on the basis of the fact that no. 1 of the same article 122 refers "only to the fact that the replacement declaration may be presented outside the legally established period – 31 May of each year – but does not, however, impose any time limit on its presentation" (cf. article 347 of the original petition).

In other words, Claimant F… understands that article 122, no. 1 is silent as to the "time limit for presentation" of the replacement declaration, thus not imposing any time limit on its presentation, since the legislator only determined that it "may be presented outside the legally established period – 31 May of each year."

Let us see.

To the contrary of what is provided for in no. 2 of article 122 of the CIRC, article 122, no. 1 of the CIRC cannot be considered a special rule as against the provision of article 59, no. 3 of the CPPT.

In fact, everything provided for in article 122, no. 1 of the CIRC corresponds with and is identical to what is provided in article 59, no. 3 of the CPPT, and it can be stated that the arrangement of article 122 in the IRC Code was determined by systematic and legislative coherence reasons, which meant that it incorporates general rules, such as that found in no. 1, and special rules, such as that resulting from no. 2 of the same article 122 of the CIRC.

The interpretation of no. 1 of article 122 should not, moreover, raise any doubts.

Let us see:

As correctly stated by the Claimants, no. 1 of article 122 refers "only to the fact that the replacement declaration may be presented outside the legally established period – 31 May of each year" (cf. article 347 of the original petition).

However, the fact that the declaration may be presented outside the legally established period for assessment – 31 May of each year – is bounded, as to consequences - assessment of declarations -, by the precepts and periods stipulated in article 101 of the CIRC, which refers to the fact that "assessment of IRC (…) may only be effected within the periods and on the terms provided for in articles 45 and 46 of the LGT," and in part III of section (b) of no. 3 of article 59 of the CPPT which states that in case of error of fact or law in the declarations of taxpayers, these may be replaced "(…) within 60 days before the expiration of the limitation period for the correction of errors attributable to taxpayers from which results a tax higher than the one previously assessed."

What means that the time limit for the presentation of the replacement declaration provided for in article 122, no. 1 of the CIRC ends 60 days before the expiration of the limitation period.

Were it not so, it would result from the provision of article 122, no. 1 of the CIRC that the replacement declaration could be presented outside the legally established period, that is ad aeternum, an understanding which would not only place in crisis the principle of security and legal certainty but, more relevantly, finds no support in the text of the law.

In the case at hand, the IRC assessment relates to the year 2008, which is why, under normal conditions, the limitation period would have occurred 60 days before 31 May 2012 (i.e. four years after the legal period).

It is true, however, that article 47 of the CIRC, in the version in force in 2008, provided that "Fiscal losses determined in a given tax period, in accordance with the foregoing provisions, are deducted from taxable profits, if any, of one or more of the six subsequent tax periods." (emphasis added).

In other words, fiscal losses could, in 2008, be deducted from taxable profits of one or more of the six following years.

In this context, the Claimants understand that fiscal losses determined by F… in 2008, in the amount of € 91,395.70, were deducted from the taxable profit that E… reported in the RETGS of Grupo A…, in the tax period of 2014.

The Claimants further understand that, consequently, having an improper fiscal loss been determined in the fiscal year 2008 and that loss having been improperly used in 2014, due to it being non-existent, it should undoubtedly be understood that it may be corrected by the Tax Authority within the limitation period of the institute in question, because it produced effects in the IRC assessment of 2014.

Let us see.

In strict terms, in light of this latter understanding advocated by the Claimants, what is intended is to correct the 2014 assessment declaration that E… reported in the RETGS of Grupo A… and not the declaration presented by F… in 2008 and replaced - by the same F…, be it noted, since it relates to the 2008 assessment - on 25 November 2015.

There are, therefore, two distinct realities which must be assessed in a different way in light of the CIRC.

It is that article 45, no. 3 of the General Tax Code is very clear in providing that "In case any deduction or tax credit has been made, the limitation period is that of the exercise of such right."

In other words, in case any deduction of losses has been made, the limitation period is that of the exercise of the right to deduct losses, which, being 6 years, and having begun in 2008, ended, consequently, in 2014.

Were it not so, and following the understanding of the Claimants, the limitation period provided for in article 45, no. 3 of the LGT would be, at most, 12 years (i.e. six years for deduction against taxable profits of fiscal losses plus six years for the company or group of companies where such losses had been recognized).

This possibility not only finds no support in the text of the law, in particular in article 45, no. 3 of the LGT, but would be incomprehensible in light of the current legal-tax regime.

It is that the 12-year limitation period only occurs exceptionally, in the terms provided for in the law, which correspond to very serious and special situations, provided for in article 45, no. 7 of the LGT, in particular whenever the right to assessment relates to facts subject to tax connected with a country, territory or region subject to a clearly more favorable tax regime, listed in an ordinance approved by the Minister of Finance, that should be declared to the tax administration but are not, or accounts or securities accounts opened in financial institutions not resident in European Union Member States, or in branches located outside the European Union of resident institutions in resident institutions, whose existence and identification are not mentioned by IRS taxpayers in the corresponding income tax return of the year in which the tax facts occur.

Consequently, the possibility of filing the replacement declaration by F… ceased, by virtue of expiration, in 2014, which is why the replacement declaration made by F… on 25 November 2015, relating to the 2008 assessment, cannot be accepted under article 122, no. 1 of the CIRC.

It should further be added, on this matter, that the fact that the replacement declaration has been marked as certain by the Tax Authority's computer system does not have the meaning that the Claimant seeks to attribute to it.

The certain declaration is the one that does not have defects preventing a possible assessment act, which is formally correct and is, in the abstract, capable of serving as the basis for assessment.

No. 5 of article 4 of Ordinance no. 1214/2001, of 23/10, invoked by the Claimant, demonstrates exactly that – a certain declaration is one that does not contain errors capable of correction by the declarant; for this reason it is provided there that, if the declaration is not marked as certain, the declarant must correct the errors with which it suffers, all with a view to enabling the possible assessment of tax.

But from this one cannot conclude that a declaration that the Administration marks as "certain" is inevitably followed by assessment.

Such assessment may be opposed by obstacles of another order, such as is the case with the expiration of the respective right. The Tax Authority can no longer exercise its right to assess, and therefore cannot, obviously, draw consequences from the declaration by the taxpayer, whether it is marked "certain" or not. Such declaration, even if formally correct, and even if it enjoys the presumption of truthfulness of its content, cannot be considered for the exercise of a right that no longer exists.

That is what, as has been seen, is now happening.

Given the foregoing, on this part, the arbitral request, insofar as it relates to the request for annulment of decisions rejecting Gracious Appeals and, as a consequence thereof, the annulment of the IRC assessment acts, should not be granted.

ii. On the Violation of the Principle of Proportionality and the Principle of Taxation of Real Income:

The Claimants understand that the application, to the concrete case, of the rules contained in nos. 8 and 9 of article 69 of the IRC Code violates the constitutional principles of proportionality and taxation by real income, provided for in the Constitution.

Let us see.

Articles 69, nos. 8 and 9, provide the following, in their current wording:

"8 - The special regime for taxation of groups of companies ceases to apply in the following cases:

a) Any of the conditions referred to in no. 3 regarding the dominant company cease to be met, without prejudice to cases in which the option provided for in no. 10 is exercised; (Wording of Law no. 82-C/2014, of 31 December)

b) If any of the situations referred to in sections (a), (b), (d) or (g) of no. 4 is verified as to the dominant company;

c) The taxable profit of any of the companies in the group is determined by resorting to the application of indirect methods;

d) (Repealed.)

e) (Repealed.)

9 - The effects of waiver or cessation in the present regime are:

a) To the end of the tax period preceding the one in which the waiver of the application of the present regime was communicated in accordance with the terms and period provided for in no. 7;

b) (Repealed.)

c) To the end of the tax period preceding the one in which any of the facts provided for in no. 8 occurred."

In turn, no. 4 of article 69 of the CIRC provides the following:

"4 — Companies which are, at the beginning or during the application of the regime, in the following situations cannot be part of the group:

a) Are inactive for more than a year or have been dissolved;

b) Against them has been instituted a special recovery or bankruptcy proceeding in which a decision to proceed with the action has been issued;

c) Report fiscal losses in the three fiscal periods preceding the beginning of the application of the regime, save, in the case of subsidiary companies, if the participation has been held by the dominant company for more than two years;

d) Are subject to an IRC rate lower than the highest normal rate and do not waive its application;

e) Have adopted a tax period not coinciding with that of the dominant company;

f) (repealed);

g) Do not assume the legal form of a limited liability company, joint-stock company or partnership limited by shares, except as provided for in no. 11. (Rectified by Rectification Declaration no. 67-A/2009, of 11 September)"

Analyzing the wording of the above-transcribed provisions, it is verified that all - article 69, nos. 4, 8 and 9 of the CIRC - have a mandatory character, with no discretion being granted to the tax administration in their application, since no. 8 of the referred article expressly and unequivocally enumerates and determines the cases in which the special regime for taxation of groups of companies ceases to apply, referring, in particular, to the situations referred to in sections (a), (b), (d) or (g) of no. 4 of article 69, regarding the dominant company.

This understanding was endorsed by the Administrative Supreme Court, in the decision of 03/12/2014 (proc. no. 0256/12), in which it considered the following:

"I - For the existence of a group of companies for tax purposes, it is necessary that a company, called dominant, hold, directly or indirectly, at least 90% of the capital of another or other companies called subsidiaries, provided such participation grants it more than 50% of voting rights, for more than one year from the date the regime begins.

II - With regard to subsidiary companies, companies which, at the beginning or during the application of the regime, report fiscal losses in the three fiscal periods preceding the beginning of the regime cannot be part of the group, except, if the participation (of at least 90% required of the dominant company) has been held for more than two years, which in the case of the present proceedings does not occur with regard to the subsidiary company which, reporting losses in the three years preceding the beginning of the regime, was held for less than two years (v. sections C) to F) and H) of the evidence above.

III - This special tax regime thus has a dynamic aspect and can cease if its respective conditions cease to be met, but can also take place when the conditions not met at a certain moment come to be satisfied."

It is true that all action by the Respondent Tax Authority is subject to the principle of tax legality, by virtue of article 266, no. 2 of the Constitution of the Portuguese Republic, article 8 of the LGT and article 3, no. 1 of the Code of Administrative Procedure.

In the concrete case resulting from the application of the rules provided for in article 69, nos. 8 and 9 of the CIRC, there is no margin for the application of the principle of proportionality in a way that would prevent the application of the rule or would moderate it by virtue of that principle.

In other words, the Tax Authority has no margin of discretion in the application of the rules provided for in article 69, nos. 8 and 9 of the CIRC, and therefore cannot, in the ordinary exercise of the application of this precept, consider the application of the principle of proportionality, since the invocation of this principle is not permitted by the ordinary legislator (which does not, of course, invalidate that it may consider the constitutional validity of the rule in question in light of the principle of proportionality that flows from the Constitution, as will be analyzed below).

In effect, the application of the provision of article 69, nos. 8 and 9 of the CIRC implies that the Respondent Tax Authority must limit itself to verifying the objective conditions for the application of the law, in this case, regarding the Claimants.

The Respondent Tax Authority could only act in conformity with the principle of proportionality if it could adopt, from among the measures necessary and adequate to achieve those ends, those which imply lesser burdens, sacrifices or disturbances to the legal position of those subject to its authority.

Now, in this case, there is no range of measures to be adopted.

Only one consequence is (was, in the applicable version) associated with the verification of non-compliance with the requirements provided for in article 69, nos. 8 and 9 of the CIRC: the cessation of the application of the special regime for taxation of groups of companies.

The regime provided for in nos. 8 and 9 of article 69 of the CIRC – in particular resulting from section (c) of no. 4 of article 69, as occurs in the case sub judice - determines the imposition of a sanction – the cessation of the application of the special regime for taxation of groups of companies – that permits no margin of appreciation on the part of the tax administration.

It is possible to discuss whether, in the concrete case, the tax consequences are or are not excessive.

It is even possible to invoke the principle of proportionality that flows from the Constitution and the consequent analysis thereof, in light of the legal regime resulting from the provision of article 69, nos. 8 and 9 of the CIRC, in order to judge the constitutional conformity of this precept.

It so happens that such legal regime, provided for in the CIRC, is precisely intended to effectuate and enhance the equality of taxpayers before the tax law.

The imposition of the sanction was elaborated by the legislator, in general and abstract terms, providing that the verification of non-compliance with the provided conditions has, as a consequence, the cessation of the application of the special regime and the inherent application of the general taxation rules to each company.

Were it not so, and if the law permitted the application, to concrete cases, of some consideration, it would have to find the criterion or criteria that would authorize the tax administration to disapply the law or to apply it in a considered manner, which would necessarily place in crisis the principle of tax legality.

In other words, the cessation of the application of the special regime for taxation of groups of companies may result from non-compliance, by one or several financially less relevant companies, in the context of the group, or from non-compliance by one or several financially very relevant companies.

Here, it is possible to discuss, de jure condendo, whether the legislator could not have created a graduated or progressive system that would permit the partial disapplication of the sanction resulting from nos. 8 and 9 of article 69 of the CIRC – the cessation of the application of the special regime for taxation of groups of companies.

But, in that scenario, and de jure condendo, it is legitimate to ask what would be the graduated or proportional criterion that would permit determining the cessation of the special regime for taxation of groups of companies or considering its partial disapplication, as the Claimants seem to argue, without calling into question the idea of generality and abstraction that characterizes tax rules.

Regardless of the answer to the foregoing question, it is certain that that was not the option of the tax legislator.

The tax legislator, in determining clear and objective rules for the cessation of the application of the special regime for taxation of groups of companies, such as those contained in article 69, nos. 4, 8 and 9 of the CIRC, which are easily understood and even foreseeable in the context of tax planning, did not offend the principle of proportionality that flows from the Constitution.

On the other hand, the Claimants further understand that the application of the cessation of the special regime for taxation of groups of companies should also be examined in light of the principle of taxation of real income.

It is understood that this principle is not offended.

It is that, as is mentioned in the decision of the Constitutional Court no. 139/2016, citing the decision of the same Court no. 753/14 "although, in general theory, the principle of ability to pay implies that only net income should be considered as taxable, with the consequent exclusion of all expenses necessary for the production or obtaining of income, it is nonetheless true that one cannot fail to recognize the legislator – as the doctrine admits – "a certain margin of freedom to limit to a certain amount, or even exclude, certain specific deductions, which, although relating to expenses necessary for obtaining the corresponding income, prove to be of difficult determination" (Casalta Nabais, op. cit., pág. 521) [the work in question is O Dever Fundamental de Pagar Impostos]. The point is that such limitations or exclusions have an adequate rational basis and apply to the generality of the incomes in question.

These are fiscal policy options based on an idea of practicability, which requires the legislator to draw up laws whose application and execution is effective and economic or efficient, and which lead to results consonant with the intended objectives. With this purpose, which also intends to ensure the material principles of equality and fiscal justice, it is constitutionally justified that the legislator may have recourse not only to the aforementioned legal presumptions but also to techniques of typification and simplification, which permit disciplining certain aspects of tax law according to criteria of normality, excluding atypical or abnormal situations (idem, págs. 622-623).

[…] As was shown at another moment, article 104, no. 2, does not institute an absolute and rigorous criterion for the taxation of companies according to real profit, but rather points to a tendential approximation between the taxable base and the profits actually earned, without excluding the recourse to presumed income and evidentiary methods." (emphasis added).

Also with regard to the constitutional principle of taxation by real income, it is noted that in nothing is this damaged, in the case of the proceedings, for the constitutional rule introduces a moderating element, the adverb "fundamentally" - cf. Decision of the Administrative Supreme Court rendered in proc. 0959/06, on 15-02-2007.

It can thus be concluded that the option taken by the legislator in the CIRC and, in particular, in article 69, falls within the legislative conformity margin, being incapable of founding autonomous constitutional censure inasmuch as it has the purpose of creating precise and rigorous legal rules, suited to the principle of certainty and legal security that should equally guide the tax legislator, and which, as such, can easily be interpreted and complied with by the taxpayer, which, in the case at hand, does not appear to have been the case.

Given all of the foregoing, on this part, the arbitral request should not be granted.

iii. On the Autonomous Taxation of Travel Allowances

The Claimants further seek, on a subsidiary basis, the disregarding of the corrections made to companies P…, S…, V…, X…, Y…, Z…, CC…, AA…, BB…, T…, DD…, Q…, H…, FF…, S.A., GG… and E… for autonomous taxation purposes relating to travel allowances, in the total amount of € 305,598.73.

Let us see the position advocated by each of the parties on this matter:

1- Position of the Claimants

Following the inspection actions conducted by the Inspection Services of …, some of the companies that appear as Claimants in the present proceedings – the companies P…, S…, V…, X…, Y…, Z…, CC…, AA…, BB…, T…, DD…, Q…, H…, FF…, S.A., GG… and E… - underwent corrections regarding the amounts subject to autonomous taxation in fiscal year 2011.

Said corrections resulted from the identification of discrepancies in the determination of autonomous taxation, relating to travel allowances. More specifically, in the values evidenced in the accounting records and the amounts considered for taxation purposes.

Thus, given the discrepancies identified with respect to the aforementioned companies, by the various Claimants, the Tax Inspection Services of … subjected to autonomous taxation, at rates of 5% or 15% - depending on whether or not a fiscal loss was determined - all travel allowances recorded in the trial balance, levying additional tax in the total amount of € 305,598.73 (considering the calculation of the companies identified above), broken down as follows:

The fiscal inspection is based on the understanding underlying the doctrine sheet that derives from proceeding 71/08.

With respect to the use of a doctrine sheet by the Tax Office of…, as a central element to anchor its decision, on the part of the Claimants, it should be noted that only the Tax Authority is bound by the generic guidance contained in circulars, regulations or instruments of similar nature, as provided for in no. 1 of article 68-A of the LGT.

Neither the Tax Inspection Services of …, nor the corresponding Tax Office, called into question the legitimacy of travel allowances nor the necessity of their expenses for the carrying out of the company's activities and the maintenance of productive sources.

It should be noted, the Claimants affirm, that these items aim to compensate workers for expenses incurred in the service of the employing entity, as a result of departures from the normal place of work to another, with a temporary character, a fact which occurs regularly in the case of the Claimants and the remaining companies in the Group. In the generality of cases under analysis, the claimants allege, these travel allowances are, in most cases, supported by travel logs, evidence of occurrence and the amounts awarded.

No. 9 of article 88 of the IRC Code, which provides for autonomous taxation of travel allowances that correspond to charges not invoiced to clients, makes no mention of an obligation to explicitly state the corresponding amount in the invoice itself, and can be read in the letter of the law (wording at the time): "The following are further taxed autonomously, at the rate of 5%, the deductible expenses relating to travel allowances and compensation for travel in the worker's own vehicle, in the service of the employing entity, not invoiced to clients, recorded under any heading, except to the extent that IRC taxation occurs in the sphere of the respective beneficiary, as well as non-deductible expenses pursuant to section (f) of no. 1 of article 45 supported by taxpayers that report a fiscal loss in the tax period to which they relate."

Therefore, for the Claimants, one cannot impose, namely through an administrative decision or the so-called "binding circulars," a greater degree of documentary proof requirement that has a direct impact on the levying of taxes, under penalty of violating the principle of tax legality.

The Claimants cite the decision of the Arbitral Tribunal, in Proceeding no. 85/2012-T, where it is stated: "The letter of section (f) of no. 1 of article 42 of the CIRC, in referring to expenses 'not invoiced to clients,' does not explicitly require that the amount of travel allowances and compensation for travel in the worker's own vehicle be specified in the invoices. On the other hand, it is not a requirement of invoices relating to the provision of services, the specification of each of the costs necessary to provide them, as can be inferred from article 35 of the VAT Code in effect in 2011/2002 (current article 36)." It follows that "(…) since it is not a requirement of invoices relating to the provision of services to indicate the specified list of all expenses necessary to provide them (which, moreover, would be practically unfeasible, given the existence of multiple general expenses whose effect on a particular service is impossible to determine with rigor), the appropriate interpretation of the aforementioned section (f) is that the 20% increase provided for therein applies only to expenses with travel allowances and compensation for use of the worker's vehicle whose amount is not included in invoices."

Likewise, the Claimants point out, in the Decision of the Central Administrative Court of the South issued on 15 July 2009, in proceeding 02014/07, it can be read: "The challenging party reflected in the billing to its clients the cost of paying travel allowances although it did not specify it, nor did it specify other costs (e.g., tire expenses, vehicle repair, etc.) out of respect for business practices normally followed in relations between companies)."

Taking into account that the reasons concretely invoked by the Claimants affected by the corrections made regarding autonomous taxation are, in general, applicable to all of them, the claimants take as an example in the proceedings the paradigmatic case of one of them, applicable, according to the Petition, mutatis mutandis, to the other companies (although with the appropriate adjustments), in order to explain what the procedure is for calculating travel allowances and the criterion used for its subjection or not to autonomous taxation. It considers, then, the concrete case of Claimant CC….

It follows from the inspection report notified to this company that "CC… considered, in fiscal year 2011, in the determination of autonomous taxation relating to travel allowances, the amount of € 16,932.72 […]". However, according to those Services, "According to the trial balance of CC…, account 63208 (PERS GAST – PERS REM TRAVEL ALLOWANCES) shows a balance of € 220,056.95 in 2011 (…)."

To justify the manner in which travel allowances were invoiced to clients and, consequently, excluded from the basis for calculation of autonomous taxation, thus rebutting the conclusions of the Tax Inspection Services, set forth in the inspection report notified, the Claimants allege that, during fiscal year 2011, CC… seconded some of its employees to companies Z…, S.A. and P…, S.A., who were used by these in the context of two Contracts for Technical Assistance and Management and Provision of Services, concluded with companies JJ…, Lda. (hereinafter abbreviated as "JJ…"), with office in Mozambique, and KK…, Lda. (hereinafter abbreviated as "KK…"), with office in Angola, Through the aforementioned Contracts for Technical Assistance and Management and Provision of Services, CC… proceeded to allocate human resources to the activities to be developed by Z… and P…, as "services necessary to the pursuance of their corporate purpose," in accordance with Documents nos. 17 and 18.

By virtue of such secondment of collaborators, CC… proceeded to invoice monthly to Z… and P…, the costs incurred with the seconded collaborators, as a provision of services (for example, they submit invoices nos. … and …, accompanied by their respective attachments, in the amounts of, respectively, € 43,413.38 and € 6,851.05, relating to the months of January/February and August 2011, under Documents nos. 19 and 20, which relate, among others, to workers LL… and MM…).

The amounts invoiced by CC… to Z… and P…, included the costs incurred with the seconded collaborators during the months in question, namely travel allowances, plus a business margin (as an example, they submit the Travel Logs relating to the months of January 2011 of worker LL…, in the amount of € 3,573.90, and of August of worker MM…, in the same amount of € 3,573.90, under the designation of Documents nos. 21 and 22)

Under the aforementioned contracts for provision of services and technical and management assistance, companies Z… and P… invoiced, respectively, to companies JJ… and KK…, as provision of services and technical assistance, the amounts agreed upon for the secondment of workers, amounts defined taking into account the professional level of each worker, as provided for in the Contracts for Technical Assistance and Management and Provision of Services.

As an example, they submit invoices nos. … and … and respective attachments, respectively, in the amounts of € 48,000.00 and USD 133,000.00, under Documents nos. 23 and 24, through which it is, in their view, possible to ascertain the amounts invoiced for each seconded collaborator (for example, of the total amount of € 48,000.00, € 6,000.00 relate to collaborator LL…; and of the total amount of USD 133,000.00, USD 8,000.00 relate to collaborator MM…).

They conclude, therefore, that CC… has elements that permit proving that the travel allowances borne during the months of January and August 2011 with collaborators LL… and MM…, both in the amount of € 3,573.90, were included in the price of services invoiced to its clients Z… and P…, relating to the months of January and August 2011, in the amounts of € 43,413.38 and € 6,851.05, respectively, which, in turn, passed such cost to its clients JJ… and KK…, under the respective Contracts for Technical Assistance and Management and Provision of Services, concluded with both, through the invoicing of € 48,000.00 and USD 133,000.00.

Through the documents submitted, aforementioned, the claimants allege that the travel allowances paid by CC… (and the remaining Claimants) to workers and invoiced to clients, are duly supported in supporting documents, and the connection between the travel allowance, the work that gave rise to the travel allowance and, as well, the client to which the travel allowance was passed on can be perfectly established.

CC… has internal mechanisms that permit ascertaining the periods of employee travel, calculating the corresponding travel allowances owed and imputing these expenses to the contracts to which each worker is assigned, thus making it possible, in a linear and perfectly objective manner, to control the amount of travel allowances included in each invoice. Thus, the Tax Inspection Services of …, in making the corrections, in the context of IRC, resulting from autonomous taxation of travel allowances, in the manner in which they did, incurred in manifest violation of the Law, in particular of no. 9 of article 88 of the IRC Code.

Completely disregarding the evidence presented by CC… that proves that travel allowances were actually invoiced to clients and maintaining its argumentative line entirely anchored in a doctrine sheet that imposes a documentary requirement superior to that which results from the law. Now, the cognitive path traced as to the procedure for calculating travel allowances and the criterion used for its subjection or not to autonomous taxation by CC…, applies mutatis mutandis to the remaining Claimant companies with equal corrections in the context of autonomous taxation.

It is important to note that, in the view of the claimants, taking into account that the autonomous taxation rates applicable (5% and 15%) took into account the taxable result determined autonomously and individually in each of the companies now Claimants, and should the arbitral tribunal decide not to grant the claims of the Claimants with respect to autonomous taxation and decide to accept the argumentative framework with respect to the maintenance of the fiscal scope relating to the period of 2011, the increased application of 10% in the companies referred to below cannot be exercised, since the group of companies taxed in the RETGS determined a taxable profit in the tax period of 2011.

2. Position of the Respondent Tax Authority:

In the view of the Respondent Tax Authority, the Claimants seek the disregarding of the corrections made to companies P…, S…, V…, X…, Y…, Z…, CC…, AA…, BB…, T…, DD…, Q…, H…, FF…, S.A., GG… and E… for autonomous taxation purposes relating to travel allowances, in the total amount of € 305,598.73. For the Tax Authority, the argumentation used by the claimants is not capable of contradicting the legality of the corrections promoted by the Tax Inspection.

In the course of the inspection actions of companies that were part of the scope of Group A…, the Tax Inspection verified discrepancies between the value of travel allowances evidenced in the accounting records and the value considered for autonomous taxation purposes pursuant to no. 9 of article 88 of the CIRC.

The Claimants reported that the invoices issued did not explicitly include any amount relating to travel allowances, the Tax Inspection considering that it had not been demonstrated that travel allowances had been invoiced to clients.

In these terms, the Tax Inspection concluded that the essential condition was not met for the non-subjection of travel allowances to autonomous taxation, and therefore deemed that such expenses should be taxed autonomously at the rate of 5% or 15%, pursuant to no. 9 combined with no. 14 of article 88 of the CIRC.

Now, from the foregoing it results, in the view of the Tax Authority, that the corrections in question are founded exclusively on the law, in particular in the provision of no. 9 of article 88 of the CIRC, a precept that determines the subjection to autonomous taxation of expenses relating to travel allowances when it is not demonstrated that such expenses are, in fact, invoiced to clients.

The Services of the Tax Office of … having invoked, correctly, the doctrine sheet no. 71/2008, to which they are bound, in order to correctly subsume the established factuality to the rule in question and confirm its interpretive sense, as results from the Reports when they refer to: "And it is also in this sense that the doctrine sheet no. 71/2008 provides."

As referred to in the Response of the Tax Authority, article 88, no. 9, of the CIRC is, like most rules that determine the subjection to autonomous taxation, an anti-abuse rule.

To that extent, and given the nature of expenses incurred with travel allowances which are difficult to prove, often corresponding to true supplements to remuneration, it was the legislator's understanding to restrict their acceptance only in the event that they were passed on to clients. And the way to ensure such control and to assess the verification of the assumption determined by the legislator is, according to the Tax Authority, through the express mention of the fact in the invoices issued and in the supporting documentation thereof.

The argument invoked by the Claimants would thus lack support, in the sense that the proof requirements for the amounts relating to travel allowances result from the doctrine sheet no. 71/2008.

Because, although the precept in question does not literally indicate that the amounts of travel allowances appear explicitly and separately in the invoices issued to clients, the truth is that such rule does not exempt the Claimant from the obligation to possess elements capable of demonstrating that the final price indicated to the client contemplates the values relating to expenses with travel allowances, as was stated in the decision rendered in proceeding no. 735/2014-T CAAD.

Now, in this case, and for the Tax Authority, the Claimants do not minimally demonstrate that the expenses incurred, as travel allowances, were actually invoiced to clients. Nor was any proof made, neither in the context of the inspection procedure and gracious appeal, nor in the present arbitral action, of the precise extent to which the amounts of travel allowances are found in the global amount invoiced to clients.

Showing itself impossible, notes the Tax Authority, with the documentary elements brought to the records, to make any connection between the values of travel allowances and its nature with the total amount subject to invoicing.

The documents brought to the records, relating to company CC…, do not succeed in proving the alleged illegality of the corrections in question. The analysis of invoice no. … (inserted in the CAAD platform only as Invoice), in the amount of € 6,851.05, refers in the "Description" field only "PROVISION OF SERVICES IN ACCORDANCE WITH ATTACHMENT," with an attachment to the invoice being a table, dated 15-06-2016 which makes no discrimination of values, referring only to the name of the worker, the company of origin, company that debits, company debited and the value to debit with VAT and without VAT.

Similar inconsistencies afflict invoice no.…, in the total amount of € 48,000.00, which refers in the "Description" field only "PROVISION OF SERVICES #Service Provision in accordance with the contract concluded in January 2010," with an attachment to the invoice being a table, dated 15-06-2016 which makes no discrimination of values, referring only to the "technical assistance value" of eight workers, in the total amount of 48,000.00, which includes the amount of € 6,000.00 relating to collaborator LL…, without any reference being made to amounts relating to travel allowances or any other.

Already as regards the allegation that the amounts invoiced by CC… to Z… and P… included the costs incurred with the seconded collaborators during the months in question, namely travel allowances, plus a business margin, such imposition is not found in any of the clauses of the contracts.

Whence, it will be necessary to conclude, alleges the Tax Authority, that no suitable documentary evidence was attached to the records from which it can be extracted that the expenses incurred, as travel allowances, were actually invoiced to clients;

Being that such requirement of proof results not only from the spirit of the rule contained in no. 9 of article 88 of the CIRC, which contemplates the legislator's intent to limit potentially fraudulent situations, but also from the general rules pertaining to the determination of the taxable base in the context of IRC, as results from the provision of article 98, no. 1, of the CIRC, which imposes on taxpayers the obligation to maintain organized accounting in accordance with commercial and tax law which permits the control of taxable profit and which complies with the requirements indicated in no. 3 of article 17 of the same Code, this precept referring that, in the execution of accounting, "all entries must be supported by justifying documents, dated and capable of being presented whenever necessary."

Now, the failure to present the supporting documents of the actual invoicing of travel allowances to its clients implies the lack of merit of the argument of the Claimants, these failing to discharge the burden that rests upon them to provide clear proof of what they come to allege, in accordance with article 74 of the LGT.

3. Analysis and Decision

The law (cf. article 88, no. 9, of the CIRC in the 2011 version) provided that:

"9 — The following are further taxed autonomously, at the rate of 5%, the deductible expenses relating to travel allowances and compensation for travel in the worker's own vehicle, in the service of the employing entity, not invoiced to clients, recorded under any heading, except to the extent that IRC taxation occurs in the sphere of the respective beneficiary, as well as non-deductible expenses pursuant to section (f) of no. 1 of article 45 supported by taxpayers that report a fiscal loss in the tax period to which they relate."

The tribunal understands that to satisfy the condition of travel allowances being considered as invoiced to clients they do not have to be specified in the invoices issued by the entities that incur them and then pass them on to clients.

Indeed, we follow the jurisprudence cited by the claimant, which interprets the precept in question here as being satisfied in the event that travel allowances are, provably or demonstrably, included in the global value of the invoices. It is, then, that investigation of proof, which can dispel doubts about the actual pass-through to invoices of travel allowances paid to workers, which will follow. For this purpose, the means of proof contained in the records are, naturally, central elements.

Let us see.

The Claimants allege:

"By virtue of such secondment of collaborators, CC… proceeded to invoice monthly to Z… and P…, the costs incurred with the seconded collaborators, as a provision of services (for example, they submit invoices nos. … and …, accompanied by their respective attachments, in the amounts of, respectively, € 43,413.38 and € 6,851.05, relating to the months of January/February and August 2011, under Documents nos. 19 and 20, which relate, among others, to workers LL… and MM…).

The amounts invoiced by CC… to Z… and P…, included the costs incurred with the seconded collaborators during the months in question, namely travel allowances, plus a business margin (as an example, they submit the Travel Logs relating to the months of January 2011 of worker LL…, in the amount of € 3,573.90, and of August of worker MM…, in the same amount of € 3,573.90, under the designation of Documents nos. 21 and 22)

Under the aforementioned contracts for provision of services and technical and management assistance, companies Z… and P… invoiced, respectively, to companies JJ… and KK…, as provision of services and technical assistance, the amounts agreed upon for the secondment of workers, amounts defined taking into account the professional level of each worker, as provided for in the Contracts for Technical Assistance and Management and Provision of Services.

As an example, they submit invoices nos. … and … and respective attachments, respectively, in the amounts of € 48,000.00 and USD 133,000.00, under Documents nos. 23 and 24, through which it is, in their view, possible to ascertain the amounts invoiced for each seconded collaborator (for example, of the total amount of € 48,000.00, € 6,000.00 relate to collaborator LL…; and of the total amount of USD 133,000.00, USD 8,000.00 relate to collaborator MM…)."

The Tribunal has duly analyzed such documents.

Not only in light of the concrete operations referred to therein, but because, as the claimants assert, they constitute the standard or regular form of procedure of the claimants on this subject matter.

Now, in the case of the documents referred to as 19 and 20, the tribunal validates the assessment of the Tax Authority. In effect, it does not appear to the tribunal, based on such documents, to be possible to conclude that there was actually invoicing of travel allowances to the clients referred to there. Document no. 20, for example, presents an invoicing value of 6,851.05 euros. Its description, as the Tax Authority refers, contains "Provision of services in accordance with attachment." The attachment, where decisive contribution should then emerge to assess the inclusion of travel allowances in the invoicing, contains a table, with the name of MM… and refers to a monthly amount to be charged, with VAT.

Now, in the understanding of this tribunal, to demonstrate that travel allowances would be charged to clients, it would be necessary, first of all, to offer clear evidence that such values, in the said table, refer to travel allowances. Such does not appear in the referred table. Then, it was also necessary that these hypothetical values of travel allowances be supported by some type of external documentation (eg., lodging, travel, tolls, or others that were deemed relevant because they derived from travel and implied travel allowances) and that the accounting effect of such values in the invoicing be demonstrated.

Now the attachment to the referred invoice, relating to worker MM… is a simple spreadsheet, not being signed by any responsible party of the company. Moreover, it bears, as the Tax Authority notes, the printed date of 2016-06-15, which also falls far short of supporting the company's thesis.

Document 19 has precisely the same construction logic, with identical or similar weaknesses or insufficiencies in evidence.

Document 21, designated as a "travel log," relating to January 2011, falls far short of having the necessary evidential force. In effect, its header is as follows transcribed:

But none of the fields in the header is filled in the body of the "travel log."

Thus, such log cannot be considered as constituting proof that it may effectively be the basis of travel allowances recorded and then invoiced.

Document 23 suffers from identical deficiencies as those already attributed to document 20.

In effect, neither the breakdown of amounts, nor the specification of itineraries and travel, nor external documents attached that support the type and value of expenses that give rise to such travel allowances, nor signatures of responsible parties of the companies, and even the date printed on the spreadsheet (2016), all of this converges, in the understanding of the tribunal, for such documents not to be attributed the implications that the claimants seek with respect to the non-application of article 88, no. 9, of the CIRC.

A simple spreadsheet, with aggregate values, without additional information that permits a minimal assessment of the correspondence between the activity of the workers, the body of documents that must emerge from it regarding travel allowances and its actual pass-through to invoices to clients cannot be sufficient for the tribunal to accept the claimants' thesis. It would be necessary that the documentation presented be, as regards the travel allowances allegedly included in the invoices, much more thoroughly supported in unequivocally confirmatory supports of such inclusion.

Additionally, the Claimants list in the Petition other documents which, in their view, would also show the actual inclusion of the travel allowances, here contested, in its invoicing.

Now analyzing such documents, eg., no. 25 relating to P…, the contract that appears there does not demonstrate, in the understanding of the tribunal, the actual imputation and invoicing of travel allowances.

P… made a debit note to S…, and this invoiced 21,000 euros to NN… S.A. To cite one example, whose logic is common to others, the travel log of March 2011, relating to OO…, which appears in this document 25, refers to "Provision of services in Mozambique," and 30 days of travel allowances; without further elements to explain or detail them.

Invoice no. …, sent to NN…, does not permit the tribunal to conclude that travel allowances were passed through to this invoicing of March 2011, as the attachment, an Excel sheet, has only described a technical assistance value that sums the invoiced value (21,000 €).

In such circumstances, it is concluded that the elements of proof, required as minimal, that travel allowances are unequivocally included in the invoiced amount, are supported by detailed documents, permit reconstituting the purpose and relevance of such amounts and are accounting recognized and included in the invoiced amounts do not appear to the tribunal as sufficient for it to grant the Claimants.

In sum: the substantial evidence is too insufficient and does not permit the tribunal an analysis that could support, even with formal imperfections that in the practice of business could be admitted, the soundness of the arguments of the Claimants.

Therefore, the request of the Claimants is not granted, and the amounts in question must be subject to autonomous taxation.

***

C. DECISION

In these terms, this Arbitral Tribunal decides to wholly reject the arbitral request filed and, consequently, to condemn the Claimants to the costs of the proceeding, set forth below.

D. VALUE OF THE PROCEEDING

The value of the proceeding is set at 5,837,398.19 (five million eight hundred thirty-seven thousand three hundred ninety-eight euros and nineteen cents), corresponding to the total amount of the request (€ 6,119,594.28 (six million one hundred nineteen thousand five hundred ninety-four euros and twenty-eight cents)), reduced by the amount reimbursed in the meantime by the Tax Authority, of € 587,794.82, as special payments on account fully deducted from the collection of company Grupo A…, and, on the other hand, from the request for disregarding of the corrections made for autonomous taxation purposes, in the amount of € 305,598.73, all calculated in accordance with article 97-A, no. 1, (a), of the Tax Procedure and Process Code, applicable by virtue of sections (a) and (b) of no. 1 of article 29 of the RJAT and no. 2 of article 3 of the Regulation of Costs in Tax Arbitration Proceedings.

E. COSTS

The arbitration fee is set at € 73,134 (seventy-three thousand one hundred thirty-four euros), in accordance with Table I of the Regulation of Costs in Tax Arbitration Proceedings, to be paid by the Claimants, since the request was wholly rejected, in accordance with articles 12, no. 2, and 22, no. 4, both of the RJAT, and article 4, no. 4, of the aforementioned Regulation.

Notify the parties.

Lisbon, 3 September 2017

The Arbitrators

(José Baeta de Queiroz)

(Nuno Cunha Rodrigues)

(António Martins)

(with dissenting opinion)

Dissenting Opinion

The Principle of Proportionality and Its Application to the Concrete Case

I concur with the sense of the decision on the issue of the principle of proportionality, although, as the text that follows will show, on the basis of somewhat different reasons. This principle, which I shall develop further below, beyond appearing in the Constitution of the Republic, implies that the "interpreter-applier" applies the law affecting individuals "in terms adequate and proportional to the objectives to be achieved." It goes hand in hand with the principle of justice, requiring that economically disproportionate or excessive solutions be avoided, such as that which, in my view, results here for the claimants.

In the CRP, the principle of legality, as regards taxes, is found in article 103, which establishes:

ARTICLE 103 (Tax System)

1. The tax system aims to meet the financial needs of the State and other public entities and a fair distribution of income and wealth.

2. Taxes are created by law, which determines the incidence, the rate, tax benefits and the guarantees of taxpayers.

3. No one can be obliged to pay taxes that have not been created in accordance with the Constitution, that are retroactive in nature or whose assessment and collection are not carried out in accordance with the law."

This is, in this article, and as is well known, the consecration of the principle "No taxation without representation," implying that taxes to be paid by taxpayers must be created by their elected representatives. It is not here, therefore, that one finds a binding of the Tax Authority to a principle of legality that supersedes others.

In order to inquire about such binding, articles 266 of the CRP and 55 of the LGT are of capital importance.

The activity of the Tax Authority, in the tax proceeding, is bounded by article 55 of the LGT which reads:

"Article 55 Principles of Tax Procedure

The tax administration exercises its functions in pursuit of public interest, in accordance with the principles of legality, equality, proportionality, justice, impartiality and celerity, in respect of the guarantees of taxpayers and other tax-bound entities."

In the domain of principles relating to administrative activity, the CRP provides:

"Article 266 - (Fundamental Principles)

1. The Public Administration pursues the public interest, in respect of the rights and interests legally protected of citizens.

2. Organs and administrative agents are subordinated to the Constitution and the law and must act, in the exercise of their functions, with respect for the principles of equality, proportionality, justice and impartiality."

I do not detect in these rules (articles 103 and 266 of the CRP and article 55 of the LGT) a rigid hierarchy of precepts to which the Tax Authority must obey; or one that expressly provides for the inevitable primacy of the principle of legality over all others that the CRP and the LGT also consecrate.

The General Tax Code mentions the principle of legality, together with several others, in the list of "principles of tax procedure" contained in article 55. The Tax Procedure and Process Code, in article 46, under the heading "proportionality," establishes that "the decisions of the Administration that collide with subjective rights or legally protected interests of individuals can only affect those positions in adequate and proportional terms to the objectives to be achieved," referring, therefore, to two of the dimensions of the principle which doctrine has come to emphasize.

This principle, by being referred to in the General Tax Code and in the Tax Procedure and Process Code, imposes not only moderate and proportional conduct in administrative procedures aimed at the determination of the taxable base or the tax to be paid. It is a general principle of application throughout the field of taxes, as it is ultimately part of a more general principle, which is that of justice. As Jorge Miranda and Rui Medeiros observe, "justice is the most nuclear ethical principle of law, and therefore an inalienable moment of law." Public administration is bound by basic requirements of justice, even if subordinated, as it is, to the realization of specific public interests.[1]

A similar idea, but now expressed in the field of taxation, is formulated by José Casalta Nabais, in the Manual of Tax Law. According to the Author, "taxes can no longer be content with the principle of tax legality, requiring

[The dissenting opinion continues but appears to be truncated in the original Portuguese text provided]