Process: 101/2014-T

Date: September 15, 2014

Tax Type: IRS

Source: Original CAAD Decision

Summary

This arbitration decision (Process 101/2014-T) addresses a challenge to an additional IRC (Corporate Income Tax) assessment of €368,175.77 for the 2009 tax year. The taxpayer, a Portuguese SGPS holding company, contested the Tax Authority's application of transfer pricing rules under Article 63 of the IRC Code to payment deferrals granted in a sale transaction. The central dispute concerns whether deferred payment terms without interest charges constitute implicit financing subject to transfer pricing adjustments. The claimant argued three main grounds: (1) the assessment exceeded the three-year statute of limitations under Article 45(2) of the General Tax Law (LGT); (2) transfer pricing rules cannot be used to reclassify or fictionalise transactions, specifically to create a deemed financing arrangement where none legally exists; and (3) the Tax Authority failed to properly demonstrate that special relationships led to non-arm's length conditions. The Tax Authority countered that transfer pricing corrections are not subject to the same limitations as corrections of evident errors, that payment deferrals without interest represent free financing requiring arm's length interest adjustments per OECD guidelines, and that it properly applied the comparable uncontrolled price method without altering the legal form of the transaction. The arbitral tribunal was constituted under the RJAT (Legal Regime of Tax Arbitration) with three arbitrators appointed by the Deontological Council after the taxpayer declined to designate its own arbitrator. The case raises fundamental questions about the scope and limits of Portuguese transfer pricing enforcement, particularly whether Article 63 CIRC permits recharacterization of transaction elements.

Full Decision

ARBITRAL DECISION

The arbitrators Jorge Lino Ribeiro Alves de Sousa (arbitrator-president), Luís Menezes Leitão and João Sérgio Ribeiro, designated by the Deontological Council of the Administrative Arbitration Center to form the Arbitral Tribunal, constituted on 14-04-2014, agree as follows:

I. Report.

  1. SGPS, S.A., with the NIF … and registered office at Rua …, Porto (hereinafter the Claimant), submitted on 10 February 2014, a request for constitution of an arbitral tribunal, pursuant to the provisions of paragraph a) of item 1 of art. 2 and of arts. 10 and following of the Legal Regime of Tax Arbitration (RJAT), contained in Decree-Law No. 10/2011, of 20 January, also invoking articles 66 and paragraph a) of art. 99 of the Tax Procedure and Process Code (CPPT).

  2. In the request for arbitral decision, the Claimant declared that it did not intend to proceed with the designation of an arbitrator, whereby the constitution of the Arbitral Tribunal proceeded in accordance with the provisions of item 1 of article 6 and item 1 of article 11 of the RJAT, by means of a decision of the President of the Deontological Council of the Administrative Arbitration Center, with the arbitrators identified above being designated. On 14 April 2014 the parties were notified of this designation, and did not manifest any intention to challenge it, the Arbitral Tribunal being considered constituted on that date, in accordance with paragraph c) of item 1 of art. 11 of the RJAT.

  3. The claim that is the object of the request for arbitral decision consists of the declaration of illegality of the additional corporate income tax (IRC) assessment No. 2013 … of 16.09.2013, relating to the tax year 2009, whose payment deadline ended on 18 November 2013, the same having been the subject of an administrative appeal still not decided by the Tax Authority.

As a result of this additional assessment, the Claimant paid the amount of € 368,175.77, with the Claimant claiming the total annulment of the said assessment and the consequent reimbursement of that amount, plus the legally due compensatory interest.

  1. The Claimant argues, in summary, as follows:

4.1. There is expiration of the right to the additional IRC assessment due to the three-year period mentioned in art. 45, item 2, of the LGT having been exceeded.

4.2. There was a violation of the Portuguese transfer pricing regime established in art. 63 of the Corporate Income Tax Code (CIRC), since that regime does not permit altering the legal form of a given operation and correcting the value of the operation that was fictionalised, and therefore cannot be used to fictionalise the existence of financing and, subsequently, to proceed with the determination of the associated remuneration.

4.3. Given that the matter concerns the terms and conditions established in a purchase and sale contract concluded in the 2008 tax year, the existence of special relationships was only demonstrated, (i) without demonstrating the establishment of conditions different from those which would normally be agreed between independent persons, (ii) that such conditions had led to the determination of profit different from what would have been determined in their absence, (iii) and that the special relationships were an adequate cause for the different conditions agreed.

  1. Pursuant to art. 17 of the RJAT the Tax and Customs Authority (ATA), now the Respondent, submitted its Reply, where it argued briefly as follows:

5.1. There is a lack of material jurisdiction of the Arbitral Tribunal to decide the present case, since art. 2.b) of Ordinance No. 112-A/2011, of 22 March excepts from the binding of the ATA to the jurisdiction of the Arbitral Tribunals claims relating to acts of determination of taxable matter and acts of determination of tax matter, both by indirect methods; the regime of art. 63 CIRC constituting a form of determination of tax matter with recourse to methods similar to indirect methods, wherein the tax matter determined by the taxpayer in its income tax return is disregarded by the ATA, as it does not express the exact quantification that could have been achieved, under normal market conditions, owing to special relationships with a certain economic operator.

5.2. It is not verified that there is expiration of the right to assessment invoked by the taxpayer, since we are not faced with an error evident in that declaration, in accordance with art. 45, item 2, LGT, but rather with corrections of the fiscal result declared under the transfer pricing regime provided for in art. 63 CIRC.

5.3. The deferrals of payment of the stipulated price and the non-requirement of payment of the respective interest, for the sale of B constituted free financings of the entities related to the Claimant: C BV and D SA, and according to OECD guidelines, the general principle that should be adopted is that financing should bear interest as it would have borne in analogous circumstances between independent parties.

5.4. The Inspection Services never altered the legal form of the contract in question, having only proceeded with a quantification of the remuneration that would correspond to the Claimant in a situation of absence of special relationships and compliance with the arm's length principle.

5.5. That is the objective of the regime established in article 63 of the CIRC, which has as its main function to neutralize certain practices of tax evasion, but also to establish parity in tax treatment between enterprises integrated in international groups and independent enterprises so as to ensure the protection of the domestic tax base, as is defined in the first paragraph of the introduction of the aforementioned Ordinance 1446-C/2001.

5.6. In consequence, the ATA applied this regime based on the comparable uncontrolled price method, and the Terms and Conditions of the Comparable Transaction and the Terms and Conditions of the Controlled Transaction are duly identified and described in the Inspection Report (pages 21 to 24), at pages 49 to 52 of the file, which is given as wholly reproduced.

5.7. The conduct of the Tax Authority was thus guided by strict compliance with the legal, constitutional and international and community law provisions to which it is bound.

  1. A meeting was held on 10 February 2014 as provided for in art. 18 of the RJAT, where the objection of lack of material jurisdiction invoked by the ATA was discussed and the date of 15 September 2014 was set for the delivery of the final decision.

II. Cleanup

The parties have legal standing and capacity and are legitimate (arts. 4 and 10, item 2, of the same instrument and art. 1 of Ordinance No. 112-A/2011, of 22 March), whereby the proceedings do not suffer from any nullities.

In these terms, the Arbitral Tribunal is regularly constituted and is competent, nothing preventing the examination and consideration of the subject matter of the proceedings.

III. Factual Matters

  1. The following facts are considered proven as relevant to the decision, based on the documentary evidence submitted and testimony given.

1.1. The Claimant has been registered since November 2005 for the exercise of the activity of management of non-financial equity interests, to which corresponds the CAE …, having been framed from the beginning of activity, for IRC purposes, under the general regime of determination of taxable profit.

1.2. From the 2010 tax year, inclusive, the Claimant became subject to IRC taxation under the Special Taxation Regime for Groups of Companies, provided for in article 69 of the CIRC, where the parent company is B SA (hereinafter B).

1.3. On 30 December 2005, the Claimant came to be part of Group D following the acquisition of the whole of its capital by C BV, a company governed by Dutch law, at which date the Claimant held 85% of the capital of B and 85% of the capital of E, SA.

1.4. On 20 December 2007, C BV sold to its subsidiary F SA the financial interests it held in Portugal, for the total amount of €52,409,640.00, including 100% of the Claimant.

1.5. In July 2008, F SA channelled to the Claimant, its investee, as title of additional contributions, the amount of €5,600,000.00, which was used by the Claimant for the acquisition of the 15% of the capital of B and E which still remained in the possession of the previous shareholders, the Claimant becoming the holder of the entire capital of these enterprises.

1.6. On 5 December 2008, the Claimant sold to C BV, indirect holder of its capital, the equity interest held in B (100% of the capital), for the amount of €29,862,000.00, to be paid in 2 instalments by the end of 2010.

1.7. In clause 3 of the purchase and sale contract for equity interests concluded between the Claimant and C BV it was established that the price would be paid as follows:

i) The amount of €20,500,000.00 would be paid by the end of the year 2009;

ii) The remaining amount of €9,362,000.00 would be paid by the end of the year 2010.

1.8. Despite the deferred payment of the price, the purchase and sale of the shares of B took effect on the date of the contract, whereby the Claimant delivered on that same date the entire securities representing the capital of B to C BV.

1.9. The Claimant thus came to hold only the equity interest in E and receivables against two non-resident entities indirect holders of its capital: C BV and D SA.

1.10. On 30 November 2011, the Claimant and D SA executed an amendment to the aforementioned purchase and sale contract for equity interests, which stipulates that, on 31 December 2009, the Claimant agreed to transfer to D SA the debt in the amount of €29,862,000.00 (which corresponds to the transfer of the debtor position from CBV to D SA).

1.11. That amendment further determines that, for reasons of a financial character, D SA does not have the capacity to comply with the payment schedule agreed in the initial contract, in particular as to the payment of the first instalment in the amount of €20,500,000.00 to be made by the end of the year 2009, whereby the two parties agreed the deferral of payment of the amount owed (€29,862,000.00) which should be paid by D SA to the Claimant, in one or several instalments, as soon as the economic and financial situation of D SA permitted, but never after 30 June 2012.

1.12. On 31 December 2009, 2010 and 2011, the capital of the Claimant was held directly by 100% by B, SA and, indirectly, also in a percentage of 100% of its capital, at a first level by C BV and, subsequently, by D SA.

1.13. In accordance with Service Order a tax inspection was determined by the Finance Directorate of Porto to the Claimant, directed to the tax years 2009 and 2010, the scope of which was extended to the 2011 tax year, with the objective of assessing the non-accounting of interest in relation to receivables held against a related non-resident entity, in light of the transfer pricing regime.

1.14. Following that inspection, corrections of a purely arithmetic nature were made to the fiscal result declared by the Claimant, in the total amount of €1,394,605.17, relating to the 2009 tax year, arising from the application of the transfer pricing regime as provided for in article 63 of the Corporate Income Tax Code (CIRC).

1.15. These corrections resulted in the additional IRC assessment No. 2013 … of 16.09.2013, relating to the 2009 tax year, with a payment deadline that ended on 18 November 2013, as a result of which the Claimant paid € 368,175.77, the same having been the subject of an administrative appeal still not decided by the ATA.

IV. Justification for the Fixing of Factual Matters

The fixing of the factual matters is based on probative judgements drawn from the documents, witness testimony and statements of the parties, and whose correspondence to reality is not disputed by the parties.

There are no facts that should be considered unproven and that have relevance for the decision of the case.

V. Legal Reasoning.

  1. On the Expiration of the Right to Assessment

The Claimant argues that in relation to transfer pricing the expiration period would be 3 years since, in its view, the ATA had all the necessary information to formulate a judgment as to the legal framework of the operation carried out. Since this was, therefore, a case of error evident in the declaration of the taxpayer, the situation would be susceptible of being brought within the exceptional case provided for in article 45, item 2 of the LGT. Consequently the right to assessment relating to the 2009 tax year would have expired on 31 December 2012.

The ATA, for its part, denies the application of that provision, asserting that the expiration period of the right to assessment to be considered is the normal period of 4 years, as follows from article 45, item 1 of the LGT.

The doctrine and case law support that by error evident in the declaration of the taxpayer should be understood that which is detectable by simple reading or summary analysis of the declaration. Now, it follows from the proven facts that the corrections to the fiscal result declared, although purely arithmetic, emanated from an inspection procedure, and in that context, there was a need to resort to additional documentation. It cannot therefore be said that they resulted from a simple reading or summary analysis of the declaration.

In light of the above, this tribunal considers that the expiration period to be considered is 4 years, whereby the additional assessment was made within the period which would only end on 31/12/2013, the Claimant's claim not therefore being well-founded in this respect.

  1. On the Objection of Lack of Jurisdiction of the Arbitral Tribunal

2.1. As was noted above, the Tax Authority considers that the determination of tax matter with recourse to the regime provided for in article 63 of the CIRC, as occurred in the present case, constitutes a form of determination of the same with recourse to methods similar to indirect methods, wherein the tax matter determined by the taxpayer in its income tax return is disregarded by the ATA, as it does not express the exact quantification that could have been achieved, under normal market conditions, owing to special relationships with a certain economic operator.

2.2. In this context, the Respondent considers that the present case falls within the exception provided for in art. 2.b) of Ordinance No. 112-A/2011, of 22 March, which excludes from the binding of the ATA to arbitral tribunals operating at CAAD the "claims relating to acts of determination of taxable matter and acts of determination of tax matter, both by indirect methods, including the decision of the revision procedure", invoking in support of that position the Judgment of the Central Administrative Court South, of 05-07-2011, delivered in case No. 04384/10.

2.3. Accordingly, the ATA argues that the Arbitral Tribunal is incompetent to examine the question, which constitutes a dilatory objection preventing consideration of the merits of the case, in accordance with the provisions of article 576, items 1 and 2 of the CPC ex vi article 2, paragraph e) of the CPPT and article 29, item 1, paragraphs a) and e) of the RJAT.

2.4. The Respondent further considers that an interpretation to the contrary would be not only illegal, but manifestly unconstitutional, due to violation of the constitutional principles of the Rule of Law and separation of powers (cf. articles 2 and 111, both of the CRP), as well as of legality (cf. articles 3, item 2, and 266, item 2, both of the CRP), as a corollary of the principle of non-disposability of tax credits inherent in article 30, item 2 of the LGT, which bind the legislator and all activity of the ATA.

Let us see whether the Respondent is right.

2.5. Pursuant to art. 2, item 1, a) of the RJAT, arbitral tribunals are competent to examine claims for declaration of illegality of acts of assessment and self-assessment of taxes. For its part, item 1 of art. 4 of the same instrument determines that the binding of the tax administration to the jurisdiction of arbitral tribunals depends on a joint ordinance of the Ministers of Finance and Justice.

2.6. Thus was published Ordinance 112-A/2011, of 22 March, resulting from its arts. 1 and 2 that the General Directorate of Taxes and the General Directorate of Customs and Special Excise Taxes became bound to the jurisdiction of arbitral tribunals operating at CAAD having as their object the examination of claims relating to taxes whose administration is entrusted to them, with some exceptions. One of these taxes is precisely the IRC, whereby the present Arbitral Tribunal has competence to settle questions relating to this tax.

2.7. The respondent argues, however, that the present case would be covered by the exclusion of the binding of the ATA to tax arbitration, in accordance with art. 2.b) of Ordinance 112-A/2011, of 22 March, given that we would be faced with a procedure similar to determination of tax matter by indirect methods, there being an equivalence between that regime and that of transfer pricing.

2.8. This question has been solved uniformly by the arbitral tribunals operating at CAAD in various decisions, noteworthy among which are the arbitral decisions 76/2012-T, of 29/10/2012, 55/2012-T, of 24/12/2012, and 91/2012-T, of 21/1/2013. As well noted in these judgments, the exclusion provided for in the final part of paragraph b) of art. 2 of Ordinance 112-A/2011 constitutes an exceptional norm, which cannot be applied by analogy in accordance with art. 11 of the Civil Code.

2.9. Moreover, analogy in the present case does not even exist since we are not faced with a situation where an arbitral pronouncement is requested on acts of determination of taxable matter or of tax matter by indirect methods, or on requests for revision of tax matter; but rather on acts of assessment, based on direct evaluation, under the transfer pricing regime, whereby the competence of the arbitral tribunal is not excluded by paragraph b) of art. 2 of Ordinance 112-A/2011.

2.10. In this case, it is precisely for the Arbitral Tribunal to ascertain whether the assessment respected the rules defined in art. 63 CIRC and in Ordinance No. 1446-C/2001, of 21 December, which constitutes a normative judgment that falls entirely within the competence of the Arbitral Tribunals, such competence not having been excluded by any provision.

2.11. Contrary to what the Respondent argues, there is no unconstitutionality in the attribution of such competence to the Arbitral Tribunals. Rather, such exclusion would be unconstitutional, given the right that belongs to all citizens to challenge contenciously in the courts the acts of the Public Administration that affect their interests (art. 20, item 1, and 268, item 4, CRP), which cannot fail to be provided for in relation to acts of application of the transfer pricing regime.

2.12. The objection invoked by the ATA regarding the incompetence of this Arbitral Tribunal is therefore groundless.

  1. Question of whether the deferrals of payment of the price constitute free financings and whether transfer pricing can be applied to them

To answer the question it is necessary to frame the deferrals of payment in the contract for alienation of the capital of B in favour of C BV. As is apparent from the inspection report itself (pp. 9 and 10) the deferrals of payment of the price are integral to the purchase and sale contract, being inseparable from it. Therefore, although the contract raises two distinct problems in terms of transfer pricing − one as to the sale price of the entire capital of B and another as to the deferral of payment of the price − they can only be analysed together, as is recognised by the ATA itself in the inspection report (pp. 7 and 8) and in the Reply (article 122).

The parties thus agree that a purchase and sale contract was concluded which is made up of various elements. However, there is a dispute regarding, on the one hand, the operation to which transfer pricing should be applied (principal question) and, on the other hand, subsidiarily, with respect to the validity of the application of the comparable uncontrolled price method.

The principal question will be examined first, proceeding to the subsidiary question only if that one does not succeed. Indeed, subsidiary requests should only be taken into consideration in the event that a prior request does not succeed [article 469, item 1, of the Civil Procedure Code, applicable by virtue of the provisions of article 29, item 1, paragraph e), of the RJAT].

As far as the principal question is concerned, the ATA considers that, notwithstanding the contract being a single transaction, there is a violation of the arm's length principle provided for in item 1 of art. 63, as regards the deferrals of payment of the price which constitute free financings (article 50 of the Reply).

The Claimant, for its part, argues that there is no free financing susceptible of being examined in light of the arm's length principle, that is, to which transfer pricing can be applied.

It is true that, in the domain of the purchase and sale contract, there is a series of operations and inherent obligations, and it is possible to specifically identify the deferrals relating to payment of the price. However, these are an integral part of a contract which, as is recognised by the parties, is a single one and encompasses all these dimensions. Indeed, the ATA affirms this expressly (article 122 of the reply).

It is not possible, therefore, to fragment the purchase and sale contract in order to apply transfer pricing to one of the elements that make it up. It should be noted that in the interpretation of the provision on transfer pricing, in addition to the literal element, other relevant elements should be considered. As regards the weighing of the historical element and, certainly, the teleological element it will surely not be irrelevant to consider the Principles applicable in the matter of transfer pricing for multinational enterprises and tax administrations. In this regard, reference should be made to an excerpt from point 1.42 of the Principles applicable in the matter of transfer pricing for multinational enterprises and tax administrations which is in a chapter which has precisely as its heading Assessment of separate and combined transactions. "In theoretical terms, the arm's length principle should be applied on a transaction-by-transaction basis to approximate as closely as possible the fair market value. But it frequently happens that distinct transactions are so closely linked or continuous that it is not possible to make a correct assessment without taking them into account together. (…) These transactions should be analysed jointly, using the method or methods most appropriate based on the arm's length principle"[3]. Now, by all the more reason, this reasoning should be applied to operations that are more than closely linked, that is, which are truly integrated like those that are the subject of our scrutiny.

Thus, notwithstanding there being clauses of the contract and amendments to it which result in a deferral of payment and have, consequently, the effects of a loan contract, these clauses are integrated in the contract understood in its entirety, and cannot be abstracted from it in order to take on autonomous life.

It would remain, therefore, only one way to abstract from the transaction any possible financing − that of disregarding the transaction conducted and requalifying it. Now, conduct of this type, although not impossible, would always be exceptional. Both at the general level and in the strict context of domestic law.

At the general level, and once more appealing to the Principles applicable in the matter of transfer pricing for multinational enterprises and tax administrations, we transcribe an excerpt from point 1.36, which is sufficiently expressive to dispense with any commentary: "the verification by the Tax Administration of a controlled transaction should be based on the transaction actually occurred between the parties and on the way it was structured by the parties (…) Except in exceptional cases, the Tax Administration should not disregard actual transactions, nor substitute them for other transactions. The restructuring of legitimate commercial transactions would be a matter of a totally arbitrary procedure…"[4]. The exceptional cases in which it is possible to disregard the structure adopted by the taxpayer refer to situations where there is a discrepancy between the form of the transaction and its economic substance, and to cases where the structure adopted prevents the Tax Administration from determining an appropriate price[5]. This will occur when, it is understood, the original structure had at its base reasons that were eminently fiscal, regardless of whether there were others.

Also in domestic law the framework that is made of the problem reflects, to a large extent, the principle to which reference was made in the preceding paragraph. The disregard of the transaction carried out is likewise something exceptional and which presupposes the application of a proper procedure. In the specific case, the effectiveness of the contract was not called into question or suggested that it had the purpose of reducing tax in an artificial, fraudulent and abusive manner, concealing a financing contract, the only transaction which would really have been intended by the parties. This without prejudice to the ATA stating in the inspection report, in an explicit manner, that "the deferrals of payment of the stipulated price for the sale of B constitute free financings of the entities related C BV and D SA" (p. 17). Now, the only procedure that would permit requalification of the financial transaction carried out in fiscal terms not having been initiated, which would only be possible with the framework in art. 63 of the CPPT and art. 38, item 2, of the LGT (general anti-abuse principle), there is no room to do so, applying, without more, article 63 of the CIRC to an operation that does not fit with it.

That is, the correct procedure not having been used to possibly disregard the purchase and sale contract and place emphasis on the free financing which would have been intended with the transaction provided for, the possibility of the operation being requalified is excluded and, consequently, of transfer pricing being applied to it.

In an arbitral award of the Administrative Arbitration Center − CAAD, delivered in Proc. No. 76/2012, of 29 October 2012, some considerations were made that summarise very well the arguments just advanced, which justifies their reproduction:

"In the application of the norm on transfer pricing, the Tax Administration must attend to the transaction actually carried out, to the 'legal form' used by the taxpayer in its commercial or financial operation, and may alter, for tax purposes, its terms or conditions when it considers them different from those which would have been contracted, accepted and practised between independent entities in comparable transactions.

Different from these situations and outside the transfer pricing regime are the situations where the Tax Administration concludes that, instead of the commercial or financial transactions actually carried out, independent persons would carry out other transactions, of different types, with other 'legal forms'. In these cases, the requirements for ceasing to consider effective, for tax purposes, the transactions actually carried out are not those provided for in art. 63 of the CIRC, but rather those provided for in art. 38, item 2, of the LGT and in art. 63 of the CPPT".

From the above it follows that art. 63 of the CIRC cannot be applied in isolation to the financing inherent in the purchase and sale contract. It is therefore prejudicial to consideration of the accessory question of the incorrect application of the comparable uncontrolled price method.

Thus, it is concluded that the Claimant is correct as to the question of the correction effected with invocation of violation of art. 63, item 1, of the CIRC, whereby the illegality of the additional assessment challenged must be declared (art. 135 of the Administrative Procedure Code).

The Claimant further petitions for the payment of compensatory interest. Pursuant to the provisions of article 43, item 1, of the LGT, compensatory interest is due when payment of an amount of tax superior to that legally due occurs, which occurred in the present case.

VI. DECISION

In these terms this Tribunal agrees to:

− rule in favor of the claim for declaration of illegality of the additional IRC assessment No. 2013…, relating to the 2009 tax year;

− annul the assessment challenged;

− and condemn the Tax and Customs Authority to the reimbursement of the assessments paid by the Claimant, and also to the payment to it of the compensatory interest due.

Costs, to be borne by the Tax and Customs Authority, with the value of the case being € 368,175.77 (value, not contested, as stated in the initial petition).

Lisbon, 15-09-2014

The Arbitrators

Jorge Lino Ribeiro Alves de Sousa

Luís Menezes Leitão

João Sérgio Ribeiro

[1] Cf. Diogo Leite de Campos; Benjamim Silva Rodrigues and Jorge Lopes de Sousa, General Tax Law Annotated and Commented, Lisbon, Encontro da escrita, 4th edition, 2012, pp. 359 and 360.

[2] Cf. Judgment of the Supreme Administrative Court of 14-06-2012, case No. 0402/12.

[3] In Principles applicable in the matter of transfer pricing for multinational enterprises and tax administrations, op. cit., p. 54.

[4] In Principles applicable in the matter of transfer pricing for multinational enterprises and tax administrations, op. cit., pp. 51 and 52.

[5] Cf. Point 1.37 of Principles applicable in the matter of transfer pricing for multinational enterprises and tax administrations, op. cit., p. 51.

Frequently Asked Questions

Automatically Created

What is the statute of limitations for additional IRC tax assessments under Article 45(2) of the General Tax Law (LGT)?
Under Article 45(2) of the General Tax Law (LGT), the statute of limitations for additional IRC assessments based on evident errors in tax returns is three years from the date of filing. However, this three-year period does not apply to transfer pricing adjustments under Article 63 of the IRC Code. The Tax Authority argued that transfer pricing corrections are not corrections of 'evident errors' but rather corrections of fiscal results that do not reflect arm's length conditions due to special relationships. Therefore, such adjustments follow the general assessment period rules rather than the shortened three-year limitation for evident errors.
Can Portuguese transfer pricing rules under Article 63 of the IRC Code be used to reclassify the legal form of a transaction and fictionalise a financing arrangement?
According to the Tax Authority's position upheld in this case, Portuguese transfer pricing rules under Article 63 of the IRC Code do not reclassify or alter the legal form of transactions, but rather quantify the appropriate arm's length remuneration that should have been charged. When payment deferrals are granted without interest, the Tax Authority treats this as implicit financing requiring interest adjustments to comply with the arm's length principle. The taxpayer contested this approach, arguing that Article 63 CIRC cannot be used to fictionalise the existence of financing arrangements. However, the Tax Authority maintained it was merely determining the remuneration corresponding to conditions that would exist between independent parties, consistent with OECD Transfer Pricing Guidelines which state that financing should bear interest as it would between unrelated parties.
How does the CAAD arbitral tribunal process work when the taxpayer does not designate an arbitrator under the RJAT?
Under the RJAT (Legal Regime of Tax Arbitration), when a taxpayer does not designate an arbitrator, the arbitral tribunal is constituted entirely through appointments by the President of the Deontological Council of the Administrative Arbitration Center (CAAD), as provided in Article 6(1) and Article 11(1) of the RJAT. In this case, three arbitrators were designated by the Council: an arbitrator-president and two additional arbitrators. The parties are notified of the designations and have the right to challenge the arbitrators. If no challenge is filed, the tribunal is deemed constituted on the notification date. The tribunal then proceeds with case management, including scheduling hearings under Article 18 RJAT to discuss procedural issues and set deadlines for the final decision.
What are the grounds for challenging an additional IRC liquidation through tax arbitration in Portugal?
Taxpayers can challenge additional IRC assessments through tax arbitration on multiple grounds, as illustrated in this case: (1) procedural grounds, including expiration of the statute of limitations under Article 45(2) LGT for assessments based on evident errors; (2) substantive grounds related to improper application of tax law, such as misapplication of transfer pricing rules under Article 63 CIRC; (3) lack of proper demonstration that special relationships existed and led to non-arm's length conditions; (4) failure to prove that special relationships were the adequate cause of different contractual conditions; and (5) lack of evidence that the conditions agreed differed from those that would normally be agreed between independent parties. Taxpayers may also raise jurisdictional defenses, such as claiming the arbitral tribunal lacks material jurisdiction over certain types of assessments.
Is a taxpayer entitled to indemnity interest (juros indemnizatórios) upon annulment of an unlawful IRC additional assessment?
Yes, upon annulment of an unlawful IRC additional assessment, the taxpayer is entitled to reimbursement of amounts paid plus compensatory interest (juros indemnizatórios). In this case, the claimant explicitly requested 'total annulment of the said assessment and the consequent reimbursement of that amount [€368,175.77], plus the legally due compensatory interest.' Compensatory interest is mandated by Portuguese tax law to compensate taxpayers for the financial loss resulting from paying unlawful taxes, calculated from the date of payment until reimbursement. This right to compensatory interest is an integral component of the taxpayer's claim for restitution when an assessment is declared illegal.