Summary
Full Decision
ARBITRAL DECISION
The Arbitrators, Advisor Fernanda Maçãs (Arbitrator President), Dr. Mariana Vargas and Dr. Henrique Fernando Rodrigues (Arbitrator Members), appointed by the Ethics Council of the Administrative Arbitration Center (CAAD) to form the Collective Arbitral Tribunal constituted on April 20, 2017, agree as follows:
I. Report
1. On February 14, 2017, A… SGPS, S.A., with Tax Identification Number … and with registered office at …, …, …-…, in Porto (hereinafter referred to as the Applicant), pursuant to the combined provisions of paragraph a) of Article 5(3), paragraph a) of Article 6(2) and Article 10(2), of Decree-Law No. 10/2011, of January 20, which approved the Legal Framework for Arbitration in Tax Matters (RJAT) and Articles 1 and 2 of Ordinance No. 112-A/2011, of March 21, requested the constitution of a Collective Arbitral Tribunal, in which the Tax and Customs Authority is the Respondent (hereinafter AT or Respondent), with a view to the declaration of illegality and consequent annulment of the Corporate Income Tax (IRC) assessment No. 2016…, as well as the statement of compensatory interest No. 2016… and the statement of account adjustment No. 2016…, all relating to the fiscal year 2012, in the total amount of €73,085.92 (seventy-three thousand and eighty-five euros and ninety-two cents).
The Applicant further seeks the condemnation of the Respondent to the restitution of the amount of tax unduly paid, plus indemnificatory interest.
1.1. By decision of the Honorable President of the Ethics Council of the Administrative Arbitration Center, the following were appointed as arbitrators for the present proceedings: as arbitrator-president, the Honorable Advisor Maria Fernanda dos Santos Maçãs, and as co-arbitrators the Honorable Dr. Mariana Vargas and the Honorable Dr. Henrique Fernando Rodrigues.
1.2. On April 20, 2017, the present arbitral tribunal was constituted.
1.3. The Applicant was notified to respond to the matter of exception by order of May 31, 2017, and by order of June 1, 2017, a new order was issued determining that the deadline established in the previous order would be counted from the notification of the PA, which occurred on June 1, 2017.
1.4. As per the information available on the CAAD platform, the Applicant had only submitted the response to the matter of exception on July 21, 2017, and consequently out of time, the Respondent came to request its removal from the record, as manifestly untimely.
1.5. By Request of August 17, 2017, the Applicant came to pronounce itself against the Respondent's request and demonstrate that the request had been sent to CAAD on June 9, 2017.
1.6. Following the Respondent's request for removal from the record, by order of August 20, 2017, the tribunal requested the CAAD to confirm "whether or not the document of the SP regarding response to the matter of exception was received on June 9, 2017".
1.7. By Order of August 24, 2017, the President of the CAAD Arbitration Center came to confirm "that on June 9, 2017 at 16:16 hours an email was received in CAAD's electronic mailbox from the Applicant whose subject was A…-IRC Procedure 116/2017-T, accompanied by an attachment named A…-IRC-Exception dilatory-9Junh2017", and that by oversight the request was not promptly entered into the Case Management System.
1.8. Aware of the order of the President of the CAAD Arbitration Center, the Tribunal, on September 3, issued an order, concluding:
"a) The SP's request for joining to the record of the response to the matter of exception is granted, considering it as delivered within the deadline;
b) The AT's request for its removal from the record is rejected.
(…)".
1.9. On the same date, an order was issued dispensing with the holding of the meeting provided for in Article 18 of the RJAT, notifying the parties to produce successive written submissions and designating December 20 as the deadline for the issuance of the arbitral decision, a deadline that was reiterated by order of October 15, 2017.
1.10. The parties submitted submissions.
2. Summary of the Position of the Parties
a. Of the Applicant:
To support the request for annulment of the IRC assessment acts and compensatory interest relating to the year 2012, the Applicant invokes the following reasons of fact and law:
The Applicant is a holding company (SGPS) which pursues its economic activity indirectly through the management of equity interests in other companies, being the parent company of the so-called Group B…, taxed under the Special Regime for Taxation of Groups of Companies (RETGS), which in fiscal year 2012 aggregated its tax results with eighteen other companies, among which:
a. C… Company for Management of Equity Interests, SA (hereinafter C…);
b. D…, SA (hereinafter D…).
The Finance Department of Porto undertook internal tax inspection actions on the two identified companies, originating from the alleged identification of tax irregularities relating to fiscal year 2012, the correction of which, according to the respective Tax Inspection Reports (hereinafter RIT), resulted in an increase to the taxable income of IRC for Group B… in the total amount of €8,386,169.05.
According to the RITs notified to the Applicant on August 8, 2014 and September 20, 2016, the corrections made to the taxable income of Group B…, of which it is the parent company, are based on corrections to the taxable income of the two companies already identified:
a) D… – €4,357,529.26; and
b) C… – €4,028,639.79.
The corrections to the taxable income of companies covered by Group B… resulted in the additional IRC assessment impugned, notified to the Applicant.
The RITs of which the Applicant was notified indicate that the correction to D… was made following the inspection action carried out under Service Order No. OI2014… (Doc. 2) and the correction to C…, under Service Order No. OI2014… (Doc. 3): the AT disregarded the financial expenses incurred by D… on the grounds that, in its opinion, they were not essential to the maintenance of the income-producing source or to the obtaining of income, in the total amount of €4,357,529.26, and corrected the amounts relating to interest borne by C…, resulting from loans obtained from its sole shareholder and unfavorable exchange differences, in the total amount of €4,028,639.79, on the grounds that, in its opinion, "(…) they relate to operations that did not protect the intrinsic interests of C…, SA, and as such are not expenses for tax purposes (…), were not essential for the obtaining of taxable income."
The Applicant alleges that the RITs of which it was notified, in its capacity as parent company of group B…, do not reproduce nor include copies of the RITs of D… and C…, nor present any substantiation to support the corrections made to the taxable income of those companies, although they make reference to them.
Therefore, the Applicant requested that a certificate of the substantiation of the additional IRC assessment contested in the present proceedings be issued to it, pursuant to Article 37(1) of the Tax Procedure and Process Code (CPPT).
However, the certificate issued by the Finance Service of Porto… does not pronounce itself on the corrections made by the inspection services to D… and C…, capable of allowing the substantiation of the corrections to the taxable income of Group B…, and the inspection reports that allegedly support the corrections to the taxable income of the referred companies, which in fiscal year 2014 were to be incorporated by merger into company E…, have never been made available to it.
With reference to the same fiscal year 2012, corrections were made to other companies in the Group, and the Applicant, in its capacity as parent company, was notified of the respective final RITs, which indicates that the AT does not ignore the obligation to inform the parent company of a Group taxed under RETGS of the corrections in the sphere of the subsidiary companies, without which the former cannot contest the legality of the tax acts resulting from them, due to lack of substantiation.
The absence of substantiation constitutes a defect of the tax act, pursuant to Article 99(c) of the CPPT, and the same should be annulled as illegal.
b. Of the Respondent:
Notified pursuant to and for the purposes provided in Article 17 of the RJAT, the AT submitted its response and attached the administrative process, in which it came to defend, by exception and by impugnation, the legality and maintenance of the assessment act subject to the present request for arbitral pronouncement.
By exception, the AT invokes the unimpeachability of the Group assessment, as regards the corrections made to company D…, previously reflected in assessment No. 2014… of August 27, 2014, which was not subject to any claim or impugnation, having become consolidated in the legal order.
Furthermore, the Respondent considers that the reasons of fact and law invoked by the Applicant are far from substantiating and sustaining the claims formulated, as the latter "confuses the totally distinct concepts of notification and substantiation of tax acts":
The Applicant invokes that the tax inspection report notified to it did not contain as attachments the reports notified to third parties, to D… and C…, and that for that reason it is unaware of the reasons invoked by the AT to correct the taxable income of the economic group of which it is the parent company.
However, the lack of notification of the substantiation does not affect the legality of the assessment, as unanimously recognized by doctrine and jurisprudence.
In the case at hand, the controversial assessment incorporates the changes to the taxable income of the Group as a result of the tax corrections made within the scope of external inspection actions on the subsidiary companies, and internal inspection actions were undertaken in order to inform the parent company, now the Applicant, of the corrections made in the individual sphere of each of the subsidiary companies, as well as the subsequent issuance of additional IRC assessments for the taxation period of 2012, in compliance with the applicable rules within the scope of RETGS.
The RIT notified to the Applicant reflects the cognitive itinerary that led the Tax Inspection to alter the values declared in the Model 22 declarations of the various companies that make up the Group, expressly referring in it to the external inspection procedures previously carried out in the individual sphere of the subsidiary companies and on which it is based, in accordance with Article 77(1) of the General Tax Law (LGT).
Thus, the AT concludes that the Applicant, as parent company, obtained knowledge of the motivation for the corrections made to the subsidiary companies with reflection in the determination of the Group's taxable income, as well as of the assessment and its substantiation, it being sufficient that it analyze, jointly with the subsidiary companies, the content of all the preliminary acts that resulted in the issuance of the assessment, namely the Model 22 declarations submitted and the content of the reports that determined the changes to the declared taxable income.
And, since the subsidiary companies were notified of the substantiation of the corrections in external inspection procedures, the reports of the internal inspection actions in the sphere of the parent company, nor the subsequent assessment acts, would not need to reproduce all the grounds already invoked (and regularly notified in earlier phases of the process), with the collection notice sent to the taxpayer needing to contain only the elements proper to the assessment act, that is, the demonstration of the calculation of the amount to be paid or reimbursed.
As for the argument that the certificate issued pursuant to Article 37 of the CPPT did not include the reports of the subsidiary companies, the legal consequence is not the lack of substantiation of the assessment.
Citing Counselor Jorge Lopes de Sousa, in Tax Procedure and Process Code – Volume I, Áreas Editora – 6th Edition, 2011, p. 352, the Respondent concludes that the arbitral tax proceeding does not constitute the appropriate legal mechanism for the protection of the Applicant's interests, as according to the illustrious Author, "It may happen that, despite the notification being requested by the notified party of the omitted elements in the notification or the respective certificate being requested, pursuant to Article 37 of the CPPT, the tax Administration does not satisfy his claim, either through inertia, by not notifying him nor issuing a certificate of the omitted elements, or because the new notification or certificate that comes to be issued also does not contain the omitted elements. In these situations, the interested party may, naturally, seek to remedy the deficiency itself, by contacting the services and consulting the process in which the act was practiced, in order to obtain knowledge of the elements he is interested in knowing. However, he is not obliged to do so, having the right to react contentiously against the inertia or persistence in the omission on the part of the tax Administration through a summons for issuance of certificates, provided for in Article 146, No. 1, of the CPPT and in Articles 104 to 108 of the Administrative Procedure Code."
The Respondent further argues that, should the impugned act be annulled on the ground of a defect of form, namely for lack of substantiation, the legal prerequisites conferring the Applicant's right to indemnificatory interest would not be met.
II. Preliminary Determination
1. The Collective Arbitral Tribunal is competent and was regularly constituted on April 20, 2017, pursuant to Articles 2(1)(a), 5, 6, and 11(c) of the RJAT.
2. The parties have legal personality and capacity, are legitimate and are legally represented, pursuant to Articles 4 and 10 of the RJAT and Article 1 of Ordinance No. 112-A/2011, of March 22.
3. The proceeding does not suffer from defects that would invalidate it.
4. The Applicant exercised the right to be heard on the matter of exception invoked by the Respondent.
III. Merits
III.1 Factual Matter
The factual matter relevant to the understanding and decision of the case, following critical examination of the documentary evidence and the administrative process (PA) attached to the record by the Applicant and the Respondent respectively, is established as follows:
A – Proven Facts
1. The Applicant is the parent company of the so-called Group B…, taxed under the Special Regime for Taxation of Groups of Companies (RETGS), which in fiscal year 2012 aggregated its tax results with eighteen other companies, among which C…, SA (hereinafter C…) and D…, SA (hereinafter D…).
2. With respect to fiscal year 2012, purely arithmetic corrections were made to the tax results declared by both subsidiary companies, with effects on the determination of the Group's taxable income;
3. Service Order OI2014…:
a. By letter No. …/… of the Tax Inspection Services (SIT), of the Finance Department of Porto, dated May 8, 2014 (CTT registration No. RM … PT), company D…, SA (hereinafter D…) was notified pursuant to Articles 60 of the General Tax Law (LGT) and 60 of the Complementary Regime of the Tax and Customs Inspection Procedure (RCPITA), to exercise the right to be heard on the Draft Tax Inspection Report (RIT) relating to the proposed corrections to the taxable income for fiscal year 2012, in compliance with OI2014…;
b. The inspection procedure, of general scope, resulted in corrections "to the tax loss declared in fiscal year 2012, as follows in the table below:
c. These corrections resulted from the disregard for tax purposes of financial expenses, pursuant to Article 23 of the Corporate Income Tax Code (CIRC), in the amount of €4,357,529.26, with the following grounds:
"Although constituted for the development of engineering activity and similar techniques and as results from its articles of association, the preparation of studies, research and innovation, D… did not exercise the activity.
It also does not have material, human or financial structure that evidences an income-producing source for the exercise of that activity and did not realize or produce any income/revenues.
D… since its incorporation has been accounting as expenses/costs the financial charges (interest) charged by its shareholder, E…, as a result of the loans granted, by virtue of the holding of a 40% financial interest in F…, for whose purpose it was incorporated, and whose transaction was agreed and negotiated by E… itself. (…)
Effectively, if the participation were to be acquired by a holding company (SGPS), as E… is, using borrowed funds, the deductibility of the financial charges incurred (…) would be limited pursuant to Article 32 of the Tax Benefits Statute (EBF).
On the other hand, the corporate operations were carried out outside the statutory scope of D…, only in the direct interest of E…, through D…, so that the interest borne by the subsidiary, with voluntary and deliberate applications made by its shareholder, E…, are not accepted as expenses/costs for tax purposes, in accordance with Article 23(1) of the CIRC".
Having the right to be heard not been exercised, the proposed corrections became final, with the final RIT being notified to D… by letter No. …/…, of the SIT of the Finance Department of Porto, dated June 2, 2014 (CTT registration No. RM …PT).
4. Service Order OI2014…:
a. The internal Service Order No. OI2014… authorized the internal inspection action on the Applicant, in its capacity as "parent company of a group of companies that opted for taxation in corporate income tax under the special regime for taxation of groups of companies" and had the purpose of "analyzing the tax consequences of the corrections made in the sphere of the subsidiary company «D…, SA»";
b. Pursuant to point III of the draft RIT notified to the Applicant for exercise of the right to be heard, by letter No. …/…, of the SIT of the Finance Department of Porto, dated July 4, 2014 (CTT registration No. RM … PT), the substantiation of the corrections made was as follows:
"III. 1. Tax Corrections promoted in the sphere of the company belonging to the group of companies
Within the scope of Service Order No. OI2014… tax corrections to the individual taxable result in the corporate income tax were proposed, declared by the entity "D… SA", because financial expenses were disregarded for not being essential to the maintenance of the income-producing source or obtaining of taxable income, pursuant to Article 23 of the CIRC, in the taxation period of 2012.
In accordance with the provisions of Article 60 of the General Tax Law (LGT) and Article 60 of the Complementary Regime of the Tax and Customs Inspection Procedure (RCPIT), the taxpayer was notified by letter No. …/… of 2014-05-08, so that within 15 days it could exercise the right to be heard on the Draft Tax Inspection Report.
After the deadline, the taxpayer did not exercise the right to be heard, so the proposed corrections were maintained, giving rise to the official correction of the individual declaration relating to 2012, in the terms set forth in the table below:
III.2. Reflection of the corrections in the individual income declaration on the group result
Article 70 of the CIRC establishes that the taxable result of the group corresponds to the algebraic sum of the taxable results of each of the companies that constitute it.
Thus, in view of the correction proposed in the individual declaration of the entity "D…, SA", NIPC…, exposed in the previous point, the corresponding adjustment must be made to the sum of the taxable results of the group as set forth:
"
c. Having the Applicant not exercised the right to be heard for which it had been notified, the final version of the RIT was sent to it by registered mail (CTT registration No. RF … PT), attached to letter No. …/…, of the SIT of the Finance Department of Porto, dated August 18, 2014;
5. Service Order OI2014…:
a. This SO authorized the external inspection action on C…, SA (hereinafter C…), a company that is part of the group of which the Applicant is the parent company and focused, partially, on the corporate income tax for fiscal year 2012;
b. Point III of the RIT, concerning "DESCRIPTION OF FACTS AND GROUNDS FOR PURELY ARITHMETIC CORRECTIONS TO THE TAXABLE INCOME" in corporate income tax for fiscal year 2012, after analysis of the activity carried out, the Balance Sheet – Assets – Other Receivables and Liabilities – Trade Payables and Other Payables, Profit and Loss Statement (exchange differences and interest borne), concludes: "It was found that the taxpayer, since its incorporation, has not had any material or human structure, or any tangible or intangible assets, and did not exercise most of the activities contained in its comprehensive articles of association.
The only activity actually carried out was the acquisition of interests in G…, H… and I…, and the granting of some short-term loans. For this it contracted financing from the parent company, as a result of which it bore interest, however those funds were not used in any activity of the taxpayer, but rather to meet treasury needs of other entities, namely in G…, H… and I….
The funds obtained and made available (…) gave rise to exchange differences that in the economic year 2012 were overall unfavorable to the taxpayer.
Although it is provided in the articles of association of the taxpayer the realization of investments through equity interests, the acquisitions carried out were at amounts far exceeding the financial capabilities of the taxpayer, to the extent that it did not have its own structure that would allow it to generate the necessary financial flows to settle the loans obtained for the realization of such acquisitions, nor the respective interest. It is thus verified that E… SA used C… SA to obtain those interests, providing for that purpose the necessary financing, that is, the operations practiced by C… SA do not protect interests intrinsic to it, but rather those of its sole shareholder E…, which has its own legal and tax personality. (…)
Taking into account the facts set forth, it is considered that the interest borne and accounted for by the taxpayer as a result of the loans obtained from its sole shareholder E…, less the interest obtained from I…, to the extent that they relate to operations that do not protect interests intrinsic to the taxpayer, are not expenses for tax purposes, pursuant to Article 23 of the CIRC, as they are charges that have been proven not to be essential for obtaining taxable income.
Likewise, the exchange differences (unfavorable in this economic year) are also not considered expenses for the purposes of Article 23(1) of the CIRC.
Thus, the correction of the tax loss declared in the economic year 2012 is proposed, in accordance with the amounts presented in the table below:
| Item | Fiscal Year 2012 |
|------|-----------------|
| Interest borne (1) - Point III.1.3.3 | €4,830,022.24 |
| Interest obtained (2) - Point III.1.2 | €896,470.57 |
| Unfavorable exchange differences (3) - Point III.1.3.1 | €696,272.99 |
| Favorable exchange differences (4) - Point III.1.3.1 | €601,184.87 |
| Correction to taxable result (5=1+3-2-4) | €4,028,639.79 |
| Declared tax loss (6) | €4,032,621.36 |
| Corrected tax loss (7=6-5) | €4,181.57 |
c. The draft RIT, accompanied by "IRC Fixation Note", was notified to E…, SA for exercise of the right to be heard, in its capacity as entity beneficiary of the merger with the inspected company, by letter No. …/… of the SIT of the Finance Department of Porto, dated June 11, 2016 (CTT registration No. RF …PT);
d. The RIT, in its final version, containing a note that the right to be heard was not exercised, and respective "IRC Fixation Note", were notified to the legal representative of C…, SA, by letter No. …, of the SIT of the Finance Department of Porto, dated July 28, 2016 (CTT registration No. RF … PT), with delivery confirmation signed by the addressee on August 1, 2016.
6. Service Order OI2016…:
a. This is an internal service order opened in the name of the Applicant, in its capacity as parent company of the group taxed in accordance with RETGS, motivated by the detection of tax irregularities in corporate income tax for fiscal year 2012 in the sphere of company C…, SA;
b. Pursuant to points III.3 and III.4 of the draft RIT, the substantiation of the purely arithmetic corrections to the Group's taxable income in fiscal year 2012 is as follows: "III.3) Values in effect for corporate income tax purposes
III.3.1. C… SA
III.3.1.1. Corrected values – fiscal year 2012
Within the scope of the external inspection procedure authorized under service order No. OI2010… the amounts relating to interest borne as a result of loans obtained from its sole shareholder E… and unfavorable exchange differences were corrected, both because they relate to operations that did not protect the intrinsic interests of C… SA and as such are not expenses for tax purposes pursuant to Article 23(1) of the CIRC, as they are charges that have been proven not to be essential for obtaining taxable income.
The disregard of these expenses resulted in a tax correction to the corporate income tax base in the amount of €4,028,639.79.
A draft tax inspection report was prepared, which was notified to the taxpayer for exercise of the right to be heard.
Since this was not exercised, the proposed corrections were maintained, with the taxpayer being notified of the corresponding tax inspection report.
III.3.2.1 A… SGPS SA
As a result of a correction made to the Model 22 declaration of corporate income tax of company D… SA, the corresponding adjustment was made to the Group's taxable result as follows:
The taxpayer was notified of the tax inspection report with the substantiation of this adjustment (service order OI2014…).
III.4) Values to be presented in the Group Model 22 declaration of corporate income tax
According to the tax framework presented, the values of the Group Model 22 declaration of corporate income tax should constitute the algebraic sum of the values currently in effect for each company in the Group, and thus reflect the corrections made in the Model 22 declarations of corporate income tax of companies C… SA and D… SA (the latter already reflected in the Group's taxable result as described above).
Given the foregoing, the amount to be considered in field 380 of table 9 of the Model 22 declaration of corporate income tax, relating to fiscal year 2012, will be the algebraic sum of the amount currently in effect for corporate income tax purposes in the Group with the corrections made to C… SA. In summary:
"
c. The draft RIT was notified to the Applicant for exercise of the right to be heard, by letter No. … of the SIT of the Finance Department of Porto, dated July 28, 2016 (CTT registration No. RF … PT);
d. The final version of the RIT was notified to the Applicant by letter No. …, of the SIT of the Finance Department of Porto, dated September 20, 2016 (CTT registration No. RF… PT), with delivery confirmation signed by the addressee on September 22, 2016;
7. Of the assessments issued:
Following the corrections described in the preceding points, the respective correction documents (DC) were prepared and the following assessments were issued in the name of the Applicant:
a. Assessment No. 2014…, dated August 27, 2014, in which no tax was determined to be payable;
b. Assessment No. 2016…, dated October 10, 2016, impugned in the present proceedings.
8. By request addressed to the Head of the Finance Service of Porto …, on December 7, 2016, the Applicant requested, pursuant to Articles 24 and 37 of the Tax Procedure and Process Code, that a certificate of the grounds for Assessment No. 2016… be issued to it;
9. In the certificate issued by the identified Finance Service it appears that:
[The Applicant proceeded to pay the assessed tax on December 19, 2016.]
B – Unproven Facts
There are no facts relevant to the decision of the case that should be considered unproven.
C – Substantiation of the Proven and Unproven Factual Matter
The factual matter proven was based on the critical assessment of the position taken by both parties, as well as the critical analysis of the documents attached to the record, including the instructional process, whose authenticity and truthfulness were not impugned by either party.
III.2. On the Law
The Applicant alleges, in essence, that the Tax Inspection Reports (RIT) notified to it by letter No. …/…, dated August 8, 2014 and by letter No. …, dated September 20, 2016, relating to the corrections to the taxable income of Group B…, of which it is the parent company, following the corrections to the taxable income of the subsidiary companies D…, SA and C…, SA respectively, were not accompanied by copies of the RITs of the inspection actions on those companies, although they make reference to them, which constitutes a lack of the legally required substantiation. An illegality that was not even remedied through the certificate it requested pursuant to Article 37(1) of the Tax Procedure and Process Code (CPPT), vitiating the impugned assessment, which should be annulled.
The central question to be decided is whether: i) with the notification of the assessment now impugned, the AT was obliged to notify the Applicant, in its capacity as parent company of a group of companies taxed under the Special Regime for Taxation of Groups of Companies (RETGS), of the inspection reports that substantiated the corrections to the taxable income of the subsidiary companies (D… and C…); ii) and what is the legal consequence.
Let us see.
It should be noted that, since a matter of mere legality is at issue, it is for the tribunal to assess the legality of the impugned assessment, as that act was practiced, being for that purpose irrelevant the attachment by the Respondent, in its response to the present proceedings, of the inspection reports relating to D… and C….
Following what is advocated by Gonçalo Avelãs Nunes, "The main ground that justifies and recommends the choice for the joint taxation of the group of companies in the context of corporate income tax results from the principle of neutrality in the taxation of income from business activity" (Taxation of Groups of Companies by Consolidated Profit in the Context of Corporate Income Tax - Contribution to a New Dogmatic and Legal Framework of its Regime, 2011, pp. 54 et seq.).
With that principle, one seeks to "prevent the solutions enshrined in tax law from being able to determine the legal form adopted by companies, seeking to ensure that the legal structure chosen realizes the best solution to optimize profits and the advantages of the investment made without distortions introduced for reasons of a tax nature."
We are thus talking about a regime whose potentialities result from the elimination of the disadvantages arising from the non-neutrality of the separate taxation regime for groups, which makes it, according to that author, an effective and fiscally correct regime.
Indeed, the regime of joint taxation of groups of companies in corporate income tax offers advantages, particularly as regards enabling and enhancing "the adoption of the corporate form that best meets the productive needs of the market, by eliminating the disadvantages of the non-neutrality of separate taxation", constituting "a useful, valid and appropriate instrument to support business restructuring and the promotion of competitiveness" (cited work, p. 59).
We are thus facing a taxation regime which allows companies to be jointly taxed through a simplified taxation model, with a view to accommodating in the reality of taxation of legal entities a broad pursuit of distinct corporate purposes within a philosophy of common group. This allows the group of companies better control of the underlying business activity, ensuring a greater degree of effectiveness in the achievement of common objectives.
This taxation regime is placed by the legislature within the reach of groups of companies, in such a way that, once the legally required prerequisites are met, the parent company may choose this type of special regime for determining the taxable income in relation to all companies in the group (Article 69 of the CIRC).
Once this special regime has been chosen, Article 70 of the CIRC provides that "With respect to each of the taxation periods covered by the application of the special regime, the taxable profit of the group is calculated by the parent company, through the algebraic sum of the taxable profits and tax losses determined in the periodic individual statements of each of the companies belonging to the group, corrected, if applicable, by the effect of the application of the choice provided for in No. 5 of Article 67."
On the other hand, it is incumbent on the parent company to send the periodic income statement regarding the taxable profit of the group determined pursuant to Article 70 (Article 120(6) of the CIRC).
Accordingly, given that there is a single tax statement and there are corrections/alterations to the tax results declared by the companies belonging to the group, the taxable profit of the latter must be adjusted in accordance with such corrections/alterations. Indeed, it follows, both from its theoretical justification and from the legal framework of the respective regime, an autonomization of taxable profit in relation to the individual profits of each subsidiary company.
It thus constitutes a prerequisite of law and fact of the tax regime that the parent company has control over the activity and the profits of the subsidiary companies. On the other hand, notwithstanding that the subsidiary companies maintain their individuality and statement obligations, they are truly a long arm of the parent company, as was established in the Judgment rendered in Arbitral Process No. 10/2012-T.
As was established in the Judgment of the Central Administrative Court of the South, dated February 23, 2017, Proc. 05493/12, "(…) the legal-tax regime of the group of companies is founded on the so-called theory of unity, in which it is advocated for the consideration, for tax purposes, of the group of companies as a fictional legal unit, with the integrated companies ceasing to be different legal subjects, as a result of the economic unity that brings them together. In that sense, the taxable income should be calculated jointly, giving rise to a single assessment and eliminating double taxation, with the respective taxable base ascertained using two types of operations, namely: a) the elimination of internal operations carried out within the group, being only relevant those practiced with third-party entities; b) the compensation of losses of the various companies that make up the group".
In the context mentioned, underlying the joint taxation regime, a principle of enhanced cooperation between the parent company and the subsidiary companies cannot fail to prevail, in terms of these providing the former with the information necessary to the knowledge of its tax situation.
In the case at hand, having analyzed the information contained in the RIT (Service Order No. OI2016…) and the factuality given as proven, it appears that the AT is correct when it states that it reflected the cognitive itinerary that led the Tax Inspection to alter the values declared in the Model 22 declarations of the various companies that make up the Group, expressly referring in it to the external inspection procedures previously carried out in the individual sphere of the subsidiary companies and on which it is based. The same RIT contains, in summary form, the applicable legal provisions and the qualification of the tax facts, which relate to amounts referring to interest borne with loans obtained from its sole shareholder E… and unfavorable exchange differences, because they relate to operations that do not protect the intrinsic interests of C…, provision of services SA. And the same is to be said regarding the situation of D….
Notwithstanding the information that accompanied the notification of the assessment subject to impugnation, the Applicant argues, recall, that nonetheless it incurs in illegality due to lack of substantiation, because it was not brought to its personal knowledge the inspection reports that served as the basis for the corrections made at the level of the subsidiary companies (D… and C…).
In the Applicant's view, the AT would thus be obliged to make individual personal communications in duplicate of the inspection reports: first it would have to personally notify the subsidiary companies and subsequently it would have to do the same with respect to the parent company. A solution that, besides having no legal basis, appears disproportionate and contrary to the most elementary principles of economy and cooperation, which, as was stated, cannot fail to assume special significance in the context of the legal-tax regime at issue.
Having the Applicant perfect knowledge of the existence of the reports notified to the subsidiary companies, we can say that the same are perfectly within its reach, since the subsidiary companies integrated in a group that opted for RETGS are not third parties, but rather belong to its circle of interests and are within its sphere of influence and control. It thus appears inequivocal that, having the inspection reports on the subsidiary companies been brought to their respective personal knowledge, that notification must also be reflected at the level of the Group.
Moreover, even if it were not to be understood in this way, the tribunal still could not rule in favor of the Applicant.
It is necessary first to distinguish "the illegality of the notification from the illegality of the notified act. The former produces "only" ineffectiveness or the inoponibility, with invalidity of the act only existing in the case of illegality that affects it itself – even if the illegality also comes to be revealed or has repercussions in the notification itself" (Mário Esteves de Oliveira and others, Annotated Administrative Procedure Code, 2nd ed., Almedina, Coimbra 1997, p. 358).
In truth, the Applicant's thesis is based on an error as to the legal consequences of the notification of the tax act now impugned not being possibly accompanied by the complete substantiation of the same.
Indeed, the Applicant requests the annulment of the impugned assessment based on illegality due to lack of substantiation, but the cause of action is based on the fact that it was not notified of the inspection reports carried out on the subsidiaries. What is abundantly demonstrated in the articles of the Arbitral Request: (75 and 76 - "the AT again did not notify the Applicant of the inspection reports allegedly notified to D… and C…"); 82 ("those same reports were not notified to the Applicant now"); and article 104 ("in order for the AT to comply with its obligation to substantiate the tax acts impugned here, it was sufficient to attach to the inspection reports notified to A… the reports allegedly notified to D…").
It is settled and uniform jurisprudence of the Supreme Administrative Court that the form of communication of the substantiation (as opposed to the lack of substantiation) does not affect the validity of the assessment. In this sense, its Judgment of the 2nd Section of November 16, 2016, Proc. No. 0954/16, concludes, "one thing is the substantiation of the act and another is the communication of that substantiation to the interested party: while the former constitutes a defect capable of determining the annulment of the act that suffers from it, the failure or defective fulfillment of the duty to communicate the substantiation cannot be reflected in the validity of the communicated act".
Thus, when the notification does not contain the substantiation of the notified act, it is permitted to its recipient to remedy that deficiency through the mechanism provided for in Article 37(1) of the CPPT, that is, by means of a request for a certificate containing the omitted substantiation, with suspensive effect on the deadline for complaint, appeal, impugnation or other appropriate legal remedy for the protection of the violated right.
In these terms, in case the AT does not satisfy the claim or the requested certificate does not contain the omitted substantiation, "the interested party may, naturally, seek to remedy the deficiency itself, by contacting the services and consulting the process in which the act was practiced, in order to obtain knowledge of the elements he is interested in knowing. However, he is not obliged to do so, having the right to react contentiously against the inertia or persistence in the omission on the part of the tax Administration through a summons for issuance of certificates, provided for in Article 146, No. 1, of the CPPT and in Articles 104 to 108 of the Administrative Procedure Code."[1].
In the case at hand, the Applicant did not proceed in this manner with respect to assessment No. 2014…, dated August 27, 2014, issued following the inspection action on company D…, SA, opened by OI2014… and notified by letter dated June 2, 2014.
Accordingly, having the Applicant not requested the substantiation of the corrections that were at the origin of this assessment No. 2014… dated August 27, 2014, contained in the respective Tax Inspection Report, nor having filed a complaint or judicial impugnation against it, the same became consolidated in the legal order.
The AT is thus correct when it alleges that the corrections made to company D…, SA, previously reflected in assessment No. 2014… of August 27, 2014, became consolidated in the legal order, not being susceptible of impugnation with the present assessment.
As already referred to above, the omission or insufficiency of notification, namely by its not containing the substantiation of the notified act, gives the interested party the faculty to request a certificate of the respective substantiation, pursuant to Article 37(1) of the CPPT.
With respect to the IRC assessment No. 2016… of October 10, 2016, impugned in the present proceedings, the Applicant effectively resorted to the mechanism provided for in that Article 37(1) of the CPPT; the issued certificate not containing the requested substantiation, but existing as results from the proven factuality, it remained for the Applicant to resort to the appropriate procedural means to obtain the missing substantiation, by means of a summons for issuance of certificates, provided for in Article 146(1) of the CPPT.
Instead of resorting to the appropriate procedural means, the Applicant came with the present arbitral request. It is true that the Applicant requests the annulment of the impugned assessment based on illegality due to lack of substantiation, but the cause of action rests, as we have seen, on the omission of notification of the inspection reports relating to the subsidiaries, which, beyond everything else, by itself does not constitute a cause for invalidity of the impugned assessment.
Accordingly, the Applicant's request is entirely without merit, with the consequent maintenance of the impugned assessment.
IV. Decision
Based on the grounds of fact and law set forth above and in accordance with Article 2 of the RJAT, it is decided to judge as without merit the request for annulment of the IRC assessment No. 2016…, as well as the statement of compensatory interest No. 2016… and the statement of account adjustment No. 2016…, all relating to fiscal year 2012, absolved from the instance the AT with respect to the corrections that gave rise to assessment No. 2014… of August 27, 2014 and from the request, with respect to the remaining corrections.
V. Value of the Proceeding
In accordance with the provisions of Article 306, Nos. 1 and 2 of the Code of Civil Procedure (CPC), Article 97-A, No. 1, paragraph a) of the CPPT and Article 3, No. 2 of the Regulation on Costs in Tax Arbitration Proceedings, the value of the proceeding is set at €73,085.92 (seventy-three thousand and eighty-five euros and ninety-two cents).
VI. Costs
Calculated in accordance with Article 4 of the Regulation on Costs in Tax Arbitration Proceedings and Table I attached thereto, in the amount of €2,448.00 (two thousand, four hundred and forty-eight euros), at the charge of the Applicant.
Lisbon, December 7, 2017.
The Arbitrators,
Fernanda Maçãs (Arbitrator President)
Mariana Vargas (Member)
Henrique Fernando Rodrigues (Member)
Document prepared by computer, pursuant to No. 5 of Article 131 of the Code of Civil Procedure, applicable by reference from paragraph e) of No. 1 of Decree-Law 10/2011 of January 20.
The editing of this decision is governed by the 1990 Orthographic Agreement.
[1] Jorge Lopes de Sousa, "Tax Procedure and Process Code" Annotated and Commented, Volume I, 6th Edition, Áreas Editora, 2011, p. 352.
Frequently Asked Questions
Automatically Created