CAAD 119/2019-T: IRC Deductibility of CESE Energy Sector Contribution Under Article 23-A CIRC

ARBITRATION DECISION

The arbitrators Fernanda Maçãs (arbitrator-president), Dr. José Ramos Alexandre and Dr. Ricardo Rodrigues Pereira (arbitrators-rapporteurs), appointed by the Ethics Council of the Administrative Arbitration Center to form the Arbitral Tribunal, hereby agree as follows:

I. REPORT

1. On 21 February 2019, the commercial company A..., SGPS, S.A., Tax ID..., with registered office in ..., ..., Lisbon (hereinafter, Claimant), filed an application for the establishment of an arbitral tribunal, pursuant to the combined provisions of articles 2, section 1, subparagraph a), and 10, section 2, 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), and article 11, section 1, of Decree-Law no. 81/2018, of 15 October, with a view to this tribunal's pronouncement regarding:

• Declaration of illegality and partial annulment of the additional Corporate Income Tax (IRC) assessment no. 2018..., relating to the year 2014;

• Restitution of the amount of tax improperly paid, plus compensatory interest at the legal rate, from the date of payment until the date of its full reimbursement.

The Claimant attached 13 (thirteen) documents and did not request the production of any other evidence.

The Respondent is the Tax and Customs Authority (hereinafter, Respondent or AT).

1. As emerges from the arbitration petition (hereinafter, AP), the Claimant bases its challenge to the disputed tax act, summarily, on the following:

The Claimant is the dominant company of Group B..., which has as its activity the indirect management of shareholdings, organized in three business areas of industrial nature: pulp manufacturing, cement production and other construction and environmental materials and.

With regard to the main activity of the Group – pulp production – this requires the use of large quantities of electrical and thermal energy (especially in the form of steam), with the latter being fundamental in the cellulose and paper industry, since the use of this type of energy is even more significant than the use of electrical energy.

In parallel, in pulp and paper production itself, the utilization of the respective raw material (wood) triggers the existence of waste with sufficient energy value for the production of energy necessary for its operation, "biomass" or "forest residual biomass" which includes, in this case, eucalyptus bark that, for some years now, the cellulose industry (where Group B... carries out its main activity) has devoted to burning for energy production.

Thus, energy production by entities of Group B... resulted from the need to generate increments of internal efficiency, essential to the pulp and paper manufacturing segment, having been reflected in the contribution that Group B... has been consecutively offering in pursuit of national energy policy objectives. For this reason, the genesis of investments in energy equipment made by Group B... should be understood within the framework of its integration into the main activity of pulp and paper production. Indeed, as a defining characteristic of the energy policy of the various entities of Group B..., there is the definition of an integrated process for utilizing raw materials derived from the main pulp and paper production process, with demonstrably clear energy and environmental impacts.

In order to clarify the terms of the relevant activity of each of the entities of Group B... involved and which are relevant to the present case, the Claimant opts for their segregation as follows: the company "C...", renewable cogeneration in support of pulp and paper manufacturing; the company "D...", renewable cogeneration in support of pulp and paper manufacturing; and the company "E...", cogeneration (combined cycle using natural gas) in support of the paper factory. Cogeneration consists of the simultaneous production of electrical energy and thermal energy, with the purpose of increasing the overall efficiency of energy production.

The AT made corrections to the taxable matter of three entities covered by the RETGS of Group B..., applying subparagraph q) of section 1 of article 23-A of the Corporate Income Tax Code, which establishes an unrestricted non-deductibility of expenses with CESE.

The Claimant does not agree with these corrections, nor with the IRC assessment resulting from them, since such provision of the Corporate Income Tax Code suffers from manifest unconstitutionality, which already manifests itself when applied to any electricity producer, being doubly evident in the specific case, since here a secondary activity is at issue carried out by the three entities targeted, which utilize raw materials derived from their main activity (e.g. eucalyptus bark) for energy production, and this can be destined to satisfy their own consumption needs.

The logic of utilizing endogenous resources, which presided over the investments in energy equipment in the various entities of Group B..., is necessarily much earlier than the entry into force of CESE and, a fortiori, earlier than the establishment of its non-deductibility regime under IRC. This is well demonstrative of how, without discussing the assumptions of subjection to the respective tax, the expense incurred with the payment thereof is a specific burden on the process of utilizing raw material derived carried out by Group B... entities.

The regime currently resulting from article 23 of the CIRC is governed by the deductibility of expenses by two criteria: a criterion of formal nature, according to which expenses or losses should have adequate documentary support, in light of the provisions of its section 3; and a criterion of material nature, according to which the same expenses or losses should have been incurred or borne by the taxpayer to obtain or guarantee income subject to IRC (commonly designated "business purpose test").

As to the first criterion, since this was not even raised by the AT in the Inspection Report, the Claimant merely states that all documentation presented would have completely proven the documentation of expenses incurred with CESE. With respect to the second criterion, it is important to mention that the doctrinal understanding is relatively unanimous: all expenses and losses that verify an objective relationship with the company's interest will be deductible, understanding as such the very object of its activity.

The present case is based on a circumstance of structural order linked to its production organization model: the fact that, parallel to its main activity of pulp and paper production, the latter results in a derived raw material (eucalyptus bark) that is utilized, as biomass, for the production of electrical energy. This option, which required the necessary investments in energy equipment by Group B... and which, in turn, date back to a period prior to the very existence of CESE, result in the payment of this tax being clearly inserted into its "business purpose".

Expenses relating to CESE do not represent merely a fiscal expense associated with any tax that was demanded of them; on the contrary, in the circumstances in which the three Group B... entities here at issue find themselves, CESE expenses represent true operational necessities, in the sense that they result from a specific procedure of utilizing endogenous resources, derived from the main activity of pulp and paper production, which requires the utilization of a very significant quantity of electrical and thermal energy (especially in the form of steam). In other words, the entities here at issue necessarily have to pay CESE in order to be able to utilize derived raw materials from a main production activity.

It is thus demonstrated that expenses incurred with the payment of CESE meet the requirement of "business purpose" provided for in article 23, section 1, of the CIRC, which is why they would constitute expenses deductible from the respective taxable profits, were it not for the limitation provided for in subparagraph q) of section 1 of article 23-A of the CIRC and also in article 12 of the CESE Regime.

In general, doctrine has reached consensus that, in order for the non-deductibility of expenses, which will always be exceptional, to occur, two requirements must be met: first, the existence of express legal provision; and, second, the existence of an intrinsic motivation that justifies that expenses or losses, admissible from an accounting perspective, do not have the same tax translation.

With regard to the first requirement, it is unequivocal that both the CESE regime (in its article 12) and article 23-A, section 1, subparagraph q), of the CIRC establish a non-deductibility regime for CESE expenses.

Regarding the second requirement, it is verified to be impossible to discern any intrinsic motivation inherent to the non-deductibility of CESE in the case under analysis and, likewise, to establish a relationship between the non-deductibility of CESE and any of the objectives provided for in the CESE Regime, such that only general credit reasons – related to income associated with IRC – remain to justify the impossibility of deduction of that first tax; that is, the basis for justifying this limitation is to maintain IRC revenue as if this legally-imposed expense had not been incurred.

Furthermore, it is also possible to discern that the solution established in article 23-A, section 1, subparagraph q), of the CIRC carries a sanctionary character when applied to the mechanism of utilizing derived raw materials from one of the main activities of Group B..., namely pulp and paper production, for energy production.

Moreover, it is equally possible to refer to an unequivocal constitutional non-conformity of the provision in article 23-A, section 1, subparagraph q), of the CIRC vis-à-vis the principle of net income, resulting from the fact that the legal solution established in the said legal provision entails, without more, a barrier to the consideration of expenses that were incurred in pursuit of the income of the companies involved; that is, taxation, under IRC, of the three Group B... entities at issue degenerates into taxation of gross income and, to that extent, suffers from a non-conformity with the principle of net income, one of the most relevant corollaries of the principle of taxation of actual profit, as regards the scope of taxation of companies.

In accordance with this, the solution established in article 23-A, section 1, subparagraph q), of the CIRC, in the interpretation according to which an entity that utilizes derived raw materials from its main activity for energy production, and this can be destined to satisfy its own consumption needs, that cannot deduct the CESE expense, suffers from unconstitutionality, by violation of the principle of taxation of companies by actual profit, established in article 104, section 2, of the CRP.

On the other hand, by importing a new non-deductible expense into the scope of IRC – when CESE expenses have, from the perspective and system of IRC, the same operational nature that assists other "fiscal expenses", clearly deductible – the legislature does nothing more than negatively value the very condition of being subject to CESE; with such valuation the legislature ends up consenting to the establishment of a purely sanctionary regime, whose sole purpose is to doubly burden taxpayers subject to CESE, both with the tax paid and, at the same time, with the non-deductibility of the corresponding expense, within the scope of IRC. The interest or special purpose of this double burden can only be to sanction, by way of taxation, taxpayers subject to CESE.

The legislature itself was not oblivious to the predominantly sanctionary impacts resulting from the establishment of a regime of unrestricted non-deductibility of expenses incurred with CESE in the CIRC; indeed, pursuant to article 67, section 13, subparagraph f), of the CIRC, the legislature established the express exclusion of CESE from the calculation of the result before depreciation, amortization, net financing expenses and taxes, relevant for calculating the percentage limit to the deductibility of financing expenses, whose regime is provided for in article 67 of the CIRC.

Furthermore, as regards its interpretation and consequent application to the specific case, the solution established in article 23-A, section 1, subparagraph q), of the CIRC also carries a constitutional non-conformity vis-à-vis the principle of equality, not least because the facts inherent to the present case denounce unequal treatment, on the part of the legislature, with respect to the universe of properly recorded expenses, because incurred in the company's interest. On the other hand, there exists no criterion of objective justification capable of determining why and on what grounds the generality of fiscal expenses will be deductible and CESE cannot be.

In accordance with this, the solution established in article 23-A, section 1, subparagraph q), of the CIRC, in the interpretation according to which an entity that utilizes derived raw materials from its main activity for energy production, and this can be destined to satisfy its own consumption needs, that cannot deduct the CESE expense, suffers from unconstitutionality, by violation of the principle of equality, established in article 13 of the CRP.

Lastly, the solution established in article 23-A, section 1, subparagraph q), of the CIRC suffers from constitutional non-conformity vis-à-vis the principle of proportionality, provided for in article 18, section 2, of the CRP.

In this light, the Claimant considers it unequivocal that the establishment of a regime of unconditional non-deductibility for a specific expense – in this case, the expense incurred with CESE – constitutes a measure restricting rights or established constitutional principles (there is, first and foremost, a restriction on the principle of taxation by actual profit).

On the other hand, there are restricted rights, first and foremost when, for any of the violations already identified, there does not exist or even appears as identifiable any objective justification. It is in that sense that (focusing on the principle of proportionality) the issue is the necessity aspect, since the non-deductibility of CESE in the specific case could never be required to achieve any ends in view, namely those envisaged by the CESE regime itself.

Thus, the solution established in article 23-A, section 1, subparagraph q), of the CIRC, in the interpretation according to which an entity that utilizes derived raw materials from its main activity for energy production, and this can be destined to satisfy its own consumption needs, that cannot deduct the CESE expense, suffers from unconstitutionality, by violation of the principle of proportionality, established in article 18, section 2, of the CRP.

Finally, the Claimant states that all the unconstitutionalities pointed out to the norm of 23-A, section 1, subparagraph q), of the CIRC, are equally charged to article 12 of the CESE Regime, since the normative command inherent in these provisions is the same.

To conclude, the Claimant considers that, if it is concluded that it is correct regarding the unconstitutionality of the norm on which the tax assessment is based, the amounts improperly paid should be reimbursed, plus compensatory interest, according to law.

1. The application for establishment of the arbitral tribunal was accepted and automatically notified to the AT on 25 February 2019.

2. The Claimant did not appoint an arbitrator, such that, pursuant to article 6, section 2, subparagraph a) and article 11, section 1, subparagraph a), of the RJAT, the President of the Ethics Council of CAAD appointed the signatories as arbitrators of the collective arbitral tribunal, who communicated acceptance of the assignment within the applicable timeframe.

On 9 April 2019, the parties were notified of this appointment and did not express a desire to refuse the appointment of the arbitrators, pursuant to the combined provisions of article 11, section 1, subparagraph b), of the RJAT and articles 6 and 7 of the CAAD Code of Ethics.

1. Thus, in accordance with the provision of subparagraph c) of section 1 of article 11 of the RJAT, the collective Arbitral Tribunal was constituted on 2 May 2019.

2. On 5 June 2019, the Respondent, duly notified for this purpose, presented its Answer in which it raised the objection of lack of material jurisdiction of the Arbitral Tribunal and specifically challenged the arguments put forward by the Claimant, concluding for the admissibility of that objection, with its consequent dismissal of the case and, should it be otherwise understood, for the non-admissibility of the present action, with its consequent dismissal of the petition.

The Respondent did not request the production of any evidence, having only attached to the case file its administrative file (hereinafter, AF).

1. The Respondent based its Answer, essentially, on the following arguments:

The Respondent invoked the objection of lack of material jurisdiction of the Arbitral Tribunal, relying on two distinct grounds: on one hand, because there is at issue the unconstitutionality of a provision concerning the legal framework of CESE and, on the other hand, because CESE is a financial contribution and not a tax. To these questions we shall return and, then, we shall give a more detailed account of the arguments put forward by the Respondent in this regard.

In another order of considerations, the Respondent states that the general rule of deductibility of expenses and losses has several exceptions dictated by a multiplicity of reasons that the legislature, within its margin of freedom of normative configuration, considered admissible and not violative of the principle of taxation by actual profit; among these exceptions is that provided for in subparagraph q) of section 1 of article 23-A of the CIRC which is nothing more than the transposition into this Code of the provision of article 12 of the CESE Regime.

The teleological sense of this article 12 can only be grasped within the framework of the CESE Regime through the combination of the object defined in section 2 of article 1, the prohibition of pass-through (article 5) and the allocation of collected revenue to the FSSS (article 11), from which it clearly emerges that the legislature's purpose in establishing a "separation ring" of this financial contribution, by circumscribing to the energy sector both the tax burden and the potential benefits of revenue allocation, isolating it from the rest of the economy.

In this regard, it would be incoherent to admit the acceptance as a deductible expense for determining taxable profit of the amounts borne by taxpayers under the heading of CESE, since deduction would be equivalent to an indirect pass-through of CESE to the State (and Local Authorities, with respect to municipal tax), to the exact extent that the resulting reduction in taxable profit would result in reduction of IRC (and municipal tax) assessed and paid.

Through this means, financing would be operated by the State (and Local Authorities) – to the extent of the reduction in IRC and municipal tax revenue – to operators subject to CESE payment, a result that the legislature clearly wished to safeguard in articles 5 and 12 of the CESE Regime. It follows from this that the reasons underlying the exclusion of deductibility of expenses incurred with CESE should be found in the design and objectives of the regulation of this financial contribution and not in the general rule of deductibility of expenses and losses set out in section 1 of article 23 of the CIRC.

Thus, the disallowance of the deduction of CESE from taxable profit is a natural and logical consequence of the choice of legislative policy on the financing of the energy sector through this contribution.

It is an option of tax policy that required the legislature to elaborate norms whose application and execution be effective, that is, that lead to results consistent with the intended objectives, and in the case, the legislature's purpose was clearly to avoid the imposition of the CESE burden on the generality of taxpayers, a goal that could only be effectively achieved by complementing the prohibition on pass-through with the non-deductibility of the corresponding expense from taxable profit under IRC.

The Respondent adds that it can be extracted from the jurisprudence of the Constitutional Court that the principle of taxation by actual profit is compatible with a certain margin of freedom for the legislature that introduces some deviations from the general rule of deductibility of expenses incurred in the context of business activity, provided that the limitations or exclusions have a rational foundation and do not collide with the principle of equality.

Furthermore, the CESE regime is unitary, in the sense that taxpayers covered by article 2 are bound to comply with the same normative framework, such that it is not clear why subparagraph q) of section 1 of article 23-A of the CIRC and article 12 of that Regime should be interpreted differently for entities that utilize derived raw materials from their main activity for energy production, even when this can be destined to satisfy their own consumption needs.

On the other hand, with regard to the principle of equality, the Respondent states that what article 13 of the CRP requires is that a comparison be established between the categories of operators covered by the norm of incidence contained in article 2 of the CESE Regime and not among the universe of IRC taxpayers, since that principle requires only equal treatment of equal situations and unequal treatment of unequal situations.

With regard to the invoked principle of proportionality provided for in section 2 of article 18 of the CRP, the Respondent argues that such constitutional command applies to constitutional precepts respecting rights, freedoms and guarantees, namely to "Fundamental rights and duties" that integrate Part I of the CRP and where the principle of taxation by actual profit provided for in section 2 of article 104 is not included, a provision inserted in Part II of the CRP, where the matter of "Economic organization" is regulated.

The Respondent concludes by arguing that it is materially unconstitutional the normative interpretation proposed by the Claimant, in the sense of permitting the deduction of expenses that it incurred as a taxpayer subject to CESE, in absolute contradiction with the legal provision of non-deductibility of such expenses expressly determined by the legislature in article 12 of the CESE Regime and in article 23-A, section 1, subparagraph q), of the CIRC, by violation of the principle of tax legality. Since such normative interpretation contradicts the rule of non-deductibility of such expenses expressly determined by the legislature, it is, therefore, materially unconstitutional, by violation of the principle of democratic rule of law, the reserve of tax law and the separation of powers, with the consequent subordination of courts to law, which derive, namely, from the provisions of articles 2, 103, 165 and 202 of the CRP.

The Respondent considers such normative interpretation materially unconstitutional also by violation of the principle of tax legality, in the aspect of generality and abstraction of tax law, resulting from the principle of legality and as instruments of tax equality and, therefore, equally by violation of the principle of tax equality, which derive, namely, from the provisions of articles 13 and 103 of the CRP.

The Respondent further considers materially unconstitutional the normative interpretation in the sense that subparagraph q) of section 1 of article 23-A of the CIRC and article 12 of the CESE Regime should be interpreted differently for entities that utilize derived raw materials from their main activity for energy production, even when this can be destined to satisfy their own consumption needs, since unequal treatment of CESE taxpayers would represent disrespect of the principle of equality established in article 13 of the CRP, without any acceptable justification, since the comparison to be established will be among the categories of operators covered by the norm of incidence (article 2 of the CESE Regime) and not among the universe of IRC taxpayers.

Finally, the Respondent understands that the disputed assessments do not suffer from any defect that should order their annulment, there being, therefore, no occasion for condemnation in compensatory interest in favor of the Claimant.

1. Notified for this purpose, the Claimant pronounced itself on the matter of objection invoked by the Respondent, according to the terms contained in its request presented on 21 June 2019, which is hereby wholly reproduced.

2. The Tribunal dispensed with the holding of the meeting referred to in article 18 of the RJAT, granted a timeframe for the presentation of optional and successive written submissions, and set 2 November 2019 as the deadline for the pronouncement of the arbitration decision.

3. The parties presented submissions, in which they reiterated the positions previously assumed in their respective pleadings.

II. CASE MANAGEMENT

1. The Arbitral Tribunal was regularly constituted.

The arbitration petition is timely.

The parties enjoy legal personality and capacity, have standing and are duly represented (cf. articles 4 and 10, section 2, of the RJAT and article 1 of Order no. 112-A/2011, of 22 March).

The case suffers no nullities.

1. The AT, as was stated, invokes the objection of lack of material jurisdiction of the Arbitral Tribunal on the ground, on one hand, that there is at issue the unconstitutionality of a provision concerning the legal framework of CESE and, on the other hand, that there is at issue a financial contribution and not a tax.

More precisely:

In articles 7 to 46 of its answer, the AT invokes the Tribunal's lack of jurisdiction (i) to rule on the issue of unconstitutionality (articles 7 to 34) and (ii) to rule on the Special Contribution on the Energy Sector Regime (CESE), because it is a financial contribution and not a tax (articles 35 to 46) and the jurisdiction of arbitral tribunals established at CAAD is circumscribed to these.

As was stated, the Claimant was heard, and it objected to both of the alleged objections.

Both objections of lack of jurisdiction are subject to priority consideration, as results from article 13 of the Code of Procedure in Administrative Courts (CPTA), applicable to tax arbitration proceedings by virtue of article 29, section 1, subparagraph c), of the RJAT.

Let us examine the first: the alleged incompetence of the Arbitral Tribunal to rule on the issue of unconstitutionality.

The fact that the Respondent itself recognizes that there is at issue "the assessment of the legality and unconstitutionality and consequent disapplication of provisions underlying the assessment act" is enough to conclude that it itself recognizes that the issues of unconstitutionality raised are issues of concrete unconstitutionality (which imply disapplication of the provision in a specific case) and not abstract unconstitutionality (which imply the removal of the provision from the legal order). Now, any court – including arbitral courts – is obliged not to apply provisions that are non-conforming with the Constitution (article 204), and insofar as such provisions have potential effects on the disputed assessment, the present Tribunal is competent for – and is obliged to – rule on such non-conformities.

Moreover, there would be no other way for the Constitutional Court itself to be able to review the invoked unconstitutionality if the present Tribunal could not assess it: the Constitutional Court's powers in regard to concrete review of constitutionality are exercised exclusively in appeal of decisions previously handed down by other courts.

Recognizing implicitly as much, the Tax and Customs Authority, in article 33 of its answer, invokes the principle of separation and interdependence of powers as an obstacle to this Arbitral Tribunal's powers of review, understanding that the interpretation that would lead the present Tribunal to understand itself as competent would itself be unconstitutional "by violation of the constitutional principles of rule of law and separation of powers (cf. articles 2 and 111, both of the CRP), as well as of legality (cf. articles 3, section 2, and 266, section 2, both of the CRP), as a corollary of the principle of inalienability of tax credits inherent in article 30, section 2 of the General Tax Law, which bind the legislature and all activity of the AT." That is: it invokes a question of unconstitutionality before the same Tribunal that, at the same time, it considers incompetent to rule on such questions.

With regard to identical argumentation, we follow the arbitration decision of 04-05-2018, handed down in Case no. 675/2017-T, of CAAD, in the part in which it states:

"There will, certainly, be some confusion, since, in a Rule of Law State, it is to the Courts and not to any other bodies, namely those that have legislative and executive functions, that it falls to administer justice, «to ensure the defense of the rights and legally protected interests of citizens, to prevent the violation of democratic legality and to settle conflicts of public and private interests» (articles 202, sections 1 and 2, of the CRP), for which purpose they must interpret and apply the laws to settle disputes between citizens and the Administration.

And it is also to the Courts that the CRP assigns the power to control the constitutionality of laws, issued by bodies with legislative power (article 204 of the CRP).

The present decision is handed down by a Court, such that it has a jurisdictional character, and in the exercise of its jurisdictional power it falls to it to apply the law, according to its interpretation, being subject only to law, as it interprets it, and not being obliged to adopt the interpretation adopted by the Tax and Customs Authority or which the bodies with legislative power would hypothetically adopt if given the competence to apply the law to disputes pending in Courts."

The first ground of the invoked lack of jurisdiction of the present Arbitral Tribunal is therefore unfounded.

Let us then examine the second invoked objection: the lack of jurisdiction to rule on the Special Contribution on the Energy Sector Regime.

The jurisdiction of arbitral tribunals operating at CAAD is defined, in the first place, by article 2, section 1, of the RJAT, which establishes the following:

"1 - The jurisdiction of arbitral tribunals comprises the assessment of the following claims:

a) The declaration of illegality of tax assessment acts, self-assessment acts, withholding at source acts and payment on account acts;

b) The declaration of illegality of acts of determination of taxable matter when not giving rise to the assessment of any tax, of acts of determination of taxable base and of acts of determination of patrimonial values".

In the second place, the jurisdiction of arbitral tribunals operating at CAAD is limited by the binding of the Tax and Customs Authority which, pursuant to article 4, section 1, of the RJAT, came to be defined by Order no. 112-A/2011, of 12 March, whose article 2 establishes the following:

"The services and organisms referred to in the preceding article bind themselves to the jurisdiction of arbitral tribunals operating at CAAD which have as their object the assessment of claims relative to taxes whose administration is entrusted to them referred to in section 1 of article 2 of Decree-Law no. 10/2011, of 20 January, with the exception of the following:

a) Claims relative to the declaration of illegality of self-assessment acts, withholding at source acts and payment on account acts that have not been preceded by recourse to the administrative channel according to articles 131 to 133 of the Code of Tax Procedure and Process;

b) ….………………………………………………………………………………...….;

c) ………………………………………………………………………………………..;

d) ……………………………………………………………………………………….;"

As discussed in the present arbitration petition is the issue of whether the amounts paid by the Claimant under the heading of CESE are fiscally deductible in the amounts paid under the heading of IRC, it seems there is no possibility of understanding other than that the Claimant's claim is covered by arbitration jurisdiction (subparagraph a) of section 1 of article 2 of the RJAT), not being excluded by any of the provisions of the said Order. And this itself notwithstanding the dual seat of the norm impeding deduction (article 23, section 1, subparagraph q), of the CIRC, and article 12 of CESE).

The norms whose unconstitutionality is questioned are article 23-A of the CIRC which, under the heading "Expenses non-deductible for tax purposes", provides that expenses incurred with CESE are not deductible for purposes of determining taxable profit. A norm whose content is replicated in article 12 of CESE.

The said article 23-A of the CIRC is inserted in the general provisions relating to determining taxable profit of legal entities, specifically implementing which expenses are not deductible for tax purposes. Among them, as relevant to the case, is the Extraordinary Contribution on the Energy Sector (CESE).

Now, in the case at hand, the Claimant petitions for the annulment of the IRC assessment no. 2018... invoking as the cause of action the illegality of the correction to taxable matter relating to the non-deductibility of CESE.

Such illegality which is based on the alleged unconstitutionality of the provisions in question when interpreted in the sense that CESE is not fiscally deductible by violation, namely, of the constitutional principles of taxation by actual income and contributive capacity, of equality and of proportionality.

The Claimant does not attack the constitutionality of CESE as a special tax, but only the constitutionality of article 23-A of the CIRC, which regulates the determination of taxable profit of legal entities. And the same may be said of article 12 of CESE which merely reproduces the content of that provision.

A different answer could be given if the arbitration petition were directed against the legal requirement of payment of CESE, but it manifestly is not the case.

To repeat, the arbitration petition is directed against an IRC assessment act, in the part in which it relates to the illegality/unconstitutionality of a correction to taxable matter by refusal of the deductibility of CESE.

In summary, even though the jurisdiction of arbitral tribunals does not include the assessment of assessment acts of special contributions – a question that does not fall to be considered in the present case – what is at issue is not the legal regime of CESE, but rather the additional IRC assessment to three companies in the Group of the Claimant, with the seat of the norms that configure it being irrelevant.

The second ground of the invoked lack of jurisdiction of the present Arbitral Tribunal is therefore unfounded.

No other exceptions or preliminary issues have been invoked that would prevent ruling on the merits and that ought to be considered.

III. REASONING

III.1. FACTUAL

§1. PROVEN FACTS

1. For purposes of relevance to the decision, the following facts are considered proven:

a) The Claimant is the dominant company of Group B..., which, in the year 2014, integrated in its perimeter, in addition to others, the following commercial companies [cf. document no. 11 attached to the AP and AF]:

• C..., S.A. (hereinafter, C...), Tax ID..., having as its object the following activities: pulp manufacturing (Primary CAE – 17110), paper and cardboard manufacturing (except corrugated) (Secondary CAE 1 – 017120) and electricity production from thermal sources (Secondary CAE 2 – 035112);

• D..., S.A. (hereinafter, D...), Tax ID ..., having as its object the activity of pulp manufacturing (Primary CAE – 17110);

• E..., Ltd. (hereinafter, E...), Tax ID ..., having as its object the following activities: electricity production from thermal sources (Primary CAE – 35112) and production and distribution of steam, hot water and cold water and cold air by pipeline (Secondary CAE – 035301).

b) The three commercial entities referred to in the preceding proven fact are holders of the licenses necessary for the pursuit of their respective activities. [cf. documents nos. 4 to 10 attached to the AP]

c) The activity of pulp and paper production requires the use of large quantities of electrical and thermal energy, especially in the form of steam. [cf. document no. 1 attached to the AP]

d) In pulp and paper production, the utilization of the respective main raw material (wood) triggers the existence of waste with sufficient energy value for the production of energy necessary for its operation, designated biomass or forest residual biomass (where eucalyptus bark is included). [cf. document no. 1 attached to the AP]

e) Because it is the utilization of endogenous resources and strictly dependent on the main activity – pulp and paper production – biomass is a primary energy source for C..., with a very significant part of the energy generated in its respective industrial complexes being produced in biomass cogeneration plants (simultaneous production of electrical energy and thermal energy).

f) The biomass utilized in the production of electrical energy in C...'s industrial complexes results from by-products and waste of the raw material used in the production process, namely: derived raw material, resulting from debarking operations of the raw material and forestry operations; sawdust and screening of wood shavings; and black liquor, a by-product resulting from the cooking of wood.

g) In addition to this biomass, C... purchases forest residual biomass on the market, in order to complement the totality of its respective biomass needs.

h) The situation of D... is totally analogous to that of C..., with reference to the renewable cogeneration existing at the level of the latter company and to which the proven facts e), f) and g) refer.

i) In the case of E..., there is a reality with contours quite similar to those of C... and D..., being only necessary to add the use of natural gas so as to provide coverage for the consumption needs of a paper production machine with a useful width of 10.4m, capable of producing more than 500 thousand tons of paper per year, at a rate of 30 meters per second.

j) C... carried out, on 13.11.2014, the assessment and payment of the Extraordinary Contribution on the Energy Sector (hereinafter, CESE), relating to the year 2014, such contribution amounting to € 112,865.24. [cf. document no. 11 attached to the AP and AF]

k) Under Service Order no. OI2016..., of 14.04.2016, C... was subject to an external general scope tax inspection procedure, carried out with the objective of verifying compliance with tax obligations relating to the year 2014, based on the IRC Form 22 income statement, relating to 2014, to which was assigned the no. ..., submitted by the company on 25.10.2016. [cf. document no. 11 attached to the AP and AF]

l) As a result of that inspection action, purely arithmetic corrections were made to the 2014 taxable profit, because C... had not added "to taxable profit the amount of 112,865.24 Euros, corresponding to CESE assessed in the period of 2014, recorded as an expense (account 812300000 – CESE Tax), an amount which, pursuant to article 23-A, section 1, subparagraph q) of the CIRC, does not constitute a tax deductible expense", with the grounds stated in the respective Tax Inspection Report which is wholly reproduced and from which it is important here to extract the following segment [cf. document no. 11 attached to the AP and AF]:

"III.1 – CORRECTIONS TO TAXABLE MATTER – IRC

III.1.1 – NON-ADDITION OF CESE (EXTRAORDINARY CONTRIBUTION ON THE ENERGY SECTOR) TO TAXABLE PROFIT: 112,865.24 EUROS

The company carried out on 13-11-2014 the assessment of the Extraordinary Contribution on the Energy Sector as per annex extracted from our IT system (SEE ANNEX 1), such contribution amounting to 112,865.24 Euros.

From the analysis of the Form 22 Income Statement no. ... submitted by the company on 25-10-2016, it is verified that there is no value entered in field 785 of Table 07, which has as its title "Extraordinary contribution on the energy sector [art. 23-A, section 1, subparagraph q)]. It is noted that this position is the same already assumed in the previous statement no. ... of 23-06-2015.

Legal Framework:

Article 23-A, section 1, subparagraph q) of the CIRC states that "The following expenses are not deductible for purposes of determining taxable profit, even when recorded as expenses of the taxation period:

...q) The extraordinary contribution on the energy sector;"

In the same sense article 12 of CESE (Extraordinary Contribution on the Energy Sector) states:

"The extraordinary contribution on the energy sector is not considered a deductible expense for purposes of application of the corporate income tax."

From the analysis:

Having Portucel recorded this contribution in the account "812300000 — CESE Tax", the company should have added this value to field 724 (IRC and other taxes that directly or indirectly affect profits [art. 45, section 1, subparagraph a)]) of Table 07 of the Form 22 Income Statement or then in field 785 (Extraordinary contribution on the energy sector [art. 23-A, section 1, subparagraph q)]) of the same table.

Verifying the discrepancy of values in the aforementioned field (724) of the Form 22 Income Statement, the company was questioned regarding such fact, and it responded as per document attached (SEE ANNEX 2):

"…, the Group's understanding is that the non-deductibility of CESE violates the constitutional principles of taxation by actual profit and equality, such that the group observed the constitution (which prevails over law) in the self-assessment of the tax, which is why this amount was not added in field 785 of the Form 22.

The fact that we have recorded the cost in an account # 81 for tax in no way changes our opinion nor justifies, by itself, the non-addition of this amount. We continue to maintain that it is a cost deductible for tax purposes."

It is thus demonstrated that the company did not add to taxable profit the amount relating to the Extraordinary Contribution on the Energy Sector, which amounted in 2014 to 112,865.24 Euros and which the company reflected as an accounting expense of the period, thereby failing to comply with article 23-A, section 1, subparagraph q) of the CIRC.

Conclusion:

Thus, the taxable result of the company is corrected by 112,865.24 Euros, corresponding to the expense recognized from an accounting perspective with the assessment of CESE and which does not constitute a tax expense under article 23-A, section 1, subparagraph q) of the CIRC."

m) D... carried out the assessment and payment of CESE, relating to the year 2014, such contribution amounting to € 284,837.18. [cf. document no. 11 attached to the AP and AF]

n) Under Service Order no. OI2016..., of 16.08.2016, D... was subject to an internal partial scope tax inspection procedure, relating to the period of 2014, under IVA and IRC, carried out with the objective of verifying the regularity of the operations carried out. [cf. document no. 11 attached to the AP and AF]

o) As a result of that inspection action, purely arithmetic corrections were made to 2014 taxable profit, because D... had not added "to taxable profit the amount of 284,837.18 Euros, corresponding to the expense with the payment of CESE (Extraordinary Contribution for the Energy Sector) with reference to the period of 2014, which it recorded by debit of account 8123 – CESE Tax, and such value, pursuant to article 23-A, section 1, subparagraph q) of the CIRC, does not constitute a tax deductible expense", with the grounds stated in the respective Tax Inspection Report which is wholly reproduced and from which it is important here to extract the following segment [cf. document no. 11 attached to the AP and AF]:

"III.1 – CORRECTIONS TO TAXABLE MATTER

III.1.1 – CESE EXPENSE IMPROPERLY CONSIDERED BY THE TAXPAYER AS TAX DEDUCTIBLE: 284,837.18 EUROS

From the analysis of the Form 22 IRC Statement no. 0744-C0875-2, submitted by the company on 201610-25.

With reference to the taxation period of 1 January to 31 December 2014, by comparison with the Simplified Business Information (IES) of the same period, it was verified that part of the value recorded as tax of the period was influencing the taxable result of the period as a negative component (…)

Questioned about the company to justify the fact that it was considering as a tax expense the value of 284,837.18 Euros that it recorded as an expense with income tax of the period, the company indicated that the value in question corresponds to the value paid under the heading of CESE.

Legal Framework:

Article 23-A, section 1, subparagraph q) of the CIRC states that "The following expenses are not deductible for purposes of determining taxable profit, even when recorded as expenses of the taxation period:

a) IRC, including autonomous taxation, and any other taxes that directly or indirectly affect profits;

(…)

q) The extraordinary contribution on the energy sector;"

In the same sense article 12 of CESE (Extraordinary Contribution on the Energy Sector) states:

"The extraordinary contribution on the energy sector is not considered a deductible expense for purposes of application of the corporate income tax."

From the analysis:

As the company indicated, the amount of 284,837.18 Euros corresponds to expenses with CESE – Extraordinary Contribution for the Energy Sector which it recorded by debit of account "812300000 – CESE Tax".

The Group's understanding is that the non-deductibility of CESE violates the constitutional principles of taxation by actual profit and equality, such that the group understands that in light of the Constitution of the Portuguese Republic (which prevails over law) in the self-assessment of the tax the CESE expense is deductible, which is why this amount was not added in field 785 of the Form 22 IRC Statement.

As to the tax deductibility of the CESE expense, the CESE regulation itself provides in its article 12 that "The extraordinary contribution on the energy sector is not considered a deductible expense for purposes of application of the corporate income tax."

In the same sense, the IRC Code, in subparagraph q) of section 1 of article 23-A establishes that "The following expenses are not deductible for purposes of determining taxable profit even when recorded as expenses of the taxation period: (…) q) The extraordinary contribution on the energy sector;".

It is thus demonstrated that the company did not add to taxable profit the amount relating to the Extraordinary Contribution on the Energy Sector, in the amount of 284,837.18 Euros and which the company reflected as an accounting expense of the period, thereby failing to comply with article 23-A, section 1, subparagraph q) of the CIRC.

Conclusion:

Thus, the taxable result of the company is corrected by 284,837.18 Euros, corresponding to the expense recognized from an accounting perspective with the charge of CESE of the period and not adjusted for purposes of determining taxable result under section 1 of article 17 of the CIRC and which does not constitute a tax expense under article 23-A, section 1, subparagraph q) of the CIRC."

p) E... carried out, on 13.11.2014, the assessment and payment of CESE, relating to the year 2014, such contribution amounting to € 407,215.05. [cf. document no. 11 attached to the AP and AF]

q) Under Service Order no. OI2016..., of 08.04.2016, E... was subject to an internal partial scope tax inspection procedure, carried out with the objective of verifying compliance with tax obligations relating to the period of 2014, under IRC. [cf. document no. 11 attached to the AP and AF]

r) As a result of that inspection action, purely arithmetic corrections were made to 2014 taxable profit, because E... had not added "to taxable profit the amount of 407,215.05 Euros, corresponding to CESE assessed in the period of 2014, recorded as an expense (account 812300000 – CESE Tax), an amount which, pursuant to article 23-A, section 1, subparagraph q) of the CIRC, does not constitute a tax deductible expense", with the grounds stated in the respective Tax Inspection Report which is wholly reproduced and from which it is important here to extract the following segment [cf. document no. 11 attached to the AP and AF]:

"III.1 – CORRECTIONS TO TAXABLE MATTER – IRC

III.1.1 – NON-ADDITION OF CESE (EXTRAORDINARY CONTRIBUTION ON THE ENERGY SECTOR) TO TAXABLE PROFIT: 407,215.05 EUROS

The company carried out on 13-11-2014 the assessment (and payment) of the Extraordinary Contribution on the Energy Sector as per annex extracted from our IT system (see annex 1), such contribution amounting to 407,215.05 Euros.

From the analysis of the Form 22 Income Statement no. ... submitted by the company on 25-05-2015, it is verified that there is no value entered in field 785 of Table 07, which has as its title "Extraordinary contribution on the energy sector [art. 23-A, section 1, subparagraph q)]".

Legal Framework:

Article 23-A, section 1, subparagraph q) of the CIRE states that "The following expenses are not deductible for purposes of determining taxable profit, even when recorded as expenses of the taxation period:

a) IRC, including autonomous taxation, and any other taxes that directly or indirectly affect profits;

(…)

q) The extraordinary contribution on the energy sector;"

In the same sense article 12 of CESE (Extraordinary Contribution on the Energy Sector) states: "The extraordinary contribution on the energy sector is not considered a deductible expense for purposes of application of the corporate income tax."

From the analysis:

Having E... recorded this contribution in the account "812300000 — CESE Tax", as per document attached (see annex 2), the company should have added this value to field 724 (IRC and other taxes that directly or indirectly affect profits [art. 45, section 1, subparagraph a)]) of Table 07 of the Form 22 Income Statement or then in field 785 (Extraordinary contribution on the energy sector [art. 23-A, section 1, subparagraph q)]) of the same table.

Verifying the discrepancy of values in the aforementioned field (724) of the Form 22 Income Statement, the company was questioned regarding such fact, and it responded (our emphasis and bolding) as per document attached (see annex 3):

"The value added in field 724 of Form 22 includes the balances of the following accounts from the trial balance: # 812100000 — Income taxes — estimate: € 313,093.07 (the difference between this value and that contained in the ABDR, € 720,308, corresponds to the value of CESE recorded in account # 812300000 - € 407,215); # 812169000 — Income tax — excess / insufficiency estimate: € 34,815.14".

Not having the company added this value in field 724, it should have included in field 785 (Extraordinary contribution on the energy sector [art. 23-A, section 1, subparagraph q)]) of the aforementioned Table 07. However, E... did not make such addition, justifying itself as follows (see annex 3):

"The Group's understanding is that the non-deductibility of CESE violates the constitutional principles of taxation by actual profit and equality, such that the group observed the constitution (which prevails over law) in the self-assessment of the tax, which is why this amount was not added in field 785 of Form 22."

It is thus demonstrated that the company did not add to taxable profit the amount relating to the Extraordinary Contribution on the Energy Sector, which amounted in 2014 to 407,215.05 Euros and which the company reflected as an accounting expense of the period, thereby failing to comply with article 23-A, section 1, subparagraph q) of the CIRC.

Conclusion:

Thus, the taxable result of the company is corrected by 407,215.05 Euros (in field 785 (Extraordinary contribution on the energy sector [art. 23-A, section 1, subparagraph q)]) of the Form 22 Income Statement), corresponding to the expense recognized from an accounting perspective with the assessment of CESE and which does not constitute a tax expense, under article 23-A, section 1, subparagraph q) of the CIRC."

s) Under Service Order no. OI2017..., the Claimant was subject to an external tax inspection procedure analyzing the Form 22 IRC Income Statement of Group B... (submitted by the Claimant), of partial scope, carried out with the objective of verifying compliance with tax obligations under IRC inherent to the application of RETGS, relating to the period of 2014. [cf. document no. 11 attached to the AP and AF]

t) Within the scope of that inspection procedure, the respective Draft Tax Inspection Report was drawn up which is wholly reproduced here, in which the following corrections to the taxable matter of Group B... were proposed, based on the grounds that follow and are also cited [cf. document no. 11 attached to the AP and AF]:

"I.4 – Brief description of the conclusions of the inspection action

(…)

I.4.1. Corrections to the Taxable Matter of the Group

(…)

I.4.1.2 – Increase in taxable result resulting from corrections made within the individual scope of company "C..., S.A.": 112,865.24 Euros

In compliance with Service Order no. OI2016..., an external inspection procedure of general scope was carried out, relating to the period of 2014, of company C..., S.A. — Tax ID..., from which resulted corrections to the individual declared taxable profit in the total amount of 112,865.24 Euros.

Thus being, and taking into account that in accordance with the provision of article 70, section 1 of the IRC Code, the taxable result of the group is constituted by the sum of the taxable profits and tax losses of each of the companies that comprise it, the corrections made to the individual result of the company referred to above will be reflected in the result declared by the group, according to what is stipulated in that provision (…).

I.4.1.3 – Increase in taxable result resulting from corrections made within the individual scope of company "E..., Ltd.": 407,215.05 Euros

In compliance with Service Order no. OI2016..., an internal inspection procedure of partial scope was carried out, relating to the period of 2014, of company E..., Ltd., Tax ID..., from which resulted corrections to the individual declared taxable profit in the total amount of 407,215.05 Euros.

Thus being, and taking into account that in accordance with the provision of article 70, section 1 of the IRC Code, the taxable result of the group is constituted by the sum of the taxable profits and tax losses of each of the companies that comprise it, the corrections made to the individual result of the company referred to above will be reflected in the result declared by the group, according to what is stipulated in that provision (…).

I.4.1.4 – Increase in taxable result resulting from corrections made within the individual scope of company "D..., S.A.": 284,837.18 Euros

In compliance with Service Order no. OI2016..., an internal inspection procedure of partial scope was carried out, relating to the period of 2014, of company D..., S.A. – Tax ID..., from which resulted corrections to the individual declared taxable profit in the total amount of 284,837.18 Euros.

Thus being, and taking into account that in accordance with the provision of article 70, section 1 of the IRC Code, the taxable result of the group is constituted by the sum of the taxable profits and tax losses of each of the companies that comprise it, the corrections made to the individual result of the company referred to above will be reflected in the result declared by the group, according to what is stipulated in that provision (…).

(…)

III – DESCRIPTION OF FACTS AND GROUNDS FOR PURELY ARITHMETIC CORRECTIONS TO TAXABLE MATTER

III.1 – Corrections to the Taxable Matter of the Group

(…)

III.1.2 – Increase in taxable result resulting from corrections made within the individual scope of company "C..., S.A.": 112,865.24 Euros

In compliance with Service Order no. OI2016... an external inspection procedure of general scope was carried out, relating to the period of 2014, of company C..., S.A., with Tax ID... .

The conclusions of the inspection action were communicated to the company, pursuant to section 1 of article 77 of the General Tax Law and are contained in the tax inspection report drawn up by the UGC on 2016-12-06, a copy of which is attached and which constitutes Annex B, which was communicated to the taxpayer in accordance with our letter no. ... of 2016-12-22.

In consequence, the taxable result of the company was corrected by 112,865.24 Euros, corresponding to the expense recognized from an accounting perspective with the assessment of CESE and which did not constitute a tax expense under article 23-A, section 1, subparagraph q) of the IRC Code (…).

The Inspection Report issued for conclusion of the inspection procedure under Service Order OI2016..., is an integral part of the present Tax Inspection Report (Annex B).

III.1.3 – Increase in taxable result resulting from corrections made within the individual scope of company "E..., Ltd.": 407,215.05 Euros

In compliance with Service Order no. OI2016..., an internal inspection procedure of partial scope was carried out, relating to the period of 2014, of company E..., Ltd., with Tax ID... .

The conclusions of the inspection action were communicated to the company, pursuant to section 1 of article 77 of the General Tax Law and are contained in the tax inspection report drawn up by the UGC on 2016-11-09, a copy of which is attached and which constitutes Annex C, which was communicated to the taxpayer in accordance with our letter no. ... of 2016-11-18.

In consequence, the taxable result of the company was corrected by 407,215.05 Euros (in field 785 -Extraordinary Contribution on the Energy Sector [article 23-A, section 1, subparagraph q)] of the Form 22 Income Statement) corresponding to the expense recognized from an accounting perspective with the assessment of CESE and which did not constitute a tax expense under article 23-A, section 1, subparagraph q) of the IRC Code (…).

The Inspection Report issued for conclusion of the inspection procedure under Service Order OI2016..., is an integral part of the present Tax Inspection Report (Annex C).

III.1.4 – Increase in taxable result resulting from corrections made within the individual scope of company "D..., S.A.": 284,837.18 Euros

In compliance with Service Order no. OI2016... an internal inspection procedure of partial scope was carried out, relating to the period of 2014, of company D..., S.A, with Tax ID... .

The conclusions of the inspection action were communicated to the company, pursuant to section 1 of article 77 of the General Tax Law and are contained in the tax inspection report drawn up by the UGC on 2017-12-21, a copy of which is attached and which constitutes Annex D, which was communicated to the taxpayer in accordance with our letter no. ... of 2018-01-11.

In consequence, the taxable result of the company was corrected by 284,837.18 Euros, corresponding to the expense recognized from an accounting perspective with the charge of CESE of the period and not adjusted for purposes of determining taxable result, under section 1 of article 17 of the IRC Code and which did not constitute a tax expense under article 23-A, section 1, subparagraph q) of the IRC Code (…).

The Inspection Report issued for conclusion of the inspection procedure under Service Order OI2016..., is an integral part of the present Tax Inspection Report (Annex D)."

u) The Claimant was notified on 30.10.2018, by the Tax Inspection Services of the Large Taxpayers Unit, of that Draft Tax Inspection Report and to, if it wished, exercise its respective right to a hearing, which the Claimant did according to the terms which are wholly reproduced here. [cf. AF]

v) Subsequently, the respective Tax Inspection Report was drawn up which is wholly reproduced here, the corrections to the taxable matter of Group B... referenced in the proven fact t) being maintained, with the same grounds described there, which was notified to the Claimant on 23.11.2018. [cf. document no. 11 attached to the AP and AF]

w) Subsequently, IRC assessment no. 2018... was issued and notified to the Claimant, dated 12.12.2018, in which the amount to be reimbursed of € 3,425,314.01 was determined. [cf. document no. 12]

x) On 21 February 2019, the Claimant presented the application for establishment of an arbitral tribunal that gave rise to the present case. [cf. Procedural Management System of CAAD]

§2. FACTS NOT PROVEN

1. For purposes of assessment and decision of the case, there are no facts that were not proven.

§3. MOTIVATION AS TO FACTUAL MATTERS

1. The facts pertinent to the determination of the case were chosen and delineated in function of their legal relevance, in light of the plausible solutions of the legal issues, pursuant to the combined application of articles 123, section 2, of the CPPT, 596, section 1 and 607, section 3, of the CPC, applicable ex vi article 29, section 1, subparagraphs a) and e), of the RJAT.

The Tribunal's conviction was based on the facts articulated by the parties, whose adherence to reality was not disputed and on the critical analysis of the documentary evidence brought to the case, including the administrative file.

III.2. LEGAL

§1. MERITS

1. After presenting a "Brief overview of CESE" (articles 82 to 92 of the AP), the first of the axes of the Claimant's argumentation, explained in articles 93 to 122 of the AP, is based on the idea that CESE is an economic cost of its activity and that, as such, should be deductible as are the other costs incurred with, as it says, a "business purpose".

It should be noted, however, that the "business purpose" that the Claimant seeks to link to CESE could never be its payment, but rather the set of options that the Claimant assumed long before the introduction of CESE into our legal order and which led to it subsequently being covered by its scope. What is relevant, therefore, is not to know whether the payment of CESE is, as the Claimant alleges, an inevitable and legitimate cost, but rather to know whether the payment of a supervenient fiscal charge should result in a compensation under IRC that nullifies that additional tax burden.

Now, as to that, the intention of the legislature was clear and unequivocally assumed, both in article 12 of the CESE regime ("The extraordinary contribution on the energy sector is not considered a deductible expense for purposes of application of the corporate income tax."), and in article 23-A of the IRC Code ("The extraordinary contribution on the energy sector is not considered a deductible expense for purposes of application of the corporate income tax."). That is to say, the first argumentative avenue of the Claimant is inadequate to the goal sought insofar as it shifts the discussion to what legitimate costs are for "obtaining or guaranteeing income subject to IRC", when what is at issue are the tax implications resulting from the introduction of a special contribution. Since the problems are different, the response that should be given to the first does not necessarily have to coincide with the solution to be given to the second.

1. A different question, and which constitutes the second axis of the Claimant's argumentation – articles 123 to 157 and 184 to 194 of the AP – is to know whether, by excluding the possibility of CESE taxpayers deducting that contribution in their tax bill (or passing it on to their customers, as also prohibited by article 5 of the CESE Regime, introduced by article 228 of the State Budget Law for 2014 – Law no. 83-C/2013, of 31 December), the legislature did not incur violation of constitutional principles.

The first argumentative avenue that it develops to substantiate that alleged violation of constitutional principles is that of the "absence of special intrinsic motivation" to exclude the deductibility of CESE expenses (section 1, and subparagraph f) of section 2 of article 23 of the CIRC) – as opposed to what occurs with other tax expenses. The Claimant understands, invoking various doctrine and jurisprudence, that the existence of a legal norm (or even two, as in the case) is not sufficient to create an exception to the principle of taxation by actual income, it being necessary that a teleologically-grounded justification constitutionally conforming to that option exist. The Claimant further alleges – articles 158 to 183 of the AP – that this is what happens with the situations provided for in the other subparagraphs of article 23-A of the CIRC.

To that the AT responds with "the legislature's purpose in establishing a 'separation ring' (ring fencing) of this financial contribution, by circumscribing to the energy sector both the tax burden and the potential benefits of the allocation of revenue, isolating it from the rest of the economy." (the AT was referring not only to the non-pass-through of CESE – imposed in article 5 of its regime – and to non-deductibility – imposed in article 12 of its regime – but also to the allocation of the revenue collected to the Fund for Systemic Sustainability of the Energy Sector – provided for in article 11 of its regime). That is, the special intrinsic motivation that animated the said options of the legislature would be in the connection between costs and benefits for energy market operators subject to CESE. In that logic, the possibility for some of those operators to be able to finance such a contribution with the reduction in taxes they would otherwise have to pay would frustrate the teleology of such financial contribution and would create, there indeed, a problem of inequality among those subject to it. Without taking a position on the CESE regime, the Tribunal must recognize that its nature as a financial contribution – its distinctive characteristic from taxes – implies a certain correspondence between the circle of those burdened with its payment and those who are its beneficiaries, at least due to increased costs they transfer to society or to the entity to which its revenue reverts. To that extent, it can be said that the logic of segregating CESE from other taxes not only has an intrinsic justification, but is even indispensable to its nature.

As to the enumeration and attempt at teleological explanation of the other situations of non-deductibility provided for in section 1 of article 23-A of