Derrama Municipal and Group Taxation Regime: AT Legitimacy in IRC Self-Assessment Dispute

Claimant: A…, SGPS, S.A.,

Respondent: Tax and Customs Authority (TCA)

I - REPORT

1. A…, SGPS S.A., with registered office at …, …, NIPC … (Claimant), filed a request for the constitution of an Arbitral Tribunal, in accordance with the provisions of articles 29 and 109 of Decree-Law no. 10/2011 of 20 January (RJAT).

2. The Claimant declared its intention not to proceed with the appointment of an arbitrator, wherefore the constitution of the Arbitral Tribunal was carried out in accordance with the provisions of no. 1 of article 6 and no. 1 of article 11 of the RJAT, with Rui Duarte Morais being appointed as arbitrator.

3. The meeting provided for in subparagraph c) of no. 1 of article 119 of the RJAT took place on 18 April 2013, the date from which the Arbitral Tribunal should be considered duly and regularly constituted.

4. The claim is "to obtain the partial annulment of the self-assessed act of the group relating to the Corporate Income Tax (CIT) for the period 2011, and the condemnation of the Tax Administration (TA) to proceed with the restitution of the amount of tax paid in excess, in the amount of €41,332.84, plus the respective compensatory interest."

II - ON EXCEPTIONS AND PRELIMINARY ISSUES

In its reply, the TA raises various exceptions and preliminary issues, which must be addressed:

A) Lack of Passive Legitimacy

1. The TA contends that it lacks legitimacy to be in court, as the sole defendant, in a matter concerning the assessment of a municipal surtax.

To support this conclusion, it alleges, in summary, that the surtax is a municipal tax, whereby the respective active subjects (the municipalities) have intervention at the level of its assessment, with the TA having only "collection functions for tax revenue (given the method of determining the surtax — which, like the CIT — is self-assessed in the income statement Form 22) and subsequent delivery to the municipality."

Upon consideration,

It is clear from article 14 of the Law on Local Finances (Law no. 2/2007, of 15 January), in its nos. 9 to 11, (as amended by Law no. 64-B/2011) that it is the Directorate-General of Taxes (now, the TA) that has, exclusively, competence for the assessment and collection of municipal surtaxes.

Because only the TA has competence to assess and collect municipal surtaxes, the final part of the initial no. 9 and current no. 10 provides that, without the communication provided therein, there is no provision for the assessment and collection of the surtax.

It is the responsibility of the TA, exclusively, in addition to the collection of tax, to supervise the self-assessments made by taxpayers, to proceed with official assessments that should take place, to decide on claims, etc.

Where the annulment of an assessment act is at issue, the entity with legal competence to perform it (or to whom its performance is legally imputed, as occurs in cases of self-assessment) has the right to stand alone in court, since its intervention in the proceedings is sufficient for the decision to produce all its useful effect.

Since the municipalities are not a legitimate party in the present proceedings, the question of their representation in court is summarily dismissed, namely, the invocation of the provisions of articles 7 of Decree-Law no. 433/99 of 26 October, and no. 2 of article 54 of the ETAF, which, moreover, only apply to taxes administered by the municipalities themselves, which is not the case.

The invoked exception of lack of passive legitimacy of the TA is therefore without merit.

Moreover, it is difficult to understand the invocation of this exception when it is certain that the TA considered itself — and rightly so — competent to examine and rule on the administrative claim filed by the taxpayer, without invoking its lack of legitimacy to do so without the intervention of the interested municipalities.

B) Incident of Induced Intervention

1. While implicitly accepting that this is not a case of necessary joinder, the TA contends that "in view of the legal relationship that is configured here, but equally by reason of the personal and direct interest that the Municipalities have in acting, the induced intervention of the same — in its multiple aspects — appears to be not only necessary, but even essential in the present arbitral proceedings, in light of articles 325 et seq. of the Civil Procedure Code, which appears pertinent to raise as a procedural incident."

Upon consideration,

1. The rules governing judicial review proceedings are subsidiarily applicable to arbitral review proceedings (article 29.2 of the RJAT). Now, in this process, the only incidents that the law expressly admits are those referred to in article 127.2, no. 1, of the CPPT.

2. It is not possible to accept the induced intervention of the tax creditor as an atypical incident for two reasons: first, because tax review, in the tax domain, continues to be understood as "a proceeding against an act" (objective conception of proceedings), the law considers the intervention of the entity that performed it (or which it believes performed it) to be sufficient.

Second, because the request for induced intervention, if granted, would result in manifest futility, given that the municipalities are not bound by the jurisdiction of the CAAD, such binding which, according to legal terms, must be made in a generic manner. That is, even assuming, by hypothesis, that the municipalities in question would accept to intervene in the present dispute, the arbitral decision would not bind them.

There is, therefore, neither legal basis nor practical interest for the procedural intervention of the tax creditor, as such (when the latter is not the tax administration, is not the one who assesses and collects the tax).

1. The TA further contends that the inadmissibility of the intervention of the municipalities in question, in the present dispute, "would constitute a violation of the principles of access to justice and effective judicial protection, constitutionally established."

We believe this to be incorrect.

In reality, in tax proceedings there is only one interest to be considered: that of the legality of taxation, here embodied in the assessments under challenge.

The financial interest of the municipalities is merely a reflected interest, without substantive and procedural autonomy, since they only have the right to make their own the revenue from taxes assessed and collected in accordance with legal terms.

The defense of legitimate interests in the collection of taxes (the legality of their assessment) is the responsibility of the competent tax administration which, in this case, is, as we have seen, the TA.

Furthermore, it should be considered that the municipalities in question are duly represented in court by the TA, by virtue of "a necessary mandate, a kind of delegation of public law" (Saldanha Sanches, "The Surtax, Natural Resources and the Problem of Revenue Distribution among Municipalities," Taxation, no. 38, p. 139), that is, they have a real possibility of asserting their legitimate interests in court.

1. Precisely because tax law is governed by a principle of strict adherence to law, the "inconveniences" that, according to the allegations, will result to the municipalities from a favorable outcome of the claim, namely the fact that there will be restitution of amounts wrongfully received, alterations to their debt limits, etc., could never be considered in the context of decision-making.

C) Incompetence of the Arbitral Tribunal

1. The TA further contends "the incompetence of the Arbitral Tribunal to render a decision on the merits of the matter in dispute, since it will not be able to produce res judicata against the Municipalities, which will have relevant consequences in the event that the Claimant's claim is upheld, leaving it unable to enforce the arbitral decision against the Municipalities, as it will not have the nature of res judicata against them."

Upon consideration,

1. The answer to the question of the arbitral tribunal's competence flows directly from what was decided above, so the consideration of such exception is only now undertaken, which, in other circumstances, would be dealt with first.

Since the Respondent is the entity that has, exclusively, competence to assess and collect the surtax and, therefore, should be considered as having its administration, the competence of the arbitral tribunals functioning in the CAAD with respect to requests for a declaration of illegality of self-assessment acts of this tax flows from this, since articles 1, subparagraph a), and 2, no. 1, of Order no. 112-A/2011, of 12 March, establish the binding of the Directorate-General of Taxes (now TA) to the jurisdiction of the arbitral tribunals functioning in the CAAD which have as their object the examination of claims relating to taxes whose administration is entrusted to them referred to in no. 1 of article 2 of Decree-Law no. 10/2011, of 20 January.

1. We will further add - although it is not within our scope to render an opinion on this issue — that, although the municipalities will not be bound by the arbitral decision, we are certain that this will be sufficient grounds for the TA to proceed with the compensatory operations that may prove necessary in order to restore what has been wrongfully received by them.

III - DISPOSITION

Since all the exceptions and preliminary issues raised by the Respondent are without merit, we find that the parties have legal personality and capacity, that the arbitral tribunal is competent, the parties in court are those having legitimacy therefor, the procedural means is appropriate, the action was timely filed, there are no defects that invalidate the proceeding, whereby it is now necessary to consider the merits of the case.

IV - PROVEN FACTS

The following facts are considered proven, taking into account the documentation attached to the record:

A) The Claimant is part of, as the holding company, Group A…, subject to the Special Tax Treatment Regime for Groups of Companies, in accordance with articles 69 and following of the CIT Code.

B) Such group was constituted, at the date (2011), by ten subsidiary companies, namely: B… S.A., NIPC …; C…, Lda., NIPC …; D…, NIPC …; E…, Lda., NIPC …; F…, S.A., NIPC …; G…, S.A., NIPC …; H…, S.A., NIPC …; I…, S.A., NIPC …; J…, S.A., NIPC …; L… S.A., NIPC …;

C) On 28 May 2012, the respective income tax returns (Forms 22) were filed, relating to the period 2011, with the surtax to be paid calculated according to the taxable profit of each of the subsidiary companies (Docs. 2 to 11, attached to p. i.).

D) The Claimant calculated the surtax to be paid by determining and individually indicating the taxable profit of each of the subsidiary companies, thus determining the total amount of €105,603.20 (Doc. 12, attached to p. 1.).

E) It did so because, when attempting to enter the municipal surtax in the manner it considered correct, the TA's computer system marked it as an "error" and considered the return as "not filed."

F) The TA published Circular Memorandum no. 20132/2008, from the CIT Services Directorate (DSIRC) Circular Memorandum no. 20132/2008, of 14 April, in which it sets forth that the municipal surtax, in relation to companies covered by RETGS, applies to the profit of each one, considered individually.

G) The TA's computer program relating to CIT returns is configured in accordance with this interpretation (cf. the decision on the administrative claim, attached to p. as doc. 14).

H) The Claimant paid the self-assessed tax on 31/05/2012, in accordance with the payment voucher, contained in the PA attached to the record.

I) The Claimant filed, on 4 July 2012, a claim against the self-assessment of CIT for the period 2011 (Doc. 13, attached to p. i.), which was denied by decision of 9 November 2012 (Doc. 14, attached to p. i.).

J) The Claimant, as the holding company of the group mentioned in B), self-determined a taxable profit of €4,284,690.78, for the fiscal year 2011 (Doc. 12, attached to p. i.).

V - ON THE MERITS

1. The main issue to be decided in this proceeding is whether municipal surtaxes, in the case of companies subject to the special tax treatment regime for groups of companies, for 2011, should be based on the group's global taxable profit or on the individual taxable profit of each of the companies forming it, including the holding company.

2. The answer is provided to us in numerous decisions of the superior courts, particularly the Supreme Administrative Court, which constitutes, to our knowledge, settled case law, and also in numerous and settled judgments and arbitral decisions of the CAAD.

For our part, we have no doubt in subscribing to such case law.

1. Making our own, with due deference, the reasoning of arbitral decision no. 106/2012-T, we shall state: in accordance with article 64 of the CIRC, in the wording then in effect, "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 holding company, through the algebraic sum of taxable profits and tax losses determined in the periodic individual statements of each of the companies belonging to the group" and "the amount obtained in accordance with the preceding number is adjusted for the portion of profits distributed among the group companies that is included in the individual taxable bases."

Article 14 of the Law on Local Finances provides that "municipalities may deliberate annually the imposition of a surtax, up to a maximum limit of 1.5% on taxable profit subject to and not exempt from corporate income tax (CIT), which corresponds to the proportion of income generated in their geographic area by taxpayers resident in Portuguese territory who engage, as their principal activity, in a commercial, industrial or agricultural activity and non-residents with a permanent establishment in that territory."

In light of the aforementioned system of determining taxable profit, in cases of taxation according to the special tax treatment regime for groups of companies, the only profit subject to CIT is the global taxable profit of the group.

For this reason, in referring in that no. 1 of article 14 that the surtax may be imposed "on taxable profit subject to and not exempt from corporate income tax" it was justified to interpret that the surtax should have as its base of application the global taxable profit of the group and not that of each of the companies that compose it, since that global taxable profit of the group is the only "taxable profit subject to CIT." The individual profits of each of the companies that make up the group are not subject to CIT, serving only for purposes of determining the consolidated taxable profit of the group, which is the only one subject to CIT.

1. To answer the question sub judice, it is therefore not necessary to invoke any considerations regarding the character of municipal surtax as an ancillary, dependent or independent tax in relation to CIT, but only to consider, as required by the principle of tax typicality, the rule of real incidence of that tax.

2. It is true that Law no. 64-B/2011, of 30 December, amended the wording of no. 8 of article 14 of the Law on Local Finances, which now provides that "when the special tax treatment regime for groups of companies applies, the surtax applies to the individual taxable profit of each of the companies in the group, without prejudice to the provisions of article 115 of the CIT Code."

However, this amendment cannot be given an interpretive nature, as the Supreme Administrative Court also concludes, consistently and repeatedly.

In reality, the recognition of an interpretive nature to a norm must be attended by particular caution, as it is an exception and because of its consequences.

Now, it suffices to note that, in the aforementioned Law no. 64-B/2011 (State Budget Law 2012), the legislator took care to give an interpretive nature to several of its provisions (e.g. articles 141, no. 2, 168 and 212) but did not do so with respect to the provision now in question, which leads us to conclude that such was not its intention.

However, there is a decisive argument that, summarily, resolves the issue: to give an interpretive nature to the new wording of no. 8 of article 14 of the Law on Local Finances would mean, in practical terms, giving retroactive effect to the new norm, in relation to fiscal years already completed at the time the new law came into force. Now, the constitutional prohibition of the retroactivity of tax law (article 103, no. 3 of the Constitution of the Portuguese Republic) absolutely forbids it.

The (self-)assessment now challenged is, therefore, illegal, due to error regarding the legal assumptions, and therefore cannot be upheld.

VI - PARTIAL ANNULMENT OF THE (SELF-)ASSESSMENT

1. It is settled case law that an assessment act is divisible and may be partially annulled, whenever the court has the necessary elements to do so.

Now, in the present case, the claimant expressly requests the partial annulment of the self-assessment it made.

Given that in our tax system the principle of declaration prevails, the statements of taxpayers must be accepted as true, with assessment to be made on the basis thereof, without prejudice to the subsequent audit powers of the Tax Administration. Such assertion is manifestly obvious when, as is the case, it is the responsibility of the taxpayer to determine its tax matter (self-assessment) and the tax due - self-assessment.

1. The Claimant self-determined, under the RETGS, a taxable profit of €4,284,690.78. By application of the maximum legally possible rate (1.5%), the amount of surtax to be paid would be €64,270.36.

It is thus found that the assessment now challenged is excessive by €41,332.84, which part should be annulled.

VII - COMPENSATORY INTEREST

1. The Claimant requests compensatory interest, in accordance with article 43 of the General Tax Law and article 61 of the Tax Procedure Code, since it "followed the generic guidance of the Tax Administration (Circular Memorandum no. 20132/2008, of 14 April 2008, from the DSIRC) in the incorrect completion of the self-assessment in question."

Upon consideration,

1. Article 43, nos. 1 and 2, of the General Tax Law provides that "compensatory interest is due when it is determined, in administrative appeal or judicial review, that there was error attributable to the services resulting in payment of the tax liability in an amount exceeding the legally due amount" and that "error attributable to the services is also considered to exist in cases where, although the assessment is made on the basis of the taxpayer's statement, the latter followed, in its completion, the generic guidance of the tax administration, duly published."

2. The situation in question falls entirely within the scope of these legal provisions (the Claimant had to complete its statement in accordance with the interpretation contained in such circular memorandum, since only statements completed in those terms were accepted by the computer system).

3. The Claimant therefore has the right to payment of the compensatory interest it requests, calculated from 31/05/2012, the date on which it delivered the self-assessed amount.

VIII - DECISION

In these terms, the decision is as follows:

a) To find totally without merit the exceptions and preliminary issues invoked by the Respondent, the Tax and Customs Authority.

b) To partially annul the assessment under challenge, in the amount of €41,332.84.

c) To order the Respondent to refund such amount (€41,332.84) to the Claimant, plus compensatory interest, calculated from 31/05/2012, in an amount to be calculated in accordance with legal terms (article 43 of the General Tax Law and 61 of the Tax Procedure Code).

d) To order the Respondent to pay the full costs of the proceeding, since the Claimant's claim was considered wholly founded.

VALUE OF THE PROCEEDING: In accordance with the provisions of article 315, no. 2, of the Code of Civil Procedure and 97-A, no. 1, paragraph a), of the Tax Procedure Code and 3, no. 2, of the Regulation of Costs in Tax Arbitration Proceedings, the value of the proceeding is fixed at €41,332.84.

Lisbon, 24 May 2013

Let notice be given.

The Arbitrator,

Rui Duarte Morais