IRC Deductibility of Employee Costs: CAAD Ruling on Tax Assessment Grounds (144/2014-T)

ARBITRAL DECISION

The Arbitrators Councillor Jorge Lopes de Sousa (designated by agreement of the other Arbitrators), Dr. António Lobo Xavier and Dr. Maria Manuela do Nascimento Roseiro, designated, respectively, by the Claimant and by the Respondent, to form the Arbitral Tribunal, constituted on 16-05-2014, agree as follows:

1. Report

A... LDA, legal person no. ..., with registered office in …, ... (hereinafter referred to as the "Claimant") filed, pursuant to the provisions of subparagraph a), of no. 1, of article 2, in no. 1, of article 3 and of subparagraph a), of no. 1, of article 10, all of Decree-Law no. 10/2011, of 20 January (Legal Regime for Arbitration in Tax Matters – hereinafter referred to only as RJAT), a request for the constitution of the arbitral tribunal in order to review and declare the illegality of the following corporate income tax (IRC) assessments, autonomous taxation and compensatory interest:

a. Assessment no. 2013 ..., of 02-01-2013, relating to the fiscal year 2006, with the amount payable, as it believes, of € 744,638.31;

b. Assessment no. 2013 ..., of 02-01-2013, relating to the fiscal year 2007, with the amount payable, as it believes, of € 679,864.70;

c. Assessment no. 2013 ..., of 02-01-2013, relating to the fiscal year 2008, with the amount payable, as it believes, of € 739,246.26;

d. Assessment no. 2013 ..., of 02-01-2013, relating to the fiscal year 2009, with the amount payable, as it believes, of € 723,643.63.

The TAX AND CUSTOMS AUTHORITY is the respondent.

The Claimant proceeded to designate an arbitrator, Dr. António Lobo Xavier, pursuant to article 6, no. 2, subparagraph b) of the RJAT.

In accordance with the provisions of subparagraph b) of no. 2 of article 6 and of no. 3 of article 11 of the RJAT and within the period provided for in no. 1 of article 13 of the same enactment, the highest official of the Tax Administration service designated as Arbitrator Dr. Maria Manuela do Nascimento Roseiro.

The designated arbitrators designated the third arbitrator, Councillor Jorge Manuel Lopes de Sousa, in accordance with article 11, no. 4 of the RJAT.

The signatories designated to form this collective Arbitral Tribunal accepted the designations, in accordance with the legally provided terms.

In accordance with and for the purposes of the provisions of no. 7 of article 11 of the RJAT, the President of CAAD informed the Parties of this designation on 20-02-2014.

Thus, in compliance with the requirement of no. 7 of article 11 of the RJAT, after the period provided for in no. 1 of article 13 of the RJAT, the collective arbitral tribunal was constituted on 16-05-2014.

The Tax and Customs Authority.

On 11-09-2014, the meeting provided for in article 18 of the RJAT took place, during which witness evidence was produced, followed by written submissions.

The arbitral tribunal was duly constituted and is materially competent to review the claims.

The parties have legal personality and capacity and are entitled to proceed (articles 4 and 10, no. 2, of the same enactment and article 1 of Order no. 112-A/2011, of 22 March).

The case does not suffer from nullities and no further objections were raised.

2. Findings of Fact

2.1. Proven Facts

Based on the elements in the administrative proceedings and file, the following facts are considered proven:

a) The Claimant is a limited liability company, whose business purpose is the melting of copper and its alloys, mainly propellers for boats and the sale of naval equipment (Report of the Tax Inspection that is in the administrative proceedings, the contents of which are considered as reproduced);

b) The two managing partners of the Claimant are B... (NIF …) and C... (NIF …), who are also managing partners of the company "D... Lda.", NIPC …, hereinafter referred to as "D...", which works in association with the Claimant with regard to the production of propellers and blades (Tax Inspection Report);

c) At the beginning of 2009, the production process was divided between the two companies, with the Claimant responsible for the mould production and casting phases and "D..." responsible for the mechanization, polishing and dispatch phases (Tax Inspection Report);

d) The Claimant and "D..." established in 05-05-2005 a company in Morocco, E..., with respective participations of 49.98% and 49.99%, which develops the same activity as the Claimant but directed to the production of small parts (Tax Inspection Report);

e) The Claimant was subject to an external inspection action, carried out by the Finance Directorate of ..., for the fiscal years 2006 to 2009 (Tax Inspection Report);

f) The said inspection action was carried out under the following service orders: OI ..., OI ... and OI ... (Tax Inspection Report);

g) The inspection acts relating to the mentioned service orders were initiated on, respectively, 09-03-2009, 30-06-2009 and 22-05-2012 (Tax Inspection Report);

h) On 27-07-2009, by Dispatch of the Finance Director of ..., the period of the inspection procedure relating to OI... was extended by a further 3 months, with the Claimant being notified of the same by letter no. ..., of 30-07-2009 (Tax Inspection Report);

i) On 03-12-2009, by Dispatch of the Finance Director of ..., the period of the inspection procedure of OI... was again extended by a further 3 months, with the Claimant being notified of the same by letter no. ..., of 04-12-2009 (Tax Inspection Report);

j) On 17-12-2009, by Dispatch of the Finance Director of ..., the period of the inspection procedure of OI... was extended by 3 months, with the Claimant being notified of the same by letter no. ..., of 21-12-2009 (Tax Inspection Report);

k) The inspection action determined by the said service orders, of external procedure and general scope, was aimed at the inspection control, for the years 2006 to 2009 (Tax Inspection Report);

l) The inspection action under service order OI... was initially of limited scope to VAT and, on 15-07-2009, by Dispatch of the Finance Director of ..., the same credential was converted to general scope, with the Claimant being notified of such change and the grounds supporting it, by letter no. ..., of 23-06-2009 (Tax Inspection Report);

m) The inspection action was initially motivated for control of the introduction of goods into free circulation, resulting from data processing by the Directorate of Services for Investigation of Fraud and Special Actions (DSIFAE), in which it was verified that the Claimant presented differences between the values reported for VIES (System of Information on Intra-Community Trade) and the values declared as intra-community acquisitions of goods in VAT declarations, and differences were found between the values declared by the tax and customs services of Spain for imports through that country destined for Portugal and the values declared as intra-community acquisitions of goods in VAT declarations (Tax Inspection Report);

n) On 22-01-2010, a Criminal Investigation Process no. ... was instituted by the Division of Tax Justice of the Finance Directorate of ..., which is pending before the Judicial Police of ..., the reason for its institution being the complaint presented, the existence of strong indications as to the lack of correspondence to reality of the commercial operations carried out with suppliers and the high values recorded in the accounts for cash, banks and partners and the special relationships with the company "D... Lda." and others (Tax Inspection Report);

o) In the course of the investigations carried out under Criminal Investigation Process no. ..., several searches were conducted pursuant to search and seizure warrants, which were carried out on 13-04-2011, at the facilities of the Claimant and "D...", with various documents being seized; 5 DVDs and 1 CD, relating to the computer database and 3 DVDs and 1 CD, relating to the email of the said companies, documents which the Public Prosecutor's Office, on 17-10-2013, authorized the Tax and Customs Authority to use for purposes of quantifying unpaid taxes (Tax Inspection Report);

p) After examining the documents seized in the said search, the Tax and Customs Authority concluded that the Claimant paid its workers overtime, bonuses, holidays and premiums, without the same having been declared and subject to personal income tax IRS (Tax Inspection Report);

q) The Tax and Customs Authority understood that the amounts paid to workers relating to overtime, bonuses, holidays and premiums are "Remuneration for Dependent Work – Category A", in accordance with subparagraph a) of no. 1 and no. 2 of article 2 of the Personal Income Tax Code, and as such subject to IRS (Tax Inspection Report);

r) The Tax and Customs Authority further verified that in compliance with the requirement of subparagraph c) of no. 1 of article 119 of the Personal Income Tax Code, the Claimant declared, in form 10, the income subject to withholding at source, without having subjected to IRS and not declared as such, the productivity bonus, despite being included in the payroll processing, resulting in a difference between the income declared and the amounts processed (Tax Inspection Report);

s) The Tax and Customs Authority concluded that the Claimant paid its workers overtime, sick leave, holidays and premiums, without the same having been declared and subject to personal income tax (IRS), in total amounts of €326,411.78 in 2006, €352,051.29 in 2007, €364,017.00 in 2008 and €168,470.50 in 2009, and calculated that IRS had not been withheld and was missing, in the total amount of € 246,587.00, in accordance with the following tables, relating to IRS not withheld at source in each month and year:

Year 2006

[tables]

Year 2007

[tables]

Year 2008

[tables]

Year 2009

[tables]

t) The Tax and Customs Authority performed various cross-checks between the values accounted for and declared by the Claimant and by its main suppliers, at the level of intra-community and domestic operations, having found that between October and December 2007, the Claimant recorded in its accounts purchases from the company F..., Metal Imports, Lda (NIF …) in the total amount of € 838,083.90 (VAT included), as follows: (Tax Inspection Report)

[table]

u) F... did not declare any amount, either in VAT or in IRC, did not have any accounting element and does not have any business structure, namely not having facilities, nor employees, nor warehouses (Tax Inspection Report);

v) The Tax and Customs Authority concluded that the operations referred to relating to F... were simulated, both as to their true supplier, as to the real value, and as to their nature, and were accounted for as purchases, which affected the results of the fiscal year 2007 through the determination of the Cost of Goods Sold and Materials Consumed, and therefore concluded that they were not fiscally accepted, and decided to correct the taxable profit of the Claimant relating to the year 2007 by € 692,631.31 (Tax Inspection Report);

w) With regard to purchases made by the Claimant from "G..., LDA.", NIF …, hereinafter designated as "G...", the Claimant recorded purchases in the years 2006, 2007 and 2008, in a total amount of € 2,767,846.48, as follows and extracts of account:

Year 2006

[table]

Year 2007

[table]

Year 2008

[table]

x) The Tax and Customs Authority, in the Tax Inspection Report, concluded that all purchases from G... relating to the year 2006 are simulated operations and affected the results of the fiscal year through the determination of the Cost of Goods Sold and Materials Consumed, in the amount of € 798,121.84 (Tax Inspection Report);

y) With regard to the operations recorded with G... relating to the year 2007, the Tax and Customs Authority concluded that there are both real and simulated operations, with the latter having been accounted for as purchases that affected the results of the fiscal year through the determination of the Cost of Goods Sold and Materials Consumed, in the amount of € 563,016.59 (Tax Inspection Report), as shown in the following table:

[table]

z) As for the operations recorded with G... relating to the year 2008, the Tax and Customs Authority concluded that the following invoices have no correspondence with real operations:

[table]

aa) The invoices referred to in the previous subparagraph were accounted for by the Claimant as purchases that affected the results of the fiscal year through the determination of the Cost of Goods Sold and Materials Consumed, in the amount of € 715,894.07;

bb) All amounts relating to the operations with G... were indicated in the Claimant's accounts as having been paid in cash in the year 2006 and, in the years 2007 and 2008, paid by cheques, with the exception of invoice no. 232, indicated as having been paid in cash, with all cheques being withdrawn at bank counters, leaving it unknown who actually received the amounts;

cc) With regard to the operations referred to relating to G..., the Tax and Customs Authority understood that the amounts of € 798,121.84, in the year 2006, of € 563,016.59, in the year 2007, and of € 468,476.07 (€ 715,894.07-247,418.00, a value relating to an invoice no. 232) in the year 2008, are subject to autonomous taxation at the rate of 50%, as they relate to undocumented expenses that were paid, the real beneficiary of such amounts being unknown and supported by the Claimant;

dd) The Claimant bore costs relating to interest on bank loans, which were maintained throughout the years 2006, 2007, 2008 and 2009, which served to finance its assets (Tax Inspection Report);

ee) In the Claimant's financial assets, in account 41 – Financial Investments with Financing Loans to subsidiaries E..., SA, the following debtor balance was presented at the end of each year:

[table]

ff) The Tax and Customs Authority understood that, with these financing loans, the Claimant should obtain interest that would be accounted for as Financial Income and Gains (account 78), a situation that did not occur (Tax Inspection Report);

gg) The Tax and Customs Authority understood that "on the basis of the accounting records it is concluded that "A..." is not obtaining any profit from the loans granted, and in return, is paying and bearing the cost of interest on loans obtained, from which it infers that if it did not grant such loans it would not have to contract such a high amount of loans from banking institutions and, consequently, would have lower financial costs with the payment of interest" and that "not recording any profit or gain from the loans granted, classified as Financial Investments, the costs associated with these investments are not accepted as tax costs, in accordance with article 23 of the Corporate Income Tax Code, and the bank interest not accepted is determined proportionally as follows, resulting in a correction to taxable profit of € 124,645.24", in accordance with the following table: (Tax Inspection Report)

[table]

hh) With regard to "Losses on Derivatives", the following is stated in the Tax Inspection Report:

C2) Losses on Derivatives (Account 6873):

"58) In the examination of this account, the documents supporting the accounting records were verified, and it was found that the values accounted for are supported by documents prepared by "A..." (internal documents) that do not demonstrate the losses actually suffered with this type of operations.

1. Faced with this fact, "A..." was requested, through notification made in 2012.10.23, for the documents that justify the calculations and values accounted for in this account, in the years 2008 and 2009, relating to operations with the financial intermediaries, "H..." and "I...",

2. In compliance with the requested, various documents were delivered, which include statements from various accounts and supporting documents, with the movements that occurred and all transactions carried out with "H..." and with "I...". Of these documents, we highlight those relating to the value of the accounts with these companies at the end of each year (2008 and 2009), documents which give us the value of the portfolio of financial securities on 31 December, which we attach in "Annex 31".

3. By consulting these documents, we found that there are two portfolios for each company, one valued in US dollars and another in euros, from which we extracted the following information regarding the value of these, on 31 December of each year:

[table]

1. From these tables, the total value in euros is the value of the portfolios on 31 December of each year, being that the value that should appear in the Balance Sheet, in the Assets, in account 15, values which are in 2008 of € 2,579,574.44 (2,198,752.70+380,821.74) and in 2009 of € 2,891,289.88 (2,609,973.27+281,316.16).

2. By consulting the Balance Sheet, which forms part of the annual statement of accounting and tax information referred to in article 113 of the Corporate Income Tax Code, it is verified that of the values calculated and presented in the previous paragraph, that of the year 2008 is exactly the value accounted for and declared the same, which does not happen for the year 2009 (Annex 32).

3. Comparing the documents with the position of the portfolios at the end of each year, presented in compliance with the notification (Annex 31), with the accounting entries in account 15 – Negotiable Securities and in account 6873 – Losses on Derivatives (excerpts in Annex 33), and with the documents supporting the accounting entries (Annex 34) which were considered insufficient to justify the entries presented, we conclude that the value accounted for in the year 2008 is in accordance with the documents presented, which is not the case for the year 2009, resulting in a correction to taxable profit in the amount of € 2,195,690.52, in accordance with subparagraph a) no. 1 of article 78 of the Corporate Income Tax Code, as follows:

[tables]

ii) With regard to "Particular Management Charges", the following is stated in the Tax Inspection Report, among other things:

C3) Particular Management Charges (Supply and External Services (account 62) and Depreciations of the Fiscal Year (account 66)):

1. In the seized objects, more precisely in the contents of "DVD-DATA4" in the folder "... 2009", we found the Access format file (mdb extension) with the name "COST MOVEMENTS II.mdb", being a database of the inputs of the companies "A..." and "D...", already mentioned above.

2. In this database, most of the expenses of these companies are recorded, if not all of them, with the indication of the distribution of these by section, by brand and by product, informing the real nature of the cost, from which we obtained information that the expenses attributed to management relate to personal expenses of the managers, in which we highlight, for example, wines, gardens, employee, jewellery, house ..., house ..., house ..., rents, etc.

3. To better clarify the above, we show an image that represents a small sample of management expenses:

[image]

1. Despite the nature of these costs being of purely individual interest to the managers and not of collective interest to the company, they were, in most cases, accounted for as costs of the fiscal year in account 62 – Supply and External Services (FSE).

2. With regard to the values accounted for and which relate to "house ..." (property built in ..., Galicia, by partner-manager C... and J...), in addition to the reference in the database of the file 'COST MOVEMENTS II.mdb", we found more proof that the same were invoiced and accounted for, in cost accounts or fixed assets, as if they were works carried out at the facilities of the companies "A..." and "D...".

3. Of the seized objects, we highlight those that were in the office used as an archive for administration and identified in the delivery notice of the PJ, in group IV, where there is a green archive folder with the inscription "House Costs ... (without …)", containing within several invoices issued in the name of "A..." and "D...", but next to these invoices we found budgets and email messages, referring to that they are works or supplies for said house, ordering that in the description of the invoice, a description compatible with supplies or provision of services for the companies be placed, as evidence a small sample is attached in Annex 35.

4. In the accounting of these management charges we found two forms of entry as to the obligation generated by deferred payment. We thus have entries in which the third-party account moved as a credit is a suppliers account (account 22) or other debtors and creditors (account 26) and on the other hand we have moved as a credit the partner account (account 25), two situations that we treat separately.

5. Particular Management Charges, with movements in accounts 22 / 26;

72.1) Joining all the information collected in the seized objects, including files copied from the various computers existing at the "D..." facilities, with the accounting records, regarding personal expenses of management and paid mostly by "A...", we prepared the tables in the annexes (Annex 36 and 37), with their respective means of proof, the contents of which we describe below:

• – The table with the name of "Particular Management Charges", contains all documents accounted for as costs of the fiscal year of "A...", paid by this, but whose nature is of purely individual interest to the managers.

• The table with the name "Depreciations – Investments House ...", contains all documents relating to the construction of the manager's house, accounted for as Tangible Fixed Assets (account 42) or as Fixed Assets Under Construction (account 44), and which were considered as costs of the fiscal year through the Depreciations and Reinstatements.

72.2) Faced with the foregoing, the costs referred to in the above tables are not considered deductible for tax purposes in accordance with article 23 of the Corporate Income Tax Code, resulting in the following correction to taxable profit of €299,594.19.

[table]

1. Particular Management Charges, with movements in account 25:

73.1) For these charges everything mentioned for charges with movements in accounts 22 / 26 applies, with the added burden that there are documents relating to travel and accommodation, without the identification of the buyer, lacking the tax identification number and name, making it impossible to verify the identity of the real beneficiary, therefore they are not properly documented pursuant to subparagraph g) of no. 1 of article 42 of the Corporate Income Tax Code, and therefore cannot be deductible for purposes of determining taxable profit.

73.2) Thus, in accordance with articles 23 and 42 of the Corporate Income Tax Code, the costs with these characteristics are duly identified in the tables in the annexes (Annexes 38, 39, 40 and 41), resulting in summary the following corrections to taxable profit:

[tables]

E) Regularization of balances of third-party accounts, which contribute to the determination of results and taxable profit

1. "A...", at the end of each year, makes regularization entries and reconciliation of third-party accounts, in order to settle them, being materially relevant in tax matters, the movements made in the years 2006, 2008 and 2009.

2. To settle such accounts, "A..." performs operations using the partner account (25), an account designated for this purpose (26310999), the accounts it wishes to settle, and the accounts with which it has special relationships (D..., K..., L..., M...). Moving the accounts to debit or credit without, in most cases, a direct correspondence between the credited account and the debited account. The account …, at the end of the years 2006, 2008 and 2009, is moved as a counterpart of the account for extraordinary income and gains and/or the account for extraordinary costs and losses, as follows:

[diagram]

1. Such entries are supported by internal documents, copies of which are attached to this report in Annex 45, 46 and 47, not being justificatory of the extinction of the obligation to third parties or the right over third parties, not complying with the provisions of subparagraph a) of no. 3 of article 115 of the Corporate Income Tax Code, as well as the rules for the movement of accounts established in the Official Chart of Accounts (POC).

2. Third-party accounts are used to record rights and obligations, whether resulting from sales, purchases, returns, or discounts granted or obtained, as well as to record discharge documents (extinction of obligation or right).

3. In this way, such regularization entries do not evidence any of these operations, and therefore A... proceeded to eliminate the rights it had over customers and/or other debtors, as well as eliminated obligations it had towards suppliers and/or other creditors, without any formal document to and from third parties justifying the operation.

4. Now, these entries constitute positive (when it extinguishes the obligation to pay third parties) or negative (when it extinguishes the right to receive from third parties) quantitative patrimonial variations, and must be reflected in the result accounts, and there should be no compensation of balances representative of liabilities (obligations) with balances representative of assets (rights), so that the accounting information is reliable and provides a true and fair view of the company's financial position.

5. A... recognizes in its accounts, and correctly, that some of these regularization balance values are extraordinary costs and losses (account 69) or extraordinary income and gains (account 79), with the former having different tax treatment, as being costs without supporting documents, they are not accepted as tax costs in accordance with article 23 of the Corporate Income Tax Code, and therefore were correctly added in table 07, in the determination of taxable profit, of the periodic statement of income (form 22 of IRC) to the net result of the fiscal year.

6. With regard to regularizations resulting from the reconciliation of accounts between third parties who are simultaneously customers and suppliers of A..., we consider that they are justified and are not taken into account for the calculation of patrimonial variations.

7. With regard to the regularizations of the balance of the customers account (21) and the account of other debtors (26) in which it is verified that the counterpart is the movement to debit of the partner account (25), we consider that, thus, the partners assumed the rights that the company possessed over these third parties, and therefore such amounts were considered for purposes of calculating advance distributions of profits and taxed as such (Annexes 38, 39, 40 and 41). As for the amounts recorded as a credit to the partner account (25) as a counterpart to balances of suppliers (22) and other creditors (26), they are not accepted as such, because the supporting documents do not prove that the partners have settled the debts to the creditors of A..., or that they have assumed the obligation, amounts that were not accepted for calculation of advance distributions of profits (Annexes 38, 39, 40 and 41).

8. Thus, from these accounting entries for regularization of balances, and after excluding those for which regularization is not accepted, we obtain the following summary table of values that should have been considered in the respective result accounts, the amounts credited to account 25, in the account of extraordinary income and gains and the amounts debited from account 25, in the account of extraordinary costs and losses, supported by the tables in Annex 45, 46 and 47, where it is demonstrated how the said values of each accounting entry for regularization of balances were obtained.

[tables]

1. In accordance with the above, A... should have reflected in those cost and income accounts the corrected value, thus resulting in the following adjustments to the declared values, with the adjustment in the cost account not being supported by supporting documents, it violates the provisions of article 23 of the Corporate Income Tax Code, and therefore, in addition to being deducted, must also be added in the determination of taxable profit, neutralizing the effect of the correction in that account.

[tables]

jj) In the Tax Inspection Report, the corrections relating to IRC and autonomous taxation were summarized as follows:

[table]

kk) On 30-11-2012, a letter was sent to the Claimant and received by it on 04-12-2012, issued by the Finance Directorate of ..., signed by "N...", with the signature affixed under the expressions "On behalf of the Finance Director" and "The Legal Substitute", accompanied by containing a Draft Tax Inspection Report, for the purpose of exercising the right to be heard, in which it states, among other things, the following:

Subject: DRAFT REPORT OF TAX INSPECTION - ARTICLE 60 OF THE GENERAL TAX LAW (LGT) AND ARTICLE 60 OF THE SUPPLEMENTARY REGIME OF THE TAX INSPECTION PROCEDURE (RCPIT)

Esteemed Sir(s),

You are hereby notified that, within a period of 14 days, you may, if you wish, exercise your right to be heard, in writing or orally, on the Draft Tax Inspection Report, which is attached, in accordance with the provisions of article 60 of the LGT and article 60 of the RCPIT.

Opting for the first form, the document that implements the right to be heard should be sent to this Service making mention of the elements contained in Our Reference.

In case you wish to make an oral statement, you should appear, within the same period, at this Service, in order for the record of statements to be drawn up.

(...) (document at page 39 of the document designated "pa2.pdf", attached with the response from the Tax and Customs Authority, the contents of which are considered as reproduced);

ll) The Claimant requested an extension of the period for exercising the right to be heard, and by dispatch of 12-12-2012 from the Finance Director of ... in substitute regime, the extension was granted and the Claimant was notified that the extension was made so that the period reached 15 days (administrative proceedings, document "PA2.pdf");

mm) The Claimant made a statement on the Draft Tax Inspection Report, in the terms contained in the administrative proceedings (document "PA2.pdf"), the contents of which are considered as reproduced, saying, among other things, the following:

"1. Before proceeding, and without endorsing any of the formal irregularities committed in the course of the present inspection procedure, it is noted that the Claimant is prevented from exercising a substantial right to be heard, with reference to the Draft Report that was sent to it, given the following:

a. Lack of approval of the Draft Report by the competent authority;

b. Absence of competence of the authority that practices the notification;

c. Lack of knowledge of the existence of any criminal proceeding against the Claimant;

d. Absence of attachment to the Draft Report of the elements on which the criminal proceedings are based, to which the Tax Administration had access, but not the Claimant, calling into question a full response by the same;

e. Absence of attachment to the Draft Report of the Letters from DSIFAE nos. 2015 and 439, which allegedly gave rise to the Inspection Procedure, the contents of which are unknown and are of fundamental importance to assess the legality of the institution of the analysis procedure;

f. Non-compliance with legal time limits for inspection".

1. However, even so, in strict compliance with the dictates of good faith and cooperation between Tax Administration and taxpayers, embodied in art. 59 of the LGT, it will always be said that the generality of the proposed corrections cannot proceed for the following reason:

a. WITHHOLDING AT SOURCE

• Corrections are proposed to the Claimant concerning payments made to workers, for which the competent withholding at source was not carried out.

• However, although the Tax Administration takes for granted the making of such payments, and, as such, the expenditure of such value by the company does not consider such amounts as a cost for the company, in direct violation of the provisions of art. 23 of the CIRC.

• Therefore, if the correction is made in the IRS context, the correction should also be made in favor of the Claimant, considering the costs with the payments, previously referred to.

b. METAL PURCHASES - SUPPLIER "F..."

• The Tax Administration intends to disregard both the cost and the VAT deducted by the Claimant regarding acquisitions from the said supplier, by considering the respective underlying operations as simulated.

• However, the Tax Administration assumes that the amounts to which such operations relate were actually paid to the supplier and that the respective goods were delivered to the Claimant.

• Moreover, there is no element indicating that the goods to which such operations relate was not used by the Claimant in the exercise of its activity.

• Now, if there is proof of the payments made and of the delivery to the Claimant of the goods to which such payments relate, the Tax Administration is in possession of all the elements to verify that the costs thereof should be accepted for purposes of determining the taxable matter of the Claimant in the IRC context.

• If such costs are not accepted for IRC purposes, the Tax Administration is disrespecting the provisions of art. 23 of the CIRC.

c. FINANCIAL COSTS AND LOSSES – "INTEREST"

• The Administration intends to increase the taxable matter of the Claimant with part of the bank interest borne with financing obtained, by virtue of the Claimant having made loans to the group company "... SA", on a free basis.

• The logic of the Tax Authority is that, since part of the financing would have been made for loans to the subsidiary, which did not pay interest to the Claimant, the respective bank interest could not be a cost as it was not essential to maintain the productive source.

• With all due respect, such logic should not proceed.

• First of all, it is stated that it is unknown how the Tax Administration determined the cost of each financing.

• But beyond that, the bank financings were not obtained for the purpose of supporting treasury of the subsidiary.

• The Claimant obtained the bank financings as a management decision and not to meet the loan to the subsidiary.

• The Claimant had bank deposits, to finance its activity, and it was with own funds that it provided support to the subsidiary, still remaining with capitals for its activity.

• However, as a management decision, it was defined by the Claimant to obtain financing for its activity.

• The bank loans obtained are not related to the support of the treasury of the subsidiary, but to the general activity of the Claimant and even if such support had not occurred, the Claimant would always have obtained the said financing and borne the respective interest.

• Therefore, the referred correction cannot proceed under penalty of violation of the provisions of art. 23 of the CIRC.

d. LOSSES ON DERIVATIVES

• The Tax Administration also states that the taxable matter of the Claimant should be increased, in 2009, in view of the provisions of subparagraph a) of no. 1 of art. 78 of the CIRC, given that in 2009, the Claimant's accounts do not reflect a gain of 2,195,690.52 €.

• According to the Tax Authority, the value accounted for in 2008 is correct, but that of 2009 is wrong.

• Now, also here the Tax Administration does not have reason.

• First of all, the reference made by the Tax Administration to art. 78 of the CIRC is not understood, and it is impossible to understand the grounds for the correction.

• On the other hand, the Tax Authority confuses the value of available funds (Cash Balance) "sent" to H..., that is, the value spent in the asset, with the value of the derivatives portfolio, at each moment, designated by Net Equity.

• The value calculated by the Tax Authority does not exist, because in 2009, the Claimant did not have the advantage that the Tax Administration calculates.

• Indeed, a Claimant error occurred in the 2008 calculation, since, after receiving the Draft Report, the Claimant verifies that the correct would have been to have accounted for a loss (as per annexes to the Draft Report).

• Therefore, instead of the calculation performed, in 2008, the Claimant should have considered as a cost of 4,579,624.22, resulting from the following:

a. Balance of account 15 before 31/12/2008 => 2,981,613.91

b. Net Equity 31/12/2008 => -1,598,010.31

c. Difference => 4,579,624.22

• Therefore, the correction proposed by the Tax Authority cannot proceed

. MOVEMENTS IN PARTNER ACCOUNTS – 25

• The Tax Administration intends further to correct the Claimant in the IRS context by presuming the distribution of profits to partners, with movements that it indicates not accepting.

• Among the referred movements are several deliveries of amounts to partners by the company, accounted for as loans to the same.

• However, the Tax Authority does not intend to accept that they are loans, presuming that they are distributions of profits.

• Now, not only is such correction not shown to be minimally founded from a legal point of view, in clear violation of the provisions of art. 77 of the LGT, but it has no adherence to reality.

1. As for the other corrections, the Claimant will not have the opportunity to make a statement given the insufficient time for the right to be heard granted, to analyze a Draft Report with more than half a thousand pages

THE PRESENT DRAFT REPORT OF CORRECTIONS ABOVE REFERRED TO SHOULD BE ANNULLED, WITH ALL LEGAL CONSEQUENCES

nn) When making a statement in exercise of the right to be heard, the Claimant contests, saying that "for caution", the corrections made regarding the following:

– Withholding at source; metal purchases – supplier "F...";

– financial costs and losses – "interest";

– losses on derivatives;

– movements in partner accounts – 25; regularizations of balances of third-party accounts

oo) On 04-01-2013, the Tax Inspection Report was sent to the Claimant, with the notification letter signed by the Finance Director of ..., in substitute regime (document "pa2.pdf" page 104, attached with the Response from the Tax and Customs Authority, the contents of which are considered as reproduced);

pp) In the Tax Inspection Report, regarding the exercise of the right to be heard, as to the issues raised in its point 1., above transcribed, the following is stated:

2.1.1) With regard to the legal questions invoked in point 1, subparagraphs a) and b) of the said right to be heard, we abstain from making any consideration, as these should be resolved in the appropriate forum.

2.1.2) With regard to the lack of attachment of elements to the draft report, these may be consulted in the respective criminal investigation proceedings, which is known to the taxpayer, since within the same searches were conducted at its facilities, on 2011.04.13, in addition to this matter having been addressed in the various contacts established with its representatives.

2.1.3) During the course of the present inspection action, the Criminal Investigation Process was instituted, as mentioned in chapter II – 2, and therefore the provision of no. 5 of art. 45 of the LGT applies.

qq) On the other questions raised by the Claimant in exercise of the right to be heard, the following is stated in the Tax Inspection Report:

2.2) Point 2 a):

2.2.1) In this point, the taxpayer does not contest the making of these payments to workers nor does it challenge the IRS withholdings calculated.

2.2.2) The taxpayer had knowledge of these payments and did not account for them with the purpose of concealing them from the Tax Administration, either in its sphere or in the sphere of the workers, harming the public treasury.

2.2.3) For such cost to be tax deductible, it is not enough that it be essential; it is necessary to prove it through a fiscally valid document and properly accounted for, a requirement that also emerges from art. 23 of the CIRC and not fulfilled by the taxpayer, as explained in the Decision of the Central Administrative Court North process ….

2.3) Point 2 b):

2.3.1) Such costs are not fiscally accepted because they are not properly documented in accordance with subparagraph g) of no. 1 of art. 42, as these are simulated operations both as to the true supplier, as to the real value of the transaction, as to its nature.

2.3.2) And further, for such cost to be tax deductible, it is not enough that it be essential; it is necessary to prove it through a fiscally valid document, a formal requirement that emerges from art. 23 of the CIRC and not fulfilled by the taxpayer, as explained in the referred Decision of the Central Administrative Court North, process ....

2.4) Point 2 c):

2.4.1) Under normal market conditions, the taxpayer when granting loans to third parties would require interest that would be accounted for as financial income of the company, a situation that did not occur because there are special relationships between the companies, as provided for in art. 58 of the CIRC.

2.4.2) Having verified the absence of such profit in the accounting records of the taxpayer, the Tax Administration chose not to presume interest, correcting the costs accounted for with the bank financings obtained, in proportion to the financing granted to the subsidiary company.

2.4.3) Indeed, if it had not used own funds to finance the subsidiary, it would not have needed to obtain the volume of loans obtained and thus would not have incurred such high financial costs.

2.4.4) In light of the foregoing, there is no evidence of the essentiality of these costs for the realization of profits or gains subject to tax or for the maintenance of the productive source, as provided for in art. 23 of the CIRC.

2.5) Point 2 d):

2.5.1) With regard to this matter, the Tax Administration made a correction to the accounted costs, in the amount of €2,185,416.05 and a correction to the profits not accounted for in the value of €10,274.47, thus resulting in a correction to taxable profit of €2,195,690.52, as better described in point C2 of chapter III.

2.5.2) Such corrections result from values accounted for relating to operations carried out with the financial intermediaries "H..." and "I...", always based on the "Cash Balance" as of 31 December.

2.5.3) Strange is the fact that the taxpayer calls into question the use of the "Cash Balance" indicator only for operations with "H...".

2.5.4) The taxpayer states that "Cash Balance" corresponds to the value of available funds sent to "H...", a situation that does not correspond to reality, taking into account that in 2008, the amount spent is € 3,292,406.64 (page 2/6 of annex 33), while the "Cash Balance" on 31.12.2008 is € 2,198,752.70 (page 3/13 of annex 31. In 2009, the amount sent was € 487,409.18, (page 5/6 of annex 33), while the "Cash Balance" on 31.12.2009 is € 2,609,973.27 (page 7/13 of annex 31).

2.5.5) The legislation cited, art. 78 of the CIRC, refers to the time then in force, having as heading "Financial derivative instruments – general rules".

2.6) Point 2 e):

2.6.1) With regard to this point, we must state that the taxpayer assumes that the balance of the partner account (25) corresponds to advance distributions of profits to the same, and not to loans, having taxed such amount in the IRS context.

2.6.2) The Tax Administration limited itself to correcting the movements accounted for in that account, with the reasons and grounds already exposed in point D) of chapter III, which resulted in benefit to the partners themselves, and calculated the unpaid monthly tax, which should be paid by the 20th of the following month, in accordance with art. 98 of the CIRS.

2.7) Point 2 f):

2.7.1) Also in this point the taxpayer already recognizes in its accounts some values of regularization of balances as extraordinary costs and losses (account 69) or extraordinary income and gains (account 79), adding, in that case (costs), such amounts to the net result, as it understands they are not tax costs in accordance with art. 23 of the CIRC.

2.7.2) The Tax Administration followed the same procedure that the taxpayer adopted and correctly, in cases where such regularizations were not made into costs or profits.

2.7.3) The reasons and grounds of such corrections are described in point E of chapter III, highlighting point 103, where it is stated that there are no documents proving that such payments were made by the partners.

2.8) Point 3:

The relevant text of the Draft Tax Inspection Report corresponds to 52 pages, with the remaining documents being support sheets for the corrections calculated.

Conclusion:

In light of the foregoing, we find that from the analysis of the petition presented by the taxpayer, in exercise of the prior right to be heard, no facts arise capable of producing alterations to the proposals initially contained in the Draft Tax Inspection Report.

rr) On the first page of the Tax Inspection Report, the contents of which are considered as reproduced, there is included, among other things, a dispatch dated 21-12-2012, with the content "I agree", signed by "N..." under the expressions "On behalf of the Finance Director" and "The legal substitute" (page 108 of document "pa2.pdf");

ss) On 02-01-2013, the following assessments were made:

– Corporate Income Tax Assessment no. 2013 ..., relating to the fiscal year 2006, with the amount payable of € 744,638.31 (document no. 1 attached with the request for arbitral opinion, the contents of which are considered as reproduced);

– Corporate Income Tax Assessment no. 2013 ..., relating to the fiscal year 2007, with the amount payable of € 679,864.70 (document no. 4 attached with the request for arbitral opinion, the contents of which are considered as reproduced);

– Corporate Income Tax Assessment no. 2013 ..., relating to the fiscal year 2008, with the amount payable of € 739,246.26 (document no. 7 attached with the request for arbitral opinion, the contents of which are considered as reproduced);

– Assessment no. 2013 ..., relating to the fiscal year 2009, with the amount payable of € 723,643.63 (document no. 10 attached with the request for arbitral opinion, the contents of which are considered as reproduced);

tt) The said assessments were notified to the Claimant accompanied by the interest calculation statements to the Claimant with the statements of account settlement and statements of account settlement which constitute documents nos. 2, 3, 5, 6, 8, 9, 11 and 12 attached with the initial petition, the contents of which are considered as reproduced;

uu) The Claimant filed a gracious complaint regarding the said assessments which was dismissed by dispatch of 29-10-2013, issued by the Finance Director of ..., in substitute regime, in which it expressed agreement with the information contained in document no. 15 attached with the petition

II.8. regarding financial products:

(...)

In this way, it is possible to verify that futures contracts are financial instruments that periodically generate gains or losses, caused by fluctuations in the price of the contracted asset.

Such fluctuations sometimes cause cash outflows from the company to cover contracted positions or cause inflows of cash or credits into the securities portfolio. Thus, the investor has an account with the broker, where the values invested in contracts (margin), commissions, fees, gains, losses, interest, closing of position by reversal or by maturity of the contract are carried. These items sometimes have a credit nature and sometimes a debit nature, so the difference between them reveals a balance, debtor or creditor, which is nothing other than the value of the investment, hence the expression Cash Balance, that is, "cash balance" or "balance in cash".

Another different matter is the liquidation of the portfolio, transforming the buy and sell contracts of the assets into liquidity and adding the current cash value (invested values and corresponding charges and credits for commissions, gains and losses).

Thus, the Cash Balance gives us the current value of the investment in portfolio, the Net Equity gives us the value of the liquidation of that portfolio, which consists of assets (cash, or cash), rights and obligations. Only then can we speak of a net position.

The use of the term Cash Balance, which translates "cash balance", is based, first of all, on the rules of accounting, which are found more specifically treated in accounting guideline no. 17, applicable at the time.

Accounting guideline no. 17 explains the accounting treatment of futures contracts, traded in organized markets, more precisely the treatment upon contracting the same, of commissions and fees, and in daily adjustments of gains and losses.

Now, the claimant did not account for such daily adjustments, which represent the receipts and payments that the company made due to the variations in prices to which such financial products are subject.

Such variations produce gains or losses and must be accounted for, but were not, so on 31.12.2009 the value in account 15 (negotiable securities) has to be adjusted to the real value, which is given to us by the broker/financial company, through the Cash Balance (cash balance). From this adjustment results a loss or gain that will be reflected in the company's results.

In the specific case, and as shown in the table inserted in point 64.2) of Cap. III of the RIT, the claimant should have reflected in results a total loss of 101,694.37€, which results from the difference between the invested value (account 15) plus previous charges and credits to the account and the Cash Balance as of 31.12.2009 (2,992,984.25€ -2,891,289.88€).

Such entry was not made, and a total loss of 2,297,384.89€ was recorded in 2009, calculated taking into account the Net Equity indicator for the financial company H... and the Cash Balance indicator for the financial company I....

It should also be noted that the opening balance of account 15 is determined taking into account the Cash Balance indicator, as that was the indicator used by the claimant for determining losses at each of the financial companies in 2008.

Indeed, and inexplicably, only for the case of the financial company H... in 2009 does the claimant claim that the Net Equity indicator should be used, whereas it itself always used the Cash Balance indicator, including in 2009 itself, for the other financial company, I....

It should also be noted that, in accordance with the referred guideline, the claimant was obliged to have detailed information about the positions to be hedged (financial assets and liabilities), in order to determine if we are dealing with "hedging" or "speculation" operations, as the accounting treatment differs. The claimant did not have any information about this.

On the other hand, the tax legislation on financial derivative instruments, article 78 of the CIRC, restricts the deduction of losses, and only hedging operations are tax deductible (no. 6 of article 78 of the CIRC). The claimant never identified the type of operations practiced.

And further, within hedging operations only losses relating to symmetric positions that are duly identified in an appropriate form, which should integrate the tax documentation process referred to at the time by article 121 of the CIRC, are accepted. The claimant does not have any information about this nor did it demonstrate to the AT that such operations comply with the provisions of the tax legislation.

vv) On 28-01-2010, a criminal investigation with no. ... was instituted, from the Services of the Public Prosecutor's Office of ..., which aims to investigate the crime of tax fraud, in which A... – Lda, and D.., Lda are accused, in which A... and partners (B... and C...), D... and partner (B...), G..., Lda and partners O... and P... were constituted as accused (document attached by the Tax and Customs Authority on 03-09-2014);

ww) In the said investigation, letters rogatory were sent to Spain for F... – Lda, NIF …, and partners to be constituted as accused (document attached by the Tax and Customs Authority on 03-09-2014);

xx) In 2010, searches were carried out at the Claimant's facilities;

yy) The mentioned draft Tax Inspection Report has attached to its first page an opinion from the Team Leader Q... and an opinion from the Division Chief R..., with the following content:

"I confirm.

Should proceed as per the OPINION OF THE TEAM LEADER, alongside.

To C. S."

zz) There is no other dispatch on the first page of the draft Tax Inspection Report;

aaa) On 28-03-2013, the Claimant paid in pending execution proceedings at the Finance Service of ... the amount of € 747,196.08, which included the amount of € 744,638.31, assessed in relation to the year 2006 (document attached with the Claimant's submissions, the contents of which are considered as reproduced);

bbb) On 28-03-2013, the Claimant paid in pending execution proceedings at the Finance Service of ... the amount of € 682,202.41, which included the amount of € 679,864.70 assessed in relation to the year 2007 (document attached with the Claimant's submissions, the contents of which are considered as reproduced);

ccc) On 12-04-2013, the Claimant paid in pending execution proceedings at the Finance Service of ... the amount of € 738,850.42, which included the amount of € 736,329.82, assessed in relation to the year 2008 (document attached with the Claimant's submissions, the contents of which are considered as reproduced);

ddd) On 12-04-2013, the Claimant paid in pending execution proceedings at the Finance Service of ... the amount of € 726,130.98, which included the amount of € 723,643.63, assessed in relation to the year 2009 (document attached with the Claimant's submissions, the contents of which are considered as reproduced);

eee) The Claimant, when it made loans to its subsidiary E..., SA, had large economic resources available, which allowed it to make the loans it made with its own capital (testimony of witness S...);

fff) The production of E..., SA was complementary to the activity of the Claimant, and therefore it was in the interest of the Claimant to maintain the normal operation of the subsidiary, and it was for this purpose that the loans were intended, which functioned as advances for this production (testimony of witness S...);

ggg) The Claimant intended, by strategic choice, to have immediately large amounts, in order to use them in business that might arise (testimony of witness S...);

hhh) The Claimant, in 2009, had two portfolios of futures and options, one being a hedge at the clearing house I... and the other being speculation at the clearing house H... (Testimony of witness T...);

iii) H... did not provide the statutory auditors with the daily indication (daily adjustments) of the values that the Claimant had in portfolio, being requested from H..., by the audit company, at least the indication of the value of the portfolio at the end of each year which, at least that, had to be reflected in the accounts (Testimony of this witness);

jjj) The indication provided by H... to the Claimant's audit company was the Cash Balance, which consisted of the amounts that had been sent by the Claimant, namely the liquidations of futures contracts, the premiums of options and the value paid for the goods in case it was acquired at the end of the contract (Testimony of witness T...);

kkk) The Claimant's audit company, for purposes of applying Accounting Guideline no. 17, the value of the portfolio at each moment was defined by the daily adjustments plus the cash balance and the net equity is what defined that value, with the Claimant having accounted for investments in H... on the basis of this (Testimony of witness T...);

lll) The Claimant had a guarantee associated with its investments in "H..." that relieved it of the need to send money immediately to maintain its positions, in case the net equity (defined in accordance with the previous subparagraph) was negative (Testimony of witness T...);

mmm) In the view of the audit company, in these situations where there is a guarantee, it is not appropriate to reflect in the accounts the value of the portfolio at the end of each year without considering the negative values that may already exist, for which it had not yet been necessary to send amounts or money to the clearing house due to the existence of the guarantee (Testimony of witness T...);

nnn) If there were no guarantee, the value of the Cash balance would be equal to that of the net equity (Testimony of witness T...);

ooo) On 17-10-2012, the Public Prosecutor's Office authorized the use of the documents and information contained in the above-mentioned investigation process, for purposes of quantifying unpaid taxes (page 13 of the Tax Inspection Report).

2.1. Unproven Facts

It was not proven that the Claimant had obtained loans to make loans to its subsidiary E..., SA.

Witness S... stated that the loans obtained by the Claimant, despite having large economic resources available, were motivated by a choice of business strategy, intending to have large amounts to take advantage of business opportunities that interested it.

The Tax Inspection Report, on page 37, confirms that the Claimant had large investments in financial products.

However, it was also not proven that, if it had not made loans to its subsidiary, the Claimant would have obtained the loans that it did obtain.

2.2. Reasoning for the Decision on Findings of Fact

The decision on findings of fact is based on the documentary evidence in the administrative proceedings, mainly from the Tax Inspection Report.

Witnesses S..., T... and U... appeared to testify with impartiality and with knowledge of the facts they reported.

3. Legal Findings

3.1. Question of the Defect in Form of the Notifications of the Assessments and Lack of Reasoning and Defect in Form of the Assessments

The Claimant argues that the notifications of the assessments and statements of account settlement are unintelligible, because, in summary,

– it does not understand the mathematical operations contained therein because from the sum of negative values a positive value is determined;

– nor does it understand whether the notifications of the assessment statements are the notifications of the assessments, whether they merely demonstrate them, or whether the assessment notifications are found in such account settlement documents;

– the corrections recommended in the RIT do not coincide with those in the assessments;

– in these documents a reversal and a supposed settlement are also referred to, without the Claimant being able to understand the legal basis for the same, arriving at a final value that also appears as "amount payable" as in the alleged assessment statements;

– it does not even know whether the aforementioned documentation together relates to the notification of the assessment act or whether it contains other tax acts;

– the assessment statements and the statements of account settlement are contained in autonomous documents, even sent to the Claimant on different dates;

– an average taxpayer, in sagacity, training and tax knowledge, is unable to fully understand what is being notified to it, nor the mathematical operations that led to the determination of the tax payable, to that of the said reversal, or the value of the adjustment of the assessment, or the need for a settlement of accounts;

– therefore, the present assessments cannot in any way proceed due to unintelligibility and in the limit even lack of notification of the assessments to the Claimant, in clear violation of the provisions of articles 36 of the CPPT and 77 of the LGT – duty to provide reasons.

The Tax and Customs Authority responds to these questions by saying, in summary,

– that the reasoning is sufficient when it allows a normal recipient to understand the path of knowledge and evaluation followed by the author of the act, that is, when the recipient may know the reasons that led the author of the act to decide in that way and not another;

– additional assessments have the nature of "mass process", which has repercussions on the form of notifications, namely in the establishment of standardized and computerized reasoning;

– if there was a situation of lack or insufficiency of reasoning, it was up to the Claimant to request the issuance of the certificate provided for in article 37 of the CPPT and, in not doing so, the defect is cured;

– in the specific case, the contextual reasoning allowed its recipient to know the reasons of fact and law that led the Respondent to make the decision in question, with that meaning and content.

3.1.1. Defects in Notification

First of all, a distinction must be made between the reasoning of an assessment act and its notification.

The notification of an assessment act is an external act and subsequent to the notified act, and therefore the defects that affect the notification cannot have repercussions on the notified act, which is already practiced and remains as it is with or without notification.

If the act contains reasoning, but this is not properly notified, there would be a defect in the act of notification, subsequent to the notified act, but not a defect of lack of reasoning of the notified act, since the deficiency in notification does not deprive the reasoned act of the reasoning contained therein.

After this clarification, it is also important to clarify the scope of article 37, no. 1, of the CPPT, which establishes that "if the communication of the decision on tax matters does not contain the legally required reasoning, the indication of the means of reaction against the notified act or other requirements required by tax laws, the interested party may, within 30 days or within the period for complaint, appeal or challenge or other judicial means arising from this decision, if shorter, request the notification of the requirements that have been omitted or the passing of a certificate containing them, free of any charge".

As results from the express tenor of this norm, it aims to remedy deficiencies in the "communication" of the decision and not deficiencies in the reasoning of the decision.

The reasoning of the decision must be contained in the act itself in tax matters, directly or by reference, successive or a posteriori reasoning not being admissible.

Therefore, article 37 of the CPPT does not aim to allow the Tax Administration to reason decisions on tax matters that were not initially reasoned, but rather to remedy deficiencies in the notification, subsequently communicating reasons that already formed part of the act. ( [1] )

In the case at hand, the Claimant did not request within the 30-day period provided for in no. 1 of that article 37, the notification of the reasoning requirements that were omitted, and therefore lost the right to demand the remedying of the deficiencies in the notifications of the assessments.

3.1.2. Defects in the Reasoning of the Notified Acts

The STA has consistently understood that the reasoning of the administrative or tax act is a relative concept that varies depending on the type of act and the circumstances of the specific case, but that the reasoning is sufficient when it allows a normal recipient to become aware of the path of knowledge and evaluation followed by the author of the act to make the decision, that is, when that person may know the reasons why the author of the act decided as it did and not differently, so as to be able to trigger the administrative or contentious mechanisms of challenge. ( [2] )

With regard to the specific deficiencies in reasoning that the Claimant refers to, the elements notified to it contain the elements for the average recipient, in the situation in which the Claimant found itself (being aware of the original IRC assessments relating to the years in question and the inspection report), to become aware of the reasons why the assessments were made.

In fact, as to the alleged differences in values of the corrections proposed in the Tax Inspection Report and those considered in the assessments, the Claimant is not correct, as both in the assessments and in the table of corrections that is in the Tax Inspection Report, the reasons for the quantification of the corrections for each year are clear, which were the ones actually considered in each of the assessments:

– with regard to the year 2006, the Claimant refers that the Tax Inspection Report indicates corrections to the taxable matter in the IRC context in the amount of € 954,851.12 and that in the IRC assessment indicates the corrected amounts of € 1,238,287.99, but it is obvious, in light of the comparison of the columns of "Previous Assessment Amounts" and "Corrected Amounts" that that amount of € 954,851.12 is the difference between the value of the previous taxable matter, of € 283,436.87 and the result of the corrections (1,238,287.99 - 283,436.87 = 954,851.12);

– similarly, for the year 2007, the Tax Inspection Report indicates corrections to the taxable matter in the amount of € 1,365,116.67, and the IRC assessment indicates corrected amounts of € 2,125,527.14, this value resulting from the difference between the latter and the taxable matter considered in the previous assessment of € 760,410.47 (2,125,527.14 - 760,410.47 = 1,365,116.67);

– identically, for the year 2008, the Tax Inspection Report indicates corrections to the taxable matter in the amount of € 1,312,027.77, and the IRC assessment indicates corrected amounts of € 4,401,742.71, this value resulting from the difference between the latter and the taxable matter considered in the previous assessment of € 3,089,714.94 (resulting from the sum of € 2,104,330.81 and € 985,384.13) (4,401,742.71 - 3,089,714.94 = 1,312,027.77);

– in the same way, for the year 2009, the Tax Inspection Report indicates corrections to the taxable matter in the amount of € 2,506,306.37 ( [3] ), and the IRC assessment indicates corrected amounts of € 6,867,043.61, this value resulting from the difference between the latter and the taxable matter considered in the previous assessment of € 4,360,737.24 (6,867,043.61 - 4,360,737.24 = 2,506,306.37).

Furthermore, as to the reversals referred to in the assessment statements, are indicated, for each one, the assessments to which they relate.

Therefore, it cannot be understood that the said assessments and assessment statements are unintelligible, for the Claimant, who had been the recipient of the previous assessments and was notified of the Tax Inspection Report.

As to the lack of indication that these are additional assessments, it is not clear how the omission can affect the Claimant, since the means for challenging additional assessments and the grounds for declaring their illegality with the grounds invoked by the Claimant are not different from those provided for the challenge of any assessments.

Moreover, if there were a relevant difference for this purpose, noting that this Arbitral Tribunal, as the Claimant itself, understands that these are additional assessments, it would have to reject the request for arbitral opinion that the Claimant presented, as none of the norms of the RJAT or of Order no. 112-A/2011, of 22 March, makes reference to the possibility of additional assessments.

In any case, the Claimant became perfectly aware that these were additional assessments, as can be inferred from the very fact of highlighting the difference, showing deep knowledge on the matter.

Nor is it clear, in this context in which assessments were made that are indeed additional assessments, in what the alleged violation of article 91 of the CIRC can be embodied, in the wording prior to Decree-Law no. 159/2009, of 13 July, which provides, precisely, in its no. 1, with reference to no. 10 of article 83 of the same Code, the possibility of making additional assessments in situations of this type.

Therefore, with the teleological perspective inherent in the referred jurisprudence on the sufficiency of reasoning, it must be concluded that the assessment acts do not suffer from the defect of lack of reasoning or of violation of article 91 of the CIRC.

3.1.3. Defect of Preterition of Essential Legal Formality – Right to Be Heard

3.1.3.1. Question of the Nullity of the Notification for Exercise of the Right to Be Heard

The Claimant argues that, in summary, the notification of the Draft Tax Inspection Report is null, by virtue of the provisions of article 39, no. 9, of the CPPT, and that, therefore, it was not granted the right to be heard before the assessments whose declaration of illegality is requested.

The alleged nullity would result from the Draft Tax Inspection Report, to which the disputed assessments refer, not being "sanctioned by an entity with competence to do so", but only by a Team Leader and a Division Chief, which, in the Claimant's view, do not have competence for the practice of correction acts or for the grant of the right to be heard.

The lack of reason of the Claimant is clear, as to the nullity of the notification.

In fact, article 39, no. 9, of the CPPT, in the wording of Decree-Law no. 160/2003, of 19 July, establishes that "the notification act shall be null in case of lack of indication of the author of the act and, in case it was practiced in the use of delegation or subdelegation of competencies, of the capacity in which it decided, its meaning and its date".

As results from the very tenor of this norm, by referring to "the capacity in which it decided" its field of application are only notified acts that embody decisions, which reveals that it refers to final acts of procedures or others that fall within the concept of administrative acts (defined in article 120 of the Code of Procedure in Administrative Courts), which is obviously not the case of mere draft decisions.

On the other hand, in the case at hand, as results from what was referred to in subparagraph jj) of the findings of fact fixed, the draft Tax Inspection Report was sent to the Claimant through a letter signed by "N...", with the signature affixed under the expressions "On behalf of the Finance Director" and "The Legal Substitute", and therefore the notification contained perfect identification of who had been the author of the "decision" to send the draft to the Claimant.

Therefore, no factual or legal ground is discerned to consider the notification null, by violation of the said article 39, no. 9, of the CPPT.

Furthermore, the incompetence of the subscriber of the said letter is not demonstrated, as it acted in the capacity of Finance Director which is the maximum regional body of the Tax and Customs Authority in the district of ... and, furthermore, article 60 of the Supplementary Regime of the Tax Inspection Procedure, which establishes the regime for notification of the draft tax inspection report for purposes of exercising the right to be heard, does not include any special norm on who has competence to carry out the notification. And, as the maximum regional entity is signing the notification letter, there can be no doubt that the notification of the Draft Tax Inspection Report was submitted "to higher consideration", as the Claimant requires.

In any case, if hypothetically there was some defect derived from whoever subscribed the said letter manifesting the intention to notify the Claimant, that defect would be one of relative incompetence, which in this case would degrade into a non-essential formality, as the goal that was aimed at with the notification was achieved, which was to provide the Claimant with the possibility of exercising the right to be heard, which it indeed exercised.

In fact, for a long time the Supreme Administrative Court has understood that procedural formalities provided for in law degrade into non-essential formalities, without power to invalidate the final act, if, despite them, the goal that the law aimed to achieve with their imposition is achieved. ( [4] )

Therefore, no defect relating to the exercise of the right to be heard occurs in relation to the draft Tax Inspection Report.

3.1.3.2. Question of the Impossibility of Exercising the Right to Be Heard Resulting from Lack of Elements Referred to in the Notification

The Claimant argues that "the notification for exercise of the right to be heard made reference to documentation that was not attached to it – letters from DSIFAE and indication of the existence of criminal proceedings brought against the Claimant", that the "dispatches from DSIFAE would be fundamental for a full exercise of the right to be heard by the Claimant, to ascertain the accusations that were being made to it in the PRIT, as well as to assess the legality of the institution of the inspection process".

The notification for exercise of the right to be heard, which is reproduced, in the essential points in subparagraph jj) of the findings of fact fixed, does not make reference to "letters from DSIFAE" or "dispatches from DSIFAE" or to any criminal proceedings.

However, in the text of the draft Tax Inspection Report, on page 7, the following is stated:

"4) Two reports were attached to the said credential, remitted by the Team for Planning of Tax Inspection of this Finance Directorate, originating from the following letters, remitted by DSIFAE:

4.1) Letter no. …, received at this Finance Directorate as no. …, of 2008.07.11, relating to possible steps to be taken with producers of waste;

4.2) Letter no. …, received at this Finance Directorate as no. …, of 2009.02.20, referring to complaint relating to "A..." related to the payment of undeclared overtime and non-invoicing of repair services for cast parts".

And, on page 8 of the same draft it states the following:

"7) On 2010.01.22, the Division of Tax Justice of this Finance Directorate instituted Criminal Investigation Process no. ..., which is pending before the Judicial Police of ... (PJ), with grounds in the complaint presented; in the existence of strong indications as to the lack of correspondence to reality of commercial operations carried out with suppliers previously identified and with others; to the high values recorded in cash accounts, banks and partners accounts and the special relationships with the company "D..., Transmission Lines and Propulsion, Lda." and others.

However, article 60, no. 5, of the LGT, which establishes what must be notified to the taxpayer for exercise of the right to be heard, indicates only that the "draft decision and its reasoning" must be communicated.

In turn, article 60, no. 1, of the Supplementary Regime of the Tax Inspection Procedure establishes that "once the tax inspection acts have been completed and if they may give rise to acts or matters unfavorable to the inspected entity, this must be notified within 10 days of the draft conclusions of the report, with the identification of such acts and their reasoning".

The right to be heard has constitutional roots, being postulated by article 267, no. 5, of the CRP, which establishes that "the processing of administrative activity shall be subject to special law, which shall ensure the rationalization of the means used by the services and the participation of citizens in the formation of decisions or deliberations that concern them".

But, as results from this norm, the Constitution does not require that for exercise of the right to be heard all information contained in the administrative and tax proceedings be provided to those with an interest in the administrative acts, relegating to "special law" the definition of the terms in which such right will be exercised, terms which may take into account factors of various kinds, including economic and practicability factors.

As can be seen from the said article 60, no. 5, of the LGT, there was a general legislative choice within the scope of the tax proceeding to communicate to the taxpayer for purposes of exercising the right to be heard only the draft decision and its reasoning and not the entire proceeding relating to the decision or all documents referred to that do not constitute grounds for the projected decision.

In the same line, article 60, no. 1, of the RCPIT, which specifies this right in relation to the tax inspection procedure, only requires that the inspected entity be communicated the "draft conclusions of the report, with the identification of such acts and their reasoning".

The reasoning of the draft decision, in light of the jurisprudence of the Supreme Administrative Court already cited, is constituted by the reasons for which whoever formulated the draft decision formulated the draft he did and not any other.

This does not mean that the taxpayer does not have the right to control the formal legality of the decision to begin the inspection, but the fact is that the option was not made to extend the right to be heard to the entire inspection procedure.

In the case at hand, it is not discerned that any of the proposals formulated in the Tax Inspection Report was based on the referred letters or any element of the said investigation proceedings, whose contents are not in the administrative proceedings, nor is it seen that the manner in which the inspection was initiated has anything to do with the reasons for which the decision proposals that were formulated were formulated and not any other.

Therefore, having communicated to the Claimant, for purpose of exercising the right to be heard, the draft decision and its reasoning, it must be concluded that the elements required by law were communicated to it, and therefore there is no violation of the right to be heard for this reason.

Thus, the alleged impossibility of exercising the right to be heard for the reasons invoked cannot be considered demonstrated.

3.1.3.3. Question of Violation of the Right to Be Heard Because the Tax Inspection Report Does Not Address New Elements Raised by the Claimant

The Claimant argues that there was a violation of article 60, no. 7, of the LGT which establishes that "new elements raised in the hearing of taxpayers are necessarily taken into account in the reasoning of the decision".

In the case, the Claimant argues the following:

In response to the notification of the PRIT the Claimant invoked the lack of approval of the same by the competent authority and the absence of competence of the authority that signs the notification of the PRIT.

In relation to such new elements the RIT indicates laconically that:

"we abstain from making any consideration, as these should be resolved in the appropriate forum".

Now, from the foregoing results a direct violation of the provisions of no. 7 of art. 60 of the LGT, which renders illegal all of the proceedings for the disputed assessments, due to lack of analysis of the new elements raised by the Claimant.

Therefore, from the foregoing it is also apodictic that should be annulled

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