IRC Tax Deductibility of Undocumented Expenses and Interest Costs – CAAD Decision 145/2014-T

ARBITRAL DECISION

CAAD: Tax Arbitration

Process No. 145/2014 – T

Subject Matter: Corporation Income Tax (IRC) – notification defects; deductibility of undocumented expenses; deductibility of interest costs.

The Arbitrators Counsellor 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 the Respondent, to constitute the Arbitral Tribunal, constituted on 16-05-2014, agree as follows:

1. Report

"A", LDA, legal entity No. …, with registered office in the Industrial Zone, …, …, (hereinafter referred to as "Claimant") came, in accordance with the provisions of subsection (a) of section 1 of Article 2, in section 1 of Article 3 and subsection (a) of section 1 of Article 10, all of Decree-Law No. 10/2011, of 20 January (Legal Framework of Arbitration in Tax Matters – hereinafter referred to only as RJAT), to request the constitution of the arbitral tribunal with a view to the examination and declaration of illegality of the following Corporation Income Tax (IRC) assessments, autonomous taxation and compensatory interest:

a. Assessment No. 2013 …, dated 02-01-2013, relating to the year 2006, with the amount due, as it considers, of € 28,985.54;

b. Assessment No. 2013 …, dated 02-01-2013, relating to the year 2007, with the amount due, as it considers, of € 23,233.65;

c. Assessment No. 2013…, dated 02-01-2013, relating to the year 2008, with the amount due, as it considers, of € 63,790.42;

d. Assessment No. 2013…, dated 02-01-2013, relating to the year 2009, with the amount due, as it considers, of € 112,564.04.

The PORTUGUESE TAX AND CUSTOMS AUTHORITY is the respondent.

The Claimant proceeded to designate an arbitrator, Dr. António Lobo Xavier, pursuant to Article 6, section 2, subsection (b) of the RJAT.

In accordance with the provisions of subsection (b) of section 2 of Article 6 and section 3 of Article 11 of the RJAT, and within the period provided in section 1 of Article 13 of the same instrument, the highest-ranking official of the Tax Administration service designated as Arbitrator Dr. Maria Manuela do Nascimento Roseiro.

The designated arbitrators designated the third arbitrator, Counsellor Jorge Manuel Lopes de Sousa, in accordance with Article 11, section 4 of the RJAT.

The signatories designated to integrate the present collective Arbitral Tribunal accepted the designations in accordance with legal provisions.

In accordance with and for the purposes of section 7 of Article 11 of the RJAT, the President of the CAAD informed the Parties of this designation on 20-02-2014.

Thus, in accordance with the provision of section 7 of Article 11 of the RJAT, upon the expiration of the period provided in section 1 of Article 13 of the RJAT, the collective arbitral tribunal was constituted on 16-05-2014.

The Portuguese Tax and Customs Authority.

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

The arbitral tribunal was regularly constituted and is materially competent to examine the claims.

The parties have legal personality and legal capacity and are legitimate (Articles 4 and 10, section 2, of the same instrument and Article 1 of Order No. 112-A/2011, of 22 March).

The process does not suffer from any nullities and no further exceptions were raised.

1. Factual Matters

2.1. Proven Facts

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

a) The Claimant is a limited liability company, whose corporate purpose is the manufacture of … and … for the naval industry in particular and for industry in general (Tax Inspection Report contained in the administrative file, the content of which is hereby reproduced);

b) The two managing partners of the Claimant are "B" (TIN …) and "C" (TIN …), who are also managing partners of the company "D – … Portuguese. Lda.", NIPC …, hereinafter referred to as "D", which works in association with the Claimant with respect 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 "D" undertaking the moulding and casting phases and "A" performing the mechanization, polishing and dispatching phases of the parts, with "D" selling raw parts to "A" and "A" in turn providing finishing services to the parts and selling finished parts to other original foreign customers (Tax Inspection Report);

d) "A" and "D" established in 05-05-2005 a company in Morocco, "E", with respective stakes of 49.99% and 49.98%, which carries out the same activity as "D", but directed towards the production of small-sized parts (Tax Inspection Report);

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

f) 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 aforementioned service orders were initiated on 22-05-2012 and concluded on 28-11-2012 (Tax Inspection Report);

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

i) The inspection action carried out under service order … was initially of partial scope relating to IRC and, on 22-12-2009, by a Dispatch of the Finance Director, the same mandate was converted to general scope, and the taxpayer was notified of such alteration and the grounds supporting it on 22-05-2010 (Tax Inspection Report);

j) The inspection action was motivated by the following:

• To verify the necessity of travel and accommodation expenses, rents, representation expenses and other costs, as a result of internal analysis of income declaration form model 22, of IRC for the years 2007, 2008 and 2009;

• To verify the commercial operations between "A" and company "D" due to the special relationships between them, having the same managing partners;

• To verify the operations recorded in the accounting records in the partners' current account;

• Information from supporting documents added within the scope of permanent monitoring, by the Tax Inspection Planning Team of this Finance Department, originating from the following letters, sent by DSIFAE:

• Letter No. …, received at this Finance Department No. …, dated 2008 07 11, concerning possible measures to be taken with producers of waste;

• Letter No. .., received at this Finance Department No. …, dated 2009 02.20, concerning a complaint relating to "A" and "D" related to payment of undeclared overtime and non-invoicing of repair services for cast parts;

• The inclusion of "A" in a criminal investigation process (Tax Inspection Report);

k) On 31-08-2010, the inclusion of "A" was proposed in Criminal Inquiry Process No. …, instituted against company "D", which is pending at the Judicial Police of … (PJ), with grounds: in the special relationships between those companies, in the verification of differences in values recorded in the current accounts of both and the high values recorded in the partners' current account (Tax Inspection Report);

l) In the course of the investigations carried out under Criminal Inquiry Process No. … various searches were carried out, pursuant to search and seizure warrants, having been carried out on 13-04-2011 at the premises of "D" and "A", with the seizure of various documents; 5 DVDs and 1 CD, relating to the computerized database and 3 DVDs and 1 CD, relating to the email of the said companies (Tax Inspection Report);

m) After examining the documents seized in the aforementioned search, the Portuguese Tax and Customs Authority concluded that "A" paid its employees overtime, below-minimum, vacation and bonus payments, without these having been declared and subject to personal income tax (IRS) (Tax Inspection Report);

n) The Portuguese Tax and Customs Authority understood that the amounts paid to workers relating to overtime, below-minimum, vacation and bonus are "Dependent Work Remuneration – Category A", in accordance with subsection (a) of section 1 and section 2 of Article 2 of the IRS Code, and as such subject to IRS (Tax Inspection Report);

o) The Portuguese Tax and Customs Authority further verified that in compliance with what is provided in subsection (c) of section 1 of Article 119 of the IRS Code, the Claimant declared, in form 10, the income it subjected to withholding at source, without having subjected to IRS and without declaring as such the productivity bonus, despite being included in the payroll processing, resulting in a difference between declared income and processed income (Tax Inspection Report);

p) The Portuguese Tax and Customs Authority concluded that the Claimant paid its employees overtime, below-minimum, vacation and bonus payments, without these having been declared and subject to personal income tax (IRS), in the total amount of € 171,908.76 in 2006, € 176,749.49 in 2007, € 245,864.00 in 2008 and € 335,445.00 in 2009, and calculated that IRS had not been withheld and was missing, in the total amount of € 167,830.00, in accordance with the following tables, relating to IRS not withheld at source in each month and year:

Year 2006

[Table]

Year 2007

[Table]

Year 2008

[Table]

Year 2009

[Table]

q) The Claimant incurred 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);

r) In the financial assets of the Claimant, in account 41 – Financial Investments with Financing Loans to the participating company "E", SA, the following balance due was presented at the end of each year:

[Table regarding "E"]

s) The Portuguese Tax and Customs Authority understood that, with these financing loans, the Claimant should obtain interest that would be recorded as Financial Gains and Profits (account 78), which did not occur (Tax Inspection Report);

t) The Portuguese Tax and Customs Authority understood that "based on accounting records it is concluded that 'A' is obtaining no benefit from the loans granted and, conversely, is paying and bearing the cost of interest on loans obtained, drawing from this the inference that if it had not granted such loans it would not have needed to incur such a high volume of loans from banking institutions and, consequently, would have had lower financial costs with interest payments" and that "not recording any benefit or gain from the loans granted, classified as Financial Investments, the costs associated with these investments are not accepted as tax costs, under Article 23 of the IRC Code, with the non-accepted bank interest being determined proportionally as per the following table, resulting in a correction to taxable income of € 195,247.20", in accordance with the following table: (Tax Inspection Report)

[Table regarding "E"]

u) In the Tax Inspection Report the following is stated regarding

Regularization of third-party account balances, which contribute to the determination of results and taxable income:

1. "A", at the end of each year, makes regularization entries and third-party account reconciliation entries, with the objective of clearing them, being materially relevant in fiscal terms, the movements made in the years 2006, 2008 and 2009;

2. To clear such accounts, "A" makes operations using the partners' account (25), an account designated for this purpose (26810999) and the accounts it wishes to clear. Moving the accounts to debit or credit without, in most cases, direct correspondence between the credited account and the debited account. Account 26810999, at the end of the years 2006, 2008 and 2009, is moved by offset against the extraordinary income and gains account and/or the extraordinary costs and gains account, as per the following scheme:

[Scheme follows]

Such entries are supported by internal documents, copies of which are attached to this report in Annex 28, 29 and 30, not justifying the extinction of the obligation to third parties or the right over third parties, not complying with the provisions of subsection (a) of section 3 of Article 115 of the IRC Code, as well as the rules for moving accounts established in the Official Chart of Accounts (POC),

1. 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 receipt documents (extinction of the obligation or right).

2. Thus, such regularization entries of balances do not evidence any of these operations, whereby "A" proceeded to eliminate rights it had over clients and/or other debtors, as well as eliminated obligations it held towards suppliers and/or other creditors, without any formal document to or from third parties justifying the operation,

3. These entries constitute quantitative patrimonial variations positive (when it extinguishes the payment obligation to third parties) or negative (when it extinguishes the right to receive from third parties), which should be reflected in the results accounts, there should be no offsetting of balances representing liabilities (obligations) with balances representing assets (rights), so that the accounting information is reliable and provides a true and fair picture of the company's financial situation;

4. "A" recognizes in its accounting, and correctly so, that some of these regularization values are extraordinary costs and losses (account 69), which in fiscal terms, as these are costs and no supporting document exists, are not accepted as fiscal costs under Article 23 of the IRC Code, whereby they were correctly added in table 07, in the determination of taxable income, of the periodic income declaration (model 22 of IRC), to the net result of the year.

5. Regarding regularizations resulting from account reconciliation between third parties that are simultaneously clients and suppliers of "A", we consider that these are justified and that they are not taken into account for the calculation of patrimonial variations.

6. With respect to regularizations of client account balances (21) and other debtors account (26) in which it is verified that the counterpart of the debit movement of the partners' account (25), it is considered that the partners assume the rights that the company held over those third parties, whereby such amounts are considered as advance against profits and thus taxed. Already the amounts recorded as credit of the partners' account (25) by counterpart of balances of suppliers (22) and other creditors (26), are not accepted as such, because the supporting documents do not prove that the partners have paid the debts to the company's creditors, or that they have assumed the obligation, amounts which were not accepted for the calculation of advance against profits (Annex 21)

7. Thus, from these accounting entries of regularization of balances, and purged of those in which the regularization is accepted, we obtain the following summary table of the values that should have been considered in the respective results accounts, the credit amounts of account 25, in the extraordinary income and gains account and the debit amounts of account 25, in the extraordinary costs and losses account, having as support the tables in Annex 28, 29 and 30 where it is demonstrated how the said values of each accounting entry of regularization of balances were obtained.

[Table follows]

1. In accordance with the above, "A" should have reflected in those cost and profit accounts the corrected value, thus resulting in the following adjustments to the declared values, whereby the correction in the costs account not being supported by a supporting document, violates the provisions of Article 23 of the IRC Code, whereby, in addition to being deducted it should also be added in the determination of taxable income, neutralizing the effect of the correction in that account;

67.1) Corrections to Taxable Income: € 195,165.82.

v) On 30-11-2012, a letter was sent to the Claimant issued by the Finance Department of …, signed by "F", with the signature placed 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 of hearing, in which the following is stated, among other things:

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

To the Honorable [Recipient(s)]

You are hereby notified that within a period of 14 days you may, if you wish, exercise the right of hearing (…) on the Draft Tax Inspection Report, attached, in accordance with the provisions of (…) Article 60 of the RCPIT.

(…). (document at page 32 of the document designated "pa2.pdf", together with the response of the Portuguese Tax and Customs Authority, the content of which is hereby reproduced);

w) The Claimant requested an extension of the period for exercising the right of hearing, and by dispatch of 12-12-2012 of the Finance Director of … in substitute regime, the extension was granted and the Claimant was notified that the extension was granted for a further 5 days (in addition to the 10 days already elapsed) (administrative file, document "PA2.pdf", pages 69 and 74, the contents of which are hereby reproduced);

x) On 19-12-2012, the Claimant made submissions on the Draft Tax Inspection Report, in accordance with the provisions contained in the administrative file (document "PA2.pdf", pages 72 to 83, the contents of which are hereby reproduced), stating, among other things, the following:

"1. Before proceeding, and without conceding to any of the formal irregularities committed in the scope of the inspection procedure in question, it is pointed out that the Claimant is prevented from exercising a substantive right of hearing 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 body;

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

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

d. Absence of attachment to the Draft Report of the elements on which the criminal case is based, to which the Tax Administration had access, but not the Claimant, putting into question a thorough response by it;

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 content of which is unknown and is of fundamental importance to assess the legitimacy of the institution of the inspection procedure under analysis;

f. Non-compliance with legal periods of inspection".

1. Nevertheless, 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 regarding payments made to workers, for which the competent withholding at source would not have been performed.

• However, although the Tax Administration takes for granted the performance of such payments, and thus the incurring of such amount by the company does not consider such amounts as cost to the company, in direct violation of Article 23 of the CIRC.

• Therefore, if the correction is made in the IRS assessment, the correction should also be made in favor of the Claimant, considering the costs with the aforementioned payments.

b. FINANCIAL COSTS AND LOSSES – "INTEREST"

• The Administration intends to increase to the taxable base of the Claimant part of the bank interest borne with financing contracted, due to the Claimant having made loans to the group company "E, S.A.", free of charge.

• The Tax Administration's logic is that, as part of the financing would have been carried out for the loans to the participating company, which did not pay interest to the Claimant, the respective bank interest could not be cost as they were not indispensable for the maintenance of the productive source.

• With due respect, such logic should not proceed.

• First and foremost, it is clarified that it is unknown how the Tax Administration calculated the cost of each financing.

• But beyond that, the bank financings were not contracted for the purpose of supporting treasury of the participating company.

• The Claimant contracted the financings as a management decision and not to meet the loan to the participating company.

• The Claimant has bank deposits to finance its activity, and it was with its own funds that it provided support to the participating company, still having capital for its respective activity.

• However, as a management decision, the Claimant defined to contract financing for its respective activity.

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

• Therefore, the correction referred to cannot proceed under penalty of violation of Article 23 of the CIRC.

(...)

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

TERMS IN WHICH THE DRAFT REPORT OF THE AFOREMENTIONED CORRECTIONS SHOULD BE ANNULLED, WITH ALL LEGAL CONSEQUENCES

y) On 04-01-2013, the Tax Inspection Report was sent to the Claimant, and the notification letter was signed by the Finance Director of …, in substitute regime (document "pa2.pdf" page 84, together with the Response of the Portuguese Tax and Customs Authority, the content of which is hereby reproduced);

z) In the Tax Inspection Report, regarding the exercise of the right of hearing, concerning the questions raised in its point 1, transcribed above, the following is stated:

2.1.1) Regarding the legal questions raised in point 1 subsections (a) and (b) of said right of hearing, we refrain from making any comment, as these should be settled in the appropriate forum.

2.1.2) As regards the lack of attachment of elements to the draft report, these may be consulted in the respective criminal inquiry file, which is known to the taxpayer, as within the scope of the same searches were carried out at his premises on 2011.04.13, and as such matter was addressed in the various contacts established with his representatives.

2.1.3) During the present inspection action, the Criminal Inquiry Process was instituted, as mentioned in Chapter II – 2, whereby section 5 of Article 45 of the LGT applies.

aa) Regarding the other questions raised by the Claimant in the exercise of the right of hearing, the following is stated in the Tax Inspection Report:

2.2) Point 2 a):

2.2.1) In this point, the taxpayer does not contradict the performance of these payments to workers nor disputes the IRS withholding calculated.

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

2.2.3) For such cost to be fiscally deductible, it is not sufficient that it be necessary; it requires proof of it through a fiscally valid document and properly accounted for, a requirement that also emerges from Article 23 of the CIRC and not met by the taxpayer, as explained in the Judgment of the Central Administrative Court North, process 00964/06.0BEPRT.

2.3) Point 2 b):

2.3.1) Under normal market conditions, the taxpayer in granting loans to third parties would require interest that would be recorded as financial profit of the company, a situation which did not occur because there are special relationships between the companies, as provided in Article 58 of the CIRC.

2.3.2) Having verified the non-existence of such profit in the accounting records of the taxpayer, the Tax Administration chose not to presume interest, correcting the costs recorded with the bank financing obtained, in the proportion of the financing granted to the participating company.

2.3.3) In fact, if it had not used its own funds to finance the participating company, it would not have needed to contract the volume of loans obtained and thus would not have incurred such high financial costs.

2.3.4) Based on the above, the necessity of these costs for the realization of profits or gains subject to tax or for the maintenance of the productive source is not verified, as provided in Article 23 of the CIRC.

(...)

2.6) Point 3:

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

Conclusion:

Based on the above, we find that from the analysis of the petition submitted by the taxpayer in the exercise of prior right of hearing, no facts result that are capable of producing changes to the proposals initially contained in the Draft Tax Inspection Report.

bb) On the first page of the Tax Inspection Report, the content of which is hereby reproduced, there is also included a dispatch dated 21-12-2012, with the content "I agree", signed by "F" under the expressions "On behalf of the Finance Director" and "The legal substitute" (page 88 of document "pa2.pdf");

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

– IRC Assessment No. 2013 …, relating to the year 2006, with the amount due of € 28,985.54 (document No. 1 attached with the petition for arbitral pronouncement, the content of which is hereby reproduced);

– IRC Assessment No. 2013 .., relating to the year 2007, with the amount due of € 23,233.65 (document No. 4 attached with the petition for arbitral pronouncement, the content of which is hereby reproduced);

– IRC Assessment No. 2013 …, relating to the year 2008, with the amount due of € 64,971.54 (document No. 7 attached with the petition for arbitral pronouncement, the content of which is hereby reproduced);

– Assessment No. 2013…, relating to the year 2009, with the amount due of € 112,564.04 (document No. 10 attached with the petition for arbitral pronouncement, the content of which is hereby reproduced);

dd) The aforementioned assessments were notified to the Claimant accompanied by demonstrations of assessment of interest to the Claimant with demonstrations of account reconciliation and demonstrations of account reconciliation which constitute documents Nos. 2, 3, 5, 6, 8, 9, 11 and 12 attached with the initial petition, the contents of which are hereby reproduced;

ee) The Claimant submitted a gracious complaint of the aforementioned assessments which was rejected by dispatch of 29-10-2013, issued by the Finance Director of …, in substitute regime, in which she manifested agreement with the information contained in document No. 15 attached with the initial petition, the content of which is hereby reproduced;

ff) On 28-01-2010, a criminal inquiry was instituted with No. …, of the Public Ministry Services of …, which has as its object the investigation of the crime of tax fraud, in which "D", Lda, and "A", Lda are charged, in which "D" and partners ("C" and "D") were constituted as suspects, "A" and partner ("B") were constituted as suspects, "G", Lda and partners "H" and "I" (document submitted by the Portuguese Tax and Customs Authority on 03-09-2014);

gg) In the aforementioned inquiry, letters rogatory were sent to Spain for the constitution as a suspect of "J" Lda, TIN …and partners (document submitted by the Portuguese Tax and Customs Authority on 03-09-2014);

hh) In 2010, searches were carried out at the premises of the Claimant;

ii) The aforementioned draft Tax Inspection Report has affixed to its first page an opinion of the Team Head "K" and an opinion of the Division Head "L", the latter having the following content:

"I confirm.

Proceedings should be made in accordance with the OPINION OF THE TEAM HEAD, alongside.

To C.S."

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

kk) On 21-03-2013, the Claimant paid in tax enforcement proceedings pending at the Finance Service of … the sum of € 28,985.54, assessed in relation to the year 2006 in IRC Assessment No. 2013… (document attached with the Claimant's submissions, the content of which is hereby reproduced);

ll) On 21-03-2013, the Claimant paid in tax enforcement proceedings pending at the Finance Service of … the sum of € 23,233.65, assessed in relation to the year 2007 in IRC Assessment No. 2013… (document attached with the Claimant's submissions, the content of which is hereby reproduced);

mm) On 21-03-2013, the Claimant paid in tax enforcement proceedings pending at the Finance Service of … the sum of € 63,790.42, resulting from the account reconciliation relating to IRC Assessment No. No. 2013…, referring to the year 2008 (document attached with the Claimant's submissions, the content of which is hereby reproduced);

nn) On 21-03-2013, the Claimant paid in tax enforcement proceedings pending at the Finance Service of … the sum of € 112,564.04, assessed in relation to the year 2009 in IRC Assessment No. 2013… (document attached with the Claimant's submissions, the content of which is hereby reproduced);

oo) The Claimant, when it made loans to its participating company "E" S.A., had large economic resources, which allowed it to make the loans it made with its own capital (testimony of witness "M");

pp) The production of "E", S.A., was complementary to the activity of the Claimant, whereby it was in its interest to maintain the current operation of the participating company, and it was for this purpose that the loans it made were intended, which functioned as advances for the production of the latter (testimony of witness "M");

qq) The Claimant intended, by strategic choice, to have immediately at its disposal substantial amounts, in order to be able to use them in business that came its way (testimony of witness "M").

2.1. Unproven Facts

It was not proven that the Claimant had contracted loans in order to make loans to its participating company "E" S.A.,.

Witness "M" stated that the loans that the Claimant contracted, despite having large economic resources, were motivated by choice of business strategy, intending to have large sums available to take advantage of business that interested it.

However, it was also not proven that, if it had not made the loans to its participating company, the Claimant would have contracted the loans it contracted.

2.2. Reasoning for the Factual Findings

The decision on the facts is based on the documentary evidence contained in the case file, mainly from the Tax Inspection Report.

Witness "M" appeared to testify with impartiality and with knowledge of the facts he reported.

1. Legal Matters

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

The Claimant contends that the notifications of the assessments and account reconciliation demonstrations are unintelligible, because, in sum,

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

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

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

– in those documents is also mentioned a reversal and a supposed reconciliation, without the Claimant being able to understand the legal basis for the same, arriving at a final value that also appears as "amount due" such as in the alleged assessment demonstrations;

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

– the assessment demonstrations and the demonstrations of account reconciliations are contained in autonomous documents, moreover sent to the Claimant on different dates;

– an average taxpayer, in sagacity, training and tax knowledge cannot fully understand what is being notified to him, nor the mathematical operations that led to the calculation of the tax due, to the mentioned reversal, or the value of the assessment reconciliation, or the need for account reconciliation;

– whereby the present assessments cannot in any way proceed due to unintelligibility and at 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 reasoning.

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

– that the reasoning is sufficient when it allows a normal addressee to understand the cognitive and evaluative course followed by the author of the act, that is, when the addressee may know the reasons that led the author of the act to decide in that manner and not another;

– additional assessments have the nature of "mass proceedings", which impacts the form of notifications, notably in the provision of standardized and computerized reasoning;

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

– in the concrete case, the contextual motivation allowed its addressee to know the factual and legal reasons that led the Respondent to make the decision in question, with that meaning and content.

3.1.1. Defects in Notification

First, it must be distinguished between the reasoning of an assessment act and its notification.

The notification of an assessment act is an external act subsequent to the notified act, whereby the defects affecting the notification cannot have repercussions on the notified act, which is already performed and continues as it is with notification or without it.

If the act contains reasoning, but this is not properly notified, one would be faced with a defect in the notification act, subsequent to the notified act, but not with a defect of lack of reasoning of the notified act, as the deficiency of notification does not deprive the reasoned act of the reasoning it contains.

After this clarification, it is also important to clarify the scope of Article 37, section 1 of the CPPT, which establishes that "if the communication of the tax decision does not contain the reasoning required by law, 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 that from this decision is available, if shorter, request the notification of the requirements that have been omitted or the passage of a certificate containing them, free of any payment".

As results from the express wording 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 tax act itself, directly or by reference, and successive or a posteriori reasoning is not admissible.

Therefore, Article 37 of the CPPT does not aim to allow the Tax Administration to reason tax decisions that were not initially reasoned, but rather to remedy deficiencies in notification, subsequently communicating reasons that already formed part of the act.

In the case at hand, the Claimant did not request within the 30-day period provided for in section 1 of Article 37 the notification of the omitted reasoning requirements, whereby it lost the right to demand the remedying of the notification deficiencies 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 according to the type of act and the circumstances of the concrete case, but that the reasoning is sufficient when it allows a normal addressee to appreciate the cognitive and evaluative course followed by the author of the act to issue the decision, that is, when that party may know the reasons why the author of the act decided as it decided and not differently, in a way that could trigger administrative or contentious impugnation mechanisms. ( [1] )

As regards the reasoning deficiencies that the Claimant itself refers to, the elements notified to it contain the elements for the average addressee, in the situation in which the Claimant found itself (being aware of the original IRC assessments for the years in question and the inspection report) to appreciate the reasons why the assessments were made.

In fact, as regards the alleged differences in the values of the corrections proposed in the Tax Inspection Report and those considered in the assessments, which the Claimant indicates in Article 44 of the initial petition, they have no correspondence with reality, and should be a mistake, as none of the indicated values appears in any of the assessments or in the assessment demonstration documents.

On the other hand, as regards the reversals mentioned in the assessment demonstrations, the assessments to which they refer are indicated.

Therefore, it cannot be understood that the assessments and assessment demonstration documents referred to are unintelligible to the Claimant, who had been the recipient of the previous assessments and was notified of the Tax Inspection Report.

As regards the lack of indication that these are additional assessments, it is not clear how the omission can affect the Claimant, since the means of 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.

Indeed, if there were a relevant difference for this purpose, with this Arbitral Tribunal noting, as the Claimant itself, that these are additional assessments, it would have to reject the petition for arbitral pronouncement 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.

Moreover, the Claimant clearly appreciated that these were additional assessments, as is inferred from the very fact of highlighting the difference, showing profound knowledge on the matter.

Nor is it possible to see, in this context in which assessments were made that are indeed additional assessments, how the alleged violation of Article 91 of the CIRC could be substantiated, in the wording prior to Decree-Law No. 159/2009, of 13 July, which provides, precisely, in its section 1, with reference to section 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 aforementioned case law on the sufficiency of reasoning, it must be concluded that the assessment acts do not suffer from a defect of lack of reasoning or of violation of Article 91 of the CIRC.

3.1.3. Defect of Pretermission of Essential Legal Formality – Right of Hearing

3.1.3.1. Question of Nullity of Notification for Exercise of Right of Hearing

The Claimant contends that, in sum, the notification of the Draft Tax Inspection Report is null, by virtue of Article 39, section 9 of the CPPT, and that, therefore, it was not granted the right of hearing before the assessments whose declaration of illegality is requested.

The alleged nullity would result from the fact that the Draft Tax Inspection Report, to which the contested assessments refer, is not "approved by an entity with competence for that purpose", but only by a Team Head and a Division Head, which, in the Claimant's understanding, do not have competence for the practice of correction acts or for the granting of the right of hearing.

The lack of merit of the Claimant's argument is clear, regarding the nullity of notification.

In fact, Article 39, section 9 of the CPPT, in the wording of Decree-Law No. 160/2003, of 19 July, establishes that "the act of notification shall be null in the case of lack of indication of the author of the act and, in case the latter has practiced it in the use of delegation or subdelegation of competences, of the quality in which it decided, its meaning and its date".

As results from the express wording of this norm, in referring to "the quality in which it decided" its field of application is only acts notified that constitute 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.

Moreover, in the case at hand, as results from what was stated in subsection (u) of the factual matters fixed, the draft Tax Inspection Report was sent to the Claimant through a letter signed by "F", with the signature placed under the expressions "On behalf of the Finance Director" and "The Legal Substitute", whereby 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 seen to consider the notification null, by virtue of Article 39, section 9 of the CPPT.

Moreover, no incompetence of the signatory of said letter is demonstrated, as it acted in the quality of Finance Director, which is the highest-ranking body of the Portuguese Tax and Customs Authority in the district of … and, moreover, Article 60 of the Complementary Regime of Tax Inspection Procedure, which establishes the regime for notification of the draft tax inspection report for the purpose of exercising the right of hearing, does not include any special norm on who has competence to carry out the notification. And, being the highest-ranking regional entity to sign the notification letter, there can be no doubt that the notification of the Draft Tax Inspection Report was submitted "to superior consideration", as the Claimant demands.

Moreover, if hypothetically there were some defect derived from who subscribed the said letter manifesting the intention to notify the Claimant, that defect would be one of relative incompetence, which in the case would be degraded to a non-essential formality, by having achieved the objective sought with the notification, which was to provide the Claimant the possibility of exercising the right of hearing, which it effectively exercised.

In fact, for a long time the Supreme Administrative Court has understood that the procedural formalities provided by law are degraded to non-essential formalities, without invalidating power of the final act, if, despite them, the objective sought by the law with its imposition is achieved. ( [2] )

Therefore, no defect occurs relating to the exercise of the right of hearing with respect to the draft Tax Inspection Report.

3.1.3.2. Question of the Impossibility of Exercising the Right of Hearing Derived from Lack of Elements Referred to in the Notification

The Claimant contends that "the notification for exercise of the right of hearing made reference to documentation that was not attached to it – letters from DSIFAE and indication of the existence of a criminal inquiry against the Claimant", that the "dispatches from DSIFAE would be fundamental for a thorough exercise of the right of hearing by the Claimant, to assess the accusations made to it in the PRIT, as well as to assess the legality of the institution of the inspection process" (Articles 96 and 97 of the petition for arbitral pronouncement).

The notification for exercise of the right of hearing, which was reproduced, in the essential points in subsection (u) of the factual matters fixed, does not make reference to "letters from DSIFAE" or "dispatches from DSIFAE" or any criminal inquiry.

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

"3.4) Supporting information added, within the scope of permanent monitoring, by the Tax Inspection Planning Team of this Finance Department, originating from the following letters sent by DSIFAE

• Letter No. …, received at this Finance Department No. …, dated 2008.07.11, concerning possible measures to be taken with waste producers;

• Letter No. …, received at this Finance Department No. …, dated 2009.02.20, concerning a complaint relating to "A" and "D" related to payment of undeclared overtime and non-invoicing of repair services for cast parts".

3.5) The inclusion of "A" in the criminal inquiry process".

1. On 2010.08.31, the inclusion of "A" was proposed in Criminal Inquiry Process No. …, instituted against company "D"', which is pending at the Judicial Police of … (PJ), with grounds: in the special relationships between those companies, in the verification of differences in values recorded in the current accounts of both and the high values recorded in the partners' current account."

However, Article 60, section 5 of the LGT, which establishes what must be notified to the taxpayer for exercise of the right of hearing, indicates only that the "draft decision and its reasoning" must be communicated.

In turn, Article 60, section 1 of the Complementary Regime of Tax Inspection Procedure establishes that "once the tax inspection acts are concluded and if they may give rise to tax acts or matters unfavorable to the inspected entity, it shall be notified within 10 days of the draft conclusions of the report, with the identification of those acts and their reasoning".

The right of hearing has constitutional roots, being postulated by Article 267, section 5 of the CRP, which establishes that "the processing of administrative activity shall be the subject of special law, which shall ensure the rationalization of the means used by services and the participation of citizens in the formation of decisions or resolutions that concern them".

However, as follows from this norm, the Constitution does not require that for exercise of the right of hearing all information contained in the administrative and tax procedures be provided to those interested in administrative acts, leaving to "special law" the definition of the terms in which such right will be exercised, terms in which various factors may be taken into account, including factors of an economic and practicability nature.

As seen from Article 60, section 5 of the LGT, there was a general legislative choice within the scope of the tax procedure to communicate to the taxpayer for the purpose of exercising the right of hearing only the draft decision and its reasoning and not the entire procedure relating to the planned decision, or all the documents to which reference is made that do not constitute the reasoning of the planned decision.

In the same line, Article 60, section 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 those acts and their reasoning".

The reasoning of the draft decision, in light of the case law of the Supreme Administrative Court already cited, is constituted by the reasons why the one who formulated the draft decision elaborated the draft it elaborated 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 of hearing to the entire inspection procedure.

In the case at hand, it is not clear that any of the proposals formulated in the Tax Inspection Report were based on the letters referred to or any element of the said criminal inquiry, the content of which does not appear in the administrative file, nor is it seen that the way the inspection was initiated has anything to do with the reasons why the decision proposals that were formulated were formulated and not any others.

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

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

3.1.3.3. Question of Violation of the Right of Hearing Due to the Tax Inspection Report Not Pronouncing on New Elements Raised by the Claimant

The Claimant contends that a violation of Article 60, section 7 of the LGT occurred, which establishes that "new elements raised in the hearing of taxpayers are obligatorily taken into account in the reasoning of the decision".

In the case, the Claimant contends the following:

106

In response to the notification of the PRIT, the Claimant raised the lack of approval of the same by the competent body and the absence of competence of the body that signs the notification of the PRIT.

107

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

"we refrain from making any comment, as these should be settled in the appropriate forum".

108

Now, from the above results a frontal violation of the provisions of section 7 of Article 60 of the LGT, which renders unlawful the entire procedure of the contested assessments, due to absence of analysis of the new elements raised by the Claimant.

109

Therefore, equally from the above it is apodictic that the contested assessments should be annulled.

3.1.3.3.1. Assertion of Procedural Illegalities in the Exercise of the Right of Hearing

The duty provided in section 7 of Article 60 of the LGT, to take "into account in the reasoning of the decision" the new elements raised in the hearing of taxpayers, is limited, obviously, to elements that constitute the reasoning of the decision, not establishing a duty of pronouncement on all illegalities that will be invoked by taxpayers in the exercise of the right of hearing, but which do not relate to the reasons for the decision.

Therefore, this duty of pronouncement is connected to and limited by the type of specific procedural decision of each special procedure.

For the special case of the tax inspection procedure, Article 62, section 1 of the Complementary Regime of Tax Inspection Procedure specifies the content of the tax inspection report, establishing, generically, that "a final report is prepared with a view to the identification and systematization of the facts detected and their legal-tax qualification".

And, in section 3 of the same article, the elements that the report must contain are specified:

a) Identification of the inspected entity, namely corporate name, tax identification number, address of registered office and local service to which it belongs;

b) Mention of the alterations to be made to the data contained in the tax administration files;

c) Date of beginning and end of inspection acts and interruptions or suspensions verified;

d) Scope and extent of the procedure;

e) Description of the reasons that gave rise to the procedure, with the indication of the number of the service order or dispatch that motivated it;

f) Complementary information, including the main debtors of the taxpayers and those jointly or severally responsible for the missing taxes;

g) Description of the facts capable of substantiating any type of joint or several liability;

h) Unjustified patrimonial increases or disproportionate expenses incurred by the taxpayer or obligated party in the period to which the inspection relates;

i) Description of the tax-relevant facts that alter the values declared or to be declared subject to taxation, with mention and attachment of the means of proof and legal reasoning supporting the corrections made;

j) Indication of the infringements verified, the notices of infringement drawn up and the correction documents issued;

l) Brief description of the results of the inspection acts and proposals formulated;

m) Identification of the officials who subscribed it, with mention of name, rank and professional number;

n) Other relevant elements.

Neither is included in this list nor in the generic formula contained in section 1 of Article 62 of the RCPIT the duty of pronouncement on all illegalities that have been raised in the inspection procedure, namely on questions of incompetence of the entity that determined the notification for exercise of the right of hearing.

In fact, the tax inspection procedure aims at the "determination of the tax situation of taxpayers" (Article 63, section 1 of the LGT), "the observation of tax realities, the verification of compliance with tax obligations and the prevention of tax infringements" (Article 2, section 1 of the Complementary Regime of Tax Inspection Procedure), not being a procedure intended for the determination of procedural illegalities, as is the case, namely, with the gracious complaint.

Therefore, it is understandable and justified that, faced with the assertion of illegalities relating to the competence to order the notification of the draft Tax Inspection Report, the entity to whom it falls to prepare the final report abstained from pronouncing, as this is a matter that goes beyond the determination of the tax situation of taxpayers that it was incumbent upon it to realize in the inspection procedure.

Thus, if the final decision of the special inspection procedure did not have to contain an assessment of the assertion of procedural illegalities, but only what was relevant for the determination of the tax situation of the Claimant, it must be concluded that it did not have to take into account in that decision the elements that were not relevant to ground it.

Therefore, on this point, there is no omission of pronouncement of the decision of the inspection procedure.

3.1.4. Nullity of Notification of the Inspection Report

The nullity of notification of the inspection report is based on grounds identical to those invoked by the Claimant regarding the nullity of notification of the draft report.

The considerations made in point 3.1.3.1 regarding the identical defect that the Claimant imputed to the notification of the Draft Tax Inspection Report apply here, for which reference is made, as regards the requirements of nullity of notification.

On the other hand, in the case at hand, as results from what was stated in subsection (aa) of the factual matters fixed, the Tax Inspection Report was sent to the Claimant through a letter signed by "F", with the signature placed under the expressions "On behalf of the Finance Director" and "The Legal Substitute", whereby the notification contained perfect identification of who had been the author of the "decision" to send the draft to the Claimant.

On the other hand, in this case, the manifestation of agreement with the content of the Tax Inspection Report was issued by the Finance Director of …, in substitute regime, on 04-01-2013, as mentioned in subsection (x) of the factual matters fixed.

Therefore, no nullity is seen in the notification of the Tax Inspection Report, in light of Article 39, section 9 (in the wording of Decree-Law No. 160/2003, of 19 July), nor any defect of incompetence.

3.1.5. Expiration of the Right to Assess and Burden of Proof

The Claimant invokes the expiration of the right to assess concerning the assessments relating to the years 2006, 2007 and 2008, as the respective assessments were notified in 2013, after four years had elapsed from the beginning of the subsequent calendar years.

The Claimant further contends, in sum, that there is no suspension of the expiration period due to inspection having taken place, as it lasted more than six months and that the expiration period cannot be considered suspended due to the pendency of a criminal inquiry, as the existence, scope, extent, duration of the same is not unknown and whether as a result of the same the expiration period was extended.

Article 45, section 1 of the LGT establishes that "the right to assess taxes expires if the assessment is not validly notified to the taxpayer within a period of four years, when the law does not set another period".

On the other hand, it results from subsection (g) of the factual matters fixed that the inspection was prolonged for more than six months, whereby the suspension of the expiration period of the right to assess provided for in Article 46, section 1 of the LGT is not applicable.

However, in section 5 of Article 45 of the LGT, it is established that "whenever the right to assess concerns facts relating to which a criminal inquiry was instituted, the period referred to in section 1 is extended until the filing or final judgment of the sentence, plus one year".

As results from the express text of this norm, in requiring that the right to assess concerns facts relating to which a criminal inquiry was instituted, for application of the period extension provided in this Article 45, it is necessary, first, that it be proven that the right to assess is based on facts relating to which a criminal inquiry was instituted.

On the other hand, as stated in the judgment of the Central Administrative Court North of 18-01-2012, process 00670/08.1BEBRG, following the judgment of the same Court of 22-04-2010, which it cites, "for that period extension to occur, it is imperative that the underlying tax facts of the (assessments) in question have been the object of an investigation under criminal procedure and a criminal inquiry instituted with respect to them, "which makes sense, as absent the required identity of the facts investigated within the criminal process and those that constitute the premise of the assessment, it is not seen in what way the pendency of that process could affect the exercise of the right to assess taxes""

In fact, in a teleological interpretation of said Article 45, section 5 of the LGT, which bears in mind, alongside the interest in the collection of taxes, the taxpayer's interest and the public interest in legal certainty, inherent in the institute of expiration of the right to assess taxes, and the constitutional principle of necessity in the restriction of taxpayer guarantees, it cannot be understood that, due to the fact that a criminal inquiry was instituted to investigate any fact that may generate a tax debt, the right to assess relating to any facts occurring in the same year is prolonged in accordance with that Article 45, section 5.

Indeed, this relative weighing of the conflicting interests of legal certainty and tax collection must necessarily lead to the conclusion that the extended period is only applicable when the facts serving as the basis for the assessment are investigated in the criminal inquiry, that is, when there was no other way for the Portuguese Tax and Customs Authority to assess within the normal period, safeguarding all interests in confrontation.

In other words, the period extension cannot be understood [as was by the Portuguese Tax and Customs Authority, in light of what is stated in point 5) on page 7 of the Tax Inspection Report] as an incomprehensible "benefit" granted to the Portuguese Tax and Customs Authority to be able to act with less diligence than is normally required in the assessment of taxes, but rather as something that is only tolerable when it is strictly necessary to carry out the assessment, namely when complete knowledge of the facts necessary to carry out the assessment only came to it through the criminal inquiry.

One of the proofs that exist in this process regarding the content of the criminal inquiry is the information provided by the Public Ministry Services of …, that on 28-01-2010, a criminal inquiry with No. … was instituted, which has as its object investigation of the crime of tax fraud, in which "D", Lda and "A", Lda are charged, in which "D" and partners ("B" and "C") were constituted as suspects, "A" and partner ("B") were constituted as suspects, "G", Lda and partners "H" and "I" (document submitted by the Portuguese Tax and Customs Authority on 03-09-2014).

Other elements revealing the facts that are the object of the inquiry are the documents seized in the aforementioned searches referred to in subsection (l) of the factual matters fixed, namely the file folders, the DVDs and a CDs relating to the computerized database and email of the Claimant.

On the other hand, on 17-10-2012, the Public Ministry authorized the use of the documents and information contained in the aforementioned criminal inquiry file for the purpose of quantifying the missing taxes (page 11 of the Tax Inspection Report), which permits the inference that the facts referred to in the documents whose use was authorized are the object of the inquiry.

Thus, taking into account the facts referred to in the Tax Inspection Report as being determined on the basis of elements obtained through the searches, it can be considered demonstrated that the impugned assessments concern facts relating to which a criminal inquiry was instituted insofar as payments to employees of the Claimant [Part III, subsection A) of the Tax Inspection Report], charges relating to management [Part III, subsection B2) of the Tax Inspection Report], and debit and credit movements in account 25 – Partners [Part III, subsection C) of the Tax Inspection Report].

As regards the loans made to the participating company of the Claimant "E", S.A., [Part III, subsection B1) of the Tax Inspection Report] and the regularization of third-party account balances that contribute to the determination of results and taxable income [Part III, subsection D) of the Tax Inspection Report], there is seen in the Report any reference to elements obtained through the searches, with reference being made only to the examination of the accounts.

Based on the above, the period of expiration of the right to assess regarding the facts underlying the IRC assessments that are the subject of this proceeding is the normal period of four years, provided in section 1 of Article 45 of the LGT, as regards the corrections made in the IRC assessment for loans made to the participating company of the Claimant "E", S.A. [Part III, subsection B1) of the Tax Inspection Report] and the regularization of third-party account balances that contribute to the determination of results and taxable income [Part III, subsection D) of the Tax Inspection Report].

Consequently, as none of the rules on suspension of these periods are applicable, the right to assess for the facts referred to relating to the years 2006, 2007 and 2008 expired, respectively, on 01-01-2011, 01-01-2012, and 01-01-2013.

Having the assessments been drawn up on 02-01-2013 and, obviously, notified subsequently, it must be concluded that the assessments relating to those years of 2006, 2007 and 2008 suffer from a defect of violation of law, which justifies their annulment in the part in which the assessments rest on the following corrections:

– as regards the corrections made relating to the loans to the participating company "E", S.A., the right to assess expired in relation to the corrections in the amount of € 30,400.09 (year 2006), € 24,262.56 (year 2007) and € 92,611.34 (year 2008);

– as regards the corrections relating to the regularization of third-party account balances that contribute to the determination of results and taxable income, the right to assess expired in relation to the corrections in the amounts of € 15,470.00 (year 2006) and € 98,874.58 (year 2008).

As regards the portions of the IRC assessments that rested on other corrections, the right to assess did not expire, as the extended period provided for in Article 45, section 5 of the LGT is applicable as regards those relating to the years 2006, 2007 and 2008 and as the assessment was made within the period referred to in section 1 of the same article, as regards the assessment of the year 2009.

3.1.6. Question of Consideration as Cost in the Scope of IRC of Expenses that were Given as Proven by the Portuguese Tax and Customs Authority for the Purpose of Assessment Due to Failure to Withhold at Source IRS

As regards the years 2006, 2007, 2008 and 2009, the Portuguese Tax and Customs Authority understood that there were payments to workers subject to IRS in the total amounts of € 171,908.76 in 2006, € 176,749.49 in 2007, € 245,864.00 in 2008 and € 335,445.00 in 2009, [subsections (n) to (p) of the factual matters fixed].

Because these incomes were not declared in the model 10 declaration nor was IRS withheld at source, the Portuguese Tax and Customs Authority assessed IRS due to failure to withhold at source, which in those four years totaled € 167,830.00 [tables of subsection (p) of the factual matters fixed].

The Claimant understands that the expenses with these payments to workers, which were given as proven for the purposes of withholding at source of IRS, should also be considered as deductible costs for the purpose of determining the taxable income of IRC.

The Portuguese Tax and Customs Authority understood in the Tax Inspection Report that for these costs not to be accepted as such for the purposes of IRC, in sum, because they were not documented and accounted for, citing the judgment of the Central Administrative Court North issued in process No. 00964/06.0BEPRT.

Article 17 of the CIRC establishes that "the taxable income of legal entities and other entities mentioned in subsection (a) of section 1 of Article 3 is constituted by the algebraic sum of the net result of the period and the patrimonial variations, positive and negative, verified in the same period and not reflected in that result, determined on the basis of accounting and possibly corrected in accordance with this Code".

Article 23 of the CIRC in the wording prior to Decree-Law No. 159/2009, of 13 July, establishes that "costs or losses are considered those that are demonstrably necessary for the realization of profits or gains subject to tax or for the maintenance of the productive source, namely the following" "charges relating to the production or acquisition of any goods or services, such as materials used, labor, energy and other general manufacturing, preservation and repair expenses".

For there to be deductibility of charges or expenses for the purpose of determining the taxable matter of IRC, it is necessary to know, first of all, whether the charges or expenses existed, that is, to know whether they should or should not be considered proven (1st question).

Then, in case of an affirmative answer to this first question of the existence of expenses or charges, there arises the question of their deductibility for the purpose of determining the taxable matter of IRC (2nd question).

To assess deductibility, already established the existence of the charges or expenses, two questions arise:

a) That the expenses or charges, proven, are also demonstrably necessary for the realization of profits or gains subject to tax or for the maintenance of the productive source (Article 23, section 1 of the CIRC in the wording prior to 2010); it is necessary two proofs to verify this requirement: the proof that the charge existed (1st question) and the proof that it is necessary for those purposes;

b) That it is not expenses or charges, proven, with respect to which there is a special norm prohibiting deductibility (Article 42, section 1, combined with Article 81, section 1), of the CIRC, in the wordings effective before 2010.

These two requirements referred to as the 2nd question to assess the deductibility of expenses or charges that it is proven existed are cumulative, as, to rule out the possibility of deduction, it is sufficient that the necessity is not proven or that one is faced with a situation that can be framed in a special norm that prohibits the deduction.

As stated, when the 2nd question is raised, in any of its aspects, it is necessary to have previously resolved the affirmative 1st question of the proof of the existence of expenses or charges.

In light of this, Article 42, section 1, subsection (g), in which it refers to the non-deductibility of undocumented expenses, only affects the scope of the 2nd question, as an affirmative answer has been given to the 1st.

In fact, the body of section 1 of Article 42, in saying that "the following charges are not deductible for the purpose of determining taxable income, even when accounted for as costs or losses of the year" has as its premise that those charges exist, limiting its statement to define situations in which, despite proving that they exist, the deduction is prohibited.

Therefore, subsection (g), in referring to "improperly documented charges" as being among those that are not deductible, is not regulating requirements to give as proven the existence of charges, the existence of which is already established, despite being improperly documented, but rather stating on their deductibility, defining a prohibition (that is, this subsection only interferes in the resolution of the 2nd question).

Similarly, Article 23 of the CIRC in saying that "Costs or losses are considered those that are demonstrably necessary..." is also presuming that those costs or losses exist, as only proving their existence can the question of necessity be raised.

Article 81, section 1 of the CIRC, in the wordings effective before 2010, confirms that when talking of "undocumented expenses" one is not referring to proof of the existence of expenses.

In fact, Article 81, section 1 of the CIRC, in the wording of Decree-Law No. 198/2001, of 3 July, said that "confidential or undocumented expenses are subject to autonomous taxation, at the rate of 50%, without prejudice to the provisions of subsection (g) of section 1 of Article 42" and in the wording of Law No. 67-A/2007, of 31 December, came to say that "undocumented expenses are subject to autonomous taxation, at the rate of 50%, without prejudice to their non-consideration as cost under Article 23"

In any of the wordings, the reference to "undocumented expenses" reports to expenses which, despite being undocumented, it was proven existed, as, if it was not proven that they existed, they could not constitute taxable matter for autonomous taxation.

Those undocumented expenses which, despite the lack of documentation, are proven and which constitute the taxable matter of autonomous taxation, are the same as those referred to in Article 42, section 1, subsection (g), as non-deductible for the purposes of determining the taxable matter of IRC.

In the case at hand, there is no question that the expenses with worker remuneration exist, as it was proven that they existed.

On the other hand, it was not even questioned by the Portuguese Tax and Customs Authority that such expenses were necessary for the realization of profits, and subsection (d) of section 1 of Article 23 includes remuneration and per diem among the types of deductible expenses.

Therefore, only the question of whether, despite the referred expenses existing and being to be considered necessary for the realization of profits, the deductibility is prohibited by subsection (g) of section 1 of Article 42 of the CIRC, because they are "improperly documented charges", which is the ground invoked by the Portuguese Tax and Customs Authority.

There exists, thus, a legal regime of irrelevance of improperly documented charges for determining taxable income of IRC, despite them existing and being necessary for the realization of profits, as was decided in the judgments of the Central Administrative Court North of 26-04-2012, issued in process No. 0964/06.0BEPRT (which is cited in the Tax Inspection Report as the ground for the correction made) and of 03-05-2012, issued in process No. 00607/08.8BEPNF.

In fact, Article 42, section 1, subsection (g) of the CIRC, in the wording of Decree-Law No. 198/2001, of 3 July, established that "the following charges are not deductible for the purpose of determining taxable income, even when accounted for as costs or losses of the year" "improperly documented charges and expenses of a confidential nature".

This prohibition of deductibility of improperly documented charges was accompanied by the imposition of autonomous taxation, provided in Article 81, section 1, which established that "confidential or undocumented expenses are subject to autonomous taxation, at the rate of 50%, without prejudice to the provisions of subsection (g) of section 1 of Article 42".

Law No. 67-A/2007, of 31 December, amended this subsection (g), which came to refer only to "improperly documented charges", this amendment was accompanied by the amendment of Article 81, section 1 of the same Code, which came to establish that "undocumented expenses are subject to autonomous taxation, at the rate of 50%, without prejudice to their non-consideration as cost under Article 23". ( [3] )

In the context of IRC, an expense may be documented, it may be proven that it was made and even that it was necessary for the obtaining of profits and not be relevant for the purpose of determining taxable income, by pure legislative policy choice, being choices of that type that are underlying most, at least, of the situations of non-deductibility listed in Article 42 of the CIRC, in the wording effective in 2009 (and currently consists of the list in Article 23-A).

Being so, in these special situations in which the CIRC prohibits the deductibility of charges, arguments concerning the lack of probative congruence do not apply, which could be relevant in light of the principle of discovery of material truth, as the non-deductibility has nothing to do with the lack of proof of the existence of the expenses. Certainly, the procedural principle of discovery of material truth, which is underlying the principle of inquisitorialism, which is stated in Article 58 of the LGT, would require that, as a rule, a probative judgment on the existence of certain expenses that is made in a tax procedure to detect omission of withholding duties at source of personal income tax relating to worker remuneration should also serve to give as proven the existence of such expenses for all other purposes.

But, in the special cases of removal of deductibility indicated in said Article 42, it is not the lack of proof of the expenses that explains the non-deductibility, but rather reasons of legislative policy concerning, above all, the reprobation of the behaviors of taxpayers, including at the level of compliance with the obligations provided in tax law.

In any event, it is clear that the regime in effect in 2009 expressly prohibited the deductibility of improperly documented expenses for the purpose of determining the taxable matter of IRC.

This proper documentation of expenses, in the context of the CIRC, which expressly indicated in its Article 115 the "accounting obligations of companies", should be understood as being that which in this Code the taxpayers were required to maintain. That is, charges will be properly documented when they are documented in accordance with the requirements of commercial and tax law, as this Article 115 requires, in the wording effective in 2009. This is a solution that is understandable, as although the norm on non-deductibility does not have the nature of a sanction, the lack of documentation in accordance with the required requirements is not ceasing to be a reprehensible behavior, capable of affecting tax revenue, which it is intended to discourage.

Therefore, it is by virtue of the legislative choice underlying the prohibition of undocumented expenses in the terms provided in the CIRC, which imposes on taxpayers "accounting organized in accordance with commercial and tax law", that despite proving that expenses with worker remuneration were incurred and even if they are necessary for the obtaining of profits, the lack of their documentation in accordance with the terms provided in the CIRC constituted a decisive obstacle to their relevance as costs.

Being this the regime that results from Article 42, section 1, subsection (g) of the CIRC, it can only cease to be applied to the case at hand on the ground of unconstitutionality, and it is perceived that problems may be raised of compatibility of this regime with the principles of taxation based on real income that informs the taxation of income of companies and with the principle of justice, inherent in the principle of democratic Rule of Law, as the relevance of certain expenses is recognized only to the detriment of the taxpayer.

As to the principle of "taxation of companies is fundamentally based on their real income", which is contained in Article 104, section 2 of the CRP, it does not justify that subsection (h) of section 1 of Article 42 is considered unconstitutional, as, as the very statement of the principle reveals, by including the expression "fundamentally", it shows that this is a rule that admits exceptions and that only claims a taxation primarily based on real income: in the case, as these expenses with remuneration that the Claimant had concealed are not deductible, the taxation of the company is not fundamentally ceasing to be based on real income, as it is the irrelevance of a small portion of labor costs. On the other hand, "the constitutional injunction of taxation according to real income cannot fail to necessarily heed the principles of practicability and operationality of the system, whereby it cannot fail to recognize them the nature of constitutional." (...) An inexecutable system or a system that does not permit the control of income and tax evasion, to the extent approximately to the reality that exists, leads in a straight line to the distortion, in practice, of the principle of taxpayer capacity and taxation according to real income ( [4] )

As to the principle of justice, it is not clear that it can be considered unjust that no fiscal weight is given to expenses that, with the intention of avoiding the taxation due, were hidden, more so in the case of parallel accounting, in a scheme of omission of repeatedly maintained tax duties over several years and covering various types of taxes. Parallel and hidden accounting, maintained persistently over several

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