IRC Tax Assessment Annulled: Violation of Article 65(1) CIRC – CAAD Case 145/2015-T

brief account of the Association based in Liechtenstein, from its creation, highlighting the fact that it is a non-profit association, with funds obtained directed to artists, emphasizing the social character of the Association.

He highlighted that one of the reasons for its location in Liechtenstein is related to the favourable tax conditions, so as to enhance the value devoted to the social cause.

The Association contracts artists and pays them fees, in addition to cataloguing, processing, and digitalizing works, receiving approximately 7,000 per year, from which it selects approximately 1,000, and having in its archive approximately 50,000. Furthermore, it organizes events in different countries around the world (in 2002 one was organized in Lisbon) to publicize the activity of the Association, which is represented in approximately 40 countries, with the same subject/work being able to be published in all of them.

The amount invoiced to the Portuguese company is determined based on the costs borne by the Association, which are mostly constituted by fees paid to artists.

C) Analysis of the Taxpayer's Response

In the response given by the taxpayer to the notification made pursuant to Article 65(1) and (4) of the Corporate Income Tax Code, the taxpayer, in addition to describing the activity of the Association in Liechtenstein, only presented exemplary items of some costs borne by the parent company, highlighting its activity. As for the operations reflected in the invoices issued to the claimant in the year 2010, in the total amount of CHF 816,240.00, nothing was presented that proves the effectiveness of these operations, namely contracts, emails, correspondence, transport documents, transport insurance, or other items that could in any way prove the operations underlying these invoices. It justifies as normal and of non-excessive amount the values invoiced, taking into account:

• on one hand, the differential between the costs borne by the Association and those passed on to the claimant, however, this differential cannot be assessed, since the total costs borne by the Association and the criterion it uses to distribute them among the different affiliated companies existing in approximately 40 countries are unknown;

• on the other hand, the relationship between the amounts paid to the parent company and the value of the claimant's sales, not specifying this ratio, nor how it is determined. In this regard, we highlight the values declared by the taxpayer from 2008 to 2010:

A brief analysis of this table allows one to verify that:

• from 2008 to 2009, the taxpayer's sales grew approximately 3.7%, Association billing increased 17.7%,

• from 2009 to 2010, the taxpayer's sales decreased 4.25% while Association billing increased 45.4%,

• from 2008 to 2010, Association billing increased 71.2% while the taxpayer's sales in the same period suffered a decline of 0.9%.

It should also be noted the following aspects:

• The Association is present in approximately 40 countries, some with business potential much higher than that of Portugal, such as Brazil, with no mention being made of the amount of revenues generated by the entire group,

• It was also shown that neither the Association nor the publishers acquire the works, leaving their author with the right to sell, display or publicize the works he creates, since the Association only acquires the right to reproduce the images, and these can be reproduced by all publishers, reducing the charge borne by each of them,

• The costs of production and commercialization of items sold by the Portuguese company are borne entirely by it, namely the purchase of the database, expenses for reproduction of works and postage costs.

In light of the above, it is concluded that no proof was made that the charges relating to the processing of graphic proposals included in the invoices issued by V ..., in the total amount of CHF 816,240.00, correspond to demonstrably carried out operations that are of a normal character and are not of excessive amount, whereby, in light of what is provided in Article 65(1) of the Corporate Income Tax Code, such expenses are not deductible for purposes of determining taxable profit relating to the fiscal year 2010, with autonomous taxation at the rate of 35% also taking place, for Corporate Income Tax purposes, in accordance with what is provided in Article 88(8) of the same code.

Thus the corrections made to the tax result declared in the fiscal year 2010 are:

. costs not accepted (Article 65 of the Corporate Income Tax Code) € 665,823.72

. declared tax result (€ 37,393.34)

. corrected tax result € 628,430.38

The correction to autonomous taxation is: € 233,038.30 (= 665,823.72 x 35%)

(...)

X. Right to a Hearing - Grounds

A) Notification of Draft Corrections

The taxpayer was notified of the draft corrections, by letter No. 4101 of 16 September 2014, by registered mail (RF 0245 8678 9 PT), to exercise the right to a hearing within 15 days.

B) Response Obtained

The taxpayer exercised the right to a hearing, in writing, on 1 October 2014.

It alleged briefly as follows:

a) As to the effectiveness of the operations:

a1) It should be noted that the amounts invoiced by the Association to the claimant correspond, mostly, to a mere pass-through of amounts paid to artists;

a2) The Association is non-profit, having as its purpose to help artists who paint with mouth and feet, as results from the preamble to the Association's bylaws;

a3) There is no contract between the association and the artists, as the obligations assumed by the Association arise exclusively from its bylaws - Articles 4, 5, 6 and 7;

a4) The obligations assumed by the association depend on the type of member: full, associate or honorary;

In order to prove the effectiveness of the operations, it submits a CD with all the works produced by the artists in 2010;

b) As for proof that the amounts in question do not have an abnormal character nor are of excessive amount, it states:

b1) the Association in the period between 1.3.2010 and 28.2.2011 paid to artists CHF 20,211,253.00, approximately € 16,733,100.00, distributed as follows in accordance with the Bylaws:

• 89 artists who are full members, monthly amount of CHF 8,000.00 totalling CHF 8,242,329.00, (Article 5(3)),

• 51 artists who are associate members in the total amount of CHF 8,242,329.00, (Article 6),

• 632 artists with scholarships pursuant to Article 15, in the total amount of CHF 9,565,324.60.

b2) in 2010 an exhibition was held in Mexico City, the Association bearing the costs in the amount of CHF 1,700,000.00.

To prove the costs referred to in this paragraph b), it attaches a declaration from the auditors of the association. It considers that these costs clearly demonstrate that the amounts invoiced to the claimant are not excessive, taking into account the various affiliated publishers and also the other costs borne by the Association.

c) As to the increase in amounts that have been invoiced by the Association since 2008, this is due to the fact that the number of artists who are members is increasing. From 2008 to 2010, the number of members went from 733 to 772.

It concludes by requesting annulment of the proposed corrections.

C) Analysis of the Response

A CD with all the works produced by the artists during the year 2010, the non-profit character of the Association, and invoices for expenses in the name of V ... do not constitute proof of the effectiveness of the operations contained in the invoices subject to this analysis.

In fact, what is at issue here is not the activity of the Association or the costs it bears, but rather the effectiveness of the operations between the Association and the taxpayer (TP), as well as their non-abnormal character and non-excessive amount, and as to that, the taxpayer provided no proof. As already set forth on page 7 of the draft report, nothing was presented that proves the effectiveness of these operations, namely contracts, emails, correspondence, transport documents and insurance. The costs borne by the Association, its non-profit objectives, do not prove the effectiveness of these operations.

As for proof of its non-abnormal character and non-excessive amount, once again the TP did not present items that demonstrate the criterion for allocating its costs among the different publishers. It presented a declaration evidencing the costs borne by the Association, costs with artists and the exhibition held in Mexico City, signed by auditors. With this declaration we know that the Association in the period between 1.3.2010 and 28.2.2011 paid to artists approximately € 16,733,100.00, however, in addition to not presenting a schedule of accounts justifying all costs borne by the Association during the fiscal year 2010, it does not specify the criterion for allocation of those costs among the approximately 40 publishers. In fact it does not justify whether that allocation is done equally among the 40 publishers, whether it is a function of the sales volume of each one, or any other criterion.

The Association's own bylaws in Article 3, § 3 specify that it has as its objective "Conclusion and intermediation of contracts with publishers in all countries of the world."

The contract established between the Association and the …, Lda. giving effect to this bylaw provision was never presented.

As for the justification presented that the amount invoiced by V ... to …, Lda. has been increasing because the number of artists has also increased, this justification is not acceptable.

In fact:

• according to items presented by the TP in the right to a hearing, the number of artists went from 733 in 2008 to 772 in 2010, that is, increased by approximately 5.32%, which does not necessarily translate into the same percentage increase in charges borne by the Association, since during this period the number of full members decreased, with the number of artists receiving lower remuneration increasing: associate members and scholarship holders.

• in the same period, the amount invoiced by V ... to …, Lda. went from € 361,268.57 (in 2008) to € 618,951.76 (in 2010), that is, increased by approximately 71.32%.

D) Conclusion

In light of the above, it is concluded that it was not demonstrated that the value of charges borne originating from amounts paid or owing to V ... (entity resident in Liechtenstein) correspond to operations actually carried out and do not have an abnormal character, nor are of excessive amount, whereby all grounds and corrections initially proposed in the draft report remain.

Note:

Regarding the amounts of taxes resulting from the corrections made in the present report, compensatory interest is owing pursuant to Article 35 of the General Tax Law.

o) By decision of 14-04-2014, the Deputy Finance Director manifested agreement with the Tax Inspection Report and endorsed the taxpayer's taxable income and the tax assessed;

p) The Tax Inspection Report was notified to the Claimant by letter of 15-10-2014, a copy of which is contained in document No. 2 attached to the request for arbitral decision, whose content is hereby reproduced, in which it states, among others, the following:

"You are hereby notified, pursuant to Article 62 of the Tax Procedures Code, of the Tax Inspection Report, which is attached as an integral part of this notification, relating to the Service Order referred to above.

Of the purely arithmetical corrections made to the taxable income and/or tax, without resorting to indirect evaluation, whose grounds are contained in the mentioned Report. In the short term, the Tax Authority's services will proceed with notification of the corresponding assessment, which will contain the means of defense, as well as the payment deadline, if applicable.

No complaint or objection is possible regarding this notification and its grounds."

q) The Corporate Income Tax assessment No. 2014 ... was drawn up, which was notified to the Claimant in the terms contained in document No. 1 attached to the request for arbitral decision, whose content is hereby reproduced, in which it states, among others, the following:

[Assessment details]

r) On 14-04-2010, the Association of ... throughout the World had bylaws, a copy of which is contained in document No. 4 attached to the request for arbitral decision, whose content is hereby reproduced;

s) The Claimant was not notified to exercise the right to a hearing before the assessment;

t) The "Parent Association" is represented in approximately 40 countries, through entities similar to the Claimant;

u) The images of paintings made by artists that are reproduced in the items sent by the Claimant to its potential customers can also be used in any of the other countries in which the "Parent Association" is represented;

v) The Claimant paid to the "Parent Association" the amounts referred to in invoices Nos. 2010-507, 2010-508, 2010-509, 2010-510, 2010-511 and 2010-512, indicated in the Tax Inspection Report;

w) The payments made by the Claimant to the "Parent Association" relate to the acquisition of material necessary for the Claimant to carry out its activity, namely rights of use of images of paintings reproduced in the items it sends to its potential customers;

x) The Claimant can reproduce in the items it sends to its customers the images whose rights of use it acquires from the "Parent Association" as many times as necessary;

y) The amounts paid by the Claimant to the "Parent Association" are intended to cover the general expenses of its activity, which include the amounts paid to the artists who provide it with the paintings that are reproduced in the items commercialized by the Claimant and the other similar entities;

z) The Claimant paid on 29-12-2014 the amount of € 448,142.25, relating to the disputed assessment (document No. 15 attached to the request for arbitral decision, whose content is hereby reproduced);

aa) On 02-03-2015, the Claimant submitted the request for arbitral decision which gave rise to the present case.

2.1. Unproven Facts

It was not proven whether the amounts paid by the Claimant to the "Parent Association" correspond to the value of the rights of use of the images and other materials acquired.

2.2. Grounds for the Decision on the Facts

The facts were found to be proven based on the documents contained in the administrative file and those attached to the request for arbitral decision, as well as based on the testimony given at the hearing by F…, M… and N….

All witnesses appeared to testify with impartiality and with knowledge of the facts they referred to.

3. LAW

3.1. Order of Consideration of Defects

In accordance with Article 124 of the Tax Procedures Code, subsidiarily applicable by virtue of Article 29(1) of the RJAT, inasmuch as the challenged acts are not attributed defects leading to a declaration of non-existence or nullity, nor is a relationship of subsidiarity indicated, the order for consideration of defects should be the one which, according to the prudent discretion of the judge, is most stable or effective in protecting the violated interests.

In the case at hand, interpreting the request for arbitral decision, it follows that the Claimant wishes that there be considered, in the first place, the defect of lack of grounds and, thereafter, the defect of denial of the right to a hearing.

Subsequently, the Claimant states that "despite the above, and by mere precaution, always without conceding, the CLAIMANT will consider and assume that the tax assessment acts and compensatory interest assessments that are the subject of the present request for arbitral decision may be based on the mentioned report" (paragraphs 35 and 42 of the request for arbitral decision), thereby attributing to the challenged act the defect of violation of Article 65 of the Corporate Income Tax Code, on the understanding that it proved that the payments to which the invoices indicated in the Tax Inspection Report refer correspond to operations actually carried out and do not have an abnormal character or excessive amount.

From the expression used, "by mere precaution", it could be inferred, in an initial analysis, that the Claimant only attributes this latter defect subsidiarily, as a precaution in the event that the two first defects do not succeed.

However, from paragraph 92 of the request for arbitral decision, in which the Claimant states that "assuming that the correction contained in the Tax Inspection Report notified to the CLAIMANT is related to the assessment acts now challenged, the assessment act now challenged should be annulled, because done in violation of the applicable legal rules and principles", it follows that the Claimant intends that cognizance be taken of the defect of violation of Article 65 of the Corporate Income Tax Code, if it is understood that the Tax Inspection Report constitutes grounds for the assessment, whereby it is not properly a subsidiary objection, but a conditional objection. In fact, the subsidiary objection of defects, permitted by Article 101 of the Tax Procedures Code, occurs when a claim "is presented to the court to be considered only in the event a previous claim does not succeed", as clarified by Article 554(1) of the Code of Civil Procedure, and in the case at hand, what the Claimant argues, in the first place, is that the assessment will not be based on the Tax Inspection Report, but, if that is not understood, the act should be annulled for violation of Article 65 of the Corporate Income Tax Code.

Finally, the Claimant attributes a defect to the assessment of compensatory interest, for lack of the prerequisite of the existence of fault and for lack of grounds as to that prerequisite.

The defects will be considered taking into account this position assumed by the Claimant, but taking into consideration that the lack of grounds for the assessment of compensatory interest is connected with the overall grounds for the assessment, in which compensatory interest was included.

In fact, although the Tax and Customs Authority drew up a document called "Statement of Interest Calculation", in which the calculation elements of compensatory interest are indicated, this document constitutes an element of grounds for assessment No. 2014 ..., which includes not only the Corporate Income Tax assessment but also compensatory interest, which is in harmony with what is provided in Article 35(8) of the General Tax Law, which establishes that "compensatory interest is incorporated in the very debt of the tax, with which it is jointly assessed". Moreover, in the notification of the assessment, the Tax and Customs Authority refers to the assessment of compensatory interest as an "attached explanatory note".

For this reason, although the autonomy of the assessment of compensatory interest may be taken into account for purposes of assessing the divisibility of the challenged act and making possible a hypothetical partial annulment, it constitutes only one of the elements on which the overall assessment rested, which defined in a unitary manner the position of the Tax and Customs Authority in relation to the Claimant, indicating an amount of € 448,142.25 to be paid.

Thus, it is assessment No. 2014 ..., in which Corporate Income Tax and compensatory interest are included, that constitutes the subject matter of the case.

3.2. Defect of Lack of Grounds

The Claimant attributes to the challenged act the defect of lack of grounds in two respects: in one of them, it refers to the entirety of the assessment, in which the value of compensatory interest is included, arguing, in short, that there is no reference in it to the grounds of the Tax Inspection Report; furthermore, as regards the assessment of compensatory interest, the Claimant also attributes a defect for failure to refer to the existence of fault.

3.2.1. Issue of Lack of Grounds as Regards the Part Relating to Corporate Income Tax

The requirement for grounds for injurious administrative acts is contained in Article 268(3) of the Constitution, which establishes that "administrative acts are subject to notification to interested parties, in the manner provided by law, and require express and accessible grounds when they affect legally protected rights or interests".

Especially as regards the grounds for tax acts, Article 77(1) and (2) of the General Tax Law establish that "the procedural decision is always grounded by means of a concise statement of the reasons of fact and law that motivated it, the grounds possibly consisting of a mere declaration of agreement with the grounds of previous opinions, information or proposals, including those forming part of the tax audit report" and that "the grounds for tax acts may be made in summary form, and must always contain the applicable legal provisions, the qualification and quantification of the tax facts and the operations for determining taxable income and the tax".

The Supreme Administrative Court has consistently understood that the grounds for an administrative or tax act is a relative concept that varies according to the type of act and the circumstances of the specific case, but that the grounds are sufficient when it allows a normal recipient to become aware of the cognitive and evaluative path followed by the author of the act to render the decision, that is, when he can know the reasons why the author of the act decided as it did and not differently, so as to be able to trigger administrative or contentious mechanisms of challenge.[1]

Although a distinction must be made between the assessment act and the notification act through which it is communicated to the recipient, in the case at hand, it was not proven that there is any other document relating to the assessment act other than the one reproduced in document No. 1 attached to the request for arbitral decision, whereby one must assume that it is a copy of the act that was performed, which will have no other content beyond what it contains.

From the mentioned document, it is evident that it contains the operations from which results the calculation of the amount assessed and states that an "explanatory note" was attached, which will be constituted by the "Statement of Interest Calculation" and the "Statement of Account Adjustment" attached by the Claimant.

In the mentioned assessment, the amounts of the previous assessment are indicated, and the "corrected amounts" are referred to, stating that the assessment is "in accordance with attached explanatory note and grounds already sent".

Among the "corrected amounts" are indicated the amount of € 628,430.38 relating to taxable income and the amount of € 234,142.69 as regards autonomous taxation, it being noted that, as to this latter, the amount of the initial assessment was € 1,104.39, whereby the correction was € 233,038.30.

These amounts of corrections are precisely the amounts of the corrections proposed on page 8 of the Tax Inspection Report that were endorsed by the decision of the Deputy Finance Director.

It is further noted that in the notification of the Tax Inspection Report, it is expressly stated that "in the short term, the Tax Authority's services will proceed with notification of the corresponding assessment, which will contain the means of defense, as well as the payment deadline, if applicable" and that in the notification of the assessment, reference is made to "grounds already sent".

In this context, having the Claimant been previously notified of the Tax Inspection Report and the decision endorsing it in which correction was proposed to the Claimant's taxable income relating to the year 2010, in the amount of € 628,430.38 and € 233,038.30, which communicated that would follow the "respective assessment", the assessment in which corrected amounts are indicated corresponding to the corrections previously communicated cannot fail to be interpreted by a recipient with normal perception abilities as being the realization of the announced assessment, which is reinforced by the fact that in the assessment itself reference is made to "grounds already sent".

Thus, interpreting the content of the assessment act in the context in which it was performed, it is concluded that there is in it an express reference to the grounds that cannot fail to be those of the Tax Inspection Report.

On the other hand, the requirement for express grounds of injurious acts made in Article 268(3) of the Constitution is compatible with grounds by reference and, in the case at hand, there is contained in the assessment act an express reference to the grounds previously sent.

Furthermore, it follows from the request for arbitral decision that the Claimant perfectly understood that the corrected amounts contained in the assessment correspond to those indicated in the Tax Inspection Report and that the grounds referred to in the notification of the assessment are those of the Tax Inspection Report, which had been previously communicated.

3.2.2. Issue of Lack of Grounds as Regards the Part Relating to Compensatory Interest

Regarding the assessment of compensatory interest, it is found that there is, in fact, lack of grounds, as the Tax and Customs Authority limits itself to stating, in the final part of the Tax Inspection Report, that "Regarding the amounts of taxes resulting from the corrections made in the present report, compensatory interest is owing pursuant to Article 35 of the General Tax Law".

Article 35(1) of the General Tax Law establishes that "compensatory interest is owing when, by a fact attributable to the taxpayer, there is delayed assessment of part or all of the tax owing or delivery of tax payable in advance, or withheld or to be withheld in the context of tax substitution".

Objective liability is exceptional, only occurring in cases specified by law (Article 483(2) of the Civil Code), and therefore, it should be understood that, for purposes of liability for compensatory interest, only where there is a "fact attributable to the taxpayer" is one in the presence of a situation capable of giving rise to a judgment of disapproval in relation to his conduct.

Along these lines, the Supreme Administrative Court has consistently understood that the imputability required for liability for compensatory interest depends on the existence of fault on the part of the taxpayer.[2]

Faced with that sole statement contained in the Tax Inspection Report on compensatory interest, one is left not knowing whether the Tax and Customs Authority understood that liability for compensatory interest is automatic, resulting from the very fact that corrections were made, or whether it concluded that a judgment of disapproval in relation to the Claimant's conduct can be formulated, capable of meeting the requirement of imputability, a situation in which the grounds should contain indication of the facts underlying such judgment of disapproval.

On the other hand, although the Tax and Customs Authority comes to clarify in paragraphs 42 and 43 of its Response what the reasons are for which it understands that the assessment of compensatory interest is justified, one is dealing with grounds a posteriori, which it is understood to be irrelevant for purposes of assessing the legality of tax acts. In fact, in a dispute concerning mere legality, as is provided in the RJAT for the arbitral tribunals that function in CAAD, in which the aim is only the declaration of illegality of acts of the types provided in Article 2(1)(a) and (b), one must assess the legality of the challenged act as it occurred, with the grounds that were used in it, other possible grounds not being relevant that could serve as support for other acts, of decision content totally or partially coinciding with the act performed. Thus, irrelevant are grounds invoked a posteriori, after the conclusion of the tax procedure in which the act was performed whose declaration of illegality is sought, including those raised in the jurisdictional proceedings.[3]

Moreover, containing Article 35 various situations in which the assessment of compensatory interest can be justified, express and sufficient grounds would require that one indicate in which part of that article it was understood that the Claimant's conduct falls under.

In any case, there is lack of grounds relating to the verification of all the requirements provided in Article 35(1) of the General Tax Law, whereby the assessment of compensatory interest is affected by the defect of lack of grounds.

3.3. Denial of the Right to a Hearing

The second defect attributed by the Claimant to the challenged act is a procedural defect, by its not having been provided a prior hearing, pursuant to Article 60(1)(a) of the General Tax Law.

The Tax and Customs Authority, in paragraphs 17 of the Response and 6 of its submissions, understands that the Claimant is not right, invoking the relevance of "the exemption contained in Article 60(3) of the General Tax Law, in conjunction with subparagraph a) of its section 1".

Article 60 of the General Tax Law establishes the following:

Article 60

Principle of Participation

1. Participation of taxpayers in the formation of decisions that concern them may be made, whenever the law does not provide otherwise, by any of the following means:

a) Right to a hearing before assessment;

b) Right to a hearing before total or partial rejection of claims, complaints, appeals or petitions;

c) Right to a hearing before the revocation of any benefit or administrative act in tax matters;

d) Right to a hearing before the decision on the application of indirect methods, when there is no inspection report;

e) Right to a hearing before the conclusion of the tax inspection report.

2 - Hearing is dispensed with:

a) In the event that the assessment is made based on the taxpayer's declaration or the decision on the claim, complaint, appeal or petition is favorable to him;

b) In the event that the assessment is made ex officio, based on objective values provided by law, provided that the taxpayer has been notified to file the missing declaration, without having done so.

3 - Having the taxpayer been previously heard in any phase of the procedure to which subparagraphs b) to e) of section 1 refer, his hearing before assessment is dispensed with, except in the event of invocation of new facts on which he has not yet pronounced.

1. The right to a hearing must be exercised within the period to be fixed by the tax administration by registered letter to be sent for that purpose to the taxpayer's tax address.

2. In any of the circumstances referred to in section 1, for purposes of the exercise of the right to a hearing, the tax administration must communicate to the taxpayer the draft decision and its grounds.

3. The period for exercise orally or in writing of the right to a hearing is 15 days, with the tax administration able to extend this period to a maximum of 25 days depending on the complexity of the matter.

4. New elements raised in the hearing of taxpayers are necessarily taken into account in the grounds of the decision.

The right to a hearing has constitutional roots, being required by Article 267(5) of the Constitution, which establishes that "the conduct of administrative activity will be the subject of a special law, which will ensure the rationalization of means to be used by the services and the participation of citizens in the formation of decisions or deliberations that concern them".

But, as follows from this rule, the Constitution does not regulate the regime of the right to a hearing, relegating to the "special law" the definition of the terms in which such right will be exercised, terms in which various factors, including economic factors and practicability, could be taken into account.

It is in this context that Article 60(3) of the General Tax Law, invoked by the Tax and Customs Authority in the present case, provides for situations in which prior hearing before assessment is dispensed with.

In the case at hand, it is not disputed in the present case that Article 60(1)(a) of the General Tax Law guarantees taxpayers the right to a hearing before assessment, which results from the express content of this rule, whereby the question to be considered comes down to knowing whether one is faced with a situation in which hearing before assessment is dispensed with by Article 60(3) of the same article.

This section 3 dispenses with the right to a hearing before assessment if the taxpayer has been previously heard in any phase of the procedure to which subparagraphs b) to e) of section 1 refer, except in the event of invocation of new facts on which he has not yet pronounced.

In the case at hand, the Claimant had the opportunity to exercise the right to a hearing based on the draft Tax Inspection Report, which is a situation that can be classified under Article 60(1)(e) of the General Tax Law, whereby, in principle, one is faced with a potential situation for application of the exemption from the right to a hearing before assessment.

For this reason, the necessity to ensure the right to a hearing before assessment can only result from the exception provided in the final part of section 3, that is, if in it have been invoked facts on which the taxpayer has not yet previously had the opportunity to pronounce.

Examining the assessment and the draft Tax Inspection Report, which served as the basis for the exercise of the right to a hearing, it is found that the only point on which the Claimant did not have the opportunity to pronounce is that of compensatory interest, as the Claimant did not include in the draft Tax Inspection Report any reference to compensatory interest, only coming to introduce it in the final part of the Tax Inspection Report itself, after the Claimant had already exercised the right to a hearing.

On the other hand, the inclusion in the assessment of compensatory interest as well as its calculation, contained in the statement attached to the assessment, are based on facts, including, as the Tax and Customs Authority acknowledges in paragraphs 42 and 43 of its Response, on a judgment regarding the existence of causal connection between the lack of "declaration as to the tax in question" and the "delayed assessment attributable to the taxpayer", as well as on a judgment of "fault of the taxpayer" that "results from the fact that it did not act with normal diligence in the fulfillment of its tax obligations".

It is thus evident that, in including compensatory interest in the assessment, the Tax and Customs Authority took into consideration new facts, inherent to the formulation of judgments regarding the existence of the mentioned causal connection and fault.

For this reason, it must be concluded that one is not faced with a situation of exemption from hearing before assessment, whereby its denial constitutes denial of a legal formality, as the Claimant argues.

It should be noted that, although it is the consideration of new facts inherent in the imposition of compensatory interest that justifies the setting aside of the exemption from the right to a hearing before assessment, being a formality of the assessment procedure that should precede the final act, its denial implies the invalidity of the final act itself of the assessment procedure, with this defect not raising the possibility of dividing the act, for purposes of annulment.

That is, it not being a case of exemption, the right to a hearing had to be ensured before the assessment act, by virtue of Article 60(1)(a) of the General Tax Law, and therefore, the rendering of this act is globally illegal.

Thus, the request for arbitral decision succeeds as to this defect.

3.4. Defect of Violation of Article 65 of the Corporate Income Tax Code

Article 65 of the Corporate Income Tax Code establishes the following, insofar as is relevant here:

1 – Amounts paid or owing, for any reason, to individuals or legal entities residing outside Portuguese territory and subject to a clearly more favourable tax regime are not deductible for purposes of determining taxable profit, except if the taxpayer can prove that such charges correspond to operations actually carried out and do not have an abnormal character or excessive amount.

2 – It is considered that an individual or legal entity is subject to a clearly more favourable tax regime when the territory of residence of the same is on the approved list by ordinance of the Finance Minister, or when it is not taxed there in income tax identical or analogous to IRS or Corporate Income Tax, or when, as regards amounts paid or owing mentioned in the previous section, the amount of tax paid is equal to or less than 60% of the tax that would be due if the said entity were considered resident in Portuguese territory.

3 – For purposes of what is provided in the previous section, taxpayers must possess and, when requested by the Tax Authority, provide the supporting evidence of tax paid by the non-resident entity and of the calculations made for determining the tax that would be due if the entity were resident in Portuguese territory, in cases where the territory of residence of the same is not on the list approved by ordinance of the Finance Minister.

4 – The proof referred to in section 1 must occur after notification of the taxpayer, made with minimum notice of 30 days.

In the case at hand, it is not a matter of dispute that there is a situation that falls under this article, as Liechtenstein is considered a country with a privileged tax regime, being as such indicated in Ordinance No. 150/2004, of 13 February, issued pursuant to section 2 of this Article 65.

The Claimant was notified in the context of the tax inspection to provide the proof required by Article 65(1), relating to four invoices relating to payments it made in the year 2010 to the Parent Association.

Following notification, the Claimant explained the reasons for which the payments were made, presented documents relating to expenses borne by the Parent Association, and presented the testimony of its managing partner.

From the proof produced, it is concluded that the Parent Association makes payments to the artists who create paintings, retaining the right to make reproductions in images, with a view to commercialization by entities identical to the Claimant, existing in dozens of countries.

The Claimant used in the year 2010 images of paintings supplied by the Parent Association, which were essential for it to carry out its activity.

In this context, it is to be concluded, in light of the rules of life and experience, that the operations to which the invoices relate are not fictitious, as it is perfectly normal that the Parent Association charges for the authorization of reproduction of the paintings, to be able to cover the expenses with payments to artists and promotional activity. Moreover, what would be abnormal is that, the Claimant not being the holder of the rights of reproduction of the paintings nor making payments to the artists, it could use the images it commercializes without any payment.

For this reason, in terms of reasonableness, it should be concluded that the operations to which the invoices relate, relating to the payments made by the Claimant to the Parent Association in the year 2010, are not fictitious nor have an abnormal nature.

It is true, however, that it was not proven that the amounts paid by the Claimant to the "Parent Association" correspond exactly to the value of the rights of use of the images and other materials acquired.

However, in addition to the determination of the value of the rights of use of images implying an unavoidable margin of subjectivity, Article 65(1) does not require that proof, as the requirements provided in its final part are alternative.

That is, to set aside the prohibition of deductibility, it is enough for the taxpayer to prove that the payments correspond to operations actually carried out and do not have an abnormal character, or that they correspond to operations actually carried out and their amount is not excessive.

In the case at hand, it is to be understood that the Claimant proved that the operations were carried out and do not have an abnormal character, whereby it is to be considered satisfied the requirement for proof necessary to ensure deductibility.

Thus, it is concluded that the assessment act is affected by the defect of violation of Article 65(1) of the Corporate Income Tax Code.

4. REQUESTS FOR REFUND OF TAX AND INDEMNITY INTEREST

The Claimant makes requests for refund of the tax paid, plus indemnity interest.

In accordance with what is provided in Article 24(b) of the RJAT, the arbitral decision on the merits of the claim, of which no appeal or objection is possible, binds the tax administration from the end of the period provided for appeal or objection, and the administration must, in the exact terms of the success of the arbitral decision in favor of the taxpayer and until the end of the period provided for spontaneous execution of judgments of the tax courts, "restore the situation that would exist if the tax act subject to the arbitral decision had not been performed, adopting the necessary acts and operations for that purpose", which is in harmony with what is provided in Article 100 of the General Tax Law, applicable by virtue of Article 29(1)(a) of the RJAT, which establishes that "the tax administration is obliged, in the event of total or partial success of a complaint, judicial objection or appeal in favor of the taxpayer, to immediate and full restoration of the legality of the act or situation subject to the dispute, comprising the payment of indemnity interest, if applicable, from the end of the period of execution of the decision".

Although Article 2(1)(a) and (b) of the RJAT uses the expression "declaration of illegality" to define the competence of the arbitral tribunals that function in CAAD, not making reference to condemnatory decisions, it should be understood that the powers that in judicial objection proceedings are attributed to tax courts are within its competences, being that the interpretation that harmonizes with the sense of the legislative authorization on which the Government relied to approve the RJAT, in which it is declared, as a first directive, that "the tax arbitration process must constitute an alternative procedural means to the judicial objection process and to the action for recognition of a right or legitimate interest in tax matters".

The judicial objection process, although it is essentially an annulment process of tax acts, admits the condemnation of the Tax Administration in the payment of indemnity interest, as can be inferred from Article 43(1) of the General Tax Law, in which it is established that "indemnity interest is owing when it is determined, in a complaint or judicial objection, that there was error attributable to the services from which results payment of the tax debt in an amount exceeding the legally due" and from Article 61(4) of the Tax Procedures Code (in the wording given by Law No. 55-A/2010, of 31 December, to which corresponds section 2 in the initial wording), which states: "if the decision that recognized the right to indemnity interest is judicial, the payment period is counted from the beginning of the period of its spontaneous execution".

Thus, section 5 of Article 24 of the RJAT, in saying that "payment of interest is owing, regardless of its nature, in the terms provided in the general tax law and in the Tax Procedure and Process Code", should be understood as permitting the recognition of the right to indemnity interest in the arbitration process and of the right to refund that serves as its basis.

As for indemnity interest, Article 43 of the General Tax Law, in the part applicable here, establishes that "indemnity interest is owing when it is determined, in a complaint or judicial objection, that there was error attributable to the services from which results payment of the tax debt in an amount exceeding the legally due".

In the case of the acts, the error underlying the assessment is attributable to the Tax and Customs Authority, as it should have considered that the proof presented by the Claimant in the administrative process was sufficient to consider demonstrated that the operations referred to in the invoices in question were actually carried out and did not have an abnormal character.

As follows from the established facts in subparagraph z), on 29-12-2014, the Claimant made the payment of € 448,142.25, relating to the disputed assessment.

Thus, as a consequence of the annulment of the assessment, the Claimant has the right to refund of the amount paid and to indemnity interest, pursuant to Article 43(1) of the General Tax Law and Article 61 of the Tax Procedures Code, calculated on the amount it paid, from the payment date (29-12-2014), until the date on which a credit note is processed, in which they are included (Article 61(5) of the Tax Procedures Code).

Indemnity interest is owing at the legal supplementary rate (Articles 43(1 and 4) and 35(10) of the General Tax Law, Article 559 of the Civil Code and Ordinance No. 291/2003, of 8 April).

5. DECISION

In these terms, the members of this Arbitral Tribunal hereby agree:

– to find the request for arbitral decision successful and to annul assessments Nos. 2014 ..., 2014 ... and 2014 ... and also the statement of account adjustment contained in document No. 2014 ..., from which results a total amount payable of € 448,142.25;

– to find the request for refund of the tax paid successful and to condemn the Tax and Customs Authority to effect it;

– to find the request for indemnity interest successful and to condemn the Tax and Customs Authority to pay indemnity interest to the Claimant, at the legal supplementary rate, calculated on the amount of € 448,142.25, from 29-12-2014 until complete refund of this amount.

6. VALUE OF THE CASE

In accordance with what is provided in Article 306(2) of the Code of Civil Procedure and 97-A(1)(a) of the Tax Procedures Code and 3(2) of the Regulations on Costs in Tax Arbitration Processes, the case is assigned the value of € 448,142.25.

7. COSTS

Pursuant to Article 22(4) of the RJAT, the amount of costs is fixed at € 7,038.00, in accordance with Table I attached to the Regulations on Costs in Tax Arbitration Processes, at the charge of the Tax and Customs Authority.

Lisbon, 28-09-2015

The Arbitrators

(Jorge Manuel Lopes de Sousa)

(Paulo Lourenço)

(Ana Maria Rodrigues)

[1] Essentially in this sense, can be seen, among many, the following decisions of the Supreme Administrative Court: of 4-11-1998, case No. 40618; of 10-3-1999, case No. 32796; of 6-6-1999, case No. 42142; of 9-2-2000, case No. 44018; of 28-3-2000, case No. 29197; of 16-3-2001, of the Plenary, case No. 40618; of 14-11-2001, case No. 39559; of 18-12-2002, case No. 48366.

[2] In this sense, can be seen the following decisions of the Supreme Administrative Court:

– of 20-3-1996, case No. 20042, published in Appendix to the Official Gazette of 13-3-1998, page 1067;

– of 2-10-1996, case No. 20605, published in Appendix to the Official Gazette of 28-12-1998, page 2707;

– of 18-2-1998, case No. 22325, published in Appendix to the Official Gazette of 8-11-2001, page 553;

– of 3-10-2001, case No. 25034, published in Doctrinal Decisions of the Supreme Administrative Court, No. 492, page 1615, and published in Appendix to the Official Gazette of 13-10-2003, page 2080;

– of 29-1-2003, case No. 1647/02, published in Appendix to the Official Gazette of 25-3-2004, page 164;

– of 12-3-2003, case No. 26800, published in Doctrinal Decisions of the Supreme Administrative Court, No. 506, page 219, and published in Appendix to the Official Gazette of 25-3-2004, page 545;

– of 19-11-2008, cases Nos. 325/08 and 576/08;

– of 11-3-2009, case No. 961/08.

[3] Essentially in this sense, can be seen the following decisions of the Supreme Administrative Court, concerning a parallel situation that arises in contentious appeal proceedings:

– of 10-11-98, of the Plenary, rendered in appeal No. 32702, published in Appendix to the Official Gazette of 12-4-2001, page 1207;

– of 19/06/2002, case No. 47787, published in Appendix to the Official Gazette of 10-2-2004, page 4289;

– of 09/10/2002, case No. 600/02;

– of 12/03/2003, case No. 1661/02.

In the same sense, can be seen:

– MARCELLO CAETANO, Manual of Administrative Law, Volume I, 10th edition, page 479, where he states that it is "irrelevant that the Administration comes, already in the pendency of the contentious appeal, to invoke as determining reasons other reasons, not set out in the act", and Volume II, 9th edition, page 1329, where he writes that "the respondent authority cannot (...), in response to the appeal, justify the performance of the challenged act by different reasons from those that appear in its express motivation";

– MÁRIO ESTEVES DE OLIVEIRA, Administrative Law, Volume I, page 472, where he writes that "the reasons objectively existing but which are not expressly adduced, as grounds for the act, cannot be taken into account in assessing its legality".