Summary
Full Decision
ARBITRAL DECISION
The arbitrators Counsellor Jorge Manuel Lopes de Sousa (arbitrator-president), (designated by the other Arbitrators), Prof. Doctor Tomás Castro Tavares and Dr. Maria Manuela do Nascimento Roseiro, designated respectively by the Claimant and the Respondent, to form the Arbitral Tribunal, constituted on 03-06-2016, agree as follows:
1. Report
A…SGPS, S. A., legal entity no. …, with registered office at Avenida …, no. …, …-……, (hereinafter referred to as "Claimant"), came, pursuant to the terms of articles 2.º, no. 1, letter a), 6.º, no. 2, letter b), and 10.º, nos. 1, letter a), and 2, of Decree-Law no. 10/2011, of 20 January ("RJAT"), to request the constitution of an Arbitral Tribunal with a view to declaring the illegality of the additional assessment act of Corporate Income Tax (IRC) and compensatory interest relating to the 2012 fiscal year, issued under no. 2016…, dated 07-01-2016, resulting in an amount payable of € 468,007.00.
The Respondent is the TAX AND CUSTOMS AUTHORITY.
The Claimant designated as Arbitrator Prof. Doctor Tomás Castro Tavares, pursuant to the terms of article 6.º, no. 2, letter b), of the RJAT.
The request for constitution of the Arbitral Tribunal was accepted by the President of CAAD and automatically notified to the Tax and Customs Authority on 24-03-2016.
Pursuant to the terms provided in letter b) of no. 2 of article 6.º and no. 3 of the RJAT, and within the deadline provided for in no. 1 of article 13.º of the RJAT, the highest officer of the Tax Administration service designated as Arbitrator Dr. Maria Manuela do Nascimento Roseiro.
The Arbitrators designated by the Parties agreed to designate Counsellor Jorge Lopes de Sousa as arbitrator-president, who accepted the designation.
Pursuant to the terms and for the purposes provided in no. 7 of article 11.º of the RJAT, the President of CAAD informed the Parties of this designation on 18-05-2016.
Thus, in accordance with the terms provided in no. 7 article 11.º of the RJAT, after the deadline provided in no. 1 of article 13.º of the RJAT had elapsed without the Parties having anything to say, the Collective Arbitral Tribunal was constituted on 03-06-2016.
The Tax and Customs Authority responded, raising the exception of material incompetence of the Arbitral Tribunal and arguing that the request for arbitral decision should be judged unfounded.
The Claimant responded in writing to the exception.
By order of 08-07-2016, a hearing was dispensed with and it was decided that the proceedings would proceed with written submissions.
The Parties submitted written submissions.
The Arbitral Tribunal was regularly constituted.
The parties have legal standing and capacity, are legitimate (arts. 4.º and 10.º, no. 2, of the same act and art. 1.º of Order no. 112-A/2011, of 22 March) and are duly represented.
The proceedings do not suffer from any nullities.
It is necessary to consider as a priority the exception of material incompetence.
2. Exception of Incompetence of the Arbitral Tribunal for the Request for Implementation of the Arbitral Decision Rendered in the CAAD Process no. 231/2015-T
The Claimant argues in the request for arbitral decision, inter alia, that "by disregarding the finality of the arbitral decision rendered in process no. 231/2015-T the contested assessment will always be illegal to the extent that, based on the value of the taxable profit determined by the Claimant in the model 22 return, it disregards in violation of the provision of article 100.º of the LGT, the effects of the reduction of €4,418,350.78 requested by the claimant in the administrative claim of the self-assessment, and sanctioned in the said decision".
The Tax and Customs Authority argues, in summary, that "the Arbitral Tribunal does not have competence to determine or impose the implementation of another arbitral decision, and this even if the same had already become final", as it does not fall within the competences of the arbitral tribunals functioning in the CAAD as defined in article 2.º, no. 1, of the RJAT and, pursuant to no. 1 of article 24.º of the RJAT the execution of judgments falls, in the first place, to the AT which must "in the exact terms of the merit of the arbitral decision in favor of the taxpayer and until the end of the deadline provided for the voluntary execution of sentences of tax court tribunals..." promote the necessary legal and material acts for the execution of the judgment.
The Claimant argues that "what is being petitioned, it should be emphasized, is not the refund of tax as a result of the correction to the taxable matter determined by the said Arbitral Decision - which, in fact, would constitute a matter for execution of judgments - but only that the excess tax resulting from the application of the assessment to the taxable matter already judged excessive, be purged, as illegal, from the additional assessment issued following the additional corrections made by the Tax Inspection Services".
The Claimant essentially seeks to have the Arbitral Tribunal consider excessive the taxable matter that served as the basis for the calculation of the tax, for this reason having been decided in another arbitral process, whose decision was challenged on grounds that do not affect the part in which the excess of the taxable matter was recognized in that other process.
The partial challenge of an arbitral decision suspends its effects only in the challenged part as can be inferred from articles 28.º, no. 2 and 26.º, no. 1, of the RJAT, by making reference to a suspensive effect "in whole or in part".
In the case at hand, the Tax and Customs Authority expressly limited its challenge to the part of the arbitral decision referred to in which it was ordered to refund to the Claimant part of the self-assessed amount.
However, the determination of the effects of the said arbitral decision should be made in the respective process and subsequent execution to be carried out by the Tax and Customs Authority, in accordance with the provision of article 24.º, no. 1, of the RJAT, this Arbitral Tribunal not having competence to decide whether the effects are or are not those sought by the Claimant.
In fact, article 24.º, no. 1, of the RJAT provides for several possibilities of execution of judgment, including the taking of new acts in substitution of previous ones, this Arbitral Tribunal not having competence to decide what effects that arbitral decision should have, namely to rule out the possibility of total or partial renewal of the act challenged in that other process.
Thus, interpreting conjointly the norms of articles 2.º, no. 1, letter a), and 24.º, no. 1, of the RJAT, it is concluded that the competences of the arbitral tribunals functioning in the CAAD do not include the declaration of illegality of acts on the grounds of illegalities connected with the execution of arbitral decisions, at least until the terms of execution are established.
Thus, the exception invoked by the Tax and Customs Authority is valid, for which reason this Arbitral Tribunal is materially incompetent to consider the issue of illegality raised by the Claimant.
3. Matters of Fact
3.1. Proved Facts
Based on the evidence contained in the case file and the administrative file attached to the proceedings, the following facts are considered proved:
a) The Claimant has been classified under the special tax regime for groups of companies (RETGS) since 01-01-2008;
b) The Tax and Customs Authority conducted an inspection of the Claimant pursuant to Service Order no. OI2014…;
c) In that inspection, the Tax Inspection Report was prepared as set out in document no. 4 attached to the request for arbitral decision, the contents of which are reproduced herein, which refers, inter alia, to the following:
I. CONCLUSIONS OF THE INSPECTION ACTION
As a result of the external inspection action carried out on the taxpayer A…SGPS, S.A. -NIPC …irregularities were identified related to the deductibility of financial expenses in accordance with the provision of no. 2 of article 32.º of the EBF. The facts ascertained result in purely arithmetic corrections to the taxable result, in accordance with the reasoning presented in Chapter III and described in the preceding sheet 'Conclusions of the Inspection Action', as well as in the following table
(...)
III. DESCRIPTION OF THE FACTS AND GROUNDS OF THE PURELY ARITHMETIC CORRECTIONS
From the analysis of the financial statements, it was found that the taxpayer declared financial expenses without making corrections thereto in the income return Form 22, pursuant to no. 2 of article 32.º of the EBF.
It is further stated that the taxpayer declared the acquisition of equity interests, valued at acquisition cost as disclosed in the financial statements, with no reference, either in the Annex or in the Legal Certification of Accounts, to the non-correction of financial expenses in accordance with the aforementioned standard.
- On the norm in force at the date of the facts
The legal regime of SGPS, provided for in Decree-Law no. 495/88, of 30 December, defines in its article 1.º, no. 1, that the typical purpose of such companies is "the management of equity interests as an indirect form of the exercise of economic activity". No. 2 of this article adds, with the wording introduced by Decree-Law no. 318/04, of 24 December, that participation in a company is considered an indirect form of exercise of the economic activity thereof when it is not of an occasional nature and represents at least 10% of the capital with voting rights of the participated company, either alone or jointly with interests of other entities in which the SGPS is dominant.
In this way the legislator sought to limit the activity of SGPS to the management of equity interests with a structural nature, preventing these companies from being assumed as a vehicle for share speculation or evasion of taxation of gains resulting from the transfer of equity interests.
In this context, Law no. 32-B/2002, of 30 December, embodied in the State Budget Law for 2003, introduced a significant change to the tax regime applicable to SGPS, centered on the typical purpose of its activity, having for this purpose inserted article 32.º of the Statute of Tax Benefits (EBF) (at the date of the aforementioned legislative change, it corresponded to article 31.º of the EBF), in force in the fiscal years under analysis.
In accordance, no. 2 of article 32.º of the Statute of Tax Benefits (EBF) provides that "[t]he capital gains and capital losses realized by SGPS, (...) of capital interests of which they are holders, provided they are held for a period of no less than one year, and likewise, the financial expenses incurred with their acquisition do not contribute to the formation of the taxable profit of these companies".
Article 32.º of the EBF, and in particular no. 2 of the aforementioned article, results in a benefit which, however, was offset by the non-deductibility, for the purposes of determining taxable profit, of the financial expenses incurred, instituting a "fiscal neutrality environment" between gains from certain financial assets and expenses associated with the debt necessary for the holding of such assets, which in the future would generate gains, excluded from taxation.
It is understood that the legislator's purpose was to prevent SGPS from accumulating two benefits, first, the exemption from taxation applicable to income from capital gains realized from the transfer of equity interests and, thereafter, the inclusion of the relevant financial expenses related to the obtaining of such income in determining taxable profit. It follows that the financial expenses related to the equity interests held by SGPS, which could (prior to Law 83-C/2013, 31/12 - in force as from 01/01/2014) benefit, at the time of transfer, from the exemption regime, could not be deducted from taxable profit, that is, if the gains were not taxed, the corresponding expenses that were linked to such income could not equally be considered for the purposes of determining taxable profit.
The disregard as an expense of the financial expenses for the purposes of determining the taxable profit enshrined in the wording of article 32.º no. 2 of the Statute of Tax Benefits (EBF), constitutes a corollary of the general principle of Indispensability of expenses, according to which the final deduction thereof is conditioned on its connection with the obtaining of income subject to tax, and from which it follows that 'if certain costs are related to income not subject to taxes, they are not tax-deductible - see Freitas Pereira, "The Periodization of Taxable Profit', in Science and Tax Technique no. 360, January - March 1988, p. 140 - principle that informs the provision of article 23.º of the Corporate Income Tax Code.
This norm thus presupposes a correspondence between the non-taxation of results obtained from the transfer of equity interests and the deductibility of expenses associated with the holding of these assets.
Thus, adjustment should be made to the taxable profit relating to financial expenses attributable to the holding of equity interests that are capable of benefiting from the special regime established at that time in no. 2 of article 32.º of the EBF.
ii) On the determination of financial expenses not tax-accepted in light of the provision of no. 2 of article 32.º of the EBF (at the date of the facts)
The fungible nature that characterizes financial means and, concurrently, the difficulty in establishing a direct relationship between the loans obtained and the financial assets, the Tax Authority, interpreting and applying the law, issued Circular 7/2004 of 30 March from the Income Tax Service for Legal Entities (DSIRC), where, "for the purposes of allocating financial expenses incurred in the acquisition of equity interests, given the extreme difficulty of using, in this matter, a method of direct or specific allocation and the possibility of manipulation of results that it would allow (...)", defines a method of calculation, allowing identification of the amount of financial expenses associated with equity interests and therefore not tax-deductible, consisting of this in the allocation "of remunerative liabilities of SGPS (...), in the first place, to remunerative loans granted by these to participated companies and other interest-generating investments, allocating the remainder to other assets, namely equity interests, proportionally to their respective acquisition cost.
III.A. DETERMINATION OF FINANCIAL EXPENSES NOT TAX-ACCEPTED PURSUANT TO NO. 2 OF ARTICLE 32.º OF THE EBF
Regarding the provisions of articles 15.º and 17.º of the Corporate Income Tax Code the determination of taxable profit is based on accounting organized in accordance with the relevant accounting framework it is noted that in this case the taxpayer opted for IFRS.
Thus, from the analysis of the trial balance before the determination of results, the accounting of financial expenses was verified - identified in the following table, however, to table 07 of the IRC income return Form 22 no correction related to these financial expenses was made in light of the referenced standard - no. 2 of article 32.º of the EBF.
A. Notification of the taxpayer
Given the above, the taxpayer was notified to the effect that it should clarify the fact that the financial expenses were not added to table 07 of the Income Return Form 22 - see Annex 1 sheet 2.
In the response given - see Annex 1 sheet 1, the taxpayer emphasizes that the bank loans obtained from C… and B…, in the respective amounts of 100,300,000.00€ and 9,000,000.00€, were channeled to the acquisition of shares in … in the years 2007 and 2008.
On the other hand, the taxpayer states that: "(...) with the transition from the former accounting standard POC/DC to the new standard, these shares came to be measured at fair value through results, and the adjustments resulting from the application of fair value are considered gains, due to the increase in fair value, and losses, due to the reduction in fair value. The taxpayer argues that, given the fact that the measurement in question is made "(...) at fair value through results, the shares being instruments of equity, which have a price formed in a regulated market and whose holding thereof represents a participation of less than 5%, these fair value adjustments are tax-accepted pursuant to no. 9 of article 18.º of the Corporate Income Tax Code, whereby, in accordance with the provision of letter b) of no. 1 of article 46.º of the Corporate Income Tax Code the regime of capital gains and losses is not applicable to gains and losses realized (...)" through the possible transfer thereof."
It is thus concluded, in light of the clarifications provided by the taxpayer, replicated in Annex 1, and by the information gathered in the scope of the external acts undertaken, that it is the understanding of the taxpayer that a direct allocation of financial expenses to the shares in … should be made, whereby the regime established in article 32.º no. 2 of the EBF will not apply (wording at the date), since it only applies to capital gains and losses realized. Accordingly, the taxpayer understands that no correction of taxable profit is due relating to the amount of financial expenses incurred with the holding of equity interests measured at acquisition cost.
That is, the taxpayer proceeded to the direct allocation of all financial expenses to the acquisition of shares in …, justifying that these shares are equity instruments, representing an equity interest of less than 5% and this interest being recognized in the financial statements at fair value through results, the value adjustments are tax-accepted pursuant to article 18.º no. 9 letter a) of the Corporate Income Tax Code, and as such, in a possible transfer of these shares result losses or gains, with the determination of tax capital gains and losses being removed from the provision of article 46.º no. 1 letter b) of the Corporate Income Tax Code. The taxpayer thus understands that, not applying the special regime for capital gains and losses, provided in no. 2 to article 32.º of the EBF, the financial expenses are fully deductible. For this purpose the taxpayer invokes Binding Information of 24/02/2011, relating to process no. 39/11.
B. Analysis of the taxpayer's claims
From the analysis of the arguments presented by the taxpayer and the elements gathered in the scope of the external inspection acts, we conclude that this, as from the 2010 fiscal year, proceeds to make a direct allocation of all financial expenses incurred to the shares in …, valued at fair value in results whose adjustments contribute to the taxable result pursuant to article 18.º no. 9 letter a) of the Corporate Income Tax Code, ruling out the application of no. 2 of article 32.º of the EBF (wording at the date). The taxpayer sustains its defense on the Doctrinal Note issued for process 39/2011, with Order of 24/02/2011 from the Director General.
It is noted that the taxpayer, until fiscal year 2009, inclusive, proceeds to the determination of financial expenses not tax-accepted through the application of the indirect allocation method, disclosed through Circular 7/2004.
Now, the Doctrinal Note invoked by the taxpayer addresses a specific situation related to an entity, SGPS, that acquired, in 2007, shares of companies listed on the Stock Exchange, representing less than 5% of their respective share capital. Until 31 December 2009, these equity interests were measured at acquisition cost, pursuant to the generally accepted accounting principles defined in the POC, moving, following the approval of the Accounting Standardization System (SNC), more specifically NCRF 27, to be measured at fair value through results. This understanding refers that for these specific shares no. 2 of article 32.º of the EBF does not apply, by virtue of the provision of article 46.º no. 1 letter b) of the Corporate Income Tax Code combined with article 18.º no. 9 letter b) of the Corporate Income Tax Code, which determines that capital gains or capital losses realized through the costly transfer of financial instruments recognized at fair value pursuant to letter a) of no. 9 of article 18.º of the Corporate Income Tax Code are not considered.
This Doctrinal Note also provides that this understanding is equally applicable, pursuant to no. 5 of article 5.º of Decree-Law no. 159/2009 of 13 July, to the transitional regime under Corporate Income Tax provided for the purposes of first-time adoption of International Accounting Norms (IAS).
Now it is important to note that these services do not question the application of this understanding, but because, in the case at hand, the taxpayer does not present only equity interests valued at fair value with adjustments recognized in results, but continues to have equity interests measured at acquisition cost, which benefit in the years under analysis from the provision of article 32.º of the EBF (wording at the date), the allocation of financial expenses, although partial, to the said equity interests is maintained.
And furthermore, because the taxpayer opted for the application of IFRS, and as such in the measurement of financial assets applies IAS 39, as well as IFRS 7 and 9 (after their entry into force) made the choice to measure some financial investments at fair value but with adjustments reflected in equity accounts, as is the case with the interests in Funds … and Eurofund (in fiscal year 2010), while in the case of shares in …, should have made the same choice, these could benefit from the special regime provided for in article 32.º of the EBF.
The central issue is that the portfolio of SGPS interests in analysis is not restricted to the shares in …, measured at fair value in results, whose adjustments contribute to the taxable result pursuant to letter a) of no. 9 of article 18.º of the Corporate Income Tax Code, ruling out only for these assets the application of the special regime provided for in no. 2 of article 32.º of the EBF. This makes a direct allocation of financial expenses to these equity interests impossible.
And, nowhere in this Doctrinal Note is it stated that a direct allocation of financial expenses to these interests is made, and it is to be understood that the understanding set forth in Circular 7/2004 was not revoked.
Although this Doctrinal Note addresses a specific case, which is not the situation of the taxpayer under analysis, it is relevant, as naturally follows from the new accounting and tax framework in force as from fiscal year 2010, that the limitation of financial expenses provided in no. 2 of article 32.º of the EBF does not apply to equity interests valued at fair value. That is, in the determination of financial expenses attributable to equity interests, these assets, not being equity interests that fall within the provision of no. 2 of article 32.º of the EBF, now form part of the "other assets held by the company" that permit the deduction of financial expenses.
If it were possible, as desired by the taxpayer, to proceed to a direct allocation of financial expenses, we would be allowing an accounting choice of the taxpayer to interfere decisively in the tax result. For, we cannot forget, as referred to in section 11.3.6. (Accounting Framework of the Taxpayer), that the taxpayer opted for the application of IFRS, that is, regarding the measurement of the shares in …, the taxpayer applied IAS 39, alternatively to NCRF 27, and these shares could have been measured at fair value through equity, and in that case could be classified under the special regime provided for in article 32.º no. 2 of the EBF (in force at the date), as it did for the interests in Funds … and Eurofund.
But, given the conditions verified in the situation at hand, the taxpayer's choice proved to be without doubt the most beneficial, in that, as these shares were undergoing major depreciation, it passed to influence the taxable results through fair value reductions, although with the limitation provided for in no. 3 of article 45.º of the Corporate Income Tax Code (wording at the date). Regarding financial expenses it could also take advantage of a part excluded from the limitation provided for in no. 2 of article 32.º of the EBF, but not as desired by the taxpayer, that is, by making a direct allocation of financial expenses. In fact, it is precisely to prevent the possibility of manipulation of results that it is determined that in the allocation of financial expenses incurred in the acquisition of equity interests, proportional distribution should be considered, consisting of the allocation "of remunerative liabilities of SGPS (...), in the first place, to remunerative loans granted by these to participated companies and other interest-generating investments, allocating the remainder to other assets, namely equity interests, proportionally to their respective acquisition cost".
It is intended with this understanding to rule out the possibility of tax planning, bearing in mind that a company must be viewed as a whole, and there cannot be isolated treatment of an element or factor that influences directly and/or indirectly the activity, as is the case with financial means, highlighting their fungible nature.
Note that we are before a company managing equity interests, whose contractual purpose is the management of equity interests in other companies as an indirect form of the exercise of economic activity, whereby it seems appropriate to conclude that all the interests held, at the time of transfer, should meet the necessary requirements for the applicability of the special regime in question, in force in the fiscal years under analysis. That is, the excellence activity of this company is the management of equity interests that gave it the possibility of enjoying an exemption regime for taxation of gains arising from the transfer of equity interests, which moreover naturally represents the item of greatest weight in the assets of this company.
Furthermore, it should be noted that the taxpayer not only contracted bank loans for the purposes of acquiring shares in …, but also contracted loans for treasury support, has pledged accounts and is a party to financial leasing contracts, that is, products by their financial nature entail financial expenses to the holder.
And finally, it is noted that management decisions, both investment and financing decisions, namely regarding the management of equity interests, the acquisition of equity interests and the payment of current expenses, are taken considering the total of funds generated, since simultaneously the company receives dividends, makes payments relating to its current expenses, transfers assets, grants loans to its participations, receives funds from its capital holders in the form of loans or supplementary contributions, whereby, even if certain debt, as is the case with the C… loan, is formally associated with a certain asset, it is not possible to guarantee the specific/concrete application of the capital obtained.
To corroborate this conclusion, it is important to note that in the C… account no. … - see Annex 1 sheet 3 and Annex 2 - in which the amount associated with the C… bank loan in the amount of 100,300,000.00€ was deposited, the taxpayer presents, before the use of the loan a balance in the amount of 8,000,000.00€ - see Annex 2. Given the above it is appropriate to question, how can the taxpayer guarantee that the amount applied to the acquisition of the shares was indeed the amount of the loan and not previously taken into account the existing balance. The tangibility of money prevents this direct association.
Thus, once again it is stated that, given the need to determine the expenses that contribute to the determination of taxable profit, in compliance with no. 2 of article 32.º of the EBF, and given the extreme difficulty of using, in this matter, a method of direct or specific allocation and the possibility of manipulation that it would allow, such allocation should be made on the basis of a formula that takes into account the following:
The remunerative liabilities of SGPS should be allocated, in the first place, to remunerative loans granted by these to participated companies and other interest-generating investments, allocating the remainder to other assets, namely equity interests, proportionally to their respective acquisition cost, as provided for in Circular 7/2004.
We thus conclude that, in accordance with the accounting and tax framework in force as from fiscal year 2010, financial expenses allocated to equity interests measured at fair value, whose adjustments are tax-accepted pursuant to letter a) of no. 9 of article 18.º of the Corporate Income Tax Code, become tax-deductible, but without ceasing to apply the formula already stated, based on an indirect and proportional allocation, because there continue to exist in this company other equity interests that benefited at that time from the provision of no. 2 of article 32.º of the EBF.
In this specific case, it is important to emphasize that the correction of financial expenses not tax-accepted pursuant to no. 2 of article 32.º of the EBF, focuses on:
(I) The financial expenses recognized in each of the fiscal years under analysis, because the taxpayer proceeds to a direct allocation of all financial expenses to the acquisition of shares in …, measured at fair value in results whose adjustments are tax-accepted pursuant to letter a) of no. 9 of article 18.º of the Corporate Income Tax Code; and
(II) The value of the negative patrimonial change, recognized in field 705 of the IRC income return Form 22, in that the taxpayer, making a direct allocation of all financial expenses to the shares in …, applies the provision of article 5.º of Decree-Law no. 159/2009 to the total amount of financial expenses added in table 07 of the income return Form 22 relating to fiscal years 2008 and 2009, by virtue of the application in those years of Circular 7/2004 in determining financial expenses not tax-accepted.
III.A.1 DETERMINATION OF FINANCIAL EXPENSES RECOGNIZED AS EXPENSES IN THE FISCAL YEARS UNDER ANALYSIS NOT TAX-ACCEPTED PURSUANT TO NO. 2 OF ARTICLE 32.º OF THE EBF
Let us begin by verifying the total value of the loans obtained by the taxpayer for the exercise of its activity, confirming that in addition to the loan from C…, there are other bank loans.
Next, let us look at the total value of equity interests that benefit from the provision of no. 2 of article 32.º of the EBF, in accordance with what is disclosed in the financial statements:
Thus, as article 32.º of the EBF, in its no. 2, provides for the non-taxation of capital gains generated from the transfer of equity interests by SGPS, against the non-deductibility of financial expenses incurred with the holding of equity interests, covered by the special regime of SGPS, in determining non-deductible financial expenses, regard is had to the provision of Circular 7/2004 of 30/03. This means that they should be allocated, in the first place, to remunerative loans granted by these to participated companies and other interest-generating investments, allocating the remainder to other assets, namely equity interests, proportionally to their respective acquisition cost.
In this specific case, and as already referred to, by virtue of the measurement of the shares in … at fair value recognized in results, tax-accepted pursuant to letter a) of no. 9 of article 18.º of the Corporate Income Tax Code, in determining the financial expenses attributable to equity interests to which the provision of no. 2 of article 32.º of the EBF applies, the value of these interests will naturally be excluded, in that the financial expenses attributable to these interests will be tax-accepted, whereby in the calculation explained below, its value appears recognized in the item other assets.
III.A.2 DETERMINATION OF THE CORRECTION TO FINANCIAL EXPENSES RECOGNIZED IN FIELD 705 (transitional regime) OF TABLE 07 OF THE IRC INCOME RETURN FORM 22 IN FISCAL YEARS 2010, 2011 AND 2012
With reference to the IRC income return Forms 22 for fiscal years 2010, 2011 and 2012 it was found that the taxpayer declared in the corresponding table 07 - field 705, negative patrimonial changes (VPN) in the context of the application of the Transitional Regime in article 5.º no. 1 of Decree-Law no. 159/2009, in the amount of 7,708,308.13€ see Annex 4.
It was verified that of these patrimonial changes, 2,317,789.33€ correspond to one-fifth (1/5) of the financial expenses incurred relating to the bank loans obtained, which the taxpayer states were intended for the acquisition of shares in …
Regarding financial expenses, it is emphasized that in fiscal years 2008 and 2009 the taxpayer, by application of Circular 7/2004, determined non-deductible financial expenses pursuant to article 32.º no. 2 of the EBF, which were added in table 07 of the Income Return Form 22, respectively in the amounts of 6,353,655.85€ and 5,235,290.79€, which totaled 11,508,946.65€ - see Annex 5.
However, the taxpayer, in the Forms 22 for the years 2010, 2011 and 2012, in the item of negative patrimonial changes considered the full deductibility of these expenses, in the proportion of 1/5, under article 5.º no. 1 of the transitional regime from POC to the new accounting standard (IFRS/SNC) provided for in Decree-Law no. 159/2009, proceeding to a direct allocation of all financial expenses to equity interests valued at fair value recognized in results, which are removed from the regime provided for in no. 2 of article 32.º of the EBF.
That is, as already referred to, the taxpayer, as from fiscal year 2010, begins to defend a direct allocation of financial expenses, which is reflected in the fact that it does not correct the non-deductible financial expenses, recognized as expenses of the fiscal years under analysis, as well as in the consideration as negative patrimonial change of all financial expenses added in table 07 in fiscal years 2007 and 2008, in the proportion of 1/5, as the rules of the transitional regime require.
However, as already discussed above for financial expenses incurred in fiscal years 2010, 2011 and 2012, also in the calculation of the negative patrimonial change relating to the transitional regime, the taxpayer cannot consider that the value of financial expenses added in the previous years (2008 and 2009) become fully deductible, in that, for the reasons already invoked, an indirect method must always be applied, where financial expenses should be allocated, in the first place, to remunerative loans granted to participated companies and other interest-generating investments, allocating the remainder to other assets, namely equity interests, proportionally to their respective acquisition cost.
That is, as already referred to previously, in accordance with what is reflected in the Doctrinal Note referred to, by virtue of the measurement of some equity interests at fair value (shares in …), the taxpayer is able to deduct the financial expenses allocated to these interests in the part that results from the application of the indirect method already referred to, and not in their totality as defended by it.
This determines that the financial expenses that would be tax-accepted be recalculated for fiscal years 2008 and 2009, excluding from the value of acquisition of the financial interests the amount of the shares in ….
Thus, the value of the negative patrimonial change, recognized in field 705, by virtue of the application of the transitional regime, should only reflect 1/5 of financial expenses that, by virtue of the new allocation of financial expenses, become deductible.
Let us see:
From the analysis of the trial balance before the determination of results for the years 2008 and 2009 and from the documentary analysis carried out, the accounting of financial expenses was verified, the identification of loans obtained and financial interests valued at acquisition cost as explained in the following tables:
Thus, in accordance with the calculations described below, for fiscal years 2008 and 2009, the amount of financial expenses allocable to equity interests, non-deductible pursuant to no. 2 of article 32.º of the EBF, was determined in light of Circular 7/2004 of 30 March, excluding from the equity interests measured at acquisition cost the amount of shares in …measured at fair value.
In accordance with the above, taking into account the financial expenses attributable to equity interests, non-deductible from fiscal years 2008 and 2009, results in a correction to the value declared as negative patrimonial change in the amount of 1,675,125.22€, as determined in the following table:
IV. REASON AND STATEMENT OF THE FACTS THAT IMPLY THE RESORT TO INDIRECT METHODS
(Not applicable to the case under consideration)
d) The Claimant did not make any statement in the exercise of the right to be heard;
e) On 08-01-2016, the Claimant was notified of the Corporate Income Tax assessment no. 2016…, relating to fiscal year 2012, and of the compensatory interest assessments nos. 2016 … and 2016…, which are the subject matter of the present arbitral request (documents nos. 1 to 3 attached to the request for arbitral decision, whose contents are reproduced herein);
f) On 31-12-2011, the Claimant held equity interests with a total value of € 158,352,847.00, most of which were acquired by contributions in kind, on the terms set out in the table on page 52 of Annex III to the Tax Inspection Report, the contents of which are reproduced herein:
g) On 14-03-2016, the Claimant submitted the request for constitution of the arbitral tribunal that gave rise to the present proceedings.
2.2. Facts Not Proved
There are no facts relevant to the decision of the case that have not been proved.
3.3. Reasoning for the Fixing of Matters of Fact
The proved facts are based on the documents attached by the Claimant with the request for arbitral decision and on the administrative file.
4. Matters of Law
4.1. Issue of the Verification or Otherwise of the Conditions for the Use of Indirect Methods
4.1.1. Positions of the Parties
The Claimant "recognizes the difficulty (though not impossibility) of, in certain cases, proceeding to a direct allocation of financial expenses for the purposes of applying the norm contained in no. 2 of article 32.º of the EBF" (article 54.º of the request for arbitral decision) but understands that, in its specific case, such difficulty did not prevent it from doing so with respect to almost the entirety of the portfolio of equity interests and contracted debt (article 54.º of the request for arbitral decision).
The Claimant argues that
– from the letter of article 32.º, no. 2, of the Statute of Tax Benefits, "by referring solely and exclusively to the 'financial expenses incurred with their (the equity interests') acquisition' it is manifest that the legislator intended to refer to expenses directly and actually incurred by the taxpayer with the acquisition of equity interests to which the capital gains and losses realized refer, as mentioned in the first part of the norm";
– the indicated interpretation of the law is the one that best accords with the ancillary principle of the Portuguese tax legal system enunciated in articles 81.º, no. 1, and 85.º, no. 1, of the LGT, (which constitute a logical corollary of the application of the constitutional principle of the prevalence of taxation by real and actual profit provided for in article 104.º, no. 2, of the Constitution of the Portuguese Republic, as well as the elementary principles of security and certainty in the definition of legal relationships), according to which the taxable matter is evaluated or calculated directly according to the criteria proper to each tax,
– and only the Tax Authority may proceed to indirect evaluation, on an exceptional and subsidiary basis, in the cases and conditions expressly provided for in article 87.º and following of the same body of law;
– that this is not the case, and the ATA has not demonstrated or even invoked the verification of the conditions that would legitimize the resort to indirect methods of quantification of taxable matter in the case in point, it is still the tax act reviewed manifestly illegal, by violation of the indicated rules and constitutional principles.
On this issue of the application of the conditions of indirect methods, the Tax and Customs Authority, in its Response, does not refer to article 81.º, and referring to articles 85.º and following of the LGT, states that "being within the scope of application/control of a tax benefit it does not, in fact, make sense to speak of the application of an indirect method as it is enshrined in articles 85 et seq. of the LGT, since the application of an indirect method aims at the determination of the taxable matter of any tax, and, in the case of financial expenses, it is obvious that the determination of the total taxable matter is not at issue but only and exclusively the calculation of a certain cost that is intended to be purged from the determination of taxable matter having in mind the purpose of neutrality between income and costs aimed at by the tax benefit", "a cost that has an instrumental function in relation to income-increase not subject to taxation (exempt)".
4.1.2. Decision on the Issue of Violation of the Rules on the Use of Indirect Methods
Articles 81.º, 85.º and 87.º of the LGT, invoked by the Claimant, establish the following, in what is relevant here:
Article 81.º
- The taxable matter is evaluated or calculated directly according to the criteria proper to each tax, and the tax authority may only proceed to indirect evaluation in the cases and conditions expressly provided for in the law.
Article 85.º
-
Indirect evaluation is subsidiary to direct evaluation.
-
To indirect evaluation apply, whenever possible and the law does not prescribe otherwise, the rules of direct evaluation.
Article 87.º
Performance of Indirect Evaluation
- Indirect evaluation may only be carried out in case of:
a) Simplified tax regime, in the cases and conditions provided for in the law;
b) Impossibility of proof and direct and exact quantification of the elements essential to the correct determination of the taxable matter of any tax;
c) The taxable matter of the taxpayer deviating, without justified reason, more than 30% downwards or, for three consecutive years, more than 15% downwards, from that which would result from the application of the objective indicators of the activity of technical-scientific basis referred to in this law.
d) Income declared under IRS deviating significantly downwards, without justified reason, from the income standards which the manifestations of wealth reasonably shown by the taxpayer could allow pursuant to article 89.º-A;
e) Taxpayers presenting, without justified reason, null taxable results or tax losses during three consecutive years, except in the cases of commencement of activity, in which the counting of this period is made from the end of the third year, or in three years during a period of five.
f) Existence of an unjustified divergence of at least one-third between the declared income and the increase in wealth or consumption evidenced by the taxpayer in the same taxation period.
Point 7 of Circular no. 7/2004 of 30 March, from the DSIRC, has the following tenor:
- As to the method to be used for the purposes of allocating financial expenses incurred in the acquisition of equity interests, given the extreme difficulty of using, in this matter, a method of direct or specific allocation and the possibility of manipulation that it would allow, such allocation should be made on the basis of a formula that takes into account the following: the remunerative liabilities of SGPS and SCR should be allocated, in the first place, to remunerative loans granted by these to participated companies and other interest-generating investments, allocating the remainder to other assets, namely equity interests, proportionally to their respective acquisition cost.
From these norms it results that the use of indirect methods of determination of the taxable matter may only take place in the situations provided for in article 87.º, no. 1, of the LGT and, even in them, may only be carried out to the extent that the use of direct methods is not viable, as follows from the rule of subsidiarity, imposed by article 85.º.
Furthermore, the Tax and Customs Authority does not even contest the application of this rule of subsidiarity, saying that the regime provided for in Circular no. 7/2004 "ensures uniformity in the taxation applicable to all SGPS that do not undertake or are not capable of carrying out such specific allocation" and that "therefore, the issue only becomes important when it is not possible to carry out such specific or direct allocation" (articles 42.º and 43.º of the Response).
Thus, the divergence between the Parties is limited to the question of whether these norms of the LGT apply to the determination of financial expenses that do not contribute to the formation of the taxable profit, in light of article 32.º, no. 2, of the EBF.
This norm, in the wording in force in 2012 (introduced by Law no. 64-B/2011, of 30 December), establishes the following:
2 - The capital gains and capital losses realized by SGPS of equity interests of which they are holders, provided they are held for a period of not less than one year, and likewise, the financial expenses incurred with their acquisition do not contribute to the formation of the taxable profit of these companies.
First of all, it should be noted that from this norm there may not result any benefit to SGPS, as in cases in which losses are realized from it only result in negative consequences for these companies, when compared to this regime with that applicable to companies of other types.
In fact, if losses are realized with the transfer of equity interests, they do not contribute as expenses for the formation of the taxable profit of SGPS, unlike what happens with the generality of companies of other types, pursuant to letter l) of no. 1 of article 23.º of the CIRC, in the wording of Decree-Law no. 159/2009, of 13 July, whereby the said no. 2 of article 32.º is not configured as a measure that prevents taxation, rather it accentuates it and, therefore, does not constitute a tax benefit, in light of the definition contained in no. 1 of article 2.º of the EBF.
Furthermore, even in cases in which gains are realized with the transfer of equity interests, the regime of article 32.º, no. 2, of the EBF may not always result in a tax benefit, since the financial expenses incurred with the acquisition of equity interests that do not count as expenses for the formation of the taxable profit may be of an amount exceeding the gains.
Thus, no. 2 of article 32.º rules on "the formation of the taxable profit" of SGPS, as is expressly referred to in its final part, imposing the application to the determination of its taxable matter three special rules in relation to the general regime:
– a rule that favors them in relation to the general regime, which is that of irrelevance for the formation of the taxable profit of gains realized with equity interests held for more than one year, removing the rule of determination of taxable matter that appears in article 20.º, no. 1, letter h), of the CIRC;
– two that disadvantage them, which are that of irrelevance for the formation of the taxable profit of losses realized and financial expenses incurred with the acquisition of equity interests, which remove the application of the rules of determination of taxable matter provided for in letters c) and l) of no. 1 of article 23.º of the CIRC (in the wording in force in 2012).
Both rules indicating income, patrimonial changes and expenses that are relevant for the formation of taxable profit of Corporate Income Tax are rules of determination of the taxable matter of Corporate Income Tax, as well as those indicating and the income, patrimonial changes and expenses that are not relevant for that purpose.
Both the rule of determination of taxable matter of Corporate Income Tax is letter h) of no. 1 of article 20.º of the CIRC, which provides for the relevance for that purpose of gains realized, as is the rule of article 32.º, no. 2, of the EBF that removes it with respect to those obtained with equity interests held by SGPS for more than one year.
Both rules of determination of taxable matter of Corporate Income Tax are those of letters c) and l) of no. 1 of article 23.º of the CIRC, which provide for the relevance of financial expenses and losses realized, as well as the rule of article 32.º, no. 2, of the EBF that removes that relevance in the case of equity interests held by SGPS for more than one year.
For this reason, there is no reason not to assign to the three rules provided for in article 32.º, no. 2, of the EBF the qualification of special rules of determination of the taxable matter of SGPS, which, because they are special, prevail, within their field of application, over the general rules on this matter.
Being so, the procedural rules provided for in the LGT on the determination of taxable matter are applicable in this matter, namely those on the subsidiarity of indirect methods and situations in which their use is authorized, provided for in articles 81.º, no. 1, 85.º, no. 1, and 87.º, no. 1, of the LGT invoked by the Claimant.
The rule of subsidiarity of the use of indirect methods has as a corollary that, to the extent that it is viable to use a direct method, the determination of taxable matter should be carried out with its use, and indirect methods may only be used regarding the determination of taxable matter that cannot be carried out directly. This is the scope of that rule which is clarified in no. 2 of article 85.º of the LGT, in which it establishes that "to indirect evaluation apply, whenever possible and the law does not prescribe otherwise, the rules of direct evaluation".
That is, even if one is faced with a situation in which it is not viable to carry out the determination of taxable matter in its entirety by direct methods and there is a need to resort to the use of indirect methods, direct methods must be used to the extent that this is possible, and indirect methods may only be used regarding the residual part of the determination of taxable matter.[1]
Direct methods of determination of taxable matter are used when it is intended to determine the real value of income or assets subject to taxation and indirect methods are used when it is intended to determine the value of taxable income or assets on the basis of indicia, presumptions or other elements available to the tax authority (article 83.º of the LGT).
Regarding the determination of financial expenses incurred by SGPS with the acquisition of equity interests, direct methods are used when it is intended to determine the actual allocation of financial expenses to the acquisition of equity interests, namely by ascertaining exactly whether there were financings to acquire each one of the equity interests acquired and the financial expenses that resulted therefrom. And indirect methods are used when it is not intended to achieve that actual allocation, but rather a presumed allocation, based on the equity interests held by SGPS and the totality of financial expenses incurred.
In this light, point 7 of Circular no. 7/2004 of 30 March, from the DSIRC (Income Tax Service for Legal Entities), by establishing that "... given the extreme difficulty of using, in this matter, a method of direct or specific allocation and the possibility of manipulation that it would allow, such allocation should be made on the basis of a formula..." manifestly provides for an indirect method of determination of financial expenses incurred with the acquisition of equity interests, as it does not intend to determine exactly whether there were financings connected with the acquisition of equity interests and the expenses actually incurred with those financings, but rather intends to determine such expenses on the basis of a presumption that the financings (remunerative liabilities) of SGPS are allocated priority to remunerative loans to participations and other interest-generating investments and, in the remainder to other assets, proportionally to their respective acquisition cost.
Substantiating the application of the method provided for in point 7 of Circular no. 7/2004 the use of an indirect method of determination of taxable matter, it may only be applied if one is faced with a situation included in the exhaustive list that appears in article 87.º, no. 1, of the LGT ("indirect evaluation may only be carried out...").
Examining the situations listed in this norm, only the possibility of classification of the situation of the case appears to be possible in letter b) which permits indirect evaluation in case of "impossibility of proof and direct and exact quantification of the elements essential to the correct determination of the taxable matter of any tax".
In the case at hand, the Claimant argues that one is not faced with a situation of this type, as the difficulty of proceeding to a direct allocation of financial expenses did not prevent it from doing so with respect to almost the entirety of the portfolio of equity interests and contracted debt and that "not having the ATA demonstrated or even invoked the verification of the conditions that would legitimize the resort to indirect methods of quantification of taxable matter in the case in point, the reviewed tax act is still manifestly illegal".
It is manifest that the Tax Inspection Report makes no demonstration of the necessity to use indirect methods, and it is even expressly stated, in part IV of the Tax Inspection Report, relating to "REASON AND STATEMENT OF THE FACTS THAT IMPLY THE RESORT TO INDIRECT METHODS", that "Not applicable to the case under consideration".
Indeed, in keeping with this statement about there being no facts implying resort to indirect methods, the Tax and Customs Authority explains in the Tax Inspection Report the reasons for which it used the indirect method provided for in point 7 of Circular no. 7/2004, without making any reference to the "impossibility of proof and direct and exact quantification of the elements essential to the correct determination of the taxable matter", required in the said letter b) of no. 1 of article 87.º of the LGT for the use of such methods.
In fact, the Tax and Customs Authority refers with basis for the use of the indirect method provided for in Circular no. 7/2004:
The fungible nature that characterizes financial means and, concurrently, the difficulty in establishing a direct relationship between the loans obtained and the financial assets, the Tax Authority, interpreting and applying the law, issued Circular 7/2004 of 30 March from the Income Tax Service for Legal Entities (DSIRC), where, "for the purposes of allocating financial expenses incurred in the acquisition of equity interests, given the extreme difficulty of using, in this matter, a method of direct or specific allocation and the possibility of manipulation of results that it would allow (...)", defines a method of calculation, allowing identification of the amount of financial expenses associated with equity interests and therefore not tax-deductible, consisting of this in the allocation "of remunerative liabilities of SGPS (,...), in the first place, to remunerative loans granted by these to participated companies and other interest-generating investments, allocating the remainder to other assets, namely equity interests, proportionally to their respective acquisition cost.
As can be seen from this reasoning, the Tax and Customs Authority used the indirect method provided for in point 7 of Circular no. 7/2004, faced with the finding of "difficulty in establishing a direct relationship between the loans obtained and the financial assets", which, in light of the said letter b) of no. 1 of article 87.º is not sufficient to enable the use of indirect methods, since it only permits them in situations of impossibility not of mere difficulty.
On the other hand, it was established in the tax inspection that the majority of the equity interests that the Claimant held at the beginning of fiscal year 2012 had been acquired through contributions in kind (page 52 of Annex III of the Tax Inspection Report), whereby, at least regarding these, it is demonstrable that for their acquisition no financings generating financial expenses were undertaken.
Therefore, at least to this extent in which it is possible to demonstrate directly that there were no financial expenses incurred for the acquisition of equity interests, it was not viable to use indirect methods to determine hypothetical expenses connected with such[1]
On the other hand, by virtue of the principle of the hierarchy of norms, enunciated in article 112.º, no. 5, of the Constitution of the Portuguese Republic, a regulatory act, such as Circular no. 7/2004, cannot, with external efficacy, interpret, supplement, modify, suspend or revoke any legislative norm, such as those of the LGT.
It is thus concluded that the contested assessment suffers from a defect of violation of law by the use of an indirect method of determination of taxable matter provided for in no. 7 of Circular no. 7/2004 in considering for the calculation made equity interests acquired through contributions in kind, regarding which it was possible to demonstrate directly that no financial expenses were incurred with their acquisition in the year 2012.
By the above, it is concluded that the contested assessment suffers from a defect of violation of the norms of articles 81.º, 85.º and 87.º, no. 1, letter b), of the LGT, which justifies its annulment [article 163.º, no. 1, of the Code of Administrative Procedure, subsidiarily applicable pursuant to article 2.º, letter c), of the LGT].
The defect also affects the assessment of compensatory interest, which has as its prerequisite the assessment of Corporate Income Tax.
4.2. Issues of Prejudicial Knowledge
As the defect referred to affects the calculation of the taxable matter itself underlying the contested assessment, the consideration of the remaining defects that the Claimant invokes is rendered useless, namely those of error as to the assumptions of fact and law.
5. Decision
In accordance with the above, the members of this Arbitral Tribunal agree to:
A) Judge the exception of partial incompetence of the Arbitral Tribunal as valid, in the terms defined in point 2 of this decision;
B) Judge the request for arbitral decision well-founded and annul the additional assessment of Corporate Income Tax and compensatory interest relating to fiscal year 2012, issued under no. 2016…, dated 07-01-2016, resulting in an amount payable of € 468,007.00.
6. Value of the Proceedings
In accordance with the provision of article 306.º, no. 2, of the Code of Civil Procedure of 2013, article 97.º-A, no. 1, letter a), of the Code of Tax Procedure and article 3.º, no. 2, of the Regulation of Costs in Tax Arbitration Proceedings, the value of the proceedings is fixed at € 468,007.00.
Lisbon, 24-10-2016
The Arbitrators
(Jorge Manuel Lopes de Sousa)
(Tomás Castro Tavares)
(Maria Manuela do Nascimento Roseiro)
Declaration of Vote
Although I held a different perspective regarding some of the considerations,[2] I voted favorably on the present arbitral decision.
This is because I consider that, in the present case, the Claimant indeed proceeded to the direct allocation of financial expenses with respect to almost the entirety of the portfolio of equity interests, whereby the TA could not have applied the indirect method of calculation as if no evidence of allocation of expenses with respect to a large part of the investments resulted from the accounting.
Lisbon, 26 October 2016
Manuela Roseiro
Declaration of Vote:
-
Regarding the matter of the exception – incompetence of the tribunal to analyze the impact on the contested assessment of an Arbitral Sentence (favorable to the taxpayer) relating to the preceding year – I agree with the sense of the decision, but with entirely different reasoning.
-
Compliance with Final Sentences may be achieved, alternatively or cumulatively, depending on the cases, through material acts (refund of sums, payment of interest, removal from the Tax Authority's computer register, reformulation of accounts, etc.) or through mere legal acts (annulment of specific administrative [tax] acts and consequent effects).
The Tax Authority – in its obligation to comply with legality – must voluntarily execute the Sentences, performing, on its own initiative, the material and legal acts of execution of the Sentence. This is an extremely important obligation. The TA is not a private party defending particular interests. It is a public entity that defends the collective interest, guided exclusively by compliance with the law and strict and scrupulous obedience to judicial decisions.
Before the principle of separation of powers, the judicial power cannot perform the material acts of execution of Sentences – delivering the check, removing the debtor from the financial authority's information list, making mathematical calculations associated... But I understand that it may annul the consequent legal acts, on the grounds of illegality and violation of res judicata, when their subject consists only in a legal declaration (without material acts of execution) of annulment of the resulting assessment, involved in a dispute also with that subject.
I offer an example: if in a judicial challenge of year X the acceptance for tax purposes (or not) of costs in the value of 1000 is discussed, which results only in the corrections of tax losses of that fiscal year – the case decided (with the annulment of the assessment of year X) will presuppose the increase in that value of the tax losses in 1000 of the following year (which had meanwhile been reduced in the assessment in year X+1), because that credit from year X migrates to year X+1, as a result of general law and res judicata.
The illegality of the antecedent act (assessment) causes the illegality of the consequent act (assessment) (in that part) – which may be declared in the Sentence of year X+1. It is evident that the matter should not even arise in the X+1 proceedings, because the TA, in voluntary execution of the Sentence, would have to proceed, on its own initiative, to the revocation of the X+1 act (or partial annulment). But if it does not – in a censurable attitude – can the judge analyzing the X+1 assessment annul the assessment on the basis of res judicata from the antecedent act?
I understand that yes: the judge can (must) annul the X+1 assessment (to the part in which it establishes an excessive value of tax losses), on the basis of the illegality of the consequent assessment, by violation of res judicata; is proceeding to the annulment of the assessment (the subject of the challenge); enters into matter of mere legal execution (without material acts) and, therefore, does not interfere with exclusive competences of execution incumbent on the Tax Authority; and – no less relevantly – because the tribunal cannot acquiesce with behaviors of the TA that do not proceed to the revocation (annulment) of the assessment, in execution of the Sentence, at risk, with its abstention, of compromising the judicial power and the external effects of Sentences.
-
The fact that one is dealing with Arbitral Sentences (and not from tax courts) – in no way compromises what has been stated: the decisional power of the CAAD Sentences is equal to that of the tax courts – res judicata has the same value (there is not a res judicata of "first" and another of "second"); the subject of the dispute in the subsequent year is the annulment of the X+1 assessment, by violation of res judicata – and that is the competence of the arbitral tribunals: the declaration of illegality of tax assessments [art. 2.º, no. 1, letter a), of the RJAT].
-
I understand, in the concrete case, that the Sentence of the arbitral process 231/2015-T (final, with content favorable to the Claimant) also projects itself into the tax assessment now at issue. The tax of the assessment under analysis is excessive, also because it is based on a taxable matter – which should be diminished by effect of the prior arbitral decision. But, in my opinion, the exact implementation and quantification of this effect requires a complex set of accounts and material acts of execution – as the claimant moreover indicates in articles 47.º and 49.º of its PI. Now, this task is barred to the judicial power, as I referred to above (point 2). And, for this reason alone, I understand that the Tribunal does not have competence for the decision.
-
One could object by saying that the Sentence could only affirm the legal reasoning: the assessment in question should be annulled, to the extent and in the part in which it is based on a taxable matter that is excessive, by effect of the prior arbitral Sentence. But this, let us agree, would bring little or nothing new compared to the prior sentence and above all would continue to require an execution of Sentence, which the TA is already absolutely bound to by effect of the prior arbitral decision.
Lisbon, 22 October 2016
Tomás Castro Tavares
[1] In this sense, one can see the decision of the Supreme Administrative Court of 02-04-2014, process no. 01510/13, in which it is stated that "in the event the impossibility of direct evaluation is merely partial (...), the resort to indirect evaluation should be limited also to the part of taxable matter that it is not viable to determine through direct evaluation", "in compliance with the fundamental rule that is grounded in the constitutional principle of taxation of companies by real income (art. 104.º no. 2 of the Constitution)".
[2] Such as understanding that "no. 2 of article 32.º of the EBF establishes a tax benefit - the non-consideration of capital gains for the formation of taxable profit – being indissociable from its application the disregard of losses and expenses of a financial nature directly associated with the acquisition of the corresponding equity interests whereby the consideration on the allocation of expenses is a component of the very application of the benefit in its entirety, applying thereto the rule of burden of proof in accordance with articles 14.º, no. 2, and 74.º, no. 1, of the LGT." (declaration of vote in Process 69/2016-T).
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