Municipal Surcharge (Derrama) Under RETGS Group Taxation Regime - CAAD Process 157/2013-T

Process 157/2013-T

Arbitral Decision

A - Report

1. A..., S.A., with the NIPC … and registered address on Rua …, … (hereinafter the Applicant), holding company of a business group subject to the special regime for taxation of groups of companies (RETGS), provided for in articles 69 et seq. of the Corporate Income Tax Code (IRC Code), filed on 4 July 2013, an application for constitution of an arbitral tribunal, in accordance with the provisions of nos. 1 and 2 of the Legal Regime of Tax Arbitration (RJAT), contained in Decree-Law no. 10/2011, of 20 January.

2. The Arbitral Tribunal was duly constituted at CAAD on 4 September 2013 to hear and decide the present case, as evidenced by the respective minutes attached to the case file.

3. In the application for arbitral ruling, the Applicant declared that it did not intend to proceed with the appointment of an arbitrator, whereby the constitution of the Arbitral Tribunal took place in accordance with the provisions of no. 1 of article 6 and no. 1 of article 11 of the RJAT, by decision of the President of the Deontological Council of the Administrative Arbitration Centre, I, the undersigned, was appointed arbitrator.

4. The subject matter of the application for arbitral ruling consists of a declaration of illegality of the self-assessment act of the Municipal Surtax of the Group dominated by the Applicant, relating to 2010, its consequent annulment and reimbursement of the tax unduly paid to the State in the amount of 13,245.61€ plus compensation interest.

5. The Applicant supports its claim, in summary, as follows:

5.1 The Applicant is the holding company of a Group that is covered by the Special Regime for Taxation of Groups of Companies (RETGS), in accordance with articles 69 et seq. of the IRC Code;

5.2 The Applicant calculated and proceeded to payment, as Surtax, of the amount of 18,867.24€, corresponding to the algebraic sum of the Surtaxes calculated individually by each of the companies that make up its scope;

5.3 The Applicant followed this understanding in compliance with Circular Notice no. ..., of 14 April 2008;

5.4 It is, however, the opinion of the Applicant that the Surtax should be calculated on the taxable profit of the Group, and not on the individual profits of the companies that make up the Group;

5.5 For which reason it presented a Gracious Complaint against the self-assessment of the Surtax, which was expressly denied by notification received on 4 June 2013;

5.6 According to the Applicant, with the entry into force of the Local Finance Law 2/2007, of 14 January, the Surtax came to be calculated on the value of taxable profit subject and not exempt from Corporate Income Tax, as an alternative to tax collection;

5.7 And due to the omission of the Local Finance Law, it should be understood that the basis of incidence of the Surtax is determined in accordance with the rules of the IRC in force for the RTEGS contained in article 70 of the IRC Code (as worded at the date of the facts);

5.8 In fact, the Applicant understands that, since the Surtax is an ancillary tax to the IRC, the surtax in groups of companies should be calculated in an aggregated manner, as if it were a single tax;

5.9 Still according to the Applicant, the Surtax should be determined based on the taxable profit of the group, calculated by the holding company, corresponding to the algebraic sum of the tax results of each one of the companies that compose it, and not through the algebraic sum of the Surtaxes calculated based on the taxable profit of each one of the companies that make up the group;

5.10 Considers, therefore, the Applicant to be entitled to the reimbursement of the Surtax unduly paid for the tax year 2010, in the amount of 13,245.61€, and also the respective compensation interest.

1. Under article 17 of the RJAT the Tax Authority and Customs Authority (AT), now the Respondent, presented its Response, where, in addition to defending itself through challenge, raised the following exceptions:

6.1 The incompetence of the Arbitral Tribunal to decide the present question, since the active subjects of the Surtax are the Municipalities, which are not bound by arbitral jurisdiction;

6.2 The necessity of compulsory intervention of the Municipality, arguing the lack of standing of the AT to be present in court as the sole defendant, since given the nature of the Municipal Surtax the passive standing to intervene in the dispute would equally be of the Municipality as the passive subject of the tax, which should be represented in court by the Representative of the Public Treasury and not by the AT, in accordance with article 54 of the ETAF;

6.3 By way of challenge the AT comes to say that the Surtax is today an independent tax from the IRC that only avails itself of the calculation rules of the IRC for the purposes of determining the taxable profit, whereby the specificities of taxation under IRC are not legally adopted for the purposes of subjection to the Surtax;

6.4 Effectively, article 14 of the LFL, in referring to "the income generated in its geographical area by passive subjects resident in Portuguese territory who carry on, as a main activity, a commercial, industrial or agricultural activity and non-residents with a permanent establishment in that territory", would impose that the Surtax be allocated to each of the passive subjects by the Municipalities in which these would generate income and not generically to the whole Group, since each one of the companies that compose it is a passive subject of IRC;

6.5 It was indeed, in the opinion of the Respondent, this the justification that was at the basis of the amendment of article 14 of the LFL by Law 64-B/2011, which came to expressly provide that "when the special regime of taxation of groups of companies is applicable, the Surtax is levied on the individual taxable profit of each one of the companies of the group, without prejudice to the provision in article 115 of the IRC Code", considering the AT that this amendment has an interpretative character – and not an innovative one – of the previous legislation.

1. On 17 January 2014 the Respondent came to request the Tribunal for the extinction of the proceedings, on the ground of supervening uselessness of the dispute, basing its claim on the content of Notice no. ... of the IRC Services Directorate, which conveyed a new understanding sanctioned by the Secretary of State for Tax Affairs on the method of calculating the Municipal Surtax in the tax year in question, as well as on the dispatch of the Director General of Taxes determining that "the application presented by the Applicant in Gracious Complaint and reiterated in arbitral proceedings be granted, revoking the express act of denial issued in that gracious proceeding".

2. Observing the rules of the adversarial principle, this Tribunal granted a period to the Tax Authority to come clarify the existence and content of any possible act of revision or revocation, as well as to comply with the provision in no. 2 of article 20 of the RJAT, all as evidenced in the Minutes of the First Meeting of the Arbitral Tribunal.

3. The Tax Authority came, in response, to reiterate its request, attaching to the case file a new Dispatch in which it is clarified that, in the present case, the right to compensation interest of the Applicant is not disputable.

4. The Tribunal, in view of the interests at stake and the applicable law, determined that the proceedings continue with their normal processing, issuing the following dispatch:

"i) The Tax Authority may, in accordance with article 13 of the RJAT, proceed to the revocation of the impugned act, provided that it respects the period established in the respective no. 1;

ii) The practice of new acts on the question which is the subject matter of the dispute, once that period has passed, depends on the occurrence of new facts;

iii) In the present circumstance no fact is known to have occurred that is capable of altering the position that the Tax Authority repeatedly stated in the administrative procedure that is at the origin of the present case;

iv) Thus, even if we were faced with an implicit revocation of the impugned act, it would always be, in light of the applicable norms, untimely;

v) It does not equally result unequivocally, from the application or from the documents attached by the Tax Authority, that an act of revision of the assessment act impugned has been practiced in accordance with the terms provided in article 78 of the General Tax Law, since such an act would always have to be expressly practiced, duly reasoned and expressly notified to the taxpayer, under penalty of not being able to produce the intended external effect;

vi) From what has been said it follows that no new fact has occurred in the legal order capable of definitively eliminating the interest of the Applicant in the appreciation of its claim, since no right has in the meantime been constituted capable of being potentially exercised;

vii) It will always be said, moreover, that even if we were faced with an act of official revision by initiative of the Tax Authority, such an act, insofar as it would itself also be capable of revocation, would always be insufficient to determine the extinction of the proceedings by supervening uselessness of the dispute".

1. Both parties were granted the possibility of producing oral arguments, as evidenced in the Minutes of the Meeting of the Arbitral Tribunal of 24 February 2014.

2. Taking into account the delay in procedural processing that occurred as a consequence of the request for extinction of the proceedings presented by the AT on the ground of supervening uselessness of the dispute, which was subsequently denied, the Tribunal decided, in accordance with the terms and for the purposes of the provision in no. 2 of article 21 of Decree-Law no. 10/2011, to extend for two months the period for issuing the arbitral decision.

B – Preliminary Issues

1. The dilatory exceptions raised by the Respondent require us to rule first on the question of the competence of this arbitral tribunal, as it is of priority knowledge in light of the provision in article 13 of the Code of Procedure in Administrative Courts (CPTA), here applicable by force of paragraph c) of no. 1 of article 29 of the RJAT. However, the question of the incompetence of the tribunal is raised by the Respondent in close connection with the question of its lack of standing to be alone in court. In the opinion of the Respondent, since the AT is merely the "collector" of the Surtax, it would be up to the Municipalities, as active subjects of the tax legal relationship, to have passive standing in the present dispute. However – invokes the Respondent – the Municipalities are not bound by arbitral jurisdiction, in accordance with no. 1 of article 4 of the RJAT, which, in its opinion, would entail the incompetence of this Tribunal.

2. We do not believe that the Respondent is right. Moreover, the question of the standing of the AT in proceedings for annulment of Surtaxes, as well as that of the competence of the Arbitral Tribunals themselves, has already been the subject of various decisions of this CAAD, namely in cases nos. 18/2001-T; 82/2012-T and 112/2013-T, the reasoning of which is followed closely. First of all, it is important to note that this arbitral tribunal is competent ratione materiae, since what is discussed here is the legality of a tax act provided for in paragraph a) of no. 1 of article 2 of the RJAT (act of assessment of taxes, self-assessment, withholding at source and payment on account). On the other hand, article 2 of Ordinance no. 112-A/2011, of 22 March, which establishes the scope of binding of the Tax Authority and Customs Authority (which succeeded the General Directorate of Taxes and the Directorate-General of Customs and Special Consumption Taxes in their respective functions) to the Arbitral Tribunals of CAAD, expressly determines that decisions that have for their object the appreciation of claims relating to taxes whose administration is entrusted to the AT bind them, provided that, as is the case in the present case, the arbitral ruling has been preceded by recourse to the administrative route whenever the legality of self-assessments, withholdings at source or payments on account is at issue.

3. Given this, the appreciation of the question of the passive standing of the AT is confined exclusively to the question of whether the Surtax, although indisputably a tax of Municipal revenue, is or is not a tax whose administration is entrusted to the AT. Now, in accordance with the Local Finance Law then in force, it is the Municipalities that have exclusively: to deliberate annually on the imposition of the Surtax, setting the respective rate up to the legal limit; to communicate timely their deliberation to the Tax Authority and Customs Authority; to receive the product of its collection, net of administrative expenses, borne by the Tax Authority and Customs Authority; and to access updated information on the same. The Municipalities do not possess, therefore, any competence in the administration of the tax, since it is exclusively up to the AT to conduct the respective tax procedures. On the other hand, the Municipalities' holding of the position of tax creditor does not confer on them, in accordance with the applicable norms, procedural standing. Moreover, this results from the fact that it was the Tax Authority, on its own and without need for any intervention by the Municipality, that judged the gracious complaint filed by the Applicant to be unfounded, in accordance with article 9 of the Code of Tax Procedure and Process.

4. Now, in that the Municipalities do not have competence to intervene in the procedure of assessment and collection of the tax; there does not rest upon them – but upon the AT, as provided in article 100 of the General Tax Law – the responsibility, before the taxpayer, to refund the tax that is judged to be illegally collected; and it is not the case that the Municipalities fall within the scope of binding to the jurisdiction of the Arbitral Tribunals of CAAD, as results from Ordinance no. 112-A/2011 of 22 March, the passive standing of the Tax Authority and Customs Authority is demonstrated in the present proceedings ut singuli. Based on this conclusion, the need to further explore the preliminary issue of the compulsory intervention of the Municipalities is deemed waived.

C – Trial

1. The Tribunal is competent. The parties have legal personality and capacity, are proper parties and the Applicant is duly represented by a lawyer. The case does not suffer from vices that invalidate it and all preliminary issues raised were appreciated, whereby it is necessary to rule on the merits of the question.

D – Proven and Unproven Facts

1. With interest for the decision of the case, the following facts are considered proven, which result, essentially, from the documentary evidence produced and the agreement between the parties:

18.1 The Applicant is the holding company of a group of companies taxed according to the Special Regime for Taxation of Groups of Companies (RETGS), of which the companies B..., S.A and C..., S.A. are also part.

18.2 On 1 January 2010 the Applicant held, directly or indirectly, at least 90% of the share capital of the dominated companies, giving it those participations more than 50% of the votes.

18.3 The group calculated, with reference to the tax year 2010, a tax profit of 374,775.63 €, resulting from the algebraic sum of the tax results calculated by the companies that make up the group,

18.4 Being that the Applicant, individually considered, calculated a positive tax result of 1,101,110.20 €, B..., S.A. calculated a positive tax result of 156,706.09 € and C..., S.A. a negative tax result of 883,040.66 €.

18.5 Within the legal period, the Applicant submitted electronically its Periodic Declaration of Income (IRC form 22), having for this purpose, in accordance with the generic guidelines published by the Tax Authority and Customs Authority in Circular Notice no. 20131 of 14 April 2008, self-assessed Surtax in the amount of 18,867.20€.

18.6 On 31 May 2011 it proceeded to payment of the assessed tax.

18.7 The Applicant presented a Gracious Complaint against the said self-assessment on 18 February 2013, which was expressly denied by notification received on 4 June 2013.

1. There were no unproven facts.

E – Law

1. The abundant and settled case law of both the STA and this CAAD is followed closely, in particular that of the decision issued in case no. 22/11-T, regarding the method of calculating the Municipal Surtax before the entry into force of Law no. 64-B/2011 of 30 December (State Budget Law for 2012). As results from the Report, what is at issue in the present case is the question of how the Municipal Surtax is determined in cases where the taxable profit is calculated under the Special Regime for Taxation of Groups of Companies (REGTS): whether based on the individual profit of each of the companies that make up the group, or based on the taxable profit of the group.

2. The RETGS is regulated in the current articles 69 to 71 of the IRC Code, corresponding to the previous articles 63 to 65, in the wording in force at the date of the tax fact at issue in the present case. No. 1 of article 63, no. 1 of the IRC Code, in the wording in force at the date of the tax fact provided that "Existing a group of companies, the holding company may opt for the application of the special regime for determining the taxable base in relation to all companies of the group". In turn, article 64 of the same code established that: "1 - In relation to each of the tax periods covered by the application of the special regime, the taxable profit of the group is calculated by the holding company, through the algebraic sum of the taxable profits and tax losses calculated in the periodic individual declarations of each one of the companies belonging to the group. 2 - The amount obtained according to the previous number is corrected for the portion of profits distributed among the companies of the group that is included in the individual taxable bases". Finally, no. 1 of article 14 of Law no. 2/2007, of 15 January, (Local Finance Law, hereinafter LFL), which "The Municipalities may deliberate to annually impose a Surtax, up to the limit of 1.5% on the taxable profit subject and not exempt from Corporate Income Tax (IRC) (…), which corresponds to the proportion of income generated in its geographical area by passive subjects resident in Portuguese territory who carry on, as a main activity, a commercial, industrial or agricultural activity and non-residents with a permanent establishment in that territory".

3. Law no. 64-B/2011 of 30 December (State Budget Law for 2012), in its article 57, gave to no. 8 of that article 14 of the LFL the following wording: "When the special regime of taxation of groups of companies is applicable, the surtax is levied on the individual taxable profit of each one of the companies of the group, without prejudice to the provision in article 115 of the IRC Code". There not being, in the previous wording of the norm, elements that would permit the interpreter to conclude unequivocally for this solution, the question naturally arose of whether such a norm would have an interpretative character or would establish a new solution.

4. Recent case law of the STA decided that "When the special regime of taxation of groups of companies is applicable, the surtax must be levied on the taxable profit of the group and not on the individual profit of each one of the companies." (see, among others, the Judgments issued in case no. 0909/10, no. 0309/11 and no. 0234/12, available at www.dgsi.pt) and has even taken sides on the question of whether the wording given to no. 8 of article 14 of the LFL by the State Budget Law for 2012 has an innovative or interpretative character: "No. 8 of article 14 of the Local Finance Law, in the wording given to it by article 57 of the State Budget Law for 2012 (Law no. 64-B/2011, of 30 December) is an innovative norm and not an interpretative one." (Judgment in Case no. 0234/12, available at www.dgsi.pt).

5. On this question, and following closely the position of JOSÉ DE OLIVEIRA ASCENSÃO, "How do we know then that the law is interpretative? 1) First and foremost through express declaration contained in the text of the diploma. 2) The express statement of the interpretative character contained in the preamble of the diploma (...) also has significance. 3) If the source expressly determines nothing, the interpretative character can still result from the text, when it is blatant the tacit reference of the new source to a pre-existing normative situation of doubt. We see no reason to require that the interpretative character be expressly affirmed, when retroactivity does not have to be" – in The Law Introduction and General Theory – A Portuguese-Brazilian Perspective, 11th edition, Coimbra, Almedina, 2001, p. 551.

6. From the analysis of article 57 of the State Budget Law for 2012 we can also conclude that the said norm does not assume an interpretative character, instead assuming true innovative character. Moreover, faced with the legislature's silence on its character, the retroactive application of the norm would always raise serious problems of constitutionality. In addition to these arguments, two others contribute to the interpretation that has been defended and that were already exposed in the arbitral decision issued in case 5/2012-T in the following manner: "also the rational element of the interpretation supports the position defended by the present applicant, since, as the same also points out, such position does not cause added difficulties in the apportionment of the Municipal Surtax product among the Municipalities to which they are entitled, and that such solution realizes more perfectly the constitutional principle of taxation of companies by real profit. Finally, and as the present applicant also referred in oral arguments, any eventual lack of clarity of the law, or even a lacuna thereof, in the matter of distribution of the Surtax among the Municipalities in cases of taxation of groups of companies, could never justify a correction – interpretative or analogous – at the level of the presuppositions of the incidence of the tax in question, rather, and at most, could imply a correction at the level of the norms regulating that same distribution".

7. The validity of such a conclusion does not seem to be affected by the argument put forward by the AT in the administrative doctrine conveyed in Circular Notice no. ... of the DSIRC, of 14 April 2008. In fact, in addition to the unavailability before this tribunal or lack of binding effect of the said administrative doctrine, it is understood that the interpretation according to which the incidence of the municipal surtax occurs on the consolidated profit of the group, and not on the individually calculated profits of each of its members, in no way collides with the role of that tax as a privileged source of municipal revenue, either as "an instrument of fiscal policy, in the autonomy of local authority and in the promotion of economic and social cohesion of the entire territory". Equally, as an interpretative element, if it is true that "each company calculates a taxable profit in its individual declaration", it is no less true that no. 1 of article 14 of the LFL does not limit itself to stating as the object of incidence the "taxable profit", but the "taxable profit subject and not exempt" from tax (IRC). Now, as follows from the provision in the current article 70 of the IRC Code, the taxable profit in a group of companies subject to RETGS is the taxable profit calculated by the holding company, through the algebraic sum of the taxable profits and tax losses calculated in the periodic individual declarations of each one of the companies belonging to the group. It is also important to take into account that Law no. 12-A/2010, of 20 June, which created the IRC surtax designated as "state surtax", determined that "When the special regime of taxation of groups of companies is applicable, the rate referred to in the previous number is levied on the taxable profit calculated in the periodic individual declaration of each one of the companies of the group, including that of the holding company". The clarity of the said incidence norm and of the legislative intent contrasts absolutely with the tenor of article 14 of the LFL, in the wording in force at the date of the tax fact disputed in the present case.

8. Also in the STA judgment of 22 June 2011 (Case no. 309/2011) it was concluded that "in accordance with the current regime of the Surtax that results from the Local Finance Law, approved by Law 2/2007, of 15 January, the Surtax came to be levied on the taxable profit subject and not exempt from IRC. When the special regime of taxation of groups of companies is applicable, the Surtax must be levied on the taxable profit of the group and not on the individual profit of each one of the companies".

9. Finally, also in the case law of the CAAD, the merits question of the present case was already decided, with all arbitral decisions having judged the question in the manner here defended.

10. In view of the foregoing - in the wake of the case law of the STA and the CAAD which is regarded as fully correct in view of the applicable legal norms – it is judged that the Municipal Surtax is levied, in the case of application of the special regime of taxation of groups of companies, on the "taxable profit of the group" and not on the "individual profit of each one of the companies" and, in consequence, the IRC assessment impugned suffers from a defect of violation of law by error in the legal presuppositions, suffering from manifest illegality, and should be partially annulled, in the part corresponding to 13,245.61€ assessed in excess as Municipal Surtax.

11. As for the question of the compensation interest to which the Applicant claims to be entitled, article 43 no. 1 of the General Tax Law provides that "Compensation interest is due when it is determined, in gracious complaint or judicial challenge, that there was error attributable to the services from which results payment of the tax debt in an amount greater than legally due", and in accordance with no. 2 of that article it is considered "also to be error attributable to the services in cases where, although the assessment is carried out based on the declaration of the taxpayer, the latter has followed, in its completion, the generic guidelines of the tax administration, duly published." Taking into account that the tax was self-assessed in accordance with the administrative doctrine conveyed in Circular Notice no. 20.132, of 14 April, no doubt will remain that there is error attributable to the services, which will determine the payment of compensation interest in accordance with articles 43 of the General Tax Law and 61 of the Code of Tax Procedure and Process, to be computed from the day following the day of the undue payment until the date of issuance of the respective credit note, all with the other legal consequences.

F – Decision

1. It is decided:

31.1 To judge unfounded the argued exceptions of incompetence of the Arbitral Tribunal and passive standing of the Respondent;

31.2 To judge founded the challenge to the legality of the Municipal Surtax assessments relating to the tax year 2010 in the amount of 13,245.61€ due to defect of violation of law by error in the legal presuppositions, annulling consequently such assessments, and condemning the Respondent to the reimbursement of the amount unduly paid;

31.3 To judge founded the application for payment of compensation interest at the legal rate counted from the date of payment of the respective surtaxes until the date of reimbursement of the corresponding amounts.

The value of the case is set at 13,245.61€ in accordance with paragraph a) of no. 1 of article 97A, applicable by force of paragraphs a) and b) of no. 1 of article 29 of the RJAT and no. 2 of article 3 of the Regulation of Costs in Tax Arbitration Proceedings.

The value of the costs of the case is set at 918.00€, in accordance with Table I of the Regulation of Costs of Tax Arbitration Proceedings, to be paid entirely by the Respondent, since the Applicant obtained full acceptance of its application, in accordance with no. 2 of article 12 and no. 4 of article 22, both of the RJAT and no. 3 of article 4 of the cited Regulation.

Register and notify.

Porto, 19 May 2014,

The Arbitrator

Filipa Correia Pinto