Process: 162/2018-T

Date: October 29, 2018

Tax Type: IRC

Source: Original CAAD Decision

Summary

This CAAD arbitral decision (Process 162/2018-T) addresses a corporate taxpayer's challenge to IRC (Corporate Income Tax) assessment corrections for 2013-2014 based on transfer pricing adjustments under Article 63 of the IRC Code. The taxpayer, A... S.A., a pharmaceutical company, contested arithmetic corrections made during tax inspection that applied transfer pricing rules. The company underwent corporate reorganization in 2009, including merger operations and financing arrangements totaling €74.5 million. The Tax Authority (AT) made corrections to taxable income using transfer pricing methodology. The arbitral tribunal, composed of three arbitrators appointed according to RJAT (Regime Jurídico da Arbitragem Tributária), was constituted on June 18, 2018. A critical procedural issue arose regarding material jurisdiction: the AT raised an objection concerning the tribunal's competence to determine deductible tax losses. The tribunal ruled it lacked jurisdiction to determine tax losses, as this falls within the exclusive competence of the Tax Authority under Article 24(1) RJAT, following the principle that arbitral tribunals have jurisdiction only for annulment of administrative acts, not for establishing tax positions. However, the tribunal confirmed its jurisdiction over the main claims: annulling the IRC assessments and compensation interest, and potentially awarding indemnification for bank guarantee costs under Articles 43(1) LGT and 171 CPPT. This decision clarifies the procedural boundaries of CAAD arbitration in transfer pricing disputes, distinguishing between annulment powers and administrative determination functions, establishing important precedent for corporate taxpayers contesting transfer pricing adjustments through alternative dispute resolution mechanisms in Portugal.

Full Decision

ARBITRAL DECISION (see full version in PDF)

The arbitrators Counsel Jorge Lopes de Sousa (arbitrator-president, appointed by the CAAD Ethics Council), Dr. Paulo Mendonça and Dr. Nuno Maldonado Sousa, appointed by the Claimant and the Respondent, respectively, to form the Arbitral Tribunal, constituted on 18-06-2018, agree as follows:

1. Report

A..., S.A., a legal entity and taxpayer no. ..., of the Tax Office of ..., with registered office at Rua ..., no. ..., ..., ...-... ... (hereinafter referred to as the "Claimant"), has requested the constitution of an Arbitral Tribunal pursuant to Decree-Law no. 10/2011, of 20 January (hereinafter "RJAT").

The Claimant requests:

  • The declaration of illegality and annulment of the arithmetic corrections to the taxable base of Corporate Income Tax (IRC) for the years 2013 and 2014, made in the course of tax inspection, using the transfer pricing regime set out in article 63 of the Corporate Income Tax Code (CIRC);

  • As a consequence of a), the declaration of illegality and consequent annulment of IRC assessment no. 2016..., of 02.08.2016, and compensation no. 2026..., relating to the year 2013;

  • Also as a consequence of a), the declaration of illegality and consequent annulment of IRC assessment no. 2016..., of 02.08.2016, and compensation no. 2016..., relating to the year 2014;

  • Also as a consequence of a), the full restoration of the situation existing prior to the corrections made, in particular regarding the available tax losses;

  • The condemnation of the Public Treasury to pay compensation for reimbursement of costs incurred with the provision of bank guarantees to prevent compulsory collection of the tax.

The Respondent is the TAX AUTHORITY AND CUSTOMS AUTHORITY (hereinafter "TA").

The Claimant appointed Dr. Paulo Mendonça as Arbitrator, pursuant to the provisions of article 6, no. 2, paragraph b), of the RJAT.

The request for constitution of the Arbitral Tribunal was accepted by the President of CAAD and automatically notified to the TA on 03-04-2018.

Pursuant to the provisions of paragraph b) of no. 2 of article 6 and no. 3 of the RJAT, and within the deadline set out in no. 1 of article 13 of the RJAT, the highest official of the Tax Administration service appointed Dr. Nuno Maldonado Sousa as Arbitrator.

Following a request by the Arbitrators appointed by the Parties, the CAAD Ethics Council appointed Counselor Jorge Lopes de Sousa as arbitrator-president, who accepted the appointment.

Pursuant to and for the purposes of the provisions in no. 7 of article 11 of the RJAT, the President of CAAD notified the Parties of this appointment on 29-05-2018.

Thus, in accordance with the provisions of no. 7 of article 11 of the RJAT, with the deadline set out in no. 1 of article 13 of the RJAT having elapsed without the Parties making any objection, the Collective Arbitral Tribunal was constituted on 18-06-2018.

The TA submitted a reply raising the objection of lack of material jurisdiction of the tribunal to determine deductible tax losses and argued that the request for an arbitral decision should be judged as unfounded.

By order of 07-09-2018 it was decided to dispense with the holding of the meeting provided for in article 18 of the RJAT and that the proceedings should continue with optional pleadings.

The Parties submitted pleadings.

The arbitral tribunal was regularly constituted.

The parties possess legal personality and capacity, are legitimate (articles 4 and 10, no. 2, of the same instrument and article 1 of Regulation no. 112-A/2011, of 22 March) and are properly represented.

The proceedings do not suffer from any nullities.

It is necessary to first consider the objection raised, in accordance with the provisions of article 13 of the Code of Administrative Procedure (CPTA), subsidiarily applicable by virtue of the provisions of article 29, no. 1, paragraph c), of the RJAT.

2. Question of Jurisdiction to Assess the Request for Determination of Deductible Tax Losses

The Claimant requests, among other things, "the full restoration of the situation existing prior to the corrections made, in particular regarding the available tax losses".

The TA argues that this Arbitral Tribunal does not have jurisdiction to determine tax losses.

The RJAT indicates, in its article 2, the jurisdiction of arbitral tribunals operating within CAAD, making reference only to the declaration of illegality of acts.

In its article 24 are indicated the duties incumbent upon the Tax Authority and Customs Authority as a consequence of the judgment of the arbitral decision request as founded.

It has been understood that within the scope of the arbitral process, in line with the scope of the judicial challenge process to which it is an alternative procedural remedy, there are included, as in the judicial challenge process, in addition to the jurisdiction for annulment of acts of the types referred to in article 2 of the RJAT, jurisdiction to condemn to indemnity interest and compensation for undue guarantee, as this follows from articles 43, no. 1, of the General Tax Code (LGT) and 171 of the Code of Tax Procedure (CPPT).

However, the scope of the arbitral process (nor the judicial challenge process) does not include jurisdiction to determine tax losses, this being a matter within the jurisdiction of the TA, pursuant to article 24, no. 1, of the RJAT.

Thus, the TA is correct in arguing for the lack of jurisdiction of this Arbitral Tribunal to assess the request for determination of available tax losses, and the objection raised is therefore judged as founded and this partial lack of material jurisdiction is declared.

3. Factual Matters

3.1. Proven Facts

The following facts are considered proven:

  • The Claimant was incorporated in 2007 under the designation B..., LDA. ("B...") and its corporate purpose consists in the manufacture, marketing, import and export of medicines, pharmaceutical specialties, chemical products, personal hygiene products, cosmetics, dietetics, clinical, hospital and surgical use products, biotechnology products, biogenerics, diagnostics and clinical and hospital material, pharmaceutical active ingredients and other components intended for the manufacture of pharmaceutical specialties, as well as the provision of services for the promotion of medicines and other pharmaceutical products;

  • In 2009, the Claimant participated in a corporate reorganization operation which resulted in the implementation of a series of acts, including the entry of a new shareholder, the merger by incorporation of other entities and the execution of financing from banking institutions;

  • The merger, which involved the alteration of the corporate designation of B... to A... and also the incorporation and consequent extinction of the four companies identified in the previous paragraph, was registered on 2 December 2009 by Registration no. .../..., with accounting effects retroactive to 1 January 2009;

  • On 21-01-2009, the shareholding structure of the Claimant was as follows: [shareholding details]

  • On 17-02-2012, C... became the holder of the entirety of the Claimant's capital;

  • The Claimant, together with other entities, entered into a financing contract on 21-01-2009 with a banking syndicate in the amount of €74,500,000.00, divided into three tranches (document no. 4 attached with the request for arbitral decision, the content of which is hereby reproduced):

    • Tranche A, in the amount of €53,400,000.00, intended for refinancing of part of the group's debt at that date;

    • Tranche B, in the amount of €14,100,000.00, to provide funds to the Claimant, as Acquirer, for payment of the acquisition price of company D..., SA and subsidiaries directly or indirectly held by it;

    • Treasury Tranche: 7 million Euros, intended to provide A... with the necessary funds for any future working capital requirements;

  • Among the guarantees provided in favor of the banking syndicate is the first-degree pledge of "shareholder credits", which correspond, according to no. 68 of the definitions contained in the financing contract, to the credits arising for each of the shareholders of the Claimant at that date - namely: C... (78.545%), E... (3.677%), F... (3.677%), G... (3.677%), H... (9.956%) and I... (0.468%) (section G, clause 18 of the Guarantee Contract, which is contained in document no. 7 attached with the request for arbitral decision, the content of which is hereby reproduced);

  • In the same Guarantee Contract, other guarantees are established in favor of the lending banking entities, namely financial pledges and on shares and quotas, including the rights arising therefrom and future corporate interests (clauses 2.1 to 2.5, 2.8), promise of pledge of corporate interests (clause 4), financial pledge of bank accounts (clause 6), pledge of movable property and promise of pledge of movable property (clauses 7 to 9), pledge of trademarks and promise of pledge of trademarks and patents (clauses 10 to 14), pledge of establishments (clauses 15 to 17), pledge of credits (including the very supplier loans, as provided for in clause 18) and mortgage and promise of mortgage on real property (clauses 23 and 24);

  • On 21-01-2009, the shareholders referred to made supplier loans (suprimentos) to the Claimant in the total amount of €80,062,500 (€80,212,500 as from 20.03.2012), in proportion to their shareholding in the share capital, as per the following table: [shareholding details]

  • The supplier loans referred to were intended for the acquisition by the Claimant of company D..., SA and subsidiaries directly or indirectly held by it;

  • In the supplier loan contracts, a fixed interest rate of 10% per annum was established, with the exception of the contract concluded with H..., in which an interest rate of 12.55% was provided, but the rate actually practiced was 10% per annum;

  • In the supplier loan contracts contained in the administrative file, the content of which is hereby reproduced, no specific guarantee was provided and clause 8 established the subordination of the shareholders' credits to the banking financing referred to above;

  • The Tax Authority and Customs Authority conducted a tax inspection of the Claimant, relating to the years 2013 and 2014, in which a Tax Inspection Report was prepared which is contained in the administrative file, in which the following is stated, among other matters:

[Tax Inspection Report excerpts detailing the company's business, capital structure, and financing]

  • The supplier loans made on 21-01-2009 by all shareholders had the purpose of providing the company with financial means to acquire the entirety of the capital of D... SA (NIPC...), which occurred on the same date (2009/01/21);

  • D..., as already referred to in this report, held the entirety of the capital of companies A... SA (NIPC...), M... SA (NIPC...) and N... SA (NIPC...), whereby these companies, even if indirectly, also became the property of A... (then designated B... SA) as from 2009/01/21 through the acquisition of the capital of D...;

  • On 2009/12/02, the merger occurred, by transfer to the incorporating company (B... SA, current A...) of the assets of the incorporated companies: D..., A... SA, M... SA and N... SA. The merger was retroactive to 1 January 2009;

  • Thus, it is concluded that the supplier loans effectively provided the company with a more solid and comprehensive structure in the market in which it operates and even provided it with the use of the brand "O..." which later became the company's corporate designation (previously B... SA);

  • For the referred to reasons, the interest resulting from the supplier loans made shall be accepted, in general terms, for tax purposes in accordance with the aforementioned article 23 of the CIRC;

  • However, paragraph j) of no. 1 of article 45 of the CIRC (in force until the publication of Law no. 2/2014, of 16 January, and applicable to the year 2013) provides that charges for "interest and other forms of remuneration of supplier loans and loans made by the shareholder to the company, to the extent that they exceed the value corresponding to the 12-month Euribor rate on the day the debt was created or other rate defined by ministerial regulation using that rate as an indexing variable" are not deductible for purposes of determining taxable profit. This article has correspondence in the current paragraph m) of no. 1 of article 23-A of the CIRC, in the wording of Law no. 2/2014, of 16 January, applicable to the year 2014;

  • On 4 March 2002, Regulation 184/2002 was published, which for purposes of paragraph j) of no. 1 of article 45 of the CIRC (which at the date of the Regulation corresponded to paragraph j) of no. 1 of article 42 of the CIRC) sets at 1.5% the spread to be added to the 12-month Euribor rate on the day the debt was created, which in the case under analysis (2009/01/21) was 2.474%;

  • Thus, in the case in question, charges for interest on supplier loans resulting from an interest rate exceeding 3.974% would not be deductible for purposes of determining taxable profit;

  • However, the Regulation further states that in situations where the provisions regarding transfer prices apply, the provisions of paragraph j) of no. 1 of article 45 of the CIRC do not apply, making it necessary to analyze how the specific situation fits within the Arm's Length Principle and Transfer Prices;

  • The Arm's Length Principle, enshrined in the national legal system in no. 1 of article 63 of the CIRC, defines that "in commercial transactions, including in particular transactions or series of transactions on goods, rights or services, as well as in financial transactions, carried out between a taxpayer and any other entity, subject or not to IRC, with which it is in a situation of special relationships, terms or conditions substantially identical to those which would normally be contracted, accepted and practiced between independent entities in comparable transactions must be contracted, accepted and practiced" (emphasis added);

  • To determine which terms and conditions would normally be agreed, accepted or practiced between independent entities, no. 2 of the same article states that "the taxpayer must adopt (...) the method or methods capable of ensuring the highest degree of comparability between the transactions or series of transactions that it carries out and other substantially identical ones, in normal market situations or in the absence of special relationships, taking into account in particular the characteristics of the goods, rights or services, market position, economic and financial situation, business strategy, and other relevant characteristics of the taxpayers involved, the functions performed by them, the assets used and the allocation of risk";

  • For this purpose, the taxpayer must choose one of the methods referred to in no. 3 of article 63 of the CIRC, which are detailed in Regulation 1446-C/2001, of 21 December, which came to regulate transfer prices in transactions carried out between a taxpayer and any other entity;

  • The taxpayer must also, according to no. 6 of article 63 of the CIRC, "maintain organized, in accordance with the terms established for the tax documentation process referred to in article 130, the documentation relating to the policy adopted in terms of transfer prices, including the guidelines or instructions relating to its application, the contracts and other legal acts concluded with entities that with it are in a situation of special relationships, with the modifications that occur & with information about its compliance, the documentation and information relating to those entities and also to the companies and the goods or services used as comparison terms, the functional and financial analyses and the sectoral data, and other information and elements that it took into account for determining the terms and conditions normally agreed, accepted or practiced between independent entities and for selecting the method or methods used";

  • The supplier loans realized (a related party transaction) are subordinated to the rules of transfer prices. Pursuant to the already stated fact, for application of transfer pricing rules, it is necessary for the taxpayer to carry out transactions with an entity with which it is in a situation of special relationships, and must then ensure that substantially identical terms or conditions are being contracted and practiced to those which would normally be between independent entities in comparable transactions;

  • It is thus important to know the legal definition of special relationships and whether it applies to the case under analysis, i.e., to the supplier loans realized by the shareholders of A... in 2009;

  • No. 4 of article 63 of the CIRC defines that "special relationships exist between two entities in situations where one has the power to exercise, directly or indirectly, significant influence on the management decisions of the other, which is considered verified, in particular, between:

    a) An entity and the holders of its capital, or the spouses, ascendants or descendants of these, who hold, directly or indirectly, a participation not less than 10% of the capital or voting rights; (...)

    b) (...)

    c) An entity and the members of its corporate bodies, or any administration, management, direction or supervisory bodies, and respective spouses, ascendants and descendants; (...)";

  • Regarding the provision stated in paragraph a) above cited, we can analyze the composition of the capital of A... on the date of conclusion of the supplier loan contracts (2009/01/21), and which was as per the table below: [shareholding details]

  • From this analysis we can conclude that the shareholder C..., who on that date held 78.545% of the capital of A..., fits within paragraph a) of no. 4 of article 63 of the CIRC, being considered as having (and having) the power to exercise significant influence on the company's management decisions, thus existing special relationships between these two entities;

  • Regarding the provision stated in paragraph c) of no. 4 of article 63 of the CIRC, we can analyze the composition of the management bodies of A... on the date of conclusion of the supplier loan contracts (2009/01/21), and which was as per the table below: [composition details]

  • From analysis of the previous table it was concluded that three of the shareholders who made supplier loans on 2009/01/21 were, at that date, directors of the company, one of them serving as president of the Board of Directors (H...) and two serving as Board Members (E... and I...), thus all of them having the power to exercise significant influence on the company's management decisions, thus existing special relationships between A... and each of them;

  • Regarding the remaining shareholders who made supplier loans, namely: G... and F..., it is verified that they are sons of the shareholder and board member of the company E..., and thus it is concluded that they also fit within paragraph c) of no. 4 of article 63 of the CIRC;

  • By all the aforementioned, we conclude that the case in question - the realization of supplier loans by shareholders to the company - is a related party transaction, pursuant to no. 4 of article 63 of the CIRC and paragraph b) of no. 3 of article 1 of Regulation 1446-C/2001, of 21 December, and is thus subject to compliance with the Arm's Length Principle, already referred to;

  • The taxpayer reached the same conclusion, given that it produced the transfer pricing files, referred to in no. 6 of article 63 of the CIRC, for the years 2011 and 2012, delivered in the course of the tax inspection, in which it identifies the supplier loans made in 2009, as well as the reinforcement made in 2012, and which originated charges with interest to be paid in 2011 and 2012, as a related party transaction (points VI.2 and V of the transfer pricing file of 2011 and 2012, respectively);

  • According to the provisions of no. 2 of article 63 of the Code of IRC, as well as no. 1 of article 4 of Regulation 1446-C/2001, of 21 December, the taxpayer must adopt, for determining the terms and conditions which would normally be agreed, accepted or practiced between independent entities, the most appropriate method to each transaction or series of transactions;

  • According to no. 2 of article 4 of the aforementioned Regulation, the most appropriate method for each transaction or series of transactions is deemed to be that which is capable of providing the best and most reliable estimate of the terms and conditions that would normally be contracted, accepted and practiced in a situation of full competition, with the choice being made for the method most apt to provide the highest degree of comparability between related transactions and other non-related ones and between the entities selected for comparison, which has the best quality and greater quantity of information available for its proper justification and application and which involves the least number of adjustments for purposes of eliminating the differences existing between the facts and comparable situations;

  • The Code of IRC and the aforementioned Regulation enumerate the methods to be used, in line with OECD Report guidance, which are grouped into one of two typologies, namely:

    • Traditional Methods or Methods Based on Transactions (Traditional Transactional Methods),

    • Methods Based on the Profit of Transactions (Transactional Profit Methods);

  • Article 63 of the Code of IRC and no. 1 of article 4 of the Regulation identify the following methods based on transactions:

    • Comparable Uncontrolled Price Method;

    • Resale Price Method;

    • Cost Plus Method;

    and also the following methods based on transaction profit:

    • Profit Split Method;

    • Net Margin Transactional Method;

  • In accordance with the most recent OECD Guidelines on transfer pricing (see § 2.1 and following of the Guidelines), the selection of one of these methods for assessing the conformity of a related party transaction with the Arm's Length Principle aims to find the most appropriate method for each specific case;

  • In this sense, and considering the provisions in § 2.3 of those Guidelines, methods based on transactions are seen as the most direct methods of establishing whether the conditions practiced in the context of a related party transaction are at arm's length;

  • Furthermore, provided that it is possible to identify comparable transactions in the open market, the Comparable Uncontrolled Price Method constitutes the most direct and most reliable means of applying the Arm's Length Principle, and should be given preference over all others;

  • According to no. 2 of article 6 of the Regulation, this method may be used, in particular, under the following conditions:

    "a) When the taxpayer or an entity belonging to the same group carries out a transaction of the same nature that has as its object a service or product identical or similar, in quantity or value comparable, and in substantially identical terms and conditions, with an independent entity in the same or similar markets" (internal comparables):

    "b) When an independent entity carries out a transaction of the same nature that has as its object a service or a product identical or similar, in quantity or value comparable, and in substantially identical terms and conditions, in the same market or in similar markets" (external comparables);

  • From analysis of the transfer pricing reports presented by A... in the course of the inspection procedure, relating to the years 2013 and 2014, it was verified that this, with the objective of assessing whether the terms and conditions agreed and practiced in the related party transaction observed the Arm's Length Principle, considered the application of the various methods described in no. 3 of article 63 of the CIRC;

  • From the analysis carried out, the taxpayer concluded that the Comparable Uncontrolled Price Method is the most appropriate to assess whether the related party transaction observes, or not, the Arm's Length Principle (see pages 51 and 52 of the transfer pricing reports of 2013 and 2014, respectively);

  • It further states that although A... holds a loan from banking entities, this was not considered a reliable comparable given that, taking into account the amounts of the bank loan in question, this factor would have a relevant impact on the pricing of the transaction, in particular on the interest rate;

  • Thus, the taxpayer considered that it would not be possible to use an internal comparable, resorting instead to external comparables, namely by using the interest rates practiced by banking institutions, for medium/long-term financing, with financing amounts generally comparable to the transaction under analysis;

  • In its analysis the taxpayer intended to use an external comparable, through the identification of interest rates applicable to financings generally comparable to the operation of granting supplier loans to A...;

  • Thus, it resorted to the Bloomberg database to search for interest rates of:

    • bonds issued in 2011 and 2012;

    • whose issuer has a rating equal to or higher than CCC (2013) or higher than CCC (2014) (Standard & Poor's notation)

    • with maturity greater than one year and less than ten years;

    • with fixed interest rate; and

    • secured by assets;

  • The search was conducted by initially selecting titles with rating higher than CCC+ (Standard & Poor's notation) and subsequently excluding results with variable rates, and selecting observations with maturity between one and ten years and with collateral secured by assets;

  • From the transfer pricing reports presented, the following grounds for the search presented by the taxpayer are drawn:

    • On the use of the Bloomberg database:

    It was justified by being a research tool for information concerning worldwide financial markets, available through specialized terminals, which provides accurate and current information at the economic, political and financial levels;

    • From issuers with rating equal to or higher than CCC (2013) / higher than CCC (2014)

    Given that prices practiced in the market depend, to a large extent, on the sharing of risks between entities involved in a given transaction, it becomes necessary to analyze the risks to which A... is exposed in the development of its activities;

    Given the aforementioned, the transfer pricing reports of 2013 and 2014 make an analysis of market, inventory, credit, supply, quality, regulatory and default risks of A..., in those years;

    From the aforementioned analysis, the taxpayer concludes that all risks are low, with the exception of default risk which is of moderate level;

    As a result of this analysis, the reports consider it appropriate to select titles with rating equal to or higher than CCC, in 2013, and higher than CCC, in 2014;

    • Fixed interest rate:

    Since the interest rate contracted in the supplier loans made was fixed (10%/year), results subject to changes in market behavior were excluded;

    • Titles with collateral secured by assets:

    Since it considers that shareholders would have as collateral the assets of A... in case of default by the latter;

  • Unlike the transfer pricing study of previous years, nothing was mentioned in 2013 and 2014 regarding the values of the selected transactions, no limit (lower or upper) having been applied to the amounts of transactions to be selected;

  • From the selection made, 32 (thirty-two) operations were considered as generally comparable to the related party transaction under analysis for 2013, which are identified at pages 68 and 69 of the 2013 file, and for 2014, 161 (one hundred and sixty-one) operations which are identified at pages 480 to 487 of the 2014 file - although it is stated in the transfer pricing file that 141 observations were accepted, used in determining the arm's length interval;

  • It should be noted that, regarding the study presented by the taxpayer, there are several inconsistencies regarding the observations rejected/accepted, in particular in 2014 since the number of observations rejected for maturity criteria (765) and collaterals (1265) do not match the lists with their identification (approximately 1020 and 9,240, respectively);

  • From the interest rates applicable to the transactions considered comparable by the taxpayer, the arm's length intervals were determined which are reproduced in the following tables: [interest rate tables];

  • Thus, A... concludes that the interest rates applied to the supplier loans made in 2009 (of 10%) are found within the intervals determined (between minimum and maximum value), thus satisfying the Arm's Length Principle;

  • Knowing the method applied by A..., as well as the comparables used in the analysis conducted, it is important to next analyze these and, consequently, the conclusion drawn by the taxpayer that the transaction satisfies the Arm's Length Principle;

[Detailed analysis of the method used, external entities selected, date of issue, maturity criteria, value of debt, currency of issuance, and conclusions regarding lack of proper comparability]

  • From the analysis of the internal loan obtained by A... from a banking consortium in 2009/01/21, a transaction substantially identical to the related party transaction was identified, carried out between A... and an independent entity, and thus comparable to the related party transaction;

[Detailed comparison between supplier loan transaction and bank financing transaction]

  • From the comparative analysis of the conditions of the transactions in question, it is verified that the greatest divergence between them is exactly in the interest rates applied;

  • With effect, the contracts of the related party transaction stipulate a fixed interest rate of 10% per annum;

  • However, the bank financing contract stipulates a variable rate, indexed to Euribor, plus a margin ("spread");

  • From all the analysis conducted on the transaction between independent entities (bank loan), it is concluded that this meets the requirements of article 5 of the aforementioned Regulation;

  • Moreover, given that the banking transaction was carried out with a banking syndicate, constituted by seven distinct banking entities, this is a strong indicator that it was governed by the actual conditions of the market at that date;

  • Indeed, according to guidelines issued by the Basel Banking Supervision Committee (see § 31), all participants in a banking syndicate (or other type of credit granting consortium) should conduct risk assessment and return on investment due diligence as if it were an individual transaction;

  • Thus, in the banking loan transaction under analysis, seven risk assessments of the borrower and the transaction would have been conducted, concluding on the application of the referred rate;

[Discussion of calculations and impact of violation of Arm's Length Principle]

  • From this analysis, it is concluded that the comparable internal resulting from the bank loan contracted in 2009 provides the highest degree of comparability between the related party transaction and the comparable market price on the date, and is thus able to validate whether the interest rate contracted in the supplier loans made is in accordance with the Arm's Length Principle;

  • It is thus necessary to calculate what impact the violation of the Arm's Length Principle had on the determination of Taxable Profit / Tax Loss for the periods under analysis;

  • Thus, a comparative analysis was carried out between the charges recorded by A... in its accounts in 2013 and 2014, and which negatively influenced both the accounting and tax result for those periods, and the charges that should have been considered, had the Arm's Length Principle been applied and conditions identical to those practiced between independent entities been accepted;

  • From this analysis, it is verified that A... considered in determining the tax results (tax losses) of 2013 and 2014 excessive charges with supplier loan interest in the amounts of €4,507,092.03 and €4,154,788.75, respectively;

  • Consequently, pursuant to no. 8 of article 63 of the CIRC, positive corrections should be made by the taxpayer, in IRC Model 22 tax return statements, to Taxable Profit / Tax Loss in amounts corresponding to the referred tax effects;

  • A... did not make the referred corrections in the declarations relating to the years 2013 and 2014, so the correction of the taxable profit declared by the taxpayer will be made, with reference to those periods, in the amounts calculated;

[Summary of corrections to taxable profit and resulting IRC assessments]

  • In the sequence of the corrections, the following IRC assessments were issued: [assessment details]

[Remainder of fact-finding section continues with findings regarding the tax inspection, related parties, and transfer pricing analysis...]

[The document continues with sections on factual findings, legal framework, and the arbitrators' analysis and conclusions regarding the transfer pricing violations and resulting tax corrections. The section reproduced above represents the substantive portions of the reported decision, with certain sections summarized where the text repeated or became highly technical.]

Frequently Asked Questions

Automatically Created

What are transfer pricing rules under Article 63 of the Portuguese IRC Code?
Transfer pricing rules under Article 63 of the Portuguese IRC Code require that transactions between related entities be conducted at arm's length market prices. The Tax Authority can make corrections to taxable income when it determines that prices used in intra-group transactions deviate from market conditions, applying internationally recognized transfer pricing methodologies. These corrections aim to prevent profit shifting and ensure proper tax base allocation. Taxpayers subject to such corrections must demonstrate that their intercompany pricing policies comply with the arm's length principle through contemporaneous transfer pricing documentation.
Can taxpayers challenge IRC transfer pricing corrections through CAAD tax arbitration?
Yes, taxpayers can challenge IRC transfer pricing corrections through CAAD tax arbitration under the RJAT (Decree-Law 10/2011). The arbitral tribunal has jurisdiction to declare the illegality and annul IRC assessments based on transfer pricing adjustments made under Article 63 of the IRC Code. This includes challenging arithmetic corrections to taxable income resulting from tax inspections. The arbitration process serves as an alternative to judicial review, allowing taxpayers to contest both the assessment acts and related compensation interest. However, the tribunal's jurisdiction is limited to annulment of administrative acts and does not extend to determining tax losses, which remains within the Tax Authority's exclusive competence.
What is the procedure for contesting arithmetic corrections to IRC taxable income in Portugal?
To contest arithmetic corrections to IRC taxable income in Portugal, taxpayers must file a request for arbitration with CAAD within the statutory deadline after notification of the assessment. The process begins with appointment of arbitrators by both parties and the CAAD Ethics Council. The Tax Authority files a reply, potentially raising preliminary objections regarding jurisdiction or procedural issues. The arbitral tribunal may dispense with oral hearings and proceed with written pleadings. Taxpayers can request annulment of assessment acts, compensation interest, and indemnification for bank guarantee costs. The tribunal examines both procedural legality and substantive merits of the corrections, including whether transfer pricing methodology was properly applied according to Article 63 IRC Code and international standards.
How does the CAAD arbitral tribunal handle material competence objections in transfer pricing disputes?
The CAAD arbitral tribunal handles material competence objections by first addressing them as preliminary matters under Article 13 CPTA (Code of Administrative Procedure), applicable subsidiarily per Article 29(1)(c) RJAT. When the Tax Authority raises jurisdictional objections, the tribunal must rule on its competence before proceeding to merits. In transfer pricing disputes, tribunals distinguish between competences: they have jurisdiction to annul IRC assessments and award compensation under Articles 43(1) LGT and 171 CPPT, but lack jurisdiction to determine tax losses, which falls exclusively to the Tax Authority under Article 24(1) RJAT. This separation respects the division between annulment powers (judicial/arbitral function) and administrative determination functions (Tax Authority's exclusive domain). Partial lack of jurisdiction results in bifurcated proceedings.
Can taxpayers claim indemnification for bank guarantee costs when contesting IRC tax assessments at CAAD?
Yes, taxpayers can claim indemnification for bank guarantee costs when contesting IRC tax assessments at CAAD, as this falls within the arbitral tribunal's material jurisdiction. Under Articles 43(1) of the General Tax Code (LGT) and 171 of the Tax Procedure Code (CPPT), tribunals have competence to award compensation for costs incurred providing bank guarantees to suspend compulsory tax collection during the challenge process. This indemnification is considered ancillary to the main annulment claim and follows the same legal framework as judicial challenge proceedings. The tribunal's jurisdiction extends to indemnity interest and guarantee compensation as consequences of declaring assessment acts illegal, distinguishing these monetary awards from determination of substantive tax positions like deductible losses, which remain with the Tax Authority.