Municipal Surcharge (Derrama) Under RETGS Group Taxation Regime – CAAD Arbitration 163/2013-T

ARBITRATION CASE NO. 163/2013-T

The arbitrators Dr. José Poças Falcão (arbitrator-president), Dr. Jorge Carita and Dr. Henrique Curado, designated by the Deontological Council of the Centre for Administrative Arbitration to form the Arbitral Tribunal, constituted on 23-9-2013, agree on the following:

I - Report

A – SGPS, SA, NIPC ..., filed an application for the constitution of a collective arbitral tribunal, in accordance with the combined provisions of Articles 2 and 10 of Decree-Law No. 10/2011, of 20 January (Legal Framework for Arbitration in Tax Matters, hereinafter referred to only as RJAT), in which the Tax and Customs Authority is the Respondent, requesting:

a) the annulment of the tax act for the assessment of Municipal Surcharge relating to the fiscal year of 2011, in the part corresponding to the amount of € 323,302.30, for the defect of violation of law;

b) the condemnation of the Tax and Customs Authority (AT) to the refund of the aforementioned amount, with compensatory interest, in accordance with Articles 43 and 100 of the LGT and Article 61 of the CPPT.

The application for constitution of the arbitral tribunal was accepted by the President of CAAD and automatically notified to the Tax and Customs Authority.

In accordance with the provision of subparagraph a) of paragraph 2 of Article 6 and subparagraph b) of paragraph 1 of Article 11 of the RJAT, in the wording introduced by Article 228 of Law No. 66-B/2012, of 31 December, the Deontological Council designated the arbitrators of the collective arbitral tribunal, who communicated their acceptance of the appointment within the respective regulatory period.

The parties were duly notified of such designation, and did not express any intention to refuse the designation of the arbitrators, in accordance with the combined provisions of Article 11, paragraph 1, subparagraphs a) and b) of the RJAT and Articles 6 and 7 of the Deontological Code.

Thus, in compliance with the provision of subparagraph c) of paragraph 1 of Article 11 of the RJAT, in the wording introduced by Article 228 of Law No. 66-B/2012, of 31 December, the collective arbitral tribunal was constituted on 23-9-2013.

The AT was notified to respond to the application filed, and did so within the respective period.

The meeting provided for in Article 18 of the RJAT was held.

Preliminary Matters - Exceptions and/or Preliminary Issues

1. The Tax and Customs Authority, in its Response to the request for arbitral pronouncement of the Claimant, put forward, in what it designated as PRELIMINARY ISSUES, a defence by exception [see §§ 12 to 81 of that pleading], although supporting arguments that it also uses in its RESPONSE BY OBJECTION.

In that defence by exception, it is surprising to find the allegation of passive procedural illegitimacy and the incompetence of this Arbitral Tribunal, sustained in the following conclusions:

"(…)

The active subject of the tax and tax creditor is the municipality and not the AT, to which are reserved mere functions of tax collection.

The highest-ranking official of the tax administration service to be sued in the proceedings would be the highest-ranking official of the local authority, and not the highest-ranking official of the Tax and Customs Authority.

Since the municipalities are neither bound to arbitral jurisdiction – as required by the RJAT – nor properly represented in court, nor is the AT in this case responsible for their representation in court, there exists a passive procedural illegitimacy of the AT.

And likewise, an incompetence of the arbitral tribunal to render a decision on the merits of the claim, since this will not be able to constitute res judicata in relation to the municipalities."

1. The AT furthermore raises the incident of third-party intervention [see § 21 of the response: "(…)it appears fully justified to consider the verification of a 'third-party intervention' of the Municipalities in the lawsuits that have as their object the municipal surcharge (…)"], and even requests the third-party intervention of the Municipalities "(…) in light of Articles 325 et seq. of the Civil Code[1], which appears pertinent to raise as a procedural incident.

2. Upon considering and deciding the issues raised[2]:

The preliminary issues of incompetence of arbitral tribunals and passive illegitimacy are related in that, should it be established that the passive legitimacy is indeed that of the municipalities which are creditors of the surcharge, then the arbitral tribunals should be considered materially incompetent, because the municipalities in question did not bind themselves to their jurisdiction, in accordance with Article 4, paragraph 1 of the RJAT, under which "the binding of the tax administration to the jurisdiction of the tribunals constituted in accordance with this law depends on an ordinance of the members of Government responsible for the areas of finance and justice, which establishes, in particular, the type and maximum value of the disputes covered".

Nevertheless, the examination of the question of competence shall be conducted first, as it is of priority knowledge, as follows from the provision of Article 13 of the CPTA, subsidiarily applicable by virtue of the provision of Article 29, paragraph 2, subparagraph c) of the RJAT. In fact, except for its own competence, a tribunal that is incompetent is prevented not only from examining the merits of the case, but from examining all other procedural prerequisites. Thus, in accordance with the well-known principle of competence-competence, under which the tribunal has competence to determine its own competence, regardless of the criterion from which it derives, even if to conclude its own incompetence, it is incumbent to first proceed to the examination of this matter.

a) The competence of this Arbitral Tribunal to examine and decide the dispute

The competence of the tribunal to judge the case instituted before it, which constitutes an essential procedural requirement and, as such, a necessary condition for the tribunal to be able to pronounce on the merits of the case, is the measure of its jurisdiction, whereby a given tribunal will only be competent to judge a particular case if and when the determinative criteria of its competence confer upon it the measure of jurisdiction sufficient for such examination. On the other hand, the tribunal's competence must be assessed in function of the claim formulated by the plaintiff and the grounds (cause of action) that support it, having regard to the manner in which they appear formulated in the initial petition, regardless of their merit or lack thereof (see, among many, the judgments of the Supreme Court of Justice of 4-03-2010, case 2425/07.1TBVCD.P1.S1 and of 10-12-09, case 09S0470, published in www.dgsi.pt).

In the concrete case, the claim at issue in the present arbitral proceedings is for a partial declaration of illegality of the assessment act for the municipal surcharge, being dependent on the question of how the municipal surcharge should be calculated within a corporate group taxed under the terms of the RETGS.

We have, therefore, a claim that is formulated with reference to an assessment act for the municipal surcharge, and that aims at its partial annulment based on defects of violation of law that are directly attributed to that assessment.

In accordance with subparagraph a) of paragraph 1 of Article 2 of the RJAT, the competence of arbitral tribunals comprises, in particular, claims for declaration of illegality of acts of assessment of taxes, self-assessment, withholding at source and payment on account.

Furthermore, Article 2 of Ordinance No. 112-A/2011, of 22 March, binds the AT to the jurisdiction of arbitral tribunals operating in CAAD that have as their object the examination of claims relating to taxes whose administration is entrusted to them.

Now, as follows from paragraphs 8 to 10 of Article 14 of the LFL (Local Finance Law), in its original wording, and paragraphs 9 to 11, in the wording introduced by the State Budget Law for 2012, it is to the Directorate General of Taxes that the competence for the assessment and collection of municipal surcharges is assigned[3].

In fact, as stated in judgment 82/2012-T, "it is because such competence is assigned to the Directorate General of Taxes that it is provided that the decision on the launching of the surcharge be communicated to it, and it is because only the Directorate General of Taxes has competence to assess and collect municipal surcharges that the final part of paragraph 9 original and current paragraph 10 peremptorily establishes that, without the communication therein provided, 'there is no assessment and collection of the surcharge'. And it is also because it is the Directorate General of Taxes which has competence to collect the surcharge that it is provided that the product of its determination by this entity be transferred to the municipalities."

On the other hand, as also stated in that judgment, "the Directorate General of Taxes and the Tax and Customs Authority, in their administrative practice, do not even question this competence of theirs to assess and collect surcharges, as is evident from the fact that the Directorate General of Taxes even issued a circular order establishing rules for their assessment and collection and has, without any hesitation whatsoever, received the amounts self-assessed by the Claimant and examined the gracious petition and hierarchical appeal that it submitted".

In summary, the Directorate General of Taxes has always had and, subsequently, the AT has come to have and maintains the competencies for assessment and collection of municipal surcharges.

Now, in accordance with the provision enshrined in paragraph 3 of Article 1 of the LGT, it is precisely the exercise of these competencies that constitutes what is conventionally denominated by "tax administration". In fact, it is provided therein that "comprise the tax administration, for the purposes of the preceding paragraph, the Directorate General of Taxes, the Directorate General of Customs and Excise Taxes, the Directorate General of Informatics and Support for Tax and Customs Services, the other public entities legally entrusted with the assessment and collection of taxes, the Minister of Finance or another member of Government competent, when exercising administrative competencies in the tax domain, and the equally competent bodies of Regional Governments and local authorities." (italics and bold ours). The attribute of "tax administration" depends, as can be seen, on the exercise of those two competencies and not, as the Respondent Entity intends, on the status of tax creditor. And it could not be otherwise since it is the tax administration, that is, the set of entities entrusted with the assessment and collection of taxes, which interacts with the taxpayer in the course of the activities that lead to the collection of taxes and, therefore, which can perform acts whose validity is important to be able to be examined. The creditor does not necessarily interact with the passive subject, and therefore its action is not relevant for purposes of procedure and tax process, whether in the gracious phase or in the contentious phase.

Now, from these conclusions necessarily follows another: that the arbitral jurisdiction, which comprises, in particular, claims for declaration of illegality of acts of assessment of taxes, self-assessment, withholding at source and payment on account relating to taxes whose administration is entrusted to the AT, is evidently competent to examine claims for declaration of illegality of acts of assessment of the municipal surcharge, whose administration is, precisely, entrusted to the AT. Accordingly, this Tribunal is competent to examine the claim raised by the Claimant.

As a new argument, not presented in previous arbitral proceedings, the AT presents, in §§ 68, 69 and 76, in support of its thesis, that judgment No. 197/2013 of the Constitutional Court (TC) understood that "(…)the active subject of the tax legal relationship which subsumes to the municipal surcharge is the municipality, which in fact has practically absolute control over its essential elements, which is not disturbed by the fact that the collection of the tax continues to belong, for reasons of convenience, to the central tax administration (…)."

This thesis is, however, not acceptable in that, instead of supporting it, the judgment of the TC comes to undermine it.

From the outset, because and as emerges from the respective report of that constitutional judgment, this process results from an appeal "(…)to the Constitutional Court under subparagraph b) of paragraph 1 of Article 70 of Law No. 28/82, of 15 November, of the decision of the tax arbitral tribunal, of 31 July 2012(…)".

Now, the aforementioned decision of the tax arbitral tribunal of 31 July 2012 is the arbitral decision in Case No. 7/2012-T, in which the AT invoked the same exceptions and in which the Arbitral Tribunal did not uphold them, and further found itself competent and rendered a decision that was even favorable to the then (and now) Respondent, the AT.

That is: the AT invokes a judgment of the TC in support of its thesis, that the AT is considered a party lacking standing and that this Arbitral Tribunal is incompetent, when the (this) Arbitral Tribunal in the process that sustains the appeal to the Constitutional Tribunal found itself competent and likewise the AT was a legitimate party and not any municipality. Issues, moreover, which in the course of examining constitutionality were not raised by the AT, thus diverging from its allegations of unconstitutionality, as in the case at hand, in §§ 58, that the consideration of the passive legitimacy of the AT, to the detriment of the municipalities would constitute a clear violation of the principles of access to justice and effective judicial protection, with constitutional basis.

The AT's new argument thus lacks support, that judgment No. 197/2013 of the Constitutional Court sustains its thesis. Rather, it undermines it.

Accordingly, the exception of incompetence of this Arbitral Tribunal does not stand.

b) Exception of passive illegitimacy of the Respondent Entity and incident of third-party intervention

Article 9 of the CPPT, relating to standing, establishes the following:

"1 - Have standing in tax procedure, besides the tax administration, taxpayers, including substitutes and persons liable, other tax obligors, parties to tax contracts and any other persons who prove legally protected interest.

2 - The standing of joint and several liable persons results from the requirement against them of compliance with the tax obligation or any tax duties, even if together with the principal debtor.

3 - The standing of subsidiary liable persons results from there having been ordered against them the reversal of tax execution or requested any precautionary measure to guarantee tax credits.

4 - Have standing in tax court proceedings, besides the entities referred to in the preceding paragraphs, the Public Prosecutor and the representative of the Public Treasury."

Article 44 of the CPPT, relating to tax procedure, establishes the following:

"1 - For the purposes of this Code, tax procedure comprises:

a) Preparatory or complementary actions of the assessment of taxes, including parafiscal taxes, or confirmation of tax facts declared by passive subjects or other tax obligors;

b) The assessment of taxes, when effected by the tax administration;

c) The review, ex officio or at the initiative of the interested parties, of tax acts;

d) The issuance, rectification, revocation, ratification, reformation or conversion of any other administrative acts in tax matters, including on tax benefits;

e) Gracious petitions and hierarchical appeals;

f) Direct or indirect assessment of income or patrimonial values;

g) The collection of tax obligations, in the part that does not have a judicial nature;

h) The contestation of a technical character relating to the tariff classification, origin or value of goods subject to a customs declaration, without prejudice to applicable special legislation;

i) All other acts directed to the declaration of tax rights.

2 - The actions of observation of tax realities, verification of compliance with tax obligations and prevention of tax violations are regulated by the Complementary Regime of Tax Inspection Procedure."

It follows from the provision set out in paragraph 1 of the cited Article 9 that, within the scope of tax procedure, active standing is conferred on the "tax administration". Now, as was made explicit in the previous point, the AT exercises the competencies of assessment and collection of the municipal surcharge, being, for such purpose, "tax administration" as the same is conceived by the provision contained in paragraph 3 of Article 1 of the LGT. This means that, with respect to the municipal surcharge, it is the AT which has competence to intervene in the procedure aimed at the assessment and collection of the tax, performing all the competencies provided for in Article 44 of the CPPT, in particular to examine gracious petitions and hierarchical appeals, as the tax administration did, and correctly, in the case at hand.

From what has been set out it follows, as is also stated in the aforementioned judgment 82/2012-T[4], that it is not relevant "to determine the procedural standing in the matter of municipal surcharges, to know who is the tax creditor, but rather to determine to whom the competencies for assessment and collection of the tax are assigned."

Now, what has just been stated regarding tax procedure is also applicable to tax court proceedings since paragraph 4 of the aforementioned Article 9 of the CPPT confers standing for court proceedings on "the entities referred to in the preceding paragraphs", including the "tax administration" referred to in paragraph 1, which will be, depending on the manner in which the proceedings are configured, active or passive (note that the regime of paragraph 4 of Article 9, with reference to paragraph 1 of the CPPT, is subsidiarily applicable to arbitral proceedings provided for in the RJAT, by virtue of the provision of subparagraph a) of paragraph 1 of its Article 29, since there is no provision of this statute that defines passive standing). What does not occur in the matter of standing, whether procedural or judicial, tax, is the attribution to the figure of the "tax creditor", to that exclusive title, of any type of procedural or judicial function.

In other words, the legislator does not assign, for purposes of procedural or judicial tax standing, any independent relevance to entities that merely occupy the position of creditors of taxes, but which are not simultaneously responsible for their assessment and collection – which, moreover, has every reason to be so since it is the relations between the entities that proceed with the assessment and collection of taxes, through potentially illegal acts, and the taxpayers, which are the passive subjects of the same taxes, that is important to examine within the scope of the tax process.

Now, the status of municipalities in the matter of municipal surcharge being precisely that of a tax creditor that does not simultaneously exercise the functions of assessment and collection of the tax, the same cannot have procedural standing – not being opposed to this conclusion the potential financial consequences of the decision for the tax creditor, since such consequences are not relevant, in accordance with the law, specifically Articles 9 of the CPPT and 1, paragraph 3 of the LGT, to ascertain procedural standing.

To conclude this point it is important to also state that, Article 9, paragraph 4, being a special rule of standing in the scope of tax court proceedings, precludes the general rule provided for in Article 26 of the CPC [30 of the current CPC], invoked by the Respondent.

The AT further invokes Article 7, paragraph 1, of Decree-Law No. 433/99, of 26 October, to corroborate the thesis of the autonomy of municipalities in the defence of their interests in court.

The provision therein establishes that "the competencies assigned in the code approved by this decree-law to local peripheral bodies shall be exercised, in accordance with the law, in the case of taxes administered by local authorities, by the respective authority", referring, therefore, to taxes whose assessment and collection are carried out by local authorities, which is why the same does not preclude, contrary to what the Respondent Entity intends, the understanding referred to above.

On the other hand, regarding the representation of local authorities in tax tribunals, provided for in Article 54 of the Statute of Administrative and Tax Courts, which establishes that "when fiscal revenues assessed and collected by local authorities are at issue, the Public Treasury is represented by a person with a degree in Law or by a lawyer designated for such purpose by the respective authority" (paragraph 3 in the wording introduced by Law No. 20/2012, of 14 May, which is paragraph 2 in the previous wording), nor does it affect the understanding here endorsed, quite the contrary. Effectively, the representation therein provided for only takes place when taxes are assessed by local authorities, which implies that representation in the other cases in which local authority revenues are at issue, that is, those in which the assessment and collection are carried out by the AT, is assured exclusively by the representatives of this entity.

From what has been set out it therefore follows that the exclusive passive standing of the AT, since no other entity is assigned by law a similar procedural position.

Therefore, the preliminary issue of passive illegitimacy also does not stand.

c) Preliminary issue of third-party intervention of the municipalities

As to this aspect, reference is made to what was said in that regard in Judgment No. 82/2012-T to the effect that the AT's claim for third-party intervention of the municipalities cannot be entertained. In fact, because arbitral proceedings were created as an alternative to judicial impugnation proceedings, the rules regulating the latter shall be preferentially applicable to it, in accordance with the provision of subparagraph a) of paragraph 1 of Article 29 of the RJAT. It happens that, in the scope of judicial impugnation proceedings, third-party intervention is not admissible, since Article 127, paragraph 1, of the CPPT only indicates as admissible incidents those of assistance, intervention by heirship and falsity. Thus, and outside those cases specially provided for in the incidents of assistance and intervention by heirship, the intervention of third parties shall be precluded.

Furthermore, as correctly noted in the cited judgment, in the system of objectivist contentious proceedings, in which passive standing is made to rest on the exercise of tax powers with reference to the impugned act, the intervention of other public entities is not admitted.

Finally, regarding the accessory third-party intervention under the provision of Article 321 of the CPC (Article 330 of the old CPC), which provides that "the defendant who has an action of recourse against a third party to be indemnified for the prejudice caused to him by the loss of the action can call him to intervene as an auxiliary in the defence, whenever the third party lacks standing to intervene as a principal party", one is clearly not in a situation that fits within this rule, as it is not possible to see on what grounds the AT could have a right of indemnification in relation to municipalities that did not perform any act injurious to its interests.

Accordingly, the incident of intervention raised by the AT is not entertained.

The Tribunal is competent and is regularly constituted, in accordance with Articles 2, paragraph 1, subparagraph a), 5 and 6, all of the RJAT.

The parties have judicial personality and capacity, are legitimate and are legally represented, in accordance with Articles 4 and 10 of the RJAT and Article 1 of Ordinance No. 112-A/2011, of 22 March.

The proceedings are free from nullities and any other vitiating defects of the proceedings.

II - Substantive Law

The essential proven facts

a) In the fiscal year of 2011, the Claimant was the dominant company of a group of companies taxed in accordance with the rules of the RETGS, provided for in Articles 69 to 71 of the Corporate Income Tax Code;

b) As the dominant company of the aforementioned group of companies, the Claimant timely submitted its income tax return Form 22 for the fiscal year of 2011, having paid the amount of € 413,469.50, as municipal surcharge assessed in accordance with the terms defined by circular letter No. 20132, of 14 April 2008, of the Tax Service Department as a result of the determination of taxable profit of the Group of € 6,661,566.21;

c) Five of the thirteen companies within the Group of which the claimant was the dominant company determined, in the aforementioned period (2011), taxable profit of € 30,547,186.79 and the remaining eight companies determined losses in the total amount of € 23,885,620.585;

d) The AT's computer system did not permit the submission of Form 22 except in accordance with the terms set out in subparagraph b);

e) The Claimant presented to the respective Finance Service a gracious petition against the self-assessment act for corporate income tax mentioned in b) [see Doc 1, attached with the request for arbitral pronouncement];

f) The aforementioned gracious petition was rejected [See Doc 2, attached with the request for arbitral pronouncement].

g) By order of 17 January 2014, the General Director of the AT determined the application to the tax act impugned in this arbitral process of the understanding sanctioned by the Secretary of State for Tax Affairs [Order No. 464/2013 – XIX, of 18 October 2013] that "(…) with respect to companies subject to taxation in corporate income tax within the framework of the special regime for taxation of groups of companies, the municipal surcharge applies to the taxable profit of the group and not to the taxable profit of each individual company (…)"

Motivation

The conviction regarding the facts thus established as proven was based on the administrative proceedings and documents attached by the claimant and not contested, in conjunction with the general absence of any controversy between the parties regarding the factual matter.

II Substantive Law (cont.)

The Law

With the exceptions not standing and the relevant factual matter established, it is ascertained that the principal issue to be determined in the present proceedings consists in knowing whether, for the fiscal year of 2011, the municipal surcharge should have been determined on the basis of the taxable profit of the group of companies subject to the RETGS, as argued by the claimant, or whether, differently, as the respondent claimed, that tax should have been calculated on the basis of the individual taxable profit of each of the companies that comprise it.

It is therefore necessary, first and foremost, to make a brief examination of the regime of the surcharge, as well as the special regime for taxation of groups of companies, provided for in the Corporate Income Tax Code.

On the regime of the surcharge.

In accordance with Article 238 of the Constitution of the Portuguese Republic (CRP), local authorities have their own patrimony and finances, and have tax powers in the cases and manner provided by law. Among others, these are translated in the possibility of imposing surcharges.

Under paragraph 1 of Article 18 of the Local Finance Law (LFL) - Law No. 42/98, of 06-08 - municipalities could "…annually impose a surcharge, up to the maximum limit of 10% on the collection of the tax on the income of legal entities (Corporate Income Tax), which proportionally corresponds to the income generated in its geographic area by passive subjects that exercise, as a principal activity, a commercial, industrial or agricultural activity."

Subsequently, Law No. 2/2007, of 15-01, established a new regime for the imposition of surcharges, providing, in paragraph 1 of its Article 14, that "Municipalities may decide to annually impose a surcharge, up to the maximum limit of 1.5% on the taxable profit subject and not exempt from the tax on the income of legal entities (Corporate Income Tax), which corresponds to the proportion of income generated in its geographic area by passive subjects resident in Portuguese territory that exercise, as a principal activity, a commercial, industrial or agricultural activity and by non-residents with a permanent establishment in that territory." - being this the regime in force at the date of the facts to which the claim that gave rise to the present proceedings relates.

From the analysis of the regime instituted by the Local Finance Law (LFL) of 2007, by comparison with the previous one, it follows that:

a) The municipal surcharge which, in the previous regime, constituted an additional to the Corporate Income Tax, being determined through the application of the rate fixed by the municipalities to the collection of this tax, became, under Law No. 2/2007, determined by application of that rate to taxable profit, thus constituting, as doctrine usually denominates, an addendum. [6]

b) By establishing specific rules regarding the definition, subjective incidence and determination of the taxable base, by express reference to the rules of the Corporate Income Tax, the surcharge remained conditioned to a principal tax (Corporate Income Tax), of which it depends, thus preserving the previous characteristic of an accessory tax. [7]

c) However, the aforementioned regime did not comprehensively regulate the corresponding tax legal relationship, thus remaining dependent on the Corporate Income Tax regime as to matters omitted, particularly as regards rules of assessment, payment, guarantees and accessory obligations.

The regime of the municipal surcharge, at the date of the occurrence of the tax fact to which the present proceedings relate, was silent as to the determination of the taxable base in the case of groups covered by the Special Regime for Taxation of Groups of Companies (RETGS), whose essential contours are provided for in Articles 69 to 71 of the Corporate Income Tax Code.

With respect to this special regime, paragraph 1 of Article 69 of the Corporate Income Tax Code establishes that "existing a group of companies, the dominant company may opt for the application of the special regime for determination of taxable matter in relation to all companies of the group."

According to paragraph 1 of Article 70 of the same Code, "…the taxable profit of the group is calculated by the dominant company, through the algebraic sum of the taxable profits and tax losses determined in the individual periodic declarations of each of the companies belonging to the group."

The question that immediately arose was whether the taxable base determined in accordance with the aforementioned terms for Corporate Income Tax would also be relevant for purposes of calculating the surcharge.

To this question the Tax and Customs Authority responded, by releasing, through Circular Letter No. 20 132, of 14-04-2008, the following understanding[8]:

"The new local finance law (Law No. 2/2007, of 15-01) altered the method of calculating the surcharge for the fiscal year 2007 and onwards.

Having doubts been raised regarding the calculation and application of surcharge to the special regimes for taxation under Corporate Income Tax, the following is hereby informed:

...

1. Special regime for taxation of groups of companies

In the scope of the special regime for taxation of groups of companies, the determination of the taxable profit of the group is done in the manner referred to in Article 64 of the Corporate Income Tax Code, corresponding to the algebraic sum of the taxable profits and tax losses determined in the individual periodic declarations.

If it is true that in the individual periodic declarations there is not a true determination of collection, the same cannot be said regarding taxable profit.

In fact, each company determines a taxable profit in its individual declaration.

Thus, for the companies that comprise the group covered by the special regime for taxation of groups of companies, the surcharge should be calculated and indicated individually by each of the companies in its declaration, with Annex A also being completed individually, if applicable.

The sum of the surcharges thus calculated shall be indicated in field 364 of Table 10 of the corresponding group declaration, with payment being the responsibility of the dominant company, in accordance with the understanding sanctioned by order of 2008-03-13 of the legal substitute of the General Director."

This understanding would not, however, be accepted by the courts, particularly the higher courts. In fact, repeatedly and unanimously, the Supreme Administrative Court (STA) pronounced itself to the effect that, not resulting from the Local Finance Law (LFL) - in the wording prior to that conferred on its Article 14 by Law No. 64-B/2011, of 30 December - specific rules for the determination of the base of incidence of the surcharge in cases of groups covered by the special regime for taxation of groups of companies, the rules of the principal tax (Corporate Income Tax) should be followed for the calculation of the surcharge.

In fact, that Supreme Court pronounced itself on the matter at issue in a judgment of 02-02-2011, rendered in Appeal 909/10, in the following terms:

"It is certain that, in accordance with the current wording of the LFL of 2007, it is clearly an autonomous tax in relation to Corporate Income Tax, since all of its structuring elements now result from law (active subject, rate margins) or obey the intervention of the local authority (taxation or not, concrete rates), only sharing, for purposes of its calculation and for simplicity of management, a common objective incidence (v. Saldanha Sanches, in cited journal, p. 137 and 138).

On the other hand, the base of incidence of the surcharge shifted, as we have seen, from the collection of Corporate Income Tax to taxable profit in Corporate Income Tax.

The base of incidence of the surcharge thus came to coincide with that of Corporate Income Tax, with respect to passive subjects that exercise on a principal basis commercial, industrial or agricultural activity, whether they are residents or non-residents that exercise such activity through a permanent establishment situated in Portuguese territory (Article 3, paragraph 1, subparagraphs a) and c) of the Corporate Income Tax Code).

This coincidence between bases of incidence was only departed from as to profits subject but exempt from Corporate Income Tax, which were expressly excluded from the base of incidence of the surcharge.

This shift raises new questions, among which stands out that of the determination of the taxable matter of the surcharge whose rules remain silent in the current legal regime.

Notwithstanding the autonomization above noted with regard to incidence, collection and rate of Corporate Income Tax, the surcharge continues, however, to depend on the Corporate Income Tax regime in all other fields that define its tax legal relationship.

In fact, besides expressly referring to Corporate Income Tax in the definition of its base of incidence and its passive subjects, the regime of the surcharge is silent as to its own rules for the determination of taxable matter, assessment, payment, accessory obligations and guarantees, to list only those in which the tax legal relationship is traditionally analyzed.

Now, as sustained by Manuel Anselmo Torres, with respect to the relevance of tax losses in the taxable matter of the surcharge, in Fiscalidade No. 38, at p. 159, the sole way to integrate these gaps consists in applying to the surcharge the regime provided for Corporate Income Tax.

In fact, as the cited author notes, only the Corporate Income Tax Code permits us to conclude, for example, that the surcharge should be subject to self-assessment and paid by the end of the 5th month following the end of the taxation period.

And the same should, in our view, occur in the case of groups of companies.

Providing the Corporate Income Tax Code, in its Articles 69 to 71, a special regime for taxation of groups of companies, a situation in which the claimant now impugning, then sued, found itself, and having this opted, as the law allowed it, for the application of this regime for the determination of taxable matter in relation to all companies of the group, the determination of taxable profit, for purposes of Corporate Income Tax, is determined through the algebraic sum of the taxable profits and tax losses determined in the individual declarations of the companies that belong to the group.

And, thus determined the taxable profit for purposes of Corporate Income Tax, the base of incidence of the surcharge is necessarily determined.

This understanding, endorsed in the decision appealed, is that which best harmonizes with the applicable legal provisions and in no way distorts the aims that the LFL intends to achieve or offends any norm or constitutional principle, particularly those mentioned by the appellant in conclusion 9 of its grounds.

Finally, the circumstance that, with respect to companies that comprise a business group and that opt for the special regime for taxation provided for in Articles 69 to 71 of the Corporate Income Tax Code, the taxable profit of the group is determined, instead of the taxable profit of each of the companies individually, and, in this manner, the base of incidence of the surcharge owed is determined overall, instead of a plurality of individual surcharges being determined, has nothing to do with the issue raised in conclusion 10 of the appeal grounds – the relevance of tax losses in the taxable matter of the surcharge – which was not even the subject of examination in the decision under appeal.

Reason by which the confirmation of the appealed judgment is thus required, thus denying the appeal."

This jurisprudence, which is here entirely endorsed, was reiterated and uniformly maintained in numerous judgments of the STA, of which stand out, among others, the judgments rendered in cases 309/11 of 22.06.2011, 234/2012 of 02.05.2012, 206/12 of 05-07-2012, 265/12 of 05-07-2012, 1302/12 of 09-01-2013, 1301/12 of 23-01-2013, 14082 of 13-03-2013, 105/13 of 13-03-2013, 1315/12 of 05-06-2013 and 1004/13 of 04-12-2013.

In the same sense that whenever the special regime for taxation of groups of companies is applicable, the surcharge should apply to the taxable profit of the group and not to the taxable profit of each of the companies that comprise it, the arbitral jurisprudence, also repeatedly and unanimously, has proven to be entirely convergent with that of the STA, as emerges from the arbitral decisions rendered in cases No. 18/2011-T, 87/2012-T, 88/2012-T, 94/2012-T, 147/2012-T, 6/2013, 11/2013-T, 13/2013-T and 93/2013-T, among others.

Subsumption

In the situation sub judice the assessment of the surcharge is at issue in light of the understanding then endorsed by the AT, that is, that the surcharge should be determined in function of the taxable profit of each of the companies individually, and not in function of the taxable profit of the Group subject to Corporate Income Tax.

Considering the uniform jurisprudence of the STA cited and that, in the course of these proceedings the AT itself, altering its previous understanding, came to endorse by order of the Secretary of State for Tax Affairs No. 464/2013 – XIX, of 18 October 2013 [in which it was determined that the aforementioned circular letter No. 20 132, of 14 April 2008, of the Tax Service Department not be applied, in the part referring to the RETGS (No. 2 of that circular letter) with respect to tax periods whose tax fact is considered to have occurred between 1 January 2007 and 31 December 2011] and which gave rise to the aforementioned application for termination of these arbitral proceedings on the grounds of subsequent inutility, the claim for annulment must entirely succeed.

It is true that Law No. 64-B/2011, of 30-12 - which approved the State Budget for 2012 - made alterations to various provisions of the LFL of 2007, having added to its Article 14 a new paragraph 8, with the following wording: "When the special regime for taxation of groups of companies is applicable, the surcharge applies to the individual taxable profit of each of the companies of the group, without prejudice to the provision of Article 115 of the Corporate Income Tax Code."

Thus, there came to be in force, as to the determination of the base of incidence of the surcharge, a specific rule applicable to groups subject to the special regime for taxation of groups of companies, being, however, applicable only to tax facts that occur after 1-1-2012, as, indeed, was understood in the aforementioned order No. 464/2013-XIX, of 18 October.

In fact, the legislator did not assign it interpretative character, and therefore, having in consideration the constitutional principle of non-retroactivity of tax law embodied in paragraph 3 of Article 103 of the CRP, that provision cannot be applied retroactively.

Being thus a new and not interpretative provision, the new paragraph 8 of Article 14 of Law No. 2/2007, of 15-01, applies only to the future, that is, to fiscal years beginning on or after 01-01-2012, not being thus applicable to the case to which the present proceedings relate, in which the surcharge relating to the fiscal year of 2011 is at issue.

From what has been set out it follows, as has been seen, that the self-assessment act for the surcharge relating to the fiscal year of 2011 is vitiated by illegality, for the defect of violation of law, in that, as the Claimant alleges, it should have been calculated on the basis of the taxable profit of the group and not, as the Respondent claimed, on the basis of the individual taxable profit of each of the companies that comprise it.

Accordingly, the claim for annulment of the assessment act for the municipal surcharge relating to the fiscal year of 2011 in the part corresponding to the amount of € 323,302.30 must proceed.

On the claim for compensatory interest.

Along with the declaration of illegality of the self-assessment of the surcharge, the Claimant further petitions that it be recognized that it has the right to compensatory interest, a matter that falls within the scope of the competencies of this Tribunal, as expressly provided in paragraph 5 of Article 24 of the RJAT.

Upon determining the illegality of the assessment and its consequent partial annulment, and finding that the undue tax debt has been paid, the right to compensatory interest subsists, whenever such results from an error attributable to the services of the AT, as provided in paragraph 1 of Article 43 of the General Tax Law (LGT).

In the present case, we are dealing with a self-assessment, effected in conformity with generic instructions issued by the AT through Circular Letter No. 20132, of 14-04-2008. In accordance with paragraph 2 of the cited Article, "error attributable to services is deemed to exist in cases in which, despite the assessment being effected on the basis of the declaration of the taxpayer, the latter has followed, in its completion, the generic guidance of the tax administration, duly published."

Thus, on the basis of the provisions of paragraphs 1 and 2 of Article 43 of the LGT and Article 61 of the Code of Tax Procedure and Process (CPPT), compensatory interest is due on the amount unduly assessed and paid, counted from the day following the day of undue payment until the date of issuance of the respective credit note, at the legal rate.

III - Decision

In harmony with what has been set out, the arbitrators of this Tribunal agree that:

a) The claim for annulment of the assessment of the Municipal Surcharge relating to the fiscal year of 2011 in the part corresponding to the amount of €323,302.30 shall be upheld;

b) The claim for refund of the aforementioned amount shall be upheld; and

c) The Tax and Customs Authority shall be condemned to refund to the claimant the amount mentioned in a), with compensatory interest, at the legal rate, in accordance with Articles 43 and 100 of the LGT and Article 61 of the CPPT.

6. Value of the case

In harmony with the provision of Article 306, paragraphs 1 and 2, of the CPC and Article 97-A, paragraph 1, subparagraph a) of the CPPT and Article 3, paragraph 2 of the Regulations on Costs in Tax Arbitration Proceedings, the value of the case is set at € 323,302.30.

7. Costs

In accordance with Article 22, paragraph 4 of the RJAT, the amount of costs is set at € 5,508, in accordance with Table I annexed to the Regulations on Costs in Tax Arbitration Proceedings, to be borne by the Tax and Customs Authority.

Lisbon, 15 February 2014

The Arbitrators

(José Poças Falcão)

(Jorge Carita)

(Henrique Curado)

[1] In the previous wording of the CPC and to which would correspond today Articles 316 et seq. of the CPC approved by Law No. 41/2013, of 26 June and which came into force on 15-9-2013.

[2] The exceptions now invoked by the AT are recurrent in identical arbitral proceedings, of which stand out and are endorsed, as they have become final, the decisions in Case No. 106/2012-T and Case No. 147/2012-T. But also in Case No. 7/2012-T, which although not final rendered a decision on examination of the exceptions entirely identical to the other aforementioned cases.

[3] With the extinction of the Directorate General of Taxes, resulting from Decree-Law No. 118-A/2011, of 15 December, these competencies passed to the Tax and Customs Authority, for which "references made in any laws" are deemed to be made, by virtue of the provision of subparagraph a) of paragraph 2 of Article 12 thereof.

[4] And also in the Judgment rendered in case No. 106/2012 – T of CAAD.

[5] As was seen, in the course of these proceedings, the respondent entity came to alter its understanding and adhere to that endorsed by the claimant, despite having not annulled the impugned tax act. Hence the continuation of the dispute and the rejection of the application for subsequent inutility thereof [see order of 30-1-2014].

[6] See, in this sense, Rui Duarte Morais, "Past, Present and Future of the Surcharge" and Sérgio Vasques, "The System of Local Taxation and Surcharge", both in Fiscalidade, No. 38, April-July 2009.

[7] In this sense, see STA, Judgment of 4-12-2013, Appeal No. 01004/13, as well as doctrine and jurisprudence cited therein.

[8] As will be seen below this understanding came to be altered by order of the Secretary of State for Tax Affairs No. 464/2013 – XIX, of 18 October determining the non-application of the circular letter No. 20 132 with respect to tax periods whose tax fact occurred between 1 January 2007 and 31 December 2011.