Portuguese IRC Tax: Autonomous Taxation Not Deductible as Business Expense - CAAD Decision 163/2014-T

Arbitral Decision

The arbitrators Dr. Jorge Manuel Lopes de Sousa (presiding arbitrator), Prof. Dr. Fernando Borges de Araújo and Dr. Henrique Curado, appointed by the Deontological Council of the Administrative Arbitration Center to form the Arbitral Tribunal, constituted on April 10, 2014, agree as follows:

1. Report

A.., S.A., with registered office at …, no. …, in Lisbon, legal entity no. … … …, registered with the Lisbon Commercial Registry Office under the same number (hereinafter "Applicant"), came, pursuant to Articles 2(1)(a) and 10(1) and (2) of Decree-Law No. 10/2011 of January 20 and Articles 1 and 2 of Ordinance No. 112-A/2011 of March 22 (hereinafter "RJAT"), to request the constitution of an Arbitral Tribunal.

The Respondent is the TAX AND CUSTOMS AUTHORITY.

The Applicant seeks a declaration of illegality of the act rejecting the administrative complaint and the IRC self-assessment act relating to fiscal year 2010, to the extent corresponding to the non-recognition for tax purposes of fiscal expenses with autonomous taxation for that same fiscal year, in the amount of €357,303.30 and, consequently, to the extent of the tax losses that were unduly not determined in that fiscal year and self-assessment in the same amount of €357,303.30, with the consequent increase of tax losses determined from €13,766,461.38 to €14,123,764.68.

The Applicant opted not to appoint an arbitrator.

Pursuant to Article 6(2)(a) and Article 11(1)(b) of the RJAT, as amended by Article 228 of Law No. 66-B/2012 of December 31, the Deontological Council appointed as arbitrators of the collective arbitral tribunal Counselor Jorge Lopes de Sousa, Prof. Dr. Fernando Borges de Araújo and Dr. Henrique Curado, who communicated acceptance of the appointment within the applicable deadline.

The parties were notified of this appointment and did not express any wish to refuse the appointment of the arbitrators, pursuant to the combined provisions of Article 11(1)(a) and (b) of the RJAT and Articles 6 and 7 of the Code of Ethics.

Thus, in accordance with Article 11(1)(c) of the RJAT, as amended by Article 228 of Law No. 66-B/2012 of December 31, the collective arbitral tribunal was constituted on April 28, 2014.

The Tax and Customs Authority filed a response defending dismissal of the arbitration request.

By order of June 11, 2014, it was decided not to hold the meeting provided for in Article 18 of the RJAT and that the proceedings should continue with written pleadings.

The Parties presented pleadings.

The Applicant concluded its pleading by stating that it concludes as in the Request for Constitution of the Arbitral Tribunal, in which it had presented the following conclusions:

From the above, in summary, it follows that both the rejection of the administrative complaint better identified above and the IRC self-assessment relating to fiscal year 2010 suffer from a material defect of violation of law, and therefore:

• The illegality should be declared and the rejection of the administrative complaint annulled insofar as it refused to annul the illegal part, in the terms discussed here, of the IRC self-assessment for fiscal year 2010, thereby violating the principle of legality;

• The partial illegality of this self-assessment should be declared (and consequently annulled), more specifically with regard to the part of said self-assessment act that reflects the non-recognition for tax purposes of fiscal expenses such as autonomous taxation, to which corresponds an amount of tax losses that were unduly not determined in the amount of €357,303.30.

The Tax and Customs Authority counter-argued, concluding as follows:

A. As of the current date, there are ten arbitral decisions that conclude that autonomous taxation levied on expenses deductible in IRC is part of said regime, being therefore due under this tax, falling within the provisions of Article 45(1)(a) of the CIRC, as amended by Law No. 55-A/2010 of December 31, not constituting deductible expenses for purposes of determining taxable profit, "and consequently, the present arbitral action should be dismissed."

B. To the reasoning contained in the mentioned arbitral decisions, it should be added that the amount resulting from the application of autonomous taxation, provided for in Article 88 of the CIRC, is not, nor has it ever been, capable of being deducted for purposes of determining the taxable profit of legal entities.

C. To the same extent that other taxes borne by taxpayers are not deductible from taxable profit, taxes that fall on expenses in relation to which the legislator and, above all, the law excluded deductibility are also not deductible.

D. In reality, formally, autonomous taxation is IRC, presenting itself as a component thereof, a complement thereof.

E. In parallel, from reading Judgments 617/2012 and 85/2013, issued by the Constitutional Court, it cannot be inferred that autonomous taxation is, in fact, a tax distinct from IRC, which immediately justifies its non-deductibility in determining taxable profit, pursuant to Article 45(1)(a) of the CIRC.

F. Both the legislator and the law, in Article 12 of the CIRC, consider autonomous taxation a component of IRC.

G. In this sense, autonomous taxation should be paid by taxpayers under the terms and deadlines provided respectively in Articles 89 et seq. and 104 et seq. of the CIRC, which, moreover, refer indiscriminately to both IRC on profit and autonomous taxation under IRC.

H. The new wording of Article 23-A(1)(a), introduced by Law No. 2/2014 of January 16, has a clear clarifying scope for the future regarding the following fact: autonomous taxation is a component included in expenses incurred under IRC.

I. Moreover, this clarifying scope follows the line (1) of the only possible interpretation of former Article 45(1)(a) of the CIRC which, even before the introduction of that new wording, existed, as well as follows the line (2) of thought (and will) of the legislator that had been developing until then, namely that autonomous taxation expenses are not deductible for purposes of determining the taxable profit of companies.

J. What the legislator intended was only to remove doubts that it knows may arise in the future, so it is meaningless to state that it is an innovative law, because, contrary to what the Applicant argues, such normative introduction follows the reasoning of former Article 45(1)(a) of the CIRC.

K. The interpretation of the provision contained in Article 23-A(1)(a) of the CIRC, as amended by Law No. 2/2014 of January 16, does not suffer from unconstitutionality, given that Articles 2 and 103(3) of the CRP were not violated.

L. From a teleological, systematic and functional perspective, autonomous taxation is a true additional IRC, and this is because, by the nature of things, a tax cannot be deductible from itself.

M. The legislator's stated intention has always been the non-deductibility of autonomous taxation, also because its objective was to avoid a certain vicious circle effect, that is, allowing the tax to be permitted to deduct itself, thereby avoiding the emptying of the core of Article 88 of the CIRC.

N. Autonomous taxation is functionally embedded in IRC, and in parallel, there is a provision (Article 88(14) of the CIRC) that makes the autonomous taxation rate dependent on whether or not the taxpayer has a tax loss.

O. Indeed, allowing competition for determining the Applicant's taxable profit would lead to the very assessment of autonomous taxation consequently reducing the IRC assessment payable, in direct confrontation with its immediate purpose, namely the disincentive to use certain goods and services of mixed use.

P. Autonomous taxation assumes a clear anti-abuse nature, since it is intended to prevent abusive use of certain expenses and distribution of dividends in fraud of the rules aimed at reaching the real income of taxpayers, pursuing, through this route, the objective of reaching the contributory capacity revealed by real income.

In these terms, and in others of law, everything petitioned in the Response is reiterated, and the present arbitration request should be dismissed in its entirety.

The Arbitral Tribunal was regularly constituted and is competent.

The parties have legal standing and capacity and are legitimate (Articles 4 and 10(2) of the same diploma and Article 1 of Ordinance No. 112-A/2011 of March 22).

No nullity is apparent.

1. Matters of Fact

2.1. Proven facts

The following facts are considered proven:

a) On May 31, 2011, the Applicant proceeded with IRC self-assessment relating to fiscal year 2010 and on April 20, 2012 filed a replacement declaration (documents nos. 1 and 2, attached with the arbitration request, the contents of which are deemed reproduced);

b) In these declarations the Applicant self-assessed the following autonomous taxation, in the total amount of €357,303.30 - fields 365, of tables 10 of Model 22 declarations:

i) autonomous taxation on vehicle expenses, which generated the amount of €224,853.12;

ii) autonomous taxation on travel allowances which generated the amount of €5,710.14;

iii) autonomous taxation on representation expenses, which generated the amount of €100,747.52;

iv) autonomous taxation on compensation for travel in the employee's own vehicle which generated the amount of €25,992.52;

c) In the referenced declarations, the Applicant did not deduct as cost/expense the amounts corresponding to autonomous taxation (agreement of the Parties);

d) On May 28, 2013, the Applicant filed an administrative complaint against the self-assessment act;

f) On December 17, 2013, the Applicant was notified, through Official Letter No. 3541 of December 12, 2013, of the decision rejecting the administrative complaint, by order issued on December 12, 2013, by the Head of the Tax Management and Assistance Division of the Large Taxpayers Unit (Document No. 4 attached with the arbitration request, the content of which is deemed reproduced);

g) On February 21, 2014, the Applicant filed the request for constitution of the arbitral tribunal that gave rise to the present proceedings.

2.2. Unproven facts

There are no facts with relevance to the decision of the case that have not been proven.

2.3. Reasoning for the decision on matters of fact

The facts were deemed proven based on the documents referenced for each point and the statements of the Parties, there being no controversy about any of them.

1. Matters of Law

The question that is the subject of the request for declaration of illegality is the deductibility in IRC of amounts paid with respect to autonomous taxation.

At issue, specifically, is the interpretation of Article 45(1)(a) of the CIRC, as amended by Decree-Law No. 159/09 of July 13 (in force in 2010), which establishes the following:

Article 45

Non-deductible expenses for tax purposes

1 - The following expenses are not deductible for the purpose of determining taxable profit, even when accounted for as expenses of the taxation period:

a) IRC and any other taxes that directly or indirectly fall on profits;

The Applicant's thesis is, in short, that amounts spent on payment of autonomous taxation are not IRC nor taxes that fall directly or indirectly on profits, and therefore would not be covered by the exclusion of deductibility provided for in that Article 45(1)(a) and, therefore, would be deductible pursuant to Article 23(1)(f) of the same Code, which establishes that "expenses are considered those that are demonstrably indispensable for the realization of income subject to tax or for the maintenance of the productive source, namely... of a fiscal and parafiscal nature" (wording of Decree-Law No. 159/09 of July 13).

The understanding of the Tax and Customs Authority is, in short, that the reference to IRC contained in Article 45(1)(a) includes autonomous taxation, which is part of IRC.

Thus, the controversy concerns the scope of these references to IRC, namely whether it includes autonomous taxation or not.

"In determining the meaning of tax rules and in qualifying the facts to which they apply, the general rules and principles of interpretation and application of laws are observed" (Article 11(1) of the LGT), which constitutes a reference to Article 9 of the Civil Code.

Article 9 of the Civil Code establishes the following:

Article 9
Interpretation of law

1 - Interpretation should not be limited to the letter of the law, but should reconstruct from the texts the legislative thought, taking into account above all the unity of the legal system, the circumstances in which the law was drafted and the specific conditions of the time in which it is applied.

2 - However, the interpreter cannot consider legislative thought that does not have in the letter of the law a minimum of verbal correspondence, even if imperfectly expressed.

3 - In determining the meaning and scope of the law, the interpreter shall presume that the legislator enshrined the most appropriate solutions and knew how to express its thought in adequate terms.

Thus, what must be done is to try to reconstruct the legislative thought, based on the interpretative elements indicated in this Article 9.

The starting point of interpretation is the letter of the law.

In the absence of other elements that lead to the election of a less immediate meaning of the text, the interpreter should in principle opt for that meaning which best and most immediately corresponds to the natural meaning of the verbal expressions used, on the presumption (imposed by Article 9(3) of the Civil Code, which is valid until proven incorrect) that the legislator knew how to express its thought in adequate terms.

In the initial wording of the CIRC, approved by Decree-Law No. 442-B/88 of November 30, no express or implicit reference was made to autonomous taxation within IRC.

Only with Law No. 101/89 of December 29, which approved the State Budget for 1990, was a first reference made to autonomous taxation within IRC, through the legislative authorization contained in Article 15(3) thereof, which provides as follows:

Law No. 101/89 of December 29
Article 15

3 - The Government is authorized to tax autonomously in IRS or IRC, as the case may be, at an increased rate of 10% and without prejudice to the provisions of Article 41(1)(h) of the CIRC, confidential or undocumented expenses incurred in the exercise of commercial, industrial or agricultural activities by IRS taxpayers who possess or should possess organized accounting or by IRC taxpayers not covered by Articles 8 and 9 of the respective Code.

Implementing this legislative authorization, the Government approved Decree-Law No. 192/90 of June 9 in which it included, outside the IRS and IRC codes, a provision on autonomous taxation which establishes the following:

Decree-Law No. 192/90 of June 9
Article 4

Confidential or undocumented expenses incurred in the exercise of commercial, industrial or agricultural activities by IRS taxpayers who possess or should possess organized accounting or by IRC taxpayers not covered by Articles 8 and 9 of the respective Code are taxed autonomously in IRS or IRC, as the case may be, at a rate of 10% without prejudice to the provisions of Article 41(1)(h) of the CIRC.

As results from the literal content of this provision, there is reference to autonomous taxation in IRS or IRC, not because they are a tax different from either of these, but rather because they are calculated by applying a rule different from the general taxation rules applicable to determining the amounts due under those taxes.

But, as far as is relevant here, the autonomous taxation being in IRC, it follows linearly from this provision that the tax to be assessed and collected is considered IRC, and therefore everything provided for IRC that is necessary to apply will be applicable to it, in what is not regulated here (for example, for purposes of deadlines for filing declarations, jurisdiction for assessment, creditor privileges, means of challenge, etc.).

Law No. 52-C/96 of December 27 amended this Article 4 of Decree-Law No. 192/90, but maintained the same reference to autonomous taxation in IRC, establishing the following:

Law No. 52-C/96 of December 27

1 - Confidential or undocumented expenses incurred by IRS taxpayers who possess or should possess organized accounting in the exercise of commercial, industrial or agricultural activities, or by IRC taxpayers, are taxed autonomously in IRS or IRC, as the case may be, at a rate of 30%, without prejudice to the provisions of Article 41(1)(h) of the IRC Code.

Law No. 87-B/97 of December 31 again amended paragraph 1 of that Article 4, giving it the following wording:

Law No. 87-B/97 of December 31

1 - Confidential or undocumented expenses incurred by IRS taxpayers who possess or should possess organized accounting in the exercise of commercial, industrial or agricultural activities, or by IRC taxpayers, are taxed autonomously in IRS or IRC, as the case may be, at a rate of 32%, without prejudice to the provisions of Article 41(1)(h) of the IRC Code.

Law No. 3-B/2000 of April 29 added a paragraph 3 to the same Article 4, with the following wording:

Law No. 3-B/2000 of April 29

3 - Representation expenses and expenses related to passenger cars incurred by IRS taxpayers who possess or should possess organized accounting in the exercise of commercial, industrial or agricultural activities, or by non-exempt IRC taxpayers who exercise, as a principal activity, commercial, industrial or agricultural activity, are taxed autonomously in IRS or IRC, as the case may be, at a rate of 6.4%.

Law No. 30-G/2000 of December 29 repealed the aforementioned Article 4, but included in the CIRC a set of autonomous taxation, through the addition of an Article 69-A with the following content:

Article 69-A
Autonomous taxation rate

1 - Confidential or undocumented expenses are taxed autonomously at a rate of 50%, without prejudice to the provisions of Article 41(1)(h).

2 - The rate referred to in the previous paragraph is raised to 70% in cases where such expenses are incurred by fully or partially exempt taxpayers, or who do not exercise, as a principal activity, commercial, industrial or agricultural activities.

3 - Representation expenses and expenses related to passenger cars, pleasure boats, tourism aircraft, motorcycles and motorbikes, incurred or borne by non-exempt taxpayers who exercise, as a principal activity, commercial, industrial or agricultural activity, are taxed autonomously at a rate corresponding to 20% of the highest normal rate.

4 - Expenses related to passenger cars, pleasure boats, tourism aircraft, motorcycles and motorbikes are considered to include, in particular, depreciation, rents or leases, insurance, maintenance and conservation expenses, fuel and taxes levied on their possession or use.

5 - Excluded from paragraph 3 are expenses related to passenger cars, pleasure boats, tourism aircraft, motorcycles and motorbikes, allocated to operation of public transport services, intended to be rented in the exercise of the taxpayer's normal activity, as well as depreciation related to vehicles in respect of which the agreement provided for in Article 2(3)(c)(8) of the IRS Code has been concluded.

6 - Representation expenses are considered to include, in particular, expenses incurred with receptions, meals, travel, outings and shows offered in the country or abroad to clients or suppliers or to any other persons or entities.

7 - Expenses corresponding to amounts paid or due, under any title, to individuals or legal entities residing outside Portuguese territory and there subject to a clearly more favorable tax regime, as defined under the Code, are subject to the regime of paragraphs 1 or 2, as the case may be, with applicable rates being, respectively, 35% or 55%, unless the taxpayer can prove that such expenses correspond to operations actually carried out and do not have an abnormal character or an excessive amount.

8 - Taxpayers to whom the regime provided for in Article 46-A applies are excluded from paragraph 3.

Although there is no express reference here to the fact that these autonomous taxation are IRC, this results, on the one hand, from the inclusion of this article in the CIRC (in parallel with the inclusion in the CIRS of a similar Article 75-A); on the other hand, from the fact that paragraphs 1 to 3 of this Article 69-A manifestly aimed to replace the former paragraphs 1 and 3 of Article 4 of Decree-Law No. 192/90.

It is true that the inclusion of these autonomous taxation directly levied on expenses and not on income of legal entities in a Code primarily intended to establish the general regime for taxation of income of legal entities creates, at least apparently, a situation of distortion of the scope of the tax, which ceases to fall directly only on profits to also fall directly on certain expenses.

But the Explanatory Memorandum contained in Bill No. 46/VIII, which gave rise to Law No. 30-G/2000 of December 29, which greatly expanded situations of autonomous taxation, leaves no room for doubt that it is a conscious and intended amplification of previously existing distortions, because it was understood that they were necessary, in short, to compensate for other distortions resulting from significant tax fraud and evasion and, thus, increase equity in the distribution of the tax burden among citizens and companies.

Indeed, the aforementioned Bill states:

The current income taxation model was established in 1988, based on personal income tax (IRS) and corporate income tax (IRC), and corresponded to the adoption of basic solutions identical to those that are common in OECD countries, which is obviously not intended to be changed.

However, pragmatic reasons immediately determined some distortions to the defined principles, which the practice of subsequent years has, in numerous situations, aggravated.

Moreover, the country's evolution introduced changes in economic and social reality, partly as a result of the impact of the European Union and the very dynamics of deepening the integration process, with repercussions on the fabric of relations and institutions that are the subject of tax laws.

There is in Portuguese society a widespread feeling that the tax system does not equitably distribute the tax burden among citizens, with the most compliant, among them, employees, bearing the largest share of the tax effort, while tax evasion and fraud maintain a significant presence that frequently allows those who earn the most income not to pay taxes or to bear them at levels far below what is required of them.

1. For the above reasons, the Government, following the preparation of studies and technical reports prepared under the aegis of previous Governments, in particular the XIII Government, as well as the work carried out by the Tax Reform Coordination Structure (ECORFI), which was created in January 2000, in addition to the debate that these issues have raised, understood that the time had come to submit to the Assembly of the Republic a broad reform of the Portuguese tax system.

These measures are intended to fulfill a tax justice pact with citizens, based on broadening the tax base, intensifying the fight against fraud and tax evasion and reducing the tax effort of compliant taxpayers, within the framework of the general principles of equity, efficiency and simplicity that should frame the tax system.

In light of this explanation, it becomes clear that, from a legislative perspective, autonomous taxation directly levied on certain expenses, within taxes that originally fell only on income, are considered distortions of the direct income taxation system that was intended with IRC.

But it also follows from this explanation that a value that was legislatively considered to be more relevant than the theoretical coherence of taxes, such as the implementation of tax justice, imposed an option for these forms of taxation, as they are in line with the principles of equity, efficiency and simplicity.

That is, it was understood that the system of taxing companies exclusively based on taxable profit generated situations of tax inequity that it was intended to mitigate or eliminate by "broadening the tax base", through the addition to direct taxation, which continues to be the essence of the company taxation system, of situations of indirect taxation, through the application of the tax also to certain expenses that were presumably understood to be causes of that inequity, as they are presumably connected with situations of "tax evasion and fraud" "which frequently allows those who earn the most income not to pay taxes or to bear them at levels far below what is required of them."

With this legislative option of "broadening the tax base" of IRC, its incidence base was expanded in relation to that contained in Article 3, but that is exactly what was intended, in light of the aforementioned Explanatory Memorandum.

Amendments were subsequently introduced to this article by Law No. 32-B/2002 of December 30, by Law No. 107-B/2003 of December 31, by Law No. 55-B/2004 of December 30, by Decree-Law No. 192/95 of November 7, Law No. 67-A/2007 of December 31, by Law No. 64/2008 of December 5, by Law No. 100/2009 of September 7, by Law No. 55-A/2010 of December 31, by Law No. 64-B/2011 of December 30, and by Law No. 2/2014 of January 16, with a clear tendency to expand autonomous taxation, which shows that, repeatedly, the tax legislator was indifferent to the possible distortions of the company taxation system that autonomous taxation may imply.

Moreover, the major concerns with tax coherence that trouble the Applicant have never been shared by our tax legislator, who, for a long time, has been maintaining a tax in which it includes, under a common denomination, an amalgam of disconnected taxation situations, which is Stamp Duty, only perceptibly justified by the simplicity and efficiency of revenue collection, and explicitly recognizes, in the aforementioned Bill, that, for pragmatic reasons, there were "distortions to the defined principles, which the practice of subsequent years has, in numerous situations, aggravated."

But this indirect taxation is still carried out within IRC, as results from the inclusion of autonomous taxation in the respective Code, which has as a corollary the application of the general provisions of this tax, which do not conflict with its special form of incidence.

Thus, while it is true that autonomous taxation constitutes a different way of levying taxes on companies, which could be contained in autonomous regulations or be arranged in the Stamp Duty Code, it is also true that the legislative option to include such taxation in the CIRC reveals an intention to consider such taxation as included in IRC, which can be justified because they are an indirect but, from a legislative perspective, equitable, simple and efficient way of taxing business income that escapes the regime of taxation with direct incidence on income.

It is thus concluded that both in light of Article 4 of Decree-Law No. 192/90 of June 9, in which, in all its versions, it was stated that autonomous taxation was "in IRS or IRC" and not another tax, as after its inclusion in the CIRC, autonomous taxation of which legal entities are taxpayers is considered IRC, and therefore the provisions of the CIRC that do not conflict with its special form of incidence and applicable rates will be applicable to them.

In this light, Law No. 109-B/2001 of December 27, when saying, in the wording given to Article 12 of the CIRC, that "companies and other entities to which, pursuant to Article 6, the tax transparency regime is applicable are not taxed in IRC, except for autonomous taxation," manifestly rested on the assumption, which resulted explicitly from the various wordings of Article 4 of Decree-Law No. 192/90 and from the integration of autonomous taxation into the CIRC operated by Law No. 30-G/2000, that these taxation were a form of taxation of legal entities in IRC, as this is the only justification for the new wording given to Article 12 of the CIRC to have made an express reference that the exclusion from IRC taxation of entities to which the tax transparency regime in IRC is applicable does not extend to autonomous taxation.

This conclusion that could already be drawn with certainty, at least from Law No. 109-B/2001, that autonomous taxation is included within IRC and the general rules of this tax are potentially applicable to it is confirmed by the new Article 23-A(1) of the CIRC, as amended by Law No. 2/2014 of January 16, when saying that "IRC, including autonomous taxation" is "not deductible for purposes of determining taxable profit."

Indeed, it results from the express content of the aforementioned Article 12 of the CIRC that autonomous taxation is included in IRC, specifically for the purpose of excluding from taxable profit the amounts spent on its payment.

On the other hand, although this express reference to the inclusion of autonomous taxation was only inserted with this Law No. 2/2014, it is certain that such inclusion already existed previously, if only because this Law did not change the scope of IRC, namely Articles 1 and 3, to which the Applicant gives special relevance for determining what is IRC.

Moreover, specifically with regard to determining taxable profit and the question of deductibility of amounts paid as autonomous taxation, good reasons stand out clearly for excluding deductibility, which is the fact that these taxation are intended to compensate for possible tax evasion (by the company itself or by persons to whom it makes payments or provides use of company assets) or discourage the realization of certain expenses that negatively affect company profits and, consequently, reduce tax revenue. Being these the essential purposes of autonomous taxation, it could not be justified that, contrary to them, a reduction in taxation be made, which would potentially attenuate their effectiveness.

Thus, it must be concluded that the legislator insistently expressed its intention to tax in IRC the expenses incurred by legal entities for which autonomous taxation is provided and that there is no textual support in the provisions relating to such taxation to conclude that expenses with payment of such taxation are not considered IRC.

On the other hand, the rational element of interpretation corroborates these conclusions suggested by the literal content, since the common purpose pursued with the imposition of such taxation, which is to discourage the practice of certain expenses, is more effectively achieved without an attenuation to which its deductibility for purposes of determining taxable profit would lead.

Moreover, the objectives pursued that were justified at the times when autonomous taxation was introduced did not cease to be valid subsequently, as can be inferred from their accentuation that was operated by the diplomas that amended their regime, indicated above.

On the other hand, the reasons that justified the introduction of autonomous taxation under IRC and the non-deductibility under this tax of amounts spent on its payment, which existed at the time they were created by Decree-Law No. 192/90 and reinforced by Law No. 30-G/2000 and subsequent diplomas, did not cease to be valid in 2010, the year in which the country was going through a very serious financial crisis.

Clear proof of this is the fact that Law No. 2/2014 of January 16, despite implementing an IRC reform that aimed to greatly reduce taxation, maintained autonomous taxation under this tax and explicitly stated, in the new Article 23-A(1)(a), that taxation is not deductible for determining taxable profit.

Contrary to what the Applicant argues, contrary to literal interpretation, the added article, when saying that "the following expenses are not deductible for purposes of determining taxable profit, even when accounted for as expenses of the taxation period" "a) IRC, including autonomous taxation, and any other taxes that directly or indirectly fall on profits," makes explicit that, from a legislative perspective, IRC and autonomous taxation are taxes that fall directly or indirectly on profits, as this understanding can justify the inclusion of the expression "any other taxes," which presupposes that IRC and autonomous taxation are also taxes of these types.

Thus, the generality of interpretative elements (literal, historical, rational, context in which the provisions were issued and circumstances in which they are applied) leads to the conclusion that autonomous taxation created under IRC is considered to be taxes of this type for purposes of deduction from taxable profit, namely in 2008, in light of the wording of Article 42(1)(a) of the CIRC, introduced by Decree-Law No. 198/2001 of July 3.

Moreover, the fact that one of the types of autonomous taxation depends on the existence of a tax loss, as was the case with "non-deductible expenses under Article 45(1)(f) borne by taxpayers that present a tax loss in the taxation period to which they relate" (Article 88(9) of the CIRC, as amended by Decree-Law No. 159/2009 of July 13), evidences the Applicant's lack of reason, as the existence or not of these autonomous taxation presupposes the prior determination of the taxable profit for that fiscal year, including all revenues and deductible expenses. Only after it is determined whether or not there is a tax loss can it be known whether there will be grounds for the autonomous taxation provided for in that paragraph 9 and, therefore, the eventual amount thereof cannot be an element for determining taxable profit, it cannot be a deductible expense.

Moreover, the adoption of the Applicant's thesis that amounts relating to autonomous taxation are deductible expenses could even lead, ultimately, due to the fact that there are autonomous taxation that depend on the existence of tax losses, to the absurd conclusion of the existence of situations in which the taxpayer would be harmed by having more deductible expenses.

One need only think, by way of example, of the situation of a company that, without considering autonomous taxation, had a taxable profit of 100 euros and had undocumented expenses in the amount of 250 euros (taxed autonomously at a rate of 50%) and also non-deductible expenses under Article 45(1)(f) in the amount of 1000 euros.

1st hypothesis: Autonomous taxation is not considered deductible expenses

The company would pay in 2010 under IRC:

• 12.5 euros relating to IRC referring to taxable profit of 100 euros, pursuant to Article 87(1) of the CIRC as amended by Decree-Law No. 159/2009 of July 13;

• 125 euros relating to autonomous taxation on undocumented expenses (50% rate on 250 euros);

• 0 euros of autonomous taxation on non-deductible expenses under Article 45(1)(f) of the CIRC, as it would not present a tax loss;

In total the company would pay under IRC 137.5 euros relating to 2010.

2nd hypothesis: Autonomous taxation is considered deductible expenses

The company, deducting autonomous taxation from taxable profit would have to pay:

• 0 euros relating to taxable profit, as it would become negative;

• 125 euros in each year relating to autonomous taxation on undocumented expenses;

• 50 euros of autonomous taxation on non-deductible expenses under Article 45(1)(f) of the CIRC (5% of 1000 euros), as deducting autonomous taxation from taxable profit it would present a tax loss.

Thus, with the deductibility of autonomous taxation, the hypothetical company would pay under IRC €175, more than it would pay without such deductibility.

That is, the adoption of the Applicant's thesis would imply acceptance of situations in which the existence of more deductible expenses would imply for the taxpayer payment of more IRC, which has no acceptable logical support.

Therefore, the hypothetical legislative solution that the Applicant suggests is manifestly incorrect and, consequently, it must be presumed not to have been legislatively adopted, as follows from Article 9(3) of the Civil Code.

3.1. Question of unconstitutionality of provisions providing for autonomous taxation under IRC

The Applicant also argues, in Article 290 of the initial petition, that "the sui generis interpretation by the Tax Authority that the provision contained in Article 23(1), or Article 45, namely in its paragraph 1(a), all of the CIRC, would indiscriminately prevent deduction in determining taxable income of real expenses with autonomous taxation, makes these provisions unconstitutional to that extent, for violation of Articles 2 (democratic rule of law, with the inherent principles of proportionality and equality and prohibition of arbitrary discrimination), 13 (principle of equality), 18(2) and (3) (principle of proportionality) and 104(2) (principle of taxation, fundamentally, of real income and, in conjunction with the principle of equality, principle of contributory capacity), of the Portuguese Constitution."

The Applicant, however, does not explain in the arbitration request what reasons it believes that such principles would be violated by the referenced provisions.

In the pleadings, the Applicant speaks of unconstitutionality, no longer of those Articles 23(1) and 45 of the CIRC, but rather of paragraphs 4 and 14 of Article 88 of the CIRC, apparently (as the Applicant does not make it explicit) the first in the wording introduced by Law No. 3-B/2010 of April 28, which was in force in 2010, and the second in the wording of Law No. 55-A/2010 of December 31, as only with this was it added. These are questions of abstract unconstitutionality, as neither of these provisions of Article 88 or corresponding have application to the case at hand. Therefore, as appraisal of questions of abstract unconstitutionality is the exclusive jurisdiction of the Constitutional Court (Article 281 of the CRP), cognizance will not be taken specifically of the question of unconstitutionality of these paragraphs 4 and 14 of Article 88 of the CIRC. However, the constitutional principles that the Applicant believes are violated are the same that it invokes in relation to Articles 23 and 45, as it only adds "prohibition of unnecessary and arbitrary restrictions" which falls within the principle of proportionality, and therefore the questions it raises regarding Article 88 are not substantially different from those it raises regarding those Articles 23 and 45.

In any case, with regard to the principles of equality and prohibition of arbitrary discrimination, it is not seen how they could be violated, since the provisions on autonomous taxation are applicable to all IRC taxpayers, under the same terms provided in law. On the other hand, as regards the principle of proportionality, since autonomous taxation aims to mitigate the effects of situations of tax evasion and fraud, it is not demonstrated that there is a violation of the principle of taxation based on contributory capacity, which is not an absolute principle, as follows from Article 104(2) of the CRP.

On the other hand, it is absolutely contrary to reality to find in these provisions negative discrimination of IRC taxpayers in relation to the generality of income tax taxpayers, as similar autonomous taxation is also provided for IRS taxpayers (Article 73 of the CIRS) and, globally, it is manifest that the tax burden that falls on legal entities is lower compared to that which falls on individuals, if only at the level of applicable rates.

Moreover, with regard to the principle of taxing companies with incidence "fundamentally on their real income," set forth in Article 104(2) of the CRP, it is not, as the letter of this provision makes clear, an absolute principle that prohibits the taxation of companies from also being done at the level of expenses incurred, only requiring that direct taxation of profits assume primary relevance in the taxation of companies.

Now, it is manifest that the taxation of companies under IRC is done primarily based on the real income of companies, with the taxation of expenses assuming an eventual and residual role in such taxation.

Therefore, no violation of the referenced constitutional principles is apparent.

1. Decision

In these terms, this Arbitral Tribunal agrees to dismiss the request for declaration of partial illegality of the IRC self-assessment and consequent municipal surcharge relating to fiscal year 2010, carried out by the Applicant, and to absolve the Tax and Customs Authority from the request.

1. Process value

In accordance with Article 315(2) of the CPC and Article 97-A(1)(a) of the CPPT and Article 3(2) of the Regulation of Costs in Tax Arbitration Proceedings, the process value is set at €89,325.83.

1. Costs

Pursuant to Article 22(4) of the RJAT, the amount of costs is set at €2,754.00, pursuant to Table I attached to the Regulation of Costs in Tax Arbitration Proceedings, payable by the Applicant.

Lisbon, July 21, 2014

The Arbitrators

(Jorge Manuel Lopes de Sousa)

(Fernando Borges de Araújo)

(Henrique Curado)