Summary
Full Decision
ARBITRAL DECISION
The arbitrators, Judge José Poças Falcão (arbitrator-president), Dr. Henrique Nogueira Nunes and Dr. José Vieira dos Reis (arbitrator members), designated by the Ethics Council of the Administrative Arbitration Centre to form the Arbitral Tribunal, constituted on 28 April 2014, hereby agree as follows:
I REPORT
A..., S.A., with registered office at ..., legal entity no. ..., registered at the Commercial Registry Office of ... under the same number (A... or Applicant), covered by the local peripheral services of the Tax Office of …, in 2010 holding company of a Group of Companies subject to the special tax regime for groups of companies provided for in articles 69 and et seq. of the Corporate Income Tax Code (CITC) (before the entry into force of Decree-Law no. 159/2009, of 13 July, articles 63 and et seq. of the Corporate Income Tax Code), has, under article 2, paragraph 1, subsection a), and article 10, paragraphs 1 and 2, both of Decree-Law no. 10/2011, of 20 January, and articles 1 and 2 of Administrative Rule no. 112-A/2011, of 22 March, requested the constitution of an Arbitral Tribunal by submitting, on 21 February 2014, the present application for an arbitral ruling, pursuant to article 10 of Decree-Law no. 10/2011, of 20 January (Legal Regime for Tax Arbitration, hereinafter "LRTA").
The Applicant requests:
A) A declaration of illegality and the consequent annulment of the dismissal of the hierarchical appeal insofar as it refused the annulment of the illegal part of the self-assessment of Corporate Income Tax and the resulting municipal surcharge for the year 2010, thereby violating the principle of legality;
B) A declaration of partial illegality thereof (and its consequent annulment), in the amount of €187,458.98, or at least, in the event that it is considered appropriate to exclude the deductibility of autonomous taxation on undocumented expenses, in the amount of €184,605.26;
C) Recognition of the Applicant's right to reimbursement of that amount and, also, the right to compensatory interest for the payment of tax wrongfully assessed.
It has alleged, in substance:
a) It proceeded, as the holding company of the aforementioned Tax Group G..., to self-assess Corporate Income Tax and the resulting surcharge for the year 2010 by means of submission of Form 22 (Doc. no. 1), and on 20 November 2012 submitted a modification to that self-assessment by means of submission of a replacement form (Doc. no. 2);
b) On 30 May 2013, the Applicant submitted, to the Large Taxpayers Unit (LTU) a claim objecting to the aforementioned self-assessment of Corporate Income Tax and the resulting surcharge for the year 2010 (see copy of the opening pages of the claim, attached hereto as Doc. no. 3);
c) On 2 September 2013 the herein appellant was notified by means of Memorandum no. ..., of 28 August 2013, of the decision dismissing the claim, by order issued on 26 August by the Honourable Head of Division for Tax Management and Assistance of the Large Taxpayers Unit (see copy of the decision dismissing the claim attached hereto as Doc. no. 4);
d) From that decision the Applicant filed a hierarchical appeal on 26 September 2013, with a view to its revocation and replacement by another that would partially annul the act of self-assessment of Corporate Income Tax and the resulting surcharge of Tax Group G...[1] for the year 2010 (see copy of the cover page of the hierarchical appeal attached hereto as Doc. no. 5).
e) On 5 February 2014 the herein appellant was notified by means of Memorandum no. ..., of 4 February 2014, of the decision dismissing the hierarchical appeal, by order issued on 27 January 2014 by the Honourable Director of Corporate Income Tax Services (see copy of the decision dismissing the hierarchical appeal attached hereto as Doc. no. 6);
f) The act subject to the request for an arbitral ruling is the dismissal of the hierarchical appeal identified above and, consequently (and in final or ultimate terms), the act of self-assessment of Corporate Income Tax, including the state surcharge, and the resulting municipal surcharge for the year 2010, insofar as it corresponds to the non-recognition for tax purposes of charges relating to autonomous taxation in that same year (see Docs. nos. 1 and 2).
g) The Applicant herein requests that the illegality of both the dismissal of the hierarchical appeal and the partial illegality of the act of self-assessment identified above (see Docs. nos. 1 and 2) be declared – and that it be consequently annulled in that part –, pursuant to article 2, paragraph 1, subsection a), of Decree-Law no. 10/2011, more specifically with respect to the part of the aforementioned self-assessment act that reflects the non-recognition for tax purposes of charges relating to autonomous taxation, to which corresponds an amount of tax wrongfully assessed of €187,458.98.
h) In the aforementioned self-assessment of Corporate Income Tax for the year 2010 (whose request for partial annulment was tacitly dismissed on hierarchical appeal), A... also proceeded to self-assess autonomous taxation provided for in article 88 of the CITC, in a total amount of €699,033.26 – see field 365, table 10, of Docs. nos. 1 and 2 – which correspond to (see Doc. no. 7 attached hereto):
i) 10% of charges relating to vehicles in the amount of €2,169,897.80;
ii) 10% of representation expenses in the amount of €131,457.69;
iii) 5% of expenses for employees' travel in their own vehicles and for allowances for relocation not invoiced to third parties in the amount of €67,323.47;
iv) 50% of undocumented expenses in the amount of €21,063.05; and
v) 35% of expenses relating to bonuses in the amount of €1,300,000.
i) Those autonomous taxes were paid in full (see field 365 of table 10 of Docs. nos. 1 and 2).
j) The aforementioned total of the self-assessment of autonomous taxes breaks down, as to its nature, in accordance with the attached table (Doc. no. 7) and with table 10 of Docs. nos. 1 and 2, as follows:
k) And excluding autonomous taxation on undocumented expenses we have a total of €688,501.73 (€699,033.26 - €10,531.53).
l) However, A... did not deduct, for purposes of determining its taxable profit for the year 2010, the charges incurred relating to the aforementioned autonomous taxation, instead treating them as if they were Corporate Income Tax or municipal surcharge (Doc. no. 8).
m) And it should have deducted or, from another perspective, it legally has the right to recognize autonomous taxation in the calculation of taxable profit for purposes of Corporate Income Tax (and the resulting surcharge), hence the present request for constitution of an Arbitral Tribunal which has as its subject the self-assessment of Corporate Income Tax (and resulting surcharge) relating to the year in question, 2010, and the subsequent act dismissing the hierarchical appeal.
n) Therefore, in terms of quantifying the tax in question, we have the following values (to which is added the value of the Corporate Income Tax state surcharge as per additional calculations below):
a) Corporate Income Tax resulting from the application of a basic rate of 25%, in the amount of €174,758.31 (€699,033.26 x 25%); and
b) municipal surcharge at the rate of 1.42% (as per detailed calculations for determination of the weighted average rate by legally provided factors, attached hereto as Doc. no. 9), in the amount of €9,926.27 (€699,033.26 x 1.42%);
c) in a total of €184,684.58.
o) And if autonomous taxation on undocumented expenses is not taken into account the total is €181,902.16 [(€688,501.73 x 25%) + €688,501.73 x 1.42%)]
p) To which is added the value of the additional Corporate Income Tax known as the state surcharge, which in the year in question (2010) was imposed (by express legal provision, on an individual basis: see article 87-A of the CITC) on the taxable profits of the following companies being part of Tax Group G...: A... and B....
q) Deducting from the taxable profit of these companies the charges relating to autonomous taxation specifically attributable to them, we have that the state surcharge by these companies (being part of Tax Group G...) determined and paid will be reduced by a total of €2,774.40 as per summary table certified by the chartered accountant attached hereto as Doc. no. 10.
r) And if the effect of the deduction of charges relating to autonomous taxation on confidential expenses (autonomous taxation borne by A... and B..., imposed on the total amount of €5,703.87, at the rate of 50% which gives an amount of €2,851.94 – see Doc. no. 7) is excluded, the reduction of the state surcharge will be less by only €71.30 (€2,851.94 x state surcharge rate 2.5%), that is, it will be €2,703.10 (€2,774.40 - €71.30).
s) In summary, the total value of Corporate Income Tax (including state surcharge) and resulting municipal surcharge, in question here, is €187,458.98 (€184,684.58 + €2,774.40).
t) And if the effect of the deduction of the charge relating to autonomous taxation on undocumented expenses is excluded, the amount in question here is €184,605.26 (€181,902.16 + €2,703.10).
This being the essential factual and/or conclusive picture alleged, the Applicant then makes several considerations and develops an array of legal arguments to conclude, in particular, that "(…) an analysis of both the scope (in the overwhelming majority of cases, on expenses or charges) and the function of autonomous taxation reveals that the same are not, do not have the nature of, income tax (profit) of the legal entity that bears it and is its subject. On the contrary, in a situation of losses (as mentioned above), of absence of any profit, it is precisely when these levies are aggravated (see the current no. 14 of article 88 of the CITC) which clearly shows how this taxation differs from Corporate Income Tax, i.e., taxation on profit (…)" and "(…) Moreover (…) autonomous taxation applies independently of Corporate Income Tax (as a consequence, precisely, of this different nature and function compared to Corporate Income Tax): it applies even (or in the same manner) when there is exclusion from (non-application of) Corporate Income Tax, or exemption from Corporate Income Tax, and applies to a different reality from that (profit) to which Corporate Income Tax applies, whereby its deduction for tax purposes does not generate a vicious circle, as would be the case with a possible deduction of surcharges (…)".
From its extensive and detailed learned pleadings, the Applicant extracts the following conclusions:
1st. As is evident to any impartial observer, autonomous taxation is not income tax, so much so that it is owed even when there is a loss. It is a tax on expenses, whose deductibility is not excluded from the calculation of taxable profit by (as numbered at the time of the facts) article 45 of the CITC, so we are dealing with a tax charge whose deductibility must be accepted in light of the principle of deductibility, precisely, of the generality of tax charges.
2nd. The provision of non-deductibility of charges relating to autonomous taxation contained in the law reforming Corporate Income Tax (Law no. 2/2014, of 16 January), which for purposes of tax non-deductibility came to equate autonomous taxation with Corporate Income Tax (fictionally treating them as, for this purpose only, Corporate Income Tax – otherwise and as stated, autonomous taxation continues to operate on expenses and to generate revenue when there are losses, credits for investment in Corporate Income Tax are not deducted from them, etc., etc., etc.) fully confirms that before this 2014 amendment there was no rule that legitimized the exclusion of this taxation from the scope of application of the fiscal principle of deductibility of all (real) charges, which the CITC specifically includes, charges relating to taxes.
3rd. From the above set out, in summary, it follows that both the dismissal of the hierarchical appeal identified above and the self-assessment of Corporate Income Tax (including its "state surcharge" over-tax) and the resulting municipal surcharge for the year 2010 suffer from a material defect of violation of law, and must:
a) a declaration of illegality be made and the dismissal of the hierarchical appeal annulled insofar as it refused the annulment of the illegal part, in the terms discussed here, of the self-assessment of Corporate Income Tax and the resulting municipal surcharge for the year 2010, thereby violating the principle of legality;
b) partial illegality of this self-assessment be declared (and consequently annulled), in the amount of €187,458.98, or at least, in the event that it is considered appropriate to exclude the deductibility of autonomous taxation on undocumented expenses, in the amount of €184,605.26;
c) consequently, recognition be given to the right to reimbursement of that amount and, also, the right to compensatory interest for the payment of tax wrongfully assessed.
The Applicant did not proceed with the appointment of an arbitrator, so under the provisions of article 6, paragraph 2, subsection a), of the LRTA, the signatories were designated by the President of the Ethics Council of CAAD to form the present collective Arbitral Tribunal, having accepted under the legally provided terms.
On 9 April 2014 the parties were duly notified of this designation, and did not express a wish to refuse such designation, pursuant to the combined provisions of article 11, paragraph 1, subsections a) and b) of the LRTA and articles 6 and 7 of the Ethics Code.
Thus, in conformity with the provisions of subsection c) of paragraph 1 of article 11 of Decree-Law no. 10/2011, of 20 January, as worded by article 228 of Law no. 66-B/2012, of 31 December, the collective arbitral tribunal was constituted on 28 April 2014, the process then following the other legal and regulatory terms.
On 19 April 2014, the Tax and Customs Authority (TCA) submitted its response contesting the application, concluding that "(…) no interpretive principle supports a restrictive interpretation of article 45, paragraph 1, subsection a) of the CITC, to the effect of excluding autonomous taxation from it; on the contrary, this shows itself to be contrary to the purposiveness of the rule since autonomous taxation has an instrumental role in the determination of Corporate Income Tax, it does not have autonomy in functional terms (only in the form of determination: scope and rate), and it contradicts the very systematic coherence, showing itself to be incompatible with the provisions of article 88, paragraph 14 of the CITC (…) wherefore, also here the request for compensatory interest formulated by the Applicant falls out of hand(…)".
Final written submissions were presented by both parties concluding these, in substance, in the manner that they had done in their pleadings.
Procedural Hearing/Procedural Matters
The arbitral tribunal was regularly constituted and has material jurisdiction, pursuant to the provisions of articles 2, paragraph 1, subsection a), and 30, paragraph 1, of the LRTA, with the prerequisite of prior recourse to the administrative route being satisfied (see article 2, subsection a), of Administrative Rule no. 112-A/2011, of 22 March and Docs. nos. 3 to 6, attached with the application for ruling).
The parties have legal personality and capacity and are legitimate (arts. 4 and 10, paragraph 2, of the same act and art. 1 of Administrative Rule no. 112-A/2011, of 22 March).
The process is not affected by nullities.
There are no exceptions or other preliminary questions to be considered and decided.
II REASONING
Proven Essential Facts
a) The Applicant, as the holding company of Tax Group G..., proceeded to self-assess Corporate Income Tax and the resulting surcharge for the year 2010 by means of submission of Form 22 (Doc. no. 1), and on 20 November 2012 submitted a modification to that self-assessment by means of submission of a replacement form (Doc. no. 2);
b) On 30 May 2013, the Applicant submitted, to the Large Taxpayers Unit (LTU) a claim objecting to the aforementioned self-assessment of Corporate Income Tax and the resulting surcharge for the year 2010 (see copy of the claim - Doc. no. 3);
c) On 2 September 2013 the herein appellant was notified by means of Memorandum no. ..., of 28 August 2013, of the decision dismissing the claim, by order issued on 26 August by the Honourable Head of Division for Tax Management and Assistance of the Large Taxpayers Unit (see copy of the decision dismissing the claim - Doc. no. 4);
d) From that decision the Applicant filed a hierarchical appeal on 26 September 2013, with a view to its revocation and replacement by another that would partially annul the act of self-assessment of Corporate Income Tax and the resulting surcharge of Tax Group G... for the year 2010 (see copy of the cover page of the hierarchical appeal - Doc. no. 5).
e) On 5 February 2014 the herein appellant was notified by means of Memorandum no. ..., of 4 February 2014, of the decision dismissing the hierarchical appeal, by order issued on 27 January 2014 by the Honourable Director of Corporate Income Tax Services (see copy of the decision dismissing the hierarchical appeal - Doc. no. 6);
f) The act subject to the present request for an arbitral ruling is the dismissal of the hierarchical appeal identified above and, consequently (and in final or ultimate terms), the act of self-assessment of Corporate Income Tax, including the state surcharge, and the resulting municipal surcharge for the year 2010, insofar as it corresponds to the non-recognition for tax purposes of charges relating to autonomous taxation in that same year (see Docs. nos. 1 and 2).
g) In the aforementioned self-assessment of Corporate Income Tax for the year 2010 (whose request for partial annulment was tacitly dismissed on hierarchical appeal), A... also proceeded to self-assess autonomous taxation provided for in article 88 of the CITC, in a total amount of €699,033.26 – see field 365, table 10, of Docs. nos. 1 and 2 – which correspond to (see Doc. no. 7 attached hereto):
i) 10% of charges relating to vehicles in the amount of €2,169,897.80;
ii) 10% of representation expenses in the amount of €131,457.69;
iii) 5% of expenses for employees' travel in their own vehicles and for allowances for relocation not invoiced to third parties in the amount of €67,323.47;
iv) 50% of undocumented expenses in the amount of €21,063.05; and
v) 35% of expenses relating to bonuses in the amount of €1,300,000.
h) Those autonomous taxes were paid in full (see field 365 of table 10 of Docs. nos. 1 and 2).
i) The aforementioned total of the self-assessment of autonomous taxes breaks down, as to its nature, in accordance with the attached table (Doc. no. 7) and with table 10 of Docs. nos. 1 and 2, as follows:
j) And excluding autonomous taxation on undocumented expenses we have a total of €688,501.73 (€699,033.26 - €10,531.53).
k) The Applicant did not deduct, for purposes of determining its taxable profit for the year 2010, the charges incurred relating to the aforementioned autonomous taxation, instead treating them as if they were Corporate Income Tax or municipal surcharge (Doc. no. 8).
Unproven Essential Facts
From the case file or by official knowledge, there is no indication of the existence of unproven essential facts for the knowledge of the issues to be decided.
Grounds for Establishing the Factual Basis
The proven facts, besides being documented [without challenge to the respective documents], also result from the failure of the Tax and Customs Authority to challenge any of the alleged facts and also, and essentially, from the administrative instruction file.
II REASONING (CONT.)
THE LAW
Questions to be Decided
The Applicant petitions that a declaration be made of the illegality of the dismissal of the hierarchical appeal, as well as a declaration of the (partial) illegality of the self-assessment act for the year 2010, and, with respect to the part of the acts that are determined by the «non-recognition for tax purposes of charges relating to autonomous taxation in that same year» – see article 13 of the application.
The Applicant considers, in substance, that the self-assessment acts suffer partially from a «material defect of violation of law» and formulates - beyond the request for a declaration of illegality of the dismissal of the hierarchical appeal - a request which aims at a declaration of (partial) illegality of that same self-assessment and its, consequent, annulment «for the year 2011 with respect to the amount of €187,458.88, with its consequent annulment in this part, in view of the manifest illegality of the assessment in this part, with all legal consequences, namely the reimbursement to the Applicant of this amount, increased by compensatory interest at the legal rate counted from 1 September 2012, until full reimbursement.» - see article 433 of the Application.
It appears from the case file that the aforementioned self-assessment was presented/submitted on 31.05.2011 and was the subject of a claim which culminated in a dismissal order, issued by the Honourable Head of Division for Tax Management and Assistance of the Large Taxpayers Unit, dated 28.08.2013.
The questions to be decided will thus be to determine whether the Applicant has the right to recognize, as expenses of the tax period, for purposes of calculating its taxable profit in Corporate Income Tax, the charges it incurred by way of autonomous taxation and, in the event that such a right is recognized, whether the request for reimbursement with payment of compensatory interest is justified.
Let us then see.
I. Context
The doubt concerning the deductibility of autonomous taxation under the previous wording of the Corporate Income Tax Code arises as a consequence of the interpretive margin created by the combination of two norms: on the one hand, the general principle of deductibility of charges demonstrably indispensable for the realization of income subject to tax or for the maintenance of the income-producing source, namely those of a fiscal and parafiscal nature, which resulted from article 23, paragraph 1, subsection f), of the Corporate Income Tax Code and, on the other hand, the rule of non-deductibility provided for in subsection a) of paragraph 1 of article 45 of the same Code, according to which there were not deductible for purposes of determining taxable profit Corporate Income Tax and any other taxes that directly or indirectly affect profits.
Specifically, the doubts arise because the rule provided for in subsection a) of paragraph 1 of article 45 of the Corporate Income Tax Code (as worded in 2010) does not expressly mention autonomous taxation and because the general principle in Corporate Income Tax was and is the deductibility of charges indispensable for the realization of income subject to tax or for the maintenance of the income-producing source. Thus, faced with a general principle of deductibility of charges and the absence of express reference to autonomous taxation, doubt arises as to whether the legislator intended to include them or not in the exception to deductibility provided for in subsection a) of paragraph 1 of article 45.
The doubts arising concerning the deductibility of autonomous taxation in the Corporate Income Tax context are, therefore, perfectly justifiable given the uncertainty created by the literal element of the norms stated and concerning the very technical nature of the type of tax that autonomous taxation is, which, this Tribunal admits, does not have the typical characteristics of a tax such as Corporate Income Tax.
Thus, it will be necessary to deepen the analysis beyond its literal element.
Autonomous taxation was introduced into the Portuguese legal system through article 4 of Decree-Law no. 192/90, of 9 June, which provided for autonomous taxation, at the rate of 10%, of confidential or undocumented expenses.
Subsequently, autonomous taxation was included in the Corporate Income Tax Code through Law no. 30-G/2000, of 29 December, which came to integrate the provision of autonomous taxation in the instrument that regulates Corporate Income Tax.
Since then, the regime for autonomous taxation has been undergoing a process of progressive expansion, in part driven by the apparent continuous intention to increase tax revenue through this mechanism.
Currently, there are several types of autonomous taxation found in article 88 of the Corporate Income Tax Code:
i) Autonomous taxation on undocumented expenses;
ii) Autonomous taxation on charges relating to vehicles;
iii) Autonomous taxation on representation expenses;
iv) Autonomous taxation on amounts paid or owed, in any capacity, to natural or legal persons residing outside Portuguese territory and there subject to a clearly more favourable tax regime;
v) Autonomous taxation on expenses for allowances and compensation for employee relocation in their own vehicles in the service of the employer;
vi) Autonomous taxation on profits distributed by entities subject to Corporate Income Tax to taxpayers who benefit from total or partial exemption;
vii) Autonomous taxation on expenses or charges relating to compensation or any compensation owed not related to the achievement of productivity objectives previously defined in the employment relationship, when there is termination of functions of manager, administrator or director, as well as on expenses relating to the part exceeding the value of remuneration that would be earned by the exercise of those positions until the end of the contract, when it is a matter of termination of a contract before its term;
viii) Autonomous taxation on expenses or charges relating to bonuses and other variable remuneration paid to managers, administrators or directors.
II. Issue to be Decided
From the analysis of the list of realities to which we referred above, we can draw two principal conclusions:
(i) The first is that autonomous taxation affects both deductible charges and non-deductible charges;
(ii) The second is that autonomous taxation aims to prevent the erosion of the taxable base in the Corporate Income Tax context, imposing taxation on charges that may be deducted by Corporate Income Tax subjects, but which, if deducted, are transformed into an increase in taxation, thus intended to serve as a disincentive to spending on such charges.
With respect to autonomous taxation on non-deductible expenses, if its deductibility were admitted, one would be admitting the deductibility of a charge not indispensable for the realization of income subject to tax or for the maintenance of the income-producing source.
Indeed, if the expense on which autonomous taxation is imposed is not, in itself, deductible, it is because (under the Corporate Income Tax system) it is not indispensable for the realization of income subject to tax or for the maintenance of the income-producing source.
Now, if that is the case, the autonomous taxation imposed on it will also not be, so one would be admitting the deduction of a charge in direct contradiction with the general principle that charges are only deductible in Corporate Income Tax if they have inherent that indispensability for the realization of income subject to tax or for the maintenance of the income-producing source.
Thus, just as taxes imposed on facts unrelated to the realization of income subject to Corporate Income Tax are not deductible, autonomous taxation imposed on non-deductible expenses must necessarily be excluded from deduction under penalty of admitting an evident systematic contradiction in the Corporate Income Tax Code, which is not acceptable in light of the interpretive principles enshrined in article 9, paragraph 3, of the Civil Code (which the General Tax Law orders to be applied under the terms of no. 1 of its article 11), which determine that the interpreter must presume that the legislator "knew how to express his thought in adequate terms" and "that he enshrined the most correct solutions".
Therefore, with respect to this type of expense, it is the Tribunal's understanding that if the same are not deductible, neither can the autonomous taxation imposed on them be deductible.
Having arrived here, it is now important to analyze the possible deductibility of autonomous taxation that affects deductible expenses. Will these be deductible?
Should not it be immediately concluded that, if the expense is deductible, the autonomous taxation itself should be deductible, as a charge that was incurred by virtue of the realization of such an expense, following the principle that the accessory follows the path of the principal (acessorium principale sequitur)?
The Applicant contends that, configuring autonomous taxation as a tax that applies to expenses[4] and not to income, this taxation cannot be considered "Corporate Income Tax" for purposes of the exclusion of deductibility provided for in subsection a) of paragraph 1 of article 45 of the Corporate Income Tax Code.
In considering the matter before the Tribunal, it should equally be noted from the outset that the rule of article 45 of the Corporate Income Tax Code is situated in a context of broad legislative discretion.
That is, in defining what charges are deductible or non-deductible for tax purposes, the tax legislator enjoys broad discretionary freedom. Hence, it cannot be said that it is forbidden to the legislator, by the "nature" of autonomous taxation (and, specifically, that which is peculiar to autonomous taxation arising from expenses deductible in the Corporate Income Tax context), whatever it may be, to exclude it from deductible charges for purposes of the tax in question.
It is thus considered that it will be legitimate for the legislator to include or exclude autonomous taxation dealing with that category of deductible charges for purposes of Corporate Income Tax, regardless of the nature that doctrine or jurisprudence attributes to them.
The Tribunal understands that one thing is the type of taxable fact that underlies a particular imposition and another thing is the title under which such imposition is owed, in essence, the cause of the tax obligation. And, in the case of autonomous taxation in the Corporate Income Tax context, that cause, the title under which the tax is demanded, will still be, and effectively, Corporate Income Tax.
One must attend, above all else, to the fact that the legal regime for autonomous taxation in question in this case only makes sense in the context of taxation in the Corporate Income Tax sphere, that is, separated from the legal regime of this tax, they would lack their principal frame of reference. Their existence, their purpose, their explanation, in essence, their juridicity, is only properly comprehensible and acceptable within the framework of the legal regime of Corporate Income Tax.
The autonomous taxation under analysis now belong, systematically, to Corporate Income Tax, and not to Value Added Tax, to Individual Income Tax, or to any new tax.
For, although it is accepted that the taxable fact impositive will be each of the singular legally typified charges, it is certain that these are not, qua tale, the final object of taxation, the reality that is intended to be taxed.
That is, autonomous taxation of the kind we are now dealing with is strongly linked to the subjects of the respective income tax, and, more specifically, to the economic and business activity carried on by them.
This aspect becomes even more evident, inasmuch as such autonomous taxation affects expenses deductible for purposes of Corporate Income Tax.
This circumstance, it is believed, is illustrative of the intertwining existing between those and Corporate Income Tax (in this case), and justificatory not only of its inclusion in the Corporate Income Tax Code, but also of its systematic integration into the legal regime of Corporate Income Tax.
In fact, not only are the charges incurred by Corporate Income Tax subjects the only ones subject to autonomous taxation in such a context, but such charges will only be subject to it if those subjects elect them as deductible expenses in determining the taxable matter of that tax.
The framework thus drawn is, it is considered, substantially distinct from what would be a tax that affected certain expenses, objectively considered, it appearing that the quality and option of the tax subject have here a relevance, if not greater, at least equal to the charge that triggers the tax imposition.
Besides, it can always be said that if the Corporate Income Tax subject chooses not to deduct from taxable profit for purposes of that tax the charges corresponding to the expenses subject to autonomous taxation, it will not have to bear it, which will be demonstrative of what was pointed out above, that is, that the cause of autonomous taxation will lie, still and ultimately, in the very regime of Corporate Income Tax.
In this framework, and returning to the question to be decided, which is to determine what the legislator's intention is, expressed in the legislative text, understood as a whole - the combination of the content of article 12 of the Corporate Income Tax Code with article 45, paragraph 1, subsection a) of the same - it will leave no great doubt as to the legislative understanding that autonomous taxation, if it does not constitute Corporate Income Tax stricto sensu, which the Tribunal admits, will certainly always be part of the regime of that tax and will be owed under that title.
It is thus considered that the legislative thought, with a minimum of verbal correspondence in the letter of the law, albeit imperfectly expressed, was, at the date of the taxable fact in question in this case, to the effect that the amounts paid under autonomous taxation on expenses deductible by a Corporate Income Tax subject should not be considered a deductible charge for purposes of determining the taxable profit subject to that tax.
The correspondence of such intention in the legislative text is evident in the content of that article 12 of the CITC, already in force at the date of the taxable fact in question in this case, which provides that:
"Companies and other entities to which, under article 6, the tax transparency regime applies are not taxed in Corporate Income Tax, except with respect to autonomous taxation."
That is, from the perspective of the legal system, reflected in its respective text, autonomous taxation is part of the regime of, and is owed under, Corporate Income Tax, which is why in the rule just transcribed the legislator expressly reserved its application. Hence, in parallel, if it were the legislator's intention to exclude autonomous taxation from the scope of subsection a) of paragraph 1 of article 45 of the CITC, he would have said so expressly, since it would not make sense (would not be reasonable) that in one rule of the Code (article 12) the legislator understood that taxation in Corporate Income Tax encompasses autonomous taxation and in another (article 45) understood the opposite.
On the other hand, and reinforcing what has been set forth, article 3 of Law no. 2/2014, of 16 January, approved in the context of the Corporate Income Tax Reform, came to add article 23-A of the CITC, which succeeds the previous article 45 and to which, by what has been said, should be given, in the matter that concerns us, interpretive character, came to provide that:
"1 — The following charges are not deductible for purposes of determining taxable profit, even when recorded as expenses of the tax period:
a) Corporate Income Tax, including autonomous taxation, and any other taxes that directly or indirectly affect profits;"
This amendment came, as is understood, to clarify that, with respect to the periods to which the rule in question applies, expenses with autonomous taxation are not deductible for tax purposes, thus making explicit in the letter of the law something that this Tribunal understands already corresponded to one of the possible interpretations on this subject.
As Oliveira Ascensão states, for a law to be interpretive it is necessary that (1) there exists a doubt in doctrine and/or jurisprudence as to the meaning of the previous law; (2) that the subsequent law opts for one of the competing interpretations, and that (3) the subsequent law is intended to interpret the old law, this purpose having to result unequivocally from its text (cf. Oliveira Ascensão, O Direito. Introdução e Teoria Geral, Almedina, 10th ed., 1999, 560-561).
Requirements that in the case sub iudice are met.
That is, the Tribunal understands that this clarification by the legislator has the nature of an authentic interpretation, insofar as the legislator comes to adopt one of the possible interpretive meanings in light of the previous rule (applicable to the case at hand) by excluding, expressly, the deductibility of autonomous taxation and even making the nature of this tax equivalent to Corporate Income Tax. And it opted for one of the possible meanings with the aim of clarifying a pre-existing doubtful situation.
The clarifying intent derives from the very mandate given to the Commission for Corporate Income Tax Reform, to actively contribute to the reduction of areas susceptible to litigation, as this excerpt from the Commission's Report for Corporate Income Tax Reform tells us: "Although some improvement is noted, the recently available data on the state of Tax Justice in Portugal allows us to conclude that the degree of conflict recorded remains misaligned with the response capacity of the national judicial organization in tax matters. The Commission believes it necessary, therefore, to undertake an effort to reduce tax litigation through the introduction of legislative amendments in matters that, although already deserving of a stable and solid jurisdictional framework, continue systematically to generate conflicts in the national tax courts."
The Commission, backed by the will of the legislator, came thus to clarify the very regime of deductibility of tax expenses, giving a new wording to article 23-A of the Corporate Income Tax Code (which came to replace the previous article 45 of the same Code).
It is true that the legislator chose not to inscribe in the instrument it approved the regime currently in force an express declaration in the text or in the preamble of the instrument, saying that it was an interpretive rule.
But the fact that it did not do so does not directly lead to the understanding that the rule in question should not, for that reason, be given interpretive character.
For in the absence of an express declaration in the law itself, the interpretive character may still result "from the text, when there is flagrant the tacit reference of the new source to a pre-existing doubtful normative situation" (cf. Oliveira Ascensão, O Direito. Introdução e Teoria Geral, Almedina, 10th ed., 1999, p. 561).
Which is manifestly the case in this matter.
That is and in summary: from consideration of the legislative text, statically and in its historical evolution, it follows that the legislator understood, and continues to understand, that autonomous taxation is part of Corporate Income Tax, whether as a tax stricto sensu, or at least in terms of being part of the same unitary tax regime, and should have the same treatment in terms of deductibility for purposes of calculating taxable profit.
In fact, the tax legislator has, in the recent past, altered the tax treatment related to autonomous taxation, without ever having changed the perspective of including it in income taxation.
In any case, as was said, from the perspective of the legislator, autonomous taxation in question in this case will, effectively and unequivocally, be part of the Corporate Income Tax regime, being owed under this tax.
And it is not within the power of the judge to alter on its own initiative the legislator's policy and technical choice in configuring this type of tax as Corporate Income Tax, even though it may not technically agree with the solution found by it. Such would constitute a corrective interpretation, admittedly forbidden by the imperative of compliance with the law.
Everything that has been said shows that the evolution of the legal regime of Corporate Income Tax has transformed it into a complex and multifaceted reality, at the most diverse levels.
By way of conclusion, in light of all that has been set forth, and in favor of conceptual rigor, it will further be said that the understanding leans towards the view that autonomous taxation, as it currently exists, may be configured as a "hybrid" tax, affecting more certain types of expenses, and not consumption or spending, generically considered, as it will not present the main characteristics of this form of taxation.
It being considered, then, that autonomous taxation affecting charges deductible in Corporate Income Tax is part of the regime of, and is owed under, this tax, and, as such is covered by the provision of subsection a) of paragraph 1 of article 45 of the CITC, the expenses for payment of that autonomous taxation will not constitute deductible charges for purposes of determining taxable profit, and in consequence of all that has been set forth above, the present arbitral action will in its entirety fail, with the request for compensatory interest being prejudiced.
III DECISION
In harmony with the foregoing, the arbitrators herein agree to declare the application wholly unfounded and, in consequence, to dismiss the action against the Tax and Customs Authority.
Value of the Proceeding
In accordance with the provisions of article 306, paragraphs 1 and 2, of the Code of Civil Procedure, article 97-A, paragraph 1, subsection a), of the Code of Tax Procedure and article 3, paragraph 2, of the Costs Regulation in Tax Arbitration Proceedings, the value of the proceeding is fixed at €187,458.98.
Costs
Pursuant to article 22, paragraph 4, of the LRTA, the amount of costs is fixed at €3,672.00, under Table I attached to the Costs Regulation in Tax Arbitration Proceedings, to be borne by the Applicant.
Lisbon, 23 October 2014
The Arbitrators
José Poças Falcão
(President)
Henrique Nogueira Nunes
(Member)
José Vieira dos Reis
(Member)
[1] It is presumed that it was intended to say "…"
[2] All documents referred to without specific mention were attached by the applicant to the respective application for arbitral ruling.
[3] Follows closely and in part the arbitral decisions of the Tribunals constituted under CAAD, rendered in cases nos. 210/2013-T and 187/2013-T, published at https://caad.org.pt/tributario/decisoes/
[4] Admitting in its submissions the possibility of classification as Individual Income Tax, if not classified as an expense.
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