IRC Deductibility of Autonomous Taxation Charges: CAAD Arbitration 167/2014-T

ARBITRAL DECISION

The arbitrators, Jorge Lino Ribeiro Alves de Sousa (arbitrator-president), Paulo Lourenço and João Marques Pinto, designated by the Deontological Council of the Centre for Administrative Arbitration to form the arbitral tribunal, constituted on 28.04.2014, agree as follows:

I. REPORT

1. A..., S.A. (hereinafter designated Claimant), legal entity no. …, requested, on 23.02.2014, the constitution of an arbitral tribunal, in accordance with the provisions of articles 2, no. 1, paragraph a), and 10, nos. 1 and 2, of Decree-Law no. 10/2011 of 20 January (hereinafter, Legal Framework for Tax Arbitration or RJAT) and articles 1 and 2 of Regulation no. 112-A/2011 of 22 March, with a view to the declaration of partial illegality of the self-assessment act for Corporate Income Tax (IRC) and consequent municipal surcharge relating to the fiscal year 2011 and the subsequent act of dismissal of the administrative claim, to the extent corresponding to the non-deduction of tax charges incurred with autonomous taxes in that same fiscal year, the amount of which totals € 124,690.36.

2. The Claimant, in its capacity as parent company of a group of companies subject to the special tax treatment regime for groups of companies (RETGS), submitted the self-assessment of Corporate Income Tax (IRC) and consequent municipal surcharge relating to the fiscal year 2011 by filing, on 31 May 2012, the Model 22 declaration.

3. On 23.09.2013, the Claimant filed, with the Unit for Large Taxpayers of the Tax and Customs Authority (AT), an administrative claim against said self-assessment of Corporate Income Tax (IRC) and consequent municipal surcharge relating to the fiscal year 2011.

4. On 30.12.2013, the Claimant was notified of the decision dismissing the administrative claim, by order issued on 18 December 2013, by the Chief of the Division of Tax Management and Assistance of the Unit for Large Taxpayers.

5. The ninety-day period, provided for in article 10, no. 1, paragraph a) of Decree-Law 10/2011, for presenting the request for constitution of an Arbitral Tribunal, counted from the dismissal of the administrative claim, ended on 30 March 2014.

6. In its request, the Claimant opted not to designate an arbitrator.

7. Pursuant to no. 2 of article 6 of the RJAT, the Deontological Council of the Centre for Arbitration designated the panel of arbitrators now signing, notifying the parties.

8. The tribunal is regularly constituted to consider and decide the matter of the proceedings.

9. The grounds supporting the Claimant's request for arbitral pronouncement are, in summary, as follows:

9.1 The act subject to the request for pronouncement of the Arbitral Tribunal is the act of dismissal of the administrative claim referred to in 3 above, and, ultimately, the self-assessment act for Corporate Income Tax (IRC) and consequent surcharge relating to the fiscal year 2011 and, to the extent corresponding to the non-deduction of tax charges incurred with autonomous taxes in that same fiscal year.

9.2 In the said self-assessment of Corporate Income Tax (IRC) for the fiscal year 2011, the Claimant also proceeded with the self-assessment of autonomous taxes provided for in article 88 of the Corporate Income Tax Code (CIRC), in a total of € 435,639.39, which correspond to:

i) 10% of vehicle expenses in the amount of € 2,113,405.21, and 20% as regards the part of vehicle expenses beyond the acquisition value fixed by law, in the amount of € 596,409.75;

ii) 10% of representation expenses, in the amount of € 967,003.51;

iii) 5% of employee travel expenses by private vehicle and cost reimbursements not invoiced to third parties, in the amount of € 166,331.14

9.3 The Claimant, for purposes of determining taxable profit of its tax group in that fiscal year of 2011, did not deduct the charges incurred with said autonomous taxes, but rather treated them as if they were Corporate Income Tax (IRC) or municipal surcharge. However, it considers itself entitled to recognize said tax charges incurred with autonomous taxes in calculating taxable profit for purposes of Corporate Income Tax (IRC) (and the consequent municipal surcharge), fundamentally for the following reasons:

9.3.1. Argument relating to the legal nature of autonomous taxation [as taxation (autonomous) on expenses that does not constitute income tax (IRC) or profit tax of the company]:

a) Autonomous taxation is not Corporate Income Tax (IRC), but rather, in the majority of cases, taxation on expenses (the inverse of taxation on income or profit, as is the case with Corporate Income Tax (IRC), including its surcharge known as state surcharge, or as is the case with municipal surcharge), that is, taxation on charges incurred by the company and representing company consumption (in a broad sense). This is the case with autonomous taxes:

i) on undocumented expenses, the first of the autonomous taxes (currently provided for in nos. 1 and 2 of article 88 of the CIRC);

ii) on expenses that have benefited persons or entities located in low-tax zones, autonomous taxation introduced by Law no. 30-G/2000, of 29 December (currently provided for in no. 8 of article 88 of the CIRC);

iii) on representation expenses and vehicle charges (among other statistically less significant expenses), autonomous taxation introduced by Law no. 30-G/2000, of 29 December, and on cost allowances and compensation for travel by private vehicle of the employee on behalf of the employer, autonomous taxation introduced by Law no. 55-B/2004 currently provided for in nos. 3 to 7, and 9, of article 88 of the CIRC);

iv) on expenses for indemnification due when there is cessation of functions of director (or manager or partner), not related to the achievement of productivity objectives previously defined in the contractual relationship, and with indemnification for contract termination before the term (for those same professional categories) to the extent exceeding the value of remuneration that would still be due until the end of said term, introduced by Law no. 100/2009, of 7 September (currently provided for in paragraph a) of no. 13 of article 88 of the CIRC);

v) on expenses or charges with bonuses attributed to directors and managers, applicable when their payment is not at least 50% deferred in time over 3 years and is not conditioned on the positive performance of the company in that future temporal period (by reference to the past that justified the attribution of the bonus), introduced by Law no. 3-B/2010, of 28 April (provided for in paragraph b) of no. 13 of article 88 of the CIRC).

b) Its function has nothing to do with the function of Corporate Income Tax (IRC), has nothing to do with the function of reaching the contributory capacity revealed by the income of legal entities, quite the contrary: when that contributory capacity is smaller, or even non-existent, is when all these autonomous taxes are increased, across the board, by the increase in their respective rates (cf. current no. 14 of article 88 of the CIRC).

c) With respect to the various types of autonomous taxation, it points to the following functions:

(i) as regards autonomous taxation on undocumented or confidential expenses, it would fulfill the purposes of combating tax evasion, the parallel or underground economy and combating hidden distribution of profits to shareholders;

(ii) as regards autonomous taxation on expenses that have benefited persons or entities located in low-tax zones, it would aim to combat abuse translated into diversion of flows or income to low-tax zones with the sole objective of removing them from the taxation that would be applied in Portugal;

(iii) as regards autonomous taxation levied on vehicle charges and on representation expenses, it would be justified by the understanding that, given the involvement of consumption of a promiscuous nature (in the sense that they can serve equally business purposes as they can effectively be serving only, or also, personal needs of the company employee), it would also be justified to tax the very expense itself, in substitution of taxation in the personal sphere of the employee.

(iv) With respect to autonomous taxation on expenses with bonuses for directors or managers and on expenses with indemnifications to them upon cessation of their functions, the purpose would be essentially revenue-related;

(v) As regards autonomous taxation on profits distributed to entities exempt from Corporate Income Tax (IRC) (or that benefit from exemption with respect to capital income, especially dividends) when the period of holding of the participation by these is not of at least one year (autonomous taxation introduced by Decree-Law no. 192/2005, of 7 November, currently provided for in no. 11 of article 88 of the CIRC), it does not apply to an expense but rather to a dividend received from a company of which shareholdings are held for a short period of time, that is, it also abstracts from income profit, since the dividend receipt does not mean that the entity in question achieved a positive result in the fiscal year in question. As for its function, it would be essentially to combat abusive practices in the field of tax planning (dividend washing, disqualification of income by transformation of dividends into capital gains).

d) The Claimant concludes that an analysis either of the incidence (in the overwhelming majority of cases, on expenses or charges), or of the function of autonomous taxes, or, even of the declarative models designed by the Tax Authority (in this case, Model 22), reveals that these are not, do not have the nature of, income tax (profit) of the legal entity that incurs them and constitutes its taxpayer subject. On the contrary, in the situation of losses it is precisely when these autonomous taxes are increased (cf. current no. 14 of article 88 of the CIRC).

e) Furthermore, autonomous taxes apply independently of Corporate Income Tax (IRC) (as a consequence, precisely, of this different nature and function in comparison with Corporate Income Tax (IRC)): they apply even (or in the same manner) when there is exclusion from subjection to (non-applicability of) Corporate Income Tax (IRC), or exemption from Corporate Income Tax (IRC), being increased even when losses occur, and they apply to a reality different from that (income/profit) to which Corporate Income Tax (IRC) applies, hence their tax deduction does not generate a vicious circle, as would be the case with a possible deduction of surcharges.

f) The literature predominantly attributes to autonomous taxes in the context of Corporate Income Tax (IRC) a character and purpose distinct from the taxation of company income. The Claimant cites, for this purpose, numerous works/opinions of various distinguished Authors recognized specialists in tax law.

g) As regards case law, the Claimant sustains that the Supreme Administrative Court (STA) has understood that autonomous taxation is not income tax (Corporate Income Tax (IRC)), being merely liquidated jointly with Corporate Income Tax (IRC) (in the same declaration – Model 22); also the Constitutional Court distinguishes Corporate Income Tax (IRC) from autonomous taxation in Corporate Income Tax (IRC) and in Personal Income Tax (IRS). As for arbitral tribunals, the Claimant invokes the decision of the arbitral panel handed down in case no. 7/2011-T, which also adopts the practically unanimous understanding of the differentiation between Corporate Income Tax (IRC) (which taxes income) and autonomous taxes (which do not tax income, but rather apply to expenses or charges).

9.3.2. Argument regarding the tax deductibility of the charge with autonomous taxation:

a) To charges resulting from autonomous taxes the general rule of deductibility of tax charges provided for in article 23, no. 1, paragraph f), of the CIRC applies inasmuch as the rule in Corporate Income Tax (IRC) is that taxes borne by a subject to Corporate Income Tax (IRC) are deductible, to the same extent and on the same level as the generality of expenses or charges – cf. paragraph f) of no. 1 article 23 of the CIRC. The exceptions to this state of affairs are precisely that, exceptions, and are provided for in paragraphs a) and c) of no. 1 of (at the time of the facts) article 45 (previously 42) of the CIRC, to which is added the exception also provided for the banking sector contribution, provided for in paragraph o) of no. 1 of the cited article 45 of the CIRC. The Claimant further adds that with respect to the autonomous taxes here at issue, there was a significant alteration as from fiscal year 2014, an alteration that constitutes further confirmation that until fiscal year 2013, inclusive, this tax charge was not excepted from the general rule of deductibility of tax charges: in the law reforming Corporate Income Tax (IRC) (Law no. 2/2014) the inclusion of tax charges with autonomous taxes was established in the exception that prevents tax deductibility of Corporate Income Tax (IRC), equating them for this purpose (inclusion in the exception of non-deductibility) to Corporate Income Tax (IRC) (cf. article 23-A no. 1, paragraph a) of the CIRC).

b) The tax charges to which the exception to their deductibility applies, provided for in the standard applicable at the time, that is, paragraph a) of no. 1 of article 45 (previously 42) of the CIRC, are only Corporate Income Tax (IRC), including state surcharge, and municipal surcharge.

c) The doctrinal controversy that existed regarding the (non-)deductibility of municipal surcharge and the manner in which it was settled, also confirm that with respect to tax charges with autonomous taxes the exception provided for in paragraph a) of no. 1 of article 45 (previously 42) of the CIRC (applicable, as we have seen, at the time of the facts), does not apply to the tax rule of deductibility of taxes.

9.4 The Claimant further conducts an analysis of the grounds advanced by the Unit for Large Taxpayers to dismiss the administrative claim filed, concluding, as it had already done in its statement that it is not only because autonomous taxation possesses a nature distinct from Corporate Income Tax (IRC), nor because the same is not found among the exceptions of tax non-deductibility provided for in article 45 of the CIRC that it defends the tax deductibility thereof; it is also because, positively there is a rule that affirms the deductibility of tax charges (article 23, no. 1, paragraph f) of the CIRC), and autonomous taxes are precisely that: tax charges resulting from taxation levied on expenses. That is, there is a rule that positively prescribes deductibility; and, on the contrary, there is no rule that negatively excepts that deductibility. It is from the combination of these arguments that the Claimant concludes there is no reason to deny the tax deductibility of charges with autonomous taxes, with the possible exception of autonomous taxes levied on undocumented expenses and payments to offshore entities (if and to the extent that these are not themselves deductible, which does not necessarily occur, as is known, with payments to offshore entities).

However, it should be noted that the Claimant, more than once, affirms that, in the case at hand, there is no incidence of an autonomous taxation on this type of expenses (undocumented and payments to offshore entities).

9.5 Finally, the Claimant petitions for the payment of compensatory interest under the provisions of article 43 of the General Tax Code (LGT), calculated on the amount of tax unduly paid (€124,690.36) and counted from its payment, which occurred on 31 May 2012, until the actual reimbursement.

1. In the Response filed, the Respondent Entity came to defend itself by means of objection.

Matter of objection

a) The Respondent begins by referring that, even admitting in theory the deductibility of autonomous taxes, as far as autonomous taxes on non-deductible expenses are concerned, despite this matter not arising in the present situation, it would never be admissible their deductibility to the extent that they would configure a tax charge on expenses not indispensable "for the achievement of income subject to tax or for the maintenance of the income source," and thus do not fall within paragraph f) of no. 1 of art. 23 of the CIRC.

b) As regards the possibility of deduction from taxable profit of charges with autonomous taxation levied on deductible expenses, the Respondent, considering that autonomous taxes do not constitute, ontologically, a type of tax distinct from Corporate Income Tax (IRC), such as, for example, the surcharge, responds with the following arguments:

i) In the first place, it argues that neither case law nor the authors cited by the Claimant pronounce themselves in the sense that autonomous taxes are not, at least formally, Corporate Income Tax (IRC), nor do they advocate their deductibility from taxable profit, either by their exclusion from paragraph a) of no. 1 of art. 45 of the CIRC, or by their inclusion in paragraph f) of no. 1 of art. 23 also of the CIRC. In this sense, it refers that the judgments of the Constitutional Court cited by the Claimant address the question of the retroactivity of the legal amendment of autonomous taxation rates introduced by Law no. 64/2008, of 5 December, which amended the then article 81 of the CIRC increasing the rate of autonomous taxation applicable to representation expenses and vehicle charges and made its effects retroactive to 1 January 2008, not pronouncing itself on whether autonomous taxes are not, at least formally, Corporate Income Tax (IRC), nor, on the other hand, advocating their deductibility from taxable profit either by their exclusion from paragraph a) of no. 1 of art. 45 of the CIRC, or by their inclusion in paragraph f) of no. 1 of art. 23 of the CIRC.

The same occurs with the case law of the Supreme Administrative Court (STA), which addresses, essentially, the matters of retroactivity and tax transparency.

As for the decision of the arbitral panel handed down in case no. 7/2011-T, which the Claimant also cites, the Respondent refers that the same addresses autonomous taxes by comparison with taxation by indirect methods, only addressing their nature, obiter dictum, in that respect, once more, of their form of calculation, but without drawing from it the conclusions that the Claimant advocates.

The Respondent does not challenge the merit of the decisions handed down by the Case law cited by the Claimant, but only the conclusions drawn from them, as it considers that from those decisions one cannot conclude, without more, that autonomous taxes are not Corporate Income Tax (IRC).

ii) As regards the substantive issue, it considers that the Claimant's claim to correct the entry of charges relating to autonomous taxes in field 724 of Model 22 for fiscal year 2010 faces, from the outset, the literal element of the rule contained in paragraph a) of no. 1 of art. 45 of the CIRC, which refers to charges with Corporate Income Tax (IRC), to the extent that one cannot deny that autonomous taxes fall formally within the Corporate Income Tax (IRC) to be paid by the taxpayer – an observation which, it alleges, is not disputed by case law nor by the prestigious authors that the Claimant cites, who address the matter of the specificities of autonomous taxes precisely on the assumption that they formally comprise the Corporate Income Tax (IRC) to be paid by taxpayers. Whence, when the legislator refers to Corporate Income Tax (IRC) charges, it necessarily includes, albeit for now on a literal plane, autonomous taxes.

iii) It further invokes the terms of article 12 of the CIRC, which, according to it, confirm, a contrario sensu, that autonomous taxes are considered Corporate Income Tax (IRC) by the legislator because the latter, by excluding from taxation in Corporate Income Tax (IRC) the companies covered by the tax transparency regime, expressly safeguards autonomous taxes ("companies and other entities to which, in accordance with article 6, the tax transparency regime is applicable are not taxed in Corporate Income Tax (IRC), except as regards autonomous taxes"). Consequently, it affirms, autonomous taxes are a component of Corporate Income Tax (IRC) to be self-assessed and paid by taxpayers in accordance with the terms and within the periods provided respectively in articles 89 and following (Liquidation – Chapter V) and 104 and following (Payment – Chapter VI) of the Corporate Income Tax Code, which, moreover, refer indifferently to both Corporate Income Tax (IRC) on profit and to autonomous taxes in the context of Corporate Income Tax (IRC). Thus, it concludes, contrary to what the Claimant intends, autonomous taxes are not some other tax distinct, despite the differences highlighted by case law in the facts on which they apply.

iv) The autonomy that gives its name to autonomous taxation rates is related, in the Respondent's view, to the facts on which they apply and to the specificities in their calculation, but not in relation to the remaining portions of Corporate Income Tax (IRC) to be self-assessed and paid by the taxpayer, since in this light autonomous taxes are, still, Corporate Income Tax (IRC). And it is so, it underlines, for all legal purposes, the product of the application of autonomous taxation rates even enjoying the tax privileges provided for in article 116 of the CIRC and applying to them the same remedies contemplated in art. 137 of the CIRC.

v) On the other hand, it notes that the matter of the (non-)deductibility of autonomous taxes cannot be placed on the same level as the discussion that previously took place around the deductibility of municipal surcharges and which culminated in the solution embodied in the State Budget Law of 1996 (Law no. 10-B/96, of 23 March), to which an interpretative nature was conferred, and, also, in the judgment of the Full Bench of the Supreme Administrative Court (STA), of 06-05-2002, handed down in appeal by opposition of judgments in case no. 022155. It is so because autonomous taxes do not share with surcharges the characteristics that make them a tax distinct and special in relation to Corporate Income Tax (IRC), to the extent that, unlike municipal surcharges, which, in their original formulation were a local tax, levied by municipalities, whose revenues have a different allocation from Corporate Income Tax (IRC) revenues, article 4 of Decree-Law no. 192/90, of 9 June, which instituted the autonomous taxation rates in our country, provided that "confidential or undocumented expenses incurred in the course of commercial, industrial or agricultural activities by subjects to Personal Income Tax (IRS) who own or should own organized accounts or by subjects to Corporate Income Tax (IRC) not framed in articles 8 and 9 of the respective Code are taxed autonomously in Personal Income Tax (IRS) or Corporate Income Tax (IRC), as the case may be, at a rate of 10%, without prejudice to the provisions of paragraph h) of no. 1 of article 41 of the CIRC." That is, even though not formally inserted in the Personal Income Tax (IRS) or Corporate Income Tax (IRC) codes, it was already determined that the product of the application of these rates constituted an addition to income tax to be liquidated and paid by the taxpayer. It concludes, therefore, that autonomous taxes, even when provided for in their own instrument, never constituted an autonomous tax, as municipal surcharges were at times, or a special tax on accessory advantages, as in the examples of "Fringe Benefits Tax" adopted in Australia and New Zealand, brought into discussion by the Claimant [cf. arts. 153 to 155 and 222 and 223 of the Petition] based on a study by MARIA DOS PRAZERES LOUSA.

vi) With respect to the wording given by Law no. 2/2014, of 16 January, to paragraph a) of article 23-A of the CIRC, it considers that the legislator came to clarify what was already previously defended by the Tax Authority, that is, it comes to consider autonomous taxes as a component included in the charges incurred under Corporate Income Tax (IRC).

vii) Thus, the Respondent rejects the Claimant's interpretation according to which "there is a rule that positively prescribes deductibility; and there is no rule that negatively excepts that deductibility," since, expressly prescribing paragraph a) of no. 1 of art. 45 of the CIRC the non-deductibility of Corporate Income Tax (IRC), it must necessarily be concluded that this rule, by its letter, also excludes the deductibility of autonomous taxes. Thus, the Claimant's thesis could only prevail if a restrictive interpretation of paragraph a) of no. 1 of article 45 of the CIRC were carried out, which is not admissible because it would imply the prior conclusion, from logical elements, that the legislator did not intend with this rule to exclude the deductibility of autonomous taxes, which it does not consider possible in the concrete case because there are no compelling reasons to exclude autonomous taxes from the letter of the rule under analysis.

viii) As regards the function performed by autonomous taxes, the Respondent argues that these have an accessory/instrumental nature in relation to the taxation of actual income, in particular with regard to the abusive use of certain expenses, being, consequently, functionally linked to the calculation of actual income. Thus, aiming autonomous taxes to reduce the tax advantage achieved with the deduction from taxable profit of costs on which they apply and also to combat tax evasion which this type of expenses, by their nature, potentiates, it will not itself be through its deduction from taxable profit as a cost of the fiscal period constitute a factor for reducing that diminution of advantage intended and determined by the legislator. It further concludes the Respondent that if the definition of the autonomous taxation rate depends on the calculation of the taxable matter, the product of its application cannot be integrated into the calculation thereof, by impossibility of logic.

ix) As regards the matter of compensatory interest, the Respondent considers that these are not due and that, even if they were, their calculation would have as initial term the date on which the notification of the decision that dismissed the administrative claim procedure occurred and, never, the moment indicated by the Claimant in its petition.

1. On 21.03.2014 the following order was issued by the President of the Arbitral Tribunal: "In view of such petition, the tribunal, dispensing with the holding of the meeting referred to in art. 18 of the RJAT, assigns to the parties the successive period of 10 days for final submissions…"

2. Within the period fixed for this purpose, the Claimant presented its submissions, which are summarized below:

a) In the Claimant's understanding, the two rules that define what Corporate Income Tax (IRC) is are its article 1 and its article 3, and these are absolutely coincident: Corporate Income Tax (IRC) is a tax on profit/income. Thus, article 12 of Corporate Income Tax (IRC), contrary to what is sustained in decisions taken in proceedings that took place within the CAAD (specifically, in the context of case 246/2013-T) does not have as its mission to define what Corporate Income Tax (IRC) is, so that what, for purposes of that article may be drawn with respect to the inclusion or not of autonomous taxes in the concept of Corporate Income Tax (IRC), should not go beyond the specific scope of application of the rule there contained. Whence, neither the conceptual reasons advanced by that arbitral decision, nor the letter of the law allow the conclusion that autonomous taxes are Corporate Income Tax (IRC) and, consequently not deductible in the process of determining the taxable matter under this tax. Along the lines of what sustains in its initial petition, the Claimant reaffirms that autonomous taxes are not Corporate Income Tax (IRC), and should therefore be a tax charge deductible in Corporate Income Tax (IRC).

b) To this conclusion that autonomous taxes are not Corporate Income Tax (IRC) the Supreme Administrative Court (STA) has also arrived on various occasions. In this sense, the Claimant transcribes parts of various judgments of the Supreme Administrative Court (STA), already referred to, moreover, in its initial request. All this case law (cf. judgments of the Supreme Administrative Court (STA) handed down in cases no. 281/11, 830/11 and 77/12) excluded the application of rules of Corporate Income Tax (IRC) (taxation on income) to Autonomous Taxes (AT hereinafter), precisely because it concluded that these were not Corporate Income Tax (IRC).

c) There is a radical difference between, on the one hand, Corporate Income Tax (IRC) and liberatory rates (by withholding at source) and AT, in that the former apply, only, to income, contrary to AT which apply to those who bear the expense and to that expense, never taxing the income of the taxpayer;

d) The function (of the majority) of AT concretely here at issue of taxing certain expenses in which the employer entity incurs, because of the potentially promiscuous use (between the personal sphere of the employee and the activity of the company) thereof, also confirms the relevance of their tax deductibility.

e) It is a contradiction in the terms to invoke the requirement of indispensability when the very expense or charge on which the AT applies is itself deductible/meets that requirement of indispensability.

f) Nothing is derived from the simplified taxation regime that supports the Tax Authority's construction.

g) The radical difference between Corporate Income Tax (IRC) and municipal surcharge on the one hand, and autonomous taxes on the other: the reason that underlies the non-deductibility of Corporate Income Tax (IRC) for purposes of measuring the base (profit or income of the legal entity) on which it applies is precisely the same as that of municipal surcharge - both of these taxes constitute a whole that aims to tax the profit of the company, so they should not themselves be deducted (if nothing is said to the contrary) for purposes of calculating the company's profit on which they will be incurred. None of this happens with autonomous taxes: they are neither an addition (as was the case until 2007 the surcharge) nor an addition (surcharge after 2007) to Corporate Income Tax (IRC), since they are not determined on the basis of the collection of Corporate Income Tax (IRC) or its base (taxable profit). In a word, they do not apply directly or indirectly to the profit or income of the company.

h) The fact that the rate of AT is increased in the event of the existence of tax losses does not constitute any logical obstacle to its deductibility.

i) In addition to these arguments, which constitute a repetition of what had already been argued in the initial petition, a large part of the Claimant's submissions pass through the critical analysis of the arbitral decision handed down in cases 246/2013-T and 255/2013-T, referring, as regards that segment of the submissions, to the respective text.

1. Also within the applicable period, the Respondent presented its submissions and conclusions, where it sustains the following:

a) The Respondent begins by reiterating all the arguments made in its defense in the sense of the non-deductibility of autonomous taxes, referring, next, that the matter to be decided has already been the subject of extensive case law on the part of the CAAD, even naming these cases (187/2013-T, 209/2013-T, 246/2013-T, 225/2013-T and 260/2013-T).

b) In this way, the Respondent takes the opportunity to, in support of its position – non-deductibility as a tax cost of AT - transcribe the part that it considers most relevant of the decision handed down in the context of case 209/2013-T, referring, as regards that segment of the submissions, to the respective text.

c) Finally, the Respondent considers that the submissions presented by the Claimant, as they are almost exclusively focused on rebutting the decisions taken in CAAD cases with nos. 246/2013-T and 255/2013-T, clearly go beyond the purpose and aims pursued by the submissions and which should be those of proceeding with the factual and legal appreciation of the issues raised in the case itself and not reviewing decisions taken in other cases.

Nothing further having been argued or requested, it is now necessary to hand down a decision.

II. REASONING

II.1 MATTER OF FACT

1. The Claimant, in its capacity as parent company of a group of companies subject to the special tax treatment regime for groups of companies (RETGS), submitted the self-assessment of Corporate Income Tax (IRC) and consequent municipal surcharge relating to the fiscal year 2011 by filing, on 31 May 2012, Model 22 declaration. In the said self-assessment of Corporate Income Tax (IRC) for the fiscal year 2011, the Claimant also proceeded with the self-assessment of autonomous taxes provided for in article 88 of the CIRC, in a total of € 435,639.39, which correspond to:

i) 10% of vehicle expenses in the amount of € 2,113,405.21, and 20% as regards the part of vehicle expenses beyond the acquisition value fixed by law, in the amount of € 596,409.75;

ii) 10% of representation expenses, in the amount of € 967,003.51;

iii) 5% of employee travel expenses by private vehicle and cost reimbursements not invoiced to third parties, in the amount of € 166,331.14

1. On 23.09.2013, the Claimant filed, with the Unit for Large Taxpayers of the Tax and Customs Authority (AT), an administrative claim against said self-assessment of Corporate Income Tax (IRC) and consequent municipal surcharge relating to the fiscal year 2011.

2. On 30.12.2013, the Claimant was notified of the decision dismissing the administrative claim, by order issued on 18 December 2013, by the Chief of the Division of Tax Management and Assistance of the Unit for Large Taxpayers.

3. The Claimant, for purposes of determining taxable profit of its tax group in that fiscal year of 2011, did not deduct the charges incurred with said autonomous taxes, but rather treated them as if they were Corporate Income Tax (IRC) or municipal surcharge.

4. The Claimant requested, on 23.02.2014, the constitution of an arbitral tribunal, in accordance with the provisions of articles 2, no. 1, paragraph a), and 10, nos. 1 and 2, of Decree-Law no. 10/2011 of 20 January (hereinafter, Legal Framework for Tax Arbitration or RJAT) and articles 1 and 2 of Regulation no. 112-A/2011 of 22 March, with a view to the declaration of partial illegality of the self-assessment act for Corporate Income Tax (IRC) and consequent surcharge relating to the fiscal year 2011 and the subsequent act of dismissal of the administrative claim, to the extent corresponding to the non-deduction of tax charges incurred with autonomous taxes in that same fiscal year, the amount of which totals € 124,690.36.

The decision of the matter of facts proven was based on the documents attached to the case and on the non-opposition of the Tax and Customs Authority with respect to facts invoked by the Claimant.

There are no unproven facts with relevance to the decision of the case.

II.2 QUESTION TO BE CONSIDERED

The merit of the claim: should the deductibility of the amounts paid as autonomous taxation be accepted for purposes of calculating taxable profit?

On the merit of the claim for declaration of partial illegality of the self-assessment act for Corporate Income Tax (IRC) for 2011

The substantive question that arises before this tribunal requires a decision on whether the sums paid within the framework of autonomous taxes by a subject to Corporate Income Tax (IRC) should be considered a deductible charge for purposes of calculating taxable profit on which that tax applies.

As we have seen, the Claimant alleges that autonomous taxes tax expenses and not income, thus representing, in this manner, a kind of penalty for companies with respect to certain charges incurred and which have some function or remunerative component.

Thus, and similarly to what occurs with other taxes that have the same nature, such as, for example, Property Transfer Tax (IMT) due in the acquisition of real property, or Stamp Tax supported in financial operations, or even VAT (when not deductible by the taxpayer subject), also autonomous taxation should, in the determination of the taxable matter of legal entities, be deductible, as a tax cost.

To the contrary, the Respondent sustains that autonomous taxes formally comprise the Corporate Income Tax (IRC) to be paid by taxpayers, so that, when the legislator refers to Corporate Income Tax (IRC) charges, it necessarily includes, albeit for now on a literal plane, autonomous taxes.

This question has already been considered and decided in various proceedings, with different arbitral judicial compositions, that took place in this Centre for Administrative Arbitration, CAAD (cf. cases 187/2013-T, 209/2013-T, 246/2013-T, 225/2013-T and 260/2013-T or more recently 282/13-T), in which there has been a notable uniformity of decisions.

Let us see what is written in the judgment relating to the last of the cited cases:

"Within the scope of the previous wording of the Corporate Income Tax Code there were two rules with direct impact on the question under analysis: on the one hand, the general principle of deductibility of charges verifiably indispensable for the achievement of income subject to tax or for the maintenance of the income source, in particular, those of a fiscal and parafiscal nature, which resulted from article 23, no. 1, paragraph f), of the Corporate Income Tax Code. On the other hand, the rule of non-deductibility provided for in paragraph a) of no. 1 of article 45 of the same Code, under which were not deductible for purposes of determining taxable profit Corporate Income Tax (IRC) and any other taxes directly or indirectly levied on profits.

Faced with a general principle of deductibility of charges and the absence of express reference to autonomous taxes in the rule contained in paragraph a) of no. 1 of article 45 of the CIRC, doubt arises as to whether the legislator intended, or not, to include them in the exception of non-deductibility provided for in this latter rule. Given the interpretative doubt created by the letter of the law, it is then incumbent upon the interpreter to interpret the legal system as a whole, seeking in the reasons for the regime of autonomous taxes the answer to the doubts raised.

Autonomous taxes were 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.

Later, autonomous taxes were included in the Corporate Income Tax Code, through Law no. 30-G/2000, of 29 December, which came to integrate the provision of autonomous taxes in the instrument that regulates Corporate Income Tax (IRC).

Since then, the regime of autonomous taxes, already inserted in the Corporate Income Tax Code, has witnessed a process of expansion that culminated in the current existence of several types of autonomous taxes provided for in article 88 of the Corporate Income Tax Code:

i) Autonomous taxation on undocumented expenses;

ii) Autonomous taxation on vehicle charges;

iii) Autonomous taxation on representation expenses;

iv) Autonomous taxation on amounts paid or owed, for any reason whatsoever, to natural or legal persons resident outside Portuguese territory and there subject to a tax regime clearly more favourable;

v) Autonomous taxation on expenses with cost allowances and with compensations for the travel of workers in private vehicles on behalf of the employer;

vi) Autonomous taxation on profits distributed by entities subject to Corporate Income Tax (IRC) to taxpayers who benefit from total or partial exemption;

vii) Autonomous taxation on expenses or charges relating to indemnification or any compensation owed not related to the achievement of productivity objectives previously defined in the contractual relationship, when there is cessation of functions of manager, director or partner, as well as on expenses relating to the part that exceeds 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 the term;

viii) Autonomous taxation on expenses or charges relating to bonuses and other variable remuneration paid to managers, directors or partners.

From the analysis of this list it is possible to conclude that autonomous taxes apply to both deductible charges and non-deductible charges and that autonomous taxes fulfill, in essence, two functions: on the one hand, to prevent erosion of the taxable base in the context of Corporate Income Tax (IRC), by applying taxation to charges that can be deducted by taxpayers of Corporate Income Tax (IRC), but which, in doing so, are transformed into an aggravation of taxation, intending, therefore, to serve as a disincentive to spending on such charges; other types of autonomous taxes aim, purely and simply, to penalize presumptively evasive or fraudulent conduct of taxpayers, constituting an anti-abuse mechanism."

Now, as was underlined by various parties, in the case at hand, one is not faced with autonomous taxes resulting from this type of expenses, but solely from expenses that are accepted as tax-deductible costs, such as vehicle expenses, representation expenses or employee travel expenses by private vehicle and cost reimbursements not invoiced to third parties.

With respect to this type of expenses, the cited arbitral decision states:

"Secondly, it is important to decide the question of the deductibility of autonomous taxes that apply to deductible expenses: should the principle be applied whereby the accessory follows the fate of the principal (acessorium principale sequitur) and decide that autonomous taxation borne with reference to a deductible charge should itself also be deductible? The question here is whether in the expression "Corporate Income Tax (IRC) and any other taxes that directly or indirectly levy on profits" (embodied in paragraph a) of no. 1 of article 45 of the Corporate Income Tax Code in the wording and in force at the time of the facts), autonomous taxes should be included or not.

The Claimant presented argument in the sense that, configuring autonomous taxation a tax distinct from Corporate Income Tax (IRC), with functions and purposes distinct from the primary function of Corporate Income Tax (IRC) of taxation of actual income of companies, this distinct form of taxation could not be considered "Corporate Income Tax (IRC)" for purposes of the exclusion of deductibility provided for in paragraph a) of no. 1 of art. 45 of the Corporate Income Tax Code. Already the Respondent considers that autonomous taxes that apply to taxpayers of Corporate Income Tax (IRC) cannot be dissociated from the tax on income of legal entities, to the extent that they are intended, even if indirectly, to contribute to the realization of the function of that tax, which is why admitting the respective deductibility for purposes of calculating taxable profit of taxpayers of Corporate Income Tax (IRC) would be, let us say, a form of fraud admitted by the system itself.

Now, on this matter, the present tribunal considers that the Claimant is right when it states that autonomous taxes operate differently from Corporate Income Tax (IRC), have, immediately, purposes distinct from Corporate Income Tax (IRC), serve functions that were not at the core of the system of taxation of legal entities when this was erected through the Corporate Income Tax Code and, to some extent, are autonomous from the taxation operated by Corporate Income Tax (IRC) in the sense that they do not depend on that for their immediate objectives to be realized. All this is true, and it is therefore recognized that some of the arguments raised by the Claimant in the sense of differentiating the two forms of taxation are pertinent.

However, this differentiation should not prevent the interpreter from perceiving that the root of autonomous taxes lies, still, in Corporate Income Tax (IRC). Notwithstanding that they have evolved to a species complex and to some extent autonomized from the tax with respect to which prima facie they emerged associated, they exist, survive and multiply because of Corporate Income Tax (IRC) and because of the ultimate objectives of Corporate Income Tax (IRC). They are, to that extent, a form of realization of the taxation of legal entities that arises from the finding of the growing incapacity to tax the respective income only on the basis of the traditional axis of Corporate Income Tax (IRC). They are, therefore, despite the differences that may today be recognized in them vis-à-vis Corporate Income Tax (IRC), a mechanism for preserving the taxable base in the context of Corporate Income Tax (IRC) and, from that perspective, it would make little sense to accept that the system itself permits their deduction. (underlined in original)

Concretely as regards autonomous taxes that apply to deductible expenses, these aim to compensate, in this manner, the loss of tax revenue that the undertaking and deduction of such expenses would occasion in its absence. Thus, while permitting the taxpayer to deduct the expense, his deduction is burdened with autonomous taxation reducing, in this way, the tax revenue lost with the deduction of the expense and discouraging future use of the type of charges that generated the autonomous taxation.

As the Constitutional Court states in Judgment no. 18/2011, with respect to charges related to vehicles: "[these] refer to deductible charges as costs for purposes of Corporate Income Tax (IRC), that is, to charges that verifiably were indispensable to the achievement of revenues, in light of what is established in article 23, no. 1, of the CIRC, the taxation provided for in those rules [present nos. 3 and 4 of art. 88 of the CIRC] being explained by a legislative intention to encourage companies to reduce as much as possible the expenses that negatively affect tax revenue".

In the same sense go the words of Saldanha Sanches when he states that "In this type of taxation [autonomous], the legislator seeks to respond to the admittedly difficult question of the tax treatment found in the area of intersection of the personal sphere and the business sphere, so as to avoid remuneration in kind more attractive for reasons exclusively of a tax nature or hidden distribution of profits." (cf. "Manual of Tax Law", 3rd Edition, Coimbra Editora, 2007, p. 406).

Given the above, although it is recognized that the regime of autonomous taxes constitutes, within Corporate Income Tax (IRC), a special regime in particular as regards the form of calculation of taxation, it is believed that this is not a decisive argument in the sense intended by the Claimant because it is, still, a regime that has as its object, even if mediate, the guarantee of the taxation of income of legal entities and the obtaining of tax revenue by that means.

Finally, it does not conflict with the interpretation that has just been made about the nature of autonomous taxes and, in particular, about the question of their (non-)deductibility in the context of Corporate Income Tax (IRC) the recent amendment made to the Corporate Income Tax Code by Law no. 2/2014, of 16 January[1], which came to repeal the old article 45, establishing now in article 23-A of the CIRC that "The following charges are not deductible for purposes of determining taxable profit, even when accounted for as expenses of the taxation period: a) Corporate Income Tax (IRC), including autonomous taxes, and any other taxes that directly or indirectly levy on profits." Indeed, the fact that it is now clearly stated in the text of the law that autonomous taxes are not deductible for purposes of calculating Corporate Income Tax (IRC) does not mean that the same conclusion could not already be drawn from the legal regime in effect previously and, as such, be applicable to legal situations constituted under the old law."

In the line of what was decided in the scope of the proceedings referred to above and in their respective reasoning, considering that the applicable legislation has changed in no way, this Arbitral Tribunal in the same manner considers that autonomous taxes, contrary to what is sustained by the Claimant, were covered by the provisions of paragraph a) of no. 1 of article 45 of the CIRC in the wording in force until 31.12.2013, and that, consequently, the amounts paid with reference to those autonomous taxes are not deductible for purposes of calculating the taxable profit of the Claimant, and therefore, the claim for declaration of partial illegality of the self-assessment act for Corporate Income Tax (IRC) with reference to fiscal year 2011 which is the subject of the present proceedings should be dismissed.

III. DECISION

a) The arbitral tribunal hereby rules that it finds the claim for arbitral pronouncement presented by the Claimant to be without merit;

b) Condemn the Claimant to bear the costs of the proceedings.

IV. VALUE OF THE CASE

In accordance with the provisions of article 315, no. 2, of the Code of Civil Procedure and 97-A, no. 1, paragraph a), of the Code of Tax Procedure and 3, no. 2, of the Regulation of Costs in Tax Arbitration Proceedings, the value of the case is set at € 124,690.36.

V. COSTS

In accordance with Table I attached to the Regulation of Costs in Tax Arbitration Proceedings, the amount of costs is € 3,060.00.

Notification to be given.

[Portuguese orthography in accordance with the Orthographic Agreement of the Portuguese Language of 1990 is adopted, with the spelling contained in the citations and all texts used having been updated accordingly].

Lisbon, 28 July 2014

(Jorge Lino Ribeiro Alves de Sousa)

(Paulo Lourenço)

(João Marques Pinto)

[1] Which reformed the taxation of legal entities, amending the Corporate Income Tax Code, approved by Decree-Law no. 442-B/88, of 30 November, the Regulatory Decree no. 25/2009, of 14 September, and the Personal Income Tax Code, approved by Decree-Law no. 442-A/88, of 30 November.