Process: 173/2018-T

Date: November 12, 2018

Tax Type: IRC

Source: Original CAAD Decision

Summary

This CAAD arbitration decision (Process 173/2018-T) addresses the procedural standing of a member company within a complementary business grouping (ACE - Agrupamento Complementar de Empresas) to challenge IRC (corporate income tax) assessments. The Tax Authority argued that only the ACE itself, as the taxable subject, had standing to contest the 2012 IRC assessment related to multi-year construction works (obras de carácter plurianual). The claimant, A... S.A., held a 44% participation in B... ACE, which executed multi-year roadway construction projects under concession contracts. The arbitral tribunal rejected the Tax Authority's exception, ruling that individual ACE members have procedural standing (legitimidade processual) to challenge assessments when they are individually notified and required to pay the tax. The decision was grounded in Articles 65 LGT and 9(1) CPPT, which grant standing to subjects liable in tax relationships and persons with legally protected interests. Critically, the tribunal emphasized that Article 130(1) CIRC expressly allows ACE members to lodge complaints or challenge assessments. The constitutional right to judicial review under Article 268(4) CRP further supports this interpretation, as denying standing would violate fundamental guarantees. The case also involved the percentage of completion method for multi-year works under NCRF 19 and Article 19 CIRC, though the standing issue was resolved as a preliminary matter. This ruling establishes important precedent that ACE members individually assessed for IRC have autonomous standing to pursue administrative complaints and arbitration proceedings, independent of the ACE entity itself, particularly when they bear direct payment obligations.

Full Decision

ARBITRAL DECISION

The arbitrators Advisor Jorge Manuel Lopes de Sousa (president-arbitrator, designated by the other Arbitrators), Dr. Filomena Oliveira and Dr. José Rodrigo de Castro, designated by the Claimant and the Respondent, respectively, to form the Arbitral Tribunal, constituted on 26-06-2018, agree as follows:

1. REPORT

A..., S.A. – BRANCH IN PORTUGAL (hereinafter briefly designated as "A..." or "Claimant"), holder of identification number for collective persons ("NIPC")..., with registered office at ..., no....–..., ...-... Lisbon, requested the constitution of an Arbitral Tribunal pursuant to Decree-Law no. 10/2011, of 20 January (hereinafter "RJAT") and Ordinance no. 112-A/2011, of 22 March.

The Claimant seeks:

  • the annulment of the additional corporate income tax (IRC) assessment act no. 2016..., of 12 October 2016, and its respective interest calculation statement, both associated with the accounts adjustment statement no. 2016..., relating to the tax period of 2012, compensation no. 2016..., of 14 October 2016;

  • the annulment of the decision dismissing the administrative complaint presented against that assessment;

  • payment to the Claimant of compensation for the provision of bank guarantee inappropriately provided.

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

The request for constitution of the Arbitral Tribunal was accepted by the President of CAAD and automatically notified to the TA on 05-04-2018.

On 06-06-2018, the President of CAAD informed the Parties of the designation of the Arbitrators, in accordance with article 11(7) of the RJAT.

Thus, in accordance with article 11(7) of the RJAT, with the period provided in article 13(1) of the RJAT having elapsed without any statement from the Parties, the Collective Arbitral Tribunal was constituted on 26-06-2018.

The TA filed a response in which it raised the exception of lack of standing of the Claimant and argued that the request for arbitral decision should be dismissed as unfounded.

By order of 28-09-2018, it was decided to dispense with the holding of the meeting provided in article 18 of the RJAT and that the proceedings should continue with optional submissions.

Only the Claimant filed submissions.

The Arbitral Tribunal was regularly constituted.

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

The exception of lack of procedural standing of the Claimant is raised.

The proceedings do not suffer from nullities.

2. EXCEPTION OF LACK OF PROCEDURAL STANDING OF THE CLAIMANT

The Claimant is a commercial company that, in the scope of its activity, became part of the complementary grouping of companies called B....

The Claimant filed an administrative complaint against the assessment as a member of a complementary grouping of companies (hereinafter "ACE"), to whom corporate income tax was assessed, and it was also under those circumstances that it filed the request for arbitral decision.

The Tax and Customs Authority contends that the Claimant had no standing to intervene in the administrative complaint procedure and also lacks standing to intervene in the present arbitral proceedings, basing itself on article 65 of the General Tax Code (LGT), which establishes that the subjects liable in relation to the tax relationship and any persons proving legally protected interest have standing in the procedure.

The Tax and Customs Authority understands that, as the subject liable in the tax relationship, the ACE is always a party with standing in judicial proceedings aimed at annulling the contested act.

The Claimant responded in its submissions, stating in summary that the assessment was notified to it, and it was it, not the ACE, that was required to pay the tax, and therefore it has legally protected interest, in accordance with article 9(1) of the Tax Procedural Code (CPPT).

Given that it is the members of the complementary groupings of companies who are required to pay corporate income tax, as was the case, it is unequivocal that they have the right to contest administratively and judicially the assessments affecting their interests, not only by virtue of articles 65 of the LGT and 9(1) of the CPPT, but also by constitutional imperative, in view of the guarantee of contentious challenge of all unlawful acts contained in article 268(4) of the Constitution of the Portuguese Republic (CRP).

Furthermore, given that corporate income tax is required from the Claimant, it is considered a subject liable, as it is bound by the fulfilment of the tax obligation (article 18(3) of the LGT), and, having that status, it can "lodge a complaint or challenge the respective assessment," as results from the express wording of article 130(1) of the Corporate Income Tax Code (CIRC).

On the other hand, this is not a situation of necessary joinder with the other companies that were part of the ACE, since the contested assessment was directed only at the Claimant and the request for arbitral decision aims at the annulment of taxation only insofar as it relates to it.

Furthermore, the aforementioned constitutional guarantee of the right to contentious challenge of unlawful acts is addressed to all administered persons, and therefore is incompatible with the impossibility of contentious challenge of an assessment act by the person to whom payment of the tax is demanded through it, regardless of the existence or non-existence of other hypothetical interested parties.

Thus, the exception of lack of standing raised by the Tax and Customs Authority is unfounded.

3. FACTUAL MATTER

3.1. Proven Facts

The following facts are considered proven:

  • The Claimant is a company whose corporate purpose is the conduct of projects and undertakings in civil construction, namely public and private works, as well as the repair, maintenance and upkeep thereof;

  • In the scope of its activity, the Claimant became part of the complementary grouping of companies called B..., A.C.E. (hereinafter briefly designated as "B..." or "ACE"), with NIPC..., in which it held (until 2017) a participation of 44%;

  • The following entities were also members of the ACE:

    • C..., S.A., with NIPC... and a participation corresponding to 23.5%;
    • D..., S.A., with NIPC... and a participation corresponding to 22.5%; and
    • E..., S.A., with NIPC... and a participation corresponding to 10%.

  • The activity of B... consists in the design, planning, construction, improvement and duplication of various stretches and roadways;

  • These activities are promoted by B... through concession contracts concluded with F..., S.A.;

  • Given the nature and duration of the works, they are classified as multi-year works;

  • B... uses the percentage of completion method for determining results of multi-year works in progress at the end of the 2012 economic period, for purposes of Accounting and Financial Reporting Standard (NCRF) no. 19 and article 19 of the Corporate Income Tax Code;

  • In compliance with Service Order no. O12015..., of 19 June 2015, B... was subject to an internal inspection procedure by the TA, in the scope of corporate income tax, with focus on the 2012 tax period;

  • In the aforementioned inspection, the Tax Inspection Report was drawn up, which is contained in Annex I included in document no. 5 attached with the request for arbitral decision, whose content is hereby reproduced, in which the following is stated, among other things:

III – DESCRIPTION OF FACTS AND GROUNDS FOR PURELY ARITHMETIC CORRECTIONS TO TAXABLE MATTER

3.1. CORRECTIONS IN THE SCOPE OF CORPORATE INCOME TAX

In relation to this tax, irregularities susceptible to correction were identified, which are summarized as follows:

3.1.1 Construction Contracts

From the analysis carried out on the accounting elements of the financial year, it was verified that the activity of the subject liable, as mentioned above, consists in the design, planning, construction and improvement of various stretches and roads. The subconcessions have underlying construction contract(s) concluded with F..., SA.

Given the nature of the works, we are dealing with multi-year works, with results being determined according to the percentage of completion criterion of the work(s) in accordance with what is recommended in article 19(1) of the CIRC and NCRF 19.

3.1.2 Accounting/Tax Framework

Upon accounting analysis, we note that NCRF 19, in paragraph 3 of the IAS, defines a construction contract as "a contract specifically negotiated for the construction of an asset or a combination of assets...," and in turn, in the fiscal analysis and in accordance with article 18(3)(c) of the CIRC, income and expenses of construction contracts must be allocated taking into account what is provided in article 19 of the CIRC. In turn, article 19(1) of the CIRC provides that "the determination of results of construction contracts is carried out according to the criterion of the percentage of completion of each tax period, corresponding to the proportion between expenses incurred up to that date and the sum of those expenses with those estimated for conclusion of the contract."

In comparison, it is stated in paragraph 22 of NCRF 19 that "when the outcome of a construction contract can be reliably estimated, the revenue of the contract and the costs of the contract associated with the construction contract should be recognized as revenue and expenses respectively with reference to the stage of completion of the contract activity at the balance sheet date." The recognition of revenue and expenses with reference to the stage of completion presupposes the use of a method that reliably measures the work performed, with NCRF 19 providing, among others, the method of the percentage of completion (proportion of costs incurred up to the date in the total estimated costs of the contract). The revenue of the year is calculated by applying the percentage of completion to the value of the contract minus the revenue of previous years, thus corresponding to the fair value of the consideration received or receivable in accordance with NCRF 19.

3.1.3 Determination of Annual Income, Considering the Percentage of Completion

In accordance with what is stated in the Simplified Business Information (IES) of the year under analysis, more precisely, Schedule 0520-A – Construction Contracts, the Subject Liable calculated the percentage of completion (47.20%) in accordance with article 19(2) of the IRC. However, it declared as annual revenue only the amount of €47,099,303.52, when according to the value of the contract and the percentage of completion ascertained, the value of revenue subject to taxation is €48,942,562.00.

In order to validate the values of accumulated expenses and the aforementioned percentage of completion, an analysis was carried out of the values declared for tax purposes, from the establishment of the company in 2009 until the year under analysis, confirming both the accumulated expenses and the degree of completion of the work, in accordance with what was declared by the Subject Liable (47.20%). However, given the degree of completion, the revenue of the period under analysis is €48,942,562.00, whereby a difference of €1,843,258.48 is verified, as shown in table no. 1, prepared on the basis of the elements provided and declared to the TA.

However, because the Subject Liable added in field 752 of Schedule 07 of Model 22 of the year under analysis the amount of €558,824.93 relating to the adjustment of the value of the construction contract(s), a value already subject to taxation, the amount susceptible to correction is €1,284,413.15, revenue for breach of articles 19 and 20 of the CIRC, in accordance with the calculations that follow in the aforementioned table 1:

Data declared by the Subject Liable to the TA

  1. Contract value: 371,923,265.00
  2. Total estimated expense: 368,391,950.00
  • Subsequently, the Claimant, in its capacity as a member of B..., was subject to an internal inspection action in the scope of corporate income tax, of partial scope, in compliance with Service Order no. O12016..., of 30 June 2016, in which the Tax Inspection Report was drawn up, which is contained in document no. 5 attached with the request for arbitral decision, whose content is hereby reproduced, in which the following is stated, among other things:

III.1. CORRECTIONS TO DECLARED FISCAL RESULT

III.1.1 TAXABLE PROFIT IMPUTED BY A.C.E.

A... S.A. – BRANCH IN PORTUGAL, has a participation of 44% in B..., A.C.E. with NIPC... and declared registered office at ... no..., ...-... Lisbon, and with regard to the 2012 financial year brought to its result €440,981.85 as its attributable and integrated share in its taxable income.

As established in article 6(2) and (3) of the CIRC:

(2) – The profits or losses of the financial year, determined in accordance with this Code, of complementary groupings of companies and European economic interest groupings, with registered office or effective management in Portuguese territory, that are established and operate in accordance with the law, are also directly attributable to their respective members, being integrated in their taxable income.

(3) – The attribution referred to in the preceding paragraphs is made to the partners or members in accordance with what results from the constitutive act of the entities mentioned therein or, in the absence of elements, in equal parts.

As a result of the inspection procedure titled by service order no. OI2015... of 19/06/2015, with decision of 24/06/2015, of an internal nature, of univalent scope, and relating to the 2012 financial year, carried out on the subject liable B..., A.C.E., a correction was made in the scope of corporate income tax to the taxable profit of €1,284,413.15 (copy of the report and letter no.... of 26/07/2016 attached in Annex I).

In accordance with the aforementioned regulation, it must be additionally attributed to the taxable income of the subject liable under analysis the amount of €565,141.79, taking into account its participation quota in the aforementioned ACE – 44% (44%*1,284,413.15= 565,141.79).

Thus, the taxable profit imputed by the A.C.E. resulting from that correction in the scope of corporate income tax to the subject liable under analysis should be reflected in field 709 of schedule 07 of the tax return model 22 of the year 2012, which should show the total value of €2,744,231.16 (565,141.79+2,179,089.37).

Consequently, the taxable profit of the financial year declared by the subject liable of €1,282,642.62 should be changed to €1,847,784.41.

  • Subsequently, the Claimant was notified of the additional corporate income tax assessment no. 2016..., of 12-10-2016, and its respective interest calculation statement, both associated with the accounts adjustment statement no. 2016..., relating to the tax period of 2012, compensation no. 2016..., of 14-10-2016 (document no. 3 attached with the request for arbitral decision, whose content is hereby reproduced);

  • The Claimant filed an administrative complaint against the assessment, in accordance with document no. 2 attached with the request for arbitral decision, whose content is hereby reproduced;

  • The administrative complaint, which bore no. ...2017..., was dismissed by decision of 29-12-2017, issued by the Head of the Administrative Justice Division of the Lisbon Finance Directorate, which manifests agreement with information contained in document no. 1 attached with the request for arbitral decision, whose content is hereby reproduced, in which the following is stated, among other things:

III – ANALYSIS OF THE REQUEST AND OPINION

The accounting of the complainant was subject to a tax inspection for the 2012 financial year, titled by internal service order no. OI2016... relating to the 2012 financial year, of partial scope, whose targeted tax was corporate income tax, from which resulted corrections to taxable matter in the amount of €565,141.79.

This correction is the reflection in the accounting of the complainant of a correction carried out by the Tax Inspection to the Complementary Grouping of Companies "B..., ACE," established in accordance with article 6 of the CIRC on 25/02/2009.

The complainant participates in the aforementioned grouping in 44%, the correction executed in its sphere (€565,141.79) corresponding to the participation percentage.

At B..., the Tax Inspection made a correction in the amount of €1,284,413.15, as a result of the application of the percentage of completion criterion, in accordance with article 19 of the CIRC.

The complainant states that the expenses incurred in accumulated terms with the construction contract on 31/12/2012 are lower than the values indicated by B... in schedule 0520-A of Annex-A of the 2012 IES. These values are due to mere lapses that induced the Tax Inspection to issue the additional corporate income tax assessment, even though unjustly.

Now, the argumentation presented in this administrative complaint is based on the technical corrections executed by the Tax Inspection to the accounting and tax return model 22 of the 2012 financial year, relating to the grouping of companies B..., so the matter debated in these proceedings should have been discussed in the sphere of the aforementioned grouping and not in the sphere of the complainant.

Nevertheless, we find that regarding the IES of B... relating to the 2012 financial year, it is indicated that the percentage of completion is 47.20% relating to the respective construction contract, and that:

  1. The accumulated costs incurred reached in 2012 the value of €173,881,854.49;

  2. The total estimated cost by the complainant amounts to €368,391,900.05;

  3. Therefore, the Tax Inspection calculated the percentage of completion as follows:

(€173,881,854.49/€368,391,900.05)

Thus, it is verified that the Tax Inspection always acted in accordance with the applicable legal norms and in accordance with the values declared by B..., A.C.E., NIF..., so the argumentation evident in these proceedings should not be accepted, given that the correction made to the complainant is not contested and what is alleged in these proceedings has not been proven.

IV – CONCLUSION

In these proceedings, the complainant expresses disagreement with the amount of tax assessed and accrued (corporate income tax assessment no. 2016...) in the amount of €181,223.20, however, the allegations presented do not challenge the correction made by the TA in its tax sphere, but rather in the sphere of the complementary grouping of companies "B..., A.C.E.", which in turn its taxable profits influence the taxable matter of all companies constituting the aforementioned grouping, in accordance with article 6 of the CIRC. Thus, this objection should have been presented in the accounting and tax sphere of the ACE.

Notwithstanding what was expressed in the previous paragraph, an analysis was carried out on the factual matter, whereby it is verified that the allegations encompassed in these proceedings do not present values consistent with the reality declared and with the elements provided by the complainant to the Tax Inspection, relating to the 2012 financial year, whereby we are of the opinion that the conclusions of the Tax Inspection in the sphere of the ACE should be maintained.

Regarding the illegality of the compensatory interest, it is our duty to inform that the prerequisite for its exaction is verified, that is, whenever, due to a fact attributable to the subject liable, the assessment of the tax due is delayed in its entirety or in part, in accordance with article 102(1) of the CIRC, combined with article 35 of the LGT.

Thus, the complainant's request contained in this administrative complaint, that is, annulment of the corporate income tax assessment no. 2016..., in the amount of €160,196.10 and consequently of the respective compensatory interest calculation statement no. 2016... in the amount of €21,137.70, to which corresponds the compensation statement no. 2016... in the total of €181,333.20, should be dismissed in its entirety.

  • The Claimant did not pay the amount assessed, so tax enforcement proceedings no. ...2016... was instituted, aimed at its coercive collection (document no. 6 attached with the request for arbitral decision, whose content is hereby reproduced);

  • On 31-01-2017, the Claimant provided a guarantee to suspend the aforementioned tax enforcement proceedings (documents nos. 7 and 10 attached with the request for arbitral decision, whose contents are hereby reproduced);

  • In the Statement of Results of the ACE on 31-12-2009, the value of €1.22 is indicated as "extraordinary income and gains" (document no. 8 attached with the request for arbitral decision, whose content is hereby reproduced);

  • In the Statement of Results by Nature of the ACE on 31-12-2010, the value of €143,801.18 is indicated as "other income and gains" (document no. 8 attached with the request for arbitral decision);

  • In the Statement of Results by Nature of the ACE on 31-12-2011, the value of €58,227.48 is indicated as "other income and gains" (document no. 8 attached with the request for arbitral decision);

  • In the Statement of Results by Nature of the ACE on 31-12-2012, the value of €1,043,323.74 is indicated as "other income and gains" (document no. 8 attached with the request for arbitral decision);

  • In the years 2010 to 2012, the documents contained in document no. 9 attached with the request for arbitral decision were issued, whose contents are hereby reproduced;

  • As to the documents indicated as referring to the year 2010 included in document no. 9, in the total amount of €41,532.00, they indicate the no. 7881, relating to account 7881 Corrections relating to prior periods:

    • no.... G... €2,000.00 – it is stated that it is correction of invoice of 30-12-2009;
    • no.... H... €23,769.72 – it is stated that it is cancellation of invoice of 20-10-2009;
    • no.... C... €15,762.28 – it is stated that it is cancellation of invoice of 29-12-2009;

  • As to the documents indicated as referring to the year 2011 included in document no. 9, the following is verified:

    • no.... Z... €4,792.00 – it is stated that it is a credit relating to invoice of December 2010, with the indication of account 7881 Corrections relating to prior periods;
    • no.... I... – Rod. Transp. €1,551.00 – it is stated that it is a credit cancelling part of invoice of 13-12-2010, with the indication of account 7881 Corrections relating to prior periods;
    • no.... J... – LTO €2,207.44 – it is stated that it relates to financial discount;
    • no.... K... – LTO €5,321.10 – it is stated that it relates to financial discount;
    • no.... L... €972.00 – it is stated that it is a credit relating to cancellation of invoice 935/2010, with the indication of account 7881 Corrections relating to prior periods;
    • no.... K... – LTO €2,267.76 – it is stated that it relates to financial discount;
    • no.... M... €231.56 – it is stated that it relates to financial discount;
    • no.... K... – €6,571.64 – it is stated that it relates to financial discount;
    • no.... M... €1,111.70 – it is stated that it relates to financial discount;
    • no.... M... €684.16 – it is stated that it relates to financial discount;
    • no.... N... €1,132.85 – it is stated that it relates to financial discount;
    • no.... N... €1,222.72 – it is stated that it relates to financial discount;

  • As to the documents indicated as referring to the year 2012 included in document no. 9, the following is verified:

    • no.... O... €42,081.00 – credit relating to invoices of 2011, it being stated that it cancels them, with the indication of account 7881 Corrections relating to prior periods;
    • no.... O... €20,222.49 – credit relating to invoices of 2010, it being stated that it cancels them, with the indication of account 7881 Corrections relating to prior periods;
    • no.... I... €11,847.00 – credit relating to invoice of 2010, it being stated that it cancels it, with the indication of account 7881 Corrections relating to prior periods;
    • no.... P... €15,619.58 – credit relating to invoice of 2011, with the indication of account 7881 Corrections relating to prior periods;
    • no.... P... €45,327.55 – credit relating to invoice of 2011, it being stated that it cancels it, with the indication of account 7881 Corrections relating to prior periods;
    • no.... Q... – Fencing €1,025.00 – credit relating to invoice of 2011, it being stated that it cancels it, with the indication of account 7881 Corrections relating to prior periods;
    • no.... R... €540.00 – credit relating to invoice of 2011, stating "accounting closing error," with the indication of account 7881 Corrections relating to prior periods;
    • no.... O... €4,000.00 – credit relating to invoice, with the indication of account 7881 Corrections relating to prior periods;
    • no.... S... €28,383.20 – credit relating to invoice of 2011, it being stated that it cancels invoice no. 2023, with the indication of account 7881 Corrections relating to prior periods;
    • no.... M... €309.05 – it is stated that it relates to financial discount;
    • no.... T... €14,984.64 – it is stated that it relates to financial discount;
    • no.... U... €886.78 – it is stated that it relates to financial discount;
    • no.... M... €1,568.77 – it is stated that it relates to financial discount;
    • no.... T... €4,189.38 – it is stated that it relates to financial discount;
    • no.... V... €403.46 – it is stated that it relates to early payment discount;
    • no.... W... €356.07 – it is stated that it relates to financial discount;
    • no.... W... €1,487.76 – it is stated that it relates to financial discount;
    • no.... O... €2,469.53 – it is stated that it relates to financial discount;
    • no.... W... €1,260.01 – it is stated that it relates to financial discount;
    • no.... T... €545.58 – it is stated that it relates to financial discount;
    • no.... T... €1,637.40 – it is stated that it relates to financial discount;
    • no.... X... €407.15 – it is stated that it relates to financial discount;
    • no.... T... €431.33 – it is stated that it relates to financial discount;
    • no.... T... €5,163.71 – it is stated that it relates to financial discount;
    • no.... T... €2,117.62 – it is stated that it relates to financial discount;
    • no.... Y... €380.40 – it is stated that it relates to financial discount;

  • The Claimant was notified to exercise the right to be heard in relation to the draft Tax Inspection Report, but did not use it;

  • On 04-04-2018, the Claimant filed the request for arbitral decision that gave rise to the present proceedings.

3.2. Unproven Facts and Reasoning for Fixing the Factual Matter

3.2.1. The facts were proven on the basis of the documents referred to and the administrative process.

The Tax Authority does not question the authenticity of the documents presented by the Claimant, in particular those contained in document no. 9 attached with the request for arbitral decision, whose content is hereby reproduced.

3.2.2. It was not proven that the amounts contained in the financial statements referred to as "extraordinary income and gains" and "other income and gains" fully respect negative corrections to billing relating to materials used or to be used in the works.

3.2.2.1. The Claimant does not present documents relating to the values it refers to of €1,250,353.72 (€1.22 in 2009, €143,801.18 in 2010, €58,227.48 in 2011, and €1,048,323.74 in 2012), but only those included in document no. 9 attached with the request for arbitral decision, which total €858,852.16.

For this reason, as regards the amount of €391,502.56, there is no evidentiary support for what the Claimant alleges.

3.2.2.2. Part of the amounts indicated refer to financial discounts and early payment discounts that should be accounted for as income: account 782 Early Payment Discounts Obtained: documents in the global amount of €59,358.57 are in those conditions.

3.2.2.3. Part of the amounts entered in the documents included in document no. 9, in the total amount of €217,892.82, correspond to movements in account 7881 – Corrections relating to prior periods.

3.2.2.4. Regarding the documents issued by the ACE included in document no. 9, in the total amount of €581,609.77, there are no elements allowing to conclude how they were accounted for.

4. LEGAL MATTER

The Claimant, being part of a complementary grouping of companies (ACE), executed a construction contract with duration exceeding one year.

Regarding contracts of this type, article 19 of the CIRC, in the version in force in 2012, establishes the following:

Article 19

Construction Contracts

1 – The determination of results of construction contracts whose production cycle or execution time exceeds one year is carried out according to the percentage of completion criterion.

2 – For purposes of the preceding paragraph, the percentage of completion at the end of each tax period corresponds to the proportion between expenses incurred up to that date and the sum of those expenses with those estimated for conclusion of the contract.

3 – Expected losses relating to construction contracts corresponding to expenses not yet incurred are not deductible.

The Tax and Customs Authority, in an inspection of the ACE, confirmed the percentage of completion, calculated by the Claimant in the Simplified Business Information (IES) for the 2012 financial year, which was 47.20%.

To that percentage corresponded taxable income under corporate income tax, regarding the Claimant of €48,942,562.00, instead of the amount it declared, which was €47,099,303.52, whereby a difference of €1,843,258.48 was verified to be added to the taxable profit of the Claimant.

Having already been declared by the Claimant, in field 752 Schedule 07 of tax return model 22, the amount of €558,824.93, the Tax and Customs Authority made a correction to taxable matter in the amount of €1,284,413.15.

The Claimant acknowledges that in the IES the values serving as the basis for the corrections in question were indicated, but contends that they were wrong, there being a difference of €1,250,353.72 (€1.22 in 2009, €143,801.18 in 2010, €58,227.48 in 2011, and €1,048,323.74 in 2012), which "corresponds, for the most part, to the amount of expenses incurred that were subsequently corrected by (i) credit notes and debit notes issued by suppliers of B... with reference to materials supplied for the execution of the works, as well as (ii) discounts obtained and various adjustments and regularizations, having been inappropriately recognized in accounting as 'other income and gains' in the various periods (see copy of the Statements of Results by Nature now attached under the designation Document no. 8)."

The Claimant attached as document no. 9 various documents relating to part of the values it refers to.

Considering these values, the Claimant contends that the percentage of completion to be considered will be lower, with reflection on the contested assessment.

4.1. Autonomous Defects Imputed to the Decision on Administrative Complaint

The Claimant requests the annulment of the decision on administrative complaint, challenging it on the two grounds invoked therein, namely the alleged lack of standing of the Claimant to file a complaint and to opt for the amounts indicated by the ACE (B...) in the IES it presented, without observing the principle of material truth, in breach of the principles of legality of taxation of companies based on actual income.

However, it is important to clarify that, as results from article 2 of the RJAT, it is the assessment act and not the subsequent decision on administrative complaint that confirmed it which is the object of the arbitral proceedings.

In cases of administrative challenges (in particular of administrative complaints and hierarchical appeals of assessment acts), if the respective decision maintains the contested act with different reasoning, it should be understood that a revocation by substitution of that act operates, with a new act remaining in the legal order that, despite maintaining the same decision content, will have the new reasoning (article 173 of the Code of Administrative Procedure of 2015, former article 147).

However, when the decision on administrative challenge merely confirms the assessment act (article 53(1) of the Code of Civil Procedure in Administrative Courts, applicable to tax arbitral proceedings by virtue of article 29(1)(c) of the RJAT), it is only the legality of the assessment that matters to be assessed, since only with the annulment of this is the legal situation it defined altered, the invalidity of the decision on administrative complaint that confirmed it being a consequence of the invalidity of the assessment.

In the case in question, the decision on administrative complaint merely maintained the contested assessment, not altering its reasoning, whereby the act that remains in the legal order defining the legal position of the Tax Authority is the assessment with the reasoning contained in the Tax Inspection Report.

In this context, it should be noted that the defects that the Claimant imputes to the decision on administrative complaint could affect the validity of this, but would never have repercussions on the prior assessment, which, being prior to the administrative complaint procedure, cannot suffer from these defects.

For this reason, given the manifest inoperativeness of the autonomous defects imputed to the decision on administrative complaint to affect the legality of the assessment, which is the object of the arbitral proceedings, it must be concluded that its assessment is useless, which justifies that no knowledge is taken of the challenge to the decision on administrative complaint (article 130 of the Civil Procedure Code).

Thus, as it is not useful to assess the legality of the assessment to assess the Claimant's standing to file a complaint (which, moreover, is clear, as stated) or the observation of the principle of material truth in the administrative complaint procedure, the issue that matters to be assessed is only that of the errors in the amounts that B... reported in the various IES that it submitted, which the Claimant invokes.

That is, the illegality of the administrative complaint will only exist insofar as the assessment it confirmed is illegal.

4.2. Question of Errors in Amounts Indicated in the IES by B... and Their Relevance to Determination of Percentage of Completion

Pursuant to article 19 of the CIRC, "the determination of results of construction contracts whose production cycle or execution time exceeds one year is carried out according to the percentage of completion criterion" and "the percentage of completion at the end of each tax period corresponds to the proportion between expenses incurred up to that date and the sum of those expenses with those estimated for conclusion of the contract."

The Tax and Customs Authority calculated that percentage of completion at the end of 2012, on the basis of documents presented to it, in particular in the IES presented by the ACE regarding the financial years 2009, 2010, 2011, and 2012.

The Claimant acknowledges that the calculation was carried out on the basis of the amounts indicated in these elements, but contends that the actual amounts "are lower than those reported by the ACE in schedules 0520-A of Annex A of the IES relating to the periods of 2011 and 2012," specifically with the accumulated expenses of the ACE by the end of 2012 being lower by €1,250,353.62 than those resulting from the IES, whereby the percentage of completion to be considered would be lower.

In the Claimant's submission, the "difference of €1,250,353.62 (one million, two hundred and fifty thousand, three hundred and fifty-three euros and sixty-two cents) corresponds, for the most part, to the amount of expenses incurred that were subsequently corrected by (i) credit notes and debit notes issued by suppliers of B... with reference to materials supplied for the execution of the works, as well as (ii) discounts obtained and various adjustments and regularizations, having been inappropriately recognized in accounting as 'other income and gains' in the various periods (see copy of the Statements of Results by Nature now attached under the designation Document no. 8)."

As can be seen from document no. 8, in the financial statements for the years 2009 to 2012, the values referred to by the Claimant are indicated as "extraordinary income and gains" regarding the 2009 financial year, and as "other income and gains" regarding the financial years of 2010, 2011, and 2012.

Pursuant to article 18(1) of the CIRC, taxable profit of collective entities is determined on the basis of accounting, with the corrections provided for in this Code.

In this assessment, it must be taken into account that article 75(1) of the LGT establishes a presumption of truthfulness of the declarations of taxpayers, "as well as data and findings entered in their accounting or records, when these are organized in accordance with commercial and tax legislation," which is the case in the case in question, whereby, in the absence of proof of facts allowing to conclude that the alleged lapses occurred, one must take as correct the presuppositions that result from the accounting.

As stated in the arbitral decision of 16-03-2018, handed down in case no. 724/2016-T, "if the CIRC is based on accounting, if the latter has a presumption of truthfulness, not only because of the scientific value of this science, but also because of the control mechanisms in its use for other purposes that compel compliance with reality (by the partner, creditor, investor, etc.), it is normal that the assessment of the percentage of completion is referred to the dictates of accounting. With this, greater adherence to reality is achieved, greater proof over time (the records are kept) – and note that construction contracts involve multi-year situations by nature. That is, in summary: any other formulation for ascertaining the percentage of completion (for example, measurement certificates) would have less credibility and value and capacity for control and proof – and for that reason, the CIRC only accepts that the percentage of completion be defined (and corrected) on the basis of accounting elements."

With no other specification revealing which accounting facts underlie those values indicated in the ACE's financial statements for the years 2009 to 2012, it is manifest that one cannot conclude solely on the basis of the financial statements that the aforementioned income, revenue and gains should, in fact, be considered as reduction of "expenses," relevant for purposes of determining the percentage of completion referred to in article 19 of the CIRC.

Thus, only with the supplementary proof that the Claimant presented in the present proceedings, in particular that contained in document no. 9, is it possible to assess whether those values refer to reduction of expenses incurred.

In the analysis of the proof presented, it must be noted, from the outset, that documents were only presented relating to operations in the global amount of €858,852.16, whereby as to the remaining amount of €391,501.56, there is no basis for considering that those amounts indicated in the IES include "expenses."

On the other hand, as regards the documents issued by the ACE included in document no. 9, in the total amount of €580,079.33 (pages 45 and following of document no. 9), there are no elements allowing to conclude how they were accounted for by the ACE, whereby one cannot conclude that their value is encompassed in the "other income and gains" referred to in the 2012 IES nor that there exists any accounting error that is reflected in the "expenses incurred" for purposes of article 19(2) of the CIRC.

For this reason, there is no basis for not applying the qualification contained in the accounting, since the lack of proof must be valued procedurally against the Claimant, on whom falls the burden of proof, pursuant to article 73(1) of the LGT, as it is the party invoking the existence of errors.

Regarding the documents included in document no. 9, it is noted that the amount of €59,358.57 corresponds to financial discounts and early payment discounts that should be accounted for as income, in account 782-Early Payment Discounts Obtained (Chart of Accounts attached to Ordinance no. 1011/2009, of 9 September), which includes non-commercial discounts, which is in line with article 20(1)(a) of the CIRC, which indicates discounts, bonuses, and rebates as income.

For this reason, there is no error in the accounting of those discounts, as they should not be accounted for as reduction of the "expenses incurred" referred to in article 19(2) of the CIRC, as an element to assess the percentage of completion.

That percentage is a criterion (among several abstractly possible) to assess the degree of completion of the work, based on the proportion of expenses incurred and those estimated for conclusion of the contract, whereby, as the Tax Authority contends, it is not justified that the measure of completion be altered by the fact that, after expenses have been incurred, discounts come to be obtained.

Regarding the remaining documents included in document no. 9, they refer to correction or cancellation of invoices issued in prior years, in the global amount of €217,892.82.

The total or partial cancellation of invoices, implying elimination of the expenses that the initial invoices evidenced, implies, in light of the criterion legally chosen to measure the extent of completion of the work, that fewer expenses are incurred than those resulting from the initial ones, with the consequent reflection on the percentage of completion of the work. Moreover, the accounting of these cancellations in an income account intended for favorable corrections relating to prior financial years (7881) does not appear relevant for this purpose, where it is not a question of attributing income to financial years, but of determining the accumulated amount of expenses of all financial years, being indifferent, for this purpose, that they relate to the current financial year or prior ones.

In light of the foregoing, it is justified that the value of these invoice cancellations be considered in the determination of the percentage of completion, which will be 47.14%: accumulated expenses incurred of €173,663,961.67 (173,881,854.49-217,892.82) and total estimated expenses for conclusion of the contract of 368,391,950.00.

Thus, the request for arbitral decision proceeds, since in the determination of taxable matter a percentage of completion higher than that which should be applied was considered, whereby the contested assessment suffers from a defect of error as to the presuppositions of fact and law, which justify its annulment, in accordance with article 163(1) of the Code of Administrative Procedure, applicable subsidiarily pursuant to article 2(c) of the LGT.

It should be noted, however, that this error is attributable to the Claimant, as it is detected on the basis of documents presented in the present arbitral proceedings and the Claimant did not present them to the Tax and Customs Authority nor in the exercise of the right to be heard in relation to the Tax Inspection Report nor in the administrative complaint.

4.3. Compensatory Interest Assessment

The compensatory interest assessment has as its presupposition the corporate income tax assessment, whereby it suffers from the same defect and its annulment is also justified.

4.4. Decision on Administrative Complaint

The decision on administrative complaint is also illegal insofar as it confirmed the contested assessment, whereby its annulment is also justified, with the grounds justifying the annulment of the assessment.

5. COMPENSATION FOR UNDUE GUARANTEE

On 31-01-2017, the Claimant provided a guarantee to suspend tax enforcement proceedings instituted for coercive collection of the contested assessment and files a request for compensation, pursuant to article 53 of the LGT.

Article 171 of the Tax Procedural Code (CPPT) establishes that "compensation in case of bank guarantee or equivalent undue provided will be requested in the proceedings in which the legality of the enforceable debt is disputed" and that "compensation must be requested in the complaint, challenge or appeal or if its ground is subsequent within 30 days after its occurrence."

Thus, it is unequivocal that the judicial challenge proceedings encompass the possibility of conviction in payment of undue guarantee and is even, in principle, the appropriate procedural means to file such a request, which is justified by obvious reasons of procedural economy, since the right to compensation for undue guarantee depends on what is decided regarding the legality or illegality of the assessment act.

The request for constitution of the arbitral tribunal and for arbitral decision has as a corollary that it will be in the arbitral proceedings that the "legality of the enforceable debt" will be discussed, whereby, as results from the express wording of that article 171(1) of the referred CPPT, it is also the arbitral proceedings that is appropriate to assess the request for compensation for undue guarantee.

The regime of the right to compensation for undue guarantee is contained in article 53 of the LGT, which establishes the following:

Article 53

Guarantee in Case of Undue Provision

  1. The debtor who, to suspend enforcement, offers bank guarantee or equivalent will be compensated fully or partially for the prejudices resulting from its provision, should he have maintained it for a period exceeding three years in proportion to the accrual in administrative appeal, judicial challenge or opposition to enforcement that have as their object the guaranteed debt.

  2. The period referred to in the preceding paragraph does not apply when it is verified, in administrative complaint or judicial challenge, that there was error attributable to the services in the assessment of the tax.

  3. The compensation referred to in paragraph 1 has as its maximum limit the amount resulting from application to the guaranteed amount of the rate of indemnity interest provided for in this law and can be requested in the very proceedings of administrative complaint or judicial challenge, or autonomously.

  4. Compensation for provision of undue guarantee will be paid by deduction from the revenue of the tax of the year in which the payment is made.

In the case in question, the guarantee was provided on 31-01-2017, whereby, having not been maintained for a period exceeding three years, the right to compensation does not have support in paragraph 1 of this article 53.

On the other hand, as was referred to in the preceding point, the error underlying the assessment is not attributable to the services of the Tax Authority, whereby we are not before a situation encompassed in paragraph 2 of this article 53.

Thus, it must be concluded that there is no legal support for the compensation request filed by the Claimant, whereby it must be dismissed as unfounded.

6. DECISION

In these terms, this Arbitral Tribunal agrees on:

  • Dismissing as unfounded the exception raised by the Tax and Customs Authority;

  • Judging the request for arbitral decision well-founded regarding the requests for annulment;

  • Annulling, insofar as the excess of the percentage of completion, which is 0.06%, (47.20% - 47.14%), the additional corporate income tax assessment no. 2016..., of 12-10-2016, and its respective interest calculation statement no. 2016..., both associated with the accounts adjustment statement no. 2016..., relating to the 2012 tax period, compensation no. 2016..., of 14-10-2016;

  • Annulling the decision on administrative complaint;

  • Judging unfounded the request for compensation for undue guarantee and absolving the Tax and Customs Authority of the respective request.

7. CASE VALUE

In accordance with article 306(2) of the Civil Procedure Code and article 97-A(1)(a) of the Tax Procedural Code and article 3(2) of the Regulation of Costs in Tax Arbitration Proceedings, the case is assigned the value of €181,333.20.

Lisbon, 12-11-2018

The Arbitrators

(Jorge Lopes de Sousa)

(Filomena Oliveira)

(José Rodrigo de Castro)

Frequently Asked Questions

Automatically Created

Can a member of a complementary business group (ACE) file an arbitration claim for IRC tax assessments in Portugal?
Yes, a member of a complementary business grouping (ACE) can file an arbitration claim for IRC assessments in Portugal. According to CAAD Process 173/2018-T, when an ACE member is individually notified of an assessment and required to pay IRC, that member has procedural standing (legitimidade processual) under Articles 65 LGT and 9(1) CPPT. Article 130(1) CIRC expressly grants ACE members the right to lodge complaints or challenge assessments. The constitutional guarantee of judicial review under Article 268(4) CRP reinforces this right, ensuring that any person required to pay tax can challenge the assessment, regardless of the ACE's separate legal personality.
What is the legal standing (legitimacy) requirement for challenging IRC additional assessments related to an ACE?
The legal standing requirement for challenging IRC assessments related to an ACE requires either status as a subject liable in the tax relationship or proof of a legally protected interest under Article 65 LGT. In Process 173/2018-T, the tribunal ruled that ACE members satisfy both criteria when individually assessed: they are subjects liable under Article 18(3) LGT because they are bound to fulfill the tax obligation, and they possess legally protected interest because they must pay the tax. Article 130(1) CIRC specifically recognizes ACE members' standing to challenge assessments. The tribunal rejected the Tax Authority's argument that only the ACE entity itself has standing, emphasizing that members directly affected by payment demands have autonomous procedural rights independent of necessary joinder with other ACE members.
How does Portuguese tax law treat pluriannual works (obras de carácter plurianual) for IRC purposes?
Portuguese tax law treats multi-year works (obras de carácter plurianual) for IRC purposes through specific revenue recognition rules under Article 19 CIRC and Accounting and Financial Reporting Standard (NCRF) 19. In Process 173/2018-T, the ACE B... executed long-duration roadway construction projects under concession contracts and applied the percentage of completion method to determine results of multi-year works in progress at the end of the 2012 economic period. This method requires recognizing revenues and expenses based on the stage of completion rather than upon project completion. The Tax Authority's 2015 inspection under Service Order O12015 focused on verifying proper application of these multi-year work accounting rules, leading to IRC adjustments that formed the basis of the contested assessment.
Can defects in a gracious complaint (reclamação graciosa) decision be challenged in CAAD arbitration proceedings?
Yes, defects in a gracious complaint (reclamação graciosa) decision can be challenged in CAAD arbitration proceedings. In Process 173/2018-T, the claimant sought annulment of both the IRC additional assessment and the decision dismissing the administrative complaint. Article 10(2) RJAT (Decree-Law 10/2011) grants CAAD jurisdiction over appeals from administrative complaint decisions. The arbitration request must identify the contested assessment act and the gracious complaint decision as separate but related objects of challenge. Portuguese tax procedure follows a principle of administrative exhaustion in certain cases, though taxpayers may proceed directly to arbitration under RJAT. When challenging both the original assessment and the gracious complaint decision, the arbitral tribunal examines substantive tax issues and procedural defects in the Tax Authority's administrative review, ensuring comprehensive judicial protection of taxpayer rights.
What are the procedural requirements for contesting IRC additional assessments through CAAD tax arbitration in Portugal?
To contest IRC additional assessments through CAAD tax arbitration in Portugal, taxpayers must comply with procedural requirements under Decree-Law 10/2011 (RJAT) and Portaria 112-A/2011. The request must identify the contested assessment act, including number and date, and specify relief sought (e.g., annulment of assessment, interest calculations, and compensation). The CAAD President accepts requests and automatically notifies the Tax Authority (Article 11 RJAT). Within the timeframe of Article 11(7) RJAT, parties are notified of arbitrator designations; if no objection is raised within the Article 13(1) period, the tribunal is constituted. Parties must have legal personality, capacity, and proper representation (Articles 4 and 10(2) RJAT). The Tax Authority files a response raising exceptions and substantive defenses. The tribunal may dispense with oral hearings under Article 18 RJAT, proceeding with written submissions. Process 173/2018-T exemplifies standard procedural compliance, with tribunal constitution on 26-06-2018 following proper notification and designation procedures.