CAAD 181/2014-T: Pre-Acquisition Dividends, Exchange Differences & Transfer Pricing in IRC Tax

ARBITRAL DECISION

The arbitrators Jorge Lino Ribeiro Alves de Sousa (arbitrator-president), António Martins and João Sérgio Ribeiro, designated by the Deontological Council of the Administrative Arbitration Center to form the Arbitral Tribunal, constituted on 30-04-2014, agree as follows:

I. REPORT

1. A…, SA, with Tax Identification Number …, with registered office in …, municipality of Setúbal (hereinafter Claimant), filed on 24-02-2014, a petition for constitution of an arbitral tribunal pursuant to the provisions of item (a) of no. 1 of Article 2 and Articles 10 et seq. of the Legal Framework for Tax Arbitration (RJAT), contained in Decree-Law no. 10/2001, of 20 January, also invoking Articles 66 and item (a) of Article 99 of the Tax Procedure and Process Code.

2. In the request for arbitral pronouncement, the Claimant declared it did not intend to designate an arbitrator, whereby the constitution of the Arbitral Tribunal proceeded in accordance with the provisions of no. 1 of Article 6 and no. 1 of Article 11 of the RJAT, by decision of the President of the Deontological Council of the Administrative Arbitration Center, having been designated the arbitrators identified above.

On 30-04-2014 the parties were notified of this designation, having manifested no intention to challenge the designation, and thus the Arbitral Tribunal is considered constituted on that date, pursuant to item (c) of no. 1 of Article 11 of the RJAT.

1. On 18-06-2014, the first meeting of the Arbitral Tribunal was held, in accordance with the terms and objectives provided for in Article 18 of the RJAT. The Claimant declared it maintained an interest in conducting witness testimony, having dispensed, however, with the examination of one of the witnesses called, maintaining the others. The representative of the Respondent dispensed with the examination of the witness called by it. After witness testimony was produced, oral arguments were made.

2. The request for arbitral pronouncement has as its immediate object the rejection of the gracious appeal no. … and as its mediate object the additional assessment no. … relating to Corporate Income Tax (IRC) for 2010, and consequent municipal surcharge.

3. The Claimant, in its capacity as the dominant company of Group A…, requests the partial annulment of the decision that rejected the gracious appeal and the consequent partial annulment of the contested additional assessment, insofar as it concerns corrections to the Claimant's taxable base (inspection activity carried out pursuant to service order …), reflected in the Group's taxable base (inspection activity carried out pursuant to service order …), detailed below:

5.1. Exchange difference arising from the appreciation of an amount received from participation in Société B… (hereinafter B…), in the amount of € 138,393.96;

5.2. Expenses with remuneration of administrator of related entity, in the amount of € 311,363.57.

1. The Claimant also claims compensation for damages resulting from the provision of guarantee and indemnification interest for the payment of undue tax.

2. The Claimant's position is, in summary, as follows:

7.1. It considers the dividends received as being relating to pre-acquisition reserves of the participation in company B… and, consequently, as a refund of reserves incorporated in the price paid when acquiring the participation in the company, and not as income. It contends that it is merely a delivery of part of what A… bought and paid, more precisely, a refund to A… of part of its investment.

7.2. It affirms that unfavorable exchange differences (associated with this refund, based on the exchange rate as of the acquisition date) are an actual loss, whereby they contribute to the fiscal result of the company.

7.3. It contends that the expenses borne by the Claimant with the remuneration of an administrator of A… do not represent a violation of the arm's length principle and are indispensable for the development of the Claimant's activity, whereby they should be considered as expenses relevant to the determination of its taxable profit.

1. In its response the ATA contended briefly as follows:

8.1. The thesis propounded by the Claimant (according to which accumulated results were purchased by A…, whereby their distribution does not correspond to income/dividends, but rather to partial recovery of the initial investment similarly to a loan refund or part of the purchase price of the investment) lacks legal support.

8.2. The losses with exchange differences recorded do not contribute to the company's fiscal result as they translate a potential devaluation of the equity interest that the Claimant holds in B…, in accordance with the valuation of equity interests by the equity method adopted by the Claimant.

8.3. The expenses borne by the Claimant with the remuneration of administrator of related entity represent a violation of the arm's length principle, in addition to not being provably indispensable for the exercise of its activity, whereby they do not affect the taxable profit thereof.

II. PRELIMINARY ISSUES

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

There are no preliminary issues and exceptions that require examination, and the proceedings are not affected by any defects.

Accordingly, the Arbitral Tribunal is properly constituted and has jurisdiction, with nothing barring the examination and consideration of the subject matter of the case.

III. MATTERS OF FACT

The following facts are considered proven as having relevance to the decision, based on documentary evidence in the record and testimony given.

1. The Claimant received in 2010 dividends from its Lebanese subsidiary B…;

2. A… accounted for this equity interest using the Equity Method (Método da Equivalência Patrimonial - MEP);

3. There were available reserves in the acquired company for distribution as of the acquisition date of the participation in the Lebanese company, which occurred in 2002;

4. In December 2001, the accounts of B… show the following reserves, as components of equity:

   • Revaluation reserve: 1,303,716 thousand Lebanese pounds
   • Legal reserve: 2,461,153 thousand Lebanese pounds
   • General reserve: 23,946,598 thousand Lebanese pounds

   In a total of 27,711,467 thousand Lebanese pounds;

5. The exchange loss at issue is related to the fact that A…'s functional currency is the euro, but its financial investment (investment in shares of B…, in this case) is in Lebanon and consequently is valued initially in Lebanese pounds (the local currency), converted afterwards for purposes of A…'s accounting in euros, at the exchange rate of the moment of acquisition in 2002;

6. When dividends are distributed in 2010, this payment is made in Lebanese pounds, which must be converted to the "euro" currency;

7. In the circumstances of the present case the amounts are as follows:

   i) A… received in 2010, after conversion to euros, € 1,695,512 in dividends from B…, which are attributable to accumulated results of B… pre-acquisition;

   ii) since these pre-acquisition accumulated results cost A… (exchange rate of the purchase date) € 1,833,906.00, A… recognized a loss resulting from the unfavorable exchange variation that occurred between the purchase date (2002) and the receipt date at issue (2010), in the amount of € 138,394 (€ 1,833,906.00 - € 1,695,512);

8. The AT contends that it must effect a correction to taxable profit in the total amount of 138,393.94 euro, relating to losses with exchange differences recorded in the accounting of A… that should not be influencing the company's fiscal result;

9. This would be so because these exchange losses translate a potential devaluation of the equity interest that A… holds in B…, in accordance with valuation by the equity method, and that pursuant to Article 18 of the CIRC should not contribute to taxable profit;

10. The Claimant is the owner of 100% of the capital of A… Angola – Investments and Participations S.A. which in turn holds 51% of A…, whereby it has special relationships with each of these companies;

11. The Administrator of A…, C…, was a person of the Claimant's confidence, with the majority of his remuneration borne by it;

12. The remaining salary should be borne by A…;

13. The context in which business is conducted in Angola and the importance of the Claimant's investments in that territory required the presence there of someone of its confidence;

14. The expatriation to Angola of personnel with the profile of Administrator C… is difficult and invariably requires high remuneration.

IV. JUSTIFICATION FOR DETERMINATION OF MATTERS OF FACT

The determination of matters of fact is based on probative judgments drawn from documents, witness testimony, and statements of the parties whose correspondence with reality is not disputed by the parties.

There are no facts that should be considered unproven and that have relevance to the decision of the case.

V. LEGAL REASONING

1. Accounting rules relating to the Equity Method (MEP)

1.1. Essential aspects for the case at hand

Given the theses in contention, it is necessary to analyze from the outset the question of the application of MEP, and whether pre-acquisition dividends fall within it for accounting-tax purposes.

The Corporate Income Tax Code does not establish its own or specific rules for the registration or quantification of patrimonial facts arising from the application of MEP. Thus, and in light of the provisions of the CIRC – notably its Article 17 – recourse must be had to the accounting rules for the modus operandi of this method of recognizing equity interests and the respective operations and records arising therefrom, such as the receipt of dividends.

Let us see therefore how the SNC [National Accounting Standards System] regulates the application of MEP.

1.2. Regulatory framework in the accounting system

NCRF [Accounting and Financial Reporting Standard] no. 13 - "Interests in joint ventures and investments in associates" provides as follows:

NCRF 13, § 4:

Equity method: is a method of accounting under which the investment or interest is initially recognized at cost and subsequently adjusted based on changes, after acquisition, in the investor's or venturer's share in the net assets of the investee or the jointly controlled entity.

The results of the investor or venturer include the share that corresponds to it in the results of the investee or the jointly controlled entity.

§ 58 — Under the equity method, an investment in an entity is initially recognized at cost and the carrying amount is increased or decreased to recognize the investor's share in the results of the investee after the date of acquisition. The investor's share in the results of the investee is recognized in the investor's results. Distributions received from an investee reduce the carrying amount of the investment. Adjustments to the carrying amount may also be necessary for changes in the investor's proportionate interest in the investee resulting from changes in the investee's equity that have not been recognized in the investee's results. Such changes include those resulting from the revaluation of tangible fixed assets and foreign currency translation differences. The investor's share in these changes is recognized directly in its equity.

Now in § 4 it refers to: "…and subsequently adjusted based on changes, after acquisition,..". In turn, in § 58 it is established: "the carrying amount is increased or decreased to recognize the investor's share in the results of the investee after the date of acquisition" (emphasis added).

This wording seems to leave no margin for doubt that dividends received based on existing pre-acquisition reserves constitute an accounting-financial fact whose patrimonial translation and recording rules must be sought in other provisions of the SNC.

This means that MEP will be relevant for recording the acquisition operation and dividends arising from profits obtained subsequent to acquisition. But it will not serve to frame and record dividends arising from pre-acquisition reserves.

Let us see, for now in simple terms, how MEP generally functions, and then analyze what rules should apply to the dividends under analysis here.

As mentioned in NCRF no. 13, the results of a given fiscal year N, determined by the investee, should be recognized as income of the investor in that same year. This recognition of a result in the investor does not depend on the investor having received dividends.

These, to be received by the investor possibly in N+1, should then be deducted from the value of the investment, which had been increased by virtue of the investor's recognition (in N) of the share of results in the investee.

By way of example: suppose that entity H… holds 25% of entity D…, that this interest is recorded at 500,000 euro on the balance sheet of H…, and that D… presents in N profits of 50,000, then, in the same year, H… recognizes income of 25% * 50,000 = 12,500 in its respective statement of results.

At the same time, it increases the value of the interest to 512,500 euro. If in N+1 H… receives dividends of 10,000, it records an inflow of funds and deducts 10,000 from the value of the interest.

Let us see now, with a bit more detail and using a more developed example, the accounting operations resulting from MEP as they arise from NCRF 13.

Assume that on 31-12-2013 company G.., Ltd[1], presented the following balance sheet:

Balance sheet of G.. at end of 2013

| Non-current assets | 2,000,000 |
| Current assets | 1,000,000 |
| TOTAL ASSETS | 3,000,000 |
| Share capital | 500,000 |
| Reserves | 400,000 |
| Net result of the year | 100,000 |
| LIABILITIES | 2,000,000 |
| TOTAL EQUITY + LIABILITIES | 3,000,000 |

If company D… holds 50% of G.. and this, in May 2014, distributes to the investor (assuming the distribution of the entire net result of 100,000 of the latter) an amount of 50%*100,000 = 50,000, what accounting translation do the profits determined in December 2013 and the dividends received in May 2014 have in the sphere of the investor?

The most relevant element is the fact that, from the investee's profits, the investor must recognize income. This is what NCRF no. 13 establishes when it provides: "Under the equity method, an investment in an entity is initially recognized at cost and the carrying amount is increased or decreased to recognize the investor's share in the results of the investee after the date of acquisition. The investor's share in the results of the investee is recognized in the investor's results."

Continuing with the example above, such income (50,000) recognized in 2013 in the sphere of D… does not translate into cash for the investor. MEP requires the adjustment of the results of the investing company in function of the profits (or losses) of the invested company. The reflection will be an increase (decrease) in the value of the investment.

But Article 18, no. 8, of the CIRC, perhaps in a vestige of the logic of "realization," orders the deferral of taxation to the moment of actual receipt or collection of dividends.

Upon receipt of dividends, one does not recognize a result (it already was in 2013), but rather a cash inflow of 50,000 (the dividend) and a reduction in value (also of 50,000) of the equity interest in the hands of the acquiring company (because the outflow of funds reduces the patrimonial value of the distributing or invested company).

It is at this moment – May 2014, always by reference to the example above - when the investor receives the dividend, that Article 18, no. 8 of the CIRC establishes the moment of taxation. That is, MEP has its own fiscal framework, in that the recognition of the investor's income (December 2013) does not determine the moment of taxation, but rather the receipt of dividends from the investee (May 2014). (Of course, Article 51 of the CIRC could neutralize this effect, but we do not address that here as an essential issue).

For what matters here, it suffices to expressly delimit these two moments on the accounting and tax plane, and to note that NCRF no. 13 is silent with regard to dividends arising from pre-acquisition reserves.

The framing of such dividends must now be seen in light of NCRF no. 20 - "Revenue," which provides (emphasis added):

6 — This Standard does not deal with revenue from:

(a) Lease arrangements (see NCRF 9 — Leases);

(b) Dividends from investments that are accounted for using the equity method (see NCRF 13 — Interests in Joint Ventures and Investments in Associates);

31 — When unpaid interest has been accrued before the acquisition of an investment that produces interest, the subsequent receipt of interest is divided between the pre and post acquisition periods. Only the post acquisition portion is recognized as revenue. When dividends of equity securities are declared from pre-acquisition net profits, those dividends are deducted from the cost of the securities. If such allocation is difficult except on an arbitrary basis, the dividends are recognized as revenue unless they clearly represent a recovery of part of the cost of the equity securities.

Now, as can be seen, § 31 is clear: when dividends of equity securities are declared as arising from pre-acquisition reserves, those dividends are deducted from the price paid for the securities.

In accounting language, the inflow of funds, increasing cash, has as its counterpart the reduction in the value of the financial investment made. This receipt is therefore attributed the nature of a return of part of the value of the initial investment. That is, the dividends discussed here do not constitute revenue (hence the caveat in § 6, (b), of NCRF no. 20).

Why do they not constitute revenue? The answer is simple. According to NCRF no. 20, "revenue" is defined as (§ 7): "….the gross inflow of economic benefits during the period arising in the course of an entity's ordinary activities when those inflows result in increases in equity, that are not increases related to contributions by participants in equity."

Now equity holders of an entity that receive dividends based on pre-acquisition reserves do not derive an economic benefit. They are merely, as referred to in § 31 of NCRF no. 20, recovering part of a price paid, and such dividends should be deducted from the cost of the securities, that is, deducted from the value of the initial investment.

One might ask: but is not the deduction from the investment also made upon receipt of post-acquisition dividends?

It is certainly true, but the phenomenon is not comparable. For the reason that, in the case of post-acquisition dividends, the profits that generate them constitute income previously recognized, and the subsequent deduction from the investment compensates, therefore without reducing its net value, the amount of the investment. That is not, as has been seen, what happens with pre-acquisition dividends.

2. Exchange difference: its fiscal framework

Having established that the distribution of pre-acquisition dividends does not constitute revenue within MEP, but rather a recovery of an amount paid for the acquisition of the interest in the distributing entity, let us now see how the exchange difference calculated by A… should be treated.

NCRF no. 23 – "The effects of changes in foreign exchange rates" – establishes:

47 — On disposal of a foreign operation, the accumulated amount of exchange differences deferred in the separate component of equity relating to that foreign operation must be recognized in results when the gain or loss resulting from the disposal is recognized.

48 — An entity may dispose of its interests in a foreign operation through sale, through liquidation, through capital repayment for shares or through abandonment of part or all of that entity. The payment of a dividend forms part of a disposal only when it constitutes a return of investment, for example, when the dividend paid arises from pre-acquisition profits. In the case of a partial disposal, only the proportionate share of accumulated exchange difference related is included in the gain or loss. A reduction in the carrying amount of a foreign operation does not constitute a partial disposal. Accordingly, no part of the deferred exchange gain or loss is recognized in results at the moment of the reduction.

Now, in light of what has been transcribed, there is no doubt that the accounting rules in force establish that receipt of a dividend arising from pre-acquisition reserves (quantified in a currency different from the euro) configures the realization of exchange differences possibly deferred. Thus, such exchange differences should, at the moment of receipt of the dividend, be recognized in results.

In the case of A…, the exchange difference thereby became real, actual, and not merely potential as the AT contends.

Having proven that the dividends are derived from reserves existing as of the acquisition date, having shown that such dividends escape the provisions of NCRF no. 13, in particular the recognition of revenue through MEP, and that NCRF no. 23 allows concluding that exchange differences calculated in the context of currency conversion are considered realized and not potential, then, in light of the rules of the CIRC – in particular Articles 17 and 23, no. 1, item (c), as then in force – it must be concluded that the exchange difference is fiscally relevant and must be accepted, this tribunal not being able to validate the position of the AT, that the case simply would be reduced to the fiscal application of MEP.

3. Relevance of expenses borne with the administrator of A… by the Claimant and their relationship with transfer pricing

3.1. Framework

To respond to the problem at hand, and in order to properly assess what is invoked by the parties, it is necessary to make, on the one hand, a delimitation of the circumstances in which the administrator acts, including therein the relevance of his activities for the achievement of the Claimant's income; and on the other hand, a summary approach to the matter of transfer pricing, so that, following from that, the proper articulation between them and the situation under analysis can be made.

3.1.1. Context in which the administrator exercises his functions

There are, as evidenced through the summary reference to the positions of the parties, divergences regarding the context in which the administrator would exercise his functions.

In the Claimant's view, the administrator, in addition to exercising these functions in A… which would remunerate him, would also receive compensation, borne by the Claimant, to represent the latter's interests in Angola, within the framework of A….

The ATA, for its part, characterizes the presence of the administrator as a provision of services by the Claimant to A….

From the proven facts results solely, being that our basis of decision, both that the professional in question was administrator of A…, acquiring this status only in the context of A…, as that he would be a man of the Claimant's confidence, who bore the expenses of his expatriation. It is equally undisputed that special relationships exist between the Claimant and A…, in light of Article 63, no. 4 of the CIRC, insofar as the former held, albeit indirectly, 51% of the capital of the latter. With regard to what has been stated, there are no major divergences between the parties. The same can be said with regard strictly to the amount spent by the Claimant, which truly is not questioned – not already its necessity.

There are divergences, yes, in a first instance, regarding the existence or not of sufficient justification for the Claimant to incur in this expense. And, in a second instance, whether it would follow from the arm's length principle that the services of this administrator should be borne by A…, and not by the Claimant.

As to the first question we can already give a response now, leaving the analysis of the second for a time subsequent to the brief delimitation we will make of transfer pricing, as only after advancing the general lines of this mechanism can we give a duly supported response to the question.

Let us focus, then, on the first question that is directly linked to the framing of these expenses within Article 23, no. 1, of the CIRC, which is transcribed below.

Article 23

Expenses

1 — Expenses are those which are provably indispensable for the achievement of revenue subject to tax or for the maintenance of the income-producing source, namely....»

Notwithstanding that the exact terms in which the administrator would defend the Claimant's interests do not appear to be delimited, it is possible to infer, both from the proven status of person of the Claimant's confidence, as from the economic dependence that existed of this person on the Claimant, that he would be in the service of the Claimant and that the latter would have an interest in the presence of that administrator in Angola. Otherwise, obviously, it would not incur in the expenses in question. Expenses which, given the salary practice of A… regarding its administrators and by imperatives of equality, would never be covered by it.

As to the indispensability of this expense, this tribunal, based on the circumstances made known in the record, the testimony of the witnesses and by knowledge of the Angolan context, which moreover is in the public domain, formed the following conviction. In a context such as Angola, in the face of partnerships with local companies, diligent management requires that in the companies participated in by the investor there be at least one administrator of the investor's confidence, the presence of which being indispensable for the proper defense of the investment made. This being, moreover, an imperative of good sense observable equally in participation relationships in other contexts than Angola. Furthermore, it is common knowledge, this having been reinforced by the Claimant and not directly contested by the ATA, that expenses relating to the expatriation of qualified personnel are normally high.

It results, therefore, from the delimitation of the context of the exercise of the administrator's functions, the conclusion that depending on his considered indispensable presence in Angola on the coverage of expatriation costs by the Claimant, these would be of an essential character, not supporting the thesis that expenses with the administrator would have no shelter in Article 23, no. 1 of the CIRC.

Let us proceed to an analysis of transfer pricing so that, following from that, we may respond to the other question arising from the expenses under analysis.

3.1.2. Transfer Pricing

The term 'transfer price' translates to the price set by a particular taxpayer when it sells or buys goods, or shares resources with an entity with which it has special relationships. In these situations, the prices used may not correspond to market prices, that is, to prices negotiated freely.

Now, this departure from the price that would normally be practiced in an equivalent transaction may have as its objective the manipulation of prices with the aim of transferring income (in the form of profit, for example) from one taxpayer to another, obtaining tax advantages. These situations typically occur internationally when it is sought, through price manipulation, to transfer profit to the country where taxation is more favorable, although they are also relevant domestically.

The response of countries to this situation is the correction of these transfer prices, in order to prevent other countries from obtaining a share of the income that was generated in their territory. This adjustment has as its reference the prices that would have been set by companies without a special relationship, acting independently. This method, designated the arm's length method (arm's length principle), is shared by most countries, although there are frequently disagreements as to how it should be implemented.

The transfer pricing mechanism, notwithstanding being, to a large extent, identified as a mechanism for combating artificial transfer of profits, its provisions consequently frequently being designated as specific anti-abuse clauses, has other functions. Specifically, the reduction of the risk of economic double taxation and contributing to a balance in the distribution of taxable profits in the various countries where multinationals operate.

It is therefore important to bear in mind that even if entities with special relationships have no abusive intent, they may still have transfer pricing applied to them. Point 1.2 of the Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations[2] is quite illuminating in this respect in the excerpts transcribed below.

«Tax Administrations should not systematically presume that associated enterprises are attempting to manipulate their respective profits. (…) Indeed, a tax adjustment under the arm's length principle does not affect the contractual obligations that bind associated enterprises at all levels, with the exception of the tax level, and may prove to be necessary, even if there is no intention to reduce or evade tax. One should not confuse the analysis of a transfer price with analyses concerning cases of fraud or tax evasion, even though measures adopted regarding transfer pricing pursue such objectives».

There are five methods for determining transfer prices: the comparable uncontrolled price method; the resale price method; the cost plus method; the profit split method and the transactional net margin method.

3.2. Framing of the specific situation

The expenses incurred by the Claimant in supporting the expenses of an administrator of a company with which it has special relationships is, in the view of this tribunal, a legitimate practice, capable of being carried out with advantages, in similar circumstances, within the framework of other groups of companies. Whereby the application of transfer pricing, should it take place, would be appropriate with the group of situations where there is no fraud or tax evasion. There having been, moreover, no suggestion to that effect by the ATA.

It is now important to respond to the question that has been pending, that is, to know whether the bearing of expenses of the administrator by the Claimant can or cannot see applied to it the transfer pricing regime.

Taking into account the fluid and markedly generic language of Article 63 of the CIRC, it is possible to sustain that the support, by the Claimant, of expenses with the expatriation of a group executive with the objective that he assume functions in a subsidiary, configures an operation there framed, given the special relationships that exist.

It is, therefore, conceivable that transfer pricing be applied. There follows, however, an obvious question that translates to determining in what manner the operation will be corrected. It is useful to recall that in cases where transfer pricing applies to perfectly legitimate operations, as appears to be the one with which we are dealing, the objective is not to combat fraud or evasion, but solely to ensure balance in the distribution of profits among the countries where the group of companies operates.

Now this finding implies that the operation referred to has fiscal consequences in the various systems in which it has impact. Specifically, the operation in question has impact on the Claimant's fiscal situation and naturally on the fiscal situation of A…. It happens, however, that, due to the principle of territoriality, transfer pricing, enshrined in Article 63 of the CIRC, can only have impact on the situation of the Claimant, and not on A…, even if, in the abstract, and faced with hypothetical local legislation that followed the most common principles in terms of application of transfer pricing, there would also be corrections in Angola.

This is to say that, notwithstanding the references made by the parties to intra-group services, each of them in distinct modalities (the Claimant as management fees, under point 7.9 of the Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations[3]; and the ATA as provision of services within the group, in the context of points 7.6, 7.29 and 7.30 of the same report[4]); these considerations can only concern A…, the beneficiary of any services. Whereby they aim, in a first instance, only at a possible application of Angolan transfer pricing legislation and provided that this would imply, obviously, an interpretation based on a historical and teleological element that was not unaware of the consideration of the Transfer Pricing Guidelines that we have been considering.

In other words, the provision of intra-group services would serve only to determine, (i) in a scenario where these would be management fees, that these costs would only be borne by the Claimant; (ii) in a scenario of provision of services, whether A… would have paid or not for these services an amount consistent with the arm's length principle, and following from that any corrections would be made to its taxable profit, there, in Angola. This exercise would obviously have no impact on the Claimant's fiscal situation in Portugal.

Now, for transfer pricing applied to the operation in question to have impact on the Claimant's taxable profit (the problem that truly is discussed by the parties), the emphasis should be placed on the question of clarifying whether the costs borne by the expatriation of the administrator, given what is normally current in the market faced with equivalent benefits, would be excessive or would fall short of what is normally practiced. This, yes, would permit, possibly, adjusting the Claimant's profit. If the costs were excessive the excess would be disregarded; if they were lower than normal, the difference would be computed as a gain. There is, however, a problem that appears to us insurmountable and that moreover is assumed by the ATA, albeit to draw other consequences:

– In a context of independence, a company would not be willing to bear the expenses of an administrator of another company.

Faced with this, the Comparable Uncontrolled Price Method, under penalty of denying itself, is not apt to fulfill its function when it comes to operations only carried out in a context of linked relationships and clearly inconceivable outside them, as is certainly the case.

The conviction that the Comparable Uncontrolled Price Method is not adequate is reinforced by the fact that the operation at issue is, in addition, a complex operation. That is, it is an operation that, precisely because it is not clearly delimited − there do not exist, indeed, clear contractual clauses delimiting the functions incumbent on the administrator − allows the parties to divide it, each focusing on distinct dimensions: (i) the Claimant on the component of control and representation of its interests and (ii) the ATA on the advantages arising for A…; what is reductive in both cases and not very consistent with the broader expression of the operation in question.

Notwithstanding that it is admittedly an operation verified within groups, without parallel in the context of independent companies, this would not prevent, however, that, still, it be susceptible to being framed in transfer pricing. However, in that case, the method appropriate for doing so could not be, it is stressed, the one used (Comparable Uncontrolled Price Method) and even less with the consequences drawn from it.

The method for the determination of transfer prices should have been another, more adequate and more consistent with complex operations with impact on the profit of several companies in the group, as is the present one. Being able only, in that scenario, the expenses with the administrator to be considered relevant for purposes of application of transfer pricing and consequent correction of profits − not in the context of the approach and through the method sustained by the ATA.

VI. DECISION

Accordingly, this Tribunal agrees to:

• Declare the application well-founded for partial annulment of the additional Corporate Income Tax assessment no. …, relating to the fiscal year 2010;

• Declare the application well-founded for partial annulment of the decision that rejected the Gracious Appeal no. …;

• Annul the assessment insofar as contested;

• And condemn the Tax and Customs Authority to the refund of undue tax, to payment to the Claimant of compensation for damages resulting from the provision of guarantee, to be quantified in execution of this decision, and indemnification interest due.

Costs, to be borne by the Tax and Customs Authority, the tribunal deciding to fix to the proceedings the value of €125,000.00, as the value of the part of the assessment contested is indeterminate.

Lisbon, 03-09-2014

The Arbitrators

Jorge Lino Ribeiro Alves de Sousa

António Martins

João Sérgio Ribeiro

[1] Purely fictitious entity.

[2] Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations, Handbooks of Fiscal Science and Technique 189, Ministry of Finance, Lisbon, 2002, p. 35.

[3] Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations, op. cit., p. 211.

[4] Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations, op. cit., pp. 210, 211, 219 and 220.