Summary
Full Decision
ARBITRATION DECISION
The arbitrators, Fernanda Maçãs (President), José Coutinho Pires and Miguel Torres, designated by the deontological council of the Centre for Administrative Arbitration to form the Arbitral Tribunal, agree as follows:
REPORT
The taxpayer A…, S.A., Tax Identification Number …, with registered office at …, …, … (hereinafter "Claimant") submitted a request for constitution of a Collective Arbitral Tribunal, pursuant to the combined provisions of Articles 2 and 10 of Decree-Law No. 10/2011, of 20 January (Legal Regime of Arbitration in Tax Matters, hereinafter "RJAT"), in which the Tax and Customs Authority (hereinafter "TCA" or "Respondent") is the respondent.
The Claimant makes a request for an arbitral pronouncement on three tax acts, all relating to the taxation period of 2013. First, regarding the additional IRC assessment No. 2016…. Second, regarding the assessment of compensatory interest No. 2016…. And, finally, regarding the accounts adjustment statement No. 2016…. For this purpose, it invokes the terms and effects of paragraph a) of paragraph 1 of Article 2 and Articles 15 et seq., all of Decree-Law No. 10/2011, of 20 January ("RJAT"), listing, as evidence, two witnesses (B… and C…).
The request for constitution of the Arbitral Tribunal was accepted by the Esteemed President of CAAD and the respondent was automatically notified on 24 March 2017.
Pursuant to paragraph a) of paragraph 2 of Article 6 and paragraph b) of paragraph 1 of Article 11 of the RJAT, as amended by Article 228 of Law No. 66-B/2012, of 31 December, the Deontological Council appointed the arbitrators of the Collective Arbitral Tribunal, who communicated their acceptance of the appointment within the applicable time period, and notified the parties of such appointment on 11 May 2017, and the parties raised no objections.
On 29 May 2017 the Collective Arbitral Tribunal was constituted following the procedures provided in Articles 2, paragraph 1, sub-paragraph a), 5, 6, paragraph 1, and 11, paragraph 1, of the RJAT (as amended by Article 228 of Law No. 66-B/2012, of 31 December), and the parties were notified of such constitution.
In the request for arbitral pronouncement, made by itself, the Claimant invokes, in summary, that:
For purposes of depreciation or accounting amortization of wind turbines, the Claimant had to determine the useful life of the same, taking into account the provisions contained in the accounting normalization rules in force in Portugal.
According to the Accounting and Financial Reporting Standard No. 7 (NCRF 7), depreciation is defined as the "systematic allocation of the depreciable amount of an asset over its useful life", and "useful life" is the "period during which an entity expects an asset to be available for use".
In the specific case of wind turbines, "the useful life of such equipment should be determined based on a given time period during which they would be available to be used by the Claimant."
To determine the useful life period, the Claimant concludes that the period of 15 years, during which the legally guaranteed fixed tariff is in force, is absolutely essential to the economic viability of the entirety of its investment.
Once this period of certain remuneration ends, i.e., 15 years from the beginning of supply to the grid, there would be no guarantees as to how the energy generated would be remunerated, therefore, such would be the horizon of susceptibility to assess the economic viability of wind farms.
There should be a coincidence between economic and operational cycles of equipment exploitation, i.e., that the depreciation of wind turbines should begin at the moment when such equipment was duly installed in the proper places and in conditions to operate as intended.
Therefore, the "useful life" should be determined based on a given time period during which they are available for use, after which they would be fully depreciated. Being the same conditioned by the terms of sale of energy generated by such equipment, which are provided for in Decree-Law No. 189/88, of 27 May (amended inter alia by Decree-Law No. 33-A/2005, of 16 February), which establishes the "fixed and guaranteed" remuneration of renewable energy production facilities for supplying electricity to the electricity grid.
In amortization, there should be a "correlation between the expenses of use of an asset and the income it generates", looking at the economic utility of assets, and not attending to the "proper functioning" of an asset assessed in technical terms.
There is a connection between the concept of "reasonableness" of the depreciation rate and the period of fixed remuneration for the sale of electrical energy assured by legislative choice included in the so-called "Green Tax Reform", approximately 15 years.
Using various comparisons, the Claimant contends that the amortization rate of 6.25% presented does not differ substantially from that which would result from the congruent application of depreciation criteria within the legal framework, thus being "within the intervals considered reasonable", and even, possibly, below what would result from the strictest application of such criteria.
The Claimant concludes by making requests in the sense of it being recognized the following:
That the additional IRC assessment No. 2016…, the assessment of compensatory interest No. 2016… and the accounts adjustment statement No. 2016…, relating to the taxation period of 2013, be annulled, in the part corresponding to the corrections that the TCA made to the taxable profit determined as set forth above and to the payment.
Under Article 43, paragraph 1, of the LGT, it demands compensatory interest at the rate of 4% per annum (from 10.01.2017 until the date of processing of the respective credit note) on the amount of tax "unduly paid".
The TCA presented its response on 30 June 2017, accompanied by the Administrative File, in which it sustained the total lack of merit of the Claimant's request, alleging, in summary, the following:
The TCA maintains the understanding that the tax acts at issue in these proceedings should remain in the legal order, by virtue of not having erred in exercising the technical discretion that was incumbent upon it by the combination of the provisions of Article 31, paragraph 2 of the IRC Code and Article 5 of Regulatory Decree No. 25/2009, of 14 September.
According to the TCA, there is only one criterion: "that of the application of rates which the TCA considers reasonable having in account the period of expected useful life".
In the absence of a legal criterion, it is therefore incumbent upon the TCA itself to determine the rate of depreciation or amortization, resorting to objective criteria for determining an expected utility - which the TCA must have done, adopting all necessary and required diligences to arrive at an objective and rigorous determination of the period of useful life of the equipment in question, which it achieved through the coincidence of information provided by companies that produce and commercialize such equipment.
On the other hand, the TCA disagrees with the concept of "expected economic useful life" on which the Claimant's argument is based, both because it remains undefined and because it has no legal foundation.
The TCA also states that the Claimant could have made use of the provision in Article 31-B of the CIRC (Article 38 of the CIRC before Law No. 2/2014, of 16 January), which allows exceptional devaluations of assets to have a reflection in impairment losses - which the Claimant did not do, although it would be through this means that it could find a reflection, within the legal framework, of aspects of variation, or depreciation, of the economic utility of assets.
The TCA invokes the argument that the useful life of an asset does not depend on its economic performance, which may depend even on the characteristics of whoever uses it and the projects in which it is inserted (which may have the most varied periods), useful life being only the period during which an asset will be available for use, for any user and for any project.
Therefore, the useful life of the assets in question does not result, nor can it result, from a legally established program, such as that embodied in Decree-Law No. 189/88, of 27 May. There a use of such equipment is provided for, but it is not incumbent upon the law to establish limits to such use, in particular preventing subsequent uses of equipment that would still be useful.
For this very reason, the TCA argues, Article 31, paragraph 2, of the CIRC requires the reasonableness of the rate to be assessed by the "period of expected utility" and not by the profits or losses recorded in a given period - it is an objective assessment by technical experts in the matter, not a subjective assessment as the Claimant attempts to direct to individual economic profitability of each business.
The TCA concludes by requesting that the action be judged without merit, as unproven, absconding the Respondent from the request, with the legal consequences.
By motion of 1 September 2017 the Claimant identified witnesses and articles of its response on which the evidence of the witnesses it listed would bear.
By order of 5 September 2017 the Arbitral Tribunal dispensed with the holding of the first meeting provided for in Article 18 of the RJAT, under the principles of the Tribunal's autonomy in conducting the proceedings and in order to promote the celerity, simplicity and informality thereof (cf. Articles 19, paragraph 2, and 29, paragraph 2, of the RJAT). The holding of the trial hearing being scheduled for 27 September at 14 hours and 30 minutes.
By motion of 13 September 2017, the Claimant requested the change of the date of witness examination. Having suggested as alternative dates 3, 12, 20, 27 and 31 October.
By arbitral order of 14 September 2017, the Tribunal designated, pursuant to Article 18 of the RJAT, 20 October 2017 for the holding of the trial hearing.
On 20 October 2017, the trial hearing took place, where the examination of witnesses listed by the Claimant was conducted, and a record thereof was produced. In accordance with paragraph 2 of Article 18 of the RJAT, the Tribunal set 29 January 2017 as the deadline for the pronouncement of the Arbitration Decision.
At the end of the hearing, the Claimant and the Respondent were notified to present written arguments within successive time periods.
The parties presented arguments, in which they contended, in essence, for their initial position.
CASE MANAGEMENT
The parties have legal personality and capacity and benefit from procedural legitimacy, pursuant to Articles 4 and 10, paragraph 2, of the RJAT and Article 1 of Regulation No. 112-A/2011, of 22 March.
The TCA proceeded to the designation of its representatives in the case and the Claimant filed a power of attorney, thus finding the Parties duly represented.
The proceedings have no nullities.
No prior or subsequent questions, prejudicial or exception, were raised that would prevent the consideration of the merits of the case, the conditions for issuing a final decision being gathered.
MERITS
FACTUAL MATTERS
§1. FACTS FOUND PROVED
With regard to the factual relevance for the decision of the case, the following facts are considered proved:
The Claimant's corporate purpose is the production, distribution and sale of electrical energy using renewable sources, namely wind energy, through the construction and operation of wind farms and electrical energy transmission lines.
In the course of its activity, the Claimant is the holder of the wind farm at …, in which it has 16 wind turbines with an installed capacity of 32 MW.
Within the scope of Service Order number OI2016…, the Claimant was the subject of an inspection action for the taxation period of 2013;
This action was due to the fact that the TCA concluded that the Claimant would have made amortizations for tax purposes that did not follow the "period of expected utility", in the case of 20 years, and consequently there were inaccuracies in the determination of the taxable income of the Claimant relating to the depreciation and amortization schedule, which the Claimant practiced in the economic year of 2013.
The Respondent justified the corrections based on the following circumstances:
The Claimant registered in the SNC account 6423000001 Expenses with Depreciation and Amortization – AMORT Wind Turbines, the amount of €1,630,474.00 which corresponds to a percentage of approximately 6.75% on the value of €24,154,942.55, registered in account 4330000001 – IMOB – Wind Turbines.
The Claimant did not provide any elements that would allow pointing to a period of expected utility of less than 20 years, therefore the corrections to the 2013 fiscal year were maintained, after the right to hearing, in the amount of €422,727.96.
The Respondent considers that with regard to elements for which depreciation or amortization rates are not fixed, only those considered reasonable by the DGCI are accepted, taking into account the "period of expected utility", in accordance with the provision in paragraph 2 of Article 31 of the CIRC. Moreover, it states that, under paragraph 3 of Article 5 of DR No. 25/2009, the rates of reintegration or amortization are accepted if considered reasonable, taking into account the period of expected utility.
In the case at hand, wind turbines are used for energy production, but are not provided for in the tables attached to DR 25/2009. Therefore, the Respondent had to use the criterion provided for in paragraph 2 of Article 31 of the CIRC and in paragraph 3 of Article 5 of DR No. 25/2009 to determine the amortization rate - the criterion of "period of expected utility".
The Respondent sought information on wind turbines from various sources (e.g., companies that commercialize and manufacture wind turbines, international electronics committee, national laboratory of energy and geology), and concluded, from these informations, that the period of 20 years would be the period of useful life of wind turbines and that, therefore, 5% would be the amortization rate considered reasonable.
A period of 20 years refers to an amortization rate of 5% and never to a rate of 6.25% as was actually used by the Claimant;
It was this discrepancy in amortization periods that led to the corrections applied by the TCA to the Claimant, which were based on the application of wind turbine amortization rates of 5%.
To the results obtained, the correction of €422,727.96 was applied. This resulted in an additional IRC assessment which, together with interest, reached the amount of €137,133.71.
With a view to suspending the enforcement proceedings, the Claimant proceeded to pay the amount of €137,133.71 on 10 January 2017 (doc. No. 4, attached by the Claimant).
The Claimant determined the amortization period of 15 years taking as reference the guaranteed tariff period for hydroelectric energy because there would be no reference for wind energy.
The Claimant projected its activity based on these assumptions. If one were to opt for setting a period of 20 years, and given the residual value, it would become probable that the Claimant's expenses would exceed its revenues, which could jeopardize the viability of its business plan and the company's viability project, given that, once the guaranteed tariff period expires (in the case of 15 years – provided for in DL 189/88, of 27 May – for supplying electricity to the electricity grid), the profitability of the activity carried out by the Claimant, in light of its economic-financial projections, would be reduced to a value much lower than that practiced in this period.
The fact that the profitability of the Claimant's activity would be reduced to a much lower value, in light of its economic-financial projections, once the guaranteed tariff period for supplying the grid expires, is mainly due to the fact that the tariff practiced in a liberalized market context is much lower.
The profitability of projects, beyond 15 years, is very low, as it is a material subject to rapid wear (given the location in generally adverse atmospheric conditions-mountain ridges) and the residual value of the equipment is negative, both due to the cost of labor for dismantling, and because technological evolution quickly renders the material obsolete and without market value.
§2. FACTS NOT FOUND PROVED
There are no facts found unprovable with interest for the case.
§3. REASONING ON FACTUAL MATTERS
The judgment of factual matters was based on critical analysis of the witness testimony produced at the trial hearing, as well as documentary evidence (which includes the administrative file) attached to the proceedings.
The witnesses (B… and C…) testified, in essence, in a coherent manner, sustained and revealing command of the reasons for knowledge with relevance to the provision of information.
LEGAL MATTERS
Regarding the Legality of the Assessments
The legal question at issue in the present action essentially comes down to determining whether the correction made by the Respondent was legally appropriate, with regard to the amortization rate applicable to assets making up the tangible fixed assets, i.e., wind turbines for electricity generation.
That much means, in consequence, evaluating whether it was legally appropriate the change that (based on this different selection of amortization rate) was made, by the TCA, to the assessment made by the Claimant.
The question to be resolved in the proceedings is, thus, to determine (in light of the tax framework in force at the date of the tax facts in question) what is the tax treatment to be granted with respect to depreciation of the Claimant's wind turbines, identified in the proceedings, in particular, to determine their useful life period for tax purposes. From this will be inferred, finally, the rate of depreciation to be accepted tax-wise.
It is necessary to consider this.
For this purpose, it is important to determine, first of all, which legal norms are applicable at the date of the tax facts. At issue was provided in Article 31 of the IRC Code, the following:
"1- Under the method of constant quotas, the annual quota of depreciation or amortization that can be accepted as an expense of the taxation period is determined by applying the depreciation and amortization rates defined in the regulatory decree that establishes the respective regime to the following values:
(...)
2 - With regard to elements for which depreciation or amortization rates are not fixed, those are accepted which by the Directorate-General of Taxes are considered reasonable, taking into account the period of expected utility of such elements."
With regard to depreciations of certain tangible fixed assets, the accounting normative found in the SNC deals with them in the NCRF 7 (Tangible Fixed Assets). Thus, in § 6 of NCRF 7 the following definitions appear:
"- Depreciation: is the systematic allocation of the depreciable amount of an asset over its useful life;
- Residual value: is the amount estimated which an entity would currently obtain by the disposal of an asset, after deducting the estimated costs of disposal, if the asset already had the age and conditions expected at the end of its useful life;
The result obtained by the accounting of companies results, as is known, from the confrontation between revenues and expenses necessary to obtain them. In the accounting plane this result is influenced by a vast set of estimates, especially with respect to the set of costs incurred. Thus, and by way of example, provisions and depreciations constitute important portions of costs evidencing accountingly whose recording is based on forecasts or estimates.
Recognizing this inevitability - that the result depends, in large part, on estimates - the Conceptual Framework (CF) of the Accounting Normalization System (SNC), § 37 provides "The preparers of financial statements must, however, struggle with the uncertainties that inevitably surround many events and circumstances, such as...the probable useful life of facilities and equipment...".
At the date of the tax facts in question, it was provided, in this regard, in Articles 28, 29 and 30, all of the IRC Code - in the provisions that are here considered relevant to the proceedings - the following:
"Article 29
1 - Depreciations and amortizations of elements of assets subject to deterioration are accepted as expenses, those being considered tangible fixed assets (...) which, in a systematic manner, suffer losses of value resulting from their use or the passage of time".
"Article 30
- The calculation of depreciations and amortizations is made, as a rule, by the method of constant quotas.
(...)
-
Different methods of depreciation and amortization from those indicated in the preceding paragraphs may still be applied, provided that, by means of a request, prior recognition is obtained from the Directorate-General of Taxes, except where this does not result in an annual quota of depreciation or amortization exceeding that provided for in the following article.
-
Except in situations duly justified and accepted by the Directorate-General of Taxes, the same method of depreciation or amortization should be applied to each element of the asset from its entry into operation or use until its depreciation or complete amortization, transmission or loss of use.
The provision in the preceding paragraph does not affect the variation of depreciation or amortization quotas according to the more or less intensive operating regime or other conditions of use of the elements to which they relate, the minimum quotas attributable to the taxation period not being able, however, to be deducted for purposes of determining the taxable profit of other taxation periods.
- For purposes of the preceding paragraph, the minimum quotas of depreciation or amortization are those calculated based on rates equal to half of those fixed according to the method of constant quotas, except when the Directorate-General of Taxes previously grants authorization for the use of lower quotas than these, following the submission of a request in which the reasons justifying them are indicated."
As is explained in the CAAD decision 75/2014-T, the straight-line method will thus be the method rule used in quantifying depreciations.
In such quantification, a flexibility criterion is observed that, admitted, in the consideration, as tax cost of values resulting from minimum and maximum quotas, as Rui Morais points out, "Even when the useful life period of an asset, for tax purposes, is fixed by law, there is no total rigidity. Only the consideration of a cost, in each one of the fiscal years corresponding to the useful life of the asset, of the value corresponding to the minimum amortization quota is mandatory, in compliance with the principle of specialization of fiscal periods. Such minimum quota is calculated by applying, to the depreciable value, a rate equal to half of the rate provided for, in such case, in the applicable table. (...). In an example: Table II (generic rates) provides that the depreciation quota for water and electricity installations is 10%. This is the same as saying that the law fixes that the amortization period (minimum) of such installations is 10 years. Only that the taxpayer can opt for an annual amortization quota lower, up to 5% (half the rate provided for in the table). This is the same as saying that the maximum amortization period could go up to 20 years.". The depreciation to be recognized periodically as an expense related to the use of an asset depends, thus, on a set of estimates, in particular, the useful life period and the residual value. But these estimates should converge on a primary objective: that of adjusting the recognized depreciation to the effective wear of the asset.
It is sought, thus, to provide those who prepare the financial information with a set of directives so that the process of determining depreciations leads to expense values that properly reflect the deterioration of assets.
No legal rate of depreciation or amortization for this exact type of assets was fixed at the date of the facts. In fact, Regulatory Decree No. 25/2009, of 14 September (Regime of Depreciations and Amortizations), does not contemplate, in its tables, this type of assets.
The regime provided for in paragraph 2 of Article 31 of the IRC Code is consequently applied to the situation under analysis. From such legal norm (transcribed above) results, with an imperative character, that the applicable amortization rate should derive from the reconciliation of two aspects.
On the one hand, as a base element, the notion of "period of expected utility" must be considered. On the other hand, once the useful life period of this type of asset is defined, it is important to determine an amortization rate that appears "reasonable" for such period.
Let us consider, now, each of these aspects, separately.
In such an analysis, due account should be taken of the necessary systematic perspective of the relevant legal norms. Tax norms should be interpreted like any others, the conception that they would have an exceptional character that was once assigned to them being overcome. As Saldanha Sanches states, "the unity of the legal system and the essentially common nature of the problems that arise in Tax Law and in other branches of Law mean that the adoption of interpretive principles with application only in tax legal relationships is hardly compatible with systematic unity.".
Likewise, Sérgio Vasques tells us that "the interpretation of tax law does not have any specificity, sufficing itself with the traditional criteria that appear among us in Article 9 of the Civil Code. The interpreter should not, thus, limit himself to the letter of tax law, but reconstitute here also, from the texts, the legislative thought, taking into account the unity of the legal system, the circumstances in which the law was elaborated and the specific conditions of the time in which it is applied. In summary, "the interpreter of tax laws, like that of any other legal rules, will have to fix the respective meaning, combining the grammatical element with the logical or teleological element, including the rational, systematic and historical aspects.".
It should be noted in this regard that Article 9 of the Civil Code marks the prevalence of the spirit over the letter of the law, although it has expressly placed the letter as a limit to the search for meaning. Without prejudice to considering that the subject matter of interpretation of laws is not of such a nature as to be imprisoned by legislative means, we view [similarly to what also appears to be the position of Sérgio Vasques] Article 9 of the Civil Code as the emanation of a general hermeneutic principle, assisting it, for that reason, intrinsic validity. This provision provides that:
"Interpretation should not limit itself to the letter of the law, but reconstitute from the texts the legislative thought, especially taking into account the unity of the legal system, the circumstances in which the law was elaborated and the specific conditions of the time in which it is applied.
However, the interpreter cannot consider the legislative thought that does not have in the letter of the law a minimum of verbal correspondence, albeit imperfectly expressed.
In fixing the meaning and scope of the law, the interpreter shall presume that the legislator has enshrined the most appropriate solutions and has known how to express his thought in appropriate terms."
In turn, the General Tax Law ("LGT"), in its Article 11, has, in the specific field of tax laws, enshrined a set of interpretation rules as follows:
In determining the meaning of tax norms and in qualifying the facts to which they apply, the general rules and principles of interpretation and application of laws are observed.
Whenever tax norms employ terms specific to other branches of law, these should be interpreted in the same sense in which they have there, except if something different stems directly from the law.
Persisting doubt over the meaning of the norms of incidence to be applied should attend to the economic substance of the tax facts.
Gaps resulting from tax norms covered in the reservation of law of the Assembly of the Republic are not susceptible to analogical integration.
These are the interpretive rules to be observed in the scope of the interpretation of the norms applicable to the present case.
First, then, it is necessary to define what is meant by "period of expected utility".
In fact, for a good decision of the case, it will, of necessity, have to analyze what definition to adopt, for tax purposes, considering the aforementioned paragraph 2 of Article 31 of the IRC Code, of the concept of "period of expected utility" of the assets at issue in the proceedings - the wind turbines.
Useful life should, thus, be one of the central parameters in quantifying the rates in question. However, Article 30, paragraph 4, of the IRC Code, in dealing with useful life, does not define what it should be, explicitly. It only establishes that this should be calculated from the rates that Article 30, paragraphs 1 and 2, determine. This norm produces, tendentially, a reasoning in a "closed circuit", with useful life resulting, by way of the provision in Article 31, paragraph 4, from the rates provided for in Article 31, paragraphs 1 and 2. However, we believe that from the combination of these norms with some provisions in Regulatory Decree No. 25/2009 a clearer reading key for the question to be decided in the proceedings can be found.
Two interpretations reveal themselves, in the abstract, as applicable.
The interpretation of this concept ("period of expected utility" or "period of expected useful life") and the selection of one or the other of the interpretations will be made, as stated, in the case under analysis, in light of the principles and nature of tax law, since it is this subject matter that is at issue in the scope of this dispute.
According to a first interpretation, the expression in question (period of expected utility) corresponds to the notion of period of economic useful life. According to a second interpretation, it corresponds to the notion of period of expected physical or technical duration.
We are, thus, before a polysemic concept.
Let us see.
In § 6 of NCRF 7 the following definitions appear:
-
Useful life is:
-
The period during which an entity expects an asset to be available for use; or
-
The number of units of production or similar that an entity expects to obtain from the asset.
In turn, §§ 56 and 57 of the same Standard establish:
"56 — The future economic benefits incorporated in an asset are consumed by an entity mainly through its use. However, other factors, such as technical or commercial obsolescence and normal wear while an asset remains idle, often give rise to a diminution of the economic benefits that could have been obtained from the asset. Consequently, all the following factors are considered in determining the useful life of an asset:
-
Expected use of the asset. Use is assessed by reference to the expected capacity or physical production of the asset;
-
Expected normal wear, which depends on operational factors such as the number of shifts during which the asset will be used and the maintenance and repair program, and the care and maintenance of the asset while idle;
-
Technical or commercial obsolescence arising from changes or improvements in production, or from a change in market demand for the service or product derived from the asset; and
-
Legal or similar limits on the use of the asset, such as the expiration dates of leases related to it.
57 — The useful life of an asset is defined in terms of the expected utility of the asset for the entity. The asset management policy of the entity may involve the disposal of assets after a specified period or after consumption of a specified proportion of the future economic benefits incorporated in the asset. Therefore, the useful life of an asset may be shorter than its economic life. The estimate of the useful life of the asset is a matter of judgment based on the entity's experience with similar assets.".
The cost resulting from the quantification of depreciations should, thus, have a systematic, or methodical character, and should appear as an effect of the application of a calculation rule that possesses internal logic. On the other hand, the useful life and the residual value of the assets will be essential parameters in determining such a method of calculation, since the essence of the phenomenon that this cost seeks to express is embodied in the allocation of the value of assets to various economic periods, during which they are assigned to a given economic activity.
In truth, according to António Borges, Azevedo Rodrigues and Rogério Rodrigues, in Elements of General Accounting, Áreas Editora, 2010, pp.697, "Fixed assets are not "consumed" in a single economic period, but rather and in principle in the number of years foreseen for its economic life. (...) In summary, as assets are used in successive periods they depreciate, that is, they lose value".
If this is the case in the accounting plane, it is understandable that also in the tax plane depreciations have, especially in the IRC Code and other complementary legislations, a treatment developed based on an economic perspective. Depreciations thus rest on an estimate of loss of value, which is materialized accountingly and tax-wise in a cost, affecting this, in turn, the result.
Results, on the other hand, from the reading of Article 3 of Regulatory Decree No. 25/2009, according to which the useful life of an asset is the "period during which its value is fully reintegrated or amortized" and because, according to the provision in Article 29, paragraph 1, of the IRC Code, reintegration or amortization consists of the losses of value that elements of tangible fixed assets suffer resulting from their use or the passage of time, then the useful life, in a tax sense, should be assessed by the time during which such losses of value would be justified by the causes mentioned in that article (use, technical progress or any others).
Reasons that, in their entirety, lead to the conclusion that the interpretation applicable here is, thus, that of period of economic useful life.
This will, then, be the notion of period of expected useful life to be considered in the interpretation of the IRC Code, in the wording applicable to the case, in Articles 29 to 31, where a broad set of norms is provided directed to the tax treatment of reintegrations and amortizations.
In fact, what is provided in Article 29 above mentioned, implies that the phenomenon of depreciations, determined for tax purposes, is unequivocally founded on the loss of value, with a character of repetition or regularity, that assets suffer by virtue of use or the passage of time. It is a central and decisive point to emphasize that it is not by the fact that an asset is characterized by a long period of technical or technological life that, necessarily, the duration of its economic useful life will also automatically extend to that span of time.
In the same direction points accounting law, providing paragraph 57 of NCRF 16 that "the useful life of an asset is defined in terms of the expected utility of the asset for the entity. (...) the useful life of an asset may be shorter than its economic life. The estimate of the useful life of the asset is a matter of judgment based on the experience of similar assets."
In the same sense, and consulting the Proposal of the Commission for the Reform of Green Tax Fiscal Reform taken office by the XIX Constitutional Government, it is verified that the same addressed the depreciation rate that DR 25/2009 should contemplate in relation to wind turbines, thereby recognizing its omission regarding this type of assets.
It is true that the rates do not apply to the tax facts at issue in the proceedings, but it is considered of great utility to refer to the understanding endorsed by this commission of specialists in a subject matter, which as we have seen, is not, however, expressly regulated by the legislator.
In this way, the Commission comes to recommend, in its draft, a fiscal life of 12.5 years, as a minimum, to 25 years, as a maximum, which would represent fiscal rates between 8% and 4%.
Perusing the aforementioned draft, the concern of this Commission is noted, when it states:
"It is generally considered that a photovoltaic system ceases to have interesting performance from an economic point of view (useful life) when its power falls below 80% of the initial power, although depending on the type of system this may continue to be useful for its respective owner.".
The Commission suggests that "The rates to be used should follow technical reasonableness and economic efficiency".
The case of computers is, in this regard, illustrative. Their technical life is today, naturally, longer than it was 20 years ago, but their useful life (depending on economic aspects, obsolescence, etc.) will not follow linearly the extension of their technical or technological life.
In truth, the useful life of each generation of wind turbines has been increasing, so technology tells us, but it does not necessarily follow from this that its economic utility, for a given company, will accompany that technological life.
The Claimant correctly took as its criterion the notion of period of economic useful life.
The adequacy of the useful life (economic) period defined by the Claimant is revealed in several respects. First, this period is shown to be in harmony with the economic conditions (regarding the period of sale of energy at a price that ensures the balanced operation of the activity) and market conditions (estimated residual value null after the 15-year period).
It was, in fact, proved that the Claimant falls within the scope of a contractual regime of energy sales at a previously fixed price for a period of 15 years (period during which the fixed and guaranteed remuneration of renewable energy generation centers is established) after which the wind turbines will have negligible residual value, insofar as there is no used market for this type of equipment.
Thus, the proved factuality stands out that the Claimant has a quite specific duration period, legally contracted, for the sale of energy under profitable conditions. Once this period ends, the wind turbines will have no utility, in an economic-financial sense (although they may have it on a plane of purely physical durability).
And, being certain that economic, financial, legal and obsolescence constraints will be felt in this type of equipment, in light of the economic activity carried out, the useful life relevant for tax purposes will, as a rule, be shorter than the purely physical (technical) life.
In economic-legal terms, an asset will have a useful life as long as it is economically profitable or beneficial. One may thus estimate a long technical or physical life, without this being incompatible with the setting of a shorter economic useful life. This is the case in the proceedings.
Having reached this first point of the judgment, it is necessary to proceed to the second, within which it will be determined whether the amortization rate set by the Claimant is or is not reasonable and, therefore, whether the rate correction made by the Respondent appears to be correct.
The Claimant considered, as an amortization rate, 6.25%.
The Respondent understood that such rate should correspond to 5%.
Regulatory Decree No. 25/2009 established the tax rates to be used for a quite broad and diverse set of assets. By means of it, the tax legislator sought, in this way, to regulate the tax acceptance of depreciations. Otherwise (in the absence of such provision), and constituting these accounting costs estimates of losses of value in long-term assets, the granting to the taxpayer of total freedom in the consideration of such costs as negative elements of taxable profit could result in undesirable situations of manipulation of tax results.
Not being provided for, in the aforementioned Regulatory Decree 25/2009, any rate for the depreciation of wind turbines at issue in the proceedings, it is appropriate to rely on a parallel place in which consists the rate of depreciation legally fixed, in the aforementioned Regulatory Decree, regarding equipment for the production of hydroelectric energy.
As evidenced by a study attached to the proceedings by the Claimant, the useful life of wind turbines could never be longer than that of equipment for the production of hydroelectric energy. The useful life of equipment for the production of hydroelectric energy is, on the other hand, the longest within the range of equipment for energy production.
Being so, and if the depreciation rate legally fixed for such equipment is 6.25%, it appears reasonable that this be the depreciation rate adopted regarding wind turbines, and should, as such, be accepted.
There is still, with regard to this aspect, a relevant point that should be underlined: the assessment that is made of the reasonableness of a certain depreciation rate assumed by a taxpayer cannot take as a presupposition any sort of business plan, but should rather be determined in concreto.
If, in these circumstances (absence of rate provided for in law) a given company were to maintain that being, for example, two or five years the period foreseen for the exploitation of a given business this would imply depreciation rates of assets of 50% or 20%, respectively, such would not, ipso facto, be a reasonable useful life, for the reasons set forth in this decision.
In the case at hand, the Tribunal's judgment as to the reasonableness of the rate fixed is, thus, anchored in legal and financial factors (contract for the sale of energy at fixed prices), technological and market factors (estimated residual value null at the end of that period). Facts these given as proved.
That is, the reasonableness of the depreciation rate fixed will have to be assessed case by case, not resulting automatically from projections or estimates of companies. Such estimates must be supported by bases or grounds that possess an appreciable degree of objectivity and controllability.
Criteria which, contrary to what should have been, the TCA did not consider in the decision it pronounced, not explaining them, consequently, in the reasoning of the correction of the assessment to which it proceeded. It is considered, thus, that the reasonableness criterion that the TCA used does not reveal itself convincingly substantiated.
In light of everything that has been explained above, it is considered that, before the provision in tax law, the Respondent, in having considered a merely technical or technological utility of the wind turbines, disconnecting it, on the other hand, from the conditions of actual use by the Claimant, in the specific case, departed from the criterion of reasonableness that is legally appropriate.
If the depreciation rates for these types of equipment were, at the time, defined in law, all of this would, naturally, be moot. However, as it is not, the criterion of reasonableness, moderation or acceptability, implies that more than simple technological or technical utility be taken into account and also attend to other factors, which indeed were expressed in the (then) Article 29, paragraph 1, of the IRC Code, which contained the general rule on depreciations accepted tax-wise.
The reasoning and conclusion reached by the TCA thus reveal themselves to be inadequate.
By force of law and for determination of the reasonable depreciation rate to apply, the TCA was called upon to make a complex balancing judgment, having to take into account, on the one hand, the period of expected useful life and, on the other hand, the notion of reasonableness. By virtue of the latter, it would be incumbent upon it to consider the specific circumstances of the business plan in question and the actual use of the assets in question by the Claimant. In relation to the first aspect, the TCA disregarded that a polysemic concept was at issue, reducing its analysis to a purely physical or technical notion.
In that balancing, the TCA thus did not obey, the criterion that flows from the pertinent legal-tax and accounting norms regarding the notion of period of expected useful life, as it made a balancing disconnected from the specific conditions of the case. It neglected, in short, the criteria that are imposed in light of the pertinent legal-tax and accounting norms.
The TCA's judgment of reasonableness thus suffers from error, not only because it chooses a parameter of expected useful life that is not appropriate, but also because the concept of reasonableness is not assessed in light of these case-specific circumstances.
It is verified, in these terms, that there was a gross violation of the parameters that the TCA was bound to value for purposes of determining the applicable depreciation rate and, consequently, of the amount owed.
Having ascertained such elements, it is concluded that, for the reasons set forth above, the decision-making procedure to which the TCA resorted does not coincide with that legally imposed, having incurred (for the above exposition) in gross error and, consequently, in "manifest error of appreciation" in the exercise of discretionary power (Fernanda Paula Oliveira, José Eduardo Figueiredo Dias, "Fundamental Notions of Administrative Law, 2016, 4th Edition, Almedina p. 142).
As was established in the Arbitration Decision regarding Process No. 593/2015-T, the jurisdictional control of this irregularity of the administrative decision is imperative, insofar as it is not a matter subtracted from Law. As to discretionary power, it is endowed today, "(…) a broad concept of discretionary power as a space for evaluation and decision proper, of the responsibility (authorship) of the Administration (…)", which may result both from direct action faculties, spaces for appreciation in the application of imprecise concepts of type and, also, from administrative prerogatives of evaluation (cf. Vieira de Andrade, Lessons of Administrative Law, 2nd Edition, Coimbra, 2011, p.47.)
Precisely what is at issue here is the recourse, by the legislator, to undetermined concepts – notions of "expected useful life" and of "reasonableness". As a rule, the concept of reasonableness confers on the Administration a large margin of appreciation, albeit limited by the balancing required by the circumstances of the case and fundamental legal principles. It happens that, in the specific case, this concept encounters, further, the limitations that will result from the densification of the concept of period of expected useful life, the filling of which results, in the case, not only from the teachings of physical sciences, but also from the interpretation of pertinent legal-tax and accounting norms.
As Fernanda Paula Oliveira and José Eduardo Figueiredo Dias state, "(...) the inspection of the conformity or compatibility of this administrative action with the legal norms and legal principles is incumbent upon the courts". They also emphasize that it is unquestionable that "the exercise of discretionary powers is subject to inspection by the judge" (cf. op. cit., pp. 137 and 140).
Clear, in this regard, is revealed Vieira de Andrade, when explicitly teaches that "discretionary power continues to be a zone of indeterminacy, but (already) is not a zone of normative indifference. The discretionary choice, even at its most distant frontier, does not represent for Law a free choice by the Administration, cannot be conceived as a manifestation of the psychological will of the agent, legitimized by legal referral to freely opt (according to extrajuridical rules) for any of the solutions supported by the enabling norm; just as discretionary power does not necessarily mean an original power external to law and Law and by this only limited". Furthermore, "even when it exercises a power of choice of content", the Administration "develops a functionally juridical activity: beyond respecting the legal external conditions of exercise of its power (competency, procedural, formal, substantial regarding the presuppositions) it must conduct itself in the itinerary of its choice by the pursuit of the legal end", concluding that "the exercise of discretionary power is also a materially juridical activity", having to "deliberate, in the internal procedure of formation of its will, according to criteria of impartiality, of justice, of equality of treatment and, including, of proportionality. It thus becomes inescapable the affirmation that all administrative activity, even that portion which is not predetermined in law, corresponding to a domain of public autonomy of the Administration, is subject to juridical rationality, in terms of the total reservation of juridicality that characterizes the State of Law", underlined ours (The duty of express reasoning of administrative acts, Coimbra, 1992, pp. 373, 374 and 375).
The TCA does not thus benefit from the possibility of deciding according to its own criteria (by itself fixed) and subtracted from the control of the Tribunal. A control which this will make considering, not only the sense of the decision, but also the reasoning thereof, where the decision-maker will know adequately to express his reasoning, thus making it accessible, in particular, to jurisdictional control.
Explains Vieira de Andrade that "The vices in the use of discretionary powers – when the motives invoked by the author of the act are proven non-existent, deficient, false, deviated, erroneous, irrelevant, contradictory, incongruous or illegitimate - are vices in the end-content relationship (functional vices of the decision), normally associated with the violation of legal principles (impartiality, justice, equality, proportionality, rationality, veracity, and good faith) that provoke, in the generality of cases, the voidability of the act", (Lessons of Administrative Law, 2nd Edition, Coimbra, 2011, p. 181).
In the case, given the reasoning invoked by the TCA, it is verified, as we have seen, that this, not only incurs in a deficit of balancing in relation to the factual circumstances of the case (economic and financial conditions of the project, technological and market factors, etc.), as it opted for an improper notion of period of expected useful life, disconnecting it from the pertinent legal-tax and accounting norms. Everything that results in manifest error of interpretation, both of the facts and of the applicable legal norms, which generates the voidability of the act (corresponding to the tax correction effected) and determines that the correction in question be annulled, as unlawful.
To be noted, finally, that the knowledge of this vice precludes the need for knowledge of the others. In the case at hand, the acts of additional IRC assessment No. 2016…, the assessment of compensatory interest No. 2016… and the accounts adjustment statement No. 2016…, relating to the taxation period of 2013, in the part corresponding to the corrections that the TCA made, are unlawful.
Regarding Compensatory Interest
The Claimant further requests that it be determined the payment of compensatory interest, pursuant to Article 43, paragraph 1, of the LGT, calculated on the amount of tax unduly paid and corresponding compensatory interest already paid.
In accordance with the provision in sub-paragraph b) of Article 24 of the Legal Regime of Tax Arbitration the arbitration decision on the merits of the claim of which there is no appeal or challenge binds the Tax Administration as from the end of the period provided for appeal or challenge, and this must, in the exact terms of the merit of the arbitration decision in favor of the taxpayer and until the end of the period provided for voluntary execution of the judgments of the tax courts, "restore the situation that would exist if the tax act which is the object of the arbitration decision had not been practiced, adopting the acts and operations necessary for the effect", which is in line with the provision in Article 100 of the LGT, applicable by force of the provision in sub-paragraph a) of paragraph 1 of Article 29 of the Legal Regime of Tax Arbitration.
Whereas pursuant to paragraph 5 of Article 24 of the Legal Regime of Tax Arbitration in stating that "payment of interest, regardless of its nature, is due, in the terms provided for in the General Tax Law and in the Code of Tax Procedure and Process" is nothing more than the recognition of the right to compensatory interest in the arbitral process.
Doctrine has also held that it falls within the scope of the competencies of arbitral tribunals the fixing of the effects of their decisions, in the same terms provided for judicial challenge, in particular, as to condemnation of compensatory interest or condemnation for indemnification for undue guarantee (cf. Carla Castelo Trindade (2016) "Legal Regime of Tax Arbitration Annotated", 121 and Jorge Lopes de Sousa (2013), "Commentary to the Legal Regime of Tax Arbitration", 116).
The request for pronouncement regarding the right to compensatory interest thus concerns the unduly paid tax and also the compensatory interest assessed by the Respondent.
In the case at hand, it is manifest that, following the declaration of unlawfulness under consideration, of the exclusive initiative of the TCA, there is entitlement to payment of compensatory interest, pursuant to Article 43, paragraph 1, of the LGT and Article 61 of the CPPT, calculated on the amount that the Claimant unduly paid, at the rate of legal interest provided for in Article 559 of the Civil Code and, currently in Regulation No. 291/2003, of 8 April (Articles 43, paragraph 4, and 35, paragraph 10, of the LGT).
DECISION
In the terms set forth, this Arbitral Tribunal decides:
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To judge the request for arbitral pronouncement regarding the unlawfulness of the additional IRC assessment No. 2016…, the assessment of compensatory interest No. 2016… and the accounts adjustment statement No. 2016…, relating to the taxation period of 2013, to be well-founded, and in this sequence,
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To annul the abovementioned assessments;
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To condemn the Tax and Customs Authority to pay the Claimant compensatory interest, pursuant to Article 43, paragraph 1, of the LGT and Article 61 of the CPPT, calculated on the amount paid, in the value of €137,113.71, from 10.01.2017 until the date of processing of the respective credit note of the amount of tax and compensatory interest unduly paid.
VALUE OF THE CASE
The value of the case is fixed at €137,113.71, in accordance with the provision in Article 97-A of the CPPT, applicable by virtue of Article 29, paragraph 1, sub-paragraph a), of the RJAT and Article 3, paragraph 2, of the Regulation of Costs in Tax Arbitration Proceedings (RCPAT).
COSTS
Costs charged to the Respondent, given that the present requests were judged well-founded, in the amount of €3,060.00, in accordance with Table I of the RCPAT, and in compliance with the provisions in Articles 12, paragraph 2 and 22, paragraph 4, both of the RJAT.
Let it be notified.
Lisbon, 18 January 2018.
The Arbitrators,
Maria Fernanda dos Santos Maçãs (President)
Coutinho Pires
Miguel Matos Torres
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