CAAD Ruling on IRC Autonomous Taxation, Special Payment on Account & Tax Deduction for Corporate Groups

ARBITRAL DECISION

Claimant: A…, S.A.

Respondent: TAX AND CUSTOMS AUTHORITY

I – REPORT

1. On 19 January 2016, the parent company A…, S.A., subject to the Special Tax Regime for Groups of Companies for the tax period 2009, with tax identification number … (hereinafter referred to as the "Claimant"), submitted to the Administrative Arbitration Center (CAAD) a request for constitution of an arbitral tribunal for purposes of obtaining an arbitral ruling, pursuant to the provisions of Articles 2, No. 1, paragraph a) and 10 of Decree-Law No. 10/2011 of 20 January (hereinafter designated as "RJAT"), following the rejection of the request for official review of the self-assessment act of Corporate Income Tax (IRC) of its Tax Group relating to the tax year 2009.

2. In the request for arbitral ruling, the Claimant chose not to appoint an arbitrator.

3. Pursuant to paragraph a) of No. 2 of Article 6 and paragraph b) of No. 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 as arbitrators His Honour Judge José Poças Falcão to preside, Dr. Jorge Carita and Dr. Rui Manuel Correia de Pinho, who accepted the position within the legally prescribed deadline.

4. The collective arbitral tribunal was constituted on 31 March 2016.

5. On 10 May 2016, the Respondent, duly notified to this effect, submitted its Response.

6. The meeting provided for in Article 18 of the RJAT was dispensed with, considering the absence of exceptions, the dispensability of correction of procedural documents, and the fact that the process followed the usual procedural formalities of the majority of cases handled by the CAAD.

7. The production of witness evidence, although not directly requested by the Claimant, appeared unnecessary given the absence of controversy regarding the essential facts for proper resolution of the case, in accordance with Article 16, paragraph c) of the RJAT and Article 130 of the Code of Civil Procedure, applicable by virtue of Article 29, No. 1, paragraph e) of the RJAT.

8. Duly notified, the Claimant and Respondent submitted written submissions on 19 September 2016 and 20 September 2016, respectively.

9. The position of the Claimant, expressed in the request for arbitral ruling and in the written submissions, is, in summary, as follows:

9.1. The rejection of the request for official review of the self-assessment act of IRC for the year 2009 and, consequently, of the self-assessment act of IRC relating to the tax year 2009 of the Claimant, as the parent company of a group subject to the Special Tax Regime for Groups of Companies, insofar as it concerns the self-assessment of autonomous taxation in that same year 2009, fixed at €141,022.72 as the final assessed/liquidated amount, is illegal as it corresponds to the failure to deduct from the portion of the IRC collection produced by autonomous taxation rates the special payment on account made in the IRC sphere in the tax year 2009, and therefore, it requests from the Arbitral Tribunal its annulment.

9.2. The Claimant understands that the IRC collection provided for in Article 45, No. 1, paragraph a) of the IRC Code (in the version in force until 2013) comprises the collection of autonomous taxation in IRC, and therefore, it must also be understood that the IRC collection provided for in Article 83, No. 2, paragraph e) of the IRC Code (in the version applicable in 2009) also encompasses the collection of autonomous taxation in IRC.

9.3. Therefore, the position of the Respondent in denying the deduction of the special payment on account from the IRC collection of autonomous taxation violates paragraph e) of No. 2 of Article 83 of the IRC Code (in the version applicable in 2009).

9.4. Furthermore, the Respondent cannot disregard the existence of extensive arbitral jurisprudence that qualifies autonomous taxation as IRC. Therefore, the Tax Authority must conclude that the IRC collection constituted by autonomous taxation is available, alongside the remainder of the IRC collection, in the operation of deductions from collection provided for in Article 90 of the IRC Code (in 2009, Article 83), among which is the deduction of the special payment on account.

9.5. The arbitral jurisprudence itself regarding the nature of autonomous taxation – which concludes that those relating to (i) expenses with vehicles, representation expenses and meal allowances constitute IRC; that (ii) they tax income as they are a substitute for the alternative measure of increasing taxable income via non-deductibility of the expense or charge on which it is imposed; that (iii) the rule directed at IRC collection contained in paragraph a) of No. 1 of Article 45 of the IRC Code should be applied to them; and that (iv) by virtue of being IRC the rules of the IRC Code that do not conflict with their special form of incidence and applicable rates shall be applicable to them – leaves no room for doubt to conclude that the rule directed at IRC collection contained in paragraph e) of No. 2 of Article 83 of the IRC Code (paragraph c) [paragraph d) since 2014] of No. 2 of Article 90 of the IRC Code) also applies to autonomous taxation.

9.6. Moreover, the reasoning used by the Tax Authority to decide unfavourably on its request for official review is inconsistent with that which was followed by it in setting aside the deductibility of autonomous taxation in the IRC sphere, with respect to Article 45, No. 1, paragraph a) of the IRC Code (in force until 2013), since here also there was no specific mention of autonomous taxation and the Tax Authority, on dozens of occasions, affirmed that those, by being IRC, also fell thereunder and were provided for. However, the Tax Authority cannot take a different approach when interpreting Article 90 of the IRC Code, by stating that also for purposes of IRC collection they are not included herein, and therefore cannot be deducted from special payments on account.

9.7. Furthermore, the Claimant does not agree with the content of the amendment to No. 21 of Article 88 of the IRC Code, nor with its interpretative character (see Article 135 of the Budget Law) added by the State Budget Law for 2016 (Law No. 7-A/2016 of 30 March), which determined that the liquidation of autonomous taxation in IRC is effected in accordance with the provisions of Article 89 and is based on the values and rates that result from the provisions of the preceding numbers, with no deductions being made from the total amount assessed, because it contradicts the very strong line of jurisprudence up to the date of publication of the new law – in this case, until 30 March 2016. Nonetheless, it should be concluded that Article 135 of the 2016 Budget Law refers only to part 1 of the new No. 21 of Article 88 of the IRC Code.

9.8. For all the foregoing, the self-assessment of IRC relating to the year 2009, insofar as it concerns autonomous taxation, should be annulled on the grounds of a defect of violation of law, due to error in the legal and factual premises, reflected in the failure to deduct from the IRC collection, more specifically from the collection of autonomous taxation in IRC, the value of the special payment on account, and the tax paid shall be refunded, plus compensatory interest. Subsidiarily, if it is considered that Article 90 (Article 83 in 2009) of the IRC Code does not apply to autonomous taxation, it should then be declared the illegality of the liquidations of autonomous taxation due to the absence of legal basis for their implementation, with the consequent refund of the same amount and the payment of compensatory interest.

1. The position of the Respondent expressed in the response and in the written submissions is, in synthesis, briefly, as follows:

10.1. The integration of autonomous taxation into the IRC Code (through Article 4 of Decree-Law No. 192/90 of 9 June) conferred a dualistic nature to the normative system of IRC. By virtue of obeying different rules, IRC took on the form of separate assessments of their respective collections. To the taxable matter determined on the basis of profit according to the rules contained in Chapter III of the IRC Code, the rate of Article 87 of the IRC Code shall apply. On the other hand, to the different realities contemplated in Article 88 of the IRC Code, the rates applicable to the various collections provided therein shall apply in accordance with the diversity of facts.

10.2. In fact, the amount assessed pursuant to paragraph a) of No. 1 of Article 90 of the IRC Code does not have a unitary character, since it comprises values calculated and associated with purposes according to differentiated rules, whereby the deductions provided for in the paragraphs of No. 2 can only be effected to the portion of the IRC collection to which there is direct correspondence, so as to maintain the coherence of the conceptual structure of the general regime of IRC.

10.3. Admitting the Claimant's thesis of the admissibility of deduction of special payments on account from the collection of autonomous taxation would completely distort the principles and purposes on which the legislator's creation of autonomous taxation was based, as a fiscal instrument to combat tax evasion, to tax income of third parties whose income increase would otherwise escape taxation, and to penalize, through fiscal means, the payment of income considered excessive given the circumstances of the economic crisis.

10.4. The interpretation defended by the Claimant is a violation of the rules currently in force for the assessment of IRC. The claims presented are based on a fantastical and fallacious construction without any legal basis, nor does the arbitral jurisprudence invoked by the Claimant truly reflect its content, since its interpretation was completely deconstructed and reconstructed according to the fiction created by it.

10.5. It should also be stated that Article 135, which added No. 21 to Article 88 of the IRC Code, with the effects provided for in Article 135, both contained in the State Budget Law for 2016, published on 30 March 2016, with entry into force the following day, definitively clarifies the disputed question, since "The liquidation of autonomous taxation in IRC is effected in accordance with the provisions of Article 89 and is based on the values and rates that result from the provisions of the preceding numbers, with no deductions being made from the total amount assessed."

10.6. This rule came to clarify in a positive manner the understanding and practice peacefully adopted by the doctrine and taxpayers in general, that is, since the creation of autonomous taxation it has always been peaceful that those did not admit any deduction, which were never called into question by the Respondent. Therefore, any interpretation contrary to that which the Claimant seeks to make would be materially unconstitutional.

10.7. Furthermore, there is evident double standard in the behaviour of the Claimant, on the one hand it defends the existence of a collection where autonomous taxation would be included, in order to benefit from the deduction of the special payment on account, on the other hand, it draws no consequences as far as the calculation of payments on account is concerned, as an obvious consequence of the act which it seeks.

10.8. Thus, the Respondent concludes that the claim for arbitral ruling formulated is entirely unfounded, including therein the condemnation to the payment of compensatory interest, considering evident the legal conformity of the act which is the subject of these proceedings.

II – QUESTION TO BE DECIDED

1. In light of the foregoing, the main question to be decided is as follows:

− Does the rejection of the request for official review of the self-assessment of IRC for the year 2009 and, consequently, the self-assessment act of IRC relating to the tax year 2009, from which resulted IRC liquidated at €141,022.72, issued by the Tax and Customs Authority, suffer from error regarding the factual and legal premises and furthermore, from a defect of violation of law, in the sense of the failure to deduct from the portion of the IRC collection produced by autonomous taxation rates the special payment on account made in the IRC sphere?

III – CASE MANAGEMENT

1. The Tribunal is regularly constituted and is materially competent, pursuant to Articles 2, No. 1, paragraph a), 5, No. 2, and 6, No. 1 of the RJAT.

As regards the timeliness of the request for constitution of the arbitral tribunal, the Claimant requests the constitution of the tribunal against the rejection of the request for official review of the self-assessment of IRC relating to the year 2009.

On 21 October 2015, the Claimant was notified of its rejection.

Pursuant to Article 10, No. 1, paragraph a) of the RJAT, the deadline for the request for constitution of the arbitral tribunal is 90 days counted after notification of the decision rejecting the request for official review (see fact provided in No. 1, paragraph e) of Article 102 of the Tax Code of Procedure and Process).

Therefore, the request for arbitral ruling is timely, since it was submitted on 19 January 2016, that is, less than 90 days counted from 21 October 2015.

The parties have standing and legal capacity, are entitled to bring the action and are legally represented, pursuant to Articles 4 and 10, No. 2 of the RJAT and Article 1 of Regulatory Decree No. 112-A/2011 of 22 March.

The process does not suffer from defects that would invalidate it.

All things considered, an arbitral decision must be rendered.

IV – FACTUAL FOUNDATIONS

1. Having regard to the administrative file and the documentary evidence attached to the case, it is necessary to now present the factual matter relevant to the understanding of the decision, which is established as follows:

The Claimant, on 28 May 2010, filed the IRC Form 22 declaration, relating to the tax year 2009 of its Tax Group (see document attached to these proceedings as doc. No. 1, appendix to the Arbitral Petition).

On 23 November 2011, the Claimant filed a replacement declaration relating to the tax year 2009 (see document attached to these proceedings as doc. No. 2, appendix to the Arbitral Petition).

In the tax year 2009, the B… Tax Group assessed a tax loss in the amount of €47,984.82 (see document attached to these proceedings as doc. No. 2, appendix to the Arbitral Petition).

In final terms, a total amount of tax to be paid of €77,245.42 was assessed. However, following the processing of the liquidation by the Tax Authority, the amount of tax to be paid was reduced to €76,292.62 due to the application of the international double taxation credit in the amount of €952.80 to the municipal surtax collection, a tax which is paid (see document attached to these proceedings as doc. No. 4, appendix to the Arbitral Petition).

The amount of €141,022.72 was assessed as autonomous taxation in the IRC sphere, €16,759.62 of withholding tax and €49,399.44 of payments on account made in the period 2009 (see document attached to these proceedings as doc. No. 2, appendix to the Arbitral Petition).

In the tax year 2009 there are special payments on account in the amount of €410,827.79 (see document attached to these proceedings as doc. No. 2, appendix to the Arbitral Petition).

Such special payments on account concern (i) €234,244.00 made by company A… between 2005 and 2009, of which the amount of €227,088.00 was made under the Special Tax Regime for Groups of Companies, of which it is the parent company (between 2007 and 2009) and the amount of €7,156.00 made by the Claimant prior to the application of the Special Tax Regime for Groups of Companies; (ii) €101,756.00 results from special payments on account made by C… and D… between 2005 and 2008, prior to their entry into the scope of application of the Special Tax Regime for Groups of Companies; (iii) €75,000.00 relating to special payments on account made by E… between 2005 and 2006, prior to its entry into the scope of application of the Special Tax Regime for Groups of Companies (see documents attached to these proceedings as docs. Nos. 4 to 8, appendices to the Arbitral Petition, and Article 16 of the Arbitral Petition not contested by the Respondent).

On 28 May 2014, the Claimant requested the official review of the self-assessment relating to the tax period 2009 (see document attached to these proceedings as doc. No. 3, appendix to the Arbitral Petition).

On 21 October 2015, the Claimant is notified of the rejection of the aforementioned request for official review, denying the right to annulment of the liquidations which were the subject of the said request, since the Tax Authority understood that the amounts paid as special payment on account are not deductible from the collection produced by autonomous taxation (see document attached to these proceedings as doc. No. 3, appendix to the Arbitral Petition).

The IRC Form 22 declaration and its articulation with the programming of the Tax Authority's computer system prevents deduction from the collection related to autonomous taxation rates in IRC, recorded in field 365 of table 10 of Form 22 declaration, of special payments on account still to be deducted from the IRC collection, beginning with the oldest ones (see documents attached to these proceedings as docs. Nos. 1 and 2, appendices to the Arbitral Petition).

1. The facts set out in the preceding number constitute uncontested matter and are documentally demonstrated in the proceedings.

2. There are no facts deemed unproven, because all facts relevant to the assessment of the claim were deemed proven.

V – LEGAL FOUNDATIONS

1. We shall now determine the applicable law to the underlying facts, in accordance with the question already stated (see above No. 10).

2. The question stated concerns the legality of the understanding according to which the rejection of the request for official review of the self-assessment of IRC for the year 2009 and, consequently, the self-assessment act of IRC relating to the tax year 2009, from which resulted IRC liquidated at €141,022.72, issued by the Tax and Customs Authority, suffers from error regarding the factual and legal premises and furthermore, from a defect of violation of law, in the sense of the failure to deduct from the portion of the IRC collection produced by autonomous taxation rates the special payment on account made in the IRC sphere.

3. The Claimant seeks that the amounts paid as Special Payment on Account (SPA) be deducted, at a minimum, from the collection produced by autonomous taxation. To this end, it essentially lists the (i) existence of extensive jurisprudence that qualifies autonomous taxation as IRC, and therefore, nothing in the law departs from the deduction of the SPA also to the portion of the IRC collection produced by such taxation; (ii) if the IRC collection provided for in paragraph a) of No. 1 of Article 45 of the IRC Code comprises, without need for any additional specification, the collection of autonomous taxation, it must be understood that Nos. 1 and 2 of Article 90 of the IRC Code also encompass the collection of autonomous taxation; (iii) the Tax Authority already expressed a favorable understanding on the possibility of the deductions provided for in No. 2 of Article 90 of the IRC Code, with the exception of that relating to international double taxation, being effected to the collection of autonomous taxation; and also the fact that (iv) the Tax Authority's computer system prevents the inscription of the value relating to autonomous taxation rates in IRC, preventing the deduction, for purposes of assessment of the IRC owed by it, of the amount of special payments on account.

4. The fundamental question that must be assessed is whether the amounts paid as special payments on account can be deducted from the collection produced by autonomous taxation.

5. Tax-resident natural persons in Portugal are subject to IRC on their income assessed on a worldwide basis, independent of the fact that this is generated, in whole or in part, abroad. The need for a tax on legal persons is connected to the assets and income of which they are holders, and which may be subject to taxation in their own person. Indeed, legal persons are the major tax collectors which to this day no country has seriously considered eliminating, suffice it to think of the cases in which the obligation to withhold tax and remit to the State the tax due by natural persons and other legal persons falls upon them, or the manner in which VAT included in the price of their sales is collected, among others.

6. In this regard, Rui Duarte Morais states that "The existence of a tax on corporations is necessary – this is a traditional argument – as a means to prevent gaps that would otherwise occur in the taxation of the income of the partners. In reality, if this tax did not exist, the partners would have a strong incentive not to distribute profits, since they would be able to defer taxation, which would only occur when and to the extent that dividends were distributed, which would – only then – be subject to tax in the person of the partners, as income from capital." (see Notes on IRC, Coimbra, Almedina Publisher, 2009, p. 7) (emphasis ours).

7. Thus, the tax legislator chose to designate profit as the basis of taxation in IRC. The concept adopted was that of income-accretion. In accordance with Article 3, No. 2 of the IRC Code "(…) profit consists of the difference between the values of net assets at the end and at the beginning of the tax period, with the adjustments established in this Code."

8. It should be noted that the legislative choice for income-accretion is highlighted in No. 5 of the Preamble of the IRC Code, which we now quote: "The concept of taxable profit adopted in IRC takes into account the evolution that has been registered in much of the legislation of other countries in the direction of the adoption, for fiscal purposes, of an extensive notion of income, in accordance with the so-called theory of patrimonial increment. This concept – which is also in line with the objectives of broadening the tax base pursued by this reform – is explicitly adopted in the Code, by referring profit to the difference between net assets at the end and at the beginning of the tax period.

In this way, relative to the system previously in force, IRC merges, through the notion of profit, the basis of incidence of the industrial contribution, of the tax on capital gains relating to the transfer for consideration of elements of fixed assets, including land for construction and the equity interests that form part of it. And it goes further in the concern to give equitable treatment to different situations, either by automatically including in its tax base certain gains – such as subsidies not intended for operation or indemnities – which, at least in part, were not taxed, or by extending them to profits attributable to the exercise of the extractive petroleum industry, hitherto not covered under the general taxation regime.

Among the consequences that this extended concept of profit implies is the inclusion in it of capital gains and losses, even though, for reasons of an economic nature, limited to those that have been realized. Realization is, however, understood in a broad sense, so as to encompass both so-called voluntary capital gains (e.g. derived from sale or exchange), and so-called involuntary capital gains (e.g. resulting from expropriations or indemnity for destruction or theft). However, to ensure the continuity of business operations, the exclusion from taxation of capital gains relating to tangible fixed assets is provided for, provided that the respective realization value is invested, within a certain period, in the acquisition, manufacture or construction of elements of fixed assets. This scheme is, moreover, similar to that used in many European countries."

1. Having established the concept of profit in conceptual terms, we advance to the process of determination and quantification of IRC.

2. IRC is imposed on taxable profit determined on the basis of the respective accounting (see Article 3, No. 1, paragraph a) and Article 123, both of the IRC Code). Article 17, No. 1 of the IRC Code determining that taxable profit is constituted by the algebraic sum of the net result of the year and the positive and negative patrimonial variations verified in the same period and not reflected in that result, determined on the basis of accounting and eventually corrected in accordance with this Code. That is, the assessment of taxable profit begins with the result of the year obtained through the technical rules of accounting, with some positive or negative adjustments afterwards, so that the result assessed corresponds to taxable profit.

At the time of creation of the IRC Code, through Decree-Law No. 442-B/88 of 30 November, autonomous taxation was not yet provided for, and therefore did not yet form part of the system that was conceived – as was well reflected in process No. 113/2015-T of this Arbitral Tribunal, "Clearly one did not and could not regulate the treatment to be given to 'autonomous taxation' which did not form part of the system, which was conceived in this simple structure: taking the accounting result as a starting point (Article 17, No. 1 of the 1989 IRC Code), correcting it so as to reflect the income intended to be taxed through rules qualitatively similar to those in force in the official accounting plan then in force (Article 18 et seq. of the 1989 IRC Code), applying to it the general rate (Article 69, No. 1 of the 1989 IRC Code) and to the product thus obtained making the deductions from taxation that had somehow already been borne or would have to be borne through another tax system (Article 71, No. 2 of the 1989 IRC Code)."

1. Having reached this point, we can already advance that the essential ground invoked by the Claimant, that autonomous taxation is qualified as IRC, and that therefore nothing in the law precludes the deduction of the special payment on account from the portion of the IRC collection produced by such taxation, cannot succeed, since autonomous taxation did not form part of the genesis of IRC, and therefore, apart from the assessment of taxable profit, i.e. the real income intended to be taxed.

2. Indeed, there are those who understand that autonomous taxation is not strictly IRC – which aims, as we have seen, at the income of legal persons and not at expenses incurred by them – but rather the substitution of taxation of "implicit" income of natural persons, which is considered not directly enforceable.

3. Autonomous taxation was introduced into taxes on income through Decree-Law No. 192/90 of 9 June and resulted from the legislative intent to penalize the taxation of confidential or undocumented expenses incurred by companies which would henceforth be taxed autonomously in personal income tax and IRC. It would only be with the fiscal reform of taxes on income embodied fundamentally in Law No. 30-G/2000 of 29 December that autonomous taxation was extended to representation expenses and to expenses with vehicles and, later, to a very diverse set of realities.

4. In this regard, it is important to cite the position defended by Rui Duarte Morais by stating that "(…) what is at stake is taxation which is imposed on certain expenses of taxpayers, which are considered as constituting taxable facts. It is difficult to discern the nature of this form of taxation, and, even more, the reason why it appears provided for in the codes of taxes on income. The objective appears to be to attempt to prevent (mitigating or eliminating the "advantage" resulting from them in IRC) that, through these expenses, the taxpayer uses for non-business purposes assets that generated fiscally deductible costs; or that remunerations are paid to third parties with evasion of the taxes that would be due by these. The undertaking of such expenses implies an additional fiscal burden for the person incurring them because the law supposes that, thus, another person ceases to pay tax." (see op. cit., pp. 202-203).

Along the same lines João Ricardo Catarino and Vasco Branco Guimarães state that "Although they constitute 'a distortion' in light of the characteristics inherent to IRC, as a direct tax that is imposed on the income of legal persons, they [autonomous taxation] find justification in the objectives they seek to pursue. The generality of cases provided for in the rule [Article 88] relates to either situations of tax evasion (e.g. the case of undocumented expenses and those relating to payments to non-residents and therein a more favorable tax regime) or risk situations in which it is difficult to assess, with certainty, the indispensability of the expense in light of Article 23 (case of representation expenses), or in which true income could be attributed to employees without the corresponding taxation in personal income tax (case of meal allowances and expenses with vehicles)." (see Lectures on Taxation, Coimbra, Almedina Publisher, 2012, pp. 280-281) (emphasis ours).

1. Along these lines, indeed, we cannot follow, with all due respect, the position of the Claimant and qualify, for these purposes, autonomous taxation as IRC so as to deduct the special payment on account from the portion of the IRC collection produced by such taxation.

2. Autonomous taxation is provided for in the IRC Code, but reveals a certain independence in relation to the tax on legal persons, since it does not aim to tax the income of legal persons, which determines that it be assessed independently of the remainder of IRC and the surtax due in each year. Its inclusion in the IRC Code is due above all to matters of simplification, since its assessment is based on expenses that contribute to the determination of the tax to be paid at the end of the period. Such independence results, from the outset, from the fact that the taxpayer is subject to autonomous taxation independently of whether it has or will have taxable income at the end of the tax period.

3. Contrary to what is stated in point 9 of the dissenting opinion of Professor Leonor Ferreira attached to the Arbitral Decision rendered in process No. 697/2014-T, presided over also by the arbitrator presiding over this Tribunal and in the same line, which we also set out in the Arbitral Decision of process No. 639/2015-T, "… there is not properly a single IRC liquidation, but rather two assessments, that is, two distinct calculations which, although processed, in accordance with paragraph a) of No. 1 of Article 90 of the IRC Code, in the declarations referred to in Articles 120 and 122 of the same Code, are effected on the basis of different parameters, since each one is materialized in the application of its own rates, provided for in Articles 87 or 88 of the IRC Code, to the respective taxable matters determined equally in accordance with rules of their own."

4. The Respondent comes to allege that the amount assessed pursuant to paragraph a) of No. 2 of Article 90 of the IRC Code does not have a unitary character, since it comprises values calculated according to different rules, to which are also associated differentiated purposes, whereby the deductions provided for in the paragraphs of No. 2 can only be effected to the portion of the IRC collection to which there is direct correspondence, so as to maintain the coherence of the conceptual structure of the general regime of the tax (see proven fact I in the same sense).

5. Any other interpretation would lead to subverting the general rules of IRC, as a tax on profit as income-accretion, and the very legal nature of autonomous taxation, as a way to prevent situations of tax evasion. One cannot now obtain such a desideratum with an interpretation of the law contrary to the "legislative intent." It would be letting in through the window what was thrown out through the door.

6. In the factuality which is the subject of these arbitral proceedings, it was proven that the IRC Form 22 declaration and its articulation with the programming of the Tax Authority's computer system prevents deduction from the collection related to autonomous taxation rates in IRC, recorded in field 365 of table 10 of Form 22 declaration, of special payments on account still to be deducted from the IRC collection, beginning with the oldest ones (see proven fact J). And indeed, there cannot be a computer system that does not reflect the law. All applications of the Tax Authority must reflect the legal provisions in force, in accordance with the principle of legality to which it is bound. Thus, the Tax Authority's computer program with respect to the IRC Form 22 declaration reflects the deductions (see No. 2 of Article 90 of the IRC Code) relating to income or expenses incorporated in the taxable matter determined on the basis of the profit of the taxpayer or advance payments of the tax. A situation completely contrary to the realities that integrate the taxable facts of autonomous taxation.

7. In this sense, in the Claimant's request for arbitral ruling it is argued that the expression "amount assessed in accordance with the preceding number," contained in No. 2 of Article 90 of the IRC Code, encompasses the sum of the amount of IRC assessed on the taxable matter determined according to the rules of Chapter III and the rates provided for in Article 87 of the IRC Code and the amount of autonomous taxation calculated on the basis of the rules provided for in Article 88 of the same Code. Therefore, admitting such reasoning, it would imply that, for example, in the basis of calculation of payments on account defined in No. 1 of Article 105 of the IRC Code autonomous taxation would be included, since in that also appears the expression used in identical terms in No. 2 of Article 90 "Payments on account are calculated on the basis of the tax liquidated in accordance with No. 1 of Article 90 (…)." And here, for purposes of the basis of calculation of payments on account – these being "pecuniary advances that are made by taxpayers in the period of formation of the taxable fact" (see Article 33 of the General Tax Law) – only IRC assessed on the basis of the taxable matter determined according to Chapter II and the rates of Article 87 of the IRC Code is considered, that is, resulting from the taxable matter that is identified with profit/income.

8. In the concrete case, the Claimant seeks the deduction "from the amount assessed in accordance with the preceding number [No. 1 of Article 90]" of the special payment on account referred to in Article 106 as provided for in paragraph c) of No. 2 of Article 90 (2012 version, as given by Law No. 3-B/2012 of 28 April).

9. The reasoning demonstrated with respect to payments on account is clearly extensible to special payments on account. The SPA was created by the legislator, through Decree-Law No. 44/98 of 3 March (which added Article 83-A to the IRC Code) with the purpose of ensuring a minimum collection of tax, since the great majority of companies did not present taxable profit and/or this was in most cases insignificant. The SPA functions, thus, as a presumption of income and as a way to combat tax evasion, just as does autonomous taxation. On the other hand, the SPA also functions as an advance payment of IRC (see No. 1 of Article 106 of the IRC Code), just as do payments on account (see Article 105 of the IRC Code), although in terms of calculation they are different, since SPAs have as their basis of calculation the tax liquidated in accordance with No. 1 of Article 90 of the IRC Code, relating to the immediately preceding tax period (see No. 5 of Article 105 of the IRC Code).

10. The Constitutional Court, in Decision No. 494/2009, concluded that "…a reading of the legal regime of the SPA that is attentive to its genesis and evolution leads to the conclusion that it does not obey primarily the logic typical of a payment on account – that is, primarily, to ensure to the public treasury regular inflows of funds and, secondarily, to protect the Tax Authority against variations in fortune of the debtor and to produce a certain 'anesthesia' of tax – rather being indissociably linked to the fight against tax evasion and fraud. For a long time there had been suspicions, from the Tax Authority in particular, regarding the income declared by taxpayers of IRC; in particular, it was questioned to what extent they corresponded to the taxable income actually earned. This was evidenced by Law No. 52-C/96 of 27 December (State Budget Law for 1997), in its Article 32 (Common Provisions), which contained the legislative authorization to the Government to "define a minimum taxation" and which would mark the introduction into our tax system of the SPA figure. In the said provision, the tax instrument that was then established was presented as "a new type of payment on account" which aimed to achieve "greater tax justice and greater efficiency of the system," admitting to resorting, "when appropriate, to circumstantial methods." It should be said that national doctrine is unanimous in affirming the nature of an instrument to combat tax evasion attributed to the SPA."

11. As we have already made clear in process 639/2015-T, by way of conclusion, we have that the legal nature of the SPA, is relevant for its configuration as "an instrument or guarantee of payment of the tax on account of which it is required, and not as an imposition in itself" (see Decision of the Constitutional Court cited above), as well as for the function associated with it in the fight against tax evasion and fraud, indissociably links this payment to the amount of IRC assessed on the taxable matter determined on the basis of profit (Chapter III of the IRC Code).

12. Being, therefore, manifestly devoid of any basis the pretension of the now Claimant to deduct the amount borne in the SPA sphere from the collection produced by autonomous taxation.

13. Having reached this point, and since it is of interest for proper resolution of the case, we proceed to cite the arbitral decision relating to process No. 113/2015-T, which specifically addressed the matter sub judice – deduction of SPA from the collection produced by Autonomous Taxation – in which the claim of the Claimant therein was judged unfounded, and in which the question to be decided is treated with clarity.

In that decision it was understood that:

"The fundamental question to which it falls to respond in this decision is whether the amounts satisfied as special payment on account can be deducted from the tax on the income of legal persons resulting from the application of autonomous taxation rates.

In comparing the abundant jurisprudence referenced by the Claimant, there is indeed a line to be emphasized and which coincides with what this arbitral tribunal follows: the tax calculated by application of the autonomous taxation rates regulated in Article 88 of the IRC Code is also tax on the income of legal persons, i.e., the tax on the income of legal persons includes autonomous taxation. If there were any doubts the current wording of Article 23-A of the IRC Code would dispel them.

(...)

The solution of the case sub judice requires that one delve a little deeper and ascertain what is the regime applicable to IRC calculated through autonomous taxation rates. The tax on income of legal persons was born imposing objectively on taxable profit, corresponding to this to the difference between net assets at the end and at the beginning of the tax period.

(...)

Thus in the original conceptual structure of IRC the assessment of taxable profit takes as its starting point the result of the year obtained through the technical rules of accounting, introducing into it some corrections of positive or negative sense, so that this final result corresponded to taxable profit, i.e. to the real income intended to be taxed (...). Clearly one did not and could not regulate the treatment to be given to 'autonomous taxation' which did not form part of the system, which was conceived in this simple structure: taking the accounting result as a starting point (Article 17, No. 1 of the 1989 IRC Code), correcting it so as to reflect the income intended to be taxed through rules qualitatively similar to those in force in the official accounting plan then in force (Article 18 et seq. of the 1989 IRC Code), applying to it the general rate (Article 69, No. 1 of the 1989 IRC Code) and to the product thus obtained making the deductions from taxation that had somehow already been borne or would have to be borne through another tax system (Article 71, No. 2 of the 1989 IRC Code) (...).

(...)

One must now see how 'autonomous taxation' was inserted into this system.

The introduction into the complex of taxes on income of the application of autonomous taxation rates was done through Decree-Law No. 192/90 of 9 June, which stipulated that undocumented or confidential expenses would henceforth be taxed autonomously in personal income tax and IRC.

(...)

All elements indicate that the introduction of the method of taxing expenses in IRC was initially an extraordinary measure, outside the conceptual structure of IRC, created to honor the principle of taxation on real, equilibrated income through the corrections codified. The said autonomy of this rate thus appears with great intensity; although it is undeniably considered that its product is tax on the income of legal persons, it is no longer income that is taxed directly (as IRC regulated) but rather expenses.

In these cases of dissonance there will be such conflicts which it is important to resolve.

These conflicts result from and are resolved through normative interpretation. Fundamentally, one will have to resolve the apparent conflict when the legislative thinking underlying the rule of the general regime of the tax on the one hand and the rule governing autonomous taxation on the other hand is not reconcilable, i.e. from its application one will achieve a purpose not pursued by the rule in question.

This conflict in the purposes to be achieved by each of these rules is evident at the moment when the so-called 'autonomous taxation' was introduced into the Portuguese tax system.

(...)

It seems clear in light of these commands that in the period 1990-2000 it was not conceivable to use potential tax credits to satisfy the tax obligation assessed under this heading, under penalty of perverting the intent of the law.

In its general line of orientation the post-reform IRC maintained the principles that are in its genesis: depart from the accounting result and correct it in accordance with the rules established, now perfected by the experience of 12 years, to achieve taxable profit.

As is being ascertained the IRC resulting from the reform came to contain in its Article 69-A, with the heading 'Autonomous taxation rate,' where it was regulated that undocumented or confidential expenses (No. 1) and representation expenses and charges relating to light passenger vehicles, pleasure boats, tourist aircraft, motorcycles and mopeds (No. 2) would henceforth be taxed autonomously."

(...)

One does not see that the reform of the IRC carried out in 2000-2001 introduced any significant change to the code. One merely introduced the mechanism to combat expenses considered undesirable that already appeared in extraordinary legislation, slightly expanded the spectrum of application but did not adapt in any way the liquidation procedure. It is therefore believed that the characterization of the regime that previously prevailed was maintained, continuing to have to effect the interpretation of the rules so as to prevent effects contrary to the ratio legis.

The successive amendments to this article did not affect in any way the (dis)balance of the system, which remained until the date of the facts.

For its part, in the Decision of the Constitutional Court No. 617/2012 with regard to 'autonomous taxation,' it was considered:

More than affirming the ratio of the imposition of autonomous taxation rates, the reasoning of the cited decision expresses well the manner in which its calculation is understood, by comparison with the liquidation of tax on income according to the general rate:

Contrary to what happens in the taxation of income in the sphere of personal income tax and IRC, in which the set of income earned in a given year is taxed (which implies that only at the end of it can the tax rate be determined, as well as the bracket in which the taxpayer fits), in this case each expense made is taxed, in itself considered, and subject to a determined rate, autonomous taxation being assessed independently of the IRC that is due in each year, by not being directly related to obtaining a positive result, and therefore capable of taxation.

The mentioned decision still expresses clearly the manner in which the taxable fact occurs instantaneously and the absence of periodic, lasting or successive character in its formation.

For this reason it thus characterizes the liquidation operation:

This liquidation operation translates itself only into the aggregation, for purposes of collection, of the set of operations subject to that autonomous taxation, the rate of which is applied to each expense, there being no influence of the volume of expenses made in the determination of the rate (emphasis ours).

It is believed that with the historical analysis, systematic framing and doctrinal and jurisprudential positions, the ratio legis of the rules that impose autonomously taxed tax and its perfect distinction from the objectives that animate the general structure of IRC has already been demonstrated. Thus the line is traced in which the conflict begins; as soon as the interpretation of the rule in question leads to a result that departs from the objectives that presided over its inclusion in the tax system. One has already seen what one and the other were.

It is recognized by all the actors who must work with tax law in general and IRC in particular, the lesser coherence of the coexistence of 'autonomous taxation' with the general regime of tax on income. The Claimant gives abundant notice of this very matter. But having recognized that this difficulty will always have to apply the law, ascertaining its meaning through interpretation."

1. And, in particular, with respect to the SPA:

"In doctrine and in jurisprudence the regime of the SPA has always been regarded as a system to prevent tax evasion and to ensure the payment of tax by all companies in activity. This line of orientation is found in the texts most conducive to the application of the regime in the courts, namely through the doctrinal work developed by the Constitutional Court. In this sense one can see in the reasoning of its Decision No. 494/2009, that the SPA in the form given to it in the IRC Code, is 'indissociably linked to the fight against tax evasion and fraud,' seeking to ensure that the income disclosed by taxpayers 'correspond[ed] to the taxable income actually earned.'

In doctrine (...) [Teresa Gil] gave substantiated account of the circumstances that surrounded the introduction of the SPA, namely the difficulties in applying the principle of taxation by real profit, noted in light of the 'divergence that exists between the profits actually obtained and those declared by companies and, therefore, subject to taxation.' Although this author considers that the SPA is an insufficient measure to solve the problem of tax evasion of this kind, preferring the establishment of minimum collection, she mentions that the SPA was ultimately the possible regime given the constitutional limits.

The current regime of the SPA is thus characterized by (i) having an indissoluble link to the fight against tax evasion and fraud; (ii) it was introduced into the IRC Code in March 1998, before the autonomous taxation rates which only came to form part of its systematics in the 2000-2001 reform; (iii) in the conception of the SPA provision was made for its deduction from the collection in the liquidation of IRC calculated on real income; (iv) the recovery of the credit resulting from the SPA is subordinated to conditions of obtaining profitability ratios specific to companies in the sector of activity in which they are inserted or to justification of the credit situation by action of inspection done at the request of the taxpayer (Article 87, No. 3 of the IRC Code). In summary, the credit for the amounts delivered as special payment on account does not constitute a claim that taxpayers of IRC can dispose of. For them to be able to do so, certain conditions must be met."

1. Finalizing:

"It now falls to finally assess the foundational argument which is that which results from the letter of the rule of Article 83, No. 2, paragraph e) of the IRC Code [wording given by Law No. 60-A/2005 of 31 December and Article 90, paragraph c) of the IRC Code, in the wording given by Law No. 3-B/2010 of 28 April] which allows that to the amount of tax on the income of legal persons assessed the deduction relating to the special payment on account made can be made.

A conflict indeed results between the regime that governs autonomous taxation and the deduction from the respective collection of the SPA. See the ratio of the rules in question. The method of assessment of tax contained in the IRC Code is based on the principle of incidence on taxable profit; autonomous taxation is imposed on expenses individually considered, the rate of which is applicable to each expense, it being that 'this liquidation operation translates itself only into the aggregation, for purposes of collection, of the set of operations subject to that autonomous taxation.'

It is unequivocal that the liquidation system is not adequate to the assessment of autonomous taxation. But will deducting the SPA from the said 'aggregation of the set of operations subject to autonomous taxation' lead to a result irreconcilable with the system in question?

This line falls to be investigated.

As was seen the SPA came to form part of the system of IRC whose liquidation enshrined in the then Article 83 was conceived to assess the tax directly imposed on the declared income. When there is a tax loss the taxpayer must still bear the SPA; this was moreover the reason for its introduction. If a given company has successive tax losses, it will systematically bear tax, since the system doubts its ability to function in a permanently deficit situation, requiring it to satisfy provisionally (on account) a determined value. It can reimburse it if it proves that this situation is common in its sector of activity or if the Tax Authority verifies the regularity of its declarations. This was the balance that the IRC required to maintain a system based on declarations made by taxpayers."

1. For its part:

(...) the tax resulting from autonomous taxation is based solely on the pursuit of tax evasion through transfer of income and has a dissuasive and compensatory effect.

There is indeed an irreconcilable conflict between the ratio of the SPA – the fight against evasion or pressure for correction of declarations – and the attribution of its credits to the satisfaction of other obligations that are not those resulting from the assessment of IRC calculated on the taxable result.

In practical terms, the possibility of deducting the SPA from autonomous taxation would imply that even if a given company was eternally in a loss situation, no tax on its real income would have to be borne, as long as it applied the SPA to the satisfaction of autonomous taxation. Moreover, the autonomous taxation itself would lose its anti-abuse character, coming to confuse itself ultimately with the tax calculated on taxable profit. But these are not the objectives of the system of taxation of income of legal persons and the best interpretation of the rule contained in Article 83, No. 2 of the IRC Code is decidedly not that which allows deducting special payments on account from the collection resulting from the application of autonomous taxation rates."

1. In light of all the foregoing, that Tribunal decided to the effect that:

"(...) the pretension of the Claimant must necessarily fail as the liquidation challenged complies with legality, as it rests on a correct interpretation of the rule cited."

1. Thus, considering the foregoing in the preceding points, the claim of the Claimant that the rejection of the request for official review of the self-assessment of IRC for the year 2009 and, consequently, the self-assessment act of IRC relating to the tax year 2009, from which resulted IRC liquidated at €141,022.72, issued by the Tax and Customs Authority, suffers from error regarding the factual and legal premises and furthermore, from a defect of violation of law, in the sense of the failure to deduct from the portion of the IRC collection produced by autonomous taxation rates the special payment on account made in the IRC sphere, is unfounded.

2. It is, therefore, moot the assessment of the controversy relating to the illegality of the self-assessment due to the absence of a rule that permits the liquidation of autonomous taxation, contained in the subsidiary claim.

3. Let it be clear that this conclusion is in line with the overwhelming majority of the Jurisprudence known to the CAAD (see, for example, 638/2015-T; 670/2015-T; 736/2015-T; 746/2015-T; 750/2015-T and 781/2015-T) and which includes the decisions in Tribunals presided over by the same arbitrator presiding over this one (see, for example, decisions rendered in processes Nos. 79/2014-T; 95/2014-T; 535/2015-T and 785/2015-T).

VI – DECISION

Accordingly, in this Arbitral Tribunal it is decided:

a) To judge unfounded the claim for declaration of illegality and annulment of the act of rejection of the official review mentioned and which refused the annulment of the part considered illegal, of self-assessment acts of IRC identified in the proceedings relating to the year 2009 and produced by autonomous taxation rates;

b) To judge unfounded the claim for declaration of illegality of such self-assessment acts in the parts corresponding to the amount of €141,022.72;

c) To judge unfounded the claim for recognition of the right of the Claimant to the refund of such amounts and, consequently, moot the right to the compensatory interest claimed;

d) To condemn the Claimant to the payment of the costs of this process.

The value of the process is fixed at €141,022.72, in accordance with Article 97-A, No. 1, a) of the Tax Code of Procedure and Process, applicable by virtue of paragraphs a) and b) of No. 1 of Article 29 of the RJAT and No. 2 of Article 3 of the Regulation of Costs in Tax Arbitration Proceedings.

The amount of costs is fixed at €3,060.00, in accordance with Table I of the Regulation of Costs of Tax Arbitration Proceedings, to be paid by the Tax and Customs Authority, since the claim was entirely unfounded, in accordance with Articles 12, No. 2, and 22, No. 4, both of the RJAT, and Article 4, No. 4 of the cited Regulation, entirely at the charge of the Claimant.

Notify.

Lisbon, 25 October 2016.

The Collective Arbitral Tribunal

José Poças Falcão
(Arbitrator President)

Jorge Carita
(Adjunct Arbitrator)

Rui Manuel Correia de Pinho
(Adjunct Arbitrator)