IRC Self-Assessment Under Article 32 EBF: Circular 7/2004 Legality and Burden of Proof in CAAD Case 199/2016-T

ARBITRAL DECISION

The Arbitrators José Pedro Carvalho (Presiding Arbitrator), Rui Ferreira Rodrigues and Luísa Anacoreta, appointed by the Deontological Council of the Centre for Administrative Arbitration to form an Arbitral Tribunal, hereby agree:

I – REPORT

On 30 March 2016, A…, SGPS, LDA., legal entity no.…, with registered office at…, no.… …, …, … … Lisbon, filed a request for constitution of an arbitral tribunal, pursuant to the combined provisions of articles 2 and 10 of Decree-Law no. 10/2011, of 20 January, which approved the Legal Regime for Arbitration in Tax Matters, as amended by article 228 of Law no. 66-B/2012, of 31 December (hereinafter, abbreviated as RJAT), seeking the declaration of illegality of the decision of the Official Review Procedure no. …/15, relating to the self-assessment act of Corporate Income Tax (IRC) contained in Form 22 of IRC identified with the code … …-…, for the tax year 2010, and of the IRC assessment act no. 2016…, in the amount of € 184,968.90.

To substantiate its request, the Applicant alleges, in summary, that:

i. The self-assessment of IRC for 2010 applied, with respect to financial charges, the provisions of Circular no. 7/2004, of 30 March, which embodies the interpretation by the Tax Administration (AT) of the provisions of article 32, no. 2 of the EBF;

ii. When determining the taxable profit of IRC for the tax year 2010, it limited itself to applying to the financial charges (interest) borne by it the formula contained in the aforementioned Circular 7/2004, of 30 March;

iii. The AT has already annulled part of the 2010 assessment, in the amount of €139,242.78 indicated in box 07 of Form 22, relating to the shareholding acquired by it in B…, LDA, through contribution in kind;

iv. As for the amount of € 184,968.90 (corresponding to the difference between the initial assessment amount of € 324,211.68 - € 139,242.78 amount annulled by the AT), the AT could only, within its competencies, develop a method that respected the direct and actual allocation, because only that would be compatible with the principle of legality constitutionally enshrined;

v. It being demonstrated that the formula created by Circular no. 7/2004 constitutes a method of attribution created exclusively by the so-called administrative law (and not merely an administrative interpretation of article 32 of the EBF), it violates the principle of legality, provided in articles 103, nos. 2 and 3, 112, nos. 5 and 6 and 165, no. 1, letter i) of the Constitution of the Portuguese Republic (CRP) and article 8, no. 2 of the General Tax Law (LGT);

vi. The administrative criterion in question is susceptible to causing significant distortions to the constitutional principle of taxation according to actual profit "the formula instituted by the circular also violated the principle of taxation according to actual profit and, consequently, the provision of article 104, no. 2, of the CRP";

vii. Given the illegality (and unconstitutionality) of the indirect method of determining non-deductible financial charges adopted by the AT in no. 7 of circular no. 7/2004 "it should also be concluded that any increase carried out in accordance with the indirect criterion provided for in that circular violates the provision of no. 2 of article 32 of the EBF, the assessment acts incorporating such increase being illegal".

On 31-03-2016, the request for constitution of the arbitral tribunal was accepted and automatically notified to the AT.

The Applicant did not appoint an arbitrator, so, pursuant to the provisions of letter a) of no. 2 of article 6 and letter a) of no. 1 of article 11 of the RJAT, the President of the Deontological Council of the CAAD appointed the undersigned as arbitrators of the collective arbitral tribunal, who communicated acceptance of the appointment within the applicable time limit.

On 25-05-2016, the parties were notified of these appointments, and did not express any wish to recuse any of them.

In accordance with the provision of letter c) of no. 1 of article 11 of the RJAT, the collective Arbitral Tribunal was constituted on 13/06/2016.

On 05-09-2016, the Respondent, duly notified for this purpose, presented its defence raising exceptions and challenging the allegations.

Having regard to the general procedural principles of procedural economy and prohibition of useless acts, pursuant to the provisions of letters c) and e) of article 16, and no. 2 of article 29, both of the RJAT, the holding of the meeting referred to in article 18 of the RJAT was dispensed with.

A deadline having been granted for the presentation of written submissions, these were presented by the parties, pronouncing themselves on the evidence produced and reiterating and developing their respective legal positions.

A period of 30 days was fixed for the rendering of the final decision, after the AT's submissions.

The Arbitral Tribunal is materially competent and is regularly constituted, pursuant to articles 2, no. 1, letter a), 5 and 6, no. 1, of the RJAT.

The parties have legal personality and capacity, are legitimate and are legally represented, pursuant to articles 4 and 10 of the RJAT and article 1 of Order no. 112-A/2011, of 22 March.

The proceedings are not affected by nullities.

Thus, there is no obstacle to the consideration of the case.

Everything having been considered, it is necessary to render

II. DECISION

A. FACTUAL MATTERS

A.1. Facts Established as Proven

1. The Applicant, formerly named C…, SGPS, LDA., is a holding company managing shareholdings (SGPS).

2. At the end of the 2010 tax year, the Applicant held shareholdings in the following companies:

1. On 10 July 2003, the Applicant subscribed for a share in company B…, LDA., in the amount of € 6,910,553.30.

2. That shareholding was entirely contributed in kind, through transfer to it of the Applicant's own commercial establishment.

3. On 27 December 2006, the Applicant acquired two further shares in the same company:

i. one with a par value of € 188,931.46, for the price of € 551,000.00; and

ii. another with a par value of € 4,899.00, for the value of € 4,900.00.

1. On 23 January 2007, the Applicant acquired a shareholding in company D…, S.A., for the total value of € 3,500,000.00.

2. On 4 February 2009, the Applicant subscribed for a shareholding in company G…, S.A., for the value of € 6,250.00.

3. On 24 May 2010, the Applicant acquired a shareholding corresponding to 75% of the share capital of company E…, S.A. in the value of € 3,483,676.00.

4. On 30 July 2010, the Applicant acquired a shareholding in company F…, S.A., corresponding to 13.82% of its share capital, for the value of € 149,093.96.

5. In the 2010 tax year, the Applicant bore financial charges in the total amount of € 804,291.00, which includes the amount of € 721,454.00 in the form of interest;

6. The financial charges in question relate to the various financings obtained by the Applicant, namely from credit institutions.

7. Interest deriving from loans contracted with credit institutions, specifically with BANCO H…, S.A., BANCO I…, S.A., and BANCO J…, S.A., amounted to € 477,318.00.

8. On 17 December 2007, the Applicant (and other companies of the Business Group to which it belongs) entered into a current account credit facility agreement with BANCO H…, S.A. (grouped, whereby the companies could avail themselves of the funds made available up to the limit established in the contract), with a credit limit of € 7,500,000.00.

9. That contract was successively amended and supplemented, the credit limit being increased to € 10,000,000.00.

10. On 15 April 2009, the Applicant entered into a credit facility agreement with BANCO I…, S.A., in the amount of € 6,000,000.00;

11. In clause 2 of that contract it is stated that "the borrowed funds (…) are intended exclusively to be used by the BORROWER for treasury support".

12. On 29 June 2009, the Applicant entered into a credit facility agreement with BANCO J…, S.A. in the amount of € 6,000,000.00 stating that "this amount is intended to finance punctual treasury needs (…)".

13. On 24 May 2010, the Applicant entered into, together with other Group entities, an amendment to the current account credit facility agreement initially granted between company K…, SGPS, S.A. and BANCO L…, SA, becoming also a beneficiary of the amount initially borrowed, in the amount of € 4,000,000.00.

14. In that contract it was expressly indicated that the financing was intended to support the treasury of the borrowing entities.

15. The credit facility agreement with BANCO L…, SA, did not result, in the course of the year 2010, in the payment of any interest by the Applicant, since the Applicant did not use those funds in the 2010 tax year.

16. The remaining financings were obtained by the Applicant from its subsidiary B…, LDA., having resulted in the payment of interest in the 2010 tax year in the total amount of € 244,136.00.

17. The financings obtained from that subsidiary were intended for the general activity of the Applicant, having no specific use.

18. On 16 May 2011, the Applicant submitted the Form 22 income tax return with reference to the 2010 tax year, identified with the code …-… .

19. In that Form 22 IRC return, the Applicant declared a negative net result for the year in the amount of € 169,290.95.

20. To that same net result for the year contributed (as a negative component) the financing expenses borne by the Applicant in the 2010 tax year, in the total amount of € 804,291.00 (which includes the amount of € 721,454.00 in the form of interest).

21. When filling in Form 22 of IRC, the Applicant made the following adjustments (increases in Box 07): (i) an increase in the amount of €688.34, relating to IRC and other taxes that directly or indirectly affected profits, and (ii) an increase in the amount of €324,211.68, relating to financial charges which, at the time, the Applicant considered not to be deductible under the provisions of no. 2 of article 32 of the EBF.

22. To determine the value to be adjusted (increased) under that legal provision, the Applicant used the methodology provided for in Circular no. 7/2004, of 30 March, of the IRC Services Directorate (DSIRC).

23. After making all the adjustments in Box 07, the Applicant determined a taxable profit in the amount of € 155,609.07.

24. Since it had tax losses from previous years of greater value, the Applicant deducted the transferable tax losses up to their concurrence with the amount determined as taxable profit, thus determining a taxable base of € 0.00 (zero euros).

25. As a result of such operations, the Applicant did not determine any IRC collection in the 2010 tax year;

26. The Applicant also self-assessed in the same Form 22 IRC return, the amount of € 2,334.14 in the form of municipal surtax.

27. In the same return the Applicant determined a final amount to recover of € 2,933.83.

28. Following the submission of the aforementioned Form 22 IRC return, the Applicant was notified of the IRC statement no. 2011…, in which the Tax Administration corrected the municipal surtax amount self-assessed by the Applicant to € 1,167.07.

29. On 15 May 2015, the Applicant filed a request for official review against the self-assessment act of IRC above identified, arguing that it had been made on the basis of an error of fact and law, since the adjustment - increase to taxable profit - of the value of € 324,211.68, made in accordance with Circular no. 7/2004, of 30 March, should not, in the Applicant's view, have been made, and requested that the amount determined be corrected, becoming negative (tax loss) in the amount of € 168,602.61.

30. As a subsidiary argument, the Applicant further indicated that, even if the methodology provided for in the aforementioned Circular no. 7/2004, of 30 March, were applied, it would be necessary to exclude for purposes of that calculation the shareholding acquired in B…, LDA, through contribution in kind, since, with respect to this, it could in no way be said that it was acquired using external financing.

31. After reviewing the official review request submitted by the Applicant, the Tax Administration rendered a decision, accepting the annulment of the increase of the amount of €139,242.78, corresponding to the financial charges that the Applicant incorrectly attributed to the acquisition of part of the shareholding it held in company B…, LDA.

32. With regard to the remaining defects that the Applicant pointed out to the act in question, the AT argued that:

i. "the aforementioned Circular limited itself to interpreting the new legal rules introduced by nos. 1 and 5 of article 38 of Law no. 32-B/2002, of 30.12, in the then article 31, now article 32 of the EBF, it emerging from its analysis that it constitutes an effort of coherent and objective analysis of the legal norms underlying it";

ii. "In accordance with the above, no defects emanating from its instructions can be discerned in the drafting of the said Circular. For there is no legislative intention on the part of the DSIRC, particularly by the institution of any rules of incidence, determination of rate and assessment, the only ones susceptible to violation of the principle of fiscal legality provided for in no. 1 of article 8 of the LGT, as a result of nos. 2 and 3 of article 103 of the CRP, nor can be drawn from the instructions contained in that generic guidance any intentions susceptible of adulterating or violating the legal norms that are at its origin"; and

iii. "Regarding the alleged violation of the principle of taxation according to actual income by the non-consideration of financial charges, it is important to note that this does not result from the instructions contained in the Circular, but rather from the interpretation that must be given to the provision of article 32 of the EBF, as a result of the legal-normative framework that regulates the regime of fiscal neutrality applicable to SGPS".

1. With regard to the "material unconstitutionality of the norm contained in no. 2 of article 32 of the EBF, in the interpretation that authorizes the segregation of non-deductible financial charges in accordance with the formula contained in points 7 and 8 of Circular no. 7/2004 and without admission of proof to the contrary", the Tax Administration also concluded that it was not for it to "pronounce itself on the unconstitutionality or not of a given norm, since, pursuant to article 202 of the CRP "courts are the organs of sovereignty with competence to administer justice in the name of the people", and the Constitutional Court, pursuant to article 221 of the CRP, "is the Court to which it specifically falls to administer justice in matters of constitutional-legal nature" and, pursuant to article 223 of the CRP "it is the responsibility of the Constitutional Court to review unconstitutionality and illegality, pursuant to articles 227 onwards"".

2. On 15 February 2016, the Applicant was notified of the IRC assessment statement no. 2016 … which reflected the aforementioned decision of partial non-acceptance, in which an amount to recover of € 5,145.22 is indicated;

3. The notification of the aforementioned assessment statement expressly refers to the fact that the assessment made corresponds to the execution of the decision rendered in the official review procedure to which the internal number …2015… corresponds.

4. In that latter act, the Tax Administration determined municipal surtax in the amount of € 122.75.

5. The assessment act no. 2016… merely reflects the reduction of the increase that the Applicant made (in the initial amount of € 324,211.68) to € 184,968.90, this latter amount remaining as an increase for purposes of determining the taxable profit for the 2010 tax year.

A.2. Facts Established as Not Proven

With relevance for the decision, there are no facts that should be considered as not proven.

A.3. Justification of Proven and Unproven Factual Matters

Regarding factual matters, the Tribunal is not required to pronounce on everything that was alleged by the parties; rather, it has the duty to select the facts that matter for the decision and to discriminate the proven from the unproven matter (cf. article 123, no. 2, of the CPPT and article 607, no. 3 of the CPC, applicable by virtue of article 29, no. 1, letters a) and e), of the RJAT).

Thus, the facts relevant to the judgment of the case are chosen and delimited according to their legal relevance, which is established having regard to the various plausible solutions to the legal question(s) (cf. former article 511, no. 1, of the CPC, corresponding to current article 596, applicable by virtue of article 29, no. 1, letter e), of the RJAT).

Thus, having regard to the positions assumed by the parties, in light of article 110/7 of the CPPT, the documentary evidence and the administrative file attached to the case, the facts enumerated above were considered proven, with relevance for the decision.

B. ON THE LAW

i. On the Exception

a.

Prior to the discussion of the merits of the case, the AT raises the question of material incompetence of the arbitral tribunal arising from the fact that the request for arbitral pronouncement was made following the rejection of a request for official review of a self-assessment act.

The Respondent argues, then, that the request for arbitral pronouncement sub judice is made following the rejection of a request for official review of a self-assessment act of Corporate Income Tax (IRC) for the year 2010, in circumstances where the period for gracious reclamation referred to in article 131 of the CPPT had already elapsed, so that, having regard to the provisions of articles 2, no. 1, letter a) and 4, no. 1, both of the RJAT, and articles 1 and 2, letter a), both of Order no. 112-A/2011, of 22 March, the material incompetence of the present Arbitral Tribunal to appreciate and decide the request would be verified.

The AT bases its understanding essentially on the provision of article 2/a) of Order 112-A/2011, of 22 March, which excludes from the disputes cognizable by arbitral tribunals operating within the CAAD, "claims relating to the declaration of illegality of self-assessment acts, withholding at source and payment on account acts that have not been preceded by recourse to the administrative route as provided for in articles 131 to 133 of the Code of Procedure and Tax Procedure".

The Respondent understands, in light of this normative provision, that it should be understood in the literal manner in which it reads it, precluding from the scope of tax arbitration jurisdiction claims relating to the declaration of illegality of self-assessment acts that have not been preceded by reclamation as provided for in the aforementioned norms of the CPPT.

However, all of the Respondent's argument on the matter ultimately comes down to arguing that it was the legislative intention to restrict the competence of tax arbitration jurisdiction, with respect to the knowledge of illegalities of self-assessment acts, only to situations where there exists a reclamation presented in accordance with articles 131 to 133 of the CPPT, because that is what, in its reading, the text of the interpreted norm says.

With all due respect, no substantial reason can be discerned among the reasons offered by the Respondent that explains the reasonableness of the understanding it sustains. Indeed, no substantial reason can be discerned – and the Respondent presents nothing in that sense – for why, having regard to the conditionalities and specificities proper to each of the gracious means in question, in the same manner as the tax courts are bound, the legality of self-assessment acts subject to a request for official review, filed beyond the period for gracious reclamation, should not be cognizable in the arbitral forum.

On the other hand, even a literalist reading of the norm in question, provided it is properly contextualized, does not inexorably lead to the result defended by the Respondent in the proceedings.

Indeed, the expression employed by the norm of letter a) of article 2 of Order 112-A/2011, of 22 March is parallel to the very norm of article 131/1 of the CPPT, which should be understood as a concretization of the assumed, and peaceably recognized, legislative intention that the tax arbitral process constitute an alternative procedural means to the judicial impugnation process.

The norm in question should also be understood as being explained by the circumstance that, in its absence – and given the tenor of article 2 of the RJAT – it appears as possible the direct impugnation of self-assessment acts, without precedence of prior administrative pronouncement.

That is, having regard to the fact that in light of the RJAT it was not configured as necessary any prior administrative intervention to the arbitral impugnation of a self-assessment, the tenor of the Order should be interpreted as equating – in this matter – the tax arbitral process to the judicial impugnation process and not, as would result from the position sustained by the Respondent, turning it from 80 to 8, taking an impugnability broader than possible in the Tax Courts, and transmuting it into a more restricted one.

Thus, no reason can be seen – and, once again, the Respondent provides no support in that sense – for why a different interpretation should be given to each of these norms, all the more so since the letter of the norm of Order 112-A/2011, of 22 March, turns out to be less restrictive than that of the CPPT, in that it does not include the expression "mandatory", nor does it refer to "gracious reclamation" but to "administrative route". Hence it is possible to read the very letter of the law in a manner that confines itself to the sense that only the knowledge of claims relating to the declaration of illegality of self-assessment, withholding at source and payment on account acts that have not been preceded by recourse to the administrative route in terms compatible with articles 131 to 133 of the CPPT is removed from the scope of tax arbitration jurisdiction, and it is certain that all the jurisprudence of the Tax Courts has been to the effect that it is compatible with the aforementioned norms the impugnation of the self-assessment acts in question provided that they are preceded by a request for official review of the tax act.

And it is this reading that is subscribed to, following the Decision rendered in process 48/2012T of the CAAD, and subsequent arbitral jurisprudence, as well as the doctrine that has been formed[1], not discerning, to the extent that the interpretation made is contained in the letter of the law, that any violation of a constitutional provision could result therefrom, all the more so the indicated articles 2, 3, no. 2, 111 and 266, no. 2, all of the Constitution of the Portuguese Republic (CRP).

Thus, and in light of all the above, the Respondent's position not being correct in this matter, the exception of incompetence of the Arbitral Tribunal should be judged unfounded.

b.

The Respondent further alleges that it clearly results from the request that the Applicant intends, also, that the tribunal render a "corrective" decision on the IRC assessment no. 2016 … relating to the 2010 tax year, with the condemnation of the AT to recognize the full restoration of the tax losses improperly used (consumed) in the year 2010.

The Respondent considers that "even though such a claim could possibly result from the execution of judgments that might be made in the event the arbitral decision rendered were to be favorable to the request, which is only conceded on a purely hypothetical basis, such a request goes beyond the competence of the present Tribunal, since the competence of arbitral tribunals is, from the outset, circumscribed to the matters indicated in no. 1 of article 2 of the RJAT, combined with the provision of Order no. 112-A/2011, of 22 March, by virtue of article 4 of the RJAT.", and that "As results from the provision of article 24 of the RJAT, the definition of the acts in which the execution of arbitral judgments must be concretized is the responsibility, in the first instance, of the AT, with the possibility of recourse to the tax courts to request coercively the execution, in the context of the judgment execution process, provided for in article 146 of the CPPT and articles 173 onwards of the Code of Procedure in Administrative Courts".

Pronouncing itself, the Respondent notes that "it did not make several requests, but only one – that for the declaration of illegality of (i) the decision rendered in the official review proceedings, and, likewise, (ii) the self-assessment act of IRC relating to the 2010 tax year and (iii) the IRC assessment act no. 2016…, in the part in which they translate the increase to the net result for the year 2010 in the amount of € 184,968.90 (cf. request contained in the Arbitral Application submitted by the APPLICANT)", and that "it indicated that the Tribunal should declare the illegality of such acts, with the other legal consequences, namely the full restoration of the tax losses improperly used (consumed) in the 2010 tax year and the restitution to the APPLICANT of the amount improperly paid in the form of municipal surtax, plus indemnity interest as provided for in article 43 of the General Tax Law.", concluding that "the indication of the legal consequences or the effects of the decision does not translate the appreciation of a new request, nor, furthermore, goes beyond the material competence of the Arbitral Tribunal, so it should be judged unfounded the exception raised by the AT.".

It is considered that both the Respondent and the Applicant, are, in part, correct.

Indeed, the Applicant's request is only one, that of the illegality of the self-assessment act of IRC relating to the year 2010, and of the act of decision of the official review procedure, to the extent that it reflects it, in consonance with the competence of arbitral tribunals enshrined in article 2 of the RJAT.

The Applicant is also correct when it indicates that "the other legal consequences, namely the full restoration of the tax losses improperly used (consumed) in the 2010 tax year and the restitution to the APPLICANT of the amount improperly paid in the form of municipal surtax, plus indemnity interest as provided for in article 43 of the General Tax Law.", are mere consequences of the request formulated.

In that framework, the AT is correct when it refers to "the definition of the acts in which the execution of arbitral judgments must be concretized is the responsibility, in the first instance, of the AT, with the possibility of recourse to the tax courts to request coercively the execution, in the context of the judgment execution process, provided for in article 146 of the CPPT and articles 173 onwards of the Code of Procedure in Administrative Courts".

Thus, the request that the Tribunal specify the consequences of the annulment decision sought not translating an autonomous request, not being, therefore, the Tribunal bound to pronounce itself on such consequences, and being the responsibility of the AT to define the acts in which the execution of arbitral judgments must be concretized, there is no material incompetence under the terms argued.

ii. On the Merits of the Case

As referred to above, at issue in the present proceedings is the review of the legality of the decision of the Official Review Procedure no. …/15, relating to the self-assessment act of IRC contained in Form 22 of IRC identified with the code …-…, relating to the 2010 tax year, and of the IRC assessment act no. 2016…, in the amount of € 184,968.90, on the grounds, essentially, that:

• the attribution of the amount of € 184,968.90 to the shareholdings does not have any correspondence with the reality of the Applicant;

• the methodology contained in Circular 7/2004 is not compatible, either with the letter or with the purpose of no. 2 of article 32 of the EBF, and consequently, cannot serve to make the adjustment that was made.

Let us see, then.

Since at issue in the present arbitral action are three tax acts (self-assessment act of IRC contained in Form 22 of IRC identified with the code …-…, relating to the 2010 tax year, decision of the Official Review Procedure no. …/15, and IRC assessment act no. 2016…), it is well to first bear in mind the structure of the tax arbitral dispute, in order to determine the order of review of the tax acts whose legality must be reviewed.

As Carla Castelo Trindade states, "the first matter that must be clear: the object of the tax arbitral process is the act of (...) self-assessment."[2], and the second-degree acts, to which article 10/1 of the RJAT refers, will be merely relevant to the timeliness of the request for arbitral pronouncement.

Thus, it is necessary to review, from the outset and in the first instance the question of the (il)legality of the self-assessment act of IRC contained in Form 22 of IRC identified with the code …-…, relating to the 2010 tax year, of the Applicant.

Even before proceeding to the review of the merits of the case, it should also be borne in mind that, in the present tax arbitral action proceedings, the annulment, for illegality, of the aforementioned self-assessment act is not requested, but, more specifically, the partial annulment thereof, to the extent that it translates, after the decision of the official review procedure, the increase to the net result for the 2010 tax year in the amount of € 184,968.90, relating to charges with the acquisition of financial shareholdings, not deductible under no. 2 of article 32 of the EBF applicable.

To substantiate the aforementioned partial illegality of its own self-assessment act, the Applicant sustains, in essence, that "the self-assessment act relating to the 2010 tax year and the assessment act no. 2016…, are illegal, to the extent that they translate the increase to the net result for the year in the amount of € 184,968.90, because it corresponds to the application of a criterion not provided for in the law".

From the Applicant's point of view, the aforementioned judgment would be justified because:

• "both the literal element and the teleological element of the aforementioned legal provision indubitably point to the conclusion that the limitation provided for in no. 2 of article 32 of the EBF will only apply to charges that are directly related to the acquisition of shareholdings held for a period of not less than one year";

• "that the formula contained in Circular no. 7/2004, of 30 March, cannot be analyzed from any other point of view than that of future legislation, and from this perspective, it is easy to conclude that it has no legal support, contradicting, furthermore, the applicable method, which is that of actual allocation, as the Tax Administration itself recognizes in that Circular.";

• "Circular no. 7/2004, of 30 March, violates — to the extent that it embodies the illegitimate creation of a new fiscal incidence norm — the provision of articles 103, 112, no. 5 and 165, no. 1, letter i), of the CRP and, likewise, article 8 of the LGT.".

As results from the facts established as proven:

• When filling in Form 22 of IRC, the Applicant made the following adjustments (increases in Box 07): (i) an increase in the amount of € 688.34, relating to IRC and other taxes that directly or indirectly affected profits, and (ii) an increase in the amount of € 324,211.68, relating to financial charges which, at the time, the Applicant considered not to be deductible under the provisions of no. 2 of article 32 of the EBF.

• To determine the value to be adjusted (increased) under that legal provision, the Applicant used the methodology provided for in Circular no. 7/2004, of 30 March, of the IRC Services Directorate (DSIRC).

• After reviewing the official review request submitted by the Applicant, the Tax Administration rendered a decision, accepting the annulment of the increase of the amount of € 139,242.78, corresponding to the financial charges that the Applicant incorrectly attributed to the acquisition of part of the shareholding it held in company B…, LDA.

It is thus verified, from the outset, that the amount of € 184,968.90, increased to the net result for 2010, whose annulment the Applicant now seeks, is the remainder of the value indicated in the Applicant's own return as not deductible under the provisions of no. 2 of article 32 of the EBF.

First and foremost, it should be said that, with respect to the review of the (il)legality (partial) of the Applicant's self-assessment, the allegations relating to the illegality/unconstitutionality of Circular 7/2004 will constitute a matter that is deemed irrelevant, to the extent that the said circular does not, in any way, bind the Applicant, and if, as is proven, it followed its criteria, it did so within the scope of its free power of decision, and not by any obligation that resulted for it from that same Circular.

Hence, in the present case, and with respect to the self-assessment act, no illegality or unconstitutionality from which the aforementioned Circular might suffer is relevant.

Furthermore, the Applicant further alleges that the determination of the relevant value of non-deductible financial charges for purposes of the EBF norm in question should be made directly, having been established as proven that the financings obtained from the banking institutions had, as their contractual purpose, the application to treasury needs, and that the financings obtained from its subsidiary were intended for the general activity of the Applicant, having no specific use.

The Applicant concludes, in this regard, that it was not, nor is it, possible for it to establish any direct allocation of the financial charges borne in 2010 to the aforementioned shareholdings, so that no adjustment (increase) could be made in light of the provisions of no. 2 of article 32 of the EBF, under penalty of the act incorporating the same adjustment suffering from the defect of violation of law.

With all due respect, the logic underlying the Applicant's position cannot be subscribed to, which, generalized, would lead to whenever a taxpayer, culpably or not, found it subjectively difficult, or even impossible, to declare a value that he was obligated to declare, he could exempt himself from doing so, alleging such difficulty or impossibility.

In the case, the article in question – 32/2 of the EBF – imposes, among other things, that "the financial charges borne with the (...) acquisition [of shareholdings held for a period of not less than one year] do not concur to the formation of taxable profit" of SGPS, SCR and ICR.

In turn article 120 of the CIRC applicable, imposes on IRC taxpayers that they present their periodic income return, as provided by law, that return being, as a rule, the basis of the tax assessment, as provided in article 90/1/a) of the same CIRC, and it is certain that the return form made available contains its own field to set forth the value referred to in the aforementioned provision of article 32/2 of the EBF, namely Box 07, which, moreover, and in the case, was filled in by the Applicant.

Hence it is indubitable that IRC taxpayers to whom the provision of the article in question of the EBF is applicable have the obligation to set forth in their respective periodic IRC return the value of the financial charges borne with the acquisition of shareholdings held for a period of not less than one year, and cannot seek to exempt themselves from such obligation, as seems to be the case with the Applicant, by alleging that it is not possible for them to establish any direct allocation of the financial charges borne to the shareholdings held.

Indeed, not only does the principle of legality not require that an expense be accepted due to the difficulty or impossibility of subjective demonstration of the requirements on which the law makes its deductibility depend (in the case, that they were not borne with the acquisition of shareholdings held for a period of not less than one year), but, in concrete terms, such difficulty will – exclusively and in the first instance – always be objectively attributable to the taxpayer who, being the one who incurs the expenses with financial charges and who gives them their purpose, is the one who can best demonstrate whether, and which of such expenses had as their purpose the acquisition of capital shares held for a period of not less than one year.

Thus, regardless of the greater or lesser difficulty – or even the impossibility – of subjectively determining the relevant value for purposes of article 32/2 of the EBF, taxpayers covered by its provision will be obligated to set forth in their respective tax return a value for that purpose – even if it is zero, or a value indirectly determined – and cannot exempt themselves from such obligation on the pretext that it is difficult, or impossible, to concretize such value.

The value declared will enjoy, provided that the respective requirements are met, the presumption of truthfulness enshrined in article 75/1 of the LGT, so that, having declared the value that, in the taxpayer's judgment, is the appropriate one, it will be incumbent upon the AT, if it disagree with it, to produce proof that such value is not the correct one, either by demonstrating a direct allocation of the financial charges borne to the acquisition of the shareholdings, or by using an indirect criterion – if it considers that this is permitted by the norm of article 32/2 of the EBF in question[3] - or by resorting to the methods of indirect taxation, under the general terms of the LGT, also provided that the respective requirements are met, which includes the "Impossibility of direct and exact proof and quantification of the elements indispensable to the correct determination of the taxable base for any tax" (article 87/1/b) of the LGT).

The taxpayer, verifying an error in its return, may correct it in a replacement return, provided that this is presented in accordance with legal terms, or else, petition – first graciously and then, if necessary, contentiously – its annulment.

In this case, however, being at issue a claim by the taxpayer, the burden of proof lies with it that the self-assessment in question is (partially) illegal, under article 74/1 of the LGT.

Indeed, as was written in the Decision of the STA of 27-06-2012, rendered in process 0982/11[4], "being at issue a self-assessment, it is the taxpayer who comes to disagree with its own declaration, impugning its truthfulness and even its authenticity" and it falls "to the appellant to demonstrate the fact alleged by it", in concretization of the principle, summarized, that "In the judicial impugnation process, the burden of proof of the facts constituting the rights of the tax administration or of the taxpayers falls upon whoever invokes them.".

Thus, and being at issue the value to be considered for purposes of article 32/2 of the EBF, it is considered that the burden of proof incumbent upon the taxpayer consists of demonstrating what the correct value is for purposes of the aforementioned norm, and not, merely, that it is not possible for it to indicate a value.

In the case, the Applicant, petitioning the annulment of the increase to the net result for the year in the amount of € 184,968.90, which results from the value declared by it for purposes of the second part of article 32/2 of the EBF applicable, seeks that the value to be considered for such purposes be zero.

However, no proof is made to that effect, the Applicant not even alleging that it did not bear financial charges with the acquisition of shareholdings relevant for purposes of that norm.

Indeed, what the Applicant says is that it cannot determine a value for that purpose. Now, being as such, since the Applicant confessedly recognizes it, there is generated a situation either of insufficiency of proof or, at least, of well-founded doubt, which must be resolved against the party burdened with the burden of proof.

That is, and in sum: having declared, in accordance with the law, a value by the taxpayer, the assessment shall be made on the basis of the declaration made, as required by article 90/1/a) of the CIRC, in the applicable version. Such assessment can only be annulled, for error of fact or law, provided that the party seeking such annulment, whether it be the AT or the taxpayer, fulfills the burden of proof incumbent upon it, demonstrating such error, which, in the case, involves the actual demonstration (beyond any reasonable doubt) of the tax amount to be assessed, and not – as occurs in the case with the Applicant – with the demonstration of a difficulty or even impossibility in indicating the correct value.

Thus, neither the subjective motivation for the indication of a declared value nor the calculation method used to arrive at it will be relevant. In order to obtain the annulment of a declared value, in terms that involve its substitution by another, even if it is zero, it becomes necessary to demonstrate that the new value to be considered is the correct one.

Now, in the case, the Applicant does not do this; it does not demonstrate, nor even alleges, that the new value to be considered for purposes of the tax assessment (zero), in the matter that is relevant in the case (charges relevant to the second part of article 32/2 of the EBF), which would justify the partial annulment of its self-assessment, is the correct one.

Indeed, the Applicant appears to be aware of what has been set forth above, in that in the last article of its initial Petition, it concludes that "no adjustment was due under the provisions of no. 2 of article 32 of the EBF". This was, in fact, what it was incumbent upon it to demonstrate, in order to obtain the requested partial annulment of its self-assessment. However, as was stated, such demonstration was not made, since, for all that has been said, one cannot equate the demonstration that it is not possible for the Applicant to determine a concrete value for the purposes referred to with the demonstration that such value is, in the case, zero, or, even, a value lower than the one considered in its self-assessment, corrected by the act of decision of the request for official review.

Thus, not being demonstrated in the proceedings, given the factual matter established as proven, that the Applicant did not bear financial charges with the shareholdings it held for more than one year, or that the amounts actually borne were lower than the value whose annulment is sought (€ 184,968.90), its self-assessment cannot be annulled in the terms sought.

The Applicant also petitions the annulment of the decision of the Official Review Procedure no. …/15, which had as its object its self-assessment of IRC for the year 2010, whose legality has just been reviewed.

With respect to this part of the claim, it is necessary to note, first and foremost, with Carla Castelo Trindade[5], "that acts of second or third degree may always be subject to arbitration, to the extent that they embody, and only to that extent, themselves, the (il)legality of the assessment acts in question.".

Continuing with the same Author[6], "not subject to arbitration are the defects proper to acts of rejection (...) of requests to review the tax act because they escape the material scope of tax arbitration".

Indeed, article 2 of the RJAT takes as the referent of the competence of arbitral tribunals, primary acts ("acts of assessment of taxes, self-assessment, withholding at source and payment on account"), and secondary acts are only relevant as referents of the timeliness of the impugning claim, as results from article 10/1/a) of that Regime, which requires that requests for constitution of an arbitral tribunal be presented within 90 days, counted from the facts provided for in nos. 1 and 2 of article 102 of the Code of Procedure and Tax Procedure.

Hence, in the first instance and as has already been seen, we are reviewing the legality of the Applicant's IRC self-assessment act (direct object of the competence of arbitral tribunals), the legality of the secondary act of decision of the official review request – whose main procedural function is to guarantee the timeliness of the Applicant for the arbitral impugnation of the primary act – being merely reflexive or derivative of the legality of the latter.

Following from what has been seen, no illegality was found in the self-assessment act that constitutes the object both of the present arbitral action and of the official review request whose decision the Applicant contests.

Thus, there being no defect in the first-degree act (self-assessment) that is reflected in the second-degree act (decision of the official review request), the latter should be maintained.

Moreover, in this context, the possible annulment of the act of decision of the official review request when – as is the case – there is a conclusion that the illegalities alleged to the primary act have not been verified, would always result in a useless act, and as such prohibited, since, bound by res judicata, the Tax Authority would not do anything more in the new act than, necessarily, confirm what was decided in the arbitral proceedings.

Hence the act of decision of the Official Review Procedure no. …/15, which had as its object the Applicant's IRC self-assessment for the year 2010, should also be maintained.

Finally, the Applicant petitions the annulment of the IRC assessment act no. 2016/...

With respect to this act, the Applicant itself recognizes that "the assessment act no. 2016…, merely reflects the reduction of the increase that the APPLICANT made (in the initial amount of € 324,211.68) to € 184,968.90, remaining this latter amount as an increase for purposes of determining the taxable profit for the 2010 tax year".

That is, such act is merely a reproduction of the IRC self-assessment act contained in Form 22 of IRC identified with the code …-…, relating to the 2010 tax year, of the Applicant, in the part in which the request for review of the tax act filed by the Applicant was not favorable, relating to that self-assessment.

Now, as those two acts, of which the assessment act in question is a consequence, remain in the legal order, necessarily must this one remain.

Moreover, and in any case, the aforementioned act, in the framework that is found, is in conformity with the provision of article 90/1/a) of the CIRC, according to which:

"1 — The assessment of IRC proceeds in the following manner:

a) When the assessment is to be made by the taxpayer in the returns referred to in articles 120 and 122, it is based on the taxable base contained therein.".

Indeed, in the part in which it does not translate the favorable nature of the partial official review request duly filed by the Applicant, the assessment in question reflects the tax return of the applicant, being based on the taxable base contained therein, as is legally imposed upon it.

Thus, the IRC assessment act no. 2016… should also be maintained in the legal order.

C. DECISION

On these grounds, this Arbitral Tribunal decides to judge the arbitral request filed as unfounded and, in consequence:

a) Maintain in the legal order the tax acts subject to the present tax arbitral action;

b) Condemn the Applicant to pay the costs of the proceedings, as fixed below, taking into account what has already been paid.

D. Value of the Proceedings

The value of the proceedings is fixed at € 184,968.90, pursuant to article 97-A, no. 1, a), of the Code of Procedure and Tax Procedure, applicable by virtue of letters 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.

E. Costs

The amount of the arbitration fee is fixed at € 3,672.00, pursuant to Table I of the Regulation of Costs in Tax Arbitration Proceedings, to be paid by the Applicant, since the request was completely unfounded, pursuant to articles 12, no. 2, and 22, no. 4, both of the RJAT, and article 4, no. 4, of the aforementioned Regulation.

Let notification be made.

Lisbon

9 December 2016

The Presiding Arbitrator

(José Pedro Carvalho - Rapporteur)

The Member Arbitrator

(Rui Ferreira Rodrigues)

The Member Arbitrator

(Luísa Anacoreta)

[1] Cf., in this sense, Carla Castelo Trindade, "Legal Regime for Tax Arbitration - Annotated", Almeida, 2016, pp. 96 et seq.

[2] "Legal Regime for Tax Arbitration - Annotated", Almeida, 2016, pp. 69.

[3] And, in that case, subjecting itself to a possible judicial annulment, as has occurred in various arbitral jurisprudence, subscribed to, including, by the signatories of the present decision, and of the Tax Courts (cf. Decision of the Court of Appeal in Porto, of 15-01-2015, rendered in process 00946/09.0BEPRT, available at www.dgsi.pt).

[4] Available at www.dgsi.pt.

[5] "Legal Regime for Tax Arbitration - Annotated", Almeida, 2016, pp. 69.

[6] Ibid., p. 70.