Summary
Full Decision
ARBITRAL DECISION (consult full version in PDF)
The arbitrators Cons. Jorge Lopes de Sousa (arbitrator-president, appointed by the Deontological Council of CAAD), Prof. Doctor Tomás Cantista Tavares and Dr. Nuno Maldonado Sousa (arbitrator members, appointed by the Claimant and the Defendant, respectively, to form the Arbitral Tribunal, constituted on 03-12-2018), agree as follows:
1. Report
A..., SGPS, S.A., a legal entity and tax taxpayer no. ..., with registered office at Rua..., ..., ..., ...-... Lisbon, (hereinafter referred to as the "Claimant") came, pursuant to Decree-Law no. 10/2011, of 20 January (hereinafter "RJAT"), to request the constitution of an Arbitral Tribunal.
The Claimant requests that the decision rejecting the administrative complaint be annulled and, as well, the IRC assessment act no. 2017..., the compensatory interest assessment act no. 2017..., which resulted in a total amount payable by reference to the fiscal year 2012, of € 418,005.93.
The Defendant is the TAX AND CUSTOMS AUTHORITY.
The request for constitution of the arbitral tribunal was accepted by the President of CAAD and automatically notified to the Tax and Customs Authority on 03-01-2019.
The signatories communicated acceptance of the burden of exercising the function of arbitrator within the applicable period.
On 12-03-2019, the parties were duly notified of this appointment and did not manifest their intention to refuse the appointment of the arbitrators, in accordance with the combined provisions of article 11, no. 1, paragraphs a) and b) of the RJAT and articles 6 and 7 of the Deontological Code.
Thus, in accordance with the provision in paragraph c) of no. 1 of article 11 of the RJAT, in the wording introduced by article 228 of Law no. 66-B/2012, of 31 December, the collective arbitral tribunal was constituted on 01-04-2019.
The Tax and Customs Authority responded defending the inadmissibility of the request for arbitral pronouncement.
By order of 07-05-2019, the meeting provided for in article 18 of the RJAT was dispensed with and it was decided that the proceedings should continue with simultaneous written submissions.
Only the Claimant presented submissions.
The arbitral tribunal was regularly constituted, according to the provisions of articles 2, no. 1, paragraph a), and 10, no. 1, of Decree-Law no. 10/2011, of 20 January, and is competent.
The Parties are duly represented, enjoy legal personality and capacity, are legitimate and are represented (articles 4 and 10, no. 2, of the same decree and article 1 of Ordinance no. 112-A/2011, of 22 March).
The proceedings contain no defects.
2. Factual Matter
2.1. Proven Facts
The following facts are considered proven:
A) The Tax and Customs Authority carried out, in 2015, an inspection action on the Claimant under Service Order no. OI2015... and directed to SGPS, intended to confirm the tax treatment of capital gains and losses obtained with capital shares (cf. Document no. 5 attached with the request for arbitral pronouncement, whose content is reproduced);
B) As a result of the inspection, corrections to the taxable IRC matter for the fiscal year 2011 were made in the amount of € 2,801,228.95, having, as a consequence thereof, the declared tax loss of € 229,614.79 changed to a taxable profit of € 2,571,614.16;
C) Following notification of the final inspection report, the present Claimant was notified of the IRC assessment for 2011 with no. 2015..., in the amount of € 68,809.50 (Document attached with the request for arbitral pronouncement, whose content is reproduced);
D) The Claimant filed, at first, an administrative complaint against the acts of IRC assessment and Compensatory Interest relating to the fiscal year 2011 and, subsequently, following the decision rejecting the administrative complaint, filed a request for arbitral pronouncement, which proceeded before the Arbitral Tribunal under no. 392/2017-T and in which an award was rendered that decided the annulment of the assessment acts, the condemnation of the Tax and Customs Administration to reimburse the tax unduly paid, plus indemnity interest, and in which it was stated that "it shall be incumbent upon the AT, in accordance with legal terms, to draw the consequences of what is now decided, namely as to the existence and losses attributable to subsequent fiscal years" (document no. 7 attached with the request for arbitral pronouncement, whose content is reproduced);
E) In execution of this arbitral award, the Tax and Customs Administration issued a new IRC assessment act no. 2018..., relating to the fiscal year 2011, from which tax is reimbursable in the amount of € 89.44 (document no. 8 attached with the request for arbitral pronouncement, whose content is reproduced);
F) Subsequently, and by reference to fiscal years 2012 and 2013, the present Claimant was also subject to an inspection action, covered by service orders nos. OI2016... and 012016..., from which resulted merely arithmetic corrections to the taxable IRC matter for fiscal years 2012 and 2013 in the amount of € 1,558,571.09 and € 1,553,887.00, having, as a consequence thereof, the declared tax loss of € 89,081.03 and € 310,603.50, respectively, changed to a taxable profit of € 1,469,490.06 and € 1,243,283.50 (Document no. 9 attached with the request for arbitral pronouncement, whose content is reproduced);
G) Following notification of the Tax Inspection Report, the Claimant was notified of the acts of additional IRC assessment and Compensatory Interest, relating to fiscal years 2012 and 2013, against which the present Claimant filed administrative complaints, which were rejected, with the acts relating to fiscal year 2012 being the subject of the present arbitral proceedings;
H) With respect to fiscal year 2014, the present Claimant was also subject to an inspection procedure, which was initiated under service order no. 0I2017... and from which resulted merely arithmetic corrections to the taxable IRC matter for that fiscal year in the amount of € 1,547,919.56, having, as a consequence thereof, the declared tax loss of € 163,821.83 changed to a taxable profit of € 1,384,097.73 (Document no. 11 attached with the request for arbitral pronouncement, whose content is reproduced);
I) Subsequently, the present Claimant was notified of the IRC assessment and Compensatory Interest, relating to fiscal year 2014, and since the present Claimant does not accept the illegality of those assessments, a request for official review of those assessments was filed (document no. 12 attached with the request for arbitral pronouncement, whose content is reproduced);
J) With respect to fiscal year 2015, the Claimant was notified, by means of an Official Letter issued on 28 July 2017, by the IRC Services Department, from which it resulted that "The value of the tax loss deducted pursuant to article 52 of the IRC Code, evidenced in model 22 declaration for the period 20/5, does not correspond to the elements contained in the database of the Tax and Customs Authority and will be subject to correction in the respective assessment, as evidenced in the attached table.", which has the following content:
(document no. 13 attached with the request for arbitral pronouncement, whose content is reproduced);
K) On 13-03-2017, the Claimant paid the sum of € 418,005.93, assessed in relation to fiscal year 2012 (document no. 14 attached with the request for arbitral pronouncement);
L) In the RIT relating to fiscal years 2012 and 2013, the following is further stated:
III.2. INVESTMENTS AND FINANCIAL INSTRUMENTS: OF THE RELEVANT LAW AND FACTS
III.2.1. Of the valuation of Investments and financial instruments
III.2.1.1 Of the transition to SNC and use of the fair value valuation model
Pursuant to Portugal's obligations towards the European Union, by legislative means, in 2009, the Accounting Standardization System (SNC) was introduced, via Decree-Law no. 158/2009, of 13 July, into the national legal order, in force since 1 January 2010. Adopting the new accounting guidelines emanating from the EU, in particular those contained in Regulation EC no. 1606/2002 of the European Parliament and Council of 19 July.
The introduction of SNC thus came to replace the then accounting framework, based on the Official Accounting Plan - POC. Concurrently, there was greater permissiveness in the acceptability of the fair value valuation model. Indeed, although this model was already used under the POC, the situations of its use were restricted, as it was directed at very specific situations, at a time when the standard measurement regime was based on historical cost.
In turn, the fiscal legislator felt the need to make changes to the tax regime for legal entities, especially in the CIRC, in order to accommodate the changes introduced by the SNC. With this aim, Decree-Law no. 159/2009 of 13 July was approved.
By means of this Decree-Law (DL), the legislator came to grant fiscal relevance to the use of fair value as a criterion for measuring assets, in particular financial instruments and investments.
It is thus necessary to extract the fiscal consequences of this same relevance. It may be stated from the outset that, unlike the accounting legislator, the fiscal legislator was more restrictive in accepting the fiscal consequences, particularly in determining taxable profit resulting from the use of the fair value criterion. Aware of the existence, or probability of existence, of some subjectivity associated with the use of the fair value criterion as a basis for measurement and the difficulty of concatenating the taxation of fair value adjustments with the principle of tax capacity, it led to the fact that, for fiscal purposes, its acceptability was partial and limited. Aware of all the foregoing, it is better understood that the tax legislator grants it fiscal relevance only in cases expressly identified, particularly to Financial Instruments, when, as stated in the preamble to DL 159/2009, the reliability of fair value determination is in principle assured. Thus excluding financial instruments of equity that do not have their price formed in a regulated market and whose capital shares correspond to more than 5% of the share capital [(paragraph b), paragraph a) of no. 9, of article 18 of the CIRC].
Additionally, with the fiscal acceptance of the fair value model, to the detriment of historical cost, the fiscal legislator envisioned a transitional regime (article 5 of DL 159/2009). Under this, commercial companies had, in a first phase, at the beginning of 2010, to adjust their financial statements, previously, mostly prepared in accordance with the Official Accounting Plan and the Generally Accepted Accounting Principles - GAAP, to historical cost, in order to reflect the consequences of the new Accounting Standardization System (SNC). The accounting recognition of the so-called transition effects consisted, in summary, of the recording in an SNC capital account of the positive or negative values resulting from the necessary adjustments made in the various accounting items.
Aware of the fiscal effects (positive or negative) resulting from said adjustments of the asset measurement criterion, for purposes of determining taxable profit, the legislator (no. 1 of article 5 of DL 159/2009) establishes the possibility that fiscal relevance may be diluted over five fiscal years. Concurring in equal parts for the formation of taxable profit of the first taxation period (i.e. in 2010) in which those rules apply and of the four following taxation periods (i.e. from 2011 to 2014, inclusive).
III.2.1.2. Of investments and the use of Fair Value as a valuation model and transition adjustments - fiscal effects.
It results from the above information (section II.3.) that the TP has, in the fiscal year, accounting recognized investments in financial instruments, capital shares whose value (price) is determined in a regulated market, whether on the Stock Exchange.
In the context of the legal framework referred to above and, as well, in invoking what is provided in paragraph a) of no. 9 of article 18 of the CIRC, the legislator permitted that, as regards the positive or negative adjustments of capital shares valued at fair value, instead of being accounting recorded in an SNC Gains/Losses account, they be recorded in a capital account. This exception is consented to by the fiscal legislator when the corporate entity uses international accounting standards, namely IAS 32 and IAS 39, for calculating the accounting adjustments of capital shares, recording these in a capital account and, consequently, that they not be, in the fiscal year in which they occur, considered fiscally relevant under IRC (article 5, no. 1 of decree law 159/2009 of 13 July).
Attentive to what is recorded in the Annex document to the Balance Sheet and Statement of Results for fiscal years ended 31 December, we note that:
The TP states:
2 2 Provisions of the SNC waived in the fiscal year
The Accounting Normalization and Financial Reporting Standard that deals with recognition, measurement and disclosure of financial instruments of the SNC is NCRF 27. However, under the option provided in paragraph 2 of NCRF 27, the Company chose to fully apply the International Financial Reporting Standards ("IAS/IFRS") as adopted by the European Union in force on 31 December 2010, in the accounting treatment of all its Financial Instruments.
Thus the Company fully applies to all its Financial Instruments the standards IAS 32 - Financial Instruments Presentation, IAS 39 - Financial Instruments Recognition and Measurement and IFRS 7 - Financial Instruments Disclosure of Information.
In this sense, having analyzed the accounting, the TP recorded the positive or negative adjustments in accordance with the International Standard referred to above.
III.2.1.2.1 - As for the fiscal effects of Transition adjustments
Regarding this point, we invoke what has already been expressed in the inspection procedure for fiscal year 2011, carried out under OI 2015... and already closed, after submission to the exercise of the right of hearing by the TP.
In the above procedure, it was found that the TP accounting recognized, as adjustments relating to the transition from POC to SNC and relating to the capital share that it held in Bank B..., the amount of 7,768,698.68 euros.
Here invoking the argumentation explained in the Report drawn up under OI 2015... for fiscal year 2011, which for the purpose of cognitive progression, is transcribed in the relevant parts. Always being stated that in 2011 the TP sold shares representing the share capital of Bank B....
On page 10 et seq.
The TP duly sent (via email) the requested elements, discriminating the accounting movements of the shares of Bank B.... reporting to fiscal years 2009 to 2011. Citing in chronological order, we highlight the following:
Email sent on 2015.02.25
1) The value of 9,117,151.50 Euros shown in Q.07 Field 767, concerns the capital gains realized in fiscal year 2011, of shares held for more than one year: - Sale of Bank B... Shares:
Note: The shares acquired on 1/10/2010 resulted from the conversion of rights acquired on shares that the Company held for more than one year.
The shares sold from Bank B... had associated a hedging operation initiated in 2009 that was regularized with the sale.
Email sent on 2015.03.16
Accounting movements of Bank B... shares from 2009 to 2011:
Year 2009:
The company held 1,516,483 shares, acquisition value - 9,746,679.97 and market value 17,515,378.65 Euros, the fair value variation was recorded by reserves:
Year 2010:
The company held 1,535,974 shares with acquisition value – 9,927,570.92 and market value 12,177,201.97 Euros, in this fiscal year a hedging operation was carried out on the existing shares, which caused the fair value variation for the year to be recorded in a results account:
Year 2011:
The Company sold 1,531,876 shares, acquisition value 9,926,710.30 and market value 13,210,069.49 Euros:
Referring to the summary of movements sent by the taxpayer, we highlight the following: "In summary, the following movements were made in 2011 relating to the sale of Bank B... shares:
1) Difference between the accounting capital gain item (in the amount of € 3,283,359.19) and the cancellation of the fair value recorded in 2010 (in the amount of € 2,249,630.95), plus the acquisition value of the 51 remaining shares in fiscal year 2011.
(2) 23,629 shares allocated to the company and sold in 2011.
(3) Fair value variation recorded by reserves in 2009.
(4) The TP should have meant value to be deducted in field 767 of form 07.
Thus, given the facts described, it is important to emphasize that the issue would not be the fact that the Bank B... shares were recorded at fair value and recognized in accounting through an SNC capital account, but the fact that these same shares were indexed to a so-called hedging operation, whose derivative financial instrument used was recorded at fair value through results, influencing, in particular, the determination of the net profit for the fiscal year prior to the sale.
As assumed by the TP, due to the existence of the derivative hedging instrument (call option), to reduce the risk of exposure to fair value variation of Bank B... shares, the company treated the hedging instrument and the hedged item through results accounts for the fiscal year, as evidenced by the entries made in 2010, respectively, in the SNC 77 account - Gains from increases in fair value - in financial instruments, and in account 66201 - Losses from reductions in fair value - in financial instruments - B.... In the latter case, the value of the adjustment of € 5,519,067.73 results from the difference between the adjustment made in the asset upon adoption of the SNC and that made at the end of fiscal year 2010, or, in other words, the difference between fair value at the beginning and end of fiscal year 2010, determined as follows:
In this sense, the circumstance referred to shows the non-accounting of the operation in accordance with the NICs, since the TP ceased to reflect in capital accounts the variations in fair value, to instead influence the determination of the fiscal year results (the alleged option for NICs ceased to prevail). In concrete, in the fiscal year preceding the sale of the asset (2010), a loss from reduction in fair value verified in the financial instrument (shares) corresponded to a variation of opposite sign in fair value of the hedging instrument.
III.1.2 Transition adjustment
[..-]
Established on this legal framework, and based on the elements that were made known to the procedure, 1/5 of the amount of € 7,768,698.68, to which corresponds the amount of 1,553,739.74, should have repercussions on the determination of taxable profit, namely in Q.07 Field 703, considering that the fiscal relevance that the treatment given to Bank B... shares came to have within the scope of the SNC was demonstrated, whose adjustments were made as a counterpart to results.
III.2.1.3. Proposed Correction
In Q7 the TP increased, in fiscal years 2012 and 2013, respectively, on line 703 - Positive patrimonial variations (transitional regime provided for in art. 5, nos. 1, 5 and 6 of DL no. 159/2009, of 13/7) the amount of 8,468.98 euros, and should increase, by all of the above transcribed, in both fiscal years, the value corresponding to 1/5 of 7,763,693.68 euros, being 1,553,739.74 euros.
Thus materialized:
III.2.2. Of the use of the MEP valuation model
According to the information provided by the TP, the commercial company uses as a valuation method, for part of its financial investments in subsidiary entities, associated or jointly controlled, the Equity Method (MEP).
The use of the MEP (disciplined, in its essence, in NCRF 13 §57 to § 63), as a method of accounting for equity capital financial shares, is characterized by the fact that the pro-rata share of results to which the participating company is entitled in the participated entity is accounted for in the fiscal year to which the results pertain.
However, the gains/losses accounted for under the MEP do not have fiscal relevance, so they must be added back (losses) or deducted (gains) for purposes of determining taxable profit, as provided in no. 7 of article 18 of the CIRC.
Thus, following the analysis in the entries evidenced in the Balance Sheet, particularly in the balance of SNC account 6852 - Costs and Losses in subsidiaries ... - MEP and 7851 - Income and Gains: subsidiaries,... - MEP, no irregularities are noted.
As for fiscal year 2012
(...)
III.3. FINANCIAL EXPENSES NOT ACCEPTED FISCALLY - ARTICLE 32, NO. 2 OF EBF
III.3.1. Legal framework of article 32, no. 2 of EBF
The special fiscal regime applicable to SGPS provided for in article 32 of the Tax Benefits Statute (EBF), determines, subject to legal requirements being met, and in the wording in force at the date of the facts now investigated by Tax Inspection (given by Law no. 64-B/2011 of 30 December), that:
Article 32. Holding companies (SGPS)
1 - (Revoked by Law no. 55-A/2010, of 31 December).
2 - The capital gains and losses realized by SGPS of capital shares of which they are holders, provided they are held for a period of not less than one year and, as well, the financial expenses incurred with their acquisition do not contribute to the formation of taxable profit of these companies
With this provision the legislator wished to establish the general rule of excluding the taxation of capital gains realized in the onerous transmission of capital shares held by SGPS's (regardless of the legal transaction that gave rise to it: whether it acquired the shares/quotas by purchase or subscription, whether their acquisition value was or was not subject to valuation, by incorporation of other assets, namely merger,...), for a period equal to or greater than one year, whatever the title by which it operates, and concurrently, the legislator understood that, since capital gains do not contribute to taxable profit, the financial expenses incurred both with acquisition and reinforcement of the equity of participations held in commercial companies and as well as other capital shares held, in particular in autonomous assets in the form of Participation Units (UP's) in Real Estate Investment Funds, should cease to contribute.
In compliance with what is legally provided in the General Tax Law - LGT, particularly in article 68.A, and based on the need to assist the user of the rule, and to standardize technical-arithmetic procedures resulting from the practical application of the aforementioned rule, the Tax Administration, through instruction no. 7/2004 of 30/03/2004 of the IRC Services Department, comes to clarify that:
- The new regime, with respect to financial expenses, is applicable "in periods initiated after 1 January 2003, even if they relate to financing obtained before that date" (point 5)
- The fiscal year in which financial expenses should be disregarded as costs, for fiscal purposes, "procedures should be followed, in the fiscal year to which they refer, to correct fiscally those that have been incurred with the acquisition of participations that may come to benefit from the special regime established in no. 2 of article 21 of the EBF, regardless of whether all conditions for application of the special taxation regime of capital gains are already met..." (point 8).
- With regard to the calculation method and respective allocation to be used for the purpose of allocating financial expenses to social participations, it should be "the allocation to be carried out on the basis of a formula, which takes into account the following: the paid liabilities of SCPS and SCR should be allocated, first of all, to paid loans granted by these to the invested companies and to other interest-generating investments, with the remainder allocated to the other assets, namely, social participations, proportionally to their respective acquisition cost"
The disregard of financial expenses for purposes of determining taxable profit established in no. 2 of article 32 of the EBF constitutes a corollary of the general principle of indispensability of costs according to which fiscal deduction is conditioned by its connection with obtaining profits subject to tax and from which it results that ( ) if certain costs are related to profits not subject to tax they are not fiscally deductible (...)"*, Principle established in the provision of article 23, no. 1 of the IRC Code - Expenses are considered those which are demonstrably indispensable for the achievement of income subject to tax or for the maintenance of the income-producing source".
III.3.2. Analysis of financial expenses incurred
The factuality resulting from the analysis carried out on the financial statements of the TP and documents that serve as support and, as well, from the information contained on the AT Internet Portal (e.g., IES declaration), in compliance with its reporting obligations, implies that, if objective that in the fiscal year in question, financial expenses were incurred
III.3.2.1. Relating to fiscal year 2012 Interest borne:
The TP in the fiscal year recorded as expenses, in SNC account 69.11 - Financing Interest Obtained, the amount of 202,249.11 euros.
Financing obtained:
The financial expenses borne by the TP result from financing/credit obtained and, concurrently, paid, in the amount of 5,300,000.00 euros, as per the information provided below by this party.
Financing granted:
For its part, the TP does not accounting recognize any amount as financing/credit granted and paid, as per the table below provided by this:
Acquisition value of capital shares
In the calculation to be performed, specifically in determining the amount of the acquisition value of capital shares held by the TP, and recorded in SNC accounts 14 and 41, we must take into account elements that are part of the respective acquisition cost.
Being that as to this we have to disregard the effect of the use of the MEP
Having regard to the elements sent by the TP, the following table was drawn up:
It is considered that the acquisition value, for purposes of no. 2 of article 32 of the EBF, is 116,431,254.94, and not the value considered by the TP, being 114,613,904.45 euros.
The difference results from the fact that the TP did not consider the value of 1,510,064.78 euros relating to capital shares at fair value.
But since this uses the international standard, in derogation to the regime inherent in the CIRC, which leads to fair value adjustments occurring in the fiscal year being recognized in a capital account rather than a expenses/income account, it should, in accordance with what was done by the TP in 2013, be increased by the value of 1,510,064.78 euros to the acquisition value of capital shares.
Determination of the value of "Other Assets"
With regard to determining the amount of this item, it is considered, based on the changes introduced by legislative means, in particular Decree-Law no. 158/2009 of 13 July, in the national accounting system and in the rules for preparation and presentation of Financial Statements. Attentive to the legal standards set forth in the aforesaid decree, to the binding content of NCRFs and to the scope advocated with respect to the bases for preparation and presentation of Financial Statements, particularly the balance sheet, the legislator opted for its presentation in "net values", which is based, in particular, on the option to report at "fair value".
From the value of assets, there must be deducted, among others, the acquisition values of capital shares, of paid financing granted, resulting in a value of other assets of 36,177,395.55 euros
Determination of the value of Financial Expenses to be disregarded
Continuing with the determination of the value of financial expenses to be disregarded in determining taxable profit, (on line 779, ex. 752, of Q7 of DRM22), we come to:
Quantum of the Value Financial Expenses to be disregarded • article 32, no. 2 EBF
Analyzing Q7 of DRM22 cp. 779/752, the TP added 149,472.86 euros.
Attentive to the above, the value to be considered for purposes of no. 2 of article 32 of the EBF, as per the demonstration calculation, results concurrently from the need to make the necessary fiscal corrections in determining Taxable Profit, in the amount of 4,631.35 € euros, to be added to the value indicated by the TP in Q7 of DRM22 cp. 779, totaling 154,304.20 euros.
(...)
IX - RIGHT OF HEARING
The hearing of the taxpayer comprises, within the procedure, the realization of the right of participation of citizens in the formation of administrative decisions affecting them, corresponds to a minimum legal content of the Principle of Participation, provided for in article 60 of the LGT.
Notified, personally, on 9 December 2016, under the terms and for the purposes of article 60 of the RCPITA, the taxpayer was apprised (official letter ... of 9 December 2016 of the Finance Department of Lisbon), of the content of the inspection procedure, its respective legal framework, the proposed corrections and the period within which, if it wished, to exercise the right of hearing.
Company A... SGPS SA, duly notified of the draft corrections to the inspection report, did not exercise the right that legally belongs to it and which was actually afforded to it.
Upon expiration of the legal period of 15 days, and in the face of the silence of the TP, we conclude the preclusion of the aforementioned right.
The corrections proposed in section III.3 of this report are maintained.
X - PROPOSAL - CONCLUSION
For all of the foregoing, it is proposed:
a) pursuant to the provision of no. 2 of article 62 RCPITA combined with the provision of article 77 of the LGT, notification to the Taxpayer of this report.
b) in compliance with the provision of article 57 of the General Regime of Tax Offenses, and for purposes of the provision of article 67 of the same decree, that the Records of Notice (of 2012 and 2013) be sent to the Lisbon Finance Service....
c) that the respective official model 22 declaration be prepared for fiscal years 2012 and 2013, in order to promote the proposed correction and the subsequent assessment.
d) that the present procedure be closed, after the necessary records.
Superior decision shall be made
For Superior Consideration
M) On this proposal, a concordant opinion was issued by the Team Leader in the following terms:
I confirm the content and grounds of the attached conclusions report, with reference to the economic fiscal years of 2012 and 2013 in accordance with the grounds mentioned, the legal requirements were met, maintaining the direct assessment of taxable matter, to proceed with technical corrections, pursuant to no. 9 of article 18 and article 23 of the CIRC, and as well as article 32, no. 2 of the EBF and article 5 of Decree-Law 159/2009, in the annual global amounts of € 1,558,571.09 (2012) and € 1,553,887.00 (2013), related to the fact that the positive patrimonial variation resulting from the transitional regime provided for in article 5 of the above-mentioned DL was not duly increased to the fiscal year result, as well as the amount of non-deductible financial expenses, attributable to capital shares held by the company. Notified for the exercise of the Prior Hearing Right, pursuant to article 60 of the General Tax Law (LGT) and article 60 of the Complementary Regime of Tax and Customs Inspection Procedure (RCPITA), the taxpayer did not exercise the respective right - Chapter IX of the Report. The respective Correction Document was prepared and a Record of Notice was instituted for the violation found, proposing its referral to the Lisbon Finance Service
The notification to the taxpayer of the result of the inspection action is also proposed.
N) On this proposal, a concordant opinion was issued by the Division Chief in the following terms:
I agree with the opinion of the Team Chief and with the inspection action report, attached.
In accordance with and on the grounds referred to, it is confirmed that as a result of the application of the legal provisions referred to, there was place for an addition to the results of the respective fiscal years, in the annual global amounts of € 1,558,571.09 (2012) and € 1,553,667.00 (2013), as reported. As a result of these increases, the declared tax losses became a taxable profit of € 1,469,490.06 in 2012 and € 1,243,283.50 in 2013.
Thus, I propose notification to the taxpayer, as provided for in articles 77 of the LGT and 62 of the RCPITA.
The Correction Document was completed and a Record of Notice was drawn up, which in this case I propose to send to the Lisbon Finance Service....
For Superior Consideration
O) On this opinion, an order was issued on 28-12-2016, by the Deputy Finance Director of the Finance Department of Lisbon, in the following terms:
I agree.
Proceed as proposed.
Notify
P) On 30-12-2016, the Claimant was notified of the Tax Inspection Report and the opinions and orders referred to by official letter stating, among other things, the following:
You are hereby notified, pursuant to article 62 of the RCPITA, of the corrections resulting from the inspection action, whose report/conclusions is attached as an integral part of this notification, relating to the Service Order mentioned above.
Of the merely arithmetic corrections made to taxable matter and/or tax, without resorting to indirect assessment, whose grounds are contained in the referred Report.
In the short term, the Tax and Customs Authority (AT) services will proceed with notification of the respective assessment, which will contain the means of defense, as well as the payment period, if applicable.
Against this notification and its respective grounds, no complaint or objection shall be available.
Q) Subsequently, the Claimant was notified of the IRC assessment for fiscal year 2012, which appears in document no. 2 attached with the request for arbitral pronouncement, stating among other things the following:
(...)
You are hereby notified of the IRC assessment for the period to which the income relates, as per the attached demonstration note and grounds already sent.
R) The Claimant filed an administrative complaint against the IRC assessment for fiscal year 2012, which was rejected by order of 25-09-2018;
S) The order rejecting the administrative complaint manifests agreement with information contained in document no. 1, whose content is reproduced, stating among other things the following:
2 - The more detailed reasons for those corrections appear in sections III.2.1 and III.3 of the report, which are here reproduced and the sense of which is summarized below:
2.1 - Positive patrimonial variation (€ 1,553,739.74):
The correction corresponds to 1/5 of the amount of € 7,768,698.68, based on the provision of no. 1 of article 5 of DL 159/2009, according to which, in the transition to the new accounting framework, the effects on equity (recognition or derecognition of assets or liabilities, or changes in their respective measurement) that have fiscal relevance for IRC purposes, contribute in equal parts to the formation of taxable profit of the first taxation period after that transition and of the four subsequent periods.
The aforementioned amount of € 7,768,698.68 corresponds to the fair value variation of Bank B... (B...) shares, which occurred upon transition to SNC, such fair value variation being considered fiscally relevant for IRC purposes.
In the report the accounting movements of those shares are described between the date of acquisition of the first, in 2008, and the sale that occurred in 2011. Based on this description, the following summary table was prepared:
It is also stated in the report that, although the taxpayer chose to use the International Accounting Standards (IAS 32, IAS 39 and IFRS 7) for measurement/recording of variations verified in financial investments (with respect to initial measurement, it recorded the Fair Value variations of B... shares as a counterpart to an equity account), it later recorded the fair value variations of the shares in results, due to the existence of a hedging derivative.
2.2 - Non-deductible financial expenses (€ 4,831.35)
Difference between the value of € 154,304.20, which should have been added to taxable profit by application of no. 2 of article 32 of the Tax Benefits Statute, in the wording in force in 2012, as well as Circular no. 7/2004 of 30/2 of the DSIRC, and the value that was added by the taxpayer, now Complainant, in field 779 of form 07 of model 22 declaration, € 149,472.86.
The value that should have been added in field 779 was calculated according to the method recommended in the said circular, as per the table below (the values in lines A through E are those contained in the report, as well as the calculations):
As verified in the table above, the difference of € 4,831.35 is explained by the differences between some values that served as the basis for the calculations (cf. lines B, D and E):
Line B: The value of € 13,712,428.41 considered in the report results from financing obtained from banks B... and C... and from D..., in the amounts of € 5,000,000.00, € 300,000.00 and € 8,412,428.41, respectively, as per Information sent by the taxpayer (balances as of 31-12-2012).
Line D: The value of € 1,510,064.78 should be added to what was considered by the taxpayer, because the taxpayer did not consider the value relating to capital shares at fair value. The change is explained by the use of the international standard (IAS 39), in derogation to the regime inherent in the CIRC, which leads fair value adjustments occurring in the fiscal year to be recognized in an equity account rather than an expense/income account and corresponds to the last four values of the "Initial Purchase Value" column of the table on page 29/40 of the report - fl. 80).
(...)
2 - As for the allegation that the notification of the additional assessment subject to complaint did not contain the grounds for the corrections that gave rise to it and that the Complainant is not required to relate the inspection action report to that additional assessment, it must be stated that in the notification of the report the Complainant is informed that the assessment resulting from the conclusions of the report will be carried out. Also in the report, in addition to the corrections and their respective grounds, at the end there is information that the assessment will be carried out taking as a basis these corrections.
Given that, after notification of the report, there was a single tax assessment relating to IRC/2012, it must be concluded that this assessment is the one mentioned in the notification and the one resulting from the corrections mentioned in the report, in addition to which the taxable matter that served as the basis for this assessment corresponds to the amount of corrected taxable profit determined in the report (as stated above in section II-1, there was no tax loss to be deducted in fiscal year 2012).
There is thus no allegation of lack of grounds.
3 - As for the allegation that the Complainant was not notified of the draft conclusions of the Inspection Report, in accordance with the terms and for the purposes provided in paragraph a) of no. 1 of article 60 of the LGT (prior hearing), it is verified that, as appears on pages 182 to 165 of the present proceedings, such notification occurred on 09-12-2016, in the person of the certified accountant, who assumed the capacity of representative of the taxpayer in relations with the AT (cf. pages 58 and 59), with notification being made under article 40 of the Complementary Regime of Tax and Customs Inspection Procedure (RCPITA).
There is thus no reason to consider that prior hearing of the draft conclusions of the report did not take place.
4 - The Complainant alleges that the accounting of variations in the fair value of Bank B... (B...) shares through results did not translate into a deviation from the option to apply the NICs, but resulted from the application of the NICs, specifically a special clause of IAS 39.
However, the correction by Tax Inspection is not based on the incorrect application of accounting standards, but on the fact that the shares were accounted for at fair value through results.
The Complainant further alleges that, although the standard of paragraph a) of no. 9 of article 18 of the CIRC applies to equity instruments recognized at fair value through results, the same is not applicable in the present case, because it is designed for securities acquired with the purpose of resale in the short term (trading) and in the case of Bank B... shares, there was no intention to sell them in the short term, but to profit from the investment through the indirect exercise of the management activity of that financial instrument.
As to that allegation, it must be stated that the distinction invoked by the Complainant is not expressly stated in the legal provision, which appears to be applicable in the present case.
The correction by Tax Inspection was based on the non-applicability of the provision of no. 2 of article 32 of the EBF, in the wording in force in 2012, because there is no place for the determination, for IRC purposes, of capital gains/losses (prerequisite for the application of that provision), since, under paragraph b) of no. 1 of article 46 of the CIRC, there is no place for the determination of capital gains/losses in the case of the sale of financial instruments recognized at fair value to which the exceptions provided in no. 9 of article 18 refer.
It thus seems the correction subject to complaint should be maintained.
5 - As for the correction, in the amount of € 4,631.35, relating to financial expenses not accepted fiscally, lack of grounds is alleged for the reasons for this correction not being understandable.
As to this issue, it must be stated that there appears to be no disagreement regarding the application of Circular no. 7/2004, or the manner of calculating the value to be added in field 779 - "Non-deductible Financial Expenses (article 32, no. 2 of the EBF)", as recommended by that circular (value that does not contribute to the formation of taxable profit).
As stated above in section II-2.2, the correction subject to complaint results from differences in some of the values considered in that calculation (lines B, D and E of the table in that section). The grounds for the correction are also indicated therein, as they appear in the report.
The Complainant does not indicate how it calculated the partial values it considers correct. It thus seems the correction subject to complaint should be maintained.
6 - The Complainant further alleges that in the notification of the assessment of compensatory interest the prerequisites on which that assessment depends are not demonstrated.
Given that the calculation is not questioned, it seems to allege that it was not demonstrated that the interest resulted from a fact attributable to the Complainant itself.
However, since these are corrections made by Tax Inspection to the values entered in form 07 - "Determination of taxable profit" of model 22 declaration for fiscal year 2012 submitted by the Complainant, it seems evident that the differences between the declared values and those that should have been (corrected) can only be attributable to the Complainant, with no other entity being mentioned to whom this attribution would belong.
It thus does not seem that compensatory interest in question should be annulled.
7 - Given that, as explained in the preceding sections, the Complainant is not correct, it is proposed that the claim be rejected, maintaining the additional assessment subject to complaint.
It is further added that, since the prerequisites of no. 1 of article 43 of the LGT are not met, the Complainant has no right to indemnity interest.
IV - PRIOR HEARING
1 - The Complainant was notified of the draft rejection decision, as appears on page 193 of the proceedings, to exercise the prior hearing right provided for in article 60 of the General Tax Law. With the notification a copy of the draft decision was sent, as appears on pages 188 to 192 of the proceedings and is reproduced in the preceding sections.
2 - In prior hearing, the Complainant comes to present a statement (pages 196 to 201) in which it reiterates the alleged facts, presenting as the only new element a copy of the arbitral decision Process no. 392/2017-T, dated 21-03-2018, resulting from a request for arbitral pronouncement made by it, which took as its object the IRC assessment for fiscal year 2011 (pages 213 to 232) and was decided in favor of the Complainant's claim.
It alleges that the AT must draw all consequences from that decision, including regarding the deduction of tax losses determined in that fiscal year from the assessments of subsequent fiscal years, and as to the remaining issues, reiterates the alleged facts in the administrative complaint.
Given that the mentioned arbitral decision does not refer to and the IRC assessment mentioned at the beginning of this information, but to that of the previous fiscal year, there is no place for altering the fiscal result of fiscal year 2012 as a result thereof.
As for the question of the deduction of tax losses as a result of the arbitral decision, it seems that it should be treated within the scope of realizing the effects of that decision, since it was not a matter mentioned in the complaint being analyzed and results from a fact subsequent to the same.
3 - Given the foregoing, and having regard to the facts and grounds invoked in the draft decision, it is proposed that the claim be decided in the same sense of rejection (cf. section III-7 above).
T) On 02-01-2019, the Claimant filed the request for arbitral pronouncement that gave rise to the present proceedings.
2.2. Unproven Facts and Rationale for Fixing Factual Matter
It was not proven what purpose the Claimant intended with the holding of the shares, namely whether it held them with lasting intention or for short-term resale.
In fact, the Claimant presented no proof on this matter, not even of a testimonial nature.
The proven facts are based on documents attached by the Claimant.
No administrative proceedings were presented.
3. Matter of Law
3.1 Issue of Lack of Grounds
The Claimant imputes to the impugned act the defect of lack of grounds in two aspects: in one of them, it refers to the entirety of the assessment act, which includes the value of compensatory interest, arguing, in summary, that there is no reference therein to the grounds of the Tax Inspection Report; furthermore, as regards the assessment of compensatory interest, the Claimant imputes a defect still by not making reference to the existence of fault.
3.1.1. Issue of lack of grounds as to the part of the assessment relating to the IRC
The requirement of grounds for harmful administrative acts is contained in no. 3 of article 268 of the CRP, which provides that "administrative acts are subject to notification to those concerned, in the manner provided by law, and require express and accessible grounds when they affect rights or legally protected interests".
Especially for the grounds of tax acts, article 77, nos. 1 and 2, of the LGT, provides that "the decision of procedure is always grounded by means of a brief presentation of the facts and reasons that motivated it, the grounds being able to consist of mere declaration of agreement with the grounds of previous opinions, information or proposals, including those that are part of the tax inspection report" and that "the grounds of tax acts may be made in summary form, always containing the applicable legal provisions, the characterization and quantification of tax facts and the operations for determining taxable matter and the tax".
The Supreme Administrative Court has uniformly understood that the grounds of an administrative or tax act is a relative concept that varies according to the type of act and the circumstances of the specific case, but that the grounds is sufficient when it allows a normal recipient to realize the cognitive and evaluative itinerary followed by the author of the act to render the decision, that is, when the recipient can know the reasons why the author of the act decided as it did and not differently, so as to be able to trigger administrative or contentious mechanisms for impugnation. ( )
Although it is to be distinguished between the assessment act and the notification act through which it is communicated to the recipient, in the case in question it was not proven that there is any other document relating to the assessment act other than that which is reproduced in document no. 2 attached with the request for arbitral pronouncement, so we must proceed from the assumption that it is a copy of the act that was executed, which would not have any content other than what it contains.
From the document referred to it is noted that it contains the operations from which results the calculation of the assessed amount and refers to a "demonstration note" attached, which appears in document no. 4 ("Statement of Account Reconciliation").
In the said assessment, the amounts of the previous assessment and the "corrected amounts" are indicated and it is stated that the assessment is "as per the attached demonstration note and grounds already sent".
Among the "corrected amounts" the value of € 1,469,490.06 is indicated relating to the "taxable matter" which is precisely what is indicated in the Tax Inspection Report as having been corrected.
It is also noted that in the notification of the Tax Inspection Report it is expressly stated that "in the short term, the AT services will proceed with notification of the respective assessment, which will contain the means of defense, as well as the payment period, if applicable" and that in the notification of the assessment act reference is made to the "grounds already sent".
In this context, given that the Claimant was previously notified of the Tax Inspection Report and the order that sanctioned it in which correction to the Claimant's taxable matter for the year 2012 was proposed, in the amount of € 1,469,490.06, which informed it that the "respective assessment" would follow, the assessment in which corrected amounts corresponding to the corrections previously communicated are indicated cannot but be interpreted by a recipient with normal powers of perception as being the materialization of the announced assessment, which is reinforced by the fact that the assessment itself makes reference to the "grounds already sent".
Thus, interpreting the content of the assessment act in the context in which it was executed, it is concluded that there is therein an express reference to grounds that cannot but be that of the Tax Inspection Report that had been notified to the Claimant.
In this context, it is to be understood that, contrary to what the Claimant argues, it was possible and required of it to establish the relationship between the Inspection Report for the year 2012 and the assessment act relating to that same fiscal year.
On the other hand, the requirement of express grounds for harmful acts provided for in article 268, no. 3, of the CRP is compatible with grounds by reference and, in the case in question, contains in the assessment act an express reference to grounds previously sent and perfectly identifiable. When it is said that grounds must be contemporary to the act, it is with the scope of expressing that it cannot be drawn up a posteriori, but not of preventing it from being done before the act, as will indeed invariably occur in situations of grounds by reference.
Moreover, as understood by the Supreme Administrative Court in the judgment of 09-05-2001, case no. 025832 ( ) "the additional assessment act based on a report of the tax inspection services should be considered grounded, even if it does not make express reference to it, since it is indubitably situated in its respective legal and factual framework, which is perfectly clear, clarifying and duly notified".
Furthermore, it is inferred from the request for arbitral pronouncement that the Claimant perfectly understood that the corrected amounts contained in the assessment correspond to those indicated in the Tax Inspection Report and that the grounds to which reference is made in the notification of the assessment are those of the Tax Inspection Report, which had been previously communicated.
The defect of lack of grounds regarding the part of the assessment relating to IRC is thus unfounded.
3.1.2. Issue of lack of grounds as to the part of the assessment relating to compensatory interest
As regards the assessment of compensatory interest, it is noted that the Tax and Customs Authority makes no reference in the Tax Inspection Report or in the opinions thereon to the possibility of its assessment.
On the other hand, in the "Demonstration of the assessment of interest" notified to the Claimant are indicated the "Taxation period" (year 2012), the no. of the IRC assessment to which it relates, the "Base Value" (of € 366,372.51), the "Calculation Period" (2013-06-01 to 2016-12-07), the rate of 4% and the assessed amount (€ 51,633.42).
As to the legal grounds, reference is made to article 102 of the CIRC which provides that "whenever, by fact attributable to the taxpayer, the assessment of part or all of the due tax or the delivery of tax to be paid in advance or to be withheld within the scope of tax substitution is delayed or undue reimbursement is obtained, compensatory interest accrues at the rate and in the manner provided for in article 35 of the General Tax Law".
In the same vein, article 35, no. 1, of the LGT provides that "compensatory interest is due when, by fact attributable to the taxpayer, the assessment of part or all of the due tax or the delivery of tax to be paid in advance, or withheld or to be withheld within the scope of tax substitution is delayed".
Strict liability is exceptional, occurring only in cases specified by law (article 483, no. 2, of the Civil Code) and therefore, it should be understood that, for purposes of liability for compensatory interest, there is only "fact attributable to the taxpayer" when a judgment of censure can be formulated with respect to its conduct.
Along these lines, the Supreme Administrative Court has uniformly understood that the imputability required for liability for compensatory interest depends on the existence of fault on the part of the taxpayer. ( )
Before that sole statement contained in the Tax Inspection Report on compensatory interest, one is left not knowing whether the Tax and Customs Authority understood that liability for compensatory interest is automatic, deriving from the very fact that corrections have been made, or whether it concluded that a judgment of censure can be formulated with respect to the Claimant's actions, capable of filling the requirement of imputability, a situation in which the grounds should contain indication of the facts underlying that judgment of censure.
On the other hand, although the Tax and Customs Authority comes to clarify in the decision of the administrative complaint what reasons it understands justify the assessment of compensatory interest, we are dealing with grounds a posteriori, which is established law to be irrelevant for assessing the legality of tax acts. In fact, in a mere legality dispute, as is provided for in the RJAT for the arbitral tribunals operating in the CAAD, in which only the declaration of illegality of acts of the types provided for in paragraphs a) and b) of no. 1 of its article 2 is sought, the legality of the impugned act must be assessed as it occurred, with the grounds used in it, not being relevant other possible grounds that could support other acts, of decisive content wholly or partially coinciding with the act executed. Thus, grounds invoked a posteriori are irrelevant, after the termination of the tax procedure in which the act whose declaration of illegality is requested was executed, including those advanced in the legal proceedings. ( )
Moreover, as article 35 contains various situations in which compensatory interest can be justified, express and sufficient grounds would require indicating in which part of that article it was understood that the Claimant's actions should be situated.
Furthermore, it is not indicated how the amount of € 366,372.51 which served as the basis for the calculation of compensatory interest was determined, since this value does not appear indicated in the assessment, and the grounds must "always contain ... and the operations for determining taxable matter and the tax" (article 77, no. 2, of the LGT). It is incumbent on the Tax and Customs Authority and not the taxpayer to make and describe the operations it carried out.
In any case, there is lack of grounds relating to the verification of all the requirements provided for in article 35, no. 1, of the LGT, so the assessment of compensatory interest contains the defect of lack of grounds.
3.2. Corrections Carried Out
The Tax and Customs Authority made the corrections underlying the impugned assessment by:
i) not having increased the result of fiscal year 2012 by the positive patrimonial variation resulting from the transitional regime provided for in Decree-Law no. 159/2009;
ii) having determined non-deductible financial expenses.
3.2.1. Correction for not increasing the result of fiscal year 2012 by the positive patrimonial variation resulting from the transitional regime provided for in Decree-Law no. 159/2009
Decree-Law no. 159/2009, of 13 July, made changes to the CIRC, "adapting the rules for determining taxable profit to international accounting standards as adopted by the European Union, as well as to national accounting normatives that aim to adapt accounting to those standards".
In its article 5, this Decree-Law includes a transitional regime, whereby "the effects on equity resulting from the adoption, for the first time, of the international accounting standards adopted pursuant to article 3 of Regulation no. 1606/2002 of the European Parliament and Council of 19 July, which are considered fiscally relevant under the IRC Code and respective complementary legislation, resulting from the recognition or non-recognition of assets or liabilities, or from changes in their respective measurement, contribute in equal parts to the formation of taxable profit of the first taxation period in which such standards are applied and of the four subsequent taxation periods".
Under article 18, no. 9, of the CIRC, in the wording approved by that Decree-Law, only adjustments resulting from the application of fair value are considered fiscally relevant when:
a) They relate to financial instruments recognized at fair value through results, provided that, in the case of equity instruments, they have a price formed in a regulated market and the taxpayer does not hold, directly or indirectly, a participation in the capital exceeding 5% of the respective share capital; or
b) This is expressly provided for in this Code.
In the case in question, the Claimant held accounting recognized investments in financial instruments, capital shares whose value (price) is determined in a regulated market.
The Claimant, using a faculty provided for in § 2 of NCRF 37, uses international accounting standards, namely IAS 32 and IAS 39, for calculating the accounting adjustments of capital shares, recording these in an equity account, specifically the Bank B... shares.
Although the adjustments referred to were revealed in accounting through an equity account, the Tax and Customs Authority found that those shares were indexed to a "hedging operation, whose derivative financial instrument used was recorded at fair value through results, influencing, in particular, the determination of net profit for the fiscal year prior to the sale" and that the Claimant "treated the hedging instrument and the hedged item through results accounts for the fiscal year".
In this context, the Tax and Customs Authority understood that "since the TP ceased to reflect in equity accounts the variations in fair value, to instead influence the determination of fiscal year results, the alleged option for NICs ceased to prevail".
The Claimant formulates the following conclusions on this matter:
A) The accounting by the Claimant of the variations in fair value of the hedging instrument (derivative/call option) and the hedged instrument (Bank B... shares) through results did not translate into a deviation from the option to apply the NICs, but rather resulted from the application of these NICs, specifically a special clause of IAS 39;
B) IAS 39 establishes as a rule that gains or losses arising from adjustments to fair value of a financial asset available for sale are recorded in equity (cf. § 46 and 55);
C) In the event that the financial asset available for sale is in a hedging relationship, a deviation from that general rule is introduced since the provision of § 71 and 89-102 of IAS 39 applies, from which it results that "The gain or loss resulting from the remeasurement of the hedging instrument at fair value (...) must be recognized in results" and "The gain or loss of the hedged item attributable to the hedged risk must adjust the carrying amount of the hedged item and be recognized in results";
D) However, it is not this specific regime provided for in IAS 39 for hedging relationships that invalidates the taxpayer's option for NICs/IAS and automatically triggers the taxation of gains and losses caused by oscillations in fair value, imposing on an SGPS (in this case, the Claimant) the application of the regime of paragraph a) of no. 9 of article 18 of the CIRC to the detriment of the special regime of article 32, no. 2 of the EBF;
E) In domestic law, the fiscal relevance (taxation) of fair value is exceptional, not the rule, and is designed for securities acquired with the purpose of short-term resale, in what is referred to as trading, thus allowing an anticipation of tax and revenue collection by the State;
F) The Bank B... shares constituted financial assets available for sale for purposes of IAS 39 and were recorded on the balance sheet as non-current assets, since the Claimant did not intend to sell them in the short term, but rather to profit from its investment through the indirect exercise of the management activity of that financial instrument, as is proper for an SGPS (cf. article 1, no. 1 of Decree-Law no. 495/88);
G) Significant holdings in listed companies, even if less than 5%, translate an intention to maintain the asset and long-term management (stability and permanence), not resale to obtain profit in the short term, so, not constituting current assets, should not be taxed at fair value;
H) Since these holdings do not appear in the financial statements as "financial instruments recognized at fair value through results", but rather as non-current assets, one of the requirements of paragraph a) of no. 9 of article 18 of the CIRC is not fulfilled, which means that oscillations in fair value do not contribute to the formation of taxable profit, that is, the rule of irrelevance of fair value adjustments established in the body of no. 9 of article 18 of the CIRC applies;
I) In addition, being a participation with the nature of a substantial financial investment, although less than 5% of the share capital, it is not permissible to subtract it from the special regime of article 32, no. 2 of the EBF, which should always be applied;
J) In summary, for significant holdings but less than 5% of the capital of a listed company (such as Bank B... shares) held by an SGPS (such as the Claimant), maintained with a lasting intention and not for short-term resale/trading (as is the case), the asset should be recorded as non-current (as occurred with the Bank B... shares, recorded in the balance sheets of 2010 and 2011) and is outside the scope of paragraph a) of no. 9 of article 18 of the CIRC, that is, does not contribute to the formation of taxable profit;
K) Finally, the position defended by the Tax Inspection Services leads to the illegal revocation, by administrative means, of an automatic tax benefit whose prerequisites are entirely fulfilled, article 32, no. 2 of the EBF.
The Tax and Customs Authority defends the position assumed in the Tax Inspection Report and in the decision of the administrative complaint, also saying, in summary:
– the fiscal legislator, within the margin of discretion of the conformity of legal normatives, in paragraph a) of no. 3 of article 17 of the IRC Code, disregarded the options that IRC taxpayers might exercise in matter of accounting standardization frameworks, which clearly shows that, being complied with the obligation provided therein regarding organization of accounting, and with the exception of compliance with specific fiscal rules, the fiscal characterization of operations, such as that provided in paragraph a) of no. 9 of article 18 of the same Code, takes into account, prima facie, the form of accounting expression given to the operations";
– that "the reality of facts, as evidenced by accounting, reveals that in 2010 and 2011, the model of measurement at fair value through results was applied, with all the accounting and fiscal consequences inherent thereto, such that the adjustments resulting from this option were fiscally recognized";
– "the Claimant, in the transition adjustments, proceeded to alter the model of valuation of Bank B... shares from historical cost to the fair value model, having, as a result of this alteration, determined a positive variation that it recorded in an equity account";
– "despite some imperfect drafting, it is not based on the reversal of the option for NICs to the detriment of NCRF 27, resulting from the association of a hedging instrument to the Bank B... shares, (...) but rather that, having this decision triggered measurement at fair value through results, the effects on net profit for the fiscal year and on taxable profit for fiscal year 2012 are, in substance, identical to those that would be obtained with the application of NCRF 27";
– "in reality, as a result of the association of a hedging instrument contracted in 2009, which remained in force until the sale of the Bank B... shares in 2011, it came to adopt, both in the measurement of the hedged element and the hedging element, the fair value through results model, subsuming the respective positive and negative adjustments in the exceptions provided for in no. 9 of article 18 of the IRC Code";
– "paragraph a) of no. 3 of article 17, paragraph a) of no. 9 of article 18 of the IRC Code, paragraph f), no. 1 of article 20 and paragraph i), no. 1 of article 23 of the IRC Code (wording in 2012) do not bind the accounting recognition of financial instruments at fair value through results to any accounting framework adopted, whether by force of the special hedging regime of NICs/IAS 39 or of NCRF 27 of the SNC, what is relevant, in substance, is the accounting expression of the measurement criterion and its contribution to the formation of results";
– "paragraph a) of no. 9 of article 18 of the IRC Code does not prescribe any requirement relating to the accounting classification of capital shares as 'instruments held for trading', therefore, the classification as 'financial assets available for sale' does not remove them from this normative";
– "the legislator appears to have assumed that the objective of holding capital
Frequently Asked Questions
Automatically Created