CAAD 203/2017-T: Autonomous Taxation (IRC) and SIFIDE Tax Credit Interaction Ruling

ARBITRAL DECISION[1]

The arbitrators Councillor Maria Fernanda dos Santos Maçãs (President), Dr. Luis Ricardo Farinha Sequeira and Dr. Paulo Manuel Quinas Raposeiro (Members), appointed by the Ethics Council of the Administrative Arbitration Center (CAAD) to form the Collective Arbitral Tribunal, have decided as follows:

I. REPORT

A…, SGPS, SA., (hereinafter referred to as or Claimant), legal entity no.…, with registered office at Street …, …, …, …-… Lisbon, came, pursuant to Article 2.º no. 1, paragraph a) and Articles 10.º and following of the Legal Regime of Tax Arbitration, provided for in Decree-Law no. 10/2011, of 20 January, as amended by Article 228.º of Law no. 66-B/2012, of 31 December (hereinafter abbreviated as "RJAT") and Articles 1.º and 2.º of Order no. 112-A/2011, of 22 March, to submit a request for an arbitral ruling on the legality of the decision dismissing the gracious complaint number …2016…, by dispatch of the Head of the Administrative Justice Division of the Finance Directorate of Lisbon, dated 23/12/2016, which upheld in the legal order the self-assessment of corporate income tax, with reference to the tax period 2014.

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 30-03-2017.

The Claimant did not proceed with the appointment of an arbitrator, so, pursuant to the provisions of paragraph a) of no. 2 of Article 6.º and paragraph b) of no. 1 of Article 11.º of the RJAT, the President of the Ethics Council of CAAD appointed the undersigned as arbitrators of the collective arbitral tribunal, who communicated their acceptance of the assignment within the applicable period.

On 17-05-2017, the parties were duly notified of this appointment and did not express their intention to refuse the appointment of the arbitrators, in accordance with the combined provisions of Article 11.º, no. 1, paragraphs a) and b), of the RJAT and Articles 6.º and 7.º of the Ethics Code.

Thus, in accordance with the provisions of paragraph c) of no. 1 of Article 11.º of the RJAT, the Arbitral Tribunal was constituted on 1-06-2017.

Duly notified, the Tax and Customs Authority submitted a response in which it defended the inadmissibility of the claim, defending itself by opposition.

As no witnesses were called by either the Claimant or the Respondent and no matter of exception was raised, the meeting referred to in Article 18.º of the RJAT was dispensed with. The date of 1 December was set for the pronouncement of the final decision.

The parties submitted written arguments, maintaining, in substance, the factual and legal arguments raised in the initial pleadings.

The Claimant requests that the Arbitral Tribunal declare the illegality of the dismissal of the gracious complaint, the illegality of the self-assessment of corporate income tax, relating to the fiscal year 2014 - assessment no.…, in the amount of € 91,314.75 - and, likewise, order the Respondent to pay compensatory interest.

To this end, the Claimant argues in summary as follows:

• Existence of an error in the determination of autonomous taxation to be borne, which distorted the tax to be assessed and paid by Group B…, in that the deduction of tax credits determined relating to the application of the Tax Incentive System for Research and Development Enterprises ("SIFIDE") was not made from the collection of autonomous taxation, and, as a consequence of a Gracious Complaint filed by the Claimant, the Tax Authority maintained the self-assessment in question unchanged, considering the deduction of such tax credits from the collection of autonomous taxation to be inadmissible.

• In the Claimant's understanding, the determination of the collection of autonomous taxation is carried out in accordance with said Article 90.º of the Corporate Income Tax Code, so there should be no obstacles to the deduction of the tax credit arising from SIFIDE from the collection originating from autonomous taxation.

• The introduction of the new Article 23.º-A of the Corporate Income Tax Code clarifies the nature of autonomous taxation as a collection of corporate income tax.

• Autonomous taxation is determined and assessed like corporate income tax, let us call it "stricto sensu", with only the applicable rates and taxable matter being different.

• The statute that approved SIFIDE does not state that the credits arising from it are deductible from every collection of corporate income tax; rather, it defines the scope of deduction, referring, in its no. 1, of Article 4.º, "to the amount determined in accordance with Article 90.º of the Corporate Income Tax Code, and up to its concurrence".

• It is concluded that Article 4.º, no. 1, of SIFIDE II, by establishing the deduction "to the amount determined in accordance with Article 90.º of the Corporate Income Tax Code, and up to its concurrence", implies the deduction to the amount of autonomous taxation that is determined in accordance with that Article 90.º.

• It is undeniable to conclude that the normative-systematic interpretation according to which the deduction of tax credits associated with SIFIDE from the collection of autonomous taxation in corporate income tax is not permitted is incoherent and contradictory (and, consequently, illegal), with the clear provision of no. 1, of Article 2.º of the Tax Benefits Statute ("EBF"), according to which the pursuit of extrafiscal interests (which in this specific case will translate, among others, into the promotion of investments qualifying for purposes of SIFIDE which have the accounting/fiscal effects highlighted above) to the norms enshrining and regulating tax benefits.

• The investment expenses provided for in SIFIDE are deductible "to the amount determined in accordance with Article 90.º of the Corporate Income Tax Code, and up to its concurrence", so it must be concluded that they are deductible from the entirety of that collection, which encompasses, in addition to that derived from the taxation of profits in each fiscal period, that resulting from special payment on account and other positive components of the tax, namely autonomous taxation, municipal levy and corporate income tax from previous tax periods.

• Now, it is clear from the above that both the extrafiscal objectives pursued by SIFIDE and those of autonomous taxation are in no way undermined with an interpretation favorable to their deduction from the collection of autonomous taxation.

• Furthermore, even if no. 21, of Article 88.º of the Corporate Income Tax Code, were to exclude the possibility of deduction of SIFIDE credit from the collection of autonomous taxation, it could never be applicable to the fiscal year 2014, under penalty of violation of Constitutionally protected Principles, namely, the Principle of Protection of Trust, inherent in Article 2.º of the Constitution of the Portuguese Republic.

• The Claimant understands that, although there are case law understandings that, although only referring to the violation of the constitutional principle of trust with respect to the application of the alleged interpretive norm of no. 21, of Article 88.º of the Corporate Income Tax Code to the fiscal year 2013, the same conclusion applies to the fiscal year 2014, in question in this action, since the grounds are the same, that is, the application of an alleged interpretive norm to tax facts totally formed in the past (tax fact of successive formation initiated on 01-01-2014 and ending on 31-12-2014), contrary to the legitimate expectations created by the taxpayer.

• Now, in this way, the Claimant understands that the extensive case law presented in this arbitral ruling request – and much of which has already been presented in the gracious complaint that preceded it – must be taken into account in this action – as it should have been in the decision of the gracious complaint itself.

• In sum, in light of the foregoing, the Claimant understands that there can be no doubts as to the deductibility of credits resulting from SIFIDE from the collection of autonomous taxation, so the Claimant should be compensated for the amount paid in excess, as a result of the non-deduction of SIFIDE from the collection of autonomous taxation.

• Thus, the Claimant understands that, with reference to the tax period 2014, to the aggregate amount of autonomous taxation of Group B…, set at € 96,866.44 (ninety-six thousand, eight hundred and sixty-six euros and forty-four cents), the latter must be entirely deducted from the corresponding SIFIDE tax credit.

• Recall, in this regard, and as already demonstrated above, that following the self-assessment made through Form 22 of corporate income tax for the tax period 2014 and after the Claimant was notified, on 7 March 2016, of the final value of SIFIDE for the tax period 2014, which amounted to € 635,651.69 (six hundred and thirty-five thousand, six hundred and fifty-one euros and sixty-nine cents), the Claimant still has available a total SIFIDE credit that carries over to the following tax periods amounting to € 1,988,939.14 (one million, nine hundred and eighty-eight thousand, nine hundred and thirty-nine euros and fourteen cents).

• Thus, and in accordance with the above, a new corporate income tax assessment should be made that will result in compensation to the Claimant of the total amount assessed in excess, that is, the amount of € 96,866.44 (ninety-six thousand, eight hundred and sixty-six euros and forty-four cents) and consequent proportional consumption of the amount of tax credit highlighted in the previous point.

In addition to the amount relating to tax unlawfully assessed, the Claimant petitions for compensation through the payment of compensatory interest calculated from the date of unlawful payment of the tax until effective and full payment, at the rate of 4% per year, in accordance with Articles 35.º, no. 10, 43.º, no. 4 of the General Tax Code and Order no. 291/03, of 8 April.

For its part, the Respondent came, in response, to argue, in summary, as follows:

• The amounts in which SIFIDE is translated are deducted "to the amounts determined in accordance with Article 90.º of the Corporate Income Tax Code, and up to its concurrence" and in the assessment for the tax period in which the expenses eligible for that purpose are incurred.

• For the Respondent, the collection to which Article 90º refers when the assessment should be made by the taxpayer (a situation that occurs in the case at hand), is determined on the basis of the taxable matter that appears in that assessment/self-assessment. (cf. Article 90.º, no. 1, paragraph a) of the CIRC).

• Elucidating the fact that the credit in which SIFIDE is translated is deducted, and only, from the collection thus determined, that is, from the collection determined on the basis of the taxable matter, is the provision of Article 5º, paragraph a), of the law regulating SIFIDE, which prevents credits arising from it from being deducted when the taxable profit is determined by indirect methods.

• And even less with regard to the consideration of autonomous taxation, which, as is known, is determined autonomously and distinctly from the determination carried out in accordance with Article 90 ° of the CIRC.

• Thus, it would not be reasonable for the Respondent, but rather contrary to the reason that led the legislator to autonomously tax those expenses that, through their deduction from taxable profits as expenses, would eliminate the basis for the existence of autonomous taxation.

• The Respondent further argues that the situation that became clearer in the new wording of paragraph a) of no.1 of Article 23.º-A of the CIRC, which expressly states that they are not deductible for the purposes of determining taxable profits: "The corporate income tax, including autonomous taxation, and any other taxes that directly or indirectly affect profits" having limited itself to clarifying what already resulted from the legal order by application of the rules of interpretation.

• In that sense, it would be contrary to the spirit of the system to permit that, by force of the deductions referred to in no. 2 of Article 90.° of the CIRC, the anti-abusive character be removed, or at least distorted, from autonomous taxation that presided over its implementation in the corporate income tax system.

• Thus stated, it is clear that autonomous taxation should not be considered for the purposes of the deductions referred to in no. 2 of Article 90.° of the CIRC.

II. CLARIFICATION

2.1. The request for an arbitral ruling is timely, as it was submitted within the period provided in paragraph a) of no. 1 of Article 10.º of the RJAT.

2.2. The parties have judicial personality and capacity, are legitimate as to the request for arbitral ruling and are duly represented, in accordance with the provisions of Articles 4.º and 10.º of the RJAT and Article 1.º of Order no. 112-A/2011, of 22 March.

2.3. There are no nullities, so it is necessary to proceed to knowledge of the merits of the claim.

III. ISSUE TO BE DECIDED

The central question to be decided, as raised by the Claimant, is whether the self-assessment of corporate income tax (including autonomous taxation) relating to the fiscal year 2014 suffers from the material defect of violation of law, subject to challenge because, according to the Claimant's understanding, the deduction of SIFIDE should not be barred from the part of the corporate income tax collection corresponding to autonomous taxation.

IV. FACTUAL MATTER

IV.1. Proven Facts:

The following facts are deemed proven:

• On 31 December 2014, the Claimant was the dominant company of a group of entities that made up the Special Tax Regime for Groups of Companies ("RETGS"), under Article 69.º of the Corporate Income Tax Code, and which was constituted, in addition to the Claimant, by the following entities:

  • C…, S.A. – Tax ID…;
  • D…, Lda. – Tax ID…;

• In the fiscal year 2014, the Claimant submitted Form 22, within which a consolidated taxable matter of € 389,180.20 and a total amount of autonomous taxation of € 96,866.44 was determined

• The Claimant applied for the Tax Incentive System for Research and Development Enterprises (SIFIDE).

• Following the self-assessment made through Form 22 of corporate income tax for the tax period 2014 and after the Claimant was notified, on 7 March 2016, of the final value of SIFIDE for the tax period 2014, which amounted to € 635,651.69, the Claimant still has available a SIFIDE credit that carries over to the following tax periods amounting to € 1,988,939.14.

• The Claimant is an entity subject to and not exempt from corporate income tax, having made the corresponding corporate income tax self-assessment for 2014 (assessment no. … through the submission of the respective Form 22 mentioned above.

• The Claimant filed, on 11 August 2016, a Gracious Complaint against the self-assessment of corporate income tax (and autonomous taxation) for 2014.

• The Gracious Complaint was decided by dispatch of the Head of the Administrative Justice Division of the Finance Directorate of Lisbon, dated 23 December 2016.

• Dissatisfied with the dismissal decision, the Claimant submitted a request for Constitution and Arbitral Ruling, which was filed on 24 March 2017.

Reasoning as to the factual matter

Regarding the proven factual matter, the conviction of the Arbitral Tribunal was based on the free assessment of the positions taken by the Parties (as to facts) and on the content of the documents attached to the case file, not disputed by the Parties, as well as on the analysis of the administrative case file attached by the Respondent.

IV.2. LEGAL MATTER

The central question to be decided in the case (as raised by the Claimant in the request submitted), is whether an error occurred in the determination of autonomous taxation to be borne, which significantly distorted the tax to be assessed and paid by the Group, by not having deducted the tax credits determined relating to the application of the Tax Incentive System for Research and Development Enterprises (SIFIDE), from the collection of autonomous taxation, when it could have done so, according to the most recent understanding of case law (in particular arbitral case law).

The answer to the problem posed presupposes, first and foremost, that one analyzes the evolution of autonomous taxation in order to ascertain whether its legal regime (comprising nature and rationale) is compatible with the Claimant's claim or, if on the contrary, reason lies with the position defended by the Respondent.

IV.2.1.1. The nature of autonomous taxation in national jurisprudence and doctrine

As stated in Arbitral Decision no. 722/2015-T, of 28 June 2016 (reiterated, among others, in Arbitral Decision no. 443/2016-T), whose tribunal was presided over by the Arbitrator-President here as well (and to whose content we refer herein), autonomous taxation taxes the expense and not the income[2], a position that is assumed by the Honorable Councilor Vítor Gomes (dissenting opinion in Judgment no. 204/2010 of the Constitutional Court), in accordance with which he states, referring to autonomous taxation, that "although formally included in the CIRC and the amount it allows to collect is assessed within its scope and as corporate income tax, the norm in question concerns a fiscal imposition that is materially distinct from taxation in this schedule (….)".

"Indeed, we are faced with autonomous taxation (…) and that makes all the difference. It is not a matter of taxing an income at the end of the tax period, but determined types of expenses in themselves, for the understandable reasons of fiscal policy that the judgment points out".[3]

And adds that "in this way, the fact revealing taxable capacity that is intended to be achieved is the simple realization of that expense, at a determined moment. Each expense is, for this purpose, an autonomous tax fact, to which the taxpayer is subject, whether or not to have taxable income in corporate income tax at the end of the period, it being irrelevant that this portion of tax only comes to be assessed at a later moment and together with the corporate income tax" (emphasis ours).

Similarly, it was also recognized by the jurisprudence of the Supreme Administrative Court (STA) "that under the designation of autonomous taxation are hidden very diverse realities, including, in accordance with no. 1 of (then) Article 81.º of the CIRC, confidential or undocumented expenses, which are taxed autonomously, at the rate of 50%, which will be raised to 70%, in cases of expenses incurred by taxpayers totally or partially exempt, or that do not exercise, as principal activity, commercial, industrial or agricultural activities (no. 2 of [then] Article 81.º) and which are not considered as a cost in the calculation of taxable income in corporate income tax. It should be noted, however, that representation expenses and those related to light passenger vehicles, in accordance with the provision of (then) Article 81.º no. 3 of the CIRC and travel allowances are affected to business activity and indispensable so are fiscally accepted in some cases even within certain limits".[4]

With regard to the position held by the Constitutional Court, cite the Judgment no. 18/11, in accordance with which it is stated that "there are facts subject to autonomous taxation, which correspond to charges demonstrably indispensable to the realization of income and (…) this means that autonomous taxation also falls on charges that correspond to the core of the concept of real income, net income and compliance with accounting obligations" (emphasis ours).

"This argument of the Constitutional Court (…) interests us only to point out that the Court recognizes that this regime constitutes a limitation to the taxation of real income (which is guaranteed by Article 104.º no. 2 of the Constitution".

More recently, the Constitutional Court has reformulated the doctrine of Judgment no. 18/11 (mentioned above), moving closer to the then dissenting opinion of Counselor Vítor Gomes and the Judgment of the STA no. 830/11 (also cited above), in the sense of understanding that "contrary to what happens in the taxation of income under IRS and corporate income tax, in which the aggregate of income obtained in a given year is taxed (which implies that only at the end of it can the tax rate and the bracket in which the taxpayer falls be determined), in this case each expense incurred is taxed in itself, and subject to a determined rate, with autonomous taxation being determined independently of the corporate income tax due in each fiscal year, because it is not directly related to obtaining a positive result, and therefore subject to taxation. Thus, and in the case of corporate income tax, we are faced with an annual tax, in which each income received is not taxed per se, but rather the aggregation of all income obtained in a given year, the law considering that the event generating the tax is deemed to have occurred on the last day of the tax period (cf. Article 8.º, no. 9, of the CIRC). Whereas as regards autonomous taxation in corporate income tax, the event generating the tax is the very realization of the expense, not a complex fact of successive formation over a year, but an instantaneous tax fact" (emphasis ours).

Now, also according to this Constitutional Court Judgment "this characteristic of autonomous taxation refers us, thus, to the distinction between periodic taxes (whose taxable event occurs in successive manner by the passage of a determined period of time, as a rule annual, and tends to repeat itself over time, generating for the taxpayer the obligation to pay tax with regular character) and single obligation taxes (whose taxable event occurs instantaneously, arises isolated in time, generating an obligation to pay on the taxpayer with an occasional character). In autonomous taxation, the tax fact that gives rise to the tax is instantaneous: it is exhausted in the act of realization of a determined expense that is subject to taxation (although the determination of the amount of tax resulting from the application of the various rates of taxation to the various acts of realization of expense considered, comes to be effected at the end of a determined tax period). But the fact that the assessment of the tax is effected at the end of a determined period does not transform it into a periodic tax, of successive formation or of a lasting nature. That operation of assessment results only in the aggregation, for collection purposes, of the set of operations subject to that autonomous taxation, whose rate is applied to each expense, with no influence of the volume of expenses incurred in the determination of the rate" (emphasis ours). [5]

With regard to doctrine, we find that, in essence, the concept and nature of autonomous taxation do not deviate substantially from the understanding of jurisprudence produced by the Constitutional Court (summarily stated above).

In fact, as RUI MORAIS states, "it is a matter of a taxation that falls on certain expenses of taxpayers, which are considered as constituting tax facts. It is difficult to discern the nature of this form of taxation and, even more so, the reason why it appears provided for in the codes on taxes on income".[6]

In the same sense, JOSÉ ALBERTO PINHEIRO PINTO states that "it is not properly corporate income tax – which aims to tax the income of legal entities and not expenses incurred by them – but the substitution of a taxation of "implicit" income of natural persons, which is considered not directly executable".[7]

In sum, some doctrine and the jurisprudence of national superior courts and the Constitutional Court consider that autonomous taxation are autonomous tax facts that fall on the expense so that, despite being formally included in the Corporate Income Tax Code, concern a taxation distinct from the income tax.

Additionally, it should be noted that it is also accepted by the generality of doctrine and jurisprudence that autonomous taxation aim to prevent abusive practices of remuneration of workers, managers and partners/shareholders of the company.

Indeed, as SALDANHA SANCHES states, "in this type of taxation, the legislator seeks to respond to the admittedly difficult question of the fiscal treatment of expenses that are found in the intersection zone of the personal sphere and the business sphere, in order to avoid in-kind remuneration more attractive for exclusively fiscal reasons or hidden profit distribution. The norm presents a characteristic similar to what we will find in the legal sanction against undocumented costs, with a rate increase when the situation of the taxpayer does not correspond to a situation of fiscal normality."[8]

In these terms, "it is a taxation that is explained by the need to prevent and avoid that, through these expenses, companies proceed to the disguised distribution of profits, above all of dividends which, thus, would remain subject to corporate income tax as profits of the company, as well as to combat fraud and tax evasion that such expenses cause (…)".[9]

IV.2.1.2. Evolution of autonomous taxation

In this matter, it should be noted that, in the initial wording of the Corporate Income Tax Code (approved by Decree-Law no. 442-B/88, of 30 November), there was no express or implicit reference to autonomous taxation, and only with Law no. 101/89, of 29 December (statute that approved the State Budget for 1990), was a first reference to autonomous taxation made within the scope of corporate income tax, through the legislative authorization contained in no. 3 of its Article 15.º [in accordance with which it was provided that the Government was authorized to autonomously tax in IRS or corporate income tax, as applicable, at a rate increased by 10% and without prejudice to the provision of paragraph h) of no. 1 of Article 41.º of the CIRC, confidential or undocumented expenses incurred in the exercise of commercial, industrial or agricultural activities by IRS taxpayers who own or must own organized accounting or by corporate income tax taxpayers not covered by Articles 8.º and 9.º of the respective Code].

As is well known, the origin in Portuguese fiscal law of autonomous taxation dates to 1990, with the publication of Decree-Law no. 192/90, of 9 June, in accordance with which (in its Article 4º), autonomous taxation was established:

a) At the rate of 10% relating to confidential or undocumented expenses; and
b) At the rate of 6.4%, relating to representation expenses and charges related to light passenger vehicles.

Indeed, it was with the approval of Decree-Law no. 192/90 (and implementing that legislative authorization), that a norm on autonomous taxation was included alongside the codes of IRS and corporate income tax, in accordance with which "confidential or undocumented expenses incurred in the exercise of commercial, industrial or agricultural activities by IRS taxpayers who own or must own organized accounting or by corporate income tax taxpayers not covered by Articles 8.º and 9.º of the respective Code are autonomously taxed in IRS or corporate income tax, as applicable, at a rate of 10% without prejudice to the provision of paragraph h) of no. 1 of Article 41.º of the CIRC".

This norm (and, in general, the regime of autonomous taxation), came to be the subject of various changes (v.g. Law no. 52-C/96, of 27 December, Law no. 87-B/97, of 31 December, Law no. 3-B/2000, of 4 April and Law no. 30-G/2000, of 29 December), in particular, through successive modifications, both of the rates and of the systematization and wording conferred to them in the respective codes on taxes on income (that is, both in the Corporate Income Tax Code and in the Income Tax Code).

With the approval of Law no. 30-G/2000, of 29 December, the decree that enshrined "autonomous taxation" was repealed, adding to the Corporate Income Tax Code Article 69º-A [corresponding at the date of the facts underlying (2014) to Article 88º] in which, in addition to the maintenance of its incidence on undocumented expenses, representation expenses and expenses with vehicles, it was extended to other situations of diverse nature.

As a consequence of this analysis of the evolution of autonomous taxation, we understand it is possible to draw, forthwith, two inferences:

(i) The first is that autonomous taxation applies both to deductible charges and to non-deductible charges under corporate income tax;

(ii) The second is that autonomous taxation aims to prevent erosion of the tax base under corporate income tax, imposing taxation on charges that may be deducted by corporate income tax taxpayers but that, if deducted, turn into an increase in taxation, intending, therefore, to serve as a disincentive to expenses with such charges.

With regard to autonomous taxation on non-deductible expenses, if their deductibility were admitted, it would be admitting the deductibility of a charge not indispensable for the realization of income subject to tax or for the maintenance of the income-producing source.

Thus, it can be taken as established, and for what will be relevant for the decision to be rendered in the context of the present case, the following assumptions:

(i) Autonomous taxation of corporate income tax anchored in the various numbers and paragraphs of Article 88º of the Corporate Income Tax Code reflect diverse situations, with different taxation rates also applying to them;

(ii) Autonomous taxation of corporate income tax falling on determined charges of corporate income tax taxpayers should be understood as payments independent of the existence or not of taxable matter;

(iii) Interpreted as payments, associated with corporate income tax, or at least related to it, which can be understood as an exception with respect to the principle of taxation of legal entities in accordance with the real and effective profit determined (Article 3º of the Corporate Income Tax Code),

(iv) In autonomous taxation, the tax fact that gives rise to taxation is instantaneous: it is exhausted in the act of realization of determined expenses that are subject to taxation (although the determination of the amount of tax resulting from the various rates of taxation to the various acts of realization of expenses considered, comes to be effected at the end of a determined tax period);

(v) The fact that the assessment of the tax is effected at the end of a determined period does not transform it into a periodic tax, of successive formation or of a lasting character, because that operation of assessment results only in the aggregation, for collection purposes, of the set of operations subject to that taxation, whose rate is applied to each expense, with no influence of the volume of expenses incurred in the determination of the rate;

(vi) Autonomous taxation is not equivalent to the non-deductibility of expenses incurred by the corporate income tax taxpayer.

On the other hand, and with respect to the characteristics of autonomous taxation, those are recognized here that, for some years now, doctrine has been pointing to this type of taxation, namely:

a) Autonomous taxation only makes sense because costs/expenses are relevant as negative components of the taxable profit of corporate income tax, and this is what motivates corporate income tax taxpayers to report as high a value as possible of these expenses to reduce the taxable matter of corporate income tax, the collection and, consequently, the tax to be paid;

b) With the associated fiscal regime, the intention is to discourage this type of expenses in taxpayers that present negative results but that, regardless thereof, continue to show consumption structures little or not at all compatible with the financial health of their companies;

c) It is, in more general thesis, to model the fiscal system so that it reveals a certain balance with a view to a better distribution of the effective tax burden among taxpayers and types of income;

d) Certain expenses are regarded unfavorably in which, admittedly, it is not easy to determine the exact measure of the component that corresponds to private consumption, and with respect to which general practice of abuse in their reporting is known.

IV.2.1.3. The cause and function of autonomous taxation under corporate income tax

It is undisputed that autonomous taxation is rooted, as mentioned, in the need to prevent abuse as to the reporting of certain charges or expenses and that may be easily subject to diversion to private consumption or that, in some way, are susceptible to formally configuring an expense of a legal entity, but that, substantively, represent or may configure abuses in order to minimize the real measure of the tax.

Aware of this difficulty, often of making a rigorous separation of these two realities, it was successively "grafted," as described above, into the regime of taxation of real and effective profit established in the Corporate Income Tax Code, as general standard, an autonomous regime for taxation of certain expenses, wholly or partly undesired and undesirable that contaminate the terms of the duty of tax, which thus appears configured below the real taxable capacity of the entity that reports it as such.

In these terms, it can be stated that autonomous taxation appear integrated in the regime of corporate income tax, are determined and due within the framework of the legal relationship of tax on the income of legal entities and it is, in this context, that their determination is effected.

But they are not "corporate income tax," tout court as the Claimant tersely and definitively states.

Indeed, for them to be thus considered they would, first of all, have to tax income and this, as we have seen, is not what occurs, at any moment. In fact, although there is an evident instrumentality between corporate income tax and the model of income taxation in Portugal and autonomous taxation (a fact moreover well evidenced in the jurisprudence of the Superior Courts and, in particular, of the Constitutional Court), the understanding prevails that autonomous taxation tax expenses.

Indeed, autonomous taxation are an instrument that (departing from and introducing some measure of distortion into a system that declares to tax real and effective income), ultimately also taxes expenses, deductible or not in corporate income tax, without this violating constitutional precepts, since the applicable norm (Article 104.º, no. 2 of the Constitution) declares imperative the taxation of companies "fundamentally" on their real and effective income, without prejudice either to situations of taxation according to profits or real income (when determined by indirect methods), or to situations of taxation of expenses subject to autonomous taxation (by express choice of law), the establishment of technical solutions (such as special payment on account) and the rules specific to their return.

In this context, it is worth recalling that neither fiscal systems nor models of concrete imposition correspond to pure models, free from elements of strangeness to the foundational system itself, of values, or to the general regime of any tax abstractly considered. Indeed, all taxes possess characteristics or solutions that, when viewed in isolation, may objectively represent a decharacterization of the model as in the purity of concepts it was conceived, but that, when articulated with the model, it is verified that they contribute to its effectiveness, and confer or reinforce its coherence.

These solutions, more pragmatic or specific, do not wound such essential value dictates, whether they are of receipt protection or densification of general value ideals (of the tax order) or specific to the tax (as is the case of the need for abuse prevention) as long as they themselves are not of such relevance that they abjure the model of taxation-rule or structurally falsify the values on which it is rooted.

In the case under analysis, although the option of fundamental law and ordinary law, as a consequence, has been clearly in the sense of taxing the income of legal entities and, in the possible forms of determining this, the taxation of real and effective income has been chosen as a manifestation of the highest standard of fiscal justice, the truth is that the system has always known more or less relevant deviations, whether because certain expenses are not considered as such by fiscal law (although objectively they may be imputable to a commercial activity), or because fiscal law, recognizing that essentiality, fears the occurrence of abuse (as is the case with autonomous taxation, generically speaking).

In part, this departure from the purity of concepts is an inevitable consequence of the complexity of life's relations, whether because pure fiscal imposition models are more costly to implement and manage since they require much more refined relevant information, or because in the field of taxes, as in other fields of life, the ideal of justice enshrined must be tempered with solutions of normative reasonableness in the qualification of relevant facts and technique in the solutions and requirements to be established, with the objective of preventing fiscal models from becoming excessively complex and costly ceasing to reach realities and practices that mitigate the tax burden or contribute to a poor distribution of the same.

Now, from this balancing of the values that support the duty to establish / bear tax with the realities of life may result the need to establish limits (fiscal or other) to the behavior of taxpayers, with the objective of maintaining within general patterns of balance, the legal solutions of the system.

On the other hand, it is important to bear in mind (because this is relevant for the purposes of the decision to be taken) that autonomous taxation constitute anti-abuse norms directed to rationalize specific behaviors of taxpayers (as regards the duty of tax) by which, traditionally, they managed to achieve a measure of tax lower than what evidenced their effective taxable capacity but that, owing to these abusive behaviors was liable to be mitigated or eliminated, with evident violation or postponement of the principle of justice, of fair distribution of the fiscal burden by those who reveals taxable capacity.

Consequently, it makes sense to admit that general deductions are made from the collection of the tax, which are permitted by law to give effective meaning to the principle of taxation of real and effective income. However, as regards the collection due by autonomous taxation, that general deduction ceases to make sense because, not taxing profits, but expenses, the issue of justice in the distribution of the general burden of the tax does not arise as to them, so it would be illogical to permit the deduction of charges when such deduction, in practice, would destroy the anti-abusive meaning that pervades them: the discouragement of deviant behaviors that its institution represses or settles.

Now, autonomous taxation, as seems clear, do not have a markedly revenue-generating purpose, that is, do not aim, primarily, at obtaining (more) fiscal revenue, although this may not be a negligible aspect, verifiable.

Indeed, they aim to dissuade behaviors, practices or options of companies rooted in reasons essentially of a nature of fiscal savings, revenue-generating and, on the other hand, preserve the balances specific to the regime of taxation of legal entities, avoiding distortions not only at the level of taxable results, as waves of deviant behaviors, affecting the legal expectation of receipt, in each economic year.

And, through these general anti-abuse clauses, force the maintenance of a healthy correlation between the volumes of business, the taxable profits and the tax due finally by the entities subject to corporate income tax, in line with the levels of average effective tax burden that falls on the different groups of taxpayers, within the Portuguese fiscal system and, even, comparatively with that of the member states of the OECD or outside it.

Thus, autonomous taxation, including those provided for in paragraph b), of no. 13, of Article 88.º of the Corporate Income Tax Code have, thus, a general disciplinary function that is not alien to the systemic purposes of the tax, up to because, as an anti-abuse mechanism, autonomous taxation are not alien to the general purposes of the fiscal system.

In these terms, the adoption of legal regimes that limit the harmful effects resulting from behaviors affecting the balanced distribution of the fiscal burden among the different groups of taxpayers does not constitute only an option of the legislator but, is rather, a strict obligation, as a result of the obligation to outline and make the system function as a whole in a balanced manner.

Indeed, autonomous taxation introduce taxation mechanisms that, naturally, will displease their recipients, but prevent or limit the harmful effects of abusive practices that would harm others and are, therefore, necessary to preserve the balances of the system.

Now, companies, just like natural persons, are also subject and with the same intensity to the general duty to pay taxes and, in this measure, fiscal law cannot fail to enshrine mechanisms that limit deviant procedures because each one should bear tax according to what they can, that is, according to their revealed taxable capacities.

It is also important to note that, in our days, the regime of taxation according to real and effective income has been adopted as a general rule for legal entities, not constituting this a mere option of functioning of the fiscal system among several other possible ones.

In fact, it is rather a concrete manifestation of the modernity and maturity of a fiscal system that requires of its recipients/beneficiaries a maturity of the same stature for it also represents a new form of ethical and social accountability in the face of the phenomenon of tax. [10]

As SALDANHA SANCHES aptly noted (cited in Arbitral Decision 187/2013-T, pp. 28), autonomous taxation constitute a form of preventing abusive actions: "(…) that the normal functioning of the system of taxation was incapable of preventing, and others, including forms more burdensome for the taxpayer, were possible. This anti-abuse character of autonomous taxation will be not only coherent with its "anti-systemic" nature (as happens with all norms of the kind), as with a presumptive nature, pointed out both by Prof. Saldanha Sanches and by the jurisprudence that cites it. They will then materially underlie a presumption of partial entrepreneurship of the expenses on which they fall, as a function of the above-mentioned circumstance that such expenses lie on a gray line that separates what is business expense, productive, from what is private expense, of consumption, and that, notoriously, in many cases, the expense will even have in reality a dual nature (part business, part private)". [11]

All these considerations summon what appears to us to be the true legislative intent, in that the discovery of the true meaning of the law constitutes an imperative, for it is important to ensure that the interpreter's activity reaches an interpretive meaning by which the law externalizes its most beneficial, most fruitful and most healthy meaning, in the words of FRANCESCO FERRARA.[12]

On the other hand, the logical sense of interpretation leads us only in the sense that autonomous taxation rest on a logic according to which the law intends to prevent or discourage such legal entities from reporting (abusively) as expenses values relating to bonuses or variable remuneration. Thus, it is the reporting as an expense for purposes of corporate income tax, in its entirety, that is intended to be discouraged.

Appealing to the rationale of the law it is clear that autonomous taxation are levied within the framework of the process of assessment of corporate income tax in accordance with a root and a dogmatic of its own that lead to the total collection of the tax not being a unitary reality but composed.[13]

Thus, in it it is possible to discern the collection of tax properly speaking, resulting from the general mechanics of determination of corporate income tax, which is due with a constitutional basis rooted in the general duty of each one (in which legal entities are included) to contribute to public expenses according to their means (Article 103.º, no. 1 of the Constitution). All in respect and in compliance with the principles of justice, equality and the duty to pay tax according to revealed taxable capacity. And from which are deducted the amounts referred to in Article 90.º of the Corporate Income Tax Code and in the terms and modes referenced there.

To this general collection, rooted in this foundational order basis, is added the specific collection, due by autonomous taxation, which has, as has been made clear, a root, a sense and its own basis, which is to discourage the adoption of behaviors taxed by them, listed in Article 88.º of the code, which constitutes an anti-abuse norm, which allows us to summon here all the specific dogmatic in which it is founded.

In this case, because it is a matter of fulfilling purposes that go beyond the purely revenue-generating purposes of the tax, to be situated in the field of behaviors that the law considers abusive and/or undesired, it seems clear that it makes no sense to effect deductions on it, under penalty of emptying, in practice, of any meaning the anti-abusive regime created.

Thus, in light of what has been set forth, we are now in a position to analyze the Claimant's request, as to the legality of the deduction of SIFIDE from the part of the corporate income tax collection of Fiscal Group B…, corresponding to autonomous taxation rates, relating to the fiscal year 2014.

IV. 2.2. Of the possible deductibility of SIFIDE from the collection of autonomous taxation

In light of the foregoing, it was concluded that the collection of autonomous taxation has a different root, which cannot, under penalty of subversion of the order of values, permit the deduction of tax benefits, under penalty of decharacterization of the principles specifically intended to be pursued.

Indeed, since the regime of autonomous taxation has a function of discouraging abusive behaviors, there is no logical reason why this discouragement could then dissipate, which would occur if it were possible to deduct from the collection of autonomous taxation, fiscal incentives, as the Claimant claims, because that possibility would result in a double strange effect, that is, on the one hand it could, at the limit, eliminate the collection resulting from autonomous taxation and, on the other, would provide for the deduction of a certain fiscal benefit (in the specific case, it is SIFIDE[14], for the fulfillment of the objectives or adoption of the behaviors set out in the norm enshrining the right to the fiscal benefit) to a tax that has a specifically anti-abuse function, of mitigation of fiscally and socially undesired behaviors.

From the combination of these possibilities would result a contradictory, illegal and unethical result, precisely because the same fiscal law would permit, within the framework of the same fiscal system, to relieve the taxpayer of the burden of paying a tax that is precisely due by the adoption of abusive, undesired and discouraged behaviors (reporting as expenses of the expenses provided for in Article 88.º of the Corporate Income Tax Code).

The arbitral understanding now endorsed, in the sense of the guidance followed in Arbitral Judgment no. 722/2015-T, is in harmony with the new no. 21 of Article 88.º of the CIRC added by Law no. 7-A/2016, of 30 March, by establishing that the amount determined of autonomous taxation is not «effected any deductions».

Also in this case, the legislator merely limited itself to adopting, clarifying it, a solution that the courts, by resorting to the applicable rules and by application of the criteria of legal hermeneutics were in a position to extract from the regime to apply, which is all this tribunal did, in the case at hand.

In light of the foregoing, it is concluded, thus, by the illegality of the deductibility of SIFIDE from the collection of autonomous taxation, without the need to resort to the interpretive character given by Article 135.º of Law no. 7-A/2016, of 30 March (OE for 2016), to Article 21.º of Article 88.º of the Corporate Income Tax Code, in accordance with which "the assessment of autonomous taxation in corporate income tax is effected in accordance with the provisions of Article 89.º and is based on the values and rates that result from the provision of the previous numbers, with no deductions being effected on the total amount determined."

Thus, it ceases to make sense the invoked unconstitutionality of no. 21 of Article 88.º of the CIRC, added by Law no. 7.º-A/2016, of 30 March, by violation of the principle of protection of trust, in that such normative is not even invoked in the resolution of the case in question.

In these terms, this Arbitral Tribunal understands that the Claimant is not correct, for the reasons and grounds invoked above, with respect to the possibility of deduction of the fiscal benefit relating to SIFIDE from the collection of autonomous taxation relating to the fiscal year 2014.

IV. 2.3. Of the other claims

Since the claim for declaration of illegality of the assessment impugned relating to the fiscal year 2014 is inadmissible, the claims made by the Claimant for restitution of the sums paid and of respective interest are also prejudiced.

V. DECISION

In these terms, this Arbitral Tribunal decides:

a) Judgment that the arbitral claim for declaration of illegality of the self-assessment of corporate income tax relating to 2014, object of challenge, is entirely inadmissible, absolving the Respondent of this claim;

b) Uphold the decision dismissing the claim in the gracious complaint of the tax act of self-assessment of corporate income tax relating to the fiscal year 2014;

c) Condemn the Claimant to pay the costs of this proceeding.

VI. VALUE OF THE PROCEEDING

In accordance with the provision of Article 306.º, no. 2, of the Code of Civil Procedure, 97.º-A, no. 1, paragraph a), of the Code of Tax Procedure and Administration and 3.º, no. 2, of the Regulation of Costs in Tax Arbitration Proceedings, the value of the proceeding is set at € 96,866.44.

VII. COSTS

In accordance with Article 22.º, no. 4, of the RJAT, the amount of costs is set at € 2,754.00, in accordance with Table I attached to the Regulation of Costs in Tax Arbitration Proceedings, to be borne by the Claimant, in accordance with Articles 12º, no.2, and 22º, no.4, both of the RJAT, and Article 4º, no.4 of the cited Regulation.

Notify.

Lisbon, 30 November 2017

The Arbitrator-President The Arbitrator-Member The Arbitrator-Member

Fernanda Maças Ricardo Sequeira Paulo Raposeiro

Document prepared by computer, in accordance with the provision of Article 131.º, no. 5, of the Code of Civil Procedure, applicable by referral of Article 29.º, no. 1, paragraph e), of the RJAT.

[1] The wording of this decision is governed by the orthography prior to the Orthographic Agreement of 1990, except as regards transcriptions effected.

[2] A position that is not called into question by the wording of paragraph a) of no. 1, of Article 23.º-A of the Corporate Income Tax Code, added by Law no. 2/2014, of 16 January.

[3] In the same sense see also the dissenting opinion of the same Arbitrator-President, appended to Arbitral Decision no. 5/2106-T, of 27 July 2016 (and to whose content we also refer herein).

[4] See proceeding no. 830/11, of 21-03-2012 (2nd Section).

[5] In this sense, see Judgment no. 310/12, of 20 June (Reporter Councilor João Cura Mariano), jurisprudence reiterated by the Plenary Judgment, in Judgment no. 617/2012 (proceeding no. 150/12, of 31 January 2013) and in Judgment no. 197/2016 (proceeding no. 465/2015, of 23 May 2016).

[6] See RUI DUARTE MORAIS, in "Notes on Corporate Income Tax", Almedina, 2009, pp. 202-203.

[7] Also CASALTA NABAIS considers that it is "a matter of taxation on the expense and not on the income" (in "Tax Law, 6.ª Ed., p. 614) and, in the same sense, see ANA PAULA DOURADO (in "Tax Law, Lessons", 2015, p. 237).

[8] See SALDANHA SANCHES, in "Manual of Tax Law", 3.ª Ed., Coimbra Editora, 2007, p. 406.

[9] See CASALTA NABAIS, Ibid., p. 614.

[10] Regarding questions about the limits of morality in the face of tax see SUSANNE LANDREY, STEF VAN WEEGHEL and FRANK EMMERINK). As regards the profound and undisputed interconnection between law and morality, see JOÃO BAPTISTA MACHADO, Introduction of Law and Discourse Legitimizing, Almedina, 9.ª Reprint pp. 50 and following.

[11] The Arbitral Decision of CAAD no. 210/13-T states that the "expenses (…) share among themselves a risk of non-entrepreneurship, that is, a risk of not being realized with business purposes, but rather extra-business or private purposes".

[12] In "Interpretation and Application of Laws", Arménio Amado, editors, 1978, p. 137 and following.

[13] See MANUEL DE ANDRADE, Essay on the theory of interpretation of laws.

[14] The System of Tax Incentives for Research and Development Enterprises (SIFIDE) aims to increase the competitiveness of companies by supporting their Research and Development effort through deduction from the corporate income tax collection of the respective expenses. This system of incentives was created in 1997 as a measure to stimulate the participation of the business sector in the overall effort of R&D. The experience resulting from its application allows to conclude that this mechanism has contributed to an effective increase in R&D activity by Portuguese companies.

The State Budget Law for 2011 (Law no. 55-A/2010, of 31 December) established SIFIDE II (which replaced SIFIDE), which came into force as of 2011, with the introduction of some changes to the legislation that made it even more attractive for companies, with the objective of continuing to increase their competitiveness, supporting their efforts in R&D.