Deductibility of Bad Debts (Uncollectible Credits) in IRC – CAAD Arbitration 210/2018-T

ARBITRATION AWARD

I. REPORT

1. The taxpayer A..., S.A., with the tax identification number ... (hereinafter referred to as the "Applicant"), with registered office at Rua ..., no. ..., ...-... ..., filed, pursuant to the combined provisions of Articles 2 and 10 of Decree-Law No. 10/2011, of 20 January, i.e., the Legal Framework for Arbitration in Tax Matters ("RJAT"), a request for the establishment of an Arbitral Tribunal in order to declare illegal the dismissal of the Hierarchical Appeal filed with a view to annul the assessment of Corporation Income Tax ("IRC") for the fiscal year 2012, with the Tax and Customs Authority ("Respondent" or "AT") being named as the respondent.

A) Establishment of the Arbitral Tribunal

1. Pursuant to the provisions of paragraph a) of section 2 of Article 6 and paragraph b) of section 1 of Article 11 of the RJAT, the Ethics Council of the Administrative Arbitration Centre ("CAAD") appointed the undersigned as arbitrator of the sole arbitrator tribunal, who communicated acceptance of the assignment within the applicable period, and notified the parties of this appointment on 14 June 2018.

2. Thus, in accordance with the provisions of paragraph c) of section 1 of Article 11 of the RJAT, and by means of the communication from the President of the Ethics Council of the CAAD, the Sole Arbitral Tribunal was constituted on 4 July 2018.

B) Procedural History

1. In the request for arbitral pronouncement, the Applicant petitions the illegality of the dismissal of the Hierarchical Appeal filed with a view to annul the IRC assessment No. 2016..., together with the respective compensatory interest assessment No. 2016... and the reconciliation statement No. 2016..., which amount to Euro 469,503.12, issued with respect to the fiscal year 2012.

2. It is equally petitioned that the reimbursement of the amount paid as tax, relating to credits considered uncollectible, as well as the payment, by the AT, of compensatory interest.

3. The AT filed its response, petitioning, for its part, the inadmissibility of the request for arbitral pronouncement, on the grounds that no legal violation is evident, requesting that the tax act under analysis, as it does not violate any legal or constitutional provision, be maintained in the legal order.

4. By order of 23 November 2018, the Sole Arbitral Tribunal, under the provisions of paragraph c) of Article 16 of the RJAT, decided, without opposition from the parties, that it was not necessary to hold the hearing referred to in Article 18 of the RJAT, as a result of the simplicity of the matters at issue, and because it considered that it had at its disposal all the necessary elements to make a clear and impartial decision.

5. Both parties, in the context of exercising the right to be heard, timely chose to present their additional arguments, to which, however, no reference need be made, as they merely reinforce the position already adopted in the documents previously filed and under consideration by this Arbitral Tribunal (i.e., the Request for Arbitral Pronouncement and the Response).

6. This Arbitral Tribunal decided, in accordance with section 2 of Article 18 of the RJAT, that it was not necessary to produce oral arguments, as the positions of the parties were clearly defined in their respective pleadings, and it likewise dispensed, for the same reason, with the hearing of the witnesses cited by the Applicant.

7. Having regard to the foregoing, this Arbitral Tribunal set the deadline for the arbitral award as 21 December 2018.

8. The Arbitral Tribunal was regularly constituted and is competent to consider the matters indicated (Article 2, section 1, paragraph a) of the RJAT), the parties have legal capacity and standing and have full locus standi (Articles 4 and 10, section 2 of the RJAT and Article 1 of Ordinance No. 112-A/2011, of 22 March). No nullities have occurred and no exceptions have been raised, and therefore nothing prevents judgment on the merits.

9. The present proceedings are therefore in a position for a final decision to be rendered.

II. QUESTION TO BE DECIDED

1. The central question to be considered and decided with regard to the merits of the case, as emerges from the procedural documents of the parties, is whether, in light of the provisions of Article 41 of the IRC Code, the conditions for the deductibility of credits considered uncollectible by the Applicant and not recognised by the AT have been met.

III. FACTUAL FINDINGS AND THEIR JUSTIFICATION

1. Having examined the documentary evidence produced, this tribunal finds as proven, with relevance to the decision of the case, the following facts:

I. The Applicant is a commercial joint-stock company whose activity relates to the trade and repair of vehicles and equipment of heavy vehicles of the brand H..., with the company being 100% owned by the company B..., with registered office in Sweden.

II. The Applicant is a taxable person under the standard IRC regime and a taxable person for VAT purposes, classified under the monthly periodicity regime.

III. In the fiscal year 2012, the Applicant proceeded to recognise tax expenses, in the amount of Euro 808,830.07, relating to credits considered uncollectible, relating, in part, to credits that had been in default for more than 24 months and, in the remainder, to credits with underlying insolvency or enforcement proceedings.

IV. The Applicant was subject to an internal inspection procedure, of partial scope, in the context of IRC, covering the fiscal years 2012 and 2013, instituted with the objective of validating the tax deductibility of expenses relating to credits considered uncollectible declared in those fiscal years and, likewise, correcting the tax losses deducted as a result of corrections made to previous fiscal years.

V. Following the aforementioned inspection procedure, the Applicant was notified of the Draft Corrections to the Inspection Report and reacted promptly through a Prior Hearing right, against the corrections set out therein.

VI. Disregarding the arguments presented by the Applicant in the context of Prior Hearing, the AT proceeded to issue the Final Inspection Report, from which corrections resulted that gave rise to Assessment No. 2016..., the compensatory interest assessment No. 2016..., as well as the reconciliation statement No. 2016..., all with reference to 2012.

VII. As the basis for the aforementioned corrections, the AT alleged, in summary, that, with regard to uncollectible credits with underlying insolvency or enforcement proceedings, the Applicant would have erroneously failed to derecognise the tax expense associated with them, since the underlying judicial proceedings had not been concluded and, consequently, there remained the possibility of the Applicant receiving that credit duly paid by the debtor.

VIII. Additionally, the AT further considered that, in some of the credits recognised by the Applicant, certain requirements for their deductibility were missing, namely, communication to the debtor and identity between the debtor and the party against whom enforcement is sought.

IX. In parallel, the AT further argued that the Applicant had deducted tax expenses in violation of the principle of specialisation of fiscal periods, since credits were allegedly declared as uncollectible in the fiscal year 2012 that would already have been in that situation in previous fiscal years.

X. It should be noted that, as regards uncollectible credits in default for more than 24 months, the AT, in accordance with its guidelines and after analysis of the documents exhibited, verified that the conditions for their recognition as a tax expense were met, determining, accordingly, that there was consequently no correction to the tax expense resulting from the declaration of the uncollectibility of those credits.

XI. Because it did not accept the aforementioned assessments, the Applicant filed a gracious complaint, which was dismissed, and subsequently filed a hierarchical appeal, likewise without success.

XII. Choosing to regularise its situation with respect to the AT, the Applicant made full payment of the tax owed, without prejudice to presently requesting this Arbitral Tribunal to decide on the illegality of the order dismissing the Hierarchical Appeal filed with a view to annul the aforementioned additional IRC assessment.

XIII. It should be noted, for the sake of clarity, that, in the understanding of this Arbitral Tribunal, the Applicant is only challenging the assessment with respect to corrections in the amount of Euro 34,417.39, in its part relating to the non-deductibility for tax purposes of uncollectible credits, thus resulting in an amount of tax to be paid (increased by compensatory interest) of Euro 25,200.42 (calculated on the basis of a simple three-rule).

1. The conviction of this tribunal regarding the facts found as proven resulted from the documents attached to the case file and the uncontested statements of the parties contained in the petition and arguments, as specified in the points of the factual findings set out above.

2. As regards the factuality found not to be proven by the Applicant and raised by the Applicant, this Tribunal notes that, having regard to the documentary evidence made available and duly analysed, the Applicant failed to demonstrate that the insolvency and enforcement proceedings in question obtained a final judgment.

3. Nevertheless, and as we shall see below, it does not appear to this Arbitral Tribunal that the Applicant itself alleged or intended to demonstrate, with the evidence presented, that final judgment occurred in the decisions underlying the credits in question.

4. Not withstanding, therefore, this factuality from considering the merits of the case, i.e., whether the credits may be considered uncollectible, in light of the legal provisions in force.

IV. ON THE LAW

A) Legal Framework

1. Given that the legal question to be decided in the present proceedings requires interpretation of the relevant legal texts, it is important, first, to set out the provisions that make up the relevant legal framework, at the date when the facts occurred.

2. In this sense, paying attention to the subject matter of the present case, we must examine the wording of Article 41 of the IRC Code, which provided, at the date of the facts, the following:

"1 - Uncollectible credits may be directly considered expenses or losses of the tax period provided that:

a) This results from an insolvency and business recovery proceeding, an enforcement proceeding, an extrajudicial conciliation procedure for the viability of companies in insolvency or in difficult economic circumstances mediated by IAPMEI - Institute for Support of Small and Medium-sized Enterprises and Investment, from an arbitral tribunal decision in the context of disputes arising from the provision of essential public services or from credits that are prescribed in accordance with the respective legal framework for the provision of essential public services and, in this case, their value does not exceed the amount of (euro) 750; and

b) Impairment loss has not been recognised or, if it has, proves to be insufficient.

2 - Without prejudice to the maintenance of the obligation for civil purposes, the deductibility of credits considered uncollectible in accordance with the preceding section or under the provisions of Article 36 is further dependent on the existence of proof of communication to the debtor of the recognition of the expense for tax purposes, which the debtor should recognise that amount as income for the purpose of determining taxable profit."

1. Indeed, the disputed question in the present case, as we shall set out below, will primarily relate to the interpretation of the aforementioned legal provision, in order to determine whether the credits here contested meet, or do not meet, the requirements of Article 41 of the IRC Code so as to be considered "uncollectible" and, thus, their tax expense be deductible.

2. Keeping this legislative framework in mind, we shall now turn to the arguments presented by the Parties.

B) Arguments of the Parties

1. In the present Request for Arbitral Pronouncement, the Applicant alleges, in summary, that the IRC assessment that is now sought to be annulled is vitiated by illegality, due to errors as to the substantive and legal assumptions in not considering deductible part of the credits considered uncollectible by the Applicant in the fiscal year 2012.

2. In support of its position, the Applicant contends that the law establishes as requirements for the recognition of the uncollectibility of a credit that (1) it results from an insolvency or enforcement proceeding, (2) impairment loss has not been recognised and (3) communication of the recognition as an expense of the fiscal year to the debtor exists.

3. In this context, the Applicant indicates that the AT appears to add a new requirement for the application of the regime, requiring the conclusion of the proceedings in question (Article 79 of the Request for Arbitral Pronouncement), which the Applicant does not understand to be a conclusion that can be reached from the wording of the legal text.

4. The Applicant argues that "In fact, it will be agreed that both singular enforcement action and universal enforcement action aim at 'the satisfaction of creditors', since they aim to satisfy unfulfilled obligations, therefore, in the abstract, the hope of collecting the credit will remain alive as long as such proceedings subsist. However, in practice, reality differs, since the actual collection of the credit does not depend on the creditor, but rather on the existence of assets in the debtor's patrimony." (Articles 96 and 97 of the Request for Arbitral Pronouncement).

5. With this in mind, the Applicant contends that the finding of a possible insufficiency of assets to satisfy the credit is, in most cases, simple to observe, by merely analysing the underlying proceeding.

6. In this context, the Applicant contends that, "determining that a certain credit maintains the hope of performance in a certain insolvency proceeding does not lead to the conclusion that this always happens in other proceedings, or that the credit will only be uncollectible at the moment the insolvency proceeding ends, since, whilst the proceeding is pending, it may result therefrom that a certain credit will never be satisfied due to insufficiency of the insolvent estate; and, in the same way that an enforcement proceeding will also never come to a successful conclusion if the patrimony of the party against whom enforcement is sought does not satisfy the credit of the creditor." (Articles 103 and 104 of the Request for Arbitral Pronouncement).

7. Thus, the Applicant concludes that a company that wishes to derecognise an uncollectible credit must (1) obtain a judicial certificate attesting, even if not expressly, that the credit is uncollectible in that proceeding and (2) communicate such derecognition to the debtor.

Therefore,

1. All tax expenses resulting from the derecognition of uncollectible credits are correctly deducted, because the uncollectibility results from judicial proceedings, because communication of the consideration as an expense to the debtor was made and, likewise, impairment loss was not registered, with the cumulative requirements being satisfied in the fiscal year 2012, in accordance with Article 41 of the IRC Code.

2. It should further be noted that, in order to give robustness to its position, the Applicant also cites multiple case law issued by the Central Administrative Court, as well as by the Arbitral Tribunal itself, which takes a position favourable to the Applicant in face of similar circumstances.

3. Finally, and understanding that it is confronted with an error attributable to the services, the Applicant requests that compensatory interest be required from the AT on the amount of tax paid in excess in relation to the eventual value subject to reimbursement.

4. For its part, the Respondent, duly notified for this purpose, filed its Response in which, in summary, upheld its main thesis that, in order for the uncollectibility of the credits to be recognised, pursuant to Article 41 of the IRC Code, the same should be based on the finality of the sentence of insolvency or enforcement underlying the credits in question.

5. The Respondent contends that the conduct of insolvency proceedings is governed by the Insolvency and Business Recovery Code and that, in accordance with Article 1 of that instrument, the insolvency proceeding aims at the satisfaction of the creditors of the company declared insolvent.

6. "Accordingly, the declaration of insolvency is not synonymous with the extinction of the legal entity, since, between the judgment declaring insolvency and its conclusion, a series of acts take place, namely convening of creditors, claiming of credits and graduation of credits which may lead to the identification of assets and satisfaction of claimed debts." (Article 35 of the Response).

7. In this context, the Respondent understands that "it thus inexorably follows that only with the conclusion of the insolvency can there be place for the recognition of the uncollectibility of the debt", since "(…) the mere pendency of an insolvency proceeding constitutes, in accordance with the provisions of paragraph a), section 1, Article 36 of the CIRC, reason for the constitution of impairment in credits and not reason for the recognition of the uncollectibility of the credit." (Articles 38 and 39 of the Response).

8. Also with regard to the enforcement proceeding, the Respondent states that, between the submission of the enforcement request and the extinction of enforcement, a series of diligences take place, with the objective of collecting the credit, with enforcement being declared extinct only when the conditions provided for in Article 919 of the Code of Civil Procedure are met.

9. Thus, as the enforcement proceeding is a proceeding designed to collect credits, the mere existence of an enforcement proceeding to collect a credit also does not confer the right on the holder of the credit to recognise it as uncollectible, with this recognition, in the understanding of the Respondent, only being possible with the extinction of that proceeding, due to lack of payment or non-existence of assets.

10. In summary, the Respondent contends that, "as long as the closure of the insolvency proceeding or the closure of the enforcement proceeding does not occur, the creditor maintains the right to receive the credit and may be indemnified for it, and consequently the financial asset cannot be derecognised." (Article 51 of the Response).

11. Thus, the Respondent points out that, in the context of IRC, recognition due to impairment results from a risk of collectibility of a credit, whereas by contrast, the concept of uncollectibility presupposes an impossibility, a definitive inexecutability of the collection of a credit, and therefore, when the legislature placed in the heading of Article 41 of the IRC Code the expression "uncollectible credits", no other interpretation can result from this than that the definitiveness of this impossibility of collection is required.

12. In this context, the Respondent concludes that: "i. without finality we have a pending proceeding, ii. having a pending proceeding there is, intuitively, no definitiveness, iii. therefore, there being no definitiveness there is no uncollectibility and, iv. consequently, there is no uncollectible credit, v. there is instead a credit of doubtful collection capable of being fiscally recognised as an impairment." (Article 75 of the Response).

13. Therefore, as the Applicant presented no proof attesting to the definitiveness of the decisions in question and their consequent recognition as an uncollectible credit, the credits do not meet the conditions of Article 41 of the CIRC.

14. Additionally, the Respondent understands that, given that the credits resulted from the normal activity of the Applicant and the risk of uncollectibility was duly justified given the pendency of insolvency and/or enforcement proceedings, impairment loss should have been recognised and deducted in these amounts.

15. Thus, and given that the proceedings pointed out by the Applicant were claimed in enforcement and/or insolvency proceedings that had their beginning in a time interval between 2002 and 2008, it follows that, in view of the principle of periodisation of fiscal years, the Applicant could not fail to recognise impairments on credits of doubtful collection in the fiscal years in which that risk occurred, in accordance with Article 35 of the CIRC (in the wording at the date of the facts), which it did not do.

16. "Certainly the Applicant should have done so, because it is not within its discretion and free will to choose the fiscal years in which it wishes to see certain tax expenses fiscally charged, particularly losses with the amounts owed by its customers." (Article 91 of the Response).

17. Finally, the Respondent concludes that the act of additional assessment at issue in these proceedings does not suffer from any defect that puts into question its legality and validity.

C) Tribunal's Consideration

1. By way of preliminary remark, it should be noted that, in the eyes of this Arbitral Tribunal, the question to be decided relates to the interpretation of Article 41 of the IRC Code at the date of the facts, and is important to know, in particular, whether it results therefrom that, for the purposes of recognition of a tax expense, it is necessary that the insolvency and enforcement proceedings underlying the uncollectible credits be concluded or not.

2. As it is a primarily interpretative question, we must cite section 1 of Article 11 of the LGT, which provides as follows:

"1 - In the determination of the meaning of tax provisions and in the qualification of facts to which they apply, the general rules and principles of interpretation and application of laws are observed.

1. For its part, as regards the general rules of interpretation, Article 9 of the Civil Code provides the following:

"1. Interpretation should not be limited to the letter of the law, but should reconstitute the legislative intent from the texts, taking especially into account the unity of the legal system, the circumstances in which the law was drafted and the specific conditions of the time in which it is applied.

1. However, the interpreter cannot consider the legislative intent that does not have in the letter of the law a minimum of verbal correspondence, even if imperfectly expressed." (our emphasis).

2. In this context, it is beyond doubt that it is on the basis of the aforementioned interpretation rules that the sense of the concept of "uncollectibility" used by the legislature in Article 41 of the IRC Code shall be given effect.

3. Having regard to the aforementioned legal provisions, the starting point of interpretation must be the text of the provision itself.

4. In this regard, we must take a position: this Arbitral Tribunal does not derive from the letter of the law any mention that points to the need for finality of the judgment of insolvency or enforcement underlying the uncollectible credits, thus being merely required that there exist an insolvency or enforcement proceeding instituted against the debtor relating to the amount owed.

5. In this context, it is unavoidable to decide here in the sense of decisions such as, for example, the judgment of the STA of 10/10/2012 (case 782/12), according to which the provision of Article 39 of the CIRC [Article 41 as of 1/1/2010] "does not require that credits in coercive collection through enforcement proceedings can only be accounted for as uncollectible credits through judgment with finality that declares their uncollectibility in enforcement proceedings."

6. Indeed, the aforementioned judgment notes at length that: "If the legislature had wished that only the judgment with finality would serve as a means of proof of the uncollectibility of the credit for the purposes of its deduction as a cost for the purpose of determining the taxable matter in the context of IRC, it would certainly have said so unequivocally; by having chosen a formula from which, even minimally, that requirement does not result, we must conclude that it did not wish to establish it as a requirement for the proof of uncollectibility (cf. Article 9, section 3, of the Civil Code). In fact, in situations where the legislature understands that for the proof of certain facts a certain means of proof is required, it always states this unequivocally."

7. In the same sense, with which this tribunal agrees, see the Arbitral Award issued in case No. 279/2013-T: "It does not appear that the intent of the legislature was in the sense of requiring judgment with finality as a means of proof of uncollectibility because if it had been so it would have expressed that requirement unequivocally. Or, put another way: there are no reasons why it should not have done so to the extent that the requirement of a certain means of proof is always done unequivocally by the legislature. Thus, the segment of Article 39 of the CIRC ('uncollectible credits may be directly considered costs or losses of the fiscal year to the extent that this results from a special business recovery and creditor protection proceeding or from an enforcement, bankruptcy or insolvency proceeding'), should be interpreted in the sense that it is not the formal final result of the proceeding (recovery of the business, enforcement, bankruptcy or insolvency) that is relevant but rather this result should be what derives from a set of acts and facts reflected in that same proceeding and which reveal unequivocally the uncollectibility of the credit (for example, a certificate of non-attachment of assets was drawn up due to absolute non-existence of patrimony of the bankrupt or insolvent person, what sense would it make to wait for a court decision with finality to consider the credit uncollectible?). [...]. It can thus be stated in summary that what must be captured are signals in the insolvency proceeding, in the business recovery proceeding, in the enforcement proceeding, that unequivocally reveal the uncollectible nature of credits."

8. Also the Arbitral Award issued in case No. 222/2018-T, more recent and presented in the proceedings by the Applicant, goes in the direction of the aforementioned decisions and judgments, considering that what is relevant for the uncollectibility of a credit, for the purposes of Article 41 of the IRC Code, does not require the extinction of the underlying proceeding, but rather that the credit be considered unequivocally uncollectible in the context of a proceeding that is ongoing.

9. Thus, this Arbitral Tribunal understands, as the aforementioned Award has already understood, that it is necessary to verify, on a case-by-case basis, whether there are signals that unequivocally point to the uncollectible nature of the credits in question.

10. Thus, having regard to the documentary evidence brought before these proceedings, and the facts found to be proven based on that evidence, it was verified that:

A. Client C..., Lda.

1. According to the information provided, in 2012, the balance of the Account of Client C..., Lda. is Euro 7,701.79, increased by the amount of Euro 1,427.20, as Value Added Tax ("VAT").

2. In 2006, when the Applicant filed in court the Enforcement Request that gave rise to the enforcement aimed at the coercive collection of the credit on C..., Lda. (case no. .../06...TCLRS-A), the total amount owed was Euro 15,808.83, composed of principal and default interest calculated up to the date the enforcement action was filed in Court.

3. During the pendency of the enforcement, C..., Lda. delivered to the Applicant, by way of return, a motor vehicle, to which the parties assigned the value of Euro 5,000, excluding VAT, and that amount was accordingly deducted from the value of the debt.

4. In addition to the return of the aforementioned vehicle, the Applicant received no amount for payment of the debt subject to enforcement, and accordingly a certificate was issued in which it is certified that the party against whom enforcement was sought (the Applicant) did not receive any amount for full or partial payment of the amount owed by the party against whom enforcement was directed, with it further being certified that enforcement was terminated due to subsequent uselessness of the action, due to non-existence of attachable assets of the party against whom enforcement was directed.

5. Additionally, it is verified from the facts found to be proven that the Applicant communicated the notification required by Article 41 of the IRC Code to the debtor.

Accordingly,

1. This Arbitral Tribunal concludes that, with respect to this credit, the necessary signals exist that unequivocally point to the uncollectible nature thereof, and thus the conditions for deductibility of the aforementioned credit are met, by being considered uncollectible, in light of the provisions of Article 41 of the IRC Code.

B. Client D..., Lda.

1. According to the information provided, the balance of Client D..., Lda. is Euro 1,696.07.

2. As regards this customer, the Applicant filed an enforcement action for the coercive collection of its credit, which was conducted under case no. .../08...T....

3. Subsequently, D..., Lda. was declared insolvent by judgment issued on 16 November 2011, in the context of case no. .../11... T....

4. Following this, by Order of the Judge responsible for the enforcement case file, dated 28 February 2012, the same were suspended, due to the declaration of insolvency of the party against whom enforcement was directed, and it can be read in the Order that "since the suspension of a proceeding cannot last 'ad eternum' (Article 1284 of the CPC), it seems to us that the solution is to determine its filing, pending the expiry of the abandonment period (given that court costs are assured)."

5. Thus, as the Applicant did not receive any amount by way of payment of the debt subject to enforcement, a certificate was issued regarding enforcement case no. .../08...T..., in which it is certified that the party against whom enforcement was sought (the Applicant) did not receive any amount for full or partial payment of the amount owed by the party against whom enforcement was directed.

6. Following this, and in view of the tenor of the Order and the aforementioned certificate, the Applicant communicated the cancellation of the expense to the debtor, in accordance with section 2 of Article 41 of the IRC Code.

Accordingly,

1. With respect to this credit, this Arbitral Tribunal concludes that here too signals exist that unequivocally point to the uncollectible nature thereof, and thus the conditions for deductibility of the aforementioned credit are met, as it is considered uncollectible, in light of the provisions of Article 41 of the IRC Code.

C. Client E..., Lda.

1. According to the information provided, the balance of Client E..., Lda. is Euro 19,368.26, this amount having been accounted for after the return of two vehicles with a total commercial value of Euro 17,500.

2. For the coercive collection of the credit, the Applicant filed the appropriate enforcement action, which was conducted under case number .../05...TBABT-N, which was subsequently terminated because no attachable assets of the party against whom enforcement was directed were found, in accordance with the certificate issued.

3. Communication was made by the Applicant, on 3 September 2012, of the cancellation of the expense to the debtor, in accordance with section 2 of Article 41 of the IRC Code. However, the registered letter was returned with the mention of "Item not collected".

Now,

1. Having concluded that communication to the debtor was duly effected, not having been received by the debtor for reasons not attributable to the Applicant, it is the understanding of this Arbitral Tribunal that, with respect to this credit, the signals exist that unequivocally point to the uncollectible nature thereof, and thus the conditions for deductibility of the aforementioned credit are met, as it is considered uncollectible, in light of the provisions of Article 41 of the IRC Code.

2. This conclusion was equally reached by the Respondent during inspection, discussing only the value considered as uncollectible credit. In this context, given the evidence produced by the Applicant, the arithmetic error of the inspection services is recognised, given that the return of the vehicles resulted in a reduction of Euro 17,500 in the amount owed (and not double that value).

3. Accordingly, the amount of Euro 17,500, erroneously increased in the Respondent's taxable result of the Applicant, should be considered as deductible.

D. Client F..., Lda.

1. According to the information provided, the balance of the account of Client F... Lda. is Euro 3,798.48.

2. For the coercive collection of the aforementioned credit, the Applicant filed the appropriate enforcement action, which was conducted under case no. 1132-A/2002.

3. As the existence of attachable assets of the party against whom enforcement was directed could not be ascertained, the Court terminated the enforcement as useless, in accordance with an Order that is part of a certificate dated 15 March 2012, in which it is also certified that the party against whom enforcement was sought had not received, to that date, any amount for full or partial payment of the debt.

4. The Applicant communicated the cancellation of the expense to the debtor, in accordance with section 2 of Article 41 of the IRC Code, on 12 July 2012. However, the registered letter was returned with the mention of "Item not collected".

Now,

1. Having concluded that communication to the debtor was duly effected, not having been received by the debtor for reasons not attributable to the Applicant, it is the understanding of this Arbitral Tribunal that, with respect to this credit, the signals exist that unequivocally point to the uncollectible nature thereof, and thus the conditions for deductibility of the aforementioned credit are met, as it is considered uncollectible, in light of the provisions of Article 41 of the IRC Code.

2. Notwithstanding the foregoing, and to the extent that the value recognised by both parties as uncollectible associated with this client is Euro 3,246.56, that shall be the value to be considered deductible for tax purposes.

E. Client G..., Lda.

1. According to the information provided, the balance of the account of Client G..., Lda. is Euro 4,273.37.

2. For coercive collection of the aforementioned credit, the Applicant filed an enforcement action, which was conducted under case number 1130/2002.

3. Following the aforementioned action, a certificate was issued in which it is certified "that no attachable assets were found and that after consultation of the computerised enforcement register ( ..) it is noted that there is at least one enforcement terminated due to lack of assets."

4. It should be noted that, in accordance with the elements presented by the parties, on 30 October 2012, the liquidation process of G..., Lda. began.

5. The Applicant communicated the cancellation of the expense to the debtor, in accordance with section 2 of Article 41 of the IRC Code, on 19 December 2012. However, the registered letter was returned with the mention of "Item not collected".

Now,

1. Having concluded that communication to the debtor was duly effected, not having been received by the debtor for reasons not attributable to the Applicant, it is the understanding of this Arbitral Tribunal that, with respect to this credit, the signals exist that unequivocally point to the uncollectible nature thereof, and thus the conditions for deductibility of the aforementioned credit are met, as it is considered uncollectible, in light of the provisions of Article 41 of the IRC Code.

2. In conclusion, after careful analysis of all the elements presented concerning the credits disputed here, this Arbitral Tribunal understands that all tax expenses resulting from the derecognition of uncollectible credits are correctly deducted, given that:

i. The uncollectibility results from judicial proceedings (insolvency or enforcement, namely);

ii. Communication of the consideration of the expense to the debtor was made (although such communication was not always successful, for reasons not attributable to the Applicant); and, likewise,

iii. Impairment loss was not registered in respect of the amounts in question.

1. The cumulative requirements are thus satisfied in the fiscal year 2012, in accordance with Article 41 of the IRC Code.

2. It should further be noted in this regard that the Respondent, notwithstanding arguing that it considers impugned "the facts alleged by the Applicant that are in opposition with [its] defence" – as can be read in the Response – it is certainly the case that the Respondent presents no facts or elements that clearly contradict the aforementioned and evident signals that the credits in question have an uncollectible nature.

In summary,

1. From the factuality set out above, it is concluded unequivocally that the Applicant succeeded in proving the uncollectible nature of the credits in question, which is why the annulment of the tax acts whose contested part relates to the aforementioned credits and which was the subject of correction by the Tax Administration is necessary.

2. In this sense, the argument presented by the AT does not hold that the expense relating to the aforementioned credits should have been registered as an impairment, and thus deductible, in accordance with the principle of specialisation of fiscal periods.

3. Particularly because, had the Applicant chosen to register an impairment, the requirements for the recognition of the expense in accordance with Article 41 of the IRC Code would no longer be met.

Given this,

1. Finally, it is necessary to consider, under the provisions of Article 24, section 5, of the RJAT, the request for payment of compensatory interest in favour of the Applicant.

2. Pursuant to Article 43, section 1, of the LGT, compensatory interest is owed when it is determined, in gracious complaint or judicial challenge, that there was an error attributable to the services that resulted in payment of the tax debt in an amount higher than the amount legally owed.

3. It is, therefore, a necessary condition for the award of such interest the demonstration of the existence of error attributable to the services.

4. In this context, as cannot fail to be concluded from the facts presented by the parties, this Arbitral Tribunal considers there to be an error attributable to the AT, given that it committed the act of assessment partly illegally on its own initiative.

Therefore,

1. It concludes that the aforementioned request for payment of compensatory interest in favour of the Applicant is well-founded.

2. However, it should be noted that this interest should only be accounted for on the amount to be reimbursed to the Applicant, based on the specific subject matter of this award.

3. In fact, and in accordance with the detail set out above, the totality of the credits whose deductibility should now be ensured corresponds to Euro 34,417.79.

4. In this sense, considering, on the one hand, that the fiscal year 2012 encompasses different realities that are not the subject of pronouncement in this regard and, on the other hand, that it is possible to determine the amount of tax paid in excess, the same should be determined for the purpose of the value to be reimbursed to the Applicant and, naturally, the value of the case in these proceedings.

5. Indeed, considering the IRC rate applicable at the date (25%), the respective Municipal Surtax (1.5%) and State Surtax (3% above Euro 1,500,000 of taxable profit), the respective amount of tax is Euro 10,153.25.

6. Likewise, for the purposes of compensatory interest, the respective amount should be calculated, considering the period (1,070 days) and interest (4%) in the same manner as the respective interest assessment statement, resulting in the amount of Euro 1,189.96.

Therefore,

1. Thus, as there subsists no doubt for this Arbitral Tribunal that the expense relating to the uncollectible credits disputed here should be accepted for tax purposes in the period of 2012, it is understood that:

A) The dismissal of the Hierarchical Appeal is vitiated by a violation of law due to error as to legal and factual assumptions, and should be annulled and, consequently,

B) The IRC assessment No. 2016..., together with the respective compensatory interest assessment No. 2016... and the reconciliation statement No. 2016... that underlie it should be annulled, with the legal consequences.

V. DECISION

1. For these reasons, this Arbitral Tribunal decides:

A) To declare the request for arbitral pronouncement well-founded and, in consequence, declare illegal and annul the IRC assessment mentioned above, with reference to 2012,

B) To order the reimbursement of the amount of Euro 10,153.25, increased by Euro 1,189.96 associated with compensatory interest wrongfully paid (total of Euro 11,343.21);

C) To condemn the Respondent, in accordance with Article 43, section 1 of the LGT and Article 61, sections 2 and 5 of the Code of Tax Procedure and Process ("CPPT"), to pay compensatory interest, at the rate resulting from section 4 of Article 43 of the LGT, calculated on the amount paid of Euro 11,343.21, from the day on which the aforementioned assessments were paid and until the day of full reimbursement of the aforementioned amount; and

D) To condemn the Respondent to pay the costs of the proceedings.

VI. VALUE OF THE CASE

1. The value of the case is fixed at Euro 11,343.21, in accordance with Article 97-A, section 1, paragraph a), of the CPPT, applicable by virtue of paragraphs a) and b) of section 1 of Article 29 of the RJAT and section 2 of Article 3 of the Costs Regulation in Tax Arbitration Proceedings ("RCPAT").

VII. COSTS

1. In accordance with the provisions of Article 22, section 4, of the RJAT, the arbitration fee is fixed at Euro 918.00, in accordance with Table I of the aforementioned Regulation, to be borne by the Respondent, given the full acceptance of the request.

Let notification be made.

Lisbon, CAAD, 20 December 2018

The Arbitrator

(Sérgio Santos Pereira)