Process: 225/2016-T

Date: November 10, 2016

Tax Type: IRC

Source: Original CAAD Decision

Summary

This CAAD arbitration case (Process 225/2016-T) addresses the application of the SIFIDE (Sistema de Incentivos Fiscais à I&D Empresarial) tax benefit to Corporate Income Tax (IRC) for fiscal year 2007. The claimant company incurred research and development expenses and applied to the Innovation Agency (Adi) for SIFIDE certification. After initially submitting their 2007 IRC return without the SIFIDE deduction (awaiting approval), the company received certification in 2011 for a tax credit of €1,282,837.78 and submitted a substitution declaration reflecting this amount. However, the Tax Authority issued subsequent assessments that did not fully recognize the SIFIDE benefit, ultimately allowing only €839,590.67 instead of the certified amount. The company sought arbitration to recover the difference of €388,915.37 plus compensatory interest calculated from March 2012. The case illustrates critical procedural issues regarding the timing of SIFIDE claims, the submission of substitution tax returns after certification is obtained, and the Tax Authority's obligation to respect certified R&D tax credits. The dispute also raises questions about taxpayers' rights to compensatory interest when the administration fails to properly process legitimate tax benefits, particularly when delays span multiple years and involve multiple assessments. The arbitral tribunal was constituted on July 26, 2016, following the Tax Authority's express rejection of the administrative review, demonstrating the importance of CAAD as an alternative dispute resolution mechanism for complex IRC matters involving fiscal incentives for business innovation.

Full Decision

ARBITRAL DECISION

The arbitrators Dr. Jorge Manuel Lopes de Sousa (arbitrator-chairperson), Professor Doctor Suzana Fernandes Costa and Professor Doctor António Martins, designated by the Deontological Council of the Administrative Arbitration Centre to form the Arbitral Tribunal, constituted on 26-07-2016, agree as follows:

1. REPORT

A…, S.A., Company Tax Identification Number…, a company with registered office at Avenue…, Lot…, …floor, …-… Lisbon (hereinafter referred to as "Claimant"), came, pursuant to the provisions of articles 2, number 1 paragraph a), 5, number 3 paragraph a), 6, number 2 paragraph a) and 10, number 1, paragraph a), all of Decree-Law no. 10/2011, of 20 January (hereinafter "RJAT") to submit a request for constitution of a collective arbitral tribunal, following the express rejection of the administrative review presented for assessment of the legality of the liquidation of Corporate Income Tax (IRC) for the fiscal year 2007.

The Claimant further seeks recognition of its right to reimbursement of the additional sum of €388,915.37 as IRC for fiscal year 2007, plus corresponding indemnification interest, calculated in accordance with article 43 of the General Tax Code (LGT), to be computed from 30-03-2012 until issuance of the corresponding credit instrument.

The request for constitution of the arbitral tribunal was accepted by the President of CAAD and notified to the TAX AND CUSTOMS AUTHORITY on 28-04-2016.

Pursuant to the provisions of paragraph a) of article 6, number 2 and paragraph b) of article 11, number 1 of the RJAT, the Deontological Council designated as arbitrators the undersigned, who communicated acceptance of the assignment within the applicable period.

On 11-07-2016, the parties were notified of such designation and did not manifest intent to refuse the designation of the arbitrators, in accordance with the combined provisions of article 11, number 1 paragraphs a) and b) of the RJAT and articles 6 and 7 of the Deontological Code.

Thus, in compliance with the provision of paragraph c) of article 11, number 1 of the RJAT, the collective arbitral tribunal was constituted on 26-07-2016.

The Tax and Customs Authority responded defending the inadmissibility of the request for arbitral pronouncement.

By order of 29-09-2016, the meeting provided for in article 18 of the RJAT was waived and it was decided that the proceedings continue with arguments.

The parties submitted no arguments.

The arbitral tribunal was regularly constituted.

The parties possess legal personality and capacity, are legitimate (articles 4 and 10, number 2, of the same decree and article 1 of Regulation no. 112-A/2011, of 22 March) and are duly represented.

The proceedings do not suffer from nullities.

There are no obstacles to the examination of the merits of the case.

2. FACTUAL ISSUES

2.1. Proven Facts

The following facts are considered proven:

  • In the taxation period of 2007, the Claimant incurred "research and development expenses" and submitted an application to the Innovation Agency ("Adi") pursuant to the Fiscal Incentive System for Research and Development (SIFIDE);

  • On 27-08-2008, the Claimant submitted the Tax Return Declaration Model 22, no.…, relating to 2007, in which it did not reflect any deduction by way of SIFIDE tax benefit in field 355 of table 10, as of the date of submission of the declaration it was still awaiting, in accordance with legal provisions, approval of the application submitted to Adi (document no. 1 filed with the request for arbitral pronouncement, the contents of which are hereby reproduced);

  • On 29-08-2008, following such submission, it made a payment in the amount of €36,739,273.11 (document no. 2 filed with the request for arbitral pronouncement, the contents of which are hereby reproduced);

  • Following external inspection action carried out by the Tax Authority ("AT"), an additional corporate income tax liquidation no. 2010…, relating to fiscal year 2007, was issued on 10-08-2010, from which resulted a tax amount payable of €694,002.78, which resulted from corrections made to the Claimant's taxable profit (Document no. 3 filed with the request for arbitral pronouncement, the contents of which are hereby reproduced);

  • On 17-09-2010, the Claimant made partial payment of the additional liquidation in the amount of €56,800.32 (Document no. 4 filed with the request for arbitral pronouncement, the contents of which are hereby reproduced);

  • On 14-11-2011, the Claimant was notified by the "Certifying Commission for Tax Incentives for Business R&D" of the grant of a tax credit for deduction from collection relating to the taxation period of 2007, in the amount of €1,282,837.78 (document no. 5 filed with the request for arbitral pronouncement, the contents of which are hereby reproduced);

  • On 30-12-2011, it submitted a new Tax Return Declaration Model 22, no.…, relating to the same taxation period, in which it reflected, as the only alteration in relation to the prior one, the "deduction from collection by way of tax benefits in the amount of €1,282,837.78," corresponding to SIFIDE, entering this amount in field 355 of table 10 (document no. 6 filed with the request for arbitral pronouncement, the contents of which are hereby reproduced);

  • On 05-11-2012, the Claimant was notified of the additional corporate income tax liquidation no. 2012…, of 29-10-2012, in the amount of €77,595.96, in which the AT did not consider the "substitution declaration submitted on 30-12-2011," as the deduction relating to SIFIDE in the amount of €1,282,837.78 is not reflected therein (document no. 7 filed with the request for arbitral pronouncement, the contents of which are hereby reproduced);

  • Given the partial payment that had been made by the Claimant in the amount of €56,800.32, the AT proceeded to issue an account reconciliation statement, with the remaining amount owed amounting to €20,795.64, in accordance with account reconciliation statement no. 2012…, of 5 November (document no. 8 filed with the request for arbitral pronouncement, the contents of which are hereby reproduced);

  • On 20-12-2013, the Claimant made a payment in the amount of €20,795.64 pursuant to the Special Regime for Regularization of Tax and Social Security Debts ("RERD"), approved by Decree-Law no. 151-A/2013, of 31 October (document no. 9 filed with the request for arbitral pronouncement, the contents of which are hereby reproduced);

  • On 14-07-2015, the Claimant was notified of a new corporate income tax liquidation statement relating to fiscal year 2007, no. 2014…, of 10-11-2014, which reflects in line 13 an amount of €839,590.67 as a deduction from collection by way of SIFIDE Tax Benefit, and from which results an IRC to be refunded in the amount of €764,031.69 (document no. 10 filed with the request for arbitral pronouncement, the contents of which are hereby reproduced);

  • The liquidation document referred to in the preceding paragraph was not accompanied by any substantiation supporting the reduction of the tax credit from €1,282,837.78 to €839,590.67;

  • On 17-07-2015, the Claimant was notified of the account reconciliation statement for corporate income tax no. 2015…, of 01-07-2015, which reflects as the amount to be refunded €820,159.61, which is broken down as follows:

    – €764,031.69, corresponding to the refund reflected in the latest "liquidation statement";

    – €77,595.96, corresponding to the refund raised in the liquidation statement issued on 29-10-2012 and which was already fully paid;

    – €20,795.64, corresponding to a deduction from the amount to be refunded, which the AT considers is still owed; and

    – €672.40, relating to another deduction from the amount to be refunded, relating to an attachment resulting from a fiscal execution process;

  • On 11-11-2015, the Claimant submitted the administrative review shown in document no. 12 filed with the request for arbitral pronouncement, the contents of which are hereby reproduced, which was registered under no.…2015…, in which it requests, in summary, the following:

    – the refund of the amount corresponding to the value of SIFIDE approved and not considered as a deduction from collection, in the amount of €443,247.11;

    – the refund of the amounts €20,795.64 and €672.40 wrongly deducted in the account reconciliation statement; and

    – the payment of indemnification interest at the legal rate, calculated on the amount of €464,715.15, until the effective and complete payment of the amounts identified above, from the dates of effective payment of these;

  • On 15-01-2016, by means of letter no.… of 14-01-2016, the Claimant was notified of the decision of partial approval of the administrative review, issued by the Head of Division of the Large Taxpayers Unit, which expresses agreement with Report no. 06-AIR2/2016, which is contained in document no. 13 filed with the request for arbitral pronouncement, the contents of which are hereby reproduced, in which, among other things, the following is stated:

"Regarding the refund of the Tax Benefit/SIFIDE (I) approved and not considered - €443,247.11

  1. As alleged, in the 2014… liquidation, the only alteration with respect to the previous liquidation - see ANNEX No. 120 - corresponds to the fact that in determining the Corporate Income Tax Liquidated, the amount of €839,590.67 was considered as a deduction from collection, an amount relating to part of the 2007 SIFIDE Tax Benefit.

This "tax credit" diverges from the SIFIDE Tax Benefit contained in the notification ("certificate declaration") of the "Certifying Commission for Tax Incentives for Business R&D," which amounted to €1,282,837.78.

The liquidation in question gave rise to a corporate income tax refund, by reference to the taxation period of 2007, in the amount of €764,031.69, a value which, in the understanding of the Respondent, is incorrectly calculated.

  1. Indeed, that amount of €764,031.69 is included in the stated 2015… account reconciliation statement, which, in terms of the calculated value, reflects a right to a credit amounting to €820,159.61.

This right includes, in addition to the stated amount €764,031.69, the amount €77,595.96 corresponding to the "amount payable" calculated in the (Corporate Income Tax) 2012… liquidation (of 29.10.2012) and which was already fully paid, less: (i) €20,795.64, associated with a "deduction" which the AT considered was still owed; and (ii) €672.40, relating to another "deduction," relating to an attachment resulting from a fiscal execution process.

In sum:

  1. The SIFIDE Tax Benefit (I), granted to A… in the taxation period of 2007, is regulated by Law no. 40/2005, of 02.08.

In accordance with articles 2 to 4 of that decree, the Tax Benefit/SIFIDE (I) consists, in essence, of "the grant of a tax benefit, by deduction from collection, and up to the extent thereof, of a percentage of research and development (R&D) expenses considered eligible, incurred during the taxation period."

Number 1 of article 6 of the same decree expressly provides that "the deduction (...) must be justified by a certificate declaration (...) certifying that the activities carried out, or to be carried out, effectively correspond to R&D activities, the respective amounts involved, the calculation of the increase in expenses (...), issued by an entity named by order of the Minister for Science, Technology and Higher Education, to integrate the tax documentation process of the taxpayer referred to in article 121 of the Corporate Income Tax Code."

  1. This Tax Benefit depends, among others, in accordance with the second part of number 2 of article 6 of the same, "on the existence, in that tax documentation process, of a document certifying that the condition referred to in paragraph b) of article 5 is met - i.e., they are not debtors to the State and Social Security of any taxes or contributions, or have their payment duly secured — with reference to the month prior to the submission of the periodic tax return." In the case of A…, given its taxation period, with "reference to 31 July 2008."

  2. The Respondent submitted [in a timely manner] on 27.08.2008 the self-assessment Tax Return Declaration/Model 22 relating to the fiscal year corresponding to the taxation period of 2007 in which it did not declare any Tax Benefit/SIFIDE.

Following receipt by the "Certifying Commission" of the declaration granting, for that same taxation period, a Tax Benefit/SIFIDE (I) amounting to €1,282,837.78, the Respondent on 30.12.2011 submitted a new Model 22 substitution declaration, in which it declared the right to the deduction from collection (...) in that amount.

The Corporate Income Tax Management Department, on 17.12.2010, by means of Letter no.…, notified A… that the new Model 22 substitution declaration would not be liquidated, in view of the provision of number 3 of article 122 of the Corporate Income Tax Code.

However, insofar as number 7 of article 38 of the Tax Code for Investment, amended by article 211 of Law no. 83-C/2013, of 31.12 (State Budget/2014), came to consider that "the certificate declaration provided for in number 1 constitutes an administrative decision for the purposes of number 3 of article 122 of the Corporate Income Tax Code," the same Corporate Income Tax Management Department on 11.12.2014, by means of its letter no.…, notified A…, to the effect that, in accordance with the Order of the Director-General of 20.10.2014, the AT would proceed to "issue the corporate income tax liquidations for the period of 2007, taking into account the SIFIDE Tax Benefit."

From that decision, the Liquidation Division of the Corporate Income Tax Management Department issued the 2014… Liquidation, in which the amount of €839,590.67 was considered in terms of the SIFIDE Tax Benefit to be deducted from the collection of Corporate Income Tax (€92,651,374.73), by reference to the taxation period of 2007.

  1. In accordance with number 1 of article 4 of Law no. 40/2005, the Tax Benefit/SIFIDE (I) determined and calculated in accordance with articles 2 to 4 of that decree shall be deducted from the corporate income tax collection and up to its extent in the corresponding period.

However, the Tax Benefit, which due to insufficient collection cannot be deducted in the taxation period in which the "expenses were incurred," may be deducted up to the 6th following period (See number 4 of article 4 of Law no. 40/2005).

Given the regulation of the Tax Benefit/SIFIDE (I), it is immediately concluded that the Tax Benefit in the amount of €1,282,837.78 (value notified by the "Certifying Commission") would be exhausted in the taxation period of 2007 of A…, however, given all the factuality referred to above, that Liquidation Division proceeded to calculate the remaining Tax Benefit that should affect the determination of Corporate Income Tax for that taxation period, as follows in the table:

  1. That Liquidation Division, noting that in the taxation period of 2009, that company would have made, within the framework of Tax Benefit/SIFIDE (I), a "deduction from collection" of €700,194.36, when the allocation for the same period was only €311,278.99, resulting in an "excess deduction" in the amount of €388,915.37, and in the taxation period of 2010, would have made a deduction of €106,830.64, when the allocation was €52,498.90, also resulting in an "excess deduction" of €54,331.74, therefore the "deduction from collection" remaining, in terms of the Tax Benefit in question, relating to the taxation period of 2007, should amount to €839,590.67 [= €1,282,837.78-(€388,915.37+ €54,331.74)].

  2. Subsequently, following Service Order OI2015…, of 24.02.2015, the Large Taxpayers Unit proceeded to carry out an inspection action covering the taxation period of 2010 of A…, which resulted in additional corporate income tax liquidation 2015…, which reflects solely the alteration of the "declared tax benefits" (...) from €1,750,064.28 (declared value) to €1,695,732.54 (allocation for the year), that is, corresponding to a variation in the amount of (-)€54,331.73 [1].

  3. Thus, showing that all legal requirements for the right to Tax Benefit/SIFIDE (I) originating from R&D expenses incurred in 2007 by the Respondent are met, namely the existence in the "tax dossier" ("tax documentation process of A…") of the certificates ("certificate documents") certifying that the requirement referred to in paragraph b) of article 5 is met, with reference to July 2008, of Law no. 40/2005, we are of the opinion that the value to be considered in terms of that Tax Benefit (reflected in the liquidation and account reconciliation statement under review) should change from €839,590.67 to €893,922.41. In these terms, the Tax Benefit/SIFIDE (I)/2007 certified by the "Certifying Commission" in the amount of €1,282,837.78 would affect the following taxation periods of A…:

  4. In light of the aforesaid, what is sought by the Respondent regarding consideration as a deduction from collection of the corporate income tax of the taxation period of 2007 of A… of the amount of €443,247.11 is partially barred, therefore we propose, subject to other and better opinion, that it will be a matter of partially rejecting the request in the present administrative review procedure.

In these terms, the amount of €54,331.74 (fifty-four thousand, three hundred and thirty-one euros and seventy-four cents) shall be attributed to the taxation period of 2007 of the Respondent as Tax Benefit/SIFIDE (I), plus indemnification interest.

Regarding the refund of amounts wrongly deducted - €20,795.64 and €672.40

  1. As for the matter now under dispute relating to the "wrongful deductions" in the account reconciliation statement ID 2015_..., in the amounts of €20,795.64 (payment pursuant to the RERD in process …2010…) and €672.40 (remainder of the "attachment order …" - PEF …), after checking the IT means at the disposal of the Large Taxpayers Unit, allows us, at this date, to conclude that:

(i) The amount of €20,795.64 was refunded [refund no. 2015…] to taxpayer … (A…) on 12.11.2015 (See Doc. no. 1 in ANNEX No. 221); and

(ii) The amount of €672.40 was refunded (Refund 2015_...) to taxpayer … (A…) on 29.07.2015 by inter-bank electronic transfer no.… (See Doc. no. 2 in ANNEX No. 225).

  1. Given the foregoing, the two amounts under dispute - €20,795.64 and €672.40 - were duly deducted in the calculation of the amount of the corporate income tax refund relating to the taxation period of 2007 of the Respondent, therefore the request, as regards this matter, is entirely barred by subsequent mootness of the dispute.

Regarding the payment of indemnification interest

  1. Indemnification interest is owed, in accordance with article 43 of the General Tax Code, calculated on the amount of €54,331.74, counted from 01.01.2014, the date on which number 7 of article 38 of the Tax Code for Investment came into force, in the wording given by article 211 of Law no. 83-C/2013, of 31.12, until its "effective and complete payment."

  2. By letter issued by this Large Taxpayers Unit, the Respondent was duly notified to, if it so wished, exercise its right of participation, in the manner of prior hearing, in written form, in accordance with the provision of paragraph b) of number 1 of article 60 of the General Tax Code, in turn combined with the provision of article 122 of the Administrative Procedure Code.

  3. Upon expiration of the period granted for the exercise of that right of participation, neither the Respondent, on the one hand, came to add other elements to the record that had not already been resolved in our previous "Draft Decision," nor the Large Taxpayers Unit, on the other hand, discovered any other elements capable of undermining the conclusions previously proposed.

In these terms,

  1. Considering the permanence of the validity of the requirements that, in fact and in law, underpinned our previous "Draft Decision," we are thus of the opinion regarding the finality of the same, with all legal consequences.

§ II. CONCLUSION

In accordance with what was previously stated and having examined all the elements of the record, in particular our previous "Draft decision" and the procedural documents filed by A…, here the Claimant, it seems to us that the request contained in the record should be partially allowed, in accordance with the contents of the "summary table" mentioned in the introduction of our Report, with all legal consequences, namely, where applicable, with respect to the provision of article 163 of the Administrative Procedure Code and also with compliance with the determination of article 100 of the General Tax Code and the provisions of number 2 of article 63 of the Supplementary Regime of the Procedure for Tax and Customs Inspection.

It is further reported that, in case of Superior Approval, notification shall be made to A…, SA, taxpayer with Company Tax Identification Number…, here the Claimant, by means of letter to be sent by registered mail, in accordance with the provisions of articles 35 to 41, all of the Tax Procedure and Process Code.

  • In the taxation period of 2009, the Claimant made, within the framework of Tax Benefit/SIFIDE (I), a "deduction from collection" of €700,194.36, with the Tax and Customs Authority understanding that the allocation for the same period was only €311,278.99, therefore an "excess deduction" in the amount of €388,915.37 resulted therefrom;

  • In the taxation period of 2010, it made a deduction of €106,830.64, with the Tax and Customs Authority understanding that the allocation was €52,498.90, therefore an "excess deduction" of €54,331.74 resulted;

  • The excesses of deduction referred to in the preceding paragraphs were not subject to any correction by the Tax and Customs Authority, but only to adjustments against the tax credit granted for fiscal year 2007;

  • On 24-02-2015, the Large Taxpayers Unit carried out an inspection action covering the taxation period of 2010 of A… (Service Order OI no.…), which resulted in additional corporate income tax liquidation no. 2015…, which reflects solely the alteration of the "declared tax benefits" (...) from €1,750,064.28 (declared value) to €1,695,732.54 (allocation for the year), that is, corresponding to a variation in the amount of (-) €54,331.73;

  • Considering the adjustments that were made in fiscal years 2009 and 2010 on the basis of the excess deduction from collection by the Claimant, as well as the partial approval of the administrative review (in the amount of €54,331.74), it is verified that the amount attributed by the certifying commission as a deduction from collection in fiscal year 2007, in the amount of €1,282,837.78 was fully refunded to the Claimant, as follows:

  • The Claimant was never notified of any liquidation act for fiscal year 2009 that incorporated any tax correction to the tax credit relating to the SIFIDE of that year, nor was it cited for the institution of any fiscal execution process for coercive collection of any IRC debt from 2009 (assertion by the Claimant in article 28 of the request for arbitral pronouncement that is not questioned by the Tax and Customs Authority);

  • On 13-04-2016, the Claimant submitted the request for arbitral pronouncement that gave rise to the present proceedings.

2.2. Unproven Facts

There are no facts relevant to the decision of the case that have not been proven.

2.3. Reasoning for the Determination of the Factual Issues

The facts were deemed proven on the basis of the documents filed with the request for arbitral pronouncement.

There is no controversy regarding the factual issues.

3. LEGAL ISSUES

3.1. Essential Question to be Decided

The essential question to be decided is framed in the following terms:

– the Claimant, after having been notified by the "Certifying Commission for Tax Incentives for Business R&D" of the grant of a tax credit for deduction from collection relating to the taxation period of 2007, in the amount of €1,282,837.78, submitted on 30-12-2011 a Model 22 substitution declaration in which it indicated this value, corresponding to the SIFIDE tax benefit, in field 355 of table 10;

– the Tax and Customs Authority on 05-11-2012 issued an additional declaration of corporate income tax no. 2012…, relating to the year 2007, in which it did not consider the stated SIFIDE value;

– on 14-07-2015, the Claimant was notified of a new corporate income tax liquidation statement relating to fiscal year 2007, no. 2014…, of 10-11-2014, which reflects in line 13 an amount of €839,590.67 as a deduction from collection as a Tax Benefit SIFIDE;

– the non-consideration in the liquidation relating to the year 2007 of the value of €1,282,837.78 granted by the "Certifying Commission for Tax Incentives for Business R&D" is due to the fact that the Tax and Customs Authority understood that in the year 2009, the Claimant had made an excessive deduction from collection of the SIFIDE tax benefit in the amount of €388,915.37;

– the excess deduction referred to was not subject to correction by the Tax and Customs Authority of the declaration relating to the year 2009, but only to adjustments against the tax credit granted for fiscal year 2007, from which was subtracted the amount that the Tax and Customs Authority considered had been deducted excessively in 2009;

– the Claimant had sufficient corporate income tax collection in 2007 to deduct the entirety of the tax benefit relating to SIFIDE in the amount of €1,282,837.78;

– in the present proceedings, the Claimant seeks to have declared the illegality of liquidation no. 2014…, complemented by the account reconciliation statement no. 2015…, to the extent that the stated amount of €388,915.37 was not considered therein, which the Tax and Customs Authority understood had been deducted excessively in the declaration relating to fiscal year 2009.

It is not disputed by the Tax and Customs Authority that the Claimant had the right to the deduction from collection of the SIFIDE tax benefit in the amount of €1,282,837.78 that was granted to it for the year 2007.

3.2. Lack of Substantiation and Omission of Legal Formality

The Claimant contends that the Tax and Customs Authority did not substantiate its procedure and violated its right to prior hearing, by "taking" the tax credit from 2007 and considering it to compensate for an alleged excessive deduction from fiscal year 2009, without, however, such alleged credit relating to fiscal year 2009 being evidenced by any tax procedure or even a liquidation act.

Tax acts, as a species of administrative acts, "lack express and accessible substantiation when they affect rights or legally protected interests" (article 268, number 3, of the Constitutional Law).

Article 76 of the General Tax Code specifies the requirements for substantiation of tax acts, establishing the following:

  1. The decision of procedure is always substantiated by means of a succinct exposition of the reasons of fact and law that motivated it, the substantiation being able to consist of mere declaration of agreement with the grounds of earlier opinions, reports or proposals, including those forming part of the tax inspection report.

  2. The substantiation of tax acts may be carried out in a summary manner, and must always contain the applicable legal provisions, the qualification and quantification of the tax facts and the operations for determining the taxable matter and the tax.

It is manifest that the liquidation impugned and the account reconciliation statement on which it was based suffer from the defect of lack of substantiation, as neither before the issuance of these documents nor in their text is any reference made to the reasons why the value of €1,282,837.78 was not considered with respect to fiscal year 2007, nor is any reference made to any document containing an explanation of these reasons.

As is consistent jurisprudence, substantiation is only sufficient when, in the context in which the act was executed, it permits a normal recipient to understand the cognitive and evaluative itinerary of the decision taken, and the relevant substantiation is that which appears in the act itself or in a document to which its text refers.

Thus, in the case at hand, it must be concluded that liquidation no. 2014…, complemented by account reconciliation statement no. 2015…, suffers from the defect of lack of substantiation, as in the context in which the acts were executed, it was not possible for a normal recipient to understand the reasons why the SIFIDE tax benefit in the amount of €1,282,837.78 was not considered.

On the other hand, it is also clear that the Claimant had the right to prior hearing before the impugned liquidation in which the substitution declaration it had submitted was not fully considered. In fact, this right is assured by paragraph a) of number 1 of article 60 of the General Tax Code and we are not in any of the situations of waiver provided for in its number 2.

Therefore, liquidation no. 2014…, complemented by account reconciliation statement no. 2015… suffers from the defects of lack of substantiation and omission of legal formality (prior hearing).

3.3. Defects of Violation of Articles 90 of the Corporate Income Tax Code and 75 of the General Tax Code and Violation of the Legal Regime of SIFIDE

The Claimant attributes to the impugned liquidation violation of article 90 of the Corporate Income Tax Code, which establishes that the liquidation is carried out on the basis of the declaration submitted by the taxpayer and "is based on the taxable matter contained therein" and violation of article 75 of the General Tax Code by establishing a presumption of truthfulness of the declaration.

Article 75 of the General Tax Code establishes that "declarations of taxpayers submitted in accordance with the provisions of law are presumed to be truthful and submitted in good faith, as well as the data and calculations entered in their accounting records or books, when these are organized in accordance with commercial and tax legislation, without prejudice to other requirements on which the deductibility of expenses depends."

In the case at hand, the Tax and Customs Authority did not raise any doubt regarding the truthfulness of the substitution declaration submitted by the Claimant, in which it indicated the amount of €1,282,837.78 of SIFIDE relating to fiscal year 2007.

In fact, the Tax and Customs Authority did not carry out the liquidation on the basis of this value because it understood that it should attribute part of it to fiscal year 2009 and not because it doubted the Claimant's declaration.

Therefore, there is no violation of the stated article 75 of the General Tax Code.

With respect to article 90 of the Corporate Income Tax Code, it establishes that "when the liquidation is to be carried out by the taxpayer in declarations to which articles 120 and 122 refer, it is based on the taxable matter contained therein" (number 1) and that to the calculated amount, in addition to others, deductions relating to tax benefits are made.

SIFIDE was introduced by Law no. 40/2005, of 3 August, to be in effect from 2006 to 2010, such initial regime being the one in force in fiscal year 2007.

In its article 4 the following is established, insofar as relevant hereto:

1 - Taxpayers subject to corporate income tax residing in Portuguese territory that engage, as a main activity or not, in an activity of agricultural, industrial, commercial and service nature and non-residents with a permanent establishment in that territory may deduct from the amount calculated in accordance with article 83 of the Corporate Income Tax Code, and up to its extent, the value corresponding to research and development expenses, to the extent that they have not been subject to financial participation by the State on a non-repayable basis, incurred during the taxation period beginning on 1 January 2006, in a double percentage:

(...)

2 - The deduction is made, in accordance with article 83 of the Corporate Income Tax Code, in the liquidation relating to the taxation period mentioned in the previous number.

3 - Expenses that, due to insufficient collection, cannot be deducted in the year in which they were incurred may be deducted up to the 6th following year.

Article 83 of the Corporate Income Tax Code, in the wording in force in 2005, corresponds to article 90, in the wording resulting from the republication carried out by Decree-Law no. 159/2009, of 13 July.

It results from these rules that, the truthfulness of the substitution declaration submitted by the Claimant not being questioned by the Tax and Customs Authority, the liquidation relating to fiscal year 2007 should be carried out, as determined in article 90, deducting from the taxable matter the entirety of the SIFIDE tax benefit, as the collection was sufficient for this purpose and deduction in subsequent periods could only be carried out if insufficient collection occurred in the taxation period in which the research and development expenses were incurred, in accordance with number 3 of the cited article 4.

Therefore, it must be concluded that liquidation no. 2014…, complemented by account reconciliation statement no. 2015…, violates the stated article 90, numbers 1 and 2, of the Corporate Income Tax Code.

3.4. Violation of the Principles of Annuality of the Tax, Specialization of Periods and Inalienability of the Tax Legal Relationship, Legality and Justice

The principle of annuality of the tax is not affected by the action of the Tax and Customs Authority, as a period other than one year was not considered for the determination of the tax payable.

On the other hand, articles 17 and 18 of the Corporate Income Tax Code and accounting standards relating to the principle of specialization of periods concern the determination of taxable profit and not the deductions from collection, which are an operation subsequent to this determination.

In the case at hand, the deduction of the amount of the SIFIDE tax benefit from the corporate income tax collection of 2007 results from the special rules of numbers 1 to 3 of article 4 of Law no. 40/2005, and not from the principle of specialization of periods nor from the principle of annuality of the tax.

With respect to the principle of inalienability, what the law provides is its application to the tax credit (article 30, number 2, of the General Tax Code), which is defined by liquidations and only arises after these, therefore we are not in the presence of a defect that could affect liquidations.

On the other hand, it is not seen that inalienability of the tax legal relationship has occurred, as it was not declared extinct nor was it transferred by the Tax and Customs Authority to any other entity.

As for the principle of legality, as a general principle to be observed by the Tax and Customs Authority (article 55 of the General Tax Code), the offense, with respect to the liquidation relating to fiscal year 2007, results from the violation of the rules of articles 90 of the Corporate Income Tax Code and 4 of Law no. 40/2005 which were referred to and does not assume autonomy.

With respect to the principle of justice, it is not seen that it is violated in the case at hand, by rules relating to the determination of the year in which the deduction from the SIFIDE tax benefit collection should be carried out, as its own regime admits that deduction may be made in the same year or in subsequent years.

Thus, the impugned liquidation does not suffer from this defect that the Claimant attributes to it, with the exception of the principle of legality, in the terms indicated.

3.5. Violation of the Legal Rules on Compensation of Credits

The liquidation and account reconciliation statement acts did not carry out any compensation of credits; rather they defined them.

On the other hand, it is manifest that the examination of the legality of legal acts that declare compensation of credits or of material acts that compensate credits does not fall within the competencies of the arbitral tribunals functioning at CAAD, defined in article 2 of the RJAT.

Therefore, this question is not taken under consideration.

3.6. Annulment of the Decision of the Administrative Review

The Claimant further attributes illegality to the decision of the administrative review (Article 136 of the request for arbitral pronouncement).

The administrative review, by maintaining liquidation no. 2014…, complemented by account reconciliation statement no. 2015…, suffers from the substantive defects that this suffers from, namely violation of articles 90, numbers 1 and 2 of the Corporate Income Tax Code and article 4, numbers 1, 2, and 3, of Law no. 40/2005, of 3 August.

3.7. Principle of Beneficial Use of Acts

The Tax and Customs Authority contends that "the prevailing case law has understood that annulability will not be decreed for an act, for omission of any formalities, if that lack, that breach of duty, in the concrete case degrades into a non-essential formality. – which is irrefutable in the present case, being proven that it was successively informed (responding to and exchanging communications via e-mail) of the procedures with a view to adjusting the accounts" and that "therefore, the principle of beneficial use of acts will come into play, which in the name of the economy of public acts gives modern voice to the old adage 'utile per inutile non vitiatur'."

The situations in which, although acts suffer from defects, no annulling effect is produced are currently indicated in number 5 of article 163 of the Administrative Procedure Code, subsidiarily applicable by virtue of the provision of article 2, paragraph c), of the General Tax Code.

This number 5 establishes the following:

5 - The annulling effect does not occur when:

a) The content of the annulable act cannot be different, because the act is of mandatory content or the examination of the concrete case allows identification of only one solution as legally possible;

b) The purpose sought by the procedural or formal requirement omitted has been achieved by another means;

c) It is proven, without room for doubt, that even without the defect, the act would have been executed with the same content.

The situation provided for in paragraph b) can only justify non-annulment in cases in which the acts suffer only from defects of formal and procedural nature, as it is the relevance of these and only these that is disregarded if the purpose sought is achieved by another means.

In the case at hand, the liquidation and the decision of the administrative review suffer from defects of substantive nature, therefore, even if it were understood that the purpose sought with the imposition of the legal requirement of prior hearing and sufficient substantiation was achieved by another means, the beneficial use of the act would always depend on the possibility of disregarding the annulling effect in light of paragraphs a) and c).

Thus, what is decisive is the examination of the situation in light of these paragraphs a) and c).

With respect to paragraph a), it is clear that the content of the act could and should be different, in particular taking into account the entirety of the SIFIDE tax benefit for deduction from collection in the liquidation relating to the year 2007, with possible adjustments in other years, if such were the case.

As for paragraph c), it is also clear that such a situation does not exist, as if the entirety of the amount of the tax benefit were considered in the year 2007, the act would be executed with different content.

Therefore, the prerequisites for application of the principle of beneficial use of the act are not met.

3.8. Abuse of Right

The Tax and Customs Authority invokes abuse of the right of impugnation by the Claimant for coming against its own previous conduct.

The prerequisites for abuse of right in this modality are not apparent, as it was not demonstrated that any conduct of the Claimant may be considered as causally connected to the illegal liquidation, which was executed by exclusive initiative and decision of the Tax and Customs Authority, which did not even permit the Claimant the possibility of exercising the right to prior hearing.

On the other hand, the right to impugn injurious acts has constitutional foundation (article 268, number 4, of the Constitutional Law) and there are no elements in the record that permit concluding that the Claimant was not injured by the impugned liquidation, as it was not demonstrated that the alleged excess deduction in 2009 occurred nor that there was ground for payment of compensatory interest by the Claimant with respect to that year, as the Tax and Customs Authority alleges.

Therefore, the invoked abuse of right is not demonstrated.

3.9. Requests for Refund and Indemnification Interest, Formulated by the Claimant, and Request for Adjustment Formulated by the Tax and Customs Authority Regarding "Excess in Fiscal Year 2009" and Invocation Thereof by the Claimant

As a consequence of the success of its annulment claim, the Claimant requests refund of the sum corresponding to the SIFIDE that was not deducted in the liquidation relating to fiscal year 2007, plus indemnification interest.

The Tax and Customs Authority, in turn, contends that no indemnification interest is owed as there is no error attributable to the services generating any obligation to compensate the Claimant and that if it is concluded that the action is successful, it should be decided that "the value deducted in excess in fiscal year 2009 (€388,915.37) be subject to the corresponding adjustment, under penalty of duplication of tax benefits or ultimately abuse of right or unjust enrichment."

The Claimant has not responded to this position of the Tax and Customs Authority, having in particular not submitted arguments.

The competency of the arbitral tribunals functioning at CAAD is restricted to the examination of the legality of acts of the types referred to in article 2 of the RJAT, added, when there are reliable elements for such, the examination of requests for refund and indemnification interest and indemnification for unjust guarantee, an examination which has been peacefully admitted by the case law in the parallel procedural medium that is the process of judicial impugnation.

However, if it is certain that the possibility must be admitted for the arbitral tribunals to define the consequences of annulment when there is no controversy regarding other questions relating to the execution of the judgment from which they depend, it is also certain that when the definition of these consequences depends on the examination of other types of questions, for whose examination the arbitral tribunals functioning at CAAD do not have competencies, the possibility of the Arbitral Tribunal examining the stated requests for refund, indemnification interest and indemnification for unjust guarantee will necessarily be excluded.

This is what occurs in the case at hand, as the Tax and Customs Authority requests (article 74 of the Response) that, if it concludes in favor of the success of the present action, the Arbitral Tribunal admit "that the value deducted in excess in fiscal year 2009 (€388,915.37) be subject to the corresponding adjustment, under penalty of duplication of tax benefits or ultimately abuse of right or unjust enrichment."

Without deciding this question of admissibility of adjustment relating to fiscal year 2009, the Arbitral Tribunal cannot decide whether refund and indemnification interest requested by the Claimant should be granted.

Therefore, not having the Arbitral Tribunal competency to examine the question raised by the Tax and Customs Authority, it also cannot examine the stated requests for refund and indemnification interest.

Therefore, the stated requests for refund and indemnification interest are not taken under consideration, nor is the adjustment of any value deducted in excess in fiscal year 2009.

4. DECISION

In these terms, the Arbitral Tribunal agrees as follows:

a) To judge the request for arbitral pronouncement successful as to the requests for declaration of illegality of the decision of the administrative review and of liquidation no. 2014…, of 10-11-2014, complemented by the account reconciliation statement no. 2015…;

b) Not to take under consideration the requests for refund, indemnification interest and adjustment of any value deducted in excess in fiscal year 2009;

5. VALUE OF THE CASE

In accordance with the provision of article 306, number 2, of the Code of Civil Procedure, article 97-A, number 1, paragraph a), of the Tax Procedure and Process Code and article 3, number 2, of the Regulation of Costs in Tax Arbitration Proceedings, the value of the case is fixed at €388,915.37.

6. COSTS

In accordance with article 22, number 4, of the RJAT, the amount of costs is fixed at €6,426.00, in accordance with Table I attached to the Regulation of Costs in Tax Arbitration Proceedings, to be borne by the Tax and Customs Authority.

Lisbon, 10-11-2016

The Arbitrators

(Jorge Manuel Lopes de Sousa)

(Suzana Fernandes Costa)

(António Martins)

[1] Voluntarily paid on 25.05.2007, by check to the entity "…", in the amount of €67,390.39 [= €54,311.74 + €6,948.50 (compensatory interest) + €6,110.15 (indemnification interest)].

Frequently Asked Questions

Automatically Created

What is the SIFIDE tax benefit and how does it apply to corporate income tax (IRC) in Portugal?
SIFIDE (Sistema de Incentivos Fiscais à Investigação e Desenvolvimento Empresarial) is a Portuguese tax incentive system that allows companies to claim tax credits against their Corporate Income Tax (IRC) for qualifying research and development expenditures. Under SIFIDE, taxpayers must obtain certification from the designated certifying authority (previously the Innovation Agency, now ANI - Agência Nacional de Inovação) confirming that expenses qualify as R&D. Once certified, companies can deduct a percentage of these expenses from their IRC liability as a tax credit, which can be carried forward if it exceeds the tax due in a given year.
How does the CAAD arbitration process work for disputes over IRC tax assessments?
The CAAD (Centro de Arbitragem Administrativa) arbitration process for IRC disputes begins when a taxpayer submits a request for arbitral tribunal constitution after exhausting administrative remedies or following express rejection of an administrative review (reclamação graciosa). The arbitral tribunal is composed of three arbitrators designated by the Deontological Council. Proceedings follow the RJAT (Legal Regime for Tax Arbitration), including an initial response phase, optional hearings, and written arguments. The tribunal issues a binding decision on the legality of tax assessments, with the same effects as a court judgment, typically within a shorter timeframe than judicial proceedings.
Can a company claim compensation for research and development expenses under the SIFIDE regime?
Yes, companies can claim compensation for research and development expenses under the SIFIDE regime, provided the expenses meet the qualifying criteria defined in the applicable legislation and are certified by the competent authority (ANI). The process requires: (1) incurring eligible R&D expenses during the fiscal year; (2) submitting an application to ANI for certification; (3) obtaining certification confirming the qualifying nature and amount of expenses; and (4) reflecting the corresponding tax credit in the IRC return, either initially or through a substitution declaration if certification is obtained after the original filing deadline. The tax credit represents a direct deduction from the IRC due.
What are the legal grounds for filing a gracious complaint (reclamação graciosa) against an IRC tax assessment?
The legal grounds for filing a gracious complaint (reclamação graciosa) against an IRC tax assessment are set forth in Article 68 of the General Tax Code (Código do Procedimento e Processo Tributário - CPPT). Taxpayers may file such complaints based on: (1) illegality of the tax assessment due to factual or legal errors; (2) incorrect calculation of the tax due; (3) failure to apply legally mandated tax benefits or deductions; (4) violation of procedural requirements; or (5) any other grounds that render the assessment contrary to law. The complaint must be filed within the statutory deadline, typically within 120 days from notification of the assessment or from when the irregularity becomes known.
Is a taxpayer entitled to compensatory interest (juros indemnizatórios) when an IRC tax assessment is found unlawful?
Yes, taxpayers are entitled to compensatory interest (juros indemnizatórios) when an IRC tax assessment is found unlawful, as provided in Article 43 of the General Tax Code (Lei Geral Tributária). Compensatory interest is due when: (1) a tax payment is made and subsequently determined to be undue or excessive; (2) the administration causes a delay in processing a legitimate tax refund; or (3) a tax assessment is annulled or reduced. Interest accrues from the date of payment (for overpayments) or from one month after the legal deadline for the refund until the issuance of the refund instrument. The rate is set periodically by ministerial order and serves to compensate taxpayers for the financial loss caused by the unlawful retention of funds by the State.