Summary
Full Decision
ARBITRAL DECISION
The arbitrators José Baeta de Queiroz (president), Emanuel Augusto Vidal Lima and João Taborda da Gama (members), designated by the Deontological Council of the Administrative Arbitration Center (CAAD) to form the Arbitral Tribunal, constituted on 21-06-2017, hereby agree as follows:
I. REPORT
A…, Lda., Tax ID No. …, with registered office at Rua …, no. …, ground floor, apt., …-… … (hereinafter "Claimant"), submitted a request for arbitral decision and constitution of an Arbitral Tribunal on 2 April 2017, pursuant to the provisions of Decree-Law No. 10/2011 of 20 January [Legal Regime for Tax Arbitration], in which the Tax and Customs Authority is summoned (hereinafter designated as "TCA" or "Respondent").
The Claimant seeks through its request for arbitral decision that there be "declared the illegality and subsequent annulment of the assessment acts for Corporate Income Tax (IRC) and Value Added Tax (IVA), relating to 2015, ordering the restitution (…) of taxes unduly paid plus corresponding compensatory and default interest".[1]
The request for constitution of the Arbitral Tribunal was accepted by the President of CAAD on 3 April 2017 and notified to the Respondent on 19 April 2017.
The Claimant did not appoint an arbitrator, whereby, pursuant to the provisions of subsection a) of No. 2 of Article 6 of RJAT, the undersigned were designated as arbitrators on 5 June 2017 by the President of the Deontological Council of CAAD, with said appointment having been accepted within the legally prescribed timeframe and terms.
On the same date, the parties were duly notified of such designation and expressed no intention to refuse the appointment of the arbitrators, in accordance with the combined provisions of subsections a) to c) of No. 1 of Article 11 of RJAT and Articles 6 and 7 of the Code of Ethics.
Thus, in compliance with the provision contained in subsection c) of No. 1 of Article 11 of RJAT, the Arbitral Tribunal was constituted on 21 June 2017, with an arbitral order having been issued on the same date to notify the Respondent to "within thirty days respond, attach a copy of the administrative file and request, if desired, the production of additional evidence".
On 11 September 2017, the Respondent submitted its response, having defended itself by way of objection and concluded such response to the effect that "a decision should be rendered determining the lack of merit of the present request for arbitral decision, absolving the Respondent of the claims, with all legal consequences".
In its response, the Respondent first argues that the cumulation of objections submitted by the Claimant, which seeks to have examined, in the same arbitral proceedings, an assessment act for Corporate Income Tax and another for IVA, is illegal, whereby the Claimant should be notified to opt for review of one or the other act, on pain of dismissal of the action. It alleges that the facts to be considered have disparate relevance depending on the taxes involved, and that the legal norms under which the two acts were performed are not the same.
On 14 September 2017, an arbitral order was issued that decided the following, regarding the exception cited, invoked by the Respondent, concerning the alleged illegal cumulation of claims:
"Regarding cases such as the present one, in which a tax on income and another on consumption are at issue, the case law of the Superior Administrative Court (STA) understood in the past that the cumulation of objections was impossible. It would only be admitted when the assessed taxes shared the same nature, that is, were all either on income, or on consumption, or on property.
That case law has been abandoned, and nowadays the STA has been deciding that there is no obstacle to objecting, in the same proceedings, to assessment acts for Corporate Income Tax and IVA. And this being based on the norm of Article 104 of the Code of Tax Procedure, apparently more demanding than the one governing tax arbitration: while Article 104 of the Code of Tax Procedure requires the 'identity of the nature of the taxes', RJAT, through its Article 3, No. 1, is satisfied with the fact that the review of the acts depends on the 'consideration of the same factual circumstances and (…) interpretation of the same principles or rules of law'.
It is well known that the permission for cumulation of objections rests on grounds of procedural economy, celerity, facilitation of access to the right to legal protection, and avoidance of contradictory judgments.
All these reasons converge in the case at hand. Moreover, the factual circumstances are coincident, ascertained in a single inspection action, and the principles and rules of law, while not exactly the same, are close and interdependent. An excessive requirement with regard to the assumption concerning the principles and rules of law to be considered would lead to the cumulation being rarely admitted, even in cases which, like the one before us, involve a single action by the TCA from which, once the facts are ascertained, a plurality of tax assessment acts originates.
It can be said that what the Claimant seeks is to review the TCA's action based on a single inspection action and founded on the facts ascertained therein, whereby it would be difficult to understand why multiple arbitral proceedings should be imposed on it for this purpose. The "disparate relevance" of facts with regard to the various taxes, invoked by the TCA, does not appear relevant in light of RJAT, which requires nothing more than identity of the factual circumstances.
The STA case law to which reference was made is found, notably, in the decisions rendered on 24/10/2012 and 22/03/2017 in proceedings 747/12 and 36/17, respectively.
In the sense now advocated, reference may be made, from CAAD, to the judgment rendered in proceeding 209/2015-T on 27/04/2016.
In light of and for the reasons set forth above, the claim of the Tax Authority is denied, holding that the cumulation of objections is legal."
In the same order, it was decided by the Arbitral Tribunal, in consonance with the procedural principles established in Article 16 of RJAT, of the autonomy of the arbitral tribunal in the conduct of the proceedings and in the determination of the rules to be observed [subsection c)], of cooperation and procedural good faith [subsection f)] and of the free conduct of the proceedings established in Articles 19 and 29, No. 2, of RJAT, and also taking into account the principle of limitation of unnecessary acts provided for in Article 130 of the Code of Civil Procedure (applicable by virtue of the provision of Article 29, No. 1, subsection e), of RJAT), to dispense with the holding of the meeting referred to in Article 18 of RJAT, "inasmuch as no request was made for the production of additional evidence nor are there other matters to discuss at that hearing, and the preliminary ruling suggested by the TCA is not shown to be necessary, at least at this stage of the proceedings."
The parties made no pronouncement regarding the content of the arbitral order referred to in the immediately preceding paragraph.
On 19 September, the Respondent submitted the administrative file to CAAD.
The deadline for arguments having elapsed without the parties submitting any, and without a timely order having been issued designating the date for the decision, for that reason and pursuant to the provision of No. 2 of Article 21 of RJAT, the same was extended for two months, with notice that such decision would be rendered by 21 February 2017.
The tribunal was regularly constituted and is competent.
The parties possess legal standing and capacity and are legitimate (Articles 4 and 10, No. 2, of RJAT and Article 1 of Ordinance No. 112-A/2011 of 22 March) and are duly represented.
The proceedings do not suffer from any nullities.
There are no obstacles to consideration of the merits of the case.
II. FINDINGS OF FACT
Proven Facts
The following facts are considered proven:
The Claimant A…, Lda. is a company engaged in the purchase and sale of immovable property (CAE 68.100), with Tax ID No. …, and is classified under the scheme of Article 9 of CIVA (exemptions for internal operations) and under the general scheme of the Corporate Income Tax. It has its registered office and tax domicile at Rua …, no. …, ground floor, apt., in …, in the area of the tax office of … … (…);
On 11 May 2009, through a public deed, the Claimant executed a contract with the Municipality of … according to which it transferred to that Municipality a parcel of land with an area of 134,235 m², intended for the implementation of the "Urban Park of the City", obtaining as consideration construction rights of 100,000 m², on adjacent parcels with a total area of 65,149 m² (cf. pp. 14 to 22 of the Administrative File);
The construction rights provided that the buildings to be constructed on those remaining parcels would have a gross construction area of 100,000 m² above ground, intended for commerce, services, residential use and facilities, including hotels and similar (cf. pp. 14 to 22 of the Administrative File);
On 5 June 2009, the transfer deed referred to was subject to minor corrections regarding the description of the properties and their respective areas, specifically with respect to the parcel of land transferred by the Claimant whose area was fixed at 133,641 m² (cf. pp. 24 to 29 of the Administrative File);
Under the third clause of the contract executed between the Claimant and the Municipality, the performance referred to in subsections b) and c) was considered not to have taken place if, by 31 December 2010, the existing planning framework did not permit construction on the remaining parcels;
As the Municipality did not make possible the modification of the existing planning framework to allow the said construction on the remaining parcels by 31 December 2010, and because the land transferred in advance became permanently part of the Municipality's assets, the Claimant filed an ordinary administrative action at the Administrative and Tax Court of Braga against the Municipality of …, proceeding No. …/13… BENRG, to claim payment of the compensation of €15,000,000.00 provided for in the eighth clause of the transfer contract (pp. 31 to 39 of the Administrative File);
However, the Claimant and the Municipality agreed to end the said judicial proceeding through the execution of a judicial settlement presented on 2015-11-24 whose homologation judgment of 2015-11-31 became final on 2016-01-12 (pp. 55 to 59 of the Administrative File);
The said judicial settlement was due to the fact that a development contract was executed on 2015-07-08 between the Municipality of … and the Claimant, approved by visa of the Court of Accounts of 2015-10-06 (pp. 41 to 53 of the Administrative File);
Indeed, on 8 July 2015, the Claimant and the Municipality executed a development contract in which they agreed that the construction area would become only 60,000 m² instead of the 100,000 m² initially provided for. Consequently, in light of the reduction in construction capacity, the Municipality assumed the obligation to compensate the Claimant in the total amount of €4,900,000.00 (cf. pp. 45 to 48 of the Administrative File);
The TCA conducted a tax inspection of the Claimant, under Service Order OI2016…, dated 2016-07-19, from the Directorate of Finances of Braga;
In that tax inspection of the Claimant's activity relating to the year 2015, a Tax Inspection Report was prepared that is part of the administrative file (pp. 65 to 76), the content of which is hereby incorporated by reference, in which, among other matters, the following is noted:
II.2 Reason, Scope and Temporal Scope
The present inspection action was carried out in accordance with and in accordance with the inspection methodology directed at taxpayers classified in the permanent monitoring register.
The Service Order is of partial scope in Corporate Income Tax and IVA, for the period of 2015.
III. Description of Facts and Grounds for Purely Arithmetic Corrections to the Taxable Base
Having analyzed the activity developed by the taxpayer, we found that in the period of 2015 it obtained income resulting from an out-of-court agreement it reached with the Municipality of …, related to the transfer of land to the Municipal Council for the expansion of the area for implementation of the Urban Park of the City or … and the failure to fulfill obligations by the municipality which consisted of granting as consideration the right to construct (development) on the remaining parts, for which purpose it was necessary to modify the existing planning framework for parcels and construction.
III.1. Contextualization of the Facts
On 2009-05-11 through a public deed the company A… acquires the mixed property located in the parish of … – … (parish code …), registered in the urban registry under articles …, …, … and … and in the rural registry under article …, denominated "Quinta … or Quinta …" for €5,000,000.00, with a total area of 199,384 square meters, from the company B…, SA, with Tax ID No. … .
On the same day, the deed of "Transfer" was executed between the A… and the Municipality, which is attached as Annex 1, in which the company A… transferred to the Municipality a parcel of the aforementioned land with an area of 134,235 m², for exclusive implementation of the Urban Park of the City, enjoying as consideration the right in the two remaining parcels with a total area of 65,149 m², the provision of the third clause – "…THIRD: The buildings to be constructed on those remaining parcels must have an area of one hundred thousand square meters above ground, intended for commerce, services, residential use and facilities, including hotels and similar;…".
On 2009-06-05 they corrected the deed of "Transfer" for inaccuracies in the description of the property transferred to the Council of … . (Annex 2)
The transferred land was, in summary, separated from the rural article … with parish code …, giving rise to the urban property registered in the registry under the article …, now article … with parish code …, giving rise to the urban property registered in the registry under the article …, now article … with parish code … due to the Administrative Reorganization of the territory of the parishes.
In the fifth clause of the "Transfer" contract it was stipulated "…"FIFTH: The effect referred to in the second, third and fourth clauses shall be considered as not definitively verified if and without fail by 31 December 2010, the existing planning does not permit construction, on the two remaining parcels, as was provided in the third clause;…".
After the deadline, the Municipality did not promote the modification of the existing planning framework to enable the taxpayer to request licensing for gross construction area on the aforementioned remaining parcels of 100,000 m², as determined in the third clause.
As a result of the failure to modify the existing planning framework, the taxpayer proceeded to file an Ordinary Administrative Action at the Administrative and Tax Court of Braga against the Municipality of …, proceeding no. …/13… BEBRG (annex 3), claiming €15,000,000.00, basing itself on the provision in the fourth clause of the Contract, which determines the value of €150.00 compensation per m² of construction that is not licensed, thus obtaining a value of €15,000,000.00.
Having the Municipality filed a defense to the Ordinary Administrative Action and consequent reply from company A…, it was determined by the Court the dismissal of the Municipality's claim.
Subsequently, by order of 2015-10-06 from the Court of Accounts, the "Development Contract" executed on 8 July 2015 between the Municipality and company A… was approved, a copy of which is attached to this report as annex 4, in which various rights and obligations are stipulated, particularly the permission to license construction on the remaining parcels of 60,000 m² and not the 100,000 m² and as compensation for this reduction in construction capacity the monetary value of €4,900,000.00 (clause three, four and five). In that same "Development Contract", it is defined that payment of the amounts and interest shall be "…after the date of finality of the settlement that will be presented in the judicial proceeding no. …/13… BEBRG…". (seventh clause)
On 2015-11-30, the Administrative and Tax Court of Braga rendered the judgment in the said judicial proceeding, considering the Action as closed, in virtue of the parties "…agreeing to end the proceeding by means of settlement in accordance with the clauses thereof…".
The agreement established in the "Settlement" defines the reduction of the company A…'s claim from €15,000,000.00 to €600,000.00 and a fixed annual interest rate of 2.5% calculated daily on the capital that remains outstanding at each moment. (annex 5 – Judgment of proceeding 1278/13.5BEBRG)
III.2.1. Tax Treatment for Purposes of Corporate Income Tax
In light of the facts that occurred and having analyzed the income declared in the year 2015, we found that the taxpayer recognized the income of €600,000.00 relating to the out-of-court agreement established by the homologation of the "Settlement", but did not recognize for Corporate Income Tax purposes the amount of €4,900,000.00 relating to the compensation obtained by the reduction of the construction area on the remaining parcels, pursuant to the agreement executed in the aforementioned "Development Contract" on 2015-07-08, in breach of the provision in Article 20, No. 1, subsection i) of the Corporate Income Tax Code.
Of the total amount of €4,900,000.00 referred to, the amount of €3,983,739.84 should be recognized for purposes of taxation under Corporate Income Tax, since the amount agreed is considered as including IVA, as determined and justified in the final part of the following section regarding IVA tax.
Thus, in determining the taxable profit for the period of 2015, in accordance with the provision in Article 17 of CIRC combined with Article 18 of the same enactment, the amount of €3,983,739.84 was not considered as income, relating to the compensation agreed on 2015-07-08.
It is worth noting that after detailed analysis of the situation, we found that the taxpayer recognized as income the €600,000.00 in 2015, when the date of finality of the judgment was on 2016-01-12, whereby such income should be recognized in the period of 2016 and consequently canceled in 2015, as determined by Article 18 of CIRC.
III.2.2. Tax Treatment for Purposes of IVA
- From the principle of the general application of IVA to all commercial transactions, whatever their nature, it follows that, in the definition of the basis of taxation, or field of application, one attempts to capture the broadest possible subject matter encompassing all economic activity in general, and the consideration obtained, in the course of the exercise of an economic activity, is, on principle, subject to IVA.
- In accordance with No. 1 of Article 3 of CIVA, it is generally considered that transfer of goods means the for-consideration transfer of tangible goods in a manner corresponding to the exercise of the right of ownership.
- In turn, pursuant to No. 1 of Article 4 of CIVA, the concept of provision of services is defined as follows: "The following are considered as provisions of services the for-consideration operations which do not constitute transfers, intra-community acquisitions or imports of goods".
- In the IVA code, the concept of provision of services here is of an economic nature and goes beyond the legal definition given by Article 1154 of the Civil Code, encompassing the transfer of rights, obligations of negative content (failure to perform a particular act) and also coercive performance of services (cf. Article 6, No. 1 of the former 6th Directive, subsequently reformed, having given rise to the current Directive 2006/112/EC, Article 25).
- The amount to be received by company A…, whether characterized as compensation or mere indemnity, is configured, in its essence, as a consideration that remuneration for an operation, that is, the reduction in construction capacity agreed upon and the corresponding rights associated therewith, in the course of the exercise of an economic activity, and is therefore subject to IVA and not exempt therefrom.
Article 562 of the Civil Code establishes the general principle of the obligation of compensation, stating that whoever is obliged to repair damage must reconstitute the obligation that would exist if the event giving rise to the obligation to repair had not occurred.
In turn, No. 1 of Article 564 of that Code provides that the duty to compensate encompasses not only the harm caused, but also the benefits that the injured party failed to obtain as a result of the injury (lost profits).
The obligor who failed to perform the obligation to which he was contractually bound finds himself compelled to reconstitute the situation that would exist if the event giving rise to the obligation to repair had not occurred, that is, he must satisfy the interest that would result from perfect performance, positive interest or performance interest. (Mota Pinto, Civil Law, 1980-158).
- In order to frame the question of whether amounts in the form of compensation or penalties are subject to IVA, account must be taken of the underlying principle of IVA, as a tax on consumption, and which corresponds to the provision in the IVA Directive – Directive 2006/112/EC, intending to tax the consideration of taxable operations and not the compensation of losses that do not have a remuneration character.
- Notwithstanding, if compensations or penalties sanction the injury of any interest, without remuneration character, because they do not remunerate any operation, but are intended instead to repair damage, they are not taxable under IVA, to the extent that they do not underlie a transfer of goods or provision of services, which clearly is not the case at hand.
- Conversely, if the compensation is intended to offset lost profits, to restore the level of income that, due to damage, the taxpayer failed to obtain, we would then be in the presence of an operation subject to IVA, and tax should be assessed upon its attribution.
Having regard to the situation at hand, the amount of €4,900,000.00 relating to the agreement established in the "Development Contract", as compensation for the reduction of the permitted construction area on the remaining parcels, with respect to the subjection to IVA of this amount, we have the following:
The amount of €4,900,000.00, contained in the "Development Contract", aims to compensate for only permitting construction of an area of 60,000 m² on the remaining parcels, when at the time of transfer of the land for the implementation of the City Park, an agreement was made for 100,000 m², thus in these terms we are dealing with an operation that aims to compensate benefits that will not occur by virtue of this new agreement (lost profits), to the extent that it underlies the consideration for a taxable operation and therefore of a remuneration character, it is subject to taxation under IVA, as flows from Article 16, combined with subsection a) of No. 1 of Article 1 and Article 4, all of the IVA Code, being taxed at the normal rate (23%) provided for in subsection c) of No. 1 of Article 18 of the same enactment.
In light of the definition of provision of services of negative character advocated in subsection b) of Article 25 of the IVA Directive (Directive 2006/112/EC of 28.11.2016) as "obligation to refrain from or to tolerate an act or a situation", it will be necessary to consider that lost profits appear as an obligation of non facere, since tolerating the reduction in construction capacity and refraining, upon remuneration, from this right, is configured as compensation for income left unearned and, therefore, a provision of services in light of that European norm.
Therefore, considering that the value was determined by the parties without reference to IVA and the service provider is the debtor of the IVA due on the taxed operation, we shall consider that the agreed value already includes IVA, whereby the taxpayer should have assessed IVA as was its responsibility, the amount of €916,260.16 (€4,900,000.00 x 23/123) for the period 2015/07, date of the agreement executed by the aforementioned "Development Contract".
IX. Right of Hearing – Grounds
[…] Having analyzed the petition sent by the taxpayer regarding the draft report, we must inform the following:
- It is important to note that in point 1 of the petition, the taxpayer points out that the period proposed for taxation by the TCA is 2016, when the matter concerns 2015;
- With regard to the taxation under Corporate Income Tax in the period of 2015 of the amount €3,983,739.84, value agreed on 2015-07-08 as compensation for the reduction of the construction area, the taxpayer argues that the income to be taxed in each period should be in accordance with the payments due in that period. However, taking into account the context in which the taxpayer finds itself and the operation carried out, such a claim has no legal basis, and instead contradicts the apportionment of taxable profit that is defined in CIRC, in its Article 18, No. 1, in which "… Income and expenses, as well as other positive or negative components of taxable profit, are attributable to the tax period in which they are obtained or incurred, regardless of their receipt or payment, in accordance with the economic apportionment regime…".
- As for the correction under IVA, the taxpayer argues the incorrect framing by the TCA of the situation in question, that such value refers to "… a mere reparatory character of the loss suffered in the value of its immovable property…", and that it would not be subject to IVA, without proving such consideration and legal support for such a claim. For this purpose we have to reinforce the grounds set forth in this report, which in fact we are not dealing with compensation for the reparation of mere damage, but rather compensation for the non-exercise of a right, of refraining from obtaining income and therefore the consideration of a taxable operation under IVA.
Accordingly, the taxpayer does not present any other elements that call for modifications to the initially proposed corrections, whereby the corrections shall remain.
Following the inspection, the Tax and Customs Authority issued the assessments referred to in the request for arbitral decision (p. 1 of the request):
IVA assessment and respective compensatory and default interest with no. 2016…, in the total amount of €961,685.84 (cf. doc. 1 and doc. 2 attached to the request – Form 50);
Corporate Income Tax assessment and respective compensatory interest with no. 2016…, in the total amount of €918,960.97 (cf. doc. 3 attached to the request – reconciliation statement).
On 3 April 2017, the Claimant submitted the request for constitution of the tribunal, which gave rise to the present proceeding, through which it seeks, as already mentioned, that there be "declared the illegality and subsequent annulment of the assessment acts for Corporate Income Tax and IVA, relating to 2015, ordering the restitution (…) of taxes unduly paid plus corresponding compensatory and default interest".
Unproven Facts and Reasoning of the Findings of Fact
The facts were proven based on the documents attached to the request for arbitral decision and those that form part of the administrative file.
There are no facts relevant to the decision of the case that were not proven.
III. LEGAL MATTERS
The Claimant bases its claim on the following arguments:
With Respect to IVA
That it is not apparent what lost profits were compensated to the Claimant;
That the amount attributed to the claimant did not intend to compensate it for any value it failed to obtain, but rather for the fact that it had to make additional transfers to the Municipality, on the assumption that the parcel it retained in its ownership would have a certain construction capacity, which did not come to pass;
That is, the compensation intended to compensate the claimant for the loss of value of its land, to which the parties had attributed the amount of €1,500,000.00, and nothing more than that;
That the compensation attributed to the claimant did not intend to "restore to it any income that it failed to obtain", but only to compensate it for the loss of value of an asset that is part of its assets. Indeed, the compensation attributed was not determined as a function of any projected income that the Claimant failed to earn, but only to compensate it for the harm suffered to its assets;
Concluding that the IVA assessment is illegal due to the non-existence of a rule of subjection;
Finally, it notes that the TCA did not provide legal grounds for the IVA assessment it performed, with the claimant unaware of what legal rule the tax inspection was based on for this purpose, which constitutes a flagrant situation of lack of grounds. To the extent that it does not allow the claimant to evaluate the legal reasons for the correction made, that is, it does not allow it to evaluate the quality of merit thereof, whether it is in accordance with law, if it should appeal or object thereto, or on what terms.
With Respect to Corporate Income Tax
The Claimant begins by noting that it has no doubts that the principle of exercise specialization referred to in Article 18 of CIRC determines that income and expenses of Corporate Income Tax taxpayers are attributable to the tax period in which they are obtained or incurred, regardless of their receipt or payment;
It further notes that it scrupulously observes this principle at both the accounting and tax level and that it also did so in the case at hand in which accounting and tax recognition of compensation was involved whose payment, due to its deferred nature, does not coincide with the date of execution of the contract giving rise thereto. This results from the fact that the payments to which the Municipality of … obligated itself have a monthly character. That is, the contract from which the obligation to pay compensation to the Claimant emerges is of deferred performance, with the right to demand the respective payments arising on the date on which they fall due and only at that moment does the tax event occur. Indeed, it understands that in relation to compensations with payment in installments, the contract in which the same are defined constitutes the tax event, but does not exhaust it, with it being necessary that the right to the performance provided therein occur for the same to become perfected;
Now, in compliance with the principle of exercise specialization, each payment due should be included in the taxable base of the exercise in which such maturity occurred, this being independent of its actual receipt;
It agrees that even if the payment has not been made, it must be considered as income of the respective exercise, thus complying with the requirement of Article 18 of CIRC.
But in the case at hand, none of the contractual compensation payments in favor of the claimant fell due in the exercise of 2015, whereby it considers that they could never be considered as income of that exercise;
It concludes by noting that in the case under analysis, the tax event only occurs on the date of maturity of each of the compensation payments, whereby no correction can, for this reason, be made to the Claimant's taxable base relating to the exercise of 2015.
In Its Response, the TCA notes, in summary, the following:
With Respect to IVA
That it is common to use the term "compensation" to designate operations such as payments for the cession of contractual position, for early termination of a contract or for price revision, which are generally taxable operations, due to the fact that they constitute consideration for a transfer of goods or provision of services, which, in reality, have nothing to do with a true compensation, in the sense relevant to validly exclude subjection to IVA;
For in cases where the designate "compensation" has underlying a consideration, a consideration, by reason of which a given entity obtains economic gains associated with the development of an economic activity, subjection to IVA cannot be excluded without infringing the common IVA system.
That the compensation made by the Municipality presents an evident connection with the exercise of the Claimant's economic activity, which does not happen with the situation invoked by the Claimant, which is referred to in the Judgment of the STA rendered in proc. 0144/06, of 18-06-2008, since this concerns pure compensation of damages to individuals;
Indeed, it is not a matter of compensating an individual for the reduction in the value of any private asset. On the contrary, the Claimant purchased land for a certain amount, with the expectation of generating profits through its pure resale or construction for sale, and, by reason of the Municipality's breach of contract, the expected profit-generating expectation from the business was reduced;
Now, in fact, subjection to taxation under IVA underlies the conduct of an economic activity and the existence of consideration. The TCA, for its part, invokes the provision in the Judgment of the STA rendered in proc. 01158/11, also referred to in the Tax Inspection Report (TIR), which distinguishes between:
"a) The compensation paid by the insurer, "(…) intended to compensate the damage caused by the loss of the asset", the same should be considered as excluded from the objective scope of IVA, "to the extent that it does not assume the nature of consideration for the transfer of a good or provision of a service (articles 1 no. 1, 4 no. 1 and 16 no. 1 CIVA)";
"b) The amounts paid by the lessee to the lessor, being paid "additionally to the lessor by lessees, do not have a compensatory nature (because they are not intended to compensate for losses and damages) but rather lie in the fulfillment of obligations contractually assumed (in each of the categories of contracts involved). Having these contracts the nature of service provision contracts, those amounts represent, yet, consideration for operations taxable under IVA".
That, as noted in the TIR, in the case of compensations (in the broad sense), the criterion to be adopted to evaluate subjection to taxation under IVA will be related to the existence of a restoration of income, a compensation for an increase in assets not realized following a contractual breach, that is, with a relationship to the main economic activity;
That the amounts in analysis are only compatible with the exercise of the Claimant's economic activity, reason why a remuneration character should be attributed to the designate "compensation", notably given that it also constitutes a consideration, a surrogate for the right to build that had been impaired, being therefore taxable;
That what was done was to evaluate whether the compensation is intended to offset lost profits, that is, to restore the level of income that, due to breach imputable to the Municipality, the taxpayer failed to obtain;
Thus, the purpose and nature of the payment underlying the "compensation" determines its classification as remuneration consideration and not as repair of damage caused. In cases of compensations for breach of contract, only case-by-case analysis of the substance of the operation can lead to an understanding of the scope of the compensation and the contextualization of its remuneration or compensatory function, and consequently to the assessment of its subjection or not to IVA.
That the case law of the CJEU has understood that these situations should follow the regime of the main contract. And it cites Marta Machado de Almeida[2] regarding the withdrawal of pending litigation, notably in cases of requests for compensation for defective performance of contracts:
"Along with the acceptance of payment of that amount, the injured party will undertake to withdraw from the action and not to file any other action with the same object, which sets up an obligation of negative character (non facere). In this case, it can indeed be configured as a new operation, concluding for the existence of an onerous character, whereby it will matter to conclude as to the incidence (or not) of IVA.
Notwithstanding the fact that the amount subject to payment, as a result of the agreement, may be configured as intended to compensate for damages, the fact is that there may be an interdependence between the compensation performance and the performance that falls to the injured party to undertake (…) in situations in which the withdrawal is formalized by means of a settlement, and such agreement is subsequently homologated by the court, it does not appear to us that the homologation is sufficient to frame the amounts paid as a judicially declared compensation, in the sense of Article 16, number 6, subsection a) of the IVA Code.
As referred to above, considering that the said rule had in its origin the understanding that judicial proof would be sufficient to classify certain performances as compensations, in its legal sense, it does not appear reasonable to us to consider that such understanding also applies in cases in which the judge merely homologates the settlement agreement, without any interference in the value that will be subject to payment, which results from the will of the parties."
Now, in the situation under judgment, there is a settlement, subsequently subject to mere homologation by the judge, aiming that the agreed amount restore the income that would be obtained through the original construction capacity, had the Municipality not broken the contractual relationship.
And this within a framework attributable solely to the exercise by the Claimant of an economic activity, within the common IVA system.
From which it clearly follows the remuneration character of the amount, since it aims to restore the same level of income that would be obtained by the Claimant from the fulfillment of the contract initially provided for.
Thus, the amount aims to repair damages in the form of lost profits, with contractual fixation of compensation, merely homologated by the judge, and therefore not being a judicially declared compensation;
That one cannot seek to have this compensation not have a remuneration nature, contrary to the first. Rather, it is only compatible within the framework of a contractual relationship of a synallagmatic nature, in the exercise of an economic activity, therefore, subject to taxation under IVA.
For the vocation of universality of the tax implies that it be understood that any kind of patrimonial attribution that is not consideration for a transfer of goods underlies a provision of taxable services;
That even if the "compensation" could contain a part of its value intended to repair a loss (emergent damage), it was not presented or proven by the taxpayer, but rather the classification of the amount as having the nature of compensation for lost profits, hence, remuneration, is required;
That it results from the case law of the CJEU the necessity to carry out an objective analysis of the purpose and nature of the amounts to be paid for breach of contract, as well as the relevance of the assumption of an obligation of non facere, as already cited in the summary of Marta Machado de Almeida.
That it also results from the case law of the CJEU that the concept of "provision of services", in the sense of the common IVA system, should be interpreted independently of the objectives and results of the operations in question, without the Tax Administration being obliged to investigate the intention of the taxpayer, given its objective character - cfr. judgment Newey and case law therein referred to;
That in legal terms, the question of subjection is of quite evident resolution, as it results from the decision of the CJEU in procs. 250 and 289/14 - but not only - that only compensation that aims at the pure repair of damage, disconnected, therefore, from the exercise of an economic activity, should not be considered subject to IVA;
That in terms of Union Law, it is, therefore, quite evident the subjection of the amount transacted, true consideration for the withdrawal of the action and compatible solely as a restoration of the lost profits of the Claimant;
That the subjection to IVA of the amount here in analysis is unavoidable.
That, with respect to the quantification of the correction, which the Claimant considers incorrect, the TCA considered IVA as a component of the agreed amount;
That the contrary understanding regarding the quantification of the tax would imply that to the agreed amount would be added IVA, which would result in a more burdensome assessment for the Claimant;
That on this matter the understanding expressed in the TIR is as follows: "considering that the value was determined by the parties without reference to IVA and the service provider is the debtor of the IVA due on the taxed operation, we shall consider that the agreed value already includes IVA, whereby the taxpayer should have assessed IVA as was its responsibility, the amount of €916,260.16 (€4,900,000.00 X 23 /123) for the period 2015/07, date of the agreement executed by the aforementioned "Development Contract"".
Thus, it was found that the amount agreed upon by the parties did not discriminate IVA, with the TCA not being able to substitute itself for the parties in the contractual agreement.
However, in accordance with the law, IVA should have been assessed as the operation is taxable. On that premise, it was considered that the agreed value already included IVA, which should have been assessed by the Claimant, as was its responsibility.
Whereby the calculation explained is in accordance with the doctrine drawn, e.g., from the judgment Corina-Hrisi Tulică, rendered on 7 November 2013, within the scope of the proceedings joined C-249/12 and C-250/12 of the CJEU:
"Council Directive 2006/112/EC of 28 November 2006 relating to the common system of value added tax, in particular its Articles 73 and 78, should be interpreted to the effect that, when the price of a good has been determined by the parties without mention of value added tax and the supplier of the said good is the debtor of the value added tax due on the taxed operation, and if the supplier does not have the possibility to recover from the purchaser the value added tax claimed by the tax administration, the agreed price should be considered as already including the value added tax."
With Respect to Corporate Income Tax
The TCA explains that the Corporate Income Tax Code embodied the rules relating to the determination of taxable profit, continuing to adopt the model of partial dependence of tax law with respect to accounting, and proceeds with the citation of the statement in point 10 of the Preamble of that Code:
"10 - Given that taxation is based on the economic reality constituted by profit, it is natural that accounting, as an instrument for measuring and informing that reality, plays an essential role as the basis for determining taxable profit.
The relationships between accounting and taxation are, however, a field that has been marked by a certain controversy and where, therefore, different ways of conceiving these relationships are possible. Removing either absolute separation or total identification, a solution marked by realism is still preferred and which, in essence, consists of basing, at the source, taxable profit on the accounting result to which are introduced, outside accounting, the corrections - positive or negative - stated in law to take into account the objectives and constraints specific to taxation.
Although to concretize the broad notion of taxable profit adopted it would have been possible to adopt as a point of reference the result determined by the difference between equity at the end and at the beginning of the period, the traditional methodology is maintained of basing taxable profit on the net result for the period contained in the net result statement, to which are added the positive and negative patrimonial variations verified in the same period and not reflected in that result."
And it emphasizes that the functions of accounting and taxation are distinct. Notwithstanding both aiming at the economic reality of enterprises, the former, as Rogério Fernandes Ferreira refers to it, constitutes a "highly developed technique of economic observation with very significant objectives for the performance of management"[3], while the latter has as its objective the satisfaction of the financial needs of the State, as flows from Article 5 of the General Tax Law.
And, in this respect, concludes that the legislator consecrated the model of partial dependence of tax law with respect to accounting law, which implies that the starting point for determining tax profit is the accounting result, with accounting performing an instrumental function, and implying such determination the consideration of purely tax corrections resulting from the rules that CIRC imposes, as flows from Article 17 of this enactment.
And the TCA reinforces this idea of the partial dependence of tax law with respect to accounting law, citing Freitas Pereira, who expressed himself in these terms, regarding the Code of Industrial Contribution which was succeeded by the Corporate Income Tax Code:
"This tax relevance of the accounting result implies the projection into the tax domain of the principles to which the determination of that result is subject. That is, it is inherent in the very definition thereof the existence of a certain number of principles to which recourse is had in its determination and which constitute an indispensable point of reference for resolving the specific problems that may arise. The recourse to those principles is not always made explicitly by tax law, as happens in Portugal (Article 22 of the Code of Industrial Contribution), but this does not diminish their importance as parameters to which the determination of the accounting result is subject and, through that, of taxable profit. They should be taken as presuppositions that the legislator could not have been unaware of. It can be said, in effect, that, in the absence of express provision to the contrary, taxable profit is determined in accordance with accounting principles, sometimes qualified as generally accepted or then, as happens here, called 'sound principles of accounting', which explains the fundamental importance that their knowledge has.
For many years, accounting principles had something of a conventional nature, in the sense that their acceptance resulted from a tacit agreement developed within the accounting profession regarding a certain number of basic rules, acceptance in whose consolidation custom and usage played a very important role.
(…)
However, the development of the profession and the creation of international bodies, such as the IASC – International Accounting Standards Committee -, as well as the expansion of accounting law, with emphasis on the Fourth EEC Directive on annual accounts of capital companies (Journal officiel des Communautés européennes, no. L 222, of 14 August 1978), facilitated the adoption of a uniform accounting basis for determining taxable profit through the consecration of accounting principles. It is thus that law can refer, as it does in Spain (Article 37 of the Regulations of the Tax on Corporations), to the principles established in official accounting standardization, which, except as otherwise provided by express provision of a tax character, are applicable for purposes of determining the taxable basis. But neither would it have been necessary for the law to invoke them expressly, for, at the current stage of the evolution of accounting, they constitute a presupposition that the simple reference to the accounting basis of profit makes immediately relevant for tax purposes. That is, currently, it can be said that such relevance is the logical corollary of the legal codification in numerous countries of accounting principles, which closely follow the norms developed at the international level by the IASC."
And it refers to the fact that, in light of the instrumental function performed by accounting in the apportionment of taxable profit, subsection a) of No. 3 of Article 17 of CIRC requires that the same be organized in accordance with accounting standardization and other legal provisions in force for the respective sector of activity, which makes the application of the accounting standards (SNC) obligatory for the generality of enterprises, without prejudice to the observance of the provisions foreseen in CIRC.
Thus, by virtue of the provision of No. 1 of Article 18 of CIRC, income and expenses, as well as other positive or negative components of taxable profit, are attributable to the tax period in which they are obtained or incurred, regardless of their receipt or payment, in accordance with the economic apportionment regime.
Such provision consecrates, in the tax system, the principle of exercise specialization, determining that the net result of the period, which constitutes the starting point for the tax result, is determined, in accordance with the rule of annuity, in an economic rather than financial or cash perspective, in consonance with the accounting principle of accrual or economic apportionment;
The TCA further clarifies that in light of what is established in CIRC the attribution to a given exercise of the positive or negative components of income relating to prior exercises may only be effected if the same are unforeseeable or unknown on the date of closing of the accounts of the prior exercise to which they should be attributed;
And concludes that it is clearly forbidden to any taxpayer to define at its discretion or in harmony with, for example, its commercial or management strategy, the timing to manifest profits or costs and losses resulting from its commercial or industrial activity, since the law imposes limits or rules on it for that purpose, particularly obligating it to attribute those profits or costs to the exercise to which they pertain.
With respect for the principle of exercise specialization assurance is made from the accounting perspective of a true and fair view of the assets or financial position, performance and changes in financial position.
From the tax perspective, the obligation to consider expenses and income in the exercise in which they are generated/incurred also prevents taxpayers from deferring expenses and income for purposes of tax management different from those that the tax legislator understood to privilege in the Portuguese tax system.
For there is no rule in the Corporate Income Tax Code, or in other complementary tax legislation, that imposes in this matter a tax treatment different from the accounting regime, rather it is confirmed by the principle contained in Article 18 of CIRC;
Now, in the case at hand, the proven factuality demonstrates that the Claimant, in determining the accounting result and, consequently, the tax result, did not comply with accounting and tax rules, namely violated the rule of annuity;
From which results, undoubtedly, that the Claimant failed to contradict the legality of the disputed assessments, since the amounts in question constitute income obtained as a consequence of the settlement executed with the Municipality of … during the exercise of 2015, in accordance with Articles 18 and 20 of CIRC;
For the right to receipt of the value agreed by the Claimant and the Municipality of … as compensation for the reduction of construction capacity was established by contract executed in July 2015, within the framework of a settlement that came to be homologated by judgment of November of that same year, with no uncertainty existing regarding the said income at the date of closing of accounts;
Whereby, in accordance with the provision of Article 18 of CIRC, it should be considered as income of the tax period of 2015, regardless of the circumstance of whether or not it has actually received any value.
APPRAISAL
With Respect to IVA
It is first noted that compensations or penalties are not subject to IVA when they do not underlie a transfer of goods or a provision of services, that is, when they sanction the injury of any interest without a remuneration character, because they do not remunerate any operation, being intended instead for the repair of losses suffered and not for compensation thereof.
Indeed, there can be no subjection to IVA in cases in which the delivery of compensation itself presupposes the absence of a synallagmatic nexus and, in consequence, the non-existence of any onerous nature, that is, in cases in which there is no interdependence between the compensation performance and another performance that falls to the injured party to undertake.
These are cases in which there is only one performance to satisfy, with the injured party being able to be asked for the fulfillment of an obligation to which it was bound[4]. This is what normally happens when we are in the presence of matters of pure extracontractual liability[5].
Now, this is not what happens in the case at hand, in which we are witness to a situation of contractual or transactional liability[6] which, as the name indicates, presupposes the violation of obligations. In the dispute at issue, it is the breach of the obligation assumed by the Municipality, stipulated in the contract for the transfer of the parcels of land, which permitted the Claimant a certain construction capacity.
The "compensation" attributed to the Claimant for the reduction of the construction area that had been initially agreed, thus represents a compensation of the "price" to which the Claimant was entitled, assuming, in this manner, a remuneration character.
Now, it is necessary to keep in mind, first and foremost, that IVA is a general tax on consumption that intends to tax transfers of goods and provisions of services performed in the national territory, on an onerous basis, by a taxable person acting as such.
This objective is expressed in subsection a) of No. 1 of Article 1 of the IVA Code (CIVA), in which the following is provided:
"1 – The following are subject to value added tax:
The transfers of goods and provisions of services performed in the national territory, on an onerous basis, by a taxable person acting as such;"
This legal provision translates the transposition to national law of the provision in subsections a) and c) of No. 1 of Article 2 of Directive 2006/112/EC (IVA Directive) relating to the common IVA system:
"1. The following operations are subject to IVA:
The supply of goods effected for consideration in the territory of a Member State by a taxable person acting in that capacity;
[…]
The supply of services effected for consideration in the territory of a Member State by a taxable person acting in that capacity;"
With the concept of transfer of goods referring to the for-consideration transfer of tangible goods in a manner corresponding to the exercise of the right of ownership (Article 3, No. 1, of CIVA and Article 14, No. 1, of the IVA Directive), there is no doubt that the disputed operation refers to the consideration for a provision of services.
In No. 1 of Article 4 of CIVA, the concept of provision of services is delimited by negation by stating that the same comprises "the operations effected on an onerous basis which do not constitute transfers of goods […]".
In fact, Article 24 of the IVA Directive establishes that "provision of services means any operation which does not constitute a supply of goods".
And Article 25 of the IVA Directive complements the concept by establishing that:
"A supply of services may in particular consist of one of the following operations:
The transfer of an intangible asset represented or not by a document;
The obligation to refrain from or to tolerate an act or a situation;
The performance of a service in pursuance of an act of a public authority or in fulfilment of a legal obligation"
To determine whether a service was provided within the meaning of the IVA Directive, it is necessary, however, to analyze the transaction in light of the objectives and characteristics of the common IVA system.
No. 2 of Article 1 of the IVA Directive has the following wording:
"The principle of the common IVA system is to apply to goods and services a general tax on consumption exactly proportional to the price of the goods and services, irrespective of the number of transactions which take place in the production and distribution process before the stage at which taxation becomes chargeable. In each transaction the amount of IVA due is calculated on the price of the goods or services at the rate applicable to such goods or services, with a deduction of the amount of IVA which has directly burdened the various cost elements."
The transaction in the case at issue corresponds to this definition. One is in the presence of an act of consumption. The Claimant transferred parcels of land in consideration for the obtaining of construction rights. These constitute a cost of the Municipality's activity.
Within the common IVA system, for purposes of the concept of provision of services, the nature of the commitment assumed between the parties must be taken into account. Indeed, for it to be inserted into the common IVA system, such commitment must imply a consumption, that is, the service must be supplied to an identifiable recipient conferring an advantage capable of being considered as a constituent element of the cost of the activity of another person in the commercial chain.
In these terms, the disputed operation, in light of the concepts developed in the IVA Code and the IVA Directive, is embodied in a provision of services, subject to IVA, within the scope of which the "compensation" attributed corresponds to the consideration due for the performance of an economic activity. That is, in the urbanization contract in which both agreed, there is a direct nexus between the Claimant's performance of reduction of construction capacity and the Municipality's performance of compensation or indemnification of the Claimant.
The payment of the "compensation" by the Municipality thus constitutes a synallagmatic fact, with there being an interdependence between the compensation performance and the loss of construction rights, occurred upon the execution of the urbanization contract, whereby it is a performance subject to IVA.
The value of €4,900,000.00 received by the Claimant, regardless of the designation given to it, "compensation" or indemnification, assumes the nature of consideration that remuneration for a provision of services, embodied in the reduction of construction capacity agreed upon and the corresponding related rights, performed in the course of the exercise of an economic activity subject to IVA and not exempt therefrom.
The value of that "compensation" corresponds, thus, in reality, to the income that the Claimant would earn were the contract to be in effect in accordance with the contractual conditions initially established and agreed, and clearly has as its objective to restore the income that the Claimant would obtain through the transfer it made of the parcels of land that belonged to it, had the Municipality not altered the said contractual conditions. That compensation has, for that reason, undoubtedly, a remuneration character.
Indeed, the construction rights initially guaranteed by the Municipality, as consideration for the transfer of the parcels of land, saw themselves reduced with respect to what was established. The agreed value of €4,900,000.00 attributed to the Claimant represents nothing more than the restoration of those rights, that is, the restoration of the consideration to which the Claimant was entitled and would cease to obtain as a consequence of the breach of what was initially agreed.
The said value is not intended to compensate eventual damage suffered by the Claimant, but constitutes a remuneration due to the Claimant with the objective of restoring the level of income that this failed to obtain in light of the diminution of the construction rights that had been agreed upon when the individualized performance of transfer by the Claimant of the parcels of land that were placed at the Municipality's disposal.
In this manner, the operation to which the compensation refers configures a taxable operation since the value received by the Claimant has a remuneration character, being intended to compensate the reduction of its construction rights and consequently the level of income that the Claimant failed to obtain, with IVA being due upon the attribution of such compensation.
With respect to the amount of IVA due, the TCA considered that the value agreed between the parties already included IVA, which should have been assessed and remitted by the Claimant, as was its responsibility.
The calculation of IVA performed by the TCA is in accordance with the doctrine that results from the judgment of 7 November 2013, Corina-Hrisi Tulică, C-249/12 and C-250/12, relating to the determination of IVA due when the parties provided nothing, at the time of execution of the contract, regarding that tax.
In this case, a preliminary ruling question was raised as to whether, in light of the provision of Articles 73 and 78 of the IVA Directive, in the case of the price of a good having been determined by the parties without mention of IVA and of the supplier of the said good being the debtor of IVA on the taxed operation, the agreed price should be considered as a price that already included IVA or as a price without IVA, to which the tax should be added.
By judgment it was decided that, "when the price of a good has been determined by the parties without mention of IVA and the supplier of the said good is the debtor of the IVA due on the taxed operation, and if the supplier does not have the possibility to recover from the purchaser the IVA claimed by the tax administration, the agreed price should be considered as already including IVA".
Now, this doctrine can be applied to the disputed operation to the extent that:
the amount of €4,900,000.00 agreed between the parties does not discriminate any amount of IVA,
the service provider in the operation is the Claimant and to it fell the responsibility of assessing the corresponding IVA, and furthermore,
it is doubtful that the Claimant could recover the IVA from the Municipality.
It is further added that, all due differences being reserved, the Municipality behaves in the referred transaction as a final consumer, to the extent that it is not permitted the recovery of any amount of IVA that is borne in order to place the Urban Park at the disposal of the inhabitants and other users.
Indeed, it is in no way evident that the Municipality would have consented to the disputed operation under the conditions now sought by the Claimant, given that the IVA that might now be claimed could not come to be recovered from the Municipality, as it would exceed the object of the contract and could not be raised against it, either as a title of contractual obligation or as a title of extracontractual legal obligation. To be thus, in the case of the Claimant not recovering that IVA, it would bear a burden of equivalent value, an effect that the TCA intended to avoid. Indeed, IVA cannot constitute a burden of the Claimant, in its capacity as service provider/supplier, given that it is, by nature, a tax on consumption that should be borne by the final consumer. With this option the TCA assured that the amount of IVA demanded of the Claimant is an amount that it effectively received from the Municipality.
Having found that the amount of €4,900,000.00 did not discriminate IVA, the TCA understood not to substitute itself for the parties in the contractual agreement. However, in view of the subjection to tax of the disputed operation and the consequent obligation to assess IVA, the TCA considered that the value agreed between the parties already included IVA, which, as is evident, should have been assessed by the Claimant.
Finally, by explaining that "(…) the value was determined by the parties without reference to IVA and the service provider is the debtor of the IVA due on the taxed operation, we shall consider that the agreed value already includes IVA, whereby the taxpayer should have assessed IVA as was its responsibility, the amount of €916,260.16 (€4,900,000.00 x 23/123) for the period 2015/07, date of the agreement executed by the aforementioned "Development Contract", the TCA provided sufficient grounds for the act, in this respect, which is the only one accused by the Claimant of a defect relating to lack of grounds.
It is true that the TCA did not expressly invoke the legal rule on which it relied, but clearly enunciated the legal regime that it understood to be applicable, in a manner that would permit the Claimant to understand the reasons for its action – an understanding that the Claimant itself demonstrates to have achieved, by the manner in which it attacked the act.
The invoked defect of lack of grounds is not recognized, based on the foregoing.
With Respect to Corporate Income Tax
Corporate Income Tax is a periodic tax that has as its basis a tax event of lasting character (the activity of the enterprise) that is fictionally divided into periods for purposes of apportionment of results[7].
The principle of taxation according to actual profit does not conflict with the principle of exercise specialization; rather, these principles are intimately related and both connected with the principle of annuity, according to which enterprises must apportion at the end of each tax period, generally of one year's duration, the results of the exercise of their activity during that same period and decide, forthwith, the allocation to be made of those results.
Within the scope of Corporate Income Tax, the question at issue appears to be resolved by departing from the reading of Nos. 1 and 2 of Article 18 of the Corporate Income Tax Code (CIRC) relating to the apportionment of taxable profit, expression also known as the principle of exercise specialization.
Indeed, No. 1 of this legal norm expressly states that:
"Income and expenses, as well as other positive or negative components of taxable profit, are attributable to the tax period in which they are obtained or incurred, regardless of their receipt or payment, in accordance with the economic apportionment regime".
And No. 2 clarifies that:
"Positive or negative components considered as relating to prior periods are only attributable to the tax period when on the date of closing of the accounts of that to which they should have been attributed they were unforeseeable or manifestly unknown".
The attribution of profits to exercises to which those profits do not pertain violates the principle of exercise specialization as well as the principle of taxation according to actual profit, determining, through that, results that, naturally, may not correspond to the actual profit of those exercises.
The economic life of enterprises must be divided into periods of time, measuring in each of them the alterations that occurred in its assets.
The right to receipt of the value of €4,900,000.00 agreed by the Claimant and the Municipality of … for compensation of construction capacity, as previously evidenced, was established by contract executed in July 2015, within the framework of a settlement that came to be homologated by judgment of November of that same year. There was, furthermore, at the date of 31 December 2015, no uncertainty as to the predictability or knowledge of the obtaining of that income and its amount. Moreover, this contract has as its debtor a Municipality, a public entity which, by nature, will never lack the means for fulfillment of the performance (contrary to a private legal person which in the limit could be declared insolvent before complete payment). Lastly, nothing results from the settlement contract that places in question the certainty of the income.
Treating it as a value which, in light of accounting principles, must be recognized as income, and with no specific tax rule existing which, for purposes of determining taxable profit, contradicts these principles, that value should be attributable to the taxable profit of the exercise of 2015 in its entirety. Indeed, No. 1 of Article 17 of CIRC states that:
"The taxable profit of legal entities and other entities mentioned in subsection a) of No. 1 of Article 3 is constituted by the algebraic sum of the net result of the period and of the positive and negative patrimonial variations verified in the same period and not reflected in that result, determined on the basis of accounting and possibly corrected pursuant to this Code".
It is further added that Article 20 of CIRC clarifies in subsection i) of its No. 1 that "compensations earned, whatever the title", are considered income and gains.
There is no rule in the Corporate Income Tax Code or other legislation of a tax nature that determines another tax treatment different from the accounting regime; on the contrary, Article 18 of CIRC confirms that the disputed income should have assured in the matter of Corporate Income Tax the same treatment given to it for accounting purposes.
The fact that payment is made in installments does not contradict this conclusion to the extent that Corporate Income Tax is governed by a principle of accrual and not of cash. In fact, it is highly relevant that the Claimant cited in support of its thesis a judgment relating to Individual Income Tax (31 of the Request) – Judgment STA, of 08-09-2010 – Proc. 0339/10, in which can be read, in the passage transcribed and highlighted by the Claimant, that "in contracts of lasting or deferred performance, as happens in cases in which payment in installments of compensation is established, the tax event is not constituted by that contractual source generating financial flows, but rather by the successive concrete realization in time of the patrimonial increases resulting from receipt of the installments provided for". However, the Claimant omits that it concerns case law emanating in the matter of Individual Income Tax. Now, for the most part of income in Individual Income Tax the opposite principle applies (there is taxation when income is paid or placed at the disposal), or there are express rules referring to the Corporate Income Tax rule (such as today Article 3, No. 6 of the Individual Income Tax Code, which did not exist at the time of the facts underlying the cited judgment, according to which "income referred to in this article is subject to taxation from the moment in which for IVA purposes the issuance of an invoice or equivalent document is mandatory or, if its issuance is not mandatory, from the moment of payment or placing at the disposal of the respective holders, without prejudice to the application of the provision of Article 18 of the Corporate Income Tax Code, whenever the income is determined on the basis of accounting."). This inapplicability of a cash rule to Individual Income Tax taxpayers with business characteristics is, moreover, reiterated with greater clarity in a most recent STA decision which states, in summary, that "for purposes of Individual Income Tax (Category B), with no obligation of invoice issuance, the moment to be considered for determining the obtaining of the income and the consequent subjection to tax, corresponds to that of receipt of the respective value (no. 6 of art. 3 of CIRS)." (Judgment STA, of 31-1-2018, P. 118/17) Now, for this reason, the STA doctrine cited, because emanating in the scope of Individual Income Tax, is not transposable to a case of Corporate Income Tax.
In conclusion, the value of €4,900,000.00 should be considered entirely as tax income of the exercise of 2015 for purposes of determination of the taxable profit thereof.
IV. DECISION
In these terms, this Arbitral Tribunal hereby agrees to:
a) Hold that the petition for annulment of the assessments for Corporate Income Tax, IVA and compensatory interest performed by the TCA lacks merit;
b) Hold that the petition for compensatory interest lacks merit, given its dependence on the principal petition;
c) Condemn the Claimant to pay the costs of the proceedings.
V. VALUE OF THE PROCEEDINGS
In accordance with the provision of Article 306, No. 2, of the Code of Civil Procedure and Article 97-A, No. 1, subsection a), of the Code of Tax Procedure and Article 3, No. 2, of the Regulation of Costs in Tax Arbitration Proceedings, the value of the proceedings is fixed at €1,880,646.81.
VI. COSTS
Costs are computed, in accordance with Article 22, No. 4, of RJAT and Article 4 of the Regulation of Costs in Tax Arbitration Proceedings and Table I attached, in the amount of €24,786.00.
Notice to be given.
Lisbon, 21 February 2018.
The Arbitrators
(José Baeta de Queiroz)
(Emanuel Augusto Vidal Lima)
(João Taborda da Gama)
[1] The assessments are for Corporate Income Tax and IVA, relating to the year 2015, in the amounts of €3,983,739.84 and €916,260.16, respectively.
[2] "IVA in Compensations". (2013). Almedina. Lisbon. (p. 68).
[3] "Accounting for Non-Accountants". IDEFF Notebooks, No. 4, 2nd Edition. Almedina. (p. 87).
[4] As referred to by Afonso Arnaldo and Pedro Vasconcelos e Silva in "IVA and Compensations", published in FISCO Magazine, no. 107/108, March, 2003, Year XIV. (p. 88).
[5] Liability resulting from the violation, even if lawful, of duties of a generic character or conducts (which normally protect absolute rights), which cause certain damage to others. The damage caused is not associated with the prior existence of a contract.
[6] Liability which is associated with the violation of obligations contained in contracts, in unilateral legal transactions or which result from the law itself.
[7] Cfr. Freitas Pereira. "The Apportionment of Taxable Profit". (1998). Notebooks on Science and Tax Technique, no. 349.
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