Process: 230/2013-T

Date: March 17, 2014

Tax Type: IRC

Source: Original CAAD Decision

Summary

CAAD Arbitral Tribunal Process 230/2013-T examined the application of transfer pricing rules under Article 63 of the Portuguese IRC Code to an international cash pooling arrangement. Company A, a Portuguese tire manufacturer wholly owned by German parent company C, challenged an additional IRC assessment of €723,180.88 for fiscal year 2007. The Tax Authority applied transfer pricing adjustments of €2,603,206.11 based on an alleged guarantee relationship within the cash pooling contract, using a comparable bank guarantee method. The taxpayer argued that transfer pricing regimes are inapplicable to cash pooling contracts and, alternatively, that the comparable price method was inadequate. The Tax Authority contended the contract was atypical, constituting a mixed agreement where Company A assumed guarantee positions favoring its German parent in exchange for below-market remuneration due to intra-group subordination. After partial reimbursement of €370,786.32 following a hierarchical appeal, the remaining dispute concerned €352,394.56 plus indemnity interest. The case raises fundamental questions about the scope of Portugal's transfer pricing rules in treasury management operations and the appropriate methodologies for determining arm's length conditions in intercompany financial arrangements.

Full Decision

ARBITRAL DECISION

The arbitrators Jorge Lino Ribeiro Alves de Sousa (arbitrator-president), João Sérgio Ribeiro, and José Vieira dos Reis, designated by the Ethics Council of the Administrative Arbitration Centre to constitute the Arbitral Tribunal, constituted on 11-12-2013, agree as follows:

I. REPORT

On 04.10.2013, company A filed a request for constitution of a collective arbitral tribunal, pursuant to the combined provisions of articles 2 and 10 of Decree-Law No. 10/2011, of 20 January (Legal Regime for Arbitration in Tax Matters, hereinafter designated as "LRAT"), in which the Tax and Customs Authority is Respondent.

The request for constitution of the arbitral tribunal was accepted by the Honourable President of CAAD and automatically notified to the Tax and Customs Authority (TA) on 08.10.2013.

Pursuant to the provisions of subparagraph a) of paragraph 2 of article 6 and subparagraph b) of paragraph 1 of article 11 of Decree-Law No. 10/2011, of 20 January, as amended by article 228 of Law No. 66-B/2012, of 31 December, the Ethics Council designated the arbitrators already mentioned above, who communicated their acceptance of the appointment within the applicable period.

On 21.11.2013 the parties were duly notified of this designation, and did not manifest their intention to refuse the appointment of the arbitrators, pursuant to the combined provisions of articles 11, paragraph 1, subparagraphs a) and b), of LRAT and articles 6 and 7 of the Ethics Code.

Thus, in accordance with the provisions of subparagraph c) of paragraph 1 of article 11 of Decree-Law No. 10/2011, of 20 January, as amended by article 228 of Law No. 66-B/2012, of 31 December, the collective arbitral tribunal was constituted on 11.12.2013.

The Claimant formulated a request for arbitral determination on the legality of the additional assessment of Corporate Income Tax (CIT) No. 2009..., relating to the fiscal year 2007, against which a Gracious Complaint was filed on 08.06.2010, which was expressly dismissed on 16.12.2010, from which a hierarchical appeal was filed on 24.01.2011, partially dismissed in accordance with the Order notified by Official Letter No. ..., of 09.07.2013. The Claimant seeks the annulment of the tax act identified above, as well as the consequent acts of assessment of compensatory interest No. 2009... and No. 2009... and settlement/reconciliation of accounts No. 2009..., resulting in a global balance to pay of €723,180.88. Insofar as it has already been reimbursed, as a result of the partial allowance of the Hierarchical Appeal, the amount of €370,786.32, the Claimant seeks the reimbursement of the remaining €352,394.56, increased by the legally due indemnificatory interest.

The Claimant attributes illegality to the aforementioned acts due to violation of the regime established in article 63 of the CIT Code (CITC) in that they presupposed the existence of a guarantee relationship susceptible to being assessed in light of the arm's length principle and the transfer pricing regime, because this regime is incapable of application to the cash pooling contract executed by the Claimant and, subsidiarily, illegality in the determination of the arm's length price, due to the inadequacy of the comparable price method used in this case.

The TA responded, impugning the adequate translation of clauses 7, 8 and 14 of the contract (cash pooling contract, attached as document 12 with the initial request), which it considers non-conforming with reality, and arguing, in summary, that the aforementioned contract has specificities that are not the conditions of an ordinary cash pooling contract, and should be qualified as mixed, combining rules of more than one type of contract. The TA maintains that the contract executed provides, beyond the contractual clauses related to the guarantees provided, conditions to be practiced with B, with the consequent fixing of conditions applicable to the deposits of A, as well as conditions to apply to the deposits of C. The TA concludes that we are faced with a single contract in which three entities intervene, directly or indirectly, internally or externally, with well-defined and identified legal positions. The TA further considers that, within the scope of the same contract, the Claimant assumed a guarantee position in favor of C, which allowed the latter to finance itself, while the Claimant, by force of the existence of special relationships, and consequent intra-group subordination with respect to C, which is a non-resident entity, is subject to participate in an operation, allocating to it risks in exchange for remuneration lower than what it would obtain in normal market conditions.

In the meeting referred to in article 18 of LRAT, the Claimant declared that it waived its request for joinder of proceedings, as well as the production of witness evidence, and further declared its preference for the presentation of written submissions. For its part, the Respondent declared its preference for the presentation of oral submissions.

The Tribunal granted successive periods of 10 days for the Claimant and the Respondent to present, in that order, their respective written submissions and designated 18.03.2014 as the date for the pronouncement of the arbitral decision.

Claimant and Respondent presented their final submissions in a timely manner.

II. PRELIMINARY DETERMINATION

The arbitral tribunal was regularly constituted.

The parties enjoy legal personality and capacity and are legitimated (articles 4 and 10, paragraph 2, of the same diploma and article 1 of Ordinance No. 112-A/2011, of 22 March).

The proceeding is not affected by nullities.

III. FACTUAL MATTERS

Based on the elements in the record, the following facts are considered proven:

a) Claimant A is a company dedicated to the manufacture of tires and inner tubes, corresponding to CAE code ..., with registered office in ..., Municipality of ... (cf. p. 5 of the tax inspection report attached as document 12 with the request for arbitral determination, whose contents are taken as reproduced);

b) Claimant A was, in fiscal year 2007, the parent company of a group of companies whose subsidiary companies were D, Lda., E, S.A., and F, S.A. (cf. p. 5 of the tax inspection report);

c) In fiscal year 2007, the Claimant was 100% owned by the German company C (cf. p. 5 of the tax inspection report);

d) The Claimant, by Service Order No. OI..., was subject to an inspection procedure for fiscal year 2007, in which corrections to the taxable matter here challenged were effected (cf. p. 4 of the tax inspection report);

e) In the course of the aforementioned procedure, the TA determined that transfer pricing applied to the guarantee relationship between A and the parent company C, whose comparability method was based on an existing bank guarantee at the domestic level (cf. pp. 3 and 27 of the tax inspection report);

f) Based on the grounds indicated in point III.1 of the tax inspection report, the correction of the taxable profit of the group of companies was proposed, resulting from the correction of the individual taxable profit of the Claimant, relating to the year 2007, in the amount of €2,603,206.11 (cf. p. 2 of the tax inspection report);

g) The correction effected gave rise to the additional CIT assessment No. 2009..., relating to fiscal year 2007, in the amount of €705,978.59 (cf. document 1 attached with the request for arbitral determination, whose contents are taken as reproduced) and, furthermore, to acts of assessment of compensatory interest Nos. 2009... and 2009..., and to the act of settlement/reconciliation of accounts No. 2009... (cf. documents 6 and 7 attached with the request for arbitral determination, whose contents are taken as reproduced);

h) From the aforementioned settlement resulted a balance to pay of €723,180.88 (cf. document 7 attached with the request for arbitral determination, whose contents are taken as reproduced), which the Claimant effectively paid on 14.03.2011 (cf. the Claimant's statement at the beginning of the request for arbitral determination, which is not disputed by the Tax and Customs Authority);

i) On 08.06.2010, the Claimant filed a gracious complaint of the additional assessment referred to in the preceding subparagraph (cf. document 2 attached with the request for arbitral determination, whose contents are taken as reproduced);

j) The gracious complaint referred to in the preceding subparagraph was dismissed by order issued on 16.12.2010 and notified to the Claimant on 27.12.2010 (documents 3 and 4 attached with the request for arbitral determination, whose contents are taken as reproduced);

k) From the order dismissing the gracious complaint a hierarchical appeal was filed on 24.01.2011 (cf. document 4 attached with the request for arbitral determination, whose contents are taken as reproduced);

l) The hierarchical appeal was partially allowed by order of 10.08.2012, which was notified to the Claimant by Official Letter No. ..., of 09.07.2013 (cf. document 5 attached with the request for arbitral determination, whose contents are taken as reproduced);

m) As a result of the partial allowance of the hierarchical appeal, the amount of €370,786.32 was reimbursed to the Claimant (cf. the Claimant's statement at the beginning of the request for arbitral determination, which is not disputed by the Tax and Customs Authority);

n) On 04.10.2013 the Claimant filed the request for constitution of the arbitral tribunal that gave rise to the present proceeding (cf. the CAAD computer system);

o) On 27.06.2005, the Claimant and C entered into a centralized cash management coordination contract with bank B (hereinafter designated as "B"), with registered office in Amsterdam, known in international terminology by the English expression cash pooling (the copy of the contract and the "Operating Manual" are contained in documents 10 and 11 attached with the request for arbitral determination, whose contents are taken as reproduced);

p) In fiscal year 2007 the aforementioned financing contract was in force (p. 30 of the tax inspection report);

q) Clause 3 of the contract establishes as the interest rate applicable to credit balances B's base rate and the rate applicable to debit balances B's base rate plus 0.50% (cf. p. 9 of the tax inspection report);

r) Pursuant to Clause 6.1 of the cash pooling contract executed between the Claimant, C and B, if at any moment the global balance recorded a debit balance, the Lead Client should, as soon as so requested by the Bank and immediately, cover the same, offsetting in its account with the Bank the deficit generated (cf. document 10 attached with the request for arbitral determination, as well as p. 11 of the tax inspection report);

s) Pursuant to Clause 7 of the cash pooling contract, each of the Clients (the Claimant and C) undertook to ensure the compensation of the Assured Liabilities by granting the Bank all and any credits of the same against the Bank (cf. document 10 attached with the request for arbitral determination, as well as pp. 11 and 12 of the tax inspection report);

t) In fiscal year 2001, A obtained financing from bank G in the amount of €40,000,000, in the context of an Investment Project, having presented to G a guarantee issued by bank H (H) in favor of that entity (cf. p. 27 of the tax inspection report);

u) Although it is a 2001 contract, it remains in force in fiscal year 2007, maintaining the initial conditions with respect to its remuneration (cf. p. 27 of the tax inspection report);

v) In the fiscal year in question A bore an annual charge with that guarantee corresponding to 0.375% (similarly to what was observed in fiscal years 2005 and 2006) (cf. p. 27 of the tax inspection report);

x) As of 05.01.2007 the deposits of A in B were remunerated at the rate of 3.75% (cf. pp. 32-33 of the tax inspection report);

z) In the year 2007, the average difference between the remuneration obtained by the Claimant for its deposits in B and the conditions obtained in other operations, between January and September, was approximately 1.21% (p. 36 of the tax inspection report).

Justification for the Determination of Factual Matters

The determination of the factual matters is based on probative judgments drawn from the documents and statements of the parties, indicated with respect to each of the points of factual matters, and whose correspondence with reality is not disputed by the parties.

There are no facts that should be considered unproven and that have interest for the decision of the case.

III. LEGAL MATTERS

  1. Question of whether there is a guarantee provided within the scope of a Cash Pooling contract and whether transfer pricing can be applied to it

The principal question to be decided in the present arbitral proceedings is whether or not there exists a guarantee provided by the Claimant to C and whether transfer pricing can be applied to it.

  1. Framework

To answer the problem at issue it is necessary to frame the question which naturally passes through a brief delimitation of the cash pooling contract and the concept of transfer pricing, and the articulation between the two.

2.1. Cash Pooling

The cash pooling contract is the designation given internationally to a centralized cash management contract which aims to maximize the availability of the same, not through the means of bank financing, but through a compensation mechanism between surpluses and needs of cash management within the companies of the same group. Through this contract it is possible to achieve, not only more favorable negotiation with financial institutions, but also to reduce the financial and exchange risks that would exist outside integrated management of resources within the group. Other advantages are also noteworthy, recognized moreover by the Tax Authority (TA) in the inspection report (p. 6), namely, (i) simplification of the management process at the individual level of each company, freeing up resources for other activities; (ii) obtaining value gains, through the reduction of interest associated with debit accounts; (iii) strengthening of the company's financial statements through the reduction of bank loans.

There are two main types of cash pooling: zero balancing or physical cash pooling and notional cash pooling.

In zero balancing or physical cash pooling there is physical transfer of surpluses from individual accounts to the cash pooling concentration account or in coverage of individual deficits by debit of the central account. There exists, therefore, real compensation between the balances of the accounts of the various companies that are part of the contract. The individual accounts are, in a sense, cancelled and the interest to be paid and to be received are calculated at the level of the central account. The centralizing entity, which can be the parent company or another company in the group, subsequently proceeds to the distribution of interest among the various participants based on the balances transferred. In simple terms it can be said that there is a series of loans between the participants.

In notional cash pooling the surpluses and deficits of individual accounts do not physically go to the concentration account. Instead, each participant maintains its position with the bank and receives or pays interest based on its debtor or creditor situation. In this modality the balance of the various associated accounts is grouped solely for purposes of calculating interest, being the compensation merely virtual. It is as if in practice there occurs a series of loans between the bank and the participants. The bank is, however, merely an intermediary, given that it does not bear the risk, or does so in a very attenuated manner.

2.2. Transfer Pricing

The expression 'transfer price' translates into the price fixed by a particular taxpayer when it sells or purchases goods, or shares resources with a person with whom it has special relationships. In such situations, the prices used may not correspond to market prices, that is, to freely negotiated prices.

Indeed, this departure from the price that would normally be charged in an equivalent transaction may aim at price manipulation with the objective of transferring income (in the form of profit, for example) from one taxpayer to another, obtaining tax advantages. These situations occur typically at the international level when an attempt is made, through price manipulation, to transfer profit to the country where taxation is more favorable, although they are also relevant at the domestic level.

The response of countries to this situation is the correction of these transfer prices, in order to prevent other countries from obtaining a share of the income that was generated in their territory. This adjustment has as its reference the prices that would have been fixed by companies without a special relationship, acting independently. This method, designated as the arm's length method (arm's length principle), is shared by the majority of countries, although there are frequently disagreements as to how it should be implemented.

The transfer pricing mechanism, notwithstanding the fact that it is, to a large extent, identified as a mechanism to combat the artificial transfer of profits, and consequently, the provisions incorporating this mechanism are often referred to as specific anti-abuse clauses, serve other functions. Specifically, the reduction of the risk of economic double taxation and contributing to a balance in the distribution of profits to be taxed in the various countries where multinationals operate.

It is therefore important to keep in mind that even if entities that have special relationships have no abusive intention, transfer pricing may still be applied to them. Point 1.2. of the Transfer Pricing Guidelines Applicable to Multinational Enterprises and Tax Administrations[1] is quite illuminating in this regard in the excerpts that are transcribed below. "Tax Administrations should not systematically assume that associated enterprises attempt to manipulate their respective profits. (...) In fact, a tax adjustment on the basis of the arm's length principle does not affect the contractual obligations that bind associated enterprises at all levels, with the exception of the tax, and may prove necessary even without the intention to reduce or evade tax. The analysis of a transfer price should not be confused with analyses dealing with cases of fraud or tax evasion, even if the measures of action adopted in terms of transfer pricing pursue such objectives."

2.3. Cash Pooling and Transfer Pricing

In normal circumstances, regardless of some legal systems repudiating centralized cash management contracts in the notional cash pooling modality, these are a legitimate mechanism practiced throughout the world with considerable advantages for groups of companies, whereby the application of transfer pricing, should it take place, would fit with those situations in which there is no fraud or tax evasion, unless, obviously, it is proven that the cash pooling contract aims at purposes other than those which normally result from it.

Cash pooling in general, despite the fact that in most countries the transfer pricing provisions do not specifically refer to this type of operations, raises some considerations in terms of transfer pricing, given that the participants replace bank deposits with operations within the group and provide cross guarantees to the Bank. As a result of this circumstance, it is attempted to verify whether the benefits arising from cash pooling are properly distributed among the participants[2].

Notwithstanding the fact that physical cash pooling and notional cash pooling aim at similar objectives, the implications that each of them has, with respect to transfer pricing, are not necessarily the same.

In physical cash pooling the various operations that compose it are developed directly between the parties that have special relationships, whereby it is conceivable that transfer pricing be applied to each of these operations.

In notional cash pooling there is a contract that, in fact, has as participants entities that have special relationships between them, but the concrete operations that raise the application of transfer pricing are developed between the bank and the various participants and not in the relationships between those entities. Whereby the transfer pricing, if to be applied, must contemplate the contract as a whole, the only situation in which there is actually an operation between parties with special relationships. This finding will not be alien to the fact that groups, being able to choose physical cash pooling, choose notional cash pooling. There will certainly be various considerations to make in the choice, but the fiscal implications, particularly those relating to transfer pricing, will certainly not be negligible.

Indeed, the fact that the operations inherent in the contract are totally interdependent implies that they present themselves as necessary in their entirety, not only to ensure the survival of the contract, but especially so that it generates the benefits sought, which, as is obvious, favors globally all members. It is observed, moreover, through the advantages of cash pooling, listed previously and closely following the enumeration made by the TA (p. 6 of the inspection report) that the combined benefits are greater than the mere sum of the benefits of each operation that composes it understood in isolation. To this end it is necessary to refer to an excerpt from point 1.42. of the Transfer Pricing Guidelines Applicable to Multinational Enterprises and Tax Administrations that is in a chapter that has precisely as its heading Assessment of Separate and Combined Operations. "In theory, the arm's length principle should be applied on an operation-by-operation basis to approximate as closely as possible the fair value of the market. But it frequently happens that different operations are so closely linked or continuous that it is not possible to make a correct assessment without considering them together. (...) These operations should be analyzed jointly, using the method or methods most appropriate based on the arm's length principle"[3].

  1. The Concrete Situation

The parties agree that a cash pooling contract was executed with all the characteristics and consequences inherent to it. There exists, however, a disagreement regarding, on the one hand, the operation to which transfer pricing should be applied and, on the other hand, subsidiarily, regarding the most appropriate method to apply it.

The principal request shall be assessed first, only moving to assess the subsidiary request if the former fails. Indeed, subsidiary requests should only be considered in the case of the failure of a prior request [article 469, paragraph 1, of the Civil Procedure Code, applicable by force of the provisions in article 29, paragraph 1, subparagraph e), of LRAT].

With respect to the principal question, the TA considers that, notwithstanding the recognition of the cash pooling contract, "the deposits made by A in B [bank B] within the scope of that contract [cash pooling] serve as a guarantee for the financings obtained by C, whereby the first provides a service and assumes risks, for the benefit of C, which are not remunerated. There is violation of the Arm's Length Principle provided for in paragraph 1 of article 58 of CITC...".

The Claimant, for its part, maintains that there is no guarantee susceptible to being assessed in light of the arm's length principle, that is, to which transfer pricing can be applied.

It is certain that in the domain of the cash pooling contract there is a series of operations and inherent obligations, and it is possible to identify some cross guarantees as an integral part of a contract which, as is recognized by the parties, is a single one and encompasses all these dimensions. Indeed, the TA explicitly states "the deposits of A are in fact guarantees within the scope of the aforementioned contracted business [cash pooling]" (p. 20 of the inspection report).

Alongside the eventual guarantees, there are, however, other operations that are in a relationship of interdependence with them and that aim at a fuller objective than the strict guarantee of a potential credit. It is not therefore possible to fragment the cash pooling contract to effect an à la carte application of transfer pricing. It is a single operation which, as the TA itself recognizes, represents a gain for the group (p. 7 of the inspection report) and contains other advantages beyond the guarantee itself, all being more than closely linked, there being a genuine situation of integration (they are part of the same contract). Now, in the interpretation of the provision on transfer pricing, beyond the literal element, other elements relevant to interpretation must be considered. With respect to the consideration of the historical element and, assuredly, the teleological element, the consideration of the Transfer Pricing Guidelines Applicable to Multinational Enterprises and Tax Administrations, moreover frequently invoked by the parties, will certainly not be alien. Regarding this important instrument of interpretation, part of point 1.42. has already been transcribed which states that it is not possible to make a correct assessment of operations that are closely linked or continuous without considering them as a whole. Now, by greater reason, this reasoning should be applied to the operations that are more than closely linked, that is, which are genuinely integrated as those that are the object of our scrutiny.

Thus, notwithstanding the fact that there are clauses that translate into a guarantee, these clauses are integrated in the contract understood as a whole, and cannot be abstracted from it gaining autonomous life. It is therefore, guarantees provided by the participants as a whole, that is, guarantees of the cash pooling contract in its entirety and not a guarantee provided by A in favor of C.

Furthermore, even if we considered the guarantee "separated from the associated operation," to use the terminology of the TA (article 188 of the response), the letter of the law would not permit application of article 58 of CITC. If in the context of Physical Cash Pooling it might still be conceivable to apply transfer pricing to the guarantees provided by the parties, given their direct relationship, in the concrete case in which there is no operation between the parties, insofar as the counterparty is B, it is not possible to apply the aforementioned article 58. As is, moreover, recognized by the TA itself by saying that "being the cash pooling system implemented in the notional pooling modality, the movements of funds (deposits and financings) operated within it are made directly with B, the intermediary entity and participant in the system (p. 9 of the inspection report)".

The guarantees, whether the one given by C or the one assured by A, regardless of the relationship of subsidiarity that exists between them, are, as has been stated several times, provided within the scope of a complex contract in favor of B, to guarantee that contract as a whole. Consequently, even if one were to highlight the guarantee from the rest of the contract, it would still not be possible to apply the provision relating to transfer pricing, for as it is clear and obvious, there are no special relationships between A and B. Furthermore, there is no support or correspondence in the letter of the law that permits application of this provision to entities that are not in a situation of special relationships; there being, therefore, no room for any extensive interpretation that might possibly aim at that result.

It is furthermore important to emphasize that, given that the rules on transfer pricing, due to their direct impact on the quantification of the taxable fact, are covered by the reservation of law of the Assembly of the Republic (being naturally excluded from that reservation, regulations of execution), it would not even be conceivable to apply this norm through analogy (article 11, paragraph 4 of the General Tax Law).

There would remain, therefore, only one avenue to abstract from the business an eventual guarantee provided by A to C – that of disregarding the executed business and requalifying it. Now, action of this type, despite not being impossible, would always be exceptional. Both in the general context and in the strict context of national law.

In the general context, and making once more an appeal to the Transfer Pricing Guidelines Applicable to Multinational Enterprises and Tax Administrations, we transcribe an excerpt from point 1.36, which is sufficiently expressive to dispense with any comment: "the verification by the Tax Administration of a linked operation must be based on the operation effectively occurring between the parties and on the manner in which it was structured by the parties (...) Except in exceptional cases, the Tax Administration should not disregard the effective operations, nor substitute them with other operations. The restructuring of legitimate commercial operations would be a totally arbitrary procedure..."[4]. The exceptional cases in which it is possible not to attend to the structure adopted by the taxpayer refer to situations in which there is a disagreement between the form of the operation and its economic substance, and to cases where the adopted structure prevents the Tax Administration from determining an appropriate price[5]. This will happen when, it is understood, the original structure had at its base eminently fiscal reasons, regardless of whether there are others.

Also in domestic law the framing that is made of the problem reflects to a large extent the principle to which reference was made in the preceding paragraph. The disregard of the operation performed is equally something exceptional and which presupposes the application of a specific procedure. In the concrete case, the effectiveness of the contract was not questioned or suggested that it aimed at the reduction of tax in an artificial, fraudulent and abusive manner, concealing the provision of a guarantee, the only operation really intended by the parties. This notwithstanding the fact that, implicitly, the eventual guarantee is highlighted as the principal motive of the cash pooling contract. Now, given that the only procedure that would permit a requalification of the financial operation performed in fiscal terms has not been initiated, which would only be possible with the framework provided in article 63 of the Code of Tax Procedure and article 38, paragraph 2, of the General Tax Law (general anti-abuse rule), there is no room to do so, by applying, without more, article 58 of CITC to an operation that does not fit it.

That is, given that the correct procedure has not been used to possibly disregard the cash pooling and place emphasis on an eventual guarantee that would have been intended with the business foreseen, the possibility of the operation being requalified is precluded and, consequently, transfer pricing being applied to it. There is therefore no justification for attempting to determine whether the legal requirements on which the application of the aforementioned general anti-abuse rule depends might eventually be met.

In an arbitral decision of the Administrative Arbitration Centre - CAAD, issued in Proc. No. 76/2012, of 29 October 2012, some considerations were made which synthesize very well the arguments just advanced, which justifies their reproduction:

"In the application of the rule on transfer pricing, the Tax Administration must attend to the operation really practiced, to the 'legal form' used by the taxpayer in its commercial or financial operation, being able to alter, for tax purposes, its terms or conditions when it considers them different from those that would be contracted, accepted and practiced between independent entities in comparable operations.

Different from these situations and outside the regime of transfer pricing remain the situations in which the Tax Administration concludes that, instead of the commercial or financial operations really effected, independent persons would undertake other operations, of different types, with other 'legal forms'. In these cases, the requirements for ceasing to consider effective, for tax purposes, the operations actually performed are not those provided for in article 58 of CITC, but rather those provided for in article 38, paragraph 2, of the General Tax Law and article 63 of the Code of Tax Procedure".

The only question that matters remains the same, that is, to determine whether the action of the Tax Administration has legal basis in article 58 of CITC, in the version in force in 2007, which was the regime actually applied in the disputed act.

It has indeed already been decided that this provision cannot be applied to the guarantee inherent in the cash pooling contract. The assessment of the subsidiary question of illegality in the determination of the arm's length price is therefore rendered unnecessary.

Thus, it is concluded that the Claimant is correct regarding the question of the correction effected with invocation of violation of article 58, paragraph 1, of CITC, whereby the illegality of the contested additional assessment must be declared (article 135 of the Code of Administrative Procedure).

As a result of such annulment, the consequent acts of assessment of compensatory interest and settlement of accounts are null, by force of article 133, paragraph 2, subparagraph i), of the Code of Administrative Procedure.

IV. DECISION

This Tribunal agrees to:

  • adjudge the request for declaration of illegality of the additional assessment of Corporate Income Tax No. 2009..., relating to fiscal year 2007, to be well founded;

  • adjudge the request for declaration of illegality of the consequent acts of assessment of compensatory interest Nos. 2009... and 2009... and settlement of accounts No. 2009... to be well founded;

  • adjudge the request for declaration of illegality of the dismissal of the Hierarchical Appeal filed against the dismissal of the Gracious Complaint to be well founded;

  • annul the contested assessments;

  • and condemn the Tax and Customs Authority to reimburse the assessments paid by the Claimant, and furthermore to pay it the legally due indemnificatory interest.

Costs, to be borne by the Tax and Customs Authority, the value of the case being €352,394.56 (uncontested value appearing in the initial petition).

Lisbon, 17-03-2014

The Arbitrators

Jorge Lino Ribeiro Alves de Sousa

José Vieira dos Reis

João Sérgio Ribeiro

[1] Transfer Pricing Guidelines Applicable to Multinational Enterprises and Tax Administrations, Tax Science and Technique Pamphlets 189, Ministry of Finance, Lisbon, 2002, p. 35.

[2] In countries such as the Netherlands, where cash pooling practice is current, the leader of the cash pool normally submits a prior request for transfer pricing opinions, where remuneration of the centralizing entity or Cash Pool leader is fixed, interest rates and distribution of benefits. Cf. Cash Pooling Efficient working capital funding, Baker McKenzie. http://www.bakermckenzie.com/files/Publication/ca1810c6-24cb-4948-93f2-552258f726ae/Presentation/PublicationAttachment/262a389c-c6e4-4e2e-8d62-276a34c5e5db/br_amsterdam_cashpooling_mar12.pdf

[3] In Transfer Pricing Guidelines Applicable to Multinational Enterprises and Tax Administrations, op. cit., p. 54.

[4] In Transfer Pricing Guidelines Applicable to Multinational Enterprises and Tax Administrations, op. cit., pp. 51 and 52.

[5] Cf. Point 1.37. of Transfer Pricing Guidelines Applicable to Multinational Enterprises and Tax Administrations, op. cit., p. 51.

Frequently Asked Questions

Automatically Created

What is the role of transfer pricing rules under Article 63 of the IRC Code in cash pooling arrangements?
Under Article 63 of the IRC Code, transfer pricing rules apply to special relationships between related entities to ensure transactions occur at arm's length prices. In cash pooling arrangements, the Tax Authority may examine whether guarantee relationships or financial services provided between group companies involve conditions different from market terms. The key issue in Process 230/2013-T was whether standard cash pooling treasury management constitutes a guarantee relationship subject to transfer pricing analysis, or whether such contracts fall outside the scope of Article 63. The taxpayer argued cash pooling contracts are distinct from guarantee arrangements and should not trigger transfer pricing adjustments, while the Tax Authority maintained that atypical cash pooling agreements with guarantee features require arm's length pricing analysis.
How did the CAAD Arbitral Tribunal rule on the additional IRC tax assessment for the 2007 fiscal year?
The complete ruling of the CAAD Arbitral Tribunal is not provided in the available excerpt, which contains only the procedural report and preliminary sections. The decision was scheduled for pronouncement on March 18, 2014. The case involved an additional IRC assessment of €723,180.88 for fiscal year 2007, with €370,786.32 already reimbursed following partial acceptance of a hierarchical appeal, leaving €352,394.56 in dispute. The tribunal was constituted on December 11, 2013, with arbitrators Jorge Lino Ribeiro Alves de Sousa (president), João Sérgio Ribeiro, and José Vieira dos Reis. To determine the final outcome regarding the transfer pricing adjustments and the applicability of Article 63 to the cash pooling contract, the complete arbitral decision would need to be consulted.
Can intercompany cash pooling contracts be subject to the arm's length principle under Portuguese tax law?
Portuguese tax law provides taxpayers challenging IRC assessments with hierarchical remedies before resorting to arbitration or courts. In Process 230/2013-T, Company A first filed a gracious complaint (reclamação graciosa) on June 8, 2010, which was expressly dismissed on December 16, 2010. Subsequently, a hierarchical appeal was filed on January 24, 2011, resulting in partial acceptance notified on July 9, 2013, leading to a reimbursement of €370,786.32. After exhausting administrative remedies, the taxpayer initiated arbitration proceedings under the RJAT (Decree-Law 10/2011) on October 4, 2013. This case demonstrates the multi-tiered Portuguese tax dispute resolution system: gracious complaint, hierarchical appeal, and finally arbitration or judicial review.
What remedies are available to taxpayers challenging IRC additional assessments, including gracious claims and hierarchical appeals?
Yes, intercompany cash pooling contracts can be subject to the arm's length principle under Portuguese tax law when they involve special relationships between related entities under Article 63 of the IRC Code. The central dispute in Process 230/2013-T concerned whether the specific cash pooling agreement constituted a guarantee relationship requiring transfer pricing analysis. The Tax Authority argued the contract was atypical, involving mixed characteristics beyond ordinary treasury management, where Company A assumed guarantee positions favoring its German parent C in exchange for below-market remuneration. The taxpayer contended that transfer pricing rules are inherently inapplicable to standard cash pooling arrangements. The case illustrates that Portuguese tax authorities analyze the substance of cash pooling agreements to determine whether guarantee services or other related-party arrangements trigger Article 63 transfer pricing requirements.
Are compensatory interest and indemnity interest applicable when an IRC tax assessment is annulled by arbitration?
When an IRC tax assessment is annulled by arbitration, Portuguese tax law distinguishes between compensatory interest (juros compensatórios) and indemnity interest (juros indemnizatórios). Compensatory interest is charged by the Tax Authority on late payments when assessments are upheld, as seen in acts 2009... in this case. Conversely, indemnity interest becomes payable by the State to taxpayers when assessments are annulled or reduced, compensating for the Treasury's undue retention of funds. In Process 230/2013-T, Company A sought reimbursement of €352,394.56 plus legally due indemnity interest. The hierarchical appeal had already resulted in partial reimbursement of €370,786.32. If the arbitral tribunal annulled the remaining assessment, indemnity interest would accrue from the payment date until reimbursement, calculated according to applicable legal rates under the General Tax Law (LGT).