CAAD Ruling on IRC Deductibility of Expenses and Sales Type Lease Adjustments (236/2014-T)

ARBITRAL DECISION

The arbitrators Doctor Jorge Lopes de Sousa (arbitrator-president), Professor Doctor António Martins and Dr. João Menezes Leitão (arbitrators-members), appointed by the Deontological Council of the Administrative Arbitration Centre to form the present Arbitral Tribunal, constituted on 12.5.2014, agree as follows:

I. Report

1. A, SA, legal entity no. …, with registered office in … Amadora (hereinafter the Claimant), filed on 06.03.2014, pursuant to the provisions of article 10 of Decree-Law no. 10/2011, of 20 January, as subsequently amended (Legal Framework of Tax Arbitration, hereinafter LFTA), a request for arbitral ruling, wherein the Tax and Customs Authority (hereinafter, Respondent or TA) is called upon, in which it indicated as "tax acts subject to the request" the additional assessments of Corporate Income Tax (CIT) and compensatory interest no. 2012 …, in the total amount of €1,230,312.37, relating to the year 2008, no. 2012 …, in the total amount of €51,318.26, relating to the year 2009 and no. 2012 …, in the total amount of €564,879.38, relating to the year 2010.

2. In accordance with articles 5, no. 3, subsection a), 6, no. 2, subsection a) and 11, no. 1, subsection a) of the LFTA, the Deontological Council of this Administrative Arbitration Centre (CAAD) appointed as arbitrators of the collective arbitral tribunal Counselor Doctor Jorge Lino Alves de Sousa, as arbitrator-president, and Professor Doctor António Martins and Dr. João Menezes Leitão, as arbitrator-members, who accepted the appointment.

By order of 3.11.2014 of the President of the Deontological Council of the CAAD, in view of the fact that Counselor Doctor Jorge Lino Alves de Sousa was temporarily unable, for health reasons, to perform his respective functions, Counselor Doctor Jorge Lopes de Sousa was appointed to perform, in a replacement capacity, the functions of arbitrator-president, a replacement that ended on 3.12.2014, as per order of that date of the President of the Deontological Council.

Subsequently, by order of 4.2.2015, the President of the Deontological Council, verifying that Counselor Doctor Jorge Lino Alves de Sousa was incapacitated, due to illness, to perform the functions of arbitrator-president of the collective tribunal, terminated his mandate and appointed, in his replacement, as arbitrator-president, Counselor Doctor Jorge Lopes de Sousa.

1. Pursuant to the provisions of subsection c) of no. 1 and of no. 8 of article 11 of the LFTA, as per communication of the President of the Deontological Council of the CAAD, the Arbitral Tribunal was constituted on 12.05.2014.

2. In its request for arbitral ruling (hereinafter initial petition or IP), the Claimant, in relation to the additional assessments mentioned above, invoked only the illegality of the corrections identified in the table below (which is presented in art. 135 of the IP by reference to the Tax Inspection Report attached as doc. no. 7 to the same IP):

The Claimant concluded its IP requesting:

"a) The annulment of the acts of additional assessment covering CIT and Compensatory Interest;

b) The refund of the amounts wrongfully assessed that were paid by the claimant".

Furthermore, in art. 138 of its IP, the Claimant stated that, to the amounts wrongfully assessed, "should be added compensation calculated at the rate of compensatory interest on the total value of the amounts assessed and overpaid".

1. By order of 15.04.2014, communicated to the CAAD on 22.04.2014, the Director-General of the TA, in accordance with the provisions of no. 1 of art. 13 of the LFTA, proceeded to the partial revocation of the act of additional CIT assessment no. 2012 …, in the total amount of € 1,230,312.37, relating to the year 2008, insofar as it was determined by the correction, in the amount of € 641,453.13, concerning the inventory write-off that occurred in the year 2008.

The Claimant pronounced itself, by request filed on 2.5.2014, on this partial revocation of the additional assessment no. 2012 …, having stated:

• to accept the mentioned partial revocation;

• to maintain interest in the maintenance of the request formulated regarding compensation calculated at the rate of compensatory interest on the total value of the amounts assessed and overpaid relating to the inventory write-off in the year 2008;

• to maintain interest "in the continuation of the proceedings regarding the remaining request for annulment of the acts of additional assessment covering CIT and Compensatory Interest, as well as the refund of the amounts wrongfully assessed that were paid by the Claimant".

In view of this partial revocation and its acceptance by the Claimant, the consideration by this Tribunal of the allegations concerning the correction relating to the inventory write-off contained in arts. 60 to 89 of the IP was foreclosed.

1. The TA filed a response, in which it concluded requesting the following:

"1) the Respondent Entity to be absolved of the instance – cf. subsection e) of no. 1 of art. 278 of the Code of Civil Procedure in force, applicable ex vi article 29, no. 1, subsection e) of the LFTA, by virtue of the exception of untimeliness of the request filed (leading to the declaration of illegality of the act and, consequently to its annulment); Without prejudice,

1. the present Request for arbitral ruling to be judged unfounded for lack of proof, and, consequently, the Respondent to be absolved of all requests, all with the due and legal consequences".

1. On 30.6.2014, as recorded in the relevant minutes, the meeting provided for in article 18 of the LFTA took place, the Arbitral Tribunal having decided, as it could obstruct the consideration of the merits of the case, to render a separate interlocutory decision on the preliminary objection raised by the Respondent regarding the untimeliness of the request filed.

2. By interlocutory award of 25 July 2014, which is hereby reproduced in full, in view of the fact that the Claimant had filed a gracious complaint on 19.4.2013 in relation to those assessments, which was dismissed by decision of the Deputy Director of Finance of the Finance Directorate of Lisbon of 29.11.2013, notified to the Claimant on 6.12.2013, and as it should be considered, through appropriate interpretation of the IP and by resorting to the figure of the implied request, that this decision of dismissal is equally an object of the request for assessment of its legality, the Tribunal judged the preliminary question raised regarding the tardiness of the request for arbitral ruling as unfounded and determined the continuation of the proceedings.

3. On 30.9.2014, as recorded in the relevant minutes, testimonial evidence was produced, with examination of witnesses D, certified public accountant of the Claimant since 2008, and E, Financial Director of the Claimant, called by the Claimant, and of witness F, Tax Inspector, called by the Respondent.

The parties subsequently presented successive written submissions.

1. In view of the replacement, mentioned above, of the President of the present collective arbitral tribunal, by order of 6.3.2015 the repetition of the testimonial evidence produced was determined, given its potential to influence the final decision, and the extension, under article 21, no. 2, of the LFTA, of the time limit for decision to 12.5.2015 was determined.

In these terms, on 15.4.2015, as per the relevant minutes, a new examination of witnesses D, E and F took place.

1. Following this examination, the Claimant requested additional time for production of further documentation.

The Tribunal, in view of the principles of free determination of evidence production procedures (art. 16, subsection e) of the LFTA), of officiality and of investigation or inquisitorial nature (art. 13, no. 1 of the Code of Tax Procedure (CTP), applicable ex vi art. 29, no. 1, subsection a) of the LFTA; see also art. 99, no. 1 of the General Tax Law (GTL)), granted the request, for a period of five days, with subsequent period for the Respondent's response, the parties being able also, if they so wish, to submit, in the same periods, complementary submissions.

The Claimant consequently proceeded to attach to the file 15 documents and formulated complementary submissions. For its part, the Respondent replied in subsequent complementary submissions, likewise attaching to the file 5 documents.

II. Preliminary Examination

1. The arbitral tribunal is competent to judge the request for arbitral ruling (art. 2, no. 1, subsection a) of the LFTA), the parties enjoy legal capacity and standing, have legitimacy (arts. 4 and 10, no. 2 of the LFTA and art. 1 of Ordinance no. 112-A/2011, of 22 March), and are duly represented.

No nullities occur and the preliminary objection raised by the Respondent was already resolved by the interlocutory award rendered on 25.7.2014.

1. It should further be noted that, in the complementary submissions of 20.4.2015 (point no. 2), the Claimant came to invoke, for the first time in the record, that "[i]n the context of the inspection action, the Respondent adopted an excessively informal procedure that did not allow it to present a reliable record of the documentation requested, the documentation delivered and the documentation allegedly not made available by the Claimant", which raised, on the part of the Respondent, in its respective complementary submissions (point no. 3), the consideration that the Claimant thus "altered the argumentation presented, invoking matters of fact that are not subsequent and that had never been referred to during the inspection action nor in the context of the gracious complaint procedure, as well as in the present arbitral proceeding".

Although the Claimant does not subsume that allegation about the tax inspection procedure to any specific legal violation of the acts at issue, it is observed that, as no subsequent facts or subsequently known facts are at issue that would justify the modification of the instance (cf. arts. 63 of the Code of Procedure in Administrative Courts and art. 588 of the Code of Civil Procedure, applicable ex vi subsections c) and e) of art. 29 of the LFTA), all illegalities that are intended to be raised must be argued in the initial pleading for all illegalities from which it is understood that the act or acts whose invalidity is submitted to the tribunal's assessment suffer (cf. art. 10, no. 2, subsection c) of the LFTA), for which reason the Tribunal need not pronounce itself on possible illegalities that are touched upon or raised outside the proper places and moments. In any case, it should further be added, documents nos. 1 to 7 attached by the Claimant with the complementary submissions (which constitute emails exchanged between the Tax Inspection and the Claimant regarding requests and responses regarding the presentation of documents in the context of the inspection procedure) do not affect or contradict what is contained in the Tax Inspection Report (attached as doc. no. 7 to the IP), it being verified, moreover, that doc. no. 4 (email of 8.5.2012) is referred to in the Tax Inspection Report (p. 14) and that doc. no. 5 (email of 7.9.2012) is already contained as annex 7 (pp. 64 verso and following) to the same Tax Inspection Report.

In summary, the questions that the Tribunal must resolve in the context of the present proceeding are those that result from the grounds of the Claimant's claim set out in the IP (cf. art. 22, no. 2 of the LFTA and 123, no. 2 of the CTP) and to whose enumeration we proceed in the following point.

III. Questions to be Decided

1. As results from the claims made by the Claimant in the IP and the arguments against them by the Respondent in its response, the questions to be decided, based on the legal provisions applicable ratione temporis to the facts, concern the legality of the following corrections to taxable matter and tax, which determined, in the corresponding part, the additional CIT assessments and the decision to dismiss the gracious complaint relating to them, here challenged, namely:

i) Adjustment of €64,533.77, as well as autonomous taxation in the amount of €32,266.89, relating to regularizations of values relating to demand deposits (2009);

ii) Non-reduction of the 2009 tax result by €1,156.74 and of 2010 by €486.53 due to provisions for disputed customer debts, regarding B (2008 to 2010);

iii) Adjustment of €5,065.25 relating to provisions for disputed customer debts, regarding C (2009);

iv) Adjustments in "Sales Type Lease" in the amounts of €908,752.00 relating to 2008, of €401,179.09 relating to 2009 and of €52,198.84 relating to 2010;

v) Adjustment of €3,572,245.29 relating to customer account balances (2008).

Let us then examine the questions thus in adjudication in order to resolve the dispute sub judice.

IV. Reasoning

1. On the Facts

a) Proven Facts

1. Having examined the documentary evidence presented, the administrative tax proceeding attached (hereinafter, ATP), and the testimonial evidence produced, the Tribunal establishes the facts that are considered proven as follows:

I. The Claimant is a company governed by Portuguese law whose purpose is the distribution, commercialization and rental of photographic, optical, video and printing equipment, accessories and consumables and maintenance services for such equipment, which, in the years 2008 to 2010, was held 99.9% by a company governed by Dutch law G, BV (fact acknowledged in arts. 5 and 6 of the IP and pp. 9-10 of the Tax Inspection Report, hereinafter TIR, attached as doc. no. 7 to the IP and also appearing at fls. 17 et seq. of the ATP).

II. The Claimant is classified under the normal VAT regime, with monthly periodicity, and for CIT purposes is taxed under the general regime, with the taxation period coinciding with the calendar year (TIR, p. 9).

III. The Claimant's situation, previously designated as H, SA, NIF …, resulted from the following operations (cf. the factual circumstances acknowledged in art. 7 of the IP, accepted in arts. 52 to 55 of the response, as well as pp. 10-11 of the TIR and draft merger attached as annex 3 to the TIR, at fls. 49 et seq. of the ATP):

i) Following a split project of August 2006, the company I, SA, NIF …, was subject to a split into two companies, the new J, SA, with NIF …, and the then named L, SA, with the former NIF ….

ii) In June 2007, there was a merger by incorporation, effective as of 2 January 2007, of J, SA, NIF …, into the company H, SA, NIF …, which changed its corporate name to A, SA.

IV. The statutory audit report as of 31 December 2007 of the Claimant, dated 16 July 2008, issued by M, SROC, SA, was issued with a disclaimer of opinion, containing the following (cf. annex 4 to the TIR in doc. no. 7 attached to the IP; see also fls. 61 verso et seq. of the ATP):

"5 – The information made available regarding the valuation of inventories that were incorporated into assets as a result of the merger with I, S.A. and which are recorded in inventories on 31 December 2007, at the value, net of adjustments, of approximately 2.1 million euros, was not sufficient for us to conclude on its valuation;

6 - Based on the results of the audit procedures performed on the account of third-party debts, which on 31 December 2007 totaled 14,789,155 euros (net of adjustments of 4,386,119 euros), in particular the requests for confirmation of balance, we conclude that the company does not have effective control over accounts receivable, with significant differences in the reconciliations of balances carried out for which it is not possible to determine their effect on the financial statements presented. As such, we are unable to determine on the insufficiency of adjustments for customers, as well as on the recoverability of deferred taxes related.

7 – The Company maintains lease contracts with customers relating to equipment rental and which are capitalized in fixed assets. To date, sufficient information has not been received to allow us to conclude on the reasonableness of the values capitalized, related depreciation and recognition of revenue associated with rental contracts".

V. The statutory audit report issued for the year 2008, dated 16 July 2009, issued by M, SROC, SA, expresses the following qualification and emphasis (cf. annex 4 to the TIR in doc. no. 7 attached to the IP; see also fls. 63 verso et seq. of the ATP):

"7 – As we were unable to conclude on the valuation of closing inventories for the year ended 31 December 2007, we are unable to determine to what extent the cost of sales recognized in the year may be affected by any valuation errors related to prior years";

" 9 – (…) we call attention to the fact that the Statutory Audit Report for the prior year was issued with a disclaimer of opinion. Since the relevant matters on the financial statements of the prior year have been resolved and corrected in the year, such limitations are no longer applicable. Comparability has been affected by some significant adjustments as disclosed in the Introductory Note and in Notes 40 and 46 of the Annex to the Balance Sheet and Statement of Results".

VI. The content of Note 46 of the Annex to the Balance Sheet and Statement of Results of the Financial Statements for 2008 of the Claimant is as follows (cf. doc. no. 15 attached to the request of 20.4.2015 of the Claimant):

"The extraordinary results were greatly affected by the reversal of adjustments made in the process of acquisition of former-I, namely "Sales Type Lease" from which A appropriated the future rents which are being reversed as they are invoiced to customers. The amount relating to 2007 is 1,428,412 euros".

VII. The statutory audit report issued for the year 2009, dated 21 May 2010, issued by M, SROC, SA, expresses the following emphasis in no. 8 (cf. annex 4 to the TIR in doc. no. 7 attached to the IP; see also fls. 65 et seq. of the ATP):

"(…) we call attention to the disclosure made in note 40 of the Annex to the Financial Statements, of a regularization in retained earnings, related to a loss from prior years not recognized in accounts receivable from customers in an amount of approximately 682 thousand Euros".

VIII. The adjustment referred to in note 46 of the Annex to the Balance Sheet and Statement of Results for the year 2008, as mentioned above in no. VI, consisted of a derecognition of sales related to "Sales Type Lease", whose accounting resulted in the following movements (cf. documents "accounting of the adjustment of customer "Sales Type Lease" in annex 11 to the TIR, as well as pp. 27-28 of the TIR and arts. 96 to 98 of the IP):

• Year 2008: Debit of account POC 697 - correction relating to prior years in the amount of € 1,428,412.83 (value increased in field 224 of Q07 of model 22 CIT);

• Year 2008: Debit of account POC 7111- Sales (corresponds to the reversal of sales for the year) in the amount of € 908,752.00;

• Year 2008: Credit of account POC 211. Customer STL (corresponds to the reversal of customer balances) in the amount of € 2,337,164.83;

Year 2009: Debit of account POC 7111- Sales (corresponds to the reversal of sales for the year) in the amount of € 401,752.00;

• Year 2009: Credit of account POC 211. Customer STL (corresponds to the reversal of customer balances) in the amount of € 401,752.00.

• Year 2010: Debit of account POC 7111- Sales (corresponds to the reversal of sales for the year) in the amount of € 52,752.00;

• Year 2010: Credit of account POC 211. Customer STL (corresponds to the reversal of customer balances) in the amount of € 52,752.00.

IX. The Claimant proceeded, in relation to the year 2008, to an adjustment (write off) of customers, with reversal of fully provisioned customer balances, in the following terms (cf. TIR, p. 31):

i) Heldback Amount - € 3,542,035.01 (as of 31.12.2005 - 3,359,714.97; from 1.1.2006 to 31.12.2006 - 182,320.04) which resulted in the following movements:

• credit of account POC 2180.x Customer doubtful collection (corresponds to the reversal of customer balances) in the amount of € 3,542,035.01.

• debit of account POC 28181- Provisions customer doubtful collection (corresponds to the reversal of the provision) in the amount of € 3,542,035.01;

ii) Entries 1000690 and 02037050 - € 898,260.47, which resulted in the following movements:

• in POC accounts, debit of account POC 2811.x Adjustments of receivables from customers in current account (corresponds to the use of the provision) and credit of account 66613 - Provisions customer debts Write-offs, in the amount of € 898,260.47, entry no. 1000690.

• in POC accounts, debit of account POC account 66613 - Provisions customer debts Write-offs, in the amount of € 898,260.47 and credit of account 21102000 - Customer current account (corresponds to the reversal of customer debts), entry no. 02037050.

X. The Claimant constituted in 2008 a provision of €3,812.27 on all invoices receivable from B, which it considered as fully tax-deductible, based on the mistaken assumption that legal collection proceedings had been initiated, when in fact only files had been sent to the lawyers (fact acknowledged in art. 39 of the IP and annex 8 to the TIR, p. 70 verso, see also the invoices attached as docs. 13 and 14 to the request of 20.4.2015).

XI. The Claimant prepared, in relation to the years 2009 and 2010, the lists of outstanding invoices and respective provisions (currently, impairment losses) for B which are attached as docs. nos. 15 and 16 to the IP, which are hereby reproduced.

XII. Invoice no. … issued on 24.05.2006, in the amount of € 5,065.25, from customer C, Lda was reversed from the accounts in the year 2008 by provision previously constituted (held back amount entry, line no. 3652, of the excel file, cf. annex 14 to the TIR, p. 113 verso, and file in doc. no. 2 attached to the request of 20.4.2015) and appears again in an aging file for 2009 discriminating invoices in arrears from customers, where provision is constituted with reference to the date of 31.12.2009, in the amount of that invoice of € 5,065.25 (cf. fact acknowledged in art. 54 of the IP; see also TIR, respective p. 24).

XIII. The Claimant proceeded in the year 2009 to regularizations of values relating to five bank accounts of demand deposits which resulted, in final terms, in the following adjustments (fact acknowledged in art. 20 of the IP; see also document in annex 6 to the TIR, p. 58 in doc. no. 7 to the IP):

XIV. The accounting of these adjustments was based solely on the internal document (entry no. 01000973 of 30.09.2009) attached as annex 6 to the TIR (cf. annex 6 to the TIR in doc. no. 7 attached to the IP, p. 58), which is hereby reproduced, which contains only the identification of the corrected bank accounts, the amounts in question and the offset of the negative adjustments in extraordinary expense accounts.

XV. In 2012 the Tax Inspection Services of the Finance Directorate of Lisbon carried out an inspection action on the Claimant, based on service orders nos. OI…, OI… and OI…, with general scope and temporal focus on the years 2008, 2009 and 2010 (cf. the TIR attached as doc. no. 7 to the IP and also appearing at fls. 17 et seq. of the ATP).

XVI. In November 2012, the TIR was prepared (attached as doc. no. 7 to the IP and also appearing at fls. 17 et seq. of the ATP), the contents of which are hereby fully reproduced, by virtue of which technical corrections were made to taxable matter and tax for CIT purposes in relation to the years 2008, 2009 and 2010 in accordance with the following table:

XVII. The TIR mentioned in the previous point contains the following, which, in view of the subject matter of the case, is relevant to highlight:

"II.7. Accounting and Tax Analysis

(...) for the year 2008:

An attempt was made to validate the adjustments made to customers, namely the heldback amount and the write off of customers supported by entry 1000690 in the year 2008 in the journal of miscellaneous operations. The validation tests involved customer circularizations where major differences were identified between the balances shown in the accounts and those circularized.

The analysis of provisions and write-offs led us to the conclusion that many of the customer invoices written off by offset of provisions are not recognized by the customers, i.e. they are not recorded with the customer.

Some of the invoices to customers were even written off using provision increases from 2007, in the adjustment they called heldback amount and in a subsequent entry in the same month were subject to new provision constitution.

A… did not provide customer current accounts in the years under analysis, only provided information on customer invoices outstanding as of 31/12/2007, 31/12/2008, 31/12/2009 and 31/12/2010 (excel files of aging, or aging of balances), having been informed of the impossibility of their computer system providing that information.

The provisions for customers in dispute are also based on the calculation basis of excel files of aging of balances.

The temporal analysis of provisions for dispute is another test that allows assessment of the lack of credibility of the information made available to us regarding customer debts that appear in the financial statements of 2008, 2009 and 2010. Just consider:

1 - We attach the customer debts made available to us, in dispute status as of December 31, 2008, 2009 and 2010 (see annex 5)

2 - In the aging map of balance aging we identify the invoices relating to those debts, amounts, due dates and provision constituted;

3 - A test was carried out on the provisions of customers in dispute for 2010: The test consisted of finding invoices from A issued to customers in 2009 and in prior years that were in dispute as of December 31, 2010, in the aging file of 31/12/2010, 31/12/2008, and 31/12/2009, using a sample as the basis.

4 - Conclusion: The customers below with invoices due prior to 2008, with provision constituted as of December 31, 2010 (100%, in dispute), in the file that discriminates customer debts as of 31/12/2009 do not exist.

Yet in the customer file as of 31/12/2008 we find those customers and invoices.

The customer file as of 31/12/2009 is therefore incongruous, discontinuous. Fact that discredits the customer files (aging) that were presented to us to fill the lack of financial information, in particular, customer statements, (detail of invoices, see annex 5).

For the year 2009, the adjustment made reducing customer balances by offset of retained earnings was not subject to any verification insofar as the response to our request for clarifications, our notification of 28 August 2012, point 3, the taxpayer states:

"In order to understand the nature of these corrections we must go back to 2007, the year of split and merger of the companies (I and H) taking into account the following points:

1. Both companies used the same external accounting company – T.

2. All accounting was generated based on the documentation sent to it.

3. In this case the companies had PHC software, which managed all documentation, invoicing, purchases, banks, inventory, however it did not generate accounting entries as the modules were not integrated with accounting.

4. In this sense, documents were sent to T, customer invoices, suppliers, receipts, payments.

After the first accounting close as A - 2007 - the new financial team was faced with the following scenario:

□ Disclaimer of opinion from our auditors M regarding the control of customer current accounts as per SLC, which has since been sent to the Dr. …

Regardless of the disclaimer of opinion, they had to create from scratch from the beginning of 2008 control procedures in all areas with reflection in the accounts, in order to reconcile all accounts and ensure that before the implementation of the new accounting system the accounts reflected reality, even though we knew there were differences from the past and that would have to be clarified and resolved.

With the introduction of the new system - Genial F - all modules are integrated, and all reconciliation has been concentrated initially on the differences from the past.

In the case in question the difference was as follows:

Customer account balance 19,175K€ vs. documents outstanding in the system per customer (sub-ledger) = 16,184K€, a difference of about 3 M€, which we were unable to determine per customer the difference, since T accounted for invoices/receipts in a single customer current account.

Faced with this scenario, without supporting information to determine differences per customer we started from certain assumptions:

□ It was assumed that the documents generated in the system that were outstanding were the valid ones, regardless of the accounting treatment given by T in its past

□ Collection and account reconciliation processes were implemented with customers through our credit control department, in order to confirm the documents that would still be outstanding when attempting to collect the debts

□ In the following years 2008 and 2009 more than 80% of the amounts outstanding were still subject to circularization by our auditors, confirming our balances, eliminating the disclaimer of opinion from our external auditors.

We concluded in 2009 that we would be in a position to close the remainder of the initial difference after all the work carried out on the customer current account, having consulted entities U and M on the accounting treatment to give to it, since we understand this to be a serious error in accounting terms".

"III - DESCRIPTION OF FACTS AND GROUNDS OF CORRECTIONS THAT ARE MERELY ARITHMETIC TO TAXABLE MATTER

(...)

III.2.3. Undocumented Expenses

III.2.3.1 Regularizations of values relating to demand deposits - Year 2009

In the year 2009, corrections were made to the balances of demand deposit accounts, this accounting appears supported by an internal document whose copy is attached and which only contains the identification of the corrected bank accounts, the amounts and by offset of extraordinary expense accounts (see annex 6).

With regard to corrections of account balances where the bank account is moved to credit by offset of the extraordinary expense account, there is implicit an outflow of money from that bank account in favor of some recipient and/or to pay a possible liability.

We notified the taxpayer on 28 August 2012 (point 1) to identify the documents (means of payment and invoices/or other equivalent documents), as well as the recipients of the payments (checks and bank transfers), relating to those and to demonstrate the indispensability of those costs in accordance with article 23 of the CIT Code. (see annex 7)

The taxpayer came to say that, "regarding the corrections, we determined following all the reconciliation work, in this case bank reconciliation, a difference in the banks when comparing the bank statements with those balances. Similarly, after reconciliation work during the following two years, we determined a final difference of 33K€. We understand we have exhausted all possible analyses and given the materiality, to correct the bank balance by the differences determined by recording a cost or income, depending on the sign of the correction, these not being related to payments or receipts having no recipient or beneficiary therefore".

The taxpayer could and should have documented the expense corresponding to each acquisition of the goods/services underlying each outflow of money. If those outflows of money correspond to the payment of any acquisitions of goods/services, or had some other destination, it was not possible to determine, for which reason they are included in the so-called confidential expenses.

Under article 81, no. 1 (current 88) of the CIT Code, confidential or undocumented expenses, as is the case here, since they are payments in relation to which the taxpayer did not identify the charge to which such payment is related or the beneficiary entity of such payment, are subject to autonomous taxation at the rate of 50% (€ 64,533.77 x 50% = € 32,266.89) and the costs accounted for are not accepted under article 23 of the CIT Code, in the total of € 64,533.77".

"III.2.4 Provisions for customer debts in dispute.

We jointly analyzed the files of customer balance aging where the identification of customers in dispute appears with the petitions of actions claimed judicially. We verified that the taxpayer made constitution/increases of provisions that are not tax-deductible:

III.2.4.1 Year 2008

(...)

The other situation concerns customer B, for which, according to clarifications provided by A, there was no proceeding pending with the lawyers. Nevertheless, they provisioned 100% of that credit which amounted to € 3,812.27, only € 2,103.06 being accepted, for arrears, as provided by subsections b), c) of no. 1 and no. 2 of article 35 of the CIT Code (see annex 7), whereby we corrected the difference of € 1,709.22.

III.2.4.2 Year 2009

Customer C, Lda appears identified by A as a customer in dispute however in the response to our notification of 28 August 2012 (point 4), it is clarified that against this no procedural document was filed in Court.

Moreover, we found that one of the provisioned invoices was written off (write off, Held back amount entry) in the year 2008, i.e. this credit was reversed from the accounts by offset of previously constituted provision.

The situation described is related to invoice no. 47 (…) issued on 24/05/2006, in the amount of € 5,065.25, which appears in the aging file for 2009, where provision is constituted with reference to the date of 31/12/2009, in the amount of that invoice or that is € 5,065.25.

Because a credit resulting from the normal activity of a company cannot support the accounting of its impairment twice:

• In 2008 the customer's debt was written off from the accounts using a provision that had been constituted (in the year 2008, held back amount entry, line no. 3652, of the excel file);

• In 2009 the customer's debt appears again in the excel spreadsheet presented by A, discriminating customer debts outstanding (aging 2009), and is again provisioned.

We therefore added the amount of the provision constituted of € 5,065.25 to the taxable matter for CIT purposes under articles 35, 36 and 39 of the CIT Code and the accounting standard, the Official Chart of Accounts approved by decree-law 410/89 of 21/11. (...)".

"III.2.6. Adjustments in "Sales Type Lease" or "Leasing Adjustments"

This adjustment which was accounted for in the years 2008, 2009 and 2010, was highlighted in the statutory audit report issued for the accounts of 31 December 2007, being a scope limitation that led to the disclaimer of opinion, and appears reported in point 7, which we now transcribe:

"7 - The Company maintains lease contracts with customers relating to equipment rental and which are capitalized in fixed assets. To date, sufficient information has not been received to allow us to conclude on the reasonableness of the values capitalized, related depreciation and revenue associated with rental contracts."

The statutory audit report issued for the year 2008 refers to the following emphasis in point 9:

"9 - (...) we call attention to the fact that the statutory audit report for the prior year was issued with a disclaimer of opinion. Since the relevant matters on the financial statements of the prior year have been resolved and corrected in the year, such limitations are no longer applicable. Comparability has been affected by some significant adjustments as disclosed in the Introductory Note and in Notes 40 and 46 of the Annex to the Balance Sheet and to the Statement of Results." (A.B.S.R)

The adjustments referred to in the A.B.S.R relate to:

• note 40, to a movement in the equity line, retained earnings account (59), in which there was a reduction of € 551,401.31, relating to deferred taxes in 2007;

• note 46, relating to the accounting of an extraordinary cost in the account of corrections relating to prior years in the total of € 1,722,750.99, of which €1,428,412 relate to a derecognition of sales related to "Sales Type Lease";

The accounting of this adjustment results in the following movements: (see annex 11)

• Year 2008: Debit of account POC 697- correction relating to prior years in the amount of € 1,428,412.83 (value increased in field 224 of Q07 of model 22 CIT);

• Year 2008: Debit of account POC 7111- Sales (corresponds to the reversal of sales for the year) in the amount of € 908,752.00;

• Year 2008: Credit of account POC 211. Customer STL (corresponds to the reversal of customer balances) in the amount of € 2,337,164.83;

Year 2009: Debit of account POC 7111- Sales (corresponds to the reversal of sales for the year) in the amount of € 401,752.00;

• Year 2009: Credit of account POC 211. Customer STL (corresponds to the reversal of customer balances) in the amount of € 401,752.00.

• Year 2010: Debit of account POC 7111- Sales (corresponds to the reversal of sales for the year) in the amount of € 52,752.00;

• Year 2010: Credit of account POC 211. Customer STL (corresponds to the reversal of customer balances) in the amount of € 52,752.00.

In response to our notification of 19 March 2012, the taxpayer sent the clarification of these adjustments to the management report at pages 5 and 6. (See annex 7).

In the management report, in comment to the statement of results and the accounting loss of A, SA, in 2008, in the amount of € 2,603,520.00, it is said:

• "this result is due to the extraordinary impact of the derecognition in 2008 of "Sales Type Lease" sales that result from the adjustment made at the beginning of A, when the merger and acquisition operation of former-I and whose impact was divided into extraordinary costs of € 1,428,412.00, relating to 2007 and € 908,752.00 euros directly in sales."

The CIT Code establishes the regime of fiscal neutrality (no. 1 of article 68) (current 74 of the CIT Code) because there is implicit the continuity of exercise of activity by the acquiring company, which results from the rights and obligations of the merged companies: "In determining the taxable profit of the merged companies (...) no result derived from the transfer of patrimony elements as a consequence of the merger (...) is considered, nor are they considered as revenue or gains, under no. 2 of article 34, the provisions constituted and accepted for tax purposes relating to credits, inventories and obligations and charges that are subject to transfer (...)".

The fiscal neutrality regime is applicable to the merger carried out by A, SA, under no. 7 of article 67 CIT Code (current 73) since in this concentration operation companies with registered office or effective management in Portuguese territory participated, subject to and not exempt from CIT.

From the application of the said regime results that when there is a transfer of fixed assets there is no place for taxation for CIT purposes, the acquiring company being obliged to that:

• The patrimony elements subject to transfer be recorded in the accounts of the acquiring/new company by the same values they had in the accounts of the merged companies (subsection a) of no. 3 of article 68 CIT Code).

• The values relating to patrimony elements transferred (assets, depreciation, write-backs and revaluations) must respect the provisions of the legislation of a tax nature (ex: CIT Code, Regulatory Decree 2/90, Decree-Law no. 31/98 of 11 February, among others) (subsection b) of no. 3 of article 68 CIT Code);

Thus in view of the fiscal neutrality regime the determination of results relating to the patrimony elements transferred is carried out as if there had been no merger (subsection a) of no. 4 of article 68 CIT Code), whereby the adjustments may not compete in the determination of taxable matter and the adjustments made must be added back.

Thus:

For the year 2008, since the taxpayer added to table 7 of model 22, in field 224 the extraordinary costs of € 1,428,412.00, only the amount of € 908,752.00 should be corrected, corresponding to the amounts deducted from sales.

For the years 2009 and 2010, we add back the amounts of € 401,179.09 and € 52,198.84, respectively, corresponding to the amounts that were deducted from sales".

"III.2.7 Adjustments to customer balances - Year 2008

Provisions for customers with doubtful collection

From the analysis of accounting movements, it is found that:

• The final balance of POC account 281 - customers for doubtful collection totals €1,371,959.25.

• The initial balance of POC account 281 - customers for doubtful collection totals €4,386,119.09.

Reduction of the provision for customers with doubtful collection

In order to determine the amount of reduction of provision verified in this year, the underlying reasons and which customers they concern, as well as the year of their constitution, the following is stated:

• The initial values result from the transfer of balances in the split process of company I, SA with NIF … (current L, SA) to company J, SA with NIF … (with beginning and cessation of activity in 2007), and subsequently to the company … resulting from the merger project that also occurred in 2007 between that company and H (current A).

• From these successive changes resulted the difficult clarification at the level of effective customer balances, as we verified in the company from observation of the accounts and the reading of the audit report issued by the auditors, as stated:

In the statutory audit report issued for the accounts of 31 December 2007, with disclaimer of opinion, by scope limitation, of the facts reported in points 5 to 7, which we now transcribe:

"6 - Based on the results of the audit procedures performed on the accounts of third-party debts, which on 31 December 2007 totaled 14,789,155 euros (net of adjustments of 4,386,119 euros), in particular the requests for confirmation of balance, we conclude that the company does not have effective control over accounts receivable, with significant differences in the reconciliations of balances carried out for which it is not possible to determine their effect on the financial statements presented. As such we are unable to determine on the insufficiency of adjustments for customers, as well as on the recoverability of deferred taxes related".

The statutory audit report issued for the year 2009 refers to the following emphasis point 8:

"8 - (...) we call attention to the disclosure made in note 40 of the Annex to the Financial Statements, of a regularization in retained earnings, related to a loss from prior years not recognized in accounts receivable from customers in an amount of approximately 682 thousand euros."

We questioned the taxpayer on this regularization in retained earnings, and this came to state that: (see annex 7)

"In order to understand the nature of these corrections we must go back to 2007, the year of split and merger of the companies (I and H) taking into account the following points:

1. Both companies used the same external accounting company - T

2. All accounting was generated based on the documentation sent to it.

3. In this case the companies had PHC software, which managed all documentation, invoicing, purchases, banks, inventory, however it did not generate accounting entries as the modules were not integrated with accounting.

4. In this sense, documents were sent to T, customer invoices, suppliers, receipts, payments.

After the first accounting close as A - 2007 - the new financial team was faced with the following scenario:

Disclaimer of opinion from our auditors M regarding the control of customer current accounts as per SLC, (...).

Regardless of the disclaimer of opinion, they had to create from scratch from the beginning of 2008 control procedures in all areas with reflection in the accounts, in order to reconcile all accounts and ensure that before the implementation of the new accounting system the accounts reflected reality, even though we knew there were differences from the past and that would have to be clarified and resolved.

With the introduction of the new system - Genial F - all modules are integrated, and all reconciliation has been concentrated initially on the differences from the past.

In the case in question the difference was as follows:

Customer account balance 19,175K€ vs. documents outstanding in the system per customer (sub-ledger) = 16,184K€, a difference of about 3 M€, which we were unable to determine per customer the difference, since T accounted for invoices/receipts in a single customer current account.

Faced with this scenario, without supporting information to determine differences per customer we started from certain assumptions:

· It was assumed that the documents generated in the system that were outstanding were the valid ones, regardless of the accounting treatment given by T in its past

· Collection and account reconciliation processes were implemented with customers through our credit control department, in order to confirm the documents that would still be outstanding when attempting to collect the debts.

· In the following years 2008 and 2009 more than 80% of the amounts outstanding were still subject to circularization by our auditors, confirming our balances, eliminating the disclaimer of opinion from our external auditors.

We concluded in 2009 that we would be in a position to close the remainder of the initial difference after all the work carried out on the customer current account, having consulted entities U and M on the accounting treatment to give to it, since we understand this to be a serious error in accounting terms."

In the course of our analysis we further verified that:

• The taxpayer does not have customer account statements, provided an extensive excel file with 39,228 lines (aging2008), with movements of invoices from 1991, with global value of €25,641,118.28.

• Did not identify which customers were subject to reduction of the provision;

• The taxpayer stated that ".... The heldback amount values are values that are in the customer current account and which due to their age were subject to payment conditions from G to the former company at the time of the split..."

• The taxpayer proceeded to the regularization of customer balances fully provisioned:

1. Heldback Amount - € 3,542,035.01. (as of 31/12/2005 - 3,359,714.97; from 1/1/2006 to 31/12/2006 - 182,320.04) which resulted in the following movements:

Credit of account POC 2180.x Customer doubtful collection (corresponds to the reversal of customer balances) in the amount of € 3,542,035.01.

• Debit of account POC 28181- Provisions customer doubtful collection (corresponds to the reversal of the provision) in the amount of € 3,542,035.01;

1. Entries 1000690 and 02037050 - € 898,260.47. Which resulted in the following movements:

• In POC accounts, debit of account POC 2811.x Adjustments of receivables from customers in current account (corresponds to the use of the provision) and credit of account 66613 - Provisions customer debts Write-offs, in the amount of € 898,260.47, entry no. 1000690.

• In POC accounts, debit of account POC account 66613 - Provisions customer debts Write-offs, in the amount of € 898,260.47 and credit of account 21102000 - Customer current account, (corresponds to the reversal of customer debts), entry no. 02037050.

To clarify the balances that were reversed the taxpayer presented for:

• Heldback amount, excel file with 9,602 lines;

• Entry 1000690, listings, with outstanding invoices from customers Z, Lda, AA, Lda, BB, Lda., CC, Lda., DD, Lda., EE, Lda, FF, SA., GG, SA., HH, SA. and II, Lda.

• We selected a sample of those listings (Heldback amount and entry 1000690) and circularized some of those customers. The responses from customers revealed that: (see customer responses in annex 12)

• Invoices unknown to the customers, as such, these invoices were not accounted for in the current accounts;

• Invoices that were paid, with payments before 2008 and after 2008;

• We requested the excel file with customer balances as of 31-12-2007 (Aging 2007), a file with 25,341 lines and compared the customers with provisions as of 31-12-2007, with the balances reversed under entry 1000690. We found that these relate to customers Z, Lda, AA, Lda, BB, Lda., CC, Lda., DD, Lda., EE, Lda, FF, SA., GG, SA., HH, SA. and II, Lda.

• From this cross-reference we concluded that provision was only constituted as of 31-12-2007, for € 107,396.95, of the invoices in the listings of entry 10000690 where they reversed customers in total of € 898,260.47, using a provision of € 898,260.47. (see annex 13)

As provided by no. 4 of art. 39 of the CIT Code:

"4 - The provisions referred to in subsections a) to c) of no. 1 that should not subsist because the events to which they relate did not occur and those that were used for purposes other than expressly provided for in this article are considered revenue of the respective taxation period."

Thus, only the provisions that were constituted to meet the risk of uncollectibility of those debts could be used (provision had only been constituted in the amount of €107,396.95)

On the other hand, from the responses of the circularizations of the customers it follows that those amounts for which provision was constituted were paid, thus those € 107,396.95 should have been reversed (see customer responses in annex 12).

• We compared the file "Customer Provision 2008" with the HeldBack amount file and verified that A, accounted for in December 2008, the following duplications:

• They wrote off customer invoices in the Heldback amount entry in total of € 214,378.79;

• They constituted a provision for arrears (they accounted for a cost in POC account 66 of € 214,378.79), for the same customer credits that were written off.

The identification of these situations is contained in annex 14 to this document and is extensive and the value of provisions constituted for regularized/written off credits amounts to € 214,378.79. (see annex 14)

• The cross-reference of the Heldback amount files with entry no. 1000690, for customer II, LDA, shows that the invoices identified in annex 15, were reversed twice, or that is in duplicate, in total of € 24,364.49.

That is, in December 2008, they were:

• Written off/regularized twice the same credits/invoices from customer II, LDA, for the invoices identified in annex; (see annex 15)

• Two provisions were used for the regularization of those credits.

Under no. 2 of article 34 of the CIT Code, this duplication constitutes a use of the provision for a purpose other than that for which it was constituted.

In conclusion,

The Financial Statements of the company must reflect its financial position and the reality of the operations carried out in the year, whereby before the preparation of the accounts, companies and/or their auditors must carry out account reconciliation procedures, in order to verify whether the balances reflected in the accounts are correct.

The fact that such reconciliations are not carried out may imply that they appear in the accounts, inappropriately, outstanding balances with customers or suppliers that no longer exist, putting into question the credibility of the company, taking into account the accounting and tax requirement for the existence of "organized accounts".

In the case at hand, the existence of these outstanding debtor balances with indeterminate age, even gave rise to the issuance of qualifications in the statutory audit report of A, made by its auditors.

In terms of accounting movement the POC recommends that doubtful collection credits should be provisioned in account 28.1 - Adjustments of receivables - Customer debts, at the end of each year, by offset of account 6661 Adjustments of receivables - Customer debts.

On the other hand, the reversal or reposition of provisions (281 to 7721 - reversals of adjustments of third-party debts), must take place in the year in which the following situations occur:

• The constituted provision exceeds the estimated loss;

• The fact for which the provision had been constituted no longer occurs (in case the credit becomes uncollectible);

• Although the loss for which the provision is constituted has occurred, it was less than expected, whereby the provision will be shown as excessive;

• The credits were considered uncollectible, but this did not result from company insolvency and recovery proceedings, nor from enforcement proceedings or alternative dispute resolution proceedings for the viability of companies in insolvency or in difficult economic situation mediated by IAPMEI — Support Institute for Small and Medium Enterprises and Investment.

A intended to adjust the value of debtor balances using provisions it had constituted.

In accordance with the POC and the accounting principle of prudence, provisions allow the preparers of financial statements to include in the financial statements a degree of caution when there is uncertainty, namely with the collectibility of receivables.

We verified that A:

1 - In years prior to 2008 constituted provisions for customers and these costs were accepted for tax purposes;

2 - In 2008 in the entries in focus in the held back amount and entry 1000690, reversed customer balances not because their collectibility was at issue, but because they were pending in the current accounts, using the provisions it had constituted and which had influenced the results of prior years.

This conclusion results from the responses of these customers circularized on a sampling basis in the course of the inspection procedure.

The responses from the customers testified to the existence of:

• unknown invoices to the customers;

• invoices that were paid by the customers;

Thus in the year 2008 what A should have done was:

1 - Reverse the amount of provisions it had constituted, since collectibility of customer balances was not at issue, as provided by no. 2 of article 34 of the CIT Code;

2 - Clear up the debtor balances in question, which were integrated into A's customer balances with the merger (Held back amount) and from other situations (entry 1000690), which affected the Company's Balance Sheet, without representing effective third-party debts.

Accordingly, we added to the taxable matter the amount of € 3,572,245.29, insofar as this value should have been recognized in revenue through the reversal of provisions deemed acceptable for tax purposes in prior years. The determination of this amount results from the variation of provisions and increases/constitutions of provisions, occurring in the year 2008, and is demonstrated in the map above.

"VIII - RIGHT TO BE HEARD

(...)

Point III.2.6-Adjustments in leasing contracts and associated

The taxpayer states that the Leasing contracts - "sales Type Lease", entered into by A before 2008, were accounted for:

• By the seller as purchases and sales of fixed assets, by the entire contract amount, debiting a temporary customer account and crediting a sales account.

• In each installment an invoice was issued and transferred from the temporary customer account to the definitive customer account the amount of the installment;

It further states that "in the accounting of the accrued and invoiced installments in 2008 and subsequent years the TOC of A chose to account for the derecognition of the sale that had been recognized and accounted for in 2007 and prior years, without invoice, so as to subsequently account for the recognition as a sale, of equal amount, this time based on an invoice".

Thus the taxpayer considers that the correction should be annulled.

In the course of the inspection procedure, the taxpayer was questioned and notified (on 19 March 2012, point 21) to clarify the adjustments they made in 2008, in the amount of € 2,066,000.00. For this purpose we requested:

a. "Report of the nature and circumstances that led to the accounting of the same;

b. The way they were quantified, specifying their calculation;

c. Copy of the documents and elements relating to their accounting (movement journal, file nos. of the entries)".

The taxpayer responded, sending the clarification to the 2008 accounts report, page 6, and added that the "adjustments to the financial leases practiced by the former company before the split and whose impact had to be recognized", (see annex 18).

With reference to years prior to 2008, to the inspection procedure, documents were made available to us, namely, the statutory audit report, merger draft and customer balance aging map.

The taxpayer in the right to be heard comes to state, that in the accounting of the contracts "Sales Type Lease" of A, there was only a change in the form of accounting of the lease contracts and that this had no impact on the results.

This new fact brought to the procedure now by the taxpayer is not proven by this, and contradicts the management report, page 6, where in comment to the statement of results and the accounting loss of A, SA, in 2008, in the amount of € 2,603,520.00, it is said:

• "this result is due to the extraordinary impact of the derecognition in 2008 of "Sales Type Lease" sales that result from the adjustment made at the beginning of A, when the merger and acquisition operation of former-I and whose impact was divided into extraordinary costs of € 1,428,412.00, relating to 2007 and € 908,752.00 euros directly in sales."

As stated above, the corrections proposed are maintained.

Point III.2.7 - Adjustments to customer balances

The taxpayer alleges that the proposed correction relates to a reversal in 2008 of customer balances of the merged company, as they were considered uncollectible, partially covered by provisions:

• "When in 2007, even before the formal merger, A realized that the provision created at the time of the split of I was not sufficient given the age of the balances, decided to increase it. The said increase was made by offset of the free reserves account, so as not to affect the taxable profit of the company and, probably, so as not to affect the image of the managers in office due to losses that were not attributable to them."

• The reversal of customer balances in 2008 was done by direct use of the provisions account;

• It concludes, stating that, "since the provisions were created without affecting the taxable profit and since the reversal of the balances was done by direct use of those provisions, also not affecting the result or the taxable profit, it seems evident that any taxation of the reversed balances is inappropriate."

In view of the taxpayer's allegations it is worth noting that:

• In the year 2008 A made more than one reversal of customer balances. The proposed correction relates to two reversals the Held back Amount, reversal of € 3,542,035.01 of customer balances and entries 1000690 and 02037050, where customer balances in the amount of € 898,260.47 are reversed;

• In the inspection procedure, by sampling, it was verified that the customer balances reversed were not uncollectible, as developed in the report at the point in question:

Customers were circularized with reference both to the Heldback Amount and to entries 1000690 and 02037050, which in their responses stated they did not know those invoices, or confirmed that they are not in debt (as per some responses attached, see annex 12).

• The taxpayer now comes to state that the provisions increased in what corresponds to the reversals of customers of the Heldback amount were made in 2007 by offset of free reserves. With reference to years prior to 2008, to the inspection procedure, documents/elements were provided by the taxpayer, following request, namely, statutory audit report, merger draft and customer balance aging map. From the information made available it was not possible to determine the way the provision was increased.

Free reserves always result from a decision to apply the positive results obtained in the year or carried forward, taken by the general assembly in accordance with the Code of Commercial Companies.

The use of reserves or distribution results in a reduction of share capital and consequently in a reduction in the value of the company.

Its use/reduction/distribution always results from a decision taken by the general assembly. If A increased the provision for customer doubtful collection using free reserves, the taxpayer in the right to be heard should present, both the evidence of the accounting movements made, and a copy of the minutes of the general assembly resolution, determining the use of the same.

• It further argues that the reversal of customer balances in 2008 was done by direct use of the provisions account. This latter matter has been extensively developed in the draft report and in the present report at pages 31 and 32, nothing further being to add.

In view of the above, the proposed corrections are maintained".

XVIII. Following the corrections resulting from the mentioned TIR, the Claimant was subject to the following assessments for Corporate Income Tax (CIT) and respective compensatory interest, with corresponding collection notes, in accordance with docs. nos. 1 to 6 attached to the IP: no. 2012 …, in the total amount of € 1,230,312.37, relating to the year 2008, issued on 28.11.2012, with indication of payment deadline of 09.01.2013; no. 2012 …, in the total amount of € 51,318.26, relating to the year 2009, issued on 28.11.2012, with indication of payment deadline of 09.01.2013; no. 2012 …, in the total amount of € 564,879.38, relating to the year 2010, issued on 28.11.2012, with indication of payment deadline of 09.01.2013.

XIX. The Claimant filed on 19.4.2013 at the 3rd Finance Service of Amadora a gracious complaint regarding the additional CIT assessments no. 2012 … (2008), no. 2012 … (2009) and no. 2012 … (2010), as per doc. no. 8 attached to the IP and document contained in the ATP from fls. 2 to 9 relating to the gracious complaint proceeding no. …2013….

XX. By decision of the Deputy Director of Finance of the Finance Directorate of Lisbon of 29.11.2013, notified to the Claimant on 6.12.2013, as per doc. no. 9 attached to the IP and document contained in the ATP in unnumbered fls., the gracious complaint mentioned was dismissed.

XXI. In the information attached to the decision mentioned, as per doc. no. 9 attached to the IP, the following are invoked as grounds for the dismissal of the gracious complaint, which are transcribed:

• "2. Undocumented expenses-Regularizations of values relating to demand deposits (year 2009: €64,533.77 and as autonomous taxation, €32,266.89):

The increase in taxable profit was based on the fact that the values regularized and charged to extraordinary costs were not documented.

The complainant informs that these are differences of unidentified origin and refers to possible explanations, such as mixing of movements, not presenting, however, documents intended to clarify the reasons for the values in question and to prove that these were not confidential expenses".

• "3. Provisions for customer debts in dispute – B (year 2008: €1,709.22)":

"According to the provisions of that legal rule [art. 35 of the CIT Code], the provision/impairment is only accepted as a tax cost/expense if it is proven, in each year, the realization of collection procedures for the amounts credited at the end of the same (written communications with the debtor), and in that case, is accepted as the maximum value provisioned that which results from the percentages referred to in no. 2 of the article.

However, in the present case, the complainant presents only aging maps of the credits on the customer in question (fls. 141 and 142), with indication of the percentages of the provision, not attaching any proof of the collection procedures carried out".

• "4. Provisions for customer debts in dispute – C (year 2009: €5,065.25)":

"The complainant questions the fact that the invoice was reversed, alleging that it appeared in the list of invoices receivable in 2008 and continued to appear in that of 2009 (...).

However, the fact that the invoice appears in the listing for 2009 does not contradict the statement that it was reversed in 2008".

"There is no (...) reason for the provision to continue to include the amount of the invoice in 2009".

• "6. Adjustments in Sales Type Lease (Year 2008: 908,752.00, year 2009: €401,752 and year 2010: €52,752.00):"

"In the context of the gracious complaint proceeding, the now complainant alleges (...) that the sales accounted for in the three years were reversed because they had already been accounted for as such in prior years, at the time of the conclusion of the contracts, and were then taxed.

However, in this context, the supporting elements of the alleged fact are not presented, for which reason I am of the opinion that the correction made should be maintained".

• "7. Adjustments to customer balances (year 2008: €3,572,245.29):

7.1. The complainant alleges that, in the context of the negotiations for the integration of I into A, the provision for doubtful receivables was increased by debit of retained earnings in the amount of €1,967,000.00, attaching an excerpt from that account for 2007".

"However, (...) consulting table 0540-"Variations in the items of equity" of the annual declaration/IES of 2007 (...), it was not possible to verify that movement, since the only movement declared there in retained earnings corresponds to the net result of 2006 (...)".

"7.2. As for the allegation that it is not possible to extrapolate from the circularization to the reversed invoices, it is to be noted that the use of audit techniques by the Tax Inspection is lawful, under article 57 of the [RCPIT]".

"7.3. In points 6 and 7 of the complaint, it is stated that the statements in the report about reversal of non-provisioned balances or about double reversal of receivable balances are groundless, being identified the names of several customers that appear in the maps included in annex 5 (...).

Having consulted the report, it was not possible to identify the statement about non-provisioned balances mentioned in the complaint. As for the double reversal, it is verified that the only reference to duplication is that of the customer credits mentioned in annex 14 to the report (...).

Having consulted annex 14 it is verified that the only customer that appears in that annex and in the maps mentioned in the complaint (...) is N (...) not corresponding, however, to the same credits".

"8. As stated above (...), I am of the opinion that the corrections subject of complaint should be maintained, for which reason the dismissal of the request is proposed, and the additional assessment resulting from those corrections is also to be maintained".

XXII. The Claimant proceeded on 9.3.2013 to pay the entire amounts subject to the assessments challenged (allegation not contested contained in art. 136 of the IP and proof of collection at fls. 171 to 173 of the ATP).

b) Unproven Facts

1. With relevance to the decision, the following facts are considered unproven:

i) The differences existing in the values relating to demand deposits (cf. proven fact no. VIII) resulted from mere mixing of movements between bank accounts (allegation contained in arts. 29 and 32 of the IP);

ii) The lists of outstanding invoices attached as docs. nos. 14, 15, 16, 17 and 18 to the IP were extracted directly from the current accounts of the accounts (allegation contained in arts. 42, 43, 53 and 54 of the IP);

iii) In the context of I, by the conclusion of each rental contract, revenue was immediately recognized for the entirety of future rents, by offset, in the balance sheet, of accounts receivable; then, by the issuance of each invoice for the monthly rent, no revenue was recognized, to avoid an improper duplication. In A, and in line with the procedure of Group JJ, no revenue came to be recognized by the conclusion of rental contracts, revenue coming to be automatically recognized at the time of issuance of each invoice, for the monthly rent, by offset, in the balance sheet, of accounts receivable from customers, this procedure which, for computer reasons, was automatically applied to all contracts, old and new, which resulted in a duplication of revenue relating to the old contracts, whereby it became necessary to reverse that duplication of revenue, as for those contracts in the past the income had been recognized for the entirety of the rents (allegations contained in arts. 91 to 94 of the IP).

c) Grounds for the Decision on the Facts

1. Regarding the reasoning of the decision above made on the facts, it is worth noting that the Tribunal's evidentiary judgment is always the result of a comparative assessment in which the objective data resulting from the documents and the testimonial declarations produced must be combined, sometimes in contradictory terms, assessing the reasons for knowledge invoked, all in order to seek, using the rules of logic and experience, the verisimilitude that leads to the Tribunal's conviction. In this context, it is noted that the Tribunal "must have a critical attitude in evaluating the credibility of the testimony, not being a mere receptacle for everything the witness says, without indicating reasons for his supposed knowledge" (see decision of the Court of Appeal of Guimarães of 23.3.2015, proc. no. 159/11.5PAPTL.G1).

Thus, the Tribunal's conviction regarding the facts given as proven was based on the documents attached to the file by the Claimant, on the documents contained in the ATP, with emphasis on the TIR regarding the factual elements that are not contested by the Claimant (cf. art. 76, no. 1 of the GTL and 115, no. 2 of the CTP), on the admission of facts assumed in the procedural documents of the parties, all as specified in the points of the evidence above set out.

To clarify, in particular, as to the fact that it was proven in no. XII, that invoice no. … in the amount of € 5,065.25, from C, Lda was reversed from the accounts in the year 2008, that the testimony of the witness called by the Claimant, D, who was examined on this point, proved to be merely conjectural and hypothetical (thus, when questioned as to whether there was any reason to reverse that invoice, he stated: "no, apparently not, if it was valid, if it was still outstanding, if it was not paid we had no reason to reverse it"; "even because the provision is calculated based on, it is the system itself that calculates, based on outstanding invoices, if the invoice is not there it could never calculate a provision in subsequent years") without evidencing, therefore, concrete knowledge of the situation, but making only conjectures. On the contrary, it follows from doc. no. 4 (email of 8 May 2012 sent by Dr. E to Dr. F), attached to the request of 20.4.2015 of the Claimant, the assumption that "[i]n the end of the year [2008] a write-off of the "held back amount" was done" and that "From the economic point of view and others referenced above, with the values provisioned the decision was the write-off at the end of the year", and as stated in point no. XII, the invoice in question is contained in the held back amount, line no. 3652, of the excel file. The Claimant, in the initial submissions and in the complementary submissions that it presented, alleges that "not all old invoices identified in the Held back amount listing were reversed", but does not proceed to any specification that would allow the Tribunal to verify the effectiveness of the allegation.

As regards the facts given as unproven, the documents attached to the file and the testimony of the witnesses called by the Claimant, D, certified public accountant of the Claimant, and E, financial director of the Claimant, did not allow to conclude, given their insufficiency, to the proof of the allegations set out in no. 16.

Thus, regarding point no. i) of the facts given as unproven, in addition to what is contained in points nos. XIII and XIV of the evidence, witness D called by the Claimant was heard, whose testimony, however, did not prove such allegation (indeed, formulated in the IP in merely conjectural terms – cf. art. 29 where it is written "seems to point to a simple mix between bank accounts"; art. 32 where it is written "to be very likely the existence of mere mixing of movements between them"), as it limited itself, in this regard, to stating the following: "when we looked at the banks and started doing the reconciliations we had differences we could not justify; those differences remained throughout the time and reached a point where we had to make a decision, and the decision we made was to regularize those differences"; "we were unable to allocate the difference to a specific type; if it was a lack of a payment or a lack of a receipt we could not allocate (...); we saw that there were differences going back that we could not justify, we tried to go back, we could not justify and that is why we regularized, therefore, reversed the differences by revenue or by costs depending on whether the difference was positive or negative"; "we explained that the negative ones were not money outflows and the positive ones were not money inflows either; so, we had no basis to justify that difference, that is why we regularized it the way we did, because if we had known what it was we would have affected it the correct way".

As for the unproven fact referred to above in subsection ii), this conclusion results from the examination of the documents themselves nos. 14, 15, 16, 17 and 18, which provide no evidence of their origin from current accounts, as well as from the testimony of witness F called by the Respondent who stated that: "The computer system of Group JJ did not provide all the elements that a normal accounting system usually provides, namely, there were not, could never be provided, statements of third-party current accounts, because they told me that the system what it provided (...

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