IRC Depreciation of Wind Turbines: CAAD Ruling on Tax Loss Reduction (238/2016-T)

The arbitrators Cons. Jorge Manuel Lopes de Sousa (arbitrator-president), Prof. Doctor Nuno Cunha Rodrigues and Dr. Pedro Nuno Ramos Roque (arbitrators assessors), designated by the Deontological Council of the Administrative Arbitration Center to form the Arbitral Tribunal, constituted on 04-07-2016, agree as follows:

1. Report

A… PERMANENT ESTABLISHMENT IN PORTUGAL, a company with tax identification number …, with registered office at Building …- Street … …, …-…, came, in accordance with the combined terms of articles 2.º, n.º 1, paragraph a) and 10.º, n.º 1, of Decree-Law n.º 10/2011, of 20 January (hereinafter "RJAT") to submit a request for constitution of a collective arbitral tribunal, with a view to the declaration of illegality and annulment of the Corporate Income Tax (IRC) assessment n.º 2016…, in the part in which it effects a reduction of the tax loss in the amount of € 241.427,08.

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

In accordance with the provisions of paragraph a) of n.º 2 of article 6.º and paragraph b) of n.º 1 of article 11.º of RJAT, the Deontological Council designated the undersigned arbitrators, who communicated their acceptance of the appointment within the applicable period.

On 17-06-2016, the Parties were notified of such designation and did not express any wish to decline the designation of the arbitrators, in accordance with the combined terms of article 11.º n.º 1 paragraphs a) and b) of RJAT and articles 6.º and 7.º of the Deontological Code.

Thus, in compliance with the provision of paragraph c) of n.º 1 of article 11.º of RJAT, the collective arbitral tribunal was constituted on 04-07-2016.

The Tax and Customs Authority filed a Response, arguing that the request should be judged unfounded.

On 21-10-2016, a hearing was held in which witness testimony was produced and it was agreed that the proceedings would continue with written arguments.

The Parties filed written arguments, in which the Tax and Customs Authority, among other things, opposed the joining of the documents submitted by the Applicant at the hearing of 2-10-2016 and joined in digital version by electronic mail on 28-10-2016.

The arbitral tribunal was regularly constituted and is competent.

The parties have legal personality and capacity to sue, are legitimate (arts. 4.º and 10.º, n.º 2, of the same diploma and art. 1.º of Ordinance n.º 112-A/2011, of 22 March) and are duly represented.

The proceedings are not affected by any nullities.

1. Issue of Joining of Documents by the Applicant at the Hearing and Subsequently

The request for constitution of the arbitral tribunal was submitted on 22-04-2016, and the documents joined by the Applicant at the hearing of 02-10-2016 and joined in digital format on 28-10-2016 are subsequent to that date (they refer to inspections carried out in June and July 2016), and therefore are not covered by the obligation to join documents with that request, which is provided for in paragraph d) of n.º 2 of article 10.º of RJAT.

In any case, it is understood that the documents referred to are not necessary for the decision of the case, and therefore will not be considered, which renders the examination of the issue of the possibility of joining pointless.

For this reason, the examination of this issue is rendered unnecessary, by force of the provisions of article 130.º of CPC, subsidiarily applicable by force of the provisions of article 29.º, n.º 1, paragraph e), of RJAT.

Thus, no cognizance is taken of this issue concerning the possibility of joining the documents.

1. Matter of Fact

3.1. Proven Facts

The following facts are considered proven:

· The Applicant is a Permanent Establishment that exercises the principal activity of "Production of electricity from wind, geothermal, solar and unspecified sources" (CAE…), classified for VAT purposes under the normal monthly periodicity regime and for Corporate Income Tax purposes under the general taxation regime;

· In compliance with the service order no. OI2015… of 2015-01-30, the Applicant was subject to a general inspection action for the fiscal year 2012;

· The Applicant operates the wind farm of B…, which was installed over an extension of 2.7 km in the Serra do …, and began operations in late 2005 with 10 wind turbines with a capacity of 1.3 MW each;

· The Applicant practiced, in the fiscal year 2012, depreciation on tangible fixed assets in the total amount of € 1.320.126,08, having recorded them semi-annually in the SNC sub-accounts "642 Depreciation and Amortization Expenses";

· In accordance with the Depreciation and Amortization Schedule, the Applicant separated the tangible fixed asset in the heading "Buildings and Other Constructions", which includes the substation and roads with an expected useful life of 20 years and depreciated at the rate of 5%, and in the heading "Basic Equipment", where it records the turbines and foundations, depreciated at the rate of 6.25%, with an expected useful life of 16 years;

· The Tax Inspection Authority notified the Applicant in order to obtain clarifications on the application of different depreciation rates to the components of the wind farm;

· In response, the Applicant stated that the turbines and foundations were defined as Unspecified Machinery and classified under code … of Table II – Generic Rates of Regulatory Decree n.º 2/90, opting for a maximum expected useful life period of 16 years and for the minimum depreciation rate of 6.25%;

· The Applicant did not submit any request to the Tax Authority requesting the adoption of a specific depreciation regime;

· The Applicant entered into an Exploitation Cession Agreement with C…, the owner of the common lands where seven wind turbines and the substation were installed, which establishes a cession period of 20 years, indicating 17-01-2026 for its termination with the possibility of renewal;

· The "Environmental Impact Study of the B… Wind Farm" (Volume I - Non-technical Summary, page 23) states that "the presence of the Wind Farm will constitute a source of income for the populations as an annual rent will be paid by the project proponent for 20 years of operation of the enterprise";

· Based on the period stipulated in the exploitation cession agreement, on the elements obtained from the environmental impact study and on consultation of technical studies on wind turbines and renewable energies, specifically the Studies by international entities referred to at page 21 of the Tax Inspection Report, the Tax Inspection Authority understood that the expected useful life period for such equipment is 20 years, and therefore should have been amortized at a rate of 5% and not at the 6.25% rate used by the Applicant (Tax Inspection Report, which is contained in document n.º 1 attached to the request for arbitral pronouncement, the content of which is hereby reproduced);

· In the Tax Inspection Report, the following is stated, among other matters:

(...)

The taxpayer chose to separate the cost of the wind farm by Buildings and Other Constructions, where it classifies the substation and roads, and by Basic Equipment, where it records the turbines and foundations, depreciated respectively at the rate of 5% and at the rate of 6.25%, calculating useful lives of 20 and 16 years.

The application of the depreciation rate of 6.25% on the turbines and foundations merited a request for clarification and for information from the taxpayer, because it was divergent from the remaining components of the wind farm, which were amortized/depreciated at the rate of 5%.

The A… responded by electronic mail, informing that the turbines and foundations were defined as Unspecified Machinery and classified under code … of Table II - Generic Rates of Regulatory Decree n.º 2/90, opting for a maximum expected useful life period of 16 years and for the minimum depreciation rate of 6.25%.

As informed by the taxpayer, "The Wind Farm was constructed by D…, under a turnkey contract, for the company A… (A…)". Ten wind turbines of the model "IZAR Bónus 1.3" were constructed. The concession period was established as 20 years.

When requested to do so, A… submitted the "Exploitation Cession Agreement" with C…, the owner of the common lands where seven wind turbines and the substation were installed. In the initial contract, signed on 2001-01-18, a period of 20 years was established for the cession of exploitation of the common lands. In an amendment of 2004-06-30, the period of cession was extended by 5 years, with 2026-01-17 indicated as the date for its termination with the possibility of renewal.

At the date of the facts (year 2005), there was no reference to wind turbines or wind farms in Regulatory Decree n.º 2/90. The same occurred in Regulatory Decree n.º 25/2009 which repealed it, until the change in wording and depreciation percentage introduced by the 2015 State Budget (Article 23º of Law n.º 82-D/2014 of 31/12), relating to code … of Table II of Generic Rates.

When the depreciation rate for a particular asset is not provided in the tables of the Regulatory Decree, depreciation and amortization considered reasonable are accepted as tax expenses, taking into account the expected useful life, as regulated by n.º 3 of article 5º of Regulatory Decree n.º 25/2009 (same article as the previous DR n.º 2/90) and by n.º 2 of article 31º of CIRC in the wording in force until 2013-12-31 (Current n.º 3 of the same article).

Since the depreciation percentage for the desired asset is not provided, the taxpayer had n.º 3 of article 5.º of the amortization regime as an alternative to the depreciation rate tables, and could also choose a calculation method different from the established ones upon prior authorization of the Tax Authority, as mentioned in n.º 3 of article 4º of DR n.º 2/90 or of DR n.º 25/2009. In both cases, the taxpayer must justify and document its choice, with the study of economic viability of the investment, the technical characteristics of the equipment used, the guarantees of suppliers, licenses and other documents relevant to the determination of expected useful life.

III.1.1.2- Legal Framework Applicable to the Depreciation of Wind Farms

The Tax Authority sought, in all means, information on wind turbines, namely technical studies and mechanical reliability studies, both from manufacturers or suppliers and from websites of institutions linked to renewable energies.

Wind turbines are complex mechanical and electrical equipment, designed from the factory for an estimated continuous operating time of approximately 120,000 hours, approximately 13 years and nine months.

Preservation measures were introduced in them, namely electromagnetic brakes, which prevent the turbines from operating with very strong winds or very weak winds that cause abnormal wear or from which no energy benefit is derived. To these interruptions in operation are added "forced shutdowns" for periodic maintenance and fortuitous repairs. Added to this is the randomness of the wind in which the driving force of the turbines is not constant. All of this is summarized in the capacity factor or effective operating factor, distributing the estimated operating hours over a longer time period.

Many of the publications found refer to a useful life period of 20 years for wind farms and an estimated operating time of 120,000 hours for turbines and wind turbines.

Under n.º 3 of article 5º of Regulatory Decree n.º 25/2009, the Tax Authority considered as reasonable the useful life period of 20 years and the percentage of 5% depreciation for wind farms, considered as a single element of Tangible Fixed Assets. This understanding was set out in Information n.º 922/15 of the Corporate Income Tax Services Department, sanctioned on 2015-07-15, relating to Proc.1530/15.

III.1.1.3- Amount of Corrected Depreciation

The elements provided by the taxpayer reinforce the understanding of the Tax Authority, as the depreciation of the remaining elements of Tangible Fixed Assets, the amortization of Intangible Assets and the exploitation cession contract of the common lands point to the useful life period of 20 years, to which corresponds the depreciation percentage of 5%.

Now, A… calculated the depreciation of the turbines and foundations at the rate of 6.25%, above the 5% considered reasonable by the Tax Authority. Resulting from this understanding combined with paragraph c) of n.º 1 of article 34º of CIRC, the corresponding difference of 241.427,08 EUR, determined in the following table, should be considered as an expense not accepted for tax purposes and added back to the result:

By the above described, it is proposed that the Net Result of the Fiscal Year be corrected, as an increase to be included in field 719 of table 07 (Calculation of Taxable Profit) of the income tax return for the year 2012, by the difference between the depreciation recorded by the taxpayer and that accepted as reasonable for tax purposes in the amount of 241.427,08 EUR. This correction increases the amount declared in this field to 244.437,42 EUR and results in a reduction of the declared Tax Loss.

(...)

IX – RIGHT TO A HEARING

IX.1- Depreciation and Real Cost

Tangible Fixed Assets are tangible items that are expected to be used for more than one year and that are intended for the production or supply of goods or services, for lease to third parties or for administrative purposes.

Tangible items lose value over time through the action of nature, technological obsolescence, wear from operation or use with consequent loss of utility. This reduction in value or depreciation is recorded over time, based on the expected useful life or use, during which the assets generate income.

Various methods of depreciation of tangible items may be considered, and the choice of one of them is the responsibility of the company's management. The decision for one of the depreciation methods may be guided by technical or economic criteria, such as the number of hours of effective operation or the quantity produced. In these cases, we can approximate these technical depreciation to the concept of "real cost" or "effective cost" as mentioned in the petition of the Right to a Hearing, as it underlies the principle of correlation between the income generated by the assets and the expenses resulting from their use.

Such depreciations are subject to tax acceptance. Tax depreciations are considered an expense of the period based on a specific time period or expected useful life and a calculation method, and the tax result must be corrected by the differences between accounting depreciations and tax depreciation.

Now, the taxpayer chose to consider tax depreciations, applying the minimum rate corresponding to Unspecified Machinery, code … of table II of Regulatory Decree n.º 25/2009 of 11 September (Regulatory Decree n.º 25/2009), with these depreciations remaining non-technical far from the concept of "real/effective cost" invoked by the taxpayer.

IX.2- Other Depreciation Methods

Indeed, as the taxpayer refers in the petition of the Right to a Hearing, Regulatory Decree n.º 25/2009 does not present absolute rigidity regarding the attribution of depreciation. Exceptions are provided for the depreciable items, the depreciable value, the depreciation method and the determination of the useful life period, regulated, for example, in article 1º n.º 2, in article 3º n.º 5, in article 4º n.º 3, in article 5º n.º 3 and in article 9º n.º 3, with article 1º being relevant for respecting the general conditions of acceptance of depreciation and amortization.

Such exceptions are also contained in the previous Reintegration and Amortization Regime of Regulatory Decree n.º 2/90, of 12 January, which was in force in 2006 when the wind farm began to be depreciated.

All exceptions provided for in Regulatory Decree n.º 25/2009 require authorization by the Tax Authority. Now, the taxpayer did not submit any request for adoption of a specific depreciation regime or binding information on the matter. Rather, it chose to classify the foundations and turbines in an item provided for in Regulatory Decree n.º 25/2009, namely in unspecified machinery.

IX.3- Maintenance and Repairs of the Turbines

The taxpayer mentions the aggressive climatic conditions of the Serra do …, where the B… Wind Farm was installed, as a determining factor in the useful life of the wind turbines and lists repairs of components, carried out between 2010 and 2015 on various turbines to justify the degradation of the equipment.

Generally, these exploitation projects are preceded by economic viability studies that involve the survey of climatic conditions at the location of installation of the wind turbines, the technical characteristics of the producing equipment and their suitability to the local climate, among other studies and planning.

All these studies aim to maximize the return on invested capital, necessarily for the total period of the concession or exploitation license. In the case at hand, this would be for a period of 20 years.

Planning for maintenance and repairs based on technical characteristics, local climatic conditions and operating hours is included in these studies.

Maintenance and repairs aim to prolong the utility of energy-producing equipment and cannot be adequate justification for shortening the expected useful life when they intend the opposite effect.

IX.4- Reference to Case n.º 16/2015-T of CAAD

The case examined by the Administrative and Tax Arbitration Center (CAAD) presents similarities with the present situation of A…, namely the aggressive climatic conditions, the implantation in an adverse location and the irregular and unexpected operation.

However, other facts contributed to the formation of the CAAD's decision, such as, for example, the period of bonified tariff, the contractual period of bank financing and the duration of the wind turbine maintenance contract, which were sufficiently explicit to accept as reasonable a useful life period of less than 20 years.

In its defense, A… did not bring, in its Right to a Hearing petition, any of these elements, nor any others, that would indicate and justify a determinable useful life period.

IX.5- New Rate and Wording for Code …

In the first analysis, we must take into account that Law n.º 82-D/2014 of 31-12-2014 which introduced amendments to Regulatory Decree n.º 25/2009 of 14 September, amendments which, according to the preamble, could be summarized as:

"(...) amendment of environmental tax norms in the sectors of energy and emissions, transport, water, waste, land planning, forests and biodiversity, also introducing a taxation regime for plastic bags and an incentive regime for scrapping end-of-life vehicles, within the framework of a reform of environmental taxation",

Specifically in its article n.º 23, it establishes that:

Article 23.º

Amendment to Regulatory Decree n.º 25/2009,

of 14 September

Code 2250 of Table II attached to Regulatory Decree n.º 25/2009, of 14 September, amended by Laws n.ºs 64-B/2011, of 30 December, and 2/2014, of 16 January, which establishes the regime of depreciation and amortization for Corporate Income Tax purposes, now has the following wording:

"Code Percentages

… Solar energy equipment, including in particular

photovoltaic solar energy equipment,

or wind energy equipment .............................................................. 8

It should be noted that this amendment has no retroactive effect, as stated in the provision of n.º 2 of article n.º 55º of the same Law:

"(...) this law applies to taxation periods that begin, or to tax events that occur, on or after 1 January 2015 (...)",

Being faced with a case dated in the year 2012, it is concluded that the aforementioned norm does not apply to the case at hand.

The taxpayer also comes forward in the petition presented, comparing the minimum useful life (12.5 years) resulting from the maximum rate (8%) of the new legislation of code … with the maximum useful life (16 years) that it attributed to the foundations and turbines based on the minimum rate (6.25%) of code …

Now, it should be noted that the effect intended with the comparison presented cannot be entertained, since it compares Tax Laws that are temporally distinct, and also refers to different legal frameworks of the equipment, that is, the taxpayer classifies the foundations and turbines under code … (Unspecified Machinery), legislation that was in force in 2012, however, it acted incorrectly, given that the assets in question are omitted from the Law to be applied, and, as required by law, in cases of omission, the provision of n.º 3 of article 5º of Regulatory Decree n.º 25/2009 should be applied.

It is important to emphasize that these minimum and maximum useful life periods could not apply to these equipment, since they are considered omitted from the tables attached to Regulatory Decree n.º 25/2009, and the calculation of amortization for the period accepted for tax purposes must follow the expected useful life period in accordance with n.º 2 of article 31º of CIRC and n.º 3 of article 5º of said Regulatory Decree, contrary to what is argued by the petitioner.

IX.6- The Useful Life of Wind Turbines and Publications

The fact that wind turbines are not provided for in the Depreciation and Amortization Regime led to research and consultation of publications relating to the subject of wind energy in its various aspects. For the tax assessment of the depreciation practiced by the taxpayer, the expected useful life period of such equipment is relevant.

The useful life of wind turbines is strongly linked to the economic viability of the wind farm, and some studies refer to operation periods of 35 to 40 years. The weight of maintenance and repairs increases with the age and use of the equipment, so the maximum profitability of a wind farm is between 20 and 25 years.

The Environmental Impact Study of the B… Wind Farm (Volume I - Non-technical Summary) mentions on its page 23 as a positive impact of the wind enterprise that:

"(...) the presence of the Wind Farm will constitute a source of income for the populations as an annual rent will be paid by the project proponent for 20 years of operation of the enterprise, (...)"

The period of 20 years was also determined by the Exploitation Cession Agreement entered into with the Parish Council of … in which the termination of the cession is stipulated as 2026-01-17, recalling that energy production began in 2006.

The environmental impact study prepared by the French "Ministère de l' Écologie et du Développement Durable" (2005), available on the Web, points, on its page 52, to an estimated useful life period of wind turbines of 20 to 30 years, at the end of which the operator has the responsibility to dismantle the wind farm and restore the location to its original state.

The "Renewable Energy Fact Sheet: Wind Turbines" prepared by the "United States Environmental Protection Agency", also available on the Web, mentions, on its page 2, a typical useful life of 20 years.

These publications were only some of those consulted to conclude that the reasonable period of operation of the wind farm would be 20 years.

The Corporate Income Tax Services Department, based on its methodology of acquiring and assessing knowledge, concluded in the same sense (Information n.º 922/15 of 2015-07-15, relating to Proc.1530/15), and establishing the useful life period of wind turbines of 20 years and an annual depreciation rate of 5% until the entry into force of the new rate and wording introduced by Law n.º 82-D/2014 of 31/12 (State Budget 2015).

IX.7- Summary

By the above described, the proposal for correction of the depreciation rates above those accepted as reasonable for tax purposes is maintained, and the proposal for correction of expenses from previous periods is maintained.

· The 10 wind turbines of the B… Wind Farm are located in an area of great wind intensity, at approximately 1000 meters above sea level, in the first mountain range from the sea coast, an area where winters are very harsh, with much humidity of atmospheric turbulence, including vertical winds for which those wind turbines are not prepared, with operation being automatically suspended in some periods because the wind intensity exceeds what allows the wind turbines to operate safely;

· The wind turbines of the B… Wind Farm, due to climatic conditions, suffer faster wear than normal, having already had various failures and need for repairs of essential components (gearboxes, generators and bearings) well before completing 10 years of operation;

· On 22-04-2016, the Applicant submitted the request for arbitral pronouncement that gave rise to the present proceedings.

3.2. Facts Not Proven

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

3.3. Reasoning for the Determination of the Matter of Fact

The facts were considered proven based on those attached to the request for arbitral pronouncement and the administrative proceeding.

The facts referred to in paragraphs M) and N) were based on the testimony of the witnesses indicated by the Applicant, who appeared to testify with impartiality and with knowledge of the facts they reported.

1. Matter of Law

4.1. Issue of the Expected Useful Life Period of Wind Turbines in the Year 2012

The Applicant considered that the wind turbines have a useful life period of 16 years, amortizing them at the rate of 6.25%, having classified the wind turbines as included under code 2295 of Table II – Generic Rates attached to Regulatory Decree n.º 25/2009, of 14 September, referring to "unspecified machinery".

The Tax and Customs Authority understood that, since it is not provided in the tables attached to Regulatory Decree n.º 25/2009, of 14 September, the Applicant should apply, in accordance with n.º 3 of article 5.º of Regulatory Decree n.º 25/2009, depreciation and amortization considered reasonable, taking into account the expected useful life period.

As stated in the Tax Inspection Report "the Tax Authority considered as reasonable the useful life period of 20 years and the percentage of 5% depreciation for wind farms, considered as a single element of Tangible Fixed Assets. This understanding was set out in Information n.º 922/15 of the Corporate Income Tax Services Department, sanctioned on 2015-07-15, relating to Proc.1530/15".

The issue that is the subject of the present proceeding is whether the amortization rate that, in the fiscal year 2012, should have been used for the wind turbines that make up the Penedo Ruivo Wind Farm, referred to in the Tax Inspection Report, is inadequate.

With respect to the fiscal year 2012, to which the disputed assessment refers, the wording of CIRC resulting from Decree-Law n.º 159/2009, of 13 July, is applicable, which in its article 31.º of CIRC establishes, in what is relevant here, the following:

Article 31.º

Depreciation or Amortization Rates

1 – In the straight-line method, the annual depreciation or amortization rate that can be accepted as an expense of the taxation period is determined by applying the depreciation or amortization rates defined in the regulatory decree that establishes the respective regime to the following values:

a) Cost of acquisition or production;

b) Value resulting from revaluation under fiscal legislation;

c) Market value, at the date of opening of the accounts, for assets subject to valuation for that purpose, when the cost of acquisition or production is not known.

2 – With regard to assets for which depreciation or amortization rates are not fixed, those that the Directorate-General of Taxes considers reasonable are accepted, taking into account the expected useful life period.

(highlighted by the Tribunal)

In the same vein, Regulatory Decree n.º 25/2009, of 14 September, establishes in its article 5.º, n.º 3, in the original wording, that "with regard to assets for which depreciation or amortization rates are not fixed in the tables referred to in n.º 1, those that the Directorate-General of Taxes considers reasonable are accepted, taking into account the expected useful life period".

Since the amortization rate for wind turbines is not provided for in Regulatory Decree n.º 25/2009, in the wording prior to Decree-Law n.º 82-D/2014, of 31 December, the Applicant had to apply a rate that could be considered reasonable, taking into account the expected useful life period for wind turbines.

From the evidence produced it resulted with certainty that there was no reason, in 2012, in the specific case of the wind turbines in question, located in an area in which they suffer pronounced wear, due to especially aggressive climatic conditions, for which it was expected a useful life period for the wind turbines greater than the 16 years that the Applicant took into account in carrying out the amortization, as these conditions imply faster deterioration than is normal and consequently a lower useful life expectancy in comparison with the generality of wind turbines.

For this reason, the information obtained by the Tax and Customs Authority to the effect that a useful life of 20 years was to be expected cannot be considered decisive, particularly when it resulted from witness testimony that rapid deterioration was indeed confirmed by there being wind turbines of the Applicant that presented serious operating problems before 16 years of use were completed and even before 10 years.

On the other hand, the fact that Law n.º 82-D/2014, of 31 December, came to expressly include "wind energy equipment" in the list of rates of Table II attached to Regulatory Decree n.º 25/2009, and to indicate rate 8, which corresponds to 12.5 years of useful life, dispels any doubts about the reasonableness of the 16-year useful life period considered by the Applicant.

That formula "wind energy equipment" encompasses in its literal meaning any equipment suitable for production and there is no reason to carry out a restrictive interpretation.

In truth, a restrictive interpretation is only justified when "the interpreter comes to the conclusion that the legislator adopted a text that betrays his thinking, insofar as it says more than what he intended to say" [1], and in the case at hand, it does not appear that the provision for a duration period of 12.5 years for wind turbines is inadequate; rather the evidence produced confirms its adequacy. On the other hand, being a notorious fact, perceivable throughout the country, that almost all electricity production from wind energy is done with installations of an industrial nature of the type of the Applicant's, it is not to be ventured that the legislator had "forgotten" this reality and introduced the legislative amendment with a view only to microgeneration installations, for which the amortization regime will normally be irrelevant, as they are held by individuals not subject to an organized accounting regime, rather than establish it for industrial installations, which are the only ones that have appreciable relevance for tax purposes.

Thus, this new rate being applicable to equipment of the type of the Applicant's and there being no reason to believe that the quality of wind turbines has been degraded markedly and generally between 2012 and 2014 in such a way that their foreseeable useful life has decreased from 20 to 12.5 years, it cannot but be understood that already at that first date it would not be considered unreasonable not to expect more than 12.5 years of useful life.

Indeed, although this amendment only has normative effect for the future, what is at issue in the present proceeding is whether it was reasonable, in 2012, to expect less than 20 years of useful life for the wind turbines, specifically 16 years, and it is manifest that the fact that the 2014 legislator understood that the period of useful life appropriate to consider for wind turbines is 12.5 years reveals that, from the legislative perspective, already in 2012 it was perfectly reasonable that a period of useful life greater than that would not be expected.

In the case at hand, the Applicant even used an amortization rate corresponding to a useful life period greater than 12.5 years, for which there is no ground for the Tax and Customs Authority not to consider reasonable the expected useful life period adopted by the Applicant and, specifically, to have considered adequate the period of 20 years, which appears manifestly out of step with reality, particularly in situations in which wind turbines are subject to above-normal wear, as occurred in the case at hand.

Based on the above, it must be concluded that the disputed assessment is vitiated by a violation of law, due to error regarding the factual and legal assumptions, which justifies its annulment, in accordance with article 163.º, n.º 1, of the Administrative Procedure Code of 2015, subsidiarily applicable by force of the provisions of article 2.º, paragraph c), of the General Tax Law.

4.2. Issue of the Reviewability of the Determination of the Expected Useful Life Period of Wind Turbines

With regard to the considerations that the Tax and Customs Authority makes on the improperly called "technical discretion", as an area of application of criteria of a technical nature by the Administration allegedly unreviewable by the Courts, this is a concept that has become obsolete with the constitutional revision of 1989, in establishing in article 268.º, n.º 4, of the Constitution the lesivity of the act as a criterion for assessing contentious challenge and consequent reviewability by the courts. [2]

And long ago the Supreme Administrative Court, following some doctrine and with the later support of the Constitutional Court, became aware of the scope of that legislative change, as can be seen from the judgment of 16-06-1999, delivered in case n.º 020839 [3], in which it was written:

For a long time the case law of the Supreme Administrative Court has uniformly admitted judicial control of issues of a technical nature, in cases where gross or manifest error is detected.

However, the reviewability of acts practiced by the Administration that involve considerable technical knowledge, which are usually referred to as practiced in the field of technical discretion, should go beyond that.

Indeed, by force of the provision of n.º 4 of article 268.º of the Constitution (n.° 3 in the 1982 wording), contentious appeal of administrative acts that affect the legal sphere of individuals cannot but be admitted.

Indeed, this right of appeal refers to "any acts whatsoever" and therefore any restriction of such right resulting from ordinary law will be materially unconstitutional.

Thus, the only restrictions on such right that could be compatible with such constitutional principle would be those that could result from the very nature of the administrative acts, namely those in which the management of conflicting public interests is at stake that falls to the administration to weigh.

The technical character of the issues to be resolved shall not constitute an obstacle to such reviewability, since, precisely to allow the resolution of issues of a technical nature within the scope of administrative litigation, it is that the Administrative Procedure Code, in its article 14°, generally provides the possibility of intervention of experts.

This norm, thus, constitutes clear evidence of the existence of a legislative intention to ensure judicial examination of matters of a predominantly technical nature.

On the other hand, the restriction of the reviewability of administrative acts in which technical criteria are applied to cases of manifest error implies a practical subversion of the principle of legality, constitutionally imposed on the Administration (n.° 2 of article 266° of the Constitution) which would be translated, in practice, into the duty not to practice manifest illegalities and correlative right to practice non-manifest illegalities, a consequence which is not compatible with such constitutional norm.

As already defended in 1980 by ESTEVES DE OLIVEIRA, in Administrative Law, volume I, page 249,

"The fact that the administrative court is not an expert in technical matters, that it has more difficulty than the Administration in seeking the content of a technical concept, that often it does not have the certainty whether the scientific judgment of the expert consulted by it is or is not more correct than the expertise judgment of the administrative body, are all circumstances that relate to the difficulty of judicial proof and have nothing to do with the freedom of the Administration".

"What we sustain is that the individual shall be admitted - except in cases to be referred to hereafter - to make in court the proof that the technical concept was wrongly applied by the administrative body: if from that proof it results, unequivocally, that the Administration erred in interpreting the technical concept, or in subsuming it under the facts of real life, then the court cannot retreat into its alleged incapacity to refuse the annulment of the administrative act, and this because there is no discretion there, as the case law itself recognizes".

In essentially coinciding sense is expressed by ANTÓNIO FRANCISCO DE SOUSA, in Administrative Discretion, pages 308-309:

"Being part of the broader category of 'improper discretion', doctrine and case law of some countries, among which Portugal but also Spain and Italy, continue to speak of 'technical discretion' to refer to that type of administrative decisions that contain a high degree of technical knowledge and which, for this reason, only those who make them would be judges of them.

Administrative judges, for having other preparation and function, should 'respect' this type of decision by not controlling them or, better, by controlling only the 'manifest errors' that they might have. From the technical impossibility and lack of preparation of judges would result for the Administration a 'limited freedom' of maneuver, that is, any highly technical decision of the Administration would be free provided it was not vitiated by 'manifest error'.

Of course, this doctrine has no scientific foundation in many aspects. On one hand, one cannot clearly define what 'highly technical decisions' are. Where the 'highly technical' character of a decision begins and ends has never been and cannot be answered in satisfactory terms, as it is a question that necessarily contains a high degree of subjectivity of those pronouncing on it. On the other hand, if the judge does not know all branches of science in order to control 'highly technical' decisions - as he is not obliged to know - he can always hear experts, as is, moreover, provided for in law, not only for civil law but also for administrative law. This is a right and duty that those who judge have, if to clarify on the facts on which they decide. The judge does not know whether a particular substance is toxic or not, but can hear chemists or doctors who will clarify this for him. From the undeniable difficulty of controlling these administrative decisions should not be withdrawn - only explicable for reasons of convenience of the judge, but putting into question the certainty and security of law - a freedom for the Administration to decide as it wishes. Technical discretion thus loses its foundation, since, in the rule of law, the freedom of the Administration can only result from the will of the Legislator expressed in law and not from the 'difficulty of judicial control'. In the third place, by limiting judicial control to the control of 'manifest error' one is tolerating 'non-manifest error'. What is manifest error and where the 'manifest' character of an error begins and ends has never been and cannot be answered in satisfactory terms. Both 'manifest error' and 'non-manifest error' are errors. Both are illegal and must be controlled by administrative courts. What the Legislator did not concede, that is, tolerance of 'manifest error', cannot be conceded by the courts. To all these scientific deficiencies of the 'doctrine of technical discretion' is added the uncertainty and legal insecurity that it brings with it, with wide repercussions on the weakening of the right of defense of individuals guaranteed constitutionally".

Thus, it is certain that the Courts cannot refuse the interested party the possibility of obtaining effective control of the application of technical criteria by the administration. [4]

This judgment of the Supreme Administrative Court was confirmed by the judgment of the Constitutional Court n.º 269/2000, of 03-05-2000, delivered in case n.º 598/99, published in the Official Gazette, 2nd series, of 15-7-2000, in which is written, by the pen of one of its most brilliant administrative law scholars:

Assured the contentious appeal based on illegality, it is with the comprehensiveness of this concept, having as parameter the block of legality to which the Administration must comply by force of the constitutional principle of legality and the limit to which it is subject in the pursuit of the public interest (article 266º of the Constitution) – the respect for the rights of citizens – that the administrative courts go "expanding" their powers of cognition.

The Constitution, the laws and regulations, the contracts entered into, the consolidated administrative acts, all are parameters for assessing the legality of administrative acts.

The binding of the Administration is revealed in fields where traditionally only administrative discretion was recognized, whose reviewability was limited, under the protection of article 19º of the Law on the Organization of Administrative Courts, to the verification of the vice of abuse of power.

It is particularly in this area that, by constitutional imperative, the contentious supervision of administrative acts is deepened.

It is not enough that the Administration, in the exercise of discretionary powers, pursues the public interest that justifies the attribution of such powers; beyond the fact that there are always areas of constraint when the Administration acts in the exercise of such powers (e.g., as to the factual assumptions on which it rests) it is the very enactment of the act that is confronted with the principles of equality, proportionality, justice, impartiality and good faith (article 266º n.º 2 of the Constitution) to which the Administration is equally bound.

But if this is so in the field of volitional discretion, it is also – if not for a stronger reason – in the field of the so-called "technical discretion" (using this expression apart from any judgment on the propriety of the terminology), where, unlike in the first case, there is no, in the definition of the concrete legal situation in question, a range of legally indifferent options.

Returning to the constitutional treatment of the matter, it is noted, finally, that the last revision places an important milestone in the aforementioned line of evolution, with the clear intention of fully ensuring the rights and guarantees of those administered.

The fundamental principle, embodied for the first time in the Constitution as it relates to the rights and guarantees of citizens in relation to the Administration, is that of "effective judicial protection" of rights or legally protected interests (article 268º n.º 4).

This principle, established in general terms in article 20º n.º 1 of the Constitution, did not exempt the constitutional legislator from repeating it when he guaranteed the defense of the rights or interests of the citizen as an administered party.

It did not, however, determine the means at the disposal of citizens to enforce their rights or interests in court – this is a task within the competence of the infra-constitutional legislator who must create the necessary and sufficient instruments for citizens to defend these rights or interests in such a way that none of them remain without adequate judicial protection.

The Constitution limited itself to pointing out, by way of example (but immediately binding), some of these means.

And it is, among them, as another indication of its loss of relative importance within the scope of administrative justice, that the contentious appeal ("challenge") "of any administrative acts" appears.

Maintaining expressly that guarantee – now not in an autonomous provision – it no longer points out the "ground of illegality" which, as we have seen, since the constitutional revision of 1971 of the 1933 Constitution and with the successive revisions of the 1976 Constitution, remained in our legal-constitutional order.

Without prejudice to the admission that this elimination could pave the way for theses which, even if not going to the point of sustaining that illegality ceased to be a ground of challenge of administrative acts, justify it by the purpose of evidencing the reason for being and ultimate purpose of the guarantee – the defense against the offense or injury of rights or interests of the administered – it appears that illegality, as it was understood, did not cease to be the sole ground of contentious appeal.

In this legal-constitutional context, some judgments of this Court are inscribed that judge unconstitutional, by violation of the guarantee of contentious appeal, norms that restrict the grounds for appeal.

This was the case with Judgment n.º 429/89 (in Constitutional Court Reports vol. 13, II, pages 1237 et seq.) which judged unconstitutional the provision of § 4 of article 97º of Decree-Law n.º 42641, of 12/11/59, which restricts to the amount of the fine the possibility of contentious challenge of a sanctionary decision of the Ministry of Finance in a proceeding instituted for breach of the ordinances regulating banking and foreign exchange commerce, and where it was written:

"It is obvious that, constitutionally, the appeal cannot but encompass all legally relevant aspects for assessing the illegality of the administrative act in question (...)"

It is also the case of Judgment n.º 233/94 (in Constitutional Court Reports vol. 27, p. 595) which judged unconstitutional, by violation of the same fundamental right, the provision of article 114º § 2 of the Code of Industrial Contribution which had been interpreted in the appealed decision as excluding the reviewability of the administrative act on certain grounds and where it was written:

"(...) it is incumbent on the courts not only to verify the assumptions of application of the norm, but also to correct the interpretation of the norm and to observe the principle of proportionality in that application, expressed not only in the respect for the purpose of the norm but also in the correction of the adequacy of the means to the result, that is, of the logical path followed by the Administration in the valuation of the concrete situation and of the internal correction of the logical-discursive reasoning that presided over its application to the case."

It is also the case of Judgment n.º 728/98 (in Official Gazette II Series, n.º 69, of 23/3/99, pages 4232) which judged unconstitutional, by violation of article 268º n.º 4 of the Constitution, the provision of article 88º of the Code of Administrative Procedure.

It is, lastly, the case of Judgment n.º 8/99 (unpublished) which judged unconstitutional, also with the same ground, the provision of article 20º of the Law on the Organization of Administrative Courts which, in appeals of decisions delivered in disciplinary proceedings in which administrative agents are charged, prevents the court from considering the severity of the penalty applied or the material existence of the failings, except under certain conditions expressly stated in the same norm.

It is, after all, a line of case law that is rooted in the understanding that "article 269º n.º 2 [wording at the time] of the Constitution can and should be interpreted as establishing a complete guarantee of appeal, that is, a guarantee that assures individuals the possibility of judicially challenging all singular and concrete acts of the Public Administration that produce external effects and are therefore susceptible to harming their rights. Thus, any legal norms that exclude this possibility of challenge with respect to certain acts or to certain categories of administrative acts or that restrict the possible grounds for such challenge only to some of the vices liable to generate the antijuridity of those acts, must be deemed unconstitutional (...)" (J.M. Cardoso da Costa, "The Protection of Fundamental Rights in 'Documentation and Comparative Law' n.º 5, p. 209).

Be that as it may, even if it were still understood today, in disagreement with the Constitution, that issues of a technical nature could only be examined by the Courts in cases of manifest error, it would have to be concluded that the impugned act is illegal.

In truth, it being now certain, in light of the legislative judgment itself embodied in article 23.º of Law n.º 82-D/2014, of 31 December (a diploma specifically designed to regulate matters pertaining to renewable energies and, certainly, preceded by adequate studies on the matter regulated) that, in normal situations, the expected useful life period of 12.5 years is adequate for wind turbines of the type of the Applicant's, it is manifest that the period of 20 years (60% higher than that) could not be considered adequate already in 2012 with respect to wind turbines subject to especially intensive use, as was demonstrated to occur in the case at hand.

That is, the determination of that period of 20 years underlying the impugned act with respect to the specific wind turbines in question is vitiated by manifest error which, even in the face of the outdated concept of "technical discretion", would be reviewable by the Courts.

1. Decision

In these terms, this Arbitral Tribunal agrees on:

a) To judge the request for arbitral pronouncement well-founded and to declare illegal the Corporate Income Tax assessment n.º 2016…, in the part in which it effects a reduction of the tax loss in the amount of € 241,427,08;

b) To annul the assessment referred to, in the respective part.

1. Value of the Proceedings

In accordance with the provisions of article 306.º, n.º 2, of the Code of Civil Procedure, 97.º-A, n.º 1, paragraph a), of the Code of Tax Procedure and 3.º, n.º 2, of the Regulation of Costs in Tax Arbitration Proceedings, the value of the proceedings is fixed at € 241.427,08.

1. Costs

In accordance with article 22.º, n.º 4, of RJAT, the amount of costs is fixed at € 4.284,00, in accordance with Table I attached to the Regulation of Costs in Tax Arbitration Proceedings, to be borne by the Tax and Customs Authority.

Lisbon, 28-11-2016

The Arbitrators

(Jorge Manuel Lopes de Sousa)

(Nuno Cunha Rodrigues)

(Pedro Nuno Ramos Roque)

[1] BAPTISTA MACHADO, Introduction to Law and the Legitimizing Discourse, page 186.

[2] Different from the so-called "technical discretion" is "administrative justice" in which what is at issue is not the application of technical criteria, but a margin of free assessment inherent in the powers conferred on the Administration in certain matters, such as is the case, for example, in the graduation of disciplinary penalties or graduation of candidates to a competition based on assessments of a qualitative nature.

[3] Available at https://dre.pt/application/file/3997343.

[4] Essentially in the same sense, the Supreme Administrative Court pronounced itself in the judgment of 29-11-2000, case 25580, in which it was summarized: "The right to contentious appeal of any harmful administrative acts, assured in n.º 4 of article 268º of the Constitution, can only be restricted with respect to acts which, by their nature, do not permit judicial control, namely those in which the management of conflicting public interests is at stake that falls to the administration to weigh, which is not the case of the acts of the Government regarding the recognition of the exemptions referred to, which have assumptions entirely fixed in law".