Autonomous Taxation on Rebilled Expenses and SIFIDE Deduction Against IRC | CAAD 241/2017-T

ARBITRAL AWARD

The Arbitrators José Poças Falcão (President), José Eduardo Mendonça da Silva Gonçalves (Member) and Raquel Franco (Member), appointed by the Deontological Board of the Centre for Administrative Arbitration (CAAD) to form the collective arbitral tribunal constituted on 21 June 2017, decide as follows:

REPORT

On 05-04-2017, the company "A…, LDA.", NIPC…, filed a request for constitution of a collective arbitral tribunal, in accordance with the combined provisions of Articles 2 and 10 of Decree-Law No. 10/2011 of 20 January (Legal Regime for Arbitration in Tax Matters, hereinafter referred to only as RJAT), in which the Tax and Customs Authority is the Respondent.

The request for constitution of the arbitral tribunal was accepted by the Honourable President of CAAD and automatically notified to the Tax and Customs Authority on 10-04-2017. In accordance with the provisions of paragraph (a) of Article 6(2) and paragraph (b) of Article 11(1) of Decree-Law No. 10/2011 of 20 January, as amended by Article 228 of Law No. 66-B/2012 of 31 December, the Deontological Board appointed as arbitrators of the collective arbitral tribunal the signatories, who communicated their acceptance of the appointment within the applicable period and notified the parties of this appointment on 05-06-2017.

Thus, in accordance with the provisions of paragraph (c) of Article 11(1) of Decree-Law No. 10/2011 of 20 January, as amended by Article 228 of Law No. 66-B/2012 of 31 December, the collective arbitral tribunal was constituted on 21-06-2017, and the relevant legal procedures were followed.

Positions of the Parties

Through the request for arbitral determination, the Claimant requests the following:

First, that an error in the self-assessment of Corporate Income Tax (IRC) for the periods 2013, 2014 and 2015 be corrected, which it understands to arise from the fact that an amount of autonomous taxation totalling € 128,837.85 was assessed, relating to expenses that were entirely recharged to B…, (an entity based in the United States of America), pursuant to a contract concluded between the parties ("Contract for Design Services"), under which A… undertakes to provide services to the North American entity;

Subsidiarily, the Claimant requests that, should this arbitral determination find that the above error does not justify the annulment of the amount paid as autonomous taxation, then its request for deduction of the tax benefit determined under the Tax Incentives System for Research and Development ("SIFIDE") from the collection of autonomous taxation for the tax periods in question should be granted.

As regards the first request, the Claimant states that, according to the contract concluded with B…, the latter should pay to A…, as sole compensation for the design services provided, fees equal to its costs multiplied by the contractually established markup of 107% of the expenses defined in the contract. The Claimant considers that this contract means that the autonomous expenses borne by it were subsequently recharged to the North American company, which, in its view, should result in these expenses not being attributed to its legal-tax sphere and, consequently, in their not being subject to taxation under autonomous taxation.

With regard to the subsidiary request, assuming the previous one was unsuccessful, it accepts the attribution to the Claimant's legal-tax sphere of the expenses referred to above, and therefore their subjection to autonomous taxation, but with the mitigating factor that the amount of the tax benefit determined under SIFIDE be deducted from the collection thus determined. It alleges, to this effect, the following:

• Case law has understood, in virtually unanimous manner, that the Corporate Income Tax collection provided for in Article 45(1)(a) of the Corporate Income Tax Code (CIRC) (in force until 2013), comprises, without need for any further specification, the collection of autonomous taxation in IRC, and therefore it should be understood that the IRC collection provided for in Articles 90(1) and 90(2)(b) and (c) of the CIRC, in the version in force in 2013, also encompasses the collection of autonomous taxation in IRC;

• Specifically with regard to SIFIDE, it also cites case law to the effect that it is deductible from the collection of autonomous taxation;

• In fact, even if the tax credit provision is expressed in terms of "deduction from the collection of IRC," as opposed to "deduction from the amount determined under Article 90 of the CIRC," the practical end result is the same, since the amount determined under Article 90 of the CIRC is none other than IRC itself.

• From the analysis of various arbitral decisions issued on this matter (for example, cases No. 769/2014-T and No. 219/2015-T), the Claimant draws, summarily, the following conclusions:

a) The autonomous taxation relating to vehicle expenses, representation expenses, travel allowances, manager bonuses and manager severance indemnities constitute IRC;

b) These forms of taxation still tax income, as they are a substitute for the alternative measure of increasing taxable income via the non-deductibility of the expense or charge on which the autonomous taxation is levied;

c) As they are IRC, the rule directed at the collection (tax assessed) of IRC in paragraph (a) of Article 45(1) of the CIRC should be applied to them;

d) The rule directed at the collection of IRC contained in paragraphs (c) and (d) (until 2013, paragraphs (b) and (c)) of Article 90(2) of the CIRC should therefore equally be applied to them, as no obstacle to this is apparent in "their special form of incidence and applicable rates".

e) As to the possible interpretative nature of Article 88(21) of the Corporate Income Tax Code, as provided for in Article 135 of the State Budget Law for 2016, it considers that the provision contained in the new Article 88(21) of the Corporate Income Tax Code does not meet the requirements to be considered interpretative, necessarily having to be qualified as an innovative rule. First, because there was no uncertain or controversial rule in its application, and second, because case law could never have arrived at the interpretation that it is sought to achieve with the introduction of Article 88(21) of the Corporate Income Tax Code. It concludes, therefore, that if the interpretative nature of the rule in question is admitted, the principle of non-retroactivity of tax law would be violated.

• It therefore considers that it should be reimbursed for the amount of tax paid in excess, by virtue of the non-deduction of credits determined under SIFIDE from the collection of autonomous taxation, which, taking into account that, with respect to the tax periods in question, amounts of € 45,166.03, € 20,968.92 and € 62,702.90 were determined as autonomous taxation, and that the credit determined under SIFIDE and capable of being deducted in each of the tax periods was, in 2013 € 3,985,267.29, in 2014 € 2,551,890.22 and in 2014 € 3,240,571.05, that is, always exceeding the amount recorded as autonomous taxation, which means that it should be deducted up to its concurrence, the Claimant should be reimbursed the total amount of € 128,837.85 relating to the sum of the amounts corresponding to the autonomous taxation determined in the periods in question.

• Finally, the Claimant petitions for the payment of compensatory interest because, although the assessments were made on the basis of the taxpayer's self-assessment, the latter followed, in completing it, the generic guidance of the Tax Authority, thus verifying the requirements of paragraph (c) of Article 43(3) of the General Tax Law.

In Response, the Respondent pronounced itself as follows:

Regarding the recharged expenses:

• As the Claimant itself acknowledges, the exclusion of charges invoiced to clients is found in Article 88(9) of the CIRC, therefore it covers only deductible charges relating to travel allowances and compensation for travel in the worker's own vehicle, in the service of the employing entity.

• When Law No. 55-B/2004 of 30 December expanded the scope of autonomous taxation to this type of expense, it also introduced in Article 42 (currently Article 23-A) of the CIRC, the conditions for the deductibility of charges with travel allowances and compensation for travel in the worker's own vehicle, in the service of the employing entity.

• By establishing in law that the criterion for deductibility of charges based on their "invoicing to clients" is relevant when it comes to charges referred to in current paragraph (h) of Article 23-A(1) and, concomitantly, those provided for in Article 88(9), both of the CIRC, it was forbidden for the interpreter to extrapolate the application of the same criterion to other domains, such as those of charges with light passenger vehicles, representation expenses and undocumented expenses.

• It further states that the company to which the Claimant alleges to make the "recharge" is its only client, so it would not be a true "recharge," but rather the natural and normal process of price formation in the market.

• Thus, we are not dealing with a recharge, but rather with a consideration charged to the North American company, and the principal request formulated by the Claimant should not proceed.

Regarding the subsidiary request (deduction of SIFIDE tax benefits from autonomous taxation collection)

• The autonomous character of these forms of taxation, arising from the special configuration given to the material and temporal aspects of the taxable events, imposes, in certain domains, the departure from or adaptation of the general rules of IRC.

• The integration of autonomous taxation in the Corporate Income Tax Code conferred a dualistic nature on the normative system of this tax, which was embodied, namely in the context of paragraph (a) of Article 90(1), in separate determinations of the respective collections, by force of them obeying different rules; that is, there is not a single IRC assessment, but two determinations.

• On the other hand, the common feature of all the realities reflected in the deductions referred to in Article 90(2) of the CIRC is the fact that they concern income or expenses incorporated in the taxable base determined on the basis of the taxpayer's profit or advance payments of tax, and are therefore entirely unrelated to the realities that make up the taxable events of autonomous taxation.

• As regards the deduction relating to tax benefits [paragraph (b) of Article 90(2)], when these are investment benefits – as is the case with SIFIDE – there is an underlying philosophy that the benefit constitutes a reward whose amplitude varies with the profitability of the investments, since the higher the profit/taxable base of IRC, the greater the capacity to effect the deduction.

• There is therefore an inseparable link between the amount of the investment tax credit and the part of the IRC collection calculated on the taxable base based on profit and, were this not so, the necessary articulation that must exist – on the material level – between the objectives pursued by tax benefits and their impact on the very magnitude that serves as the basis for calculating the taxable base and collection – profit – would be undermined.

• As regards SIFIDE, the values that express this tax benefit are deducted "from the amounts determined in accordance with Article 90 of the Corporate Income Tax Code, and up to their extent" and in the assessment relating to the tax period in which the expenses eligible for this purpose are incurred and, in the event of lack or insufficiency of collection determined in these terms, expenses that cannot be deducted in the year in which they are incurred "may be deducted up to the 6th immediately following year".

• The collection referred to in Article 90, when the assessment must be made by the taxpayer, is determined on the basis of the taxable base appearing in that assessment/self-assessment [cf. Article 90(1)(a) of the CIRC].

• As the credit that translates to SIFIDE is deducted only from the collection thus determined, that is, from the collection determined on the basis of the taxable base [this is provided for in Article 5(a) of the SIFIDE Regulation, which expressly prevents credits arising from it from being deducted when taxable profit is determined by indirect methods].

• Regarding autonomous taxation, it reiterates that these are determined in an autonomous and distinct manner from the determination carried out in accordance with Article 90 of the CIRC, and therefore there does not arise from the tax mechanism created by the legislator, either in the CIRC or in the autonomous taxation regime, any way of meeting the claims formulated by the Claimant.

• As regards the request for compensatory interest, the Tax Authority limited itself to applying the legal consequences, which, from the tax point of view, were imposed by the occurrence of the factual requirements underlying the correction made, and therefore the challenge regarding the interest requested should also be judged unfounded.

Factual Matters

Established Facts

A) The Claimant is a company subject to Portuguese law that is covered by the general regime of Corporate Income Tax.

B) The Claimant submitted the following income declarations, on the dates that are referred to below:

• Corporate Income Tax Form 22 Declaration of Income, with identification …-… -…, relating to the tax period 2013, submitted on 1 August 2016;

• Corporate Income Tax Form 22 Declaration of Income, with identification …-… -…, relating to the special tax period 2014 (between 1 July and 31 October 2014), submitted on 1 August 2016;

• Corporate Income Tax Form 22 Declaration of Income, with identification …-… -…, relating to the tax period 2014 (between 1 November 2014 and 31 October 2015), submitted on 1 August 2016.

C) The submission of the same was aimed at updating the information contained in Section 7 of Annex D relating to the credit of the Tax Incentives System for Research and Development ("SIFIDE"), capable of being carried forward to subsequent periods, in order to reflect the amount granted on 1 October 2015 by the Certification Committee for Tax Incentives for Research and Development regarding the 2013 tax period.

D) From the said declarations of income resulted the determination of taxable profit as follows:

• Form 22 Declaration for 2013 – € 1,439,462.82 (one million four hundred and thirty-nine thousand, four hundred and sixty-two euros and eighty-two cents);

• Form 22 Declaration for special 2014 – € 550,958.66 (five hundred and fifty thousand, nine hundred and fifty-eight euros and sixty-six cents);

• Form 22 Declaration for 2014 – € 465,030.36 (four hundred and sixty-five thousand and thirty euros and thirty-six cents).

E) From the said declarations resulted furthermore an amount of autonomous taxation totalling € 128,837.85, which is subdivided as follows:

• Form 22 Declaration for 2013 – € 45,166.03 (forty-five thousand, one hundred and sixty-six euros and three cents);

• Form 22 Declaration for special 2014 – € 20,968.92 (twenty thousand nine hundred and sixty-eight euros and ninety-two cents);

• Form 22 Declaration for 2014 – € 62,702.90 (sixty-two thousand seven hundred and two euros and ninety cents).

F) The amounts of the tax benefits recorded in Section 7 of Annex D of the Form 22 Declarations of Income submitted by the Claimant with reference to the tax periods in question were as follows:

• Tax period 2013 – € 2,641,856.65

• Special tax period 2014 - € 3,985,267.29

• Tax period 2014 - € 3,240,571.05.

G) On 5 August 2016 the Claimant filed three separate administrative complaints regarding each of the tax acts referred to above:

• Administrative complaint relating to the Form 22 Declaration for the tax period 2013;

• Administrative complaint relating to the Form 22 Declaration for special tax period 2014;

• Administrative complaint relating to the Form 22 Declaration for tax period 2014.

H) On 5 January 2017, the Claimant was notified of the decisions dismissing the administrative complaints, issued in cases No. …2016…, …2016… and …2016….

I) On 09.05.2009, the Claimant entered into a services agreement with B…, a related company entity, based in the United States of America.

J) Clauses 1 and 3 of the said contract establish as follows:

Article 1: Definitions

1.5 Markup shall mean the 107% of Contractor's cost as defined herein

Article 3: Compensation

Company shall pay Contractor in the functional currency of the contractor, as sole compensation for the Design Services, a service fee equal to Contractor´s costs multiplied by the Markup. For purposes of this Agreement, Contractor´s costs shall be considered to equal all direct costs and standard overhead. Direct costs are defined as wages and salaries paid by the Contractor and materials and other direct costs. Standard overhead costs are defined as rent, utilities and other indirect costs incurred by the Contractor. To the extend that Contractor´s direct costs and standard overhead are note directly associated with the Design Services, the direct costs and standard overhead costs shall be prorated such that the service fee is based only upon that portion of the direct costs and standard overhead directly associated with the Design Services. Such Services fee as set forth in this Paragraph 3.1 shall be the sole and full compensation from Company to Contractor for all Design Services rendered under the Agreement".

K) On 01.11.2014 a Research and Development Contract was entered into between the parties, with the aim of replacing the contract referred to in the paragraph above.

L) Clauses 5.1 and Annex A of the said contract, which is an integral part thereof, establish as follows: (clause 5.1) "In consideration for the R&D Services performed by Developer under this Agreement, Company shall pay to developer the fees set forth in Exhibit A (the "Service Fees") attached hereto and made a part hereof. The parties agree to review periodically the Service Fees and to make adjustments to the Service Fees deemed appropriate to maintain an arm's length compensation."; (Annex A) "Pursuant to Section 5.1 of the Agreement, the Service Fees payable hereunder shall be equivalent to developer's Costs, plus an eight percent (8%) markup hereof".

Facts Not Established

There are no facts relevant to the decision that have not been established.

Justification of the Decision on the Factual Matters

The facts were established as proven on the basis of the documents attached to the request for arbitral determination, the administrative process and the facts set forth by the Parties in their respective procedural filings with regard to which there is no dispute.

LEGAL GROUNDS

In accordance with the request presented by the Claimant, the present case requires analysis of two distinct aspects:

First, whether the alleged recharged expenses to B… (an entity based in the United States of America), pursuant to a contract concluded between the parties ("Contract for Design Services"), under which A… undertakes to provide services to the North American company, have an impact on the Claimant's Corporate Income Tax assessment;

Second, whether the Claimant is correct in requesting the deduction of the tax benefit determined under the Tax Incentives System for Research and Development ("SIFIDE") from the collection of autonomous taxation for the tax periods in question.

Let us examine this, then.

Regarding the alleged recharged expenses:

Under the "Contract for Design Services" concluded between the Claimant and B…, the latter undertook to pay to the Claimant, "… for the Design Service provided, fees equal to its costs [the Claimant's costs], multiplied by the contractually established markup …".

It follows from the contract that A… provides a service ("Design Service") to its counterparty, not limiting itself to incurring expenses on behalf of the recipient or user of the goods or services (a situation in which the expenses incurred should be recorded in appropriate third-party accounts, which could justify the "recharged expenses," but which does not correspond to the case). Thus, the expenses incurred are at the basis of "its costs," with A… obtaining a commercial margin by applying the "contractually established markup."

In this way, the expenses incurred for the provision of the service are a reference for the calculation of the fees due; there is not properly a recharge, but rather an agreement between the parties as to the value of the payment due, which is governed by the combination of two variables: (i) expenses incurred; and (ii) contractually defined markup.

The Claimant alleges that, given the fact that autonomous taxation is levied entirely on expenses and charges that, according to its claim, were recharged to another entity during the tax periods in question, pursuant to a service provision contract, autonomous taxation should not have been assessed on the same, and therefore considers that there is an error in the self-assessment and, consequently, that the amount of the tax in question (i.e., assessed autonomous taxation) should be refunded to it.

The argument presented does not, however, stand. In fact, having incurred expenses, by a taxpayer subject to Corporate Income Tax, which, under the Corporate Income Tax Code, contribute to the formation of autonomous taxation collection, the law determines their subjection to this form of taxation – having been this the operation performed in the assessments of the periods in question. It is further added that, in the view of this tribunal, it is only the value of the expenses incurred that is taken into account to calculate the fees due by the Claimant's counterparty, with a markup added to those, not constituting this situation a true recharge, much less with the tax impact sought.

Thus, as regards the first request formulated, the Tribunal considers that the Claimant is not correct.

Let us now examine the subsidiary request, relating to the deductibility of the SIFIDE tax benefit from the collection generated by autonomous taxation.

The answer to the question posed by the Claimant requires, from the outset, that the evolution of autonomous taxation be analyzed in order to determine whether its legal regime (comprising nature and purpose) is compatible with the claim presented.

The nature of autonomous taxation has been debated in case law and in legal doctrine, with the prevailing view being that it aims to tax the expense and not the income. In this sense, see, for example, the dissenting opinion of His Excellency Justice Vítor Gomes, appended to Constitutional Court Decision No. 204/2010, in which he states, referring to autonomous taxation: "although formally included in the CIRC and the amount it allows to collect is assessed within its scope and as IRC, the rule in question concerns a tax imposition that is materially distinct from the taxation in this schedule (….)".

"In fact, we are dealing with autonomous taxation (…) and this makes all the difference. It is not a matter of taxing an income at the end of the tax period, but certain types of expenses in themselves, for understandable reasons of tax policy that the decision points out." And he adds that "in this way, the fact revealing tax capacity that it is sought to achieve is the simple performance of that expense, at a given moment. Each expense is, for this purpose, a tax fact that is autonomous, to which the taxpayer is subject, regardless of whether or not it will have taxable income in IRC at the end of the period, with it being irrelevant that this portion of tax will only be assessed at a later time and jointly with IRC" (emphasis added).

In the same sense, it was also recognized by the case law of the Supreme Administrative Court (STA) "that under the designation of autonomous taxation there are hidden very diverse realities, including, in accordance with Article 81(1) of the CIRC (then in force), undisclosed or undocumented expenses, which are taxed autonomously, at the rate of 50%, which will be raised to 70% in cases of expenses incurred by taxpayers wholly or partially exempt, or who do not carry on, as their principal activity, activities of a commercial, industrial or agricultural nature (Article 81(2) [then in force]) and which are not considered as a cost in the calculation of taxable income in IRC. It should be noted, however, that representation expenses and those related to light vehicles, in accordance with what is provided for in Article 81(3) of the CIRC [then in force] and travel allowances are related to business activity and are indispensable and therefore are fiscally accepted in some cases, albeit within certain limits".

With regard to the position that was assumed by the Constitutional Court, see Constitutional Court Decision No. 18/11, which states that "there are facts subject to autonomous taxation, which correspond to expenses proven to be indispensable for the realization of income and (…) this means that autonomous taxation also falls on expenses that correspond to the core of the concept of real income, net income and compliance with accounting obligations".

More recently, the Constitutional Court has been reformulating the doctrine of Constitutional Court Decision No. 18/11, moving closer to the then dissenting opinion of Justice Vítor Gomes and Supreme Administrative Court Decision No. 830/11, understanding that "contrary to what happens in income taxation under Personal Income Tax and Corporate Income Tax, in which all income earned in a given year is taxed (which means that only at the end of it can the tax rate be determined, as well as the bracket in which the taxpayer falls), in this case each expense incurred is taxed, in itself considered, and subject to a certain rate, with autonomous taxation being determined independently of the IRC that is due in each year, by not being directly related to obtaining a positive result, and therefore subject to taxation. Thus, and in the case of IRC, we are dealing with an annual tax, in which each income received is not taxed per se, but rather the aggregation of all income obtained in a given year, with the law considering that the fact generating the tax is deemed to be verified on the last day of the tax period (cf. Article 8(9) of the CIRC). As regards autonomous taxation in IRC, however, the fact generating the tax is the very performance of the expense itself, not a complex fact of successive formation over a year, but rather an instantaneous tax fact".

Now, also according to this Constitutional Court Decision "this characteristic of autonomous taxation thus refers us to the distinction between periodic taxes (whose generating fact is produced in a successive manner, by the passage of a given period of time, generally annual, and tends to repeat itself in time, generating for the taxpayer the obligation to pay tax with regular character) and single-obligation taxes (whose generating fact is produced in an instantaneous manner, appears isolated in time, generating on the taxpayer an obligation to pay with avulse character). In autonomous taxation, the tax fact that gives rise to the tax is instantaneous: it is exhausted in the act of performing a certain expense that is subject to taxation (although the determination of the amount of tax, resulting from the application of the different rates of taxation to the different acts of performing the expense considered, will be made at the end of a given tax period). But the fact that the assessment of the tax is made at the end of a given period does not transform it into a periodic tax, of successive formation or of lasting character. This operation of assessment is translated merely into the aggregation, for purposes of collection, of the set of operations subject to that autonomous taxation, the rate of which is applied to each expense, with no influence of the volume of expenses incurred on the determination of the rate".

As regards legal doctrine, we find that, in essence, the concept and nature of autonomous taxation does not differ substantially from the understanding of case law produced by the Constitutional Court. In fact, as Rui Morais refers, "it is a question of a taxation that focuses on certain expenses of taxpayers, which are considered to be tax facts. It is difficult to discern the nature of this form of taxation and, even more so, the reason why it appears provided for in the codes of taxes on income"[1].

Casalta Nabais also considers that it is "a taxation on expense and not on income" (in "Tax Law", 6th Ed., p. 614) and, in the same sense also Ana Paula Dourado pronounces herself (in "Tax Law, Lessons", 2015, p. 237).

In summary, some legal doctrine and the case law of national superior courts and the Constitutional Court consider that autonomous taxation constitutes autonomous tax facts, which focus on the expense and therefore, despite being formally included in the Corporate Income Tax Code, concern a form of taxation distinct from income tax.

Additionally, it should be noted that it is also accepted by the generality of legal doctrine and case law that autonomous taxation aims to prevent abusive remuneration practices for workers, managers and shareholders/stockholders of the company. As Saldanha Sanches refers, "in this type of taxation, the legislator seeks to respond to the admittedly difficult question of the fiscal treatment of expenses that are found in the zone of intersection of the personal sphere and the business sphere, so as to avoid in-kind remuneration more attractive for exclusively fiscal reasons or the hidden distribution of profits. The rule presents a characteristic similar to what we will find in the legal sanction against undocumented costs, with a rate increase when the situation of the taxpayer does not correspond to a situation of normal fiscal conduct."[2] In these terms, "it is a taxation that is explained by the necessity to prevent and avoid that, through these expenses, companies proceed to the camouflaged distribution of profits, especially dividends that would thus be subject to IRC as profits of the company, as well as to combat the fraud and tax evasion that such expenses cause (…)"[3].

It is accepted that autonomous taxation is rooted, as was touched on, in the necessity to avoid abuses as regards the statement of certain charges or expenses and which may easily be subject to diversion for private consumption or which, in some way, are susceptible to formally constituting an expense of a legal entity, but which, substantially, represent or may constitute abuses in order to minimize the actual tax burden. Given the difficulty of effecting a rigorous separation of these two realities, it was successively "grafted" onto the taxation regime of real and effective profit of IRC, as a general standard, an autonomous taxation regime of certain expenses. Thus it can be said that autonomous taxation emerges integrated in the IRC regime, is determined and due within the scope of the legal relationship of taxation on the income of legal entities and it is in this framework that its determination is made.

However, it is not, outright, Corporate Income Tax. In fact, for them to be thus considered they would, from the outset, have to tax income and this, as we have seen, is not what happens, at any moment. In truth, although there is evident instrumentality between IRC and the model of income taxation in Portugal and autonomous taxation (a fact moreover well evidenced in the case law of the Superior Courts and, in particular, of the Constitutional Court), the prevailing understanding is that autonomous taxation taxes expenses.

In this context, it is worth recalling that neither fiscal systems nor concrete models of taxation correspond to pure models, free from elements of extranity to the founding system itself, of values, or to the general regime of any tax abstractly considered. In fact, all taxes possess characteristics or solutions that, when viewed in isolation, may objectively represent a de-characterization of the model as in the purity of concepts it was conceived, but that, when articulated with the model, it is verified that they contribute to its effectiveness, and confer or reinforce its coherence.

In the case under analysis, although the choice of fundamental law and, as a consequence, ordinary law, has been clearly in the direction of taxing the income of legal entities and, in the possible forms of determining this, the choice was made for real and effective income taxation as a manifestation of the highest standard of tax justice, the truth is that the system has always known more or less relevant deviations, either because certain expenses are not considered as such by tax law (although objectively they may be attributable to a commercial activity), or because tax law, recognizing this essentiality, fears the occurrence of abuses (as is the case with autonomous taxation, generically speaking).

On the other hand, it is important to bear in mind (because this is relevant for purposes of the decision to be taken) that autonomous taxation constitutes anti-abuse rules directed at rationalizing specific behaviors of taxpayers (with regard to the tax obligation) by which they, traditionally, managed to achieve a tax burden lower than that evidenced by their effectively revealed tax capacity but which, by virtue of these abusive behaviors, was capable of being mitigated or eliminated, with evident violation or postponement of the principle of justice, of fair distribution of the tax burden by those who reveal tax capacity. Consequently, it makes sense to admit that general deductions are made from the tax collection, which are permitted by law to give effective meaning to the principle of real and effective income taxation. However, with regard to the collection due by autonomous taxation, that general deduction no longer makes sense because, not taxing profits, but rather expenses, the question of justice in the distribution of the general tax burden does not arise with regard to them, and therefore it would be illogical to allow the deduction of charges when such deduction, in practice, would destroy the anti-abuse meaning that pervades them; the disincentive of deviant behaviors that its institution represses or resolves.

As aptly referred by Saldanha Sanches (cited in Arbitral Decision No. 187/2013-T, pp. 28), autonomous taxation constitutes a form of preventing abusive actions: "(…) that the normal functioning of the taxation system was incapable of preventing, with others, including forms more burdensome for the taxpayer, being possible. This anti-abuse character of autonomous taxation will be not only coherent with its "anti-systemic" nature (as happens with all rules of this type), but also with a presumptive nature, pointed out both by Prof. Saldanha Sanches and by the case law that cites it. They will then materially underlie a presumption of partial businesslike character of the expenses on which they are levied, as a function of the above-mentioned circumstance of such expenses being situated on a gray line that separates what is business expense, productive, from what is private expense, consumption, it being well known that, in many cases, the expense will even in reality have a dual nature (partly business, partly private)".

Within this spirit, it is clear that autonomous taxation is collected within the context of the IRC assessment process in accordance with its own root and dogmatics which lead to the total tax collection not being a unitary reality but a composite one.

Thus, it is possible to discern in it the proper tax collection, resulting from the general mechanics of IRC determination, which is due on the basis of a constitutional foundation resting on the general obligation of each one (in which legal entities are included) to contribute to public expenses according to their means (Article 103(1) of the Constitutional Republic of Portugal). To this general collection, rooted in this foundational order, is added the specific collection, due by autonomous taxation, which has, as was made clear, its own root, sense and basis, namely that of disincentivizing the adoption of the behaviors taxed by them, listed in Article 88 of the code, which constitutes an anti-abuse rule, which allows us to invoke here all the dogmatics upon which it is based.

In this case, as it is a matter of fulfilling purposes that go beyond the purely revenue-raising ends of the tax, to be situated in the field of behaviors that the law considers abusive and/or undesired, it seems clear that it does not make sense that deductions be effected to it, under penalty of emptying, in practice, of any sense, the anti-abusive regime created."

Here we are, we are in a position to analyze the Claimant's request, as to the legality of the deduction of SIFIDE from the part of the IRC collection relating to autonomous taxation.

SIFIDE, created by Law No. 40/2005 (as amended by Law No. 10/2009 and Decree-Law No. 82/2013) is a system of Tax Incentives for Investment in Research and Development. Currently, this type of incentive system is provided for in the Tax Investment Code (SIFIDE II). The deduction from collection, in accordance with Article 4(2) of Law No. 40/2005, is intended to allow profits that may be obtained as a result of the investments subject to tax incentives, determined in accordance with Article 17 of the CIRC, contributing positively to the taxable base, to be taxed at a lower effective tax rate, as a result of the deduction from collection of SIFIDE tax benefits. Article 90(1)(a) of the CIRC provides that "When the assessment must be made by the taxpayer in the declarations referred to in Articles 120 and 122, it is based on the taxable base that appears in them".

In accordance with Article 3 of the CIRC:

"1 - IRC is levied on:

a) The profit of trading companies

(...)

2 - For purposes of the above, profit consists of the difference between the values of net assets at the end and beginning of the tax period, with the corrections established in this Code".

In accordance with Article 11 of the General Tax Law (LGT):

"1 - In determining the meaning of tax rules and in qualifying the facts to which they apply, the general rules and principles of interpretation and application of laws are observed.

(...)

3 - Persisting doubt about the meaning of the rules of incidence to be applied, regard should be had to the economic substance of the tax facts.

4 - Gaps resulting from tax rules covered by the reserve of law of the Assembly of the Republic are not susceptible to analogical interpretation."

In accordance with Article 9 of the Civil Code:

"1 - Interpretation should not be limited to the letter of the law, but should reconstruct from the texts the legislative thought, taking especially into account the unity of the legal system, the circumstances in which the law was drawn up and the specific conditions of the time in which it is applied.

2 - However, the interpreter cannot consider the legislative thought that does not have in the letter of the law a minimum of verbal correspondence, even if imperfectly expressed.

3 - In fixing the meaning and scope of the law, the interpreter shall presume that the legislator established the most appropriate solutions and knew how to express his thought in adequate terms."

We concluded above, following the case law mentioned there and other not explicitly alluded to, that the collection of autonomous taxation has a different root from that of Corporate Income Tax, which cannot, under penalty of subversion of the order of values that presided over the creation of taxation by means of autonomous taxation, allow the deduction of tax benefits from the collection generated by them, under penalty of de-characterization of the principles that it is specifically sought to pursue. In fact, having the autonomous taxation regime a function of disincentivizing abusive behaviors, there is no logical reason why that disincentive could then dissipate, which would occur if it were possible to deduct from the collection of autonomous taxation tax incentives – as the Claimant requests – since that possibility could result, in the limit, in the elimination of the collection resulting from autonomous taxation, allowing the deduction of certain tax benefit to a tax that has a specifically anti-abuse function, that is, of mitigation of conduct that is fiscally and socially undesired. Take as an example the case of autonomous taxation on charges with light passenger vehicles, intended to tax charges that may translate into in-kind benefits for the users of the vehicles, but whose taxation in Personal Income Tax, with income in kind, depends on an agreement concluded between the employee (user of the vehicle) and the company. In the event that an agreement is concluded, charges with light passenger vehicles are not taxed under autonomous taxation in the Corporate Income Tax sphere (cf. Article 88 of the CIRC), with taxation instead occurring in Personal Income Tax in the sphere of the respective beneficiary (user of the vehicle). Thus, autonomous taxation of charges with light passenger vehicles only occurs when, with respect to these vehicles, Personal Income Tax taxation of the respective beneficiary (user of the vehicle) did not occur. Now, if one were to allow the deduction of a tax benefit from the collection generated by autonomous taxation on light vehicle expenses, one would be, within the framework of the same tax system, relieving the taxpayer of the burden of paying a tax that is precisely due by the adoption of abusive, undesired and disincentivized conducts (statement as expenses of the charges provided for in Article 88 of the Corporate Income Tax Code).

It is also important to note, as stated in the dissenting opinion attached to Arbitral Decision No. 5/2016-T, although referring to the SIFIDE and RFAI regimes, that there is also no "any conceptual error nor any contradiction between what has just been stated and the fact that the SIFIDE and RFAI regimes establish that the same are implemented in deductions from the IRC collection. By making this express reference, the legislator is referring to the proper IRC collection for the determination of which autonomous taxation does not contribute, precisely because they do not enter into the determination of either taxable profit or taxable base, and, as a consequence, do not contribute to the IRC collection, nor even to assessed IRC or IRC to be paid/recovered (cf. CASALTA NABAIS, Idem, p. 541). The result of autonomous taxation, it is repeated, determined in an autonomous manner, does not contribute to the IRC collection; rather, it must be added to the assessed IRC for purposes of determining the amount to be paid or recovered, which constitutes a result quite different."

Furthermore, the arbitral understanding now upheld, in accordance with the orientation followed, for example, in Arbitral Awards Nos. 722/2015-T and 443/2016-T, is in harmony with the new Article 88(21) of the CIRC added by Law No. 7-A/2016 of 30 March, by establishing that to the amount determined for autonomous taxation no "any deductions are made". Also in this case, the legislator merely adopted, clarifying it, a solution that the courts, with recourse to the applicable rules and by application of the criteria of legal hermeneutics were in a position to extract from the applicable regime, which is all that this collective has done, in the case at hand.

Furthermore, in support of the non-deductibility of SIFIDE from the collection of autonomous taxation is the argument that, with regard to autonomous taxation, as results from the addition of Articles 11 and 12 of the former Article 81 of the CIRC (current Article 88) by Decree-Law No. 192/2005 of 7 November, although both the IRC collection determined in accordance with Article 90(1)(a) of the CIRC (on the basis of the taxable base determined in accordance with Article 15 of the CIRC) and the collections of the various facts subject to autonomous taxation (determined in accordance with the various provisions contained in Article 88 of the CIRC) appear in the IRC assessment, generally "made by the taxpayer in the declarations referred to in Articles 120 and 122", these collections are independent, with deductions being admissible to one of the collections, but deductions not being admissible to the set of collections, whether to the set of autonomous taxation collections or to the set of these with the collection determined in accordance with Article 90(1)(a) of the CIRC (on the basis of the taxable base determined in accordance with Article 15 of the CIRC), and therefore, to Article 88(21), added by Law No. 7-A/2016 of 30 March, was given the character of an interpretative rule, with no reason to contest this character since it does not represent innovative legislation.

The version of Articles 11 and 12 of the former Article 81 of the CIRC (current Article 88) given by Decree-Law No. 192/2005 of 7 November, provided as follows:

"11 - Profits distributed by entities subject to IRC to taxpayers who benefit from total or partial exemption are taxed autonomously, at the rate of 20%, encompassing, in this case, capital income, when the share holdings to which the profits relate have not remained in the ownership of the same taxpayer, uninterruptedly, for the year prior to the date of their placing at disposal and will not be maintained for the time necessary to complete that period.

12 - From the amount of the tax determined, in accordance with the above, the tax that may have been withheld at source is deducted, and in that case the withheld tax cannot be deducted under Article 83(2)".

Thus it is expressly stated that it is possible for a deduction to exist to the collection of a certain autonomous taxation while at the same time such deduction cannot simultaneously be made to the collection determined in accordance with Article 90(1)(a) of the CIRC (on the basis of the taxable base determined in accordance with Article 15 of the CIRC), as well as its symmetric.

In the case, as SIFIDE deductions are tax benefits, and bearing in mind Article 2(1) of the Status of Tax Benefits which establishes that "Tax benefits are considered to be measures of an exceptional character established for the protection of relevant extrafiscal public interests that are superior to those of the taxation itself that they prevent", it is necessary to ascertain, in the particular case, which "taxation they prevent", and, considering the preamble of Decree-Law No. 292/97 of 22 October, which establishes a regime of tax incentives for research and development that preceded SIFIDE, in the preamble of this legal instrument it is stated "to introduce a tax credit for investment in R&D, which may benefit taxpayers subject to Corporate Income Tax who carry on as their principal activity an activity of a commercial, industrial or agricultural nature, and which will translate into a deduction from the collection of that tax", whereby the fact that this tax credit is intended for entities with profit-making purposes, as well as being a predecessor to Articles 4(3) to 4(6) of Decree-Law No. 192/90, added by Law No. 3-B/2000 of 4 April, which came to provide for the autonomous taxation of "representation expenses and charges related to light passenger vehicles", when previously only the autonomous taxation of "undisclosed or undocumented expenses" was provided for (Articles 4(1) and 4(2) of Decree-Law No. 192/90), it follows that the deductions of SIFIDE, in the sense that profits generated by Research and Development activities may be taxed at an effective tax rate lower than the general IRC rate, can only be made to the collection determined in accordance with Article 90(1)(a) of the CIRC (on the basis of the taxable base determined in accordance with Article 15 of the CIRC), with deductions of SIFIDE not being admissible from collections of autonomous taxation.

In light of what has been stated above, it is concluded, in this way, as to the illegality of the deductibility of SIFIDE from the collection of autonomous taxation, without need to resort to the interpretative character given by Article 135 of Law No. 7-A/2016 of 30 March (State Budget for 2016), to Article 88(21) of the Corporate Income Tax Code, in accordance with which "the assessment of autonomous taxation in IRC is carried out in accordance with the provisions of Article 89 and is based on the values and rates that result from the provisions of the above numbers, with no deductions being made to the total amount determined."

In these terms, this Arbitral Tribunal considers that the Claimant is not correct, for the reasons invoked above, with regard to the possibility of deduction of the tax benefit in question (relating to SIFIDE) from the collection of autonomous taxation relating to Corporate Income Tax for the years in question, terms in which the Claimant's request is unfounded, and the dismissal of the corresponding administrative complaints is to be maintained.

DECISION

Terms in which this Arbitral Tribunal decides:

a) To judge totally unfounded the arbitral request for declaration of illegality of the self-assessments of Corporate Income Tax relating to 2013 and 2014, subject to challenge, with the Respondent absolved of this request;

b) To maintain the decision of express dismissal of the administrative complaints;

c) To absolve the Respondent of the request for payment of compensatory interest.

V. Value of the Case

The value of the case is set at € 128,837.85 (one hundred and twenty-eight thousand, eight hundred and thirty-seven euros and eighty-five cents) in accordance with the provisions of Article 3(2) of the Regulation of Costs in Arbitration Proceedings in Tax Matters (RCPAT), Article 97-A(1)(a) of the Tax Procedure Code and Article 306 of the Civil Procedure Code.

VI. Costs

The amount of costs is set at € 3,060.00 (three thousand and sixty euros), under the provisions of Article 22(4) of RJAT and Table I attached to RCPAT, charged to the Claimant, in accordance with the provisions of Article 12(2) of RJAT and Article 4(4) of RCPAT.

Let it be notified.

Lisbon, 19 January 2018.

The Collective Arbitral Tribunal

José Poças Falcão

(Arbitrator President)

José Eduardo Gonçalves

(Arbitrator Member)

Raquel Franco, in dissent as per attached dissenting opinion.

(Arbitrator Member)

Document produced by computer, in accordance with Article 131(5) of the Civil Procedure Code, applicable by reference in Article 29(1)(e) of RJAT.

Dissenting Opinion

I disagree with the prevailing opinion for the following reasons:

To answer the questions posed to this Arbitral Tribunal, I consider it, from the outset, fundamental to know whether, regardless of the nature of the tax to which autonomous taxation refers, the respective amount is "determined in accordance with Article 90 of the CIRC". If it is, I consider that it should be concluded that, to determine the limit of deductions admissible under this tax, regard should be had to the collection arising from autonomous taxation.

Article 90 of the CIRC refers to the forms of assessment of Corporate Income Tax, by the taxpayer or by the Tax Authority, applying to the determination of the tax due in all situations provided for in the Code. Thus, it also applies to the assessment of the amount of autonomous taxation, since there is no other provision that provides for different terms for its assessment. Its autonomy is moreover restricted to the applicable rates and the respective taxable base – which does not justify, in our view, that a distinction should be made between the collection arising from autonomous taxation and the rest of the Corporate Income Tax collection.

The argument that the anti-abuse nature of autonomous taxation justifies the non-deductibility from the respective collection does not, in my understanding, hold, for the simple, but decisive fact that such an argument finds no support in any rule of the Portuguese tax legal system.

It seems to us, from the analysis of the Corporate Income Tax Code, that, regardless of the understanding one has as to the nature of autonomous taxation in the Corporate Income Tax sphere – a discussion that does not have to be raised to answer the concrete question that here arises – there is no doubt that the sum collected by way of that autonomous taxation is collected as Corporate Income Tax. Resorting to what is said, in this regard, in the Award issued in case 775/2015-T, "(…) autonomous taxation is inseparable from the subjects of the income tax in question, and, more specifically, from the economic activity carried out by them, which is even more evident when one thinks of the link that, although it has varied in successive legislative amendments, autonomous taxation had and still has some connection with deductibility – and the actual deduction – of taxed expenses. This circumstance, it is believed, is illuminating of the interweaving that exists between them and Corporate Income Tax (in the case), and is justificatory not only of their inclusion in the CIRC, but equally of their integration, as of right, as part of the legal regime of Corporate Income Tax."

Considering – as is considered – that autonomous taxation integrates the regime of Corporate Income Tax, it is then important to know what is deductible from the respective collection. Now, as to this aspect, again recourse is had to the words used in the Arbitral Award issued in case 775-2015-T:

"It being understood that autonomous taxation is (part of) Corporate Income Tax, it is understood that the assessment of Corporate Income Tax is unique, including the part that comes from autonomous taxation.

There is a unique Corporate Income Tax assessment that comprises two parts: the assessment of autonomous taxation and that of the remaining Corporate Income Tax, each with taxable base determined in its own way and with its own tax rates, but both assessed in accordance with Article 90 of the CIRC. Given a unique assessment, it is concluded that the part of the collection that comes from autonomous taxation is an integral part of the Corporate Income Tax collection.

On the contrary, in no other article of the CIRC is a reference found to the assessment of autonomous taxation as a distinct process. To accept that the collection of autonomous taxation is not included in Article 90 of the CIRC, would be to accept that there is a gap in the law and, this law being a tax law, does not allow integration. And thus, the Tax Authority may perhaps have erred in not allowing the deduction of the amounts relating to the PEC that the Claimant had the right to deduct from the collection.

To accept that the assessment of autonomous taxation is outside Article 90(1) of the CIRC and, therefore, to exclude from its collection the deductibility of SIFIDE provided for in Article 90(2)(c), would oblige the taxpayer to pay a tax the assessment of which is not made in accordance with the law, contrary to Article 103(3) of the Constitution of the Portuguese Republic and the principle of tax legality that the General Tax Law, in its Article 8(2)(a), establishes.

From which follows the identical conclusion: that, there being no rule on the assessment of autonomous taxation distinct from that which regulates the general assessment of Corporate Income Tax, it must be accepted that the collection of Corporate Income Tax encompasses it, being included in Article 90(1) of the CIRC and therefore deductible, notably, the tax incentives at issue in the present case. The absence of limits to the deductibility of these realities from the collection resulting from autonomous taxation points in the same direction – which the legislator could have done, as it did when stating various exceptions and limits to the rules of deductibility of Article 90(2) of the CIRC.

As to the amendment introduced by the Law that approved the State Budget for 2016 (Law 7-A/2016 of 30 March), specifically with regard to the introduction of Article 88(21) of the CIRC: several numbers were added to Article 88 of the CIRC, which refers to autonomous taxation, by this Law, including number 21, according to which "The assessment of autonomous taxation in Corporate Income Tax is carried out in accordance with the provisions of Article 89 and is based on the values and rates that result from the provisions of the above numbers, with no deductions being made to the total amount determined." In Article 135, the legislator provides that "the wording given by this law to Article 51(6), Article 83(15), Article 84(1), Articles 88(20) and 88(21) and Article 117(8) of the Corporate Income Tax Code has an interpretative nature."

Article 90 was not amended and continues to refer to the collection of Corporate Income Tax and, by everything stated above, the collection that results from the application of the rules of Article 88 is Corporate Income Tax collection. What Article 88(21) now prohibits is that, to this collection, deductions be made until such moment as, once the total Corporate Income Tax collection is determined, the deductions of Article 90 are made. It should be noted that, if the legislator wished, indeed, to prohibit the deductions provided for in Article 90 from being made to the part of the Corporate Income Tax collection that results from autonomous taxation, it could have done so directly instead of amending Article 88 – but it did not.

In the present case, being at issue the tax periods corresponding to the years 2013 and 2014, it is important to analyze the effect of the amendment introduced by the State Budget Law for 2016 and, above all, the interpretative character attributed to it.

In accordance with Article 13(1) of the Civil Code (CC), "an interpretative law is integrated into the law interpreted, saving, however, the effects already produced by the performance of the obligation, by a final judgment, by settlement, albeit not approved, or by acts of an analogous nature."

The most relevant effect that the legislator draws from the characterization of a rule as interpretative is, therefore, that of its application in time, in particular, that of its non-application, in such cases, of the principle of non-retroactivity of law. Being that an effect, it is necessary, however, that one first proceeds to the identification of the characteristics that make a given rule an interpretative rule and that, from that perspective, differentiate them from innovative rules.

For a new law – as is, in the case at hand, Article 88(21) of the CIRC – to be truly interpretative, two requirements are necessary: (i) on the one hand, that the solution of the previous law be controversial or at least uncertain; (ii) on the other hand, that the solution defined by the new law falls within the framework of the controversy and is such that the judge or the interpreter could reach it without exceeding the limits normally imposed on the interpretation and application of law. Thus, if the judge or the interpreter, in the face of old texts, could not feel authorized to adopt the solution that the new law comes to establish, then the latter is decidedly innovative.

An interpretative rule, therefore, is one that does not alter any content or element of the rule interpreted, merely translates its meaning – being, therefore, obliged to respect the rights acquired under the validity of the rule interpreted, particularly in matters in which the prohibition of retroactivity is especially provided for, as is the case with the matter of the principle of non-retroactivity of tax law, provided for in Article 103(3) of the Constitution.

Returning to the concrete case, it has already been stated that it is understood that the text of the law before this amendment did not permit the conclusion that the deduction of SIFIDE from the part of the Corporate Income Tax collection resulting from autonomous taxation was prohibited. On the other hand, this solution does not yet clearly result from Article 88(21) of the CIRC. Thus, as to the scope of the deductions provided for in Article 90, there continues to be no reason to consider the collection of autonomous taxation excluded.

In sum, as to the effect of the amendment made by the State Budget Law for 2016, I consider that Article 88(21) of the CIRC does not have an interpretative character with respect to the question under discussion, not applying to facts occurring before its entry into force, namely, to the tax period and facts relevant in the present case.

For these reasons, I would judge the request for declaration of illegality of the self-assessments at issue in the present case to be well-founded, to the extent relating to the non-deduction of the amounts of SIFIDE from the collection of autonomous taxation.

Lisbon, 19 January 2018

Raquel Franco

[1] Cf. Rui Duarte Morais, in "Notes on Corporate Income Tax", Almedina, 2009, pp. 202-203.

[2] Cf. "Manual of Tax Law", 3rd Ed., Coimbra Publisher, 2007, p. 406.

[3] Cf. Casalta Nabais, Idem, p. 614.