Summary
Full Decision
ARBITRAL DECISION
I - REPORT
On 07/04/2017, A…, S.A., with the tax identification number … and registered office in Lisbon, filed a request for the constitution of an arbitral tribunal with a view to declaring the illegality and consequent annulment of the tax assessment act for the levy of Corporate Income Tax (IRC) numbered 2016…, relating to the tax year 2012, requesting the reimbursement of the tax which, as a consequence of such act, it paid, in the amount of € 14,453.17, plus compensatory interest.
It designated José Almeida Fernandes as arbitrator.
The request for constitution of the arbitral tribunal was accepted on 10/4/2017.
The Tax and Customs Authority (AT) designated José Rodrigo de Castro as arbitrator.
The arbitrators chose José Baeta de Queiroz to preside over the collective arbitral tribunal.
The arbitrators accepted the appointment, and the arbitral tribunal was constituted on 14/07/2017.
Notified to respond by 01/10/2017, the AT did so on 29/09/2017, after the relevant administrative file was attached.
On 01/10/2017 the meeting referred to in article 18 of the Statutory Framework for Tax Arbitration (RJAT) was dispensed with as it was deemed to serve no purpose, and the parties were invited to submit written arguments, which the Claimant did on 13/10/2017 and the AT on 23/10/2017.
On 15/11/2017 the tribunal announced its decision for 13/12/2017.
II – PROCEDURAL REVIEW
The arbitral tribunal is materially competent and is regularly constituted, pursuant to articles 2, no. 1, subparagraph a), 5 and 6, no. 1, of the RJAT.
The parties have legal personality and capacity, are legitimate and are legally represented, pursuant to articles 4 and 10 of the RJAT and article 1 of Order no. 112-A/2011, of 22/3.
The proceedings are not affected by nullities, exceptions or preliminary issues that should be examined and which would prevent the examination and decision of the case.
III – THE FACTS
III – 1 – Established Facts
a) A…, SA, was established on 21/11/1994 under the name B…, SA.
b) By means of a merger by incorporation, on 23/06/2015, of the companies C…, Ltd. (tax identification number …) and D…, SGPS, SA, (tax identification number …) into the company B…, SA, the latter became known as A…, SA.
c) The share capital of A… amounts to € 6,400,000.00, corresponding to 6,400,000 shares of € 1.00.
d) A… is part of the E… group of companies, with its share capital held by the company F…, SA, which holds 100% of the Claimant and the latter, in turn, holds a partial stake in other companies, including, as relevant to the present case, G…, SA, holding 20%.
e) The activity of the Claimant consists of waste management and, in particular, the collection, transport and treatment of solid and industrial waste, including the construction and operation of sanitary landfills, and the design, construction and maintenance of green spaces.
f) According to the classification of economic activities, those actually carried out are:
- Main CAE 38212 – Treatment and disposal of other non-hazardous waste;
- Secondary CAE 1 38112 – Collection of other non-hazardous waste;
- Secondary CAE 2 38111 – Collection of inert waste;
- Secondary CAE 3 38211 – Treatment and disposal of inert waste.
g) The Claimant has been subject to the General IRC Regime since 01/01/1994, maintaining organized accounting, computerized as required by law, and for VAT purposes, has been subject to the normal regime with monthly periodicity since 01/01/2000, by choice.
h) G… SA, was established on 31/7/1996 by the Association of Municipalities of the … Region, which includes the municipalities of …, …, … and …, and also by the H… Consortium, S.A., with the purpose of designing, constructing and managing solid and liquid waste treatment plants and related activities, and is held 20% by the current A….
i) A… (formerly B… until 2015) provided various services of its specialty to its related company G… for many years, which by the end of 2012 reached the value of € 12,754,032.95, at that time entirely owed to it.
j) The debt to the then B… (now A…) was already € 6,993,765.98 as of 31/12/2006 and 6/9/2007.
k) Given the weak economic-financial situation of G…, an AGREEMENT FOR RECOGNITION OF DEBT AND PAYMENT was celebrated between B…, G… and I… on 6/9/2007, pursuant to which the Claimant (then B…) waived the accrued and future interest to which it would be entitled, on the condition that the debtor G… fully and strictly comply with the Plan of 25 annual installments also agreed, in the amount of € 279,750.64, to begin on 31/03/2008 and to end on 31/03/2032, under penalty of demand for accrued and future interest.
l) A…, SA, contracted loans, lease contracts, factoring, etc., from which resulted financial charges, in order to be able to develop its activity and manage its treasury, in the total amount of € 875,515.17 in 2012.
m) From the internal analysis carried out by the Tax Inspection Services of the Directorate of Finance of Lisbon, a tax inspection action resulted which concluded, in summary, that:
- The waiver of accrued and future interest granted to G… consisted of a "disguised loan", since by offering patrimonial advantages to third parties, the taxpayer incurred financial charges, namely interest, resulting from the loans it had contracted, without obtaining any financial benefit inherent to the amounts it has to receive from related companies";
- "it is thus inferred that if the taxpayer had not lent the amount in question, it would not have had need to incur the financial charges, so it is not proven that such financial charges were incurred in the interest of the company"
- The financial charges resulting from the loans it had to contract due to this said "waiver" are not related to its income and, therefore, cannot be considered as fiscally accepted costs in light of article 23 of the IRC Code, as they do not meet the 3 essential requirements of that provision: (i) proof (justification), through documentary evidence; (ii) indispensability, when connected with the obtaining of profit; and (iii) their connection to income subject to tax.
n) It appears from the inspection report that "either through the non-receipt of invoiced amounts, or through the non-charging of interest inherent to amounts owed, [the Claimant] is in reality financing the said company [G…], while at the same time incurring financial charges from loans contracted, it is thus inferred that if the taxpayer had not lent the amount in question, it would not have had need to incur the financial charges, so it is not proven that such financial charges were incurred in the interest of the company."
p) In light of these conclusions, the AT disallowed the vast majority of the financial charges incurred by the Claimant in 2012, through the application of a ratio of "loans granted/loans obtained" month by month which was applied to the monthly balance of charges incurred by the Claimant [see Annex VII of the Inspection Report].
q) The AT considered the totality of amounts owed monthly by G… in 2012 for the provision of services rendered by the Claimant as corresponding to a "loan granted to a related company" which corresponded to the numerator of the fraction and the loans obtained by the Claimant as the denominator.
r) In practice, the application of that ratio used by the AT determined that the totality of charges incurred by the Claimant between the months of January and November were not accepted for purposes of fiscal deduction by the Claimant and as regards the financial charges incurred in December the fiscal deduction of 63.22% thereof was corrected [see Annex VII of the Inspection Report].
s) The application of the said monthly ratio to the balance of monthly charges determined by the AT resulted in a correction to the taxable matter for the tax period 2012 in the amount of € 846,965.16 (from a total value of financial charges of € 875,515.17 incurred in 2012) [see Annex VII of the Inspection Report];
t) The correction determined by the AT gave rise to the additional IRC tax assessment act challenged here in which the amount to be paid was determined as € 14,453.17 (which includes a correction of the IRC assessment of € 12,704.45 and compensatory interest in the amount of € 1,748.69).
u) The Claimant proceeded to pay the additional IRC assessment and compensatory interest on 06/01/2017 [see Doc. no. 8 attached to the Case records on behalf of the Claimant].
III – 2 – Justification of the Judgment on the Established Facts
The facts taken as established result from the tribunal's conviction, based on the critical examination of the documents attached to the case and the inspection report, all of which is hereby incorporated herein.
III – 3 – Unestablished Facts
With relevance to the decision on the merits, it remained unproven what amount of the financial charges incurred by the Claimant in 2012 were directly related to the financing which the Claimant contracted due to G… not having promptly paid the debts resulting from the provision of services rendered by the Claimant in the course of its activity.
IV – ON THE LAW
With regard to the applicable law that may substantiate the additional IRC assessment of 2012, in the total amount of € 14,453.17 of IRC and compensatory interest, the following arguments of the parties are highlighted.
The AT bases the correction determined in the Tax Inspection proceeding and the non-acceptance for fiscal purposes of the vast majority of financial charges incurred in 2012 solely on the failure to meet the requirements provided in article 23 of the IRC Code because, in its view, the Claimant contracted loans and incurred their respective charges, but simultaneously grants a "disguised loan" (i.e., the amounts owed monthly by G… in 2012 for the provision of services rendered by the Claimant) which is not remunerated by virtue of a "waiver" of accrued and future interest pursuant to an agreement celebrated with G… on 06/09/2007.
Hence, in its conclusion, the AT infers in the inspection proceeding that if the Claimant had not "lent" the amount in question, it would not have had need to incur the financial charges, so it is not proven that such financial charges were incurred in the interest of the company" and, therefore, "the financial charges in question do not constitute costs for fiscal purposes".
In the Response and Submissions of the Respondent no new arguments or grounds are brought, nor different case law.
From the point of view of the Claimant, the intention to qualify the Agreement for Recognition of Debt and Payment (in which a waiver of future interest is granted) as a "loan" could only be justified in light of the general anti-abuse clause and not the application of article 23 of the IRC Code. Now, according to the Claimant, such types of agreements constitute a common situation of commercial "practice", whenever debtors find themselves in a weak economic-financial situation – as was the case with G….
Equally, for the Claimant, "no concrete facts or even minimally credible indications are presented of the relationship between the upstream financing and the (fictitious) "disguised loan" to G…" and that the "AT's attempt to establish a direct nexus between the amount of financial charges incurred (€846,965.16) and the balance of the G… customer account at the end of 2012 (€12,754,032.95) is not apt to demonstrate the dispensability of the expenses".
Now examining this, this Tribunal, in light of the facts and applicable law, must first note that it was not established as proven what concrete amount of the totality of financial charges incurred by the Claimant in 2012 were related to financing which the Claimant was forced to contract due to G… not having promptly paid the debts resulting from the provision of services rendered by the Claimant in the course of its activity or, to be more specific, which of these financial charges would result from the fact that the Claimant "did not charge any interest for non-payment" by G….
The Tribunal admits (and understands) that the AT intends to ensure that related entities cannot freely decide which specific companies should or should not bear financial charges that are deductible for fiscal purposes (and, besides, the fiscal legal system provides, in addition to article 23 of the IRC Code, express provisions that allow corrections by the AT expressly in these cases, such as provided in article 63 of the IRC Code or even, if necessary, with recourse to article 38, no. 2 of the LGT, which are provisions that were not invoked by the AT in the tax inspection proceeding to substantiate its correction act).
However, the AT did not even prove which financial charges incurred by the Claimant concretely resulted from the non-payment of services rendered by it to G… or from the non-charging of interest due to that non-payment.
And, therefore, one cannot conclude, as the AT does, that "if the taxpayer had not lent the amount in question, it would not have had need to incur the financial charges" and then immediately conclude that then the vast majority of financial charges incurred by the Claimant in 2012 cannot be considered as fiscally accepted costs in light of article 23 of the IRC Code.
Moreover, one cannot consider such proof to have been minimally made through recourse to a criterion of determination by flat rate of financial charges supposedly attributable to G… due to the delay in the payment of its debts, through an empirical ratio determined ad hoc by the AT from which it turns out that practically the totality of financial charges incurred by the Claimant in 2012 would not be deductible for fiscal purposes.
Now, the case law, regarding the principle of indispensability of financial costs and, consequently, of fiscally relevant costs pursuant to article 23 of the IRC Code, states that: "The Tax Administration cannot assess the indispensability of costs in light of criteria concerning the opportunity and merit of the expense. A cost is indispensable when it relates to the company's activity, and costs unrelated to the company's activity shall only be those in which it is not possible to discern any causal nexus with the income or gains (or with the income, in the current expression of the Code – cf. Art. 23, no. 1 of the IRC Code), explained in terms of normality, necessity, congruence and economic rationality" [cf. Decision issued by the Administrative Court of Southern Court on 16/10/2014, Case 06754/13].
Moreover, it may be said that the Claimant, by not attributing the corresponding part of financial charges to G… due to the delay or protraction in the time of payment of its debts related to its activity, will have committed an act of management that will allow it to obtain it over 24 years and, thus, one can only conclude that the financial charges it incurred, at least those that could be said to be directly related to G…'s debt, show themselves to be still related to the obtaining of its income, which although already invoiced and considered as such, only come to be truly realized at the moment of their receipt.
In these terms and in light of the case law established by the superior courts, article 23, no. 1 of the IRC Code does not permit the AT to consider, by itself and immediately, on the one hand, that G…'s debt, without the requirement of interest, constituted a "disguised loan", given that this debt results in fact from the Claimant's activity of rendering services, and, on the other hand, the AT did not prove that the financial charges incurred in 2012 by the Claimant were related to this same debt of G….
Therefore, it has been demonstrated that everything took place within the scope of the company's activity and this, in light of the case law, is sufficient ground to consider the indispensability of the financial charges incurred and, therefore, for them to be accepted as costs under the provisions of article 23 of the IRC Code, which determines the illegality of the correction determined by the AT in the tax inspection proceeding and consequently of the additional assessment act challenged here.
V - COMPENSATORY INTEREST
The Claimant further requests the reimbursement of the amount paid in excess of the additional assessment which is the subject matter of this present arbitral action with compensatory interest from the date of its payment (06/01/2017) until the full reimbursement of the said amount.
In accordance with the provisions of subparagraph b) of art. 24 of the RJAT the arbitral decision on the merits of the claim which is not subject to appeal or challenge binds the tax administration from the end of the term provided for appeal or challenge, and this, in the exact terms of the merits of the arbitral decision in favor of the taxpayer and until the end of the term provided for the spontaneous execution of the sentences of the judicial tax courts, "reestablish the situation that would exist if the tax act which is the subject matter of the arbitral decision had not been carried out, adopting the acts and operations necessary for that purpose", which is in harmony with what is provided in art. 100 of the LGT [applicable by virtue of the provisions of subparagraph a) of no. 1 of art. 29 of the RJAT] which establishes that "the tax administration is obliged, in case of total or partial success of a gracious objection, judicial challenge or appeal in favor of the taxpayer, to the immediate and full reestablishment of the legality of the act or situation which is the subject matter of the dispute, including the payment of compensatory interest, if applicable, from the end of the term of execution of the decision".
Although art. 2, no. 1, subparagraphs a) and b), of the RJAT uses the expression "declaration of illegality" to define the competence of the arbitral tribunals that function in the CAAD, not making reference to condemnatory decisions, it should be understood that the powers attributed to tax courts in judicial challenge proceedings are comprehended in their competence, this being the interpretation that is in harmony with the sense of the legislative authorization on which the Government based itself to approve the RJAT, in which it proclaims, as the first guideline, that "the tax arbitral process must constitute an alternative procedural means to the judicial challenge process and to the action for the recognition of a right or legitimate interest in tax matters".
The judicial challenge process, despite being essentially an annulment process of tax acts, admits the condemnation of the Tax Administration to pay compensatory interest, as is inferred from art. 43, no. 1, of the LGT, in which it is established that "compensatory interest is owed when it is determined, in a gracious objection or judicial challenge, that there was error attributable to the services from which results payment of the tax debt in an amount greater than legally due" and from art. 61, no. 4 of the CPPT (in the version given by Law no. 55-A/2010, of 31 December, to which corresponds no. 2 in the original version), which states that "if the decision that recognized the right to compensatory interest is judicial, the payment period runs from the beginning of the period of its spontaneous execution".
Thus, no. 5 of art. 24 of the RJAT, when it says that "payment of interest is owed, regardless of its nature, in the terms provided for in the general tax law and in the Code of Tax Procedure and Process", should be understood as permitting the recognition of the right to compensatory interest in the arbitral process.
In cases of improper payment of tax, the taxpayer is entitled to be reimbursed, as follows from the provisions of articles 100 of the LGT and 24, no. 1, subparagraph b), of the RJAT.
The substantive regime of the right to compensatory interest is regulated in article 43 of the LGT, which establishes the following:
Article 43
Improper Payment of the Tax Obligation
1 – Compensatory interest is owed when it is determined, in a gracious objection or judicial challenge, that there was error attributable to the services from which results payment of the tax debt in an amount greater than legally due.
2 – Error attributable to the services is also considered to exist in cases in which, although the assessment is made based on the taxpayer's declaration, the latter followed, in its completion, the generic guidelines of the tax administration, duly published.
3 – Compensatory interest is also owed in the following circumstances:
a) When the legal term for official restitution of taxes is not met;
b) In case of annulment of the tax act by initiative of the tax administration, from the 30th day following the decision, without the credit note having been processed;
c) When the revision of the tax act by initiative of the taxpayer is made more than one year after his request, except if the delay is not attributable to the tax administration.
4 – The rate of compensatory interest is equal to the rate of compensatory interest.
5 – In the period between the date of the end of the term of spontaneous execution of judicial decision that has become final and the date of issue of the credit note, with respect to the tax which should have been reimbursed by judicial decision that has become final, default interest is owed at a rate equivalent to double the rate of default interest defined in general law for debts to the State and other public entities.
In the case at hand, there is improper payment of tax as regards the additional assessment in which the request for arbitral ruling succeeds.
On the other hand, it is unquestionable that the errors affecting this additional assessment are attributable to the Tax and Customs Authority which made the IRC assessment and compensatory interest by its own initiative.
Thus, the Claimant is entitled to compensatory interest calculated at the legal rate and paid in accordance with the provisions of articles 43, nos. 1, and 35, no. 10 of the LGT, of article 24, no. 1, of the RJAT, of article 61, nos. 3 and 4, of the CPPT, of article 559 of the Civil Code and Order no. 291/2003, of 8 April (or such other or others that may alter the legal rate), with respect to the additional assessment which is annulled, from the date on which the payment of the respective tax was made (06/01/2017).
VI – DECISION
Therefore, as a consequence, this Tribunal decides:
a) To uphold the arbitral challenge action;
b) To annul the additional IRC assessment and compensatory interest for the tax year 2012, in the total amount of € 14,453.17, numbered 2016…;
c) To order the reimbursement to the Claimant of the IRC and compensatory interest improperly paid; and
d) To condemn the Respondent to the payment of compensatory interest calculated on that amount, from the date of its respective payment until reimbursement, in light of the provisions of nos. 1, 2 and 4 of article 43 of the LGT.
VIII – VALUE OF THE CASE
In accordance with the provisions of articles 306, no. 2, of the CPC, 97-A, no. 1, subparagraph a), of the CPPT and 3, no. 2, of the Regulation of Costs in Tax Arbitration Proceedings, the value of the case is fixed at € 14,453.17.
IX – COSTS
In accordance with the provisions of articles 22, no. 4 of the RJAT and 5, no. 2 of the Regulation of Costs in Tax Arbitration Proceedings, there is no need to fix the amount of costs nor their apportionment.
Lisbon, 12 December 2017.
The Arbitrators,
(José Baeta de Queiroz)
(José Almeida Fernandes)
(José Rodrigo de Castro)
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