CAAD 251/2015-T: MODCOM Subsidies IRC Tax – Taxpayer Accounting Presumption of Truth

ARBITRAL DECISION

CAAD: Tax Arbitration

Case No. 251/2015-T

Subject: Subsidies under the MODCOM programme; presumption of truthfulness of the taxpayer's declaration and accounting; well-founded indications of non-correspondence with reality; proof of the truthfulness of these elements

I – Report

1. On 14.04.2015, the Claimant, A…, taxpayer number …, with registered office at Rua …, no. …, …, …, ..., ..., requested the CAAD to constitute an arbitral tribunal, pursuant to article 10º of Decree-Law No. 10/2011, of 20 January (Legal Regime for Arbitration in Tax Matters, hereinafter only referred to as RJAT), in which the Tax and Customs Authority is the Respondent, with a view to annulling the following tax acts:

• Tax Assessment Act for Corporate Income Tax (IRC) No. 2013 …, performed on 24 July 2013, by His Excellency the Director-General of the Tax and Customs Authority, with reference to the tax year 2010, from which results the amount to be paid of € 42,702.68.

• Tax Assessment Act for Compensatory Interest No. 2013 ….

• Order of Her Excellency the Head of Services, of the Department of Corporate Income Tax, dated 16 December 2014, which determined the dismissal of the hierarchical appeal filed against the gracious complaint submitted against the assessment acts.

The Claimant further petitions the restitution of the amounts which it considers to have been unduly paid, relating to the assessed tax, increased by default interest that may be due at the legal rate, calculated from the date of payment until the date of complete restitution of that amount.

1. The request for constitution of the arbitral tribunal was accepted by His Excellency the President of the CAAD and notified to the Tax and Customs Authority.

Pursuant to and for the purposes of paragraph 1, article 6º of the RJAT, by decision of the President of the Deontological Council, duly communicated to the parties within legally applicable deadlines, the signatory was appointed arbitrator, who communicated to the Deontological Council and to the Centre for Administrative Arbitration the acceptance of the appointment within the applicable deadline.

The Arbitral Tribunal was constituted on 26.06.2015

1. The grounds presented by the Claimant in support of its claim were, in summary, as follows:

a. The additional IRC assessment and the corresponding compensatory interest assessment contested do not result in sufficient necessary substantiation, of fact and law, and it cannot be considered that the conclusions of the inspection report form part of such substantiation as there was no explicit reference to that concrete document;

b. Not having complied with the formal requirement of substantiation of the assessment acts in question and the CLAIMANT not having been notified in accordance with the provisions of paragraph a), of paragraph 1, of article 60º of the General Tax Law, an essential legal formality was disregarded - lack of prior hearing;

c. The substantiation of the Conclusions Report on which, allegedly, the corrections rest that gave rise to the contested assessment acts is not congruent or clear, insofar as it is based on mere conclusive judgements, and even if this were not the case, it could never support the correction made to the 2010 tax year, objectified by taxation under article 53º of the Corporate Income Tax Code, of the amount financed under the Application No.s / Project Nos. …, …, … and …;

d. The tax administration further violated fundamental rules relating to the distribution of the burden of proof, never demonstrating, as was its responsibility, in a clear and unequivocal manner, the facts constituting its alleged right to assess additional tax;

e. Even if it could be considered that the tax administration made proof of the facts which it alleges – which in fact did not occur, as will be demonstrated – the same cannot, in any case, support the correction to the taxable profit of the CLAIMANT that motivated the tax acts now contested, as they are not related in any way with the subsidy received in the course of 2010, relating to the Applications indicated;

f. The assessment act in question is also, in the part relating to the Surcharge, silent as to the necessary substantiation, of fact and law, whereby it is vitiated by a defect of form;

g. As a result of the foregoing, the assessment act in which the correction effected was materialized cannot fail to be considered illegal and annulled accordingly;

h. With regard to the Order of Her Excellency the Head of Services, of the Department of Corporate Income Tax, dated 16 December 2014, which dismissed the aforementioned hierarchical appeal presented by the now CLAIMANT, the same was performed in violation of the applicable legal norms and principles and should be annulled accordingly since, without any justification, the tax administration issued the decision to dismiss the hierarchical appeal without hearing the witnesses indicated and without indicating the reason why it may have considered the requested means of proof unnecessary;

i. The legal prerequisites contained in articles 43º and 100º of the General Tax Law are met, to determine payment of compensatory interest in favour of the CLAIMANT;

j. Because the correction effected and the tax assessment act performed are illegal, the compensatory interest assessment cannot fail to be considered illegal, as is also, for the same reason, the order dismissing the gracious complaint that precedes it.

1. The ATA – Tax and Customs Authority, called upon to respond, contested the claim of the Claimant, defending itself by impugnation, in summary, with the following grounds:

a. Regarding the alleged insufficiency of substantiation of the tax assessment and compensatory interest now disputed, both as to facts and law, the Claimant's thesis lacks any legal support, since the substantiation of the assessment act now disputed is that which appears in the tax inspection report, whose conclusions were sanctioned by order of 21/03/2013 of the Head of Division of the Tax Inspection Services of the Finance Office of ..., by sub-delegation of the Finance Director, there appearing to be no need for explicit reference of the assessment act to the content of the final tax inspection report, a requirement that has no legal support and that is remedied when 30 days have elapsed from the notification of the assessment act and the taxpayer does not make use of the faculty provided for in No. 1 of article 37º of the CPPT.

b. Regarding the alleged disregard of essential formality due to failure to notify the SP to exercise its right to prior hearing, the Claimant has no reason, as clearly results from the above, with special relevance to the exemption contained in No. 3 of article 60º of the LGT, in articulation with paragraph a) of its No. 1, also in this part the Claimant's claim should be judged unfounded.

c. To the contrary of what is alleged, the assessment object of impugnation does not suffer from the defect of lack of substantiation, as it is considered that the intended purposes thereof have been achieved, namely the understanding of the content of the act by its recipients and the possibility to react against it.

d. Given that it is demonstrated that the TIS, in the inspection report, inequivocally proved which evidence and indications motivated the decision to make the corrections, the assessment impugned does not suffer from formal defects relating to substantiation, since its terms make known the reasons of fact and law that presided over the action of the Administration and the entire path it traveled to reach the definition of the Claimant's legal situation in the context of IRC.

e. In light of the facts established by the TIS it is concluded that the indications or prerequisites for the action of the TA were verified, namely because it was proven that certain events and invoices registered in the Claimant's accounting did not constitute any operations and therefore were fictional.

f. By mere calculation error, the Tax Inspection Services (TIS) applied the portion relating to the impugned surcharge at the rate of 1.5% to the collection and not to taxable profit as prescribed in No. 1 of article 14º of Law No. 2/2007.

g. It thus results from the law, in a clearly explicit manner, the method of calculation of the surcharge, whereby the TIS incurred in a mere calculation error, which is not confused, as the Claimant wishes, with violation of the duty to substantiate.

h. Regarding compensatory interest, the substantiation of its respective assessment integrates the substantiation of the missing tax, duly explained in the inspection report, to which is added the demonstration of the compensatory interest assessment.

i. As to the causal nexus that justifies reimbursement to the State in the form of compensatory interest, No. 6 of article 35º of the LGT determines that the tax declaration filed outside the legal deadline, and by even greater reason the lack of the respective declaration as to missing tax, as is the case in the present matter, always constitutes a delay in assessment attributable to the taxpayer.

j. The Claimant requests payment of compensatory interest but has no reason, as under articles 43º of the LGT and 61º of the CPPT, the right to compensatory interest depends on having occurred some error attributable to the services which, in this case, did not occur.

k. The judgements of opportunity regarding the production of witness evidence grant the instructing body the faculty to dispense with it if it considers, according to its prudent evaluative judgment, that the file provides the necessary and sufficient factual elements for the decision on the merits to be rendered, in light of the possible legal solutions, being undeniable that this situation does not constitute any violation of any act/formality imposed by law, since it is this, in articles 69º paragraph e) of the CPPT and 88º No. 2 of the CPA (in force at the date of the facts) that expressly grants the instructing body the faculty to dispense with it.

1. Given that there was no situation among those provided for in article 18º, No. 1 of the RJAT, which would make the arbitral meeting provided therein necessary, the holding thereof was dispensed with, on the grounds of the prohibition of useless acts.

On 5.11.2015 an arbitral tribunal meeting took place for the purpose of examining the witnesses presented by Claimant and Respondent.

1. The Claimant presented written submissions, reaffirming the positions stated in the request for arbitral pronouncement and further making a critical appreciation of the evidence produced, which are summarized as follows:

a. With regard to matters of fact, the CLAIMANT considers that, through the evidence produced, both documentary and testimonial, all relevant factuality was demonstrated, from which results the illegality and the consequent need to annul the assessment acts in question.

b. The tax administration failed even to prove that the accounting operations would have as their principal objective to settle written debts of the CLAIMANT, or in what way they could have influenced the awarding of subsidies for the undertaking of commerce promotion initiatives – and such assessment was not even its responsibility, but rather that of the entity supervising the awarding of the said subsidies, in this case the DGAE.

c. Now, from the documentary and testimonial evidence produced it results that the invoicing issued by the CLAIMANT, or issued in its favour, is based on actual operations, thereby demonstrating that the services were in fact rendered.

d. Once again, it was incumbent upon the tax administration that in the Conclusions Report which, allegedly, contains the substantiation of the assessment acts now contested, it prove what it alleges and not limit itself merely, generically, to mere guesses, suppositions or presumptions, without any factual concreteness.

e. Indeed, what is referred to as "our [the tax administration's] perception and sensitivity" does not constitute a legally admissible means of proof that "part of the initiatives depicted therein, there is no conclusive proof that they were concretized" – see point 5.2.18 of the tax administration's response – which, as was conclusively demonstrated, does not even correspond to the reality of the facts.

f. Being that, at no moment, either from the inspection report or from the response of the tax administration, is it determined which of the initiatives contained in the applications for subsidies through MODCOM presented by the Claimant that, allegedly, were not carried out.

g. From all that has been set out above, it is necessary to conclude that an instructional deficit occurred in the inspection action that gave rise to the assessment acts now contested, in manifest violation of the principle of discovery of material truth to which the tax administration is obliged and, likewise, of the provisions of article 74º of the General Tax Law, in that it did not, as was its legal responsibility, prove the facts constitutive of the rights which it invokes. In this regard, the facts alleged by the tax administration, but never demonstrated, cannot benefit it.

h. The law indeed presumes true and in good faith the declarations of taxpayers, whereby the need for proof on the part of the tax administration is much more exacting. In the case at hand, at no time did the tax administration succeed in overcoming the presumption of truthfulness enjoyed by the CLAIMANT's accounting and the other elements recorded.

i. In light of the foregoing, it results that the tax administration proceeded to the erroneous qualification of the facts alleged and likewise did not observe the rules of distribution of the burden of proof, whereby it is demonstrated a violation of the provisions of articles 268º, No. 3, of the Constitution of the Portuguese Republic and 74º and 77º of the General Tax Law.

j. Even if it could be considered that the tax administration made proof of the facts which it alleges – which is not conceded and is only by mere caution of representation being considered – it should always be concluded that the same cannot support the correction to the taxable profit of the CLAIMANT that gave rise to the tax acts now contested.

k. Indeed, it is reiterated that the correction effected and now contested is based on the fact that the tax administration understood that the accounting operations aimed to settle written debts, proceeding to annul them without support in external document, whose suitability would justify the operation. However, and as was, documentary and testimonially, proved, the accounting records result from financial movements attributable to the normal activity of the CLAIMANT, whereby the corrections effected result from error as to the factual and legal presuppositions, which imposes annulment.

l. The same is considered regarding the understanding of the tax administration that the amounts received by the CLAIMANT, relating to the Applications No. / Projects No. …, …, … and …, in the total amount of € 156,314.48, constitute a patrimonial increase obtained gratuitously, on the ground that they were applied in the payment of invoices that did not correspond to operations performed, which, as resulted from the testimonial and documentary evidence attached to the file, does not correspond to the reality of the facts.

m. Indeed, it was proven that the operations and commerce promotion actions underlying the said Applications / Projects were in fact carried out and the services were in fact rendered.

n. As the witness B… stated:

"There were always initiatives in all municipalities. These are projects that are designed for certain important times or that we think will be important in commercial terms and which aim to promote these times, so to speak, whereby normally they focus on times such as Christmas, Easter, Children's Day, Mother's Day, Father's Day, thus they are celebrated or commemorated always at the same time, on the same days, in all localities. Those actions that related to specific times are always the same. But we had the celebration of popular saints, for example in ..., which we did not do in the other municipalities, we had the fair of … in ... because it is related to the fur fair of …. There is one action or another that is typical of each municipality, thus, as in ... we did something related to St. Martin, which we will not do in the other municipalities because it has no significance, but in general, the actions are common in all municipalities".

o. Moreover, in the course of the testimony given by Mrs. Inspector C… this witness stated that "I never said that the events did not take place, full stop." In this sense, it may be considered that the tax administration, contrary to what appears to result from the Inspection Report, admits, as it could not fail to, that the events were in fact carried out.

p. However, given the testimony that occurred in the course of the witness examination procedure which took place on 5 November, specifically the testimony given by the witness presented by the tax administration, it was demonstrated that the inspection procedure is vitiated by instructional deficit, in that they did not strive for discovery of material truth, limiting themselves to making references to mere suppositions, presumptions and intuitions.

q. In light of the foregoing, it is concluded that the tax administration made corrections in error as to the presuppositions, of fact and law, whereby annulment of the tax acts now contested is requested.

1. The Respondent also presented written submissions, reaffirming the positions stated in the response to the request for arbitral pronouncement and further making critical appreciation of the evidence produced, which are summarized as follows:

A. It was clearly demonstrated that the entire process of application for the subsidies in question was constructed and delimited so that all entities involved could take advantage of the benefits afforded by the MODCOM programme.

B. All the more so that, contrary to what was alleged by Witness B…, when the tax inspector went to the premises of the now Respondent, the organized files of the applications did not exist, which demonstrates that their composition was being built as requested by the various entities to whom they had to provide information.

C. The same occurred in the present matter, presenting documents, at various times, in a disjointed and disconnected manner, to create the idea that each of the events had taken place.

D. However, and as results from personal knowledge and analysis of the various documents (photographs) by the tax inspector, many of the places that were presented did not correspond to the indicated location of the undertaking of the initiatives.

E. It is concluded that this posture is transversal to all years. In addition to being virtually undeniable that of all the invoiced initiatives, only some will have been carried out in a disconnected manner between municipalities, so that all together they would constitute in some way a complete project, there being no conclusive proof that the same were concretized.

F. Thus, because they are legal, the corrections should be maintained in the legal order, and the Arbitral Tribunal should judge the request for arbitral pronouncement unfounded.

1. The tribunal is materially competent and is regularly constituted pursuant to the RJAT.

The parties have legal personality and capacity, are legitimate and are legally represented.

The process does not suffer from defects that would render it invalid.

1. It is necessary to resolve the following questions:

a. Insufficiency of substantiation, of fact and law of the additional IRC assessment and the corresponding compensatory interest assessment contested.

b. Disregard of the prior hearing provided for in paragraph a), of No. 1 of article 60º of the General Tax Law.

c. Lack of congruence and clarity of the substantiation of the Conclusions Report, in the event it is understood that the same constitutes the substantiation of the assessments in question.

d. Omission of substantiation, of fact and law, in the part relating to the assessment of the surcharge.

e. Illegality of the Order of Her Excellency the Head of Services, of the Department of Corporate Income Tax, dated 16 December 2014, which dismissed the hierarchical appeal presented by the now CLAIMANT.

f. Illegality of the impugned assessments due to error in the factual and legal presuppositions.

g. Legality of the Claimant's claim for payment of compensatory interest.

II – Relevant Matters of Fact

1. In the interest of deciding the case, the following facts were proved:

2. The Administration conducted an external tax inspection of general scope, with temporal incidence over the years 2008, 2009, 2010 and 2011, authorized by External Service Orders Nos. OI2012…/… and OI2012…, dated 17 April 2012 and 25 May 2012.

3. The tax inspection procedure was motivated by an express request from the Fraud Investigation and Special Actions Department, with a view to investigating possible irregularities in the obtaining of public funds, more specifically of the financial incentives granted by the Commerce Modernization Fund.

4. The taxpayer was notified of the draft corrections, through office No. 815 of 13 February 2013, to exercise the hearing right provided for in article 60º of the RCPITA and article 60º of the LGT.

5. The Claimant did not exercise its right to prior hearing, the draft report being converted into a final report by order of 21/03/2013 of the Head of Division, by sub-delegation of the Finance Director of ... and the Claimant being notified of the final report.

6. The final report of the inspection procedure contains, among other things, the following:

"The taxpayer commenced its activity on 1998-10-01 with Primary CAE: 94110 - ACTIVITIES OF ECONOMIC AND EMPLOYER ORGANISATIONS and Secondary CAE: 58140 - PUBLISHING OF MAGAZINES AND OTHER PERIODIC PUBLICATIONS, being classified, in the context of IRC, under the general regime with accounting organized by legal requirement, computerized and centralized at the head office and in terms of VAT in the normal regime of quarterly periodicity, although part of its activity is exempt under article 9º of the VAT Code, thus configuring itself as a mixed taxpayer.

As indicated by A… in the IRC mod. 22 of the last 3 years under analysis, the same is an entity that does not exercise as a principal activity an activity of a commercial, industrial or agricultural nature, however we verified that it does not have public utility status, thus cannot benefit from the (subjective) exemption provided for in article 10º of the IRC Code, without prejudice to the non-subjection or exemption (objective) applicable to the operations mentioned in the previous article 49º now 54º, Nos. 3 and 4 of the IRC Code, for which reason the declaration of 2008 was filed with filling errors, and should have indicated Regime "General" and Type of SP "Resident that does not exercise as principal activity commercial, industrial or agricultural activity.

It was given to us to observe that the SP has defined in its by-laws as objectives (article 3º):

"The defense, representation and promotion of the legitimate economic, professional and social interests of its members, as well as the rights thereof, their prestige and dignification:

a) Contribute to the harmonious development of economic activities in its area, in the technical, economic, associative and cultural domains;

b) Launch necessary initiatives and do whatever may contribute to technical, economic and social progress, in particular by promoting and creating common services;

c) Promote a spirit of solidarity, cooperation and mutual support among its members."

Which translates in practice to the development of support actions for members, whether by provision of information, such as for example concerning some obligations to which they are subject, or by offering training and clarification actions, sometimes serving as an intermediary between official entities and the interested parties themselves. But also the promotion of actions and events promoting the activities exercised by its members, in this case, local commerce, associating itself with street animation initiatives or revaluation of certain traditional commerce areas.

At the level of accounting information we could further extract, as we summarize in the charts below, that indeed its income is in all respects related to the activity described so far.

(…)

Having initiated the inspection actions identified in point II.1 on days 23 and 28 May 2012, respectively, after a brief introduction on the activity of A…, carried out by the Secretary-General, Dr. B…, we centered our analysis essentially on the commercial relations between A… and the entities previously listed, namely:

a) D… – …, LDA. – NIPC …

b) E… – …, LDA. – NIPC …

c) F…– …, LDA. – NIPC …

The existence of commercial relations in the years under analysis with those entities was detected, and in 2011 we witnessed, more or less in parallel with the beginning of the inspection actions of which they were subject and with the change of direction of A…, the entry of new business partners, to register:

a) G… – …, LDA. – NIPC …

b) H… – … LDA – NIPC …

A… was, throughout the years under analysis, promoter of various applications for public funds, under the MODCOM programme relating to the municipalities that make up its list of members, namely ..., ..., ... and ... with the principal objective of those initiatives being street animation, so as to promote local commerce.

According to information provided by the entities competent for analysis, monitoring and evaluation of applications, initiatives and programmes (IAPMEI and DGAE), the participations, with payments already made, to the investments made under the above-mentioned projects amounted to 353,826.68€, with the aid granted being non-reimbursable.

We verified that the entities F… and H…, in the years in which they had commercial relations with A…, were simultaneously its suppliers and clients, a situation that confirmed the indications that led to the undertaking of the present actions.

(…)

In the year 2010, with support in internal document classified as No. …-… part of the balance of account 211110099 – F…, in the amount of 61,231.20€, was transferred, for the counterpart of accounts 27893X – Other Accounts to receive and pay – Current Loans. With the same document the remaining balance of that account (75,730.00€), the entire balance of account 211110674 – D… (14,500.00€) and part of the balance of account 211110675 – E… (27,830.00€) are still annulled for counterpart of accounts 552130X – Associative Fund – MODCOM.

Already on the basis of a different internal document, classified as No. …-… a new portion (51,953.44€) of the debt of E… (account 211110675) was settled as title of settlement of balances.

Accounting maneuvers that would have as their principal objective to settle the written debts, proceeding to annul them without support in external document whose suitability would justify the operation under analysis.

Certainly related to the movements described above, we found, by analysis of bank statements, that there were, in August 2010, new payments (in two tranches) from F… simultaneously with transfers of equal amounts (112,398.07€ and 111,134.65€).

In addition to the analysis already described, some of the files/projects drawn up and candidates for subsidies for participation by means of MODCOM were subject to more detailed attention. From this analysis some details stood out that are in themselves indicative of a greater fraudulent practice. We will now enumerate them:

a) Manipulation of payment proofs (as already described);

b) Falsification of proofs of the holding of the sponsored events, such as copying, overlapping and pasting images so as to make it appear that a certain occurrence took place (for example, the publication of a certain billboard); (Annex II)

c) The actual samples of flyers, pamphlets or other advertising media do not reflect the characteristics to be expected in this type of product, such as the type of paper applied and even the printing and inks used for that purpose;

d) Also strange is the similarity between the campaigns and the projects, ranging from the promotional phrases to the adopted mascot, which would be relevant were it not the case that they are increasingly and always being charged, as if it were a new initiative/study/work;

e) It is also worth noting that among the various projects photographs are shared (proofs of undertaking), with the clear intent to make it appear another initiative. Someone who does not look more carefully and who is completely unaware of the most emblematic areas of each of the zones involved, will certainly not have this perception, as appears in the project of ... (2008), photographs taken in ... and ..., in the project of ... (2010) photographs of ..., in the project of ... (2009) photos of ... and in that of ... (2010/11) photos of ....

It is concluded that this posture is transversal to all years. In addition to being virtually undeniable that of all the invoiced initiatives, only some will have been carried out in a disconnected manner between municipalities, so that all together they would constitute in some way a complete project.

For this purpose we had the opportunity to question the Secretary-General of A…, B…, on 30 November 2012 at the premises of A… which stated, referring to the execution reports of the projects which had seen their applications approved for participation by MODCOM, that "they were entirely the responsibility of company D…, the photographs were taken by them, the monitoring of the actions and the interim or final reports were the responsibility of D…. I had the opportunity to review some of these reports detecting various irregularities, such as for example incorrect indication of the locality where the action had taken place, which was rectified, or placement of photos that not only did not belong to our initiatives but were not even from our region, being given alert to those situations and requested their regularization."

Confirming our perception and sensitivity, corroborating that indeed those reports evidence clearly that, of part of the initiatives depicted therein, there is no conclusive proof that the same were concretized, proof of which is the responsibility of the applicant and which should have been presented to the entities responsible for managing the programme, IAPMEI/DGAE.

The former President of the board of directors of A… (between 2007 and 2010) stated: "The monitoring files were the responsibility of all parties involved, D… as supplier of samples of materials and photos attached to that file, the services of A… for the preparation and forwarding of the report and respective process and the board of A… in a monitoring function".

We felt the need to obtain more information about the type of action that would be in question and which was here subject to state participation. After the research and study carried out it was well established that the type of actions applied for by A… fit the type C "Projects for commercial promotion of urban centers, through animation, promotion and disclosure actions". Conditions of access met, project requirements met and eligible expenses covered, everything pointed to a successful participation.

We verified that the content of the projects visualized corresponded entirely to what was stipulated in the very regulation, with no room for creativity and/or critical spirit, adding or removing nothing to what was required, appearing a conception tailored to measure.

We also verified that "the financial aid to be granted takes the nature of non-reimbursable incentive corresponding to 60% of eligible expenses, with a maximum of €60,000 per project". Now, if we pay attention to the values contained in the projects, we verify that these approach abruptly an investment total of 100,000.00€, seeking to maximize the obtaining of the aid. We drew from this that, in addition to all the plot already described, there was still the clear concern to do things "by measure", whether it be the composition of the initiative or its cost.

Of relevant importance is also the installed capacity, human and technical, that A… should possess and present so as to be able to render the invoiced services to the related entities, recalling D…, E…, F… and H…. Or not the fact that its staff throughout the years under analysis consisted of 3 employees with essentially administrative functions, in addition to the cleaning employee, dismissed from duties at the end of 2010. It is therefore clear the absence of this capacity.

We sought to better assess this capacity, in particular by questioning both the secretary-general and both presidents in office during the years under analysis, Messrs. I… and J….

The Secretary-General stated, referring to A…'s invoicing to those entities: "That invoicing respected premises occupied by D… whether those premises were those of A… or of third parties, however I am ignorant of whether there existed any agreement(s) for occupation of those spaces. (…) There was never any contestation on the part of those companies of the values that were invoiced to them. I was also never requested to prepare any monitoring file of that involvement, of the tasks carried out or the time spent.

In turn, the current president of the board, J…, responding to the question related to the services rendered by A… to those companies: "The invoiced values relate to advertising, rental of rooms, consultancy, as to the quantification of the same there is no parametrization or price table. I cannot quantify the time or action developed. As to the spaces we included the new headquarters and the space of the old one, as well as spaces ceded by businesspeople. All employees and collaborators of A… are assigned to all actions I cannot tell you what the function of each one is. Of note is that the rentals are not unique and exclusively linked to the 'MODCOM' project, but rather are generalist. (…) In relation to room rental, allocation of human resources and publicity services I can make an analogy, but as to consultancy and market studies I do not comment (…) As to MODCOM/QREN projects and IEFP applications drawn up and invoiced I cannot specify (…)".

With regard to the same clarification Mr. I… stated: "Of the total value of the application there were services that were the responsibility of A…. When we presented the application, in the project the responsibility for execution was total and global of D…, although in practice some of those services came to be ensured by A… itself and its management, reason for which A… felt the need to invoice D… the services that were invoiced to it. There were no files that would allow the quantification and valuation of the invoiced services to be proven."

It will also be interesting to assess the capacity for A… to meet the commitment assumed before the MODCOM funding programme itself of financing the part that falls to it of the cost assumed by the different projects.

Bearing in mind that the source of income of the association was, in the years under analysis, essentially derived from the payment of quotas by its members, and that those amounts are intended for payment of the costs/fixed expenses inherent to its activity, for which they are often insufficient, leading the management to rethink its own structure of costs/expenses and profits/income, such as examples thereof the dismissal of the cleaning employee and the sub-rental of training rooms to the IEFP.

For this purpose, and because it was important to understand some financial movements already previously described, such as the loans from companies "D…" and H…, we questioned Mr. I…, which stated: "All payments were independent of each other, with no settlement of accounts. From part to part, as soon as payment was made the question was closed. There will never have been return of cheques, neither from the part of the service provider company, nor from our part. (…) I went to CGD in an attempt to obtain financing for this situation, which in itself was quite punctual as it was something that in very short term would be resolved/settled. The second time it was Ms. B… that resolved it, requesting from the Bank (CGD) that the same be done.".

Here we verify that the former president does not recognize the credits that appear in the association's accounting to the service providers, the same occurring with respect to the settlement of accounts already described and points as a form of financing an informally requested credit, since there are no supporting documents of the same, from a banking institution.

In contrast Ms. B… stated that "documents related to bank loans do not exist, from what I know neither will have existed."

On the other hand, the current president of the board of A…, Mr. J…, adds: "Whether H…, K… or any other banking institution the only thing we did was a request for financial aid. Just as it is in the statements.", in reference to the loans assumed by A… with H…, its service provider, client and creditor, and without providing any other type of explanation, in particular regarding the "self-financing" component of the projects, all the more since any credit always presupposes a moment of reimbursement, with no form of obtaining funds for the purpose being envisioned.

From the reading and comparison of the different statement terms various contradictions and inaccuracies stand out, which together with the remaining analysis carried out throughout the present procedure and reported here, contribute to our strong conviction regarding the existence of clear indications that those service provisions are fictional.

Recalling and highlighting the indications and reasons for which we consider the invoicing of the Service Providers as not evidencing actual operations:

1 – The financial movements inherent to those relations, already previously described, concerned mere exchanges of means of payment, with no effective payments of the services in question being verified;

2 – The proofs of the holding of the events having been manipulated, as aforementioned;

3 – The existence of duplication of costs inter-projects, i.e. despite the similarities between projects, no benefits typical of this type of economies of scale being registered, costs being duplicated, in particular of conception, whether of the Mascot, of the catalogues and even of the very project, which varied little between each initiative;

4 – And still the very inducement to invoicing indicated as false by A…, in an attempt at approximation/compensation of costs and tax to be delivered to the coffers of the State.

Proceeding from these conclusions and in addition to the corrections that have already been pointed out in terms of VAT in point III.1. of the Report, we understand that the SP should be further assessed in the context of IRC given that, not complying with the rules of allocation of the subsidies, since the same were influenced by the fiction of operations and values, as already extensively demonstrated, considering itself as a patrimonial increase obtained as a title of gratuity under article 48º, now article 53º of the CIRC, not benefiting from any exemption as already demonstrated, was not used in the pursuit of the statutory purposes of the association, since it will have been applied in the payment of invoices that present strong indications of relating to operations, in whole or in part, fictional.

(…)"

1. The CLAIMANT was notified of the IRC assessment act No. 2013 …, performed with reference to the tax year 2010 and, likewise, of the compensatory interest assessment act No. 2013 …, to which corresponds the Account Reconciliation Statement No. 2013 …, from which results the amount to be paid of € 42,702.68.

2. Not accepting the IRC and Compensatory Interest assessment acts notified, the CLAIMANT filed the respective gracious complaint, petitioning the annulment of the said tax acts.

3. Through office of the TAX JUSTICE DIVISION, of the FINANCE OFFICE OF ..., the CLAIMANT was notified of the Order of Her Excellency the Head of the Tax Justice Division, of the Finance Office of ..., of 5 May 2014, performed under the authority delegation of His Excellency the Finance Director, which determined the dismissal of the said Gracious Complaint.

4. The CLAIMANT filed a Hierarchical Appeal against the said acts, which would come to be dismissed by Order of Her Excellency the Head of Services, of the Department of Corporate Income Tax, dated 16 December 2014.

5. The Order of Her Excellency the Head of Services, of the Department of Corporate Income Tax, dated 16 December 2014, which dismissed the Hierarchical Appeal that precedes, was notified to the CLAIMANT through Office No. …, of the Tax Justice Division, of the Finance Office of ..., dated 5 January 2015 and the said Office No. … of the Tax Justice Division, of the Finance Office of ..., was sent to the CLAIMANT by registered mail with acknowledgment of receipt signed on 14 January 2015.

6. The CLAIMANT is a private associational organization of businesspeople, non-profit, whose objectives are the defense, representation and promotion of the legitimate economic, professional and social interests of its members, as well as the rights thereof, their prestige and dignification.

7. Throughout recent years, the realization of part of these objectives has been carried out through the undertaking, in the municipalities of its area of influence – ..., ..., ... and ... – of initiatives, related to street animation or revaluation of certain traditional commerce areas, with a view to the promotion and development of local commerce.

8. The CLAIMANT has come to apply for the Commerce Modernization Fund, created through Decree-Law No. 178/2004, of 27 July, with respect to the Municipalities that make up its list of members, ..., ..., ... and ..., with the principal objective of those initiatives being street animation, so as to promote local commerce.

9. With respect to the year 2010, the approved projects which were financed were duly approved by the Institute for Support to Small and Medium Enterprises and to Investment and by the General Directorate of Enterprise, and subsidies were granted to it as non-reimbursable incentive, corresponding to 60% of eligible expenses.

10. The actions relating to the subsidies received by the Claimant relating to the year 2010, to which the projects financed under MODCOM related, were in fact carried out.

11. The Company F…, Lda, in the year in question, rendered services to the Claimant necessary for the execution of the projects financed under MODCOM.

12. The CLAIMANT paid the payment of the tax owed in the amount of 39,859.04, on 19.12.2013, an amount which did not include compensatory interest.

11. FACTS NOT PROVED

In the interest of deciding the case, it was not proved that invoices were issued to the Claimant relating to operations that did not occur.

12. SUBSTANTIATION OF THE DECISION ON MATTERS OF FACT

The decision on matters of fact is based on the documents in the administrative file, as well as on the documents provided by the parties and further on the testimonial evidence produced by the parties.

The testimonial evidence produced had particular relevance regarding the disputed matters of fact, set out in points 12º, 15º and 16º.

To the proof of these facts the testimonies of witnesses B… and L…, secretary-general and administrative technical officer of the Claimant, respectively, contributed, who appeared to testify in an impartial manner regarding the facts which they demonstrated knowledge of, despite the professional relationship with the Claimant.

Witness B… affirmed the occurrence of the facts in question, explaining in detailed and circumscribed manner, the various actions carried out, the places, the manner in which they were carried out and other details of the actions in question. Confronted with various photographs relating to several financed actions, he was able to identify the places and the type of action to which it related. The testimony in question proved credible, demonstrating the witness direct and detailed knowledge of the facts.

Witness L… confirmed, in the essential, the testimony of witness B…, his testimony also proving credible and with direct knowledge of the facts, having demonstrated participation in local commerce actions in the year 2010.

Witness C…, tax inspector who conducted the inspection and drew up the report, in addition to having essentially confirmed what was contained in the inspection report, stressed never having affirmed that the events did not take place but that there were aspects that did not take place. However, from this testimony it does not result the concretization of the aspects that would not have been carried out, in particular with respect to the subsidies relating to the year 2010. Thus, its testimony did not undermine the credibility and verisimilitude of the testimonies given by witnesses B… and L….

-III- The Applicable Law

1. Having the claimant attributed various defects to the impugned tax acts, it is necessary to determine the order of knowledge of the same, the order of article 124º of the CPPT being observed, applicable by virtue of article 29º, No. 1, paragraph a) of the RJAT (See. Jorge Lopes de Sousa, Commentary to the Legal Regime of Tax Arbitration, in GUIDE TO TAX ARBITRATION, Coord. Nuno Villa-Lobos and Mónica Brito Vieira, 2013, Almedina, p. 202). (See. JORGE LOPES DE SOUSA, Commentary to the Legal Regime of Tax Arbitration, in Guide to Tax Arbitration, Coord. Nuno Villa-Lobos and Mónica Brito Vieira, 2013, Almedina, p. 202).

The procedence of any of the defects invoked by the claimant will lead to annulment of the tax act. However, the defect of violation of law is the one that will lead to the "more stable or effective protection of the injured interests" in that its eventual procedence will prevent renewal of the act, which does not occur with annulment resulting from the other defects.

Accordingly, the Tribunal will examine first the defect of violation of law.

1. It can be anticipated from the outset that, given the matters of fact proved, it is manifest that the assessments in question suffer from the defect of violation of law due to error in their factual and legal presuppositions, a ground for annulment thereof.

Indeed, the Respondent understood that the Claimant "should be further assessed in the context of IRC given that, not complying with the rules of allocation of the subsidies, since the same were influenced by the fiction of operations and values, as extensively demonstrated, considering itself as a patrimonial increase obtained as a title of gratuity under article 48º, now article 53º of the CIRC, not benefiting from any exemption as already demonstrated, was not used in the pursuit of the statutory purposes of the association, since it will have been applied in the payment of invoices that present strong indications of relating to operations, in whole or in part, fictional."

However, apart from the Respondent not having indicated which concrete operations relating to the year 2010 which, in its understanding, would not have been carried out, the fact is that from the matters of fact it results proved the carrying out of the operations in question.

The Respondent did not prove that the Claimant had made any payment relating to invoices "fictional". Indeed, the Respondent did not even point to any invoice in these conditions, limiting itself to referring to being "virtually undeniable that of all the invoiced initiatives, only some will have been carried out".

As Jesuíno Alcântara Martins writes "It will be truly possible to affirm that the inspection procedure is above all a procedure intended for the collection of sufficient proof to support possible tax corrections. The quality of the proof collected influences the quality of the substantiation that will be used to justify the corrections of the inspection, to such an extent that we could affirm that the better the quality of the proof collected, the better the quality of the substantiation of the inspection corrections".

On the other hand, Vitor Faveiro tells us that "They are therefore manifestly illegal the decisions of "direct assessment" of the tax matter based on subjective expressions, such as: "it is evident", "it appears that" "it is our opinion", "we have no doubt", "it is our view", "should be considered", "we believe that", and so many others that in current practice are used in such acts, if not dealing with mere conclusive expressions of the objective demonstration of the situation in question."

This is what occurs with the expression "virtually undeniable" ("that of all the invoiced initiatives, only some will have been carried out"), since such conclusion is not based on objective elements. Indeed, as already mentioned, the Respondent does not even indicate which of the invoiced initiatives in its understanding were carried out and those which, according to its thesis, were not.

In these circumstances, the presumption of truthfulness of the taxpayer's declaration and accounting established in article 75º, No. 1 of the LGT cannot validly be said to have been challenged.

The same occurs with the transfers, annulments and balance regularizations mentioned on page 19 of the report which according to the Respondent "would have as their principal objective to settle the written debts", since, in addition to everything else, it is not even invoked that such accounting records would relate to invoices relating to the year in question.

1. Conversely and independently of the considerations just produced, from the proved matters of fact it results that "The actions relating to the subsidies received by the Claimant relating to the year 2010, to which the projects financed under MODCOM related, were in fact carried out." (No. 15 of the matters of fact) and that "The Company F…, Lda, in the year in question, rendered services to the Claimant necessary for the execution of the projects financed under MODCOM." (No. 16 of the matters of fact) whereby, even if well-founded indications had been proved that the declaration or accounting of the taxpayer did not reflect the taxable matter, moving away with the legal presumption, it should always be considered that the taxpayer faced with the proved matters of fact would, nonetheless, under the light of article 74º No. 1 of the LGT, have made the positive proof of the carrying out of the operations in question, thereby moving away hypothetical indications.

2. Finally, it will always be said that, even if the version had been proved that part of the operations in question would not have been carried out, "not complying with the rules of allocation of the subsidies", as the Respondent refers, one would not be manifestly face to patrimonial increases obtained as a title of gratuity, but in such case face to unlawful income. It would not be cases of gratuitous acquisitions, if only because the costs of the operations carried out would remove this characteristic from them.

As write Diogo Leite de Campos, Benjamim Silva Rodrigues and Jorge Lopes de Sousa, in commentary to article 10º of the General Tax Law:

"Given that the unlawfulness of the behaviour is irrelevant for purposes of taxation, such circumstance functions for and against the taxpayer. Should not lead to an assessment out of step with the norms of tax law. Thus, should be taken into account, not only the gains of the taxpayer, but the costs supported to obtain them".

Now, according to the thesis of the Respondent part of the operations and consequent costs will have occurred.

In these conditions, by disregard of these costs, in violation of article 10º of the General Tax Law, also on this ground, the assessments in question would be vitiated by the defect of violation of law due to error in its factual and legal presuppositions.

In conclusion, the assessments judged cannot fail to be annulled on the ground of the defect of violation of law, which is well-founded with respect to all the assessments, whereby the knowledge of the other defects invoked by the Claimant is precluded.

1. The Claimant further came to request the condemnation of the Respondent to reimburse the amounts paid corresponding to the assessments sub judice as well as the respective compensatory interest.

Let us examine this.

In harmony with the provision in paragraph b) of article 24º of the RJAT, the arbitral decision on the merits of the claim of which no appeal or impugnation may lie binds the tax administration from the end of the deadline provided for appeal or impugnation, this needing, in the exact terms of the procedence of the arbitral decision in favour of the taxpayer and until the end of the deadline provided for spontaneous execution of the sentences of the tax judicial tribunals, to "restore the situation that would exist if the tax act object of the arbitral decision had not been performed, adopting the acts and operations necessary for that purpose", which is in harmony with the provision in article 100º of the LGT [applicable by virtue of the provision in paragraph a) of No. 1 of article 29º of the RJAT] which establishes that "the Tax Administration is obliged, in case of total or partial procedence of gracious complaint, judicial impugnation or appeal in favour of the taxpayer, to the immediate and full reconstitution of the legality of the act or situation object of the dispute, including the payment of compensatory interest, if applicable, from the end of the deadline for execution of the decision".

Although article 2º, No. 1, paragraphs a) and b) of the RJAT uses the expression "declaration of illegality" to define the competence of the arbitral tribunals which function in the CAAD, making no reference to condemnatory decisions, it should be understood that they comprise in their competencies the powers which in judicial impugnation proceedings are attributed to the tax tribunals, 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 first directive, that "the tax arbitration process should constitute an alternative procedural means to the judicial impugnation process and to the action for recognition of a right or legitimate interest in tax matters".

The judicial impugnation process, although being essentially a process of annulment of tax acts, admits condemnation of the Tax Administration in the payment of compensatory interest, as is drawn from article 43º, No. 1 of the LGT, in which it is established that "compensatory interest is due when it is determined, in gracious complaint or judicial impugnation, that there was error attributable to the services from which results payment of the tax debt in an amount higher than legally due" and article 61º, No. 4 of the CPPT (in the wording given by Law No. 55-A/2010, of 31 December, which corresponds to No. 2 in the initial wording), that "if the decision that recognized the right to compensatory interest is judicial, the deadline for payment is counted from the beginning of the deadline for its spontaneous execution".

Thus, No. 5 of article 24º of the RJAT in saying that "payment of interest is due, 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 allowing recognition of the right to compensatory interest in the arbitration process.

In the case at hand, it is manifest that, following the illegality of the assessment acts, there is place for refund of the tax, by force of the said articles 24º, No. 1, paragraph b), of the RJAT and 100º of the LGT, as such is essential to "restore the situation that would exist if the tax act object of the arbitral decision had not been performed".

With respect to compensatory interest, it further behooves us to appreciate this claim in light of article 43º of the General Tax Law.

Article 1 thereof provides that "Compensatory interest is due when it is determined, in gracious complaint or judicial impugnation, that there was error attributable to the services from which results payment of the tax debt in an amount higher than legally due".

We endorse the understanding of Diogo Leite de Campos, Benjamim Silva Rodrigues and Jorge Lopes de Sousa who maintain that "The error attributable to the services which carried out the assessment is demonstrated when gracious complaint or judicial impugnation of that same assessment proceeds and the error is not attributable to the taxpayer" (General Tax Law, writings encounters, 4th Edition, 2012, p. 342).

In the case "sub judice", the error which gave rise to the assessments now annulled not being attributable to the Claimant, the claim for condemnation of the Respondent as to compensatory interest cannot fail to proceed.

Thus, the Tax and Customs Authority shall execute this decision, pursuant to article 24º, No. 1, of the RJAT, reimbursing the amounts paid by the Claimant relating to the annulled assessments, with compensatory interest, at the legal rate.

Compensatory interest is due from the date of payment until that of processing of the credit note, in which it is included (article 61º, No. 5, of the CPPT).

-IV- Decision

Accordingly, the arbitral tribunal decides to judge totally well-founded the request for arbitral pronouncement and, in consequence:

a) Declare the annulment of all assessments object of the present process.

b) Declare the annulment of the order of Her Excellency the Head of Services, of the Department of Corporate Income Tax, dated 16 December 2014, which determined the dismissal of the hierarchical appeal filed against the gracious complaint presented against the assessment acts.

c) Condemn the Tax and Customs Authority in the annulment of the assessments object of the present process and, in consequence to reimburse the claimant the amounts paid with compensatory interest at the legal rate counted from the date of payment by the claimant until that of processing of the credit note.

Value of the action: € 42,702.68 (forty-two thousand, seven hundred and two euros and sixty-eight cents) pursuant to the provisions of article 306º, No. 2, of the CPC and 97º-A, No. 1, paragraph a), of the CPPT and 3º, No. 2, of the Regulation of Costs in Arbitration Proceedings.

Costs borne by the Respondent, in the amount of 2,142€ (two thousand one hundred and forty-two euros) pursuant to No. 4 of article 22º of the RJAT.

Let notification be made.

Lisbon, CAAD, 14.12.2015

The Arbitrator

Marcolino Pisão Pedreiro