Summary
Full Decision
ARBITRAL DECISION
The arbitrators Advisor Jorge Lopes de Sousa (arbitrator-president), Dr. Sofia Ricardo Borges and Dr. Augusto Vieira (arbitrator-members) appointed by the Ethics Council of the Centre for Administrative Arbitration to form the Arbitral Tribunal, constituted on 01-08-2018, agree as follows:
1. REPORT
A..., LDA., a company with registered office at ..., no. ... –..., ...-... Lisbon, with the sole registration number and collective person number 504.455.257, hereinafter referred to only as "Claimant", came, in accordance with Decree-Law no. 10/2011, of 20 January (hereinafter "RJAT"), to request the constitution of an Arbitral Tribunal.
The Claimant seeks to have declared the illegality of the corporate income tax (IRC) assessment for the year 2014, embodied in assessment no. 2018..., of 08-01-2018 and respective demonstrative statement of compensatory interest calculation no. 2018..., and in the demonstrative statement of account adjustment no. 2018..., corresponding to offset no. 2018..., of 10-01-2018, in the amount of € 70,250.13.
The Claimant further requests reimbursement of the unduly paid amount plus respective compensatory interest.
The Respondent is the TAX AUTHORITY AND CUSTOMS AUTHORITY.
The request for constitution of the arbitral tribunal was accepted by the President of CAAD and automatically notified to the Tax Authority and Customs Authority on 22-05-2018.
Pursuant to the provisions of subsection a) of article 6, paragraph 2, and subsection b) of article 11, paragraph 1, of the RJAT, in the wording introduced by article 228 of Law no. 66-B/2012, of 31 December, the Ethics Council appointed as arbitrators of the collective arbitral tribunal the signatories hereto, who communicated their acceptance of the assignment within the applicable time period.
On 12-07-2018 the parties were duly notified of such appointment, having manifested no intention to refuse the appointment of the arbitrators, in accordance with the combined provisions of article 11, paragraph 1, subsections a) and b) of the RJAT and articles 6 and 7 of the Code of Ethics.
Thus, in conformity with the provisions of subsection c) of article 11, paragraph 1 of the RJAT, in the wording introduced by article 228 of Law no. 66-B/2012, of 31 December, the collective arbitral tribunal was constituted on 01-08-2018.
The Tax and Customs Administration submitted a Response in which it defended the lack of merit of the claims.
By order of 04-10-2018 the meeting provided for in article 18 of the RJAT was dispensed with and it was decided that the proceedings would continue with written submissions.
The Parties submitted written submissions.
The arbitral tribunal was regularly constituted, in accordance with the provisions of articles 2, paragraph 1, subsection a), and 10, paragraph 1, of Decree-Law no. 10/2011, of 20 January, and is competent.
The Parties are duly represented, possess legal standing and capacity, are parties with standing and are represented (articles 4 and 10, paragraph 2, of the same act and article 1 of Ordinance no. 112-A/2011, of 22 March).
The proceedings do not suffer from any nullities.
2. FACTUAL MATTER
2.1. Proven Facts
The following facts are considered proven:
- The Claimant is a limited liability company, classified under CAE 86906 – Other human health activities;
- Under Service Orders nos. OI2016..., OI2016..., OI2016... and OI2017... an inspection was carried out on the Claimant, in which the Tax Inspection Report was drawn up, which is attached as document no. 2 together with the request for arbitral ruling, in which the following is referred to, among other matters:
1.2. ANALYSIS OF THE FACTS
- Accounting for the acquisition of the property in January 2014
Upon analyzing the elements sent following the notification made, it was found that in the account "11.1 - cash", in the 2014 financial year, a credit entry was made on 2014-01-31 in the amount of € 209,870.32.
This entry, which has the description "miscellaneous operations patrimonial value of 284,690.00 deducted from the value of the land of 74,819.68", had as its counterpart a debit entry to the account "43.2.2 - Tangible fixed assets - Buildings O. Constructions 17%".
To analyze the entry made, the respective supporting document was requested.
In response to this request, the Urban Land Registry (Caderneta Predial Urbana) of article no. ... of the parish of ..., Municipality of ..., District of Santarém was presented as supporting document, which has the tax patrimonial value (VPT) of € 284,690.00.
In the asset inventory, a "Land in ..." (asset code -...) with the value of € 74,819.68 and a "... article ..." (asset code -...) with the value of € 209,870.32 (annex 2) were registered.
The sum of these two inventory items totals the tax patrimonial value of the aforementioned article no.
Given these facts, the acquisition document for that property was requested.
The document presented refers to a deed of sale and purchase executed on 2001-09-21 in which the taxpayer acquired the aforementioned land for the amount of €157,121.34 (31,500,000$00 at the date of the deed) (annex 9).
Analyzing, we thus have:
- As per the deed presented, the taxpayer acquired a piece of land in 2001 for the value of €157,121.34;
- The acquisition of this property was initially recorded for the amount of € 74,819.68;
- In January 2014 the taxpayer accounted for a cash outflow in the amount of € 209,870.32 referring to the difference between the value that was recorded (€ 74,819.68) and the VPT (€ 284,690.00);
- To justify this accounting entry the taxpayer only presented the Urban Land Registry;
- However, the VPT does not justify any outflow of financial resources from the company, nor can it serve as support for the accounting entry made.
- The accounting for the outflow of financial resources relating to the acquisition of the property should be carried out based on the value actually paid by the taxpayer in the acquisition of the property (€ 157,121.34) and not on the VPT (€ 284,690.00);
- By virtue of having previously accounted for the payment of € 74,819.68, taking into account the deed presented (annex 9), the amount of €82,301.66 (€ 157,121.34 -74,819.68) remained to be accounted for;
- In January 2014 an outflow of financial resources from the company was accounted for in the amount of €127,568.66 (€209,870.32 - €82,301.66) which has no documentary support whatsoever.
(...)
1.3. CONCLUSION
The taxpayer began its activity in 1999, and it is verified that:
- This company operates with a service provider (Dr. B...);
- In January 2014 an outflow of financial resources from the company was accounted for in the amount of € 127,568.66 (€ 209,870.32 - € 82,301.66) which has no documentary support whatsoever;
(...)
III.4. CORRECTIONS TO BE MADE
III.4.1 - Financial Year 2014
As previously explained, the accounting in January 2014 of the outflow of financial resources from the company in the amount of € 127,568.66 has no documentary support whatsoever.
The situation in question only fits within the figure of undocumented expense which in the case under analysis translates into the actual outflow of values existing in cash or bank deposits, namely bank notes or legal tender coins, checks or postal orders, national or foreign. These fund outflows necessarily translate into payments, and/or the acquisition of goods and/or services, and/or further, a gift or set of gifts.
In fact, the situation in question constitutes an expense: "1. Act of spending money, of expending. 2. Amount that is spent, amount to be paid to another" (Dictionary of Contemporary Portuguese Language of the Academy of Sciences of Lisbon).
The autonomous taxation of undocumented expenses translates into an anti-abuse measure, see the Decision of the Constitutional Court no. 18/2011, of 12 January 2011, Case no. 204/2010, which we quote: "The fiscal logic of the regime [non-consideration as cost - which is not now at issue - and autonomous taxation] is based on the existence of a presumed loss to the Public Treasury, by not being able to prove, due to lack of documentation, whether there was payment of VAT or other taxes that were due in relation to the transactions carried out, or whether the income that third parties came to earn through the commercial relations maintained with the taxpayer were declared for the purposes of income tax incidence. Furthermore, autonomous taxation, not directly affecting a profit, will have implicit the idea of discouraging a practice which, in addition to affecting equality in the distribution of public charges, may involve situations of criminal unlawfulness or of less fiscal transparency"
In accordance with paragraph 1 of article 88 of the Corporate Income Tax Code (CIRC), "Undocumented expenses are taxed autonomously, at the rate of 50%, without prejudice to their non-consideration as expenses in accordance with subsection b) of paragraph 1 of article 23-A", and paragraph 14 of the same article further states, "The autonomous taxation rates provided for in this article are increased by 10 percentage points as regards taxpayers presenting a fiscal loss in the period to which any of the tax facts referred to in the preceding paragraphs relate, connected to the exercise of an activity of a commercial, industrial or agricultural nature not exempt from IRC."
In the case under analysis, only the autonomous taxation rate of 50% will apply, since the taxpayer presented a fiscal profit in the 2014 financial year, and there is also no amount to be added in terms of taxable matter, since no expense was accounted for as a counterpart to the said monetary outflow.
Thus, it is proposed that the company be subject to an autonomous taxation rate of 50% (paragraph 1 of article 88 of the CIRC), regarding the cash outflow with no documentary support whatsoever, for the reasons already previously stated:
> Cash outflow - € 127,568.66 (undocumented expenses)
> Autonomous taxation rate - 50% (paragraph 1 of article 88 of the CIRC)
> Tax to be paid - € 63,784.33
(...)
VII. VIOLATIONS VERIFIED
The failure to calculate autonomous taxation on undocumented expenses constitutes a violation of paragraph 1 of article 88 of the CIRC, punishable by paragraph 1 of article 119 and paragraph 4 of article 26, both of the General Tax Violations Regime (RGIT).
(...)
IX. RIGHT TO BE HEARD
(...)
In the petition presented, the taxpayer essentially alleges the following:
(...)
- "As to the concept of undocumented expenses, it is understood in jurisprudence that "(...) those are expenses that have no documentary support at accounting level (...) It will further be said that expenses should be considered confidential or undocumented that do not specify their nature, origin or purpose, being, by nature, undocumented (...)"',
- "... as regards the matter of autonomous taxation of undocumented expenses, given that the right of the tax administration to tax such expenses with a higher rate is at issue, in compliance with the aforementioned rules relating to the distribution of the burden of proof, it should demonstrate effectively the prerequisites upon which the law makes the admissibility of the taxation in question dependent."
- "... in the specific case and in light of the above it is verified that the totality of the expenses that the tax inspection services intend to tax autonomously have documentary correspondence, namely the loan receipts (recibos de mútuo) executed over the years 2012 to 2014 and presented in the course of the inspection procedure.";
- "Consequently, it is not understood how the tax inspection services can intend to qualify the referred amount of €557,959.54 as undocumented expenses."',
- "In light of the above, the draft tax inspection report should be revised as petitioned, annulling the corrections to the tax allegedly due by the Claimant, corresponding to autonomous taxation, in the amounts of €63,784.33, with respect to the 2014 financial year and €278,979.77, with reference to the 2015 financial year.".
From the analysis of the submissions presented it was concluded that the taxpayer contests the proposed corrections based on two points:
(...)
With regard to the correction proposed for the year 2014 in the amount of € 63,784.33 relating to autonomous taxation, despite the taxpayer in the conclusion of its petition requesting the annulment of the proposed correction, throughout its entire petition the taxpayer mentions nothing, nor presents any argument that justifies the requested annulment.
X. CONCLUSIONS
In the exercise of the right to be heard, the taxpayer made several allegations which, as was demonstrated, are contradicted by the facts ascertained, wherefore the tax corrections relating to the 2014 and 2015 financial years, proposed and referred to in chapter III, become final in the following amounts:
- 2014
IRC - Autonomous taxation on undocumented expenses: € 63,784.33
(...)
- Following the inspection action, the Tax Authority and Customs Authority issued the IRC assessment no. 2018..., of 08-01-2018, and respective demonstrative statement of compensatory interest calculation no. 2018..., and the demonstrative statement of account adjustment no. 2018..., corresponding to offset no. 2018..., of 10-01-2018, in the amount of € 70,250.13, reported to the 2014 financial year (document no. 1 attached to the request for arbitral ruling, the contents of which are reproduced hereby);
- On 15-02-2018, the Claimant made payment of the amount of € 70,250.13, concerning the aforementioned assessment (document no. 3 attached to the request for arbitral ruling, the contents of which are reproduced hereby);
- The Claimant acquired on 21-09-2001 a rural property for the price of 31,500,000.00 escudos, corresponding to € 157,121.34 (document no. 4 attached to the request for arbitral ruling, the contents of which are reproduced hereby);
- The acquisition of this property was initially recorded for the amount of € 74,819.68 (agreement of the Parties, article 61 of the request for arbitral ruling and article 6 of the response);
- In 2012 the said property was registered in the land registry as an urban property, having been assigned the tax patrimonial value (VPT) of € 284,690.00 (urban land registry which is attached as document no. 5, together with the request for arbitral ruling, the contents of which are reproduced hereby);
- In January 2014, the Claimant accounted for a cash outflow in the amount of € 209,870.32 referring to the difference between the value that was recorded (€ 74,819.68) and the VPT (€ 284,690.00), with the said land registry being the only document presented to justify this operation;
- This entry, which has the description "miscellaneous operations patrimonial value of 284,690.00 deducted from the value of the land of 74,819.68", had as its counterpart a debit entry to the account "43.2.2 - Tangible fixed assets - Buildings O. Constructions 17%";
- In the 2015 financial year, an entry transferred the amount of €82,301.66 from account 43.2.2 to account 43.1.1 – Tangible fixed assets – Land and natural resources, whereby the value of the building became €127,568.66 and the value of the supporting land €157,121.34, with the total value of the property being €284,690.00, corresponding to the VPT;
- On 21-05-2018, the Claimant submitted the request for arbitral ruling which gave rise to the present proceedings.
2.2. Unproven Facts
There are no facts relevant to the decision of the case that have not been proven.
2.3. Reasoning for the Determination of the Factual Matter
The proven facts are based on the documents submitted by the Claimant and on the administrative proceedings.
3. LEGAL MATTER
3.1. Autonomous Taxation Assessment
In the present proceedings, only the autonomous taxation of the 2014 financial year is contested, relating to "undocumented expenses", on the grounds of paragraph 1 of article 88 of the CIRC.
Article 88, paragraph 1, of the CIRC, in the wording of Law no. 2/2014, of 16 January, establishes that "undocumented expenses are taxed autonomously, at the rate of 50%, without prejudice to their non-consideration as expenses in accordance with subsection b) of paragraph 1 of article 23-A".
The Claimant argues that "undocumented expenses" are expenses that have no documentary support justifying them and consequently do not identify their recipient, distinguishing them from "charges not properly documented" to which article 45, paragraph 1, subsection g) of the CIRC referred, in the wording of Decree-Law no. 159/2009, of 13 July.
The Claimant cites, in support of its position, the decision of the Supreme Administrative Court of 19-04-2017, delivered in case no. 01320/16, in which it was held that
– "the legislator established a difference between charges not properly documented and undocumented expenses, reserving this qualification for expenses that lack any documentary proof whatsoever";
– expenses are not subject to autonomous taxation when it is "possible to identify the persons (...) who received such amounts" "because they are documented albeit insufficiently".
The Claimant further argues that the recognition of an expense as undocumented may not disregard the demonstration of the effective occurrence thereof (as was understood in the arbitral decision of 28-05-2014, delivered in case no. 20/2014-T).
It appears that what the Claimant argues, in line with the cited jurisprudence which is hereby adopted, is correct and is not even contradicted by the Tax Authority and Customs Authority in its Response, wherefore it is considered as procedurally settled.
For this reason, it is in light of this that the question of whether the requirements for the application of autonomous taxation provided for in paragraph 1 of article 88 CIRC have been fulfilled must be assessed.
In the case at hand, as understood by the Tax Authority and Customs Authority, an outflow of financial resources from the cash account occurred on 31-01-2014 (credit entry in the amount of € 209,870.32) having as its counterpart a debit entry in the account "43.2.2 - Tangible fixed assets - Buildings O. Constructions 17%", which translates into the use of that amount for acquisition of a building (to which the land registry presented by the Claimant refers), which was constructed on the land that the Claimant acquired in 2001.
Subsequently, in the 2015 financial year, another entry transferred the amount of €82,301.66 from account 43.2.2 to account 43.1.1 – Tangible fixed assets – Land and natural resources, whereby the value of the building became €127,568.66 and the value of the supporting land €157,121.34, with the total value of the property being €284,690.00, corresponding to the VPT. However, as the Tax Authority and Customs Authority states in the Tax Inspection Report, these entries of January 2015 have no implications in terms of the company's financial assets.
For this reason, it is those entries of 31-01-2014 that are relevant to the assessment of the question of whether an undocumented expense occurred.
Those entries of 31-01-2014 reveal a real expense for the construction of the building whose land registry was presented by the Claimant to the Tax Authority and Customs Authority. It was, moreover, the only explanation put forward by the managing partner of the Claimant to the Tax Authority and Customs Authority when referring that "it will probably be from the expenses of building the house" (page 12 of the Tax Inspection Report).
Thus, in light of the evidence produced, it is ascertained that, as is normal, there were expenses with the "building of the house" on the land that the Claimant acquired in 2001, wherefore, there being no other outflow of financial resources in the Claimant's accounting for such purpose, it is to be concluded that it is to these expenses that the accounting entries made on 31-01-2014 refer, which moreover refer to "Buildings O. Constructions".
With respect to the building, the Claimant only presented a document evidencing payment of the value of the land on which it was constructed, which was the equivalent in escudos to € 157,121.34.
The land registry, which was the only document presented, reveals the characteristics of the property in the valuation for tax purposes, but does not allow the conclusion of who received the amount expended in its acquisition.
Thus, having the Claimant accounted for an outflow of financial resources in the total amount of € 284,690.00 relating to the building (including the land), it is concluded that there are no documents evidencing expenses in the amount of € 127,568.66 (284,690.00 - € 157,121.34) that were accounted for on 31-01-2014. ( [1] )
On the other hand, by proving that an expense with the construction of the building occurred which is accounted for in the amount of € 127,568.66 (which came to be explicitly indicated with the 2015 entries referred to), it is justified that this be considered the value of the expense, since it is what is indicated in the accounting and it was neither indicated nor proven that the amount expended is lower.
Having proven that an expense with the construction of the building occurred, it is justified that, in the absence of documents evidencing its value, the value resulting from the accounting be considered for tax purposes, if it is not proven, nor is there reason to doubt, that it is higher than the actual.
In the case at hand, since the total value of the building that is accounted for corresponds to the value of the tax patrimonial value, the value that the law attributes to it for tax purposes, there is no reason whatsoever to conclude that that amount is higher than the actually expended.
In any event, the Claimant neither alleged nor proved that the referred amount is higher than the expenses with the construction of the property which its managing partner confirmed were borne.
One is thus dealing with an undocumented expense, for the purposes of paragraph 1 of article 88 of the CIRC, as an expense with the construction of the building was carried out and the identification of the beneficiary or beneficiaries of such expense was not ascertained, nor is it possible to ascertain it by the information provided by the Claimant.
By the foregoing, the impugned assessment in what concerns autonomous taxation for undocumented expenses does not suffer from the defects that the Claimant attributes to it.
3.2. Compensatory Interest Assessment
In the impugned assessment the amount of € 6,465.80 of compensatory interest was included, with citation of articles 102 of the CIRC and 35 of the LGT and on the grounds of "delayed assessment". The compensatory interest was calculated for the period of 01-06-2015 to 11-12-2017, based on the rate of 4% (Demonstrative statement of interest calculation, which is attached as document no. 1 together with the request for arbitral ruling).
The Claimant argues that no responsibility for compensatory interest can be attributed to it, as the assessment was not delayed by a fact attributable to it and as it bears no fault.
However, where autonomous taxation applies, its amount should have been self-assessed with form 22 declaration, which should be submitted by the last day of May 2015 (article 120, paragraph 2, of the CIRC).
Thus, given that the assessment of autonomous taxation was carried out only on 08-01-2018, there was a delay in the assessment, which is attributable to the Claimant, by not having carried out the self-assessment by 31-05-2015.
On the other hand, as was stated in the Tax Inspection Report "the failure to calculate autonomous taxation on undocumented expenses constitutes a violation of paragraph 1 of article 88 of the CIRC, punishable by paragraph 1 of article 119 and paragraph 4 of article 26, both of the General Tax Violations Regime (RGIT)".
As the Supreme Administrative Court has consistently held, "when a particular conduct constitutes a fact qualified by law as unlawful, the existence of fault should be inferred from the fulfillment of the regulatory hypothesis, by logical deduction, in the form presupposed in the provision of the type of unlawfulness in question". ( [2] )
Thus, the failure to assess the autonomous taxation in a timely manner should be considered culpable.
By the foregoing, the assessment of compensatory interest does not suffer from the defects that the Claimant attributes to it.
4. REIMBURSEMENT OF TAX PAID AND COMPENSATORY INTEREST
As follows from the foregoing, the impugned assessment does not suffer from the defects that the Claimant attributes to it, wherefore its annulment is not justified.
Consequently, there is no basis for the reimbursement of tax paid.
On the other hand, there being no unduly paid tax, there is no right to compensatory interest, as follows from paragraph 1 of article 43 of the LGT.
5. DECISION
By virtue of the foregoing, this Arbitral Tribunal agrees to:
- Rule that the claims for annulment of the assessment, reimbursement of tax paid and compensatory interest are without merit;
- Absolve the Tax Authority and Customs Authority of these claims.
6. VALUE OF THE PROCEEDINGS
In accordance with the provisions of article 97-A, paragraph 1, subsection a), of the CPPT and article 3, paragraph 2, of the Regulations on Costs in Tax Arbitration Proceedings, the value of the proceedings is set at € 70,250.13.
7. COSTS
Pursuant to article 22, paragraph 4, of the RJAT, the amount of costs is set at € 2,448.00, in accordance with Table I attached to the Regulations on Costs in Tax Arbitration Proceedings, to be borne by the Claimant.
Lisbon, 26-11-2018
The Arbitrators
(Jorge Lopes de Sousa)
(Sofia Ricardo Borges)
(Augusto Vieira)
_______________
[1] The Claimant accounted for on 31-01-2014 an outflow of financial resources from the Cash account in the amount of € 209,870.32, but as to the amount of € 82,301.66 (included therein) a deed of acquisition of land was presented as documentary evidence of the expense, since of the amount of € 157,121.34 only the amount of € 74,819.68 was accounted for.
[2] In this sense, reference may be made to the decisions of the Supreme Administrative Court of 23-09-1998, case no. 022612, published in Appendix to the Official Gazette of 28-12-2001, page 2505; of 19-11-2008, case no. 0325/08; and of 23-04-2013, case no. 01195/12.
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