Process: 261/2013-T

Date: May 5, 2014

Tax Type: IRC

Source: Original CAAD Decision

Summary

This arbitration decision (Process 261/2013-T) addresses whether autonomous taxation charges (tributações autónomas) incurred in 2010 can be deducted as tax expenses when calculating Corporate Income Tax (IRC) and municipal surtax (Derrama). The claimant, a dominant company of a tax group, self-assessed IRC totaling €538,619.72 in autonomous taxation but did not deduct this amount when calculating taxable profit, resulting in alleged excess tax of €134,872.02. The company filed a gracious claim on 30 May 2013, which was deemed rejected by implicit dismissal on 30 September 2013, followed by an arbitration request on 21 November 2013. The Tax Authority raised a preliminary objection of untimeliness. The claimant argues that autonomous taxation constitutes a tax on spending rather than income tax, and therefore should be deductible under article 23, no. 1, paragraph f) of the CIRC, as the exception in article 45, no. 1, paragraph a) does not apply. The claimant cites Constitutional Court Decision 671/2012 recognizing autonomous taxation as a spending tax, not an income tax. The AT contends these charges are not deductible tax expenses. The case involves fundamental questions about the legal nature of autonomous taxation, proper interpretation of IRC deductibility rules, timeliness requirements for tax arbitration, and the taxpayer's right to refund with compensatory interest when self-assessments are deemed partially illegal.

Full Decision

ARBITRAL DECISION

CAAD: Tax Arbitration

Case No. 261/2013 - T

Claimant: A

Respondent: Tax Authority and Customs Authority

I - REPORT

  1. A, (hereinafter abbreviated as "A") a company with tax identification number..., with registered office at..., hereinafter referred to as Claimant, submitted, on 21.11.2013, pursuant to articles 2, no. 1, paragraph a), and 10 et seq of Decree-Law No. 10/2011, of 20 January, which approves the Legal Framework for Tax Arbitration (RJAT), a request for arbitral award, in which the Tax Authority and Customs Authority is respondent (hereinafter abbreviated as AT), requesting:

a. The declaration of partial illegality of the self-assessment of Corporate Income Tax (IRC) and municipal surtax (identified in the case file), referring to the year 2010, in the part corresponding to the amount of €134,872.02, due to a material defect of violation of law;

b. The recognition of the Claimant's right to reimbursement of this amount and, likewise, the right to compensatory interest for the tax indebtedly collected.

  1. The request for constitution of an Arbitral Tribunal was submitted by the Claimant on 21.11.2014 and accepted by His Excellency the President of the CAAD Deontological Council on 22.11.2014, and the Tax and Customs Administration was notified of the submission of said request on the same date.

  2. On 08.01.2014, the parties were notified of the appointment of the arbitrators, and neither party expressed an intention to challenge their appointment, therefore, the Arbitral Tribunal was constituted on 23.01.2014 and this fact was communicated to the parties on the same date.

  3. On 25.02.2014, the AT submitted a Response to the Request filed by the Claimant, invoking, first and foremost, the exception of untimeliness of the request submitted by the Claimant.

  4. On 28.02.2014, the Claimant submitted a written Response to the matter of an exceptional nature, raised in its response by the Respondent.

  5. On 07.03.2014, the meeting provided for in article 18 of the RJAT was held, as shown in the respective minutes, which are hereby fully reproduced. In that meeting, a period of ten consecutive days was set for the parties to submit written arguments. Furthermore, 6 May 2014 was set as the deadline for issuing the arbitral award.

  6. The parties submitted their written arguments, as shown in the case file, and which are hereby fully reproduced.

A) On the request filed by the Claimant

  1. In its request, the Claimant alleged, in summary, the following factual situation:

  • A, in its capacity as the dominant company of the Y Tax Group, proceeded with the self-assessment of IRC and surtax for the fiscal year 2010;

  • On 25 January 2012, it submitted an amendment to that self-assessment by means of a replacement return;

  • On 30 May 2013, the Claimant submitted to the Large Taxpayers Unit a gracious claim against said self-assessment of IRC and municipal surtax referring to the year 2010;

  • Pursuant to article 57, no. 5, of the General Tax Code (LGT), the gracious claim was deemed rejected by implicit dismissal on 30 September 2013;

  • The Claimant submitted the present request for constitution of an arbitral tribunal on 21.11.2013, therefore the arbitral request is timely;

  • In the case of acts of self-assessment of tax, prior recourse to the administrative route is also required;

  • Thus, the act which is the subject of the request for arbitral award is the act of self-assessment of IRC and consequent surtax relating to the year 2010, to the extent corresponding to the non-deductibility of expenses relating to autonomous tax assessments of the fiscal year 2010, to which corresponds an amount of tax indebtedly collected in the value of €134,872.02;

  • In that assessment, pursuant to article 88 of the Corporate Income Tax Code (CIRC), a total amount of "autonomous tax assessments" in the value of €538,619.72 was determined, which have been fully paid;

  • However, A did not deduct that value from the autonomous tax assessments in the calculation of taxable profit for IRC purposes and consequent surtax, whereas, in the Claimant's view, it has that right;

  • In terms of quantification, the IRC resulting from the application of the base rate of 25% to the value of €538,619.72, results in €134,654.93, plus the state surtax in the value of €138.19 and the municipal surtax in the value of €78.89, in a total of €134,872.01, as per the explanatory document attached by the Claimant as document no. 7.

B) On the grounds of the Claimant's request

  1. The Claimant sustains, in the first place, that autonomous tax assessment does not overlap with income tax (IRC) or the company's profit, but rather constitutes a tax on spending, and that the AT itself recognizes this (as per document no. 8 attached by the Claimant to the request) and is extracted from the declarative forms themselves (form 22).

  2. Thus, autonomous tax assessments are, in most cases, in technical terms, a tax on spending, a tax on expenses incurred by the company and representative of company consumption.

  3. No part of the autonomous tax assessments in question in this case concerns undocumented expenses.

  4. The unanimous position of legal scholars is to recognize that autonomous tax assessments are not income tax; on the contrary, they assign to it, rightly, a different character and purpose (other than taxing the company's income).

  5. And jurisprudence points in the same direction, both the jurisprudence of the Supreme Court of Justice and of the Constitutional Court, as well as that of this Arbitral Tribunal.

  6. To the tax expenses resulting from autonomous tax assessments applies the general rule of deductibility of tax expenses provided for in article 23, no. 1, paragraph f), of the CIRC, since the tax expense of autonomous tax assessments was not, nor is, excepted from the tax rule of deductibility of tax expenses; therefore, the exception provided for in paragraph a) of no. 1 of article 45 (formerly 42) of the CIRC does not apply to the tax rule of deductibility of taxes.

  7. At issue in the present case are autonomous tax assessments levied on tax-deductible expenses.

  8. There is a legal norm that affirms the tax deductibility of tax expenses, in this case, article 23, no. 1, paragraph f), of the CIRC, and autonomous tax assessments are exactly that: tax expenses resulting from a tax levied on spending.

  9. The reasons underlying the projected rejection stated in the draft decision of the gracious claim are confused in that autonomous tax assessments do not tax the income of the taxpayer nor are minimally comparable to the surtax; and their deductibility results, affirmatively, from the provisions of article 45 of the CIRC.

  10. The autonomous tax assessments in question are, evidently documented expenses, contrary to what is alluded to in the draft rejection of the gracious claim.

  11. Autonomous tax assessments cannot have a punitive character, as results from the reference in point 38 of the draft decision rejecting the gracious claim.

  12. It results from the Decision of the Constitutional Court no. 671/2012, of 19 December, that autonomous tax assessments are a tax on spending and not on income, with their consequent deductibility in the context of IRC.

  13. When the AT cannot base the tax assessment on a norm of concrete law and merely, usurping the legislative function, creates a norm "through an adequate weighing of the aforementioned interests at stake, of the economic and social circumstances underlying the costs incurred with autonomous tax assessment and of the purpose intended by the legislator," it is doing nothing more than making a clean slate of the principle of legality and the separation between the legislative and executive powers.

  14. The sui generis interpretation of the AT that the norm contained in article 23, no. 1, or article 45, in particular in its no. 1, paragraph a), all of the CIRC, would indiscriminately prevent the deduction in the ascertainment of taxable income of actual expenses with autonomous tax assessments, renders those norms unconstitutional, to that extent, by violation of articles 2 (Democratic Rule of Law State, with its inherent principles of proportionality, equality and prohibition of arbitrary discrimination), 13 (principle of equality), 18, nos. 2 and 3 (principle of proportionality) and 104, no. 2 (principle of taxation, fundamentally, of real income in conjunction with the principle of equality and principle of taxpaying capacity), of the Constitution of the Portuguese Republic.

  15. The Claimant concludes by requesting from the Arbitral Tribunal:

  • That it declare the partial illegality of the self-assessment in the part corresponding to the value of €134,872.02, as well as,

  • The right of the Claimant to compensatory interest, given that the self-assessment of IRC and the autonomous tax assessments of the fiscal year 2010 are paid, therefore declared the illegality requested regarding the self-assessment the Claimant is entitled to reimbursement of the amount indebtedly paid, as well as the compensatory interest calculated, at the legal rate, on that amount, from the date of payment of the tax (31 May 2011), until full reimbursement of the same.

C) The Response of the Respondent Tax Authority and Customs Authority

  1. The Respondent submitted a Response to the Claimant's request, in which it sustains that:

  • The request filed is untimely, in that the 90-day period stipulated for voluntary payment of the voluntary tax obligation, provided for in article 102, no. 1, paragraph a), of the Tax Procedure and Process Code (CPPT), ended, in the case at hand, on 31.05.2011, therefore, the submission of the arbitral request, on 21.11.2013, occurred more than two years after the end of that 90-day period, therefore it is untimely and the tribunal cannot consider it;

  • Although it made reference to and identified the circumstances of the existence of a gracious claim and the implicit dismissal, the fact is that the Claimant did not formulate/specify to the Tribunal any request aimed at the annulment of the implicit dismissal that occurred, resulting from its gracious claim;

  • Not having done so, that is, not having the claimant challenged in the second degree the act (the implicit dismissal of the gracious claim), the arbitral request is untimely and, consequently, the Tribunal cannot consider the request filed regarding the act of self-assessment;

  • The Claimant is concerned with rebutting the reasons put forward by the AT in a mere draft decision of rejection without ever, "at any point in its request for arbitral award, devoting a line requesting the illegality of the implicit dismissal";

  • On 21.10.2013 the Claimant was notified of said draft decision rejecting the gracious claim submitted on 31.05.2013;

  • Following which it informed the AT that it had already submitted an appeal of the assessment act in question to the Arbitral Tribunal, which determined the archiving of the procedure;

  • But, this without ever requesting the illegality of the implicit dismissal that served as the starting point for counting the period for submission of the request for direct challenge of the act of self-assessment;

  • Pursuant to articles 660, no. 2, and 661, no. 1, of the Code of Civil Procedure (CPC) (articles 608, no. 2, and 609, no. 1 of the current CPC), besides matters of official knowledge, the judge cannot hear in the judgment matters not raised by the parties, nor condemn in object or quantity greater than what has been requested;

  • Resulting clearly and unequivocally from the initial application the direct challenge of the act of self-assessment of tax (IRC), the request filed should be declared unsuccessful due to untimeliness and the defendant entity should be absolved of the action;

  • Without conceding, the AT alleges, on the merits of the matter, that autonomous tax assessments are not, at least formally, IRC, nor is their deductibility from taxable profit accepted, either by their exclusion from paragraph a) of no. 1 of art. 45 of the CIRC, or by their inclusion in paragraph f) of no. 1 of art. 23 of the CIRC;

  • Autonomous tax assessments do not constitute a tax distinct from IRC, but rather consist of an additional to it, concluding, moreover, that autonomous tax assessments are not deductible, in that a tax cannot be, by the very nature of things, deductible to itself.

  • It further refers to the accessory nature of autonomous tax assessments (acessorium principale sequitur) which prevents the consideration of autonomous tax assessments as a tax expense;

  • Finally, the ascertainment of autonomous tax assessments occurs after the ascertainment of taxable matter, therefore, if the rate of autonomous tax assessment depends on the ascertainment of taxable matter, the product of its application cannot integrate the calculation of the latter, by logical impossibility;

  • It concludes by arguing for the dismissal of the request filed by the Claimant regarding the annulment of the self-assessment, as well as the request filed regarding compensatory interest.

  1. The Claimant submitted a response to the exception of untimeliness invoked by the AT in the Response submitted, which is hereby fully reproduced.

  2. The parties further submitted written arguments, within the period set by the Tribunal, which are hereby fully reproduced.

II – ISSUES TO BE DECIDED

  1. The first issue to be decided is that of the timeliness of the request for arbitral award.

  2. The second issue, as configured by the request filed by the Claimant, is whether the amounts incurred by the IRC taxpayer, as autonomous tax assessments, should be considered deductible expenses for the purpose of calculating taxable profit in IRC.

III - PROVEN FACTS CONSIDERED RELEVANT

  • The Claimant submitted the self-assessment in question in the present case on 31 May 2011, referring to the fiscal year 2010;

  • Subsequently, this self-assessment was replaced by a replacement return submitted on 25 January 2012;

  • This assessment was the subject of a gracious claim, submitted to the Tax Office of..., on 30 May 2013;

  • In that income declaration, an amount of autonomous tax assessments of €538,619.72 was determined;

  • However, A did not deduct that value from the autonomous tax assessments in the calculation of taxable profit for IRC purposes for the fiscal year;

  • From the application of the base rate of 25% to the value of €538,619.72, results the value of €134,654.93, plus the state surtax, in the value of €138.19, and the municipal surtax, in the value of €78.89, in a total of €134,872.01.

  • The Claimant paid the tax (IRC) owed referring to the fiscal year 2010, as well as the value of the autonomous tax assessments in question.

IV – ON THE ISSUE OF TIMELINESS OF THE REQUEST FOR ARBITRAL AWARD

  1. This Tribunal identified in points 27 and 28 the two issues to be decided. But the first of them – the timeliness of the request for arbitral award – constitutes a dilatory exception and, therefore, if successful, will prevent consideration of the second. It is important, therefore, to consider it first.

  2. The Claimant files a request for arbitral award on the legality of the self-assessment of IRC and the autonomous tax assessments of the period relating to the fiscal year 2010. The subject matter of the request is, therefore, this self-assessment.

  3. The period for challenging an act of assessment or self-assessment of tax is 90 days (pursuant to article 10, no. 1, paragraph a), of the RJAT, counted from the facts provided for in numbers 1 and 2 of article 102 of the CPPT).

  4. In the case at hand, the 90-day period shall be counted from the end of the period for voluntary payment of the tax obligation, by force of the provision of article 104, no. 1, paragraph b), of the CIRC.

  5. Thus, the period for challenging the assessment act had already ended, both at the time the Claimant submitted the replacement return (31.05.2011), and subsequently when it submitted the gracious claim following that replacement return, that is, already on 25.01.2012.

  6. The request for arbitral award was submitted on 21.11.2013.

  7. It is established in both doctrine and arbitral jurisprudence of the CAAD that although article 2, no. 1, paragraph a), of the RJAT makes explicit reference to the jurisdiction of arbitral tribunals to declare the illegality of assessment acts, this jurisdiction extends also to second and third-degree acts that assess the legality of the primary acts, such as acts of rejection of gracious claims and acts of rejection of hierarchical appeals filed against decisions of such claims.

  8. Thus, having exceeded the period for a direct challenge of the assessment or self-assessment, a route opened to the Claimant to challenge the act of implicit dismissal of the gracious claim to which it refers in article 5 of its request, that is, to raise consideration of the legality of the self-assessment dependent on the filing and unfavorable decision of a means of gracious defense.

  9. However, it happens that the Claimant when it expressly identifies the arbitral request does so in the following terms (cf. articles 13 and 14 of its request):

"13.

The herein claimant intends that the partial illegality of the aforementioned self-assessment act be declared (cf. Docs. nos. 1 and 2 – and that it be consequently annulled, in that part, pursuant to article 2, no. 1, paragraph a), of Decree-Law No. 10/2011, more specifically regarding the part of said self-assessment act that reflects the non-deductibility of expenses relating to autonomous tax assessments, to which corresponds an amount of tax indebtedly collected in the value of €134,872.02.

In this sense, said assessment act should be declared illegal and annulled in that part, in that it is defective with an illegality defect, pursuant to the terms and with the grounds that we propose to demonstrate hereinbelow."

  1. And it ends its request as follows: "In these terms, the partial illegality of the self-assessment of IRC and consequent municipal surtax of the A Fiscal Group relating to the fiscal year 2010, in what respects the amount of €134,872.02, should be declared, with its consequent annulment in that part, given the manifest illegality of the assessment in that part, with all legal consequences, in particular the reimbursement to the Claimant of this amount, plus compensatory interest at the legal rate counted from 31 May 2011 until full reimbursement."

  2. Thus, if, on the one hand, it is unequivocal that the Claimant when identifying and filing its arbitral request made not the slightest allusion to the challenge of the act of implicit dismissal of the gracious claim that it submitted on 30 May 2013,

  3. On the other hand, it is also very clear that the Claimant identifies as the subject matter of the arbitral request the act of self-assessment of IRC and municipal surtax whose declaration of partial illegality and consequent partial annulment it requests from this Tribunal.

  4. We cannot, therefore, fail to agree with the Respondent when in its Response it writes that the Claimant "did not formulate/specify to the Tribunal any request aimed at the annulment of the implicit dismissal that occurred, resulting from its gracious claim."

  5. The scope of the Tribunal's powers of cognition is limited by the request.

  6. And this Tribunal is exclusively faced with the direct challenge of an act of self-assessment of IRC and municipal surtax.

  7. A challenge that was manifestly submitted outside the period provided for in article 2, no. 1, paragraph a), of the RJAT, as already demonstrated above.

  8. Contrary to what the Claimant intends in its Response to the exception of untimeliness deduced by the Respondent (cf. its no. 20), the interpretation of the provision of articles 2 and 10, no. 1, paragraph a), and no. 2, paragraph b), both of the RJAT, to the effect that, for purposes of the 90-day reaction period that opens with the rejection of the gracious claim, the subject matter of the proceeding and the arbitral claim cannot be, respectively, the tax act and the request for declaration of its illegality, does not contradict any constitutional provision, in particular those that guarantee the principle of access to courts for the protection of rights (cf. articles 20, no. 1, and 268, no. 4) or the principle of protection of confidence (article 2), nor the provision of article 9 of the Civil Code.

  9. In effect, access to law is not unlimited or unconditional. It takes place in accordance with the legal rules that govern it. The Claimant had an appropriate means to guarantee its claim – to challenge the act of implicit dismissal of the gracious claim -, but did not do so. In no way, therefore, is there occasion for any violation of the principle of confidence inherent to the principle of Rule of Law enshrined in article 2 of the Constitution of the Portuguese Republic.

V – DECISION

  1. For the reasons stated, the Tribunal decides:

a) To uphold the exception of untimeliness of the request for arbitral award;

b) And, as a consequence, to dismiss the arbitral request, absolution of the Respondent being granted.

The value of the case is set at €134,872.02, pursuant to article 97-A, no. 1, paragraph a), of the CPPT, applicable by force of paragraphs a) and b) of no. 1 of article 29 of the RJAT and of no. 2 of article 3 of the Regulation of Costs in Tax Arbitration Proceedings.

The arbitration fee is set at €3,060.00, pursuant to Table I of the Regulation of Costs in Tax Arbitration Proceedings, to be paid entirely by the Claimant, pursuant to article 22, no. 4, of the RJAT.

Let it be recorded and notified.

The present Award was drafted in accordance with the orthography prior to the Orthographic Agreement of 1990.

Lisbon, 5 May 2014.

The Presiding Arbitrator

(Jorge Lino Alves de Sousa)

The Arbitrator Vogal

(Maria do Rosário Anjos)

The Arbitrator Vogal

(Luís Máximo dos Santos)

Frequently Asked Questions

Automatically Created

Can autonomous taxation charges be deducted as a tax expense in the IRC self-assessment under Portuguese tax law?
Under Portuguese tax law, the deductibility of autonomous taxation charges as tax expenses in IRC self-assessment is contested. The claimant argues that autonomous taxation (tributações autónomas) constitutes a tax on spending rather than income tax, and should therefore be deductible under article 23, no. 1, paragraph f) of the Corporate Income Tax Code (CIRC), which allows deduction of tax expenses. The claimant contends that the exception in article 45, no. 1, paragraph a) of CIRC does not apply to autonomous taxation on documented, tax-deductible expenses. This position is supported by Constitutional Court Decision 671/2012, which characterized autonomous taxation as a spending tax. However, the Tax Authority disputes this deductibility. The fundamental issue is whether autonomous taxation's sui generis nature as a levy on certain expenses permits its deduction when calculating taxable IRC profit, or whether it must be treated as a non-deductible tax charge under the IRC framework.
What is the legal deadline for filing an arbitration request (pedido de pronúncia arbitral) to challenge an IRC self-assessment?
The legal deadline for filing an arbitration request (pedido de pronúncia arbitral) to challenge an IRC self-assessment follows the timeframes established in the Legal Framework for Tax Arbitration (RJAT - Decree-Law 10/2011). In cases of self-assessed taxes like IRC, prior recourse to the administrative route (gracious claim) is required. Under article 57, no. 5 of the General Tax Code (LGT), if the Tax Authority does not decide within the legal timeframe, the gracious claim is deemed rejected by implicit dismissal. In this case, the gracious claim filed on 30 May 2013 was deemed rejected on 30 September 2013, and the arbitration request was filed on 21 November 2013, approximately 52 days later. The Tax Authority raised an exception of untimeliness, suggesting this period may have exceeded the permitted deadline under RJAT article 10. The timeliness of arbitration requests is strictly enforced, as it constitutes a procedural requirement that, if violated, prevents the tribunal from examining the merits of the case.
How does the CAAD assess the timeliness of arbitration requests involving IRC and Derrama municipal surcharge?
The CAAD (Centro de Arbitragem Administrativa) assesses timeliness of arbitration requests involving IRC and Derrama by verifying compliance with statutory deadlines under the RJAT. For self-assessed taxes, the assessment begins by confirming that the taxpayer exhausted the mandatory prior administrative route through a gracious claim. The tribunal then calculates whether the arbitration request was filed within the legal timeframe after the administrative decision (or implicit rejection). Timeliness is evaluated as a preliminary procedural matter, often raised as an exception by the Tax Authority before addressing substantive issues. In this case, the AT invoked the exception of untimeliness in its Response filed on 25 February 2014, and the claimant submitted a written response to this exceptional matter on 28 February 2014. The tribunal must rule on this procedural exception before proceeding to the merits. The meeting under article 18 of RJAT addressed procedural matters including this exception. Strict compliance with deadlines is essential because untimeliness is an absolute bar to arbitral jurisdiction.
What are the grounds for claiming illegality of an IRC and Derrama self-assessment related to autonomous taxation deductions?
The grounds for claiming illegality of an IRC and Derrama self-assessment related to autonomous taxation deductions include violation of substantive tax law (material defect). The claimant argues that the self-assessment incorrectly failed to deduct €538,619.72 in autonomous taxation charges when calculating taxable profit, resulting in excess tax of €134,872.02 (comprising IRC of €134,654.93, state surtax of €138.19, and municipal Derrama of €78.89). The legal basis is that autonomous taxation constitutes a tax on spending, not income tax, and therefore qualifies as a deductible tax expense under article 23, no. 1, paragraph f) of CIRC. The claimant contends the exception in article 45, no. 1, paragraph a) of CIRC does not apply because it concerns income taxes, not spending taxes. Additional grounds include violation of the legality principle, arguing the Tax Authority improperly created interpretative norms without legislative basis. The claimant supports its position with Constitutional Court jurisprudence (Decision 671/2012), prior CAAD decisions, and tax doctrine recognizing autonomous taxation's distinct nature from IRC.
Is a taxpayer entitled to a refund and compensatory interest when an IRC self-assessment is declared partially illegal?
Yes, under Portuguese tax law, when an IRC self-assessment is declared partially illegal, the taxpayer is entitled to both reimbursement of the excess tax collected and compensatory interest. In this case, the claimant explicitly requests: (a) declaration of partial illegality of the IRC and Derrama self-assessment for 2010 in the amount of €134,872.02 due to material defect of violation of law; and (b) recognition of the right to reimbursement of this amount plus compensatory interest for tax unduly collected (juros indemnizatórios). The right to compensatory interest is governed by article 43 of the General Tax Code (LGT), which provides that when a taxpayer has paid more tax than legally due, the State must pay interest for the period the excess amount was retained. This compensates the taxpayer for the financial loss of having funds improperly withheld. The interest rate and calculation method are specified in tax legislation. The reimbursement and interest are automatic consequences of declaring the self-assessment partially illegal, representing restitution of amounts collected without legal basis and compensation for the State's temporary use of those funds.