IRC Cost Deduction and Accrual Principle: CAAD Arbitration on Tax Justice (262/2015-T)

ARBITRAL DECISION

The arbitrators Fernanda Maçãs (presiding arbitrator), João Espanha and Maria Manuela do Nascimento Roseiro, hereby agree as follows:

I. REPORT

1. The Claimant A…, S.A., with corporate identification number…, filed a request for the constitution of a collective arbitral tribunal, pursuant to the combined provisions of Articles 2 and 10 of Decree-Law No. 10/2011, of 20 January (Legal Framework for Arbitration in Tax Matters, hereinafter referred to only as LFATM), in which the Respondent is the Tax and Customs Authority (TCA).

2. In such request, the Claimant initially requested an arbitral pronouncement on "the illegality of the additional assessment of Corporate Income Tax (hereinafter "CIT") relating to the fiscal year 2008 (CIT Liquidation Statement No. 2013… and Compensation No. 2013…)", in the amount of €109,487.30.

2.1. Subsequently, as a result of an invitation from the Tribunal, the Claimant proceeded to correct the Request, which then had as its object "the illegality of the decision by the Head of the CIT Services Department dismissing the Hierarchical Appeal No. …2014…, of 16-12-2014 (…) and, consequently, the illegality of the additional assessment of Corporate Income Tax (hereinafter "CIT") relating to the fiscal year 2008 (CIT Liquidation Statement No. 2013… and Compensation No. 2013…), pursuant to Article 99 of the Tax Procedure and Process Code …"

2.1.1. The Claimant concludes by requesting:

(i) "the revocation of the decision by the Head of the CIT Services Department dismissing the Hierarchical Appeal (…), with the consequent

(ii) annulment of the CIT assessment act No. 2013… and Compensation No. 2013…, based on its illegality as it rests on grounds that suffer from deficient interpretation of the applicable legal provisions, pursuant to Article 99 of the TPPC (…) and Articles 20, No. 1, subsection c), 23, No. 1, subsection c) and 35, all of the CIRC; Article 4, No. 1 of the LGT; Articles 103 and 104 of the CRP;

(iii) "(…) reimbursement of the total amount paid, of €141,222.88 (one hundred and forty-one thousand two hundred and twenty-two euros and eighty-eight cents), plus compensatory interest due until the date of reimbursement, pursuant to Article 43 of the LGT."

1. On 21/04/2015 the request for constitution of the arbitral tribunal was accepted by the President of the CAAD and automatically notified to the Tax and Customs Authority.

3.1. In the request for arbitral pronouncement, in accordance with Article 10, No. 2, subsection g), of Decree-Law No. 10/2011, of 20 January, the Claimant expressed its intention to appoint an arbitrator in accordance with subsection b) of No. 2 of Article 6 of the aforementioned LFATM.

3.2. Consequently, the constitution of the arbitral tribunal proceeded in accordance with subsection b) of No. 2 and No. 3 of Article 6 and Nos. 2, 4, 5 and 6 of Article 11 of the LFATM, with the parties proceeding to appoint their respective arbitrator, Dr. João Espanha, appointed by the Claimant, and Dr. Maria Manuela do Nascimento Roseiro, appointed by the Respondent, who, in turn, in compliance with what is provided in Article 3, No. 2, subsection b), of Ordinance No. 112-A/2011, of 22 March, appointed as Presiding Arbitrator, Counsellor Fernanda Maçãs.

Pursuant to and for the purposes of No. 7 of Article 11 of the LFATM, His Excellency the President of the CAAD informed the Parties of this appointment on 1/7/2015.

In accordance with the provision of No. 7 of Article 11 of the LFATM, as amended by Article 228 of Law No. 66-B/2012, of 31 December, following the expiry of the period provided in No. 1 of Article 13 of the LFATM, it was communicated that the Collective Arbitral Tribunal was constituted on 16/7/2015.

3.3. In these terms, the Arbitral Tribunal is properly constituted to examine and decide the subject matter of the proceedings.

1. To substantiate the request for arbitral pronouncement, the Claimant alleges, in summary, the following:

a. The present Request for examination has as its object the additional CIT assessment resulting from the following corrections made following a Tax Inspection conducted for the fiscal year 2008: a) €3,193,526.54 - interest receivable from B…, Ltd. ("B…Brazil") capitalized between October 2000 and 31 December 2007; b) €480,719.62 - interest receivable from B…Brazil capitalized in 2008; c) €184,493.45 - exchange rate variation of all interest receivable from B…Brazil capitalized through the end of 2008, relating to the fiscal year 2008;

b. In 2000 and 2001, it made financing in United States dollars ("USD") to its subsidiary B…Brazil and received the first payment of interest in 2006 but did not account for income relating thereto, nor costs relating to exchange rate differences associated with the capital of the loans, until fiscal year 2008 because it understood that it was only obligated to recognize such income at the time of receipt, at which point it could benefit from the foreign tax credit for double taxation corresponding to the withholding tax to which the interest is subject in Brazil, which occurs only with payment;

c. It then proceeded in 2008 to accumulate accounting of income at its net value of the exchange rate differences associated with the interest owed by B…Brazil of which it was creditor, capitalized between October 2000 and 31 December 2007; that is, income in the amount of €3,193,526.54 was calculated considering the gross income value of €3,706,609 (three million seven hundred and six thousand six hundred and nine euros), from which costs relating to exchange losses were deducted (€513,083), which was considered correct by the Tax Authority (in the last paragraph of page 12 of the TIR);

d. However, the Tax Authority does not admit that the Claimant, also between October 2000 and 31 December 2007, incurred exchange losses in the amount of €5,824,813.31 relating to the capital of the loans made, considering that the amount lent to B…Brazil in USD was 12,130,000 and that, using the exchange rate of 1.4721 corresponding to the date of 31 December 2007, results in the determination of the amount in Euros of €8,239,929.35;

e. A value which, compared with the historical value accounted for in €14,064,742.66, results in an exchange loss of €5,824,813.31, which should be considered as a cost, pursuant to Article 23, No. 1, subsection c) of the CIRC, it being indisputable that "exchange rate differences" constitute a cost for CIT purposes, thus having to be considered in the respective CIT assessment;

f. These exchange rate differences were already admitted by the Tax Authority regarding the interest, for the years 2000 to 2007, failing to admit these same exchange rate differences relating to the capital of the loans, so that having had income of €3,193,526.54 corresponding to net interest, taking into account costs of €5,824,813.31, there is a global loss of €2,631,286.77;

g. By not having accounted for these values as income and as costs in each of the years 2000 to 2007 – which it could/should have done - it actually prejudiced itself in €5,824,813.31, itself and never the public treasury;

h. The exchange difference of €5,824,813.31, accounted for in 2008, and corresponding to exchange rate variations associated with financing to B…Brazil, should equally be considered in the calculation of tax, for the same reasons that led to taxation of the positive equity variation, corresponding to income from interest capitalized and not paid by B…Brazil (cf. Article 23, No. 1, subsection c) of the CIRC) – that is, by not being an equity variation excepted for the purpose of forming taxable profit;

i. Moreover, the Tax Authority, regarding the interest receivable from B…Brazil capitalized in 2008 and the exchange rate variation of all interest capitalized through the end of 2008 and relating to fiscal year 2008 (positive), added them to taxable profit.

j. In dismissing the Hierarchical Appeal presented by the Claimant, the Tax Authority does not address the arguments presented above and merely states that the Claimant "made a deduction to taxable profit, thus 'nullifying' the fiscal effect, with respect to the determination of taxable base" but does not consider income and costs;

k. For correct taxation, not only should income be valued, but also costs incurred, in this case by exchange rate variation, pursuant to Article 23, No. 1, subsection c) of the CIRC, both of the interest (exchange rate differences already considered) and of the capital (exchange rate differences here demonstrated and which should be admitted by the Tax Authority in the CIT assessment);

l. The Tax Authority cannot understand that for taxation purposes only income should be considered, ignoring costs, in this case exchange losses, because this consists of violation of material truth and the principle of contributive capacity inherent in the principle of fiscal equality, noting the provision of Article 4, No. 1, of the LGT and Article 104, No. 2, of the CRP;

m. If the Tax Authority intends to make any corrections, then these should take into account both income and costs, so that there is exact correspondence with the principle of material truth and with the principle of contributive capacity; otherwise no correction should be admitted, since it will result in violation of the aforementioned principles.

n. The dismissal of the Amicable Claim and the Hierarchical Appeal confirms the violation by the Tax Authority of material truth and, consequently, the principle of contributive capacity inherent in the principle of fiscal equality, denying the principle of economic capacity and departing from the material truth of the facts;

o. The assessment is fully paid, in the course of tax enforcement proceedings, totaling the amount of €141,222.88, the annulment of the CIT assessment act should result in the annulment of the effects resulting from the aforementioned tax enforcement proceedings, the full amount paid having to be restored in order to restore the Claimant's situation as it existed prior to the proposed corrections.

p. Compensatory interest is also due to the Claimant, pursuant to Article 35, number 10, by virtue of Article 43, number 4, both of the LGT.

5.1. The Tax and Customs Authority submitted a response and attached the investigative file, invoking, in its defense, by way of objection, in summary:

a. With respect to the corrections relating to interest, in the amount of €3,193,526.54, these correspond to the capitalization of interest on the loan made to B…Brazil, as of 2007/12/31, which was accepted by the Tax Administration, as results from the Inspection Report;

b. As explained in the TIR Report, "the Subject made accounting entries in accounts 592 – results carried forward/adjustments in subsidiaries (credited) and 2711 – accruals of income/interest receivable - C…Holding (debited), considered such amount a positive equity variation not reflected in net income and, simultaneously, made a deduction to taxable profit, thus 'nullifying' the fiscal effect, with respect to the determination of taxable base";

c. But "pursuant to the Official Accounting Plan (OAP), namely the explanatory note to account 59 - Results Carried Forward and accounting directive No. 8, of 1992/01/19, Articles 18, 17, 24 of the CIRC, accounting directive No. 26, it is concluded that the deduction made by the Subject in Table 07 of Form 22 in the amount of €3,193,526.54 cannot be accepted, since economic benefits must be recognized as soon as determined, regardless of receipt, that is, the occurrence of the respective financial flow, in accordance with Article 18 of the CIRC, combined with accounting directive No. 26."

d. But, although the Claimant states in the Request for arbitral pronouncement that it disagrees with the corrections made by the Tax Administration, the corrections relating to interest are not questioned in the Request, so the dispute has as its object solely the disregard of costs corresponding to exchange rate differences;

e. With respect to the corrections relating to costs corresponding to exchange rate differences and the principle of periodization of taxable profit, given what is provided in subsection c) of No. 1 of Article 23 of the CIRC, the Tax Administration never questioned the fact that exchange rate differences constitute a deductible cost for CIT purposes, but rather the fact that the Claimant failed to account for these exchange rate differences in the years to which they pertained, in accordance with Article 18 of the CIT Code, which provides for the principle of specialization of fiscal years, also enshrined in the OAP;

f. In obedience to this principle, income and costs, as well as other positive or negative components of taxable profit, are attributable to the fiscal years to which they pertain, regardless of receipt or payment, and should be included in the financial statements of the respective periods, incorporating the very notion of profit or loss;

g. The exchange rate differences relating to the loans granted should have been accounted for at the end of each fiscal year, reflecting the exchange rate fluctuations occurring in the markets, resulting in the updating of the value of the loans made in foreign currency (in the case at hand, in American currency) as of 31 December of each year and, being negative, would constitute a cost accounted for as such (in this sense, Decision 0269/12, of 09-05-2012, of the STA);

h. In the situation of the present case, the Claimant only in fiscal year 2008 proceeded to account in account 59 – Results carried forward, of all amounts of income (accrued interest) and costs (negative exchange rate differences) accumulated from 2000 through 2007 (inclusive);

i. By accounting in a single future fiscal year all income and costs that should have been accounted for in prior years (and which, in this manner, would reflect the company's economic capacity) it violated the requirement imposed by law, not complying with the Principle of Specialization of Fiscal Years, and having a procedure inconsistent with the OAP, accounting regulations and fiscal rules (cf. item 5.2.1) and with International Accounting Standard (IAS) 21, namely item 16;

j. In the case at hand, the negative amount calculated for exchange rate differences was calculated based on the exchange rate, as of 2007-12-31 (1.4721 dollars), which is an incorrect and unacceptable criterion given that exchange rate differences must be calculated annually, as of the close of fiscal years;

k. From the calculation adopted by the Claimant it appears that the appreciation of the euro against the American dollar was fixed in the period between 2000 and 2007 and would allow use of an exchange rate at a date when the euro reached one of its highest points, making a clean slate of all variations occurring in previous years (on 26 October 2000, the euro reached its historic low against the dollar of 82 cents; on 2 January 2002, when euro notes and coins entered circulation in Portugal, the euro was worth 90 cents of the dollar, reached parity in mid-2002 and gained ground through 2004; on 15 July 2008, it reached the historic maximum of 1.59 dollars);

l. It was by choice – an incorrect one, because it disrespects accounting and tax rules, and ignorance or misinterpretation of law does not justify non-compliance nor exempts persons from the penalties established therein, as provided in Article 6 of the Civil Code - that the Claimant did not consider income relating to interest on the financing, as well as costs relating to exchange rate differences associated with the capital of the loans until fiscal year 2008;

m. The Claimant also does not explain why, given that the first interest payment relating to the financing occurred in 2006, it decided to account for accrued interest and exchange rate updates only in fiscal year 2008 (with respect to the deductibility of expenses arising from exchange rate variations, cf. the content of the STA Decision, of 09-02-1993, case 14344);

n. With respect to the alleged violation of the principle of contributive capacity and material truth, it should be noted that the Claimant did not evidence in its accounting the costs corresponding to exchange rate variations since 2000, not reflecting the positive and negative components that would correspond to its economic capacity and the alleged violation of the principle of contributive capacity - if it existed, which is not conceded at all - would be the fruit of the violation of the principle of specialization of fiscal years and of a whole set of accounting rules as explained above (cf. STA Decisions, of 05-07-2012, case 0658/11 and of 13/11/2002, case No. 01333/02).

5.2. The Respondent also presented a defense by way of exception alleging the lapse of the request for arbitral pronouncement, with the following grounds:

a. As per the request and cause of action formulated by the Claimant, the request is directed against the additional CIT assessment No. 2013…, referenced above, which had a payment deadline of 17/6/2013;

b. In accordance with No. 1 of Article 10 of the LFATM, as of the date the present request for arbitral pronouncement was filed, accepted on 17/4/2015, the 90-day period counted from the payment deadline for such assessment had already expired.

1. By order of 21 October 2015, the Tribunal invited the Claimant to perfect, if it so wished, the object of the Arbitral Request formulated, and, for purposes of production of evidence, the hearing was scheduled for 25 November 2015 at 10 a.m.

2. At the hearing, witness evidence was produced, and, after hearing the parties, "the Tribunal requested that the Claimant, within 5 days, attach to the file documents proving the official exchange rates between 2000 and 2008, in order to clarify the graph contained in the inspection report and the table of Article 26 of the request for arbitral pronouncement". At that same hearing, a time period was set for the presentation of written and successive arguments on which the parties had reached agreement, and 16 January 2016 was set as the deadline for the issuance of the Arbitral Decision.

7.1. By request of 1/12/2015 the Taxpayer proceeded to attach to the file the documents requested at the hearing by the Tribunal.

1. The Claimant and the Respondent presented written arguments within the legal period, arguing, in essence, for the positions initially defended.

II. PRELIMINARY MATTERS

1. Regarding the lapse of the request for arbitral pronouncement

9.1. The Respondent presented a defense by way of exception, arguing, among other things, that the present request for arbitral pronouncement is directed "against the additional assessment No. 2013.., with additional tax payable in the amount of €109,487.30, and corresponding compensatory interest, which had a payment deadline of 2013-06-17".

For the Tax Authority, the request for arbitral pronouncement is untimely as it was filed more than 90 days after expiry of the payment period for the additional assessment. And it adds, "Although the claimant does not cease to mention the dismissal of the hierarchical appeal, the request formulated concerns the additional tax assessment, verifying the lapse of the right of action (…)."

From the file it appears that the order dismissing the hierarchical appeal is dated 16 December 2014 and that it was notified to the Claimant on 20 January 2015 (cf. doc. 2, attached with the arbitral request). For its part, the present request was filed on 17 April 2015 (as per the CAAD platform record).

It is necessary to decide.

In its response to the exception raised by the Tax Authority, the Claimant alleged, among other things, that the revocation of the decision dismissing the hierarchical appeal is a means to obtain a declaration of illegality of the CIT assessment in question and that, on the other hand, "There can be no doubt (…) that the request for arbitral pronouncement is filed following the dismissal of the hierarchical appeal, with the time period for filing being calculated on the basis of this fact, always with a view to the ultimate objective of annulment of the CIT assessment".

Meanwhile, invited by the Tribunal to perfect its request, the Claimant presented a perfection of both its initial and final request in the following terms:

"A…, S.A., (…) comes, pursuant to Article 10, No. 1, subsection a) and No. 2, subsection c) of the Legal Framework for Tax Arbitration (Decree-Law No. 10/2011, of 20 January, as subsequently amended), to submit its request for arbitral pronouncement, based on the illegality of the decision by the Head of the CIT Services Department dismissing the Hierarchical Appeal No. …2014…, of 16-12-2014 (…) and, consequently, the illegality of the additional assessment of Corporate Income Tax (hereinafter "CIT") relating to the fiscal year 2008 (CIT Liquidation Statement No. 2013… and Compensation No. 2013…), pursuant to Article 99 of the Tax Procedure and Process Code …" and, in these terms, the following must be determined:

"(i) the revocation[1] of the decision by the Head of the CIT Services Department dismissing the Hierarchical Appeal No. …2014…, of 16-12-2014, as per the substantiation attached thereto – Information No. …/2014 (…), based on its illegality as it rests on grounds that suffer from deficient interpretation of the applicable legal provisions, pursuant to Article 99 of the TPPC and the applicable legal provisions" (sic), "in particular, Articles 20, No. 1, subsection c), 23, No. 1, subsection c) and 35, all of the CIRC; Article 4, No. 1 of the LGT; Articles 103 and 104 of the CRP, resulting, consequently, in the annulment of the CIT assessment act No. 2013… and Compensation No. 2013…, in the same terms and grounds; and (ii) the Claimant being reimbursed the total amount paid, of €141,222.88 (one hundred and forty-one thousand two hundred and twenty-two euros and eighty-eight cents), plus compensatory interest due until the date of such reimbursement, pursuant to Article 43 of the LGT."

The Claimant clarified what, in truth, already resulted from its request: the request for arbitral pronouncement comes formulated based on the dismissal of the hierarchical appeal which it submitted on the matter to the Tax and Customs Authority. By calculating the period for the request for arbitral pronouncement from notification of the order dismissing the hierarchical appeal (dated 16 December 2014 and notified to the Claimant on 20 January 2015), and not from the payment deadline of the assessment (17 June 2013), the Claimant filed said request in a timely manner.

Therefore, the exception invoked by the Respondent is without merit.

9.2. The parties have legal personality and capacity, are shown to be legitimate and are properly represented (Articles 4 and 10, No. 2, of the LFATM and Article 1 of Ordinance No. 112-A/2011, of 22 March).

9.3. The tribunal is competent and properly constituted.

9.4. The proceedings do not suffer from nullities.

9.5. There are no other circumstances that would prevent the examination of the merits of the case.

III. MERITS

III.1. Findings of Fact

1. Proven Facts

10.1. With relevance to the examination and decision of the issues raised, both preliminary and substantive, the following facts are established and proven:

a) The Claimant - whose activity includes civil engineering works and purchase and sale of real property, having expanded its operations to Africa and Brazil - made loans in American dollars to its associated company, B…, Ltd., based in Brazil (B…Brazil) in the years 2000 and 2001, with whom it executed, under Article 1256 of the Brazilian Civil Code, twelve loan contracts (designated "private instrument of loan") (PA, Annex 8 to TIR, RG3, pages 70 to 82, and witnesses presented by the Claimant);

b) The twelve contracts referred to in the preceding number provide in their respective clauses: availability, in a single remittance or in parts, of amounts in national currency but equivalent, as of the foreign exchange closing date, to determined amounts in United States dollars and total €12,130,000 (twelve million one hundred and thirty thousand dollars, corresponding to the sum of the amounts in dollars, contained in the different contracts, of 1,050,000.00, 1,860,000.00, 3,000,000.00, 3,290,000.00, 170,000.00, 210,000.00, 220,000.00, 330,000.00, 350,000.00, 350,000.00, 400,000.00 and 900,000.00); restitution of the loaned amounts in the 24th month from the dates of foreign exchange closing of the respective remittances; payment of interest semi-annually, with application of an interest rate of 5% in six of the contracts and 5.5% in the other six (Article 9 of the Request, Article 24 of the Response, Annex 8 of the TIR, PA, RG 3, p. 70 to 82);

c) Until fiscal year 2008 the Claimant did not proceed with the proper recording of the loans referred to in the preceding numbers, in accordance with accounting directive No. 8 and the principle of specialization of fiscal years, only doing so following emphasis made by the Official Auditor in the legal certification of accounts for 2008, dated 9 March 2009 (TIR, II.3.2. PA, RG 2, pages 42);

d) The Claimant filed its CIT income tax return Form 22 for the period 2008 on 28 October 2009, having calculated a tax loss of €1,949,958.12 and, for self-assessment purposes, a reimbursement of €29,657.95, which it received via bank transfer on 30-10-2009 (PA, RG 2, Annex 7 to TIR, pages 58 to 60 v. RH, page 42);

e) The corrections made regarding CIT resulted from verification that the loans referred to in subsections a) and b), partially paid starting in 2006, were accounted for in fiscal year 2008 in the corresponding accounts for income and financial gains (Articles 10 and 11 of the Request, Article 26 Response, RI, III. 1.1. and in the course of hearing in RG, page 181 of the PA, RG, p. 181 and declarations of the witnesses);

f) The loans were accounted for in the OAP account 4131002 – Financial Investments/loans from C…Holding SA, which, in fiscal year 2008, presented an opening balance of €15,219,543.53 (TIR, III.1.1., PA, pages 42, v.);

g) In fiscal year 2008, to determine the total amount of interest accounted for in account 2711 (in the total amount of €3,858,739.61), the Claimant calculated the number of days of the loan until 2007/12/31 and 2008/12/31, having applied a variable interest rate in the order of 5% and 5.5% (in accordance with what was established in the respective contracts) and carried out the exchange rate update of capital and interest as of 2007/12/31 and 2008/12/31 (Article 26 of the Response, TIR, III.1.1., PA, RG, 3, page 42, verso);

h) Interest was accounted for by debiting OAP account 2711 - Accruals of income/interest receivable/C…Holding by crediting account 592 - Results carried forward/adjustments in subsidiaries (TIR, III.1.1., PA, RG, 3, page 43);

i) For purposes of determining fiscal result, the Claimant entered the interest referred to in the preceding number in field 202 of Table 07 as a positive equity variation not reflected in net income and, simultaneously, deducted the same amount in field 237 of the TIR declaration, IX.2.1. PA, RG, 3, page 50, verso);

j) The Claimant made, in 2008, a calculation of the accumulated exchange rate variation of the financing granted to B…Brazil, by application of the exchange rate 1.4721, in effect as of 2007/12/31, having calculated the negative amount of €5,824,813.31 (TIR, IX.2.1., PA, RG, 3, page 50, verso);

k) The amount of €5,824,813.31 was, in accounting terms, debited in account 59 – results carried forward, by crediting account 413 – Loans from financing, leading to a decrease in the company's net situation TIR, IX.2.1., PA, RG, 3, page 50, verso);

l) In tax terms, the amount of €5,824,813.31 was entered in field 203 of the CIT return as a negative equity variation not reflected in net income, with the same value being simultaneously added in field 225 of the return (TIR, IX.2.1., PA, RG, 3, page 51, verso);

m) The Claimant was the subject of an external inspection action relating to fiscal year 2008, initiated by Service Order No. OI2012…, which took place between 7 November 2012 and 25 February 2013, and which gave rise to the Draft Tax Inspection Report notified to the Claimant by letter No.…, of 6 March 2014 (TIR, II.1 and Annex 21, PA, RG 2, pages 40 and RG.6, page 180);

n) In the Draft Tax Inspection Report resulting from the inspection action, divergencies/irregularities were identified in some accounts, noting with respect to CIT corrections in a total amount of €4,276,831.63, corresponding to (i) €3,193,526.54 – interest receivable from B…Brazil capitalized between October 2000 and 31 December 2007; (ii) €480,719.62 – interest receivable from B…Brazil capitalized in 2008; (iii) €184,493.45 – exchange rate variation (iv) financial costs not accepted for tax purposes (v) €297,695.42 – costs relating to credits with doubtful collectability not accepted for tax purposes, namely (with relevance to the present case) those relating to Deductions made in Table 07 of Form 22 (TIR, III., PA, RG 2, page 42);

o) The draft Tax Inspection Report referred to in the preceding number, containing the corrections to taxable income, for CIT purposes, in the total value of €4,276,831.63, of which the amount of €3,858,739.61 concerned "the deductions made in T07 - Form 22: €3,193,526.24 + €480,719.62 + €184,493.45), was notified to the Claimant via letter No. 016651, of 2013/03/06, to exercise within 15 (fifteen) days the right to a hearing on the proposed corrections (TIR, III.1.1. and 3.1, PA.RG, 3, page 44, v. and 49; PA, RG 6, page 180);

p) The right to a hearing was exercised through a document filed with the Tax Authority on 19 March 2013, where the Claimant expressed its disagreement with the corrections (i) (ii) (iii) and (v), referred to in subsection n) and part of the corrections relating to financial costs (iv) [2]. (PA, RG 6, pages 180 to 182);

q) In exercising the right to a hearing, the Claimant invoked that "the proposed correction, by forgetting the exchange rate differences that penalized A… and, considering only the interest not capitalized and not received as income, is not proceeding correctly (and even less fairly in light of the principle of contributive capacity constitutionally enshrined)" and that "the negative equity variation of €5,824,813.31 accounted for in 2008 and corresponding to exchange rate variations associated with financing to B…Brazil should equally be considered, for the same reasons that led to taxation of positive equity variation corresponding to income from interest capitalized and not paid by B…Brazil (cf. Article 23, No. 1, subsection c) of the CIRC) – that is, because it is not an equity variation excepted for the purpose of forming taxable profit" (PA, RG 6, pages 181 and v);

r) On 20 March 2013, the Claimant delivered a corrected return in which it added to field 225 the amount of €55,159.58 corresponding to a correction relating to financial charges accepted in prior hearing, and with a determination of taxable profit of €1,894,798.54 (TIR, IX.2.2., PA, RG, pages 52 and 55, v.);

s) The Final Tax Inspection Report of 25 March 2013, concluded the examination of the response relating to the matter of deductions in Table 07 as follows: «For not having respected the principle of specialization of fiscal years, the Subject is now, in fiscal year 2008, reflecting an exchange rate calculated at the close of 2007, which should have been calculated annually, at the close of each fiscal year, in prior years, as the OAP recommends, as well as international accounting standards. In conclusion, the taxpayer's intention to disregard the amount added in Form 22 of negative exchange rate differences will not be accepted, as it is considered that they are correctly added in the calculation of fiscal result. As for the amount concerning accrued interest, the Subject cannot make its taxation dependent on receipt of such interest, so they cannot be deducted, now in field 237 of Form 22 relating to fiscal year 2008, consequently the Tax Authority maintains its correction, with the substantiation expressed in the draft report. Finally, it should be noted that the Subject states that it chose, until fiscal year 2008, not to consider income relating to interest on the financing granted to B…Brazil because it understood that it should only recognize them at the time of receipt. Now, as we have seen, this choice does not comply with accounting and tax rules. And also declared that interest was paid, for the first time in 2006. What remained to be clarified is why only in fiscal year 2008 did it decide to account for accrued interest and exchange rate updates, when it should have done so in a timely manner» (TIR, IX.2.1, PA, RG 2, page 52);

t) As a result of the analysis conducted by the Final Report, the correction amounts were thus calculated and the fiscal result declared in fiscal year 2008 was altered: corrections in CIT €4,156,435.03, with change of the result from a loss of €1,894,798.54 to taxable profit of €2,261,636.49 (Article 31 of the Response and TIR, PA RG 2, page 54, v. and 55);

u) Taking into account the losses carried forward from the period 2007, in the amount of €1,610,394.27, pursuant to Article 52 of the CIRC, the taxable base was calculated in the amount of €651,242.22 (€2,261,636.49 - €1,610,394.27 = €651,242.22) (Article 32 of the Response and TIR, IX.2.5, PA RG2, pages 54.v and 55);

v) An additional assessment No. 2013… and compensation No. 2013… was issued, dated 27 May 2013, with a demonstration of liquidation of interest and adjustment of accounts, in a total amount due of €109,487.30 (€91,397.14 of tax value; €18,086.60 of compensatory interest and €3.26 of default interest) (Article 33 of the Response and PA, RG 1, page 4 decision of RH, and doc. No. 2 attached with the Request);

w) On 25 September 2013, the Claimant presented an amicable claim - which was processed with No. …2013… – requesting annulment of the assessment referred to in the preceding number, invoking, in particular, the disregard as costs of exchange losses in the amount of €5,824,813.31 (Article 34 of the Response and PA, RG 1, pages 4 to 10);

x) Notified by letter No. … of 13 February 2014 of the draft dismissal and to exercise prior hearing, the Claimant responded on 6 March 2014 (PA, RG7, pages 212 to 222);

y) The Amicable Claim was dismissed by order of 21 March 2014 by the Deputy Director of Finance, under information from the Administrative Justice Division of the Finance Directorate of Lisbon, dated 10 March 2014 (cf. the PA);

z) On 28 April 2014, the Claimant presented a hierarchical appeal (Case No. …/14) of the decision referred to in the preceding number, expressing disagreement with the draft decision, in particular with regard to the disregard as costs of exchange losses, without corresponding consideration of exchange losses (PA, RG7, pages 212 to 222);

aa) Having the appealed act been upheld by order of 29 May 2014 by the Director of Finance of Lisbon (under information of 26 May 2014), the appeal was dismissed by order of the Director of the CIT Services of 16 December 2014 as per the content of Information No. …/2014, of the CIT Services, dated 27 October 2014 (PA – RH, page 38);

bb) Said order was notified to the Claimant on 20 January 2015 (cf. doc 2 attached to the file by the Claimant) and the arbitral request was filed on 17 April 2015, as per the record on the CAAD platform;

cc) The assessment is fully paid, in the course of tax enforcement proceedings, totaling the amount of €141,222.88;

dd) In the period between October 2000 and 31 December 2007, the Claimant incurred exchange losses relating to the capital of the loans made;

ee) The Claimant made reference to the existence of such losses in the CIT Form 22;

ff) In said return, the Claimant attributed to such losses the value of €5,824,813.31;

gg) The Tax Authority, in the context of the assessment, did not take into account any cost relating to said exchange rate variations.

10.2. Facts Not Proven

It was not proven that the costs relating to exchange rate differences associated with the capital of the loans, until fiscal year 2008, correspond to the amount declared by the Claimant in CIT Form 22 (€5,824,813.31).

10.3. Substantiation of Proven and Unproven Facts

The factual findings were based on the position taken by each of the Parties and not contradicted by the opposing party, on a critical analysis of the documents attached to the file (in the pleadings and at the hearing phase) whose authenticity and veracity were not contested by either party.

It was further based on the content of witness testimony produced at trial, which proved to be credible, given the conviction, clarity, coherence and relevance with which it was given.

10.4. There are no other facts relevant to the examination of the merits of the case that have not been proven.

III.2. Legal Analysis

11.1. Regarding the illegality of the assessment subject to challenge

The Tax and Customs Authority (TCA) conducted an inspection of the Claimant relating to the year 2008, from which resulted, in CIT matters, several corrections to taxable profit, only those concerning exchange rate variations recorded by the Claimant being challenged.

Such variations are the following:

a) €3,193,526.54 – interest receivable from B…, Ltd. ("B…Brazil") capitalized between October 2000 and 31 December 2007;

b) €480,719.62 – interest receivable from B…Brazil capitalized in 2008;

c) €184,493.45 – exchange rate variation of all interest receivable from B…Brazil capitalized through the end of 2008, relating to fiscal year 2007.

d) (€5,824,813.31) - exchange rate variation of the value of the loan granted to B…Brazil.

It results from the evidence that the Claimant, as shareholder of B…Brazil, made loans in dollars to the latter (in a total amount of 12,130,000) from the United States of America ("USD"), in the years 2000 and 2001, on the basis of twelve loan contracts.

For years the Claimant did not proceed, in particular for tax purposes and in accordance with the principle of specialization of fiscal years, to the proper accounting of income relating to the accrued interest. It also did not proceed to update the exchange rate of the credits of the capital loaned and, therefore, did not account for, in each of the fiscal years, any exchange losses or gains.

Following emphasis by the Official Auditor in the legal certification of accounts relating to fiscal year 2008, the Claimant, in accordance with accounting directive No. 8, accounted for interest receivable from A… capitalized through 31.12.2007, by debiting account 2711 – accruals of income/interest receivable by crediting account 592 – results carried forward/adjustments in subsidiaries. Simultaneously, it recorded interest receivable relating to fiscal year 2008, in the amount of €480,719.62, by moving the same account 2711, by crediting the account for income and financial gains 782 - gains in group and associated companies.

The Claimant recorded the exchange rate variation of €184,493.45, relating to interest relating to 2008, capitalized through 31.12.2007, by accounting by debiting account 2711, by crediting the account for income and financial gains 785 - favorable exchange rate differences.

With respect to the capital loaned, the Claimant calculated an accumulated exchange rate variation of €5,824,813.31 by application of the exchange rate 1.4721, in effect as of 31.12.2007, resulting from the difference between the initial value of the financing of €14,064,742.66, accounted for in the OAP account 4131002 – Financial Investments/loans from financing and the updated value of €8,239,929.35, this difference - €5,824,813.31 - being recorded in account 592 - results carried forward/adjustments in subsidiaries, by debiting.

On 28 October 2009 the Claimant filed Form 22 relating to 2008, as follows:

• it entered the amount of €3,193,526.54 (which it says corresponds to the value of interest deducted from accumulated negative exchange rate variations) as a positive equity variation not reflected in income, pursuant to Article 21 of the CIRC, in field 202 of Table 07, but also deducted the same amount from taxable profit in field 237 of the return.

• the amount of accumulated exchange rate differences relating to the capital loaned, of €5,824,813.31, was entered in field 203 of Table 07 of the periodic CIT return as a negative equity variation not reflected in the net income of the fiscal year and, simultaneously, the same amount was added in field 225 of Table 07 of said return, thus 'nullifying' its effect on fiscal result.

Following inspection action, the Tax Authority made corrections to the Claimant's return that included the elimination of the deduction of the positive equity variation relating to interest accumulated through 31/12/207. That is, the Tax Authority considered that the positive effect relating to interest and its exchange rate update should be taxed, but did not correct the taxpayer's return so that taxable profit would be affected (decreased) by the effect of the exchange rate update of the credit granted to the associated company.

It is this difference in approach that the Claimant contests, demanding that, similar to what occurs with interest and its exchange rate variations, the exchange rate variation relating to capital also be considered in the corrections to be made by the Tax Authority regarding fiscal year 2008.

This is, in short, the central issue to which the dispute is confined and which must be resolved.

What is questioned is whether the Tax Authority should consider the negative equity variation constituted by the exchange rate difference relating to the capital loaned by the Claimant to B…Brazil recorded over prior fiscal years and entered only in 2008.

As we have seen, in the Claimant's understanding, such recognition is a corollary of the correction made to its 2008 taxable profit with respect to loan interest, the specialization of which should also have been made over prior fiscal years and whose recording in 2008 the Tax Authority accepts. Otherwise, and according to the Claimant, the practice adopted by the Tax Authority will consist of violation of material truth and consequently the principle of contributive capacity, inherent in the principle of fiscal equality.

The Respondent contests this, arguing that it is opposed by the principle of specialization of fiscal years, enshrined in accounting law (then and now) and in Article 18 of the CIRC (likewise, then and now), such non-observance by the Claimant being what would violate the principle of material truth.

What is the law on this?

11.1.1. The accounting and tax regime for exchange rate differences, in effect at the time of the facts, is set forth and described in point 6 of CAAD Decision 76/2012-T, which we reproduce in the part considered pertinent:

"Article 17 of the CIRC, in the version in effect in 2006[3], provides that 'the taxable profit of legal entities and other entities mentioned in subsection a) of No. 1 of Article 3 is constituted by the algebraic sum of the net result for the fiscal year and the positive and negative equity variations occurring in the same period and not reflected in such result, determined on the basis of accounting and eventually corrected in accordance with this Code'."

"Article 18 of the CIRC, in the same version, provides in its Nos. 1 and 2 that 'income and costs, as well as other positive or negative components of taxable profit, are attributable to the fiscal year to which they pertain, in accordance with the principle of specialization of fiscal years' and that 'positive or negative components considered as pertaining to prior fiscal years are only attributable to a fiscal year when as of the date of closing of accounts of the year to which they should be attributed they were unforeseeable or manifestly unknown'."

"Article 20 of the CIRC provides that 'income or gains are considered to be those derived from operations of any nature, as a result of normal or occasional action, basic or merely accessory, in particular those resulting from' 'income of a financial nature, such as interest, dividends, discounts, premiums, transfers, exchange rate differences and bond issue premiums',"

"Article 23 of the CIRC, in the version in effect in 2006[4], provides, insofar as is relevant here, the following:

1 – Costs or losses are considered to be those that are demonstrably indispensable for the realization of income or gains subject to taxation or for the maintenance of the income-producing source, in particular the following: (...)

c) Financial charges, such as interest on foreign capital employed in operations, discounts, premiums, transfers, exchange rate differences, credit operation expenses, debt collection and issuance of shares, bonds and other securities and bond redemption premiums; "

"As results from the express content of the transcribed Articles 20 and 23, exchange rate differences, positive or negative, are to be considered in determining taxable profit as gains or losses."

"The principle of economic specialization of fiscal years, referred to in No. 1 of Article 18 of the CIRC, translates to the rule that must be considered as gains or losses of a particular fiscal year the income and costs, as well as other positive or negative components of taxable profit, that pertain to that fiscal year, being irrelevant the fiscal year in which they materialize."

"In No. 2 of the same Article 18 an exception is provided only for positive or negative components of taxable profit that, as of the date of closing of accounts of a particular fiscal year, were unforeseeable or manifestly unknown, which clearly shows that, in other cases, such positive or negative components determined as of the date of closing of accounts are relevant to the determination of the assessment of that fiscal year."

"In the case at hand, it is manifest that we are not in a situation that can be categorized as this exception, since exchange rate variations at the end of each fiscal year are perfectly determinable."

"On the other hand, the determination of taxable profit is made on the basis of accounting and the accounting rules applicable in 2006 imposed the accounting of exchange rate differences for purposes of determining accounting result."

"In fact, since the amendments introduced by Decree-Law No. 228/86, of 13 August, in the Official Accounting Plan approved by Decree-Law No. 47/77, of 7 February, the results of exchange rate differences began to be considered, as a rule, as current and relevant to the balance sheet. In particular with respect to credits or debts maturing in the medium and long term, as is the case of those at issue in the present proceedings, exchange rate differences began to be capable of being deferred only 'when there are objective reasons to consider a reversible evolution in the exchange rate' (as clarified in the Preamble of such decree). This legislative intention was implemented in the text of the decree as follows:

2.2.1 - Operations in foreign currency are recorded at the exchange rate of the date considered for the operation, unless the exchange rate is fixed by the parties or guaranteed by a third entity. As of the balance sheet date, credits or debts resulting from such operations, with respect to which there is no fixing or guarantee of exchange rate, are updated on the basis of the exchange rate of that date;

2.2.2 - In the case of credits or debts payable in the short term, the exchange rate differences resulting from the update referred to in 2.2.1 are recorded in subaccounts 667 or 767.

With respect to credits and debts maturing in the medium and long term, exchange rate differences calculated as of the balance sheet date are recorded in subaccounts 667 or 767, if there are reasonable indicators that the evolution of the exchange rate is irreversible in the immediate future; otherwise, they are recorded in subaccounts 2712 or 2752 and transferred, respectively, to subaccounts 667 or 767 in the fiscal years in which payments or receipts, total or partial, of the debts or credits with which they are related occur and for the part corresponding to each payment or receipt;"

"In the Official Accounting Plan approved by Decree-Law No. 410/89, of 21 November, in effect in 2006[5], the obligation to account for exchange rate differences in the balance sheet was reinforced, with respect to losses, expressly clarifying that exchange rate differences are, as a rule, 'recognized as results for the fiscal year' and restricting the possibility of deferment to cases of favorable exchange rate differences (gains) and not also losses, by providing the following:

5.2 - Debts from and to third parties

5.2.1 - Operations in foreign currency are recorded at the exchange rate of the date considered for the operation, unless the exchange rate is fixed by the parties or guaranteed by a third entity.

As of the balance sheet date, debts from or to third parties resulting from such operations, in relation to which there is no fixing or guarantee of exchange rate, are updated on the basis of the exchange rate of that date.

5.2.2 - As a general principle, exchange rate differences resulting from the update referred to in 5.2.1 are recognized as results for the fiscal year and recorded in accounts 685 «Financial costs and losses - Unfavorable exchange rate differences» or 785 «Income and financial gains - Favorable exchange rate differences».

Where favorable exchange rate differences result from medium and long-term debts, they should be deferred, if there are reasonable expectations that the gain is reversible. These shall be transferred to account 785 in the fiscal year in which payments or receipts, total or partial, of the debts with which they are related occur and for the part corresponding to each payment or receipt."

"Thus, it is to be concluded that accounting for unfavorable exchange rate differences as results for the fiscal year was imposed by the accounting rules in effect at the date when the facts at issue occurred."

The Claimant acted incorrectly, therefore, by not accounting in each of the fiscal years to which they pertained, (i) interest and (ii) exchange rate variations relating to both such interest and the value of the capital loaned, as it violated the rules of the principle of specialization of fiscal years which, being accounting rules – furthermore expressly adopted by the CIRC in its Article 18, should have been observed.

Nevertheless, it is important to ascertain and decide to what extent the Respondent is authorized to correct only the Claimant's return with respect to positive equity variations, increasing taxable profit and disregarding the exchange rate updates relating to capital, which would mitigate taxation, with the argument of violation of the principle of specialization of fiscal years.

Let us examine this.

11.1.2. From the periodization of results imposed by management and economic information needs derives the "principle of specialization of fiscal years", "characterized by the division of the company's life into temporal intervals and the attribution to each of them of the components, positive and negative, that make it possible to determine the result corresponding to it". (…) such specialization "requires the conduct of an end-of-year inventory, from which derives the necessity to impute to each fiscal year all income and costs that are inherent to it and only those" [6].

The same Author,[7] referring to the importance and reason for the principle of specialization of fiscal years, considers that "the temporal specialization of the components of profit is even more important for tax purposes than for accounting purposes, given the constraints in which tax determination takes place, so as to avoid deviations of results between different fiscal years with purposes of minimization of the tax burden, (…). In fact, such temporal imputation can be an instrument of results manipulation, so as to, in particular:

a) Defer profit over time;

b) Fractionate profits, distributing them over different fiscal years, with the objective of avoiding, in a progressive tax, taxation by higher rates;

c) Concentrate profit in a fiscal year where more substantial deductions can be made effective (e.g., by carryover of losses or by tax incentives)."

The principle of specialization of fiscal years "aims to tax the wealth generated in each fiscal year, regardless of its actual receipt", which gains special "relevance in cases where there is no coincidence between the fiscal year in which gains or losses are accounted for and the fiscal year in which the corresponding receipts or expenses take place.

As was held in the Decision of the STA of 27/4/2008, case No. 0807/07, "That principle thus applies to cases in which costs are accounted for in one fiscal year but the actual expense is borne in another, and to cases in which the gain, although accounted for in one fiscal year, is in fact received in another. Now in such situations, in which there is a mismatch between the accounting of costs and income and their actual implementation, the law provides that they be accounted for as they are obtained and borne, not as their receipt or payment occurs. Hence, charges emerging from operations carried out in a fiscal year should be imputed to it, even if not borne in it, just as income resulting from operations carried out in a fiscal year should be imputed to it even if collected in another."

Nevertheless, it is equally established jurisprudence of this Supreme Court that the rigidity of this principle must be mitigated or tempered by the invocation of the principle of justice, in situations in which, for example, all periods for revision of the tax act being surpassed and there being no prejudice to the State, one should avoid falling into an unjustified injustice to the administered. In this sense, it was held in the Decision of the STA of 9 May 2012, case No. 269/12, reproducing the Decision of the same Court of 19/11/2008, case No. 0325/08:

"The principle of justice is a basic principle that must inform all activity of the Tax Administration, as results from Article 266, No. 2, of the CRP and Article 55 of the LGT, whose relevance is not exhausted within the scope of acts undertaken in the exercise of discretionary powers, although it has there a primary domain of application. Since Article 266, No. 2, of the CRP makes no distinction in the application of legality, both by the Administration and by the courts, each provision that frames a particular action of the Administration cannot be viewed in isolation; rather, the entirety of the legal system must be considered, which is the primary element of legal interpretation (Article 9, No. 1, of the CC). It cannot be said that, in cases of exercise of binding powers, compliance with a particular ordinary law prevails over the constitutional principles referred to, for these principles also form part of the binding normative bloc, they are also defining of legality, and, as constitutional rules, are of priority application in relation to ordinary law".

Further on, in the same Decision it can be read that "from the aforementioned Article 18, No. 1, of the CIRC, there results a binding for the Administration, which, as a rule, must apply the principle of specialization of fiscal years in its activity of control of the returns presented by taxpayers. But the exercise of this power of control, predominantly binding, can lead to a situation of flagrant injustice, and in those situations, the principle of justice, enshrined in Articles 266, No. 2, of the CRP and Article 55 of the LGT, must be made to operate, to prevent such situation of injustice repudiated by the Constitution from materializing.

"In the weighing of the values at stake (on one hand the principle of specialization of fiscal years which is a legislatively arbitrary rule of temporal separation, for tax purposes, of a tax fact of prolonged duration and, on the other hand, the principle of justice, which reflects one of the nuclear concerns of a State governed by the rule of law) it is manifest that, in a situation of incompatibility, the latter principle should prevail."

On this subject, it should be noted the arbitral jurisprudence noted in CAAD Decision No. 362/2014-T:

"The Supreme Administrative Court has (…) decided, with respect to the principle of specialization of fiscal years, that 'this principle must tend to be conformed to and be interpreted in accordance with the principle of justice, with constitutional and legal conformity (Articles 266, No. 2 of the CRP and Article 55 of the LGT), so as to permit the imputation to a fiscal year of costs relating to prior fiscal years, provided it does not result from voluntary and intentional omissions, aimed at operating the transfer of results between fiscal years»[8]".

In the same sense, the Central Administrative Court of the South[9] pronounced as follows:

I.- The principle of specialization or autonomy of fiscal years requires that income and costs economically attributable to a determined fiscal year be considered only in that fiscal year, only they being able, thus, to influence its result.

II.- Such principle suffers the exceptions provided for by law, which are: - in cases in which there is unforeseeability or manifest lack of knowledge of positive or negative components and works of a multi-year nature (Article 18, Nos. 2 and 5 and Article 19 of the CIRC); in situations in which the tax administration suffered no prejudice from the error committed by the taxpayer and when such error does not result from voluntary or intentional omissions aimed at operating transfers of results between fiscal years.

11.1.3. After this brief examination of the applicable legal provisions and the jurisprudence on the meaning and scope of the principle of specialization of fiscal years, let us return to the case at hand.

As has been stated, the Claimant indicated in its return that there were corrections to taxable profit, but that they canceled each other out, not affecting it.

For its part, the Tax Authority, in its corrections, limited itself to adding to taxable profit all entries recorded in results accounts relating to interest and respective exchange rate variations, but did not correct (which would cause taxable profit for the same fiscal year to decrease) the exchange rate variation relating to the capital of the loan to which such interest pertains.

According to the Claimant, in addition to the positive equity variation, it incurred in the same period mentioned above, exchange losses in the amount of €5,824,813.31 (five million eight hundred and twenty-four thousand eight hundred and thirteen euros and thirty-one cents), relating to the capital of the loans made.

The Tax Authority's reasoning regarding the assessment relating to interest not accounted for as income (and respective exchange rate updates) and thus not taxed is not disputed; the question is its failure to pay equal attention to the negative components of taxable profit.

The Tax Authority argues that it does not have any obligation to reconstruct a supposed accounting truth for taxpayers, with the duty to respect accounting and tax law resting on taxpayers.

By virtue of Article 266 of the CRP, the activity of the Tax Administration must be conducted "in subordination to the Constitution and law and must respect the rights and legitimate interests of citizens (principle of legality) and the principles of equality, proportionality, justice, impartiality and good faith".

According to DIOGO LEITE CAMPOS AND OTHERS, "by virtue of that constitutional rule, the action of the administration, to be legal, must be in harmony with the principles of equality, proportionality, justice, impartiality and good faith which, having their own content, do not cease to form part of the bloc of legality that such action must respect" (cf. General Tax Law Annotated and Commented, 4th ed. 2012, p.446).

According to the same Authors (op. cit., p. 449), the principles of justice and impartiality require of the administration, in the field of tax procedure, that it be guided "by criteria of impartiality in investigating factual situations, conducting all necessary steps to ascertain material truth, regardless of whether the facts to be investigated are contrary to the patrimonial interests that the tax administration must defend", which has recognition in Article 58 of the LGT.

Now, in the case at hand, in the absence of legal provision justifying differentiated treatment between positive and negative components of taxable profit, the mentioned principles would require that the Tax Authority consider taxable profit as a whole, making corrections to the taxpayer's return, both with respect to components that aggravate taxable profit and those that would contribute to mitigate it.

In fact, with respect to the recording of exchange rate devaluations of capital, while the respective recording could be done annually, it was not obligatory. The OAP (5.2.2.) foresaw that in the case of medium and long-term credits and debts, the recording could be done differently. If the company chose to do so differently (originally, upon return of capital), only in justified and weighty circumstances could it alter the criterion followed, in the name of the principle of consistency – moreover treating itself a potential effect, susceptible to reversal. To that extent, there is no necessarily reason to impose the same treatment on exchange rate differences associated with current income (accrued interest) and differences resulting from the updating of the exchange rate of capital, which could be relevant only at the date of its repayment or receipt.

It is possible, however, for the Claimant to opt to treat differently interest and capital, as well as their respective exchange rate differences, and its decision was to record the accounting impact of those loans in its various aspects. Whether from zealousness in following the recommendations of the Official Auditor, whether (as everything suggests) for reasons of transparency and clarity in its financial reporting, it is clear from the elements brought to the file that the Claimant's option was to record the multiple aspects and dimensions of its financial operation with its Brazilian subsidiary, as soon as it was alerted to the error in which it was incurring. An option that, in the present case, is legitimate and merits no censure, as it had nothing to do with manipulation or transfer of results between fiscal years in order to obtain gain at the expense of the Treasury.

From this perspective, by limiting the corrections to the taxpayer's return in the component that aggravates taxation, the Tax Authority does not proceed correctly, as it devalues the accounting records and their fiscal impact of the operation as a whole, whereas it was as a whole that the Claimant wished to work with it. To that extent, the Tax Authority must respect the legitimate option, in this concrete case, of the Claimant, so it is obligated to correct symmetrically the components that would cause lesser taxation.

Against this understanding, the argument regarding violation of the principle of specialization of fiscal years does not hold, because, as we have seen, this is an instrument for achieving just taxation and not an expedient that permits the Tax Authority to collect tax superior to what was due.

It is equally untenable that responsibility for the regularity and correctness of its returns be placed only on the taxpayer.

In fact, the phenomenon of the privatization of justice cannot transfer to the taxpayer the burden of incurring losses resulting from errors in self-assessments, which, moreover, in certain contexts, are equated to errors by the tax administration services (for example, by way of example, Articles 52, No. 2, of the LGT, Article 78, No. 2, of the LGT and Article 131 of the TPPC).

Consequently, in addition to principles such as those of good faith, justice, material truth, the very principle of legality understood in a broad sense (as a bloc of legality including the mentioned constitutional principles) would require that the Tax Authority proceed to a global examination of the value of the taxpayer's taxable profit, correcting the return both with respect to positive equity variations and negative ones.

Moreover, given the circumstances surrounding the case, there emerges from the file sufficient evidence to conclude that non-compliance with the principle of specialization of fiscal years did not result "from voluntary and intentional omissions, but rather from an error, an error which, as soon as detected, was subject to correction in accordance with the option taken by the Claimant, which was to record accounting all aspects of its financial operation with its Brazilian subsidiary.

Thus, we are not, therefore, in the presence of a voluntary or intentional omission, in particular aimed at operating transfers of results between fiscal years, circumventing the purposes pursued by law with the establishment of the principle of specialization of fiscal years.

Finally, resulting from the file, an increase in assessment unjustly due in favor of the State, the application of the principle of justice aims precisely to restore the balance between the Tax Authority and the taxpayer. There being no prejudice to the State, there is, in this manner, no intent that can have as its object such prejudice.

Thus, in agreement with the jurisprudence referred to above, we understand that, the principle of specialization of fiscal years not being an absolute principle, and that the same, as an accounting and tax rule, cannot be interpreted and applied to the detriment of the principles of material truth, contributive capacity and justice. Put differently, it cannot be invoked to prevent the acceptance for tax purposes of all exchange rate variations recorded by the Claimant in fiscal year 2008, even though they should have been recorded in prior fiscal years.

Nothing else would make sense – above all, to require, as the Tax Authority does, that such principle be observed only with respect to negative components of taxable profit (more precisely, with respect to certain negative components, as part of them – those relating to interest – were accepted by the Tax Authority), but already being dispensable with respect to positive components.

Given the circumstances of the case at hand, taking into account, on one hand, the operations at issue and the manner in which they occurred, as well as the fact that there was no intention to omit costs or defer their payment, and, on the other hand, having weighed the interests and principles in conflict, it is understood that there are reasons to give precedence to the principle of justice, concluding to the illegality of the corrections made by the Tax Authority.

In this sequence, having been proven that the Claimant incurred exchange losses relating to the capital loaned, which were not considered by the Tax Authority in the assessment, when they should have been, the assessment suffers from illegality, regardless of the exact value to which such exchange rate variations correspond.

In these terms, it cannot fail to be concluded that the decision by the Head of the CIT Services Department dismissing Hierarchical Appeal No. …2014…, of 16-12-2014, is illegal, with the consequent annulment of the additional CIT assessment act relating to fiscal year 2008 (CIT Liquidation Statement No. 2013… and Compensation No. 2013…), and reimbursement of the amount paid in the sum to be fixed in execution of judgment.

11.2. Regarding Compensatory Interest

The Claimant also petitions for payment of compensatory interest, in accordance with Article 43, No. 1, of the LGT.

In accordance with what is established in subsection b) of No. 1 of Article 24 of the LFATM (following Article 100 of the TPPC), the tax administration, in the exact terms of the merits of the arbitral decision in favor of the taxpayer and until the end of the period provided for voluntary execution of judgments by judicial tax courts, must "restore the situation that would exist if the tax act subject to the arbitral decision had not been undertaken, adopting the acts and operations necessary for such purpose".

Moreover, Article 24, No. 5, of the LFATM provides that payment of interest, regardless of its nature, is due, in accordance with the provisions of the General Tax Law and the Tax Procedure and Process Code" – which must be understood as permitting recognition of the right to compensatory interest in arbitral proceedings. Indeed, although Article 2, No. 1, subsections a) and b), of the LFATM uses the expression "declaration of illegality" to define the competence of arbitral tribunals operating at the CAAD, making no reference to condemnatory decisions, it must be understood that the competence includes the powers attributed to judicial tribunals in impugnation proceedings, being this the interpretation that conforms with the sense of the legislative authorization on which the Government based itself to approve the LFATM.

Now, with the contested additional assessment being annulled as illegal, as a rule, there should be not only reimbursement of the tax paid, but also payment of compensatory interest, for only thus can the "(…) situation that would exist if the tax act subject to arbitral decision had not been undertaken" be restored. It should be noted that this is not about establishing an objective nexus between the annulment of the assessment and the duty to pay interest, but rather the imputation of a responsibility linked to the culpability of the Tax Authority services, which promoted an assessment that, by the non-acceptance of costs linked to the exchange rate variation recorded with respect to the capital of the loan in 2008, was struck by illegality.

In the present case, however, we consider this is not the case.

In fact, in completing the Form 22 that gave rise to the additional assessment in question, the Claimant was anything but clear. And only after multiple steps taken both by the Respondent and by the Claimant, was it possible to understand the factual situation underlying the question to be decided, the Tribunal itself having great difficulty in delineating, with the necessary precision, said question.

Being ultimately an erroneous action, the fact is that it cannot be attributed only or primarily to the services of the Tax Authority, but above all to the incompetence of the Claimant in its relationship with the Tax Authority – hence the non-application to the case of No. 1 of Article 43 of the General Tax Law (LGT).

Consequently, the Claimant has no right to compensatory interest, in accordance with Article 43, No. 1, of the LGT and Article 61 of the TPPC.

In these terms, the petition is without merit.

IV. DECISION

In these terms, the present Arbitral Tribunal agrees to:

a. Dismiss the exception of lapse of the arbitral request;

b. Sustain the request to annul the decision by the Head of the CIT Services Department dismissing Hierarchical Appeal No. …2014…, of 16-12-2014, and, in this sequence,

c. Annul the additional CIT assessment act relating to fiscal year 2008 (CIT Liquidation Statement No. 2013… and Compensation No. 2013…);

d. Condemn the Tax Administration to reimburse the amount unjustly paid, in the sum to be fixed in execution of judgment;

e. Dismiss the petition for condemnation of the Tax Administration to payment of compensatory interest to the Claimant.

V. VALUE OF THE CASE

In accordance with Articles 306, No. 2, and 297, No. 2 of the C.P.C., Article 97-A, No. 1, subsection a) of the C.P.P.T. and Article 3, No. 2, of the Regulation of Costs in Tax Arbitration Proceedings, the case is assigned the value of €109,487.30.

Lisbon, 22 January 2016.

The arbitrators,

Fernanda Maçãs,

João Espanha

Maria Manuela do Nascimento Roseiro

[1] The Claimant requests the "revocation" of the order, but as it does so on the grounds of illegality, it must be understood that it requests the "annulment".

[2] The corrections relating to autonomous taxation and, partially, those relating to financial costs and under Stamp Tax were accepted (PA, RG 6, pages 180/181).

[3] Identical to the version in force in 2008.

[4] Idem.

[5] Ibid.

[6] Cf. MANUEL H. F. PEREIRA, "Periodization of Taxable Profit", Science and Tax Technique, 1988, No. 349, pp. 77 et seq.

[7] Cf. op. cit., pp. 80-81.

[8] Decision of the Supreme Administrative Court of 2-4-2008, case No. 0807/07.

[9] Decision of the Central Administrative Court of the South of 28-03-2007, case No. 1551/06