Summary
Full Decision
ARBITRAL DECISION
The arbitrators José Poças Falcão (arbitrator-president), Luís Menezes Leitão (adjunct arbitrator) and Luís Alves (adjunct arbitrator), appointed by the Deontological Council of the Centre for Administrative Arbitration to constitute the Arbitral Tribunal, agree as follows:
I. REPORT
1. A…, S.A. ("A… SGPS"), company with registered office at …, no. … – floor …, …-… Lisbon, legal entity with tax identification number …, with share capital of € 5,000,000, B…, Lda ("B…"), company with registered office at …, …, …, …-… …, legal entity with tax identification number…, with share capital of € 50,000 and C…, Lda ("C…"), company with registered office at …, …, …-… …, legal entity with tax identification number…, with share capital of € 45,000, hereinafter referred to jointly as "petitioners", "claimants" or "plaintiffs", having been notified of the decision dismissing the administrative appeal filed for review of the legality of the corporate income tax (IRC) assessment no. 2014…, of the compensation relating to the IRC tax assessment statement and the interest assessment statement no. 2014 … and of the account reconciliation statement no. 2014…, relating to the tax year 2009, came forward, pursuant to and for the purposes of Article 2(1)(a) and Article 10 of Decree-Law no. 10/2011 of 20 January, to request arbitral pronouncement seeking the revocation of the administrative appeal decision issued by the Lisbon Tax Authority, for illegality and, consequently, the annulment of the corporate income tax assessment no. 2014… of the compensation relating to the IRC tax assessment statement and the interest assessment statement no. 2014 … and of the account reconciliation statement no. 2014…, relating to the tax year 2009, with annulment of the corrections underlying the issuance of the tax acts challenged and further condemning the Tax Authority to pay compensation arising from the provision of undue guarantee.
They alleged, in essence and in summary, that they form a group of companies headed by A…, taxed according to the Special Regime for Group Taxation (RETGS); all these companies have as their principal activity the production and commercialization of energy through the operation of renewable energy production projects; the depreciation rates practiced by B… and C… in relation to the wind turbines of their wind farms (6.25%) representing an expected useful life of 16 years, were not accepted by the Tax Authority which, in conclusion of an audit action performed, proceeded to correct the declared fiscal result in the amount of €1,566,469.46 understanding that the maximum depreciation rate allowed for such equipment should be 5%, corresponding to 20 years of useful life; after issuance of the tax assessment statements and account reconciliation, with interest totaling €541,545.82, the claimants submitted an administrative appeal which was not upheld according to the order of 5-2-2016; the petitioners, with a view to suspending the fiscal execution process initiated as a result of these assessments, submitted to the Lisbon Tax Authority - … a bank guarantee in the amount of €686,113.48.
They attached documents and requested the production of witness testimony.
2. The request for constitution of the arbitral tribunal was accepted and automatically notified to the Tax Authority.
3. The Respondent did not proceed with the appointment of an arbitrator, therefore, pursuant to Article 6(2)(a) and Article 11(1)(b) of the RJAT, the President of the Deontological Council of the CAAD appointed as arbitrators of the collective arbitral tribunal the undersigned, who communicated acceptance of the appointment within the applicable deadline.
4. The parties were duly notified of this appointment and did not manifest any intention to challenge the appointment of the arbitrators, in accordance with the combined provisions of Article 11(1)(a) and (b) of the RJAT and Articles 6 and 7 of the CAAD Deontological Code.
5. Thus, in accordance with Article 11(1)(c) of the RJAT, the collective arbitral tribunal was constituted on 15 July 2016.
6. The Respondent, duly notified for such purpose, filed its Response in which it specifically challenged the arguments raised by the Claimant, concluding by requesting the dismissal of the present action, with its consequent absolution of the claim.
6.1. The Respondent, in addition to a copy of the administrative file, attached 3 (three) documents and requested the production of witness testimony.
7. The Tribunal dispensed with the holding of the meeting referred to in Article 18 of the RJAT and, considering the insistence of the Claimant regarding its request for witness testimony production, proceeded to question the witnesses D… and E… and further admitted the attachment of a document as shown in the respective minutes.
At the same time, the Tribunal, considering the provisions of Article 21(1) and (2) of the RJAT, decided to extend, by 2 months, the deadline for the decision.
8. Both parties submitted written closing arguments in which, in essence, they maintained the positions and arguments raised in their respective pleadings.
II. PRELIMINARY EXAMINATION
The Arbitral Tribunal was regularly constituted and is competent.
The proceedings do not suffer from any nullities.
The parties have legal standing and capacity, are duly represented and are legitimate.
There are no exceptions or preliminary issues that prevent knowledge of the merits and that require examination.
III. GROUNDS FOR DECISION
PROVEN FACTS
Regarding the factual matter, it is important, first and foremost, to note that the Tribunal does not have to pronounce on everything alleged by the parties, being its duty instead to select the facts that matter for the decision and to distinguish the proven facts from the unproven (cf. Article 123(2) of the CPPT and Article 607(3) and (4) of the CPC, applicable ex vi Article 29(1)(a) and (e) of the RJAT). In this manner, the facts relevant to the judgment of the case are chosen and delimited based on their legal relevance, which is established in view of the various plausible solutions to the legal question(s).
Within these parameters, the following facts are considered proven:
1. The Claimants are private limited liability companies whose principal activity is the production and commercialization of energy through the operation of renewable energy production projects, as well as any other complementary or accessory activities thereof, which may eventually be necessary or related to the principal object, with CAE: 35113.R3.
2. The Claimants are companies integrated in a group of companies taxed according to the Special Regime for Group Taxation ("RETGS"), with the company A…, since the fiscal year 2006, being the dominant company of the Group.
3. In the fiscal year 2009 the Group consisted of the following companies:
| Company | NIF |
|---------|-----|
| A…, S.A. (dominant company and herein Claimant) | … |
| F…, Sole Proprietor, Lda. | … |
| G…, Lda. | … |
| H…, Lda. | … |
| I…, Lda. | … |
| J…, Lda. | … |
| K…, Lda. | … |
| B…, Lda. (Claimant) | … |
| C…, Lda. | … |
| L…, Lda. | … |
| M…, SGPS, S.A. | … |
| N…, Lda. | … |
| O… Sole Proprietor, Lda. | … |
4. A taxable profit was declared in 2009 by the Group in the amount of € 20,423,560.48.
5. This amount results from the sum of the fiscal results determined by each of the companies included within the Group's scope:
| Company | Result determined 2009 (€) |
|---------|----------------------------|
| A…, S.A. | -634,856.64 |
| F…, Sole Proprietor, Lda. | 287,449.98 |
| G…, Lda. | 283,951.74 |
| H…, Lda. | 705,811.89 |
| I…, Lda. | 379,205.20 |
| J…, Lda. | 44,990.89 |
| K…, Lda. | 660,228.63 |
| B…, Lda. | 11,543,062.76 |
| C…, Lda. | 382,967.31 |
| L…, Lda. | -355,970.29 |
| M…, SGPS, S.A. | -10,855.79 |
| N…, Lda. | 7,137,679.30 |
| O… Sole Proprietor, Lda. | -104.50 |
| Taxable Profit | 20,423,560.48 |
6. As a result of intervention by the Tax Authority the following corrections were made by the tax administration:
| Company | Result determined (€) | Correction (€) | Corrected Result (€) |
|---------|----------------------|----------------|---------------------|
| B…, Lda. | 11,543,062.76 | 1,442,267.49 | 12,985,330.25 |
| C…, Lda. | 382,967.31 | 124,201.97 | 507,169.28 |
| Total correction | | 1,566,469.46 | |
| Total of Group | 20,423,560.48 | | 22,071,028.84 |
7. These corrections resulted from the non-acceptance of the depreciation rate practiced by B… and C… in relation to the wind turbines of their wind farms which was 6.25%, meaning that, for tax purposes, the aforementioned assets – wind turbines – intended for the production of electrical energy which constitute a wind farm, have an expected useful life period of 16 years.
8. The Tax Inspection Services performed a correction to the declared fiscal result in the amount of € 1,566,469.46, as they understood that the maximum depreciation rate that would be permitted for such equipment would be 5%, corresponding to 20 years of useful life.
9. The Respondent notified the Claimants of the Draft Audit Reports on 2013/10/29, having been notified to exercise the right to be heard, pursuant to Article 60 of the General Tax Law (LGT) and Article 60 of the Supplementary Regime for Tax Audit Procedure (RCPIT).
10. The Claimants did not exercise their respective right to be heard in relation to the Draft Audit Reports.
11. The Claimants were notified of the tax assessment statement no. 2014 …, of the account reconciliation statement, compensation no. 2014 … and of the interest assessment statement, compensation no. 2014…, with payment deadline of 2014/06/18, from which resulted a total amount of tax and compensatory interest to be paid amounting to € 541,545.82.
12. For the purpose of suspension of the fiscal execution process initiated for coercive collection of the IRC assessment, the Claimants submitted to the Lisbon Tax Authority … a bank guarantee in the amount of € 686,113.48.
13. By petition filed at the Lisbon Tax Authority on 2014/10/16, the Claimants submitted an administrative appeal, which after being assessed, resulted in the order of 2016/02/05 which dismissed such appeal.
14. The wind turbines in question have an average useful life period of 16 years.
Unproven Facts
It was not proven that:
- the wind turbines in question have a minimum useful life period of 20 years.
Grounds for Conviction
The Tribunal founded its conviction regarding the aforementioned factual framework, considering and critically analyzing all the documentary evidence attached, including the instructional administrative file, in conjunction with the clarifying and convincing testimony of the witnesses questioned at the hearing who demonstrated good knowledge of the reality of the facts beyond having technical knowledge regarding wind turbines, wind energy production and physical and economic deterioration or obsolescence of such equipment.
IV – LAW
- ON THE ILLEGALITY OF THE CORPORATE INCOME TAX ASSESSMENT
Article 28(1) of the Corporate Income Tax Code states, at the time of the facts: "Depreciation and amortization of elements of assets subject to depreciation are accepted as expenses, considering as such elements of fixed assets which, on a recurring basis, suffer losses in value resulting from their use, the passage of time, technological progress or any other causes."
Article 29 of the same Code further states:
"1 - The calculation of depreciation and amortization for the fiscal year shall be made, as a rule, by the method of constant quotas.
2 - IRC taxpayers may, however, opt, for the calculation of depreciation for the fiscal year, for the method of declining quotas in relation to elements of tangible fixed assets that:
a) Have not been acquired in used condition;
b) Are not buildings, light passenger or mixed vehicles, except when used for companies operating public transport services or intended to be leased in the normal exercise of the activity of their owner company, furniture and social equipment.
3 - Different methods of depreciation and amortization may also be used when the nature of the depreciation or the economic activity of the company justifies it, after prior recognition by the General Directorate of Taxes.
4 - In relation to each element of fixed assets the same depreciation and amortization method must be used from its entry into operation until its depreciation or total amortization, transfer or disposal.
5 - The provision in the preceding number is without prejudice to:
a) The variation of depreciation and amortization quotas in accordance with the more or less intensive regime or other conditions of use of the elements to which they apply, provided, however, that the minimum quotas attributable to the fiscal year may not be deducted for the purpose of determining the taxable profit of other fiscal years;
b) The consideration as expenses of depreciation or amortization quotas higher than normal due to the occurrence of exceptional devaluations from abnormal causes duly proven and accepted by the General Directorate of Taxes.
6 - For the purposes of the provision in subparagraph a) of the preceding number, the minimum depreciation or amortization quotas are those calculated on the basis of rates equal to half of those fixed according to the method of constant quotas."
In accordance with Article 30(2) of the same Code, "With respect to elements for which no depreciation and amortization rates are fixed, those that the General Directorate of Taxes considers reasonable shall be accepted, taking into account the period of expected useful life."
From an accounting and tax perspective, depreciation and amortization of assets and elements of fixed assets subject to depreciation consist of losses in value resulting from their use in the economic activity of a taxpayer which, on a recurring basis, such elements suffer because of, by themselves, or cumulatively:
· The passage of time (use/physical wear);
· Technological progress (obsolescence);
· Other causes.
However, while from an accounting perspective the value of depreciation and amortization must be determined by the best possible measurement of such loss in value (allowing for various and other methods and reference indicators), understood as that corresponding to the portion of the value of the fixed asset element that is "consumed" in a given period of time (e.g., a fiscal year) due to its use in the economic activity of the economic agent, from a tax perspective, aiming at less arbitrariness by the Tax Authority, the criteria and methods to be used in determining the value of depreciation and amortization of said fixed asset elements to be recognized as a deductible expense in each of the fiscal years, are exhausted in those provided for in the Corporate Income Tax Code and in the Regulatory Decree applicable to the specific case.
Thus, although, conceptually, depreciation and amortization of fixed assets do not differ in the accounting and tax perspectives, the same cannot be said with regard to determining their value to be considered as a deductible expense to revenues generated in the activity of a given economic agent/taxpayer, the consequence of which may be reflected in a deviation between accounting result and tax result.
In such accordance, there being no doubt as to the causes of depreciation generating depreciation and amortization in the various perspectives (use/physical wear, technical obsolescence and/or others), it is important, therefore, from an exclusively tax perspective, to assess the reasonableness of its quantum.
For this purpose, as provided in law, the method to be used must be considered:
· Constant quotas;
· Declining quotas (by option of the taxpayer and if applicable) - which was not the case herein;
· Others, when the nature of the depreciation or the activity of the taxpayer justifies it, but after prior recognition by the Tax Authority – which also was not the case herein;
Being that, the application of any of the aforementioned methods is without prejudice to:
· Variation of depreciation and amortization quotas in light of more or less intensive regimes of use of the fixed asset elements in the economic activity of the taxpayer, provided, however, that they fall between the maximum quotas (obtained from consideration of the minimum period of useful life of said elements) and minimum quotas (obtained from consideration of the maximum period of useful life of such elements) – nor was this the case;
· Consideration of depreciation and amortization quotas higher than normal due to the occurrence of exceptional devaluations from abnormal causes duly proven and accepted by the Tax Authority – equally, this was not the case;
From which results the importance of understanding the concepts of useful life, quota, minimum quota and maximum quota and, in the specific case, of maximum and minimum period of useful life.
Now, as defined in tax law, useful life is the period during which the value of a fixed asset element is fully amortized or depreciated, while quota is a part, a proportion, a ratio. As such, the quota will have a numerator less than the denominator. (In the limit, if the numerator and denominator are equal, the part would coincide with the whole).
Returning to such concepts from an exclusively tax perspective of depreciation and amortization:
Annual quota of depreciation or amortization is the part of the loss in value that is recognized as tax deductible in each of the fiscal years. By way of example, an asset with a useful life of 16 years determines an annual depreciation quota of 1/16, that is, a portion of the value of the fixed asset element corresponding to (6.25%). If a useful life of 20 years is assumed an amortization quota of 1/20 is determined, that is, a portion of the value of the fixed asset element corresponding to (5.00%).
The minimum quota (the lesser amount tax deductible in each fiscal year as depreciation and amortization) is determined by a denominator corresponding to twice the maximum period of useful life and the maximum quota (the greater amount tax deductible in each fiscal year as depreciation and amortization) is determined by a denominator corresponding to half the maximum period of useful life.
In the examples above presented, a fixed asset element with a maximum useful life period of 40 years (2x20) generates an annual minimum depreciation quota of 2.5% (5%/2) and the other, with a maximum useful life period of 32 years, generates an annual minimum depreciation quota of 3.125%.
On the other hand, for the same examples, if it is considered that 16 and 20 years constitute the periods of maximum useful life, to which would correspond annual minimum depreciation quotas of 6.25% and 5%, respectively, then, the annual maximum depreciation quotas would be 12.5% (6.25%x2) and 10% (5%x2), respectively, from which would result minimum useful life periods of 8 and 10 years, also respectively.
Such an exercise could be relevant, specifically, to assess the reasonableness of the useful life considered by the Tax Authority in the case at hand, to the extent that, among other things, unless proven otherwise, considering the opinion formed on the factual situation contained in the respective procedural documents, as well as the witness testimony given, it seems to us reasonable that the minimum useful life period of 20 years (to which corresponds a maximum annual depreciation quota adopted by the Tax Authority is consistent with the reality underlying it, to the extent that, accepting it, necessarily it will be admitted a maximum useful life period of 40 years to which would correspond a minimum depreciation and amortization rate of 2.5%.
In fact, the rates provided in Tables I and II of the applicable Regulatory Decree are those that allow a maximum quota of depreciation and amortization annually, having, for this reason, the corresponding minimum useful life period as their basis.
However, the case under examination arises from the fact that the fixed asset elements in question are not susceptible to being classified under any of the aforementioned Tables I and II of Regulatory Decree no. 2/90 and, for this reason, annual depreciation and amortization quotas should be adopted by the taxpayer that are considered reasonable by the Tax Authority, taking into account the period of expected useful life.
In considering both the possible causes of depreciation of the fixed asset element, determining losses in value that must be expressed through corresponding depreciation and amortization (mainly use and technical obsolescence), and the concepts of maximum and minimum depreciation and amortization quotas (inseparable from their respective concepts of minimum and maximum useful life periods respectively) and, further, the evidence presented, as well as the wording of the currently applicable Regulatory Decree (RD 25/2009 of 14 September), the failure to demonstrate unreasonableness attributed to the Claimants' option by the Tax Authority and considering everything else that is best noted below, specifically, the noted in the preamble of Regulatory Decree no. 2/90 of 12 January which states "(… in an environment characterized by strong technological progress, depreciation and amortization should be viewed in a dynamic perspective as decisive factors for the growth and expansion of companies, and through that, of investment itself (…)"
To be more specific:
The question that arises is what should be the period of expected useful life of the assets in question (in this case, the wind turbines).
On this point, Article 3(1) and (2) of Regulatory Decree no. 2/90 of 12 January states the following:
"1. The useful life of a fixed asset element is, for tax purposes, the period during which its value is fully amortized or depreciated, excluding, where applicable, its residual value.
2 - Regardless of the depreciation or amortization method used, the following is considered:
a) Minimum useful life period of a fixed asset element is that which is derived from the rates that can be accepted tax-wise according to the method of constant quotas;
b) Maximum useful life period of a fixed asset element is that which is derived from a rate equal to half of those mentioned in the preceding subparagraph."
It is further stated in Article 5(1) to (3) of the same Regulatory Decree:
"1 - In the case of using the method of constant quotas, the annual depreciation or amortization quota that can be accepted as an expense for the fiscal year is determined by applying to the values mentioned in Article 2(1) the rates fixed in the tables annexed to this regulation, with the generic rates mentioned in Table II only applying when, for fixed asset elements of the activity branches in question, specific rates are not fixed in Table I.
2 - The following cases are excepted from the provision in the preceding number, in which depreciation and amortization rates are calculated based on the corresponding period of expected useful life, which may be corrected when it is considered to be less than what should objectively have been estimated:
a) Assets acquired in used condition;
b) Assets valued for opening accounting purposes;
c) Major repairs and improvements;
d) Works in third-party buildings.
3 - With respect to elements not mentioned in the preceding number for which no depreciation and amortization rates are fixed in the tables referred to in item 1, those that the General Directorate of Taxes and Duties considers reasonable shall be accepted, taking into account the period of expected useful life."
Both the Corporate Income Tax Code and Regulatory Decree 2/90 refer to a "period of utility" or "useful life" of the asset in question, and the question that arises, given that there is no rate expressly defined at the time of the facts for wind turbines, is what rate will be "reasonable" to apply.
The Tax Authority understood that a rate of 5% should be applied, which would correspond to a "useful life" of 20 years. But is it reasonable to understand that wind turbines last 20 years? Is it economically viable to maintain them, even if they can continue to function?
It was confirmed by the witnesses of the Claimants that the suppliers of these assets assume only a two-year warranty, and there may be operation and maintenance contracts for such assets for a period between 5 and 7 years.
The witnesses also confirmed that wind turbines, after a few years, are no longer on the market as they have become obsolete in light of technological advances and newer equipment available on the market, having to be repaired multiple times or have parts replaced.
The Claimants thus defined a period of 16 years, based primarily on the maximum period of 15 years defined in Annex II of Decree-Law no. 189/88 of 27 May, which defines a legally guaranteed tariff for a maximum period of 15 years, so as to ensure the economic viability of maintaining such wind turbines.
What occurs is that this concept of "useful life" cannot be defined simply by the period in which it is possible to keep the wind turbines operating, forgetting the associated maintenance costs and the continuous technological development of the same.
As stated in the preamble of Regulatory Decree no. 2/90 of 12 January: "Depreciation and amortization play a strategic role in terms of economic policy and business management. Indeed, there is currently consensus that, in an environment characterized by high technological progress, depreciation and amortization should be viewed in a dynamic perspective as decisive factors for the growth and expansion of companies and, through that, of investment itself."
It should also be noted that, with the new legislative amendments of Regulatory Decree No. 25/2009 of 14 September, since 2014 a rate of 8% has been defined for wind equipment, corresponding to 12.5 years of useful life, which is lower than that practiced by the Claimant.
In fact, the CAAD Judgment no. 238/2016 already states, "the truth, a restrictive interpretation is only justified when 'the interpreter concludes that the legislator adopted wording that betrays his thought, to the extent that it says more than what he intended to say' and, in the case at hand, it does not appear that the provision of a duration period of 12.5 years for wind turbines is inappropriate, rather the evidence presented confirms its adequacy. On the other hand, being a notorious fact, perceptible throughout the country, that almost all electricity production from wind energy is done with industrial nature installations such as those of the Claimant, it is not to be assumed that the legislator 'forgot' this reality and introduced the legislative amendment solely for micro-generation installations, for which the amortization regime will normally be irrelevant, as they are owned by income tax subjects who are not subject to organized bookkeeping regime, rather than establishing it for industrial nature installations, which are the only ones that have appreciable relevance for tax purposes.
Thus, being this new rate applicable to equipment of the type of the Claimant and there being no reason to believe that the quality of wind turbines has degraded significantly and generally between 2012 and 2014 so that their expected useful life has dropped from 20 to 12.5 years, it cannot fail to be understood that already at that first date it would not be considered unreasonable not to expect more than 12.5 years of useful life.
In fact, although this amendment only has normative effect for the future, what is at issue in the present case is whether it was reasonable, in 2012, to expect less than 20 years of useful life for wind turbines, namely 16 years, and it is manifest that the fact that the 2014 legislator understood that the period of useful life adequate to consider for wind turbines is 12.5 years reveals that, from the legislative perspective, already in 2012 it was perfectly reasonable not to expect a useful life period beyond that.
In the case at hand, the Claimant even used a depreciation rate corresponding to a period of useful life superior to 12.5 years, for which there is no ground for the Tax and Customs Authority not to consider reasonable the period of expected useful life adopted by the Claimant and, specifically, to have considered adequate the period of 20 years, which seems manifestly adjusted away from reality, particularly in situations in which wind turbines are subject to wear superior to normal, as occurred in the case at hand."
Likewise, it is difficult to affirm that, in 2009, wind turbines would have a useful life of 20 years, being that, since 2014, and to date, the legislator understands that the useful life is 12.5 years, without we being faced with a manifest technological regression.
The CAAD Judgment no. 593/2015 further states: "In the same sense, and consulting the Proposal of the Commission for the Reform of Green Taxation appointed by the XIX Constitutional Government, it is verified that the same has ruled on the depreciation rate that Regulatory Decree 25/2009 should contemplate in relation to photovoltaic panels and air, thus recognizing its omission regarding this type of assets.
It is true that the rates do not apply to the tax facts at issue in the case at hand, but it is considered of great utility to refer to the understanding endorsed by this commission of specialists in a subject matter which, as we have seen, is not yet expressly regulated by the legislator.
In this manner, the Commission comes to recommend, in its draft a fiscal life of 12.5 years, as a minimum, up to 25 years, as a maximum, which would represent fiscal rates between 8% and 4%.
Following the aforementioned draft, there is evidence of this Commission's concern, when it states:
"It is generally considered that a photovoltaic system ceases to have interesting performance from an economic point of view (useful life) when its power drops below 80% of the initial power, although depending on the type of system this may continue to be useful for its owner."
The Commission suggests that "The rates to be used must follow technical reasonableness and economic efficiency."
(…) In truth, the useful life of each generation of photovoltaic panels and wind turbines has been increasing, technology tells us so, but from this does not necessarily follow that their economic utility, for a particular company, accompanies this technological life.
(…) The adequacy of the useful life period (economic) defined by the Claimant is revealed in several aspects.
First, this period is revealed in harmony with economic conditions (concerning the period of sale of energy at a price that ensures the balanced operation of the activity) and market conditions (estimated residual value null after the period of 16 years).
It was proven, in effect, that the Claimant is framed within a contractual regime for the sale of energy at a price previously fixed for a period of 15 years (period during which the fixed and guaranteed remuneration of renewable energy production plants is established) after which the panels will have a negligible residual value, to the extent that there is no market for used equipment of this type.
(…) And, being certain that the economic, financial, legal and obsolescence constraints will be felt in this type of equipment, in light of the economic activity developed, the useful life relevant for tax purposes will, as a general rule, be less than the purely physical (technical) life."
Regarding the statement by the Respondent that the application of these rates would be within its "technical discretion", the Constitutional Court Judgment no. 269/2000 already clearly stated: "(…) the revision of 89 came to guarantee 'always' to the administered the 'access to administrative justice' for the protection of those rights or interests, imposing on the ordinary legislator the construction of procedural means apt to implement such guarantee and prohibiting the creation or subsistence of restrictive or conditioning measures of access to administrative justice whenever the conduct of the Administration had injured legally protected rights or interests. Thus it is that contentious review begins, at the constitutional level, to lose its relative importance in the set of procedural means adequate for the effective protection of the rights and legally protected interests of the administered. Already before, however, the ordinary legislator – in particular with the LPTA – had created, although in a relatively incipient manner, new procedural means, main and secondary, apt to defend those rights and interests, which responded to the criticism, moreover generalized, of how contentious review was structured, insufficient to repair the injuries caused by conduct injurious to the Administration and despite the progress achieved in this domain, in particular with the regime of execution of judgments established in Decree-Law no. 256-A/77 of 16 June. On the other hand, one cannot refuse the reinforcement of the guaranteeing function of contentious review, operated at par with legislative evolution by the jurisprudence of our administrative courts. That jurisprudence, in the sense of a more profound verification of the legal conformity of the administrative acts appealed, did not constitute an obstacle the typology of the vices of administrative acts traditionally enshrined in Articles 815 of the Administrative Code and 15(1) of the Organic Law of the Supreme Administrative Court; more properly it will be said that, in that typology, the 'violation of law' assumed an amplitude sufficient for it to encompass any and all form of illegality different from those that integrated themselves into the other typified vices. Guaranteed contentious review on grounds of illegality, it is with the breadth of this concept, having as a parameter the block of legality which the Administration must observe by force of the constitutional principle of legality and the limit to which it is subject in the pursuit of public interest (Article 266 of the CRP) – respect for the rights of citizens – that the administrative courts come to 'expand' their powers of knowledge. The Constitution, the laws and regulations, the contracts signed, the consolidated administrative acts, all are parameters for assessing the legality of the acts of the Administration. The binding of the Administration is revealed in domains where traditionally only administrative discretion was recognized, whose reviewability was limited, under the cover of Article 19 of LOSTA, to the verification of the vice of abuse of power. It is in particular in this area that, by constitutional imperative, the contentious verification of administrative acts deepens. It is not enough that the Administration, in the exercise of discretionary powers, pursues the public interest that justifies the attribution of such powers; in addition to there always being areas of binding when the Administration acts in the exercise of such powers (e.g. regarding the factual assumptions on which it is based) it is the very establishment of the act that is confronted with the principles of equality, proportionality, justice, impartiality and good faith (Article 266(2) of the CRP) to which the Administration is equally bound. But if this is so in the domain of volitional discretion, it also is – if not all the more so – in the domain of the so-called 'technical discretion' (using this expression apart from any judgment on the propriety of the terminology), where, differently from what happens in the first case, there is not, in the definition of the concrete legal situation in question, a range of legally indifferent options."
Therefore, there cannot be any doubt that, not only did the Claimants have the right to challenge the rates applied by the Respondent, but the rates practiced by the Claimants are the most correct ones, being even lower than those now in practice.
- ON THE UNCONSTITUTIONALITY FOR VIOLATION OF THE PRINCIPLE OF EQUALITY
The Claimants contend that the application of a lower rate by the Tax Authority than the rates practiced in relation to hydroelectric plant equipment and the rates now in force for wind turbines suffers from unconstitutionality for violation of the principle of equality.
Now, the principle of equality, as referred to in Constitutional Court Judgment no. 775/2014 of 18 December, "may be translated into the obligation of all citizens or legal entities to be bound by the payment of taxes, prohibiting arbitrariness so that equal situations have equal treatment and different situations have different treatment. From this follows the capacity to contribute which imposes that tax will be equal for those who are in an equal situation and different for those who are in a different situation."
The question that arises is whether hydroelectric plant equipment has the same degree of degradation and technological development as wind turbines, and at first glance, it is difficult to understand that this is the case, due to the lack of elements that prove it. On the other hand, if we understand that hydroelectric plant equipment is in the same situation as wind turbines, that would mean that Regulatory Decree no. 25/2009, which is now in force, would also be unconstitutional, as while hydroelectric plants maintain the useful life period of 16 years, the useful life period of wind turbines changed to 12.5, maintaining the differentiation, but now in the opposite direction. It is difficult to affirm that all equipment used by energy production entities has the same characteristics and the same duration period, which leads to the conclusion that there is no unconstitutionality.
On the other hand, the fact that the legislator has established a specific rate for wind turbines, based on a useful life period of 12.5 years, from 2014, cannot mean that the non-application of that same rate value before 2014 is unconstitutional, under penalty of calling into question the entire application of law over time. The question that arises here is not whether the rate applied by the Claimants was correct, but whether the application of another rate is unconstitutional in comparison with a later law. An understanding in that sense would mean that the rate would become immutable, as any change to it, in subsequent legislative amendments, would result in a situation of inequality among taxpayers who opened wind farms in different years. Nevertheless, the comparison between the rates applied by the Claimant and the rates subsequently defined by the legislator has relevance for the purpose of assessing the illegality of the conduct of the Tax Authority, although it does not appear to be susceptible to being considered as unconstitutional.
- ON THE PROVISION OF BANK GUARANTEE AND REQUEST FOR COMPENSATION
The Claimants were subject to a fiscal execution process for coercive collection of the corporate income tax assessment in the case at hand, having provided a bank guarantee in the amount of € 686,113.48.
In accordance with Article 53(1) of the General Tax Law: "The debtor who, to suspend execution, offers a bank guarantee or equivalent shall be compensated in whole or in part for the damages resulting from its provision, if he has maintained it for a period exceeding three years in proportion to the success in administrative appeal, challenge or opposition to execution that have as their object the debt guaranteed."
However, as referred to in item 2 of the same article: "The deadline referred to in the preceding item does not apply when it is verified, in administrative appeal or judicial challenge, that there was error attributable to the services in the assessment of the tax."
In the specific case, it can be understood that there is error attributable to the services in the assessment of the tax, given that the question in question has been subject to extensive arbitral jurisprudence, which has consistently decided in the sense of considering a useful life period of 15 to 16 years, in the case of amortization of wind turbines and the Tax Authority continues to understand that a much longer useful life period applies, even after it has been repeatedly confirmed that such conduct is not lawful.
The compensation referred to in Article 53(1) of the LGT, in accordance with items 3 and 4 of the same article, has as its maximum limit the amount resulting from the application to the guaranteed value of the rate of indemnity interest provided in the LGT and can be requested in the administrative appeal itself or judicial challenge, or autonomously, being paid by deduction from the revenue of the tax of the year in which payment is made.
In the same sense, Article 171(1) of the Code of Tax Procedure and Process (CPPT) provides: "Compensation in case of bank guarantee or equivalent unduly provided shall be requested in the process in which the legality of the enforceable debt is disputed."
Being that it is in this arbitral process that the legality of the enforceable debt is being discussed, it can (as it was) be requested in the same.
Regarding the quantum of compensation:
Being public and notorious that for the service of provision of bank guarantees charges/commissions are paid to Banks depending, in particular, on risk, amount and deadline of the guarantee, it must be concluded that, albeit not alleged, the Claimant has borne [and certainly continues to bear] charges for the maintenance of the guarantees.
Now having provided these guarantees for the total value of the assessments subject to this challenge, interest, costs and other surcharges (Cf. Article 199-6 of the CPPT) and having obtained success in this action, will have to include in this compensation those bank charges.
Certainly, this quantum of compensation was not concretized.
This, however, would not necessarily have to be alleged as whoever requires compensation does not need to indicate the exact amount of damages – Cf. Article 569 of the Civil Code.
The compensation shall thus be determined in the process of execution of judgment and having present the limitations of its quantum provided in Article 53-3 of the LGT.
IV – DECISION
Based on the grounds invoked, this Tribunal decides:
a) To find the petition for annulment of the corporate income tax assessment no. 2014 …, of the interest assessment no. 2014 … and of the account reconciliation statement no. 2014…, relating to the tax year 2009, well-founded, annulling the corrections underlying the issuance of the tax acts now challenged;
b) To condemn the Tax and Customs Authority to pay compensation, in the terms above, arising from the provision of undue guarantee and to be determined in execution of judgment and
c) To condemn the Respondent, Tax and Customs Authority, to pay costs.
Value of the Case and Costs
The case is fixed at the value of € 541,545.82 (amount indicated and not contested), and the value of the corresponding arbitration fee at € 8,262.00 in accordance with Table I of the Regulation of Costs of Tax Arbitration Proceedings and which shall be entirely borne by the Tax and Customs Authority.
Lisbon, 28-2-2017.
The Collective Arbitral Tribunal,
José Poças Falcão
(Arbitrator-President)
Luís Menezes Leitão
(Adjunct Arbitrator)
Luís Alberto Ferreira Alves
(Adjunct Arbitrator)
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