Process: 266/2017-T

Date: February 18, 2018

Tax Type: IRC

Source: Original CAAD Decision

Summary

CAAD Process 266/2017-T addresses a critical issue in Portuguese corporate taxation: whether travel allowances (ajudas de custo) paid to employees and subsequently recovered through client billing are subject to autonomous taxation under IRC. The taxpayer company, operating in construction and infrastructure, contested an IRC assessment of €107,260.00 for fiscal year 2012, arguing that €652,879.86 in travel allowances included in contract prices but not itemized on client invoices should be exempt from autonomous taxation. The company's core argument rests on the principle that costs effectively invoiced to clients—even when not separately itemized—constitute reimbursable expenses rather than taxable benefits. The case highlights three fundamental tax law principles: first, whether the economic substance of cost recovery through global contract pricing negates the application of autonomous taxation rates; second, the Tax Authority's burden of proof when challenging a taxpayer's treatment of such expenses; and third, the taxpayer's right to compensatory interest when assessments result from errors attributable to the Tax Authority. The arbitration proceedings involved witness testimony and examination of itinerary maps supporting the business purpose of employee displacements. This decision has significant implications for Portuguese companies in service sectors requiring frequent employee travel, particularly regarding documentation requirements, invoicing practices, and the interplay between contract pricing structures and autonomous taxation obligations under IRC Article 88.

Full Decision

ARBITRAL DECISION

I – REPORT

On 18 April 2017, A…, S.A., Tax Identification Number …, with registered office at Rua …, no. …, …, …-… Lisbon, filed a request for the constitution of an arbitral tribunal, pursuant to the combined provisions of articles 2 and 10 of Decree-Law no. 10/2011, of 20 January, which approved the Legal Framework for Arbitration in Tax Matters, as amended by article 228 of Law no. 66-B/2012, of 31 December (hereinafter, abbreviated as RJAT), seeking the declaration of illegality of the tax act embodied in the IRC assessment no. 2015…, of 23-11-2015, in the statement of compensatory interest assessment no. 2015 … and no. 2015… and in the statement of accounts adjustment no. 2015…, all of 25-11-2015, in the total amount of € 107,260.00, as well as the annulment of the decision of partial denial of the gracious claim no. …2016…, and the consequent reimbursement of the amounts wrongly paid, increased by the respective compensatory interest.

To support its claim, the Petitioner alleges, in summary, the following:

  • Allowances for expenses that are invoiced to clients cannot be subject to autonomous taxation, even if they are not itemized on the invoice;

  • It is incumbent upon the Tax Administration to prove that there was a basis for the correction of autonomous taxation;

  • The tax act is based on a manifest error attributable to the Tax Administration, and therefore compensatory interest is owed to the Petitioner.

On 20-04-2017, the request for constitution of the arbitral tribunal was accepted and automatically notified to the Tax Administration.

The Petitioner did not appoint an arbitrator, and therefore, pursuant to the provisions of subparagraph a) of article 6, section 2, and subparagraph a) of article 11, section 1, of the RJAT, the President of the Ethics Council of CAAD appointed the undersigned as arbitrators of the collective arbitral tribunal, who communicated their acceptance of the assignment within the applicable time period.

On 12-06-2017, the parties were notified of these appointments, and neither party manifested any intention to challenge any of them.

In accordance with the provisions of subparagraph c) of article 11, section 1, of the RJAT, the Collective Arbitral Tribunal was constituted on 28-06-2017.

On 13-09-2017, the Respondent, duly notified for such purpose, submitted its response defending itself solely by means of challenge.

On 08-11-2017, the meeting referred to in article 18 of the RJAT took place, where witnesses presented by the Petitioner were examined.

Having been granted a deadline for the submission of written arguments, the parties submitted such arguments, commenting on the evidence produced and reiterating and developing their respective legal positions.

A deadline of 30 days was set for the issuance of the final decision after the submission of arguments by the Tax Administration.

Taking into account the complexity of the case, the procedural course followed, and the suspensions of deadlines arising from the regime of article 17-A of the RJAT, in accordance with the terms and for the purposes of article 21, section 2, of the RJAT, the deadline for issuance and notification of the final decision referred to in section 1 of that article was extended by two months.

The Arbitral Tribunal is materially competent and is duly constituted, in accordance with articles 2, section 1, subparagraph a), article 5, and article 6, section 1, of the RJAT.

The parties have legal personality and capacity, are legitimately interested and are legally represented, in accordance with articles 4 and 10 of the RJAT and article 1 of Order no. 112-A/2011, of 22 March.

The proceedings do not suffer from any nullities.

Therefore, there is no obstacle to the adjudication of the case.

Everything having been considered, it is proper to issue the following decision:

II. DECISION

A. FACTS

A.1. Facts Established as Proven

  • The Petitioner is, and was in 2012, a corporation with the Economic Activity Code – 43210 and is engaged in the design, construction, execution, maintenance, operation and exploitation of all types of buildings, industrial and urban infrastructure and their respective special technical installations, namely electrical, mechanical, telecommunications, security, air conditioning installations, among others.

  • The Petitioner is, and was in 2012, subject to the general regime for the determination of taxable income.

  • The Petitioner's activity includes, and included in 2012, a strong component of services rendered outside its facilities, requiring the displacement of its employees, both in Portugal and abroad.

  • The services provided by the Petitioner during the fiscal year in question were preceded by a budget that estimated all the costs foreseeably associated with the work, which, after approval by the client, led to the execution of construction contracts or others.

  • The contracts executed by the Petitioner with its clients regulate the terms and conditions on which the provision of service by the Petitioner is based, including as regards price, which, depending on the client in question, was based on a fixed amount for the entire work, a variable amount depending on the degree of execution of the work, or a fixed amount for each task contemplated in a particular work.

  • Among the said costs were found, whenever the work involved displacements, allowances for expenses, referred to as "major displacements."

  • The prices agreed by the Petitioner with its clients contemplated the various costs that the Petitioner foresaw incurring with the execution of the work, including costs of materials, equipment and costs of displacements, and the respective associated margin.

  • Invoicing was carried out in accordance with the contracts to which they related, generally based on measurement reports, there being cases in which it occurred during the period of warranty of the work.

  • The unit prices invoiced to the Petitioner's clients included the cost borne by the Petitioner with allowances for expenses, but no express reference was made to the charges with allowances for expenses in the invoices issued to them.

  • In the fiscal year 2012, the Petitioner presented a fiscal loss of €2,112,964.62 and computed the amount of €181,805.60, by way of autonomous taxation.

  • In the period referred to, the Petitioner was part, as the parent company, of a group of companies, subject to the Special Regime for the Taxation of Groups of Companies.

  • The Petitioner was subject to an external inspection procedure, of partial scope and focusing on the fiscal year 2012, through Service Order no. OI2014…, which aimed to clarify situations identified by the Tax Administration as being at risk, in the context of the preliminary verification carried out on the information available in the Tax Administration's computer system, concerning taxpayers covered by the Permanent Monitoring methodology.

  • In the context of the inspection action, as a result of the analysis carried out on the analytical trial balance as of 31-12-2012, the Tax Administration verified the accounting of account 632310 – Allowances for expenses not subject to IRS, of the amount of €652,879.86, relating to the payment of allowances for expenses to the company's employees, which includes displacements within the national territory and abroad.

  • The said allowances for expenses are supported by itinerary maps, which include the name of the employee, the date and place of displacement, the length of stay, as well as the amount allocated.

  • In the context of the inspection procedure, the Petitioner was asked to justify why the amounts paid to employees as allowances for expenses were not subject to autonomous taxation, having been informed by the company's tax advisor that "(…) considered them to be invoiced to clients because they were allocated to employees in the context of the works performed." It further informed that, in this manner, "it considered to meet the necessary requirements for this purpose."

  • In light of the foregoing, the Tax Administration carried out a correction to the autonomous taxation declared in the fiscal year 2012, in the amount of €97,931.98, as a result of the application of the autonomous taxation rate of 15% to the deductible charges with allowances for expenses in the amount of €652,879.86.

  • The Petitioner was notified of the draft Tax Inspection Report, proposed by the Tax Inspection Services of the Finance Directorate of Lisbon, in which the following correction was proposed:

[The document text continues with the inspection report content]

  • The Petitioner was also notified, pursuant to article 60 of the Tax Code of Administrative Procedure and article 60 of the General Tax Law, to exercise, if it so wished, its right of hearing, which it did.

  • In the exercise of its right of hearing, the Petitioner presented its disagreement regarding the proposed correction, requesting its annulment, alleging the following:

"Taking into account that its activity is based, in part, on the execution of electrical installations in Portugal and abroad, it is important to emphasize that the execution of this type of service is naturally preceded by a work budget (which contemplates all the costs associated with the concrete work, whether direct or indirect) whose approval by the final client will result in the execution of a contract (construction or other).";

"The contract executed with the client (…) will contemplate the terms and conditions on which the provision of service by the Petitioner is based, namely as regards price (…). The agreed price will naturally contemplate all the costs that the Petitioner will incur with the execution of the work (e.g., cost of materials, equipment, allowances for expenses, etc.) and the respective associated margin.";

"It is not conceivable how the Petitioner could budget a particular work without considering the respective costs that it will incur, in particular with allowances for expenses, especially considering the fact that the installation can only be implemented by using specialized personnel and, naturally, displaced to the work site, and that its allocation is derived from the application of law.

This means that the invoicing associated with a particular client will always be based on one or more works associated (and respective budget), and, as commented by the tax advisor during the tax inspection, the Petitioner reflects in the invoicing of its clients the cost of payment of allowances for expenses (and other costs associated with the work), although it does not expressly discriminate it in the invoice out of respect for practices normally followed in relations between companies.";

"There is no legal obligation to expressly show the charges with allowances for expenses in the invoices issued to clients," further adding that "the law does not establish, for purposes of autonomous taxation, the need to show in the invoices the amount of allowances for expenses, it being sufficient for the Petitioner to be in a position to demonstrate, through management information systems and other admissible means of proof, whether the allowances for expenses were invoiced to clients or not."

  • Through official letter no. … of 17-07-2015, the Tax Inspection Services issued the Final Tax Inspection Report, which contains the following:

[Report content]

  • The Petitioner was notified of assessment no. 2015 …, the amount of tax owed having been determined as €98,088.22.

  • On 25-11-2015, the Petitioner was notified of the compensatory interest assessment no. 2015… and no. 2015… and the statement of accounts adjustment no. 2015….

  • The Petitioner duly paid the amount determined in the said tax act.

  • On 24 March 2016, the Petitioner filed a Gracious Claim regarding the assessment act, which was filed in the Lisbon Tax Service under no. …2016….

  • In the gracious claim, the Petitioner invoked, in addition to the illegality of the correction made to autonomous taxation, that the tax act then claimed did not reflect in the determination of the tax, as owed, the amount of €1,147.63, referring to the tax credit for international double taxation.

  • On 10-01-2017, the Petitioner was notified of the decision of partial approval of the gracious claim, the Petitioner's request regarding the correction referring to international double taxation being accepted, but maintaining the corrections to autonomous taxation.

A.2. Facts Established as Not Proven

With relevance to the decision, there are no facts that should be considered as not proven.

A.3. Reasoning on the Proven and Not Proven Facts

With regard to the facts, the Tribunal does not need to pronounce itself on everything that was alleged by the parties; rather, it has the duty to select the facts that matter for the decision and to distinguish the proven facts from those not proven (see article 123, section 2, of the Tax Code of Administrative Procedure and article 607, section 3, of the Civil Code of Procedure, applicable by virtue of article 29, section 1, subparagraphs a) and e), of the RJAT).

Thus, the facts relevant to the adjudication of the case are chosen and determined based on their legal relevance, which is established in light of the various plausible solutions of the question(s) of Law (see former article 511, section 1, of the Civil Code of Procedure, corresponding to current article 596, applicable by virtue of article 29, section 1, subparagraph e), of the RJAT).

Thus, taking into account the positions taken by the parties, in light of article 110, section 7, of the Tax Code of Administrative Procedure, the documentary evidence and the procedural acts joined to the record, the facts listed above were considered proven, with relevance to the decision, taking into account that, as was stated in the Decision of the Southern Regional Administrative Court of 26-06-2014, issued in case 07148/13[1], "the probative value of the tax inspection report (…) may have probative force if the assertions contained therein are not challenged."

No pronouncement was made as to facts that were either proven or not proven, which were alleged by the parties and presented as facts, consisting of strictly conclusive affirmations, incapable of proof and whose truthfulness must be determined in relation to the concrete facts set forth above.

B. ON THE LAW

At issue in the present arbitral action is the assessment of the legality of the subjection to autonomous taxation, pursuant to article 88, section 9 and section 14, of the IRC, applicable, of the charges relating to allowances for expenses paid to the Petitioner's employees, without the value paid for this purpose having been itemized in the invoices issued to the Petitioner's clients.

The said article 88 of the IRC provides, in its sections 9 and 14:

"9 - The following are also subject to autonomous taxation, at the rate of 5%, the deductible charges relating to allowances for expenses and compensation for displacement in the employee's own vehicle, in service to the employing entity, not invoiced to clients, recorded under any heading, except insofar as there is taxation under IRS in the sphere of the respective recipient, as well as the non-deductible charges pursuant to subparagraph f) of section 1 of article 45 supported by taxpayers that present a fiscal loss in the tax period to which they relate. (...)

14 - The autonomous taxation rates provided for in this article are increased by 10 percentage points for taxpayers that present a fiscal loss in the tax period to which relate any of the tax facts referred to in the preceding sections."

The question that arises in the present proceedings relates to the fulfillment of the requirement of autonomous taxation applied, set forth in section 9 transcribed above, regarding the invoicing to clients of the deductible charges relating to allowances for expenses, recorded by the Petitioner as deductible charges.

The autonomous taxation in question was introduced by Law no. 55-B/2004, of 30-12 (Budget Law 2005), which amended article 81 of the IRC, and adding to it, among other things, section 9 (corresponding to the same section of article 88 of the IRC in effect on the date of the tax facts now at issue, and even today), establishing, on the matter now at issue, a regime that is maintained in its essential features[2].

The new regime established the restriction of the incidence on the charges referred to, when deductible, to the verification of the following circumstances:

  • that they are not invoiced to clients;

  • that there is not, in whole or in part, taxation under IRS in the sphere of the respective recipient.

The presupposition of the autonomous taxation now in question (allowances for expenses not invoiced to clients and not subject to IRS taxation of the recipient, but deductible), as it was created and remains today, is thus that the taxpayer possesses, as is the case here, for each payment made, a map through which it is possible to effect the control of the displacements to which the expenses refer, namely their respective locations, length of stay, objective and, in the case of displacement in the employee's own vehicle, identification of the vehicle and its respective owner, as well as the number of kilometers traveled, in accordance with subparagraph f) of section 1 of article 45 of the IRC, in the wording in effect on the date of the tax facts now at issue (current article 23-A/1/h)).

Moreover, the autonomous taxation now under analysis (relating to allowances for expenses and compensations for use of the employee's own vehicle not invoiced to clients and not subject to IRS taxation of the recipient, but deductible) only operates on expenses that do not exceed the legal limits and that have observed the requirements of their allocation to state employees, as in other cases, by force of the provisions of subparagraph d) of section 3 of article 2 of the CIRS, allowances for expenses and compensations for use of the employee's own vehicle will be subject to IRS and, as such, not subject to the autonomous taxation in question, provided for in the first part of the norm in question.

Only by complying with these conditions will the expenses in question be deductible under IRC and not subject to taxation under IRS, and as such, susceptible to being subject to the taxation provided for in the first part of section 9 of article 88 of the IRC.

That is, and summarizing, autonomous taxation on deductible expenses relating to allowances for expenses and compensations for use of the employee's own vehicle applies to charges with respect to which:

  • the legal limits of their allocation to state employees have not been exceeded;

  • the requirements of their allocation to state employees have been observed; and

  • the taxpayer possesses, for each payment made, a map through which it is possible to effect the control of the displacements to which the expenses refer, namely their respective locations, length of stay, objective and, in the case of displacement in the employee's own vehicle, identification of the vehicle and its respective owner, as well as the number of kilometers traveled.

Once these conditions are met, the only way to avoid subjection to the autonomous taxation in question is the invoicing of the charges to clients.

Here we have arrived, it is not easy to discern what the material basis is for the imposition of the autonomous taxation in question.

Thus, first and foremost, as Professor Ana Paula Dourado points out, the objective of ensuring tax revenue should be excluded, as it is an illegitimate (fallacious) interpretive argument, since "All fiscal norms in the strict sense have as their objective the obtaining of revenues, and this objective cannot justify itself." [3].

The autonomous taxation in question should, therefore, be legitimized in light of the material bases which, in view of the constitutional principles applicable, have been invoked to – rightly – support autonomous taxation in general, namely the penalizing purposes, anti-abuse and mitigation of fringe benefits.

In this regard, the Tax Administration argues in the Tax Inspection Report that the taxation in question sub iudice is based on the "alleged" [sic] difficulty of distinguishing between the private character and the business nature of certain expenses and on the fact that there were some forms of income that were not taxed in the sphere of their recipients, either because they were not known or because the income was not determinable with precision.

The Tax Inspection Report further states that "expenses with allowances for expenses are difficult to prove and often correspond to true salaries of workers."

Already in the arbitral proceedings, the Respondent, citing various case law elaborated regarding autonomous taxation, argues that the norm in question integrates "the category of anti-abuse norm," that "expenses incurred with allowances for expenses, (…) are difficult to prove, often corresponding to true supplements to salaries thus concealed," and therefore "it was the legislator's understanding to restrict their acceptance only in the case where they were charged to clients," and that "the way to ensure this control is through the express mention of the fact in the invoices issued."

Reserving the respect due to other opinions, it is believed that the proper understanding of the regime in question requires more than the mere replication of principles, recitals and grounds of decisions issued in situations where the autonomous taxation now occupying us was not at issue.

Given that, and as regards the arguments listed by the Tax Administration in the Tax Inspection Report and in the arbitral proceedings, it is believed that one cannot fail to take into account that such autonomous taxation, as has been seen, concerns expenses that have not exceeded the legal limits and have observed the requirements of their allocation to state employees, and with respect to which the taxpayer possesses, for each payment made, a map that complies with what is currently provided for in article 23-A/1/h) of the IRC.

Once the said conditions are met, it should be considered, at least in principle, that the Tax Administration will have at its disposal all the elements to verify whether, in fact and to what extent, the allowances for expenses and compensations for displacement in the employee's own vehicle were incurred exclusively in the interest of the company or not, with, in the first case, obviously, the expenses in question being deductible and, in the second, equally obviously, not being so.

The said conditions imposed by the regime of deductibility of such expenses, the presupposition of the autonomous taxation in question, thus ensure, it is believed, all the necessary guarantees to, in principle, determine the effectiveness of the expenses, and it is not, therefore, legitimate to consider that it is based on the circumstance that "expenses with allowances for expenses are difficult to prove." In fact, this circumstance, which is not disputed in the proceedings, is underlying the very requirements of deductibility that, once met, allow, as stated, to reasonably ensure the necessary proof of their effectiveness.

On the other hand, the fulfillment of the requirements of subparagraph d) of section 3 of article 2 of the CIRS, a condition of non-subjection to IRS in the sphere of the recipients, and equally a presupposition of the autonomous taxation in question, will also ensure sufficiently, it is believed, that the allowances for expenses in question neither "correspond (…) to true salaries of workers," nor "to true supplements to salaries thus concealed," since, precisely, the limits and requirements of their allocation to state employees will aim, precisely, to ensure that this does not happen.

Similarly, one should not assume underlying the autonomous taxation in reference the "fact that there were some forms of income that were not taxed in the sphere of their recipients, either because they were not known or because the income was not determinable with precision," first of all because none of these situations are at issue, that is, the recipients are known, and the value assigned to them is determined with precision, and then because the non-taxation of allowances for expenses is legally regulated in the CIRS, in the same terms applicable "to state employees," thus following the same legitimation that exists in cases where allowances for expenses assigned to them are at issue.

To understand the autonomous taxation with which we are now dealing, and its legal basis, it is thus necessary to go further, and to bear in mind the two fundamental requirements of the deductibility of expenses under IRC which, as is known, are:

  • the effectiveness of the expense (and its proof by suitable means);

  • the necessity thereof to obtain or guarantee the income subject to IRC.

Autonomous taxation of a non-penalizing nature[4], it can be said that, in one way or another, aim to address situations in which the general regime of proof of the said fundamental requirements of the deductibility of expenses under IRC, established in article 23 of the IRC, is, in practice, insufficient, given the reality of economic life, to ensure, with the necessary credibility, their verification.

As J.L. Saldanha Sanches states, "[i]n this type of taxation, the legislator seeks to respond to the admittedly difficult question of the tax regime of expenses that are in the zone of intersection of the personal sphere and the business sphere, so as to avoid remuneration in kind more attractive for exclusively fiscal reasons or the concealed distribution of profits."[5] Now, in the concrete case, nothing seems to suggest that the allowances for expenses paid translate into remuneration in kind or into concealed distributions of profits.

Those that are the characteristics usually attributed to non-penalizing autonomous taxation can be traced back to the said finding. Thus, the combat against illegitimate erosion of the tax base, the discouraging of certain expenses of presumed non-business origin, or the taxation of concealed distribution of income to third parties, not taxed in their sphere, by means of autonomous taxation, will be based on the finding that the normal regime of deductibility of expenses, based on article 23 of the IRC, is not, in the expenses subject thereto, adequate, of itself, to guarantee that the said situations, contrary to that, do not occur in reality.

That is: with respect to certain expenses, the legislator understood that the accounting and fiscal procedures in force for the general case were not sufficiently effective to ensure that those complied with one or both of the said fundamental requirements of deductibility, and, in order to mitigate the consequences arising therefrom, chose to subject them to autonomous taxation, thereby reducing, in substance, their deductibility quotient.

In the case at hand, it is believed then that the taxation in question is based exclusively on the said inadequacy of the general regime of deductibility of costs to ensure the effective necessity of the allowances for expenses subject to autonomous taxation to obtain or guarantee the income subject to IRC, since, as has been seen, the proof of their effectiveness (i.e., their actual realization in the accounted values and the identification of their real recipients) is not at issue, since it is ensured by the additional requirements established by the legislator for their deductibility.

It is understood thus, in this light, the reason for the requirement of invoicing to clients established in the norm of section 9 of article 88 of the IRC, as aimed at ensuring that the allowances for expenses in question were incurred to obtain or guarantee the income subject to IRC.

The question then arises of determining whether the requirement in question should be understood in its apparent literal sense, that is, whether, when the norm in question uses the expression "not invoiced to clients," it is requiring that the data relating to allowances for expenses included in the amount invoiced be expressly and distinctly mentioned in the invoicing, or whether the legal text instead refers to the requirement of demonstrating that the value of the allowances for expenses is covered by the amount invoiced to clients, as proof that they were incurred to obtain or guarantee the income subject to IRC.

Reserving the respect due to other opinions, it is considered that the latter is the case.

In fact, and first of all, it has been repeatedly stated by the superior tax courts that invoicing for IRC purposes is less exacting than for VAT, and is intended essentially to convey "the essential elements of the operation that confer title, in such a way as to enable the Tax Administration both the control of the legality of the deduction for fiscal purposes of the expense, and the respective taxation of the amounts earned by the service providers." [6].

In the same sense, the Northern Central Administrative Court, for example, decided that "[i]n the wording of Law 87-B/98, of 31/12, the expression allowances for expenses "invoiced to clients," which appeared in subparagraph f) of section 1 of article 41 of the IRC for purposes of full deductibility of their amount, corresponded to charges under that heading charged to clients and included in the invoice amount, without requiring the itemization of their amount on the invoice itself, nor any formality in their accounting."[7].

In light of this understanding, which is endorsed, it is not to be presumed that the fiscal legislator intended to add to the already complex tangle of accounting and declarative obligations and duties of taxpayers covered by the organized accounting regime, the requirement of including, as the Respondent suggests, "in the invoices issued the amount corresponding to allowances for expenses and the kilometers traveled," or "the exact location (… of the work), the time or the distance traveled," especially since such data is absolutely irrelevant for fiscal control, whether of the invoice recipient or the issuer.

On the other hand, and under pain of, it is believed, unconstitutionality, the subjection to autonomous taxation of amounts relating to allowances for expenses, not subject to IRS, by simply "not invoiced to clients," cannot be understood in its literal sense, since the invoicing of charges to clients will not, in various situations, such as displacements in the general interest of the company[8], be viable at all. That is, if it is understood that charges with allowances for expenses are "not invoiced to clients" if they are not expressly and distinctly mentioned in an invoice, one would be subjecting imperative autonomous taxation, thereby preventing full deductibility, a series of charges incapable (in that sense) of invoicing, because they were incurred in the general interest of the company, and not in service to a specific client.

This consequence would be even more problematic if one notes that the deductibility of expenses with allowances for expenses was (as it is) expressly guaranteed by article 23 of the IRC (on the date of the tax facts, as it is today, in subparagraph d) of section 1), a norm that would be contradicted by the understanding that the autonomous taxation in question would make impossible, tout court, the full deduction of such expenses, in the event that they were not subject to IRS taxation or invoiced to clients, even if they are duly proven and beyond any reasonable doubt the effectiveness of the expense and its necessity to obtain or guarantee the income subject to IRC.

One would thus fall into that situation described by Professor Ana Paula Dourado, in which "If the objective were to discourage the deduction of expenses to which companies are entitled, autonomous taxation (…) would be difficult to reconcile with the Constitution and the taxation of tax-paying capacity and actual profit."[9], and "the legislator cannot resort to irrebuttable presumptions, fictions and all similar presumptive techniques, whenever (from the moment that) the use thereof puts into question the prevalence of taxation on actual income"[10].

Moreover, the Respondent itself ends up acknowledging, in its Response in the arbitral proceedings, that "legislation indicates that it is not required that the invoicing of allowances for expenses be done expressly and distinctly in the invoicing to clients."[11], with it being solely incumbent upon "taxpayers to possess elements capable of demonstrating that, notwithstanding such fact, the final price indicated to the client contemplates the amounts relating to expenses with allowances for expenses and compensation for displacement in the employee's own vehicle."[12], and that "to demonstrate the presuppositions of the norm of the IRC here in question, the Petitioner would have to demonstrate that, although not invoiced to the client, those values were, in fact, included in the 'price.'"[13].

Also in the Arbitral Decision issued in case 735/2014-T, cited by the Respondent, it was concluded that "Although it is not required that the costs to which section 9 of article 88 of the IRC relate be reflected/recorded expressly in the invoices issued to clients, that fact does not exclude (…) that the Petitioner be exempted from proving that the final price recorded in the invoices incorporated the amounts relating to expenses with allowances for expenses and compensation for displacement in the employee's own vehicle."

This is, in summary, the understanding that is endorsed, that is, that the expenses to which section 9 of article 88 of the IRC relate do not need to be reflected/recorded, expressly, in the invoices issued to clients, and that the taxpayers who intend not to subject those expenses to autonomous taxation must, among other things, possess elements capable of demonstrating that, notwithstanding such fact, the final price indicated and actually invoiced to the client contemplates the amounts relating to expenses with allowances for expenses and compensation for displacement in the employee's own vehicle.

In light of such understanding, it is immediately apparent that the tax act subject to the present arbitral action is affected by an error of law, in the interpretation and application of the norm of article 88, section 9, of the IRC, since, as appears from the Tax Inspection Report, it is based exclusively on the understanding that "in the invoicing issued by the taxpayer to its clients, there is no evidence of the charging of allowances for expenses in the respective invoices (amount and itemization of allowances for expenses)," that "these expenses would only be (…) not subject to autonomous taxation if the respective amount were charged to clients and expressly mentioned in the invoicing issued," and that "it does not result expressly from the analysis of the invoicing issued that these deductible charges were invoiced to clients," which understanding, by what has been set forth above, is not what should be considered as resulting from the norm of article 88, section 9, of the IRC, and which, as has been seen, is not in accordance with what is supported by the Respondent itself in the arbitral proceedings.

Given that, and taking into account that, as was stated in the Decision of the Superior Administrative Court of 23-09-2015, issued in case 0134/11[14], "It is exclusively in light of the reasoning expressed by the Tax Administration when practicing the additional VAT assessment that the legality of such tax act should be assessed," it must be concluded, immediately, that the tax act subject to the present arbitral action is subject to annulment, in light of the pointed error of law.

Furthermore, it results from the facts proven, among other things, that:

  • The Petitioner's activity includes, and included in 2012, a strong component of services rendered outside its facilities, requiring the displacement of its employees, both in Portugal and abroad;

  • The services provided by the Petitioner during the fiscal year in question were preceded by a budget that estimated all the costs foreseeably associated with the work, which, after approval by the client, led to the execution of construction contracts or others;

  • The contracts executed by the Petitioner with its clients regulate the terms and conditions on which the provision of service by the Petitioner is based, including as regards price, which, depending on the client in question, was based on a fixed amount for the entire work, a variable amount depending on the degree of execution of the work, or a fixed amount for each task contemplated in a particular work;

  • Among the said costs were found, whenever the work involved displacements, allowances for expenses, referred to as "major displacements";

  • The prices agreed by the Petitioner with its clients contemplated the various costs that the Petitioner foresaw incurring with the execution of the work, including costs of materials, equipment and costs of displacements, and the respective associated margin;

  • Invoicing was carried out in accordance with the contracts to which they related, generally based on measurement reports, there being cases in which it occurred during the period of warranty of the work;

  • The unit prices invoiced to the Petitioner's clients included the cost borne by the Petitioner with allowances for expenses, but no express reference was made to the charges with allowances for expenses in the invoices issued to them.

  • The said allowances for expenses are supported by itinerary maps, which include the name of the employee, the date and place of displacement, the length of stay, as well as the amount allocated.

In light of such facts, it must be concluded that the Respondent has presented elements capable of demonstrating that, notwithstanding not being expressly mentioned in the invoice, the final price indicated and invoiced to the client contemplates the amounts relating to the expenses with allowances for expenses that it did not subject to autonomous taxation.

In fact, the articulation of budgeting, contracting and invoicing, with the itinerary maps, will be elements sufficient for the Tax Administration to assess whether, and to what extent, the price invoiced by the Petitioner to its clients reflects the allowances for expenses allocated by it, accounted for as deductible and not subject to autonomous taxation.

By disregarding such elements, the tax act also incurred an error of fact, equally generative of its annulability.

Thus, and for all that has been stated, the tax acts subject to the present action should be annulled, the arbitral claim thereby proceeding.

The Petitioner further requests that the Respondent be condemned to the reimbursement of the tax wrongly paid, increased by compensatory interest, in accordance with article 43, section 1, of the General Tax Law.

In accordance with the provisions of subparagraph b) of article 24 of the Legal Framework for Tax Arbitration, the arbitral decision on the merits of a claim as to which no appeal or challenge is possible binds the Tax Administration from the end of the deadline provided for appeal or challenge, and the latter must, in the exact terms of the success of the arbitral decision in favor of the taxpayer and until the end of the deadline provided for voluntary execution of decisions of tax judicial courts, "restore the situation that would exist if the tax act subject to the arbitral decision had not been practiced, adopting the acts and operations necessary for this purpose," which is in line with the provisions of article 100 of the General Tax Law, applicable by virtue of the provisions of subparagraph a) of section 1 of article 29 of the Legal Framework for Tax Arbitration.

As for section 5 of article 24 of the Legal Framework for Tax Arbitration, which states that "payment of interest, regardless of its nature, is due in accordance with the terms provided for in the General Tax Law and in the Tax Code of Administrative Procedure" is nothing more than the recognition of the right to compensatory interest in the arbitral proceeding.

In the case at hand, given that the illegality of the assessment act has been declared, there is entitlement to the payment of compensatory interest, in accordance with article 43, section 1, of the General Tax Law and article 61 of the Tax Code of Administrative Procedure, calculated on the amount that the Petitioner paid wrongly.

Such interest shall be considered owed from the date of wrongful payment until the moment of its respective reimbursement.

C. DECISION

For these reasons, this Arbitral Tribunal decides to declare the arbitral claim fully well-founded and, accordingly:

  • To annul the IRC assessment no. 2015…, of 23-11-2015, the compensatory interest assessment no. 2015… and no. 2015…, and the statement of accounts adjustment no. 2015…, all of 25-11-2015, and the decision of partial denial of the gracious claim no. …2016…;

  • To condemn the Tax Administration to the payment of compensatory interest, in the terms set forth above;

  • To condemn the Respondent to the payment of the costs of the proceedings, in the amount of € 3,060.00.

D. Value of the Case

The value of the case is fixed at € 107,260.00, in accordance with article 97-A, section 1, subparagraph a), of the Tax Code of Administrative Procedure, applicable by virtue of subparagraphs a) and b) of section 1 of article 29 of the RJAT and section 2 of article 3 of the Regulation on Costs in Tax Arbitration Proceedings.

E. Costs

The amount of the arbitration fee is fixed at € 3,060.00, in accordance with Table I of the Regulation on Costs of Tax Arbitration Proceedings, to be paid by the Respondent, as the claim was fully successful, in accordance with article 12, section 2, and article 22, section 4, both of the RJAT, and article 4, section 4, of the cited Regulation.

Let notice be given.

Lisbon, 18 February 2018

The Presiding Arbitrator

(José Pedro Carvalho)

The Arbitrator Member

(Leonardo Marques dos Santos)

The Arbitrator Member

(Paulo Ferreira Alves)

[1] Available at www.dgsi.pt, as well as the remaining case law cited without indication of source.

[2] Note further that, contrary to what, on the date of entry into force of Law no. 55-B/2004, of 30-12, occurred with autonomous taxation on representation expenses, and what still occurs today (and on the date of the tax facts, occurs with autonomous taxation on vehicle expenses), provision was not made for the non-subjection of taxpayers exempt objectively, and therefore, strictly speaking, the very entities referred to in articles 9 and 10 of the IRC should liquidate and pay autonomous taxation on allowances for expenses allocated to their employees, provided that they are not subject to IRS nor invoiced to clients.

[3] "Tax Law," Almedina, 2016, p. 227.

[4] Understanding as non-penalizing autonomous taxation those that apply to non-deductible expenses or whose rate exceeds the normal IRC rate.

[5] "Manual of Tax Law," 3rd Edition, Coimbra Editors, 2007, p. 407.

[6] In this sense, see, for example, the Decision of the Southern Regional Administrative Court of 21-05-2015, issued in case 07833/14.

[7] In this sense, see, for example, the Decision of the Northern Regional Administrative Court of 03/12/2015, issued in case 00005/04.2BEPNF.

[8] Displacements for market prospecting, product disclosure, employee training, contacts with public entities, including the Tax Administration itself, etc.

[9] Cit., p. 228.

[10] Cit., p. 240.

[11] Point 35 of the Response.

[12] Point 36 of the Response.

[13] Point 40 of the Response.

[14] Available at www.dgsi.pt.

Frequently Asked Questions

Automatically Created

Are travel allowances (ajudas de custo) invoiced to clients subject to autonomous taxation under Portuguese IRC?
Under Portuguese IRC law, travel allowances are generally subject to autonomous taxation at rates specified in Article 88 of the IRC Code. However, the taxpayer argued that when such allowances are economically passed through to clients—even if not separately itemized on invoices—they should be exempt from autonomous taxation because they represent reimbursable costs rather than company expenditures. The key issue is whether the form of invoicing (itemized vs. global pricing) or the economic substance (cost recovery through contract pricing) determines the tax treatment. The company maintained that since contract prices included all foreseeable costs including travel allowances, these expenses were effectively invoiced to clients and should not trigger autonomous taxation.
What is the burden of proof for the Tax Authority when correcting autonomous taxation on travel allowances?
The burden of proof in Portuguese tax law generally requires the Tax Authority to demonstrate the legal and factual basis for corrections to taxpayer-declared positions, particularly regarding autonomous taxation adjustments. The taxpayer argued that the Tax Authority failed to prove why travel allowances included in client contract pricing should be subject to autonomous taxation. According to administrative procedure principles, when the Tax Authority challenges a taxpayer's classification or treatment of expenses, it must substantiate the grounds for correction with concrete evidence. However, taxpayers bear the initial burden of maintaining adequate documentation—such as itinerary maps, contracts showing cost structures, and proof that expenses were incorporated into client billing—to support their position that costs were effectively transferred to clients.
Can a company claim compensatory interest (juros indemnizatórios) for errors attributable to the Tax Authority in IRC assessments?
Yes, under Portuguese tax law, taxpayers can claim compensatory interest (juros indemnizatórios) when tax assessments result from manifest errors attributable to the Tax Authority, as established in Article 43 of the General Tax Law (LGT). Compensatory interest compensates taxpayers for the financial prejudice suffered due to improper retention of funds by the State. To obtain compensatory interest, the taxpayer must demonstrate: (1) that an error occurred in the assessment; (2) that the error is attributable to the Tax Authority's services rather than to ambiguity in the taxpayer's declaration or supporting documentation; and (3) that the taxpayer suffered actual financial damage. In this case, the company claimed that the autonomous taxation assessment was based on a manifest error by the Tax Authority, entitling it to reimbursement with compensatory interest. The success of such claims depends on proving clear administrative fault rather than mere difference of interpretation.
How does CAAD arbitration work for disputing IRC autonomous taxation assessments in Portugal?
CAAD (Centro de Arbitragem Administrativa) arbitration provides an alternative dispute resolution mechanism for Portuguese tax disputes under the Legal Framework for Arbitration in Tax Matters (RJAT). The process begins when a taxpayer files a request for constitution of an arbitral tribunal within the statutory deadline. For IRC autonomous taxation disputes, the arbitral tribunal (which can be singular or collective) examines whether the Tax Authority correctly applied autonomous taxation rules. The procedure includes: submission of the initial request; appointment of arbitrators; the Tax Authority's response; an evidentiary hearing where witnesses may be examined and documents analyzed; submission of written arguments; and issuance of a final decision within specified deadlines (extendable for complex cases). CAAD decisions are binding and have the same force as court judgments. This mechanism offers faster resolution than administrative courts, with specialized arbitrators experienced in tax law, making it particularly suitable for technical issues like autonomous taxation classification.
Does the lack of itemized travel allowances on client invoices trigger autonomous taxation under Portuguese tax law?
The absence of itemized travel allowances on client invoices does not automatically trigger autonomous taxation if the company can demonstrate that these costs were incorporated into the overall contract pricing structure. The critical distinction is between costs that represent true company expenditures (subject to autonomous taxation) and costs that are economically transferred to clients through contract pricing (arguably exempt). Portuguese tax law focuses on economic substance over legal form in many contexts. In this case, the company argued that its contracts with clients were based on budgets including all costs—materials, equipment, travel allowances, and profit margins—meaning travel costs were effectively invoiced even without separate line items. Supporting documentation included: construction contracts showing pricing methodology, budgets estimating displacement costs, itinerary maps proving business purpose, and accounting records demonstrating cost allocation. The Tax Authority's position likely centered on the formal requirement that for costs to be considered 'invoiced to clients' and thus exempt from autonomous taxation, they must be explicitly identified on invoices rather than merely embedded in global pricing.