CAAD 274/2018-T: Transfer Pricing Comparable Market Price Method in IRC Corporate Tax

ARBITRAL DECISION (consult full version in PDF)

The arbitrators Counselor Judge Fernanda Maçãs (president) and Doctors Jorge Manuel Figueiredo and Henrique Nogueira Nunes (members), designated by the Deontological Council of the Administrative Arbitration Center to form the present Tribunal agree as follows:

I. Report

1. A..., S.A., NIPC..., with registered office at ..., ..., ... (hereinafter A... or Claimant) filed a request for constitution of a collective arbitral tribunal, pursuant to the combined provisions of articles 2, no. 1, lit. a), and 10 of Decree-Law no. 10/2011, of 20 January (Legal Regime for Arbitration in Tax Matters, hereinafter RJAT), in which the Tax and Customs Authority (hereinafter TA) is Respondent, with a view to assessing the illegality of the tax act establishing Corporate Income Tax (IRC) no. 2010..., and corresponding compensatory interest, maintained following the rejection order of Hierarchical Appeal no. ..., issued on 28 February 2018, and notified on 2 March 2018.

2. The request for constitution of the arbitral tribunal was accepted by the President of CAAD and automatically notified to the Respondent.

2.1. The Claimant did not proceed to appoint an arbitrator; therefore, pursuant to the terms of lit. a) of no. 2 of article 6 and lit. b) of no. 1 of article 11 of the RJAT, the President of the Deontological Council of CAAD designated the signatories as arbitrators of the collective arbitral tribunal, who communicated acceptance of the assignment within the applicable period.

2.2. The parties were duly notified of such designation and did not manifest intent to refuse the appointment of arbitrators, pursuant to the combined terms of article 11, no. 1, lits. a) and b), of the RJAT and articles 6 and 7 of the Deontological Code.

2.3. Thus, in accordance with the provision of lit. c) of no. 1 of article 11 of the RJAT, the Arbitral Tribunal was constituted on 6 August 2018.

3. The Claimant summarized the reasons for its petition in the following conclusions:

1. The terms and conditions of the operations for alienation of equity stakes subject to analysis by the Tax Authority, in transfer pricing terms, respected the principle of arm's length, in that it was demonstrated that the price practiced was superior to the substantial accounting value of the entities in question, contrary to what the Tax Authority contends;

2. In this sense, given all elements presented by the Claimant, it must be concluded that the Tax Authority failed to demonstrate that the price practiced in transactions between related entities was not reasonable, i.e., did not correspond to a market value, therefore any adjustments in transfer pricing should be considered illegal;

3. With respect to the accounting evaluation of the companies, given that companies B... and C... presented, at the date of the operations, overvalued assets, omitted or contingent liabilities, negative historical results and prospects of negative future results, the accounting evaluation carried out by the Claimant constituted a badwill situation;

4. For purposes of determining the corrected equity value of the companies, pursuant to applicable legislation, all adjustments resulting from emphases and reservations apparent in the Legal Certification of Accounts for 2001 and also for 2002 should be accepted;

5. The Legal Certification of Accounts, with reference to 31 December 2002, that is relating to the situation of the companies approximately 2 months after the date of acquisition of the equity stakes, is a privileged instrument for assessing corrections to be considered in determining the fair value of the equity stakes held in B... and F...;

6. The Legal Certification of Accounts expresses the opinion of the statutory auditor as to whether the financial statements present, in a true and fair manner, the financial position of the company or other entity, as well as the results of its operations, as of the date and for the period to which they relate;

7. In this sense, the Tax Authority failed to demonstrate that the reservations and emphases were not known to the parties as of October 2002, initially sheltering itself in refusing adjustments deriving from facts occurring in 2002, on the simplistic argument that the Legal Certification of Accounts was only prepared in 2003, and subsequently on the false argument that the valuation model provided for in Decree-Law no. 328/88, of 27 September, required that the valuation be determined on the basis of the last accounting result (31 December 2001);

8. That is, based on arguments devoid of legal foundation, the Tax Authority acted as if the real valuation of the equity stakes in October 2002 were irrelevant, conduct that independent entities would never adopt;

9. In fact, if no. 1 of Annex III of Decree-Law no. 328/88, of 27 September, only requires, in order to determine the substantial value of equity stakes, that corrections be made that prove justified given the relevant facts that have occurred between the last fiscal year and the date of alienation of the equity stakes, the Tax Authority cannot deny that all facts described in the Legal Certification of Accounts of 2002 constitute relevant facts, occurring in 2002, and that influence the fair value of the equity stakes;

10. In so acting, the Tax Authority gravely violates the constitutional principle of justice, embodied in no. 2 of art. 266 of the Constitution of the Portuguese Republic, since the non-consideration of the elements referred to in the Legal Certification of Accounts of 2002 leads to a flagrantly unjust situation, by virtue of its disregard impeding the determination of the fair value of the equity stakes, therefore the principle of justice must be applied in order to prevent this illegal situation from occurring;

11. From the perspective of an independent purchasing entity, for determining the fairness of the price it would pay for a given company, the opinion of the last full audit conducted (Legal Certification of Accounts with reference to 31 December 2001) would always be relevant, as well as the events and performance between that date and the expected date of acquisition (October 2002);

12. Pursuant to the accounting evaluation carried out by the Claimant, using the equity adjustment method, and comparatively with the evaluation presented by the Tax Authority, an evaluation results of the substantial accounting value of B... in the amount of € 1,368,653, whereby the equity stake held by D... (74.76%) would be equivalent to € 1,023,205:

[TABLE FOLLOWS - equity values with various adjustments]

13. Pursuant to the accounting evaluation carried out by the Claimant, using the equity adjustment method, and comparatively with the evaluation presented by the Tax Authority, an evaluation results of the substantial accounting value of C... in the amount of € 1,566,026:

[TABLE FOLLOWS - equity values with various adjustments]

14. The accounting value of D..., reflected in the real market price ascertained in the proposal for its acquisition by an independent entity (E... S.P.A.), corresponds to € 600,000.00, whereby the value of an equity stake in F... in the amount of 87.56% would correspond to € 525,360.00;

15. There is thus no legal foundation that permits the Tax Authority to disregard a value defined within the scope of a contractual relationship, of arm's length and determined in accordance with market conditions;

16. The accounting value of D..., suggested by the Tax Authority, could never correspond to its real value, since the value of the equity stakes held in B... and F... would have to be disregarded, under penalty of evaluating the same reality twice;

17. Consequently, pursuant to the accounting evaluation carried out by the Claimant, using the equity adjustment method, and comparatively with the evaluation presented by the Tax Authority, an evaluation results of the substantial accounting value of F... in the amount of € 1,985,480.58, whereby the equity stake held by D... (9.6%) would be equivalent to € 190,606.14:

[TABLE FOLLOWS - equity stakes and values]

18. With respect to the evaluation of F..., note is made of the existence of a proposal for alienation of the group, directed to an independent entity, for an amount between € 6,000,000.00 and € 8,000,000.00, which, however, was not accepted, whereby the real market value of F... would always be inferior to € 6,000,000.00;

19. In view of all the foregoing, it results that the operations for alienation, by D..., of the equity stakes held in B... (for the price of € 2,000,000.00) and F... (for the price of € 350,000.00), were effected at market prices, there being no legal foundation that permits the Tax Authority to correct the values at which such equity stakes were transmitted and, subsequently, that permits correcting the tax loss ascertained in the 2002 fiscal year as a consequence of the losses recorded;

20. Without prejudice, should it be considered that the Tax Authority has demonstrated that the price practiced in the transaction between related entities did not respect the principle of arm's length, which is admitted only as a precaution, without waiving and by mere duty of prudent representation, there will always be the necessary conclusion that the operations qualified by the Tax Authority as allegedly "comparable" for purposes of determining such market value should be disregarded;

21. In fact, for purposes of evaluating the market value of the equity stakes held in B... and F..., the Tax Authority could not have adopted the Comparable Market Price criterion, since the operations used as comparables are not conducted between independent entities, nor substantially identical, since their relevant economic and financial characteristics do not demonstrate to be analogous or sufficiently similar, affecting significantly the determination of the terms and conditions that would be practiced in a normal market situation;

22. By virtue of the foregoing, the correction, in the amount of € 2,273,659.70, to the amount of tax losses deducted in fiscal year 2007 and generated in fiscal year 2002 is illegal;

23. Therefore, Assessment no. 2010..., compensation no. 2010..., statement of account settlement no. 2010... and the respective assessment of compensatory interest no. 2010... are manifestly illegal, insofar as they result from an illegal correction to the tax losses deducted, and should be subject to reform;

24. Since the Claimant proceeded to payment of the assessment in dispute, it should be reimbursed in the amount of € 569,310.40, plus indemnification interest at the legal rate, pursuant to arts. 43, no. 1 and 100, both of the LGT, counted from the date of payment of the challenged assessment, i.e., 3 January 2011, until full reimbursement of said amount.

It closes requesting:

(i) The declaration of illegality of the additional IRC assessment no. 2010..., compensation no. 2010..., statement of account settlement no. 2010..., as well as the respective assessment of compensatory interest, with all legal consequences, namely its partial annulment and restitution to the Claimant of the amounts unduly paid; and,

(ii) Indemnification of the Claimant by the Tax Authority for damages resulting from unduly paid assessment in dispute, including compensatory interest, condemning it to payment of respective indemnification interest, pursuant to the terms of no. 2 of art. 43 and art. 100 of the LGT and art. 61 of the CPPT.

4. The Response of the TA – which began by invoking extinction of the Claimant's right of action, on the understanding that it only challenged the assessment notified to the Claimant on 2 December 2010 "and the corrections resulting from the inspection action that gave rise to it" – closed with the following conclusions:

• The obligation to constitute a transfer pricing file has the purpose of ascertaining whether the value of assets allocated to each of the entities at the moment of carrying out the operation respects, or not, the principle of arm's length, therefore this can only be relevant if the report incorporating all requirements is contemporary with the underlying operation and incorporates all requirements provided for in the applicable legal provisions.

• The claimant did not comply with its tax obligations. In fact, at point III.1.2.1.2 of the RIT it was demonstrated that the claimant 1) did not possess the transfer pricing file, having only presented a report prepared by a company of statutory auditors, allegedly with the objective of proving the application of the arm's length principle in the alienation of the equity stakes in question; 2) did not make the necessary adjustments to the accounting result to which no. 8 of the current art. 63 of the CIRC refers, in the periodic income statement form 22, an operation that is required by no. 1 of art. 3 of Ordinance 1446-C/2001, of 21/12; 3) did not indicate in the annual declaration of accounting and tax information the existence in fiscal year 2002 of operations with entities with which it was in a situation of related party relations, contrary to what is provided in the then no. 7 of article 58 (current art. 63) of the CIRC.

• The report presented by the claimant and prepared by entity H... – Company of Statutory Auditors dated 10 October 2002 does not meet the requirements provided, inasmuch as it does not attach documentation respecting the policy adopted regarding transfer prices, namely documentation and information relating to those related entities and likewise the companies and goods and services used as a comparison term, the functional and financial analyses and sector data, and other information and elements that it took into consideration for determining the terms and conditions normally agreed, accepted or practiced between independent entities and for selecting the method or methods used.

• According to the elements collected during the inspection procedure it was possible to conclude that, in this case, the Comparable Market Price method is the most appropriate method to apply, since it constitutes the most direct way of determining the arm's length price.

• The transfer pricing regime does not imply that each taxpayer cannot structure operations with related entities freely as it pretends, rather it corrects the tax result so as to eliminate tax advantages arising therefrom.

• It was incumbent upon the claimant to rebut the application of the Comparable Market Price method by bringing credible elements to the proceeding, which it failed to do especially because it did not have the transfer pricing file.

• The ascertainment of the substantial value is described in the RIT on which the claimant had opportunity to pronounce itself by questioning the adjustments made on the basis of DL 328/88.

• In evaluating the respective equity stakes and for all quantifications of adjustments considered on the basis of the Legal Certification of Accounts, the TA provided adequate explanation, as is shown in the statement of facts of the present response.

• The value supporting the correction derives from the application of the Comparable Market Price method, therefore the ascertainment of the substantial value served only to demonstrate the total absence of application of the market price in the alienation of the equity stakes of the then D... in B... and in F....

• There is no reason why the contracts for purchase and sale of shares entered into between I... and Fund J... and F... and between I... and Fund J... and G..., cannot be considered as practiced under free market conditions.

• No concrete facts were presented by the claimant demonstrating that any of the entities intervening in each of those transactions had the power to exercise, directly or indirectly, significant influence on the management decisions of the other, therefore, given what is provided in article 58 (current 63) of the IRC Code, the requirements are not at all verified for considering the existence of related party relations between any of the entities involved.

5. By order of 5 November 2018, the Claimant was notified to respond to the matter of exception invoked by the TA – which it did by invoking having equally challenged "the rejection order of Hierarchical Appeal no. ...2012... issued (...), on 28 February 2018, and notified on 2 March 2018", contrary to what was the understanding of the TA – and to specify the articles of the P.I. referring to aspects of fact regarding which it intended to present testimonial evidence.

6. By order of 18 November, the holding of the first meeting provided for in article 18 of the RJAT was dispensed with and the holding of the hearing for judgment was scheduled for 13 December 2018 at 14:00 hours.

7. The hearing for judgment took place on 13 December at 14:00 hours, during which the examination of witnesses indicated by the Claimant (K..., L..., and M...), as well as by the Respondent (N...), took place, in accordance with the terms recorded in the respective Minutes, which are hereby reproduced for all due purposes.

In the said Minutes it can be read that "Pursuant to article 21, no. 2, of the RJAT, the Tribunal determined the extension of the time period referred to in no. 1 of the cited article by two months, counted from the end thereof, as well as the communication of such circumstance to the Deontological Council of CAAD, by force of no. 3 of article 11 of the Deontological Code, determined based on the judicial recess period that occurred between 16-07-2018 and 31-08-2018, as well as the recess period to run between 22-12-2018 and 03-01-2019.

The Tribunal notified both parties for successive written submissions within 15 days and designated 6 April 2019 for delivery of the arbitral decision, having, by order of 3 April 2019, set as the final date for the arbitral decision to be delivered 6 June 2019.

8. Claimant and Respondent presented submissions, the former invoking that there was no extinction of the right of action as the TA had intended, and reiterating that the challenged assessment was illegal "by virtue of (i) erroneous determination of the adjusted accounting value of the alienated equity stakes and (ii) non-comparability of the operations considered by the Tax Authority as comparable", and the latter contending for the legality of that assessment, inasmuch as "the ascertainment of the substantial value served only to demonstrate the total absence of application of the market price in the alienation of the equity stakes of the then D... in B... and in F...", and "The value supporting the correction derives from the application (...) of the Comparable Market Price method", there being "no reason why the contracts for purchase and sale of shares entered into between I... and Fund J... and F..., G... and C..., cannot be considered as practiced under free market conditions."

II. Case Management

9.1. The arbitral tribunal was regularly constituted and is materially competent, as provided in article 2, no. 1, lit. a) and 4, both of the RJAT.

9.2. The parties have legal capacity and standing, are legitimate and are represented (articles 4 and 10, no. 2, of the same statute and article 1 to 3 of Ordinance no. 112-A/2011, of 22 March).

9.3. The Respondent raised the exception of extinction of the right of action, arguing, in essence, that, since the Claimant only attacks the act of additional assessment no. 2010... and corresponding compensatory interest, the time period for presenting a request for arbitral pronouncement would be 90 days from notification of the challenged assessment statement, pursuant to lit. b) of no. 1 of article 102 of the CPPT. In this context, having the additional assessment been notified to it on 2 December 2010 and the request for constitution of the arbitral tribunal having been presented on 2018-05-30, the same would be untimely.

In exercise of the right to be heard, the Claimant argued, among other things, that, contrary to what was contended by the Respondent, the request for arbitral pronouncement presented is directed at the decision that fell on the Hierarchical Appeal and does not cease to be part of the object of the arbitral petition, resulting clear that the Claimant did not forego contesting such decision, therefore, consequently, the exception of extinction of the right of action raised by the Respondent should be judged without merit.

Let us examine this.

Upon analysis of the Request for Arbitral Pronouncement it appears that the Claimant begins, in its introduction, by stating that the same has the purpose of assessing the illegality of the act of taxation of Corporate Income Tax no. 2010... and corresponding compensatory interest, "maintained following the rejection order of Hierarchical Appeal no. ...2012..., issued by the Illustrious Subsecretary-General (by subdelegation), on 28 February 2018, notified on 2 March 2018".

In article 342 of the Petition the Claimant again expressly refers to being notified on 2 March 2018 of the rejection order of the Illustrious Subsecretary-General, unable to conform to the decision (see articles 341 to 343 of the Petition). On the other hand, throughout the arbitral petition the Claimant invokes and specifically contests the rejection decision insofar as it maintains the illegalities pointed out to the assessment act (cf. vg articles 432 to 438 and 477).

In sum, analyzed in its entirety the petition and the cause of action, it appears that the Claimant seeks, since 29 April 2011, to discuss the illegality of the assessment now challenged (mediate object of the petition), having its claim been successively denied, first through rejection of the Request for Administrative Review (notified on 18 October 2012) and subsequently through rejection of the Hierarchical Appeal (immediate object of the petition), which, maintaining the assessment act with the illegalities questioned, cannot fail to open the contentious avenue for the Claimant to challenge (cf. articles 332 to 343 of the Petition).

It is true that the Claimant could have used the presumption of rejection of the administrative review for purposes of judicial challenge. Note, however, that the "tacit rejection" established in article 106 of the CPPT is merely a faculty that individuals may exercise or not. It is, in essence, a right to favor opening of the contentious avenue and can never revert against access to the courts.

Accordingly, where express rejection has supervened that fell on prior rejection of administrative review, the counting of the 90-day time period referred to in art. 10, no. 1, lit. a), of the RJAT begins from notification of the rejection decision of the Hierarchical Appeal, that is, begins on 3 March 2018 (the day following the mentioned notification) and would end on 31 May 2018.

Consequently, inasmuch as the request for arbitral pronouncement was presented on 30 May 2018, the same was presented timely, the raised exception should be judged without merit.

9.4. The proceeding is not affected by nullities.

It is for us to decide.

III. On the Merits

III.1. Statement of Facts

10.1. Established Facts

The following relevant facts for the decision are considered established:

a) In October 2002, E... S.P.A. acquired D... SA.

b) On 30 November 2005, O... SA was also acquired by E... S.P.A.

c) On 28 December 2006, the merger by incorporation of the two companies of E... S.P.A., existing in Portugal, D... S.A., and O... S.A took place, the latter being incorporated in the former and the corporate name being changed to the current A..., S.A.

d) In the fiscal year in question (2007) A... SA deducted from its taxable income, tax losses from fiscal year 2002, in the amount of € 8,695,607.94.

e) It was verified that the main cause for the said negative taxable income (€ 12,166,789.05) in fiscal year 2002 was losses ascertained from the alienations of equity stakes that the then D..., S.A., current A..., SA, held in B..., SA and in F... SGPS, S.A.

f) On 4 October 2002 E... S.P.A. entered into a contract with F... SGPS, S.A., for acquisition from it of all 1,607,457 shares of D..., S.A.

g) The transaction was completed on 21 October 2002, with the value of the sale by F... to E... of all D... shares amounting to € 2,950,000.00 (two million nine hundred fifty thousand euros), resulting from the following sum:

• € 600,000.00 (six hundred thousand euros), which would be the value of sale of D...;

• € 2,000,000.00 (two million euros) corresponding to the value of sale of D...'s equity stakes in B... to F...;

• € 350,000.00 (three hundred fifty thousand euros) corresponding to the value of sale of D...'s equity stakes in F... to G..., which was held 100% by F....

h) The losses at issue were ascertained:

• in the alienation, by D..., in October 2002, in favor of company G... S.A., of an equity stake of 9.6% held in F... for the value of € 350,000.00; and

• in the alienation, by D..., in October 2002, in favor of company F..., of an equity stake of 74.76% held in B... for the value of € 2,000,000.00;

i) Resulting from the said alienations of equity stakes that D... held in B... and F..., the Claimant (then designated D...) ascertained, in fiscal year 2002, accounting losses in the amount of € 7,793,484.55 and tax losses in the amount of € 8,950,892.45, which were preponderant in obtaining its negative net result in the value of € 9,498,396.95 and its taxable result, also negative, of € 12,166,789.05.

j) On the date of transmission of D...'s equity stakes in B... and F... to G..., respectively, related party relations existed between those entities, as provided in no. 4 of article 58 (current 63) of the IRC Code, as evidenced in the chart that follows:

[RELATIONSHIP TABLE]

l) F... also held 100% of the capital of G..., therefore, pursuant to lit. b) of no. 4 of article 58 (current 63) of the IRC Code, related party relations also existed between D... and G....

m) The Claimant did not possess the "transfer pricing file" provided for in no. 6 of article 58 (current 63) of the IRC Code and in articles 13 and 14 of Ordinance no. 1446-C/2001, of 21 December, having only presented a report, prepared by H... – Company of Statutory Auditors.

n) The Claimant did not indicate, in the annual declaration of accounting and tax information the existence, in fiscal year 2002, of operations with entities with which it was in a situation of related party relations, contrary to what is provided in no. 7 of article 58 (current 63) of the IRC Code.

o) The Claimant did not make the necessary adjustments to the accounting result in the periodic income statement form 22, an operation that is required by no. 1 of article 3 of Ordinance no. 1446-C/2001, of 21 December;

p) At the end of each of fiscal years 2001 and 2002, the total equity capital of each of the companies that were subject to alienation of equity stakes by the then D... was as follows:

[EQUITY TABLE]

p) The sale of equity stakes that D... held in B... (€ 2,000,000.00) and in F... (€ 350,000.00) was made to F... itself and to another company 100% held by F... (G...), whereby F...'s net revenue was € 600,000.00.

10.2. Unestablished Facts

With relevance to the decision of the case, it was not proved:

- that the repurchases of shares from I... and Fund J... corresponded to the reversal of equity stakes with a financing/venture capital logic and were therefore inappropriate as a comparison term;

- that there were factual errors in the methodology used by the TA for evaluating the transactions that gave rise to the challenged assessment act.

10.3. Justification of the Established and Unestablished Statement of Facts

With respect to the statement of facts, the Tribunal need not pronounce on everything that was alleged by the parties; rather it has the duty to select the facts that matter for the decision and discriminate between established and unestablished facts (cf. art. 123, no. 2, of the CPPT and article 607, no. 3 of the CPC, applicable ex vi article 29, no. 1, lits. a) and e), of the RJAT).

Thus, the facts pertinent to the judgment of the case are chosen and determined according to their legal relevance, which is established in light of the various plausible solutions of the question(s) of Law (article 596 of the CPC, applicable ex vi article 29, no. 1, lit. e), of the RJAT).

Accordingly, taking into consideration the positions assumed by the parties, in light of article 110/7 of the CPPT, the documentary and testimonial evidence, and the PA attached to the file, the above-listed facts were considered established, with relevance to the decision.

Once the Claimant did not comply with its legal obligations to be able to demonstrate, based on the transfer pricing file and related declarations, that the price practiced in the alienations carried out with group entities, prior to the acquisition of all D... shares held by F... SGPS by E... S.P.A., respected the legal requirements, the TA had the freedom to adopt a reasonable method of evaluating such price – which it did, using legal criteria.

As will be better stated below in Law, the violation of such obligations did not preclude the possibility of the Claimant demonstrating the lack of foundation of the methodology adopted by the TA, but it impeded on it, in those circumstances, to demonstrate that, either the criterion used was legally inadequate, or that it was factually wrong, which does not occur, neither via the alleged non-comparability of the transactions, nor via the use of the criteria invoked.

In fact, the Claimant admitted (article 164 of its Submissions) that the value of alienation of equity stakes by I... and Fund J... did not correspond to the value that appeared in the repurchase obligation, although it argued that such previously fixed commitment influenced the value of alienation. In any case, it did not offer solid proof to that effect. In fact, beyond the testimony of M... (interested party in this case, particularly given his quality as former administrator of the Claimant and joint debtor of the latter to I... and J... – I..., pursuant to the contracts attached as Annexes 47 and 49 of the RIT), there is not a single email or letter or physical support to account for this, nor any testimony from I... and Fund J... to corroborate the Claimant's thesis, therefore this Tribunal cannot adhere to its thesis. Moreover, the contracts entered into with the venture capital companies I... and Fund J... (cf. Annexes 47, 48 and 49 of the RIT) mention nothing regarding the initial venture capital operations or that these contracts are an anticipation of the repurchase initially provided for in the venture capital contracts, as financing contracts.

III.2. Statement of Law

Summary of the Case and Questions to be Decided

It is for this Tribunal to assess the legality of the arithmetical corrections promoted by the TA to the taxable matter of IRC 2007 ascertained by the Claimant, having the objective the validation of tax losses deducted in this fiscal year, but generated in fiscal year 2002, resulting from the alienation of equity stakes to a set of related entities, having resulted in corrections to the value of deductible tax losses in the amount of € 2,273,659.70, which generated the issuance of an additional IRC assessment no. 2010..., compensation no. 2010..., statement of account settlement no. 2010..., having resulted in tax and compensatory interest payable in the value of € 569,310.40.

In the year 2002, the Claimant (then D...) generated tax losses derived from the alienation of the following equity stakes held by it to the following entities:

i. Alienation on 16 October 2002 in favor of company G... S.A. of an equity stake of 9.6% held in F... for the value of € 350,000.00; and,

ii. Alienation on 16 October 2002 in favor of company F..., of an equity stake of 74.76% held in B... for the value of € 2,000,000.00.

The main terms and conditions of these sales of equity stakes were determined in a contract entered into between E... S.P.A. and F... on 4 October 2002 – (cf. Annex 6 of the RIT).

In view of the foregoing, in the course of the inspection action, considering the non-existence of the "file" of transfer pricing, the TA concluded that the principle of arm's length had not been respected by the Claimant and, for purposes of determining the price that would be practiced between independent entities, considered the minimum values of the arm's length interval, as follows below:

EQUITY STAKE MINIMUM VALUE ARM'S LENGTH INTERVAL

B... SA 3,454,689.00

F... SGPS SA 1,168,970.70

TOTAL 4,623,659.70

In view of the values of alienation of the equity stakes in question in the file considered by the Claimant, it appears that, in the understanding of the TA, had the said alienations been carried out between independent entities, its income would be higher by € 2,273,659.70, as follows below:

EQUITY STAKE MINIMUM VALUE ARM'S LENGTH INTERVAL (1) VALUE CONSIDERED BY TAXPAYER (2) INCREASE IN REVENUE

B..., SA 3,454,689.00 2,000,000.00 1,454,689.00

F... 1,168,970.70 350,000.00 818,970.70

TOTAL 4,623,659.70 2,350,000.00 2,273,659.70

In order to determine the value of alienation of the equity stakes in respect of the principle of arm's length, the TA adopted the Comparable Market Price Method, using certain comparables that the Claimant believes are not comparable in the operations in question in the file.

On the other hand, the Claimant considers having proved that it practiced a price for the transactions in question in obedience to the principle of arm's length and that the accounting evaluation it carried out and communicated to the TA should be accepted for complying with the said principle of arm's length.

In view of the statement of facts given as established and unestablished, the questions to be decided in the present file are as follows:

A) Legal-fiscal consequences of the non-existence of a "transfer pricing file" and of the compliance with accessory declarative obligations related to the existence of related party operations;

B) Adequacy of the price practiced by the Claimant as respecting the principle of arm's length. Adequacy of the use of the Comparable Market Price method chosen by the TA;

C) Adequacy of the methodology used by the TA for determining the market value of the equity stakes. Analysis of the comparability of the operations considered by the TA as comparable.

A) Legal-fiscal Consequences of the Non-Existence of a "Transfer Pricing File" and of Compliance with Accessory Declarative Obligations Related to the Existence of Related Party Operations:

Before entering into the assessment of the questions at issue, it should be clarified that it is not questioned in the file, and is not the subject of any disagreement between the parties (cf. art. no. 8 of the PA and no. 40 and 41 of the Response), the verification of a situation not reducible to the concept of related party relations provided for in the then article 58 of the IRC Code (currently article 63) in the transactions in question, the said transactions being thus subject to compliance with the principle of arm's length.

With respect to the first question above stated, it results from the file and the evidence produced that the Claimant:

- did not possess the transfer pricing file provided for in no. 6 of article 58 (current 63) of the IRC Code and in articles 13 and 14 of Ordinance no. 1446-C/2001, of 21 December, despite being obligated to present the same as at no time in the proceeding does it say there is no place for its presentation;

- did not make the necessary adjustments to the accounting result in the periodic income statement form 22, an operation that is required by no. 1 of article 3 of Ordinance 1446-C/2001, of 21/12;

- did not indicate in the annual declaration of accounting and tax information the existence in fiscal year 2002 of operations with entities with which it was in a situation of related party relations, failing to comply with what is provided in no. 7 of article 58 (current 63) of the IRC Code, having instead presented a report, prepared by H... – Company of Statutory Auditors, dated 10/10/2002 (cf. Annex 12 of the RIT), with the objective of proving the application of the arm's length principle in the alienation of the equity stakes in question in the file.

The preparation and development of a transfer pricing documentation process is nothing more than a means of compilation and articulation of the various studies, analyses and information that the taxpayer obtained and that were used to support the decision on determining the terms and conditions of the related party operations it carried out. Without prejudice to potential liability for breach of accessory/declarative obligations, pursuant to law, the fact that a taxpayer does not prepare such documentation process does not mean, in the understanding of this Tribunal, that it cannot prove the determination of the arm's length price that it has practiced in a given operation with related entities. But, evidently, the burden of such proof will be its, and will imply the demonstration that the determination made subsidiarily by the TA is not adequate, in fact or in law.

As was written in the Judgment of the Central Administrative Court of the South, of 18 December 2008, rendered in Proc. 02515/08 (and available at http://www.dgsi.pt/jtca.nsf/a10cb5082dc606f9802565f600569da6/ae9989923824396980257536003c9f8f?OpenDocument) "having the TA proceeded to merely quantitative corrections to determine the taxable income of the taxpayer, it was incumbent on it to demonstrate the verification of the legal presuppositions that permit the use of direct valuation consented by arts. 57 of the CIRC and 77 of the LGT and, such proof having been made, the burden falls on the taxpayer of demonstrating that there was error or manifest excess in the quantification."

Transposing the doctrine of such judgment – moreover invoked by the Claimant in its Request for Arbitral Pronouncement – to the concrete case, it is concluded that the non-existence of the transfer pricing file does not entail for the taxpayer (in this case, for the Claimant) the impossibility of, in an administrative or judicial proceeding, proving the rationale employed in determining the price practiced in related party operations (without prejudice to potential liability for breach of its accessory and declarative obligations). But it has the burden of demonstrating that there was error or manifest excess in the quantification.

On the other hand, the fact that the Claimant did not prepare the transfer pricing file means that, should the TA consider that the terms and conditions of the related party operations do not comply with the principle of arm's length, it may, provided duly justified, correct the same, adopting the methodology it considers most appropriate.

Thus, because the Claimant did not present the transfer pricing file, the TA – having had reasonable doubts regarding the value practiced by the Claimant for the alienation of shares of B... and F... given their adjusted equity – sought to identify comparable operations to justify the application of the Comparable Market Price method.

Which leads us to the second of the questions above stated.

B) Adequacy of the Price Practiced by the Claimant as Respecting the Principle of Arm's Length. Adequacy of the Use of the Comparable Market Price Method Chosen by the TA:

It is appropriate to bear in mind here, by its immediate relevance for the legal framework of the case, what is provided in no. 1, 2, 3, 6 and 7 of article 58 of the IRC Code, in the wording applicable ratione temporis to fiscal year 2007:

1 - In commercial operations, including, in particular, operations or series of operations regarding goods, rights or services, as well as in financial operations, carried out between a taxpayer and any other entity, subject or not to IRC, with which it is in a situation of related party relations, must be contracted, accepted and practiced terms or conditions substantially identical to those that would normally be contracted, accepted and practiced between independent entities in comparable operations.

(Wording of Law no. 30-G/2000, of 29 December)

2 - The taxpayer must adopt, for determining the terms and conditions that would normally be agreed, accepted or practiced between independent entities, the method or methods capable of assuring the highest degree of comparability between the operations or series of operations it carries out and other substantially identical ones, in normal market situations or in the absence of related party relations, taking into account, in particular, the characteristics of goods, rights or services, market position, economic and financial situation, business strategy, and other relevant characteristics of the companies involved, the functions performed by them, the assets used and the distribution of risk.

(Wording of Law no. 30-G/2000, of 29 December)

3 - The methods used must be:

(Wording of Law no. 30-G/2000, of 29 December)

a) The Comparable Market Price method, the Resale Price method or the Cost Plus method;

b) The Profit Split method, the Net Margin method or other, when the methods referred to in the preceding subparagraph cannot be applied or, being applicable, do not permit obtaining the most reliable measure of the terms and conditions that independent entities would normally agree, accept or practice.

(...)

6 - The taxpayer must maintain, organized, pursuant to the terms established for the tax documentation process referred to in article 121, documentation respecting the policy adopted regarding transfer pricing, including the guidelines or instructions relating to its application, the contracts and other legal acts entered into with entities that with it are in a situation of related party relations, with the modifications that occur and with information about their respective compliance, documentation and information relating to those entities and likewise to the companies and goods or services used as a comparison term, the functional and financial analyses and sector data, and other information and elements that it took into consideration for determining the terms and conditions normally agreed, accepted or practiced between independent entities and for selecting the method or methods used.

(Wording of Decree-Law no. DL 198/2001, 3 July)

7 - The taxpayer must indicate, in the annual declaration of accounting and tax information referred to in article 113, the existence or non-existence, in the fiscal year to which that relates, of operations with entities with which it is in a situation of related party relations, and should, in the case of declaring their existence:

(Wording of Decree-Law no. DL 198/2001, 3 July)

a) Identify the entities in question;

b) Identify and declare the amount of operations carried out with each one;

c) Declare whether it organized, at the time the operations took place, and maintains, the documentation relating to the transfer prices practiced.

On this basis, it results from the then article 58 (current 63) of the IRC Code the necessity of operating corrections to the taxable matter of the taxpayer when the terms and conditions of the financial operations carried out by it with an entity with which it is in a situation of related party relations are not substantially identical to those that would normally be contracted, accepted and practiced between independent entities in comparable operations.

Pursuant to no. 13 of article 58 of the IRC Code "The application of the methods of determining transfer prices, either to individual operations or to series of operations, the type, nature and content of the documentation referred to in no. 6 and the procedures applicable to correlative adjustments are regulated by ordinance of the Minister of Finance. (Wording of Law no. 30-G/2000, of 29 December)" which, as is known, is Ordinance no. 1446-C/2001, of 21 December.

Accordingly, and with respect to the rules provided for in the IRC Code and Ordinance no. 1446-C/2001 of 21/12/2001, described below are the principles and transfer pricing rules most relevant for the analysis of this case, namely:

1. The principle of contemporaneity of information;

2. The documentation process (transfer pricing file);

3. Comparability factors of the operations.

1. On the Contemporaneity of Information

As a rule, the terms and conditions of related party operations must be determined with information available and known on the date of their carrying out. Such information must be contemporaneous with that existing on the date the transactions are carried out. Indeed, as is the case in operations carried out between independent parties and in the generality of economic transactions.

For these purposes, the taxpayer must carry out an economic analysis of the terms and conditions of the operation that it intends to undertake, so as to support its decision should the terms and conditions established for that transaction come to be questioned by the TA.

This is the understanding of the OECD in its reports relating to transfer pricing matters, understandings and principles followed by Portugal and incorporated into Portuguese legislation regarding transfer pricing matters.

In this sense, described below are the comments made by the OECD (at the date of the facts in question in the file) on this subject, in accordance with points 5.3 and 5.4 of its report referred to below, which we transcribe (underlined and bold ours):

"5.3 Every taxpayer should endeavor to determine its transfer prices for tax purposes in conformity with the arm's length principle, on the basis of the information that it can reasonably be expected to have at the time of such determination. Consequently, the taxpayer should normally examine whether its transfer prices are calculated correctly for tax purposes before fixing those prices. For example, it would be desirable for the taxpayer to examine whether comparable data would be available with respect to transactions in the open market. The taxpayer could equally verify, based on the information it has, whether the conditions under which its transfer prices were established in the course of preceding years have altered, since transfer prices for the current year must be fixed having these considerations in mind.

5.4 When the taxpayer examines whether the manner in which it sets its transfer prices is correct from the tax point of view, it should also in parallel adopt the same principles of prudent management when it comes to evaluating a business decision of similar complexity and importance. It is foreseeable that the application of these principles will require the taxpayer to prepare or refer to documentary evidence, which could serve to document the efforts undertaken to comply with the arm's length principle, consisting of these documents the information on which the transfer prices were based, the factors taken into consideration and the method selected.".

The principle of contemporaneity was incorporated into Portuguese legislation in no. 1 of article 15 of Ordinance no. 1446/C-2001 of 21 December (herein transcribed below).

From the analysis of the OECD principles and the rules established by the Ordinance above referred to applicable regarding the contemporaneity of information, we have conceptually three moments that may be established as relevant for the date of reporting of the relevant information:

(i) carrying out of the transaction: in accordance with the principle established by the OECD (and what makes most economic sense), these data must be known on the date of carrying out the operation;

(ii) end of the tax period: formulation adopted by the Ordinance that regulates the preparation and maintenance of the "transfer pricing file", more consistent with the principle that the taxable event for periodic taxes occurs on the last day of the tax period, and that such adjustment would still occur within the respective tax year and, in principle, would already be reflected in the accounts;

(iii) limit of the time period for filing the periodic income statement (form 22): a subsidiary situation that would still permit reflecting the arm's length situation within the same tax period.

2. "Transfer Pricing File"

The fact that the Claimant did not prepare the "transfer pricing file" in accordance with the applicable rules at the date does not preclude the possibility of demonstrating post facto what should have been demonstrated ex ante – as we have seen.

However, non-compliance with its declarative and accessory obligations regarding transfer pricing impends on the Claimant the burden of proof that the evaluation made by the TA is not correct (in fact and, or, in law) and that the price it itself had adopted was, notwithstanding the lack of documentary elements, an arm's length price.

3. Comparability Factors of the Operations.

Introduction of adjustment mechanisms to comparables is provided for, permitting to mitigate or eliminate differences in comparability between related party operations and those carried out between independent parties. The objective is, insofar as possible, to make the operations more comparable, given that their terms and conditions may be very disparate. This point is provided for in articles 4 and 5 of the said Ordinance no. 1446-C/2001, as described below:

"Ordinance no. 1446-C/2001, D.R. I Series-B, no. 294, of 21/12/2001, 4th Supplement

(...)

CHAPTER II

Of the methods for determining transfer prices

in accordance with the arm's length principle

Article 4

Determination of the Most Appropriate Method

1 - The taxpayer must adopt, for determining the terms and conditions that would normally be agreed, accepted or practiced between independent entities, the most appropriate method for each operation or series of operations, taking into account the following:

a) The Comparable Market Price method, the Resale Price method or the Cost Plus method;

b) The Profit Split method, the Net Margin method or other method appropriate to the facts and specific circumstances of each operation that satisfies the principle set forth in no. 1 of article 1 of this ordinance, when the methods referred to in the preceding subparagraph cannot be applied or, being applicable, do not permit obtaining the most reliable measure of the terms and conditions that independent entities would normally agree, accept or practice.

2 - The most appropriate method for each operation or series of operations is considered to be that which is capable of providing the best and most reliable estimate of the terms and conditions that would normally be agreed, accepted or practiced in a situation of arm's length, the choice being made for the method most apt to provide the highest degree of comparability between the related party operations and other unrelated ones and between the entities selected for comparison, which counts with better quality and greater quantity of available information for its adequate justification and application and which implies the smallest number of adjustments for purposes of eliminating the differences existing between the facts and comparable situations.

3 - Two operations meet the conditions to be considered comparable if they are substantially identical, which means that their relevant economic and financial characteristics are analogous or sufficiently similar, in such a way that the differences existing between the operations or between the companies intervening in them are not susceptible of affecting in a significant manner the terms and conditions that would be practiced in a normal market situation or, being so, it is possible to make the necessary adjustments that eliminate the relevant effects provoked by the differences verified.

(...)

Article 5

Comparability Factors

For purposes of the preceding article, the degree of comparability between a related party operation and an unrelated party operation must be evaluated, taking into account, in particular, the following factors:

a) The specific characteristics of goods, rights or services which, being the subject of each operation, are susceptible of influencing the price of the operations, in particular the physical characteristics, the quality, the quantity, the reliability, the availability and the volume of supply of goods, the negotiation form, the type, the duration, the degree of protection and the anticipated benefits from the use of the right and the nature and extent of the services;

b) The functions performed by the entities intervening in the operations, taking into consideration the assets used and the risks assumed;

c) The contractual terms and conditions that define, explicitly or implicitly, the manner in which the responsibilities, risks and profits are distributed among the parties involved in the operation;

d) The economic circumstances prevailing in the markets in which the respective parties operate, including their geographic location and size, the cost of labor and capital in the markets, the competitive position of buyers and sellers, the stage in the circulation circuit, the existence of substitute goods and services, the level of supply and demand and the degree of general development of the markets;

e) The strategy of the companies, contemplating, among the aspects susceptible of influencing its normal functioning and conduct, the pursuit of research and development activities for new products, the degree of diversification of activity, the control of risk, the schemes for market penetration or maintenance or strengthening of market share and, as well, the life cycles of products or rights;

f) Other characteristics relevant to the operation in question or to the companies involved.

(...)

CHAPTER IV

Of the Accessory Obligations of Taxpayers

Article 13

Tax Documentation Process

1 - The taxpayer must have, pursuant to no. 6 of article 58 of the IRC Code, information and documentation respecting the policy adopted in determining transfer prices and maintain, in an organized manner, elements capable of proving:

a) Market parity in the terms and conditions agreed, accepted and practiced in operations carried out with related entities;

b) The selection and use of the most appropriate method or methods for determining transfer prices that provide greater approximation to the terms and conditions practiced by independent entities and that assure the highest degree of comparability of operations or series of operations carried out with other substantially identical ones realized by independent entities in normal market situations.

2 - The tax documentation process referred to in the preceding number is also governed by what is provided in no. 1 and 2 of article 121 of the IRC Code.

3 - Exemption from compliance with what is provided in no. 1 is granted to the taxpayer which, in the preceding fiscal year, has achieved an annual value of net sales and other income below (euro) 3,000,000.

Article 14

Relevant Information

To comply with the obligation referred to in the preceding article, the taxpayer must obtain or produce and maintain informative elements, namely as to the following aspects:

a) Description and characterization of the related party relation situation in accordance with what is provided in no. 4 of article 58 of the IRC Code that is applicable to the entities with which it carries out commercial, financial or other operations, as well as of the evolution of the corporate relationship of the connection that constitutes the origin of the related party relationship, including, if applicable, the subordination contract, parity group contract or other contract of equivalent effect, or, as well, demonstrative elements of the dependency situation to which subparagraph g) of no. 4 of the same article refers;

b) Characterization of the activity exercised by the taxpayer and by the related entities with which it carries out operations and, with respect to each of these, discriminated indication, by nature of operations, of the values thereof recorded by the taxpayer in the last three years, or for the period in which they have taken place, if shorter, as well as, in cases where it is justified, making available the corporate accounts of those entities;

c) Detailed identification of the goods, rights or services that are the subject of related party operations, and of the terms and conditions established, when such information does not result from the contracts entered into;

d) Description of the functions exercised, assets used and risks assumed, either by the taxpayer or by the related entities involved in the related party operations;

e) Technical studies with focus on essential areas of the business, namely those of investment, financing, research and development, market and restructuring and reorganization of activities, as well as forecasts and budgets relating to overall activity and activity by division or product;

f) Guidelines relating to the application of the policy adopted regarding transfer pricing, regardless of the form or designation attributed to them, which contain instructions namely on the methodologies to use, the procedures for collecting information, in particular internal and external comparable data, the analyses to carry out to evaluate comparability of operations and the cost and profit margin policies practiced;

g) Contracts and other legal acts practiced both with related entities and with independent entities, with the modifications that occur and with historical information about their respective compliance, and should still be provided, when not expressly recorded in existing legal instruments or when the practice followed departs from what is agreed in them, the following elements:

1) Definition of the scope of intervention of the parties involved;

2) Conditions for delivery of products and accessory activities involved, namely after-sales services, technical assistance and warranties;

3) Price and, if necessary, respective form of calculation, and, further, if this is associated with assumptions, the indication thereof and the circumstances in which they are subject to review, as well as the discrimination of the respective rules and detailed explanation of the multi-year price adjustments, pointing out, namely, the quantitative effects deriving from factors linked to economic cycles;

4) Duration agreed or foreseen and modalities of termination allowed;

5) Penalties and the respective procedure of calculation for default or non-compliance, whatever its form of manifestation, including namely default interest;

h) Explanation regarding the application of the method or methods adopted for determining the arm's length price in relation to each operation and indication of the reasons justifying the selection of the method considered most appropriate;

i) Information on the comparable data used, evidencing, in the case of resort to external entity specialized in market studies, the justification of selection, in cases where it is justified, the technical file of the studies and, as well, an analysis of sensitivity and statistical reliability or, being internal the source of data, the respective technical file;

j) Details about the analyses conducted to evaluate the degree of comparability between related party operations and unrelated party operations and between the companies intervening in them, including the functional and financial analyses, and about the possible adjustments made to eliminate the differences existing;

l) Business strategies and policies, namely regarding risk, that are susceptible of influencing the determination of transfer prices or the distribution of profits or losses of operations;

m) Any other information, data or documents considered relevant for determining the arm's length price, the comparability of operations or the adjustments made.

Article 15

Documentary Support for Relevant Information

1 - The information referred to in the preceding articles must be supported by documents produced by the taxpayer or by third parties and relate to the fiscal year of carrying out the operations, and may consist of:

a) Official publications, reports, studies and databases prepared by public or private entities;

b) Reports on market studies conducted by recognized national or foreign institutions;

c) Lists of prices or quotations published by stock exchanges and commodity exchanges;

d) Contracts or other legal acts practiced either with related entities or with independent entities, as well as documentation prior to their preparation and texts of modification or amendment to the same;

e) Market consultations, letters and other correspondence containing references to the terms and conditions practiced between the taxpayer and related entities;

f) Other documents issued regarding operations carried out by the taxpayer, pursuant to applicable tax and commercial rules.

(...)

Bold and underlining ours.

The Claimant understands that the price it chose in the transactions between related entities was in accordance with the principle of arm's length, inasmuch as from the accounting evaluation it carried out, using the equity adjustment method, resulted that the price practiced was superior to the substantial accounting value of the entities in question, because, at the time, they presented overvalued assets, omitted or contingent liabilities, negative historical results and prospects of negative future results, and that for purposes of determining the corrected equity value adjustments resulting from emphases and reservations apparent in the legal certifications of accounts of fiscal year 2001 and 2002 should be accepted, with the latter being, in the Claimant's view, essential for assessing corrections to be considered in determining the fair value of the equity stakes held in B... and in F....

Let us examine this.

The TA invoked, which was not contradicted by the Claimant, that it based the value of the transmission of the alienated equity stakes on the necessity of making adjustments to the accounting value of the companies, on the basis of their respective legal certifications of accounts (CLC), in particular that of 2002.

Now, it is the understanding of the Tribunal that the CLC of 2002 could not have been considered for purposes of determining the value of the said equity stakes, inasmuch as the terms and conditions of the related party operations must be determined with information available and known on the date of their carrying out. Such information must be contemporaneous with that existing on the date the transactions are carried out. Additionally, as a rule, the issuance of the CLC of 2002 is only possible after the closure of accounts of the company with reference to 31 December 2002. Although it is considered that the facts exist per se, independent of being recorded in the CLC, they were only confirmed with the issuance of the CLC of 2002 which occurred in the following year, on 6 May 2003 (cf. Annex 17 of the RIT) to that of the related party operations in question.

The consideration of the points identified in the CLC of 2001, known on the date of the operation, and therefore contemporaneous, and reflected in the transactions, is the appropriate approach, because contemporaneous.

Although certain accounting aspects relating to the CLC of 2002 may have been discussed with the administration of companies B... and F..., the final document would only be known by the administration of the Claimant in May 2003, after the date of the business of purchase and sale of the shares of B... and F... by E... (October 2002).

On the other hand, even if the accounting records of the companies involved in the operations in question in the file, that of the selling company (D...) as well as of the alienated companies (B... and F...) may present various accounting deficiencies, having been "inflated" according to the testimony of M...– point RRR of the Claimant's Submissions – this is not relevant, nor does it condition the action of the TA; that is: if in the preparation of the financial statements the administration of a company decides not to correct them in accordance with what is established in accounting standards, so as to evidence to users of the same a false and inflated patrimonial and financial situation, it should be held liable for the conclusions that eventual users of the same, namely and for this case, the TA, may come to draw.

Accordingly, in the understanding of the Tribunal, it makes sense and is coherent that the TA can avail itself of the information presented by the companies and known on the date of the operations - CLC of 2001 - so that it can base itself on the same to put into question the price practiced in the operations of alienation of shares and resort, to correct it, to other methods.

Regarding the CLC of 2002, the Tribunal understands it should not be used for the simple reason that it was not known. The argument used by the Claimant that the opinion of the last full audit conducted should always be relevant and that its main conclusions or facts were already known to the administrations of the companies in question does not mean that they should be taken into consideration prior to the approval of the accounts of the companies relating to fiscal year 2002 and issuance of the respective legal certification of accounts which would occur only in the year 2003.

Regarding the approach of using the methodology provided for in DL no. 328/88 of 27 September by the TA determining only the substantial (accounting) value in question, and not taking into consideration the goodwill element, it is said that this, in general, consists of a method of evaluating companies provided for purposes of privatization of public companies for sale to the market. It justifies the equity perspective and does not incorporate the potential for future profits (goodwill), which in normal situations would lead to a more conservative evaluation of the company, should the financial statements of the company reflect its patrimonial situation in a true and fair manner.

The argument adduced by the Claimant that this method does not reflect the situations of loss in value of the companies does not hold, inasmuch as these should have been reflected, in large measure, in the actual equity capital of the companies. The fact that the administration of the companies in question in the file did not correctly apply accounting principles, with the objective of presenting higher equity capital, certainly allowed it to obtain benefits therefrom (whether in access to credit or in the presentation of its results), but also exposed it to the use of such accounting to confront transactions carried out at values inconsistent with it. Thus, even by force of the principle of truthfulness of data recorded in accounting (art. 75 of the LGT), the TA had justified and sufficient grounds to question the losses presented and, faced with them, invoke the transfer pricing regime and seek to determine, according to one of the methods at its disposal, the value of the intra-group transactions.

The fact that the valuation regime employed is a regime applicable to the privatization of public companies, to be sold in the market to independent parties, will not be reason for it not to be capable of being used by the TA. The fact that the TA privileged the determination of the substantial value, from an equity perspective, and not the capacity to generate (or not) future profits, thereby reducing the uncertainty and some arbitrariness in the choice of evaluation criteria and financial projections, is no reason for such approach not to be followed.

Accordingly, in view of the foregoing, the Tribunal understands that the price practiced by the Claimant in the transaction between related entities, given the relevant divergence between it and the value resulting from the accounting evaluation carried out through the equity adjustment method, will have constituted an indication that the principle of arm's length had not been respected.

Consequently, the Respondent, in the course of inspection, and in the absence of an attainable criterion adopted by the Claimant and duly documented in a non-existent "transfer pricing file", understood, in the exercise of its legal prerogative of establishing methodology for evaluating the equity stakes in question in the file, to opt for the Comparable Market Price method.

Note that transfer pricing legislation does not provide for the adoption of a determined or determined methods of evaluating equity stakes to the detriment of others (nor would it be advisable to do so), depending on the circumstances of the concrete case, the taxpayer (or the TA) being free to choose the method they consider most appropriate provided it is duly justified.

The fact that the Claimant did not present any methodology for evaluating the companies in question, as it did not even have a "transfer pricing file", and the fact that the report of the Statutory Auditors Company H... that it presented on 10 October 2002 (cf. Annex 12 of the RIT) to justify the price was not considered credible by the TA, permitted it to present the methodology it considered most appropriate for the purpose, so as to obtain the arm's length interval, and that ended up being the Comparable Market Price method with resort to a set of comparables that will be analyzed in the following point.

The aforesaid report of the Statutory Auditors Company opted to consider the accounting value method, the income value method and the discounted cash-flow method. Accordingly, the statutory auditors company itself considered various methods, some with more focus on equity and others with more emphasis on income or future results.

However, the conclusions of the said report are not duly justified, namely regarding the reason for using the weightings of 15% for the accounting value method, 35% for the income value method and 50% for the discounted cash-flow method. Clearly, different weightings would produce different results.

When questioned by the TA about the justification of the criteria adopted in the evaluation of the equity stakes, the statutory auditor of the said statutory auditors company refers, in addition to other considerations not relevant for this purpose, that "...the evaluation criteria used took into consideration the state