Summary
Full Decision
The arbitrators Dr. Jorge Lopes de Sousa (arbitrator-president), Dr. Paulo Lourenço and Dr. Victor Simões, designated by the Ethics Council of the Administrative Arbitration Centre to form the Arbitral Tribunal, constituted on 29-07-2015, agree as follows:
- Report
A..., S.A. (hereinafter abbreviated as "Claimant"), with Tax Identification Number..., with headquarters at Av...., No. ... – Building..., Floor..., ...-... Carnaxide, following the dismissal of the Formal Complaint No. ...2014..., submitted in the context of the additional corporate income tax assessment No. 2013..., relating to the year 2010, requested the constitution of an arbitral tribunal in tax matters, under article 10, paragraph 1, subsection a), of Decree-Law No. 10/2011, of 20 January (Legal Framework for Arbitration in Tax Matters, hereinafter "RJAT"), and seeks an arbitral ruling on the illegality of the said assessment and its annulment, as well as the reimbursement of the amount of € 379.007,25 (€ 220,811.345 of corporate income tax and € 159.195,80 of municipal surtax), with compensatory interest.
The request for constitution of the arbitral tribunal was accepted by the President of CAAD and notified to the Tax and Customs Authority on 29-04-2015.
Under the terms of subsection a) of paragraph 2 of article 6 and subsection b) of paragraph 1 of article 11 of the RJAT, the Ethics Council designated as arbitrators of the collective arbitral tribunal the signatories, who communicated their acceptance of the appointment within the applicable period.
On 16-06-2015, the parties were duly notified of this appointment, and did not manifest any intention to challenge the appointment of the arbitrators, in accordance with the combined terms of article 11, paragraph 1, subsections a) and b) of the RJAT and articles 6 and 7 of the Ethics Code.
In conformity with the provision of subsection c) of paragraph 1 of article 11 of the RJAT, the collective arbitral tribunal was constituted on 29-07-2015.
The Tax and Customs Authority responded, arguing for the dismissal of the request for arbitral ruling and its absolution from all claims.
By order of 01-10-2015, it was decided to dispense with the meeting provided for in article 18 of the RJAT and for the proceedings to continue with written arguments.
The parties presented written arguments.
The parties have legal personality and capacity, are entitled to participate and are duly represented (articles 4 and 10, paragraph 2, of the same statute and article 1 of Ordinance No. 112-A/2011, of 22 March).
The proceedings do not suffer from any defects and no obstacle arises to the examination of the merits of the case.
- Findings of Fact
2.1. Proven Facts
The following facts are considered proven:
a) The Claimant A..., S.A., Tax ID No..., in the year 2010, was subject to the general corporate income tax regime, belonging to a group of companies taxed under the Special Tax Regime for Groups of Companies (RETGS), being the parent company of the group;
b) On 31 December 2010, the group was composed of the following subsidiary companies:
B..., S.A., with Tax ID No...;
C..., S.A., with Tax ID No...;
D..., S.A., with Tax ID No...;
E..., S.A., with Tax ID No...,
F..., S.A., with Tax ID No...;
G..., S.A., with Tax ID No...,
H..., S.A., with Tax ID No...;
I..., Ltd., with Tax ID No...;
J..., S.A., with Tax ID No...;
c) A tax inspection was conducted, based on Inspection Order 2011..., on the company D..., S.A. (hereinafter "D..."), relating to the year 2010;
d) In the year 2010, D... had in its accounting records relating to the year 2010 account ... –K...– SGPS with aggregate movements in the amount of € 26.700.000,00, an account which was used to reflect the value of intra-group loans with the Claimant, the parent company, according to the following table:
[table]
e) No contract was entered into regarding these loans, which had as their purpose to address punctual cash flow difficulties within the relationship between D... and the Claimant;
f) With respect to the aforementioned loans, neither interest was stipulated nor was any interest paid;
g) In the year 2010, D... contracted bank loans, in particular the following:
[table]
h) The loans obtained by the Claimant, identified above, gave rise to bank charges including interest and similar amounts in the following amounts:
[table]
i) The Tax and Customs Authority, in the Tax Inspection Report, took the following position regarding these loans:
3.4 Regarding the acceptability of all interest and similar charges
The taxpayer, had it not made those loans to the parent company, would not have needed to resort to all the loans shown in tables nos. 5 and 6, nor would it have incurred all the costs detailed in table no. 7, as follows is determined:
Under paragraph 1 of article 23 of the CIRC, costs are those which are demonstrably indispensable for the realization of income subject to taxation or for the maintenance of the income-producing source.
As described above, the interest and similar financial charges borne in the year 2010, in the amount of 781,515.91 EUR would not have occurred if the taxpayer had not made the interest-free loan to the parent company, such that these costs are not indispensable for the realization of income or for the maintenance of the income-producing source, and therefore cannot be accepted for tax purposes, under the terms of paragraph 1 of article 23 of the CIRC already quoted.
The Supreme Administrative Court, in proceedings where the disputed matter was similar to that described in this section, ruled on the dispensability of financial costs incurred by the free financing of other companies (in this regard, see the Judgments of 2009-05-20 in case 1077/2008, of 2007-02-07 in case 1046/2005, available at www.dgsi.pt, which conclude, in summary, that charges borne by a company with bank loans contracted to meet financing needs made to a company (even if associated or inter-group) for which no interest was charged do not constitute costs of a company under article 23 of the CIRC).
Thus, it is not a tax cost, under article 23 of the CIRC, the portion of financial costs that relate to loans made by the taxpayer to the parent company.
Next, the portion of financial costs corresponding to loans made by the taxpayer to the parent company will be calculated, since the total of account 69 - Financial Costs (table no. 07) corresponds to the totality of annual costs, such that it is necessary to determine what portion, not accepted for tax purposes, corresponds to those loans made by the taxpayer. The answer to this question lies in analyzing the total values of loans obtained, the total financial costs, determining what the financial costs would be (and, consequently, the fiscal result) if such financing did not exist.
In order to determine that corresponding portion, the monthly final balance of loans obtained and loans made was calculated, since, taking into account that throughout the year those accounts will undergo fluctuations, it will be a value that reflects more precisely the value of loans obtained.
[calculation details]
After calculating the monthly final balances, the average monthly balance of the total of loans obtained and made will be estimated, by dividing the total aggregate by the number of months in the year, which gives a monthly average of loans obtained of 8,333,333.33 EUR (100,000,000.00 EUR /12) and a monthly average of loans made of 3,041,666.67 (36,500,000.00 EUR /12).
The proportion of financial costs that will not be accepted corresponds to the fraction between the monthly average of loans made and the monthly average of loans obtained and which corresponds to 0.365 (3,041,666.67 EUR / 8,333,333.33 EUR).
Multiplying the fraction previously obtained with the totality of financial costs yields the quota portion of those financial costs, which correspond to charges related to loans made by the taxpayer to the parent company and which, under article 23 of the CIRC, cannot be accepted as tax costs, whose value is 285,253.34 EUR {781,516.00 EUR x 0.365).
In conclusion, the amount of 285,253.34 EUR will be added to the taxable profit declared by the taxpayer in the year 2010.
j) D... had in its accounting records relating to the year 2010 account ... – Corrections Relating to Prior Periods, with a total of costs (debits) of € 1,099,481.91 EUR, and in the tax return for the year 2010 (Form 22 of Corporate Income Tax 2010) the amount of € 22,771.00 was added in field 710, of table 07;
k) The Tax and Customs Authority, in the Tax Inspection Report, understood regarding this account... the following:
3.6 Costs relating to prior years
In account ... - Corrections Relating to Prior Periods, the total of costs (debits) was 1,099,481.91 EUR, and in the tax return for the year 2010 (Form 22 of Corporate Income Tax 2010) only the amount of 22,771.00 EUR was added in field 710, of table 07.
Given the principle of exercise specialization enshrined in paragraphs 1 and 2 of article 18 of the CIRC, which provides that income and costs, as well as other positive or negative components of taxable profit, are attributable to the tax period in which they are obtained or borne, regardless of their receipt or payment, in accordance with the accrual basis and that positive or negative components, considered as relating to prior periods, are only attributable to the tax period when, on the closing date of the accounts of the period to which they should have been attributed, were unforeseeable or manifestly unknown, the taxpayer was notified, on 2012-09-11, to send the extract of account..., as well as the justification of the fiscal acceptability of the amounts recorded in this account, which were not added in field 710, of table 07, of the Model 22 Declaration of Corporate Income Tax of 2010 (point 21 of the notification, see annex no. 1), requesting the attachment of evidentiary elements that they deemed appropriate.
The taxpayer sent the account extract on 2012-10-26 (see annex no. 5), by email, (see annex no. 3 - page no. 7), which is reproduced below (see table no. 10).
The justification of acceptability presented was that contained in the "text" column of table no. 10.
Because that response was considered insufficient, the taxpayer was contacted, through its tax advisor, by email sent on 2012-11-02 (see annex no. 3 - page no. 9), informing him that it was not possible to understand which entries gave rise to the 22,770.50 EUR added to taxable profit, and that it remained necessary to substantiate the fiscal acceptability of the remainder, alerting him that, if the same were not validated in light of paragraph 2 of article 18 of the CIRC, they would be added, such that justification of the fiscal acceptability of the remainder was requested again, always bearing in mind paragraph 2 of article 18 of the CIRC, and they could attach evidentiary elements as they deemed appropriate.
In response sent by email on 2012-11-19 (see annex no. 3 - page no. 5), the taxpayer informed that the criterion was to remove from the balance of account... those movements that would not be included in field 710 of form 22. All remaining movements assume that they would be added and therefore would not be tax costs.
The justification and substantiation for the movements in this account that were not added in table 07 is limited only to the fact that it was unforeseeable for the invoices recorded to be received on the closing of 2009.
Thus, as it was possible to determine, only two movements were not added to table 07 of the model 22 declaration of Corporate Income Tax of 2010: document no. ... and document no..., in the amount of 370,107.49 EUR and 706,603.92 EUR respectively (those marked in table no. 9), with an aggregate amount of 1,076,711.41 EUR.
The justification presented by the taxpayer is insufficient, in that, if it was a matter of unforeseeable 'receipt of invoices' at the closing date of the accounts of the prior year, as alleged, such fact should have been demonstrated through the presentation of elements that would support and corroborate that assertion.
Given that, under article 74 of the LGT, the burden of proof of facts rests on whoever alleges them and also considering the elements/justifications presented by the taxpayer, it is concluded that the taxpayer failed to substantiate the legitimacy of those costs under paragraph 2 of article 18 of the CIRC, such that they will be added to Taxable Profit.
Thus, the amount of 1,076,711.41 EUR will be added to field 710, of table 07, of the model 22 declaration of Corporate Income Tax of 2010.
l) Following the inspection of D..., the Tax and Customs Authority made the following corrections in the total amount of 1,361,964.75€:
[table]
m) The aforementioned corrections were based on:
i) Non-acceptance of a cost in the amount of Euro 285,253.34 (two hundred eighty-five thousand, two hundred fifty-three euros and thirty-four cents), corresponding to a portion of the financial charges borne by D... under financing obtained from a banking institution; and
(ii) Non-acceptance of a cost in the amount of Euro 1,076,711.41 (one million seventy-six thousand, seven hundred eleven euros and forty-one cents), because the Tax and Customs Authority understood that it corresponds to a cost of a prior exercise (specifically the year 2009);
n) Following the exercise of the right to a hearing on the Draft Tax Inspection Report, the Tax and Customs Authority stated in the Tax Inspection Report the following:
9.1 Analysis of the Right to a Hearing
The exercise of the right to a hearing (see annex no. 6) was conducted as follows (for methodological reasons, the points presented in the right to a hearing were grouped for easier analysis):
9.1.1 - It contests the proposed Corporate Income Tax correction of 285,253.34 EUR (paragraphs 3rd to 39th of the right to a hearing) - point 3.1 to 3.4 of the report
Thus it states that:
9.1.1.1 Regarding statements that the loan contract entered into with ... is totally independent of the movements of account... –K...— SGPS
The movements of account ... —K...— SGPS — relate to centralized treasury management operations conducted with K...- COMPANY MANAGING SHAREHOLDER INTERESTS S.A., the parent company of the perimeter of entities taxed in accordance with the Special Tax Regime for Groups of Companies (RETGS), in which the taxpayer is integrated, with the purpose of addressing an excess treasury situation that existed in the sphere of the taxpayer.
With a view to proper contextualization, it is fundamental to recall that the taxpayer was created in 2009 with the objective of managing the hospital establishment corresponding to the former Hospital ... (Hospital...), under a public-private partnership arrangement and having, therefore, entered into a management contract with the Portuguese State, and was left with treasury surpluses in 2010.
Thus, and by virtue of the 'capital contributions' that occurred in the year of its constitution, the taxpayer was left with an excess of treasury.
Now the financial costs "borne in 2010, in the amount of 781,515.91 EUR" are unquestionably accepted for tax purposes, since, on the one hand, no causal nexus is presented with the aforementioned financial flows, since they refer to a loan contract entered into with L... signed previously, in February 2009 (cf. doc. 2), and are not, therefore, contemporaneous with the centralized treasury management operation.
Indeed, and as moreover results from the draft report itself, the operations for covering treasury shortages with K...- COMPANY MANAGING SHAREHOLDER INTERESTS S.A. (parent company) only took place between January 2010 (12/01/2010) and September 2010 (15/09/2010), as results from point 3.1 of the Draft Corrections of the Inspection Report.
Consequently, the loan contract entered into with L... is totally independent of the aforementioned operation to cover treasury shortages, such that the financial costs associated would always be attributable to the taxpayer, for the reason that such loan contract is the financing contract of the management contract (annex thereto included) entered into between the Portuguese State and the Entity Managing the Establishment.
This loan contract and/or financing contract is thus within the scope of the set of contracts that were made to serve the purpose of such management contract, with the financial costs now under analysis being the financial costs inherent in the proper performance of such financing contract.
It is therefore clear and indisputable that the financial costs recorded in 2010 and now under analysis are simply those inherent in the "proper and timely performance of the obligations" of such financing contract of the management contract and that would always occur regardless of the occurrence of such centralized treasury management operation.
It is therefore obvious that the purpose of such loan contract is bound and linked to the financing of the hospital management project, such that the financial costs inherent in its performance by the Declarant also have their cause in those objectives (cf. Doc. 2), thereby demonstrating the indispensability of these costs for the realization of income subject to taxation or for the maintenance of the income-producing source, namely (cf. as results from article 23 of the Corporate Income Tax Code).
It is therefore fallacious the argument raised in the draft corrections that defends that "the taxpayer, had it not made those loans to the parent company, would not have needed to resort to all the loans shown in tables nos. 5 and no. 6, nor would it have incurred all the costs detailed in table no. 7, as follows is determined." (cf. page 4/11 of the draft).
On the other hand, it should be noted that the centralized treasury management operation was only initiated in January 2010 (12/01/2010), having as objective to optimize benefits from the excess treasury situation.
In this context, the conclusion drawn in the draft is not based on any logical premises, since the loan with L... not only was not entered into in the period between January and September 2010, but was granted in a prior exercise and ends up remaining in effect in subsequent exercises.
It being fundamental to note that the financing granted by L... that have been obtained since a period prior to 2010, and with a view to financing the hospital management contract (cf. Doc. 2), before the occurrence of this centralized treasury management operation, meaning that the "total of account 69 — Financial Costs (table no. 07) corresponds to the totality of annual costs" {cf. page 4/1 1 of the draft} simply translates the costs inherent in the proper performance of the financing contract.
The loans granted under such financing contract and the respective financing costs inherent in their performance that are now under analysis are completely distinct from the intra-group financing made, with such loans having been stipulated in the context of defining the financing model of the management contract of the hospital establishment to be entered into with the Portuguese State and logically long before such treasury operations.
As an example of the total absence of inter-relation between the loans granted under the financing contract and such treasury operations, one may point to the fact that there exist in such contract clauses for voluntary early repayment (see clauses tenth and second and following), therefore, such implies that early repayment cannot subsequently be re-obtained automatically by the present Declarant according to its variations in liquidity.
It is therefore evident that the loans obtained and respective financing costs were derived from the loans granted under the aforementioned financing contract and were not derived from the current accounts tied to the centralized treasury management operations, making it indisputable to conclude that the capacity for alteration/repayment is completely distinct.
It should be emphasized that this loan contract for financing of the management contract is totally distinct from the reality of treasury management operations via current account, given that if the present Declarant proceeded to the repayment of amounts obtained via loan, if it later needed these repaid amounts, it is not guaranteed that new or repeated financing, or at least, that this would be obtained under the same conditions, thus dealing with distinct realities that do not interrelate.
Moreover, dealing with a loan contract with its inherent characteristics, if the present Declarant foregoes the amounts obtained for the reason that they are undergoing centralized treasury management operations, it would later run the risk that when it later came to need the amounts it foregoes (repaid), such amounts would not again be granted or would be granted under much more onerous conditions.
It should also be said that such financial flows could never be the cause of such loans obtained from L... since they are subsequent and not prior to the execution of the aforementioned loan.
It is therefore illogical to assert that something is a cause (centralized treasury management operations) of an effect (loan with L...), when that effect is prior to the cause.
On the other hand still, nowhere in the draft are mentioned what were the concrete reasons that triggered the resort to such loan contract, in particular:
(i) whether they were pressing needs for lack of liquidity;
(ii) and, if there were pressing needs for lack of liquidity, what is the causal nexus with the treasury management operation now analyzed.
It therefore contends that the findings established in the draft are merely conclusory, not presenting an argumentative path that would allow concluding that the financial flows relating to such centralized treasury management operations are the cause of the loans obtained under the aforementioned loan contract.
Having analyzed the arguments now presented by the taxpayer, it is found that these are based on the premise that the loan contract entered into with L..., from which all costs recorded in account 69 derive, occurred in February 2009, reason for which, in its view, they present no causal nexus with the loans made to the parent company K...- Company Managing Shareholder Interests S.A., in the year 2010.
In this regard, it should be clarified that no corrections were made to charges incurred in 2009 arising from the loan contract entered into with L... intended to finance the hospital management project in the context of the public-private partnership entered into with the Portuguese State.
What is at issue is that in 2010, part of the liquidity of the taxpayer for which the loan with L... contributed was channeled not for financing the hospital management project but rather for financing the parent company K...- COMPANY MANAGING SHAREHOLDER INTERESTS S.A (loans without interest).
It should further be clarified that the available funds of any company are an amount that, due to its liquid nature, rapidly dissipate, and that with the passage of time it becomes very complex to trace their origin. That is, when a company has available funds and then consumes them, whether by payment to suppliers, payment of salaries, whether by loan, or applications in various investments, it is no longer possible to trace their provenance. In essence, the available funds of a company constitute an aggregated value, and when one pays a supplier or a salary, or lends, it is hardly possible to make the causal nexus with the financial input that gave rise to it, all because, as is clear to see, money is a fungible thing.
It is therefore not possible, given the fungible nature of available funds, at the time of their use to know what the respective financial input is.
The taxpayer alleges that the liquidity that the loan contract entered into with L... provided to the taxpayer is totally independent and in no way contributed to the treasury surpluses that made possible the loans to the parent company K...- COMPANY MANAGING SHAREHOLDER INTERESTS S.A. reflected in the debits of account ... –K..., but does not demonstrate it.
Constituting the amounts at issue available funds in the inspected company, in particular deposits of monetary values in its bank accounts, and given the absence of any accounting documents capable of proving the arguments advanced by the taxpayer, with part of these amounts having been channeled to company A..., for purposes other than those of its activity, the fraction of charges relating to these loans cannot be accepted as a tax cost.
The corrections now proposed relate to charges incurred by the inspected company with the same loan in the year 2010, the year in which the taxpayer channeled funds for activities that have nothing to do with its own, and that in no way contributed to the realization of any income subject to taxation, such that the conclusions, evidenced in points 3.1 to 3.4 of the report, remain valid, that part of the costs shown in table no. 7 cannot be considered tax costs because they are not indispensable.
9.1.1.2 Management options regarding which the Tax Administration should not interfere (B)
Moreover, in order to characterize such financial flows as being the cause of triggering the obtaining of such loans, they would have to be the sole cause and not even a partial cause, under penalty of the Tax Authority interfering in the organization of the taxpayer to the point of seeking to influence how it manages the optimization of its financial flows.
The tax administration cannot interfere in the management of any entity. And it is not with this report that it does.
However, article 17 of the CIRC expressly provides that taxable profit is constituted by the algebraic sum of the net result of the period and the positive and negative changes in assets and liabilities verified in the same period and not reflected in that result, determined on the basis of the accounts and possibly corrected in accordance with the CIRC.
The making of a management decision of an entity is always the responsibility of its representatives, never the tax administration. Only those decisions have to be scrutinized in light of the CIRC, in order to know whether or not they contribute to the formation of taxable profit.
Given that if accounting costs are found that do not contribute to taxable profit, they will have to be added, and that is what is at issue.
Thus, the statement that those loans to the parent company K...-COMPANY MANAGING SHAREHOLDER INTERESTS S.A. are management options regarding which the Tax Administration should not interfere, in no way is relevant to change the tax correction proposal at issue.
9.1.1.3 Correlative adjustment within the group - (C)
It should be noted that it makes no sense to raise the question now analyzed, when it is known that the present Declarant forms with the parent company that received the aforementioned loans a group of companies taxed under the RETGS in accordance with the current articles 69 and following of the Corporate Income Tax Code and are therefore taxed in accordance with the principle of fiscal unity.
Consequently, and in good truth, any transaction between both produces a correlative effect, canceling itself out, consequently, in consolidated terms (RETGS).
That is, any tax adjustment in the sphere of the Declarant due to transactions carried out with entities that with it share the perimeter of the RETGS is in practice eliminated upon determination of the aggregate taxable base. This should also happen under these circumstances, constituting this correction in a useless act and therefore should not be performed by the Tax Authority.
The argument that it makes no sense to raise the question now analyzed, in that any tax adjustment between both produces a correlative effect, eliminating itself, consequently, in consolidated terms (RETGS) constituting this correction in a useless act and therefore should not be performed by the Tax Authority, is not exact.
What is at issue is whether these costs of the taxpayer are or are not tax costs, and if they are not, they will have to be disregarded in the taxpayer making that negative adjustment to the parent company K...- COMPANY MANAGING SHAREHOLDER INTERESTS S.A., with no correlative effect in the opposite direction with null effect occurring.
Thus, the statement of a correlative adjustment within the group in no way is relevant to change the tax correction proposal at issue.
9.1.1.4 Method used for the correction adopted by the Tax Authority- (D)
Finally, it is also important to emphasize that the method adopted by the Tax Authority in point 3.4 of the Draft Corrections of the Inspection Report for calculating the concrete amount of correction of € 285,253.34 (financial costs weighted by the monthly average of financing obtained and the monthly average of financing granted), does not result from the Law (understood as the Corporate Income Tax Code), such that the only valid test is that which results from paragraph 1 and subsection c) of paragraph 1 of article 23 of the said Code, that is, are they or are they not indispensable, with such indispensability being demonstrated by the execution of a loan contract arising from the Hospital Establishment Management Contract itself entered into with the Portuguese State, which is long-term and began on 5 February 2009.
In light of the foregoing, the financial costs in the amount of € 781,515.81 arising from loans obtained from L... are costs accepted for tax purposes and expressly provided for in subsection c) of paragraph 1 of article 23 of the CIRC.
It should be noted that the CIRC does not define which method to apply in order to determine what proportion of financial costs will not be tax costs.
But from the moment it is concluded that parts of these costs do not contribute to taxable profit in accordance with paragraph 1 of article 23 of the CIRC, then necessarily that part must be quantified. For this purpose, the method described in point 3.4 of the report was employed, objective and guided by criteria of reasonableness.
Such that the statement of the taxpayer on this point in no way is relevant to change the proposed tax correction at issue.
(...)
9.1.3 - It contests the proposed Corporate Income Tax correction of 1,076,711.41 EUR (paragraphs 45th to 62nd of the right to a hearing) - point 3.6 of the report
Regarding this proposed correction, the taxpayer states that:
Regarding the amount of 1,076,711.41 EUR, it should be clarified that they relate to reversals of accruals of income recorded and taxed in a prior exercise (understood as 2009) and not to costs (in the terminology then applicable).
Such that the disregarding of such reversal (by means of recognition of an expense in 2010) would result in a glaring double taxation in the sphere of the Declarant. Which would be at least unacceptable in a State based on the rule of law.
The explanation is simple and clear: the movement relating to Document no. ... and Document no..., mentioned in point 3.6 of the Draft Corrections of the Inspection Report, relate, respectively, to a reversal (recorded in 2010) of an accrual of income recorded in 2009 relating to user fees and also to a reversal recorded in 2010 of an accrual of income, for production in outpatient medical services recorded in 2009 (cf. Doc. 3 of the right to a hearing), income whose counterpart is the State.
Indeed, upon closing the accounts of the prior exercise and, in accordance with estimates of production and, consequently of billing, such income was recognized in 2009, which was found to be overestimated, proceeding simply in the accounts now analyzed to the reversal of the accrual of such income.
Moreover, the fact that the Declarant demonstrates the capacity to proceed in 2010 to this reversal is demonstrative of its capacity for timely management of its production indicators, and it should also be noted that there is uncertainty always inherent to these contracts and income that the group may also demonstrate to have succeeded in other similar circumstances, such that the uncertainty of these estimates has historical precedent, as is moreover public knowledge and mainly the State's own.
It should be noted that it can even be argued that the accounting treatment of such reversal was not the most elucidating, given that such recording was made in an account for corrections relating to prior exercises, however, what is already indisputable by imposition of the Prohibition of Double Taxation of the same economic fact is the non-taxation of this adjustment in 2010.
Moreover, it should be noted that being an income accrual, it would be manifestly illegal not to permit such reversal given that, in this case, the State even taxed more than it should have taxed, since it taxed income that never came to materialize, such that, even prior to such reversal, the Portuguese State taxes non-existent income.
Even if one does not understand it thus and understands that we are faced with a correction of costs of a prior exercise, which is, however, fundamentally disagreed with, merely for precaution it should always be said such correction would also have to be accepted, even if not in the year 2010
The principle (of specialization) requires that income and costs be attributable to the exercise to which they pertain, requiring nothing more than that (see that the letter of article 18 of the Corporate Income Tax Code requires nothing more than this simple requirement of attribution to the certain exercise). Indeed, the restriction imposed by such principle is limited only and solely to the necessity to attribute costs and income to the exercise to which they pertain, even requiring that proper fiscal specialization be performed when accounting specialization is no longer possible, such that, the principles of specialization of exercises and the prohibition of double taxation impose that in situations where an adjustment is made for the cost of a prior exercise, the corresponding correction must be made to the prior exercise to which such cost pertains.
In this sense, one may cite Directive Letter 14/93, of 23-11-1993:
"1. Under article 18 of the CIRC, income and costs, as well as other positive or negative components of taxable profit, are attributable to the exercise to which they pertain, in accordance with the principle of specialization of exercises.
- Thus, and it being the responsibility of the Tax Inspection Services within the scope of internal or external analysis to monitor taxable income, determined on the basis of a taxpayer declaration, they must, without prejudice to the penalty applicable to the case, make the appropriate corrections to the net result of the exercise to which the costs or income pertain, when, in accordance with article 18 of the CIRC, they are not considered negative or positive components of the taxable profit of the exercise in which they were recorded."
It concludes by arguing that it is fundamentally a matter of correcting fiscal specialization since it is not possible to correct accounting specialization.
Thus, as finally it is possible to understand, the movements at issue (see table no. 13), after all, are not matters of costs related to prior exercises (2009), but will be reversals of income overestimated in 2009 that seek to reverse in 2010.
Summarizing what was alleged by the taxpayer, what would have happened was that in 2009, the taxpayer would have provided services to the State, but by not having issued the respective invoices within that exercise (by not being able to quantify/determine these same services) and to comply with the principle of specialization of exercises, would have estimated amounts that were added to the income of 2009 (debit to account ... 0 and credit to an account 7 of gains), whose excess compared to what actually occurred, it now seeks to reverse/annul (credit to account... and debit to an account 7 of gains or 6 of costs).
The taxpayer presented in the right to a hearing two documents (doc. no. 3 of the right to a hearing - see annex no. 6),
The first document is an internal document with no. ... (and not the document ... but related to this since the reference doc 30/173 is mentioned in the final part of this, which certainly refers to document no. ...).
As it is understood, by document no. ..., the taxpayer debits account ... and credits ... in 627,847.26 EUR. Document no. ... credits account ... and debits account ... (it is presumed that this is a lapse by the taxpayer that certainly refers to the account at issue... and not to this) in the amount of 370,107.49 EUR.
Translating the accounting movements at issue, what document no. ... does is annul income that would have been estimated in excess in the amount of 627,847.26 EUR.
Document no. ... transfers part of the annulment of income to a cost account (in practical terms the effect is the same).
That is, it was annulled, presumed due to excess of estimate, the amount of 627,847.26 EUR, with the counterpart of that annulment being the decrease in income in the amount of 257,739.77 EUR and an increase in cost in the amount of 370,107.49 EUR.
The descriptive of this document refers to "Correction, Production - in the calculation, moderating fees were not deducted".
As for the second document presented in doc. no. 3 of the right to a hearing (see annex no. 6), it is understood that document no. ... consists of a computer printout of document no. ... dated 2009-08-31 and recorded in the accounts on 31-12-2009.
In document no. ... of 2009, there is a debit to account... and a credit to account ... in the amount of 1,936,032.92 EUR.
By document no..., in which the accounts moved are not shown, it is presumed that account ... would have been debited with ... as counterpart.
That is, in 2009, the amount of 1,936,032.92 EUR of income would have been estimated, and in 2010, there was a partial annulment of that estimate in the amount of 706,603.92 EUR.
Regardless of the accounting treatment given to such reversal, the reversal of excessively estimated income is perfectly normal and it is obviously not the objective of the Tax Inspection to seek to impose any kind of double taxation.
The reversal of excess income previously taxed, as a rule, is accepted for tax purposes.
However, and in accordance with paragraph 1 of article 23 of the CIRC, costs are those which are demonstrably indispensable for the realization of income subject to taxation or for the maintenance of the income-producing source.
Now the taxpayer presents two internal documents with explanations/substantiations/calculations in manuscript.
The probative value of accounting records rests essentially on the respective supporting documents, and, as for those which should be, it is the external origin that provides them with a character that can be designated as presumption of authenticity. An internal origin document can only replace an external origin document when additional proofs are gathered that confirm the authenticity of the movements reflected in it.
Thus, and because the taxpayer resorts to internal documents, it should attach other means of proof demonstrating unequivocally the correctness and legitimacy of the entry made. And those other means of proof should focus not only on the materiality of the operation in itself but also on other elements indispensable to the quantification of its respective effects.
It is not sufficient to justify a cost/expense/reversal with an internal document (made by itself). Alongside that support, it must demonstrate, by any other means, the existence and main characteristics of that movement. In that task, it may adduce any means of proof (witnesses, auxiliary documents, explanation of its accounts).
It thus happens that the taxpayer was not able to make that "unequivocal demonstration" of that reversal and which is its responsibility, given that it is the taxpayer that has the power/duty to equip itself with the necessary elements for such purpose.
In good truth, just as 370,107.49 EUR and 706,603.92 EUR appear in those documents, any other values could perfectly appear there.
If indeed these are reversals of excess income, it was very important the attachment of additional elements that would not raise the slightest doubt about their legitimacy.
Such that the conclusions drawn at point 3.6 remain valid, adding to the substantiation therein contained paragraph 1 of article 23 of the CIRC, that is, unproven costs. To this extent, Directive Letter 14/93, of 23-11-1993, does not apply.
o) Following the inspection of D..., an inspection was conducted of the Claimant, parent company, with the issuance of Inspection Order 2013..., with a view to, in the context of the RETGS, project in the group's tax return, parent company K..., SGPS, SA, Tax ID No..., the aforementioned corrections relating to the taxable base of D...;
p) In the Tax Inspection Report of this inspection of the Claimant, it refers, among other things, to the following:
III. Description of facts and grounds for purely arithmetic corrections to the Taxable Base
- Corrections to the Taxable Base of the Company "D... SA".
As a result of the inspection analysis Inspection Order 2011... of the company "D... -, SA.", Tax ID No.... relating to the year 2010, the following corrections were made totaling 1,361,964.75€: (Annex l, sheets 1 to 42):
[table]
From the acceptability of all interest and similar charges:
As explained in the inspection report conducted by the finance office direction of..., the taxpayer, by making interest-free loans to the parent company, incurred costs and financial charges related to bank loans obtained. Thus, under article 23 of the CIRC, the portion of financial costs relating to loans made by the taxpayer to the parent company were not considered tax costs, since these costs are not indispensable for the realization of income or for the maintenance of the income-producing source, in the amount of 285,253.34.
Costs relating to prior exercises:
Given that the taxpayer was unable to substantiate the legitimacy of the costs contained in account ... - Corrections relating to prior periods, totaling 1,099,481.91€ (costs), and only to have added in field 710 of Table 07 of Model 22 of 2010, the amount of 22,771.00€, under paragraph 2 of article 18 of the CIRC, the value of the difference in the amount of 1,076,711.41€ was added to taxable profit.
Thus, the declared fiscal profit of 4,451,385.01€ was corrected by 1,361,964.75€, resulting in a taxable profit of 5,813,349.76€.
(...)
- Corrections to the Taxable Base of the Group
Taking into account the corrections made to the individual results of the company "D... SA", this led the group's taxable profit to be changed from 4,451,385.01€ to 5,813,349.76€:
[table showing the group composition with corrections]
However, the taxpayer indicated in the Model 22 group declaration, as the group's fiscal result the amount of 4,451,385.02€, such that the value of the corrected fiscal profit is 5,813,349.776.
q) Following this inspection of the Claimant, Assessment No. 2013... was issued, with the amount due of € 220,811.45, which was attached with the request for arbitral ruling, whose contents are considered reproduced, assessment in which the Tax and Customs Authority made an offset with the amount of municipal surtax assessed in excess by the group in the same period, in the amount of € 158,195.80;
r) The Claimant filed a formal complaint against the aforementioned assessment, which was dismissed by order of 29-01-2015, issued by the Deputy Director of Finance, expressing agreement with a report in which it refers, among other things, to the following:
3.1. Interest and Similar Charges (§ 12 to § 67)
After analyzing the arguments presented by the complainant, we make the following considerations:
Taxpayers are free to conduct the management of their businesses, bearing the costs they deem necessary. Different is their acceptance in tax terms. The tax acceptance of costs should follow the general rule provided for in article 23 of the CIRC.
Paragraph 1 of article 23 of the Corporate Income Tax Code provides that, only, shall be considered costs or losses those which "are demonstrably indispensable for the realization of income or gains subject to taxation or for the maintenance of the income-producing source", that is, the qualification of costs as deductible implies that they be related to the activity conducted by the company in terms of their economic adequacy, given the purpose of obtaining results.
The Judgment of 2006-03-29, of the Supreme Court of Justice, rendered in case no. 01236/05, considers that "the criterion of indispensability was created by the legislator, not to permit the Administration to intrude in the management of companies, dictating how it should be applying its means, but to prevent the tax consideration of costs that, even though accounted as costs, are not within the scope of the company's activity, were incurred not for its pursuit, but for other interests foreign to it".
In this regard, we transcribe an excerpt from the judgment of the Central Administrative Court of 2009-03-10, rendered in case no. 02608/08, which, "Appealing to the Study of Tomás de Castro Tavares (On the Relationship of Partial Dependence between Accounting and Tax Law in Determining the Taxable Income of Legal Entities: Some Reflections at the Level of Costs, in CTF, no. 396, pages 7 to 177)" concludes to the effect that "The indispensability referred to in article 23 of the CIRC as a condition for a cost to be deductible does not refer to necessity (expenditure as a sine qua non condition of income), nor even to convenience (expenditure as an action convenient for business organization), under penalty of intolerable intrusion of the Tax Authority in the autonomy and freedom of management of the taxpayer, but requires, only, an economic causal relationship, in the sense that it is sufficient that the cost be incurred in the interest of the company, in order, directly or indirectly, to obtain profits. The legal notion of indispensability is therefore delimited by an economic-business perspective, by direct or indirect fulfillment of the ultimate motivation of contributing to the obtaining of profit."
For purposes of proving the indispensability of the cost, it is the responsibility of the taxpayer to inform the Tax Authority of its necessity, just as it is its responsibility, and in cases where applicable, to inform the Tax Authority about the recipients of goods or services and the reasons that motivated them, so that it may be determined whether or not they are foreign to the purposes of the company and, consequently, whether they are fiscally deductible or not under article 23 of the CIRC.
It is well known that the fiscal admissibility of costs or losses is submitted, in a first analysis, to the scrutiny of paragraph 1 of article 23 of the CIRC. From this, three essential requirements are extracted for an accounting cost to be valued and accepted as a tax cost: proof, indispensability, and connection to taxable income, such that the cumulative absence thereof compromises the achievement of the objective it seeks to attain.
In these terms, it becomes necessary, in order to respond affirmatively to the consideration as costs for tax purposes, to confirm their indispensability. It is then required that, for the acceptance of the cost or loss, beyond the correspondence with a real economic fact, a value judgment be formed that is assessed "by criteria" of economic rationality given the statutory objectives and considering, therefore, the reasonableness and substantiation of the management decisions at the time and in the circumstances in which they are taken.
If this rules out from the start all costs that result from operations whose purpose is exclusively tax, tax savings, as they are totally lacking in economically valid reasons, it equally excludes costs where, without sufficient substantiation to be assessed by objective parameters, would not be incurred by a diligent economic operator placed in analogous conditions.
As has been sanctioned by consolidated case law orientation, the requirement of indispensability necessarily implies an objective assessment of costs borne.
It should be underlined that it is not a matter of judging the soundness or effectiveness of any decision made in the exercise of freedom of business management, but only to carry out an assessment in accordance with common standards of normality and convenience, without prejudice to the possibility of concrete justification, which corresponds to a delimiting orientation that has been subscribed to by the case law.
In these terms, and within the scope of the inspection conducted, it was demonstrated that "the taxpayer, by making interest-free loans to the parent company, incurred costs and financial charges related to bank loans obtained ... the portion of financial costs relating to loans made by the taxpayer to the parent company were not considered tax costs."
As such, the tax deductibility of these costs is ruled out, since in the inspected company, regarding the charges incurred with the loan of a loan contract with L..., in the total amount of € 285,253.34:
-
there do not exist "any accounting documents capable of proving the arguments";
-
"part of the liquidity of the taxpayer for which the loan with L... contributed was channeled not for financing the hospital management project but rather for financing the parent company K... (loans without interest)"
(Transcriptions from the inspection report drawn up in the Finance Office direction of..., as per sheet 410 of the records).
In this way, the identified charges do not meet the requirements of indispensability of costs under paragraph 1 of article 23 of the CIRC.
Thus, when the accounts or records are found to be organized in accordance with commercial and tax law, the truthfulness of the data and determinations resulting therefrom is presumed, unless errors, inaccuracies, or other reasonably founded indications are found that it does not reflect the taxpayer's actual taxable base.
Consequently, there are errors or inaccuracies susceptible to tax correction, and having analyzed the documents attached to the petition (contracts and bank statements), we find that they are insufficient.
Thus, we find that the complainant's claim cannot be accepted since it does not attach to the records actual documentary evidence that would permit confirming in a clear and unequivocal manner what is alleged in its petition regarding the indispensability of the costs.
In this direction, it appears to us that the correction made by the Tax Inspection Services is correct.
3.2 Costs Relating to Prior Exercises (§ 68 to § 118)
The complainant states that the values below discriminated, in the total amount of € 1,076,711.41, are not costs of prior exercises, but rather reversals of income overestimated in the prior economic period of 2009 and reversed in the year 2010.
In the inspection report (cf. sheet 408 of the records), it was found that there were recorded (account H ...) as costs of the year 2009 two documents, nos. ... and..., in the amount of € 370,107.49 and € 706,603.92, whose justification was to be "unforeseeable 'receipt of invoices'" at the closing date of the accounts of the prior year".
Having analyzed the petition and the documents attached relating to "costs relating to prior exercises," we have the following to highlight:
The documents presented numbered 10, 11, 12, 13, 15, and 16, as per sheets 291 to 299 and 305 to 308 of the records, are photocopies of accounting entries;
- The documents presented numbered 14 and 17, as per sheets 300 to 304 and 309 to 312 of the records, are respectively photocopies of the model 22 declaration (2009) and meeting minutes on closing accounts.
Now, the Corporate Income Tax Code is very clear regarding the obligation of commercial companies to have accounting organized in accordance with commercial and tax law, stressing subsection a) of paragraph 3 of article 17 of the CIRC, and refers that the accounts should "be organized in accordance with accounting standardization and other applicable legal provisions for the respective sector of activity (...)", being enshrined in article 115 of the CIRC, the specific duties for company records, in particular in subsection a) of paragraph 3 - "In the execution of the accounts (...) all entries must be supported by supporting documents, dated and capable of being presented whenever necessary".
In light of the law, it is concluded that, to be deductible, costs will be obligatorily proven by valid documents, understood as a rule, by valid document that whose external origin - is the general rule as to those justifying acquisitions of goods and services - demonstrates unequivocally the truthfulness of the economic operation underlying the accounting entry made, as well as the other elements indispensable to the quantification of its respective effects.
We reaffirm the understanding of the case law of the Central Administrative Court South, through Judgment No. 01466/06 of 30 January 2007, in understanding that "In light of the principles set forth, costs not properly documented do not constitute deductible charges for purposes of determining taxable profit (they exist when they are not supported by external documents in such a way as to allow one to know easily, clearly and precisely the operation, evidencing the cause, nature and amount) and ..."
In the same sense is the opinion of Freitas Pereira in his Opinion rendered in CEF No. 3/92, of 6/1/1992, published in CTF no. 365, pages 343 to 352, "The non-existence of an external document intended to prove an operation for which it should exist necessarily affects, in principle, the probative value of the accounts and that lack cannot be made up for by the presentation of an internal document. This is because the probative value of accounts rests essentially on the respective supporting documents and, as for those which should be, it is the external origin that provides them with a character that can be designated as presumption of authenticity. An internal origin document can only replace an external origin document when additional proofs are gathered that confirm the authenticity of the movements reflected in it.
In this sequence, we do not confirm the argumentation presented by the complainant and it appears to us that the correction made by the Tax Inspection Services is correct.
3.3. REGARDING SUSPENSION OF THE ENFORCEMENT PROCEDURE (§ 119 and § 120)
The enforcement procedure can only be suspended if there exists a formal complaint, judicial challenge or judicial appeal that has as its subject the legality of the debt being enforced - article 52 of the LGT and article 169 of the CPPT. However, these procedures alone do not determine the suspension of enforcement.
Except for cases provided by law, it becomes necessary that a guarantee be constituted or provided, in accordance with articles 195 and 199 of the CPPT, or that the seizure guarantees the entirety of the debt being enforced and accrued interest.
It was thus concluded that, after consultation to the database of the Tax Authority, the suspension of the enforcement procedure occurred on date 2014-09-08, as per sheets 451 and 452 of the records.
- Opinion
Having considered the foregoing, after analyzing the elements received, we find that the complainant did not present relevant and reliable data to the proceedings through the presentation of new elements, such that it appears to us that the corrections made by the Tax Inspection Services are correct.
VI - DECISION PROPOSAL
Given the foregoing and, unless we are mistaken, the DISMISSAL of this formal complaint is proposed, in accordance with the grounds described above.
VII - BRIEF INFORMATION
Having completed the instruction of the proceedings, a Draft Decision was prepared, which was notified to the complainant, through letter no. ..., of 2014-12-05, registered with CTT - RD ...PT - 2014-12-05 (cf. sheets 462 and 463 which are attached to this record), sent to the registered address, with the purpose of exercising, if it wishes, the right of participation in the form of prior hearing, under article 60 of the General Tax Law, which right it did not exercise, despite having received the notification on 2014-12-09, as per sheet 464 of the records.
In these terms, given the foregoing, the conversion into definitive of the draft decision is proposed and the DISMISSAL of the formal complaint with the grounds of this report.
s) D... entered into a financing contract with L... whose copy is contained in document no. 8 attached with the formal complaint, whose contents are considered reproduced;
t) D... entered into a management contract with the Portuguese State whose copy is contained in document no. 5 attached with the formal complaint, whose contents are considered reproduced;
u) In the year 2009, the Claimant received in the months of February and August 2009 amounts relating to realization of capital and supplementary contributions in the aggregate amount of € 9,500,000.00 (document no. 7 attached with the formal complaint);
v) On 29-04-2015, the Claimant filed the request for constitution of the arbitral tribunal which gave rise to this proceeding.
2.2. Unproven Facts and Basis for Setting the Factual Record
2.1.1. The Claimant alleges that it paid the amount assessed (article 17 of the request for arbitral ruling), but there is no document in the proceeding proving such payment, such that it is not proven that payment was made.
2.1.2. The facts were proven on the basis of documents attached by the Claimant with the request for arbitral ruling and on the basis of the arguments of the Parties, in points where it is not a matter of facts that must be proven by document.
2.1.3. It was not proven that the amounts obtained with loans contracted by D... in 2009 from L... were used to make financings to the parent company of the group in 2010.
2.1.4. It was not proven that the accounting records presented by the Claimant in the formal complaint relating to user fees and expenses with outpatient medical services correspond exactly to operations performed, as is referred to below, in point 3.2 of this judgment.
2.1.5. The Tax and Customs Authority was notified by electronic mail sent on 07-12-2015, to attach to the proceedings the administrative file within a period of 5 days, which file it did not attach within the period provided for in article 17, paragraph 2 of the RJAT.
The Tax and Customs Authority only attached the administrative file on 28-12-2015, long after the fixed period.
For this reason, the administrative file will not be taken into consideration, which, moreover, is not essential to render the decision, after the incompleteness of the documents attached with the request for arbitral ruling has been remedied by the Taxpayer.
- Findings of Law
3.1. Issue of deductibility or non-deductibility of financial charges from bank financing
D... made loans to the Claimant, the parent company of the group in which it is integrated.
The Tax and Customs Authority understood that, had D... not made loans to the parent company, it would not have needed to resort to all the loans shown in tables nos. 5 and 6, nor would it have incurred all the costs detailed in table no. 7, tables which are reproduced in the factual record fixed.
In the exercise of the right to a hearing, the Claimant argued that the loan contract entered into with L..., from which all the costs recorded in account 69 derive, occurred in February 2009, reason for which, in its view, they present no causal nexus with the loans made to the parent company K...- Company Managing Shareholder Interests S.A., in the year 2010.
The Tax and Customs Authority understood that "what is at issue is that in 2010, part of the liquidity of the taxpayer for which the loan with L... contributed was channeled not for financing the hospital management project but rather for financing the parent company".
The Tax and Customs Authority recognized, in the Tax Inspection Report relating to D..., that "it is therefore not possible, given the fungible nature of available funds, at the time of their use to know what the respective financial input is. The taxpayer alleges that the liquidity that the loan contract entered into with ... provided to the taxpayer is totally independent and in no way contributed to the treasury surpluses that made possible the loans to the parent company K...- COMPANY MANAGING SHAREHOLDER INTERESTS S.A. reflected in the debits of account...-K..., but does not demonstrate it".
In the Tax Inspection Report relating to the Claimant, the Tax and Customs Authority was more assertive regarding the existence of causal nexus between the loans and the charges borne in stating that "the taxpayer, by making interest-free loans to the parent company, incurred costs and financial charges related to bank loans obtained".
In the decision of the formal complaint, in line with the Tax Inspection Report, the Tax and Customs Authority stated that, regarding the aforementioned charges with loans, the requirement of indispensability required by article 23 of the CIRC for their relevance as financial charges is not proven, since:
-
there do not exist "any accounting documents capable of proving the arguments";
-
"part of the liquidity of the taxpayer for which the loan with L... contributed was channeled not for financing the hospital management project but rather for financing the parent company K... (loans without interest)"
It is further added in the decision to dismiss the formal complaint that "when the accounts are organized in accordance with commercial and tax law, the truthfulness of the data and determinations resulting therefrom is presumed, unless errors, inaccuracies, or other reasonably founded indications are found that it does not reflect the taxpayer's actual taxable base. Consequently, there are errors or inaccuracies susceptible to tax correction and, having analyzed the documents attached to the petition (contracts and bank statements), we find that they are insufficient".
To calculate the financial charges to be considered as incurred with loans to the parent company, the Tax and Customs Authority used a proportional method, understanding that 36.5% of the total amount of those charges borne in 2010 would have been borne for making the loans.
It is found that, in clause 4 of the Financing Contract, the purposes of the loans are indicated, and in particular, that "the Medium-Term Credit can only be used by the Borrower for payment of the consideration provided in clause 57 (Consideration) of the Management Contract for the Transfer of the Hospital Establishment".
And, in Clause 57 of the Management Contract it refers that "on the date of Transfer of the Hospital Establishment, the Entity Managing the Establishment pays to Hospital ... or to the entity designated for this purpose by the Public Contracting Entity, as consideration for the acquisition of the Hospital Establishment, the amount of 15 million euros".
Beyond this, it is also found that the Claimant received in the year 2009 € 9,500,000.00 from capital contributions and supplementary contributions.
In this context, if it is true that it cannot be proven that no part of the loans contracted by D... in 2009 was used for financings to the parent company, so too is it true that there is no indication whatsoever that this happened and the indications existing in the proceeding point in the opposite direction.
On the other hand, given the difficulty of proof of the allocation of financial resources, inherent in their fungibility (as the Tax and Customs Authority itself recognized in the Tax Inspection Report), less stringent requirements must be applied by the law-applier to consider the burden of proof met, giving weight to less relevant and convincing proofs than those that would be required if such difficulty did not exist, applying the Latin maxim "iis quae difficilioris sunt probationis leviores probationes admittuntur".
Thus, the Claimant presenting a beginning of proof of the allocation of the financing obtained, which results from the very terms of the financing contract and the fact that it obtained in the year 2009 substantial financial availability arising from capital contributions and supplementary contributions, and with no indication whatsoever pointing in the opposite direction, it must be concluded that, at minimum, we are faced with a situation of founded doubt as to the allocation of amounts resulting from the financing to the making of loans by D... to the Claimant, doubt which, by force of article 100 of the Code of Tax Procedure and Process (CPPT), applicable to tax arbitral proceedings by force of article 29, paragraph 1, subsection c), of the RJAT, must be valued procedurally in favor of the Claimant, justifying the annulment of the correction at issue.
By the foregoing, the request for arbitral ruling as to this correction relating to financial charges from bank financing is well-founded, which justifies the annulment of the assessment appealed, in the part corresponding to this correction, by defect of error on the factual grounds.
3.2. Issue of the correction relating to charges considered to be from exercises prior to 2010
3.2.1. Positions of the Parties
The Tax and Customs Authority found that in account... - Corrections Relating to Prior Periods, the total of costs (debits) was € 1,099,481.91 EUR, and in the tax return for the year 2010 (Form 22 of Corporate Income Tax 2010) of the ... only the amount of € 22,771.00 EUR was added in field 710, of table 07 (relating to "Corrections relating to prior tax periods").
The Tax and Customs Authority further determined that the difference between these amounts relates to two movements that were not added to table 07 of the model 22 declaration of Corporate Income Tax of 2010: document no. ... and document no..., in the amounts of € 370,107.49 and € 706,603.92 respectively.
In the exercise of the right to a hearing, D... alleged, in sum, that those movements at issue did not relate to costs from prior exercises, but constituted reversal of income overestimated in 2009, which have the State as their counterpart, relating to user fees and production in outpatient medical services, which it sought to reverse in 2010, having presented documents.
The Tax and Customs Authority, in the Tax Inspection Report relating to D... understands that:
The reversal of excess income previously taxed, as a rule, is accepted for tax purposes.
However, and in accordance with paragraph 1 of article 23 of the CIRC, costs are those which are demonstrably indispensable for the realization of income subject to taxation or for the maintenance of the income-producing source.
Now the taxpayer presents two internal documents with explanations/substantiations/calculations in manuscript.
The probative value of accounting records rests essentially on the respective supporting documents, and as for those which should be, it is the external origin that provides them with a character that can be designated as presumption of authenticity. An internal origin document can only replace an external origin document when additional proofs are gathered that confirm the authenticity of the movements reflected in it.
Thus, and because the taxpayer resorts to internal documents, it should attach other means of proof demonstrating unequivocally the correctness and legitimacy of the entry made. And those other means of proof should focus not only on the materiality of the operation in itself but also on other elements indispensable to the quantification of its respective effects.
It is not sufficient to justify a cost/expense/reversal with an internal document (made by itself). Alongside that support, it must demonstrate, by any other means, the existence and main characteristics of that movement. In that task, it may adduce any means of proof (witnesses, auxiliary documents, explanation of its accounts).
It thus happens that the taxpayer was not able to make that "unequivocal demonstration" of that reversal and which is its responsibility, given that it is the taxpayer that has the power/duty to equip itself with the necessary elements for such purpose.
In good truth, just as 370,107.49 EUR and 706,603.92 EUR appear in those documents, any other values could perfectly appear there.
If indeed these are reversals of excess income, it was very important the attachment of additional elements that would not raise the slightest doubt about their legitimacy.
D... presented with the formal complaint documents with nos. 10, 11, 12, 13, 15, and 16, which are photocopies of accounting entries, and documents nos. 14 and 17, which are the model 22 declaration for the exercise of 2009 and the meeting minutes on closing accounts for 2009, 2010, and 2011, relating to a meeting held on 02-08-2012, between "representatives of the Public Contracting Entity and representatives of the Entity Managing the Establishment".
In the decision of the formal complaint, the Tax and Customs Authority understood, in sum, that:
– "the Corporate Income Tax Code is very clear regarding the obligation of commercial companies to have accounting organized in accordance with commercial and tax law, stressing subsection a) of paragraph 3 of article 17 of the CIRC, and refers that the accounts should "be organized in accordance with accounting standardization and other applicable legal provisions for the respective sector of activity (...)", being enshrined in article 115 of the CIRC, the specific duties for company records, in particular in subsection a) of paragraph 3 - "In the execution of the accounts (...) all entries must be supported by supporting documents, dated and capable of being presented whenever necessary"".
– "to be deductible, costs will be obligatorily proven by valid documents, understood as a rule, by valid document that whose external origin - is the general rule as to those justifying acquisitions of goods and services - demonstrates unequivocally the truthfulness of the economic operation underlying the accounting entry made, as well as the other elements indispensable to the quantification of its respective effects"
– "the non-existence of an external document intended to prove an operation for which it should exist necessarily affects, in principle, the probative value of the accounts and that lack cannot be made up for by the presentation of an internal document. This is because the probative value of accounts rests essentially on the respective supporting documents and, as for those which should be, it is the external origin that provides them with a character that can be designated as presumption of authenticity. An internal origin document can only replace an external origin document when additional proofs are gathered that confirm the authenticity of the movements reflected in it";
– "in this sequence, we do not confirm the argumentation presented by the complainant and it appears to us that the correction made by the Tax Inspection Services is correct".
From this final substantiation contained in the decision to dismiss the formal complaint, which reaffirms the correction made in the Tax Inspection Report to D..., it is concluded that, although the Tax and Customs Authority argues that, in principle, valid documents for proving facts recorded in the accounts should be of external origin, it did not exclude the possibility of proof being made by internal origin documents provided there are "additional proofs that confirm the authenticity of the movements reflected in it," proofs which the Tax and Customs Authority understood do not exist in the case at hand, given the documents presented in the inspection and in the formal complaint.
3.2.2. Assessment of the issue of the correction relating to charges considered to be from exercises prior to 2010
The preparation of Financial Statements of an entity (except for cash flow information) should use the accrual basis of accounting (or economic accrual), identified in article 18 of the CIRC, designated as the principle of specialization of exercises.
For technical application of the accounting recognition of this fundamental accounting presumption, the chart of accounts in use in 2010 provides the following accounts of Accruals of costs and income and Deferrals of costs and income:
2721 – Debtors for accruals of income;
2722 – Creditors for accruals of costs.
and
281 – Costs to be recognized;
282 – Income to be recognized
Entries in the accounts of Debtors and Creditors for accruals of income and costs (2721 and 2722) are generally supported in estimates, without prejudice to the fact that they may correspond to the definitive value, in case the binding documentation is already known on the date of the accounting entry of the accrual.
Entries of costs and income to be recognized (281 and 282) are generally supported by binding documentation, in the year of the accounting entry of the deferral.
As regards the case in question, account 2721 – Debtors for accruals of income – records on the debit side the counterpart of income that should be recognized in the period itself, even though they do not have binding documentation, whose receipt only occurs in subsequent period or periods (explanatory note 2721 of the SNC).
It should be noted that in 2009 (accounting standardization based on POC), this account had the code 2719 – Accruals of income, but with the same rule of movement.
Thus, whether the forecast of 2009 income from user fees or production in outpatient medical services, even though they do not have binding documentation, should be recognized in that year, as it was, even though their invoicing or right to receive occurs in subsequent periods.
Such that account 271 – Accruals of income (2721 in 2010) should be debited by the estimate of income by credit to an account – 7 – Income in the year 2009, and subsequently in subsequent years credited, when invoicing or the right to receive is issued.
Following the offset referred to in the previous point, if a debit balance still results in account 2721 – Debtors for accruals of income and such signifies an excess estimate made in 2009, given the invoicing or right to receive in 2010 or a subsequent exercise, such difference should be reversed/adjusted in an exercise subsequent to 2009.
That is, if the forecast of income is made in a period for a different value from the definitive value determined in subsequent exercises, it should then be adjusted, in the case, through account ... – Corrections relating to prior periods.
However, such entry in account ... does not deal with the correction of an error from a prior year, perhaps due to non-application of the accrual principle/specialization of exercises, but only an adjustment to an initial estimate in accordance with Accounting Standard and Financial Reporting Standard (NCRF) 4.
The Accounting Norm and Financial Reporting Standard 4 – Accounting Policies, Changes in Accounting Estimates and Errors (NCRF 4) refers with interest to the case that:
• A change in an accounting estimate is an adjustment in the recorded amount of an asset, based on the assessment of the present state of the asset and results from new information, not being a correction of error (§ 5).
• Many items in financial statements cannot be measured with precision and can only be estimated. Estimation involves judgments based on the latest information available (§ 27).
• The use of reasonable estimates is an essential part of the preparation of financial statements and does not diminish their reliability (§ 28) (example: estimate of financial assets).
• An estimate may need revision if there are changes in the circumstances on which the estimate was based or as a result of new information or more experience. Given its nature, the revision of an estimate is not related to prior periods and is not the correction of an error (§ 29).
• A change in an accounting estimate should be recognized prospectively by including it in the results of the period or periods of the change (§ 31), with the recognition of the effect of the change in accounting estimate being made in the current and future period of the change (§ 5).
This means that, for compliance with the Accrual presumption (specialization of exercises), not having binding documentation, an accrual of income is recorded on the debit of account.../... based on an estimate, affecting the Result of the year (2009),
[continues with analysis of accounting standards and principles for reversal of prior period income]
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