CAAD Ruling on IRC Depreciation Rates for Wind Turbines – Process 284/2016-T

ARBITRAL AWARD

I – Report

1. The taxpayer company "A…, S.A.", with Tax Identification Number … (hereinafter "Claimant"), submitted on 23 May 2016 a request for the establishment of a Collective Arbitral Tribunal, pursuant to the combined provisions of articles 2 and 10 of Decree-Law no. 10/2011, of 20 January (Legal Framework for Tax Arbitration, hereinafter "RJAT"), with the Tax and Customs Authority (hereinafter "TCA" or "Respondent") as the respondent party.

2. The Claimant seeks an arbitral decision on the illegality of the additional assessment notices (and corresponding statements of account adjustments and statements of interest calculations) for Corporate Income Tax (IRC) no. 2015…, relating to the year 2011, no. 2015…, relating to the year 2012, no. 2015…, relating to the year 2013, and no. 2015…, relating to the year 2014, in the amounts of €65,137.65, €61,518.55, €59,284.95, and €52,745.61 respectively, plus the amount paid for the issuance of bank guarantees intended to stay the fiscal enforcement proceedings instituted in the meantime. Four witnesses were listed.

3. The request for establishment of the Arbitral Tribunal was accepted by the President of CAAD and automatically notified to the TCA on 6 June 2016.

4. Pursuant to the provisions of paragraph a) of section 2 of article 6 and paragraph b) of section 1 of article 11 of the RJAT, as amended by article 228 of Law no. 66-B/2012, of 31 December, the Ethics Council appointed the arbitrators of the Collective Arbitral Tribunal, who communicated their acceptance of the assignment within the applicable time period, and notified the parties of this appointment on 20 July 2016.

5. The Collective Arbitral Tribunal was constituted on 4 August 2016; it was regularly constituted and is materially competent in accordance with articles 2, section 1, paragraph a), 5, 6, section 1, and 11, section 1, of the RJAT (as amended by article 228 of Law no. 66-B/2012, of 31 December).

6. Pursuant to sections 1 and 2 of article 17 of the RJAT, the TCA was notified on 7 August 2016 to submit a response.

7. The TCA submitted its Response on 30 September 2016, accompanied by a copy of the Administrative File.

8. In that response the TCA alleges, in summary, the total lack of merit of the Claimant's request, and objects to the production of witness testimony (also listing, as a precaution, one witness).

9. The Arbitral Order of 3 October 2016 dispensed with the holding of the meeting referred to in article 18 of the RJAT, offering the parties the possibility of submitting written arguments and setting, for the deadline for delivery of the final decision, 30 days after submission of arguments by the Respondent, or the end of the deadline for submission of such arguments.

10. The parties did not submit written arguments.

11. The proceedings are free from defects of nullity and no further preliminary or subsequent issues, whether prejudicial or concerning exceptions, remain that would prevent consideration of the merits of the case, with all conditions being met for delivery of a final decision.

12. The TCA proceeded to appoint its representatives in the proceedings and the Claimant submitted a power of attorney, with the parties thus being duly represented.

13. The parties have legal personality, legal capacity, and legal standing, pursuant to articles 4 and 10, section 2, of the RJAT and article 1 of Ordinance no. 112-A/2011, of 22 March.

II – Legal Reasoning: Factual Matters

II.A. Facts Considered Proven and Relevant to the Decision

1. The Claimant is a limited company whose primary activity is the production of wind energy (CAE: …) for sale to D… S.A..

2. The Claimant is the owner of the Wind Park of …, in the Municipality of …, comprising a total of 5 wind turbines.

3. The Claimant entered into a contract in April 2006, in its capacity as purchaser/owner of the works ("PURCHASER"), with the company "C…, S.A.", in its capacity as supplier/contractor ("CONTRACTOR"), for the installation of 5 wind turbines in the Wind Park, which contains in section 1.3 ("General Information") the following: "The CONTRACTOR will design, manufacture build and assemble the WIND FARM for a operating period (design life) of at least twenty (20) years. [§] The CONTRACTOR will follow the latest Portuguese and international (IEC and ISO) regulations […]" (Annex 7 to the Tax Inspection Report).

4. The International Standard IEC …-1, of August 2005, applicable by virtue of the contract, states on page 22 that there are 3 classes of turbines and establishes that "The design lifetime for wind turbine classes I to III shall be at least 20 years" (Annex 6 to the Tax Inspection Report).

5. In the Technical Study "Expected Useful Life Period of Wind Energy Conversion Equipment" prepared by the National Laboratory for Energy and Geology in December 2013, and submitted to the proceedings both by the Claimant (Document no. 13 attached to the claim) and by the Respondent (Document no. 1 attached to its response), it states that "The methodology developed by LNEG made it possible to conclude that the maximum useful life period of a wind turbine is between 20 and 25 years" (p. 3), "the expected useful life period for wind turbines (approximately 20 years)" (p. 6), "In the majority of cases, the economic and environmental analyses of wind sector projects conduct studies on the basis of the expected life of the equipment, i.e. 20 years" (p. 10); and, in the specific case of Portugal (pp. 17-20), "this reduction value corresponds to a maximum useful life period between 20 and 25 years" (p. 20).

6. In September and October 2015 the Claimant was the subject of a tax inspection action, with the inspection action covering the years 2011, 2012, 2013, and 2014.

7. The general scope inspection action, carried out by the Directorate of Finances of Lisbon, was determined by service orders nos. OI2014…, OI2015…, OI2015… and OI2015…, and was based on the fact that in prior years irregularities had been detected regarding depreciation/reinstatement practices for equipment assets.

8. From this inspection action resulted a proposal for corrections to the taxable matter in the amounts of €210,295.37, €210,715.97, €210,715.97, and €210,715.97 respectively, which were the differences between the depreciations practiced and recorded by the claimant considering a useful life period of 15 years (at an annual rate of 6.67%) and the depreciations accepted for tax purposes considering a useful life period of the equipment of 20 years (at an annual rate of 5%).

9. This proposal was based on the dual circumstance that: a) it was found that the Claimant was practicing a depreciation rate higher than that accepted by the Respondent (i.e., based on a useful life period of 15 years and not 20 years); b) it was detected that in 2011 expenses attributable to the year 2008 had been recorded.

10. In the first case, it was the circumstance that the equipment did not have depreciation rates specified in the table attached to Regulatory Decree no. 25/2009, of 14 September, falling under the code "… – Not specified" and the regime provided for in article 5, section 3 of Regulatory Decree no. 25/2009 and article 31, section 2 of the Corporate Income Tax Code (CIRC) applying to it.

11. In the second case, it was a violation of the principle of the accrual method, established in article 18, sections 1 and 2 of the CIRC.

12. As to the depreciation rates, the Respondent obtained information from independent entities which pointed to an estimated useful life value for the wind turbines of 20 years, and therefore rejected the depreciation practiced at the rate of 6.67%, in favor of depreciation accepted at the rate of 5%.

13. The calculation of the value to be corrected was carried out as follows:

1. The following were the alterations to the taxable matter (TM):

1. The Claimant was notified of the draft Tax Inspection Report on 12 November 2015, being notified to exercise the right to be heard.

2. The said Report contains, among other things, the following:

"The basic equipment, the depreciations of which are being practiced at the rate contained in the code '…' of the table attached to Regulatory Decree no. 25/2009, of 14 September, corresponds to the five wind turbines installed in the Wind Park of …, referred to in section 1.3.1.2 of the Draft Report.

The table attached to Regulatory Decree no. 25/2009, of 14 September, does not provide for the depreciation of this type of equipment. Thus, they are classified as '… - Not specified'. The taxpayer applied the depreciation rate of 6.67%, considering as the useful life period of the wind turbines 15 years.

Pursuant to sections 1 and 3 of article 31 of the CIRC and section 3 of article 5 of Regulatory Decree no. 25/2009, of 14 September, 'With respect to items for which no depreciation or amortization rates are established in the tables referred to in section 1 (article 5), those that the Directorate-General of Taxes considers reasonable are accepted, taking into account the expected period of usefulness'.

'The depreciation rates for wind parks were not provided for in the tables attached to Reg. Decree no. 25/2009, of 14 September, until the entry into force of Law no. 82-D/2014, of 31 December. The rates in the tables were the same as those in the repealed Reg. Decree no. 2/90, of 12 January, and at that time (1990), electricity was not yet being produced for commercialization on the basis of this new technology.

Thus, the Tax Authority accepted those that it considered reasonable, based on section 3 of article 5 of Reg. Decree no. 25/2009', according to opinion no. 922/2015 (Opinion), from the Directorate of Services of the Record/Division of Design, cf. (Annex V)

The supplier of the wind turbines, C…, considers that the estimated useful life of these assets is at least 20 (twenty) years, in accordance with (Section 1.3 General information - 'the contractor shall manufacture, build and assemble the wind park for operation (useful life) of at least 20 years', set forth in the Functional Descriptions of the Wind Park of …), cf. (Annex VI). When questioned about the reason for depreciating the said equipment considering a useful life period of 15 years and not the one defined by the supplier itself, of 20 years, the taxpayer informed us that the proximity of the wind park to the sea increases the level of degradation of the wind turbines, and therefore it considered it reasonable to estimate a useful life period of 15 (fifteen).

However, the IEC …-1 standard, issued by the International Electrotechnical Commission applicable to this activity sector, which is now attached, cf. (Annex VI), also provides for a useful life period of 20 (twenty) years for wind turbines, not considering the proximity of the wind park to the sea as a relevant factor.

II.1.3 - Depreciations - Decommissioning Expense of the Park

As referred to in section II.3.5.3 the taxpayer reports in the years 2011, 2012, 2013 and 2014 through the item of depreciations and amortizations the expense of decommissioning the wind park recorded in account 642 - Depreciation and amortization expense/Tangible fixed assets, in the annual amount of €63,836.32 (Years 2013/2014) and €63,836.34 (Years 2011/2012)

However, because the expenses with decommissioning do not constitute a component of the acquisition cost of the equipment, in accordance with the provisions of article 2 of Reg. Decree 25/2009. The expense with depreciations/amortizations of the same, in the said amounts cannot be accepted for tax purposes, reason why the taxpayer proceeded to its increase to the accounting result in Q07 (field 721), in the various years.

II.1.4 - Conclusion - Value of Depreciations and Amortizations to be Corrected

Given the foregoing, it is proposed that the value of depreciations recorded as an expense in each of the years under analysis be corrected, resulting from the difference between the depreciations practiced and recorded by the company considering the useful life period of 15 years, and the value of depreciations that, under the legal terms, can be accepted for tax purposes considering the useful life period of the asset, of 20 years, in accordance with the calculations that follow:

1. The Claimant exercised its right to be heard, in writing, on 30 November 2015.

2. In December 2015 the Claimant was notified of Assessment Notice no. 2015…, Statement of Account Adjustment no. 2015… and Statement of Interest Calculation no. 2015…, and Assessment Notice no. 2015…, Statement of Account Adjustment no. 2015.. and Statement of Interest Calculation no. 2015…, relating respectively to the years 2011 and 2012.

3. In January 2016 the Claimant was notified of Assessment Notice no. 2015…, Statement of Account Adjustment no. 2016… and Statement of Interest Calculation no. 2016..., and Assessment Notice no. 2015…, Statement of Account Adjustment no. 2016… and Statement of Interest Calculation no. 2016…, relating respectively to the years 2013 and 2014.

4. For the purpose of suspending judicial collection (in the course of fiscal enforcement which are proceeding under case nos. …2016…, …2016…, …2016… and …2016…) of the assessments in question, the now Claimant contracted four bank guarantees with Bank D…, which involved initial payment of the total amount of €409.62 (€112.81 + €107.48 + €90.31 + €99.02).

5. On a quarterly basis, the Claimant pays to company E…, S.L. (which, by holding the entire capital of the now impugning party, was the one who contracted the guarantees with bank D… in the name of the defendant) for the maintenance of these guarantees the sum of €409.62.

6. The now Claimant has already paid, as a result of the guarantees provided, the sum of €409.62.

II.B. Facts Considered Not Proven

Based on the documentary elements available in the proceedings and consensually accepted by the parties, it is verified that, with interest for the decision of the case, nothing remained to be proven.

III – Legal Reasoning: Legal Matters

III.A. Position of the Claimant

a) The Claimant begins by alleging that the entry into force, on 1 January 2015, of Law no. 82-D/2014, of 31 December, which provided an amendment to Regulatory Decree no. 25/2009, of 14 September, setting depreciation and amortization rates for wind energy equipment, and which set them at 8%, would prove that the legislature would have recognized, correspondingly, that the minimum useful life period of such equipment would be 12 years and six months – and not 20 years, and not even 15 years.

b) The Claimant questions the manner in which information about the useful life of the equipment was obtained from the supplier of the same, and contests, as obsolete and out of context, the IEC …-1 standard, which converges to indicate the 20-year period.

c) Furthermore, it states that the IEC …-1 standard was not, in its generality and in its "standard" basis, applicable to the specific circumstances of the wind park operated by the Claimant, and that the standard refers to a mere expectation of the occurrence of "ideal conditions".

d) Furthermore, it suggests that the same IEC…-1 standard obscures the heterogeneous character of the components of wind turbines, with various useful life periods and therefore various profitability conditions – arguing that it is "customary" for equipment to begin to be replaced after 12 years of operation, while also noting that there are performance/efficiency losses of 6% after 10 years, with losses of 3% for each subsequent 10-year period, in addition to obsolescence factors that can provide gains of 50% in replacing older generators.

e) All of these arguments, according to the Claimant, would work toward demonstrating that the average useful life of wind turbines is less than 20 years, corresponding to the "recognition" of this circumstance that would have been embodied in the provisions of Law no. 82-D/2014, of 31 December, which in its view would have reestablished "reasonableness" in this matter.

f) Furthermore, the Claimant argues that what is at issue is solely the useful life of the equipment, and that therefore the overall assessment of the project that these equipment serve is irrelevant – and that, in its view, would have dominated the TCA's calculation, insofar as it would have been based more on purely "technical or technological" considerations, disconnected from "actual conditions of use" by the Claimant, which it itself understands to constitute a requirement of "reasonableness".

g) On the other hand, in addition to invoking CAAD jurisprudence, the Claimant understands that the TCA's calculations would lead to unacceptable values if the combination of articles 5 and 19 of Regulatory Decree no. 2/90, of 12 January were applied to them, from which it follows that maximum rates were applied.

h) The Claimant insists, next, that the accounting calculation upon which it based the declared depreciation was the most appropriate to the assessment of the "actual wear and tear" of the equipment. And it clarifies that this assessment resulted from the convergence of 3 factors:

1. Because the period for which payment of the tariff for energy produced from renewable sources is guaranteed is 15 years (pursuant to Decree-Law no. 225/2007, of 31 May, and successive amendments);

2. By the fact that the wind turbines operated by the Claimant are exposed to wear and tear much greater than usual;

3. By the fact that wind turbines are complex machines, with respect to which there are no reliable studies as to their structural durability.

i) The Claimant emphasizes that the existence of a guaranteed price for the 15-year period was determinative in its calculation of the financial return on investment and, consequently, in its calculation of the amortization of the equipment – even arguing that no operator in the sector programmed their investments beyond this temporal goal, and further concludes that "useful life" is synonymous with "benefit" and "profitability".

j) As to the alleged violation of the accrual principle, the Claimant clarifies that a debt due in 2008 was only paid in 2011 because a judicial dispute had occurred between the two dates – not resulting, therefore, from voluntary or intentional omission, with no reason imputable to the Claimant, no intention of transferring results between years nor of causing harm to the State.

k) Finally, the Claimant seeks to be reimbursed for the bank guarantees which, in a total amount of €409.62 (to be renewed quarterly), it had to contract to suspend the judicial collection of the assessments now in question (case nos. …2016…, …2016…, …2016… and …2016…).

III.B. Position of the Respondent

a) In its Response, the Respondent sustains the conclusions it had already reached in the Final Report of the inspection action, and in particular that the depreciation rate applied by the Claimant cannot be considered reasonable, taking into account the expected period of usefulness of the assets in question.

b) Invoking the applicable legal regime, the Respondent understands, on the other hand, that, having carried out all the necessary due diligence to objectively ascertain what the expected period of usefulness is, it obtained from various independent and credible sources the convergent reference to the value of 20 years of useful life for the wind turbines – and it was from this value that resulted the application of the new amortization rate and the correction to the taxable matter in the context of Corporate Income Tax.

c) Based on this, the Respondent understands that it regularly exercised the discretionary power that was conferred on it, at the time, by article 5, section 3 of Regulatory Decree no. 25/2009, in combination with article 31, section 2 of the CIRC.

d) From the reading of the two provisions the Respondent emphasizes that they point to a single criterion of assessment for the fixing of the amortization or depreciation rate that, once accepted by the TCA, becomes the rate in effect: the assessment of the "expected useful life period" of the depreciable or amortizable assets.

e) These articles do not authorize, therefore, the Respondent emphasizes, the use of a multiplicity of criteria, separately or together, as, in its view, the Claimant intends to do. In them, the Respondent observes, expressions do not appear such as "in particular" or "namely" that would authorize the addition of other criteria, such as that of "expected economic useful life" which the Claimant invokes, in an apparent effort to make the "expected useful life" of the equipment (an objective criterion) coincide with the duration of a particular economic project (a subjective criterion).

f) The Respondent states that its effort to make an objective assessment was not limited to consulting the contract entered into between the Claimant and the supplier of the wind turbines or the IEC standard in effect at the time of the contract, but also extended to various companies that manufacture and sell wind turbines, which all corroborated the 20-year period for the "expected useful life" (the "lifetime cycle") of such equipment, as well as to national and international academic studies, which it cites.

g) From this effort to make an objective assessment of what constitutes the "expected useful life period" of wind turbines the Respondent adduces the argument that it did not commit any flagrant or gross error that could disturb the legitimate exercise of the discretionary power that, at the time of the facts, was conferred on it by the combination of article 5, section 3 of Regulatory Decree no. 25/2009 with article 31, section 2 of the CIRC – and that, therefore, there is no place for contentious impugnation of such exercise of technical discretion.

h) The Respondent further dismisses as irrelevant the invocation of the subsequent regime of "Green Taxation", both because retroactive effect cannot be given to it and because the legality with which discretionary powers were conferred on the Administration at each moment cannot be questioned by this means.

i) Regarding the issue of violation of the accrual principle, the Respondent emphasizes the fact that the judicial action that opposed the Claimant to the Directive Board of the Commons of … arose from the contractual non-performance of the Claimant itself in 2008.

j) If that is the case, the Respondent invokes the application of article 18, sections 1 and 2 of the CIRC, arguing that the income or expenses of 2008 could only be considered attributable to 2011 if they were in 2008 unforeseeable or manifestly unknown – which was not the case, given the situation of contractual non-performance in which the Claimant placed itself in 2008.

III.C. Issues to be Decided

The primary issue to be decided concerns the legality or otherwise of the correction made by the TCA, upon which the corrections made in the impugned assessments are based, and which the Claimant contests, it being understood that, "In matters of law, the tribunal is not bound by the assertions of the parties, nor even as to the legal qualification of the facts made by them, and enjoys freedom in the investigation, interpretation and application of Law (article 664 of the Code of Civil Procedure)"[1].

III.C.1 – On the Merits of the Case

As emerges from the facts found to be proven, the TCA disregarded the depreciation rate corresponding to a useful life period of 15 years, applied by the Claimant, because it understood that 20 years would, in its judgment, be the reasonable period for that purpose.

The TCA's decision is based on section 2 of article 31 of the CIRC and on section 3 of article 5 of Regulatory Decree no. 25/2009, of 14 September, which provide, respectively:

• "With respect to items for which no depreciation or amortization rates are established, those that the Directorate-General of Taxes considers reasonable are accepted, taking into account the expected period of usefulness.";

• "With respect to items for which no depreciation or amortization rates are established in the tables referred to in section 1, those that the Directorate-General of Taxes considers reasonable are accepted, taking into account the expected period of usefulness."

The issue that is to be resolved in the present proceedings has already been the subject of consideration in other tax arbitration proceedings, as indicated by the parties, and, in general, the decisions delivered have gone in the direction of substituting for the judgment made by the TCA, considering reasonable the lower period used by the taxpayers.

Saving all due respect to such decisions, the criticism made in the dissenting opinion delivered in arbitration case no. 593/2015T[2] is considered pertinent and well-founded, where it is noted that:

"Note that, pursuant to article 31, section 2 of the Corporate Income Tax Code and article 5 of Regulatory Decree no. 25/2009, of 14 September, these amortization rates became the applicable rates "by operation of law", insofar as those provisions conferred on the TCA a discretionary power to fix the rates – within a specific framework of "technical discretion", as we shall see below.

This is enough to close the issue specifically raised by the omission of express amortization rates for the equipment in question: those provisions point the way to resolve this issue, and that way was followed. There came to be amortization rates defined in accordance with the law, and those were the ones that were applied.

(...)

Let us now clarify our understanding, both as to the existence, in the case, of technical discretion "stricto sensu", and as to the respective implications in terms of the non-justiciability of contentious challenges to decisions taken, within that scope, by the TCA.

Administrative discretion is more a power-duty than a pure freedom of choice, since everything is subordinated to the pursuit of the concrete public interest, although as to the content, object, or form of the administrative solution there may be admitted a multiplicity of equally valid routes – that is, that do not collide with any other principle guiding administrative activity.

In cases where the law wished to confer discretion, it ceases to be legitimate for the Tribunal charged with controlling the legality of an administrative act to enter into the definition of a content, object or form as the sole compatible with the purpose to be pursued, in order, in light of them, to appraise the act in question – which in practice would mean admitting that the Tribunal substituted itself for the Public Administration in the delineation of the elements of the act by it performed, denying the very existence of the discretion established in law.

The margin of free administrative decision thus constitutes a functional limit to administrative jurisdiction, insofar as that margin is centered in spheres of merit, convenience or opportunity in the reservation of competence, without implications for the validity of administrative conduct, being situated outside the bounds of contentious justiciability, which can only serve for the violation of the external limits of discretionary power (although there remains the possibility of merit control through the gracious means, this still compatible with the autonomy of public administration).

In other words, in pure administrative discretion Courts must limit themselves to verifying whether the legal limits of discretion, the positive limits of competence, purpose, impartiality and proportionality were or were not respected – not being able to scrutinize whatever has resulted from the administrative decision taken in observance of those limits.

(...)

Being unable to substitute itself for the Administration in the formulation of a judgment that falls strictly within the merit and propriety of the action of the latter, technical discretion is in principle withdrawn, also, from judicial justiciability, unless it displays gross, manifest, crass error.

In a strict sense, technical discretion is that in which, where the solution of questions requiring specialized scientific knowledge is at issue, the Administration is forced to take decisions supported by information and technical-professional studies, the Administration being thus bound to the conclusive manifestation of the professionals consulted, not being able in sum to adopt a solution different from that indicated by the specialists – and administrative decisions of this nature may only be challenged judicially or administratively if there is lacking the support of these technical information corroborated by specialists in the matter, or if the decision diverges openly from the conclusions contained in these information and studies.

In technical discretion the prerequisites that make up the provision of the norm configure technical concepts pertaining to facts only verifiable or assessable on the basis of knowledge and instruments proper to sciences other than legal science.

What is at issue, then, is an administrative activity translated into technical judgments of existence, technical assessments or technical judgments of probability, by which the law confers on the Administration a power of technical assessment, which, not implying comparative weighing of secondary interests, involves assessment of facts and circumstances of a technical character.

Hence the reason that doctrine has sometimes, in the century and a half of development of the concept (which is said to have emerged in the middle of the nineteenth century), used the expression "improper discretion" as a genus of which "technical discretion" would be a species, seeking to emphasize the absence of judgments of opportunity and convenience that prevail over strictly technical judgments (technical discretion would be linked with "freedom of proof" and with "bureaucratic justice" within that family of "improper discretions").

(...)

On the other hand, in technical discretion "stricto sensu" there is no place for an assessment judgment based on indeterminate legal or legal-technical concepts, a judgment that has nothing to do with the margin of free appraisal and decision that characterize genuine discretionary judgment, rather being confined to the rules proper to legal interpretation in purely subsumptive application and, therefore, subject to judicial control.

With the technique of the indeterminate legal concept there is no discretion: the law refers to a sphere of reality whose limits do not appear well stated, but which can be determined in the concrete case by way of interpretation, admitting no more than one solution, no more than one "densification" of the concept.

In technical discretion "stricto sensu" there is, yes, room for an assessment judgment based on knowledge and rules proper to non-legal science or technique that are at issue, it being certain that it is not for the Tribunal to control the good science or good technique employed by the administrative entity, by manifest lack of competence in the extrajuridical matters necessary therefor.

These are cases in which the assessment by the Administration requires the use of technical criteria, and the solution of technical questions should be carried out according to rules and knowledge proper thereto – and the law not only recognizes this but imposes it on all operators of Law (and not only on the Administration, its first subject).

Where technical discretion "stricto sensu" is present, judicial control must, therefore, be confined to the zones of binding adjacent to the exercise of said technical discretion, that is, again, limit itself to verifying the respect, or lack thereof, of the legal limits of discretion, of the positive limits that presided over the legal conferment of discretionary power and corresponding prerogatives – and can specifically scrutinize, at the frontiers of the "margin of free appraisal", (1) a gross or manifest error in appraisal (2) an error in the factual premises (3) an abuse of power or (4) a manifest violation of the general principles of impartiality, equality, proportionality, justice and good faith as principles shaping administrative activity.

More specifically, if the law commits to the Administration the power to specify an assessment not previously fixed by the law itself, a Court cannot proceed to re-weigh the judgments made by the Administration within that scope, unless there is demonstrated the existence of gross or manifest error – in particular the lack of support in technical-professional information and studies corroborated by specialists and demanded by the densification of extrajuridical concepts.

(...)

We are here very close to the field in which, in the USA, the topic of "technical discretion" has been developed, there very much centered on the delimitation of the competence of regulatory agencies, whether to define the limits of their normative function, whether to establish the limits of the corresponding judicial control.

There emerged the technique of "standards", by which the law limits itself to establishing parameters, principles, indeterminate concepts, being left to the agencies the function of specifying regulatory norms, directives – specialized and decentralized rules, based on technical knowledge not comprehensible, in its specificity, either by the legislator itself, or by judicial control.

A Tribunal cannot scrutinize those judgments, we insist, no matter how much they diverge from the understanding of individuals or from the understanding of the judge himself – a Tribunal being required to confine itself to the zones of adjacent binding, and at most demonstrate, through other technical-professional information corroborated by specialists, that the information and studies used by the Administration in support of its judgments were glaringly false, capricious or inadequate, or that they were openly, grossly, disregarded in the very judgments made by the Administration for the pretended densification of extrajuridical concepts.

Let us insist that mere divergence of judgments between the Administration and individuals, or even between the Administration and the Tribunal, does not constitute proof of any error or defect of the impugned act that is subject to contentious scrutiny, and does not in any way legitimate the Tribunal's substitution for the Administration in the formulation of a judgment that falls strictly within the merit and propriety of the action of the latter.

And so much is this the case that, in cases of gross error where it can be concluded that the Administration has exceeded its powers and openly left the field of technical discretion to enter that of illegality, to the point that the Tribunal can annul the administrative decision in question, it is settled that the Tribunal can never substitute the annulled administrative decision with another which it deems more appropriate – that is, it cannot, without violation of the constitutional principle of separation of powers, avail itself of that technical discretion.

A Tribunal cannot scrutinize those judgments, in sum, save in these strict presuppositions, save when there is patent a gross, glaring, open error, translated into grave maladjustment of the decision to the concrete situation and to the pursuit of the public interest, in such terms that the exclusion of justiciability by non-technical means could be taken to be arbitrary – for otherwise, without all these safeguards, technical discretion "stricto sensu" would be a dead letter, everything foundering in strict binding, and the invocation of a margin of free appraisal and technical assessment committed to the Administration would become a bizarre legal fiction.

(...)

Returning to the case, and summarizing.

If we accept that there is a discretionary power established in favor of the TCA, we cannot fall into the temptation to proceed to a "comparison of reasonableness" between periods of depreciation, that proposed by the Claimant and that proposed by the TCA: the law expressly vetoed this by establishing a discretionary power in favor of the TCA.

Thus, to reject as "not reasonable" a period proposed by the Claimant, it was enough for the TCA to carry out a due diligence in the direction of demonstrating that such a period does not flow from the concept of "expected useful life" which it itself, the TCA, adopts. The TCA did this; and in doing so did not violate openly, grossly, any of the general principles of law to which it is subject.

Given the technical discretion, it is not for any Tribunal to enter into the substantive merit of the assessment, and even less for an arbitral tribunal, which should confine itself to issues of legality (article 2 of the RJAT).

This Tribunal, or any other, may find it more reasonable the period proposed by the Claimant, or may conversely find it more reasonable the period proposed by the TCA – but this evaluation is, and must be, irrelevant in the case, because, we insist, the establishment by law of a discretionary power, such as the one that was exercised, prohibits any possibility of "comparison of reasonableness" between periods of depreciation, as it prohibits any other merit judgment.

What would remain for this Tribunal, or any other Tribunal, would be to scrutinize the zones of binding adjacent to the exercise of said technical discretion, demonstrating that the TCA adopted a procedure glaringly, grossly incorrect, to the point of leaving no doubt as to being able to strike illegality the exercise of discretionary power – to the point of permitting that, on the basis of a non-technical judgment, it were evident the anti-juridicality of the results of the TCA's action."

This understanding is entirely subscribed to, that is, that the norms in question confer on the TCA a technical discretion, by which the Tribunal may only "scrutinize the zones of binding adjacent to the exercise of said technical discretion, demonstrating that the TCA adopted a procedure glaringly, grossly incorrect, to the point of leaving no doubt as to being able to strike illegality the exercise of discretionary power – to the point of permitting that, on the basis of a non-technical judgment, it were evident the anti-juridicality of the results of the TCA's action.".

However, in the case, it is judged that it is this that happens, that is, that the discretionary power was, in light of the law, incorrectly exercised, which will be sought to be demonstrated through two routes.

Let us see.

Although, in the present case, one is in the field of technical discretion, the considerations made in the Decision of the Administrative Supreme Court of 27-11-2013, delivered in case 01159/09[3], regarding the application of indeterminate concepts, shall apply directly, it being understood that:

"In this way, encountering indeterminate concepts, it falls to the deciding body, from the outset, to grasp their sense and scope through an interpretative operation of the norm in which they are inserted, because the law must provide, to a large extent, a sufficiently clear standard for its interpretation. An interpretative operation which, being binding, also falls to the tribunal to scrutinize.

In this measure, and as noted by ANTÓNIO FRANCISCO DE SOUSA (In "Indeterminate Legal Concepts in Administrative Law", Almedina, 1994, p. 18 and 60.), the "indeterminate legal concepts" possess peculiarities within the scope of Administrative Law, since there the judge has the function of monitoring whether the administration gave the correct interpretation and application to these concepts. The interpretation and application of indeterminate legal concepts by the administration constitutes, therefore, an activity strictly bound to the law. To admit any margin of appraisal in favor of the Administration «would mean extending the field of discretion to the Tatbestand legal and with this a grave blow would be dealt to the guarantees of the citizen that the Rule of Law does not admit»."

That is: the norm that confers the powers of technical discretion on the TCA does not cease to be a legal norm, requiring, before its application (where discretion is exercised), interpretation, an interpretation which is, naturally, judicially scrutinizable.

This is not here, thus, to transpose into the domain of technical discretion the special duty of reasoning that assists the Administration when it applies indeterminate concepts, but rather to assert such as happens with the norms that contain these, regarding norms that confer that, it is necessary "to grasp their sense and scope through an interpretative operation of the norm in which they are inserted, because the law must provide, to a large extent, a sufficiently clear standard for its interpretation. An interpretative operation which, being binding, also falls to the tribunal to scrutinize.".

In other words, the norm that confers discretionary powers on the Administration requires itself an interpretation, from the outset to the effect of determining what the concrete powers are that are conferred – in essence, what task the legislator intends to be entrusted to the discretion of the Administration, and such hermeneutical operation, as it cannot fail to be, is judicially scrutinizable.

Thus, from the outset, and in the case, it appears that the interpretation that the TCA made of the legal norms in question, indicated above, is not the correct one, the TCA having erroneously determined what task was incumbent upon it pursuant thereto.

In effect, the TCA, as appears from the inspection report transcribed above, merely indicates a value, such as the number of years that it considers reasonable for the amortization of the equipment in question.

Now, in our view, this is not the sense of the norms applied.

Effectively, both one and the other of the norms refer to situations in which, for a given item, no depreciation or amortization rates are found to be established, providing that in that case the rates that the Directorate-General of Taxes considers reasonable are accepted.

Now, the use of the plural cannot fail to be significant, and the significance should not fail to be that the TCA is not required to fix a single depreciation rate as being reasonable, but rather to fix an interval of rates that are considered reasonable.

Effectively, in the hermeneutical labor to be performed, one cannot fail to note that the norms in question do not prescribe that the TCA substitute itself for the legislator in the indication of a percentage, similar to those fixed in the table that is silent as to the item to be amortized, but in the indication of depreciation or amortization rates that are reasonable.

Now, the acceptable depreciation or amortization rates, in the system in force, are comprised within an interval arising between the minimum and maximum periods of useful life of an asset, as defined in article 3, section 2 of Regulatory Decree no. 25/2009, of 14 September.

Whence that, where the filling of omissions in the table attached to said Regulatory Decree is concerned, the TCA should proceed in the same terms, fixing, not a fixed depreciation or amortization rate, as a function of a concept of "expected useful life", filled by a judgment of "average expected utility value", but as it flows from the regime of that same Regulatory Decree and attached table, an interval of reasonable depreciation or amortization rates, comprised between a reasonable minimum useful life period and a reasonable maximum useful life period (tending to be equivalent to double the minimum useful life period)[4] as, for the items listed in said table, occurs, this being precisely the sense of the use of the plural of the word "rate", and respective concordances, in the norms of articles 31, section 2 of the CIRC and 5, section 3 of Regulatory Decree no. 25/2009, of 14 September.

Otherwise, that is, by understanding that the TCA could, in each concrete case where it were called upon to pronounce itself, fix for the same type of asset item a single concrete amortization rate, and, consequently, a single useful life period, as a function of what, in that concrete case, appeared reasonable to it, one would fall into an unacceptable lack of generality in the decisions of the Administration, remitting to a "casuality" that is precisely the opposite of what the legal system imposes should happen in the filling of legal lacunae through the exercise of discretionary power.

The values of security and justice demand that, when the Administration is legally entrusted with the discretionary power to fill lacunae in the law itself, the Administration should act in the same plane of abstraction and generality that ideally preside over the fixing of legal criteria, when these exist.

In the case of the norms in question, when the law alludes to "are accepted", it cannot fail to refer to the admissibility of an interval of rates, which come to be in force for a universe of omitted equipment, whether or not they have already been the subject of amortization or depreciation, of assessment of tax or of dispute with the Administration itself.

The Administration, awakened or not by the initiative of some taxpayer declaring their position, should seek to ascertain, with impartiality, with generality, abstraction and congruence, the rates that come to be in force for that case and for all the others.

Otherwise, the very guarantees that, for taxpayers, result from impartiality and generality would be called into question: one taxpayer would see their rate of 5% be accepted – but who would guarantee that another taxpayer, with the same type of equipment but with more persuasive ability, or even simply with more fortune, could not see a rate of 7 or 8% "accepted"?

On the other hand, only the fixing of a set of reasonable rates, corresponding to the interval of minimum and maximum useful life of an item of the omitted asset, fixed from a point of view of generality and abstraction, makes it possible to avoid that a taxpayer with equipment analogous to another to which the TCA had fixed a determined precise depreciation or amortization rate, but who used it in diverse circumstances, influential on the respective useful life period, not be irremediably harmed by the circumstances assessed by the TCA, proper to the first case it had apprised.

In this manner, the understanding now sustained not only, it is judged, does not go against the principles of security, equality and legal generality, nor against the generic duty of impartiality that bears on the Administration, but rather, on the contrary, shall be imposed by them.

Thus, only "accepted" depreciation rates corresponding to a minimum and maximum useful life period, by the TCA, and these coming to be in force for all similar cases, in the express terms of the legal regime, is the lacuna filled and the rate in force ceases to be the "TCA's rate" to be the rate of the Law itself. Only in this way, it is judged, is execution given to the legal command to fix "rates" (in the plural) of amortization or depreciation, not conceiving how the fixing of a single depreciation rate could correspond to legislative intent, when, precisely, it is not this the modus operandi of the legislator in treating the same matter, on the one hand, and the legislative command is clear in prescribing the acceptance of "reasonable" rates, on the other.

Furthermore, this interpretation would always be imposed by the principle of equality, insofar as no material justification exists for taxpayers to be able to use depreciation rates comprised between the minimum and maximum period of useful life of assets, in the case that the same appear in the table attached to Regulatory Decree no. 25/2009, of 14 September, and only be able to use a single rate (precisely that considered reasonable by the TCA), in the case they do not.

And note, such as in the case of the items forming part of the table attached to Regulatory Decree no. 25/2009, of 14 September, there is no difficulty whatsoever with the interval of depreciation or amortization rates resulting from the combination of the table with the regime of such decree, in the omitted cases, of fixing by the TCA of the interval of reasonable acceptable rates, there will not be. Effectively, the subsequent procedure will be precisely the same, that is, within the interval fixed, whether by the combination of the regime of the Regulatory Decree and its attached table, or by the TCA, the taxpayer will choose the rate most appropriate to their concrete situation, without there being, in one as in the other situation, any difficulties, casuality or arbitrariness, or, for whoever does not so understand, there being the same in both situations.

Whence that, by indicating, pursuant to articles 31, section 2 of the CIRC and 5, section 3 of Regulatory Decree no. 25/2009, of 14 September, a single amortization rate, corresponding to a fixed useful life period, the TCA incurred in erroneous application of those normatives and, consequently, in an erroneous exercise of the power of technical discretion that they confer on it.

Being here to scrutinize an illegality prior to the exercise of the technical discretion that the norms in question confer on the TCA, naturally one is not entering into the substance of the exercise of such power, not being discussed, therefore, the technical correctness of the solution to which it arrived, insofar as what is concluded is that the solution to which it arrived was not the one that the normative commands that confer discretionary power on it prescribed that it produce.

However, the incorrect intervention of the TCA in the case at hand does not stop here. In effect, the situation in question is not one in which a taxpayer, confronted with the absence of an item in the table attached to Regulatory Decree no. 25/2009, of 14 September, requests from the TCA the indication of depreciation or amortization rates that it considers reasonable.

Rather, in the case, the Claimant, pursuant to the law, submitted its tax return[5], with its accounting duly organized, and the TCA intended to carry out, and did carry out, corrections thereto, being a case in which "It is to the TCA that falls the obligation of proof of the verification of the legal prerequisites (binding) of its action, in particular if aggressive (positive and unfavorable)"[6].

That is, confronted with the Claimant's return, it fell to the TCA, in the first instance, to demonstrate that it was wrong, such burden resulting not from the norms of section 2 of article 31 of the CIRC and section 3 of article 5 of Regulatory Decree no. 25/2009, of 14 September, but from article 74, section 1 of the General Tax Law (LGT), combined with article 75, section 1 of the same Law[7].

Now, saving respect due to other opinions, demonstrating that the depreciation rate used by the Claimant, corresponding to a useful life period of 15 years, was incorrect – i.e. was not "reasonable" – is not the same as demonstrating that the depreciation rate corresponding to a useful life period of 20 years is correct – i.e. "reasonable", which is what the TCA did.

In other words, the circumstance that the depreciation rate corresponding to a useful life period of 20 years is reasonable says nothing about whether the depreciation rate corresponding to a useful life period of 15 years is, or is not, reasonable[8].

Thus, being, as stated, the burden of the TCA to demonstrate the verification of the prerequisites of the legality of its action, and forming part of such prerequisites the incorrectness of what was declared by the Claimant, it is concluded that the TCA did not fully demonstrate such prerequisites, since, in place of demonstrating that the depreciation or amortization rate underlying what was declared by the Claimant was not reasonable, it merely demonstrated that the depreciation or amortization rate corresponding to a useful life period of 20 years was reasonable, from which it does not follow, either necessarily or directly, that the depreciation or amortization rate corresponding to a useful life period of 15 years, used by the Claimant, was not reasonable.

In this way, the TCA not having demonstrated the legality of its corrective intervention, it should, also by this route, be considered illegal.

The Claimant also petitions for recognition of the right to compensation for costs suffered with the guarantee provided.

The arbitral decision on the merits of the claim from which there is no recourse or challenge binds the tax administration from the end of the deadline provided for recourse or challenge, and this shall, in the exact terms of the judgment on the merits in favor of the taxable person and until the end of the deadline for spontaneous performance of the judgments of the tax courts, restore the situation that would have existed if the tax act that was the object of the arbitral decision had not been performed, adopting the acts and operations necessary for that purpose, as expressly results from paragraph b) of article 24 of the RJAT.

In the same provision "the legislator made clear that the effects provided for there are 'without prejudice to the other effects provided for in the Code of Tax Procedure and Process'. It is considered in this regard that the legislator is here referring to all effects that flow from the Tax Procedure and Process Code (CPPT) for the taxable person, and that are applicable after the consolidation in the legal order of a determined legal-tax situation, flowing from a definitive decision whether gracious or judicial."[9]

Notwithstanding that the process of judicial challenge is essentially a process of mere annulment, in it can be delivered a judgment condemning the Tax Administration to the payment of compensation for undue guarantee, as results from article 171 of the Tax Procedure and Process Code (CPPT).

As was stated in the decision delivered in Case no. 28/2013-T[10]:

"it is unequivocal that the process of judicial challenge encompasses the possibility of a judgment for the payment of undue guarantee and it is, in principle, the adequate procedural means to file such a petition, which is justified by obvious reasons of procedural economy, because the right to compensation for undue guarantee depends on what is decided about the legality or illegality of the assessment act. The petition for constitution of the arbitral tribunal has as a corollary to become in the arbitral process that the 'legality of the debt under execution' will be discussed, whereby, as results from the express tenor of section 1 of said article 171 of the CPPT, it is also in the arbitral process that it is adequate to appraise the petition for compensation for undue guarantee."

It is concluded, thus, that this tribunal is competent to appraise the petition for compensation for undue guarantee provided.

The regime for the right to compensation for undue guarantee is contained in article 53 of the General Tax Law (LGT), which establishes the following:

"1. The debtor who, to suspend execution, offers a bank guarantee or equivalent shall be compensated in whole or in part for the damage resulting from its provision, if maintained for a period exceeding three years in proportion of the success in administrative recourse, challenge or opposition to execution which have as object the guaranteed debt.

1. The period referred to in the preceding section does not apply when it is verified, in gracious reclamation or judicial challenge, that there was error imputable to the services in the collection of the tax.

2. The compensation referred to in section 1 has as maximum limit the amount resulting from the application to the guaranteed value of the rate of compensatory interest provided for in the present law and can be requested in the very process of reclamation or judicial challenge, or autonomously.

3. The compensation for provision of undue guarantee shall be paid by offset against the revenue of the tax of the year in which the payment was made."

In the case in question, it is manifest that the error that affects the assessment acts is imputable to the Respondent Entity, as the assessments were of its initiative and the Claimant contributed in no way to that error being committed.

The Claimant has, therefore, the right to compensation for the guarantee provided, with reference to the amount whose annulment was determined and has not yet been paid, in the amount of €409.62, plus what has in the meantime come to be demonstrated as supported, if necessary in execution of sentence.

IV. Decision

In light of all the foregoing, it is decided to judge the arbitral claim well-founded and, in consequence:

a) To annul the acts of additional assessment (and corresponding statements of account adjustment and statements of interest calculation) for Corporate Income Tax no. 2015…, relating to the year 2011, no. 2015…, relating to the year 2012, no. 2015…, relating to the year 2013, and no. 2015…, relating to the year 2014, in the amounts of €65,137.65, €61,518.55, €59,284.95, and €52,745.61 respectively;

b) To condemn the Respondent to the payment of compensation for undue guarantee, in the amount of €409.62, plus what has in the meantime come to be demonstrated as supported, if necessary in execution of sentence;

c) To condemn the Respondent in the costs of the proceedings, fixed below.

V. Value of the Proceedings

The value of the proceedings is fixed at €239,095.38, pursuant to the provisions of article 97-A of the Tax Procedure and Process Code (CPPT), applicable ex vi article 29, section 1, paragraph a) of the RJAT and article 3, section 2, of the Regulation of Costs in Tax Arbitration Proceedings (RCPAT).

VI. Costs

Costs at the charge of the Respondent, given that the present claim was judged entirely well-founded, in the amount of €4,284.00, pursuant to Table I of the RCPAT, and in compliance with the provisions of articles 12, section 2, and 22, section 4, both of the RJAT.

Lisbon, 2 December 2016

The Arbitrators

José Pedro Carvalho
(President)

Fernando Araújo
(Dissenting, in accordance with the dissenting vote attached)

André Sousa Tavares

Dissenting Vote

SUMMARY

1. The legal path for fixing amortization rates

2. Objective and not subjective assessment

3. The irrelevance of subsequent legal regimes

4. From administrative discretion to technical discretion

5. Technical discretion

6. Technical discretion "stricto sensu"

7. The non-reviewability of technical rules

8. The principle of equality and the duty of impartiality

9. The concrete case

10. Conclusion

11. THE LEGAL PATH FOR FIXING AMORTIZATION RATES

Given that article 31, section 2 of the Corporate Income Tax Code and article 5 of Regulatory Decree no. 25/2009, of 14 September, established that, for amortization rates not fixed, the Tax and Customs Authority (TCA) will accept those that are "considered reasonable, taking into account the expected useful life period of those items", the TCA contacted the suppliers of the equipment in question, and other sources, normative, conventional and expert in these technical and scientific areas, which informed that the relevant amortization periods were 20 years for the wind turbines – and not 15 years for such equipment, as had been indicated by the Claimant.

The TCA acted in accordance with what those provisions imposed on it.

In effect, from the combination of article 31, section 2 of the Corporate Income Tax Code and article 5 of Regulatory Decree no. 25/2009, of 14 September, there does not result a multiplicity of criteria at the disposal of the TCA to choose, but only one: that of the application of rates that the TCA considers reasonable taking into account the expected period of usefulness.

The TCA availed itself of independent technical and scientific information to arrive at the determination of reasonableness in the case; and, pursuant to article 31, section 2 of the Corporate Income Tax Code and article 5 of Regulatory Decree no. 25/2009, of 14 September, it rejected the 15-year amortization period that had been used, instead adopting the 20-year amortization period, from which resulted an amortization rate of 5%, different from the 6.67% rate that had been applied by the Claimant.

Note that, pursuant to article 31, section 2 of the Corporate Income Tax Code and article 5 of Regulatory Decree no. 25/2009, of 14 September, that amortization rate became the applicable rate "by operation of law", insofar as those provisions conferred on the TCA a discretionary power to fix the rates – within a specific framework of "technical discretion", as we shall see below.

This is enough to close the issue specifically raised by the omission of express amortization rates for the equipment in question: those provisions point the way to resolve this issue, and that way was followed. There came to be amortization rates defined in accordance with the law, and those were the ones that were applied.

1. OBJECTIVE AND NOT SUBJECTIVE ASSESSMENT

Note also that this path is that of objective assessment of the amortization rates, and not the path of subjective assessment, as the Claimant attempted, either when it alleged that the "expected period of usefulness" would be the period of profits generated by the subsidized tariff regime for the 15-year period, provided for in Decree-Law no. 189/88, of 27 May, and in item 20 of Annex II to Decree-Law no. 33-A/2005, of 16 February; or when, within the scope of the inspection action, it alleged that proximity to the ocean would determine accelerated degradation of the equipment.

A "rate" subjectively calculated with the specific and avowed objective of coinciding with a period of subsidized tariff is not a true amortization rate of equipment, it is a mere accounting expedient that aims to ensure a kind of "meeting of accounts" after that period.

A "rate" subjectively calculated in violation of all available scientific and technical norms and based on a geographical location that was already incorporated in the objective assessment of the durability of the equipment, and continues to point to the 20-year period – even in "offshore wind farms", and in the "floating turbines" of the "deep water offshore wind farms", which are not near the ocean but in the ocean itself – is not a tenable rate, unless one wishes to disregard science and technological expertise in favor of circumstantial declarations by taxpayers, opening the door to arbitrariness in future decisions taken, we insist, in opposition to all available technical-professional information (if not even in disregard of such information, with doubts cast on its reliability…).

1. THE IRRELEVANCE OF SUBSEQUENT LEGAL REGIMES

Note also, on the other hand, that the supervening of another legal regime in which the original normative omission ceased to exist – namely the regime of "Green Taxation" (Law no. 82-D/2014, of 31 December) which allows amortizations in periods such as that adopted by the Claimant, by establishing useful life periods for such equipment with minimum duration of 12.5 years and maximum of 25 years – has neither can have any relevance to the case, since there governed, at the date of the facts, a discretionary power that was regularly exercised by the TCA, from which resulted the fixing of amortization rates that were the legally applicable, on that date, to the equipment in question.

Let us admit that, if the succession of legal regimes could serve as an additional, and exceptional, basis for the challenge of a decision taken in the exercise of discretionary power, then not only would all decisions of the Administration thus taken be fragilized because subject to a precarious status, at least within the periods of extinction (or even, absurdly, would such decisions have to be taken to be "not reasonable" by the sole circumstance of not incorporating a prognostic judgment as to possible future regimes within a period of extinction); but the legal criteria themselves that would have been filled by the exercise of a discretionary power of the Administration would be critically exposed to the succession of regimes, in an endless cascade of retroactivities.

1. FROM ADMINISTRATIVE DISCRETION TO TECHNICAL DISCRETION

Let us now clarify our understanding, both as to the existence, in the case, of technical discretion "stricto sensu", and as to the respective implications in terms of the non-justiciability of contentious challenges to decisions taken, within that scope, by the TCA.

Administrative discretion is more a power-duty than a pure freedom of choice, since everything is subordinated to the pursuit of the concrete public interest, although as to the content, object, or form of the administrative solution there may be admitted a multiplicity of equally valid routes – that is, that do not collide with any other principle guiding administrative activity.

In cases where the law wished to confer discretion, it ceases to be legitimate for the Tribunal charged with controlling the legality of an administrative act to enter into the definition of a content, object or form as the sole compatible with the purpose to be pursued, in order, in light of them, to appraise the act in question – which in practice would mean admitting that the Tribunal substituted itself for the Public Administration in the delineation of the elements of the act by it performed, denying the very existence of the discretion established in law.

The margin of free administrative decision thus constitutes a functional limit to administrative jurisdiction, insofar as that margin is centered in spheres of merit, convenience or opportunity in the reservation of competence, without implications for the validity of administrative conduct, being situated outside the bounds of contentious justiciability, which can only serve for the violation of the external limits of discretionary power (although there remains the possibility of merit control through the gracious means, this still compatible with the autonomy of public administration).

In other words, in pure administrative discretion Courts must limit themselves to verifying whether the legal limits of discretion, the positive limits of competence, purpose, impartiality and proportionality were or were not respected – not being able to scrutinize whatever has resulted from the administrative decision taken in observance of those limits.

1. TECHNICAL DISCRETION

Being unable to substitute itself for the Administration in the formulation of a judgment that falls strictly within the merit and propriety of the action of the latter, technical discretion is in principle withdrawn, also, from judicial justiciability, unless it displays gross, manifest, crass error.

In a strict sense, technical discretion is that in which, where the solution of questions requiring specialized scientific knowledge is at issue, the Administration is forced to take decisions supported by information and technical-professional studies, the Administration being thus bound to the conclusive manifestation of the professionals consulted, not being able in sum to adopt a solution different from that indicated by the specialists – and administrative decisions of this nature may only be challenged judicially or administratively if there is lacking the support of these technical information corroborated by specialists in the matter, or if the decision diverges openly from the conclusions contained in these information and studies.

In technical discretion the prerequisites that make up the provision of the norm configure technical concepts pertaining to facts only verifiable or assessable on the basis of knowledge and instruments proper to sciences other than legal science.

What is at issue, then, is an administrative activity translated into technical judgments of existence, technical assessments or technical judgments of probability, by which the law confers on the Administration a power of technical assessment, which, not implying comparative weighing of secondary interests, involves assessment of facts and circumstances of a technical character.

Hence the reason that doctrine has sometimes, in the century and a half of development of the concept (which is said to have emerged in the middle of the nineteenth century), used the expression "improper discretion" as a genus of which "technical discretion" would be a species, seeking to emphasize the absence of judgments of opportunity and convenience that prevail over strictly technical judgments (technical discretion would be linked with "freedom of proof" and with "bureaucratic justice" within that family of "improper discretions").

1. TECHNICAL DISCRETION "STRICTO SENSU"

On the other hand, in technical discretion "stricto sensu" there is no place for an assessment judgment based on indeterminate legal or legal-technical concepts, a judgment that has nothing to do with the margin of free appraisal and decision that characterize genuine discretionary judgment, rather being confined to the rules proper to legal interpretation in purely subsumptive application and, therefore, subject to judicial control.

With the technique of the indeterminate legal concept there is no discretion: the law refers to a sphere of reality whose limits do not appear well stated, but which can be determined in the concrete case by way of interpretation, admitting no more than one solution, no more than one "densification" of the concept.

In technical discretion "stricto sensu" there is, yes, room for an assessment judgment based on knowledge and rules proper to non-legal science or technique that are at issue, it being certain that it is not for the Tribunal to control the good science or good technique employed by the administrative entity, by manifest lack of competence in the extrajuridical matters necessary therefor.

These are cases in which the assessment by the Administration requires the use of technical criteria, and the solution of technical questions should be carried out according to rules and knowledge proper thereto – and the law not only recognizes this but imposes it on all operators of Law (and not only on the Administration, its first subject).

Where technical discretion "stricto sensu" is present, judicial control must, therefore, be confined to the zones of binding adjacent to the exercise of said technical discretion, that is, again, limit itself to verifying the respect, or lack thereof, of the legal limits of discretion, of the positive limits that presided over the legal conferment of discretionary power and corresponding prerogatives – and can specifically scrutinize, at the frontiers of the "margin of free appraisal", (1) a gross or manifest error in appraisal (2) an error in the factual premises (3) an abuse of power or (4) a manifest violation of the general principles of impartiality, equality, proportionality, justice and good faith as principles shaping administrative activity.

More specifically, if the law commits to the Administration the power to specify an assessment not previously fixed by the law itself, a Court cannot proceed to re-weigh the judgments made by the Administration within that scope, unless there is demonstrated the existence of gross or manifest error – in particular the lack of support in technical-professional information and studies corroborated by specialists and demanded by the densification of extrajuridical concepts.

1. THE NON-REVIEWABILITY OF TECHNICAL RULES

We are here very close to the field in which, in the USA, the topic of "technical discretion" has been developed, there very much centered on the delimitation of the competence of regulatory agencies, whether to define the limits of their normative function, whether to establish the limits of the corresponding judicial control.

There emerged the technique of "standards", by which the law limits itself to establishing parameters, principles, being left to the agencies the function of specifying regulatory norms, directives – specialized and decentralized rules, based on technical knowledge not comprehensible, in its specificity, either by the legislator itself, or by judicial control.

A Tribunal cannot scrutinize those judgments, we insist, no matter how much they diverge from the understanding of individuals or from the understanding of the judge himself – a Tribunal being required to confine itself to the zones of adjacent binding, and at most demonstrate, through other technical-professional information corroborated by specialists, that the information and studies used by the Administration in support of its judgments were glaringly false, capricious or inadequate, or that they were openly, grossly, disregarded in the very judgments made by the Administration for the pretended densification of extrajuridical concepts.

Let us insist that mere divergence of judgments between the Administration and individuals, or even between the Administration and the Tribunal, does not constitute proof of any error or defect of the impugned act that is subject to contentious scrutiny, and does not in any way legitimate the Tribunal's substitution for the Administration in the formulation of a judgment that falls strictly within the merit and propriety of the action of the latter.

And so much is this the case that, in cases of gross error where it can be concluded that the Administration has exceeded its powers and openly left the field of technical discretion to enter that of illegality, to the point that the Tribunal can annul the administrative decision in question, it is settled that the Tribunal can never substitute the annulled administrative decision with another which it deems more appropriate – that is, it cannot, without violation of the constitutional principle of separation of powers, avail itself of that technical discretion.

A Tribunal cannot scrutinize those judgments, in sum, save in these strict presuppositions, save when there is patent a gross, glaring, open error, translated into grave maladjustment of the decision to the concrete situation and to the pursuit of the public interest, in such terms that the exclusion of justiciability by non-technical means could be taken to be arbitrary – for otherwise, without all these safeguards, technical discretion "stricto sensu" would be a dead letter, everything foundering in strict binding or in judicial arbitrariness, and the invocation of a margin of free appraisal and technical assessment committed to the Administration would become a bizarre legal fiction.

1. THE PRINCIPLE OF EQUALITY AND THE DUTY OF IMPARTIALITY

It is possible that section 2 of article 31 of the Corporate Income Tax Code and section 3 of article 5 of Regulatory Decree no. 25/2009, of 14 September, when both use the expression "are accepted" with respect to depreciation or amortization rates, induce somewhat into error the reader, in that they seem to suggest that this acceptance is the culmination of a dialogue, case by case, taxpayer by taxpayer, of proposals and counter-proposals of rates – a dialogue which might eventually lead, either to a consensus ("are accepted"), or to a disagreement (implicitly, "are rejected").

Except that is not what manifestly results from the letter of the law, because if it were not only would one run the risk of partiality, incongruence, errancy, lack of generality in the decisions of the Administration, but one would be remitting to a "casuality" that is precisely the opposite of what the legal system imposes should happen in the filling of legal criteria through the exercise of discretionary power.

The values of security and justice demand that, when the Administration is legally entrusted with the discretionary power to fill cases omitted in the law itself, the Administration should act in the same plane of abstraction and generality that ideally preside over the fixing of legal criteria, when these exist. This is what logically flows from the duty to fix rates "which are not established".

In the case of the norms in question, when the law alludes to "are accepted", it cannot fail to refer to the rates that come to be in force for a universe of omitted equipment, whether or not they have already been the subject of amortization or depreciation, of assessment of tax or of dispute with the Administration itself.

The Administration, awakened or not by the initiative of some taxpayer declaring their position, should seek to ascertain, with impartiality, with generality, abstraction and congruence, the rates that, once fixed, come to be the "accepted" rates for that case – and for all the others.

Otherwise, the very guarantees that, for taxpayers, result from impartiality and generality would be called into question: one taxpayer would see their 5% rate be accepted – but who would guarantee that another taxpayer, with the same type of equipment but with more persuasive ability, or even simply with more fortune, could not see a 7% or 8% rate "accepted"?

Not that such a solution is not abstractly possible: a casuality, a case-by-case re-evaluation, argument by argument, accepting in some cases and rejecting in others, could be compatible with the values of justice and security if there prevailed, in that universe, something similar to a "most-favored-nation clause": a depreciation rate more elevated than its equipment "accepted" to a taxpayer, this fixed rate would come to apply to all other taxpayers – retroactively even, for protection of those who had already paid previously.

But such a solution is not the one that governs in the circumstances in question: a depreciation rate "accepted" by the TCA is the one that comes to be in force for all similar cases, for the simple reason that, in the express terms of the legal regime, with this "acceptance" the omission is resolved and the rate in force ceases to be the "TCA's rate" to be the rate of the Law itself.

For this reason it does not appear acceptable the argument that the TCA should specifically justify, in this specific case or in another, the reasons for its rejection, since its rejection can be based – as is proper for the exercise of a power of technical discretion – on the simple demonstration that the rate it adopted is reasonable for the universality of cases involving such equipment, and which became "ope legis" the legal rate in force.

I insist: what flows from section 2 of article 31 of the Corporate Income Tax Code and section 3 of article 5 of Regulatory Decree no. 25/2009, of 14 September is not the obligation of the initiation of a dialogue between TCA and Taxpayer at the term of which it is concluded that "are accepted" or "are rejected" the rates and periods of depreciation or amortization "proposed" by the Taxpayer. What flows from those norms is that the TCA "will fix" the rates that the law has not "fixed" yet, and that such rates have to be "fixed" – that is, have to be determined in a single value, invariable, the sole compatible with the protection of the interests of taxpayers in face of the prevalence of the principle of equality.

The idea of the "fixing" of the rate, the interests of the prevalence of the principles of equality and legal generality, the generic duty of impartiality that bears on the Administration, even in its moments of exercise of technical discretionary power "stricto sensu", prohibit the idea that the TCA could be entrusted with the breadth of fixing, not a rate, but an "interval of rates", a "band of reasonableness", if we may be permitted the concept – for all the difficulties and difficulties that we have just specified subsisted in that case, in face of a still variable rate: fixed the "interval of rates", who would decide which the effective rate that would fall in each case? How would casuality or arbitrariness be avoided? To whom would be entrusted this second discretionary power, that of the "specification" of the fixed rate within a "band of reasonableness of rates"?

In no point of those provisions do I glimpse, remotely implicit even, a "duty to reject substantively" that the TCA could have violated, or from which would flow a burden of proof that would fall on the TCA.

And, very emphatically, we have to stress that considerations about the duty to reason that falls on the Administration when it inter[... truncated document continues but appears to be cut off in the original ...]