Autonomous Taxation as Deductible Expense for IRC: CAAD Arbitration 292/2013-T

ARBITRAL DECISION

I – REPORT

1. On 16 December 2013, A..., S.A., (hereinafter referred to as A...) legal entity no. …, with registered office at Avenue …, in Lisbon, Lisbon tax office 7, and B..., S.A., (hereinafter referred to as B...) legal entity no. …, with registered office on Street …, in Funchal, Funchal tax office 1 (both entities, hereinafter also referred to as Claimants), came before this Tribunal pursuant to the provisions of Article 2(1) of Decree-Law no. 10/2011, of 20 January, and of Ordinance no. 112-A/2011, of 22 March, to request the constitution of an arbitral tribunal for the examination of the legality of the self-assessment of Corporate Income Tax (IRC) relating to the 2010 fiscal year carried out by company C..., S.A. (hereinafter C...).

2. In their request for arbitral decision, the Claimants chose not to appoint an arbitrator.

3. Pursuant to Article 6(1) of the RJAT (Regime Jurídico da Arbitragem Tributária – Legal Framework for Tax Arbitration), by decision of the President of the Deontological Council, the undersigned was appointed as sole arbitrator and accepted the position within the legally prescribed timeframe.

4. The arbitral tribunal was constituted on 14 February 2014.

5. Following the Reply of the Tax and Customs Authority (hereinafter the Authority or AT), filed on 19 March 2014, the Claimants filed, on 24 March 2013, their response to the exceptions raised by the AT.

6. The Claimants and the Authority waived holding the meeting provided for in Article 18 of the RJAT, presenting successive written submissions, and it was indicated in an arbitral order that the decision would be issued by 10 August 2014.

7. The Request for Arbitral Decision

In their initial Request, the Claimants state, in summary:

• Through a spin-off and merger that occurred on 30 December 2011, the Claimants succeeded universally, in 24.24% (A...) and 75.76% (B...), in the legal and patrimonial positions of company C..., which was dissolved in the same process;

• Said spin-off and merger operation was the subject of authorization from the Minister of Finance for the transfer of tax losses;

• C..., in determining taxable profit and self-assessing IRC for the 2010 fiscal year, did not deduct the expense incurred with said autonomous taxation, in the amount of €26,927.70, treating them as if they were IRC or municipal surtax;

• The autonomous taxation in question, which C... assessed and paid, is provided for in Article 88 of the CIRC (Corporate Income Tax Code) and corresponds to autonomous taxation on: vehicle expenses (€22,522.20), travel allowances and similar items (€703.98) and representation expenses (€3,701.52);

• Thus, A... and B..., who succeeded to the tax losses of C... (which amounted to €14,514,125.73), hold, with respect to the 2010 fiscal year (which amounted to €7,016,386.10), the first 24.24% (€8,013,286 / €33,055,409.00) and B... 75.76% (€25,042,123.00/€33,055,409.00);

• With the increase in C...'s tax losses originating in 2010, in the amount of €26,927.70, and as petitioned, A... will see increased by €6,527.27 (€26,927.70 x 24.24%) the total tax losses it already held, arising from the 2010 fiscal year of C..., which will thus increase from €1,700,771.99 (24.24% x €7,016,386.10) to €1,707,299.26 (€1,700,771.99 + €6,527.27) and B... will see increased by €20,400.43 (€26,927.70 x 75.76%) the total tax losses it already held, arising from the 2010 fiscal year of C..., which will thus increase from €5,315,614.11 (75.76%x€7,016,386.10) to €5,336,014.54 (€5,315,614.11+€20,400.43), that is, respectively €1,707,299.26 (A...) and €5,336,014.54 (B...);

• The Claimants filed a gracious complaint (administrative review request) of the self-assessment of IRC relating to the 2010 fiscal year, which was denied by orders whose notification was received by A... on 25 September 2013, and by B... on 27 September 2013, whereby the request now presented is timely;

• The requirement of prior recourse to the administrative route has been met, pursuant to Article 2(a) of Ordinance no. 112-A/2011, of 22 March;

• The joinder of parties is legitimate because two claims are at issue that depend on the examination of the same factual circumstances and the interpretation and application of the same principles and rules of law regarding the deductibility in IRC of expenses related to autonomous taxation;

• The figure of autonomous taxation has never had the nature of an income tax, IRC or IRS, being in most cases a tax on expenditure;

• The function of autonomous taxation has nothing to do with the function of IRC, of reaching the contributory capacity revealed by the income of legal entities, especially since it is when this contributory capacity is lower, even non-existent, that all these autonomous taxation become more burdensome, across the board (Article 88(14) of the CIRC);

• Aimed initially at combating the risk of tax evasion and fraud (taxation of undisclosed and undocumented expenses), autonomous taxation has diversified extraordinarily and increased in value, coming to be aimed merely at obtaining more tax revenue;

• Most autonomous taxation applies independently of IRC: even when there is exclusion from IRC taxation or exemption from IRC, and they apply to a reality different from that (profit) to which IRC applies, whereby their tax deduction does not generate a vicious circle, as in the case of a possible deduction of municipal surtaxes, according to interpretation confirmed by doctrine and case law;

• Autonomous taxation is deductible pursuant to Article 23(1)(f) of the CIRC because the rule in IRC is that taxes borne by an IRC taxpayer are deductible, to the same extent and on the same footing as general expenses or charges (for example, Transfer Tax, Stamp Duty, Property Tax and even VAT when it constitutes an actual burden for the VAT and IRC taxpayer, where VAT cannot be deducted on various supplies, as well as customs duties), with exceptions provided for in subparagraphs (a) and (c) of Article 45(1) (formerly Article 42) of the CIRC;

• And when the legislator intended to provide for the non-deductibility of another autonomous taxation (approved by Article 141 of Law no. 55-A/2010, of 31 December), it provided for it expressly (subparagraph (o) of Article 45(1) of the CIRC, as amended by Law no. 55-A/2012), which it did not, on the other hand, do with the proposed contribution on the energy sector (Article 217 of Draft Law no. 178/XII);

• And the fact that the draft law for IRC reform (Draft Law no. 175/XII) included expenses related to autonomous taxation in the exception that prevents tax deductibility in IRC (Article 23-A(1)(a) of the CIRC), equating them for this purpose (inclusion in the exception for non-deductibility) constitutes confirmation that until 2013, inclusive, this tax expense was not excepted from the general rule of deductibility of tax expenses;

• But this equation constitutes a legal fiction – autonomous taxation is neither IRC nor any other tax that bears on profits, but tax borne by its taxpayer, a true tax burden for the same;

• In the Portuguese tax system in force at the time of the situation under examination, the only taxes, apart from IRC itself, covered by the exception to the principle of deductibility of taxes in computing profit subject to IRC were the state surtax (cf. Article 87-A of the CIRC) and municipal surtax;

• The expression "or indirectly bearing on profits" (Article 45(1)(a) of the CIRC, added by Law no. 10-B/96, of 23 March, to the former Article 42) was raised by the controversy regarding municipal surtax which, although not being IRC, indirectly bore on the profits subject to IRC, on the same income to which IRC applies, but autonomous taxation in no way bears on profits (directly or indirectly), much less on the profits of the IRC taxpayer, and cannot be subsumed in Article 45(1)(a) of the CIRC (formerly Article 42 and initially Article 41);

• The argumentation used in the doctrinal controversy over the (non-)deductibility of municipal surtax and the way it was resolved is not applicable to the present case: while surtax was an ancillary tax of IRC, autonomous taxation is autonomous, independent of non-taxation situations in IRC (a situation even more extreme than exemption), and, unlike municipal surtax and IRC, does not have the nature of an income tax;

• Autonomous taxation bears at the upstream point of the calculation of taxable profit, is a tax burden that charges expenses, and since it is not a tax of the same nature as IRC it will not "cancel each other out", its relevance as a tax burden is limited to contributing to the determination of actual profit or income, avoiding taxation of profit that does not actually exist;

• The AT's interpretation that the rule contained in Article 23(1) or Article 45, especially in its subparagraph (a), all of the CIRC, prevents the deduction in determining taxable income of actual expenses related to autonomous taxation, would render these rules unconstitutional, by violation of Articles 2 (democratic rule of law with its inherent principles of proportionality and equality and prohibition of arbitrary discrimination), 13 (principle of equality), 18(2) and (3) (principle of proportionality) and 104(2) (principle of taxation, fundamentally, of actual income and, in conjunction with the principle of equality, principle of contributory capacity) of the Portuguese Constitution;

• The self-assessment of IRC by C..., relating to the 2010 fiscal year, suffers from a partial substantive defect of violation of law and should be declared partially illegal, with annulment of the part that reflects the failure to recognize the tax burden of expenses related to autonomous taxation;

• Thus, the tax losses determined in the self-assessment for the 2010 fiscal year should be corrected upward by €26,927.70, with the consequent increase in tax losses transferred as a result of the spin-off and merger to the Claimants, by €6,527.27 for A..., and by €20,400.43 for B..., with the consequent increase in A...'s tax losses from €1,700,771.99 to €1,707,299.26, and in B...'s from €5,315,614.11 to €5,336,014.54.

1. Reply of the Tax and Customs Authority (AT)

The Authority replied, in summary:

a) Raising exceptions, all of which could lead to dismissal of the Authority's position, of:

• Lack of jurisdiction of the arbitral tribunal because it is a matter of (own) regional revenue, whose collection falls within the scope of the Autonomous Region of Madeira (RAM) administration, lying outside the scope of tax arbitration to which only the Ministry of Finance is bound (Decree-Law no. 118/2011, of 15 December and Ordinance no. 112-A/2011, of 22 March);

• Illegality of the joinder of parties because, given the material incompetence of the Arbitral Tribunal to settle the claim brought by "B..., S.A.", this entity cannot join "A..., S.A." for purposes of examining the illegality of the self-assessment act, relating to the 2010 period;

• Lack of timeliness of the request for arbitral decision because, presented on 16.12.2013 regarding the self-assessment act of IRC for 2010, with the tax payment date until 31.05.2011, the request does not seek annulment of the denial order of the respective administrative challenge;

b) Contesting:

• It cannot be inferred from the case law decisions or doctrinal references cited by the Claimants that autonomous taxation, despite the peculiarities in its determination, is not IRC, integrating the provision of Article 45(1)(a) of the CIRC;

• The jurisprudence of the Constitutional Court (Decisions no. 310/2012, 382/2012 and 617/2012) deals with the application of autonomous taxation rates from the perspective of the prohibition of retroactivity without advocating their deductibility from taxable profit (by exclusion of Article 45(1)(a) of the CIRC/inclusion in Article 23(1)(f) of the CIRC);

• The jurisprudence of the STA (Supreme Administrative Court) concerns the question of retroactive application of the change in autonomous taxation rates (Decisions no. 0281/11 and no. 0757/11) and on the tax transparency regime (Decision no. 0830/11), but it also does not conclude that they are not IRC or that it is not lawful to include them in Article 45(1)(a) of the CIRC;

• As to the arbitral tribunal's decision (proc. no. 7/2011-T), it concerns autonomous taxation, by comparison with indirect assessment, on its nature concerning the determination method, without drawing the conclusions advocated by the Claimant;

• Sérgio Vasques, in the cited note of the Manual of Tax Law, merely emphasizes their autonomy in relation to the determination method without questioning the inclusion of autonomous taxation in IRC, while at the same time stating that "income taxes also contemplate elements of unitary obligation, such as the exempting rates of IRS or the autonomous taxation rates of IRC";

• Article 12 of the CIRC confirms, a contrario sensu, that the legislator considers autonomous taxation to be IRC: if in excluding from taxation under this tax companies covered by the tax transparency regime it is careful to expressly safeguard autonomous taxation, it is because autonomous taxation is a component of IRC to be self-assessed and paid by taxpayers pursuant to Articles 89 et seq. and 104 et seq. of the CIRC, provisions which refer, indifferently, both to IRC and to autonomous taxation under IRC;

• The "autonomy" of autonomous taxation rates is justified by the facts on which they bear and the specificity in their determination, but it is still IRC;

• Article 4 of Decree-Law no. 192/90, of 9 June, established autonomous taxation rates on certain expenses as an addition to the income tax to be assessed and paid by the taxpayer;

• Autonomous taxation has never been an autonomous tax nor a special tax on "accessory benefits" (the cited study, by Maria dos Prazeres Lousa, dates from a time when the taxation of accessory benefits, provided for in general terms in Article 2 of the 3 IRS Code, had no practical application);

• Autonomous taxation is not equated by the legislator to the taxation of accessory benefits (currently listed in Article 2(3)(b) of the IRS Code and deductible in IRC);

• Autonomous taxation aims to prevent companies from incurring expenses whose nature is difficult to distinguish and which could be used as a vehicle for tax evasion, are a dissuasive mechanism for the use of goods and services of mixed use and the concealed transfer of dividends (even with the increase in autonomous taxation rates these are far from reaching the level of the marginal rate of the highest bracket of the IRS table);

• Autonomous taxation has never been an autonomous special tax, nor a "consumption tax" or a "general consumption tax" but an integral component of IRC, configuring an element of unitary obligation (evident in Article 88(11) of the CIRC);

• The legislative change introduced by Law no. 2/2014, of 16 January (with the current wording of Article 23-A(1)(a), which replaced the former Article 45(1)(a) of the CIRC), had a clearly clarifying scope that autonomous taxation is a component included in the expenses borne under the heading of IRC;

• And it corroborates the interpretation that has always been made of it, both by the Tax and Customs Authority and by the generality of taxpayers (notably the current Claimant), in the self-assessment of IRC;

• The placement in different boxes in form 22 - distinction between the fields of IRC assessed (361) and payable or recoverable (362) and the field of autonomous taxation (365) - is explained by the fact that autonomous taxation consists of rates that bear on autonomous facts but surtaxes also appear in their own field, separate from the IRC fields, without this being an argument to advocate their deductibility from taxable profit;

• Article 41(a) of the CIRC, in its original version, does not have an exceptional nature (by contrast with the "general rule" of Article 23(2)(f) of the CIRC), as recognized in case law regarding surtax, when it decided that its non-inclusion in Article 45(1)(a) of the CIRC did not prevent it from being disregarded as a cost for tax purposes;

• Autonomous taxation was created by the legislator with the objective of encouraging taxpayers to reduce expenses whose necessity is difficult to verify, and which, contributing negatively to the formation of taxable profit, negatively affect tax revenue; prevent companies from using these expenses to proceed with the concealed distribution of profits, especially dividends, which would thus only be subject to IRC as profits of the company, and further combat tax fraud and evasion caused by such expenses;

• The legislator's intention was accentuated through successive increases in rates and penalization of taxpayers who benefit from a more favorable tax regime, in which part of the expenses are taxed autonomously and independently of the existence or not of taxable matter for IRC purposes, with the intention of reaching the taxpayer who did not determine taxable matter, precisely because of this type of expense;

• In seeking to prevent abusive use of certain expenses and distribution of dividends in fraud of the rules aimed at reaching the actual income of taxpayers, autonomous taxation is justified in light of the principle of contributory capacity, by its anti-abuse function, fulfilling the IRC function of reaching the contributory capacity revealed by the actual income of taxpayers;

• If autonomous taxation were admitted as a tax cost, the dissuasive effect that the legislator aimed to achieve with it would be undermined, and this same autonomous taxation would be nullified, since the amount paid would be offset by the reduction of the same from taxable profit, therefore, from IRC payable or from losses to be carried forward, which would be illogical;

• The fact that, pursuant to Article 88(14) of the CIRC, the determination of the autonomous taxation rate depends on prior determination of taxable matter, places the assessment of autonomous taxation at a later phase than the IRC assessment procedure, contradicting the Claimant's thesis that the expense incurred with autonomous taxation should be deducted in determining taxable profit;

• According to the Claimant's thesis, it would not be known at the time of determining taxable profit what amount of expense with autonomous taxation to deduct because it would be unknown whether the rate increase is due;

• Neither would the rate increase provided for in Article 88(14) of the CIRC be justified if the tax loss on which it depends were itself caused by the deduction of autonomous taxation;

• Adapting to autonomous taxation the question that was once raised regarding surtax, it is concluded that "If the definition of the autonomous taxation rate depends on the determination of taxable matter, the product of its application cannot be part of that determination, by logical impossibility";

• The restrictive interpretation of Article 45(1)(a) of the CIRC, defended in the request contradicts the teleology of the rule (autonomous taxation has an instrumental role in determining IRC, only having autonomy in the form of determination, incidence and rate) and systematic coherence, being incompatible with the provision of Article 88(14) of the CIRC.

1. Claimants' Reply to Exceptions and Final Submissions by the Parties

9.1. Reply to Exceptions

Regarding the invoked lack of jurisdiction of arbitral tribunals to examine the assessment relating to B..., with registered office in Funchal, Autonomous Region of Madeira, the Claimants, analyzing the applicable legislation, reject the interpretation made by the Authority of the successive Organic Laws (regional finances) and organic diplomas of national and regional tax administration services, rejecting the effects that the AT draws as to the non-binding nature of the Autonomous Region of Madeira to tax arbitration, pursuant to Ordinance no. 112-A/2011, of 22 March. They also emphasize that the lack of jurisdiction of the arbitral tribunal to decide with respect to one of the assessments and, therefore, considering the joinder illegal, would only lead to partial dismissal of the case.

Regarding the lack of timeliness of the request, beyond the jurisprudence of the STA issued on challenge following denials of gracious complaints, they argue that the taxpayer cannot, on the pretext that the arbitral request could not primarily concern the tax act/harmful act, be prevented from availing itself of the 90-day period for presenting a request for arbitral decision, provided for in Article 10(1) of the RJAT, counted from the denial of the gracious complaint.

The interpretation that, for purposes of the 90-day reaction period, which opens with express denial of the gracious complaint, the object of the proceeding and the arbitral claim could not be, respectively, the tax act and the request for declaration of its illegality, would violate constitutional principles of access to courts for protection of rights (Articles 20(1) and 268(4) of the CRP) and protection of legitimate expectations.

9.2. Final Submissions

9.2.1. By the Claimants

In written submissions, the Claimants stated in summary conclusion:

"A. It is unequivocal that the two norms of the CIRC that define what IRC is are its Article 1 (more generic) and Article 3. Both explain what IRC is, being absolutely coincident in this: tax on profit/income, with no subparagraph containing the tax base of autonomous taxation here at issue (expenses or costs of a certain type) or any other.

B. And it is noted that these are norms that have existed since the beginning of IRC, but which have been subject to republication more than once long after autonomous taxation already existed (the last republications/reaffirmations occurred with Law no. 2/2014, of 16 January and, four years earlier, with Decree-Law no. 159/2009, of 13 July), and were not adapted to include autonomous taxation in its definition of IRC: on the contrary, they always reaffirmed, at that time, the original definition of IRC.

C. For its part and in contrast, Article 12 of the CIRC in the version in force since 2002 (and, since 2014, Article 23-A(1)(a) of the new CIRC) do not have the mission or function of defining what IRC is, and thus have not transformed into IRC, outside their specific (material and temporal) scope of application, that (autonomous taxation on expenses and costs) which is not and never has been, as results from the fundamental norms specifically defining what IRC is and which are contained in the respective code (see cited Articles 1 and 3).

D. And it would be/would be serious and dangerous for the coherence and rationality of the tax system and, consequently, for those who safeguard (or should safeguard) it, if it were otherwise: if the definition of IRC contained in Articles 1 and 3 of the CIRC is really superseded by a new definition of transversal/general application that would be drawn a contrario sensu from the wording of Article 12 of the CIRC in force since 2002, then the systematic implications to be drawn from it are more than many and all contrary to the practice that has been followed since always peacefully by AT and taxpayers: cf. the issue of deduction of autonomous taxation as tax credits in IRC (investment credits; for international double taxation; etc.); cf. the issue of deduction of autonomous taxation to PEC (special payment on account); etc.

E. Moreover, the STA, in the Decision of 21 March 2012, issued in proceeding no. 0830/11, by reference to facts concerning 1996, i.e., prior to the current wording of Article 12 of the CIRC (in force since 2002, having been introduced by Article 32 of Law no. 109-B/2001, of 27 December), saw in the expression IRC, there then (1996) used exclusively, something that did not embrace autonomous taxation.

F. Wherefore the safe conclusion that the 2014 legislative change embodied in the wording given to Article 23-A(1)(a) of the new CIRC (former Article 45) has an innovative character and, consequently, can only be applied from then on. Wherefore also the necessary conclusion that it suffers from unconstitutionality, by violation of Article 103(3) of the Constitution (prohibition of retroactivity of tax law), and by violation of the principle of protection of legitimate expectations inherent in the rule of law principle (cf. Article 2 of the Constitution),

G. the interpretation of the rule contained in Article 23-A(1)(a) of the CIRC, introduced by Law no. 2/2014, of 16 January, in the sense that the equation made therein of autonomous taxation to IRC, would apply to fiscal years prior to 2014, by allegedly having a materially interpretative nature of the former rule it replaced (the rule contained in Article 45(1)(a) of the CIRC, and prior to 2010, Article 42) and which did not make such equation. (...)" [1]

9.2.2. By the Authority

In written submissions, the Authority concluded:

"A. To date, there exist ten arbitral decisions concluding that autonomous taxation that bears on expenses deductible in IRC form part of said regime, and are therefore due under this tax, falling within the provision of Article 45(1)(a) of the CIRC, as amended by Law no. 55-A/2010, of 31 December, not constituting expenses deductible for purposes of determining taxable profit, 'whereby this present arbitral action should be dismissed'.

B. To the reasoning contained in the aforementioned arbitral decisions is added that the value resulting from the application of autonomous taxation, contained in Article 88 of the CIRC, is not, nor has it ever been, capable of being deducted for purposes of determining the taxable profit of legal entities.

C. To the same extent that other taxes borne by taxpayers are not deductible from taxable profit, nor are taxes that bear on expenses in relation to which the legislator and, above all, the law has excluded from deductibility.

D. In reality, formally, autonomous taxation is IRC, presenting itself as a component, a complement thereto.

E. Similarly, from a reading of Constitutional Court Decisions 617/2012 and 85/2013, it does not follow that autonomous taxation is, in fact, a tax distinct from IRC, which, from the outset, justifies its non-deductibility in determining taxable profit, pursuant to the provision of Article 45/1(a) of the CIRC.

F. Both the legislator and the law, in Article 12 of the CIRC, consider autonomous taxation a component of IRC.

G. In this sense, autonomous taxation should be paid by taxpayers in accordance with the terms and deadlines respectively provided for in Articles 89 et seq. and 104 et seq. of the CIRC, which, moreover, refer, in an undifferentiated manner, both to IRC on profit and to autonomous taxation under IRC.

H. The new wording of Article 23-A/1(a), introduced by Law no. 2/2014, of 16 January, has a manifest clarifying scope for the future regarding the following fact: autonomous taxation is a component included in the expenses borne under the heading of IRC.

I. Indeed, this clarifying scope follows the line (1) of the only possible interpretation of the former Article 45(1)(a) of the CIRC that, already before the introduction of that new wording, existed, as well as follows the line (2) of thinking (and will) of the legislator that had been developing until then, namely that expenses of autonomous taxation are not deductible for purposes of determining the taxable profit of companies.

J. What the legislator intended was merely to remove doubts that it knows may arise in the future, whereby it is unreasonable to affirm that it is an innovative law, because, contrary to what the Claimant argues, this normative introduction follows the line of reasoning of the former Article 45(1)(a) of the CIRC.

K. The interpretation of the rule contained in Article 23-A(1)(a) of the CIRC, as amended by Law no. 2/2014, of 16 January, does not suffer from unconstitutionality, given that Articles 2 and 103(3) of the CRP have not been violated.

L. Both from a teleological, systematic and functional perspective, autonomous taxation is an authentic addition to IRC, and this because, by the nature of things, a tax cannot be deductible from itself.

M. From the beginning, the intention manifested by the legislator was that of non-deductibility of autonomous taxation, especially since its objective was to avoid a certain effect of a vicious circle, that is, permission for the tax to allow itself to be deducted from itself, thereby avoiding the emptying of the core of Article 88 of the CIRC.

N. Autonomous taxation is functionally embedded in IRC, and there is, in parallel, a rule (88/14 of the CIRC) that makes the autonomous taxation rate dependent on the circumstance of the taxpayer presenting or not a tax loss.

O. In effect, permitting the concurrence for determining taxable profit would lead to the very assessment of autonomous taxation reducing, consequently, the assessment of IRC payable, in direct confrontation with its immediate purpose, namely the disincentive to the use of certain goods and services of mixed use.

P. Autonomous taxation assumes a clear anti-abuse nature, since it aims to prevent abusive use of certain expenses and distribution of dividends in fraud of the rules aimed at reaching the actual income of taxpayers, pursuing, by this route, the objective of reaching the contributory capacity revealed by the actual income of taxpayers."

1. Issues to Be Decided

The request for arbitral decision seeks to determine whether the amounts assessed and paid by the claimant under the heading of autonomous taxation are or are not deductible as expenses for purposes of determining taxable profit in IRC (Article 45, section 1, subparagraph (a) of the CIRC, in the version in force at the time of the facts).

As for the exceptions raised by the Authority – lack of jurisdiction of the tribunal, illegal joinder of parties and lack of timeliness of the request – these will be examined and decided, preliminarily, after the establishment of the facts.

1. Preliminary Issues

The Tribunal is regularly constituted, pursuant to Articles 2(1)(a), 5(2), and 6(1) of the RJAT.

The parties have legal personality and capacity, are legitimate and are legally represented, pursuant to Articles 4 and 10(2) of the RJAT and Article 1 of Ordinance no. 112-A/2011, of 22 March.

We shall see whether the tribunal is competent to examine the merits, whether the joinder is legal and whether the request is timely.

II. REASONING

1. Established Facts

Based on the procedural documents and various documents attached to the file and not disputed, the following facts are established, indicating the reasoning for each point:

12.1. The registered offices of the Claimants "A..., SA" (A...) and "B..., SA", are located, in the first case on Avenue …, in Lisbon, … Lisbon and in the second case, on Street …, Funchal Municipality: … (Request for arbitral decision and documents no. 1 and 2 attached by the Claimants with the request for arbitral decision).

12.2. On 30 December 2011, the Claimants, A..., S.A., and B..., incorporated company C... (C...) through a spin-off and merger operation which resulted in the dissolution of C..., the incorporating companies becoming holders, respectively, of 24.24% and 75.76% of the legal and patrimonial positions of the dissolved company (Request for arbitral decision, Docs.1 and 2, attached by the Claimants).

12.3. Said spin-off and merger operation was, pursuant to Article 75 of the CIRC, the subject of an order authorizing the transferability of tax losses determined in C..., in the years 2008 to 2010 (in the total amount of €14,514,125.73), to the companies to which the assets of the dissolved company were transferred, in the proportion corresponding to the assets transferred to each of the acquiring companies, A... and B..., Claimants in the present proceedings (Doc. no. 3, attached by the Claimants with the request for arbitral decision).

12.4. The IRC Department Directors informed the Claimants that the deduction of transferred losses should be made in accordance with a specific plan, established pursuant to Dispatch no. 79/2005-XVII, of 2005.04.15 of SEAF and Circular no. 7/2005, of 16 May 2005 (Doc. no. 3, attached with the request for arbitral decision).

12.5. Form 22 declaration relating to the 2010 fiscal year (period 01-01-2010 to 31-12-2010) of IRC of company "C..., SA", was filed by it on 31 May 2011 (Doc. no. 4, attached with the request for arbitral decision).

12.6. In field 02 (registered office, effective management or permanent establishment) of Form 22, was indicated "Lisbon – 10th District" (Doc. 4, attached with the request for arbitral decision).

12.7. The registered office of C... SA, was then on Avenue …, Lisbon (Doc. 1, pp. 11, and Doc. 2, pp. 20, attached with request for arbitral decision).

12.8. In the Form 22 declaration referred to in the previous number, C... determined the total amount of tax payable of €26,912.82, corresponding to withholdings at source made by third parties and payments on account, deducted from autonomous taxation provided for in Article 88 of the CIRC, (Doc. no. 4 attached by the Claimants, and File, pp. 28 to 33).

12.9. The total of €26,927.70 of autonomous taxation, effectively paid by C... (Doc. 8 attached by the Claimants and File, pp. 34) corresponds to the taxation of expenses, itemized in field 11, for representation expenses (€37,015.15), for light passenger vehicles with value below the legal limit (€134,955.85), for passenger vehicles with acquisition value exceeding the legal limit (€45,133.06) and for travel allowances and compensation for travel in own vehicle by the employee (€14,079.57) (item 3 of the gracious complaint, in File, pp. 5).

12.10. From the application of the rates then provided for in law (10%, 20% and 5%) to the different types of expenses, resulted the amounts of €3,701.52 (representation expenses), €22,522.20 (vehicle expenses) and €703.98 (travel allowances and similar) (Article 17 of the Request; Doc. 4 attached with Request and File pp. 28 to 33).

12.11. On 3 June 2013, B... filed a gracious complaint directed to the Director of Finances of Funchal (File, pp. 4), against the self-assessment made by C... relating to the 2010 fiscal year (Form 22 filed on 31/05/2011), requesting that autonomous taxation paid be deducted as an exercise cost, determining a tax loss for C... for the 2010 period in the amount of €7,043,313.80, of which would be imputed to the Claimant €5,336,014.53 (File, pp. 4 to 27).

12.12. Company A... filed, with the Lisbon Finance Department, a gracious complaint (no. …) of the self-assessment made by C... relating to the 2010 fiscal year (File, pp. 76 and 77).

12.13. The Lisbon Finance Department, verifying that the divided company was incorporated by two companies, and that if there were a decision on the 2010 IRC self-assessment, this would interfere in the legal sphere of the two incorporating companies, notified, by office letter of 24/7/2013, of 26 July 2013, A... to "legitimate the request, the petition being signed by the two incorporating companies" (p. 74, 76 File).

12.14. The complaint filed by B…, SA, with no. …, was the subject of a draft decision, approved on 15/07/2013, by the AT, through the Director of the Large Taxpayers Unit (UGC) based on the reasoning of an inspector's report of the Tax Assistance Division (DGAT), dated 8 July 2013, (File pp. 58 to 70) notified by office letter …, of 15/07/2013 (File, pp. 71 and 72);

12.15. Company A..., whose gracious complaint, filed on 31/05/2013, was initially considered incorrect, was the subject of "formalization of the situation", (email exchange between the UGC and the Finance Department of Lisbon, pp. 73 et seq., in particular 76, of the File) being notified, by office letter of the UGC, dated 20/08/2013, of the draft decision issued in proceeding …, of B..., for prior hearing, as an interested party (File, pp. 78 et seq.).

12.16. The decision denying the gracious complaint in proceeding …, of B..., was made final by order issued, on 20 September 2013, on information no. …, by the direction of the Tax Management and Assistance Division of the Large Taxpayers Unit, UGC (File pp. 80 to 82).

12.17. The denial decision was notified by the UGC to A... by office letter no. … and to B…, SA by office letter no. …, both of 23 September 2013 (File, pp. 86 to 91), received, by the first, on 25 September 2013 and, by the second, on 27 September 2013 (Docs.5 and 6 attached by the Claimants).

12.18. The present request for arbitral decision was presented on 16 December 2013.

1. Unproven Facts

The factual matter established is sufficient for examination of the legal issue, with no relevant unproven facts for the resolution of the present dispute.

1. Application of Law

14.1. The Exceptions

14.1.1. (Lack of) Jurisdiction of the Arbitral Tribunal

Claimant B…, S.A, seeks, joined with A..., SA, examination of the legality of a self-assessment of IRC relating to the year 2010 carried out by C..., a company subsequently dissolved whose assets were incorporated by the Claimants, through a spin-off and merger operation carried out on 30 December 2011.

The Claimants, as universal successors of the incorporated company C..., filed, in 2013, complaints regarding said self-assessment made by that company in 2011 and relating to the 2010 fiscal year.

Given the order authorizing the transfer of tax losses determined in C..., in the years 2008 to 2010 (in the total amount of €14,514,125.73), to the companies to which the assets of the dissolved company were transferred, in proportion to the assets transferred to each of the acquiring companies, A... and B..., Claimants in the present proceedings (cf. 12.3), the question arises whether the Claimants' position should not be assessed by reference to the position of the company whose legal relations they succeeded to, and the issues raised by the Authority, given the Autonomous Region of Madeira, concern only one of the successors of the incorporated company, C..., the taxpayer in the self-assessment [2] relating to the 2010 fiscal year, whose legality is at issue in the present request for arbitral decision.

However, and independently of the resolution of this doubt, this tribunal does not subscribe to the thesis of the Authority that, being a matter of (own) regional revenue whose collection falls within the scope of the Autonomous Region of Madeira administration, the request of B... would be outside the scope of tax arbitration to which only the Ministry of Finance is bound.

Indeed, the organic diplomas, of a regulatory character, formerly Ordinance no. 348/2007, of 30 March, and now Ordinance no. 320-A/2011, of 30 December, assign to the national-level tax administration services, formerly DGCI now AT, the competence to: assess and control the (self-)assessment of IRC, inspect and audit taxpayers, decide gracious complaints, hierarchical appeals and official reconsideration requests regarding IRC, issue instructions with a view to standardizing the application of norms relating to IRC, prepare the respective reporting forms.

These functions were/are carried out essentially by the central DSIRC service, which manages the income tax of legal entities (IRC), with a fundamental role also falling to DSIT and UGC (Articles 4 and 14 of Ordinance no. 348/2007 and, currently, Articles 4 and 34 of Ordinance no. 320-A/2011), concluding that it was the DGCI and is today the AT, that administers IRC.

On the other hand, analyzing the provisions of the successive Regional Finance Laws of the Autonomous Regions – both the diploma in force at the time of the facts, Organic Law 1/2007, of 19 February, and the previous one, Organic Law no. 13/98, of 24 February, or the subsequent one, Organic Law no. 2/2013, of 2 September – it is concluded that:

• The Autonomous Regions have the right (Article 10 of Law no. 13/98; Article 15 of Organic Law of 2007; Article 24 of Organic Law of 2013) to the delivery by the Government of the Republic of tax revenues relating to taxes that should belong to them in accordance with regional finance law as well as other revenues assigned to them by law. Among those provided for in the Regional Finance Laws, the right to IRC revenue is counted[3];

• The right to revenue is related to the exercise of activity in the Region[4];

• There are no interpretive elements leading us to conclude that the law has assigned the administration of IRC to the autonomous regions, at least when the activity does not develop exclusively in that territory;

• Regional tax powers of a normative and administrative nature[5] comprise the power to create and regulate taxes, in force only in the respective Autonomous Regions and to adapt national-scope taxes to regional specificities[6];

• If it is true that Article 62 of Organic Law of 2007 provided on "Transfer of attributions and powers to the Autonomous Regions" [7], subsection 1 of Article 51 distinguished regional administrative powers in fiscal matters, to be exercised by the respective regional governments and administrations: the tax capacity of the Autonomous Regions to be active subjects of taxes collected in them; the right to delivery, by the State, of tax revenues that should belong to them; the power to set the amount of rates, fees and prices due for the provision of services;

• Subparagraph (a) of Article 51(2) of Organic Law 1/2007, making explicit the capacity of the Autonomous Regions to be active subjects of taxes collected in them, provides for the power of Regional Governments to create the fiscal services competent for the assessment, collection and payment of taxes to regional-scope taxes. It further adds (subparagraphs (b) and (c) of Article 51) the power to regulate matters referred to in the previous subparagraph, but without prejudice to the guarantees of taxpayers, of national scope, as well as the power of the Autonomous Regions to use the State's fiscal services based in the Autonomous Regions, by payment of compensation[8];

• Decree-Law no. 18/2005, of 18 January, transferred to regional bodies and services only the powers of its Finance Department in the Autonomous Region of Madeira (Article 1(1)), being at issue the "attributions and fiscal powers which, within the scope of the Finance Department of RAM and the services dependent on it, had been exercised up to then by the Government of the Republic" (Joint Dispatch no. 309-F/2005, published in Official Journal 2nd series of 19 April 2005).

It is concluded, therefore, that the Tax and Customs Authority maintains, through its central services, the generality of powers concerning the administration of IRC, namely regarding collection, control, inspection, issuance of guidance and interpretations of law, examination of complaints, intervention in contentious matters[9].

Whereby the exception of lack of jurisdiction of the arbitral tribunal raised by the Claimant is judged groundless.

14.1.2. Illegal Joinder of Parties

The exception of material lack of jurisdiction of the Arbitral Tribunal to examine the claim of Claimant "B..., S.A." being groundless, the exception of illegal joinder, raised by the Authority only as a logical consequence of that first one, is also groundless.

14.1.3. (Lack of) Timeliness of the Request

The contested issue consists in determining whether, as the Authority maintains, the Claimants had, in the request filed on 16.12.2013, to expressly request the declaration of illegality of the denial of the gracious complaint filed against the IRC self-assessment relating to 2010, under penalty of the request, having as its object the self-assessment act, proving untimely for having exceeded the direct challenge period of the tax self-assessment act (that is, of the primary act).

The Authority cites excerpts from Jorge Lopes de Sousa, in Comments to the Legal Framework for Tax Arbitration, attempting to emphasize that the competences of arbitral tribunals operating in the CAAD include decisions denying gracious complaints and hierarchical appeals, and that being requests for declaration of illegality of self-assessment acts, withholding at source and payment on account acts, pursuant to Article 2 of the RJAT, preceded as a rule by recourse to mandatory gracious complaint, pursuant to Articles 131 to 133 of the CPPT (Code of Tax Procedure), the immediate object of the challenge proceeding is, as a rule, the second-degree act that examines the legality of the assessment act, an act which, if it upholds it, must be annulled, to obtain the declaration of illegality of the assessment act.

Let us examine the concrete case under consideration.

In the request for arbitral decision (Articles 2 to 10) the claimants raise the illegality of the self-assessment act; demonstrate having filed gracious complaints and that these were examined by the UGC and denied by the AT on 20 September 2013 (they attach the documents, including the notifications); invoke this administrative proceeding to conclude that the 90-day period provided for in Article 10(1)(a) of Decree-Law no. 10/2011, of 20 January, would end on 24 December 2014; throughout a large portion of the text of the Request (cf. Articles 172 to 291) they directly rebut arguments of the AT in the examination of the gracious complaint.

In reality, it cannot be said that the Request does not also seek the denial of the gracious complaint (or complaints)….

But, in any case, it is judged that the extension of the competence of arbitral tribunals, only provided for to examine the legality of (primary) assessment acts, to the examination of (second or third degree) acts that examine the legality of primary acts and which is justified by the reference made in Article 10(1)(a) of the RJAT to Article 102(2) of the CPPT [10] should not lead to an interpretation as restrictive as that defended by the Authority.

In effect, we judge that the fundamental matter in this respect, and as we understand results from the cited work, is the conclusion that decisions denying gracious complaints cannot be examined in themselves, namely those that did not rule on the merits of the assessment act that is the subject of the complaint, because what is sought through the challenge of the gracious complaint decision is to examine the legality of the underlying assessment act, not the gracious complaint decision that did not rule on the merits of the taxpayer's claim (cf. Jorge Lopes de Sousa, cited work p. 125).

On the other hand, in a case such as that in the proceedings, where examination of the legality of a self-assessment act is sought, the interpretation of Article 2 of the RJAT in conjunction with Articles 1 and 3 of the CPPT requires prior complaint in cases where it is also required in tax tribunals [11], this sense being expressly adopted pursuant to the binding of the Tax and Customs Authority, through Ordinance no. 112-A/2012, of 22 March.

But, once the gracious complaint is filed and is denied, a request for arbitral examination arises within 90 days, counted pursuant to Article 10 of the RJAT and Article 102 of the CPPT. If a second (or third) degree act effectively rules on the illegality, it may be the immediate object of the request for arbitral examination, but, if it does not rule on the illegality but on another matter, the denial cannot, in itself, be the object thereof, only being so the primary tax act.

From this it does not appear that it can be concluded that in a case where, having been issued a decision denying a complaint, which expressly ruled on the legality of the tax act complained of, the request for arbitral decision cannot make the tax act itself the direct object of the challenge. Indeed, the very letter of Article 2(1)(a) of the RJAT provides that the competence of tax tribunals encompasses the declaration of illegality of self-assessment acts, despite that, as far as these are concerned, the general rule is the requirement to file a prior gracious complaint.

In a case such as the present, where it is proven that this requirement was met, it is considered that the interpretation here defended by the Authority would be an unjustifiable restrictive application contrary to the ratio legis (which, it will be recalled, is that it is not for the tribunal to examine decisions denying gracious complaints in themselves, but rather to examine the legality of the assessment act subject to the gracious complaint).

Moreover, in the present case, the Claimants, in the argumentation developed in a substantial part of the Request for arbitral decision (cf. pp. 46 to 75), directly also attack the denial of the gracious complaint, only not having expressly and formally indicated this as the direct object of the Request for arbitral decision.

The exception of lack of timeliness is therefore groundless.

Considering the exceptions raised by the AT as groundless, nothing prevents examination of the merits of the case.

14.2. Examination of the Request

14.2.1. The Figure of Autonomous Taxation – Emergence and Evolution

"Autonomous taxation," in IRS and IRC, emerged with Decree-Law no. 192/90, of 9 June[12], bearing on "undisclosed or undocumented expenses".

It consisted of the application of a 10% rate to such expenses, without prejudice to the provision in Article 41(1)(h) of the CIRC, from which provision of the CIRC (approved by Decree-Law no. 442-B/88, of 30 November, and in force as from 1 January 1989), it resulted that "are not deductible for purposes of determining taxable profit", "expenses not duly documented and expenses of a confidential nature".

The rate became 25%[13] with the amendment of Law no. 39-B/94, of 31/12 (Budget Law 95), a law which, through amendments to Article 41 of the CIRC, also established limits on acceptance as tax costs by companies "of representation expenses, as well as expenses relating to light passenger vehicles or mixed-use vehicles" (Article 41(1), subparagraphs (g) and (j), and Article 41(4) of the CIRC)[14].

The 1997 Budget Law (Article 31 of Law no. 52-C/96, of 27/12), raised the rate provided for in Article 4(1) of Decree-Law 192/90, to 30%, and added a subsection 2: "The rate referred to in the preceding number shall be increased to 40% in cases where such expenses are incurred by IRC taxpayers, totally or partially exempt, or who do not engage as principal activity commercial, industrial or agricultural activities").

The 1999 Budget Law (Article 31 of Law no. 87-B/98, of 31/12) increased to 32% the previous rate of 30%, and to 60% the rate provided for in Article 4(2) of Decree-Law 192/90, relating to IRC taxpayers totally or partially exempt, also noting amendments to Articles 41 and 24 of the CIRC[15].

The 2000 Budget Law (Law no. 3-B/2000, of 4/4) amended Decree-Law no. 192/90, extending the taxation to expenses with representation costs and vehicle expenses (subsections 3 to 6),[16] as well as amending Articles 41 and 24 of the CIRC[17].

As for the amendments to Decree-Law no. 192/90 and repeal of provisions of Article 41, these were justified by the shift to "autonomous taxation of representation expenses and light vehicle expenses" "eliminating the restriction on their acceptance as costs", as well as "clarification of the concept of representation expense"[18] and, as to the amendment of Article 24 of the CIRC (item III.3), this would be "a refinement of an anti-abuse rule introduced by the 1999 Budget Law, regarding gratifications to members of corporate governing bodies, excluding situations where shareholding is insignificant and clarifying the concept of indirect shareholding" (cf. Budget Law 2000 report, item III.3).

In the XIV Constitutional Government, Law no. 30-G/2000, of 20 December, and later Decree-Law no. 198/2001, of 3 July, came to include autonomous taxation in IRS and IRC in the respective Codes, first as Articles 75-A of the IRS Code and 69-A of the CIRC and later, following the revision of the Codes effected by Decree-Law 198/2001, as Articles 73 of the IRS Code and 81 of the CIRC[19].

Confidential expenses become subject to taxation at 50%, both in IRS and in IRC, being in IRC the rate raised to 70% in cases where expenses are incurred by taxpayers totally or partially exempt, or who do not engage as principal activity commercial, industrial or agricultural activities.

Taxation of deductible expenses relating to representation costs and relating to vehicles become subject to taxation at a rate corresponding to 20% of the highest normal IRC rate (Article 81(3) of the CIRC)[20].

And another autonomous taxation is created (Article 81(7)), at the rate of 35% or 55%, according to subsections 1 or 2 of the same article (entities subject or with exemption), on amounts paid or due, in any capacity, to natural or legal persons resident outside the territory and subject there to a clearly more favorable tax regime, such as defined in accordance with the Code, unless the taxpayer can prove that such expenses correspond to operations actually carried out and do not have an abnormal character or an exaggerated amount.

In summary, following the amendments introduced with the 2000 reform, autonomous taxation in IRC encompassed undisclosed or undocumented expenses; representation expenses; expenses with light passenger vehicles, recreational boats, tourist aircraft, motorcycles and motorbikes; amounts paid to residents in favorable tax regimes.

Subsequently, various amendments followed. Synthetically:

• Law no. 109-B/2001, of 27/12 (2002 Budget Law), added to Article 81 of the CIRC, expenses with mixed-use light vehicles and, aiming at neutrality between the two taxes, amended the IRS Code, with the autonomous taxation rate on expenses with light passenger or mixed-use vehicles, motorcycles and motorbikes, in Article 73, changing from 10% to 20% of the normal IRC rate;

• Law no. 32-B/2002, of 30/12 (2003 Budget Law) added to Article 81 of the CIRC an autonomous taxation, at the rate of 50% of the normal IRC rate, of deductible expenses relating to light or mixed-use vehicles, whenever the acquisition cost exceeded €40,000.00 and the taxpayer presented tax losses in the two preceding periods;

• Law no. 107-B/2003, of 31/12 (2004 Budget Law) amended the provision of Article 81 of the CIRC, so that autonomous taxation rates, instead of being referenced to the highest normal IRC rate, became fixed at fixed percentage values, of 6% and 15%, for expenses with light passenger or mixed-use vehicles, motorcycles or motorbikes, depending on whether the acquisition value was below or above €40,000.00, respectively;

• Law no. 55-B/2004, of 30/12 (2005 Budget Law): reduced, in IRC (Article 81(3)), the autonomous rate from 6% to 5%, relating to deductible expenses with representation costs and those relating to light passenger or mixed-use vehicles, motorcycles or motorbikes, incurred or borne by taxpayers not exempt and who exercise, as principal activity, commercial, industrial or agricultural activity and included in the IRS (Article 73(7)) and IRC (Article 81(9)) Codes an autonomous taxation at the rate of 5% on deductible expenses relating to expenses with travel allowances and compensation for travel in own vehicle by the employee, in service to the employer entity, not invoiced to clients, except to the extent that there is taxation in IRS in the sphere of its beneficiary;

• Decree-Law no. 192/2005, of 7/11, added to the CIRC an autonomous taxation rate of 20%, on profits distributed by entities subject to IRC to taxpayers who benefit from total or partial exemption, when the company shares to which the profits relate have not remained in the ownership of the taxpayer, uninterrupted, for at least 1 year. [21]

• Law no. 67-A/2007, of 31/12 (2008 Budget), amended Article 81(1), eliminating the reference to "confidential" [22];

• Law no. 64/2008, of 05/12, which approved anti-cyclical fiscal measures, amended Articles 73 of the IRS Code and 81 of the CIRC, raising to 10% the taxation of deductible expenses relating to representation costs and for vehicles, although with exclusion of those powered exclusively by electrical energy and maintaining 5% taxation of vehicles with CO2 emission below a certain value. It raised the autonomous taxation rate in IRC relating to vehicle expenses exceeding 40,000.00 €, when taxpayers present tax losses in the two preceding fiscal years to 20%. It created an autonomous rate for companies manufacturing and distributing refined petroleum products (Article 4, subsections 1 and 2 as to incidence), prohibiting the passage of the expense borne to the price of the product (Article 4(4)) and clarifying that autonomous taxation in IRC determined pursuant to Article 2(2), is not deductible for any purpose in determining taxable profit, both in individual accounts and from a group perspective (Article 4(3));

• Law no. 100/2009, of 07/09, with the objective of creating a "regime of taxation of compensation for cessation of duties or for termination of a contract before the end earned by administrators, managers and directors of legal entities resident in Portuguese territory", amended Article 2 of the IRS Code, coming to tax amounts paid as compensation or allowance to managers or administrators for the cessation of mandates, and approved Article 81(13) of the CIRC, subjecting to autonomous taxation, at the rate of 35%, expenses or charges relating to compensation or any allowances due, not related to the achievement of productivity objectives previously defined in the contractual relationship, when the cessation of duties of manager, administrator or director occurs and, as well, expenses relating to the part exceeding the value of the remuneration that would be earned by the exercise of those offices until the end of the contract, when it is a matter of termination of a contract before the end;

• Law no. 3-B/2010, of 28/04 (2010 Budget Law), amended Article 88(4) of the CIRC, indexing the fiscally accepted limit of light passenger or mixed-use vehicles to Article 34(1)(e) of the CIRC and introduced an autonomous taxation at the rate of 35%, on compensation, indemnification and bonuses earned by managers, administrators and directors (Article 88(13), subparagraph (b) of the CIRC)[24]. It also introduced exceptional autonomous taxation of the financial sector, provided for in Article 90 of the Budget Law: "Expenses or charges relating to bonuses and other variable remuneration, paid or accrued in 2010 by credit institutions and financial companies, to administrators or directors, shall be subject to autonomous taxation under IRC at the single rate of 50%, when these represent a portion exceeding 25% of annual remuneration and have value exceeding €27,500".

• Law no. 55-A/2010, of 31/12 (2011 Budget Law)[25] approved autonomous taxation, at the rate of 10%, on expenses with vehicles whose acquisition value is equal to or below 30,000 euros, in the 2011 fiscal year, and below 25,000 euros, in 2012, whether gasoline or diesel, only excluding those powered by electrical energy; taxes at a rate of 20% expenses with vehicles whose acquisition value exceeds the fiscally accepted limit, regardless of the occurrence of tax losses in the 2 preceding years. All autonomous taxation rates in IRC are increased by ten percentage points in the case of presentation of a tax loss in the same period.

• Law no. 64-B/2011, of 30 December (2012 Budget), extended the surcharge on undocumented expense charges to taxpayers who derive income from gaming activities and increased from 20% to 25% the rate of 20% on profits distributed by entities subject to IRC to taxpayers who benefit from total or partial exemption provided for in Article 88(11).

Finally, following the work of the IRC Reform Commission, Law no. 2/2014, of 16 January, was approved, which maintained in its fundamentals the regime of autonomous taxation of Article 88 of the CIRC.

That is, following the recent legislative amendment, which aimed at "an IRC reform oriented toward competitiveness, growth and employment", the CIRC continues to provide for autonomous taxation. Current Article 88 provides for the taxation of:

• undocumented expenses (50%/70%);

• expenses with light passenger vehicles, motorcycles and motorbikes (brackets of 10% to 35%, depending on the acquisition value)[26];

• representation expenses (10%);

• expenses corresponding to amounts paid or due, in any capacity, to natural or legal persons resident outside Portuguese territory and subject there to a clearly more favorable tax regime (35%/55%);

• travel allowances/travel in own vehicles not invoiced to clients (5%);

• profits distributed by entities subject to IRC to taxpayers who benefit from total or partial exemption encompassing capital income, when company shares did not remain in the ownership of the taxpayer in the preceding year (23%);

• expenses with compensation for cessation of duties and with bonuses and other variable remuneration, when exceeding certain values, to managers administrators, directors (35%)[27].

And there continues to be a surcharge on autonomous taxation rates of 10 percentage points as to taxpayers presenting a tax loss in the period to which any of the taxable facts referred to in the various subsections of Article 88, relating to the exercise of an activity of a commercial, industrial or agricultural nature not exempt from IRC are related (Article 88(14) of the CIRC).

14.2.2. Function and Legal Nature of Autonomous Taxation in IRS and IRC

In the decision of the case sub judice it becomes necessary to identify the ratio legis that presided, initially, at the creation of the taxation provided for in Article 4 of Decree-Law 192/90, of 9 June and what the nature of that taxation is, initially and throughout the legal amendments already described.

During the validity of Decree-Law 192/90, Article 4 of Decree-Law 192/90 encompassed within the incidence of autonomous taxation IRS taxpayers with organized accounting and IRC taxpayers, in the exercise of commercial, industrial or agricultural activities, which essentially coincided with entrepreneurial activity, with the 2000 reform coming to also encompass taxpayers with professional income.

Autonomous taxation on undocumented (or confidential in the wording until 2008) expenses, alone until the addition, by the 2000 Budget, of subsections 3 to 6 to Article 4 of Decree-Law 192/90, bears on an "unusual" entrepreneurial conduct, since these are expenses which, although recorded in the accounts, are not supported by documentation permitting knowledge of their cause and/or beneficiaries, and may even be concealing, potentially, unlawful activities such as corruption[28]. Beyond their non-acceptance as costs, such expenses suffer taxation that has a penalizing character[29], attempting both dissuasion and also compensation for damage of various kinds.

The non-deduction as costs directly avoids erosion of the tax base, the penalization aims at compensation for revenue possibly not obtained (deviation to one's own or another's benefit of income which would be subject to taxation if the beneficiaries were known). Basically, it is as if it is presumed that this type of "expense" when not justified, not only does not correspond to actual charges but represents deviation of funds that cease to be properly taxed, coming thus to be taxed in another way: 10%, in 1990; 25% in 1995; 30%/40% in 1997; 32%/60% in 1999; 50%/70% from 2000 on.

Casalta Nabais, describing autonomous taxation, still of Article 4 of Decree-Law no. 192/90, commented under the heading "The IRS and IRC on confidential or undocumented expenses",[30] on the taxation of confidential expenses at the rate of 32%, and capable of being raised to 60% in IRC[31]: "It is a taxation that is explained by the need to prevent and avoid that through such expenses, companies proceed with the concealed distribution of profits, especially dividends which would thus only be subject to IRC as company profits".

On the other hand, understanding the other situations subject to autonomous taxation requires, on the other hand, that it be recalled that although, since the beginning of the 1989 Tax Reform, greater tax justice has been pursued (taxation of actual income; respect for equality and tax capacity, etc.) through greater administrative efficiency and broadening of the tax base, these objectives have not always proved easy to achieve.

The Commission for Development of Tax Reform (1995/96) found in its work that 60% of IRC taxpayers did not pay tax, with 50 companies responsible for 51% of tax, 30% of which was paid by only 3 companies[32]. Some more structural measures were proposed (such as overall review of tax benefits, reduction of the nominal rate, extension of the loss carryforward period regarding early years results, improvement of rules on double taxation, introduction of a minimum tax on corporations), but also limits on the deductibility of costs, notably regarding representation expenses and travel allowances.

In "Ten Years of the Tax Reform on Income," the Director of IRC Services, Manuel Meireles, despite noting a very positive evolution of the tax between 1996 and 1999, stated that a series of indicators allowed identification of clear signs of evasion, with 11 of the companies in which the State had qualified participation being responsible for 26% of the tax assessed, despite holding only 4% of sales volume[33]. Among various measures, he proposed the creation of a simplified regime for smaller companies to overcome the situation of concealment of income and padding of costs[34].

On the eve of the 2000 reform, political officials of the Ministry of Finance noted the inadequacy of the mechanisms established by law to combat fraud and evasion under IRC given the difficulty in effectively controlling the truthfulness of declared costs and values. And they proposed, as one of the measures, the penalization (sic) of undocumented expenses (supra, note 18).

As already recalled, autonomous taxation continued to extend to other situations: in 2000 it encompassed expenses with representation and expenses with vehicles; payments to residents in territories considered to have very favorable tax regimes; deductible expenses with travel allowances and compensation for travel in own vehicle by the employee, in service to the employer entity; profits distributed by entities subject to IRC to taxpayers who benefit from total or partial exemption. And the rates continued to increase, in some cases substantially.

Recently,[35] Professor Casalta Nabais considered that with the expansion that occurred, "especially through the 2011 and 2012 Budget Laws," it is a matter of "taxation on expenditure or consumption and not on income," being "evident that the expansion and aggravation of such autonomous taxation currently has a clear objective of obtaining more tax revenue"[36]. And he emphasizes the increase in taxation, referring to the evolution of rates on undocumented expenses in IRS and IRC (not considered deductible costs and subject to autonomous taxation) and on representation expenses and vehicle expenses, in IRS and IRC (treated as costs but subject to autonomous taxation, in the case of vehicle expenses increased to 20% in IRC, in case of tax losses).

But, despite this and other positions in doctrine very critical of autonomous taxation, citing in their support the cited jurisprudence of the STA and Constitutional Court, the recent IRC reform maintained fundamentally the type of incidence of these taxation, as is maintained those included within the scope of the IRS (Article 73 of the IRS Code).

Do these autonomous taxation – given the evolution described and the current configuration – aim fundamentally at obtaining revenue, with their insertion in the IRS and IRC Codes not being understandable as being taxation on expenditure?

Before reaching a conclusion let us analyze the argumentation of the parties in this proceeding.

1. The Arguments in Presence and Their Examination

The Parties deployed in the proceedings arguments (which we have attempted, at risk, being hundreds of articles, to summarize with some detail) for and against deductibility in IRC of the amounts assessed under the heading of autonomous taxation pursuant to Article 88 of the CIRC.

15.1. Taxation on Expenditure or Component of IRC

The Claimants argue that autonomous taxation has never had the nature of an income tax, within the scope of IRC or IRS, and that it results unequivocally from Articles 1 and 3 of the CIRC (norms existing since its beginning of validity) that IRC is a tax on profit/income, with its nature not being altered by Article 12 of the CIRC, as amended since 2002, nor by Article 23-A(1)(a) of the new CIRC in force since 2014.

They maintain that autonomous taxation is, in most cases, a tax on expenditure, including because the fact that they become more burdensome when the contributory capacity revealed by the income of legal entities is lower, means that its nature is contrary to taxation according to tax capacity. They acknowledge that, initially, autonomous taxation aimed at combating the risk of tax evasion and fraud but with its respective diversification and increase, came to aim solely at obtaining tax revenue, applying even in cases of exemption or non-taxation to IRC.

Whereas the Authority considers that autonomous taxation is neither nor has ever been an autonomous special tax, nor a "consumption tax" or a "general consumption tax" but rather an integral component of IRC, configuring an element of unitary obligation. Its autonomy is justified by the facts on which it bears and the specificities in its determination, but no longer, legally, in relation to the remaining portions of IRC to be self-assessed and paid by the taxpayer. Article 12 of the CIRC, confirms, a contrario sensu, that the Code considers IRC as autonomous taxation because, if in excluding from taxation in IRC companies covered by the tax transparency regime it is careful to expressly safeguard autonomous taxation, it is because autonomous taxation is a component of IRC to be self-assessed and paid by taxpayers pursuant to Articles 89 et seq. and 104 et seq. of the CIRC, provisions which refer indifferently both to IRC and to autonomous taxation under IRC.

15.2. (Non-)Deductibility of Autonomous Taxation

The Claimants argue that, being autonomous taxation not taxes of the same nature as IRC, they are deductible in IRC because the rule is the deduction as an expense of taxes borne, only being excluded the cases of state surtax and municipal surtax. Unlike these, which still have the nature of taxes on income, autonomous taxation bears upstream of the calculation of taxable profit, is a tax burden that charges expenses, its recognition as a tax burden is limited to contributing to the determination of actual profit or income, avoiding taxation of profit that does not actually exist, under penalty of unconstitutionality by violation of various constitutional principles including the "principle of taxation, fundamentally, of actual income and, in conjunction with the principle of equality, principle of contributory capacity". The exclusion of the deductibility of autonomous taxation would have to be expressly provided (as in the case of contributions to the banking sector and to the energy sector).

The AT counters that, being autonomous taxation still a component of IRC, when the CIRC uses the expression "IRC expenses," it literally includes autonomous taxation.

And it considers that from the cited jurisprudence it cannot be inferred that autonomous taxation, despite the particularities in its determination, is not included in the provision of Article 45(1)(a) of the CIRC. Neither the Constitutional Court decisions (relating to the application of autonomous taxation rates, from the perspective of the prohibition of retroactivity) nor the STA decisions (on the question of retroactive application of the change in autonomous taxation rates or on the tax transparency regime), conclude that autonomous taxation is not IRC or rule on its deductibility from taxable profit.

It also emphasizes that the fact that the determination of the autonomous taxation rate depends on prior determination of taxable matter, places the assessment of autonomous taxation at a later phase than the IRC assessment procedure, which is a logical obstacle to the Claimants' thesis that the expense incurred with autonomous taxation should be deducted in determining taxable profit because, should the Claimants' thesis be adopted, it would not be known at the time of determining taxable profit what amount of expense with autonomous taxation to deduct precisely because it would be unknown whether the rate increase is due.

15.3. Autonomous Taxation of Expenses and Taxation of Remuneration

The Claimants argue that in any of the cases sub judice, of expenses with travel allowances, representation expenses and vehicles, there is business causation of the expenditure. Whereby the decisions that relate non-deductibility to the question of the necessity of the cost would lack reason. Because these questions – excess of travel allowances and representation expenses, personal use of company vehicles – would be merely questions of salary taxation, to have repercussion on the beneficiaries and not on the company bearing the remuneration, which would always have the right to deduct such charges as costs.

On this analysis the AT counters that autonomous taxation is not an autonomous tax nor a special tax on "accessory benefits" (these are currently taxed in IRS, being provided for in Article 2(3)(b) of the IRS Code, and are deductible in IRC), but rather aims to prevent companies from incurring expenses whose nature is difficult to distinguish and which could be used as a vehicle for tax evasion. They are a dissuasive mechanism for the use of goods and services of mixed use and the concealed transfer of dividends.

15.4. The Wording of Article 23-A of the CIRC

And, as to the current wording, following the 2014 IRC reform, of Article 23-A(1)(a) of the CIRC, providing that expenses with autonomous taxation are not deductible in IRC, the Claimants consider it to be a norm with an innovative character, confirmatory that until 2013, inclusive, this tax expense was not excepted from the general rule of deductibility of tax expenses. And can only be applied from then on, under penalty of unconstitutionality by fiscal retroactivity.

The AT counters that the current wording of Article 23-A(1)(a), which replaced the former Article 45(1)(a) of the CIRC, had a clearly clarifying scope that autonomous taxation is a component included in the expenses borne under the heading of IRC, and corroborates the interpretation that has always been made of it, both by the AT and by the generality of taxpayers, in the self-assessment of IRC.

15.5. Examination of the Positions

It is stated from the outset that, regarding the opposition of arguments made in the preceding points, the tribunal does not accept any of the arguments of the Claimants and considers the analysis opposed thereto by the Authority to be correct. That is, the tribunal considers that autonomous taxation, in IRS and IRC:

• Were created, maintained and expanded, as a means of complementing the taxation of income by those two taxes;

• Despite some (not all...) bearing on expenditures, do not configure taxes on expenditures or on consumption;

• Nor are they a mere substitution of taxation of remuneration or fringe benefits;

• Aim, in some form, as demonstrated by the legislative evolution and its respective reasoning[37], summarized, to combat forms of tax evasion or business conduct considered by the legislator as causing unjustifiable erosion of the tax base[38];

• Given their nature and function, autonomous taxation in IRC has the same treatment as IRC, not being deductible as an expense for purposes of determining taxable profit;

• That is how it is today (in the validity of the amendments introduced by Law no. 2/14) as it was already before that amendment, understanding that the wording of Article 23-A of the CIRC cannot even be designated as interpretative[39], the issues raised on its innovative character being groundless and the invocation of unconstitutionality of application to the past of the rule on non-deductibility of autonomous taxation in determining taxable profit in IRC being groundless.

But, analyzing still some further arguments of the Claimants:

The claimants express strangeness at the discrimination of income, for example in the form of compensation to administrators, since such charges do not burden the taxpayers but only shareholders, who have the power not to approve the accounts for the fiscal year and to censure the administration. However, it is well known that in stock corporations[40],

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