CAAD 299/2015-T: IRC Indirect Assessment Methods Challenge – Tax Liquidation Annulment

ARBITRAL DECISION

I – Report

1.1. A…, Lda., NIPC …, with registered office at Place …, …, hereinafter referred to as the "Claimant", having been notified of the acts of assessment of Corporate Income Tax (IRC) and compensatory interest relating to the tax periods 2010 and 2011, in the total amount of €25,140.50, filed, on 8/5/2015, a petition for constitution of an arbitral tribunal and arbitral decision – pursuant to the provisions of article 10 of Decree-Law No. 10/2011, of 20/1 (Legal Framework for Arbitration in Tax Matters, hereinafter referred to as "RJAT") – in which the Tax and Customs Authority ("AT") is the Respondent Entity, with a view, in summary, to the annulment of the "act of assessment of IRC and compensatory interest" and the recognition of "the right to indemnificatory interest, pursuant to article 43 of the General Tax Law, with the refund of sums paid plus their respective interest."

1.2. On 24/7/2015, the present Sole Arbitral Tribunal was constituted.

1.3. On 27/7/2015, the AT was served, as the defendant party, to submit its response, pursuant to article 17, no. 1, of the RJAT. The AT submitted its response on 29/9/2015, having raised an objection of ineptitude of the initial petition and argued, in summary, in favour of the total dismissal of the Claimant's request. The administrative file was sent on 25/9/2015.

1.4. On 9/10/2015, the Claimant filed a motion in which it addressed the above-mentioned objection, stating, in summary, that the same could not proceed, "due to the non-existence of the alleged unintelligibility between the request and the cause of action."

1.5. On 15/10/2015, the Respondent filed a motion raising an objection of untimeliness regarding the IRC assessment of the year 2010. When notified, the Claimant addressed the said objection through a motion dated 18/11/2015.

1.6. By order of 23/11/2015, the Tribunal considered it unnecessary to hold the hearing provided for in article 18 of the RJAT, because, in addition to the parties having already addressed the objections raised, the statements of the parties and the production of testimonial evidence requested by the Claimant were unnecessary, given that the file contained all the elements necessary for the decision. Furthermore, the date for the issuance of the decision was set for 30/11/2015.

1.7. The Arbitral Tribunal was properly constituted, is materially competent, and the Parties have legal personality and capacity, rendering them legitimate. With regard to the objections raised by the Respondent, see, infra, section IV.

II – Allegations of the Parties

2.1. The Claimant alleges, in its initial petition, that: a) it seeks the "assessment of the legality of the tax acts of assessment in the matter of [IRC] and compensatory interest relating to the tax periods 2010 and 2011, in the total amount of €25,140.50" and that the request is "deduced from the tax acts of assessment of IRC and compensatory interest that are better identified below: IRC period 2011, assessment no. 2014 …, amount €25,140.50"; b) "the acts of assessment challenged here were promoted following the inspection act carried out under Service Order No. OI2013…"; c) "the act challenged here is illegal, due to error regarding the procedure for determining taxable income", insofar as "the elements on which the AT based the corrections to the taxable income do not permit its direct and exact quantification, that is, through direct assessment"; d) "the facts invoked by the AT, were they to be true, would reveal themselves to be causal and/or determining [...] in the making impossible of the ascertainment of IRC taxable income, through direct assessment"; e) "the AT [...], by basing the corrections to the taxable income on mere indicia and presumptions, should have assumed in the report of substantiation [...] that the method used for determining taxable income was that of indirect assessment, given that the case sub judice meets the prerequisites established in articles 87 and 88 of the General Tax Law and not, as falsely indicated, through recourse to corrections of merely arithmetic nature"; f) "the substantiation and criteria motivating the additional tax assessment reveal the impossibility of direct and exact quantification of IRC taxable income, based on the Claimant's accounting records"; g) "the case sub judice meets the prerequisites that legitimize recourse to indirect assessment, [and therefore] it is to be concluded that the act challenged here is affected by illegality, due to error in the procedure for assessing taxable income, which constitutes a pretermission of essential formality, which legitimizes its avoidability, pursuant to article 99, let. d), of the Code of Tax Procedure (CPPT)"; h) "the error incurred by the AT implied the denial of the Claimant's participation in the assessment of taxable income, through the request for review of taxable income, established in article 91 of the General Tax Law"; i) "[there is no simulated transaction] because the services were effectively acquired by the Claimant company from the transferring company duly identified in the substantiation report, which resulted in the preparation of an architecture project authored by Architect B… for the industrial unit of the [Claimant], thus providing proof that the issuance of the invoices in question resulted from a commercial transaction carried out between the parties, because all invoices were subject to payment in currency/legal tender, thus there was movement of pecuniary values inherent to the purchase made"; j) "[the fact that the operation in question was carried out through currency] in no way prejudices the effective reality/materiality of the operations carried out"; l) "given that the reasons motivating the cost in question are eminently social reasons, of pursuit of its social purpose, associated with the preservation of the industrial unit and improvement of the working conditions of its staff, while at the same time creating better conditions to receive and meet with commercial partners, the conclusion conveyed by the AT is prejudiced, according to which the cost in question reveals itself to be perfectly dispensable for the realization of income, having been demonstrated unequivocally the indispensability of the costs incurred for the maintenance of the income-generating source, as it flows from no. 1 of article 23 of the Corporate Income Tax Code (CIRC)"; m) "[as to the alleged omission in sales] the taxable profit of €630,803.15 of the [Claimant] is, contrary to what the AT claims, absolutely exaggerated, disproportionate and far from being adjusted to the reality of the taxpayer [given the] identification of the banks, identification of the amounts moved, date of operations and justification of the movements [contained in documents D, E, N, AA, U, V, A, C, F and G, all from Annex 1], [...] [for which reason] it cannot but be concluded that, notwithstanding the analysis carried out by the AT in the context of the appreciation of the Right to Be Heard, it is possible to justify and document, as has been justified, the amount of €179,102.50"; n) "the AT clearly violated article 58 of the General Tax Law, as it was required to carry out all necessary steps for the discovery of material truth, [...] [since] the AT did not seek to gather necessary elements for obtaining material truth from the taxpayer company, as is stated, merely basing its substantiation [...] on the entries and transfers in the bank accounts held by manager C… [...] which means that the AT penalized the taxpayer for unsustainable and unadjusted amounts, without even assessing the rigor of the amounts declared in the operations carried out in the years 2010 and 2011, as well as the correspondence of the elements gathered with the reality of the company"; o) "in the absence of elements, the AT did not take steps to investigate and deepen the reality of the facts, merely limiting itself to subvert the accounting reality of the petitioner"; p) "given the substantiation presented by the AT, one can only conclude that the facts supporting the acts of assessment subject to challenge are not clear nor sufficient to legitimize the corrections to the declared tax result"; q) the "AT, by anchoring its decision in the facts that have been presented, does not properly clarify the interested taxpayer regarding the possible correspondence between the amount of taxable income achieved and the number of sales omitted, not enabling it to know the cognitive and evaluative itinerary followed by the Author of the act being challenged [...] [by which there occurred] substantiation defect, susceptible to, in light of let. c) of article 99 of the CPPT affect the intrinsic validity of the tax act strictly speaking in which the additional assessment is translated"; r) "in the case at hand, as has been demonstrated in the course of this pleading, the AT, in violation of the provisions contained in articles 17 and following of the CIRC, proceeded to determine the taxable income through merely arithmetic corrections, which also determined an erroneous quantification of taxable income for the tax periods 2010 and 2011, such illegal action by the AT determining the payment of undue tax"; s) "having the [Claimant] paid the assessed tax, in the amount contained in the respective notes [...], it has the right to the refund of the sums paid plus indemnificatory interest under article 43 of the General Tax Law"; t) "for all that has been said, one can only conclude that the act subject to judicial challenge is affected by illegality – [by] error in the method of quantifying taxable income, error as to the prerequisites, violation of the principle of material truth [and] substantiation defect – which, pursuant to article 99 of the CPPT, generates its avoidability."

2.2. The Claimant concludes, in light of the above, that the "petition for arbitral decision should be judged well-founded and upheld and, consequently, the act of assessment of IRC and compensatory interest, better identified in the heading of this petition and relating to the tax periods 2010 and 2011, should be annulled, [further recognizing] in favor of the taxpayer the right to indemnificatory interest, pursuant to article 43 of the General Tax Law, with the refund of the sums paid plus their respective interest."

2.3. For its part, the AT alleges, in its defense, that: a) "the Claimant, after stating that the petition for arbitral decision has as its object 'the tax acts of assessment' of IRC and compensatory interest relating to the tax periods 2010 and 2011, proceeds only to the identification of the assessment of the period 2011, no. 2014 …, in the amount of €25,140.50, annexing, for that purpose, documents no. 9 and no. 10. Which correspond, respectively, to the Account Settlement Statement and the IRC Assessment Statement of the year 2011"; b) "[the Claimant petitions] the Tribunal to 'annul the act of assessment of IRC and compensatory interest, better identified in the heading of this petition and relating to the tax periods 2010 and 2011'. However, throughout the petition, the Claimant refers, sometimes, to seeking to challenge 'the acts' of additional assessment, as can be verified, by way of example, besides the introduction, by the content of articles 1, 2, 20, 400, 418. And in other passages of the pleading, it refers to the 'act' of assessment, namely in articles 23, 25, 27, 28, 30, 402, 421. However, from reading the arbitral request (in the context of which the Claimant refers, indistinctly, both to the assessment of 2010 and to the assessment of 2011, notwithstanding the identifying document reporting only to the assessment of 2011, requesting the annulment of both) it is not understood which act or acts the Claimant intends to challenge and to which tax periods it refers"; c) "the doubt about which concrete act or acts are in question in the present arbitral action prevents the Tax Authority from fully addressing the defects that the claimant invokes in the initial petition. Wherefore, the initial petition is inept due to unintelligibility of the indication of the request, which generates the nullity of the proceedings, pursuant to no. 1 and let. a) of no. 2 of article 186 of the Code of Civil Procedure (CPC), which is to be determined ex officio, in accordance with the provisions of article 196 of the CPC, both applicable by virtue of let. e) of no. 1 of article 29 of the RJAT. The nullity of the proceedings constitutes a dilatory objection that prevents the knowledge of the merits of the case, and should determine the absolution of the respondent entity from the instance, given the provisions of articles 278, no. 1, let. b), 576, nos. 1 and 2, and 577, let. b) of the CPC, applicable by virtue of article 29, no. 1, let. e) of the RJAT"; d) "[as to the alleged error in the procedure for assessing taxable income,] the Claimant is not [correct because,] in casu, as shown in the Inspection Report (RIT) which is fully reproduced for all legal purposes, the amount determined for sales omissions results from the amounts credited in the bank accounts held by the managing partners and used in the company's activity, which were not recorded in the taxpayer's accounting, nor was it proven that they were movements outside the company. At no point is it mentioned in the RIT that the inspection services encountered the impossibility of quantifying the taxable income directly and exactly, or that they resorted to any methodology based on indicia or presumptions. [...]. The RIT also clarifies that an analysis was performed on the documents and accounting records and on the bank statements of accounts held by the Claimant (cf. pp. 11) and by its partners, with the conclusions mentioned on pp. 18 and 19 of the RIT not denoting, certainly, indicia "described in a summary manner", but rather the exhaustive reference to amounts recorded by the Claimant without it having been proven their relevance for tax purposes. In this manner, throughout the RIT, namely in chapters III and IX, the reasons of fact and law motivating the corrections of merely arithmetic nature were set forth clearly and precisely. Substantiated in the analysis of the entire accounting of the Claimant and of the elements furnished by it to justify the amounts questioned by the Inspection"; e) "it should be noted that the Inspection accepted the justifications for the amounts of €111,063.12, in 2010 and €119,608.62, in 2011, amounts that were taken into account in the calculations of points III.5.1.1, III.5.1.5, III.5.2.1 and III.5.3 of chapter III of the RIT (cf. p. 39 of the RIT), which demolishes the Claimant's argument that only the indirect assessment procedure would give it the possibility of participation in the procedure of quantifying taxable income"; f) "The facts ascertained and the elements obtained in the course of the inspection procedure, particularly those provided by the Claimant, legitimate and oblige the Inspection to make merely arithmetic corrections, but do not constitute sufficient grounds for the application of indirect taxation methods, since such methodology can only be used 'if it is not at all possible to carry out the calculation' based on accounting"; g) "the use of information relating to the partner's personal account did not constitute an 'element foreign' to the Claimant's accounting, as it was used in the company, namely to receive VAT refunds, nor is it sufficient grounds for resorting to indirect taxation methods, constituting, moreover, the crossing of information an effective technique of tax audit"; h) "once it has been proven that the legal prerequisites that legitimate the corrections to the declared taxable income are met, it then became incumbent on the Claimant to prove that which would call into question the amounts determined, namely it is up to it to prove the veracity of the values recorded in the declarations submitted, in accordance with the rules on burden of proof contained in article 74 of the General Tax Law. Proof that was not carried out either in the context of the inspection action, as clearly demonstrated by the RIT, nor in the present arbitral action"; i) "[as to the invoked illegality of the corrections through recourse to direct assessment and, namely as to the corrections relating to the simulated transaction:] In 2010, the Claimant recorded invoice no. 1/2, issued on 2010-01-29, by the company 'D… - Unipessoal, Lda.', in the same amount as invoices no. 1 and no. 2 (€22,750.00 plus VAT of €4,550.00) and with the same description ('preparation of an industrial project (restructuring) of your facilities'). The invoice was recorded in accounts 622115, 2432211 and 271111707 on 2010-01-31, with the payment recorded on an earlier date, 2010-01-29, by debit to the cash account. [...]. [...] the company 'D… - Unipessoal, Lda.' has a share capital of €5,000.00, entirely subscribed by sole partner E…. This partner being the sole partner of the company 'D… - Unipessoal, Lda.', and also is the holder of a 50% stake in the share capital of the [Claimant]. Whereby, in accordance with the provisions of let. b) of no. 4 of article 63 of the Corporate Income Tax Code, the two companies find themselves in a situation of special relationship, as partner E… has a participation of not less than 10% of the capital of both companies. Having analyzed the VAT declarations filed by the company 'D… - Unipessoal, Lda.', for the years 2009 and 2010, the Tax Inspection services verified that only in field 3 of the periodic VAT declarations appears the amount of invoices issued to the [Claimant]. For their part, the Tax Inspection services verified that the company 'D… - Unipessoal, Lda.': Had no expenses associated with the invoices issued; Had no salaried employees; Did not pay category B income to architect B…. The facts ascertained [–] namely: the high value of the operation, at a time when the company was going through serious financial difficulties; Although the invoices were issued in 2009 and 2010, only in 2014 were some works carried out at the company's facilities 'A…, Lda.'; the payment being made by cash; the existence of special relationships between the two companies; from consultation of the declarations filed by 'D… - Unipessoal, Lda.', it appeared that it has no costs associated with the invoices issued [–] allowed the Tax Inspection to conclude that there are serious indicia that the invoice issued on 2010-01-29 in the amount of €22,750.00 does not evidence real transactions, whereby the expense recorded in the year 2010 in account 622115 - OTHER SERVICES has no framework in article 23 of the Corporate Income Tax Code"; j) "The Claimant comes to invoke that the services were effectively provided, because there is an architecture project subject to payment in cash, advancing generic arguments not corroborated by any means of proof, and as such, incapable of putting into question the strong indicia ascertained in the inspection procedure. Moreover, proof documents no. 2 to 5, sustain the understanding of the Tax Inspection, as they prove the carrying out of works in the year 2014. On the other hand, the costs of the works are in no way related to the expenses with the architecture project, whose materiality is far from being demonstrated, namely by lack of proof of the financial flows associated with the declared expenses [whereby it is concluded that] in casu, [...] there is a lack of documentary proof of the costs and their unsuitability for being deducted for tax purposes, as the requirements demanded in article 23 of the CIRC are not met, under which only costs are considered for the fiscal year those that have been proven to be indispensable for the realization of income or gains or for the maintenance of the income-producing source"; l) "[as to the invoked illegality of the corrections through recourse to direct assessment and, namely as to the correction relating to sales omission:] [contrary to] what the Claimant alleges in art. 169 and 170 of the initial petition, [...] the company's accounts were not all blocked, as some movements were made in these same accounts during the period subject to the inspection action, namely the credit of amounts relating to VAT refunds, and there were also accounts held by the Insolvency Estate. [...]. Given that the bank accounts of the partners were used in the development of the company's activity, the inspection services proceeded to compare between the amounts shown in the bank statements of the accounts and the amounts that were accounted for, having been determined by the inspection services that there were movements that had not been recorded in the company, and in this regard, clarifications were requested from the Claimant, namely documents supporting the referred bank movements not recorded in the company (cf. Annex 1 to the RIT)"; m) "For justification and proof of the private movements [in the Bank... account], the Claimant merely presented the summary contained in the annex to the RIT (annex 4), without presenting any document, sufficing itself with the generic justifications mentioned therein. The Claimant further presented e-mails exchanged with Bank...B, verifying that on October 6 only photocopies of transfers were requested, with no request being made for the issued checks, nor the deposits received"; n) "[as to the Bank...C bank account, the Claimant also did not exhibit] any document proving the private movements, presenting only the summary contained as annex 5 to the RIT, where identical generic justifications appear. Further presented e-mails exchanged with bank Bank...C, verifying that on October 10 only photocopies of two transfers were requested, with the remaining documents requested in the notification not being requested"; o) "[as to the CGD bank account,] once again, the Claimant delivered a summary with the identification of the movements it considered private, without the presentation of documents proving the alleged, cf. annex 6 to the RIT"; p) "Given what is described in the RIT, [...] it is necessary to conclude that the Claimant used the private bank accounts of the partners for company activity, not having made all the records of these movements in accounting. Whereby the Claimant violated the provisions of article 98, no. 1, of the CIRC, under which it is obliged to have accounting organized in accordance with commercial and tax law, permitting the control of taxable profit and meeting the requirements set forth in no. 3 of article 17, this provision stating that, in the execution of accounting, 'all entries must be supported by justifying documents, dated and capable of being presented whenever necessary' [and] also violated the provisions of no. 1 of article 63-C of the General Tax Law, as it did not possess an exclusive bank account for payments and receipts relating to company activity, as well as no. 3 of the same legal provision, as it made cash payments exceeding the permitted amount"; q) "[existing] 'entries' in the bank accounts held by the managing partners and used in company activity, which were not recorded in the Claimant's accounting [and] that, after notification to present documents proving the unrecorded movements, the Claimant, despite claiming they were private movements, did not exhibit any supporting document, [...] cannot the Respondent but conclude that the unproven entries are the result of undeclared sales, relating to the years 2010 and 2011"; r) "the presumption of veracity established in article 75, no. 1, of the General Tax Law functions only regarding operations recorded in accounting properly organized pursuant to commercial and tax legislation, and this presumption ceases, pursuant to no. 2 of the same provision, with the demonstration that 'the declarations, accounting or records reveal omissions, errors, inaccuracies or well-founded indicia that they do not reflect or prevent knowledge of the taxpayer's real taxable income'. Now, having it been proven by the AT that the legal prerequisites legitimating the corrections to the declared taxable income are met, it then becomes incumbent on the taxpayer to prove that which calls into question the amounts determined [...] proof that in casu is far from being carried out"; s) "In the arbitral forum, the Claimant comes to present exactly the same argumentation without presenting new elements that justify an alteration of the Respondent's position regarding the movements understood as unjustified. [...] In casu, as widely demonstrated, the Claimant failed to present proof documents permitting it to contradict the corrections made by the Tax Inspection"; t) "[there did not occur the alleged violation of the principle of material truth, as] the methodology applied by the AT for determining taxable income [...] was not indirect assessment, [given that] the legal prerequisites for its application were not met [and, on the other hand, because] it was under the principle of inquisitorial authority and in the exercise of its competence for verification of compliance with tax obligations and prevention of tax infractions, provided in article 2 of the Regulation of Tax Inspection Proceedings (RCPIT), that the Tax Inspection: Analyzed the information contained in the bank accounts of the partners, which were used in the company, proceeding to compare between the amounts in the bank statements of accounts held by the partners and the amounts that were accounted for, having determined that not all movements were recorded; Sent, on August 29, 2014, an e-mail to the Claimant requesting the presentation of documents supporting the bank movements that had not been recorded (cf. Annex 1 of the RIT); Notified the Claimant, on September 25, 2014, to the person of managing partner C…, to proceed with the attachment of documents proving the bank movements, as the Claimant provided clarifications but, contrary to what was requested, did not attach any document proving that the account movements were of private origin (cf. Annex 2 and 3). And it was, also, in compliance with the principle of inquisitorial authority and collaboration that the Tax Inspection granted the request for extension of the deadline for compliance with the notification of September 25, 2014, as well as granted the request for extension of the deadline for the exercise of the right to be heard"; u) "the requirement of substantiation of tax acts stems, namely, from articles 268, no. 3, of the General Tax Law, 77 of the General Tax Law, and 124 and 125 of the Code of Administrative Procedure (CPA), but it is uncontroversial, given the prevailing case law, that substantiation is sufficient when it allows a normal recipient to understand the cognitive and evaluative itinerary followed by the author of the act, that is, when the recipient can know the reasons that led the author of the act to decide in that manner and no other. Now, in the case at hand, the conclusions set forth in the RIT substantiate, in fact and in law, the proposed corrections, permitting the identification and knowledge, clear and documentally, of the entire path followed by the Inspection to arrive at the total value of the corrections. [...]. Wherefore, there does not occur in casu the invoked substantiation defect."; v) "there did not occur any defect that should dictate the annulment of the corrections, whereby there is no place for the payment of indemnificatory interest."

2.4. The AT concludes, in light of the foregoing, that the "dilatory objection of ineptitude of the initial petition, provided in article 186, no. 1, and no. 2, let. c), of the Code of Civil Procedure, should be judged well-founded, and the absolution of the respondent entity from the instance should be determined, pursuant to the provisions of articles 278, no. 1, let. b), 576, nos. 1 and 2, and 577, let. b), of the CPC, applicable by virtue of article 29, no. 1, let. e), of the RJAT", or, should that not be the case, that "the present Petition for arbitral decision should be judged without merit and not proven, and, consequently, the Respondent should be absolved of all Requests, all with the proper and legal consequences." The AT also pronounced on the unnecessariness of carrying out the testimonial proof hearing.

III – Proven Facts, Unproven Facts, and Their Substantiation

3.1. The following facts are considered proven:

i) The Claimant is a limited liability company, registered in the Commercial Registry Office of ... under no. …, with share capital of €249,398.96 fully subscribed. It is classified, for VAT purposes, in the normal regime with monthly periodicity, since 1/1/1986, for the exercise of the activity "Footwear Manufacturing – CAE 15201", and is a subject of Corporate Income Tax, taxed under the general taxation regime, since 1/1/2001.

ii) The company was declared insolvent on 20/5/2008, in case no. …/08….T…, by the Court of ..., with Dr. F… being appointed as Insolvency Administrator. By court decision of 11/3/2011, the insolvency proceeding was closed.

iii) The act of assessment in question here stems from an inspection act carried out under Service Order No. OI2013….

iv) The Tax Inspection ("IT") sent, on 29/8/2014, an e-mail to the Claimant requesting the presentation of documents supporting the bank movements that had not been recorded (v. annex 1 of the RIT). On 25/9/2014, the IT notified the Claimant, to the person of managing partner C…, to proceed with the attachment of documents proving the bank movements, as the Claimant provided clarifications but did not attach any document proving that the movements were of private origin.

v) The Deputy Director of Finance of the Inspection Area of the Financial Department of Porto granted the request for extension of the deadline for compliance with the notification of 25/9/2014 (first to 16/10/2014 and, later, to 20/10/2014), and granted the request for extension of the deadline for the exercise of the right to be heard, by order of 19/11/2014.

vi) With respect to the corrections in question (relating to sales omission and simulated transaction), it was concluded, as to sales omission, that there are "entries" in the bank accounts held by the managing partners and used in the company's activity, which were not recorded in the Claimant's accounting, and that, after notification to present documents proving the recorded movements, the same claimed (and claims) to be private movements but without exhibiting supporting documents, whereby the IT considered that the "entries" resulted from omitted sales, relating to the years 2010 and 2011.

vii) In fact, and as was mentioned in iv), the IT requested clarifications from the Claimant, namely documents supporting the referred bank movements not recorded in the company (v. annex 1 to the RIT). In response, the Claimant presented summaries identifying movements considered private, but did not present documents proving what it alleged therein (v. annexes 4 to 6 to the RIT). The same occurred in this arbitral forum.

viii) Contrary to what the Claimant alleged, the company's accounts were not all blocked, as some movements were made in these same accounts during the period subject to the inspection action, namely the credit of amounts relating to VAT refunds, with there also being accounts held by the Insolvency Estate. Given that the bank accounts of the partners were used in the development of company activity, the IT proceeded to compare between the amounts shown in the bank statements of the accounts and the amounts that were accounted for, having been determined by said IT that there were movements that had not been recorded in the company, and in that regard, clarifications were requested from the Claimant, which were not satisfactory, as was noted in the previous point [vii)].

ix) With respect to the invoked simulated transaction, it was found, in the analysis made by the IT to the accounting elements of the year 2010, the recording of invoice no. 1/2, in the same amount (€22,750.00 + VAT at the normal rate then in force, in the amount of €4,550.00) as each of the two earlier ones, dated 30/10/2009 and 30/12/2009, of the company 'D… – Unipessoal, Lda.', and also with the same description ('preparation of an industrial project (restructuring) of your facilities'). The said invoice was recorded in accounts 622115, 2432211 and 2711111707, on 31/1/2010, with the payment recorded on 29/1/2010, by debit to the cash account.

x) By consultation of the Tax Registry System, it was verified that the sole partner of the said company 'D… – Unipessoal, Lda.', E…, is equally a partner, with a 50% stake in the share capital, of the Claimant. Since the beginning of the activity, the person G… appears as Certified Public Accountant (TOC) of said 'D…', who is also the Certified Public Accountant of the Claimant. By the foregoing, it was concluded that there exists a special relationship.

xi) As can be read in the IT's report, the company 'D… – Unipessoal, Lda.' had no expenses associated with the invoices issued, nor salaried employees, and had not paid category B income to architect B….

xii) In light of the elements described above, in ix) to xi) – and taking into account, further, the fact that payment was made by cash and only some works were carried out at the Claimant's facilities in 2014 (despite the invoices having been issued in 2009 and 2010) –, it was understood to be necessary the correction of the amounts in question declared for Corporate Income Tax purposes, pursuant to the provisions of article 23 of the CIRC.

xiii) The present petition for arbitral decision has as its object the act of assessment of Corporate Income Tax and compensatory interest relating to the tax period 2011, as this is the only one identified by the Claimant in its petition (assessment of the period 2011, no. 2014 …, in the amount of €25,140.50).

xiv) Contrary to what the Claimant stated in its motion of 9/10/2015, the corrections made for Corporate Income Tax purposes for the year 2010 and 2011 did not "only result in an additional tax assessment for the year 2011", as the corrections for the year 2010 resulted in the issuance of assessment no. 2014 …, in the amount of €20.48 (v. documents extracted from the AT's Computer System, attached to the file by the Respondent, and which are considered reliable). This assessment was notified and delivered on 23/12/2014, whereby it cannot be included in this arbitral process, as, the initial petition having been filed on 8/5/2015, the legal deadline for challenging this assessment in the arbitral forum had already elapsed (23/12/2014 + 25 days of article 39, no. 10, of the CPPT = 18/1/2015 + 90 days of article 10, no. 2, let. a), of the RJAT = 17/4/2015). Accordingly, the petition for decision, insofar as it concerns this Corporate Income Tax assessment, is untimely and the Tribunal cannot know thereof.

3.2. Unproven facts: the allegations of the Claimant relating to the justification of the bank movements in question and above noted (because, as was stated, the necessary documentary proof of the same was not made).

3.3. The facts considered pertinent and proven (v. 3.1) are substantiated in the analysis of the positions exposed by the parties and the documentary evidence attached to the present file. The facts considered unproven (v. 3.2) are substantiated, as has already been mentioned, in the lack of the necessary documentary proof demonstrating the allegations made.

IV – Preliminary Issues: Objection of Untimeliness and Objection of Ineptitude of the Initial Petition

As to the objection of untimeliness raised by the Respondent in its motion of 15/10/2015, there is little to add to what is contained in point xiv) of the proven facts.

Indeed, contrary to what the Claimant stated in its motion of 9/10/2015, the corrections made for Corporate Income Tax purposes for the year 2010 and 2011 did not "only result in an additional tax assessment for the year 2011", as the corrections for the year 2010 resulted in the issuance of assessment no. 2014 …, in the amount of €20.48 (as per documents extracted from the AT's Computer System, attached to the file by the Respondent, and which are considered reliable).

This assessment was notified and delivered on 23/12/2014, not being capable of being included in the present arbitral process, as, the initial petition having been filed on 8/5/2015, the legal deadline for challenging this assessment in the arbitral forum had already elapsed (23/12/2014 + 25 days of article 39, no. 10, of the CPPT = 18/1/2015 + 90 days of article 10, no. 2, let. a), of the RJAT = 17/4/2015). The reason whereby the petition for decision, insofar as it concerns the Corporate Income Tax assessment no. 2014 …, is untimely and the Tribunal cannot know thereof.

With respect to the objection of ineptitude of the initial petition, raised by the Respondent in its response, it is found, in fact, some confusion in the terms used for the presentation of the Claimant's claim, sometimes making reference to "act", sometimes making reference to "acts".

However, it is understood – by making the minimum necessary interpretive effort – that what the Claimant intended to have appreciated was the additional tax assessment for the year 2011, whereby, avoiding rigor, it does not appear unjustified to consider that there exists, under the terms already stated, intelligibility between the request and the cause of action, albeit originally it has been expressed in an imperfect manner.

In conclusion: for the reasons pointed out, the objection of ineptitude of the initial petition does not proceed and the objection of untimeliness proceeds (v. article 576, no. 1 and 3, of the CPC), whereby the object of the present proceeding shall concern only the Corporate Income Tax assessment and respective compensatory interest of the year 2011 [v. point xiii) of the proven facts].

V – On the Law

The issues that arise in the present proceeding consist, in summary, in knowing whether: 1) there was, or was not, error in the procedure for assessing taxable income and, namely, whether in this case it was not feasible to ascertain IRC taxable income through direct assessment; 2) there was, or was not, illegality of the corrections made through recourse to direct assessment, namely, those referring to the simulated transaction and sales omission; 3) there was, or was not, violation of the principle of material truth and substantiation defect of the corrections. Subsequently, the issue relating to the indemnificatory interest petitioned by the Claimant shall be addressed [4)].

1. On the Ascertainment of IRC Taxable Income by Direct Assessment

The Claimant argues that "the act challenged here is illegal, due to error regarding the procedure for determining taxable income", insofar as "the elements on which the AT based the corrections to taxable income do not permit its direct and exact quantification, that is, through direct assessment". For its part, the AT responded that the Claimant is "not [correct because,] in casu, as shown in the RIT which is fully reproduced for all legal purposes, the amount determined for sales omissions results from the amounts credited in the bank accounts held by the managing partners and used in the company's activity, which were not recorded in the taxpayer's accounting, nor was it proven that they were movements outside the company. At no point is it mentioned in the RIT that the inspection services encountered the impossibility of quantifying the taxable income directly and exactly, or that they resorted to any methodology based on indicia or presumptions."

From the analysis of the present file, it is found that – as was noted in point vi) of the proven facts – the corrections referred to concern "entries" in the bank accounts held by the managing partners and used in company activity, which were not recorded in the Claimant's accounting. After notification to present documents proving the recorded movements, the Claimant claimed them to be private movements but did not exhibit supporting documents, whereby the IT correctly considered that these are sales omitted from the accounting, relating to the years 2010 and 2011.

There was not, therefore, recourse to indicia or presumptions, only the consideration of the objective and exact amounts credited in the said bank accounts, given the justification provided by the IT and the lack of due documentary proof, on the part of the Claimant, of its claim that such amounts would relate to private movements.

This procedure was correct, as it did not appear impossible to ascertain the taxable income directly and exactly, and also because, pursuant to the provisions of article 85, no. 1, of the General Tax Law, indirect assessment has a subsidiary character.

In this sense, and as is emphasized, for example, by the following Decision, "the alternative ascertainment by the Tax Authority should be made, whenever possible, with recourse to direct methods or technical corrections, that is, by the determination of taxable income through the elements of the taxpayer's own accounting, and there can only be recourse to presumptive methods when such direct ascertainment proves entirely infeasible, the Public Treasury not enjoying any margin of discretion regarding the choice of the method (direct or indirect) of assessment of taxable income. [Accordingly,] the accounting disregard of costs contained in invoices that do not evidence actually carried out operations must be grounded in article 23 of the CIRC, be operated through merely arithmetic corrections to taxable income (not through indirect methods) and such proceeding not violating (rather being imposed by) the constitutional principle of taxation of companies by real income (cf. article 104, no. 2, of the Portuguese Constitution)." (Decision of the Supreme Administrative Court of 16/4/2013, case 5721/12).

In these terms, and observing, further, from reading chapters III and IX of the RIT, that therein were set forth, in a clear and rigorous manner, the reasons of fact and law underlying the corrections of merely arithmetic nature – based on the taxpayer's declaration and without recourse to presumptive methods –, it is concluded that the Claimant is not correct, in this part.

1. On the Legality of the Corrections Through Recourse to Direct Assessment

With respect, specifically and in greater detail, to the legality of the correction relating to sales omission, it should be noted that, as has already been noted in the matter considered proven [v. point viii)], contrary to what the Claimant alleged, the company's accounts were not all blocked, as some movements were made in these same accounts during the period subject to the inspection action, namely the credit of amounts relating to VAT refunds, with there also being accounts held by the Insolvency Estate. Taking into account that the bank accounts of the partners were used in the development of company activity, the IT proceeded to compare between the amounts shown in the bank statements of the accounts and the amounts that were accounted for, having been determined, by the cited IT, that there were movements that had not been recorded in the company, and in that regard, clarifications were requested from the Claimant, which were not considered satisfactory [v. annexes 4 to 6 to the RIT, and point vii)].

In fact, for justification and proof of the alleged private movements, the Claimant: i) as to the Bank...A account, merely presented the summary contained in the annex to the RIT (annex 4), without presenting any document. It presented e-mails exchanged with Bank...B, but it is verified that on October 6 only photocopies of transfers were requested, with no request being made for the issued checks, nor the deposits received; ii) as to the Bank...C bank account, the Claimant also did not exhibit any document proving the private movements, presenting only the summary contained as annex 5 to the RIT, where generic justifications appear (as also occurred in annex 4). It further presented e-mails exchanged with bank Bank...C, verifying that on October 10 only photocopies of two transfers were requested, and that the remaining documents requested in the notification were not requested; iii) finally, as to the CGD bank account, the Claimant delivered, once again, a summary with the identification of the movements it considered private, without the presentation of documents proving the alleged, as can be observed from annex 6 to the RIT.

By all the foregoing, it is concluded that the AT's assessment was correct, and that the Claimant incurred in violation of articles 98, no. 1, of the CIRC (under which it is obliged to have accounting organized in accordance with commercial and tax law, permitting the control of taxable profit and meeting the requirements referred to in no. 3 of article 17), and 63-C, nos. 1 and 3, of the General Tax Law (it did not possess an exclusive bank account for payments and receipts relating to company activity, and made cash payments exceeding the permitted amount).

As to the simulated transaction, the Claimant states that the same does not exist "because the services were effectively acquired by the Claimant company from the transferring company duly identified in the substantiation report, which resulted in the preparation of an architecture project authored by Architect B… for the industrial unit of the [Claimant], thus providing proof that the issuance of the invoices in question resulted from a commercial transaction carried out between the parties, because all invoices were subject to payment in currency/legal tender, thus there was movement of pecuniary values inherent to the purchase made". It further adds that the fact that the operation in question was carried out in cash "in no way prejudices the effective reality/materiality of the operations carried out".

However, as was referred to in points ix) to xii) of the proven facts, it was found, in the analysis made by the IT to the accounting elements of the year 2010, the recording of invoice no. 1/2, in the same amount (€22,750.00 + VAT at the normal rate then in force, in the amount of €4,550.00) as each of the two earlier ones, dated 30/10/2009 and 30/12/2009, of the company 'D… – Unipessoal, Lda.', and also with the same description ('preparation of an industrial project (restructuring) of your facilities'). The said invoice was recorded in accounts 622115, 2432211 and 2711111707, on 31/1/2010, with the payment recorded on 29/1/2010, by debit to the cash account.

Now, by consultation of the Tax Registry System, it was verified that the sole partner of the said company 'D… – Unipessoal, Lda.', E…, is equally a partner, with a 50% stake in the share capital, of the Claimant. Since the beginning of the activity, the person G… appears as Certified Public Accountant of said 'D…', who is also the Certified Public Accountant of the Claimant. By the foregoing, it was concluded that there exists a special relationship. On the other hand, and as is read in the IT's report, the company 'D… – Unipessoal, Lda.' had no expenses associated with the invoices issued, nor salaried employees, and had not paid category B income to architect B….

Thus, in light of the elements described above, in ix) to xi) – and taking into account, further, the fact that payment was made by cash and only some works were carried out at the facilities of the Claimant in 2014 (despite the invoices having been issued in 2009 and 2010) –, it was understood, and correctly, to be necessary the correction of the amounts in question declared for Corporate Income Tax purposes, pursuant to the provisions of article 23 of the CIRC.

In these terms, it is concluded that the Claimant is also not correct, in this part.

1. On the Principle of Material Truth and the Duty of Substantiation

The Claimant further alleges that "the AT did not seek to gather the necessary elements for obtaining material truth from the taxpayer company, as is stated, merely basing its substantiation [...] on the entries and transfers in the bank accounts held by manager C… [...]" and that "in the absence of elements, the AT did not take steps to investigate and deepen the reality of the facts, merely limiting itself to subvert the accounting reality of the petitioner". It further adds that the AT "did not properly clarify the interested taxpayer regarding the possible correspondence between the amount of taxable income achieved and the number of sales omitted, not enabling it to know the cognitive and evaluative itinerary followed by the Author of the act being challenged [...] [by which there occurred] substantiation defect, susceptible to, in light of let. c) of article 99 of the CPPT, affecting the intrinsic validity of the tax act strictly speaking in which the additional assessment is translated".

It is not perceived, however, the invoked violation of the principle of material truth or of the duty of substantiation.

In fact, and as the AT correctly states, the Tax Inspection performed several acts and measures under the principles of inquisitorial authority and collaboration, with a view to the proper pursuit of the principle of material truth: "Analyzed the information contained in the bank accounts of the partners, which were used in the company, proceeding to compare between the amounts in the bank statements of accounts held by the partners and the amounts that were accounted for, having determined that not all movements were recorded; Sent, on August 29, 2014, an e-mail to the Claimant requesting the presentation of documents supporting the bank movements that had not been recorded (cf. Annex 1 of the RIT); Notified the Claimant, on September 25, 2014, to the person of managing partner C…, to proceed with the attachment of documents proving the bank movements, as the Claimant provided clarifications but, contrary to what was requested, did not attach any document proving that the account movements were of private origin (cf. Annex 2 and 3) [...]; [G]ranted the request for extension of the deadline for compliance with the notification of September 25, 2014, as well as granted the request for extension of the deadline for the exercise of the right to be heard" (see, also, points iv) and v) of the proven facts).

There is not, therefore, any conduct violating the invoked principle of material truth, the same being able to be said as to the duty of substantiation, as the substantiation exists, is detailed, and enabled the Claimant to understand the cognitive and evaluative path of the challenged decision, permitting it to react legally against the same.

This has been the prevailing understanding in case law, as is demonstrated, for example, by the following Decision: "the requirements of substantiation are not inflexible, and may vary according to the type of act and the concrete circumstances in which the same was issued: the act will be sufficiently substantiated when the recipient, placed in the position of a normal recipient – the reasonable person to which article 487, no. 2, of the Civil Code refers – becomes aware of the reasons of fact and law underlying it, in a manner to permit it to opt, in an informed manner, between the acceptance of the act or the use of legal means of reaction, and in a manner such that, in this case, the court can also exercise effective control of the legality of the act, assessing its legal correctness in light of its contextual substantiation. The duty of substantiation is assured whenever, despite the absence of express reference to any legal provision or legal principle, the decision is situated in a determined and unequivocal legal framework, perfectly knowable from the point of view of a normal recipient, concluding, thus, that there will be substantiation of law whenever, given the express tenor of the act, the legal reasons determining it are perfectly intelligible." (Decision of the Supreme Administrative Court of 18/9/2014, case 6789/13).

In the same sense, see, further, for example, the following Decision: "The decision of the Administration to proceed with the correction of taxable income, whether through recourse to direct methods (arithmetic corrections), or through recourse to indirect methods, [is understood to be substantiated if it contains] the specification of the concrete reasons of fact and law motivating the corrections, in such a manner that the taxpayer understands the cognitive itinerary of the decision, and can, if not in agreement, avail itself of the legal means of reaction against such decision" (Decision of the Supreme Administrative Court of 10/7/2015, case 2261/08).

1. On the Right to Indemnificatory Interest

The declaration of illegality and consequent annulment of an administrative act confers on its recipient the right to the reintegration of the situation in which the same would have found itself prior to the execution of the annulled act. However, as the act in question here does not, for the reasons already set forth in 1), 2), and 3), suffer from any illegality or error imputable to the services, there is no reason for its annulment, and therefore, it is concluded that, in the present case, no indemnificatory interest is owed to the Claimant.

VI – DECISION

In light of the foregoing, it is decided:

• To judge the peremptory objection of untimeliness of the present request well-founded insofar as it concerns assessment no. 2014 ….

• To judge the petition for arbitral decision without merit, with the challenged act (assessment no. 2014 …) remaining entirely in the legal order, and accordingly absolved, the respondent entity of the request.

• To judge the request without merit insofar as it relates to the recognition of the right to indemnificatory interest in favor of the claimant.

The value of the proceeding is fixed at €25,140.50 (twenty-five thousand one hundred forty euros and fifty cents), pursuant to articles 32 of the Code of Tax Procedure (CPTA) and 97-A of the Code of Tax Procedure (CPPT), applicable by virtue of the provisions of article 29, no. 1, lets. a) and b), of the RJAT, and article 3, no. 2, of the Regulation of Costs in Tax Arbitration Proceedings (RCPAT).

Costs charged to the Claimant, in the amount of €1,530.00, pursuant to Table I of the RCPAT, and in compliance with the provisions of articles 12, no. 2, and 22, no. 4, both of the RJAT, as well as the provisions of article 4, no. 4, of the cited Regulation.

Notify.

Lisbon, November 30, 2015.

The Arbitrator,

Miguel Patrício

Text prepared by computer, pursuant to the provisions of article 131, no. 5, of the Code of Civil Procedure, applicable by remission of article 29, no. 1, let. e), of the RJAT.

The drafting of the present decision is governed by the spelling prior to the 1990 Orthographic Agreement.