Summary
Full Decision
ARBITRAL TAX JURISPRUDENCE
ARBITRAL DECISION
Case Number: 3/2019-T
Date of Decision: 2019-09-16
Tax: IRC (Corporate Income Tax)
Value of Claim: € 341,091.55
Subject Matter: IRC - Lack of reasoned basis for assessment. Compensatory interest. Fair value adjustments. SGPS. Tax benefit.
ARBITRAL DECISION (see full version in PDF)
The arbitrators Councillor Carlos Fernandes Cadilha (presiding arbitrator, appointed by the CAAD Deontological Council), Prof. Doctor Tomás Cantista Tavares and Dr. Nuno Maldonado Sousa (arbitrator members, appointed by the Claimant and Respondent respectively, to form the Arbitral Tribunal, constituted on 04-04-2019), agree as follows:
1. Report
A..., SGPS, S.A., a legal entity and taxpayer with identification number ..., with registered office at Rua ..., ... ..., ... floor, ...-... Lisbon, (hereinafter referred to as "Claimant") came, pursuant to Decree-Law No. 10/2011, of 20 January (hereinafter "RJAT"), to request the constitution of an Arbitral Tribunal.
The Claimant requests that the decision refusing the administrative appeal and, as well as, the Corporate Income Tax assessment act No. 2017... and the compensatory interest assessment act No. 2017..., which resulted in a total amount payable by reference to the fiscal year 2013, of € 341,091.55, be annulled.
The Respondent is the TAX AND CUSTOMS AUTHORITY (hereinafter AT).
The request for constitution of the arbitral tribunal was accepted by the President of CAAD and automatically notified to the Tax and Customs Authority. The signatories communicated acceptance of the burden of performing the functions of arbitrator within the applicable time period. The parties were notified of that appointment, having manifested no intention to refuse the appointment of the arbitrators, in accordance with the combined provisions of article 11, paragraph 1, subparagraphs a) and b) of RJAT and articles 6 and 7 of the Code of Ethics. Thus, in accordance with the provision in subparagraph c) of paragraph 1 of article 11 of RJAT, in the wording introduced by article 228 of Law No. 66-B/2012, of 31 December, the collective arbitral tribunal was constituted on 01-04-2019.
AT responded arguing the unfoundedness of the request for arbitral ruling.
By order of 11-05-2019 the meeting provided for in article 18 of RJAT was dispensed with and it was decided that the case proceed with written submissions, which were subsequently presented by both parties.
The arbitral tribunal was duly constituted, in accordance with the provisions of articles 2, paragraph 1, subparagraph a), and 10, paragraph 1, of Decree-Law No. 10/2011, of 20 January, and is competent.
The Parties are duly represented, possess legal personality and capacity, are legitimate and are represented (articles 4 and 10, paragraph 2, of the same statute and article 1 of Regulation No. 112-A/2011, of 22 March).
The case is free from nullities.
2. Statement of Facts
2.1. Proven Facts
The following facts, with relevance to the decision, are considered proven:
A) In 2015, AT conducted an inspection of the Claimant under Service Order No. OI2015... and directed at SGPS, intended to confirm the tax treatment of gains and losses obtained with capital stakes;
B) As a result of the inspection, corrections were made to the taxable matter of Corporate Income Tax for fiscal year 2011 in the amount of € 2,801,228.95, and as a consequence thereof, the declared tax loss of € 229,614.79 changed to taxable profit of € 2,571,614.16;
C) After notification of the final inspection report, the Claimant was notified of the 2011 Corporate Income Tax assessment No. 2015..., in the amount of € 68,809.50;
D) The Claimant initially filed an administrative appeal against the Corporate Income Tax assessment acts and Compensatory Interest relative to fiscal year 2011 and, subsequently, following the decision refusing the administrative appeal, filed a request for arbitral ruling, which proceeded before the Arbitral Tribunal under No. 392/2017-T and in which a decision was rendered annulling the assessment acts, condemning AT to reimburse the tax improperly paid, plus compensatory interest and in which it was stated that "it shall be incumbent upon AT, under legal terms, to draw the consequences of the hereby decided, namely regarding the existence and tax losses attributable to subsequent fiscal years";
E) In execution of this arbitral decision, AT issued a new Corporate Income Tax assessment act No. 2018..., referring to the year 2011, from which resulted tax to be reimbursed of € 89.44;
F) Subsequently, and by reference to fiscal years 2012 and 2013, the Claimant was subject to another inspection action, covered by service orders No.s OI2016... and 012016..., from which resulted purely arithmetic corrections to the taxable matter of Corporate Income Tax for fiscal years 2012 and 2013 in the amount of € 1,558,571.09 and € 1,553,887.00, and as a consequence thereof, the declared tax loss of € 89,081.03 and € 310,603.50, respectively, changed to taxable profit of € 1,469,490.06 and € 1,243,283.50;
G) After notification of the Tax Inspection Report, the Claimant was notified of the acts of additional Corporate Income Tax assessment and Compensatory Interest relating to fiscal years 2012 and 2013, against which it filed an administrative appeal, which were refused, and the acts relating to fiscal year 2013 are the subject of the present arbitral case;
H) Regarding the year 2012, the claimant filed another arbitral action (which had No. 2/2019) – whose object is similar to the present case, and already decided by Decision of 24/6/2019 (having become res judicata);
I) Regarding 2014, the Claimant was also subject to an inspection procedure, initiated under service order No. 012017... and from which resulted purely arithmetic corrections to the taxable matter of Corporate Income Tax for that fiscal year in the amount of € 1,547,919.56, and as a consequence, the declared tax loss of € 163,821.83 changed to taxable profit of € 1,384,097.73;
J) Subsequently, the Claimant was notified of the Corporate Income Tax assessment and Compensatory Interest relating to fiscal year 2014, and a request for official review of those assessments was filed, because the Claimant does not accept the illegality of those assessments;
K) Regarding fiscal year 2015, the Claimant was notified, by means of an Official Letter issued on 28 July 2017, by the Corporate Income Tax Management Services, from which it resulted that "The amount of the tax loss deducted under the terms of article 52 of the Corporate Income Tax Code, evidenced in the model 22 statement for the period of 20/5, does not correspond to the elements contained in the database of the Tax and Customs Authority and will be subject to correction in the respective assessment, as evidenced in the attached table." which has the following content:
L) On 13-03-2017, the Claimant paid the sum of € 341,091.55, assessed with respect to fiscal year 2013 (document attached with the request for arbitral ruling);
M) In the ITR (Inspection Tax Report) relating to fiscal years 2012 and 2013, the following is also mentioned:
III.2. INVESTMENTS AND FINANCIAL INSTRUMENTS: OF THE LAW AND RELEVANT MATTER OF FACT
III.2.1. On the Valuation of Investments and Financial Instruments
III.2.1.1 On the Transition to SNC and Use of the Fair Value Valuation Model
Arising from Portugal's obligations to the European Union, through legislative means, in 2009, the Accounting Standardization System (SNC) was introduced via Decree-Law No. 158/2009, of 13 July, into the national legal system, effective from 1 January 2010. Adopting the new accounting guidelines emanating from the EU, namely those contained in Regulation (EC) No. 1606/2002 of the European Parliament and of the Council of 19 July.
The Introduction of SNC thus came to replace the then accounting framework, based on the Official Chart of Accounts - POC. Concurrently, greater permissiveness in the acceptability of the fair value valuation model. Indeed, although this model was already used under the POC, the situations for its use were restricted, as it was directed at very specific situations, in a period when the measurement rule was based on historical cost.
In turn, the tax legislator felt the need to make changes to the taxation regime of legal entities, particularly in the CIRC, in order to accommodate the changes introduced by SNC. With this aim, Decree-Law No. 159/2009 of 13 July was approved.
Through this Decree-Law (DL), the legislator came to grant tax relevance to the use of fair value as a criterion for measuring assets, namely financial instruments and investments.
It is thus necessary to extract the tax consequences of that same relevance. It should be noted in advance that, contrary to the accounting legislator, the tax legislator was more restrictive in the acceptability of the tax consequences, particularly in determining taxable profit resulting from the use of the fair value criterion. Aware of the existence, or probability of existence, of some subjectivity associated with the use of fair value as a basis for measurement and the difficulty of reconciling the taxation of fair value adjustments with the principle of taxable capacity, it led to the fact that, for tax purposes, its acceptability was partial and limited. Aware of all that has been stated, it is better understood that the tax legislator grants it tax-fiscal relevance only in cases expressly identified, namely to Financial Instruments, when, as mentioned in the preamble of DL 159/2009, the reliability of the determination of fair value is in principle assured. Thus excluding financial instruments of own capital that do not have their price formed in a regulated market and whose capital stakes correspond to more than 5% of the social capital [(subparagraph b), subparagraph a) of paragraph 9, article 18 of CIRC].
Additionally, with the acceptance of the fair value model by the tax legislator, to the detriment of historical cost, the tax legislator advocated for a transitional regime (article 5 of DL 159/2009). Covered by this, commercial companies had, in a first phase, at the beginning of 2010, to adjust their financial statements, previously, mostly prepared in accordance with the Official Chart of Accounts and Generally Accepted Accounting Principles - GAAP, to historical cost, in order to reflect the consequences of the new Accounting Standardization System (SNC). The accounting recognition of the so-called transition effects occurred, in essence, through the entry in an SNC account of own capital, of the values (positive or negative) resulting from the necessary adjustments made in the various items of the accounts.
Aware of the tax effects (positive or negative) resulting from the aforementioned adjustments of the criterion for measuring assets, in determining taxable profit, the legislator (paragraph 1 of article 5 of DL 159/2009) establishes the possibility that tax relevance be spread over five fiscal years. Occurring in equal parts, for the formation of taxable profit of the first period of taxation (i.e. in 2010) in which those rules apply and of the four following periods of taxation (i.e. in 2011 to 2014, inclusive).
III.2.1.2. On Investments and the Use of Fair Value as a Valuation Model and on Transition Adjustments - Tax Effects.
It follows from the information above (section II.3.) that the SP has, in the fiscal year, accounting recognized investments in financial instruments, capital stakes whose value (price) is determined in a regulated market, namely on the Stock Exchange.
In the context of the legal framework aforementioned and, also, in the invocation of the provision in subparagraph a) of paragraph 9 of article 18 of CIRC, the legislator permitted that, as to positive or negative adjustments of capital stakes, valued at fair value, instead of being accounting recorded, in an SNC account of Gains/Losses, be recorded in an own capital account. This exception is permitted by the tax legislator, when the corporate entity uses international accounting standards, namely IAS 32 and IAS 39, for the calculation of accounting adjustments of capital stakes, recording these in an own capital account and, therefore, that they not be, in the fiscal year in which they occur, considered tax relevant under the terms of Corporate Income Tax (article 5, paragraph 1 of decree law 159/2009 of 13 July).
Attentive to what is recorded in the document Attached to the Balance Sheet and to the Statement of Results for the fiscal years ended 31 December, we note that:
The SP states:
2 2 Provisions of SNC Derogated in the Fiscal Year
The Accounting Standard and Financial Reporting that deals with the recognition, measurement and disclosure of financial instruments of SNC is NCRF 27. However, under the option provided for in paragraph 2 of NCRF 27, the Company chose to apply fully the International Financial Reporting Standards ("IAS / IFRS") as adopted by the European Union in effect on 31 December 2010, in the accounting treatment of all its Financial Instruments.
Thus, the Company applies fully to all its Financial Instruments the standards IAS 32 - Financial Instruments Presentation, IAS 39 - Financial Instruments Recognition and Measurement and IFRS 7 - Financial Instruments Disclosure of Information.
In this sense, having analyzed the accounts, the SP recorded the positive or negative adjustments, under the terms of the International Standard above mentioned.
III.2.1.2.1 - As to the Tax Effects of Transition Adjustments
Regarding this point, we invoke what was already stated in the inspection procedure for the fiscal year 2011, conducted under Service Order 2015... and already closed after submission to the exercise of the right of hearing by the SP.
In the above procedure, it was determined that the SP accounting recognized, as transition adjustments from POC to SNC and relating to the capital participation it held in Bank B..., the amount of 7,768,698.68 euros.
Here invoking the reasoning explained in the Report prepared under Service Order 2015... for fiscal year 2011, which for a matter of the learning process, we transcribe in the parts relevant here. Let it always be noted that in 2011 the SP sold shares representing the capital of Bank B... .
At page 10 et seq.
The SP timely sent (via email) the requested items, specifying the accounting movements of Bank B... shares relating to fiscal years 2009 to 2011. Citing in chronological order, we highlight the following:
Email sent on 2015.02.25
- The amount of 9,117,151.50 Euros appearing in Q.07 Field 767, concerns the gains realized in fiscal year 2011, from shares held for more than one year: - Sale of Shares of Bank B...:
Note: The shares acquired on 1/10/2010 resulted from the conversion of rights acquired on shares held by the Company for more than one year.
The Bank B... shares sold had an associated hedging operation initiated in 2009 that was regularized with the sale.
Email sent on 2015.03.16
Accounting movements of B... Shares from 2009 to 2011:
Year of 2009:
The company held 1,516,483 shares, acquisition value - 9,746,679.97 and market value 17,515,378.65 Euros, the fair value variation was recorded by reserves:
Year of 2010:
The company held 1,535,974 shares of acquisition value – 9,927,570.92 and market value 12,177,201.97 Euros, in this fiscal year a hedging operation was performed on the existing shares, which resulted in the fair value variation of the year being recorded in a results account:
Year of 2011:
The Company sold 1,531,876 shares acquisition value 9,926,710.30 and market value 13,210,069.49 Euros:
Referring to the summary of movements sent by the taxpayer, we note the following: "In summary, the following movements were made in 2011 relating to the sale of Bank B... shares:
- Difference between the accounting gain item (in the amount of € 3,283,359.19) and the annulment of the fair value recorded in 2010 (in the amount of € 2,249,630.95), plus the acquisition value of the 51 remaining shares in fiscal year 2011.
(2) 23,629 shares attributed to the company and sold in 2011.
(3) Fair value variation recorded by reserves in 2009.
(4) The SP should have meant amount to be deducted in field 767 of Q.07.
Thus, given the facts described, it is important to note that the issue would not be the fact that the Bank B... shares were recorded at fair value and were accounted for through an SNC account of own capital, but the fact that these same shares were indexed to a so-called hedging operation, whose derivative financial instrument used was recorded at fair value through results, influencing, namely, the determination of the net result of the fiscal year prior to the sale.
As assumed by the SP, due to the existence of the derivative hedging instrument (call option), to reduce B..., the company treated the hedging instrument and the hedged item through results accounts of the fiscal year, as evidenced by the entries made in 2010, respectively, in the SNC account 77 - Gains from fair value increases - in financial instruments, and in account 66201 - Losses from fair value reductions - in financial instruments - B.... In this latter case, the amount of the adjustment of € 5,519,067.73 results from the difference between the adjustment made in the asset upon adoption of SNC and that made at the end of fiscal year 2010, or, in other words, from the difference between fair value at the beginning and end of fiscal year 2010, determined as follows:
In this sense, the circumstance referred to evidences the non-accounting of the operation in accordance with IAS, since the SP ceased to reflect in own capital accounts the fair value variations, to begin to influence the determination of the results of the fiscal year (ceased to apply the alleged option for IAS). Concretely, in the fiscal year that preceded the sale of the asset (2010), to a loss from fair value reduction in the financial instrument (shares) corresponded a variation of opposite sign in the fair value of the hedging instrument.
III.1.2 Transition Adjustment
[..-]
Based on this legal framework, and having as basis the elements that were made known to the procedure, 1/5 of the amount of € 7,768,698.68, which corresponds to the amount of 1,553,739.74, should have effects in determining taxable profit, namely in field 703 of Q.07, considering that it was demonstrated that the tax relevance that, within the scope of SNC, the treatment given to Bank B... shares had, whose adjustments were made by contraposition to results.
III.2.1.3. Correction Proposal
In Q7, the SP added, in fiscal years 2012 and 2013, respectively, in line 703 - Positive Patrimonial Variations (transitional regime provided for in article 5, paragraphs 1, 5 and 6 of DL No. 159/2009, of 13/7) the amount of 8,468.98 euros, and should add, for all the above transcribed, in both fiscal years, the amount corresponding to 1/5 of 7,763,693.68 euros, namely 1,553,739.74 euros.
Thus materialized:
III.2.2. On the Use of the Equity Method Valuation Model
According to the information provided by the SP, the commercial company uses as the valuation method, of part of its financial investments in subsidiary entities, associates, or jointly controlled entities, the Equity Method (MEP)
The use of MEP (disciplined, in its essence, in NCRF 13 §57 to § 63), as a method of accounting for financial capital participations, is characterized by the fact that the pro-rata share of results to which the participating company is entitled in the participated company is accounted for in the fiscal year to which the results pertain.
However, gains/losses accounted for within the scope of the application of MEP do not have tax relevance, whereby they must be added (losses) or deducted (gains) for purposes of determining taxable profit, as provided for in paragraph 7 of article 18 of CIRC.
Thus, following the analysis contained in the entries evidenced in the Trial Balance, particularly to the balance of account SNC 6852 - Costs and Losses in subsidiaries ...- MEP and 7851 - Income and Gains: subsidiaries, ... -MEP. no irregularities are registered,"
As for fiscal year 2013:
7.12 Annulment of the effects of the equity method and the proportional consolidation method in the case of joint ventures that are Corporate Income Tax taxpayers (article 18, paragraph 8, CIRC) – 712; amount 38,226.57€; account 6852
7.58 Annulment of the effects of the equity method and the proportional consolidation method in the case of joint ventures that are Corporate Income Tax taxpayers (article 18, paragraph 8) – 758; amount 11,269,782.40€; account 7851
"(...)
III.3. FINANCIAL CHARGES NOT ACCEPTED FOR TAX PURPOSES - ARTICLE 32, PARAGRAPH 2 OF EBF
III.3.1. Legal Framework of Article 32, Paragraph 2 of EBF
The special tax regime applicable to SGPS provided for in article 32 of the Tax Benefits Statute (EBF), determines, when the legal requirements are met, and in the wording in effect as of the date of the facts now subject to inspection by the Tax Authority (given by Law No. 64-B/2011 of 30 December), that:
Article 32. Managing Companies of Social Participations (SGPS)
1 - (Repealed by Law No. 55-A/2010, of 31 December).
2 - The gains and losses realized by SGPS of capital stakes of which they are holders, provided they are held for a period of no less than one year, as well as the financial charges incurred with their acquisition do not concur toward the formation of taxable profit of these companies
With this provision the legislator intended to establish the general rule of exclusion of taxation of gains realized in the onerous transfer of capital stakes held by SGPS's (regardless of the legal transaction that gave rise to them: whether it acquired the shares/quotas through purchase or subscription, whether their acquisition value was or was not subject to appreciation, through incorporation of other assets, namely merger,...), for a period equal to or greater than one year, whatever the title by which it occurs, and concurrently, the legislator understood that, gains not concurring for taxable profit, the financial charges incurred whether with acquisition, reinforcement, of the own capital of participations held in commercial companies and also of the other capital stakes held, namely in autonomous assets in the form of Participation Units (UP's) in Real Estate Investment Funds, should cease to concur.
In compliance with what is legally provided in the General Tax Law - LGT, particularly in article 68-A, and based on the need to assist the applier of the rule, and to standardize procedures of a technical-arithmetic nature resulting from the practical application of the aforementioned rule, the Tax Administration, through instruction No. 7/2004 of 30/03/2004 from the Corporate Income Tax Management Services, clarifies that:
-
The new regime, regarding financial charges, is applicable "in periods beginning after 1 January 2003, even if they relate to financing obtained before that date" (point 5)
-
The fiscal year in which financial charges should be disregarded as costs, for tax purposes, "should proceed, in the fiscal year to which they relate, to the tax correction of those that have been incurred with the acquisition of participations that are susceptible to benefiting from the special regime established in paragraph 2 of article 21 of EBF, regardless of whether all the conditions for application of the special regime of taxation of gains have already been met..." (point 8).
-
With regard to the calculation method and respective allocation to be used for the purpose of allocating financial charges to social participations, the "allocation should be made based on a formula that takes into account the following: the remunerated liabilities of SCPS and SCR should be allocated, first, to remunerated loans granted by these to the participated companies and to other interest-bearing investments, allocating the remainder to the remaining assets, namely social participations, proportionally to their respective acquisition cost"
The disregarding of financial charges for purposes of determining taxable profit established in paragraph 2 of article 32 of EBF embodies a corollary of the general principle of indispensability of costs according to which the tax deduction is conditioned by its connection with the obtaining of profits subject to tax and from which it results that ( ) if certain costs are related to profits not subject to tax they are not tax deductible (...)", Principle established in the provision in article 23, paragraph 1 of the Corporate Income Tax Code - "Costs are those that are demonstrably indispensable for the realization of income subject to tax or for the maintenance of the source of production".
III.3.2. Analysis of Financial Charges Incurred
The factuality resulting from the analysis made to the financial statements of the SP and documents that serve as its support and also from the information inserted in the AT Internet Portal (e.g., IES statement), in compliance with its filing obligations, implies that, it should be objectified that in the fiscal year in question, financial charges were incurred
(…)
III.3.2.2. Regarding fiscal year 2013 Interest Supported:
The SP in the fiscal year recorded in expenses, in SNC account 69.11 - Interest on Financing Obtained, the amount of 35,722.13 euros.
Financing Obtained:
The financial charges incurred by the SP result from financing/credit obtained and, concurrently, remunerated, in the amount of 2,300,000.00 euros, as per information, below, sent by this.
(…)
Financing Provided:
For its part, the SP accounting recognizes, as remunerated financing/credit provided, the amount below, given the table:
(…)
Acquisition Value of Capital Stakes
In the calculation to be made, concretely in determining the quantum of the acquisition value of capital stakes held by the SP, and recorded in SNC accounts 14 and 41, we must consider for their concurrence, the elements that integrate their respective acquisition cost.
Being that as to this we must disregard the effect of the use of MEP
Having in mind the elements sent by the SP, the following table was prepared:
(…)
In this fiscal year, the SP considered rightly, as acquisition value, the one referring to all capital stakes.
Determination of the "Other Assets" Value
Regarding the determination of the amount of this item, consideration is given, based on the changes introduced through legislative means, particularly Decree-Law No. 158/2009, of 13 July, to the national accounting system and to the rules for the preparation and presentation of Financial Statements. Attentive to the legal norms embodied in the cited legal diploma, the binding content of NCRFs and the scope advocated as to the bases for the preparation and drawing up of Financial Statements, particularly of the balance sheet, the legislator opted for its presentation in "net values", which is based, namely, on the option for reporting at "fair value"."
That, by the table on page 34, results in a value of other assets of 23,738,695.25€
Determination of Financial Charges to be Disregarded
Proceeding in the determination of the value of financial charges to be disregard in determining taxable profit, (in line 779, e.g. 752, of Q7 of DRM22.) comes:
Quantum of Value of Financial Charges to be Disregarded • article 32, paragraph 2 EBF
Analyzing Q7 of DRM22 field 779/752, the SP added 10,731.13 euros,
Given the aforementioned, the value to be considered for purposes of paragraph 2 of article 32 of EBF, should have added 10,878.39 euros, according to the calculation demonstrated, the amount of 147.26 euros should be added
(...)
Summary Table:
Taxable loss previously declared – 310,603.50€
Proposed Correction 1,553,887.00€
Taxable Profit 1,243,283.50€
(...)
IX - RIGHT OF HEARING
The hearing of the taxpayer comprises, within the procedure, the realization of the right of participation of citizens in the formation of administrative decisions that concern them, corresponds to a minimum legal content of the Principle of Participation, provided for in article 60 of LGT.
Notified, personally, on 9 December 2016, under the terms and for the purposes of article 60 of RCPITA, the taxpayer took knowledge (letter 55944 of 9 December 2016 from the Finance Department of Lisbon), of the content of the inspection procedure, its respective legal framework, the proposed corrections and the deadline to, if desired, exercise the right of hearing.
The company A... SGPS SA, duly notified of the draft corrections of the inspection report, did not exercise the right that legally pertains to it and that was effectively given to it.
After the legal period of 15 days had elapsed, and in the face of the silence of the S.P, we conclude by the preclusion of the aforementioned right.
Maintaining the corrections proposed in point III.3 of this report.
X - PROPOSAL - CONCLUSION
For all the aforementioned, the following is proposed:
a) under the terms of the provision in paragraph 2 of article 62 RCPITA combined with the provision in article 77 of LGT, notification to the Taxpayer of this report.
b) in compliance with the provision in article 57 of the General Regime of Tax Infringements, and for purposes of the provision in article 67 of the same statute, that the Notice Deeds (of 2012 and 2013) be sent to the Finance Service of Lisbon ... .
c) that the respective official statement model 22 be drawn up for fiscal year 2012 and for that of 2013, in order to promote the proposed correction and the subsequent assessment.
d) that the present procedure be closed, after the registrations deemed necessary.
Superior discretion will decide better
For Consideration of Superior Authority
N) On this proposal, an agreeing opinion was issued by the Team Chief as follows:
I confirm the content and grounds of the attached conclusions report, with reference to the economic fiscal years of 2012 and 2013 in accordance with the grounds mentioned, the legal prerequisites were verified for, maintaining the direct assessment of taxable matter, proceeding with technical corrections, under the terms of paragraph 9 of article 18 and article 23 of CIRC, as well as article 32, paragraph 2 of EBF and article 5 of Decree-Law 159/2009, in the total annual amounts of € 1,558,571.09 (2012) and € 1,553,887.00 (2013), related to the fact that the positive patrimonial variation resulting from the transitional regime provided for in article 5 of the aforementioned DL was not duly added to the results of the fiscal year, as well as the amount of non-deductible financial charges, attributable to capital stakes held by the company. Notified to exercise the Right of Prior Hearing, under the terms of article 60 of the General Tax Law (LGT) and article 60 of the Supplementary Regime of the Tax and Customs Inspection Procedure (RCPITA), the taxpayer did not exercise the respective right - Chapter IX of the Report. The respective Correction Document was prepared and an Infringement Notice instituted, proposing that it be sent to the Finance Service of Lisbon
The notification to the taxpayer of the outcome of the inspection action is also proposed.
O) On this proposal, an agreeing opinion was issued by the Division Chief as follows:
I agree with the opinion of the Team Chief and with the tax inspection report attached hereto.
Under the terms and with the grounds referred, conduct is based on the application of the legal provisions referred, to the extent that there was a correction to the results of the respective fiscal years, in total annual amounts of € 1,558,571.09 (2012) and € 1,553,667.00 (2013), as informed. As a result of these additions, the declared tax losses changed to taxable profit of € 1,469,490.06 in 2012 and of € 1,243,283.50 in 2013,
Thus, I propose notification to the taxpayer, as provided for in articles 77 of LGT and 62 of RCPITA,
The Correction Document was completed and an Infringement Notice was raised, which, in this case, I propose be sent to the Finance Service of Lisbon ... .
For consideration of superior authority
P) On this opinion, an order was issued on 28-12-2016, by the Deputy Finance Director of the Finance Department of Lisbon, as follows:
Agreed.
Proceed as proposed.
Notify
Q) On 30-12-2016, the Claimant was notified of the Tax Inspection Report and the referred opinions and order by means of an official letter in which the following is mentioned, among other things:
You are hereby notified, under the terms of article 62 of RCPITA, of the corrections resulting from the inspection action, whose report/conclusions is attached as an integral part of this notification, relating to the Service Order referred above.
Of the purely arithmetic corrections made to the taxable matter and/or tax, without resorting to indirect assessment, whose grounds are contained in the aforementioned Report.
In the near term, the services of the Tax and Customs Authority (AT) will proceed with notification of the respective assessment, which will contain the means of defense, as well as the payment period, if applicable.
No appeal or challenge may be made against this notification and its grounds.
R) Subsequently, the Claimant was notified of the Corporate Income Tax assessment relating to fiscal year 2013, which is contained in document No. 2, attached with the request for arbitral ruling, in which it is stated, among other things, that the corrected taxable matter is 1,243,283.50€ and it is indicated, "You are hereby notified of the Corporate Income Tax assessment relating to the period to which the income pertains, as per the attached demonstration note and grounds already sent".
S) The Claimant filed an administrative appeal against the Corporate Income Tax assessment relating to fiscal year 2013, which was refused by order of 25-09-2018;
T) The order refusing the administrative appeal evidences agreement with information contained in document No. 1, whose content is given as reproduced, in which it is stated, among other things, the following:
2 - The more detailed reasons for those corrections are contained in sections III.2.1 and 111.3 of the report, which are given as reproduced here, and the following is synthesized as to their meaning:
2.1 - Positive Patrimonial Variation (€ 1,553,739.74):
The correction corresponds to 1/5 of the amount of € 7,768,698.68, based on the provision in paragraph 1 of article 5 of DL 159/2009, according to which, in the transition to the new accounting framework, the effects on own capital (recognition or non-recognition of assets or liabilities, or changes in their respective measurement) that have tax relevance for purposes of Corporate Income Tax, concur in equal parts toward the formation of taxable profit of the first period of taxation after that transition and of the four following periods.
The aforementioned amount of € 7,768,698.68 corresponds to the fair value variation of Bank B... shares (B...), which occurred upon transition to SNC, with such fair value variation being considered tax relevant for purposes of Corporate Income Tax.
In the report, the accounting movements of those shares are described between the date of acquisition of the first ones, in 2008, and the sale that occurred in 2011. Based on that description, the following summary table was prepared:
It is also mentioned in the report that, although the taxpayer chose to use International Accounting Standards (IAS 32, IAS 39 and IFRS 7) for measurement/recording of variations verified in financial investments (with respect to initial measurement, it recorded the fair value variations of B... shares by contraposition to an own capital account), it subsequently began to record the fair value variations of the shares in results, for the reason of the existence of a derivative hedging instrument.
2.2 - Non-Deductible Financial Charges (€ 147.26)
Difference between the amount of € 10,878.39, which should have been added to taxable profit by application of paragraph 2 of article 32 of the Tax Benefits Statute, in the wording in effect in 2012, as well as Circular No. 7/2004 of 30/2 of DSIRC, and the amount that was added by the taxpayer, now Appellant, in field 779 of table 07 of statement model 22, € 10,731.13.
The amount that should have been added in field 779 was calculated according to the method advocated in that circular, as per the table below (the values in lines A E are those in the report, as well as the calculations)":
Which amounts to the difference of 147.26 to be corrected under the terms of circular 7/2004
"As can be seen from the table above, the difference of € 147.26 is explained by the differences between the values of line E that served as the basis for the calculations:
Line E: as per the table on page 34/40 of the report (determination of other assets – page 85 of the present case file), the values in the columns correspond to those in the trial balance (cf. balance IES/2013 – page 171 verso, with the values in accounts 14 and 41 contained in points 9.4 other financial assets on 31-12-2013 and 25 – related parties also on 31-12-2013, of the comments in the IES pages 176 to 178. The correction is grounded in the rules for presenting financial statements, particularly the balance sheet, in net values.
(...)
2 - As to the allegation that the notification of the additional assessment that is the subject of the appeal did not contain the grounds for the corrections that gave rise to it and that it is not required of the Appellant to relate the inspection report to that additional assessment, it should be noted that in the notification of the report, the Appellant is informed that assessment will proceed as a result of the conclusions of the report. Also in the report, beyond the corrections and their respective grounds, it is stated at the end that assessment will proceed based on these corrections.
Given that, following notification of the report, there was only one tax assessment relating to Corporate Income Tax/2013, it can be concluded that that assessment is the one mentioned in the notification and the one resulting from the corrections mentioned in the report, and that the taxable matter that served as the basis for that assessment corresponds to the amount of the corrected taxable profit calculated in the report (as referred above in point II-1, there was no tax loss to be deducted in fiscal year 2013).
Thus, the alleged lack of grounds does not occur.
3 - As to the allegation that the Appellant was not notified of the draft conclusions of the inspection report, under the terms and for the purposes provided for in subparagraph a) of paragraph 1 of article 60" of LGT (prior hearing), it is verified that, as is evident from pages 183 to 186 of the present case file, that notification occurred on 09-12-2016, in the person of the certified accountant, who assumed the quality of representative of the taxpayer in relations with AT (cf. pages 58 and 59), with the notification being made under the terms of article 40 of the Supplementary Regime of the Tax and Customs Inspection Procedure (RCPITA).
There is thus no reason to consider that prior hearing of the draft conclusions of the report did not take place.
4 - The Appellant alleges that the accounting of variations in the fair value of B... shares (B...) through results did not result in a deviation from the choice to apply IAS, but resulted from the application of IAS, concretely from a special clause of IAS 39.
However, the correction by the Tax Inspection is not grounded in the incorrect application of accounting standards, but in the fact that the shares were accounted for at fair value through results.
The Appellant further alleges that, although the provision in subparagraph a) of paragraph 9 of article 18 of CIRC applies to Own Capital Instruments recognized at fair value through results, the same is not applicable in the present case, because it is conceived for securities acquired with the purpose of short-term resale (trading) and, in the case of B... shares, there was no intention to sell them in the short term, but to obtain returns on the investment through indirect exercise of the activity of managing that financial instrument.
As to that allegation, it should be noted that the distinction invoked by the Appellant is not expressed in the legal rule, which appears to be applicable in the present case.
The correction by the Tax Inspection was grounded in the non-applicability of the provision in paragraph 2 of article 32 of EBF, in the wording in effect in 2012, because there was no place to the calculation, for purposes of Corporate Income Tax, of gains/losses (prerequisite of application of that rule), given that, under the terms of subparagraph b) of paragraph 1 of article 46 of CIRC, there is no place to the calculation of gains/losses in the case of sale of Financial Instruments recognized at fair value to which the exceptions provided for in paragraph 9 of article 18 refer.
Thus, it appears that the correction that is the subject of the appeal should be maintained.
5 - As to the correction in the amount of € 147.26, relating to financial charges not accepted for tax purposes, lack of grounds is alleged on the grounds that the reasons for that correction are not understandable.
As to that issue, it should be noted that there does not appear to be disagreement as to the application of Circular No. 7/2004, or as to the manner of calculating the value to be added in field 779-"Non-Deductible Financial Charges (article 32, paragraph 2 of EBF)", as advocated in that circular (value that does not concur toward the formation of taxable profit).
As referred above in point II-2.2, the correction that is the subject of the appeal results from differences in some of the values considered in that calculation (lines B, O and of the table in that point), with the grounds of the correction also being indicated there, as they appear in the report.
The Appellant does not indicate how it calculated the values that it considers correct. Thus, it appears that the correction that is the subject of the appeal should be maintained.
6 - The Appellant further alleges that in the notification of compensatory interest there is no demonstration of the prerequisites on which that assessment depends.
Given that the calculation is not disputed, it appears to be alleged that it was not demonstrated that the interest resulted from a fact attributable to the Appellant itself.
However, given that these are corrections made by the Tax Inspection to the values entered in table 07-"Determination of taxable profit" of statement model 22 for fiscal year 2012 presented by the Appellant, it appears evident that the differences between the declared values and those they should have been (corrected) can only be attributable to the Appellant, with no other entity being mentioned to which that attribution would fall.
Thus, it does not appear that the Compensatory Interest in question should be annulled.
7 - Given that, as set out in the preceding points, the Appellant is not correct, the proposal is for Refusal of the request, maintaining the additional assessment that is the subject of the appeal.
It is further added that, given that the prerequisites of paragraph 1 of article 43 of LGT do not occur in this case, the Appellant does not have the right to compensatory interest.
IV- PRIOR HEARING
1 - The Appellant was notified of the draft refusal decision, as is evident from page 193 of the case file, to exercise the prior hearing right provided for in article 60 of the General Tax Law. A copy of the draft decision was sent with the notification, as is evident from pages 188 to 192 of the case file and is reproduced in the preceding points.
2 - In prior hearing, the Appellant comes to present a statement (pages 196 to 201) in which it reiterates the aforementioned, presenting, as the only new element, a copy of the arbitral decision in Case No. 392/2017-T, dated 21-03-2018, resulting from a request for arbitral ruling made by it, which had as its object the Corporate Income Tax assessment relating to fiscal year 2011 (pages 213 to 232) and was decided in the sense of the merits of the Appellant's request.
It alleges that AT should draw all the consequences of that decision, including as to the deduction of tax losses calculated in that fiscal year in the assessments of subsequent fiscal years, and, as to the remaining issues, it reiterates the aforementioned in the administrative appeal.
Given that the aforementioned arbitral decision does not refer to and the Corporate Income Tax assessment mentioned at the beginning of this information, but to that of the prior fiscal year, there is no place for the alteration of the tax result of fiscal year 2013 as a result thereof.
As to the issue of the deduction of tax losses as a result of the arbitral decision, it appears that it should be dealt with within the scope of the realization of the effects of that decision, given that it was not an issue mentioned in the appeal analyzed here and results from a fact subsequent to the same.
3 - Given the above points, and taking into account the facts and grounds invoked in the draft decision, it is proposed that the request be decided in the same sense of Refusal (cf. point III-7 above).
U) On 02-01-2019, the Claimant filed the request for arbitral ruling that gave rise to the present case.
2.2. Facts Not Proven and Grounds for Determination of Statement of Facts
The purpose envisioned by the Claimant in the holding of the shares was not proven, namely whether it held them with lasting intention or for short-term sale. The Claimant presented no proof on this matter, not even of a testimonial nature.
The proven facts are based on the documents submitted by the Claimant.
An administrative case file was presented.
3. Matter of Law
It should be noted, as a preliminary matter, that this case (Corporate Income Tax of 2013) is very similar to the subject matter of arbitral case 2/2019-T (Corporate Income Tax of 2012), in the identity of the questions involved with respect to the same claimant, since the subjects being analyzed have multi-year effects and in the identity of the arguments presented by the claimant and the reasoning advocated by AT (and the subject of the cases). Just as it is also similar to the subject matter of arbitral case 372/2017-T, which dealt with the Corporate Income Tax of 2011 of the same claimant, with similar questions (and arguments of the parties identical to this case).
The Tribunal analyzed and decided this case, taking into account this entire body of jurisprudence. After weighing the factual elements and the legal issues, it decided in the same sense as those two decisions, whose relevant passages will be transcribed, with due respect.
3.1 Issue of Lack of Reasoned Basis
For the resolution of this subject matter, the reasoning used in case No. 2/2019-T is transcribed, in essence, adapted to the situation at issue, to which adherence is given.
Beginning of citation, with detail adaptations to the case of the files.
"The Claimant imputes to the challenged act a vice of lack of reasoned basis in two aspects: in one of them, it refers to the entirety of the assessment act, which includes the amount of compensatory interest, defending, in sum, that there is in it any reference to the grounds of the Tax Inspection Report; further, regarding the assessment of compensatory interest, the Claimant imputes a vice also on the grounds that there is no reference to the existence of fault.
3.1.1. Issue of Lack of Reasoned Basis as to the Part of Assessment Relating to Corporate Income Tax
The requirement for reasoned basis of injurious administrative acts is contained in paragraph 3 of article 268 of the CRP, in which it is established that "administrative acts are subject to notification to the interested parties, in the form provided by law, and require express and accessible reasoned basis when they affect rights or legally protected interests".
Especially for the reasoned basis of tax acts, article 77, paragraphs 1 and 2, of LGT, establish that "the decision of procedure is always grounded by means of a brief statement of the reasons of fact and law that motivated it, and the reasoned basis may consist in a mere declaration of agreement with the grounds of prior opinions, information or proposals, including those that integrate the tax inspection report" and that "the reasoned basis of tax acts may be made in summary form, and should always contain the applicable legal provisions, the qualification and quantification of the tax facts and the operations of determining the taxable matter and the tax".
The Supreme Administrative Court has come to uniformly understand that the reasoned basis of the administrative or tax act is a relative concept that varies according to the type of act and the circumstances of the specific case, but that the reasoned basis is sufficient when it allows a normal recipient to perceive the cognitive and evaluative itinerary followed by the author of the act to issue the decision, that is, when that party can know the reasons why the author of the act decided as it did and not differently, in order to be able to trigger administrative or contentious mechanisms of challenge. ( )
Although it is necessary to distinguish between the act of assessment and the act of notification through which it is communicated to the recipient, in the case at issue it was not proven that there is any other document relating to the act of assessment other than that which is reproduced in document No. 2 attached with the request for arbitral ruling, whereby one must proceed from the assumption that it is a copy of the act that was made, which will not have content other than what it contains.
From the aforementioned document it is observed that it contains the operations from which the calculation of the assessed amount results and reference is made to a "demonstration note", which appears in document No. 4 ("Statement of Settlement").
In the aforementioned assessment, the amounts of the prior assessment are indicated, and the "corrected amounts" and reference is made to the assessment being "as per demonstration note attached and grounds already sent".
Among the "corrected amounts" the value of € 1,243,283.50 is indicated regarding "taxable matter" which is precisely what is indicated in the Tax Inspection Report as having been corrected.
It is further ascertained that in the notification of the Tax Inspection Report it is expressly stated that "in the near term, AT services will proceed with notification of the respective assessment, which will contain the means of defense, as well as the payment period, if applicable" and that in the notification of the assessment act reference is made to "grounds already sent".
In this context, given that the Claimant was previously notified of the Tax Inspection Report and the order that approved it in which correction to the Claimant's taxable matter relating to the year 2013 was proposed in the amount of € 1,243,283.50, which informed it that the "respective assessment" would follow, the assessment in which corrected amounts are indicated corresponding to the corrections previously communicated cannot fail to be interpreted by a recipient with normal perceptive capacities as being the realization of the announced assessment, which is reinforced by the fact that in the assessment itself reference is made to "grounds already sent".
Thus, interpreting the content of the assessment act in the context in which it was made, it is concluded that there is in it an express reference to grounds that cannot fail to be that of the Tax Inspection Report that had been notified to the Claimant.
In this context, it is to be understood that, contrary to what the Claimant argues, it was possible and required to establish the relationship between the Inspection Report relating to the year 2012 and the assessment act relating to that same fiscal year.
On the other hand, the requirement for express reasoned basis of injurious acts provided for in article 268, paragraph 3, of the CRP, is compatible with reasoned basis by reference and, in the case at issue, contains in the assessment act an express reference to the grounds previously sent and perfectly identifiable. When it is said that the reasoned basis must be contemporaneous with the act it is with the scope of expressing that it cannot be drawn up a posteriori, but not so as to prevent it from being done before the act, as, after all, will invariably occur in situations of reasoned basis by reference.
Moreover, as the Supreme Administrative Court understood in the decision of 09-05-2001, case No. 025832 ( ) "the assessment act based on a report of the tax inspection services should be considered grounded, even if it does not make express reference to it, given that it is, undoubtedly, within its respective legal and factual framework, perfectly clear, clarifying and duly notified".
Furthermore, it is inferred from the request for arbitral ruling that the Claimant clearly perceived that the corrected amounts appearing in the assessment correspond to those indicated in the Tax Inspection Report and that the grounds to which reference is made in the notification of the assessment is that of the Tax Inspection Report, which had been previously communicated.
Thus, the vice of lack of reasoned basis as to the part of the assessment relating to Corporate Income Tax does not hold.
3.1.2. Issue of Lack of Reasoned Basis as to the Part of Assessment Relating to Compensatory Interest
Regarding the assessment of compensatory interest, it is observed that the Tax and Customs Authority neither in the Tax Inspection Report nor in the opinions that fell upon it makes reference to the possibility of its assessment.
On the other hand, in the "Demonstration of interest assessment" notified to the Claimant are indicated the "Period of taxation" (year 2013), the number of the Corporate Income Tax assessment to which it refers, the "Base Amount", the "Calculation Period", the rate of 4% and the assessed amount.
As to grounds of law, reference is made to article 102 of CIRC which establishes that "whenever, by a fact attributable to the taxpayer, the assessment of all or part of the tax owed or delivery of advance tax or tax to be withheld under withholding tax substitution or obtaining undue reimbursement is delayed, compensatory interest accrues at the rate and under the terms provided for in article 35 of the General Tax Law".
Similarly, article 35, paragraph 1, of LGT establishes that "compensatory interest is owed when, by a fact attributable to the taxpayer, the assessment of all or part of the tax owed or delivery of advance tax, or withheld or to be withheld under withholding tax substitution, is delayed".
Objective liability is exceptional, occurring only in cases specified by law (article 483, paragraph 2, of the Civil Code) and, therefore, it should be understood that, for purposes of liability for compensatory interest, a "fact attributable to the taxpayer" is present only when a judgment of censure may be formulated regarding its conduct.
In this line, the Supreme Administrative Court has come to uniformly understand that the attributability required for liability for compensatory interest depends on the existence of fault on the part of the taxpayer. ( )
Faced with that sole statement contained in the Tax Inspection Report about compensatory interest, one is left not knowing whether the Tax and Customs Authority understood that the liability for compensatory interest is automatic, resulting from the very fact that corrections were made, or whether it concluded that a judgment of censure may be formulated regarding the Claimant's actions, capable of filling the attributability requirement, a situation in which the reasoned basis should contain indication of the facts underlying that judgment of censure.
On the other hand, despite the Tax and Customs Authority coming to clarify in the decision on the administrative appeal what reasons justify the assessment of compensatory interest, one is faced with a posteriori reasoned basis, which is settled law to be irrelevant for purposes of assessing the legality of tax acts. In fact, in a contentious proceeding of mere legality, as is provided for in RJAT for arbitral tribunals functioning at CAAD, in which the goal is only the declaration of illegality of acts of the types provided for in subparagraphs a) and b) of paragraph 1 of its article 2, one must assess the legality of the challenged act as it occurred, with the reasoned basis used in it, and other possible grounds that could serve as support for other acts, with content decisions fully or partially coinciding with the act made, are not relevant. Thus, grounds invoked a posteriori are irrelevant, after the end of the tax proceeding in which the act whose declaration of illegality is requested was made, including those ventured in the judicial proceeding. ( )
Moreover, containing article 35 various situations in which the assessment of compensatory interest can be justified, express and sufficient reasoned basis would require that it be indicated in which part of that article the Claimant's actions were understood to be framed.
Furthermore, it is not indicated how the amount of the tax serving as the basis for the calculation of compensatory interest was determined, since that value does not appear indicated in the assessment, and the reasoned basis must "always contain ... and the operations of determining the taxable matter and the tax" (article 77, paragraph 2, of LGT). It is the Tax and Customs Authority and not the taxpayer that the law imposes to make and describe the operations that it made.
In any case, there is a lack of reasoned basis relating to the verification of all the requirements provided for in article 35, paragraph 1, of LGT, whereby the assessment of compensatory interest suffers from a vice of lack of reasoned basis.
End of citation from case 2/2019-T, of CAAD.
It should be noted that as to these vices of reasoned basis, there is total identity of the questions between the year 2012 and 2013; the claimant is the same; identical manner as AT made the notifications and the type and content of the acts notified; identity in the arguments of the parties to impute (claimant) and dismiss (respondent) the vices in question. Whereby, the tribunal, after having pondered everything, agrees with the solution of Decision 2/2019-T and adheres to the reasoning and solution indicated in that decision.
3.2. Corrections Made
The corrections made by AT (underlying the challenged assessment) are of two types: a) for the claimant not having added to the result of fiscal year 2013 the positive patrimonial variation resulting from the transitional regime provided for in Decree-Law No. 159/2009; and b) for having calculated (deducted) financial charges, which in AT's view would be non-deductible.
3.2.1. Correction for Not Adding to the Result of Fiscal Year 2013 the Positive Patrimonial Variation Resulting from the Transitional Regime Provided for in Decree-Law No. 159/2009
This issue is exactly the same as the subject dealt with in 2012 – the tax repercussion, over 5 years (and, therefore, in 2012 and 2013, 1/5 in each year) of the positive patrimonial variation resulting from the transitional regime provided for in Decree-Law No. 159/2009.
The arbitrators agree entirely with what was decided in arbitral case 2/2019-T and, therefore, transcribe, with due respect, what was there decided – with small alterations to account for the fiscal year in question (2013).
Beginning of citation
"Decree-Law No. 159/2009, of 13 July, made changes to the CIRC, "adapting the rules for determining taxable profit to international accounting standards as adopted by the European Union, as well as to national accounting standards aimed at adapting accounting to those standards".
In its article 5, that Decree-Law includes a transitional regime, under the terms of which, "the effects on own capital resulting from the adoption, for the first time, of international accounting standards adopted under article 3 of Regulation No. 1606/2002 of the European Parliament and of the Council of 19 July, which are considered tax relevant under the terms of the Corporate Income Tax Code and respective supplementary legislation, resulting from the recognition or non-recognition of assets or liabilities, or changes in their respective measurement, concur in equal parts toward the formation of taxable profit of the first period of taxation in which those standards are applied and of the four following periods of taxation".
Under article 18, paragraph 9, of CIRC, in the wording approved by that Decree-Law, adjustments resulting from the application of fair value are only considered tax relevant when:
a) They relate to financial instruments recognized at fair value through results, provided that, in the case of own capital instruments, they have a price formed in a regulated market and the taxpayer does not hold, directly or indirectly, a participation in capital greater than 5% of the respective social capital; or
b) It is expressly provided for in this Code.
In the case at issue, the Claimant held accounting recognized investments in financial instruments, capital stakes whose value (price) is determined in a regulated market.
The Claimant, using a faculty provided for in § 2 of NCRF 37, uses international accounting standards, namely IAS 32 and IAS 39, for the calculation of accounting adjustments of capital stakes, recording these in an own capital account, namely the shares of Bank B....
Although the aforementioned adjustments are revealed in the accounting through an own capital account, the Tax and Customs Authority ascertained that those shares were indexed to a "hedging operation, whose derivative financial instrument used was recorded at fair value through results, influencing, namely, the determination of the net result of the fiscal year prior to the sale" and that the Claimant "treated the hedging instrument and the hedged item through results accounts of the fiscal year".
In this context, the Tax and Customs Authority understood that "given that the SP ceased to reflect in own capital accounts the fair value variations, to begin to influence the determination of the results of the fiscal year ceased to apply the alleged option for IAS".
The Claimant formulates the following conclusions on this issue:
A) The accounting by the Claimant of variations in fair value of the hedging instrument (derivative/call option) and the hedged instrument (Bank B... shares) through results did not result in a deviation from the choice to apply IAS, but rather the result of the application of these IAS, concretely of a special clause of IAS 39;
B) IAS 39 establishes as a rule that gains or losses from adjustments to fair value of an available-for-sale financial asset are recorded in own capital (cf. § 46 and 55);
C) In the case where the available-for-sale financial asset is in a hedging relationship, a deviation from that general rule is introduced given that the provision in § 71 and 89-102 of IAS 39 is applicable, from which it results that "The gain or loss resulting from the re-measurement of the hedging instrument at fair value (...) should be recognized in results" and that "The gain or loss resulting from the hedged item attributable to the hedged risk should adjust the carrying amount of the hedged item and be recognized in results";
D) However, it is not this specific regime provided for in IAS 39 for hedging relationships that invalidates the taxpayer's choice of IAS and automatically triggers the taxation of gains and losses caused by oscillations in fair value, imposing on an SGPS (in this case, the Claimant) the application of the regime in subparagraph a) of paragraph 9 of article 18 of CIRC to the detriment of the special regime of article 32, paragraph 2, of EBF;
E) In domestic law, the tax relevance (taxation) of fair value is exceptional, not the rule, and is conceived for securities acquired with the purpose of short-term resale, in what is called trading, thus permitting an anticipation of the tax and the collection of revenue by the State;
F) Bank B... shares constituted available-for-sale financial assets for purposes of IAS 39 and were recorded on the balance sheet as a non-current asset, given that the Claimant did not intend to sell them in the short term, but rather to obtain returns on its investment through indirect exercise of the activity of managing that financial instrument, as is characteristic of an SGPS (cf. article 1, paragraph 1, of Decree-Law No. 495/88);
G) Substantial participations in quoted companies, even if less than 5%, reflect an intention to maintain the asset and lasting management (stability and permanence), not resale for obtaining short-term profit, whereby, not constituting current assets, should not be taxed at fair value;
H) Given that these participations do not appear on the financial statements as "financial instruments recognized at fair value through results", but as non-current assets, one of the requirements of subparagraph a) of paragraph 9 of article 18 of CIRC is not met, which means that oscillations in fair value do not concur toward the formation of taxable profit, that is, the rule of irrelevance of fair value adjustments established in the body of paragraph 9 of article 18 of CIRC is applicable;
I) Moreover, being a participation with the nature of a substantial financial investment, albeit less than 5% of the social capital, it is not permissible to withdraw it from the special regime of article 32, paragraph 2, of EBF, which should always be applied;
J) In sum, for substantial participations but less than 5% of the capital of a quoted company (such as Bank B... shares) held by an SGPS (such as the Claimant), maintained with a lasting intention and not for short-term sale/trading (as is the case), the asset should be recorded as non-current (as occurred with Bank B... shares, recorded in the balance sheets of 2010 and 2011) and falls outside the scope of subparagraph a) of paragraph 9 of article 18 of CIRC, that is, does not concur toward the formation of taxable profit;
K) Finally, the position defended by the Tax Inspection Services leads to the illegal revocation, through administrative means, of an automatic tax benefit whose prerequisites are entirely fulfilled, article
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