Summary
Full Decision
ARBITRAL DECISION
The arbitrators José Baeta de Queiroz (Presiding Arbitrator), Sofia Ricardo Borges and Sara Barros, designated by the Deontological Council of the Center for Administrative Arbitration to constitute the Arbitral Tribunal, constituted on 14.07.2017, decide as follows:
1. Report
A…, S.A., with registered office at Rua …, …, …-… …, registered in the Commercial Registry Office of … and with corporate identification number …, requested the constitution of the Arbitral Tribunal for declaration of illegality and consequent partial annulment of acts of Corporate Income Tax (IRC) assessments, embodied by assessments no. 2016… and 2016…, subsequent to internal inspection action arising from Inspection Orders no. OI2010… and OI2016… and relating, respectively, to the tax years 2013 and 2014.
The Tax and Customs Authority (AT) is the respondent.
The request for constitution of the Arbitral Tribunal was accepted by the President of CAAD and notified to the AT on 16.05.2017.
The undersigned arbitrators were designated by the Deontological Council for this collective tribunal – see articles 6, subsection 2 paragraph a) and 11, subsection 1 paragraph b) of the RJAT. Following their acceptance of the appointment, the parties were duly notified on 29.06.2016 and did not manifest any intention to refuse their designation – see article 11, subsection 1 paragraphs a) and b) of the RJAT and articles 6 and 7 of the Deontological Code.
The Arbitral Tribunal was constituted on 14.07.2017 – see article 11, subsection 1 paragraph c) of the RJAT.
The AT, in its response, argued for dismissal of the claim.
By order of 02.10.2017 the Claimant was notified to indicate the facts it intended to prove by witness testimony, which it did within the prescribed period.
By order of 17.10.2017 a meeting was scheduled pursuant to article 18 of the RJAT for 07.11.2017. The AT requested a change of date. By order of the Tribunal of 23.10.2017 a new date was scheduled for that purpose, namely 28.11.2017. The Claimant then, in turn, requested rescheduling of the meeting and by order of 10.11.2017 the Tribunal scheduled the same definitively for 05.12.2017.
On the aforementioned date of 05.12.2017, commencing at 10 o'clock, the meeting for examination of witnesses took place, all summoned by the Claimant, and the minutes of that meeting were drawn up and are on file.
At the end of the meeting and at the request of the representatives of the respondent AT, the Tribunal notified the parties to submit written submissions within 10 days, first the Claimant and then the respondent. The Tribunal further determined to extend the deadline of article 21, subsection 1 of the RJAT, in accordance with subsection 2 thereof, for two months.
The parties submitted their written submissions.
2. Case Management
The Tribunal was regularly constituted and is competent.
The parties are duly represented, possess legal personality and capacity and have standing.
The proceedings do not suffer from nullities and there are no nullities, exceptions or preliminary issues requiring consideration before ruling on the merits.
3. Findings of Fact
3.1. Proven facts:
a) The Claimant's corporate purpose is "real estate development, purchase and sale of real property, leasing and management of property or real estate rights, urbanization and subdivision of land, as well as construction of urban buildings owned by it or by third parties."
b) The Claimant was the subject of external inspection actions (Inspection Orders nos. OI2010… and OI2016… relating, respectively, to the tax years 2013 and 2014) which were based on information from the Tax Justice Department – Executive Debt Management Division of the Finance Directorate of Lisbon, to investigate possible commission of the crime of credit frustration by the Claimant together with the related company B…, S.A., tax identification number ….
c) The inspection actions concerned the tax years 2013 and 2014, having partial scope, in Corporate Income Tax (IRC) and in VAT for 2013 and in IRC for 2014.
d) As a result of the inspection actions, corrective assessments were made by the AT.
e) On 03.10.2016 the Claimant was notified of the draft inspection report relating to the years 2013 and 2014.
f) The Claimant exercised the right of prior hearing by written defense which it sent by registered mail on 28.10.2016.
g) In the scope of the Claimant's right of prior hearing, the witnesses indicated by it were heard by the AT.
h) On 23.11.2016 the Claimant was notified of the inspection report (RIT), a copy of which is on file in the Administrative Process (PA), the contents of which are considered reproduced herein, and from which (RIT) appears, among other things, the following:
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i) The RIT contains, in its final section, the reasons that determined the AT's decision not to modify the draft RIT in light of the exercise of the right of prior hearing (pp. 76-80 of the PA).
j) The Claimant was notified of two additional assessments on 06.12.2016, as follows:
- one assessment relating to Corporate Income Tax for the year 2013 and compensatory interest, with payment deadline until 01.02.2017, in the amount of € 43,971.60 (of which € 3,919.60 is compensatory interest), and
- one assessment relating to Corporate Income Tax for the year 2014 and compensatory interest, with payment deadline until 02.02.2017, in the amount of € 63,724.62 (of which € 3,485.25 is compensatory interest).
k) The Administrator of company B… is, to date, the ex-spouse of the Administrator of the Claimant.
l) C…, a textile commercial agent by profession and friend of the Administrator of the Claimant, received a voucher for a week's stay in August 2013 in the Algarve, which she subsequently gave to another person who was her friend.
m) Regarding the gift of a stay, C… (whose name does not match the name on the voucher) did not expect it, which was a surprise to her, as she does not maintain with the Claimant any connection that in her opinion would justify it.
n) The invoices of November 2013 recorded by the Claimant as tax-deductible expenses correspond to expenses for clothing and footwear.
o) The invoice dated 31.12.2013 issued by D…, Lda. to the Claimant, in the amount of € 100,000.00 plus VAT, relates to work on the factory of ….
p) The works on the Claimant's property, the factory of …, were carried out at the end of 2013 and were intended for cleaning, conservation and maintenance.
q) Between the Claimant and D… a works contract was executed on 14 October 2013, reproduced herein, pursuant to which, among other things, "(…) the first party intends to proceed with conservation and maintenance works on the factory of … (…)" and "(…) the deadline for execution of the works provided for (…) is 75 days from the date of the respective execution."; "For the works that are the subject of the contract the 1st party shall pay to the 2nd party the sum of € 100,000.00 (one hundred thousand euros), plus VAT at the current rate."; "For purposes of payment for its works the 2nd party shall issue a final work measurement report, which it shall send to the 1st party for its validation."; "(…) the warranty period for the executed works is two years, counted from the date of receipt by the 1st party of the measurement report referred to in the preceding clause."
r) The measurement report shows: reference is made to the section of the RIT above where the content of the report is transcribed (see pp. 7-8 of this Decision), without any partial values assigned.
s) The Works Owner (the Claimant) did not have any amount quantified and accordingly a global amount was assigned to it.
t) In the same factory of …, new works were carried out in 2014.
u) The works executed at the factory of … in 2014 were of greater depth, consisted of a more refined intervention, than those carried out in 2013.
v) With reference to the 2014 works at the factory of … an invoice was issued in the total amount of € 175,000.00, plus VAT, without itemization of work, containing, in addition to the price: "Repair works on your units as detailed in the Attached Report", "Works executed in December 2014" – Invoice No. 15, Date: 2015-03-26 (doc. 11 submitted by the Claimant). This invoice relates to work carried out on three properties.
x) The description contained in the "Attached Report" of the 2014 works at the factory … is the one already transcribed above (see p. 8 of this Decision).
y) In the same "Report" the amount of € 103,000.00 (before VAT) is assigned to the 2014 work at the factory ….
z) Pursuant to the "Report attached" to "Invoice No. 15, Date: 2015-03-26" the total value of € 175,000.00 (plus VAT) also included two other interventions: in (i) Property at …, …, to which the Report assigns the value of € 60,000.00 (before VAT) and (ii) Unit N at …, to which the Report assigns the value of € 12,000.00 (before VAT).
aa) On 29.10.2014 a contract was executed between the Claimant and D…, "Works Contract for the execution of maintenance and conservation works" (hereinafter "Contract"), in which the conditions for these three works are agreed (doc. 12 submitted by the Claimant), which has an annex titled "Repair and maintenance work on Units …" in which the already transcribed description is provided (see pp. 7-8 of this Decision), without assignment of values.
bb) In the "Measurement Report" submitted by the Claimant as doc. 32, dated 31.12.2014, there appear, alongside the same description of works contained in the Annex to the Contract, values assigned to each of the three interventions, as noted above and as also previously transcribed (see p. 7 of this Decision, third paragraph): …, € 60,000.00, …, € 12,000.00, factory of …, € 103,000.00 (amounts without VAT).
cc) In the scope of work performed by D… under the Contract, and with reference to the intervention on the property of …-…, the Claimant submitted various invoices from other suppliers.
dd) Among them, an invoice issued by E… Lda. directly to the Claimant, dated 31.12.2013 and due date 01.01.2014, submitted by the Claimant as doc. 18, in the amount of € 7,893.14 (VAT included), relating to materials.
ee) Other invoices were also issued to the Claimant by E… Lda., also all dated 31.12.2013 and due date 01.01.2014, submitted by the Claimant as docs. 33, 34 and 37, respectively in the amounts of € 12,356.08, € 2,526.42 and € 5,206.32 (VAT included), relating to materials.
ff) With respect to the invoices from E…, the supplier's current account showed on 31.12.2014 a credit balance in the amount of € 27,981.96.
gg) E… is a supplier to B….
hh) The property at …, …, is a residence that had been built by B…, with year of registration in the property tax register 2010, Form 1 of the IMI filed in July 2008, intended for residential use.
ii) The property at … is the residence of the Administrator of the Claimant.
jj) Unit N, …, is a unit owned by the Claimant, intended for commercial use, with an area of 24.55 m², year of registration in the property tax register 2004 (doc. 23 submitted by the Claimant).
kk) The invoices relating to works at the factory of …, described as conservation and maintenance works of late 2013 and late 2014, total € 249,690.00 (VAT included).
ll) In the aforementioned total amount of € 249,690.00 (VAT included) the value relating to building materials/equipment is proportionally diminutive.
mm) At the time of the inspection actions the invoices issued by D… to the Claimant remained pending payment, more than two years having elapsed from their issuance.
nn) In view of the doubts raised in the RIT the Claimant requested D… to provide additional documentation that could prove that the invoices corresponded to services actually provided.
oo) D… provided a copy of:
• Its internal control record of the progress of the work, on which appears the work in question, the dates and the work executed on those dates (Docs. 5, 13, 20, 24, submitted by the Claimant).
a) Its Monthly Worker Control records, on which appear the work in question, the service-providing company, the workers assigned to the work and the corresponding professional category, the days of the month in question, an indication of whether the worker was present all day or only part of the day, and the signatures of the workers (Docs. 7, 8, 9, 14, 15, 21, 22, 25, 26, submitted by the Claimant).
b) The Transport Guides of 2014, relating to documentation of transports that were carried out between the work site and the construction yard of the Factory of … (Docs. 27 to 31, submitted by the Claimant). These are documentation of the transport of waste (waste and metal mixture), electrical supports with lamps, sealing sheets, trolleys, box with various material).
pp) To date the factory of … remains in the ownership of the Claimant.
qq) Apart from the transport guides mentioned in oo), no other transport guides for the aforementioned materials exist.
3.2. Facts not proven
For purposes of determining the outcome of the case, the following facts are not considered proven.
A) The invoice of August 2013 relating to a stay in the Algarve constituted an expense that the Claimant had to bear as consideration for the indication of properties for acquisition.
B) The invoices of November 2013 correspond to items for gifts to customers and represent expenses essential to obtaining the Claimant's income.
C) The material itemized in the invoices issued to the Claimant by E… Lda., dated 31.12.2013 and due date 01.01.2014, was actually purchased by the Claimant as an investment for future use.
D) The invoices issued by Lousaqua to the Claimant correspond to real transactions.
E) The amount of € 249,690.00 (VAT included) in the two invoices relating to works at the factory of …, described as conservation and maintenance works carried out in 2013 and 2014, corresponds to reality.
F) The Claimant had an urgent need to perform works at the factory of … at the end of 2013 and intended to proceed with its sale.
G) The amounts contained in invoice no. 15 of 26.03.2015 relating to works on the Property at …, … (€ 73,800.00, VAT included) and on Unit N, … (€ 14,760.00, VAT included) correspond to reality.
H) It is practice in measurement reports in the sector of activity of the Claimant for there to be no itemization of value per service performed.
3.3. Basis for the findings of fact
The determination of the facts was based on the documents submitted to the proceedings, which are considered reproduced herein, none of which were contested by either party, on the parties' statements in their pleadings and on the witness testimony, critically assessed by the Tribunal.
4. Matters of Law
Issues to be decided
The Claimant argues that the challenged acts are flawed by violation of the right of prior hearing, defect of lack of reasoning, and violation of law due to error in the factual basis, in that the expenses not accepted for tax purposes should have been.
We shall address each of these points separately.
4.1. Violation of the right of prior hearing
The Claimant argues that the facts it invoked when exercising the right of prior hearing, following the preparation of the draft inspection report to which it was subjected, were not contradicted, with the AT merely contesting them, without including them in the analysis of the issues (…) at issue in the inspection, with the final conclusions not reflecting the "reality of those same facts."
Thus article 60 of the General Tax Code (LGT) would have been disregarded.
Let us examine this:
Prior hearing of those interested constitutes a form of their right to participate in decisions affecting them, a right granted by article 26, subsection 5 of the Constitution of the Portuguese Republic (CRP), and which was implemented by ordinary law in various statutes, including, in addition to the LGT, the Code of Administrative Procedure (CPA) and the Code of Tax Procedure and Process (CPPT).
It is not merely a formal right, satisfied by giving the interested party a hearing, while disregarding the reasons he advances in his favor.
But nor is it required that the Administration take each of the arguments and reasons, whether of fact or of law, advanced by the interested party, and refute them point by point. Nor would that be feasible, and could even serve as a tool to paralyze administrative activity, nor would the protection of the interested party be enhanced thereby.
What matters is that he be heard and that whatever useful material he brings when exercising his right of prior hearing be weighed, and not ignored, by the entity responsible for deciding.
This is why subsection 7 of the aforementioned article 60 of the LGT provides that "new elements raised during the hearing of taxpayers are mandatorily taken into account in the reasoning for the decision."
In other words, and a contrario, if, when exercising the right of prior hearing, new elements are not presented, the deciding entity is not required to take into account, in reasoning its decision, the "old" elements advanced by the taxpayer, as such elements were already previously considered.
In the present case, an inspection had been conducted of the Claimant and the AT had drawn conclusions from it, based on reasoning, advancing a provisional decision, precisely because it still depended on the taxpayer's participation.
Only if the taxpayer came forward with new elements would the AT be required to address them in the reasoning of its decision.
However, the Claimant does not point to the new elements it brought to the inspection process that the AT would have been obliged to consider. It merely states, without specifying, that it raised "relevant and important matters" that were set aside only after conclusions had been drawn – which could not but be the case since, as stated, from the nature of the procedure it results that there were necessarily conclusions at that point supporting a projected decision.
Moreover, it is the Claimant itself that expressly concedes that the final inspection report added "a section relating to the right of prior hearing, in which the facts and allegations of the Inspected party brought forward during the exercise of that right were criticized" (emphasis ours).
In other words, the elements that the Claimant brought to the procedure were not ignored, rather they were weighed and criticized, even though they did not lead to a decision different from the one projected.
4.2. Defect of lack of reasoning
This alleged defect would result from the fact that the AT, in order to disregard the tax relevance of expenses relating to travel (voucher in the name of F… relating to the use of an apartment between 1 and 8 August 2013), concluded that it was a vacation trip, given the period and location of the stay and its beneficiary; and in refusing to accept as a tax deduction the acquisition of clothing and footwear items, concluded, given the type of goods in question, that they were not intended for gifts, but for enjoyment by the administrators or family members.
It is argued that the conclusory character of these assertions and the fact that the inspection did not seek clarifications prevent the Claimant from understanding the reasoning that led the AT to act as it did.
The Claimant invokes violation of articles 268 of the CRP, 151 of the CPA and 77 of the LGT.
Regarding the requirements for reasoning administrative acts, doctrine and case law are extensive and well-known, and present no significant disagreement. It is therefore not necessary to expand on the treatment of this issue from the constitutional text and the implementations of ordinary law and its interpretation. It will suffice to state, conclusively, that reasoning is sufficient when it allows a normal recipient (the reasonable and prudent person) to understand the reasons that lead to the performance of the act in one sense and not in another, so as to enable him to present his reasons against the act or, accepting its grounds, to comply with it. Viewed from another angle, there will be lack of reasoning, insufficiency or obscurity, one and the same thing, when the reasons that led to the decision are not externally expressed in an intelligible manner.
It should be noted, finally, that the defect relating to reasoning has a formal nature and not a substantive one, that is, it is irrelevant that the expressed reasoning is at odds with the factual situation or with applicable law – if that is the case, one is dealing with a substantive defect and not a formal one, due to error in the factual or legal basis. There would be reasoning in that case, explaining the reasons for the performance of the act, but erroneously so.
Having established this, it is readily apparent that, in our case, the AT clearly explained the reasons why it did not consider as tax-deductible expenses the costs relating to travel – voucher in the name of F… relating to the use of an apartment between 1 and 8 August 2013 in Albufeira, in the Algarve – it was because it understood that, considering the time period, location, and beneficiary of the voucher, it was a vacation trip.
And in refusing to accept as a tax deduction the acquisition of clothing and footwear items, the AT reasoned by stating that, given the type of goods in question, they were not intended for gifts, but for enjoyment by the administrators or family members.
From a legal standpoint, the AT indicated as grounds article 23 of the CIRC.
The fact, invoked by the Claimant, that the statements contained in the inspection report are conclusory, and that the AT did not seek clarifications, does not detract from what has already been stated, that there is reasoning, that it is clear, coherent, and sufficient to be capable of transmitting to the recipient the reasons for non-treatment of the said expenses as tax-deductible costs.
Moreover, evidence of this is the manner in which the Claimant argues about this defect, demonstrating that it well understood the motivation of the AT, but disagrees with it, considering that the expressed reasoning is not grounded in a sufficient investigation and that the expenses in question should be tax-deductible.
4.3. Violation of law due to error in the factual basis
The Claimant argues, in summary:
- that the invoices issued by D…, recorded in its accounts and relating to works at the factory of …, on the property in …, and on unit N in …, correspond to supplies of goods and services actually provided, and are not forged, contrary to the AT's understanding;
- that the invoices issued by E…, recorded in its accounts and relating to the supply of building materials, correspond to actual supplies of those materials, kept in a construction yard and subsequently used in the modernization of unit N located in … and on the property located in … and on another property, and are not forged, contrary to the AT's understanding.
In this regard, it is important to understand that the labor of courts in cases submitted to them consists, in the first instance, in the establishment of the facts alleged or within the court's official knowledge which, in the court's conviction, based on critical assessment of the evidence presented by the parties or gathered on the court's own initiative, in cases where the law permits, are shown to be proved.
In a second moment, the court takes those facts, identifies the law applicable to them, interprets it, and applies it, drawing the decision.
When, as here, it is a matter of reviewing the legality of an act performed by the Administration, the court compares the Administration's performance with its own judgment and declares or does not declare the act illegal, annulling it or leaving it in force.
Now, in the present case, and in that first moment, in which the pertinent facts must be determined, this tribunal issued a judgment by which it deemed certain facts, set out above, to be proven, and expressly declared that it did not consider other facts, also deemed relevant, to be proven.
Let us now recall what was considered not proven:
- that the invoice relating to a stay in the Algarve constituted an expense that the Claimant had to bear as consideration for the indication of properties for acquisition;
- that the invoices of November 2013 correspond to items for gifts to customers and represent expenses essential to obtaining the Claimant's income;
- that the material itemized in the invoices issued to the Claimant by E… Lda., dated 31.12.2013 and due date 01.01.2014, was actually purchased by the Claimant as an investment for future use;
- that the invoices issued by E… to the Claimant correspond to real transactions;
- that the amounts contained in the invoices relating to works at the factory of … correspond to reality;
- that the Claimant had an urgent need to perform works at the factory of … at the end of 2013 and intended to proceed with its sale;
- that it is practice in measurement reports in the sector of activity of the Claimant for there to be no itemization of value per service performed.
In light of this judgment regarding the facts, and from the judicious combination of proven and unproven facts, it is easy to conclude that the Tribunal cannot adopt the Claimant's understanding, which seeks to have the invoices issued in its name correspond to real transactions, carried out in the scope of its activity or in its interest.
It should be stated, finally, that having the AT grounded its performance on valid factual basis, on the one hand pointing out the reasons why it does not consider the aforementioned expenses as tax deductions and, on the other, setting aside the presumption of truthfulness contained in article 75, subsection 1 of the LGT by alleging and proving facts demonstrative or strongly indicative that the accounting and or declarations of the taxpayer do not merit that presumption, it was incumbent upon the Claimant to prove that, rather, the expenses incurred with acquisitions of a vacation stay, clothing and footwear, in 2013 – evidential and clearly outside the scope of its corporate purpose, unrelated to what is evidently necessary to support activity in real estate development, purchase and sale of real property, leasing and management of property or real estate rights, urbanization and subdivision of land, as well as construction of urban buildings owned by it or by third parties – had been incurred in the scope of its activity, done in the interest of the company, being essential to obtain its social revenues or to maintain its productive source.
And that the expenses recorded as relating to the acquisition of building materials and works on properties had actually been carried out, corresponding to works performed on properties of the company and to materials applied therein or kept in stock for future interventions.
Now, while the AT satisfied the burden of proof incumbent upon it, the same did not happen with the Claimant, which did not prove either the essentiality of the questioned costs or the reality of the operations that was substantially called into question. That is, with respect to the facts that the Tribunal deemed not proven, even though it did not deem the opposite facts to be proven, the uncertainty prejudices the party burdened with the burden of proof, that is, the Claimant, pursuant to the provisions of article 74, subsection 1 of the General Tax Code.
Thus, having analyzed all the grounds of the Claimant's challenge, and having found none of the defects that it attributes to the assessment act in question, there is no basis for annulling that act, rendering the claim unmeritorious.
5. Decision
For the reasons set out above, finding no formal or substantive defects in the challenged acts as alleged by the Claimant, its claim is adjudged unmeritorious, and the aforementioned acts shall remain in force.
6. Value of the case
Pursuant to the provisions of articles 3, subsection 2 of the Regulation of Costs in Tax Arbitration Proceedings (RCPAT) and 97-A of the CPPT, the value of the case is fixed at € 107,692.22.
7. Costs
The costs are calculated at € 3,060.00, in accordance with article 4, subsections 1 and 4 of the RCPAT, and shall be borne by the Claimant, in light of its total failure.
Let notification be made.
Lisbon, 14 March 2018
The Arbitrators
José Baeta de Queiroz
Sofia Ricardo Borges
Sara Barros
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