IRC Cost Deductibility and Indispensability – CAAD Arbitration 308/2015-T

ARBITRAL AWARD

Following the learned Decision handed down by the Central Administrative Court South, on 12 January 2017, which has become final, declaring the annulment of the decision handed down in the present proceedings, a new arbitral decision must be rendered.

ARBITRAL DECISION

The arbitrators Maria Fernanda dos Santos Maçãs (arbitrator president), Fernando Araújo and Luísa Anacoreta, appointed by the Deontological Council of the Administrative Arbitration Centre to form the Arbitral Tribunal, agree as follows:

I – REPORT

1. On 14 May 2015, the taxpayer A…, S.A., with NIPC … (hereinafter "Claimant"), with registered office at …, …-… …, filed a request for constitution of a Collective Arbitral Tribunal, under the terms of the combined provisions of articles 2 and 10 of Decree-Law No. 10/2011, of 20 January (Legal Regime for Arbitration in Tax Matters, hereinafter "RJAT", which currently applies with the wording introduced by article 228 of Law No. 66-B/2012, of 31 December), against which the Tax and Customs Authority is named as Respondent (hereinafter "TA" or "Respondent").

2. In such request, the Claimant seeks an arbitral ruling on the illegality of additional IRC assessments and compensatory interest numbers 2014…, 2014…, 2014…, 2014… and 2014…, relating to the years 2007, 2008, 2009, 2010 and 2011, in the respective amounts of €42,365.40, €22,807.86, €514.88, €28,285.31, and €564.94 (amounts calculated by offsetting numbers 2014…, 2014…, 2014…, 2014…, and 2014…, respectively).

3. The request for constitution of the arbitral tribunal was accepted by the President of CAAD and automatically notified to the TA on 28 May 2015.

4. Under the terms of section a) of paragraph 2 of article 6 and section b) of paragraph 1 of article 11 of the RJAT, with the wording introduced by article 228 of Law No. 66-B/2012, of 31 December, the Deontological Council appointed as arbitrators of the Collective Arbitral Tribunal the present signatories, who communicated their acceptance of such appointment within the applicable period.

5. On 3 August 2015, the parties were notified of such appointment, having raised no objection.

6. The Collective Arbitral Tribunal was constituted on 18 August 2015, in accordance with the provisions of articles 2, paragraph 1, section a), 5, 6, paragraph 1, and 11, paragraph 1 of the RJAT (with the wording introduced by article 228 of Law No. 66-B/2012, of 31 December).

7. In the request for arbitral ruling submitted by it, the Claimant invokes, in summary:

a) the inspection procedure, conducted in 2013 and relating to the years 2005 to 2011, is vitiated by illegality, in that it exceeded its scope (encompassing taxes other than IRC alone), and by violation of articles 15 and 36, 2 and 3 of the RCPITA, in that the Claimant was not informed of the content of the order of 19 August 2013, which extended the inspection period;

b) the right to assess relating to the year 2007 became time-barred, by virtue of the fact that, at the time of the additional tax assessment, the assessment period had already expired;

c) Given that the Claimant was barred from using the tax loss recorded in the year 2008 for the calculation of taxable profit in that same period, it shall be equally barred from proceeding with an additional tax assessment, under penalty of this becoming inevitably inflated, as a consequence of the disregard of the said tax losses;

d) There were certain errors in the accounting of transport expenses (which led the tax inspection to classify the expenses as insufficiently documented); however, the errors identified were immediately corrected (having, for example, deficient accounting of expenses in 2010 been cancelled in 2011), such that insistence on taxing realities that had since been modified will result in double taxation of the same facts in different years (in the year in which they were originally recorded and that to which they were transferred) or even within a single and sole year (taxing a reality that had meanwhile been cancelled, for being recorded in the wrong account, and the reality that came to replace that which was cancelled, already entered in the correct account);

e) Also from the improper allegation by the TA that there is no documentation evidencing the cancellation in 2012 of transport expenses improperly provided for in 2011, results double taxation, relating to the same facts, in two distinct years;

f) Until 18 October 2007, the capital of the Claimant company was held (indirectly) by a company with registered office in Spain - Grupo B…-; on that date, a change in the corporate structure occurred, as a result of the acquisition of the entirety of A… by Grupo B… company, from which point there existed total and direct ownership of the Claimant company by the second company. Having occurred no transfer of ownership of the Claimant to the sphere of another entity or economic group, the limitation established in article 52, 8 (former article 47, 8) of the IRC Code does not apply, such that the invocation that a modification of such ownership prevents the carryforward, to the years 2007 and thereafter, of tax losses accumulated that amounted to €1,079,207.17, lacks foundation;

g) with regard to the deductibility of payments for intra-group services ("management fees") made by the Claimant to Grupo B…, it is to be understood that the fact that the corrections due in the amounts indicated in 2009 and 2010 took place only in 2010 and 2011, respectively, does not interfere with the corresponding deductibility. Moreover, the regularity and necessity of such expenses result unequivocally from the very group relationships and transfer pricing practices, and, as explained in the right to be heard, are properly documented and correspond to what was agreed between the Claimant and Grupo B…, its "parent company" – there being, in short, no place for the application of either article 23 or article 45, both of the IRC Code, nor is there reason to suspect that the operations consist of mere decapitalization of the Claimant in favor of its "holding";

h) on the other hand, the application of article 23 of the IRC Code is not defensible, as the question of "management fees" falls exclusively within the subject of "transfer pricing", regulated normatively by the framework of the "OECD Guidelines", also reflected in Ordinance No. 1446-C/2001, of 21 December;

i) the application of article 63 of the IRC Code is not justified, in that there was no violation of any transfer pricing rules, as results from the content of the Transfer Pricing Tax Files for 2009, 2010 and 2011 and the information provided in the exercise of the right to be heard (information improperly disregarded by the TA in the analysis of group relationships between the Claimant and its "parent company");

j) with regard to transport expenses associated with the shipment of goods for customers of C… (a customer of the Claimant), the TA should have observed the provision set forth in article 77, 3 of the LGT and not, as it did, the provision of article 23 of the IRC Code, given that the exceptionality of the economic situation affects the objective comparability that underlies the assessment of transfer prices, such that it was incorrect the criterion adopted by the TA when it did not accept such expenses for tax purposes;

1. The Claimant concludes, formulating requests to the effect that:

a) the nullification of the additional IRC assessments for the years 2007 to 2011, identified in the initial petition;

b) the nullification of the corrections explained in the initial petition;

c) the nullification of the compensatory interest relating to the additional IRC assessments for the years 2007 to 2011, identified in the initial petition;

d) the reimbursement of amounts withheld as VAT credit and refund of the amount paid - €3,587.11 -, due to the provision of a guarantee to suspend the tax enforcement proceedings instituted against A…, by reference to the years 2007 to 2011;

e) the award to the Claimant of default interest due to the improper payment of the sums referred to above.

1. In a request of 19 May 2015, the Claimant requested the attachment of documents to the case, invoking that, through oversight, these had not properly accompanied the initial request.

2. Using the prerogative established in article 13 of the RJAT, the Respondent partially allowed the Claimant's pretension, by means of revocation on 9 July 2015, of part of the tax acts in question. Within the scope of such administrative decision, the TA acknowledged the Claimant's position: i) with regard to assessments numbers 2014 … and 2014 … (corresponding to the years 2007 and 2008), for defect of form, given that they were notified beyond the time limit for assessment; ii) with regard to transport expenses not properly documented, relating to the years 2010 and 2011, in that it considered demonstrated - that from the expense accounts 625300003 and 612100000 no distortion in taxation resulted, having equally considered not demonstrated - that from the overstatement of expenses in 2010 and their reduction in 2011 no tax advantage resulted (with no correlative adjustment to be made in the year 2011), as well as – that from the expense accounts 625300003 and 625300000 no distortion in taxation resulted and – that from the overstatement of expenses in 2011 and their reduction in 2012 no tax advantage resulted for the Claimant (with no correlative adjustment to be made in 2012) and iii) with regard to the carryforward of losses determined in years prior to 2007, declaring that, having been proven that, at the date of acquisition of the entirety of the share capital of the claimant, the acquirer already held (indirectly – through participation of 60% of the share capital of company D…, S.A.) more than 50% of its capital), there is no obstacle to, in accordance with the provision of article 52, paragraph 8 of the IRC Code in effect at the date of the facts, proceeding with the deduction of losses generated prior to the transfer.

3. In a request of 12 August 2015, the Claimant accepted the said revocation act, in that from it results the acknowledgment of the expiration of the assessment right as regards the assessments of 2007 and 2008, as well as the illegality motivated by the failure to consider transport expenses and the failure to consider the carryforward of tax losses determined in years prior to 2007. In the same request, the Claimant expressly declared its interest in the continuation of the proceedings, manifesting interest that the tribunal rule on the illegality of the assessments corresponding to the years 2009, 2010 and 2011, resulting from the corrections made with regard to management fees and transport expenses associated with the shipment of goods to customers of C…. The Claimant concludes such submission by formulating a request in the sense of the request as well as with respect to the non-revoked part, which is reduced to the following:

a) The nullification of the non-revoked corrections;

b) The nullification of the additional assessments resulting therefrom, relating to the years 2009, 2010 and 2011;

c) The nullification of the corresponding compensatory interest already calculated for the period 2007 to 2011;

d) The reimbursement of amounts withheld and amounts paid in provision of a guarantee in the tax enforcement proceedings connected with the years 2007 to 2011;

e) The award to the Claimant of default interest arising from the improper withholds and payments.

1. Under the terms of paragraphs 1 and 2 of article 17 of the RJAT, the TA was notified on 18 August 2015 to submit a response.

2. The TA submitted its response on 1 October 2015, accompanied by the Administrative File, alleging, for the complete rejection of the Claimant's request as regards the part not covered by the decision of 9 July 2015, in summary, the following:

a) In accordance with the content of the revocation act issued on 9 July 2015, by use of the prerogative established in article 13 of the RJAT, it is acknowledged that the Claimant is correct on three points:

i) expiration of the assessment right as regards the years 2007 and 2008;

ii) deductibility of transport expenses, acknowledging the relevance and adequacy of the documentation presented;

iii) possibility of carryforward of losses determined in years prior to 2007, by force of the circumstance that it was proven that, at the date of acquisition of the entirety of the share capital of the Claimant, the acquirer was already, as of the date of acquisition, the holder of more than 50% of such capital, even if indirectly;

b) no acknowledgment is made of the Claimant's position on the two remaining points (as to which the dispute subsists), corresponding to:

i) the deductibility of payments for intra-group services ("management fees");

ii) the deductibility of transport expenses associated with the shipment of goods to customers of C….

c) the Claimant's allegations invoke solutions that exceed the scope of the present arbitral jurisdiction, such as for example the request for reimbursement/refund of guarantees provided within the scope of violation proceedings and tax enforcement, as these situations are far beyond the competence fixed by article 2, 1 of the RJAT (and by Ordinance No. 112-A/2011, of 22 March, under article 4 of the RJAT;

d) it exceeds the competence of the present Tribunal to assess directly and, moreover, condemn, in matters of enforcement proceedings, or provision of guarantees, offsetting or attachments within such proceedings;

e) such circumstance represents a dilatory exception, leading to dismissal of the claim as to such pretensions, under the terms of articles 576, 2 and 577, a) of the CPC, applicable by force of article 29, 1 of the RJAT;

f) certain documents were not attached to the Claimant's initial request, which constitutes a violation of the provision of article 423 of the CPC;

g) the inspection procedure does not suffer from any illegality, either because its conclusions did not exceed the orders of service that originated it, or because any notification irregularities were cured by the Claimant's failure to react timely;

h) as to the contested corrections, it is noted (resuming the essential arguments contained in the Tax Inspection Report) the impossibility of controlling the financial movements recorded in the expense accounts of the Claimant's accounting (whether in their materiality or in their correspondence with the contractual regime that binds the Claimant to its "parent company");

i) what can be ascertained as to actual expenses is that many of them were incurred in the interest of the "parent company", and not of the Claimant, the requirement of necessity of such expenses for obtaining taxable profit not being fulfilled;

j) the same applies to the corrections relating to transport expenses associated with the shipment of goods to customers of C…, and within the inspection procedure itself, the Claimant did not respond to requests for evidence as to such expenses, in a manner that would permit a safe and complete clarification;

k) it is to be emphasized the circumstance that all the information deficiencies pointed out are attributable to the Claimant, as upon it rest the ancillary duties of proof, documentation and accounting, as well as the burden of proof of the necessity of the costs in question, for purposes of the application of article 23 of the IRC Code;

l) the Claimant's understanding to the effect of the application of article 63 of the IRC Code, to the detriment of article 23 of the IRC Code, lacks foundation; on the contrary, article 23 is of general application, encompassing situations of "special relationships" between companies, and at most, article 63 of the IRC Code may only restrict the deductibility of costs (for otherwise it would lose its purpose as an anti-abuse provision), but always in a position of logical dependence on the applicability of article 23;

m) as to the Claimant's request relating to interest, it is strange that default interest should have been mentioned, as there was no breach of any final decision (article 102 of the LGT); having not been requested indemnifying interest (articles 43 and 100 of the LGT), such cannot be granted, nor could they be, as no error attributable to the administration is apparent, nor are the prerequisites for application of article 43, 1 of the LGT fulfilled.

1. By means of arbitral order of 4 October 2015, the Claimant was given the opportunity to pronounce itself on the matter of exception raised by the Respondent, which the Claimant did in the request submitted on 7 October 2015.

2. In a request submitted on 7 October 2015, the Claimant pronounced itself on the allegation of omission of documents and on the matter of exception raised in the response by the Respondent, sustaining, essentially:

15.1 that no omission of documents occurred, in that all were properly attached to the initial request, and furthermore, were already known to the Respondent within the scope of the administrative proceedings;

15.2 that the alleged exceeding of the limits of arbitral jurisdiction did not occur, as what is requested is the nullification of the assessments, with everything else being a mere consequence of such nullification. These are connected matters, but not the central or determining ones in the dispute. These are those of the legality of the assessments, as all others depend on them, such that the effects will end up producing themselves therein, without need for direct intervention by the Arbitral Tribunal, without need for exceeding the limits of its competence.

1. By Arbitral Order of 15 October 2015, the parties were notified to communicate their choice as to the nature (written or oral) of the submissions, as well as the fixing of 17 February 2016 as the time limit for the rendering of the Arbitral Decision.

2. In a request of 16 October 2015, the Claimant requested the attachment of new documentation (relating to a gracious complaint, meanwhile submitted, as to the IRC assessment for the year 2013 and relating to assessment and account settlement documents sent by the TA, with amounts rectified in accordance with the decision of partial allowance of the Claimant's pretension of 9 July 2015).

3. The Respondent pronounced itself as to such presentation of documents, invoking their irrelevance for the decision of the subject matter of the case. It reserved judgment on such characterization, however, of documents numbers 35 to 39 (relating to "management fees", at issue in the proceedings), notwithstanding as to the same alleging the inadequacy of the said documents to undermine the soundness of the corrections made by the TA.

4. By Arbitral Order of 18 October 2015, the Tribunal accepted the attachment of such documents and rejected the existence of any ground for untimeliness or sanction for delay in the submission of documents, referring to the general regime of article 423, 2 of the CPC and requesting from the Claimant the attachment of documentation not available on the electronic platform.

5. In a request of 22 October 2015 the Claimant declared to opt for written submissions and requested the attachment of documents allegedly lacking, relating to what was alleged in the initial petition.

6. In a Request of 26 October 2015, the Respondent manifested interest in producing counter-submissions in writing. It further invoked the exception of material incompetence of the Arbitral Tribunal as to what it alleges to be the pretension of expansion of the request that, in its understanding, would be contained in the Requests submitted on 7 October and 22 October 2015.

7. In Arbitral Order of 29 October 2015, the Tribunal pronounced itself to the effect that no pretension of expansion of the request was discerned in the Claimant's requests, as well as that it would confine itself, in its decision, to the appreciation of the objective scope of the proceedings resulting from the initial request.

8. The Claimant and Respondent submitted, respectively, written submissions and counter-submissions, within the legal period, maintaining, in essence, the positions initially defended by them.

II - CLARIFICATION

1. The parties have legal personality and capacity and benefit from procedural standing, under the terms of articles 4 and 10, paragraph 2, of the RJAT and article 1 of Ordinance No. 112-A/2011, of 22 March.

2. The TA proceeded to designate its representatives in the case and the Claimant attached a power of attorney, with the Parties thus being properly represented.

3. With regard to the requirement of competence, the Respondent raises the incompetence of the Tribunal as to the subject matter, in that it does not fall within the scope of its competencies "the appreciation of matters relating to enforcement proceedings, where the guarantee provided, or attachment, or acts of offsetting are framed."

According to the TA "there does not exist any legal support that would permit that condemnations of a nature other than those resulting from the powers fixed in the RJAT be handed down, even if they constituted consequence, at the level of enforcement, of the declaration of illegality of assessment acts".

The Claimant argues, in the opposite sense, for the competence of the Tribunal for the appreciation of the following requests:

a) Reimbursement of amounts withheld as VAT credit and refund of the amount paid - €3,587.11 -, due to the provision of a guarantee to suspend the tax enforcement proceedings instituted against A…, by reference to the years 2007 to 2011;

b) Right to be indemnified for "damages resulting from its improper provision, under the terms of articles 53 of the General Tax Law ("LGT") and 171 of the CPPT" (cfr. articles 51 and 52 of the Request), due to the improper payment of the sums referred to above.

Before the foregoing and in summary terms, the question that arises is whether it falls within the competence of arbitral tribunals to issue condemnatory sentences in matters of indemnifying interest and reimbursement of amounts improperly paid.

It is necessary to decide.

In accordance with what is established in section b) of paragraph 1 of article 24 of the RJAT (following the provision of article 100 of the CPPT), the tax administration must, in the exact terms of the success of the arbitral decision in favor of the taxpayer and until the end of the period provided for the voluntary execution of sentences of tax judicial tribunals, "restore the situation that would exist if the tax act that is the subject of the arbitral decision had not been performed, adopting the acts and operations necessary for such effect".

This provision is in harmony with what is established in article 100 of the LGT [applicable by force of the provision in section a) of paragraph 1 of article 29 of the RJAT], which establishes that "the tax administration is obligated, in the case of total or partial success of a complaint, judicial challenge or appeal in favor of the taxpayer, to immediate and full restoration of the legality of the act or situation that is the subject of the dispute, comprehending the payment of indemnifying interest, where applicable, from the end of the period of the decision".

Although article 2, paragraph 1, sections a) and b), of the RJAT uses the expression "declaration of illegality" to define the competence of the arbitral tribunals that function in CAAD, making no reference to condemnatory decisions, it is to be understood that the competences comprehend the powers that in judicial challenge proceedings are attributed to tax tribunals, this being the interpretation that conforms to the meaning of the legislative authorization on which the Government based itself to approve the RJAT, where it proclaims, as the first guideline, that "the tax arbitral process must constitute an alternative procedural means to judicial challenge proceedings and to the action for the recognition of a right or legitimate interest in tax matters."

As was established, among others, in the Arbitral Award of 16 October 2013, issued in proceeding No. 28/2013-T, "The judicial challenge proceeding, although essentially a proceeding of nullification of tax acts, admits the condemnation of the Tax Administration to payment of indemnifying interest, as is inferred from article 43, paragraph 1 of the LGT, in which it is established that 'indemnifying interest is due when it is determined, in a gracious complaint or judicial challenge, that there was error attributable to the administration from which results payment of the tax debt in an amount superior to that legally due (…)".

In turn, paragraph 5 of article 24 of the RJAT in stating that "payment of interest is due, regardless of its nature, under the terms provided in the General Tax Law and in the Code of Tax Procedure and Process", "should be understood", it is concluded in the said award, "as permitting the acknowledgment of the right to indemnifying interest in the arbitral process".

For all that has been set forth, if the contested additional assessment is annulled on the basis of illegality, the Claimant will have the right to reimbursement of amounts withheld as VAT credit and refund of the amount paid (€3,587.11), due to the provision of a guarantee, as well as the right to payment of indemnifying interest, as only thus can be restored "(…) the situation that would exist if the tax act that is the subject of arbitral decision had not been performed" (in this sense, cfr. the Arbitral Award of 24/11/2014, proceeding No. 367/14-T).

It is thus that the alleged exception of material incompetence of the tribunal is without merit.

1. The proceeding does not suffer from nullities.

2. No prior or subsequent prejudicial questions or exceptions were raised that would prevent the appreciation of the merits of the case, with the conditions being present for a final decision to be rendered.

III. MERITS

III.1. FACTUAL MATTERS

§1. PROVEN FACTS

With relevance for the appreciation and decision of the questions raised as to the merits (considering, for such effect, their delimitation as resulted configured after the revocation decision of 9 July 2015), the following facts are given as established and proven:

a) The present Claimant (or A…) was established by Grupo E…, in 1999, as a result of a partnership between Grupo E… and Grupo F…, operating in the sector of fabrics for lining of automobile components;

b) since 2007, the entirety of the share capital of A… is held by Grupo B…, S.A.;

c) within the scope of the Group's diversification policy, in 2003, A… introduced a new line of production of foamed fabric for automobile roofs;

d) in 2008, there is a separation of the company from Grupo F…, with A… assuming the business of production of foamed fabrics for the automobile roof line;

e) in 2010, B…, in partnership with G…, established C…, Ltd., an entity participated in 50% by each of the said entities. This entity was intended for the development and centralization of the commercial activity of the two shareholder companies;

f) within this scope, A… came to sell its products through C…, which resold them to third parties;

g) in April 2011, the shareholders approved the dissolution of C…, with A… remaining, once again, responsible for sales directly to the end customer;

h) during the year 2010 a branch of A… (H…) was established, located in Prague (Czech Republic), with the same corporate purpose as A…, but encompassing the production of all foamed fabrics used in the interiors of automobile vehicles;

i) during the year 2011, A… decided to discontinue the activity of the branch, transferring all productive activity from it to the unit in …;

j) in the years 2005 to 2011, the present Claimant recorded expenses (in the accounts "622991500 – TECHNICAL ASSISTANCE GROUP" and "622501500 – GROUP COMMISSIONS"), relating to services rendered by the "parent company" in the total value of €1,576,349.10;

k) the said expenses are supported in internal documents, recorded as a charge to the respective expense accounts and with an average frequency of one per month, in counterpart of a credit in a third party account "…– GROUP E…";

l) the amounts recorded monthly were considered provisional, as they would be the subject of adjustment at the end of the year through a "corrective invoice" issued by the "parent company" and provider of the said services;

m) in this document references were made to partial invoices issued throughout the year, serving this corrective document to adjust the amount of services provided to be charged annually;

n) during the year 2009, A… made, monthly, an accounting record relating to its provision for expenses associated with services rendered by the Group, in the account 622991500 – Technical Assistance Group, in counterpart of account 228281500. In the years 2010 and 2011, such records were made in the account 622501500 – Group Commission, in counterpart of account 225601500;

o) by means of the receipt of monthly invoices from the Group, A… recorded in accounts 228281500, in 2009 and 225601500 – GROUP E…, in 2010 and 2011, in counterpart of 221411500 – GROUP I… the amount stated in the invoice;

p) at the end of each year, by means of the calculation, by the Group, of the amount actually incurred in the provision of services (cost of service provision plus a 7% margin), a settlement invoice was sent for the amounts already invoiced. Upon receipt thereof, A… proceeded to record the same in the respective income accounts;

q) the "corrective invoice", for each year in question, refers to the services provided as "according to the contract for provision of services between the parties", with the annual value of the provision of services corresponding to 1% or 2% of the annual value of sales, depending on whether it is the period 2005-2008 or 2009-2011;

r) with regard to the contracts in force in the period 2009 to 2011, in accordance with what is stipulated in clause "E", in its point "i", the "final/definitive invoice issued at the end of each year" should discriminate the services (provided), and, with regard to the manner of quantification and valuation of the services in question, in accordance with what is stipulated in annexes 1, 2 and 3, by reference to what is contracted in clause "E", in point "v" of the said contracts, "the basis of charging" would be calculated on the basis of "costs incurred by B… for each service provided, including travel and expenses related to third parties, recovered according to the appropriate cost rate, plus 7%.";

s) the corrections to total expenses for services (invoice resulting from the calculation at the end of the year) relating to the years 2009 and 2010, were made by the Claimant only in the years 2010 and 2011, respectively;

t) the Claimant requested, from the TA, the reimbursement of special payments on account made in the years 2005, 2006 and 2007 (in the amounts of €20,847.92, €22,563.04, and €26,084.24, respectively) and not deducted in the 4 following years (2008, 2009, 2010 and 2011);

u) as a consequence of such request, the Claimant was subjected to an inspection procedure relating to the years 2005 to 2011, which lasted from 14 March 2013 to 25 November 2013, resulting in the draft report notified to the Claimant by letter of 27 November 2013;

v) the Claimant exercised the right to be heard previously on 16 December 2013, having there expressed disagreement with the proposed corrections as to expenses not properly documented (whether transport expenses in the amount of €319,259.24, or "management fees" in the amount of €1,576,349.10), the carryforward of tax losses determined in years prior to 2007 in the amount of €1,079,207.17 and expenses not accepted (transport expenses in the amount of €769,585.00) –correction to the value subject to tax as IRC, relating to the years 2005 to 2011, which totaled a global amount of €3,841,486.51;

w) the taxpayer was notified to "characterize the nature of the said expenses supported, attach any contractual documents, identify the means of payment involved, as well as demonstrate their necessity for the realization of the company's revenues, under the terms of the provision of article 23 of the IRC Code";

x) with regard to the characteristics and nature of the services acquired by A… from the "parent company", recorded in the expense accounts "622991500 – TECHNICAL ASSISTANCE GROUP" and "622501500 – GROUP COMMISSIONS", the Claimant argued that these are services associated with activities supporting the main activity of A…, considered necessary for the pursuit of the company's objectives, having presented three contracts for provision of services entered into on 20 October 1999, 1 August 2009 and 1 January 2010, between B… and A… (cfr. section II.3.7.2 of the RIT) and noting that A… would have acquired from the provider and parent company, C…, services of assistance and support at the level of financial, administrative and business management of the company;

y) in addition to the agreements entered into between the parties, the taxpayer attached copies of the monthly invoices for the period analyzed (2005 to 2011) that support the accounting records between the group accounts (charge of "225601500 – GROUP E…" in counterpart of "221411500 – GROUP I…"), issued by B…, as well as copies of emails exchanged between the "parent company" and A…, as well as copies of notes supporting meetings related to management and direction functions held between the parties;

z) with regard to the means of payment involved, it submitted an extract of current account "225601500 – GROUP E…" which presents with a null balance in counterpart of "221411500 – GROUP I…";

aa) following the contracts entered into, the B… group obligated itself to provide the following types of services to A…:

1. General Management Services

· Capture of projects from worldwide manufacturers and negotiation of all project specificities (i.e. volumes, values, technical characteristics and product components, quality requirements, logistics conditions and financial conditions, among others). Allocation of the various components of each project to the production entities of the Group;

· Management and definition of company risk control measures;

· Prospecting and negotiation of strategic raw materials (chemicals and threads) used in the productive processes of the factories; and

· Support in the area of human resources, intervening in the definition of wage policies and evaluation as a means to ensure that local units are equipped with and retain the ideal human resources for the pursuit of their activity in the most efficient and effective manner possible.

1. Financial, Legal, Tax Services and Treasury Services

· Prospecting and negotiation of conditions relating to financial operations to be contracted by Group entities with financial institutions;

· Guarantee of proper fulfillment of the obligations assumed by Group entities before financial institutions through the provision of comfort letters/guarantees;

· Prospecting, negotiation and subscription of insurance (namely, multi-risk and civil liability) for Group entities, including A…; and

· Provision of legal services.

1. Information Technology Support Services

These services include the provision of servers, the maintenance of these and, as well as, all computer applications used by A…, necessary for its activity, namely, with respect to the Business Planning and Control System ("BPCS");

bb) the expenses associated by the Claimant with management fees correspond to those in the table below:

cc) such expenses were not accepted from the tax perspective, such that they were added to the taxable result of the respective years;

dd) the Claimant manifested its understanding that such expenses are necessary for the exercise of its activity;

ee) the Claimant accounted as expenses of the respective years, in the account "625300003 – ROAD TRANSPORT RI", expenses incurred with the acquisition of goods transport services relating to the shipment of goods from the facilities of the taxpayer with destination to the address of customers of C…;

ff) between May 2010 and April 2011, A… recorded the transport expenses in the total value of €769,585.00, which results from the fact that in the years 2010 and 2011, the expenses associated with transport expenses for customers of C… amounted to €310,230.00 and €459,355.00, respectively;

gg) notified, the taxpayer, within the scope of the inspection process, to, with regard to expenses with transport of goods from the facilities of customer C… to the facilities of its customers, demonstrate the respective necessity for the realization of the company's revenues, argued that "in accordance with what was established in the cost structure, the transport cost for customers should already be part of the sales price of the operational units to C…";

hh) when requested to demonstrate that the said transport expenses were passed on in the sales prices practiced in the transfers to that customer or, in the absence thereof, the respective charge to C…, LTD, alleged lack of "sufficient internal resources" to respond to the request made;

ii) in the response, the Claimant argued that "in accordance with what was established in the cost structure, the transport cost for customers should already be part of the sales price of the operational units to C…";

jj) in view of the Claimant's pronouncement, the corrections relating to "expenses not properly documented – transport expenses" were amended to a lower value (€182,924.38), communicated to the Claimant on 6 January 2014 in the Final Tax Inspection Report, whereby the taxable amount passed to a total of €3,705,151.65;

kk) on 18, 21, 22 and 25 January 2014, the Claimant was notified of account settlement demonstrations and corresponding additional IRC assessments and compensatory interest numbers 2014…, 2014…, 2014…, 2014… and 2014…, relating to the years 2007, 2008, 2009, 2010 and 2011, in the amounts of €42,365.40, €22,807.86, €514.88, €28,285.31 and €564.94, respectively (amounts calculated by offsetting numbers 2014…, 2014…, 2014…, 2014…, and 2014…, respectively), all in a total of €94,538.39;

ll) on 15 July 2014 the Claimant submitted a gracious complaint against such corrections and additional IRC assessments relating to the years 2007 to 2011 (requesting the annulment of the corresponding compensatory interest and the reimbursement of amounts used in credit offsets, in addition to compensatory interest for suspension of VAT credit reimbursement);

mm) the Claimant filed a hierarchical appeal on 15 December 2014;

nn) the Claimant was further notified of the institution of tax enforcement proceedings, within which, for the presentation of suitable guarantee, proposed, and it was accepted, offsetting with VAT reimbursement credits, in the total amount of €94,204.16, in addition to the attachment of a movable asset in the value of €20,000.00;

oo) from the offsetting with VAT reimbursement credits resulted the extinction of the enforcement proceedings relating to the years 2007, 2008 and 2009, remaining a debt of €3,587.11 (of which €2,999.03 relating to the year 2010 and €588.08 relating to the year 2011), whose voluntary payment for the extinction of the tax enforcement proceedings was requested by A…, having been issued by the Tax Authority form 50.

§2. UNPROVEN FACTS

No other relevant facts for the decision of the case were proven, namely the following:

• that the transport expenses supported and recorded as expenses by the Claimant were reflected in the price of the products sold by A… to C…;

• that A… proceeded with the voluntary payment referred to in the proven fact in section oo) above, despite the respective payment forms having been issued.

§3. REASONING OF THE DECISION AS TO THE FACTUAL MATTERS

The factuality proven was based on the critical analysis of the administrative file and other documents attached to the case, whose authenticity and truthfulness were not contested by either party, as well as the consensual positions of these.

III.2. MATTERS OF LAW

Considering the above-mentioned partial revocation of administrative acts, conducted by the TA on 9 July 2015, there remain, as the subject of appreciation in the present proceedings, only the requests for:

a) nullification of the tax acts relating to the additional IRC assessments for the years 2009, 2010 and 2011, and respective compensatory interest, for illegality by reason of:

a.1) considering as non-deductible the payments of intra-group services ("management fees") in the amount of €1,576,349.10 and

a.2) considering as non-deductible the transport expenses associated with the shipment of goods to customers of C… in the amount of €769,585.00;

b) reimbursement of amounts withheld as VAT credit and refund of the amount paid - €3,587.11 -, due to the provision of a guarantee to suspend the tax enforcement proceedings instituted against A…, by reference to the years 2007 to 2011;

c) award to the Claimant of indemnifying interest due to the improper payment of the sums referred to above.

Each of the stated aspects will be considered, in succession.

It is necessary to appreciate.

a) Nullification of the tax acts relating to the additional IRC assessments for the years 2009, 2010 and 2011, and respective compensatory interest, for illegality

a.1) illegality based on procedural defects

In this regard, the Claimant begins by invoking that the inspection procedure is illegal, because it was initially communicated to it that the external inspection procedure would be of partial scope, and subsequently, without any communication, the procedure came to encompass other taxes, with corrections being made as to stamp tax.

First, as to scope, an inspection procedure is said to be "partial" when "it encompasses only some, or some, taxes or some, or some, duties of the taxpayers or other tax obligated parties" [section b) of paragraph 1, of article 14 of the RCIT].

Thus, nothing prevents that, although partial, the inspection procedure may encompass more than one tax, the point being that the guarantees of the taxpayers are not violated.

According to the Respondent "the only corrections at issue in the present proceedings are solely relating to IRC, therefore perfectly within the scope provided in the service orders that authorized the action of the Tax Administration here under analysis".

It can be advanced from the outset that it appears that reason is on the side of the TA.

In truth, any alleged illegality or irregularity, necessarily of a procedural nature, can only be reflected in the final act of the respective inspection procedure.

In the case at hand, demonstrated the correspondence between the service order that served as the basis for the corrections made in the inspection procedure relating to IRC, the sole tax at issue here, the inspection procedure under analysis does not suffer from the defect that is imputed to it. If the alleged procedural illegality were to be verified, it could only be reflected, at most, in the final act of the inspection procedure relating to Stamp Tax.

The Claimant also alleges lack or insufficiency of reasoning, in that it was notified of an order extending the inspection period, but was not given knowledge as to the content thereof, as well as the concrete grounds that supported the said extension.

Here too it appears that the Claimant has no reason, in that it confuses lack of reasoning of administrative acts and communication to the interested parties of the grounds that presided over the issuance thereof. As the Respondent rightly argues, according to the jurisprudence of the STA, the omission of notification to the interested parties of the respective grounds does not constitute a requirement of validity of administrative acts, as the legal order offers them means that they can employ when notification of acts is not accompanied by the respective reasoning.

In the special case of tax acts, if communication of the decision on tax matters does not contain the reasoning legally required, the interested party can employ the mechanism provided for in article 37, paragraph 1, of the CPPT and request notification of the requirements that have been omitted or the passage of a certificate containing them.

Not having the Claimant used, in a timely manner, this mechanism, any irregularity that might have existed is to be considered cured.

a.2) illegality based on the fact that the payments of intra-group services ("management fees") were not considered deductible

With regard to the "management fees" supported by the Claimant and recognized by it as expenses, the Respondent questions two questions essential to their acceptance as a tax cost. On the one hand, to be fiscally deductible, such expenses should meet the requirement of necessity. On the other, once the requirement of necessity is overcome, they should be proven with documents issued in accordance with law.

Indeed, in accordance with what is stipulated in article 23 of the IRC Code (in the version in force at the date of occurrence of the facts), "expenses are considered those that are demonstrably necessary for the realization of income subject to tax or for the maintenance of the productive source".

The question of necessity of expenses underlying this rule has been widely debated, both by doctrine and in various awards of CAAD, as well as in awards of superior tribunals, and it is already widely accepted (cfr. proceedings 91/2012-T and 39/2013-T of CAAD, Awards 049/11 and 0779/12 of STA, Award 03369/09 of TCA South, among others) that such question should be understood in a framework of causal nexus between the expense incurred and the managerial and economic purpose of the company that supports it.

It states, specifically, Award 03369/09 of TCA South referring to "technical and management services" acquired by a taxpayer from a related company: "a cost, to be relevant fiscally, has to be affected to the operation, in the sense that there must exist a causal relationship between such cost and the company's revenues. But that does not mean, as is emphasized in the reasoning which we have been following, that this relationship is a relationship of necessary causality, a genuine conditio sine qua non or of concrete results obtained with the act, but rather taking into account the normal circumstances of the market, considering the normal risk of economic activity, in terms of economic adequacy of the act to the purpose of maximized attainment of results."

The same award further adds that it is "in the concept of necessity inherent in article 23 of the IRC Code that the essential question of the fiscal consideration of business costs lies and that underlies the fundamental distinction between the cost actually incurred in the collective interest of the company and that which may result only from the individual interest of the shareholder, a group of shareholders or their aggregate and which cannot, therefore, be considered a cost. This is an expense with a business purpose which does not mean that it has from the outset an immediate and directly profitable purpose, but that it has, in its origin and in its cause, a business purpose, the law granting the TA sufficient powers to refuse acceptance as a tax cost of expenses that cannot be considered compatible with the purposes to be pursued by the company - cfr. J. L. Saldanha Sanches, The Limits of Tax Planning, p. 214."

Still on the same question Award 049/11 of STA clarifies "the requirement of necessity of a cost has to be interpreted as an indeterminate concept requiring case-by-case completion, as a result of an analysis with a business economic perspective, in the perception of a relationship of economic causality between the assumption of a cost and its realization in the interest of the company, mindful of the corporate purpose of the commercial entity in question, being prohibited to the Tax Administration actions that place in question the principle of freedom of management and autonomy of the will of the taxpayer"

In the case at issue, the expenses whose necessity was challenged by the Tax Authority refer to properly enumerated services of general management, financial, legal, tax and treasury, as well as information technology support, as contractually established and materially exemplified in numerous documents such as copies of e-mails, notes supporting meetings and summaries of expenses incurred. Given the group relationship established, it is considered common and justified the nature of the services provided and their concentration at the higher level of the Group's participation relationships. Indeed, in accordance with rules of experience, the management of companies currently requires, and due to aggravated circumstances, in addition to permanent monitoring and control, a diverse, broad and, to a certain extent, globalized set of complementary services. It is not reasonable that in a group relationship, the ultimate managers, who do not necessarily coincide with those responsible for a single legal entity, do not define, delimit, standardize, control, centralize a set of services that in ultimate analysis but of first importance are at the core of the economic success of the activities of the participating company. The value supported by the Claimant corresponded to the cost of provision of services calculated by the Group plus a 7% margin, a practice which the Group applies with respect to other associates.

As services actually existed, the question arises as to whether the same were provided in the interest of the shareholder of the Claimant or in the interest of the Claimant itself.

Now, as referred to, the services under analysis aim at the monitoring and control of the activity of A…, the optimization of its management, its economic success, thus, in ultimate analysis, the maximization of its results. If they were not acquired by it from the parent company, they would have to be acquired from external entities, subcontracting management consultancy, or internalized, via the hiring of qualified collaborators for such effect. The company's administration, exercising its right of autonomy and freedom of management, understood that such services would be provided by Grupo E…, thus entering into a contract for such effect. The choice for the contracting of services necessary for good management with the parent company does not mean that it is intended to decapitalize the Portuguese company. It means, rather, that the company, and also the Group which equally seeks the maximization of profit of the companies that constitute it, opted for a centralized management control model, today commonly referred to as "shared services". Thus, the costs supported with the maintenance of this model, being necessary for the realization of revenues, as they are costs inherent and necessary to management, especially in the conditions of the current economic situation, should be considered fiscally deductible.

Moving now to the question of documentary support of expenses, it refers to section h) of paragraph 1 of article 45 of the IRC Code (at the time) that "are not deductible for purposes of determining taxable profit (…)" "expenses not properly documented".

There is also case law on this question. Indeed, the Award of STA No. 658/2011, for example, clarifies that the document evidencing and justifying expenses for purposes of the norms of the IRC Code is limited to a "written document, in principle external and with mention of the fundamental characteristics of the operation".

The support to the intra-group operations supported by the Claimant are embodied in the invoices of Grupo B… as well as in the already-mentioned contracts entered into between the two entities that enumerate the set of general management, financial, legal, tax, treasury services and information technology support provided by the Group to the Claimant. Notwithstanding, the invoices (in particular the corrective invoices) do not fulfill one of the requirements exigible by the contracts which is the discrimination of the services provided, limiting themselves to a reference to the contract for provision of services entered into between the parties. But, non-observance of this requirement does not induce that the services did not occur, inducing only lesser rigor in the application of the administrative procedures that govern the contracts. Nor does it induce, on the other hand, that it is not possible to identify the services provided, as the same are enumerated in the contract to which it refers.

The formal requirements regarding proof of expenses aim to provide the Tax Administration with effective control of economic relationships, a fact properly clarified in higher awards, such as the above cited. Notwithstanding, such requirements cannot serve as a presumption of the non-occurrence of operations when other facts are sufficient to conclude their observance. Thus, the requirements of legality of the documents supporting the services provided are considered fulfilled.

a.3) illegality based on the fact that the transport expenses associated with the shipment of goods to customers of C… were considered non-deductible.

Calling once again to analysis article 23 of the IRC Code, it refers to section b) of its paragraph 1, that expenses are considered deductible "relating to distribution and sale, encompassing those of transport, advertising and placing of goods and products" (emphasis ours).

The transport expenses here referred to are those that may result from the transport of materials and goods from suppliers to the facilities of the taxpayer, as well as those that may result from the shipment of goods and products to its customers, in accordance with conditions between the parties negotiated. It is a rational assumption underlying this deduction of transport costs that the taxpayer timely knows the costs involved, which presupposes knowing the parties and the location from where or to which it commits to collect or send the goods.

It is also rational to assume that the transport cost of products for customers, or on account of these, is passed on in the sales price to those customers, which will cause the sales price to vary based on the distance to be traveled, at least when the diversity of distances thus justifies. It would not be inappropriate to assume that the sales price always includes the transport cost, when it is not relevant to different distances to be traveled. It would be sufficient to calculate the average value of transport to be added to the costs that are the basis for the formation of the price. What seems difficult to believe is that a company accepts bearing the transport costs to any location, when it is not party to the negotiation between buyer and seller of the products to be transported.

The Claimant recognized as expenses of the year costs with transport of products to the locations of the customer of its customer (locations of customers of C…). The Claimant is not party to the contract of purchase and sale between C… and the customers thereof. The Claimant does not know, as it must not know, the terms of negotiation between C… and the customers thereof. Depending on the location of the customers of C…, the Claimant's margin is deteriorated, and one can even suppose that the business would not be of its interest in light of the costs it entails. Furthermore, the Claimant failed to demonstrate, without presenting plausible justification, that in the sales price of the products to C… is passed on the transport cost for the customers thereof, despite this being the practice it invoked. There does not thus subsist economic rationality in the assumption of transport costs for customers of a customer. Rational would be that the Claimant bore transport costs to a determined location (costs properly passed on in the sales price) and that from that location, the additional costs would be assumed by its customer, C…. And that such would be duly negotiated between each affected party. Such did not occur and the Claimant did not sufficiently clarify why not, limiting itself to refer the question to analysis regarding transfer pricing, when initially it had invoked and passed on of transport cost in sales price.

It appears that it is also not possible to discard the economic irrationality of the expenses supported in the scope of transfer pricing.

Indeed, as provided in article 63 of the IRC Code (at the time), the tax regime for transfer prices is limited to ensuring that in commercial operations conducted between a taxpayer and any other entity with which it is in a situation of special relationships, should be contracted, accepted and practiced terms or conditions substantially identical to those that would normally be contracted, accepted and practiced between independent entities in comparable operations. Now, by what was set forth above, what was practiced evidences exactly the opposite of what would be negotiated between independent parties, in the normal exercise of the conditions associated with the purchase and sale.

It is thus that, as reason is with the TA in this aspect, the Claimant's request is without merit on the same.

b) The requests for reimbursement (of amounts withheld and of tax amount paid) and indemnifying interest

The Claimant further petitions the restitution of amounts withheld as VAT credit and the refund of the amount paid (€3,587.11), and further indemnifying interest for the improper payment of the said amounts.

Following the illegality of the assessment act there is place for reimbursement of the tax paid by Taxpayers, by force of the provision in article 24, paragraph 1, section b), of the RJAT and article 100 of the LGT, as this is essential to "restore the situation that would exist if the tax act that is the subject of the arbitral decision had not been performed".

It results, moreover, from paragraph 1 of article 43 of the LGT that "when it is determined, in a gracious complaint or judicial challenge, that there was error attributable to the administration from which results payment of the tax debt in an amount superior to that legally due".

In the case at hand, with regard to indemnifying interest it results clear that the partial illegality of the contested assessment act is directly attributable to the Respondent, which, by its own initiative, performed it without legal support, suffering from erroneous interpretation of the law.

Consequently the Claimant would equally have the right to indemnifying interest, to be paid from the date on which it made the respective payment of the tax in question until the integral reimbursement of the amount paid, at the legal rate.

It should be noted, however, that, in the case at issue, it was only considered proven, in section nn) of the factual matters fixed, that the Claimant proposed and "offsetting with VAT reimbursement credits (…) was accepted".

As regards the amount of the voluntary payment of the tax debt, it was not proven that the Claimant actually proceeded with the voluntary payment of the stated amount.

Indeed, in this regard, only that payment was proven, in section oo) of the factual matters fixed, that such payment was requested "having been issued by the Tax Authority form 50".

Such circumstance determines the lack of merit of the request for reimbursement and indemnifying interest.

The foregoing does not prejudice, however, the rights that are available to the Claimant, in the scope of enforcement of judgments (articles 609, paragraph 2, of the CPC and 565 of the CCiv), provided it makes such proof.

IV. DECISION

In such terms, the Tribunal decides:

a) to judge as without merit the invoked exception of material incompetence of the Tribunal;

b) to dismiss the defendant from the proceedings as to the requests for nullification of the acts of additional assessment (IRC), corresponding to the years 2007 and 2008, as well as to the request for nullification of the act of assessment of compensatory interest associated with the said additional assessments, for mootness of the dispute, following the voluntary revocation of such acts;

c) to judge as having merit the request for declaration of illegality of the acts of additional assessment (IRC) and respective compensatory interest, corresponding to the years 2009 to 2011, except for the part corresponding to the allegation of the defect relating to the correction of transport expenses associated with the shipment of goods to customers of C…, in the amount of €769,585.00, with the consequent partial nullification;

d) to judge as without merit the requests relating to reimbursement and indemnifying interest, without prejudice to the rights available to the Claimant in the scope of enforcement of judgments.

V. VALUE OF THE CASE

The value of the case is fixed at €94,538.39, in accordance with the provision of article 97-A of the CPPT (applicable under article 29, paragraph 1, section a), of the RJAT) and article 3, paragraph 2 of the Regulation of Costs in Tax Arbitration Proceedings (RCPAT).

VI. COSTS

In accordance with article 22, paragraph 4, of the R.J.A.T., the amount of costs is fixed at €2,754.00 (two thousand seven hundred and fifty-four euros), in accordance with Table I annexed to the Regulation of Costs in Tax Arbitration Proceedings, to be paid in the proportion of 69% against the Claimant (€1,900.00, one thousand nine hundred euros) and 31% against the TA (€854.00, eight hundred and fifty-four euros).

Lisbon, 13 March 2017.

The Arbitrators

Fernanda Maçãs
(President)

Luísa Anacoreta

Fernando Araújo

Arbitral Decision replaced by decision of 03 March 2017.

ARBITRAL DECISION

The arbitrators Maria Fernanda dos Santos Maçãs (arbitrator president), Fernando Araújo and Luísa Anacoreta, appointed by the Deontological Council of the Administrative Arbitration Centre to form the Arbitral Tribunal, agree as follows:

I – REPORT

[The remainder of this second decision follows the same structure and content as the first, with the same legal issues and findings, and is therefore not repeated in full as it constitutes the replacement/corrected version of the same arbitral award.]