CAAD 310/2016-T: Autonomous Taxation IRC – Business Expenses Presumption and Rebuttal

ARBITRAL DECISION

The arbitrators José Poças Falcão (presiding arbitrator), Rui Ferreira Rodrigues and Luís Alberto Ferreira Alves (co-arbitrators), appointed by the Deontological Council of the Administrative Arbitration Center (CAAD) to form the Arbitral Tribunal, constituted on 23 August 2016, agree on the following:

1. Report

1.1

"A…, S.A.", hereinafter referred to as the "Claimant", taxpayer no. …, with registered office in the Industrial Zone of …, Union of Parishes of …, municipality of …, requested the constitution of a collective arbitral tribunal, under the combined provisions of Article 2, No. 1, paragraph a) and Article 10, both of Decree-Law No. 10/2011 of 20 January (Legal Regime of Arbitration in Tax Matters, hereinafter referred to simply as "LRAT") and Articles 1 and 2 of Ordinance No. 112-A/2011 of 22 March, with the Tax and Customs Authority (TCA) as Respondent.

1.2

The request for arbitral pronouncement, filed on 07 June 2016, concerns the dismissal order issued by the Chief of the Administration Division of the Corporate Income Tax Service Directorate of the Tax and Customs Authority, by delegation of powers, on 30 March 2016, issued in case no. …2015… regarding the ex officio review procedure provided for in Article 78 of the General Tax Law (GTL) and the consequent annulment of the corporate income tax (CIT) assessment no. 2013 …, of 16 May 2013, relating to the fiscal year 2012, resulting from the self-assessment made in declaration Form 22 (declaration no. …), with the consequent refund of the amount of 69,171.47 €, plus the respective compensatory interest.

1.3

The Claimant chose not to appoint an arbitrator.

1.4

The request for constitution of the arbitral tribunal was accepted by the President of the CAAD and notified to the TCA on 28 June 2016.

1.5

The signatories were appointed by the President of the Deontological Council of the CAAD as arbitrators of the collective arbitral tribunal, in accordance with the provisions of Article 6 of the LRAT, and notification of acceptance of the assignment was communicated within the applicable time limit.

1.6

On 10 August 2016, the Parties were notified of this appointment and did not object to it, in accordance with the combined provisions of Article 11, No. 1, paragraphs a) and b) of the LRAT and Articles 6 and 7 of the CAAD Code of Ethics.

1.7

Thus, in accordance with the provisions of paragraph c) of No. 1 of Article 11 of the LRAT, the collective arbitral tribunal was constituted on 23 August 2016.

1.8

The Respondent was notified, by arbitral order of 01 September 2016, to present its response within 30 days in accordance with Article 17, No. 1 of the LRAT and, if it so wished, to request the production of additional evidence.

1.9

It was further notified to submit, within the same time period, the administrative case file (PA) referred to in Article 111 of the Tax Procedure and Process Code (TPPC).

1.10

On 06 October 2016, the Respondent submitted its Response, defending itself by impugnation, pleading for the rejection of the request for arbitral pronouncement with the consequent dismissal of the action.

1.11

On the same date it submitted the administrative case file.

1.12

By order of 21 November 2016, the meeting provided for in Article 18 of the LRAT was scheduled for 18 January 2017, at which the witness brought by the Claimant would be examined.

1.13

On 24 November 2016, the Claimant indicated the articles of the Request related to the facts on which the witness examination should focus.

1.14

On 17 January 2017, the Claimant requested the postponement of the witness examination, in accordance with Article 508, No. 3, paragraph b) of the Code of Civil Procedure.

1.15

By order of 27 January 2017, the meeting provided for in Article 18 of the LRAT and the examination of the witness brought by the Claimant was rescheduled for 15 February 2017.

1.16

On 01 February 2017, the Claimant again requested the postponement of the witness examination, in accordance with Article 508, No. 3, paragraph b) of the Code of Civil Procedure, submitting documentary evidence of the witness's absence.

1.17

By order of 03 February 2017, the said meeting and the examination of the witness brought by the Claimant was rescheduled for 15 March 2017.

1.18

In view of the successive requests for postponement of the witness examination, by the same order the time limit for issuing the decision was extended by a further two months, in exercise of the faculty provided for in Article 21, No. 2 of the LRAT.

1.19

On 15 March 2017, the meeting was held and the witness was examined.

1.20

The Tribunal, with the consent of the Parties, notified them to submit written arguments simultaneously within a period of fifteen days.

1.21

The date of 20 April 2017 was also set for the issuance of the respective arbitral award.

1.22

On 30 March 2017, the Parties submitted written arguments, commenting on the evidence produced, with the Claimant pleading for the total acceptance of the request for arbitral pronouncement, as proven, with due legal consequences, and the Respondent pleading for the total rejection of the same request, with the consequent dismissal of the action.

2. Cleansing

2.1

The Parties have legal personality and capacity, are shown to be duly entitled and are regularly represented (Articles 4 and 10, No. 2 of the LRAT and Article 1 of Ordinance No. 112-A/2011 of 22 March).

2.2

The case is not affected by any nullities.

2.3

The Arbitral Tribunal is regularly constituted and is materially competent to know and decide on the request, see Article 2, No. 1, paragraph a) of the LRAT.

2.4

No other circumstances exist that would prevent the examination of the merits of the case.

3. Position of the Parties

3.1 Of the Claimant

The Claimant supports its request for arbitral pronouncement, in summary, as follows:

The Claimant, for the taxation period of 2012, in income declaration Form 22, calculated the total amount of 69,171.47 € relating to autonomous taxation, of which 64,096.39 € corresponds to expenses with light passenger vehicles and 5,075.08 € to representation expenses.

The expenses underlying the autonomous taxation at issue were incurred with clear and evident business purpose: the promotion of products commercialized by the Claimant.

The Claimant filed a review request, provided for in Article 78 of the GTL, to which case no. …2015… was assigned, due to error in self-assessment, as it understood that the said autonomous taxation had been improperly assessed given the entirely business character of the expenses associated with it, and the same was dismissed by order of the Chief of the Administration Division of the Corporate Income Tax Service Directorate of the Tax and Customs Authority, by delegation of powers, of 30 March 2016.

Autonomous taxation, in the understanding of the Constitutional Court, functions as a mechanism of instantaneous taxation on certain expenses.

The legislator listed the expenses that should be subject to autonomous taxation, having adopted a presumption of non-business character for that purpose.

To determine whether an expense act is or is not subject to autonomous taxation, it must first be verified whether the type of expense in question is listed in Article 88 of the CIRC and, in case of affirmative response, it will be necessary to evaluate the "integral business character" of that expense act, in which case the legal presumption is set aside and, consequently, the susceptibility of these expenses to autonomous taxation is eliminated.

Since the subjection of certain expenses to autonomous taxation is based on the presumption of their non-business character, it cannot fail to conclude that such presumption is susceptible to rebuttal, in accordance with the provisions of Article 73 of the General Tax Law (GTL).

The Claimant further understands that the norms on which autonomous taxation is based have an anti-abuse character, and therefore the rebuttal of presumptions must be admitted under penalty of violation of European Union Law.

The expenses with light passenger vehicles incurred by the Claimant constitute expenses inherent to the pursuit of its corporate purpose and, consequently, expenses with strictly business purpose, since the vehicles are used by employees entrusted with the functions of commercialization, advertising and presentation of products commercialized by the Claimant (sales staff and directors), being valuable work instruments for those who, by their functions, must carry out constant displacements throughout the country.

Representation expenses (rental of spaces for events, advertising, catering) are part of the communication and marketing strategy previously defined and scheduled by the economic group to which the Claimant belongs, in accordance with internal norms, aiming, through events such as "…", 14th edition, and "…", at customer acquisition and sales realization.

Various seminars and courses for civil construction professionals were also held.

There is no private character in representation expenses, being objectively and entirely business-related.

It concludes, pleading for the acceptance of the request for arbitral pronouncement and, as a result, for the annulment of the said dismissal order of the review request of 30 March 2016, and the consequent annulment of the corporate income tax (CIT) assessment no. 2013…, of 16 May 2013, relating to the fiscal year 2012, resulting from the self-assessment made in declaration Form 22 (declaration no. …), with the consequent refund of the amount of 69,171.47 €, plus the respective compensatory interest, in accordance with Articles 43 and 100 of the GTL.

3.2 Of the Respondent

Defending itself by impugnation, it invokes the following arguments:

The Respondent, in its response, makes clear its understanding that the norms establishing autonomous taxation are undoubtedly norms of tax incidence, not embodying any presumption whose rebuttal can be admitted.

At the origin of autonomous taxation on vehicles and representation expenses, there is not underlying the presumption of non-integral business character of the expenses, since if they did not fit within the general interest of the company, their deductibility would not even be accepted, due to failure to meet the requirement of indispensability referred to in No. 1 of Article 23 of the CIRC.

The norms establishing autonomous taxation of certain realities result from legislative balancing of various factors, such as the virtual impossibility of assessing the nature of each specific expense and the difficulty of ascertaining with certainty the true purpose of the expense and the exclusivity of that purpose.

Autonomous taxation are taxes, which penalize certain expenses incurred by companies, and the disincentivizing intention and behavior-shaping purpose that also assists Tax Law should not be minimized.

Admitting the Claimant to prove the alleged integral business character of the expenses authorizing autonomous taxation constitutes a violation of the principle of tax legality, in the aspect of generality and abstraction, and of the principle of equality in the tax aspect, which flow from Articles 13 and 103 of the Fundamental Law.

Furthermore, mere testimonial evidence cannot be considered sufficient, when the possibility that the law provides for the taxpayer to escape the tax imposition in question is of a documentary nature.

Finally, the Respondent understands that compensatory interest is not due since there is no error attributable to its services.

Therefore, since the tax act impugned by the Claimant does not merit censure, it should remain valid in the legal order.

4. Grounds

4.1 Proven Facts

Relevant to the assessment and decision of the substantive issue raised, the following facts are established and proven:

4.1.1

The Claimant is a commercial company governed by Portuguese law, of the type "public limited company", which pursues, within its corporate purpose, among others, the activity of commercialization of chemical products for construction.

4.1.2

On 16-05-2013, the Claimant proceeded to file the corresponding income declaration (Form 22 of CIT), provided for in Articles 117, No. 1, paragraph b) and 120 of the Corporate Income Tax Code (CIRC), relating to the fiscal year 2012, see doc. 2, attached with the request for arbitral pronouncement.

4.1.3

The assessment was made by the declaring company (self-assessment), in accordance with the provisions of paragraph a) of Article 89 of the CIRC, having determined a loss for tax purposes in the amount of 17,640.79 €, which was entered in field 777, table 07, of the declaration.

4.1.4

In field 365 of table 10, the amount of 69,171.47 € was entered, relating to autonomous taxation, of which:

• 64,096.39 €, correspond to expenses with light passenger vehicles; and
• 5,075.08 €, correspond to representation expenses.

4.1.5

In fields 420, 421 and 414 of table 11, the amounts of the said expenses that served as the basis for autonomous taxation were entered, detailed as follows:

4.1.6

Resulting in assessment no. 2013…, of 16 May 2013, in the amount of 69,155.06 €, impugned in the present proceedings regarding autonomous taxation, in the amount of 69,171.47 €, see doc. 3, attached with the request for arbitral pronouncement.

4.1.7

On 16 September 2015, the Claimant requested ex officio review of the above tax act, in accordance with paragraph c), No. 1 of Article 54 and Nos. 1 and 2 of Article 78 of the General Tax Law, in the wording in force at the time, with the legal consequences, namely restitution of the amount of 69,171.47 €, see administrative case file (PA) attached to the proceedings.

4.1.8

By order of the Chief of the Administration Division of the Corporate Income Tax Service Directorate of the Tax and Customs Authority, in substitution regime, of 24 February 2016, issued in case no. …2015… regarding the ex officio review procedure provided for in Article 78 of the General Tax Law (GTL), the dismissal of the ex officio review request was projected on substantive grounds, and the Claimant was notified to, within 15 days, comment, if it so wished, in accordance with Article 60 of the GTL, see doc. 5, attached with the request for arbitral pronouncement and doc. no. 11 of PA.

4.1.9

A right that the Claimant chose not to exercise, so that, by order of 30 March 2016 of the Chief of the Administration Division of the Corporate Income Tax Service Directorate of the Tax and Customs Authority, by delegation of powers, the dismissal order of the ex officio review request was issued, see doc. no. 11 of PA.

4.1.10

Which was notified to the Claimant through official letter no. … of the Tax Justice Division of the Finance Directorate of…, of 08-04-2016, registered with proof of receipt (registration no. RD … PT) signed on 11-04-2016, so that, in accordance with No. 3 of Article 39 of the TPPC, it is considered notified on that date, see doc. no. 1, attached with the request for arbitral pronouncement, and doc. no. 11 of PA.

4.1.11

In the project for dismissal of the review request of the act now impugned, subsequently made final, the following grounds appear, among others (see doc. no. 11 of PA):

a) "Having the claimant recorded in its accounts and deducted for tax purposes certain expenses relating to expenses incurred with the use of light passenger vehicles and representation expenses, it proceeded to tax autonomously such expenses, and did so – as is evident from its statement – in the exact terms provided for in the normative framework governing the application of autonomous taxation", see xvi, p. 7.

b) "That is, finding the facts subject to taxation identified according to the terms provided for in the corresponding norm of tax incidence, it must be concluded that there is no error of fact or law", see xvii, p. 7.

c) "Consequently, no illegality susceptible of being attributed to the assessment act now reviewed occurs", see xxi, p. 7.

d) "It is important to note from the outset that the business character of expenses is a question that arises regarding their deductibility for determining taxable profit and not in the field of autonomous taxation incidence, as has been clearly demonstrated above", see xxix, p. 8.

e) "The thesis claimed by the claimant does not therefore apply, that autonomous taxation will only occur if and when such business character is not proven, since, in light of the formula of the norm, it is not possible to support such interpretation, nor is it possible to understand that this was the legislator's intention", see xxxviii, p. 9.

f) "Subject to autonomous taxation applies to all expenses typified in the norms of tax incidence, with general character, not raising, therefore, the question of whether they have business character or not, since as to that assessment the legislator only requires it for the deductibility of expenses in determining taxable profit", see xxxix, p. 9.

4.1.12

The twenty-two vehicles to which the expenses detailed in point 4.1.5 refer, in the total amount of 313,974.47 € (fields 420 and 421, table 11, of declaration form 22), are used by fourteen sales technicians, one technical assistance technician, one administrative staff member responsible for commercial back-office, five directors and one managing director, all employees of the Claimant, whose functions inherently involve activities of commercialization, advertising and presentation of its products, see doc. 6, attached with the request for arbitral pronouncement.

4.1.13

The branch of activity of the Claimant involves the permanent displacement of means and people to the most diverse points of the Country.

4.1.14

The civil construction sector is not confined to a particular geographic region.

4.1.15

The supply of construction products for works carried out from north to south of the Country involves permanent displacements by employees of the Claimant to the most varied construction sites.

4.1.16

The displacements relate to the supply and delivery of materials, and to the purpose of publicizing and divulging the brand "…" as well as seeking to present the most appropriate solutions for each type of construction.

4.1.17

The functions of the employees referred to involve displacement to clients for purposes of brand divulgation and sale of its products, and otherwise it would not be possible to perform such functions with the same efficiency or effectiveness.

4.1.18

The use of public transport would imply a loss of flexibility as well as loss of time, resulting in the diminishment of its commercial efficiency and associated sales.

4.1.19

Displacement, by means of taxi, of any commercial employee would represent a structural cost much higher, when compared with the use of a Claimant vehicle.

4.1.20

Technical assistance service provision involves regular displacement to clients and/or to works carried out by these.

4.1.21

As regards the directors, their functions involve displacements with considerable frequency to clients, namely due to frequent external meetings within their current representative functions.

4.1.22

It is practice in the Claimant's sector of activity to assign vehicles to directors.

4.1.23

The civil construction sector was among the most affected by the financial crisis that began in 2008, with repercussions on the Claimant's performance, given its activity in the manufacture and commercialization of waterproofing materials, thermal insulation and flooring, among others.

4.1.24

The needs for promotion and advertising of the brand and products commercialized by the Claimant were accentuated in the years following the said crisis.

4.1.25

The commercial employees of the Claimant, to whom displacements to clients, potential clients or to locations of event realization fell, had need to enjoy vehicles, given that its products and material intended for the realization of events are in great number.

4.1.26

The Claimant's employees promote the brand "…" and contact clients and potential clients located in the most varied geographic zones of the Country.

4.1.27

The Claimant had clients with civil construction works taking place throughout the country, and monitoring the said clients and corresponding construction works was essential to the client-supplier proximity relationship.

4.1.28

The following expenses with light passenger vehicles in the Claimant's service are subject to autonomous taxation: rent of respective operational leases (renting); insurance; fuel and tolls (witness testimony and art. 35 of the arguments submitted by the Claimant).

4.1.29

The Claimant controls the kilometers, fuel and tolls of the vehicles in its service and all expenses that the Claimant detects do not have a business purpose are not borne by it, being instead charged to the employees in question (witness testimony and Conclusion XIII of the arguments submitted by the Claimant).

4.1.30

The conditions of use of the vehicles were communicated to the employees and are known to them (witness testimony and art. 44 of the arguments submitted by the Claimant).

4.1.31

The employees to whom the vehicles that the Claimant has in its service are delivered may (in the sense that it may be the case that they do) use them for non-business purposes, during vacations, holidays and weekends and, all the more so, on working days on which they have been working, without prejudice to, whenever this is detected, being charged the expenses of fuel and tolls deemed non-business (witness testimony and art. 43 of the arguments submitted by the Claimant).

4.1.32

The representation expenses, in the amount of 25,375.41 €, entered in field 414, table 11, of declaration form 22, are recorded in account SMC … of the Chart of Accounts, approved by Article 1 of Ordinance No. 1011/2009 of 09 September, see doc. 7, attached with the request for arbitral pronouncement.

4.1.33

These expenses are part of the communication and marketing strategy previously defined and scheduled by the international Group in which the now-Claimant is included.

4.1.34

The final objectives of such strategies are designed to enhance contact between the brands and the public, acquire customers and realize sales.

4.1.35

The holding of promotional events aims at the promotion of the Claimant's products to clients and potential clients, in the expectation that future economic benefits will arise.

4.1.36

The representation expenses relate to the rental of spaces for events, advertising expenses as well as catering expenses of the said events.

4.1.37

The Claimant promoted the holding of various seminars and courses for civil construction professionals and related areas as well as participation in various sector fairs, namely:

• "…", 14th edition: Technical seminar dedicated to the theme of thermal insulation by exterior, as well as conferences and workshops, to be held in … (…), in Lisbon, from … to 12 of … of 2012, see doc. 9, attached with the request for arbitral pronouncement; and
• "…" taking place from 25 to … of … of 2012 in …, in Angola, see doc. 9, attached with the request for arbitral pronouncement.

4.1.38

The Claimant participated in promotional events, such as "…", 5th edition, in the category of architecture, construction, engineering and real estate, to be held in September 2012, see doc. 10, attached with the request for arbitral pronouncement.

4.1.39

Such events were important for the dissemination of the Claimant's brand, for adapting the products to customer preferences, and as a way of achieving future customers and positioning against competition, and participation in those aimed at the growth of the Claimant's brand and sales.

4.2 Unproven Facts

1. That the expenses with vehicles used by employees (except directors) for non-business purposes (articles 4.1.29 and 4.1.31), namely rents of operational leases (renting), insurance, taxes, inspections, repairs, maintenance and other expenses, were not borne by the Claimant.

2. That the expenses with vehicles used by directors for non-business purposes (article 4.1.22) were not borne by the Claimant.

3. That the representation expenses correspond, as to their amount of 25,375.41 €, to those referred to in points 4.1.33 to 4.1.38 of the proven facts.

4.3 Motivation

Regarding the facts, the Tribunal does not have the duty to rule on all the facts alleged, having instead the duty to select those relevant to the decision, taking into account the cause (or causes) of action underlying the claim filed by the applicant [(see Articles 596, No. 1 and 607, Nos. 2 to 4 of CCP, applicable ex vi of Article 29, No. 1, paragraphs a) and e) of the LRAT)] and to record whether it considers it proven or not proven (see Article 123, No. 2 of TPPC).

According to the principle of free assessment of evidence, the Tribunal bases its decision, regarding the evidence produced, on its intimate conviction, formed from the examination and evaluation it makes of the means of proof brought to the case and in accordance with its life experience (see Article 607, No. 5 of CCP). Only when the probative force of certain means is pre-established in law (e.g. full probative force of authentic documents, see Article 371 of the Civil Code) does the principle of free assessment of evidence not apply in the assessment of the evidence produced.

Thus, the Tribunal's conviction was based on the documentary corpus attached to the proceedings, on the positions assumed by the Parties and on the testimony of witness B…, certified accountant and financial director of the Claimant, regarding the facts contained in points 4.1.12 to 4.1.31 and 4.1.33 to 4.1.39.

The witness demonstrated knowledge about the subject matter under discussion in the present proceedings, his testimony being well-informed, assertive, consistent and spontaneous, resulting from fluent speech and without difficulties in recalling, expressing and contextualizing the stated facts, having acknowledged that the possibility of personal use of the vehicles in question was not ruled out, control being effected of their use regarding, only, fuel and tolls. The directors were excluded from this control.

Due to the fact that salespeople, technicians and directors take the company vehicles home for the weekend, instead of leaving them parked at the company, in itself already implies use for personal benefit, unless those expenses associated with private displacements, namely rents of operational leases (renting), insurance, taxes, inspections, repairs, maintenance and other expenses, and excluding those relating to fuel and tolls, were charged and deducted from the remuneration earned in due proportion of the use of the vehicles for personal purposes. However, there was not rigorous and systematic control, supported by itinerary forms and kilometer records, so that such settlement becomes impractical.

Regarding representation expenses, it also emerged from the witness evidence that these refer not only to those contained in the proven facts, which would correspond to approximately 50% of the amount spent with those, but to others, namely lunches with clients.

5. Legal Issues (Grounds)

The disputed issue, which constitutes the thema decidendum, lies in determining, first, whether the norms on which the autonomous taxation contested by the Claimant is based have an underlying presumption; if so, whether it is legally possible to rebut it; and, finally, whether, in the concrete case, the Claimant has succeeded in doing so.

The following issues are to be considered:

• The (il)legality of the assessment impugned; and
• The request for payment of compensatory interest.

5.1 The (il)legality of the assessment impugned

Regarding the nature of autonomous taxation and its degree of connection with CIT, we transcribe an excerpt from the arbitral decision issued in Case No. 785/2015, of 09-08-2016, of the CAAD, with which we agree:

"(…) It is necessary to go back to the year 1990 to find the first legislative intervention in order to subject certain expenses to autonomous taxation, which occurred with the publication of Decree-Law No. 192/90 of 9 June, whose Article 4 provided that 'confidential or undocumented expenses incurred in the exercise of commercial, industrial or agricultural activities by IRS or CIT taxpayers not covered by Articles 8 and 9 of the respective Code are autonomously taxed in IRS or CIT, as the case may be, at a rate of 10%, without prejudice to the provisions of paragraph h) of No. 1 of Article 41 of the CIRC.'

This norm was subject to various subsequent amendments which successively increased the taxation rate provided for in it.

With this type of taxation it was intended, on the one hand, to encourage the taxpayers subject to it to reduce as much as possible the expenses that negatively affect tax revenue, and on the other hand, to prevent that, through such expenses, companies proceeded to disguised distribution of profits, especially dividends which would thus only be subject to CIT as company profits, as well as to combat the tax fraud and evasion that such expenses cause not only in relation to IRS or CIT, but also in relation to the corresponding contributions, both from employers and workers, for social security".

Saldanha Sanches, regarding autonomous taxation provided for in Article 81, No. 3, of the CIRC (current Article 88, Nos. 3 and 4), wrote the following: "(...)In this type of taxation, the legislator seeks to respond to the admittedly difficult question of the tax regime of expenses that find themselves in the intersection zone of the personal and business spheres, so as to avoid remuneration in kind more attractive for purely tax reasons or the hidden distribution of profits. The norm presents a characteristic similar to what we will find in the legal sanction against undocumented costs, with an increase in the rate when the situation of the taxpayer does not correspond to a situation of tax normality. If in the taxpayer's statement there is no profit, the cost may be subject to negative valuation: for example, we have a rate of 15% applied when the taxpayer had losses in the two previous fiscal years and purchased a light passenger vehicle for more than € 40,000 (Article 81, No. 4).

With this provision, the system shows its dual nature, with an aggravated rate of autonomous taxation for certain special situations that it seeks to discourage, such as the purchase of vehicles for business purposes or vehicles in principle too expensive when there are losses. Here, a kind of presumption is created that these costs do not have a business purpose and, therefore, are subject to autonomous taxation. In summary, the cost is deductible, but autonomous taxation reduces its tax advantage, since here the tax base is not net income, but rather a cost transformed – exceptionally – into an object of taxation (...)" (emphasis ours).

At the time of the facts (fiscal year 2012), Article 88, Nos. 3 to 7 and 14 of the CIRC read as follows:

"3 Expenses incurred or supported by taxpayers not subject to exemption and who exercise, as their main activity, an activity of commercial, industrial or agricultural nature, related to light passenger or mixed vehicles whose acquisition cost is equal to or less than the amount fixed under paragraph e) of No. 1 of Article 34, motorcycles or motorbikes, excluding vehicles powered exclusively by electrical energy, are autonomously taxed at the rate of 10%.

4 Expenses incurred or supported by the taxpayers mentioned in the preceding number, related to light passenger or mixed vehicles whose acquisition cost exceeds the amount fixed under paragraph e) of No. 1 of Article 34, are autonomously taxed at the rate of 20%.

5 Expenses related to light passenger vehicles, motorcycles and motorbikes are considered to be, in particular, depreciation, rents or leases, insurance, maintenance and conservation, fuel and taxes levied on their ownership or use.

6 — Excluded from the provisions of No. 3 are expenses related to light passenger vehicles, motorcycles and motorbikes, allocated to the operation of public transport service, intended to be rented in the normal exercise of the taxpayer's activity, as well as depreciation related to vehicles in respect of which the agreement provided for in point 9) of paragraph b) of No. 3 of Article 2 of the IRS Code has been celebrated.

7 Expenses deductible relating to representation expenses are autonomously taxed at the rate of 10%, considering as such, in particular, expenses incurred with receptions, meals, trips, excursions and entertainment offered in the Country or abroad to clients or suppliers or to any other persons or entities.

14 The autonomous taxation rates provided for in this article are increased by 10 percentage points for taxpayers who present tax losses in the taxation period to which any of the tax facts referred to in the preceding numbers relate".

Because the issue to be decided is entirely identical to that which was the subject of the arbitral award, moreover erudite, issued in Case No. 309/2016-T of 16-01-2017, which we subscribe to in full, we proceed to the transcription of the following excerpt:

"(…) When speaking of autonomous taxation, as is the case, it is convenient to immediately bear in mind that we are dealing with a set of disparate situations, which will encompass, at least, three distinct types, namely:

• Autonomous taxation of certain income (e.g.: Nos. 3, 5 and 6 of the IRS Code);
• Autonomous taxation of certain deductible expenses (e.g.: Nos. 3 and 4 of Article 88 of the CIRC);
• Autonomous taxation of other expenses regardless of their deductibility (e.g.: Articles 1 and 2 of Article 88 of the CIRC).

This clarification becomes important since it is understood that, given the disparity and heterogeneity of situations subject to autonomous taxation, it will be at this point not only unnecessary but even counterproductive to attempt to synthesize and seek a proper and unitary legal nature, common to all those situations.

The nature of the specific autonomous taxation at issue in the proceedings has been the subject of broad discussion in recent doctrine and case law.

A strong school of thought has viewed them as an expense tax, which would tax certain types of expenses, in a manner completely detached from income, in such a way that even some argue that they constitute a proper tax, which would only casually be integrated into the IRS and CIT codes.

Nevertheless, the understanding that autonomous taxation on deductible expenses, such as those at issue in the present proceedings, still integrate the regime of the taxes regulated by the codes in which they are integrated, aiming, albeit in a convoluted manner, at the income taxed by those, has obtained recurring acceptance in CAAD case law.

Naturally, whoever considers the autonomous taxation now in question a tax directly inciding on expense will conclude that the norms under interpretation, from Article 81, Nos. 3/a) and 7 of the CIRC in force at the time of the tax fact (current Article 88, Nos. 3, 4 and 7), will not integrate any presumption, directly formulating the subject of its incidence – the expense.

It is not considered, however, that this is the most correct understanding, it being understood instead that the autonomous taxation in question may be configured as a "hybrid" tax, inciding on the income of individuals and legal entities, and not on consumption or expense, since they will not present the principal characteristics of this form of taxation, nor will they incide equally on assets, and fitting into a problematic of taxation of income regarding which the legislator understood to act at two levels (separately or simultaneously): not accepting the deductibility of some expenses, in whole or in part, and/or taxing them autonomously.

In this context, the autonomous taxation now in question in the proceedings will integrate, among other things, the list of specific anti-abuse norms, the similarity being evident, for example, with the norm of current Article 65/1 of the CIRC (repealed by Article 13 of Law No. 2/2014 of 16-01), which provides that:

"Amounts paid or owed, for any reason, to individuals or legal entities resident outside Portuguese territory and subject there to a clearly more favorable tax regime are not deductible for the purpose of determining taxable profit, unless the taxpayer can prove that such expenses correspond to actually realized operations and do not have an abnormal character or exaggerated amount".

That is, in the cases to which the autonomous taxation borne by the Claimant in the proceedings relate, the legislator could have opted for a regime similar to that established in the transcribed norm, purely and simply prohibiting the respective deductibility, or conditioning it in the same terms of that norm, or in others it understood to be appropriate. Instead, the legislator opted not to go so far, the legal regime of CIT on the expenses in question remaining at a level below that, by allowing the deductibility of the expenses in question, against the immediate payment of a part of the taxable profit which will be affected by such deduction, present or future.

Nevertheless, the similarity of the regimes will still be undeniable, as well as the concerns and purposes underlying them.

What has just been said thus has underlying the finding that autonomous taxation, including that at issue in the proceedings, owes much of its reason for being to the circumstance that it will be objectively unviable to levy full taxation on a rigorous basis, in the field of IRS, on the potential beneficiaries of the expenses subject to those (which would be equivalent to a taxation of fringe benefits as conceived and applied in Australia and New Zealand). It is not ignored thus that autonomous taxation of the type we are dealing with here has a facet directed directly at the income of individuals. Such as they also have, indeed, a sanctioning facet – in the sense of imposing unfavorable treatment – regarding the type of expenses that trigger them. However, these facets do not empty, nor much less make impossible, another facet, equally (if not more) relevant, inseparably interlinked with income, in the case of legal entities.

It is understood, then, that, by way of the impositions in question, it is also intended, at least in equal measure, to discipline the use by companies of expenses that may be necessary, in part, to the pursuit of normal activity, but which – based on a judgment of normality – will also be for the benefit of individuals who end up enjoying them for personal purposes and not professional. Only that, the Tax Administration not having any "measuring tape" to make such separation, the legislator has been opting, for quite some time, for the introduction in the CIT Code of this portion that already considered objectively, at the time of the proceedings, an imposition, at the very least, similar to CIT, even if such provision may be questioned (as well as the current wording, regarding the inclusion in the CIT, of autonomous taxation in Article 23-A of the CIRC).

The characteristics that doctrine has been pointing out to autonomous taxation in question for some years are thus recognized here, such as:

a) autonomous taxation only makes sense because the costs/expenses are relevant as negative components of taxable income of CIT. That is what motivates CIT taxpayers to report as high a value as possible of these expenses to reduce the taxable base of CIT, the tax levy and, consequently, the tax to pay;

b) it is intended to discourage such type of expenses in taxpayers showing negative results but who, regardless, continue to show structures of consumption little or not at all compatible with the financial health of their companies;

c) it is, in a more general sense, about shaping the tax system so that it reveals a certain balance aiming at a better distribution of the effective tax burden among taxpayers and types of income;

d) certain expenses are regarded unfavorably in which, admittedly, it is not easy to determine the exact measure of the component corresponding to private consumption, and regarding which the general practice of abuse in their reporting is known.

Better or worse, the autonomous taxation now in question should thus be understood as a form of preventing certain abusive actions, which the "normal" functioning of the taxation system was unable to prevent, being that other ways of combating such actions, including ways more onerous for the taxpayer, were possible.

This anti-abuse character of the autonomous taxation now in question will not only be coherent with its "anti-systemic" nature (as happens with all norms of the genre), but with a presumptive nature, pointed out both by Prof. Saldanha Sanches and by the case law that often cites him.

Under the prism just expounded, autonomous taxation in analysis will thus have underlying a presumption of "partial" business character of the expenses on which it incides, based on the above-mentioned circumstance that such expenses are situated in a gray area that separates what is business expense, productive, from what is private expense, consumption, being that, notoriously, in many cases, the expense will effectively in reality have a dual nature (part business, part personal).

Confronted with such difficulty (note that it would hardly be justified that, based on this difficulty of proof, one would prevent the same, saying, in essence, to the interested party that, since it will be very difficult for him to prove the measure/exclusivity of business use, he is prevented from doing so), the legislator, instead of simply denying its deductibility, or inverting the burden of proof of the business character of the expenses in question (imposing, for example, the demonstration that "they do not have an abnormal character or exaggerated amount", as it does in Articles 65/1 and 88/8 of the CIRC (the discretion of the legislative process would license the legislator to apply the same mechanism it understood to be appropriate for expenses in favor of offshore companies, to other expenses, namely those here in question), opted to establish the regime currently in force, which, nevertheless, has precisely the same foundation, the same purpose, and the same type of result, as other forms used in other typical situations of the regime (in the case) of CIT.

Thus, from the known fact that a certain type of expense is incurred, the legislator draws the unknown fact, which is the assessment of the degree of business allocation of the product of such expenses.

And it will be this unknown fact, presumed by the legislator, that triggers and justifies the autonomous taxation in question in the present proceedings. Indeed, it was by presuming that the expenses on which such autonomous taxation incides have, as a rule, mixed allocation, there being, therefore, an unjustified benefit in their full deduction, that the legislator began, in a first phase, by limiting the percentage of those it admitted as deductible. Subsequently, for reasons which will matter little to the case, but which will involve budgetary constraints, on the one hand, and the need to ensure the taxation of possible benefits that individuals could derive from those expenses, the legislator adopted the current model of autonomous taxation of the expenses now in question. But such did not exclude, but rather complemented, that primitive motivation to tax, adequately, the income of legal entities, distorted by the deduction of expenses which the legislator presumes of allocation not entirely business. That is: the budgetary purposes and, possibly, taxation of fringe benefits, which may assist the current regime of the autonomous taxation we are dealing with, do not exclude, but rather are based on, the said presumption of "partial business character" of the expenses on which they fall (and, complementarily, on the distortion of taxation of legal entity income resulting therefrom)".

Based on the foregoing, the Arbitral Tribunal understands that Article 88 of the CIRC, namely Nos. 3, 4 and 7, contains an implicit presumption of partial business character, which, like all presumptions in matters of tax incidence, admits proof to the contrary, in accordance with the provisions of Article 73 of the GTL, which provides: "Presumptions established in norms of tax incidence always admit proof to the contrary".

In this regard, Article 350/2 of the Civil Code provides:

"Legal presumptions may, however, be rebutted by proof to the contrary, except in cases where the law prohibits it."

And even if it were a presumption juris et de iure, and as such indelible, it would always be susceptible to rebuttal, by force of the said Article 73 of the GTL.

Thus, it must be concluded that the presumption of "partial business character" in question should, in consistency, be considered as covered by the possibility of rebuttal generally established in Articles 350/2 of the Civil Code and 73 of the GTL, either by the taxpayer or by the Tax Administration, which appears, moreover, in accordance with a proportional and adequate distribution of the burden of proof, in so far as, inciding autonomous taxation in question on expenses of business character not a priori evident, it will be the taxpayer who will be better positioned to demonstrate that such requirement is verified in concrete.

For its part, the Tax Administration itself, if it so understands and considers that the case justifies the inherent expenditure of resources, may always demonstrate that, regarding the expenses in question, and even though autonomous taxation has incided on them, the general requirement of Article 23/1 of the CIRC is not met, namely its indispensability for the realization of the income subject to tax or for the maintenance of the productive source.

Resuming the transcription we were making of the arbitral award issued in Case No. 309/2016-T:

"(…) Note here, even in function of some confusion that seems to be prevalent, that the integral business character spoken of here is not identified with the business character to which Article 23 of the CIRC refers. Rather, the fulfillment of the requirements of Article 23 of the CIRC, regarding the expenses in question, is a prerequisite of autonomous taxation itself.

Indeed, by requiring that the "expenses (...) relating to representation expenses and those related to light passenger or mixed vehicles, motorcycles or motorbikes" be deductible in order to subject them to autonomous taxation, naturally the legislator is referring back to the general criterion of Article 23 of the CIRC, as a requirement for autonomous taxation in question to operate.

From which, from the outset, the "business character" (partial) presumed by the autonomous taxation in question is special, in relation to the business character of Article 23, which they presuppose.

In other words, and making explicit the normative articulation between the regimes in question, in a general way and as a rule, the fulfillment of the criteria of Article 23 of the CIRC confers on the taxpayer the right to fully deduct the corresponding expenses from taxable profit.

However, regarding the expenses subject to autonomous taxation, now in question, such right is burdened with the obligation to bear the corresponding autonomous taxation, essentially because the legislator, as seen above, understands that, within the framework of normality, which also underlies the regime of Article 23 of the CIRC, such expenses have special characteristics, which indicate a non-integral business character, contrary to what occurs with the generality of expenses that meet the requirements of said Article 23 of the CIRC.

From which, in order to justify the non-incidence of autonomous taxation on the expenses in question, the taxpayer must, not attempt to demonstrate the fulfillment of the requirements of that Article 23, but rather demonstrate beyond any reasonable doubt that, in concrete, the expenses of the kind in question, which it intends to fully deduct without being subject to autonomous taxation, had exclusively business allocation.

The recognition of this presumptive nature of the autonomous taxation in question in the proceedings, in the terms above expounded, will, among everything else, be a safeguard of its constitutionality, in that the possibility of its full deduction by the taxpayer will be guaranteed, or its non-deduction, depending on which side the presumption underlying them is, concretely and in each case, rebutted, thus ensuring, properly, the conformity of the legal regime in question with the principles of tax equality and contributive capacity, which would be unnecessarily (and, occasionally, as is the case, disproportionately) impaired, by the establishment of an indelible presumption of the partiality of the business allocation of the expenses in question.

The understanding invoked by the TCA is thus not subscribed to, according to which such interpretation will be materially unconstitutional by violation of the principle of tax legality, in the aspect of generality and abstraction, flowing from the principle of legality and also as instruments of tax equality, and therefore, equally by violation of the principle of tax equality, which flow from the provisions of Articles 13 and 103 of the Constitution.

Indeed, unconstitutional will be, saving better opinion and due respect, the interpretation according to which there will be burdened with autonomous taxation the expenses demonstrably deductible supported in the exclusive interest of the company, since such, apart from integrating a taxation without any foundation in real contributive capacity, would transform the autonomous taxation in question into a tax exclusively incident on expense (and not, even indirectly, on income), and would generate a situation of effective inequality, between taxpayers who can derive private benefits from the expenses in question, and those who, by force of the nature of their activity, effectively and demonstrably allocate such expenses entirely to business purposes (for especially expressive in this regard, reference is again made here to the situation sub judice in Case 628/2014-T of the CAAD, already cited)".

In the same sense, in addition to the arbitral decisions of the CAAD issued in the said Cases Nos. 309/2016-T and 628/2014-T, those issued in Cases 198/2016-T, 51/2016-T and 719/2015-T may be seen.

It now becomes necessary to assess whether, in concrete, the presumption of the norm of Article 88, Nos. 3, 4 and 7 of the CIRC, in the wording in force at the time of the tax fact, was, or was not, rebutted.

First of all, it should be said that testimonial evidence is admitted as a rule, this not being the case only when the fact in question is proven by document or other means of proof with full probative force, or when the same fact, by disposition of law or stipulation of the parties, can only be proven by document (see Articles 392 and 393 of the Civil Code). In the tax court proceeding, in light of the rule of admissibility of all general means of proof (see Article 115, No. 1 of the TPPC), when there is no special law requirement about a certain type of means of proof (e.g. documentary), the interested parties may use any legal means of proof provided for in substantive evidence law.

Of the expenses relating to charges with light passenger vehicles —

From the testimonial evidence produced, it was found that the twenty-two vehicles, being work instruments of the Claimant's employees, entrusted to them, may be used by them for personal purposes, namely during vacations, holidays and weekends. However, when the Claimant detects the use of vehicles for non-business purposes, the expenses with fuel and tolls, and only these, are not borne by the Claimant, being instead charged to the employee in question.

However, this control does not include vehicles used by the directors for non-business purposes, in the number of six, whose expenses are always borne by the Claimant, even those relating to fuel and tolls, as mentioned above.

However, in addition to these expenses we must consider others, such as operational lease rents, insurance, taxes, inspections, maintenance and repairs, which are borne exclusively by the Claimant and not by the users of the vehicles.

As is readily apparent, the partition of these costs, distinguishing therein the fraction that should be considered business from that which has an extra-business nature, is, at the very least, impractical, if not practically impossible.

Given all the foregoing, it is necessary to judge that the Claimant did not fulfill the burden incumbent upon it to rebut the presumption of partial business character of the expenses in question, so that, in this part, the arbitral request should be rejected.

Of the expenses relating to representation expenses —

Regarding representation expenses, it also emerged from the testimonial evidence that these relate also, but not exclusively, to the purposes contained in points 4.1.33 to 4.1.39 of the facts given as proven.

It was not proven, thus, the contrary result emerging from the testimonial evidence, that the amount of expenses that the Claimant intends to be withdrawn from autonomous taxation related exclusively to the purposes referred to therein, in such terms that it could be considered demonstrated, beyond any reasonable doubt, as occurring in an exclusively business context, not including others that provide to its employees, corporate bodies, partners or third parties benefits for personal purposes.

In this context, it is concluded, then, that the presumption of Article 88/7 of the CIRC, in force at the time of the tax fact, should not be considered rebutted, so that, not being demonstrated that the expenses on which the autonomous taxation in question incided had 100% business allocation, they cannot fail to be subject to the incidence of that taxation.

Given the foregoing, in this part also, the present arbitral action should be judged to be rejected and, consequently, the tax act that is the subject of the present proceeding should be upheld.

5.2 Of the request for compensatory interest

Since this request is dependent on the acceptance of the previous request, with the rejection of that one, this one is also rejected, there being no condemnation of the TCA in the payment of compensatory interest.

6. Decision

Based on the foregoing, it is decided:

a) To judge the request for annulment of the order of the Chief of the Administration Division of the Corporate Income Tax Service Directorate of the Tax and Customs Authority, by delegation of powers, of 30 March 2016, issued in case no. …2015…regarding the ex officio review procedure provided for in Article 78 of the General Tax Law, rejecting it and upholding it in the legal order;

b) To judge the request for annulment of the corporate income tax (CIT) assessment no. 2013…, of 16 May 2013, relating to the fiscal year 2012, resulting from the self-assessment made in declaration Form 22 (declaration no. …), rejecting it;

c) To judge the request for refund of the amount of 69,171.47 € rejecting it and, consequently, the right to compensatory interest is rendered moot; and

d) To condemn the Claimant to the payment of the costs of the arbitral proceeding, in the amount of 2,448.00 €, see No. 1 of Article 527 of the Code of Civil Procedure and Article 4 of the Regulation of Costs in Tax Arbitration Proceedings (RCPAT).

7. Value of the Case

In accordance with the provisions of Articles 306, No. 2 of CCP, 97-A, No. 1, paragraph a) of TPPC and 3, No. 2 of RCPAT, the case is valued at 69,171.47 €.

8. Costs

In accordance with Article 22, No. 4 of the LRAT, the amount of costs is fixed at 2,448.00 €, in accordance with Table I, annexed to the RCPAT.

Notify.

Lisbon, 13 April 2017.

The Presiding Arbitrator[1],

(José Poças Falcão)

The Co-Arbitrator,

(Rui Ferreira Rodrigues)

The Co-Arbitrator[2],

(Luís Alberto Ferreira Alves)

Concurring Opinion of the Presiding Arbitrator, José Poças Falcão:

I voted in favor of the decision rejecting the request in full. However, I understand that Article 88 of the CIRC [wording given by Law No. 64-B/2011 of 30-12], does not contain rebuttable presumptions by application of Article 73 of the GTL. It is rather a norm which, having underlying a presumptive judgment of the difficulty of rigorous control of certain expenses, opts to typify situations of application of autonomous taxation, translated in practice in the reduction of the amount of deductible costs in determining taxable income.

Thus, for example, at the origin of autonomous taxation on vehicles and representation expenses there is not underlying the presumption of non-integral business character of the expenses, since if they did not fit within the general interest of the company, their deductibility would not even be accepted, due to failure to meet the requirement of indispensability referred to in No. 1 of Article 23 of the CIRC.

It should be noted that the norms establishing autonomous taxation of certain realities result from legislative balancing of various factors, such as the virtual impossibility of assessing the nature of each specific expense and the difficulty of ascertaining with certainty the true purpose of the expense and the exclusivity of that purpose.

Autonomous taxation are taxes which penalize certain expenses incurred by companies, and the disincentivizing intention and behavior-shaping purpose that also assists Tax Law should not be minimized.

Thus I would not admit proof of the integral or partial business character of the expenses authorizing autonomous taxation, since such would imply, in my view, a violation of the principle of tax legality, in the aspect of generality and abstraction, and of the principle of equality in the tax aspect, which flow from the provisions of Articles 13 and 103 of the Constitution.

13 April 2017

Concurring Opinion of Co-Arbitrator, Luís Alberto Ferreira Alves:

I voted in favor of the decision rejecting the request in full, dissenting, only as to the absence of a presumption in representation expenses, as provided for and defined in No. 7 of Article 88 of the CIRC [wording given by Law No. 64-B/2011 of 30-12], i.e., considering as "representation expenses, in particular, expenses incurred with receptions, meals, trips, excursions and entertainment offered in the country or abroad to clients or suppliers or to any other persons or entities".

Indeed, and in the abstract, to assume the possibility of rebutting the presumption of the partial character of business nature, as concerns the said representation expenses (understood, these, in such a broad sense that raises the substantive question, which is to know, beyond those which others might exist?, namely, when their business character has already been confirmed by the prior screening resulting from the application of Article 23 of the CIRC, and as such assumed, both by the Claimant and by the Respondent), cannot fail to appear to me, in practice, as obligatorily resulting in a reality that will be confined to an empty set. And, if that is the case, surely, the content of No. 7 of Article 88 of the CIRC would reveal itself to be completely devoid of any logical and practical sense, whose defect prevents me from conceiving to be underlying it.

13-4-2017

[Text prepared by computer, in accordance with the provisions of Article 131, No. 5 of CCP, applicable by reference of Article 29, No. 1, paragraph e) of the LRAT].

[1] Who submits the dissenting opinion below.

[2] Who submits the dissenting opinion below.