IRC Tax Assessment Expiry and Cost Deductibility in Real Estate Subdivision | CAAD 332/2014-T

ARBITRAL AWARD

The arbitrators, Jorge Lino Alves de Sousa (arbitrator-president), Nuno Pombo and José Vieira dos Reis, designated by the Deontological Council of the Administrative Arbitration Center (hereinafter, "CAAD") to form the Arbitral Tribunal, constituted on 23 June 2014, hereby agree as follows:

I - REPORT

1. On 10.04.2014, the company "A, Lda.", Tax ID No. ..., with registered office in the place and parish of ..., municipality of ... (hereinafter, "SP" or "Claimant"), requested, pursuant to the terms and provisions of articles 2nd and 10th of Decree-Law No. 10/2011, of 20 January (Legal Framework for Tax Arbitration, hereinafter, "LFTA"), the constitution of an Arbitral Tribunal, with the Tax and Customs Authority (hereinafter, "TA" or "Defendant") being named as the respondent.

2. The request for constitution of the Arbitral Tribunal was accepted by the Honorable President of CAAD and automatically notified to the TA on 14.04.2014.

3. Pursuant to the provisions of subparagraph a) of article 6(2) and subparagraph b) of article 11(1) of Decree-Law No. 10/2011, of 20 January, as amended by article 228 of Law No. 66-B/2012, of 31 December, the Deontological Council designated as arbitrators of the Arbitral Tribunal those already mentioned above, who communicated their acceptance of the corresponding appointment within the applicable period.

4. On 04.06.2014 the parties were duly notified of this appointment and did not express any wish to refuse the designation of the arbitrators pursuant to the combined provisions of article 11(1), subparagraphs a) and b) of the LFTA and articles 6 and 7 of the Deontological Code.

5. Thus, pursuant to the provisions of subparagraph c) of article 11(1) of Decree-Law No. 10/2011, of 20 January, as amended by Law No. 66-B/2012, of 31 December, the Arbitral Tribunal was constituted on 23.06.2014.

6. On 06.10.2014, by order of its president, the tribunal, and, since the matter susceptible of justifying the meeting referred to in art. 18 of the LFTA was being discussed in writing, the tribunal dispensed with holding the said meeting.

7. In the present arbitral proceedings, the Claimant seeks that the Arbitral Tribunal declare the partial illegality of the self-assessed Corporate Income Tax for 2013 No. 2013..., of 24 June 2013, relating to the year 2009, concerning the amount of € 175,561.30 (one hundred seventy-five thousand five hundred sixty-one euros and thirty cents), on the grounds of its illegality, due to lapse of rights or to erroneous qualification and quantification of income, profits, patrimonial values and other tax facts, pursuant to art. 10(2), subparagraph c) of the LFTA and art. 99, subparagraph a) of the Code of Tax Procedure and Process (hereinafter, "CTPP").

8.A. The Claimant supports its petition, in summary, in the following terms:

The Claimant carried out, in the years 1999 and following, a subdivision operation which comprised the union of several plots of land intended for construction.

On 16.03.2003 a deed of exchange was executed between the Claimant and B and his wife C, exchanging a plot of land intended for urban construction for autonomous fractions to be built on this and other plots of land belonging to D.

Each one of the prestations was assigned the value of € 870,000.00 (eight hundred seventy thousand euros), with no sum of money being delivered by either party.

The autonomous fractions to be delivered to the transferors of the land were future goods, to be built on lots 3 and 5 of the said Urban Development (D).

In early 2008, the SP concluded the construction of the buildings in which the autonomous fractions were located and these were evaluated pursuant to the Urban Real Estate Tax Code (hereinafter "URETC"), being assigned a total value of € 1,080,950.00 (one million eighty thousand nine hundred fifty euros).

In light of the said evaluation, the Claimant proceeded, in its accounting, to adjust the acquisition cost of the land to the value assigned to the fractions actually delivered [crediting the sales sub-account 71212 – sale of finished products – deeds, in the amount of € 1,080,950.00, with a corresponding debit to the sub-account 268000081 – sundry debtors and creditors – B, in the amount of € 870,000.00, and further, a debit to sub-account 316115 – purchase of raw materials, in the amount of € 210,950.00 (two hundred ten thousand nine hundred fifty euros)].

The Claimant also made other accounting entries, on 31.12.2009, through document No. 5 journal 4, recording additional costs of € 491,296.21, with the following movements:

• by credit of sub-account 316114 – purchase of raw materials without deduction and debit of sub-account 331 – finished products in the amount of € 491,296.21, and,

• by debit of sub-account 316114 - Purchase of Raw Materials - Without Deduction, by credit of sub-account 574 Free Reserves, in the amount of € 491,296.21.

In turn, for the determination of accounting results, with the entry made through entry No. 1 of journal 98, the Claimant affected the determination of accounting results with the movement crediting sub-account 331 – Finished Products with a corresponding debit to sub-account 616 – Cost of Goods Sold and Materials Consumed (CGMC), which movement refers to the fractions of lots No. 3 and No. 5.

The TA conducted tax inspections for the tax years 2009, 2010 and 2011 of the Claimant, with the tax inspection report being notified on 29.04.2013 and, following the same, an additional assessment of € 220,472.81 (two hundred twenty thousand four hundred seventy-two euros and eighty-one cents) being issued, which is contested by the Claimant regarding the amount of € 175,561.30, relating to the movements identified above.

In the present case, the right to assessment by the TA lapses four years after the occurrence of the tax fact (see art. 45(1) of the General Tax Law, hereinafter "GTL").

The transfer of the right of ownership in the onerous transmission of future immovable property by purchase and sale or exchange occurs by force of the contract, but the efficacy of such transmission only occurs when the goods become present [art. 408(2), art. 879, subparagraph a) and art. 939, all of the Civil Code, hereinafter "CC"], such that, in the present case, the transmission of the said future goods occurred when they became present, that is, with the execution of the deed of constitution of condominium ownership.

The deed of constitution of condominium ownership of Lot 3 was executed on 17.01.2008 and the deed of constitution of condominium ownership of Lot 5 was executed on 14.03.2008. Thus, with respect to Lot 3, the future goods became present on 17.01.2008 and, as to Lot 5, the future goods became present on 14.03.2008, the transmission occurring effectively on those dates.

The tax fact undoubtedly occurred in the year 2008, which means, in the Claimant's understanding, that the lapse of the right to assess the claimed tax occurred on 31.12.2012.

Even if this were not understood, the Claimant contends that the accounting movements in question are perfectly legal and, therefore, legitimate.

In the Claimant's view, the tax fact in question contains a series of special features that relate to the advent of the new tax legislation introduced by DL No. 287/2003 of 12 November:

a) the exchange contract was executed in 2003, before the entry into force of DL No. 287/2003, of 12 November and the amendments and additions which the same decree makes to the legislative acts then in force;

b) the transmission of one of the prestations of the contract (that of the future goods) only occurs in 2008, when the goods become present;

c) the SP records in its accounting, as the cost of the land received, the value assigned to the autonomous fractions in the exchange contract, that is, € 870,000.00;

d) the SP promotes the approval of the constitution of condominium ownership of both lots in 2007 and the execution of the respective deeds in 2008;

e) the goods, having become present, were revalued pursuant to the URETC, the fractions in question being assigned a total value of € 1,080,950.00.

It is legitimate to proceed with the updating of the cost of the land, since this is a component of the overall cost attributable to each of the fractions; this is, in the Claimant's view, imposed by the principle of material truth, since the value of the cost of the land is equivalent to the value of the fractions given in exchange for it.

If a revaluation of the values of the fractions occurs, it becomes necessary to update the value of the cost of the land, which will be reflected in the cost of each autonomous fraction, and, therefore, in the tax result of the transmission of the autonomous fractions.

The same applies to the other accounting entry, through document No. 5 journal 4 debiting sub-account 316114 – purchase of raw materials without deduction, by credit of sub-account 574 – Free Reserves, in the amount of € 491,296.21.

The provisions of art. 58-A of the Corporate Income Tax Code (CITC), added by DL No. 287/2003, of 12 November (current article 64 of the CITC), are applicable to the concrete case, since the transmission of the future fractions in the exchange contract, and made present in the year 2008, occurred in full force of that legal provision; moreover, the said provision applies both to the situation of the acquirer and the alienator.

The Claimant rectified the value of the revalued fractions pursuant to the URETC, in its capacity as acquirer of the said goods: in the sphere of the Claimant there is a true and proper acquisition of the fractions in question because in condominium ownership the executing party originally acquires a specific right over a set of autonomous fractions.

The accounting entries made by the Claimant accurately reproduce what is recommended in the Dispatch of the General Directorate of Taxes given in response to a letter from the Directorate of the Portuguese Accountants Association to the State Secretary for Tax Affairs, of 21.04.2005 – Interpretation of Art. 58-A of the CITC, which is available for consultation in the Manual of the Statutory Auditor, in the annotations to article 58-A of the CITC contained in the section ....

8.B. In its Response, the TA raised, in summary, the following:

8.B. 1 By way of exception:

Article 10 of the LFTA establishes, as to tax assessment/self-assessment acts, that the period for presenting the request for arbitral pronouncement is 90 (ninety) days, referring, as to the moment of commencement of the count, to what is prescribed in article 102(1) and (2) of the CTPP. Pursuant to subparagraph a) of article 102(1) of the CTPP, the 90-day period is counted from the end of the voluntary payment period of the tax obligation. In the case at issue, that date is 26.08.2013.

Having the request for constitution of the arbitral tribunal been presented on 10.04.2014, such period is shown to have been exceeded, the request being untimely.

8.B.2 By way of merits:

i) Regarding the alleged lapse of the right to assess:

The Claimant errs in identifying as the essential fact in the present case, which would have originated the assessment now being challenged, the exchange contract proper, when in fact what is at issue are accounting entries made in the tax year 2009, without the (necessary) observance of the applicable rules.

Only in that year, and only after the execution of the deed of "determination of object of exchange" on 19.09.2009, did the Claimant proceed to the delivery of the future goods relating to the exchange in question, keeping, until then, such goods in its accounting, such that what is at issue is a transferring act materialized in the year 2009 and the manner in which it was accounted for.

The TA further notes that what is at issue are the accounting entries made through documents No. 2 of journal 4 and No. 1 of journal 98, which consist of the attribution of costs, in the amounts and conditions referred to in subparagraphs A) and B) of point 3.1.3.1 of the inspection report, which were not added for the purpose of determining the tax result and which negatively influenced the tax result of that same tax period.

ii) Regarding the accounting entries considered improper by the TA

The TA considers that improper entries were made as a consequence of the deed of determination of the object of exchange, in which the Claimant proceeded to record credit the sales sub-account 71212 – Sale of Finished Products – Deeds, in the amount of € 1,080,950.00, with a corresponding debit to sub-account 268000081 – Sundry Debtors and Creditors – B, in the amount of € 870,000.00 and further a debit to sub-account 316115 – Purchase of Raw Materials, in the amount of € 210,950.00.

With these entries, the Claimant valued the merchandise and raw materials at acquisition cost and the products and work in progress at production cost, thus attributing production costs to the fractions in question which it did not incur in their construction, such that such costs cannot be accepted as tax costs of the tax year for two reasons:

• The Claimant had already recorded in the income account (71212 – Sale of Finished Products – Deeds) the transfer of ownership of the fractions by values that coincide with the patrimonial tax values assigned already in the framework of the URETC based on the deed of "determination of object of exchange", to the undivided succession of B, and,

• Because the latent intentional element cannot be ignored in the communications exchanged between the Claimant and its tax advisor (contained in the administrative file) in which the former tells the latter, regarding the exchange of the land plots, to do what is necessary at the accounting level to avoid capital gains. Capital gains that would occur as a result of the difference between the cost/production value and the alienation value and which would influence the taxable result in due proportion.

With the entries made, the Claimant updated the value of the land to the value corresponding to the sum of the PTVs of the fractions delivered as consideration in the exchange, claiming as grounds the provision of subparagraph b) of article 58-A(3) of the CITC (current article 64).

This article was introduced into the CITC by article 6 of DL 287/2003, of 12 November, whose article 32 fixes the entry into force on 1 January 2004, only being able to apply to legal transactions occurring after that date, which is not the case here because the exchange deed is dated 16.06.2003.

Thus, in the absence of a legal rule that permits such an accounting entry, the amount of € 210,950.00 cannot be taken into account as a negative component for the purpose of determining the tax result.

The TA further considers that the Claimant, based on the same deed of determination of the object of exchange, also made the following accounting entries, on 31.12.2009, through document No. 5 journal 4, recording additional costs of € 491,296.21, with the following movements:

• by credit of sub-account 316114 – purchase of raw materials without deduction and debit of sub-account 331 – finished products in the amount of € 491,296.21, and,

• by debit of sub-account 316114 - Purchase of Raw Materials - Without Deduction, by credit of sub-account 574 Free Reserves, in the amount of € 491,296.21.

In turn, for the determination of accounting results, with the entry made through entry No. 1 of journal 98, the Claimant affected the determination of accounting results with the movement crediting sub-account 331 – Finished Products with a corresponding debit to sub-account 616 – Cost of Goods Sold and Materials Consumed (CGMC), which movement refers to the fractions of lots No. 3 and No. 5.

However, the TA understands that this cannot proceed because the Claimant, upon receiving the land, undertook to give in exchange autonomous fractions in buildings to be constructed, in lots that are part of the said land, and the parties assigned the same value to the things to be exchanged between them, which means that it acquired the land for the value of the exchange (€ 870,000.00).

With these entries, the Claimant made it so that the cost of the constructed fractions was equal to the PTV of said fractions evaluated pursuant to the URETC, when, in truth, the first was less than the second.

8.B.3. Response to the exception of untimeliness

In response to the exception raised by the TA, the Claimant presented the following response:

· Pursuant to article 10(1), subparagraph a) of the LFTA "... The request for constitution of an arbitral tribunal is presented within 90 days, counted from (...) the notification of the decision or the end of the legal period for decision of the hierarchical appeal..."

· The Claimant filed a gracious complaint – Case No. ..., and, on 13.01.2014, was notified of the order dismissing it.

· The subsequent period of 90 days for presentation of the request for constitution of an arbitral tribunal ended only on 14.04.2014, such that, having the request for arbitral pronouncement been presented on 10.04.2014, it is therefore timely.

8.B.4. Exercise of the right to be heard by the TA

The TA presented the following arguments invoking the principle of the right to be heard:

· The Claimant identified only as the object of the petition it formulated the assessment of Corporate Income Tax relating to the year 2009, making no reference to the gracious complaint filed.

· The CAAD case law, contained in award No. 188/2013-T:

"(...) it is stated in the decision on case No. 65/2012-T - "the formula 'declaration of illegality of tax assessment acts, self-assessment, withholding tax and advance payment acts', used in subparagraph a) of article 2(1) of the LFTA, in a mere declarative interpretation, does not restrict the scope of arbitral jurisdiction to cases in which an act of one of those types is challenged. In fact, the illegality of assessment acts can be declared jurisdictionally as a corollary of the illegality of a second-instance act, which confirms an assessment act, incorporating its illegality.

1. However, for the Tribunal to be able to rule, immediately, on the legality of the dismissal of a request to review the tax act, it is necessary that the Claimant, first, bring that act to the knowledge of the Tribunal and that, second, the petition directed to the Tribunal expressly aims at the declaration of illegality of the act of dismissal of that means of administrative defense. Now, such condition does not obtain in the case at issue, since the Claimant asks the Arbitral Tribunal to rule, directly, on the legality of the assessment and in no part of its petition does it even refer to the existence of a request to review the tax act. It is only in the allegations, and in response to the question raised by the Defendant, that the Claimant comes, for the first time, to mention that there was a request to review the tax act.

2. Now, having the period for a direct challenge of the assessment or self-assessment been exceeded, which places the possibility of the Arbitral Tribunal appreciating the legality thereof in dependence on the interposition and unfavorable decision of a means of gracious defense; with the Claimant not making, in its petition, the slightest reference to this means of gracious defense; and the scope of the powers of cognition of the Tribunal being limited by the petition, one must conclude, in the case at issue, that the Tribunal will not be able to control the legality of the assessment act as a corollary of the illegality of the act of tacit dismissal of the request to review the tax act."

· In light of the foregoing, the TA requests the dismissal of the instance pursuant to subparagraph e) of article 278(1) of the Code of Civil Procedure (hereinafter "CCP"), applicable by operation of article 29(1) of the LFTA.

8.B.4. Subsequent procedural acts

On 04.11.2014, the Claimant presented to the Tribunal a motion requesting the joinder to the case of the part of the administrative file not joined by the Defendant, that is, the gracious complaint (which it attached as document 1). Subsidiarily, should the Tribunal decide not to accept such petition, the Claimant further presented a petition for amendment of the request for arbitral pronouncement and of the tax act that is the object of the request for arbitral pronouncement, pursuant to the provisions of article 29(1), subparagraph e) of the LFTA and article 265(2) and (6) of the CCP. For this purpose, the Claimant invokes that, on 23.09.2013, it filed a gracious complaint (pages 1 to 13 of the said document 1), and that, on 13.01.2014, the Claimant was notified of the order dismissing the gracious complaint filed (pages 28 to 40 of the same document 1). Thus, it requests that the tax act that is the object of the present request for arbitral pronouncement become the act of dismissal of the gracious complaint, notified to the Claimant on 13.01.2014 (cf. Document 1), and that the request for arbitral pronouncement become the declaration of illegality of the act of dismissal of the gracious complaint, regarding the amount of € 175,561.30, due to lapse of rights or to erroneous qualification and quantification of income, profits, patrimonial values and other tax facts [pursuant to art. 10(2), subparagraph c) of DL No. 10/2011 of 20 January, and art. 99 ab initio and subparagraph a) of the CTPP].

In the final analysis, should this not be understood, the Claimant contends that the arbitral tribunal should invite it to perfect its procedural pleading, so that any deficiencies that may exist are eliminated.

By order of 19.11.2014, the Tribunal decided to admit the joinder to the proceedings of the said motion and to notify the TA to comment on the same.

On 01.12.2014, the TA presented its response, whose joinder to the case was decided by order of 03.12.2014. In this response, the TA alleges the following:

· Pursuant to article 10(2) of the LFTA, subparagraphs c) and d), the exposition of questions of fact and law that are the object of the request for arbitral pronouncement, the presentation of evidence elements of the facts invoked, as well as the indication of means of proof to be presented, is made at the time of presentation of the request for constitution of the arbitral tribunal. Thus, there is no legal support for the allegation of new facts, nor for the presentation and indication of means of proof after that moment.

· The question now introduced by the Claimant is not susceptible of being qualified as supervening and, even if it could be, its raising could only occur up to the phase of allegations, which, in the case at issue, is understood to have been closed with the order of 16.01.2014, which determined the acceptance of the motion presented by the Defendant and reiterated the date previously scheduled for the delivery of the arbitral decision (cf. article 86(1) and (2), by operation of article 29(1), subparagraph c) of the LFTA).

· With regard to the expansion of the petition, articles 264 and 265 of the CCP provide, applicable by operation of subparagraph e) of article 29(1) of the LFTA:

"Article 264

Amendment of the petition and cause of action by agreement

If the parties agree, the petition and the cause of action may be amended or expanded at any time, in the first or second instance, unless the amendment or expansion inconveniently disturbs the instruction, discussion and judgment of the case.

Article 265

Amendment of the petition and cause of action in the absence of agreement

1‐ In the absence of agreement, the cause of action may only be amended or expanded as a consequence of confession made by the defendant and accepted by the claimant, the amendment or expansion being made within 10 days from acceptance.

2‐ The claimant may, at any time, reduce the petition and may expand it until the closing of the discussion in the first instance if the expansion is the development or consequence of the original petition.

3‐ If the modification of the petition is made at the final hearing, it shall be recorded in the respective minutes.

4‐ The petition for application of compulsory pecuniary sanction, under article 829-A(1) of the Civil Code, may be made pursuant to subparagraph (2).

5‐ In indemnification actions based on civil liability, the claimant may request, until the closing of the final hearing in the first instance, the condemnation of the defendant pursuant to the provisions of article 567 of the Civil Code, even if initially it had requested the condemnation of the latter in a fixed amount.

6‐ Modification of both the petition and the cause of action is permitted, provided that it does not entail convolution to a legal relationship different from that in dispute."

· The TA does not agree with the petition formulated by the Claimant, further understanding that, pursuant to the provision of article 265 of the CCP, any eventual amendments would only be admissible until the closing of the discussion in the first instance, a circumstance which it understands has already occurred at the time of presentation of the motion in question. It concludes by saying that, even if it were considered that the expansion sought is merely "development or consequence of the original petition" (cf. article 265(2) of the CCP), the same would not be admissible.

II - REASONING

II.1 - PRELIMINARY ISSUE: THE EXCEPTION OF UNTIMELINESS

Having been raised by the Defendant in the present proceedings the exception of untimeliness of the request for arbitral pronouncement, it is necessary, first of all, to appreciate such preliminary issue.

According to the Defendant, the request for arbitral pronouncement would be untimely as a consequence of the combination of two circumstances:

(i) Having as object only one act – the act of additional corporate income tax assessment relating to the year 2009; and

(ii) Finding itself already exhausted, on the date of presentation of the request for arbitral pronouncement (10.04.2014), the period for challenging such assessment act before the arbitral tribunals (which would have terminated on 26.08.2013).

(ii)

The Claimant raises the declaration of illegality of the corporate income tax assessment act in question as a corollary of the illegality of a second-instance act – the dismissal of the gracious complaint – which confirmed the assessment act, incorporating its alleged illegality. In that case, the period for presentation of the request for arbitral pronouncement would be counted from the notification of the decision of dismissal of the gracious complaint (13.01.2014) and would therefore be timely (because it was presented on 10.04.2014, when the period ended only on 14.04.2014).

Thus, it is necessary to decide.

As has already been clarified in previous decisions of CAAD[1], the formula "declaration of illegality of tax assessment acts, self-assessment, withholding tax and advance payment acts", used in subparagraph a) of article 2(1) of the LFTA, in a mere declarative interpretation, does not restrict the scope of arbitral jurisdiction to cases in which an act of one of those types is challenged. In fact, the illegality of assessment acts can be declared jurisdictionally as a corollary of the illegality of a second-instance act, which confirms an assessment act, incorporating its illegality.

For the Arbitral Tribunal to be able to rule, immediately, on the legality of the dismissal of a gracious complaint, it is necessary that the Claimant bring that act to the knowledge of the Tribunal and that the petition directed to the Tribunal expressly aims at the declaration of illegality of the act of dismissal of that means of administrative defense. Now, although such condition did not obtain in the petition initially presented, the Claimant did correct such omission through the respective amendment, through which it passed to also include in its object the dismissal of the gracious complaint (which was joined to the case).

Thus, the powers of cognition of the Tribunal, which are limited by the petition, were increased, such that the legality of the assessment act can now be controlled as a corollary of the illegality of the act of dismissal of the gracious complaint.

As to the TA's understanding that the amendment of the petition initially presented was no longer possible at the moment it was requested, this does not stand. In effect, according to article 265(2) of the CCP, applicable by operation of subparagraph e) of article 29(1) of the LFTA, the claimant may expand the petition until the closing of the discussion in the first instance if the expansion is the development or consequence of the original petition. In the present case, the Claimant requested the expansion of the petition initially formulated of declaration of illegality of the tax assessment act by adding to it the petition of declaration of illegality of the dismissal of the gracious complaint - which is a confirmatory act of the assessment act, which, in the Claimant's understanding, maintains the illegality of the first. Thus, the expansion requested falls within the provision of article 265(2) of the CCP, being "the development or consequence of the original petition." As to the moment at which the said expansion was raised, neither is adherence given to the understanding advocated by the TA insofar as, manifestly, the closing of the discussion in the first instance, at that moment, had not yet occurred. It is further true that, in all truth, the Claimant, in the pleading immediately preceding the one that was the object of the order of 16.10.2014 refers almost exclusively to the dismissal of the gracious complaint, which is why neither the Defendant nor the tribunal should consider themselves surprised by the petition for amendment of the petition, inasmuch as everything materially relevant therein refers had already been adduced by the Claimant before 16.10.2014. It should further, as to this aspect, be borne in mind that arbitral procedure is a procedure that is intended to be informal and, as far as possible, dedicated to the analysis of the merits issues raised by the parties. Thus, under the principle provided in subparagraph e) of article 16 of the LFTA, pursuant to which the arbitral tribunal has autonomy in the conduct of the proceedings and in the determination of the rules to be observed with a view to obtaining, within a reasonable period, a pronouncement on the merits of the claims formulated, it is decided to accept the expansion of the petition in the terms in which it was formulated by the Claimant and, in consequence, to decide in the sense of the timeliness of the request for arbitral pronouncement.

II.2 - PRELIMINARY EXAMINATION

1. The Tribunal is competent and is regularly constituted, pursuant to articles 2(1), subparagraph a), 5 and 6, all of the LFTA.

2. The parties have legal personality and capacity, are parties to the dispute and are legally represented, pursuant to articles 4 and 10 of the LFTA and article 1 of Regulation No. 112-A/2011, of 22 March.

3. There are no nullities that invalidate the proceedings.

III - SUBJECT MATTER TO BE DECIDED

The substantive question in the present case consists of determining whether the accounting entries made by the Claimant with reference to the exchange operation that occurred should, or should not, be considered legitimate and whether, should they be considered illegitimate, the corrections made by the TA to the corporate income tax for 2009 which gave rise to the amount of € 175,561.30 incorporated in the corporate income tax assessment No. 2013..., of 24 June 2013, are legal.

IV - FACTS

IV.1 - FACTS ESTABLISHED

(i) The SP carried out, in the years 1999 and following, a subdivision operation which comprised the union of several plots of land intended for construction.

(ii) On 16.06.2003 a deed of exchange was executed between the SP and B and his wife C, exchanging a plot of land intended for urban construction for autonomous fractions to be built on this and other plots of land belonging to D.

(iii) Each one of the prestations was assigned the value of € 870,000.00.

(iv) In the year 2007, the SP requested approval of the Condominium Ownership at the Municipal Chamber of ....

(v) Having been, still in 2007, certified the compliance of the property with the requirements specific to Condominium Ownership and the respective certificate issued.

(vi) In early 2008, the SP concluded the construction of the buildings in which the future goods were integrated.

(vii) The SP further promoted the registration of the said autonomous fractions in the urban property matrix of the parish of ... – ....

(viii) In 2008, the autonomous fractions were evaluated pursuant to the URETC, being assigned a total value of € 1,080,950.00.

(ix) On 19.09.2009 a deed of "determination of object of exchange" was executed at the Notarial Office of ..., relating to the exchange contract executed on 16.06.2003.

(x) On 31.12.2009, the Claimant, with support in document No. 2 of journal 4, recorded credit the sales sub-account 71212 – sale of finished products – deeds, in the amount of € 1,080,950.00, with a corresponding debit to sub-account 268000081 – sundry debtors and creditors – B, in the amount of € 870,000.00, and further, a debit to sub-account 316115 – purchase of raw materials, in the amount of € 210,950.00.

(xi) On 31.12.2009, the Claimant, through document No. 5 journal 4, recorded additional costs of € 491,296.21, with the following movements:

• by credit of sub-account 316114 – purchase of raw materials without deduction and debit of sub-account 331 – finished products in the amount of € 491,296.21, and,

• by debit of sub-account 316114 - Purchase of Raw Materials - Without Deduction, by credit of sub-account 574 Free Reserves, in the amount of € 491,296.21.

(xii) In turn, for the determination of accounting results, with the entry made through No. 1 of journal 98, the Claimant affected the determination of accounting results with the movement crediting sub-account 331 – Finished Products with a corresponding debit to sub-account 616 – Cost of Goods Sold and Materials Consumed (CGMC), which movement refers to the fractions of lots No. 3 and No. 5.

(xiii) The TA conducted tax inspection of the SP with respect to the tax years 2009, 2010 and 2011, such procedure being concluded in the year 2013, and the tax inspection report being notified to the SP on 29.04.2013.

(xiv) As a result of the inspection procedure, the TA issued an additional assessment in the amount of € 220,472.81.

IV.2 - FACTS NOT ESTABLISHED

There are no facts not established that are relevant to the decision of the case.

IV.3 - REASONING FOR THE DECISION ON THE FACTS

The determination of the facts was based on the administrative file, on the documents joined to the proceedings and on statements of the Claimant which are not challenged by the Tax and Customs Authority.

V - APPLICATION OF THE LAW TO THE FACTS

V.1 – THE LAPSE OF THE RIGHT TO ASSESS

The Claimant understands that the right of the TA to proceed with the assessment of the tax in question lapsed on 31.12.2012. This understanding is based on the conviction that the relevant tax fact took place in the year 2008 and that, pursuant to the provision of article 45(1) of the GTL, "the right to assess taxes lapses if the assessment is not validly notified to the taxpayer within a period of four years". The Defendant, in turn, does not subscribe to this point of view, arguing instead that the tax fact with relevance for the appreciation of this question occurred in 2009, which is why its right to proceed with the respective assessment did not lapse.

To answer this question, we must keep present the following facts and establish their chronology:

a) The deed of exchange between the SP and the transferors of the land to which we have been referring was executed on 16.06.2003;

b) In that deed, the same value was assigned to each of the prestations (acquisition of the land by the SP and acquisition of the future autonomous fractions by the transferors of the land): € 870,000.00;

c) The construction of the buildings in which the autonomous fractions are integrated was completed in early 2008;

d) The condominium ownership of both buildings in which said autonomous fractions are integrated was constituted in 2008;

e) Said autonomous fractions were registered in the respective matrix in 2008;

f) The evaluation of the autonomous fractions for purposes of URETC took place in 2008;

g) The deed of determination of the object of the exchange agreed between the parties on 16.06.2003 was executed on 19.09.2009;

h) The following accounting entries were made on 31.12.2009: i) recording of the sale of finished products by the amount of the sum of the PTVs (€ 1,080,950.00) with a corresponding ii) debit to the sub-account where the Claimant's debt to the transferors of the land was recorded in the amount of € 870,000.00 and, iii) to operate the adjustment that ensures the equivalence between the value given to the land in 2003 and the value reached in 2009 to the fractions that constituted the sole consideration for the acquisition of the land, the debit to the sub-account referring to "purchase of raw materials".

The question is therefore whether the period for lapse of the right to assess relates to 2008, as the Claimant wants, in which case the right would have already lapsed, or to 2009, in which case the TA may still exercise the right to assess the respective tax. That is, it is necessary to decide whether the date of execution of the deed of constitution of condominium ownership is relevant for these purposes, as the Claimant intends, or whether, on the contrary, the date of execution of the deed of determination of the object of the exchange and the respective accounting entries, both had in 2009, matter.

An exchange consists of the contract that has as its object the reciprocal transfer of ownership of things or other rights between the contracting parties[2]. Being a legal transaction of alienation for a price, the rules of purchase and sale apply to it, by force of the provision of article 939 of the CC, to the extent that they are compatible with its nature.

It is a consensual contract, although subject to form (public deed) whenever it has as its object, as in the case at issue, the exchange of immovable property (article 875 of the CC), and synallagmatic, since the performances to which each of the parties binds itself are the cause of the other. It is also a contract with real effect since the ownership of the goods that are its object is transferred by the mere effect of the contract, obliging the parties to exchange to deliver the things [article 879, subparagraph a), article 408(1) and article 882, all of the CC].

As is clear, there is no obstacle to the exchange having as its object future goods (article 880 of the CC) and it is exactly that which occurs in the present case, inasmuch as the Claimant cedes to the transferors of the land intended for construction autonomous fractions not yet existing, nor even constructed.

The Claimant contends, and rightly so, that "the transfer of the right of ownership in the onerous transmission of future immovable property by purchase and sale or exchange occurs by force of the contract, but the efficacy of such transmission only occurs when the goods become present". This is no other conclusion than can be drawn from article 408(2) of the CC: "if the transfer concerns future or indeterminate property, the right is transferred when the property is acquired by the alienator or determined with the knowledge of both parties".

In the 2003 exchange contract one can read that the Claimant "cedes and transfers to the common patrimony of the first executing parties [the transferors of the land intended for construction] the following autonomous fractions which will integrate the urban properties to be built (...) so as to be subject to the regime of condominium ownership (...)". The description that is made of said future autonomous fractions is what is possible... Let us take an example, in no way different from any other property description made in the exchange contract: "An apartment type T-Two, on the first floor against the western extremity and facing north/south (...)". Now, it is difficult to conceive that an exchange contract with these characteristics could be sufficient title to produce any transferring effects with respect to the future autonomous fractions.

Moreover, note the circumstance that the parties to the exchange transferors of the land intended for construction, in that same public deed that titles the exchange, reserve for themselves "the right of ownership over the property ceded by them (...) until the future goods which constitute the future consideration, received by them, are delivered to them (...) in conditions that they may be used". From what has just been stated, one must deduce that there will be a need to proceed with a delivery of those same fractions. It seems, therefore, premature the conclusion whereby the future autonomous fractions pass to integrate the patrimony of the parties to the exchange transferors of the land intended for construction on the date on which the deeds of constitution of condominium ownership of each of the buildings are executed. For that matter, the case law invoked by the Claimant only apparently corroborates that assertion. For, in truth, to say that the future goods (the said autonomous fractions) become present with the constitution of condominium ownership is correct. It is the constitutive deed of condominium ownership that confers individualized legal existence to each of the fractions, each of them forming a property unit legally independent and autonomous in relation to the building and the other fractions. It is even accurate to state that that constitutive deed produces real effects in the proper sense, insofar as, by it, the fractions come to exist and, therefore, come to be the property of someone, goods until then legally non-existent, because merely future. However, with due respect, that is not the central issue of the problem that we must see resolved. What we care about is not knowing when the said autonomous fractions came to exist and to be the property of someone. What matters to us is, rather, to grasp the moment from which those autonomous fractions come to integrate the patrimony of the transferors of the land intended for construction and that moment, as was sought to be demonstrated, cannot be the date of execution of the deed of constitution of condominium ownership.

If it were as the Claimant intends, what meaning would be attributable to the deed of determination of object of exchange? Would it make sense to determine what is a priori determined? In this 2009 deed, one reads that "in determination of the object of the exchange all executing parties declare that the indicated future consideration (...) corresponds to the following autonomous fractions", making correspond, with the knowledge of all parties involved, each of the diffuse descriptions made in the exchange deed to a specific autonomous fraction, now identified with all the property and matrix elements necessary for the intended transfer of ownership rights over the said autonomous fractions.

It is therefore the deed of determination of the object of the exchange (a document strangely omitted by the Claimant in its request for arbitral pronouncement) that permits the transfer of ownership rights over those fractions[3]. It is therefore no surprise the finding that the Claimant, following the execution of the deeds of constitution of condominium ownership of each of the buildings, in 2008, did not proceed to any accounting entry suggestive of that transfer of ownership. In truth, the Claimant only recorded it in accounting in 2009, admittedly following the mentioned deed of determination of the object of the exchange.

Thus, the arbitral tribunal understands that the relevant tax fact for the case occurred in 2009 and not in 2008 as the Claimant contends, which is why it judges that the lapse of the right to assess the tax in question is not verified.

V.2 – THE LEGAL RELEVANCE OF ACCOUNTING FOR THE QUANTIFICATION OF THE TAX FACT

Upstream of the determination of the tax debt is the entire process, not infrequently complex, tending toward the quantification of the tax fact. It is certain that, however intricate that complexity may be, judex non calculat, it falling to the law the prescription of the methods through which that quantification is conducted. It is, in that measure, a matter of fact[4].

Among us the model of partial dependence of taxation on accounting operates, which determines that, whenever tax-specific rules are not established, the adoption, by tax law, of the accounting treatment occurs. Whenever there are no specific tax rules, one must adopt and assign legal effects to what results from adequate accounting recording. Thus, the balance sheet of the company and the totality of its accounting entries are instruments which the legal order normally uses, and in a mandatory manner in the absence of specific tax rules, to proceed with the determination of tax-relevant values. Consequently, one should not think that accounting, accounting principles, by the tax relevance which it assumes the so-called tax balance (which, as we know, may differ from the commercial one), is exhausted in a set of rules of a merely technical nature, more or less arbitrary. On the contrary, it must be concluded that those principles, those rules, by virtue of the acceptance that the legal order grants them, assume themselves as genuine normative commands, binding, that far exceed the nature of strictly expert judgments.

V.2 – ACCOUNTING ENTRIES MADE AND THEIR CONFORMITY WITH THE LEGAL ORDER

As was seen, the Claimant, on 31.12.2009:

I. Through document No. 2 of journal 4, recorded credit the sales sub-account 71212 – sale of finished products – deeds, in the amount of € 1,080,950.00, with a corresponding debit to sub-account 268000081 – sundry debtors and creditors – B, in the amount of € 870,000.00, and further, a debit to sub-account 316115 – purchase of raw materials, in the amount of € 210,950.00.

II. Through document No. 5 journal 4, recorded additional costs of € 491,296.21, with the following movements:

• by credit of sub-account 316114 – purchase of raw materials without deduction and debit of sub-account 331 – finished products in the amount of € 491,296.21, and,

• by debit of sub-account 316114 - Purchase of Raw Materials - Without Deduction, by credit of sub-account 574 Free Reserves, in the amount of € 491,296.21.

III. In turn, for the determination of accounting results, with the entry made through No. 1 of journal 98, affected the determination of accounting results with the movement crediting sub-account 331 – Finished Products with a corresponding debit to sub-account 616 – Cost of Goods Sold and Materials Consumed (CGMC), which movement refers to the fractions of lots No. 3 and No. 5.

It is important to evaluate the correctness or appropriateness of the accounting entries made by the SP to adjust the value assigned to the goods that are the object of the exchange contract.

On one hand, the accounting records the patrimonial facts underlying the exchange contract entered into between the parties by the value assigned to the goods fixed therein, in the amount of € 870,000.00, at each of the moments when the transfer of ownership or delivery of the goods is operated. In the case at issue, the value of each of the prestations is equal, which is why there is no room for adjustments or any other compensations. The accounting will also record the patrimonial facts resulting from the process of construction (or production) of the future autonomous fractions until their delivery, with the determination of results being effected in accordance with the principles, criteria and methods imposed by the Official Accounting Plan (OAP), in force in 2009, the year of alienation of the autonomous fractions, without prejudice to observance of the provisions set forth in the CITC.

For inventories, the CITC provides that the values to be considered in revenues and costs to be taken into account in determining taxable profit are those resulting from the application of criteria that use effective acquisition or production costs. And from the accounting principles enshrined in the OAP, with indisputable legal relevance, what is of interest for the case is to appeal to the principle of historical cost, which states that "accounting records must be based on acquisition or production costs, expressed either in nominal monetary units, or in constant monetary units".

The CITC also provides that revenues (income) and costs (expenses) relating to sales (or exchanges, in the case at issue) are attributable to the tax period in which they are, respectively, realized (obtained) or incurred and are generally considered revenues (income) realized (obtained), and the corresponding costs (expenses) incurred, on the date of delivery of the corresponding goods or, if earlier, on the date on which the respective transfer of ownership is operated. It further establishes that the determination of results in works effected for own account sold (or exchanged, in the case at issue) piecemeal is effected, using the criterion of the percentage of completion, as they are being completed and delivered to the acquirers, even though the total costs thereof are not known exactly.

The construction of the buildings in which the autonomous fractions that were alienated to the transferors of the land intended for construction are integrated was completed, as stated, in 2008. However, in 2009, the Claimant proceeded to the attribution of costs relating to that construction, as if they had been incurred in that same tax year 2009. This entry, as is evident, affects the determination of taxable profit. For, having the Claimant proceeded, as it did, to the accounting of the delivery of the fractions given as consideration for the acquisition of the land intended for construction, a delivery which took place by the deed of determination of the object of the exchange, it did so, in obedience to what the article 58-A of the CITC provides (current article 64), by the corresponding PTVs, although it is not correct to proceed with the accounting of the delivery of the fractions by the PTVs, but rather by the value of the exchange contract (the correction of the positive difference between the PTV and the value of the exchange contract is made in the tax return declaration of the corresponding tax period). Moreover, in that same deed of determination of the object of the exchange the executing parties declare that "they consider that exchange contract fully performed, with respect to lots three and five, here mentioned, having nothing further to claim from each other regarding it, be it for whatever reason" (see pp. 84-85 of the Administrative File joined to the proceedings with the response of the Defendant).

If we were confronted with pure or simple purchases and sales (purchase by the Claimant of the land intended for construction and sale, by the Claimant, to third parties, of the autonomous fractions constructed), there would be no doubts about the accounting treatment of these operations nor about the result, taxable, which they would generate.

We are however in the presence of an exchange. It is well to bear in mind, however, that, pursuant to article 939 of the CC, the regime of purchase and sale applies, with the necessary adaptations, to an exchange. And if it is thus in civil law terms, there is no reason why it should not be so from a tax point of view.

As was stated, the rule of valuation of inventories or goods imposes the adoption of the method that uses acquisition or production costs (article 26 of the CITC). This requirement entails that merchandise and raw materials be valued at acquisition cost and products and work in progress at production cost.

Now, inveighing against what it considers to be "a mechanical application of the general rule of accounting result determination", that which is imposed by article 26 of the CITC, the Claimant proceeds to the "accounting rectification of the value of the land" and does so by attributing to the tax year 2009 construction or production costs allegedly incurred in that same year, when it is certain that that construction or production had been completed in 2008, in the prior tax year. But more. Those costs attributed by the Claimant to the construction were never actually incurred by it. It is clear, and the administrative file joined to the proceedings provides evidence of this very thing, that this entry aimed only to eliminate, in accounting terms, a taxable "capital gain" which, in truth, did not exist. The Claimant sought, in this way, to reflect in its accounting what it designates as the "principle of material truth", which would always impose the elimination of a gain which the Claimant understood it had not obtained. In any case, potential or latent capital gains resulting from revaluations of the cost of the fractions to the PTVs, even if expressed in the accounting, do not contribute to the formation of taxable profit.

As was sought to be demonstrated, accounting rules assume a genuine normative vocation and, for the sake of legal certainty, consistency, cohesion and harmony of the tax system itself, one cannot permit the instrumentalization of those rules to the aspirations of taxpayers, however just they may seem to them. That is, to suppress an accounting advantage of which the Claimant understood it had not benefited, one cannot manipulate the accounting entries to the point of fictionalizing production costs that were never incurred and recording them at a moment after the very conclusion of the construction work.

It is meant by what precedes to convey that the Claimant could not have made use of the accounting entries it made (and which were not at its disposal). Such does not imply, however, that the Claimant would have to be taxed on a gain it did not have. In truth, the Claimant had the faculty to make use of the routes that the tax rules, for that purpose, place at the service of taxpayers. Foremost, the Claimant should have proceeded, in the tax return of the tax year to which the revenue obtained from the transmission operation of the fractions is attributable, that is, 2009, to a correction, corresponding to the addition of the positive difference between the final PTV of the property and the value contained in the contract. This is precisely the pellucid solution that subparagraph a) of article 58-A(3) of the CITC (current 64) imposes. That is, the Claimant felt the need to resolve what it intuited to be a problem. However, instead of making use of the expedient with which tax law intended to overcome it, it opted to adulterate its books, violating accounting rules and principles, offending, in that measure, the legal order.

Moreover, since article 58-A of the CITC (current 64) has the nature of a special anti-abuse clause, the Claimant could always demonstrate, pursuant to and for the purposes of the provision of article 129 of the CITC (current 139) that "the price actually practiced in the transmissions of real rights over immovable property was less than the patrimonial tax value", which it should have done through the procedure to which article 3 of that provision appeals, which also did not occur.

The accounting entries made in 2009, aimed at influencing the taxable result in violation of the rules that govern its quantification, are illegitimate and consequently illegal, whereby the effects produced by those accounting entries in the determination of the Claimant's taxable profit must be eliminated, not contributing them to the formation of the taxable result.

VI. DECISION

Pursuant to the terms and grounds set forth above, the Arbitral Tribunal hereby orders:

a) To dismiss the exception of untimeliness of the request for arbitral pronouncement;

b) To dismiss the request for arbitral pronouncement (declaration of illegality of the act of dismissal of the gracious complaint).

VII. VALUE OF THE CASE

In accordance with the provisions of article 315(2) of the CCP, subparagraph a) of article 97-A(1) of the CTPP and further article 3(2) of the Regulation of Costs in Tax Arbitration Proceedings, the value of the case is set at € 175,561.30 (one hundred seventy-five thousand five hundred sixty-one euros and thirty cents).

VIII. COSTS

For the purposes of the provision of article 12(2) and article 22(4) of the LFTA and article 4(4) of the Regulation of Costs in Tax Arbitration Proceedings, the amount of costs is set at € 3,672.00 (three thousand six hundred seventy-two euros), pursuant to Table I attached to the said Regulation, to be borne entirely by the Claimant.

Lisbon, 22 December 2014

The Collective Arbitral Tribunal

(Jorge Lino Ribeiro Alves de Sousa)

(José Vieira dos Reis)

(Nuno Pombo)

[1] See case No. 65/2012-T.

[2] ANTÓNIO MENEZES CORDEIRO, Law of Obligations, III, 3rd ed., p. 165.

[3] On a different matter, although related, it appears to be the understanding of the Supreme Administrative Court in the award of 26.03.2014, relating to case 0594/13.

[4] See on this J. L. SALDANHA SANCHES, The Quantification of the Tax Obligation – Duties of Cooperation, Self-Assessment and Administrative Assessment, 2nd ed., Lex, 2000.