Summary
Full Decision
ARBITRAL DECISION
The arbitrators José Poças Falcão (President Arbitrator), Luís Janeiro and António Pragal Colaço (Member Arbitrators) designated by the Deontological Council of the Centre for Administrative Arbitration to form the Arbitral Tribunal, hereby agree as follows:
I. REPORT
1. The Claimant A... S.A., (hereinafter also referred to as Claimant), with registered office at ..., ..., Rua..., nº..., ...-... Paço de Arcos, with the Tax Identification Number: ..., submitted on 26/7/2018 a request for arbitral decision with a view to obtaining a decision declaring the illegality of the decision rejecting the administrative complaint - Case: n.º ...2018..., which concerned the IRC self-assessment for the fiscal year 2015.
2. The claim subject to the request for arbitral decision consists in the declaration of illegality of the decision rejecting the administrative complaint - Case n.º ...2018..., which concerned the IRC self-assessment for the fiscal year 2015, insofar as it corresponds to the failure to deduct from the IRC tax assessed the tax credits arising from the autonomous tax rates calculated under the Extraordinary Fiscal Credit for Investment (CFEI), in the amount of €161,674.32 - Model 22 Declaration - Field 725 of table 076 of Annex D of Model 22 Declaration, from SIFIDE II in the amount of €373,860.77 - Model 22 Declaration - Field 712 of table 073 of Annex D of Model 22 Declaration), as well as the deduction for Double International Taxation in the amount of €326,329.12, Model 22 Declaration - table 14 of Model 22 Declaration) to be deducted from the IRC tax assessed, and subsidiarily, in the event that it is understood that Article 90 of the IRC Code does not apply to autonomous taxation, it also requests the declaration of illegality of the assessment of autonomous taxation, due to absence of legal basis for its implementation, with the consequent reimbursement of the respective amount and payment of the corresponding compensatory interest.
3. The request for constitution of the arbitral tribunal was accepted by the President of CAAD and automatically notified to the Tax and Customs Authority by electronic dispatch on 26/7/2018.
3.1 The Claimant did not appoint an arbitrator, therefore, pursuant to the provisions of paragraph a) of Article 6(2) and paragraph b) of Article 11(1) of the RJAT, the President of the Deontological Council designated the signatories as arbitrators of the collective arbitral tribunal, who communicated acceptance of their appointment within the prescribed period.
3.2 On 12/9/2018, the parties were notified of the appointment of the arbitrators and raised no objections.
3.3 In accordance with the provisions of paragraph c) of Article 11 of the RJAT, the collective Arbitral Tribunal was constituted on 2/10/2018.
3.4 In these terms, the Arbitral Tribunal is regularly constituted to consider and decide upon the subject matter of the case.
4. To substantiate the request for arbitral decision, the Claimant alleges, in summary, the following:
4.1 The Claimant is a joint stock company subject to and not exempt from taxation under IRC.
4.2 On 27/05/2016 it submitted Model 22 IRC declaration for 2015, having calculated the amount of autonomous taxation in IRC in the amount of €151,227.08.
4.3 The Claimant submitted, on 31 March 2017, a replacement periodic income statement (Model 22) of IRC for the fiscal year 2015, with a view to deducting the tax credit for Double International Legal Taxation in table 14 of that declaration.
4.4 In the calculation of the tax resulting from the application of autonomous tax rates in IRC, the computer system does not allow the inscription of the value relating to autonomous tax rates, in terms of IRC deducted from the amounts of the CFEI fiscal benefit, SIFIDE II and Double International Taxation, in the form of tax credit deductible from the IRC tax assessed.
4.5 The Claimant had its tax and social security situation regularized and its taxable profit was not calculated by indirect methods.
4.6 The fiscal benefits and credits referred to should be deducted from the autonomous taxation assessed because: (i) they may be deducted from the IRC tax assessed under Article 90 of the IRC Code; (ii) the autonomous taxation assessed is considered as IRC tax assessed, being an integral part thereof; (iii) the assessment rules provided for in Article 90 of the IRC Code are applicable to autonomous taxation; and (iv) the Claimant's understanding is in line with various CAAD case law, which has already ruled on this matter.
4.7 The provision contained in the second part of Article 88(21) of the IRC Code, introduced by Law No. 7-A/2016, of 30 March, should not have a true interpretative nature and if it does, it cannot be applied to the case sub judice, as such application would constitute recognition of retroactive effect to tax law, in manifest contradiction with Article 103(3) of the Portuguese Constitution.
4.8 The amendment to the second part of Article 88(21) of the IRC Code was considered materially unconstitutional, for violation of the constitutional prohibition of retroactivity of taxes, contained in Article 103(3) of the Portuguese Constitution (Constitutional Court Decision n.º 267/2017, of 31-05-2017).
4.9 Therefore, both before and after Law No. 7-A/2016, of 30 March, and Law No. 114/2017, of 29 December, Article 90(1) of the IRC Code is applicable to the assessment of autonomous taxation.
4.10 The Claimant filed, on 22 December 2017, an administrative complaint, seeking to correct the illegalities referred to above.
4.11 On 20 June 2018, the Claimant was notified of the final decision on the administrative complaint filed, which rejected the request to deduct fiscal benefits and double taxation credit from the IRC tax assessed (including that derived from autonomous taxation), for the fiscal year 2015.
4.12 The differences between the determination of the amount resulting from autonomous taxation and that resulting from taxable profit are limited to the determination of the taxable matter and the applicable rates, which are those provided for in Chapters III and IV of the IRC Code for IRC based on taxable profit and in Article 88 of the IRC Code for IRC based on the taxable matter of autonomous taxation and their respective rates. However, the assessment procedures provided for in Chapter V of the same Code are of common application to autonomous taxation and to the remaining IRC taxable matter.
4.13 Whatever calculations are to be made, the assessment undertaken by the taxpayer or by the Tax Authority in accordance with Articles 89(a), 90(1)(a), (b) and (c), and 120 or 122, is unitary, and on its basis the overall IRC is calculated, regardless of the taxable matter relating to each type of taxation underlying it.
4.14 Deductions provided for in Article 90(2) of the IRC Code should be permitted from the IRC tax assessed resulting from autonomous taxation, at least in cases where the deductions result from special law, as it will necessarily be possible to prevent them through a restrictive interpretation of Article 90(2), since it is this special law, precisely because it is special law, that imposes its application, as special laws take precedence over general laws in their specific domains of application.
4.15 To accept that the assessment of autonomous taxation is outside Article 90(1) of the IRC Code and, therefore, to exclude from its assessed tax the deductibility of CFEI and SIFIDE provided for in Article 90(2)(c), would require the taxpayer to pay a tax whose assessment is not carried out in accordance with the law, contrary to Article 103(3) of the Portuguese Constitution and the principle of tax legality established by the General Tax Law in Article 8(2)(a).
4.16 As regards the deductibility of investment expenses provided for in SIFIDE II from the IRC tax assessed derived from autonomous taxation, given that there is a unitary assessment, it follows that the part of the assessed tax coming from autonomous taxation is an integral part of the IRC tax assessed.
4.17 Since Article 90, inserted in Chapter V, which is referred to in Article 4(1) of SIFIDE, there is no support in law for making a distinction between the assessed tax coming from autonomous taxation and the remaining IRC assessed, due to the fact that the rates and the methods for determining the taxable matter are different.
4.18 It is certain that we are dealing with fiscal benefits whose justification is legislatively considered more relevant than obtaining tax revenues, inferring from that Article 92 that the legislative intention to encourage investments in research and development provided for in SIFIDE is so firm that it even does not establish any limit to the deductibility of the IRC tax assessed.
4.19 The Claimant cites the arbitral decisions issued in Cases (769/2014-T; 219/2015-T; 369/2015-T; 370/2015-T; 637/2015-T; 673/2015-T; 740/2015-T; 749/2015-T; 784/2015-T; 5/2016-T; 31/2016-T; 326/2016-T; 360/2016-T; 456/2016-T; 530/2016-T; 536/2016-T; 565/2016-T; 576/2016-T; 578/2016-T; 630/2016-T; 672/2016-T; 679/2016-T; 59/2017-T; 60/2017-T; 134/2017-T; 216/2017-T; 428/2017-T; 433/2017-T; 474/2017-T and 45/2018-T).
4.20 Noting that the great majority of arbitral decisions, of which those referred to in the previous point are exemplified, were in the direction of allowing the deductibility of the SIFIDE fiscal benefit from the autonomous taxation assessed. However, some decisions issued, mainly between the entry into force of Law No. 7-A/2016 and before the Constitutional Court decision (Decision n.º 267/2017 of 31/05/2017) were in the direction of not permitting the said deduction, influenced by the legal amendment referred to, which "allowed more than one reading" with respect to the said deduction. With the publication of the said decision, which affirmed the unconstitutionality of that Article 135, its application to fiscal years prior to 2016 was rejected. Thus, we are led to conclude that, with this new framework, probably these unfavorable decisions would never have been issued.
4.21 Therefore, the decision on the administrative complaint suffers from a defect of violation of law, due to error on the legal presuppositions, consisting of incorrect interpretation of Articles 3(1) of Law No. 49/2013, 88 (namely Article 88(21) of the IRC Code, added by Law No. 7-A/2016, of 30 March) and 90 of the IRC Code, as well as Article 133 of Law No. 7-A/2016, defects that justify its annulment.
4.22 The Claimant in Article 76 of its request for arbitral decision addresses the issue concerning the credit for Double International Taxation, but immediately following in Article 77, states that it does not intend the Arbitral Tribunal to rule on the said issue.
4.23 Based on the illegality of the assessment acts, it is entitled to compensatory interest and requests it in consequence.
5. The Tax and Customs Authority submitted a response and attached the administrative file, invoking in summary the following:
5.1 The Tax and Customs Authority responded essentially by analyzing the legal nature of autonomous taxation and its relationship with the general rules of the tax in which it is integrated.
5.2 The autonomous character of this taxation, resulting from the special configuration given to the material and temporal aspects of the taxable events, requires, in certain areas, the exclusion or adaptation of the general rules of application of IRC, consisting in separate computations of their respective assessed taxes, due to them being subject to different rules. The integration of autonomous taxation into the IRC Code (and IRS Code) gave a dualistic nature, in certain respects, to the normative system of this tax, which materialized, notably, under the framework of Article 90(1)(a) of the IRC Code, in separate computations of their respective assessed taxes, due to them being subject to different rules, since, in one case, it concerns the application of the rate(s) of Article 87 of the IRC Code to the taxable matter determined according to the rules contained in Chapter III of the Code, i.e., based on profit, and in another case, it concerns the application of the rates to the values of the taxable matters relating to the different situations contemplated in Article 88 of the IRC Code.
5.3 In overall terms, the IRC tax assessed under Article 89 and Article 90(1) has a composite nature, divisible, on the one hand between the tax assessed itself, resulting from the general IRC computation structure, which is owed on constitutional grounds based on the general duty of each person (including legal persons) to contribute to public expenditure according to their means (Article 103(1) of the Portuguese Constitution), to which are deducted the amounts referred to in Article 90(2), in the terms and manner referred to therein, and on the other hand, the sum of the autonomous taxation assessed that incorporates its own meaning and grounds and which, for that reason, should not be subject to confusion.
5.4 Now, in the same way that support is found in the letter and ratio of the law to conclude coherently, and also in substance, reasons are detected to conclude that the fiscal benefits, including SIFIDE, cannot be deducted from the same assessed taxes and that SIFIDE should not be deducted from the amounts of the autonomous taxation assessed.
5.5 The result of this interpretation would imply that, in the basis for calculating the advance payments defined in Article 105(1) of the IRC Code – and in terms identical to those used in Article 90(2) ["Advance payments are calculated on the basis of the tax assessed under Article 90(1) (…)]", the autonomous taxation assessed would be included.
5.6 The only (and consistent) interpretation of the expression "amount computed under the preceding number" is consistent with the nature of the deductions referred to in the paragraphs of Article 90(2) of the IRC Code, relating to: - tax credits for double international legal and economic taxation (current paragraphs a) and b));
- fiscal benefits (current paragraph c));
- special advance payment (current paragraph d));
- and withholdings at source (current paragraph e)).
5.7 The arguments now raised have already been presented in arbitral proceedings, specifically in Case n.º 603/2014 – T and Case n.º 697/2014-T, both decided in favor of the Respondent, whose sole purpose was the deduction from the portion of IRC tax produced by autonomous tax rates of those of SIFIDE, as well as in cases n.º 113/2015-T; 535/2015-T; 639/2015-T; 535/2015-T; 670/2015-T; 722/2015-T; 736/2015-T; 745/2015-T; 746/2015-T; 750/2015-T; 751/2015-T; 752/2015-T; 767/2015-T; 769/2015- 780/2015-T; 781/2015-T; 784/2015-T; 784/2015-T; 174/2016-T, all of them corroborating the thesis argued by the Respondent.
5.8 As regards the interpretative effect conferred by Article 135 contained in the State Budget Law for 2016, the Respondent appeals to the case law issued, among many others, in the decisions issued in arbitral cases n.ºs 722/2015 –T CAAD; 727/2015 – T CAAD; 785/2016 T CAAD and also in the dissenting opinion issued by the distinguished Counselor Fernanda Maçãs in case n.º 5/2016 T CAAD.
5.9 It concludes as to the illegality of the deductibility of SIFIDE from the autonomous taxation assessed, without need to resort to the interpretative character given by Article 135 of Law No. 7-A/2016, of 30 March (State Budget Law for 2016), to Article 21 of Article 88 of the IRC Code, which now has the following content: "21 - The assessment of autonomous taxation in IRC is carried out in accordance with the provisions of Article 89 and is based on the values and rates resulting from the provisions of the preceding numbers, with no deductions being made from the total amount computed." In short, the legislator in adding this 21 to Article 88 of the IRC Code with the content mentioned, merely adopted and reinforced the interpretative meaning that already resulted from the applicable rules as was demonstrated.
5.10 As the assessment resulted from a correct application of law and not from any error attributable to the services, there is no basis for the payment of compensatory interest.
6. As there were no reasons to justify it, the Tribunal waived the holding of the first meeting provided for in Article 18 of the RJAT, which it did under the principles of the Tribunal's autonomy in conducting the case.
7. The Claimant and the Respondent submitted pleadings reiterating the arguments presented in the earlier procedural documents.
II.
8. PRELIMINARY DETERMINATION OF ISSUES
8.1 The parties have legal personality and capacity, are legitimate and are properly represented (Articles 4 and 10(2) of the RJAT and Article 1 of Order n.º 112-A/2011, of 22 March).
8.2 The tribunal is competent and is regularly constituted.
8.3 The case does not suffer from nullities.
8.4 No objections were raised.
8.5 There are no other circumstances that prevent the tribunal from deciding on the merits of the case.
III REASONING
9. THE FACTS
9.1 Proven Facts
With relevance for the consideration and decision of the claim, the following facts are established and proved:
9.1.1 The Claimant is a joint stock company subject to and not exempt from taxation under IRC.
9.1.2 On 27/05/2016 it submitted Model 22 IRC declaration for 2015, having calculated the amount of €150,062.68 to be paid, which results from autonomous taxation in IRC in the amount of €151,227.08, less the amount of €1,164.40 in respect of withholdings at source.
9.1.3 The Claimant proceeded to self-assess IRC for the year 2015, where it did not register the deduction of fiscal benefits insofar as it corresponds to the failure to deduct from the portion of IRC tax assessed produced by autonomous tax rates, of tax credits computed under the Extraordinary Fiscal Credit for Investment (CFEI), in the amount of €161,674.32 - Model 22 Declaration - Field 725 of table 076 of Annex D of Model 22 Declaration, from SIFIDE II in the amount of €373,860.77 - Model 22 Declaration - Field 712 of table 073 of Annex D of Model 22 Declaration).
9.1.4 In the calculation of the tax resulting from the application of autonomous tax rates in IRC, the computer system in Model 22 does not allow the inscription of the value relating to autonomous tax rates, in terms of IRC deducted from the amounts of the CFEI fiscal benefit, SIFIDE II and Double International Taxation, in the form of tax credit deductible from the IRC tax assessed.
9.1.5 The Claimant in Article 76 of its request for arbitral decision addresses the issue concerning the credit for Double International Taxation, but immediately following in Article 77, states that it does not intend the Arbitral Tribunal to rule on the said issue.
9.1.6 The Claimant had its tax and social security situation regularized and its taxable profit was not calculated by indirect methods.
9.1.7 The Claimant filed, on 22 December 2017, an administrative complaint, seeking to correct the illegalities referred to above.
9.1.8 On 20 June 2018, the Claimant was notified of the final decision on the administrative complaint filed, which rejected the request to deduct fiscal benefits and double taxation credit from the IRC tax assessed (including that derived from autonomous taxation), for the fiscal year 2015.
9.2 Reasoning of Factual Matters
With respect to factual matters, the Tribunal does not have to rule on everything that was alleged by the parties; rather, it has the duty to select the facts that matter for the decision and to distinguish the proven from the unproven matter (cf. Article 123(2) of the Tax Procedure Code and Article 607(3) of the Civil Procedure Code, applicable under Article 29(1)(a) and (e) of the RJAT).
In this way, the facts relevant to the trial of the case are chosen and delimited based on their legal relevance, which is established having regard to the various plausible solutions to the question(s) of law (cf. previous Article 511(1) of the Civil Procedure Code, corresponding to the current Article 596, applicable under Article 29(1)(e) of the RJAT).
Therefore, taking into account the positions assumed by the parties, in light of Article 110/7 of the Tax Procedure Code, the documentary evidence and the administrative record attached to the case, the facts listed above were considered proven with relevance for the decision.
The facts given as not proven result from the absence of evidence in their respect.
Allegations made by the parties and presented as facts, consisting of statements that are strictly conclusive in nature, not susceptible to proof, and whose truthfulness must be assessed in relation to the concrete factual matter consolidated above, were not given as proved or not proved.
9.3 Unproven Facts
There are no other facts with relevance to the consideration of the merits of the case that have not been proved.
10. THE LAW
10.1 The central question to be decided is whether the fiscal credits arising from the fiscal benefit of CFEI and SIFIDE II, in the form of tax credit deductible from the IRC tax assessed, can be deducted from the autonomous taxation values in IRC in the amount of €151,227.08. The inclusion of the taxable matter underlying autonomous taxation without any differentiation from the taxable matter calculated in accordance with the specific IRC articles is therefore at issue. It is, thus, the type of reading one has of Article 90(1)(a) of the IRC Code, which, in turn, is related, in terms of who must carry out the assessment of the tax, to Article 89(a) of the IRC Code. The logical conclusion will be that, if there is no differentiation, the assessed tax resulting therefrom will count towards the value to which the amounts referred to in Article 90(2) of the IRC Code will be deducted, which include fiscal benefits, notably CFEI and SIFIDE II (present in this Case); if, on the other hand, it is concluded that this taxable matter is dual, it will not be possible to make any deduction from the assessed tax (autonomous taxation) resulting therefrom. In short: to a unitary assessed tax resulting from unitary taxable matter, deductions should be made in a unitary manner; in the contrary case, the assessed tax will not be unitary and, consequently, neither will the deductions be unitary.
To facilitate exposition, Articles 89 and 90 of the IRC Code are reproduced:
Article 89
Competence for Assessment
The assessment of IRC is carried out:
a) By the taxpayer himself, in the declarations referred to in Articles 120 and 122;
b) By the Tax and Customs Authority, in all other cases.
Article 90
Procedure and Form of Assessment
1 - The assessment of IRC is carried out as follows:
a) When the assessment is to be made by the taxpayer in the declarations referred to in Articles 120 and 122, it is based on the taxable matter contained therein;
2 - To the amount computed under the preceding number the following deductions are made, in the order indicated:
a) That corresponding to double international legal taxation;
b) That corresponding to double international economic taxation;
c) That relating to fiscal benefits;
d) That relating to special advance payment referred to in Article 106;
e) That relating to withholdings at source not susceptible to offset or reimbursement in accordance with applicable law.
10.2 This is yet another case involving autonomous taxation in IRC, so it will be important to provide a review of this fiscal reality, in particular of its origins and implementation in Portuguese tax law in terms of IRC and IRS.
10.3 It appears that autonomous taxation originated in the antipodes of Portugal and as an autonomous tax. As can be read in a paper on fringe benefits in Australia presented at the "22nd APEC Finance Ministers' Technical Working Group Meeting in Khanh Hoa, Vietnam, on 15 June 2006" by Sam Reinhardt and Lee Steel":
"Fringe benefits (indirect, non-cash benefits provided to employees in addition to wages or salary) have been legally taxable in Australia since the inception of the federal income tax. Because of difficulties in determining the value of fringe benefits and for a range of other administrative and related reasons, in practice there was an almost universal non-inclusion of most fringe benefits in assessable income by employees (Australian Government 1985).
In recognition of the growing trend of remunerating employees with non-cash business benefits (particularly for those employees on higher incomes), the explicit taxation of fringe benefits was proposed in the Draft White Paper (Australian Government 1985). Fringe benefits tax was subsequently introduced in 1986. Fringe benefits tax is levied on employers, rather than employees, to simplify compliance and administration."
The genesis of autonomous taxation is essentially an alternative, in terms of another tax, to the taxation, in its own terms, of dependent workers (as well as company officials) on non-pecuniary benefits, which began to be more relevant at a time when these forms of remuneration increased in companies, particularly for workers with higher incomes. In Australia, it was decided to create an autonomous tax, which we consider to be a transparent and correct solution with respect to what is effectively intended with this type of taxation. Despite being autonomous, it falls on employers, thus being an additional burden for these entities. As one would say in economic language, this autonomous tax levied on employers is a "surrogate" (substitute) of another tax.
10.4 In Portugal, already with the IRC and IRS Codes at "cruising speed", the tax legislator decided to introduce autonomous taxation into our tax system in terms of these two taxes on income, essentially with the aim of preventing tax evasion from which individuals would end up being the main beneficiaries. These taxation measures began to be applied to confidential expenses following Decree-Law No. 192/90, of 2 June, and were extended to a vast set of situations with the 2001 tax reform, particularly for expenses typically for the benefit of dependent workers/company officials, although advantage was also taken to extend autonomous taxation to other realities, in particular in the international sphere (for example, transfers in certain circumstances to residents in "tax havens"). It is interesting to mention situations in which it is expressly recognized that there will only be autonomous taxation in IRC if there is no taxation in IRS. For example, the case of autonomous taxation of charges with light passenger vehicles in IRC (cf. Article 88(6) of the IRC Code) only when there has been no taxation in IRS, by way of category A and due to its use by the worker or company official being provided for in a written contract (cf. Article 2(3)(b)(9) of the IRS Code). How can such autonomous taxation of IRC be included in the normal taxation scheme of a legal person in IRC? The legislator can give it whatever name it chooses, but the reality is different, as the legislator itself admits expressly (as in the case we have just reported) or implicitly.
10.5 Many discussions have already taken place regarding autonomous taxation (with the tax legislator, in several cases, ultimately avoiding future disputes through subsequent legislation that amended previous provisions that gave rise to different positions), in particular in various tax arbitration cases. Are autonomous taxation IRC? Should they be considered a tax on consumption since they are taxation on expenses? On this point, we would add that the frequent use of the expression "expenses" is in itself reductive. In that autonomous taxation also arises on other charges (which are not expenses, as these are a legal concept that relates to the transaction), such as those relating to depreciations of tangible fixed assets.
10.6 After all, what did the legislator intend with the introduction of autonomous taxation in IRC? It seems essential to understand the spirit of that law, namely due to the fact that the General Tax Law, in Article 11(1) establishes that:
"In determining the meanings of tax rules and in qualifying the facts to which they apply, the general rules and principles of interpretation and application of laws are observed".
The inquiry into the spirit of the law leads to its logical or rational examination, in which the systematic, historical and teleological elements are distinguished.
10.7 As to the systematic element, which we consider to be the most relevant in this specific case, the legislator chose to introduce a new form of taxation (on charges, rather than the traditional taxation on income/gains), taking advantage of existing taxes on income, especially to maintain the unity of the tax system. In fact, it could have created a new tax whose tax base depended on another(s), but this was not the decision made. Having made this choice, it then had three possible alternatives: to disregard these charges (whose scope has been widening, as already referred), to tax them autonomously or to accumulate the two penalties. The latter two hypotheses prevailed, for which the observation of the high number of IRC taxpayers presenting tax losses and the consequent ineffectiveness in obtaining tax revenue, if the choice had been only to disregard these charges for tax purposes, will not have been unrelated. Thus, in some cases it accumulated both procedures (confidential/undocumented expenses and some transfers to residents in "tax havens") and in most situations, it only decided to adopt autonomous taxation. Now, any autonomous taxation follows the same logic, whether in IRC or in IRS, and which already existed prior to the emergence of the autonomous taxation to which we are referring, which is contained in Article 88 of the IRC Code: that of being a taxation segregated from that corresponding to the "overall structure of the tax", which we understand, in IRS, as the portion relating to aggregated income (on a mandatory basis or optionally, in the latter case in accordance with paragraphs 3 and 5 of Article 22 of the IRS Code), and in IRC, for legal persons with head office or effective management in Portugal and which exercise there, as their main activity, an activity of a commercial, industrial or agricultural nature, based on a tax base whose rules are found in Articles 17 to 52 of the IRC Code. In the IRS Code, prior to this "autonomous taxation", liberatory rates (in Article 71) and special rates (in Article 72) already existed since the entry into force of the IRS Code, for residents. And new situations have been added to that portion of IRS, outside of aggregation: for example, the taxation of non-habitual residents regarding income obtained in "high value added activities" became an integral part of Article 72. And what unites all these taxation "apart" from the "overall structure of the tax" is that they do not admit any deductions from the assessed tax resulting from their tax base. This is called the systematic element. If it already existed in IRS for residents and was not questioned in IRS, it also began to exist in IRC and here, yes, disagreements began because of the wording of Article 90 of the IRC Code. The reason for these disagreements will have been originated by the wording of Article 90 of the IRC Code remaining unchanged after the "grafting" of autonomous taxation into this Code. The tax legislator acted only at the level of table 10 of the Model 22 declaration, by not making any connection between the autonomous taxation field and the portion of "IRC proper". It will have considered that the mention contained in Article 80 of the IRC Code was sufficiently clarifying as that makes a clear connection between the IRC assessment and the Model 22 declaration when it refers to IRC assessment being made "...a) By the taxpayer himself, in the declarations referred to in Articles 120 and 122;". And certainly it was not by mistake that autonomous taxation was inserted in the said table 10, in a location that does not allow any connection to the assessed tax deductions contained in Article 90(2) of the IRC Code. We are used to grafting in the fields of the Model 22 IRC declaration, sometimes even barely legible, as the font size is smaller to fit in the right place. This concern to place in the right place is a rule that surpasses the aspect of the declaration and translates that connection to the provisions of the IRC Code. In fact, it seems to us totally unrealistic, for example, to link a deduction from assessed tax for double international legal taxation or for fiscal benefits to a taxation that of IRC only has a mention that it is there included (and which was added to the IRC Code so that there would be no doubt that the legislator had inserted it within an already existing tax). Making such a literal interpretation of Article 90 of the IRC Code will be directly contravening the duality that was introduced in IRC with autonomous taxation. And contravening the tax system on income that has existed since the 1980s Tax Reform which introduced a single tax on income, but which admitted from the outset exceptions to the general rule of aggregation of income, in the case of individuals, that is, autonomous treatment for certain situations. And in this case, the system is not one of communicating vessels, but rather of "parallel" vessels.
10.8 On the date of the self-assessed IRC for 2015 dealt with in this case, it was already well established that autonomous taxation was IRC or was related to category B of IRS, as the case may be.
10.9 Also to emphasize the duality of IRC, we take the opportunity to mention that the current wording of Article 12 of the IRC Code already existed in 2015:
Article 12
Companies and other entities covered by the transparent taxation regime
Companies and other entities to which, in accordance with Article 6, the transparent taxation regime is applicable are not taxed in IRC, except with respect to autonomous taxation.
This provision is one that we consider quite relevant for the decision to be made in this arbitral case. As we know, transparent taxation aims to eliminate double economic taxation, taxing the partners or members in the cases of ACE (Complementary Groupings of Undertakings) and AEIE (European Groupings of Economic Interest), respectively on the "taxable matter" or on the "profit or loss for tax purposes". By not excluding autonomous taxation from these entities with respect to IRC, it is beyond doubt that the tax legislator distinguishes two realities: the IRC ("proper", in our view), which has always existed and which preceded autonomous taxation, and a second reality, which also came to exist and which, despite being treated in the same Code and, in that sense, being considered IRC, deserved its own designation: autonomous taxation. This duality of IRC was already recognized by Professor SALDANHA SANCHES, J. L., Manual of Tax Law, p. 407: "With this provision [autonomous taxation] the system shows its dualistic nature." The same Professor, as cited in Arbitral Decision 187/2013-T, pp. 28, highlighted the anti-abuse purpose of autonomous taxation when referring to: "... the 'normal' functioning of the taxation system was unable to prevent [certain abuses], while others, including forms more burdensome for the taxpayer, were possible. This anti-abuse character of autonomous taxation will be not only coherent with its "anti-systemic" nature (as with all rules of this type), but with a presumptive nature, indicated both by Prof. Saldanha Sanches and by the case law that cites him. They 'will then have materially underlying a presumption of "partial" entrepreneurial nature of the expenses to which they apply, due to the above-mentioned circumstance that such expenses are in a gray area separating what is business expense, productive, from what is private expense, consumption, with the result that, notoriously, in many cases, the expense will even in reality have a dual nature (partly business, partly private)".
In this same sense, of the duality of IRC due to the existence of autonomous taxation, was the understanding contained in Case n.º 722/2015-T (in which part of the arbitral decision also concerned a deduction from assessed tax relating to SIFIDE), from which we transcribe a crucial excerpt for such consideration, and in which we see ourselves:
"Appealing to the ratio legis it is clear that autonomous taxation is levied within the IRC assessment process in accordance with its own roots and dogmatics which lead to the total tax assessed not being a unitary reality, but a composite one (MANUEL DE ANDRADE, Essay on the Theory of Interpretation of Laws). Thus, it is possible to discern in it the tax assessed itself, resulting from the general IRC computation mechanics, which is owed on constitutional grounds based on the general duty of each person (including legal persons) to contribute to public expenditure according to their means (Article 103(1) of the Portuguese Constitution). Everything in respect and in compliance with the principles of justice, equality and the duty to pay tax according to the contributory capacity revealed. And to which the amounts referred to in Article 90 of the IRC Code are deducted and in the terms and manner referred to therein.
To this general assessed tax, grounded in this fundamental order basis, is added the specific assessed tax, owed through autonomous taxation, which has, as was made clear, its own root, meaning and grounds, which is to discourage the adoption of behaviors taxed by them, listed in Article 88 of the Code, which constitutes, as is settled doctrine, an anti-abuse rule, which allows us to invoke here all the proper dogmatics on which it is based. Being that, in this case, since it is a matter of complying with purposes that go beyond the purely revenue ends of the tax, to place itself in the field of behaviors that the law considers abusive and/or undesired, it seems clear to us that it does not make sense that deductions be made to it, under penalty of emptying, in practice, of any meaning the anti-abusive regime created."
We would add that, although it is usual to refer to autonomous taxation, the tax legislator designated this reality contained in the IRC Code only as "autonomous taxation", indeed discriminating between the various rates of autonomous taxation, depending on the charges to be taxed. This designation reinforces the idea of the duality of IRC: there is IRC on the taxable matter of taxpayers calculated according to the general rules of the IRC Code, which depends on its own rules and leads to the calculation of a gross assessed tax, to which, in turn, various deductions will be made united by the same tax logic, and, in parallel, there is autonomous taxation, with its own rules and diverse depending on the situation to be taxed, but whose calculation is exhausted in its own article of the IRC Code: Article 88.
10.10 In this sequence, the following will coexist in the same Code (IRC):
(i) a taxable profit or tax loss and taxable matter, which have always existed and continue to exist, relating to that reality which we designated, for lack of a more appropriate expression that the legislator itself could have adopted to avoid this type of dispute, as "IRC proper" and the application to this taxable matter of the rate(s) of Article 87 of the IRC Code and, more recently, to taxable profit, of surcharges, designated as State Levy, dealt with in Article 87-A of the IRC Code, as well as the deductions from assessed tax provided for in Article 90 of the IRC Code;
(ii) several independent taxable matters, independent of each other and from that referred to in (i), but to which different rates are applied to calculate the various portions of this "other" assessed tax of IRC, which has always been segregated in the Model 22 declaration of IRC. It is not by chance, as we stated earlier, that table 10 of the Model 22 declaration, when the new reality of autonomous taxation appeared, considered it entirely independent of the "other IRC", which we designate as "IRC proper".
Indeed, in this decision we in no way considered the current wording (although subsequent to the matter to which this arbitral case refers) of Article 88, in its paragraph 21:
Article 88
Autonomous Taxation Rates
...
21 - The assessment of autonomous taxation in IRC is carried out in accordance with the provisions of Article 89 and is based on the values and rates resulting from the provisions of the preceding numbers, with no deductions being made from the total amount computed, even if those deductions result from special legislation.
It is even understandable this wording following other amendments that have already occurred in other controversial IRC matters: thus it was with the Municipal Levy (which became unequivocally non-deductible for purposes of determining the tax base in IRC) and with autonomous taxation (which came to be expressly included in IRC, although without loss of its own identity, we would add). We transcribe the part of Article 23-A of the IRC Code, in its current wording, which reflects these two legislative amendments.
Article 23-A
Non-Deductible Charges for Tax Purposes
1 - The following charges are not deductible for purposes of determining taxable profit, even when accounted for as expenses of the taxation period:
a) IRC, including autonomous taxation, and any other taxes that directly or indirectly affect profits;
...
Returning to the point we were addressing: the position we defend is in light of the previous wording of Article 88 of the IRC Code, that is, without the existence of the current paragraph 21. We know that case law is divided in the treatment of prior situations. Our decision is one of the possible ones. In its argumentation, both the Claimant and the Respondent cited various arbitral cases in which the decisions are diverse for situations identical to that to which this case refers.
10.11 As to the historical element, autonomous taxation in IRC appears in a context of combating tax evasion in the taxation of income, although more particularly the income of individuals. They are a vehicle discouraging abusive behaviors of taxpayers, that is, including in the sphere of expenses of legal persons (or professional or business activities of category B of IRS), amounts whose actual beneficiaries, even if not entirely, are entities which, in turn, will not be taxed in any respect on those benefits. Also the historical element leads to the view that these autonomous taxation measures came to tax a reality different from that of income of legal persons.
10.12 As to the teleological element, autonomous taxation in IRC also aims to prevent the erosion of the tax base in terms of IRC, by taxing charges deductible by IRC taxpayers, or by taxing more heavily charges not deductible to which, by this means of autonomous taxation, an increased taxation is imposed. Again, a parallel circuit to IRC "proper" is evident, but included in a broader definition of IRC and which aims to collect revenues for the State. And it is official statistics themselves that highlight the importance of autonomous taxation revenues in overall IRC revenues (they have already exceeded 1/10 of IRC revenues).
11 THE ISSUE OF THE ALLEGED UNCONSTITUTIONALITY OF ARTICLE 8-21 OF THE IRC CODE, AS AMENDED BY LAW NO. 7-A/2016
The Claimant alleges that the provision contained in the second part of Article 88(21) of the IRC Code, introduced by Law No. 7-A/2016, of 30 March, should not have a true interpretative nature and if it does, it cannot be applied to the case sub judice, as such application would constitute recognition of retroactive effect to tax law, in manifest contradiction with Article 103(3) of the Portuguese Constitution, and thus the amendment to the second part of Article 88(21) of the IRC Code was considered materially unconstitutional, for violation of the constitutional prohibition of retroactivity of taxes, contained in Article 103(3) of the Portuguese Constitution (Constitutional Court Decision n.º 267/2017, of 31-05-2017), concluding that both before and after Law No. 7-A/2016, of 30 March, and Law No. 114/2017, of 29 December, Article 90(1) of the IRC Code is applicable to the assessment of autonomous taxation.
Let us examine the issue by following, to that effect, very closely the orientation followed, inter alia, by the decisions issued in cases n.ºs 697/2014-T, 727/2015-T and 605/2016-T, both issued by Tribunals presided by the also president of this Tribunal and still in the dissenting opinion in case n.º 60/2017-T.
Article 133 of Law No. 7-A/2016, of 30 March, amended the wording of Article 88 of the IRC Code clarifying that the assessment of autonomous taxation is made in accordance with Article 89 of the IRC Code – without any reference to Article 90 of the IRC Code – with no deductions being admitted.
Under Article 135 of this law, the new wording of paragraph 21 of Article 88 of the IRC Code has an interpretative nature. This means that, in light of what Article 13(1) of the Civil Code determines, "(...) interpretative law is integrated into the law being interpreted, saving, however, the effects already produced by performance of the obligation, by judgment which has become final, by settlement, even if not homologated, or by acts of an analogous nature (...)". That is, this rule, having an interpretative character, is of immediate application, integrating the rule being interpreted as if such legal provision had always existed.
In view of this amendment and given the interpretative character of the rule, the implications for the case in question must be analyzed.
It stands out immediately that the amendment introduced came to determine, for these situations and as seen previously, the distinction and autonomy of the processing of IRC in the strict sense, that is, two manifestly distinct and individualized procedures were then determined: one for the assessed tax of IRC and another for the assessed tax in terms of autonomous taxation. Limits were also equally determined, and in an interpretative manner, to the way the fiscal benefit in question is understood.
It is now the law, and its literal interpretation, that does not allow the deduction to be made. Especially when it is a regime, that of autonomous taxation, which is exceptional in the legal-constitutional framework, and which for that reason has determinations that should be interpreted strictly and in respect for the letter of the law. Having amended the wording of Article 88 of the IRC Code with interpretative effects, the fiscal interpreter has no alternative but to apply the rule as it exists today, as if such wording had always existed. This would only not be the case if this solution were incompatible with rules of higher hierarchy, namely constitutional ones. This not being the case, in accordance with the principle of the primacy of law, the interpretative rule should be applied, there being no constitutional objection to such.
On this point it must be stated that, although in tax matters the constitutional principles of legality and the prohibition of retroactivity of law, provided for in Article 103 of the Portuguese Constitution, impose some restrictions on the legislator, it is understood that there is no generic constitutional prohibition of interpretative tax laws.
This does not follow, in this particular, the position defended, for example, by J.L Saldanha Sanches when he concludes that "(...) and for this reason it does not seem to us that interpretative law can take place in tax matters: if until now what was at issue were falsely interpretative laws, the constitutional review came to prevent the retroactive effects of any rule in tax matters. Including those caused by interpretative law (...)".
Similarly, it is considered that, given the case law of the Constitutional Court on the interpretation and delimitation of the scope of the principle of prohibition of tax retroactivity, the conclusions of decisions n.º 172/2000, 197/2016, 267/2017 and 395/2017 of that Court do not justify interpretation in the sense of an absolute prohibition of interpretative laws.
The constitutional admissibility of interpretative laws in tax matters - as with any rules of a fiscal nature - should be assessed according to the matters they concern and their respective normative content since the constitutional prohibition of retroactivity of tax law is limited to the matters of incidence (objective, subjective, temporal and territorial) of the tax.
In effect, as Casalta Nabais writes, from the wording of Article 103(3) of the Portuguese Constitution it results "(…) the prohibition of retroactive tax rules that are burdensome or that worsen the legal situation of taxpayers (…)" (our emphasis).
And the same is argued by Diogo Leite de Campos, Benjamim Silva Rodrigues and Jorge Lopes de Sousa: "(...) The constitutionality of retroactive tax rules must be assessed differently depending on whether they concern the material elements that contribute to the definition of the tax rule type (incidence, exemptions and rate) or other matters (guarantee of taxpayers, procedure of assessment and collection). The prohibition contained in Article 103(3) of the Portuguese Constitution concerns only the former. The constitutional conformity of the latter must be assessed in light of the material principles of legal certainty and protection of legitimate expectations that underlie the rule of law (Article 2 of the Portuguese Constitution)".
And the truth is that case law practice, of which the Administrative Court of Appeals decisions of 21-03-2012, case n.º 830/11, and 16-05-2012, case n.º 675/11 are examples, have admitted the existence of interpretative tax laws.
Starting from the theoretical admissibility of interpretative laws in tax matters, it is necessary to analyze whether, in the case in question, despite the express declaration of the legislator, we are actually dealing with an interpretative law.
For Ferrer Correia, "(...) in the absence of other elements that allow one to give interpretative value to a rule, the fundamental criterion to be used for that purpose is 'that the principle contained in the new law can be considered inherent in the earlier law. Now this requirement should be considered satisfied whenever it can be said that courts would normally rule, in the domain of the earlier legislation, in accordance with such principle. (…) For, when this requirement is met, the reasons underlying the principle of non-retroactivity of law cease, which are embodied in the protection of acquired rights and the expectations conceived by individuals in acting under the norms of the prior law. If case law was clearly favorable to a certain understanding of the earlier legislation, and the new law comes to confirm it expressly, there is no reason not to define this law as interpretative and as such applicable even to the past. In short, no one will be able to complain of violations of subjective rights or frustration of expectations, since those interested, had they resorted to the courts to assert a supposed right or to have a certain situation clarified, would probably not have obtained a result different from that which is now certain".
And this is also the understanding of Baptista Machado when he concludes that "(...)the reason why interpretative law applies to facts and situations prior to it lies fundamentally in the fact that it, coming to establish one of the possible interpretations of the old law with which those interested could and should have reckoned, is not susceptible to violating secure and legitimately founded expectations (...)". In these cases, there is no true retroactivity in the application of interpretative law because the interpretation of the original rule made in light of the legal framework in force would lead to the same solution as that established by the legislator in a later rule.
It is thus considered that, in order to qualify a law as interpretative, the following requirements should be met:
(i) there is a controversial or uncertain question in the existing law; and
(ii) the legislator establishes an interpretative solution that resolves the uncertainty that the interpreter or judge would arrive at on the basis of the normative framework in force prior to the legislative amendment.
Applying these criteria to the situation in question, we are led to conclude that we are indeed dealing with an interpretative law. In fact, the matter regulated by the new and current paragraph 21 of Article 88 of the IRC Code was controversial and uncertain (having given rise to the arbitral cases mentioned and listed by the Claimant and the Respondent, in addition to those mentioned earlier), with the solution established corresponding to one of the plausible interpretations that the judge would arrive at, as indeed it did, for example, in the arbitral decisions issued in cases n.º 697-2014-T, n.º 722/2015-T, n.º 727/2015-T and 605/2016-T.
Against this understanding it will not be proper to argue that, in order for there to be an effective interpretative law, it would be necessary a line of case law that imposed a certain solution on the legislator, which would not be verified in this situation given that there are various decisions in the opposite sense, as detailed by the Claimant.
And this argument is not well-founded since, as Baptista Machado refers, "(…) it is not necessary that the law come to establish one of the earlier lines of case law or a strong earlier line of case law. Particularly since interpretative law often arises before such lines of case law have even formed. (…) For a new law to be truly interpretative, two requirements are therefore necessary: that the solution of the earlier law be controversial or at least uncertain; and that the solution defined by the new law falls within the framework of the controversy and is such that the judge or interpreter could arrive at it without exceeding the limits normally imposed on the interpretation and application of law. If the judge or interpreter, faced with old texts, could not feel authorized to adopt the solution that the new law comes to establish, then this is decidedly innovative." (our emphasis).
Essential is, thus, that the solution established by the legislator could be ascertained by the interpreter or judge within the normative framework in force and within the scope of the controversy or uncertainty generated by the rule. As already referred, although the solution established by the legislator may not be the one that a particular tribunal might arrive at, the truth is that it would correspond to a possible interpretation within the framework of the controversy, logically supported in other prior (arbitral) decisions.
Furthermore, this conclusion regarding the interpretative character of the new paragraph 21 of Article 88 of the IRC Code, with the inherent application thereof in accordance with Article 13 of the Civil Code, does not violate the principle of prohibition of retroactivity of tax law arising from Article 103(3) of the Portuguese Constitution because, as stated above, the constitutional principle in question prohibits the creation of retroactive taxes, thus limiting its scope of application to the matters of subjective, objective, temporal and territorial incidence. Now, in the case in question, the question is not the incidence, the rate or the quantum of the assessed tax due for autonomous taxation, which remains unchanged; what is being discussed is the obligation to make a disbursement of that assessed tax in favor of the State, preventing offset with a tax credit arising from the CFEI regime. The tax obligation is exactly the same, what could differ would be the payment obligation and, as stated above, this matter does not enjoy any special constitutional protection.
Finally, it is reaffirmed that one cannot conclude that the attribution of interpretative nature to the rule in question puts at risk the principle of legal certainty because, by adopting the rule an interpretation that is one of the possible ones (which is manifestly the case), one is not violating founded expectations. The interpretation that is now admitted was viable prior to the emergence of the interpretative law. For these reasons, this solution does not offend constitutional principles, whether the prohibition of retroactivity of tax rules, or the principle of legal certainty.
There is, consequently, no basis for invoking unconstitutionality.
In light of the above, in the case sub judice, the intended illegality of the IRC self-assessment act for 2015 does not occur, also from the constitutional perspective.
IV DECISION
Based on the foregoing, this Collective Tribunal decides:
a) To dismiss the claim in its entirety and, consequently,
b) To uphold in the legal order the decision rejecting the administrative complaint - Case n.º ...2018..., which concerned the IRC self-assessment for the fiscal year 2015, insofar as it corresponds to the failure to deduct from the portion of IRC tax assessed produced by autonomous tax rates, tax credits computed under the Extraordinary Fiscal Credit for Investment (CFEI), in the amount of €151,227.08;
c) To uphold in the legal order the self-assessment act which was the subject of the said administrative complaint; and
d) To condemn the Claimant to pay the costs of this case.
Value of the Case
In accordance with the provisions of Articles 306(2) and 297(2) of the Civil Procedure Code, Article 97-A(1)(a) of the Tax Procedure Code and Article 3(2) of the Regulation of Costs in Tax Arbitration Proceedings, the value of the case is set at €151,227.08.
Costs
In accordance with the provisions of Articles 22(4) and 12(2) of the Legal Regime of Arbitration, Article 2, Article 3(1) and Articles 4(1) to (4) of the Regulation of Costs in Tax Arbitration Proceedings, as well as Table I attached to this instrument, the value of the costs is set at €3,672.00.
• Notification to be made.
[1 Text prepared by computer, in accordance with Article 131 of the Civil Procedure Code, applicable by reference to paragraph e) of Article 29(1) of the Legal Regime of Tax Arbitration, with blank verses, and reviewed by the arbitrator.
2 The wording of this decision is governed by the orthography prior to the Orthographic Agreement of 1990, except as regards transcriptions made].
Lisbon, 2 April 2019
The Collective Arbitral Tribunal,
José Poças Falcão
(President Arbitrator)
Luís Janeiro
(Member Arbitrator)
António Pragal Colaço
(Member Arbitrator)
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