CAAD Arbitration on IRC Deductibility of Repair vs Amortization Expenses for Tangible Assets

ARBITRAL DECISION

The Arbitrators José Pedro Carvalho (Presiding Arbitrator), Catarina Gonçalves and Manuel Alberto Soares, appointed by the Ethics Council of the Center for Administrative Arbitration to form an Arbitral Tribunal, hereby decide:

I – REPORT

On 4 June 2015, A…, SA, with Tax ID No…, with registered office at…, …-…, filed a request for constitution of an arbitral tribunal, under the combined provisions of articles 2 and 10 of Decree-Law No. 10/2011, of 20 January, which approved the Legal Framework for Arbitration in Tax Matters, as amended by article 228 of Law No. 66-B/2012, of 31 December (hereinafter, abbreviated as RJAT), seeking the declaration of partial illegality of the corporate income tax (IRC) assessment and compensatory interest for 2010, No. 2015…, compensation No. 2015…, in the amount of €61,208.31.

To support its request, the Applicant alleges, in summary, that, in challenging the assessment as it relates to the amortisation of expenses concerning tangible fixed assets, and understanding that such expenses relate to conservation and repair expenses, qualified as exercise expenses, the following occurs with respect to that assessment:

• Erroneous apprehension of the facts and incorrect subsumption to applicable law;

• Violation of articles 23, 29 and 30 of the CIRC (wording and numbering at the date of the facts);

• Violation of articles 1 and 5 of Regulatory Decree No. 2/90 (wording and numbering at the date of the facts);

• Defects in reasoning (article 77 of the LGT);

• Violation of article 18 of the CIRC and article 35 of the LGT.

On 08-06-2015, the request for constitution of the arbitral tribunal was accepted and automatically notified to AT (Tax Authorities).

The Applicant did not proceed with the appointment of an arbitrator, wherefore, under the provisions of paragraph a) of no. 2 of article 6 and paragraph a) of no. 1 of article 11 of the RJAT, the President of the Ethics Council of CAAD appointed the undersigned as arbitrators of the collective arbitral tribunal, who communicated acceptance of the appointment within the applicable period.

On 28-07-2015, the parties were notified of these appointments, and neither manifested a will to refuse any of them.

In accordance with the provision in paragraph c) of no. 1 of article 11 of the RJAT, the collective Arbitral Tribunal was constituted on 12-08-2015.

On 28-09-2015, the Respondent, duly notified for this purpose, filed its reply defending itself solely by way of objection.

On 27-11-2015, the meeting referred to in article 18 of the RJAT took place, where the witnesses presented by the Applicant were examined.

Given that a period was granted for the submission of written arguments, these were submitted by the parties, commenting on the evidence produced and reiterating and developing their respective legal positions.

A period of 30 days was set for the delivery of final decision, following the submission of arguments by AT.

The Arbitral Tribunal is materially competent and is regularly constituted, in accordance with articles 2, no. 1, paragraph a), 5 and 6, no. 1, of the RJAT.

The parties have legal personality and capacity, are legitimate and are legally represented, in accordance with articles 4 and 10 of the RJAT and article 1 of Administrative Order No. 112-A/2011, of 22 March.

The proceedings do not suffer from any nullities.

Thus, there is no obstacle to the consideration of the merits of the case.

All things considered, it is now necessary to render decision.

II. DECISION

A. MATTERS OF FACT

A.1. Facts Found to be Proven

1. The Applicant is a legal entity under private law, resident in national territory, registered in the activity of "Production of Sparkling and Effervescent Wines" to which corresponds CAE…, retail trade in beverages, CAE… and viticulture CAE…, which has as its purpose the agricultural exploitation of properties and the preparation of common wines, sparkling alcoholic beverages, brandies, as well as their commercialisation, and which produces and commercialises, specifically, the well-known brand of sparkling wines, designated as "B…".

2. The Applicant submitted mod. 22 declarations for IRC, as well as annual declarations of accounting and tax information up to the 2010 tax year, as stipulated in articles 120 and 121 of the IRC Code.

3. The assessment that is the subject matter of the present arbitral proceedings results from corrections made to the taxable income of the applicant, within the scope of an inspection procedure (service order No. 012014…), which resulted from the disregard of the following expenses:

4. The expenses referred to were recorded by the Applicant as maintenance and repair expenses, being charged in full as exercise expenses, recorded in SNC Account… - Supply and External Services – Specialised Services - Conservation and repair of Buildings and SNC account… – FSE - Specialised Services - Conservation and repair of Basic Equipment.

5. In the inspection procedure, AT considered that the Applicant had not justified the accounting treatment used.

6. Further, AT considered that it was not in the presence of repairs but rather of acquisition of services associated with tangible fixed assets, essentially buildings and equipment.

7. The conclusion referred to in the preceding point resulted "from the consultation and analysis of the description of the invoices", taking into consideration the "nature and magnitude" of the works described.

8. It can further be read in this regard in the Tax Inspection Report (RIT):

"The contracted services do not constitute repairs; they are 'upgrades' that constituted investment expenses, were intended to improve existing technology and the company's productive capacity and increased the value and useful life of the assets involved.

From the information gathered, it was found that they relate to adaptations to new technologies and increase in their capacity and to the present date these equipment have not been subject to new intervention.

We are thus in the presence of large-scale interventions that altered the capacity and useful life of the equipment. Indeed, they are recorded in account… – other repairs, invoices issued by the same supplier, those yes, of routine maintenance that are limited to the exercise itself and which are correctly recorded as exercise expenses.

That is, given the description and values contained in the documents, it is found that:

Given the nature of the works and goods invoiced, the same do not end or are not consumed in a single exercise only. Their use in the activity of the SP will continue in the following exercises since the pavements, the roof, the piping, the land drainage system, the aluminium frames and shutters, water supply, the storage tanks, do not end their use at the end of 2010.

They are various services but given their characteristics and invoiced value, we find that their use is not limited nor exhausted in the year under analysis, and it is probable that their use will extend over several exercises, generating future economic benefits.

Indeed, some of these expenses are part of the entity's policy to upgrade old real estate assets with a view to modernising the cellars and providing the company with spaces for tourist use (see indication in the Report of the Board of Directors for 2010.

Let us consider the criteria for the definition and recognition of an expense already previously set out in point 111.5.1, defined, respectively, in paragraphs 76 to 78 and 92 to 96 of the Conceptual Framework (CF).

According to these criteria, we find that the invoices in question do not relate to expenses that should be immediately recognised in the exercise in which they are incurred. The future economic benefits associated with these operations are associated with the tangible fixed asset to which it is associated, that is, they will flow to the entity beyond the current accounting period, not being limited or exhausted in the 2010 exercise.

Under IRC and in accordance with art. 18 and art. 23, the expenses also do not meet the requirements to contribute, in full, to the formation of the taxable result of 2010.

Thus, the tax correction of the expenses recorded in account… is to be proposed, which amounts to the global value of €245,054.90 (given that to the value of expenses recorded in the amount of €250,054.90 was deducted the value of the debit to the landlord - debit note No. 9)."

1. Following that, it was concluded in the RIT that:

"Now, pursuant to art. 23, it is incumbent upon the SP to demonstrate the tax deductibility of the recorded charges. As already mentioned, the same only presented the invoices for acquisition. From the analysis thereof and as previously stated, we conclude the following:

• Taking into account what is recommended in the conceptual framework of the standards, namely the concept underlying the definition of asset as well as the provisions in NCRF 7, we find that civil construction work/machinery repair fall within the definition of tangible fixed asset and meet the recognition criteria according to the standard and the definition of asset provided in the conceptual framework.

• The works and repairs were carried out on assets used by the SP in its operational activity and involved a return of income through increased efficiency in their use by the entity (e.g.: roof remodelling, floor restoration, piping, wall reinforcement, water drainage,...);

• The repairs to the machinery increased its efficiency (capacity);

• The useful life of the improvements/constructions and repairs was foreseeable at the date they were carried out - 2010, such that their use would be longer than one year (a fact confirmed on the present date - November 2014 - in which the assets in question have not been subject to new repairs since 2010);

• The cost of these items is reliably measured by the monetary return spent (value of invoices).

Based on the above, we can state that the improvements/constructions and repairs, carried out on the new facilities/machinery, meet the criteria mentioned in the NCRF 7 Conceptual Framework, and insofar as they generate future economic benefits and are reliably measurable, they should be capitalised, that is, recognised as tangible fixed assets."

1. In the said inspection procedure, AT considered that the works carried out should not be treated as a total exercise cost, but as investment expenses to be amortised at rates of 10%, 14.28% and 12.50% per year, depending on whether they applied to buildings, vineyards and equipment, respectively, these percentages (of 10%, 14.28% and 12.50%) being deductible for IRC purposes in 2010, pursuant to the table attached to Regulatory Decree 2/90 - and the remaining value of the works and repairs should be deductible in the subsequent years.

2. The Applicant actively cooperated with the inspection, providing all elements, documents and explanations necessary and requested by AT.

3. The deadline for voluntary payment of the assessment occurred on 27/03/2015.

4. As regards the buildings and surrounding areas, the Applicant had, in the year in question, two facilities:

a. Winery and storage warehouses (for ageing) located at…;

b. The offices (and warehouse for sale) located at… (composed of an old building and warehouses).

1. The facilities referred to in point a. of the preceding number were visited annually by thousands of people and also had marketing and promotion purposes for the brand and products of the Applicant.

2. The vineyards exploited by the applicant required annual maintenance work, which could include the preparation of roads for harvest and partial reconstruction, due to winter storms and summer heat, so, before the harvest, it was necessary to repair the roads annually through which the trucks making the harvest passed.

3. Wine and sparkling wine production requires machinery that includes the cooling system, tanks and presses, which only works at harvest time and which must be cleaned annually before harvest.

4. The said equipment is reviewed and tested every year in its functionalities and operation.

5. The Applicant's cooling system was only used at harvest time and constitutes the "heart" of the harvest production process - to allow the "handling" of the fermentation of the product, being the way to generate cold at the time of harvests, when the climate is still warm, in the circuit through which the wine passes and is installed (when it is produced), being essential to provide quality to the product.

6. After the harvest (and immediate storage), the cooling system had no further use, until the following harvest.

7. Every year, around June, as a preparation for the harvests, the Applicant had to fine-tune and check the state of the cooling system, to make it work at harvest.

8. The cooling system, after months of shutdown, could require repairs - and from one year to the next, even though work had been done in the previous year.

9. In the year 2010, the said equipment used by the Applicant in its production activity were second-hand goods, in a state of use, with frequent use and consequent wear.

10. In the facilities referred to in point b. of number 13 above, all the movement of trucks centralising the final product coming from… and intended to be subsequently sold to end customers took place.

11. The Applicant's facilities in… functioned as the central warehouse for finished product.

12. The sparkling wine remained in ageing and storage in… and after being labelled, was transported to…, for sale to end customers.

13. In that area there was heavy truck traffic.

14. The floor (in granite paving) required annual repairs, arising from the frequent passage of trucks on the floor, small contacts of the same with the walls and winter rains (rainfall drainage), which caused erosion on the pavement, walls and drainage (beneath the pavement).

15. The work referred to in the May 2010 invoice was carried out on the floor referred to in the preceding number.

16. In 2010, it was necessary to carry out a set of works on the buildings, vineyards and production equipment of the Applicant.

17. These works were divided into two categories: the "urban arrangements" (2080), "roof replacement of the warehouse and its respective insulation: restorations of the interior offices", and the "restorations and repairs of pavements in granite in the grounds" and "wall reinforcement and lifting of paving and drainage" whose works were carried out at…: and those designated by AT as "light construction" (2005), which include the "installation of aluminium frames, shutters and mosquito nets", and interventions in vineyards (Various piping work, drainage, reconstruction of terraces and others) and equipment (equipment upgrading [cooling system] and fermentation tanks) whose works were carried out in….

18. At the end of 2010, due to rains and bad weather in the area of…, part of the roof was damaged, with rain entering the offices, so there was a need to repair the damaged part of the roof.

19. The said roof was completely remodelled in a subsequent exercise, when the applicant had financial availability to do so and to restore the part of the offices that was damaged by the rain.

20. The works of "installation of aluminium frames, shutters and mosquito nets" refer to the replacement of parts of the house located at….

21. The July 2010 invoice corresponds to work on vineyards and roads in preparation for the harvest - which was done annually, frequently in the same locations.

22. In November 2010 there was a great storm (rain) that damaged the vineyard extensively - and there was a need to create a system to drain rainwater and reconstruct the vineyard terraces that were damaged.

23. The works on equipment concern two situations:

c. On the cooling system (on 01/06/2010), in the value of €91,262.50 and €39,112.50;

d. On the water supply to the fermentation tanks (on 15/12/2010).

1. The applicant carried out works/repairs on an annual basis.

2. In the year 2010, the cooling system machinery had deteriorated and there was a need to alter the piping and tanks, adapting it to the configurations for that year's harvest.

3. There was also a need to adapt the configuration of the tanks and the routes of movement between them (footbridges) in order to comply with determinations of the labour inspection (ACT).

4. The harvests prior to the year 2010 degraded the "water supply to the fermentation tanks", which was resolved in that same year.

A.2. Facts Found Not to be Proven

1. The assets involved in the invoices referred to in point 3 of the proven facts have not been subject to new repairs since 2010.

2. The upgrades involved in the invoices referred to in point 3 of the proven facts substantially increased the overall value of the production system.

A.3. Reasoning on the Proven and Unproven Matters of Fact

With regard to matters of fact, the Tribunal does not have to rule on everything alleged by the parties; rather, it has the duty to select the facts that are important for the decision and to distinguish proven from unproven matters (see art. 123, no. 2, of the CPPT and article 607, no. 3 of the CPC, applicable by virtue of article 29, no. 1, paragraphs a) and e), of the RJAT).

Thus, the facts relevant to the judgment of the case are selected and determined based on their legal relevance, which is established in light of the various plausible solutions to the legal question(s) (see previous article 511, no. 1, of the CPC, corresponding to current article 596, applicable by virtue of article 29, no. 1, paragraph e), of the RJAT).

Thus, taking into account the positions taken by the parties, in light of article 110/7 of the CPPT, the documentary evidence and the procedural file attached to the record, combined with the testimonial evidence produced, the facts listed above were considered proven as relevant to the decision.

In particular, the facts found to be proven in points 13 to 40 resulted from the testimony of witnesses presented by the applicant, who testified to them, as they were found to be proven, in a serene, coherent and understandable manner, despite the professional relationships that linked them to the Applicant.

Thus, the witness C…, production director of the Applicant, demonstrated direct knowledge of the works carried out and their respective motivations and nature.

The witness D…, administrative manager also of the Applicant, clarified that his intervention was essentially at the level of invoice processing, having dealt directly with the invoices in question in the present proceedings. He demonstrated general knowledge about the Applicant's facilities, equipment and mode of operation, based on 24 years of service to it, particularly with regard to the needs that the conservation of the same implied. With respect to the paving work carried out at the facilities in…, he partially contradicted the preceding witness, in that he said he believed that the works carried out on the pavement of those facilities did not involve the complete replacement of the same, but recognised that he was not certain that this was the case.

The witness E…, registered auditor (ROC) of the Applicant since the 1990s, revealed that, based on the knowledge arising from the activity he performs for it, he can affirm that it has always made annual expenses in the order of the values involved in the present arbitral proceedings, which he corroborated with documentation that he exhibited and which was subject to contradictory examination at the examination.

The witness F…, who performed functions as a legally registered accountant (TOC) for the Applicant since 2010, testified on the accounting treatment of the expenses in question in the record, and the motivations and judgements that attended to it.

The facts found not to be proven result from the absence of proof concerning them.

Thus, with regard to the first of such facts, the evidence produced actually points in the opposite direction, that is, in the direction that, in the subsequent years, the goods in question were subject to new interventions, of greater (as in the circumstance to which the fact found to be proven under no. 32 refers) or lesser value.

As for the second of the facts found not to be proven, no concrete evidence was collected or presented by AT, specifically with regard to the value of the goods when new, the wear they suffered and the possible extent to which each of the works in question in the invoices subject to correction contributed to exceeding the normal value of the intervened goods, on the one hand, and/or with respect to their production capacities before and after those interventions, on the other.

B. ON THE LAW

The subject matter of the present arbitral proceedings is the correction made by AT in the assessment of IRC of the Applicant, for the 2010 tax year, which had as its object expenses recorded and declared by the Applicant as conservation and repair expenses, and qualified by AT, not as repairs, but rather as acquisition of services associated with tangible fixed assets, essentially buildings and equipment.

It is thus necessary to assess the legality of such correction.

As AT very correctly states in the Tax Inspection Report[1], the burden of proof of the deductibility of the expense that seeks to deduct from its taxable profit rests with the Applicant.

Indeed, as follows from article 74/1 of the LGT, if the Applicant wishes to avail itself of the rule of article 23 of the CIRC, it will be incumbent upon it to ensure proof of its respective prerequisites.

However, article 350/1 of the Civil Code, applicable pursuant to article 2/d) of the LGT, provides that "Whoever has a legal presumption in his favour is excused from proving the fact to which it leads."

In the case, and with relevance to the issue, article 75/1 of the LGT, in the wording in force at the date of the tax facts, provided that "The declarations of taxpayers presented in accordance with the provisions of the law are presumed to be true and made in good faith, as well as the data and findings recorded in their accounting or books, when these are organised in accordance with commercial and tax legislation."

Now, in the case, it is proven that the Applicant submitted mod. 22 declarations for IRC, as well as annual declarations of accounting and tax information up to the 2010 tax year, as stipulated in articles 120 and 121 of the IRC Code.

In these terms – and no irregularity having been found – in the matter that is the subject of the present arbitral proceedings – in its accounting or books, it must be concluded that the presumption in question is operative.

One could question – it is true – the applicability of the presumption in question, with respect to the requirements for deductibility of expenses.

Indeed, in the revision of the LGT carried out by Law 83-C/2013, of 31 December, the above-transcribed article 75/1 of that law was amended, being added, at the end, the passage: "without prejudice to the other requirements on which the deductibility of expenses depends".

The said amendment is susceptible to two readings: it may be seen as interpretative, in which case one must consider that the regime prior to the amended wording already established the same regime; or as innovative, in which case one must consider that only from the legislative amendment in question onwards is the regime it institutes in force.

Without prejudice to respect due to other opinions, it is considered that the amendment in question will have an innovative character, in that, on the one hand, it constitutes a restriction of the scope of the rule in which it is integrated and, on the other, such restriction does not appear to be sustainable in light of the legal framework pre-existing the said legislative amendment.

In any event, it will always be said that, in concrete terms, one is not even facing a question of deductibility of the expense – this is consensually accepted – but only as to the form and extent in which such deductibility should operate. In other words, the question is not whether the expense is deductible, but rather in what form, and to what extent, should that deductibility be realised.

Given the provision in the above-cited article 75/1 of the LGT, it must therefore be presumed true and in good faith, both the mod. 22 declarations for IRC, as well as the annual declarations of accounting and tax information up to the 2010 tax year, presented, in accordance with the law, by the Applicant, as well as the data recorded in its accounting, as it could not fail to be, since it would not be understood that, having the Applicant submitted its declarations in accordance with the law, and having regularly organised accounting, it would be placed on the same footing as a remiss taxpayer[2].

It is concluded, thus, that, in the case, the said presumption of article 75/1 of the LGT operates, whereby, the AT wishing to alter the classification declared by the Applicant, and resulting from the data and elements recorded in its accounting and books, will need to overcome that presumption, which may occur in two ways, namely:

• by setting it aside – preventing it from operating – by demonstrating any of the circumstances listed in no. 2 of the same article 75 of the LGT;

• by rebutting it, by proof to the contrary of what is presumed, pursuant to no. 2 of also already referred article 350 of the Civil Code.

Let us see if this occurs[3].

The presumption in question will not operate if any of the (preventive) circumstances listed in no. 2 of article 75 of the LGT are verified, namely, and for what now matters:

• The declarations, accounting or books reveal omissions, errors, inaccuracies or well-founded indications that they do not reflect or prevent knowledge of the real taxable matter of the taxpayer;

• The taxpayer did not fulfil the duties that fell to him to clarify his tax situation.

As Elisabete Louro Martins explains[4]:

"The degree of proof required from the Tax Administration to set aside the presumption of truth provided in the LGT in favour of the taxpayer will, in our opinion, depend on the nature of the defects found. Formal defects (...) must be the subject of effective proof based on the documents presented by the Subject to Taxation (...). In truth, either the documents are formally correct or they are formally incorrect, it being inadmissible that a decision be rendered based on mere indications of facts that can be apprehended based on available documents.

On the other hand, the same rule cannot be applied to material defects, since they are often based on elements external to the accounting, such as the fact that they do not cover real operations that may confer on the subject to taxation the right to deduction, which do not allow obtaining a reasonable degree of certainty regarding the existence of the tax fact. As follows from the second part of paragraph a) of no. 2 of art. 75 of the LGT, in the case of material defects, it will be sufficient for the Tax Administration to present concrete objective facts, based on concrete evidence, which according to the rules of common experience are strongly indicative of the existence of the tax fact".

Examining the factual list ascertained in the present proceedings, it is verified that no fact is evident with regard to the second of the preventive circumstances of the operation of the presumption in question, which have just been listed. On the contrary, as is clear from the fact found to be proven in point 11 of the matters of fact, the Applicant corresponded, to the extent that was possible for it, to the requests for cooperation formulated by AT, in the sense of clarifying its tax situation. Thus, citing Jorge Manuel Santos Lopes de Sousa[5], "once the duty to clarify has been fulfilled, the presumption of truthfulness and good faith of the declarations of taxpayers provided in no. 1 of art. 75 of the LGT is maintained, and it is incumbent upon the Tax Administration to challenge the truthfulness, through the demonstration of 'serious indications' of non-correspondence with the truth, thus 'incumbent upon [it] the burden of proof of the facts that prevent the truth presumed to result from the declaration of taxpayers"".

Taking, then, into account the first of those same circumstances, referred to above, it will be necessary, with respect to each group of situations in question in the present proceedings, to assess whether omissions, errors, inaccuracies of the declarations or accounting were detected, and/or whether serious indications were gathered that they do not reflect the real taxable matter of the taxpayer.

If this is the case, one should then ascertain whether, the presumption of truthfulness resulting from article 75/1 of the LGT failing, the Applicant succeeds, by another means of proof, in fulfilling the burden of proof that, in terms previously outlined, rests with it.

If this does not occur, it will be necessary to verify whether AT has succeeded in providing proof to the contrary of the facts which, in terms previously stated, should be presumed, concerning the nature of the works in question in the present proceedings, in the exercise of the faculty that, pursuant to article 350/2 of the Civil Code, will assist it[6].

Examining the matters of fact given as proven, it is not possible to discern any circumstance indicating that – in the matter that concerns us – omissions, errors, inaccuracies of the declarations or accounting occur, and/or well-founded indications that they do not reflect the real taxable matter of the Applicant.

Thus, in light of the presumption in question, and contrary to what AT considered in the RIT, it was not incumbent upon the Applicant to justify the accounting treatment effected. Rather, the Applicant was obliged to declare, in accordance with the law, the accounting treatment it made, and to ensure the regularity of its books. Having done this, as is the case, it will not be the Applicant who has to justify the accounting treatment effected, but AT, which seeks to operate a correction therein, will have to justify the legality of its action, demonstrating that that accounting treatment, which is presumed in good faith and based on true data and findings, should be altered.

Having reached this point, it will then be necessary to assess whether AT, pursuant to no. 2 of article 350 of the Civil Code, presented sufficient proof to the contrary of what is presumed pursuant to article 75/1 of the LGT, that is, of the fact that the works and repairs unquestionably carried out by the Applicant, have the nature underlying the accounting treatment and tax treatment given to them and declared by the Applicant. In other words, it will be necessary to verify whether sufficient proof has been made (that is: beyond any reasonable doubt) that "the works carried out were not maintenance of goods, but rather upgrades that constituted investment expenses, intended to improve existing technology and the company's productive capacity and increase the value and useful life of the assets involved, the cost of which should be spread over the expected period of utility"[7], or that, in summary, it has been demonstrated "that, in each case, the works carried out contributed to increasing the value or the probable duration of the goods on which they were carried out"[8].

It is, in short, a matter of assessing whether those facts have been demonstrated which are the factual grounds of the tax act that is the subject of the present proceedings, namely that:

• "The contracted services do not constitute repairs; they are 'upgrades' that constituted investment expenses, were intended to improve existing technology and the company's productive capacity and increased the value and useful life of the assets involved (...) that relate to adaptations to new technologies and increase in their capacity and to the present date these equipment have not been subject to new intervention.";

• "We are thus in the presence of large-scale interventions that altered the capacity and useful life of the equipment.";

• "the works and goods invoiced (...) do not end or are not consumed in a single exercise only. Their use in the activity of the SP will continue in the following exercises since the pavements, the roof, the piping, the land drainage system, the aluminium frames and shutters, water supply, the storage tanks, do not end their use at the end of 2010.";

• "They are various services but given their characteristics and invoiced value, we find that their use is not limited nor exhausted in the year under analysis, and it is probable that their use will extend over several exercises, generating future economic benefits.";

• "some of these expenses are part of the entity's policy to upgrade old real estate assets with a view to modernising the cellars and providing the company with spaces for tourist use";

• "The future economic benefits associated with these operations are associated with the tangible fixed asset to which it is associated, that is, they will flow to the entity beyond the current accounting period, not being limited or exhausted in the 2010 exercise.";

• "The works and repairs were carried out on assets used by the SP in its operational activity and involved a return of income through increased efficiency in their use by the entity";

• "The repairs to the machinery increased its efficiency (capacity);

• "The useful life of the improvements/constructions and repairs was foreseeable at the date they were carried out - 2010, such that their use would be longer than one year";

• "the improvements/constructions and repairs, carried out on the new facilities/machinery (...) generate future economic benefits".

AT, as appears from the RIT, considers that these facts flow from the consultation and analysis of the invoices presented, particularly their description and values, which, in AT's opinion, reveal a "nature and magnitude" of the works and goods invoiced, which allows the conclusion that the same, given their characteristics and invoiced value, do not end or are not consumed in a single exercise only.

Without prejudice to admitting that, at least from an abstract point of view, circumstances may be envisaged in which the description of the invoicing, combined with the amounts invoiced, would allow the conclusion that one is in the presence of expenses whose utility extends beyond one exercise, in the concrete case it is considered that one is not in one of those situations.

It is thus considered that the description of the invoices, contained in point 3 of the matters of fact, is not, by itself, incompatible with the acquisition of goods and services that are intended to maintain or restore the value of the goods on which they integrate the fixed assets of the purchaser.

Also, the amount mentioned in the invoices in question, by itself, or combined with the said description, is insufficient to, beyond any reasonable doubt, allow the assertion that the expenses in question did not have the nature and purpose accounted for and declared by the Applicant. Indeed, without perceiving the overall value of the goods in question, their concrete use and the state and functionalities in new condition, in the period immediately prior to the repair and, subsequently, post-repair, it will not be possible to substantively contradict, solely on the basis of the description and amounts of the invoices in question, the declaration and accounting records of the Applicant.

In this manner, and for lack of better proof, the factual judgements on which the tax act that is the subject of the present arbitral proceedings rested are without foundation.

Indeed, the value and description of the invoices is insufficient for the conclusion that "The contracted services (...) were intended to improve existing technology and the company's productive capacity and increased the value and useful life of the assets involved (...) that relate to adaptations to new technologies and increase in their capacity", since neither of the said elements conveys anything definite regarding the aptitude to improve technology and productive capacity.

In the same way, it is not possible to understand how from those same elements (description and values invoiced) it is possible to extract that "We are (...) in the presence of large-scale interventions that altered the capacity and useful life of the equipment.", given that, in concrete terms, the value says nothing in this regard, not least because it is not known whether the contracted services and goods acquisitions were cheap or expensive.

Also, unless we are mistaken, nothing can conclusively be affirmed with regard to the expenses in question being aimed at "the modernisation of the cellars and providing the company with spaces for tourist use", that "The works and repairs (...) involved a return of income through increased efficiency in their use by the entity", or that "The repairs to the machinery increased its efficiency (capacity)".

In the same manner, the circumstances of the use of the "works and goods invoiced (...) continuing in the following exercises since the pavements, the roof, the piping, the land drainage system, the aluminium frames and shutters, water supply, the storage tanks, do not end their use at the end of 2010.", of the "use of the same not being limited nor exhausted in the year under analysis, and it being probable that their use will extend over several exercises, generating future economic benefits.", of "The future economic benefits associated with these operations being associated with the tangible fixed asset to which it is associated, that is, flowing to the entity beyond the current accounting period, not being limited or exhausted in the 2010 exercise.", of "The useful life of the improvements/constructions and repairs being foreseeable at the date they were carried out - 2010, such that their use would be longer than one year", and of "the improvements/constructions and repairs, carried out on the new facilities/machinery (...) generating future economic benefits", will not be relevant, by themselves, to the discussion at hand.

This is because, for the correction made by AT to be deemed appropriate, it will not be enough that the utility of the good or its productive aptitude increases, in relation to the state in which the same was found prior to the acquisition of goods or services intended for it. Naturally, all repairs, by definition, imply an increase in the utility or value of the repaired goods. Thus, if, for example, a shop window glass breaks, it is evident that the repair of that glass entails an appreciation and an increase in the utility of the shop whose window was repaired, in relation to the moment when it had the broken window, and it is certain that the repaired window will endure, and maintain its utility and productive aptitude, indefinitely, in the future. Hence, it is not enough to demonstrate that goods or services were acquired intended for application to elements of tangible fixed assets, for the conclusion – without more – that we are in the presence of expenses subject to depreciation, and not entirely deductible.

The proven facts do not equally allow support for the allegations of AT in the arbitral proceedings, namely that "the assets involved were not subject to new repairs since 2010", that "the upgrades substantially increased the overall value of the production system", that "the works are, in themselves, works of improvement, that increase the value of the assets", or that it has been demonstrated "that, in each case, the works carried out contributed to increasing the value or the probable duration of the goods on which they were carried out".

In this manner, not having been proven, beyond the threshold of reasonable doubt, the factual prerequisites on which the tax act that is the subject of the present arbitral proceedings is based, the same should be annulled, the request formulated by the Applicant succeeding.

C. DECISION

It is thereby decided by this Arbitral Tribunal to uphold the arbitral request formulated and, in consequence:

a) Partially annul the corporate income tax (IRC) assessment and compensatory interest for 2010, No. 2015…, compensation No. 2015…, in the amount of €61,208.31;

b) Condemn the Respondent to pay the costs of the proceedings, in the amount of €2,448.00.

D. Value of the Proceedings

The value of the proceedings is fixed at €61,208.31, pursuant to article 97-A, no. 1, a), of the Code of Tax Procedural and Procedural Rules, applicable by virtue of paragraphs a) and b) of no. 1 of article 29 of the RJAT and of no. 2 of article 3 of the Regulation of Costs in Tax Arbitration Proceedings.

E. Costs

The value of the arbitration fee is fixed at €2,448.00, pursuant to Table I of the Regulation of Costs in Tax Arbitration Proceedings, to be paid by the Respondent, given that the request was entirely upheld, pursuant to articles 12, no. 2, and 22, no. 4, both of the RJAT, and article 4, no. 4, of the said Regulation.

Let it be notified.

Lisbon

2 February 2016

The Presiding Arbitrator

(José Pedro Carvalho - Rapporteur)

An Arbitrator Member

(Catarina Gonçalves)

An Arbitrator Member

(Manuel Alberto Soares)

[1] "pursuant to art. 23, it is incumbent upon the SP to demonstrate the tax deductibility of the recorded charges."

[2] As was already written in the preamble of Decree Law 154/91, of 23 April, which approved the CPT, "The presumption of the truth of acts of the Tax Administration was replaced by the presumption of the truth of acts of the citizen-taxpayer".

[3] Note that the non-rebuttal of the presumption, and the effects derived therefrom, do not constitute a change in the rules of distribution of the burden of proof, which, as seen, burden the Applicant. As Jorge Manuel Santos Lopes de Sousa states ("Rebuttal of presumptions established in the rules on tax incidence: art. 73 of the LGT", p. 36, available at http://hdl.handle.net/1822/24601), "The party on whom the burden of proof rests does not cease to be the party that originally would have that legal burden. What happens, as PIRES DE SOUSA emphasises, is that 'the legal presumption provides to the party that can benefit from it, greater certainty about the results it will achieve with the proof of the base-fact once this is fixed in a concrete and determined way by the legal rule"", and, further on (p. 37), "Whereas presumptions apply in the probative phase, the rules of distribution of the burden of proof act at a later moment, once the insufficiency of the proof of the facts is verified and the judge is not convinced".

[4] "The Burden of Proof in Tax Law", Wolter Kluwer Portugal/Coimbra Editora, 2010, p. 129.

[5] Op, cit., pp. 175 et seq..

[6] See Elisabete Louro Martins, Op. cit., p. 125: "when doubts arise about the facts declared by the Subject to Taxation in the income statement, if all the questions raised by the Tax Administration have been resolved in the tax inspection proceedings or in the performance of the duty to provide clarifications through the analysis of documents presented by the same, it will not be legitimate for the Tax Administration to act through the practice of the tax act, without presenting any proof that objectively indicates the formal or material defect verified, pursuant to article 350, no. 2, of the CC, since full probative force is attributed to legal presumptions".

[7] See article 10 of AT's reply.

[8] See article 39 of AT's reply.