Summary
Full Decision
ARBITRAL DECISION
The Arbitrators José Baeta de Queiroz, Amândio Silva and Daniel Taborda, designated by the Deontological Council of the Center for Administrative Arbitration to form an arbitral tribunal, hereby decide as follows:
1. Report and Case Management
On 7 June 2017, the company A…, SA., a taxpayer, legal person with registration number …, with registered office at Rua …, n.º…, in Lisbon, came, pursuant to Article 2.º, n.º 1, paragraph a), 5.º, n.º 3, paragraph a), 6.º, n.º 2, paragraph a), 10.º, n.º 1, paragraph a) and n.º 2, all of Decree-Law n.º 10/2011, of 20 January, Legal Regime of Tax Arbitration (hereinafter LRTA), to request the constitution of an arbitral tribunal, seeking the annulment of the tax assessment act for Corporate Income Tax (IRC) n.º 2017…, relating to the fiscal year 2014, in the amount of €2,036,005.21.
Specifically, the Claimant seeks the annulment of the correction relating to the calculation of the autonomous taxation of 35% provided for in paragraph b) of n.º 13 of Article 88.º of the IRC Code, in the amount of €301.381,64, applied to the variable remuneration earned by one of the members of the board of directors.
On 7 June 2017, the request for constitution of the arbitral tribunal was accepted and automatically notified to the Tax Authority (AT).
The Claimant did not proceed with the appointment of an arbitrator, wherefore, pursuant to the provisions of paragraph a) of n.º 2 of Article 6.º and paragraph a) of n.º 1 of Article 11.º of the LRTA, the President of the Deontological Council of the CAAD designated the undersigned as arbitrators of the collective arbitral tribunal, who communicated acceptance of the appointment within the applicable period.
On 03-08-2017, the parties were notified of these designations and expressed no objection to any of them.
In conformity with the provisions of paragraph c) of n.º 1 of Article 11.º of the LRTA, the collective arbitral tribunal was constituted on 24-08-2017.
On 03-10-2017, the Respondent, duly notified to that effect, filed its response, raising exceptions and objections.
By order of 04-10-2017, the tribunal dispensed with the meeting provided for in Article 18.º of the LRTA.
Duly notified, the Claimant filed written pleadings.
The deadline for issuing the final decision was set for 30-01-2018.
The arbitral tribunal is materially competent and regularly constituted, pursuant to Articles 2.º, n.º 1, paragraph a), 5.º and 6.º, n.º 1, of the LRTA.
The parties have legal standing and capacity, are legitimate and are duly represented, pursuant to Articles 4.º and 10.º of the LRTA and Article 1.º of Regulation n.º 112-A/2011, of 22 March.
The proceedings are free from procedural defects.
Therefore, there is no obstacle to the examination of the merits of the case.
2. Parties' Submissions
2.1. Claimant's Submissions
The Claimant submits, in summary, the following:
The correction is based fundamentally on the understanding of the tax authority that the Claimant failed to comply with the requirements provided for in paragraph b) of n.º 13 of Article 88.º of the IRC Code, because the payment of 50% of the variable remuneration for the period 2014 that was deferred was made before three years had elapsed following the fiscal year to which it relates.
The provision establishes the possibility of excluding from autonomous taxation variable remunerations (i) whose payment is subject to deferral of not less than 50% for a minimum period of three years; and (ii) conditioned to the positive performance of the company throughout that period.
According to the most recent case law of the Supreme Administrative Court (STA) and Constitutional Court (TC), regarding the retroactivity of Article 5.º of Law n.º 64/2008, of 5 December, autonomous taxation constitutes an autonomous tax event in relation to IRC as it applies to the incurrence of an expense.
Given the diversity of autonomous taxation, only on the basis of the occasion and ratio legis is it possible to ascertain the scope of the negative delimitation of Article 88.º, n.º 13, paragraph b) of the IRC Code.
The introduction of this provision aimed to pressure companies, through autonomous taxation, to opt for regular and periodic assignment of accessory remuneration to their employees with directive functions and administration, rather than management behaviours that favour assumption of long-term risks at the expense of short-term gains.
In this sense, variable remuneration should be distributed over the economic year (as a rule over 3 to 5 years), as advocated in the Commission Recommendation of 30 April 2009 on remuneration policies in the financial services sector (2009/384/CE) and in Directive 2010/76/EU of the European Parliament and of the Council, of 24 November 2010, relating to access to the business of credit institutions and the pursuit of their business.
This remuneration policy was transposed into Annex XI of the General Regime of Credit Institutions and Financial Societies by Decree-Law n.º 88/2011, of 20 June.
Thus, the interpretation of the expression "deferral for a minimum period of three years" should be interpreted as "distribution over a minimum period of three years".
Accepting that the wording of the law permits both interpretations, it is nonetheless argued that, since autonomous taxation norms are exceptional, the interpreter should adopt that which favours the subsumption of the general rule to the greatest number of possible situations, thus accepting the interpretation alleged by the Claimant.
2.2. Respondent's Submissions
The Respondent submits, in summary, the following:
What is at issue is a "semantic" detail which is the meaning of "deferral", which should be determined according to the general rules of interpretation of law, by reference to the letter of the law.
Now, if we replace the word deferral with one of its meanings (postponement, for example), the meaning of the provision is exactly as alleged by the AT: "postponement for a minimum period of three years".
If we consider, on the other hand, the teleological and systematic elements, we arrive at a similar conclusion.
According to the State Budget Report for 2010, the intention of the legislature was to subject to autonomous taxation those autonomous taxation events that were not associated with criteria and objectives of productivity and results of the company.
It further adds that, even if the Claimant's interpretation were accepted, this would not signify an exclusion of taxation because the payment of remunerations, as expressly assumed by the Claimant, was not conditioned to the achievement of positive results by the Bank.
It concludes by noting that the Claimant's normative interpretation is unconstitutional by violation of the principle of legality, specifically its corollary of parliamentary reservation of law, as well as by violation of the principle of taxpaying capacity.
3. Factual Matters
i. Facts Considered Proven
The following facts have been established in these proceedings:
In the period 2014, the Claimant assigned to the Vice-Chairman of the board of directors a variable remuneration in the amount of €861.090,39, of which half (€449.000,00) was paid in cash (€224.500,00) and €224.500,00 in shares, retained until the end of the mandate.
The other half was deferred as follows: €149.670,00 assigned and paid in 2016 (€75.000,00 in cash and 12,097 shares); €149.670,00 assigned and paid in 2017 (€75.000,00 in cash and 12,097 shares) and €149.670,00 assigned and to be paid in 2018 (€75.000,00 in cash and 12,097 shares).
The variable remuneration was not subject to autonomous taxation by the Claimant in Form 22 Declaration filed.
Following the external inspection action carried out by the Division of Inspection of Banks and Other Financial Institutions of the Large Taxpayers Unit with respect to the fiscal year 2014, Corporate Income Tax (IRC) assessment n.º 2017… was issued in the total amount of €2,036,005.21.
In this assessment, the variable remuneration identified in point 1 above was subjected to taxation at the rate of 35%, pursuant to Article 88.º, n.º 13, paragraph b), resulting in an IRC assessment for autonomous taxation in the amount of €301.381,64, now contested.
ii. Facts Considered Not Proven
None.
iii. Rationale for the Factual Findings
With respect to the factual matters, the tribunal need not pronounce on everything alleged by the parties; rather, it is its duty to select the facts relevant to the decision and distinguish the proven facts from those not proven (cf. Article 123.º, n.º 2, of the Tax Procedure and Process Code and Article 607.º, n.º 3 of the Civil Procedure Code, applicable by virtue of Article 29.º, n.º 1, paragraphs a) and e), of the LRTA).
Accordingly, the facts relevant to the judgment of the case are selected and delimited according to their legal relevance, which is established with regard to the various plausible solutions of the legal question(s) (cf. former Article 511.º, n.º 1, of the Civil Procedure Code, corresponding to current Article 596.º, applicable by virtue of Article 29.º, n.º 1, paragraph e), of the LRTA).
Thus, having regard to the positions taken by the parties, in light of Article 110.º/7 of the Tax Procedure and Process Code, the documentary evidence and the proceedings file, the above-listed facts were considered proven as relevant to the decision.
4. Legal Matters
The disputed issue in these proceedings is whether the variable remuneration assigned in 2014 to the member of the board of directors of the Respondent benefits from the exclusion of autonomous taxation provided for in the second part of paragraph b) of n.º 13 of Article 88.º of the IRC Code, applicable to bonuses and other variable remunerations.
Article 88.º, n.º 13, paragraph b) of the IRC Code provides:
"Are taxed autonomously at the rate of 35%:
Expenses or charges relating to bonuses and other variable remunerations paid to managers, administrators or directors when these represent a share greater than 25% of annual remuneration and have a value exceeding €27.500,00, unless their payment is subordinated to deferral of not less than 50% for a minimum period of three years and conditioned to the positive performance of the company throughout that period."
We shall begin by addressing, in generic terms, the issue of autonomous taxation and its purposes, and then respond to the disputed question.
4.1. Legal Nature of Autonomous Taxation
The regime of autonomous taxation in force is the result of numerous legislative amendments.
The subjection of certain expenses to autonomous taxation first appeared with Decree-Law n.º 192/90, of 2 June, in a context of penalizing the taxation of undisclosed or undocumented expenses incurred by companies.
Subsequently, autonomous taxation was included in the IRC Code through Law n.º 30-G/2000, of 29 December, which incorporated the provision on autonomous taxation into the diploma regulating IRC.
Since then, the regime of autonomous taxation has undergone a process of progressive expansion, partly driven by the apparent continuous intention to increase tax revenue through this mechanism.
Taking into account Article 88.º of the IRC Code, autonomous taxation applies broadly to the following realities: undocumented expenses; charges for vehicles; representation expenses; subsistence allowances; amounts paid to non-residents; profits distributed by entities subject to IRC to taxpayers benefiting from exemption; expenses or charges relating to indemnities or any compensation due not related to the contractual relationship; and also expenses or charges relating to bonuses and other variable remunerations paid to managers, administrators or directors.
Some autonomous taxation has as its basis the presumption of the existence of income that ceased to be taxed, not only under IRC but also under IRS, as explained in the decision of the arbitral tribunal issued n.º 209/2013-T, which decided negatively on the question of the deductibility of autonomous taxation as a tax cost under IRC, "it is a matter of '(…) a form of, indirectly and through the expense, taxing income'."
The purpose of autonomous taxation is therefore dual. They aim to tax real income, thus correcting taxable income to bring it closer to actual income, and at the same time, they seek to penalize taxpayers who through the incurrence of certain expenses or through certain non-compliance behaviours penalize and correct, even in some situations years later, deductions that were made and ended up reducing taxable income.
It will then be necessary to understand the nature and meaning of autonomous taxation that applies to the charge relating to bonuses and variable income of managers, administrators or directors when they exceed certain thresholds.
4.2. Autonomous Taxation on Bonuses and Variable Income
Article n.º 13 of Article 88.º of the IRC Code was introduced by Law n.º 3-B/2010, of 8 April, a diploma that approved the State Budget for 2010.
According to the State Budget Report, the measure was justified in the following terms: "In accordance with the policy of good practices that the Government has been encouraging in the financial sector and, as well, with the most recent guidelines of the Portuguese Securities Market Commission (CMVM) regarding listed companies, the present Bill proposes the establishment of an autonomous IRC rate of 35%, applicable to all expenses or charges relating to bonuses and other variable remunerations paid to managers, administrators or directors when these represent a share greater than 25% of annual remuneration and have a value exceeding 27,500 euros, unless their payment is subordinated to deferral of not less than 50% for a minimum period of 3 years and conditioned to the positive performance of the company throughout that period."
That is, the legislature intended to use fiscal policy to pressure (by taxing in an aggravated manner) companies to adopt the best practices of governance.
For better understanding, the CMVM Recommendations on Corporate Governance (2010) published at the time of enactment of the law were:
"II.1.5.1. The remuneration of members of the governing body should be structured to allow alignment of their interests with the long-term interests of the company, be based on performance evaluation and discourage excessive risk-taking. To this end, remuneration should be structured, in particular, as follows:
(i) The remuneration of administrators exercising executive functions should include a variable component whose determination depends on a performance evaluation, carried out by the competent bodies of the company, in accordance with measurable pre-determined criteria, which consider the real growth of the company and the wealth effectively created for shareholders, its long-term sustainability and the risks assumed, as well as compliance with the rules applicable to the company's business.
(ii) The variable component of remuneration should be globally reasonable in relation to the fixed component of remuneration, and maximum limits should be set for all components.
(iii) A significant part of variable remuneration should be deferred for a period of not less than three years, and its payment should be dependent on the continuation of the company's positive performance throughout that period.
(iv) Members of the governing body shall not enter into contracts, either with the company or with third parties, which have the effect of mitigating the risk inherent in the variability of the remuneration set for them by the company.
(v) Until the end of their mandate, executive administrators must retain shares of the company that they have acquired through variable remuneration schemes, up to the limit of twice the annual total remuneration, with the exception of those that need to be disposed of to pay taxes resulting from the benefit of those same shares.
(vi) Where variable remuneration comprises the award of options, the start of the exercise period should be deferred by a period of not less than three years.
(…)"
On the other hand, Article 8.º of Notice n.º 10/2011 of the Bank of Portugal stipulates identical guidelines:
"1 - The remuneration of executive members of the governing body should include a variable component, with a maximum limit set, whose determination depends on a performance evaluation, carried out by the competent bodies of the institution, in accordance with measurable pre-determined criteria, including non-financial criteria, which consider, beyond individual performance, the real growth of the institution and the wealth effectively created for shareholders, the protection of the interests of customers and investors, its long-term sustainability and the extent of risks assumed, as well as compliance with the rules applicable to the institution's business.
2 - Until the end of their mandate, executive members of the governing body must retain shares of the institution that they have acquired through variable remuneration schemes, up to the minimum limit of twice the annual total remuneration, with the exception of those that need to be disposed of to pay taxes resulting from the benefit of those same shares.
3 - Where variable remuneration comprises the award of options, the start of the exercise period should be deferred by a period of not less than three years."
The present Bank of Portugal regulation has at its foundation the Recommendations of the European Commission of 30 April 2009 (2009/384/CE) concerning remuneration policies in the financial services sector.
Common to all these provisions is the objective of avoiding the perverse effects and short-term consequences that a remuneration policy can provoke. To this end, variable components of remuneration should depend on pre-defined and measurable performance criteria, from a medium-term perspective, so that it can be assessed whether value was created in a sustained manner.
The variable component of remuneration is constituted by distinct items: "annual bonuses (generally monetary awards granted according to the achievement by the company of certain objectives), share awards (these usually being acquired by the company under the terms permitted by the regime for acquisition of own shares provided for in Article 317.º) and stock options (options for subscription and acquisition of shares)".[1]
This distinction of the various components of variable remuneration is relevant because the recommendations now described are distinct for each type of variable remuneration: remuneration relating to bonuses should be deferred for a period of not less than three years, and its payment should be dependent on the continuation of the company's positive performance throughout that period (Recommendation II.1.5.1, point iii) of the CMVM Recommendation (2010)); shares received as variable remuneration should follow the same principle as remuneration relating to bonuses but be retained by board members until the end of their mandate (Recommendation II.1.5.1, point v) and n.º 2 of Article 8.º of Notice n.º 10/2011); the exercise of share options (stock options) should be deferred by a period of not less than three years (Recommendation II.1.5.1, point vi) and n.º 3 of Article 8.º of Notice n.º 10/2011).
We note, for proper framing of the disputed question, that the various provisions cited use two distinct expressions: for bonuses and payment in shares "deferral for a period of not less than three years" is advocated and for stock options "deferral for a period of not less than three years" is imposed. In the same recommendation, the legislature uses, for distinct remunerations, distinct expressions, with no subsisting, in terms of systematic coherence, any doubt as to the meaning of each. There is an intention that the exercise of the option to purchase shares only takes place after three years, but a more flexible temporal payment policy definition is permitted for the other variable remunerations.
Given the historical context, the purpose of Article 88.º, n.º 13, paragraph b) does not depart from the sense and purpose of similar provisions in corporate governance codes of best practices. According to the Constitutional Court, in Decision n.º 197/2016, "In the case of paragraph b) of n.º 13 of Article 88.º, the intention of the law appears to be to subject to autonomous taxation variable remunerations that are not associated with criteria of productivity, because those situations are excepted from taxation where payment is subordinated to deferral of not less than 50% for a minimum period of three years and conditioned to the positive performance of the company throughout that period."
4.3. Compliance with the Requirement "payment subordinated to deferral of not less than 50% for a minimum period of three years"
Given the literal wording, the meaning of "deferral for a minimum period of three years" can mean either deferral until a minimum term of three years or deferral over a period of three years.
Accordingly, it is necessary, according to the general rules of interpretation, to consider the ratio of the provision. As already expressed by the Constitutional Court, the intention of the legislature appears to be the partial subjection of variable remunerations to productivity criteria, granting greater assertiveness to programmatic (non-imperative) provisions such as CMVM recommendations.
Either interpretation complies with the sense and objectives of the provisions. Payment over the three years, through the achievement of positive results, complies with the aim of assessing good management from the perspective of annual accountability. Faced with the positive performance of the company in that year, the administrator's right to receive a proportional share of the deferred variable remuneration vests.
This interpretation is also in accordance with the best practices advocated for corporate governance. As developed above, we cannot confuse the directives relating to the payment of stock options with the provisions relating to bonuses and other variable remunerations: the meaning of deferral for a "period of three years" for the former and deferral "for a minimum period of three years" for the latter is clear.
Accordingly, the interpretation compatible with a policy of staged payments over the period of three years prevails, but also with payment after this period because what was defined was the minimum period of compulsory deferral (payment may, for example, be deferred to the end of four years or in staged form in the 4th, 5th and 6th years). In any of these situations, the exclusion of autonomous taxation also depends on the positive performance of the entity during the entire deferral period defined.
We do not see, finally, in what sense this interpretation violates, as the Respondent understands, the principle of legality, specifically its corollary of parliamentary reservation of law, considering that the provision was approved by the Parliamentary Assembly. With regard to the principle of taxpaying capacity and equality, we cite the Constitutional Court which, regarding this specific provision, states:
By parity of reasoning, the challenged provisions do not call into question the principle of taxpaying capacity. As the Constitutional Court has affirmed, the principle of taxpaying capacity, although not expressly enshrined in the Constitution, is nothing more than "the (qualified) expression of the principle of equality, understood in a material sense, in the field of taxes, that is, equality in taxation". And, in that sense, it constitutes the tax corollary of the principles of equality and fiscal justice and from which flows a command for the ordinary legislature to architect the tax system with a view to the taxpaying capacities of each one (cf. Decision n.º 187/2013 and the case law cited therein).
It should be recalled that autonomous taxation applies to certain expenses typified in tax law that have been incurred by the company, and only to those expenses, and not to the taxation of business income that has been earned in the respective economic year. And the objective of the legislature - as has been stated - is to discourage the incurrence of expenses that may adversely affect tax revenue and artificially reduce the very taxpaying capacity of the company.
The logic of autonomous taxation to which the provisions of n.º 13 of Article 88.º refer appears to be this. The company reveals financial availability to assign to its managers excessive indemnities not contractually provided and which have no direct relationship to individual performance in achieving positive economic results. In such circumstances, the taxpayer should be in a position to bear an additional tax burden with respect to those same expenses (which could be avoided) and which is intended to compensate for the tax advantage resulting from the reduction of taxable income as a result of the incurrence of those expenses.
The expense constitutes an autonomous tax event, generating a tax to which the taxpayer is subject regardless of whether or not taxable income in IRC was obtained in the same taxation period. And thus, the fact revealing taxpaying capacity is the very incurrence of the expense.
Reimbursement of Amounts Paid and Compensatory Interest
The Claimant further requests that the AT be condemned to reimburse it of the amounts unduly paid, plus corresponding compensatory interest in accordance with Article 43.º of the General Tax Code.
This same issue has been raised in various previous proceedings in which matters identical to those of these proceedings are analyzed, including Process 303/2015-T of the CAAD, where it was written what is now, with proper respect, transcribed:
"In accordance with the provisions of paragraph b) of Article 24.º of the LRTA, the arbitral decision on the merits of the claim for which there is no appeal or challenge binds the tax authority from the end of the period provided for appeal or challenge, and the latter must, in the exact terms of the success of the arbitral decision in favor of the taxpayer and until the end of the period provided for spontaneous execution of the judgments of the tax courts, 'restore the situation that would exist if the tax act subject of the arbitral decision had not been made, adopting the acts and operations necessary to that effect', which is in line with what is provided for in Article 100.º of the General Tax Code [applicable by virtue of the provisions of paragraph a) of n.º 1 of Article 29.º of the LRTA] which establishes that 'the tax authority is obliged, in case of total or partial success of a gracious objection, judicial challenge or appeal in favor of the taxpayer, to the immediate and full restoration of the legality of the act or situation subject of the dispute, including the payment of compensatory interest, if applicable, from the end of the period for execution of the decision'.
Although Article 2.º, n.º 1, paragraphs a) and b), of the LRTA uses the expression 'declaration of illegality' to define the jurisdiction of arbitral tribunals operating in the CAAD, not making reference to condemnatory decisions, it should be understood that their powers include those powers that in judicial challenge proceedings are attributed to tax courts, this being the interpretation that harmonizes with the sense of the legislative authorization on which the Government based itself to approve the LRTA, in which it proclaims, as the first guideline, that 'the tax arbitration process must constitute an alternative procedural means to the judicial challenge process and to the action for recognition of a right or legitimate interest in tax matters'.
The judicial challenge process, although essentially a process for annulment of tax acts, admits condemnation of the Tax Authority to payment of compensatory interest, as appears from Article 43.º, n.º 1, of the General Tax Code, which establishes that 'compensatory interest is due when it is determined, in gracious objection or judicial challenge, that there was error attributable to the services from which results payment of the tax debt in an amount higher than legally due' and from Article 61.º, n.º 4 of the Tax Procedure and Process Code (in the form given by Law n.º 55-A/2010, of 31 December, which corresponds to n.º 2 in the original form), which establishes that 'if the decision recognizing the right to compensatory interest is judicial, the period for payment is counted from the beginning of the period for its spontaneous execution'.
Thus, n.º 5 of Article 24.º of the LRTA, when it states that 'payment of interest, regardless of its nature, is due in the terms provided for in the general tax code and in the Tax Procedure and Process Code', should be understood as allowing the recognition of the right to compensatory interest in the arbitration process, as well as the reimbursement of the amount paid, which is a prerequisite for the existence of such interest."
Following the illegality of the IRC assessment act subject to these proceedings, there is no doubt that the Tax and Customs Authority should proceed not only to the restitution of the amounts unduly paid by the Claimant, giving effect to the imperative of Article 100.º of the General Tax Code cited above, as well as to the payment of the respective compensatory interest that is due from the dates on which the payments were made by the Claimant until the date on which the respective reimbursement occurs.
6. Decision
Accordingly, and with the grounds stated, this arbitral tribunal decides to judge entirely favorably the main claims of the Claimant and, in consequence:
- to declare the claim for declaration of illegality of the IRC assessment n.º 2017…, relating to the fiscal year 2014, in the part relating to autonomous taxation on variable remunerations, in the amount of €301.381,64, to be well-founded,
- to condemn the Respondent to reimburse the Claimant in the amount of €301.381,64, relating to the autonomous taxation paid, and further to pay it compensatory interest counted from the date of payment until the moment when the reimbursement of the amounts corresponding to autonomous taxation occurs.
7. Case Value
In accordance with the provisions of Article 305.º, n.º 2, of the Civil Procedure Code and 97.º-A, n.º 1, paragraph a), of the Tax Procedure and Process Code and 3.º, n.º 2, of the Regulation of Costs in Tax Arbitration Proceedings, the value of the case is set at €301.381,64.
8. Costs
Pursuant to Article 22.º, n.º 4, of the LRTA, the amount of costs is set at €5,508 (€4,896 + €306 + €306, which corresponds to €2,754 x 2, paid by the claimant) in accordance with Table I attached to the Regulation of Costs in Tax Arbitration Proceedings, to be borne by the Tax and Customs Authority.
Notify.
Lisbon, 31 January 2018
The Arbitrators,
José Baeta de Queiroz
Amândio Silva
Daniel Taborda
[1] ANA PERESTELO DE OLIVEIRA, Manual de Governo de Sociedades, Almedina, 2017, p. 208.
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