CAAD Case 367/2014-T: IRC Costs Deduction and Accrual Principle – Reformed Arbitral Decision 2019

ARBITRAL DECISION

Decision – Following the annulment decreed by the Central Administrative Court of the South, pursuant to judgment of 06/12/2018, of the arbitral decision rendered on 24 November 2014 (consult full version in PDF)

The arbitrators Dr. Jorge Manuel Lopes de Sousa (arbitrator-president), Professor Doctor Leonor Fernandes Ferreira and Dr. José Coutinho Pires, appointed by the Ethics Council of the Centre for Administrative Arbitration to form the Arbitral Tribunal, constituted on 18-07-2014, agree as follows:

1. Report

A..., S.A., Tax Identification Number ..., with registered office at Street ..., no. ..., ..., ...-... ..., submitted a request for constitution of a collective arbitral tribunal, pursuant to Articles 95 of the General Tax Law ("LGT"), 99(a) of the Code of Tax Procedure and Process ("CPPT"), 137(1) of the Corporate Income Tax Code ("CIRC") and 10(1)(a) and (2) of the Legal Framework for Arbitration in Tax Matters ("RJAT"), with a view to declaring the illegality and consequent annulment of the additional assessment of Corporate Income Tax ("IRC") no. 2013..., dated 5 December 2013, relating to the year 2009, in the total amount of €590,394.46.

The respondent is the TAX AND CUSTOMS AUTHORITY.

The claimant opted for non-designation of an arbitrator.

Pursuant to the provisions of Article 6(2)(a) and Article 11(1)(b) of the RJAT, the Ethics Council of the CAAD appointed the signatory arbitrators of the collective arbitral tribunal, who communicated acceptance of their appointment within the applicable deadline.

The parties were notified of this appointment and did not manifest any intention to refuse the appointment of the arbitrators, in accordance with the combined provisions of Article 11(1)(a) and (b) of the RJAT and Articles 6 and 7 of the Code of Ethics.

Thus, in conformity with the provision of Article 11(1)(c) of the RJAT, the collective arbitral tribunal was constituted on 08-07-2014.

The Tax and Customs Authority submitted a response in which it defended the inadmissibility of the request for arbitral pronouncement.

By order of 12-10-2014, the meeting provided for in Article 18 of the RJAT was dispensed with and it was determined that the proceedings should continue with successive written pleadings, with 28-11-2014 being set as the date for the arbitral decision.

On 24-11-2014, an arbitral decision was rendered.

The Tax and Customs Authority challenged the decision and the Central Administrative Court of the South, by judgment of 06-12-2018, annulled it solely as regards the claimant, on the ground that it was rendered before the deadline for the Tax and Customs Authority's pleadings had elapsed.

The proceedings were reopened and the Tax and Customs Authority submitted pleadings.

The Arbitral Tribunal was duly constituted and is competent.

The parties have legal personality and capacity and are legitimately represented and properly represented (Articles 4 and 10(2) of the RJAT and Article 1 of Ordinance no. 112-A/2011, of 22 March).

No nullity is apparent.

2. Factual Matter

2.1. Proven Facts

The following facts are considered proven:

• The Tax and Customs Authority conducted a general scope inspection of the claimant relating to the year 2009, which commenced on 14-01-2013 (notification of Service Order OI2012...);

• The inspection had two extensions for periods of 90 days each;

• The claimant was incorporated on 09-01-1995 and carries on the activity of production and commercialization of cork stoppers, CAE 16294;

• Under Corporate Income Tax, the claimant declared a high accounting and tax loss in the 2008 fiscal year, and from then on has been deducting it from the taxable profits calculated in subsequent fiscal years;

• The claimant's situation regarding Corporate Income Tax, resulting from the statement filed, is summarized in the following table:

• The claimant filed on 21-06-2013 a gracious complaint regarding the self-assessment of Corporate Income Tax for the 2009 fiscal year for utilization of the tax benefit provided for in Article 19 of the EBF (net job creation), and the tax authority accepted a deduction of €72,983.03 from the Taxable Result of that fiscal year, which thus became €26,158.56;

• A... operates in two industrial units located in the municipality of ...:

  • A... 1 (main unit) operates in facilities located at Street ..., no. ..., and Street ..., no. ..., in ..., which constitute the company's headquarters and the "A... Group" headquarters in Portugal, and comprise an industrial pavilion with several warehouses and a construction site area covering more than 14,000 m², where the production part, offices, laboratory, and raw materials and finished products warehouses are located; this real property corresponds to urban property registration no. ... of the parish of ..., was recently constructed (in 2007), and is leased to the taxpayer by B..., SA, Tax ID ..., the entity owning it;

  • A... 2 operates in facilities located at ..., Street..., no. ..., in ..., where the finishing unit for cork stoppers intended for European markets is installed; this real property corresponds to urban property registration no. ... of the parish of ..., and is leased to the taxpayer by U..., Tax ID ..., the owner thereof;

• The claimant controls all vertically integrated operations of the production process, which can be summarized as follows:

  • Cork is acquired, selected and marked by its exclusive supplier, A... 3 Raw Materials Limited Liability Company (hereinafter referred to only as A... 3), Tax ID ..., which has its registered office at the same location as A... and production facilities that were expanded and reconstructed in 2003, in ... (and include a cork stabilization park, a warehouse for prepared cork pallets and a high-efficiency stainless steel boiler);

  • Weekly, cork is transported on pallets containing approximately 750kg each, from A... 3 to A...'s facilities in ...;

  • At the company's main industrial unit (internally designated as A... 1), in ..., cork is transformed into stoppers, with all operations of the production process being carried out there until the finished product is obtained: slicing, manual and automatic drilling, drying, rectification, electronic and manual selection, washing and pre-drying, TCA7 bacteria control through the patented ... system (exclusive to the A... Group), drying, coating;

  • When intended for third-country markets, namely the American market (United States and Argentina), the stoppers are shipped from A... 1, with the finishing operations being carried out by group companies existing in those countries;

  • When intended for the intra-EU market, namely Spain and France, the stoppers go to the unit in ... (internally designated as A... 2) for carrying out finishes (such as marking, humidification and treatment), which are carried out according to customer orders and specifications, and only then are they dispatched to intra-EU customers;

  • This occurs because the A... Group in European countries only has commercial agents, entities to whom they pay commissions on intermediary sales, whereas in the United States of America, Australia and South Africa and Argentina it has actual group distribution companies, with the capacity to carry out the finishing of stoppers before delivery to end customers;

  • In Portugal, the claimant has only 1 salesperson, given the reduced size of this market in the company's turnover;

• In the Tax Inspection Report contained in the administrative file, whose contents are reproduced, an analysis of the financial charges borne by the claimant in the year 2009 is made in the following terms:

II.3.8. Analysis of Financial Charges Borne in the 2009 Fiscal Year

An analysis was conducted of the indispensability of the financial charges that negatively impacted this taxpayer's Taxable Result in the 2009 fiscal year. Resulting from the company's indebtedness to meet its medium and long-term financial needs, part of these resources are being used to finance a group company gratuitously, A... 3, thereby burdening A... without any remuneration.

II.3.8.1. The company A... 3 – Raw Materials, Limited Liability Company

A limited liability company called A... 3 – Raw Materials, Limited Liability Company, Tax ID ..., incorporated on 15 November 2006 at the Real Property and Commercial Registry of ..., with the object of purchase and sale of cork, preparation of cork for the manufacture of stoppers and for any other industrial applications, Industry and trade of cork products and derivatives, and provision of services related to such activities.

The company has its registered office at Street ..., no. ..., ...-... ..., municipality of ..., and was incorporated with a share capital of €50,000.00, divided into a single share, initially belonging to A....

On 19 March 2007 A... sold the total interest it held in A... 3 to C..., SGPS, Lda, Tax ID ..., which has its office in ..., Building ..., ... – ... ... – Oeiras, and this company currently remains as the sole holder of the share capital of A... 3.

It should be noted that A... only participated in the share capital of A... 3 for approximately 4 months (between 15 November 2006 and 19 March 2007).

The management of A... 3 appointed at the date of its incorporation consisted of 4 members (exactly the same as those comprising the Board of Directors of A...) D..., E..., F... and G....

On 15 September 2006, H... was also appointed manager (also administrator of A...). It is thus verified that A... and A... 3 are related entities, that is, between which there exist special relationships, in the manner defined in subsections d) and g) of Article 63(4) of the Corporate Income Tax Code (CIRC).

This information is contained in the Permanent Certificate of Commercial Registration of A... 3 Raw Materials, Limited Liability Company, a copy of which is attached as Annex 8 (5 pages).

II.3.8.2. Gratuitous Financing of A... 3

A... concluded with A... 3 on 01 January 2007 a Current Account Advances Contract, attached as Annex 9 (3 pages), by means of which:

• A... grants to A... a loan in the form of a current account for a total maximum amount of €2,000,000;

• This contract has a duration of 60 months, beginning on 01-01-2007, being automatically renewable;

• The amount of loan granted will be used according to the treasury needs of A... 3, in the form of a current account, in which the financial flows between A... and A... 3 will be recorded;

• No interest shall be due on the capital utilized under this contract.

The arguments indicated in the said Contract by the taxpayer for the non-remuneration of this loan were the following:

• A... 3 began its activity in 2007 in a context of high uncertainty as to its commercial success, and is thus in a "start-up" phase;

• A... 3 operates on an almost exclusive basis for A..., which means that any increase in costs would inevitably be reflected in the cork sales conditions for A...;

• A... 3 (in financial needs that could affect its commercial performance and thereby affect A...'s activity as the recipient of most of A... 3's production;

• A..., as the sole shareholder of A... 3, is willing to financially assist A... 3, in order to ensure the viability of its activity.

As for the financial operations carried out between A... and A...3 (financing granted by the former to the latter), these were not even subject to any analysis at the level of the transfer pricing file (see Chapter II.3.9.2 of this Report), with no justification having been presented for this, except the argument that A... 3 is in a start-up phase, and A... understood that the financing should be granted to it without any remuneration.

On 01 January 2010 an Addendum to this Contract was made – in Annex 10 – to amend the initial clause relating to the interest rate, thus now providing for the remuneration of the financing under market conditions, by calculating annual interest based on Euribor plus a market spread, from the 2010 fiscal year. Thus, in the 2010 and 2011 fiscal years A... debited to A... 3 interest and stamp duty borne by its account, applying the interest rate Euribor plus a spread of 4%, in the following amounts:

[Table showing payments from 2010-2011 - values not fully visible in original]

• Following the analysis, the Tax and Customs Authority effected an arithmetic correction relating to the financing costs of A... 3, with the following grounds:

III.1.1. Financing Costs of A... 3

III.1.1.1. Facts Determined

Under the Current Account Advances Contract described in Chapter II.3.8 of this Report, A... financed its former subsidiary A... 3 during the 2009 fiscal year without debiting any remuneration for these financings. The following table presents the values debited from A... 3, on which no interest was debited, as of 31 December:

[Table of financing values - specific amounts not fully visible in original]

We also verified that the company became indebted to the banking sector, both through collateralized accounts and through medium and long-term bank loans. As a result of these financings, A... is bearing financial costs of substantial amount.

In the following table we list the value of the said financings obtained in the fiscal year and as of 31 December:

[Table of financing values - specific amounts not fully visible in original]

The financial charges borne in this fiscal year with the said financings were as indicated below:

[Table of financial charges - specific amounts not fully visible in original]

Regarding interest borne on bank loans and banking services – commercial paper commissions, the amounts in question correspond to the balances of the respective accounts in the 2009 fiscal year. The movements of account 608109/698102 were analyzed, and a map was drawn up which is attached as Annex 83, from which it was concluded that all respected commissions for management of collateralized accounts or commissions relating to medium and long-term financing.

(...)

III.1.1.2. Legal Framework

Taking into account the provision of Article 23 of the Corporate Income Tax Code, the corrections to be proposed shall follow the following legal framework:

Article 1 of this article tells us: "costs or losses are considered those that are proven to be indispensable for the realization of profits or gains subject to tax or for the maintenance of the source of income..."

Within this framework it is easily deduced that the financings contracted by A... and utilized by A... 3 at zero cost (in a group treasury logic), generated (and continue to generate) costs in A... that did not contribute (and continue not to contribute) to the realization of profits or gains or to the maintenance of this company.

Thus, we propose that the financial costs recorded in A... be corrected to reflect only and solely the cost of capital actually utilized by this taxpayer. In this way, the financial costs that the company bore, the costs recorded in this account that corresponded to the financings granted to A... 3, will not be accepted for tax purposes (value of corrections to be made), with the remaining value reflecting the financial costs that the company bore and that were actually necessary for the exercise of its activity.

For this purpose, the criterion we propose shall consist of:

1. Calculate the company's average annual debt balance;

2. Ascertain the financing costs actually borne by the company in the period under analysis;

3. Determine the effective debt cost rate of A...;

4. Apply this rate to the value of the financings made by this to A... 3 in 2009;

5. Disregard as a tax cost the value thus determined.

(...)

III.1.1.4. Calculation of the Value to be Disregarded as a Cost

III.1.1.4.1. Average Debt Balance of A...

From the analysis of the accounting and collection of bank statements of the accounts in question, we found that in the 2009 fiscal year A... financed itself with the banking sector through collateralized accounts and bank loans. The table below summarizes the movements of the accounts considered in this analysis during 2009:

[Table of movements - specific amounts not fully visible in original]

(...)

By summing up the daily average debt balances thus obtained, we determined an Average Debt Balance for A... of €9,758,109.37 in the 2009 fiscal year, broken down as follows:

[Table showing breakdown - specific amounts not fully visible in original]

III.1.1.4.2. Effective Cost of Debt of A...

Having determined the value of medium and long-term bank debt daily, and ascertained the financial charges borne by A... in relation to it during the 2009 fiscal year (which, as we saw in Chapter III.1.1.1 of this Report, amounted to €633,729.58), we are in a position to calculate the Rate of effective cost of borrowed capital, which was 6.49%:

[Calculation shown - specific amounts not fully visible in original]

If we compare the values obtained with the reference rate used by the company in 2010 and 2011 for debiting interest to A... 3, which, as we saw, was 3-month Euribor plus a spread of 4%, we find that the values obtained are close but always above this indicator, which we reproduce in the table on the next page, and which, as is known, suffered a sharp decline in 2009.

The 3-month Euribor rate in the year under analysis underwent the following evolution:

[Table of Euribor rates - specific amounts not fully visible in original]

III.1.1.4.3. Calculation of A... 3's Financing Costs

As already mentioned, A... granted financings to A... 3 in the form of a current account during 2009, which were recorded in accounts 268156 – CSP3 Transfers and 2783156 – CSP3 Transfers, whose statements are in Annexes 81 and 82, respectively.

Using the effective cost rate of borrowed capital determined in the previous chapter and applying it to the number of days the company was financing A... 3, we obtain the value of the financial costs to be disregarded under Article 23 of the CIRC. Attached as Annex 86 (6 pages) are tables presenting the calculations performed to determine the value to be disregarded as a cost.

In summary, the costs to be corrected in the 2009 fiscal year are as follows:

[Table of cost corrections - specific amounts not fully visible in original]

Given the foregoing, A... caused financial costs to concur in the determination of its Taxable Result for the 2009 fiscal year that do not contribute to the formation of profits or gains subject to tax or to the maintenance of the source of income, in the amount of €97,278.08, such that the Taxable Result of this fiscal year should be increased by the costs disregarded here.

• The Tax and Customs Authority effected an arithmetic correction based on non-compliance with the principle of periodization of exercises, with the following grounds:

III.1.2. Non-Compliance with the Principle of Periodization of Exercises

III.1.2.1. Corrections Relating to Prior Years Recorded

As reported in Chapter II.3.11.1 of this Report, the taxpayer recorded in account 6972 – Corrections relating to prior years without VAT regularization in the 2009 fiscal year (see statement in Annex 49) a total amount of €331,726.66 of costs relating to credit notes issued and debit/credit memos received from K..., Ltd (a company based in Bermuda that no longer exists), which are summarized in the map found in Annex 87 and relate to merchandise returns occurring in 2007 and 2008.

III.1.2.2. Legal Framework

Taking into account the provision of Article 18 of the Corporate Income Tax Code, the corrections to be proposed shall follow the following legal framework:

Article 1 tells us: "Income and expenses, as well as other positive or negative components of taxable profit, are attributable to the tax period in which they are obtained or incurred, regardless of their receipt or payment, in accordance with the economic accrual basis. ..." Article 2 adds: "Positive or negative components considered as relating to prior periods are only attributable to the tax period when on the date of closure of accounts of the one to which they should have been attributed they were unforeseeable or manifestly unknown."

In this context, costs relating to fiscal years prior to 2009 (2007 and 2008) cannot be accepted for tax purposes in this fiscal year by virtue of not complying with the principle of periodization of exercises set out in this rule. Being merchandise returns that would have occurred in 2007 and 2008 (there is no proof in the accounting or evidence of the actual return of such merchandise), they could never be included in the Taxable Result of the 2009 fiscal year since, as of 31 December 2009, they would be fully known to the taxpayer.

III.1.2.3. Calculation of Costs Not Accepted Due to Non-Compliance with the Principle of Periodization of Exercises

Given the foregoing, A... caused costs relating to prior fiscal years to concur in the determination of its Taxable Result for the 2009 fiscal year that do not comply with the principle of periodization of exercises, in the amount of €331,726.66, such that the Taxable Result of this fiscal year should be increased by such costs.

• In the Tax Inspection Report, the Tax and Customs Authority also understood that a correction should be made relating to profits attributed to the Irish company I..., in the following terms:

III.1.3. Profits Attributed to the Irish Company I...

III.1.3.1. The Taxation of Companies in Ireland

Ireland constitutes a fiscally attractive jurisdiction in Europe, by virtue of possessing, among others, the following characteristics:

• A low corporate income tax rate (equivalent to our Corporate Income Tax) of 12.5%, generally applicable to profits resulting from commercial and industrial activities;

• It had a reduced rate of 10% applicable to certain production operations and international services, whose application ceased on 31 December 2010;

• For certain activities related to property and for activities of exploitation of natural gas, minerals and petroleum, the applicable rate is 25%;

• Passive income, such as dividends, interest, rents and royalties are taxed at a maximum rate of 25%;

• It adopted the European Mother-Subsidiary Directives (...) and the Interest and Royalties Directive (...), as well as the Savings Directive (...);

• Extensive network of Double Taxation Conventions based on the OECD Model Convention;

• Broad exemptions for withholding taxes on dividends, interest and royalties;

• Exemption from tax on capital gains for stock transactions;

• Special regime for holdings;

• Advantageous tax credit regime for R&D activities;

• Total absence of rules for (...) Sections and for thin capitalization;

• Transfer pricing rules based on OECD guidelines only applicable from 01 January 2011;

• Existence of tax incentive packages to maximize access to community funds and their efficient utilization.

In recent years there has been increased attention by the international community to the issue of tax havens and international tax competition: in 2005, the publication by the OECD of a "blacklist" of countries and territories that did not have any taxation (or applied minimal nominal rates) and that demonstrated lack of transparency and willingness to exchange information with other Tax Administrations, relaunched the discussion, and opened the door, among other measures, to the implementation of various Mutual Agreement Procedures and to the exchange of bank and tax information by jurisdictions that previously favored banking secrecy (such as Switzerland, Luxembourg, Austria and Belgium in Europe, and the important Asian financial centers of Singapore and Hong Kong).

Despite being on the OECD "white list" in terms of exchange of information on tax matters, Ireland has frequently been criticized for presenting attributes similar to a tax haven, such as:

• The combination of a 12.5% corporate income tax rate (in effect since 2003-01-01) with tax planning behavior by multinational companies, particularly abusing transfer pricing rules;

• The role of the IFSC (...) (International Financial Services Center, created in 1987 and located in Dublin) in attracting investment to Ireland: it should be recalled that it is in this location that the law firm/accounting firm that established I... and provides it with accounting services has its registered office.

Lastly, and not least importantly, Ireland, like other jurisdictions with a clearly more favorable tax regime, should pay attention to the economic substance of the activity of the companies that choose to establish themselves there, ensuring that this choice corresponds to valid economic reasons and that they actually develop an economic activity of an agricultural, commercial, industrial or service provision nature.

(...)

III.1.3.3. Summary of Facts Determined

The facts determined regarding the operations declared between the taxpayer and the Irish company I..., Ltd have been explained throughout this Report. A summary of the same is presented below:

1. The Taxable Result of the taxpayer for the 2009 fiscal year amounted to only €26,158.56, and the Net Result determined was positive but very small (€20,402.45);

2. Of the total invoiced intra A... Group by the taxpayer in 2009 – approximately €15 million – €12.7 million went to I... (approximately 85%);

3. The taxpayer alleges that it acts as an industrial unit ensuring the production of stoppers for the Group, in which commercial functions are concentrated in other entities, namely I..., A... Spain and A... France;

4. However, it appears that the disposal of A...'s production occurs directly, both in the European market and in the US, Australia and South Africa markets, with the only difference being that in the first market the products are invoiced to the respective customers, and in the second markets the products are invoiced to I...;

5. The products manufactured by A... are sold to A... USA (A...U), A... Australia (A...A) and A... South Africa (A...SA), but invoiced to I...: in the invoices issued, the latter appears as the customer and the former as the recipients;

6. They are shipped from the taxpayer's facilities in ... directly to the United States, Australia or South Africa, and transported in its name and at its expense, without any reference to I... appearing in the transport and customs documentation, of any kind;

7. Transport expenses are borne by A... and customs clearance expenses as well;

8. The same occurs when there are returns: the taxpayer charges the expenses to the recipient thereof, not to the entity to whom they were invoiced (I...), as would be expected in a normal commercial relationship;

9. In the purchase orders exhibited by the taxpayer there is no signature of any responsible person or employee of I..., and a purchase order has even been detected (intended for A...U) in which direct shipment of merchandise to a customer of A...U in Canada is requested, a customer which, on the face of it and under normal conditions, I... would not know;

10. There are foreign payment orders received by the taxpayer (relating to transactions whose recipient was A...U) where I... appears as the coordinator, but its address appears in the USA, at the seat of A...U (...), and they originate from the bank with which A...U works, J...; A...U confirmed to the Tax and Customs Authority through the US tax authorities, that I... used A...U's address to receive correspondence from the bank account it possessed with the American bank J...;

11. Several transfers ordered directly by A... Australia were received and recorded as receipts from client I..., in these cases, whoever is paying for the merchandise is its effective recipient and not the entity that appears in the invoices as the customer;

12. The taxpayer received payment orders in the name of I... that relate to invoices intended for A... SA and indicate in the respective detail the number of the corresponding invoices issued by I... to A... South Africa, which proves that the entity actually making the payment is not I..., but rather A...SA, for otherwise such mention would not make sense;

13. A merchandise shipment was discounted in which A...U appears as the drawer, despite relating to an invoice issued to I...; subsequently, a transfer ordered by I... was received in that same amount and relating to the same invoice;

14. Despite not having direct commercial relationships with A... U, A... A and A... SA, A... charged them monthly management fees, R&D fees and quality control fees;

15. In turn, A... U also charges the taxpayer monthly with marketing expenses, telephone, accommodation and website design, trips to the USA, advertising and trademark use, and A... A with administrative expenses, entertainment, travel, telephone and vehicle-related charges;

16. The taxpayer issued in the 2009 fiscal year credit notes to the company registered in K... relating to returns of stoppers that did not pass the TCA test and were invoiced in 2007 and 2008, but did not exhibit any transport or customs documents proving such returns.

17. A...'s management states that K... operated as the Group's purchasing center before I... and was replaced by it in 2009, but is unaware of the reason for its replacement and whether it continues to be active or not; the tax authorities of Bermuda confirmed to them that this company was merged into another and no longer exists, and A... U informed them, through the US tax authorities, that it filed its last tax return on 2009-05-13;

18. In the taxpayer's accounting, K...'s accounts were all settled at the end of 2009 through internal documents, as a counterpart to A... Group SARL's third-party account, which, in turn, made bank transfers that made it possible to almost eliminate that debt balance;

19. The A... Group's parent company, A... Group, Ltd, was registered in Bermuda until 16 November 2009 and then moved to Luxembourg, remaining the sole owner of I..., from whom it received €370,000.00 in dividends in the 2009 fiscal year;

20. A...'s management states that I... functions as a purchasing center of the Group for the USA, Australia and South Africa, but is unaware of the structure installed in Ireland that it possesses to exercise its activity;

21. At the Group's official website (at the address www...com) there is no reference to I..., which does not even appear as a company belonging to it;

22. I... is registered in Ireland for engaging in the activity of Wholesale Trade of Wood, Construction Materials & Sanitary Equipment since 2008-11-06;

23. The facilities at I...'s address, located in..., in Dublin, correspond to a virtual office, a service marketed by L... company consisting of receipt of correspondence and telephone calls associated with an address of choice, provided to clients located anywhere in the world, who merely wish to formally establish their company there, not actually engage in any activity there;

24. I... was incorporated in Ireland on 2007-09-27 by the consulting/law firm M... (which has its office in...), with N... and O... (both solicitors) being appointed administrators; the address of exercise of the activity and administration indicated was the registered office of the said consulting/law firm;

25. According to the financial statements obtained through the Irish tax authorities, the sole supplier of I... in 2009 was A..., and its sole customers were A...U, A...A and A...SA, to whom all of its Business Volume of €14,485,091.00 was destined, having calculated a gross margin on cost of 69.51%;

26. It has only one female employee, P..., who has held the position of director since 2008-11-06 jointly with E... and, from 2009-03-26, also with D... (president of the Board of Directors of A...);

27. P... was listed until 2012-11-07 in the Tax Authority's register as resident in Portugal, having a tax domicile at Street ..., no. ..., ..., ...-... Algés, being the owner of the property located at that address, having obtained a mortgage for acquisition of that property in 1999, which was declared as the taxpayer's permanent home;

28. In the financial statements of I... are recorded incomes paid to P... in 2009 and subsequent years; simultaneously it was verified that in the same year she earned incomes in Portugal of category A paid by the group company Q..., the only entity that has been paying her incomes since 2001;

29. Notified on 2012-10-17, she came to allege being a resident of the Republic of Ireland since 2009, and working at I... as resident director; however, she only changed her tax domicile to Ireland at the time, following that notification;

30. A...U is a company registered in the State of California, created on 1981-03-13, 100% owned by A...U Holding Company, whose president is D... and which has its office in ..., California;

31. A...U confirmed having received merchandise shipments from A..., invoiced to I..., having forwarded supporting documentation, which made it possible to attest that there is a direct and unequivocal relationship between the invoicing A...–I...– A... USA, verifying that there are always two invoices issued for each actual goods transaction that occurs: the dates of the invoices, the goods, references and quantities are exactly the same, varying only in price; the payments made to the taxpayer by I... are ordered from the USA and come from a bank account opened in the name of that company in the same American bank with which A...U works, with the latter even having provided proof thereof, which obviously it only has access to because they were executed by it;

32. Ireland has frequently been criticized for presenting attributes similar to a tax haven, namely a very low taxation rate – 12.5% – in the corporate income tax sphere; possessing a clearly more favorable tax regime, it should pay attention to the economic substance of the activity of companies that choose to establish themselves there;

33. In the Cadbury Schweppes case, ruled by the CJEU in 2006, it was established that measures restricting the principle of freedom of establishment may be admitted, but only and solely in situations where the subsidiary does not exist physically in terms of installations, personnel and equipment, which denote the existence of an establishment intended to pursue an effective economic activity.

III.1.3.4. Legal Framework

Taking into account the provision of the Corporate Income Tax Code, the corrections to be proposed shall follow the following legal framework:

Article 20(1)(a) stipulates: "Profits are considered those resulting from operations of any nature, as a result of a normal or occasional action, basic or merely accessory, namely those relating to sales or provision of services (...)"

In this circumstance, the profits attributed to the Irish company I..., Ltd in the 2009 fiscal year shall be considered as profits of the taxpayer, to the extent that it was proven that this entity does not have economic substance nor commercial justification, having been used solely for tax purposes, without any effective intervention in the transactions that occur between the taxpayer and the Group companies that it supplies, A... USA, A... Australia and A... South Africa.

It should be emphasized that, in our view, the operations between the taxpayer and I... Ltd are not subject to analysis under the transfer pricing regime contained in Article 63 of the CIRC (which, as we know, has as its paradigm the principle of arm's length, gathering today broad international consensus for understanding that its adoption makes it possible not only to establish parity in tax treatment between companies integrated in international groups and independent companies, but also to neutralize certain tax evasion practices and ensure the consequent protection of the domestic tax base), by virtue of not being actual economic operations.

In reality, Article 63(1) establishes that: "In commercial operations, including in particular operations or series of operations on goods, rights or services, (...), carried out between a taxpayer and any other entity, subject or not to Corporate Income Tax, with which it is in a situation of special relationships, terms or conditions substantially identical to those that would normally be contracted, accepted and practiced between independent entities in comparable operations must be contracted, accepted and practiced." Now, as we have seen, the commercial operations between the taxpayer and I... Ltd did not, in fact, take place, but rather occurred (and continue to occur) between the taxpayer and A... USA, A... Australia and A... South Africa, its real customers.

III.1.3.5. Calculation of the Value to be Considered as Profit

Having been provided by A... USA (through the respective tax authorities) with the lists of invoices issued to A...U by I... in 2009 and of invoices issued to I... by its suppliers with reference to I...'s invoice to which they relate, it was possible to compile the data and calculate an overall difference of €1,908,524.06 between the amount invoiced by the taxpayer to I... and the amount invoiced by this to the customer and actual recipient of the goods, A... USA.

This difference corresponds precisely to the profits that were, through this tax planning scheme, attributed to the Irish company, when, in reality, they relate to the taxpayer, and should therefore be taxed in its sphere.

Given the foregoing, A... did not cause profits to concur in the determination of its Taxable Result for the 2009 fiscal year in the amount of €1,908,524.06, such that the Taxable Result of this fiscal year should be increased by these profits incurred, but attributed to the Irish company I.... Ltd.

• In the Tax Inspection Report, the Tax and Customs Authority compiled the corrections proposed as follows:

III.1.4. Corrections Proposed to the Taxable Result of the 2009 Fiscal Year

In light of the corrections proposed in Chapters III.1.1.4.3, III.1.2.3 and III.1.3.4 of this Report, the Taxable Result of the 2009 fiscal year, in the amount of €26,158.96, shall amount to €2,363,687.36, as demonstrated:

[Table of corrections - specific amounts visible in original as approximately:

• Taxable Result: €26,158.96

• Corrections totaling €2,337,528.80

• New Taxable Result: €2,363,687.36]

• Following notification of the draft Tax Inspection Report, the claimant stated, in sum, the following:

A. Regarding the financing costs of A..._3_Raw Materials, Limited Liability Company:

• The disregard of financial costs is inadmissible because none of the financings obtained by A... from third parties (and with which it incurred costs for interest, bank commissions and stamp duty in 2009) was intended to finance A... 3;

• The analysis of the financings granted to A... 3 compared with the cash flows relating to customer receipts demonstrates that none of these financings were made with recourse to borrowed capital (attaching demonstrative table);

• The criterion used by the Tax Authority to disregard the financial costs actually borne by applying a rate calculated with reference to the total financings existing in 2009 is devoid of any legal basis, ignoring the fact that there were no financings obtained by A... for granting credit to A... 3, and the existence of customer receipts in an amount substantially superior to the financings granted;

B. Regarding non-compliance with the principle of periodization of exercises:

• The taxpayer recognizes that the costs in question should, in compliance with the provision of Article 18 of the CIRC, have been recorded in the year in which the merchandise return occurred: 2008 and not in 2009;

• However, this untimely recording of costs in no way prejudiced the Public Treasury, since the taxable matter of the year 2008 remained unduly elevated; the principle of periodization of exercises must be countered by the principle of justice, such that the correction sought by the Tax Authority, if not accompanied by the corresponding favorable correction to A... regarding the year 2008, would result in a flagrant injustice;

• Attached are documents numbers 1, 2, 3 and 4, which prove the actual return of the merchandise in question, which occurred at the end of 2008 regarding credit notes numbers .../91... and .../91..., both issued in 2009.

Regarding the omission of sales profits to A... USA DAL

• I... Ltd is a real company with actual existence (having its own employee and leased facilities in an office center), which, within the A... business group, acquires raw materials and merchandise from various entities;

• A... has no corporate control over I..., therefore could never instrumentalize a company it does not control, nor derive any patrimonial benefit from a company whose dividends would never be distributed to it (and also would never be to C...U Holding, Inc, which indirectly controls A..., since it does not participate, directly or indirectly, in the capital of I...);

• The US tax authorities confirmed that the counterparty of A... USA in the commercial transactions in question was I... and not A...;

• It is not legitimate for the Tax Authority to draw any conclusion from the fact that merchandise is delivered directly to I...'s customers about the supposed non-existence of that company, since that is a common commercial practice;

• I...'s purchase orders are received via email and signed by an administrator of A..., then digitalized and returned to I... by the same means, it being completely false the assertion that A... ordered merchandise from itself sold to I...; attached are documents 5 to 72, which consist of POs (purchase orders) to A... made in 2009;

• Alleges the existence of 54 telephone calls and 23 written messages for contact with I...'s employee in Ireland during 2009, which inequivocally reveal the existence of a recurrent and effective commercial relationship, attaching documents 73 to 138 – detailed statements of S... issued to A... in 2009;

• Alleges the existence of 54 telephone calls and 23 written messages for contact with I...'s employee in Ireland during 2009, which inequivocally reveal the existence of a recurrent and effective commercial relationship, attaching documents 73 to 138 – detailed statements of S... issued to A... in 2009;

• Further adds that there was a visit by a representative of A... to Ireland in 2009 (R...) to visit I..., attaching a copy of an invoice issued by a travel agency, in which are charged to A... an airline ticket to Dublin and accommodation in a hotel between December 14 and 16, 2009 (document 139);

• Concludes by stating that, regarding the quantification of I...'s profits that the Tax Authority intends to attribute to A...:

• The profits realized in I...'s sales to A... USA are unknown to A...;

• The Tax Authority admits that I... did not have as its sole supplier in 2009 A...;

• The information provided by the US tax authorities regarding the supplies made by I... to A... USA has no evidentiary value because it is a list unaccompanied by any supporting documents;

• The US tax authorities are not competent to provide information about a company resident in Ireland.

• In the Tax Inspection Report, the following was stated regarding the questions raised by the claimant in exercise of the right of response:

A. Regarding the financing costs of A... 3 Raw Materials, Limited Liability Company:

The financing granted to A... 3 in the 2009 fiscal year (in the amount of €378,501.26) effectively translates, for A..., into a provision of substantial monetary means without any remuneration, which, although located outside the scope of its corporate purpose, does not cease to constitute a credit granting activity, an activity that should naturally be income-generating, like the other activities exercised by the company.

The argument invoked by the taxpayer to justify the non-charging of interest does not hold (as explained in Chapters II.3.8 and III.1.1 of this Report) basically because, in the case of financings granted to a third party, they are in no way indispensable for the realization of profits or for the maintenance of the source of income of the taxpayer. This was moreover recognized by A... itself when, from 2010 onwards, and in all subsequent fiscal years, it began to charge interest to A... 3 at a market interest rate.

Finally, with respect to the alleged existence of cash flows relating to customer receipts of an amount much greater than the financings granted to A... 3, it does not appear to us that it is possible to establish any connection between them. In reality, the taxpayer itself cannot do so either, it merely invokes this fact.

This is explained by the characteristic of fungibility of money: it is not possible to ensure that it was precisely the monies received from customers that were applied to finance A... 3, with verification rather of significant bank indebtedness on the part of the taxpayer, which would probably be lower if those financings had not occurred in the same way, the financial costs that such indebtedness entails would naturally be mitigated with the profits that such credit granting did not generate in 2009, and came to generate in subsequent fiscal years. This is also the direction of the case law cited in Chapter III.1.1 of this Report.

B. Regarding non-compliance with the principle of periodization of exercises

Article 45(1) of the General Tax Law provides that the right to assess taxes expires within four years, in the case of periodic taxes, counted from the end of the year in which the taxable event occurred. Now, given that, as the taxpayer itself recognizes (and was reported in Chapters II.3.11 and III.1.2 of this Report), these are costs attributable to the 2008 fiscal year, a fiscal year that is outside the legal period of limitation, it is not currently possible to make any correlative correction to 2008. We are in this case faced with a legal requirement, which moreover constitutes one of the fundamental guarantees of taxpayers in our legal system, preventing the assessment of taxes beyond 4 years following the fiscal year in which the taxable event occurred.

Already regarding the 2009 fiscal year, it is a legal imperative of the Tax Authority to comply with the provisions of Articles 18(1) and (2) of the CIRC, complying with the principle of periodization of exercises.

C. Regarding the omission of sales profits to A... USA Inc.:

As detailed in Chapters II.3.9 to II.3.13 and III.1.3 of this Report, the company resident in Ireland I... Ltd is a regularly constituted company compliant with its tax obligations, otherwise there would be no point in its existence. It was incorporated by an Irish law firm in 2007, and has had since late 2008 as administrators E... (also administrator of A...) and P... (an employee of a group company, who was proven to be resident in Portugal at least until November 2012), with its registered office located in a virtual office in Dublin. It has no production or commercial facilities, does not carry out any physical transactions of goods, nor provides any type of services.

The information contained in I...'s financial statements and confirmed by the US tax authorities is that A... was the sole supplier of merchandise to I... in 2009, with only some debit notes from group companies relating to service provision, with no significant expression.

It is naturally not by the fact that merchandise is delivered directly to A... USA that the operations between the taxpayer and I... are questioned, but rather by the fact that all the evidence gathered points in the direction that they are not effective economic operations. The argument presented by the taxpayer that it could never instrumentalize a company it does not control is not valid, since the sole shareholder of I... – A... Group Ltd – indirectly controls A... through A...U SGPS, Lda, which holds 36.5%.

Contrary to what the taxpayer asserts, the A... group, namely its parent company, received dividends from I... in 2009, thereby obtaining clear patrimonial benefits from its existence. It should also be noted that there are special relationships between A... and I..., since both entities have an administrator in common, E..., as was confirmed to us by the Irish tax authorities.

The circumstance that purchase orders are found signed only by a person responsible for the supplier and contain no signature or reference to a person responsible for the customer is not common commercial practice; on the other hand, if their sending is always carried out by email, it would not require any signature in the first place.

Having carried out an internet search regarding I..., it was once again concluded that it does not have any official website (as we saw, the A... group does not include it on its website), nor is it possible to find any fixed telephone number associated with it. The detailed statements of S... now presented by the taxpayer indicate only an Irish telephone number: ..., for which mobile text messages are noted as having been sent. It was possible to determine that this number corresponds to a mobile telephone operated by T... Ireland (prefix 87), but not who is the person or entity to whom it is assigned. In any case, it is always a mobile device which, as such, could be used anywhere in the world, despite belonging to an Irish network and operator. In the global world in which we live, such contacts prove little or nothing, and, given the dimension that operations with I... possess in A...'s Business Volume, if they had occurred, they would be manifestly insufficient. The same shall be said regarding the alleged visit made during two days by an A... employee.

To conclude, regarding the information provided by the US tax authorities, it is important to clarify that:

• These are data provided directly by A... USA itself;

• They encompass all transactions relating to the merchandise in question: from A... to I... and from I... to A... USA, information that would never be known to the customer under normal circumstances;

• The quantities and amounts of the operations were confirmed by several invoices sent and which are contained in Annexes 70 to 72 of this Report.

In sum, the taxpayer, neither during the inspection, nor now in the exercise of the right of response, managed to prove the actual substance of the substantial transactions carried out with I... in 2009.

• By order of 29-1-2013 issued on the first page of the Tax Inspection Report, the Director of Finance of..., in a substitute capacity, expressed agreement with the corrections proposed in that Report, in the total amount of €2,337,528.80, being €1,908,524.06 for profits attributed to a third party, €97,278.08 for financial costs not accepted for tax purposes and €331,726.66 for non-compliance with the principle of periodization of exercises;

• The said correction of the taxable profit of the claimant for 2009 in the total amount of €2,337,528.80 resulted in the establishment of a taxable profit of €2,363,687.36 and a taxable income for the fiscal year in the amount of €2,121,580.30, based on the deduction (ex officio) of €215,948.50 of transferable tax losses from prior fiscal years – see page 76 of the Final Tax Inspection Report;

• Following the corrections referred to, the additional Corporate Income Tax assessment no. 2013..., dated 05-12-2013, was drawn up, in the amount of €590,394.46, which includes compensatory interest and the statement of account settlement no. 2013..., with a voluntary payment deadline of 03-02-2014 (document attached with the request for arbitral pronouncement, whose contents are reproduced);

• In 2009, I..., Ltd had leased office facilities in the "L..." office space center in..., Dublin, D2 (document no. 390 and http://www...);

• I..., Ltd made payments to "P..." with reference to the months of February to December 2009, with the indications "payroll" and "refund of expenses" (document no. 390 attached with the request for arbitral pronouncement, whose contents are reproduced);

• I..., Ltd paid T... Ireland for a mobile telephone account with the number ... used by P... (document no. 390, attached with the request for arbitral pronouncement, whose contents are reproduced);

• Throughout 2009, from a mobile telephone used by the claimant several telephone calls were made and written messages sent to the mobile telephone number referred to in the previous subsection (documents nos. 314 to 379, attached with the request for arbitral pronouncement, whose contents are reproduced);

• In December 2009, an employee of the claimant went to Ireland (document no. 380, attached with the request for arbitral pronouncement, whose contents are reproduced);

• On 19-12-2013, the claimant paid the sum of €517,960.15, relating to the Corporate Income Tax assessment, with the payment of compensatory interest being waived under the Exceptional Regime for Regularization of Tax and Social Security Debts, approved by Decree-Law no. 151-A/2013, of 31 October;

• On 05-05-2014, the claimant filed the request for constitution of the arbitral tribunal that gave rise to the present proceedings.

2.2. Facts Not Proven

There are no facts relevant to the decision of the case that have not been proven.

2.3. Substantiation of the Factual Matter

The substantiation of the decision on the factual matter is based on the Tax Inspection Report and the documents attached with the request for arbitral pronouncement.

3. Matters of Law

3.1. Questions for Decision

The Tax and Customs Authority conducted an inspection of the claimant relating to the year 2009, which resulted, in the matter of Corporate Income Tax, in a correction of the taxable profit in the total amount of €2,337,528.80, consisting of:

a) €1,908,524.06 for profits that were attributed to I..., Ltd;

b) €97,278.08 for financial costs not accepted for tax purposes;

c) €331,726.66 for non-compliance with the principle of periodization of exercises.

The claimant believes that none of these corrections should be made.

Each of these questions shall be examined in the order indicated by the claimant.

3.1.1. The Question of Profits Relating to I..., Ltd

The Tax and Customs Authority understood it should make a correction in the amount of €1,908,524.06 to the claimant's taxable income, by understanding that it should be attributed profits from products sold by the claimant to A... USA (A...U), A... Australia (A...A) and A... South Africa (A...SA), but invoiced to I..., Ltd.

In the view of the Tax and Customs Authority, in sum, the profits attributed to the Irish company I..., Ltd in the 2009 fiscal year should be considered as profits of the claimant, to the extent that it was proven that this entity does not have economic substance nor commercial justification, having been used solely for tax purposes, without any effective intervention in the transactions occurring between the claimant and the Group companies it supplies, A... USA, A... Australia and A... South Africa.

The facts that led the Tax and Customs Authority to formulate that conclusion were the following, in sum:

– Ireland constitutes a fiscally attractive jurisdiction in Europe;

– The Taxable Result of the claimant for the 2009 fiscal year amounted to only €26,158.56, and the Net Result determined was positive but very small (€20,402.45);

– Of the total invoiced intra A... Group by the claimant in 2009 – approximately €15 million – €12.7 million went to I... (approximately 85%);

– The claimant alleges that it acts as an industrial unit ensuring the production of stoppers for the Group, in which commercial functions are concentrated in other entities, namely I..., A... Spain and A... France, but it appears that the disposal of A...'s production occurs directly, both in the European market and in the US, Australia and South Africa markets, with the only difference being that in the first market the products are invoiced to the respective customers, and in the second markets the products are invoiced to I...;

– The products manufactured by A... are sold to A... USA (A...U), A... Australia (A...A) and A... South Africa (A...SA), but invoiced to I...: in the invoices issued, the latter appears as the customer and the former as the recipients;

– They are shipped from the claimant's facilities in ... directly to the United States, Australia or South Africa, and transported in its name and at its expense, without any reference to I... appearing in the transport and customs documentation, of any kind;

– Transport expenses are borne by A... and customs clearance expenses as well;

– The same occurs when there are returns: the taxpayer charges the expenses to the recipient thereof, not to the entity to whom they were invoiced (I...), as would be expected in a normal commercial relationship;

– In the purchase orders exhibited by the taxpayer there is no signature of any responsible person or employee of I..., and a purchase order has even been detected (intended for A...U) in which direct shipment of merchandise to a customer of A...U in Canada is requested, a customer which, on the face of it and under normal conditions, I... would not know;

– There are foreign payment orders received by the taxpayer (relating to transactions whose recipient was A...U) where I... appears as the coordinator, but its address appears in the USA, at the seat of A...U (...), and they originate from the bank with which A...U works, J...; A...U confirmed to the Tax and Customs Authority through the US tax authorities, that I... used A...U's address to receive correspondence from the bank account it possessed with the American bank J...;

– Several transfers ordered directly by A... Australia were received and recorded as receipts from client I..., in these cases, whoever is paying for the merchandise is its effective recipient and not the entity that appears in the invoices as the customer;

– The taxpayer received payment orders in the name of I... that relate to invoices intended for A... SA and indicate in the respective detail the number of the corresponding invoices issued by I... to A... South Africa, which proves that the entity actually making the payment is not I..., but rather A...SA, for otherwise such mention would not make sense;

– A merchandise shipment was discounted in which A...U appears as the drawer, despite relating to an invoice issued to I...; subsequently, a transfer ordered by I... was received in that same amount and relating to the same invoice;

– Despite not having direct commercial relationships with A... U, A... A and A... SA, A... charged them monthly management fees, R&D fees and quality control fees;

– In turn, A... U also charges the taxpayer monthly with marketing expenses, telephone, accommodation and website design, trips to the USA, advertising and trademark use, and A... A with administrative expenses, entertainment, travel, telephone and vehicle-related charges;

– The taxpayer issued in the 2009 fiscal year credit notes to the company registered in K... relating to returns of stoppers that did not pass the TCA test and were invoiced in 2007 and 2008, but did not exhibit any transport or customs documents proving such returns;

– A...'s management states that K... operated as the Group's purchasing center before I... and was replaced by it in 2009, but is unaware of the reason for its replacement and whether it continues to be active or not; the tax authorities of Bermuda confirmed to them that this company was merged into another and no longer exists, and A... U informed them, through the US tax authorities, that it filed its last tax return on 2009-05-13;

– In the taxpayer's accounting, K...'s accounts were all settled at the end of 2009 through internal documents, as a counterpart to A... Group SARL's third-party account, which, in turn, made bank transfers that made it possible to almost eliminate that debt balance;

– The A... Group's parent company, A... Group, Ltd, was registered in Bermuda until 16 November 2009 and then moved to Luxembourg, remaining the sole owner of I..., from whom it received €370,000.00 in dividends in the 2009 fiscal year;

– A...'s management states that I... functions as a purchasing center of the Group for the USA, Australia and South Africa, but is unaware of the structure installed in Ireland that it possesses to exercise its activity;

– At the Group's official website (at the address www...com) there is no reference to I..., which does not even appear as a company belonging to it;

– I... is registered in Ireland for engaging in the activity of Wholesale Trade of Wood, Construction Materials & Sanitary Equipment since 2008-11-06;

– The facilities at I...'s address, located in..., in Dublin, correspond to a virtual office, a service marketed by L... company consisting of receipt of correspondence and telephone calls associated with an address of choice, provided to clients located anywhere in the world, who merely wish to formally establish their company there, not actually engage in any activity there;

– I... was incorporated in Ireland on 2007-09-27 by the consulting/law firm M... (which has its office in...), with N... and O... (both solicitors) being appointed administrators; the address of exercise of the activity and administration indicated was the registered office of the said consulting/law firm;

– According to the financial statements obtained through the Irish tax authorities, the sole supplier of I... in 2009 was A..., and its sole customers were A...U, A...A and A...SA, to whom all of its Business Volume of €14,485,091.00 was destined, having calculated a gross margin on cost of 69.51%;

– It has only one female employee, P..., who has held the position of director since 2008-11-06 jointly with E... and, from 2009-03-26, also with D... (president of the Board of Directors of A...);

– P... was listed until 2012-11-07 in the Tax Authority's register as resident in Portugal, having a tax domicile at Street ..., no. ..., ..., ...-... Algés, being the owner of the property located at that address, having obtained a mortgage for acquisition of that property in 1999, which was declared as the taxpayer's permanent home;

– In the financial statements of I... are recorded incomes paid to P... in 2009 and subsequent years; simultaneously it was verified that in the same year she earned incomes in Portugal of category A paid by the group company Q..., the only entity that has been paying her incomes since 2001;

– Notified on 2012-10-17, she came to allege being a resident of the Republic of Ireland since 2009, and working at I... as resident director; however, she only changed her tax domicile to Ireland at the time, following that notification;

– A...U is a company registered in the State of California, created on 1981-03-13, 100% owned by A...U Holding Company, whose president is D... and which has its office in ..., California;

– A...U confirmed having received merchandise shipments from A..., invoiced to I..., having forwarded supporting documentation, which made it possible to attest that there is a direct and unequivocal relationship between the invoicing A...–I...– A... USA, verifying that there are always two invoices issued for each actual goods transaction that occurs: the dates of the invoices, the goods, references and quantities are exactly the same, varying only in price; the payments made to the taxpayer by I... are ordered from the USA and come from a bank account opened in the name of that company in the same American bank with which A...U works, with the latter even having provided proof thereof, which obviously it only has access to because they were executed by it;

– Ireland has frequently been criticized for presenting attributes similar to a tax haven, namely a very low taxation rate – 12.5% – in the corporate income tax sphere; possessing a clearly more favorable tax regime, it should pay attention to the economic substance of the activity of companies that choose to establish themselves there;

– In the Cadbury Schweppes case, ruled by the CJEU in 2006, it was established that measures restricting the principle of freedom of establishment may be admitted, but only and solely in situations where the subsidiary does not exist physically in terms of installations, personnel and equipment, which denote the existence of an establishment intended to pursue an effective economic activity.

3.1.1.1. The Claimant's Position

The claimant defends, on this question, in sum:

– The correction determined by the Tax Administration under Article 20(1)(a) of the CIRC is based on the understanding that the sales of merchandise made by the Irish company I..., LTD to the American company A... USA, INC should be attributed to the claimant;

– The Tax Administration bases this understanding on a subjective judgment regarding the absence of economic substance and commercial justification of I..., LTD, rejecting the actual occurrence of transactions carried out by the claimant with that customer on the basis of (i.) unconfirmed speculation regarding the absence of facilities and activity of I..., LTD, (ii.) generic considerations regarding the content of common commercial practice in matters of signing of purchase orders and (iii.) an inadmissible prejudice regarding companies established in the Republic of Ireland, which it pejoratively qualifies as a country of low taxation level;

– The Tax Administration does not minimally demonstrate the supposed inactivity of I..., LTD nor the falsity of the merchandise sales made to it by the claimant, and the burden of proof inherent in such a conclusion would always fall on the Tax Administration;

– Additionally, the inadmissibility of the Tax Administration's position regarding the supposed instrumentalization of I..., LTD by the claimant to allegedly conceal sales profits and reduce the results subject to taxation in Portugal also results from the finding that neither the claimant, nor the companies that control it, hold control over the supposedly instrumentalized I..., LTD, reducing the Tax Administration's thesis to a set of unfounded allegations and without the slightest factual corroboration or even certain formulation;

– The Tax Administration does not contest that the price and other negotiating conditions practiced by the claimant in its sales to I..., LTD corresponded to the terms that would be practiced between independent entities, in an arm's length context, which is why the supposed diversion of profits from Portugal to Ireland on which the Tax Administration bases its claim is not even demonstrated;

– If the Tax Administration intended to question the terms practiced by the claimant in the sales made to I..., LTD, invoking any diversion of tax base from Portugal to Ireland, it should have conducted an examination of the situation in matters of transfer pricing, in light of Article 58 of the CIRC, a task which, however, the Tax Administration consciously chose not to develop, alleging for this purpose that the sales in question did not actually occur;

– If the Tax Administration intended to adopt