Summary
Full Decision
ARBITRAL DECISION
A..., SGPS, S.A. (which was also previously denominated "B..., SGPS, S.A." and "C..., SGPS, S.A."), NIPC..., with registered office at Rua..., no...., ..., ...-... Lisbon, requested arbitral pronouncement on the rejection of an administrative review petition filed by it, relating to an additional assessment of Corporate Income Tax (IRC) for 2011 (assessment no. 2014...) and statement of account no. 2014..., seeking the annulment of that decision and the consequent partial annulment of the assessment, as well as the refund of tax unduly paid (not reimbursed), together with indemnity interest.
The administrative review petition was rejected by order dated 09/03/2015, from the Director of the UGC, of which the Petitioner was notified through official letter no...., dated 10/03/2015, sent by registered mail of the same date.
The Petitioner filed its Arbitral Appeal on 09/06/2015, accepted by CAAD on 11/06/2015.
The Respondent is AT (Autoridade Tributária e Aduaneira - Tax and Customs Authority).
The Petitioner opted to designate an arbitrator, indicating for such functions Mr. Prof. Dr. António Martins. The Respondent designated as arbitrator Mr. Dr. Rodrigo de Castro, with the presiding arbitrator, Mr. Prof. Dr. Rui Duarte Morais, designated by consensus between them.
The arbitral tribunal was constituted on 21/08/2015.
The AT presented its Response in due time.
The meeting referred to in art. 18 of the RJAT was waived.
With no evidence to be produced, oral arguments took place at CAAD on 03/12/2015.
I - Report
The Petitioner contests the rejection of the administrative review petition filed by it, relating to the additional assessment of IRC for 2011, insofar as the decision on such petition rejected its claims to: a) annul the reduction, made by AT, of the foreign tax credit for double taxation as provided in articles 90 and 91 of the CIRC, in the amount of € 52,137.17; b) deduction of tax benefits instituted by RFAI 2009 from the state surtax collection and autonomous taxation of the group that it heads; c) carryforward to subsequent fiscal years of tax benefits obtained under RFAI 2009 not deducted as a consequence of the application of article 92 of the CIRC.
The Petitioner further seeks the condemnation of AT to the payment of interest due for the non-refund of the tax it considers to have been assessed in excess.
The Respondent AT sustains the legality of the assessment. We will analyze subsequently, with respect to each of the issues raised, the arguments presented by the parties.
The proceeding is proper and timely, the parties are legitimate and duly represented, there are no nullities or exceptions that need to be addressed.
II - Proved Facts
The following facts are documented as proved, and are relevant for the proper decision of the case:
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In 2011, the Petitioner headed a group of companies to which the Special Regime for Taxation of Groups of Companies (RETGS) was applicable, being therefore a taxable person for IRC relating to that group.
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As a result of internal inspection action, the AT made the following corrections to the tax self-assessed by the Petitioner: a) reduction of the foreign tax credit for double taxation, under articles 90 and 91 of the CIRC, in the amount of € 52,137.17; b) disregard of the deductibility of tax benefits obtained under RFAI from the state surtax collection and autonomous taxation of the group, in the amount of € 381,728.33; c) increase of the tax, relative to that self-assessed, due to adjustments made by invoking the provision of article 92 of the CIRC, in the amount of € 48,984.88.
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The foreign tax credit for double taxation referred to in point 2. a) results from income derived from content transmission rights received by companies "D... S.A." and "E..., S.A." (which are part of the group, subject to RETGS, of which the Petitioner is the parent company), originating in Cape Verde, which were, in that country, subject to withholding at source by application of the rate of 10% to the respective gross value.
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The tax credit resulting from tax benefits provided for in RFAI 2009 was determined in the sphere of company F..., S.A., currently G..., S.A., which also was part of the group, subject to RETGS of which the Petitioner was the parent company.
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Such corrections gave rise to the additional assessment now being contested.
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The additional assessment now being contested gave rise to a tax refund of value lower than that which the petitioner had determined in its tax return.
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The Petitioner timely filed, on 05/01/2015, an administrative review petition against that assessment, which was totally rejected, with such decision being sent, by registered mail, on 10/03/2015.
There are no unproved facts relevant for the proper decision of the case.
III - Deciding on the Merits:
A) Reduction of the Foreign Tax Credit for Double Taxation
The Petitioner seeks the annulment of the reduction, made during inspection, of the foreign tax credit for double taxation made by invoking articles 90 and 91 of the CIRC, in the amount of € 52,137.17.
Deciding on the issue:
No disagreement exists as to the qualification of the income in question as royalties.
Given that there was in force, at the date of the facts, a Convention on Double Taxation between Portugal and Cape Verde (approved by Resolution of the National Assembly no. 63/2000), we have that the appraisal of the question should be made in light of the conventional articles, given the hierarchical superiority of norms contained in international conventions relative to those of internal origin, as results from art. 8, no. 2, of the Constitution of the Portuguese Republic.
From the articles of the said Convention directly relevant to the appraisal of the case in analysis are the following norms:
Article 12
Royalties
1 - Royalties arising in one Contracting State and paid to a resident of the other Contracting State may be taxed in that other State.
2 - However, these royalties may also be taxed in the Contracting State from which they arise and in accordance with the legislation of that State, but if the person receiving the royalties is the beneficial owner thereof, the tax so imposed shall not exceed 10% of the gross amount of the royalties.
The competent authorities of the Contracting States shall determine, by mutual agreement, the manner of applying this limit.
Article 23
Methods (of elimination of double taxation)
1 - a) When a resident of one Contracting State obtains income which, in accordance with the provisions of this Convention, may be taxed in the other Contracting State, the first State shall deduct from the income tax of that resident an amount equal to the income tax paid in that other State. The amount deducted shall not, however, exceed the fraction of the income tax, calculated before the deduction, corresponding to the income that may be taxed in that other State.
We begin by noting that, with respect to royalties, the solution adopted in the CDT Portugal – Cape Verde (and also in the generality of conventions concluded by Portugal) departs from that advocated in the OECD Model, inasmuch as this establishes the rule of exclusive competence of the state of residence to tax this type of income[1].
Thus, the problem of the amount of the tax credit (of the value to be deducted by the state of residence, relative to the tax paid in the source state) does not arise within the framework of the OECD Model, regarding royalties. This finding assumes some relevance in the analysis of the concrete case, since the Commentary on no. 1 of Article 23-B of the OECD Model Convention, on which the AT relies to support its understanding, cannot be understood as referring to the case of royalties, for the simple reason that, in the economy of this Model Convention, no issue of international double taxation arises with respect to these income.
The "balance" between the right to taxation of the source state and that of the state of residence, when involved are conventions such as that concluded with Cape Verde – those which establish the cumulative competence of the two contracting states to tax royalties - is achieved as follows: the source state will tax the gross income at a rate which, at most, cannot exceed a conventionally fixed value (in this case, 10%) and the state of residence will deduct the value of this collection from that of its tax, calculated on a worldwide basis, which includes the gross income obtained in the other country (i.e., the income actually obtained increased by the tax paid there).
Precisely because it is thus that "many of the co-contracting states, when major exporters of technology, seek the inclusion of a low withholding tax rate, advancing the argument that they bear the deduction of expenses necessary for the production of the good or the birth of the right that gives rise to the royalties[2]".
No doubt seems to exist, therefore, that at least in the case of royalties, the tax paid in the source country, levied on gross income, is deductible from the IRC collection, calculated on the basis of the worldwide income of the taxable person[3], in the determination of which all fiscally relevant expenses are considered, including those incurred by the production of income obtained abroad.
In other words, at least with respect to royalties, the final part of art. 23 of the CDT Portugal - Cape Verde (the amount deducted shall not, however, exceed the fraction of the income tax, calculated before the deduction, corresponding to the income that may be taxed in that other State) will only apply in the unlikely case where the IRC rate applicable to a particular taxpayer is lower than the rate to which the income was subject in the source state: "the maximum deduction is equivalent to the rate of the tax of the state of residence applied to the income obtained in the other state"[4].
This interpretation of the conventional norm is most consistent with the principle of good faith which, under art. 26 of the Vienna Convention on the Law of Treaties, presides over the interpretation of international agreements between states. Portugal and Cape Verde concluded a CDT aiming at the elimination of situations of international double taxation regarding income that a resident in one of these states obtains in the other. The total elimination of international double taxation is the rule, the objective pursued by the parties, whereby it is in this sense that any interpretive doubts regarding the conventional articles should be resolved.
A State which, due to a subsequent alteration of its internal norms[5], intends to unilaterally limit the meaning and objectives of what was agreed with the other contracting state will certainly not be complying with the dictates of good faith.
In the concrete case, we find, in the final part of art. 12 of the Convention Portugal-Cape Verde, a provision somewhat "unusual" in terms of conventional articles: the competent authorities of the Contracting States shall determine, by mutual agreement, the manner of applying this limit.
We can admit that this paragraph reflects an openness of the contracting states to the establishment of special rules in the determination of the tax credit to be applied by the state of residence. Only, such an agreement never existed, whereby the AT does not allege it in supporting its position.
Furthermore, as a second ground of our understanding, only the full deduction of the tax paid in the source state from the collection of tax of the state of residence (tax whose taxable base was calculated taking into account the expenses incurred to obtain income from foreign source) allows full realization of the principle of neutrality in the export of capital that the method of imputation (foreign tax credit) seeks to achieve[6]: the total tax to be paid by the taxable person (the sum of the tax to be paid in the source and residence states) should be equal to the tax it would pay if all of its income originated (source) in the state of residence.
Thus, we consider that in the concrete case, there should be no application of the provision of article 91, no. 1, al. b), not least because its application would partially frustrate the objective of total elimination of double taxation in situations involving Portugal and Cape Verde, the principal objective pursued by the convention subscribed by the two countries.
We cannot, therefore, subscribe to the administrative understanding that the provision of this norm is, without further ado, applicable both in cases of unilateral grant (by Portuguese internal law) of foreign tax credit, and when there exists a CDT[7].
The Petitioner is therefore correct on this issue.
B) Deduction of Tax Benefits Instituted by RFAI 2009 from the State Surtax Collection of the Group
The Petitioner argues, in summary, that, being the state surtax an integral part of the IRC collection, the tax credits determined under RFAI may be deducted up to the value of the state surtax determined by the group (subject to RETGS).
This is because, despite recognizing that IRC strictly speaking and the state surtax have distinct rules of incidence, it understands that their assessment is carried out in a single manner, being done under the terms provided in article 90 of the CIRC, the no. 2 of which stipulates that to the amount determined under the preceding number the deductions provided therein are made (including the deduction relating to tax benefits) and in the order indicated therein, provided that when the special regime for taxation of groups of companies is applicable, the deductions referred to in no. 2 relating to each of the companies are made in the amount determined with respect to the group, under the terms of no. 1.
On the other hand, the AT argues, in summary, that the deduction of RFAI 2009 should only take place with respect to the state surtax determined by the company in the sphere of which the benefit originated and not already to the sum of the state surtax of the various companies that make up the group. This is because – the AT understands - the state surtax is levied, under the terms of no. 1 of art. 87-A of the CIRC, on the individual profit of each of the companies of the group, that is, "the state surtax that the parent company pays does not correspond to a state surtax of the group but rather to the sum of the state surtax determined in each company individually (…) one cannot properly speak of a state surtax of the group but rather of a sum of individual state surtax, despite the parent company being responsible for its payment". "The state surtax thus does not follow the same regime provided in art. 70 of the CIRC for the determination of the taxable profit of the group". "We are faced with the sum of the different state surtax collections of the various companies of the group to which it is sought to deduct a tax benefit generated by a single company of the group".
It is important to begin by examining the applicable legal provisions.
Article 70, no. 1 of the CIRC, in the version in force in 2011, provided: with respect to each of the periods of taxation covered by the application of the special regime, the taxable profit of the group is calculated by the parent company, through the algebraic sum of the taxable profits and tax losses determined in the individual periodic declarations of each of the companies belonging to the group.
On the other hand, art. 87-A of the CIRC, added by Law no. 12-A/2010, of 30/06, stipulated, under the heading State Surtax:
1 - A supplementary tax rate of 2.5% shall be levied on the portion of taxable profit exceeding (euro) 2,000,000 that is subject to and not exempt from corporate income tax determined by taxable persons resident in Portuguese territory who carry on, as their principal activity, a commercial, industrial or agricultural activity and by non-residents with a permanent establishment in Portuguese territory.
2 - When the special regime for taxation of groups of companies is applicable, the rate referred to in the preceding number shall be levied on the taxable profit determined in the individual periodic declaration of each of the companies of the group, including that of the parent company.
3 - The taxable persons referred to in the preceding numbers shall proceed to assess the additional surtax in the periodic tax return referred to in article 120.
It is clear that the legislator expressly provided for the situation of companies subject to RETGS with respect to the state surtax. This tax, notwithstanding its accessory character relative to IRC, was excluded from the scope of application of RETGS, since it does not apply to the overall profit of a group of companies (to the algebraic sum of the taxable profits and tax losses of the companies that compose it), but rather to the taxable profit of each of the companies of the group, including the parent company.
Which is well understood if we consider the objectives of Law 12-A/2010, which "approves a set of additional measures for budgetary consolidation aimed at strengthening and accelerating the reduction of excessive deficit and the control of public debt growth provided for in the Stability and Growth Program (PEC)".
It is evident that the sum of the profits of the companies making up a group will result in an amount greater than that of the algebraic sum of the taxable profits and tax losses of such companies.
It thus results, clearly, from the letter and the ratio of the law, that the general rules of RETGS do not apply to the state surtax, whereby the existence of a group of companies is irrelevant for the purposes of this tax.
Thus, the Petitioner's claim to deduct the tax credit relating to RFAI, of which it is the holder of one of the companies of the group it heads, from the "state surtax collection of the group", is unfounded, because, quite simply, this does not exist, as the AT correctly understands.
C) Deduction of Tax Benefits Instituted by RFAI 2009 from Autonomous Taxation Collection
The Petitioner seeks to deduct the credit resulting from the tax benefit in question from the autonomous taxation collection relating to the fiscal year in question (2011).
To this end it argues, in summary: that autonomous taxation "is IRC" (is part of this tax), relying, for this conclusion, on substantial case law, both from STA and from Arbitral Tribunals (CAAD); that no. 1 of article 90 of the CIRC refers to the final assessment of IRC, which includes the total amount of tax to be paid for this purpose and which includes not only the IRC collection strictly speaking, but also the state surtax and autonomous taxation, as it refers to the assessment of IRC which takes place on the basis of the tax return presented by taxpayers under article 120 of the CIRC, which includes not only the taxable base that will serve as the basis for calculating the collection of IRC strictly speaking, but also the taxable profit from which the state surtax will be calculated in the sphere of each company and the possible expenses to which autonomous taxation will apply.
On the other hand, the AT argues, in summary, that the law does not provide for the possibility of making the deductions provided for in no. 2 of article 90 of the CIRC to the amount due by virtue of autonomous taxation because, if that had been the intention, the legislator would have referred to it expressly, providing that the deductions in question would be made to the amount determined under the preceding number and article 88; that given that autonomous taxation aims to reduce the tax advantage achieved with the deduction from taxable profit of costs to which it applies and also to combat tax evasion which some of these expenses, by their nature, may promote, the tax itself cannot, through the consideration of its amount for the purpose of deducting benefits, constitute a factor of reduction of this reduction of advantage intended and determined by the legislator; that while it is true that autonomous taxation has the nature of IRC, it cannot be overlooked that it taxes expenditure and not income, burdens certain charges incurred by companies and is determined in a manner totally independent of IRC, whereby only the norms that in the IRC Code directly refer to it are applicable to it.
Appreciating:
As to the nature of autonomous taxation as constituting an integral part of IRC, the case law understanding referred to by the Petitioner does not merit any reservations on our part. However, a different question is to know how such understanding projects itself, that is, the nature of autonomous taxation does not, by itself, resolve the issue under analysis.
We will begin by recalling that such case law aimed to answer a concrete question: whether the collection of autonomous taxation was deductible from the collection of IRC, which would happen if "it were not IRC". That is, we cannot draw from this case law the conclusion that autonomous taxation is applicable, for all purposes, the general rules of IRC.
In reality, the differences between what is sought to be taxed via IRC and via autonomous taxation are marked, and, furthermore, the different intent that presides over each of these taxation[8].
Thus, other decisions, to which the Petitioner also refers, made clear that autonomous taxation does not share some of the essential characteristics of IRC, namely that it should be regarded as a non-periodic tax[9].
Established that the answer to the question sub judice does not directly result from the nature of autonomous taxation, whether these "are or are not IRC", it is important to recall the legal provisions in question, in the wording in force in 2011.
Articles 1, 2 and 6 of article 90 of the CIRC provided:
1 — The assessment of IRC takes place in the following terms:
a) When the assessment is to be made by the taxable person in the declarations referred to in articles 120 and 122, it is based on the taxable base contained therein;
b) (…)
c) (…)
2 — To the amount determined under the preceding number the following deductions are made, in the order indicated:
a) That corresponding to double taxation internationally;
b) That relating to tax benefits;
c) That relating to the special payment on account referred to in article 106;
6 — When the special regime for taxation of groups of companies is applicable, the deductions referred to in no. 2 relating to each of the companies are made in the amount determined with respect to the group, under the terms of no. 1.
On the other hand, nos. 1 to 3 of art. 3 of Law no. 10/2009, of 10 March, which instituted RFAI 2009, provide as follows:
Tax Incentives
1 - Tax incentives subject to IRC resident in Portuguese territory or having a permanent establishment therein, which carry on as their principal activity a commercial, industrial or agricultural activity covered by no. 1 of the preceding article which make, in 2009, investments considered relevant, are granted the following tax benefits:
a) Deduction from the IRC collection, and up to 25% thereof, of the following amounts, for investments made in regions eligible for support under the incentives with a regional purpose:
i) 20% of the relevant investment, for investment up to the amount of (euro) 5,000,000;
ii) 10% of the relevant investment, for investment exceeding (euro) 5,000,000 in value;
b) Exemption from municipal property tax, for a period of up to five years, with respect to properties of their ownership which constitute relevant investment;
c) Exemption from municipal tax on onerous transfers of real property with respect to acquisitions of properties which constitute relevant investment;
d) Exemption from stamp duty with respect to acquisitions of properties which constitute relevant investment.
2 - The deduction referred to in paragraph a) of the preceding number is made in the assessment relating to the period of taxation commencing in 2009.
3 - When the deduction referred to in the preceding number cannot be made in full due to insufficient collection, the amount still not deducted may be done so, under the same conditions, in the assessments of the four following fiscal years.
Having these norms in view, it is important to know whether the amount of autonomous taxation can be understood as IRC collection for the purposes of this tax benefit.
Transcribing, with due respect, from CAAD decision no. 219/2015-T[10], we will say: "Thus, the question that interests us to resolve, is, regardless of the nature of the tax to which autonomous taxation refers, to know whether the amount of autonomous taxation is "determined under article 90 of the CIRC", because if it is, it must be concluded that, to determine the limit of deduction, regard is had to the collection coming from autonomous taxation.
Article 90 of the CIRC refers to the forms of assessment of IRC, by the taxable person or by the Tax Authority, applying to the determination of the tax due in all situations provided for in the Code, including additional assessment (no. 10).
For this reason, it also applies to the assessment of the amount of autonomous taxation, which is determined by the taxable person or by the Tax Authority under article 90 of the CIRC, there being no other provision that provides for different terms for its assessment. Its autonomy is restricted to the applicable rates and their taxable base, but the determination of its amount is made under article 90.
The differences between the determination of the amount resulting from autonomous taxation and the amount resulting from taxable profit lie in the determination of the taxable base and the rates, provided for in Chapters III and IV of the CIRC, but not in the forms of assessment, which are provided for in Chapter V of the same Code and are of common application to autonomous taxation and to the remaining taxable matters of IRC.
For this reason, since it is to article 90, inserted in this Chapter V, that reference is made in article [3, no. 1, of RFAI], no legal support is seen for making a distinction between the collection coming from autonomous taxation and the remaining IRC collection, due to the fact that the rates and the forms of determination of the taxable base are distinct.
(…)
On the other hand, the fact that the deductibility of the tax benefit (…) is limited to the collection of article 90 of the CIRC, up to its limit, does not allow us to conclude that the tax credit is only deductible if there is taxable profit, because what that fact requires is that there be IRC collection, which can exist even without taxable profit, namely by virtue of autonomous taxation".
We thus have that the literal element of the norm does not exclude the interpretation made by the Petitioner, since the deductibility of the tax benefit in question from the collection of autonomous taxation finds a "minimum verbal correspondence" in the legislative text (art. 9, no. 2, of the Civil Code).
It is true that autonomous taxation, in addition to aiming to guarantee a minimum collection relative to companies that show losses (a question that does not arise in the concrete case), aims to reduce the "tax participation" in certain expenses and, possibly, to discourage their realization, and such objectives will be less achieved with the possibility that the respective collection can be subject to deductions.
But, on the other hand, tax benefits are "measures of an exceptional character instituted for the protection of relevant extra-fiscal public interests that are superior to those of the taxation that they prevent" (article 2, no. 1, of the EBF).
In the confrontation between these two objectives, it is the law itself that indicates to us what should prevail. The public interests that determine the creation of a tax benefit are, by nature, superior to those of the taxation that they prevent.
This is, even more, manifest with respect to tax incentives for investment, since they constitute a true public promise, in the sense that to taxable persons who adopt certain behaviors, supposedly of the greatest economic and social interest, a certain "tax reward" is guaranteed.
An interpretation of the law, not expressly imposed by the legal text, that restricts the "enjoyment" of the tax benefits in question would undermine the credibility of the "legislative promises" in tax matters, would be, in short, contrary to the principle of trust, inherent in the idea of the Rule of Law.
Accepting the deductibility from the autonomous taxation collection of credits resulting from RFAI, it is asked: with respect to a group of companies subject to RETGS, should the deduction be made to the autonomous taxation collection relating to the set of companies of the group or only with respect to that of each of the companies that benefited from such tax benefit?
We think the answer results directly from the law, since no. 6 of art. 90 of the CIRC provided that "when the special regime for taxation of groups of companies is applicable, the deductions referred to in no. 2 relating to each of the companies are made in the amount determined with respect to the group, under the terms of no. 1".
The Petitioner is therefore correct.
D) Application of Article 92 of the CIRC
The Petitioner understands that it does not have to proceed to the maximum deduction permitted by article 3 of RFAI 2009, as it considers that no. 2 of article 90 of the CIRC only requires that the taxable person deduct part of the tax benefits to which it is entitled and not all of them, because, otherwise, it could lose the right to deduct certain tax benefits – which could happen as a result of the application of the rules that temporarily limit the carryforward thereof and of which article 3, no. 3 of RFAI is an example -, which could certainly not have been the legislator's intention.
In concrete terms, of the amount of RFAI 2009 that still remained available for deduction, the Petitioner only intends to deduct from the IRC collection relating to 2011 the amount sufficient for the tax assessed under no. 1 of article 90 to correspond exactly to 90% of the amount that would be determined if the taxable person did not enjoy tax benefits.
On the other hand, the AT understands that the legislator, in providing for the possibility of carryforward of the tax benefit relating to RFAI to future fiscal years, presupposed that the deduction of the benefit be made up to the limit set out in the law, that is, 10% of the IRC collection, because the text of the law (no. 3 of art. 3 of Law no. 10/2009, of 10 March) clearly refers that only the benefit not deducted due to insufficient collection can be carried forward.
This conclusion would also result – according to the AT - from the provision of no. 2 of article 90 of the IRC Code, since there it is stated that from the IRC collection the deductions relating to double taxation, tax benefits, special payment on account and withholding tax not subject to offset or refund are made, in the order indicated. That is, there being an enumeration, fixed imperatively in sequential terms, the taxpayer cannot choose the fiscal year in which to deduct the tax benefits, so as to avoid the adjustment resulting from the application of article 92 of the IRC Code. Thus, each of the deductions provided for in no. 2 of article 90 should be made in the order indicated therein, only proceeding to the next deduction immediately following in the case of there still being a remaining value of collection, resulting from the insufficiency of the amount of the deduction previously made, whereby the Petitioner's claim to the effect that it only intends to deduct from the IRC collection part of the amount corresponding to RFAI, finds no legal support in the legal block.
Furthermore, the AT understands that the value of RFAI not deducted by force of the application of the provision of art. 92 of the CIRC cannot be carried forward to the following fiscal years.
We will begin by examining the content of such norm, in the wording in force in 2011:
1- For entities that carry on, as their principal activity, a commercial, industrial or agricultural activity, as well as non-residents with a permanent establishment in Portuguese territory, the tax assessed under no. 1 of article 90, net of the deductions provided for in paragraphs a) and b) of no. 2 of the same article, cannot be less than 90% of the amount that would be determined if the taxable person did not enjoy tax benefits and the regimes provided for in no. 13 of article 43 and in article 75.
2- The following tax benefits are excluded from the provision of the preceding number:
a) Those that have a contractual character;
b) The fiscal incentive system for business research and development II (SIFIDE II);
c) The tax benefits for free zones provided for in articles 33 and et seq. of the Tax Benefits Statute and those that operate by reduction of rate;
d) Those provided for in articles 19, 32 and 42 of the Tax Benefits Statute.
The first conclusion to be drawn from such a norm is that the tax benefit in IRC provided for by RFAI was subject, in 2011, to the global limit of deductions from the collection then provided for in no. 1 of article 92 of the CIRC.
However, as arbitral case law has been concluding, an understanding which we support[11], "this conclusion is not sufficient to resolve the issue, because the possibility of carryforward of the RFAI tax benefit does not necessarily affect the limit of article 92, no. 1. It is sufficient that, in the year in question, the amount of the tax benefit be used that, added to the remaining tax benefits and regimes provided therein, does not exceed the limit of 25% [in this case, 10%] of the collection, so as to allow the tax assessed not to be less than 75% [in this case, 90%] of what would be determined if the taxable person did not enjoy tax benefits and the regimes provided for in no. 13 of article 43 and in article 75.
That is, if to achieve the objectives of ensuring that, in each year, the tax collected does not result in less than a certain percentage of that which would be due if no deductions relating to tax benefits existed (excepting those listed in no. 2 of art. 90) it is sufficient that the deduction from the collection not exceed 25% [in this case, 10%] of the collection.
Thus, there derives from article 92, no. 1, of the CIRC no obstacle to the carryforward of deductible amounts, provided that, in each year, the minimum limit of tax assessed that is sought is not exceeded".
Let us now analyze the provision of no. 3 of article 3 of RFAI: when the deduction referred to in the preceding number cannot be made in full due to insufficient collection, the amount still not deducted may be done so, under the same conditions, in the assessments of the four following fiscal years.
"It is manifest that this norm has underlying a legislative intention that the tax benefits supporting investment be enjoyed by taxpayers, to a reasonable extent, which will be the four years following that in which the investment occurs.
This possibility of deduction in the four subsequent periods constitutes an important guarantee for the taxpayer, by increasing the possibilities for this to fully enjoy the tax benefit, freeing it from the contingency of there not being sufficient collection for full deduction in the year of the investment. The possibility of carryforward should be considered as an important or even decisive factor to motivate investment decisions.
Being to be presumed that the legislator established the most correct solution (article 9, no. 3, of the Civil Code) to achieve the intended objective of encouraging investment, the reference to the possibility of carryforward in the case of insufficient collection should not be interpreted to the extent of making it difficult for taxpayers to enjoy the tax benefit, because the objective of the norm is precisely the opposite, to increase the possibilities for taxpayers to effectively enjoy the benefit, which legislatively is understood to be a fair counterpart to the investment.
Being thus, in a teleological interpretation, which allows finding in the law a way to ensure the objectives sought legislatively and not to prejudice them, the possibility of deduction should exist in the generality of situations in which the IRC collection available to enjoy the tax benefit is not sufficient for its full enjoyment, which is not a different interpretation from one with correspondence in the letter of the law, because from article 92, no. 1, of the CIRC results a reduction of the collection available to enjoy tax benefits in IRC. And, therefore, when this available collection is insufficient to deduct the totality of the tax benefit resulting from the investment, there will be a situation of "insufficient collection" for the purposes of article 3, no. 3, of RFAI.
Thus, it is concluded that the position defended by the Petitioner finds in the letter of the law, even by interpretation merely declarative, verbal correspondence in the letter of article 3, no. 3, of RFAI, even more than the minimum insufficiently expressed required by article 9, no. 2, of the Civil Code. Furthermore, even if an extensive interpretation were necessary, it would be permitted by article 10 of the Tax Benefits Statute, because it is clear that the legislative intention underlying no. 3 of article 3 of RFAI is to allow the taxpayer to use the tax benefit to which it is entitled in subsequent years, up to the limit of four, when unable to use it in prior years.
On the other hand, this interpretation is the one that ensures axiological coherence of the legal system, because it would not be coherent to admit in article 3, no. 1, paragraph a), of RFAI a deduction from the IRC collection of up to 25% and, at the same time, permanently restrict the benefit by way of article 92, no. 1, of the CIRC.
Therefore, if it is certain that the concerns of consolidating public finances can justify that, in each year, the obtaining of minimum IRC revenue is imposed over the tax benefit, those concerns can no longer explain why there would not be the possibility of using the tax benefit in one of the four subsequent years, if such use in any of them would not affect that consolidation.
It is thus concluded that the tax benefit resulting from RFAI in IRC matters can only be used to the extent that it does not compromise the limit provided for in article 92, no. 1, of the CIRC, but there is no legal obstacle for the part that is not used in the year of the investment to be used for deduction from the IRC collection in the subsequent years, up to the limit provided for in no. 3 of article 3 of RFAI.
Therefore, in the case at hand, as the limit provided for in article 92, no. 1, of the CIRC does not permit the deduction from the collection of the total amount of the investment made that benefits from the RFAI regime, this had to (or could) not charge all of that investment to that year, remaining without right to deduction in the part in which that limit would be exceeded, being able to use the faculty provided in no. 3 of article 3 of RFAI"[12].
E) Right to Carryforward to Subsequent Fiscal Years of Tax Benefits Obtained Under RFAI 2009 but Not Deducted as a Consequence of the Application of Article 92 of the CIRC
The Petitioner, in the administrative review petition filed, requested that it be recognized the right to carry forward to subsequent fiscal years the tax benefits obtained under RFAI 2009 not deducted as a consequence of the application of article 92 of the CIRC.
Now, being involved the "recognition of a right", such request does not fall within the competence, on the ground of subject matter, that the law attributes to arbitral tribunals (CAAD) in tax matters, because it only conferred upon them the powers of cognition that the state tax courts exercise in impugnation proceedings, namely those to know the legality of assessments, indemnity interest and indemnification for provision of undue guarantee. That is, the knowledge of requests which, in the state courts, should be processed by other procedural forms – in this case, an action for recognition of a right or legally protected interest – is not included in the competence that the law attributed to arbitral tribunals in tax matters (art. 2 of the RJAT).
This arbitral tribunal cannot therefore know of such request[13].
F) Indemnity Interest
The Petitioner requests the condemnation of AT to the payment of indemnity interest relating to the amount of the tax that, having won the case, should be refunded to it[14], because, having the self-assessment been made on the basis of generic guidance from AT – as it alleges – and the additional assessment now being contested made by the services themselves, there is involved an error imputable to the services, which gives rise to the payment of indemnity interest, under article 43 of the LGT.
On the other hand, the AT understands that, there being no error in the self-assessment imputable to AT and AT having made its decision before one year has elapsed after the request, there is no legal ground for requesting the indemnity interest petitioned by the Petitioner under art. 43 of the LGT.
It must be made clear that what is involved is an additional assessment, promoted by AT and not an error in the self-assessment.
Thus, we are faced with a situation of partial annulment, due to illegality, of a "pure" administrative act of assessment.
Article 43, no. 1, of the LGT provides that indemnity interest is due when it is determined, in administrative review or judicial impugnation, that there was an error imputable to the services from which results payment of the tax debt in an amount higher than that legally due.
It is a settled understanding that the error of the services in proceeding to an assessment is considered to be verified when an administrative review or impugnation of that same assessment is filed, except if such error is imputable to the taxable person (which is not the case).
No doubt arises that the arbitral tribunals of CAAD have the same competence as the state courts regarding impugnation proceedings and that arbitral decisions are equated with those of the latter.
Nor does it present doubts that the requirement of an excessive payment of tax is equivalent economically to the decision to make a refund lower than what is due, and that the function of indemnity interest is to compensate for the forced unproductivity of the amounts of which the taxable person was deprived.
Whereby the Petitioner has the right to payment of indemnity interest relating to the amount which, illegally, was not refunded to it, to be calculated at the legal rate from the date on which such refund should have taken place (art. 104, no. 6 of the CIRC).
In view of the foregoing, the arbitrators constituting the present Arbitral Tribunal agree to:
A) Partially annul the order that decided on the total rejection of the administrative review petition filed by the Petitioner;
B) Partially annul the assessment being contested, which should be reformulated as follows:
B1) Acceptance, as a deduction from the collection, of a foreign tax credit for double taxation of € 52,137.17, an amount which is added to that already recognized for such purpose;
B2) Acceptance of the deduction of tax benefits instituted by RFAI 2009 from the autonomous taxation collection of the group, subject to RETGS, headed by the Petitioner;
B3) With respect to the amount of RFAI 2009 that still remained available for deduction in 2011, the deduction from the IRC collection of the group (including the autonomous taxation collection) should be only in the amount sufficient for the value of the tax to be paid to correspond to 90% of the amount that would be determined if the taxable person did not enjoy tax benefits.
C) Not to know of the request for recognition of the right to "carry forward to subsequent fiscal years the tax benefits obtained under RFAI 2009 not deducted as a consequence of the application of article 92 of the CIRC".
D) To condemn the Respondent, Tax and Customs Authority, to the payment of indemnity interest, to be calculated on the amount of tax unduly not refunded, at the applicable legal rates, from the date limit on which such refund should have taken place.
E) To dismiss the remaining requests as unfounded.
The value of the case is set at € 151,824.09.
The costs of the proceeding (arbitration fee) are the sole responsibility of the Petitioner (art. 5, no. 2, of the Regulation of Costs in Tax Arbitration Proceedings).
Lisbon, 25 January 2016
Rui Duarte Morais
António Martins
Rodrigo de Castro
[1] Article 12 of the OECD Model (Royalties): 1. Royalties arising in one Contracting State and paid to a resident of the other Contracting State may only be taxed in that other State.
[2] Maria Margarida Cordeiro de Mesquita, Conventions on Double Taxation, Cadernos de Ciência e Técnica Fiscal, no. 179, 1988, p. 203.
The Author considers that the fixing of rates of 10% as the maximum limit of the tax capable of being levied by the source state corresponds to the interest of states which, in the bilateral context, are "major exporters of technology". This is – we add – the case of Portugal relative to Cape Verde.
[3] This was, necessarily, in the legal framework in force before the IRC reform of 2014.
[4] Maria Margarida Cordeiro de Mesquita, cit., p. 290.
[5] Which would be the case, since the CDT Portugal – Cape Verde dates from 2000 and the consideration of expenses incurred to obtain income from foreign source (today contained in paragraph b) of no. 2 of art. 91-A of the CIRC), was introduced, albeit with different wording, by Law 39-A/2005, of 29 July.
[6] By all, Rui Duarte Morais, Imputation of Profits of Non-Resident Companies…., 2005, p. 146-151.
[7] The administrative understanding which, also in the present proceeding, is made of the provision of article 91, no. 1, paragraph b), of the CIRC appears explained in the report which Maria dos Prazeres Lousa presented to the Congress of the IFA of 2011, in Paris, which is published in Cahiers de Droit Fiscal International, vol. 96b, p. 541 to 550. It is not appropriate here to assess the substance of such understanding which, in various aspects, we understand not to be subscribed to.
[8] The "differences" between taxation in IRC strictly speaking and autonomous taxation appear clearly explained by Fernando Carreira de Araújo and António Fernandes de Oliveira in «The deductibility in IRC of charges with autonomous taxation», Cadernos de Justiça Tributária, no. 3, 2014, p. 3 to 19.
The fact that the Courts have considered – we believe correctly – that the collection of autonomous taxation was not deductible from the collection of IRC (a question meanwhile expressly resolved by legislative means) does not "erase" such differences.
[9] See Paula Rosado Pereira, "Again the question of retroactivity of tax law in the field of autonomous taxation of charges: commentary to the Decision of the Supreme Administrative Court, Process no. 0281/11, of 6 July 2011, 2nd Section", Revista de Finanças Públicas e Direito Fiscal, Coimbra, year IV, no. 3 (2011), p. 267 to 284.
[10] Arbitrators: Jorge Lopes de Sousa; Vasco Valdez; Maria Isabel Guerreiro.
[11] CAAD Decision no. 693/2014, arbitrators Jorge de Sousa, Henrique Nogueira Nunes and Nuno Pombo.
[12] Ibidem.
[13] In the same sense CAAD Decision no. 693/2014, arbitrators Jorge de Sousa, Henrique Nogueira Nunes and Nuno Pombo.
[14] Refund which will be added to that already made.
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