CAAD Case 376/2018-T: Deductible Expenses and Indispensability Requirement in IRC Corporate Tax

ARBITRAL DECISION (consult full version in PDF)

The arbitrators Cons. Jorge Lopes de Sousa (arbitrator-president), Dr. Pedro Miguel Bastos Rosado and Dr. Cristina Aragão Seia (arbitrator-members), appointed by the Deontological Council of the Centre for Administrative Arbitration to form the Arbitral Tribunal, constituted on 17-10-2018, agree as follows:

1. Report

A... S.A., holder of tax identification number ..., with registered office in ... - ..., ...-..., ..., hereinafter abbreviated as "Claimant", has, in accordance with Decree-Law No. 10/2011, of 20 January (hereinafter "RJAT"), requested the constitution of an Arbitral Tribunal.

The Claimant requests the annulment of corrections to taxable matter in the total amount of €3,858,877.40 (€1,681,121.40 relating to the year 2009 and €2,177,756.00 relating to the year 2010) and of assessments Nos. 2018... and 2018... relating to the tax years 2009 and 2010, of the assessment of default interest No. 2018... and account adjustments No. 2018..., of 09-07-2018, relating to the tax period 2009 and No. 2018..., of 10-07-2018, relating to the tax period 2010.

The Respondent is the TAX AUTHORITY AND CUSTOMS SERVICE.

The request for constitution of the arbitral tribunal was accepted by the President of CAAD and automatically notified to the Tax and Customs Authority on 08-08-2018.

Pursuant to the provisions of subparagraph a) of paragraph 2 of Article 6 and subparagraph b) of paragraph 1 of Article 11 of RJAT, in the wording introduced by Article 228 of Law No. 66-B/2012, of 31 December, the Arbitrators initially appointed by the Deontological Council communicated their acceptance of the assignment within the applicable time period.

On 26-09-2018, the parties were duly notified of such appointment and did not manifest any intention to refuse the appointment of the arbitrators, in accordance with the combined provisions of Article 11, paragraph 1, subparagraphs a) and b) of RJAT and Articles 6 and 7 of the Deontological Code.

Thus, in accordance with the provision of subparagraph c) of paragraph 1 of Article 11 of RJAT, in the wording introduced by Article 228 of Law No. 66-B/2012, of 31 December, the collective arbitral tribunal was constituted on 17-10-2018.

The Tax and Customs Administration submitted a Response in which it argued that the request for arbitral judgment should be ruled unfounded.

On 10-01-2019, the meeting provided for in Article 18 of RJAT was held, in which witness evidence was produced and it was decided that the proceedings would continue with simultaneous submissions.

The Parties submitted their arguments.

The arbitral tribunal was regularly constituted, in accordance with the provisions of Articles 2, paragraph 1, subparagraph a), and 10, paragraph 1, of Decree-Law No. 10/2011, of 20 January, and is competent.

The Parties are duly represented, possess legal personality and capacity, are legitimate and are represented (Articles 4 and 10, paragraph 2, of the same decree and Article 1 of Ordinance No. 112-A/2011, of 22 March).

The proceedings do not suffer from any nullities.

2. Factual Matters

2.1. Proven Facts

The following facts are considered proven:

• The Claimant was established in 2007 and is located in the industrial park of B..., with B... and Group C... being its principal clients;

• The capital of the Claimant was held, at the date of the facts, 100% by the company D... S.L. (hereinafter referred to as D... Ibérica);

• The principal activity of the Claimant consists of the assembly of modules, production, distribution and commercialization of parts or components for the automobile industry;

• The operation of the Claimant is conditioned by the activity carried out by B..., as well as its manner of operating;

• During the years 2009 and 2010, the Claimant produced primarily bumpers and "FrontEnd" modules for application to vehicles produced by B..., although the painting of such components was the responsibility of company E..., S.A. (hereinafter referred to as E...);

• The Tax and Customs Authority conducted a partial-scope inspection of the Claimant for the tax periods of 2008, 2009, 2010, 2011, 2012 and 2013, pursuant to service orders Nos. OI2015..., OI2015..., OI2015..., OI2015..., OI2015... and OI2017...;

• The Claimant exercised its right to be heard, with the relevant terms contained in document No. 4 attached to the request for arbitral judgment, the content of which is hereby reproduced;

• In such inspection, the Report contained in document No. 5 attached to the request for arbitral judgment was drawn up, the content of which is hereby reproduced, which refers, among other things, to the following:

III.1. CORRECTIONS TO TAXABLE MATTER

III.1.1. TAX YEAR 2008

III.1.1.1. FISCALLY NON-DEDUCTIBLE COSTS - SHARE OF ADDITIONAL COSTS

In the tax year 2008, the taxpayer recognized as a debit to SAP account 400100 (POC 711) - "domestic sales" the amount of €2,108,408.00 and to SAP account 607020 (POC 621) - "External work and assembly" the amount of €2,040,963.83, in the total amount of €4,059,371.83, the supporting documents of which correspond to invoices issued by company "E..., SA." VAT No. ... (provider of painting services to A...), with the description 'share of additional costs', as set out in the following table:

As previously mentioned in Chapter II, in 2008 E... was a company held at 50% of its capital by F... S.L. (holder of all the capital of A...), a relationship that was terminated in 2009 with the sale of the stake by F... S.L..

In the years under analysis, E... was the provider of painting services to A..., and in 2008 and part of 2009, it provided and charged A... with various services termed "Share services" related to the sharing of costs for electricity, communications and administrative matters, since A... did not have its own capacity (as set out in point 11.6.11), and which should not be confused with the "share of additional costs" identified in the preceding table, which translated into Portuguese means "Sharing of additional costs".

Given the activity carried out by E... (provision of painting services on parts to be incorporated into the product supplied by A... to B...) and the lack of knowledge of the nature of the costs that it charged to A... in the invoices identified above, the taxpayer was questioned about the nature of such costs.

The representative of the taxpayer, pursuant to Article 52 of RCIPTA, informed that the amounts of costs charged by E... to A... were related to the fact that B... Germany had entered into a contract with A... Ibérica (parent company of A..., based in Spain), which aimed to grant a financial compensation for the provision of painting services for the model ..., to company E..., because this company was presenting significant losses.

Since B... could not grant this compensation directly to E..., as there was no commercial relationship between them, it would be paid to A..., and transferred by the latter to E....

To effect this payment, E... issued invoices to A... (on a monthly basis), with the amount to be charged by E... to A... calculated on the basis of the difference between:

• the selling price of a certain part to be incorporated into the model ..., invoiced by A... to B... (invoices issued by B... under the self-invoicing regime) and

• the purchase price of the same part, acquired by A... from D... Ibérica (parent company, based in Spain), with the calculations to be contained in a document attached to the invoices.

According to these instructions, the part was purchased by A... at the unit price of €1.6888 and the unit selling price invoiced to B... was €96.4555.

In turn, E... charged the same part at the price of €94.85 to A..., and the difference was intended to cover the cost of acquisition of the part.

In this way, A... did not make any profit or loss on the operation, as it was aimed solely at transferring financial resources to E....

As shown in the invoices issued by E..., in the document attached to them, designated as "Price increase values for painting – settled by AE (abbreviated designation of B...)", the month, the number of vehicles, the monthly amount self-invoiced by B..., and the amount to be charged to A... are identified.

In view of the insufficiency of the elements presented, on 27/11/2017, A... was notified, in the person of the representative identified in point II, to present by 4/12/2017: (this deadline having been extended to 13/12/2017, at the request of the taxpayer)

• copy of the contract entered into between B... Germany and D... Ibérica, which provides for the award of a bonus, in the form of a financial compensation to be paid to A... for the painting services of bumpers sold to B...;

• copy of the contract entered into between A... or D... Ibérica, and E..., which establishes the sharing of costs in the provision of painting services (termed share costs) invoiced monthly by the latter to A...;

• copy of the credit notes issued by B... to A..., relating to bonuses awarded to A....

On 13/12/2017, the taxpayer submitted the following written clarifications, which we hereby transcribe:

(...) B.(...) 2-

(...) in the event of the award of financial compensation by B... to A... regarding the provision of painting services, A... would pass on part of such compensation to E... as compensation for the painting services subcontracted to it.

(...)

There is no written contract between A... (or D... Ibérica) and E... on the award of these financial compensations, since they resulted from global negotiations between the two main entities involved (B... & A...) and from the passing on by A... to E... of part of such compensation received from B....

(...)

4 - Attached we send a demonstration example of all the documentary and financial movement of the operation: Self-invoice from B... for painting services acquired from A... + Payment by B... to A... for these same painting services. (...)

These documents prove and support the payment of services by B... to A... Portugal for painting services (...)."

In addition to this response, the taxpayer submitted additional clarifications, in a letter of 09/01/2018, informing:

"As had been mentioned from the beginning of A...'s operations, it had been receiving a compensation from B..., which aimed to compensate losses incurred by the painting activity of E..., an entity to which A... subcontracted the painting services of the parts supplied to B....

When operations began, the prices agreed with B... regarding the supply and painting proved insufficient to support the operating costs of E..., so the commercial terms were revised, resulting in an increase in the value of the said part. These compensations were received from B... by A..., and subsequently passed on to E....

Thus, the mechanism operated by B... to pay this compensation was to increase the unit value of the part ..., which went from a unit price of 1.75€(...), to the unit price of €94.85.

It is important to note that although during 2008 the code of the part was changed to..., the part itself is the same.

(...) the first three characters "1QO" refer to the car model for which the part will be applied, in this case, the .... (...)

Attached we send invoice (...) from the supplier (F... Ibéria) from which A... acquired the part in question, where it is proven that the acquisition price of A... is €1.69, thus proving that it would not be reasonable for the subsequent selling price to B... to be €94.85. It is only that way because the price was intended to compensate the costs incurred by E... with the painting of the part."

Additionally to these clarifications, copies were requested of invoices from E... for the provision of services to A... for June 2009, copies of the product file..., contained in B...'s self-invoices, and in relation to which the amounts subsequently transferred to E... would have been paid to A... (in accordance with what was stated by the taxpayer), and invoices for the purchase of said part from A...'s supplier.

Subsequently, the taxpayer presented a document issued by G..., dated 19.12.07, effective 29.01.08, regarding supplier F... Portugal S.A., in which a purchase price (unit: 100) was initially established for part..., of €160.44, changed to €9,485.00.

The document, written in German and verbally translated by the taxpayer in a subsequent meeting, mentions "execution of financial support for E... on this part".

The document is not signed, and in the footer is identified as "form M 4s-06.02 PDF- G...".

From careful reading of the documentation presented by the taxpayer, including the third-party account of E..., the following stands out:

Regarding the provision of services by E... to A...:

• A... declared in Annex P of its 2008 Tax Return that it had purchased from E... €7,789,884.00 including VAT;

• E... invoiced in 2008 for the provision of painting services to A..., €2,456,443.09 (€2,958,749.99 including VAT);

• E... invoiced in 2008 to A... as "Share Services" (facility rental, machinery, personnel, energy, among others) €235,940.21 without VAT;

• E... invoiced in 2008 to A... as "Share of additional costs" the amount of €4,059,371.83 without VAT;

• E... never invoiced A... for "Share of additional costs" as a provision of services for the painting of automobile components, and never identified any service provisions in these invoices.

• The invoicing of "share of additional costs" is 65% higher than the invoicing of painting service provision;

Regarding the prices attributed to the identified part:

• The code 1QO identifies the model...;

• "The part (...) referred to in B...'s self-invoices does not appear in the service provision invoices issued by E..., with A... admitting that this part, although belonging to the model ..., is not subject to the painting process;

• The unit price of the "Share of additional costs" contained in the invoices issued by E... to A..., was €94.85;

• The unit price of part ... invoiced by A... to B... was €96.4555;

• The acquisition price of the part by A... from D... Ibérica was €1.6888 in 2008 and €1.6252 in 2009;

• The difference between the selling price of the part to B... by A... and the amount charged by E... to A... is €1.6055 (96.4555 - 94.85), a price lower than the purchase price by €0.0833, thus resulting that, according to the statements of the taxpayer, A... would incur a loss on the sale of the part. (In 2008, by way of example, the loss would be €3,604.39).

From the comparison between the values invoiced to B... and the values charged by E...:

• The number of vehicles expressed in the B... account extracts is very close to the quantities identified in the "share of additional costs" invoices issued by E... to A..., and are related to the number of vehicles ... produced by B...;

• The amount invoiced by A... to B... (under the self-invoicing regime) of said part, in 2008 was €4,155,032.84;

• The amount invoiced by E... in 2008 to A... as "Share of additional costs" was €4,059,371.83;

• However, the document issued by G..., mentioning the "execution of financial support for E... on this part" (part...), although referring to E..., does not state that this amount should be delivered to E... in the unit amount of €94.85.

Faced with the clarifications and documents presented by the taxpayer to justify the costs incurred with the invoices issued by E..., as "share of additional costs", the Tax Authority makes the following considerations:

1. The taxpayer invoked that it was merely a financial compensation awarded by B... to E..., before which A... merely served as a vehicle given the absence of direct commercial relations between those two entities. If real, such an event should never affect the profit and loss accounts of A..., being then a gratuitous transfer and handled accounting and tax-wise as such, in the corresponding third-party accounts or balance sheet accounts, without any influence on the determination of the net result of the period, and consequently its taxable result.

2. To justify the facts invoked, the taxpayer presented a "contract" for changing the price of a part that A... purchased from the holder of its share capital (F... Ibérica SL), incorporated into the product it sells to B..., without the same being subject to the painting process subcontracted to E..., and sold to B..., justifying that the change in the price of that same part "aimed to compensate losses incurred by the painting activity of E...".

The taxpayer further states that "When operations began the prices agreed with B... regarding the supply and painting proved insufficient to support the operating costs of E..., so the commercial terms were revised, resulting in an increase in the value of the said part." If so, being a renegotiation of the prices previously agreed relating to painting, the normal course would be to alter the prices of the parts subject to painting and not to alter the price of a part that is not subject to such process. Therefore, the justifications provided by the taxpayer are not coherent on this point.

1. It further results from the data and prices presented by the taxpayer regarding the part in question that, if A... did as it states, it incurred losses on the operation described, a situation that does not favour it.

2. From the analysis of the invoices issued by E... and the supporting documents presented by the taxpayer, it is verified that the value of "share additional costs" is based on the attribution of a unit price of €94.85 relating to quantities of a part that was not sold by E... to the taxpayer nor upon which any painting service was provided by E....

Faced with all of the foregoing, it is concluded that despite the justifications and documents presented by the taxpayer, it was not possible for the Tax Authority to attribute and identify a direct and causal relationship between the price attributed to part ... sold by A... to B... and the expenses invoiced by E... to A... as "share of additional costs", and it is not possible to conclude on their indispensability for the obtaining of taxable income.

In this sense, the amount of €4,059,371.83 recorded by the taxpayer as a cost of the period should be added to the taxable result of 2008, pursuant to the principle underlying Article 23 of CIRC, in accordance with which (in force at the date):

"Costs or losses are considered those that are demonstrably indispensable for the achieving of income or gains subject to tax or for the maintenance of the productive source".

(...)

III.1.2. TAX YEAR 2009

III.1.2.1. FISCALLY NON-DEDUCTIBLE COSTS - SHARE OF ADDITIONAL COSTS

In 2009, the taxpayer recognized in SAP account 607020 (POC 621) - "External work and assembly" the amount of €1,681,121.40, the supporting documents of which correspond to invoices issued by company "E..., SA." VAT No. ... (provider of painting services to A...), with the description "share of additional costs", as set out in the following table.

The costs incurred by the taxpayer as "share of additional costs" have the same nature as those incurred in 2008, the analysis of which was carried out in point III.1.1.1 of this report, and maintaining the same assumptions, with their indispensability not being justified, the amount of €1,681,121.40 recorded by the taxpayer as a cost of the period should be added to the taxable result declared in 2009, pursuant to the principle underlying Article 23 of CIRC.

III.1.3. TAX YEAR 2010

III.1.3.1. FISCALLY NON-DEDUCTIBLE EXPENSES - SHARE OF ADDITIONAL COSTS

In the tax period 2010, the taxpayer recognized in account SAP 607020 (SNC 621) - "External work and assembly" the amount of €2,177,756.00, the supporting documents of which correspond to invoices issued by company "E..., SA." VAT No. ... (provider of painting services to A...), with the description "share of additional costs", as set out in the following table:

The expenses incurred by the taxpayer as "share of additional costs" in 2010 have the same nature as those incurred in 2008 and 2009, the analysis of which was carried out in point III.1.1.1 of this report, and maintaining the same assumptions, with their indispensability not being justified, the amount of €2,177,756.00 recorded by the taxpayer as an expense of the period should be added to the taxable result declared in 2010, pursuant to the principle underlying Article 23 of CIRC.

• Following the inspection, the Claimant was notified of the assessments of Corporate Income Tax Nos. 2018... and 2018... relating to tax years 2009 and 2010, of the assessment of default interest No. 2018... and account adjustments Nos. 2018..., of 09-07-2018, relating to the tax period 2009 and No. 2018..., of 10-07-2018, relating to the tax period 2010 (documents 1, 2 and 3, attached to the request for arbitral judgment, the content of which is hereby reproduced);

• During the periods covered by the tax inspection, the activity of the Claimant comprised the production of parts, assembly and delivery of various components to be incorporated into the production of B... vehicles;

• The models for which the Claimant was supplying components were, essentially, the ..., the ... and the ...;

• Various parts used in the assembly of the components were subject to a painting procedure, with the service being subcontracted to entity E...;

• For B..., the Claimant was considered as a level 1 supplier ("Tier one") and E... was considered as a level 2 supplier ("Tier two");

• For organizational and structural reasons of B..., it establishes direct commercial relations only with level 1 suppliers;

• Within this organizational structure, all operations related to painting services and E... necessarily previously went through the scope of the Claimant;

• E... was created through a joint-venture between D... Ibérica and company H... S.A., being held by both entities until mid-2009;

• The reason for the creation of E... arose from specific painting needs of B... (essentially with the start of production of the model ...), this joint-venture being created with the objective of dividing the financial effort needed for investment in a new painting line;

• The prices previously negotiated between B... and D... Ibérica for the production and painting of components were based on certain estimated production volumes, volumes that were never achieved by B...;

• The financial crisis that occurred in the years 2008 to 2010 strongly affected the worldwide automobile industry, with a sharp reduction in estimated production volumes, the fixed costs incurred by E... for painting services began to become unbearable, and its activity generated losses over several consecutive years;

• During the year 2007, the shareholders of E..., D... Ibérica [with the F... Group being represented by F... GmbH] and H..., S.A., communicated these financial difficulties to Group C..., requesting a review of the agreed price for painting services (Document No. 6 attached to the request for arbitral judgment, the content of which is hereby reproduced);

• On 28-09-2007, Group C... agreed to make a price adjustment for the painting service in the amount of €94.85 for each car of model ... produced (Document No. 7 attached to the request for arbitral judgment, the content of which is hereby reproduced);

• The said price adjustment made by B... is also contained in the minutes of the Board of Directors of E..., dated 21-11-2007, which refers to:

• there was a price increase of the parts supplied to B... to €94.85;

• H... and F... (former name of the Claimant, as shown in the permanent certificate attached as document No. 8 to the request for arbitral judgment, the content of which is hereby reproduced) will transfer the amount of €450,000.00 after receiving notification from B... (Document No. 9).

• After the agreement on the adjustment to the painting service price, B... began to pay an additional €94.85 to the Claimant for each model ... car produced.

• Such price increase, made in the form of communication (and not the signing of a "Promise to Sell Agreement"), aimed solely at not binding to a legal obligation, with B... wishing to guarantee the possibility of revoking this situation at any time, which would be more difficult under a contract;

• Since the amount referred to was an adjustment to the painting service price, E... invoiced this amount monthly to the Claimant, based on the monthly report issued by B... on the total number of model ... cars produced;

• The amounts invoiced by E... to the Claimant were invoiced by the Claimant to B... (through self-invoicing carried out by the latter), given the commercial relationship established between the Claimant and the latter and which requires that the Claimant be the intermediary in these operations, given that B..., as already mentioned, only invoices level 1 suppliers;

• Since B... began to pay an additional €94.85 to the Claimant for each model ... car produced and such increase was fixed for the model ..., the Claimant selected a part of said automobile to explain to the Tax Authority how invoicing was carried out, both by B... and by E...;

• The part in question had the designation..., being selected because it is a part that exists in all vehicles and only one exists in each vehicle;

• The reason why the said part was selected to make the adjustment to the amount paid for services provided by E... is related to the fact that Group C... stipulated that this adjustment would be made on the basis of each car of model ... produced;

• Due to the paints used in the painting procedure having different prices [naturally, the most commonly used colors have lower prices due to the volume of purchases], there are different prices for the components supplied by the Claimant, depending on the color of each;

• It was, therefore, necessary to identify a part, regardless of whether it was subject to the painting process, that was unique in each car of model ... produced and whose price did not vary from car to car, thus functioning as a counting element, being that it was B... that selected the part and decided how this increase in the price of the services provided by E... would be processed;

• The choice of the part arose for reasons of simplicity, as each ... car that included that part also included the painting service from E...;

• In the years 2009 and 2010, the invoices indicated in documents Nos. 10 to 17 attached to the request for arbitral judgment, the content of which is hereby reproduced, were issued, which were recorded as income in the accounting of the Claimant;

• The "share additional costs" charged by E... to the Claimant appear in the following tables: (document No. 18 attached to the request for arbitral judgment, the content of which is hereby reproduced);

• On 08-08-2018, the Claimant submitted the request for constitution of the arbitral tribunal that gave rise to the present proceedings.

2.2. Unproven Facts and Reasoning for the Factual Findings

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

The facts were deemed proven based on the documents submitted by the Claimant and on the administrative record.

The witnesses examined confirmed the facts referred to by the Claimant in the tax inspection that are referred to in the Report, regarding the nature and justification of the "share additional costs".

All witnesses appeared to testify with impartiality and all showed they possessed knowledge of the facts of the case, having professional connections to the Claimant and to B....

3. Matters of Law

A tax inspection was conducted of the Claimant, in which, among other things, corrections to the taxable matter of tax years 2009 and 2010 were made, relating to expenses recorded by the Claimant as "Share of additional costs", in the amounts, respectively, of €1,681,121.40 and €2,177,756.00.

The said corrections were based on the understanding of the Tax and Customs Authority that it was not possible to "attribute and identify a direct and causal relationship between the price attributed to part ... sold by A... to B... and the expenses invoiced by E... to A... as 'share of additional costs', and it is not possible to conclude on their indispensability for the obtaining of taxable income".

With this assumption, the Tax and Customs Authority understood that those expenses invoiced as "share of additional costs" do not satisfy Article 23, paragraph 1, of CIRC, in the wording in force in 2009 ([1]) which established that "costs or losses are considered those that are demonstrably indispensable for the achieving of income or gains subject to tax or for the maintenance of the productive source" and in the wording in force in 2010 ([2]) which established that "expenses are considered those that are demonstrably indispensable for the achieving of income subject to tax or for the maintenance of the productive source".

The evidence produced corroborated the factuality described by the Claimant that, despite the designation of "share of additional costs", what was at issue was an increase in painting costs for vehicles decided by B... to be paid per vehicle (in the amount of €94.85), an increase that was justified by the fact that the number of vehicles produced fell far short of the forecasts on which the initial agreement was based, due to the decrease in sales volume that was a consequence of the economic crisis.

The evidence produced clarified that it was solely for practical reasons, to facilitate the determination of the amount to be paid based on the number of vehicles, that B... selected a particular part, unique in each vehicle, identical in all and present in all vehicles, with a single identifying reference, to include the increase in painting cost per vehicle that B... agreed to pay, in light of the losses that E... was sustaining because the quantity of vehicles produced was less than initially forecast. That part in which the increase in the cost of painting per vehicle was reflected was not even painted, as for each painted part there were approximately 20 colors, with distinct identifying references.

Thus, the Claimant bore that additional €94.85 cost of painting, paying it to the subcontractor E..., and, in turn, that increase in cost was included in the invoices of the Claimant's sales to B....

In analyzing the situation within the scope of the Claimant, it is impossible not to conclude that the expenses referred to were indispensable for the achieving of the income or revenue, as it was precisely by making the payments to E... that the Claimant could, thereafter, see that increase in costs included in the invoicing of the Claimant's sales to B....

Even if it were considered that those amounts invoiced as "share of additional costs" were reducible to financing carried out by B... to E..., it would be within the scope of that company that the question of the indispensability of the payments it agreed to could be raised.

But, in the legal sphere of the Claimant, which merely paid E... that increase in painting cost per vehicle (as "share of additional costs") and received from B... precisely what it had paid, it is manifest that bearing this cost was for the Claimant indispensable for the achieving of the income or revenue that constituted the payments made to it by B..., as the latter only paid that increase in cost because previously the Claimant had paid it to E....

Thus, it must be concluded that the position of the Tax and Customs Authority, in understanding that the payments made by the Claimant as "share of additional costs" were not indispensable "for the achieving of taxable income", is based on an error regarding the factual assumptions, which justifies the annulment of the corrections made and the assessments that applied them, in accordance with the provision of Article 135, paragraph 1, of the Administrative Procedure Code of 1991, in force in 2009/2010, subsidiarily applicable pursuant to Article 2, subparagraph c), of the General Tax Law.

The assessment of default interest and the account adjustments have as their premises the corrections and assessments referred to, and therefore suffer from the same defect, also justifying their annulment.

4. Questions Beyond the Tribunal's Knowledge

Since the request for arbitral judgment is to be ruled upon as founded on the basis of the error referred to, the consideration of the remaining defects attributed by the Claimant to the impugned acts becomes unnecessary and moot [Articles 130 and 608, paragraph 2, first part, of the Code of Civil Procedure, subsidiarily applicable in accordance with the provision of Article 29, paragraph 1, subparagraph e), of RJAT].

5. Decision

In accordance with the foregoing, the arbitrators agree to:

• Rule that the request for arbitral judgment is founded;

• Annul the corrections to the Claimant's taxable matter in the amounts of €1,681,121.40, relating to the year 2009, and €2,177,756.00, relating to the year 2010, and the assessments that applied them, with Nos. 2018... and 2018... relating to tax years 2009 and 2010, respectively, as well as the assessment of default interest No. 2018... and the account adjustments No. 2018..., of 09-07-2018, relating to the tax period 2009, and No. 2018..., of 10-07-2018, relating to the tax period 2010.

6. Value of the Case

In accordance with the provisions of Articles 296, paragraph 1, of the Code of Civil Procedure and 97-A, paragraph 1, subparagraph a), of the Tax Procedure Code and 3, paragraph 2, of the Regulations of Costs in Tax Arbitration Proceedings, the value of the case is fixed at €3,858,877.40.

7. Costs

Pursuant to Article 22, paragraph 4, of RJAT, the amount of costs is fixed at €48,960.00, in accordance with Table I annexed to the Regulations of Costs in Tax Arbitration Proceedings, to be borne by the Tax and Customs Authority.

Lisbon, 30-01-2019

The Arbitrators

(Jorge Lopes de Sousa)

(Pedro Miguel Bastos Rosado)

(Cristina Aragão Seia)

[1] Resulting from Law No. 107-B/2003, of 31 January.

[2] Resulting from Decree-Law No. 159/2009, of 13 July.