RFAI and Contractual Tax Benefit (BFC) Credits in IRC: CAAD Case 383/2015-T Ruling

ARBITRAL DECISION

I. Report

1. On 15-06-2015, the company A..., S.A., NIPC..., filed a request for the constitution of a sole arbitration tribunal, pursuant to the combined provisions of Articles 2 and 10 of Decree-Law No. 10/2011, of 20 January (Legal Regime for Arbitration in Tax Matters, hereinafter referred to only as RJAT), with a view to declaring the illegality of the decision of tacit rejection of the administrative appeal No. ...2014... and, consequently, of the self-assessment act of Corporate Income Tax (IRC) relating to the year 2011.

2. Pursuant to Article 6(1) of the RJAT, the Deontological Council of the Arbitration Centre appointed the undersigned arbitrator, notifying the parties.

3. The tribunal is properly constituted to consider and decide upon the subject-matter of the proceedings.

4. The grounds supporting the Claimant's request for arbitral pronouncement are, in summary, as follows:

4.1 The Claimant is a taxpayer subject to IRC who engages, as its principal activity, in the production of pharmaceuticals and, as complementary activities, in the wholesale trade of pharmaceutical products and in the manufacture of perfumes, cosmetics and personal hygiene products.

4.2 During the tax year of 2011, the Claimant made investments in the total amount of €4,057,983.75 in its production facilities, located in the Municipality of... .

4.3 Of that amount, the Claimant invested the sum of €235,269.68 in tangible fixed assets acquired in new condition (not corresponding to land, buildings—except manufacturing plants—, light passenger or mixed vehicles, furniture, articles of comfort or decoration, social equipment, or other investment goods that are not directly or indispensably associated with its productive activity).

4.4 On 22 May 2012, the Claimant submitted its (first) IRC form 22 declaration for the tax year 2011.

4.5 In the said IRC form 22 declaration, the Claimant recorded non-exempt taxable matter of €747,636.27 and a tax collected of €185,346.57.

4.6 On the other hand, the Claimant did not record any deduction from the tax collected in that declaration, and therefore paid IRC in the amount—equal to the tax collected—of €185,346.57.

4.7 To this amount, the Claimant deducted (i) withholdings at source suffered during the tax year, in the amount of €53,650.15; and (ii) advance payments made, in the amount of €43,314, and added (i) municipal surtax, in the amount of €9,420.22; and (ii) amounts due as autonomous taxes, in the amount of €7,900.02.

4.8 As a result, the Claimant determined a total amount payable, as tax, of €105,702.66.

4.9 Following this, the Claimant was notified of the tax assessment statement corresponding to tax assessment No. 2012... and made the payment of the total amount payable of €105,702.66.

4.10 Subsequently, on 18 October 2012, the Claimant and the Portuguese State, represented by ..., I.P.–..., IP, entered into a fiscal investment contract, pursuant to the provisions of Article 41 of the Tax Benefits Statute and Article 9 of the Fiscal Investment Code, in the wording then in force.

4.11 In accordance with the said fiscal investment contract, the Claimant acquired the right to deduct from the IRC tax collected for the tax years 2011 and 2012 an amount corresponding to 15% of the relevant investments actually made in those periods, up to a maximum limit of €735,063.15.

4.12 Consequently, as a result of the relevant investments that had been made during the tax year 2011, the Claimant obtained the right to deduct from the tax collected for the tax year 2011 the amount of €183,765.79.

4.13 On 15 October 2013, the Claimant submitted, pursuant to Article 122(3) of the IRC Code, a substitute IRC form 22 declaration for the tax year 2011.

4.14 In this substitute declaration, the Claimant maintained the values previously recorded for (i) non-exempt taxable matter; (ii) tax collected; (iii) withholdings at source; (iv) advance payments; (v) surtax; and (vi) autonomous taxes and deducted from the tax collected the said amount of €183,765, corresponding to the aforementioned tax benefits of contractual nature.

4.15 As a result, there occurred (i) a reduction of the IRC paid, from €185,346.57 to €1,580 and, consequently, (ii) the determination of a total amount to be recovered of €78,063.13, instead of a total amount to be paid of €105,702.66.

4.16 Following the substitute declaration, the Claimant: (i) was notified of the tax assessment statement corresponding to tax assessment No. 2014...; and (ii) was reimbursed the amount of €183,765.79, corresponding to the total amount to be recovered recorded in the substitute declaration (€78,063.13) plus the amount that had been paid by the Claimant with reference to the original self-assessment, of May 2012 (€105,702.66).

4.17 In the meantime, after the submission of the said substitute declaration, the Claimant carried out an internal review of procedures, with respect to the tax year 2011, and concluded, in that context, that that tax declaration did not reflect, as it should have, the entirety of the deductions to which the Claimant is entitled, specifically did not reflect the tax benefit—provided for in Article 3 of the Tax Regime for Investment Support (hereinafter referred to as "RFAI")—arising from the investment described in Article 5 of the present initial request, embodied in the Claimant's right to deduct from the IRC tax collected in 2011, and up to the extent of 25% thereof, the amount corresponding to 20% of the amount of €235,269.68 invested in the said acquisition of tangible fixed assets, that is to say, in this case, the right to deduct the amount of €46,336.64.

4.18 On 22 May 2014, the Claimant filed an administrative appeal against the self-assessment of IRC for the year 2011.

4.19 On 7 November 2014, the tax administration notified the Claimant of the draft decision of rejection and, as well, of the information prepared in the course of the administrative appeal.

4.20 In reaction, the Claimant exercised, on 14 November 2014, its right of prior hearing, arguing, in essence, that the result of the tax assessment to be considered pursuant to Article 92 of the IRC Code is €1,422.70 and not—as the tax administration incorrectly believed—€41,702.97.

4.21 Nevertheless, by decision of the Director of Finance of..., of 12 December 2014, the administrative appeal presented by the Claimant was held to be rejected.

4.22 Not accepting the said rejection decision, on 14 January 2015 the Claimant lodged an administrative hierarchical appeal thereof to the Minister of State and Finance, and in that context sought to demonstrate, once more, the manifest error incurred by the tax administration.

4.23 The Claimant not having been notified, to date, of any decision or draft decision regarding the said hierarchical appeal, it hereby requests the declaration of illegality of the self-assessment act of IRC for 2011 and, as well, of the rejection decisions that kept it in the legal order.

4.24 The Claimant considers that the tax administration labored under a manifest error of law, and for that reason the rejection decision is illegal.

4.25 Indeed, Article 92 of the IRC Code, in the version in force in 2011, requires that—for purposes of determining the result of the tax assessment—there be compared the tax that would exist if the Claimant did not enjoy the tax benefit provided for in the RFAI (in which the contractual tax benefit could be used in full), with that which results from the use of the tax benefit provided for in the RFAI (in which context the contractual tax benefit can only be used in part).

4.26 The Claimant therefore considers that the result of the tax assessment, determined by Article 92 of the IRC Code, corresponds to 90% of the tax that would be assessed if the Claimant limited itself to deducting only the contractual tax benefit (case in which this would be totally utilized in the tax year 2011 and the total value deducted from the tax collected would be €183,346.57).

4.27 Given that the Claimant meets the requirements set forth in Article 3(1) of the RFAI, to benefit from the investment support regime provided for in that act.

4.28 The Claimant has the right to deduct from the IRC tax collected, up to the extent of 25% thereof, (i) 20% of the value of certain investments made in regions eligible for state aid with regional purpose, up to the amount of investment of €5,000,000.00; and (ii) 10% of the value of those same investments, with respect to the portion exceeding the said €5,000,000.00 [cf. Article 3(1)(a) of the RFAI].

4.29 Eligible for this purpose are investments allocated to the operation of the enterprise, which are not the source of other tax benefits of the same nature, which provide for net job creation, to be maintained at least until the end of the fourth subsequent tax year (cf. Articles 2(2) and (3) and Article 6 of the RFAI) and which have one of the purposes provided for in paragraphs (a) and (b) of Article 2(2) of the RFAI.

4.30 The amount of the relevant investment to be taken into account corresponds to the value of "additions, occurring in the tax year, of tangible fixed assets," except insofar as such additions result from transfers of fixed assets in progress carried forward from prior tax years and do not correspond to advances; and "as well as, [of] what, having the nature of tangible assets and not concerning advances, results in additions to fixed assets in progress" (cf. Article 2(5) and (6) of the RFAI).

4.31 In principle, the deduction from the IRC tax collected described above is carried out in the tax assessment relating to the tax year in which the investments are actually made (cf. Article 3(2) of the RFAI).

4.32 If, however, it is found that the tax collected in that tax year is insufficient to absorb the entirety of the tax benefit, the portion not deducted may still be, under the same conditions, in one (or in several) of the tax assessments of the four subsequent tax years (cf. Article 3(3) of the RFAI).

4.33 Finally, with respect to the ancillary obligations to be fulfilled by the beneficiary entities, the RFAI requires the respective beneficiaries to have documentation that identifies discriminatingly the relevant investments and the respective amount and that evidences the calculation of the tax benefit and the absence of debts to the State and Social Security (cf. Article 4 of the RFAI).

4.34 The Claimant is a taxpayer subject to IRC who engages, as its principal activity, in an economic activity that may be classified within the categories provided for in the cited Article 2(1)(a) of the RFAI.

4.35 During the course of the year 2011, the Claimant made substantial investments in its production facilities, of which €235,269.68 correspond to relevant investments in accordance with the definition that results from Articles 2(2) and (3) and Article 6 of the RFAI.

4.36 And the Claimant fulfilled all the ancillary obligations to which it is bound, pursuant to Article 4 of the RFAI.

4.37 The Claimant therefore considers that, in accordance with Article 3(1)(a) of the RFAI, it would, in the abstract, have the right to deduct from the IRC tax collected for the tax year 2011 an amount equivalent to 20% of that relevant investment, that is to say, €47,053.94.

4.38 However, given that that amount of €47,053.94 is (slightly) superior to 25% of the IRC tax collected for the tax year 2011, the deduction in question cannot be entirely carried out in the self-assessment relating to that tax year.

4.39 Thus, as it follows from Article 3(1)(a), (2) and (3) of the RFAI, the deduction should be distributed as follows:

i) the amount of €46,336.64 (forty-six thousand, three hundred and thirty-six euros and sixty-four cents)—corresponding to 25% of the IRC tax collected in 2011—should be deducted in the self-assessment relating to that period; and

ii) the remaining amount—of €717.30—should be deducted from the tax collected in one (or, partially, in several) of the four subsequent tax years, provided that the tax collected in those periods permits.

4.40 In these terms, it is necessary to conclude that there exists the Claimant's right to the deduction from the IRC tax collected for 2011 of the tax benefits of the RFAI, in the amount of €46,336.64.

4.41 As it follows from the cited Article 92(1) of the IRC Code, in the version applicable in 2011, the tax assessed cannot be less than 90% of the amount that would be determined if the taxpayer did not enjoy certain tax benefits (are excluded from this correction, among others, for example, benefits of a contractual character—cf. Article 92(2) of the IRC Code).

4.42 In these terms, taking into account that the benefits arising from the application of the RFAI were included in the provision of Article 92(1) of the IRC Code, it is necessary that there be compared—after the respective deduction from the tax collected—(i) the result then achieved with (ii) that which would have been determined, in its specific case, if the deduction had not been carried out.

4.43 If the Claimant did not have the right to deduct the said amount of €46,336.64, corresponding to the benefits of the RFAI, the Claimant would naturally deduct the entirety of the amount of €183,346.57, corresponding to the tax benefits of a contractual character (and not only €139,009.93).

4.44 The Claimant thus concludes the following: (i) the value of the tax collected assessed in 2011 is €185,346.57; (ii) the value of the tax benefits of the RFAI is—insofar as it is limited to 25% of the tax collected—of €46,336.64 (forty-six thousand, three hundred and thirty-six euros and sixty-four cents); (iii) the value of the tax benefits of a contractual character is €183,765.79.

4.45 In this sense, the total amount to be deducted—corresponding, naturally, to the total of the tax collected (€185,346.57)—is composed, in the first place, by the amount of €46,336.64, corresponding to the tax benefits of the RFAI, and, subsequently, up to the extent of the 2011 tax collected, by the amount of the tax benefits of contractual character, that is to say, by the amount €139,009.93.

4.46 Conversely, the tax that would be assessed if the Claimant did not enjoy the tax benefits of the RFAI would amount to €1,580.78.

4.47 Thus, the tax to be assessed, pursuant to Article 92(1) of the IRC Code, is €1,422.70 (corresponding to 90% of the tax—in the said amount of €1,580.78—that would be assessed if the Claimant did not enjoy the tax benefit provided for in the RFAI) and that, to that extent, the amount to be reimbursed is €158.08.

4.48 There thus occurs an error of the tax administration in the decision that fell on the administrative appeal.

4.49 Indeed, the tax administration, instead of comparing the result arising from the enjoyment of tax benefits of the RFAI with that which it would obtain without the use of those benefits, compared, in clear violation of Article 92 of the IRC Code, two identical scenarios: it compared the tax resulting from the use of the right to deduct the tax benefits of the RFAI with the tax that would result from the use of those same benefits.

4.50 Consequently, the tax administration reached an absurd result: the use of the tax benefit of the RFAI instead of giving rise, as would be appropriate, to a reduction of tax to be paid, results in an increase of the tax burden, corresponding to an additional tax of €40,122.20.

4.51 Furthermore, the rejection decision now contested contradicts the administrative guidance contained in Circular No. 6/2013, of the Director-General of the Tax and Customs Authority.

1. For its part, the Respondent Tax and Customs Authority presented its response, in which it defended itself in the following terms:

5.1 As stated in point 2 of the hierarchical appeal petition, in the administrative appeal presented, the Claimant intended to have the following corrections to the self-assessment recognized:

i) "the tax credit under the Tax Regime for Investment Support ("RFAI") with respect to investments made in 2011, in the total amount of €47,053.94, with the consequent acceptance of the substitute IRC income declaration Form 22 for the tax year 2011, for recognition of that tax credit";

ii) "the reimbursement of the amount of €158.08 relating to IRC assessed in excess in the tax year 2011", and,

iii) "the carryforward of the IRC tax credits relating to the RFAI and the Contractual Tax Benefit ("CTB") that, due to insufficient tax collected, were not susceptible to full utilization in the tax year 2011".

5.2 It should be noted that it certainly results from an oversight the mention of the recognition of the RFAI credit, with respect to investments made in 2011 "with the consequent acceptance of the substitute IRC income declaration Form 22 for the tax year 2011, for recognition of that tax credit—cf. para. i);

5.3 The substitute declaration contained, rather, the tax credit arising from a contractual tax benefit, and did not contain any credit relating to the RFAI.

5.4 In the draft decision on the administrative appeal, notified for purposes of exercising the right of prior hearing, it was stated:

"The Appellant (...) may benefit from the Tax Regime for Investment Support (...) [made] relevant investments, eligible for purposes of the RFAI (...) [the] amount of the benefit requested by the appellant is not cumulative, with respect to the same investment, with other benefits, namely those contained in the Fiscal Investment Contract entered into on 2012/10/18 (...)

Considering that the appellant is entitled to the amount of €46,336.64 relating to the tax benefit of the RFAI in the tax year 2011, taking into account the limit of Art. 92 of the CIRC, the amount to be considered in the result of the tax assessment (field 371 of the income declaration form 22) will be €41,702.97 and not the amount of €1,422.70 indicated by the appellant".

5.5 And in the final decision of the same appeal it states: "With the appellant intending to make corrections to its substitute IRC income declaration Form 22 for the tax year 2011, considering the tax credit of the RFAI in the amount of €46,336.64 and the tax credit relating to the contractual tax benefit in the amount of €139,009.93, the result of the tax assessment must take into account No. 1 of Art. 92 of the CIRC", and continues by carrying out the mathematical demonstration of the tax assessment, with the values resulting from the HRA petition, in the terms that are here reproduced and that result in €41,702.94.

5.6 As stated in the same decision: "The result of the tax assessment, by application of Art. 92 of the CIRC, cannot be the amount indicated by the appellant of €1,422.70 (€1,580.78 IRC assessed in the substitute declaration submitted * 90%)".

5.7 Well, as explicitly written "The appellant cannot begin from the IRC assessed in its substitute declaration, to calculate the application of No. 1 of Art. 92 of the CIRC, since in such declaration the total value of the contractual tax benefit was considered for purposes of calculating the tax and not the requested amount of €139,009.93".

5.8 As can be inferred from the comparison between the requests formulated in the course of the administrative appeal and what was decided in that means of administrative justice, it appears that the Claimant was recognized the right to deduct the amount of €46,336.64, as title of RFAI, with respect to the tax year 2011.

5.9 And the reimbursement of the amount of €158.08, relating to IRC allegedly assessed in excess in the tax year 2011, as a result of the application of the limit of Art. 92 of the CIRC, was not recognized.

5.10 It also appears that the Claimant intended and intends to carry forward the tax credits of RFAI and of contractual tax benefit (hereinafter CTB) that are not susceptible to utilization in 2011 due to insufficient tax collected.

5.11 Whereby the values to be carried forward would necessarily be different, depending on whether or not the deduction as title of RFAI was accepted;

5.12 In view of the fact that deduction as title of RFAI should necessarily be carried out as priority, as it has a shorter period for deduction.

5.13 Note that the amount petitioned in the administrative appeal for purposes of utilization as a deduction from the 2011 tax collected, as title of CTB, is €139,009.93;

5.14 Not the €183,765.79, indicated in the self-assessment (of substitution) appealed.

5.15 And note that the appellant, now the Arbitration Claimant, intends the recognition of the right to carry forward the remaining amount of CTB, by way of the priority use of the RFAI credit.

5.16 With no registration, at any moment, on the contrary, of the Claimant renouncing such carryforward.

5.17 However, concomitantly, what the then Appellant intended and now intends is to apply the limitation of Art. 92 to the result of the tax assessment carried out in accordance with the substitute Form 22 declaration of 15.10.2013, in which it deducted €183,765.79, as title of CTB.

5.18 Being certain that the acceptance of the deduction of €46,336.64, as title of RFAI, implies the reduction of the deduction of CTB, from the amount of €183,765.79, contained in the said Form 22 of substitution, to that of €139,009.93, contained in the petition of the administrative appeal, due to insufficient tax collected.

5.19 Which means that, accepting the Tax Administration the deduction of RFAI requested, such implies the carryforward of €46,336.64 (the difference between €183,765.79 and €139,009.93), as title of CTB, to the following tax years.

5.20 Amount not considered (obviously) in the self-assessment appealed, in accordance with the Form 22 of substitution presented.

5.21 On the other hand, neither is it understood the reference made to the recognition of the "tax credit under the Tax Regime for Investment Support ("RFAI") with respect to investments made in 2011, in the total amount of €47,053.94, with the consequent acceptance of the substitute IRC income declaration Form 22 for the tax year 2011, for recognition of that tax credit",

5.22 Since, as it appears from the Initial Petition and Response, the substitute declaration presented was accepted and, as a consequence, the amount to be reimbursed of €183,765.79 was determined.

5.23 Happening, however, that, after being reimbursed, the now Claimant understood to present an administrative appeal invoking error in the self-assessment, by reason of the fact that no amount was considered in this substitute declaration as title of RFAI.

5.24 Thus, the controversy to be resolved by the constituted Arbitration Tribunal consists in determining the manner of operation of the limit imposed by Art. 92 of the CIRC, in the version applicable, in the case of the instant proceedings.

5.25 That is to say, the question to be decided consists in knowing whether the limit of Art. 92 should consider the different amounts of tax collected, depending on whether the contractual tax benefit of €183,765.79, contained in the self-assessment appealed, is utilized, which will not, in case of recognition of the right to deduction of RFAI, be entirely utilized,

5.26 Or rather, that of €139,009.93 of contractual tax benefit, petitioned by the Appellant, in case of granting of the pretension to have recognized the right to deduction of €46,336.64, as title of RFAI.

5.27 And that did, indeed, come to be taken into account in the tax assessment, by virtue of having been granted the right to deduction of RFAI in the amount of €46,336.64.

5.28 And this taking into account that the right to carry forward to the tax assessments of the following tax years the remaining tax credits, whether they have been recognized as title of RFAI, whether as title of CTB, although they concern other tax periods, and therefore are external to the self-assessment appealed, in this sense, are relevant—it is believed—for the resolution of the present dispute.

5.29 The RFAI constitutes a tax benefit to investment in tangible fixed assets and intangible fixed assets, and Article 2 of the law that regulates the RFAI referred to above, in numbers 2 to 6, defines the scope of application of the regime at the level of the type of eligible and non-eligible investments and the conditions required for IRC taxpayers to benefit from the tax incentive in question, and Article 3(1) establishes the manner of calculating the tax benefit.

5.30 In accordance with paragraph (a) of No. 1 of Article 3 of the RFAI, this tax benefit consists of a "deduction from the IRC tax collected", and the deduction is made "up to the extent of 25% thereof".

5.31 Thus, in the specific case, the maximum limit of the deduction as title of RFAI, in 2011, is €46,336.64 (25% x €185,346.57).

5.32 Article 3(3) of the RFAI further states that, when the deduction "cannot be carried out in full due to insufficient tax collected, the amount still not deducted may be, under the same conditions, in the tax assessments of the four subsequent tax years".

5.33 Given that the deduction is carried out in the tax assessment relating to the tax period in which the investment was made, in the specific case, in 2011, the deduction to be carried out will be €46,336.64—as decided in the administrative appeal.

5.34 It follows from the very nature of the benefit in question the establishment of various limits to the deduction from the tax collected of the amounts invested, which have to do with the amounts invested and the region where the investments are made, a situation that may lead to the entirety thereof not being able to be deducted from the tax collected in the year in which they were made.

5.35 Now, in this case, the law still allows for the possibility of their carryforward.

5.36 Moreover, if in accordance with the norms of the RFAI the claimant cannot deduct from the tax collected in the year 2011 a certain amount of investments made, then it may deduct them up to the limit of the 4 subsequent tax years.

5.37 If, in those periods, it still does not have sufficient tax collected to deduct them, then it will lose that possibility.

5.38 As it clearly follows from the content of the applicable norm ratione temporis, since the RFAI was not provided for in the exclusions recorded in No. 2 of Art. 92 of the CIRC, in force in 2011, the provisions of No. 1 of the same norm are applicable to it.

5.39 The legislature not having, until the amendment of the article made through Decree-Law No. 82/2013, expressly included the RFAI in the norm contained in Article 92, No. 2 (as it did in the case of SIFIDE), one can only conclude that this results from an option in terms of economic and financial policy, especially if we consider that these are benefits that have been successively extended by itself without any rectification of the wording of the mentioned article, as well as that, from the amendment of the article carried out by Law No. 82/2013, of 17 June, it does not result that this was introduced with interpretative character.

5.40 The values effectively deducted from the tax collected as title of CTB will be excluded from that comparison.

5.41 Certainly they are not the values that had been deducted but—due to error of the taxpayer—will no longer be deductible in full and will be carried forward to future tax years!

5.42 Well, we see that the total of deductions from the tax collected considered by the taxpayer in the self-assessment appealed was €183,765.79, as title of CTB;

5.43 Having determined an IRC assessed of €1,580.78, by virtue of having considered the said value of deduction from the tax collected of €183,765.79—entirely relating to CTB.

5.44 We see that the grounds for the partial granting of the HRA is reduced to the application of the norm of limitation to the enjoyment of tax benefits contained in Art. 92 of the CIRC, in view of the alterations to the deductions from the tax collected petitioned by the then appellant.

5.45 Art. 92 of the CIRC, introduced by the State Budget Law for 2005, is inserted in the chapter relating to the manner of calculating tax and was created with a view to limiting the potentially negative effects that tax benefits may have on the calculation of tax, hence, in essence, such article intended to create a minimum ceiling of IRC to be paid, in each year.

5.46 In the initial version of 2005 and until 2009, the minimum percentage was 60%, with the State Budget for 2010 the limit was raised to 75% and with the State Budget for 2011, to 90%.

5.47 Thus, we are faced with a norm relating to the determination of the tax collected that altered, in the years 2010 and in the present case of 2011, the effective tax limit, which has to do with the amount, quantum, of the tax to be paid.

5.48 Regarding the objective that presided over the institution of a rule of global limitation of tax benefits, in Article 86 (subsequently renumbered as Art. 92) of the IRC Code, the explanatory notes inserted in the Reports that accompanied the proposals for State Budget Law for 2005 and for 2011 give account of two types of motivations:

i) to broaden the tax base of the IRC, and

ii) to ensure greater equity in the tax treatment of enterprises that enjoy tax benefits and those that do not.

5.49 We have, then, that the motivation that was at the origin of what, in a first analysis, could appear as a measure exclusively related to the collection of tax revenue (by way of limitation of tax expenditure), gained in the meantime a new dimension: it was also intended to achieve the alignment of Portuguese tax regulations with best practices of international tax competition (between States), pursued in the OECD and the European Union.

5.50 On the other hand, it should also be noted that the norm of Art. 92 of the CIRC has the purpose of limiting the application of all tax benefits (not expressly excluded) and not only of the RFAI.

5.51 Now, if one subscribed to the Claimant's understanding, the effect intended by the legislator, in the sense of imposing limits on the deduction of benefits from the tax collected and thus guaranteeing a minimum tax collected, would end up being totally neutralized.

5.52 It would suffice to declare first a negligible tax collected and then appeal from the self-assessment, requesting the use of a fraction of the benefits excluded from the limit (and the carryforward of the remainder), still calculating the limit on the value first declared!

5.53 The Claimant argues that, without prejudice to the fact that the tax collected is not susceptible to absorbing in its entirety the benefit of the RFAI relating to the tax year 2011, added to the total amount of contractual tax benefit, whereby the remaining amounts will be carried forward to future tax years (as it expressly requested in the administrative appeal and in the hierarchical appeal).

5.54 Notwithstanding all this, for base of calculation of the limit of Art. 92 of the CIRC the Appellant intended and the Claimant now intends that account should be taken of the tax collected resulting from consideration of the entire amount of the contractual tax benefit as a deduction from the tax collected in that tax period—carried out in the self-assessment (of substitution) of which it comes to appeal.

5.55 Whilst, concomitantly, it indicates in its petition—in an express manner—that it intends to use only the amount of €139,009.93, and carry forward the remainder!

5.56 The non-actual use of the total amount of contractual tax benefit—combined with the pretension of the right to carry forward in future periods the difference between the amount previously inscribed as title of deduction from the tax collected and the amount that it actually utilizes, due to the priority deduction of the RFAI—cannot fail to be taken into account for purposes of interpretation and application of Article 92 of the CIRC, as was decided by the Tax Administration.

5.57 We have moved from a total value of deductions from the tax collected relating to CTB—hence, excluded from the limit—to a total value of deductions from the tax collected that is decomposed in an amount relating to RFAI, of €46,336.64—not excluded from the limit—and an amount of €139,009.93, relating to CTB.

5.58 Only being excluded from the limit, pursuant to No. 2,—naturally—the amount utilized.

5.59 For the remaining amount—to be carried forward—does not form part of the 2011 tax assessment, it may be deducted from the tax collected of the following tax years, if the legal requirements are observed.

5.60 From the provisions under analysis it results very clearly that it was not the intention of the legislator to permit taxpayers to calculate the limit of enjoyment of benefits on the basis of amounts not effectively deducted in the tax year and reportable to future ones.

5.61 To accept the interpretation of the Claimant in the sense that it has the legitimate right to enjoy in the future the tax benefit not effectively deducted, but to use it, nonetheless, as the base for calculation of the limit of Art. 92, would constitute the violation of the most elementary rules of legal hermeneutics.

5.62 Article 11 of the General Tax Law (LGT) provides that in determining the meaning of tax law norms and in qualifying the facts to which they apply the general rules and principles of interpretation and application of laws, contained in Article 9 of the Civil Code, are observed.

5.63 No. 1 of Article 9 of the Civil Code designates as elements of interpretation of the law the literal element, which consists of the letter of the law, the systematic element, which appeals to the unity of the legal system, the historical element and the teleological element, providing, on the other hand, No. 2 of the provision that a meaning cannot be considered that does not have in the letter of the law "a minimum of verbal correspondence, even if imperfectly expressed".

5.64 On the other hand, it must be stressed that this is in this case the interpretation of norms concerning the application in concreto of tax benefits, and the concept of tax benefits was defined by the legislator in Article 2 of the Tax Benefits Statute as "measures of an exceptional character instituted for the protection of relevant extra-fiscal public interests that are superior to the taxation that they prevent".

5.65 If such rigor is imposed on the legislator in the formulation of norms that enshrine tax benefits, then, by a fortiori, equal rigor is imposed on the interpreter when it has to determine the meaning that the norms bear, being permitted only to extend the text and conform it with legislative thought in the face of strong evidence that the legislator said less than it wanted, which, as fully demonstrated, does not occur in the situation under consideration in the present proceedings.

5.66 The Claimant further argues that its pretension would enjoy support in the guidance contained in Circular 6/2013.

5.67 From the outset, the example given is not identical, namely in view of the fact that only a benefit that operates by deduction from taxable income is at issue, while here we deal with benefits that operate by deduction from the tax collected.

5.68 The example in the Circular is also different from the case of the instant proceedings, in view of the fact that, in the former, a benefit not excluded from the limit is at issue and here we deal with a case in which it is intended to deduct a benefit also not excluded, reducing concomitantly the value of the deduction as title of CTB, excluded from the limit.

5.69 And, above all, we see that the amounts to be carried forward, in the example, are downstream, that is to say, they result from the application of the norm;

5.70 It must still be noted that, to uphold the pretension of the Claimant, such would imply for the Tax Administration the violation of the constitutional imperatives to which it is bound, namely the principles of tax legality, and, as well, that of tax equality.

5.71 It lacks any axiologically acceptable foundation, the Claimant's pretension to calculate the limit on a tax collected assessed on a benefit amount that it ends up not utilizing, carrying forward to the following tax years.

1. On 14/10/2015, an arbitral order was issued, dispensing with the hearing provided for in Article 18 of the RJAT, given that the circumstances that are the subject of the various paragraphs of No. 1 of this provision were not present, and also dispensing, in accordance with No. 2 of Article 18 of the RJAT, with the production of oral submissions, given that the positions of the parties were perfectly defined in their respective pleadings.

II. Facts Proved

1. The Claimant is a taxpayer subject to IRC who engages, as its principal activity, in the production of pharmaceuticals and, as complementary activities, in the wholesale trade of pharmaceutical products and in the manufacture of perfumes, cosmetics and personal hygiene products.

2. During the tax year of 2011, the Claimant made investments in the total amount of €4,057,983.75 in its production facilities, located in the Municipality of... .

3. Of that amount, the Claimant invested the sum of €235,269.68 in tangible fixed assets acquired in new condition (not corresponding to land, buildings—except manufacturing plants—, light passenger or mixed vehicles, furniture, articles of comfort or decoration, social equipment, or other investment goods that are not directly or indispensably associated with its productive activity).

4. On 22 May 2012, the Claimant submitted an IRC form 22 declaration for the tax year 2011.

5. In the said IRC form 22 declaration, the Claimant recorded non-exempt taxable matter of €747,636.27 and a tax collected of €185,346.57.

6. To this amount, the Claimant deducted (i) withholdings at source suffered during the tax year, in the amount of €53,650.15; and (ii) advance payments made, in the amount of €43,314, and added (i) municipal surtax, in the amount of €9,420.22; and (ii) amounts due as autonomous taxes, in the amount of €7,900.02.

7. As a result, the Claimant determined a total amount payable, as tax, of €105,702.66.

8. The Claimant was notified of the tax assessment statement corresponding to tax assessment No. 2012... and made the payment of the total amount payable of €105,702.66.

9. On 18 October 2012, the Claimant and the Portuguese State, represented by ..., I.P.–..., IP, entered into a fiscal investment contract.

10. On 15 October 2013, the Claimant submitted a substitute IRC form 22 declaration for the tax year 2011.

11. In this substitute declaration, the Claimant maintained the values previously recorded for (i) non-exempt taxable matter; (ii) tax collected; (iii) withholdings at source; (iv) advance payments; (v) surtax; and (vi) autonomous taxes and deducted from the tax collected the amount of €183,765, corresponding to tax benefits of a contractual nature.

12. As a result, there occurred (i) a reduction of the IRC assessed, from €185,346.57 to €1,580 and, consequently, (ii) the determination of a total amount to be recovered of €78,063.13, instead of a total amount to be paid of €105,702.66.

13. The Claimant: (i) was notified of the tax assessment statement corresponding to tax assessment No. 2014...; and (ii) was reimbursed the amount of €183,765.79, corresponding to the total amount to be recovered recorded in the substitute declaration (€78,063.13) plus the amount that had been paid by the Claimant with reference to the original self-assessment, of May 2012 (€105,702.66).

14. On 22 May 2014, the Claimant filed an administrative appeal against the self-assessment of IRC for the year 2011.

15. On 7 November 2014, the tax administration notified the Claimant of the draft decision of rejection and, as well, of the information prepared in the course of the administrative appeal.

16. The Claimant exercised, on 14 November 2014, its right of prior hearing.

17. By decision of the Director of Finance of..., of 12 December 2014, the administrative appeal presented by the Claimant was held to be rejected.

18. On 14 January 2015 the Claimant lodged a hierarchical appeal thereof to the Minister of State and Finance.

4.19 The Claimant was not notified, to date, of any decision or draft decision regarding the said hierarchical appeal.

III. Facts Not Proved

There are no facts not proved relevant to the decision of the case.

IV. On the Law

1. The issue to be considered in these proceedings concerns exclusively the illegality of the self-assessment act of Corporate Income Tax (IRC), relating to the year 2011, in light of the norm provided for in Article 92 of the CIRC in the version in force in 2011.

This issue has already been examined in a similar case, decided in proceedings 702/2014-T of this Arbitration Centre, which was presided over by the undersigned Arbitrator, whereby the grounds of that decision will be partially followed:

1. Article 92 of the CIRC states, in the version in force at the time:

"1 - For entities that engage, as their principal activity, in a commercial, industrial or agricultural activity, as well as non-residents with a permanent establishment in Portuguese territory, the tax assessed pursuant to 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 taxpayer 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 provisions of the preceding number:

a) Those of a contractual character;

b) The system of tax incentives for business research and development II (SIFIDE II);

c) Tax benefits to free trade zones provided for in Articles 33 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"

Unlike what occurs in the current version of Article 92, in 2011 the Tax Regime for Investment Support (RFAI) was not expressly provided for in No. 2.

1. Similarly, Article 3 of the Tax Regime for Investment Support (RFAI), approved by Article 13 of Law 10/2009, of 10 March, provided at the time as follows:

"1 – To IRC taxpayers resident in Portuguese territory or who possess a permanent establishment therein, who engage as their principal activity in a commercial, industrial or agricultural activity covered by No. 1 of the preceding article, who make, in 2009, investments considered relevant, the following tax benefits are granted:

a) Deduction from the IRC tax collected, and up to the extent of 25% thereof, of the following amounts, for investments made in regions eligible for aid under the scope of incentives with a regional purpose:

i) 20% of the relevant investment, with respect to the investment up to the amount of €5,000,000;

ii) 10% of the relevant investment, with respect to the investment of a value exceeding €5,000,000;

b) Exemption from municipal property tax, for a period of up to five years, with respect to real property of its ownership that constitutes relevant investment;

c) Exemption from municipal tax on onerous transfers of real property with respect to acquisitions of real property that constitute relevant investment;

d) Exemption from stamp duty with respect to acquisitions of real property that constitute relevant investment.

2 – The deduction referred to in paragraph (a) of the preceding number is carried out in the tax assessment relating to the tax period that begins in 2009.

3 – When the deduction referred to in the preceding number cannot be carried out in full due to insufficient tax collected, the amount still not deducted may be, under the same conditions, in the tax assessments of the four subsequent tax years.

4 – For purposes of the provisions of paragraphs (b) and (c) of No. 1, the exemptions provided for therein are conditioned upon recognition, by the competent municipal assembly, of the interest of the investment to the region.

5 – The overall amount of tax incentives granted pursuant to the preceding numbers cannot exceed the amount that results from the application of the maximum limits applicable to investment with a regional purpose for the period 2007-2013, in force in the region in which the investment is made, contained in Article 7."

1. It is thus verified that in paragraph (a) of No. 1 of Article 3 of the RFAI a maximum percentage of annual deduction from the IRC tax collected of 25% is established, which implies that the IRC tax collected could not fall below 75% of the tax collected that would exist without the RFAI.

Conversely, Article 92 of the CIRC regulates, in generic terms, the maximum percentage of annual reduction of the IRC tax collected as a result of the utilization of the various tax benefits and regimes provided for in No. 13 of Article 43 and in Article 75 of the same act.

What Article 92 of the CIRC provides is that the minimum IRC tax collected cannot be less than 90% of the tax collected that would exist without the application of tax benefits or other regimes already referred to. Only the tax benefits referred to in No. 2 thereof are excepted.

Let us analyze how these provisions should be reconciled.

Note, in the first place, that the percentage of the minimum tax collected, contained in Article 92 of the CIRC, has been increased several times. Initially, in the version given to the then Article 86 CIRC, by Law 55-B/2014, of 30 December, that percentage was 60%. Subsequently, through Law No. 3-B/2010, of 28 April, the percentage of the minimum tax collected was raised to 75%. Finally, through Law No. 55-A/2010, of 31 December 2010, that percentage was further increased to 90%.

Thus, at the time they arose, the norms of the CIRC and the RFAI could coexist perfectly, since initially we would have a percentage limit of deductions of 25% for the RFAI and a percentage of 40% for the IRC in general, these two percentages coming to coincide, as from April 2010. Only as of 2011 does the issue arise, with the increase of the percentage of the minimum IRC tax collected to 90%. However, the same Law 55-A/2010, of 31 December, which amended Article 92 of the CIRC, also renewed the RFAI for 2011.

This issue, despite being very little debated in the doctrine, has already been the subject of some positions. Thus RODRIGO RABECA DOMINGUES, "O Regime Fiscal de Apoio ao Investimento", in Revisores e Auditores: Revista da Ordem dos Revisores Oficiais de Contas, No. 56 (2012), pp. 44-50 (49-50), argues that "considering that the right to the carryforward of the RFAI would be lost, the legislator would be emptying the RFAI (which it itself created) of much of its interest and purpose—the promotion of business investment and job creation. Moreover, it would be difficult to sustain that in the same Law (the State Budget for 2011), the legislator extends the RFAI until 31 December 2011 and, simultaneously, creates a norm that, if interpreted in a blind manner, would empty the RFAI of much of its economic and fiscal interest". The author concludes, therefore, that "the rationale of Article 92 of the IRC Code does not intend to affect the carryforward of tax benefits".

This position is not, however, unanimous in the doctrine, with ABÍLIO JOSÉ DA COSTA SOUSA, Tax Benefits Statute Commented, Moneris/Vida Económica, 2013, p. 138, pronouncing himself regarding the RFAI in the sense that "the utilization of this benefit is conditioned by Article 92 of the IRC Code, whereby in practice the same cannot exceed 10% of the assessed IRC".

We agree with this latter position.

Indeed, the initial objective of Article 86, subsequently Article 92 CIRC, was to establish a limit to tax benefits granted to enterprises. In its initial version there was an express indication of the tax benefits to which that limit applied, but it was already referred to in the State Budget Report 2005 (p. 52) that the intention was to establish a "limit to the reduction of the effective tax rate by utilization of tax benefits".

Subsequently that limit came to cover each and every tax benefit not expressly excepted in that provision. There can be no doubt that Article 92(1) of the CIRC aims to limit the effect of tax benefits granted by other norms, for it is precisely one of its functions, as is evident from its text. Thus, the objective of that norm is naturally its application to all tax benefits, functioning thus as a super-imposition norm, which applies regardless of the amount of the various tax benefits granted. This objective results clearly from the explanatory notes inserted in the Report that accompanied the proposal for the State Budget Law for 2011, which refers to two types of motivations: to broaden the tax base of the IRC, and to ensure greater equity in the tax treatment of enterprises that enjoy tax benefits and those that do not. In the State Budget Report 2011 (p. 72) the following is indeed referred to:

"-: "(…) with the concern of broadening the tax base of the IRC and of ensuring greater equity in the tax treatment of enterprises, the Proposal for the State Budget Law for 2011 proceeds to a review of the global limit to the enjoyment of tax benefits that appears in Article 92 of the IRC Code.

This is a provision that was already subject to review in the State Budget Law for 2010, at which time the reference percentage was raised from 60% to the current 75%, pointing to an effective tax rate of 18.75%. With the Proposal for the State Budget Law for 2011, two alterations are introduced intended to strengthen this limitation: first, raising to 90% the reference percentage below which tax benefits are disregarded; and second, inverting the structure of this limitation rule, given that instead of positively enunciating the benefits to which it applies, it is generically applied to any tax benefit, with only the exceptions being enumerated.

With this, one points to an effective tax rate of 22.5% and reproduces in the scope of the IRC a rule of moralization similar to that introduced in the field of Personal Income Tax".

Now, in light of this justification, it is manifest that each and every benefit not expressly excepted in Art. 92, as was the case with the RFAI, was subject to the maximum limit of 10%, it not being possible to interpret Article 3 RFAI in isolation, without taking into account the limitation provided for in Article 92(1) CIRC.

1. In principle, the deduction from the IRC tax collected described above is carried out in the tax assessment relating to the tax year in which the investments are actually made (cf. Article 3(2) of the RFAI).

If, however, it is found that the tax collected in that tax year is insufficient to absorb the entirety of the tax benefit, the portion not deducted may still be, under the same conditions, in one (or in several) of the tax assessments of the four subsequent tax years (cf. Article 3(3) of the RFAI).

In accordance with paragraph (a) of No. 1 of Article 3 of the RFAI, this tax benefit consists of a "deduction from the IRC tax collected", and the deduction is made "up to the extent of 25% thereof".

In the specific case, the maximum limit of the deduction as title of RFAI, in 2011, is €46,336.64 (25% x €185,346.57).

Given that the RFAI was not provided for in the exclusions recorded in No. 2 of Art. 92 of the CIRC, in force in 2011, the provisions of No. 1 of the same norm are applicable to it, reducing the deduction to 10%.

Thus, and as referred to in the Decision of CAAD No. 702/2014-T:

"Now, in light of this justification, it is manifest that each and every benefit not expressly excepted in Art. 92, as was the case with the RFAI, was subject to the maximum limit of 10% that this norm institutes, so the claimant did not have grounds in the interpretation it propounds. (…)

Moreover, it is notorious that the primary legislative concern in the State Budget of 2011 was the reduction of the deficit of public finances, guaranteeing a certain level of tax revenue, in line with the commitments undertaken with international creditors. For this reason, the specific conditions in which this Budget was prepared point unequivocally to the objective of ensuring tax revenue taking precedence over the maintenance of tax benefits not expressly indicated, at least as regards their relevance in that year of 2011. (…)

In any case, the elimination that the same Law No. 55-A/2010 effected of the reference to "benefits in the form of deduction from the tax collected", which in the preceding version was made in No. 2 of Article 92 of the CIRC, to indicate the tax benefits excluded from the regime of No. 1, cannot fail to be interpreted as subjecting to the new limitation made in No. 1 all tax benefits not maintained in the new list, and this is the only interpretation that has in the letter of the law the minimum of verbal correspondence required by Article 9(3) of the Civil Code".

1. The Claimant contends, however, that, given that the tax collected is not susceptible to absorbing in its entirety the benefit of the RFAI relating to the tax year 2011, added to the total amount of contractual tax benefit, whereby the remaining amounts will be carried forward to future tax years. It accordingly intends to utilize the RFAI up to the legal limit and carry forward the contractual tax benefit to future tax years.

Conversely, the Tax Authority maintains that, by utilizing the contractual tax benefits, the Claimant ceases to be able to utilize the RFAI up to the legal limit, under penalty of calling into question the limitation intended by Article 92 of the CIRC, through the combination of deductions of limitatable and non-limitatable tax benefits.

1. On this issue, it was written in the decision issued in proceedings 702/2014 the following:

"Dissecting the norm of Article 92(1), one detects that

– the hypothesis (what triggers the legal consequence), is IRC taxpayers enjoying tax benefits and other regimes indicated therein that reduce the IRC tax collected by more than 90% of the amount that would be determined if the taxpayer did not enjoy tax benefits and the regimes provided for in No. 13 of Article 43 and in Article;

– the enactment (the legal consequence triggered by the occurrence of that hypothesis) is the amount of the tax to be assessed passing to be 90% of what would be determined if the taxpayer did not enjoy tax benefits and the regimes provided for in No. 13 of Article 43 and in Article 75.

The reference to "the provisions of the preceding number", made in No. 2 of Article 92, points literally in the direction that the exclusion that is provided for is reported to the enacting part and not to the provision of No. 1. Indeed, if it were intended to allude to the provision of No. 1, the formula adequate to express legislative thought would be "the following tax benefits are excluded from the provision of the preceding number...", which would have the effect of removing the tax benefits therein indicated from everything that is established in No. 1, since, a situation being removed from the provision of a norm, it is necessarily excluded from its enactment (…).

The reason for being of No. 2 does not justify a different interpretation from that which results from the literal tenor.

In truth, the objective of No. 2, in excluding the tax benefits listed therein from the enactment of No. 1, is only to establish that those tax benefits do not suffer limitation, whereby, even if from their application it results that the assessed IRC is lower than the percentage referred to in No. 1, there is no reduction in those tax benefits (…).

But, it is not inferred from No. 2 of Article 92, that the tax benefits indicated therein should be neutral for purposes of the application of No. 1, designedly that they should not be considered as deductions provided for in paragraph (b) of No. 1 of Article 90 or that they should not be considered tax benefits.

Indeed, the very fact that there is agreement of the Parties regarding the relevance of those tax benefits referred to in No. 2 of Article 92 to determine the "second magnitude", suffices to conclude that, in coherence, in light of the interpretation of the Claimant itself, that alleged neutrality is not legislatively enshrined.

On the other hand, no reasons are detected that justify the adoption of an interpretation different from that to which the literal tenor points, designedly at the level of the congruence and reasonableness of the solution to which this tenor points.

It is certain that, as the Claimant refers, through the weighing of the tax benefits indicated in No. 2 of Article 92 for determination of the limit resulting from its No. 1, other tax benefits may suffer a limitation greater than that they would if the former were not considered. That is, in the case at hand, by reason of the existence of SIFIDE and contractual tax benefits (indicated in No. 2), the tax benefit of the RFAI may be more reduced than it would be if those former tax benefits were not considered.

But, in that there is no incongruence, for, from the outset, the limitation of the generality of tax benefits not provided for in No. 2 of Article 92 is precisely the effect it is intended to obtain with No. 1 of this article.

Moreover, in cases where there are tax benefits indicated in No. 2 of Article 92 concomitantly with others, although it is not desired to affect the relevance of the former, they do not cease to affect the obtaining of revenues and, consequently, to make difficult the primary objective of the State Budget for 2011, which is to progress in the path towards the consolidation of public finances and assuring a certain level of revenues, through an effective tax rate of 22.5%.

And, for this reason, it is in harmony with this design and appears reasonable and balanced a legislative solution that is reduced to the fact that, when there is concurrence of non-limitatable and limitatable tax benefits (in light of the perspective embodied in Article 92), being greater the negative effect on the obtaining of revenues, it is also greater the limitation of the limitables".

Thus one agrees with the position of the Tax Authority that to accept the interpretation of the Claimant in the sense that it has the legitimate right to enjoy in the future the tax benefit not effectively deducted, but to use it, nonetheless, as the base for calculation of the limit of Article 92, would not be in conformity with the rules of legal hermeneutics.

1. It should further be noted that, according to Article 2(1) of the Tax Benefits Statute, tax benefits are "measures of an exceptional character instituted for the protection of relevant extra-fiscal public interests that are superior to the taxation that they prevent".

Now, permitting that tax benefits be considered for the base of calculation of the limit of Article 92 of the CIRC, even though they have not been effectively deducted and only shall be in future tax years, would imply contradicting the exceptional character of tax benefits, pursuant to Article 2 of the Tax Benefits Statute.

This does not mean that the Claimant does not have the legitimate right to utilize these benefits not effectively deducted in future tax years, but only that these cannot have the function of increasing the limits of Article 92 of the CIRC in the 2011 self-assessment, as would be the case with the combined utilization of the RFAI and of the contractual tax benefits, in the manner intended.

1. In light of all the above, it is necessary to conclude that the rejection decision regarding administrative appeal No. ...2014... is legal and, as well, that the self-assessment of IRC for the tax year 2011 is legal.

IV. Decision

The request for annulment of the decision rejecting the administrative appeal No. ...2014... and, as well, of the self-assessment of IRC for the tax year 2011, is held to be without merit.

The value of €158.08 (value indicated and not disputed) is fixed to the proceedings, and the value of the corresponding arbitration fee is fixed at €306.00 euros pursuant to Table I of the Regulation of Costs of Tax Arbitration Proceedings.

Costs to be borne by the claimant entity.

Lisbon, 30 November 2015

The Arbitrator

(Luís Menezes Leitão)