Process: 386/2015-T

Date: April 21, 2016

Tax Type: IRC

Source: Original CAAD Decision

Summary

Process 386/2015-T addresses a critical IRC dispute concerning non-invoiced services and the principle of taxation by real income. The case involved a branch of an international company providing a computerized reservation system (B... platform) to Portuguese travel agencies. While written contracts included provisions allowing the company to invoice for additional technical services (maintenance, support, VPN management), the taxpayer argued these services were never actually charged due to a tacit agreement of gratuity between the parties. The Tax and Customs Authority (TCA) issued official IRC assessments and compensatory interest for tax years 2009-2011, presumably adding back the value of non-invoiced services as taxable income. The company challenged these assessments, arguing that market practice in the reservation platform industry treats such ancillary services as complimentary components of the main system provision. The taxpayer contended that neither party recognized any obligation to pay for these services, and that invoicing them would contradict legitimate business expectations. Crucially, the company invoked the constitutional principle of taxation by real income (tributação pelo rendimento real), arguing that IRC should only apply to actual economic gains, not theoretical or potential revenues. The taxpayer also cited applicable accounting standards (POC, Accounting Directive 26, and later SNC/NCRF 20) which require revenue recognition only when economic benefits are probable and consideration is receivable at fair value. After the TCA dismissed the gracious complaints, the taxpayer escalated to CAAD arbitration under Decree-Law 10/2011. This case highlights the tension between formal contractual provisions and actual business practices, raising fundamental questions about when services qualify as gratuitous for tax purposes and whether tax authorities can impute income based solely on contractual capacity to charge rather than actual consideration received.

Full Decision

ARBITRAL AWARD

The arbitrators Fernanda Maçãs (arbitrator president), Diogo Feio and Nuno Miguel Morujão, designated by the Deontological Council of the Administrative Arbitration Centre to form the Arbitral Tribunal, constituted on 24/8/2015, hereby agree as follows:

I. REPORT

  1. The taxpayer A... - BRANCH IN PORTUGAL, with the NIPC ..., (hereinafter "Claimant"), submitted, on 19/6/2015, a request for constitution of a Collective Arbitral Tribunal, in accordance with the combined provisions of articles 2 and 10 of Decree-Law no. 10/2011, of 20 January (Legal Regime of Arbitration in Tax Matters, hereinafter "LRATM"), in which the Tax and Customs Authority (hereinafter "TCA" or "Respondent") is the respondent.

  2. The Claimant requests the arbitral decision on the petition for annulment of the TCA's dismissal of the gracious complaints submitted by the Claimant: gracious complaint no. ...2014..., relating to the official assessment of CIT and compensatory interest for the year 2009, regarding which it was notified of the respective dismissal on 1/4/2015, and gracious complaints no. ...2014... and no. ...2015..., concerning respectively official assessments of CIT and compensatory interest for the years 2010 and 2011, regarding which it was notified of the respective dismissal on 2/6/2015.

  3. The request for constitution of the Arbitral Tribunal was accepted by the Esteemed President of the Administrative Arbitration Centre and automatically notified to the TCA on 24/8/2015.

  4. The Claimant did not proceed with the appointment of an arbitrator, wherefore, in accordance with the provisions of paragraph (a) of item 2 of article 6 and paragraph (b) of item 1 of article 11 of the LRATM, as amended by article 228 of Law no. 66-B/2012, of 31 December, the President of the Deontological Council designated as arbitrators of the Collective Arbitral Tribunal the present signatories, who communicated acceptance of the appointment within the applicable timeframe.

  5. On 7/8/2015, the parties were notified of the designation of the arbitrators, having raised no objection.

  6. In accordance with the provision in paragraph (c) of item 11 of the LRATM, the Collective Arbitral Tribunal was constituted on 24/8/2015.

  7. In these terms, the Arbitral Tribunal is duly constituted to hear and decide on the subject matter of the proceedings.

  8. To support the request for arbitral decision, the Claimant alleges, in summary:

a. The Claimant's principal activity is the provision of the computerized system B... for the reservation of trips in different means of transport, through communication between service providers - tour operators, airlines, hotels and others - and end users.

b. In this system there exist, on the one hand, (i) service providers (airlines, hotels, tour operators) and, on the other hand, (ii) end users (travel agencies), which access the system B... locally in which they make reservations.

c. In its capacity as representative of Group C... in Portugal, the Claimant enters into contracts with different travel agencies for the use thereof, through which the use of the B... reservation system is made available.

d. Together with the provision of the B... reservation system and as it is a computer platform, the possibility of providing various services connected with the normal functioning of that platform and/or increase/adaptation of its functionalities to the needs of the travel agencies (hereinafter "additional services") is made available to travel agencies.

e. Such services are the subject of a written contract, and are identified in clause 2.1, which refers to "continuous and uninterrupted access to 'B... Functionality', as described in ANNEX III of the Present Contract".

f. That annex refers to the technical specifications related to access to the B... system, namely: system performance and capacity; technical help desk support; maintenance support; VPN operation, maintenance and management service (network infrastructure), etc.

g. In turn, in Annex II of the contracts are identified specific "additional services" that can be provided to travel agencies by the Claimant, namely: expansion of operational installations, equipment replacement, external changes or changes of ownership, equipment removal and software reinstallation.

h. Clause 9.1 of the contracts (included in the 'Invoicing and payment method' section) establishes the terms and conditions applicable to the services described in clause 2.1 in accordance with the rates described in Annex II, providing for "the possibility of invoicing the services that come to be provided by it to the travel agencies, especially because if such were not expressly provided, it could never require any payment, should the circumstances of the business mentioned above change". To this end it states that "as a matter of legal security of the Claimant, the possibility of invoicing the services that come to be provided by it to the travel agencies is therefore provided, especially because if such were not expressly provided, it could never require any payment, should the circumstances of the business mentioned above change".

i. The Claimant maintains that "market practice regarding this type of service demonstrates that they are not susceptible to obtaining any consideration, insofar as in the expectations of the parties involved - Claimant and travel agencies - they are not invoiced by the suppliers of computer platforms".

j. To this end it states that "despite the contractual formality existing (...), it was established (through mutual and tacit agreement) between the parties - Claimant and travel agencies - to give no practical effect to the said clause", emphasizing that "this situation is nothing more than a normal practice in the market in which it operates, insofar as the said services constitute an ancillary part of the provision of the B... system" [emphasis of the Claimant], adding that "the said services should be regarded as an integral part of the obligations assumed by the Claimant in the context of the provision of the Amadeus system to travel agencies so that they can use it in its fullness".

k. In such a way that "none of the entities recognize the existence of that right attributable to the Claimant to charge for the provision of the services - neither the entity that would have the greatest incentive to 'force' such existence (the Claimant itself), nor the counterparties (the travel agencies) as they do not expect to incur expenses for the maintenance/management of the computer platform". And consequently, it maintains that regarding those services, once provided, there is no place for any invoicing or recognition of revenue, as there is no tax event.

l. Thus, it concludes that the additional assessments it received from the TCA, which it challenged in gracious complaints that came to be dismissed, violate the constitutional principle of taxation based on actual income, adding that the services provided were not only not invoiced, but were not charged for.

m. On the other hand, it states that, since the TCA considered its accounting suitable for purposes of applying the direct assessment method, the application of corrections to its accounting is not legitimate.

n. With respect to the correction of its accounting it further invokes the applicable accounting rules (Official Chart of Accounts and Accounting Directive no. 26 until 2009, and System of Accounting Standardization and Financial Reporting Accounting Standard no. 20 from 2010 onwards), according to which "revenue is recognized when it is probable that future economic benefits will flow to the entity and those benefits can be reliably measured". Additionally, in accordance with the cited rules, it provides that "revenue should be measured at the fair value of the consideration received or receivable" [emphasis of the Claimant], "in this case the services provided by the Claimant, individually considered, present a fair value of zero (0) since the parties involved (and without any relationship between them) both understand that the services should not be subject to quantification and consequent invoicing, with the absence of economic benefits justifying such accounting being notable".

o. Thus, it maintains that if for accounting purposes no revenue should have been recorded, and lucrative income being determined on the basis of accounting, as provided in article 17 of the CIT Code, in the context of direct assessment of taxable matter, as verified in the present case, it cannot be concluded that, for tax purposes, there is an omission of income in the accounting and, consequently, there is no correction that is due to the lucrative income declared in the income tax return.

  1. The TCA filed a Response, accompanied by the Administrative File, alleging, in summary:

a. In the user contracts under analysis there is no provision for the possibility of non-invoicing of the services provided and listed in the respective annex II; on the contrary, "what is actually contracted and what consequently has legal effects, as it results from the express and clear will of the parties, is that for the provision of services described in annex II of the user contract (expansion of operational installations, replacement of user and equipment, external changes or changes of ownership, equipment removal at the request of travel agencies and equipment reinstallation) the users have to pay the price stipulated in the respective table, contained in that annex", wherefore "it results beyond doubt that one is dealing with an onerous contract as far as these services are concerned".

b. On the other hand, with respect to the alleged tacit agreement, the same did not observe "the same formalities ad substantiam and or formatione that characterize the principal contract, so that, thus one could infer the existence of a possible amendment thereto, which thus being did not exist", as would be required under the terms of clause 12 of the contract, concluding that the thesis of the alleged tacit agreement "is here being defended by possible convenience or procedural strategy for a possible favorable outcome in the present dispute".

c. The Respondent states that "within the scope of the inspection procedure it was fully and unequivocally proven that the services, here in question, were effectively provided and not invoiced by the Claimant", and that "the Claimant itself admits the effective provision of those services".

d. By failing to issue invoices, as required by paragraph (b) of item 1 of article 29 of the VAT Code (as worded at the date of the facts), the Claimant omitted from its accounting and, consequently from the periodic CIT declarations, the amounts corresponding to the services it performed.

e. The service provisions performed were quantified by the Claimant regarding each of the periods under analysis, constituting proceeds/income that can be classified under paragraph (a) of article 20 of the CIT Code, from which it results that "the technical corrections proposed by the Inspection Services deserve no censure and conclusively the assessment acts challenged here".

f. As to the alleged violation of the principle of taxation based on actual income, in the present case by imputing to the Claimant the proceeds/income omitted resulting from the contracts concluded between it and the users, the Respondent understands that this rule is being applied, adding that having the Claimant reflected in its accounting the expenses incurred with the service provisions in question, "it cannot (...) claim not to record the due proceeds/income and simultaneously record its costs".

g. The Respondent maintains that the accounting and taxation under CIT of the services provided is due, having regard to the verification of the following premises: "i) the provision of services is contractualized, establishing its content, its payment and the method of invoicing; ii) the services were effectively provided; iii) expenses with these service provisions (personnel, travel, equipment, etc.) were recognized in accounting in execution of such contracts, and finally; iv) the services were not invoiced, as article 29, paragraph (b), item 1 of the VAT Code would determine".

h. Concluding then that "the service provisions performed thus constitute proceeds/income of the Claimant and as such had to be recorded in its accounting, in the respective periods, and could not fail to enter into the determination of lucrative income, in accordance with the provisions of art. 17 and art. 20, item 1, paragraph (a) of the CITC (as then in force), having thus omitted it from the income declarations of the said periods 2009 to 2011", noting that "it is certain that the periodic income declarations duly submitted by the Claimant translate the net result it determined, based on accounting, what happens is that the result determined has omissions of proceeds/income, as a result of the non-issuance of invoices corresponding to the services performed with the consequent omission in the accounting record" [emphasis of the Respondent].

i. With respect to accounting rules, the Respondent understands that "if an entity omits proceeds/income or expenses/costs in one or more accounting periods, the accounting information can never achieve its informative or performative objectives" [emphasis of the Respondent], respectively for purposes of usefulness for management decisions or for purposes of taxation.

j. The Respondent states that "the model of partial dependence between accounting and Tax Law has been adopted for a long time in the Portuguese tax system", and with respect to accounting treatment, account must be taken of the accounting principles of the Chart of Accounts (until 2009) and the Accounting Standardization System (from 2010), which establish the "objective of obtaining a true and fair view of the financial position and the results of the company's operations, it becomes necessary to respect accounting principles, and one of them is the principle of specialization (accrual regime or economic periodization), which clearly provides that 'proceeds and costs are recognized when earned or incurred, regardless of their receipt or payment, and should be included in the financial statements of the periods to which they relate'".

k. On the other hand, article 18, item 1 of the CIT Code, under the heading "Periodization of lucrative income", also provides that "income and expenses, as well as other positive or negative components of lucrative income, are attributable to the tax period in which they are earned or incurred, regardless of their receipt or payment, in accordance with the economic periodization regime", with item 2 of the same article providing that "positive or negative components considered as relating to earlier periods are only attributable to the tax period when on the date of closing of the accounts of the period to which they should be attributed they were unforeseeable or manifestly unknown".

l. Wherefore, "both from an accounting point of view and from a tax point of view, it is concluded that for the determination of the net result of each period all costs and income generated in each period must contribute", adding and concluding, in summary, that "one cannot confuse the moment of generation of the proceeds/income with the moment of their receipt, as the generation of the proceeds will generate a right to receive that amount at the same moment or at a different moment in time", that "from an accounting point of view the invoicing and consequent registration of the proceeds/income resulting from the service provisions effectively provided by the Claimant was required", and that "in the present case, the Claimant in addition to not determining its accounting result in accordance with the accounting principles in force, violates the tax provision provided in art. 18".

  1. By arbitral order of 17/10/2015, in accordance with art. 18 of the LRATM, the date of 18/11/2015 was set for the holding of the hearing, with parties further being invited to indicate their preference for oral or written final arguments, as well as to identify the object of the evidence required and the submission of documentary evidence.

  2. At the said hearing there was production of testimonial evidence offered by the Claimant and the Respondent and a timeframe was set for presentation of written arguments, in accordance with the agreement of the parties, as well as 23/2/2016 was set as the deadline for issuance of the arbitral decision.

  3. The parties submitted written arguments within the legal timeframe, arguing, in essence, for the positions initially defended.

II. CLARIFICATION

  1. The parties have legal personality and capacity, as well as are beneficiaries of procedural standing (articles 4 and 10, item 2 of the LRATM and article 1 of Ordinance no. 112-A/2011, of 22 March).

  2. The TCA proceeded with the designation of its representatives in the proceedings and the Claimant submitted a power of attorney, the Parties thus being duly represented.

  3. In accordance with the provisions of arts. 2, item 1, paragraph (a), 5, 6, item 1 and 11, item 1, of the LRATM (as amended by art. 228 of Law no. 66-B/2012, of 31 December), the Arbitral Tribunal is competent and is duly constituted.

  4. The proceedings do not suffer from any nullities.

  5. In the initial petition of the Claimant a preliminary issue was raised which requires consideration, relating to the cumulation of claims, and in the defense presented by the Respondent an exception was raised, relating to the alleged untimeliness of the request for arbitral decision.

III. CONSIDERATION OF PRELIMINARY ISSUES

  1. In accordance with the provisions of article 608 of the Civil Procedure Code in force, applicable in accordance with the provision in article 22 of the LRATM, "(…) the judgment rules, in the first place, on procedural questions that may result in absolution of the instance, according to the order imposed by their logical precedence" and the judge must "resolve all questions that the parties have submitted to consideration, except those whose decision is precluded by the solution given to others (…)".

  2. In these terms, having regard to the preliminary issues raised, it becomes necessary to consider and decide previously, in the present arbitral proceedings, the issues relating to the cumulation of claims and the untimeliness of the request for arbitral decision.

III.1 (Un)timeliness of the request for arbitral decision

In its defense the Respondent states that the request for arbitral decision is untimely because the 90-day period is exceeded from the end of the voluntary payment period for the additional CIT assessments issued (cfr. paragraph (a) of item 1 of art. 102 CTPT, ex vi art. para. (a) of item 1 of art. 10 of the LRATM). It maintains that as these assessments were issued on 23/7/2014 (CIT 2009), 1/8/2014 (CIT 2010) and 24/9/2014 (CIT 2011) and the request for arbitral decision was submitted on 19/6/2015, the 90-day period would have been exceeded.

However, as the Claimant submitted gracious complaints against the said assessments, and received dismissal thereto[1], respectively on 1/4/2015 (CIT 2009), 2/6/2015 (CIT 2010) and 2/6/2015 (CIT 2011), these are the relevant dates for purposes of counting the 90-day period, counted from the notifications (cfr. paragraph (e) of item 1 of art. 102 CTPT ex vi art. para. (a) of item 1 of art. 10 of the LRATM).

Recalling that the request for arbitral decision was submitted on 19/6/2015, it is concluded that the period for challenging was timely, the exception invoked by the Respondent not holding.

III.2 Cumulation of claims

In its initial petition the Claimant raises the cumulation of claims, as in the case in question analysis is required of three responses to gracious complaints, reactive to official assessment acts, under CIT, relating to the years 2009, 2010 and 2011.

In accordance with item 1 of art. 3 of the LRATM, the cumulation of claims is admissible when the success thereof "depends essentially on the same factual circumstances and on the interpretation and application of the same principles or rules of Law".

From the analysis of the file it results that the same factual circumstances are indeed at issue and interpretation and application of the same principles or rules of Law is required.

Wherefore, for reasons of procedural economy, the unified challenge of the three gracious complaints will be analyzed in this proceeding.

  1. Having no subsequent issues been raised that obstruct the consideration of the merits of the case, the conditions are met for a final decision to be rendered.

IV. MERITS

IV.1 Factual matters

  1. With relevance for the consideration and decision of the issues raised as to the merits, the following facts are taken as established and proven:

a) Following service orders no. OI2013…, no. OI2013… and no. OI2013…, during 2013 and 2014 the Claimant was subject to inspection actions, of partial scope (CIT), respectively relating to the years 2009, 2010 and 2011, whose procedure began respectively on 2/12/2013, 5/2/2014, and 5/2/2014;

b) From those procedures resulted on 17/4/2014 (relating to the years 2009 and 2010), and on 24/6/2014 (relating to the year 2011), inspection report draft projects and, on 12/5/2014 (relating to the years 2009 and 2010) and 11/7/2014 (relating to the year 2011), the corresponding final inspection reports, in which corrections were pointed to under CIT for 2009, 2010 and 2011;

c) As to the inspection procedures relating to the years 2009 and 2010, the Claimant exercised the right to a prior hearing against the said inspection report drafts, the same not having occurred as to the draft report resulting from the procedure relating to the year 2011;

d) On 28/5/2014, 6/6/2014 and 29/7/2014, the Claimant was notified respectively of the additional CIT assessments and corresponding compensatory interest no. 2014… (relating to 2009), no. 2014… (relating to 2010), and no. 2014… (relating to 2011), in the amounts of 76,828.84 € (relating to 2009), 60,636.01 € (relating to 2010), and 36,236.15 € (relating to 2011), to be paid respectively by 18/9/2014, 2/10/2014 and 9/12/2014;

e) The assessments notified to the Claimant are based, according to the final tax inspection reports, on omissions made in the execution of accounting relating to proceeds/revenue from services provided ("additional services") and not reflected in the accounting, in each of the years 2009, 2010 and 2011, in the respective amounts of 248,980.27 €, 203,774.87 € and 125,744.27 €;

f) Following the assessment notices, and as no payment was made by the Claimant, the following tax executions were filed: File no. ...2014..., relating to the year 2009, File no. ...2014..., relating to the year 2010, and File no. ...2014..., relating to the year 2011, in the amount of 36,236.15 €.

g) In order to suspend those tax executions, the Claimant provided the following bank guarantees, from Bank D…, SA.: bank guarantee no…, in the amount of 97,068.01 €, bank guarantee no…, in the amount of 76,771.05 €, and bank guarantee no…, in the amount of 45,804.53 €.

h) On 11/11/2014, the Claimant filed two gracious complaints, relating to the assessments above indicated relating to 2009 and 2010, and on 16/1/2015 filed a gracious complaint relating to the assessment above indicated relating to 2011, requesting in the three complaints annulment of the additional assessments above indicated (of CIT plus compensatory interest) respective to each year, as well as indemnification for the undue bank guarantees provided above indicated, which received response from the TCA on 1/4/2015 (relating to 2009) and 2/6/2015 (relating to 2010 and 2011), dismissing the complaint petitions;

i) On 16/6/2015, the Claimant submitted a request for constitution of an Arbitral Tribunal, requesting annulment of the TCA's decisions dismissing the gracious complaints above indicated, and as a consequence to determine the annulment of the CIT assessment statements and corresponding compensatory interest no. 2014… (relating to 2009), no. 2014… (relating to 2010), and no. 2014… (relating to 2011), as well as condemnation of the TCA to pay indemnification for the losses suffered as a result of the undue provision of the said bank guarantees (cfr. the electronic application in the Administrative Arbitration Centre system);

j) In accordance with the written contracts brought into the proceedings, agreed between the Claimant and its counterparties, the "additional services" object of controversy in the present dispute are onerous, in accordance with the price table in Annex II to the said written contracts;

k) Such contracts contain a provision (clause 12), by means of which the contracting parties agree that any alteration to these juridical transactions must observe the same written form;

l) There were no written alterations as to the onerous nature of the "additional services" provided for contractually;

m) The "additional services" object of controversy were provided, were not invoiced, were not recorded in accounting, and were not collected.

  1. With relevance for the consideration and decision of the issues raised as to the merits, the following is taken as not proven:

a) The existence of a "tacit agreement" between the Claimant and its counterparties, to the effect of making the "additional services" free of charge, as an alteration to the written contracts in force;

b) The prevalence in the sector of activity in which the Claimant operates, of a generalized practice coincident with the practice of the Claimant, namely, that the Claimant's competitors do not charge for "additional services" provided for as onerous in the written contracts in force.

  1. Substantiation of factual matters

The factual basis proved was based on critical consideration of the position assumed by each of the parties, as well as critical analysis of the documents attached to the proceedings, whose authenticity and veracity were not challenged by any of the parties.

It was based, on the other hand, on the careful consideration of the content of the testimonial depositions produced at trial, with two of the deponents (E… and F…), both employees of the Claimant with responsibilities in the commercial area, although providing clarifications in an assertive manner as to the business developed by the Claimant (both testifying namely as to the taxpayer's business model and characterization of the commercial practices prevailing in the sector in which it operates), knew little or nothing about their accounting procedures, and the third deponent (G…), technical responsible for the tax inspection carried out by the TCA, which culminated in the assessments challenged by the Claimant, testified assertively about his findings in the scope of the inspection procedure for CIT (also demonstrating indirect knowledge as to a prior inspection procedure carried out by the TCA of the Claimant, having as partial scope VAT), demonstrating little knowledge as to the sector of activity in which the Claimant operates.

As to the alleged "tacit agreement" in particular, supposedly free of charge as to the "additional services", which altered the terms of the "written contract", onerous as to those same services, it is important to note that the "written contract" expressly establishes (in its clause 12), that it can only be altered if the written form is observed. In this manner, by agreement, a presumption of essentiality as to form (written) was enshrined. Apart from the Claimant not having, with the evidence produced, managed to demonstrate the existence of a "tacit agreement", it should be said that, notwithstanding the said presumption being rebuttable in the general terms, the testimonial evidence could not be admissible, by conjunction of item 1 of art. 223, item 1 of art. 393 and art. 351, all of the Civil Code.

These circumstances were taken into consideration by the Arbitral Tribunal in the consideration of factual matters.

  1. There are no other facts, with relevance for consideration of the merits of the case, that have not been proven.

IV.2 Legal matters

The central issue to be decided turns on establishing whether the dismissal of the gracious complaints above identified is well-founded, and consequently whether the CIT assessments and corresponding compensatory interest no. 2014… (relating to 2009), no. 2014… (relating to 2010) and no. 2014… (relating to 2011) are or are not illegal, on the basis of illegalities of the administrative act of dismissal, resulting, following the formulation of the Claimant, from:

i) Violation of the Principle of taxation based on Actual Income;

ii) Wrong interpretation of the law (namely article 17 of the CITC);

iii) Violation of the burden of proof of the TCA (art. 74 of the General Tax Law).

These three axes of argument are based, predominantly, on the existence of a "tacit agreement", which would agree on the free provision of "additional services", altering the terms of the "written contract", which was onerous as to those same services.

As was established, the Claimant failed to prove the existence of the said "tacit agreement", it being certain that the burden of proof fell upon it. On the other hand, the Claimant did not allege the invalidity of the "written contract" in force with the counterparties.

These are therefore the fundamental parameters that govern the consideration of the legal matters, from which it results proven, merely, the validity, merely, of the "written contract" onerous.

Given the logical dependence of the arguments adduced by the Claimant with the argument substantiating the existence of a "tacit agreement" free of charge, the legal matters consequently result necessarily diminished.

Having also been proven that the Claimant: i) provided "additional services" whose economic quantification was admitted before the TCA and ii) did not invoice, did not make accounting records, nor collected any amount for the "additional services" in the terms provided for in the "written contract" (onerous), the legal issues to be resolved are the following:

1- The "additional services" provided onerous, omitted from accounting, not invoiced and not collected, are subject to taxation under CIT?

2- As to the burden of proof of the TCA: having the TCA applied "direct assessment" of taxable matter, proceeding with the "corrections proposed, in accordance with the final part of articles 16, item 1 and 17, item 1 of the CIT Code, combined with articles 81 to 84 of the General Tax Law"[2], does this amount to accepting that the accounting and income tax return statements Model 22 submitted by the Claimant are reliable[3], thus preventing the TCA from issuing additional assessments based on the omission of proceeds/income underlying the "additional services"?

1) As to the taxation of "additional services" under CIT

The Claimant maintains that according to the Principle of taxation based on actual income, the taxation of companies should be made "based on actual income, that is, on the results effectively determined and not based on normal/presumed results"[4]. The constitutional command aims to exclude the taxation of normal income, that which the taxpayer could have obtained under "normal conditions of operation"[5], being prohibited "the determination of taxable matter, (…) [by] normal income, detached from the concrete reality of the taxpayer"[6]. The Claimant maintains on the other hand, and as a consequence, that there is no tax obligation due to the absence of a tax event.

Let us see.

I. The Principle of taxation based on actual income presently obtains with us, according to which "the taxation of companies is based fundamentally on their actual income" (cfr. item 2 of art. 4 of the Portuguese Constitution).

That provision provides that "the taxation of companies is based fundamentally on their actual income", which corresponds to the intention that the tax is levied on the income actually obtained. Or in the negative, to refuse that taxation is levied, at least as a rule, on normal income, that which could have been obtained under usual circumstances.

II. At a first moment taxation based on actual income is based on the accounting of taxpayers, prepared in accordance with the accounting rules in force at each time. As a measure of economic performance derived from accounting, "accounting profit" is the starting point for the determination of "lucrative income", in which consists the model of "partial dependence" that prevails in Portugal.

III. Thus, CIT is levied (in particular) on the profits of commercial companies (item 1 of art. 3 of the CITC), which "consists of the difference between the values of the net assets at the end and beginning of the tax period, with the corrections established in this Code" (item 2 of art. 3 of the CITC). In concrete terms, "the lucrative income of legal persons (…) is constituted by the algebraic sum of the net result of the period and of the positive and negative equity variations occurring in the same period and not reflected in that result, determined on the basis of accounting and possibly corrected in accordance with this Code" (item 1 of art. 17 CITC).

IV. In order to permit the determination of lucrative income, accounting must be organized in accordance with accounting standardization and other legal provisions in force for the respective sector (without prejudice to compliance with the provisions of the CITC), and reflect all operations carried out by the taxpayer, being organized so that the results of operations and equity variations subject to the general CIT regime (para. (a) and (b) of item 3 of art. 17 of the CITC).

V. Notwithstanding this important reference of the CITC to accounting law – so that lucrative income can be determined on the basis of accounting (commercial), this must be organized in accordance with "accounting standardization and other legal provisions in force for the respective sector of activity", and must "reflect all operations carried out by the taxpayer (…)" – the consideration of accounting rules does not override the rules proper to the CITC, in particular with respect to the recognition and measurement of revenue. On the contrary, it is the rules of the CITC that, in case of difference, prevail over accounting rules.

Indeed, in accordance with the preamble of the CITC, "the relationships between accounting and taxation are, (…) a domain that has been marked by some controversy and where, therefore, different ways of conceiving those relationships are possible. Setting aside absolute separation or total identification, a solution marked by realism continues to be privileged and which, in essence, consists of reporting, at the source, lucrative income to the accounting result to which are introduced, extraaccountingly, the corrections - positive or negative - set forth in the law to take into account the objectives and particularities of taxation. (….)" [emphasis ours].

VI. Now in accordance with the CITC, and according to the "accrual regime", "income and expenses, as well as other positive or negative components of lucrative income, are attributable to the tax period in which they are earned or incurred, regardless of their receipt or payment, in accordance with the economic periodization regime" (item 1 of art. 18).

With respect, in particular, to revenues relating to service provisions, "revenues (…) are attributable to the tax period to which they relate in the amount of the nominal consideration" (item 5 of art. 18 of the CIT Code)[7] [emphasis ours].

From this it results, unequivocally, that given an onerous service provision contract is in effect, the respective revenues must be taxed under CIT, in the tax period to which they relate, in the amount of the nominal consideration, that is, by the agreed prices, regardless of the accounting treatment, and whether the collection has, or has not, already occurred.

VII. None of this reflects the presumption of income, rather resulting precisely from the contractual reality in effect.

VIII. Also the omission of invoicing does not prevent there being place for taxation of the revenue under CIT. Indeed, the right of credit over customers arises from the contract in effect ("written contract"), as soon as the services in question are provided, depending on the payment obligation of the price established in the contract.

The omission of the issuance of invoices is irrelevant for purposes of taxation under CIT, as these do not have binding constitutive effects, and therefore the relevant tax event consists in the provision of a service that was agreed to be onerous.

IX. In sum, in the present case, the "additional services" provided under an onerous service provision contract are subject to taxation under CIT, regardless of whether (still) no invoice has been issued and whether payment has (still) not occurred, in obedience to the Principle of taxation based on actual income and to the "accrual regime".

The argument of the Claimant does not therefore hold, that there is no tax obligation due to violation of the Principle of taxation based on actual income and due to the absence of a tax event.

2) As to the burden of proof of the TCA

The Claimant maintains that the circumstance that the TCA, within the scope of an inspection procedure, considered it appropriate to apply "direct assessment" of taxable matter, proceeding with the "corrections proposed, in accordance with the final part of articles 16, item 1 and 17, item 1 of the CIT Code, combined with articles 81 to 84 of the General Tax Law"[8], amounts to accepting that the accounting and income tax return statements Model 22 submitted by the Claimant are reliable[9], preventing it as such from issuing additional assessments, without demonstrating the effective existence of actual income. As such, it maintains that the TCA did not observe the burden of proof legitimizing the additional assessments issued.

Let us see.

I. It is indeed the responsibility of the TCA to bear the burden of proof of the facts constitutive of its rights set forth in the additional assessments issued (art. 74 of the General Tax Law).

II. During the tax inspection procedure the TCA: i) obtained written "user contracts", ii) verified that in those contracts was included the express provision of "additional services" and that these would be provided onerous, iii) obtained itemized information regarding the "additional services" that were provided to each customer, duly quantified in accordance with the prices specifically associated with each service (in both cases the information was made available by the Claimant, at the request of the Respondent), and iv) verified that regarding such services no invoices had been issued, nor had the accounting revenues been recognized that it considered had place.

III. In accordance with the terms imposed by law the Claimant participated in the procedure, exercising its right to a hearing, in accordance with the terms provided in art. 60 of the General Tax Law and art. 60 of the Tax Procedure Code.

IV. On the other hand, as we have already seen, the taxation of companies must be based on actual income, on the basis of profits generated, and not on the basis of normal/presumed profits.

Indeed, it is stated in the preamble of the CITC, in the determination of taxable matter "(…) the aim is always to tax the effective actual income, which, in the case of companies, is even a constitutional imperative. As a corollary of that principle, it is the taxpayer's statement, controlled by the tax administration, that constitutes the basis for the determination of taxable matter.

The determination of lucrative income by indirect methods is consequently restricted to cases expressly enumerated in the law, which are reduced to the minimum possible, only occurring when it takes place as a result of anomalies and incorrections in accounting, if it is not entirely possible to effect that calculation on the basis thereof. (…)".

Given that taxation is based on the economic reality constituted by profit, it is natural that accounting, as an instrument of measurement and information of that reality, plays an essential role as a support for the determination of lucrative income".

V. Benefiting from the collaboration of the Claimant, the TCA quantified, and correctly so, in accordance with objective parameters, the fiscally relevant omissions (revenue of the "additional services" onerous in accordance with the contracts), and from that calculated the respective impact that its correction implied, simulating the corrected profit and the respective impact of additional CIT assessment (and corresponding compensatory interest) to which it corresponded.

And the criterion of those corrections was precisely, for the reasons set out above, the imperative of taxation based on actual income, which had not been observed by the taxpayer in its determination of lucrative income.

VI. Now the hypothesis that the Claimant's accounting suffers from errors or inaccuracies does not prevent the fixation of taxable matter from being effected on the basis of that same accounting, if it comes to reveal actual income, after those errors and inaccuracies are corrected (cfr. STA Decision of 21/3/2001, file 025677). The recourse to indirect methods, in exceptional situations such as those referred to regarding art. 88 of the General Tax Law is justified by the impossibility of direct and exact proof and quantification of taxable matter, which can result from various anomalies, among which, the non-organization of accounting in accordance with the rules and principles of the accounting system adopted and legislation specific to the sector of activity. However, "such anomalies must be of such a nature that they render impossible the determination of taxable matter"[10], a situation which does not occur in our case.

VII. In light of the foregoing, the arguments invoked by the Claimant are also unfounded, regarding the non-observance of the burden of proof by the TCA.

V. DECISION

Considering the various reasons set forth in the substantiation, the Tribunal decides to judge the petition for annulment of the dismissal of the gracious complaints above identified as unfounded, and concurrently, decides to maintain the assessment acts subject to the present action, with the consequent maintenance, in the legal order, of the assessments made. Consequently, the Tribunal also decides to judge the petition for condemnation of the TCA to pay indemnification for the losses suffered as a result of the provision of bank guarantees as unfounded.

VI. VALUE OF PROCEEDINGS

In harmony with the provisions of articles 306, item 2, and 297, item 2 of the C.P.C., of art. 97-A, item 1, para. (a), of the C.P.T.P. and of article 3, item 2, of the Regulation of Costs in Tax Arbitration Proceedings, the proceedings are given a value of € 173,701.00.

VII. COSTS

In accordance with the provisions of articles 22, item 4, and 12, item 2, of the Legal Regime of Arbitration, in article 2, in item 1 of article 3 and in items 1 to 4 of article 4 of the Regulation of Costs in Tax Arbitration Proceedings, as well as in Table I attached to this regulation, the total amount of costs, chargeable to the Claimant, is fixed at € 3,672.00.

Lisbon, 21 April 2016.

The Arbitrator-President,

Fernanda Maçãs

The Co-Arbitrators,

Diogo Feio

Nuno Miguel Morujão (Rapporteur)

[1] Cfr. art. 5 of the Initial Petition.

[2] Cfr. art. 90 of the Initial Petition.

[3] Cfr. art. 93 of the Initial Petition.

[4] Cfr. art. 80 of the Initial Petition.

[5] Cfr. art. 80 of the Initial Petition.

[6] Cfr. art. 88 of the Initial Petition.

[7] Cfr. version prior to Law no. 2/2014, of 16 January, in force from 1 January 2010 in accordance with republication by Decree-Law no. 159/2009, of 13 July.

[8] Cfr. art. 90 of the Initial Petition.

[9] Cfr. art. 93 of the Initial Petition.

[10] Cfr. Lopes, C. M. and Martins, A., Taxation by Indirect Methods – An analysis of the case-law framework of the accounting-tax prerequisites, Almedina, 2014, p. 89.

Frequently Asked Questions

Automatically Created

What happens when a company fails to issue invoices for services rendered under Portuguese IRC rules?
Under Portuguese IRC rules, when a company fails to issue invoices for services rendered that were contractually agreed upon, the Tax Authority may challenge this omission and issue official assessments. The TCA can add the value of non-invoiced services to taxable income, arguing that the company derived economic benefit from the services provided. However, taxpayers can contest such assessments by demonstrating that services were genuinely provided gratuitously under a tacit agreement, that no consideration was received or receivable, and that applicable accounting standards (SNC/NCRF 20) do not require revenue recognition when economic benefits are not probable. The key issue becomes whether the services constitute true gratuity or disguised remuneration subject to IRC taxation.
How does the concept of a tacit agreement of gratuity affect corporate income tax assessments in Portugal?
A tacit agreement of gratuity can significantly impact IRC assessments when taxpayers can demonstrate that despite contractual provisions allowing for invoicing, there was mutual understanding between parties that services would be provided free of charge. This defense requires proving that: (1) market practice supports gratuitous provision of such ancillary services, (2) neither party expected payment, (3) the services are integral to the main commercial relationship, and (4) no consideration was actually received or receivable. However, tax authorities may challenge such claims, particularly when written contracts explicitly establish pricing mechanisms. The burden falls on taxpayers to prove the tacit gratuity genuinely reflects business reality rather than tax avoidance, and that it complies with the constitutional principle of taxation by real income.
Can the Portuguese Tax Authority issue official IRC assessments based on non-invoiced transactions?
Yes, the Portuguese Tax Authority can issue official IRC assessments based on non-invoiced transactions when it determines that taxable income has been omitted or understated. The TCA has authority to correct taxpayer accounting and assess additional IRC and compensatory interest for prior years. These assessments typically occur when the tax authority identifies services rendered, goods delivered, or other economic benefits for which no invoices were issued and no revenue was recognized. However, such assessments must respect the constitutional principle of taxation by real income, meaning the TCA must demonstrate that actual economic benefit was obtained. Taxpayers can challenge these assessments through gracious complaints (reclamação graciosa) and, if dismissed, through CAAD tax arbitration, arguing that services were genuinely gratuitous or that applicable accounting standards did not require revenue recognition.
What is the principle of taxation by real income (tributação pelo rendimento real) and how does it apply to IRC disputes?
The principle of taxation by real income (tributação pelo rendimento real) is a constitutional cornerstone of Portuguese tax law, establishing that IRC should tax actual economic gains rather than presumed, theoretical, or fictitious income. This principle requires that tax assessments reflect genuine economic capacity and real income obtained by the taxpayer. In IRC disputes, this principle protects taxpayers against arbitrary assessments based solely on contractual capacity to charge or theoretical revenue potential. When applied to non-invoiced services cases, it means the TCA must prove that real economic benefit was received, not merely that contractual provisions allowed for invoicing. Taxpayers invoke this principle to argue that if services were genuinely provided gratuitously with no consideration received or receivable, no taxable income exists. The principle works in conjunction with accounting standards requiring revenue recognition only when economic benefits are probable and measurable.
How can taxpayers challenge official IRC liquidations and compensatory interest through CAAD tax arbitration?
Taxpayers can challenge official IRC liquidations and compensatory interest through CAAD (Centro de Arbitragem Administrativa) tax arbitration following a structured process. First, they must file a gracious complaint (reclamação graciosa) with the Tax Authority within the statutory deadline, challenging the assessment's legality. If the TCA dismisses the complaint, taxpayers can then request constitution of an arbitral tribunal under Decree-Law 10/2011 (RJAT). The request must be submitted within 90 days of notification of the dismissal decision. Taxpayers can choose between singular or collective arbitral tribunals. The arbitration process offers advantages over judicial courts: faster resolution (typically 6-12 months), specialized tax arbitrators, lower costs, and binding decisions. In the arbitration, taxpayers can challenge both the substantive tax assessment and procedural irregularities, invoking constitutional principles, accounting standards, and demonstrating that the TCA's corrections lack legal foundation. Successful challenges can result in annulment of assessments and reimbursement of amounts paid.