CAAD 402/2018-T: SIFIDE II and RFAI Tax Credits Deductible from Autonomous Taxation (IRC)

ARBITRAL DECISION

I. STATEMENT OF FACTS

I.1

On 24 August 2018, the taxpayer A..., S.A., corporate entity no. ..., with registered office at ..., ... ...-... ..., requested, in accordance with and for the purposes of Article 2 and Article 10, both of Decree-Law no. 10/2011, of 20 January, the constitution of an Arbitral Court with the designation of a single arbitrator by the Ethics Council of the Centre for Administrative Arbitration, in accordance with Article 6(1) of the aforementioned decree.

The request for constitution of the Arbitral Court was accepted by His Excellency the President of CAAD and was notified to the Tax and Customs Authority (hereinafter referred to as AT or "Respondent") on 30 August 2018.

The Claimant did not proceed with the appointment of an arbitrator; therefore, under Article 5(2)(b) and Article 6(1) of the RJAT, the undersigned was designated by the President of the Ethics Council of CAAD to serve on this singular Arbitral Court, having accepted in accordance with legal provisions.

The AT submitted its response on 10 December 2018.

By order of 11.12.2018, the holding of the meeting provided for in Article 18 of the RJAT was dispensed with and it was decided that the proceedings would continue with written final submissions.

On 21 December 2018, the Claimant submitted submissions.

The Respondent submitted its submissions on 18 January 2019.

The Claimant requests that the Arbitral Court annul the decision of tacit dismissal of the Grace Claim filed, as well as declare partially annulled the IRC tax assessment notice no. 2016..., issued on 1 July 2016, resulting from the submission of the IRC Income Statement (Model 22) with identification no. ..., thereby determining the reimbursement of the amount of €32,374.60 (thirty-two thousand, three hundred and seventy-four euros and sixty cents), as improperly paid tax for the tax period 2015, specifically the reimbursement to the claimant of the sum improperly paid, plus compensatory interest.

II.A. The Claimant's Grounds

The Claimant sustains its request, in summary, in the following terms:

Tax credits assessed under SIFIDE and RFAI are deductible from the collection of autonomous taxation because they are an integral part of the IRC collection and are subject to the general rules for IRC assessment provided for in Article 90 of the IRC Code.

Autonomous taxation should be considered "IRC," as results not only from the wording of Article 23-A(1)(a) of the IRC Code (as amended by Law no. 2/2014, of 16 January) and the literal content of Article 12 of the same Code, but also from the abundant jurisprudence of Arbitral Courts.

Article 90(1)(a) of the IRC Code, referring to the form of IRC assessment by the taxpayer, through the statements referred to in Articles 120 and 121 of the IRC Code, and applying to all situations provided for in the Code, applies equally to the assessment of the amount of autonomous taxation assessed by the taxpayer.

The deductibility of tax benefits from the amount assessed under Article 90 of the IRC Code does not require the existence of taxable profit, since what the latter in fact requires is that there be IRC collection, which may exist even without taxable profit, namely by force of autonomous taxation.

The norm introduced by the State Budget Law for 2016 (no. 21 of Article 88 of the IRC Code, introduced by Law no. 7-A/2016, of 30 March) constitutes an innovative norm with retroactive effect and consequently lacks interpretative character, since this new law in fact has an innovative nature regarding the rules to be considered for the purposes of deductions from autonomous taxation collection, not having limited itself to explaining what already resulted from the legal order and in a clear manner by applying the rules of interpretation and application of the law.

The provision determining that the new wording of Article 88 of the IRC Code produces effects in all situations—present and past—insofar as it implies the non-deductibility of tax benefits from autonomous taxation collection, to tax facts already fully consolidated in the legal order, constitutes an unequivocal retroactive application of tax law, inadmissible in light of the constitutional parameter enshrined.

For this reason, Article 135 of Law no. 7-A/2016, which attributes an interpretative character to no. 21 of Article 88 of the IRC Code, which determined that "the assessment of autonomous taxation in IRC is carried out in accordance with the provisions of Article 89 and is based on the values and rates resulting from the provisions of the preceding numbers, with no deductions being made from the total amount assessed," is tainted with unconstitutionality, by violation of the principle of non-retroactivity of tax law enshrined in Article 103(3) of the CRP.

Confirming the error attributable to the Services, in accordance with Articles 43(1) and (2) of the LGT, the taxpayer requested the payment of compensatory interest, at the legal rate in effect.

II.B. The Respondent's Reply

In its Reply, the AT invoked the following:

Autonomous taxation has an autonomous character, resulting from the special configuration given to the material and temporal aspects of the facts constituting the tax event, requiring, in certain fields, the departure from or an adaptation of the general rules of application of IRC.

The integration of autonomous taxation into the IRC Code (and IRS) conferred a dualistic nature, in certain respects, to the normative system of this tax, which materialized, notably, within the framework of Article 90(1)(a) of the CIRC, in separate assessments of their respective collections, because they obey different rules.

This is the application of the rate(s) of Article 87 of the CIRC to the taxable matter determined according to the rules contained in Chapter III of the Code, and in another case, this is the application of the rates to the values of the taxable matters relating to the different realities contemplated in Article 88 of the CIRC.

These are two distinct calculations which, although processed, under Article 90(1)(a) of the CIRC, in the statements referred to in Articles 120 and 122 of the same code, are effected on the basis of different parameters, since each materializes itself in the application of its own rates, provided for in Articles 87 or 88 of the CIRC, to the respective taxable matters similarly determined according to their own rules.

In deductions from collection by way of tax benefits, the amount to which they are made can only relate to the tax levied on the basis of taxable matter determined according to the rules of Chapter III and the rates provided for in Article 87 of the CIRC.

This, under penalty of an incongruence resulting from the subversion of the necessary interconnection which, on the material level, should exist between the objectives pursued by the benefits and the actual magnitude represented by profit.

It is impossible to effect any deduction of credits resulting from SIFIDE from the collection produced by autonomous taxation, under penalty of subverting the entire teleology that was present at its genesis.

The assessment in question does not result from any error by the services but follows directly from the application of the law.

The 2016 State Budget added number 21 to Article 88 of the CIRC, attributing the same interpretative character.

In light of the foregoing, it is always stated that if there were any doubts, they would be dispelled by that normative provision.

The very interpretative effect conferred by that Law would be, per se, unnecessary, since, as has been demonstrated, no other interpretation would be capable of being made taking into account the teleology and legal hermeneutics of the norms in question.

Although Article 10 of the EBF admits extensive interpretation and prohibits analogy in the interpretation of norms on tax benefits, it does not prohibit the recourse to restrictive interpretation and, therefore, in objectively founded situations its use is not precluded.

III. CASE MANAGEMENT

The Court is competent and regularly constituted, in accordance with Articles 2(1)(a), 5, and 6, all of the RJAT.

The parties have legal personality and capacity.

The parties are legitimate and legally represented, in accordance with Articles 4 and 10 of the RJAT and Article 1 of Ordinance no. 112-A/2011, of 22 March.

The proceedings are proper.

There are no preliminary matters to be considered or vices that would invalidate the proceedings.

It is now necessary to examine the merits of the request.

IV. MATTER TO BE DECIDED

The central question to be decided, as presented by the Claimant, is whether the self-assessment of IRC (including autonomous taxation) for the year 2015 is tainted with the material defect of violation of law, subject to challenge since, according to the Claimant's understanding, the deduction of SIFIDE and RFAI from the portion of collection corresponding to autonomous taxation should not be prohibited.

V. FACTUAL MATTERS

V.1. Proven Facts

Before addressing the questions, it is necessary to present the factual matter relevant to their understanding and decision, which, having examined the documentary evidence, the attached administrative tax proceedings, and taking into account the facts alleged, is fixed as follows:

On 30 May 2016, the claimant submitted the IRC return Form 22 for the year 2015, at which time it carried out the self-assessment of autonomous taxation for the same year of 2013, in the amount of €32,374.60.

In light of the statement, the Claimant declared a tax loss of €1,123,195.17.

The claimant possessed a balance of deductible tax benefits, in the tax period 2015, in the total amount of €871,028.08 (eight hundred and seventy-one thousand, twenty-eight euros and eight cents), as detailed in the following table:

Values in euros

In the tax period 2015, the Claimant did not deduct any amount relating to tax benefits in field 355 of the Income Statement Form 22.

On 30 January 2018, the claimant filed a grace claim against the aforementioned self-assessment for the year 2015.

The Respondent did not issue any decision on the grace claim filed.

The claimant submitted its request for arbitral determination to CAAD on 24.08.2018.

V.2. Unproven Facts

There are no essential unproven facts, since all facts relevant to the examination of the request were considered proven.

V.3. Reasoning of Factual Matters

The proven facts constitute undisputed matter and are documentarily demonstrated in the record.

Facts numbered 1 to 7 are accepted as established by the analysis of the administrative proceedings, by the documents submitted by the Claimant (documents 1 to 6 of the petition for constitution of the Court), and by the position assumed by the parties.

VI. THE LAW

VI.1. The Nature of Autonomous Taxation

The autonomous taxation rates apply to certain expenses incurred by IRC taxpayers, which by their nature may present a more ambiguous connection to the realization of income subject to taxation or the maintenance of the productive source. Increasingly, the autonomous taxation mechanism seeks to deter some excesses in the occurrence of such expenses.

Unlike what occurs with the philosophy inherent in the remaining provisions of the IRC Code, no income is taxed but rather expenses or costs.

With autonomous taxation, it is sought in some way to penalize taxpayers for incurring certain types of expenses or costs, in certain conditions, even if such taxpayers have incurred a tax loss and therefore in that fiscal year do not pay IRC.

The incidence of autonomous taxation is not limited to corporations and other IRC taxpayers with profit-making purposes, this taxation also extending to associations, foundations, IPSS and other entities that do not exercise, as their principal activity, commercial, industrial or agricultural activities, and to all entities that have income exempt or not subject to IRC.

Regarding autonomous taxation, it should be noted that it is assessed in an autonomous and distinct manner from the assessment carried out under Article 90 of the CIRC.

Developing further the question of the nature of autonomous taxation and its degree of connection with IRC, we must go back to 1990 to find the first legislative intervention to subject certain expenses to autonomous taxation, which occurred with the publication of Decree-Law no. 192/90, of 9 June, whose Article 4 provided that "confidential or undocumented expenses incurred in the course of commercial, industrial or agricultural activities by IRS taxpayers who possess or should possess organized accounts or by IRC taxpayers not covered by Articles 8 and 9 of the respective Code are taxed autonomously in IRS or IRC, as the case may be, at a rate of 10%, without prejudice to the provisions of Article 41(1)(h) of the CIRC." This norm was subject to various subsequent amendments that successively increased the taxation rate provided therein.

With this type of taxation, it was intended, on one hand, to encourage taxpayers subject to it to reduce as much as possible the expenses that negatively affect tax revenue, and on the other hand, to prevent companies, through these expenses, from effecting disguised profit distribution, particularly dividends which would thus only be subject to IRC as company profits, as well as to combat tax fraud and evasion that such expenses cause not only in relation to IRS or IRC, but also in relation to the corresponding contributions, both of employers and workers, to social security.

Saldanha Sanches (cf. Manual de Direito Fiscal, 3rd Edition, Coimbra Editora, 2007, p. 407), regarding the autonomous taxation provided for in Article 81(3) of the CIRC (wording of 2005, corresponding essentially to Article 88(3) and (7), in the 2015 wording), wrote as follows: "In this type of taxation, the legislator seeks to respond to the admittedly difficult question of the tax regime for expenses that are found in the intersection of the personal sphere and the business sphere, so as to prevent remuneration in kind that is more attractive for exclusively fiscal reasons or disguised profit distribution. The provision presents a characteristic similar to what we will find in the sanction against undocumented costs, with an increase in the rate when the taxpayer's situation does not correspond to a situation of fiscal normalcy. If in the taxpayer's declaration there is no profit, the cost can be subject to a negative assessment: for example, we have a 15% rate applied when the taxpayer had losses in the previous two fiscal years and purchased a light passenger vehicle for more than €40,000 (Article 81(4)). With this provision, the system demonstrates its dual nature, with an aggravated autonomous taxation rate for certain special situations that the legislator seeks to discourage, such as the acquisition of vehicles for business purposes or vehicles that are in principle too costly when there are losses. Here, a kind of presumption is created that these costs do not have a business purpose and, therefore, are subject to autonomous taxation. In summary, the cost is deductible, but autonomous taxation reduces its tax advantage, since here the basis of incidence is not a net income, but rather a cost that is transformed—exceptionally—into an object of taxation." (emphasis in original).

Unlike what occurs in the taxation of income under IRS and IRC, in which the whole of the income earned in a given year is taxed (which implies that only at the end of the year can the tax rate and the tax bracket in which the taxpayer is inserted be calculated), in this case (autonomous taxation), each expense incurred is taxed, considered in itself, and subject to a certain rate, with autonomous taxation being assessed independently of the IRC owed in each fiscal year, as it is not directly related to the achievement of a positive result, and therefore capable of being taxed.

Thus, in the case of IRC, we are dealing with an annual tax, in which each income received is not taxed separately, but rather the aggregation of all income obtained in a given year, with the law considering that the fact giving rise to the tax is deemed to have occurred on the last day of the tax period (cf. Article 8(9) of the CIRC).

As regards autonomous taxation in IRC, the fact giving rise to the tax is the very realization of the expense itself; we are not dealing with a complex fact of successive formation over a year, but with an instantaneous tax fact.

This characteristic of autonomous taxation leads us to the distinction between periodic taxes (whose tax-generating event occurs successively, by the passage of a given period of time, as a rule annual, and tends to repeat itself over time, generating for the taxpayer the obligation to pay tax on a regular basis) and taxes of single obligation (whose tax-generating event occurs instantaneously, appears isolated in time, generating on the taxpayer an obligation of payment on an irregular basis).

In autonomous taxation, the tax fact giving rise to the tax is instantaneous: it is exhausted in the act of performing certain expense that is subject to taxation (although the assessment of the amount of tax resulting from the application of the various autonomous taxation rates to the various acts of performing expenses considered will be carried out at the end of a given tax period). But the fact that the assessment of the tax is carried out at the end of a given period does not transform it into a periodic tax, of successive formation or lasting character. This assessment operation merely translates into the aggregation, for collection purposes, of the set of operations subject to that autonomous taxation, whose rate is applied to each expense, with no influence on the rate determination from the volume of expenses incurred.

In this case we are dealing with a tax obligation of single obligation, affecting operations that occur and are exhausted instantaneously, in which the fact giving rise to the tax appears isolated in time, creating for the taxpayer an obligation of payment on an irregular basis. That is, the autonomous taxation rates here in analysis do not refer to a period of time, but to a moment: that of the isolated operation subject to the rate, without prejudice to the fact that the calculation of the amount owed by the economic agents subject to the said "rate" is carried out periodically, at a given moment, together with other similar operations, without the combined assessment affecting its result.

For this reason, Sérgio Vasques (cf. Manual de Direito Fiscal, Almedina, 2011, p. 293, note 470) draws attention to the circumstance that taxes on income include elements of single obligation, such as liberatory rates of IRS or autonomous taxation rates of IRC.

Autonomous taxation, in accordance with its initial regulation, constituted a kind of surrogate for the non-deductibility regime previously provided for in the CIRC.

Indeed, at its genesis was the fiscal non-acceptance of a percentage of certain expenses, with autonomous taxation constituting an alternative and more effective form of cost correction whenever it is a matter of areas more prone to tax evasion (allowances, representation expenses, vehicle expenses, etc.).

Thus, it would not be reasonable (before it would be contrary to the reason that led the legislator to autonomously tax such expenses) that, through its deduction from taxable profit as an expense, the basis for the existence of autonomous taxation would be eliminated.

Arbitral jurisprudence has decided that autonomous taxation belongs, as a rule, systematically, to IRC, and not to VAT, IRS, or any other tax in the Portuguese tax system. This is the case, among others, of the arbitral decisions issued within the framework of CAAD, nos. 166/2014-T, 246/2013-T, 260/2013-T, 282/2013-T, 6/2014-T and 36/2014-T, 697/2014-T.

Superior courts have also held that "autonomous taxation, although formally inserted in the IRC Code, has always had its own treatment, since it does not apply to income, the formation of which takes place throughout the year, but rather to certain one-off expenses that represent autonomous tax facts subject to rates different from those of IRC"(...) "Despite being a form of taxation provided for in the CIRC, it has nothing to do with the taxation of income, but rather with the taxation of certain expenses, which the legislator understood, for the reasons stated above, should be done autonomously." (Decision of the STA of 21/03/2012, proc. 830/11 and, in the same sense, Decision of the STA of 06/07/2011, proc. no. 0281/11, Decision of the STA of 17.04.2013, proc. no. 166/13, Decision of the STA of 21.01.2015, proc. no. 04710/14 and Decision of the TCAS of 16.10.2014, proc. no. 06754/13).

The Constitutional Court in Decision no. 617/2012 of 31/01/2013 argued that in autonomous taxation, the fact giving rise to the tax is instantaneous, as it "is exhausted in the act of performing certain expense that is subject to taxation (although the assessment of the amount of tax resulting from the application of the various autonomous taxation rates to the various acts of performing expenses considered will be carried out at the end of a given tax period). But the fact that the assessment of the tax is carried out at the end of a given period does not transform it into a periodic tax, of successive formation or lasting character. This assessment operation merely translates into the aggregation, for collection purposes, of the set of operations subject to that autonomous taxation, whose rate is applied to each expense, with no influence on the rate determination from the volume of expenses incurred."

And in Decision no. 310/12, of 20 June, the Constitutional Court considered that "(...) unlike what occurs in the taxation of income under IRS and IRC, in which the whole of the income earned in a given year is taxed (which implies that only at the end of the year can the tax rate and the tax bracket in which the taxpayer is inserted be calculated), in this case each expense incurred is taxed, considered in itself, and subject to a certain rate, with autonomous taxation being assessed independently of the IRC owed in each fiscal year, as it is not directly related to the achievement of a positive result, and therefore capable of being taxed."

More recently, the Constitutional Court in Decision no. 197/2016, proc. no. 465/2015, concluded as follows:

"Autonomous taxation has no cumulative effect in relation to IRC and only applies to the expenses concretely incurred and not to the business income subject to tax, and consequently it does not have the consequence that the appellant attributes to it of expanding the rate on the overall taxation relating to the company's income. Indeed, autonomous taxation cannot be understood as an additional tax that the taxpayer must pay by way of IRC."

The majority of legal doctrine does not depart from the understanding of the superior courts. Thus, as Professor RUI MORAIS teaches, "what is at issue is a taxation that applies to certain expenses of taxpayers, which are considered as constituting tax facts. It is difficult to discern the nature of this form of taxation and, even more so, the reason why it appears provided for in the codes of taxes on income." (RUI DUARTE MORAIS, Apontamentos ao IRC, Almedina, 2009, pp. 202-203). And also CASALTA NABAIS considers that it is "a taxation on expenses and not on income" (CASALTA NABAIS, Direito Fiscal, 6th Ed., p. 614). In the same line, Professor Ana Paula Dourado asserts that "it is consensual that autonomous taxation reaches the taxpayer's expense and not their income." Direito Fiscal, 2015, Almedina, p. 237.

It is therefore not questionable that the mechanism of autonomous taxation of the whole of the realities provided for in Article 88 of the CIRC aims primarily to safeguard the general equilibriums of the tax system itself, the specific equilibriums of IRC and the revenue of the tax itself. That is, it aims to prevent that through the significant recognition of expenses such as those provided for in Article 88, no distortions affecting the system and the expectation of what should be the "normal" revenue of the tax are introduced. In this case, as is equally well-known, what is at issue is discouraging the performance/recognition of these expenses, first and foremost because, by their nature and purpose, they can more easily be subject to diversion to consumption that is, in essence, private or corresponds to expenses that continue to have, also, as a specific and ultimate purpose, the avoidance of tax. These are realities that, as has already been noted, present some degree of blameworthiness since, while not violating the law directly, generate significant and important imbalances with respect to the general idea of justice, the fundamental duty to contribute in proportion to one's means, equality, sacrifice, the proportionality of the tax measure in face of possible manifestations of wealth, the taxation of actual income and justice.

Operating in a different manner from what constitutes the essential purpose of IRC—which taxes income—autonomous taxation, it is reaffirmed, taxes certain specific expenses or charges—and constitutes an instrumental, accessory reality of that tax, in the exact measure in which it is in function of it that they were instituted and are, therefore, capable of being recognized an instrumentality or accessority of purposes, rooted in the safeguarding of the purposes of the tax itself in which they manifest themselves.

It is thus held as certain that autonomous taxation does not constitute IRC in the strict sense but is imbricated with it (IRC).

Revelations of the functional link between IRC and autonomous taxation, and within the framework of the legislator's overall intent, stand out, for example, from the discipline of Article 12 of the CIRC regarding entities subject to the regime of fiscal transparency, by not taxing them in IRC, "save as regards autonomous taxation," a relationship that similarly manifests itself with respect to no. 14 of Article 88 of the CIRC, in the sense that autonomous taxation rates take into account whether the taxpayer presents a fiscal loss or not.

Analyzed further from another perspective, autonomous taxation should be considered in the context of specific anti-abuse norms and their similarity with the regime provided for in Article 23A(1)(r) of the CIRC ("1 - The following expenses are not deductible for the purposes of determining taxable profit, even when accounted for as expenses of the tax period: a) (...); r) The amounts paid or due, for any reason, to natural or legal persons resident outside Portuguese territory and there subject to a regime identified by ordinance of the Government member responsible for the finance area as a regime of taxation clearly more favorable, unless the taxpayer proves that such expenses correspond to operations actually carried out and do not have an abnormal character or an exaggerated amount.…"). Since autonomous taxation aims to reduce the tax advantage achieved by deducting from taxable profit the costs on which it applies, and further to combat tax evasion that this type of expense, by its nature, promotes, it cannot itself, through its deduction from taxable profit as an expense of the fiscal year, constitute a factor in reducing that reduction of advantage intended and determined by the legislator.

The analysis of the evolution of autonomous taxation also allows us to better interpret and determine its nature.

In the original wording of the IRC Code, approved by Decree-Law no. 442-B/88, of 30 November, no express or implied reference was made to autonomous taxation within the scope of IRC. Only with Law no. 101/89, of 29 December, which approved the State Budget for 1990, was a first reference to autonomous taxation made within the scope of IRC, through the legislative authorization contained in Article 15(3), which provides as follows:

3 - The Government is authorized to autonomously tax in IRS or IRC, as the case may be, at an aggravated rate of 10% and without prejudice to the provisions of Article 41(1)(h) of the CIRC, confidential or undocumented expenses incurred in the course of commercial, industrial or agricultural activities by IRS taxpayers who possess or should possess organized accounts or by IRC taxpayers not covered by Articles 8 and 9 of the respective Code.

The origin in the Portuguese tax legal order of autonomous taxation dates back to 1990, with the publication of Decree-Law no. 192/90, of 9 June, where specifically in its Article 4, regarding confidential or undocumented expenses, an autonomous taxation of 10% was established, and for representation expenses and charges related to light passenger vehicles, a rate of 6.4%. Implementing this legislative authorization, the Government approved Decree-Law no. 192/90, in which it included, outside the codes of IRS and IRC, a provision on autonomous taxation establishing the following:

Decree-Law no. 192/90, of 9 June

Article 4

Confidential or undocumented expenses incurred in the course of commercial, industrial or agricultural activities by IRS taxpayers who possess or should possess organized accounts or by IRC taxpayers not covered by Articles 8 and 9 of the respective Code are autonomously taxed in IRS or IRC, as the case may be, at a rate of 10%, without prejudice to the provisions of Article 41(1)(h) of the CIRC.

This norm and, generally, the regime of autonomous taxation, was subject to various amendments (e.g., Law no. 52-C/96, of 27 December; Law no. 87-B/97, of 31 December; Law no. 3-B/2000, of 4 April; Law no. 30-G/2000, of 29 December) in particular through successive modifications, both of the rates and of the systematization and wording given to them in the respective codes on taxes on income, that is to say, both in the CIRC and in the CIRS.

With the approval of Law no. 30-G/2000, of 29 December, the Decree that established "autonomous taxation" was repealed, adding to the CIRC Article 69-A—corresponding to the date of the underlying facts (2015) to Article 88, where in addition to maintaining the incidence of these to undocumented expenses, representation expenses and vehicle expenses, it was extended to other situations of diverse nature.

We can thus draw two basic conclusions:

(i) The first is that autonomous taxation applies both to deductible expenses and to non-deductible expenses under IRC;

(ii) The second is that autonomous taxation aims to prevent the erosion of the tax base under IRC, by imposing taxation on expenses that can be deducted by IRC taxpayers, but which, if so deducted, transform themselves into an aggravation of taxation, thus seeking to serve as a disincentive to the expense of such charges.

Regarding autonomous taxation on non-deductible expenses, if one were to admit their deductibility, one would be admitting the deductibility of an expense not indispensable for the realization of income subject to tax or for the maintenance of the productive source.

As can be established, and for what will be relevant in determining the decision to be made in the context of these proceedings, the following premises:

(i) autonomous taxation of IRC anchored in the various numbers and subsections of Article 88 of the CIRC translate different situations, to which also different taxation rates apply;

(ii) autonomous taxation of IRC affecting certain expenses of IRC taxpayers should be understood as payments independent of the existence or not of taxable matter;

(iii) interpreted as payments associated with IRC, or at least related to it, it can be understood as an exception to the principle of taxation of legal entities in accordance with real and actual profit assessed (Article 3 of the CIRC);

(iv) in autonomous taxation, the fact giving rise to taxation is instantaneous: it is exhausted in the act of performing certain expenses that are subject to taxation (although the assessment of the amount of tax resulting from the various autonomous taxation rates to the various acts of performing expenses considered will be carried out at the end of a given tax period);

(v) the fact that the assessment of the tax is carried out at the end of a given period does not transform it into a periodic tax, of successive formation or lasting character. This assessment operation merely translates into the aggregation, for collection purposes, of the set of operations subject to that taxation, whose rate is applied to each expense, with no influence on the rate determination from the volume of expenses incurred;

(vi) autonomous taxation is not equivalent to the non-deductibility of expenses incurred by an IRC subject.

The characteristics that doctrine has been pointing to autonomous taxation for some years are thus recognized here, such as:

a) Autonomous taxation only makes sense because costs/expenses matter as negative components of the IRC taxable profit. This is what motivates IRC taxpayers to recognize as high a value as possible of these expenses to reduce the taxable matter of IRC, the collection, and consequently the tax to be paid;

b) It is intended to discourage such type of expenses in taxpayers who show negative results but who, regardless thereof, continue to display consumption structures poorly or not at all compatible with the financial health of their businesses;

c) It is, in more general thesis, a matter of modeling the tax system so that it reveals a certain balance with a view to a better distribution of the effective tax burden among taxpayers and types of income;

d) Certain expenses are considered unfavorably when, admittedly, it is not easy to determine the exact measure of the component that corresponds to private consumption, and regarding which the general practice of abuse in their recognition is known.

In conclusion, autonomous taxation, which applies to expenses deductible under IRC, is part of the regime and is owed by way of this tax, with expenses with the payment of such autonomous taxation not constituting charges deductible for the purposes of determining taxable profit.

This understanding was recently clarified by law by Article 3 of Law no. 2/2014, of 16 January, which added Article 23A to the CIRC (while its Article 13 repealed Article 45) with the following wording:

Article 23A - Non-deductible expenses for tax purposes

"1. The following expenses are not deductible for the purposes of determining taxable profit, even when accounted for as expenses of the tax period:

• IRC, including autonomous taxation, and any other taxes that directly or indirectly apply to profits".

There being no doubt as to the interpretative character of the provision transcribed, in accordance with legal hermeneutics rules, in practice, such norm comes to express what the legislator has always understood and continues to understand, namely that expenses resulting from the cost associated with autonomous taxation do not matter for the purposes of determining taxable profit.

In Article 45(1)(a), which preceded Article 23A(1)(a), there was no express mention of autonomous taxation. Precisely because autonomous taxation is not IRC is why the legislator felt the need to expressly refer, adding them in commas, that they too are not considered deductible for tax purposes.

Law no. 7-A/2016 of 30.03 brought a new wording to Article 88(21) of the CIRC:

21 - The assessment of autonomous taxation in IRC is carried out in accordance with the provisions of Article 89 and is based on the values and rates resulting from the provisions of the preceding numbers, with no deductions being made from the total amount assessed.

In adding this no. 21 to Article 88 of the CIRC with the content mentioned, the legislator merely adopted and reinforced the interpretative sense that already resulted from the existing norms, as demonstrated by the reasoning set out above.

Law no. 114/2017 of 29 December (State Budget Law for 2018) again reinforced the absence of deductions from autonomous taxation by modifying no. 21 of Article 88:

"The assessment of autonomous taxation in IRC is carried out in accordance with the provisions of Article 89 and is based on the values and rates resulting from the provisions of the preceding numbers, with no deductions being made from the total amount assessed, even if such deductions result from special legislation."

The amendment introduced by the State Budget Law for 2018 was to the effect that no deductions are made from the amount due in autonomous taxation even if these stem from special legislation such as SIFIDE and RFAI. Now, even without resorting to the interpretative character given by the legislator again to no. 21 of Article 88 of the IRC Code, it is clear that the legislator intended to clarify what in any case already resulted from the law.

Indeed, the solution found by this court has a clear legal basis without even needing to apply the provision of no. 21 of Article 88 of the CIRC, in any of its versions, as has been demonstrated from the reasoning set out above.

Thus, for all the foregoing, the argument invoked by the Claimant as to the illegality of the assessment, by absence of legal basis for its implementation, based on Article 103(3) of the Constitution, a provision that establishes that "no one can be obliged to pay taxes that have not been created in accordance with the Constitution, that have a retroactive nature or whose assessment and collection are not carried out in accordance with the law," is without merit.

VI.2. Regarding the Non-Deductibility of SIFIDE II and RFAI

The fiscal incentives system for corporate research and development (R&D) (SIFIDE) was initially approved by Law no. 40/2005 of 03.08.

The case in question concerns the fiscal year 2015, and therefore the legislation in force at that date should be considered (Tax Code on Investment – CFI - Decree Law no. 162/2014 of 31.10).

SIFIDE II allows IRC taxpayers resident in Portuguese territory who carry out, as their principal activity, an agricultural, industrial, commercial and service activity, and non-residents with permanent establishment, to deduct from the IRC collection assessed in accordance with Article 90(1)(a) of the IRC Code, until its occurrence, the value corresponding to research and development expenses in the part that has not been the subject of financial contribution from the State, in a dual percentage: a) base rate – 32.5% of expenses incurred in that period; and b) incremental rate - 50% of expenses incurred in that period in relation to the simple arithmetic average of the two preceding fiscal years, up to the limit of €1,500,000.

This is, in essence, the possibility of deducting from the IRC collection assessed in the fiscal year the amount of tax credit verified. Expenses that, due to insufficient collection, cannot be deducted in the fiscal year in which they were incurred can be deducted up to the eighth subsequent fiscal year.

Given its respective requirements, SIFIDE II is an automatic tax benefit (Article 5(1) of the EBF), as it does not require prior recognition. This tax benefit has a mixed nature, as it incorporates not only objective requirements relating to the type and nature of eligible expenses (Articles 37 and 38 of the CFI), but also subjective requirements that consider the conditions and nature of the beneficiaries (Articles 39 to 40 of the CFI).

In order to be able to benefit from this fiscal incentive, taxpayers must comply with the conditions and obligations provided for in Articles 39 to 41, among others, not being subject to taxation by indirect methods, the absence of debts to the State, and the fiscal documentation process. This must contain the declaration proving that the activities carried out effectively correspond to research or development actions, the respective amounts involved, the calculation of the increase in expenses in relation to the average of the two preceding fiscal years, and other elements considered relevant. The certifying declaration is issued by an entity appointed by ordinance of the Government member responsible for the economy area, to be included in the fiscal documentation process of the taxpayer referred to in Article 130 of the IRC Code. This documentation must also include a document evidencing the calculation of the benefit.

The Fiscal Support Investment Regime (RFAI) is a tax benefit, provided for in Articles 22 et seq. of the CFI, which allows companies to deduct from the collection assessed a percentage of the investment made in non-current assets (tangible and intangible).

The RFAI applies to IRC taxpayers who carry out an activity included in the codes of the Portuguese Classification of Economic Activities, Revision 3 (CAE-Rev.3) indicated in Article 2 of Ordinance no. 282/2014 of 30.12, by reference to Article 2(2) and 22(1) of the CFI.

Under Article 22(4) of the CFI, IRC taxpayers who cumulatively meet the following conditions may benefit from these tax incentives:

• Have regularly organized and properly organized accounts;

• Their taxable profit is not determined by indirect methods;

• Maintain in the company the assets that are the subject of investment:

During a minimum period of three years, in the case of SMEs;

For five years in other cases;

When less, during the respective period of minimum useful life;

Until the period in which the respective physical removal, dismantling, abandonment, or loss of use occurs;

• Are not indebted to the State and to social security for any contributions, taxes, or quotizations, or have the payment of these debts properly secured;

• Are not considered companies in difficulty in accordance with the Commission communication;

• Carry out relevant investment that provides for the creation of jobs and their maintenance until the end of the minimum maintenance period of the assets that are the subject of the investment.

To IRC taxpayers, the legislator granted in Article 23(1)(a) of the CFI, among others, the following tax benefit:

• Deduction from the IRC collection of the following amounts of relevant applications: In the case of investments made in the North, Center, Alentejo, Autonomous Region of the Azores, and Autonomous Region of Madeira regions, 25% of relevant applications, for investment made up to the amount of €5,000,000, and 10% of relevant applications, for the part exceeding that amount.

Are the values recognized under SIFIDE II and RFAI deducted from the collection produced by autonomous taxation?

As regards SIFIDE II, under Article 38(3) of the CFI:

3 - The deduction is made, in accordance with Article 90 of the IRC Code, in the assessment for the tax period mentioned in the previous number.

As regards RFAI, Article 23(1)(a) provides as follows:

1 - To the IRC taxpayers provided for in Article 1 of the previous article, the following tax benefits are granted:

a) Deduction from the IRC collection assessed in accordance with Article 90(1)(a) of the IRC Code, of the following amounts of relevant applications:

(…)"

Thus, both in SIFIDE II and in RFAI the tax benefit is realized through "deduction from IRC collection." In both cases, the expressions used by the legislator do not have substantially different scope.

Now, the collection referred to in Article 90 when the assessment is to be made by the taxpayer (the situation that occurs in this matter) is assessed on the basis of the taxable matter contained in that assessment/self-assessment [cf. Article 90(1)(a) of the CIRC].

Thus, the credit into which SIFIDE II and RFAI are translated is deducted only from the collection so assessed, that is, from the collection assessed on the basis of taxable matter and not from the collection resulting from autonomous taxation. As was stated above, the assessment of autonomous taxation is carried out under Article 88 of the CIRC, being assessed in an autonomous and distinct manner from the assessment carried out under Article 90 of the CIRC.

We are therefore not dealing with any restrictive interpretation.

Although tax benefits may be subject to extensive interpretation (Article 10 of the EBF), as a rule they are subject to strict or minimum interpretation, which does not have to be restrictive.

It is now settled that tax laws are interpreted like any other laws, with its true meaning to be determined in accordance with the techniques and interpretative elements generally accepted by doctrine (Article 9 of the Civil Code, Article 11 of the LGT).

In light of the foregoing, with regard to hermeneutic norms, we should resort to what is provided for in the Civil Code. Article 9(1) of the Civil Code provides as follows:

1. Interpretation should not be confined to the letter of the law, but should reconstruct from the texts the legislative thought, taking especially into account the unity of the legal system, the circumstances in which the law was enacted, and the specific conditions of the time in which it is applied.

Thus, the letter is naturally assumed as the starting point for interpretation, with the function that from the outset is a negative one, namely, it cannot "be considered as comprised among the possible meanings of the law that legislative thought (spirit, meaning)" that does not have in the letter of the law a minimum of verbal correspondence, even if imperfectly expressed." Also, as OLIVEIRA ASCENSÃO states, "the letter is not only the starting point, it is also an irremovable element of all interpretation. That is to say that the text also functions as a limit to the search for the spirit."

Applying what has been stated to the case in analysis, it is important to consider the literal element. The letter of the law expressly provides for different forms of assessment of autonomous taxation from the IRC collection, thus not allowing the deductibility of SIFIDE II and RFAI from the collection of autonomous taxation.

Furthermore, the unity of the legal system is also an interpretative element under Article 9(1) of the Civil Code. Citing Professor Batista Machado, "Of the three interpretative factors to which Article 9(1) refers, this is undoubtedly the most important." This unity is affected if through interpretation we arrive at contradictory results.

Under Article 9(3) of the Civil Code, the interpreter should presume that the legislator adopted the most appropriate solution.

An interpretation different from the one adopted here is contradictory for the reasons contained in the decision rendered in CAAD proceeding no. 542/2017 on 02.07.2018, to which we fully adhere and here partially reproduce:

"The norms that create tax benefits, we have seen, admit extensive interpretation. However, only to the extent that through such interpretation one is contributing to the pursuit of the public interest objective that justified the tax benefit in question in concrete terms. That is the reason for the possibility of extensive interpretation in this regard. Interpretation in this context must necessarily take into particular account the teleological element, as is well understood, by the specialty of the norms in question. Correct interpretation and application require, in this specific context, the consideration of the economic policy that the norm expresses and which must, always and necessarily, be pursued by this means.

In this case, a public policy of stimulating corporate research and development and productive investment. The legislator aimed to incentivize taxpayers to adopt behaviors that contribute to these ends. And it is thus that, through these tax benefits, tax credits are granted that are calculated by reference to expenses in which the taxpayer incurs and that are considered eligible for the purposes of investment in question, in research and development in the case of SIFIDE, and by reference to the applications considered relevant and expenses considered eligible in investments under RFAI and CFEI. And we cannot fail to note, as revealing in our view, how, in the regimes of these latter two tax benefits, the legislator, in enumerating the eligible expenses for the purposes of the tax benefit itself, expressly excepted, from those, expenses that would lead us to the susceptibility of subjection to autonomous taxation rates - such as expenses with light passenger or mixed vehicles and others. That is, the same legislator, does not even permit, by excluding them, that these expenses (those he indicated) be accounted for for the purposes of the amount of investment to be considered relevant and from which the value of the tax benefit to be attributed will be calculated. One should ask: would the same legislator then, presumed to be reasonable, benefit the same taxpayer by allowing this taxpayer to resort, for example, to the expenses mentioned there and by this means—use of the tax credit arising from the tax benefit—end up being exempt from the autonomous taxation owed? No. That is our understanding.

Also regarding the economic policy and extra-fiscal purposes pursued through the tax benefits in the proceedings, it can be read in the Preamble of the CFI, among other things: "(...) following the reform of IRC and with the objective of intensifying support for investment, favoring sustainable growth, job creation, and contributing to the reinforcement of the capital structure of companies (...); regarding the Fiscal Support Investment Regime, the limit on the tax credit in IRC is also increased, (...) encouraging entrepreneurship, innovation, and favoring the creation of companies with healthy capital structures."

In contrast with the specific objectives with which the legislator created the tax benefits, aiming to incentivize certain behaviors of the taxpayer with the objectives we have just seen, autonomous taxation has been created by the same legislator on expenses in which the taxpayer may incur, behavior which the legislator seeks to discourage for the reasons we have also seen above.

The meanings of the respective norms—relief via tax benefits / aggravation via autonomous taxation—are thus antagonistic. Through the former, the legislator aims to incentivize behaviors of the taxpayer; through the latter, the legislator aims to discourage behaviors of the taxpayer. For the underlying reasons that have already been set out. And given that the logic that runs through all situations of subjection to autonomous taxation is that the legislator wants to tax more heavily the performance of such expenses by the taxpayer whenever the latter is exempt or presents losses.

We do not therefore see how a legislator, who should be presumed to be a reasonable legislator and to have enshrined coherent solutions in the System, could have wished to benefit taxpayers through the application of credits from tax benefits—intended to stimulate certain behaviors by it (legislator) desired (on the basis of objectives so superior that they justify it)—to the relief (and even exemption) of a taxation created by it (legislator) with a view to discouraging the taxpayer from incurring such expenses, penalizing the taxpayer for incurring them for the underlying reasons we have seen.

On the other hand, neither do we see how the same legislator could have aimed at the deduction of credits from tax benefits to amounts of autonomous taxation if one considers that in legislating regarding tax benefits it was necessary, by constitutional imperative, to estimate the respective fiscal expense caused, as we have seen. It does not seem admissible, especially in a matter as delicate as that of public spending, that a reasonable legislator would have found it feasible such a quantification regarding amounts of autonomous taxation, taking into account the type of expenses therein involved."

The incoherence of the tax system, in the internal perspective of each tax and in the articulation between different taxes, undermines the principle of equality (Article 13 of the CRP) among taxpayers.

In conclusion, following the decisions previously rendered in CAAD (proc. no. 722/2015, proc. no. 727/2015, proc. no. 785/2015, proc. no. 629/2016, proc. no. 473/2017, proc. no. 511/2017, proc. no. 525/2017, proc. no. 542/2017, proc. no. 630/2017, proc. no. 641/2017, proc. no. 9/2018, proc. no. 13/2018, proc. no. 41/2018, proc. no. 110/2018), I decide that amounts relating to SIFIDE II and RFAI should not be deducted from the amount of autonomous taxation as it is contrary to the provisions of Article 88 of the CIRC.

VI.3 Compensatory Interest

The examination of the Respondent's condemnation to pay compensatory interest is prejudiced by the solution reached above. As the tax act under review is upheld, consequently the request for compensatory interest should also be ruled as without merit.

VII. DECISION

In light of all that has been set forth:

a) To rule entirely without merit the request for declaration of illegality of the decision of dismissal of the Grace Claim, as well as the IRC tax assessment notice no. 2016..., for the fiscal year 2015;

b) To uphold entirely the tax act that is the subject of these proceedings;

c) To condemn the Claimant to pay the costs of these proceedings, as detailed below.

The value of the proceedings is fixed at €32,374.60 in accordance with Article 97-A(1)(a) of the CPPT, applicable by force of Article 29(1)(a) of the RJAT and Article 3(2) of the Regulation on Costs in Tax Arbitration Proceedings.

The arbitration fee is fixed at €1,836.00 in accordance with Table I of the Regulation on Costs in Tax Arbitration Proceedings, to be paid in full by the Claimant, since the request was entirely without merit, in accordance with Articles 12(2) and 22(4) of the RJAT and Article 4(4) of the aforementioned Regulation.

Let notice be given.

Lisbon, 19 February 2019

The Arbitrator

André Festas da Silva