IRC Depreciation of Wind Turbines (Aerogeradores): CAAD Arbitration Decision 408/2016-T

The arbitrators Cons. Jorge Manuel Lopes de Sousa (arbitrator-president), Prof. Doctor Eduardo Paz Ferreira and Prof.ª Doctor Ana Maria Rodrigues (arbitrator members), appointed by the Deontological Council of the Administrative Arbitration Center to form the Arbitral Tribunal, constituted on 17-10-2016, agree as follows:

1. Report

A…, S.A., registered in the Commercial Register Office of Lisbon under the unique number of registration and identification of legal entity…, with registered office at Av…, Lot…, …–…, …-… Lisbon, submitted, pursuant to articles 2.º and 10.º, no. 1, of Decree-Law no. 10/2011, of 20 January (hereinafter "RJAT") a request for constitution of the collective arbitral tribunal, aimed at assessing the legality of the implied rejection that was formed following the absence of response to the administrative appeal filed on 23-02-2016 before the Finance Service of Lisbon… (immediate object) as well as the additional IRC assessments relating to the fiscal years 2011, 2012 and 2013 - mediate object.

The request for constitution of the arbitral tribunal was accepted by the President of CAAD and notified to the TAX AND CUSTOMS AUTHORITY on 17-08-2016.

Pursuant to the provisions of subparagraph a) of no. 2 of article 6.º and subparagraph b) of no. 1 of article 11.º of RJAT, the Deontological Council appointed as arbitrators the signatories, who communicated acceptance of the appointment within the applicable period.

On 29-09-2016, the Parties were notified of this appointment, having expressed no intention to refuse the appointment of the arbitrators, pursuant to the combined articles 11.º no. 1 subparagraphs a) and b) of RJAT and articles 6.º and 7.º of the Deontological Code.

Thus, in accordance with the provision in subparagraph c) of no. 1 of article 11.º of RJAT, the collective arbitral tribunal was constituted on 17-10-2016.

The Tax and Customs Authority filed a Response, defending that the request should be dismissed.

On 13-12-2016, a hearing was held at which witness evidence was produced and it was agreed that the proceedings would continue with written pleadings.

The Parties filed pleadings.

The arbitral tribunal was regularly constituted and is competent.

The parties have legal personality and capacity, are proper parties (arts. 4.º and 10.º, no. 2, of the same statute and art. 1.º of Ordinance no. 112-A/2011, of 22 March) and are properly represented.

The proceedings do not suffer from any nullities and there are no obstacles to consideration of the merits of the case.

2. Facts

2.1. Proven Facts

The following facts are considered proven:

· The Claimant's corporate purpose is the "exploitation of alternative energies, provision of services, sale of alternative energy production equipment" and is classified for the activity of "Production of electricity from wind, geothermal, solar and unspecified sources (CAE…), being subject to IRC in the general taxation regime;

· The Claimant is engaged in the exploitation of a set of wind turbines, located in the municipality of …, called the … Wind Farm;

· The Claimant was the subject of a tax inspection action authorized by service order no. OI2014…, of 04-06-2014, of general scope, relating to the fiscal year 2012;

· Subsequently, the Claimant was the subject of inspection procedures covered by service orders OI2015… and OI2015…, both of 16-09-2015, of general scope, relating to the fiscal years 2011 and 2013;

· In the Tax Inspection Report relating to the inspections for fiscal years 2011 and 2013, whose contents are reproduced herein, the following is stated, among other matters:

3.2-CORRECTIONS MADE

Following the analysis of the schedules of reintegrations and depreciations of the taxpayer, it was verified that the wind towers, as well as other expenses connected with them, are being depreciated at a rate of 6.67% (useful life of 15 years).

From reading the leasing contracts concluded with the owners of the land where the wind towers are located, we can verify that, in general, these were concluded for a period of 25 years.

The general rules for depreciation and amortization are defined in the IRC Code (CIRC) in its articles 29º to 34º, however the CIRC refers to regulatory statute for the development of this regime.

For the assets in question in these inspection procedures, Regulatory Decree 2/90 is applicable to assets whose use commenced in fiscal year 2009, and Regulatory Decree 25/2009 to assets whose use commenced in 2010. In both cases, the tables annexed to these Regulatory Decrees are silent regarding these assets.

Now to fill this legislative gap, no. 3 of article 5.° of Regulatory Decree 2/90 provides that "regarding elements not mentioned in the preceding number" for which depreciation and amortization rates are not fixed in the tables referred to in no. 1, those that are considered reasonable by the Directorate-General of Taxes and Contributions, taking into account the expected useful period, shall be accepted". In the same manner, no. 3 of article 5.° of Regulatory Decree 25/2009 provides that "regarding elements for which depreciation or amortization rates are not fixed in the tables referred to in no. 1, those that are considered reasonable by the Directorate-General of Taxes, taking into account the expected useful period, shall be accepted".

In summary, as to elements for which depreciation or amortization rates are not fixed in the aforementioned tables, those that are considered reasonable by the Tax and Customs Authority, taking into account the expected useful period, shall be accepted, in accordance with no. 3 of article 31.º of CIRC, combined with no. 3 of article 5.º of Regulatory Decree 2/90 and Regulatory Decree 25/09.

In order to assess the reasonableness of the expected useful period for the equipment comprising "wind farms", various informal contacts were made by the Services with various suppliers of such equipment such as B… (C…), D…, E… and F…, in order to arrive at the conclusion of a useful life period that would be considered reasonable.

Following these contacts, it was verified by the Services that the suppliers assume that, with the technological advances introduced and with the increasing reliability growth, the equipment is designed so that under standard operation and maintenance conditions it has an expected useful life superior to twenty years. From this age onwards it is likely that maintenance costs will be higher, due to the need to replace more expensive components, and that the operating project will become, over the years, economically less attractive/profitable (annex 1 - example)

The technical study was also analyzed, conducted by the National Energy and Geology Laboratory (LNEG), on the "expected useful life period of wind energy conversion equipment". This work had as its main objective to determine the estimated useful life period for a wind turbine, as part of a service provision agreed between LNEG and the Portuguese Association of Renewable Energy Producers (APREN). This determination of the estimated useful life period for a wind turbine was framed to identify the depreciation rate to apply in wind farm projects, given that in Regulatory Decrees 2/90 and 25/09 the rate for these assets is omitted from their Annexed Tables (annex 2).

LNEG developed its study using a methodology based on two fundamental aspects: the identification of the reduction in energy production over time through the determination of the capacity factor trend and the decline in economic profitability of a wind farm. This approach allowed them to define a time interval for the useful life of the turbine.

As a conclusion of its study, LNEG estimates that the useful life period of a wind turbine is between 20 to 25 years. LNEG considers that after this period it becomes necessary to replace components due to their deterioration, thus beginning the decline in project profitability due to increased maintenance costs and a consequent reduction in economic results that, along the timeline, will make the project unfeasible. LNEG also concluded that this study achieves results consistent with those mentioned by wind turbine manufacturers, namely an expected useful life of approximately 20 years.

We have thus, in summary of what was pointed out above, that the estimated useful life of wind farms is determined as a function of a set of physical/material and economic factors. The physical or material factors are related to the capacity/durability of equipment which, as a result of what was stated by the manufacturers and by LNEG itself, we can conclude may operate normally beyond 20 years of age, which may, however, entail repairs (greater or lesser) resulting from wear of its components. The economic factors are related to the optimal financial profitability of the project which, as a result of the age of the equipment, is presumed to decrease due to the expected increase in maintenance and repair expenses of the equipment and its possible loss of capacity due to technological evolution, which may entail production losses.

This information and conclusions are corroborated by the projects themselves presented by the various entities operating the wind farms. Regarding the case in question, the taxpayer presented, for its … Wind Farm, a project for 20 years. This information can be verified on page 24 of the Environmental Impact Study, relating to this wind farm, whose useful life is under consideration. This study was prepared by the company "G…" (annex 3).

Upon consultation of other studies prepared for other wind farms, it is noted that the projects presented are likewise for 20 years.

On this matter, the Directorate of Services of the Tax on Income of Legal Persons (DSIRC) was also asked to issue an opinion.

In its opinion the DSIRC states that:

• "(...) The depreciation rates for wind farms were not provided in the Tables Annexed to Reg. Decree No. 25/2009, of 14 September, until the entry into force of Law No. 82-D/2014, of 31 December. The rates in the Tables were the same as those of the repealed Reg. Decree No. 2/90, of 12 January, and at that time (1990), electricity was not yet being produced for commercialization based on this new technology.

Thus the Tax Authority accepted those it considered reasonable, based on no. 3 of art. 5.° of Reg. Decree No. 25/2009.";

• "To taxpayers holding wind farms who requested authorization from the AT — Tax and Customs Authority for application of an annual depreciation rate of 5%, based on an estimated useful life of 20 years, were authorized by higher order (...);

• "This Directorate of Services requested from the applicants that they send technical studies that allowed them to conclude that the estimated useful life of "Wind Farms" was 20 years.

We were sent, among others, an opinion from which the following excerpt is transcribed: "... Wind technology has undergone remarkable progress in less than two decades. Thus it moved from a situation of complete technological infancy to the existence of 6 MW turbines with bearings of 120 m diameter that manage to present levels of mechanical reliability above 95%. (...) Now the entire industry refers as project useful life time the value of 120,000 hours of operation, which with standard load factors means approximately 20 years. To confirm this value it is sufficient to consult on the WEB some reference institutions of this industry, independent and autonomous of the manufacturers... ";

• "In view of the foregoing, regarding the depreciation of wind farms (tangible fixed assets as a whole), it appears to us that the maximum depreciation rate to accept for tax purposes will be 5%, in the taxation periods that began before 1 January 2015, under no. 3 of art. 5.° of Reg. Decree No. 25/2009 of 14 September".

Thus, from all the foregoing, it results that there is a unanimous position of the various entities consulted (equipment suppliers, LNEG study and AT) and of the various wind farm operating companies, that wind farm projects have an expected useful life of 20 years, a period from which it is calculated that their profitability will decrease and that the project will begin to lose economic interest, although it is acknowledged that wind turbines, the essential and most valuable element of wind farms, may have a useful life of full operation (with appropriate maintenance) beyond the optimal economic useful life of the project. In addition to this is the fact that it is calculated that the maximum expected profitability will occur during the first 20 years of operation, but nothing prevents wind farms from continuing to convert wind energy into electricity in an economically sustainable and profitable manner for many more years.

Thus, and in accordance with the provision in no. 2 of article 30.° of CIRC and no. 3 of article 5.° of the aforementioned Regulatory Decrees (2/90 and 25/09), combined with what has been stated above, we consider, for purposes of reintegrations and depreciation, that the useful life period acceptable for wind farms (tangible fixed assets as a whole) is 20 years, which would correspond to a depreciation/reintegration rate of 5%.

In this manner, and in accordance with the provision of article 34.° of CIRC, the taxpayer performed excessive depreciation, and therefore corrections must be made.

3.2.1 -Year 2011

The correction made to fiscal year 2011, pursuant to article 34.° of CIRC, is €1,118,675.62, as detailed in the following table:

3.2.2-Year 2013

The correction made to fiscal year 2013, pursuant to article 34.° of CIRC, is €1,121,052.22, as detailed in the following table:

3.3 - DETERMINATION OF TAXABLE INCOME

3.3.1 -Year 2011

As a result of the corrections made in the amount of €1,118,675.62, explained and substantiated in the preceding point, the taxable income of the taxpayer moved from an amount of €5,088,662.80 to a corrected income of €6,207,338.42.

3.3.1 -Year 2013

As a result of the corrections made in the amount of €1,121,052.22, explained and substantiated in the preceding point, the taxable income of the taxpayer moved from an amount of €6,092,138.29 to a corrected income of €7,213,190.51.

· The Tax Inspection Report relating to the inspection for fiscal year 2012, whose contents are reproduced herein, is similar to that relating to fiscal years 2011 and 2013, with corrections made as follows:

The correction made, pursuant to article 34.° of CIRC, is €1,120,902.75, as detailed in the following table:

3.3 - DETERMINATION OF TAXABLE INCOME

As a result of the corrections made in the amount of €1,120,902.75, explained and substantiated in the preceding point, the taxable income of the taxpayer moved from an amount of €5,123,894.71 to a corrected income of €6,244,797.46.

· Following the inspections, the following additional IRC assessments and compensatory interest were issued:

For fiscal year 2011, with payment deadline of 18-01-2016:

– IRC assessment no. 2015…, of 04-12-2015, in the amount of € 324,415.93 (document no. 4 attached to the request for arbitral ruling, whose contents are reproduced herein);

– compensatory interest assessment no. 2015…, in the amount of € 45,258.24 (document no. 6 attached to the request for arbitral ruling, whose contents are reproduced herein);

– account settlement statement no. 2015… (document no. 5 attached to the request for arbitral ruling, whose contents are reproduced herein);

For fiscal year 2012, with payment deadline of 23-11-2015:

– IRC assessment no. 2015…, of 21-09-2015, in the amount of € 360,707.10 (document no. 1 attached to the request for arbitral ruling, whose contents are reproduced herein);

– compensatory interest statement no. 2015…, in the amount of € 30,040.80 (document no. 3 attached to the request for arbitral ruling, whose contents are reproduced herein);

– account settlement statement no. 2015… (document no. 2 attached to the request for arbitral ruling, whose contents are reproduced herein);

For fiscal year 2013, with payment deadline of 08-02-2016:

– IRC assessment no. 2015…, of 04-12-2015, in the amount of € 350,389.93 (document no. 7 attached to the request for arbitral ruling, whose contents are reproduced herein);

– compensatory interest assessment no. 2015…, in the amount of € 19,678.53 (document no. 8 attached to the request for arbitral ruling, whose contents are reproduced herein);

– account settlement statement no. 2015… (document no. 9 attached to the request for arbitral ruling, whose contents are reproduced herein);

· On 23-02-2016, the Claimant filed an administrative appeal against the additional IRC assessments for fiscal years 2011, 2012 and 2013;

· Until 23-06-2016, the administrative appeal was not decided;

· The … wind farm commenced operations in 2009 and is subject to adverse weather conditions, caused by its proximity to the sea and dense air, with intense maritime winds, with turbulence and not continuous, which accentuates equipment wear, causing the need for repairs and replacement of parts (namely, generator bearings and gearboxes) in progressively shorter time periods;

· Just over two years after commencing operations, substantial repairs were already necessary;

· In the years 2013, 2014 and 2015, the number of breakdowns has been increasing;

· Equipment manufacturers do not provide warranty for equipment operation for 20 years, although some parts may reach that duration, possibly with repairs;

· The maintenance contracts that the wind turbine supplier company accepted had a maximum period of 12 years;

· There are no historical data that allow concluding that the wind turbines have a useful life period of 20 years, as there is no wind farm with that duration;

· Only with many repairs will it be possible to ensure the operation of the wind turbines for 20 years;

· Wind turbines manufactured from 2008 onwards, as is the case with the Claimant's, will tend to last less than those initially manufactured, as the first ones were oversized;

· In the financing study conducted before the Claimant's wind farm commenced operations, a duration of 15 years was projected for the wind turbines;

· The Claimant provided bank guarantees to suspend tax executions instituted for collection of the assessed amounts (documents nos. 11, 12, 13, 14, 15, and 16 attached to the request for arbitral ruling, whose contents are reproduced herein);

· On 15-07-2016, the Claimant filed the request for arbitral ruling that gave rise to the present proceedings.

2.2. Unproven Facts

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

2.3. Justification for the Determination of the Facts

The facts were proven based on the documents attached to the request for arbitral ruling and in the administrative file.

The facts referred to in subparagraphs K) and L) were based on the testimony of the witnesses indicated by the Claimant, who appeared to testify with impartiality and with knowledge of the facts they reported.

3. Legal Matters

3.1. Issue of the Expected Useful Life Period of Wind Turbines in 2011, 2012 and 2013

The Claimant considered that the wind turbines have a useful life period of 15 years, depreciating them at a rate of 6.67%.

The Tax and Customs Authority understood that, as not provided in the tables annexed to Regulatory Decree no. 25/2009, of 14 September, the Claimant should apply, pursuant to no. 3 of article 5.º of Regulatory Decree no. 25/2009, depreciation and amortization rates considered reasonable, taking into account the expected useful period.

As stated in the Tax Inspection Report, "as to the depreciation of wind farms (tangible fixed assets as a whole), it appears to us that the maximum depreciation rate to accept for tax purposes will be 5%, in the taxation periods that began before 1 January 2015, under no. 3 of art. 5.° of Reg. Decree No. 25/2009 of 14 September".

The issue in the present proceedings is whether the depreciation rate that, in fiscal years 2011, 2012 and 2013, should be used for the wind turbines comprising the Claimant's Wind Farm, referred to in the Tax Inspection Report, is inadequate.

With respect to fiscal years 2011 to 2013, to which the assessed amounts in question relate, the version of CIRC resulting from Decree-Law no. 159/2009, of 13 July, is applicable, which in its article 31.º of CIRC establishes, for what is relevant here, the following:

Article 31.º

Depreciation or Amortization Rates

1 – In the method of constant rates, the annual depreciation or amortization rate that may be accepted as an expense of the taxation period is determined by applying the depreciation or amortization rates defined in the regulatory decree that establishes the respective regime to the following values:

a) Cost of acquisition or production;

b) Value resulting from revaluation under fiscal legislation;

c) Market value, as of the date of opening of the books, for assets subject to valuation for this purpose, when the cost of acquisition or production is not known.

2 – For elements for which depreciation or amortization rates are not fixed, those that are considered reasonable by the Directorate-General of Taxes, taking into account the expected useful period, are accepted.

(highlighted by the Tribunal)

In the same vein, Regulatory Decree no. 25/2009, of 14 September, establishes in its article 5.º, no. 3, in the original wording, that "regarding elements for which depreciation or amortization rates are not fixed in the tables referred to in no. 1, those that are considered reasonable by the Directorate-General of Taxes, taking into account the expected useful period, are accepted".

As the Regulatory Decree no. 25/2009, in the version prior to Law no. 82-D/2014 of 31 December, did not provide for the depreciation rate for wind turbines, the Claimant was required to apply a rate that could be considered reasonable, taking into account the expected useful life period for the wind turbines.

From the evidence produced, it resulted with certainty that there was no reason, in 2011, 2012 and 2013, in the specific case of the wind turbines in question, located in a place where they suffer pronounced wear due to especially aggressive weather conditions, for an expected useful life period for the wind turbines greater than the 15 years that the Claimant took into account in performing the depreciation, as these conditions entail faster deterioration than is normal and consequently a lower expectation of useful life in comparison with the average.

Therefore, the information obtained by the Tax and Customs Authority to the effect that a useful life of 20 years could be expected cannot be considered decisive, particularly when the testimony evidence confirmed that rapid deterioration was indeed verified by the fact that some of the Claimant's wind turbines experienced major operating problems before 5 or 6 years of use had elapsed, and therefore well before reaching half the useful life estimated by the Claimant.

On the other hand, the fact that Law no. 82-D/2014, of 31 December, expressly included "wind energy equipment" in the list of rates of Table II annexed to Regulatory Decree no. 25/2009, and indicated a rate of 8%, which corresponds to a useful life of 12.5 years, dispels any doubts about the reasonableness of the 15-year useful life period considered by the Claimant.

That formula "wind energy equipment" encompasses in its literal content any equipment suitable for production and there is no reason to effect a restrictive interpretation.

In truth, a restrictive interpretation is only justified when "the interpreter concludes that the legislator adopted a text that betrays his thought, to the extent that it says more than what he intended to say" ([1]) and, in the case in question, it does not appear that the provision of a period of duration of 12.5 years for wind turbines is inadequate; rather the evidence produced confirms its adequacy. Furthermore, as it is a notorious fact, perceptible throughout the country, that almost all electricity production from wind energy is done with industrial-type installations such as the Claimant's, it is not to be ventured that the legislator had "forgotten" this reality and introduced the legislative amendment intended only for microgeneration installations, for which the amortization regime will normally be irrelevant, since they are held by IRS subjects who are not subject to an organized accounting regime, rather than establishing it for industrial installations, which are the only ones that have appreciable relevance for tax purposes.

Thus, as this new rate is applicable to equipment of the type of the Claimant's and there is no reason to believe that the quality of the wind turbines has degraded markedly and generally between 2011 and 2014 so that their predictable useful life has fallen from 20 to 12.5 years, it cannot be understood otherwise than that already at that first date it would not be unreasonable not to expect more than 12.5 years of useful life.

Indeed, although this amendment only has normative effect for the future, what is at issue in the present proceedings is whether it was reasonable, in 2011, 2012 and 2013, to expect less than 20 years of useful life for the wind turbines, namely 15 years, and it is manifest that the fact that the legislator of 2014 understood that the appropriate useful life period to consider for wind turbines is 12.5 years reveals that, from a legislative perspective, already in 2011, 2012 and 2013 it was perfectly reasonable not to expect a period of life superior to that.

This evidence is confirmed by the Draft Green Tax Reform ([2]), dated 30-06-2014, in which it is stated, on pages 112-113:

Given the economic and environmental importance that the renewable energy sector assumes in Portugal, Regulatory Decree no. 25/2009 should contemplate specific amortization rates for equipment used in its exploitation, thus promoting renewal thereof and additional investment in clean energies. The rates to be used must follow technical reasonableness and economic efficiency. On the other hand, taking into account the Iberian dimension of the electricity market, competitiveness criteria within the Iberian market framework and adjustment to standardized economic conditions in investments in this type of equipment suggest that Portuguese law be aligned with Spanish law. Taking into account these two aspects, it seems reasonable to adopt a maximum useful life period of 25 years, to which will correspond, pursuant to the fiscal standard established by the legislator, a minimum useful life period of 12.5 years.

In the case in question, the Claimant even used a depreciation rate corresponding to a useful life period greater than 12.5 years, and therefore there is no basis for the Tax and Customs Authority not to consider reasonable the expected useful life period adopted by the Claimant and, in particular, to have considered adequate the period of 20 years, which appears manifestly misaligned with reality, particularly in situations where wind turbines are subject to wear greater than normal, as occurred in the case in question.

From the foregoing, it must be concluded that the assessed amounts in question suffer from defect of violation of law, due to error regarding factual and legal presuppositions, which justifies its annulment, pursuant to article 163.º, no. 1, of the Code of Administrative Procedure of 2015, subsidiarily applicable by force of the provision in article 2.º, subparagraph c), of the General Tax Law.

3.2. Issue of the Reviewability of the Determination of the Useful Life Period of Wind Turbines

With respect to the considerations that the Tax and Customs Authority makes regarding the improperly called "technical discretion," as an area of application of criteria of a technical nature by the Administration allegedly beyond the review of the Courts, this is a concept that became obsolete with the constitutional revision of 1989, when it came to establish in article 268.º, no. 4, of the CRP harmfulness of the act as a criterion for assessing contentious review and consequent reviewability by the courts. ([3])

And it is a long time that the Supreme Administrative Court, in the wake of some doctrine and with the later support of the Constitutional Court, has become aware of the scope of that legislative amendment, as can be seen from the judgment of 16-06-1999, handed down in case no. 020839 ([4]), in which it was written:

For a long time the jurisprudence of the Supreme Administrative Court has uniformly admitted the judicial control of matters of a technical character, in cases where gross or manifest error is detected.

However, the reviewability of acts practiced by the Administration that involve substantial technical knowledge, which are usually referred to as practiced in the domain of technical discretion, should go beyond that.

In truth, by force of the provision of no. 4 of art. 268.° of the CRP (no. 3 in the 1982 version), one cannot fail to admit contentious review of acts of the administration that affect the legal sphere of private individuals.

Indeed, this right of review refers to "any acts whatsoever" and therefore any restriction of such right resulting from ordinary law will be materially unconstitutional.

Thus, the only restrictions on such right that could be compatible with such constitutional principle would be those that might result from the very nature of administrative acts, namely those in which it is a question of managing conflicting public interests that are for the administration to weigh.

The technical character of the issues to be resolved cannot constitute an obstacle to such reviewability, since precisely to allow the resolution of questions of a technical character within the scope of contentious administrative review, that the LPTA in its article 14.°, provides generalized for the possibility of intervention of technicians.

This norm, thus, constitutes clear evidence of the existence of a legislative intention to ensure jurisdictional review of matters of a predominantly technical character.

On the other hand, the restriction of the reviewability of administrative acts in which technical criteria are applied to cases of manifest error implies a practical subversion of the principle of legality, constitutionally imposed on the Administration (no. 2 of article 266.° of the Constitution) which would come to be translated, in practice, into the duty not to practice manifest illegalities and the correlative right to practice non-manifest illegalities, a consequence that is not compatible with such constitutional norm.

As ESTEVES DE OLIVEIRA defended already in 1980, in Administrative Law, volume I, page 249:

"The fact that the administrative court is not expert in technical matters, has more difficulty than the Administration in seeking the content of a technical concept, and often has no certainty whether the scientific judgment of the expert consulted by it is or is not more correct than the judgment of expertise of the administrative body, are all circumstances linked to the difficulty of judicial proof and have nothing to do with the freedom of the Administration."

"What we sustain is that the private individual must be admitted - save cases to be mentioned hereafter – to make proof in court that the technical concept was wrongly applied by the administrative body: if, from such proof, it results, unequivocally, that the Administration erred in interpreting the technical concept, or in subsuming within it the facts of real life, then the court cannot retire within its alleged incapacity to refuse annulment of the administrative act, and this because there is no discretion there, as the jurisprudence itself recognizes".

In essentially coinciding sense, ANTÓNIO FRANCISCO DE SOUSA pronounces himself, in Administrative Discretion, pages 308-309:

"Being part of the broader category of 'improper discretion,' doctrine and jurisprudence in some countries, among which Portugal but also Spain and Italy, continues to speak of 'technical discretion' to refer to that type of administrative decisions that contain a high degree of technical knowledge and which, therefore, only those who take them would be judges thereof.

Administrative judges, for having other training and function, must 'respect' this type of decision by not controlling them or, better yet, controlling only the 'manifest errors' that they might suffer. From the technical impossibility and lack of preparation of the judges would result for the Administration a 'limited freedom' of maneuver, that is, every highly technical decision of the Administration would be free as long as it was not vitiated by 'manifest error.'

Of course this doctrine has no scientific foundation in many respects. On the one hand, one cannot clearly define what are 'highly technical decisions.' Where the 'highly technical' character of a decision begins and ends has never been nor can it be answered in satisfactory terms, since it is a matter that necessarily contains a high degree of subjectivity on the part of the one pronouncing themselves. On the other hand, if the judge does not know all branches of science to be able to control 'highly technical' decisions - as he does not have the duty to know - he will always be able to hear experts, as is indeed provided for in the law, not only for civil law but also for administrative law. It is a right and duty that the one who judges has, if to clarify on the facts on which he decides. The judge does not know if a certain substance is toxic or not, but can hear chemists or doctors who can clarify this to him. From the undeniable difficulty of control of these administrative decisions should not be drawn - only explicable by reasons of comfort of the judge, but putting at risk the certainty and security of the law - a freedom for the Administration to decide as it wishes. Technical discretion thus loses its foundation since, in the Rule of Law, the freedom of the Administration can only result from the will of the Legislator expressed in the law and not from 'difficulty of jurisdictional control.' In the third place, by limiting jurisdictional control to the control of 'manifest error,' one is tolerating 'non-manifest error.' What is manifest error and where it begins and ends the 'manifest' character of an error has never been nor can it be answered in satisfactory terms. Both 'manifest error' and 'non-manifest error' are error. Both are illegal and must be controlled by administrative courts. What the Legislator did not grant, that is, tolerance of 'manifest error,' cannot be granted by the courts. To all these imperfections of a scientific order of the 'doctrine of technical discretion' are added the uncertainty and legal insecurity that it brings with it, with broad repercussions on the weakening of the right of defense of individuals guaranteed constitutionally".

Thus, it is certain that the Courts cannot refuse to the interested party the possibility of obtaining effective control of the application of technical criteria by the administration. ([5])

This judgment of the Supreme Administrative Court was confirmed by the judgment of the Constitutional Court no. 269/2000, of 03-05-2000, handed down in case no. 598/99, published in the DR, 2nd series, of 15-7-2000, in which it is written, penned by one of its most brilliant administrative law scholars:

Guaranteed the contentious review based on illegality, it is with the breadth of this concept, having as a parameter the block of legality to which the Administration must adhere by force of the constitutional principle of legality and the limit to which it is subject in the pursuit of the public interest (article 266.º of the CRP) – the respect for the rights of citizens – that administrative courts go "broadening" their powers of cognition.

The Constitution, laws and regulations, contracts executed, consolidated administrative acts, all are parameters for assessing the legality of acts of the Administration.

The binding nature of the Administration is revealed in domains where traditionally only administrative discretion was recognized, whose reviewability was limited, under article 19.º of LOSTA, to the verification of the vice of abuse of authority.

It is particularly in this area that, by constitutional mandate, the contentious review of administrative acts is deepened.

It is not enough that the Administration, in the exercise of discretionary powers, pursues the public interest that justifies the attribution of such powers; beyond there being, always, areas of binding when the Administration acts in the exercise of such powers (e.g., as regards the factual presuppositions on which it rests) it is the very enactment of the act that confronts itself with the principles of equality, proportionality, justice, impartiality and good faith (article 266.º no. 2 of the CRP) to which the Administration is equally bound.

But if this is so in the domain of volitional discretion, it is also – if not with even greater reason – in the domain of the so-called "technical discretion" (using this expression apart from any judgment on the propriety of the terminology), where, differently from what happens in the first case, there is not, in the definition of the concrete legal situation in question, a range of legally indifferent options.

Returning to the constitutional treatment of the matter, it is noted, finally, that the latest revision places an important milestone on the mentioned evolutionary line, with the clear purpose of fully ensuring the rights and guarantees of the administered.

The fundamental principle, embodied for the first time in the Constitution as it relates to the rights and guarantees of citizens in relation to the Administration, is that of "effective jurisdictional protection" of rights or legally protected interests (article 268.º no. 4).

While this principle is enshrined in general terms in article 20.º no. 1 of the CRP, the constitutional legislator did not refrain from repeating it when guaranteeing the defense of the rights or interests of the citizen as an administered person.

He did not, however, care to establish the means by which citizens have to assert their rights or interests in court – this is a task within the competence of the infra-constitutional legislator who must create the necessary and sufficient instruments for citizens to defend those rights or interests in such terms that none of them is left without adequate jurisdictional defense.

The Constitution limited itself to pointing out, by way of example (but immediately binding), some of these means.

And it is, among them, as yet another indication of its loss of relative importance within the scope of administrative justice, that the contentious review ("impugnation") of "any administrative acts whatsoever" appears.

While this guarantee is expressly maintained – now no longer in an autonomous provision – it ceases, however, to point out the "foundation in illegality" which, as we have seen, since the 1971 revision of the 1933 Constitution and with successive revisions of the 1976 Constitution, remained in our legal-constitutional order.

Notwithstanding that it can be admitted that this elimination may open the way to theses which, even if not going to the point of sustaining that illegality ceased to be the exclusive ground for impugnation of administrative acts, justify it by the purpose of evidencing the reason for being and ultimate purpose of the guarantee – the defense against offense or injury to the rights or interests of the administered – it appears that illegality, as it has been understood, did not cease to be the sole ground of the contentious review.

In this legal-constitutional context are inscribed some judgments of this Court that deem unconstitutional, for violation of the guarantee of contentious review, norms that restrict the grounds of review.

This was the case in the Judgment no. 429/89 (in ATC 13th vol. II, pages 1237 et seq.) which deemed unconstitutional the norm of § 4.º of article 97.º of Decree-Law no. 42641, of 12/11/59, which restricts to the quantitative amount of the fine the possibility of contentious impugnation of a punitive decision of the Ministry of Finances in a proceeding instituted for infraction of statutes governing banking and exchange commerce, and in which it was written:

"It is obvious that, constitutionally, review cannot fail to encompass all legally relevant aspects for assessing the illegality of the administrative act in question (...)"

It is also the case of Judgment no. 233/94 (in ATC volume 27.º, page 595) which deemed unconstitutional, for violation of the same fundamental right, the norm of article 114.º § 2 of the Code of Industrial Contribution which had been interpreted in the appealed decision as excluding the reviewability of the administrative act with certain grounds and in which it was written:

"(...) it is for the courts not only to verify the presuppositions for application of the rule, but also to correct the interpretation of the rule and the observance of the principle of proportionality in such application, expressed not only in the respect of the purpose of the rule but also in the correction of the adequacy of the means to the result, that is, the logical 'iter' followed by the Administration in the assessment of the concrete situation and the internal correction of the logical-discursive reasoning that presided over its application to the case."

It is also the case of Judgment no. 728/98 (in DR II Series, no. 69, of 23/3/99, pages 4232) which deemed unconstitutional, for violation of article 268.º no. 4 of the CRP, the norm of article 88.º of the CPCI.

It is, finally, the case of Judgment no. 8/99 (unpublished) which deemed unconstitutional, still on the same ground, the norm of article 20.º of LOSTA which, in appeals from decisions handed down in disciplinary proceedings in which administrative officers are accused, prevents the court from knowing the gravity of the penalty applied or the material existence of the faults, except under certain expressly stated conditions in the same rule.

This is, after all, a line of jurisprudence that is rooted in the understanding that "article 269.º no. 2 [version at the time] of the Constitution may and should be interpreted as establishing a complete guarantee of review, that is, a guarantee that assures to individuals the possibility of judicially impugning all singular and concrete acts of the Public Administration that produce external effects and are susceptible, therefore, of harming their rights. Thus, any legal norms that exclude this possibility of impugnation with respect to certain acts or certain categories of administrative acts or that restrict the possible grounds for such impugnation only to some of the vices susceptible of generating the antijurisdicity of such acts, must be regarded as unconstitutional (...)" (J.M. Cardoso da Costa, "Protection of Fundamental Rights in "Documentation and Comparative Law" no. 5, page 209).

In any case, even if it were still to be understood today, in dissonance with the Constitution, that questions of a technical character could only be reviewed by the Courts in cases of manifest error, it would have to be concluded that the impugned act is illegal.

In truth, being today certain, in light of the legislative judgment itself embodied in article 23.º of Law no. 82-D/2014, of 31 December (statute specifically intended to regulate matters concerning renewable energies and certainly preceded by appropriate studies on the matter regulated) that, in situations of normalcy, an expected useful life period of 12.5 years is appropriate for wind turbines of the type of the Claimant's, it is manifest that the period of 20 years (60% higher than that) could not be considered adequate already in 2011, 2012 and 2013 with respect to wind turbines subject to especially intense use, as was demonstrated to occur in the case in question.

That is to say, the determination of that period of 20 years underlying the impugned act with respect to the specific wind turbines in question suffers from manifest error, which, even in the face of the outdated concept of "technical discretion," would be reviewable by the Courts.

3.3. Illegality of the Implied Rejection of the Administrative Appeal

Being illegal the assessment acts, the implied rejection of the administrative appeal in which their legality was questioned is also illegal.

3.4. Illegality of the Compensatory Interest Assessments

The compensatory interest assessments have as a presupposition the IRC assessments, with which they are jointly assessed (article 35.º, no. 8, of the General Tax Law).

Thus, the illegality of the IRC assessments implies the illegality of the compensatory interest assessments, which suffer from the same vices.

4. Indemnification for Indebted Guarantee

It was proven that the Claimant provided bank guarantees to suspend tax executions instituted for collection of the assessed amounts.

The Claimant formulates a request for indemnification for the provision of such guarantees.

Article 171.º of the Code of Tax Procedure and Dispute Resolution establishes that "indemnification in case of bank guarantee or equivalent indebted guarantee will be requested in the proceeding in which the legality of the exigible debt is disputed" and that "indemnification must be requested in the administrative appeal, impugnation or review or in case its ground is supervenient within 30 days after its occurrence".

The request for constitution of the arbitral tribunal and for arbitral ruling has as a corollary that it is in the arbitral proceeding that the "legality of the exigible debt" will be discussed, and therefore, as results from the express content of that no. 1 of the cited article 171.º of the Code of Tax Procedure and Dispute Resolution, it is also the arbitral proceeding that is appropriate to review the request for indemnification for indebted guarantee.

The regime of the right to indemnification for indebted guarantee is contained in article 52.º of the General Tax Law, which establishes the following:

Article 52.º

Guarantee in Case of Indebted Provision

1. The debtor who, to suspend execution, offers bank guarantee or equivalent will be indemnified totally or partially for the damages resulting from its provision, in case he has maintained it for a period longer than three years in proportion of the success in administrative review, impugnation or opposition to execution that have as their object the debt guaranteed.

2. The period referred to in the preceding number does not apply when it is verified, in administrative appeal or judicial impugnation, that there was error imputable to the services in the assessment of the tax.

3. The indemnification referred to in number 1 has as its maximum limit the amount resulting from the application to the guaranteed amount of the rate of indemnificatory interest provided for in this law and may be requested in the administrative appeal or judicial impugnation proceeding itself, or autonomously.

4. Indemnification for provision of indebted guarantee will be paid by deduction from the revenue of the tax of the year in which payment is made.

In the case in question, the errors underlying the assessed amounts in question are imputable to the Tax and Customs Authority, as they were of its initiative and the Claimant in no way contributed to those errors being committed.

Therefore, the Claimant is entitled to indemnification for the guarantees provided.

As there are no elements that allow determining the amount of indemnification, the judgment must be made with reference to what is to be assessed in execution of this judgment (articles 609.º, no. 2, of the Code of Civil Procedure and 565.º of the Civil Code, applicable in this sense pursuant to article 2.º, subparagraph d), of the General Tax Law).

5. Decision

On these grounds, this Arbitral Tribunal agrees to:

a) Dismiss the request for arbitral ruling as well-founded and declare illegal the IRC assessments nos. 2015…, 2015… and 2015…, as well as the compensatory interest assessments nos. 2015…, 2015… and 2015… and the implied rejection of the administrative appeal;

b) Annul the assessments referred to.

6. Value of the Proceeding

In accordance with the provision of article 306.º, no. 2, of the Code of Civil Procedure, 97.º-A, no. 1, subparagraph a), of the Code of Tax Procedure and Dispute Resolution and 3.º, no. 2, of the Regulation of Court Costs in Tax Arbitration Proceedings, the value of the proceeding is fixed at € 1,080,771.20.

7. Court Costs

Pursuant to art. 22.º, no. 4, of RJAT, the amount of court costs is fixed at € 14,994.00, pursuant to Table I annexed to the Regulation of Court Costs in Tax Arbitration Proceedings, at the charge of the Tax and Customs Authority.

Lisbon, 30-01-2017

The Arbitrators

(Jorge Manuel Lopes de Sousa)

(Eduardo Paz Ferreira)

(Ana Maria Rodrigues)

[1] BAPTISTA MACHADO, Introduction to Law and the Legitimating Discourse, page 186.

[2] Available at
http://www.portugal.gov.pt/media/1541780/Anteprojecto%20Reforma%20Fiscalidade%20Verde%20Final.pdf

[3] Different from the so-called "technical discretion" is "administrative justice" in which the application of technical criteria is not at issue, but a margin of free appraisal inherent in the powers conferred on the Administration in certain matters, as is the case, for example, of the graduation of disciplinary penalties or graduation of candidates to a competition based on assessments of a qualitative nature.

[4] Available at https://dre.pt/application/file/3997343.

[5] Essentially in the same sense, the Supreme Administrative Court pronounced itself in the judgment of 29-11-2000, case 25580, in which it was summarized: «The right to contentious review of any harmful administrative acts, ensured in no. 4 of art. 268.º of the Constitution, can only be restricted with respect to acts which, by their nature, do not allow jurisdictional control, namely those in which it is a question of managing conflicting public interests that the administration must weigh, which is not the case with the acts of the Government in the matter of recognition of the exemptions referred to, which has presuppositions wholly fixed in the law».