Process: 413/2018-T

Date: July 8, 2019

Tax Type: IRC

Source: Original CAAD Decision

Summary

CAAD case 413/2018-T addresses profit periodization (periodização do lucro) under Portuguese Corporate Income Tax (IRC) rules, specifically concerning when construction-related expenses can be deducted. The taxpayer, A... Lda, challenged an additional IRC assessment of €262,749.40 for fiscal year 2010, arguing that the Tax Authority (AT) erroneously disallowed expenses totaling €869,944.76 related to an ongoing construction project in Cascais. The AT's position was that these expenses, including materials (€395,396.33), subcontracting costs (€315,022.70), and other services (€159,526.03), could not be deducted in 2010 because the corresponding revenue had not yet been recognized, citing Articles 17(1) and 18(1) and (3)(a) of the CIRC. The taxpayer contended this violated proper accrual accounting principles and constituted a violation of Article 104(2) of the Portuguese Constitution. The case involved a construction project (Cost Center 30) that commenced in 2010 but generated no sales that year, while the taxpayer simultaneously sold 7 of 9 units from a different project (Cost Center 29). The tribunal had to determine whether expenses should match the period when incurred or when corresponding revenue is recognized. The taxpayer exhausted administrative remedies, filing both an administrative appeal (reclamação graciosa) rejected in 2015 and a hierarchical appeal (recurso hierárquico) rejected in May 2018, before pursuing CAAD arbitration. This case illustrates the 'founded doubt' (fundada dúvida) concept in Portuguese tax arbitration, where legitimate interpretative disputes regarding timing of expense recognition qualify for arbitral review, particularly when accounting standards and tax law interact regarding multi-year construction projects.

Full Decision

ARBITRAL DECISION (consult full version in PDF)

I – REPORT

1. On 29 August 2018, A... Lda, Tax ID No. ..., with registered office at Av. ..., ..., ...-..., ...-... ..., filed a request for constitution of an arbitral tribunal, pursuant to the combined provisions of Articles 2 and 10 of Decree-Law No. 10/2011, of 20 January, which approved the Legal Regime of Arbitration in Tax Matters, as amended by Article 228 of Law No. 66-B/2012, of 31 December (hereinafter, briefly designated RJAT), seeking the declaration of partial illegality of the additional corporate income tax assessment act No. 2014... of 05/11/2014, for the year 2010, and respective compensatory interest, in the total amount of € 262,749.40, as well as the acts of rejection of the administrative appeal and hierarchical appeal that had that assessment act as their subject.

2. To support its request, the Claimant alleges, in summary, a defect of violation of law, by violation of the provisions of Articles 17, No. 1 and 18, Nos. 1 and 3, subsection a), both of the Corporate Income Tax Code (CIRC), due to erroneous qualification of tax facts, as well as error in the factual and legal assumptions and, further on the grounds of substantive unconstitutionality by violation of the provision of Article 104, No. 2, of the Constitution of the Portuguese Republic (CRP).

3. On 30-08-2018, the request for constitution of the arbitral tribunal was accepted and automatically notified to the Tax Authority (AT).

4. The Claimant failed to appoint an arbitrator, therefore, pursuant to the provision in subsection a) of No. 2 of Article 6 and subsection a) of No. 1 of Article 11 of the RJAT, the President of the Deontological Council of CAAD designated the signatories as arbitrators of the collective arbitral tribunal, who communicated acceptance of the appointment within the applicable time period.

5. On 18-10-2018, the parties were notified of such designations, and neither manifested a desire to challenge any of them.

6. In accordance with the provision in subsection c) of No. 1 of Article 11 of the RJAT, the collective Arbitral Tribunal was constituted on 08-11-2018.

7. On 12-12-2018, the Respondent, duly notified for that purpose, filed its response defending by way of challenge.

8. On 22-02-2019, the meeting referred to in Article 18 of the RJAT was held, at which the witnesses presented by the Claimant were examined.

9. Having been granted a time period for the presentation of written submissions, these were presented by the parties, pronouncing themselves on the evidence produced and reiterating and developing their respective legal positions.

10. It was indicated that the final decision would be notified by the deadline set forth in Article 21/1 of the RJAT, which deadline was extended by 2 months, in accordance with No. 1 of the same Article.

11. The Arbitral Tribunal is materially competent and is regularly constituted, in accordance with Articles 2, No. 1, subsection a), 5 and 6, No. 2, subsection a), of the RJAT.

The parties have legal personality and capacity, are legitimate and are legally represented, in accordance with Articles 4 and 10 of the RJAT and Article 1 of Ministerial Ruling No. 112-A/2011, of 22 March.

The proceedings do not suffer from any nullities.

Thus, there is no obstacle to the consideration of the case.

All considered, it falls to pronounce:

II. DECISION

A. FACTUAL MATTERS

A.1. Facts established as proven

1. In the context of an external tax inspection procedure, with Reference OI2014..., the AT proceeded to disregard certain expenses recorded in the accounts by the Claimant, on the grounds that they did not meet the necessary requirements to be fiscally deductible, in accordance with the provision of Article 18, No. 3, subsection a) of the CIRC, since it considered that the expenses in question concerned the work of ..., parish of ..., which was ongoing during that fiscal year, and had not yet generated the corresponding income.

2. The said expenses were inherent to:

3. The fiscal results were corrected, as per the table below:

4. The value not accepted as expenses for tax purposes includes the following values:

a. € 395,396.33: Value recorded as exercise expenses in account 6121-29-Cost of goods sold and materials consumed - Raw materials-...-Cascais, subsidiaries and consumption, transferred via account 331-Raw materials from purchase accounts 31212-1 (€ 383,936.98) and 31213-1 (€ 11,459.35);

b. € 315,022.70: Value recorded in account 621-Subcontracting, corresponding to expenses equally allocated to the cost center relative to the work of ... .

5. In the declaration model 1 submitted for purposes of registration of the property under Real Estate Tax (IMI) (Article of matrix U-...), it states that the works of ... were completed on 26-01-2009.

6. In light of the above, and by analysis of the supporting documents and because the work of ... is the only one ongoing in 2010, the AT concludes that the amounts referred to in subsections a) and b) of No. 4 above concerned that work.

7. The amounts referred to below were recorded as expenses relating to the work of ... :

a. € 89,162.53: Value recorded in account 6268-Other supplies and services;

b. € 63,900.31: Value recorded in account 6813-Fees;

c. € 6,463.19: Value recorded in account 62639-Other Insurance.

8. From the tax inspection report (RIT), it furthermore states the following:

(...)

9. Further appearing in the RIT, regarding the right of hearing exercised by the Claimant, the following:

10. Following the inspection procedure referred to, the additional corporate income tax assessment act No. 2014... of 05/11/2014, for the year 2010, and respective compensatory interest was issued.

11. The Claimant filed an administrative appeal on 19-12-2014, the respective draft rejection of which was notified to the Claimant through Letter ... of 2015-04-21, for purposes of the right to participate in the formation of the decision, having been granted a time period of 15 days for that purpose.

12. The right of hearing was exercised through a request filed on 2015-05-06 at the Tax Office.

13. In the final decision of the administrative appeal procedure, rejection of the request was decided.

14. From this decision, the Claimant filed, on 29-07-2015, a hierarchical appeal, which was rejected by order of the Director of Services of the Corporate Income Tax Services Directorate, dated 16-05-2018.

15. The invoices that were identified and analyzed in the inspection report, to which they are attached, relating to the work of ..., were recorded in accounts 31212, 621, 6268 and 6813.

16. The work of ..., performed by the Claimant was begun in the year 2010.

17. During the entire year of 2010, the Claimant did not carry out any sales relative to that work.

18. In 2010, the Claimant sold 7 of the 9 units covered by Cost Center 29 – ... .

19. The value of products and work in progress recorded by the Claimant at the beginning of the 2010 fiscal year was € 2,660,098.31, recorded in account 3611 and distributed among the cost centers: (4) € 117,261.25 and (29) € 2,542,837.06.

20. The value of products and work in progress recorded by the Claimant at the end of the 2010 fiscal year was € 2,602,261.25, recorded in account 3611 and distributed among the cost centers: (4) € 117,261.25, (29) € 1,585,000.00 and (30) € 900,000.00 (value relative to the cost of land acquisition).

A.2. Facts established as not proven

With relevance to the decision, there are no facts that should be considered as not proven.

A.3. Justification of the proven and not proven factual matters

With respect to factual matters, the Tribunal need not pronounce on everything alleged by the parties; rather, it has the duty to select the facts that matter for the decision and distinguish proven matters from unproven ones (see Article 123, No. 2, of the Tax Procedure and Process Code (CPPT) and Article 607, No. 3 of the Code of Civil Procedure (CPC), applicable by virtue of Article 29, No. 1, subsections a) and e), of the RJAT).

Thus, the facts relevant to the judgment of the case are chosen and defined according to their legal relevance, which is established in light of the various plausible solutions to the question(s) of law (see former Article 511, No. 1, of the CPC, corresponding to the current Article 596, applicable by virtue of Article 29, No. 1, subsection e), of the RJAT).

Therefore, taking into account the positions assumed by the parties, in light of Article 110/7 of the CPPT, the documentary evidence and the file documents attached to the proceedings, the facts listed above were considered proven, with relevance to the decision, taking into account that, as stated in the Decision of the TCA-South of 26-06-2014, handed down in case 07148/13, "the probative value of the tax inspection report (...) may have evidentiary force if the assertions contained therein are not challenged".

The testimonial evidence produced contributed nothing to the facts established as proven that result from the documentary evidence indicated, which is, moreover, consensual between the parties.

Allegations made by the parties and presented as facts consisting of strictly conclusive statements, incapable of proof and whose truthfulness is to be assessed in relation to the concrete factual matter consolidated above, were neither established as proven nor as not proven.

B. ON THE LAW

The question to be resolved in this arbitration proceedings consists of determining whether the correction made by the AT was legal, relating to the 2010 fiscal year of the Claimant, corresponding to the non-acceptance as expenses for tax purposes of the sum of the following values:

a. € 395,396.33: Value recorded as exercise expenses in account 6121-29-Cost of goods sold and materials consumed - Raw materials, subsidiaries and consumption-...-Cascais, transferred via account 331-Raw materials from purchase accounts 31212-1 (€ 383,936.98) and 31213-1 (€ 11,459.35); and

b. € 315,022.70: Value recorded in account 621-Subcontracting, corresponding to expenses equally allocated to the cost center relative to the work of ... .

As stated in the Decision of the Superior Administrative Court (STA) of 23-09-2015, handed down in case 01034/11, and as has been repeated jurisprudence of superior state courts, "It is exclusively in light of the reasoning expressed by the AT when making the additional VAT assessment that the legality of that tax act should be determined."

Thus, in order to determine the legality of the tax act sub iudice, one shall follow the discursive path set forth in the RIT, so as to understand its grounds and assess its validity.

The RIT begins, then, by noting that in the year 2010, the Claimant had only one work ongoing, located in ..., ... .

It continues by noting that in that same fiscal year the Claimant proceeded to sell 7 units relating to a work performed in ..., in Cascais, and one unit relating to another work located in ..., ... .

It is noted, next, in the RIT that the referred works were completed in 2010, with, namely, the work in ..., Cascais, being considered as such on 26-01-2009.

The AT concludes, then, that "the production expenses, borne and recorded by the taxpayer in the fiscal years under analysis concern the work that was ongoing in these [years]".

Further stated in the RIT is that in the fiscal year of 2011, "the taxpayer (...) allocated all the expenses with purchases of materials and external supplies and services to the work that was ongoing –...– via the accounting standards (SNC) account "36 – products and work in progress"".

With regard to the fiscal year of 2010, which is what now concerns us, it appears in the RIT that "in the fiscal year of 2010, it was verified that expenses were allocated to the cost center relating to the work of ...- whose construction works ended on 2009-01-26 -, and considered as expenses of the fiscal year, charges recorded in SNC accounts 31212-1 and 621, in the amounts of respectively € 383,936.98 and € 315,022.70, which, after sample analysis of the supporting documentation of the accounting records, discriminated below and whose copies are included in Annex III, were confirmed to concern the work located in ..., which was in progress".

Next, the RIT itself contains a list of supporting documents for those amounts in SNC accounts 31212-1 and 621, which, in accordance with the documentation attached thereto and in the file, is verified to result from the same documents that expressly refer to the work of ... .

Additionally, in the RIT there is a reference to an additional amount of € 170,988.38, relating to the work of ..., concerning:

a. € 89,162.53: Value recorded in account 6268-Other supplies and services;

b. € 63,900.31: Value recorded in account 6813-Fees;

c. € 6,463.19: Value recorded in account 62639-Other Insurance.

These, in their entirety, are the facts on which the corrections made in the RIT are based, and now in question, it being certain that the Claimant accepts, entirely, all those facts.

Indeed, the Claimant does not contest that:

· In 2010 it had only the work of ... ongoing;

· In 2010 it sold the units indicated in the RIT;

· It actually bore the charges appearing in the supporting documents of SNC accounts 31212-1 and 621;

· Such expenses relate to the work of ... ;

· In the fiscal year of 2010, those same expenses were allocated to the cost center relating to the work of ... ;

· It actually bore the charges appearing in accounts 6268, 6813 and 62639, also indicated in the RIT; and that

· Such charges relate to the work of ... .

What the Claimant contests is the conclusion drawn by the AT from those facts.

Continuing with the RIT, the regime of Article 18/3/a) of the CIRC is set forth therein, concluding that "the expenses in question, and which are proven to concern the work of ..., which was in progress in the fiscal years under analysis, should only be recognized as such in the fiscal year in which the income from the corresponding sales is realized. They should, therefore, remain as inventories of products and work in progress, in the fiscal years under analysis."

With the correction against which the Claimant objects being determined, on the grounds that it is considered "not fiscally accepted as an expense of the 2010 fiscal year, the amount of € 869,945.06, (...) because it concerns work that is in progress, and consequently has not yet generated the corresponding income, in this fiscal year."

The Claimant, for its part, argues, in summary, that the amount of € 869,948.06, corrected by the AT, did not adversely affect its taxable profit for the 2010 fiscal year, since it was in account 36 ("products and work in progress"), arguing that only by oversight would the amount in question not have been allocated to the cost center relating to the work of ..., in the fiscal year referred to, having instead been allocated to the cost center relating to the finished work of ... , a situation that would be corrected in the fiscal year 2012.

In pronouncing on the right of hearing exercised by the Claimant, where it manifested, from the outset, its disagreement with the corrections that were implemented as referred to, the AT begins by asserting that "the amount of € 878,755.00 that the taxpayer transfers, in the economic fiscal year of 2012, from the inventory account of the work of ...- 3611-29 – to the inventory account of the work of ... – 3611-30 – (...) was generated in fiscal years prior to 2010".

To support such a judgment, the AT presents the following table:

It is noted, then, in the RIT, that "in 2010 the account relating to the inventories of the work of ..., which only referred to 2 units that remained unsold, presented a balance of 1,585,000.00 that was carried forward to the following fiscal year", and that in that same year "the closing balance of the products and work in progress account of the work of ... is lower than its opening balance".

It is concluded, in that sequence, in the RIT, that "the production cost of the units sold in this fiscal year corresponds in part to the value carried forward from prior fiscal years and which was accumulated in the opening balance".

It is further emphasized in the RIT that the "method of determining the production cost of the units sold was not made explicit", as well as that "it is difficult to make explicit the method of determination", recognizing that it is "considered excessive the values of capitalized expenses in light of the number of units to be transferred", it is judged therein that "the expenses are transferred randomly to other works in progress".

Further asserted in the RIT is that the "amounts recorded in the referred accounts of class 6, at the end of the period, when results were determined, were not transferred to the corresponding account for products and work in progress, through integration in the closing inventory thereof, since the balance of this account (3611-29) decreased in the fiscal year of 2010, that is, the value of the respective closing inventory of the taxation period is lower than that verified at the beginning of the same period (opening inventory)".

In summary, it is concluded in the RIT that "contrary to what was alleged by the taxpayer when exercising the right of hearing, the amount by him transferred in 2012 to the work of ... concerns expenses borne in fiscal years prior to 2010, the balance of which was carried forward to the following years".

In this framework, what is the legal position?

*

As stated in the Decision of the TCA-South of 05-03-2015, handed down in case 03108/09, "If the assessment procedure was initiated by the Tax Authority, the latter shall bear the burden, by force of Article 74 of the General Tax Code (LGT), of demonstrating the occurrence of the facts from which the right to assessment derives (the presupposition fact of the existence, qualification and quantification of the tax fact)."

That being the case, that is, being a matter of an assessment procedure initiated by the AT, one must then determine whether the latter fulfills the burden set forth in the cited decision.

As results from what has been previously set forth, the assessment issued by the AT, and contested by the Claimant, is based essentially on the following grounds:

- The Claimant recorded, in the fiscal year 2010, the total amount of € 869,948.06, relating to expenses with the work of ... , work which, in that fiscal year, was in progress, and from which, in the same fiscal year, it did not carry out any sale;

- The referred amount contributed negatively to the calculation of the Claimant's taxable profit in the year 2010, since it was not recorded, concurrently, as inventories of products and work in progress, in SNC account 36.

- Therefore, the same referred amount should be added to the Claimant's taxable profit, in accordance with the regime of Article 18/3/a) of the CIRC, in accordance with which such should only be recognized as such in the fiscal year in which the income from the corresponding sales is realized.

Now, with all due respect, the understanding of the AT cannot be ratified nor, consequently, the corrections flowing therefrom.

The regime of accrual or economic periodization, evident in § 22 of the Conceptual Framework of the Accounting Standards System (SNC), states the following:

"... in order to fulfill their objectives, financial statements are prepared in accordance with the accrual basis of accounting (or economic periodization). Through this basis, the effects of transactions and other events are recognized when they occur (and not when cash or cash equivalents are received or paid) being recorded accounting and reported in the financial statements of the periods with which they relate. Financial statements prepared in accordance with the accrual basis inform users not only of past transactions involving the payment and receipt of cash but also of obligations to pay in the future and of resources that represent cash to be received in the future. Thus, information is provided about past transactions and other events that is more useful to users in making economic decisions...".

In this sense, expenses and income should be attributed to the period to which they actually pertain, regardless of when their payment or receipt occurs. Such procedure is not dependent on the value of the operation or its materiality and should, in principle, be respected.

The Corporate Income Tax Code, in its Article 17 - Determination of taxable profit, in subsection a) of No. 3, stipulates that to allow this determination, the accounts should be organized in accordance with accounting standards, therefore the application of the principle previously mentioned also applies to tax matters, as also required by Article 18 - Periodization of taxable profit, in its No. 1, which is transcribed:

"Income and expenses, as well as other positive or negative components of taxable profit, are allocable to the taxation period in which they are obtained or borne, regardless of their receipt or payment, in accordance with the economic periodization regime".

That is, conceptually, Article 18 of the Corporate Income Tax Code seeks to follow the accounting treatment, also foreseeing periodization of taxable profit.

Notwithstanding, the application of the principle of periodization of taxable profit operated by the AT does not present itself in conformity with what has been the recurrent understanding of jurisprudence in the matter, which has judged that:

"III - The principle of specialization of fiscal years aims to tax the wealth generated in each fiscal year and therefore its respective income and costs are recorded as they are obtained and borne, and not as their respective receipt or payment occurs.

IV - However, this principle must tend to conform and be interpreted in accordance with the principle of justice, with constitutional and legal conformation (Articles 266, No. 2 of the CRP and 55 of the LGT), so as to permit the allocation to a fiscal year of costs relating to prior fiscal years, provided that it does not result from voluntary and intentional omissions, with a view to operating the transfer of results between fiscal years."

As stated in the Decision of the STA of 09-05-2012, handed down in case 0269/12:

"It is likewise repeated jurisprudence of this Supreme Court that the rigidity of this principle must be remedied or tempered with the invocation of the principle of justice, in situations where, with all review periods already exceeded and with no prejudice to the State, one should avoid falling into an unjustified injustice for the taxpayer."

In summary, the Decision of 02-03-2016, handed down in case 01204/13, also of the STA, states that:

"It is important to understand that:

1) the allocation of income or a cost to a given fiscal year obeys an economic criterion and not a financial criterion.

and,

2) that the principle of specialization of fiscal years is not rigid but should tend to conform and be interpreted in accordance with the constitutional principle of Justice."

It is thus deemed settled that the principle of periodization of taxable profit, contained in Article 18 of the CIRC, should tend to conform and be interpreted in accordance with the principle of justice, with constitutional and legal conformation (Articles 266, No. 2 of the CRP and 5/2 of the LGT), so as to permit the allocation to a fiscal year of costs relating to prior fiscal years, provided that it does not result from voluntary and intentional omissions, with a view to operating the transfer of results between fiscal years.

Now, in the case at hand, what is verified, with relevance to the case, is the following:

- The Claimant, at the end of the fiscal year 2010, had recorded in SNC account 36-1 the total amount of € 2,602,261.25;

- Of this amount, the amount of € 117,261.25 was recorded in cost center (4), the amount of € 1,585,000.00 was recorded in cost center (29), and the amount of € 900,000.00 was recorded in cost center (30).

Further verified is that:

- cost center (29) relates to the work of ... , from which 7 units were sold in the year 2010, and from which 2 units remained unsold;

- that cost center recorded, in its SNC sub-account 36-11-29, in the year 2010, a negative variation of € 957,837.06, going from € 2,542,837.06 to € 1,585,000.00;

- the amount recorded in SNC sub-account 36-11-30 (cost center (30), work of ...), in the year 2010, concerns exclusively the cost of land acquisition for the respective property.

Now, from the outset, what stands out from the foregoing is that the amount recorded in SNC sub-account 36-11-29, at the end of the fiscal year 2010, is manifestly excessive, as the RIT itself acknowledges when pronouncing on the prior hearing of the Claimant, referring to it as being "considered excessive the values of capitalized expenses in light of the number of units to be transferred".

And that such is the case is beyond doubt, given the data determined in the RIT itself. As mentioned, with respect to the work of ... , it is verified that in 2010, 7 units were sold and the amount recorded in SNC sub-account 36-11-29 decreased by € 957,837.06, leaving a balance of € 1,585,000.00, with only two units remaining unsold.

That is:

- the sale of 7 units implied the reduction of SNC sub-account 36-11-29 by € 957,837.06;

- leaving € 1,585,000.00 to be allocated to only two units!

Given such a finding, one of two things must be the case:

- Either one accepts that the amount recorded in that SNC account 36-11-29, at the end of the fiscal year 2010, includes the expenses borne by the Claimant in the work of ... , and which were erroneously recorded in SNC account 36-11-29, instead of in SNC account 36-11-30, as the Claimant argues; or

- Or one considers, as ultimately happens in the RIT, when pronouncing on the prior hearing of the Claimant, that the amount recorded in that SNC account 36-11-29, at the end of the fiscal year 2010, "concerns expenses borne in fiscal years prior to 2010, the balance of which was carried forward to the following years".

In this case, which was the one assumed in the RIT, an inescapable conclusion emerges: that the amount recorded in SNC account 36-11-29 is contributing positively to the calculation of the Claimant's taxable profit, in an amount at variance with the Claimant's actual income.

Indeed, if, as the AT posits in the RIT, the amount recorded in that SNC account 36-11-29 "concerns expenses borne in fiscal years prior to 2010, the balance of which was carried forward to the following years", and is excessive "in light of the number of units to be transferred", one can only conclude that that amount includes expenses that should have contributed negatively to the calculation of the Claimant's taxable profit in fiscal years prior to 2010.

Now, the AT does not challenge the reality of the amounts recorded in that SNC account 36-11-29.

It is likewise not placed in question the possibility that the non-consideration of the values that the AT qualified as relating to prior fiscal years, in the respective fiscal years, was underlying a purpose to manipulate taxable profit between fiscal years, so as to obtain tax advantages.

Therefore, in obedience to the rule applied by the AT, Article 18/3 of the CIRC, interpreted in accordance with the jurisprudence exposed, the AT should have considered, as a negative component of the Claimant's taxable profit, the amount that it itself detected as excessive, recorded in the 2010 fiscal year in the Claimant's SNC account 36-11-29.

Indeed, as there are no voluntary and intentional omissions at issue, with a view to operating the transfer of results between fiscal years, it must be concluded that the correction at issue occurred in violation of the provision of Article 18 of the IRC, interpreted in accordance with the jurisprudence cited.

It should be noted that, in the perspective set forth, the issue is not the application of the regime of periodization of taxable profit to the expenses that the Claimant recorded relating to the ongoing and uncompleted work (...), but its application only to that part, and not also to the amounts recorded in SNC account 36-11-29.

That is, as the AT found that the amount recorded in that account was, notoriously and in the terms previously set forth, excessive, and having gathered no indication that the amounts recorded therein resulted from voluntary and intentional omissions, with a view to operating the transfer of results between fiscal years, the AT should, in accordance with the terms determined by the cited jurisprudence, consider, in the fiscal year in which it operated the corrections by application of the rules relating to periodization of taxable profit, interpreted "in accordance with the principle of justice, with constitutional and legal conformation (Articles 266, No. 2 of the CRP and 55 of the LGT), so as to permit the allocation to a fiscal year of costs relating to prior fiscal years".

On the other hand, and even if such were not understood, it would always have to be concluded that the act is voidable, pursuant to Article 100/1 of the CPPT, which provides that:

"Whenever the evidence produced results in a well-founded doubt about the existence and quantification of the tax fact, the challenged act shall be annulled."

Indeed, restating the aforementioned Decision of the TCA-South of 05-03-2015, handed down in case 03108/09, in the case at hand the AT "shall bear the burden, by force of Article 74 of the LGT, of demonstrating the occurrence of the facts from which the right to assessment derives (the presupposition fact of the existence, qualification and quantification of the tax fact)."

Now, with regard to the quantification of the tax fact – which in the case of corporate income tax consists of the profit actually verified in each year – one cannot fail to consider, much by force of what has been previously set forth, that there exist well-founded doubts as to whether the same corresponds or does not correspond to the amount that results from the AT's corrective intervention, now under review.

Thus, and as previously set forth, from what appears in the RIT – which circumscribes the grounds of the correction operated – what is determined, beyond any doubt (even because it is admitted by the AT itself) is that the amount recorded in SNC account 36-11-29 of the Claimant, at the end of the fiscal year 2010, and which contributes positively to the calculation of taxable profit subject to tax in the ex officio assessment sub iudice, is notoriously excessive.

As also set forth, in the specific case two possibilities are presented that may be at the genesis of such an anomaly, namely:

- the amount recorded in that SNC account 36-11-29, at the end of the fiscal year 2010, includes the expenses borne by the Claimant in the work of ... , and which were erroneously recorded in SNC account 36-11-29, instead of in SNC account 36-11-30, as the Claimant argues; or

- the amount recorded in that SNC account 36-11-29, at the end of the fiscal year 2010, "concerns expenses borne in fiscal years prior to 2010, the balance of which was carried forward to the following years", as is maintained in the RIT, when pronouncing on the prior hearing of the Claimant.

As also had the opportunity to be set forth previously, the RIT supports itself in this latter hypothesis, on the grounds that "the balance of this account (3611-29) decreased in the fiscal year of 2010, that is, the value of the respective closing inventory of the taxation period is lower than that verified at the beginning of the same period (opening inventory)".

Now, the mere decrease of the balance of SNC account 36-11-29 does not, of itself, permit the conclusion, to the exclusion of other hypotheses, that amounts were not recorded therein, as the Claimant argues, that should have been recorded in SNC account 36-11-30, and which were not recorded therein by oversight.

Indeed, with a significant volume of sales having been verified (7 out of 9), in the inventories to which cost center 29 referred, and not having verified a minimum or approximately proportional decrease in SNC account 36-11-29, one could equally legitimately conclude that the disproportion of the final amount recorded in that account, in the fiscal year 2010, "concerns expenses borne in fiscal years prior to 2010, the balance of which was carried forward to the following years", as is maintained in the RIT, as that it results from expenses borne by the Claimant in the work of ... , and which were erroneously recorded in SNC account 36-11-29, instead of in SNC account 36-11-30, as the Claimant argues.

Now, as there are no grounds in the RIT and in its supporting documentation that can remedy such a doubt, it must always be concluded that the AT did not fully comply with the burden "of demonstrating the occurrence of the facts from which the right to assessment derives", particularly as regards the quantification of the tax fact, remaining a doubt which, by force of the provision of Article 100/1 of the CPPT, shall determine the annulment of the tax act sub iudice, therefore the arbitration claim shall proceed.

*

C. DECISION

On these terms, this Arbitral Tribunal decides to judge the arbitration claim filed entirely well-founded and, in consequence:

a) Partially annul the additional corporate income tax assessment act No. 2014... of 05/11/2014, for the year 2010, and respective compensatory interest, in the total amount of € 262,749.40, in the part concerning the amount of € 869,948.06, added to the taxable base, as well as the acts of rejection of the administrative appeal and hierarchical appeal that had that assessment act as their subject;

b) Condemn the Respondent to pay the costs of the proceedings, in the amount set forth below.

D. Value of the Proceedings

The value of the proceedings is fixed at € 262,749.40, in accordance with Article 97-A, No. 1, a), of the Tax Procedure and Process Code, applicable by force of subsections a) and b) of No. 1 of Article 29 of the RJAT and No. 3 of Article 3 of the Regulation of Costs in Tax Arbitration Proceedings.

E. Costs

The arbitration fee is fixed at € 4,896.00, in accordance with Table I of the Regulation of Costs in Tax Arbitration Proceedings, to be paid by the AT, since the claim was entirely well-founded, in accordance with Articles 12, No. 2, and 22, No. 4, both of the RJAT, and Article 4, No. 5, of the said Regulation.

Notify accordingly.

Lisbon, 8 July 2019

The President Arbitrator

(José Pedro Carvalho)

The Arbitrator Member

(Hugo Freire Gomes)

The Arbitrator Member

(Ana Teixeira de Sousa)

Frequently Asked Questions

Automatically Created

What is profit periodization (periodização do lucro) under Portuguese IRC rules and how was it disputed in CAAD case 413/2018-T?
Profit periodization (periodização do lucro) under Portuguese IRC rules refers to the temporal allocation of income and expenses to the correct fiscal period according to the accrual principle established in Article 17(1) of the CIRC. In CAAD case 413/2018-T, this concept was disputed regarding construction expenses totaling €869,944.76 incurred in 2010 for an ongoing project that generated no revenue that year. The Tax Authority argued these expenses violated Article 18(1) and (3)(a) CIRC because they lacked correlation with income in the same period, while the taxpayer contended that accrual accounting principles required recognizing expenses when incurred, regardless of revenue timing. The case centered on whether construction costs should be capitalized as work-in-progress until sale (the AT's position) or expensed immediately (the taxpayer's position), representing a fundamental dispute about matching principles in Portuguese corporate taxation for multi-year construction projects.
How does the concept of 'founded doubt' (fundada dúvida) apply to IRC tax disputes in Portuguese arbitration proceedings?
The concept of 'founded doubt' (fundada dúvida) in Portuguese IRC tax disputes refers to legitimate interpretative uncertainty regarding tax law application that justifies arbitral intervention under the RJAT (Legal Regime of Arbitration in Tax Matters). In arbitration proceedings, founded doubt exists when reasonable legal arguments support different interpretations of tax provisions, warranting independent judicial review. This case exemplifies founded doubt through the conflict between accrual accounting standards and tax periodization rules: the taxpayer presented credible arguments that Article 17(1) CIRC requires expense recognition when incurred, while the AT maintained a defensible interpretation that Article 18(3)(a) requires expense-revenue correlation within the same fiscal period. The existence of founded doubt does not predetermine the outcome but establishes that the dispute involves genuine legal complexity rather than clear-cut rule violation, thereby satisfying the threshold for CAAD jurisdiction under Articles 2 and 10 of the RJAT for cases involving interpretative tax law questions.
What are the legal grounds under Articles 17 and 18 of the CIRC for challenging additional IRC tax assessments?
Articles 17 and 18 of the CIRC provide the primary legal grounds for challenging additional IRC tax assessments related to income and expense recognition. Article 17(1) establishes the fundamental accrual principle (princípio da periodização económica), requiring that taxable profit reflect income and expenses attributable to each fiscal period according to economic accrual, regardless of cash receipt or payment. Article 18(1) defines fiscally deductible costs as those incurred or supported to obtain or guarantee taxable income, while Article 18(3)(a) specifically excludes expenses not documented according to legal requirements. In case 413/2018-T, the taxpayer invoked these provisions arguing the AT violated Article 17(1) by refusing to recognize legitimately incurred 2010 construction expenses, and misapplied Article 18(3)(a) by imposing an unlawful requirement that expenses correlate with same-period revenue. The taxpayer also alleged violation of Article 104(2) of the Portuguese Constitution, which prohibits retroactive taxation, arguing that disallowing properly recognized expenses effectively imposed unlawful taxation violating constitutional guarantees of legal certainty and property protection in tax matters.
Can a taxpayer challenge an IRC additional assessment through both a gracious complaint (reclamação graciosa) and hierarchical appeal (recurso hierárquico) before CAAD arbitration?
Yes, under Portuguese administrative tax law, taxpayers must exhaust administrative remedies before pursuing CAAD arbitration. The hierarchical sequence requires first filing a gracious complaint (reclamação graciosa) under Articles 68-75 of the CPPT against the tax assessment act. If rejected, the taxpayer may then file a hierarchical appeal (recurso hierárquico) under Articles 66-67 CPPT, challenging the decision of the subordinate tax authority before the hierarchically superior authority. Only after exhausting both administrative remedies can the taxpayer access CAAD arbitration under Article 10 of the RJAT. In case 413/2018-T, this procedural sequence was followed: the taxpayer filed an administrative appeal on 19-12-2014 (rejected after exercising the right of prior hearing), then filed a hierarchical appeal on 29-07-2015 (rejected by the Director of Corporate Income Tax Services on 16-05-2018), and finally submitted the CAAD arbitration request on 29-08-2018. This exhaustion requirement ensures administrative authorities have opportunity to review and correct potential errors before judicial or arbitral intervention, consistent with principles of administrative self-control and procedural economy in Portuguese tax procedure.
How does Article 104(2) of the Portuguese Constitution protect taxpayers against unlawful corporate tax (IRC) assessments?
Article 104(2) of the Portuguese Constitution establishes that 'taxes are created by law, which determines incidence, rate, tax benefits and guarantees for taxpayers.' This constitutional provision protects taxpayers against unlawful IRC assessments by requiring strict legality (princípio da legalidade fiscal) in taxation, meaning tax obligations can only arise from clear legal authorization, not administrative interpretation extending beyond statutory language. In case 413/2018-T, the taxpayer invoked constitutional protection arguing that the Tax Authority's disallowance of legitimately incurred expenses violated Article 104(2) by imposing tax obligations not clearly established in the CIRC. The taxpayer contended that neither Article 17(1) nor Article 18 explicitly requires expense-revenue correlation within the same fiscal period for construction projects, and therefore the AT's interpretation constituted unlawful quasi-legislative rule-making violating constitutional separation of powers. This constitutional dimension reinforces taxpayer protection by subjecting administrative tax interpretations to constitutional scrutiny, ensuring that additional assessments rest on unambiguous statutory authority rather than expansive administrative constructions that effectively create new tax obligations beyond those democratically enacted by Parliament, thereby safeguarding legal certainty and property rights against arbitrary taxation.