CAAD Process 414/2018-T: IRC Cost Deductibility, Autonomous Taxation & Revenue Omission Ruling

ARBITRAL DECISION

I – REPORT

The arbitral tribunal agrees:

1. A..., LDA., with the collective identification number ..., with registered office at Rua ..., no. ..., in Lisbon, hereby requests the constitution of an Arbitral Tribunal, pursuant to articles 2, no. 1, subparagraph a), and 10 of Decree-Law no. 10/2011, of 20 January, to assess the legality of the tax acts of additional IRC assessment and payment of compensatory interest, in the total amount of € 880,441.23, relating to the tax years 2008 and 2009, as well as the decisions of partial rejection of the hierarchical appeal and gracious complaint filed against such assessments, further requesting the condemnation of the Tax Authority (hereinafter Respondent or TA) to payment of indemnificatory interest.

The request is based on the following grounds.

The Claimant is 100% owned by B..., S.A., and, following an external inspection action concerning the tax situation in IRC, with reference to the tax periods of 2008 and 2009, was subject to corrections relating to depreciation at excessive rates, expenses from prior years, expenses whose beneficiaries were not identified, cafeteria expenses, expenses relating to quotas of C..., omitted revenues, autonomous taxation of confidential expenses, disposal of tangible fixed assets, expenses relating to regularizations of balances, expenses relating to J..., S.A., accounting regularizations credited to account 26... and accounting regularizations credited to account 26..., open debtor balances in accounts 26... (Funchal) and 26... (... – Porto) and regularizations debited to account 21....

Regarding the first issue, the Claimant contends that the works in question were carried out in a leased building (Station of ...) which was owned by the parent company, therefore the depreciation rates considered by the TA were not applicable as it was not a building belonging to its tangible fixed assets. Furthermore, the Claimant was not limited to performing conservation, repair or maintenance works, but rather works aimed at transforming the leased property into a space suited to the needs for the exercise of its economic activity, which, as such, did not allow for them to be considered as a cost relating to a single tax period.

Moreover, it is not required that the depreciation rates to be practiced in the case of works in third-party buildings be supported by technical opinions, nor did the TA demonstrate that the applicable depreciation rate was the only one that could correspond to the expected useful life period.

Regarding expenses attributable to prior years, the correction is justified on the grounds that these are expenses reported in 2008, but which refer to invoices issued and services provided and completed in the tax period of 2007, when it is shown that the consulting services in question pertained to recruitment and selection of candidates for the staff that only ended in 2008, so the economic benefits obtained were only reflected in that year, in application of the principle of specialization of tax periods, it being irrelevant that the Claimant proceeded with partial payments of services in 2007.

And even if it were considered that the cost should have been fiscally imputed to the tax year 2007, there would be no justification for any correction, in light of the principle of justice, as there was no prejudice to the Public Treasury or voluntary or intentional omission aimed at operating transfers of results between tax years.

The TA also determined the correction of taxable profit for non-compliance with the requirement of indispensability regarding expenses whose beneficiaries were not identified.

In one case, the expense relates to the offering of a gift card from "...", in the context of a marketing operation intended to reward the "..." whose beneficiary was not effectively identified. However, considering the indirect link between the attribution of the prize and the obtaining of revenues, such expense cannot fail to be considered as indispensable for the maintenance of the productive source and, as such, deductible for tax purposes.

In another case, the TA considered that the payment of travel expenses for an employee of E..., SA (E...) in the context of a feasibility study for the opening of a tourist circuit in Prague, despite being identified, had not been indispensable for the realization or obtaining of revenues, when it is certain that the entity providing the services was not prevented from invoicing or charging to the Claimant the expenses it incurred in the context of the service provision contracted by the Claimant.

In another situation, the TA did not accept an invoice issued to F..., in the context of consulting services provision, by considering that the document did not allow identification of the project to which the service provided relates, although it is verified that the invoices are recognized in the Claimant's accounts and have a strict relationship with its commercial activity.

Another expense that justified the correction of taxable profit is referenced as "gift articles", and it is important to clarify that such expenses benefited the Claimant's employees and commercial agents and partners and are part of a strategy to motivate and reward good performance and foster the growth of economic activity, it being possible to establish a relationship between the expenses and the revenues or gains generated and the maintenance of the productive source.

The TA further understood that expenses incurred with a contract for leasing equipment for the operation of a cafeteria does not meet the requirement of indispensability by considering that the Claimant did not evidence accounting revenues resulting from its operation, all the more so as the Claimant already pays meal allowances to its employees and does not need to have a functioning cafeteria.

The Claimant contends that the cafeteria contributes to the increase in demand for training activities and is important for the well-being of workers and its relevance as a tax cost is not dependent on any specific and directly associated revenue from the operation of its cafeteria, whose installation and operation is uniquely within the scope of strategic and business management decisions. It is equally irrelevant the attribution to workers of the meal allowance, which, as has been highlighted by jurisprudence, does not represent a duplication of costs in relation to payments made for the supply of meals.

The TA further disregarded the quotas paid with membership of C... (C...), by understanding that there is no direct link between the expense and the obtaining of taxable gains. Now, the economic activity of the Claimant is centered in the tourism sector, through the organization and operation of tourist circuits, and despite not exercising the activity of a travel agency, maintains interest in being an associate member of C..., insofar as it allows it to have access to relevant information for the organization and operation of the tourist circuits it develops and to adopt business decisions based on better market knowledge, so the indispensability of such expenses for the productive source cannot fail to be recognized.

The TA further understood that the protocol entered into with G..., (G...) aimed at the creation and operation of tourist circuits in the city of Braga implied the sharing of the results of the tax period, so the non-issuance of invoices intended to recover half of the negative operating result for 2008 represents an omission of revenues that determines the correction of taxable profit.

However, although the protocol provides that G... would bear half of the "profits or losses obtained from the sale of tickets/transport titles", the truth is that this entity refused, in practice, to bear the negative results arising from the joint operation of that circuit, which led the Claimant to bear, in full, the loss generated in 2008 as a means to ensure the maintenance of the partnership and protect, in the medium/long term, its best interests in maintaining the business, there having been no omission of revenues in this circumstance, but rather a decision founded on a rational economic basis for business management, which resulted in a contractual amendment not reduced to writing to which a business motivation cannot fail to be attributed.

The TA further qualified as "confidential expenses" subject to autonomous taxation the expenses incurred with commissions paid to hotels and residences for which no invoice was issued nor is there external supporting document.

What happened is that the Claimant paid commercial partners a discount corresponding to 20% of the value of the vouchers sold which was inscribed as a debtor balance in account 21... – and which justified the qualification as confidential expenses – when in fact it was merely an error of accounting entry that did not affect tax revenue, as all receipts associated with the sale of vouchers were recorded in the accounts, with no revenue being excluded for purposes of determining taxable profit.

The TA further proceeded to disregard as an expense for tax purposes the disposal of an element of fixed assets, in the amount of € 11,700.00, relating to "heavy passenger vehicles", by considering that such asset had never been depreciated and therefore the legal requirements for effecting the exceptional depreciation of the asset provided for in article 10 of Regulatory Decree no. 2/1990, of 12 January, were not met.

At issue is the refurbishment of a tram carried out through a service provision contract with the company H..., Lda., in the context of which an invoice was issued in the amount of € 11,700.00 corresponding to 90% of the total fees agreed. After completion of the work, the invoice was initially recorded in tangible fixed assets, and was subsequently reclassified accounting in account 62 as a cost relating to the tax period 2009.

Finding that it was not a matter of disposal of fixed assets, the TA concluded that it was unknown whether the remaining 10% of the fees were invoiced or even whether the refurbishment was completed, so it considered as not demonstrated the existence of the expense as a cost of the tax period. The point is that, given supporting documentation (invoice issued by the company H..., Lda.) and the refurbishment having been carried out, there can be no doubt that we are dealing with an expense demonstrably indispensable for the economic activity of the Claimant that falls within the provision of article 23, no. 1, subparagraph a), of the IRC Code.

The TA further considered that the accounting entries for regularization of third-party balances are not eligible costs for tax purposes, as to obtain the cancellation of customer balances it should have constituted provisions, in accordance with articles 35 and 36 of the IRC Code, or consider such balances as "uncollectible receivables", in accordance with article 41 of the same Code.

The Claimant clarifies on this point that, in one case, the entries were intended to correct amounts improperly recognized as revenues because they related to services that had been contracted and invoiced to the end client, but were not effectively provided, and, in two other cases, were intended to regularize the accounting movements relating to commercial discounts on vouchers sold by recognizing as revenue 80% of the total value of sales, which corresponded to the amounts actually collected, so the accounting regularization did not influence the net result determined in any way.

The TA did not accept for tax purposes the expenses incurred with exterior arrangements in a building used by the Claimant, carried out by the company I..., Lda. (I...), on the grounds that the indispensability of the cost for the realization of revenues was not proven and did not correspond to the value of services documented through invoices, a position that is justified in the inspection procedure by the fact that it was not possible to determine the scope of the commercial relationships established with J..., S.A. (J...).

However, these expenses related exclusively to invoices issued by I... and this company had no connection with J..., so the deductibility of costs and the characterization of contracted services cannot be dependent on any information that the TA lacked to obtain from J... or relating to services that this entity also provided in the context of commercial relationships with the Claimant.

On the other hand, the exterior arrangements were intended to improve the company's image before its clients, being associated with economic and business interest, and the respective costs were imputed to the result of the tax period over three years, moreover it was incumbent on the TA to prove that the works were not carried out or did not correspond to the total services provided.

The TA further understands that the accounting regularizations carried out in account 26.8.5.998 are not properly characterized nor respect the accounting principle of the prevalence of "substance over form", corresponding to a non-recognition of revenues or earnings that, as such, should be added to taxable profit.

Now, the regularizations in question had no impact on the determined results, corresponding, in one case, to the increase in the valuation of obligations and equity participation securities, and, in another case, to corrections of accounting movements relating to vehicle rental, with no revenue occurring that would have influenced the determination of the net result of the tax period.

Regarding the partnership established with K..., Lda. (K...) for the operation of tourist circuits in the city of Porto, the TA concluded that the Claimant had omitted revenues to the extent that it did not reflect in the operating results, which should be distributed equally, the equivalent to the value of the depreciation of buses used in the operation.

What happened is that, given that the main reason that led to obtaining these negative operating results in 2009 was the criteria adopted for depreciation of buses, the Claimant proceeded to alter these criteria for purposes of determining the operating result by increasing the useful life period of the vehicles, so that depreciation was spread over a longer period of time, without this having represented a change in the result distribution formula or the omission of revenues.

The TA further investigated the open debtor balances in accounts 26... and 26... relating to Horários do L... S.A. (L...) and K..., respectively, as a result of the joint operation of tourist circuits in the cities of Porto and Funchal, concluding that there was present an unrecognized expense subject to autonomous taxation at the rate of 50%.

What is verified is that the amount from the sale of vouchers relating to the tourist circuit of Funchal, plus commercial discount, was incorrectly credited to account 21..., as it should have been recorded in account 26..., and, on the other hand, there are amounts relating to services provided to L... (such as training activities) that cannot be confused with the sale of vouchers for tourist circuits, confirming that the Claimant does not, in fact, have any amount to receive from L....

With regard to "Amounts receivable K...", the TA confuses the commercial relationships maintained by the Claimant with M... and those maintained by the Claimant with the Company K..., S.A. (K...), and, on the other hand, account 26... – amounts receivable – K... is overvalued, by error, in the amount of € 133,097.13, with settlement of accounts having been made at the end of the partnership in 2012 between the two companies where all existing balances were settled, without relevant regularizations to be recorded, with no justification for the transformation of open debtor balances into "confidential expenses" for purposes of subjection to autonomous taxation.

The TA further argues that regularizations debited in account 26... correspond to outflows of monetary means from the company, without any justification, understanding them to be confidential expenses for which the taxpayer does not have any supporting document.

However, these are accounting corrections for bank reconciliation that are documentarily proven and from which no outflow of monetary means from the company resulted, making no sense to state that they constitute accounting regularizations whose origin is unknown.

A final correction promoted by the Respondent relates to regularizations credited in account 21..., which relates to vouchers sold and which were likewise qualified as "confidential expenses", with the argument that these are undocumented expenses reflected in the debtor balance and that were artificially regularized.

However, as already mentioned, the regularizations related to the proper accounting of commercial discounts, with the aim of reconstructing the accounts in correspondence with reality, so the regularization did not affect the value of net revenues, but rather served to restore the effective value of ticket sales to be taxed, considering the commissions paid to commercial partners.

The Claimant concludes that the interpretation of the provisions of the IRC Code is illegal and unconstitutional, for violation of the principle of taxation of companies according to real income.

The TA, in its response, contends that, as the taxpayer did not indicate the calculations or present technical opinions that would justify the estimated useful life periods, and from which resulted the rates of 5% and 10%, it must be concluded that excessive depreciation rates of tangible fixed assets were practiced, having infringed the provision in subparagraph d) of no. 1 of article 34 of the IRC Code, resulting therefrom an expense not deductible for tax purposes.

Regarding expenses from prior years, it is important to note that services that extend beyond one year must be imputed proportionally to each of the tax periods to which they relate, according to the principle of specialization in the case of consulting services provided by N..., and as it is not possible to determine what part of such services were performed in 2008, the respective expenses cannot be imputed – at least not in their entirety – to that tax period.

The beneficiaries of the amounts spent on gifts or prizes – such as the gift card from ... – are unknown and, thus, it is not possible to determine whether the expenses relate to employees or to persons unrelated to the company, one of the requirements not being met upon which, in accordance with no. 1 of article 23 of the IRC Code, tax deductibility depends. Moreover, the link between the remuneration attributed to F... and the company's activity is not clear and, with regard to travel expenses to Prague of an employee of the consultant E... S.A., these should have been included in the amount paid to the contracted company, not in any case being deductible expenses for purposes of determining taxable profit.

The correction relating to expenses with the cafeteria equipment lease contract was determined because it was found that the cafeteria was not in operation and the facilities were only used as a social gathering room by employees, with no revenue being recorded associated, so the requirements for deductibility referred to in article 43, no. 1, of the IRC Code were also not met.

On the other hand, expenses incurred with membership fees paid with registration in C... cannot be considered as incurred in the interest of the business activity of the Claimant, taking into account that the latter never exercised travel agency activity nor could it do so as it did not meet the admissibility requirements of the special scheme for VAT purposes.

The Claimant further assumed, in full, the losses determined within the protocol entered into with G..., refraining from passing on to this entity its share of the losses generated by the initial operation of tourist circuits in Braga, thus causing an omission of revenue registration that negatively affected the result of the 2008 tax period.

With regard to revenues relating to the sale of transport tickets, the Claimant instituted a procedure that did not contemplate the issuance, by the agents, of a document that would evidence the commissions earned by hotels, which originated a debtor balance in account 21..., corresponding to "undocumented expenses" and, as such, are subject to autonomous taxation at the rate provided in no. 1 of article 81 of the IRC Code. Being that it is not merely an error of accounting entry, but a reduction of revenues resulting from the sale of transport tickets by effect of payment of commissions that have no support in any supporting document issued by the beneficiaries.

With regard to the correction in the amount of € 11,700.00, corresponding to 90% of the invoice relating to the refurbishment of a tram, this amount was initially recorded in the tangible fixed assets account and then transferred to an expense account of the 2009 tax period. With no indication that the remaining 10% of the fees owed were invoiced, doubt remained for the TA as to completion of the works and deductibility as an expense for tax purposes.

Entries debited to the revenue account, in the amounts of € 393,980.07 and € 3,476.25, were intended to cancel invoices payable which, according to the Claimant, relate to services that were not effectively provided. However, the accounting regularization lacks full justification and for costs arising from the cancellation of customer balances to be fiscally accepted it is necessary that the appropriate provisions be constituted and the receivables be the result of normal activity, in accordance with articles 35 and 36 of the IRC Code.

The disregard for tax purposes of expenses incurred with exterior arrangements in a building used by the Claimant is justified because the accounting records are not perfectly documented and the invoices relating to the works in question are unknown, moreover the Claimant presents different entities as intervening parties in carrying out the works.

The accounting regularization operations in account 26... presume the non-recognition of revenues or earnings associated with the accounting movements, in violation of the provision in articles 17 and 20 of the IRC Code, thus justifying the increase to taxable profit that was determined within the inspection procedure.

Regarding the partnership established with M..., Lda. (M...) for the operation of tourist circuits in the city of Porto, the correction made aims to integrate in the taxable profit the share of losses that contractually should have been imputed to M..., and which the Claimant chose to assume, with the consequent omission of revenues. And although the Claimant argues that, to maintain the partnership with K..., it adjusted the value of bus depreciation used in the circuit, extending the useful life period and thus transferring the cost to following tax periods, this change is not reflected in the "revenues", meaning that the Claimant assumed in full the costs with bus depreciation.

As for the open debtor balances in accounts 26... and 26... relating to L... S.A. (L...) and K..., it was concluded that the amounts in question are not sufficiently documented in the Claimant, despite having invoked a settlement of accounts, and relate to commissions paid to commercial partners for which no invoices were issued, and should be characterized as "confidential expenses" for purposes of autonomous taxation.

On the other hand, the correction relating to regularizations debited in account 26... is justified on the basis of errors and discrepancies in accounting records and bank statements, with no certain indication that the regularizations were necessary or should be made by the amounts mentioned, thus having been qualified as undocumented expenses subject to autonomous taxation.

2. Following the proceeding, the meeting referred to in article 18 of the RJAT was held and the testimonial evidence indicated by the parties was produced.

In arguments, the parties sought to establish the facts that should be considered settled and, moreover, maintained their previous positions.

3. The request for constitution of the Arbitral Tribunal was accepted by the President of CAAD and notified to the TA in accordance with regulatory requirements.

Pursuant to the provision in subparagraph a) of no. 2 of article 6 and subparagraph b) of no. 1 of article 11 of the RJAT, in the version introduced by article 228 of Law no. 66-B/2012, of 31 December, the Ethics Council designated as arbitrators of the collective Arbitral Tribunal the signatories, who communicated acceptance of the office within the applicable deadline.

The parties were properly and timely notified of this designation, and did not manifest any wish to refuse it, in accordance with the combined provision of article 11, no. 1, subparagraphs a) and b), of the RJAT and articles 6 and 7 of the Ethics Code.

Thus, in accordance with the provision in subparagraph c) of no. 1 of article 11 of the RJAT, in the version introduced by article 228 of Law no. 66-B/2012, of 31 December, the collective Arbitral Tribunal was constituted on 8 November 2018.

The Arbitral Tribunal was regularly constituted and is materially competent in light of the provision in articles 2, no. 1, subparagraph a), and 30, no. 1, of Decree-Law no. 10/2011, of 20 January.

By arbitral order of 3 April 2019, the deadline for decision was extended by two months, in accordance with the provisions of article 21, no. 2, of the RJAT, by virtue of having occurred postponements of inquiries and difficulties in scheduling proceedings that made it impossible to render an arbitral decision within the initial six-month period.

The parties have legal personality and capacity, are legitimate and are represented (articles 4 and 10, no. 2, of the same diploma and 1 of Ordinance no. 112-A/2011, of 22 March).

The proceeding does not suffer from nullities and no exceptions were invoked.

It is incumbent upon us to assess and decide.

II – REASONING

FACTS

3. The relevant facts for the decision of the case that may be considered established are the following:

• A..., LDA., with the collective identification number..., with registered office at Rua..., no....., in Lisbon, is 100% owned by B..., S.A.

• Following an external inspection action on the tax situation in IRC, with reference to the tax periods of 2008 and 2009, the Claimant was subject to corrections relating to depreciation at excessive rates, expenses from prior years, expenses whose beneficiaries were not identified, cafeteria expenses, expenses relating to C... quotas, omitted revenues, autonomous taxation of confidential expenses, disposal of tangible fixed assets, expenses relating to regularizations of balances, expenses relating to J..., S.A., accounting regularizations credited to account 26..., accounting regularizations debited to account 26..., open debtor balances in accounts 26... (Funchal) and 26... (K... – Porto) and regularizations credited to account 21....

• Works were carried out in a leased building (Station of ...) which was owned by the parent company, with the depreciation rates provided in Tables I and II attached to Regulatory Decree no. 2/90 not being applied, depreciation having been done at rates of 10% and 5%.

• Consulting services were provided by N... relating to recruitment and selection of candidates for staff that only ended in 2008.

• The Claimant offered a gift card from "...", with the corresponding invoice having been issued, in the context of a marketing operation intended to reward the "..." whose beneficiary was not effectively identified.

• The Claimant incurred expenses for gift articles for the benefit of employees, agents and commercial partners, with the corresponding invoices having been issued by suppliers.

• The Claimant paid for consulting provided by E..., SA (E...) and the travel of an employee thereof, in the context of a feasibility study for opening a tourist circuit in Prague.

• The Claimant incurred expenses with a contract for leasing equipment for the operation of a cafeteria.

• In 2009 the cafeteria was not in operation and the facilities were only used as a social gathering room by employees and trainees of courses taught by A....

• The Claimant pays meal allowances to workers. (see PI, response and administrative proceeding)

• The Claimant is registered as an associate member of C... (C...), paying the respective fees and held a license for the exercise of this activity.

• The Claimant entered into a protocol with G..., (G...) for the creation and operation of tourist circuits in the city of Braga, which implied the sharing of results 50% for each party.

• The Claimant entered into a protocol with M..., Lda. (M...) for the creation and operation of tourist circuits in the city of Porto, which implied the sharing of results 50% for each party.

• Regarding the partnership established with M..., Lda. (M...) for operation of tourist circuits in the city of Porto, in 2009, the depreciation rate of buses used in the operation was verbally altered by increasing the useful life period of vehicles, exclusively for purposes of determining the result to be shared.

• The Claimant accepted to bear, in full, the loss generated in 2008 in the partnership entered into with G..., in the amount of € 5,539.43 based on a contractual amendment not reduced to writing.

• The Claimant accepted to bear, in full, the loss generated in 2009 in the partnership entered into with K..., in the amount of € 58,587.42, based on a contractual amendment not reduced to writing, based essentially on the consideration of a longer useful life of buses used therein, without accounting expression having been given in the corresponding depreciations. (testimonial evidence)

• The Claimant evidenced an open debtor balance in account 26..., in 2009, relating to L... S.A. (L...), in the amount of € 133,097.13, as a result of the joint operation of tourist circuits in the city of Funchal.

• With regard to revenues relating to the sale of transport titles, the Claimant instituted a procedure that did not contemplate the issuance, by the agents, of a document that would evidence the commissions earned by them, but rather by the Claimant, which originated a debtor balance in account 21... – Hotel Vouchers.

• The amount from the sale of vouchers relating to the tourist circuit of Funchal, plus commercial discount, was incorrectly credited to account 21... and, on the other hand, there are amounts relating to services provided to L... (such as training activities).

• The Claimant paid commissions to hotels and residences for which it did not itself issue an invoice nor is there external supporting document, consisting in a discount corresponding, as a rule, to 20% of the value of vouchers sold.

• The Claimant proceeded with the refurbishment of a tram through a service provision contract with the company H..., Lda., in the context of which an invoice was issued in the amount of € 11,700.00 corresponding to 90% of the total fees agreed.

• The Claimant initially considered, in 2008, the refurbishment of the tram as an element of tangible fixed assets, in the amount of € 11,700.00 relating to "heavy passenger vehicles", with the corresponding invoice having been reclassified in early 2009 to fixed assets in progress and subsequently reclassified accounting in account 62 as a cost relating to the tax period 2009.

• The Claimant improperly filled the depreciation and amortization statement model 32, by including therein as an element of fixed assets the refurbishment of the tram, in 2008.

• The Claimant incurred expenses with exterior arrangements in a building in ... carried out by the company I..., Lda. (I...).

• In 2009, entries were made debiting the revenue account, in the amounts of € 393,980.07 and € 3,476.25, of which the Claimant assumes unjustified the amount of € 4,123.53 (€ 3,683.57 + € 439.96).

• The Claimant proceeded with accounting regularizations made in account 26..., relating to the increase in the valuation of obligations and equity participation securities, and, in another case, corrections of accounting movements relating to vehicle rental.

• The regularizations debited in account 26... present errors and discrepancies between accounting records and bank statements.

The Tribunal formed its conviction regarding the established facts on the basis of documents attached to the petition and in the proceeding joined by the Tax Authority with its response and the testimonial evidence presented in the context of the hearing provided in article 18 of the RJAT.

LEGAL ISSUES

Excessive Depreciation Rates

Regarding the works carried out in a leased building (Station of ...), which was owned by the parent company, not being a building belonging to its tangible fixed assets, and the works not having been limited to conservation, repair or maintenance work, but rather to the transformation of the leased property into a space with characteristics appropriate and necessary for the exercise of its economic activity, article 5, no. 2, of Regulatory Decree no. 2/90, of 12.01, in force at the time of the facts, applies, in accordance with which, in the case of works in third-party buildings, the rates of reintegration and amortization are calculated on the basis of the corresponding expected useful life period, which may be adjusted when it is considered to be less than what should have been objectively estimated.

This is an exception to the provision in article 30, no. 1, of the CIRC, according to which "the calculation of depreciation and amortization is, as a rule, done by the method of constant quotas", a provision that was implemented by no. 1 of article 5 of the aforementioned Regulatory Decree, which refers to the application of Tables I and II.

As the referred tables are not applicable, because they are works in third-party buildings, the rates considered reasonable in light of the expected useful life period should be accepted. In this case, the Tax Authority considered that the depreciation rates inscribed by the Claimant, in the order of 5% and 10%, were higher than those legally provided, as the calculations were not indicated or technical opinions supporting them were not presented, and set this rate at 2% which corresponds to the generic rate in Table II of the regulatory instrument. But, as seen, the tables attached to the Regulatory Decree are not applicable to works in third-party buildings and it was incumbent on the Administration to bear the burden of proof that the rate of 2% was, in the circumstances of the case, reasonable according to the expected useful life period (article 74, no. 1, of the LGT).

As this proof was not effected, the arithmetic correction relating to depreciation amortization is unjustified.

Expenses Attributable to Prior Years: Consulting of N...

In the case of consulting services provided by N..., it is important to note, regarding expenses from prior years, that services extending beyond one year must be imputed proportionally to each of the tax periods to which they relate, according to the principle of specialization of tax periods. As it is not possible to determine what part of such services was performed in 2008, the respective expenses cannot be imputed – at least not in their entirety – to that tax period.

On this matter, the TA contends that regarding expenses attributable to prior years, the correction is justified because these are expenses recorded in 2008, but which refer to invoices issued and services provided and completed in the tax period of 2007. The Claimant contends, in contrast, that the consulting services in question pertained to recruitment and selection of candidates for staff that only ended in 2008, so the economic benefits obtained were only reflected in that year, in application of the principle of specialization of tax periods, it being irrelevant that the Claimant proceeded with partial payments of services in 2007. And even if it were considered that the cost should have been fiscally imputed to the tax year 2007, there would be no justification for any correction, in light of the principle of justice, as there was no prejudice to the Public Treasury or voluntary or intentional omission aimed at operating transfers of results between tax periods.

Being certain that the periodization of real profit that is intended to be taxed under IRC requires the consideration of expenses and revenues in their respective tax periods (principle of specialization of tax periods), it is also important to note that the non-recognition in any of the tax periods taxed under IRC of expenses of a nature indispensable to the pursuit of the activity pursued raises questions about the principle of taxation according to real profit.

It was with this conviction that the TA itself issued Circular Memorandum no. 14/93, of 23 November 1993, in which it recommends that any adjustments to the taxable result of a tax period as a result of corrections arising from aspects related to the periodization of taxable profit should be followed by corresponding corrections in the tax period to which such corrected expenses effectively correspond. However, in this case, as results from the testimonial evidence, such correlative adjustment was not made in the tax period of 2007, as this would already have expired for IRC assessment purposes.

Moreover, it is not demonstrated that the imputation of costs to the 2008 tax period resulted from voluntary and intentional omission, aimed at operating transfers of results between tax periods, as is the case when it is intended to reduce the amount of taxable profits, so nothing precluded the principle of specialization of tax periods, despite its fiscal relevance, from being understood in articulation with the principle of justice to which the Tax Administration is also bound in accordance with article 55 of the LGT (see judgments of the STA of 13 October 1996, Case no. 20404, and 5 February 2003, Case no. 01648/02).

In this sense, it appears to the tribunal that the non-recognition of expenses recorded in the tax period relating to 2008 is not justifiable, even if such expenses should be imputed to the prior year.

Expenses with Unidentified Beneficiaries

Article 23, no. 1, of the CIRC, in the wording in force at the time of the facts, considered as "expenses those that are demonstrably indispensable for the realization of revenues subject to taxation or for the maintenance of the productive source. Although it is a particularly restrictive wording, the truth is that subparagraphs a) to m) of no. 1 allowed the consideration as expenses of a broad set of costs, and jurisprudence has also drawn attention to the casuistic character of the fulfillment of the concept of indispensability, formulating the following criterion: "the rule is that correctly accounted expenses are tax costs; the criterion of indispensability was created by the legislator, not to allow the Administration to intrude into company management, dictating how it should apply its means, but to prevent the tax consideration of expenses that, although accounted as costs, do not fall within the scope of the company's activity" (see, among others, the judgment of the STA of 29.03.2006, Case no. 1236/05).

Currently, the wording of article 23, no. 1, introduced by Law no. 2/2014, provides that "for the determination of taxable profit, all expenses and losses incurred or borne by the taxpayer to obtain or guarantee revenues subject to IRC are deductible", which should be understood as aimed at implementing a greater degree of certainty in the concrete application of deductibility criteria. The provision thus came to establish as a general principle that expenses related to the taxpayer's activity are deductible, reinforcing the idea that the connection with business activity is sufficient, regardless of effective contribution to taxable revenues (see Final Report of the Commission for the Reform of Corporate Income Tax, 30 June 2013).

Both wordings, and especially the first which concerns us here, must be interpreted and applied in light of objective and reasonable criteria of adequacy, normality and business necessity, or, in other words, consistency and congruence with the concrete business model carried out by the taxpayer. It is in light of these criteria that the expenses presented and the corrections made by the TA will be evaluated. This is, obviously, an analysis of high factual intensity, which cannot be dissociated from the particularities of each concrete case.

The Client ... and Gift Card "..."

The TA determined the correction of taxable profit for non-compliance with the requirement of indispensability regarding expenses whose beneficiaries were not identified. In one case, the expense relates to the offering of a gift card from "...", in the context of a marketing operation intended to reward the "Client..." whose beneficiary was not effectively identified. Although it may be admitted, as the Claimant suggests, the existence of an "indirect link" between the attribution of the prize and the obtaining of revenues subject to IRC, it is at least plausible to question whether the requirement of indispensability is met. Moreover, the beneficiaries of amounts spent on gifts or prizes – such as the gift card from ... – are unknown, which hinders the degree of assessment of the fulfillment of the requirements of no. 1 of article 23 of the IRC Code.

Still, the TA does not adequately justify the correction made, allowing nothing to conclude that expenses relating to the notoriety and marketing of business entities and their activities are excluded from subparagraphs a) or b) of no. 1 of article 23 of the CIRC. Moreover, there is no safe indicator in the law that leads to disqualify as expenses for tax purposes those relating to beneficiaries that are not identified. At most, it could be questioned, provided that the TA had invoked it thus, whether we were in the presence of documented but confidential expenses because the beneficiary is unknown.

However, considering the internal communications existing and contained in the documentary collection attached to the proceeding, it can reasonably be maintained that the marketing action was planned, was requested and internal authorization was obtained to carry it out, falling within the concept of an expense deductible for IRC purposes.

Gift Articles

Another expense that justified the correction of taxable profit is referenced as "gift articles". However, it is important to clarify that such expenses demonstrably benefited the Claimant's employees and commercial agents and partners, being part of a strategy for motivation, recognition and distinction of good performance, with a view to encouraging and fostering the growth of economic activity. In this context, and given the importance of human capital and strengthening existing commercial relationships, these are expenses considered normal and necessary for the realization of business activity.

As results from the documents attached to the proceeding by the Claimant, despite some persons singular who concretely received them being unknown, the agents (collective persons) to whom the gifts were attributed have been identified, the invoices for the acquisition of goods/services underlying them have been made available, and internal communications relating to requests for authorization to carry out the expense associated with the marketing action in question have also been provided.

Thus, as it is possible to establish a relationship of indispensability between the expenses and the revenues or gains generated and the maintenance of the productive source, the tribunal considers that the correction made by the Tax Administration should be disregarded for insufficient justification.

Payment of Travel Expenses of an E... Employee

In another case, the Administration considered that the payment of travel expenses for an employee of E..., SA (E...) in the context of a feasibility study for the opening of a tourist circuit in Prague, despite being identified, had not been indispensable for the realization or obtaining of revenues, when it is certain that the entity providing the services was not prevented from invoicing or charging to the Claimant the expenses it incurred in the context of the service provision contracted by the Claimant. For the TA, the link between the remuneration attributed to F... and the company's activity is not clear and, with regard to travel expenses to Prague of an employee of the consultant E... S.A., these should have been included in the amount paid to the contracted company, not in any case being deductible expenses for purposes of determining taxable profit.

In the tribunal's view, the realization of market prospecting trips for the internationalization of the activity to which the taxpayer is dedicated appears indispensable, especially in the context of an increasingly globally dispersed market. No relevant difference is discerned between the situation in which the expenses for travel and remuneration of consultants are charged autonomously and that other situation in which they are included in a broader object of service provision contracted to a supplier. Management options are made according to the circumstances of the case and, having the TA not identified situations of conflict of interest or lack of independence between the Claimant and the contracted entities, it is not demonstrated that the managers of the Claimant acted in their own interest and not in favor of business interest.

Moreover, the practice followed by the Claimant – to invoice the fees for service provision to another company while simultaneously bearing the travel expenses of the respective employees – does not appear anomalous; on the contrary, it is relatively frequent in business circles.

In light of all the above, the tribunal considers that the expenses in question fall within the concept of expenses indispensable for the realization of revenues subject to taxation and, as such, could not fail to be considered for purposes of determining taxable profit.

Cafeteria Expenses

In this case, the TA understood that expenses incurred with a contract for leasing equipment for the operation of a cafeteria do not meet the requirement of indispensability by considering that the cafeteria was not in operation and its facilities were only used as a social gathering room by employees, with no revenue being recorded associated, all the more so as the Claimant already pays meal allowances to its employees and does not need to have a functioning cafeteria.

However, the argument put forth by the Claimant is supportable, contending that the cafeteria was aimed at contributing to the increase in demand for training activities – especially at a time and in a place where the nearest restaurant was at a considerable distance from the facilities where they were held – and is important for the well-being of workers. At the time of inspection, conditions had not yet been created for the cafeteria to operate, so the Claimant's management understood that such equipment and corresponding expense was justified, so that all users of the facilities, both employees and recipients of training activities, would benefit and such value would strengthen the attractiveness of the training programs taught.

Its relevance as a tax cost is not dependent on any specific and directly associated revenue from the operation of its cafeteria, all the more so as the process of construction, installation of equipment and putting into full operation is generally gradual and phased. In any event, it can reasonably be considered that this process, in its different phases, falls fully within business management decisions, it being irrelevant the attribution to workers of meal allowances, which, as has been highlighted by jurisprudence, does not represent a duplication of costs in relation to payments made for the supply of meals.

Considering the sense sufficiently broad that, even in the then-current wording of article 23 of the CIRC, was generally recognized to the notion of indispensability of expenses incurred for the maintenance of the productive source of revenues subject to taxation under IRC, the expenses in question, including the expense incurred with the lease of equipment and accessories necessary for the operation of a cafeteria, may be considered included within the scope of the Claimant's strategic management decisions and, as such, are deductible for tax purposes.

Expenses Relating to C... Membership Fees

The TA further disregarded the membership fees paid with registration as an associate member of C... (C...) by understanding that there is no direct link between the expense and the obtaining of taxable gains. In its view, these expenses cannot be considered as incurred in the interest of the business activity of the Claimant, taking into account that the latter never exercised travel agency and tourism activity nor could it do so as it did not meet the admissibility requirements of the special scheme for VAT purposes.

In contrast, the tribunal verified not only that the economic activity of the Claimant is centered in the tourism sector, through the organization and operation of tourist circuits, but that the Claimant itself holds the necessary license to exercise the activity of travel and tourism agency. Thus, the decision by the taxpayer's management to register as an associate member of C... is inserted in the strategic approach defined by it, as is attested by the fact that it holds a license to pursue travel agency activity, in addition to which, having consulted the bylaws of C..., its action in the field of activities relating to tourism appears to be of interest for the activity pursued by the Claimant even if the latter did not exercise the travel agency activity for which it is qualified at the time.

In this context, the economic and commercial interest in being an associate member of C... is undeniable, insofar as it allows it to have access to information and contacts relevant to the organization and operation of the tourist circuits it develops and to adopt business decisions based on better market knowledge. In accordance therewith, the tribunal considers that the provision of article 23, no. 1, of the CIRC cannot be interpreted in such a restrictive manner as to limit the management decisions that the company sees fit to follow. There is clear congruence between the expense in question and the Claimant's business model, and the indispensability of such expenses for the maintenance of the productive source of revenues should be recognized.

Omitted Revenues: K... and G... and Bus Depreciation

The protocol entered into with G..., E.M. (G...), aimed at the creation and operation of tourist circuits in the city of Braga, implied the sharing of the results of the tax period. However, although the protocol provided that G... would bear half of the "profits or losses obtained from the sale of tickets/transport titles", the truth is that this entity refused in practice to bear the negative results arising from the joint operation of that circuit. In this context, the TA contended that the non-issuance of invoices intended to recover half of the negative operating result for 2008 represents an omission of revenues that determines the correction of taxable profit.

Effectively, the Claimant assumed in full the losses determined within the protocol entered into with G..., refraining from passing on to this entity its share of the losses generated by the initial operation of tourist circuits in Braga, thus causing an omission of revenue registration that negatively affected the result of the 2008 tax period.

However, as results from the testimonial evidence produced, the Claimant's decision to bear the loss generated in 2008 – at a time of project startup where it had no interest in reporting losses to investors – was understandable, from an economic point of view, as an appropriate and necessary means to ensure the maintenance of the partnership and protect, in the medium/long term, its best interests in maintaining the business, thus persisting concrete circumstances that justified the revision of the initially and formally established conditions.

It is important to note, in any event, that, within the scope of the partnership contract, by effect of the provision in article 25 of Decree-Law no. 231/81, of 28 July, the amount and enforceability of the partner's participation in profits or losses are determined by the rules contained in that provision, "unless a different regime results from express agreement or the circumstances of the contract" (no. 1). And, on the other hand, in accordance with no. 2 of article 23 of the same diploma, only in writing can the clauses excluding the partner's participation in business losses be proven, which eliminates the possibility of the amendment to the initial contract, in that domain, being able to be made by mere verbal agreement.

As the amendment of the contractual wording cannot be verified according to the legally prescribed form, it must be recognized that there was an omission of revenues as it is not possible to validate the amendment in participation in losses on the basis of mere criteria of economic rationality and business management.

Regarding the partnership established with K... for the operation of tourist circuits in the city of Porto, the correction made by the TA was aimed at integrating in the taxable profit the share of losses that should have been contractually imputed to M..., and which the Claimant chose to assume, with the consequent omission of revenues. And although the Claimant argues that to maintain the partnership with K... it adjusted the value of bus depreciation used in the circuit, extending the useful life period and thus transferring the cost to following tax periods, this change is not reflected in the "revenues", meaning that the Claimant assumed in full the costs with bus depreciation.

In view of the fact that the main reason that led to obtaining these negative operating results in 2009 related to the criteria adopted in bus depreciation, the Claimant proceeded to alter these criteria by increasing the useful life period of the vehicles so that amortization was spread over a longer period of time, without this having represented a change in the result distribution formula or an omission of revenues.

However, in accordance with Regulatory Decree no. 2/90, of 12 January, in application of the provision in no. 1 of article 29 of the CIRC, depreciation and amortization are fiscally accepted according to the method of constant quotas, provided that the same result, in each economic year, from the application of an amortization/depreciation rate comprised within the interval of the maximum and minimum rates applicable to each element or set of elements of tangible fixed assets.

Moreover, as regards the partner's participation in profits and losses determined within the partnership contract, article 25 of Decree-Law no. 231/81, of 28 July, provides that the amount and enforceability of the partner's participation in profits or losses are determined by the rules contained in that provision, "unless a different regime results from express agreement or the circumstances of the contract" (no. 1).

However, in this specific case, it results from the testimonial evidence produced that there was a verbal agreement between the parties to alter the formula for determining the result of the partnership, which could justify the assumption by the Claimant of the share of losses that should be imputed to M.... The fact is that in accordance with no. 2 of article 23 of the same diploma, already mentioned above, the exclusion of the partner's participation in business losses is subject to written form, which eliminates the possibility of the amendment to the initial contract, in that domain, being able to be made by mere verbal agreement.

It must be understood, in this context, that there was an omission of revenues as invoked by the Tax Authority.

Autonomous Taxation: L... and K... Vouchers

Regarding this issue, the TA investigated the open debtor balances in accounts 26... and 26... relating to the company L... S.A. (L...) and K..., as a result of the joint operation of tourist circuits in the cities of Porto and Funchal.

With regard to revenues relating to the sale of transport titles, the Claimant instituted a procedure that did not contemplate the issuance, by the agents, of a document that would evidence the commissions earned by hotels, which originated a debtor balance in account .... In this situation, the TA considered that the debtor balance inscribed in that account corresponded to commissions due to commercial partners for which no supporting document existed, and, in that sense, qualified such amounts, totaling € 136,660.19, as confidential expenses subject to autonomous taxation at the rate provided in no. 1 of article 88 of the IRC Code.

In contrast, the Claimant contends that the debtor balance relating to the aforementioned account 21... – which corresponded to an asset account that was debited by counterpart to a revenue account (account 7) – has its origin in accounting errors that resulted in the improper debit in account ... of the total value of vouchers sold without taking into account the 20% discount relating to commissions earned by commercial partners, which should have been recorded in account 269.

Now, the TA did not respond, in the Tax Inspection Report, to the argument raised by the Claimant and merely characterized as confidential expenses the debtor balance existing in the mentioned account 21... on the assumption of non-existence of an invoice. The fact is that these amounts correspond to commissions relating to vouchers on which an invoice was issued, so what is at issue is an accounting error resulting from these values not having been recorded in account 269 as advances on account of sales. Moreover, the totality of tickets sold, including the value of commissions associated with issued vouchers, was recognized as revenue in account 72 – service provision.

There is no evidence, in this circumstance, that the debtor balance corresponds to confidential expenses, and, moreover, the TA does not sufficiently justify its characterization as such.

As results from article 100, no. 1, of the CPPT, "whenever it results from the evidence produced that there is founded doubt regarding the existence and quantification of the tax fact, the challenged act must be annulled", which leads necessarily to the conclusion that the arbitral request is well-founded on this point.

Disposal of Tangible Fixed Assets

The Tax Authority further proceeded to disregard, as an expense for tax purposes, the disposal of an element of fixed assets, in the amount of € 11,700.00 relating to "heavy passenger vehicles", by considering that such asset had never been depreciated and therefore the legal requirements for effecting the exceptional depreciation of the asset provided for in no. 1 of article 10 of Regulatory Decree no. 2/90, of 12 January, were not met.

At issue is the refurbishment of a tram carried out through a service provision contract with the company H..., Lda., in the context of which an invoice was issued in the amount of € 11,700.00 corresponding to 90% of the total fees agreed. After completion of the work, the invoice was initially recorded in tangible fixed assets, and was subsequently reclassified accounting in account 62 as a cost relating to the tax period 2009.

The procedure adopted by the Claimant was to initially consider the expenses borne with the service provision made by the H..., Lda. workshop as fixed assets in progress in 2008, and thus transited to 2009, the year in which with the completion of the refurbishment it was classified in tangible fixed assets and, at the end of 2009, reclassified as an expense of the tax period. What is at issue, thus, is an accounting error reported to 2008 that could only be formally corrected through disposal or sale, it not having been filled out any of the corresponding statements.

In accordance therewith, the TA understood that the disposal from tangible fixed assets, not having been previously communicated to the Administration, could not correspond to a loss fiscally deductible under IRC. And it added that it was unknown whether the remaining 10% of the fees were invoiced or even whether the refurbishment was completed, so the existence of the expense as a cost of the tax period was not demonstrated.

For the arbitral tribunal, the practice adopted by the Claimant resulted from an accounting classification error, as the expense should have been partially considered in deferred costs in the proportion of the time duration of the refurbishment and, thus, only part of the expense incurred would be fiscally deductible in 2009 for IRC purposes.

Thus, we are not dealing with an effective disposal of tangible fixed assets, but rather an expense that could and should be partially deferred, so the basis for the arithmetic correction made is not shown to be justified. Moreover, given there is supporting documentation (invoice issued by the company H..., Lda.) and confirming that the expense was effectively incurred and relates to the exercise of business activity, it is understood that this is an expense demonstrably indispensable for the realization of revenues subject to taxation that falls within the provision of article 23, no. 1, subparagraph a), of the IRC Code.

Accounting Entries for Regularization of Balances

The TA further considered that accounting entries for the regularization of third-party balances are not eligible costs for tax purposes as to obtain the cancellation of customer balances it should have constituted provisions, in accordance with articles 35 and 36 of the IRC Code, or consider such balances as "uncollectible receivables", in accordance with article 41 of the same Code.

The Claimant clarifies on this point that, in one case, the entries were intended to correct amounts improperly recognized as revenues because they related to services that had been contracted and invoiced to the end client, but were not effectively provided, and, in two other cases, were intended to regularize the accounting movements relating to commercial discounts on vouchers sold by recognizing as revenue 80% of the total value of sales, which corresponded to the amounts actually collected, so the accounting regularization did not influence the net result determined in any way.

Specifically, the entries debiting revenue accounts, in the amounts of € 393,980.07, relate to the following situations:

• Entry 12.070, in the amount of € 3,476.25, relating to the regularization of invoices issued in 2007 and 2008, on the grounds of non-attendance of trainees in training activities taught, the evidence presented being limited to an internal document called "List of invoices to be paid to be canceled". This document does not reference the trainees who would not have attended the training activities nor are the agreed conditions mentioned regarding cancellations or non-attendance in the training activities.

• Entry 10.029, in the amount of € 59,219.05, relating to the correction of revenue generated by the operation of the Porto tourist circuit through the debit of account 72.3.1.2., as a result of errors in classification practiced by the Claimant at the time of the operations in question.

• Entry 10.030, in the amount of € 309,901.91, relating to the correction of revenue generated by the operation of tourist circuits through the debit of various revenue accounts as a result of errors in classification practiced by the Claimant at the time of the operations in question.

• Entry 12.068, in the amount of € 24,310.81, relating to the correction of revenue generated by the operation of the Funchal tourist circuit through the debit of account 72.3.8.1, as a result of classification errors.

With regard to the first entry, the tribunal considers that the internal supporting document is manifestly insufficient to justify the credit of invoices issued in 2007 and 2008 and the correction to the corresponding revenues then recorded in account 72.7.3.

With regard to the remaining entries, the accounting records are intended to correct the value of the revenue inscribed by the issuance of travel tickets as regards commissions, implying the cancellation of the totality of the revenue and the recognition of revenues in an amount corresponding to 80%, so that the result generated contemplates the charge relating to commissions earned by commercial partners. Thus, the TA, by disregarding the reduction of the totality of the revenue without taking into account that, simultaneously, the Claimant had recognized 80% of that revenue, makes an arithmetic correction that determines the taxation of a result corresponding to 180% of the revenue effectively generated, not taking into account the economic substance of the accounting regularization made.

The request thus proves to be without merit with regard to point i) in the amount of € 3,476.25 and well-founded with regard to points ii), iii) and iv), in the total amount of € 393,431.77.

Exterior Arrangements in Building

The TA did not accept for tax purposes expenses incurred with exterior arrangements in a building used by the Claimant, carried out by the company I..., Lda. (I...), on the grounds that the indispensability of the cost for the realization of revenues was allegedly not proven and did not correspond to the value of services documented through invoices, a position that is justified in the inspection procedure by the fact that it was not possible to determine the scope of commercial relationships established with J..., S.A. (J...).

The Claimant contends that these expenses related exclusively to invoices issued by I... and this company had no connection with J..., so the deductibility of costs and the characterization of contracted services cannot be dependent on any information that the Administration lacked to obtain from J... or relating to services that this entity also provided in the context of commercial relationships with the Claimant. And, on the other hand, the exterior arrangements were intended to improve the company's image before its clients, being associated with economic and business interest, with the respective costs being imputed to the result of the tax period over three years.

The tribunal considers that the non-recognition for tax purposes of expenses incurred with exterior arrangements in a building used by the Claimant is justified as the accounting records are not adequately documented and the invoices relating to the works in question are unknown, moreover the Claimant presents different entities as intervening parties in carrying out the works. Thus there are omissions and inaccuracies that eliminate the presumption of veracity of accounting elements (article 75, no. 2, of the LGT) and prevent the characterization of such expenses as indispensable for the maintenance of the productive source.

Regularizations Credited in Account 26...

The Tax Authority further understands that the accounting regularizations made in account 26... are not properly characterized nor respect the accounting principle of the prevalence of "substance over form", corresponding to a non-recognition of revenues or earnings that, as such, should be added to taxable profit.

In contrast, the Claimant contends that the regularizations in question had no impact on the determined results, corresponding, in one case, to the increase in the valuation of obligations and equity participation securities, and, in another case, corrections of accounting movements relating to vehicle rental, with no revenue occurring that would have influenced the determination of the net result of the tax period.

The regularizations in question are better detailed in the chart below:

[Table of regularizations details...]

With regard to the "gains" obtained from O... participation units relating to prior years, reflected by the Claimant without revenue account movement, debited to account 15.2.3 by counterpart of the credit of account 26..., these are not subject to taxation under IRC, as they are potential gains resulting from the measurement of assets at fair value, as these are only subject to taxation upon their effective realization through transfer.

Specifically, and despite the accounting rules then in force not allowing it, under penalty of violation of the prudence principle applicable to it, even if the accounting entry in question had moved a revenue account, which it did not, such revenue should be disregarded for purposes of taxation of the taxable result under IRC in 2009, so the correction made by the TA on this point should be disregarded.

As for the accounting entry relating to the correction made in the context of vouchers debited to account 21..., the arbitral tribunal, in agreement with the technical opinion attached to the Proceeding as annex 41, understands that these entries "occurred solely to regularize third-party accounts, not constituting unacknowledged revenues (...), given that all tickets are recorded in service provisions in the month they are issued", concluding that these amounts do not relate to unrecorded revenues but to the correction of records made with less rigor in the adopted accounting criterion.

Regarding the corrections made by the TA with reference to movements made to the credit of account 26... by counterpart of debits from accounts 21... and 21..., the tribunal considers that, being a correction of accounting records made in duplicate, there does not occur in this situation the non-recognition of revenues that should be added to taxable profit.

As for the regularizations debited in account 26..., in the amount of € 340,831.79, they are better detailed in the chart below:

[Table of regularizations details...]

The arbitral tribunal, in agreement with the technical opinion attached to the Proceeding as annex 41, understands that the aforementioned regularization entries relate to movements of reconciliation between the accounting records made by the Claimant and the bank movements contained in the account statements issued by the banks in question and that these movements are justified in the reconciliation itself, with indication of their nature. This situation confirms the conviction that the values are open in the reconciliation because of less rigor in the internal accounting criterion followed, whether between accounting and the bank statement itself, or between related third-party accounts. It is verified that the regularizations made had the objective of adjusting bank reconciliations and corresponding third-party accounts to open movements, a situation that led to significantly smaller values in December 2009 than in December 2008.

In summary, the arbitral tribunal considers that the corrections made by the TA in the amounts of € 169,089.87 and € 340,831.79 should be disregarded.

Open Debtor Balances in Accounts 26... and 26...

Regarding this issue, the TA investigated the open debtor balances in accounts 26... and 26... relating to the company L... S.A. (L...) and K..., respectively, as a result of the joint operation of tourist circuits in the cities of Porto and Funchal, better detailed in the chart below:

[Table of balances details...]

With regard to revenues relating to the sale of transport titles, the Claimant instituted a procedure that did not contemplate the issuance, by the agents, of a document that would evidence the commissions earned by hotels, which originated a debtor balance in account 21.... That is, the amount from the sale of vouchers relating to the tourist circuit of Funchal, plus commercial discount, was incorrectly credited to account 21... as it should have been recorded in account 26.... On the other hand, there are amounts relating to services provided to L... (such as training activities) that cannot be confused with the sale of vouchers for tourist circuits, confirming that the Claimant does not, in fact, have any amount to receive from L..., as for the open debtor balances in accounts 26... and 26... relating to L... S.A. (L...) and K....

The TA understood that this situation could reasonably be understood, not only as a mere accounting entry error, but as a reduction of revenues resulting from the sale of transport titles by effect of payment of commissions that have no support in any supporting document issued by the beneficiaries. Based on such premise, the TA qualified the debtor balances of account 26..., in the amount of € 161,162.27 and of account 26..., in the amount of € 184,296.93, as commissions paid to hotels for which it did not itself issue an invoice nor is there external supporting document, therefore "undocumented expenses" subject to autonomous taxation at the rate of 50%.

Now, the tribunal considers that, having the totality of revenues been recognized accounting and fiscally with the issuance of tickets by drivers, both for cash sales and for voucher exchanges, and corrected for commissions due to agents through an accounting entry different from that underlying the movement of accounts here in question, the doubts regarding collectibility raised by the TA can only justify the consideration as non-deductible expenses for purposes of article 23, no.