Summary
Full Decision
ARBITRAL DECISION
The arbitrators Dr. Jorge Manuel Lopes de Sousa (arbitrator-chair), Dr. Nuno Maldonado Sousa and Armindo Fernandes Costa, designated by the Deontological Council of the Administrative Arbitration Center to form the Arbitral Tribunal, constituted on 13-08-2014, agree as follows:
1. Report
A..., S.A., a company registered in the Commercial Registry Office of Lisbon under the single registration and identification number for legal persons..., with registered office in... Lisbon, filed a request for constitution of a collective arbitral tribunal, in accordance with the combined provisions of articles 2 and 10 of Decree-Law no. 10/2011, of 20 January (Legal Regime for Arbitration in Tax Matters, hereinafter referred to as RJAT), in which the Tax and Customs Authority is the Respondent.
The request for constitution of the arbitral tribunal was accepted by the President of the CAAD and automatically notified to the Tax and Customs Authority on 16-06-2014.
In accordance with the provisions of paragraph (a) of article 6, no. 2 and paragraph (b) of article 11, no. 1 of the RJAT, the Deontological Council designated the arbitrators of the collective arbitral tribunal, the undersigned, who communicated acceptance of the appointment within the applicable time limit, and notified the parties of such designation on 29-07-2014.
Thus, in accordance with the provisions of paragraph (c) of article 11, no. 1 of the RJAT, the collective arbitral tribunal was constituted on 13-08-2014.
The Claimant requests:
(i) Partial annulment of the Corporate Income Tax (IRC) assessment no. 2011... (notified by compensation notice no. 2011...), relating to the fiscal year 2009, with respect to the corrections to customer loyalty programs, in the amount of €12,494,495.00, which resulted in an IRC amount calculated at €187,417.43;
(ii) Annulment of the compensatory interest assessed on that amount;
(iii) An order for immediate and full restoration of the situation that would have existed had the illegality not been committed, which requires, in particular, the reimbursement to A... of the amount illegally assessed and paid, as well as the payment of indemnity interest, in accordance with article 43 of the General Tax Law (LGT), until full reimbursement, relating to the period between the date of payment of the aforementioned amount and its return to A....
The Tax and Customs Authority filed a response, raising a peremptory exception arising from the expiration of the right to invoke defects not raised within the scope of judicial challenge of the assessment act, and two dilatory exceptions, one unnamed arising from improper use of the arbitral action and another relating to the untimeliness of the request for arbitral determination. Furthermore, the Tax and Customs Authority contended that the request for arbitral determination should be dismissed as without merit, with its absolution from all claims.
On 29-10-2014, the meeting provided for in article 18 of the RJAT was held, in which the Claimant responded to the exceptions and witness testimony was taken. The Claimant also submitted to the proceedings, with the agreement of the Tax and Customs Authority, a copy of a gracious appeal with no. ...2011..., a decision dismissing said gracious appeal and its respective judicial challenge, with no. .../12.... At the meeting it was further agreed that the case would proceed with successive written submissions and 19-12-2014 was set as the date for rendition of the arbitral decision.
The Parties submitted submissions.
The Claimant concluded its submissions as follows:
A. The Claimant merely followed the applicable accounting standards (IFRIC 13), as even the tax inspection itself recognized, treating the amount relating to... as deferred income.
B. Therefore, the correction effected by the Tax Administration entirely lacks legal foundation.
C. Moreover, the Tax Administration, in subsequent inspections, refrained from following the same understanding, not correcting in favor of the Claimant the deferred income in 2010 which the Claimant reported for taxation in 2011 and 2012.
D. In doing so, the Tax Administration violated the constitutional principles of justice and impartiality, and the disputed assessment resulted in double taxation on the same income, which is not permissible.
Therefore, it is requested that the present request for arbitral determination be upheld.
The Tax and Customs Authority submitted submissions in which it concluded as follows:
I. The Claimant sought, in the present proceedings, to demonstrate the illegality of the corrections, but adduced no proof, neither documentary nor testimonial, to accomplish that end, instead establishing the strict legal conformity of the corrections to taxable income made by the Tax Inspection.
II. The Claimant considered as charges eligible for tax purposes, both by virtue of the deduction of previously taxed provisions and by the non-taxation of deferred income in accordance with IFRIC 13, the amount of €12,494,495.00, relating to Customer Loyalty Programs, being €5,662,495.00 relating to deferred income in the fiscal year and €6,832,000.00, relating to the deduction of transferred provisions, an amount which, in accordance with article 18 of the Corporate Income Tax Code (CIRC), should be added to the taxable profit of fiscal year 2009.
III. In fact, these are merely cost estimates, and the recorded liability will not be realized if the... are not redeemed by their expiration date, which prevents verification of such a charge as a negative component of taxable profit for IRC purposes and, consequently, its tax deductibility.
IV. In this manner, the Claimant reduces its income (negative component of taxable profit) relating to services already provided based on the valuation of services to be provided only eventually, with a high degree of uncertainty regarding the occurrence of the recognized liabilities to which tax significance was attributed.
V. Therefore, the recognition of these liabilities, whether via a provision or deferred income, should receive the same tax treatment as provisions, with only the provisions expressly provided for in article 34 of the CIRC being eligible for tax purposes.
VI. The provisions for customer loyalty programs that the Claimant had established prior to the change in accounting policy, by application of IFRIC 13, since they were not expressly provided for in the CIRC, had to be corrected annually for purposes of determining taxable profit, as was, moreover, the procedure adopted by the Claimant.
VII. The establishment in fiscal year 2009 of deferred income, by application of the new accounting policy resulting from IFRIC 13, is not fiscally deductible, given that the deferral of taxation of deferred income but already realized in accordance with paragraph (b) of article 18, no. 3 of the CIRC, similar to the provision constituted heretofore, has no basis in the Corporate Income Tax Code.
VIII. The Claimant invokes the innovative argument that the Tax Authority would have changed its understanding regarding the tax treatment applicable to customer loyalty programs and the effects of adoption of IFRIC 13;
IX. Such argument, which proved to be incorrect, was not raised within the scope of hierarchical appeal and, as such, was not subject to determination and decision by the Tax Authority, which prevents its allegation in the present arbitral action.
X. The Claimant incurred costs, namely with capital amortizations realized in the year 2011, in the context of the credit securitization operation, which it chose to disregard in determining the taxable profit of that fiscal year, nor did it proceed to file amended declarations with the adjustments it considers to be due and which would correct the alleged situation of double taxation, voluntarily forgoing being taxed according to its actual income.
In these terms and in all other matters of law, and with the kind assistance of Your Excellencies, everything previously petitioned in the Response is reiterated, and the present Request for arbitral determination should be dismissed as not proven, especially for the procedural reasons invoked and, consequently, the Respondent should be absolved of all claims, all with the due and legal consequences.
The arbitral tribunal was regularly constituted and is materially competent, in light of the provisions of articles 2, no. 1, paragraph (a), and 30, no. 1 of the RJAT.
The parties possess legal personality and capacity, are legitimate (articles 4 and 10, no. 2 of the same statute and article 1 of Ordinance no. 112-A/2011, of 22 March) and are properly represented.
The case is not affected by nullities.
2. Factual Matters
2.1. Facts Deemed Proven
a) Under Internal Service Order no. OI2010..., the Claimant was subjected to an internal tax inspection procedure for fiscal year 2009, as a result of which corrections to IRC taxable income were made in the total amount of €35,757,302.61, with the IRC assessment no. 2011... and the consequent tax reconciliation statement no. 2011... being issued, which determines tax payable and respective compensatory interest in the amount of €548,852.78;
b) The Claimant agreed with some of the corrections made by the Tax Inspection and disagreed with the corrections relating to (i) securitization of future credits, from which resulted a correction to taxable profit in the amount of €23,262,807.61 and (ii) customer loyalty program, from which resulted an increase to taxable profit in the amount of €12,494,495.00;
c) The Claimant filed with the Lisbon Finance Service..., on 26-07-2011, gracious appeal no. ...2011... regarding the tax assessment act no. 2011..., in which it restricts the subject matter of discussion to the correction relating to the customer loyalty program, informing, with respect to securitization of future credits, that it "filed independent Judicial Challenge" (see page 6 of the attached Gracious Appeal);
d) On the same day 26-07-2011, the Claimant sent by fax to the Lisbon Finance Service... the gracious appeal no. ...2011... regarding the same tax assessment act no. 2011... relating to the fiscal year 2009, in which it contests the correction relating to securitization of future credits (see page 154 of Gracious Appeal no. ...2011... and page 6 of Gracious Appeal no. ...2011...);
e) The gracious appeal no. ...2011... relating to the correction regarding securitization of future credits was dismissed by order of the Director of the Large Taxpayers Unit, dated 12-07-2012, and the Claimant, following the dismissal decision, filed on 05-09-2012 judicial challenge of the tax assessment act no. 2011... which is pending before the Tax Tribunal under no. .../12.... (see page 152 of Gracious Appeal no. ...2011...);
f) The gracious appeal no. ...2011... was dismissed by order of the Director of the Large Taxpayers Unit, dated 20-06-2012, and the Claimant filed hierarchical appeal, on which a dismissal decision was rendered and notified by registered letter dated 06-03-2014;
g) The Claimant on 09-06-2014 filed the present request for arbitral determination;
h) The Claimant operates in the activity of transport..., as well as assistance to third parties and sale of goods, being classified under CAE -62100;
i) The Tax Inspection Report regarding the correction relating to the customer loyalty program states, among other things, the following:
1.4.1 – Customer Loyalty Programs - Derecognition of provision and recognition of deferred income (article 18 of the CIRC) - €12,494,495.00
The taxpayer during fiscal year 2009 altered the accounting policy associated with customer loyalty programs, having treated as charges eligible for tax purposes (both by virtue of the deduction of previously taxed provisions and by the non-taxation of deferred income) the amount of €12,494,495.00.
In accordance with article 18 of the CIRC, the amount of €12,494,495.00 should be added to the taxable profit of fiscal year 2009, relating to the change in accounting policy prescribed for Customer Loyalty Programs, as per point III.1.1.
(...)
III.1.1 – Customer Loyalty Programs - Derecognition of provision and recognition of deferred income (article 18 of the CIRC)
a) Description of facts
During fiscal year 2009 the taxpayer altered the accounting policy associated with customer loyalty programs - AB... and AC... proceeding to value the... and points awarded to adhering customers at fair value.
Until 31 December 2008, the... and points awarded were valued in accordance with the estimate of costs to be incurred, based on adherence to said programs and properly provisioned.
The balance of the respective provisions (accounts 2981000003-Prog... freq. and 2981000018- AD...) existing on 31-12-2008 were €6,716,000.00 and €116,000.00, respectively, which were subject to taxation upon their constitution and increases, having been deducted in field 228 of table 07 of the income tax return Form 22 for fiscal year 2009, given the cancellation/transfer thereof by change of said accounting policy.
In the year 2009, following the increase of the provision relating to the..., in the amount of €1,659,000.00, the same, by application of IFRIC 13, was transferred in its entirety (balance of account 2981000003) to account 2742000001 - AB... -... (deferred income), in the amount of €8,375,000.00. - see SAP document no. 8030105334, dated 31-12-2009. Also, the provision for points after the increase of €8,000.00 was subject to balance transfer (account 2981000018), in the amount of €124,000.00, to account 2742000002 - AE... - see SAP document no. 8030105332, dated 31-12-2009.
On the other hand, during fiscal year 2009, part of the service revenue was allocated to credits of... and points, with the same being deferred until the moment when the customer redeems the... or points accumulated by them. For that purpose, €2,534,883.00 was debited to account 7211019401 - AB... -deferred rec., as well as €1,439,191.00 to account 7380110002 – AB… -partial deferred rec., with a credit to account 2742000001 - AB... -... (see SAP document no. 8020010262, dated 31-12-2009). On the other hand, with respect to points, deferred revenues in the amount of €21,421.00 were debited to account 2742000002 - AE... with a credit to account 7211019401 - AB... –deferred rec. (see SAP document no. 8020010322, dated 31-12-2009). From the retrospective application of said IFRIC 13, a reversal of revenues recognized in prior periods was made, which now become deferred income, with the amount of €16,090,648.63 debited to account 5910000028 - 2008 Period-Adjustment with a credit to account 2742000001, without any tax significance being attributed to it. In these terms, it is found that the taxpayer during fiscal year 2009 treated as charges eligible for tax purposes, both by virtue of the deduction of previously taxed provisions and by the non-taxation of deferred income, the amount of €12,494,495.00, relating to Customer Loyalty Programs, being €5,662,495.00 relating to deferred income in the fiscal year and €6,832,000.00, relating to the deduction of transferred provisions.
b) Tax treatment
b1) Under the Corporate Income Tax Code
In accordance with nos. 1 to 3 of article 18 of the CIRC, which addresses the accrual of taxable profit, we have:
"1 - Income and expenses, as well as other positive or negative components of taxable profit, are attributable to the fiscal year to which they pertain, in accordance with the principle of period specialization.
2 - Positive or negative components considered as relating to prior fiscal years are only attributable to the fiscal year when, on the date of closing the accounts of the year to which they should have been attributed, they were unforeseeable or clearly unknown.
3 - For purposes of applying the principle of period specialization:
a) Income from sales is generally considered realized, and the corresponding expenses borne, on the date of delivery or shipment of the corresponding goods or, if earlier, on the date when the transfer of ownership occurs;
b) Income from service provision is generally considered realized, and the corresponding expenses borne, on the date when the service is completed, except in the case of services consisting of the provision of more than one act or of a continued or successive provision, which should be recognized in results in proportion to their execution."
And in accordance with no. 1 of article 23 of the same Code, relating to the tax deductibility of expenses, it is found that only those expenses or losses that are demonstrably indispensable for the realization of income or gains subject to tax or for the maintenance of the productive source are considered.
On the other hand, in accordance with the legal provision set forth in no. 1 of article 34 of the CIRC, relating to tax-deductible provisions, only the following provisions can be deducted for tax purposes:
"a) Those intended to cover debts resulting from normal activity which at the end of the fiscal year may be considered doubtful and are evidenced as such in the accounts;
b) Those intended to cover the value losses suffered by inventory;
c) Those intended to cover obligations and charges arising from legal proceedings in progress due to facts that would require their inclusion among the expenses of the fiscal year;
d) Those mandatorily constituted, by virtue of a generic and abstract requirement, by companies subject to supervision by the Bank of Portugal and by branches in Portugal of credit institutions and other financial institutions with registered office in another Member State of the European Union intended to cover specific credit risk, country risk, unrealized losses on trading portfolio securities and unrealized losses on other investments, and also the technical provisions and provisions for premiums receivable mandatorily constituted, by virtue of standards issued by the Insurance Institute of Portugal, of generic and abstract character, by insurance companies subject to its supervision and by branches in Portugal of insurance companies with registered office in another Member State of the European Union;
e) Those constituted by companies engaged in the extractive petroleum industry, intended for the restoration of deposits;
f) Those constituted by companies in the extractive industries sector or waste treatment and disposal, intended to meet charges for landscape and environmental recovery of sites affected by operations, whenever this is mandatory and after the cessation thereof, in accordance with applicable legislation."
b2) Of the controversial situation
In accordance with the work carried out, it was found that the taxpayer, during fiscal year 2009, proceeded to derecognize the provisions relating to Customer Loyalty Programs"[1], and to recognize deferred income, by application of IFRIC 13 - Customer Loyalty Program, altering the existing accounting policy.
This change meant that the provisions it had established - which were not accepted for tax purposes - were derecognized and transferred to deferred income.
By application of IFRIC 13, part of service revenue is deferred, in an amount corresponding to the estimated future value at redemption of the... or points by customers, until the moment when the customer redeems the... or points accumulated by them, exchanging them for certain products or services or, if the customer does not proceed to redeem them, until the respective expiration date.
In these terms, it is found that although of different accounting nature, the effects that deferred income/revenue produces in determining taxable profit are, in all respects, similar to those produced by an expense/cost or negative patrimonial variation. In fact, each of them constitutes a negative component of taxable profit.
Therefore, the tax acceptance of deferring income/revenue will depend on the verification of the conditions imposed on expenses/costs by no. 1 of article 23 of the CIRC.
Now, in accordance with no. 1 of article 23 of the CIRC, as previously noted, those expenses/costs are considered that are demonstrably indispensable for the realization of income/revenue subject to tax or for the maintenance of the productive source.
As a consequence of the verification of the indispensability of expenses/costs required by this legal provision, expenses/costs that a taxpayer foresaw it would incur but had not yet incurred, were accounted in accounts of liabilities, have merited and continue to merit special attention from the legislator.
Whence, only the provisions expressly provided for in the CIRC are eligible for tax purposes, namely in its article 34.
Therefore, the provisions for existing customer loyalty programs, since they are not expressly provided for in the CIRC, had to be corrected annually for purposes of determining taxable profit, as was done by the taxpayer. Although the policy of granting... or points amounts (as happened in the past) to an obligation assumed by the service provider to, as a result of services provided to its customers, grant them goods or services gratuitously or at a discount in the future, under previously established and known conditions, an obligation that is only realized if customers use the... or points before the respective expiration date expires. The respective international accounting standards organization, through IFRIC Interpretation 13, reached consensus that, between reflecting this liability accountingly as a provision or as deferred income, it was more correct to recognize it as deferred income.
However, for tax purposes, the assumptions associated with the recognition of liability via the provision or deferred income/revenue are the same. In effect, deferring revenue will imply deferring taxation of already fiscally realized income, since as IFRIC 13 itself states, in its point 5, what is allocated to premium credits is a portion of the "fair value of the amount received or to be received in respect of the initial sale".
However, deferred income does not correspond to a service that will necessarily (certainly) be provided or a product that will necessarily (certainly) be granted, gratuitously or at a discount, because there will certainly be many customers who do not redeem the... or points accumulated, giving rise to their expiration. Therefore, by deferring a portion of the amount invoiced to customers, the amount of income that, corresponding to the provision of the initial service, is considered already realized in accordance with paragraph (b) of article 18, no. 3 of the CIRC, is being reduced.
And because this deferral is not "demonstrably indispensable for the realization of income subject to tax or for the maintenance of the productive source", we conclude that, for tax purposes, the amount of service provided by the taxpayer - which entitles to... or points - must be subject to taxation, in full, when such service is provided to customers, that is, when, in accordance with paragraph (b) of article 18, no. 3 of the CIRC, the income from such service provision is considered realized, not permitting the deferral of taxation of the portion that, following the application of IFRIC Interpretation 13 - Customer Loyalty Program, must be allocated to premium credits through deferral of income.
Thus, the transfers of existing provisions relating to the Frequent Program... (AB...) and AD..., to deferred income through a change in accounting policy do not contribute to the formation of taxable profit relating to fiscal year 2009, since for tax purposes, the assumptions associated with the recognition of liability via the provision or deferred income/revenue are the same. Not being, therefore, accepted the deduction made in the amount of €6,832,000.00, since even if it were considered to be a derecognition of a non-deductible provision and the subsequent recognition of a corresponding liability through deferred income, the cost arising from it would also not have tax acceptance and would have to be added in determining the taxable profit of the fiscal year.
On the other hand, in accordance with all the foregoing, the establishment in fiscal year 2009 of deferred income, by application of the new accounting policy, in the amount of €5,662,495.00, is not tax deductible, given that the deferral of taxation of already realized deferred income in accordance with paragraph (b) of article 18, no. 3 of the CIRC, similar to the provision constituted heretofore, has no basis in the Corporate Income Tax Code.
In view of the foregoing, the amount of €12,494,495.00 should be added in determining the taxable profit of fiscal year 2009, relating to the change in accounting policy prescribed for Customer Loyalty Programs.
j) The amount of... not used by customers amounts to a percentage of approximately 31% (testimony of witness B...).
k) There is difficulty in valuing services to be provided in the context of managing loyalty programs, due to uncertainty regarding the percentage of... used by customers (testimony of witness B...).
l) Customer loyalty programs operate with the participation of several partners, such as airlines and companies in other areas of business (see documentary and testimonial evidence).
m) The Claimant's customers can exchange the... for services provided by all companies participating in the programs (see documentary and testimonial evidence).
n) In accounting terms, and until the fiscal year 2009, the Claimant recorded the liability (estimate of costs to be incurred) inherent in the attribution of... to its customers through a provision that, in balance sheet terms, was classifiable as a liability;
o) In tax terms, and until the fiscal year 2009, the A..., for purposes of determining its taxable profit, increased in the income tax returns Form 22 (table 07) the expenses incurred with the constitution of said provision, since the same was not tax deductible;
p) In 2009, the Claimant altered its accounting policy in order to align it with the guidance conveyed in Interpretation 13 of the International Financial Reporting Interpretations Committee ("IFRIC 13"), proceeding to value the... attributed to customers under its loyalty programs at fair value, deferring the respective amount, as income (and no longer as an expense), until such time as those customers made use of those... or until the maximum period of 36 months (the time when they expire);
q) Following the adoption of this new accounting policy, the Claimant understood that maintenance of the provisions previously established to meet the movements of its customer loyalty programs was not justified, with their reversal being required;
r) With respect to the fair value of the... attributed and not used or expired at the end of the fiscal year 2009, the Claimant understood that the deferred income associated would not be subject to taxation for purposes of this tax;
s) The Claimant during fiscal year 2009 treated as charges eligible for tax purposes, both by virtue of the deduction of previously taxed provisions and by the non-taxation of deferred income, the amount of €12,494,495.00, relating to Customer Loyalty Programs, being €5,662,495.00 relating to deferred income in the fiscal year and €6,832,000.00 relating to the deduction of transferred provisions;
t) The Claimant proceeded in fiscal years 2010, 2011 and 2012 to defer revenues relating to customer loyalty programs called AB... and AC..., adopting the accounting treatment provided in IFRIC 13 – Customer Loyalty Program (Document no. 14 attached with the request for arbitral determination, the content of which is deemed reproduced);
u) The Claimant paid on 28-03-2011 the amount of €187,417.43, plus compensatory interest in the amount of €12,493.24 (page 17 of the administrative proceeding document designated "P419 T 2014 - PA7.pdf", the content of which is deemed reproduced).
2.2. Facts Deemed Not Proven
It was not proven that in years after 2009 the Tax and Customs Authority changed its understanding regarding the effects of adoption of IFRIC 13.
2.3. Basis for the Proven Factual Matters
The proven facts are based on the administrative proceeding file, the documents submitted with the request for arbitral determination and on the testimonial evidence at the points indicated.
3. Preliminary Issues
3.1. Expiration of the Right to Invoke Defects Not Raised within the Scope of Judicial Challenge of the Assessment Act and Improper Use of Arbitral Action
The Tax and Customs Authority raises an exception for expiration of the right to invoke defects not raised within the scope of judicial challenge of the assessment act and improper use of arbitral action.
The issue is raised because the Claimant filed two gracious appeals having as their subject matter the same IRC assessment act (assessment no. 2011... which is the subject of the present proceeding) in judicial challenge proceedings no. .../12....
The Tax and Customs Authority contends that "concurrently, in an arbitral tribunal and in a tax tribunal, an arbitral action and a judicial challenge action are pending regarding the same tax act, and the effect that the Claimant seeks to obtain with both actions is single - the annulment of the assessment regarding the two corrections contested by it".
However, as the Tax and Customs Authority itself acknowledges, the judicial challenge has as its subject matter the "correction relating to securitization of future credits" and not the one referring to the accounting for revenues relating to customer loyalty programs.
Now, being so, it is manifest that the Tax and Customs Authority lacks reason, since the possibility of challenging the same tax act in a judicial tribunal and in an arbitral tribunal is implicit but clearly provided for in article 13, no. 4, by establishing that "the submission of requests for constitution of arbitral tribunal precludes the right to, on the same grounds, lodge a gracious appeal, challenge, request revision, including revision of the taxable base, or promote official revision, or seek arbitral determination regarding the acts subject to such requests or regarding the consequent assessment acts, except when the arbitral proceedings terminate before the date of constitution of the arbitral tribunal or the arbitral proceedings terminate without a determination on the merits of the case".
In truth, the restriction of the preclusion of the right to challenge the same act "on the same grounds" reveals unequivocally that such preclusion does not occur when the same assessment act is challenged through two procedural means with different grounds.
Moreover, in the case at hand, the assessment act has complex grounds, being based on more than one correction to the Claimant's taxable income, and the issues raised regarding each of them are completely distinct, whereby, in addition to different grounds being invoked, different parts of a materially and legally divisible act are being challenged.
Therefore, there is no legal obstacle to the Claimant having independently challenged the same act in judicial challenge proceedings on issues and with grounds different from those underlying the request for arbitral determination.
Thus, the two aforementioned exceptions are without merit.
3.2. Untimeliness of the Request for Arbitral Determination
The Tax and Customs Authority states that the Claimant identifies as the subject of the request for arbitral determination the assessment acts for IRC and compensatory interest, and the deadline for voluntary payment terminated on 28-03-2011, whereas the request for arbitral determination was submitted on 09-06-2014.
As clearly results from the reference made in article 10, no. 1 of the RJAT, in cases where there is a gracious appeal and hierarchical appeal, the deadline for submitting a request for arbitral determination is counted from notification of the decision thereon.
As results from the competence attributed to arbitral tribunals operating in the CAAD to assess the legality of assessment acts, and not of decisions dismissing hierarchical appeals or gracious appeals, when there is administrative challenge of assessment acts, these assessment acts are always challengeable within a deadline counted from notification of the dismissal decision, since article 10, no. 1 indicates them as starting points. Therefore, the party seeking arbitration does not have to challenge the acts of the second or third level, and even when it challenges these, it is considered that the subject matter of the arbitral proceedings is always the mediate subject matter that constitutes the assessment acts maintained by acts of the second or third level whenever the Claimant does not impute to these defects of their own. But, obviously, if the party seeking arbitration merely intends to have the illegality of assessment acts declared, which are those, being susceptible to coercive enforcement, affect its legal sphere, it does not have to challenge the acts of the second or third level, which lack autonomous harmfulness.
In any event, a hypothetical deficiency in the formulation of the request would not result in dismissal of the claim, only giving rise, if necessary, but always when necessary, to a correction, as required by paragraph (c) of article 18, no. 1 of the RJAT, in harmony with the constitutional right to judicial review of all acts of the Administration that harm the rights of taxpayers (articles 20, no. 1 and 268, no. 4 of the Portuguese Constitution).
In the case at hand, the decision dismissing the hierarchical appeal was made through a letter registered on 06-03-2014, with notification being presumed to have occurred on 10-03-2014 (a Monday), in accordance with article 39, no. 1 of the Tax Procedure Code (CPPT).
The request for arbitral determination was submitted on 09-06-2014, on the ninetieth day thereafter.
Since the deadline for submitting a request for arbitral determination is 90 days, as results from article 10, no. 1, the submission was timely.
Thus, this preliminary issue is without merit.
4. Matters of Law
4.1. Issue of the Correction Relating to Customer Loyalty Programs
The Claimant established two customer loyalty programs, accounting, until fiscal year 2009, for the liability (estimate of costs to be incurred) inherent in the attribution of... to its customers through a provision that, in balance sheet terms, was classifiable as a liability and was not tax deductible.
With the adoption, in 2009, of the accounting directive embodied in International Financial Reporting Interpretation 13 (IFRIC 13), issued by the International Financial Reporting Interpretations Committee (IFRIC), the Claimant understood that maintenance of the provisions previously established to meet the movements of its customer loyalty programs was not justified, with their reversal being required.
In fiscal year 2009, whether by virtue of the deduction of previously made provisions or by the non-taxation of deferred income in accordance with IFRIC 13, the Claimant's taxable profit was negatively affected in the amount of €12,494,495.00, relating to customer loyalty programs, being €5,662,495.00 relating to deferred income in the fiscal year and €6,832,000.00 relating to the deduction of transferred provisions.
The Tax and Customs Authority understands, in sum, that the deferral of a portion of the amount invoiced to customers reduces the amount of income that is considered already realized in accordance with paragraph (b) of article 18, no. 3 of the CIRC, whereby the effect that deferral of income from service provision resulting from adoption of IFRIC 13 has is identical to that which any negative component of taxable profit has, which justifies that its tax relevance be conditioned by article 23, no. 1 of the CIRC, which establishes the rule that only costs that are demonstrably indispensable for the realization of income subject to tax or for the maintenance of the productive source are relevant.
In the case at hand, the Tax Administration understands that this indispensability is not proven because the obligation assumed by the Claimant is dependent on eventual use of the... or points before the respective expiration date.
Until 2008, the A... used one of the alternative forms provided for in IAS 18 for the treatment of customer loyalty programs: adjust the accounting result through the creation of a provision for the estimated value of premiums to be granted.
This accounting procedure approximated the accounting result to reality, leaving all revenue in income, but adding an expense that resulted in adjustment of the result by reducing it.
The tax administration, not recognizing the provision, ended up taxing higher profit than actual, correcting this excess in subsequent fiscal years when the provision was reinstated.
The alternative procedure provided for in IFRIC 13 began to be adopted by the Claimant from 2009.
The application of IFRIC 13 results in the portion of consideration received from customers that relates to premium credits being deferred as a liability until the obligation to deliver to them the respective premiums is fulfilled. The liability is measured by the value of the benefits to be received by customers (not the cost to the entity) and recognized as deferred income (not as expense).
The Tax and Customs Authority, however, understands that this treatment contravenes the rules of the CIRC on accrual of taxable profit.
Article 17, no. 1 of the CIRC establishes that "the taxable profit of legal persons and other entities mentioned in paragraph (a) of article 3, no. 1 is constituted by the algebraic sum of the net result of the fiscal year and of the positive and negative patrimonial variations verified in the same period and not reflected in that result, determined on the basis of accounts and possibly corrected in accordance with this Code".
Thus, although in general taxable profit is based on accounts, it results unequivocally from this standard that the provisions of the CIRC prevail.
Therefore, the resolution of the issue which is the subject of the present proceeding comes down to ascertaining whether the rules of the CIRC impose a solution different from that advocated by IFRIC 13.
Article 18, no. 1 of the CIRC, establishes, in the wording in effect in 2009, that "income and expenses, as well as other positive or negative components of taxable profit, are attributable to the fiscal year to which they pertain, in accordance with the principle of period specialization".
The principle of period specialization is reflected in the treatment as income or expense of a particular fiscal year of revenues and charges that economically pertain to it, being irrelevant the fiscal year in which receipt or payment is made, as results from no. 1 of article 18 of the CIRC. ( [2] )
Paragraph (b) of its no. 3 of this article 18, in the same wording, clarifies that "income from service provision is generally considered realized, and the corresponding expenses borne, on the date when the service is completed, except in the case of services consisting of the provision of more than one act or of a continued or successive provision, which should be recognized in results in proportion to their execution".
In cases where the... or points are used by customers, we are faced with a situation classifiable under the final part of this paragraph (b), since to the immediate provision of the transport service which the Claimant primarily engages in will subsequently follow the provision of a new transport service (in the case of...) or other services.
In cases where the... or points end up not being used within the respective expiration period, only when this occurs can it be concluded that a successive provision did not occur. But even in this case, it results from this paragraph (b) that, when at the end of the fiscal year in which the service provision begins not all the acts in which it is translated have been performed, the respective revenues are not immediately accounted in that initial period.
On the other hand, in light of that paragraph (b), when faced with a successive provision of the service, the subsequent provision of the service is necessarily only eventual and the lack of certainty regarding its realization does not preclude the deferral of the corresponding income and expenses.
Thus, in these situations of successive service provision, in light of the specially provided for in that paragraph (b), it is not necessary, for the indispensability required by article 23, no. 1 of the CIRC for relevance of a negative component of taxable profit to be considered proven, that there be certainty that the supplementary service will be provided. In truth, for negative patrimonial variations to be considered as expenses it suffices to prove the relationship of those variations with the activity generating the income, which permits them to be considered as caused by business management acts.
That is, in the case at hand, in light of the referred paragraph (b), the proof of the indispensability required by no. 1 of article 23 is satisfied with the proof that the customer has the right to the service and that the grant of this right is furthering the formation of income, being an acceptable business management act.
Therefore, even if one considers, as the Tax and Customs Authority argues in the Tax Inspection Report (page 11), that "although of different accounting nature, the effects that deferred income/revenue produces in determining taxable profit are, in all respects, similar to those produced by an expense/cost or negative patrimonial variation" and that "the tax acceptance of deferring income/revenue will depend on the verification of the conditions imposed on expenses/costs by no. 1 of article 23 of the CIRC", one must conclude that, in the case at hand, the indispensability of that negative component for generating income is proven, since it is manifest that customer loyalty programs fall within the scope of good business management of a company like the Claimant, as is apparent from the testimonial evidence produced.
Thus, it is concluded that the act being challenged, by understanding that the requirement of indispensability required by article 23, no. 1 of the CIRC is not met, is based on an erroneous interpretation of that standard.
4.2. Compensatory Interest
Compensatory interest is included in the assessed amount (article 35, no. 8 of the LGT).
Therefore, from the illegality of the correction made regarding customer loyalty programs results the illegality of the IRC assessment and of the compensatory interest, insofar as they were based on that correction.
5. Reimbursement of Amount Paid
The Claimant paid the assessed amount of €187,417.43, plus compensatory interest in the amount of €12,493.24, as referred to in paragraph (u) of the factual matters fixed.
Thus, since the IRC assessment and compensatory interest are illegal, insofar as they are the subject of the present proceedings, the Claimant has the right to be reimbursed the totality of the amounts paid, in the total amount of €199,910.67, as results from the duty to "restore the situation that would have existed had the tax act subject to the arbitral decision not been practiced" which is imposed upon it by article 24, no. 1, paragraph (b) of the RJAT, in harmony with the provisions of article 100 of the General Tax Law.
6. Indemnity Interest
The Claimant further requests that payment of indemnity interest be determined, with respect to the amount paid illegally.
Article 43, nos. 1 and 2 of the LGT establish that "indemnity interest is due when it is determined, in a gracious appeal or judicial challenge, that there was error imputable to the services resulting in payment of the tax debt in an amount exceeding that legally due".
In the case at hand, it was the Tax and Customs Authority that made the correction to the Claimant's taxable income, on its own initiative, whereby the error affecting it is imputable to the services for purposes of no. 1 of article 43 of the LGT.
Thus, the claim for indemnity interest made by the Claimant is justified, with indemnity interest being due counted from 28-03-2011 until full payment of the amount of €199,910.67 of IRC and compensatory interest, in accordance with that standard and article 61 of the CPPT.
7. Decision
In these terms, the Arbitral Tribunal agrees on
a) To hold the request for arbitral determination well-founded with respect to the declaration of illegality of the IRC assessment no. 2011... (notified by compensation notice no. 2011...), relating to fiscal year 2009, with respect to the corrections to customer loyalty programs, in the amount of €12,494,495.00, which resulted in an IRC amount calculated at €187,417.43 and to partially annul this assessment, as to this amount;
b) To hold the request for arbitral determination well-founded with respect to the compensatory interest and to annul the assessment of compensatory interest on that amount of €187,417.43;
c) To hold the request for arbitral determination well-founded with respect to the reimbursement and indemnity interest claims, and to order the Tax and Customs Authority to reimburse the Claimant of the amount of €199,910.67 (of IRC and compensatory interest) and to pay it indemnity interest calculated on this amount, from 28-03-2011, until full payment.
8. Case Value
In accordance with the provisions of article 315, no. 2 of the Code of Civil Procedure (CPC) and article 97-A, no. 1, paragraph (a) of the CPPT and article 3, no. 2 of the Regulation of Costs in Arbitration Proceedings in Tax Matters, the case value is set at €199,910.67.
9. Costs
In accordance with article 22, no. 4 of the RJAT, the amount of costs is set at €3,672.00, in accordance with Table I attached to the Regulation of Costs in Arbitration Proceedings in Tax Matters, to be borne by the Tax and Customs Authority.
Lisbon, 15 December 2014
The Arbitrators
(Jorge Manuel Lopes de Sousa)
(Nuno Maldonado Sousa)
(Armindo Fernandes Costa)
[1] Provides products or services free of charge or at a discount as attribution of... or points, upon the sale of a service.
[2] Decision of the Supreme Administrative Court of 8-7-1992, case no. 14364, published in Appendix to the Diário da República of 30-6-95, page 2208, which adopts consistent case law, as can be seen from the following decisions: of 9-5-1990, case no. 10497, published in Appendix to the Diário da República of 31-3-93, page 419; of 20-10-1993, case no. 13355, published in Appendix to the Diário da República of 31-10-95, page 259; of 9-12-1993, case no. 15778, published in Science and Technical Tax Journal, no. 375, page 210; of 26-4-1995, case no. 18218, published in Appendix to the Diário da República of 14-8-97, page 1116; of 2-3-1994, case no. 14535, published in Appendix to the Diário da República of 28-11-96, page 709.
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