Summary
Full Decision
ARBITRAL DECISION
The Arbitrators Dr. Jorge Manuel Lopes de Sousa (Arbitrator-President, designated by the other Arbitrators), Dr. José Alberto Pinheiro Pinto and Dr. Maria Manuela do Nascimento Roseiro, designated by the Claimant and the Respondent, respectively, to form the Arbitral Tribunal, constituted on 31-10-2016, hereby agree as follows:
1. Report
A…, S.A., hereinafter referred to as A… or Claimant, taxpayer n.º…, with registered office in … of …, came, pursuant to Decree-Law n.º 10/2011, of 20 January, hereinafter "RJAT" - Legal Framework for Tax Arbitration, to request the constitution of a collective arbitral tribunal, with a view to the declaration of illegality of the Corporate Income Tax (IRC) assessments n.º 2016 … and n.º 2016 …, of the account reconciliation statements n.º 2016 … and n.º 2016 …, and of the compensation interest payment statements n.º 2016 … and n.º 2016 …, relating to the fiscal years 2012 and 2013.
The Respondent is the TAX AUTHORITY AND CUSTOMS AUTHORITY.
The Claimant designated as Arbitrator Dr. José Alberto Pinheiro Pinto, pursuant to Article 6.º, n.º 2, paragraph b), of the RJAT.
The request for constitution of the Arbitral Tribunal was accepted by the President of the CAAD and automatically notified to the Tax Authority and Customs Authority on 18-08-2016.
Pursuant to paragraph b) of n.º 2 of Article 6.º and n.º 3 of the RJAT, and within the deadline established in n.º 1 of Article 13.º of the RJAT, the head of the Tax Administration service designated as Arbitrator Dr. Maria Manuela do Nascimento Roseiro.
The Arbitrators designated by the Parties agreed to designate Counselor Jorge Lopes de Sousa as arbitrator-president, who accepted the designation.
Pursuant to and for the purposes of n.º 7 of Article 11.º of the RJAT, the President of the CAAD informed the Parties of this designation on 24-10-2016.
Thus, in accordance with what is provided in n.º 7 of Article 11.º of the RJAT, after the deadline established in n.º 1 of Article 13.º of the RJAT had elapsed without the Parties raising any objections, the Collective Arbitral Tribunal was constituted on 31-10-2016.
The Tax Authority and Customs Authority submitted a response in which it defended the inadmissibility of the request for arbitral pronouncement.
On 02-02-2017, a hearing took place in which testimony was produced and it was agreed that the case would proceed with written pleadings.
The Arbitral Tribunal was duly constituted and is competent.
The parties have legal personality and capacity and are duly represented (Articles 4.º and 10.º, n.º 2, of the same statute and Article 1.º of Order n.º 112-A/2011, of 22 March).
There are no nullities or any obstacle to the examination of the merits of the case.
2. Factual Matters
2.1. Proven Facts
The following facts are considered proven:
a) The Claimant is a joint-stock company classified under CAE 51100 - Passenger air transport;
b) The Claimant is classified in the general regime of Corporate Income Tax (hereinafter "IRC") with organized accounting and in the normal regime of Value Added Tax (hereinafter "VAT"), with monthly periodicity in the fiscal years 2012 and 2013;
c) The Claimant was wholly acquired by Group B… on 30-06-2007;
d) Following this acquisition of the Claimant by Group B…, a restructuring of the Claimant's activities took place, in the terms set out in documents n.ºs 20 and 21 attached to the request for arbitral pronouncement, whose contents are hereby reproduced;
e) The generality of airline companies have the practice of providing pass facilities to their employees and their families (spouse and children), using available seats on flights (commercially useless space), which constitutes a benefit of these employees, which is only realized if available seats exist at the time of check-in; (testimony of witness C…)
f) This benefit is also recognized to employees of other companies related to airline companies and to employees of each of these on flights of other companies, following agreements between them; (testimony of witness C…)
g) The Claimant's employees enjoyed this benefit on its flights, before the company's integration into group B…; (testimony of witness C…)
h) With the cessation of flights in the Claimant's own aircraft and the company's integration into group B…, it was agreed between the Claimant and B… that the Claimant's employees would maintain this benefit, being able to use B…'s flights; (testimony of witness C…)
i) The maintenance of this benefit was decided as a management option that aimed to prevent disruptions to the company's functioning caused by foreseeable labor conflict if the benefit were discontinued, relating only to the Claimant's employees;
j) Previously, a serious labor conflict had already occurred at B…, because D… had ceased to recognize B…'s employees the enjoyment of this benefit on its aircraft; (testimony of witness C…)
k) In cases where an airline company makes available the space available on its aircraft to employees of other companies for use by these companies' employees, this availability is considered a service that is valued, with a cost being set for this use, which is borne by the company whose employees use the other company's flights, regardless of the effective use of this benefit by these employees, based on an estimated usage, which is what occurs with the Claimant, regarding the possibility of its employees using B…'s flights; (testimony of witness C…)
l) In the company that provides these pass facilities to its own employees, no costs connected with this benefit are recorded; (testimony of witness C…)
m) It does not appear in the collective labor agreement of the Claimant's employees that the Claimant is obligated to provide its employees with the stated benefit (testimony of witness E…)
n) Authorization was not requested from the Tax Authority and Customs Authority (Directorate-General of Taxes) pursuant to Article 43.º, n.º 1, of the IRC Code, regarding the stated benefit (testimony of witness E…)
o) Punctuality is an important element for the competitiveness and image of airline companies, whereby companies seek to maximize the possibilities of aircraft crew members being on time at airports; (testimony of witness C…)
p) To achieve the maximization of punctuality possibilities, B…, previously provided company transport to crew members between their residences and the airport, but later preferred that crew members use their own means of transport, arriving already in their own uniforms, assuring them parking at the airport, whose difficulty is frequently an obstacle to punctuality; (testimony of witness C…)
q) This solution of providing parking was also used by the Claimant, being strictly restricted to crew members with their own means of transport and to access flights they would perform; (testimony of witness C…)
r) This option of ensuring parking is less costly than ensuring transport in company vehicles and is a management option that companies must assume; (testimony of witness C…)
s) The improper use of parking is a disciplinary infraction and there is sampling control of this use; (testimony of witness C…)
t) In January 2012, when they were preparing to close the accounts for the fiscal year 2011, the Claimant's accounting services encountered invoice n.º M…, relating to the repair of an engine, dated December 2011, which was recorded in 2012 (testimonies of witnesses F… and G…)
u) The Claimant's engine maintenance services informed the accounting services that the stated repair had been carried out in January 2012, whereby the record was made in this year; (testimonies of witnesses F… and G…)
v) The repair in question was carried out and completed in the year 2011; (testimonies of witnesses F…, G… and E…)
w) The losses of the years 2011 and 2012 have already been used in subsequent fiscal years; (testimony of witness F…)
x) The Tax Authority and Customs Authority made no correction relating to the fiscal year 2011, regarding the stated invoice, because this fiscal year was outside the statute of limitations period for the right to assess; (testimonies of witnesses F… and E…)
y) The Claimant uses a depreciation rate for aircraft considering a useful life period of 16 years, with a residual value of 10% for all flight equipment (aircraft, engines, spare parts and respective tools), following approval by the Tax Authority and Customs Authority of a request in this regard presented by the Claimant (document n.º 13 attached to the request for arbitral pronouncement, whose contents are hereby reproduced);
z) The Claimant, in 2012 and 2013, conducted an analysis of major repair expenses and concluded that it could only capitalize major engine repairs if there was an expectation of generating future economic benefits and that this was not the case, because the fleet was already old and the company already had the expectation of proceeding with a fleet renewal, in the short term; (testimony of witness F…)
aa) The Claimant, like most airline companies, records in the asset always 10% of the acquisition value of aircraft as residual value, which is never depreciated; (testimonies of witnesses F… and G…)
bb) The residual value is equivalent to the expectation of selling the aircraft or engines, whereby the Claimant understood that it could not capitalize a higher value; (testimony of witness F…)
cc) Because it did not have the expectation that the stated major repairs would generate future economic benefits that would justify a capitalization higher than the residual value of 10%, the Claimant maintained the residual value and recorded these major engine repairs as costs of the respective fiscal years 2012 and 2013; (testimony of witness F…)
dd) In the fiscal years 2012 and 2013, no impairment was recognized regarding the aircraft on which the engine repairs in question were carried out, but it was recognized later, in 2014; (testimonies of witnesses F… and E…)
ee) The use of the aircraft on which the stated repairs were carried out extended through several fiscal years, until 2016; (testimonies of witnesses G… and E…)
ff) There was no expectation that the aircraft on which the stated repairs were carried out would be used until 2022; (testimony of witness F…)
gg) The residual value of aircraft is essentially that of the engines; (testimony of witness F…)
hh) Since 2016, the aircraft owned by the Claimant in 2012 are no longer being used; (testimonies of witnesses F… and G…)
ii) The document designated "…–…" is intended to predict when repairs will be carried out if the aircraft are in operation, but not to predict the useful life of the aircraft; (testimony of witness G…)
jj) The Tax Authority and Customs Authority, based on service orders n.ºs OI2015… and OI2015…, conducted a partial external audit to the Claimant's accounting regarding IRC for the fiscal years 2012 and 2013, as a result of which various corrections were promoted;
kk) At the time of the audit, the Claimant's fleet consisted of fourteen aircraft: eight … and six …;
ll) In this audit, an inspection report was prepared, a copy of which was attached to the request for arbitral pronouncement as document n.º 7, whose contents are hereby reproduced, in which is referenced, among other things, the following:
III. - DESCRIPTION OF FACTS AND GROUNDS FOR PURELY ARITHMETIC CORRECTIONS
III.1 - EXPENSES WITH ENGINE REPAIR
The fleet of A… consists of 14 aircraft, 8 … and 6 …. Each aircraft has two engines incorporated. In addition to the engines in use in the aircraft, A… has 4 spare engines, two for each type of aircraft. The company does not depreciate by components; aircraft are recognized as a whole in fixed assets. Spare engines are recognized individually (annex 1, pg. 1 to 24).
Engine repairs are recognized as an expense, in the fiscal year in which they occur. For the accounting recognition of these repairs, A… uses the sub-account … -Maintenance and Repair - Engines and the sub-account … - Maintenance and Repair - Unscheduled Repairs.
According to information collected from the company:
• In sub-account 6223210510 - Engines are recognized the engine maintenance expenses carried out according to flight cycles;
• In sub-account 6223210530 - Unscheduled Repairs are recognized expenses with unscheduled repairs, resulting from fortuitous events;
• Estimates of expenses are created to meet the repairs annually provided, with the sub-account 6223210510 or the sub-account 6223210530 (on the debit) being moved, offset by the sub-account 2739222980 - Other Services (on the credit);
• With the approval of the invoice issued by the supplier, the estimate is cancelled, through the movement of the accounts identified in the previous point (account 62 on the credit and account 27 on the debit);
• Also with the approval of the invoice, the expense is recognized, for the amount corresponding to the invoice, in the sub-account 6223210510 or in the sub-account 6223210530, offset by suppliers;
III.1.1 - FISCAL YEAR 2012
III.1.1.1 - SUB-ACCOUNT MAINTENANCE AND REPAIR - ENGINES
In this fiscal year, the balance of the maintenance and repair sub-account, 6223210510 - Engines, amounts to € 11,425,703.40, with the detail that is itemized in the following table. Documents with the legend FA correspond to invoices, documents with the legend FB correspond to credit notes, and documents SC, SA and SX6 correspond to cancellation, creation of estimates, and accounting reclassification.
A) EXPENSES EVIDENCED BY INVOICES
After analysis of the supporting documents for this sub-account, the invoices that follow were identified, corresponding to engine repairs (annex 2. pg. 1 to 20). Invoices classified as "SC" correspond to invoices that were initially recognized in the sub-account 6223210530 - Infrequent Repairs and subsequently reclassified to the sub-account 6223210510 - Engines.
We verified the recognition in 2012 of an invoice dated 2011, invoice n.º…, of 23-12-2011, from the supplier … (annex 2, pg.3). This invoice corresponds to the repair of engine CAE 310030. According to the repair history made available by A… (annex 3, pg. 9), this engine was removed for repair from aircraft … on 16-10-2011, and installed after repair in aircraft … on 21-12-2011.
It follows from the above that the engine repair service for CAE 310030 occurred in 2011, not in 2012, information that is consistent with the issuance of the invoice by the supplier, which also relates to 2011 and not to 2012.
According to n.º 1 of Article 18.º of the IRC Code, "income and expenses, as well as other positive or negative components of taxable profit, are attributable to the taxation period in which they are obtained or incurred, regardless of their receipt or payment, in accordance with the accrual basis of accounting."
With the recognition in 2012 of an invoice issued in 2011 and which corresponds to services actually provided in 2011, A… violated the principle of accrual basis of accounting provided in n.º 1 of Article 18.º of the IRC Code. The expense evidenced by invoice n.º…, of 23-12-2011, is not an expense of 2012, but an expense of 2011, from which results a correction to taxable profit of € 914,999.65.
B) ESTIMATED EXPENSES
In the maintenance and repair sub-account, 6223210510 - Engines, in addition to the recognition of expenses based on invoices, we have the recognition of expenses based on estimates (documents SC, SA, SX). We identified as estimates of expenses with repairs to occur in 2013, the amounts that are identified below. These expenses are cancelled in 2013, the fiscal year in which the engine repair occurs, with the receipt of the invoice from suppliers, as explained in section III.1.2.
III.1.1.2 - SUB-ACCOUNT MAINTENANCE AND REPAIR - UNSCHEDULED REPAIRS
In 2012, expenses with engine repair are also recognized in the maintenance and repair sub-account 6223210530 — Unscheduled Repairs. The detail of this sub-account is as shown in the following table. The amount recognized based on SC documents corresponds to invoices that were reclassified to the sub-account 6223210510 - Engines.
After validation of the supporting documents recognized in this sub-account, we identified the invoices corresponding to engine repairs that are identified below.
It follows from the above that in 2012, A… recognized actual expenses with engine repair in the amount of € 8,568,406.48, distributed between the sub-account 6223210510 - Engines and the sub-account 6223210530 - Unscheduled Repairs.
Of the amount previously mentioned, and in accordance with the reasoning in section III.1.1.1, we disregarded € 914,999.65, due to violation of the principle of accrual basis of accounting provided in n.º 1 of Article 18.º of the IRC Code.
III.1.2 - FISCAL YEAR 2013
In 2013, the balance of the sub-account 6223210510 - Engines amounts to € 4,230,413.79. Proceeding with the analysis of the detail of the movements recognized in that sub-account (annex 4, pg. 1 to 10), we verified that the sum of the invoices exceeds the balance of the sub-account, as evidenced in the following table (only documents identified as "FA" correspond to invoices).
In 2012, estimates were created in the sub-account 6223210510 - Engines for engine repairs, which were carried forward to the 2013 fiscal year, in the amount of € 5,840,000.00. These estimates were cancelled in 2013, with the movement on the debit of the sub-account 2739222980 - Other Services, offset by the sub-account 6223210510 - Engines, as evidenced in the table below.
At the same time that the cancellation of the 2012 estimates occurred, expenses with engine repairs were recognized, for which an estimate of € 5,840,000.00 was created. The estimate of € 5,840,000.00 in 2012 resulted in actual expenses of € 3,629,293.53 in 2013, as evidenced by the invoices identified below.
The fact that in 2012 estimates were created that were carried forward to 2013 and that exceeded the actual expenses of that year, with the corresponding cancellation of the excess estimate, resulted in the value of estimates cancelled in 2013 being greater than the value of estimates created in that fiscal year, which resulted in the decrease in the balance of the sub-account 6223210510 - Engines. The cancellation of the excess estimates absorbed part of the expense recognized based on invoices.
Although the balance of the previously identified sub-account amounts to € 4,230,413.79, expenses with engine repairs are recognized in this sub-account in the amount of € 5,409,258.75 (annex 2, pg. 13 to 19).
Among the invoices recognized in this sub-account, we identified an invoice from 2012, invoice n.º…, of 07-12-2012, issued by supplier L…, SA, NIPC:…, for repair of engine CAE 310085 (annex 2, pg.13). By consulting the repair history of this engine (annex 3, pg. 37), we verified that the engine was removed from aircraft … on 07-08-2012 and installed after repair in aircraft …, on 30-11-2012.
According to clarifications provided by the taxpayer, email of 02-03-2016, an estimate of € 1,062,000.00 was made for engine CAE 310085 on 31/10/2012. The estimate includes the work to be performed by L…, as well as the incorporation of material that A… had purchased for this intervention. In 2013, the invoice was recorded and the estimate was cancelled, with the cost remaining in 2012 (the year in which the intervention occurred).
It results from the above that despite the invoice relating to the repair of engine CAE 310085 having been recognized in 2013, the actual expense with the repair of that engine, in the part relating to services, in the amount of € 256,929.85, was recognized in 2012 by estimate.
III.2 - CAPITALIZATION OR EXPENSE
With respect to the engine repairs identified in the previous section, it is important to verify whether they should be capitalized or charged as expenses of the fiscal year. The decision to capitalize or charge as expense of the fiscal year implies the analysis of the expenses incurred, taking into account the criteria for asset recognition provided in International Accounting Standard 16 (IAS 16). Paragraph 6 of this standard establishes that tangible fixed assets are tangible items held for use in the production or supply of goods or services, from which it is expected that they will be used for more than one period. For its part, paragraph 7 establishes that the cost of a tangible fixed asset item must be recognized as an asset if, and only if, it is probable that economic benefits associated with the item will flow to the entity and if the cost of the item can be measured reliably. Paragraphs 12 to 14 determine the treatment to be given to the costs of routine servicing of the asset, parts of asset items that require replacement at regular intervals, and the cost of major inspections. From reading these paragraphs, only the costs corresponding to routine servicing of the asset should be recognized in results when incurred, with the remaining expenses to be capitalized.
Analyzing the fleet of A… (annex 1, pg.1 to 24), and respective spare engines, which we itemized in the following table, we verified that with the exception of aircraft … and …, with useful life period until 2016, and spare engine CAE 310057, with useful life period until 2014, repairs occurred in completely depreciated engines or at the end of useful life, or to be incorporated in depreciated aircraft, or in aircraft at the end of useful life, as we identified in the following table. In 2012 the aircraft …, as well as the replacement engines of the same brand are completely depreciated.
With respect to the useful life period for flight equipment, A… was authorized, according to dispatch from the Directorate of Services for Corporate Income Tax, dated 12/01/2010, to consider a useful life period of 16 years with a residual value of 10% for all flight equipment (aircraft, spare parts and respective tools).
To identify the aircraft in which the repaired engines were incorporated, we requested from A… the history of each engine (annex 3, pg. 1 to 42). Based on the information provided (Parts Tracking Report), it was possible to establish the correspondence between the engines and the respective aircraft, through the aircraft registration. In the table below, we have the identification of the aircraft in which the engine was incorporated, with the indication of the fiscal year in which the end of useful life occurred (the fiscal year in which the aircraft is completely depreciated).
It results from the previous table that in 2012 and 2013, engines incorporated in depreciated aircraft or at the end of useful life were repaired. This situation does not occur for engines CAE 310086, CAE 310097 and CAE 310085, because they were incorporated in aircraft with end of useful life in 2016 (aircraft …- end of useful life on 01-03-2016, aircraft …- end of useful life on 01-02-2016).
At the moment of incorporation of the engines in the aircraft, A… defines the estimated date for the next repair - … (annex 3, pg. 39 to 42). Based on this information, it was possible to verify that the next repair for engine 310086 is estimated for 17-05-2018, for engine 310097 on 16-12-2016 and for engine 310085 on 08-10-2019, that is, the expected useful life of the engines overlaps with the useful life of the aircraft in which they are incorporated.
By analyzing the repair history of the engines, it is possible to verify that the time that elapses between two interventions is greater than 365 days (1 year). The benefits arising from engine repair do not end in the fiscal year in which they are carried out, but over the various fiscal years in which the engine is in flying condition, which materializes in the occurrence of income for A… in more than one fiscal year.
Based on the forecasts of future repairs - … (annex 3, pg. 39 to 42), we proceeded with the analysis of the time that intervenes between the date of incorporation of the engines and the estimated date for the next repair. We verified that more than 365 days elapse between these dates, whereby the use of the engine, as well as the benefits arising from its use do not end in one fiscal year.
When questioned about the accounting policy adopted by A… for the expenses with maintenance and repair of engines, clarifications were provided, by email of 28-01-2016 (annex 5 pg. 1 to 4), which are summarized below:
• Expenses with repairs and maintenance are recognized as an expense in the fiscal year in which they occur;
• Each aircraft is recognized as an individual element in the asset of A…, encompassing all its components;
• Throughout the useful life, aircraft are subject to constant maintenance and repair operations, which are part of a plan monitored by national and international authorities;
• The regularity of maintenance depends on flight hours and conditions of the aircraft, it being natural for several maintenance operations to occur during the useful life of the aircraft;
• They consider that these are expected repair services and within the activity plan that do not increase the useful life period of the aircraft to which they are integrated;
• The useful life period established for the aircraft already provides for this type of maintenance and repair operations.
With respect to the clarifications provided by the taxpayer, the fact that repairs are part of a plan monitored by national and international authorities, and occur within the activity plan, does not invalidate the capitalization of its expenses. The decision between capitalizing and recognizing as an expense should be made based on the criteria provided in IAS 16, it not being determining that repairs are monitored by external entities and form part of a pre-defined repair plan.
They consider that engine repairs do not increase the useful life period of the aircraft, however, based on the information collected from the company, which we referenced previously, we conclude that the engines that were repaired were incorporated in completely depreciated aircraft, or in which the expected utility for the engines overlaps with the useful life of the aircraft.
In the present case, and taking into account the requirements for capitalization of costs with assets, provided in IAS 16, we have: the cost of the item can be measured reliably, since it is evidenced by invoices issued by entities external to A…, there is an expectation of obtaining future economic benefits related to engine repair costs, and the use of the asset does not end in one fiscal year.
It follows from the above that A… should not have recognized in full in 2012 and 2013 the cost of engine repair of € 8,568,406.48 and € 5,409,258.75, but should have proceeded to capitalization of such cost.
III.3 - EXPENSES WITH DEPRECIATION
III.3.1 - TAX FRAMEWORK
With the capitalization of the cost of an asset, its expense dilutes over the fiscal years during which income is expected to be obtained, through the recognition of a depreciation expense. The depreciation regime is provided in paragraphs 43 to 62 of IAS 16. According to paragraph 55, the depreciation of an asset begins when it is available for use, with paragraph 57 providing that the useful life of an asset is defined in terms of the expected utility of the asset for the entity.
The IRC Code prescribes a model of partial dependence between accounting and taxation. Paragraph 10 of the preamble to Decree-Law n.º 442-B/88 (the statute approving the IRC Code), and n.º 1 of Article 17.º of the IRC Code, trace, originally, taxable profit to accounting profit, to which they introduce changes in equity not reflected in it, and positive or negative accounting adjustments provided for by law, to safeguard the objectives and conditions specific to taxation. The treatment provided for in the accounting standard is applicable for tax purposes whenever the IRC Code and complementary legislation do not establish their own rules.
With respect to the recognition of expenses with assets and depreciation regime, in addition to accounting rules, it is necessary to consider the rules provided in the IRC Code, in Articles 29.º to 34.º, and the rules of Regulatory Decree 25/2009 of 14/09.
Article 29.º, n.º 1 of the IRC Code and Article 1.º, n.º 1 of Regulatory Decree 25/2009 of 14/09 provide that depreciation and amortization of asset elements subject to deterioration are accepted as expenses, being considered as subject to deterioration the tangible assets that systematically suffer losses in value resulting from their use or the passage of time.
The methods for calculating depreciation are provided in Articles 3 and 31.º of the IRC Code and in Articles 5.º and 6.º of the Regulatory Decree. As the standard method for calculating depreciation, n.º 1 of Article 30.º of the IRC Code and n.º 1 of Article 4.º of the Regulatory Decree provide the straight-line depreciation method, which materializes, in terms of n.º 1 of Article 31.º of the IRC Code, by applying depreciation rates to the acquisition cost, or to the value resulting from revaluation under tax legislation or to market value, as of the date of the opening of the books, to determine the annual depreciation quota, this quota being equal throughout the entire useful life period of the asset.
N.º 6 of Article 31.º of the IRC Code and Article 7.º of the Regulatory Decree provide for depreciation by pro-rata in the year of commencement of use or operation of the elements, corresponding to the number of months counted from the month of entry into use or operation of the elements.
The regime applicable to major repairs and improvements is provided in n.º 2 of Article 5.º of the Regulatory Decree of 14/09, in paragraph a) of n.º 5 of the same statute, and in n.º 5 of Article 31.º of the IRC Code. Paragraph a) of n.º 5 of Article 5.º of the Regulatory Decree defines as major repairs those that increase the value or probable duration of the elements to which they relate, and n.º 2 of the same standard provides for the deduction of the depreciation rate applicable, according to the period of expected utility.
As demonstrated in the previous section, engine repairs should be capitalized, because they meet the requirements for asset recognition provided in IAS 16, and correspond to major repairs, since they allowed extending the useful life period of the aircraft. Corresponding these repairs to major repairs, the useful life is deducted in accordance with the legislation previously cited based on the period of expected utility.
III.3.2 - CALCULATION
A) Depreciation by Date of Incorporation
The expense to be capitalized in each fiscal year corresponds to the actual expense recognized in the accounting based on supplier invoices, corrected by the allocation of the repair expense for engine 310085 (invoice issued by L… in 2012, but recorded in 2013), to that fiscal year, and disregard for the 2011 invoice recognized as an expense in 2012.
The definition of the expected utility period for the engines that were subject to intervention in 2012 and 2013 was based on the data made available by A…, more specifically the engine repair history and the forecast of future repairs (annex 3, pg. 1 to 42). We consider that the commencement of use occurred on the date the engines were incorporated in the aircraft.
Given the data made available (repair history of engines and estimated date for next repairs), the expected utility period could be estimated, using historical values, that is, the actual time that elapsed between repairs, or forecasting data, that is, the period calculated based on the estimated date for the next intervention. We opted to use historical data, because they correspond to actual data, actual times, while estimated times may be subject to changes.
We used this criterion because, according to information provided by the taxpayer (annex 5, pg. 3), the regularity of maintenance depends on flight hours and conditions of the aircraft itself.
We compiled in the following tables the information made available by A… (annex 3, pg. 1 to 42). Based on that information, we proceeded with the calculation of expected useful life (column 9) and the calculation of the annual value of depreciation expenses (columns 11 and 12). The calculation was made for the engines incorporated in each fiscal year and depreciation was calculated by pro-rata, in terms of n.º 6 of Article 31.º of the IRC Code, as it is the policy followed by A….
B) Correction in Favor of the Taxpayer - 2013
In the previous section, we proceeded with the calculation of the annual depreciation expense for 2012 and 2013, taking into account only the engines incorporated in each of those fiscal years.
However, with respect to 2013, the taxpayer has the right to deduct from taxable result the depreciation expense of engines incorporated in that fiscal year, as well as the depreciation expense of engines incorporated in 2012. Thus, in addition to the deduction from taxable result of € 384,883.85, we consider the deduction of € 2,119,481.74, as evidenced below.
It results from the previous calculations that in 2013, the taxpayer has the right to deduct from taxable result € 2,504,385.59 (€ 384,883.85 + € 2,119,481.74).
C) Correction to Taxable Profit
As a result of the capitalization of the cost of engine repair, taxable profit is corrected by € 6,835,682.60 (2012) and by € 2,647,963.36 (2013). In 2012, we consider deductible the expense of € 1,074,654.08, corresponding to the annual depreciation of engines incorporated in that fiscal year, and in 2013, we recognize the expense of € 2,504,365.59, corresponding to the annual depreciation of engines incorporated in 2012 and 2013.
III.1.4 - PAX FACILITY
A… recognized in 2012 and 2013, as evidenced in the following table, expenses denominated "PAX facilities", in the amount of € 90,840.00 and € 112,600.00.
These expenses are evidenced by two invoices (annex 6, pg. 3 and 4).
A… made available the Procedure of the Passage Facility Regime (annex e, pg. s to 14), resulting from the reading of the same, more specifically from section 7, that employees of A… may enjoy the granting of passage facilities for leisure on the first day of the month following that in which they total 12 (twelve) months of effective and continuous work at A…. Passage facilities for leisure are intended for travel on routes operated by A…'s equipment, or in third-party companies. The cost of these trips is absorbed by A… except for airport taxes.
With respect to this regime, A… provided the clarifications that are summarized as follows:
• Since A…'s integration into group B…, A… has been using aircraft space not commercialized/sold by B…;
• For the use of this space, A… pays B… an amount, fixed by agreement between B… and A…;
• They consider that the use of these spaces constitutes a social welfare benefit, in that it represents something that A… makes possible for the company's employees, generally and within a social welfare policy in the company;
• They consider the incurred expense deductible for IRC purposes, because it is a social welfare benefit generally applicable to personnel, as established in Article 43.º of the IRC Code;
Expenses with personnel will be deductible if they fall within paragraph d) of n.º 1 of Article 23.º or Article 43.º, both of the IRC Code. In order to be subsumed to the provisions of Article 23.º of the IRC Code, it is necessary that they be indispensable for obtaining income subject to tax or for the maintenance of the income-producing source and that they result in income in the sphere of the beneficiaries, which is not the case here.
Expenses with the PAX facility regime are a social benefit granted to employees and their family members, which results in the possibility of them carrying out airplane trips, paying only airport taxes, whereby they do not constitute expenses indispensable for the maintenance of the income-producing source.
The cost incurred with this social benefit does not correspond to income taxed without income tax base in the sphere of its beneficiaries, A… cannot establish the correspondence between the amount paid to B… and the passage facilities actually utilized, and consequently cannot allocate this cost to each of its employees.
With the possibility of deducting these expenses excluded in terms of Article 23.º of the IRC Code, it is necessary to assess whether the conditions of Article 43.º of the IRC Code are met, the standard that the taxpayer invokes as the premise for the deduction of the previously identified expenses.
Article 43.º, n.º 1 of the IRC Code provides:
Also deductible are the expenses of the taxation period, including depreciation or amortization and rents of property, relating to the optional maintenance of daycare centers, nursing rooms, kindergartens, cafeterias, libraries and schools, as well as other social welfare benefits as such recognized by the Directorate-General of Taxes, made for the benefit of the company's personnel or retirees and their respective family members, provided they have a general character and do not have the nature of dependent labor income or, if they do, are of difficult or complex individualization in relation to each of the beneficiaries.
The previously cited standard provides for the deductibility of expenses with the provision of social benefits to company personnel, whose individualization is complex or difficult. Deductible are the expenses taxatingly listed, or those that, despite not being listed, are subject to recognition by the Directorate-General of Taxes (current Tax Authority and Customs Authority - ATA).
The passage facility regime is not taxatingly provided in n.º 1 of Article 43.º of the IRC Code, whereby, and taking into account the wording of that standard, its deductibility is conditioned on obtaining recognition from the ATA.
A… does not have recognition of passage facilities as social welfare benefits, whereby the expense with the acquisition of this service from B… cannot be deductible for tax purposes.
Non-compliance with the conditions provided in n.º 1 of Article 43.º of the IRC Code results in a correction to taxable profit of € 90,840.00 in 2012, and of € 112,600.00 in 2013.
III.5 - AUTONOMOUS TAXATION
In 2012 and 2013, A… calculated € 14,336.67 and € 17,387.36 of autonomous taxation. After validation of this calculation (annex 7, pg. 1 and 2), with the rubrics of the trial balance, we verified that charges with vehicles relating to parking are not being subjected to autonomous taxation. A… recognizes parking expenses in sub-account 6222709900 of € 208,543.08 in 2012 and of € 246,677.48 in 2013. These expenses are evidenced by invoices issued by M…, NIPC:…, which are listed below for each fiscal year (annex 7, pg. 5 to 10).
The autonomous taxation regime is provided in Article 88.º of the IRC Code. According to n.º 3 of that standard, charges relating to light passenger or mixed vehicles are subject to autonomous taxation at the rate of 10%, effected or incurred by taxpayers not exempt subjectively and who exercise, as their main activity, a commercial, industrial or agricultural nature activity.
According to n.º 5 of the same standard, charges relating to vehicles are considered those relating to light passenger vehicles, motorcycles and mopeds, namely depreciation, rents or leases.
It is thus concluded that the amounts incurred with the payment of parking and which are evidenced by the invoices previously identified are subject to taxation, from which results the assessment of € 20,854.31 in 2012 and €24,667.91 in 2013.
III.6 - CONCLUSION
III.6.1 - TAXABLE PROFIT
As a result of this inspection procedure, the correction to taxable profit of € 7,841,522.25 for 2012 was identified, and the correction of € 2,760,563.31 for 2013.
1.6.2 - TAX LOSSES
A… considered, as stated in the completion of table 09 of the income statement model 22 for 2012 and 2013, that in those fiscal years, it has the right to deduct losses of € 72,540,483.23 and € 5,248,774.36 respectively.
Taking into account the successive versions of Article 52.º of the IRC Code, losses identified until 2009 are reportable in a period of 6 years, and losses identified from 2010 to 2011 (version given by Law n.º 3-B/2010, of 28/04), in a period of 4 years. Thus, in 2012, A… can deduct from taxable profit the losses identified since 2006, and in 2013, the losses identified since 2007.
Taking this into account, and based on the results contained in the income statements filed by A…, between 2003 and 2011, we proceeded with the calculation of the losses deductible in 2012.
We also proceeded with the calculation of the amounts used until that fiscal year.
We conclude that the value of reportable losses in 2012 is € 72,540,483.23 (sum of losses identified between 2006 and 2011). In 2009, losses in the amount of € 1,709,148.68 were deducted, through the use of losses identified in 2003.
Thus, and taking into account the version of n.º 2 of Article 52.º of the IRC Code, according to which the deduction to be made in each taxation period cannot exceed the amount corresponding to 75% of the respective taxable profit, in 2012 and 2013, A… will have the right to deduct losses in the amount of € 8,119,125.53 and € 5,819,062.81, as shown in the table below.
III.6.3 - AUTONOMOUS TAXATION
Values were also identified that lacked autonomous taxation as itemized below.
mm) Following the inspection action, the following assessments and statements were issued:
– regarding the fiscal year 2012, the IRC assessment and compensatory interest n.º 2016 … and the account reconciliation statement n.º 2016 … and compensatory interest payment statement n.º 2016 … (documents n.ºs 1, 3 and 5 attached to the request for arbitral pronouncement, whose contents are hereby reproduced;
– regarding the fiscal year 2013, the IRC assessment and compensatory interest n.º 2016…, the account reconciliation statement n.º 2016…, and the interest payment statement n.º 2016 … (documents n.ºs 2, 4 and 6 attached to the request for arbitral pronouncement, whose contents are hereby reproduced);
nn) On 21-07-2016, the Claimant submitted the request for arbitral pronouncement that gave rise to the present case.
2.2. Unproven Facts
It was not proven which vehicles used the parking spaces that were invoiced by M… to the Claimant, nor what type and price the vehicles were.
It was not proven that the Claimant paid the amounts assessed, nor that it provided any guarantee connected with the impugned assessments.
2.3. Reasoning for the Factual Determination
The facts were given as proven based on the documents attached to the request for arbitral pronouncement and which are in the administrative file and, at the points indicated, based on the testimony evidence.
The witnesses appeared to testify with intention and with knowledge of the facts they reported, because they were connected with the activity of B… and the Claimant, the three indicated by it, and because the one indicated by the Tax Authority and Customs Authority was the one who conducted the tax audit on which the contested corrections are based.
3. Legal Matters
3.1. Issue Regarding the Application of the Accrual Basis Principle Regarding the Recording of Invoice n.º M…
As results from the evidence produced, invoice n.º M… was recorded by the Claimant in the fiscal year 2012, but relates to an engine repair carried out in December 2011 and which was already used in that year.
The evidence produced makes it possible to conclude with certainty that it was due to an oversight, resulting from incorrect information provided to the accounting services by the engine maintenance services, that the inappropriate recording of the invoice in question was made, and that the Claimant did not obtain any advantage with the recording of the expense in fiscal year 2012 instead of 2011, specifically because in both fiscal years it had tax losses that were already used in subsequent fiscal years.
Article 18.º of the IRC Code establishes the principle of accrual basis of accounting, in terms of which "income and expenses, as well as other positive or negative components of taxable profit, are attributable to the taxation period in which they are obtained or incurred, regardless of their receipt or payment, in accordance with the accrual basis of accounting."
In view of this principle, the stated invoice should have been recorded in the year 2011 and the corresponding expense should be attributed to that fiscal year and not to 2012, as it was.
However, following the correction unfavorable to the Claimant made by the Tax Authority and Customs Authority regarding fiscal year 2012, no corresponding favorable correction was made regarding fiscal year 2011, because the Tax Authority and Customs Authority understood that it could not do so, because the statute of limitations period for the right to assess had expired.
The Claimant acknowledges that the recording should have been made in fiscal year 2011, but invokes the principle of justice, because the rigid application of that principle would lead, in the present case, to an unjust situation in that the expense in question, the fiscal relevance of which the Tax Authority and Customs Authority does not question, cannot be relevant in any of the fiscal years.
The principle of justice is imposed on all the activities of the Tax Administration by Articles 266.º, n.º 2 of the Portuguese Constitution and Article 55.º of the General Tax Law.
From the concurrent observance of the principles of legality and justice, it is concluded that the duty of the Tax Administration to apply the principle of legality does not translate into mere formal compliance with the standards that specifically regulate certain situations, also encompassing the duty for the administration to consider the consequences of its activities and refrain from the strict application of standards when it results in a manifestly unjust result.
The application of the principle of justice, overriding the principle of accrual basis of accounting, has been applied in situations of this type, leading to no correction being made when it is not possible to attribute expenses to the fiscal year to which they should be attributed, in view of that principle, and taxpayers did not act intentionally with the objective of obtaining some advantage.
The Supreme Administrative Court has adopted this understanding, having decided, regarding the principle of accrual basis of accounting, that "this principle should tend to conform to and be interpreted in accordance with the principle of justice, with constitutional and legal configuration (Articles 266.º, n.º 2 of the Portuguese Constitution and Article 55.º of the General Tax Law), in order to allow the attribution to a fiscal year of costs relating to prior fiscal years, provided that it does not result from voluntary and intentional omissions, with the aim of operating the transfer of results between fiscal years."
It is a situation of this type that occurs in the present case, whereby, in harmony with this jurisprudence, it is necessary to declare the illegality of the stated correction to the Claimant's taxable matter for fiscal year 2012 in the value of € 914,999.65, from which the illegality of the assessment act results, in the part in which it had as its premise this correction.
3.2. Issue of Recognition of Expenses Relating to Aircraft Engine Repairs
The Claimant uses a depreciation rate for aircraft considering a useful life period of 16 years, with a residual value of 10% for all flight equipment (aircraft, engines, spare parts and respective tools), following approval by the Tax Authority and Customs Authority of a request in that regard presented to it by the Claimant, as is evident from document n.º 13 attached to the request for arbitral pronouncement.
With respect to fiscal years 2012 and 2013, the Claimant conducted an analysis of engine repair expenses and concluded, interpreting IAS 16, that it could only capitalize engine repairs if there was an expectation of generating future economic benefits. The Claimant understood there was no such expectation, because the fleet was already old and the company already had the expectation of proceeding with fleet renewal in the short term, as subsequently occurred, since the aircraft were only used until 2016.
Although it expected the aircraft in which engine repairs were carried out to continue to be used and to generate benefits for the Claimant, it understood that it should not capitalize the values of these repairs, because there was the stated residual value of 10%, and the foreseeable future economic benefits did not justify an increase in capitalization relative to that value.
Based on this understanding, the Claimant maintained the residual value and recorded these engine repairs as costs of the respective fiscal years 2012 and 2013.
The Tax Authority and Customs Authority understood that engine repairs should have been capitalized, because they met the requirements for asset recognition provided in IAS 16 (predictability of future economic benefits and possibility of reliable measurement), and corresponded to major repairs, in view of the provision in paragraph a) of n.º 5 of Article 5.º of Regulatory Decree n.º 25/2009, of 14 September, because they allowed extending the useful life period of the aircraft, since twelve of the repairs were carried out on engines of aircraft already fully depreciated as of 2013, and with respect to the other three engines, next repairs were forecast for engine 310086 on 17-05-2018, for engine 310097 on 16-12-2016, and for engine 310085 on 08-10-2019, dates after the useful life of the aircraft in which the engines were incorporated.
In IAS 16, § 7, it is established that "the cost of a tangible fixed asset item must be recognized as an asset if, and only if: (a) it is probable that future economic benefits associated with the item will flow to the entity; and (b) the cost of the item can be measured reliably."
In the present case, this second condition was verified, since there were invoices relating to engine repairs.
The situations of repairs to engines of aircraft already fully depreciated and not yet fully depreciated appear to be different, whereby a separate approach is justified.
3.2.1 Issue Regarding Repairs to Engines CAE 310086, CAE 310097 and CAE 310085, of Aircraft Not Yet Fully Depreciated as of 2013
The engines CAE 310086, CAE 310097 and CAE 310085 were incorporated in aircraft with end of useful life in 2016 (aircraft …- end of useful life on 01-03-2016 and aircraft …- end of useful life on 01-02-2016).
These engine repairs were provided for in the maintenance plans monitored by national and international authorities, intended to maintain the safety of the aircraft, whereby they were aimed at ensuring the restoration of their fitness to continue to provide the foreseeable economic benefits during the useful life period.
With respect to these aircraft, it cannot be considered proven that it was to be expected that repairs would provide increases in utility relative to the initially foreseen useful life periods, but only that this would be ensured.
In fact, as resulted from the testimony evidence produced, the forecast of future repairs contained in the … did not mean that the expected useful life of the aircraft would extend to the dates provided for in it, which was verified not to have occurred, since none of the aircraft flew after the year 2016. In any case, at minimum, one must remain in a situation of grounded doubt about whether an increase in useful life was to be expected, and doubts on this matter should be procedurally valued in favor of the Claimant, by force of the provision in Article 100.º, n.º 1 of the Code of Administrative Procedure applicable to tax arbitral cases by force of the provision in Article 29.º, n.º 1, paragraph c) of the RJAT.
Under these conditions, repairs relating to the engines of the three aircraft in which an increase in useful life was not to be expected cannot be considered "major repairs," in view of the concept defined in paragraph a) of n.º 5 of Article 5.º of Regulatory Decree n.º 25/2009, of 14 September, since it clarifies that "major repairs and improvements" are considered "those that increase the value or probable duration of the elements to which they relate."
For this reason, the Claimant's position of considering expenses with repairs as expenses is acceptable.
Consequently, the correction made regarding these expenses with engines of aircraft not yet depreciated is illegal, due to defect of violation of law, due to error regarding the legal premises, and warrants its annulment.
3.2.2 Issue Regarding Repairs to Engines of Aircraft Already Fully Depreciated as of 2013
With respect to repairs to engines of nine aircraft already completely depreciated, it is to be understood that it was to be expected that the repairs in question would provide additional future benefits, derived from the subsequent use of these aircraft, which is accepted by the Parties.
In fact, with respect to aircraft already fully depreciated, repairs aimed at prolonging the possibility of obtaining additional future economic benefits in relation to those that would normally be associated with the aircraft in question, which would be exhausted during the foreseen useful life period.
The reason that the Claimant invokes for not capitalizing the values of repairs relating to these engines is the existence of the stated residual value of 10%, which would not be exceeded even with the value of repairs.
The residual value of an asset is the amount that an entity would currently expect to obtain from the disposal of an asset, after deduction of estimated costs of disposal, if the asset already had the age and condition expected at the end of its useful life (IAS 16, § 6).
If there were no residual value, the benefits arising from the possibility of additional use of aircraft already completely depreciated would justify capitalization, since the value of the asset would be at least that of the repairs.
However, with an existing capitalized residual value, which may or may not correspond to the real value of the asset, repairs to completely depreciated assets can only justify capitalization of their value, in addition to residual value, if the value of the asset becomes greater than what was already recorded.
In the present case, the Tax Authority and Customs Authority understood that capitalization should be made of the value of repairs as if there were no residual value, which could only be justified if it demonstrated that the capitalized residual value was not less than the real value of the aircraft in question.
However, the Claimant argues that this residual value was already excessive even without considering appreciation derived from engine repairs, and this excess came to be recognized accounting in 2014, through the recognition of impairment with respect to the residual value itself, despite the values of engine repairs not having been capitalized.
On the other hand, witness F… stated that the element of greatest relevance in the residual value of aircraft is that of the engines, whereby if the engines are damaged, it is probable that the 10% residual value, if it was determined on the assumption that the engines are functioning, is greater than the real value of the aircraft, and if that is the case, engine repairs will ensure that the residual value, which will be essentially the value of the engines, corresponds to reality.
These points were not sufficiently clarified by the evidence presented and produced, but under these conditions, it is at least doubtful that the appreciation derived from the expected future economic benefits would justify the capitalization of a value of aircraft greater than what was already recorded in the accounting as residual value, because the fact that impairment was recognized in 2014 with respect to this residual value, even without the increase that could result from the capitalization of the value of repairs, without other cause for decrease in value having been proven, justifies at least doubt about the correspondence to reality of the Claimant's thesis that already in 2012 and 2013 the value of aircraft, even with repairs, would not exceed the capitalized residual value.
Also here, by force of the stated Article 100.º, n.º 1 of the Code of Administrative Procedure, doubt should be valued in favor of the Claimant, which amounts to processing it as a premise that residual values already encompassed the values of repairs in question.
Thus, this correction also suffers from the defect of error regarding factual premises that warrants its annulment, in terms of Article 163.º, n.º 1, of the Code of Administrative Procedure.
3.2.3. Measurement of Depreciations
However, if it were understood that capitalization of the value of engine repairs to aircraft already completely depreciated was justified, it appears that the calculation method used by the Tax Authority and Customs Authority for calculating depreciations was incorrect, as the Claimant argues.
In fact, the period of expected utility in 2012 and 2013 should have been calculated based on the expectations of use existing at the times of repairs, taking into account the factors indicated in § 56 of IAS 16, which establishes the following:
- The future economic benefits incorporated in an asset are consumed by an entity principally through its use. However, other factors, such as technical or commercial obsolescence and normal wear and tear while an asset remains idle, often result in the diminution of the economic benefits that could have been obtained from the asset. Consequently, all the following factors are considered in determining the useful life and an asset:
(a) Expected use of the asset. Use is assessed by reference to the capacity or expected physical output of the asset.
(b) Expected normal wear and tear, which depends on operational factors such as the number of shifts during which the asset will be used and the programme of repairs and maintenance, and the care and maintenance of the asset whilst idle.
(c) Technical or commercial obsolescence arising from changes in, or improvements in, production, or from a change in the market demand for the service or product output of the asset.
And
(d) Legal or other limits on the use of the asset, such as the expiry dates of related leases.
As is evident from section III.3.2. of the Tax Inspection Report, the Tax Authority and Customs Authority did not take into account the Claimant's expectations of use, nor did it apply any of the factors indicated here, having explained its option in these terms:
We opted to use historical data, because they correspond to actual data, actual times, while estimated times may be subject to changes.
We used this criterion because, according to information provided by the taxpayer (annex 5, pg. 3), the regularity of maintenance depends on flight hours and conditions of the aircraft itself.
Implementing this option, the depreciation calculation tables show that the Tax Authority and Customs Authority determined the value of depreciations only taking into account historical data, that is, it understood that the expected useful life of each aircraft in 2012 and 2013 was equivalent to the period that elapsed between the repair of each engine carried out in 2012 or 2013 and the previous repair of the same engine.
To prove this, take as an example the first engine referred to in the table relating to fiscal year 2012:
The Tax Authority and Customs Authority determined two values of "useful life" for each engine:
– in field 6, it indicated as "useful life" the value in years corresponding to the period that elapsed between the previous engine repair and the date of removal: 2.64 (corresponding, with rounding, to 964 days);
– in field 9 the Tax Authority and Customs Authority indicated a value of "useful life" corresponding approximately to the number of years between the date of incorporation of the engine in each aircraft and the estimated date for new intervention: 7 years.
The depreciation rate indicated in field 10, which was the one used to determine the "annual quota" for this engine, is that of 37.86%, corresponding to 2.64 years of useful life and not to 7 years of useful life.
It is this criterion of the depreciation rate corresponding to the period that elapsed between the previous intervention in each engine and its removal that was applied to the calculation of all the other annual quotas indicated in the tables referred to.
That is, the Tax Authority and Customs Authority understood that the expected useful life of each aircraft was equivalent to the period that elapsed between the repair of each engine carried out in 2012 or 2013 and the previous repair of the same engine.
This calculation criterion has no legal support.
In fact, this criterion is not provided for in IAS 16 and does not observe its § 56, in prescribing that "all the following factors are considered in determining the useful life of an asset."
On the other hand, in harmony with the provision in Article 31.º, n.º 5, of the IRC Code in the version in force in 2012 and 2013, "in the case of assets acquired in used condition or major repairs and improvements to asset elements subject to deterioration, the corresponding depreciation rates are calculated based on the period of expected utility of one and the other."
In the case of assets acquired in used condition or major repairs and improvements to asset elements subject to deterioration, the corresponding depreciation rates are calculated based on the period of expected utility of them.
The same imposition of the "period of expected utility" to determine depreciation and amortization rates is made in n.º 2 of Article 5.º of Regulatory Decree n.º 25/2009, of 14 September, with respect to "major repairs and improvements," understood as those "that increase the value or probable duration of the elements to which they relate" [n.ºs 2, paragraph c) and 5, paragraph a) of the stated Article 5.º].
In the present case, the Tax Authority and Customs Authority did not determine the "period of expected utility" based on the factors imposed by IAS 16, but rather based on the actual utility that previous repairs of the same engines had, which does not allow any judgment about the period of expected utility for the aircraft in 2012 and 2013, since it was not even verified that the previous repairs of each of the engines were identical to those carried out in each of them in the years 2012 and 2013.
Thus, also for this reason, if it were understood that capitalization should have been carried out, the corrections relating to engines of aircraft already completely depreciated suffer from the defect of violation of law that warrants its annulment.
3.3. Issue Regarding the Expense Relating to Employee Passage Facilities
In the context of the Claimant's integration into group B…, an agreement was entered into through which B… undertakes, among other things, to provide the Claimant with the necessary means for compliance with the rights and benefits of the Claimant's employees, among which are the passage facilities made available to the generality of the Claimant's employees (document 21 attached to the request for arbitral pronouncement, whose contents are hereby reproduced).
The Claimant has been using, for use by its employees, aircraft space not commercialized or sold by B…, paying the latter an amount fixed by agreement between the companies.
The Claimant considers that the use of these spaces constitutes a social welfare benefit, in that it represents something that A… makes possible for the company's employees, generally and as part of a social welfare policy in the company, and considered the incurred expense deductible for IRC purposes, because it is a social welfare benefit generally applicable to personnel, in terms of Article 43.º of the IRC Code.
The Tax Authority and Customs Authority understood in the Tax Inspection Report the following:
"Expenses with personnel will be deductible, if they fall within paragraph d) of n.º 1 of Article 23.º or Article 43.º, both of the IRC Code. In order to be subsumed to the provision of Article 23.º of the IRC Code, it is necessary that they be indispensable for obtaining income subject to tax or for the maintenance of the income-producing source and that they result in income in the sphere of the beneficiaries, which is not the case here.
Expenses with the PAX facility regime are a social benefit granted to employees and their family members, which results in the possibility of them carrying out airplane trips, paying only airport taxes, whereby they do not constitute expenses indispensable for the maintenance of the income-producing source.
The cost incurred with this social benefit does not correspond to income taxed without income tax base in the sphere of its beneficiaries, A… cannot establish the correspondence between the amount paid to B… and the passage facilities actually utilized, and consequently cannot allocate this cost to each of its employees.
With the possibility of deducting these expenses excluded in terms of Article 23.º of the IRC Code, it is necessary to assess whether the conditions of Article 43.º of the IRC Code are met, the standard that the taxpayer invokes as the premise for the deduction of the previously identified expenses."
(...)
"The previously cited standard provides for the deductibility of expenses with the provision of social benefits to company personnel, whose individualization is complex or difficult. Deductible are the expenses taxatingly listed, or those that, despite not being listed, are subject to recognition by the Directorate-General of Taxes (current Tax Authority and Customs Authority - ATA).
The passage facility regime is not taxatingly provided in n.º 1 of Article 43.º of the IRC Code, whereby, and taking into account the wording of that standard, its deductibility is conditioned on obtaining recognition from the ATA.
A… does not have recognition of passage facilities as social welfare benefits, whereby the expense with the acquisition of this service from B… cannot be deductible for tax purposes."
The Claimant argues that the amount it pays to ensure these passage facilities constitutes an expense of the Claimant resulting from a contractual binding protected by law, imperative and compulsory, and in that measure, an undeclinable obligation, an expense incurred in compliance with a contractually protected legal duty (Article 23.º of the IRC Code).
The Claimant further argues, in summary, the following:
– it cannot fail to incur the expense in question, having in its employ employees who are holders of a labor relationship that includes the benefit in question, in the exact measure that this expense, once integrated in the set of social and labor benefits of the employee, enjoys the protection that results from law, and in that measure, constitutes a charge that falls within paragraph d) of n.º 2 of Article 23.º of the IRC Code;
– the expense incurred is an expense of the Claimant with the labor factor, in benefit of good working conditions, employee satisfaction, labor peace in the company and its productivity, clearly provided for in Article 23.º of the IRC Code.
– this expense is indispensable for the achievement of revenues and for the maintenance of the income-producing source.
It was not proven that there is a written commitment of the Claimant to ensure such passage facilities to its employees, but it resulted from the evidence produced, specifically from the testimony of witness C…, that the benefit in question has been recognized by the generality of airline companies and that its elimination would surely be a source of serious labor conflicts.
Article 23.º, n.º 1 of the IRC Code, in the version in force in 2012 and 2013, establishes that "expenses are those that are demonstrably indispensable for the achievement of revenues subject to tax or for the maintenance of the income-producing source."
As has been understood, the concept of indispensability contained in Article 23.º of the IRC Code must be understood from an economic and business perspective, being considered indispensable all expenses that aim, directly or indirectly, to implement the interest of the company, which is the obtaining of profit, regardless of the success or failure of these acts to achieve this objective.
A benefit of employees whose elimination is a source of labor conflicts should be considered indispensable for the achievement of revenues subject to tax, since it is to be presumed that, if such conflicts existed, the revenues that could be obtained when they do not exist would not be obtained.
In any case, it is manifest that, aiming at this objective of ensuring labor peace in the company, these expenses must be understood as being incurred in the interest of the company, which allows the conclusion of their indispensability, in view of Article 23.º, n.º 1 of the IRC Code and consequent deductibility for the formation of taxable profit.
In this context, with the requirements met for the general deductibility of these expenses, non-compliance with the conditions provided in Article 43.º, n.º 1 of the IRC Code, which provides for an expansion of the deductibility of expenses with social welfare benefits, regardless of their indispensability for the formation of taxable profit, is irrelevant.
Thus, the Claimant is correct on this issue.
3.4. Issue of Autonomous Taxation Regarding Vehicle Expenses
The Claimant recognized parking expenses in sub-account 6222709900 of € 208,543.08 in 2012 and of € 246,677.48 in 2013, evidenced by invoices issued by M….
The Tax Authority and Customs Authority did not question the deductibility of these expenses, but understood that autonomous taxation of 10% provided in n.º 3 of Article 88.º of the IRC Code applies to them, with reference to its n.º 5, whereby it assessed the amount of € 20,854.31 regarding fiscal year 2012 and €24,667.91 regarding fiscal year 2013.
N.ºs 3 to 5 of Article 88.º of the IRC Code, in the version given to them by Law n.º 55-A/2010, of 31 December, establish the following:
3 - Charges relating to light passenger or mixed vehicles are subjected to autonomous taxation at the rate of 10%, whose acquisition cost is equal to or less than the amount set in terms of paragraph e) of n.º 1 of Article 34.º, motorcycles and mopeds, effected or incurred by taxpayers not exempt subjectively and who exercise, as their main activity, an activity of a commercial, industrial or agricultural nature, are subjected to autonomous taxation, excluding vehicles powered exclusively by electrical energy.
4 - Charges relating to light passenger or mixed vehicles are subjected to autonomous taxation at the rate of 20%, whose acquisition cost exceeds the amount set in terms of paragraph e) of n.º 1 of Article 34.º, effected or incurred by taxpayers mentioned in the previous number.
5 – Charges relating to light passenger vehicles, motorcycles and mopeds, including, in particular, depreciation, rents or leases, insurance, maintenance and conservation, fuel and taxes inciding on their possession or use, are considered as charges relating to vehicles.
As stated, the necessity of such expenses and their deductibility is not in question, which was accepted by the Tax Authority and Customs Authority.
The Claimant argues that the literal element of the standard does not permit autonomous taxation of expenses with vehicles that are not the company's own, and the logical element of interpretation demonstrates that this would make no sense, because, among other things, it would require knowledge, possession and processing of data about the personal life and assets of its employees.
In the present case, the vehicles that occupied the parking spaces are not identified, it not having been determined, in particular, their value, nor whether they were light passenger or mixed vehicles, whether they were or were not powered exclusively by electrical energy, and it results from the testimony evidence produced that they were parking of crew members' vehicles, paid by the Claimant to ensure the punctuality of its flights.
The Claimant is correct that the autonomous taxation rates provided in n.ºs 3 and 4 of Article 88.º of the IRC Code are based on the premise that these are expenses with vehicles of the taxpayers themselves, since only in that case will there be information regarding their acquisition cost and characteristics, which are decisive elements to define whether there is taxation and the applicable rate.
As the Claimant correctly points out, n.º 5, when referring as subject to autonomous taxation the taxes inciding on the possession and use of vehicles, confirms that this taxation is only applicable to expenses with vehicles of the taxpayers themselves, since, obviously, it would make no sense to pay autonomous taxation with respect to taxes inciding on the possession and use of the vehicles of others.
Thus, the application of the stated autonomous taxation suffers from the defect of violation of law, specifically n.ºs 3 and 5 of Article 88.º of the IRC Code, which warrants its annulment [Article 163.º, n.º 1, of the Code of Administrative Procedure, subsidiarily applicable in terms of Article 2.º, paragraph c) of the General Tax Law].
3.5. Assessment of Compensatory Interest and Account Reconciliation Statements
The assessments of compensatory interest and account reconciliation statements have as their premise the IRC assessments, whereby the illegality affecting these repercutes on those assessments and statements.
For this reason, the annulment of these assessments and statements is also warranted.
3.6. Issues of Prejudiced Judgment
As the request for arbitral pronouncement is to be judged well-founded for the reasons invoked, the judgment of other issues is prejudiced, as it would be futile (Article 130.º of the Code of Civil Procedure).
4. Interest, Guarantee Costs and Applicable Costs
The Claimant, in addition to requesting the annulment of the acts of assessment of IRC and compensatory interest and the account reconciliation statements, also requests "interest, costs with the provision of guarantees and applicable costs."
4.1. Compensatory Interest
It is not clear what interest the Claimant is referring to in the request it made, it being presumed that it will refer to compensatory interest.
The right to compensatory interest depends on "payment of the tax debt in an amount exceeding the legally due" (Article 43.º, n.º 1 of the General Tax Law).
It was not proven that the Claimant paid the amounts assessed, whereby it cannot be considered demonstrated that there is a right to compensatory interest.
Thus, this request is dismissed, without prejudice to any rights that may be recognized in execution of this judgment, in terms of Article 24.º, n.º 5 of the RJAT.
4.2. Indemnification for Guarantee
The Claimant makes reference in the request it formulates to "costs with the provision of guarantees," it being presumed that it will be referring to guarantees it may have provided in connection with the amounts assessed, specifically to suspend tax enforcement actions that may have been instituted for their collection, since it is in situations of this type that there is reason to consider costs of this type in arbitral cases, in terms of Articles 53.º of the General Tax Law and 171.º of the Code of Administrative Procedure.
In the present case, it was not demonstrated that any tax enforcement action was instituted for collection of the amounts assessed, nor that any guarantee was provided, whereby there is no basis for awarding indemnification for undue guarantee under the provision in Article 53.º of the General Tax Law.
Thus, this request is dismissed, without prejudice to any rights that may be recognized in execution of this judgment.
4.3. Responsibility for Costs
With respect to responsibility for costs, in arbitral cases in which an Arbitrator is designated by the Taxpayer, "the arbitration fee is entirely borne by the taxpayer and paid in its entirety," in terms of n.º 2 of Article 5.º of the Regulation of Costs in Tax Arbitration Cases.
Being in a case of this type, it is to the Claimant that the entire responsibility for the costs of the case falls, which are already paid.
For this reason, there is nothing further to decide on this matter.
5. Decision
Accordingly, the Arbitrators of this Tribunal Arbitral agree as follows:
a) To judge the request for arbitral pronouncement well-founded;
b) To annul the IRC assessments n.º 2016 … and n.º 2016 …;
c) To annul the compensatory interest assessments n.º 2016 …and n.º 2016…;
d) To annul the account reconciliation statements n.º 2016 … and n.º 2016 …;
e) To judge the requests for compensatory interest and indemnification for guarantee as dismissed, without prejudice to any rights that must be recognized in execution of judgment.
6. Value of the Case
In accordance with the provision in Article 306.º, n.º 2 of the Code of Civil Procedure and Article 97.º-A, n.º 1, paragraph a) of the Code of Administrative Procedure and Article 3.º, n.º 2 of the Regulation of Costs in Tax Arbitration Cases, the case is valued at € 1,311,172.58.
Lisbon, 31-03-2017
The Arbitrators
(Jorge Manuel Lopes de Sousa)
(José Alberto Pinheiro Pinto)
(Maria Manuela do Nascimento Roseiro)
Dissenting Opinion
I partially disagree with the learned decision (sections 3.2 and 3.3) that prevailed, with the following grounds:
I. Aircraft Engine Repairs (3.2.)
On this issue, it was decided that, regardless of the relevance of the recording of a residual value, the corrections made by the Respondent should always be annulled because they were improperly grounded regarding the duration of the expected useful life period. Although any combination of criteria considered relevant by the TA could raise objections, I accept that the stated corrections should have been made and justified in a more substantiated manner. However, I must note my disagreement regarding the relationship established by the Claimant between capitalization of expenses with repairs and residual value of the assets in question, when it argues that "the decision regarding the accounting treatment to be carried out associated with repairs, that is, asset versus expense, would have to be weighed (…) in light of the possibility of future recoverability of the asset in terms of IAS/IFRS." If the Claimant believed the residual value was inappropriate, it should have revised it, considering the existence of impairments in the fiscal year in question or in one of the following ones. The decisive issue in the case, as far as I am concerned, is that relating to the effect of repairs to assets that are already
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