Process: 429/2017-T

Date: May 21, 2018

Tax Type: IRC

Source: Original CAAD Decision

Summary

CAAD arbitration case 429/2017-T addresses the fundamental IRC principle of especialização dos exercícios (accrual accounting) and the deductibility of €499,830.49 in expenses relating to Social Security contributions (€486,281.14) and IMT (€13,549.35) incurred in financial year 2013. The taxpayer, A… S.A., argued that tax and contributory obligations only become certain, liquid and due upon formal assessment, and therefore expenses should be deductible in the year of notification (2013), not when originally incurred (2007-2010 for Social Security, 2009 for IMT). The company contended that requiring taxpayers to anticipate future assessments violates principles of justice and contributive capacity. The Tax Authority countered that Article 18 of the IRC Code requires expenses to be recognized when incurred, regardless of payment timing, unless unforeseeable or manifestly unknown at year-end closure. The Authority argued the taxpayer had constituted provisions for Social Security risks in 2007 (€1,069,739.00), demonstrating awareness of the liability. Regarding IMT, the Authority alleged attempted tax evasion detected through inspection. The dispute centers on whether these expenses were truly unforeseeable under Article 18(2) CIRC, or whether the taxpayer should have recognized them in the original years when the underlying obligations arose, consistent with the principle of taxation of real profit and proper periodization of taxable income.

Full Decision

JUDGMENT

1. REPORT

1.1

A…, S.A., a taxable person, legal entity with registration number …, with registered office at Rua do …, …-… …, came, pursuant to article 2, paragraph 1, letter a) and article 10, paragraphs 1 and 2 of Decree-Law no. 10/2011, of 20 January (hereinafter RJAT) and articles 1 and 2 of Administrative Order no. 112-A/2011 of 22 March, to request the constitution of an arbitral tribunal.

1.2

The respondent party in these proceedings is the TAX AND CUSTOMS AUTHORITY.

1.3

The Deontological Council of the Centre for Administrative Arbitration (CAAD) appointed the undersigned to form the Collective Arbitral Tribunal, having notified the parties accordingly, and the Tribunal was constituted on 20 September 2017.

1.4

The request for arbitral decision has as its immediate object the dismissal of the hierarchical appeal and, as mediate objects, the express dismissal of the administrative complaint presented by the Applicant and the corporate income tax (IRC) self-assessment act of the Applicant relating to the financial year 2013, insofar as it corresponds to the non-deduction in the calculation of taxable profit of an expense related to Social Security contributions made in 2013 and an expense related to a Property Transfer Tax (IMT) settlement in the same financial year, settlement, complaint and appeal which are better identified in the Applicant's request and in the documents attached thereto, to which reference is made here.

The applicant contends for the illegality of the dismissal of the hierarchical appeal and consequently of the prior dismissal of the administrative complaint, insofar as they disregard the recognition of the illegality of part of the IRC self-assessment and consequent municipal surcharge relating to the financial year 2013 of the applicant and, furthermore, for the illegality of such part of the IRC self-assessment (including municipal surcharge) and consequent municipal surcharge relating to the financial year 2013, more specifically with respect to the non-deduction for purposes of determining the taxable profit of the Applicant company of the amount of € 499,830.49 (€ 486,281.14 in Social Security contributions and € 13,549.35 in IMT), which gives rise to excess tax amounting to € 132,455.08, thus broken down: € 124,957.62 in IRC and € 7,497.46 in consequent municipal surcharge.

The Applicant argues that a tax or contributory obligation only becomes certain, liquid and due with the execution of an assessment act and that, in turn, the temporal attribution of expenses should only operate downstream of this event, or of an estimate of the tax when physically relevant, due to the impossibility of dealing with the ethereal and abstract plane of the law, instead requiring that in concrete terms an obligation be ascertained (or at least estimated, when fiscally relevant) (objectification).

Furthermore, it contends that, in the case of self-assessment, it is not required to impose on the taxpayer the obligation to sacrifice its understanding and self-assess what it judges the administrative entity will consider as due, under pain of not considering the expense relating to the official assessment issued by the administrative entity in another financial year.

It argues that the Tax Authority's interpretation did not respect the principle of justice or the principle of contributive capacity and that it has the right to deduction for purposes of taxable profit of the amount of € 499,830.49, of which € 486,281.14 relates to Social Security contributions and € 13,549.35 to IMT.

It concludes by petitioning for a declaration of illegality of the dismissal of the hierarchical appeal, the complaint and the illegality (partial) of the self-assessment relating to the financial year 2013 and the consequent annulment in that respect, as well as the reimbursement of the amounts paid by it as a consequence of such assessments, plus compensatory interest.

1.5

The TAX AND CUSTOMS AUTHORITY presented its response on 17 October 2017.

It defended itself by way of challenge, alleging that the principle of specialization of financial years, which finds its substance in article 18 of the IRC Code, determines that revenues and expenses are recognized when obtained or incurred regardless of their receipt or payment, and must be included in the financial statements of the periods to which they relate, unless, in accordance with paragraph 2 of the same article, on the date of closure of the accounts of the period to which they should have been attributed, they were unforeseeable or manifestly unknown, which, in its view, did not occur in the present case since the Applicant would have been aware of the existence of the process being conducted at Social Security since 2007, the year in which the first process relating to contributions in arrears for prior years arose and had already constituted a provision for risks and charges related to Social Security expenses in 2007, in the amount of 1,069,739.00€.

It further argues that the Social Security debt became certain, liquid and due as soon as the Applicant submitted the income statements of its employees with all salary components, as the legal norms that led to an inspection procedure against the Applicant already existed when the statements relating to those years were submitted, and therefore the Applicant is not correct when it states that its Social Security debt only became certain, liquid and due with the final decision issued in the administrative procedure conducted by Social Security and the respective notification in 2013 of the amounts ascertained in that decision, as it already was much earlier (2007 to 2010).

As for the IMT, the Respondent alleges that the Applicant "clearly attempted to evade payment of the tax that was legally due, only ceased not to pay because it was the subject of an inspection procedure that detected the situation" and that, therefore, also here, the expense was not at all unforeseeable, since the said correction results from the legal norm, previously existing as at the date of 2009, and capable of being known by its addressees and that "at most the Applicant can state that it did not foresee an inspection procedure that would detect the attempted evasion of payment", and therefore "such ignorance does not support the purpose of unforeseeability, which is why, in accordance with the principle of periodization of taxable profit, set out in article 18 of the IRC Code, such expense should have been attributed to the year to which it relates, that is 2009, and not to the year of its payment, that is 2013".

It alleges that the non-consideration of all expenses and revenues obtained or incurred in a given year or financial period constitutes not only a violation of the principle of specialization of financial years (article 18 of the IRC Code), but also violates the principle of taxation of real profit, because if not declared by the taxpayer in a given year or financial period, all revenues and profits economically attributable to it, the profit that comes to be ascertained cannot, naturally, correspond to the real profit of that year or financial period, and it is in relation to that period of time that the real profit, for purposes of taxation, must be assessed.

It concludes by contending for the lack of merit of all claims, including that relating to compensatory interest, excepting, as to the latter, that even if the former were to succeed, there would never be grounds for compensatory interest as there is, in its view, no error attributable to the services that would justify it.

1.6

Having been notified of the Tribunal's intention to waive the arbitral tribunal meeting provided for in article 18 of the RJAT, the parties did not come to object.

1.7

On 23 November 2017 the Applicant presented its arguments, reiterating the position already set forth in the request for constitution of the Arbitral Tribunal and further arguing that the Respondent entered into contradiction, with respect to the Social Security issue, as to the moment at which the Social Security debt becomes certain, liquid and due.

It further contends that "since the expense was not previously deductible by way of estimate/provision (in this the Tax Authority and taxpayer agree), and the expense having only been materialized/substantiated in settlement in 2013, it then belongs fiscally to the ascertainment of the taxable profit of 2013, regardless of the technical question of whether from an accounting point of view this expense should enter into the ascertainment of the accounting result of the financial year 2013 (and it is understood that yes, reversing prior accounting provisions and recording in counterpart this expense which now gained actual existence, as opposed to potential) or whether it should instead directly affect the account of equity (negative equity variation) without passing through the results account of the financial year".

1.8

The Respondent presented its arguments on 24 November 2017, in which it maintains in full the content of its Response duly presented, reiterating the arguments set forth therein. It adds that, in its view, no taxpayer can carry any revenue or expense to a different year, even if it has paid or received it in that other year, and therefore, in light of this principle, the Tax Authority cannot accept the deduction of this expense in the year 2013 only because it was in this year that the payment occurred, substantiating this thesis with several decisions of higher courts, which it identifies, and continuing to sustain that it is with the tax event that the tax obligation is born and that, in the case of Social Security, the determination of this value is not dependent on any other ascertainment other than that resulting from the law, and this is not capable of either ignorance or unforeseeability, it is at that moment that the obligation becomes liquid, certain and due.

As for the IMT, the Respondent continues, in its arguments, to sustain that the correction results from a legal norm in force as at the date of the facts, i.e. in 2009, and capable of being known by its addressees who cannot invoke their ignorance. This is why, in accordance with the principle of periodization of taxable profit, set out in article 18 of the IRC Code, such expense should have been attributed to the year to which it relates, that is 2009, and not to the year of its payment, that is 2013.

1.9

On 15 February 2018 the Applicant came to attach to the proceedings proof of payment of the subsequent court fees.

1.10

The Tribunal issued two successive orders, on 22 February and 16 March 2018, extending the period fixed for the arbitral decision, given the complexity of the matter sub judice, and another, on 22 March 2018, inviting the parties to send their written submissions in editable format, pursuant to the principle of cooperation with the Tribunal in article 130 of the Code of Civil Procedure.

2. PRELIMINARY MATTERS

The Tribunal was regularly constituted and is competent.

The parties have legal personality and capacity, are proper parties and are regularly represented. The Tribunal was regularly constituted and is competent.

The proceedings do not suffer from any defects that would render it invalid.

3. FINDINGS OF FACT

With relevance for the decision on the merits, the Tribunal considers the following facts proven:

  • On 27 May 2014 the applicant submitted its IRC Form 22 return for the financial year 2013 (Document 1, with PI);

  • It subsequently presented, on 19 June 2015, a replacement return considering the right to deduct from taxable profit the total amount of € 499,830.49 (€ 486,291.14 relating to Social Security contributions and € 13,549.35 relating to IMT) which it had not considered in the first return (Document 2, with PI);

  • The Applicant paid, in addition to the fixed salary, amounts relating to extraordinary bonuses, contingent bonuses, supplementary allowance, annual bonus, extraordinary premiums and productivity premiums relating to the months of March, June, September and December of 2007; March, April, June, September and December of 2008; March, June, September and December of 2009 and March, April, June, September and December of 2010 (Document 12 with PI);

  • Such amounts were not declared by the Applicant to Social Security in order to be included in the contribution base for that social security scheme;

  • Social Security instituted an investigation process against the Applicant in 2011 for the non-declaration of the said variable remuneration;

  • Following that investigation process, Social Security also instituted an enforcement procedure on 19 December 2013 for collection of the contributions it considered to be in arrears (Document 11 with PI);

  • The Applicant paid such contributions as part of that enforcement procedure (Document 11 with PI);

  • The Applicant had constituted a provision for risks and charges related to Social Security expenses in 2007, in the amount of 1,069,739.00€;

  • In the period of 2013, the total amount of provision for other risks and charges that had been made by the Applicant in prior tax periods amounted to € 985,786.70, an amount that was fully added in field 721 of the IRC return (Form 22) for the tax period of 2012;

  • In the course of the tax period of 2013, following the aforementioned payment of the said contributions, the Claimant proceeded to reverse the entirety of the amount of the said provision, with the income resulting from the reversal being disregarded for purposes of determining the respective taxable profit in respect of IRC;

  • There was judicial homologation of the decision to waive the application of a penalty to the claimant for the practice, in material co-authorship and in the consummated form, of a crime of fraud against Social Security, provided for and punishable by article 106 of the Social Security Contributions and Benefits Law (RGIT) (see document 12, attached by the Claimant);

  • On 18 February 2009 a contract was entered into between the Applicant and company B… Ltd., tax identification number …, for the concession of operation of the quarry contained in urban and rustic articles …, …, … and … of the parish of …, for the value of 245,000€, payable 200,000€ upon signature of the contract and 45,000€ on 30.06.2009;

  • On 2 July 2009 the Applicant and that company executed a deed of purchase and sale of part of the real property subject to the concession;

  • On 3 July 2009 the Applicant and that company executed a deed of purchase and sale of the remaining part of the real property subject to the concession;

  • In 2013 an inspection action occurred as a result of which a correction to the IMT relating to those acquisitions was made, as the inspection considered that the amount paid when the deeds of purchase and sale of the real property were executed, which corresponded to the tax property value (VPT) thereof, did not take into account the amount paid previously by the now purchasing Applicant for the right of exploitation;

  • The Applicant did not contest such correction to the IMT assessment and promoted, in 2013, the settlement of the IMT in question;

  • And paid it, in the same year, in the amount of € 13,549.35;

  • When submitting on 27 May 2014 its Form 22 return for 2013, the applicant did not deduct the amount of those expenses, but rather reversed its accounting treatment by adding them for purposes of calculating taxable profit in field 752 of table 7 of the said Form 22;

  • In order to effect such fiscal deduction in the financial year 2013, the applicant then submitted an administrative complaint against its tax self-assessment in that financial year;

  • The complaint was dismissed;

  • The Applicant presented a hierarchical appeal against the dismissal decision;

  • The hierarchical appeal was also dismissed by order of 13 April 2017 on the grounds set out in the information preceding it in which it was concluded: "In accordance with the principle of legality in conjunction with the principle of specialization of financial years provided for in article 18 of the IRC Code and the principle of justice which guides the action of the Tax Authority preventing excessive taxation but obligating constant vigilance against behaviors of tax evasion and fraud, it is not acceptable to recognize the fiscal deductibility of expenses incurred with Social Security contributions and IMT in the financial year 2013, when they relate to prior financial years and were known and foreseeable" and which was notified to the Applicant on 19 April 2017.

Unproven Facts

No other facts with relevance for the assessment of the merits of the case were alleged by the parties that were not proven.

Reasoning on the Findings of Fact

The conviction regarding the facts stated as proven was based on the allegations of the Applicant and the Respondent not contested by the other party, supported in the documentary evidence submitted by both the Applicant and the Respondent, whose authenticity and correspondence to reality were also not questioned.

It should be noted that the fundamental divergence of the parties is, in essence, relative to the legal classification and framework.

4. LEGAL ANALYSIS

It should be noted preliminarily that, as recently stated by the Supreme Administrative Court [see Judgment of 14 March 2018, in Case no. 0716/13/2nd Division], it is settled and uniform case law that the Court does not have to assess or consider all the arguments or considerations that the parties may have produced. This is because one thing are the issues submitted to the court and another are the arguments used in their defense. Since only the procedural claims formulated by the parties to the court have the status of issues and not the arguments used by them in defense thereof, the court is not bound to assess the arguments used by the parties.

The act object of the request for decision of the Arbitral Tribunal is, quoting the Applicant, "(...)the dismissal of the hierarchical appeal above identified and, consequently, the express dismissal of the administrative complaint and (and in final or ultimate terms), the IRC self-assessment act of the applicant relating to the financial year 2013, insofar as it corresponds to the non-deduction in the calculation of taxable profit of an expense relating to Social Security contributions effected in 2013, and an expense relating to a settlement of IMT in the same financial year (see Documents nos. 1 and 2) (...)".

ISSUES TO BE DECIDED

In addition to constitutional issues, the Applicant raises the following questions:

1st Question: Whether the Applicant could, in the situation of the present case, proceed, in the income tax return for the financial year 2013, to deduction in the calculation of taxable profit of an expense relating to Social Security contributions arising from remuneration and other salary increases to employees earned in prior financial years;

2nd Question: Whether it is equally admissible to deduct from taxable profit in the financial year 2013 the amount of € 13,549.35 relating to a correction to the IMT relating to acquisitions of real property by the Applicant in 2009, as the inspection considered that the amount paid when the deeds of purchase and sale of the real property were executed, which corresponded to the tax property value (VPT) thereof, did not take into account, as the base for taxation, the amount paid previously for the right of exploitation of a quarry on the real property subject to the sale; and

3rd Question: Whether, if it were considered that the Applicant could effect those deductions and, consequently, if the orders dismissing the administrative complaint and hierarchical appeal presented by the Applicant and its self-assessment were deemed illegal, compensatory interest would be due for the amounts it unduly paid.

Let us now proceed.

1st Question – The issue of the expenses paid by the Applicant in the year 2013 in the amount of € 486,281.14 relating to Social Security contributions arising from bonuses and gratifications granted to its employees between 2007 and 2010

Article 18, paragraph 1 of the IRC Code has the following wording: "Revenues and expenses, as well as other positive or negative components of taxable profit, are attributable to the tax period in which they are obtained or incurred, regardless of their receipt or payment, in accordance with the regime of economic periodization."

As Rui Duarte Morais explains, "the attribution of a revenue or expense to a certain financial year obeys an economic criterion (and not a financial one), that is, the operations carried out in it affect its result, regardless of the receipt or payment of the respective price or other consideration. Credits and debits are recorded and not payments and receipts.

(…) For the purpose of the temporal attribution of an expense, the moment at which the company extinguishes its debts is not relevant, but rather the moment when such obligations are born. Included therefore in the revenues and expenses of the financial year are the expenses originating in the same, even if to be received or paid in the future".

Thus, and manifestly, it follows from this provision that, in the case sub judice, the expenses in question should have been considered for fiscal purposes in the year of birth of the respective obligations (in the case of Social Security contributions, in the periods in which the salaries, principal and accessory, of the workers should have been declared) and not in the year of effective payment of the contributions.

In addition, the solution of article 18, paragraph 1 of the IRC Code, even if it may not coincide with accounting, must always prevail in light of the provision in article 17-1 of the IRC Code.

It should be noted, en passant, that the non-consideration of all expenses and revenues obtained or incurred in a given year or financial period constitutes not only a violation of the aforementioned principle of specialization of financial years (article 18 of the IRC Code), but also violates the principle of taxation of real profit, because if not declared by the taxpayer in a given year or financial period, all revenues and profits economically attributable to it, the profit that comes to be ascertained cannot, naturally, correspond to the real profit of that year or financial period, and it is in relation to that period of time that the real profit, for purposes of taxation, must be assessed.

The exception established in paragraph 2 of the same article has the following wording: "Positive or negative components considered as relating to prior periods are only attributable to the tax period when on the date of closure of the accounts of the period to which they should have been attributed they were unforeseeable or manifestly unknown."

As stated in the Judgment of the Supreme Administrative Court of 04.02.2008 (Case 0807/07), this principle (specialization of financial years), "(…)aims to tax the wealth generated in each financial year and hence its respective revenues and expenses are accounted for as they are obtained and incurred, and not as their receipt or payment occur (…) must tend to be conformed and interpreted in accordance with the principle of justice, with constitutional and legal conformation (articles 266, paragraph 2 of the Constitution and 55 of the General Tax Law), in order to allow the attribution to a financial year of expenses relating to prior financial years, provided that it does not result from voluntary and intentional omissions, with a view to operating the transfer of results between financial years.". The same was understood by that Court in the Judgment delivered on 14.03.2018, in Case 0716/13.

It has also been the understanding of the Supreme Administrative Court (SAC) that the non-submission or defective submission of remuneration declarations does not prevent taxpayers from considering the debt as certain, liquid and due, as such failure or error may give rise to the application of a fine, but does not imply that the Applicant cannot settle the respective debt obligation (failure to pay the contribution) on the basis of the elements at its disposal relating to the workers in question, this being the understanding more respectful of the principles of certainty and legal security, as this understanding does not question the alleged uncertainty of the debt (see, for all, the Judgment of the SAC issued in the context of case no. 01431/12, on 19/02/2014).

Thus it is that the Social Security debt becomes certain, liquid and due as soon as the Applicant submitted the income statements of its employees with the salary components, as the legal norms that led to an inspection procedure against the Applicant already existed when the statements relating to those years were submitted.

This means that in the case at hand, there is completely absent the unforeseeability and/or ignorance (article 18, paragraph 2, IRC Code), not imputable to the taxpayer, of the expenses in question (Social Security contributions). To uphold another understanding would be to recognize that ignorance or misinterpretation of the Law would justify its non-compliance and would exempt the offender from the legal consequences established. Which is manifestly contrary to the provision in article 6 of the Civil Code.

In this same vein are, for example, the judgments of the SAC of 5 February 2003 - Appeal no. 1648-02, published in the Official Journal of 25-2-2014, page 217 ["(...)when the IRC self-assessment is made in which expenses with holidays and holiday allowances relating to a year not covered are induly included, the Tax Administration can proceed to the official correction, removing such expenses, in accordance with the principle of specialization of financial years (...)"] and of 25 June 2008 – Appeal no. 291/08 ["(...)for the purpose of paragraph 2 (of article 18 of the IRC Code) positive or negative components are not unforeseeable or manifestly unknown when their non-consideration in the financial year to which they relate is due to an accounting error or other error of the taxpayer itself, as such norm must be interpreted in the sense that such prerequisites, to be relevant, must result from external situations which the taxpayer cannot control (...)"].

Thus it does not appear, in the present case, the unforeseeability of the deductions for Social Security in the years of payment of remuneration, when, in light of the prevailing legislation on the matter, it was absolutely clear the obligation of the employer to make and reflect in the respective declarations the deductions for Social Security on, not only the basic salary of its employees but also on:

  • Seniority bonuses and other amounts established according to the seniority of workers;

  • Commissions, bonuses and other benefits of an analogous nature;

  • Performance, productivity, attendance, collection, driving, savings and other premiums of an analogous nature that have a regular character;

  • Remuneration for the provision of supplementary work;

  • Remuneration for night work;

  • Remuneration corresponding to the holiday period to which the worker is entitled;

  • Christmas, holiday, Easter and other allowances of an analogous nature;

  • Allowances for hazardousness, danger or other special conditions of work provision;

  • Allowances for compensation for exemption from work schedules or equivalent situations; and

  • The amounts of meal allowances, whether provided in cash or in meal vouchers, on the same terms foreseen in the Personal Income Tax Code (CIRS).

Not having proceeded with full compliance of these declarative obligations to Social Security in 2009, it is its own fault.

And this very fact was recognized in the criminal investigation case no. …/12… TAPBL instituted in the Public Prosecutor's Office Services in Pombal, in which it was considered that the now Claimant did not proceed to declare all the amounts paid to its employees [namely those now mentioned in 3) and 4) of the list of proven facts], "(...)acting freely and consciously in the concealment of such amounts (...)" (see Document 12, attached with the request for arbitral decision).

Concluding on this part: no basis appears for failing to apply in the case sub judice the standard regime of periodization of taxable profit, provided for in article 18, paragraph 1 of the IRC Code.

For which reason the claim shall fail as to this question.

2nd Question – Deduction from taxable profit of the financial year 2013 of the amount of € 13,549.35 relating to a correction to the IMT relating to acquisitions of real property by the Applicant, as the inspection considered that the amount paid when the deeds of purchase and sale of the real property were executed, which corresponded to the tax property value (VPT) thereof, took into account the amount paid previously for the right of exploitation

The IMT is levied on onerous transfers of the right of property or partial figures of that right, on real property situated in national territory and is due, as a rule, by the persons, natural or legal, to whom the real property is transferred, with the respective tax obligation arising at the moment the transfer occurs – See, in particular, articles 1, 2 and 4 of the IMT Code.

As for the basis of taxation for the IMT, article 12 of the IMT Code provides that it shall be that contained in the act or contract or else the tax property value of the real property, whichever is greater.

In the present case, between the Claimant and company B… Ltd., tax identification number …, there was executed, on 18 February 2009, a contract for the concession of exploitation of the quarry, contained in urban and rustic articles …, …, … and … of the parish of …, for the value of 245,000€, payable 200,000€ upon signature of the contract and 45,000€ on 30.06.2009 and, on 2 July 2009 and 3 July 2009, the Applicant and that company executed deeds of purchase and sale of the real property subject to that concession.

Considering that the amount paid when the deeds of purchase and sale of the real property were executed corresponded to the tax property value (VPT) thereof, without taking into account the amount paid previously by the now purchasing Applicant for the right of exploitation, additional IMT was assessed in 2013 in the amount of € 13,549.35.

The Applicant promoted, in 2013, the settlement of the IMT in question and proceeded to its payment.

Now, the question that arises is whether this "additional" assessment in 2013 was or could be considered unforeseeable or manifestly unknown so as to benefit from the exception to the standard regime of periodization provided for in the aforesaid article 18, paragraph 1 of the IRC Code, in accordance with paragraph 2 of this provision.

A first note is that there is no evidence in the record that the Applicant even contested this IMT assessment. That matter or tax act is not the object of these proceedings.

The object of the claim in this part is, it is understood, solely to determine whether the Applicant could attribute to the financial year in which payment occurred (2013) this expense with IMT arising from acts of transfer of real property that occurred in 2009.

Now, it does not appear that it is contested or brought into question by the Applicant that the IMT assessment made at the time of the transfer of the real property should not have been altered, as it was by the Tax Authority in 2013 following an inspection action.

There appears thus to permeate the idea that the original IMT assessment based on the VPT of the real property would have been incorrect and that this should rather, as came to happen as a result of tax inspection, be the amount paid previously for the right of exploitation of the real property transferred.

The surprise or unforeseeability is not thus sustained in facts alleged or demonstrated; on the contrary, given the apparently peaceful payment (there is no record that it was contested by the Applicant) of IMT assessed in 2013, this seems even to reinforce, in some way, the foreseeability of that assessment.

Of all the foregoing and in conclusion: it does not appear to have been proven or supported in concrete facts any relevant unforeseeability that would permit accepting the unforeseeable or unknown nature in 2009 of the IMT obligation in the legal-tax framework that came to be recognized, including by the Applicant, in 2013, following the inspection carried out by the Tax Authority services.

From this it will likewise follow the lack of merit of the arbitral claim also in this part, due to the non-verification of the prerequisites of the aforementioned exception to the rule of periodization of taxable profit.

Constitutional Issues Raised by the Applicant

In the grounds of the request for arbitral decision, the Applicant addresses questions of (un)constitutionality.

It is surprising in particular the allegation that if the norm of article 18 of the IRC Code, especially its paragraphs 1 and 2, "(...)were applicable to resolve the question of these proceedings(...) in the interpretation that the Tax Authority made of it is unconstitutional, by violation of the principle of proportionality (prohibition of excess) that results from the establishment of the principle of the democratic rule of law enshrined in article 2 of the Constitution, with particular implementation in articles 18, paragraph 2, and 266, paragraph 2, of the Constitution, and by violation of the constitutional right to effective judicial protection of rights and legally protected interests, established in article 268, paragraph 4, of the Constitution, which does not accord with the imposition that the taxpayer voluntarily self-assess at a given time a given contribution that the administrative authority deems due, under pain of being unable to deduct the inherent fiscal expense in respect of IRC with that contribution if the assessment thereof is later imposed on it in a subsequent financial year by the administrative entity (official assessment)(...)" and deems violated the principle of justice in the consideration that, if we understand correctly, no prejudice resulted for the Public Treasury from any possible error of the Applicant when it disregarded the expenses of the financial year 2009, and attributes or reflects them in the financial year 2013 [articles 70 et seq. of the Tax Procedure Code].

No basis appears, in particular, factual and legal foundation minimally sustained or sustainable to consider the occurrence of "(...) violation of the constitutional right to effective judicial protection of rights and legally protected interests, established in article 268, paragraph 4, of the Constitution (...)" and of the principle of proportionality and the prohibition of excess nor any administrative imposition of tax assessment.

The principle of proportionality obliges the Administration not to affect the rights or legitimate interests of taxpayers in terms not adequate and proportionate to the objectives to be achieved – See article 7 of the Administrative Procedure Code.

In the case sub judice, the assessments and procedures of the Tax Authority occurred, as was seen, purely and simply from the Law and from the principle of legality to which the Tax Administration is especially bound and within total and absolute legal and constitutional normality.

On the other hand, it does not appear, even if intimated, the invoked or insinuated affection of the Applicant's right to effective judicial protection, understood this principle as a guarantee given to the citizen of being able to appeal for a judicial decision about a question that opposes him to the Administration, assuring him the necessary means so that the guarantee in question is real and effective. In fact, it is of no avail that the law provides for the possibility of contesting an administrative act if, for example, the prerequisites for contesting them are so restrictive as to inhibit the possibility of recourse in the great majority of situations in which the individual considers himself harmed by the Administration.

In the case, no basis appears for a judgment of violation of that principle.

And as to the principle of justice – which the Applicant understands equally and learnedly violated – this does not impose the abandonment of article 18, paragraph 1 of the IRC Code, all the more so as this would result, in the case, in the abandonment of the rule of specialization of financial years, through violation of that same rule with respect to the financial year 2009.

It should be noted that the principle of justice is not absolute but must rather be considered in each concrete situation in confrontation with other principles such as, for example, that of legality.

"The principle of justice, as a parameter for assessing the constitutional conformity of legal norms, presupposes, however, that a normative solution absolutely unacceptable (…), that affects a given dimension of the fundamental core of essential interests of the person and that collides with the structuring values of the legal order" is at stake [See judgment of the Constitutional Court 363/2001 (published in the Official Journal, II Series, of 13 October 2001)]

"The administration should refrain from implementing the legal commands when, in view of the particularities of the case, the reasons of public interest that justify its action are not verified or when it produces a manifestly unjust result" – See General Tax Law – Annotated and Commented, by Diogo Leite de Campos, Benjamim Rodrigues and Jorge Lopes de Sousa – Annotation to article 55, where the principles of tax procedure are provided for.

Well now, it does not result manifestly unjust the result "imposed" by the Tax Authority from compliance with the rule of periodization of financial years, nor is it evidenced – quite the contrary – that the declarative omissions of the Applicant relating to Social Security contributions in 2009 were involuntary or resulting from non-culpable ignorance of that obligation.

As to the principle of contributive capacity it will be equally said that it is not affected by the fact that fiscal relevance does not occur in 2013 of obligations born and evidenced in 2009. Quite the contrary.

Contributive capacity being an economic legal concept, set forth in article 104, paragraph 2, of the Constitution and in article 4 of the General Tax Law, comes down to the principle that "all citizens must pay taxes on the totality of their revenues, and in the measure thereof".

Now, on the contrary, it would be the contributive capacity of the Applicant in the year 2013 that would come to be affected or distorted if the attribution in that financial year of expenses of the financial year 2009 were accepted without, as was seen, valid foundation.

Thus it likewise proves to be devoid of foundation the invocation, in the case, of the violation of the principle of contributive capacity.

3rd Question – Whether, if it were considered that the Applicant could effect those deductions and, consequently, if the orders dismissing the administrative complaint and hierarchical appeal presented by the Applicant and its self-assessment were deemed illegal, compensatory interest would be due for the amounts it unduly paid.

This last question raised by the Applicant, with the total lack of merit of the other claims, becomes obviously moot.

5. DECISION

On these terms and with the reasoning above, it is decided:

a) To wholly dismiss the claim and, in consequence,

b) To maintain in the legal order the aforementioned acts of dismissal of the administrative complaint and the hierarchical appeal, as well as the IRC self-assessment act insofar as it corresponds to the non-deduction in the calculation of taxable profit of the expense relating to Social Security contributions effected in 2013 and the expense relating to the settlement of IMT in the same financial year but relating to the financial year 2009;

c) To deem moot the claim for compensatory interest; and

d) To condemn the Applicant to pay the costs of this process.

Value of the Case

The value of the case is fixed at € 132,455.08, in accordance with the provisions of article 3, paragraph 2 of the Tax Arbitration Procedure Costs Regulation (RCPAT), article 97-A, paragraph 1, letter a) of the Tax Procedure Code and article 306 of the Code of Civil Procedure.

Costs

The amount of costs, charged to the Respondent, is fixed at € 3,060.00 (article 22, paragraph 4 of the RJAT and Table I attached to the RCPAT).

Let notification be made.

Lisbon, 21 May 2018

The Collective Arbitral Tribunal,

José Poças Falcão
(President)

António Alberto Franco
(Adjunct Arbitrator)

Eva Dias Costa
(Adjunct Arbitrator)

Frequently Asked Questions

Automatically Created

What is the principle of expense timing (especialização dos exercícios) in Portuguese IRC?
The principle of especialização dos exercícios in Portuguese IRC, established in Article 18 of the IRC Code, requires that revenues and expenses be recognized when obtained or incurred, regardless of actual receipt or payment. This accrual accounting principle mandates that expenses and revenues must be included in the financial statements of the periods to which they economically relate, ensuring proper matching of income and costs. The only exception under Article 18(2) applies when expenses were unforeseeable or manifestly unknown at the date of closure of accounts for the period to which they should have been attributed.
How does the predictability of costs affect the deductibility of expenses in Portuguese corporate tax?
Predictability of costs is crucial for IRC deductibility timing. Under Article 18(2) of the IRC Code, expenses must be attributed to the year they economically relate to, unless they were unforeseeable or manifestly unknown at year-end. The Tax Authority in case 429/2017-T argued that when a taxpayer has awareness of potential liabilities (evidenced by provisions or ongoing administrative procedures), expenses cannot be considered unforeseeable. This means taxpayers cannot defer expense recognition merely because formal assessment occurs later. Predictability is assessed objectively based on available information, legal obligations, and the taxpayer's own accounting practices, including provision recognition.
Can Social Security contributions and IMT payments be deducted in a different tax year under IRC rules?
Social Security contributions and IMT payments must generally be deducted in the tax year to which they economically relate, not when paid or formally assessed. In case 429/2017-T, the Tax Authority rejected the taxpayer's attempt to deduct 2007-2010 Social Security contributions and 2009 IMT in the 2013 tax year. The Authority argued that Social Security debts became certain when income statements were submitted under existing legal norms, and the taxpayer's 2007 provision demonstrated awareness. For IMT, the obligation arose in 2009 when the taxable event occurred, regardless of later inspection detection. Only genuinely unforeseeable expenses under Article 18(2) CIRC qualify for different-year deduction, which requires proving the expense was manifestly unknown at the original year-end closure.
What was the outcome of CAAD arbitration case 429/2017-T regarding IRC self-assessment for 2013?
While the full decision text is not provided, case 429/2017-T concerns the Tax Authority's rejection of €499,830.49 in expense deductions claimed in 2013 for Social Security contributions and IMT relating to prior years (2007-2010 and 2009 respectively). The Authority dismissed both the administrative complaint and hierarchical appeal, maintaining that these expenses should have been recognized in their original years under the especialização dos exercícios principle. The taxpayer challenged the IRC self-assessment for 2013, seeking recognition of €132,455.08 in excess tax (€124,957.62 IRC plus €7,497.46 municipal surcharge) plus compensatory interest. The case centers on whether Article 18(2)'s unforeseeability exception applied, with the Authority arguing the taxpayer had sufficient knowledge through ongoing procedures and prior provisions to recognize expenses in their proper periods.
When does a tax or contributory obligation become certain and deductible for IRC purposes in Portugal?
A tax or contributory obligation becomes certain and deductible for IRC purposes when the underlying economic event occurs and the obligation arises under applicable legal norms, not merely when formally assessed or notified. In case 429/2017-T, the Tax Authority distinguished between legal certainty (when law creates the obligation) and administrative certainty (formal assessment). For Social Security, obligations became certain when income statements were submitted under existing contribution rules, even though final assessment occurred years later. The taxpayer's argument that obligations only crystallize upon assessment notification was rejected. However, Article 18(2) CIRC provides an exception: expenses genuinely unforeseeable or manifestly unknown at year-end closure may be recognized later. This exception requires objective assessment based on the taxpayer's actual knowledge, industry practices, legal obligations, and accounting records including provisions, rather than subjective claims of uncertainty about future administrative determinations.