IRC Tax Deductibility of ATR Tariff Expenses and Burden of Proof – CAAD Case 436/2017-T

ARBITRAL DECISION

The arbitrators José Baeta de Queiroz (president), José Ramos Alexandre and Paulo Ferreira Alves (members) appointed by the Deontological Council of the Administrative Arbitration Center (CAAD) to form the Arbitral Tribunal, agree as follows:

REPORT

1. A.A., S.A., corporate entity no. ..., with registered office at Rua ..., no. ..., ...-... ..., presented, on 20/07/2017, pursuant to article 2.º no. 1, subsection a) and articles 10.º and following of the Legal Framework for Tax Arbitration, contained in Decree-Law no. 10/2011, of 20 January, as amended by article 228.º of Law no. 66-B/2012, of 31 December (hereinafter abbreviated as "RJAT"), a request for arbitral pronouncement with a view to the assessment of the legality of the self-assessment of Corporate Income Tax (IRC) for 2014.

2. The object of the request for arbitral pronouncement consists of the claimant's claim that both the illegality of the rejection of the administrative review and the partial illegality of the aforementioned self-assessment act be declared and consequently annulled, pursuant to article 2.º, no. 1, subsection a), of Decree-Law no. 10/2011, specifically with respect to the portion of the aforementioned self-assessment act that reflects the failure to make a tax deduction in the fiscal year 2014 of expenses with Third-Party Network Access Tariffs (ATR) in the amount of €2,032,766.36, and likewise with respect to the reflected tax on this excess taxable base which in 2014 amounts to €138,776.31.

The claimant further requests that the right to reimbursement of the amounts of tax unduly paid be recognized, plus compensatory interest, calculated on €138,776.31, counted from the date of the tacit rejection of the administrative review, that is, from 31 May 2017.

The respondent is the Tax and Customs Authority (AT).

1. The request for constitution of the arbitral tribunal was accepted by the President of CAAD and automatically notified to AT on 20/07/2017.

The claimant did not appoint an arbitrator, therefore, pursuant to subsection a) of no. 2 of article 6.º and subsection b) of no. 1 of article 11.º of RJAT, the President of the Deontological Council appointed the signatories as arbitrators of the Collective Arbitral Tribunal, who communicated acceptance of their appointment within the prescribed period.

On 08-09-2017 the parties were notified of the appointment of arbitrators, and no impediment was raised.

In accordance with the provision in subsection c) of no. 11.º of RJAT, the Collective Arbitral Tribunal was constituted on 25/09/2017.

In these terms, the Arbitral Tribunal is duly constituted to assess and decide the object of the proceeding.

1. To substantiate the request for arbitral pronouncement, the claimant alleges, in summary, the following:

A.A. is a Portuguese joint-stock company engaged in the retail sale of natural gas and electrical energy to end consumers, with a focus on the Portuguese and Spanish markets.

A.A. filed its income tax return (Form 22) for IRC on 26 May 2015, with reference to the taxation period of 2014, ending on 31 December 2014, and also filed a substitute income tax return (Form 22) for IRC on 14 July 2015.

It transpired that, in the course of the closing work of the accounts for the taxation period of 2015, A.A. concluded that there were material errors in the accounting recording of certain expenses, in particular an insufficiency in the accrual of expenses related to Third-Party Network Access Tariffs ("ATR") determined in the taxation period of 2014, in the total amount of €2,032,766.36.

With the expenses related to ATR tariffs being undervalued at the date of presentation of the income tax return (Form 22) for IRC relating to the taxation period of 2014, the fiscal result determined by the claimant in that year does not reflect its actual financial situation on 31 December 2014.

Consequently, the claimant considers that the taxable profit determined in that year proved to be excessive given that not all operational expenses pertaining to it were taken into account in its calculation.

Since the aforementioned period was already closed, it was necessary to restate the accounts relating to the period of 2014 with the accrual of expenses item being increased (as a counterpart to results) in the amount of €2,032,766.36.

The aforementioned adjustment resulted, for accounting purposes, in a restatement of the financial statements of A.A. with reference to 31 December 2014, with its impact leading, together with another adjustment in the amount of €178,918.45, to an increase in Liabilities and the Negative Net Result of the Period in the amount of €2,211,684.81 (of which €2,032,766.36 relates to the insufficiency of expenses with ATR tariffs, at issue here, and €178,918.45 to the recognition of invoices and credit notes from B...), as mentioned in point 5.3.3 "Restatement of 2014 accounts" of the Report and Accounts relating to the taxation period of 2015.

Having regard to the principle of periodicity of taxable profit and ability to pay, these expenses with ATR tariffs should have been tax-deductible in 2014, and were not due to an error in their correct determination.

Indeed, in accordance with the general principle of periodicity of taxable profit, enshrined in no. 1 of article 18.º of the IRC Code, it follows that the application of this provision leads to the conclusion that income and expenses borne by taxpayers must be considered, for tax purposes, in the period to which they are economically attributable.

In the case at hand, what is at issue is an accrual of expenses: notwithstanding the fact that in the year 2014 and, moreover, until the closing of the 2014 accounts, certain invoices relating to ATR tariffs had not yet been received, their tax deduction belongs to 2014 because the tariffs in question relate to the business conducted in 2014, more specifically, they relate to the cost of network transport (or network access) of gas sold by A.A./consumed by its customers, in the fiscal year 2014, and not in the fiscal year 2015 (in which the respective invoice merely took place).

The aforementioned expenses relating to ATR tariffs, in the amount of €2,032,766.36, should be considered deductible for tax purposes in the taxation period of 2014, so as not only to respect the legal principle of periodicity of taxable profit, but also that of ability to pay and taxation based on actual income.

Indeed, this is a legally undue omission of a tax deduction, which moreover constitutes a situation of clear tax injustice, if only because the situation in question did not result in any economic benefit for A.A., but rather resulted in a significant and undue increase in its tax burden with reference to the taxation period of 2014.

By annulling partially the 2014 assessment in question, as is right and proper, in the part corresponding to the failure to deduct the aforementioned expenses, the taxable base for the fiscal year 2015 must be consequentially and symmetrically adjusted upward (determination of a lesser fiscal loss), as the claimant has already indicated to AT in the administrative review proceedings, and as is reiterated here and can be observed in the summary tables below (which also contain the other consequences of the adjustment reducing the taxable profit of 2014: determination of reportable fiscal loss for subsequent years, lesser deduction of tax benefits with consequent greater carryforward of the same, lesser deduction of PEC with consequent greater carryforward of PEC).

In the context of this case, the claimant understands, let it be recalled, that the expense in question belongs to the fiscal year 2014, and petitions precisely in that sense, but if, for a reason that the claimant cannot discern, it is decided otherwise, then the expense must be deducted at the latest in the fiscal year 2015, not only by absolute logical necessity, but also by virtue of the principle of justice.

The principle of justice and the pursuit of the public interest (and not outside of it) prevent AT from denying its tax deduction at the latest in the fiscal year 2015, because by denying the deduction in the natural fiscal year (economic belonging) of these expenses which is 2014, it is inconceivable that the denial of that deduction would continue in 2015, particularly in a context where there is no reason to believe that there is a voluntary and intentional omission of the deduction of expenses in 2014 (on the contrary, the taxpayer is fighting to remedy that omission by using the legal periods for this purpose), "voluntary and intentional, with a view to operating the transfer of results between fiscal years".

With particular respect to this last point, it should be underlined that the failure to make a tax deduction of the tax expenses in question in the fiscal year 2014 only brings loss to the claimant, and gain for AT (more tax received earlier, anticipated, without any interest).

For which reason, if absurdly the deduction of these expenses in the economic fiscal year to which they belong (2014) were rejected, it would still always have to be maintained the deduction in the fiscal year 2015, by logical imperative (if it does not belong to 2014, then it belongs to 2015; it cannot belong to void) and, additionally, by the requirement of the principle of justice.

The Courts have consistently established an interpretative line according to which the attribution, to a given fiscal year, of expenses relating to previous taxation periods (and in this case, if that wrong attribution is maintained it will not be by the will of the claimant, who timely requested and requests the attribution to the correct year – that of 2014) does not call into question the fundamental principle of economic periodicity, in cases where no loss results to the Tax Administration.

The principle of justice and the pursuit of the public interest prevent AT from denying its tax deduction at the latest in the fiscal year 2015, because by denying the deduction in the natural fiscal year (economic belonging) of these expenses which is 2014, it is inconceivable that the denial of that deduction would continue in 2015, particularly in a context where there is no reason to believe that there is a voluntary and intentional omission of the deduction of expenses in 2014 (on the contrary, the taxpayer is fighting to remedy that omission by using the legal periods for this purpose), "voluntary and intentional, with a view to operating the transfer of results between fiscal years".

The claimant paid, with reference to the fiscal year 2014, tax in an amount superior to that legally due, therefore, with the illegality of the (self-)assessment declared in the part petitioned here, the claimant has the right not only to the respective reimbursement, but also, pursuant to article 43.º of the General Tax Law ("LGT"), to compensatory interest.

In sum, "the tax administration is generically obliged to act in accordance with the law (articles 266.º, no. 1, of the Constitution of the Portuguese Republic and 55.º of the General Tax Law), therefore, regardless of the proof of fault of any of the persons or entities that compose it, any illegality not resulting from an action of the taxpayer will be imputable to the fault of the services themselves" (see Judgment of the Supreme Administrative Court, of 12 December 2001, Case no. 26233).

And such imputability in the case of error in self-assessment was expressly provided for in 2014 in no. 2 of article 78.º of LGT regarding the revision of tax acts, with the same provision establishing that "without prejudice to the legal burdens of administrative review or contestation by the taxpayer, error in self-assessment is considered imputable to the services, for the purposes of the preceding number".

Thus, there is no doubt that once the self-assessment is annulled, or the illegality thereof declared, in the part requested here, it should be considered as verified an error imputable to the Services for the purpose of payment of compensatory interest for the loss resulting from the payment of excess tax.

1. The respondent presented its answer and subsequently attached the Administrative File. In the aforementioned answer it invoked, in summary, the following:

Beyond the generic explanation regarding the origin of the accounting recording errors that are at the root of the value of expenses with ATR tariffs (€2,032,766.36), the deduction of which from the taxable profit of 2014 is claimed by the claimant, no details are provided regarding the methodology adopted, in particular to identify the invoices that contain values of ATR tariffs relating to gas transport sold in 2014, nor the elements used in the calculations to remove the values of the supplier invoices.

The information provided does not allow knowing what concrete realities are translated in the amount in question, particularly because it is unknown the process of identification and quantification of the consumption/sales carried out in 2014 contained in the invoices issued by the ORD in the course of 2015.

This lack of demonstration of the substance of the amount of expenses with ATR tariffs is accompanied by the lack of clarity of the procedure used in the accounting recording of expenses attributable to 2014, as the entries made, the accounts affected and the precise date on which this occurred are not disclosed.

In this respect, the claimant states that, since the accounts for the period of 2014 were already closed, the adjustment obliged "a restatement of the financial statements of A.A. with reference to 31 December 2014", which consisted of the replacement of the values of certain items in the results statement and the balance sheet for 2014, in order to comply with the obligation to disclose comparative information with respect to the previous period.

It can be inferred from the Notes to the Appendix transcribed that the solution found to reflect in the 2015 accounts the alleged material errors of previous fiscal years appears to have consisted of a transfer to the account Retained Earnings, by correction of the application of the value restated from the negative result of 2014.

That is, if the information provided in the Appendix is correctly understood, the opening balance sheet items for the fiscal year 2015 were the restated financial statements of 2014 presented in point 5.3.3 of the Appendix, a restatement which, however, did not result in mere reclassifications of certain items but, rather, consisted of reflecting retrospectively the impact of operations that were not recorded in the accounting of 2014, such that the net result of the period registered a significant worsening.

In sum, the elements presented by the claimant to substantiate the adjustments of the alleged material errors committed in 2014 do not fully demonstrate the bases of the calculation of the value of ATR tariffs attributable to the taxation period of 2014 nor how the amount in question was removed from the invoicing of the ORD suppliers issued in 2015.

On the other hand, as evidenced by Note 15 of the Appendix to the Financial Statements of 2015, the recognition in Retained Earnings (Account 56 SNC) in the amount of 2,032,766.36 euros, relating to ATR expenses of 2014, carried out in 2015, appears to have been carried out through the application of the net result (negative) of 2014, having as support the resolution recorded in the minutes of the general meeting for approval of accounts for this period.

In this manner, reasonable doubts persist regarding the adequacy of the procedure used to reflect in the accounting the expenses that were intended to be attributed to the taxation period of 2014, all the more so given that everything suggests that no direct recording of the expenses occurred in the retained earnings account.

However, in line with the recommendation contained in paragraph 56 of NCRF 25 – Income Taxes, for tax purposes, by virtue of the provision in subsection b) of no. 3 of article 17.º of the IRC Code, combined with no. 1 and subsection a) of no. 2 of article 123.º of the same Code, all operations that result in corrections of errors from previous fiscal years and consequently may translate into positive and negative components of taxable profit must be recorded in the accounting, i.e., be the subject of entries made in the appropriate accounts, specifically in the retained earnings account.

Given the insufficiencies referred to and, essentially, the one relating to the absence of proof of the calculations made to quantify the "material errors" detected in the 2015 accounts, it is not possible to validate, for tax purposes, the correction to taxable profit for 2014 that the claimant claims, without attaching any documentation to support its claim.

Indeed, by legal imperative (subsection a) of no. 3 of article 17.º of the IRC Code, accounting must be organized in accordance with accounting standards and other legal provisions, but without prejudice to compliance with the provisions set forth in this Code and which, in turn, subsection a) of no. 2 of article 123.º determines that, in the execution of accounting, "All entries must be supported by supporting documents, dated and capable of being presented whenever necessary".

In this manner, the lack of supporting documentation for the accounting adjustments made, everything being limited to information and assertions made by the claimant without sufficient proof of the elements that, in concrete terms, were used to determine which expenses were invoiced in 2015 but were based on consumption/sales carried out in 2014 and which therefore should be attributed to this taxation period of 2014, makes it impossible to validate and accept, for tax purposes, the adjustments thus made.

Now, the deficiencies in the organization of its accounting, in particular the non-existence of documentation required in articles 17.º and 123.º of CIRC, prevent the claimant from proving the materiality of the operations, as well as from proving its claim for the annulment of the contested assessment.

Being that the failure to present the supporting documents implies the rejection of the claimant's arguments, breaching the burden of proof that falls upon it to fully prove what it alleges, in accordance with the rule of allocation of the burden of proof provided in article 74.º of LGT.

The respondent agrees entirely with the interpretation conveyed by the claimant, which is to say that if the expenses with ATR tariffs are demonstrably directly and specifically related to the actual consumption of gas and the concomitant sale of gas to customers carried out in 2014, then, having regard to the balance that, in each taxation period, must be established between expenses and revenue from sales, regardless of the frequency of invoicing by the ORD, nothing would prevent accepting their attribution to 2014, as this is required by the principle of specialization of fiscal years.

Nevertheless, in order for it to be possible to assign tax relevance to the amount of expenses with ATR tariffs attributable to the fiscal result of the taxation period of 2014, they must, in the first place, pass the test of the requirement of documentary proof, pursuant to no. 3 of article 23.º and no. 2 of article 123.º of the IRC Code, and in this respect, the claimant does not provide, as set out above, any clarifying elements regarding the application of the internal procedure adopted in the evaluation of such expenses, in particular regarding the selection of invoices from ORD suppliers, the manner in which the link of the expenses to the fiscal year 2014 was established, the manner of determination and criteria used in their quantification.

The claimant fails to prove documentally the expenses it intends to deduct from taxable matter, limiting itself to making generic assertions that are far from supporting its claim.

Thus, and in accordance with the above, the request for arbitral pronouncement should be declared to have no merit, both as to the attribution and deduction of expenses with ATR tariffs to the fiscal result of the taxation period of 2014, since the claimant failed to substantiate and prove how it arrived at the value of these expenses, thereby failing to comply with the legal requirement of proof and documentation of expenses, provided for in no. 3 of article 23.º of the IRC Code and in subsection a) of no. 2 of article 123.º of the IRC Code,

As well as with respect to the attribution and deduction of expenses with ATR tariffs to the fiscal result of the taxation period of 2015, disregarding thus the deduction of the amount recorded in field 775 of table 07 of the income tax return form 22, for non-compliance with the principle of specialization of fiscal years enshrined in no. 1 of article 18.º of the same Code, since the provision of no. 2 of this regulation cannot be applied to it.

The right to compensatory interest requires that the following requisites provided in article 43º of LGT be fulfilled: (i) the arbitral tribunal determines the existence of an error in an assessment act, (ii) that such error is imputable to the services of the respondent, and (iii) that from that error resulted the payment of a tax debt in an amount superior to that legally due.

Now, as fully demonstrated, the contested decisions are in absolute conformity with the law, with no defect occurring that would dictate the annulment of the self-assessment, therefore there is no basis for the payment of compensatory interest."

1. On 31-10-2017, the Arbitral Tribunal, having regard to the facts invoked, the documentary evidence already submitted, considering that it saw no utility in the additional evidence requested, dispensed with the holding of the meeting provided for in article 18.º of RJAT, inviting the parties to submit arguments in writing within ten days, which it did pursuant to the principles of the autonomy of the Tribunal in conducting the proceeding, and in order to promote celerity, simplification and informality thereof (see articles 19.º, no. 2 and 29.º, no. 2 of RJAT).

The claimant did not submit arguments, and the respondent also opted, as requested, not to submit arguments, reiterating the arguments previously made in its answer.

The Tribunal set 26/01/2018 as the deadline for the arbitral decision.

PROCEDURAL MATTERS

1. The Tribunal is competent and duly constituted. The parties have legal personality and capacity, show themselves to be legitimate and are duly represented (articles 4.º and 10.º, no. 2, of RJAT and article 1.º of Ordinance no. 112-A/2011, of 22 March).

2. The proceeding suffers from no nullities. No exceptions were raised and no other circumstances exist that prevent the knowledge of the merits of the case.

MERITS

III.1. Matter of Fact

1. Proven Facts

9.1. With relevance to the assessment and decision of the issues raised, the following facts are established and proven:

• The claimant presented an IRC Form 22 for 2014 on 26/05/2015, corresponding to the taxation period of 1/01/2014/31/12/2014. (Doc. 1);

• It also presented a Form 22 Substitute IRC return relating to the same taxation period on 2015/07/14 (Doc. 2), in which it made a change to the results for tax purposes;

• The claimant presented, on 31-01-2017, an administrative review with the Service of ... against the tax acts of self-assessment of IRC for 2014 and 2015 (as referred to in Document no. 3 attached to the request for arbitral pronouncement and in pages 2 to 16 of the Administrative File);

• The Tax Administration did not issue any decision in administrative review proceedings within the period provided for in article 57º, no. 1 of LGT, that is, by 31/05/2017.

• The claimant contested both the tacit rejection and the legality of the assessments of 2014 and 2015, as it claims, because €2,032,766.36 was not considered in determining the results of 2014, within the legal period.

• The claimant attached copies of the aforementioned Form 22 declarations, which are also contained in the Administrative File submitted by the respondent, and also copies of the Report and Accounts of 2015 and 2014 and their respective Appendices.

9.2. Basis for the Matter of Fact

Regarding the proven matter of fact, the conviction of the Arbitral Tribunal was based on the free assessment of the positions assumed by the Parties (regarding facts) and on the content of the documents submitted to the proceedings, not contested by the Parties, as well as on the analysis of the administrative file remitted by the respondent.

9.3. There are no other facts with relevance to the assessment of the merits of the case that have not been proven.

III.2. Matter of Law

Having regard to the positions assumed by the parties in the pleadings presented, the request for arbitral pronouncement to be decided by the present Arbitral Tribunal consists of assessing the legality of the self-assessment act for IRC and Municipal Surcharge.

The claimant's claim, in summary, is subsumed in the failure to record the expense for tax purposes in the fiscal year 2014 in the amount of €2,032,766.36 with Third-Party Network Access Tariffs. The claimant intends that this expense be recorded for tax purposes in the fiscal period 2014 and that the respective adjustment to the assessed tax be made. The claimant alleges that the determination of this expense was only possible in the closing work of the accounts for the period of 2015, motivated by the existence of material errors in the accounting recording of certain expenses, namely, an insufficiency in the accrual of expenses related to Third-Party Network Access Tariffs relating to the fiscal period of 2014.

The respondent, succinctly, counter-argues by invoking that no details are provided by the claimant regarding the methodology adopted, in particular to identify the invoices that contain values of Third-Party Network Access Tariffs relating to gas transport sold in 2014, nor the elements used in the calculations to remove the values from the supplier invoices. Indeed, the alleged material errors committed in 2014 do not fully demonstrate the bases of the calculation of the value of Third-Party Network Access Tariffs attributable to the taxation period of 2014 nor how the amount in question was removed from the invoicing of Distribution Network Operators issued in 2015. Given the insufficiencies referred to and, essentially, the one relating to the absence of proof of the calculations made to quantify the "material errors" detected in the 2015 accounts, it is not possible to validate, for tax purposes, the correction to taxable profit for 2014 that the claimant claims, without attaching any documentation to support its claim.

Given the foregoing, and entering into the legal substantiation of the present arbitral decision, it is first necessary to perform a prior analysis of the legal regime, doctrine and jurisprudence of expenses.

Article 23.º of CIRC tells us that "for the determination of taxable profit, all expenses and losses incurred or borne by the taxpayer to obtain or guarantee income subject to IRC are deductible".

As will be demonstrated, for analysis of the necessity and deductibility of the expenses invoked by the claimant, it is first necessary to judge whether the operations listed comply with the legal provisions that the taxation of corporate income must obey.

In these terms, and given the established matter of fact, the central issue concerns the burden of proof and documentary proof of expenses, as provided for in the tax-legal framework set forth in articles art. 31.º LGT, article 23.º, 23.º-A and 123.º of CIRC, in force until 31 December 2014.

The aforementioned articles provide that in order to verify the tax deductibility of expenses it is necessary to demonstrate their respective existence, which, as a rule, involves their proof by a fiscally relevant document and properly recorded in accounting.

Let us see it otherwise. It results from article 31.º, no. 2 of LGT that the ancillary obligations of the taxpayer constitute "those that aim to make possible the determination of the tax obligation, namely the presentation of declarations, the exhibition of fiscally relevant documents, including accounting or records". (our emphasis)

Following the guiding line of the General Tax Law, article 23º of CIRC establishes that proof of expenses is a necessary element for their tax deductibility:

"1 - For the determination of taxable profit, all expenses and losses incurred or borne by the taxpayer to obtain or guarantee income subject to IRC are deductible.

2 - The following expenses and losses are considered covered by the preceding number, in particular:

• Those relating to the production or acquisition of any goods or services, such as materials used, labor, energy and other general production, conservation and repair expenses;

• Those relating to distribution and sales, covering transport, advertising and placement of goods and products;

• Of a financial nature, such as interest on foreign capital applied in operations, discounts, premiums, transfers, exchange differences, expenses with credit operations, collection of debts and issuance of bonds and other securities, redemption premiums and those resulting from the application of the effective interest method to financial instruments valued at amortized cost;

• Of an administrative nature, such as remuneration, including amounts attributed as participation in profits, allowances, current consumption material, transport and communications, rents, litigation, insurance, including life, illness or health insurance, and "Life" branch operations, contributions to pension savings funds, contributions to pension funds and to any supplementary social security schemes, as well as expenses with employment termination benefits and other post-employment benefits or long-term benefits of employees;

• Those relating to analyses, rationalization, research, consultation and development projects;

• Of a tax and paratax nature;

• Depreciation and amortization;

• Impairment losses;

• Provisions;

• Losses from fair value reductions in financial instruments;

• Losses from fair value reductions in consumable biological assets that are not pluriannual forestry operations;

• Realized losses;

• Indemnities resulting from events whose risk is not insurable.

3 — The deductible expenses under the preceding numbers must be documented, regardless of the nature or support of the documents used for this purpose. (our emphasis)

4 - In the case of expenses incurred or borne by the taxpayer with the acquisition of goods or services, the supporting document referred to in the preceding number must contain, at least, the following elements:

• Name or company name of the supplier of the goods or provider of the services and of the purchaser or recipient;

• Tax identification numbers of the supplier of the goods or provider of the services and of the purchaser or recipient, whenever they are entities with residence or permanent establishment in the national territory;

• Quantity and usual denomination of the goods acquired or of the services provided;

• Value of the consideration, specifically the price;

• Date on which the goods were acquired or on which the services were rendered."

In harmony therewith, article 23.º-A no. 1, subsection b), establishes that the following expenses are not deductible for the purpose of determining taxable profit, even when recorded as expenses of the taxation period: b) Undocumented expenses.

And following this legislative line, CIRC imposes accounting obligations on companies in its article 123.º which requires entities subject to this taxation to record patrimonial facts:

"1 — Commercial or civil companies in commercial form, cooperatives, public enterprises and other entities that exercise, as their main activity, a commercial, industrial or agricultural activity, with head office or effective management in Portuguese territory, as well as entities that, although not having head office or effective management in that territory, have a permanent establishment there, are obliged to have accounting organized in accordance with the law which, in addition to the requirements indicated in no. 3 of article 17.º, permits the control of taxable profit.

2 — In the execution of accounting, the following must be observed in particular:

• All entries must be supported by supporting documents, dated and capable of being presented whenever necessary;

• Operations must be recorded chronologically, without amendments or erasures, and any errors must be the subject of accounting adjustment as soon as discovered.

3 — No delays in the execution of accounting exceeding 90 days are permitted, counted from the last day of the month to which the operations relate.

4— Books, accounting records and their respective supporting documents must be preserved in good order for a period of 12 years.

5 — When accounting is established by electronic means, the obligation of preservation referred to in the preceding number is extended to documentation relating to the analysis, programming and execution of electronic data processing.

6 — The supporting documents provided for in no. 4 that are not authentic or authenticated documents may, after three taxation periods following that to which they relate and upon obtaining prior authorization from the Director-General of Taxes, be replaced, for tax purposes, by microfilms that constitute their faithful reproduction and comply with the conditions that will be established.

7 - It is also permitted to file electronically invoices or equivalent documents, sales slips or any other documents with tax relevance issued by the taxpayer, provided they are processed by computer, in accordance with the terms defined in no. 7 of article 52.º of the VAT Code.

8 — Entities referred to in no. 1 that organize their accounting using electronic means must have the capacity to export files in the manner and formats to be defined by ordinance of the Minister of Finance.

9 — Computer programs and equipment for invoicing depend on prior certification by the Directorate-General of Taxes, and are of mandatory use, in accordance with the terms to be defined by ordinance of the Minister of Finance."

The combination of the aforesaid tax-legal framework, and as a result of the very wording of the law, and in harmony with the principle of practicability (costs must be properly documented), results in two requirements necessary for company expenses to be tax-deductible.

These requirements are:

• that they are supported by documents issued in accordance with legal provisions;

• and that they are indispensable for the realization of revenue.

These requirements, when not met, result in non-deductibility from income, as the jurisprudence of the Supreme Administrative Court has already decided (see Judgment of 5.7.2012, case no. 0658/11):

"In the case at hand, only the verification of the formal requirements demanded for the proof of costs is at issue, and whose violation implies the sanction of non-deductibility from income. The formal requirements comprise the internal and external aspects. The internal documents are prepared within the company, normally for exclusive internal use (leave sheets and posting notes). The external documents are those that come from or are intended for the outside, such as invoices, receipts and debit notes) and these are the ones that normally fall within the concept of "supporting documents", which accompany any and every expense."

National doctrine also advocates the position that a supporting document is necessary, usually a formal external support with a certain weight, although doctrine may differ on the legal requirements of that document. We emphasize (See SALDANHA SANCHES, "Poorly documented and undocumented costs: their deductibility regime", Note to the Judgment of STA of 16 February 2000, appeal no. 24,133, Tax Law, no. 3, July 2000, p. 86.) these formal requirements although created for VAT should be applied "to the set of tax relationships as they correspond to good accounting practices" and, moreover, such "invoice requirements are those that allow the company's records to fulfill all functions as an instrument of recording and verifiable information that it is called upon to perform".

However, according to other authors, the notion of "supporting document" is broader than the notion of invoice, and may encompass any form of external representation of the operation, without the specific formalities of the invoice, "provided that it clearly explains the main characteristics of the operation (the subjects, the price, the date and the object of the transaction)" (See TOMÁS CASTRO TAVARES, "On the relationship of partial dependence between accounting and tax law in the determination of taxable income of legal entities: some reflections at the level of costs", Science and Tax Technique, 396, pp. 123 et seq.)

However, the claimant did not submit any external document that would documentary prove the expenses invoked.

Regarding documentary proof and the respective burden of proof, it is important to highlight the jurisprudence on this topic, which we subscribe to, see the Arbitral Judgment, Case 236/1014-T of 4 May 2015, of Dr. Jorge Lopes de Sousa, Professor Dr. António Martins and Dr. João Menezes Leitão:

"Now, general or patrimonial accounting aims, as is known, to make known the situation of an economic entity according to various perspectives. From an economic perspective, the net result is determined, from the comparison between costs and revenue. From a patrimonial perspective, the constitution of assets, liabilities and net worth are observed in the balance sheet.

To facilitate this – and other – information, accounting records patrimonial facts. Two requirements are necessary for these recordings to be made: a documentary basis that permits the quantification of the fact to be evidenced; and the use of appropriate accounts which, among us, are contained in the applicable accounting standards.

The documentary basis of the recordings may be of an external or internal nature. It will be of an external nature if the operations to be recorded are carried out between different entities. Thus, sales of goods to customers, the payment of interest to a bank, are documented based on invoices, debit notes, or other documents that are issued by one entity and sent to another.

However, there are cases where the facts to be recorded by financial or patrimonial accounting, relating to purely internal operations, cannot be based on external documents issued by third parties or intended for them. This would be the case, for example, of the deterioration of inventories, or of the calculation and recording as a cost in a given fiscal year of the values relating to expenses with holidays and holiday allowances whose right was established in that fiscal year but which will only be paid in the following one.

In such situations, the documentary support of the accounting entries is generally constituted by elements prepared internally, on the basis of which the posting notes are then made that evidence the accounts affected.

However, with respect to expenses that result – or are recorded as a consequence of – relationships with third parties, they should, as a rule, be supported by or based on documents from third-party entities (e.g., invoices, receipts, extracts, debit notes, account statements, contracts), requiring, therefore, that such expenses be proven, in the first place, by such documents".

In the same sense, the summary of the Judgment of the Supreme Administrative Court of 5.7.2012, within the scope of case no. 0658/11, quite clear and objective, and which we subscribe to:

"I – In IRC matters, the supporting and justifying document of costs for the purposes of articles 23º, no. 1, and 42º, no. 1, subsection g), of CIRC, does not have to assume the essential formalities required for invoices for VAT purposes, since the requirement of documentary proof is neither confused with nor exhausted in the requirement of an invoice, being sufficient only a written document, in principle external and with mention of the fundamental characteristics of the operation, since unlike what happens with VAT, in IRC matters, the justification of the cost is a probationary formality and, therefore, replaceable by any other kind of proof. II – If the appellant, in addition to not having presented external documents identifying the main characteristics of the transactions, limits itself to presenting internal notes recorded in accounting referring to purchases, meat, fish, eggs, and to mere purchase receipts, without identification of the main characteristics of the operations carried out, such as the object, the purchaser, the supplier and the price, they cannot be relevant as supporting documents of the respective costs for the purposes of articles 23º, no. 1, subsection a), and 42º, no. 1, subsection g), of CIRC, a provision according to which for the purposes of determining taxable profit only properly documented expenses are relevant. III – The formal requirements in relation to the proof of costs aim to provide the Tax Administration an effective control of economic relationships both on the side of the purchaser and the supplier, since, as was said, to the disclosure of a cost for one agent, there corresponds a benefit for the other, and as this is not an isolated practice but a repeated practice involving several economic agents, with and without organized accounting, accepting such notes as a suitable document to prove the respective costs would be to disregard the obligation that falls upon the appellant as to the requirements of organized accounting and, at the same time, invite several economic agents to remain outside the tax system. IV – In the concrete case, considering that the principles of ability to pay and taxation based on actual profit are not absolute, but rather have as limits other constitutionally protected values, and that the principle of justice does not cover situations such as those in the proceedings, in an overall assessment of the interests at stake, mediated by the principle of proportionality, priority should be given to the protection of the public interest in combating tax evasion and avoidance, underlying the formal requirements. V – If amortization is the accounting process of distributing, rationally and systematically, the cost of an asset that depreciates over the different fiscal years covered by its useful life, and if they aim to give effect to the basic rule that "to the revenue of a fiscal year are deducted the costs that, in that fiscal year, it became necessary to bear to obtain such revenue", they can only be accepted when recorded as costs or losses of the fiscal year to which they relate, according to article 1, no. 3, of Regulatory Decree no. 2/90, and by the requirement of the principle of specialization of fiscal years. VI – If the appellant did not prepare a depreciation schedule in accordance with the parts of the building that became ready for use by the public, in order to record in each fiscal year the corresponding portion of depreciation, but instead recorded for depreciation purposes the entire construction project in fiscal years in which it was not possible for the entire work to be fit for operation, such depreciations cannot be accepted as costs of the fiscal years. VII – In the context of the concrete case, the public interest in the prevention and combating of tax evasion, underlying the prevention of manipulation of the principle of specialization of fiscal years, must take precedence over the principles of justice and taxation based on actual income."

Also within the scope of relevant jurisprudence for the decision of the present case, we refer for analysis to the Judgment of the Supreme Administrative Court of 5.7.2012, within the scope of case no. 0658/11, made in the Arbitral Judgment, Case 236/1014-T of 4 May 2015, which we now transcribe: "As is emphasized in this Judgment, it is settled that, in IRC matters (taking into account the applicable regulations by reason of time), the formalism of evidentiary documents of expenses does not have to reach the requirements of CIVA. But transactions with third parties must evidence, at least, a documentary basis that is judged as a minimum element of support, possibly reinforced by another type of proof, which clarifies or supplements the indication that a certain entity incurred in a cost. If they are internal documents, they must contain sufficient information so that the information expressed in them about the transactions can be tested, in comparison with the entities that appear in them as counterparties. Other means of proof, such as testimonial evidence, shall serve, fundamentally, as a general rule, as auxiliary elements or supplementary proof, if the documentary proof permits the raising or investigation of this type of additional or supplementary proof".

Given the foregoing, and applying the same interpretative logic to the present case, it follows that transactions with third parties must be supported by a documentary basis, although the same does not need to meet the requirements of CIVA (such as the invoice), but may be proven with other auxiliary elements, such as testimonial evidence.

On testimonial evidence as a means of proof of tax-deductible expenses, the Judgment of the Supreme Administrative Court of 22.1.2014, case no. 01632/13, has already ruled, and it was considered that "although the tax law makes the deductibility of the expense/cost dependent on its respective proof (article 23° no. 1 and article 45º no. 1 subsection g) of CIRC), it does not restrict it to that resulting from its recording in accounting and external supporting document, accepting that, in the insufficiency of these, the occurrence of the cost and its respective corporate application may be proven, by other means of proof [it being certain, however, that such documentary proof should be considered as predominant in the documentation of the cost and its consequent deductibility, it is not, however, the only one, given even the prevalence of the principle of ability to pay. (See, on the question of the relevance, or not, of other types of proof, besides documentary, António Moura Portugal, The Deductibility of Costs in Portuguese Tax Jurisprudence, Coimbra Publisher, 2004, pp. 201 et seq... And on the admissibility of other means of proof, including testimonial evidence, to make up for the lack of external documents, as a demonstration of the fairness of the assessment made and as a demonstration of the amount spent, see also, Freitas Pereira, CEF Opinion, no. 3/92, of 6/1/92, CTF no. 365, pages 343/352, and Tomás de Castro Tavares, CTF no. 396, pp. 7/177.)]".

The question of alternative means of proof of recorded expenses was assessed by the Northern Administrative Court, in the Judgment of 14 July 2014, in case 02390/05.0BEPRT, in which the following was decided: "in the absence of an external document proving the cost in question, proof of the realization of the cost must be admitted by any means, provided that it is adequate to demonstrate the main characteristics of the transaction, which implies the clear definition of the operations in question and the production of the necessary proof in order to overcome the difficulty pointed out related to the lack of an external document…", and it was also considered that: "In this respect it is elementary that (...) it was incumbent upon the Respondent to draw up the entire process in question, specifying the main characteristics of each of the transactions in question", "imposing to evidence the upstream process, that is, what was contracted between the parties, the conditions set, (...) in order to make clear the reading of the set of situations discussed in the proceedings".

In tax doctrine, the importance of documentary proof of expenses is also underlined. We note the understanding of António Moura Portugal, The Deductibility of Costs in Portuguese Tax Jurisprudence, Coimbra, 2004, states (p. 109): "In matters of costs, the most important means of proof is, without doubt, the documentary, for reasons that boil down to greater suitability to the requirement of practicability and to the specific characteristics of tax litigation, this apart from the outstanding importance that this means of proof assumes in the usual practice of commerce and economic transactions". The Author goes on to emphasize that (p. 195): "Jurisprudence does not accept as a sole rule the principle of equation between invoices and supporting document of the cost…In a word, the requirement of documentary proof, in this respect, is neither confused with nor exhausted in the requirement of an invoice".

The aforementioned author further tells us, with regard to the question of whether the supporting document is the exclusive means of proof for the "proof" of the cost, "The majority jurisprudential current goes in the direction of admitting the recourse to other means of proof (in particular testimonial evidence) to prove that a certain posting relates to a cost…".

Finally, on the relationship between documentary proof and testimonial evidence, the cited Author also writes (p. 202): "The STA had the opportunity to pronounce itself on this subject, separating the issues of the substitution of an invoice by testimonial evidence (not admitted by law) from the cases in which testimonial evidence functions as a mere complement to that documentary proof".

Given the foregoing, it clearly follows that an external suitable document is necessary, so that testimonial evidence alone is not sufficient.

Alternative or complementary means may be used to documentary proof, so that there is no indeterminacy regarding the material characteristics of the operations.

However, testimonial evidence may and should be used for elucidation and demonstration of the materiality and quantification of the underlying operations.

Indeed, without such documents it is not possible to make an analysis of their necessity to obtain the revenue of the taxpayer.

Thus, it is now necessary to assess the respective burden of proof of the expenses at issue here.

As SALDANHA SANCHES emphasizes, regarding the burden of proof and duties of cooperation, "When speaking of the burden of proof in a relationship, such as the tax legal relationship, in which the activity of the tax administration is carried out in strict compliance with a legal authorization, we must always speak of the burden of proof in a material sense, which represents a mere extension of the duties of cooperation that the law assigns to the taxpayer, sometimes tending to be confused with them". He further states: "Whenever there is doubt about the necessity of a certain expense, the taxpayer should cooperate with the Tax Administration to provide elements that put an end to that doubt". (Saldanha Sanches, p. 388, Manual of Tax Law, 3rd Ed.)

The general rule of the burden of proof falls on whoever invokes it pursuant to articles 74.º no. 1 of LGT and 342.º no. 1 of CC.

As enumerated in article 74.º no. 1 of LGT: "The burden of proof of the facts constitutive of the rights of the tax administration or of the taxpayers falls on whoever invokes them.", and in the same sense article 342.º no. 1 of CC: "He who invokes a right must make proof of the facts constitutive of the right alleged."

On the burden of proof of tax-deductible expenses in the terms at issue here, the Arbitral Judgment, Case 236/1014-T of 4 May 2015, of Dr. Jorge Lopes de Sousa, Professor Dr. António Martins and Dr. João Menezes Leitão, has already decided on an identical question:

"As a consequence, the Tax Administration bears the burden of proof of the occurrence of the legal prerequisites binding it as a legitimizer of its action, for which it must prove the constitutive facts on which the administrative-tax decision legally depends with certain content and with certain sense. For its part, it falls to the taxpayer to prove the facts that operate as the basis of the claims and rights it invokes.." (…) "As such, in accordance with the provision of no. 1 of article 74.º of LGT, it falls to the claimant to demonstrate the bases and factual situations in which the adjustments, disallowances and adjustments that, by it, were promoted are based and whose relevance and tax consistency it affirms, falling, therefore, upon the claimant the burden of clarifying, proving and documenting the operations in question and their justification. This very fact is, moreover, expressly recognized by the claimant who, in its arguments (no. 3), assumes that "the burden of proof of the constitutive facts of the right alleged fell upon the claimant".

In this sequence, it should further be noted that it results from article 75.º, no. 1 of LGT that the declarations of the taxpayers, presented in accordance with the provisions of the law, as well as the data and computations recorded in their accounting or records, when organized in accordance with commercial and tax legislation, are presumed to be true. However, this presumption ceases in particular if such declarations, accounting or records, or their respective supporting data, present omissions, errors and inaccuracies or if well-founded indications are found that they do not reflect or prevent knowledge of the real taxable matter of the taxpayer (article 75.º, no. 2, subsection a) of LGT). Let it be recalled further that, pursuant to no. 3 of article 75.º of LGT, "[t]he evidentiary force of the taxpayers' electronic data depends, except as otherwise provided by special law, on the provision of documentation relating to their analysis, programming and execution and on the possibility of the tax administration confirming them". (…) Now, whenever subsection a) of no. 2 of article 75.º of LGT applies, "it is on the taxpayer that the burden of proof of the facts declared or recorded in its accounting or records on which there are probationary doubts falls", therefore "the doubts that in the judicial proceeding persist about the matter of fact, cannot be considered doubts founded" for the purposes of no. 1 of article 100.º of CPPT (see thus Jorge Lopes de Sousa, Code of Procedure and Tax Procedure annotated and commented, vol. II, 6th ed, 2011, p. 133).

Whence it falls upon the claimant the burden of effective demonstration of the facts recorded and the reasons underlying the adjustments made to the accounting, it not being sufficient that doubt remains about the viability of the respective justification, as the provision of no. 1 of article 110.º of CPPT has its pivotal application when it is the Tax Administration that is affirming the existence of the tax facts and their respective quantification (see thus, the Judgment of the Supreme Administrative Court of 26.2.2014, case no. 0951/11). In this manner, the proof produced must ensure, with the certainty required, that the regularizations and adjustments made possess sufficient consistency and materiality in view of the justifications that underlie them.

The aforementioned Judgment is quite enlightening as to the responsibility of the burden of proof.

As such, in accordance with the provision of no. 1 of article 74.º of LGT, it falls to the claimant the burden of clarifying, proving and documenting the operations in question. It falls to it to demonstrate and justify their relevance and tax consistency, resorting to means of documentary proof and if necessary supplementing testimonially the factual elements that support its correction, as these were promoted by the claimant.

In this sense, "whenever there is doubt about the necessity of a certain expense, the taxpayer should cooperate with the Tax Administration to provide elements that put an end to that doubt". (Saldanha Sanches, p. 388, Manual of Tax Law, 3rd Ed.)

Given the foregoing, and in accordance with the legal framework provided for in articles, article 31º LGT, article 23.º, 23.º-A and 123.º of CIRC and in no. 1 of article 74.º of LGT, it falls to the claimant the burden of proving the costs. Given the proof produced by the claimant, the expenses invoked by it in the present request for arbitral pronouncement in the amount of €2,032,766.36 relating to alleged Third-Party Network Access Tariffs do not possess the necessary documentary basis that constitutes sufficient proof for them to be considered proven.

In these terms, in the situation at issue, the expenses presented in the amount of €2,032,766.36 are not acceptable as a tax cost, given the absence of supporting documentation for the underlying operations.

In conclusion, for all of the foregoing, in the case under analysis, it fell to the claimant the burden of proof, and as such, to present proof and the supporting documents of the expenses incurred, since the internal notes recorded in accounting and the documentary and testimonial proof presented, because they do not constitute external documents, and by not identifying the main characteristics of the operations effected, specifically the object of the operation, the purchaser, the supplier and the price, are considered incapable of being relevant as suitable documentary support to prove the respective costs, for the purposes of articles 23º, no. 1, subsection a), and 42º, no. 1, subsection g), of CIRC, a provision that requires for the purpose of determining taxable profit that the expenses be properly documented.

Thus, the claimant's claim is therefore without merit.

Finally, given that the request for annulment of the tax is considered to have no merit, the assessment of the right to compensatory interest is prejudiced as this is dependent on the existence of that.

DECISION

For these reasons, the present Tribunal agrees to:

Find without merit the request for declaration of illegality of the self-assessment act for Corporate Income Tax and Municipal Surcharge, no. ...-... -..., relating to the substitute IRC declaration for 2014, which fixed a total tax to pay of €138,776.31 (one hundred thirty-eight thousand seven hundred seventy-six euros and thirty-one cents).

VALUE OF THE PROCEEDING

In accordance with the provisions of articles 306.º, no. 2, and 297.º, no. 2 of C.P.C., article 97.º-A, no. 1, subsection a) of C.P.P.T. and article 3.º, no. 2, of the Rules of Costs in Tax Arbitration Proceedings, the proceeding is assigned a value of €138,776.31.

COSTS

In accordance with the provisions of articles 22.º, no. 4, and 12.º, no. 2, of RJAT, article 2.º, no. 1 of article 3.º and nos. 1 to 4 of article 4.º of the Rules of Costs in Tax Arbitration Proceedings (RCPAT), as well as Table I attached to this statute, the total value of costs is fixed at €3,060.00 (three thousand and sixty euros), to be borne by the claimant in accordance with article 12.º, no. 2 of RJAT, article 4.º of RCPAT and Table I attached to the latter. – no. 10 of article 35º, and nos. 1, 4 and 5 of article 43º of LGT, articles 5.º, no. 1, subsection a) of RCPT, 97.º-A, no. 1, subsection a) of CPPT and 559.º of CPC).

Notify the parties.

Lisbon, 26 January 2018

The Arbitrators

José Baeta de Queiroz

José Ramos Alexandre

Paulo Ferreira Alves