Deductibility of Tax Benefits Against Autonomous Taxation in IRC: CAAD Case 439/2018-T

ARBITRAL DECISION

I. REPORT

On 5 September 2018, A..., S.A., with the Portuguese Tax Number ... and with its registered office at ..., ..., ...-... ..., which previously operated under the corporate name B..., S.A. (hereinafter referred to as the Claimant), filed, under the provisions of articles 95, nos. 1 and 2, paragraphs a) and d), of the General Tax Law (LGT), 99, paragraph a), of the Tax Procedure and Process Code (CPPT) and articles 2, no. 1, paragraph a), 5, no. 2, paragraph a), 6, no. 1 and 10, nos. 1, paragraph a) and 2, of Decree-Law no. 10/2011, of 20 January, which approved the Legal Regime of Arbitration in Tax Matters (RJAT), a request for the constitution of an Arbitral Tribunal, against the Tax and Customs Authority (hereinafter AT or Respondent).

The request for constitution of the arbitral tribunal was accepted by the Esteemed President of CAAD and automatically notified to the AT, and, pursuant to the provisions of no. 1 of article 6 and paragraph b) of no. 1 of article 11 of the RJAT, as amended by article 228 of Law no. 66-B/2012, of 31 December, the Deontological Council appointed the undersigned as arbitrator of the singular arbitral tribunal, an appointment accepted within the applicable timeframe without opposition from the Parties.

A. Subject matter of the request:

The Claimant seeks a declaration of illegality and the consequent partial annulment of the self-assessments of Corporate Income Tax (IRC) nos. 2014... and 2015..., referring to the tax years 2013 and 2014, for the amounts of €21,104.54 and €32,299.29, respectively, as well as of the decision of tacit dismissal of the request for official revision submitted on 9 February 2018, due to non-compliance with the regime embodied in articles 88, 90 and 92 of the IRC Code, 2 of the Tax Benefits Status (EBF) and 103, no. 3, of the Constitution of the Portuguese Republic (CRP).

The Claimant further requests the reimbursement of the amounts unduly paid, plus compensatory interest, under the terms of article 43, no. 1, of the LGT and 61 of the CPPT, as well as the condemnation of the Respondent for procedural costs, assigning to the request the economic value of €53,403.83 (fifty-three thousand, four hundred and three euros and eighty-three cents).

B. Summary of the Parties' positions

1. Of the Claimant:

The Claimant bases the annulment and indemnification requests on the following factual and legal grounds:

1. The forms of IRC model 22 declarations, approved by the Dispatches of the Secretary of State for Tax Affairs nos. 1576/2014, of 31 December 2013 and no. 15632/2014, of 18 December 2014, did not allow the Claimant to deduct the remaining amount of tax benefits available in the years 2013 and 2014 from the IRC collection, determined as autonomous taxation in those years;

2. In the year 2013, the Claimant had tax benefits in the total amount of €895,344.72, relating to SIFIDE II of 2012, RFAI of 2011, RFAI of 2012, RFAI of 2013 and CFEI, of which it deducted from the IRC collection only the amount of €300,252.08, having left undeducted tax benefits in the amount of €595,092.64;

3. In field 365 of table 10 of the IRC Model 22 declaration of the year 2013, the Claimant determined autonomous taxation in the amount of €21,104.54;

4. In the year 2014, the Claimant had tax benefits in the total amount of €896,331.16, relating to SIFIDE II of 2013, RFAI of 2011, RFAI of 2012, RFAI of 2013 and CFEI, of which it deducted from the IRC collection of the year 2014 the amount of €116,470.30, leaving undeducted tax benefits in the amount of €779,860.86;

5. In field 365 of table 10 of the IRC Model 22 declaration of the year 2014, the Claimant determined autonomous taxation in the amount of €32,299.29;

6. Considering that the self-assessments of IRC of the years 2013 and 2014 were affected by a defect of violation of law, due to error regarding the legal assumptions, the Claimant filed a request for official revision, tacitly dismissed;

7. Autonomous taxation is a rate of IRC that applies to certain expenses of taxpayers and is based on the difficulty of inspection and control of companies by the AT and the need to tax expenses that do not have fiscally relevant business purpose, being a component of IRC, as results from the current article 23-A, no. 1, paragraph a), of the CIRC, which prohibits the deductibility from taxable profit of "IRC, including autonomous taxation";

8. IRC includes autonomous taxation for purposes of non-deductibility from taxable profit, and it is not understood how it could not include the same autonomous taxation regarding the procedure for the liquidation and deduction of tax benefits, under the terms of article 90, nos. 1 and 2, of the CIRC;

9. Article 88 of the CIRC merely defines the different rates of autonomous taxation and not any mechanism for the liquidation of the tax, concluding that article 90 of the CIRC refers to the forms of liquidation of IRC, applying to the determination of the tax due in all situations foreseen in the CIRC, including autonomous taxation, as there is no other provision that foresees different terms for its liquidation;

10. Thus, it is concluded that the deduction relating to tax benefits foreseen in article 90, no. 2, of the CIRC is applicable to the collection resulting from autonomous taxation;

11. If article 90 of the CIRC were not applicable to the liquidation of the autonomous taxation foreseen in the CIRC, one would have to conclude that there would be no rule providing for its liquidation in the years 2013 and 2014, and the liquidations should be annulled as unconstitutional due to violation of article 103, no. 3, of the CRP;

12. According to article 90, no. 2, of the CIRC, deductions are made "to the amount determined under the preceding number"; no. 1 of the same rule refers precisely to the operation of liquidation of IRC, which includes autonomous taxation, from which the collection results, to which the deductions foreseen in the various paragraphs of no. 2 of article 90 of the CIRC cannot fail to be made;

13. Thus, if the amount of tax benefits exceeds the collection resulting from taxable profit, the remaining part of the deductible tax credit shall also be deductible from the collection resulting from autonomous taxation and up to the amount thereof;

14. The possibility of deduction of SIFIDE II, CFEI and RFAI results from the very nature of tax benefits, as "measures of an exceptional character instituted for the protection of relevant extrafiscal public interests that are superior to those of taxation itself that prevent them", which override the purpose of collection of revenue from autonomous taxation;

15. Neither the amendment made by Law no. 7-A/2016, of 30 March (State Budget for 2016) to no. 21 of article 88 of the CIRC can lead to a different understanding in the years 2013 and 2014, despite the legislator having attributed a supposedly interpretative nature to this legislative amendment, due to violation of the principle of non-retroactivity foreseen in article 103, no. 3, of the CRP;

16. The IRC Model 22 declarations of the years 2013 and 2014 were completed by the Claimant in accordance with the forms made available by the AT, which do not allow any deductions from autonomous taxation, which resulted in an incorrect liquidation of the amount of tax of those years and constitutes a situation of error imputable to the services of the AT.

17. Of the Respondent:

Following the dispatch of notification under the terms and for the purposes foreseen in article 17 of the RJAT, the AT submitted a response in which it defended itself by means of exceptions and contestation and attached the administrative file (PA).

a) By Exception:

The Respondent invokes the exception of material incompetence of the arbitral tribunal to resolve the dispute that is the subject of the present case, based on article 2, paragraph a), of Order no. 112-A/2011, of 22 March, which established the object and terms of the binding of the then DGCI and DGAIEC, now AT, to the jurisdiction of the Arbitral Tribunals that function, under the terms of Decree-Law no. 10/2011, of 20 January, at CAAD, in which claims relating to "Declarations of illegality of self-assessment acts, withholding at source and payment on account that were not preceded by recourse to the administrative procedure under articles 131 to 133 of the Tax Procedure and Process Code" are expressly excluded from the scope of the binding, and also in the fact that the request for arbitral pronouncement was submitted following the tacit dismissal of a request for official revision submitted after the deadline for filing a complaint under article 131 of the CPPT had expired.

b) By means of contestation, the AT defends, in summary, the following:

a. The integration of autonomous taxation in the CIRC conferred a dualistic nature, in certain aspects, to the normative system of this tax, which was embodied, in particular, in the framework of article 90/1-a) of the CIRC, in separate determinations of their respective collections, which obey different rules;

b. There is not, therefore, a single liquidation of IRC, but rather two separate determinations, two distinct calculations which, although processed under the terms of article 90/1-a) of the CIRC, in the declarations referred to in articles 120 and 122 of the same code, are made on the basis of different parameters, each materialized in the application of its own rates, foreseen in articles 87 or 88 of the CIRC, to their respective taxable bases determined also in accordance with their own rules;

c. From this it results that the amount determined under article 90/1-a) does not have a unitary character, comprising values calculated according to different rules, to which are associated also differentiated purposes, so that the deductions foreseen in the paragraphs of no. 2 can only be made to the part of the IRC collection with which there is a direct correspondence, in order to maintain the coherence of the conceptual structure of the standard regime of the tax;

d. In overall terms, the IRC collection, determined under articles 89 and 90/1, has a composite nature: on the one hand, the tax collection proper, resulting from the general structure of IRC determination, to which are deducted the amounts referred to in article 90/2, under the terms specified there, and on the other, the sum of the collections from autonomous taxation;

e. The interpretation that there is not a single IRC collection and that indiscriminate deductions as referred to in article 90/2 of the CIRC cannot be made to it, has now been established by means of the interpretative norm of article 88/21 (added by Law 7-A/2016, of 30 March), with the intention of ensuring certainty and equality in the application of the law;

f. The Claimant intends that the expression "amount determined under the preceding number", inherent to no. 2 of article 90 of the CIRC, should be understood as encompassing the sum of the amount of IRC, determined on the taxable base determined according to the rules of chapter III and the rates foreseen in article 87 of the same Code, and the amount of autonomous taxation, calculated on the basis of the rules foreseen in article 88, which would imply that, in the basis for calculation of payments on account defined in article 105/1 of the CIRC – and in terms identical to those used in article 90/2, autonomous taxation would be included;

g. However, just as it is pacifically recognized by doctrine and is coherent with the nature of payments on account, although in article 105/1 of the CIRC the expression "Payments on account are calculated on the basis of the tax liquidated under no. 1 of art. 90 (...)" is used, for its calculation basis only the IRC determined on the basis of the taxable base, determined according to the rules of chapter III and the rates of article 87 of the respective Code is considered;

h. The delimitation of the content of the expression used by the legislator in article 90/2 of the CIRC, "amount determined under the preceding number", and in article 105/1 of the CIRC, "tax liquidated under no. 1 of art. 90", should be made by attributing to it the same meaning in both provisions;

i. This is the interpretation coherent with the nature of the deductions referred to in the paragraphs of article 90/2 of the CIRC, relating to: Tax credits for double international taxation, legal and economic [current paragraphs a) and b)]; Tax benefits [current paragraph c)]; Special payment on account [current paragraph d)] and Withholding at source [current paragraph e)];

j. All the realities reflected in the deductions referred to in article 90/2 of the CIRC relate to income or expenses incorporated in the taxable base, determined on the basis of the profit of the taxpayer or advance payments of the tax, and are therefore entirely extraneous to the realities that integrate the facts generating autonomous taxation;

k. The tax credit or collection deduction is one of the technical modalities, foreseen in article 2/2 of the EBF, adopted in the measures of tax incentives for investment, for the transparency and simplicity of the calculation of the fiscal expense associated and for its indexing to the profitability of the investment, as happens in the case of SIFIDE, and which only materializes if there is profit;

l. Also with respect to the deduction of CFEI, article 3/5-a) of Law 49/2013 itself provided a clarifying answer, by prescribing that "Applying the special regime for taxation of groups of companies, the deduction foreseen in no. 1: a) Is made to the amount determined under paragraph a) of no. 1 of article 90 of the IRC Code, on the basis of the group's taxable base;", in which there is no interference whatsoever from autonomous taxation;

m. For its part, the autonomous taxation of the set of realities foreseen in article 88 of the CIRC is intended to safeguard the specific balances of IRC and the revenue of the tax by discouraging the realization of expenses that, by their nature and purposes, may be more easily subject to diversion for private consumption or correspond to expenses that have as their specific and ultimate purpose the avoidance of tax;

n. It must, therefore, be concluded that to the amount of collections from autonomous taxation tax benefits should not be deducted, especially, and in the matter that concerns us here, SIFIDE, an incentive oriented towards companies that through research and innovation create knowledge and new production processes in order to improve their competitive position in markets, create value and generate profits, and not to "reward" those that maximize the realization of expenses that are part of the facts subject to autonomous taxation rates;

o. The deductibility of tax benefits as argued by the Claimant would result in a tax incentive oriented towards the economic development of the country potentially eliminating, in the limit, the collection resulting from autonomous taxation and fostering the incentive of behaviors translated into the realization of expenses that the legislator intended to discourage;

p. Article 135 of Law 7-A/2016, of 30 March, which attributed an interpretative character to no. 21 of article 88 of the CIRC, merely established an understanding that already had support in the letter and the ratio of the law and that always had application by the generality of taxpayers as it is extracted from the legal provisions in force, nor does it violate the principle of protection of legitimate expectations, as no taxpayer in the period mentioned above had the expectation of exercising the SIFIDE II tax credit to the amount of collections from autonomous taxation;

q. As no error imputable to the services in the liquidation of the tax is verified in the present case, the Claimant should not be recognized any right to compensatory interest.

Notified to respond to the matter of the exception invoked by the Respondent, the Claimant defended that such exception does not occur, citing doctrine and jurisprudence to that effect.

As no additional evidence was requested nor were there contested facts, the holding of the meeting referred to in article 18 of the RJAT was waived and the Parties were invited to submit successive written arguments commencing with the Claimant, with 1 March 2019 being set as the date for pronouncement of the arbitral decision and the Claimant being warned that, by that date, it should proceed to pay the subsequent arbitration fee.

The Claimant submitted its written arguments, in which it reiterated the content of the previous procedural documents.

The Respondent did not submit counter-arguments.

II. PROCEDURAL CLEANSING

1. The Arbitral Tribunal was regularly constituted on 19 November 2018, in conformity with the provision of paragraph c) of no. 1 of article 11 of Decree-Law no. 10/2011, of 20 January, as amended by article 228 of Law no. 66-B/2012, of 31 December.

2. The parties have legal standing and capacity, are legitimate and are legally represented, under the terms of articles 4 and 10 of the RJAT and article 1 of Order no. 112-A/2011, of 22 March.

3. The process is not affected by defects that would invalidate it.

4. The cumulation of claims, even though relating to different acts, under the terms of no. 1 of article 3 of the RJAT, when their merit depends essentially on the assessment of the same factual circumstances and on the interpretation and application of the same legal principles or rules.

III. GROUNDS

III.1 FACTUAL MATTERS

In the judgment, the judge must distinguish the proven facts from those not proven, basing his decisions (article 123, no. 2, of the Tax Procedure and Process Code [CPPT], subsidiarily applicable to the tax arbitration process, under the terms of article 29, no. 1, paragraph a), of the RJAT), under penalty of nullity, imposed by no. 1 of article 125 of the same CPPT.

A. Proven Facts:

1. The Claimant is a Portuguese commercial corporation, with its registered office and effective management at ..., ..., ...-... ..., which previously operated under the corporate name B..., S.A. and whose corporate purpose consists, among others, in the pursuit of activities of drying, storage, processing and commercialization of rice and corn (article 6 of the Initial Petition);

2. In the year 2013, the Claimant had the following tax benefits, in the total value of €895,344.72 (Docs. 6 to 11 attached to the Initial Petition):

Tax benefit Amount

SIFIDE II – 2012 €138,639.05

RFAI – 2011 €90,306.38

RFAI – 2012 €279,815.48

RFAI – 2013 €116,632.43

CFEI – 2013 €269,951.38

1. The Claimant submitted the IRC model 22 declaration for the year 2013 on 26/05/2014 (declaration no. 2011... – Doc. 1 attached to the Initial Petition), in which field 351 of table 10 determined the IRC collection in the amount of €300,252.08, from which it deducted tax benefits in the same amount, leaving undeducted the amount of €595,092.64;

2. In field 365 of table 10 of the said IRC model 22 declaration, the Claimant determined autonomous taxation in the amount of €21,104.51, to which no deduction could be made, as not permitted by the form made available by the AT (Doc. 1 attached to the Initial Petition);

3. From the IRC model 22 declaration no. 2011... resulted the self-assessment no. 2014..., in which the refund of the amount of €57,483.84 was determined (Administrative File);

4. In the year 2014, the Claimant had the following tax benefits, in the total value of €896,331.16 (Docs. 6 to 12 attached to the Initial Petition):

Tax benefit Amount

SIFIDE II – 2013 €301,238.52

RFAI – 2011 €15,243.36

RFAI – 2012 €279,815.48

RFAI – 2013 €85,744.23

CFEI €214,289.57

1. On 26/05/2015, the Claimant submitted the IRC Model 22 declaration for the year 2014 (Declaration no. 2011-...), having determined, in field 351 of table 10, the collection in the amount of €116,470.30, from which it deducted tax benefits, up to their concurrence, leaving undeducted the amount of €779,860.86 (Doc. 2 attached to the Initial Petition);

2. In field 365 of table 10 of the same declaration, the Claimant determined autonomous taxation in the amount of €32,299.29, from which could make any deduction, as such is not permitted by the form made available by the AT (Doc. 2 attached to the Initial Petition);

3. From the IRC model 22 declaration no. 2011-..., resulted the self-assessment of IRC no. 2015..., which determined a refund of the amount of €156,311.52 (Administrative File);

4. In the years 2015, 2016 and 2017, the Claimant deducted from the IRC collection of those years and only up to their concurrence, tax benefits in the amounts of €53,772.79, €81,466.28 and €75,459.21, respectively (Docs. 13, 14 and 15, attached to the Initial Petition);

5. On 9 February 2018, the Claimant submitted a request for official revision of the IRC self-assessments nos. 2014... and 2015..., relating to the years 2013 and 2014, on the grounds of the impossibility of deducting tax benefits from the collection of autonomous taxation, according to the form of the IRC model 22 declaration made available by the AT (Doc. 3 attached to the Initial Petition and Administrative File);

6. The Claimant was not notified of the decision on the request for official revision identified in the preceding number.

B. Facts Not Proven:

There are no facts with relevance to the decision of the case that should be considered as not proven.

C. Reasoning of the proven and unproven factual matters:

With respect to the factual matters, the Tribunal does not need to pronounce itself on everything that was alleged by the parties; rather, it has the duty to select the facts that matter to the decision and to distinguish the proven facts from those not proven.

Thus, the facts pertinent to the judgment of the case are chosen and delineated according to their legal relevance, which is established in consideration of the various plausible solutions to the question(s) of law (cfr. former article 511, no. 1, of the Civil Procedure Code, corresponding to current article 596, applicable by virtue of article 29, no. 1, paragraph e), of the RJAT).

Thus, taking into account that none of the facts described above, invoked by the Claimant on the basis of the documentary evidence indicated in each of the paragraphs above, was contested by the Respondent, and there is no controversy over them, they should be considered as proven.

III.2 LAW

1. Preliminary matter – of the (in)competence of the arbitral tribunal

In its Response, the Respondent invoked the exception of lack of material competence of the arbitral tribunal to adjudicate the claim.

As this is a procedural matter which, if verified, leads to the dismissal of the suit, preventing the tribunal from ruling on the merits of the case (articles 576 and 577, paragraph a), of the Code of Civil Procedure, applicable to the tax arbitration process by virtue of article 29, no. 1, paragraph e), of the RJAT), it should be examined as a priority matter.

The AT bases the material incompetence of the arbitral tribunal on the letter of the provision in paragraph a) of article 2 of Order no. 112-A/2011, of 22 March, which established the object and terms of the binding of the then DGCI and DGAIEC, now AT, to the jurisdiction of the Arbitral Tribunals that function, under the terms of Decree-Law no. 10/2011, of 20 January, at CAAD, excluding from the scope of the binding "Claims relating to the declaration of illegality of self-assessment acts, withholding at source and payment on account that were not preceded by recourse to the administrative procedure under articles 131 to 133 of the Tax Procedure and Process Code", as well as on the fact that the request for arbitral pronouncement was submitted following the tacit dismissal of a request for official revision submitted after the deadline for filing a complaint under article 131 of the CPPT had expired.

The competence of arbitral tribunals functioning under the aegis of CAAD, as defined in article 2 of the RJAT, comprises the assessment, among others, of claims for declaration of illegality of acts of liquidation of taxes, self-assessments, withholding at source and payments on account (no. 1, paragraph a), with the tax administration being bound to the jurisdiction of the tax arbitration tribunal, under the terms of article 4 of the RJAT, and Order no. 112-A/2011, of 22 March.

Notwithstanding the literal wording of paragraph a) of article 2 of Order no. 112-A/2011, of 22 March, which excludes the arbitrability of claims relating to the declaration of illegality of self-assessments, withholding at source and payments on account in cases where the taxpayer has not previously made use of administrative challenge under articles 131 to 133 of the CPPT, both doctrine and jurisprudence have understood that, for that purpose, the request for official revision should be equated to the administrative complaint provided for therein.

In fact, both the decision of dismissal, express or tacit, of the administrative complaint and that of the request for official revision are second-degree acts, directly harmful (article 95, no. 1, paragraph d), of the LGT – according to the facts established, the Claimant not having been notified of the decision on the request for official revision filed on 9/02/2018 within the deadline referred to in no. 1 of article 57 of the LGT, its dismissal is presumed for the purposes of no. 5 of the same article), which are the immediate object of the claim and through which the legality of the primary acts is assessed, such as in the present case the self-assessments of IRC of the years 2013 and 2014.

Thus, Carla Castelo Trindade defends that "(…) the necessary administrative complaints foreseen in articles 131 to 133 of the CPPT are justified by the need for an administrative filter, prior to judicial action, because they relate to acts that are not the responsibility of the Tax Administration but of the taxpayer itself and in which the latter has not yet had any involvement. In that sense, the request for official revision serves the purpose of that administrative filter, because there the Administration will have the opportunity to pronounce itself on the act of self-assessment, withholding at source or payment on account. Excluding arbitral jurisdiction merely because the means used was not in fact an administrative complaint would violate the principle of effective judicial protection, as established in article 20 of the CRP.

And this admissibility is valid, a fortiori, both for the request for official revision submitted after the deadline provided for the necessary administrative complaint (which is 2 years under those articles of the CPPT), and for the request made when it was still possible to file an administrative complaint".

Convergently, at the level of tax arbitration jurisprudence, cite the Decision handed down in case no. 620/2017-T, with the President of the Arbitral Tribunal being Counselor Jorge Lopes de Sousa:

"(…) the Constitution does not require that the interpretation of normative instruments be limited to the literal wording and, in the matter at hand, as explained, properly interpreted the provisions of article 2, no. 1, of the RJAT and article 2 of Order no. 112-A/2011, of 22 March, it is concluded that the binding of the Tax and Customs Authority to the arbitral tribunals functioning at CAAD encompasses cases in which self-assessment acts were preceded by requests for official revision. For that reason, the interpretation made did not increase the binding of the Tax and Customs Authority in relation to what is regulated, but rather precisely defined the binding that results from the regulatory instrument, properly interpreted.

(…)

Thus, the interpretation of paragraph a) of article 2 of Order no. 112-A/2011 that is adopted here, instead of being materially unconstitutional, is the only one that ensures its constitutionality, in light of the provision in articles 103, no. 2, 112, no. 5, 165, no. 1, paragraph i), and 198, paragraph b), of the CRP, as mentioned above. That is, this is the interpretation in conformity with the Constitution, in which is recognized in the rule "a meaning which, although not apparent or not resulting from other elements of interpretation, is the necessary meaning and what becomes possible by virtue of the shaping force of the Fundamental Law. And there are various ways that, to that end, are followed and various results to which one arrives: from extensive or restrictive interpretation to reduction (eliminating the unconstitutional elements of the rule or of the act)".

Thus, there is no incompetence of the Arbitral Tribunal to assess decisions dismissing requests for official revision that assess the legality of both self-assessment acts and additional liquidation acts. (…)".

Also the Constitutional Court, in Decision no. 244/2018, of 11 May 2018, case no. 636/2017 - 1st Division, pronounced itself on the competence of arbitral tribunals in identical situations, concluding "(…) the non-unconstitutionality of the rule that considers requests for official revision equivalent to situations in which "recourse to the administrative procedure under articles 131 to 133 of the Tax Procedure and Process Code" occurred, for the purpose of interpreting paragraph a) of article 2 of Order no. 112-A/2011, with such situations being, for that reason, encompassed by the jurisdiction of the arbitral tribunals functioning at CAAD.".

Adhering to the understanding set forth, it is considered that also in the case of the present proceedings the arbitral tribunal is materially competent to decide the case, following the tacit dismissal of the request for official revision of the IRC self-assessments nos. 2014... and 2015....

1. On the deductibility of tax benefits from the collection of autonomous taxation

The main issue in question in this case is whether the amounts deductible from the tax benefits foreseen in SIFIDE II, RFAI and CFEI can be deducted from the IRC collection arising from autonomous taxation, in the years 2013 and 2014, despite the addition, by Law no. 7-A/2016 of 30 March, of no. 21 of article 88 of the IRC Code, and the subsequent wording introduced to it by Law no. 114/2017, of 29 December, to which was attributed an interpretative nature.

2.1. The Liquidation of Autonomous Taxation

According to article 89 of the IRC Code, the liquidation of this tax, including autonomous taxation, is the responsibility, in the first instance, of the taxpayers, in the periodic declaration referred to in articles 120 and 122 of the IRC Code and, subsidiarily, of the tax administration.

The procedure and form of liquidation are established in article 90 of the IRC Code, which, as worded in the year 2013, provided:

"Article 90 - Procedure and form of liquidation

1 - The liquidation of IRC is carried out as follows:

a) When the liquidation is to be made by the taxpayer in the declarations referred to in articles 120 and 122, it is based on the taxable base contained therein;

b) In the event of non-submission of the declaration referred to in article 120, the liquidation is made by 30 November of the year following the year in question or, in the case provided for in no. 2 of that article, by the end of the 6th month following the end of the deadline for submission of the declaration mentioned therein and is based on the value of the minimum annual monthly remuneration or, when greater, the entirety of the taxable base of the closest fiscal year which is determined;

c) In the event of non-liquidation under the preceding paragraphs, it is based on the elements available to the tax administration.

2 - To the amount determined under the preceding number, the following deductions are made, in the order indicated:

a) That corresponding to double international taxation;

b) That relating to tax benefits;

c) That relating to the special payment on account referred to in article 106;

d) That relating to withholding at source not susceptible to compensation or refund under the terms of applicable legislation.

3 - (Repealed)

4 - To the amount determined under no. 1, with respect to the entities mentioned in no. 4 of article 120, only the deduction relating to withholding at source is to be made when it has the nature of tax paid on account of IRC.

5 - The deductions referred to in no. 2 concerning entities to which the tax transparency regime established in article 6 applies are imputed to their respective partners or members under the terms established in no. 3 of that article and deducted from the amount determined on the basis of the taxable base that took into account the imputation provided for in the same article.

6 - When the special regime for taxation of groups of companies is applicable, the deductions referred to in no. 2 relating to each of the companies are made in the amount determined with respect to the group, under the terms of no. 1.

7 - From the deductions made under paragraphs a), b) and c) of no. 2 no negative value can result.

8 - To the amount determined under paragraphs b) and c) of no. 1 only are the deductions made of which the tax administration has knowledge and which can be made under nos. 2 to 4.

9 - In cases where the provision of paragraph b) of no. 2 of article 79 is applicable, annual liquidations are made on the basis of the taxable base determined on a provisional basis, and, in view of the liquidation corresponding to the taxable base relating to the entire liquidation period, the difference determined should be collected or cancelled.

10 - The liquidation referred to in no. 1 may be corrected, if applicable, within the deadline referred to in article 101, by collecting or cancelling the differences determined.".

With the republication of the IRC Code by Law no. 2/2014, of 16 January, the provision of article 90 took on the following wording, in effect in the year 2014:

"Article 90 - Procedure and form of liquidation

1- The liquidation of IRC is carried out as follows:

a) When the liquidation is to be made by the taxpayer in the declarations referred to in articles 120 and 122, it is based on the taxable base contained therein;

b) In the event of non-submission of the declaration referred to in article 120, the liquidation is made by 30 November of the year following the year in question or, in the case provided for in no. 2 of that article, by the end of the 6th month following the end of the deadline for submission of the declaration mentioned therein and is based on the value of the minimum annual monthly remuneration or, when greater, the entirety of the taxable base of the closest fiscal year which is determined;

c) In the event of non-liquidation under the preceding paragraphs, it is based on the elements available to the tax administration.

2 - To the amount determined under the preceding number, the following deductions are made, in the order indicated:

a) That corresponding to double legal international taxation;

b) That corresponding to double economic international taxation;

c) That relating to tax benefits;

d) That relating to the special payment on account referred to in article 106;

e) That relating to withholding at source not susceptible to compensation or refund under the terms of applicable legislation.

3 - (Repealed).

4 - To the amount determined under no. 1, with respect to the entities mentioned in no. 4 of article 120, only the deduction relating to withholding at source is to be made when it has the nature of tax paid on account of IRC.

5 - The deductions referred to in no. 2 concerning entities to which the tax transparency regime established in article 6 applies are imputed to their respective partners or members under the terms established in no. 3 of that article and deducted from the amount determined on the basis of the taxable base that took into account the imputation provided for in the same article.

6 - When the special regime for taxation of groups of companies is applicable, the deductions referred to in no. 2 relating to each of the companies are made in the amount determined with respect to the group, under the terms of no. 1.

7 - From the deductions made under paragraphs a), b) and c) of no. 2 no negative value can result.

8 - With respect to taxpayers covered by the simplified regime for determining the taxable base, to the amount determined under no. 1 only are the deductions provided for in paragraphs a) and e) of no. 2 to be made.

9 - From the deductions made under paragraphs a) to d) of no. 2 no negative value can result.

10 - To the amount determined under paragraphs b) and c) of no. 1 only are the deductions made of which the tax administration has knowledge and which can be made under nos. 2 to 4.

11 - In cases where the provision of paragraph b) of no. 2 of article 79 is applicable, annual liquidations are made on the basis of the taxable base determined provisionally, and, in view of the liquidation corresponding to the taxable base relating to the entire liquidation period, the difference determined should be collected or cancelled.

12 - The liquidation referred to in no. 1 may be corrected, if applicable, within the deadline referred to in article 101, by collecting or cancelling the differences determined.".

It thus appears to be beyond dispute that the provision of article 90 of the IRC Code applies to autonomous taxation, determined by the taxpayer in the model 22 declaration or, where applicable, by the Tax Administration, because if it did not, one would have to conclude, as the Claimant does, that not existing in the years under analysis any specific rule for the liquidation of autonomous taxation, these would have to be annulled as illegal and unconstitutional, in light of article 103, no. 3, of the CRP, which requires that the liquidation of taxes be made "under the terms of the law".

All the more so since article 88 of the IRC Code merely identifies the situations susceptible to autonomous taxation, establishing the respective rates and not containing any rule regarding liquidation, the procedure for which, in accordance with the structure of the Code, begins in article 89.

As for the collection from autonomous taxation foreseen in the IRC Code, whose autonomy is restricted to the applicable rates and the taxable base on which they are levied, it is now settled jurisprudential understanding that it constitutes IRC collection, determined under no. 1 of article 90 of the said Code, to which the deductions foreseen in the various paragraphs of its no. 2 can be made, when the liquidation is made by the taxpayer or, when made by the Tax Authority, those of which it has knowledge (article 90, no. 8, as worded in 2013 and no. 10, as worded in 2014).

In fact, as stated in the grounds of the Decision of the Constitutional Court no. 267/2017, case no. 466/16, 2nd Division, "(…) the autonomy of the taxation in question as to its taxable base, as to the applicable rates and even as to the moment of payment, by itself, does not determine – neither logically nor legally – the irrelevance of the collection obtained with autonomous taxation within the scope of the determination of the collection of IRC itself – a matter regulated, in general, in article 90, no. 1, of the CIRC –, in particular as to the integration of that collection in this latter one and, therefore, as to the admissibility of consideration of the value of the said collection for the purpose of the realization of the legally foreseen deductions in article 90, no. 2, of the CIRC. Such a matter, in the absence of a specific rule to the contrary – such as that which came to be established in article 88, no. 21, of the CIRC – is a matter of the legislative configuration of IRC itself, including in it the relevance or irrelevance, for the purposes of determination of the final IRC collection, of the amounts paid as autonomous taxation. (…)".

2.2. The Deduction of Tax Benefits

From the IRC collection determined by the taxpayers or by the Tax Administration, the tax benefits available to the taxpayer are deductible (article 90, no. 2, paragraph b) of the IRC Code, for the year 2013 and paragraph c) as to the year 2014).

It remains, however, to ascertain whether that provision encompasses all and any tax benefits or whether there may be tax benefits, in particular tax benefits for investment, that may not be included there.

The tax benefits available to the Claimant in the years 2013 and 2014 related to the System of Tax Incentives for Business Research and Development II (SIFIDE II), the Tax Regime for Support of Investment (RFAI) and the Extraordinary Tax Credit for Investment (CFEI).

In the years under analysis, SIFIDE II was successively regulated by articles 33 et seq. of the Tax Code for Investment, approved by Decree-Law no. 249/2009 of 23 September and by articles 35 et seq. of the new Tax Code for Investment, approved by Decree-Law no. 162/2014, of 31 October, which provided that the said incentive applies to IRC taxpayers resident in Portuguese territory who carry on, as a main activity, an activity of an agricultural, industrial, commercial or service nature and to non-residents with a permanent establishment in that territory, which they may deduct from the amount determined under article 90 of the IRC Code, and up to its concurrence, in the liquidation relating to the tax period to which it relates, provided that its taxable profit is not determined by indirect methods. Expenses that, due to insufficiency of collection, cannot be deducted in the year in which they were incurred may be deducted in subsequent years.

In the same years, RFAI was regulated by articles 26 et seq. and 22 et seq. of Decree-Laws no. 249/2009 of 23 September and no. 162/2014, of 31 October, respectively, under conditions similar to those previously described.

As for CFEI, approved by Law no. 49/2013, of 16 July, it is an incentive for IRC taxpayers who carry on, as a main activity, a commercial, industrial or agricultural activity, whose taxable profit is not determined by indirect methods (article 2), translating into a deduction from the IRC collection of the year 2013 (article 3) and which, in the case of the special regime for taxation of groups of companies, is made to the amount determined under paragraph a) of no. 1 of article 90 of the IRC Code, on the basis of the taxable base of the group; the amount that cannot be deducted in the year may be so in the five subsequent tax periods.

Now, in the regime of the tax incentives available to the Claimant in the years 2013 and 2014, nothing indicates that they cannot be deducted from the amount determined under no. 1 of article 90 of the IRC Code, in which autonomous taxation is included, which does not constitute an indirect method of valuation, for the purposes of articles 85 and 87 et seq. of the LGT.

On the other hand, as tax benefits are measures of an exceptional character instituted for the protection of relevant extrafiscal public interests, superior to those of taxation itself that prevent them, which can only be suspended or extinguished in the situations foreseen in article 8 of the EBF, they would always override the tax collection purpose underlying autonomous taxation.

Thus, prior to the addition of no. 21 of article 88 of the CIRC, by Law no. 7-A/2016, of 30 March, there was no legal basis for excluding the deductibility of the SIFIDE II, RFAI and CFEI tax benefits from the collection of autonomous taxation.

2.3. The Interpretative Nature of No. 21 of Article 88 of the IRC Code

Article 133 of Law no. 7-A/2016, of 30 March, which approved the State Budget for 2016, added no. 21 of article 88 of the IRC Code, which provided that no deductions could be made to the amount determined as autonomous taxation, with article 135 of the same Law attributing an interpretative nature to that rule.

Article 231 of Law no. 114/2017, of 29 December (State Budget for 2018), gave new wording to no. 21 of article 88 of the IRC Code, which then provided that "21 - The liquidation of autonomous taxation in IRC is carried out under the terms foreseen in article 89 and is based on the values and rates that result from the provision in the preceding numbers, with no deductions being made to the total amount determined, even if such deductions result from special legislation."

As a rule, the law applies only for the future, unless it is given retroactive effect (article 12, no. 1, of the Civil Code); however, as interpretative law is integrated into the law interpreted, it will always have retroactive effects which, in tax matters, are prohibited by article 103, 3, of the CRP.

Accordingly, the Constitutional Court decided in Decision no. 267/2017, case no. 466/16, 2nd Division, "To declare unconstitutional, in violation of the prohibition of creation of taxes with retroactive nature established in article 103, no. 3, of the Constitution, the provision of article 135 of Law no. 7-A/2016, of 30 March, in the part in which, by effect of the merely interpretative character attributed to it, it determines that the provision of article 88, no. 21, 2nd part, of the IRC Code – that number added by article 133 of the cited Law – according to which, to the total amount resulting from autonomous taxation liquidated in a given year in the context of IRC, the amounts paid as special payment on account in that same year cannot be deducted, applies to tax years prior to 2016 (…)".

Although the matter in question in the appeal in the Constitutional Court Decision cited related to the deductibility of PEC from the collection of autonomous taxation and in the present case the deductibility of tax benefits is at issue, it follows from the interpretation of infraconstitutional law that these are also deductible from the collection of autonomous taxation, under the terms of no. 2 of article 90 of the IRC Code, since these are integrated in the amount determined under no. 1 of the same article, a conclusion that holds true both with respect to the original wording of no. 21 of article 88 of the IRC Code and with respect to that introduced by Law no. 114/2017, of 29 December, for the years prior to its publication, even though the "special legislation" mentioned in this latter one refers to the instruments that regulate the tax benefits available to the Claimant.

From the foregoing, the illegality of the tacit dismissal of the request for official revision of the IRC self-assessments of the years 2013 and 2014 results, as does the illegality of the same self-assessments, which should be partially annulled.

1. On the Requests for Reimbursement of the Tax and Compensatory Interest

The tax arbitration process was conceived as an alternative to the process of judicial challenge (cfr. the legislative authorization granted to the Government by article 124, no. 2 (first part) of Law no. 3-B/2010, of 28 April – State Budget Law for 2010), and it should be understood that the arbitral tribunals functioning under the aegis of CAAD have the same powers that, in judicial challenge proceedings, are attributed to the tax tribunals.

In accordance with the provision of article 24 of the RJAT, the effects of the arbitral decision that becomes final and binding are the binding of the tax administration to "restore the situation that would have existed if the tax act that is the subject of the arbitral decision had not been carried out, adopting the acts and operations necessary for that purpose", with "payment of interest, regardless of its nature, in accordance with the terms foreseen in general tax law and in the Tax Procedure and Process Code.".

Also, article 100 of the LGT determines that "The tax administration is obliged, in case of total or partial allowance of administrative complaints or appeals, or judicial proceedings in favor of the taxpayer, to the immediate and full restoration of the situation that would have existed if the illegality had not been committed, including the payment of compensatory interest, under the terms and conditions foreseen in the law."

In the situation under analysis, the immediate object of the case is the tacit dismissal of the request for official revision not of tax acts (carried out by the tax administration), but of self-assessments made by the taxpayer, equated to tax acts regarding the guarantees of taxpayers, under the terms of article 54, no. 2, of the LGT.

The restoration of the situation prior to the illegality of the IRC self-assessments of the years 2013 and 2014 with nos. 2014... and 2015..., respectively, determines the reimbursement of the tax obligation supported in excess, plus compensatory interest under the legal terms.

The regime of compensatory interest, due for error of the services, consists of nos. 1 and 2 of article 43 of the LGT, with the following wording:

"Article 43 - Undue Payment of the Tax Obligation

1 - Compensatory interest is due when it is determined, in an administrative complaint or judicial challenge, that there was error imputable to the services that resulted in the payment of the tax obligation in an amount greater than that legally due.

2 - It is also considered that there is error imputable to the services in cases where, although the liquidation is made on the basis of the taxpayer's declaration, the latter followed, in its completion, the generic guidance of the tax administration, duly published.

(…)"

The self-assessments of IRC made by the Claimant, in which it was not possible to deduct the tax benefits available to it (SIFIDE II, RFAI and CFEI) from the collection of autonomous taxation, resulted from the completion of the IRC model 22 declarations, approved by the Dispatches of the Secretary of State for Tax Affairs nos. 1576/2014, of 31 December 2013, and 15632/2014, of 18 December 2014.

On the other hand, compensatory interest is also due, under the terms of article 43, no. 3, paragraph a), of the LGT, "When the legal deadline for official reimbursement of taxes is not met.", that is, in cases where the (self-)liquidation determines a refund in favor of the taxpayer.

In this context, considering that the error of the self-assessments nos. 2014... and 2015... from which resulted the refund of tax in an amount less than that legally due should be imputed to the tax administration, compensatory interest is due at the legal rate from, the date on which each of the refunds should have been issued, until the date of its actual issuance.

IV. DECISION

In these terms the arbitral tribunal decides:

a. To judge the exception of material incompetence of the arbitral tribunal to assess the legality of the tacit dismissal of the official revision of the IRC self-assessments of the years 2013 and 2014 as unfounded;

b. To judge the request for arbitral pronouncement as well-founded and to declare the illegality of the IRC self-assessments nos. 2014... and 2015..., which are partially annulled, in the part in which they did not permit the deduction of SIFIDE II, RFAI and CFEI from the collection of autonomous taxation determined by the Claimant in the years 2013 and 2014, for the amounts of €21,104.54 and €32,299.29, respectively;

c. To condemn the Respondent to reimburse the Claimant the amounts of €21,104.54 and €32,299.29, plus compensatory interest relating to each of the amounts to be reimbursed, from the dates on which each of the refunds should have been made.

VALUE OF THE CASE: In accordance with the provision of article 306, nos. 1 and 2, of the Code of Civil Procedure, 97-A, no. 1, paragraph a), of the CPPT and 3, no. 2, of the Regulation of Costs in Tax Arbitration Proceedings, the value of the case is set at €53,403.83 (fifty-three thousand, four hundred and three euros and eighty-three cents).

COSTS: Calculated in accordance with article 4 of the Regulation of Costs in Tax Arbitration Proceedings and Table I attached thereto, in the amount of €2,142.00 (two thousand, one hundred and forty-two euros), to be borne by the Tax and Customs Authority.

Let notice be given.

Lisbon, 1 March 2019.

The Arbitrator,

Mariana Vargas

Text prepared by computer, under the terms of no. 5 of article 131 of the Code of Civil Procedure, applicable by referral of paragraph e) of no. 1 of article 29 of Decree-Law 10/2011, of 20 January.

The wording of this decision follows the 1990 spelling agreement.