Process: 442/2017-T

Date: January 26, 2018

Tax Type: IRC

Source: Original CAAD Decision

Summary

CAAD Process 442/2017-T addresses the application of the accrual principle under Article 18 of the Portuguese Corporate Income Tax Code (CIRC) regarding ATR (Third-Party Network Access) tariff expenses totaling €178,918.45. The applicant company paid invoices and debit notes to B... SA in 2015 following a court settlement agreement executed on 19 March 2015, which resolved a legal dispute. Although the expense was disclosed in Note 5.3.1 of the 2015 Financial Statements Annex, the company failed to deduct it for tax purposes due to error. The company filed a gracious appeal on 31 January 2017 challenging the IRC self-assessment for fiscal year 2015, which was tacitly dismissed. The company argued that the €178,918.45 expense should be tax-deductible in 2015 under the accrual/matching principle, invoking principles of periodization of taxable profit, ability to pay, and tax justice. The Tax Authority contested this, arguing that the expense did not qualify for the exception under Article 18(2) of CIRC, as the company failed to provide adequate justification for the accounting treatment adopted. The TA further contended that principles of justice and taxation on actual income should not override other legislative objectives such as combating tax fraud and evasion and ensuring fiscal system sustainability. The arbitral tribunal rejected the TA's preliminary objection regarding prejudiciality with case 436/2017-T (which concerned different ATR expenses from 2014), finding no dependency between the proceedings and proceeding to examine the merits of the case.

Full Decision

ARBITRATION DECISION

Report

A…, SA (hereinafter referred to as "A…" or "Applicant"), with tax identification number … and registered office at Rua …, no. …, in …, appeared, on 25-07-2017, under Article 2, No. 1, paragraph a) and Articles 10 and et seq. of the Legal Framework for Tax Arbitration, as provided for in Decree-Law No. 10/2011, of 20 January, as amended by Article 228 of Law No. 66-B/2012, of 31 December (hereinafter abbreviated as "RJAT") and Articles 1 and 2 of Regulatory Order No. 112-A/2011, of 22 March, to lodge a request for arbitral award concerning (i) the legality of the dismissal of a gracious appeal filed by it on 31 January 2017 (doc. 2 attached with the arbitral request), insofar as it fails to acknowledge the illegality of part of the self-assessment of Corporate Income Tax (IRC) for the financial year 2015 (doc. 1 attached with the arbitral request) and concerning (ii) the legality of that part of the self-assessment of IRC, with respect to the non-recognition for tax purposes in that year of an expense in the amount of € 178,918.45, relating to Third Party Access to the Network (ATR) tariffs.

The Tax and Customs Authority (hereinafter, "TA") is the Respondent.

The request for constitution of the arbitral tribunal was accepted by the President of CAAD and automatically notified to the TA on 28-07-2017.

The Applicant did not proceed with the appointment of an arbitrator, and therefore, in accordance with the provisions of paragraph a) of No. 2 of Article 6 and paragraph b) of No. 1 of Article 11 of the RJAT, the President of the Deontological Council of CAAD designated the undersigned as arbitrator of the singular arbitral tribunal, who communicated acceptance of the appointment within the applicable period.

On 12-09-2017 the parties were duly notified of this designation and did not express the will to refuse it, in accordance with the combined provisions of Articles 11, No. 1, paragraphs a) and b), of the RJAT and 6 and 7 of the Deontological Code.

Thus, in accordance with the provisions of paragraph c) of No. 1 of Article 11 of the RJAT, the arbitral tribunal was constituted on 27-09-2017.

Duly notified, the TA submitted, within the legal period, a reply in which it defended the lack of merit of the request, raising a preliminary issue, defending itself through contestation and attaching a copy of the administrative file.

The hearing referred to in Article 18 of the RJAT was dispensed with, as it was considered unnecessary in this case, and the tribunal invited the parties to produce written submissions, which they did, reiterating and developing their respective legal positions.

The date of 24-01-2018 was set for the issuance of the final decision.

The Applicant herein requests that the illegality of the tacit dismissal of the gracious appeal be declared, as well as the partial illegality of the above-identified self-assessment and, consequently, that the said dismissal and self-assessment be annulled, under Article 2, No. 1, paragraph a), of Decree-Law No. 10/2011, insofar as it reflects the non-deduction for tax purposes in the 2015 tax year of an expense relating to ATR tariffs in the amount of € 178,918.45, arguing, in summary:

  • On 31-05-2016, the Applicant submitted its Corporate Income Tax return (Model 22) for the 2015 financial year;

  • During the said financial year, the applicant proceeded to pay a set of invoices and debit notes to B…, S.A. (hereinafter referred to as "B…"), in the amount of € 178,918.45, following a court settlement agreement, executed on 19-03-2015, which ended a legal dispute between the Applicant and B…;

  • Although reported in Note 5.3.1 of the Annex to the Financial Statements for 2015 (doc. 3), the Applicant did not deduct the expense for tax purposes, due to error;

  • An expense which it understands should be deducted for tax purposes in the 2015 financial year, in accordance with the principles of periodisation of taxable profit, capacity to contribute and justice;

  • Therefore, the illegality of the dismissal of the gracious appeal and the partial illegality of the self-assessment relating to the 2015 financial year should be declared and, consequently, the said dismissal and self-assessment should be annulled, with respect to the non-consideration of the expense in the amount of € 178,918.45.

In turn, the Respondent came forward in reply to argue, in summary:

  • The consideration of these expenses in the taxation period of 2015 is not subsumed under the exception contemplated in No. 2 of Art. 18, because the Applicant fails to put forward grounds that justify the accounting procedures adopted, nor do they permit the deduction of the amounts in question in the taxation period of 2015;

  • The principles of justice, taxation on actual profit and capacity to contribute should not override other objectives of the legislator, such as combating fraud and tax evasion and the sustainability of the financial and fiscal system;

  • Therefore, the arbitral request should be dismissed.

The arbitral tribunal is materially competent and was duly constituted.

The parties have legal personality and capacity, are legitimate and are legally represented (Articles 4 and 10, No. 2, of the same statute and Article 1 of Regulatory Order No. 112-A/2011, of 22 March).

The proceedings are not affected by nullities.

However, the TA raises a preliminary issue: it argues the existence of a relation of prejudiciality or dependence between the present arbitral request and the one that gave rise to case No. 436/2017-T (document attached with the reply to the preliminary issue).

In case 436/2017 the Applicant herein requests the declaration of legality and annulment of the dismissal of the gracious appeal insofar as it fails to acknowledge the illegality of part of the self-assessment relating to the 2014 financial year, with respect to the improper disregard of an expense relating to ATR (Third Party Access to the Network) tariffs, in the amount of € 2,032,766.36; the declaration of partial illegality and consequent partial annulment of the self-assessment relating to the 2014 financial year relating to the amount of € 2,032,766.36 of excessive taxable base to which corresponds tax in the amount of € 138,766.31, the reimbursement of which it requests, as well as the payment of compensatory interest.

In the present arbitral request, the Applicant requests the declaration of legality and annulment of the dismissal of the gracious appeal insofar as it fails to acknowledge the illegality of part of the self-assessment relating to the 2015 financial year, with respect to the improper disregard of an expense in the amount of € 178,766.36 relating to a court settlement; the declaration of partial illegality and consequent partial annulment of the self-assessment relating to the 2015 financial year relating to the amount of € 178,766.36 of excessive taxable base to which corresponds tax in the amount of € 37,572.87.

As the Applicant argues, "different expenses, invoiced in different years, with [request] and cause of action invoked, also different".

No relation of prejudiciality or dependence is apparent between both arbitral requests, and therefore, under No. 1 of Art. 272 of the CPC as interpreted through Art. 29, No. 1, paragraph e) of the RJAT, the Respondent's claim for suspension of the present arbitral proceedings until the judgment becomes final in case 436/2017-T fails to succeed.

There is therefore no obstacle to the consideration of the merits of the case.

II. Decision

1. Matters of Fact

1.1. Facts Held as Proven

The following facts are held as proven:

  • The Applicant is a joint-stock company registered in the register for the exercise of the activity of "Gas Trading by Pipelines", CAE 35230.

  • On 31 May 2016, the Applicant submitted its Corporate Income Tax declaration Model 22 for the 2015 financial year (doc. 1 attached with the arbitral request).

  • The Applicant filed, on 31 January 2017, a gracious appeal against the self-assessments for the 2014 and 2015 financial years, requesting the tax recognition in 2015 of costs in the total amount of € 2,211,684.81 (doc. 2 attached with the arbitral request).

  • Included in that amount is the sum of € 178,918.45, relating to ATR tariff expenses, which, although reported in Note 5.3.1 of the Annex to the Financial Statements for 2015 (doc. No. 3 attached with the arbitral request), the Applicant did not deduct in the 2015 financial year.

  • The determination of this amount of € 178,918.45, relating to prior taxation periods (2012 and 2013), resulted from a settlement in a legal proceeding (doc. 8 attached with the arbitral request).

  • On 17 April [2013], B… filed against the Applicant a writ of execution concerning a set of invoices and debit notes dated 2012 and 2013 relating to ATR tariffs in the amount of € 295,204.58 (doc. No. 5 attached with the arbitral request).

  • The applicant filed opposition to the writ (doc. No. 6 attached with the arbitral request), invoking the reasons it indicated in its arbitral request and summarised below:

"22

Firstly, the said writ of execution included invoices that had been paid by the now applicant and which were not, in fact and at the date, pending payment, for which reason part of the claimed amount was not actually in default.

23

Regarding the remaining invoices, the applicant rejected them because the necessary data had not been sent to validate the alleged expense, data which B… had a contractual obligation to supply.

24

Indeed, the network access use agreement concluded between the parties provides that B… should provide information to A… regarding final consumption values, capacity used, service quality compensation and other services relating to its clients (Doc. No. 7, in particular the clause 9 on "Billing and Payment").

25

As prescribed in clause 9 of the said agreement, B… bills access tariffs, service quality compensations and other services provided, simultaneously with the communication of the above-mentioned data.

26

The contract further provides (clause 9) that A… may contest the billed amounts before proceeding to payment thereof.

27

Now, precisely that is what occurred (docs. Nos. 5 and 6) with respect to part of the invoices and debit notes whose amounts were claimed by B…: additional information had been requested relating to them, essential for confirmation of the legitimacy of the billed amounts, which, at the date of initiation of the writ of execution proceedings, had not been received (docs. Nos. 5 and 6), so the now applicant did not have to acknowledge such invoices and respective debt while that lack had not been remedied and could then validate the expenses which B… wanted to impute to it without demonstration thereof, and in fact did not acknowledge, either for civil purposes or for tax purposes, with respect to the amount in question here (docs. Nos. 5 and 6)".

  • The said writ of execution ended by settlement concluded between the Applicant and B…, in which the latter recognised it was in debt for € 178,918.45, a settlement approved by the Central District Court of Lisbon, with the TA being notified of the end of the proceeding on 19 March 2015 (doc. No. 8 attached with the arbitral request).

  • Up to the date of presentation of the arbitral request, the applicant was not notified of any decision issued in the gracious appeal proceeding it had filed.

  • On 25 July 2017, the Applicant lodged the present request for arbitral award.

1.2. Facts Held as Not Proven

There are no material facts for the decision of the case that have not been proven.

1.3. Grounds of the Factual Matters

The proven facts are based on the positions assumed by the parties, in light of Article 110, No. 7 of the TPPT, on the documentary evidence and on the Administrative File attached to the records.

2. On the Law

The essential question to be decided and raised by the Applicant, A…, in its request for arbitral award is the question of the (il)legality of the Corporate Income Tax self-assessment act for 2015 by virtue of the fact that the amount of € 178,918.45 was disregarded as an expense, an amount that the Applicant had to pay to one of its suppliers, following a court settlement agreement executed and approved in 2015.

The legal framework of the question is based on Article 18 of the Corporate Income Tax Code (CIRC), which provides as follows:

Article 18

Periodisation of taxable profit

1 — Income and expenses, as well as other positive or negative components of taxable profit, shall be attributable to the taxation period in which they are obtained or incurred, regardless of their receipt or payment, in accordance with the economic periodisation regime.

2 — Positive or negative components considered as relating to prior periods shall only be attributable to a taxation period when at the date of closure of the accounts of the period to which they should have been attributed they were unforeseeable or manifestly unknown.

(…)

The principle of specialisation of the financial year is established here, which makes the financial year coincide with the tax year which, in turn, generally coincides with the calendar year. Thus, in accordance with this principle, each year constitutes a financial year and as such has its results account which expresses the profit or losses.

Now, "for this purpose, income and costs should be recognised when obtained or incurred, regardless of their receipt or payment"[1]. The principle of specialisation of the financial year is expressed precisely in the fact that the charges that are economically attributable to a given financial year should be considered as costs thereof, the financial year in which payment is made being irrelevant.

In the same vein, Rui Duarte Morais emphasises the importance of this principle "characterised by the division of the life of the company into time intervals and by the attribution to each of them of the components, positive and negative, which make it possible to determine the result corresponding to it"[2], (…) with this specialisation "imposing the carrying out of an inventory at the end of the financial year, from which there follows the need to attribute to each financial year all the income and costs that are inherent to it and only those"[3].

Freitas Pereira adds in this regard[4], also referring to the importance and rationale of the principle of specialisation of financial years, that "the temporal specialisation of profit components is even more important for tax purposes than for accounting purposes, given the constraints in which the determination of the tax to be paid occurs, so as to avoid divergences in results between different financial years with the purpose of minimising the tax burden (…). Indeed, this temporal attribution can be an instrument of results manipulation, so as to, namely:
a) Defer profits in time;

b) Fragment profits, distributing them over different financial years, with the aim of avoiding, in a tax with progressive rates, taxation at higher rates;

c) Concentrate profit in a financial year where more substantial deductions can be effectuated (e.g. by loss carry-forward or tax incentives)."

As already noted, the amount in question in the present case would be based on a court settlement in a writ of execution that was processed in the Central District Court (Civil Section) of the District of Lisbon and in which the Applicant and B…, its supplier, were parties.

The Applicant states in its arbitral request that the object of the said writ of execution was "a set of invoices and debit notes dated 2012 and 2013, relating to ATR tariffs" (Article 20 of the arbitral request).

The Applicant argues that "until the agreement reached in 2015 it did not (…) have to acknowledge any expense or debt whatsoever, because it was convinced of the lack of contractual basis for B… to invoice it with amounts not duly justified, that is, not accompanied by sufficient information to support their legitimacy, the reality of such expenses".

Now, it does not appear to us that this position is consistent with the principle of specialisation of financial years nor with the wording of Article 18, No. 2 of the CIRC, which states that "positive or negative components considered as relating to prior periods shall only be attributable to a taxation period when at the date of closure of the accounts of the period to which they should have been attributed they were unforeseeable or manifestly unknown".

If it is true that A… understood that some of the invoices that were the subject of the dispute between it and B… had already been paid, it acknowledges that, in relation to the others, some "were not, in fact and at the date, pending payment" and, regarding the remaining ones (…), it rejected them because the necessary data had not been sent to validate the alleged expense".

At no point did the Applicant allege that B… did not provide the contracted service. Therefore, although questioning the amount of the service, the truth is that this was effectively provided and that this service would necessarily have to be counterpart to a cost/expense that the Applicant could deduct for tax purposes, if not with respect to the 2012 financial year, at least in the 2013 financial year, the period in which, according to itself, the controversial invoices and debit notes were issued.

Moreover, given that the writ of execution was filed on 17 April 2013, at least from that date onwards, the Applicant could not fail to be aware of the foreseeability/existence of the expenses in question.

It therefore does not seem legitimate to argue that the expenses, at the date of closure of the accounts of the period to which they should have been attributed [2013 financial year], were unforeseeable or manifestly unknown, nor do we find any valid reason why they should be attributed to the 2015 financial year.

It is therefore considered that the principle of specialisation of financial years, based on the public interest of prevention and combating tax evasion, should prevail over the constitutional principle of taxation of companies on actual profit enshrined in Article 104, No. 2 of the Constitution of the Portuguese Republic (CPR).

In summary, in the view of this Court and in accordance with Article 18, No. 1 of the CIRC, the expense in question in the present case should have been deducted in the 2013 financial year, since, in accordance with the principle of specialisation of financial years and the provisions of Article 18, No. 2 of the CIRC, the expense in question was not unknown to the Applicant and was not unforeseeable.

Indeed, at least from the moment the writ of execution proceedings were instituted against it (April 2013), the expense in question ceased to be unforeseeable and manifestly unknown, as the Applicant argues!

Nevertheless, the Applicant could always have resorted to another accounting and tax mechanism: disagreeing, with reason or without it, with the values being demanded of it in the writ, it should have made, as a precaution, a provision, in accordance with Article 39, No. 1 a) of the CIRC.

The said provision allows for the making of provisions, deductible for tax purposes, to meet obligations and charges arising from ongoing legal proceedings due to facts that would result in their inclusion among the expenses of the taxation period.

The Applicant invokes in its defence the prevalence of the principles of justice and taxation on actual profit and capacity to contribute, provided for in Articles 266, No. 2 and 104, No. 2 of the CPR, respectively, over the principle of specialisation of financial years.

The CAAD Decision, issued on 31-03-2017, in case No. 422/2016-T clarifies in this regard that "(…) the principle of justice is imposed on the entirety of the activity of the Tax Administration (…). From the concomitant observance of the principles of legality and justice, it follows that the duty of the Tax Administration to apply the principle of legality does not translate into mere formal subordination to the rules that specifically regulate certain situations, also encompassing the duty of the administration to take into account the consequences of its activity and to abstain from the strict application of rules when from them results a manifestly unjust outcome. The application of the principle of justice overriding the principle of specialisation of financial years has been effected in situations of this type, leading to the fact that no correction is made when it is not possible to attribute expenses to the period to which they should be attributed, in light of that principle, and the taxpayers did not act intentionally with the objective of obtaining some advantage. The Supreme Administrative Court has adopted this understanding, having decided, with respect to the principle of specialisation of financial years, that 'this principle should be interpreted in accordance with the principle of justice, with constitutional and legal conformity (Articles 266, No. 2 of the CPR and 55 of the LGT), so as to permit the attribution to a financial year of costs relating to earlier financial years, provided that it does not result from voluntary and intentional omissions, with a view to operating the transfer of results between financial years'[5][6]."

It does not, however, appear to us that the case under examination fits within the type of situations that this application of the principles of justice and actual taxation intends to protect.

In truth, the deferral of costs/expenses to the 2015 financial year was not due to the fact that they were unforeseeable or manifestly unknown, as results from the proven facts, nor to error by the Applicant. Neither did the TA have any kind of intervention throughout the entire process (it merely tacitly dismissed the gracious appeal relating to the 2015 self-assessment, contrary to the factual basis underlying the diverse jurisprudence and doctrine invoked by the Applicant. The deferral of costs/expenses was due solely to a choice made by the Applicant for which no legal basis is found.

Indeed, strictly speaking, in light of the principle of specialisation, in the view of this Court, the expense should already have been attributed and deducted, or at least provisioned, in the year 2013; having not done so in that year, the Applicant could still have filed, within the legal period, a gracious appeal of the respective self-assessment. But no! It comes forward to report it to the 2015 financial year and, not having deducted it, allegedly due to error, comes later to file a gracious appeal invoking the illegality of this self-assessment.

Indeed, as the Respondent argues, given that the agreement "was reached and approved in the 2015 financial year, [the Applicant notified on 19.03.2015 of the closure of the writ of execution], the legally provided means could have been activated – e.g., gracious appeal of the self-assessment of Corporate Income Tax for 2012 and/or 2013 – to request the attribution of the charges arising from the Agreement".

We understand that, contrary to what is argued by the Applicant, the resolution of the question to be decided cannot be approached by accentuating only the importance that the principles of justice and capacity to contribute merit for us, rather it requires a global weighing of the interests at stake mediated by the principle of proportionality.

Indeed, we cannot fail to take into account the legal requirements of a formal nature and of specialisation of financial years and that these have underlying objectives such as the control of the activity of the taxpayer, the promotion of reality and the protection of the public interest in combating tax evasion and avoidance.

For this reason the establishment by law of the sanction of non-deductibility of costs for the violation of ancillary and formal obligations by the taxpayer is understood: the principle of taxation according to actual profit must yield before the purposes of general prevention of tax law.

In summary, if on the one hand, the principles of capacity to contribute and taxation on actual profit are not absolute but having as limits other constitutionally protected values, on the other, the principle of justice cannot provide cover for situations such as those of the instant case, in a global weighing of the interests at stake, mediated by the principle of proportionality: the view of this Court is that prevalence should be given to the public interest of prevention and combating tax fraud, and in this weighing of interests should equally be taken into account the principle of justice from the perspective of taxpayers who fulfil their tax obligations, who would otherwise be discriminated against compared to those who systematically do not fulfil them.

In the present case, deciding in the sense requested by the Applicant would also correspond to ignoring the obligation resting on it regarding the requirements of organised accounting.

Recognising, in this concrete case and for the reasons set out, the prevalence of the principle of specialisation of financial years cannot be interpreted as "violation of the principle of proportionality (prohibition of excess) resulting from the establishment of the principle of the democratic rule of law inscribed in Article 2 of the Constitution, with particular implementation in Articles 18, No. 2, and 266, No. 2, of the Constitution, Article 52 and by violation of the principles of private initiative, private property, including means of production, and freedom of management and business organisation, which are derived from or deduced from Articles 62 (right of private property), 80, paragraph c) (freedom of initiative and business organisation), 81, paragraph f) (freedom of business management, which has as its counterpart a State that promotes neutrality as opposed to creating distortions) 82, Nos. 1 and 3 (guarantee of existence of the private sector) and 86, No. 2 (prohibition of intervention by the State in the management of private companies), all of the Constitution", as the Applicant argues.

The arbitral request cannot therefore proceed.

3. Decision

In accordance with the foregoing, this Arbitral Tribunal decides:

  1. To dismiss the preliminary issue raised by the Respondent, it not being considered that there exists any relation of prejudiciality or dependence between the present arbitral request and the one that gave rise to case No. 436/2017-T;

  2. To dismiss the request for arbitral award;

  3. To condemn the Applicant to payment of the costs of the proceedings.

4. Value of the Proceedings

The value of the proceedings is fixed at € 37,572.87, in accordance with Article 305, No. 2 of the CPC and Article 97-A, No. 1, a), of the Code of Tax Procedure and Process, applicable by virtue of paragraphs a) and b) of No. 1 of Article 29 of the RJAT and of No. 2 of Article 3 of the Regulation of Costs in Tax Arbitration Proceedings.

5. Costs

The value of the arbitration fee is fixed at € 1,836.00, in accordance with Articles 12, No. 2, and 22, No. 4, both of the RJAT, and Article 4, No. 4, of the Regulation of Costs of Tax Arbitration Proceedings and Table I annexed to the same.

Notice to be given.

Lisbon, 26 January 2018

The Arbitrator,

(Cristina Aragão Seia)

[1] Cf. Decision of the SAC issued on 25-06-2008, in case 0291/08; DGCI, CIRC Annotated, 1990, pp. 146-147; Noel Monteiro, "Regime of Competencies of the Financial Year", in Science and Fiscal Technique 108 - 231/33, and Accounting in Light of Fiscal Law, vol. 1, pp. 145 et seq.

[2] Notes on Corporate Income Tax, Almedina Coimbra, 2009, p. 103.

[3] Cf. Freitas Pereira, "The Periodisation of Taxable Profit", Science and Fiscal Technique, No. 349, pp. 77 et seq.

[4] Cf. Ob cit., pp. 77 et seq.

[5] Decision of the SAC of 2-4-2008, issued in case No. 0807/07.

[6] Indeed, long ago the Tax Administration recognised the need for flexibility in the application of the principle of specialisation of financial years, in Circular Letter No. C-1/84, of 8-6-84, published, with its respective opinion, in Science and Fiscal Technique, Nos. 307-309, pages 781-791, in which the following understanding was adopted, regarding the parallel question that arose in the domain of Industrial Contribution: "whenever in a given financial year there are costs and income from earlier financial years, the corresponding tax treatment should comply with the following rules:

a) Non-acceptance of costs and income resulting from voluntary or intentional omissions in the financial year in which they are accounted for, being considered, in principle, as such those that are practised with tax intentions, namely, when:

  • a period of exemption is about to expire or about to begin;

  • the taxpayer has an interest in reducing losses in a given financial year to obtain greater benefit from the loss carry-forward provided for in Article 43 of the Code;

  • the taxpayer intends to reduce the amount of taxable profits to alleviate its tax burden.

b) In the remaining cases, costs and income from earlier financial years should not be corrected."

Frequently Asked Questions

Automatically Created

What is the accrual principle (princípio da especialização dos exercícios) under Article 18 of the Portuguese Corporate Tax Code (CIRC)?
The accrual principle (princípio da especialização dos exercícios) under Article 18 of the Portuguese Corporate Income Tax Code establishes that income and expenses must be recognized in the fiscal year to which they economically relate, regardless of when payment is made or received. This matching principle ensures that taxable profit reflects the economic reality of each fiscal period. Article 18(2) provides limited exceptions allowing expenses to be recognized in a different period when properly justified, but requires clear accounting grounds and documentation supporting the treatment adopted.
Can ATR (Third-Party Network Access Tariffs) costs be deducted as expenses in the fiscal year they relate to under IRC rules?
ATR (Third-Party Network Access Tariffs) costs are generally tax-deductible as business expenses under IRC rules when they meet the requirements of Article 23 of CIRC: they must be incurred or supported for obtaining or guaranteeing taxable income, properly documented, and recognized in the fiscal year to which they economically relate under the accrual principle. The key issue in Process 442/2017-T was whether ATR tariff costs settled through a 2015 court agreement could be deducted in 2015, despite the company initially failing to claim the deduction due to error and the expenses potentially relating to prior periods.
How did CAAD rule on the deductibility of €178,918.45 in ATR tariffs for the 2015 tax year in Process 442/2017-T?
The complete ruling in Process 442/2017-T is not fully provided in the available excerpt, which concludes during the 'Matters of Fact' section before presenting the tribunal's legal analysis and final decision. The arbitral tribunal, constituted on 27 September 2017, rejected the Tax Authority's preliminary objection for suspension based on alleged prejudiciality with case 436/2017-T (concerning different 2014 ATR expenses), finding the cases involved different expenses from different years with distinct causes of action. The tribunal proceeded to examine whether the €178,918.45 ATR expense qualified for tax deduction in 2015 under Article 18 CIRC's accrual principle and whether the exception in Article 18(2) applied to expenses from a court settlement agreement.
What is the procedure for challenging an IRC self-assessment through a gracious complaint (reclamação graciosa) and tax arbitration in Portugal?
To challenge an IRC self-assessment in Portugal, taxpayers must first file a gracious complaint (reclamação graciosa) with the Tax Authority within 120 days of notification or payment (Article 70 of the General Tax Law). If the complaint is dismissed (expressly or tacitly after failure to decide within the legal timeframe), taxpayers may then pursue tax arbitration under the RJAT (Legal Framework for Tax Arbitration - Decree-Law 10/2011). The arbitration request must be submitted to CAAD (Administrative Arbitration Centre) within 90 days of the dismissal decision, specifying the contested acts and legal grounds. The process involves constitution of the arbitral tribunal, written submissions, optional hearings, and culminates in a binding arbitral award that can only be challenged on limited grounds before administrative courts.
Under what conditions can the Tax Authority (AT) deny the fiscal recognition of expenses in a different tax year than the one in which they were incurred?
The Tax Authority may deny fiscal recognition of expenses in a different tax year than when incurred based on Article 18 of CIRC's accrual principle, which requires expenses to be recognized in the period to which they economically relate. The TA can reject deductions when: (1) the taxpayer fails to provide adequate justification for recognizing expenses outside their proper economic period; (2) the accounting treatment lacks proper documentation or violates accounting standards; (3) the expense does not meet the exception criteria in Article 18(2) for late recognition; (4) there is insufficient evidence demonstrating when the expense economically accrued; or (5) the treatment could facilitate tax fraud or evasion, undermining fiscal system sustainability and the principle of legality in taxation.