CAAD 443/2018-T: SGPS Regime Deduction of Charges Under Circular 7/2004 - IRC Tax Ruling

ARBITRAL DECISION

The Arbitrator Professor Doctor Jónatas Machado, appointed by the Deontological Council of the Centre for Administrative Arbitration to sit on the present Arbitral Tribunal, constituted on 19.11.2018, renders the following decision:

1 REPORT

1. A... – SGPS, S.A. (hereinafter abbreviated as "A..." or "Claimant"), holder of the unique taxpayer identification number ("NIPC")..., with registered office at Rua..., n.º..., ...-... ... ..., filed, pursuant to the provisions of paragraph a) of section 1 of article 2, paragraph a) of section 2 of article 6 and articles 10 et seq. of Decree-Law no. 10/2011, of 20 January ("RJAT"), in conjunction with paragraph a) of article 99 and paragraph e) of section 1 of article 102, both of the Tax Procedure Code ("CPPT"), applicable by virtue of paragraph a) of section 1 of article 10 of the RJAT, the constitution of the Arbitral Tribunal, in which the Tax Authority and Customs Authority (hereinafter "Respondent" or "TA") is named as respondent, regarding the decision to reject the official review request of the tax act filed against the assessment of Corporate Income Tax ("IRC") no. 2017... and corresponding statement of account adjustment, in the total amount payable of Euro 618.16 (six hundred and eighteen euros and sixteen cents).

2. The request for constitution of the arbitral tribunal was accepted by the President of the CAAD and automatically notified to the Tax Authority and Customs Authority on 07-09-2018.

3. In accordance with articles 5, section 2, paragraph a), 6, section 1 and 11, section 1 of the RJAT, the Deontological Council of this Centre for Administrative Arbitration (CAAD) appointed Professor Doctor Jónatas Machado as sole arbitrator on 29-10-2018.

4. The parties were duly notified of such appointment, to which they did not object in accordance with articles 11, section 1, paragraphs b) and c) and 8 of the RJAT and articles 6 and 7 of the Deontological Code of the CAAD.

5. By virtue of the provisions of paragraph c) of section 1 and section 8 of article 11 of the RJAT, as per communication from the President of the Deontological Council of the CAAD, the Arbitral Tribunal was constituted on 19.11.2018.

1.1 Description of Facts

6. The Claimant is a holding company ("SGPS"), governed by Portuguese law, which pursues, within its corporate purpose, the main activity of managing shareholdings in other companies, and on 31 December 2013, was the parent company of Group B... and, consequently, of the entities that comprised the scope of the respective Special Tax Regime for Groups of Companies ("RETGS"), namely, pursuant to article 69 of the Corporate Income Tax Code ("CIRC"), the subsidiaries "C..., S.A.", holder of NIPC...; "D... – Real Estate Investment Company, S.A.", holder of NIPC...; "E..., Lda.", holder of NIPC...; "F..., SGPS, S.A.", with NIPC ... (hereinafter "F..."); "G..., Lda.", with NIPC ... and "H..., Lda.", with NIPC..., in accordance with the following scheme:

7. In such capacity, the Claimant submitted, on 30 May 2014, Model 22 Declaration regarding the aforementioned consolidated tax return, by reference to the 2013 tax year, considering that, pursuant to article 115 of the IRC Code, it bears responsibility for payment of the IRC and prior submission of the Model 22 Declaration for the group, with the other group entities being jointly and severally liable for payment of the tax.

8. From the submission of said declaration resulted the determination of an aggregated fiscal result in the negative amount of € 495,527.10 (four hundred and ninety-five thousand, five hundred and twenty-seven euros and ten cents).

9. In determining the taxable profit of the Claimant and F..., these companies submitted individual Model 22 Declarations, in which fiscal results were determined in the negative amount of € 87,246.08 (eighty-seven thousand, two hundred and forty-six euros and eight cents) and positive amount of € 1,900.81 (one thousand nine hundred euros and eighty-one cents), respectively.

10. In the year 2017, by virtue of the issuance of service orders OI2016... and OI2016..., dated 08-08-2016, inspection procedures were initiated against the Claimant with the objective of controlling the RETGS of Group B..., with F..., as a company member of the group, also being inspected, pursuant to service order OI2016..., of 08-08-2016.

11. Due to the fact that neither the Claimant nor F... added any amount in field 779 of their respective Model 22 Declarations for the 2013 tax year as financial expenses incurred with acquisitions of capital shares, as a result of these inspection actions, draft reports were prepared proposing corrections to the taxable profit of the Claimant in the total amount of € 63,115.59 (sixty-three thousand, one hundred and fifteen euros and fifty-nine cents) and of F... in the amount of € 44,473.65 (forty-four thousand, four hundred and seventy-three euros and sixty-five cents), with the aggregate of these individual corrections in the RETGS of Group B... amounting to € 107,589.24 (one hundred and seven thousand, five hundred and eighty-nine euros and twenty-four cents).

12. According to the position of the Tax Inspection Services ("SIT"), such expenses could not, pursuant to section 2 of article 32 of the Tax Benefits Statute ("EBF") then in force, be relevant to the determination of the taxable profit of these companies, wherefore they calculated the amount to be added in the aforementioned declarations through the application of the formula established in Circular no. 7/2004, of 30 March, of the Corporate Income Tax Services Directorate.

13. Notwithstanding not agreeing with the aforementioned corrections, but in order to maintain its record before the TA unblemished, the Claimant, as parent company of the RETGS, proceeded, still during the inspection procedure, to submit the corresponding substitute Model 22 Declaration of the Group, with no. ..., on 7 August 2017.

14. By virtue of the submission of that declaration, the Claimant determined an aggregated fiscal result in the negative amount of Euro 382,617.11 (three hundred and eighty-two thousand, six hundred and seventeen euros and eleven cents), which constitutes a positive difference of € 112,909.99 (one hundred and twelve thousand, nine hundred and nine euros and ninety-nine cents) compared to what was initially reported, with such discrepancy corresponding, almost entirely, to the correction upon which the present Request for Constitution of Arbitral Tribunal is based, in the amount of € 107,589.24 (one hundred and seven thousand, five hundred and eighty-nine euros and twenty-four cents), albeit relating to the taxable matter.

15. Following the inspection action promoted by the TA and the submission of the substitute Model 22 Income Declaration for the 2013 tax year, the Corporate Income Tax ("IRC") assessment no. 2017 ... and the corresponding statement of account adjustment were issued, resulting in an amount payable in the total amount of € 618.16 (six hundred and eighteen euros and sixteen cents), relating to the 2013 tax year.

16. After the aforementioned regularizations by the Claimant and its subsidiary – and having declined to exercise the right to a hearing regarding the conclusions contained in the Draft Report previously notified to the Claimant through Official Communication no. 2017..., of 19-07-2017 – the final tax inspection report was issued, in which the aforementioned corrections were consolidated – qualified by the SIT as merely arithmetic – to the taxable matter of the RETGS headed by the Claimant.

17. Believing that the TA's corrections were unfounded, the Claimant decided to file, on 11 December 2017, a request for official review of the tax act, with a view to its annulment, having been notified on 9 March 2018 to, if it so wished, exercise the right to participate in the decision through prior hearing, pursuant to paragraph b) of section 1 of article 60 of the General Tax Law ("LGT"), which it did not do, having been notified of the final decision to reject the request on 04 June 2018.

18. In the request for arbitral pronouncement, A... requested the annulment, on the ground of illegality, of the decision rejecting the request for official review of the tax act filed against the Corporate Income Tax ("IRC") assessment no. 2017... and corresponding statement of account adjustment, resulting in an amount payable in the total amount of Euro 618.16 (six hundred and eighteen euros and sixteen cents), relating to the 2013 tax year.

19. Having been duly notified, pursuant to sections 1 and 2 of article 17 of the RJAT, to submit its response within 30 days, the TA filed its response on 08.01.2019, seeking the maintenance in the legal order of the contested acts.

1.2 Arguments of the Parties

20. The arguments and counter-arguments raised by the parties concern, fundamentally, the legality of the application of the calculation formula established in point 7 of Circular no. 7/2004, of 30 March, of the Corporate Income Tax Services Directorate.

21. The Claimant alleges that the invalidity of the calculation formula leads to the illegality of the self-assessment made by the Claimant and of the decision rejecting the request for official review, constituting an error in the application of law that can only be attributed to the TA services, grounding its thesis, fundamentally, on the following arguments:

a) One of the cornerstones of the national fiscal-legal system is, precisely, the principle of tax legality, enshrined in article 103 of the Fundamental Law and directly transposed into tax legislation by article 8 of the LGT, exactly under that heading;

b) Circulars in which generic orientations are set out are not legislative acts, constituting only doctrine created by the administration, which only binds the TA and its organs;

c) The method of calculating financial expenses to be disregarded in determining the taxable profit of holding companies established by Circular no. 7/2004, never having been settled, should be considered illegal, insofar as it is a method of determining taxable matter without the minimum support in law;

d) Article 32 of the EBF did not provide, either formally or materially, any mechanism or formula that would allow financial expenses (costs) incurred with financing obtained for the acquisition of capital shares to be attributed to them (thus not making it possible to determine which expenses were fiscally accepted and which would not contribute to the formation of the taxable profit of holding companies), bearing in mind the fungibility of money and the multiple possible allocations of amounts received as a result of loans obtained;

e) Although issued to help determine, with greater certainty, the amount of financing expenses to be disregarded in the calculation of the taxable profit of holding companies, thereby providing section 2 of article 32 of the EBF with a calculation method, the solution adopted is based on a proportional, indirect and presumptive calculation method, distorting, in a serious manner, at least in most cases, the tax treatment of the taxpayer, substantially exceeding the scope of the aforementioned article;

f) The law does not establish criteria for allocating financial resources to the acquisition of social participations, and the TA cannot, through administrative means, create rules of incidence, on pain of constitutional material unconstitutionality, since such rules must emanate from Law (of the Assembly of the Republic) or Decree-Law (of the Government) duly authorized;

g) Although the use of indirect valuation methods is provided for in the LGT, namely in articles 87 to 89-A, their use is of a markedly exceptional and subsidiary nature, the TA being able to make use of such methods (indirect valuation) only in cases expressly enumerated in article 87 of the LGT and only as a subsidiary mechanism in relation to evaluation by real and direct allocation methods;

h) In light of the principle of taxation of real income, which emerges as a corollary of the principle of taxpaying capacity, taxation using indirect methods should be admitted as an exception that must be properly justified, in pathological cases in which the taxpayer refuses to cooperate with the administration in disclosing their income, cases in which, in accordance with the LGT, there may be indirect determination of taxable matter by means of presumptions;

i) Recourse to indirect methods is only admissible if this is the only possibility of calculating taxable matter when the taxpayer violated its duties of cooperation and its declaration, especially its accounting, does not merit confidence;

j) The impossibility of direct accounting of taxable matter must always be ascertained and proven by the TA in concrete terms, considering the situation of a particular taxpayer, and not abstractly invoked and sustained on the ground that, allegedly, it is arduous or burdensome to apply methods of direct determination of its taxable matter;

k) Although the regime established in section 2 of article 32 of the EBF does not institute any criterion that would allow distinguishing between financial expenses allocated (or not) to the acquisition of capital shares, the TA could only, within the scope of its competencies, move in the direction of developing a method that would respect direct and real allocation, because only that would be compatible with the principle of legality constitutionally established and also, as we have seen, with that of taxation of real income;

l) In parallel – and regardless of whether the allocation method in question constitutes an indirect valuation of taxable matter, and is thus illegal – Circular no. 7/2004, of 30 March, determined that financial expenses (costs) incurred with loans obtained for the acquisition of capital shares be disregarded, for purposes of determining the taxable profit of holding companies, in the tax year to which they relate, "regardless of whether all the conditions for the application of the special regime for capital gains taxation have already been met";

m) As follows from Point 6 of said Circular, if it were concluded, upon the onerous transfer of the social participations held by those companies, that the requirements necessary for the application of the tax regime for holding companies were not met, then, "in that tax year, the consideration as a tax cost of the financial expenses that were not considered as a cost in previous tax years" would proceed.

22. To the contrary, the TA came to uphold the maintenance of the contested acts, emphasizing the following grounds:

a) Decree-Law no. 495/88, of 30 December, which regulates the activity of holding companies, stipulates that their sole contractual object is management of shareholdings in other companies as an indirect form of exercise of economic activities;

b) Participation in a company is considered an indirect form of exercise of economic activity when the participation is held for a period exceeding one year and reaches at least 10% of the capital with voting rights, with holding companies generally being prohibited from disposing of social participations held before one year has elapsed from their acquisition;

c) The general rule is the non-taxation of capital gains and losses resulting from the disposal of social participations held by holding companies, as they benefit from the application of section 2 of article 32 of the EBF, which contradicts the general regime for taxation of capital gains and losses obtained by IRC taxpayers;

d) Pursuant to section 2 of article 32 of the EBF, then in force, holding companies are exempt from taxation on capital gains in the disposal of capital shares, provided they are held for a period, but cannot deduct fiscally the financial expenses they incur for the acquisition of those same participations, thus being unable to accumulate two benefits;

e) The disregard of financial expenses should operate immediately, not depending on the disposal of social participations and the realization of capital gains, which means not considering, ab initio, the financial costs incurred with the acquisition of social participations that may come to benefit from the exclusion from taxation provided in section 2 of article 32 of the EBF, correcting this initial disregard if it is found, a posteriori, that the temporal requirement provided for in that rule was not met;

f) Paragraph b) of section 3 of article 17 of the IRC Code in conjunction with the special regime provided in section 2 of article 32 of the EBF determine the obligation to identify financial expenses directly or indirectly related to the acquisition of capital shares targeted by the exclusion of deduction for purposes of, where appropriate, adding them to taxable profit;

g) From the provisions of section 1 of article 74 of the General Tax Law results an allocation of the burden of proof, with the TA and taxpayers bearing the burden of proving the facts they allege as a prerequisite for the right they intend to exercise;

h) The Claimant has the burden of specifically proving the financings obtained and the corresponding financial expenses;

i) The Claimant does not provide documentary evidence of the amounts of remunerated loans obtained and of the financial expenses inherent to the respective loans and the relationship with the alleged loans obtained;

j) The use of the allocation method from Circular 7/2004 is aimed precisely, in accordance with the provisions of article 32, section 2 of the EBF, at achieving taxation as close as possible to real profit, particularly in the case of omission of quantification, by the taxpayer, of financial expenses attributable to capital shares held by it;

k) The methodology presented by the taxpayer, of the alleged direct allocation, does not allow for assessing concretely which financial expenses correspond to the acquisition of capital shares, as such not deductible for purposes of article 32 of the EBF, which reinforces the correction of the method applied within the inspection procedure, in accordance with what is established in Circular no. 7/2014;

l) It is not Circular no. 7/2004 that creates presumptions of non-deductible expenses, but it is the law itself that excludes the deductibility of financial expenses (incurred with financing linked to the acquisition of social participations disposed of and which realize capital gains excluded from taxation) for purposes of determining the taxable profit of the year in which they are incurred, even if earlier;

m) Except for what is imposed in section 7 of Circular no. 7/2004, regarding the use of the indirect method of allocation of financial expenses, nothing would prevent, on the assumption that direct allocation was possible, the Claimant from undertaking it, thereby contradicting the imposition of the indirect method of allocation of financial expenses, reason why it is not clear in what way this administrative instruction could contain true rules of incidence, determination of rate and assessment.

n) Article 32 of the EBF, in determining that financial expenses incurred with the acquisition of social shares do not contribute to the formation of the taxable profit of holding companies, did not establish the method to be used for purposes of allocating financial expenses to social participations;

o) Circular no. 7/2004, in respect for the ratio legis implemented with the legislative change to section 2 of article 32 of the EBF, intends nothing more than to give effect to the law, explaining a possible method and a way of calculating financial expenses incurred with its acquisition of social shares;

p) The issuance of Circular no. 7/2004, of 30/03, recommending the adoption of an indirect method, whenever a holding company faces the practical impossibility of a specific allocation of financial expenses to capital shares, i.e., when the identification of financial expenses incurred with the acquisition of those participations places difficulties of execution and becomes difficult to control, had as its origin reasons of practicability and feasibility of a legal rule and the duty that section 3 of article 59 of the LGT imposes on the TA to disclose generic orientations regarding the interpretation and application of tax norms;

q) The administrative orientations set out in the Circular (points 7 and 8) on the method of indirect allocation and its respective formula have underlying them the concern of alignment with the ratio legis of section 2 of article 32 of the EBF, and are circumscribed by the classical methodologies used in corporate financial management, and should, in any case, be understood as a subsidiary mechanism for the application of the method of direct and specific allocation, which takes precedence over any other method;

r) It is not Circular no. 7/2004 that creates rules of incidence, but it is the law itself, interpreted in the terms set out above, that excludes the deductibility of financial expenses (incurred with financing linked to the acquisition of social participations disposed of and which realize, even if potentially, capital gains excluded from taxation), for purposes of determining the taxable profit of the year in which they are incurred;

s) The consistent interpretation of Circular no. 7/2004 is in conformity with the letter of the law, insofar as it does no more than undertake the discovery of its most precise meaning, in respect, moreover, for the general theory of interpretation of law and the normative framework that shapes it, limiting itself, within its legal scope, to promote the uniformization of interpretation and application of the tax rule in question;

t) The tax act of assessment in question here is not vitiated or afflicted with any illegality that can be attributed to it on the basis of this question of allocation of financial expenses, associated with the issuance of Circular no. 7/2004, of 30 March.

1.3 Arbitral Meeting of Article 18 of the RJAT

23. By order of 09.01.2019, given the absence of evidence to be produced at a hearing and the pronouncement already made in writing by the Claimant, the holding of the meeting referred to in article 18 of the RJAT was waived and simultaneous written submissions were ordered, with the legal deadline for rendering the arbitral decision being set.

24. In the submissions, filed with the proceedings by the Claimant on 28.01.2019 and by the Respondent on 05.02.2019, the latter maintained in essence the arguments presented in the initial pleading, with the latter referring, without more, to its defense.

2 PRELIMINARY ISSUES

25. Given that notification of the decision rejecting the request for official review took place on 11 June 2018, it is noted that the Claimant had until 9 September 2018 to file the request for arbitral pronouncement, wherefore the same is timely.

26. No exceptions were raised.

27. The Arbitral Tribunal is regularly constituted (articles 5, section 2, 6, section 1, and 11 of the RJAT) and is materially competent (articles 2, section 1, paragraph a) of the RJAT).

28. The parties have legal personality and capacity and are duly represented.

29. The proceedings do not suffer from nullities nor were any exceptions raised, and the matter may proceed to a decision on the merits of the case.

3 GROUNDS

3.1 Established Facts

30. Based on the documents brought to the proceedings, the following facts relevant to the decision of the case sub judice are established:

1. Based on the Corporate Income Tax ("IRC") assessment no. 2017... and on the corresponding statement of account adjustment, the total amount payable of Euro 618.16 (six hundred and eighteen euros and sixteen cents), relating to the 2013 tax year, was determined. (Documents no. 1 and 8)

2. The Claimant is a holding company ("SGPS"), governed by Portuguese law, which pursues, within its corporate purpose, the main activity of managing shareholdings in other companies, and on 31 December 2013 was the parent company of Group B... and, consequently, of the entities that comprised the scope of the respective Special Tax Regime for Groups of Companies ("RETGS"), namely, pursuant to article 69 of the CIRC, the subsidiaries "C..., S.A.", holder of NIPC...; "D..., S.A.", holder of NIPC...; "E..., Lda.", holder of NIPC...; "F..., SGPS, S.A.", with NIPC ... (hereinafter "F..."); "G..., Lda.", with NIPC ... and "H..., Lda.", with NIPC.... (Document no. 2)

3. As the parent company, the now Claimant submitted, on 30 May 2014, the Model 22 Declaration regarding the aforementioned consolidated tax return, by reference to the 2013 tax year (cf. Model 22 Declaration of Group B... no. ... . (Document no. 3)

4. In determining the taxable profit of the Claimant and F..., these companies submitted individual Model 22 Declarations (cf. Model 22 Declarations with nos. ... and ..., of 30 and 29 May 2014) in which fiscal results were determined in the negative amount of Euro 87,246.08 (eighty-seven thousand, two hundred and forty-six euros and eight cents) and positive amount of Euro 1,900.81 (one thousand nine hundred euros and eighty-one cents), respectively. (Documents nos. 5 and 6)

5. The SIT proceeded directly to the application of the formula provided for in the aforementioned generic orientation and determined, indirectly, the amounts of expenses that, allegedly, would have been attributed to the acquisition of social participations by the Claimant and by F.... (Documents nos. 5 and 6)

6. The Claimant, as parent company of the RETGS, proceeded, still during the inspection procedure, to submit the corresponding substitute Model 22 Declaration of the Group, with no. ... (cf. substitute Model 22 Declaration of Group B..., relating to the 2013 tax year, on 7 August 2017. (Document no. 7)

7. The final version of the Tax Inspection Report was notified to the Claimant through Official Communication no. 2017..., of 25-10-2017. (Document no. 9)

8. On 11 December 2017, A... SGPS, in the name of the RETGS it heads, filed a request for review of the tax act, pursuant to the provisions of section 1 of article 78 of the General Tax Law ("LGT"), against the IRC assessment act identified above, in which it argued the illegality of the corrections made and which gave rise to the submission of the aforementioned declaration and consequent self-assessment of IRC. (Document no. 10)

9. Maintaining its position, based, in particular, on the application of Circular no. 7/2004, of 30 March, the TA notified the Claimant, through Official Communication no. 2018..., of 28-02-2018, of the draft decision rejecting the request for official review filed (Document no. 11).

3.2 Unestablished Facts

31. With relevance to the decision on the merits, there are no alleged facts that should be considered as unestablished.

3.3 Grounds for Decision

32. With respect to matters of fact, the Tribunal does not have to pronounce on everything that was alleged by the parties, with it being incumbent on it to select the facts that matter for the decision and distinguish the facts established from those not established (cf. article 123, section 2 of the CPPT and article 607, section 3 of the Code of Civil Procedure, applicable by virtue of article 29, section 1, paragraphs a) and e), of the RJAT).

33. The facts pertinent to the judgment of the case are chosen and delimited according to their legal relevance, which is determined in consideration of the various plausible solutions to the questions that are the subject of the dispute (cf. article 596, section 1, of the Code of Civil Procedure, by virtue of article 29, section 1, paragraph e), of the RJAT).

34. Thus, the facts listed above were established as relevant to the decision.

3.4 The Issue to be Decided

35. The issue to be decided concerns, fundamentally, the legality of the application of the calculation method established in point 7 of Circular no. 7/2004, of 30 March, relating to the tax regime for holding companies provided, at that time, in article 32 of the EBF, which, pursuant to the case file, was the basis for the corrections made by the SIT, contained in the substitute Model 22 Declaration submitted by the Claimant.

The Holding Company Tax Regime

36. The tax regime in question was introduced by Law no. 32-B/2002, of 30 December, which established a tax benefit intended for holding companies and Venture Capital Companies ("SCR"), with a view to increasing their competitiveness. It provided for the non-contribution, to the formation of taxable profit, of the amount determined as capital gains and losses realized by holding companies with the disposal of capital shares, provided they were, among other requirements, "held for a period of not less than one year". At the same time, it established the non-contribution of financial expenses (costs) to the formation of taxable profit, provided they were borne by said companies (i.e., holding companies), with loans obtained for the acquisition of capital shares. It was intended that only financial expenses directly associated with the acquisition of social shares would be covered by the non-deductibility.

37. The logic was relatively straightforward: "given that a holding company was in a position to benefit from the exclusion from taxation as soon as it realized capital gains with the disposal of the social participations, it was no longer in an equivalent position to that of other companies, which, realizing capital gains with the disposal of social participations, did not benefit from said exclusion – wherefore it was understood that it was only within that exceptional regime that the fairness of the disregard of expenses in consideration for the disregard of gains should be weighed".

38. Under this regime, to determine the non-deductibility of certain financial expenses, it became necessary to demonstrate a direct relationship between them and the acquisition of certain social participations. Thus, if certain participations were not acquired with liabilities generating financial expenses, they would not be considered for the purpose of applying section 2 of article 32 of the EBF, as regards the non-deductibility of financial expenses. On the other hand, with respect to social participations acquired with financing generating expenses, only the expenses derived from the financing relating to their acquisition would not be deductible.

39. Its application proved to be especially complex, and it was not easy or even possible to determine what part of the financial expenses (costs) annually borne by holding companies would correspond to the acquisition of capital shares. This was particularly so because companies frequently obtained loans for the pursuit of different objectives.

40. With a view to reducing complexity and uncertainty, giving effect to the principle of legal certainty and protection of citizens' confidence, the TA, through the Directorate of Corporate Income Tax Services (DSIRC), issued Circular no. 7/2004, of 30 March, of the Corporate Income Tax Services Directorate, with the objective of assisting taxpayers in determining the adjustment to be made for the calculation of their taxable profit. Worthy of note, for the present case, is point 7, where the pro rata formula for calculating the amount of financial expenses that should be disregarded in determining the taxable profit of holding companies was established, namely, expenses related to financing obtained for the acquisition of capital shares.

41. According to the proposed method, "the remunerated liabilities of holding companies and venture capital companies should be allocated, first and foremost, to remunerated loans granted by these to the companies in which they have a stake and to other investments generating interest, with the remainder being allocated to the remaining assets, namely social participations, in proportion to their respective acquisition cost".

Generic Orientations and the Principle of Tax Legality

42. This method of calculating financial expenses to be disregarded in determining the taxable profit of holding companies is reflected in the determination of taxable matter, which immediately raises the question of whether it is compatible with the principle of tax legality, enshrined in article 103 of the Portuguese Constitution and set out in article 8 of the LGT. This is a qualified manifestation of the principle of legality of the Administration, which is a sub-principle of the constitutionally-structural principle of the rule of law. The constitutional-fiscal significance of the issue under analysis concerns, precisely, the fact that one is confronted with the introduction of an indirect method of determining taxable matter through a Circular bearing a generic orientation.

43. Pursuant to article 112, section 1 of the Constitution, "[l]egislative acts are laws, decree-laws and regional legislative decrees." In this provision, the normative acts with the dignity of formal law are enumerated. The principle of legality is inseparable from the principle of typicality of legislative acts. Its corollary is the principle of parallelism of forms or normative equivalence. In broad strokes, this principle means that a given legal regime can only be altered, repealed, revoked, supplemented or interpreted with external effect through a normative source endowed with hierarchical dignity and formal equivalence to that which established such regime.

44. The principle of normative equivalence is manifested in section 5 of article 112 of the Constitution, according to which "[n]o law may create other categories of legislative acts or confer on acts of another nature the power to, with external effect, interpret, supplement, modify, suspend or repeal any of its provisions." This means that only a formally legislative act can interpret, supplement, modify, suspend or repeal, with external effect, a provision of another formally legislative act. Whence it follows that the generic orientations issued by the administration, contained in circulars, regulations or instruments of equivalent nature (articles 55 CPPT and 68-A of the LGT), are not formal law – nor can such status be conferred on them by formal law – being acts that bind only the TA and its organs.

45. This does not mean, however, that they do not repercuss, indirectly, on the tax-legal situation of taxpayers. Such does indeed occur, by virtue of the fact that generic orientations express the TA's understanding of the spirit and text of provisions of tax law. In other words, they condense the official interpretation of tax law made by the TA. For this reason, they are invocable before taxpayers, although they cannot be invoked retroactively before those who acted on the basis of a plausible and good faith interpretation of the law.

46. The TA's competence for the administration of taxes and the promotion of correct application of tax legislation necessarily requires the formulation of generic orientations and the elaboration of rules to guarantee effectiveness to all norms created by the legislator. Indeed, the TA is called upon daily to interpret, supplement and give concrete form to tax law, and this often presents itself endowed with high complexity, sometimes because it must resort to indeterminate concepts, sometimes because it mobilizes multiple precise technical concepts of legal, economic and accounting nature.

47. In its activity, which involves direct and permanent contact with millions of individual and collective taxpayers, resident and non-resident, and the monitoring of millions of transactions, the TA faces tax issues in which the payment of all taxes is discussed involving the most diverse amounts, from the lowest to the highest, in which questions of legality, equality, horizontal equity, vertical equity or social justice acquire extreme political and legal acuity. For this reason, perfection in the exercise of such vast responsibilities cannot reasonably be expected.

48. Called upon to act under intense procedural pressure, the TA cannot count on the legislator to undertake detailed regulation of taxes or to be in a position to provide it, in real time or with high promptness, all the elements of authentic interpretation, gap-filling or technical concretization of which the former needs for the immediate, categorical and persuasive solution of the multiple concrete cases with which it is confronted at all times.

49. Because it is so, the TA cannot shy away from the necessary activity of interpretation, supplementation and concretization of tax law. It is, in practice, the primary interpreter of tax norms, with courts intervening in the second line. On the TA rests a constitutional imperative of interpretative regularity, and it is incumbent on it to ensure a sufficient degree of material legality, spatial uniformity and temporal consistency, so as to guarantee the effective pursuit of the purposes of taxation and at the same time affirm the values of universality, legality, equality, predictability, legal certainty and protection of citizens' confidence and preserve the legitimacy and functional and institutional credibility of the tax administration, which are essential for the exercise of its mission.

50. It is for these reasons, of undeniable constitutional relevance, that it is established that the binding information itself – all subject to publication – must be converted into administrative circulars, once the requirements of article 68-A, section 3 of the LGT are met. They constitute an important source of tax information available to taxpayers. Their publication means that the circulars can serve as precedent to be used in the solution of other similar cases, and can be cited and invoked for that purpose.

51. On one hand, they instruct TA officials on the interpretation and uniform application to be given to tax laws, contributing to the simplification and celerity of administrative work. On the other hand, they perform an important task of information and guidance of taxpayers, offering them indications on the way the TA will apply a provision of tax law to substantially identical factual realities.

52. That is, generic administrative circulars bind only the TA, but do so, evidently, when the latter applies tax law to the generality of taxpayers. They oblige the TA to apply legally identical solutions to taxpayers in factually identical conditions. They do not have the hierarchical-normative value of formal law, wherefore neither taxpayers nor courts are legally bound by the generic orientations, insofar as that would be contrary to the principle of typicality of laws enshrined in article 112 of the Constitution.

53. This means that taxpayers, without any penalty, may refrain from following administrative circulars when filling out and submitting their income declarations, if they are reasonably convinced, in good faith, that their position is realistically sustainable and endowed with plausibility and merit, and may, if they so wish, allege its illegality before the TA and the courts. The latter can declare its illegality, although it is expected, for reasons of competence and institutional fitness, that they manifest a reasonable degree of consideration for the TA's interpretative, applicative and concretizing activity, when the same is defensible, that is, if it is characterized by reasonableness and plausibility in light of legally, economically and accounting-fiscally relevant parameters.

54. This expectation of jurisdictional consideration is associated with the recognition of the greater institutional fitness and specialized experience of the TA in comparison with courts, as well as its greater technical, personnel and material capacity to investigate and obtain relevant information. Still, courts are not deprived of the final word on whether the TA's interpretation is legally sustainable, being left with ample margin to completely disregard generic administrative circulars, whenever, in a duly reasoned manner, they understand they should do so by force of the Constitution and law.

55. Although there is no perfect solution to resolve the problem of inconsistency in the application of tax law in a way that also guarantees a mechanism of absolute certainty for the taxpayer, generic administrative circulars bearing orientations provide a vehicle for an almost perfect solution. TA circulars often contain patterns and criteria through which the TA addresses tax facts and tax norms, so if courts consider them simply merely a piece of paper devoid of any legal value - a position that many taxpayers might also assume – the TA will be deprived of any incentive to issue generic orientations, thereby seriously compromising equality and predictability in the application of tax law.

56. Still – as already stated above – despite their interpretative and concretizing legal value, administrative circulars are not law in the formal sense. They are hierarchically subordinate to the Constitution and law, as is the case with regulations. They are therefore forbidden from making decisions that are materially legislative-tax in nature that compromise the principle of tax legality.

57. Pursuant to article 8 of the LGT, fundamental decisions in areas such as incidence, rate, tax benefits, guarantees for taxpayers, definition of crimes and the general regime of tax violations, as well as assessment and collection of taxes, including periods of prescription and expiration, regulation of tax substitution and liability figures, definition of ancillary obligations, definition of tax penalties of non-criminal nature and rules of tax procedure and process, cannot be made by circulars, regulations or instruments of equivalent nature.

58. Thus it is understood, moreover, that taxpayers can contest the constitutionality and legality of generic orientations before courts and that the tax administration is required to revise them, taking into account, in particular, the jurisprudence of the superior courts (article 6-A of the LGT).

Point 7 of Circular no. 7/2004, of 30 March

59. Once the meaning of circulars with generic orientations has been clarified, it is important to inquire whether Point 7 of Circular no. 7/2004, of 30 March, is compatible with the constitutional principle of tax legality. As it states there, "given the extreme difficulty of using, in this matter, a method of direct or specific allocation and the possibility of manipulation that it would allow, such allocation should be made on the basis of a formula that takes into account the following: the remunerated liabilities of holding companies and venture capital companies should be allocated, first and foremost, to remunerated loans granted by these to the companies in which they have a stake and to other investments generating interest, with the remainder being allocated to the remaining assets, namely social participations, in proportion to their respective acquisition cost".

60. This was about providing criteria for interpretation and application of section 2 of article 32 of the EBF, guaranteeing, at once, effectiveness, uniformity, equality, predictability and legal certainty for the provision in question. This aspect is of great practical importance, considering the fact that the possible proliferation of multiple interpretations would not fail to have serious consequences from the point of view of the principles of tax legality and equality, the interaction of the TA with taxpayers, the effective realization of the purposes of taxation and the fight against tax avoidance.

61. Since then, it is on the basis of the aforementioned instructions that tax inspection has been making and substantiating corrections to financial expenses borne by holding companies. The TA recognized that section 2 of article 32 of the EBF, although pointing to a method of direct allocation, did not provide, either formally or materially, any mechanism or formula that would allow financial (cost) expenses incurred with loans obtained for the acquisition of capital shares to be allocated to participating entities, not making it possible to determine fiscally accepted expenses and expenses that would not contribute to the formation of the taxable profit of holding companies, taking into account the multiple possible allocations of amounts received as a result of loans obtained. For this reason, the risk of tax manipulation was manifest.

62. With a view to allowing the proper execution of law, the TA imperatively determined the recourse to a pro rata formula for the determination of financial expenses associated with the acquisition of participations, a technique of application that is complex and controversial. The question immediately arose as to whether the TA merely interpreted the legal norm or went so far as to autonomously create innovative rules concerning the objective requirement for the incidence of the tax, a matter that constitutes a reserve of formal law, pursuant to articles 103 and 165/1 i) of the Constitution.

Arguments in Favor of Point 7 Solution

63. In favor of the solution advocated in Point 7 of Circular no. 7/2004, and in line with what has previously been said about administrative circulars with generic orientations, it can be sustained that it is nothing more than the simple technical concretization of the objective and fundamental legislative criterion consisting of the denial to holding companies of a double benefit (i.e. deduction/non-inclusion), through a reasonable mechanism, proportionate and in no way foreign to generally accepted accounting practices.

64. According to such an understanding, Point 7 of the Circular merely confers effectiveness on the legally-set criterion, unfolding and technically explicating its implications which were already present in seminal and implicit form in the spirit and letter of the law, a criterion endowed with sufficient normative density. More specifically, it would not have been Circular no. 7/2004 that created irrebuttable presumptions of non-deductible costs, but rather article 32, section 2 of the EBF that intended, in an entirely reasonable and legitimate manner, to exclude the deductibility of financial expenses incurred with financing linked to the acquisition of social participations whose disposal realizes capital gains excluded from taxation.

65. Given that the Constitution provides that the TA, in its interpretation of the tax norms for which it is responsible to carry out, ensures the effectiveness and uniformity of application of fiscal norms, this translates, necessarily, into the legally-subordinate issuance of generic orientations that allow filling and technically concretizing the fundamental options of the legislator. It would not be reasonable, therefore, to conclude that any and all interpretation or concretization of the principles, rules and concepts of tax law – namely, which, leaving their essential elements untouched, increases their effectiveness and reduces uncertainty in their application – should be viewed as tainted by illegality and qualified as the disguised and abusive exercise of the legislative function by the TA.

66. For this understanding, there would not be at stake, in this domain, the generalized application of indirect methods, since it will always be open to the taxpayer to bring to the TA all the concrete documentary elements necessary for precise distinction between expenses to be considered and to be disregarded in determining the taxable profit of the holding company. Section 2 of article 32 of the EBF would require the definition of a method of application apt to guarantee its effectiveness, that is, which does not render impossible or extremely difficult the application of the criterion it defines. Circular no. 7/2004, expressing the exercise of an indispensable function of integration and supplementation by the TA, would have come to technically concretize and give generality to that requirement, in a manner that is not arbitrary and entirely reasonable, adequate and proportionate, without there being any basis for speaking of violation of the principles of tax legality, proportionality or legal certainty and protection of citizens' confidence, inherent in the principle of the rule of law.

67. Consequently, the use of the calculation formula contained in Circular no. 7/2004 would be entirely legitimate, provided that its concrete application is always ensured in conformity with the purpose or ratio legis of section 2 of article 32 of the EBF and the taxpayer is recognized the possibility of escaping from it whenever the consequences of its application prove to be contrary to the principles and purposes underlying this legal provision and the same is reasonably and in good faith convinced that it has probative conditions to sustain the merit of its position in the face of the law.

68. The application of the direct allocation criterion is not excluded a priori in any way, and can be carried out by the affected companies through adequate accounting documentation. Recourse to the indirect method would always be possible, in harmony with the provisions of article 87, section 1, paragraph b) of the LGT, when it was impossible, in concreto, to prove and directly and accurately quantify the essential elements for the correct determination of taxable matter, for purposes of section 2 of article 32 of the EBF.

69. Even though one can speak of an absolute legal preference for the use of direct valuation methods for fixing taxable matter, because these methods provide greater guarantees of accuracy, recourse to indirect methods cannot absolutely be rejected, exceptionally, in cases where it proves manifestly impossible or extremely difficult to prove and directly and accurately quantify the constituent elements of taxable profit.

Application of Point 7 Solution

70. In jurisprudence, doubts have been raised as to whether Circular no. 7/2004 proceeds to fix and create innovative criteria and methods endowed with external effect for the verification of the incidence of the tax, in violation of the formal law reserve.

71. All comes down to whether it is legitimate to introduce, by Circular, an indirect method of determining taxable profit based on presumptions and exceeding the criterion of direct and real allocation legally established. For some jurisprudence, given that there is no legally-provided technical method, its creation would not be incumbent on the TA, on pain of organic and formal unconstitutionality.

72. In the jurisprudence of the Supreme Administrative Court, it has been sustained that recourse to methods of indirect valuation, although provided for in the LGT, namely in articles 87 to 89-A, is of markedly exceptional and subsidiary use, on pain of illegality. According to this orientation, the TA should only make use of such methods (indirect valuation) in cases expressly enumerated in article 87 of the LGT – simplified taxation regime, in cases and conditions provided for by law or impossibility of proving and accurately quantifying the essential elements for the correct determination of taxable matter of any tax – and only as a subsidiary mechanism in relation to evaluation by real and direct allocation methods.

73. According to this orientation, taking into account the circumstances of each concrete case, one cannot assert the abstract illegality of the method provided for in Point 7 of the aforementioned circular, if understood as only being applicable subsidiarily, as an indirect method, in cases in which it is not viable to determine directly the amount of expenses connected with financing used in the acquisition of social participations, as allow articles 85, section 1, and 87, section 1, paragraph b), of the LGT. However, the impossibility of proof of which article 87, section of the LGT speaks must be absolute, the "extreme difficulty of using, in this matter, a method of direct or specific allocation" invoked in point 7 of Circular no. 7/2004 not being sufficient as a reason for use of the indirect method.

74. This approach obtained recently weighty votes from the Supreme Administrative Court, which once again reaffirmed that "[p]oint 7 of Circular no. 7/2004, of 30.03, of the DSIRC, establishes an indirect method, presumptive, of allocation of financial expenses in disrespect of articles 87 to 90 of the LGT and is, therefore, illegal", while emphasizing the need for attention to the circumstances of each concrete case since "the 'norm' issued by the TA cannot be considered per se, in isolation, without any relationship to a concrete situation of a particular taxpayer, as if it were an illegal and prohibited allocation method; if there are reasons that justify its application, it may be a suitable method for carrying out the respective allocation, but if such reasons are not present, it is an unsuitable method for carrying out that same allocation."

75. Reiterating this position, the Supreme Administrative Court held that it shows "affected by a violation of law the act of self-assessment of IRC made in obedience to the instructions contained in Point 7 of Circular no. 7/2004, of 30.03, of the Corporate Income Tax Services Directorate, insofar as it establishes an illegal method of allocation of financial expenses incurred with the acquisition of social participations". There, the STA sustained, in a decision relevant to the case in question, that:

"as an indirect method of determining taxable profit, it would only be admissible, in general terms [cf. section 1 of article 85 and paragraph b) of section 1 of article 87 of the LGT] in cases in which there is infeasibility of direct determination of expenses resulting from financing directly associated with the acquisition of social participations, with the TA bearing the burden of proof of the verification of those prerequisites, pursuant to section 3 of article 74 of the LGT, as was well stated in the founding decision. Now, in the case sub judice, with respect to the singled out corrections, the TA did not question that the prerequisites mentioned in article 23 of the CIRC regarding the deductibility of costs were not met, instead merely using the formula contained in Circular no. 7/2004 and proceeding, in that manner, to a true use of indirect methods to determine the value of financial expenses that supposedly would have been borne with the acquisition of capital shares, and it also did not identify any social participation that had been acquired through recourse to financing, nor any financing that had given rise to the financial expenses that it understood to correct. Now, for the TA to be able to resort to the method provided for in point 7 of Circular no. 7/2004, it was incumbent on it to demonstrate that it could not effect a direct allocation, which it did not do, instead merely proceeding, without more, to apply that method. In conclusion, it is the TA that bears the burden of proof for the determination of taxable matter by indirect methods, with section 3 of article 74 of the LGT not permitting that burden to be shifted to the taxpayer".

76. This repeatedly sustained jurisprudential position is not without significance, from the point of view of the constitutional scheme of allocation of competences and functions and the requirements of equality and legal certainty and protection of citizens' confidence. On one hand, it is incumbent on courts, in their function of controlling the TA and guaranteeing taxpayers' rights, to assess the conformity of administrative circulars and their application in the concrete case with the Constitution and law. The position of the superior courts, always determining attention to the specificities of each concrete case, cannot fail to be taken into account by the remaining legal operators.

77. Tax tribunals, including arbitral tax tribunals, should take into account administrative circulars bearing generic orientations when they seek to technically concretize the fundamental options of the tax legislator. With respect to Circular no. 7/2004, it is incumbent on them to ensure, in accordance with the jurisprudence of the Supreme Administrative Court, that its application to the concrete case does not constitute an illegality and/or unconstitutionality.

78. Whereas there does not exist among us the Anglo-Saxon rule of judicial precedent, the pretension of consistency of jurisdictional decisions corresponds to an optimization requirement stemming from the principles of tax legality, tax equality and legal certainty and protection of citizens' confidence. On this depends, moreover, the very credibility and legitimacy of the jurisdictional and administrative institutions themselves.

79. From the point of view of the constitutional scheme of allocation of competences and functions, the decisions of superior courts should take precedence over the activity of the administration and provide interpretative parameters to the generality of courts, including the present arbitral tribunal. This, in total coherence with the aforementioned duty, which rests on the TA, to revise the generic orientations taking into account, in particular, the jurisprudence of the superior courts (article 6-A of the LGT).

80. This jurisprudence is part of a broader institutional dialogue, within which it is incumbent on the legislator to correct the insufficiencies of the legal text pointed out by the administration and courts. Specifically, it would be incumbent on it, to dispel all doubts, to cut out the solution of Point 7 of Circular no. 7/2004 and paste it into the text of a legal provision with hierarchical-normative dignity of formal law.

81. Within the framework of the principle of separation of powers constitutionally enshrined, the creation, interpretation and application of legal norms occur within the scope of a permanent institutional dialogue among legislative, administrative and judicial powers. What is at stake is the promotion and protection of the unity and coherence of the legal system, the functionality of the governance structure and the fundamental rights of citizens. The latter have the right to structure their personal and economic life within the framework of an institutional and normatively-structured, stable and predictable legal order.

Burden of Proof and Concrete Application of Circular no. 7/2004

82. On the burden of proof, the starting point is the provision of section 1 of article 74 of the LGT, which provides that "[t]he burden of proof of facts constituting the rights of the tax administration or taxpayers rests with whoever invokes them". Whence would result, prima facie, the allocation of the burden of proof, with the TA and taxpayers having the burden of proving the facts they allege as a prerequisite for the right they intend to exercise. This norm is especially relevant in the matter of deductions, insofar as it is generally accepted doctrine in tax law that "the taxpayer has the burden of proof to establish that he or she has a right to the deduction". Thus, the burden of proving the existence and quantification of expenses, for purposes of the correct determination of the tax effected in the assessment, rests with the taxpayer.

83. Being decisive the provision of article 74, section 1 of the LGT – insofar as it intends to invoke the regime of section 2 of article 32 of the EBF for holding companies, and considering that from their purpose and ratio it can reasonably be deduced a presumption of association between financial expenses and the acquisition of social participations – the taxpayer should specifically prove the existence, quantification and classification of the various financings obtained and of the corresponding financial expenses, in order to avert the subsidiary application of the method of Point 7 of Circular no. 7/2004, with such presumption always admitting proof to the contrary, by force of the provision of article 73 of the LGT.

84. The absence of proof would condition the relevance of said financings and expenses for purposes of the regimes in question, insofar as it would remain to be demonstrated the essential connection between the expenses assumed and the purposes that allow their deduction or impose their non-deduction.

85. In a first reading, according to article 74, section 1 of the LGT, the burden of proof of the deductibility of costs would rest with the taxpayer, insofar as it is to them that the allegation of the prerequisites of deductibility matters, and in the specific case of holding companies, no one is in a better position than them to indicate and concretize the financial expenses borne with the acquisition of the social participations.

86. It should be considered that article 75, section 1 of the LGT provides that "the declarations of taxpayers submitted in accordance with the terms provided by law are presumed true and made in good faith, as well as the data and determinations entered in their accounting or records, when these are organized in accordance with commercial and tax legislation, without prejudice to the other requirements on which the deductibility of expenses depends". According to this provision, the TA should accept the declaration submitted by the taxpayer as true, being incumbent on it to prove that the same is tainted by vices that prevent the acceptance of the substantive merit of its content and the tax assessment that corresponds to it.

87. However, it is necessary to consider the terms of section 2 of the same article 75 of the LGT, which provides that "The presumption referred to in the previous number does not apply when: a) The declarations, accounting or records reveal omissions, errors, inaccuracies or founded indications that they do not reflect or impede the knowledge of the actual taxable matter of the taxpayer; b) The taxpayer does not fulfill the duties incumbent on it to clarify its tax situation, except when, under the terms of this law, the refusal to provide information is legitimate;" Whence it follows that, to benefit from the presumption of truth and good faith of the income declaration, the taxpayer has at least the duty to provide sufficient documentary information for knowledge of the actual taxable matter.

88. It is true that article 74, section 3 of the LGT provides that "In case of determination of taxable matter by indirect methods, the burden of proof of the verification of the prerequisites of its application rests with the tax administration, with the burden resting with the taxpayer of proving excess in its respective quantification." This provision acquires decisive relevance in the case in question, as is clear from the jurisprudence of the Supreme Administrative Court referred to above. It relieves the taxpayer of the burden of proof, understood as the burden of persuasion concerning the substantive merit of its position.

89. Given that the Circular no. 7/2004 is at issue, which seeks to respond to the difficulties of using the allocation method at the risk of its manipulation by taxpayers, there is no doubt that the application of indirect methods, in a generalized manner and without taking into account the concrete situation of each taxpayer, is proscribed by articles 104, section 2 of the Constitution, 81, section 1 and 85 of the LGT, and by the principle of typicality of laws, inherent in section 5 of article 112, section 5, of the Constitution. However, this does not mean, as the Supreme Administrative Court well emphasized, that said circular can, in the abstract, be considered illegal or unconstitutional in all cases.

90. In the same direction points the principle of interpretation of legal norms in conformity with the Constitution, with the double function of guaranteeing the primacy of the constitution and conservation of norms. As long as it is possible to give a legal norm an interpretation that gives it a meaning in conformity with constitutional principles and rules, that should be the orientation adopted by legal operators. It is in this framework that it has been understood that the indirect method of Point 7 of the Circular for calculating the amount of financial expenses intended for the acquisition of social participations can only be applied subsidiarily and after the infeasibility of direct quantification in the concrete case has been demonstrated.

91. In other words, in general terms, [cf. section 1 of article 85 and paragraph b) of section 1 of article 87 of the LGT] recourse to the indirect method of Point 7 is admissible only in cases in which there is infeasibility of direct determination of expenses resulting from financing directly associated with the acquisition of social participations, with the TA bearing the burden of proof of the verification of those prerequisites, pursuant to section 3 of article 74 of the LGT.

92. Now, and seeking to follow the jurisprudential orientation of the Supreme Administrative Court, it is important to bear in mind that, in the concrete case, neither the Claimant nor F... added any amount in field 779 of their respective Model 22 Declarations for the 2013 tax year as financial expenses borne with acquisitions of capital shares, wherefore those declarations reveal omissions that allow the conclusion that they do not reflect the actual taxable matter of the taxpayer and impede its knowledge.

93. Within the burden of proof of the taxpayer, it is possible to distinguish, as some doctrine does and is underlying the argument set out above, between the burden of production and burden of persuasion, the former comprising the duty to, with a minimum threshold of requirement, provide to the TA documentary elements suitable to sustain, prima facie, the correctness of its own tax position – which does not accord with the mere allegation of the arbitrariness of the TA's position, the simple claim of the right to a deduction or the generic and unexplained denial of tax responsibility. For its part, the burden of persuasion consists in the demonstration, in definitive terms and in a clear and convincing manner, of the substantive merit of the taxpayer's position from the available documentary elements.

94. Once the documents necessary to establish basic facts (e.g. loans; payment of interest; acquisition of social participations) that make possible the determination of taxable matter have been produced, it would not avail here to rely on the thesis that the facts speak for themselves (res ipsa loquitur). Rather, it would be incumbent on the Tax Authority, pursuant to article 74, section 3 of the LGT, to bear the burden of proof of the verification of the prerequisites of the application of indirect methods, from a comprehensive, causal, coherent and consistent analysis of the pertinent factual data. Now the Claimant does not even offer – as it could and should have done in its capacity as a party in the relevant transactions – documents from which the amounts of remunerated loans obtained and of financial expenses inherent to the respective loans and the relationship with the alleged loans obtained could be established.

95. That omission in the provision of declaratory elements in the Model 22 Declaration made concretely clear, to the TA and the present tribunal, the impossibility of proceeding to the use of direct methods, and the taxpayer is the one who would be in better conditions to offer elements that would allow at least sustaining prima facie its viability – even without having the burden of proving, clearly and convincingly, the substantive merit of its tax position in definitive terms – by virtue of being able to have all documentation that would allow it to proceed to a direct allocation. The TA's burden of proof does not relieve the Claimant of the adequate fulfillment of its ancillary declaratory obligations, but should rather be understood in the close relationship it establishes with them.

96. The use of the allocation method of Point 7 of Circular no. 7/2004 aims precisely, in accordance with the provision of article 32, section 2 of the EBF, to achieve taxation as close as possible to real profit, particularly in the case of omission of quantification, by the taxpayer, of financial expenses attributable to capital shares held by it. The methodology presented by the taxpayer, of the alleged direct allocation, does not allow for ascertaining concretely which financial expenses correspond to the acquisition of capital shares, and as such are not deductible for purposes of article 32 of the EBF, which reinforces the correction of the method applied within the inspection procedure, in accordance with what is established in Circular no. 7/2004.

97. As the jurisprudence of the STA has understood, for the TA to be able to resort to the method provided in Point 7 of Circular no. 7/2004, it is required that it demonstrate that it could not effect a direct allocation, pursuant to article 74, section 3 of the LGT. However, this does not relieve the taxpayer of its burden of production of documentary elements so that its declaration, even if it does not allow for knowledge of the actual taxable matter, comes to provide the TA with basic factual elements that allow it, at the very least, to demonstrate the impossibility of direct allocation and the need for indirect evaluation.

98. Given that the taxpayer has not even provided the minimum required declaratory information, which could be contested by the TA, it should be understood that the demonstration referred to in article 74, section 3 of the LGT was fully accomplished by the individual, by way of the omissions affecting the declaration, making it concretely not incumbent on the TA to prove and directly and accurately quantify the deductible and non-deductible expenses. That is, the TA does not have to prove what has already been fully demonstrated by the taxpayer.

99. This, on pain of understanding that payment of the tax in the amount selected by the taxpayer, apart from any documentary element, would presumably be valid until the TA proved otherwise, which would lead to a reduction in tax revenue, with the resulting increase in deficit and debt. Likewise, if the understanding upheld by this tribunal is not accepted, the doors would be wide open to the benefit of dishonest, negligent or careless taxpayers and to necessarily more invasive and burdensome tax inspections.

100. This understanding is supported, moreover, by several orders of considerations of great constitutional and legal relevance. It encourages taxpayers to comply with legal requirements on the rigorous maintenance of records of transactions (e.g. financings; interest paid; purchase and sale of social participations) essential to the fulfillment of their ancillary declaratory obligations (articles 31, section 2 of the LGT; 17, section 3, 117 et seq. of the CIRC), promotes the efficiency and effectiveness of the tax administration and thereby reduces the costs of tax collection with gains for all taxp