CAAD Process 446/2017-T: IRC Self-Assessment Correction & Accrual

Process: 446/2017-T

Date: April 9, 2018

Tax Type: IRC

Summary

This CAAD arbitration case (Process 446/2017-T) addresses the correction of IRC (Corporate Income Tax) self-assessments for fiscal years 2008 and 2009, involving complex issues of accounting treatment and the accrual principle. The claimant, an automotive company, challenged self-assessments totaling €3,528,711.61 in alleged excess payments. The dispute centers on the proper accounting treatment of 'Variable Marketing' expenses—commissions and promotional incentives paid to concessioners after they sell vehicles to end customers. Under the former Official Accounting Plan (POC), the company recorded these amounts as provisions (account #298). Following the 2010 implementation of the Accounting Standardisation System (SNC), the company concluded these should have been recognized as estimated certain expenses (account #281) rather than provisions. Applying this realization retroactively, the company filed a Gracious Complaint under Article 131 CPPT to correct the 2008-2009 self-assessments. The Tax Authority denied the complaint, arguing: (1) the POC treatment as provisions was appropriate for those years; (2) provisions created temporary differences that reversed upon utilization; (3) no ultimate tax harm occurred since reversals offset initial additions to taxable income. The claimant countered that €21,046,959.19 in provisions were never reversed, resulting in excess IRC payment of €3,328,973.22 and municipal surtax of €199,738.39 for 2008, plus incorrectly calculated tax losses for 2009. The case raises fundamental questions about the accrual principle's application in tax corrections, whether accounting errors justify retroactive taxable profit adjustments, and taxpayers' rights to refunds with compensatory interest when self-assessments are corrected.

Full Decision

ARBITRAL DECISION

I – REPORT

The Claimant, A…, S.A., with the unique registration and tax identification number…, with registered office at …, no. …, …, in Lisbon, requested the CAAD to constitute an arbitral tribunal, in accordance with article 10 of Decree-Law no. 10/2011, of 20 January (Legal Framework for Arbitration in Tax Matters, hereinafter referred to as RJAT), wherein the Tax and Customs Authority (AT) is the Respondent, with a view to annulling the self-assessment of IRC for the fiscal year 2008, with no. 2009… and the self-assessment of IRC for the fiscal year 2009, with no. 2010….

The Claimant further petitions reimbursement of the amount of €3,528,711.61 which it alleges to have paid in excess, relating to the year 2008, plus indemnification interest accrued and accruing, calculated at the maximum legal rate, until full and effective payment.

The request to constitute the arbitral tribunal was accepted by the Honorable President of the CAAD and notified to the Tax and Customs Authority.

In accordance with and for the purposes of article 6(1) of the RJAT, by decision of the President of the Deontological Board, duly communicated to the parties within the legally applicable time periods, the undersigned were designated to comprise the Collective Tribunal, and communicated to the president of the Administrative Arbitration Centre their acceptance of the appointment within the applicable regulatory period.

The Arbitral Tribunal was constituted on 28 September 2017.

The grounds presented by the Claimant in support of its claim were, in summary, as follows:

Within the scope of its business, the Claimant sells motor vehicles to its concessioners so that they place them on the market and proceed to sell them to the public and, as contractually established, is bound to the payment of commissions and other forms of promotional incentives to the concessioners, after the date on which they proceed to sell the motor vehicle to the end customer, these amounts being designated by the English jargon "Variable Marketing" and recorded under the accounting rules as advertising and sales promotion.

During the validity of the Official Accounting Plan (POC), the Claimant registered in its accounts, up to the year 2009, with respect to vehicles sold by A… to concessioners and not yet sold by them to the end customer, the gain arising from the sale of the vehicles to its concessioners and, simultaneously, in a "Provisions" account the amounts relating to commission and other incentives to be paid to them (POC account #298 – Other provisions) and at the moment when the Claimant paid the commission to its concessioners for the sale of vehicles to the end customer, the respective amount was reduced in the same "Provisions" account.

With the implementation of the Accounting Standardisation System (SNC), in 2010, and following an in-depth analysis of the method of recognition of the elements of its income statements, the Claimant concluded that, given the nature of the said charges relating to commissions to be paid to its concessioners at the moment when they sell vehicles to the end customer, these amounts should be recognised as estimates of certain charges of the fiscal year in which the vehicles are sold to the concessioners, and not as provisions.

Thus, in the fiscal year 2010, under the SNC regime, the amounts relating to commissions to be paid to the concessioners were recorded by the Claimant as an estimate of costs, in account SNC #281 – Expenses to be recognised.

Additionally, following the analysis and reflection carried out, the Claimant concluded that the reclassification of the said expenses should, as a matter of consistency and, since in substance everything occurred in a similar manner in previous years, apply such reclassification to prior years, namely 2008 and 2009.

Accordingly, in line with that conclusion, the Claimant duly submitted, on 30 May 2011, a Gracious Complaint, in accordance with article 131 of the Code of Tax Procedure and Processes (CPPT), relating to the self-assessments for the fiscal years 2008 and 2009, now subject to this arbitral pronouncement request, alleging error therein.

The Claimant was notified of the draft denial of the Gracious Complaint filed by it, on the basis of the following arguments:

- The interpretation given by the Claimant for the charges with commissions to be paid to the concessioners in the fiscal years 2010 and following do not translate into provisions because the moment and amount to be measured are perfectly defined, thus being liabilities, as they respect present obligations of the entity arising from past events, the settlement of which is expected to result in an outflow of resources from the entity incorporating economic benefits;

- In the years 2008 and 2009, during the validity of the POC, the Claimant treated the charges with the estimate of commissions to be paid to the concessioners as provisions, which, not being accepted for tax purposes, would be increased in the fiscal year of their constitution and deducted when utilised. They would, therefore, be treated as temporary differences;

- Given the accounting treatment adopted by the Claimant, one is faced with deductible temporary differences, since they are deductible in the determination of the tax result of future periods, when the corresponding assets or liabilities are extinguished;

- It is considered that the procedure chosen by the Claimant does not violate the tax law in force in those fiscal years (2008 and 2009), nor is it observed that the Claimant is being harmed, insofar as the expenses it considered as provisions, and not recognised for tax purposes (as they did not comply with legal provisions), were reversed in the following fiscal year or in the following fiscal years, through the disregard for tax purposes of the revenue recorded accounting-wise, with respect to the utilisation of the provisions and with the consequent recording as expenses of the payments made;

- There does not exist, from a broader temporal perspective, any tax paid by the Claimant unduly, because as the latter refers to in its statement (article 34) "by virtue of the actual payment of the amounts in question, the Claimant deducted from its taxable income the amount corresponding to the reduction of provisions previously taxed".

The Claimant submitted, on 5 August 2015, a request under its right to hearing, where, in summary, it invoked that:

- The Claimant only partially reversed, in the fiscal years 2008 and 2009, the charges with commissions and promotional campaigns recognised in the accounts up to 2009, and disregarded for tax purposes, with the amount of €21,046,959.19 not having been reversed;

- In 2010 the Claimant did not proceed to deduct the payments made corresponding to commissions and campaigns whose expense had been accounted for and not deducted in prior years;

- In 2010 the Claimant analysed the substance of the said charges and concluded that these should in fact not be recognised in the accounts as provisions, but rather as estimates of certain charges contractually provided for in the fiscal year in which the vehicles were sold to the concessioners;

- In the years prior to 2010, they were unduly increased in the Claimant's taxable income, giving rise to IRC and municipal surtax paid in excess in the fiscal year 2008, and an incorrect determination of tax losses with respect to the fiscal year 2009;

- The Claimant was harmed, since in 2008 it paid IRC in excess in the amount of €3,328,973.22 and municipal surtax in excess in the amount of €199,738.39, and additionally, in the fiscal years 2010 and following the Claimant did not proceed to deduct the amounts paid corresponding to the estimated charges increased in prior years and, for this reason, it was not possible to deduct the €21,046,959.19 that had been taxed.

The Claimant was notified, on 28 April 2017, of the denial of the Gracious Complaint filed by it, on the basis of the same arguments set out in the draft denial, the Tax Authority having further invoked that, should any adjustment exist, it should only occur as from 31 December 2009, given the reclassification and, to that extent, with effects from the fiscal year 2010.

In the draft decision, the Tax Authority invoked, on the one hand, that the "registration procedure initially adopted by the [Claimant] does not conflict with the tax law in force at the date of the facts in question" and, on the other hand, that "there does not exist, from a broader temporal perspective, any tax in excess, because as the [Claimant] affirms in its initial petition, in its article 34: 'by virtue of the actual payment of the amounts in question, the Claimant deducted from its taxable income the amount corresponding to the reduction of provisions previously taxed'"

In the course of the prior hearing and, in response to the allegation of the Tax Authority, the Claimant invoked that:

- The Claimant did not proceed to fully deduct the payments made corresponding to commissions and campaigns whose expense had been accounted for and not deducted in prior years, with the amount of €21,046,959.19 remaining to be deducted, a value that was taxed up to 2009, paid after 2009 and was not deducted in the fiscal year 2010 and following;

- Given this situation, the Claimant is, in fact, harmed, insofar as it paid tax in excess in 2008, in the total amount of €3,528,711.61;

- The accounting treatment of the situation at issue is related to the substance of the charges, which should not be recognised as provisions, but rather as estimates of certain charges contractually provided for in the fiscal year in which the vehicles were sold to the concessioners.

- However and, notwithstanding the allegation raised by the Claimant in the prior hearing, the Tax Authority did not offer any comment on this situation, limiting itself to invoking that "[i]n accordance with the foregoing and having examined all the elements of the file, in particular our previous 'Draft Decision' and the procedural documents submitted by the Claimant, in particular the initial petition and its prior hearing request, it seems to us that the request in the file should be denied, both with respect to the year 2008 and with respect to the year 2009".

- It is thus verified that the final decision denying the Gracious Complaint did not pronounce on the arguments set out in the prior hearing request submitted in a timely manner by the Claimant.

- Now, in accordance with article 60(7) of the General Tax Law (LGT) "[t]he new elements raised in the hearing of taxpayers are necessarily taken into account in the reasoning of the decision", under penalty of deficient reasoning, susceptible to leading to the annulment of the decision of the procedure.

- Therefore, by not pronouncing on the new factual elements invoked by the Claimant in the prior hearing - that the accounting and tax treatment initially adopted by the Claimant harms it, by virtue of implying the payment of tax in excess in 2008 and, further, by virtue of the Claimant not having deducted from its taxable income all the amounts of charges it incurred, the Tax Authority clearly violated the provisions of article 60(7) of the LGT.

- Accordingly, the final decision denying the Gracious Complaint presented by the Claimant should be annulled and, in consequence, the self-assessments of IRC relating to the fiscal years 2008 and 2009 should be annulled.

Regarding the Reclassification of Balance Sheet Accounts

On this matter, the claimant further alleged:

It is manifest that the amounts to be paid by the Claimant as commissions to the concessioners are liabilities of certain amount, for which reason they cannot be treated as provisions.

And, not being provisions, these expenses should be recognised as expenses in the same period in which the income arising from the sale of vehicles by the Claimant to those concessioners is recognised.

In summary, the Claimant having recognised, in 2010, that the accounting treatment it had been adopting since prior years for commissions to be paid to the concessioners was not correct – the payment to be made to the concessioners was (and is) an expense determinable with reliability both as to its value and as to its actual occurrence, for which reason it does not meet the requirements for constitution of a provision – proceeded to the reclassification of that reality in accounting terms.

Accordingly, in conformity with the principle of material justice - with or without an express rule determining it -, the substance of the treatment of the amounts to be paid by the Claimant as commissions to the concessioners should prevail.

That is to say, notwithstanding the accounting of the values in question in a "Provisions" rubric, insofar as their true nature is that of an accrual of costs, the corresponding tax framework should be adopted - i.e. recognition as an expense of the values, to occur at the moment when they are recognised as such, without any adjustment for tax purposes when, at the moment when they are estimated, they are recorded in the balance sheet rubric "POC #273 – Accrual of costs" in conformity with article 18(1) of the Corporate Income Tax Code (CIRC), "income and expenses, as well as other positive or negative components of taxable profit, are attributable to the taxation period in which they are obtained or incurred, regardless of their receipt or payment, in accordance with the economic accrual basis."

Thus, just as accounting-wise, such charges should be considered as expenses in the taxation period in which the income associated with them is obtained, regardless of the moment of their effective payment.

Insofar as this provision is not found in the list of situations provided for in article 34 of the CIRC in force at the date of the facts, it was not accepted for tax purposes, having been, for that reason, subject to increase in Q07 of the IRC statement form M22 of the Claimant.

Parallel to this, in the same fiscal years, and by virtue of the effective payment of part of the amounts in question, the Claimant deducted from its taxable income part of the amount corresponding to the reduction of provisions previously taxed.

By considering that the accounting and tax treatment given to the charges with commissions and promotional campaigns did not seem correct, the Claimant did not proceed, in 2010 and in the following fiscal years, to the recognition for tax purposes of the payments made to the concessioners (via annulment and respective deduction of the utilisation of the provision constituted in the fiscal years 2008 and 2009), and whose expense had been accounted for (as a provision in costs) and not deducted in the fiscal years prior to 2010.

Thus, the Claimant understands that, by virtue of the reclassification of the said balance sheet accounts, that is, of the consideration of charges with commissions and promotional campaigns to the concessioners as should appear in account POC #273 – Accrual of costs and, considering that the expenses recorded by the Claimant are accepted for tax purposes, understands that adjustments should be made to its taxable income, and, in consequence, with respect to the fiscal year 2008, tax losses should be considered in the amount of €8,675,841.01 and, consequently, the amount of €3,528,711.61 should be reimbursed (corresponding to IRC in excess in the amount of €3,328,973.22 and municipal surtax in excess in the amount of €199,738.39) and for its part and, with respect to the fiscal year 2009, the declared tax losses should be reduced to the amount of €1,296,224.56.

Regarding the Right to Indemnification Interest

To support its request for indemnification interest the Claimant alleges:

should the interpretation made by the Tax Authority be considered illegal and the self-assessments of IRC come to be annulled and, likewise, the decision denying the Gracious Complaint presented, the Claimant should be compensated for the period of time in which it was deprived of the amount unduly paid, by reference to the year 2008.

Indeed, the Claimant understands that, without prejudice to the additional documentation that was requested and, likewise, all the clarifications provided in the course of the administrative procedure, it is manifest that, as from 30 May 2011, the Tax Authority had in its possession all the elements necessary to accept the accounting treatment carried out by the Claimant and, in consequence, give it the due consequence at the tax level (in this case, the reimbursement of tax in the fiscal year 2008 and the reduction of tax loss in 2009).

Article 43 of the LGT provides, to that effect - by virtue of article 24(5) of the RJAT - that indemnification interest is owed to the taxpayer when it is determined that there was error attributable to the services of the latter which resulted in the payment of tax debt superior to that due.

Thus, should the Claimant's claim be upheld, there is no doubt that, in accordance with the said legal provision, indemnification interest accrued and accruing is owed, to be calculated from the date of presentation of the Gracious Complaint (i.e., 30 May 2011) until actual and full reimbursement by the Tax Authority, at the rate of 4% per annum, in accordance with article 24(5) of the RJAT, article 35(10), and article 43(4) of the LGT, article 559 of the Civil Code and Directive no. 291/03, of 8 April.

Response of the AT

The AT – Tax and Customs Authority, called upon to pronounce, contested the claim of the Claimant, defending itself by exception and challenge, in summary, with the following grounds:

BY EXCEPTION

Regarding Partial Incompetence of the Arbitral Tribunal ratione materiae

It raises the partial incompetence of the Collective Arbitral Tribunal to consider the alleged lack of reasoning of the decision denying the Gracious Complaint inasmuch as, according to its claim, the consideration of such matter falls outside the competence of the Arbitral Tribunal;

Indeed, the competence of arbitral tribunals is limited to the matters listed in Article 2(1) of the RJAT, namely: "(…) the consideration of the following claims: a) The declaration of illegality of acts of tax assessment, self-assessment, withholding at source and payment on account; b) The declaration of illegality of acts of determination of the taxable matter when not giving rise to the assessment of any tax, of acts of determination of taxable income and of acts of determination of property values."

Now, the alleged lack of reasoning invoked by the Claimant results in a defect inherent in the Gracious Complaint, and not a defect of first-instance acts, that is, in this case, the self-assessments of 2008 and 2009.

In light of the above-transcribed article it is clear that it is outside the jurisdiction of tax arbitration the consideration of any questions relating to defects inherent in acts of second-instance (as is the case with the Gracious Complaint sub judice) or of third-instance (e.g., Hierarchical Appeal) under penalty of violation of law.

The material incompetence of the Arbitral Tribunal for the consideration of the question of the alleged defect of lack of reasoning of the decision denying the Gracious Complaint constitutes a dilatory exception that prevents the continuation of the process, leading to the acquittal of the instance as to the claim in question, in accordance with the provisions of Article 576(1) and (2) and Article 577(a) both of the Code of Civil Procedure (CPC) by virtue of Article 29(1)(e) of the RJAT.

BY CHALLENGE

In light of the Official Accounting Plan (POC), in force at the time of the fiscal years under analysis, it recorded in its accounts, with respect to vehicles sold to concessioners and not yet sold by them to end customers, the gain arising from the sale of those vehicles, simultaneously recording in a provisions account - "POC account 298: other provisions" - the amounts relating to commissions and other incentives to be paid to the concessioners.

Therefore, at the moment when the Claimant paid these values to its concessioners, for the sale of vehicles to end customers, the respective amount was deducted in the provisions account "POC account 298: other provisions".

In the years 2008 and 2009, the POC was in force, and CIRC was still applicable, in the wording at the time, so that under those instruments the Claimant constituted a provision for purposes of estimating the payment of the commission and other incentives to its concessioners.

Such provision did not have a framework in the CIRC to be deducted for tax purposes, requiring the Claimant to increase the amount of the constitution and later deducting its utilisation.

And this, despite the Claimant alleging that the values recorded accounting-wise as provisions were unduly increased in the taxable income, does not correspond to the correct application of the law, insofar as they were properly increased, just as the deduction, which also appears correct, to the exact extent that the constitution would not be accepted for tax purposes.

With respect to the values in question, the expenses relating to the payment of commissions can not only be quantified with high reliability, since they are contractually established between the Claimant and its concessioners, but these amounts are directly and closely related to the income obtained from the sale of vehicles, concluding that there will hardly be variations between the various years.

That is to say, both in accounting terms and in tax terms, the only difference could merely result from an infinitesimal time lag over the various years of activity of the Claimant and does not relate to the amounts provisioned but rather to the payments made.

It should further be noted that from the analysis of the elements provided, it is ascertained that the commitments with the payment of commissions to the concessioners were undertaken in each of the fiscal years, 2008 and 2009, before and after, the respective expense being recognised in those periods.

For tax purposes, the genesis of the question relates to the characterisation of these liabilities, given that accounting-wise they were, in those years, recognised as provisions, in a first phase and as an expense at the moment of payment.

With the approval of the Accounting Standardisation System (SNC), by Decree-Law no. 158/2009, of 13 July, whose structure is very close to the International Accounting Standards (IAS), conditions were created to amend the CIRC and respective supplementary legislation, so as to adapt the rules for determination of taxable profit to IAS.

In accordance with the conceptual framework of the SNC "expenses are recognised in the income statement when there has been a decrease in future economic benefits related to a decrease in an asset or an increase in a liability that can be measured with reliability."

Similarly, Accounting and Financial Reporting Standard (NCRF) 21 - Provisions, contingent liabilities and contingent assets, states, in its paragraph 8 (definitions) that a provision "is a liability of uncertain timing or amount".

From this it is deduced that the interpretation of the Claimant for the charges with commissions to be paid to the concessioners, in the fiscal years 2010 and following, do not translate into provisions, precisely because the moment and the amount to be measured are defined.

They are liabilities, as they respect present obligations of the entity arising from past events, the settlement of which is expected to result in an outflow of resources from the entity incorporating economic benefits.

Such definitions occurred as from 2010, with the adjustments that the Claimant necessarily had to make.

Previously, the POC approved by Decree-Law no. 410/89 of 21 November, established in its technical considerations that "provisions are intended to recognise liabilities whose nature is clearly defined and which at the date of the balance sheet are probable or certain of occurrence, but uncertain as to their value or date of occurrence".

Therefore, in the years 2008 and 2009, during the validity of the POC, the Claimant treated the charges with the estimate of commissions to be paid to the concessioners as provisions, which, not being accepted for tax purposes, would be increased in the fiscal year of their constitution and deducted when utilised, that is, would be treated as temporary differences.

In accordance with Accounting Directive no. 28 - Income Taxes: Temporary differences are "differences susceptible of compensation in future periods between the accounting values of assets and liabilities and their tax base, including differences between tax results and accounting results that originate in one period and are reversed in one or more subsequent periods".

Given the accounting treatment adopted by the Claimant, we are faced with deductible temporary differences, given that "they result from amounts that are deductible in the determination of the tax result of future periods, when the corresponding assets or liabilities are extinguished".

Therefore, the procedure carried out by the Claimant does not conflict with the tax law in force in the fiscal years in question (2008 and 2009).

Now, it is important first and foremost to recall that it was in 2010, in the context of the transition from the POC to the SNC, that the Claimant altered the accounting policy it had been adopting, in a coherent and consistent manner up to the end of 2009, in relation to the accounting of commissions and promotional incentives granted to the concessioners, starting to recognise them in account #281 – Expenses to be recognised, as it alleges.

That is to say, the Claimant made a clean break with the consistency of its past actions – up to the end of 2009 – and seeks to retrospectively project the changes introduced, in 2010, in terms of the accounting of the said charges, in the two previous years, for alleged reasons of consistency, albeit in a different accounting regulatory framework, but with the purpose of extracting only tax consequences.

In this context, the Claimant comes to defend the thesis that the change introduced, in 2010, by virtue of the SNC, in the manner of accounting for charges with commissions and promotional incentives owed to the concessioners translated into a mere reclassification of accounts, that is, that it was nothing more than a change in designation of accounts and, consequently, there would be no place for any transition adjustment.

However, contrary to what is alleged the change was not limited to the designation of accounts, it was more profound, as it involved a shift in the very interpretation of the underlying realities, since under the validity of the POC, the accounting recognition of the liabilities undertaken regarding the payment of commissions to the concessioners as Provisions for other risks and charges (account 298 - Other provisions) was based on the probable existence of some degree of uncertainty, whether as to its exact amount or as to the date of occurrence of the payment, whereas the accounting recognition of such expenses in an accruals account presupposes the consideration of "a degree of uncertainty much less than in provisions" (cf., final part of §10 of NCRF21).

However, when there was established, with the accounting change in 2010, a temporal alignment, for accounting and tax purposes, between the moment relevant for the attribution to results of expenses with commissions to be paid to the concessioners, it remained open the tax deduction of expenses, to be paid in 2010, related to sales made in 2009, which, naturally should have given rise to a transition adjustment.

Indeed, there are not sufficient elements that allow one to know what treatment was given, in 2010, to expenses associated with provisions for risks and charges constituted in 2009.

For what results is that in 2010, the Claimant sought to anticipate the solution to that question, in the fiscal years 2008 and 2009 with the consequent adjustments to the self-assessment, having, for that purpose, deducted the Gracious Complaint from the self-assessment, the denial of which originated the present request for arbitral pronouncement.

Such a solution would have repercussions only on the tax plane, insofar as it would amount to an alteration in the treatment which, in conformity with the tax provisions and the accounting rules, in force at the time, was given to the values entered in the periodic tax return forms model 22, relating to the fiscal years 2008 and 2009, related to the provisions from which it results that the claim of the Claimant contains no support or basis in law.

Moreover, only for reasons of alleged consistency with the accounting treatment which, as from 2010, under the regulatory framework of the SNC, started to confer such treatment on the charges under analysis, has nothing more in view than to anticipate, for 2008, the effects of the transition from the POC to the SNC, concentrating the tax impact of the transition, in its entirety, on the taxable profit of this fiscal year.

Indeed, the taxable profit of 2008, according to the calculations presented in the table inserted in article 67 PI, would be influenced by a double deduction:

one, of €21,991,733.87, relating to estimated expenses with the payment of commissions and promotional incentives related to the sales of vehicles to concessioners recorded in this same fiscal year, to be paid in subsequent fiscal years; and; another, of €17,870,442.28, relating to charges of the same nature paid in 2008 and related to sales made in the previous year.

Now, given that the determination of taxable profit is made on the basis of accounting and must be organised in accordance with the accounting standardisation in force, by virtue of article 17(1) first paragraph and article 17(3) of the CIRC, taxpayers cannot subsequently, i.e., after the closure of accounts, seek to extract tax consequences, with repercussions on taxable profit, from merely virtual accounting changes, as is the case with the Claimant.

By the foregoing, and in line with what was decided in the decision denying the Gracious Complaint, the effects of the transition adjustment from the POC to the SNC assume tax relevance only as from the fiscal year 2010, inclusive, with no legal support whatsoever for reflecting such adjustment in the fiscal year 2008, which, as mentioned above, would cause the taxable profit relating to this fiscal year to reflect both the expenses effectively paid in the year and the estimated expenses.

Regarding the Alleged Defect of Lack of Reasoning

The Claimant further alleges lack of reasoning of the decision denying the gracious complaint, alleging that the final decision did not pronounce on the arguments spent in the prior hearing request.

In addition to the exception of incompetence of that Arbitration Centre to consider defects arising from a 2nd-instance act raised, it should be further noted that the Claimant's arguments fail immediately.

Even if the decision denying now at issue suffered from lack of reasoning, such a defect would never project onto the tax act (first-instance act).

In reality, such a defect would only have the effect of annulling the administrative decision of Gracious Complaint, and the said gracious procedure should accordingly fall back to the stage immediately prior to the failure committed.

On the other hand, the contentious section of the Supreme Administrative Court (STA) has formed a solid line of reasoning to the effect that formal defects do not necessarily require the annulment of the act to which they relate, and that essential procedural formalities degrade into non-essential ones if, despite them, satisfaction was given to the interests which the law had in view in providing for them, for which reason the arguments put forward by the Claimant are unfounded.

Regarding Indemnification Interest

In accordance with Article 43 of the LGT indemnification interest is owed only when the error in question is attributable to the Respondent.

In the case at hand, we are not faced with an error committed by the Respondent, nor is there any general guidance on this matter, in accordance with the terms and for the purposes of Article 43(2) of the LGT.

What is at issue here is a request for tax re-characterisation, due to an error committed by the Claimant itself.

As such, it is devoid of sense and lacks legal basis to claim that the Respondent indemnify with interest the Claimant, for errors committed precisely by the latter.

But even if – by hypothesis and without in the least conceding to what has just been stated – one were to admit as legally possible the payment of indemnification interest to a taxpayer responsible for committing the very error, certain it is that the date-event from which interest would be calculated could never be 2011.05.30, as the Claimant proposes.

As of 2011.05.30 the error had not only been previously produced by the Claimant itself (in the self-assessment), but it also remained in its sphere.

Such that the error remained until the date of the rendering of the decision denying the claim by the Respondent.

Therefore, only on the date of the rendering of the decision sub judice, with the formation of administrative res judicata, is it that, in logical terms, the error passes to be assumed by the Respondent, because only on this occasion does it assume a position regarding the claim of the taxpayer.

And never on 2011.05.30, as on that date only a petition was submitted, it being materially impossible to proceed on that same date to an instantaneous analysis of the claim of the taxpayer.

Concluding, even if, without conceding, one were to recognise the right to indemnification interest in favour of the Claimant, the date-event will necessarily have to coincide with the date of the decision now at issue, because only on this occasion did the error in the self-assessment pass to be assumed, logically and legally, by the Respondent.

5. By order of 7.11.2017 the meeting provided for in article 18 of the RJAT was dispensed with, it being further determined that the contradictory relating to the defence by exception would be exercised by the Claimant in the final written statements or in the period in which these should be presented.

6. On 17 January 2018, in a hearing designated for that purpose, witness examination was conducted of witness indicated by the Claimant.

7. The parties submitted written statements in which, essentially, they maintained the positions already expressed in the initial petition and response, the Claimant having further made a critical assessment of the witness evidence produced.

8. The Claimant further responded to the defence by exception exercised by the Respondent, in summary, in the following terms:

The Claimant does not accept the allegation and request by the Tax Authority as to the aforesaid exception as well pointed out in the decision rendered in case no. 117/2013-T, of 17.05.2013, of the Administrative Arbitration Centre:

"(…) the formula 'declaration of illegality of acts of tax assessment, self-assessment, withholding at source and payment on account', used in article 2(1)(a) of the RJAT does not restrict, in a mere declarative interpretation, the scope of arbitral jurisdiction to cases in which an act of one of those types is directly impugned. In reality, the illegality of assessment acts can be declared jurisdictionally as a corollary of the illegality of a second-instance act, which confirms an assessment act, incorporating its illegality.

The inclusion in the competence of arbitral tribunals operating in the CAAD of cases in which the declaration of illegality of the acts indicated therein is made through the declaration of illegality of second-instance acts, which are the immediate subject of the challenging claim, results securely from the reference made in that rule to self-assessment, withholding at source and payment on account acts, which are expressly referred to as included among the competences of arbitral tribunals. Indeed, with respect to these acts the gracious complaint procedure is imposed, as a rule, in articles 131 to 133 of the CPPT, for which reason, in these cases, the immediate subject of the challenging procedure is, as a rule, the second-instance act that assesses the legality of the assessment act, an act which, if it confirms it, must be annulled in order to obtain the declaration of illegality of the assessment act. The reference made in article 10(a) of the RJAT to article 102(2) of the CPPT, in which the challenging of acts denying gracious complaints is provided for, clears any doubts that the competence of arbitral tribunals operating in the CAAD encompasses cases in which the declaration of illegality of the acts referred to in article 2(a) of the RJAT has to be obtained following the declaration of the illegality of second-instance acts." (The same position was, likewise, assumed, among others, in cases no. 746/2015-T, of 25.08.2016, 627/2016-T, of 26.04.2017)

This is the understanding of SERENA CABRITA NETO and CARLA TRINDADE (in Contentious Tax Law, Volume I, Almedina, 2017, page 540) who write: "those acts denying [gracious complaint to hierarchical appeal] can only be 'brought' to arbitral jurisdiction, under the strict condition that they themselves have assessed the (i)legality of the tax act which the taxpayer, truly and effectively, seeks to impugn through arbitration. In these cases the arbitral tribunal will assess the legality of the act denying gracious complaint by assessing the legality of the tax act. This is, in reality, the subject of the request to constitute an arbitral tribunal. If this is legal, the act denying the gracious complaint will be legal, insofar as it confirms its legality. If, on the contrary, the tax act is illegal, the act denying the gracious complaint will also be so insofar as it confirms the legality of an illegal act."

In the case sub judice it is verified that the act (self-assessment) contested is manifestly illegal, as will be seen in detail below and was assessed in the course of the Complaint, for which reason, in consequence, also the act denying the same – as a whole, including its inherent defects - is illegal, and such illegality should be known and declared in this action. It could not be otherwise, a contrario, in the understanding of the Claimant, whilst the sole defect under examination in the proceedings.

It appears, therefore, that the exception invoked should not proceed, as unfounded, the instance being maintained as presented by the Claimant.

9. By order of 15-3-2018 and with the grounds invoked therein the period provided for in article 21(1) of the RJAT was extended.

RULING

The Competence of the Arbitral Tribunal

The Exception of Material Incompetence

Act denying gracious complaint – Alleged lack of reasoning.

The AT raises the partial incompetence of the Collective Arbitral Tribunal to consider the alleged lack of reasoning of the decision denying the Gracious Complaint inasmuch as, according to its claim, the consideration of such matter falls outside the competence of the Arbitral Tribunal.

The Claimant exercised the contradictory with respect to this exception.

Let us see:

The competence of arbitral tribunals is limited to the matters listed in article 2(1) of the RJAT, namely: "(…) the consideration of the following claims: a) The declaration of illegality of acts of tax assessment, self-assessment, withholding at source and payment on account; b) The declaration of illegality of acts of determination of taxable matter when not giving rise to the assessment of any tax, of acts of determination of taxable income and of acts of determination of property values."

Now, the alleged lack of reasoning invoked by the Claimant results in a defect inherent in the act of denial of the Gracious Complaint, and not a defect of first-instance acts - in this case, the self-assessments of 2008 and 2009.

The question of whether it is effectively outside arbitral tax jurisdiction the consideration of any questions relating to inherent defects of acts of second-instance (as in this case the act denying the Gracious Complaint) or of third-instance (e.g., Hierarchical Appeal) and, in consequence, whether this Arbitral Tribunal will be materially (in)competent for the consideration of the question of the alleged defect of lack of reasoning of the decision denying the Gracious Complaint will be assessed opportunely, with the merits of the claim.

Thus it is that, as noted below, the defect invoked and/or the material competence of this Tribunal to consider and decide it are questions that do not prevail over the assessment and decision on (prior) assessment of the defect of violation of law of the self-assessment acts of IRC of 2008 and 2009, which is the subject of the proceedings. This is because this order of assessment of the defects invoked is the one that will lead to the "more stable or effective protection of injured interests": its eventual merit will prevent the renewal of the act, which does not occur with the hypothetical annulment, total or partial, arising from the defect of lack of reasoning of the decision that denied the gracious complaint.

The self-assessments of IRC of the Claimant relating to the years 2008 and 2009, with respect to which the Claimant petitions their respective annulment for illegality, are, ultimately, the final subject of the present proceedings.

It is unquestionable that the arbitral tribunal has competence to consider these acts.

With respect to the act denying the gracious complaint, the question of the consideration of the defect arising from alleged lack of reasoning of that act will be assessed and decided, should it be necessary.

The tribunal is thus materially competent and is regularly constituted in accordance with the RJAT.

The parties have legal personality and capacity, are legitimate and are legally represented.

The proceedings do not suffer from defects that would invalidate it.

Questions to be Decided

The following questions must be resolved:

1. Illegality of the self-assessment acts which are the subject of the proceedings for violation of substantive law.

2. Right of the Claimant to indemnification interest; and

3. Illegality of the act denying the gracious complaint for alleged lack of reasoning.

II – REASONING

Essential Proven Facts

The following facts are considered proven, with relevance:

1. Within the scope of its business, the Claimant sells motor vehicles to its concessioners so that they place them on the market and proceed to their sale to the public.

2. The Claimant is contractually bound to the payment of commissions, and other forms of promotional incentives to the concessioners, after the date on which they proceed to sell the motor vehicle to the end customer, these amounts being recorded under the accounting rules as advertising and sales promotion.

3. During the validity of the Official Accounting Plan (POC), the Claimant recorded in its accounts, up to and including the year 2009, with respect to vehicles sold by A… to concessioners and not yet sold by them to the end customer, the gain arising from the sale of vehicles to its concessioners and, simultaneously, in a "Provisions" account the amounts relating to commission and other incentives to be paid to them (POC account #298 – Other provisions).

4. At the moment when the Claimant paid the commission to its concessioners for the sale of vehicles to the end customer, the respective amount was reduced in the same "Provisions" account.

5. [Insofar as this provision is not found in article 34 of the CIRC in force at the date of the facts] the said provision was not accepted for tax purposes, having been, for that reason, subject to increase in Q07 of the IRC statement form M22 of the Claimant.

6. Parallel to this, in the same fiscal years, and by virtue of the effective payment of part of the amounts in question, the Claimant deducted from its taxable income part of the amount corresponding to the reduction of provisions previously taxed.

7. On 28.05.2009, the Claimant carried out the self-assessment of IRC for the fiscal year 2008, with no. 2009… from which resulted a tax collection of €3,528,711.61;

8. On 28.05.2010, the Claimant carried out the self-assessment of IRC for the fiscal year 2009, with no. 2010… from which resulted a tax loss of €2,722,792.65.

9. The Claimant paid the tax self-assessed relating to the year 2008.

10. With the implementation of the Accounting Standardisation System (SNC), in 2010, and following an analysis of the method of recognition of the elements of its income statements, the Claimant concluded that, given the nature of the said charges relating to commissions to be paid to its concessioners at the moment when they sell vehicles to the end customer, these amounts should be recognised as estimates of certain charges of the fiscal year in which the vehicles are sold to the concessioners, and not as provisions.

11. The Claimant understood that to the said expenses should apply such reclassification to prior years, of 2008 and 2009, for which reason it submitted, on 30 May 2011, a Gracious Complaint, in accordance with article 131 of the CPPT, in which, in summary, it alleged that:

- as a matter of consistency and coherence of balance sheet reading, the Claimant recognises its error in the recording of the amounts relating to commissions to be paid to the concessioners and, in consequence, understands that it should proceed to the reclassification of the said expenses in balance sheet;

- that the reclassification which the Claimant carried out does not respect a transition adjustment arising from the entry into force of the SNC, but follows solely from a mere reclassification of balance sheet accounts, namely between liabilities headings;

in the sequel of the reclassification of the amounts recorded accounting-wise in 2008 and 2009 as "Provisions", that the appropriate tax treatment be assigned to the amounts in question - which change from "Provisions" to "Accrual of costs" -, with the due correction of the self-assessments relating to the said fiscal years;

- given the correction of the self-assessments requested, it is verified that the Claimant has the right, by reference to the fiscal year 2008, to the reimbursement of tax unduly paid, in the amount of €3,528,711.61 and, by reference to the fiscal year 2009, to the consideration of tax losses in the amount of €2,094,398.89.

12. By means of Office no. …, of 21 July 2015, the Claimant was notified of the draft denial of the Gracious Complaint filed by it, on the basis of the following arguments:

- In the years 2008 and 2009, during the validity of the POC, the Claimant treated the charges with the estimate of commissions to be paid to the concessioners as provisions, which, not being accepted for tax purposes, would be increased in the fiscal year of their constitution and deducted when utilised [They would, therefore, be treated as temporary differences];

- There does not exist, from a broader temporal perspective, any tax paid by the Claimant unduly.

13. By not conforming to the position assumed by the Tax Authority, the Claimant submitted, on 5 August 2015, a request under its right to hearing, where, in summary, it invoked that:

- In 2010 the Claimant did not proceed to deduct the payments made corresponding to commissions and campaigns whose expense had been accounted for and not deducted in prior years;

14) The aforesaid complaint was entirely denied by order of 27-4-2017.

15) As from the fiscal year 2010 [year of entry into force of the SNC] the amounts of commissions and other incentives referred to above, started to be recorded accounting-wise in the account "# SNC 281 – Estimate of costs – Expenses to be recognised"

16) In number 8 of the request in which the Claimant exercised its right to hearing, the following is contained:

17) The Claimant was notified, on 28 April 2017, of the denial of the Gracious Complaint filed by it, on the basis of the same arguments set out in the draft denial, the Tax Authority having further invoked that, should any adjustment exist, it should only occur as from 31 December 2009, given the reclassification and, to that extent, with effects from the fiscal year 2010.

Unproven Facts

With interest for the decision of the cause there are no unproven facts.

Tribunal's Motivation for Decision on Facts

The Tribunal's conviction as to the decision on facts was based essentially on the administrative record held by the AT and on the documents in the proceedings, not challenged reciprocally by the parties, the testimony given by witness B… having further been relevant, for clarification of the Claimant's marketing policies, of the reasons underlying the accounting framework of commissions and other incentives paid by the Claimant to its concessioners and further, the reasons underlying the reclassification of the said expenses in the balance sheet.

II – REASONING (cont.)

Applicable Law

Note first that, as recently noted by the STA [cf. Decision of 14-3-2018, in Case no. 0716/13/2nd Division], it is settled and established jurisprudence that the Tribunal is not required to consider or know all the arguments or considerations that the parties may have produced. This is because one thing are the questions submitted to the tribunal and another are the arguments used in their defence. Since only those matters formulated as claims to the tribunal by the parties have the standing of questions and not the arguments used by them in defence thereof, the tribunal is not bound to consider all arguments used by the parties.

Having the impugner invoked the illegality of the self-assessment acts for violation of substantive law and the defect of lack of reasoning of the decision that denied the gracious complaint presented against those acts, it is necessary to determine the order of consideration thereof, which must be observed, as is settled, that provided for in article 124 of the CPPT, applicable by virtue of article 29(1)(a) of the RJAT (Cf. Jorge Lopes de Sousa, Commentary to the Legal Framework for Tax Arbitration, in GUIDE TO TAX ARBITRATION, Coord. Nuno Villa-Lobos and Mónica Brito Vieira, 2017, Almedina, p. 205).

The defect of violation of law is the one that will lead to the "more stable or effective protection of injured interests" insofar as its eventual merit will prevent the renewal of the act, which does not occur with the hypothetical annulment arising from the defect of lack of reasoning of the decision that denied the gracious complaint.

In conformity, the Tribunal will first consider the question of the illegality alleged against the self-assessments.

Let us then see.

The Question of the Accounting Qualification of Expenses with Commissions and Other Promotional Incentives in Light of the POC.

In accordance with the Explanatory Notes to the Official Accounting Plan, in force at the time of the facts in question, the provisions account (29) "(…)is intended to record liabilities whose nature is clearly defined and which at the date of the balance sheet are probable or certain of occurrence, but uncertain as to their value or date of occurrence. (…)".

For its part, in accordance with the same Explanatory Notes, the accrual of costs account (273) "(…)serves as a counterpart to costs to be recognised in the same fiscal year, although they do not have binding documentation, the expense for which will only be incurred in a subsequent fiscal year or subsequent fiscal years".

It is necessary to ascertain the meaning of these rules, in order to assess which of them should subsume the expenses in question, it being that, given the literal element, both appear, prima facie, potentially applicable to the expenses in question.

Writing with respect to the SNC, Tomás Castro Tavares tells us that "Accounting law is interpreted like any other law, however technical or intricate it may be. There is nothing original or complex here. Many other laws regulate many other highly complex relationships, through extensive statutes, equally very technical and with intricate language."

These considerations are also, obviously, applicable to the legal-accounting framework that preceded the SNC.

Let us then see the teleology of each of these normative commands, it being that only the application of one of them will embody the correct application of accounting law, since we are not faced with a situation which results in a "right of choice" on the part of the accounting decision-maker.

Analysing account 273, it must first be noted that the same presents the following sub-accounts:

2731 – Insurance to be settled

2732 – Remuneration to be settled

2733 – Interest to be settled

…

2739 – Other accruals of costs

For its part, account 29 presents the following sub-accounts:

291 – Provisions – Pensions;

291 – Provisions – Taxes;

291 – Provisions – Ongoing legal proceedings;

291 – Provisions – Work-related accidents and occupational diseases;

291 – Provisions – guarantees to customers;

…. ……

291 – Provisions – Other provisions;

It is thus verified that the sub-accounts of account 29 relate, essentially or tendentially, to covering risks related to the activity of the company.

Common point to all situations of account 273 is the voluntary and contractual basis of the birth of the legal obligations in question (insurance contracts, loan contracts, employment contracts, etc…).

As José Bento-José Fernandes Machado write "This account 273 – Accrual of costs is credited by debit of the following cost accounts, according to the costs entered therein:

62211 - Supply and external services - Electricity;

62213 - Supply and external services - Water

62222 - Supply and external services - Communication

62228 - Supply and external services - commissions

62229 - Supply and external services - Fees

62233 - Supply and external services - Advertising and publicity

62642 - Personnel costs - Personnel remuneration

62645 - Personnel costs - Charges on remunerations

62681 - Costs and financial losses - Interest borne.

Now, the expenses in question in the present proceedings have precisely the nature of external services on a contractual basis, not being intended to face underlying risks to the teleology of account 29 of the POC.

Also on this subject matter this question, Leonor Fernandes Ferreira writes:

"Rogério Ferreira, in his work entitled Provisions (Ferreira, 1970) clarified that provisions are current and estimated costs. And noted that provisions are regarded as estimated costs (of a fiscal year) but relating to future processing of expenses (or of non-revenue), expenses of uncertain future verification. However, this has not always been understood. In bygone times, it was even admitted that provisions included commitments or charges to be paid, such as commissions to be paid and interest to be paid, and also authentic reserves and losses certain already verified".

Thus, given the foregoing, the correct legal-accounting subsumption of the expenses in question would be their recording in account 273 (Accruals of costs) of the POC and not in the provisions account.

As stated in the STA decision of 28-01-2015, case 0652/14, "provisions are accounting records of amounts intended to meet a charge attributable to the fiscal year, but of future verification, or already verified but of uncertain amount".

Whereas in the case of "provisions" there is uncertainty as to the occurrence of the obligation, its value, or the date of its occurrence, in the case of "accrual of costs" there is no such uncertainty, verifying only the non-occurrence of the maturity of the obligation, a situation which occurs in the case at hand.

Thus, from an accounting perspective, the correct recording would unquestionably be the recording thereof in account 273 of the POC and not in the provisions account, taking into account that these are certain obligations, which are constituted with the sale of vehicles to the concessioners.

Obviously, this less correct accounting, made by choice, wrong, of the taxpayer over years, can be, shall we say, "corrected" by way of gracious complaint and subsequent request for arbitral pronouncement in case of denial, most especially if it is demonstrated that such wrong procedure resulted in prejudice to the taxpayer in terms of IRC taxation.

That is to say: there is here, underlying, a will of the taxpayer itself to set aside the presumption of veracity of its accounting by recognising the practice of repeated errors over years and which it considers as preventing the knowledge of the real taxable matter (Cf. article 75, of the LGT).

And, in truth, the Law permits the taxpayer the correction of errors in the tax declaration which, as in the case sub juditio, originate in the circumstance that the accounts themselves do not reflect, as alleged, what was supposed to happen and which was to reflect, designedly, the taxable matter of the taxpayer.

It would seriously violate the principle of tax justice to prohibit the taxpayer from correcting errors in the tax declaration (self-assessment of IRC), provided that such request for correction is formulated under certain conditions of time (in light of the principle that, in general, all rights have a time and a manner for their exercise).

More specifically: once an error of fact or law is verified in the declarations of taxpayers, these may be replaced up to assessment, without prejudice to the contraventional liability that may apply (articles 59 et seq., of the CPPT) or then, with the same grounds provided for judicial challenge, the taxpayer may resort to the mechanism or procedure of gracious complaint (articles 68 et seq., of the CPPT).

The Periodisation of Expenses (and Income) in Light of Article 18 of the CIRC.

Article 18(1) of the CIRC has the following wording: "Income and expenses, as well as other positive or negative components of taxable profit, are attributable to the taxation period in which they are obtained or incurred, regardless of their receipt or payment, in accordance with the economic accrual basis."

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

(…) for the temporal attribution of a cost, what is relevant is not the moment in which the company settles its debts, but rather the moment in which such obligations arise. Included, therefore, in the revenues and costs of the fiscal year, are charges originating in the same, even if to be received or paid in the future".

Thus, manifestly, it follows from this provision that, in the case sub juditio, the expenses in question should have been considered for tax purposes in the year of the birth of the respective obligations (sales of vehicles to the concessioners) and not in the year of payment, in the case of non-coincidence between the two legal facts.

Therefore, the solution of article 18(1) of the CIRC coincides with the accounting solution just set out, it being certain that, if such coincidence did not occur, the solution of the CIRC would always prevail, as is evident, in accordance with the provisions of its article 17(1).

The Matter of Taxable Income for the Fiscal Years 2008 and 2009. Correct Temporal Attribution.

In line with the aforementioned conclusions, both the accounting rules of the POC and article 18(1) of the CIRC, directly applicable, prevent payments made in the years 2008 and 2009 with commissions and other promotional incentives in prior years from being considered as expenses of the payment fiscal year.

At this point, it cannot be overlooked that the Claimant does not use the same criterion in sustaining the non-consideration of such expenses in 2009, paid in that year, but relating to prior years, and, simultaneously, pursuing the consideration as expenses of the fiscal year 2008 of the same type of costs, paid in that year but relating to prior years.

With this solution, the principle of the specialisation of fiscal years would continue to be violated, with respect to the fiscal year 2008, since expenses would be considered that do not belong to such fiscal year, in accordance with article 18(1) of the CIRC, such conclusion also being in line with the accounting rules in force at the date of the facts, as mentioned above.

Thus, it is concluded that the Claimant is correct with respect to the temporal attribution of the costs in question, with the exception of the expenses with commissions and other promotional incentives of the years prior to 2008 and paid in this year (designated in the table of no. 14) of the evidence as "Reversal of values increased in prior years") in the amount of 17,870,442.28 €.

That is to say, in accordance with the foregoing, the self-assessment in question is incorrect, not only because expenses in the amount of 21,991,733.87 € have not been considered and, by the same token, because there has been deducted, in violation of article 18(1) of the CIRC, the amount of 17,870,442.28 € relating to commissions and other promotional incentives of prior years.

Thus, in accordance with article 18(1) of the CIRC, the taxable income should be reduced by 4,121,291.59 €.

Overall Analysis of the Question in Light of the Principle of Justice and of the Taxation of Real Profit of Companies. The Problem of Commissions Paid in 2008 Incurred in Prior Years.

The conclusion just reached in obedience to the rules of economic periodisation, however, raises the problem of the possible permanent disregard of expenses with commissions and campaigns of the years prior to 2008 and paid in this year, which must be weighed in light of the principle of justice, for as Manuel Henrique de Freitas Pereira refers, "(…) the determination of periodic results assumed as an essential purpose of accounting is relatively recent. It continues, moreover, to be unanimously admitted that the profit or loss of a company is calculable, in strictness, only at the end of its life.(…)

One speaks of the company's total result or final result. The periodic result – whose determination is imposed by the need for management, but which is also indispensable for tax purposes – constitutes a portion of such total result: it is the result that corresponds to a certain period of the company's life".

In doctrine, Diogo Leite de Campos, Benjamim Silva Rodrigues and Jorge Lopes de Sousa expound the following on the interaction between the principle of justice and the rule of specialisation of fiscal years:

"The activity of the tax administration cannot be limited to a mechanical application of laws to factual situations, and must always bear in mind the objective that justifies it, which is the pursuit of the public interest (articles 266(1) of the Constitution and 5 and 55 of the LGT).

(…).

When there is divergence between the criterion of the taxpayer and that of the tax administration on the attribution of a certain gain or loss to a certain fiscal year the latter must proceed to the correction of the taxable income, making the revenue or cost increase in the year to which it understands it should pertain and, correspondingly, should reduce such revenue or cost from the taxable income of the year to which the taxpayer attributed it.

With this procedure, there will be no situation of injustice, as the increase of tax in a certain year will correspond to a decrease tending to be similar in the other, and there will be no taxation of the same revenue in two fiscal years or non-deduction in any of them of a cost that should be considered.

However, in certain situations in which the correction is made in the last year in which it can be made and has as its object a cost that should have been considered in the previous fiscal year, it is no longer (or may no longer be) possible to correct the taxable income of that prior year, as the period in which corrections could be made has already elapsed. The same occurs when, although at the moment the tax administration makes the alteration of the taxable income it would be possible to make the corresponding correction in the year to which it is understood the costs should be attributed, it does not do so and, with the passage of time, it becomes impossible to do so."

(…).

This is a situation in which the exercise of a bound power (correction of taxable income in the face of a violation of the principle of specialisation of fiscal years) leads to a flagrantly unjust situation and in which, therefore, the question arises of making the principle of justice, established in articles 266(2) of the Constitution and 50 of the LGT, operate to prevent the possibility of making the said correction.

There are, in this situation, two duties to be weighed, both covered by law: one is to restore the truth about the determination of the taxable income of the fiscal years referred to, giving effect to the principle of specialisation, a restoration that the tax administration must effect even if it brings it no advantage; the other is to prevent administrative activity from translating into the creation of an unjust situation.

Among these two values, in particular in cases in which the tax administration had no prejudice from the error committed by the taxpayer, it should be opted for not making the correction, the said duty of correction being limited by virtue of the principle of justice".

In jurisprudence it can be read in the arbitral decision rendered in case 233/2017-T, of 2017-10-24, in line with the jurisprudence of the STA referred to therein, the following: "The principle of justice, invoked by the Claimant, is imposed on the totality of the activity of the Tax Administration by articles 266(2) of the Constitution and 55 of the LGT. From the concurrent observance of the principles of legality and justice it is concluded that the duty of the Tax Administration to apply the principle of legality does not translate into a mere formal subordination to the rules that specifically regulate certain situations, also encompassing the duty of the Tax Administration to take into account the consequences of its activity and to refrain from the strict application of rules when therefrom results a manifestly unjust outcome. The application of the principle of justice will be paramount over the principle of specialisation of fiscal years in cases in which non-compliance has not resulted in prejudice to the public revenue and it has not been concretised intentionally with the objective of obtaining tax advantages.

The Supreme Administrative Court has adopted this understanding, having decided, with respect to the principle of specialisation of fiscal years, that 'that principle must tendentially conform itself and be interpreted in accordance with the principle of justice, with constitutional and legal conformity (articles 266(2) of the Constitution and 55 of the LGT), in order to permit the attribution to a fiscal year of costs relating to prior fiscal years, provided that it does not result from voluntary and intentional omissions, with a view to operating the transfer of results between fiscal years'.

(…)

In situations in which the attribution of expenses or negative patrimonial variations to a fiscal year different from that to which they should be attributed in light of the principle of specialisation of fiscal years brings about tax advantages for the taxpayers, a presumption should be made, based on the rules of life and common experience, that the alteration of the correct attribution was made intentionally, as it is normal for taxpayers to seek to lighten their tax burden. On the contrary, when the alteration of the correct attribution of expenses does not bring about any advantage, a presumption should be made that the erroneous attribution to the fiscal years is not intentional. In cases in which the Supreme Administrative Court has admitted that the principle of justice should prevail over strict legality relating to the principle of specialisation of fiscal years are situations in which non-observance of that principle does not bring about any prejudice to the public revenue, in particular situations in which the taxpayer has not obtained advantages or was even harmed by the error committed in the application of the principle of specialisation of fiscal years. In situations of such type, it cannot be justified that a greater tax burden be inflicted on the taxpayer, in the name of a fetishistic and uncritical respect for the observance of legality and outside any perspective of pursuit of the public interest, which is the primary duty to be observed by Public Administration, as follows from article 266(1) of the Constitution.

But, in the case at hand, the attribution of the negative patrimonial variation in question to the fiscal year 2012, instead of being attributed to the fiscal year 2011, has as a corollary advantages for the Claimant, which justify that a presumption be made that the inadequate attribution was intentional and imply that the application of the principle of specialisation of fiscal years cannot be set aside on the basis of purported considerations of justice."

In the case sub juditio, in light of the principle of justice, various factors must be weighed.

First and foremost, we are not faced with corrections made by the AT to the taxpayer's tax declaration but, instead, it is the taxpayer itself that comes to consider that its declarations and self-assessments suffer from error by violation of the accounting and tax rules relating to specialisation of fiscal years.

The taxpayer opted to submit a gracious complaint against the self-assessments of the years 2008 and 2009, when it could, also, have submitted the request for revision of the self-assessment acts of the years 2007 and 2006 or formulate such request for the four fiscal years referred to, in accordance with article 78 of the General Tax Law in force at the date of the request for the gracious complaint in question in the present proceedings, from which it would follow that it would cease to run the risk of disregarding the expenses incurred in such fiscal years with commissions and other promotional incentives.

It is true that the same problem could continue to arise with respect to prior fiscal years, but it is also true that the principle of justice, like any other principle, does not possess absolute value, and must always be weighed in conjunction with the other principles, in particular the principle of legal certainty and with the rules, which derive from it, relating to the expiry of the right to file a complaint and challenge the tax acts. It is this which is the foundation for the fact that illegal assessment or self-assessment acts, damaging to the taxpayer, become solidified in the legal order after the expiry of the period for filing a gracious complaint, official revision request and judicial challenge, as they are no longer subject to challenge. It follows from this that, in the case of an illegal self-assessment from which results tax superior to that due, in the absence of reaction by the taxpayer against it within the legal periods, the taxpayer bears the consequence arising from the circumstance that the act in question can no longer be altered.

Moreover, it does not emerge from the proceedings that the concentration of expenses with campaigns and commissions in 2008 of expenses of this year but also of prior years do not harm the public revenue, all the more so as from the years whose tax results were noted in the present proceedings (2008, 2009 and 2010), only in the year 2008 was there taxable profit, which would be transformed into a tax loss should the expenses with commissions and campaigns of prior fiscal years be taken into consideration, with the consequent annulment of the total tax assessment.

In these circumstances, and in particular in light of the jurisprudence cited, it is considered that the principle of justice does not impose the setting aside of article 18(1) of the CIRC, all the more so as such would result in the setting aside of a violation of the rule of specialisation of fiscal years, through the violation of that same rule with respect to the fiscal year 2008, the taxation period most relevant in the present proceedings.

Thus, even if the principle of justice is weighed, in accordance with the terms set out above, it is concluded that the self-assessment in question is incorrect, not only because expenses in the amount of €21,991,733.87 have not been considered and, in accordance with article 18(1) of the CIRC, are attributable to the fiscal year 2008, but also, with opposite sign, because there has been deducted, in violation of the same legal provision, the amount of €17,870,442.28 relating to commissions and campaigns attributable to prior taxation periods.

Thus, in accordance with article 18(1) of the CIRC, the taxable income should be reduced by €4,121,291.59 € and not by €21,991,733.87 €, as claimed by the respondent, from which follows the partial annulment of the tax act.

For the same reasons and in consequence of the foregoing it is necessary to conclude that in the determination of the taxable income of the year 2009, expenses for the fiscal year should be considered those incurred with commissions and campaigns relating to the sales of motor vehicles to concessioners occurring in this year, even if paid in subsequent fiscal years and, on the contrary, should not be considered expenses with payments of such type of expenses relating to sales of the same type of prior years, in particular of the year 2008 which, as mentioned above, is attributed to this year and not to 2009, contrary to what was considered in the self-assessment.

In consequence, the self-assessment of the year 2009 should thus reflect a tax loss of €1,296,224.56 € and not of €2,722,792.65 €, as was considered, whereby this assessment also suffers from the defect of violation of law, and should thus be annulled.

Act Denying Gracious Complaint – Alleged Lack of Reasoning.

As already noted above, the AT raises the partial incompetence of the Collective Arbitral Tribunal to consider the alleged lack of reasoning of the decision denying the gracious complaint on the grounds that, according to its claim, the consideration of such matter falls outside the competence of the Arbitral Tribunal, it being that the competence of arbitral tribunals is limited to the matters listed in article 2(1) of the RJAT, namely: "(…) the consideration of the following claims: a) The declaration of illegality of acts of tax assessment, self-assessment, withholding at source and payment on account; b) The declaration of illegality of acts of determination of taxable matter when not giving rise to the assessment of any tax, of acts of determination of taxable income and of acts of determination of property values."

Given that only partially will proceed the request for annulment of the assessment acts sub judice, it is necessary to consider the aforesaid question.

As already seen, the alleged lack of reasoning invoked by the Claimant results in a defect inherent in the act of denial of the Gracious Complaint, and not in a defect of first-instance acts - in this case, the self-assessments of 2008 and 2009.

Now, the consideration of inherent defects of acts denying gracious complaints is withdrawn from the competence of the Arbitral Tribunal.

The consideration of this question could be prejudiced if the request for annulment of the assessment acts proceeded in its entirety.

As it will only be partially annulled, it is necessary to consider and decide this question.

Let us see:

The question raised relates to the subject of the tax arbitral proceedings when the taxpayer has previously resorted to a gracious administrative remedy (gracious complaint, hierarchical appeal or official revision request).

Note that already in the course of judicial challenge such matter was discussed in order to determine whether the real subject of the challenge was the assessment act or the act deciding the complaint, the STA having settled such matter by deciding that it was the first of such acts that was the subject, for which reason the inherent defects of the assessment and not those of the order that decided the complaint should be judicially tested (Cf. STA Decision, of 18-5-2011 / Case no. 0156/11).

Now transposing to tax arbitral proceedings this Jurisprudence and also considering the provisions of article 2 of the RJAT, it is shown that the subject of the arbitral proceedings is the act of tax assessment, self-assessment, withholding at source or payment on account, and the arbitrability of acts denying gracious complaints, hierarchical appeals or official revision requests is excluded, it being certain that from the provisions of article 10 of the RJAT, only and exclusively results the dies a quo of the period for presentation of the request for arbitral pronouncement.

It is admitted, however, the arbitrability of those administrative tax acts (the so-called second and third-instance acts) insofar as they contain themselves [... truncated ...]

Frequently Asked Questions

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What is the CAAD arbitration process for challenging IRC self-assessments in Portugal?

The CAAD (Centro de Arbitragem Administrativa) arbitration process for challenging IRC self-assessments begins with the taxpayer submitting a request to constitute an arbitral tribunal under Article 10 of Decree-Law 10/2011 (RJAT - Legal Framework for Arbitration in Tax Matters). The CAAD President accepts the request and notifies the Tax Authority, then designates arbitrators to form the tribunal (either sole or collective). In this case, a collective tribunal was constituted on 28 September 2017. The process allows taxpayers to challenge tax acts, including self-assessments, and seek annulment plus reimbursement of amounts paid in excess with compensatory interest. The arbitration provides an alternative to judicial tax courts, offering faster resolution of tax disputes.

How does the accrual principle (princípio da especialização de exercícios) apply to corporate tax corrections?

The accrual principle (princípio da especialização de exercícios) in Portuguese corporate tax requires that income and expenses be recognized in the fiscal year to which they economically relate, regardless of payment timing. For IRC taxable profit corrections, this principle is fundamental: expenses must be allocated to the year when the economic event occurs, not when cash changes hands. In this case, the company argued that commissions related to vehicle sales to concessioners should be recognized as estimated expenses in the year of sale to concessioners (when the obligation arises), not as provisions. The Tax Authority must respect this principle when assessing whether accounting corrections are valid. Corrections applying the accrual principle retroactively may justify adjustments to prior years' taxable profits if the original treatment violated proper matching of revenues and expenses.

Can a company correct an accounting error in IRC taxable profit through arbitration?

Yes, Portuguese law permits companies to correct accounting errors in IRC taxable profit through CAAD arbitration, though specific conditions apply. The taxpayer must first exhaust administrative remedies, typically by filing a Gracious Complaint under Article 131 CPPT (Code of Tax Procedure and Processes). If denied, arbitration becomes available. In this case, the company identified an accounting error: treating certain expenses as provisions under POC when they should have been estimated certain expenses. The company sought to correct self-assessments for 2008-2009 retroactively based on this realization. The key issues are: (1) whether the original treatment constituted an error versus a permissible accounting choice under POC; (2) whether correction creates unjust enrichment or rectifies genuine overpayment; (3) whether temporal limitations or the principle of tax certainty bar retroactive corrections. Success depends on proving the error resulted in excess tax payment not otherwise recoverable through normal reversal mechanisms.

What are the rules for adjusting provisions and variable marketing expenses under Portuguese tax law?

Under Portuguese tax law, provisions and variable marketing expenses receive distinct treatment. Provisions under POC (Official Accounting Plan) were generally non-deductible for IRC purposes unless meeting strict legal requirements, creating temporary differences that increase taxable income when constituted and decrease it when utilized or reversed. The IRC Code requires provisions to meet specific criteria for deductibility. Variable marketing expenses like commissions and promotional incentives, when properly classified as estimated expenses rather than provisions, should be deductible in the year the obligation arises under the accrual principle if the amount can be reliably estimated and relates to taxable income generation. Under SNC (Accounting Standardisation System), the distinction became clearer: provisions (account #29x) cover uncertain obligations, while estimated expenses (account #281) cover certain obligations with determinable amounts. For adjustments, taxpayers must demonstrate: (1) the reclassification reflects economic substance; (2) original treatment was erroneous, not merely a different acceptable approach; (3) the adjustment doesn't create double deductions or artificial losses.

Is a taxpayer entitled to a refund and compensatory interest after an IRC self-assessment correction?

Yes, Portuguese tax law entitles taxpayers to refunds and compensatory interest (juros indemnizatórios) when IRC self-assessment corrections prove excess payment occurred. Article 43 of the Tax Benefits Statute and Article 61 CPPT govern compensatory interest, calculated at the legal rate from the payment date until refund. The interest compensates taxpayers for the State's use of funds paid in excess. However, entitlement requires proving: (1) payment exceeded the legally due amount; (2) excess resulted from correctable error or illegality; (3) the taxpayer didn't benefit from offsetting advantages (like provision reversals in subsequent years). In this case, the claimant sought €3,528,711.61 plus accrued interest at the maximum legal rate. The Tax Authority argued no refund was due because provision reversals in subsequent years would offset initial additions to taxable income. The claimant countered that €21,046,959.19 was never reversed, establishing genuine excess payment. Resolution depends on proving net tax harm across all affected years, not just isolated year analysis.

IRC Self-Assessment Correction: Accounting Error and Accrual Principle in CAAD Case 446/2017-T

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IRC Self-Assessment Correction: Accounting Error and Accrual Principle in CAAD Case 446/2017-T

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