Summary
Full Decision
ARBITRAL AWARD
Report
On 10-08-2017, the company "A… SGPS S.A.", Tax and Customs Identification Number (NIPC)…, filed a request for the constitution of a collective arbitral tribunal, pursuant to the combined provisions of Articles 2 and 10 of Decree-Law No. 10/2011 of 20 January (Legal Framework for Arbitration in Tax Matters, hereinafter referred to as RJAT), in which the Tax and Customs Authority is the Respondent.
The request for the constitution of the arbitral tribunal was accepted by the Honourable President of CAAD and automatically notified to the Tax and Customs Authority on 01-09-2017. In accordance with the provisions of subparagraph a) of paragraph 2 of Article 6 and subparagraph b) of paragraph 1 of Article 11 of Decree-Law No. 10/2011 of 20 January, as amended by Article 228 of Law No. 66-B/2012 of 31 December, the Deontological Council designated the undersigned as arbitrators of the collective arbitral tribunal, who communicated their acceptance of the appointment within the applicable period, and notified the parties of this designation on 17-10-2017.
Thus, in accordance with the provisions of subparagraph c) of paragraph 1 of Article 11 of Decree-Law No. 10/2011 of 20 January, as amended by Article 228 of Law No. 66-B/2012 of 31 December, the collective arbitral tribunal was constituted on 09-11-2017.
Within the scope of the arbitral judgment request presented by it, the Claimant petitioned for a declaration of illegality of the corporate income tax (IRC) assessment act No. 2017…, relating to the fiscal year 2012, which it equally challenges together with the corrections from the tax inspection that preceded it. Specifically, the Claimant contests the fact that the deduction of financial charges in the amount of € 490,872.55 was disallowed, with the consequent determination of excess taxable income and likewise with the consequent determination of reflective tax on this excess taxable base for the fiscal year in the amount of € 117,809.42, and corresponding compensatory interest in the amount of € 13,477.12, in a total amount of € 131,286.53.
To support its request, the Claimant alleges, in summary, that the aforementioned assessment:
as regards the correction of € 490,872.55 in the sphere of the Claimant, relating to non-deductible financial charges relating to capital participations, that "… the implementation of corrections using the formula set forth in Circular No. 7/2004, which embodies the Tax Administration's interpretation of the provisions of Article 32, paragraph 2 of the CIT Code, is illegal, and even more illegal when the tax inspection, instead of adopting it as a last resort, beginning first by making a real allocation, foregoes the use of it and directly follows the application of the formula determined by the IRC Department"; and
"It is established case law that the Tax Administration, when it deems it necessary to make a correction/assessment based on the provisions of (now repealed) Article 32, paragraph 2, of the CIT Code – or more precisely, when the Tax Administration applies the aforementioned rule – must at minimum try first, and if it cannot demonstrate why, apply direct allocation methodology. In this case, and as has been the customary practice, the Tax Administration merely applied the formulaic and presumptive method created by Circular No. 7/2004"
II. Preliminary Matters
The Arbitral Tribunal is materially competent and regularly constituted, in accordance with Articles 2, paragraph 1, subparagraph a), 5 and 6, paragraph 1, of the RJAT.
The parties have legal personality and capacity, are legitimate and are legally represented, in accordance with Articles 4 and 10 of the RJAT and Article 1 of Administrative Rule No. 112-A/2011 of 22 March.
The proceedings do not suffer from any nullities.
Thus, there is no obstacle to the examination of the case.
III. Reasoning
III.1 Proven Facts:
With regard to the factual matters brought before the Tribunal by the Parties, the Tribunal considers the following facts as proven, based on the documentary evidence provided and the facts alleged and not contested, which are relevant to the final decision:
The Claimant is (and was in 2012) subject to the Special Tax Regime for Groups of Companies (hereinafter RETGS), being the dominant company of the Group "B…";
In the fiscal year 2012, the fiscal perimeter of the Group consisted of the following companies:
-A…, SGPS (inspected taxpayer);
-C…, SA;
-D…, SA;
-E…, LDA;
-F…, SA;
-G…, SA;
-H…, LDA;
-I…, SGPS, LDA.
Under Service Orders No. OI2016… and OI2016…, tax inspection procedures were conducted on the subsidiary companies A… SGPS, SA and C…, SA (NIPC…), respectively.
With regard to the arithmetic corrections relating to IRC, in the context of the tax inspection of A…, SGPS, SA, in the amount of € 490,872.55, these resulted from the disallowance, for IRC purposes, in accordance with paragraph 2 of Article 32 of the CIT Code (as worded at the date of the facts), of financial charges incurred with the acquisition of capital participations held for a period of not less than 1 year.
The company A…, SGPS, SA did not increase, with reference to the fiscal year 2012, for purposes of determining taxable income, any amount as non-deductible financial charges under paragraph 2 of Article 32 of the CIT Code, which in this case amounted to € 490,872.55.
Therefore, an increase was made, for purposes of determining taxable income for IRC of A…, SGPS, relating to 2012, of these financial charges in that amount of € 490,872.55.
The correction made caused a change in the taxable income declared for IRC purposes, increasing from € 345,559.70 to € 836,432.25, as shown in the table below.
This table does not result in any corrections to the losses deducted in the group income statement presented by A… SGPS.
A correction was made to the non-exempt taxable income of the group, relating to the fiscal year 2012, in the amount of € 558,972.55, increasing from € 861,024.30 to € 1,419,996.85, as follows:
The Claimant was notified to exercise the right to participate, a right which it failed to exercise.
III.2 Unproven Facts
There are no other facts of interest for the decision, proven or unproven.
III.3 Reasoning on the Factual Matters
With regard to the factual matters, the Tribunal is not required to rule on everything alleged by the parties; rather, it has the duty to select the facts that are important for the decision and to distinguish proven from unproven matters [cf. Article 123, paragraph 2, of the Tax Procedure Code (CPPT) and Article 659, paragraph 2 of the Code of Civil Procedure (CPC), applicable by virtue of Article 29, paragraph 1, subparagraphs a) and e), of the RJAT].
In this manner, the facts relevant to the judgment of the case are selected and determined in accordance with their legal relevance, which is established in light of the various plausible solutions to the legal question(s) [cf. Article 511, paragraph 1, of the CPC, applicable by virtue of Article 29, paragraph 1, subparagraph e), of the RJAT].
In light of the foregoing, the factual framework relevant to the case sub judice is that which has been described above. To establish this, the Tribunal weighed the positions of the parties in their respective written submissions, as well as all the documentary evidence incorporated in the proceedings, including a copy of the administrative file submitted by the Tax Administration.
It is true that in the field of tax law, the burden of proof does not have the subjective dimension of other branches of law, but rather an objective one, in the sense that what matters for the decision on the merits of the case, whether in the administrative procedure or in judicial proceedings, is what emerges from the truth of the facts established, regardless of which party bears the burden of such proof, given the predominance of the inquisitorial principle set forth in Articles 99 of the General Tax Law (LGT) and 13 of the Tax Procedure Code (CPPT). However, when such proof cannot be established and in the impossibility of the tribunal remaining in a state of non liquet – cf. Article 8, paragraph 1 of the Civil Code – then the case must be decided against the party burdened with that burden of proof (in this case, the Tax Administration). Thus, taking into account the foregoing and the positions assumed by the parties, the documentary evidence and the copy of the Administrative File attached to the record, the facts listed above were considered proven and unproven, to the extent relevant to the decision.
IV. Reasoning (continued)
The Law
The issue at the heart of the present dispute concerns the methodology for quantifying financial charges disallowed for purposes of the provisions of paragraph 2 of Article 32 of the CIT Code, as worded at the date of the facts described above.
Article 32, paragraph 2 of the CIT Code provided, as of the date of the facts, that:
"The capital gains and losses realized by holding companies (SGPS), capital company registers (SCR) and capital investment companies (ICR) on capital participations of which they are holders, provided that held for a period of not less than one year, and likewise the financial charges incurred with their acquisition do not contribute to the formation of taxable income of these companies."
Essentially, the question is whether the use of a method based on a proportional formula can be accepted in light of the wording of the aforementioned provision that governs the tax regime for holding companies (SGPS), or whether, instead, exclusive or preferential reliance on direct determination methods is required – such as a method of real allocation between the financial charges incurred and the capital participations acquired by means of such charges.
The legislator's logic was naturally to ensure maximum neutrality in both the positive and negative components of the formation of taxable income, whenever onerous transfers of capital participations by these specific companies were involved. This would thus prevent obvious tax asymmetries as well as the risk of abuses that might otherwise arise.
Now, two responses, quite distinct in content, have been given to this question.
One was that set forth in Circular 7/2004 of 30 March from the IRC Department: the establishment of a pro rata mechanism – similar to what is seen in other taxes such as VAT – as the sole means of determining the amounts of financial charges to be disallowed. This is an indirect or approximate calculation method, but with the great advantage of simplifying application.
Another was that advanced by various taxpayers, which involves the application of the real or specific allocation method, with precise identification of the financial charges and the application of the financing that they service and the capital participations that do not contribute to the taxable income of the holding company (SGPS).
This latter method has against it, it must be acknowledged, considerably greater difficulty in application, constituting an ancillary burden that falls, from the outset, upon the taxpayer itself in the context of self-assessment, and only secondarily upon the Tax Administration. However, the fact that it has known equivalents in other areas of Tax Law constitutes solid evidence that it is not an unviable method as suggested in the aforementioned Circular and as is argued in the present case by the Tax Administration – this is the case with VAT, where it is used in various transactions (e.g., of a real estate nature).
This method naturally has the advantage of being the one that most closely approaches both the Constitution, the letter of the law, and the (apparent) intention of the legislator.
The approach to the Fundamental Law derives from Article 103, paragraph 2, which prescribes taxation of companies based "fundamentally on their actual income", which appears to reduce the scope for preferential recourse to estimation methods.
As for greater proximity to the law – it should be recalled that a Circular constitutes merely an interpretative sense given, albeit in general terms, to a provision of law – this derives from paragraph 2 of Article 32 of the CIT Code establishing that the "financial charges incurred with their acquisition" do not contribute to the formation of taxable income, referring to capital participations, thus appearing to impose an immediate connection between such charges and these assets.
Finally, in the State Budget Report for 2003 (Law No. 32-B/2002 of 30 December) where the amendment of the wording took place that would lead to the approval of the aforementioned Circular, the amendment of this rule is framed (with reference to the modification of the then Article 31 of the CIT Code, now Article 32) with the following rationale: "The non-deductibility is established, for purposes of determining taxable income, of charges of a financial nature directly associated with the acquisition of capital participations by holding companies (SGPS)" – page 52, available at www.dgo.pt.
It remains, therefore, only to determine whether the recourse to the proportional method – as the Respondent claims – is inevitably compromised or whether it can eventually be used in certain (and very specific) situations.
Now, we have already seen how the very examples found in other areas of the tax system prevent the conclusion that Circular 7/2004 reaches, hastily, concerning the alleged "extreme difficulty of use, in this matter, of a direct or specific allocation method".
Thus, the outright rejection of the real allocation method, as appears to result from the aforementioned Circular – and therefore the derogation of the rule of deductibility of costs, set forth in Article 23, paragraph 2, subparagraph c) of the Corporate Income Tax Code – is manifestly unjustified, as the Claimant rightly points out.
But the same cannot be said, in our view, of the case in which the taxpayer has not made use precisely of this real allocation method, limiting itself to contesting the Tax Administration's use of the indirect method.
In line with what we have already seen invoked in Decision No. 679/2015-T of CAAD, recourse to the formula set forth in the Circular may be subsidiarily acceptable in certain and peculiar circumstances; namely, when the application of direct methods proves impracticable or inadequate; this is what can be read on pages 28-29 (PDF version) of that arbitral decision: "it would make sense, having exhausted the possibilities of allocating equity directly to the acquisition of capital participations in subsidiary companies, to apply the formula contained in the Circular. But, it seems clear that in this latter case, the Tax Administration must show that there would not exist, in the specific situation, a fairer way, more economically rational or more in accordance with the specific allocation of financial charges to capital participations, other than the aforementioned formula. That is, the formula constitutes an expedient, understandable, useful and sometimes appropriate for quantitatively applying the rule of Article 32 of the CIT Code. But this will not always be the case, because in cases where it is proven that capital participations have specific financing through equity, the Tax Administration must, before applying the formula, ask itself whether direct allocation would be the fairest course of action."
We likewise consider this to be the case when the taxpayer itself, although called upon to calculate the non-deductible financial charges by means of direct methods and to explain the terms in which it applied such methods – in sum, to self-assess – has failed to do so.
This is precisely what occurs in the present proceedings.
When, although having the opportunity to do so (moreover, having been expressly requested to do so), the taxpayer refrains from responding, calculating or justifying the grounds for applying direct methods, merely limiting itself to sustaining the (alleged) unconditional obligation of the Tax Administration to always resort to direct methodology for determining non-deductible financial charges, the taxpayer cannot fail to assume the burden of its inaction.
It would be hard to understand how the Tax Administration could be outright prevented from using an indirect method, when the taxpayer itself neither promoted nor applied any direct method (or if it did apply one, did not explain the terms in which it did so).
It would not be reasonable for the Tax Administration to be called upon to remedy the shortcomings in the determination of taxable income through recourse to direct methods which the taxpayer itself has foregone to apply, explain or justify, when it is certain that the constitutional preference for the application of these was established precisely for the protection of the interests of the taxpayer itself.
This would translate into the incomprehensible acceptance of venire contra factum proprium, with the taxpayer taking advantage of its own inaction.
Thus, and (only) in light of this very peculiar set of circumstances which have been proven above – we consider the proportional formulation set forth in Circular 7/2004 to be applicable, as a viable method for determining non-deductible financial charges to taxable income for purposes of paragraph 2 of Article 32 of the CIT Code.
We therefore see no violation of the law in the aforementioned assessment.
Decision
In view of the foregoing:
The request for an arbitral ruling is dismissed, the impugned tax assessment act is upheld, and the Respondent is accordingly absolved of the claims made in the request for the constitution of an Arbitral Tribunal; and
the Claimant is condemned to pay the costs.
Value of the Case
In accordance with Article 306, paragraphs 1 and 2 of the Code of Civil Procedure, approved by Law No. 47/2013 of 26 June, Article 97-A, paragraph 1, subparagraph a) of the Tax Procedure Code, and Article 3, paragraph 2 of the Rules on Costs in Tax Arbitration Proceedings, the value of the case is set at € 131,286.53.
Costs
In accordance with Articles 12, paragraph 2, 22, paragraph 4 of the RJAT, and Articles 2 and 4 of the Rules on Costs in Tax Arbitration Proceedings, and Table I attached hereto, the amount of costs is set at €3,060.00, to be borne by the Claimant, as previously decided.
Let notice be given.
[Document prepared by computer, in accordance with Article 131 of the Code of Civil Procedure, applicable by reference to Article 29, paragraph 1 of the Legal Framework for Arbitration in Tax Matters, with blank verses and reviewed by the collective of arbitrators].
Lisbon, 16-3-2018
The Collective Arbitral Tribunal,
José Poças Falcão
(President)
Gustavo Lopes Courinha
Paula Florindo
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