CAAD 476/2018-T: IRC Impairment Losses on Doubtful Debts – Deductibility and Accrual Basis Rules

ARBITRAL DECISION (consult full version in PDF)

The arbitrator Professor Doctor Jónatas Machado, appointed by the Deontological Council of the Centre for Administrative Arbitration to serve on the present Arbitral Tribunal, constituted on 06.12.2018, renders the following decision:

REPORT

1. A... LDA., (hereinafter "Applicant" or "A..."), with tax identification number..., with registered office at Rua ..., ...-... ..., came, on 26.09.2018, pursuant to article 2, no. 1, paragraph a), and article 10, nos. 1 and 2, both of Decree-Law no. 10/2011, of 20 January (Legal Regime for Arbitration in Tax Matters or "RJAT") and articles 1 and 2 of Order no. 112-A/2011, of 22 March, to request the constitution of an Arbitral Tribunal to rule on the illegality of corrections to taxable income for the period of 2014, in the amount of 58,544.01 € (fifty-eight thousand five hundred and forty-four euros and one cent) resulting from impairment losses on receivables that were recorded in the period of 2014, in the amount of 242,522.45 € (two hundred and forty-two thousand five hundred and twenty-two euros and forty-five cents).

2. The request for constitution of the arbitral tribunal was accepted by the President of CAAD and automatically notified to the Tax and Customs Authority on 02.10.2018.

3. In accordance with articles 5, no. 2, paragraph a), 6, no. 1 and 11, no. 1 of the RJAT, the Deontological Council of this Administrative Arbitration Centre (CAAD) appointed as sole arbitrator Professor Doctor Jónatas Machado on 16.11.2018.

4. The parties were duly notified of this appointment, to which they did not lodge any objection, in accordance with the combined terms of articles 11, no. 1, paragraphs b) and c) and 8 of the RJAT and 6 and 7 of the Code of Ethics of CAAD.

5. By virtue of the provisions of paragraph c) of no. 1 and no. 8 of article 11 of the RJAT, as per communication from the President of the Deontological Council of CAAD, the Arbitral Tribunal was constituted on 06.12.2018.

6. The Applicant seeks to have declared the illegality of the corrections to taxable income for the period of 2014, in the amount of 58,544.01 € (fifty-eight thousand five hundred and forty-four euros and one cent), proceeding consequently to the annulment of the tax assessment acts for Corporate Income Tax sub judice and also concerning compensatory interest, on the grounds that they are vitiated by error in the factual and legal assumptions, with the legal consequences thereof.

7. The Tax and Customs Authority (hereinafter "Respondent" or "AT"), pursuant to article 17 of the RJAT, presented its reply on 22.01.2019, in which it defended itself by exception and by contestation, petitioning finally that the present request for arbitral ruling be judged unfounded, as unproven, and consequently that the Respondent be absolved of all claims with the duly legal consequences.

8. Considering it appropriate to hear the three witnesses presented by A..., the tribunal scheduled the arbitral tribunal meeting provided for in article 18 of the RJAT, which took place at CAAD's premises on 15.02.2019.

9. In their final submissions, presented by the Applicant on 22.02.2019 and by the Respondent on 08.03.2019, the parties substantiated their positions, and made references to evidentiary elements brought forward at the aforementioned meeting.

Description of Facts

1. The Applicant was subject to an internal inspection action, of partial scope, authorized by internal service order no. OI2017... concerning the tax period of 2014, with the Tax and Customs Authority having ascertained purely arithmetic corrections in the field of Corporate Income Tax – taxable matter.

2. During the tax period of 2014 the taxpayer declared impairment losses in the amount of 242,522.45 €, in account 6511, Impairment Losses – Customers, by offsetting account 219110100000, Customer Receivables.

3. In this context, the Applicant was subject to a purely arithmetic correction to taxable income in the amount of 213,834.06 € (two hundred and thirteen thousand eight hundred and thirty-four euros and six cents), in consideration of the following:

i. Impairment losses not accepted for tax purposes – in the amount of 173,836.78 €;

ii. Insufficient delay for the constitution of impairment and lack of reversal – in the amount of 33,272.28 €;

iii. Undue reduction of income – in the amount of 6,725.00 €.

Arguments of the Parties

1. The arguments and counter-arguments wielded by the parties concern fundamentally the regime for recording impairments and the lawfulness of the corrections made to taxable income.

2. The Applicant alleges that the AT does not make a correct legal framework regarding impairment losses on receivables, grounding its thesis fundamentally on the following arguments:

a) The AT does not clearly substantiate the position defended, limiting itself to stating that the Applicant recorded impairment losses in the amount of 242,522.45€, with the sum of 173,836.78 € not being accepted for tax purposes because there are facts that call into question the tax deductibility of those losses, namely that 1) in relation to some customers there are already execution or insolvency proceedings, and, 2) in relation to some customers there have been no business relationships for several years;

b) Given the Tax Inspection Report, the AT does not adequately substantiate the position assumed, limiting itself to considering that the impairment losses sub judice should have been recognized, that is, recorded and accepted for tax purposes in other periods;

c) Until 2014, the contacts maintained by the Applicant indicated that the receivable would be satisfied and, therefore, until then the expectation of its receipt was high and real – the Applicant had not assumed until then the uncertainty in receipt;

d) This uncertainty was due to the difficulty of contacts between the Applicant and customers and/or knowledge of the latter's economic difficulties in honoring the commitments undertaken with the former;

e) The Applicant maintained the expectation of collecting the receivables in face of the permanent collection efforts (telephone calls; contacts from the administrative department; personal contacts between the managers of the Applicant and the customer, etc.) that it was undertaking, as set out in the following tables:

f) From the various personal and telephone contacts/efforts undertaken by the Applicant, aimed at the collectability of the receivables, the customers conveyed the intention to pay shortly, often proposing payment plans;

g) Only in 2014 did the Applicant verify that there was an inherent risk to the collection of the receivables – a risk that was not evident in periods prior to 2014;

h) The Applicant only recorded the impairment losses in 2014, since it was only at that date that it verified that, contrary to what had happened until then, it had lost the expectation of receipt of the receivables;

i) The tax act in question is the fruit of the arbitrariness of the AT, subsuming itself in the vice of lack of substantiation generating annulability;

j) The AT is obliged, by constitutional and legal imposition, to substantiate, under penalty of annulment of the tax act, with knowledge of the remaining issues raised being prejudiced;

k) The AT, during the inspection, ignored all the testimonial evidence that the Applicant could offer to prove the efforts undertaken for purposes of collection of the receivables and better identified in the table above, having shown no interest in questioning the Applicant's employees, namely from the administrative and collections department, to understand the reason why the Applicant only in 2014 recorded the impairment losses here under discussion.

1. Conversely, the AT came to support the maintenance of the corrections to taxable income made by it and the corporate income tax assessment acts impugned, essentially, with the following arguments:

a) It is considered that there is sufficient substantiation when it allows a normal recipient to understand the cognitive and evaluative itinerary followed by the author of the act, that is, when the recipient can know the reasons that led the author of the act to decide in that manner and not otherwise;

b) From reading the Tax Inspection Report (RIT) it follows that an average human being, placed in the position of recipient, can grasp its meaning and conclusion, with the respective reasons being widely understood and subsequently referenced and attacked by the Applicant in its request for arbitral ruling which, otherwise, would not have presented it, that is, the Applicant understood the cognitive itinerary of the corrections impugned;

c) It is not possible to affirm that a given act is without basis when, in the concrete case, the contextual motivation allowed its recipient to know the factual and legal reasons that led the Respondent to make the decision in question, with that meaning and content;

d) The substantiation is sufficiently clear and unequivocal, especially since the Applicant, by way of the present request for arbitral ruling, admits and demonstrates, in light of the arguments explained throughout its pleadings, to have fully understood the factual and legal framework on which the Respondent's decision was based, attempting to refute its action and attributing vices to the AT's arguments;

e) If there was a situation of lack or insufficiency of substantiation it was incumbent on the Applicant to make use of the mechanism provided for in article 37 of the Code of Tax Procedure and Process (CPPT) and request its respective notification or issuance of the certificate in conformity;

f) The substantiation of the SIT was based on the only possible and consequently correct interpretation of articles 28-A and 28-B of CIRC, on impairment losses;

g) Impairment losses that originate in each tax period should be attributed to the result of that tax period, in light of the criteria defined in tax law, once the events or conditions that determine the existence of risk of uncollectability are verified, in observance of the principles of prudence and the specialization of periods, in accordance with no. 1 of article 28-A and article 28-B, both of CIRC;

h) Paragraphs 23 and 24 of NCRF 27 – Financial Instruments, require that, as at the date of each financial reporting period, the impairment of all financial assets that are not measured at fair value through results be assessed, with the respective losses being recognized if there is objective evidence (e.g. financial difficulty; breach of contract, default or non-payment; probability of insolvency or reorganization of the debtor; observable decrease in the estimate of future cash flows);

i) From the analysis of the customer current accounts of the Applicant, it was verified that, for the majority of these customers, there were already execution or insolvency proceedings or, the age of the balances exceeded 24 months, counting from maturity and, not insignificantly, there were no business relationships for several years;

j) In 2010 the Applicant develops its own, diverse and successive "démarches" in order to ensure the collectability of those receivables, and the tax inspectors never denied that efforts had been made with customers for this purpose;

k) The Applicant, as concerns the receivables from customers that appear on the list in the table it presents, confirms that the period of delay elapsed since maturity already exceeded the 24 months, provided for in paragraph d) of no. 2 of article 28-B of the Corporate Income Tax Code and reiterates that it developed in various forms and at different times contacts with negligent debtors and that, in face of the justifications given, it maintained, until the exercise of 2014, the expectation of receipt of the sums owed;

l) In periods prior to 2014 the legal conditions were already present that determined the existence of the risk of uncollectability, which fully justified its accounting and tax recognition, namely: (i) pending execution or insolvency proceedings against some customers; or (ii) period of delay exceeding 24 months, existence of evidence of efforts made for receipt of the sums owed and existence of objective evidence of impairment;

m) The age of the debts was, in general, significant, with some preceding 2010, coupled with the successive breaches of promises made by the debtors in the frequent contacts that were made with them by various means, constitute sufficient elements for "objective evidence of impairment";

n) They can only cease to be considered in a given tax period when, on the date of closing of the accounts to which they should have been attributed, they are unforeseeable or manifestly unknown, as provided for in nos. 1 and 2 of article 18 of CIRC, which is manifestly not the case;

o) The foreseeability of uncollectability was already abundantly known to the Applicant and the proof that the contacts developed by various means with the negligent customers did not produce the desired effects resides precisely in the permanence of the receivables in its accounts;

p) The issues related to the verification of the conditions that determine the existence of the risk of uncollectability and the moment at which this risk occurs are perfectly defined in tax legislation (paragraph a) of no. 1 of article 28-A and article 28-B, all of CIRC), in a way that does not leave such issues to the free will or subjectivity of the criteria of each taxpayer and to harmonize the legal faculty of constitution of impairment losses to cover receivables of doubtful collectability, with the principle of specialization of periods and the inherent periodization of taxable income;

q) In face of the indications both of the economic and financial situation of the country and of the prolonged negligent behavior of the debtors, it was incumbent on the Applicant to recognize the impairment losses determined in accordance with the criteria defined in articles 28-A and 28-B, of the Corporate Income Tax Code, concurrently observing the principle of specialization of periods.

r) Not having the Applicant proceeded in that way, the non-fulfillment of the factors that determine the tax deductibility of the impairment losses recognized in the tax period of 2014 has as a consequence that the receivables in question can only affect the tax result in the tax period in which they are declared uncollectable, provided that the terms and conditions provided for in article 41 of the Corporate Income Tax Code are verified;

s) The customer CC..., Lda, may have complied with the payment plan, with the current account at year-end containing only invoices due less than 6 months. Nevertheless, in addition to not reversing the impairments already constituted in 2013, the Applicant still reinforced them in 2014.

Arbitral Meeting of Article 18 of RJAT

1. Considering it appropriate to hear the three witnesses presented by A..., the tribunal scheduled the arbitral meeting provided for in article 18 of the RJAT, which took place on 15 February, with the same offering the following testimony:

a) DD..., NIF..., administrative clerk of the Applicant, exercised, among others, collection functions, adopting different collection procedures for receivables depending on the concrete conditions of the customer, on a case-by-case basis, depending on the customers' relationship with the company. She did not speak with anyone from the tax administration during the inspection. She confirmed that after 2014 several customer receivables were paid, for example, B... Unipessoal is making settlements and L... paid in full, following a judicial process. She stressed that collection is a gradual and insistent process, which may involve verbal payment agreements, with management responsible for declaring certain receivables uncollectable. Delay in payment does not always prevent continuation of transactions with debtors.

b) EE..., NIF..., majority partner since March 2017. She did not personally speak with the tax administration. She performed collection functions, insisting by various means with customers – many of whom had an almost familial relationship – with the latter progressively deferring payment, and at some point alleging difficulties resulting from the crisis. For years there was hope that the receivables would be paid. She clarified that in 2014 the company understood it was the time to write off the receivables. L... paid in 2018, by agreement, after being sued judicially, a practice that the company tends to adopt more expeditiously today.

c) FF..., NIF..., accountant of the company since 2017, accompanied the formalities of the tax inspection carried out on the company, having readily provided all requested elements, although she did not personally speak with anyone from the AT. She believes that the AT, like herself, must pay attention not only to delay but to the efforts made for collection and to the objective evidence of impairment, in accordance with the accounting standard. She believes that the fulfillment of the impairment requirements should be verified carefully, case by case, since some of the objective criteria for impairment (e.g. being on the brink of insolvency) are difficult to ascertain and also difficult and subjective to fulfill. She confirmed that some customers in debt paid after 2014. This witness believes that corrections made to the tax result indirectly affect accounting. Being extremely difficult to objectively prove the requirements of impairment, an error in that matter could also trigger a negative reaction from the AT.

SANEAMENTO (JUDICIAL HOUSEKEEPING)

1. Given that the deadline for voluntary payment of the tax installments legally notified to the Applicant occurred on 09.07.2018, it is verified that the Applicant had until 08.10.2018 to lodge the request for arbitral ruling, so the same is timely, in accordance with no. 1 of article 10 of the RJAT.

2. The AT raised the preliminary issue of restitution of amounts paid as a fine.

3. The Arbitral Tribunal is regularly constituted (articles 5, no. 2, 6, no. 1, and 11 of the RJAT), and is materially competent (article 2, no. 1, paragraph a) of the RJAT).

4. The parties possess legal standing and capacity and are duly represented.

5. The case has no nullities nor were exceptions invoked, and it may proceed to a decision on the merits of the case.

SUBSTANTIATION

Facts Established as Proven

1. Based on the documents and testimony brought before the tribunal, the following facts relevant to the decision of the case sub judice are established as proven:

a) The Applicant deducted from the taxable profit of 2014 impairment losses on receivables from customers, which should have been recognized and attributed to the tax result of earlier periods, in the amount of €173,836.78. (Documents 1 and 2).

b) The Applicant was subject to an internal inspection action authorized by internal service order no. OI2017... concerning the tax period of 2014, with the Tax and Customs Authority having ascertained in account reconciliation purely arithmetic corrections in the field of Corporate Income Tax in the amount of 58,544.01 € to be paid by 07.09.2018 – taxable matter, with the corresponding Tax Inspection Report being issued.

c) The Applicant presented various customers with invoices in default for more than 24 months at the end of December 2013, which include, namely, debts prior to 2011, 2010, 2009, 2007 or 2006, some invoices from 2002 and from the years 90 of the past century, with collection efforts being made (i.e. 2008, 2009, 2010, 2011, 2012) or with some judicial execution proceedings (i.e. 2010, 2012) and insolvency proceedings (i.e. 2010, 2011, 2012, 2013) (RIT, Document 2).

d) In this context, the Applicant was subject to a purely arithmetic correction to taxable income in the amount of 213,834.06 € (two hundred and thirteen thousand eight hundred and thirty-four euros and six cents), in consideration of the following:

i. Impairment losses not accepted for tax purposes – in the amount of 173,836.78 €; ii. Insufficient delay for the constitution of impairment and lack of reversal – in the amount of 33,272.28 €; iii. Undue reduction of income – in the amount of 6,725.00€. (Documents 1 and 2).

e) The Applicant received payments from customers in debt subsequent to 2014; (Documents 3, 4 and 5)

f) The customer CC..., Lda, may have complied with the payment plan, with the current account at year-end containing only invoices due less than 6 months; (Documents 2, 6, 7, 8, 9, 10, 11, 12)

g) Nevertheless, in addition to not reversing the impairments already constituted in 2013 for customer CC..., Lda, the Applicant still reinforced them in 2014; (Documents 2, 6, 7, 8, 9, 10, 11, 12)

Facts Not Proven

1. With relevance to the decision on the merits there are no alleged facts that should be considered as unproven.

Rationale

1. Regarding the factual matter the Tribunal does not have to rule on everything that was alleged by the parties, being incumbent upon it to select the facts that matter for the decision and to discriminate the proven from the unproven material (see article 123, no. 2, of CPPT and article 607, no. 3 of CPC, applicable ex vi article 29, no. 1, paragraphs a) and e), of RJAT).

2. The facts relevant to the judgment of the case are chosen and delimited in function of their legal relevance, which is established in attention to the various plausible solutions of the issues that are the object of the dispute (v. 596, no. 1, of CPC, ex vi article 29, no. 1, paragraph e), of RJAT).

3. Thus, the facts enumerated above were considered proven, with relevance to the decision.

Issues to be Decided

1. The issues to be decided concern, first and foremost, the alleged lack of substantiation of the AT's act and the lawfulness of the corrections to taxable income for the period of 2014, in the amount of 58,544.01 €.

3.4.1. Lack of Substantiation

1. The Applicant alleges the illegality of the AT's act due to lack of substantiation. In its view, the AT does not clearly substantiate the position defended, limiting itself to stating that the Applicant recorded impairment losses in the amount of 242,522.45€, with the sum of 173,836.78 € not being accepted for tax purposes because there are facts that call into question the tax deductibility of those losses, namely that 1) in relation to some customers there are already execution or insolvency proceedings, and, 2) in relation to some customers there have been no business relationships for several years. For the Applicant, even considering the RIT, the AT does not adequately substantiate the position assumed, limiting itself to considering that the impairment losses sub judice should have been recognized, that is, recorded and accepted for tax purposes in other periods. However, such an allegation appears difficult to sustain.

2. First, article 77 of the General Tax Law (LGT) is satisfied with a succinct exposition of the factual and legal reasons that motivated the act, even admitting a mere declaration of agreement with the grounds of previous opinions, information or proposals, including those that form part of the tax audit report. Second, the tax legislator embraces the possibility of summary substantiations, although always containing the applicable legal provisions, the qualification and quantification of the tax facts and the operations for determining the taxable matter and the tax.

3. Now, these elements are contained with sufficient clarity in the act in question and in the RIT on which it is based. A careful reading of the documents in question allows one to immediately conclude that what is at issue, for the AT, is the non-fulfillment of the objective requirements defined by articles 28-A and 28-B of CIRC for the recording of impairments, with the inherent risks of subjective and opportunistic manipulation of impairments for the reduction of taxable income in years in which this may be especially advantageous. Moreover, it is symptomatic that the Applicant, while alleging the lack of substantiation on the part of the AT, develops its argumentative rhetoric in order to refute the position expressed in the RIT.

4. Also this tribunal, one of the recipients of the substantiation, had no difficulty in understanding the AT's cognitive discourse. In fact, an examination of the RIT, to whose information the substantiation of the AT's act may refer, is far from presenting generic or summary substantiation. Quite the contrary, the RIT goes so far as to present the description of the facts and the grounds for the purely arithmetic corrections made, to refer to the legal norms infringed, to demonstrate the age of the receivables, to present tables specifying one by one the customers with invoices in default for more than 24 months at the end of December 2013, where there are debts prior to 2011, 2010, 2009, 2000, some invoices due in the years 90 of the past century, together with the efforts made for collection or the existence of judicial execution or insolvency proceedings, as can be seen:

5. The Applicant exercised its right to be heard, having the opportunity to bring forward the elements it considered relevant, with the position it sustained being subject to response in the RIT. It is based on a detailed report that the AT concludes that the receivables in question should have been recorded as impairments in the years prior to 2014 or in the year in which the uncollectability of the receivables was verified. The alleged vice of illegality of the act due to lack of substantiation is therefore unfounded.

3.4.2. Recording and Deduction of Impairment Losses

1. The issue to be decided concerns the lawfulness of the corrections to taxable income for the period of 2014, in the amount of 58,544.01 €. Paragraph a) of no. 1 of article 28-A of CIRC, in the version that was in force in the exercise of 2014, provided that "[i]mpairment losses may be deducted for tax purposes, when recorded in the same tax period or in earlier tax periods, related to receivables resulting from normal activity, including interest for delay in fulfillment of obligation, which, at the end of the tax period, may be considered of doubtful collection and are evidenced as such in the accounts".

2. This possibility of deduction is inseparable from the constitutional principles of taxation according to the ability to pay and real income. The company may deduct impairment losses regarding receivables resulting from its normal activity that come to be considered of doubtful collection. The deduction of impairment losses is expressly related to the principle of specialization of periods, that is, it is linked to a specific tax period and to the corresponding periodization of taxable profit. The deduction of impairment losses should occur when it becomes clear that one is dealing with a receivable of doubtful collection.

3. In accordance with nos. 1 and 2 of article 18 of CIRC, revenues and expenses, as well as other positive or negative components of taxable profit, are attributable to the tax period in which they are obtained or incurred, regardless of their receipt or payment, in accordance with the regime of economic periodization, with positive or negative components being considered as respecting to earlier periods attributable to the tax period only when on the date of closing of the accounts to which they should have been attributed they were unforeseeable or manifestly unknown.

4. In order to prevent, at the level of the taxpayer, free interpretation of what constitutes receivables of doubtful collection and to limit the possibility of artificial reduction of the taxable base, article 28-B, of CIRC, under the heading of impairment losses on receivables, determines that for purposes of determining the impairment losses provided for in paragraph a) of no. 1 of article 28-A of the same statute, receivables of doubtful collection are considered to be those in which the risk of uncollectability is duly justified, namely, when the debtor has a pending execution proceeding, insolvency proceeding, special revitalization proceeding or business recovery procedure by extrajudicial means under the System for Business Recovery by Extrajudicial Means (SIREVE), approved by Decree-Law no. 178/2012, of 3 August, or when one is dealing with receivables that have been judicially claimed or in arbitration or are in default for more than six months from the date of their maturity and there is objective evidence of impairment and that efforts have been made for their receipt.

5. With regard to receivables in default exceeding six months, a situation in which all of the Applicant's receivables mentioned in the tables above were found, no. 2 establishes the percentages of the same that limit the annual accumulated amount of the impairment loss on receivables, which are 25% for receivables in default for more than 6 months and up to 12 months; 50% for receivables in default for more than 12 months and up to 18 months; 75% for receivables in default for more than 18 months and up to 24 months; and 100% for receivables in default for more than 24 months. In accordance with the provision in question, these percentages cover interest for delay in fulfillment of obligations, depending on the delay of the receivables to which they correspond. As can be seen, the percentages increase as the age of the receivable increases, reflecting the increase in the risk of non-compliance and the reduction in the capacity for collection. The tax legislator, in no. 3 of article 28-B of CIRC, makes a negative delimitation of what constitutes receivables of doubtful collection, excluding from the concept certain types of receivables, none of which are at issue in the present case.

6. It is important to consider, in this context, the Accounting and Financial Reporting Standard no. 27 (NCRF 27). In paragraphs §§ 23 to 26 the standards for recognition of impairments of financial assets as at the date of each financial report are set out. It is provided that where there is objective evidence of impairment the respective loss must be recognized in the statement of results.

7. Objective evidence is described as an observable reality, susceptible to empirical investigation and intersubjective validation. In accordance with § 24, the same includes observable data that draw the attention of the holder of the asset to loss events such as, namely and synthetically, significant financial difficulty of the debtor, non-payment or default of interest or amortization of debt, the existence of economic difficulties of the debtor that lead the creditor to grant terms that it would not otherwise consider, an observable decrease of future cash flows. § 25 adds the possibility of other factors evidencing the impairment, such as significant changes that may have adverse effects on the technological, market, economic or legal environment in which the debtor operates.

8. The legal and accounting standards just mentioned are of great relevance to the concrete case. They seek to effect a reasonable articulation of the principles of taxation of real income, the periodization of periods, prudence in business management and the protection of the taxable base. Taken together, they aim to reduce the margin of subjectivity in the deduction of impairment losses. In fact, they impose the recording of impairments whenever it is a matter of receivables related to the company's normal activity, considered of doubtful collection and as such evidenced in the accounts.

9. It is indisputable that one is dealing, in this case, with receivables related to the company's normal activity – associated with the acquisition of goods produced or marketed by the creditor – resulting from the tables above presented that they refer to customers of A..., some of them of long standing, with whom it maintained a close relationship marked by good faith. In other words, the primary motivation that underlay the formation of the receivables was clearly linked to the exercise of the company's commercial activity.

10. Nor is the fact that these are business receivables susceptible of being considered of doubtful collection (business bad debts), presenting considerable risk of uncollectability, in issue, in that one was dealing with receivables in default for more than 6 months and in some cases for a considerable number of years. The presence of objective evidence of impairment and the making of efforts cannot be dissociated from the fact that the recording of impairment in 2014 runs counter to the principle of economic periodization of taxable profit, in that, in accordance with article 18, nos. 1 and 2 of CIRC, the rule is that negative components of taxable profit must be attributed to the tax period in which they are incurred, with the attribution of the same to other tax periods being exceptional and limited to components unforeseeable or manifestly unknown.

11. From this it follows that in order to proceed to the attribution to 2014 of negative components embodied in impairments due to receivables of doubtful collection it was necessary that one be dealing with unforeseeable or manifestly unknown realities, which is not the case. In fact, it results from the objective data available that the risk inherent to collection already existed in the years prior to 2014. The table of receivables above presented accounts for the considerable age of a large number of due invoices and the existence of efforts made for their collection, with the AT having verified, in the context of an RIT of internal tax inspection, that in some cases there were already execution and insolvency proceedings and that there were no business relationships with some of the debtors, for several years.

12. The RIT goes so far as to present the description of the facts and the grounds for the purely arithmetic corrections made, to refer to the legal norms infringed, to demonstrate the age of the receivables, and to present tables specifying one by one the customers with invoices in default for more than 24 months at the end of December 2013, where there are debts prior to 2011, 2010, 2009 or 2000 and even some invoices due in the years 90 of the past century, together with mention of efforts made for collection and the existence, in some cases, of judicial execution and insolvency proceedings. The facts described there, with the necessary concrete specifications, refer to the customers whose corrections are questioned by the Applicant, namely B... Unipessoal, C..., D..., I..., J..., K..., L..., O..., P..., Q..., R..., S..., T..., U..., X..., Y... and Z.... Faced with this reality, it is entirely reasonable to conclude regarding the significant financial difficulty of the debtors, of which mention is made in § 24 paragraph a) of NCRF 27. These elements allow one to conclude, reasonably, for the existence of objective evidence of impairment, for purposes of paragraph c) of no. 1 of article 28-B of CIRC.

13. Furthermore, the witnesses heard at the public hearing provided for in article 18 of RJAT confirmed that the process of collection of receivables was gradual and insistent, whether personally or by telephone, dragging on for several years. This means, in practice, that there was already objective evidence of impairment in 2011, but certainly in 2012 or 2013, and that successive and protracted efforts had been made for receipt of the receivables. If it is true that, for the Applicant, the existence of constant contacts with the debtor companies and the continued and persistent undertaking of the aforementioned collection efforts is affirmed in the records, confirmed by the witnesses and used to demonstrate the existence of an expectation of receipt of the receivables – allegedly justifying the deferment of the deduction of impairments – it is also true that for paragraph c) of no. 1 of article 28-B of CIRC such efforts constitute one of the objective legal prerequisites for demonstrating the presence of receivables of doubtful collection, reducing the margin of subjectivity of the taxpayer.

14. Moreover, the reference made by the witnesses to the making of collection efforts for receivables over several years, being entirely relevant to the concrete case, should always be reasonably interpreted, in the abstract, according to the standard of the diligent administrator, in a sense that prevents a negligent, inattentive, indolent or incautious administrator – who intentionally or negligently has not over years made the collection efforts objectively incumbent for collecting old receivables – from ending up in the fiscally more favorable position of being able to manipulate temporally the deduction of impairment losses and thereby circumvent the principles of specialization of periods, prudence and protection of the taxable base.

15. It is also worth noting that the global financial crisis – which spread from the United States to Europe and affected Portugal from 2010 onwards and which, at some point, will have been invoked by the debtors to justify the deferment of satisfaction of their debts – may indeed be seen as a significant, anomalous and adverse alteration in the economic and financial environment of the debtors.

16. But this, by itself, does not justify the deferment of the recording of impairment losses to 2014. On the contrary, these are realities that fall within the empirical-objective criteria for identification and proof of the existence of impairments provided for in article 28-B and in NCRF 27, in §§ 24 and 25, where reference is made to adverse national economic conditions and significant changes with adverse effects on the economic environment. In fact, a concrete analysis of the verification of the normatively relevant prerequisites – in the line of the so-called all-events test, inseparable from the principle and method of economic periodization – requires the conclusion that all the events reported in the RIT, and confirmed by the Applicant, concerning the significant age of the due invoices, the diverse, constant and insistent collection efforts, the successive breach of payment promises made by the debtors, the execution and insolvency proceedings that existed, the rupture of business relationships with some customers and the difficulties created for the debtors and the creditor by the economic and financial crisis, constitute, in their entirety, objective evidence of impairment prior to 2014, for purposes of articles 28-A and 28-B of CIRC and NCRF 27.

17. The principles of specialization of periods and prudence (due diligence), objectively shaping economic activity and tax law, would require here the recording of impairments, as otherwise the accounting would not reflect the patrimonial reality of the company and real income. In fact, the rules contained in articles 28-A and 28-B of CIRC, in addition to their immediate relevance in the context of tax compliance, produce the important regulatory effect – which radiates throughout the entire economic system – of encouraging the administrators of commercial companies to adopt an attentive, diligent, proactive, systematic, organized and competitive posture of optimization of receivables management. This posture, in addition to providing for a good functioning of the economy, will have important consequences for the adequate performance of tax obligations – both principal and ancillary – and in the preservation of the taxable base.

18. A propensity for the relativization of the concerted action of the principles of specialization of periods and prudence, even if well intentioned, can have deleterious systemic consequences, frustrating the objectives pursued by the tax legislator. The principle of justice, enshrined in articles 266, no. 2 of the Constitution of the Portuguese Republic (CRP) and 55 of the LGT, cannot be mobilized to bridge the passivity of creditors in managing the collection of their receivables and in the timely accounting recording of the corresponding impairments.

19. This is not to call into question the management capacity of the company's administration or to question its freedom of strategic-commercial configuration. It is certainly for the administrators that, in the exercise and within the scope of their freedom of private economic initiative constitutionally enshrined, it is incumbent to define and execute the plans for development of their business activity, in particular those they deem most opportune and appropriate for collection of the company's receivables.

20. It is likewise recognized that the administrators of companies are the primary interested parties in the collection of receivables and in the making of the appropriate and necessary efforts for obtaining that result. It is for them to decide, in particular, whether they seek to collect their receivables through personal, direct or indirect contacts, by telephone or email, or to assent to payment plans specially designed to facilitate the gradual recovery of amounts owed. It is incumbent on them to set, for example, how much time they will grant debtors for full or even partial satisfaction of their receivables, whether they consider opting for resorting to the judicial route or whether they prefer to enter into factoring contracts with financial institutions to obtain immediate liquidity.

21. However, what is at issue in the case under consideration is not the intrusion of the AT into the essential nucleus of the Applicant's business activity, but solely the recognition of the existence, in tax law, of objective criteria for the recording of impairments that remove from the taxpayer the power to freely choose the period in which it wishes to proceed with the accounting and deduction of the respective losses, minimizing the risks of tax abuse of impairment.

22. The existence of these objective criteria follows from the need for the legislator to effect a constitutionally adequate balance of the tax law principles of taxation according to the ability to pay and real income, the specialization of periods, prudence in business management (due diligence) and the prevention of erosion of the taxable base. This balance is all the more important given that taxpayers are called upon to actively collaborate with the AT in the effectuation of taxation and the pursuit of its public constitutional purposes – voluntarily complying with their tax obligations through self-interpretation, -declaration, -assessment and -taxation and submitting to possible and uncertain ex post facto review by the AT – with the risk always existing that these purposes could be considerably distorted and neutralized through some drift in tax planning (tax planning drift).

23. In this context, it is important to emphasize that the economic, business and accounting criteria, on one hand, and the tax criteria, on the other, do not necessarily and entirely coincide. Were this not so, the taxpayer could freely control the timing of deductions, with the doors open to aggressive tax planning through the transfer of deductions (deduction shifting) temporally oriented toward the periods in which they would prove fiscally most advantageous, depending on the annual variation of profits and losses, marginal tax rates or tax benefits. Although each concrete case must be rigorously examined on its merits in function of its factual specificity and normative relevance, the legal solution that should be given to it, in the context of interpretation and application of tax law, cannot abstract from the systemic implications that would necessarily result from it for the generality of cases.

24. The considerations set out lead this tribunal to consider that the AT, in the case in question, has not practiced the arithmetic corrections in question by means of an act devoid of legal basis.

DECISION

For these reasons, the Arbitral Tribunal decides:

1. To judge unfounded the present request for arbitral ruling, as unproven.

2. To absolve the Respondent of all claims with the legally due consequences.

Case Value

The case value is set at € 59,332.26, in accordance with article 306, no. 1 of CPC and article 97-A, no. 1, a), of the Code of Tax Procedure and Process, applicable by force of paragraphs a) and b) of no. 1 of article 29 of RJAT and no. 2 of article 3 of the Regulation of Costs in Tax Arbitration Proceedings.

Costs

The arbitration fee payable by the Applicant is set at € 2,142.00 in accordance with articles 12, no. 2, and 22, no. 4, both of RJAT, and article 4, no. 4, of the Regulation of Costs in Tax Arbitration Proceedings and Table I attached thereto.

Notify the parties.

Lisbon, 19 March 2019

The Arbitrator

Jónatas Machado