CAAD Process 480/2018-T: IRC Corporate Tax Accounting Obligations and Proof of Acquisition Value

ARBITRAL DECISION

I. Report

1. The legal entity A..., S.A., with the tax identification number ... (hereinafter referred to as the "Claimant"), with registered address in ..., ...-... ..., ..., filed, pursuant to the combined provisions of articles 2 and 10 of Decree-Law No. 10/2011 of 20 January, i.e., the Legal Framework for Arbitration in Tax Matters ("LFATM"), a request for constitution of an Arbitral Tribunal, in order to have declared illegal the act of assessment of Corporate Income Tax ("CIT") for the tax year 2016, with the Tax and Customs Authority ("Respondent" or "TCA") being named as defendant.

A) Constitution of the Arbitral Tribunal

1. Pursuant to the provisions of paragraph a) of no. 2 of article 6 and paragraph b) of no. 1 of article 11 of the LFATM, the Deontological Council of the Centre for Administrative Arbitration ("CAAD") designated the undersigned as arbitrator of the single arbitral tribunal, who communicated acceptance of the assignment within the applicable deadline, and notified the parties of this designation on 19 October 2018.

2. Thus, in conformity with the requirements of paragraph c) of no. 1 of article 11 of the LFATM, and by means of the communication of the President of the Deontological Council of CAAD, the Single Arbitral Tribunal was constituted on 6 December 2018.

B) Procedural History

1. In the request for arbitral pronouncement, the Claimant petitions for the illegality of the act of additional assessment of CIT for 2016, with compensation number 2018... and compensatory interest, in the total amount of EUR 24,225.43.

2. The TCA submitted a response, petitioning in turn for the dismissal of the request for arbitral pronouncement, on the grounds that no defect of violation of law is evident, requesting that the tax act under analysis, as it does not violate any legal or constitutional provision, be maintained in the legal order.

3. By order of 30 May 2019, the Single Arbitral Tribunal, pursuant to the provisions of paragraph c) of article 16 of the LFATM, decided, without opposition from the parties, that it was not necessary to hold the meeting referred to in article 18 of the LFATM, as a result of the simplicity of the questions at issue, as well as considering that it had at its disposal all the elements necessary to render a clear and impartial decision.

4. The present Arbitral Tribunal decided, in conformity with no. 2 of article 18 of the LFATM, that it was not necessary to produce oral arguments or to hear witnesses, as the positions of the parties were perfectly defined in their respective pleadings, and set as the deadline for the arbitral decision 6 June 2019.

5. In addition to the Request for Arbitral Pronouncement, the Claimant also presented a Motion, to which it attached the Arbitral Decision handed down in case no. 170/2018-T, which was partially favourable to the Claimant, having an impact on the present Request, whereby the contents of this Motion are being considered by this Arbitral Tribunal for purposes of adjudication of the case.

6. The Arbitral Tribunal was regularly constituted and is competent to adjudicate the issues indicated (article 2, no. 1, paragraph a) of the LFATM), the parties possess legal standing and capacity and have full legitimacy (articles 4 and 10, no. 2 of the LFATM and article 1 of Ordinance No. 112-A/2011 of 22 March). No nullities occur and no exceptions were raised, whereby nothing prevents judgment on the merits.

7. The present case is thus in a position for a final decision to be rendered.

II. Question to be Decided

1. The central question to be examined and decided regarding the merits of the case, as emerges from the parties' procedural documents, is whether the CIT assessment aforesaid suffers from the defects of illegality which the Claimant attributes to it, namely: i) insufficient reasoning of the assessment act, ii) error of fact and law regarding the non-acceptance of expenses with depreciation of tangible fixed assets and iii) disregard of fiscal losses relating to prior tax years, which were also contested in the appropriate proceedings.

III. Decision on the Facts and its Reasoning

1. Having examined the documentary evidence produced, the present tribunal finds as proven, with relevance to the decision of the case, the following facts:

I. The present Claimant carries out its economic activity in the field of wood fibre, particle board and veneer industry, and their commercialisation.

II. Within the scope of its activity, the Claimant is depreciating tangible fixed assets that were acquired before 2006, having destroyed the supporting documents with external efficacy (i.e., invoices) that supported the acquisition of these assets, as these documents were more than ten years old.

III. Additionally, in 2006, the Claimant acquired, secondhand, from company B..., which also carries out its activity in the wood industry, producing hardboard and MDF, the L42 Sunds Defibrillator, which was used by B... in the course of its activity, being an element of its fixed assets.

IV. It should be noted in this regard that the "assembly of the L42 Sunds defibrillator", in the value of EUR 175,000, is supported by an invoice issued on 2 October 2006 by B..., recorded by the Claimant in a "works in progress" account, having transferred, on 31 December 2015, to a Tangible Fixed Asset account, and depreciation initiated at an annual rate of 12.5%.

V. Following other inspection procedures which had as their object the fiscal result for the tax years 2013, 2014 and 2015, the Claimant was subject to an inspection regarding the tax year 2016.

VI. In this context, by means of Official Letter No. ... of 6 March 2018, from the Tax Inspection Services of the Finance Department of ..., the Claimant was notified of the draft tax inspection report, which proposed to make the following corrections for CIT purposes:

a) Correction relating to depreciations not accepted for tax purposes;

b) Correction relating to fiscal losses from prior years not accepted by the TCA.

VII. Specifically, the correction relating to depreciations not accepted for tax purposes comprised three distinct items, namely:

a) Depreciation of assets which, according to the TCA, lack supporting documentation or are supported only by an internal document: in the amount of EUR 8,383.70;

b) Depreciation of assets supported partly by an internal document: in the amount of EUR 71,645.64; and,

c) Depreciation of the L42 Sunds Defibrillator: in the amount of EUR 21,874.99.

VIII. In view of the content of the Draft Report, the Claimant submitted a written statement, pursuant to the Right to be Heard, to which it attached documents intended to prove the illegality of the proposed correction regarding the depreciation of assets supported partly by an internal document.

IX. As a result of the exercise of the Right to be Heard, the TCA, in the Inspection Report, corrected part of its correction, nevertheless stating that "Verifying that part of the values of tangible fixed assets still subsist without support in a document accepted for tax purposes, we correct the depreciation of the period from EUR 71,645.64 to the amount of EUR 24,198.19".

X. This correction resulted in the issuance of the additional CIT assessment with compensation number 2018... and compensatory interest, in the total amount of EUR 24,225.43, in relation to which the Claimant, with a view to contesting its legality in arbitral proceedings, provided adequate security for this purpose.

XI. Being dissatisfied with these assessments, the Claimant is presently requesting from the present Arbitral Tribunal that it decide on the illegality of the additional CIT assessment referred to above, and consequently that any sum wrongfully withheld or paid be reimbursed to it, as well as the costs of wrongful security.

1. The conviction of the present tribunal regarding the facts found to be proven resulted from the documents annexed to the case file and the uncontested statements and arguments of the parties, as specified in the points of the facts set out above.

2. There is no material factuality relevant to the decision of the case found to be not proven.

IV. On the Law

A) Legal Framework

1. Given that the legal question to be decided in the present case requires interpretation of the relevant legal texts, it is important, firstly, to list the provisions that comprise the relevant legal framework, at the date of the occurrence of the facts.

2. In this sense, given the subject matter of the present case, it is necessary to consider the wording of article 23 of the CIT Code, which provided, at the date of the facts, as follows:

"1 - For the determination of taxable profit, all expenses and losses incurred or borne by the taxpayer to obtain or ensure income subject to CIT are deductible. (…)

3 - Deductible expenses under the terms of the preceding numbers must be documented, regardless of the nature or medium of the documents used for this purpose.

4 - In the case of expenses incurred or borne by the taxpayer with the acquisition of goods or services, the supporting document referred to in the preceding number must contain, at a minimum, the following elements:

a) Name or corporate denomination of the supplier of the goods or service provider and of the purchaser or recipient;

b) Tax identification numbers of the supplier of the goods or service provider and of the purchaser or recipient, whenever these are entities with residence or permanent establishment in the national territory;

c) Quantity and usual denomination of the goods acquired or of the services provided;

d) Value of the consideration, namely the price;

e) Date on which the goods were acquired or on which the services were performed. (…)

6 - When the supplier of the goods or service provider is obliged to issue an invoice or document legally equivalent under the terms of the VAT Code, the supporting document for the acquisition of goods or services provided for in no. 4 must mandatorily assume that form." (emphasis ours).

1. Indeed, the disputed question in the present case, as we shall set out below, will be concerned, above all, with deciding whether the expenses incurred with the depreciation of tangible fixed assets meet the necessary requirements to be deductible, for CIT purposes, in light of article 23 of the CIT Code, given that the Claimant did not present the respective supporting documentation, or only presented internal documentation regarding the acquisition of these assets.

2. As it assumes particular relevance for the case in question, it is also necessary to analyse no. 4 of article 123 of the CIT Code, which provided, at the date of the facts, regarding the accounting obligations of companies, that "Books, accounting records and respective supporting documents must be kept in good order for a period of 10 years".

3. Keeping this legislative framework in mind, we shall now address the arguments presented by the Parties.

B) Arguments of the Parties

1. In the present request for arbitral pronouncement, the Claimant alleges, in summary, that the CIT assessment which it now seeks to annul suffers from illegality, for three distinct reasons:

i) insufficient reasoning of the assessment act;

ii) error of fact and law regarding the non-acceptance of expenses with depreciation of tangible fixed assets; and

iii) disregard of fiscal losses relating to prior tax years, which were also contested in the appropriate proceedings.

1. With regard to the first argument presented – the insufficient reasoning of the assessment act – the Claimant contends that, regarding the depreciation of assets the acquisition of which was supported, in part, by an internal document, the TCA accepted only part of the amounts in relation to which the Claimant presented supporting documentation in the course of the Right to be Heard.

2. However, having not presented any reasoning which would allow discernment of the criteria used for the acceptance of certain documents as valid, and others not.

3. Supporting its position in this regard, the Claimant also cites extensive doctrine and case law, both administrative and arbitral, which specifies what reasoning should be considered as "sufficient" to comply with the legal obligation of the duty to provide reasons for assessment acts incumbent upon the TCA.

4. Concluding, in its analysis, that the assessment act notified to it suffers from illegality due to insufficient reasoning.

5. Subsidiarily, the Claimant argues that, regarding the corrections affecting the amounts of the depreciation of assets, this assessment is illegal in not accepting these expenses, for tax purposes.

6. In this context, the Claimant divides its arguments regarding the three distinct corrections made by the TCA, namely:

a) Depreciation of assets which, according to the TCA, lack supporting documentation or are supported only by an internal document: in the amount of EUR 8,383.70;

b) Depreciation of assets supported partly by an internal document: in the amount of EUR 24,198.19; and,

c) Depreciation of the L42 Sunds Defibrillator: in the amount of EUR 21,874.99.

1. As such, with regard to the corrections of depreciation of assets the acquisition of which is not supported by any document, the Claimant alleges that "part of the elements of the fixed assets to which such corrections relate are prior to 2006, i.e., they relate to acquisitions/production of assets that occurred in tax periods in relation to which the Claimant no longer had, nor was legally obliged to have, additional documentation" (cf. article 50 of the Request for Arbitral Pronouncement).

2. On this matter, the Claimant alleges that, pursuant to the provisions of no. 4 of article 123 of the CIT Code, there was no obligation to keep the supporting documents of assets acquired before the year 2006, given that the said legal provision establishes a ten-year period for this filing.

3. The Claimant further argues, in this regard, that the TCA cannot maintain a correction that is based on "condemnation or censure of conduct widely permitted by law – among others, for reasons of administrative cost efficiency – and even induced by the same, given the setting of the said period." (cf. article 62 of the Request for Arbitral Pronouncement).

4. Whereby "the (supposed) reasoning of the TCA resides solely in the erroneous conviction that, not having been preserved a document (which the law does not require to be preserved), it is enabled to disregard the reality of the facts (widely demonstrated by the material confirmation of the existence and use of the asset and the repeated entry of the same in the depreciation and amortisation schedules) and artificially to presume the absence of an expense that was actually incurred." (cf. article 94 of the Request for Arbitral Pronouncement).

5. Additionally, the Claimant alleges that all the schedules presented are duly supported by internal documents entitled MAC ("Computer-Assisted Maintenance") which, however, the TCA considers do not adequately prove the corresponding expenses.

6. A position which the Claimant vehemently disagrees with, especially as it understands that the documentation presented contains the main characteristics of the operations carried out, and more, the external documentation that would prove the expenses was older than 10 years and, as such, was not obliged to be preserved, for the reasons set out above.

7. Regarding the correction made to the expenses relating to the depreciation of the L42 Defibrillator, and given that the respective invoice for the acquisition of this equipment was made available to the TCA, with the Respondent having the opportunity to verify that this equipment existed in the Claimant's facilities, the Claimant does not understand why the depreciation expense of this equipment should not be accepted.

8. In this context, the Claimant makes explicit that the invoice contains no reference to B..., or to the serial number of the equipment, as this was not manufactured by B..., since it was a matter of the disposal of one of its secondhand tangible fixed assets.

9. Additionally, the Claimant objects to the possibility of disregarding the expenses with the depreciation of an asset that had never been depreciated, merely for temporal reasons (as it had been acquired in 2006 but would only begin its depreciation in 2015), as this disregard would violate the constitutional principles of justice, proportionality and impartiality to which the TCA is bound.

10. Finally, the Claimant emphasises that the correction relating to the deductibility of fiscal losses from prior years is illegal, and that this correction is based on the corrections to the fiscal result for the years 2013, 2014 and 2015, which were also contested in the appropriate proceedings.

11. Indeed, with regard to the tax year 2013, the Decision handed down by the Arbitral Tribunal in case no. 170/2018-T is already known, which found the Request for Arbitral Pronouncement of the present Claimant partially justified, in the amount of EUR 653,022.84.

12. For its part, the Respondent, duly notified for this purpose, presented its Response, in which it addressed the arguments presented by the present Claimant as follows:

13. With regard to the alleged defect of insufficient reasoning, the Respondent contends that it appears from the Request for Arbitral Pronouncement that the Claimant understood the content of the act, given that "it refutes, point by point, all the arguments expounded in the report." (Article 11 of the Response).

14. Still in this regard, the Respondent alleges that "Contrary to what the Claimant states, the Inspection Services took care to respond in a case-by-case manner, individualising each one of the corrections, and supporting the final decision of the TIR with recourse to the legal and accounting arguments which in their view appeared adequate." (Article 30 of the Response).

15. Having justified the partial maintenance of the correction relating to the depreciation of assets the acquisition of which was supported, in part, by an internal document, insofar as "the pressing question is based on the fact that the TP did not provide the supporting documents for the acquisition of materials and services associated with part of the value of the items referred to above, providing only a copy of the internal document as was mentioned in the draft report." (Article 34 of the Response).

16. For its part, with regard to the corrections affecting the amounts of the depreciation of assets, the Respondent also chooses to divide its arguments among the three distinct bases for these corrections.

17. In this context, with regard to the corrections of depreciation of assets the acquisition of which is not supported by any document, the Respondent argues that "In light of the law, there are two requirements for the company's expenses to be deductible from the tax perspective: 1) that they be proved with documents issued in accordance with legal terms; 2) and that they be necessary for the achievement of income, regardless of whether the acquisition/production of the assets took place more than 10 years ago." (Article 50 of the Response).

18. Moreover, it alleges that "Observing article 23 of the CITC, it appears that the conditions for acceptance of the expense in the period do not include any temporal element or any reference to article 123, both of the CITC." (Article 51 of the Response).

19. The Respondent further contends, on this matter, that, even though no. 4 of article 123 of the CIT Code indicates as the limit for keeping accounts and supporting documents a period of 10 years, this does not mean that by operation of law from that moment onwards any and all arithmetic correction must be sustained by the TCA, exempting taxpayers from proving with documents the veracity of the expenses in which they incurred and the income they derived.

20. In this regard, the present Respondent urges the present Arbitral Tribunal to decide on the unconstitutionality of the normative interpretation of no. 4 of article 123 of the CIT Code, for violation of paragraph g) of no. 2 of article 23 of the same Code and of the principles of contributory capacity and equality, in its corollary of the principle of actual income of companies, provided for in article 104, no. 2 of the Constitution of the Portuguese Republic ("CPR"), "when interpreted in the sense that the taxpayer is relieved of the obligation to keep accounting and supporting documents, in their possession for a period longer than 10 years, relating to the acquisition values of goods generating expenses, still in depreciation, which compete for the determination of taxable profit, when these costs are subject to scrutiny in the course of tax inspection for a given exercise of business economic activity within the limitation period of 4 years from expiration, as provided for in article 45, no. 1 of the General Tax Law ("GTL")". (Article 91 of the Response).

21. Moreover, the Respondent further requests that it be judged unconstitutional "the normative interpretation of article 123, no. 4 of the CITC, for violation of article 74 of the GTL and of the principles of contributory capacity and equality, in its corollary of the principle of actual income of companies, provided for in article 104, no. 2 of the CPR, when interpreted in the sense that, after 10 years of proper conservation of accounting and supporting documents required of taxpayers by article 123, no. 4 of the CITC, it is to the Tax Authority that it falls to prove, in the situation here at issue, the value of the acquisition cost of the goods that constitute the tangible fixed assets of the company". (Article 93 of the Response).

22. Regarding the presentation by the present Claimant of internal documents for justification of the expenses, the Respondent is inflexible in its argument that MAC documents are not suitable to prove the respective expenses in accordance with the provisions of article 23 of the CIT Code, since they are not external documents, not identifying the main characteristics of the operations carried out.

23. With regard to the third arithmetic correction, relating to the expenses with the depreciation of the L42 Defibrillator, the TCA argues that it is not possible to affirm that the equipment in operation in the Claimant's facilities corresponds to what appears in the invoice made available, given that the latter does not mention the serial number of the equipment.

24. Indeed, the Respondent contends that it took care to implement the principles of inquiry and participation, by notifying the Claimant to present a document attesting its ownership of the equipment, apart from the 2006 invoice, which did not happen.

25. Whereby, it was incumbent upon the Claimant to prove that the L42 Defibrillator equipment in operation in 2015 was the same one acquired from B... in 2006, which it failed to do.

26. Finally, the Respondent concludes that the additional assessment act, in question in these proceedings, does not suffer from any defect that calls into question its legality and validity.

C) Tribunal's Assessment

1. By way of preliminary note, it should be stated that the present Arbitral Tribunal will address the issues raised by the present Claimant regarding the legality of the assessment act in the order in which they were raised in the Request for Arbitral Pronouncement, with knowledge of the merits of the reasons invoked for illegality being prejudiced in the face of the non-acceptance of the depreciation of assets, should the ground of formal illegality for insufficient reasoning of the assessed act proceed.

2. With regard to the alleged insufficient reasoning of the assessed act, it should be noted that, as appears from the facts described above, the TCA's Inspection Services were particularly diligent in drafting the Inspection Report, having individualised each one of the corrections in question, with recourse to the legal and accounting arguments which, in their view, appeared adequate.

3. With regard to the point disputed, in the eyes of the present Claimant, as to the alleged impossibility of discerning the arguments which allowed the TCA to accept only part of the amounts in relation to which the Claimant presented supporting documentation in the course of the Right to be Heard, it is necessary to take a position.

4. In this context, the present Arbitral Tribunal verified, through careful reading of the Inspection Report, that the Inspection Services did not accept only the depreciation of assets the acquisition of which was supported, in part, by an internal document.

5. It should be noted in this regard that the jurisprudence of the Supreme Administrative Court ("SAC") has uniformly come to understand that the reasoning of an act is a relative concept that varies according to the type of act and the circumstances of the concrete case, and that reasoning is sufficient when it allows a normal recipient to understand the cognitive and evaluative path followed by the author of the act, that is, when the recipient is able to know the reasons that led the author of the act to decide in that manner and not another.

6. In this context, and given that, as far as we can ascertain, the Claimant correctly understood the reason why the TCA did not accept certain documents presented as justificatory of the expenses with depreciation – given that it has discussed at length the validity of the internal documents it presented in this regard – we understand that the reasoning of the assessment act under analysis was adequate and sufficient.

7. It should further be noted that, in the event that the present Claimant did not truly understand the assessment issued (which this Arbitral Tribunal is not assuming, given that all the documents produced in the proceedings seem to indicate the contrary), it could always have requested, through the administrative means available for this purpose, notification of the requirements that were omitted or a certified copy containing them, free of any payment.

8. This is the faculty granted to taxpayers, namely in article 37 of the Code of Tax Procedure and Process ("CTPP"), when the notification received is defective due to insufficient reasoning.

9. Having not done so, the argument raised by the Claimant regarding insufficient reasoning of the assessment act presently being contested cannot proceed.

10. The formal defect raised by the Claimant not proceeding, it falls to the present Arbitral Tribunal to judge the conformity of the present CIT assessment with the applicable legal provisions of the Portuguese legal order.

11. In this context, in the eyes of this Arbitral Tribunal, the question to be decided is whether expenses incurred with the depreciation of tangible fixed assets whose supporting documentation was destroyed, because it was issued more than 10 years ago, or internal documentation was merely presented as justification for these expenses, should be accepted as deductible expenses for CIT purposes.

12. It is necessary, first of all, to make a critical analysis of the content of nos. 4 and 6 of article 23 of the CIT Code, which, at the date of the facts, establish the obligation for expenses incurred by a given company to be supported by a suitable document.

13. Indeed, and as the Respondent contends, nothing in this article refers to no. 4 of article 123 of the CIT Code, regarding the accounting obligations of companies.

14. However, the present Arbitral Tribunal cannot fail to make a systematic interpretation of the entire CIT Code, understanding that such would be the legislator's intention.

Now,

1. The systematic interpretation of a given provision analyses the relationship between the legal norms themselves.

2. Indeed, assuming that the legal system is a unitary whole, without incompatibilities, this interpretation allows for the choice of the meaning of the provision that is coherent with the whole, preventing legal norms from being interpreted in isolation.

3. In this context, although no express reference is made in article 23 of the CIT Code to the accounting obligations of companies, nothing is said in the article that would allow the provision in no. 4 of article 123 of the same Code to be disapplied.

Let us see,

1. Article 23 of the CIT Code establishes that, in the case of expenses incurred or borne by the taxpayer with the acquisition of goods or services, their acceptance depends on the existence of a supporting document which, whenever required, must meet the conditions of an invoice.

2. However, the article contains no provision regarding the obligation incumbent upon the taxpayer to keep these supporting documents during a given period of time.

3. Indeed, the only article that provides on this matter is article 123, in its no. 4, which provided, at the date of the facts, that the taxpayer must keep the books, accounting records and respective supporting documents in good order during a period of 10 years.

Now,

1. From this it follows that the legislator intended to limit in time the obligation to keep accounting records and respective supporting documentation for a period that seemed reasonable to it (i.e, 10 years), relieving the taxpayer of the administrative costs of keeping a large volume of documentation for an unreasonable period of time.

2. As such, the TCA cannot conclude that the taxpayer did not prove the elements composing the respective acquisition value of the depreciated assets in 2016, given that these were acquired more than 10 years ago and as we concluded above, the Claimant was not obliged to keep the accounting elements for a period longer than that.

3. In this sense, the Decision of the Supreme Administrative Court, handed down in case no. 0244/06 of 8/11/2006, proposes, which provides, on the disputed matter of the case:

"Now, from this it follows that from the non-presentation of such elements, requested from the appellant after the ten-year period in which it was obliged to keep them had elapsed, the Tax Administration cannot conclude that the taxpayer did not prove the elements composing the respective acquisition value, namely those which are different from the price proper.

Whereby, given that in the accounting of the appellant, more than ten years ago, there was recorded a value of the acquisition cost of the real property in question, it falls to the Tax Administration to prove that this value is not correct.

Thus and given that the Tax Administration did not make a demonstration of the incorrectness of the fixing of the accounting value of the acquisition, it is not legitimate to now come, after that period of ten years has elapsed, to require of the taxpayer the proof thereof." (emphasis ours).

1. The Decision handed down by the Arbitral Tribunal, in case no. 170/2018-T, also adopted this understanding, deciding that "The Claimant argues that it was not obliged to hold documentation older than 10 years, by virtue of the provisions of article 123, nos. 4 and 5, of the CITC, in harmony with article 40 of the Commercial Code".

2. Having regard to the jurisprudence set out above, the present Arbitral Tribunal cannot but agree with the position upheld by the Claimant, understanding that there was no obligation to preserve the supporting documents for a period longer than 10 years, regardless of them supporting the acquisition values of assets which are being depreciated.

3. Indeed, and notwithstanding understanding the position of the Respondent, in the sense that, in the absence of the respective supporting documents, it will be particularly arduous to prove that a given acquisition value of an asset that is being depreciated does not correspond to the correct amount,

4. The present Tribunal understands that taxpayers cannot be penalised for acting in conformity with the law, by destroying, in good faith, documents in the archives that are more than 10 years old.

5. All the more so given that the TCA had ample opportunities to request these documents in prior years.

Now,

1. Having regard to the foregoing, the present Arbitral Tribunal understands that the expenses with the depreciation of the assets in which the supporting documentation was not presented by the Claimant should be accepted, as it had already been issued more than 10 years ago.

2. This understanding should equally be applied to the correction of EUR 24,198.19, regarding the depreciation of assets supported partly by an internal document.

3. Indeed, in accordance with the wording of article 23 of the CIT Code, the expenses incurred by a given company must be supported by a suitable document, which, in the case of being issued by VAT taxpayers, should be an invoice, thereby complying with all the formal requirements for this purpose.

4. In this context, an internal document should not, in principle, be accepted, for tax purposes, to prove the expenses incurred by a given company.

5. Nevertheless, the present Tribunal verified that the expenses supported by internal MAC documents also corresponded to goods acquired before 2006, whose external supporting documents had already been destroyed.

Whereby,

1. Having regard to the fact that, as has already been concluded, the Claimant had no obligation to keep these supporting documents for more than 10 years, the present correction should not be maintained in the legal order.

2. It is also necessary, in this regard, to address the constitutionality issues raised by the Respondent.

3. In this context, it is worth recalling that the matters in relation to which Arbitral Tribunals are authorised to pronounce themselves are listed in article 2 of the LFATM.

4. In this regard, the Arbitral Tribunal is competent to assess the legality of assessment acts, as results from paragraph a) of no. 1 of article 2 of the LFATM.

5. Nevertheless, what the Respondent is petitioning from the present Arbitral Tribunal is fundamentally different, requesting that the normative interpretation of no. 4 of article 123 of the CIT Code be considered unconstitutional, for violation of paragraph g) of no. 2 of article 23 of the same Code and of the principles of contributory capacity and equality, in its corollary of the principle of actual income of companies, provided for in article 104, no. 2 of the Constitution of the Portuguese Republic ("CPR"), "when interpreted in the sense that the taxpayer is relieved of the obligation to keep accounting and supporting documents, in their possession for a period longer than 10 years, relating to the acquisition values of goods generating expenses, still in depreciation, which compete for the determination of taxable profit, when these costs are subject to scrutiny in the course of tax inspection for a given exercise of business economic activity within the limitation period of 4 years from expiration, as provided for in article 45, no. 1 of the General Tax Law ("GTL")".

6. Moreover, the Respondent further requests that the "normative interpretation of article 123, no. 4 of the CITC be judged unconstitutional, for violation of article 74 of the GTL and of the principles of contributory capacity and equality, in its corollary of the principle of actual income of companies, provided for in article 104, no. 2 of the CPR, when interpreted in the sense that, after 10 years of proper conservation of accounting and supporting documents required of taxpayers by article 123, no. 4 of the CITC, it is to the Tax Authority that it falls to prove, in the situation here at issue, the value of the acquisition cost of the goods that constitute the tangible fixed assets of the company".

7. Now, the assessment of the unconstitutionality of a given interpretation of a normative provision is no longer a question of concrete unconstitutionality, applicable to a given assessment, but rather of abstract unconstitutionality.

8. As such, the present Arbitral Tribunal does not have competence to pronounce on the issues raised, and this type of assessment should only be requested from the Esteemed Constitutional Court, from which an appeal of the present Arbitral Decision may be made, should the Respondent so wish.

9. Still regarding the corrections relating to depreciation, it falls to the present Arbitral Tribunal to take a position regarding the expenses incurred with the depreciation of the L42 Defibrillator equipment.

10. In this regard, the Respondent argues that it was not possible for it to determine whether the equipment that is being depreciated, and which is in the Claimant's facilities, is the one listed in the invoice issued by B... in 2006, given that this invoice is missing some elements that would allow identification of the equipment, such as the serial number.

11. In this regard, it is necessary to consider article 74 of the General Tax Law ("GTL"), which deals with the matter of the burden of proof.

12. The general rule of burden of proof, expressed in the said article, places the obligation to prove the facts constitutive of the rights of the tax administration or of the taxpayers on whoever invokes them.

13. In this context, the Claimant, notified for this purpose in the course of the inspection, proved that the L42 Defibrillator equipment had been acquired from B... in 2006, having only begun its depreciation in 2015, presenting, for this purpose, documents proving its allegations and even indicating the equipment in question in its facilities.

14. Now, it was incumbent upon the TCA to invoke facts capable of shaking the legal presumption of veracity of the taxpayers' statements and the data contained in their accounting records.

15. Such is, moreover, the understanding that emanates from the interpretation of paragraph a) of no. 2 of article 75 of the GTL, which causes the presumption of veracity that generally occurs in the statements of taxpayers to fall before grounded indicia that the same do not reflect or prevent knowledge of the actual taxable matter of the passive subject.

16. Having reached this point, it falls to the present Arbitral Tribunal to take a position, namely in deciding whether the indicia raised by the Respondent in the course of the inspection are, or are not, sufficient to be subsumed under the concept of "grounded indicia", for the purposes of article 75 of the GTL already cited.

17. In this context, the present Tribunal carefully analysed the probative elements raised by the TCA in the course of the inspection, and found that no element was raised by the Respondent that would allow the presumption of veracity of the Claimant's statements to be shaken.

18. Being merely argued that it is "strange" that the Claimant did not have more elements of proof of the acquisition of the equipment, and that it had only begun to depreciate it 9 years after its acquisition.

Now,

1. Such is manifestly insufficient to shake the presumption of veracity of the Claimant's statements and, as such, the present Tribunal understands that this correction should be annulled.

2. Finally, there remains for the present Arbitral Tribunal to pronounce on the disregard of fiscal losses relating to prior years, which were also contested in the appropriate proceedings.

3. In this context, following the publication of Arbitral Decision no. 170/2018-T, which found the Request for Arbitral Pronouncement of the present Claimant partially justified, in the amount of EUR 653,022.84, the present Arbitral Tribunal understands that legality should be restored, through the updating of fiscal losses available for deduction in the tax year 2016.

Thus,

1. The request for annulment of the above-mentioned assessment act entirely proceeds, and the request for condemnation of the Respondent to pay costs and other charges of the proceedings also proceeds consequently.

V. Decision

1. For these reasons, this Arbitral Tribunal decides:

A) To find the request for arbitral pronouncement procedurally sound and, consequently, to declare illegal and annul the act of CIT assessment mentioned above, by reference to 2016, which resulted in tax payable in the amount of EUR 24,225.43;

B) To order the reimbursement of any sum paid by the Claimant to the date, if any exists; and,

C) To condemn the Respondent to pay the costs of the proceedings.

VI. Value of the Case

1. In general terms, the rules relating to the fixing of the value of the case in tax proceedings are currently found in article 97-A of the Code of Tax Procedure and Process ("CTPP"). In general, there is a dichotomy between the challenging of the assessment, in which the amount for whose annulment is sought would be relevant [paragraph a)] and when the act of fixing the taxable matter is being challenged, in which the contested value would be considered [paragraph b)].

2. Now, in cases of fixing the taxable matter, it is found that, for the purposes of determining the value of the case, the same fiscal corrections may be at issue, in quantitative terms, but a different value of the case – with an impact, for example, on the determination of jurisdiction in courts or calculation of costs in arbitration proceedings.

3. Indeed, see situations in which the TCA may make large corrections to the taxable matter, without such corrections resulting in any tax payable, considering, for example, the existence of reportable fiscal losses. In these circumstances, the value of the case would therefore correspond to the value of the corrections themselves being challenged.

4. On the other hand, in a situation in which the TCA makes identical corrections to the taxable matter but, this time, because the taxpayer had no reportable fiscal losses, a tax assessment payable was generated, then, and although, it is reiterated, the same quantification of the taxable matter was in question, the value of the case would correspond to the value of the assessment – which, as is easily understandable, would be much lower than the value of the corrections that generated it.

5. In that case, the court would be called upon to scrutinise the legality of the same corrections, possibly arising from a similar inspection procedure, but the value of the action would be diametrically different.

6. In this regard, one recognises, nonetheless, the potential justification for this distinct framework in the case in which there is no assessment and therefore no immediate financial impact, while in the other case there is an impact (negative) immediate by imposing payment of an amount (or provision of security) that may never come to pass in the first case, justifying in part, for example, the reduction of costs (by way of a lower value of the case) when it is the challenging of an assessment.

7. However, the principle enunciated above cannot override what is the basic principle of equality, constitutionally enshrined.

8. In this regard, see the understanding of Professor Doctor Jorge Lopes de Sousa:

"In cases in which the act of fixing the taxable matter referred to in paragraph b) of no. 1 of article 97-A is directly challenged, the benefit which it is sought to obtain is not equivalent to the 'contested value', adopted as the criterion for fixing the value, but rather to the tax that would cease to be collected with the alteration of the contested value of the taxable matter, which will always be much less than that."

1. Hence, as the same author notes, "(…) in coherence with the legislative option underlying the fixing of value provided for in paragraph a), one should, in these situations of challenging the act of fixing of taxable matter, opt for the fixing of the value of the action in function of the value of the tax that would be connected with the contested taxable matter."

2. Thus, he concludes, "Issues of compatibility of this criterion with the constitutional principle of equality may arise here, since the judicial challenging of acts of fixing of taxable matter in which the questioning of an identical value is at issue will have a different value for the purposes of tax costs, depending on whether or not an assessment act is carried out, and it may even happen that a broader challenging corresponds to a lower value of the action. It is thus to raise the material unconstitutionality of the criterion used in paragraph b), in light of the constitutional principle of Equality (art. 13 of the CPR)."

3. In light of the context above, and as a result, from the outset, of the (still recent) introduction of tax arbitration into Portuguese legal practice, it is essential for the proper functioning of this mechanism to take a prudent approach in the analysis of these issues in view of the possibility of a misguided judgment prejudicial to the interest of either of the parties, subsequently subject to the limited possibilities for challenging and appealing arbitral decisions.

4. In this context, there are multiple references in article 5 of the LFATM to the "value of the claim", although there is no indication of how to determine it.

5. In this context, reference is made to paragraph e) of no. 2 of article 10 of the LFATM, in which reference is made to the "indication of the value of the economic utility of the claim", as one of the requirements of the request for constitution of an arbitral tribunal to be presented by the Claimant.

6. Indeed, the LFATM transfers to the Claimant the responsibility for the initial definition of the value of the economic utility of the claim, although, naturally, subject to assessment by the tribunal, as is the case here.

7. In this context, one does not see any other possible conclusion than that the reference of article 10 is nothing more than a definition (albeit only slightly) more detailed of the concept of the value of the claim in article 5.

8. In this regard, and as developed in learned arbitral decisions (see, by way of example, the decision handed down in case no. 151/2013-T) the subsidiary legislation in relation to the LFATM for this purpose is the CTPP in which are found, in article 97-A, the express rules for the determination of the value of the case, potentially applicable to all situations referred to in article 2, no. 1 of the LFATM.

9. Indeed, although the Regulations on Costs of Tax Arbitration also contains provisions on the determination of the value of the case, applicable for the purposes of costs, it is not to be supposed that one should resort to that document to assess the methods of determining the values of disputes, not least because of its introduction subsequent to the publication of the entire LFATM.

10. Returning to the concrete case, the assessment which constitutes the value of the case proposed by the Claimant and with the agreement of the Respondent resulting only from the amount payable in CIT, the Arbitral Tribunal considers it extremely important, too, to emphasise the impact of the deductible fiscal losses at issue here.

11. Indeed, and as a result of the context described, the present Arbitral Tribunal understands that the consideration of the amount payable of an additional CIT assessment, which resulted from an incorrect accounting of the deductible fiscal losses available in the sphere of the Claimant, raises grounded doubts in the sense of ensuring the necessary balance in the definition of the value of the economic utility of the present request for arbitral pronouncement.

12. Indeed, the jurisprudence and doctrine produced on this matter acknowledges the challenges associated with the interpretation of this subject matter, resulting from the various sources of law available, not always coherent with each other and which make it difficult to apply a systematic, simple and clear approach to the determination of the relevant value, not least to determine the economic utility of the claim.

13. By way of example, see a scenario in which the potential correction were of tens of millions of euros, although the assessment reflected a value payable of only EUR 100 (as a result, for example, of the correction of autonomous taxation), whereby, without demonstrating a different economic utility value, a potentially equivalent value of the claim would result, being the case assessed by a single arbitrator (there having been no option otherwise), with clear prejudice to all mechanisms for protection of the rights and guarantees of the parties involved.

14. Indeed, and emphasising the need to use the tax arbitration mechanism in a conscientious, prudent and responsible manner, it appears to the Arbitral Tribunal that the value of the claim, relevant for the purposes of the application of article 5 of the LFATM, cannot correspond, in this case, to the value of the assessment paid by the Claimant in the amount of EUR 24,225.43 when there are corrections subject to challenge in the total amount of EUR 244,760.13, corresponding, namely to:

a) corrections relating to depreciation, in the amount of EUR 54,456.88; and,

b) corrections relating to the deduction of fiscal losses from prior years, in the amount of EUR 190,303.25

1. In this regard, it should further be noted the need to assess the economic utility of a given claim not on the basis of its mere immediate effect (which may be very reduced or even non-existent), but also considering its potential future impact.

2. In this context, the present tribunal recognises the scant doctrine and jurisprudence on the concept of the economic utility of the claim relevant for the present purpose, recognising that, in certain situations, this may be susceptible to divergence of position.

3. Nevertheless, as has been extensively discussed previously, the present tribunal considers that the literal interpretation of the value of the tax assessment note for the determination of the value of the claim would raise serious issues of inequity.

4. In this context, and in order not to empty of meaning the provisions of article 5 and 10 of the LFATM as regards the value of the claim (understood as the economic utility of the claim), the tribunal considers that the amount of EUR 52,218.50 should be considered, corresponding to the impact, in terms of CIT, of the sum of the corrections proposed by the Respondent in the course of the tax inspection and subject to challenge in this request for arbitral pronouncement, considering a rate of 22.5% (21% of CIT and 1.5% of municipal surtax) to the amount relating to depreciation, and a rate of 21% of CIT concerning the value resulting from fiscal losses available for deduction.

VII. Costs

1. In accordance with the provisions of article 22, no. 4, of the LFATM, the value of the arbitration fee is fixed at EUR 2,142.00, in accordance with Table I of the said Regulations, to be borne by the Respondent, given the full success of the claim.

Notify accordingly.

Lisbon, CAAD, 6 June 2019

The Arbitrator

(Sérgio Santos Pereira)