Summary
Full Decision
Arbitral Decision
REPORT
A - PARTIES
A..., S.A. with Tax ID ..., and with registered office at ..., ...-... Porto, hereinafter referred to as the Claimant or taxpayer.
Tax and Customs Authority, hereinafter referred to as the Respondent or AT.
The request for constitution of the Arbitral Tribunal was accepted by the President of CAAD, and accordingly the Arbitral Tribunal was duly constituted on 31-08-2017, to hear and decide on the subject matter of the present dispute, and the Tax and Customs Authority was automatically notified on 31-08-2017, as appears from the respective minutes.
The Claimant did not proceed with the appointment of an arbitrator, and therefore, pursuant to Article 6, subsection 1, and Article 11, subsection 1, letter b) of Decree-Law No. 10/2011 of 20 January, as amended by Article 228 of Law No. 66-B/2012 of 31 December, the Ethics Council designated Arbitrator Paulo Ferreira Alves, whose appointment was accepted in accordance with the legal provisions.
On 03-11-2017, both parties were duly notified of this designation, in accordance with Article 11, subsection 1, letters a) and b), of the Tax Arbitration Regulations and Articles 6 and 7 of the Code of Ethics, and neither party expressed any objection to the Arbitrator's designation.
In accordance with the provisions of Article 11, subsection 1, letter c) of Decree-Law No. 10/2011 of 20 January, as amended by Article 228 of Law No. 66-B/2012 of 31 December, the single Arbitral Tribunal was duly constituted on 23-11-2017.
Both parties agreed to dispense with the holding of the meeting provided for in Article 18 of the Tax Arbitration Regulations and to submit written submissions.
The Arbitral Tribunal is duly constituted and materially competent, pursuant to Articles 2, subsection 1, letter a), and 30, subsection 1, of Decree-Law No. 10/2011 of 20 January.
The parties have legal personality and legal capacity, are legitimate, and are legally represented (Articles 4 and 10, subsection 2, of the same decree and Article 1 of Ordinance No. 112-A/2011 of 22 March).
The proceedings do not suffer from any defects that would render them void.
B – CLAIM
The Claimant hereby petitions for a declaration of illegality of the tax act of additional assessment for Corporate Income Tax No. 2012..., relating to the fiscal year 2008, in the amount of 11,740.35 € (eleven thousand seven hundred and forty euros and thirty-five cents).
C – GROUNDS FOR THE CLAIM
To support its request for an arbitral ruling, the Claimant alleged, with a view to obtaining a declaration of illegality of the tax assessment act for Corporate Income Tax, already described in point 1 of this Decision, in summary, the following:
The Claimant was notified by Official Notice No. 2017... of 2017-04-17 of the decision of 2017-03-23 of the Deputy Director General (by sub-delegation) of the Corporate Income Tax Service Directorate, denying a request for official review relating to self-assessment of CIT for the 2008 fiscal year.
As the administrative record shows, the present request for official review of the tax act resulted from a request to convert a previous administrative complaint, which the AT refused to convert, but which was ordered to be accepted by judgment of 03.03.2016 of the Administrative Court of Porto, in Case ...15... BEPRT.
The Claimant carries on the activity of a pawnbroker, regulated by Decree-Law No. 365/99 of 17 September, an activity which consists, in accordance with Article 1, subsection 2 of Decree-Law No. 365/99, in the exercise by a natural or legal person of the activity of lending money secured by pledge.
Article 32, subsection 1 of Decree-Law 365/99 requires the pawnbroker to indemnify the borrower "[i]n case of loss, disappearance, theft, robbery or fire of items given in pledge."
Pursuant to Article 33, subsection 1, this responsibility for indemnification "is mandatorily transferred to an insurance company."
The Claimant alleges that given the nature of the pawnbroking activity, which entails a high velocity of circulation of goods, it is impossible to determine with exactitude the value of the amounts to be insured, that is, at each moment the value of the insured goods may be higher or lower than the value of the goods in the possession of the pawnbroker as security for the loans granted.
It is possible, therefore, that at the moment when an event whose risk is covered by insurance occurs, the insurance value may be less than the value of the lost, disappeared, stolen, robbed or destroyed goods. And this discrepancy may not be foreseeable at the moment the insurance is taken out.
Having this situation in mind, the law stipulated (Article 33, subsection 2, of Decree-Law 365/99) the obligation of a minimum insurance value, the criterion for which is what results from the average of the valuations made in the previous year, a criterion which is established in the Uniform Policy for Mandatory Liability Insurance of the Pawnbroker.
In the year 2008, the Claimant was the victim of two thefts, duly proven - on 14/4/2008 (at the headquarters) and on 29/12/2008. The Claimant was also the victim of another theft on 7/5/2009 (at branch 6), facts undisputed by the AT.
The total value of indemnities to be paid to the borrowers in relation to the thefts occurring in 2008 was € 19,273,585.43. The value covered by insurance was € 14,132,588.05. The Claimant assumed part of the insurance value as a deductible in the total amount of € 1,623,217.52.
The insurer paid indemnification in the amount of € 12,509,370.53. The Claimant paid the difference in full, that is, € 5,141,001.38 plus the deductible, which resulted in a charge to the Claimant of € 6,764,218.90.
In the Model 22 declaration, in field 7, no. 213, for the 2008 fiscal year, the Claimant entered the amount of € 5,084,036.47.
Following a tax inspection, the AT informed the Claimant of the failure to assess and pay CIT for the 2008 fiscal year.
After making the respective corrections (taxes were corrected resulting in an amount outstanding of EUR 3,926.05), as well as the account reconciliation statements, interest calculations and payment statements, the final result was a CIT amount to be borne by the Claimant of EUR 11,740.35.
In truth, the assessment of tax was based on an incorrect completion by the Claimant of Model 22, field 7, no. 213.
The error consisted in the Claimant having marked as "non-deductible expenses" the amounts paid to customers as indemnification, for purposes of Article 42, subsection 1, letter e), of the Corporate Income Tax Code, when this understanding is contrary to law and to its correct interpretation.
However, the Claimant paid the taxes improperly assessed.
Since payment of the tax does not imply any acceptance of the act, as we are dealing with the inalienable right to challenge the act.
The Claimant alleges that the question under consideration is whether the amount of indemnification at the charge of the Claimant in favor of the borrowers can be considered as resulting from an event whose "risk is not insurable" for purposes of classification as "deductible expenses" under Article 42, subsection 1, letter e), of the Corporate Income Tax Code, in conjunction with Article 23, subsection 1, letter j), of the Corporate Income Tax Code, in the versions in force at the date of the facts.
In conclusion, there is no rule that requires entering into insurance for the full amount. In this case, the insurable part is the mandatory part: "what results from the average of the valuations made in the previous year." This was respected.
The Claimant contends that the amounts paid by the Claimant to the injured borrowers as compensation for the stolen items given in pledge by them are "costs/expenses" according to the terminology of both the Portuguese Chart of Accounts and the Portuguese Accounting Standards. And these costs should be accepted for tax purposes.
D - RESPONSE OF THE RESPONDENT
The Respondent, duly notified for this purpose, timely filed its response in which, in summary, alleged the following:
The assessments of CIT and compensatory interest at issue in the present arbitration action result from the conclusions reached in the internal procedure of tax inspection, authorized by Service Order No. OI2011..., of the Tax Inspection Services of the Finance Directorate of Porto, whose report is hereby fully reproduced for all legal purposes, in the course of which technical corrections were made to the Corporate Income Tax Periodic Return (MODEL 22) submitted by the Claimant for the 2008 tax period.
The activity carried on by the Respondent consists essentially in the granting of loans secured by pledge, in this case, articles made of gold, silver and watches. As a consequence of the main activity of pawnbroking, it engages in the sale of second-hand gold auctioned by itself when borrowers do not redeem the items and fail to pay the interest.
The Claimant, being a company that exercises the activity of pawnbroking, has a specific legal regime - Decree-Law No. 365/99 of 17 September, which regulates the access, exercise and supervision of the pawnbroking activity.
It is taxed on CIT based on its profits in accordance with Articles 2, subsection 1, letter a), and 3, subsection 1, letter a), of the Corporate Income Tax Code. Pursuant to Article 3, subsection 2 of the Corporate Income Tax Code, profit corresponds to the difference between the amounts of net assets at the end and at the beginning of the tax period, with the adjustments established in the Corporate Income Tax Code.
The activity of the Claimant is specifically regulated by Decree-Law No. 365/99 of 17 September, which, as regards insurance, contains an exclusive chapter (Chapter IV — On Insurance) relating to the specific obligation of the pawnbroker to indemnify the borrowers in "case of loss, disappearance, theft, robbery or fire of items given in pledge."
This responsibility is mandatorily transferred to an insurer as provided by Article 33, subsection 1 of the said decree, through the conclusion of mandatory insurance contracts.
As the Claimant herself states, it follows from the said Legal Regime for Pawnbroking Activity that the insured value "is at minimum what results from the average of the valuations made in the previous year" (Article 33, subsection 2 of the Legal Regime for Pawnbroking Activity).
Furthermore, the uniform general conditions of this mandatory liability insurance of the pawnbroker, approved by the Portuguese Insurance Institute, set out in Regulatory Standard No. 005/2000 of 24/05, are of mandatory application by insurers and provide for this minimum value.
Thus, pursuant to Article 11, subsection 1 of the Uniform Policy for Mandatory Liability Insurance of the Pawnbroker, the insurer's responsibility "is, at minimum, whatever the number of injured parties from a single loss, equal to the value that results from the average of the valuations made in the previous year."
However, and as the Claimant herself recognizes, this is the minimum insured value, it being always possible to increase this value by adjusting it to the incurred risk and taking into account the liabilities assumed by the pawnbroker.
That is, contrary to what is argued both by the Claimant and in the opinion she mentions, there is no doubt that we are dealing with "events whose risk is insurable," and it depends on the Claimant updating the insured value with the insurance company and consequently accounting for the respective insurance premiums as costs accepted for tax purposes.
As the Claimant herself recognizes, it was within her knowledge that there occurred in 2008 a notable increase in the value of items given in pledge by borrowers when compared with the value that was insured.
Given that the total value to be indemnified to the borrowers, the responsibility of the Claimant, removing the value of the bond that was considered as a tax deductible cost, came to the amount of € 5,084,036.47, a value which corresponds to 24% and 31% of the Claimant's net assets on 31 December 2008 and 31 December 2007.
That is, one quarter of its balance was not covered by insurance.
This cost relating to indemnifications at the charge of the Claimant resulting from events whose risk was insurable, in addition to not meeting the requirements of Article 23 of the Corporate Income Tax Code - in as much as such cost was not indispensable for the realization of income subject to taxation or even for the maintenance of the source of income, as the activity of the Claimant continued in the same manner - in light of the letter and spirit of the law, namely as provided in letter e) of Article 42, subsection 1 of the Corporate Income Tax Code, charges, even when accounted for as costs or losses of the period relating to indemnifications for the occurrence of events whose risk is insurable, are not deductible for the purpose of determining taxable profit.
And this risk was insurable, it being sufficient for this purpose that, given the increase that occurred in the volume of business and consequently in the value of items given in pledge by borrowers, the Claimant had proceeded to update the insurance policy, namely the value to be insured with the insurance company.
It appears to be sufficiently demonstrated the possibility, including as resulting from a legal requirement (Articles 32 and 33 of the Legal Regime for Pawnbroking Activity), of insuring the risk of theft of items given in pledge by borrowers, such that the amount of indemnifications at the charge of the Claimant as a pawnbroker due to the failure to ensure a substantial part of such goods is not deductible for purposes of determining taxable profit in accordance with letter e) of Article 42, subsection 1 of the Corporate Income Tax Code.
However, and as the Claimant also recognizes, this is the minimum insured value, it being always possible to increase this value by adjusting it to the incurred risk and taking into account the liabilities assumed by the pawnbroker.
In short, contrary to what is argued by the Claimant and in the opinion she mentions, there is no doubt that we are dealing with "events whose risk is insurable," and it depends on the Claimant updating the insured value with the insurance company and consequently accounting for the respective insurance premiums as costs accepted for tax purposes.
In view of the foregoing, the act of additional assessment at issue in these proceedings does not suffer from any defect that would call into question its legality and validity.
E - FACTUAL BASIS
Prior to entering into consideration of the question submitted for ruling, it is appropriate to present the factual matter relevant to its understanding and decision, based on documentary evidence and the facts alleged.
Thus, in accordance with the principle of free evaluation of evidence, taking into account evidence provided by documents and as the parties did not raise any objection to the authenticity or evidentiary value of the documents submitted, this Tribunal accepts the submitted documents as true, suitable and authentic in accordance with Article 75, subsection 1 of the General Tax Law.
With regard to material facts of relevance, this Tribunal establishes as proven the following facts:
The Claimant carries on the activity of a pawnbroker, regulated by Decree-Law No. 365/99 of 17 September.
The borrowers and injured parties are mandatorily indemnified in case of theft, and the value of indemnifications is calculated in accordance with Article 32, subsection 2 of Decree-Law No. 365/99 of 17 September, and corresponds to the value of the valuation of the object, less the amount owed at the date of occurrence and plus half the value of the valuation.
In the year 2008, the Claimant was the victim of two thefts, on 14/4/2008 (at the headquarters) and on 29/12/2008.
As a consequence of these two thefts, the total value of indemnities to be paid to the borrowers in relation to the thefts occurring in 2008 amounted to € 19,273,585.43.
The value covered by mandatory insurance was € 14,132,588.05.
The Claimant assumed part of the insurance value as a deductible in the total amount of € 1,623,217.52.
The insurer paid indemnification directly to the injured parties in the amount of € 12,509,370.53.
The Claimant paid the shortfall, that is, € 5,141,001.38 plus the deductible, which resulted in a charge to the Claimant of € 6,764,218.90.
The value of the deductible was accepted by the parties as tax deductible.
In the Model 22 declaration of 2008, in field 7, no. 213, relating to the 2008 fiscal year, the Claimant entered the amount of € 5,084,036.47 as indemnifications for insurable events as a non-deductible charge.
From the Model 22 declaration submitted by the Claimant, assessment No. 2012... resulted in the amount of 11,740.35 € (eleven thousand seven hundred and forty euros and thirty-five cents).
The Claimant filed a request for official review No. ...2016..., concerning assessment No. 2012....
The Claimant was notified by Official Notice No. 2017... of 2017-04-17 of the decision of 2017-03-23 of the Deputy Director General (by sub-delegation) of the Corporate Income Tax Service Directorate, denying the request for official review relating to self-assessment of CIT for the 2008 fiscal year.
F - FACTS NOT PROVEN
Of the facts of interest for the decision of the case, contained in the claim, all subject to concrete analysis, those not included in the factual matter described above were not proven.
G - QUESTIONS TO BE DECIDED
Given the positions adopted by the parties in the arguments presented, the following constitute the central issues to be resolved, which it is therefore necessary to consider and decide:
The one alleged by the Claimant:
Declaration of illegality of the tax assessment act for Corporate Income Tax No. 2012..., in the amount of 11,740.35 € (eleven thousand seven hundred and forty euros and thirty-five cents).
Condemnation to payment of compensatory interest.
H - MATTER OF LAW
Given the positions adopted by the parties in the written pleadings and submissions presented, the request for an arbitral ruling to be resolved by this Arbitral Tribunal consists of examining the legality of the tax assessment act for Corporate Income Tax No. 2012....
The Claimant's claim, in summary, amounts to a request for non-consideration and tax deductibility of expenses/charges of the amounts paid as compensation for the value shortfall in indemnifications legally due to customers for theft of pledged goods, within the scope of its pawnbroking activity.
The Respondent, summarily, counter-argues, invoking, within the context of the pawnbroking activity carried out by the Claimant, that the pledged goods must be insured for their full value, and that the responsibility of insurance is by law transferred to an insurance company. And since the goods are insured by an insurance company for their full value, in the case of indemnification for theft, any indemnification paid by the Claimant to compensate for the value of the indemnification in shortfall is not a tax deductible cost, as such expense/indemnification falls within the scope of Article 42, subsection 1, letter e), as the risk is by law mandatorily insurable in full.
Given the positions of the parties, the following summary is prepared of the most relevant facts:
The Claimant requested official review of the tax acts relating to self-assessment of CIT for the tax period 2008, resulting from the improper disregard as a tax cost of the amount of € 5,084,036.47, charges that constitute indemnifications paid by reason of thefts of pledged goods in its possession, and requested the restitution of overpaid tax and recognition of the right to compensatory interest.
The Claimant was the victim of two thefts, on 14/4/2008 and on 29/12/2008, at two different locations.
The borrowers and injured parties are mandatorily indemnified in case of theft, and the value of indemnifications is calculated in accordance with Article 32, subsection 2 of Decree-Law No. 365/99 of 17 September, and corresponds to the value of the valuation of the object, less the amount owed at the date of occurrence and plus half the value of the valuation.
The total value of indemnifications to be paid to the borrowers in relation to the thefts occurring in 2008 amounted to € 19,273,585.43.
The value covered by insurance is € 14,132,588.05.
The Claimant paid a deductible of € 1,623,217.52.
The insurer paid indemnification in the amount of 14,132,588.05 €, to the borrowers and injured parties, of which 12,509,370.53€ corresponds to the amount actually paid by the insurer and the remainder 1,623,217.52€ corresponds to the Deductible.
The Claimant paid to the borrowers and injured parties, as indemnification, the amount of € 5,084,036.47, which corresponds to the difference of the total amount of indemnifications, € 19,273,585.43 less the amount covered by insurance (which includes the deductible) € 14,132,588.05, totaling € 5,084,036.47.
The value of the deductible is accepted by the parties as tax deductible.
Faced with the foregoing, it is incumbent upon this tribunal to analyze, based on the matter of law and fact, whether the amounts paid by the Claimant as compensation for indemnifications legally due to the borrowers, because the Claimant did not at the time of the thefts have insurance for the total value of the indemnifications legally due, should this cost be accepted and deductible for tax purposes in accordance with Article 23, subsection 1, letter j), of the Corporate Income Tax Code, on the grounds that it is considered an uninsurable risk, or the cost arises from the occurrence of an event whose risk is insurable, being this charge non-deductible for tax purposes, in accordance with Article 42, subsection 1, letter e) of the Corporate Income Tax Code.
In these terms, we shall address the following questions, in the following order:
a) Analysis of the legal regime, doctrine and jurisprudence regarding indemnification as a tax deductible or non-deductible charge.
b) Analysis of the concept of insurable or uninsurable risk, in light of Article 23, subsection 1, letter j), and Article 42, subsection 1, letter e) of the Corporate Income Tax Code, in force in the year 2008.
c) The responsibility to insure and transfer the risk of indemnification, within the scope of the activity carried out by the Claimant and the contractual relationship with the Borrowers and Insurer.
d) Interpretation and application of Article 42, subsection 1, letter e) of the Corporate Income Tax Code in light of the activity carried out by the Claimant.
Faced with the foregoing, and entering into the legal reasoning of the present arbitral decision, it is incumbent upon us first to conduct a preliminary analysis of the legal regime, doctrine and jurisprudence regarding indemnification for reason of thefts as expenses.
Article 23 of the Corporate Income Tax Code (2008 version) states that "Costs or losses are considered those which are duly proven to be indispensable for the realization of profits or gains subject to taxation or for the maintenance of the source of income, in particular the following: (…)."
As will be demonstrated, for the analysis of the necessity and deductibility of the costs invoked by the Claimant, it is first necessary to determine whether the operations listed comply with the legal precepts which the taxation of corporate income must follow.
The combination of the aforementioned tax legal framework, and as a result of the letter of the law itself, and in harmony with the principle of practicability (costs must be duly documented), gives rise to two necessary requirements for the expenses of companies to be deductible from a tax perspective.
These requirements are:
a) that they be proven with documents issued in accordance with legal terms;
b) and that they be indispensable for the realization of profits.
With regard to indemnifications for reason of thefts, the case law has already pronounced itself on this matter, understanding that they constitute tax deductible expenses, provided that the risk is not mandatorily insurable by law.
We cite the Judgment of the Central Administrative Court of the South, case 01138/06 of 06/20/2006, from which we quote its summary: "IX).- Indemnifications to third parties for damage whose risk is insurable, as is the case here, are not deductible as provided in letter e) of Article 41, subsection 1 of the Corporate Income Tax Code in force at the time of the facts, and in the event that the taxpayer decides not to report to the insurer the occurrence of claims because the amounts of indemnifications fall below the deductible, to avoid aggravation of the premiums of the respective insurance contracts, for the values it has paid on this account to be accepted as tax costs of the period involved, it requires the constitution of a reserve.
X).- To accept the thesis of the appellant, we would have the subversion of the system which requires insurance of risks when it is certain that only actual costs can be considered as such and not those which are merely hypothetical. The appellant would report the claims and pay the indemnifications whose value was contained in the deductible but was sub-rogated and had the right of recourse against the author of the damage, thus making the value of this a merely potential cost."
And in this same sense decided the Judgment of the Central Administrative Court of the South, case 00400/97, which decided in the following sense: "It follows from what is stipulated that a criterion is established defining which will be considered as costs or losses those which, duly proven, are indispensable for the realization of profits or gains subject to taxation and for the maintenance of the respective source of income. After the establishment of this criterion, the precept enunciates, by way of example - let it be said again - the costs or losses of greatest significance.
The disputed situation falls within the provision of the example provided in letter j) of the aforementioned Article 23 according to which, when indispensable for the realization of profits or gains subject to taxation or for the maintenance of the source of income, indemnifications resulting from events whose risk is not insurable are considered costs or losses.
Given the individualized circumstances of the present case, we agree with the assertion of the appellant when she asserts that she demonstrated that the unforeseen, accidental theft in question, with consequences for the exploitation of the company, for her constitutes a true 'economic loss,' and the respective value should be accepted as a loss.
In that sense, moreover, points with rationality the opinion of the General Directorate of Tax Revenue contained in the record that as regards theft or embezzlement committed by persons external to the companies, teaching that, although it cannot be inserted in a general manner within the normal framework of the activity exercised by a company, it can be accepted provided that a police report has been filed and sufficient justifications are presented to the TAX ADMINISTRATION. (…) Now and as the respondent emphasizes in its counter-submissions, it was clearly and uncontrovertibly demonstrated that the event 'in casu' was not insurable, such that the argument of the respondent PUBLIC TREASURY fails at its foundation, which thus achieves success only on the question of the value of the theft which was fixed at 609,157$60, with no other censure meriting the judgment appealed, which should be confirmed in all other respects."
The aforementioned judgment is clear: indemnifications for reason of theft are accepted as a cost provided that the events whose risk is not insurable, having been demonstrated in the case that the event was not insurable.
Thus, I understand that indemnifications for theft events should be accepted for tax purposes. It is incumbent upon this tribunal to determine whether the indemnifications paid by the Claimant meet the essential requirement of resulting from an event whose risk is not insurable.
Faced with the foregoing, it is necessary to conduct an interpretation of the concept of insurable or uninsurable risk, provided for in Article 23, subsection 1, letter j), and Article 42, subsection 1, letter e), both of the Corporate Income Tax Code, in light of legislation, jurisprudence and doctrine.
Article 23, subsection 1, letter j) states:
"1 - Costs or losses are considered those which are duly proven to be indispensable for the realization of profits or gains subject to taxation or for the maintenance of the source of income, in particular the following: (…)
j) Indemnifications resulting from events whose risk is not insurable."
This article is complemented by Article 42, subsection 1, letter e):
"1 - The following charges are not deductible for the purpose of determining taxable profit, even when accounted for as costs or losses of the period: (…)
e) Indemnifications for the occurrence of events whose risk is insurable;"
The combination of both articles, may at first glance appear redundant, however their interpretation and analysis together leaves no doubt: indemnification for events whose risk is insurable is not deductible.
Indeed, that is the intention of the legislator, if we make an interpretation by negative inference of Article 23, subsection 1, letter j) "j) Indemnifications resulting from events whose risk is not insurable," it follows that indemnifications for insurable risk would not at a first analysis be considered costs, for if this were not so, the legislator would not make a clear allusion to uninsurable risk, being only necessary to refer to indemnifications for risk.
The combination of both subsections of the above-transcribed articles shows evidently that indemnifications for insurable risks are not a tax deductible charge.
Given the evidence, there is a clear distinction between insurable and uninsurable risks, and it is therefore incumbent upon this tribunal to analyze the distinction between both and the responsibility to insure the risk, within the scope of the activity carried out by the Claimant and the contractual relationship with the Borrowers and Insurer.
Regarding the pawnbroking activity carried out by the Claimant, and especially the legal obligations imposed within the scope of that activity, regarding insurable risk, the following analysis and inferences result:
The pawnbroking activity is regulated by Decree-Law No. 365/99 of 17 September, which establishes in Article 1, subsection 2: "Pawnbroking activity is considered the exercise by a natural or legal person of the activity of lending money secured by pledge."
In other words, the pawnbroking activity consists of receiving a certain item as security for a loan contract, which remains in the possession of the pawnbroker, to which a value is assigned and a loan contract is entered into for that value.
It is therefore incumbent upon the Claimant to have the duty to safeguard the item/security and to return it at the end of the contract in the same condition as it was received.
Within the scope of Articles 32 and 33, relating to the obligations concerning indemnification to the borrower and the relationships with insurers, the Decree-Law imposes the following:
Article 32
Specific Obligation to Indemnify
1 - In case of loss, disappearance, theft, robbery or fire of items given in pledge, the pawnbroker is obliged to indemnify the borrower.
2 - The indemnification referred to in the preceding paragraph is that which results from the value of the valuation of the object, less the amount owed at the date of occurrence and plus half the value of the valuation.
Article 33
Mandatory Insurance
1 - The responsibility to indemnify provided for in the preceding article is mandatorily transferred to an insurance company.
2 - The value of the insurance referred to in the preceding paragraph is at minimum what results from the average of the valuations made in the previous year.
3 - The value referred to in the preceding paragraph during the 1st year of activity is fixed by indication of the pawnbroker.
4 - Annually proof of the renewal of the insurance and the payment of the respective premium must be provided to the General Directorate of Commerce and Competition.
5 - The insurance entity communicates to the General Directorate of Commerce and Competition the rescission of the insurance contract.
As can be verified from the above-transcribed articles, the following is evident:
The pawnbroker has the obligation to indemnify in case of theft, and this obligation is transferred in full to an insurance company.
The insurer has the responsibility to indemnify in case of loss, disappearance, theft, robbery or fire of items given in pledge.
Indemnification corresponds to the value of the valuation plus half the value of the valuation, from which is deducted the amount owed.
The law imposes only the minimum insurable value, it being incumbent upon the pawnbroker to decide whether to increase this value based on expected business volume.
Thus it is incumbent upon the pawnbroker to define the value of insurance for the year 2008 according to its management criteria.
Faced with the foregoing, the legislation in force imposes as a mandatory requirement for the exercise of the pawnbroking activity that the pawnbroker is obliged to transfer the responsibility to indemnify to an insurance company, the indemnifications for the risk of loss, disappearance, theft, robbery or fire of items given in pledge.
Moreover, the law itself does not contemplate the payment of any indemnification on account of loss, disappearance, theft, robbery or fire of items given in pledge being made by the pawnbroker.
Arriving at the conclusion that there is a clear distinction in tax law between what constitutes insurable and uninsurable risk, it now falls to us to conduct a legal-tax classification of the interpretation to be given to risk and insurable risk within the scope of the activity carried out by the Claimant.
Analysis which is supported by Regulation No. 12/2000 (Standard No. 5/2000-R of the Portuguese Insurance Institute, amended by Regulation No. 32/2000 — Standard No. 11/2000-R, by Regulation No. 3/2000 — Standard No. 16/2000-R, and by Regulation No. 80/2005 — Standard No. 13/2005-R), which approves the uniform policy of liability insurance of the pawnbroker.
The aforementioned regulatory standard establishes the uniform general conditions of mandatory liability insurance of the pawnbroker, which are of mandatory application by insurers.
In particular, the following is relevant: Article 3 "The insurer guarantees the payment of indemnifications that are legally required of the insured, for property damage resulting from material injury that, exclusively in the exercise of his pawnbroking activity, is caused to third parties, by reason of loss, disappearance, theft, robbery or fire of items given in pledge."
Thus, within the scope of the activity of the Claimant, risk is understood as all risks within the scope of contractual and extra-contractual civil liability that may arise within the scope of the contractual relationship regulated by civil law.
And insurable risk is understood as that which by law is mandatory to be assured by an insurance contract with a duly licensed insurance company, respectively "loss, disappearance, theft, robbery or fire of items given in pledge" (Article 32, subsection 1 of Decree-Law No. 365/99 of 17 September).
However, and as results from all commercial activities, there is a certain degree of uncertainty regarding business volume, businesses are cyclical and there are periods with higher volume and others with lower. And in the case of the pawnbroking activity this uncertainty is more evident, as will be enumerated.
It results from Article 14 that loan contracts are carried out for a period of rule of 1 month, being automatically renewable for equal and successive periods, up to a maximum of two years (Article 14, subsection 1). Furthermore, Article 14 states: The contract is considered automatically renewed with the payment of interest relating to the previous month, as well as default interest, if applicable (Article 14, subsection 2).
This is to say that in accordance with Article 14 of the said Decree-Law, the cessation of the loan contract through payment is the responsibility of the borrower, such that the lender and now Claimant will have to hold the pledge for a period that can range from 1 month to 2 years.
Over this period, the pawnbroker must still wait three months of default before it can proceed to sell it (Article 19 et seq.).
Since renewals are made monthly, up to the deadline for payment of interest, it is therefore not permissible for the lender to determine with great certainty what value of pledges it will have in its possession in that month or that week.
As enumerated, the pawnbroking activity and the mandatory nature of loan contracts make it possible and mandatory for the Claimant to have the total value in its possession insured at all times. Even if this entails high costs with insurance premiums from insurance companies.
But it is a risk and cost that arises from the pawnbroking activity itself and the legislation.
Moreover, pawnbrokers incur a high degree of risk when holding items in their possession while the loan contract is in force, a risk which is clear in the present case, given that the Claimant was, as it alleges, the victim of three thefts in 2008 and 2009.
Thus, and given the legal reasoning described above, the pawnbroking activity requires a relationship and security for the borrower, which consists of the transfer of the responsibility to indemnify in case of loss, disappearance, theft, robbery or fire of items to an insurance company. As such, the borrower, when he leaves his items with the pledge in the possession of the pawnbroker, has the security that he will be compensated in the event of an extraordinary event occurring.
Moreover, the reason why the law requires insurance results from the risk that the activity itself entails, which can result in significant losses that the pawnbroker may not have the economic capacity to bear, resulting ultimately in his bankruptcy and a loss for the borrower.
Thus, the situation at hand results from a management decision on the part of the Claimant, first in the value it insured, and secondly in entering into loan contracts with values that exceeded the insured value, creating a risk that the law seeks to avoid, of the insurance contract not indemnifying all of the indemnification owed within the scope of Articles 32 and 33, and with the remainder to be paid by the pawnbroker, indemnifications which Articles 32 and 33 do not provide are to be paid by the pawnbroker but rather by the insurance company.
However, one could raise the question whether the Claimant could at any time increase the insured value or refuse to enter into loan contracts. The answer to both is in the affirmative.
As results from Regulation No. 12/2000, the same expressly provides for the possibility of entering into another insurance contract covering the uninsured value or that exceeds the value of the existing insurance, Article 15, subsection 2: "If at the date of the loss there is more than one insurance contract guaranteeing the same risk, this policy shall only function in case of non-existence, nullity, ineffectiveness or insufficiency of earlier insurance." (our emphasis)
Understand insufficiency as provided in Article 14 - Insufficiency of Capital - "In the event that there are multiple injured parties from the same loss and the amount of damages exceeds the insured capital, the insurer's responsibility for each of them shall be reduced proportionally in relation to the amount of their respective damages suffered, up to the extent of that capital."
Thus dismissing the argument that it was not possible to take out other insurance or to update the existing insurance.
For in the situation at hand, the Claimant chose to incur this risk, and as the Claimant states, in the three thefts it suffered in 2008 and 2009, in none of the situations in the 2008 tax period did it have the total value insured, as it paid indemnifications directly to the borrowers who lost their items.
Finally, and given the exposition of law and fact, it is incumbent upon this tribunal to conduct an interpretation and application of Article 42, subsection 1, letter e) of the Corporate Income Tax Code (2008 version) in light of the activity carried out by the Claimant, from which it concludes that indemnifications for the risk of loss, disappearance, theft, robbery or fire of items given in pledge constitute, by being mandatory insurance, an insurable risk, and therefore are not tax deductible as they fall within the scope of the said article.
Effectively, the Claimant alleges that it paid the shortfall amount of indemnifications, however it could have lacked the economic capacity to do so, and it is precisely this type of situation that Decree-Law No. 365/99 of 17 September and Article 42, subsection 1, letter e) of the Corporate Income Tax Code seek to safeguard, that the Pawnbroker does not contract insurance for values lower than legally established to reduce its costs, creating a difference when situations, as was the case here, of a theft occur.
Moreover, if Article 42, subsection 1, letter e) and the Corporate Income Tax Code itself permitted the deduction as a cost of indemnification in situations where insurance is mandatory, this would be favoring the non-conclusion of insurance contracts and increasing the risk of activities, for ultimately the risks which it is sought to protect (loss, disappearance, theft, robbery or fire of items given in pledge) would be transferred to the sphere of the borrower without his knowledge, for in accordance with Decree-Law No. 365/99 of 17 September, the borrower when entering into a loan contract with a legally licensed and authorized pawnbroker (mandatory posting of the license certificate Article 9 of Decree-Law No. 365/99 of 17 September) is entering into a contract whose risk is totally assured by an insurance company.
In conclusion, for all that has been set out above, in the case under examination, the charges paid by the Claimant as indemnification fall within the scope of non-deductible charges in accordance with Article 42, subsection 1, letter e) of the Corporate Income Tax Code in force in the year 2008, for being on an insurable risk by law.
And thus the claim of the Claimant lacks merit.
F - DECISION
The present Tribunal hereby decides to:
Dismiss the claim for declaration of illegality of the tax act of additional assessment for Corporate Income Tax No. 2012..., in the amount of 11,740.35 € (eleven thousand seven hundred and forty euros and thirty-five cents).
The amount of the case is fixed at 11,740.35 €, taking into account the economic value of the case assessed by the value of the tax assessments impugned, and accordingly the costs are fixed at the respective amount of 918.00€ (nine hundred and eighteen euros), to be borne by the Claimant in accordance with Article 12, subsection 2 of the Tax Arbitration Regime, Article 4 of the Tax Arbitration Court Rules and Table I annexed thereto - subsection 10 of Article 35, and subsections 1, 4 and 5 of Article 43 of the General Tax Law, Articles 5, subsection 1, letter a) of the Tax Arbitration Court Rules, 97-A, subsection 1, letter a) of the Tax Procedure Code and 559 of the Code of Civil Procedure).
Let notification be made.
Lisbon, 1 February 2018
The Arbitrator
Paulo Ferreira Alves
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