Process: 489/2014-T

Date: March 19, 2015

Tax Type: IRC

Source: Original CAAD Decision

Summary

This arbitral decision (Process 489/2014-T) addresses a dispute regarding the SIFIDE (Sistema de Incentivos Fiscais à Investigação e Desenvolvimento Empresarial) tax benefit for corporate income tax in Portugal. The claimant company filed R&D expenses for fiscal year 2010 and received certification from the SIFIDE Certifying Committee approving a tax credit of €69,735.60. However, the Tax and Customs Authority (TCA) subsequently reduced this to only €9,389.25, disallowing virtually all personnel costs and operating expenses. The company challenged this through tax arbitration, raising three main arguments: First, the TCA usurped powers by implicitly revoking the SIFIDE Committee's certification decision, which should be binding. Second, regarding personnel costs, the TCA rejected time records because they were not recorded daily, but the company argued no legal requirement mandates daily recording format and their monthly records accurately reflected actual R&D hours. Third, concerning operating expenses, the TCA rejected the duodecimal method used to allocate indirect costs proportionally to R&D activities. The company contended this methodology represents best practice and that even if the TCA disagreed with the methodology, it should apply its preferred calculation method rather than disallowing all expenses entirely. The company argued that general operating expenses necessary for productive activity must be proportionally allocated to R&D since it's impossible to separately quantify which portions relate specifically to R&D work. The case raises fundamental questions about the respective powers of the SIFIDE Certification Committee versus the tax authority, acceptable documentation standards for personnel expenses, and proper methodologies for allocating indirect operating costs to R&D activities eligible for the SIFIDE tax credit under IRC law.

Full Decision

ARBITRAL DECISION

  1. REPORT

1.1 A A…, S.A., Legal Entity No. …, with registered office in …, submitted a request for arbitral pronouncement, pursuant to Article 10 of Decree-Law No. 10/2011, of 20 January (Legal Framework for Tax Arbitration, hereinafter "LFTA"), with the "Respondent" being the Tax and Customs Authority (hereinafter "TCA").

The Claimant seeks a declaration of nullity of the Despatch granting partial acceptance of the gracious objection to the self-assessment of Corporate Income Tax (IRC) for the fiscal year 2010, within the scope of Process No. …2013…, issued by the Director of Finance of …, Assistant, or, failing such nullity, its annulment, with the tax credit of € 60,346.35, associated with the SIFIDE tax benefit, included in the replacement income tax return Form 22, with reference to the fiscal year 2010, filed on 13 March 2013, to be considered legitimate.

The Claimant further seeks the refund of the tax paid and the payment of compensatory interest, pursuant to the terms provided in Article 43 of the General Tax Law (LGT).

1.2 As the basis for its request, the Claimant submits and alleges in summary that:

(a) On 2 June 2011, the Claimant submitted, through electronic submission, the periodic income tax return (form 22) for Corporate Income Tax (IRC) for the fiscal year 2010.

(b) In the fiscal year 2010, which covers the taxation period from 1 January to 31 December 2010, the Claimant incurred Research and Development (R&D) expenses, to be considered as eligible for the purposes of the System of Tax Incentives for Business R&D (SIFIDE), regulated by Law No. 40/2005 of 3 August (hereinafter "SIFIDE Law").

(c) On 31 July 2012, the Claimant submitted its application to the SIFIDE Certifying Committee, regarding the R&D expenses incurred during the year 2010.

(d) On 13 March 2013, the SIFIDE Certifying Committee approved, by decision, the application submitted by the Claimant, in the course of which a tax credit in the amount of € 69,735.60 was recommended.

(e) On 28 May 2013, the Claimant submitted a replacement income tax return (Form 22), based on Article 122(3) of the Corporate Income Tax Code, including in Field 355 of Table 10, the tax credit recommended by the SIFIDE Certifying Committee, in the amount of € 69,735.60, calculating an amount of IRC recoverable of € 32,311.57.

(f) On 31 May 2013, the Claimant sent to the Finance Service of …, a Gracious Objection based on error in the self-assessment of tax, requesting the correction of the self-assessment of IRC, relating to the fiscal year 2010, acknowledging the existence of a tax credit resulting from SIFIDE in the amount of € 69,735.00.

(g) The TCA initiated an inspection procedure, to which the number Process …2013… was assigned, issuing a Draft Report which concluded that only the amount of € 9,389.25 should be considered as the amount of legitimate tax benefit.

(h) The correction of the tax credit made by the TCA resulted in the disregard of two types of expenses included for the purposes of calculating the tax benefit in question: (i) all personnel expenses and (ii) all operating expenses, with the exception of two invoices totalling € 790.00 relating to the transport of H2 rail separators to the location of technical testing.

(i) The Claimant exercised the Right of Hearing regarding the Draft Decision granting partial acceptance of the gracious objection presented.

(j) By means of Official Letter No. …, dated 21-04-2014, issued by the Director of Finance of … – Finance Service of …, the Claimant was notified of the final decision regarding process …2013…, which maintained in full the decision rendered in the course of the Draft Decision, accepting only the tax benefit of € 9,389.25.

(k) With this decision the TCA revoked, albeit implicitly, the decision of the SIFIDE Certifying Committee, re-examining projects that had already been subject to certification by an administrative body competent to do so.

(l) The SIFIDE Certifying Committee does not make merely a recommendation; the Committee certifies qualitatively and quantitatively R&D activities.

(m) Even if it is understood that the TCA has powers of inspection over declarations issued by the SIFIDE Certifying Committee, under the provisions of Article 7 of the Tax Benefits Statute, only the Committee can revoke its decision.

(n) The act of correction is therefore null, by usurpation of powers.

(o) It further argues that the final decision granting partial acceptance issued by the TCA is deficient as to the factual reasons that led the TCA to conclude that the Claimant brought nothing new when exercising the prior hearing, as well as the reasons why the elements cannot be considered, contending for its illegality, due to violation of the duty to state reasons provided for in Article 77 of the LGT.

(p) Without waiving, with respect to the legitimacy of the expenses – personnel costs – included by the Claimant for the purposes of the tax benefit in question, which were not accepted by the TCA, the Claimant alleges:

i. With respect to the recording of hours, there is no rule or regulation that imposes or defines the manner in which hours must be recorded;

ii. One cannot immediately conclude, as the TCA did, that the hours accounted for by the Claimant are not acceptable because in the "time sheet" it is not possible to verify hours on a daily basis;

iii. The absence of daily recording of hours could only be accepted as the basis for the correction made by the TCA if the law imposed that same recording as a condition, or as a form of mandatory proof, for the hours to be accepted, which does not occur in the matter in question;

iv. The TCA presents no proof that permits demonstrating or suspecting that the hours presented by the Claimant are not real, whereas the Claimant clearly demonstrated that the hours recorded are actual hours spent on R&D activities.

(q) Regarding the legitimacy of the expenses – operating expenses – included by the Claimant for the purposes of the tax benefit in question, which were not accepted by the TCA, the Claimant alleges that:

i. The methodology used by the Claimant – the duodecimal method – corresponds to best practices, which is why it is also the methodology normally used for the purposes of the benefit in question;

ii. Considering that companies often do not use monthly specialization, the methodology used by the Claimant, taking into account annual cost values, reduces the risk of bias in the calculated values;

iii. Regardless of the question of which methodology is most correct, the fact is that the TCA cannot disregard all costs because it does not accept the methodology;

iv. If the TCA believes that the methodology used is not the most correct, then it is incumbent upon it to make the correction following the methodology that it considers to be proper;

v. With respect to the question of the criterion for selection of expenses that were directly or indirectly allocated to R&D projects, expenses that were directly related to the projects were considered in full, expenses that were not, even if indirectly, related to the projects were not considered, as is the case with advertising, commissions, gift items, etc.;

vi. Expenses that are essential for the Claimant's productive activity were considered as being indirectly related to R&D, with the value of their allocation corresponding to the percentage of hours spent on projects over total annual hours;

vii. In other words, only 1% of the expenses considered indirectly related to the projects were considered as eligible for the purposes of SIFIDE;

viii. For the Claimant to be able to develop R&D activities, it must be operating and must produce, which is why the general expenses necessary for the Claimant's activities must also be allocated to R&D activities and, as it is not possible to quantify which part of those expenses corresponds to R&D activity, their allocation is made proportionally;

(r) Concluding that the request for arbitral pronouncement should be upheld, annulling the rejection of the Objection of Self-Assessment, and consequently correcting the self-assessment through the consideration of the tax credit in full, as well as the corresponding correction to the IRC and refund of the tax paid, plus the payment of compensatory interest pursuant to Article 43 of the LGT.

1.3 The Tax and Customs Authority contested, alleging in summary that:

(a) With respect to the alleged incompetence of the TCA, inasmuch as, according to the Claimant, in inspecting the benefit relating to SIFIDE, the TCA would be interfering in the competences of the Certifying Committee, the Claimant's argument has no merit.

(b) SIFIDE consists of an automatic and mixed tax benefit, not requiring prior recognition and being comprised of objective and subjective elements.

(c) The statement issued by the entity that "certifies" SIFIDE – appointed by despatch of the Minister of Science, Technology and Higher Education, only recommends the grant of a tax credit in a certain amount.

(d) The SIFIDE Certifying Committee is responsible only for issuing a statement of conformity of certain expenses with R&D activities and recommending their acceptance as a tax benefit.

(e) A given set of values, relating to expenses deemed eligible by the Certifying Committee, does not, for that reason, cease to be able to be assessed (quantitatively, not qualitatively) by the TCA within the scope of the powers conferred upon it, in particular, by the norms of the Tax Benefits Statute.

(f) It falls to the TCA, pursuant to the law, to have the competence to control the verification of the prerequisites of tax benefits, to which SIFIDE is not and could not be, naturally, an exception.

(g) With respect to the alleged illegitimacy of the expenses – personnel costs – included by the Claimant for the purposes of the tax benefit in question, the TCA alleges in summary that:

i. The Claimant failed to demonstrate, neither within the scope of the inspection procedure, nor now, within the scope of the present arbitration process, that the hours recorded correspond to actual hours spent on R&D projects;

ii. This is not verifiable by any document presented, in particular, the monthly "time sheets" presented by the Claimant;

iii. It disagrees when the Claimant states that "it had no interest in the recorded hours not corresponding to the hours actually spent," inasmuch as personnel expenses were determined from the actual cost that each collaborator directly involved in the project had for the company, multiplied, for that purpose, by the number of hours that each collaborator allocated to each project by the hourly cost that each one has for the company;

iv. Which, therefore, influences the amount of operating expenses, not only because the Claimant allocates expenses based on the number of hours allocated to the project, but also because the objective limit to the consideration of the eligibility of operating expenses is established by a percentage of personnel costs;

v. The recording of hours thus assumes a determining role in the allocation of costs to projects and, therefore, in the value recommended as a tax benefit;

vi. The TCA found that the "time sheets" used by the Claimant (i) do not indicate the number of hours dedicated per day; (ii) do not indicate the specific activities and tasks performed by each worker at each moment; (iii) the manner in which the hours allocated were determined and how records of those hours were made was not explained; and (iv) the schedules that the Claimant, within the scope of the inspection procedure, invoked as being associated with each machine and which would record the activities undertaken contained omissions, notwithstanding the respective allocation of hours.

(h) On the other hand, with respect to the alleged illegitimacy of the expenses – operating expenses – included by the Claimant for the purposes of the tax benefit in question, the TCA alleges in summary that:

i. The Claimant accounted for annual expenses of a project that only began on 24/01 and 14/04, not using a duodecimal logic, therefore the accounting thus carried out does not reflect the operations actually performed, which was imperative given that the Claimant has the obligation to have organized accounting;

ii. There are expenses considered by the Claimant for which the nexus of causality was found not to exist with reference to R&D projects;

iii. Even with respect to cases in which the nexus of causality exists (such as occurs with electricity and rents), their allocation was made expressly, including in full amounts that are not related to the projects;

(i) Concluding for the lack of merit of the present request for arbitral pronouncement, with the appropriate and legal consequences.

1.4 The Arbitral Tribunal is regularly constituted, is materially competent, the process is not afflicted with vices that would invalidate it, no exceptions have been raised and the Parties have legal personality and capacity, proved themselves legitimate and the Claimant is regularly represented by Attorney, therefore it must proceed to consider and decide.

  1. FACTS

2.1 Facts Considered Proven

(a) On 2 June 2011, the Claimant submitted, through electronic submission, the periodic income tax return (form 22) for Corporate Income Tax (IRC) for the fiscal year 2010.

(b) In the fiscal year 2010, which covers the taxation period from 1 January to 31 December 2010, the Claimant incurred Research and Development (R&D) expenses, to be considered as eligible for the purposes of the System of Tax Incentives for Business R&D (SIFIDE), regulated by Law No. 40/2005 of 3 August (hereinafter "SIFIDE Law").

(c) On 31 July 2012, the Claimant submitted its application to the SIFIDE Certifying Committee, regarding the R&D expenses incurred during the year 2010.

(d) On 13 March 2013, the SIFIDE Certifying Committee approved, by decision, the application submitted by the Claimant, in the course of which a tax credit in the amount of € 69,735.60 was recommended.

(e) On 28 May 2013, the Claimant submitted a replacement income tax return (Form 22), based on Article 122(3) of the Corporate Income Tax Code, including in Field 355 of Table 10 the tax credit recommended by the SIFIDE Certifying Committee, in the amount of € 69,735.60, calculating an amount of IRC recoverable of € 32,311.57.

(f) The tax credit recommended by the SIFIDE Certifying Committee results from the approval of two R&D projects, designated "3H2 – H2 Rail Separators" and "5EAA, Study and Analysis of Additives (EAA)".

(g) With the aforesaid R&D projects, the SIFIDE Certifying Committee considered eligible expenses totalling € 126,862.30, thus itemized:

i. Personnel expenses totalling € 64,279.74, with € 35,109.92 allocated to project 3H2 and € 29,169.82 to project 5EAA;

ii. Operating expenses totalling € 34,482.56, with € 18,668.84 allocated to project 3H2 and € 15,813.72 to project 5EAA; and

iii. Expenses with outsourced R&D activities totalling € 28,100.00.

(h) On 31 May 2013, the Claimant sent to the Finance Service of …, a Gracious Objection based on error in the self-assessment of tax, requesting the correction of the self-assessment of IRC, relating to the fiscal year 2010, acknowledging the existence of a tax credit resulting from SIFIDE in the amount of € 69,735.60.

(i) The TCA initiated an inspection procedure – Process No. …2013… – issuing a Draft Report which concluded that the amount of € 9,389.25 should be considered as the amount of legitimate tax benefit.

(j) The Claimant exercised the Right of Hearing regarding the Draft Decision granting partial acceptance of the gracious objection presented.

(k) By means of Official Letter …, dated 21-04-2014, issued by the Director of Finance of … – Finance Service of …, the Claimant was notified of the decision on the gracious objection, in which the TCA:

i. Accepted in full the expenses with outsourced R&D activities – which refer to testing with verification of compliance by the separators with European standards, in the amount of € 28,100.00;

ii. Partially accepted operating expenses – only in the amount of € 790, a cost that refers to the transport of the separators to the testing location; and

iii. Did not accept any eligible costs relating to personnel expenses;

accepting, in consequence, the tax benefit of only € 9,389.25.

(l) The value of personnel costs allocated to R&D projects was determined based on the actual cost that each employee of the Claimant spent on each R&D project.

(m) The determination of the value of this charge was done using individual "time sheets" of the Claimant's employees.

(n) The Claimant's "time sheets" contain an indication of the hours spent on each R&D project, by employee involved, with monthly frequency and identification of the respective R&D project.

(o) The valuation of the hourly cost of each collaboration with R&D projects was done using the average hourly cost of each employee, that is, the Claimant divided the annual cost of the employee by the fraction of the total number of hours that the same person worked in the year, dedicated to the project, as documented by the "time sheets".

(p) The "time sheets" of the Claimant's employees were subject to control and validation by the heads of the R&D project and by the respective employees who collaborated on it.

(q) The determination of the value of operating expenses that was not accepted by the TCA was done based on the method of indirect allocation, with the value of the allocation corresponding to the percentage of hours spent on R&D projects, over the total annual operating hours of the Claimant.

(r) For the purposes of determining the value of operating expenses, all annual expenses of the Claimant were allocated, relating to the fiscal year 2010.

(s) The R&D projects considered for the purposes of the recommendation of the tax credit included in the statement of the SIFIDE Certifying Committee commenced on 24 January 2010 and 14 April 2010.

(t) Regarding the criterion for selection of expenses that were indirectly allocated to R&D projects, accounts of the fourth degree were considered, generic accounts of the Accounting Normalization System.

2.2 Facts Not Considered Proven and Respective Justification

There are no facts relevant to the decision that are considered not proven.

2.3 Justification of the Proven Facts

The proven facts are based on the documents attached to the records, whose authenticity and correspondence were not questioned, as well as on the testimony given at the hearing.

  1. LAW

The first question that the Claimant brings before this Tribunal for consideration concerns whether the TCA, in not accepting the tax credits recommended by SIFIDE, incurred or not in a vice of usurpation of power, interfering in a competence that, by law, is entrusted to another entity (the SIFIDE Certifying Committee).

With all due respect to other opinions, it is understood that the Claimant has no merit in this matter.

Indeed, as the TCA correctly points out, SIFIDE consists of an automatic and mixed tax benefit, not requiring prior recognition and being comprised of objective and subjective elements.

The statement issued by the entity that "certifies" SIFIDE – appointed by despatch of the Minister of Science, Technology and Higher Education – merely recommends the grant of a tax credit in a certain amount, which follows, from the outset, from the SIFIDE Law itself, Law No. 40/2005 of 3 August 2005, which provides as an ancillary obligation the request for the aforesaid "certification," and imposes, furthermore, concurrently, the possession of a document "that evidences the calculation of the tax benefit."

Continuing with the TCA's argument, it is thus understood that a given set of values, relating to expenses deemed eligible by the Certifying Committee, does not, for that reason, cease to be able to be assessed (quantitatively, not qualitatively) by the TCA within the scope of the powers conferred upon it, in particular, by the norms of the Tax Benefits Statute.

It shall thus fall to the TCA, pursuant to the law (Article 7 of the Tax Benefits Statute), to have the competence to control the verification of the prerequisites of tax benefits, to which SIFIDE shall not be an exception.

Thus, it is not discerned that the aforesaid vice of usurpation of power has occurred, with the corresponding argument to be rejected.

The Claimant further argues that the final decision granting partial acceptance issued by the TCA is deficient as to the factual reasons that led the TCA to conclude that the Claimant brought nothing new when exercising the prior hearing, as well as the reasons why the elements cannot be considered, contending for its illegality, due to violation of the duty to state reasons provided for in Article 77 of the LGT.

As the TCA states, "the right of hearing exercised (…) was analyzed in detail in the Information that supports the final despatch of grant/partial denial, to which reference is made and which corresponds to sections III. Prior Hearing, III.1 Perspective of the Claimant, and also III.2 Assessment of the Rebuttal."

Now, as stated in the Decision of the STA of 10-02-2010, issued in process 01122/09, and available at www.dgsi.pt:

"I - The statement of reasons of an administrative act is a relative concept that varies according to the type of act and the circumstances of the specific case, but is only sufficient when it permits a normal recipient to perceive the cognitive and evaluative path followed by the author of the act to render the decision, that is, when that person can know the reasons why the author of the act decided as it did and not differently, in such a manner as to be able to trigger the administrative or litigation mechanisms of challenge.

II - An administrative act is sufficiently reasoned which, supplemented with an opinion to which it refers, permits achieving that objective."

Subscribing to the jurisprudence transcribed, this argument is also understood to lack merit.

Having said this, it is necessary to consider the substantive question that arises in this case, which is whether, in fact, the Claimant demonstrated all the facts necessary for it to be recognized the tax benefit that it included in its replacement declaration for IRC of 2010, as was its burden (Article 74(1) of the LGT), or not.

With respect to the question of whether there existed expenses in activities eligible for the tax benefit of SIFIDE, there are no doubts in the record, this being a consensual fact between the parties.

The question that arises is therefore with respect to the quantification of such expenses.

This matter, so that no doubts remain, is also covered by the burden of proof that legally falls on the claimant seeking the tax benefit. That is: in order for that person to enjoy the benefit it seeks, it is not enough to demonstrate that it carried out an activity qualified as Research and Development, and that it incurred costs with it, but also the concrete amount spent, it not being permitted to lament the procedural justice that eventual non-compliance with the burden of proof incumbent upon it may entail. In summary: when seeking a benefit of a certain amount, the justifying elements of that specific amount chosen must be gathered, it not being sufficient to demonstrate the generic existence of expenses eligible from the perspective of the benefit, and subsequently choose a method, more or less approximate, of concrete determination thereof, which would be a sort of determination of the amount of the benefit by indirect methods.

Nor may, in this matter, the aspirant to the benefit seek an inversion of the burden of proof, arguing, in essence, that, absent a specific form of fulfilling that burden, it shall fall to the counterparty to demonstrate that the one chosen by the claimant seeking the benefit is incorrect.

Having said this, as has already been seen, the correction made by the TCA resulted in the disregard of two types of expenses included for the purposes of calculating the tax benefit in question:

(a) all personnel expenses;

(b) all operating expenses, with the exception of two invoices totalling € 790.00 relating to the transport of H2 rail separators to the location of technical testing.

Let us examine each of those situations.

With respect to the first of the situations listed, it was determined that:

  • The value of personnel costs allocated to R&D projects was determined based on the actual cost that each employee of the Claimant spent on each R&D project;

  • The determination of the value of this charge was done using individual "time sheets" of the Claimant's employees;

  • The Claimant's "time sheets" contain an indication of the hours spent on each R&D project, by employee involved, with monthly frequency and identification of the respective R&D project;

  • The valuation of the hourly cost of each collaboration with R&D projects was done using the average hourly cost of each employee, that is, the Claimant divided the annual cost of the employee by the fraction of the total number of hours that the same person worked in the year, dedicated to the project, as documented by the "time sheets";

  • The "time sheets" of the Claimant's employees were subject to control and validation by the heads of the R&D project and by the respective employees who collaborated on it.

The procedure indicated appears, in the concrete case, to be sufficient for the personnel expenses incurred by the Claimant in R&D activity, which it unquestionably carried out, to be considered duly proven.

Indeed, in this matter, objective elements are provided by the Claimant (number of hours per employee), and not mere "estimates," which, although internal to the Claimant, are acceptable from a standpoint of normalcy, given that they are validated by more than one source and were sufficiently corroborated by the testimonial evidence presented.

It is therefore not considered decisive in this matter the circumstance that the recording of hours presented by the Claimant is monthly, and not daily, in the first place because no legal or regulatory provision imposed such latter type of recording, and secondly because it is understood that the fundamental aspect shall be that the elements made available are sufficiently credible to reasonably convince of the truthfulness of what is declared, and not that they permit the most easy and precise control possible.

It is therefore not deemed acceptable, here, the argument that the TCA draws from the difficulty of control, resulting from the non-evidencing on a daily basis of the number of hours of each employee. Indeed, if it is certain that the recording presented by the Claimant does not facilitate the inspection task of the TCA as much as it could, it does not render it impossible, on the one hand, nor, on the other hand, does that Authority present any concrete circumstance that calls them into question, aside from a cartesian doubt.

It is thus understood that the elements presented by the Claimant permit, in the concrete case, with the necessary certainty, concluding that those hours of work of the employees it indicates shall have been employed by the Claimant in R&D, and had the cost that it indicates.

It is further noted that the elements presented do not invalidate, in any way, the control of what is declared by the TCA. The same could, from the outset, in addition to attempting to ascertain the material falsity of the records or the occurrence of fraud, interview the duly identified employees, verify whether the functions and qualifications of the same were adequate for the tasks that R&D postulated, cross-reference with other data it might obtain relating to records of hours of other activities of the employees, contrast the number of hours employed per employee in R&D with those necessary for the normal activity of the company, among many other possibilities, directed at calling into question the credibility of the elements presented by the Claimant.

In this context, it is thus considered that, for the purposes of the SIFIDE tax benefit declared by the Claimant, the costs relating to personnel expenses should be accepted.

As for the remaining costs at issue in the present proceeding, relating to operating expenses, the same cannot be said.

Indeed, in this matter, it was determined that:

  • The determination of the value of operating expenses that was not accepted by the TCA was done based on the method of indirect allocation, with the value of the allocation corresponding to the percentage of hours spent on R&D projects, over the total annual operating hours of the Claimant.

  • For the purposes of determining the value of operating expenses, all annual expenses of the Claimant were allocated, relating to the fiscal year 2010;

  • Regarding the criterion for selection of expenses that were indirectly allocated to R&D projects, accounts of the fourth degree were considered, generic accounts of the Accounting Normalization System.

In practice, what the Claimant did, not having specific data on the concrete consumption and expenses directly implied by R&D activities, was to sum all its annual expenses, compute the number of hours it operated and, within this, what it allocated to those activities, allocating, proportionally, its general costs to such activities.

Now, always with all due respect to other opinions, it is understood here that it failed, beyond the unavoidable reasonable doubt, to demonstrate that, in fact, the value it allocates as costs, in this matter, was, in fact, what occurred.

Indeed, and absent better judgment, it appears that the method chosen for the allocation of common expenses (operating), shall not be acceptable because it departs from an undemonstrated premise, which is that the R&D activity consumed such resources in the same proportion as the rest.

Now, not being, as it is not, made such demonstration, the value presented cannot be accepted. And, although it is evident that such expenses occurred, as given the elements available to the Tribunal, the latter cannot, in obedience to the legal commands, establish any other, unable to remain in a situation of non liquet, given Article 8(1) of the Civil Code, must, by force of the rules of the burden of proof, disregard the totality of the amounts stated, in this respect.

The Claimant combines with the request for annulment of the tax act that is the subject of the present proceedings, the request for condemnation of the TCA for payment of compensatory interest.

In the matter at hand, it is manifest that the illegality of the tax act challenged, is attributable to the Tax Administration, which, on its own initiative, performed it without legal support.

Notwithstanding, it cannot be overlooked that the self-assessment was, in the first place, erroneously done by the Claimant itself.

Thus, as stated in the Decision of the STA of 30-09-2009, issued in process 0520/09, and available at www.dgsi.pt, "There is a right to compensatory interest pursuant to subsection (c) of Article 43(1) of the LGT, when a gracious objection of a self-assessment act is decided favorably to the taxpayer and the decision is rendered more than one year counting from the date of presentation of the objection and the delay is not attributable to the Tax Administration."

Consequently, the Claimant is entitled to compensatory interest, on the amount unduly paid, pursuant to Article 43(1) and (3)(c) of the LGT and Article 61 of the Code of Tax Procedures and Processes (CPPT).

Compensatory interest is due as of 1 April 2014, and calculated based on the amount unduly paid, until its full refund to the Claimant, at the legal rate, pursuant to Articles 43(1) and (4), and Article 35(10), of the LGT, Article 61 of the CPPT and Article 559 of the Civil Code and Portaria No. 291/2003, of 8 April (without prejudice to any subsequent changes to the legal rate).

  1. DECISION

In light of the foregoing, the Arbitral Tribunal decides:

(a) To partially uphold the present action, with respect to the eligibility, for the SIFIDE tax benefit, of personnel expenses incurred by the Claimant in R&D projects, in the amount of € 64,279.74, with € 35,109.92 allocated to project 3H2 and € 29,169.82 to project 5EAA;

(b) In consequence, to condemn the TCA to payment of compensatory interest relating to the amount unduly paid by the Claimant, resulting from the disregard, in the benefit referred to, of that amount, counted from 1 April 2014;

(c) To reject the present action, in the remaining part;

(d) To condemn the parties in the costs of the proceeding, in the proportion of their respective lack of success, which is set at 65.6% to be borne by the TCA and 34.4% to be borne by the Claimant, totaling thus the amount of € 1,605.88 to be borne by the TCA and € 842.12 to be borne by the Claimant.

  1. VALUE OF THE PROCEEDING

In accordance with the provisions of Article 315(2) of the Code of Civil Procedure (CPC) and Article 97-A(1)(a) of the CPPT and Article 3(2) of the Regulation of Costs in Tax Arbitration Proceedings, the proceeding is valued at € 60,346.35.

  1. COSTS

The value of the arbitration fee is set at € 2,448.00, pursuant to Table I of the Regulation of Costs of Tax Arbitration Proceedings, to be paid by the Respondent and the Claimant, in the proportion of their respective lack of success (34.4% for the Claimant and 65.6% for the Respondent), once the claim was only partially upheld, pursuant to Articles 12(2) and 22(4), both of the LFTA, and Article 4(4) of the aforesaid Regulation.

Notify.

Lisbon, Administrative Arbitration Centre, 19 March 2015

The Arbitrators,

José Pedro Carvalho

Jorge Júlio Landeiro de Vaz

André Gonçalves

Frequently Asked Questions

Automatically Created

What is the SIFIDE tax benefit and how does it apply to corporate income tax (IRC) in Portugal?
SIFIDE (Sistema de Incentivos Fiscais à Investigação e Desenvolvimento Empresarial) is a Portuguese tax incentive system for business research and development, regulated by Law No. 40/2005. It applies to Corporate Income Tax (IRC) by allowing companies that incur eligible R&D expenses to claim a tax credit that reduces their IRC liability. The benefit requires certification from the SIFIDE Certifying Committee, which evaluates and certifies both the qualitative and quantitative aspects of R&D activities. Companies must submit applications to this Committee demonstrating their R&D expenditures, and upon approval, can include the certified tax credit in their IRC tax returns to reduce tax due or generate refundable amounts.
Are personnel costs and operating expenses eligible for SIFIDE R&D tax credits?
Yes, both personnel costs and operating expenses can be eligible for SIFIDE R&D tax credits, though with specific requirements. Personnel costs for employees directly engaged in R&D activities are eligible, but companies must maintain adequate documentation of time spent on R&D projects. Operating expenses can include both direct costs (fully attributable to R&D projects) and indirect costs (general expenses necessary for business operations that support R&D). Indirect operating expenses are typically allocated proportionally based on the percentage of time or resources dedicated to R&D activities. However, the Tax Authority may scrutinize the documentation and methodology used to justify these expenses, as demonstrated in this case where the TCA challenged time recording methods and cost allocation methodologies.
How is the SIFIDE tax credit calculated and claimed on the Modelo 22 tax return?
The SIFIDE tax credit is calculated based on certified R&D expenses and claimed on the Modelo 22 (IRC tax return) as follows: First, the company incurs eligible R&D expenses during the fiscal year. Second, the company submits an application to the SIFIDE Certifying Committee with documentation of R&D activities and expenses. Third, upon Committee approval and certification of the tax credit amount, the company can file a replacement Modelo 22 tax return under Article 122(3) of the IRC Code. The certified tax credit is entered in Field 355 of Table 10 of the Modelo 22. The credit can reduce IRC liability or generate a refundable amount if it exceeds taxes due, as specified in the return calculations.
Can a taxpayer challenge a partial deferral of a SIFIDE tax credit through arbitration at CAAD?
Yes, a taxpayer can challenge a partial deferral or reduction of a SIFIDE tax credit through arbitration at CAAD (Centro de Arbitragem Administrativa). This case demonstrates the process: after the Tax Authority issued a decision granting only partial acceptance of the gracious objection and reducing the SIFIDE credit from €69,735.60 to €9,389.25, the company filed a request for arbitral pronouncement under Article 10 of Decree-Law No. 10/2011 (Legal Framework for Tax Arbitration). The arbitration can address both the nullity and annulment of the Tax Authority's decision, seek recognition of the legitimate tax credit, and request refund of taxes paid plus compensatory interest under Article 43 of the General Tax Law.
What are the requirements for the SIFIDE Certification Committee to approve R&D expense deductions?
The SIFIDE Certification Committee approval requirements include: submission of an application detailing R&D activities and associated expenses; demonstration that expenses relate to genuine research and development activities; proper documentation of personnel costs including time allocation to R&D projects; and justification of operating expenses as directly or indirectly related to R&D work. The Committee certifies both qualitatively (whether activities constitute R&D) and quantitatively (the amounts eligible for tax credit). However, disputes arise regarding the binding nature of the Committee's decisions, documentation standards for personnel time records, and acceptable methodologies for allocating indirect costs. The Tax Authority may subsequently inspect and challenge the Committee's certification, though questions exist about whether this constitutes an improper usurpation of the Committee's specialized certification powers.