Summary
Full Decision
ARBITRAL DECISION
They agree in Arbitral Court
I – Report
- A..., E.P.E., legal entity no. ... with registered office at ..., no. ..., ...-... Lisbon, dominant company of Fiscal Group B..., subject to the special tax regime for groups of companies, filed a request for constitution of an arbitral tribunal, pursuant to article 2, no. 1, paragraph a), and articles 10 et seq. of Decree-Law no. 10/2011, of 20 January, to examine the legality of the dismissal of the administrative appeal lodged against the self-assessment act for corporate income tax (IRC), relating to the fiscal year 2015, in the amount of € 217,691.76, insofar as it does not admit the deduction from the IRC collection of the autonomous taxation rates on fiscal benefits calculated within the scope of the Extraordinary Fiscal Credit for Investment (CFEI).
The request is based on the following grounds.
The Applicant is the dominant company of Fiscal Group B..., which is subject to the special tax regime for groups of companies provided for in articles 69 et seq. of the IRC Code, and as such submitted the aggregate IRC declaration (model 22) for the year 2015, having proceeded with the self-assessment of autonomous taxation for that same year in the amount of € 425,944.56.
In the self-assessment, it was prevented from deducting the amounts of fiscal benefits recognized to the companies of the fiscal group under the fiscal incentive system designated as CFEI, which amounted to € 1,036,682.13 and which corresponded to tax credits in an amount exceeding the collection of autonomous taxation.
The Applicant also met the necessary requirements to deduct the fiscal benefits, insofar as the taxable profit was not determined through indirect methods and its fiscal and contributive situation was regularized.
Furthermore, the IRC collection provided for in article 45, no. 1, paragraph a), of the IRC Code includes the collection of autonomous taxation in IRC, being subject, as such, to the determination method provided for in article 90 of that Code, whereby deductions relating to fiscal benefits had to be made with respect to the amount determined, in the terms of paragraph c) of no. 2 of that provision.
The provisions of no. 12 of article 88 of the CIRC, which only permits the tax withheld at source to be deducted from the part of the IRC collection produced by no. 11 of article 88 of the CIRC, are not relevant.
The Applicant further states that the norm of article 88, no. 21, of the CIRC, in the wording introduced by article 134 of Law no. 7-A/2016, of 30 March, has an innovative nature, despite its express qualification as an interpretative norm, rendering it inapplicable to the situation of the case by effect of the principle of prohibition of retroactivity of tax law and by violation of the principle of separation of powers and interdependence of organs of sovereignty and the principle of independence of judicial power.
And should it be understood that article 90 of the IRC Code does not apply to autonomous taxation, then the illegality of the assessment of autonomous taxation should be declared for absence of legal basis for its implementation, in view of the provisions of articles 8, no. 2, paragraph a), of the LGT and 103, no. 3, of the Constitution.
Consequently, it requests the declaration of illegality of the decision to dismiss the administrative appeal, as well as of the IRC self-assessment act, relating to the fiscal year 2015, for the defect of violation of law, insofar as it bars the deduction of fiscal benefits from the part of the IRC collection corresponding to autonomous taxation rates, and, subsidiarily, the declaration of illegality of the assessment of autonomous taxation for absence of legal basis.
The Tax Authority, in its response, considers that the inclusion of autonomous taxation in the IRC Code, by its nature and purpose, has as a logical corollary the application of the general norms specific to that tax that do not conflict with its special form of incidence, conferring a dualistic nature on the normative system of the tax that is embodied in the separate determination of the respective collections in accordance with different rules.
There being thus two distinct calculations, which, although processed in accordance with paragraph a) of no. 1 of article 90, are effected on the basis of the application of different rates to the respective taxable bases that are determined equally in accordance with specific rules.
The assessment of IRC is carried out by applying the rates of article 87 to the taxable base determined in accordance with Chapter III of the Code, whereas with respect to the assessment of autonomous taxation various collections are determined in accordance with the rates provided for in article 87, resulting from the provisions of articles 88 and 89, depending on the diversity of facts that give rise to the assessment of autonomous taxation, and thus one cannot speak of a unitary system of taxation in IRC.
And in that sense the "amount determined in accordance with the preceding number", to which no. 2 of article 90 of the CIRC refers, should be understood as encompassing the sum of the amount of IRC determined in accordance with the rules of Chapter III of the Code by application of the rates provided for in article 87 and the amount of autonomous taxation, calculated on the basis of the rules provided for in article 88.
Otherwise, the deduction of fiscal benefits from the collection resulting from autonomous taxation would have a contradictory effect, allowing the achievement of fiscal incentive objectives to come to eliminate autonomous taxation in relation to expenses that the legislator intends to discourage.
It concludes for the inadmissibility of the request.
- Following the proceedings, the meeting referred to in article 18 of the RJAT was dispensed with, as well as the production of testimonial evidence.
In submissions, the Applicant reiterated its previous position. The Tax Authority did not file a counter-submission.
- The request for constitution of the arbitral tribunal was accepted by the President of CAAD and notified to the Tax and Customs Authority in accordance with regulatory requirements.
In accordance with the provisions of paragraph a) of no. 2 of article 6 and paragraph b) of no. 1 of article 11 of the RJAT, in the wording introduced by article 228 of Law no. 66-B/2012, of 31 December, the Deontological Council designated as arbitrators of the collective arbitral tribunal the signatories, who communicated acceptance of the mandate within the applicable period.
The parties were duly and timely notified of that designation and did not manifest any intention to refuse it, in accordance with the combined provisions of article 11, no. 1, paragraphs a) and b), of the RJAT and articles 6 and 7 of the Deontological Code.
Thus, in accordance with the provisions of paragraph c) of no. 1 of article 11 of the RJAT, in the wording introduced by article 228 of Law no. 66-B/2012, of 31 December, the collective arbitral tribunal was constituted on 17 December 2018.
The arbitral tribunal was regularly constituted and is materially competent, in view of the provisions of article 2, no. 1, paragraph a) of Decree-Law no. 10/2011, of 20 January.
The parties possess legal standing and capacity, are legitimate and are represented (articles 4 and 10, no. 2, of the same diploma and 1 of Order no. 112-A/2011, of 22 March).
The case does not suffer from any nullities.
It is appropriate to examine and decide.
II – Reasoning
- The facts relevant to the decision of the case are as follows:
a) The "Fiscal Group B..." composed of A..., E.P.E., C..., S.A., D..., S.A., currently named E..., S.A., F..., Lda, G..., S.A and H... S.A., in which A..., E.P.E. appears as the dominant company, is subject to the Special Tax Regime for Groups of Companies (RETGS);
b) As the dominant company of Fiscal Group B..., the Applicant submitted an aggregate IRC declaration Model 22 for the fiscal year 2015, proceeding with the self-assessment of autonomous taxation for that same year in the total amount of € 425,944.56;
c) The computer system did not permit the deduction from the IRC collection of the amounts of fiscal benefit recognized to the companies of the fiscal group under the Extraordinary Fiscal Credit for Investment (CFEI), with reference to the fiscal year 2015, in the amount of € 1,036,682.13;
d) The Applicant filed an administrative appeal against the self-assessment of autonomous taxation for the aforementioned fiscal year 2015, which was dismissed by decision of 5 July 2018 from the Head of the Division of Tax Management and Assistance of the Large Taxpayers Unit;
e) The decision to dismiss the administrative appeal was based on the non-deductibility of the credits resulting from the fiscal benefits of the CFEI from the collection of autonomous taxation.
The Tribunal formed its conviction regarding the facts proven on the basis of the documents attached to the petition.
Matters of law
- The issue to be decided is whether there is room in the context of IRC for the deduction from the collection produced by autonomous taxation rates of fiscal benefits calculated within the scope of the Extraordinary Fiscal Credit for Investment (CFEI).
This question has been decided by the majority arbitral jurisprudence in the affirmative sense, using as the main argument the method of assessment of IRC even when autonomous taxation is at issue. The collection provided by autonomous taxation – it is stated – constitutes IRC collection and the deduction of fiscal benefits is made in relation to the amount determined in accordance with article 90 of the CIRC, which leads to the conclusion that the processing of the assessment of the tax, as results from the said article 90, applies to all situations provided for in the Code, including with respect to autonomous taxation. Starting from this central idea, it is concluded that the autonomy of this type of taxation is restricted to the applicable rates and the respective taxable base, there being no legal support, in view of the provisions of article 90, for distinguishing between the collection from autonomous taxation and that resulting from income subject to IRC.
In any case, the analysis of the issue justifies a more precise characterization of the so-called autonomous taxation, in line with what was decided, among others, in the decisions rendered in Proceedings nos. 641/2017-T and 7/2018-T, which will be closely followed here.
It should first be stated that autonomous taxation constitutes the main exception to the taxation of income according to the principle of net income or real income, by which the income of individuals is determined after deducting the expenses incurred in obtaining it and the taxation of companies is determined in accordance with the profit determined by accounting (SALDANHA SANCHES, Manual of Tax Law, 3rd edition, Coimbra, p. 406).
As has been frequently noted, autonomous taxation originally applied to confidential and undocumented expenses (article 4 of Decree-Law no. 192/90, of 9 June), subsequently extending to charges relating to vehicles, amounts paid to persons with a more favorable tax regime and representation expenses, and later to charges relating to travel allowances or travel expenses.
With the State Budget Law of 2010 (Law no. 3-B/2010, of 28 April), autonomous taxation also came to include charges relating to indemnities paid to managers, administrators or managing directors by virtue of cessation of functions, and as well as charges relating to bonuses and other variable remuneration paid to managers, administrators or managing directors when these represent a portion greater than 25% of annual remuneration and have a value exceeding € 27,500. Meanwhile, Law no. 55-A/2010, of 31 December, added a no. 14 to article 88, providing for an increase in the autonomous taxation rates provided for in that article of 10 percentage points as to taxpayers who present a tax loss in the taxation period to which any of the tax facts referred to in the preceding numbers relate.
The introduction of the autonomous taxation mechanism is justified, on the other hand, by the fact that it applies to expenses whose tax regime is difficult to discern as they are found in a "zone of intersection of the private sphere and the business sphere" and is aimed at preventing and avoiding that, through these expenses, companies proceed with hidden distribution of profits or assign income that may not be taxed in the sphere of their respective recipients, also having the objective of combating fraud and tax evasion (SALDANHA SANCHES, ob. cit., p. 407).
Furthermore, autonomous taxation, although regulated normatively in the context of income tax, is materially distinct from taxation in IRC, insofar as it does not directly affect the taxable profit of the company, but certain expenses that constitute, in themselves, a new tax fact (that refers not to the perception of income but to the realization of expenses). And thus autonomous taxation has inherent the idea of discouraging a practice that, in addition to affecting equality in the distribution of public charges, may involve situations of less fiscal transparency, and is explained by a legislative intention to encourage companies to reduce as much as possible the expenses that negatively affect tax revenue.
In those special situations listed in the law, the legislator chose, therefore, to subject the expenses to autonomous taxation as a form alternative and more effective to the non-deductibility of the expense for purposes of determining the taxable profit, especially as when the company comes to suffer a tax loss, there will be no payment of tax, frustrating the objective intended to be achieved which is to discourage the very realization of that type of expenses.
However, through successive legal amendments, the legislator has come to broaden the scope of autonomous taxation, having come to include charges relating to indemnities paid to managers, administrators or managing directors when they cease functions, and as well as charges relating to bonuses and other variable remuneration paid to managers, administrators or managing directors when these exceed certain thresholds. What is shown to be justified as a way of ensuring "a fairer distribution of tax burdens and progressive moralization of corporate remuneration policies". As doctrine has recognized, these are, in this case, autonomous taxation mechanisms that depart from the initial purpose of combating fraud and tax evasion – as occurred with undocumented expenses – but which may still be framed in the objective of limiting expenses that may impact on the taxable income of companies.
In this context, analyzing the issue of autonomous taxation in light of the principle of taxation of companies according to real income and the principle of tax capacity, the Constitutional Court, in decision no. 197/2016, subscribed to the following understanding.
"(…) IRC and autonomous taxation are distinct taxes, with different tax base and subject to specific rates. IRC is levied on income obtained and profits directly attributable to the exercise of certain economic activity, by reference to the annual period, and thus taxes the aggregation of all income obtained in the taxation period. On the contrary, in autonomous taxation in IRC – according to constitutional jurisprudence itself – the taxable event is the very realization of the expense, being characterized as an instantaneous tax fact that appears isolated in time and generates an obligation of payment with a sporadic character. For this reason it is understood that we are faced with a single-obligation tax, as opposed to periodic taxes, whose taxable event is produced successively over time, generating the obligation to pay tax on a regular basis.
As can be concluded, autonomous taxation, although provided for in the CIRC and assessed together with IRC for collection purposes, has nothing to do with the taxation of income and profits attributable to the company's economic exercise, since they are levied on certain expenses that constitute autonomous tax facts that the legislator, for reasons of tax policy, wished to tax separately by subjection to a predetermined rate that has no relation to the company's sales volume".
Similarly, the decision of the Constitutional Court no. 310/2012, which declared unconstitutional, for violation of the principle of non-retroactivity of tax law, the norm of article 5, no. 1, of Law no. 64/2008, of 5 December, insofar as it makes retroactive to 1 January 2008 the effects of the increase in autonomous taxation rates, drew attention to the materially distinct nature of autonomous taxation in relation to the tax on income of legal entities, even though this tax imposition is formally inserted in the IRC Code.
In that regard, that judgment emphasized:
"Contrary to what happens in the taxation of income under the scope of IRS and IRC, where the set of income earned in a given year is taxed (which implies that only at the end of it can the tax rate be determined, as well as the bracket in which the taxpayer falls), in this case each expense incurred is taxed, considered in itself, and subject to a given rate, with autonomous taxation being determined independently of the IRC that is owed in each fiscal year, as it is not directly related to obtaining a positive result, and therefore liable to taxation.
Thus, and in the case of IRC, we are faced with an annual tax, where each income received is not taxed per se, but rather the aggregation of all income obtained in a given year, with the law considering that the taxable event of the tax is deemed to have occurred on the last day of the taxation period (cf. article 8, no. 9, of the CIRC).
As for autonomous taxation in IRC, the taxable event is the very realization of the expense, with no complex fact being involved, of successive formation over a year, but rather an instantaneous tax fact.
This characteristic of autonomous taxation thus refers us to the distinction between periodic taxes (whose taxable event is produced successively, by the passage of a certain period of time, as a rule annual, and tends to repeat itself in time, generating for the taxpayer the obligation to pay tax on a regular basis) and single-obligation taxes (whose taxable event is produced instantaneously, appears isolated in time, generating on the taxpayer an obligation of payment with a sporadic character).
In autonomous taxation, the tax fact that gives rise to the tax is instantaneous: it is exhausted in the act of realization of a certain expense that is subject to taxation (although the determination of the amount of tax, resulting from the application of the various taxation rates to the various acts of realization of expense considered, is to be effected at the end of a given taxation period). But the fact that the assessment of the tax is effected at the end of a given period does not transform it into a periodic tax, of successive formation or of a permanent character. This operation of assessment translates only into the aggregation, for collection purposes, of the set of operations subject to that autonomous taxation, whose rate is applied to each expense, with no influence of the volume of expenses incurred in determining the rate".
It is understood, in accordance with what has just been stated, that the tax base of autonomous taxation does not translate into net income, but rather a deductible cost transformed exceptionally into an object of taxation, corresponding to a legal sanction intended to reduce the tax advantage that could result from unjustified or excessive expenses. And, in this framework, it would be entirely contrary to the unity of the legal system that fiscal benefits to be granted to taxpayers under IRC should come to be deducted from the collection resulting from the application of autonomous taxation rates.
As noted, autonomous taxation rates have the nature of anti-abuse norms and are intended to discourage certain special situations that aim to obtain a reduction in the tax burden through the deduction of costs that are presumed not to be determined by a business cause. Moreover, the normative system of the tax has a dualistic nature in that it integrates, on the one hand, the taxable base based on taxable profit, and, on the other hand, the taxable base resulting from the application of autonomous taxation rates levied on certain types of expenses.
Even though the assessment of the tax is effected in an aggregated manner, on the basis of these two different components, it makes no sense that the general deductions to be made with respect to the determined amount of tax fall upon the collection due by the application of autonomous taxation rates. In fact, deductions to the collection constitute one of the ways of giving effect to the principle of tax capacity that has as one of its corollaries taxation according to real income. Being taxes on income, the objective deductions to be contemplated are those corresponding to expenses that may reasonably be considered necessary to obtain the income and that are suited to the nature of each category of income, with it being understood, in the case of business activities, the costs or losses incurred or borne by the taxpayer to obtain or ensure income subject to IRC (SÉRGIO VASQUES, Manual of Tax Law, Coimbra, 2015, p. 299).
It is certain that the law also admits deductions to the taxable profit and, among them, those relating to fiscal benefits (article 90, no. 2, paragraph c)). However, it does not make sense that these deductions can occur in relation to the collection of autonomous taxation.
It should be recalled that autonomous taxation is levied on certain expenses specified in tax law that have been incurred by the company, and only on those expenses, and does not aim at the taxation of business income that has been earned in the respective economic year. And the legislator's objective – as referred – is to discourage the realization of expenses that may negatively impact tax revenue and artificially reduce the company's own tax capacity.
The logic of autonomous taxation seems to be this. The company reveals financial availability to incur expenses that involve situations of less fiscal transparency and negatively affect tax revenue. In that circumstance, the taxpayer should be in a position to bear an additional tax burden with respect to those same expenses (which could be avoided) and which is intended to compensate for the tax advantage resulting from the reduction in the taxable base by effect of the realization of those expenses.
The expense constitutes an autonomous tax fact, generating a tax to which the taxpayer is subject regardless of whether or not they have obtained taxable income in IRC in the same taxation period. And thus the fact that reveals tax capacity is the very realization of the expense.
To admit that tax credits resulting from situations of incentive or fiscal benefit could neutralize the sanctioning effect of autonomous taxation would distort the very concept of fiscal benefit and the principles of tax capacity and fair distribution of the tax burden.
By their very nature, fiscal benefits are exceptional measures instituted for the protection of relevant extrafiscal public interests that are superior to those of taxation itself, corresponding to situations where the tax legislator provides relief, for technical or tax policy reasons, for certain manifestations of wealth that it intends to exclude from normal taxation (article 2, no. 1, of the EBF). The fiscal benefit is considered, on the other hand, as a tax expenditure insofar as it falls upon a situation subject to taxation and is equivalent, in quantitative terms, to uncollected tax revenue.
It makes no sense, in this conditionality, that deductions to the collection of the tax resulting from fiscal benefits fall not only on the taxable profit, but on expenses that the legislator intended to tax for reasons of fiscal transparency. What would lead to permitting the fiscal benefit to be used to frustrate the objective intended to be achieved with autonomous taxation which is precisely to discourage the very realization of that type of expenses.
- In the case at hand, the Applicant imputes to the decision to dismiss the administrative appeal and to the IRC self-assessment act the defect of violation of law insofar as they do not admit the deduction from the IRC collection produced by autonomous taxation rates of fiscal benefits calculated within the scope of the CFEI.
The fiscal benefit to be granted to taxpayers within the scope of the CFEI, as provided for in article 3, no. 1, of Law no. 49/2013, corresponds to a deduction from the IRC collection in the amount of 20% of investment expenses in assets used in the operation, with the subsequent no. 5 determining that, in the case of application of the special tax regime for groups of companies, the deduction is made to the amount determined in accordance with paragraph a) of no. 1 of article 90 of the IRC Code, based on the taxable base of the group.
The law orders the deduction of the amounts resulting from fiscal incentives from the amount determined in accordance with article 90 of the CIRC, and it should be understood that the reference is made to the assessment procedure to which that same provision of the Code refers. The specific norms that regulate fiscal incentives do not contain, as such, a special regime with respect to the method by which the deduction to the collection should be processed, whereby there will be place for the deduction of fiscal benefits to the amount of tax determined as provided for in article 90, no. 2, paragraph c).
The point is that this provision, as has been suggested, cannot be interpreted to encompass autonomous taxation since we are there faced with taxation distinct from IRC and with respect to which it would make no sense to have deductions on the grounds of fiscal benefit.
In this regard, the Applicant also refers to the innovative nature of the norm of article 88, no. 21, of the CIRC, in the wording introduced by article 134 of Law no. 7-A/2016, of 30 March, with the consequent inapplicability to the situation of the case for violation of the principle of prohibition of retroactivity of tax law.
The said norm came to establish that "the assessment of autonomous taxation in IRC is effected in accordance with the provisions of article 89 and is based on the values and rates that result from the provisions of the preceding numbers, no deductions being made to the global amount determined". And the subsequent article 135 of the same Law confers on the cited provision of article 88, no. 21, of the CIRC an interpretative nature.
The invocation of the pointed provision could raise the question of whether the norm, in the conditionality of the case, could be qualified as interpretative and whether the retroactive effect of that qualification could undermine the principle of prohibition of retroactivity of tax law.
However, the tribunal, in order to reach the solution of the case, limited itself to interpreting the provision of article 90, no. 2, paragraph c), of the CIRC according to the general rules of legal interpretation, refraining from applying the provision of the said article 88, no. 21, of the CIRC, whereby, not having been used that provision as the ratio decidendi, the violation of any parameter of constitutionality that relates to the alleged interpretative character of the law is not invocable, whether by reference to the principle of prohibition of retroactivity of tax law or to any of the other constitutional principles invoked (among many, the decisions of the Constitutional Court nos. 319/94 and 524/98).
- The Applicant further submits a subsidiary request aimed at obtaining the annulment of the tax assessment act for autonomous taxation, should it be understood that article 90 of the CIRC does not apply to this type of taxation, on the grounds that there is no legal basis for its implementation, invoking the provisions of articles 8, no. 2, paragraph a), of the LGT and 103, no. 3, of the Constitution.
If properly understood, the Applicant proceeds from the assumption that, as there is no place for the deduction from the IRC collection produced by autonomous taxation rates of fiscal benefits, there is also no legal basis for effecting autonomous taxation.
The argument is based on an obvious misunderstanding.
The autonomous taxation rates are provided for in article 88 of the CIRC and it is that provision that permits the assessment of the corresponding tax, although that assessment appears aggregated to the assessment of IRC. In considering that fiscal benefits are not deductible to the amount of tax determined that results from the application of autonomous taxation rates, the tribunal is not stating that the provision of article 90 is not applicable to autonomous taxation, but rather making an interpretation of article 90, no. 2, paragraph c), to the effect that the deduction to the collection of fiscal benefits does not fall upon autonomous taxation.
It being certain that autonomous taxation does not cease for that reason to have legal support.
Terms in which the Applicant's request is inadmissible, and the decision to dismiss the administrative appeal impugned is to be upheld, with the remaining requests for reimbursement of amounts paid and payment of indemnificatory interest necessarily being prejudiced.
III – Decision
Terms in which it is decided:
a) To judge inadmissible the arbitral request for declaration of illegality of the IRC self-assessment, relating to the fiscal year 2015, as well as of the decision to dismiss the administrative appeal lodged against the self-assessment act;
b) To judge prejudiced the requests for reimbursement of amounts paid and for payment of indemnificatory interest.
IV – Case Value
In accordance with the provisions of articles 306, no. 2, and 297, no. 2 of the CPC, article 97-A, no. 1, paragraph a) of the CPPT and article 3, no. 2, of the Regulation of Costs in Tax Arbitration Proceedings, the case value is set at € 217,691.76.
V – Costs
In accordance with article 22, no. 4, of the RJAT, the amount of costs is set at € 4,284.00, in accordance with Table I attached to the Regulation of Costs in Tax Arbitration Proceedings, which shall be borne by the Applicant.
Notify.
Lisbon, 7 May 2019
The President of the Arbitral Tribunal
Carlos Fernandes Cadilha
The Arbitrator Member
João Menezes Leitão
The Arbitrator Member
Filipa Barros
Frequently Asked Questions
Automatically Created