Summary
Full Decision
ARBITRAL DECISION
They agree in arbitral tribunal
I – Report
1. A... – BRANCH IN PORTUGAL, with the legal entity identification number..., with registered office at ..., n.º ...-..., ...-... Lisbon, hereby requests the constitution of an arbitral tribunal, pursuant to the provisions of articles 2.º, n.º 1, subparagraph a), and 10.º of Decree-Law n.º 10/2011, of 20 January, to assess the legality of the tax act of additional IRC assessment resulting from the disallowance of impairment losses and, likewise, of the decision dismissing the administrative appeal lodged against that act, further requesting payment of compensation for the provision of an undue bank guarantee.
The applicant bases its request on the following grounds.
The Applicant is a company whose business object is the management of projects and works in civil construction.
Following the launch by B..., S.A., on behalf of the Portuguese State, of the international public tender for the concession of railway infrastructure for the section ...-..., as an integral part of the high-speed connection between ... and ..., the Applicant became part of the Joint Venture (ACE) which adopted the designation of C... - ACE, with a shareholding of 17.25%.
On the other hand, D..., S.A. (D...) and the Portuguese State signed, on 8 May 2010, a concession contract which concerned the design and construction of a high-speed line between ... and ... and its concession for 40 years, having been, on the same date, concluded between D..., as concessionaire, and C..., as ACE, a works contract relating to the execution of all design, project, expropriation, construction, supply and installation of equipment works provided for in the concession contract.
Subsequently, E... submitted the concession contract to the Court of Accounts for purposes of prior scrutiny, with the refusal of prior approval occurring, due to absence of financial viability conditions, by decision n.º 9/12, of 21 March 2012.
In light of the refusal of approval, the C.../ACE constituted, by reference to the tax period of 2012, an impairment loss in the amount of € 47,203,373.86, on overdue credits from client D....
Following an inspection action, the Tax Authority proceeded to correct the taxable profit determined by C.../ACE, by reference to the period of 2012, in the amount of € 39,059,469.00 by disallowance as a tax deductible expense of the impairment loss constituted on the amounts receivable from D..., making it impact on the fiscal result of the Applicant, as a member of the Joint Venture in the proportion of its shareholding (17.50%), which resulted in a correction in the amount of € 6,737,758.44.
The Applicant did not proceed to pay the tax owed, and was therefore notified, on 10 August 2017, of the institution of tax enforcement proceedings, having submitted a request for suspension of proceedings by means of constitution of a bank guarantee and subsequently lodged an administrative appeal against the additional assessment act.
The administrative appeal was dismissed on the basis of the following three considerations: non-existence of default on the grounds that the Applicant did not formally demand payment from the debtor and a written agreement was executed providing for non-payment of the amounts owed until obtaining the Court of Accounts' approval; lack of objective evidence of impairment, since, with the State acting as guarantor in the contractual relationship in question, the credits cannot be considered as doubtful debts; non-existence of collection efforts.
The Applicant submits, however, that all the requirements for the tax deductibility of impairment losses are met, firstly because, pursuant to the works contract concluded between C.../ACE and D..., invoices were issued and sent to D... and the due date was indicated which, in most cases, was set at 90 days.
Notwithstanding the fact that the parties actually executed an agreement, in the scope of the works contract, providing for non-payment of the amounts owed and any default interest until obtaining the Court of Accounts' approval, the circumstance that approval was refused determined the restoration of the conditions initially agreed upon contractually, with the debtor's default situation occurring after the due date of each of the invoices.
For this reason, an amending agreement was executed, on 20 March 2013, in which the existence of debt of € 47,203,373.86 is expressly acknowledged, plus default interest for the delay in payment of the respective invoices.
On the other hand, the impairment loss could not have been recorded in earlier periods since the external and objective event that originated the recognition of the impairment loss was precisely the refusal of prior approval by the Court of Accounts.
Furthermore, objective evidence of impairment also subsists, and the provision of article 36.º, n.º 3, subparagraph a), of the IRC Code is not applicable, since the contractual relationship existing between the Applicant and D..., based on a works contract, is not confused with the relationship existing between the latter entity and the State, founded on a concession contract, and therefore it cannot be stated that the credit against D... corresponds to a credit against the State.
Objective evidence of impairment also results from the weak financial situation of the debtor, revealed by the report and accounts for 2012, which showed an asset of € 57,123,000 against a liability of € 346,094,000, and which was aggravated by the refusal of approval by the Court of Accounts.
It must be concluded that all the requirements for acceptance as a tax deductible expense of the impairment loss exist, pursuant to articles 35.º and 36.º of the IRC Code, including as regards default from the date of due date of the invoices.
If this is not the case, the disallowance of the tax deductible expense undermines the principle of taxation according to actual profit.
The Tax Authority, in its response, contends that the possibility of constituting impairments to cover the risk of collection of credits depends on compliance with the general requirements of subparagraph a) of n.º 1 of article 35.º and the specific requirements of n.º 1 of article 36.º of the IRC Code, which is not the case here.
The default of credits, in light of the provisions of articles 804º and 805º of the Civil Code, is only counted from the date of judicial or extrajudicial formal demand, and in this case, it was agreed between C... and D... that the concessionaire would not pay the amounts owed until obtaining the Court of Accounts' approval, and therefore the debtor could not have been considered in default until the ruling of the Court, and moreover was never formally demanded to comply.
Furthermore, what is at issue is a concession contract executed between the State and D..., and therefore the credits existing against the concessionaire have ab initio the guarantee of the State, and cannot be considered as doubtful debts.
The Applicant also did not demonstrate having carried out efforts to receive payment of the debt, and the correspondence exchanged between C... and D... only evidences the agreement reached between the parties regarding the non-existence of default until obtaining the Court of Accounts' approval, as well as the updating of the value of the debt as of 31 May 2012.
Even if doubts existed, the agreement executed between the parties on 20 March 2013, following the refusal of approval by the Court of Accounts, assures that the credits against D... were acknowledged and safeguarded, by means of stipulation of the amount to be paid, the payment term, the form of calculation and remuneration of interest, and especially by what is stated in point 3.2 wherein it is mentioned that the concessionaire shall assure to the ACE the legal and procedurally admissible mechanisms necessary for presentation to the Portuguese State of the costs effectively incurred by the ACE, in the part that has not been recognized as payment of invoices and default interest.
It is concluded that, in light of subparagraph c) of n.º 1 of article 36º of the IRC Code, there is no risk of uncollectibility of the credits, and moreover the debtor was not constituted in default, there is no objective evidence of impairment, nor were efforts carried out for payment.
2. Following the proceedings, a meeting was scheduled for 3 April 2019 to which article 18.º of the RJAT refers, also intended for the hearing of the witness set out in the arbitral request. The witness's inability to attend on the scheduled date having been communicated and willingness to attend on 8, 11 and 12 April following having been manifested, the hearing was scheduled for 8 April. Having been requested again to postpone the hearing, the Tribunal decided that the inability to attend a procedural act scheduled for one of the dates for which the witness indicated availability does not constitute a legitimate impediment, pursuant to the provisions of article 508.º, n.º 3, subparagraph b), of the CPC, for further postponement of the procedural act.
Accordingly, the meeting provided for in article 18.º of the RJAT was dispensed with, as well as the production of witness evidence, determining the continuation of proceedings for optional written submissions within the successive period of 15 days.
In submissions the parties maintained their previous positions.
3. 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 terms.
Pursuant to the provisions of subparagraph a) of n.º 2 of article 6.º and subparagraph b) of n.º 1 of article 11.º of the RJAT, as amended by article 228.° of Law n.º 66-B/2012, of 31 December, the Deontological Council appointed as arbitrators of the collective arbitral tribunal the signatories, who communicated acceptance of the assignment within the applicable period.
The parties were duly and timely notified of this appointment and did not manifest willingness to reject it, pursuant to the joint provisions of article 11.º, n.º 1, subparagraphs a) and b), of the RJAT and articles 6.° and 7.º of the Deontological Code.
Thus, in accordance with the provision of subparagraph c) of n.º 1 of article 11.º of the RJAT, as amended by article 228.° of Law n.º 66-B/2012, of 31 December, the collective arbitral tribunal was constituted on 20 December 2018.
The arbitral tribunal was regularly constituted and is materially competent in light of the provisions of articles 2.º, n.º 1, subparagraph a), and 30.º, n.º 1, of Decree-Law n.º 10/2011, of 20 January.
The parties have legal capacity and standing, are duly represented (articles 4.º and 10.º, n.º 2, of the same statute and 1.º of Ordinance n.º 112-A/2011, of 22 March).
The proceedings do not suffer from nullities and no exceptions were raised.
It is appropriate to assess and decide.
II - Grounds
Factual matters
4. The facts relevant to the decision of the case that may be considered established are the following.
A) The Applicant is part of the Joint Venture, under the designation of C..., A.C.E., constituted on 8 February 2010, and in which it holds a shareholding of 17.25%;
B) On 8 May 2010, a concession contract was executed between D..., S.A. and the Portuguese State, which had the object of the design and construction of a high-speed line between ... and ... and its concession for 40 years;
C) On that same date, D..., as concessionaire, awarded to C..., by means of a works contract, the execution of all design, project, expropriation, construction, supply and installation of equipment works provided for in the concession contract;
D) The Court of Accounts refused prior approval of the concession contract by decision n.º 9/12, of 21 March 2012, notified by the concessionaire to C... by communication of 23 March following;
E) As a consequence of the refusal of approval, C... and D... executed an agreement, dated 20 March 2013, with a view to regulate the termination of the works contract, pursuant to which the parties acknowledge and agree as follows:
a) The concessionaire shall pay to the ACE the following amounts owed under the works contract:
- € 47,203,373.86 relating to invoices issued and accepted by the Concessionaire which remain unpaid as of the date of execution of the agreement and which are detailed in Annex I;
- € 2,832,630.62 relating to default interest for delay in payment of the said invoices to which shall be added default interest accruing until full payment.
b) The concessionaire undertakes to demand from the grantor by means of arbitration (or in courts of law if the arbitration route is not possible) the payments of the amounts previously mentioned, which shall be paid to the ACE if and when and to the same extent as these are paid by the grantor;
(...).
3.2. In the event that payment of the invoices and respective default interest is not acknowledged in arbitration or judicial proceedings, the concessionaire shall assure to the ACE the legal and procedurally admissible mechanisms necessary for presentation to the Portuguese State of the costs effectively incurred by the ACE in the part that has not been acknowledged as payment of invoices and default interest, the value of which shall not exceed the amounts previously mentioned.
G) Annex I to the agreement contains the list of invoices relating to works carried out under the works contract, in the global amount of € 47,203,373.86;
H) Annex II to the agreement contains the calculation of default interest relating to invoices in default as of the date of execution of the agreement in the global amount of € 2,832,630.62;
I) C.../ACE recorded, on 31 May 2012, an impairment loss in the value € 47,203,373.86, by means of entry in account D 6511000001-Impairment Losses – In amounts receivable – Clients-D..., S.A.;
J) The Tax Authority initiated an external inspection procedure relating to C..., credited by Service Order OI2016..., with a view to analyzing the deductibility of the impairment loss recorded in 2012.
L) The Tax Inspection Report drawn up in the scope of that procedure disallowed the deductibility as a tax deductible expense of the impairment loss recorded by C..., determining the correction of the fiscal result declared in IRC in the amount of € 39,059,469.00 by application of the tax default criterion;
M) The proposed correction is based on the following grounds: (a) C... accepted regarding the invoices issued to D... that the period of default would only commence after the issuance of the Court of Accounts' approval; (b) D... was not formally demanded to pay the amounts owed; (c) the taxpayer did not present objective evidence of the impairment of the debt; (d) no collection efforts were carried out;
N) The proposal contained in the Tax Inspection Report was approved by dispatch of the director of finance of Lisbon, of 1 March 2017;
O) The Applicant was subject to an inspection, of limited scope, pursuant to OI2016..., concerning the financial year of 2012, to determine the allocation to its fiscal result of the correction made with respect to C..., with a correction being determined in the amount of € 6,737,758.44, corresponding to the percentage of the shareholding in the Joint Venture.
P) The proposal contained in the Tax Inspection Report was approved by dispatch of the director of finance of Lisbon, of 17 May 2017;
Q) The Tax Authority issued an additional IRC assessment notice in the amount of € 2,147,834.83, plus compensatory interest in the amount of € 334,802.82, titled by document n.º 2017..., of 22 May 2017;
R) On 26 October 2017, the Applicant filed an administrative appeal against the additional IRC assessment act;
S) The administrative appeal was dismissed by dispatch of the deputy director of finance, of 28 June 2017, based on the following grounds: (a) non-existence of default, justified by the fact that the Applicant did not formally demand payment from the debtor and there was a written agreement providing for non-payment by D... until obtaining the Court of Accounts' approval; (b) lack of objective evidence of impairment, considering that the State is guarantor in the contractual relationship in question and the credits cannot be considered as doubtful debts; (c) non-existence of collection efforts;
T) Having not proceeded to pay the tax owed, the Applicant was cited for the institution of tax enforcement proceedings pursuant to the provisions of article 191.º, n.º 4, of the CPPT, by communication dated 9 August 2017;
U) The Applicant made a request for suspension of tax enforcement proceedings, by means of submission of a bank guarantee, which was accepted by dispatch of the chief finance officer in substitution, of 22 September 2017;
V) Through correspondence exchanged between D... and C.../ACE, on 7 and 13 December 2010, the parties agreed that "until obtaining the Court of Accounts' approval, payment by the concessionaire to C... of any amounts provided for in the works contract relating to the concession RAV .../... (...) shall be made only if and to the extent that the concessionaire receives the amounts provided for in the Financial Model of the Concession", and, accordingly, "non-payment by the concessionaire of amounts owed to C... pursuant to the works contract shall not be considered, until obtaining the prior approval of the Court of Accounts, for any purpose, as breach or as default in the performance of the payment obligation by D...".
X) By letter dated 25 May 2012 sent to D..., C... forwards for "such purposes as deemed appropriate" an annex with the updating of the amounts owed and the calculation of default interest as of 31 of that month;
Z) By letter dated 3 February 2011, D... informs the Applicant that it made a bank transfer in the amount of € 14,195,582.00 for payment of invoices, on the basis of the commitment that had been assumed between the parties, and in response, the Applicant, on 4 March 2011, without challenging the principle of deferred payment, states that it is entitled to be paid the amount of 21.559 M€ and not € 14,195,582.00.
The Tribunal formed its conviction as to the proven facts based on the documents attached to the petition and to the administrative procedure attached by the Tax Authority with the response. The agreement mentioned in subparagraph v) of the factual matters was acknowledged by the Applicant in the initial petition (article 70.º) and was not contested by the Respondent.
Legal matters
5. The Tax Authority proceeded to correct the taxable profit determined by the Applicant, by reference to the tax period of 2012, by having disallowed as a tax deductible expense the impairment loss constituted by C.../ACE on the amounts owed, in the scope of the works contract which the ACE had executed with D..., S.A., concessionaire of the high-speed line between ... and ....
It bases its position on the non-fulfillment of the requirements of article 36.º, 1, subparagraph c), of the IRC Code, given that the debtor was not constituted in default because she was not formally demanded to pay and no evidence of the risk of uncollectibility was presented nor were collection efforts carried out.
The Applicant counters that the invoices were issued and sent to the debtor with the indication of the due date and that, although an agreement had been established between the parties providing for non-payment of the amounts owed and default interest until obtaining the Court of Accounts' approval, that agreement was revoked as a consequence of the refusal of approval and replaced by another one in which the existence of debt is acknowledged, plus default interest, for the delay in payment of the respective invoices, and it must be understood that the situation of default operates from the date of the due date of the invoices.
On the other hand, the debtor was in a situation of financial weakness, which was aggravated by the refusal of approval by the Court of Accounts and is revealed by the report and accounts for 2012, and there is documentary evidence of the carrying out of collection efforts through correspondence and various telephone contacts.
The question at issue is, therefore, whether the requirements for impairment loss are met.
The applicable legal regime, in the wording in force at the date of the facts, resulted from the joint provisions of articles 35.º and 36.º of the IRC Code.
Article 35º, n.º 1, subparagraph a), of the IRC Code provided that impairment losses may be deducted for tax purposes that were recorded in the same tax period or in previous tax periods "related to credits resulting from normal activity which, at the end of the tax period, may be considered as doubtful debts and are evidenced as such in the accounting records".
For purposes of determining the impairment losses provided for in that provision, the subsequent article 36.º, in the part that is most relevant to consider, provided the following:
1 - For IRC purposes, doubtful debts are those in which the risk of uncollectibility is duly justified, which occurs in the following cases:
a) When the debtor has pending execution proceedings, insolvency proceedings, special revitalization proceedings or extrajudicial business recovery procedure (SIREVE);
b) When the credits have been claimed judicially or in arbitral tribunal;
c) When the credits are in default for more than 6 months from the date of respective due date and there is objective evidence of impairment and that collection efforts have been carried out.
(…)
3. The following are not considered doubtful debts:
a) Credits against the State, autonomous regions, local authorities and public entities in general or credits in which these have given guarantees;
b) Credits covered by insurance;
c) Credits against natural or legal persons who hold, directly or indirectly, more than 10% of the capital;
d) Shareholdings held, directly or indirectly, in more than 10% of the capital"
In the case at hand, what is essentially at issue is the uncollectibility criterion established in subparagraph c) of n.º 1 of article 36.º, pursuant to which it must be proven that there are credits in default for more than 6 months and there is objective evidence of impairment and that collection efforts have been carried out.
The debtor is considered constituted in default when, for a reason attributable to him, the performance, being still possible, was not carried out at the time due, with the effects of debtor default translating into the obligation to repair the damage caused to the creditor (article 804.º of the Civil Code). The damage that may be considered for purposes of the compensation to be borne by the debtor is that which arises for the creditor from the fact of the delay in performance and must be calculated in accordance with the general principles of civil liability. However, in the case of a monetary obligation, the compensation corresponds to legal interest counted from the date of constitution in default (article 806.º).
In any case, the determination of article 806.º regarding default interest does not set aside the general principles relating to debtor default, either as regards fault in the delay of performance, or as regards the necessity of formal demand.
As a general rule, as follows from article 805.º of the Civil Code, the debtor is only constituted in default after having been judicially or extrajudicially formally demanded to comply, with the exception only of cases in which the obligation has a fixed term or arises from an unlawful act or if the debtor himself prevents the formal demand, in which case he will be deemed to have been formally demanded on the date when he normally would have been.
In the case at hand, the Applicant contends that the invoices issued had a fixed due date, which, in most cases, was 90 days, and therefore, being an obligation with a fixed term, of which the debtor necessarily had knowledge, there was no need for formal demand.
However, it cannot be ignored that the parties established an agreement, still in the course of 2010, whereby, until the issuance of the Court of Accounts' approval, payments would be made to the extent that the concessionaire had the necessary financing from the grantor and, until the fulfillment of that formality, the debtor would not be constituted in default for delay in performance of the payment obligation.
As a consequence of the refusal of approval, the parties executed another agreement, on 20 March 2013, intended to regulate the terms of termination of the works contract, whereby the concessionaire undertook to pay the amount of € 47,203,373.86 relating to invoices issued and accepted and still owed, as well as € 2,832,630.62 relating to default interest for delay in payment of those invoices which could be added to further default interest accruing until full payment.
The point is that the ACE recorded the impairment loss, in the stated amount € 47,203,373.86, on 31 May 2012, at a time when the agreement liberating the debtor from default responsibility was still in force, with everything occurring - at that date - as if the parties, after having fixed a term for performance, had agreed that the obligation would be without a fixed term.
On the other hand, the so-called amending agreement, essentially intended to regulate the position of the parties in light of the supervening change of circumstances that resulted in the termination of the works contract, cannot have the consequence of restoring the situation of default with effects reported to the date of the initial due date of the obligation, especially if account is taken of the fact that the interested parties had expressed the clear intention of making the constitution of default dependent on a future and uncertain event, which would constitute the issuance of the Court of Accounts' approval.
Therefore, when on 31 May 2012, the ACE recorded the impairment loss the requirement of the debtor's default referred to in subparagraph c) of n.º 1 of article 36.º was not yet met.
6. Furthermore, at the date of constitution of the impairment loss, there was no objective evidence of the risk of uncollectibility of the debt. In the agreement stipulated in December 2010, at a time when the concession contract was still dependent on prior scrutiny by the Court of Accounts, what was provided is that the payment of invoices in default would be regularized through the funds made available to the concessionaire by the grantor. There being no indicator that the works contract would not be executed or that the concessionaire was in a situation of significant financial difficulty.
It is not disputed that the situation cannot be considered covered by the rule of article 36.º, n.º 3, subparagraph a), of the IRC Code, which provides that credits against the State are not considered as doubtful debts. The credits that the Applicant has against the concessionaire, in the scope of the works contract, cannot be considered as credits incurring against the State, since these only arise in the legal sphere of the concessionaire as a result of another contractual relationship in which the Applicant is not a party. In any case, as a result of that causal link, the parties trusted that the invoices relating to works carried out could be settled through the payments to which the grantor was bound pursuant to the concession contract and, apparently, that possibility was only frustrated with the refusal of approval by the Court of Accounts and the consequent termination of the contractual relationship.
As is well known, and results from the literal and systematic context of article 36.º, n.º 1, subparagraph c) of the IRC Code, the key requirement for the tax recording of impairment is the existence of "objective evidence of impairment" beyond the period of default. That is, the passage of time alone is not sufficient – objective evidence of impairment is required which translates into the assumption by the creditor that the credit is in default and in the consequent attempts at collection.
It is for the taxpayer to evaluate, when deciding to constitute impairments, whether the risk of uncollectibility is normal, or whether, at a certain moment, it became excessive, and only in this latter case is it justifiable to recognize the impairment by finding that the probability of uncollectibility exists.
In the case at hand, it is not possible to accept the risk of uncollectibility when the agreement on deferred payment through State financing was still in force, from which it was expected to obtain payment of the debts.
7. The constitution of impairment is still dependent on the requirement of proof of collection efforts.
The Applicant invokes the existence of evidence of carrying out collection efforts through correspondence exchanged with the debtor and various telephone contacts and further refers that the amending agreement itself executed on 20 March 2013, wherein the existence of the amounts owed and the default interest is expressly acknowledged, represents, in itself, a collection effort.
It is important to note first that there is no evidence in the proceedings of telephone contacts having been carried out for the purpose of collecting the debts and the existing correspondence, to which reference is made in subparagraphs V, X and Z of the factual matters, cannot be interpreted as having been intended for that purpose.
It was through the letters of 7 and 13 December 2010 that the parties agreed that non-payment by the concessionaire of the amounts owed pursuant to the works contract would not reveal, until the issuance of the prior approval of the Court of Accounts, as breach or default in the performance of the obligation. By the letter of 25 May 2012, C... merely forwards an updated list of the amounts owed and the calculation of default interest, as of 31 of that month. By letter of 3 February 2011, D... informs the Applicant that it made a bank transfer in the amount of € 14,195,582.00 for payment of amounts owed - emphasizing that the payment is made on the basis of the commitment that had been assumed between the parties -, and in response, on 4 March 2011, the Applicant, without challenging the principle of deferred payment, merely notes that it maintains the right to payment of the remaining amount owed.
From the content of any of these missives there does not emerge any allusion to the due date of the obligation or to the delay in payment or any other type of considerations that could be understood as a means of pressure on the debtor for the purpose of collecting the amounts owed, and, on the contrary, all the correspondence exchanged has as its assumption the principle of deferred payment that had been assumed by the parties, without this being able to be understood as a definitive breach or a delay in performance.
The amending agreement, on the other hand, was merely intended to regulate the position of the parties in light of the supervening change of circumstances that resulted in the termination of the works contract, and there only the amounts of the invoices and the default interest that remain owed are defined. The agreement has essentially the effect of an acknowledgment of debt and does not constitute any collection effort, all the more so since additional obligations are imposed on the concessionaire with a view to obtaining, even by judicial means, payment of those amounts by the grantor, being only to the extent that those payments come to be carried out that the concessionaire undertakes to settle the existing debt.
And it is important, finally, to note that the said agreement was formalized on 20 March 2013 and could never be understood as a collection effort for purposes of justifying the impairment loss when this came to be constituted in 2012 and, therefore, at a moment prior to it.
8. The Applicant further alleges that the non-deductibility of impairment losses violates the principle of taxation according to actual profit.
From this principle, which article 104.º, n.º 2, of the Constitution consecrates, it follows that the determination of the taxable profit of companies must be based fundamentally on their respective accounting records, as a means of making known the economic situation of companies, and aims to ensure that the fiscal system permits the control of income in a measure close to the reality existing.
Taxable profit for IRC purposes is therefore based on the accounting result, to which the tax legislator introduces the extraaccounting corrections necessary to take into account the objectives and constraints of tax law, and, as the Constitutional Court has recognized, the fiscally relevant income does not constitute a materially tangible reality of value, but rather a normatively modeled concept and accountably measurable (cf. decision n.º 162/2004 and, in the doctrine, SÉRGIO VASQUES, Manual de Direito Fiscal, Coimbra, 2015, p. 301).
In this context, as a corollary of the principle of taxpaying capacity, income taxes must contemplate objective deductions corresponding to expenses or losses that may reasonably be considered necessary to obtain the income. Those deductions require, in any case, a legal framework as a means of ensuring the principle of universality and equality in the payment of taxes.
It is not sufficient, therefore, that the taxpayer deducts the costs incurred, but that he deducts them in accordance with the legally defined criteria. And, in that sense, the impossibility of full deduction of costs or losses, as such recorded by taxpayers, for purposes of determining the tax base, when it results from non-compliance with the general requirements governing the specific deduction at issue, does not contravene the constitutional principle.
Requests whose assessment becomes moot
Given that the main request for a declaration of illegality of the tax assessment act and of the decision dismissing the administrative appeal is to be judged unfounded, the assessment of the request for compensation for the provision of an undue guarantee necessarily becomes moot.
III – Decision
For these reasons, it is decided:
a) To judge the arbitral request unfounded;
b) To judge the assessment of the request for compensation for the undue provision of a guarantee as moot.
Value of the cause
The Applicant indicated as the value of the cause the amount of € 2,311,554.56, which was not contested by the Respondent and corresponds to the value of the assessment which was sought to be opposed, and therefore the value of the cause is fixed at that amount.
Costs
Pursuant to articles 12.º, n.º 2, and 24.º, n.º 4, of the RJAT, and 3.º, n.º 2, of the Regulation of Costs in Tax Arbitration Proceedings and Table I annexed to that Regulation, the amount of costs is set at € 29,988.00, which is charged to the Applicant.
Notify.
Lisbon, 17 June 2019
The President of the Arbitral Tribunal
Carlos Fernandes Cadilha
The Arbitrator Member
António Martins (attached concurring opinion)
The Arbitrator Member
Luís Menezes Leitão
Concurring Opinion
1- While agreeing with the unfoundedness of the arbitral request, and notwithstanding the high regard for the fellow Arbitrators who subscribed to it, I dissent on various points of the reasoning set forth in the Decision.
Depending on the acceptance for tax purposes of the impairment loss recorded by the applicant on three cumulative conditions, namely: debtor default, objective evidence of impairment and that collection efforts have been carried out, I consider that these collection efforts for receipt of the credit have not been proven. However, I understand, for the reasons set forth below, that default exists and that objective evidence of impairment is present.
2- The parties agreed, in 2010, that until obtaining the Court of Accounts' approval there would be no default by the debtor. This appears to be a condition suspending default; which would normally occur after 90 days (the term stipulated in the invoices).
The agreed condition was "obtaining the approval", and not, for example, "the decision of the Court of Accounts", which could be a refusal or an issuance of approval. The economic and legal logic of such a condition is that, if the approval were obtained – and only in this scenario - the financial condition of the concessionaire D..., through the execution of the works and the financial flows it would receive after the approval, would then allow it to globally pay C... (ACE) the outstanding invoices and rebalance D...'s financial situation.
This means that the parties agreed on a condition (obtaining the Court of Accounts' approval and the consequent legal-financial validation of the works project) that would allow D... to set aside the weak financial situation that it was already facing. If this were not so, the difficulties of this entity would be significantly aggravated.
In summary, only the actual obtaining of approval (and not a Court of Accounts decision in any direction) would give D... the entry of funds to meet the commitments it was assuming. Hence the explicit condition for exclusion of default agreed by the parties in 2010, but only in a scenario of obtaining approval, and not in the circumstance of its refusal.
When, in March 2012, the Court of Accounts refuses the approval, it is verified that the condition suspending default is not fulfilled, which seriously aggravates the economic-financial operating conditions of D.... In my understanding, the effect of that refusal is to place in default the invoices, which then become an obligation to pay with a fixed term, by reason of the failure of the condition suspending default.
As Carlos Mota Pinto emphasizes, Teoria Geral do Direito Civil, 4ª edition, by A. Pinto Monteiro and Paulo Mota Pinto, Coimbra Editora, 2012, p. 575, the non-fulfillment of a suspensive condition implies that "the definitive effects to which the transaction was aimed are not produced and the provisional or preparatory effects themselves that took place during the meantime disappear".
If I interpret correctly, this means that the exclusion of default between 2010 - which was valid, by agreement of the parties, until obtaining approval - ceases to be valid with the refusal of approval and causes default to retroact to the initial date of invoicing. In my understanding, this matter should merit further weight in the structure of the decision.
In effect, without the said suspensive condition there would be normal default responsibility, in an obligation with a fixed term (90 days). The condition referred to above, agreed by the parties, transformed the fixed term of default into a term that (if approval were obtained) would never have materialized; then the failure to obtain approval, causing that condition to fail, implies, in my opinion, that the conditions of default are traced back to the initial invoicing.
The consequence of the non-fulfillment of a suspensive condition should be, unless I am mistaken, to eliminate its effects; that is, in the case at hand, it should result in the invoices issued after 2010 being in default within the (normal) term of 90 days, eliminating the (exceptional) payment term agreed in case approval of the Court of Accounts were obtained.
I also believe that the letter sent by C... (ACE) in May 2012, (document 10 attached to the proceedings) on invoices in default between 2010 and the date of refusal of approval, as well as the acceptance of these amounts of default interest by entity D..., constitute a confession, or validation, by this entity, that default is traced back to the conditions initial of the invoicing. That is, the debtor does not contest, but rather accepts, that the refusal of approval implies default from the 90-day term contained in the invoices. This admission seems to me entirely consistent with the non-existence of effective default only in a scenario in which the Court of Accounts had granted approval.
I thus dissent from the text of the draft decision. In it, it is understood that the fact that, in 2012, there was still the 2010 agreement prevents the consideration of default responsibility. The agreement was in force, but the essential point of that agreement, which excluded default – obtaining the Court of Accounts' approval - was already well known as not having been fulfilled. This has consequences on the effects of the agreement.
In my view, the existence of the agreement in 2012 constitutes, therefore, a lesser relevance than the fact that the key condition of that agreement – the issuance of approval by the Court of Accounts – is, in 2012, when the impairment loss was recognized in accounting, a condition already demonstrably unfulfilled. There being, therefore, consequences at the level of the temporal counting of the period of default. Furthermore, the letter of May 2012, in which D... accepts the default from 2010, indicates that D... assumes default (after the refusal of approval by the Court of Accounts) in the manner in which the applicant refers to it.
3- As regards objective evidence of impairment, I consider that document 13 (legal certification of accounts of D...), attached to the proceedings, is essential to conclude that it exists. The legal certification of accounts (CLC) of D... shows an entity in technical bankruptcy, with significant negative equity. The certification also draws attention to the uncertainty regarding the company's ability to liquidate liabilities, invoking even article 35º of the CSC, which provides for the consequences of capital loss.
Moreover, the refusal of approval by the Court of Accounts, as is also expressed in the legal certification of accounts, constituted an additional negative fact of wide scope in the impossibility of financial rebalancing of D..., and consolidates the scenario of great weakness of this entity as debtor.
The text of the Court of Accounts' decision (document 11 attached to the proceedings) makes several very critical observations, disapproving the financial management of the project involving E... and D..., referring, on p. 15 et seq., to a series of irregularities that determined the denial of approval.
Now, Accounting Standard and Financial Reporting n.º 27 establishes the conditions for a credit against customers to be considered with impairment. They are:
"Objective evidence that a financial asset or a group of assets is impaired includes observable data that draw the attention of the holder of the asset to the following loss events:
a) Significant financial difficulty of the issuer or debtor;
b) Breach of contract, such as non-payment or failure to pay interest or principal on debt;
c) The creditor, for economic or legal reasons related to the debtor's financial difficulty, offers the debtor concessions that the creditor would otherwise not consider;
d) It becomes probable that the debtor will enter bankruptcy or any other financial reorganization;
e) The disappearance of an active market for the financial asset due to the debtor's financial difficulties;
or f) Observable information indicating that there is a decrease in the measurement of the estimate of future cash flows of a group of financial assets since their initial recognition, although the decrease cannot yet be identified for a given individual financial asset of the group, such as adverse national, local or sectorial economic, market, technological or legal conditions.
Other factors may also evidence impairment, including significant changes with adverse effects that have occurred in the technological, market, economic or legal environment in which the issuer operates."
Condition a) is verified in light of the CLC and also from what in the Court of Accounts' decision is referred to regarding the causes and consequences of the refusal of approval. The refusal of approval also clearly indicates alterations significant with adverse effects that have occurred in the legal environment in which D... operated. This is because D...'s financial management, and its ability to pay debts, depended on compliance with legal rules, validatable by the Court of Accounts, which proved to have had an unfavorable outcome.
Given that impairment loss involves a judgment of probability regarding the debtor's difficulties in meeting its obligations, I consider that the evidence brought to the proceedings is sufficient to conclude that such a probability existed. In sum, the already weak financial situation of the debtor, added to the refusal of approval by the Court of Accounts which makes it even more obvious, combine to support a prognosis of difficulties in D...'s meeting of its obligations to C... (ACE).
I thus dissent from the draft decision when it states that there was no indicator of financial difficulty of D.... Such difficulty already existed, evidenced in the accounts and in the CLC, and the refusal of approval by the Court of Accounts constitutes the additional event that aggravates it very clearly.
These are, in summary, the reasons for my disagreement on these two points of the decision.
António Martins
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