Summary
Full Decision
ARBITRAL DECISION
I - REPORT
A…, S.A., legal entity number …, with registered office in Lisbon, came, as the dominant company of Group B…, and under articles 2º no. 1, subsection a) and 10º and following of the Legal Framework for Tax Arbitration (RJAT), contained in Decree-Law no. 10/2011, of 20 January, as amended by article 228º of Law no. 66-B/2012, of 31 December and articles 1º and 2º of Ministerial Order no. 112-A/2011, of 22 March, to present, on 29 August 2016, a request for arbitral determination on the legality of the additional assessment of Corporate Income Tax (IRC) no. 2005…, relating to the financial year 2001, as well as the partial dismissal of the administrative review request lodged against it.
It did not proceed to appoint an arbitrator, and therefore, in accordance with the provisions of subsection a) of no. 2 of article 6º and subsection b) of no. 1 of article 11º of the RJAT, the President of the Deontological Board of CAAD appointed the signatories hereto as such, who communicated acceptance of the assignment within the applicable time limit, with the tribunal being constituted on 18 November 2016 (subsection c) of no. 1 of article 11º of the RJAT), in the absence of any manifestation of will by the parties to refuse the appointment of the arbitrators, in accordance with the combined provisions of article 11º, no. 1, subsections a) and b), of the RJAT and articles 6º and 7º of the Deontological Code.
Notified to respond, the Tax and Customs Authority (AT) did so through opposition, defending the lack of merit of the request.
At the meeting referred to in article 18º of the RJAT, a witness presented by the Claimant was heard, with the parties producing oral arguments in which they sustained their respective positions, and the tribunal announced that it would deliver the decision by 31 March 2017, a date later transferred to 10 April 2017.
II - PRELIMINARY EXAMINATION
The Arbitral Tribunal is materially competent and was regularly constituted.
The parties have legal personality and capacity, are legitimate and are legally represented (articles 4º and 10º, no. 2, of the RJAT and 1º of Ministerial Order no. 112-A/2011, of 22 March).
The proceedings are not affected by any nullities.
No other circumstances exist that would preclude consideration of the merits of the case.
III - DECISION
III - 1. Facts
III – 1.1. Established Facts
The following facts are considered established:
A)
The Claimant is the dominant company of "Group B…", which, in the financial year 2001, opted to be taxed under IRC according to the Special Regime for Group Taxation (RETGS).
B)
Group B… comprises, in addition to the Claimant, C…, S.A., D…, S.A., E…, S.A., and F…, S.A..
C)
Following the external tax inspection procedure, under Service Order no. OI2005…, initiated for the purpose of verifying compliance with tax obligations inherent to the application of RETGS, the AT services made, among others, the following corrections:
• € 16,711,855.65 relating to costs with social utility activities that exceed the limit of 15% of payroll expenses recorded as remuneration, salaries or wages, in violation of no. 2 of article 40º of the Corporate Income Tax Code (CIRC);
• € 203,253.80 relating to charges not properly documented, as the respective supporting documents, whether issued by third parties or internal documents prepared by the company at the date of incurring the charges to complement such external documents, did not allow assurance in an unequivocal manner that these are costs effectively indispensable for the realization of profits or gains subject to tax or for the maintenance of the productive source, in violation of subsection g) of no. 1 of article 42º of the CIRC;
• € 145,533.71 relating to travel costs, not considered deductible for tax purposes, as it was not proven that the said trips were used in the service of the company, given that their purpose was not set out in the description of the respective invoices or supporting documents that had been presented in relation thereto, in violation of no. 1 of article 23º of the CIRC.
D)
The Claimant was notified, for exercise of the right to participate, of the Draft Inspection Report, after which the Final Inspection Report was prepared, whose conclusions were notified to the Claimant, and which determined adjustments to the taxable base as well as to the tax calculation.
E)
Such corrections resulted in additional assessment no. 2005…, of 2005-11-16, in the amount of € 12,362,731.34 and compensatory interest in the amount of € 1,741,828.12, against which the Claimant filed an administrative review request.
F)
The administrative review request was partially granted by decision of 2016-04-29, in accordance with the conclusions set out in the Information …/2016 of the AT services.
G)
Of the € 203,253.80 relating to charges considered not properly documented, referred to in B), the Claimant contests, in the present proceedings:
€ 2,901.98 relating to airfares;
€ 12,911.95 relating to airfares;
€ 3,316.65 whose supporting document is a letter from Bank…, entitled invoice, but not numbered, and without reference of the issuing entity, containing a list of expenses incurred.
H)
Regarding the charge in the amount of € 3,316.65, the AT understood that the supporting documents did not allow "assurance in an unequivocal manner that these are costs effectively indispensable for the realization of profits or gains subject to tax or for the maintenance of the productive source, a situation which leads to the exclusion of the said amount from the scope of costs recommended under art. 23º of the CIRC".
I)
Bank… advised the Claimant in business in Brazil, namely, in the acquisition of control of G… by A….
J)
The AT disallowed the expenses incurred with airfares - € 2,901.98 plus € 12,911.95 -, on the grounds that it is not a cost indispensable for the realization of income subject to tax and the maintenance of the productive source.
K)
The said airfares were used by members of the Administration and senior management of the Claimant, in its service, for visits to Brazil and Spain, where it has interests, namely, shareholdings in companies in the electricity production and distribution sector, and to New York, on whose stock exchange the Claimant was listed.
L)
Part of Group B… is the company F…, whose objective is to provide medical assistance to employees of the group companies in the area of medical care provision (curative medicine) and in the area of occupational medicine (occupational medicine).
M)
Pursuant to clause 114 of the 2000 Collective Labor Agreement, in force at the time, the Claimant was obligated to provide its workers, pensioners and retirees, medical services within the scope of curative medicine, which cover the areas of general practice, specialties, auxiliary diagnostic means, nursing, medications and medical supplies, prosthetics and orthopedics, special therapies and hospital assistance.
N)
Within this scope, the companies of Group B… entered into service provision contracts with F… regulating the conditions under which the latter undertakes to provide the services in question.
O)
The medical services provided by F… to the companies of Group B… within the scope of curative medicine are invoiced to those companies based on the number of workers in their service who may benefit from those services, by means of a monthly fee (tariff) per user, set annually based on the volume of services provided in the previous year by F… and the general health price index. In parallel, each worker or pensioner participates in the expenses through the payment, 14 times per year, of a monthly amount (mutual) to be deducted from remuneration or pension and which is set annually based on the costs borne by F… in the previous year. This amount, at the charge of the worker, does not vary based on the number of their family members who benefit from F…'s medical services.
P)
At the level of occupational medicine, the medical services provided by F… to the group companies are borne exclusively by the companies that pay, based on the number of workers in their service, a fixed amount per worker which is revised annually based on the general health price index.
Q)
The costs borne by the companies in question within the scope of occupational medicine and curative medicine were recorded in the cost accounts 647 denominated "Social Action Costs – Medical Services" of each of those companies.
R)
These costs were reduced by the AT to 15% "(…) of payroll expenses recorded as remuneration, salaries or wages (payroll), established in no. 2 of art. 40º of the CIRC", with the AT rejecting as a tax cost the excess of € 16,711,855.65.
S)
The Claimant recorded, as supplements to retirement and survivor pensions, € 52,275.86.
T)
The AT only considered as tax costs, of this amount, the part not exceeding 15% of the payroll, invoking the provisions of no. 2 of article 40º of the CIRC.
U)
Of the amount assessed, the Claimant paid € 5,465,215.44 on 2 January 2006, being € 4,686,032.39 of tax and € 779,185.05 of compensatory interest, and on 18 December 2013 a further € 119,679.91 under the RERD.
V)
On 26 April 2006 the Claimant provided security in the enforcement proceedings arising from the contested assessment, by means of surety insurance, incurring a charge of € 152,864.11.
III. – 1.2. Unproven Facts
Among those alleged, relevant to the decision, none remained unproven.
III. – 1.3. Reasoning on the Facts
The tribunal's conviction results from the examination of the case documents, in particular, of the administrative file, all of which are reproduced herein, and from the testimony of the witness heard, who proved knowledgeable of the facts and testified with apparent impartiality.
III – 2. Law
On Medical Services
(i) Summary of the Claimant's Position
The Claimant argues, in summary, that:
- The expenses incurred with medical services should not be considered social utility activities, as they do not fall within any of the situations provided for in article 40º, no. 2 of the IRC Code and are legally mandatory costs, and should therefore be considered indispensable and deductible under general terms;
- Occupational medicine costs are indispensable insofar as, given their mandatory nature under law, companies with workers cannot avoid incurring these costs;
- In the case of curative medicine, the costs are equally mandatory insofar as they arise from a Collective Labor Agreement whose non-compliance is liable to generate civil and administrative liability for the companies. Moreover, Collective Labor Agreements have a legal source at their foundation;
- The companies of Group B… are not free to detach themselves from the Collective Labor Agreement and to cease the provision of the benefits provided therein;
- Workers cannot renounce the rights and benefits provided therein;
- Workers have an individual and individualizable right to be medically assisted at the expense of the employer. If this right is not ensured, each worker, individually, may obtain forced execution of their right;
- The medical services provided are not a true health insurance. The amounts borne by the companies of Group B… are intended to remunerate medical services to which they are legally obligated.
(ii) Summary of the Respondent's Position
The Respondent argues, in summary, that:
- Given that no acquired and individualized rights of beneficiaries are at issue, there are no costs indispensable for the realization of profits or maintenance of the productive source;
- These are not dependent employment income for purposes of Personal Income Tax, as they do not fall within article 23º, no. 1, subsection d) and no. 4 of the IRC Code;
- The expenses incurred, although not aggregated to a health insurance in the strict and formal sense of the term, are in all respects similar to contributions to a medical plan;
- Given that the expenses incurred are difficult to individualize in relation to each beneficiary, the expenses constitute social utility activities intended to benefit not only the employees of the employing entities in a general manner, but also retirees and their family members, and should therefore be framed in article 40º of the IRC Code;
- The deductibility of social utility activities that are not expressly enumerated in the first part of article 40º, no. 1 of the IRC Code depends on prior recognition by the AT, which did not occur in this case. Thus, the expenses in question can only be framed in article 40º, no. 2 of the IRC Code;
- The regime established in article 40º of the IRC Code constitutes an exception to article 23º of the same Code. In effect, the IRC Code provides that certain liberalities are accepted as costs which, as such, would not be considered costs in light of articles 23º and 24º of the same Code.
(iii) Decision on Medical Services
Under article 23º of the IRC Code, in the wording in force at the date of the facts, "1 – Costs or losses are those which are proven to be indispensable for the realization of profits or gains subject to tax or for the maintenance of the productive source, in particular the following:
(…)
d) Administrative expenses, such as remuneration, allowances, pension benefits or supplements, current consumption materials, transport and communications, rents, litigation, insurance, including life insurance and "Life" branch operations, contributions to retirement savings funds, contributions to pension funds and to any supplementary social security schemes;
(…)
4. Except when covered by article 40º, health and personal accident insurance premiums, as well as amounts spent on life insurance and "Life" branch operations, contributions to pension funds and to any supplementary social security regimes that are not considered dependent employment income, in accordance with the first part of no. 3) of subsection b) of no. 3 of article 2º of the Personal Income Tax Code (IRS)".
With respect to the deductibility of expenses with medical services, it is necessary first to assess the possibility that these may be deductible under general terms, i.e., in the context of article 23º of the IRC Code. This is because, in this respect, the position of the Claimant and the Respondent are directly antagonistic. It is also important to confirm the interpretation to be given to article 23º, no. 4 of the IRC Code. In this context, it also seems necessary to analyze the scope of application of that article when interpreted jointly with article 40º of the IRC Code (current article 43º), relating to social utility activities.
Regarding the matter of the deductibility of costs, under article 23º of the IRC Code, this Center has pronounced on it several times. It reads, in effect, in the decision of case no. 39/2013-T, of 10/14/2013, in which Jorge Lopes de Sousa was the presiding arbitrator, that the "interpretation of the concept of indispensability contained in article 23º of the CIRC has, in Portuguese tax law doctrine, in TOMÁS TAVARES and ANTÓNIO PORTUGAL, authors of seminal works on the elucidation of such concept.
For the first of these authors: 'The legal notion of indispensability is framed, therefore, in an economic-business perspective, by meeting, directly or indirectly, the ultimate motivation for obtaining profit. Indispensable costs are equivalent to expenditures incurred in the interest of the company or, in other words, in all acts abstractly subsumable within a profitable profile.'
And continues: '(…) Indispensability subsumes to any act performed in the interest of the company. The legal notion of indispensability thus excludes acts at odds with the purpose of the company, not insertable within the corporate interest, especially because they do not aim at profit'.
The second author, regarding the question of which is the best interpretation of the concept of indispensability, expresses the following position:
'The solution adopted among us (at least in doctrine), in the wake of understandings advocated by Italian doctrine, has been to interpret indispensability according to the corporate purpose. This position is present from the outset in the writings of Vítor Faveiro, who links the indispensability of expenditure to its assessment as a management act according to the specific corporate purpose, refusing that this indispensability can be assessed freely based on any subjective judgment of the law applier'.
These works thus sustain that any economic decline (expenditure) that has a relation with the corporate purpose, whether incurred within the scope of activity, or demonstrates a business purpose, will meet the requirement of indispensability."
In case no. 12/2013-T, of 07/08/2013, in which Tomás Maria Cantista de Castro Tavares was the presiding arbitrator, it is stated that, having "taken into account the jurisprudence of the superior courts (duly cited by the parties, in particular by the Respondent [namely, Supreme Administrative Court Decision 186/06, of 12/7/2006; 107/11 of 30/11/2011; 1077/08, of 20/5/2009; 246/02, of 10/7/2002 and Central Administrative Court South Decision 5251/11, of 24/4/2012, consulted at www.dgsi.pt]) and the teachings of doctrine that have addressed the matter (abundantly cited by the parties, in particular by the Respondent) including work by which the arbitrator is an author (Tomás Cantista Tavares, On the relationship of partial dependence between accounting and Tax Law in Determining Taxable Income of Legal Persons: some reflections at the level of costs, CTF 396, October-December 1999 and António Portugal, Cost Deductibility in Portuguese Tax Jurisprudence, Coimbra Publisher, 2004), we can establish the following corollaries, accepted by all these sources, regarding the case at hand:
1. Article 23º of the CIRC contains an open clause, which requires interpretation and application to the specific case (without the Tax Authority being able to exercise a judgment of opportunity or technical discretion), whereby only costs indispensable for the realization of income subject to tax or for the maintenance of the productive source are fiscally accepted.
2. Indispensability between costs and income is assessed in an economic sense: indispensable costs are those incurred in the interest of the company, which are connected with its capacity, by insertion within its profitable scope (in a mediate or immediate manner) and in the exercise of its concrete activity.
3. The Tax Authority cannot evaluate the merit and opportunity of the company's management economic decisions. It cannot interfere with the freedom and autonomy of management of the company. A cost will be accepted fiscally if it is appropriate to the company's productive structure and to the obtaining of profits, even if it proves to be an unfruitful or economically disastrous operation.
4. The indispensable expenditure equals any expenditure incurred in order to obtain income and that represents an economic loss for the company.
(…)
7. Article 23º of the CIRC merely seeks to refuse the fiscal acceptance of costs which, although thus accounted for by the company, are not in reality business costs. These are clearly abusive situations, as such expenditures do not fall within the scope of its activity – they were incurred not in the interest of the company, but for the pursuit of extraneous objectives (for example, to conceal the personal expenses of administrators).
8. Tax cost requires a proper and self-interested interest of the company that records the cost: that interest must exist autonomously and cannot be diluted in collective interest or group interest.".
Now, taking as valid the theories described above and applying their guidelines to the facts under analysis in the present case, it will always be necessary to recall, in the first place, that the list provided in article 23º is not exhaustive. Article 23º assumes itself, as stated, as an open clause, so that the cost may be deductible even if not directly subsumable to one of the subsections provided in its no. 1. Thus, the fact that expenses are, or are not, individualizable in relation to each worker, does not assume as a definitive element in the analysis of the deductibility of the cost.
On the other hand, costs should, as a general rule, be deductible, unless the law expressly determines their non-deductibility. And even in these cases, as António Moura Portugal states, "it results that jurisprudence does not deny any value to the exemplifying enumeration, but that it is far from being the intended legal indispensability.
At most, one might speak of a potential indispensability, by way of a probabilistic judgment and the greater affinity that results from the fact that it is one of the charges enumerated in law as examples of deductible costs. In any case, without resulting from this any guarantee or definitive judgment"[1].
Now, in the case of occupational medicine, the fact that expenses are mandatory under law, being indispensable for the maintenance of employees, seems argument enough to accept the deductibility of the cost. Not only is the existence of employees a necessary element to "the realization of profits or gains subject to tax or to the maintenance of the productive source", but the fact that it is a legal obligation is sufficient to determine the existence of a "proper and self-interested interest of the company that records the cost".
The fact that medical services cannot be traced to dependent employment income, does not thus seem to be fundamental to its deductibility under article 23º of the IRC Code. The question that matters to ask, to assess the possibility of deducting a cost for tax purposes or, in other words, whether a cost should be considered indispensable, is to verify whether the intention that led to the assumption of the expense is, or is not, business-related.
Thus, the said expenses seem to be deductible under general terms, i.e., within the scope of article 23º of the IRC Code.
Expenses with curative medicine and benefits for pensioners and family members may require some additional notes.
In this context we note that these services are also mandatory, arising from obligations resulting from a Collective Labor Agreement in force, which will also be sufficient to demonstrate the non-abusive character of the expenses.
Moreover, the law does not appear to require as a condition for the deductibility of a cost, a subjective judgment regarding the possibility that the expense, in concrete, has been apt for the obtaining of profit or the maintenance of the productive source. The AT should not thus subsequently substitute itself for the decision-making bodies of the Claimant and make a judgment on how it would conduct the situation if confronted with the need to make a similar decision taking into account the facts of the case. It is not a condition for the deductibility of a cost that there be a potential identity of decisions between the private party and the AT. In this respect J. L. Saldanha Sanches argued that the issue is not "whether or not it corresponds to the most effective defense of the company's interests: this is a question that cannot be resolved by attributing a power of intervention to the State – neither in the guise of the Administration, nor even in the guise of the judge, so that these can perform a judgment of merit on a certain option of business management. It also cannot depend on validation through the verification a posteriori of the actual generation of profits. The judgment on the possibility, in abstract, of a cost or expense producing profits is neither the responsibility of the Administration when discussing the quantification of taxable profit, nor of the judge when judging a commercial dispute between partners.
It is not a matter of whether the operation was a good or bad management decision, whether it would be the best solution for that specific case. The freedom and responsibility of the decision belong only to the manager"[2]
Rui Duarte Morais argues, regarding the deductibility of tax costs, that "those recorded in the accounts will be accepted as such, for tax purposes, provided they are proven and indispensable"[3]. In this context, the author notes that "first, one must pay attention to the literal element of the rule in the meaning of the word indispensable. Indispensable is not that which is 'mandatory', but what is necessary"[4], adding that necessity is intended for the maintenance of the productive source, understood in a dynamic sense. "Companies aim at their development, their growth. Expenditures incurred with such objective are, indisputably, tax costs"[5]. The same author argues that "taxpayers are thus free in their choices, in particular to decide how to manage their companies, to decide which (in their kind and amount) the charges they deem convenient for the pursuit of a certain economic activity.
We have, as a principle inherent in the idea of a Fiscal State, the non-interference of the administration in the management of companies.
The invocation of the rule of indispensability of costs can never be made to substitute the judgment of convenience and opportunity of the charges assumed, as they resulted from the decision of the corporate bodies, by another judgment, also of a business nature, made by the tax administration or by the courts.
A cost does not cease to be (should not cease to be considered as such for tax purposes) because, in a retrospective evaluation, it proves useless or ineffective (e.g., because it does not prove to be a generator of income) or simply excessive in the view of fiscal interests. Especially because such an evaluation would often be tainted by the fact that, at the time it is carried out, new facts are known, not present when the decision was made by the taxpayer.
We cannot consider as valid the direction of certain jurisprudence that refuses the fiscal acceptance of certain costs because it is not possible to establish a direct correlation with the obtaining of concrete income"[6].
In effect, Rui Duarte Morais argues that if "the assumption of the charge giving rise to the cost was presided over by a genuine business motivation – in the understanding of the partners and/or managers of the company, who alone have the responsibility to decide on corporate interest -, the cost is indispensable. When it should be concluded that the charge was determined by other motivations (personal interest of partners, administrators, creditors, other companies in the same group, business partners, etc.), then such cost should not be had as indispensable" [7].
In the same sense, José Casalta Nabais argues that the "principle of free economic availability requires that one permit, with the greatest possible amplitude, the free decision of the individual in all domains of life, and that the limitation of that freedom of decision be only admitted when, from its exercise without obstacles, damage results to the collectivity, or when the state must take precautions so that that same freedom of decision can be conserved and maintained"[8].
Whether in the case of curative medicine or in the case of occupational medicine, the objective that led to the expenses was the fulfillment of obligations that, in a more or less direct manner, can be traced back to law. Thus, the maintenance of workers depends, not only on the existence of occupational medicine, but also on medical assistance services, without which the Collective Labor Agreement would be violated.
Note that, even in the case of medical protection extended to pensioners and family members, it is possible to discern a business objective, as it is intended, in essence, to ensure with these services a greater motivation on the part of active workers, both with a view to the benefits that may come to benefit them upon retirement, as well as the protection that their families enjoy.
Regarding the scope of application of the then article 40º of the IRC Code pertaining to social utility activities and its relationship with the then article 23º, no. 4 of the same Code, this Center has also pronounced. In Case no. 69/2013-T, of 10/22/2013, in which Jorge Lopes de Sousa was the presiding arbitrator, particularly regarding health insurance expenses, it states that "as a rule, health insurance premiums of which family members of workers are beneficiaries are not considered as costs for purposes of IRC, as they are not considered dependent employment income of the respective beneficiaries.
Therefore, the eventual consideration as costs of health insurance premiums of which family members of workers are beneficiaries can only result from article 40º of the CIRC in force in 2005 (former article 38º and current article 43º), under the exception provided in the first part of that no. 4 of article 23º.
It should be noted, however, that the first part of the said no. 3) of subsection b) of no. 3 of article 2º of the IRS, in referring to amounts spent, whether mandatorily or optionally, by the employer with life insurance and "Life" branch operations, suggests that it is irrelevant for these premium expenses to be considered 'dependent employment income', and consequently, costs in light of no. 4 of article 23º of the CIRC, regardless of whether these are mandatory or optional insurance.
There is thus no basis for distinguishing between mandatory and optional health insurance, at the level of the relevance of their premiums as costs, when the mandatory nature derives from contractual bindings and is not imposed by law.
In fact, subsection b) of no. 4 of article 40º of the CIRC, when defining the conditions for the deductibility of health insurance costs, refers to benefits established 'in compliance with collective labor regulation instruments', which reveals that the regime of this article 40º also applies to mandatory benefits through this means, which have contractual basis, as these are the nature of those imposed by collective labor regulation instruments (articles 539º and following of the Labor Code, approved by Law no. 99/2003, of 27 August, in force in 2005).
Thus, it is concluded that, as results from that no. 4 of article 23º of the CIRC, health insurance premiums that are dependent employment income are deductible as costs. Those that are not dependent employment income, can only be when covered by article 40º.
The consideration as costs of health insurance premiums of which family members of workers are beneficiaries is thus ruled out, through no. 1 of article 23º, as it is specially regulated for its relevance for that purpose, in no. 4 of the same article, with referral to article 40º of the CIRC."
Under the same decision, particularly regarding "the deductibility as costs of expenses with health insurance for family members of workers must be assessed in light of article 40º of the CIRC, which, in 2005, established the following:
(…)
Regarding the reference to 'family members' of workers, these are only found in nos. 1 and 9.
From this observation, it is concluded, already in a first analysis, that the 'family members' of workers are not a social reality that the legislator had forgotten when establishing the regime of 'social utility activities'.
But it is also concluded that, among all the social utility activities that were considered appropriate to encourage with the deductibility of expenses as costs, it was understood to give relevance at that level only some of them when family members of workers are beneficiaries.
In fact, 'when, as is usually the case, legal norms (legislative formulas) carry more than one meaning, then the positive function of the text is translated in giving stronger support to or more strongly suggesting one of the possible meanings. This is because, among the possible meanings, some will correspond to the most natural and direct meaning of the expressions used, whereas others can only fit within the verbal framework of the rule in a forced, artificial manner. Now, in the absence of other elements that induce the choosing of the less immediate meaning of the text, the interpreter should opt in principle for that meaning which best and most immediately corresponds to the natural meaning of the verbal expressions used, and in particular to their technical-legal meaning, in the assumption (not always exact) that the legislator knew how to express his thinking correctly'.
Thus, in the case at hand, there is no basis in the text of the law to conclude that expenses with health insurance that are considered deductible costs embrace those relating to family members of workers, as only to the workers is reference made in no. 2 and the legislator had in mind the hypothetical extension of the scope of application of the rule to family members of workers, expressly mentioned in nos. 1 and 9.
No. 4, which also applies to health insurance, also only makes reference to workers and not to their family members.
On the other hand, showing that family members of workers were not forgotten when this article was drafted, in no. 9 of this article 40º reference is again made to these family members, with respect to the social utility activities referred to in no. 1, which reinforces the conclusion that only in the cases provided for in no. 1 was it understood that there should be acceptance of deduction as costs of expenses relating to them.
Under these circumstances, the omission of reference to family members of workers in nos. 2 and 4, in the context of an article of the CIRC in which they were in the legislative mind, should be considered as intentional, in light of the presumption, imposed by article 9º, no. 3, of the Civil Code, that the legislator knew how to express his thinking in adequate terms.
There are thus insistent textual arguments pointing towards the interpretation made by the Tax Administration, that health insurance for family members is not deductible as costs, only those indicated in nos. 2 and 4, relating to company employees [when they do not constitute acquired and individualized rights of the respective beneficiaries, because if they do, full deductibility is ensured by article 23º, no. 1, of the CIRC, combined with no. 4 of the same article and no. 3) of subsection b) of no. 3 of article 2º of the IRS].
(…)
Beyond the textual arguments, it should be noted that, from the perspective of the relevance of costs for obtaining income, which is the one that must be adopted in this matter, it is justified that those be treated differently, at the level of the incentive that deductibility of expenses represents, those that are effected with the social support infrastructure referred to in no. 1 and those that relate to health insurance for family members of workers.
In fact, the former (childcare centers, nursing rooms, kindergartens, canteens, libraries and schools) are naturally geared to have repercussions at the level of benefits to the company, by allowing workers easier assistance to their dependents, with the corollary of greater availability to the company and the natural positive reflection in the increase of income, whereas health insurance for family members of workers do not have, or at least will probably not have, any positive effect at the level of company earnings.
Furthermore, it is also clear that it is justified that one distinguish, at the level of deductibility of costs and their relevance for the formation of income, between health insurance of which workers are beneficiaries, directly connected with the promotion of effective work in the interest of the company, and insurance of which their family members are beneficiaries, which have no direct relationship with that interest.
On the other hand, it is also this interpretation that results from the literal tenor that comports with the constitutional principle of taxation of legal persons with incidence fundamentally by real income, which points towards the direction that only expenses incurred with the perspective of increasing earnings or income or maintaining the productive source can be relevant as costs and not the superfluous ones, those that have no perceptible relationship with the formation of income.
If the company, on its own initiative, decides to effect, with legal binding of a contractual nature or without it, expenses that are not necessary for the formation of income nor maintenance of the productive source, it should bear entirely those expenses, with no logical, legal, or constitutional support that it be the generality of taxpayers to bear the part of the loss that such conduct derives for the public treasury, through the diminution of fiscal revenues.
Nor is there seen here a violation of the principle of equality, as the tax treatment of expenses connected with the formation of income or the maintenance of the productive source does not have to be identical to that given to expenses that do not contribute to that formation.
On the other hand, the principle of contributive capacity is also not violated, as it does not require that relevance be given to unnecessary diminutions of income.
The constitutional right to private property is also not affected, as the duty to pay taxes is one of the restrictions constitutionally provided for that right.
It may also be said that, in this matter of health insurance, comparisons with the regimes of medical assistance to civil servants and equivalent are not justified, as these are contributory regimes, paid by workers whose family members are beneficiaries.".
Also in Case no. 328/2015-T, of 06/07/2016, in which José Baeta de Queiroz was the presiding arbitrator, and in which "the question that now presents itself to be resolved, is, exclusively, a question of Law, and is directly connected with the interpretation of nos. 2 and 3 of article 40º of the CIRC, in the wording applicable to the facts at the time, which provided that: 'Also are considered costs or losses of the financial year, up to the limit of 15% of payroll expenses recorded as remuneration, salaries or wages relating to the financial year, those borne with health and personal accident insurance contracts, as well as with life insurance contracts, contributions to pension funds and equivalents or to any complementary social security regimes, that guarantee, exclusively, the benefit of retirement, pre-retirement, retirement supplement, invalidity or survival in favor of the company's workers.'; and that 'The limit established in the preceding number is raised to 25%, if workers do not have the right to social security pensions.'.
First of all, it is to be said that the understanding advocated by the AT, according to which article 40º of the CIRC refers to liberalities that would not be considered in light of articles 23º and 24º of the same Code, is not subscribed to.
In fact, and with all due respect and better opinion, it is considered that what is at issue in the provisions of the rule in question, are not liberalities, but alternative forms of remuneration for work provision. That is: the spirit that presides over their attribution, is not an animus donandi (which, moreover, would be contradictory, taking into account the profitable purpose that is essential to the legal figure of the commercial company, the form under which the overwhelming majority of corporate income tax subjects are incorporated), but – rather – a will to remunerate one's staff for the work they provide (whether such type of remuneration is, or is not, taxed in personal income tax, is a different and autonomous question from the one now being discussed). It will be unquestionable, in sum, it is thought, the existence of a synallagma between the provision of work by staff, and the "health and personal accident insurance contracts, as well as life insurance contracts, contributions to pension funds and equivalents or to any complementary social security regimes, that guarantee, exclusively, the benefit of retirement, pre-retirement, retirement supplement, invalidity or survival in favor of the company's workers". Such benefits will be, notoriously and as a rule, perceived by both parties (employer and staff) as a complement to the agreed remuneration.
And it will be, precisely, this remunerative nature, and not of liberality, combined with the difficulty of its taxation as income in the sphere of the beneficiaries, that will explain the restriction on the amount of expenses that are deductible, a restriction that is explained not by a purpose of encouraging companies to incur certain types of expenses, as put forth by the AT, but – rather – of limiting them.
It is not understood, on the other hand, what the relation is between the calculation base of the mandatory general social security regime, and the calculation base of the limit of optional contributions to regimes of a complementary nature, established by the AT. In fact, one thing is the calculation base of a contribution; another is the calculation base of a limit to contributions; yet another, is the calculation base of a limit to the fiscal deductibility of expenses with contributions, which is what is now in issue, and which cannot be seen what kind of common logic it will share with the first of the situations set out, in terms of imposing a relationship of identity.
Nothing advances in the direction advocated by the Respondent, the circumstance that the legislator refers that such expenses must be recorded as 'remuneration, salaries or wages'. In fact, if it is true that, in the case of amounts relating to employment income, it is normal that social security contributions will fall on them, it is equally true that situations in which this does not happen, although not constituting the rule, will not themselves be abnormal situations nor, much less, pathological ones, multiplying themselves in the applicable legal regimes, for example, both situations of exemption, and situations of exclusion, as well as situations of optional subjection.
The argument wielded by the AT, that no. 3 would be explained by the need to adopt a higher limit, for reasons of fiscal policy and considering greater social utility, if workers do not have the right to social security pensions, is also not accepted. In fact, workers who do not have the right to social security pensions, by principle, will be those who – precisely – will be removed from the contributive base for social security, for which it would be senseless that it be on the basis of this that the limit to the deductibility of the expenses in question be calculated.
In this manner, no argument is perceived that would justify any departure from the written sense of the law, it being considered that if the legislator wished that the calculation base for the said limit be that of the set of remuneration that serves as the calculation base for contributions to social security, he would have said so, instead of using the expression 'payroll expenses recorded as remuneration, salaries or wages relating to the financial year'".
Now, notwithstanding the fact that the specific ratio juris underlying articles 23º, no. 4 and 40º of the IRC Code can be discussed, we find that, both from the text of the law and from the arbitral decisions described above, the restrictions on deductibility described only apply to the particular cases described in said articles. It will not thus be possible to invoke a mere substantive interpretation to subsume the provision of medical care to the legislative provision applicable to health insurance, as the AT does. As already mentioned above, the general rule will be the deductibility of tax costs, unless these are expressly limited. In fact, this is required by the principle of contributive capacity. Situations of non-deductibility or of limits on deductibility are thus absolutely exceptional.
Thus, if in line with what was argued in Case no. 328/2015-T, of 06/07/2016, the situations provided for in article 40º of the IRC Code are not "liberalities, but alternative forms of remuneration for work provision", by analogy they will also be other elements which, in accordance with article 2º, no. 3, b) 3) of the IRS Code, are equally considered remuneration.
We thus recall that whereas in the case of "amounts spent, whether mandatorily or optionally, by the employer with life insurance and 'Life' branch operations, contributions to pension funds, retirement savings funds or any complementary social security regimes", these are only considered remuneration "provided that they constitute acquired and individualized rights of the respective beneficiaries" or that "not constituting acquired and individualized rights of the respective beneficiaries, they are subject by these to redemption, advance, remission or any other form of anticipation of the corresponding availability;". The said requirements, in particular the existence of acquired and individualized rights, are not required with respect to another type of remuneration.
The absolutely exceptional nature of the limitations on the deductibility of costs and the fact that the requirements provided for in article 40º of the IRC Code only apply to "health and personal accident insurance contracts, as well as life insurance contracts, contributions to pension funds and equivalents or to any complementary social security regimes, that guarantee, exclusively, the benefit of retirement, pre-retirement, retirement supplement, invalidity or survival in favor of the company's workers", makes it so that the regime provided for in articles 23º, no. 4 and 40º of the IRC Code is not applicable to the medical expenses under discussion in the present proceedings.
In fact, in accordance with article 2º, no. 3, subsection b) of the IRS Code, remuneration is considered to be "all rights, benefits or privileges not included in the principal remuneration that are derived due to the provision of work or in connection with it and constitute for the respective beneficiary an economic advantage", even though the advantages are not paid to the worker, or paid by the employing entity. In fact, notwithstanding the fact that it now results from no. 11 of article 2º of the IRS Code that remuneration is considered to exist even though the advantage benefits "any other person in their household or who is linked to them by a relationship of kinship or affinity up to the 3rd degree of the collateral line, to which is equated the relationship of each of the unmarried partners with the relatives of the other", this rule having been introduced by Law no. 82-E/2014, of 31 December, the said principle already results from article 2º of the IRS Code. In fact, remuneration is considered to be all advantage derived in connection with the provision of work, whether this is paid at the time of provision or in the future, constituting, in the latter case, an expectancy existing at the time of negotiation of the salary package.
Thus, if there were any doubts that expenses with the provision of medical care services fall within article 23º of the IRC Code, being a consequence of the general rule, it would always be necessary to reiterate their subsumption to the notion of remunerative expense provided for in article 23º, no. 1, subsection d) of the IRC Code, thus giving, also in this context, reason to the Claimant.
We do not do so only in the terms already mentioned case no. 328/2015-T, of 06/07/2016, of the CAAD to which the same president of this same decision presided (see, in particular section iv.).
Also recently the Central Administrative Court South used a line of reasoning that we can transfer to the present case, framing the costs now under discussion in article 23º, but admitting here, contrary to that Court, their deductibility, as there only probative sufficiency was lacking which here abounds. The Central Administrative Court South thus states in Case 7661/14, of 19/02/2015, and with the underlining that we add:
"The appellant censures the appealed judgment, as well as the correction effected. The latter imposed the treatment of expenses relating to medical care acts provided to workers of group companies, as social utility activities, subject, therefore, to the limit of acceptance as a cost of 15% on the amount of expenses recorded as payroll remuneration, in accordance with article 40º/2, of the CIRC.
The appellant did not attach to the proceedings elements that prove the expenses in question. The correction in question imposes the treatment as social utility activities, subsumable to the provision of article 40º/2, of the CIRC, of expenses with medical care to workers of group companies. A correction that was confirmed by the appealed judgment, in its precise terms.
The attack on the merit of the correction and the legal characterization at issue would suppose probative activity developed in the direction of specifying the terms in which the expenses in question were incurred, with a view to their characterization as actual costs and indispensable for the formation of income, which by their permanence, regularity and effectiveness and indispensability would exclude their characterization as social utility activities. The invocation of judicial decisions to the contrary does not appear to be useful to the position of the appellant, given that what is at issue are costs, whose descriptive detail it is necessary to elucidate, through adequate supporting documentation. Without the said proof, the characterization sought incurs begging the question, as the possible error in the subsumption, supposes the clarification of the factual premise from which it starts.
It is this lack of concrete proof of the terms in which the expenses in question were incurred that was the subject of censure by the judgment, a judgment which the appellant does not manage to reverse, as the relevant established matter of fact is not impugned by the same – article 640º of the Code of Civil Procedure. The appellant did not manage to attach to the proceedings elements that permit to assess the destination of the expenses in question; it did not attach to the proceedings elements that permit to decharacterize the assertion that these are expenses with medical care for its employees and with the social protection of the same and in that measure traceable to social utility activities, subsumable to the provision of article 40º/2, of the CIRC, in accordance with established tax jurisprudence [paragraphs 14./III.1.4 and 59 of the factual findings].
Finally, it is necessary to assess the allegation that the legal characterization at issue offends the principle of legality enshrined in article 103º of the Constitution.
In this regard, it will be said that the deductibility of costs provided for in article 23º of the CIRC, given that they are necessary for the formation of income, depends on the demonstration by the taxpayer of special requirements, such as effectiveness and indispensability. On the other hand, the deductibility of costs provided for in article 40º/2, of the CIRC, depends on their effectiveness and their relation with the mechanisms of social protection of company workers, also depends on their establishment in instruments of collective labor regulation and on the fact that their granting obeys objective criteria and identical for all beneficiaries. Underlying the normative intent of both provisions is the constitutional principle of taxation of real income of companies. In the case of the provision of article 23º/1, of the CIRC, the deductibility of the cost is connected with the causal relationship of the same with the generation of income, in the case of the provision of article 40º/2, of the CIRC, the deductibility of the cost is connected with the guarantee of social protection of the worker and their household members ensured by the company, within the framework of instruments of collective labor regulation. These are typologies of different costs, which justify a regime of deductibility also different, in accordance with legal terms. In the case, it appears that the prerequisites of article 40º/2, of the CIRC are met [paragraphs 14./III.1.4 and 59 of the factual findings].
From which it follows that the principle of fiscal legality not only supports, but makes necessary the characterization of the costs under examination and, as a consequence, makes inevitable the application of the threshold of 15% on payroll expenses recorded as remuneration of personnel, as prescribed by the provision of article 40º/2, of the CIRC.
In deciding in the sense referred to, the appealed judgment should be confirmed, in this part."
That is, the Central Administrative Court sees thus two possible regimes for the same expense, having in account the proof effected and the conviction of that proof in the adjudicator. In the cases of article 40º, no. 2, the proof is less demanding, but also the deductibility is limited, this compromise being made by the merit of the expenses, so to speak; in the cases of article 23º, the proof is more demanding and deductibility follows general terms. Now, also applying this methodology, we understand that these costs are deductible under article 23º insofar as in the present proceedings it was proven the effectiveness, permanence, regularity and indispensability of these costs in the sphere of the companies that incur them.
On Undocumented Costs
The Claimant contests the position of the AT in not considering deductible the following expenses recorded as such in the Claimant's accounts:
- Airfares in the amount of € 2,901.48
- Travel agency invoice in the amount of € 12,911.95
- Expense reimbursement in the amount of € 3,316.65.
The Respondent states in its Reply to the Request for Arbitral Determination submitted by the Claimant that the "costs identified above were not accepted by the AT on the grounds that they did not allow assurance in an unequivocal manner that they are indispensable for the realization of income or gains or maintenance of the productive source of the same". And it bases such conclusion on the fact that the supporting documentation proved insufficient "for the following reasons:
i- Regarding expenses with travel and accommodation: absence of a travel report countersigned by the hierarchy that would allow proof of the indispensability of the expense, or, a travel report without the respective signature by the hierarchy that would allow proof of the authorization of the expense.
ii- Regarding expenses with specialized work/expense reimbursement: the supporting documentation in question (letter from Brazilian entity that charged A… for expenses incurred on its behalf), did not contain any reference of the issuing entity, nor the invoice number".
In doubt about the acceptance of the said costs as a fiscal expense, by indispensability to the realization of income, the AT considered that the existence of a travel report, a signature by the hierarchy that would allow proof of authorization of expense and reference to the issuing entity and invoice number in the supporting documentation of the expense reimbursement would be sufficient complement to conclude on the indispensability of the expense.
Now, regardless of the merits of the organizational adoption of good internal control practices, the non-adoption of such good practices cannot be the basis for non-compliance with the duty to prove the fiscal deductibility of costs borne by companies. In fact, nowhere does the IRC Code require compliance with the requirements referred to by the AT, or any other relating to the adoption of ideal internal control practices, to prove indispensability of expenditures borne by taxpayers for the realization of taxable income.
Thus, it remains to analyze whether the expenses borne by the Claimant, whose veracity was not questioned by the AT, relate to the effective exercise of its business activity. In fact, as stated in the Decision of the Supreme Administrative Court of 29 March 2006, relating to Case 01236/05, "under penalty of violation of the principle of contributive capacity, the Administration can only exclude expenses not directly excluded by law based on strong motivation that convinces that they were incurred beyond the corporate objective, that is, in the pursuit of another interest that is not business-related, or, at least, with clear excess, deviant, in relation to the needs and objective capacities of the company."
On the other hand, the Decision of the Central Administrative Court of 14 July 2014, relating to case 2390, states that, "in the context of corporate income tax, the document that proves and justifies costs for the purposes of articles 23º, no. 1, and 42º, no. 1, subsection g), of the CIRC does not have to assume the essential formalities required for invoices in the context of Value Added Tax. The requirement for documentary proof is not confused with nor exhausted in the requirement of invoice, being sufficient, for some authors, merely a written document, in principle external and with mention of the fundamental characteristics of the operation. Regarding the jurisprudence of this Supreme Court, it was recorded in the Decision of 8/7/1999, case no. 23535, that 'The requirements of invoices, contained in article 35º, no. 5, of the Value Added Tax Code, are not requirements of formal validity of invoices for purposes of Corporate Income Tax, but only for purposes of deduction of Value Added Tax, in accordance with article 19º, no. 2, of the Value Added Tax Code'."
Now, referring part of the expenses in question to trips by A… executives to Brazil and Spain, territories in which the Claimant has substantial presence with subsidiaries, and to New York, whose Stock Exchange A… was listed on at the time, trips that the AT does not contest, there is no reason why the absence of a travel report and/or authorization by the hierarchy should legitimate the connection of these expenses to its business interest. Also the absence of reference to the issuing entity and invoice number in the reimbursement letter of expenses borne by Bank…, an investment bank contracted by the Claimant to assist it in negotiations in 2001 for the acquisition of control by the Claimant of company G…, does not seem to be sufficient reason for the expense to be put in question as necessary to the pursuit of the business interest of the Claimant.
Thus, it is concluded that the expenses borne by the Claimant respect the principle of indispensability provided for in article 23º of the IRC Code and are properly proven, giving reason to the Claimant.
IV. Compensatory Interest
As established in the factual findings, the Claimant paid, of the assessed amount, € 5,465,215.44 on 2 January 2006, being € 4,686,032.39 of tax and € 779,185.05 of compensatory interest, and on 18 December 2013 a further € 119,679.91 under the RERD. In addition, on 26 April 2006 it provided security in the enforcement proceedings arising from the contested assessment, by means of surety insurance, incurring a charge of € 152,864.11.
As results from the discourse that precedes, regarding the legal assessment of the case, there was no delay in the assessment of tax due – rather, the assessment made and subsequent collection of tax was illegal.
Accordingly, and in accordance with the provision of article 35º of the General Tax Law, the compensatory interest assessed and in part paid were paid wrongly, and should be reimbursed to the Claimant.
The same applies to the security provided by the Claimant to suspend the enforcement action arising from the illegal assessment. Having established the illegality of the assessment, the Claimant should be indemnified for the expenses it incurred, by force of article 53º, nos. 1 and 2 of the said Law.
All of this was petitioned by the Claimant, which also on these points obtains success.
Finally, the Claimant requests from the AT compensatory interest, and this request also prevails, in light of the provision of article 43, no. 1 of the General Tax Law: it is verified, in judicial impugnation, that the AT committed an error attributable to it and from which resulted the payment of an undue tax debt.
V. OPERATIVE PART
In these terms, the members of this Arbitral Tribunal agree:
a) To find the request for arbitral determination meritorious and, in consequence, to declare illegal the decision on the administrative review, to the extent unfavorable to the claimant, and to annul the IRC assessment, to the extent impugned, with the legally applicable tax consequences:
b) To find meritorious the request to condemn the AT to payment of compensatory interest, from the dates of the payments made, and on those payments, until complete reimbursement;
c) To find meritorious the request to condemn the AT to payment of the amount borne by the Claimant with the provision of security by means of surety insurance;
d) To condemn the AT to payment of the costs of the proceedings.
VI. VALUE OF THE PROCEEDINGS
The value of the proceedings is fixed at € 6,776,630.85 (six million, seven hundred and seventy-six thousand, six hundred and thirty euros and eighty-five cents), in accordance with the provisions of articles 3º, no. 2, of the Regulation of Costs in Tax Arbitration Proceedings (RCPAT), 97º-A, no. 1, subsection a), of the Tax Procedural Code, and 306º, no. 2, of the Code of Civil Procedure.
VII. COSTS
The amount of costs is computed at € 84,762.00 (eighty-four thousand, seven hundred and sixty-two euros), in accordance with the provisions of articles 12º, no. 2, of the RJAT and 4º, no. 4, of the RCPAT.
Notice thereof.
Lisbon, 10 April 2017.
The arbitrators,
(José Baeta de Queiroz)
(João Taborda da Gama)
(Luísa Anacoreta)
[1] António Moura Portugal, Cost Deductibility in Portuguese Tax Jurisprudence (2004), 271.
[2] J. L. Saldanha Sanches, Manual of Tax Law 3(2007), 384.
[3] Rui Duarte Morais, Notes on IRC (2007), 79.
[4] Rui Duarte Morais, Notes on IRC (2007), 83.
[5] Rui Duarte Morais, Notes on IRC (2007), 89.
[6] Rui Duarte Morais, Notes on IRC (2007), 85-86.
[7] Rui Duarte Morais, Notes on IRC (2007), 87.
[8] José Casalta Nabais, The Fundamental Duty to Pay Taxes, A Contribution to the Constitutional Understanding of the Contemporary Fiscal State (2009), 204.
Frequently Asked Questions
Automatically Created