CAAD Case 531/2018-T: IRC Tax Deductibility of Expenses Under Article 23 of the IRC Code

ARBITRAL DECISION

The Arbitrators José Pedro Carvalho (Presiding Arbitrator), Adelaide Moura and Ricardo Marques Candeias, designated by the Ethics Council of the Centre for Administrative Arbitration to form an Arbitral Court, hereby agree on the following:

I – REPORT

On 25 October 2018, A..., Lda., NIPC ..., with registered office in ..., ...-... ..., filed a petition for constitution of an arbitral tribunal, pursuant to the joint provisions of articles 2 and 10 of Decree-Law No. 10/2011, of 20 January, which approved the Legal Regime for Arbitration in Tax Matters, as amended by article 228 of Law No. 66-B/2012, of 31 December (hereinafter, abbreviated as RJAT), seeking the declaration of illegality of the additional Corporate Income Tax (IRC) assessment No. 2018..., of the interest assessment No. 2018... and the account reconciliation statement No. 2018..., with an amount payable of €94,287.98, relating to the year 2015, as well as the additional IRC assessment No. 2018..., of the interest assessment No. 2018... and the account reconciliation statement No. 2018..., with an amount payable of €14,830.38, relating to the tax period 2016.

To substantiate its petition, the Petitioner alleges, in summary, the following:

• Defect of violation of law, due to erroneous application of numbers 1 and 4 of article 23 of the IRC Code;
• Violation of the provisions of article 102 of the IRC Code.

On 29 October 2018, the petition for constitution of the arbitral tribunal was accepted and automatically notified to the Tax Authority (AT).

The Petitioner did not appoint an arbitrator, whereupon, pursuant to the provision in subparagraph a) of number 2 of article 6 and subparagraph a) of number 1 of article 11 of the RJAT, the President of the Ethics Council of the CAAD designated the undersigned as arbitrators of the collective arbitral tribunal, who communicated acceptance of the appointment within the applicable time limit.

On 18 December 2018, the parties were notified of these designations, and neither manifested any will to refuse any of them.

In accordance with the provision in subparagraph c) of number 1 of article 11 of the RJAT, the collective Arbitral Court was constituted on 09 January 2019.

On 13 February 2019, the Respondent, duly notified for that purpose, filed its response defending itself by objection.

On 29 April 2019, the hearing referred to in article 18 of the RJAT was held, at which party statements were made and witnesses presented by the Petitioner were examined.

Having been granted a time limit for the submission of written arguments, these were submitted by the parties, pronouncing themselves on the evidence produced and reiterating and developing their respective legal positions.

It was indicated that the final decision would be notified by the end of the time limit provided for in article 21/1 of the RJAT.

The Arbitral Tribunal is materially competent and is regularly constituted, pursuant to articles 2, number 1, subparagraph a), 5 and 6, number 2, subparagraph a), of the RJAT.

The parties have legal personality and capacity, are legitimate and are legally represented, pursuant to articles 4 and 10 of the RJAT and article 1 of Ordinance No. 112-A/2011, of 22 March.

The case is not subject to any nullities.

Thus, there is no obstacle to the consideration of the case.

Everything having been examined, it is appropriate to pronounce:

II. DECISION

A. FACTUAL MATTERS

A.1. Facts Established as Proven

• The Petitioner is a commercial limited liability company, constituted on 28 October 2014, which has as its object the production and marketing of beverages and olive oil, as well as consulting and service provision.

The share capital of the Petitioner is held as follows:

• The Petitioner entered into various contracts with the companies that hold participation therein:

  • The Petitioner entered into contracts with C..., Lda., on 02-01-2015, 02-01-2016 and 02-02-2017, for commercial consulting services;

  • The Petitioner entered into contracts with B..., CRL, on 02-01-2015, 05-01-2016, 03-01-2017 and 16-01-2018, for service provision;

  • On 02-01-2015, the Petitioner entered into contracts with D..., CRL for service provision.

• The aforementioned contracts aimed at providing commercial support to the Petitioner, namely in the implementation of the A... brand in the market, as well as techniques and strategies enhancing the efficiency of the activity pursued by the Petitioner.

• The entities with which the Petitioner contracted effectively performed the contracted services.

• Regarding each of the aforementioned entities, at each moment there was only a single contract, covering which the services were provided.

• In the period 201512, in Field 24 of the periodic declaration and VAT identified with number ..., the Petitioner declared the following deductions:

  • Deduction in the amount of €69,920.00, evidenced by invoice No. FA 2015/318, issued on 22-12-2015 by supplier B..., C.R.L. (NIF...);

  • Deduction in the amount of €7,360.00, evidenced by invoice No. 2FD 2EGO/6, issued on 31-12-2015 by supplier D... C.R.L.;

  • Deduction in the amount of €1,497.70, evidenced by invoice No. FA 2015/1154, issued on 24-12-2015 by supplier C..., S.A. (NIF...);

  • Deduction in the amount of €14,720.00, evidenced by invoice No. FA 2015/1155, issued on 24-12-2015 by supplier C..., S.A;

  • Deduction in the amount of €2,075.17, evidenced by invoice No. FA 2015/1182, issued on 31-12-2015 by supplier C..., S.A.

• In invoice No. FA 2015/318, issued on 22-12-2015 by supplier B..., C.R.L., the following particulars appear:

  • Description: "Service Provision VAT 23%" and "Wine Bottling for 2015";

  • Quantity: the numeral "1" appears;

  • Unit Price: the number "1.000.0000" appears;

  • Net Value: the number "304,000.00" appears;

  • Tax Rate: "23.00" appears;

  • VAT Charged: the amount of "€69,920.00" appears;

  • Total of document: the amount of "€373,920.00" appears;

  • As to the date when the services were performed, the year 2015 appears, associated with the description of wine bottling.

• Through Official Notice No. ..., of 16-02-2017, the Petitioner was requested, in its point 2, that regarding the aforementioned invoice, the unit of measurement relating to the acquired bottling services should be indicated, and that the price of each unit of measurement of those same services should be indicated.

• In response sent on 02-03-2018 through electronic mail, the Petitioner informed that the invoice "Comprises consulting and commercial support services, as well as the provision of the wholesale sales commercial structure for wines produced by B... and an additional compensatory value for the structure of bottling and wine production costs, logistics and management during the year 2015. The total value corresponds to the value of 4.75% of the value of annual sales in the year, in company A..., with a ceiling of the value of €304,000, plus VAT at the legal rate in force".

• In invoice No. 2FD 2EGO/6, issued on 31-12-2015 by supplier D... C.R.L., the following particulars appear:

  • Description: "Consulting and Commercial Support Services";

  • Quantity: the numeral "1" appears;

  • Unit Price: the number "32,000.00" appears;

  • Value: the number "32,000.00" appears;

  • Tax Rate: "23.00" appears;

  • VAT Charged: the amount of "7,360.00" appears;

  • Total of document: the amount of "€39,360.00" appears;

  • As to the date of performance of the services, it states that "The goods/services were made available to the purchaser on that date, in accordance with subparagraph f) of number 5 of article 35 of the VAT Code".

• In response sent on 02-03-2018 through electronic mail, the Petitioner informed that the invoice "Comprises consulting and commercial support services for the sale of olive oils produced in the cooperative with the brand... and creation and implementation of the proprietary brand of olive oils "A..." throughout the year 2015", and that "The value of said services results from a percentage of 0.5% of the total net sales of the year 2015 with a maximum of €32,000".

• In invoice No. FA 2015/1154, issued on 24-12-2015 by supplier C..., S.A., the following particulars appear:

  • Description: "Commercial Consulting";

  • Quantity: the numeral "1" appears;

  • Unit Price: the number "6.511.720000" appears;

  • Value: the number "6,511.72" appears;

  • Tax Rate: "23.00" appears;

  • VAT Charged: the amount of "1,947.70" appears;

  • Total of document: the amount of "€8,009.42" appears;

  • Date of performance of the services: "November 2015" appears.

• The Petitioner was requested that, regarding the identified invoice, the unit of measurement of the acquired commercial consulting services, the respective unit price, as well as a copy of requisition No. 2015/11, mentioned in the invoice, should be indicated.

• In response, sent on 02-03-2018 through electronic mail, the Petitioner informed that "The services were performed during November 2015, having as objectives: 1. Development of new products; 2. Promotional strategy; 3. Logistics efficiency; and 4. Costing system" and that "The consulting is based on the unit price of €30/hour, with requisition 11/2015 being an indicative field of the invoice".

• In invoice No. FA 2015/1155, issued on 24-12-2015 by supplier C..., S.A., the following particulars appear:

  • Description: "Service Provision";

  • Quantity: the numeral "1" appears;

  • Unit Price: the number "64.000.00000" appears;

  • Value: the number "64,000.00" appears;

  • Tax Rate: "23.00" appears;

  • VAT Charged: the amount of "€14,720.00" appears;

  • Total of document: the amount of "€78,720.00" appears;

  • As a date of performance of the services, no mention appears, only the indication, in the field entitled Requisition, of the year 2015.

• Through the aforementioned Official Notice, it was requested in its point 7 that, regarding the aforementioned invoice, the effective nature of the acquired services should be indicated, the unit of measurement thereof and the respective unit price, as well as copy of requisition number 2015, mentioned in the invoice.

• In response, sent on 02-03-2018, through electronic mail, the Petitioner informed that "The service provision results from the fulfilment of sales objectives for the year 2015. Given that A... exceeded the sales objective for the year 2015 of €7,000,000.00, the application of a rate of 0.9% of the sales volume achieved was defined, with a maximum value of €64,000.00", and further clarified that "Requisition number 2015 is an indicative field with reference to the year".

• In invoice No. 2015/1182, issued on 31-12-2015 by supplier C..., S.A., the following particulars appear:

  • Description: "Commercial Consulting";

  • Quantity: the numeral "1" appears;

  • Unit Price: the number "9,022.470" appears;

  • Value: the number "9,022.470" appears;

  • Tax Rate: "23.00" appears;

  • VAT Charged: the amount of "€2,075.17" appears;

  • Total of document: the amount of "€11,097.64" appears;

  • Date of performance of the services: "December 2015" appears.

• Through the aforementioned Official Notice, the Petitioner was requested in its point 8 that, regarding the identified invoice, the unit of measurement of the acquired commercial consulting services, the respective unit price, as well as copy of requisition No. 12/2015, mentioned in the invoice, should be indicated.

• In response, sent on 02-03-2018, through electronic mail, the Petitioner informed that "The services were performed during December 2015, having as objectives: 1. Development of new products; 2. Promotional strategy; 3. Logistics efficiency; and 4. Costing systems", and it was further clarified that "The consulting is based on the unit price of €30/hour, with requisition 12/2015 being an indicative field in the Invoice".

• The taxable base expressed in the invoices referred to above was recorded in an account for specialized works and declared by the Petitioner as an expense for the purposes of determining the net result for the fiscal year 2015 and for the purposes of calculating taxable profit.

• In the period 201612, in field 24 of the periodic VAT declaration identified with number ..., a deduction in the amount of €14,858.00 was declared, which is evidenced by invoice No. FA 2016/120, issued on 30-12-2016 by supplier B..., CRL.

• The taxable base expressed in that invoice was recorded in an account for specialized works, and declared by the Petitioner as an expense for the purposes of calculating taxable profit for the year 2016.

• In the aforementioned invoice the following particulars appear:

  • Description: "Logistics Service Provision Management December 2016";

  • Quantity: the numeral "1" appears;

  • Unit Price: the number "1.600.0000" appears;

  • Net Value: the number "64,600.00" appears;

  • Tax Rate: "23.00" appears;

  • VAT Charged: the amount of "€14,858.00" appears;

  • Total of document: the amount of "€79,458.00" appears;

  • Date of performance of the services: "December 2016" appears.

• Through Official Notice No. ..., among others, it was requested in its point 4 that, regarding the identified invoice, the unit of measurement relating to the acquired logistics and management services should be indicated, and that the unit price of each unit of measurement of those same services should also be indicated.

• In response sent on 02-03-2018, the Petitioner informed that the services contained in invoice FA 2016/120, "Comprise consulting and commercial support services, as well as the provision of the wholesale sales commercial structure for wines produced by B... and an additional compensatory value for the structure of bottling and wine production costs, logistics and management during the year 2016. The total value corresponds to the value of 0.76% of the value of annual sales of the year, in company A..., with a ceiling of the value of €64,600.00, plus VAT at the legal rate in force".

• The Petitioner was subject to a general scope tax inspection action, covering the fiscal years 2015, 2016 and 2017, determined by Service Orders No. OI2017..., OI2018..., OI2018... and OI2018....

• Through Official Notice No. ..., of 12-08-2018, the Petitioner was notified of the draft inspection report and, should it wish, to exercise its right to prior hearing.

• The Petitioner exercised the right to hearing, pursuant to article 60 of the General Tax Law (LGT) and 60 of the Tax Inspection Procedure Code (RCPIT).

• By Official Notice No. ..., of 12-06-2018, the Petitioner was notified of the Tax Inspection Report, which contains, inter alia, the following:

• In the Tax Inspection Report the AT made the following corrections to the taxable matter in the context of IRC:

• The Petitioner was notified of the additional IRC assessment acts No. 2018 ... and No. 2018 ..., relating, respectively, to the fiscal year 2015 and 2016.

• The Petitioner was also notified of interest assessments No. 2018 ... and No. 2018 ..., relating to the tax periods 2015 and 2016.

• The Petitioner filed a bank guarantee for suspension of the tax enforcement proceedings instituted by virtue of non-voluntary payment of the aforementioned assessments.

A.2. Facts Established as Not Proven

With relevance for the decision, there are no facts that should be considered as not proven.

A.3. Justification of Proven and Not Proven Factual Matters

Regarding factual matters, the Tribunal does not have to pronounce on everything alleged by the parties, but rather has the duty to select the facts that matter for the decision and to distinguish proven from unproven matters (cf. article 123, number 2, of the Tax Procedure and Process Code (CPPT) and article 607, number 3 of the Code of Civil Procedure (CPC), applicable ex vi article 29, number 1, subparagraphs a) and e), of the RJAT).

Thus, the facts pertinent to the judgment of the case are chosen and outlined according to their legal relevance, which is established in light of the various plausible solutions of the question(s) of Law (cf. former article 511, number 1, of the CPC, corresponding to the current article 596, applicable ex vi article 29, number 1, subparagraph e), of the RJAT).

Thus, having regard to the positions assumed by the parties, in light of article 110/7 of the CPPT, the documentary evidence and the procedural file attached to the case, as well as the witness evidence and party statements produced, the facts listed above were considered proven, with relevance for the decision, bearing in mind that, as stated in the Decision of the Court of Appeal of the South (TCA-Sul) of 26-06-2014, in process 07148/13, "the probative value of the tax inspection report (...) may have probative force if the assertions contained therein are not disputed".

In particular, the facts established under points 4 to 6 took into account the party statements and the testimony of witnesses presented by the Petitioner, who, regarding the companies for which they worked, confirmed the reality and effectiveness of the commercial operations in question in the case, and also considered the supporting documentary evidence (contracts and invoices), as well as the circumstance that at no time did the AT question whether we were dealing with non-existent or simulated operations.

No evidentiary weight was assigned to allegations made by the parties and presented as facts, consisting of strictly conclusory statements, incapable of proof, and whose veracity must be assessed in relation to the specific factual matter consolidated above.

B. ON THE LAW

Essentially, the issue at stake in the present arbitral proceedings is to determine whether, as alleged by the Petitioner, the additional IRC assessment relating to the year 2015, object of the present proceedings, is defective due to violation of law, namely of numbers 1 and 4 of article 23 of the IRC Code and/or the provisions of article 102 of the same Code.

The issue is related to the disallowance as a cost of the following invoices, better described in the factual matters:

• FA2015/318, issued on 2015-12-22 by supplier B..., C.R.L., NIF...;

• 2FD 2EGO/6, issued on 2015-12-31 by supplier D... C.R.L..;

• FA 2015/1154, issued on 2015-12-24 by supplier C..., S.A. NIF...;

• FA 2015/1155, issued on 2015-12-24 by supplier C..., S.A.;

• FA 2015/1182, issued on 2015-12-31 by supplier C..., S.A.;

• FA 2016/120, issued on 2016-12-30 by supplier B..., CRL, C.R.L..

It is necessary, in light of the justification provided by the AT in the inspection report, which supports the tax acts under review, to determine whether, regarding the expenses evidenced by the invoices indicated, the prerequisites of article 23 of the applicable IRC Code are met, the content of which is hereby transcribed:

"1 - For the determination of taxable profit, all expenses and losses incurred or borne by the taxpayer to obtain or ensure income subject to IRC shall be deductible.

2 - The following expenses and losses shall be considered as covered by the preceding number, in particular:

a) Those relating to the production or acquisition of any goods or services, such as materials used, labor, energy and other general costs of production, preservation and repair;

b) Those relating to distribution and sale, including costs of transport, advertising and placement of goods and products;

c) Of a financial nature, such as interest on foreign capital employed in operations, discounts, premiums, transfers, exchange differences, costs of credit operations, debt collection and issuance of bonds and other securities, redemption premiums and those resulting from the application of the effective interest method to financial instruments valued at amortized cost;

d) Of an administrative nature, such as remuneration, including those attributed as a share in profits, allowances, material for current consumption, transport and communications, rent, litigation, insurance, including life, sickness or health insurance, and operations in the 'Life' class, contributions to pension savings funds, contributions to pension funds and to any supplementary social security schemes, as well as costs relating to benefits upon cessation of employment and other post-employment or long-term benefits of employees;

e) Those relating to analyses, rationalization, research, consulting and development projects

f) Of a fiscal and parafiscal nature;

g) Depreciation and amortization;

h) Impairment losses;

i) Provisions;

j) Losses due to fair value reductions in financial instruments;

k) Losses due to fair value reductions in consumable biological assets that are not pluriannual forestry operations;

l) Realized losses;

m) Compensation resulting from events whose risk is not insurable.

3 — Deductible expenses according to the above numbers must be documented, regardless of the nature or medium of the documents used for that purpose.

4 - In the case of expenses incurred or borne by the taxpayer with the acquisition of goods or services, the supporting document referred to in the preceding number must contain, at least, the following elements:

a) Name or business name of the supplier of goods or service provider and of the purchaser or recipient;

b) Tax identification numbers of the supplier of goods or service provider and of the purchaser or recipient, whenever they are entities with residence or permanent establishment in the national territory;

c) Quantity and usual designation of the acquired goods or services provided;

d) Value of the consideration, namely the price;

e) Date on which the goods were acquired or on which the services were performed.

5 — (Repealed).

6 - When the supplier of goods or service provider is obliged to issue an invoice or legally equivalent document pursuant to the VAT Code, the supporting document for the acquisition of goods or services referred to in number 4 must obligatorily take that form.

7 - Expenses relating to non-voting preference shares classified as financial liabilities in accordance with the accounting standards in force, including the costs of issuing these securities, are deductible for the purposes of determining the taxable profit of the issuing entity".

Directly related to this regulation is the regime of article 23-A of the same Code, whose subparagraph c) of number 1, also invoked in the Inspection Report, provides as follows:

"1 - The following charges are not deductible for the purposes of determining taxable profit, even when recorded as expenses of the tax period: (...)

c) Charges whose documentation does not comply with the provisions of numbers 3 and 4 of article 23, as well as charges evidenced in documents issued by taxpayers with a non-existent or invalid tax identification number or by taxpayers whose cessation of activity has been officially declared pursuant to number 6 of article 8;".

Also mentioned in the Inspection Report, with relevance to the matter, article 36, number 5, of the VAT Code provides:

"5 - Invoices must be dated, numbered sequentially and contain the following elements:

a) The names, business names or corporate names and the registered office or domicile of the supplier of goods or service provider and of the recipient or purchaser, as well as the corresponding tax identification numbers of the taxpayers;

b) The quantity and usual designation of the goods transmitted or services provided, with specification of the elements necessary for determining the applicable rate; packaging not actually transacted must be the subject of separate indication and express mention that its return was agreed;

c) The price, net of tax, and other elements included in the taxable value;

d) The applicable rates and the amount of tax due;

e) The reason justifying the non-application of tax, if applicable;

f) The date on which the goods were made available to the purchaser, the date on which the services were performed or the date on which payments prior to the performance of the operations were made, if that date does not coincide with the date of issue of the invoice.

In the event that the operation or operations to which the invoice relates comprise goods or services subject to different tax rates, the elements mentioned in subparagraphs b), c) and d) must be indicated separately, according to the applicable rate."

Regarding the issue at hand, the AT alleges, in summary, that the invoices presented by the Petitioner, as documentary support for the disallowed expenses, do not comply with the provisions of articles 23/4 and 6 of the IRC Code and 36/5 of the VAT Code, applicable, but does not, however, question that the billed services were rendered, nor the authenticity of the invoices.

A matter analogous to that discussed in the present case was examined in the context of arbitral process 217/2018-T of the CAAD, in whose final decision it can be read that:

"The clarification of the conditions for deductibility of tax expenses was one of the points affected by the Reform of the IRC, implemented by Law No. 2/2014, of 16 January, with its Preliminary Draft referring to the purpose of eliminating interpretative divergences on the issue of documentary evidence of recorded expenses and inherent litigation. Thus, the general principle that expenses and losses incurred or borne by the taxpayer to obtain or ensure income subject to IRC are deductible is modeled by formal requirements, and the taxpayer must possess documents that prove them, which must contain the essential elements of identification of the operations, their participants, value and date, and, in the case of operations that give rise to the obligation to issue an invoice pursuant to the VAT Code, these documents must take that form.

The problem that arises is the consequence for the taxpayer of non-compliance with formal requirements, which in the case of the invoice, depends on its issuance by a third party, the service provider, with the AT taking the position that, in the absence of this document, the expense will be disallowed in the determination of the collectible matter for IRC, due to non-compliance with a formal requirement.

It should be recalled that in the situation in question the Petitioner demonstrated the materiality of the operations which is not disputed by the AT. These actually existed and generated financial flows at the exact value for which they were recorded as a credit in the income account (commissions charged to the F...) and as a debit in the same account of deductions from income (payment of the value corresponding to 80% of those commissions to B...). Moreover, the operations are documentarily supported in the executed Agreement, in issued payment notices that support the accounting records and in the customary documents of banking practice: account statements.

From the set of documents referred to result the essential elements of information required by article 23, number 4 of the IRC Code, so the AT is not correct when it states that the expenses would not be deductible due to non-compliance with the provisions of numbers 3 and 4 of article 23, with number 3 allowing documentary proof to be effected by any means, i.e., "regardless of the nature or medium of the documents used for that purpose".

The issue that arises is, therefore, only one: whether operations whose material existence has been demonstrated, and which are documented in the manner referred to containing the essential elements of transaction identification, by the fact that they are not supported by invoices issued by the service provider (B...), as postulated by article 29, number 1, subparagraph b) of the VAT Code, are not tax deductible by application of article 23, number 6 of the IRC Code.

The norm in question was introduced with the IRC Reform to resolve divergent interpretations regarding "documentary evidence" issues, as mentioned in the Preliminary Draft of the Reform, making the possession of an invoice mandatory for the purposes of deducting expenses in IRC. Nevertheless, it appears that the inclusion of this new formal requirement – the possession of an invoice – which came to be part of article 23, number 6 of the IRC Code, is placed in the realm of proof of operations, ad probationem, and not in that of their material prerequisites, ad substantiam, and aims to complement measures to combat tax fraud and evasion.

Thus, we believe that the valid considerations of Rui Morais prior to the IRC Reform remain valid to the effect that, for documentary proof of expenses, "the taxpayer should be admitted to supplement proof of the existence of the cost through recourse to any means admitted in law", as "the non-acceptance, for purely formal reasons, of the deductibility of a cost that was actually borne, would correspond to taxation of profit that does not exist, to a tax for which the corresponding tax capacity does not underlie." – cf. Notes to the IRC, Almedina, 2007, pp. 79-80. In the same direction points the case law of the Supreme Administrative Court (STA), as, by way of illustration, that contained in the Decisions of 5 July 2012, case No. 658/11, and 14 September 2011, case No. 433/11.

Having reached in the concrete situation the unequivocal conclusion that the expenses were actually incurred by the Petitioner in the exercise of its activity, are supported by documents (although not by invoices) and that there is no risk of fraud, it appears that they should be considered deductible.

First of all, by a literal argument, as article 23, number 6 of the IRC Code does not provide for the non-deductibility of expenses due to lack of an invoice. On the other hand, article 23-A, which lists charges not deductible for tax purposes, makes a reference, in subparagraph c) of its number 1, to numbers 3 and 4 of article 23, but not to number 6 which provides for the mandatory nature of the invoice, which cannot fail to mean a distinction in the treatment and effects that expenses not properly documented deserve, in the sense of those to which essential elements of transaction identification are lacking (enumerated in number 4), and expenses that are proven by documentary means with mention of all these elements, but not supported by an invoice, as is the case here.

A similar conclusion is valid in the domain of VAT, in which the obligation to issue invoices has long been crystallized and the "sacramental character" of the invoice is established. The consistent case law of the European Court in this matter is that "the fundamental principle of VAT neutrality requires that the deduction of this upstream tax be granted if the material requirements are met, even though taxpayers have neglected certain formal requirements. Therefore, when the tax authorities have the necessary data to know that the material requirements were met, they cannot impose additional conditions on the taxpayer's right to deduct the tax that may have the effect of eliminating that right (see, in that sense, judgments of 21 October 2010, Nidera Handelscompagnie, C-385/09, EU:C:2010:627, no. 42; of 1 March 2012, Kopalnia Odkrywkowa Polski Trawertyn P. Granatowicz, M. Wąsiewicz, C-280/10, EU:C:2012:107, no. 43; and of 9 July 2015, Salomie and Oltean, C-183/14, EU:C:2015:454, nos. 58, 59 and case law referred to therein)." – cf. Judgment of 15 September 2016, C-516/14, Barlis.

See, in this regard, the summary of the interpretation that has been made by the Court of Justice as contained in the CAAD decision in process No. 96/2018-T, of 30 October 2018:

"[…] the Court of Justice concludes that article 178, subparagraph a) of the VAT Directive must be interpreted as precluding national tax authorities from refusing the right to VAT deduction simply because the taxpayer possesses an invoice that does not meet the requirements laid down by article 226, number 6 of that directive, when those authorities have all the information necessary to verify whether the substantive requirements concerning the exercise of that right are satisfied – cf. Barlis Judgment, no. 43 and operative part.

This position had previously been endorsed in the Judgments of 30 September 2010, Uszodaépito kft, C-392/09; of 21 October 2010, Nidera, C-385/09; of 1 March 2012, Kopalnia (or Polsky Trawertyn), C-280/10; of 27 September 2012, VSTR, C-587/10; of 8 May 2013, Petroma, C-271/12; of 18 July 2013, Evita-K EOOD, C-78/12; of 6 February 2014, SC Fatorie, C-424/12 and of 11 December 2013, Idexx Laboratories, C-590/13. This consistent case law of the Court of Justice affirms that, without prejudice to the important documentary function of the invoice, insofar as it may contain verifiable data, provided that the substantive requirements are met and demonstrated, non-observance of formalities cannot, in principle, lead to the suppression of the right to VAT deduction, reinforcing that this "ensures the neutrality in the application of VAT, so it cannot be refused solely because the taxpayers neglected certain formal requirements, when the substantive requirements have been met" – cf. Judgment Uszodaépito kft, no. 38).

In the interpretation of the Court of Justice, the requirement to possess an invoice in all points compliant with the VAT Directive provisions would have an unacceptable consequence: that of calling into question the taxpayer's right to deduction, when the data can be validly proved by means other than an invoice – cf. no. 48 of Judgment Kopalnia.

Moreover, on this point, and as mentioned in arbitral decision No. 3/2014-T, of 6 December 2016, the Judgment of 12 July 2012, EMS Bulgaria, C-284/11, should be invoked, "which places the question of the effects associated with non-compliance with formalities in the sanctioning domain and not in the (very distinct) plane of the effects that are imperative or extinguishing of the exercise of the (substantive) right to deduction".

This understanding has been reinforced in later case law, namely in the Judgment of 15 November 2017, Rochus Geissel, C-374/15, which recalls that the right to VAT deduction cannot, in principle, be limited, and that the deduction regime aims to completely free the businessman from the burden of VAT due or paid in the course of all his economic activities, so VAT paid upstream must be deducted if the substantive requirements are met, even though taxpayers have neglected certain formal requirements (nos. 40 to 46 of Judgment Rochus Geissel).

Similarly, the Judgment of 15 September 2016, Senatex, C-518/14, reiterates the previous anti-formalist position and adopts the understanding that, should the rectification of invoices containing errors (or omissions) occur, the same produces (retroactive) effects on the date when the invoices were initially drawn up – Judgment Senatex, nos. 35 to 43 and operative part.

However, in situations of fraud, for example, when the violation of "formal requirements has the effect of preventing certain proof that the material requirements were observed", the Court of Justice confirms the admissibility, in light of European law, of refusing the right to deduction. In this case, it is necessary to demonstrate that the taxpayer "fraudulently failed to comply, which is for the referring court to verify, with most of the formal obligations incumbent upon it in order to benefit from this right." – cf. Judgment of 28 July 2016, Giuseppe Astone, C-332/15, no. 42 and point 2 of the operative part.

National doctrine is parameterized by European case law. According to Sérgio Vasques, "[t]he complexity surrounding the invoice regime and the margin of freedom still left to the member states in this matter have led to a multiplication of disputes before the CJEU relating to the formal requirements for exercising the right to VAT deduction. In its decisions the court, while reiterating the function of the invoice as support of the right to deduction, in correspondence with article 178 of the Directive, has allowed that on this formal requirement the substance of the operations prevail, whenever this proves necessary to ensure VAT neutrality and does not pose excessive risk" – cf. The Value Added Tax, Almedina, 2015, pp. 340-345 (excerpt from p. 341).

Miguel Durham Agrellos and Paulo Pichel, also with support in European case law, consider that formal defects are only capable of preventing the right to deduction if they "reasonably call into question the ability to correctly collect the tax and to carry out inspections by the tax authorities, such that this is not in a position to know the underlying material reality, given the elements presented by the taxpayer" – cf. "European Court Case Law on Invoice Formal Requirements and the Right to VAT Deduction", VAT Notebooks 2015, Coord. Sérgio Vasques, Almedina, 2015, pp. 191-211 (excerpt from p. 194).

Also Cidália Lança states that "according to the case law of that Court [Court of Justice], the principle of neutrality requires that VAT deduction be granted if the substantive requirements have been met, even if taxpayers have neglected certain formal requirements" – cf. Annotation to article 36 of the VAT Code: VAT Code and RITI Notes and Comments, Coord. and Organization by Clotilde Celorico Palma and António Carlos dos Santos, Almedina, 2014, p. 340.

If this is so for VAT purposes, a tax in which the invoice is fundamental, as it is in the invoice that the tax is assessed, the (legal) transfer to the recipient, and it is the basis for the exercise of the right to deduction ("a check on the Treasury"), and indirect subtractive method of VAT is called the "invoice method", all the more reason it should be in IRC.

In these terms, having the Petitioner proved the materiality of the operations involved in the pursuit of its activity, regarding which it possesses a collection of documents from whose combination result the essential descriptive elements required in article 23, number 4 of the IRC Code, and with no risk of fraud and evasion arising, the legal solution of the concrete case in light of the interpretation advocated of articles 23 and 23-A of the IRC Code is that of the deductibility of the expenses in question. This solution, which is reached at the infra-constitutional level, is, equally, the one that best corresponds to an interpretation in accordance with the principles of tax equality (in the aspect of tax capacity) and proportionality enshrined in the Constitution (articles 13, 18, number 2 and 103, number 2 of the Portuguese Constitution)."

Endorsing, with due respect, what was written in the judgment that has just been cited, the main problem that arises in the present case is to determine, not whether the expenses documented by the invoices identified above did not exist, but only whether the information provided by the Petitioner is sufficient to support the essentiality of these costs as required by article 23 of the IRC Code.

The documents relating to the costs in question are deemed sufficient to show that the Petitioner incurred the expenses to which they relate, which, as stated, is also not disputed by the AT.

For, as was written in the Decision of the STA of 05-07-2012, in case 0658/11, in doctrine that should be considered as in force "In the context of IRC, the supporting and justifying document of the costs for the purposes of the provisions of articles 23, no. 1, and 42, no. 1, subparagraph g), of the IRC Code, does not have to assume the essential formalities required for invoices in the context of VAT, since the requirement of documentary proof is not confused with nor exhausted in the requirement of an invoice, it being sufficient only a written document, in principle external and with mention of the fundamental characteristics of the operation, since unlike what happens with VAT, in the context of IRC, the justification of the cost constitutes a formal probative matter and, therefore, replaceable by any other kind of evidence.".

And, as was written in the Decision of the STA of 16-03-2005, in case 00340/03:

"1. In respect of properly documented expenses there must be presumed the veracity of the cost for the purposes of determining taxable profit in the context of IRC, which is why it is incumbent on the Tax Authority to allege the existence of elements capable of calling into question that veracity, in particular by the enumeration of objective, solid and consistent indicia, that translate a high probability that these documents do not title real operations.

1. In respect of undocumented or insufficiently documented expenses the burden falls on the taxpayer to prove the respective cost, as article 23 of the IRC Code requires him to do, by demonstrating that the operations were actually carried out, and it is possible for him for that purpose to resort to other means of evidence (namely to complementary means of documentary proof and witness evidence) to demonstrate and convince of the goodness of the corresponding accounting entry and of the illegality of the correction that the Tax Authority has carried out by virtue of such lack or insufficient documentation.".

Also in the Decision of the Court of Appeal of the South, of 20-04-2010, in case 03632/09, it can be read: "Thus, the ineffectiveness as evidence of the bookkeeping entries does not prevent their replacement by other means of evidence admitted in law and adequate to substantiate the justness of the assessment by proving the underlying commercial operation to the deficient recording or documentary support of that accounting entry.".

It is true that in the recent IRC reform the legislator came to establish increased requirements for supporting documents, very similar (article 23, number 4), or identical to those of VAT (article 23, number 6), but it should not be inferred therefrom that such requirements are as strict in IRC as in VAT, not least because the nature and structure of both taxes is substantially distinct, and, as is proficiently pointed out in the arbitral decision given in process 217/2018-T of the CAAD, even in the case of VAT it is understood that non-observance of formal elements is overlooked, provided this does not call into question the substantiality of the operations and does not pose a risk to tax revenue collection.

In the concrete case, it should be noted, first of all, that the argument justifying the AT emerges in some respects as contradictory, as for example when, regarding invoice FA 2015/318, it states, on the one hand, that it is "given the non-operated but due, discrimination in the invoice, of the actual services that its taxable base will comprise (...) prevented from assessing, for each of them, its effective connection with the activity taxed in the context of IRC and in the context of VAT." and, at the same time, that as regards "the only service mentioned therein, and because that same service, given its rationale, does not appear as necessary to obtain or ensure income subject to IRC.

In any case, reading the AT's corrective justification as a whole, it is verified that, in summary, it was understood that the incorrections or insufficiency in the invoices of various elements that should have been contained therein (taxable base, discrimination/denomination of services, quantity, unit price, date of performance of services), prevent the proof of the indispensability of the expenses.

This understanding is summarized in the following passage of the Inspection Report:

"the non-compliance with such formalities prevents the fiscal deductibility of the invoice, in the sphere of the purchaser, because such non-compliance results in an impossibility of connecting, based on the elements existing therein, the substance of the acquisitions that it evidences, with the taxable operations, exercised by the purchaser of the goods/services described therein, and that impossibility may result, either from an incorrect identification, and/or omission, of the realities that were subject of invoicing, and/or from an incorrect, and/or non-existent, quantification, and/or from an incorrect, and/or non-existent, indication of the date of performance of the operations".

Before proceeding, it should be noted that, objectively, the AT collected or presented no positive evidence whatsoever that raises any kind of doubt about the usefulness or necessity of the expenses in which the Petitioner, admittedly, incurred. Rather, the AT merely casts a Cartesian doubt over those charges, founded exclusively on the content of the invoices, and abstracting from other elements, and demanding evidence at the trial level, to accept their deductibility.

On the other hand, and as has already been seen, neither in the context of VAT, whose formalities are, notoriously, stricter, is it considered that proof of the formal requirements of the tax relevance of operations is limited to the document/invoice. In other words, and using the language of the Inspection Report, neither in the context of VAT is it considered that non-compliance with such formalities per se prevents the fiscal deductibility of expenses to which the document/invoice relates.

Finally, as regards the alleged impossibility of connecting the substance of the acquisitions to the taxable operations, i.e., of assessing the necessity of the expenses, presupposed by article 23 of the applicable IRC Code, the Inspection Report assumes a perspective long proscribed by established doctrine and case law in the matter, which amounts to the pretension of not only verifying the compatibility of the expense with the purposes pursued by the company, but of reviewing the relationship between the expense and the specific income of the taxpayer.

As was written in the Decision of the Court of Appeal of the South of 30-01-2007, in case 01486/06:

"IV.- The essential question of the fiscal consideration of business costs is rooted in the concept of indispensability inherent in article 23 of the IRC Code and on which is based the fundamental distinction between the cost actually incurred in the collective interest of the company and that which may result only from the individual interest of the partner, a group of partners or all of them and which cannot, therefore, be considered as a cost.

V.- This is an expense with a business purpose which does not mean it has an immediate and directly profit-making purpose, but has, in its origin and in its cause, a business purpose, the law granting the Tax Authority sufficient powers to refuse to accept as a tax cost expenses that cannot be considered compatible with the purposes pursued by the company."

The STA has also understood that "The concept of indispensability of costs, to which article 23 of the IRC Code refers, refers to costs incurred in the interest of the company or borne within the scope of activities deriving from its corporate purpose. Only when the costs result from decisions that do not meet such requirements, in particular when they do not have any affinity with the company's activity, should they be disallowed.".

As can be seen, proof of the essentiality of a provably incurred expense does not pass through a microscopic demonstration of the anatomy of the expense, but rather through the linking, from a point of view of reasonableness, to the "collective interest of the company", through the demonstration of a business cause and origin.

Within this framework, what the AT should seek to discern in the body of evidence (and not merely in the invoices) presented to it by the taxpayer is not to connect the substance of the acquisitions to the taxable operations, but to verify whether it does not show any affinity with the company's activity.

Moreover, and independently thereof, the fact is that it results from the evidence produced, consolidated in the facts established as proven, that services were effectively rendered to the Petitioner as invoiced, and such services are, objectively and by their nature, related to the Petitioner's activity.

Even in the situation where the AT (contradictorily, as has been seen) mentions that the bottling service, given its rationale, does not appear as necessary to obtain or ensure income subject to IRC, such judgment should not be accepted, given that, as the Petitioner is engaged in, as is proven and accepted by the AT, the production and marketing of beverages and olive oil, naturally the wine bottling service is not alien to the Petitioner's activity.

The AT's discourse justifying this point, in particular in stating that the reality of the Petitioner would be "characterized by the purchase and sale of wine already bottled, or already packaged in bags (bags)", could be relevant from the point of view of showing that such services were not rendered, namely that the services would not have been performed, due to absence of object. However, this was not the line followed by the AT, so, not questioning that they occurred, it must necessarily be considered that such services are related to the Petitioner's activity.

All of this is sufficient, therefore, to consider the essentiality of the expenses in question as demonstrated. And, once demonstrated, it will not be lawful to reason that the failure to prove the method of calculating the concrete amount of an expense – and/or its possible exaggeration – and, even less, that the failure to evidence this method of calculation in the invoice, implies the disallowance of that expense as a whole.

As was written in process 91-2012-T of the CAAD:

"Faced with the infeasibility of ascertaining which services were rendered and their indispensability, the tax administration notified the Petitioner to, among other things, specify, date and quantify these services.

The Petitioner provided clarifications, but, after thorough analysis, was unable to ascertain which intra-group services were rendered nor their quantification, nor their date.

As a result of this infeasibility of ascertainment, the tax administration understood that article 23 of the IRC Code was violated, by the Petitioner failing to prove the indispensability of the costs referred to in the achievement of the profits nor in the maintenance of the productive source and concluded that it had to give a negative answer to the question of whether "there was effectively an intra-group service provision" (...)

In the case at hand, having the tax administration concluded that it could not be ascertained which services were performed and their quantification, it adopted an understanding that amounts to the fact that none of the services rendered, which it was unaware of, was necessary to realize the profits or maintain the productive source.

This understanding has no correspondence with reality, since some services were rendered, as results from the factual matter fixed, so the assessment acts relating to the years 2007 and 2008, in the part in which they were based on corrections relating to "Management fees", are defective due to an error in the factual premises.

Moreover, having applied the regime of article 23 of the IRC Code to a situation to which it does not apply, those acts are defective due to a violation of law by error in the legal premises."

A distinct issue from the one just addressed would be that of the reasonableness of its quantification. It would be a matter of knowing whether, given that the services are provably rendered "indispensable for the realization of income subject to tax or for the maintenance of the productive source", as in this case they are, the value set and paid as consideration was appropriate or not.

This issue – which would slide into the domain of the problematic concerning transfer pricing – was not, however, raised by the AT.

Given the foregoing, in considering that deficient compliance with the formal requirements of documents supporting expenses (invoices) alone implies the impossibility of proving the connection of those with the Petitioner's activity, the tax assessment and collection acts that are the object of the present arbitral action, incurred in erroneous interpretation of articles 23/1, 3, 4 and 6, and 23-A/1/c), both of the applicable IRC Code, and should, therefore, be annulled, the arbitral petition thus succeeding.

The annulment of the tax assessments carries with it the consequent annulment of the interest assessments for late payment.

Accessorily, the Petitioner formulated a request for compensation for undue guarantee.

The arbitral decision on the merits of the claim that no appeal or objection is admissible binds the Tax Authority from the end of the period provided for appeal or objection, with the Administration being required, in the exact terms of the merits of the arbitral decision in favor of the taxpayer and until the end of the period provided for the voluntary execution of judgments of tax courts to restore the situation that would exist if the tax act that is the object of the arbitral decision had not been carried out, adopting the acts and operations necessary for that purpose, as expressly results from subparagraph b) of article 24 of the RJAT.

In the same provision "the legislator made clear that the effects provided for therein are "without prejudice to other effects provided for in the Code of Tax Procedure and Process". It is considered in this regard that the legislator is here referring to all effects that flow from the CPPT, for the taxpayer, and that are applicable after the consolidation in the legal order of a certain legal-tax situation, resulting from a final decision, whether it be ex gratia or judicial."

Notwithstanding the fact that the judicial objection process is essentially a mere annulment process, it may pronounce a condemnation of the Tax Authority to pay compensation for undue guarantee, as results from article 171 of the CPPT.

As was stated in the decision given in Process No. 28/2013-T "it is unequivocal that the judicial objection process comprises the possibility of condemnation to pay undue guarantee and is even, in principle, the appropriate procedural means to make such a request, which is justified by obvious reasons of procedural economy, as the right to compensation for undue guarantee depends on what is decided on the legality or illegality of the assessment act. The petition for constitution of the arbitral tribunal has as a corollary that it will be in the arbitral process that the "legality of the debt subject to enforcement" will be discussed, so, as results from the express content of number 1 of said article 171 of the CPPT, it is also the arbitral process that is appropriate to assess the request for compensation for undue guarantee."

It is thus concluded that this tribunal is competent to assess the request for compensation for undue guarantee provided.

The regime for the right to compensation for undue guarantee is contained in article 53 of the General Tax Law, which establishes the following:

"1. The debtor who, to suspend enforcement, offers bank guarantee or equivalent shall be compensated in whole or in part for the losses resulting from its provision, should they have maintained it for a period exceeding three years in proportion to the achievement in administrative appeal, judicial objection or opposition to enforcement that have as their object the guaranteed debt.

1. The period referred to in the preceding number shall not apply when it is verified, in ex gratia objection or judicial objection, that there was an error attributable to the services in the tax assessment.

2. The compensation referred to in number 1 has as its maximum limit the amount resulting from the application to the value guaranteed of the rate of indemnity interest provided for in this law and may be requested in the very process of objection or judicial objection, or autonomously."

3. Compensation for the provision of undue guarantee shall be paid by deduction from the tax revenue of the year in which the payment was made."

In the case at hand, it is verified that the error affecting the annulled assessment acts is attributable to the AT, as the assessments were carried out at its initiative and the Petitioner contributed in no way to that error being committed.

The Petitioner therefore has the right to compensation for the guarantee provided.

However, the costs incurred by the Petitioner to provide the guarantee were not alleged nor proved, so it is not feasible to fix the compensation to which it is entitled here, which may be carried out, if necessary, in execution of this decision.

C. DECISION

This Arbitral Tribunal decides to uphold in its entirety the arbitral petition formulated and, in consequence,

• Annuls the additional IRC assessment act No. 2018..., the interest assessment No. 2018... and the account reconciliation statement No. 2018..., with an amount payable of €94,287.98, relating to the year 2015, as well as the additional IRC assessment act No. 2018..., the interest assessment No. 2018... and the account reconciliation statement No. 2018..., with an amount payable of €14,830.38, relating to the tax period 2016;

• Condemns the Tax Authority to pay the Petitioner compensation for the provision of undue guarantee, in the terms indicated above; and

• Condemns the Respondent in the costs of the proceedings, in the amount fixed below.

D. Value of the Proceedings

The value of the proceedings is fixed at €109,118.36, in accordance with article 97-A, number 1, a), of the Code of Tax Procedure and Process, applicable by force of subparagraphs a) and b) of number 1 of article 29 of the RJAT and of number 3 of article 3 of the Regulation of Costs in Tax Arbitration Proceedings.

E. Costs

The amount of the arbitration fee is fixed at €3,060.00, in accordance with Table I of the Regulation of Costs in Tax Arbitration Proceedings, to be paid by the Respondent, once the petition was wholly successful, in accordance with articles 12, number 2, and 22, number 4, both of the RJAT, and article 4, number 5, of the cited Regulation.

Notify hereof.

Lisbon, 5 September 2019

The Presiding Arbitrator

(José Pedro Carvalho)

The Arbitrator Member

(Adelaide Moura)

The Arbitrator Member

(Ricardo Marques Candeias)