CAAD 535/2015-T: Deductibility of PEC Against Autonomous Taxation in IRC Under Article 90(2)(d) CIRC

ARBITRAL DECISION

The arbitrators Judge Dr. José Poças Falcão (arbitrator president), Dr. Óscar Barros and Dr. André Festas da Silva (arbitrator members), designated by the Deontological Council of the Administrative Arbitration Centre (CAAD) to form the Arbitral Tribunal, constituted on 04 November 2015, agree as follows:

I. REPORT

I.1

On 05 August 2015, the taxpayer A… (Portugal) S.A., with registered office in …, Neighbourhood of …, …-… Coimbra, Tax Identification Number …, requested, in accordance with the terms and for the purposes of article 2, paragraph 1, subsection a) and article 10, both of Decree-Law No. 10/2011 of 20 January, the constitution of an Arbitral Tribunal with designation of a panel of three arbitrators by the Deontological Council of the Administrative Arbitration Centre, in accordance with the provisions of article 6, paragraph 2, subsection a) of the said legal instrument.

The request for constitution of the Arbitral Tribunal was accepted by the Honourable President of CAAD and was notified to the Tax and Customs Authority (hereinafter referred to as AT or "Respondent") on 07 September 2015.

The Claimant did not proceed with the appointment of arbitrators, wherefore, under the provisions of article 5, paragraph 3, subsection a) and article 6, paragraph 2, subsection a) of the Regulations of Tax Arbitration (RJAT), the undersigned were designated by the President of the Deontological Council of CAAD to form part of the present Collective Arbitral Tribunal, having accepted in accordance with the legal provisions.

The AT submitted its response on 04 December 2015.

By order of 15.02.2016, the holding of the meeting provided for in article 18 of the RJAT was dispensed with, as there was no controversy regarding the essential facts for the proper decision of the case, and having rejected the request for production of witness evidence, it was decided that the proceedings should continue with written final submissions.

On 22 February 2016, the Claimant submitted its submissions.

The Respondent submitted its submissions on 8 March 2016.

The Claimant requests that the Arbitral Tribunal declare the illegality of the rejection of the administrative appeal No. … 2014 … and, likewise, the illegality of the self-assessment of Corporate Income Tax (IRC), including autonomous taxation rates, relating to the 2013 financial year, with respect to the amount of autonomous taxation rates in IRC of €70,000.00, with the corresponding annulment in this respect and the consequent reimbursement of this amount, plus compensatory interest at the legal rate from 30 May 2014 until full reimbursement.

I.A. The Claimant supports its Request, in summary, as follows:

On 29 May 2014, the current claimant submitted its Corporate Income Tax ("IRC") return, Model 22, for the 2013 financial year, at which time it proceeded to self-assess autonomous taxation in IRC for the same 2013 year in the amount of €78,174.37.

On 4 February 2015, the claimant submitted an administrative appeal against the aforementioned self-assessment relating to the 2013 financial year.

On 14 May 2015, the claimant was notified of the rejection of the aforementioned administrative appeal.

In accordance with the income return filed, in the financial year in question, A… determined a tax loss in the amount of €3,966,354.17, having nevertheless determined a total amount of tax payable of €78,138.67, tax which has been paid, and which resulted from the determination of autonomous taxation in IRC in the amount of €78,174.37, less the amount of €35.70 of source withholdings suffered, to the reimbursement of which A… was entitled.

On the other hand, with respect to special advance payments on account, there remains an amount to be deducted from the IRC assessment totalling €259,222, with the following distribution by financial year:

Previous financial years
2009: €49,222
2010: €70,000
2011: €70,000
Subtotal: €189,222
2013 financial year: €70,000
Total: €259,222

However, with respect to the tax resulting from the application of autonomous taxation rates in IRC, the AT's computer system prevents the claimant from entering the value relating to the said autonomous taxation rates in IRC,

...purged, i.e., deducted, within the scope of the IRC assessment resulting from the application of these rates, of the amounts of special advance payments on account still available (beginning with the oldest) for deduction from the IRC assessment, which were detailed above, which resulted in an excess tax paid by reference to the 2013 financial year at issue here.

That is, the AT's computer system, through which IRC is self-assessed, does not allow taxpayers to deduct, for the purposes of determining the IRC owed by them, the IRC resulting from autonomous taxation determined against the special advance payment on account.

That system does not therefore allow deduction of a portion of the advance payments made on account of the IRC that will be due finally – the special advance payments on account ("PEC") – to a part of the IRC finally effectively determined – the autonomous taxation.

It should be noted that, in the specific case, here what is at issue is taking into account €70,000.00 in special advance payments on account made by reference to the 2013 financial year, for the purposes of its application (deduction) to the assessment of autonomous taxation in IRC up to that same amount relating to the same 2013 financial year, an application which was refused by the AT.

The denial of the deduction of the PEC to the IRC assessment of autonomous taxation violates subsection c) of paragraph 2 of article 90 of the IRC Code (previously to 2010, article 83; and since 2014 it became subsection d) of the said paragraph 2 of article 90 of the IRC Code).

The contradiction is glaring: the AT, at the same time as it affirms, and the courts give it reason, that the assessment of autonomous taxation is an IRC assessment, from which results the application to the same of the rule applicable to the IRC assessment contained in subsection a) of paragraph 1 of article 45 of the IRC Code (wording and numbering in force until 2013), now denies that the assessment of autonomous taxation is IRC, and consequently also denies the application of subsection c) of paragraph 2 of article 90 of the IRC Code to the assessment of autonomous taxation.

Nowhere in the law is the deduction of these special advance payments on account from the IRC assessment or parts of the IRC assessment resulting from anti-tax evasion legislative measures excluded.

Therefore, if the AT understands that article 90 of the IRC Code does not include the IRC assessment resulting from autonomous taxation (determined in accordance with article 88), but only the IRC assessment resulting from taxable profit (determined in accordance with article 87), it would still have to be concluded that, after all, the taxation itself of autonomous taxation is, in itself, illegal.

Moreover, outside of this specific case, the AT has already understood that special advance payments on account are deductible from the IRC assessment comprised of autonomous taxation.

The AT understood that only tax credits for international double taxation would not be deductible from autonomous taxation.

The claimant paid tax in an amount greater than legally owed, wherefore, having declared the illegality of the (self-)assessment in the part here requested, the claimant is entitled not only to the respective reimbursement, but also, under article 43 of the General Tax Code ("LGT"), to compensatory interest.

In addition, the error from which the (self-)assessment against which complaint is made suffers results from an error by the Services regarding the legal presuppositions which conditioned the computer filling of the self-assessment return (Model 22), as mentioned above.

I.B. In its Response, the AT invoked the following:

It is recognised that the autonomous character of these taxation rates resulting from the special configuration given to the material and temporal aspects of the taxable events, requires, in certain areas, the exclusion or an adaptation of the general rules of application of IRC.

In reality, the integration of autonomous taxation into the IRC Code (and the Personal Income Tax Code), conferred a dualistic nature, in certain aspects, to the normative system of this tax, which was embodied, in particular, in the context of subsection a) of paragraph 1 of article 90 of the IRC Code, in separate determinations of the respective assessments, by virtue of obeying different rules.

And this, since, in one case, it is a matter of the application of the rate(s) of article 87 of the IRC Code to the taxable matter determined in accordance with the rules contained in Chapter III of the Code and, in another case, it is a matter of the application of rates to the values of the taxable matters relating to the different realities contemplated in article 88 of the IRC Code.

That is, contrary to what is stated in point 9 of the dissenting vote statement attached to the Arbitral Decision delivered in case No. 697/2014-T, there is not a single assessment of IRC, but rather two determinations.

That is, two distinct calculations which, although processed, in accordance with subsection a) of paragraph 1 of article 90 of the IRC Code, in the returns referred to in articles 120 and 122 of the same code, are effected on the basis of different parameters, since each is materialised in the application of its own rates, provided for in articles 87 or 88 of the IRC Code, to the respective taxable matters determined equally in accordance with their own rules.

Following the integration of autonomous taxation into the IRC Code, through Law No. 30-G/2010 of 29/12, the legislator does not appear to have felt the need to explicitly state, in a comprehensive manner – that is, in all the normative provisions where it manifests itself – the consequences of the coexistence of two forms of taxation within the IRC system, limiting itself to safeguarding the situations in which the exemption from IRC did not extend to autonomous taxation.

Well, when it comes to the deductions provided for in paragraph 2 of article 90 of the IRC Code, the claimant came to defend in the case – anchoring itself, with due respect, in a simplistic and decontextualised reading of this normative provision – that the expression "amount determined in accordance with the preceding paragraph" should be understood as encompassing the sum of the amount of IRC determined on the taxable matter determined in accordance with the rules of Chapter III and at the rates provided for in article 87 of the same Code, and the amount of autonomous taxation calculated on the basis of the rules provided for in article 88.

It should be noted that, furthermore, the result of this interpretation would imply that, in the basis of calculation of advance payments defined in paragraph 1 of article 105 of the IRC Code – and in terms identical to those used in paragraph 2 of article 90, namely: "Advance payments are calculated on the basis of the tax assessed in accordance with paragraph 1 of article 90 (…)" – autonomous taxation would be included.

Now, it should be stressed that the coherence and adequacy of this understanding is grounded in the very nature of advance payments of the tax owed finally, which, in accordance with the definition in article 33 of the LGT, are "monetary payments made in advance by taxpayers during the period of formation of the taxable event", constituting a "(...) form of bringing the moment of tax collection closer to the moment of perception of income so as to address situations where such approximation cannot be effected through source withholdings."

Therefore, in proper logic, it only makes sense to conclude that the respective calculation basis corresponds to the amount of the IRC assessment resulting from the taxable matter that is identified with the profit/income of the taxpayer's financial year.

In reality, it should be noted that the common feature in all the realities reflected in the deductions referred to in paragraph 2 of article 90 of the IRC Code lies in the fact that they relate to income or expenses incorporated in the taxable matter determined on the basis of the taxpayer's profit or advance payments of tax, and are therefore entirely unrelated to the realities that form the taxable events of autonomous taxation.

With respect to tax credits intended to eliminate international double taxation (legal and economic), the very normative provisions (articles 91 and 91-A of the IRC Code), which regulate their method of calculation, specify that the income in question must have been included in the taxable matter, a magnitude which, for obvious reasons, can only be the one determined on the basis of profit (Chapter III of the Code) which constitutes the central nucleus of IRC.

Moreover, the position defended by the AT has explicit support in the provision of paragraph 5 of article 90 of the IRC Code – through which the legislator provides a clear indication that the amount of tax assessed, to which the deductions referred to in paragraph 2 of the same article are effected, does not include the amount corresponding to autonomous taxation – in stating that the deductions which are allocated to the partners or members of entities covered by the transparent taxation regime established in article 6 (entities which are subject to the payment of autonomous taxation, by virtue of article 12) are "deducted from the amount determined on the basis of the taxable matter that took into account the allocation provided for in the same article".

By simple consequence of the preceding considerations which led to the conclusion that the deductions referred to in subsections a) and b) of paragraph 2 of article 90 of the IRC Code are effected to the "amount determined in accordance with the preceding paragraph", understood as the amount of IRC determined on the basis of the taxable matter determined in accordance with the rules contained in Chapter III and the rates of article 87 of the same Code, and descending to the specific case, it is possible to extend such conclusion to the deduction relating to special advance payments on account.

It suffices, for this purpose, to invoke the provision of paragraph 7 (in the 2013 version) of the same article, according to which "the deductions effected in accordance with subsections a), b) and c) of paragraph 2 cannot result in a negative value".

Thus, and by way of conclusion, we have that the legal nature of the PEC, revealed by its configuration as "an instrument or guarantee of payment of the tax on account of which it is required, and not as a tax in itself", as well as by the function associated with it in combating tax evasion and fraud, links this payment indissolubly to the amount of IRC determined on the taxable matter determined on the basis of profit (Chapter III of the Code).

It is therefore manifestly without any basis the pretension of the now Claimant to deduct the amount supported under special advance payment on account to the assessment produced by autonomous taxation in 2013.

One cannot attribute to the AT a position in a certain direction – which, curiously, appears in the case as favourable to the Claimant's pretension – when, on the matter in question, there has been no pronouncement leading to the conclusion that the express understanding was altered in the completion of the periodic income return, Model 22, which, as we have seen and demonstrated, completely rules out the possibility of deduction of special advance payments on account from the amount of autonomous taxation.

Even if compensatory interest could be configured in the situation on the record – and it cannot, by all that was stated above concerning the propriety of the impugned act on the record – its calculation would always have as its initial point the date of notification of the decision rejecting the administrative appeal procedure, that is, 14-05-2015, and never the moment indicated by the Claimant in its request.

II. PRELIMINARY MATTERS

The Tribunal is competent and is regularly constituted, in accordance with articles 2, paragraph 1, subsection a), 5 and 6, all of the RJAT.

The parties have legal standing and capacity.

The parties are legitimate and are legally represented, in accordance with articles 4 and 10 of the RJAT and article 1 of Ordinance No. 112-A/2011 of 22 March.

The proceedings are proper.

There are no other preliminary issues to be examined nor defects that invalidate the proceedings.

It is now necessary to examine the merits of the request.

III. THEMA DECIDENDUM

The essential issue to be examined is as follows:

Does or does not the Claimant have the right to proceed with the deduction, also from the IRC assessment produced by the application of autonomous taxation rates, of the special advance payments on account (PEC)?

IV. FACTUAL MATTER

IV.1. Proven Facts

Before proceeding to examine the issues, it is necessary to present the factual matter relevant to its understanding and decision, which, having examined the documentary evidence, the administrative tax proceedings attached and taking into account the facts alleged, is established as follows:

On 29 May 2014, the present claimant submitted its Corporate Income Tax ("IRC") return, Model 22, for the 2013 financial year, at which time it proceeded to self-assess autonomous taxation in IRC for the same 2013 year in the amount of €78,174.37.

On 4 February 2015, the claimant submitted an administrative appeal against the aforementioned self-assessment relating to the 2013 financial year.

On 14 May 2015, the claimant was notified of the rejection of the aforementioned administrative appeal.

A… determined a tax loss in the amount of €3,966,354.17, having nevertheless determined a total amount of tax payable of €78,138.67, tax which has been paid, and which resulted from the determination of autonomous taxation in IRC in the amount of €78,174.37, less the amount of €35.70 of source withholdings suffered, to the reimbursement of which A… was entitled.

The claimant paid €70,000.00 in special advance payments on account made by reference to the 2013 financial year.

The AT's computer system, through which IRC is self-assessed, does not allow taxpayers to deduct the amount resulting from autonomous taxation determined from the special advance payment on account processed in accordance with article 106 of the IRC Code (wording given by Law No. 66-B/2012, in force in 2013).

IV.2. Unproven Facts

There are no essential unproven facts, since all facts relevant to the examination of the request were deemed proven.

IV.3. Reasoning for the Factual Matter

The proven facts constitute uncontested matter and are documented in the proceedings.

Facts numbers 1 to 6 are accepted by agreement of the parties, by examination of the administrative proceedings and by the documents attached by the Claimant (documents 1 to 9 of the request to constitute the Tribunal).

V. THE LAW

Preliminary Notes

Autonomous taxation rates apply to certain expenses incurred by IRC taxpayers, which by their nature may present a more ambiguous connection to the realisation of income subject to taxation or the maintenance of the income source. Increasingly, the mechanism of autonomous taxation is used to discourage certain excesses in the occurrence of this type of expenses.

Contrary to what occurs with the philosophy inherent in the remaining provisions of the IRC Code, income is not taxed but rather expenses or costs.

With autonomous taxation, it is intended in some way to penalise taxpayers for the realisation of certain types of expenses or costs, in certain conditions, even though such taxpayers have incurred a tax loss and therefore in that financial year would not pay IRC.

The incidence of autonomous taxation is not limited to companies and other IRC taxpayers with profit-making purposes, and such taxation also extends to associations, foundations, institutions of particular social interest and other entities that do not exercise, on a principal basis, activities of a commercial, industrial or agricultural nature, and also to all entities that have income that is exempt or not subject to IRC.

With respect to autonomous taxation, it should be noted that these are determined independently and separately from the determination carried out in accordance with article 90 of the IRC Code (wording in force in 2013).

Developing further the question of the nature of autonomous taxation and its degree of connection with IRC:

It is necessary to go back to 1990 to find the first intervention by the legislator aimed at subjecting certain expenses to autonomous taxation, which occurred with the publication of Decree-Law No. 192/90 of 9 June, whose article 4 provided that "confidential or undocumented expenses incurred in the course of commercial, industrial or agricultural activities by personal income tax ("IRS") taxpayers who have or should have organised accounts or by IRC taxpayers not covered by articles 8 and 9 of the respective Code are taxed autonomously in IRS or IRC, as appropriate, at a rate of 10%, without prejudice to the provision in subsection h) of paragraph 1 of article 41 of the IRC Code."

This rule was subject to various subsequent amendments which successively increased the taxation rate provided for therein.

With this type of taxation, the intention was, on the one hand, to encourage taxpayers subject to it to reduce, as much as possible, the expenses that negatively affect tax revenue and, on the other hand, to prevent, through these expenses, companies from proceeding to disguised distribution of profits, especially dividends which would thus only be subject to IRC as company profits, as well as to combat the tax fraud and evasion that such expenses occasion not only in relation to IRS or IRC, but also in relation to the corresponding contributions, both from employers and workers, to social security.

Saldanha Sanches (see Manual of Tax Law, 3rd Edition, Coimbra Editora, 2007, page 407), regarding the autonomous taxation provided for in article 81, paragraph 3, of the IRC Code (wording of 2005, corresponding, in essence, to article 88-3, in the 2013 wording), wrote as follows: "In this type of taxation, the legislator seeks to respond to the admittedly difficult question of the tax regime for expenses that are located in the zone of intersection between the personal sphere and the business sphere, in order to avoid remuneration in kind that is more attractive for purely tax reasons or disguised distribution of profits. The rule presents a characteristic similar to what we will find in the legal sanction against undocumented costs, with an increase in the rate when the taxpayer's situation does not correspond to a situation of tax normality. If there is no profit in the taxpayer's return, the cost may be subject to a negative assessment: for example, we have a rate of 15% applied when the taxpayer has losses in the last two financial years and a light passenger vehicle was purchased for more than €40,000 (article 81, paragraph 4). With this provision, the system shows its dual nature, with an increased autonomous taxation rate for certain special situations that it is intended to discourage, such as the acquisition of vehicles for business purposes or vehicles that are in principle too expensive when losses exist. This creates a sort of presumption that these costs do not have a business cause and are therefore subject to autonomous taxation. In summary, the cost is deductible, but autonomous taxation reduces its tax advantage, since here the basis of taxation is not a net income but rather a cost transformed – exceptionally – into an object of taxation." (emphasis added).

Contrary to what happens in the taxation of income under IRS and IRC, in which all income earned in a given year is taxed (which implies that only at the end of that year can the tax rate be determined, as well as the bracket in which the taxpayer falls), in the case of autonomous taxation, each expense incurred is taxed, considered in itself, and subject to a certain rate, and autonomous taxation is determined independently of the IRC that is owed in each financial year, by virtue of not being directly related to the achievement of a positive result, and therefore subject to taxation.

Thus, in the case of IRC, we are faced with an annual tax, in which each income received is not taxed separately, but rather the aggregation of all income obtained in a given year, and the law considers that the taxable event of the tax is deemed to occur on the last day of the tax period (see article 8, paragraph 9, of the IRC Code).

As regards autonomous taxation in IRC, the taxable event of the tax is the very realisation of the expense, and we are not faced with a complex fact of successive formation over a year, but rather a punctual taxable event.

This characteristic of autonomous taxation refers us to the distinction between periodic taxes (whose taxable event occurs in a successive manner, through the passage of a certain period of time, as a rule annually, and tends to repeat itself over time, creating for the taxpayer the obligation to pay tax on a regular basis) and single-obligation taxes (whose taxable event occurs in a punctual manner, appears isolated in time, creating for the taxpayer an obligation to pay tax on an occasional basis).

In autonomous taxation, the taxable event that gives rise to the tax is punctual: it is exhausted in the act of realisation of certain expense that is subject to taxation (although the determination of the amount of tax resulting from the application of the various taxation rates to the various acts of expense realisation considered will be carried out at the end of a certain tax period). But the fact that the assessment of the tax is carried out at the end of a certain period does not transform it into a periodic tax, of successive formation or of a lasting character. This operation of assessment is merely the aggregation, for the purpose of collection, of the set of operations subject to that autonomous taxation, to which the rate is applied to each expense, with no influence from the volume of expenses incurred on the determination of the rate.

In this case we are faced with a tax with a single obligation, applying to operations that are produced and exhausted in a punctual manner, in which the taxable event of the tax appears isolated in time, creating for the taxpayer an obligation to pay tax on an occasional basis. That is, the autonomous taxation rates analysed here do not refer to a period of time, but to a moment: that of the isolated operation subject to the rate, without prejudice to the fact that the determination of the amount owed by economic agents subject to the said "rate" is carried out periodically, at a certain moment, together with other similar operations, without the combined assessment affecting its result.

For this reason, Sérgio Vasques (see Manual of Tax Law, Almedina, 2011, page 293, note 470) draws attention to the fact that income taxes include single-obligation elements, such as the liberatory rates of IRS or the autonomous taxation rates of IRC.

Autonomous taxation, in accordance with its original regulation, constituted a sort of substitute for the regime of non-deductibility previously provided for in the IRC Code.

Indeed, in its genesis was the fiscal non-acceptance of a percentage of certain expenses, and autonomous taxation was an alternative and more effective form of cost correction whenever it is a matter of areas more prone to tax evasion (travel allowances, representation expenses, vehicle expenses, etc.).

Thus, it would not be reasonable (in fact contrary to the reason that led the legislator to autonomously tax those expenses) that, through their deduction from taxable profit as expenses, the foundation for the existence of autonomous taxation be eliminated.

The arbitral case law has decided that autonomous taxation belongs, as a rule, systematically, to IRC, and not to value-added tax, IRS, or any other tax in the Portuguese tax system. This is the case, among others, of the arbitral cases delivered within the scope of CAAD, Nos. 166/2014-T, 246/2013-T, 260/2013-T, 282/2013-T, 6/2014-T and 36/2014-T, 697/2014-T.

Superior Courts have also understood that "autonomous taxation, although formally inserted in the IRC Code, has always been given its own treatment, since it does not apply to income, whose formation is occurring throughout the year, but rather to certain individual expenses that represent autonomous taxable events subject to different rates from those of IRC" (…) "Although it is a form of taxation provided for in the IRC Code, it has nothing to do with the taxation of income, but rather with the taxation of certain expenses, which the legislator understood, for the reasons pointed out above, to do so in an autonomous manner." (Decision of the Higher Administrative Court of 21/03/2012, case 830/11 and, in the same sense, Decision of the Higher Administrative Court of 06/07/2011, case No. 0281/11, Decision of the Higher Administrative Court of 17.04.2013, case No. 166/13, Decision of the Higher Administrative Court of 21.01.2015, case No. 04710/14 and Decision of the Administrative Court of Appeal of 16.10.2014, case No. 06754/13).

The Constitutional Court, in Decision No. 617/2012 of 31/01/2013, defended that in autonomous taxation, the taxable event that gives rise to the tax is punctual, since "it is exhausted in the act of realisation of certain expense that is subject to taxation (although the determination of the amount of tax resulting from the application of the various taxation rates to the various acts of expense realisation considered will be carried out at the end of a certain tax period). But the fact that the assessment of the tax is carried out at the end of a certain period does not transform it into a periodic tax, of successive formation or of a lasting character. This operation of assessment is merely the aggregation, for the purpose of collection, of the set of operations subject to that autonomous taxation, to which the rate is applied to each expense, with no influence from the volume of expenses incurred on the determination of the rate."

And in Decision No. 310/12 of 20 June, the Constitutional Court considered that "(…) contrary to what happens in the taxation of income under IRS and IRC, in which all income earned in a given year is taxed (which implies that only at the end of that year can the tax rate be determined, as well as the bracket in which the taxpayer falls), in this case each expense incurred is taxed, considered in itself, and subject to a certain rate, and autonomous taxation is determined independently of the IRC that is owed in each financial year, by virtue of not being directly related to the achievement of a positive result, and therefore subject to taxation."

The generality of legal doctrine does not depart from the understanding of the superior courts. Thus, as Professor RUI MORAIS teaches, "this is a taxation that applies to certain expenses of taxpayers, which are considered to constitute taxable events. It is difficult to discern the nature of this form of taxation and, even more so, the reason why it appears provided for in the codes of income taxes." (RUI DUARTE MORAIS, Notes on IRC, Almedina, 2009, pp. 202-203).

And CASALTA NABAIS also considers that it is "taxation on expense and not on income" (CASALTA NABAIS, Tax Law, 6th ed., p. 614).

In the same line, Professor Ana Paula Dourado asserts that "it is consensual that autonomous taxation reaches the expense of the taxpayer-contributor and not its income." Tax Law, 2015, Almedina, page 237.

It is therefore not questionable that the mechanism of autonomous taxation of the set of realities provided for in article 88 of the IRC Code aims, primarily, to protect the general equilibrium of the tax system itself, the specific equilibrium of IRC and the revenue of the tax itself. That is, to prevent the significant manifestation of expenses such as those provided for in article 88 from introducing distortions affecting the system and expectations regarding what should be the "normal" revenue of the tax. In this case, as is also well known, it is a matter of discouraging the realisation/manifestation of these expenses, starting because, by their nature and purposes, they can more easily be subject to diversion to consumption that, in essence, is private or correspond to expenses that do not cease to have, also, as a specific and ultimate purpose, the avoidance of tax. These are realities that, as was previously noted, present some degree of culpability in that, although not directly violating the law, they generate significant and important imbalances in the general idea of justice, on the fundamental duty to contribute in proportion to their wealth, equality, sacrifice, proportionality of the tax measure in the face of possible manifestations of wealth, taxation of actual income and justice.

Operating in a different manner from what constitutes the essential scope of IRC – which taxes income – autonomous taxation, it is reiterated, taxes certain specific expenses or charges – and constitutes an instrumental, accessory reality of that tax, to the extent that it is in function of it that they were instituted and are therefore capable of being recognised as having an instrumentality or accessory nature of purposes, rooted in the safeguarding of the purposes of the tax itself where they manifest themselves.

It is thus certain that autonomous taxation does not constitute IRC in the strict sense but is imbricated with it, and should be contained in the "other taxes" of which we are informed by the final part of subsection a) of paragraph 1 of article 45 of the IRC Code (wording in force in 2013).

Revelations of this functional connection, and within the context of the legislator's intention as a whole, stand out, for example, from the discipline of article 12 of the IRC Code regarding entities subject to the transparent taxation regime, by not taxing them in IRC, "except as regards autonomous taxation", a relationship that equally manifests itself in view of paragraph 14 of article 88 of the IRC Code, in the sense that autonomous taxation rates take into account whether or not the taxpayer presents a tax loss.

Analysed further from another perspective, autonomous taxation must be considered in the context of specific anti-abuse rules and their similarity with the regime provided for in paragraph 1 of article 65 of the IRC Code ("sums paid or owed, in any capacity, to natural or legal persons resident outside the territory of Portugal and there subject to a clearly more favourable tax regime are not deductible for the purposes of taxable profit, unless the taxpayer can prove that such expenses correspond to operations actually carried out and do not have an abnormal character or an exaggerated amount").

Aiming at autonomous taxation to reduce the tax advantage achieved with the deduction from taxable profit of the costs on which it applies, and also to combat tax evasion which this type of expense, by its nature, encourages, it cannot itself through its deduction from taxable profit as an expense of the financial year constitute a factor of reduction of that reduction of advantage intended and determined by the legislator.

Concluding: autonomous taxation, which applies to expenses that are deductible in IRC, is part of the regime and is owed under this tax, and the expenses relating to the payment of such autonomous taxation do not constitute expenses deductible for the purposes of determining taxable profit.

This understanding was recently clarified by article 3 of Law No. 2/2014 of 16 January, which added article 23-A to the IRC Code (at the same time that its article 13 repealed article 45) with the following wording:

Article 23-A) – Expenses non-deductible for tax purposes

"1. The following expenses are not deductible for the purposes of determining taxable profit, even when accounted for as period expenses:

the IRC, including autonomous taxation, and any other taxes that directly or indirectly affect profits".

No doubt remains as to the interpretative character of the transcribed rule, in accordance with the rules of legal hermeneutics; in practice, such rule expresses what the legislator has always understood and continues to understand, namely that the expenses resulting from the cost associated with autonomous taxation are not relevant for the purposes of determining taxable profit.

Special Advance Payments on Account (PEC)

This regime is provided for in articles 106 of the IRC Code and 33 of the LGT.

The PEC is an advance payment on account of a fact that is in formation, that is, it presupposes a taxable event of a single obligation as opposed to periodic taxable events.

The PEC was created with the purpose of guaranteeing a minimum collection of tax, and this was even its first designation in the discussion of the Budget proposal for 1998.

This requirement of minimum collection arose from the observation that the vast majority of companies did not present taxable profit and/or that this was in most cases insignificant.

Like autonomous taxation, the PEC functions as a presumption of income and as a form of combating tax evasion, obliging some companies to pay at least some tax.

The PEC is also used as a "fiscal anaesthesia mechanism", making the time between the taxable event and the payment of tax shorter. Although the regime of autonomous taxation has as its foundation the taxation of presumed income, it differs from the regime of PEC, in that the payment of autonomous taxation is final and is not subject to subsequent adjustments.

The PEC regime has many other specificities that it would now be inappropriate to mention; attention is only drawn to the possibility that the value supported may be deducted from the assessment, making it much less burdensome for companies than autonomous taxation.

Furthermore, companies may, in certain circumstances, obtain reimbursement of the PEC supported, if they cannot deduct the entire value, thus functioning as a way to defeat the presumption of income that results from this institution.

The incidence of PEC is based on the volume of sales relating to the preceding tax period, in accordance with the cited article 106-2 of the IRC Code, and payments are made during the period of formation of the taxable event. (In this sense, António Lima Guerreiro, LGT Annotated, Rei dos Livros Publishing, page 167).

Although its relationship with tax capacity is not obvious, the volume-of-sales criterion is closer to a notion of income than the expenses subject to autonomous taxation.

Since the creation of PEC, problems of constitutionality have been raised, due to its departure from, in particular, the principle of tax capacity. The fact is that, despite the heated debate, the PEC institution endures.

From the above it is evident and in conclusion that the deduction of the PEC payment in 2013 is not deductible from the amount of autonomous taxation determined in the return submitted by the Claimant relating to the same period.

Compensatory Interest

If, as is inferred from the above, the impugned tax act does not suffer from the defects invoked, it must be maintained and, consequently, the request for compensatory interest should also be judged unfounded.

VI. DECISION

In accordance with the above, the members of this Arbitral Tribunal agree to:

1. Judge entirely unfounded the request for declaration of illegality of the act of rejection of the administrative appeal No. … 2014 … and the resulting self-assessment of IRC, including autonomous taxation rate relating to the 2013 financial year;

2. Maintain entirely the tax acts that are the subject of this proceedings;

3. Judge moot the examination of the other requests made in the record; and

4. Condemn the Claimant to pay the costs of the proceedings, as detailed below.

Value of the Proceedings

In accordance with the provisions of article 306, paragraphs 1 and 2, of the Code of Civil Procedure and article 97-A, paragraph 1, subsection a), of the Code of Tax Procedure and article 3, paragraph 2, of the Regulations of Costs in Tax Arbitration Proceedings, the value of the proceedings is fixed at €70,000.

Costs

In accordance with article 22, paragraph 4, of the RJAT, the amount of costs is fixed at €2,448.00, in accordance with Table I attached to the Regulations of Costs in Tax Arbitration Proceedings, to be borne by the claimant, A… (Portugal) S.A.

Let notification be made.

Lisbon and CAAD, 27-4-2016

The Arbitral Tribunal

(Dr. José Poças Falcão – Arbitrator President)

Dissenting, in accordance with the statement attached

(Dr. Óscar Barros)

(Dr. André Festas da Silva)

DISSENTING VOTE STATEMENT

I disagree with the position taken by the majority, for the reasons set out below:

1. The primary question raised is whether the Claimant has or does not have the right to proceed with the deduction of the special advance payment on account (PEC) from the part of IRC that results from the application of autonomous taxation rates.

2. The first aspect to examine is, in my view, that relating to the characterisation of autonomous taxation under IRC, that is, in the specific case, concluding whether autonomous taxation is or is not part of IRC.

3. To this end, in the articles of the IRC Code in force in 2013, there are some references to autonomous taxation that help us to conclude as to the nature of the tax that results from autonomous taxation rates.

4. In this regard, note in particular the provision of article 12, when it states that "companies and other entities to which, in accordance with article 6, the transparent taxation regime applies are not taxed in IRC, except as regards autonomous taxation". That is, those entities are taxed in IRC in what results from autonomous taxation rates, however, as regards the remaining part of IRC, specifically that resulting from the application of the rate provided for in article 87, paragraph 1 of the IRC Code, their taxation under this tax is not verified.

5. On the other hand, the extensive case law on the characterisation of autonomous taxation as an element forming part of the provision of article 45, paragraph 1, subsection a) of the IRC Code, with the wording prior to the last tax reform of IRC, adopts the position that autonomous taxation is IRC.

6. Moreover, if there were any doubt that the tax resulting from autonomous taxation is also IRC, the wording given to article 23-A, paragraph 1, subsection a) of the same Code dissipated it, since it states "the IRC, including autonomous taxation, and any other taxes that directly or indirectly affect profits", that is, the current wording of the said rule reiterates that IRC as a whole is also composed of the tax resulting from autonomous taxation.

7. In conclusion, I have no doubt that the tax resulting from autonomous taxation rates is effectively IRC.

8. Having clarified the question of whether autonomous taxation is or is not IRC, the question that now matters to examine is - if autonomous taxation resulting from the application of the rates provided for in article 88 of the IRC Code has a common assessment regime with IRC that results, for example, from the rate provided for in article 87, paragraph 1 of the same Code, being therefore included in the regime provided for in article 90 of the IRC Code, or whether, conversely, they are based on assessment regimes that are autonomous to each other.

9. Indeed, the only rule where the assessment of IRC is provided for is that contained in article 90 of the IRC Code, and there is no other provision in the mentioned Code on the assessment of autonomous taxation.

10. Now, if it were not concluded that autonomous taxation is not the subject of assessment through the regime of assessment of IRC provided for in article 90 of the IRC Code, it would have to be admitted that the tax resulting from autonomous taxation had no regulatory provision that allowed assessment of the tax, which does not appear to be the case. This is therefore not the understanding which, in my opinion, should prevail, but rather that, being autonomous taxation a component of IRC, and given the absence of any other provision in the IRC Code that provides for the assessment of that component of IRC, the assessment of that tax resulting from the application of autonomous taxation rates can only be carried out in accordance with article 90 of the IRC Code.

11. In these circumstances, the assessment of IRC as a whole is processed in accordance with article 90, paragraph 1 of the IRC Code, with the deductions permitted being enumerated in paragraph 2 of the same article, among which is the deduction of PEC. Specifically, the deduction is admitted in article 90, paragraph 2, subsection c) "relating to the special advance payment on account referred to in article 106".

12. Now, as to limitations on these deductions, in particular as to the deduction of PEC, paragraph 7 of the cited article limits its deduction up to the amount of the tax assessed in accordance with paragraph 1 of the same article, that is, the deduction of PEC cannot result in a negative value, to be reimbursed to the taxpayer.

13. Furthermore, article 93 of the IRC Code also imposes additional limitations on the deduction of PEC.

14. Indeed, PEC can only be deducted after the deductions corresponding to international double taxation and tax benefits have been made.

15. The final limitation is related to the timing of the deduction. Thus, in accordance with article 93, paragraph 1, the deduction of PEC is effected in the same tax period in which the PEC is made, however, in case of insufficient (self-)assessed tax, its deduction is limited to the fourth following tax period.

16. There are therefore no other limitations in the general regime to the deduction of PEC from the amount of tax assessed in accordance with article 90, paragraph 1 of the IRC Code.

17. Thus, once the mentioned limitations are not verified, in accordance with article 90, paragraph 2, subsection c) of the IRC Code, the PEC can be deducted from the IRC assessed in accordance with paragraph 1 of the same article.

18. Finally, it is important to note that the motivations, nature, purposes and incidence of autonomous taxation and its comparison with the part of IRC that results from the application of the general rate provided for in article 87, paragraph 1 of the IRC Code, as well as those relating to the motivations and nature of PEC, and although recognising the merit and importance of the same for reaching an adequate understanding and correct knowledge of the tax, in my view, such elements are not decisive for the analysis and conclusion of the issue at hand.

19. For all that has been stated, I understand that:

• The tax resulting from the application of autonomous taxation rates provided for in article 88 of the IRC Code is part of IRC;

• The assessment of IRC, including the IRC that results from autonomous taxation, operates in accordance with article 90, paragraph 1 of the IRC Code, so much so that there is no other regime for the assessment of the tax resulting from autonomous taxation rates;

• In accordance with article 90, paragraph 2 of the IRC Code, provided that the limitations on the deduction of PEC provided for in paragraph 7 of the same article and article 93, paragraph 1 also of the IRC Code are not verified, the PEC is capable of deduction from the assessed IRC, of which the IRC relating to autonomous taxation forms an integral part.

1. In conclusion, I understand that the PEC is capable of deduction from the IRC assessed by application of autonomous taxation rates, however, it must be considered that the limitations on the deduction are legally provided for in the IRC Code and already mentioned above, therefore I dissent from this arbitral pronouncement.

Lisbon and CAAD, 27-4-2016

(Dr. Óscar Barros)

[1] References in this text to the IRC Code will be to that in force in the period at issue in the case (2013), unless other specifications are omitted.

[2] On this matter, see José João Avillez Ogando, The Constitutionality of the PEC Regime, Supplement of the Bar Association Journal, Year 62, III, December 2012.

[3] In force since 01 January 2014.

[4] The current wording of article 23-A, paragraph 1, subsection a) of the IRC Code introduced with the tax reform of IRC effective from 01 January 2014 corresponds to the provision contained in article 45, paragraph 1, subsection a) of the same Code in force before the said tax reform.