Summary
Full Decision
ARBITRAL DECISION
The Arbitrator Dr. Filipa Barros (sole arbitrator), designated by the Deontological Council of the Administrative Arbitration Center ("CAAD") to form the Sole Arbitral Tribunal, constituted on 25 November 2016, decides as follows:
I. REPORT
The company A…, LDA. legal entity no. …, with registered office at Rua dos…, no. …, …, hereinafter "Claimant", hereby requests, pursuant to the provisions of article 2, no. 1, paragraph a), article 6, no. 1 and article 10, no. 1 paragraph a) and no. 2, all of Decree-Law no. 10/2011, of 20 January, hereinafter referred to as "RJAT"[1], the constitution of an Arbitral Tribunal to pronounce on the illegality and consequent annulment of the Corporate Income Tax assessments and compensatory interest, relating to the year 2014, issued under nos. respectively 2016…, 2016 …/… and 2016…, in the total amount of € 24,714.35.
To substantiate its request, the Claimant considers, in summary, that in the course of its activity of buying and selling real estate for construction, it made in 2009 a payment of €100,000.00 for the acquisition of a plot of land, in a transaction that turned out to constitute a fraud crime to its own detriment. In fact, neither could the land be sold, nor was the amount paid ever refunded, therefore, since such circumstances were duly proven by a judgment of conviction, it is necessary to recognize the aforementioned payment as a fiscal cost, essential to the exercise of its respective activity, and therefore, deductible from the taxable income of the 2014 tax period, in accordance with article 23 of the Corporate Income Tax Code.
It argues that despite the conviction of the perpetrators of the fraud to return the amount in question, the Claimant was never able to recover the aforementioned value, having given up doing so following an opinion issued by its legal representative, according to which the perpetrators of the fraud would not have attachable assets to satisfy the Claimant's credit.
In view of the foregoing, the Claimant recognized the expense in account 684 – inventory losses – sub-account 6848, as a contra-entry to account 39235 – advance for purchases, considering that such amount should be accepted as a fiscal expense either through its classification as an inventory breakdown, or through an inventory adjustment or even through impairment losses on receivables, under penalty of violation of the principle of taxation on actual profit, enshrined in articles 13 and 104, no. 1 and 2 of the Constitution of the Portuguese Republic.
On 31 August 2016, the request for constitution of the Arbitral Tribunal was accepted by the Honorable President of CAAD and immediately notified to the Respondent in accordance with legal procedures.
The Claimant did not proceed to appoint an Arbitrator.
Thus, in accordance with and for the purposes of the provisions of no. 1 of article 6 and paragraph b) of no. 1 of article 11 of RJAT, by decision of the Honorable President of the Deontological Council, duly communicated to the parties, within the legally prescribed periods, the undersigned was designated as arbitrator of the Sole Arbitral Tribunal, and communicated to the Deontological Council and to the Administrative Arbitration Center the acceptance of the mandate within the period stipulated in article 4 of the Code of Ethics of the Administrative Arbitration Center.
In compliance with the provisions of paragraph c), of no. 1, of article 11 of Decree-Law no. 10/2011, of 20 January, as amended by article 228 of Law no. 66-B/2012, of 31 December, the Sole Arbitral Tribunal was constituted on 25 November 2016, followed by the pertinent legal procedures.
The Respondent, duly notified for this purpose, presented its answer by way of objection, in which it argues for the dismissal of the request for arbitral pronouncement.
To this end, it argues that the amount recorded as an expense should not be accepted for purposes of fiscal deductibility under the provisions of article 23 of the Corporate Income Tax Code, either through inventory breakdown as recorded by the Claimant, or through inventory adjustment or impairment losses on receivables.
According to the Respondent, in order for there to be an inventory breakdown, it would be necessary that such asset was part of the inventory and that it had suffered a normal breakdown (by deterioration) or abnormal breakdown (theft of goods), which was not the case. As for inventory adjustment, since the land never formed part of the Claimant's inventory, there can be no inventory adjustment, since the legal requirements imposed by articles 28 and 28-A of the Corporate Income Tax Code are not met.
The Respondent also contests the classification of the aforementioned advance within the scope of article 28-A under the heading "Losses by impairment in receivables" understanding that such provision only covers credits resulting from normal activity, being these those originated by sales of goods and provision of services that are proper to the objectives or main purposes of the company, being literally excluded credits from mere financial operations, such as advances to suppliers, and such value cannot be accepted as a fiscal expense under the provisions of article 28, no. 1 paragraph a) and 28-A of the Corporate Income Tax Code.
It concludes for the dismissal of the request for arbitral pronouncement.
On 16 January 2017, given that, in this case, none of the purposes legally entrusted to it were present, and having regard to the position taken by the parties, under the provisions of articles 16 paragraph c), 19 and 29 no. 2 of RJAT, as well as the principles of procedural economy and the prohibition of performing useless acts, the holding of the meeting referred to in article 18 of RJAT was dispensed with, and the parties were notified to present successive written arguments within the period of 10 days.
In the arguments presented, the parties merely reproduced the positions defended in their respective pleadings.
II. PROCEDURAL SANITATION
The Arbitral Tribunal is materially competent and is properly constituted, in accordance with articles 2, no. 1, paragraph a), 5 and 6, no. 1, of RJAT.
The parties have legal personality and capacity, are legitimate and are properly represented, (cf. articles 4 and 10, no. 2 of RJAT and article 1 of Ordinance no. 112-A/2011 of 22 March).
The process is not affected by any nullities.
III. REASONING
1. Facts deemed proven
The facts were deemed proven on the basis of the documents attached in the administrative proceeding, the request for arbitral pronouncement and the response presented by the Tax Authority, as indicated below.
1) The Claimant is a commercial company under Portuguese law, whose corporate purpose consists of the buying and selling of real estate and building construction, being classified under CAE 68100;
2) For corporate income tax purposes, the Claimant is classified under the general regime, by virtue of paragraph a), no. 1 of article 2 of the Tax Code;
3) In the course of its activity, the Claimant purchases land for future construction or mere resale;
4) In the purchase of land, it is customary to execute purchase and sale promise agreements where deposits are made;
5) In March 2009, the Claimant made a payment of €100,000.00, as a deposit, with a view to acquiring half of a plot of land for construction located in…, parish of… and Municipality of Cascais, registered in the cadastre and described in the Land Registry Office under no. … and …;
6) The delivery of the deposit was recorded in the accounts as an advance for purchase;
7) The projected transaction turned out to constitute a crime of Fraud, because the company owning the land did not have it for sale nor intended to sell it;
8) The Claimant, as soon as it became aware of the fraud scheme, brought a declaratory action for condemnation against B… and C… in order to obtain the restitution of the deposit paid in the amount of €100,000.00;
9) On 27 February 2012, by judgment handed down by the Civil Court of Lisbon (…Court, case no. …/11… TVSB) this Court decided to condemn the said Defendants in the following terms:
"Based on the foregoing, and in accordance with the legal provisions cited, I find this action well-founded and, as a consequence, I decide:
a) To condemn the Defendants to pay to the Claimant the sum of €100,000.00 (one hundred thousand euros), as compensation for patrimonial damages;
b) To condemn the Defendants to pay to the Claimant the amount corresponding to default interest, accrued, from 12 March 2009, and accruing, calculated on the sum of €100,000.00 (one hundred thousand euros) calculated at the successive supplementary rates of legal interest fixed for civil interest, until actual payment.
Court costs by the Defendants (art. 446, no. 1 and no. 2 of C.P.C."
10) The Claimant requested its legal representative appointed in case no. …/11… TVSB (case of conviction for fraud of defendants B… and C…) to issue an opinion regarding the status of proceedings aimed at the enforcement of the amount of €100,000.00;
11) On 11 June 2014, Dr. D…, legal representative of the Claimant in case no. …/11… TVSB, issued a written opinion where he pronounces, among other things, on the possibility of collecting the debt in the amount of €100,000.00;
12) In the opinion issued by the Claimant's legal representative, the following is stated: "Furthermore, those judicial proceedings were both conducted in default of C…, who had fled to Brazil, where, to the best of his knowledge, he continues to be 'on the run', as, having been arrested, he managed to escape and has never been heard from again, so much so that the Public Prosecutor's Office itself abstained from taking action for the collection of costs owed to the Court in the Civil Action because he had been "...served by publication and no attachable assets were known to him; There is, therefore, no real and effective possibility of collection from C…, because, if there had been, the Public Prosecutor's Office itself would have taken action for the collection of costs owed to the Court; as for B…, the asset investigations we conducted did not reveal the existence of any assets or attachable income, and even the Public Prosecutor's Office only managed to find the salary he would have earned as a receptionist at the company "E…", which even if it continues (which is unknown), would have been attached for payment of costs owed to the Court.
It is, therefore, my opinion that the continuation of this case has no chance of success and will only further aggravate the losses already incurred by "A…", which is why it seems to me, from a cost-benefit perspective, that the company's interests would be better protected if we stop here (without prejudice, obviously, to being able to reopen the proceedings if, by chance, any of the aforementioned C… and B… should acquire assets and/or income that they clearly do not have today, at least in their name)."
13) Given the understanding that the deposit would never be recovered, the Claimant assumed in 2014 an accounting and fiscal loss, recognizing the €100,000.00 as an expense in account 684 – inventory losses, sub-account 6848 – as a contra-entry to account 39235 – advance for purchase;
14) On 21 January 2016, the Claimant was notified by letter no. … of 21-01-2016, to send documentation and provide clarifications regarding the 2014 tax year, specifically, the justification and documentation of the amount recorded as an expense in the amount of €100,000.00, relating to inventory losses of that year;
15) On 10 February 2016, the Claimant was subject to a tax inspection of partial scope, authorized under Service Order no. OI2016…, issued by the Tax Inspection Service of the Finance Directorate of…, for reasons of control of the real estate promotion and mediation sector;
16) Based on the conclusions found in the Tax Inspection Report (hereinafter RIT), the contents of which are hereby fully reproduced, "the taxpayer recorded as an expense in account 684 – Inventory losses, sub-account 6848 – other losses, the amount of 100,000.00€ as a contra-entry to account 39235 – advance for purchase.
The document supporting the recognition of the expense is a letter from the law firm F… which, in its capacity as judicial representative of A…, in the civil action brought against C… and B… report the facts found, namely that the advance made in 2009 to these two gentlemen, in the amount of €100,000.00, with a view to acquiring half of a plot of land for construction located in…, parish of…, municipality of Cascais, registered in the cadastre and described in the Land Registry Office under no. … and …, was nothing more than a "fraud" and that the probability of A… being reimbursed for the amount in question is low or nil (Annex 3).
(...)
Having analyzed the situation against the fiscal legislation, more specifically, against the provisions of the corporate income tax code, it is important to ascertain whether the amount recorded as an expense is or is not accepted as a fiscal expense, either through inventory breakdown or impairment losses on receivables. And as regards the situation in question, I must inform the following:
- The amount of €100,000.00 does not have the characteristics of an inventory breakdown. In order for there to be an inventory breakdown, the first situation was that such asset was part of the inventory and that there had been a breakdown either normal (by deterioration of the asset, waste) or abnormal (theft of goods), which does not apply to the situation in question;
- As for inventory adjustment, article 28 of the Corporate Income Tax Code states that inventory adjustments are not deductible from taxable income up to the limit of the difference between the cost of acquisition or production and its realizable value, when the latter is lower than the former. In the situation in question, the land never became part of the Claimant's inventory, so there can be no inventory adjustments, as provided for in article 28 of the Corporate Income Tax Code.
- Also, the amount of €100,000.00 does not meet the requirements to be accepted as a fiscal expense as losses by fiscally deductible impairment. Article 28-A of the Corporate Income Tax Code states the following:
"The following impairment losses may be deducted for tax purposes, when recorded in the same tax period or in earlier tax periods:
a) Those related to credits resulting from normal activity, including interest for delay in the fulfillment of obligation, which, at the end of the tax period, may be considered of doubtful collection and are evidenced as such in the accounts;
Credits resulting from normal activity are understood to be only those credits that originate from sales of goods and provision of services that are proper to the objectives or main purposes of the company, whereby credits from mere financial operations, such as advances to suppliers, are literally excluded.
Thus, since the requirements provided for in article 28, no. 1 and paragraph a) of no. 1 of article 28-A of the Corporate Income Tax Code are not met, the amount recorded as inventory losses in the amount of €100,000.00 is not accepted as a fiscal expense, and therefore a correction of this amount is proposed. (...)"
17) The Claimant was notified of the draft report to exercise its right to be heard under the provisions of article 60 of the General Tax Law and article 60 of the Rules of Tax Procedure and Process, within a period of 15 days;
18) The Claimant exercised the right to be heard, timely, in writing, on 28 March 2016;
19) On 05 April 2016, the Claimant was notified of the decision on the right to be heard, in the sense of its denial;
20) On 08 April 2016, the Claimant was notified of the corporate income tax assessments and respective compensatory interest;
21) On 23 May 2016, the Claimant proceeded to make full payment of the additional tax assessments and compensatory interest, in the amount of €24,714.35;
22) On 31 August 2016, the Claimant filed the request for constitution of the Arbitral Tribunal that gave rise to this proceeding (cf. electronic request to CAAD).
2. Facts not proven
No facts with relevance to the assessment of the matter that were not proven were found.
3. Motivation
With respect to the facts, the Tribunal does not have to pronounce on everything that was alleged by the parties, but rather has the duty to select the facts that matter for the decision and to distinguish the proven facts from the unproven ones (cf. art. 123, no. 2, of the Code of Tax Procedure and Process and article 607, no. 3 of the Civil Procedure Code, applicable pursuant to article 29, no. 1, paragraphs a) and e), of RJAT).
In this way, the relevant facts for the judgment of the case are chosen and cut out according to their legal relevance, which is established with attention to the various plausible solutions of the legal issue(s) (cf. previous article 511, no. 1, of the Civil Procedure Code, corresponding to the current article 596, applicable pursuant to article 29, no. 1, paragraph e), of RJAT).
Thus, having regard to the positions assumed by the parties, in the light of article 110, no. 7 of the Code of Tax Procedure and Process, the documentary evidence and the administrative proceeding attached to the case, it was considered proven, with relevance for the decision, the facts listed above.
4. Legal Issues
The essential question at issue in these proceedings concerns whether or not there is justification for the additional corporate income tax assessment resulting from corrections to the Claimant's taxable income, as a result of the non-acceptance as a fiscal expense of the payment of a deposit, in the amount of €100,000.00, for the purchase of a plot of land whose transaction turned out to constitute fraud to the detriment of the Claimant. The beneficiaries of the deposit or advance payment were the subject of a judgment of conviction in declaratory proceedings, although they have not paid the debt, and such amount was assumed by the Claimant as a fiscal loss in 2014, and recorded in account 684 – inventory losses – sub-account 6848 – as a contra-entry to account 39235 – advance for purchase.
As documents supporting the fiscal deductibility of the expense, the Claimant presents a judgment of conviction in declaratory proceedings and an opinion issued by its legal representatives in the civil action brought against the perpetrators of the fraud, from which it can be inferred a low probability of reimbursement of the amount paid as a deposit for the purchase of a plot of land.
It is therefore necessary to assess, for tax purposes, whether the amount of €100,000.00, referred to above, recorded by the Claimant as inventory losses, is properly documented and meets the requirements to be accepted as a fiscal expense, in accordance with article 23 of the Corporate Income Tax Code, either as inventory breakdown, inventory adjustment, or as losses by impairment as the Claimant argues.
It should be noted that, for the Tax Authority, the question of whether or not the acceptance of the aforementioned amount as a fiscal expense in the 2014 tax year is admissible is closely linked to the question of accounting – as inventory losses – associated with the proof of the necessity of the expense, made on the basis of an opinion from its legal representatives regarding the difficulties in collecting the credit recognized in a judgment of conviction.
Beginning with the question of the recording of the expense as inventory losses, it should be said that the Corporate Income Tax Code follows a model of partial dependence between taxation and accounting for purposes of determining taxable income. In number 10 of the Preamble to this law, it is stated that "since taxation is based on the economic reality constituted by profit, it is natural that accounting, as an instrument for measuring and providing information on that reality, plays an essential role as a basis for determining taxable income".
On the other hand, in accordance with article 17, no. 1 of the Corporate Income Tax Code, "Taxable income of legal entities and other entities mentioned in paragraph a) of no. 1 of article 3 consists of the algebraic sum of the net result of the period and the positive and negative changes in assets occurring in the same period and not reflected in that result, determined on the basis of accounting and possibly corrected in accordance with this Code."
It states in no. 3 that "In order to allow the determination referred to in no. 1, the accounts must:
a) Be organized in accordance with accounting standards and other legal provisions in force for the respective sector of activity, without prejudice to observance of the provisions of this Code;
b) Reflect all operations carried out by the taxpayer and be organized so that the results of operations and changes in assets subject to the general corporate income tax regime can be clearly distinguished from those of the remainder."
Now, with respect to the matter in question, it is Accounting Standard NCRF 18 that prescribes what inventories are and defines the treatment to be given to inventories. For this purpose, inventories are assets:
1) Held for sale in the ordinary course of business activity;
2) In the process of production for such sale; or
3) In the form of materials or consumables to be applied in the production process or in the provision of services.
Regarding the recording as inventory losses (account 684) of the amount of €100,000.00, paid as a deposit for the purchase of a plot of land, it should be noted that the land in question never formed part of the Claimant's inventory, nor was it ever held by the latter on legal terms. The Claimant made an advance payment to a supplier in the course of its activity. Therefore, the asset "land" never became the object of acquisition, nor, consequently, is it correct to assert that it suffered adjustments as the Claimant argues, since the requirements provided for in article 28 of the Corporate Income Tax Code are not met.
It should be emphasized that the asset never formed part of the Claimant's inventory because, in truth, it made an advance payment to a supplier and established a receivable in its favor which, in the course of the proceedings undertaken by the Claimant, proved to be of doubtful collection. However, despite the existence of objective and irrefutable evidence of impairment, namely the breach of the promise-to-sell contract, evidence of fraud, the disappearance of the false promise-sellers, among others, the Claimant chose not to record the impairment in its accounts.
This finding leads us to consider that the expense of €100,000.00 also does not meet the requirements to be accepted as a fiscal expense in the form of impairment loss, as the Claimant seeks.
Impairment losses relating to credits of doubtful collection are governed by Accounting Standard NCRF 27 – Financial Instruments.
On the other hand, the fiscal treatment of impairment losses should be analyzed under the Corporate Income Tax Code. Now, in this respect, article 23, no. 1 paragraph h) of the Corporate Income Tax Code provides that "impairment losses are considered expenses of the period, since they are indispensable for the realization of income or for the maintenance of the source of production."
Article 28-A of the Corporate Income Tax Code defines impairment losses in receivables for credits of doubtful collection:
"1- The following impairment losses may be deducted for tax purposes, when recorded in the same tax period or in earlier tax periods:
a) Those related to credits resulting from normal activity, including interest for delay in the fulfillment of obligation, which, at the end of the tax period, may be considered of doubtful collection and are evidenced as such in the accounts;
b) Those relating to premiums to be collected recognized by insurance companies.
2 – (...)
3 - Impairment losses and other value corrections referred to in the above numbers that should not be maintained, because the objective conditions that determined them no longer exist, are considered positive components of the taxable income of the respective tax period."
From the analysis of the aforementioned provision, it can be concluded that there are cumulative conditions for the acceptance of impairment losses relating to credits of doubtful collection as fiscally deductible, these being as follows:
a) They are derived from the normal activity of the entity;
b) They may be considered of doubtful collection; and
c) They are evidenced in the accounts.
In this case, it is clear that the conditions provided for in article 28-A of the Corporate Income Tax Code are not met. Indeed, even if it is admitted that the credit can be considered of doubtful collection, the other requirements referred to above, which are cumulative in nature, are not met, because neither does the credit result from the normal activity of the Claimant, nor was the credit recorded in the accounts as a credit of doubtful collection, in accordance with the proven facts.
For purposes of the concept of normal activity, it appears from an Opinion issued by the Tax Studies Center that "(...) the only interpretation of paragraph a), of no. 1, of art. 33 of the Corporate Income Tax Code that appears to us to be sustainable, for the reasons defined above, is that which qualifies as relevant, for purposes of establishing the provisions provided therein, only credits that originate from sales of goods and provision of services that are proper to the objectives or main purposes of the company, excluding, linearly, credits that result from mere financial operations (advances or payments on account)."[2]
The same understanding is reflected in Opinion no. 11/95 also from the Tax Studies Center, which considers that credits resulting from advances to suppliers are not subject to adjustment, as would be the case in question.
In conclusion, either because the credit of doubtful collection was not evidenced in the accounts, or because it was created outside the normal scope of the Claimant's activity, in light of the criteria set forth, such value cannot be accepted as a fiscal expense in the form of impairment loss, in accordance with articles 28-A and 23, no. 1 paragraph h) of the Corporate Income Tax Code.
It remains to analyze whether, notwithstanding the foregoing (non-classification as inventory breakdown or impairment) the loss of the value of the deposit meets the requirements to be recognized as a deductible expense from taxable income, under the general terms of article 23 of the Corporate Income Tax Code, as the Claimant argues.
For ease of exposition, let us begin by transcribing the provisions of article 23 of the Corporate Income Tax Code (wording at the date of 2014):
"1 - For the determination of taxable income, all expenses and losses incurred or borne by the taxpayer to obtain or ensure income subject to corporate income tax are deductible.
2 - The following expenses and losses are considered to be covered by the above 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 production, conservation and repair expenses;
b) Those relating to distribution and sale, including transport, advertising and placement of goods and products;
c) Of a financial nature, such as interest on borrowed capital applied in the operation, discounts, premiums, transfers, exchange differences, expenses with credit operations, debt collection, 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 participation in profits, allowances, materials of current consumption, transport and communications, rents, litigation, insurance, including life, illness or health, and operations in the 'Life' branch, contributions to pension funds, contributions to pension funds and to any supplementary social security schemes, as well as expenses with employment termination benefits and other post-employment or long-term benefits of employees;
e) Those relating to analyses, rationalization, research, consultation and development projects;
f) Of a fiscal and parafiscal nature;
g) Depreciation and amortization;
h) Impairment losses;
i) Provisions;
j) Losses from reductions in fair value in financial instruments;
k) Losses from reductions in fair value in consumable biological assets that are not multi-year forestry operations;
l) Realized losses;
m) Compensation resulting from events whose risk is not insurable.
3 — Deductible expenses in accordance with the above numbers must be documented, regardless of the nature or support of the documents used for this purpose."
In this respect, the Claimant argues that the loss of the deposit intended for the purchase of a plot of land falls directly within the concept of necessity for purposes of article 23 of the Corporate Income Tax Code, and should therefore be accepted as a fiscal expense. The Claimant further argues that despite the existence of a judgment of conviction against the perpetrators of the fraud to return the €100,000.00 paid as a deposit, the real and effective possibility of collection from them is unlikely based on asset investigations carried out by its legal representative, which is documented and proven in an opinion issued for this purpose. Being, therefore, irrefutable that the company suffered a loss, susceptible to negatively affecting its results, such expense should be recognized fiscally, because everything was done to avoid the loss and to be reimbursed for it.
Now, the Claimant is not right.
In accordance with no. 1 of article 23, the law provides that all expenses and losses incurred or borne by the taxpayer to obtain or ensure income subject to corporate income tax are deductible. Thus, the rule is that all expenses are deductible, with it being the responsibility of the Tax Authority, through a tax inspection, to determine which expenses will or will not be considered relevant for ensuring income subject to corporate income tax.
It should be noted that expenses considered deductible for tax purposes must, on the one hand, be necessary and, on the other, be documented.
In fact, and as has been decided in other proceedings that have been heard before CAAD, the requirement of necessity of expenses for the realization of income subject to tax or for the maintenance of the source of production, established by article 23 of the Corporate Income Tax Code, has been the subject of proper legal treatment by case law.[3]
Thus, the Supreme Administrative Court has come to declare, regarding the meaning and functioning of the requirement of necessity of expenses for tax purposes, that the requirement of necessity of an expense must be interpreted as an indeterminate concept requiring case-by-case completion, as a result of an analysis of an economic business perspective, in the perception of a relationship of economic causality between the assumption of a cost and its realization in the interest of the company, having regard to the corporate purpose of the commercial entity in question.[4]
Accordingly, in the matter of expenses or losses, for purposes of corporate income tax, from a comprehensive and global perspective, it is unavoidable to us that, in their respective definition and classification, the legislator intended to establish as a determining, central element, the requirement of necessity, for the realization of income or gains subject to tax or for the maintenance of the source of production.
Having established this initial and central idea, it is necessary to proceed with the task of interpreting the scope of the disputed question, which passes, in our view, by conforming the judgment of necessity of the expense, to the requirements and purposes inscribed in the law.
Being article 23 of the Corporate Income Tax Code the central norm that aims to regulate the deductibility of expenses for tax purposes by reference to their necessity for the determination of taxable income and the requirement of proof, we cannot fail to harmonize it, in the search for harmonious and comprehensive solutions, with the other legal provisions that specify the legislator's intent.
Considering the accounting treatment given by the Claimant to the loss of the deposit for the purchase of a plot of land (Inventory losses account 684, sub-account 6848, as a contra-entry to account 39235 – advance from customers) the Claimant acknowledges that to the extent that it made an advance payment to a supplier, it has a receivable, a situation which, strictly speaking, would fall within the concept of impairment, although, as stated above, it was not recorded in the accounts as such.
In this context, the Claimant brought a judicial proceeding and proceeded to derecognize the asset, taking the amount of €100,000.00 to costs, on the basis of the judgment of conviction, in civil proceedings, declaring the fraud and condemning the defendants to return the aforementioned amount paid as an advance payment. Reporting to the circumstances of the uncollectibility of the credit, the Claimant attaches an opinion from its legal representatives, according to which the probability of reimbursement of the amount in question would be "low or nil" (emphasis in original).
It should be noted, however, that uncollectable credits accepted as fiscal expenses are determined in accordance with article 41 of the Corporate Income Tax Code, which has the following wording:
"Article 41
Uncollectable Credits
1 - Uncollectable credits may be directly considered expenses or losses of the tax period in the following situations, provided that an impairment loss has not been admitted or it is insufficient:
a) In enforcement proceedings, after the registration referred to in paragraph b) of no. 2 of article 717 of the Civil Procedure Code; (emphasis in original)
b) In insolvency proceedings, when the same is declared of limited character, after the final judgment of verification and graduation of credits provided for in the Insolvency and Company Recovery Code or, when it exists, the homologation of the plan subject to the deliberation provided for in article 156 of the same Code; (As amended by Law no. 82-C/2014, of 31 December)
c) In special revitalization proceedings, after homologation of the recovery plan by the judge, provided for in article 17-F of the Insolvency and Company Recovery Code;
d) In accordance with the provisions of SIREVE, after execution of the agreement provided for in article 12 of that scheme;
e) In the context of disputes arising from the provision of essential public services, after arbitral decision;
f) In accordance with the legal regime of the provision of essential public services, the credits are prescribed and its value does not exceed the amount of (euro) 750.
2 - (Repealed)"
With relevance to the case at hand, it results from article 41 of the Corporate Income Tax Code that uncollectable credits arising from the aforementioned judicial proceedings of a judicial nature may be considered expenses of the period, provided that impairment loss has not been recognized in relation to these or is revealed to be insufficient.
In this way, examining paragraph a) of article 41 of the Corporate Income Tax Code, only credits whose uncollectability is proven in enforcement proceedings will be considered fiscally deductible, either after the registration of the extinction of enforcement proceedings, because no attachable assets have been found, or at a time prior to the final judgment of the enforcement judgment, provided that the lack of attachable assets is determined.[5]
In other words, legal entities, having regard to the purposes they aim to pursue, cannot draw fiscal consequences, constituting fiscally deductible expenses outside the scope in which the law permits, in this case, against the regime defined for costs from uncollectable credits.[6]
In this sense, in line with the case law established by the Supreme Administrative Court, the company must exhaust all procedural means necessary and provided for by law to recover its credit, and the proof of the insufficient assets of the debtors (perpetrators of the fraud) and the demonstration of the impossibility of collection must be proven in enforcement proceedings, in accordance with the aforementioned article 41 of the Corporate Income Tax Code.
The legal provision is explicit in excluding the possibility of using alternative means of proof, such as an opinion prepared by the Claimant's legal representatives accounting for the steps taken and the low probability of collection of the credit.
Moreover, such legal impossibility can be better understood by looking at the collection proceeding situation referred to in the opinion itself attached to the case.
In fact, according to the facts stated in point 12 of the facts, the judicial proceedings are not concluded or exhausted, and the proceedings may be resumed if any of the debtors involved acquires assets at a later time (emphasis in original).
Therefore, the Claimant, in seeing its right recognized in the judgment of conviction obtained in declaratory proceedings, seeks to be reimbursed the amount owed, if, in a later phase, attachable assets are found in the sphere of the debtors. Given that the Claimant has not, as it claims, exhausted the possibilities of effective remedy of a violated credit right, nor has it renounced the amount owed, there will be no fiscal and accounting framework for the derecognition of the asset.
However, if the Claimant nevertheless decides to derecognize the aforementioned credit, its amount must be added in Form 07 of Model Declaration 22, for purposes of determining the taxable income of the tax period in which the derecognition occurred, since, as mentioned, the conditions of necessity of the expense have not been met due to non-compliance with article 23 of the Corporate Income Tax Code in conjunction with the requirements demanded by article 41 of the same Code for the consideration of the credit as uncollectable.
Based on the foregoing, it is concluded that it is not viable to accept as an expense for tax purposes the amount of €100,000.00 paid by the Claimant as an advance/deposit in a transaction that was not completed, in accordance with article 23, no. 1 of the Corporate Income Tax Code.
Therefore, the request for arbitral pronouncement presented by the Claimant is judged to be completely unfounded.
IV. DECISION
Under these terms, this Arbitral Tribunal decides:
– to judge completely unfounded the request for declaration of illegality and consequent annulment of the corporate income tax assessment no. 2016… and of the compensatory interest assessment no. 2016 …/… and of the settlement of accounts no. 2016…, thereby absolving the Tax and Customs Authority.
– to condemn the Claimant to pay the costs of the proceedings.
V. VALUE OF THE CASE
The value of the case is fixed at €24,714.35, in accordance with article 97-A, no. 1, a), of the Code of Tax Procedure and Process, applicable by virtue of paragraphs a) and b) of no. 1 of article 29 of RJAT and no. 2 of article 3 of the Regulation of Costs in Tax Arbitration Proceedings.
VI. COSTS
The arbitration fee is fixed at €1,530.00 in accordance with Table I of the Regulation of Costs in Tax Arbitration Proceedings, to be paid by the Claimant, since the request was completely unfounded, in accordance with articles 12, no. 2, and 22, no. 4, both of RJAT and article 4, no. 4, of the aforementioned Regulation.
Notify.
Lisbon, 30 March 2017
The Arbitrator
(Filipa Barros)
[1] Acronym for Legal Regime for Tax Arbitration.
[2] Opinion of the Tax Studies Center, Case no. 1244/95, of 12/07/95.
[3] The question of the necessity of costs for purposes of article 23 of the Corporate Income Tax Code has been the subject of doctrinal and case law analysis. Thus, and as emphasized by António Moura Portugal ("The Deductibility of Costs in Portuguese Tax Case Law", especially, pages 171/172), "The deductibility or acceptance of costs contained in the balance sheet ceased to be a question of fact and became a question of law, with effects on the level of the burden of proof, which ceased to fall on the taxpayer".
Further, the same author emphasizes:
"The legal solution of accepting the taxpayer's accounting gives the taxpayer's records a presumption of truthfulness, in the sense that it is accepted that this information reflects a faithful and accurate situation of the company's patrimonial situation, transferring the burden of proof of the incongruity or falsity of that information as a faithful representation to the Tax Authority".
This principle is also reflected in the scope of the General Tax Law, in articles 74 and 75, which refer, respectively, to the burden of proof and to the statement and other elements of the taxpayer.
[4] See, among others, Supreme Administrative Court Judgments of 29 March 2006, case no. 01236/05, of 22 March 2006, case no. 01077/05, as well as the judgment of the Administrative Court of the South of 16 October 2014, case no. 6754/13.
[5] See, in this sense, Judgment of the Supreme Administrative Court of 10 October 2012, case no. 0782/12.
[6] We use, by analogy, the criteria employed in the Judgment of the Administrative Court of the South of 13 March 2007, in case no. 01576/07, where the question of debt forgiveness constituted as a cost outside the legal framework that defines the constitution of provisions for credits of doubtful collection or the regime of costs for uncollectable credits was addressed.
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