Summary
Full Decision
ARBITRAL DECISION
I – REPORT
A – Identification of the Parties
Claimant: A…, LDA., with NIPC … and with registered office located at Street…, no…, …, …-…, …-…, hereinafter referred to as Claimant or Taxpayer.
Respondent: Tax and Customs Authority, hereinafter referred to as Respondent or AT.
The Claimant submitted a request for the establishment of an Arbitral Tribunal in tax matters and a request for arbitral decision, pursuant to article 2(1)(a) and article 10(1)(a), both of Decree-Law No. 10/2011, of 20 January (Legal Regime of Arbitration in Tax Matters), hereinafter abbreviated as RJAT.
The request for the establishment of the Arbitral Tribunal was accepted by the President of the Administrative Arbitration Center (CAAD), and in accordance with the provision of article 11(1)(c) of Decree-Law No. 10/2011, of 20 January, as amended by article 228 of Law No. 66-B/2012, of 31 December, the Tax Authority was notified on 2017-10-06.
The Claimant did not proceed to appoint an arbitrator, whereupon, pursuant to article 6(1) and article 11(1)(b) of Decree-Law No. 10/2011, of 20 January, as amended by article 228 of Law No. 66-B/2012, of 31 December, the Ethics Council appointed Rita Guerra Alves as Arbitrator, the appointment having been accepted by her in accordance with the legally established terms.
On 2017-11-28, the parties were duly notified of this appointment, and did not manifest their intention to refuse the appointment of the arbitrator, in accordance with article 11(1)(a) and (b) of RJAT and articles 6 and 7 of the Code of Ethics.
The Single Arbitral Tribunal was properly constituted on 2017-12-20, to examine and decide on the matter of the present dispute, and the Tax and Customs Authority was automatically notified on 2017-12-20 as recorded in the respective minutes.
On 22-02-2018, the meeting referred to in article 18 of RJAT was held, and witness testimony was taken. Both parties presented successive written arguments.
B – REQUEST
The Claimant seeks to have declared the illegality of the tax assessment acts for Corporate Income Tax (IRC) and compensatory interest, no. 2017… and no. 2017…, relating to the tax period 2013, in the total amount of 45,391.69€ (forty-five thousand three hundred ninety-one euros and sixty-nine cents).
C – BASIS OF CLAIM
To support its request for arbitral decision, the Claimant alleges, with a view to declaring the illegality of the tax assessment acts for Corporate Income Tax (IRC) already described in point 1 of this Decision, the following:
In March 2017 the company was notified of Service Order No. OI2016… of limited scope, directed at the analysis of IRC for 2013 of the company, in particular, at the analysis of financial expenses declared in the fiscal year.
As a result of such inspection action, the company was notified of corrections to the 2013 fiscal year resulting from the non-recognition as an expense of financing charges in the amount of € 225,064.93.
The AT Services analyzed the balance accounts of customers and suppliers.
The IT Services concluded, insofar as it is relevant to note here, the following:
The balance of customers as of 2016-12-31 (a date which is presumed to be an error of the Services, so it should be considered 2013-12-31) is € 9,842,260.20, while the balance of suppliers is lower by approximately € 3,725,000.00 (supplier balance is € 6,117,757.52);
The company has open intragroup supplier balances in the amount of €528,571.02, while its intragroup customers owe it €3,491,852.21, a value representing 35.48% of the total customer credits recorded, not included in factoring contracts;
Subsequently, the IT Services of the AT analyzed the average collection and payment periods of A…, calculated on the basis of the value of the balances evidenced in the analytical trial balance, and concluded that the average collection period of A… is 75 days, and the average payment period is 50 days.
As is clearly evident from the various transcriptions of the reasoning for the corrections at issue, the AT Services insist on stating that there is no accounting evidence whatsoever of collection by A… from B… of interest or indemnification to compensate for delay in payment of services rendered or for financing charges.
Using this fact as an argument that corroborates the corrections made by the Inspection Services, which relate to the non-recognition of the totality of financing expenses incurred in the 2013 fiscal year, in the total amount of €225,064.93.
The fact that the company does not charge interest/indemnification for delay in payment of the services it renders to companies that are part of, or are not part of, the same economic group is a matter that relates to the business decisions taken by the CLAIMANT and/or the commercial terms agreed by the Parties in each operation/contract.
The Inspection Services could legitimately question such commercial choice of company A… (in not charging interest for delay in payment of invoices due, relating to services rendered to Group companies) only in the context of transfer pricing matters, which did not occur.
It would certainly be the responsibility of the IT Services to demonstrate and prove that company A… was practicing, in relations with Group companies, terms and conditions different from those practiced with other non-Group companies with which it also maintains equivalent commercial relations.
Proof which, it will always be said, the AT Services did not make, and also would not have succeeded in making, given that, as will be more evident below, for reasons relating to the market in which it operates, and with a view to maintaining good relations with customers, A… has the same policy regarding non-charging of interest/compensation for delay in payment of invoices due, issued whether to Group or "extra-group" Customers.
In view of what has been stated, it is important to conclude that since the AT Inspection Services did not analyze the question of non-charging of interest/collection from company B… for delay in payment of invoices due, under the Transfer Pricing regime, provided for in article 63.0 of the IRC Code.
Such reasoning is devoid of meaning with a view to justifying the non-recognition of the amount relating to financing charges in the 2013 fiscal year as a tax expense of the said fiscal year.
Thus, and in accordance with the Final Inspection Report, it will be solely and exclusively under the provision of article 23 of CIRC that the case at issue must be analyzed.
The Claimant further alleges, as to the indispensability of the expenses at issue for obtaining taxable income of the Claimant, that the activity carried out by the Claimant comprises two business areas: pre-wholesale commerce in medicines and health products and logistics management.
And that in the development of such business areas, the Claimant establishes commercial relations with Customers and Suppliers.
Assuming further, as a consequence of the operational activity carried out, fixed costs of regular monthly occurrence, or otherwise, whose late payments compromise the continuity of the company and/or the realization of taxable income.
And in this context, and as demonstrated by the AT, that in general, the average payment term to suppliers is less than the average collection period.
Thus, as a common business practice of any other commercial company in Portugal, to meet periods of cash shortage, A… entered into a financing contract with G…, in 2010, in the forms of current account credit and credit for the remission of bank guarantees, as it was merely a matter of financial flows.
It should be noted from the outset that, given the Claimant's difficulties in meeting timely the fixed monthly costs on which the maintenance of the income-producing source of the company depends - expressly recognized by the Tax Inspection Services, namely on pp. 19 and 22 of the Inspection Report – the "abnormality" of the company having to bear financial charges resulting from the contracting of a "current account credit" account is not understood.
It is questioned whether the abnormality lies in the existence of a current account credit financing contract in the sphere of the Claimant,
Or in the difficulty in directly relating the need for the company to bear financial charges, which in 2013 amounted to € 225,064.91, to meet the operational costs of the company - of regular monthly character, or otherwise - which, as has been demonstrated, and is not a disputed fact, are notoriously superior to the operational income of the Claimant;
The AT's argumentation to justify the corrections at issue is, in addition to being insufficient, without any legal or factual support,
Terms in which the corrections of the AT Inspection Services cannot proceed, given the indispensability of the financial expenses incurred in the maintenance of the income-producing source subject to tax.
Namely, given the need of the Claimant to resort to bank credit to meet the operational costs of regular monthly occurrence, or otherwise - payment of Suppliers, workers, costs with fixed facilities and vehicles, etc., - and which ensure the maintenance of the operational activity of the company, and likewise of its income.
Terms in which, having demonstrated, contrary to the Tax Authority Services, that the financial charges subject to correction were incurred by the Claimant within the scope of a current account credit financing contract concluded in 2010, with G…, which aims to overcome treasury deficiencies of the company and to meet the proven costs of the company, with monthly or other due dates,
Costs which reveal the nature of operational costs, and whose amount in 2013 far exceeded the amount of the operational income of the Claimant.
The causality of the cost in question with the business interest of the Claimant must be considered proven, in particular, in the aspect of cost necessary to the maintenance of the income-producing source of taxable income of the company.
Therefore, the financing charges incurred by the Claimant in 2013, and deducted as expenses of the fiscal year, have full basis under article 23 of CIRC, in the wording in force on the date of the facts.
The Claimant further alleges, as to the error in the total non-recognition of the financing charges incurred, the following:
As has been amply demonstrated in this Arbitration Request, the assumption for the total non-recognition, by the AT Services, of the financing charges incurred by A…, in the 2013 fiscal year, was that company A… would only have needed to resort to external (bank) financing due to delay in payments by Group companies, most notably B…, S.A., for goods acquired from A…/services rendered to such entity.
The Claimant reiterates its total disagreement with such argumentation, starting with the lack of factual evidence and minimal reasoning for such correspondence, as already set out in the previous Chapter.
Therefore, if the corrections made are maintained, the non-recognition of financing expenses can only be made in proportion to the representativeness of A…'s credit over company B… - in the proportion of 23.9% (if non-matured credits as of 31/12/2013 are not recognized) - or in the limit of 35.3% (if non-matured credits as of 31/12/2013 are considered).
The Claimant concludes by upholding the illegality and voidability of said assessment acts for Corporate Income Tax (IRC) for breach of law.
D – RESPONSE OF THE RESPONDENT
The Respondent, duly notified for this purpose, timely presented its response, in which, in brief summary, alleged the following:
The AT understands that the argument used by the Claimant regarding the fact that the correction was not made using the transfer pricing regime contains within itself an inaccuracy.
Because the justification for the corrections relates to the non-compliance with the requirements of article 23 of CIRC for accepting the deductibility of the declared financing costs and not to corrections to the taxable basis resulting from non-compliance with the Arm's Length Principle, set forth in article 63 of CIRC, it not having been questioned, in the inspection phase, the price of the operations, and nothing appearing in the RIT regarding the evaluation of the terms and conditions of the operations in light of the said Principle.
Thus, it is in that legal provision that the conditions are defined for the costs to be fiscally deductible, which will only be accepted if they pass the first test of indispensability required by article 23 of CIRC.
Without prejudice to the existence in the tax legal system of other provisions with an anti-abuse nature, namely article 63 of CIRC, which imposes a limit on the deductibility of costs that have already passed the indispensability test.
Thus, given the justification for the corrections contained in the RIT, the costs declared by the Claimant failed the indispensability test, whereupon it fell to the Claimant, in the present arbitral action, the burden of demonstrating that the amounts not recognized could be subsumed in the legal concept of expense, providing proof of their indispensability for the realization of the income or gains subject to tax or for the maintenance of the income-producing source, proof which, it is advanced from now on, it did not succeed in making.
Now, the fundamental requirements for financing charges incurred to be valued and accepted as a tax expense are, on the one hand, the verification of the expenses and on the other, their indispensability for obtaining the gains subject to tax.
The indispensability of expenses for obtaining the gains subject to tax makes the fiscal deductibility of the cost depend on a justified relationship with the productive activity of the company and this indispensability is verified as long as these charges are connected with the obtaining of profit.
Indispensability which, in our view, the Claimant failed to prove either in the inspection procedure or in the present proceedings, as was its responsibility.
It should be noted that the reason which triggered the correction of financing expenses was induced by the verification, by the tax inspection services, of a practice adopted by the Claimant which was revealed in the fact that, at the same time as it contracted loans and bore the corresponding expenses, it showed high debtor balances, extended payment periods and absence of remuneration of these same credits.
From this asymmetrical situation results an imbalance in the expense/income binomial resulting from the assumption by the Claimant of financial expenses that had repercussions in benefits or advantages in the sphere of related entities.
It is, therefore, possible to establish a causal nexus between the financing obtained and the high debtor balances of the accounts that reflect the movement with the related entities, hence the methodology followed by the tax inspection for the calculation of non-deductible financing expenses, which is proven by the cognitive itinerary reflected in the RIT.
Well then, it is concluded that the financing that generated financial charges was conducted for the granting of credits or moratoriums to related entities.
Given the causal nexus between part of the financing expenses and the account balances of the operations, the reality is that indeed the charges are incurred to meet the lack of payment of operations by part of the customers that make up the group.
From which it results, therefore, that if those debtors had not benefited from the deferment of payment dates, financial means would have accrued to the Claimant which with great probability would have made it unnecessary to contract financing in such high amounts and this would logically cause a relief of financial expenses.
The main question is whether it would be indispensable to maintain the same level of indebtedness if the receipt of the debts of intragroup customer accounts had not benefited from moratoriums.
In view of the foregoing, it is considered that the expenses in question are not deductible for the formation of taxable profit because they are not qualified as indispensable for the realization of the Claimant's income subject to tax or for maintenance of the Claimant as an income-producing source.
E – FACTUAL BASIS
For the examination of the issues raised, it is necessary to present the factual matter relevant to its understanding and the decision to be rendered, based on the facts alleged and the documentary and witness evidence produced in the proceedings.
On factual matters of relevance, this Court finds as established the following facts:
The Claimant's corporate purpose is the transport of goods, warehousing and commerce, import and export of pharmaceutical products, chemicals and other medicinal substances, in accordance with the updated registration in the Commercial Registry Office of Lisbon (CRCL).
The Claimant is registered for the exercise of the activity of "road transport of goods", with CAE No. 49410.
The Claimant is part of the C… group and is owned 10% by Company D…, SGPS, S.A. and 90% by company E…, S.A., and is indirectly owned by the parent company of the group - F… CRL - a pharmacy cooperative established in 2000, resulting from the merger of three other cooperatives. Its main activity is the distribution of medicines.
In 2009, following a restructuring of the group, company D… SGPS SA incorporated four companies, representing four different business areas, one of which is the present Claimant, and in 2013, the group's corporate structure was as follows:
[Details redacted]
The Respondent entered into a Financing Contract with a Banking Credit Institution G…, hereinafter called "G… – ExpressBill Financing Contract".
The expenses here in question are expenses with financing charges, namely, financing charges resulting from the Financing Contract with the Banking Credit Institution G…, hereinafter called "G… – ExpressBill Financing Contract".
The Claimant was subject to an inspection action by the tax inspection services of the Finance Directorate of Lisbon, accredited by Service Order No. OI2016…, issued on 2016-12-20.
As a result of the inspection action, the company was notified of corrections to the 2013 fiscal year resulting from the non-recognition as an expense of financing charges in the amount of € 225,064.93.
F – UNPROVEN FACTS
Of the facts with interest for the decision of the case, contained in the claims, all subject to concrete analysis, those which do not appear in the factual basis described above were not proven.
G – QUESTIONS TO BE DECIDED
Given the positions of the parties, assumed in the arguments presented, the following constitute central issues to be decided, which must therefore be examined and decided:
a) The declaration of illegality of the tax assessment acts for Corporate Income Tax (IRC) and compensatory interest, no. 2017… and no. 2017…, relating to the tax period 2013, in the total amount of 45,391.69€ (forty-five thousand three hundred ninety-nine euros and sixty-nine cents).
b) The request for payment of compensatory interest.
H – MATTERS OF LAW
Given the positions of the parties, the central question to be decided by this Arbitral Tribunal consists in examining the legality of the acts of assessment of Corporate Income Tax.
The Claimant, briefly, alleges in its request for arbitral decision, that the expenses of financing charges meet the requirements of article 23 of CIRC, wherefore they should be fiscally accepted, and that the analysis of the case at issue must be decided solely and exclusively under article 23 of CIRC in force on the applicable date.
The Respondent, counter-argues to the effect that the justification for the corrections relates to the non-compliance with the requirements of article 23 of CIRC for accepting the deductibility of the declared financing costs in the amount of € 225,064.93 which do not pass the indispensability test required by article 23 of CIRC.
In this manner, the central question presented to the proceedings consists in examining whether the expenses with financing charges meet the requirements of article 23 of CIRC in force on the date (2013).
In the case at issue, the non-compliance with article 23 of the IRC Code constitutes the only legal basis invoked by the AT which allowed it to make the correction made, which is why it is in light of this legal provision that we shall examine the correction and the consequent additional assessment claimed.
In truth, the justification of the Tax Administration could have been based on the General Anti-Abuse Clause or on the terms of the application of transfer pricing rules, which, it is reiterated, did not occur.
It is, therefore, in light of article 23 of the IRC Code that the case at issue must be examined, seeking to inquire whether the financing expenses subject to correction, and resulting from the loan contract entered into by the Claimant, meet the requirements of the said legal provision.
Therefore, let us then analyze what type of expenses are in question.
The parties agree that the expenses here in question are expenses with financing charges, namely, financing charges resulting from the Financing Contract with a Banking Credit Institution G…, hereinafter called "G… – ExpressBill Financing Contract".
Accordingly, it is necessary to analyze the "G… – ExpressBill Financing Contract", listing which charges result from it.
It was stipulated in the said financing contract, the following (which is partially transcribed):
1.1. customers may give instructions to G… to execute, on the due dates of certain invoices, payment orders in favor of their creditors (excerpt taken from section 1.1 of the general conditions of the G… Express BILL service).
3.1 – by instructions of the Customer G…, and simultaneously with the issuance of the payment order, G… will issue a G… Express Bill Bank Guarantee in favor of the issuer of the invoices to guarantee the payment of the amounts represented in the invoices, on the date of their respective maturity. (excerpt taken from section 3.1 of the general conditions of the G… Express BILL service).
(…)
- As to the Price of Credit Assignment for Payment:
6.1. The price of the assignment of credits to be paid by the Invoice Issuer to G… comprises a service fee and an interest rate.
6.2. The service fee shall be calculated, case by case, and shall apply to the amount of the payment order issued by the Customer G…. The service fee will be expressly indicated in the particular conditions of the credit assignment.
6.3 The interest rate corresponds to the 3-month Euribor rate plus the spread (…) The interest rate shall be calculated on the amount of the Payment Order, by the number of days resulting from the difference between the Due Date of the payment order and the date of the credit assignment, being calculated on an annual basis of 360 days and charged at the moment of assignment.(excerpts taken from section 6 of the general conditions of the G… Express BILL service).
From the analysis of said contract, it results that we are dealing with a financing contract concluded with a Banking institution, through which the Bank provides a bank guarantee in favor of the invoice issuer to guarantee the payment of the amounts represented in the invoices issued to the Claimant, on the date of their respective maturity, through the payment by the Claimant of a service fee and interest plus Stamp Duty.
We are thus dealing with a financing contract, by virtue of which the Claimant incurs in these expenses/charges, now in question, its deductibility.
Indeed, the Claimant, in the year 2013, incurred the following charges resulting from the "G… – ExpressBill Financing Contract", duly itemized in the following table:
[Table with financial details]
From said table, a total of financial charges of 225,064.93€ results for the year 2013.
We find it certain that both parties accepted that the value in question is limited to the financial charges in the value of 225,064.93€, having not been disputed other charges within the scope of the financing contract "G… – ExpressBill Financing Contract".
That value calculated corresponds to interest in the value of 205,362.75€ and to bank guarantees or service fee and Stamp Duty in the value of 19,702.18€.
In view of the foregoing, let us then analyze in light of article 23 of CIRC, whether these expenses, called financing charges, relating to an interest rate and a service fee, are fiscally accepted in accordance with the said provision.
On the legal-fiscal framework applicable to the present case (2013), let us proceed to the transcription of article 23 of CIRC:
"1 — Expenses are considered those which are demonstrably indispensable for the realization of income subject to tax or for the maintenance of the income-producing source, in particular:
a) Those relating to the production or acquisition of any goods or services, such as materials used, labor, energy and other general expenses for production, conservation and repair;
b) Those relating to distribution and sale, covering those of transport, advertising and placement of goods and products;
c) Of a financial nature, such as interest on foreign capital applied in operations, discounts, premiums, transfers, exchange differences, expenses with 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 profit sharing, allowances, current consumption materials, transport and communications, rents, litigation, insurance, including life insurance and "Life" branch operations, contributions to retirement savings funds, contributions to pension funds and to any complementary social security schemes, as well as expenses with termination benefits and other post-employment or long-term benefits of employees;
e) Those relating to analyses, rationalization, investigation and consultation;
f) Of a fiscal and parafiscal nature;
g) Depreciation and amortization;
h) Adjustments in inventories, impairment losses and provisions;
i) Expenses resulting from the application of fair value to financial instruments;
j) Expenses resulting from the application of fair value to consumable biological assets that are not multi-year forestry operations;
l) Realized losses;
m) Indemnifications resulting from events whose risk is not insurable.
2 — Not accepted as expenses are unlawful expenses, in particular those arising from behaviors that reasonably indicate the violation of Portuguese criminal legislation, even if occurred outside the territorial scope of its application.
3 — Not accepted as expenses of the tax period are those incurred with the onerous transfer of equity shares, whatever the title by which it operates, when held by the alienator for a period less than three years and provided that:
a) The equity shares were acquired from entities with which there are special relationships, as per No. 4 of article 63;
b) The equity shares were acquired from entities resident in Portuguese territory subject to a special tax regime.
4 — Nor are those accepted as expenses of the tax period incurred with the onerous transfer of equity shares, whatever the title by which it operates, whenever the alienating entity has resulted from a transformation, including the modification of the corporate purpose, of a company to which a different tax regime was applicable with respect to these expenses and less than three years have elapsed between the date of the occurrence of this fact and the date of the transfer.
5 — Also not accepted as expenses of the tax period are those incurred with the onerous transfer of equity shares, whatever the title by which it operates, to entities with which there are special relationships, as per No. 4 of article 63, or to entities resident in Portuguese territory subject to a special tax regime, as well as losses resulting from changes in the valuation model relevant for tax purposes, as per No. 9 of article 18, which result, in particular, from accounting reclassification or from changes in the assumptions referred to in article 18(9)(a)."
From the analysis of the said legal provision, there results the admissibility of expenses for tax purposes, provided that the following is verified: their indispensability for the realization of income subject to tax or for the maintenance of the income-producing source.
On the concept of indispensability, case law and doctrine have long been pronouncing on what understanding should be given to this concept.
We refer to the following understanding, made in the context of process No. 12/2013-T, CAAD:
"The indispensability between costs and income is assessed in an economic sense: indispensable costs are those incurred in the interest of the company, which are connected with its capacity, by inclusion in its profit purpose (in a mediate or immediate form) and in the exercise of its concrete activity.
The Tax Authority cannot judge the merit and opportunity of the company's economic management decisions. It cannot interfere with the freedom and autonomy of management of the company. A cost will be accepted fiscally if it is appropriate to the productive structure of the company and to the obtaining of profits, even if it turns out to be an economically fruitless or economically ruinous operation.
The indispensable expense is equivalent to all expense incurred in order to obtain income and which represents an economic depletion for the company. Article 23 of CIRC requires not only an adequate causal connection between the cost and the income (in the aforesaid economic terms), but it also connects itself alternatively (as indicated by the word "or") with the maintenance of the income-producing source – in the sense of an economic link between the expense and the existence and maintenance of the company and its activity.
A company can obtain funds (and pay interest) and then deliver those funds to a subsidiary without any causal and direct remuneration – and still properly exercise its activity, within its capacity and profit purpose: it can make a capital increase (article 25 of CSC), supplementary or accessory contributions without interest (articles 210 and 287 of CSC) or loans without interest (article 243 of CSC) – and in any of these cases it acts totally within its exercise capacity and with a profit intent and in the exercise of its activity"(our emphasis).
We hold the same understanding as that endorsed in that decision, and therefore we understand that the indispensability between costs and income is assessed in an economic sense, and therefore the indispensable expense is equivalent to all expense incurred in order to obtain income and which represents an economic depletion for the company. Indeed, it follows from the legal provision that expenses are considered those which are demonstrably indispensable for the realization of income subject to tax.
And it is further stated that equating the notion of indispensability to a relationship with productive activity or to an obligatory nexus of causality with the obtaining of income is not, therefore, a position endorsed by reference doctrine, as is transcribed below:
On the understanding to be given to the nexus of causality, see the position of RUI MORAIS which, in a similar sense, maintains: "The invocation of the rule of indispensability of costs can never be made to replace the judgment of convenience and opportunity of the charges assumed, as resulted from the decision of the corporate bodies, with another judgment, also of a business nature made by the tax administration or by the courts". (…): "We cannot approve the orientation of certain case law that refuses the fiscal acceptance of certain costs because it is not possible to establish a direct correlation with the obtaining of concrete income. Taken to the extreme such an understanding, we would have that expenses with investigation would only be fiscally deductible when such research was successful, when, as a result, the company started selling new goods and services…" (…): "We defend that the question of whether a cost should be or not be considered indispensable should be resolved based on the objective intent of the transaction, that is the business purpose test… We believe it is fairly clear what the scope of the rule is: to refuse fiscal participation in some of the expenses incurred by the taxpayer… If the assumption of the expense was preceded by a genuine business motivation… the cost is indispensable. When it should be concluded that the expense was determined by other motivations (personal interest of shareholders, directors, creditors, other companies in the same group, commercial partners, etc., then such cost should not be considered indispensable."
An equal position is assumed by DIOGO LEITE DE CAMPOS AND MÓNICA LEITE DE CAMPOS: "Allowing an administrative judgment a posteriori on the financial, commercial, etc., management of the company would involve the constant risk that this judgment would rest on supplementary elements that did not exist, or did not clearly exist, at the time of the decision-making and that could not have been taken into account. The tax administration does not have to judge whether a company was well or badly managed".
And in the same sense, we conclude with the position of J. L. SALDANHA SANCHES:"…knowing whether a certain cost corresponds, or not, to the most effective defense of the company's interests is a question that cannot be resolved by granting power of State intervention...in order to perform a judgment of merit on a certain business management option, just as it cannot validate the qualification of the expense as a cost by subjecting it to the condition of a posteriori verification of the actual generation of income"
Let us also address next the Decision of the Supreme Administrative Court of 29/3/2006 made in process No. 1236/05:
"«In light of the current CIRC, it can immediately be affirmed that, by all accounts, the expense imposed by law itself constitutes an indispensable cost. Even by the most restrictive criterion – that of necessity, which tends to only consider deductible expenses without which income could not be obtained – this type of expense is eligible. Nonetheless, it must be noted that not all of these costs, whose incursion the company cannot avoid, are deductible – remember the municipal tax, which the law excludes from deductible costs, and which motivated extensive case law.
(…) The rule is that correctly accounted for expenses are tax costs; the indispensability criterion was created by the legislator, not to allow the Administration to interfere in the management of the company, dictating how it should apply its means, but to prevent the fiscal consideration of expenses which, although accounted for as costs, do not fall within the scope of the company's activity, were incurred not for its pursuit but for other extraneous interests.
Strictly speaking, they are not true costs of the company, but expenses which, having in view their object, were abusively accounted for as such. Without the Administration being able to evaluate the indispensability of costs in light of criteria affecting their opportunity and merit.
The concept of indispensability cannot only not be equated to a strict judgment of imperative necessity, as has been said, but also cannot be based on a judgment on the convenience of the expense, made, necessarily, a posteriori. For example, expenses made with an advertising campaign that proved unsuccessful cannot, solely as a function of that result, be affirmed as dispensable.
The judgment on the opportunity and convenience of expenses is exclusive to the entrepreneur. If he decides to make expenses in order to pursue the object of the company but is unsuccessful and these expenses prove, ultimately, fruitless, they do not cease to be tax costs. But every expense that he accounts for as a cost and shows itself foreign to the end of the company is not a tax cost, because not indispensable.
We understand, therefore, that fiscally deductible costs are all expenses that are directly related to the production process (for our case, it does not matter to consider those of investment), in particular, with the acquisition of production factors, as is the case of labor. And that, under penalty of violation of the principle of tax capacity, the Administration can only exclude expenses not directly removed by law under a strong motivation that convinces that they were incurred beyond the corporate objective, or that is, in the pursuit of another interest than the business, or, at least, with clear excess, deviating, in face of the objective needs and capacities of the company.»
And, further it states "that, under penalty of violation of the principle of tax capacity, the Administration can only exclude expenses not directly removed by law under a strong motivation that convinces that they were incurred beyond the corporate objective, or, at least, with clear excess, deviating, in face of the objective needs and capacities of the company".
And in the same sense, see the Decision of 6 October 2009, of the Central Administrative Court South, in process 03022/09:
For the fiscal concept of cost, the definition contained in the aforementioned article 23 of CIRC applies, which, after transmitting to us, in a broad manner, the notion of costs or losses as encompassing all expenses incurred by the company which, demonstrably, are indispensable for the realization of income or for the maintenance of the income-producing source, proceeds to a merely exemplificative enumeration of various expenses of this type. We are dealing with a concept of cost that can be considered common to the fiscal and commercial balance sheets. The fiscal definition of cost, as a broader concept than production and acquisition costs, starts from a broad perspective of company activity and need, thus establishing an objective connection between the activity of the company and the expenses which will, inevitably, result from it. And it does so with a clearly fiscal purpose, which consists in distinguishing between costs that can be accepted for tax purposes and which, therefore, will influence the calculation of taxable profit and those that cannot be accepted for such effect (see ruling of Central Administrative Court South - 2nd Section, 7/2/2012, proc.4690/11; ruling of Central Administrative Court South - 2nd Section, 16/4/2013, proc.5721/12; ruling of Central Administrative Court South - 2nd Section, 29/5/2014, proc.7524/14; ruling of Central Administrative Court South - 2nd Section, 16/10/2014, proc.6754/13; J. L. Saldanha Sanches, The Quantification of the Tax Obligation, Lex Lisboa 2000, 2nd Edition, p.237 et seq.; António Moura Portugal, The Deductibility of Costs in Portuguese Tax Case Law, Coimbra Editora, 2004, p.101 et seq.).
The costs or losses of the company constitute, therefore, the negative elements of the profit and loss statement, which are fiscally deductible when, being duly documented, they are indispensable for the realization of income or for the maintenance of the income-producing source of the company in question. The absence of any of these requirements implies the non-consideration of said elements as costs, thus the respective amounts should be added back to the accounting result (see ruling of Central Administrative Court South - 2nd Section, 7/2/2012, proc.4690/11; ruling of Central Administrative Court South - 2nd Section, 16/4/2013, proc. 5721/12; ruling of Central Administrative Court South - 2nd Section, 29/5/2014, proc.7524/14; ruling of Central Administrative Court South - 2nd Section, 16/10/2014, proc.6754/13; F. Pinto Fernandes and Nuno Pinto Fernandes, Corporate Income Tax Code, annotated and commented, Rei dos Livros, 5th edition, 1996, p.206 et seq.).
The requirement of indispensability of a cost has been judicially interpreted as an indeterminate concept requiring case-by-case completion, as a result of an analysis from an economic-business perspective, in the perception of a relationship of economic causality between the assumption of a charge and its realization in the interest of the company, considering the corporate object of the commercial entity in question, being forbidden to the Tax Administration actions that put in crisis the principle of freedom of management and autonomy of the will of the taxpayer. Nevertheless, if the Tax Administration doubts with foundation the insertion in the corporate interest of a given expense, there falls upon the taxpayer the burden of proof that such operation is inserted in its corporate scope (see ruling of Supreme Administrative Court - 2nd Section, 29/3/2006, rec.1236/05; ruling of Central Administrative Court South - 2nd Section, 17/7/2007, proc.1107/06; ruling of Central Administrative Court South - 2nd Section, 16/4/2013, proc. 5721/12; ruling of Central Administrative Court South - 2nd Section, 16/10/2014, proc.6754/13; ruling of Central Administrative Court South - 2nd Section, 10/7/2015, proc.8473/15).
It should also be noted that companies are required to have accounting organized in accordance with the law of commerce and taxes, which allows the control of taxable profit (see article 98 of CIRC, as in force in 1998; articles 29 and 31 of the Commercial Code).
As to the framing in the aforementioned article 23 of CIRC, three case law subsidies should be invoked relating to the application of such provision:
1-It is the understanding of the courts that the Tax Administration cannot evaluate the indispensability of costs in light of criteria affecting the opportunity and merit of the expense of a subjectivist nature. A cost is indispensable when it is related to the activity of the company, being that costs foreign to the activity of the company will be only those in which it is not possible to discern any causal nexus with the income or gains (or with the income, in the current expression of the code - see article 23, no.1, of CIRC), explained in terms of normality, necessity, congruence and economic rationality (see ruling of Supreme Administrative Court - 2nd Section, 21/04/2010, rec.774/09; ruling of Supreme Administrative Court - 2nd Section, 13/02/2008, rec.798/07; ruling of Central Administrative Court South - 2nd Section, 17/11/2009, proc.3253/09; ruling of Central Administrative Court South - 2nd Section, 16/10/2014, proc.6754/13; ruling of Central Administrative Court South - 2nd Section, 22/1/2015, proc.5327/12; ruling of Central Administrative Court South - 2nd Section, 10/7/2015, proc.8473/15);
2-An indispensable cost does not have to be a cost that directly results in the obtaining of income. There are several costs that only mediatedly fulfill this function and which, for that reason, do not cease to be considered indispensable, under article 23 of CIRC. (see ruling of Central Administrative Court South - 2nd Section, 1/6/2011, proc.4589/11; ruling of Central Administrative Court South - 2nd Section, 22/1/2015, proc.5327/12; ruling of Central Administrative Court South - 2nd Section, 19/2/2015, proc. 8137/14; ruling of Central Administrative Court South - 2nd Section, 10/7/2015, proc.8473/15);
3-The issue of the burden of proof of the indispensability of the cost is set aside from the presumption of truthfulness of correctly organized accounting (see article 75, No.1, of LGT) as it does not question the truthfulness (existence and amount) of the accounted expense but its relevance, in light of the law, for tax purposes, in this case, its qualification as a deductible cost, in the scope of the cited article 23 of CIRC. (see ruling of Central Administrative Court South - 2nd Section, 2/2/2010, proc.3669/09; ruling of Central Administrative Court South - 2nd Section, 16/10/2014, proc.6754/13; ruling of Central Administrative Court South - 2nd Section, 22/1/2015, proc.5327/12; ruling of Central Administrative Court South - 2nd Section, 19/2/2015, proc. 8137/14; ruling of Central Administrative Court South - 2nd Section, 10/7/2015, proc.8473/15).".
Also on this subject, and with reference to a decision rendered by the Northern Central Administrative Court – process 00624/05.OBEPRT, of 12 January 2012 – it is stated there: "In the consideration and fulfillment of this indeterminate concept – indispensability – it is imperative that the analysis of a specific cost be made in function of corporate activity, that is, in function of its objective within the framework of company activity; indispensable costs will be equivalent to expenses incurred in the interest of the company. The indispensability criterion was created by the legislator precisely to prevent the fiscal consideration of expenses which, despite being accounted for as costs, do not fall within the scope of company activity, which were incurred not for its pursuit but for other extraneous interests".
Indeed, the interpretation of the concept of "indispensability" contained in article 23 of CIRC has been, by doctrine and extensive case law, understood to the effect that costs are considered indispensable when they are equivalent to expenses incurred in the interest of the company; to expenses incurred within the scope of activities arising from its corporate purpose. Only when costs result from decisions that do not meet such requirements should they then be disregarded.
Under article 23 of the IRC Code, the fiscal deductibility of the financing charges incurred by the Claimant, like any other expense, depends on a judgment as to its indispensability for the realization of income or gains subject to tax or for the maintenance of the income-producing source (body of No.1).
The Supreme Administrative Court has understood, as to the sense and operation of the requirement of indispensability of costs for tax purposes, that "the requirement of indispensability of a cost must be interpreted as an indeterminate concept requiring case-by-case completion, as a result of an analysis from 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, considering the corporate object of the commercial entity in question" (see, for example, the rulings of the Supreme Administrative Court of 29.3.2006, process no. 01236/05 and of 15.6.2011, process no. 049/11; following these decisions and in the same sense, see, for example, the ruling of the Central Administrative Court South of 16.10.2014, process no. 06754/13).
It is, consequently, a matter of knowing whether the financing charges subject to correction have the potential to positively influence the obtaining of income by the Claimant.
In other words, to proceed to the application to the case in question of the requirement of indispensability of costs, it is crucial to ascertain, on the basis of all relevant facts and circumstances, the effective and concrete allocation of the financing.
We have already stated above that there must be a causal nexus between the financing charge incurred and the activity developed by the Claimant. And it was also in that sense that the Supreme Administrative Court decided in the ruling of 10.7.2002, process no. 0246/02, in which it decided "the costs provided in that article 23 must relate to the company itself, the taxpayer," therefore, "for a certain amount to be considered a cost of that company it is necessary that the respective activity be developed by itself, not by other companies even if in a relation of domination", reiterating, in the subsequent rulings of 7.2.2007, process no. 01046/05, of 20.5.2009, process 01077/08, of 30.11.2011, process no. 0107/11 and of 30.05.2012, process no. 0171/11, that "costs must relate, first and foremost, to the company itself, the taxpayer, that is, for a certain amount to be considered a cost of that company it is necessary that the respective activity be developed by itself, not by other companies", because, "[o]therwise, how could the exercise of the activity of one company be imputed to another company with which it had some relationship".
Referring to the concrete case, we have the Claimant contracting the financing for payment of invoices to its suppliers, which financing occurred on the invoice due date.
Indeed, in the relationship of economic causality of the cost with the interest of the company, we have that the business interest assessed is that of the company itself that deducts the cost fiscally.
On another front, it is also explicitly stated by the case law that it is a required assumption for the application of article 23 of CIRC "the individual consideration of each company or institution, so that here cannot interfere reasoning of those in which appeal is made to "group" management criteria or even the financing – albeit free of charge – of its shareholders or even the will of these which in that matter is irrelevant, given that it is a legal criterion, being only relevant the legal person whose costs are being examined" (see the rulings of the Central Administrative Court South of 16.10.2007, process no. 01276/06 and of 18.12.2008, process no. 02515/08).
Hence, in compliance with the provision of No.1 of article 23 of CIRC, it is perfectly appropriate to verify whether the assumptions of fiscal deductibility of costs with financing charges were satisfied in attention to the activity of the Claimant and to the tax period in question, being the only required assumption for the application of article 23 of CIRC, it should be underlined, the individual consideration of each company or institution, with group management criteria or even financing being unable to interfere here.
We hold the same understanding as that endorsed in the extensive case law and doctrine, and therefore we understand that the indispensability between costs and income is assessed in an economic sense, and therefore the indispensable expense is equivalent to all expense incurred in order to obtain income and which represents an economic depletion for the company. Indeed, it follows from the legal provision that expenses are considered those which are demonstrably indispensable for the realization of income subject to tax.
We have facts and evidence in the proceedings and from the witness testimony taken, which permits us to conclude that the assumption of the charge by the Claimant was due to a genuine business motivation, consequently the cost is indispensable.
From the foregoing, it is indisputable that the indispensability of the costs incurred by the Claimant underlying the financing operation within the scope of the "G… – ExpressBill Financing Contract" is verified.
And therefore it must be concluded that, in the situation of the proceedings, there is a positive judgment of subsumption in the corporate activity by which indispensable costs will be equivalent to costs incurred in the interest of the company.
Therefore, the costs accounted for by the Claimant in the fiscal year in question, arising from financing charges relating to the provision of bank guarantee for payment of supplier invoices on their due date, satisfy the requirement of indispensability of costs/expenses imposed for tax purposes under article 23 of CIRC.
As a consequence, given the provision of article 23 of CIRC, there occurs the defect of violation of law, by error in the assumptions of law and fact, imputed to the correction to taxable profit made regarding the IRC for the year 2013.
Resulting from the foregoing the annulment, in its entirety, of the assessment for IRC purposes which is the subject of the present proceedings, by a defect that prevents its renewal and the examination of the remaining defects imputed by the Claimant to the AT is rendered moot.
H – OF THE COMPENSATORY INTEREST
The Claimant further petitions for the payment of compensatory interest due on the amount of tax and compensatory interest paid, from the date of its payment on 06.07.2017, until the effective reimbursement thereof.
In view of the foregoing, the assessment, in the part covered by the annulment, results from error of fact and law attributable exclusively to the tax administration, in that the Claimant fulfilled its duty to file.
In truth, it has been demonstrated that the Claimant paid the disputed tax in an amount higher than what is owed. In this manner and by virtue of the provision of articles 61 of CPPT and 43 of LGT, the Claimant is entitled to compensatory interest due, interest which must be accounted for from the date of payment of the undue tax (annulled) until the date of issuance of the respective credit note, the period for payment of which is counted from the date of the beginning of the period for spontaneous execution of this decision (article 61, nos. 2 to 5 of CPPT), all at the rate determined in accordance with the provision of No.4 of article 43 of LGT.
In view of all the foregoing and the invoked legal provisions, it is decided in favor of the Claimant's request.
I – DECISION
Therefore, given all the foregoing, this Arbitral Tribunal decides:
To uphold the request for declaration of illegality of the tax assessment acts for Corporate Income Tax (IRC) and compensatory interest, no. 2017… and no. 2017…, relating to the tax period 2013, in the total amount of 45,391.69€ (forty-five thousand three hundred ninety-nine euros and sixty-nine cents).
To order the Respondent to refund to the Claimant this amount wrongfully assessed and paid, increased by the payment of compensatory interest already accrued relating to the period that elapsed between the date of payment of the tax until its return, as well as in the payment of compensatory interest accruing from the date of notification of this decision until effective and complete payment, all in accordance with nos. 2 to 5 of article 61 of CPPT, at the legal rate determined in accordance with the provision of No.4 of article 43 of LGT until complete reimbursement.
The value of the proceedings is fixed at 44,800.00€, which is equivalent to the value of the assessment given the economic value of the proceedings, assessed by the value of the tax assessments impugned, and in accordance therewith the costs are fixed, in the respective amount of 2,142.00€ (two thousand one hundred forty-two euros), to be borne by the Respondent in accordance with article 12, No. 2 of the Tax Arbitration Regime, article 4 of RCPAT and Table I attached to the latter. – No. 10 of article 35, and nos. 1, 4 and 5 of article 43 of LGT, articles 5, No.1, al. a) of RCPT, 97-A, No. 1, al. a) of CPPT and 559 of CPC).
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Lisbon, 21 March 2018
The Arbitrator
Rita Guerra Alves
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