CAAD 549/2018-T: IRC Tax Assessment on Asset Write-Off Requirements and Expense Deduction Rules

ARBITRAL DECISION

The arbitrators Cons. Jorge Lopes de Sousa (arbitrator-president, appointed by the Deontological Council of CAAD), Dr. Jesuíno Alcântara Martins and Dr. Jorge Carita, appointed by the Claimant and the Respondent, respectively, to form the Arbitral Tribunal, constituted on 24-01-2019, agree as follows:

1. Report

A..., UNIPESSOAL, LDA., with the collective person identification number ... and with tax domicile at ..., ...–..., ...-... Lisbon, hereinafter designated as "Claimant", came, under the terms of Decree-Law No. 10/2011, of 20 January (hereinafter "RJAT"), to request the constitution of an Arbitral Tribunal.

The Claimant requests "the declaration of illegality and consequent annulment of the additional Corporate Income Tax (IRC) assessment relating to the period of 2013, dated 29 November 2017, which resulted in tax payable to the State in the amount of € 109,623.27, plus compensatory interest in the amount of € 12,881.26, as per the account settlement note of 4 December 2017, and of the additional Corporate Income Tax assessment relating to the period of 2014, dated 27 November 2017, which resulted in tax payable to the State in the amount of € 58,093.24, plus compensatory interest in the amount of € 2,177.83, as per the account settlement note of 29 November 2017".

The Respondent is the TAX AND CUSTOMS AUTHORITY.

The request for constitution of the arbitral tribunal was accepted by the President of CAAD and automatically notified to the Tax and Customs Authority on 07-11-2018.

The arbitrators communicated acceptance of the assignment within the applicable period.

On 04-01-2019, the Parties were duly notified of this appointment, and did not express any intention to refuse the appointment of the arbitrators, in accordance with the combined terms of article 11, no. 1, paragraphs a) and b) of the RJAT and articles 6 and 7 of the Code of Ethics.

Thus, in accordance with the provisions of paragraph c) of no. 1 of article 11 of the RJAT, in the wording introduced by article 228 of Law No. 66-B/2012, of 31 December, the collective arbitral tribunal was constituted on 24-01-2019.

The Tax and Customs Authority responded, arguing for the dismissal of the claim.

By dispatch of 27-02-2019, the meeting provided for in article 18 of the RJAT and arguments were dispensed with.

The arbitral tribunal was regularly constituted, in accordance with the provisions of articles 2, no. 1, paragraph a), and 10, no. 1, of Decree-Law No. 10/2011, of 20 January, and is competent.

The Parties are duly represented, enjoy legal personality and capacity, are legitimate and are represented (articles 4 and 10, no. 2, of the same decree-law and article 1 of Order No. 112-A/2011, of 22 March).

The proceedings are not affected by any nullities.

2. Factual Matters

2.1. Proven Facts

A) The Claimant is a limited liability commercial company that declared commencement of activity for tax purposes on 30-01-2003, with CAE no. 47784 – Retail Trade of Other New Products in Unspecified Specialized Establishment, and is subject to the general tax regime for Corporate Income Tax purposes and, for VAT purposes, to the normal monthly periodicity regime;

B) On 22-05-2014, the Claimant submitted Form 22 Declaration No. 3247-C2313-20, relating to the period of 2013, which resulted in a refund in the amount of € 122,740.29 in accordance with assessment No. 2014...;

C) On 28-04-2015, the Claimant submitted Form 22 Declaration No. ..., relating to the period of 2014, which resulted in a refund in the amount of € 30,060.52 in accordance with assessment No. 2015...;

D) Under Service Order No. OI2017... of 04.10.2017, an internal inspection action was carried out for the period 2013 and, as a result, corrections were proposed to the taxable profit declared in Corporate Income Tax in the amount of € 334,342.47;

E) As a consequence of the aforesaid correction, the taxable profit declared by the Claimant, in the amount of € 1,511,911.41 changed to € 1,846,253.88, and the Corporate Income Tax assessment No. 2017... was issued, materialized by the account settlement demonstration note No. 2017..., relating to the period of 2013, in the amount of € 109,623.27;

F) The Tax Inspection Report was prepared for the financial year 2013, together with the request for arbitral ruling, the contents of which are hereby reproduced, in which, among other things, the following is stated:

III - Description of Facts and Grounds for Purely Arithmetic Corrections to Taxable Matter

III.1.1. Corporate Income Tax (IRC)

III.1.1. Expenses and Losses from Disposal of Tangible Fixed Assets not deductible - article 38 (currently 31.B) of CIRC

As a result of the internal inspection action with no. 012017..., relating to the Corporate Income Tax and VAT of the financial year 2014, to which the taxpayer was subject, it was found that account 68733 - Expenses and Losses on Non-Financial Investments - Disposals of Tangible Fixed Assets presented a final debit balance of €214,147.78, which is not tax-deductible because it concerns disposals of tangible fixed assets of stores in relation to which the taxpayer had not complied with the provisions of article 31.B no. 3 of CIRC (did not communicate the disposals to the competent Tax Services, nor did it have a disposal report). Having declared in the Simplified Business Information Declaration (IES) of 2013 submitted that account 687 presented a balance of €334,342.00, the present inspection order was issued to ascertain whether that account contains disposals of tangible fixed assets not deductible under the terms of the CIRC provision cited (article 38, no. 3 of CIRC at the time).

Thus, the taxpayer was notified through Office No. ... of 13-10-2017 from this Tax Office to submit, in relation to that financial year, the General Analytical Trial Balance Before and After Results Determination, the extract of the sub-account of account 687 - Expenses and Losses on Non-Financial Investments relating to Disposals of Tangible Fixed Assets and copies of documents supporting the accounting records in that sub-account. (See Annex 1 page 1)

Following analysis of the elements requested from the taxpayer, it is verified through the General Analytical Trial Balance and account extract sent via email that the sub-account 68733 - Disposals - Of Tangible Fixed Assets presents accounting records totaling €334,342.47 (final balance as of 31-12-2013).

The taxpayer also sent the internal documents with the accounting entries made in account 68733, relating to the disposal of tangible assets from twenty-nine stores. Generally, it is found that the accounting entries made consisted in debiting account 68733 in exchange for account 433xx - Basic Equipment of the acquisition value recorded in this latter account, and debiting account 438xx - Accumulated Depreciation in exchange for account 68733 of the amount of accumulated depreciation at the date of disposal (accounting entries dated 30-06-2013 and 31-12-2013) (See Annex 1 pages 3 to 102).

The following table presents the total values recorded as debit and credit of account 68733 per store relating to disposals of tangible fixed assets:

Under no. 3 of article 38 (currently 31.B) of CIRC, whenever there is physical disposal, dismantling, abandonment or rendering unusable of non-current assets, the provisions of paragraphs a), b) and c) of that number must be observed, that is, a disposal report must be prepared signed by two witnesses reporting the facts that motivated the exceptional devaluation, containing a discriminative list of the assets in question, and communicated to the tax service of the location of the physical existence of the assets at least 15 days before, the place, date and time of physical disposal, in accordance with the transcription of the CIRC of the cited provision:

Article 38 - Exceptional Devaluations

(...)

Thus, in the notification made to the taxpayer through Office No. ... of 13-10-2017, a copy of the disposal report(s) and the respective communication(s) to the tax service(s) in the area of the location of the assets to be disposed, which are referred to in paragraphs a) and c) of no. 3 of article 38 (currently 31.B) of CIRC" was requested, and the taxpayer responded via email that it did not possess such documents (See Annex 1 page 2)

Thus, given that the taxpayer recorded a total of €334,342.47 of expenses in the 2013 financial year in account 68733, relating to the net book value of tangible fixed assets disposed of from the stores identified in the table above, not having complied with the requirements contained in no. 3 of article 38 (currently 31.B) of CIRC, that is, not having a disposal report nor having made the necessary communication of the place, time and reason for the disposals to the competent Tax Services, such expense cannot be accepted for tax purposes. A correction to the taxable matter of 2013 is thus proposed in the amount of €334,342.47.

G) Following the inspection relating to the 2013 financial year, the Corporate Income Tax assessment No. 2017... was issued, dated 20-11-2017;

H) The Claimant filed a gracious complaint regarding the aforementioned assessment relating to the 2013 financial year, which was dismissed by dispatch notified to the Claimant on 08-08-2018;

I) The decision on the gracious complaint refers to the substantiation of information, the contents of which are hereby reproduced, in which, among other things, the following is stated:

IV - ASSESSMENT OF THE REQUEST

1. The taxpayer was notified through office no. ... of 13-10-2017 from this Tax Office to submit the General Analytical Trial Balance Before and After Results Determination, the extract of the sub-account 68733 - Expenses and Losses on Non-Financial Investments relating to Disposals of Tangible Fixed Assets and copies of documents supporting the accounting records in that sub-account. (see annex I of the inspection procedure)

2. Following analysis of the elements requested from the taxpayer, it was verified through the maps sent and account extract that the accounting records relating to disposals of tangible fixed assets totaled the amount of € 334,342.47.

3. Under no. 3 of article 38 (currently 31-B) of CIRC, whenever there is physical disposal, dismantling, abandonment or rendering unusable of non-current assets, the provisions of paragraphs a), b) and c) of that number must be observed, that is, a disposal report must be prepared signed by two witnesses reporting the facts that motivated the exceptional devaluation, containing a discriminative list of the assets in question, and communicated to the tax service of the location of the physical existence of the assets at least 15 days before, the place, date and time of physical disposal.

4. Thus, in the notification made to the taxpayer referred to above, a copy of the disposal report(s) and the respective communication(s) to the tax service in the area of the location of the assets to be disposed, which are referred to in paragraphs a), b) and c) of no. 3 of article 38 (currently 31-B) of CIRC, was requested, and the taxpayer responded via email that it did not possess such documents.

5. Thus, given that the taxpayer considered as expenses the amount of € 334,342.47 and did not comply with the requirements contained in no. 3 of article 38 (currently 31-B) of CIRC, that is, did not have a disposal report nor had made the necessary communication of the place, time and reason for the disposals to the competent tax services, such expense cannot be accepted for tax purposes.

6. Although the claimant herein comes to clarify the reasons for the disposals of fixed assets, these will only be accepted for tax purposes provided that the physical disposal is proven through the respective report, which in the case at hand did not occur.

7. In light of the above, the burden of proof fell upon the claimant, in accordance with the terms and for the purposes of no. 3 of article 38 (currently 31-B) of the Corporate Income Tax Code, proof which it did not produce (see article 74 of the General Tax Law), either during the inspection procedure or when presenting the present gracious complaint.

8. With respect to elements of assets subject to depreciation whose unit costs do not exceed € 1,000.00, and which the claimant herein alleges could have been applied the provisions of article 33 of the Corporate Income Tax Code, that is, could have deducted as expenses, in their entirety, the acquisition value of some of these assets in the respective year of acquisition, it should be noted the following.

9. In accordance with the provisions of no. 1 of article 19 of decree-law no. 25/2009 of 14/09, these elements of reduced value, subject to depreciation, may be wholly depreciated or amortized in a single taxation period; however, it is verified in no. 3 of the same article that these assets considered in no. 1 must appear in the depreciation and amortization maps by their global value, in a separate line, with the designation "Elements of unit cost less than € 1,000.00, whose maximum useful life period is considered, for tax purposes, of one year."

10. As for what the claimant herein alleges should have been considered in the inspection analysis, it should be noted that in the inspection procedure, it is only necessary to verify whether what the taxpayer declares to the state complies with the tax rules.

11. Now, if the taxpayer did not declare as an expense the said elements it considers to be of reduced value, nor did it attach elements proving the provisions of article 33 of the Corporate Income Tax Code and article no. 19 of decree-law no. 25/2009, the inspection could not consider this aspect in the inspection analysis.

12. Given the foregoing, it is considered that the conditions are not met for the claimant's claim to be granted.

V - PROPOSED DECISION

1. For the reasons stated above, the dismissal of the present complaint is proposed with the grounds indicated above.

J) With respect to the 2013 financial year, an internal inspection procedure was also conducted, OI2017..., which resulted in proposals for arithmetic corrections to the taxable profit declared in Corporate Income Tax in the amount of € 214,147.78;

K) Thus, the taxable profit declared by the Claimant, in the amount of € 1,338,646.32, changed to € 1,552,794.10, and the Corporate Income Tax assessment No. 2017... was issued, materialized by the account settlement demonstration note No. 2017..., relating to the period of 2014, in the amount of € 58,093.24;

L) The Tax Inspection Report was prepared for the financial year 2014, together with the request for arbitral ruling, the contents of which are hereby reproduced, in which, among other things, the following is stated:

III - Description of Facts and Grounds for Purely Arithmetic Corrections to Taxable Matter

III.1. Corporate Income Tax (IRC)

III.1.1. Expenses and Losses from Disposal of Tangible Fixed Assets not deductible - article 31.B of CIRC

Within the scope of Ongoing Monitoring of the taxpayer, as a result of the analysis of the Form 22 Corporate Income Tax return declarations and simplified business information declarations submitted relating to 2014, the same was notified through Office No. ... of 31-05-2017 from this Tax Office to submit, in relation to that financial year, specifically the General Analytical Trial Balance, the Report and Accounts and the extract of the sub-accounts of account 687 - Expenses and Losses on Non-Financial Investments and a copy of the document of highest value recorded in each of those sub-accounts.

Following analysis of the elements requested from the taxpayer, it was verified through the General Analytical Trial Balance and account extract sent via email that the sub-account 68733 - Disposals - Of Tangible Fixed Assets presented accounting records in a total of €214,147.78 (final balance as of 31-12-2014).

The taxpayer also sent the internal documents with the accounting entries made in account 68733, relating to the disposal of tangible assets from ten stores, and also the listing of assets subject to disposal containing their respective "Acquisition Value" and "Accumulated Depreciation" in relation to stores No. 484, 483 and 360. Generally, it is found that the accounting entries made consisted in debiting account 68733 in exchange for account 433xx - Basic Equipment of the acquisition value recorded in this latter account, and debiting account 438xx - Accumulated Depreciation in exchange for account 68733 of the amount of accumulated depreciation at the date of disposal (accounting entries dated 30-06-2014 and 31-12-2014). (See Annex 1)

The following table presents the total values recorded as debit and credit of account 68733 per store relating to disposals of tangible fixed assets (detailed in Annex 2):

Under no. 3 of article 31.B of CIRC, whenever there is physical disposal, dismantling, abandonment or rendering unusable of non-current assets, the provisions of paragraphs a), b) and c) of that number must be observed, that is, a disposal report must be prepared signed by two witnesses reporting the facts that motivated the exceptional devaluation, containing a discriminative list of the assets in question, and communicated to the tax service of the location of the physical existence of the assets at least 15 days before, the place, date and time of physical disposal, in accordance with the transcription of the CIRC of the cited provision:

Article 31-B

Losses by impairment in non-current assets

(...)

Thus, the taxpayer was requested via email regarding the disposals of stores No. 484 and 1562 (doc. no.... and ... recorded in account 68733), for a copy of the disposal report and the communication to the Tax Service referred to in paragraphs a) and c) of no. 3 of article 31-B of CIRC. (See Annex 3).

The taxpayer responded that it did not possess a disposal report or communication to the Tax Service of those stores, and it was subsequently confirmed by telephone that the taxpayer also did not have a disposal report in accordance with the terms defined in paragraphs a) and b) of no. 3 of article 31.B of CIRC, nor had made the communication to the Tax Service provided for in paragraph c) of no. 3 of article 31.B of CIRC regarding the disposals of the remaining stores.

Thus, given that the taxpayer recorded a total of €214,147.78 of expenses in the 2014 financial year in account 68733, relating to the net book value of tangible fixed assets disposed of from the stores identified in the table above, not having complied with the requirements contained in no. 3 of article 31-B of CIRC, that is, not having a disposal report nor having made the necessary communication of the place, time and reason for the disposals to the competent Tax Services, such expense cannot be accepted for tax purposes. A correction to the taxable matter of 2014 is thus proposed in the amount of €214,147.78

M) Following the inspection relating to the 2014 financial year, the Corporate Income Tax assessment No. 2017... was issued, dated 20-11-2017;

N) The Claimant filed a gracious complaint regarding the aforementioned assessment relating to the 2014 financial year, which was dismissed by dispatch notified to the Claimant on 08-08-2018;

O) The decision on the gracious complaint refers to the substantiation of information, the contents of which are hereby reproduced, in which, among other things, the following is stated:

IV - ASSESSMENT OF THE REQUEST

1. The taxpayer was notified through office no. ... of 31-05-2017 from this Tax Office to submit the General Analytical Trial Balance, the Report of Accounts and the extract of the sub-accounts of account 687 - Expenses and Losses on Non-Financial Investments and a copy of the document of highest value recorded in each of those sub-accounts. (see annex I of the inspection procedure)

2. Following analysis of the elements requested from the taxpayer, it was verified through the maps sent and account extract that the accounting records relating to disposals of tangible fixed assets totaled the amount of € 214,147.78.

3. The taxpayer also sent the internal documents with the accounting entries made in account 68733, relating to the disposal of tangible assets from ten stores, and the listing of assets subject to disposal containing their respective "acquisition value" and "accumulated depreciation" in relation to stores no. 484, 483 and 360. (see annex I of the inspection procedure)

4. Under no. 3 of article 38 (currently 31-B) of CIRC, whenever there is physical disposal, dismantling, abandonment or rendering unusable of non-current assets, the provisions of paragraphs a), b) and c) of that number must be observed, that is, a disposal report must be prepared signed by two witnesses reporting the facts that motivated the exceptional devaluation, containing a discriminative list of the assets in question, and communicated to the tax service of the location of the physical existence of the assets at least 15 days before, the place, date and time of physical disposal.

5. The taxpayer was requested via email for a copy of the disposal report and the communication to the Tax Service, regarding the disposals of stores no. 484 and 562 (documents nos. ... and ... recorded in account 68733). (see annex 3 of the inspection procedure)

6. The taxpayer responded that it did not possess a disposal report or communication to the Tax Service of those stores, and it was subsequently confirmed by telephone that the taxpayer also did not have a disposal report in accordance with the terms defined in paragraphs a) and b) of no. 3 of article 31-B of CIRC, nor had made the communication to the Tax Service provided for in paragraph c) of no. 3 of article 31-B of CIRC regarding the disposals of the remaining stores.

7. Thus, given that the taxpayer considered as expenses the amount of € 214,147.78 and did not comply with the requirements contained in no. 3 of article 38 (currently 31-B) of CIRC, that is, did not have a disposal report nor had made the necessary communication of the place, time and reason for the disposals to the competent tax services, such expense cannot be accepted for tax purposes.

8. Although the claimant herein comes to clarify the reasons for the disposals of fixed assets, these will only be accepted for tax purposes provided that the physical disposal is proven through the respective report, which in the case at hand did not occur.

9. In light of the above, the burden of proof fell upon the claimant, in accordance with the terms and for the purposes of no. 3 of article 31-B) of the Corporate Income Tax Code, proof which it did not produce (see article 74 of the General Tax Law), either during the inspection procedure or when presenting the present gracious complaint.

10. Given the foregoing, it is considered that the conditions are not met for the claimant's claim to be granted.

V - PROPOSED DECISION

1. For the reasons stated above, the dismissal of the present complaint is proposed with the grounds indicated above.

P) The inspection actions were considered by the Tax and Customs Authority to be of an internal nature;

Q) During the course of the inspection action relating to the 2013 financial year, the Tax Inspector, through a letter, requested from the Claimant the following elements:

1. Analytical Trial Balance Before and After Results Determination,

2. Extract of the sub-account of account 687 - Expenses and Losses on Non-Financial Investments relating to Disposals of Tangible Fixed Assets and copies of documents supporting the accounting records in that sub-account.

3. Copy of the disposal report(s) and the respective communication(s) to the tax service(s) in the area of the location of the assets to be disposed, which are referred to in paragraphs a) and c) of no. 3 of article 38 (currently 31.-B) of CIRC.

R) During the course of the inspection action relating to the 2014 financial year, the Tax Inspector, through electronic mail, requested from the Claimant the following elements:

1. Analytical Trial Balance Before and After Results Determination;

2. Copy of the Management Report and the Annex to the Financial Statements;

3. Copy of the Minutes of Approval and Distribution of Results for the periods ended 31-12-2014 and 31-12-2013;

4. With respect to the value declared in field A5118 of the 2014 IES in Current Assets - Shareholders/Partners in the amount of €49,534,801.18, extract of the respective SNC account, as well as a copy of the five documents of highest value supporting the values recorded in that account;

5. Extract of the sub-accounts of account 687 - Expenses and Losses on Non-Financial Investments and a copy of the document of highest value recorded in each of those sub-accounts.

6. In relation to the values declared in VAT relating to intra-community acquisitions, identify the respective intra-community suppliers (name, country, tax identification number and respective annual value declared for each supplier).

S) The Claimant was notified to exercise the right to a hearing regarding the draft inspection reports, but did not exercise it;

T) On 06-11-2018, the Claimant presented the request for arbitral ruling that gave rise to the present proceedings.

2.2. Unproven Facts

It was not proven whether the stores referred to in the Tax Inspection Report were renewed or closed, nor what became of the assets that formed part of them.

2.3. Substantiation of the Determination of Factual Matters

The proven facts are based on documents submitted by the Claimant and on the administrative file.

3. Legal Matters

The Claimant imputes to the contested assessments defects which it designates as omission of legal formalities and lack of substantiation.

However, the grounds of the request for arbitral ruling are not limited only to defects of such types, as indeed was understood by the Tax and Customs Authority, when it pronounced itself, in its Response, on the error in application of the substantive legal regime.

3.1. Omission of Legal Formalities

The Claimant argues as follows, in summary:

– for an inspection procedure to be considered internal, not only must all of its activity take place in the services of the Tax Administration, but it must consist in the formal and coherence analysis of documents that have been presented to it by the taxpayer;

– an internal inspection is one that results from the crossing of computer data available to the Tax Administration;

– if this entity proceeds to analyze other documents – as was the case with the claimant herein – the procedure must necessarily be qualified as external;

– requesting in writing all documentation is not materially different from collecting it at the taxpayer's premises, and should not therefore have a different legal treatment, constituting, in both cases, acts of inspection of an external nature;

– the inspections of the financial years 2013 and 2014 involved the verification of elements existing outside the tax services, and should therefore be considered external;

– articles 46, no. 2, and 49, no. 1, of the Complementary Regime for Tax Inspection Procedures (RCPIT) were violated.

The Tax and Customs Authority argues as follows, in summary:

– with the current wording of article 13 of the RCPIT, applicable from 02-07-2016, it was clarified "that internal inspection procedure comprises the formal and coherence analysis of documents held by AT or obtained in the course of the said procedure";

– in light of the current wording of article 13, what actually determines the internal or external nature of a procedure is the place where acts are performed and not the obtaining of documents and/or request for cooperation and clarifications from the taxpayer;

– as no inspection acts were performed or any evidentiary elements collected and consulted at the Claimant's premises or at third parties' premises, the procedure clearly does not have an external nature.

It is manifest that the Tax and Customs Authority is correct on this issue, in light of the current wording of article 13 of the RCPIT, introduced by Decree-Law No. 36/2016, of 1 July, which was in force in 2017, when the inspections in question were carried out.

The original wording of article 13 of the RCPIT was as follows:

Article 13

Place of the Inspection Procedure

As to the place of execution, the procedure may be classified as:

a) Internal, when inspection acts are performed exclusively in the services of the tax administration through the formal and coherence analysis of documents;

b) External, when inspection acts are performed, in whole or in part, at premises or installations of taxpayers or other tax obligors, of third parties with whom they maintain economic relations or at any other location to which the administration has access.

In light of this original wording, the performance of diligences aimed at obtaining documents meant that the inspection could not be considered internal, as it could not be considered to be performed "exclusively in the services of the tax administration through the formal and coherence analysis of documents". ( )

However, with the wording introduced by Decree-Law No. 36/2016, of 1 July, article 13 of the RCPIT came to establish the following, in its paragraph a):

As to the place of execution, the procedure may be classified as:

a) Internal, when inspection acts are performed exclusively in the services of the tax administration through the formal and coherence analysis of documents held by it or obtained in the course of the said procedure; (emphasis ours)

As can be seen from the final part of this paragraph a), the obtaining of documents in the course of the procedure does not rule out the classification of the inspection as internal, provided that "inspection acts are performed exclusively in the services of the tax administration through the formal and coherence analysis" of those documents.

Thus, as the inspections were considered internal, there was no omission of the legal formalities referred to by the Claimant, provided for in articles 46, no. 2, and 49, no. 1, of the RCPIT, which are only applicable to inspections classified as external.

3.2. Insufficiency of Substantiation and Error of Interpretation of Applicable Rules

The Claimant argues that the contested acts are insufficiently substantiated, alleging the following, in summary:

– the corrections made were limited to citing the respective legal rule without analyzing the grounds that led to the disposal of the assets;

– in the clarification request made by AT and as mentioned on page 8 of the report, elements that supposedly should be included in the tax file were requested, but clarifications were not requested on the nature and grounds of the disposals;

– the disposals to tangible fixed assets that the taxpayer made were motivated by store renewal (due to the need to modernize it); expiry of the lease or occupation agreement, as it was not possible or desired to renew it; or ultimately because the store was operating at a loss and the administration decided to close it;

– the inspection action was classified as internal and, as a result, AT did not make the observation that seemed necessary to substantiate the corrections;

– in the case of disposals resulting from abandonment of the store, such fact is easily provable by direct observation of the location, which was not done;

– the legal rule contained in the former article 38 of the Corporate Income Tax Code cannot be interpreted as imperative, but rather as regulatory;

– if the taxpayer proceeds to destroy assets in its portfolio, it has no way of deflecting the presumption of their transfer, that is, it cannot prove it afterwards.

– however, this is not what happened in the present case, as the closure of a store is a fact verifiable afterwards, being possible by simple observation of the same to verify that it is no longer occupied by the taxpayer, and, consequently, the abandonment of the space implies disposal of assets.

– the tax inspection limited itself to verifying the non-existence of documents, not having inquired during the inspection action instruction phase, the reason or nature of the disposals;

– in the list of disposals of tangible fixed assets, contained on page 7 of the inspection report, there is the existence of assets, with respect to which the taxpayer could have applied the provisions of article 33 of the Corporate Income Tax Code;

– with respect to elements of assets subject to depreciation whose unit costs do not exceed € 1,000, the deduction is accepted, in the taxation period of their acquisition or production cost, except when they form an integral part of a set of elements that should be depreciated or amortized as a whole.

– this means that the taxpayer could have deducted as expenses, in their entirety, the acquisition value of some of these assets in the respective year of acquisition.

– this aspect too should have been considered in the inspection analysis;

– we are facing a limited analysis and insufficient substantiation;

– being deficient the substantiation adduced, such equals lack of substantiation, which will lead to the inevitable voidability of the acts due to a formal defect.

In administrative and tax terminology, the term "substantiation" is used with two meanings: "material substantiation" and "formal substantiation".

Formal substantiation "can be understood as an exposition enunciating the reasons or motives of the decision", while material substantiation corresponds to "the referral of what was decided to an evaluative parameter that justifies it: in the first sense, the formal aspect of the operation is privileged, associating it with the transparency of the decision-making perspective; in the second, relevance is given to the substantive suitability of the act performed, integrating it into a system of reference in which it finds bases of legitimacy". (...) ( )

It is with this latter meaning that case law has spoken of lack of "substantive substantiation" or "substantive substantiation", which corresponds to the failure to demonstrate the substantive prerequisites of the corrective action of the tax administration. ( )

"The duty of express substantiation requires that the administrative body indicate the reasons of fact and law that determined it to perform that act, externalizing, in its decisive features, the internal procedure of formation of the decision-making will. The duty is fulfilled provided there is a declaration expressing a discourse that purports to justify the decision, regardless of whether that reasoning is adequate". ( )

Only lack of formal substantiation will constitute a formal defect.

Lack of substantive substantiation, in particular due to non-correspondence to the reality of the substantive prerequisites invoked (which is equivalent to failure to prove those prerequisites when the burden of proof falls on the Administration) or due to error of law, will constitute a defect of error regarding the substantive prerequisites of fact or error regarding the substantive prerequisites of law.

As can be seen from the grounds invoked by the Claimant, it does not limit itself to imputing to the contested decisions a formal defect of insufficient substantiation, as it includes allegation of error in application of the invoked rules, in light of the reasons for the disposals, which it understands should rule out the application of article 38 (current article 31-B) of CIRC, as they are not imperative rules but rather regulatory ones (articles 43 to 53 of the request for arbitral ruling) and there exist tangible fixed assets to which the Claimant could have applied the regime of article 33 of CIRC (articles 54 to 57 of the request for arbitral ruling).

Moreover, it was with this scope of not only being a matter of lack of formal substantiation that the Tax and Customs Authority interpreted the request for arbitral ruling, when making cumulative reference to the "alleged lack of substantiation and erroneous interpretation of the rules" (page 10 of the response).

The Tax and Customs Authority alleges the following, in summary:

– the case law of the Supreme Administrative Court (STA) has uniformly come to understand that the substantiation of the act is a relative concept that varies according to the type of act and the circumstances of the specific case, and that substantiation is sufficient when it allows a normal recipient to understand the cognitive and evaluative itinerary followed by the author of the act, that is, when the recipient can know the reasons that led the author of the act to decide in that way and not in another;

– the reasons for the decisions of the Tax and Customs Authority were widely understood and subsequently referenced and attacked by the Claimant in its request for arbitral ruling which, otherwise, would not have presented it;

– if there was a situation of lack or insufficiency of substantiation, it was incumbent on the Claimant to make use of the mechanism provided for in article 37 of the Code of Tax Procedure and Process (CPPT) and request the respective notification or issuance of the certificate in conformity.

3.2.1. Question of Insufficiency of Substantiation

The requirement for substantiation of harmful administrative acts is contained in no. 3 of article 268 of the Constitution of the Portuguese Republic (CRP), which establishes that "administrative acts are subject to notification to the interested parties, in the form provided by law, and require express and accessible substantiation when they affect legally protected rights or interests".

Especially for the substantiation of tax acts, article 77, nos. 1 and 2, of the General Tax Law (LGT), establishes that "the decision of the procedure is always substantiated by means of a brief exposition of the reasons of fact and law that motivated it, and the substantiation may consist of mere declaration of agreement with the grounds of previous opinions, information or proposals, including those that form part of the tax inspection report" and that "the substantiation of tax acts may be made in a summary form, and must always contain the applicable legal provisions, the qualification and quantification of the tax facts and the operations for determining the taxable matter and the tax".

"It is equivalent to lack of substantiation the adoption of grounds which, by obscurity, contradiction or insufficiency, do not specifically clarify the motivation of the act" [article 153, no. 2, of the Code of Administrative Procedure (CPA) of 2015, subsidiarily applicable under the terms of article 2, paragraph c), of the LGT].

The Supreme Administrative Court has uniformly come to understand that the substantiation of the administrative or tax act is a relative concept that varies according to the type of act and the circumstances of the specific case, but that substantiation is sufficient when it allows a normal recipient to become aware of the cognitive and evaluative itinerary followed by the author of the act to make the decision, that is, when the recipient can know the reasons why the author of the act decided as it did and not in a different manner, so as to trigger administrative or contentious mechanisms of challenge. ( )

In the case at hand, the inspection reports allow one to clearly perceive the reasons that led the Tax and Customs Authority to make the corrections in the context of Corporate Income Tax, which are the non-compliance with the requirements that it understood to be required by no. 3 of article 38 of CIRC, as to the 2013 financial year, and by no. 3 of article 31-B of the same Code as to the 2014 financial year, specifically not having a disposal report, in accordance with the terms defined in those rules and not having made the communications to the Tax Service provided for therein.

Moreover, as to the question of elements of assets of unit value not exceeding € 1,000.00, the decision on the gracious complaint relating to the 2013 financial year also clarifies the reasons why the Tax and Customs Authority did not grant the Claimant's claim, specifically understanding that "the taxpayer did not declare as an expense the said elements it considers to be of reduced value, nor did it attach elements proving the provisions of article 33 of CIRC and article no. 19 of decree-law no. 25/2009".

Thus, the contested assessments do not suffer from a defect of lack of formal substantiation.

3.2.2. Question of Error of Interpretation of Applicable Rules

The Claimant argues that the corrections made suffer from an error of interpretation of the applicable rules, specifically article 38 of CIRC, in the wording resulting from the republication made by Decree-Law No. 159/2009, of 13 July (in force in 2013), and of the corresponding article 31-B of the same Code, in the wording introduced by Law No. 2/2014, of 16 January, in force from the 2014 financial year onwards.

In nos. 1 of the articles referred to, the acceptance as tax expenses of losses by impairment in non-current assets "resulting from abnormal causes duly proven, specifically, disasters, natural phenomena, exceptionally rapid technical innovations or significant changes, with an adverse effect, in the legal context" is admitted.

Defining the "legal context" to which these rules refer, in no. 3 of the referred article 38

3 – When the facts that determined the exceptional devaluations of the assets and the physical disposal, dismantling, abandonment or rendering unusable occur in the same taxation period, the net tax value of the assets, adjusted for any recoverable amounts, may be accepted as an expense for the period, provided that:

a) The physical disposal, dismantling, abandonment or rendering unusable of the assets is proven through the respective report, signed by two witnesses, and the facts that originated the exceptional devaluations are identified and proven;

b) The report is accompanied by a discriminative list of the elements in question, containing, with respect to each asset, the description, year and acquisition cost, as well as the net book value and net tax value;

c) It is communicated to the tax service of the area of the location where those assets are situated, with a minimum notice of 15 days, the place, date and time of physical disposal, dismantling, abandonment or rendering unusable and the total net tax value thereof.

The wording of no. 3 of article 31-B is essentially identical, with differences only in the terminology used and resulting from the new orthographic agreement observed in its wording.

3 - When the facts that determined the exceptional devaluations of the assets and the physical disposal, dismantling, abandonment or rendering unusable occur in the same taxation period, the net tax value of the assets, adjusted for any recoverable amounts, may be accepted as an expense for the period, provided that:

a) The physical disposal, dismantling, abandonment or rendering unusable of the assets is proven through the respective report, signed by two witnesses, and the facts that originated the exceptional devaluations are identified and proven;

b) The report is accompanied by a discriminative list of the elements in question, containing, with respect to each asset, the description, year and acquisition cost, as well as the net book value and net tax value;

c) It is communicated to the tax service of the area of the location where those assets are situated, with a minimum notice of 15 days, the place, date and time of physical disposal, dismantling, abandonment or rendering unusable and the total net tax value thereof;

The Claimant argues, in summary:

– the disposals of tangible fixed assets that the taxpayer made center on the following reasons:

• store renewal (due to the need to modernize it);

• expiry of the lease or occupation agreement, as it was not possible or desired to renew it; or

• ultimately because the store was operating at a loss and the administration decided to close it;

– these requirements are not imperative, being a merely regulatory rule, justified by the circumstance that "if the taxpayer proceeds to destroy assets in its portfolio, it has no way of deflecting the presumption of their transfer, that is, it cannot prove it afterwards";

– this is not what happened in the present case, as the closure of a store is a fact verifiable afterwards, being possible by simple observation of the same to verify that it is no longer occupied by the taxpayer, and, consequently, the abandonment of the space implies disposal of assets;

– in the list of disposals of tangible fixed assets, contained on page 7 of the inspection report, there is the existence of assets, with respect to which the taxpayer could have applied the provisions of article 33 of the Corporate Income Tax Code.

The Tax and Customs Authority argues, in summary, as follows:

– by recording those amounts as expenses, the burden falls on the Claimant, in accordance with article 74 of the General Tax Law, to demonstrate that those amounts are tax-accepted and deductible, especially as the requested documentation should be included in the tax file (no. 6 of article 38 of CIRC);

– the Claimant did not prepare the required documentation nor did it make the necessary communication;

– furthermore, the Claimant never – in the inspection procedure, in which it did not exercise the right to a hearing, in the gracious complaint process or in the present proceedings – made any kind of proof of the actual physical disposal of the assets in question;

– and even the reasons alleged do not seem suitable and/or sufficient to prove the necessity of disposal of those quantities of assets;

– eventual store renewal (capable of proof by means of exhibition of invoices for works, for example) does not necessarily require the disposal of all assets;

– equally, the expiry of a store lease (provable through presentation of the contract) also does not necessarily entail the disposal of all assets;

– with respect to elements of assets subject to depreciation whose unit costs do not exceed € 1,000.00, and which the Claimant alleges could have been applied the provisions of article 33 of CIRC, it will always be said that, in accordance with the provisions of no. 1 of article 19 of Decree-Law 25/2009 of 14.09, these elements of reduced value, subject to depreciation, may be wholly depreciated or amortized in a single taxation period;

– however, in no. 3 of the same article, that these assets considered in no. 1 must appear in the depreciation and amortization maps by their total value, in a separate line, with the designation "Elements of unit cost less than (euro) 1,000.00", whose maximum useful life period is considered, for tax purposes, of one year.";

– if the taxpayer did not declare as an expense the said elements it considers to be of reduced value, nor did it attach elements proving the provisions of article 33 of CIRC and article no. 19 of Decree-Law 25/2009, the inspection services could not consider this aspect in the analysis carried out in the procedure.

It is manifest that the Claimant did not satisfy the formal requirements demanded by nos. 3 of articles 38 and 31-B referred to for proof of physical disposal of assets.

On the other hand, there is no legal support for understanding that the required requirements are not imperative, as the terminology used, which includes the expression "may be accepted as an expense for the period, provided that...", is not compatible with the interpretation defended by the Claimant, that these are rules of a regulatory nature. Moreover, regulatory rules are directed at the services, aiming to optimize their action, and not at taxpayers.

Thus, the exclusion of the application of the requirements referred to in those rules would only be viable through a restrictive interpretation, which is that implicitly the Claimant defends when saying that the justification for these formal requirements is that "if the taxpayer proceeds to destroy assets in its portfolio, it has no way of deflecting the presumption of their transfer, that is, it cannot prove it afterwards", but "this is not what happened in the present case", as "the closure of a store is a fact verifiable afterwards, being possible by simple observation of the same to verify that it is no longer occupied by the taxpayer, and, consequently (...) the abandonment of the space implies disposal of assets".

The reason for those formal requirements is the proof of physical disposal, dismantling, abandonment or rendering unusable of the assets, so a restrictive interpretation will be viable, whenever such proof is possible by other means.

In truth, "the teleological method has increasingly moved to the foreground in relation to literal interpretation. According to the long-known principle: cessante ratione legis, cessat lex ipsa, the purpose and reason for being should matter more than the literal sense thereof. The ratio should prevail, not only within the limits of a literal text often equivocal, but also breaking the fetters of that literal text or restricting a legal formula of scope that is too broad. In these latter cases one speaks of extensive or restrictive interpretation". ( )

However, in the case at hand, as the Tax and Customs Authority correctly notes, neither in the inspection procedure nor in the present proceedings was such proof of physical disposal, dismantling, abandonment or rendering unusable of the assets made.

Furthermore, contrary to what the Claimant argues, one cannot understand that the renewal of stores or their closure due to expiry of lease or decision by the administration (which the Claimant, in article 43 of the request for arbitral ruling, states took place), implies the total disposal of assets that formed part of them.

Specifically, as the Tax and Customs Authority states, "eventual store renewal (capable of proof by means of exhibition of invoices for works, for example) does not necessarily require the disposal of all assets" and "the expiry of a store lease (provable through presentation of the contract) also does not necessarily entail the disposal of all assets".

In any event, it is manifest that the Claimant did not present any proof of the disposal of assets in the portfolio of values corresponding to those it recorded in the 2013 and 2014 financial years, referred to in the tax inspection reports.

For that reason, there is no ground for ruling out the application to the situation of these proceedings of the requirements provided for in those nos. 3 of articles 38 and 31-B.

3.2.3. Elements of Assets Subject to Depreciation Whose Unit Costs Do Not Exceed € 1,000

The Claimant argues that "in the list of disposals of tangible fixed assets, contained on page 7 of the inspection report, there is the existence of assets, with respect to which the taxpayer could have applied the provisions of article 33 of the Corporate Income Tax Code".

Article 33 of CIRC establishes the following:

Elements of Reduced Value

With respect to elements of assets subject to depreciation whose unit costs do not exceed € 1,000, the deduction is accepted, in the taxation period of their acquisition or production cost, except when they form an integral part of a set of elements that should be depreciated or amortized as a whole.

However, as is mentioned in the decision on the gracious complaint relating to the 2013 financial year, this possibility of deduction is subject to the regime provided for in article 19 of Regulatory Decree-Law No. 25/2009, of 14 September, which establishes that "assets depreciated or amortized under the terms of no. 1 must appear in the depreciation and amortization maps by their total value, in a separate line for elements acquired or produced in each taxation period, with the designation 'Elements of unit cost less than (euro) 1,000', such elements whose maximum useful life period is considered, for tax purposes, of one year".

In the case at hand, the Claimant did not satisfy this requirement, so the conditions were not met for acceptance of the deductions referred to.

Thus, also as to this point, the defect invoked by the Claimant is not demonstrated.

4. Decision

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

a) Dismiss the request for arbitral ruling as unfounded;

b) Absolve the Tax and Customs Authority of the claims.

5. Value of the Proceedings

In accordance with the provisions of article 296, no. 1, of the Code of Civil Procedure (CPC) and 97-A, no. 1, paragraph a), of the Code of Tax Procedure and Process (CPPT) and 3, no. 2, of the Regulation of Costs in Tax Arbitration Proceedings, the value of the proceedings is set at € 182,775.60.

Lisbon, 13-03-2019

The Arbitrators

(Jorge Lopes de Sousa)

(Jesuíno Alcântara Martins)

(Jorge Carita)