Summary
Full Decision
ARBITRAL DECISION
The Arbitrators José Pedro Carvalho (Presiding Arbitrator), Gustavo Lopes Courinha and Elísio Brandão, designated by the Deontological Council of the Administrative Arbitration Centre to form an Arbitral Tribunal, hereby agree on the following:
ARBITRAL DECISION (consult full version in PDF)
I – REPORT
On 18 October 2017, A..., Lda., NIPC..., with registered office at Rua ..., ..., ...-... ..., ..., Azores, filed a request for constitution of an arbitral tribunal, pursuant to the combined provisions of articles 2 and 10 of Decree-Law no. 10/2011, of 20 January, which approved the Legal Framework for Arbitration in Tax Matters, as amended by article 228 of Law no. 66-B/2012, of 31 December (hereinafter, abbreviated as RJAT), seeking the declaration of illegality of the Corporate Income Tax (IRC) assessment act relating to the year 2014 (assessment no. 2017..., of 24.07.2017), which resulted in an increase in tax payable, by way of autonomous taxation, in the amount of 1,254,499.10 euros (one million, two hundred and fifty-four thousand, four hundred and ninety-nine euros and ten cents) and of compensatory interest assessment in the amount of 102,147.15 euros (one hundred and two thousand, one hundred and forty-seven euros and fifteen cents), totaling 1,356,646.25 euros (one million, three hundred and fifty-six thousand, six hundred and forty-six euros and twenty-five cents), with payment deadline of 22 September 2017.
To support its request, the Claimant alleges, in summary, that:
The contested act violated the combined provisions of articles 75, no. 1 of the LGT and 88, no. 1 of the CIRC by reason that the presumption of accuracy of the accounting to which article 75, no. 1 of the LGT refers should be considered as rebutted, both by the external audit promoted by the taxpayer and by the inspection report itself;
Absent such presumption, it would be incumbent upon the Tax Authority (AT) to prove the effective outflow of monetary means on which it intended to base autonomous taxation in respect of undocumented expenses;
The Tax Authority having failed to provide such proof and the taxpayer, now Appellant, having provided contrary proof through the provision of bank statements, there was no expense whatsoever, because there was no expenditure or outflow of monetary means from the company's bank accounts;
Article 74, no. 1 of the LGT is violated, since the Tax Authority failed to prove the existence of undocumented expenses that would permit it to apply the tax rule set out in article 88, no. 1 of the CIRC;
The two internal accounting entries, intended to correct accounting differences generated in prior years, cannot in any case be considered as an undocumented expense subject to autonomous taxation;
In such cases, the Tax Authority should proceed to determine taxable income through indirect methods (articles 74, no. 3 and 87 of the LGT) and cannot resort to the tax rule set out in article 88, no. 1 of the CIRC, in the segment wherein it provides for autonomous taxation of undocumented expenses at the rate of 50%;
The additional IRC assessment act now contested is illegal because the requirements for application of article 88, no. 1 of the CIRC, in the segment wherein it provides for autonomous taxation of undocumented expenses at the rate of 50%, are not met.
On 19-10-2017, the request for constitution of the arbitral tribunal was accepted and automatically notified to the Tax Authority.
The Claimant did not appoint an arbitrator, wherefore, pursuant to the provisions of subparagraph a) of no. 2 of article 6 and subparagraph a) of no. 1 of article 11 of the RJAT, the President of the Deontological Council of CAAD designated the signatories as arbitrators of the collective arbitral tribunal, who communicated acceptance of the task within the applicable period.
On 07-12-2017, the parties were notified of such designations and did not manifest any intent to challenge any of them.
In accordance with the provisions of subparagraph c) of no. 1 of article 11 of the RJAT, the collective Arbitral Tribunal was constituted on 28-12-2017.
On 06-02-2018, the Respondent, duly notified for such purpose, filed its reply defending itself solely by way of challenge.
Pursuant to the provisions of subparagraphs c) and e) of article 16 and no. 2 of article 29, both of the RJAT, the holding of the meeting referred to in article 18 of the RJAT was dispensed with.
Following the granting of a deadline for the submission of written submissions, these were presented by the parties, pronouncing on the evidence produced and reiterating and developing their respective legal positions.
A deadline of 30 days was set for the issuance of final decision, following submission of submissions by the Tax Authority, which deadline was extended until the expiration of the period set in article 21(1) of the RJAT.
Taking into account the period of judicial recess and the provisions of article 17-A of the RJAT, pursuant to the terms and for the purposes of article 21(2) of the same statute, the deadline referred to in no. 1 of the same article was extended for two months.
The Arbitral Tribunal is materially competent and is regularly constituted, pursuant to articles 2, no. 1, subparagraph a), 5 and 6, no. 1, of the RJAT.
The parties possess legal personality and capacity, are legitimate and are legally represented, pursuant to articles 4 and 10 of the RJAT and article 1 of Ordinance no. 112-A/2011, of 22 March.
The proceedings are not tainted by any nullity.
Thus, there is no obstacle to the examination of the case.
Everything being considered, it behoves us to issue
II. DECISION
A. FACTUAL MATTER
A.1. Facts Established as Proven
The now Claimant was subject to an inspection procedure, through OI2017..., of 24-05-2017, of an internal nature, limited scope (IRC) and relating to the year 2014, initiated by the Tax Inspection Services (SIT) of the Finance Department of ... (...) in the context of the central action with the Code "... Control of initial and final inventories declared in the IES of 2014".
In that context, on 13-01-2017, the now Claimant was notified to submit, within a period of 15 (fifteen) days, the following documents:
− Inventory for 2012 to 2015;
− Analytical trial balances for 2012 to 2014;
− Accounting entry that gave rise to the adjustment for inventory losses/impairments for 2013, in the amount of € 354,529.98; and
− Extract of account 36 – Finished goods for 2012 to 2014.
The Claimant complied with the request, having submitted to the SIT of the DF-AH all the aforementioned documents.
Following analysis of said documents and because the SIT "verified that the subject matter under examination presented a certain degree of complexity", an external dispatch was issued for collection of documents dated 15-02-2107.
The inspection report states that "together with the Company's Certified Accountant, the Accounting/Tax elements of the Taxpayer were then analyzed in greater depth, as well as the supporting documents that existed".
From that analysis, the SIT concluded that account 12 (bank deposits) of the Chart of Accounts (SNC) "presented a very high value as of the taxation period of 2013 given the income declared in account 72 – Service Provision".
From the analysis "of the balance sheet contained in the Annual Declaration of Accounting and Tax Information – IES, relating to taxation periods 2008 to 2014" the SIT verified "the following evolution of the balance in SNC account 12 - Bank Deposits:
[Table]
They further verified the following evolution of the balance of SNC account 72 – Service Provision:
[Table]
The SIT further verified that "as of the taxation period 2014 there are no bank statements, hence it is verified that the taxpayer did not perform reconciliation, making it impossible to determine the effective balance of SNC account 12 - Bank Deposits".
The SIT conducted a "retrospective analysis up to the year 2012 of the extract of SNC account 12 - bank deposits".
With regard to "the taxation period of 2012" and after describing the accounting entries that are at the origin of the balance of € 3,034,294.97 in the demand deposit account on 31-12-2012, the SIT observed that "the aforementioned accounting entries are supported only by documents of an internal nature (Posting Notices), and no documents of an external nature/origin were made available (constitution of time deposits)".
With regard to "the taxation period of 2013", the RIT states that "SNC account 12 – Demand Deposits is not used for debit entries, only a credit entry of € 2,921,720.87, in accordance with Journal Entry 4 - Miscellaneous Operations (Annex III), Internal Entry no..., dated 31-12-2013 by counterpart of SNC account 13 – Time Deposits, which is debited in the amount of € 3,571,263.87, with € 483,588.53 coming from SNC account 11 – Cash, in the same internal entry, without any external supporting document. Since this is a posting note with many movements, it was not possible to determine which account the amount of € 165,954.50 came from to make up the € 3,571,263.87 debited from the time deposit account".
Referring again in the RIT to the fact that the "aforementioned accounting entries are supported only by documents of an internal nature (Posting Notices), and no documents of an external nature/origin were made available (constitution of time deposits, bank documents, among others)" and that "as of the taxation period 2012 SNC account 11 – Cash is little used. However, in the year 2013 it is verified that this account is the only account of Class 1 – "Financial Means" used for debit entries, with the debit movements referring to receipts from SNC 21-clients and the credits being payments of Account SNC 22 -suppliers and Account SNC 23 - Personnel, however the analysis of the extract of said account demonstrates that payments to third parties were recorded without financial availability therefor, as the "cash" during several months presented a credit balance despite continuing to make payments to third parties".
With regard to "the taxation period of 2014", it is stated in no. III of the draft report and in the inspection report that "SNC account 11 - Cash is increased with a debit of € 3,664,109.64 by counterpart of SNC account 13 – Time bank deposits based solely on a document prepared internally on ... (annex IV), without any external supporting document. It is further verified that SNC account 56 - Retained earnings is debited by counterpart of SNC account 11 - Cash in the amount of € 3,584,283.36, based solely on a document prepared internally on ... (annex V)".
Considering the fact that the company, now Appellant, presented taxable profit since 2008, recognized and measured in SNC account 56 – Retained earnings, the SIT requested "a copy of the financial statement closing minutes for the year 2014 (annex VI), to verify if in said year there was a distribution of profits given the accounting entry supported by the internal document on ...".
From the analysis of said minutes the Tax Authority concluded that there was no dividend distribution, wherefore "the aforementioned accounting recognition constitutes an outflow of monetary means (€ 3,584,283.36) from the company by counterpart of the reduction of its capital", being "manifestly impossible to ascertain the concrete identity of the true recipient(s) of the monetary means" and that "considering that said accounting recognition was not recorded in any shareholder/stockholder account (nor is there any Minutes thereof), the Tax Authority is barred from resorting to the presumption referred to in article 6, no. 4 of the CIRS, wherefore there remains no other legally valid and sustainable solution other than the taxation of expenses (outflow of monetary means from the company) undocumented, by resorting to the provisions of no. 1 of article 88 of the CIRC – autonomous taxation – rate of 50% under article no. 1 of article 88 CIRC, as amended by Decree-Law no. 159/2009 of 13 July, with the due 30% reduction for the Autonomous Region of the Azores in accordance with D.L.R. 2/99/A, of 20 January".
In the RIT, it is further concluded that:
"i. The aforementioned accounting records are supported only by resort to mere internal documents, without any external support that would allow them to be adequate, identifying their origin and destination;
ii. The accounting records occurring in 2014 evidence an outflow of financial flows from the company (credit of SNC account 11 – cash), by counterpart of a sharp drop in the company's capital, namely the retained earnings account (SNC 56), with a notable "decapitalization" of the company occurring;
iii. Although confronted therewith, the Taxpayer failed to present justifications/clarifications which, in an unequivocal manner, would allow validation of the origin and destination (recipients of the aforementioned monetary amounts) of the financial flow alleged to have left SNC account 11-Cash, by counterpart of the company's capital.
iv. At no time, in particular in the disclosures inherent to its financial statements, did the Taxpayer justify/inform that it promoted corrections relating to prior periods (materially relevant) having resorted to the provisions of NCRF 4;
v. The Taxpayer failed to comply with the obligation referred to in article 63-C of the LGT.
vi. In so doing, it is verified that the taxpayer concealed and altered the facts or values that should appear in the accounting, the records and the tax declarations, making it impossible to correctly determine taxable income, its inspection and control, translating this conduct as illegitimate and typified in article 103 of the RGIT, being punishable as tax fraud".
By letter from the Tax Authority – Finance Department of ... (Tax Inspection Services) – no..., of 02-06-2017, the now Claimant was notified to exercise the right of prior hearing "on the draft corrections of the inspection report", being granted for such purpose a period of 15 (fifteen) days.
The now Claimant requested, on 09-06-2017, an extension of the deadline to exercise its right of prior hearing to the maximum of 25 (twenty-five) days.
On 19-06-2017, the Tax Authority notified the now Appellant of the decision to extend the deadline to exercise its right of prior hearing to said maximum limit.
The Appellant made its position known on the draft corrections of the inspection report on 03-07-2017.
In the external audit report requested by the Appellant from B..., Lda. (B...), which covered "the years 2005 to 2014, with a review of all line items of the financial statements during this period", it was concluded that "at the end of the financial year 2014 various accounts were regularized by counterpart of equity causing its reduction in the amount of 3,584,253.36 euros", and were identified balances capable of correction throughout the years under review which, at the end of the year 2013, totaled an estimated value of 3,594 thousand euros.
It was concluded in said audit that "had the Company, in the year 2014, retrospectively reexpressed the comparative information as a result of the identification of error, as recommended in NCRF 4 – "Accounting Policies, Changes in Accounting Estimates and Errors", the following effects could have been attributed to prior periods:
[Table]
With regard to reconciliation of financial movements in banks with operations disclosed in the Appellant's financial statements, the external audit report prepared by B... concluded "a significant level of correlation between accounting movements and bank movements", although "situations of inflows and outflows of financial means from bank accounts that had no accounting expression" were identified, as shown in the following table:
[Table]
Said report was able to obtain the complete bank statements only from the year 2008, computing that the accumulated initial divergence amounted to € 3,008,621.60.
In years prior to 2008, according to the same report, outflows of financial means occurred without corresponding documentary and accounting records, as per the following table:
[Table]
According to the same report "despite the fact that it was not possible to identify all the reasons that gave rise to the regularization of accounts for 2014, it was possible to attribute the total of the correction made by accounting in 2014 to the years to which it relates up to 2009 and conclude that a significant portion (approximately 3,008 thousand euros) of the amount regularized in 2014 results from errors reported to periods prior to 2009" and that "the remaining errors attributed to the years 2009 to 2013 total approximately 394 thousand euros and are distributed across the different years".
It is further concluded in that report that:
"the total of the regularization made in 2014 exceeded the amount due by an amount which we estimate at approximately 192 thousand euros, which derives essentially from an overvaluation of liabilities of approximately 54 thousand euros and an undervaluation of assets which we estimate at approximately 138 thousand euros"; and that
"the overvaluation of equity attributable to the years 2012 and 2014, in the approximate amounts of 310 and 192 thousand euros, and the undervaluation of equity attributable to the year 2013 in the amount of 143 thousand, result essentially from the net effect of inflows and outflows of financial means from bank accounts that had no accounting expression, which is why the Audit considered that they should reduce equity when outflows exceed inflows and increase equity by the reverse situation".
With regard to the analysis of the main components of the financial statements, the external audit report contains several references that allow concluding the existence of various accounting deficiencies, in particular:
"C. Inventories
[Text excerpt]
According to information obtained from the Company responsible for accounting, the balances presented at the end of the years 2005 to 2010 were supported by information obtained from Mr. C... (manager in function during this period) which were not supported by documentation."
"D. Accounts receivable
Customers
From our analysis of the procedures adopted, we conclude that these were not sufficient to ensure the compliance of accounting records and consequently the financial information disclosed. Despite the existence of extra-accounting procedures that ensure the effectiveness of control over accounts receivable, during the period under review, we verified that the information existing in accounting is insufficient, not ensuring, therefore, the reasonableness of the balances. It should be noted in this regard that A... outsources its accounting services to an external entity, and significant deficiencies were found in the interaction with management, especially during the period under review until 2011.
In accounting records, from the year 2005 until the end of the year 2008, the billing and receipt movements were not recorded in the customer account, a procedure that was changed in 2009, with the customer account beginning to record the billing movements and some receipt movements, although insufficiently until mid-2014.
From our analysis of the movements that are at the origin of the accounting balances disclosed, we verified the following:
i) In the years 2005 and 2006 the customers item presents no balance or movement;
ii) The customer balance at the end of 2007 results from an accounting transfer movement (dated 31.12.2007) from the banks item for 980,324 euros, with no documentary support or other justification having been identified;
iii) The customers item presents no accounting movement during the year 2008, carrying forward the balance recorded at the end of the year 2007;
iv) During the year 2009 billing and receipt movements were recorded with the same value, except with respect to the issuance of a receipt for 16,342.06 euros.
v) Already in the year 2010, only billing movements were recorded in the customer account, with no receipt movement having been recorded, which is why this item recorded a significant increase in this year.
vi) During the year 2011 customer account movements were recorded, with this item being reduced by an accounting movement of 2,505,025.20 euros by counterpart of the demand deposits item without any documentary support or justification existing therefor;
vii) In the year 2012 billing movements were recorded as a debit in the customer account, standing out (given the amount) a credit movement of 700 thousand euros by counterpart of demand deposits, which presents no documentary support or justification;
viii) During the year 2013 various billing and receipt movements were recorded, standing out (given the amount) a credit movement of 386,811.53 euros by counterpart of demand deposits without there being any documentary support or justification for such;
ix) In the year 2014 various billing and receipt movements were recorded in the customer account, with no atypical movements having been identified.
E. Net financial means
According to information obtained from the person responsible for accounting, during the period under review bank reconciliations were not prepared, in addition to the fact that accounting movements in the demand deposits items sometimes resulted from information obtained verbally from Mr. C... (manager in function until the year 2011) namely concerning payment to suppliers and receipt from customers. This procedure gave rise to accounting records that aggregate various financial movements, a situation that makes it impossible to match them with financial movements and, consequently, the preparation of bank reconciliations; Also according to information obtained from the accounting services, there were no procedures for checking the cash, with accounting movements possibly resulting from lack of knowledge about how invoices delivered to accounting were paid or received or, in other situations, from the transfer of unjustified differences determined at a particular moment to other items. According to information obtained from the Company, the actual cash balances at the end of each period are residual, which is why the Audit adjustments reduced the cash balances disclosed in the financial statements to zero"
"G. Non-current liabilities
Suppliers
From our analysis of the procedures adopted by the Company responsible for accounting, we conclude that these were not sufficient to ensure the compliance of accounting records and consequently the financial information disclosed. Despite the existence of extra-accounting procedures that ensure the effectiveness of internal control over accounts payable, we verified that the information existing in accounting was insufficient especially with respect to the recording of financial movements, not ensuring this the reasonableness of the balances. According to information obtained from the person responsible for accounting, especially during the period of functions of Mr. C..., the information obtained was not sufficient to reflect in the accounts all movements with suppliers, in addition to the fact that there were no checking procedures, in particular the comparison with the balances existing in the management control system.
Notwithstanding the lack of procedures supported by documentation, according to information obtained from the person responsible for accounting, at the end of each year Mr. C... verbally indicated to accounting which supplier balances were to be paid, motivating the regularization of various balances, mainly by counterpart of the net financial means items.
Also according to the information obtained, at the end of the year 2010 a significant number of documents was provided to accounting to record, with no possibility existing to verify the supplier balances with Mr. C..., which is why payments were not reflected that should have reduced the account balance. For this reason the year 2010 closed with a balance of approximately 1,004 thousand euros.
State and other public entities
As previously stated in this report, we verified that the information existing in accounting was insufficient especially with respect to the recording of financial movements, not ensuring, therefore, the reasonableness of the balances. For this reason the accounting records indicated balances payable to the State and Social Security that according to the elements and information obtained were not in arrears.
(...)
Other payable accounts
As previously stated in this report, we verified that the information existing in accounting was insufficient especially with respect to the recording of financial movements, not ensuring, therefore, the reasonableness of the balances. For this reason, the accounting records indicated salaries payable to personnel that according to the elements and information obtained were not in arrears".
A.2. Facts Established as Not Proven
Of relevance to the decision, there are no facts that should be considered as not proven.
A.3. Substantiation of Proven and Not Proven Factual Matter
Regarding factual matter, the Tribunal is not required to pronounce on everything that was alleged by the parties; rather, it is incumbent upon it to have the duty to select the facts that matter for the decision and discriminate between proven and not proven matter (cf. article 123, no. 2, of the CPPT and article 607, no. 3 of the CPC, applicable by virtue of article 29, no. 1, subparagraphs a) and e), of the RJAT).
Thus, the facts relevant to the judgment of the case are chosen and delimited according to their legal relevance, which is established in light of the various plausible solutions to the legal question(s) (cf. former article 511, no. 1, of the CPC, corresponding to current article 596, applicable by virtue of article 29, no. 1, subparagraph e), of the RJAT).
Thus, taking into account the positions assumed by the parties, in light of article 110(7) of the CPPT, documentary evidence and the Administrative Procedure file attached to the record, the facts listed above were considered proven, of relevance to the decision, bearing in mind that, as stated in the Decision of the Court of Administrative Appeals-South of 26-06-2014, issued in case 07148/13[1], "the evidentiary value of the tax inspection report (...) may have probative force if the assertions contained therein are not challenged".
No consideration was given to allegations made by the parties and presented as facts consisting of strictly conclusory affirmations, incapable of proof and whose truthfulness is to be evaluated in relation to the concrete factual matter above established.
B. ON THE LAW
As the Respondent correctly defines it, "The essential issue to be decided consists of determining whether the regularization of the balances of Time Deposits and Cash by counterpart of the reduction of the company's equity can be attributed to the realization of undocumented expenses and as such subject to autonomous taxation, pursuant to no. 1 of article 88 of the Corporate Income Tax Code".
Indeed, as appears in the RIT and the proven factual matter, the Tax Authority verified that in the year 2014 of the Claimant "SNC account 11 - Cash is increased with a debit of € 3,664,109.64 by counterpart of SNC account 13 – Time bank deposits based solely on a document prepared internally on 1006002 (annex IV), without any external supporting document. It is further verified that SNC account 56 - Retained earnings is debited by counterpart of SNC account 11 - Cash in the amount of € 3,584,283.36, based solely on a document prepared internally on 1006004 (annex V)".
Based on said finding, as well as on the finding that there was no dividend distribution, the Tax Authority concluded that "the aforementioned accounting recognition constitutes an outflow of monetary means (€ 3,584,283.36) from the company by counterpart of the reduction of its capital", being "manifestly impossible to ascertain the concrete identity of the true recipient(s) of the monetary means" and that "considering that said accounting recognition was not recorded in any shareholder/stockholder account (nor is there any Minutes thereof), the Tax Authority is barred from resorting to the presumption referred to in article 6, no. 4 of the CIRS, wherefore there remains no other legally valid and sustainable solution other than the taxation of expenses (outflow of monetary means from the company) undocumented, by resorting to the provisions of no. 1 of article 88 of the CIRC – autonomous taxation – rate of 50% under article no. 1 of article 88 CIRC, as amended by Decree-Law no. 159/2009 of 13 July, with the due 30% reduction for the Autonomous Region of the Azores in accordance with D.L.R. 2/99/A, of 20 January".
The Claimant further objects to the assessment carried out, arguing, inter alia, that "there is (...) an error of law in the combined application of articles 74, no. 1 of the LGT and 88, no. 1 of the CIRC because the Tax Authority failed to prove the fulfillment of the tax subject matter, i.e., the existence of undocumented expenses" (article 148 of the Initial Request), and that "the additional IRC assessment act now contested is illegal because the requirements for application of article 88, no. 1 of the CIRC, in the segment wherein it provides for autonomous taxation of undocumented expenses at the rate of 50%, are not met." (article 173 of the Initial Request).
The Claimant stresses that "it would be incumbent upon the Tax Authority to prove the effective outflow of monetary means on which it intended to base autonomous taxation in respect of undocumented expenses" and that "the Tax Authority failed to prove the existence of undocumented expenses that would permit it to apply the tax rule set out in article 88, no. 1 of the CIRC" (cf. article 175 of the Initial Request).
Article 88(1) of the CIRC, in the applicable wording, provided that:
"Undocumented expenses are taxed autonomously, at the rate of 50%, without prejudice to their non-recognition as expenses pursuant to subparagraph b) of no. 1 of article 23-A".
The first issue that arises with regard to the application of the aforementioned rule is that of verifying whether or not undocumented expenses have occurred.
In this case, it is judged that such a demonstration does occur, and such fact is moreover confessed by the Claimant itself, which expressly recognizes that "situations of inflows and outflows of financial means from bank accounts that had no accounting expression" were identified (article 38 of the Initial Request), the existence of "unjustified bank movements" (article 53 of the Initial Request), as well as the existence "of accumulated cash differences" (article 163 of the Initial Request).
Moreover, the Claimant's own suggestion, according to which "the Tax Authority should proceed to determine taxable income through indirect methods" (article 172 of the Initial Request), ultimately incorporates a confession that, in fact, undocumented expenses did occur, and that, for this reason, they are not capable of being ascertained through direct methods.
Thus, and in light of the foregoing, there is no doubt that the Claimant's accounting, notwithstanding its incorrectness and lack of reliability, evidences, with sufficient consistency, the occurrence of undocumented expenses.
Nevertheless, while a taxation in the context of Corporate Income Tax, the application of autonomous taxation in question is subject to the specific rules of that tax, which are not incompatible with its nature, in particular and as matters to the case, with respect to the rules relating to specialization of years and periodization of taxable profit, as derives, moreover, from articles 8 and 18 of the CIRC, with the necessary adaptations derived from the circumstance that autonomous taxation in question, in accordance with repeated case law both of the Supreme Administrative Court and of the Constitutional Court, involves a type of taxation that has underlying it an instantaneous and financially-natured tax event.
Thus, for a specific autonomous taxation of the kind that now concerns us to be legally applicable, in addition to the demonstration – made in the case, as has been seen – of the occurrence of undocumented expenses, and their respective quantification, it becomes necessary to demonstrate that they occurred in the year to which the corresponding assessment relates, that is, and in the case, in the year 2014.
In this sense, it was already understood in the arbitral award issued in case 287/2017T[2] that "only expenses incurred in a taxation period can be taxed by reference to that year."
Thus, and in sum, the legal application of article 88(1) of the CIRC presupposes the demonstration of:
the occurrence of undocumented expenses;
in a specific year; and
in a specific amount.
With respect to the occurrence of undocumented expenses, as has been seen, it is verified that the Tax Authority gathered consistent indicators of their occurrence, indicators which are corroborated, as has also been seen, by the Respondent's own admission.
Nevertheless, such admission, that undocumented expenses did indeed occur, is restricted, as regards the year 2014, to the amount of €192,041.00 (cf. articles 38, 53 and 68 of the Initial Request).
Regarding the remaining expenses, the Claimant alleges that they occurred in prior years, and given the facts ascertained it is not possible for this Tribunal to conclude that this is not the case.
Now, as the Claimant emphasizes, pursuant to article 74 of the LGT "The burden of proof of facts constitutive of the rights of the tax administration or taxpayers rests upon whoever invokes them".
In the case at hand, the Tax Authority, seeking to apply taxation by invoking the provisions of article 88(1) of the CIRC, has the burden of demonstrating the respective constitutive facts, including, as matters to the case, the occurrence of undocumented expenses in the year 2014, and the respective amount.
In this regard, it should be noted that the accounting movements on which the Tax Authority based its action, and which prove to be not properly supported by supporting documentation, do not incorporate within themselves any record of an expense (or expenses), that is, the transfer of patrimonial assets of the Claimant to third parties, wherefore one is not faced with a case in which there is a direct accounting record of an undocumented expense, but rather with records that lack material and documentary support and which, for this reason, give rise to an indication of the prior occurrence of undocumented expenses not accounted for.
Nevertheless, it is not possible, it is judged, to extract from such accounting movements the moment at which the indicated expenses occurred, and, apart from the value referred to (€192,041.00) confessed by the Claimant as having occurred in the year 2014, and in the absence of these elements, it is not possible to conclude, beyond any reasonable doubt, that in that year other expenses corresponding to the remaining value of the movements recorded by the Claimant and pointed out by the Tax Authority have occurred.
Thus, and in light of the rules on burden of proof, as well as the provisions of article 100(1) of the CPPT, one must conclude that the alleged error in the factual prerequisites, and consequent error in law, is verified, in the part wherein autonomous taxation relating to undocumented expenses was assessed on the amount in excess of €192,041.00, with the consequent partial annulment of the assessments of tax and compensatory interest sub iudice.
It is true that one may question, in light of the specific nature of the taxation in question, and concretely the deterrent/sanctioning function of conduct (realization of undocumented expenses) that underlies it, whether such a function may not end up being partly compromised in cases, such as the present one, in which accounting regularizations of expenses financially incurred in prior years occur, such regularizations not themselves being considered as undocumented expenses.
There is at stake therein the application – or better, the manner of application – of the afore-referenced rules relating to specialization of years and periodization of taxable profit to autonomous taxation which, taking into account the legal nature that has been recognized to them, as an instantaneous and financial tax event, implies that, counter to what occurs with the standard regime of Corporate Income Tax stricto sensu, relevance is assigned to the financial movement, and not to its respective economic attribution.
Nevertheless, and taking into account the positive legal regime of autonomous taxation sub iudice, it is judged that it is beyond the limits of the intervention of the interpreter and applicator of Law (which is obligated to temporally fix the expense in a specific year) to expand the scope of subjection thereto to the accounting movements of regularization of undocumented expenses financially incurred in prior years, such an expansion requiring, necessarily and in light of the principle of tax legality, legislative intervention.
C. DECISION
On these terms, this Arbitral Tribunal decides to partially grant the arbitral petition formulated and, in consequence:
To partially annul assessment no. 2017..., of 24-07-2017, in the part wherein it subjected to autonomous taxation the amount in excess of €192,041.00, and proportionally, the respective compensatory interest assessment;
To condemn the parties to the costs of the proceedings, in the proportion of their respective non-success, fixing the amount of € 983.70 to be borne by the Claimant, and € 17,376.30 to be borne by the Respondent.
D. Process Value
The process value is fixed at € 1,356,646.25, pursuant to article 97-A, no. 1, a), of the Code of Tax Procedure and Process, applicable by virtue of subparagraphs a) and b) of no. 1 of article 29 of the RJAT and no. 2 of article 3 of the Regulation of Costs in Tax Arbitration Proceedings.
E. Costs
The arbitration fee is fixed at € 18,360.00, pursuant to Table I of the Regulation of Costs in Tax Arbitration Proceedings, to be paid by the parties in the proportion of their respective non-success, as fixed above since the petition was partially granted, pursuant to articles 12, no. 2, and 22, no. 4, both of the RJAT, and article 4, no. 4, of the aforementioned Regulation.
Let notice be given hereof.
Lisbon, 28 August 2018
The Presiding Arbitrator
(José Pedro Carvalho)
The Arbitrator Vogal
(Gustavo Lopes Courinha)
The Arbitrator Vogal
(Elísio Brandão)
[1] Available at www.dgsi.pt, as is the remaining cited case law without mention of provenance.
[2] Available at www.caad.org.pt.
Frequently Asked Questions
Automatically Created