IRC Corporate Tax: Prior Year Expenses, Autonomous Taxation & RETGS Group Regime – CAAD 56/2017-T

ARBITRAL DECISION

The arbitrators Ms. Counsellor Fernanda Maçãs (arbitrator-president), Ms. Doctor Carla Castelo Trindade and Mr. Doctor Daniel Taborda (arbitrators-members), appointed by the Deontological Council of the Centre for Administrative Arbitration to form the Collective Arbitral Tribunal, constituted on 26-04-2017, agree as follows:

I. Report

1. A A…, S.A. (Claimant), legal entity no. … came, pursuant to the provisions of articles 2, no. 1, subparagraph a) and 10, no. 1, subparagraph a) of the Legal Regime for Arbitration in Tax Matters ("RJAT"), to submit a request for arbitral pronouncement with a view to annulling the IRC tax assessment act for the year 2011 (assessment note no. 2015…), a claim which the gracious complaint no. …2016… dismissed.

The respondent is the TAX AUTHORITY AND CUSTOMS AUTHORITY, hereinafter "ATA".

The request for constitution of the arbitral tribunal was accepted by the President of CAAD and notified to the ATA on 27-01-2017.

In accordance with the provisions of subparagraph a) of no. 2 of article 6 and subparagraph b) of no. 1 of article 11 of the RJAT, as amended by article 228 of Law no. 66-B/2012, of 31 December, the Deontological Council appointed as arbitrators of the collective arbitral tribunal Ms. Counsellor Fernanda Maçãs, Ms. Doctor Carla Castelo Trindade and Mr. Doctor Daniel Taborda and notified the parties of such appointment on 13-03-2017, and they did not manifest any intention to refuse the appointment of the arbitrators, in accordance with the combined provisions of article 11, no. 1, subparagraphs a) and b) of the RJAT and articles 6 and 7 of the Deontological Code.

Thus, in compliance with the provisions of subparagraph c) of no. 1 of article 11 of the RJAT, as amended by article 228 of Law no. 66-B/2012, of 31 December, the Collective Arbitral Tribunal was constituted on 26-04-2017.

In these terms, the Arbitral Tribunal is regularly constituted to examine and decide on the subject matter of the case.

1. To support the claim, the Claimant alleges, in summary:

A) Regarding "annulment of outpatient services and annulment of SNS increase 2010", whose similarity justifies a joint approach:

a) within the scope of financing of public hospitals, as well as hospital establishments under public-private partnership arrangements, under the responsibility of the National Health Service ("SNS"), through its Regional Health Administrations ("ARS"), the respective funds are allocated taking into consideration certain variables, namely the Homogeneous Diagnostic Groups ("GDH");

b) at the end of the exercises of 2009 (first year of activity of B…) and 2010, B… was still in negotiations with the ARSN regarding the valorization of each of the GDH, so it could not estimate with exactness the remuneration to be received from the ARSN regarding production during those periods;

c) despite at the end of the exercise of 2011, B… still not having exact information about such remuneration, as a result of contacts maintained and accumulated experience, it was possible to acquire greater knowledge regarding the interpretation of the various norms contained in the contract executed with the ARSN;

d) in 2011, B… decided to adjust downwards the increase in income recorded (and taxed) in the exercises of 2009 and 2010, in order to improve this estimate previously recorded;

e) in 2012 there was a reconciliation of the values relating to the exercises of 2009, 2010 and 2011, through the final validation by the SNS of the amount of remuneration to be attributed to B… as managing entity. In that exercise, a negative equity variation of 22,787,987 euros resulted, which reveals that "the now Claimant was subject to taxation under IRC on the basis of a fiscal result much higher than that which, in practice, should have been recorded" (point 58 of the Initial Petition, hereinafter "IP");

f) the fiscal acceptance of this negative equity variation was the subject of submission by B… of a Binding Information Request, which obtained a favorable understanding from the ATA, according to which «given the above, and by reading of the "Management Contract", it is verified that the billing of the services in question is complex, since it is done on the basis of the contractual clauses that regulate it, and there may be divergence of interpretation between the claimant and the ASRN contracting entity, with the claimant having knowledge of the interpretation of the clauses by that entity only in 2012, upon reconciliation, for which reason it appears acceptable to us to accept the annulment/reduction of income relating to 2009, 2010 and 2011 as a negative equity variation in the taxation period of 2012, pursuant to article 24 combined with no. 2 of article 18, both of the IRC Code» (point 69 of the IP).

B) The Claimant argues regarding the "medical internship" that:

a) B… was established on 2 February 2009 with the objective of managing the hospital of C…, under a public-private partnership arrangement, in the terms and scope of the Management Contract executed in 2009 with the Portuguese State, represented by the ARSN;

b) one of the obligations arising from that contract determines that B… ensure the conditions for the functioning of the medical internship regime but did not explicitly attribute the obligation of payment of remuneration of professionals under the medical internship regime to either party. Interpreting that this payment was not its responsibility and, based on experience accumulated in other public-private partnerships in the health sector, B… issued invoices to the ARSN in each of the periods between 2009 and 2011 inclusive, relating to income that it estimated to receive from that entity as a form of compensation for expenses incurred with remuneration of professionals in the first and second year of the medical internship regime;

c) these invoiced values with reference to 2009 and 2010 amounted to 1,746,770.10 euros and were subject to taxation in those exercises;

d) pursuant to an Official Letter from the Ministry of Health (relating to process …/2011, of May 2011), B… became aware of the ARSN's interpretation regarding the functioning of the medical internship regime and its decision not to bear the amount corresponding to the expenses incurred by it with remuneration of professionals integrated in the second year of the medical internship;

e) based on this new information, B…, in the exercise of 2011, issued credit notes associated with the invoices of 2009 and 2010, annulling them, and issued invoices relating only to expenses associated with the first year of the medical internship. This combined effect was classified in the item "expenses of prior exercises" in the total of 255,538.26 euros: 1,746,770.10 in credit notes (debited) and 1,491,231.84 of new invoices relating to expenses incurred with first-year students (credited);

f) the invoices totaling 1,491,231.84 euros were subsequently annulled in 2013, when the ARSN assumes, definitively, that it will bear the expenses relating to the first year of internship. This prompted a binding information request, by reference to the exercise of 2013, to ensure fiscal acceptance, under IRC, of the annulment of amounts invoiced regarding the first year of medical internship. It was based on the value of new invoices issued in 2011 relating to the exercises of 2009 and 2010 (1,491,231.84 euros) and obtained a favorable understanding from the ATA.

C) The Claimant argues regarding "others" that:

a) these are operational expenses relating to communications services, legal advice, medicines and medical devices;

b) their recording in prior exercises did not occur due to lack of knowledge of their amount and receipt of documents after the closing of accounts for the exercise;

c) in this item there were also recorded two invoices relating to health accreditation and quality service provisions, where the service provider is fiscally resident in the United Kingdom, in the amount of 19,029.92 euros, which the ATA accepted within the inspection procedure;

d) no reasons are evident why the remaining invoices (totaling 722,573.08 euros) should not be accepted, since they stem from the same reality: unpredictability/lack of knowledge on the dates of closing of the accounts of the exercise.

D) Regarding the autonomous taxation surcharge, the Claimant understands that only dominated companies that determine fiscal losses should be subject to the increase in autonomous taxation rates by 10% and that no. 20 of article 88 of the CIRC has a truly innovative character.

E) Finally, the Claimant further alleges that the assessment note notified to it does not inform it of all corrections made, failing to comply with the requirements demanded by no. 2 of article 36 of the CPPT.

a) the Claimant does not consider itself validly notified and, consequently, the assessment cannot produce any effect,

b) in function of the period of expiry set out in the LGT, the right to any type of new assessment by reference to the exercise of 2011 ended on the past 31 December 2015, so this should be considered closed, without the corrections proposed by the AT producing their effects, given the illegality of the assessment.

F) The Claimant concludes by requesting:

• The declaration of illegality of the IRC tax assessment act, by reference to the fiscal exercise of 2011; and, consequently,

• The disregard of any adjustments proposed by the ATA to the fiscal result determined by the fiscal consolidated group dominated by the claimant by reference to the exercise of 2011 and, as well, to the amount of autonomous taxation to be paid.

1. The Tax Authority and Customs Authority submitted a response and attached the procedural case, invoking, in summary:

A) By opposition

a) Regarding the item "annulment of outpatient medical services 2009" and "annulment of SNS increase 2010" briefly the respondent maintains that:

b) Whether in the scope of the inspection procedure or in the scope of gracious complaint, B… could not demonstrate how it obtained the value of the reversal (annulment) of income taxed in prior years;

c) In 2011, negotiations with the ARSN were still ongoing and only in 2012 was it possible to close the accounts regarding exercises 2009, 2010 and 2011, by making a reconciliation (with the amount actually received from the SNS). Therefore, "only in that year would it be legitimate for the claimant to record or make the reconciliation annulling the gain in clear departure from the principle of specialization of exercises" (point 87 of the Response).

d) The same arguments pointed out by the Respondent are valid for the medical internship (point 93 of the Response), excepting that, only in 2013, the expense/negative equity variation resulting from the annulment of the income realized in prior periods could negatively contribute to the formation of taxable profit.

e) With respect to the item "Others", the ATA understands that the documentation presented by the Claimant is "insufficient to prove that "the expenses were manifestly unknown and unforeseeable in 2009 or 2010, being unknown when the services were actually provided and whether they relate to the expenses in question" (point 98 of the Response).

f) Regarding the autonomous taxation surcharge, the Respondent counters that, considering the substance of the RETGS, in which the taxable profit/fiscal loss of the dominated companies contributes to the taxable profit/fiscal loss of the group, determined by the parent company, it makes no sense that the autonomous taxation rates be applied to the fiscal loss determined individually.

g) The Respondent further defends that the "act of assessment is not confused with notification of the same, realized by sending of the assessment note" (point 47 of the Response) and that this act "is duly substantiated, in fact and in law, with such substantiation being contained in the Final Tax Inspection Report" (point 54 of the Response).

B) By exception

In the defense by exception the Respondent came to invoke the material incompetence of the Arbitral Tribunal, arguing, in summary:

The Claimant requests that the Arbitral Tribunal condemn the ATA to: «the disregard of any adjustments proposed to the fiscal result determined by the fiscal consolidated group dominated by the claimant, by reference to the exercise of 2011 and, as well, to the amount of autonomous taxation to be paid."

"Now, even if such claim could possibly arise from a hypothetical enforcement of judgments that might be made in the event that the arbitral decision rendered were to be granted, which is only by mere academic hypothesis considered, what is certain is that such claim exceeds the competence of this Tribunal.

In fact, the competence of arbitral tribunals is, from the outset, circumscribed to the matters indicated in no. 1 of article 2 of the RJAT."

1. Having had opportunity for contra argument on the matter of exception and there being no place for testimonial evidence, the Tribunal, by order of 9 July 2017, dispensed with the meeting provided for in article 18 of the RJAT, which it did pursuant to the principles of autonomy in the conduct of the case. The date of 26 October 2017 was also set for the rendering of the arbitral decision. This term was extended to 26 December, by order of 28 September 2017.

2. Both parties submitted allegations reiterating, in essence, the arguments already made in the initial pleadings.

5.1. The Respondent reiterated that "in fact, pursuant to no. 1 of article 2 of the RJAT, as well as of Ordinance no. 112-A/2011, of 22 March, ex vi article 4 of the RJAT, there is no legal support that permits arbitral tribunals to render condemnations of a nature other than those arising from the powers fixed in the RJAT: declaratory powers on the basis of illegality.

"Thus, the binding of the AT to arbitral supervision presupposes a limitation of the situations in which it can fully decide whether or not to appeal an unfavorable judicial decision, that is, the power to choose between definitively renouncing collection of the tax credit or adopting behavior potentially adequate to seek to enforce it.

The Respondent concludes, in an innovative manner, arguing that "(…), is constitutionally prohibited, by force of the constitutional principles of the rule of law and separation of powers (cf. articles 2 and 111, both of the CRP), as well as of the right of access to justice (article 20 of the CRP) and of legality [cf. articles 3, no. 2, 202 and 203 of the CRP and further article 266, no. 2 of the CRP], in its corollary of the principle of indisponibility of tax credits inherent in article 30, no. 2 of the LGT, an interpretation that expands the binding of the AT to arbitral supervision established by law.

"Because such interpretation would imply the expansion of the situations in which the AT must be bound by such regime, renouncing to that same extent the full jurisdictional appeal [cf. article 124, no. 4, subparagraph h) of Law no. 3-B/2010 and articles 25 and 27 of the RJAT, which imposes a restriction of remedies from the arbitral decision]."

1. Considering the question of unconstitutionality raised in an innovative manner by the respondent entity and given that the allegations were successive, by order of 17 October, the opportunity to exercise contra argument was given to the Claimant. In the same order, the Claimant was asked to indicate the value of the case, with contra argument from the Respondent.

2. In both cases the Claimant provided nothing.

II. Assessment

1. The parties possess legal personality and legal capacity, are legitimate and are represented (articles 4 and 10, no. 2 of Decree-Law no. 10/2011, of 20 January and article 1 of Ordinance no. 112-A/2011, of 22 March).

2. On the exception of incompetence of the arbitral tribunal

The Respondent came to invoke the exception of incompetence of the Arbitral Tribunal, based on article 2, no. 1 of the RJAT. It alleges that the disregard of adjustments to the fiscal result determined by the fiscal consolidated group dominated by the Claimant exceeds the scope of the competence of this Tribunal.

The request for arbitral pronouncement was filed against the express act of dismissal of the gracious complaint, case no. …2016…, filed, in turn, against the additional IRC assessment for the year 2011 (no. 2015…), issued following an inspection action opened by service order no. OI2015… . Thus, the subject matter of the request is constituted by the assessment act resulting from the disregard by the ATA of a set of deductions from the taxable matter to which the Claimant considers itself entitled and of the increase (by ten percentage points) of the autonomous taxation rates within the scope of the consolidated profit.

Therefore, a request is at issue for the declaration of illegality of acts of tax assessments, which is within the scope of the competence of the arbitral jurisdiction.

It is not overlooked that the Claimant concludes by requesting, in addition to the declaration of illegality of the tax assessment act [subparagraph a)], "The disregard of any adjustments proposed by the AT to the fiscal result determined by the fiscal consolidated group dominated by the claimant by reference to the exercise of 2011 and, as well, to the amount of autonomous taxation to be paid." [subparagraph b)].

However, as the Claimant observes, in the response to the exceptions, the request referenced in subparagraph b) comes formulated in the sequence of that mentioned in subparagraph a) where it expressly refers to the "illegality of the tax assessment act for IRC, by reference to the fiscal exercise of 2011". In this sense, it is, moreover, expressive, the use of the adverb «consequently».

A comprehensive reading of the Claimant's request does not allow one to extract, contrary to what the Respondent argues, that it is intended for this tribunal to render sentences of condemnation to behavior nor sentences of recognition of rights.

The Respondent came in the counter-allegations to add that an interpretation that expands the binding of the AT to arbitral supervision established by law, is constitutionally prohibited by force of the constitutional principles of the rule of law and separation of powers (cf. articles 2 and 111, both of the CRP), as well as of the right of access to justice (article 20 of the CRP) and of legality [cf. articles 3, no. 2, 202 and 203 of the CRP and further article 266, no. 2 of the CRP], in its corollary of the principle of indisponibility of tax credits inherent in article 30, no. 2 of the LGT.

Beyond the abstract allegation of the aforementioned unconstitutionalities, it is not evident in what manner the interpretation endorsed in the arbitral request points to an expansion of the binding of the Respondent to arbitral supervision legally fixed in article 2 of the RJAT. The alleged violation of constitutional principles, such as those of the Rule of Law, separation of powers and legality, thus falls through.

It further follows that, as was demonstrated above, the request of the Claimant, not entailing any condemnation of the Respondent in the "disregard of adjustments to the fiscal result determined by the fiscal consolidated group dominated by the Claimant nor the condemnation to accept the adjustments of expenses in 2012", but only the declaration of illegality of the tax act in question, does not collide with any constitutional principles, nor does it call into question the "indisponibility of tax credits".

Moreover, the invocation of the principle of indisponibility of tax credits will possibly be a lapse, since when deciding on its competence, relevant only as a procedural presupposition, the Arbitral Tribunal is surely not practicing any act of disposition of a tax credit, in the sense of the invoked article 30, no. 2 LGT. But as to the question of the theoretical discussion that has arisen regarding the principle of indisponibility of tax credits and the manner in which the possible non-conformity with the CRP of a tax arbitration regime was overcome, see point 5.2.3 of the annotation of article 1 of the Legal Regime for Tax Arbitration Annotated, by Carla Castelo Trindade, of the Almedina publisher, on pages 46 and following, in order to understand that this is a subject matter long since overcome.

In these terms, the exception of incompetence formulated by the Respondent is without merit.

1. As to the value of the case, as we have seen, the Claimant did not proceed to indicate the value of the case in the arbitral request.

The tribunal, by order of 17 October 2017, requested that pursuant to the principle of cooperation and procedural good faith provided for in article 16 of the RJAT and also pursuant to the principle of free conduct of the case provided for in article 19 also of the RJAT, the Claimant come within ten days to make such indication. There was no response to this order.

However, by indication from CAAD, made on 6 November, the taxpayer will have indicated the value of the request upon completion of the form of the request for constitution of Arbitral Tribunal to which the indication (mandatory) of the value of the case applies.

However, the request for constitution of the arbitral tribunal and the request for arbitral pronouncement are different things: "the request for constitution of the arbitral tribunal is materialized in the completion of an electronic form that will be directed to the president of CAAD. That electronic form must necessarily include, among other elements listed in the subparagraphs of no. 2 of article 10, the request for arbitral pronouncement. That request for arbitral pronouncement is, this yes, the true initial petition in substantive sense, being, indeed, this the designation used in the online form when asking the user to attach the request for arbitral pronouncement. Thus, the request for arbitral pronouncement is an autonomous document that must be attached electronically, of course, to the request for constitution of the arbitral tribunal. It is from the request for arbitral pronouncement however that the questions of fact and law that substantiate it must appear, lest such request be a true initial petition. The initial petition of the arbitration, where the facts and legal grounds that motivate the claim of the taxpayer appear, where the request and cause of action appear, is, therefore, attached to the request for constitution of arbitral tribunal." (cfr. pages 270 and 271 of the Legal Regime for Tax Arbitration Annotated, by Carla Castelo Trindade, of the Almedina publisher).

Nevertheless, taking into consideration the value of the economic utility of the request which is fixed in the procedural management system, in the amount of € 886,736.57, the tribunal reached the conclusion that this value will result from the fact that there are fiscal corrections in the amount of 3,700,332.08 €, from the fact that in 2015, date of the assessment, a rate of 21% and a municipal surtax of 1.5% (in …) were in effect, the sum of which will result in a value of 832,574.72€. Now if to this amount is added the assessment of autonomous taxation in the value of 54,161.85 € it would reach the value indicated by the Claimant of 886,736.57€.

However, this value is not correct inasmuch as on the one hand because there were fiscal losses, there should therefore be no municipal surtax, and consequently the value thereof (55,504.98€) should be expunged from the value of the economic utility of the request, on the other hand, in the year 2011, the rate of 25% was in effect instead of the rate of 21% applicable in the year of assessment – 2015. In view of the foregoing, the correct value of this case will be € 925,083.02 (3,700,332.08 €*25%) to which should be added the 54,161.85 € of the value of autonomous taxation which will result in an amount of € 979,244.87.

In fact, doctrine has understood that, in the face of an error in the determination or indication of the value of the economic utility of the request by the taxpayer, the arbitral tribunal should correct the error ex officio, as soon as it becomes aware of it, being able to do so by order, interlocutory decision or even in the final decision (Cf. Carla Castelo Trindade (2016), "Legal Regime for Tax Arbitration Annotated", 284).

In view of the foregoing, the value of the case is set at € 979,244.87.

1. The case does not suffer from nullities.

2. There are no other circumstances that prevent the examination of the merits of the case.

It is competent for the Arbitral Tribunal to examine and decide on the merits of the request.

III. Merits

III.1. Facts

1.1. Proven facts

Based on the elements contained in the case and documents joined with the request for arbitral pronouncement, the following facts are considered proven:

A) The Claimant is the parent company of a group of companies that opted for taxation under IRC under the special regime of taxation of groups of companies ("RETGS");

B) The fiscal scope is comprised of the parent company (claimant) and the following companies (dominated), whose results relating to 2011 are presented in the following table:

C) The fiscal loss declared by the group, in the exercise of 2011, was 12,647,643.39 euros, which resulted from the algebraic sum of the fiscal results determined in each of the companies that constitute the Group;

D) Following inspection actions, relating to the exercise of 2011, carried out on the accounting-fiscal elements of the companies B…, S.A. (service order no. OI2014…) and A…, S.A. (service order no. OI2015…), the ATA detected inaccuracies in the determination of their respective taxable matters;

E) Thus, service order no. OI2015… was opened, in order to reflect those corrections in the Group's income declaration Form 22 (declarable assessment). Consequently, a correction to the taxable matter under IRC was proposed of 3,847,933.24 euros, comprised of two individual corrections: one of 147,601.16 euros in the individual sphere of the Claimant, which it accepted voluntarily through the submission of a substitute Form 22 income declaration, and another in company B… in the value of 3,700,332.08 euros, relating exclusively to corrections relating to prior exercises, which is now contested.

F) The non-acceptance of fiscal expenses recorded relating to corrections of prior exercises in the total value of 3,700,332.08 euros in the sphere of B… is broken down as follows:

G) These values are supported by various documents:

• List of invoices issued in 2009 and 2010 and annulled in the exercise of 2011 (reversal of SNS increase 2010 and reversal of outpatient medical 2009);

• Copy of credit notes issued in 2011 relating to exercises 2009 and 2010 and invoices issued in 2011 by reference to 2009 and 2010 (medical internship);

• List and copy of invoices recorded as expenses of prior exercises (others);

H) Within the scope of the inspection procedure, the documents and arguments put forward by B… were not accepted by the ATA, with the draft decision being maintained, with which the Claimant does not conform. The proposals for correction of the individual results of the Claimant were already accepted and regularized;

I) The Claimant was notified of the draft inspection report to exercise the right of hearing on the corrections proposed by the ATA to the group's declaration, dispensing with it;

J) The Claimant determined fiscal loss in 2011, so the adjustments resulting from the inspection procedure do not imply any amount to be paid. But they have a significant impact on fiscal losses that can be carried forward to subsequent exercises;

L) Furthermore, within the scope of the inspection procedure, tax in arrears was determined, in the amount of 54,161.85 euros.

M) This tax in arrears will result from the increase in autonomous taxation rates applicable within the scope of the RETGS, pursuant to no. 14 of article 88 of the CIRC;

N) Thus, assessment no. 2015… was issued, which was notified to the Claimant through registration dated 2015-11-30, RY … PT, having been received on 01/12/15;

O) From this assessment, a gracious complaint was deducted by the Claimant, on 30/03/16, which was dismissed by the ATA, based on the following arguments:

"Having been examined by the Administrative Justice Division, of the DF of Lisbon, it was understood, namely, cfr. fl. 13 of the information of 14/07/16, that:

• As to expenses relating to prior years:

"The document presented as number 3 is a table comparing the revalorization carried out in 2011 with the value that was recorded (cf. fl. 195 of the case files);

• The document presented as number 4 is a minutes of accounts closing (cf. fl. 197 to 199 of the case files);

• Document 5 – response to a binding information request (cf. fl. 201 to 204 of the case files);

• It presents a series of invoices issued and expenses incurred (cf. fl. 205 to 832 of the case files).

"With the allegations presented it appears to be a matter of reversal (annulment) of income taxed in prior years, however the complainant does not demonstrate how it obtains the values in question, does not prove what it alleges. (…) Thus we verify that the complainant's claim cannot be accepted inasmuch as it does not come to attach to the case files actual documentary proof that allows confirming clearly and unequivocally what is alleged in its petition."

As to autonomous taxation:

"Now, with the 2016 Budget, Law no. 7-A/2016, of 30 March, no. 20 was added related to no. 14, both of the mentioned article, which states that in the RETGS, the fiscal loss to be considered is the fiscal loss of the group, determined pursuant to article 70 of the CIRC, the wording of this provision being of an interpretive nature.

In this vein, it appears to us that the correction made by the Tax Inspection Services is correct."

P) As the Claimant, even though duly notified, did not exercise the right of hearing, the draft Decision was converted to final and the complaint was dismissed.

1.2. Unproven facts

There are no facts relevant to the decision of the case that have not been proven.

1.3. Substantiation of the proven and unproven facts

The proven factuality was based on a critical assessment of the position assumed by each of the parties, as well as a critical analysis of the documents joined to the case files, whose authenticity and veracity were not impugned by either party.

III.2. Legal matters

III.2.1. On the illegality of the assessment

The following questions are to be examined:

• Vice of illegality/expiry due to notification not being accompanied by the respective substantiation, pursuant to what is required in article 36, nos. 1 and 2 of the CPPT;

• Examination of the legality of corrections to the taxable matter;

• Increase in autonomous taxation rates.

Let us see.

Vice of illegality/expiry, due to notification not being accompanied by the respective substantiation

Article 36 of the CPPT establishes that tax acts that "affect the rights and legitimate interests of taxpayers only produce effects in relation to them when validly notified to them" (no. 1) and that "notifications shall always contain the decision, its grounds and means of defense and time limit to react against the notified act, as well as the indication of the entity that carried it out and whether it did so in the exercise of delegation or sub-delegation of powers" (no. 2).

The Claimant argues, in summary, that, in this case, the assessment note does not comply with these requirements and, therefore, suffers from the vice of illegality and cannot produce any effects, with repercussions on the period of expiry.

There is, as to this question, a procedural point to make from the outset, resorting for this purpose to pages 289, 290 and 291 of the manual by Serena Cabrita Neto and Carla Castelo Trindade – Tax Contention, Volume I, Procedure, Principles and Guarantees, where it is stated that:

"By force of article 36 of the CPPT, the notification act must always contain the decision, its grounds and means of defense and the time limits to react against the notified act, as well as the indication of the entity that carried it out and whether it did so in the exercise of delegation or sub-delegation of powers. If it does not contain the decision, its grounds and means of defense and the time limits to react against the notified act, the notification will be merely irregular. (…)

Different from the vices of notification are the vices of the notified act. This must contain the substantiation in fact and in law, under penalty of being considered illegal and consequently voidable, due to absence or vice of substantiation legally required pursuant to article 99, subparagraph c) of the CPPT. What is fundamental to retain is that from the invalidity of notification only ensues inefficacy – and never the illegality – of the notified act, insofar as its efficacy depends on the valid notification pursuant to article 77, no. 6 of the LGT.

Let us look first at the vices of notification so that we then relate them to those of the notified act.

Thus, the lack of any of the substantial requirements referred to above may affect the validity of the notification and consequently the efficacy of the notified act. In this manner, the act whose efficacy will depend on a notification that does not contain a certain requirement demanded by article 36, no. 2 of the CPPT, will not produce effects in relation to its recipients. Depending on the requirement that is lacking, the notification may suffer from two different vices. (…)

If any other requirement provided for in article 36 of the CPPT is lacking, such as the decision, the substantiation legally required or the indication of the means of defense and time limits to react against the notified act, the notification act will be merely irregular. Thus, LOPES DE SOUSA argues that, in principle, irregular notification will produce all effects for which it is suitable. This will only not produce effects in relation to that which it did not communicate, for example, the decision or the time limits to react, if the recipient comes to use the faculty provided for in article 37 of the CPPT. If the recipient of the act does not use the mechanism provided for in article 37 of the CPPT, as will be seen further below, the irregularity of the notification is cured, so the notification act that does not contain all the requirements demanded by article 36, no. 2 of the CPPT will continue to be valid as an act of communication to the recipient as to everything it communicated. In this sense, see the judgment of the STA of 29 October 2014, rendered within the scope of case no. 01381/12, in which the understanding of this author was reiterated:

" (…) irregular notification does not cease to produce effects for which it is suitable, which is to give notice to the recipient of the existence of a decision of the tax authority, and only not producing the effects for which it is unsuitable (those of initiating the terms for administrative or judicial appeal) if the interested party uses such faculty (if the interested party does not come to use this faculty, even these effects for which the notification is unsuitable will be produced with the irregular notification, because the irregularity is considered cured by the failure to use such faculty within the legal term)."

Thus, the Claimant's conclusion is based on an error as to the legal consequences of the notification of the tax act not possibly being accompanied by complete substantiation of the same.

It constitutes reiterated and uniform jurisprudence of the Supreme Administrative Court that the form of communication of the substantiation (as opposed to the lack of substantiation) does not affect the validity of the assessment act. In this sense, it concludes in its Judgment of the 2nd Section, of 16/11/16, Case no. 0954/16, "one thing is the substantiation of the act and another is the communication of those grounds to the interested party: while that constitutes a vice susceptible to determining the annulment of the act that suffers from it, the failure to comply or defective compliance with the duty of communicating the grounds cannot be reflected in the validity of the communicated act".

In the concrete case, it is admitted that the assessment note does not contain the complete integral substantiation of the assessment, but the impugned assessment is based on the draft report and the final report of the inspection procedure, which were duly communicated to the Claimant. Therefore, the assessment note does not suffer from the alleged vice of illegality, due to lack of substantiation.

Consequently, the tax act, as soon as notified to the recipient, pursuant to legal terms, immediately produces the legal effects to which it is intended, even if it is not accompanied by all the substantiation that supports it and even if it is considered illegal.

Thus, resorting once more to the manual by Serena Cabrita Neto and Carla Castelo Trindade – Tax Contention, Volume I, Procedure, Principles and Guarantees - this time on page 299, we have two distinct regimes: "If the notification act does not contain the decision, the means of defense and the time limits to react and the recipient of the act does not resort to the mechanism of article 37 of the CPPT – i.e., the only missing element is the substantiation - the vices of the irregular notification shall be considered cured, so the notified tax act will be efficacious in relation to its recipient as to everything it communicated. If, on the contrary, the substantiation of the decision is lacking, as, on the one hand, the lack of substantiation may constitute a vice of the notified act generating its illegality and, on the other, without knowledge of the substantiation the recipient of the act cannot assess the legality of the same, this vice of the notification is not cured by the non-use of the mechanism provided for in article 37 of the CPPT. The notification will be irregular and the notified act illegal due to vice of lack of substantiation, pursuant to article 99, no. 1, subparagraph c) of the CPPT. However the act will not be inefficacious. The individual cannot allege the inefficacy of the act in relation to itself, notwithstanding the lack of substantiation. This is all because they did not use the mechanism provided for in article 37 of the CPPT. However, they may request the substantiation and allege its illegality, this notwithstanding they did not use the mechanism provided for in article 37 of the CPPT." (emphasized by us)

Thus being, the eventual circumstance that the notification of the tax act is not accompanied by the communication of all the substantiation does not affect its efficacy and, therefore, has no repercussion on the period of expiry.

In these terms, the Claimant has no reason.

B. Examination of the legality of corrections to the taxable matter

The correction to the taxable matter of company B… is comprised of several items, which were qualified by the ATA as expenses not accepted fiscally as they relate to prior exercises:

• Annulment of income relating to outpatient medical services recorded in 2009: 1,418,688 euros

• Annulment of income relating to the agreement established with the National Health Service (SNS) recorded in 2010: 1,303,533 euros.

• Annulment of income relating to medical internship recorded in 2009 and 2010: 255,538 euros.

• Other expenses: 722,573.08 euros.

The first two adjustments concern the correction of estimates of income taxed in prior years. In fact, in the exercises of 2009 and 2010, corresponding to the first two years of activity of B…, the valorization of the production of this entity was still being negotiated with the ARSN. Thus, revenues were recognized relating to outpatient medical services and to the agreement established with the SNS, based on a preliminary valuation, obtained in accordance with the available information and the interpretation of the agreements executed by B…. With this increase in revenues, subject to taxation, in the exercises of 2009 and 2010, B… resorted to estimates since the negotiation of the final values with the ARSC was in progress and, therefore, when closing the accounts, it did not know the exact remuneration of the health services provided in those exercises. That is, despite the fact that on the dates of closing of accounts, the values of the revenues were not final, based on the available information and the interpretation of the agreements in effect, B… decided, and rightly so, to reflect in its accounting an estimate of those amounts.

In the course of negotiations, the available information proved to be more complete and rigorous, which made it possible to adjust the previously made estimates. This is what B… did when closing the accounts of 2011. This revision of the estimates was done downwards, resulting in a bookkeeping entry in the item "corrections of prior exercises". In 2012, the year in which negotiations with the ARSN were concluded, this downward revision of the value of remuneration for services provided in prior years proved to be insufficient, insofar as, in that exercise, further adjustments were recognized, converting the values of revenues estimated in prior exercises into final ones.

The third adjustment was made in the exercise of 2011, because it was in that exercise that the Claimant became aware of the (partial) position of the ARSN regarding the remuneration of professionals integrated in the second year of medical internship.

Whether in the initial estimate of the value of revenues, or in its subsequent revision (which gave rise to expenses in the account of corrections of prior exercises), based on the improvement in the quality and quantity of available information on the date of closing of accounts of 2011, B… complied with what is provided for in accounting legislation.

First, it followed the accrual regime. This is one of two presuppositions underlying the preparation of financial statements, being part of the Conceptual Framework of the System of Normalization of Accounts (Notice no. 8254/2015, of 29 July)[1] (although maintaining the essential meaning, it came to replace the so-called principle of specialization of exercises contained in the revoked Official Plan of Accounts).

According to paragraph 22 of the aforementioned Conceptual Framework, "in order to meet their objectives, financial statements are prepared in accordance with the accrual basis of accounting. Through this basis, the effects of transactions and other events are recognized when they occur (and not when cash or cash equivalents are received or paid) being recorded in accounting and reported in the financial statements of the periods with which they are related. Financial statements prepared in accordance with the accrual basis inform users not only of past transactions involving the receipt and payment of cash but also of obligations of future payment and of resources that represent cash to be received in the future. In this manner, information is provided concerning past transactions and other events that is more useful to users in making economic decisions".

Additionally, B… observed the requirements for recognition of items in the financial statements (paragraphs 80 and following of the Conceptual Framework). One of them establishes that the cost or its value be measured with reliability (subparagraph b) of paragraph 81).

The use of estimates in measurement forms part of the recognition process, so long as it does not prejudice reliability. This is what results from paragraph 84 of the Conceptual Framework, according to which "the second criterion for recognition of an item is that it possesses a cost or a value that can be measured with reliability as referred to in paragraphs 31 to 38 of this Conceptual Framework. In many cases, cost or value needs to be estimated; the use of reasonable estimates is an essential part of the preparation of financial statements and does not destroy their reliability. (…)". Because they are estimates, they must be continuously reviewed based on available information. Changes in facts and circumstances should lead to adjustments, in order to bring them closer to future actual results (which, necessarily, will differ from the estimates).

As is characteristic of the business world, B… operates in an environment of uncertainty, made worse by the circumstance that negotiation with the ARSN lasted for several business exercises, which was reflected in the impossibility of, on the dates of the respective closing of accounts, knowing the final value of remuneration for the services it had provided in each of them. This constraint required the use of initial and subsequent estimates in the measurement of revenues, based on the best knowledge existing at each moment according to available information and the best interpretation of agreements in effect, complying with the presupposition of the accrual basis[2].

After this accounting framework, justified by the fact that, according to the partial dependency model, which appears expressly in point 10 of the preamble of the Decree-Law approving the CIRC, accounting norms strongly influence the determination of real profit, it is important to observe what is provided for in that Code.

It was already mentioned that the accrual regime plays a central role in the determination of profit of the exercise. Therefore, it is understandable that the CIRC takes up and densifies that presupposition underlying the preparation of financial statements. Under the designation of "Periodization of taxable profit", article 18 of the CIRC establishes that "revenues and expenses, as well as the other positive or negative components of taxable profit, are attributable to the taxation period in which they are obtained or incurred, independent of their receipt or payment, in accordance with the regime of economic periodization" (no. 1).

Concretizing this rule, subparagraph b) of no. 3 establishes that "revenues relating to service provisions are generally considered realized, and the corresponding expenses incurred, on the date on which the service is completed, except (…)".

The Claimant provided services in the exercises of 2009 and 2010 and attributed those revenues to the exercises in which they were realized, following what is provided for in article 18 of the CIRC. Once it resorted to estimates for the measurement of revenues from services provided, in the exercise of 2011 it sought to adjust those estimates based on the information it gathered in the contacts established with its customer, available on the date of closing of accounts.

It further follows that the Claimant issued invoices to the ARSN in 2009 and 2010 in order to compensate for the expenses incurred with medical internship, ensuring the so-called "balancing between expenses and revenues". In 2011, based on information provided by its customer, it issued credit notes associated with the invoices of 2009 and 2010, annulling them, and issued invoices relating only to expenses associated with the first year of medical internship. Also in this exercise, based on the information it had, it sought to make/correct the attribution of expenses and revenues to the exercise to which they relate. Indeed, if these bookkeeping operations were not executed, that is, if there had been no estimates and corrections in the recording of revenues, there would be at issue a violation of the principle of periodization of taxable profit.

The non-observance of the rule of economic periodization provided for in the CIRC would allow the transfer of results from one period to another. Having as reference the revoked Official Plan of Accounts, Tavares (1999:85)[3] argues that "the accounting and fiscal principles of specialization of exercises possess, therefore, a common base matrix. The divergences are located, only, at the level of binding density, especially in pathological cases of omission, by mere lapse, in the recording of certain items (positive or negative) in the competent balance sheet". According to the Judgment of the Central Administrative Court of the South, of 30/6/2009, Case no. 02475/08, "the principle of taxation of real profit does not conflict, rather it is intimately related to the principle of specialization of exercises and both are connected with the principle of annuality, according to which companies should determine, at the end of each year, the results of the exercise of activity during that period and decide, from the start, on the destination to be given to those results, when positive".

However, no. 2 of article 18 of the CIRC recognizes that the principle of economic periodization admits some exceptions: "positive or negative components considered as relating to prior periods are only attributable to the taxation period when on the date of closing of accounts of that to which they should be attributed they were unforeseeable or manifestly unknown". The Judgment of the Supreme Administrative Court, of 25/6/2008, Case no. 0291/08, refers that «"positive or negative components" are not "unforeseeable or manifestly unknown" when their non-consideration, in the exercise to which they relate, is due to accounting error or otherwise, of the taxpayer itself, since such norm shall be interpreted in the sense that such presuppositions, in order to be relevant, must arise from external situations that the taxpayer cannot control». According to the Judgment of CAAD no. 367/2014-T, of 24-11-2014, «the Supreme Administrative Court has (...) decided, with respect to the principle of specialization of exercises, that "this principle must tend to conform to and be interpreted in accordance with the principle of justice, with constitutional and legal conformations (articles 266, no. 2 of the CRP and 55 of the LGT), so as to allow the attribution to an exercise of costs relating to prior exercises, provided it does not result from voluntary and intentional omissions, with the aim of operating the transfer of results between exercises"».

The facts proven in relation to the first three adjustments have demonstrated that they arose from exogenous situations, outside the control of B… and that it did not seek to transfer results between exercises.

Regarding the fourth adjustment ("others"), the arguments expended are applicable, reiterating itself, given its pertinence and relevance for this concrete case, that attribution to a different taxation period is possible in the event that expenses are unforeseeable or manifestly unknown on the date of closing of accounts.

That is, the recording in the item for expenses designated "corrections of prior exercises" in 2011 finds accommodation in the justified exceptions to the principle of specialization of exercises provided for in law: the unforeseeability or manifest lack of knowledge of the positive or negative components at the time of closing of accounts. It further follows that the ATA had no prejudice from the bookkeeping procedure adopted, which appears adequate to the circumstances and which does not arise from intentional omissions with a view to operating transfers of results between exercises.

C. Examination of the increase in autonomous taxation rates

No. 14 of article 88 of the CIRC provides for the increase in autonomous taxation rates applicable, by ten percentage points, in the taxation periods in which the taxpayer determines fiscal loss. It prescribes that "the autonomous taxation rates provided for in this article are increased by 10 percentage points for taxpayers who present fiscal loss in the period to which any of the facts referred to in the above numbers relating to the exercise of an activity of a commercial, industrial or agricultural nature not exempt from IRC". This norm has been in effect since 2010, but only with Law no. 7-A/2016, of 30 March, was no. 20 introduced, to which an interpretive nature was attributed. The number added states that "for purposes of the provision in no. 14, when the special regime for taxation of groups of companies established in article 69 is applicable, the fiscal loss determined pursuant to article 70 is considered".

Until 2016, despite the binding information relative to case no. 2011004399, with an Order of the Deputy Director-General, of 2012-03-30, supporting that "for purposes of application of the provision in no. 14 of article 88 of the CIRC, in cases where taxpayers are part of a group covered by the special regime of taxation of companies (RETGS), the result (taxable profit or fiscal loss) determined in the Group's declaration for the taxation period to which any of the facts liable to autonomous taxation is to be considered and not the taxable profit or the fiscal loss determined by each of the companies that are part of the consolidation scope covered by the regime", there subsisted the doubt as to whether the increase in autonomous taxation rates was applicable to the individual result of each of the participating companies or to the fiscal result of the Group. Stated differently, whether no. 14 should be interpreted in the sense given by no. 20, introduced in 2016.

The RETGS is an optional model, which determines that the calculation of taxable profit of the Group be done through the algebraic sum of taxable profits and fiscal losses determined by each of the participating companies in the fiscal scope. As the Judgment of the Central Administrative Court South, of 23-02-2017, Case 05493/12, notes, "(…) the legal-fiscal regime of the group of companies is founded on the so-called theory of unity, in which it is advocated for the consideration, for fiscal purposes, of the group of companies as a fictitious legal unit, with the integrated companies ceasing to be different legal subjects, as a result of the economic unity that brings them together. In that sense, the taxable matter must be calculated in a combined manner, giving rise to a single assessment and eliminating double taxation, being the respective taxable base determined using resort to two types of operations, namely: a) the elimination of internal operations carried out within the group, only those practiced with third entities being relevant; b) the compensation of losses of the various companies that comprise the group".

On the other hand, it is important to emphasize that autonomous taxation is a component of IRC with special characteristics, which has prompted much controversy in Jurisprudence and Doctrine. In summary, following what is provided for in the Judgment of CAAD relating to Case no. 567/2016-T, of 13 March 2017, «it has previously been detected, on the one hand, the futility of seeking a unitary concept of IRC that coherently accommodates the regime of autonomous taxation, and that, on the other, the methodologically most productive way of generating legally adequate solutions for the problem in question passes through understanding the current IRC regime as a product of historically explained evolution that led to the building of a structure of a dual or hybrid nature, comprising a principal nucleus corresponding to traditional IRC, and an adjacent part, connected with that and forming part of the same global normative reality, with its own specificities from which results a departure, in various and substantial respects, from the principal regime, insofar as the principles and general solutions, notwithstanding, sometimes apply, other times, are contradictory, and as such inapplicable, with the own nature of that such "adjacent rule-making" that is embodied in the so-called autonomous taxation»».

The Group assumes itself as an autonomous fiscal unit, with the parent company being responsible in the first instance for the payment of IRC and as well as the submission of the Group's declaration. There being fiscal loss of the Group, it will be on the basis of this amount that the application of article 88 of the CIRC should be determined. Autonomous taxation has its own characteristics but is part of IRC, so it should be considered from a Group perspective, and not in a case-by-case manner, company by company. Thus, the application of the increased rate by ten percentage points applies to the fiscal loss of the Group.

In these terms, the Respondent has reason, in this respect.

IV. Decision

In these terms, the arbitrators in this Arbitral Tribunal agree to:

• Judge the exception of incompetence of the Tribunal raised by the Respondent without merit;

• Judge the request to annul the assessment resulting from corrections to the taxable matter of company B…, with impact on the fiscal loss of the Group, well-founded, with the consequent partial annulment of the impugned assessment;

• Judge the request to annul the assessment regarding the increase in autonomous taxation rates applicable to the fiscal loss of the group without merit, absolving the Respondent of this part of the request.

V. Value of the case

The value of the case is fixed at the value of the tax acts annulled in € 979,244.87, pursuant to article 97-A, no. 1, a), of the Code of Tax Procedure and Process, applicable by force of subparagraphs a) and b) of no. 1 of article 29 of the Legal Regime for Tax Arbitration and no. 2 of article 3 of the Regulation of Costs in Tax Arbitration Cases.

VI. Costs

Taking into account the value of the case indicated, pursuant to article 22, no. 4, of the RJAT, the amount of costs is fixed at 13,770 euros, pursuant to Table I attached to the Regulation of Costs in Tax Arbitration Cases, to be borne by the Claimant and Respondent, depending on their respective unsuccessful portions. Falling to the Claimant 761.62 euros and to the ATA the remainder.

Lisbon, 17 November 2017

The Arbitrators

(Fernanda Maçãs)

(Carla Castelo Trindade)

(Daniel Taborda)

[1] By Order no. 264/2015- XIX of the Secretary of State for Tax Matters, of 16 July 2015, the Conceptual Framework of the System of Normalization of Accounts, approved by Decree-Law no. 158/2009, of 13 July, amended by Decree-Law no. 98/2015, of 2 June, was approved.

[2] This uncertainty persists at present, since it is intrinsic to the activity of B…. In the 2016 Financial Statements Report, which is part of the 2016 Integrated Report of A…, p. 93, it can be read in note 2.3 ("Critical Judgments/Estimates") that «there are ongoing processes of reconciliation with the Regional Health Administration of the North, I.P. ("ARS Norte"), regarding the account settlements of the exercises of 2014, 2015 and 2016 of the Hospital Establishment of .... Regarding the account settlements of the exercises of 2014 and 2015, they are at this date in the process of closing of determination of actual Production, with the same having already been completed in June 2015 and June 2016, respectively. Pursuant to what is provided for in the management contract, the agreement regarding the exercise of 2016, should occur by the end of June 2017». This question merits comment in the Legal Certification of Accounts and Audit Report (consolidated financial statements of 2016) in the paragraph entitled "Relevant Audit Matters". The first relevant matter disclosed concerns the "recognition and measurement of revenue and compliance with contractual and regulatory requirements of public service provision given the complexity of the Management Contracts of the Public-Private Partnerships of the Hospital of … and the Hospital of …". The first risk of material significant distortion is thus described: "(…) The Group has under management the service of two public hospitals: the Hospital of … and the Hospital of .... The activity and revenue of these two units are determined in accordance with what is stipulated in the Public-Private Partnership Management Contracts, executed with the Regional Health Administrations (…)". It concludes that "the process of recognition and measurement of revenue from public service provision thus involves a significant judgment of the Management Body as disclosed in Note 2.3 of the Notes to the Consolidated Financial Statements, particularly with respect to the determination of eligible production and its measurement." (https://www.A....pt/Section/... /Relat%c3%b3rios+e+Contas/173, accessed on 5-10-2017).

[3] Tavares, T.M.C.C, 1999, "On the Relationship of Partial Dependence between Accounting and Fiscal Law in the Determination of Taxable Income of Legal Entities: Some Reflections at the Level of Costs", Science and Fiscal Technique, 396, pp. 7-177.