CAAD Arbitration 573/2016-T: IRC Depreciation Regime and Expected Useful Life Period

Arbitral Decision

I. Report

1. The company A… – Branch in Portugal (hereinafter referred to as the "Claimant"), with the tax identification number..., with registered office at …– Rua…–…, …– Cascais, filed, on 20 September 2016, pursuant to the combined provisions of Articles 2 and 10 of Decree-Law No. 10/2011 of 20 January, i.e., the Legal Framework for Arbitration in Tax Matters ("RJAT"), a request for the constitution of an Arbitral Tribunal in order to declare the following additional assessments illegal: i) No. 2016…; ii) No. 2016…; and iii) No. 2016…, which correspond, respectively, to the years 2012, 2013 and 2014, relating to Corporate Income Tax ("IRC"), with the corrections resulting in a reduction of the tax losses determined in those years in the total amount of € 515,694.63, with the Tax and Customs Authority (the "Respondent" or "TA") being summoned.

A) Constitution of the Collective Arbitral Tribunal

1. In accordance with section (a) of paragraph 2 of Article 6 and section (b) of paragraph 1 of Article 11 of the RJAT, the Deontological Board of the Administrative Arbitration Centre ("CAAD") appointed as arbitrators of the Collective Arbitral Tribunal (the "Tribunal") the signatories hereof, who communicated their acceptance of the appointment within the applicable timeframe, and notified the parties of this appointment on 23 November 2016.

2. Accordingly, in compliance with section (c) of paragraph 1 of Article 11 of the RJAT, and upon communication by the Chairman of the Deontological Board of the CAAD, the Tribunal was constituted on 12 December 2016.

B) Procedural History

1. In the request for arbitral ruling (hereinafter abbreviated as "PI"), the Claimant petitioned for a declaration of the illegality of the additional assessments mentioned above, which provided for corrections to the tax loss determined by the Claimant, raised in the context of an inspection carried out by the TA with respect to the aforementioned tax periods.

2. The TA filed a response, petitioning for the dismissal of the request for arbitral ruling, on the basis that the corrections made are, in fact and in law, properly substantiated, and no defect or illegality can be asserted.

3. By order of 6 February 2017, the Tribunal, pursuant to section (c) of Article 16 of the RJAT, scheduled the meeting referred to in Article 18 of the same decree for 16 March 2017, at which witness examination took place of witnesses called by the Claimant, namely B…, who gave his testimony in English, with translation into Portuguese ensured by the interpreter Dr. C…, and D…, all as recorded in the minutes in the file.

4. At the end of the hearing, the Tribunal notified the Claimant and the Respondent to present written submissions in succession, each in a period of 10 days, which was duly accomplished, respectively, on 27.3.2017 and 19.4.2017, with the parties, in essence, by reference to the witness testimony, maintaining the positions set out in their pleadings.

5. The final deadline set for the issuance of the arbitral decision was 12 May 2017.

6. The Tribunal was regularly constituted and is competent to consider the issues indicated (Article 2, paragraph 1, section (a) of the RJAT), the joinder of claims formulated is admissible pursuant to paragraph 1 of Article 3 of the RJAT, the parties have legal standing and capacity and have full legitimacy (Articles 4 and 10, paragraph 2 of the RJAT and Article 1 of Regulation No. 112-A/2011 of 22 March). There are no nullities, exceptions or preliminary issues to decide, so nothing prevents judgment on the merits.

II. Issue to be Decided

1. The present Tribunal will assess and decide the merits of the case, which consists of assessing whether the useful life period of 20 years defined by the Respondent in the context of arithmetic corrections in the basis of the IRC assessments Nos. 2016…, 2016… and 2016… for the wind turbines of the …Wind Park is to be considered as reasonable, taking into account the applicable regulation, in accordance with what resulted, at the relevant date of the facts, from paragraph 2 of Article 31 (years 2012 and 2013) and paragraph 3 of Article 31 (year 2014) of the Corporate Income Tax Code (CIRC) and paragraph 3 of Article 5 of Regulatory Decree No. 25/2009 of 14 September.

2. In this respect, it is necessary to resolve the issues raised by the Claimant regarding the error in the factual and legal premises of the arithmetic corrections determining the assessments impugned regarding the consideration of the expected useful life period of the wind turbines of the …Wind Park of 20 years, corresponding to a depreciation rate of 5%, instead of the period of 16 years adopted by the Claimant, corresponding to a depreciation rate of 6.25%, as well as regarding the violation of the constitutional principles of equality and taxation of actual profit.

III. Decision on the Facts and its Reasoning

1. Upon critical examination of the documentary evidence produced, in particular the documents annexed to the PI and the Tax Inspection Report (RIT) set forth on pages 3 et seq. of the tax administrative procedure file (PA), and having assessed the witness testimony presented, the Tribunal considers the following facts as proven, being relevant to the decision of the case:

I. The Claimant, A… Branch in Portugal, is a permanent establishment of the German commercial company E…, with registered office in…, …, … …, Germany, which has as its corporate purpose participation in companies managing wind parks designed to manage and operate wind energy installations (as per copy of the permanent certificate annexed as document No. 4 to the PI), being subject to the general IRC tax regime since 1.1.2007 (see fact acknowledged in paragraph 16 of the PI and noted in the RIT, p. 8).

II. The Claimant is the owner of the … Wind Park, in the municipality of …, district of…, which has been in operation since 2009, consisting of four wind turbines, with a height of 80 m, of 2MW, manufactured by F…, and a support building, where an electrical power output substation and automated control and command systems operate, built along one of the ridges of…, near the site of… (witness testimony of B… and D… RIT, p. 8).

III. The Claimant chose for the … Wind Park a type of Class 1 wind turbine – a class of wind turbines that guarantees higher levels of robustness and safety (fact acknowledged in paragraph 135 of the PI).

IV. The Preliminary Study of the "… Wind Park", annexed to the Environmental Impact Declaration for the Project "… Wind Park", refers in point No. 46 to the "time horizon of the useful life of the wind park, of 20 to 25 years" (see the said Study on pages 61 to 74 of the PA, as well as in document No. 13 annexed to the PI).

V. The Claimant assigned to the aforementioned wind turbines (composed of turbines and foundations) an expected useful life period of 16 years, corresponding to a depreciation rate of 6.25%, defining them as Unspecified Machinery and classified under Code 2295 of Table II – Generic Rates of Regulatory Decree No. 2/90 (see fact acknowledged in paragraph 27 of the PI).

VI. The Claimant was subject, pursuant to Service Orders Nos. OI2015…, OI2016… and OI2016…, to an internal tax inspection of partial scope, which covered IRC with respect to the tax periods 2012, 2013 and 2014, which resulted in the Tax Inspection Report set forth on pages 3 et seq. of the PA and also annexed as document No. 9 to the PI.

VII. Pursuant to the said RIT, corrections of a purely arithmetic nature were made in IRC, on the basis that "the taxpayer wrongly considered the deductibility for tax purposes of expenses that do not meet the legal requirements provided for in Article 34 of the CIRC, consisting of the practice of depreciation rates higher than those legally permitted. The incorrectness practiced resulted in an increase to taxable profit in the amount of 171,898.21€ in each of the years" (p. 4 of the PA), corrections that are summarized in the following table (see RIT, pp. 7 and 15):

VIII. To support these corrections, the following was recorded in the RIT, which is relevant to highlight here (pp. 12 to 15):

• "it was verified that the taxpayer is depreciating part of the wind towers (turbines and foundations) at the rate of 6.25%";

• "the tables annexed to these Regulatory Decrees [No. 2/90, of 12.1 (in force until the tax period 2009) and No. 25/2009, of 14.9 (in force for the tax periods beginning on or after 1.1.2010)] shall always be omitted, with respect to certain assets, as was the case for wind towers, as regards the tax periods under analysis (2012, 2013 and 2014).

To fill this gap, paragraph 2 of Article 31 of the CIRC, with respect to the years 2012 and 2013, provided that "with respect to elements for which depreciation or amortization rates are not fixed, those that the Directorate-General of Taxes considers reasonable, having regard to the expected period of usefulness, are accepted", and paragraph 3 of Article 31 of the CIRC provided, for the year 2014, that "with respect to elements for which depreciation or amortization rates are not fixed, those that the Tax and Customs Authority considers reasonable, having regard to the expected useful life period of those elements, are accepted."

The DR 25/09 refers, in paragraph 3 of its Article 5, to "with respect to elements for which depreciation or amortization rates are not fixed in the tables referred to in paragraph 1, those that the Directorate-General of Taxes considers reasonable, having regard to the expected period of usefulness, are accepted".

Following this gap, the Directorate of Corporate Income Tax (DSIRC) issued an opinion, in July 2015, regarding wind parks (...), in which it is stated that:

(...) To taxpayers holding wind parks who requested authorization from the TA (...) for the application of an annual depreciation rate of 5%, based on an estimated minimum useful life of 20 years, authorization was granted by senior order...

... This Directorate requested that the applicants send the technical studies that allowed them to conclude that the estimated useful life of the "Wind Parks" was 20 years. We were sent, among others, the opinion, from which the following excerpt is transcribed: "... Wind technology has seen remarkable progress in less than two decades. Thus, we went from a situation of perfect technological infancy to the existence of turbines with 6 MW, with rotors of more than 120 m in diameter that can achieve mechanical reliability levels above 95%...

Now the entire industry refers to the useful life time of project as 120,000 hours of operation, which with standard load factors means approximately 20 years. To confirm this value, it is sufficient to consult on the Web some reference institutions of this industry, independent and autonomous from manufacturers:...

"Define therefore an effective useful life of onshore wind power plants in Portugal of 20 years".

Thus, until the amendment introduced by Article 23 of Law No. 82-D/2014 of 31 December, in Regulatory Decree No. 25/2009 of 14 September, to code 2250 of table II annexed to that decree, the maximum rate of 5% was authorized by the TA to taxpayers who submitted the respective request, based on the studies/opinions sent by them and pursuant to paragraph 3 of Article 5 of DR 25/2009 of 14 September.

Paragraph 2 of Article 55 of Law No. 82-D/2014 of 31 December provides that this Law applies to tax periods that begin, or to tax events that occur, on or after 1 January 2015.

Given the above, with respect to the depreciation of wind parks (tangible fixed assets as a whole), it appears to us that the maximum depreciation rate to be accepted for tax purposes will be 5%, in the tax periods that began before 1 January 2015, pursuant to paragraph 3 of Article 5 of Reg. Decree No. 25/2009 of 14 September".

Referring to the then paragraph 2 of Article 31 of the CIRC and paragraphs 3 of Articles 5 of DR 2/90 and DR 25/09 to the period of expected usefulness as the criterion defining the reasonableness of the rates to be used, and as mentioned in the DSIRC opinion mentioned above, the services made various informal contacts with various equipment suppliers in order to determine what would be the expected useful life period of the same.

Following said contacts, it was verified that suppliers produce equipment, designed for standard operating and maintenance situations, which, despite the losses of efficiency resulting from wear over time, guarantee economic profitability for periods of at least 20 years, after which maintenance costs tend to be higher, due to the need for replacement of more expensive components (...),

Regarding the economic viability of wind projects, the technical study, carried out by the National Laboratory for Energy and Geology (LNEG), relating to the "expected useful life period of wind energy conversion equipment" prepared as part of a service provision agreement between the LNEG and APREN - Portuguese Association of Renewable Energy Producers (...) was also consulted.

The study in question was based on two fundamental aspects: the identification of the reduction in energy production over time through the determination of the capacity factor trend; and the decrease in economic profitability of a wind park.

Regarding this latter aspect in particular, the study concludes that, given the degradation of a turbine's capacity factor (which varies up to 20%, over a period of 35-40 years of operation), the maximum profitability period of a wind park is between 20 and 25 years, this considering the commercial non-viability of a project reached when the Internal Rate of Return is less than 8% (corresponding to a reduction in energy produced of more than 11%).

On the expected useful life period of a wind park, see also, for example the "Guide de l'étude d'impact sur I'environnement des parcs éoliens" prepared by the French Ministry of Ecology and Sustainable Development, available on the Web, which points, on its page 52, to an estimated useful life period of wind turbines of 20 to 30 years, or the "Renewable Energy Fact Sheet: Wind Turbines" prepared by the United States Environmental Protection Agency, also available on the Web, which mentions, on its page 2, a typical useful life of 20 years.

As also mentioned in the DSIRC opinion, consulting various environmental impact studies prepared for various wind parks, it is noted that the estimated useful life considered in them is 20 years.

All the elements mentioned above thus point to an expected useful life period for wind park projects of 20 years, the maximum profitability period of the same, after which that profitability decreases, this not preventing the wind turbines from having a longer life span (with appropriate maintenance) as mentioned, for example, in the LNEG study, where the study of the capacity factor of the latter is considered up to 40 years".

• "In the specific case of the … Wind Park, the elements collected also allow pointing to an expected useful life period of the respective wind park of 20 years, as follows:

• In the annex to the Environmental Impact Declaration relating to the Preliminary Study of the … Wind Park, it is stated, on its page 10 - point 46, that the time horizon of the useful life of the wind park is 20 to 25 years (...).

• From the analysis of the depreciation and amortization schedule, it is verified that the "high voltage line" (connection "branches" to the public grid), classified as an intangible asset and important component of the wind park, is being amortized at the rate of 5%, in accordance with what is provided in section (b) of paragraph 2 of Article 16 of DR 25/09, and determined as a function of the period of time during which exclusive use takes place (code 2475 of Section II of Table II - Generic Rates - annexed to DR 25/09). Thus, the taxpayer is implicitly considering a utilization period of 20 years.

Therefore, with all pointing, in the elements relating to the taxpayer, to an operating period of its respective wind parks of at least 20 years, it can be concluded that an expected useful life period of the same duration, in line with the general considerations mentioned above, in particular with what is referred to in the DSIRC opinion.

If this is understood to be the case, the depreciation accepted for tax purposes, as provided for in the then paragraph 2 of Article 31 of the CIRC and in paragraphs 3 of Articles 5 of DR 2/90 and DR 25/09, should consider an expected useful life period, with a character of reasonableness, of 20 years, to which will correspond a depreciation rate of 5%.

The differences between the amounts of depreciation recognized by the taxpayer and the amounts of depreciation accepted for tax purposes are equal in the periods of 2012, 2013 and 2014, being in each year as follows:

IX. Following the corrections resulting from the indicated inspection action, the Claimant was subject to IRC assessments Nos. 2016…, 2016… and 2016…, relating, respectively, to the years 2012, 2013 and 2014, which corrected the tax loss declared in those years by €171,898.21 each, totaling €515,694.63 (as per documents Nos. 1, 2 and 3 annexed to the PI and RIT, p. 16).

1. Still relevant to the decision of the case, the Tribunal considers the following facts as not proven:

i) The stress and wear to which the wind turbines of the … Wind Park are subject, due to their location in the mountainous region of…, given the terrain relief, constituted by a series of steep slopes, and the adverse weather conditions, with very strong winds, determines a useful life time of the wind turbine components of no more than 16 years (allegations contained in paragraphs 133 and 134 of the PI).

ii) There is a history of repairs and maintenance already carried out in the … Wind Park that demonstrates the deterioration of the equipment, with operational problems before even completing ten years (allegations contained in paragraphs 137 and 138 of the PI).

iii) The expected useful life period of the wind turbines of the … Wind Park, in the particular weather conditions and terrain relief of the location where they are installed, is less than 20 years (allegation contained in paragraphs 140 and 141 of the PI).

1. The Tribunal's conviction regarding the facts given as proven resulted from the examination of the documents annexed to the file, from the acknowledgment of facts made by the Claimant, from the testimony of the witnesses indicated, which revealed direct knowledge of the matter reported in point II of the evidence, all as specified in the points of the facts stated above.

2. As for the facts given as not proven, the documents annexed to the file and the testimony of the witnesses called by the Claimant, B…, a Claimant's employee for 17 years with functions in the technical part of the operation of wind parks, who has traveled to the … Wind Park seven or eight times since 2009, and D…, an electrotechnical engineer, managing partner of a company providing services in the area of electrical maintenance for the Claimant, only allowed the conclusion that the facts to which the allegations indicated above in paragraph 13 relate were not demonstrated, as will be explained below.

3. The witness B… gave an indication of some temporal gaps which, in his opinion, could serve as the basis for the definition of an expected useful life for the wind turbines, in particular the period of the financing contracted for the acquisition of the wind turbines (18 years), the period during which the Claimant will benefit from a special tariff for energy production from renewable sources (15 years), or even the period of warranty coverage granted by wind turbine manufacturers to the Claimant (15 years).

However, it must be noted that none of the indicative periods corresponds to the useful life used by the Claimant.

On the other hand, this witness stated that the wind turbines of the … were of the same type as those existing in northern Germany, but the location was completely different, these being located in a flat region at sea level, with horizontal winds, whereas in… they are located in the mountains, with winds coming from below, with greater humidity and stronger winds. Following this, he stated that the estimated useful life period of the wind turbines in Germany was 20 years, which is the approved one, while he foresaw for…, due to the value of production being higher and due to the greater load on the turbines caused by turbulence, a shorter useful life period of about 20%.

However, when questioned as to whether the indication of this time period for… would constitute an absolute value, such that the wind turbines would not function after that period, he acknowledged that it is difficult to state that, but that there was a high risk of proximity to the end of useful life, considering the greater stress required in…, even though he admitted that it would be possible to replace components, but that its cost could be significant.

Then, when asked about the reasons why the project evaluation, even as a matter of rigor and alignment of expectations, was not reduced from 20 to 16 years, witness B… stated that the difference between the 20 years of park operation (foreseen in the project evaluation) and the useful life indicated for the wind turbines (16 years) was a business risk that the Claimant decided to assume.

Precisely, the Tribunal cannot fail to give relevance to the fact, above given as proven in point IV, that the Preliminary Study of the "… Wind Park", annexed to the Environmental Impact Declaration, considers a "time horizon of the useful life of the wind park, of 20 to 25 years", it being known that such type of studies take into account the environmental and morphological characteristics of the region in which the wind park is located.

Additionally, as was given as proven (point III), a Class 1 type wind turbine was chosen for the … Wind Park, which is a class of wind turbines that guarantees higher levels of robustness and safety. It should be noted, furthermore, that in the document No. 5 itself annexed to the PI reference is made to the fact that the MM turbine models of F… can be adjusted to adapt to all wind classes and location conditions, ensuring "total flexibility and economic efficiency in all wind speeds and location conditions".

On this basis, the Tribunal did not consider the statements made in this regard by witness B… sufficiently conclusive to be able to judge as proven that, by their specific characteristics and by the weather and terrain conditions of the location where they are installed, the wind turbines of the … Wind Park possess an expected useful life period of less than 20 years.

Regarding maintenance problems, witness B… made reference to the "forecast" of 12 years of service to determine the need for replacement of major components of the wind turbines, but specifically regarding specific interventions that occurred he only alluded to having already replaced "some bearings in some turbines" and that some deterioration or wear is already detected. As such, the Tribunal considers that no conclusive proof was made of the occurrence of a "history of repairs and maintenance already carried out in the … Wind Park".

As for witness D…, his testimony proved to be manifestly insufficient in relation to the factuality in question in the file, relating to the … Wind Park. In fact, such witness, who stated that he accompanies in the electrical part the … Wind Park, as well as the … Wind Park, contiguous to that one, when questioned about the replacement of the major components of the wind parks and about their duration over the 16-year period, after noting that he is not a mechanical engineer and "does not know the maintenance reports" of the … Wind Park ("I don't know what has happened"), given that his "responsibility does not extend to that", did not pronounce specifically on the situation in…, but rather on the wind park in…, about which he had experience, and which he stated was "somewhat similar in terms of winds".

For these reasons, the Tribunal did not judge the allegations indicated above in paragraph 13 as proven.

IV. On the Law

A) Legal Framework

1. Given that the legal issue to be decided in this proceeding requires interpretation of the pertinent legal texts, it is important, first of all, to list the norms that make up the relevant legal framework, at the date of occurrence of the facts (2012, 2013 and 2014).

2. It follows from Article 5, paragraph 3 of Regulatory Decree No. 25/2009 of 14 September that "with respect to elements for which depreciation or amortization rates are not fixed in the tables referred to in paragraph 1, those that the Directorate-General of Taxes considers reasonable, having regard to the expected period of usefulness, are accepted".

3. Already in the IRC Code, in particular in paragraph 2 of Article 31, at the relevant date of the facts (years 2012 and 2013), the following was provided: "with respect to elements for which depreciation or amortization rates are not fixed, those that the Directorate-General of Taxes considers reasonable, having regard to the expected period of usefulness, are accepted". Likewise, according to paragraph 3 of Article 31 of the same Code, in the wording resulting from Law No. 2/2014 of 16 January, "with respect to elements for which depreciation or amortization rates are not fixed, those that the Tax and Customs Authority considers reasonable, having regard to the expected useful life period of those elements, are accepted".

4. Thus, it appears that the legislator came to provide the necessary space for the Respondent to define, within a reasonableness criterion, the useful life period of goods for which depreciation rates are not fixed.

5. Given the above, the Tribunal must assess the issue to be decided, having this premise as its basis.

B) Arguments of the Parties

1. Regarding the useful life period of the wind turbines of the … Wind Park, and there being no, at the relevant date of the facts, a legally established useful life period for those assets, the Claimant argued that "the case sub judice involves an interpretative exercise, and it should be analyzed what definition should be given, for tax purposes, to the expected useful life period of the wind turbines (…).

In the case at hand, we are faced with one of the situations in which a useful life period for the asset in question (…) was not expressly provided".

1. In this way, for the Claimant, in the choice it made regarding the useful life period of the assets in question "the various concrete circumstances that allow determining a reasonable period during which these specific pieces of equipment do not become obsolete in the logic of the concrete performance of its activity must be necessarily identified.

(…)

It was precisely following this legal framework, in particular by appealing to the aforementioned reasonableness criterion, that the inspected taxpayer established, in 2009, a useful life period of 16 years for the wind turbines (…)".

1. Therefore, in its understanding, the Respondent's reasoning (which argued for a minimum useful life period of 20 years for the wind turbines), "proves to be misaligned, not in line with tax legislation (…), contradictory, and manifestly insufficient (…)

That is, the Tax Authority opts to establish as a reasonable useful life period, for any and all wind turbines regardless of the circumstances of each specific case, that which is considered (…) the maximum life period reasonably expected for these".

1. Furthermore, the Claimant also accuses the Respondent of "justifying the choice of a useful life period of 20 years for the wind turbines at issue here on the fact that the Preliminary Study of the … Wind Park considers this to be the period of the concession of the … Wind Park".

2. However, for the Claimant, this period has nothing to do with the useful period of use of the generators, which may, for example, need repairs or even become unusable before. "(…) There is a history of repairs and maintenance already carried out in the …Wind Park, although they have been covered by the warranties that the wind turbines still enjoy. It is thus apparent that the actual deterioration of the equipment that gave rise to operational problems before they even completed ten years.

(…)

In light of the particular conditions of the … Wind Park, (essentially weather-related and relating to the terrain relief where it is installed), which led to equipment repairs even before the anticipated useful life time, and in light of the Claimant's accumulated experience in more than 90 wind parks over the last 25 years, as well as the average term of the investment, led to the consideration of a reasonable useful life period of 16 years".

1. In the course of its presentation, the Claimant cites some arbitral decisions, in particular the Arbitral Decision relating to Case No. 75/2014-T, of 18 September, in which it was held that the TA "«by having considered a merely technical or technological utility of the photovoltaic panels, disconnecting it from the conditions of actual use by the Claimant, in the specific case, departed from a reasonableness criterion (…)»".

2. The Claimant also recalls that in 2015, with the publication of Law No. 85-D/2014 of 31 December, wind energy equipment, in particular the aforementioned wind turbines, came to have a specially provided amortization rate, in this case 8% (or 12.5 years of useful life).

3. In this regard, the Claimant also cited the understanding set forth in Arbitral Case No. 16/2015-T of 9 January, "(…) «there being no reason to believe that the quality of the wind turbines has degraded markedly and generally between 2010 and 2014 so that its foreseeable useful life has fallen from 20 to 12.5 years, one cannot fail to understand that already at that first date it would not be unreasonable not to expect more than 12.5 years of useful life»".

4. The Claimant also considered itself to be facing a violation of the constitutional principle of equality and taxation of actual profit, thus requesting a declaration of the illegality of the previously referred assessments.

5. After the Respondent's response, the Claimant brought to light another Arbitral Decision, this one relating to Case No. 238/2016-T.

6. For its part, the Respondent, after being duly notified to this effect, filed its response in which, at the outset, it considered that, pursuant to the Law, "with respect to elements for which depreciation or amortization rates are not fixed, those that the Directorate-General of Taxes and Duties considers reasonable, having regard to the expected period of usefulness, are accepted, in accordance with what is provided for in paragraph 2 of Article 31 of the CIRC".

7. In this sense, the Respondent considers that it follows from the Law that it is its duty "to consider the expected period of usefulness (…) being this the only criterion that can determine the said rate with objectivity, rigor and security.

It should be noted that the criterion at issue here is that of the expected period of usefulness, it is a period of expected, probable usefulness, and not a period of absolutely exact, precise and certain usefulness".

1. The Respondent argues that, in its understanding, the useful life of the wind turbines at issue is 20 years, a conclusion it drew from the research carried out. "And as mentioned above, all companies that commercialize and/or manufacture wind turbines, whose information the TA had the opportunity to consult and analyze, indicate the period of 20 years as being its useful life period. Moreover, this 20-year period is the period recommended by the International Committee of Electronics (…)".

2. The Respondent also cites the dissenting opinion in Case 593/2015, "if the law entrusts the Administration with the power to specify a valuation not previously fixed by the law itself, a Court cannot proceed to re-weigh the judgments made by the Administration in this respect, unless it is demonstrated that there is a gross or manifest error – in particular lack of support in information and studies of a technical-professional nature corroborated by specialists and required by the densification of extra-legal concepts.

(…)

This Court, or any other, may find that the deadline proposed by the Claimant is more reasonable, or it may instead find that the deadline proposed by the TA is more reasonable – but that evaluation is, and must be, irrelevant in this case, because, it is insisted, the establishment by law of a discretionary power, such as the one exercised, precludes any possibility of reasonableness between depreciation periods, as it precludes any other judgment on the merits".

1. In view of the above, the Respondent recalls that the minimum useful life period it has accepted for this type of asset is 20 years, a period that is in line with the opinion of independent scientists and with up-to-date scientific literature, as well as with the opinion of companies that commercialize and/or manufacture wind turbines.

2. The Respondent emphasizes that "with the percentage of wear of the requested asset not being provided, the Claimant was subject to the regime provided for in paragraph 3 of Article 5 of the Applicable Amortization Regime, and could also opt for a different calculation method from those established through prior authorization of the Tax Administration (…) in both cases the Claimant would have to justify and document its choice, with the study of economic viability of the investment, the technical characteristics of the equipment used, the guarantees of suppliers, licenses and other documents relevant to the determination of expected useful life.

(…)

Expected period of usefulness which the Claimant considers to be 16 years, without having demonstrated it either in the course of the inspection procedure or in the course of arbitral impugnation. The Claimant merely alleges facts, without thereby demonstrating that the period it adopted for the depreciation of the equipment in question is the correct one".

1. In another aspect, the Respondent points out that the subsequent legal regime brought to the attention of the Claimant is manifestly irrelevant in this situation.

2. The Respondent concluded its presentation by stating that "it has legal support for the criterion used to determine the applicable amortization rates, considering that it is the law itself that indicates the criterion «of reasonableness, having regard to the expected period of usefulness»", thus requesting the dismissal of the request for arbitral ruling.

C) Assessment by the Tribunal

1. In view of the above, the Tribunal will assess and decide the merits of the case, which consists, in particular, of determining whether the useful life period of 20 years defined by the Respondent for the wind turbines of the … Wind Park is to be considered as reasonable, taking into account the technical discretion attributed to it, in accordance with what resulted, at the relevant date of the facts, from Regulatory Decree No. 25/2009 of 14 September.

2. First of all, let us examine the wording of the law at that date.

3. In accordance with paragraph 2 of Article 31 of the IRC Code, "with respect to elements for which depreciation or amortization rates are not fixed, those that the Directorate-General of Taxes considers reasonable, having regard to the expected period of usefulness, are accepted". Similarly, according to paragraph 3 of Article 31 of the IRC Code, as revised by Law No. 2/2014 of 16 January, "with respect to elements for which depreciation or amortization rates are not fixed, those that the Tax and Customs Authority considers reasonable, having regard to the expected useful life period of those elements, are accepted".

4. In this sense, it appears that the legislator came to provide the necessary space for the Respondent to define, within a reasonableness criterion, the useful life period of goods for which depreciation rates are not fixed.

5. In view of the above, the Tribunal must assess the issue to be decided, having this premise as its basis.

6. As recorded in point V of the proven facts, following what was acknowledged in the PI, the Claimant "opted to assign to these equipment an expected useful life period of 16 years and corresponding to a minimum depreciation rate of 6.25%, defining them as Unspecified Machinery and classified under code 2295 of Table II – Generic Rates of Regulatory Decree No. 2/90".

7. Now, that code falls within Group 3 – Machinery, Apparatus and Tools of the previously referred table, a group that concerns assets that in no way resemble the configuration of wind turbines.

8. In fact, by way of example, falling within the scope of that Group 3 are assets such as televisions, scales, compressors and other objects associated with the concept of Machinery, Apparatus, Tools.

9. Therefore, notwithstanding the fact that wind turbines did not have, at the date of the facts, a legally established useful life, it has, in the Tribunal's view, no justification to include them under code 2295, as the Claimant did. For this reason, the matter in question relates, in fact, to the application of the normative solution by which "with respect to elements for which depreciation or amortization rates are not fixed in the tables referred to in paragraph 1, those that the Directorate-General of Taxes considers reasonable, having regard to the expected period of usefulness, are accepted" (see the above-mentioned Article 5, paragraph 3 of Regulatory Decree No. 25/2009 of 14 September, Article 31, paragraph 2 (years 2012 and 2013) and Article 31, paragraph 3 (year 2014) of the IRC Code).

10. Well then, as far as this period of usefulness or expected useful life is concerned, the evidence produced, in accordance with the above indications in the decision on the facts (Nos. 13 and 14), does not permit the conclusion that specific circumstances have been proved that determine an expected useful life period inferior to 20 years in relation to the specific wind turbine equipment at issue in the file, so as to deem unreasonable the administrative fixation of the expected usefulness of 20 years.

11. Now, it is clear to the Tribunal that the Law confers on the Respondent the technical discretion necessary for it, within the limits of reasonableness, to fix an expected useful life period for elements for which depreciation or amortization rates are not fixed.

12. And, as the Respondent has the power (conferred by Law) to do so, it should be the Claimant, not agreeing with the Respondent's correction, to demonstrate that the said reasonableness was not complied with, pursuant to paragraph 1 of Article 74 of the General Tax Law ("LGT").

13. In fact, "the burden of proof of the facts constituting the rights of the tax administration or of the taxpayers falls on whoever invokes them".

14. It is also appropriate here to make reference to the dissenting opinion rendered in Arbitral Case No. 593/2015, whose exposure is to be applauded, "(…) in technical discretion «stricto sensu» there is, yes, the judgment of valuation based on knowledge and rules specific to the science or technique not legal that are at issue, it being understood that it is not for the Court to control the good science or the good technique employed by the administrative entity, for manifest lack of competence in the extra-legal matters necessary for that.

(…)

More specifically, if the law confers on the Administration the power to specify a valuation not previously fixed by the law itself, a Court cannot proceed to re-weigh the judgments made by the Administration in this respect, unless it is demonstrated that there is a gross or manifest error, in particular lack of support in information and studies of a technical-professional nature corroborated by specialists and required by the densification of extra-legal concepts.

(…)

This Court, or any other, may find that the deadline proposed by the Claimant is more reasonable, or it may instead find that the deadline proposed by the TA is more reasonable – but that evaluation is, and must be, irrelevant in this case, because, it is insisted, the establishment by law of a discretionary power, such as the one exercised, precludes any possibility of reasonableness between depreciation periods, as it precludes any other judgment on the merits".

1. On the other hand, as one is dealing with an asset (wind turbine) relatively recent in the business landscape, it is acceptable, at the outset, for doubts to be raised as to the useful life to be considered as regards the depreciation of that asset, until such time as it is legally established (which only occurred in 2015).

2. When finally defined, through Law No. 82-D/2014 of 31 December, the useful life of wind turbines (typically the legislator is slow to react), this was fixed at 12.5 years.

3. Therefore, it was neither 16 years, as indicated by the Claimant, nor 20 years, as indicated by the Respondent.

4. Neither was it the 15 years to which the guaranteed period corresponds, nor the 18 years (duration of the financing contracted to acquire the wind turbines).

5. At the relevant date of the facts, neither the Claimant nor the Respondent could have anticipated that the legislator would come to fix a useful life of 12.5 years for wind turbines.

6. Therefore, based on the useful life that came to be specially established for wind turbines, both the criterion followed by the Claimant and the criterion followed by the Respondent seem to be hardly reasonable.

7. And for that reason, the present Tribunal, in assessing now the issue to be decided, should ignore that fact (also because that normative amendment was not given any interpretive character), limiting itself to considering the legislation existing at the date, avoiding applying tax law retroactively (a procedure constitutionally prohibited, pursuant to Article 103, paragraph 3 of the Constitution of the Portuguese Republic).

8. Note should also be taken that if the Claimant had come to perceive that indeed its wind turbines were depreciating in an abnormal manner (having regard to their useful life period, in theory, expected), it could always make use of the mechanism provided for in Article 31-B of the IRC Code, which provides, in its paragraph 1, "that may be accepted as tax expenses the impairment losses on non-current assets from abnormal causes proven, in particular disasters, natural phenomena, exceptionally rapid technical innovations or significant changes, with adverse effect, in the legal context".

9. By last, the present Tribunal leaves the note regarding the arbitral decision issued in case 238/2016-T, cited by the Claimant, which lacks factual identity in relation to the case of these proceedings, inasmuch as, according to what is declared in the respective statement of facts, in that case it was considered "10 wind turbines of 1.3MW power", of the "IZAR Bonus 1.3 model".

10. As it has not been proven that the expected useful life period of the wind turbines of the … Wind Park is less than 20 years, it cannot be considered that an error in the factual and legal premises of the arithmetic corrections that are the basis of the impugned assessments has occurred.

11. Similarly, in light of the factuality proven and not proven, the allegation of the Claimant does not succeed (see paragraph 169 of the PI) of "violation of the constitutional principle of equality and taxation of actual profit, given that the amortization rate proposed by the Tax Administration pursuant to paragraph 2 of Article 31 of the IRC Code is clearly unconstitutional, as violating the principle of proportionality", being incapable of subsuming to the case sub judice.

V. Decision

1. To conclude, the following should be sanctioned:

2. The Respondent, within the limits of the technical discretion conferred on it, defined, based on a reasonableness criterion, an expected useful life period for the Claimant's wind turbines, which caused a correction to the fiscal result determined by the latter.

3. The Claimant, not satisfied with this correction, decided to impugn it, and the burden thus falls on it to prove why the Respondent's criterion was not reasonable, pursuant to Article 74 of the LGT.

4. The Claimant, despite having resorted to an amortization rate applicable to a group of assets that in no way resemble wind turbines (Group 3 Machinery, Apparatus, Tools), failed to demonstrate that the fixation of the expected useful life of the wind turbines of the … Wind Park at 20 years is unreasonable.

5. As the Claimant has not demonstrated that the criterion used by the Respondent was not reasonable, its request for a declaration of illegality of the previously mentioned assessments should not succeed.

VI. Decision

1. In these terms, this Tribunal decides:

A) To judge the request for arbitral ruling completely without merit and, consequently, to maintain in the legal order the additional assessments referred to above, in the total amount of € 515,694.63;

B) To condemn the Claimant in the costs of the proceeding, given the complete lack of merit of the request.

VII. Value of the Proceeding

1. The value of the proceeding is fixed at € 515,694.63, pursuant to Article 97-A, paragraph 1, section (a) of the CPPT, applicable by virtue of sections (a) and (b) of paragraph 1 of Article 29 of the RJAT and paragraph 2 of Article 3 of the Regulations of Costs in Tax Arbitration Proceedings ("RCPAT").

VIII. Costs

1. In accordance with what is provided for in Article 22, paragraph 4 of the RJAT, the arbitration fee is fixed at € 7,956.00 pursuant to Table I of the aforementioned Regulation.

Let it be notified.

Lisbon, CAAD, 4 May 2017

The Arbitrators

(José Baeta de Queiroz – President)

(João Menezes Leitão – Member)

(Gonçalo Cid Peixeiro – Member)