Summary
Full Decision
ARBITRAL DECISION (consult complete version in PDF)
I - REPORT
A - Identification of the Parties
Claimant: A..., S.A., holder of Tax Identification Number..., with registered office at Street ..., no. ..., Rooms ... and ..., ...-... Porto, hereinafter referred to as Claimant or Taxpayer.
Respondent: Tax and Customs Authority, hereinafter referred to as Respondent or TA.
The Claimant filed a request for constitution of an Arbitral Tribunal in tax matters and a request for arbitral ruling, pursuant to the provisions of paragraph a) of number 1 of article 2 and paragraph a) of number 1 of article 10, both of Decree-Law no. 10/2011, of January 20 (Legal Regime for Arbitration in Tax Matters), hereinafter briefly designated as LRAT.
The request for constitution of the Arbitral Tribunal was accepted by the President of the Administrative Arbitration Centre (CAAD), and in accordance with the provisions of paragraph c) of number 1 of article 11 of Decree-Law no. 10/2011, of January 20, with the wording introduced by article 228 of Law no. 66-B/2012, of December 31, on November 20, 2018 the Tax Authority was notified.
The Claimant did not proceed with the appointment of an arbitrator, therefore, pursuant to the provisions of number 1 of article 6 and paragraph b) of number 1 of article 11 of Decree-Law no. 10/2011, of January 20, with the wording introduced by article 228 of Law no. 66-B/2012, of December 31, the Ethics Council designated Arbitrator Rita Guerra Alves, accepted by her in accordance with legally provided terms.
On January 10, 2019 both parties were duly notified of this appointment, and they did not manifest any will to refuse it, in accordance with article 11 number 1, paragraphs a) and b), of the LRAT and Articles 6 and 7 of the Code of Ethics.
The Singular Arbitral Tribunal was regularly constituted on January 30, 2019, to assess and decide on the subject matter of the present dispute, and automatically on that same day the Tax and Customs Authority was notified, as shown in the respective minutes.
No witness evidence was presented, and following the procedural course, both parties waived the meeting referred to in article 18 of the LRAT and agreed to present written submissions.
The parties possess legal personality and capacity, are legitimate and are represented (articles 4 and 10, number 2, of the same instrument and 1 of Ordinance no. 112-A/2011, of March 22).
The process is not affected by defects that would invalidate it.
B – REQUEST
The Claimant petitions for a declaration of illegality of the tax assessment act for Corporate Income Tax (CIT) no. 2016..., corresponding to the fiscal year 2014, in the amount of €50,987.70 (fifty thousand nine hundred and eighty-seven euros and seventy cents).
C – CAUSE OF ACTION
To support its request for arbitral ruling, the Claimant alleges, in order to obtain a declaration of illegality of the tax assessment act for Corporate Income Tax (CIT), already described in point 1, the following:
The additional CIT assessment contested here resulted from an erroneous interpretation of tax law by the SIT, understanding that the amounts paid to entities resident in Hong Kong, in the total amount of €110,000.00 (one hundred ten thousand euros), would not be deductible from taxable income for the purpose of determining taxable profit and, additionally, subject to autonomous taxation.
Regarding the application of the Special Anti-Abuse Clause of paragraph r), of number 1, of article 23-A of the CIT Code, the Claimant argues that the Tax and Customs Authority ("TA") cannot simply disregard a payment actually made – which existed, in fact, and in the amounts declared by the taxpayer – merely because the entity that received the payment is based in a territory subject to a tax regime classified as clearly more favorable, under penalty of violation of the principle of freedom of business management, a principle with constitutional relevance in articles 61, 89, paragraph c) and 86 of the Constitution of the Portuguese Republic.
The Claimant argues that the agreement is only signed by one of the parties, since, for practical reasons and linked to the prevalence given to the operation/transaction over the form, B... did not sign the Agreement that formalizes, in writing, the contractual relationship – particularly because the agreement was performed before the signing of the agreement, with B... choosing not to sign it, given that what was established had already been performed.
The Claimant argues that, by virtue of the principle of freedom of business management and free competition, the legislator was properly concerned with removing the application of this clause when i. "Such charges correspond to operations actually performed," and ii. They do not have an abnormal character or an exaggerated amount.
In fact, there was, in fact, a payment to an entity based in a territory subject to a clearly more favorable tax regime, as consideration for real estate intermediation services provided.
Therefore, this transaction has nothing to do with pursuing the objective of reducing or eliminating tax burden.
Thus, and applying the guidelines of jurisprudence and doctrine which determine that, in cases such as the one now being analyzed, the rules of common experience should be applied to assess the actual occurrence of operations, it can be concluded that the invoice issued by B..., as well as the respective supporting contract which determined €535,241.00 as the objective sale price for the said unit AF, with complete correlation in the referred accounting records (subject to accounting audit and legal certification of accounts), make clear the actual existence of this economic operation with B...
The fact that the purchaser of unit AF of the development was brought in by the entity providing the service – to whom the Claimant paid the amount of €110,000.00 – is sufficient to justify the economic substance of the operation, as will be developed.
Regarding the second requirement for the application of paragraph r), of number 1, of article 23-A of the CIT Code, the "abnormal character or exaggerated amount" of the expense incurred, the Claimant argues that the commission of €110,000.00 (one hundred ten thousand euros), which represented 20.75% commission and not 25.5% (given that there is a VAT component included), is perfectly reasonable if we compare it with the other commissions charged by other international intermediaries of the same nature as B...
The Claimant further argues that the expense associated with the payment made to B... is also directly linked to the branding activity of the present Claimant in that market.
The Claimant argues that the amount paid does not have an abnormal character, insofar as, although the commission value is higher than that paid for services rendered to the remaining autonomous units, the truth is that normality should be evaluated by comparison to other payments occurring in similar circumstances.
The Claimant argues that the amount paid does not have an abnormal character, insofar as, although the commission value is higher than that paid for services rendered to the remaining autonomous units, the truth is that normality should be evaluated by comparison to other payments occurring in similar circumstances.
Now, considering the fact that the unit subject to sale – unit AF – was the last of the available units in that development, its sale could be considered more difficult, given that, it is well-known, according to market laws, this means that the units already sold would be the most commercially interesting. Thus, setting the commissions in a proportion of the sale value – which incentivizes the developer to sell the unit at a higher value – the fact that that unit was the least attractive to potential buyers meant that alternative markets were sought.
It concludes by arguing that the special anti-abuse clause established in paragraph r), of number 1 of article 23-A of the CIT Code does not apply, due to lack of its prerequisites.
D - RESPONSE OF THE RESPONDENT
The Respondent, duly notified for this purpose, timely presented its response, in which, in brief summary, alleged as follows:
Notwithstanding awareness that the invoice under discussion is associated with the sale of Unit AF, the legislator limits the tax deductibility thereof to proof that "such charges correspond to operations actually performed and do not have an abnormal or exaggerated character."
For the purposes of paragraph r) of number 1 of article 23-A of the CIT Code, the charges itemized in the invoice are relevant, assessing whether they refer to operations actually performed for the benefit of the Respondent and in the development of its activity.
It argues that what is at issue in this case is the demonstration of the actual performance of the provision of services referred to in invoice no. 189/2014 of June 24 issued by B... to the Respondent, and not the payment to B..., an entity based in a tax haven (which we know was executed) nor the property (Unit AF), whose sale was indeed executed.
Indeed, it is precisely the financial operations (payments) made to tax havens that are contemplated in the norm, which without proof of the actual performance of the service provision and the non-abnormal or non-exaggerated character thereof, fall within the scope of the norm.
The Respondent argues that, as to this requirement, the claimant did not demonstrate that: It did not present any written contract entered into with B...; The description of invoice no. 189/2014, of June 24, comprises a set of services that do not form part of the claimant's interest in pursuing its corporate purpose. The justifications presented by the claimant "search for alternative markets (. . .) immediate liquidity needs of its shareholder C..." do not hold without the necessary proof that those services were actually performed as part of the development of its commercial activity; Services provided for the purpose of obtaining residence visas for citizens of foreign nationality have no tax relevance in the tax sphere of the claimant, as they are outside the context of the activity; It equally failed to prove that the expenses allegedly incurred, associated with the sale of Unit AF, constitute fair remuneration for the performance of that transaction, by comparison with expenses for similar services in the market; Since the claimant failed to prove the actual performance of the services described in invoice no. 189/2014, its normal character and balanced amount, the standard regime provided in the CIT Code was applied to this operation, with the expenses incurred being disregarded for tax purposes, as this concerns payment to an entity based in a tax haven.
This is the conclusion to be drawn from reading the norm, which was introduced into the CIT Code by Decree-Law no. 37/95, of December 14 (originally article 57-A) and was intended to regulate payments to entities resident in countries with privileged tax regimes for the purpose of determining taxable profit, in order to avoid tax evasion and fraud.
It argues that the preamble to said DL mentions the adoption in Portuguese legislation of two anti-abuse measures to combat practices of tax evasion "as a way to preserve tax revenues and ensure justice in taxation, in the context of measures that, at the international level, are being taken for this purpose."
With the objective of countering the relocation of income to territories ensuring a privileged tax regime, one of the anti-abuse measures "consists in the reversal of the burden of proof when dealing with amounts paid or owed by entities resident in Portuguese territory to entities resident in those territories - so that these amounts are deductible in determining their taxable profit it becomes incumbent upon the taxpayer resident to demonstrate that they correspond to operations actually performed and do not have an abnormal character or an exaggerated amount." (see preamble to DL 37/95)
The Respondent concludes by arguing that the present request for arbitral ruling should be judged without merit, as manifestly unfounded, with the legal consequences thereof.
E - FACTUAL BASIS
It should be stated that it is not within the jurisdiction of the Tribunal to rule on everything alleged by the parties regarding matters of fact, and the facts relevant to the judgment of the case should be selected and considered by the Tribunal, which should also distinguish the proven facts from those not proven (cf. article 123, number 2, of the CPPT and article 607, number 3 of the CPC, applicable by virtue of article 29, number 1, paragraphs a) and e), of the LRAT).
Therefore, in order to address the issues submitted for consideration, it is necessary to first present the relevant factual matter that allows the Tribunal to understand and make a decision, based on the facts alleged and the documentary evidence produced in the file.
As for the factual matter considered relevant, the present Tribunal finds established the following facts:
The Claimant is an anonymous commercial company, constituted on April 14, 1994, whose corporate purpose is to make investments in the real estate area, with the main Economic Activity Code ("EAC") no. 41200 – Construction of Buildings –, and secondary EAC no. 68100 – Purchase and Sale of Real Estate, held 100% by company C..., S.A.
On May 29, 2015, the present Claimant proceeded to submit Tax Form 22 ("TF22") of the consolidated tax it controls, pursuant to which a consolidated tax result of €389,180.20 (three hundred eighty-nine thousand one hundred and eighty euros and twenty cents) and a total amount of autonomous taxation of €96,866.44 (ninety-six thousand eight hundred and sixty-six euros and forty-four cents) was determined.
The Claimant was subject to a tax inspection covering the fiscal years 2012, 2013 and 2014, in compliance with Internal Service Order no. OI2015..., which culminated in the CIT corrections contained in the Tax Inspection Report.
In the fiscal year 2014, the Claimant recorded in account #6221 – Specialized Work, the amount of €135,300.00 (one hundred thirty-five thousand three hundred euros).
The company "D...", based in Hong Kong, issued on June 24, 2014, invoice no. 189/2014, in the amount of €110,000.00 (one hundred ten thousand euros), plus the charging of Value Added Tax ("VAT"), in the amount of €25,300.00 (twenty-five thousand three hundred euros), with the following description of services provided, "provision of services related to obtaining residence visas for citizens of Chinese origin through the acquisition of real estate with a value exceeding €500,000.00".
The present Claimant sold unit AF, with T3 typology, with registration article..., of the Building ... development, composed of 36 units, to a citizen of Chinese nationality for the amount of €530,000.00 (five hundred thirty thousand euros).
The transaction of unit AF was carried out with the intervention of company B... based in Hong Kong, and the payment made to this company, in the amount of €110,000.00, which represents a commission of 20.75% on the property value.
In the year 2014, the following units of the Building ... development were sold at the following amounts and their respective commissions and percentages:
The percentage of commissions paid by the Claimant for the acquisition of those units is between 3.69% and 7.38%.
On March 16, 2016, the Claimant was notified of the additional CIT assessment by means of account reconciliation document no. 2016...
On May 12, 2016, the present Claimant proceeded to pay the amount of allegedly missing tax, in the amount of €50,987.70.
On September 22, 2016, the Claimant filed a gracious complaint.
On June 26, 2017, the present Claimant was notified of the order denying the gracious complaint.
The special administrative region of Hong Kong is part of the list of countries, territories and regions with privileged tax regimes, disclosed in Ordinance no. 292/2011 of February 13, published in the Official Journal on 2011-02-08.
The Claimant does not have a written agreement signed by D... regarding invoice no. 189/2014.
F - FACTS NOT PROVEN
Of the facts with interest for the decision of the case, subject to concrete analysis, those not included in the factuality described above were not proven.
G - ISSUES TO BE DECIDED
Given the positions of the parties, adopted in the arguments presented by each, it is incumbent upon the Tribunal to assess and decide on:
The declaration of illegality of the tax assessment act for Corporate Income Tax (CIT) no. 2016..., corresponding to the fiscal year 2014, in the amount of €50,987.70 (fifty thousand nine hundred and eighty-seven euros and seventy cents).
The payment of compensatory interest.
H - LEGAL BASIS
As previously stated, the central issue to be resolved by the present Arbitral Tribunal concerns the assessment of the legality of the Corporate Income Tax (CIT) assessment act no. 2016..., corresponding to the fiscal year 2014, in the amount of €50,987.70 (fifty thousand nine hundred and eighty-seven euros and seventy cents).
The issue at hand consists in analyzing whether or not the expense declared by the Claimant is deductible for tax purposes, referring to invoice no. 189/2014 issued by the legal entity based in Hong Kong, with the name "D...", on June 24, 2014, an entity resident in a territory with a privileged tax regime, disclosed in Ordinance no. 292/2011 of February 13.
To that end, it is necessary to analyze the legal-tax regime of the Special Anti-Abuse Clause provided in paragraph r), of number 1, of article 23-A of the CIT Code, and determine whether the legal requirements therein provided are met, as well as determine where the burden of proof of the facts invoked falls, and whether they are properly supported by the documentary evidence in the file.
Thus, the Special Anti-Abuse Clause provided in paragraph r), of number 1, of article 23-A of the CIT Code, at the date of the facts, 2014, stipulated the following:
"1 - The following charges are not deductible for the purpose of determining taxable profit, even when accounted for as expenses of the taxation period: r) Amounts paid or owed, for any reason, to natural or legal persons resident outside Portuguese territory, and there subject to a tax regime identified by ordinance of the government member responsible for the area of finances as a clearly more favorable taxation regime, unless the taxpayer proves that such charges correspond to operations actually performed and do not have an abnormal character or an exaggerated amount." (our emphasis)
Breaking down paragraph r), of number 1, of article 23-A, we note that as to the burden of proof, it is the taxpayer who bears the burden of proof regarding charges with tax regimes provided for in the ordinance, and it is specifically incumbent upon him to prove that the operation corresponding to the charge was actually performed and that it does not have an abnormal or exaggerated character.
It is important to note that the provision of article 23-A does not exclude the application of the general rule provided in art. 23 number 1 of the CIT Code, "1 - For the purpose of determining taxable profit, all expenses and losses incurred or borne by the taxpayer to obtain or ensure income subject to CIT are deductible, assessing whether they refer to operations actually performed for the benefit of the taxpayer and in the development of its activity;
As well as the rule provided in article 23 number 4 and 6, relating to the existence of a written document, namely an invoice or similar document.
Returning to the question of the burden of proof, there is no doubt, since the legislator was clear in the provision provided in paragraph r), of number 1, of article 23-A, as well as in the preamble to Decree-Law no. 37/95 of December 14.
See in this regard the preamble to Decree-Law no. 37/95 of December 14, wherein the legislator introduced two anti-abuse measures: "two anti-abuse measures are taken with a view to countering the relocation of income to territories that assure them a privileged tax regime. One of them consists in the reversal of the burden of proof when dealing with amounts paid or owed by entities resident in Portuguese territory to entities resident in those territories - so that these amounts are deductible in determining their taxable profit, it becomes incumbent upon the taxpayer resident to demonstrate that they correspond to operations actually performed and do not have an abnormal character or an exaggerated amount."
Preliminarily, it is important to analyze the rules governing the burden of proof in the legal-tax relationship of the taxpayer, which results from article 74 number 1 of the LGT: "the burden of proof of the facts constituting the rights of the tax administration or the taxpayers falls on whoever invokes them," in line with article 342 number 1 of the CC, "the burden of proof of the facts constituting the alleged right falls on the one who invokes that right." (our underline)
Furthermore, on the issue of the burden of proof, there is extensive jurisprudence, maintaining that it is incumbent upon the TA to bear the burden of proof of the verification of the legal prerequisites that legitimize its action and that it is incumbent upon the taxpayer to prove the facts that support the claims and rights it invokes. (see Arbitral Process no. 236/1014-T of May 4, 2015).
To this effect, the Judgment of the Supreme Administrative Court of February 26, 2014, case no. 0951/11: "In cases where the correction of the declared taxable matter results from the fact that the TA has considered that certain expenses cannot be part of the acquisition value to be considered in calculating capital gains because they relate to assets that were not transferred (the reason why, through the process generally called 'arithmetic corrections', it eliminated such expenses from the acquisition value), it is incumbent upon the TA to prove that the legal prerequisites that legitimize its action in the sense of correcting taxable profit are verified (that is, to demonstrate the facts that led it to conclude that those expenses do not relate to the assets transferred), only then incumbent upon the taxpayer is the burden of proof of the existence of the facts it alleged as grounds for its right to have such amounts recognized negatively in the calculation of capital gains."
This Judgment is clarifying as to the distribution of the burden of proof, to which reference is made: "It is therefore necessary to answer the question – purely legal, as we have already stated, and, for this reason, within the scope of the powers of cognition of this Supreme Court – of knowing on whom falls the burden of proving such fact, against whom should the question of whether the referred improvements were or were not transferred be decided. (…) Thus, it is necessary to recall, briefly and synthetically, the rules for the distribution of the burden of proof: in principle, it is incumbent upon the TA to bear the burden of proof of the verification of the legal prerequisites (mandatory) of its action, in particular if aggressive (positive and unfavorable) and, conversely, it is incumbent upon the administered party to present sufficient proof of the illegality of the act, when those prerequisites are shown to be verified, a solution now fixed by article 74, number 1 ('The burden of proof of the facts constituting the rights of the tax administration or the taxpayers falls on whoever invokes them.'), of the LGT and which at that time should already be considered applicable because it corresponded to the general rule of article 342 of the Civil Code (CC), which states that whoever invokes a right bears the burden of proving the constitutive facts, with the opposing party bearing the burden of proving the imperative, modifying or extinctive facts. But this will not always be the case. The burden of proof will vary depending on the type of administrative act in question, and the question of its distribution must be decided 'in accordance with the position that the parties occupy in the proceedings and with the type of legal relationship that constitutes its object and, consequently, in the field of judicial review of annulment, with the type of act being annulled, as the law characterizes or defines its constitutive elements' (Cfr., inter alia, the following judgment of the Tax Litigation Section of the Supreme Administrative Court: – of April 17, 2002, delivered in the case no. 26.635, published in the Appendix to the Official Journal of March 8, 2004. (…) In order to proceed with the correction of declarations (and consequent additional tax assessment considered to be missing), the TA, namely when it considers that costs or revenues have been declared that do not correspond to reality (those because nonexistent or higher than actual, these because lower than actual), must substantiate its formal and material judgment, and judicial oversight may extend to both aspects of the substantiation (formal and material). (…) Thus, in the case of the instant case, we can advance the following conclusions, in accordance with jurisprudence long established in the tax courts: because the additional CIT assessment is based on the non-recognition by the TA of a portion of the acquisition value (that relating to the expenses declared as improvements), it is incumbent upon the TA to prove that the legal prerequisites that legitimize its action are verified, that is, to demonstrate the existence of serious indications that the transmission of the improvements whose value is part of the acquisition value did not occur; once this proof is made, it falls upon the Taxpayer the burden of proving the existence of that transmission, which it alleged as grounds for its right to have such costs recognized negatively in the calculation of capital gains and, consequently, in its taxable matter; in this case, it will not be sufficient for the Taxpayer to create doubt about its truthfulness, even if well-founded, as in this case article 121 of the CPT does not apply; in truth, the burden enshrined in this legal provision against the TA (that doubt as to the existence and quantification of the tax fact should be decided against the TA: in dubio contra Fisco) only exists when it is the TA that is affirming the existence of the tax facts and their respective quantification and not when, as in the instant case, it is the Taxpayer that must demonstrate the existence of the facts on which it bases its right to have certain costs recognized negatively in the calculation of capital gains and, consequently, of its taxable profit. This is why we have said that it is sufficient for the TA to demonstrate the verification of the 'index-facts' (objective and credible indications) which, combined with one another and assessed in light of the rules of experience, allowed it to conclude that the transmission in question did not occur. If it does so, the administrative decision to disregard the expenses in question as an integral part of the acquisition value to be used in calculating capital gains will be materially substantiated and, consequently, the presumption of truthfulness of the accounting records, as provided for at that time in article 78 of the CPT, will be displaced. It is this same article that states that the presumption it provides can be displaced, in particular, by the verification of 'other well-founded indications that it does not reflect the actual taxable matter of the taxpayer' (That is, although we are dealing with a legal presumption, for it to be displaced there is no need for contrary proof – unlike what is generally required regarding such presumptions (see article 350, number 2, of the CC), because article 78, in fine, of the CPT establishes, with special character, a different regime for displacing the presumption.)."
It concludes to the effect that: "In cases where the correction of the declared taxable matter results from the fact that the TA has considered that certain expenses cannot be part of the acquisition value to be considered in calculating capital gains because they relate to assets that were not transferred (the reason why, through the process generally called 'arithmetic corrections', it eliminated such expenses from the acquisition value), it is incumbent upon the TA to prove that the legal prerequisites that legitimize its action in the sense of correcting taxable profit are verified (that is, to demonstrate the facts that led it to conclude that those expenses do not relate to the assets transferred), only then incumbent upon the taxpayer is the burden of proof of the existence of the facts it alleged as grounds for its right to have such amounts recognized negatively in the calculation of capital gains. It is sufficient for the TA to demonstrate the verification of the 'index-facts' (objective and credible indications) which, combined with one another and assessed in light of the rules of experience, allowed it to conclude that the assets to which the expenses in question relate were not transferred and, thus, that the administrative decision to disregard those expenses in calculating capital gains is materially substantiated and the presumption of truthfulness of the accounting records is displaced (as provided for at that time in article 78 of the CPT). Once this demonstration is made, it then falls upon the taxpayer to demonstrate that those assets were actually transferred, it not being sufficient for it to create doubt to that effect (article 121 of the CPT does not apply here) because it is not the TA that is invoking the existence of an undeclared tax fact or attributing a different dimension to a tax fact from that declared, in which case it would be decided against it in the face of doubt, but rather it is the taxpayer that invokes its right to have the expenses it states as relating to transferred assets recognized negatively in the calculation of capital gains, which is why doubt to that effect is unfavorable to it."
Further within the scope of jurisprudence, although on a different theme, but of relevance to the substantiation of the present arbitral decision, it was decided in the Arbitral Decision, Process 236/1014-T of May 4, 2015, as follows:
"Consequently, it is incumbent upon the Tax Administration to bear the burden of proof of the verification of the legal prerequisites (mandatory) that legitimize its action, for which it must prove the constitutive facts on which the administrative-tax decision legally depends with certain content and with a certain sense. For its part, it is incumbent upon the taxpayer to prove the facts that support the claims and rights it invokes." (…) "As such, in compliance with the provisions of number 1 of article 74 of the LGT, it is incumbent upon the Claimant to demonstrate the bases and factual situations on which it grounds the adjustments, disregards and regularizations which it promoted and whose tax relevance and consistency it asserts, thus the burden falling upon the Claimant to clarify, prove and document the operations in question and their justification." (our emphasis)
(…) In this sequence, it should further be noted that it results from article 75, number 1 of the LGT that the declarations of the taxpayers, presented in accordance with the terms provided in law, as well as the data and determinations recorded in their accounting or books, when organized in accordance with commercial and tax legislation, are presumed true. However, this presumption ceases in particular if those declarations, accounting or books, or their supporting data, present omissions, errors and inaccuracies or if well-founded indications are gathered that they do not reflect or prevent knowledge of the actual taxable matter of the taxpayer (article 75, number 2, paragraph a) of the LGT). It should also be recalled that, pursuant to number 3 of article 75 of the LGT, "[t]he probative force of the taxpayer's computer data depends, except as provided in special law, on the provision of documentation relating to its analysis, programming and execution and the possibility of the tax administration confirming it". (…) Now, whenever paragraph a) of number 2 of article 75 of the LGT applies, "it will be upon the taxpayer that the burden of proof of the facts declared or recorded in his accounting or books about which there are evidentiary doubts falls," therefore "doubts that subsist in the court proceedings regarding matters of fact cannot be considered well-founded doubts" for the purposes of number 1 of article 100 of the CPPT (see thus Jorge Lopes de Sousa, Code of Tax Procedure and Process annotated and commented, vol. II, 6th ed, 2011, p. 133).
Therefore, the burden of demonstrating effectively the facts recorded and the reasons underlying the adjustments made in the accounting incurs on the Claimant, and it is not sufficient to leave doubt about the viability of their justification, since the provision of number 1 of article 110 of the CPPT has its full application when it is the Tax Administration that is asserting the existence of the tax facts and their respective quantification (see thus, the judgment of the Supreme Administrative Court of February 26, 2014, case no. 0951/11). Thus, the evidence produced must ensure, with the requisite certainty, that the regularizations and adjustments made have sufficient consistency and materiality in light of the justifications that underpin them."
In any case, there is a presumption of truthfulness and good faith regarding the Claimant's declarations, a basic principle enshrined in article 75 of the LGT, which prescribes: "The declarations of the taxpayers presented in accordance with the terms provided in law are presumed true and made in good faith, as well as the data and determinations recorded in their accounting or books, when these are organized in accordance with commercial and tax legislation, without prejudice to the other requirements on which the deductibility of expenses depends. (Wording of Law no. 80-C/2013 of December 31)".
The displacement of this presumption occurs when: "the declarations, accounting or books reveal omissions (article 75 number 2 paragraph a)) and when the taxpayer fails to fulfill the duties incumbent upon him to clarify his tax situation (article 75 number 2 paragraph b)).
For its part, it is incumbent upon the Respondent to bear the burden of proof regarding the verification of the legal prerequisites (mandatory) that legitimize its action, that is, it is incumbent upon it to prove the fact it invoked.
Consequently, in accordance with the provisions of number 1 of article 74 of the LGT, and in particular by virtue of what is expressly provided in paragraph r), of number 1, of article 23-A of the CIT Code, it is incumbent upon the Claimant to bear the burden of clarifying, proving and documenting the operations in question, including demonstrating and justifying their tax relevance and consistency, resorting to documentary means of proof and, if necessary, supplementing with witness testimony the factual elements that support their correctness, since they were promoted by the Claimant.
In other words, it is incumbent upon the Claimant to bear the burden of proof in two moments: in a first moment to prove that invoice no. 189/2014 corresponds to a real operation, and in a second moment, to prove that its value is not abnormal or exaggerated.
As to the verification of the operation, in particular the payment of a commission for real estate intermediation for the sale of the unit in question, the TA did not challenge it, therefore the present Tribunal takes it as an accepted fact.
The TA challenges and alleges its abnormal and exaggerated value, therefore it is incumbent upon the taxpayer, through the reversal of the burden of proof, to prove that it is not.
It should be noted that there is jurisprudence on this matter which will be closely followed, specifically Judgments nos. 05082/11 and 08126/14, both from TCAS and the CAAD decision 687/2015-T.
See in this respect Judgment 08126/14 of the Central Administrative Court South: "It should further be noted that the law does not require any formalism in these proofs, thus applying to them the system of free proof and the taxpayer being able to resort to all means of proof permitted by law (see, e.g., articles 352 et seq. of the Civil Code). As regards proof of the truthfulness of the operation, the mere exhibition of written documents, namely contracts entered into between the parties, will not suffice, as these are presumed to be simulated, nor will the demonstration of payment of the price, since this is not disputed. What must be the object of proof is rather the actual performance of services, or the receipt of a loan, that is, the commercial fact that was at the origin of the payment of the same price that appears as a cost to be deducted in the context of CIT. As to proof of the lack of abnormal or exaggerated character of the expenses, this must involve the demonstration that the contract, whose truthfulness was proven, is presented as balanced. For this purpose, the taxpayer should demonstrate what the actual importance of the benefits gained from the contract in question is, as well as provide proof that the charges established constitute fair remuneration for those benefits, namely by comparison with the costs of similar services in the market".
Without reservation, adopting Judgment 08126/14 as to proof of the lack of abnormal or exaggerated character of the expenses, in particular, it is incumbent upon the Claimant to demonstrate the existence of a contract, a true one and one that is demonstrated to be balanced, demonstrating what the actual importance of the benefits gained from the contract in question is, as well as demonstrating that the charges established constitute fair remuneration for those benefits by resorting to comparison with the costs of similar services in the market.
Let us analyze in the concrete case the arguments and evidence presented by the Claimant.
Addressing the issue, we find that the verification of the normal character or not exaggerated character of a given operation and its respective cost or charge cannot prove difficult or complex to justify for a company whose main activity generating income is the sale of real estate, and which regularly resorts to real estate intermediation services.
In the case at hand, within the rules of proof enshrined in articles 352 et seq. of the Civil Code, the Claimant presented as documentary evidence to demonstrate the transaction, invoice no. 189/2014 issued by the legal entity based in Hong Kong, with the name "D...", issued on June 24, 2014, and a written document, which the Claimant defines as being a written agreement entered into between the Claimant and "D...", without the signature of "D...".
The Claimant did not present witness evidence, or other additional proof.
Now, from the analysis of the evidential material in the present file, it results that the document presented by the Claimant, namely the invoice (or similar), whose presentation is mandatory pursuant to article 23 number 4 and 6, is in itself insufficient to demonstrate the fulfillment of the requirements stipulated in article 23-A, and it is incumbent upon the Claimant to present additional proof.
As to the document that the Claimant defines as an unsigned written agreement, the Claimant argues that in accordance with the principle of freedom of form of legal transactions, provided in article 219 of the Civil Code, and a corollary of the Principle of autonomy of the parties, it permits that contracts be entered into between the parties in any form, including via oral agreement.
However, the Claimant did not prove that the agreement was entered into via oral or written agreement, proof which it was incumbent upon it to make pursuant to paragraph r), of number 1, of article 23-A of the CIRC and article 74 and 75 of the LGT.
Not having made this proof, it is not possible for the Tribunal to decide with certainty whether invoice no. 189/2014 corresponds to the services defined in that alleged written agreement.
It was incumbent upon the Claimant to demonstrate the existence of a contract, a true one, however it did not do so and as such the requirement of the existence of a contract is not thus met.
However, and not dismissing the possibility of the Claimant presenting other means of proof to substantiate the necessary requirements, in particular demonstrating that the charges established constitute fair remuneration for those benefits by resorting to comparison with the costs of similar services in the market, the truth is that the Claimant also did not do so, i.e., it did not present elements of comparison with the costs of similar services in the market.
Conversely, the Respondent presented comparative elements of costs of similar services, in the same period and regarding the same development, already identified in the matter of fact.
Synthetically, the principle of full concurrence tells us in article 63 number 2 "(…) the taxpayer must adopt, for the determination of the terms and conditions that would normally be agreed, accepted or practiced between independent entities" (our emphasis), using to define the normal, various methods, better developed in article 63.
In this sense, it is necessary to analyze similar transactions carried out by the Claimant, or similar transactions carried out by similar entities.
Being incumbent upon the Claimant to attach those transactions as evidence of what it alleged.
Thus, it was submitted to the file, by the Respondent, the history of transactions carried out by the Claimant relating to 2014, namely the sale of the remaining units of the same development, of typology T2, T3 and T4.
It results from this history that the percentage of commissions paid by the Claimant for the sale of said properties varies between 3.69% and 7.38%.
Values that are clarifying of the normal percentage of commission, as it demonstrates in a first moment that the commission of 20.75% relative to the property value paid by the Claimant now in discussion, appears to be abnormal and exaggerated, insofar as the commission paid represents approximately 5.6 times more than the minimum percentage that the Claimant paid in commissions in the year 2014, and 2.81 times more than the maximum percentage.
As referred to, comparing with equal operations, done by the Claimant in the same fiscal period, there is in fact an abnormal and exaggerated payment in the charge here at issue.
Additionally, the Claimant argues that this payment is normal for transactions made with international clients in analogous situations, and that it is also directly linked to the branding activity of the present Claimant in that market.
In sum, the Claimant presented a set of arguments to justify the value of the commission and the charge, without, however, attaching proof that supports the respective arguments, proof that it was incumbent upon it to present pursuant to paragraph r), of number 1, of article 23-A of the CIRC and article 74 and 75 of the LGT.
In light of the foregoing, it was incumbent upon the Claimant to demonstrate that charges correspond to operations actually performed and do not have an abnormal or exaggerated character, however it failed to prove in the present file that the charge is normal and not exaggerated. Indeed, from the evidence presented, it was demonstrated that the charge is abnormal and exaggerated compared to similar transactions practiced by the Claimant.
Thus, the present tribunal decides that the charge corresponding to invoice no. 189/2014 issued by the legal entity based in Hong Kong, with the name "D...", on June 24, 2014, is abnormal and exaggerated, thereby violating the provision of paragraph r), of number 1, of article 23-A of the CIRC, and cannot be accepted as a deductible charge for the purpose of determining taxable profit.
Pursuant to articles 608, number 2, 663, number 2 and 679 of the Code of Civil Procedure, by application of article 29 of the LRAT, the present Arbitral Tribunal is not obliged to assess all arguments alleged in the initial petition by the Claimant or in the response made by the Respondent, when the decision is prejudiced by the solution already given and which results in the legality of the assessment.
I - DECISION
Therefore, in light of all the foregoing, the present Arbitral Tribunal decides:
To judge without merit the request for declaration of illegality of the tax assessment act for Corporate Income Tax (CIT) no. 2016..., corresponding to the fiscal year 2014, in the amount of €50,987.70 (fifty thousand nine hundred and eighty-seven euros and seventy cents).
The value of the case is set at €50,987.70 (fifty thousand nine hundred and eighty-seven euros and seventy cents), corresponding to the value of the assessment, having regard to the economic value of the case, assessed according to the value of the tax assessment contested, and accordingly the costs are set at the respective amount of €2,142.00 (two thousand one hundred and forty-two euros), to be borne by the Claimant, in accordance with the provision of article 12, number 2 of the Tax Arbitration Regime, the provision of article 4 of the RCPAT and Table I attached thereto. – number 10 of article 35 and numbers 1, 4 and 5 of article 43 of the LGT, articles 5, number 1, paragraph a) of the RCPT, 97-A, number 1, paragraph a) of the CPPT and 559 of the CPC).
Notify.
Lisbon, April 22, 2019
The Arbitrator
Rita Guerra Alves
Text prepared by computer, pursuant to article 138, number 5 of the Code of Civil Procedure (CPC), applicable by remission of article 29, number 1, paragraph e) of the Legal Regime for Arbitration in Tax Matters.
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