IRC Tax Dispute: Permanent Inventory System and SIFIDE R&D Tax Incentives – CAAD Ruling 586/2015-T

ARBITRATION DECISION

The arbitrators Judge Counselor Dr. Maria Fernanda dos Santos Maças (arbitrator president), Prof. Doctor Leonor Fernandes Ferreira and Dr. André Festas da Silva (arbitrators members), appointed by the Deontological Council of the Center for Administrative Arbitration (CAAD) to form the Arbitral Tribunal, constituted on November 20, 2015, hereby agree as follows:

I. REPORT

I.1

On September 8, 2015, the taxpayer A…Portugal, Lda., with registered office at …, …-… Tondela, Tax ID No. …, requested, in accordance with the terms and for the purposes of the provisions of paragraph a) of Article 2(1) and Article 10, both of Decree-Law No. 10/2011 of January 20, the constitution of an Arbitral Tribunal with the appointment of three arbitrators by the Deontological Council of the Center for Administrative Arbitration, in accordance with the provisions of paragraph a), Article 6(2) of the aforementioned legal instrument.

1. The request for constitution of the Arbitral Tribunal was accepted by the President of CAAD and notified to the Tax and Customs Authority (hereinafter referred to as AT or "Respondent") on September 23, 2015.

2. The Claimant did not proceed with the appointment of arbitrators, whereupon, pursuant to the provisions of Article 5(3), paragraph a) and Article 6(2), paragraph a) of RJAT, the undersigned were appointed by the President of the Deontological Council of CAAD to form the present Collective Arbitral Tribunal, having accepted in accordance with legal provisions.

3. In accordance with the provisions of paragraph c) of Article 11 of RJAT, the Collective Arbitral Tribunal was constituted on November 20, 2015.

4. By order of January 3, 2016, the Claimant was invited to complete its arbitration request.

5. On January 4, 2016, the Claimant requested the attachment of Office No. … of December 17, 2015 from the IRC Service Directorate, which was admitted by order of January 4, 2016, with the Respondent being invited to comment, which did not occur.

6. On January 13, 2016, the Claimant submitted its completed arbitration request, which was admitted by order of January 18, 2016.

7. The examination of witnesses took place on January 27 and February 12, 2016, with the deadline for rendering the Award set for May 20, 2016.

8. On February 26, 2016, the Claimant submitted its legal arguments.

9. On March 9, 2016, the Respondent submitted its legal arguments.

10. The Claimant requests that the Arbitral Tribunal declare the illegality of the additional assessment No. 2015 …, with all other legal consequences, namely that AT be condemned to payment of party costs and compensation for undue provision of bank guarantee relating to the additional IRC assessment for the 2010 fiscal year.

I.A. The Claimant sustains its request, in summary, in the following terms:

Following the inspection action with reference to fiscal year 2010, AT concluded that corrections should be applied to the declared taxable profit and, likewise, to the calculation of tax following the disregard of tax benefits.

To support the aforementioned corrections, AT relied on a single argument – the (alleged) absence of organized accounting in the sphere of the Claimant, a sine qua non condition for the application of tax benefits.

Such supposed absence of organized accounting is due to the fact that the Claimant allegedly did not adopt the permanent inventory system, provided for in Article 12 of Decree-Law No. 158/2009 of July 13, which approved the Accounting Standardization System ("SNC").

AT concludes that the Claimant did not adopt, in fiscal year 2010, the permanent inventory system, given that "the accounts relevant for purposes of assessing its use are only moved periodically, which in the present case is monthly."

For which reason "it is not possible to determine, at any time, the existing inventories, as well as the cost of each sale."

There are only two types of inventory systems for inventories, which are opposed to each other, namely: (i) the intermittent or periodic inventory system and (ii) the permanent inventory system.

The Claimant proceeded with accounting records according to the dictates of the permanent inventory system with the consequent and inherent movement of accounts and not through physical counting of inventories at the end of the fiscal year, in order to determine the cost of sales and, likewise, the final inventory stock.

However, the computer system used at the time was not adapted in such a way that, automatically, it would effect accounting entries relating to the movements of accounts 32 to 35 (relating to merchandise/finished products) and, likewise, account 61 – Cost of Merchandise Sold and Materials Consumed, when a sale was realized.

For which reason in fiscal year 2010, as a matter of time management and relief of administrative work, the procedure of only effecting the respective accounting record, manually, at the end of each month was implemented.

Thus, at the end of each month, in order to reflect in the respective accounting the value of inventories in stock and, likewise, the cost of merchandise sold and materials consumed, A… Portugal proceeded with accounting records.

1. In this manner, recognition of the value of inventory in warehouse was given at any time – only dependent on the aforementioned manual entry – with no need to effect physical inventory counting.

2. If (i) the value of cost of sales and the value of inventory in warehouse can be verified at any time – distinctive characteristic of the permanent inventory system – and (ii) no physical inventories are necessary to obtain the value of inventory in warehouse – distinctive characteristic of the intermittent inventory system – then it is undeniable that the Claimant adopts the permanent inventory system!

3. The characteristics of the permanent inventory system are, definitively fulfilled, namely: (i) the Claimant does not resort to physical counts to determine final stocks/consumption of merchandise sold and (ii) the Claimant records a sale through two entries (journal entries) – one to record the sale and another to record the products sold at the cost of inventory outflows, despite the latter being done monthly.

4. The Claimant also calls attention to the fact that its financial statements were properly audited by an independent entity which, within the scope of functions endowed with public faith, considered that they reflected truly and fairly its financial situation, having even attested that the Claimant had adopted the SNC as of January 1, 2010.

5. Even if it were considered that the Claimant did not have a permanent inventory system implemented in fiscal year 2010, the right that AT exercised, by proceeding with the corrections in question, translates into illegitimate to the extent that it manifestly exceeds the limits imposed by good faith, good customs, or by the social or economic purpose of that right.

6. It is also important to consider what Article 123(3) of the IRC Code provides – as written at the time – according to which "delays in accounting execution exceeding 90 days, counted from the last day of the month to which the operations relate, are not permitted."

7. Since, as AT itself concluded, entries were made monthly, that is, at most there would be a delay of 30 days in accounting execution.

8. In view of the foregoing, the corrections applied by AT suffer from illegality because, conceiving of some delay in accounting execution (which is not at issue), it is permitted, since the hypothetical delay does not exceed 90 days from the moment to which the operations relate.

9. The Claimant further states that, with respect to the R&D cycle conducted by Group B…, this comprises a set of iterative stages, involving the various units of the Group at the international level according to their accumulated know-how and specialization.

10. The prototyping phases and respective tests can be implemented by any of the units of the Group, with A… Portugal being one of the main units that contributes at this level, given its experience in the sector.

11. Thus, A… Portugal participates in each of the following phases of the experimental development process, namely:

Phase 5: Theoretical conception and development of prototypes –

Phase 6: Realization of "basic" and "complex" tests and trials and subsequent (re)definition of process parameters.

Phase 7: Final technical validation

1. It is incorrect to conclude that the fact of participating only in the prototyping phase means that A… Portugal does not perform R&D activities, given that this constitutes one of the planned phases of R&D in light of the main world standards that address the subject.

2. In view of the foregoing, the Claimant considers that the correction in analysis lacks all basis, wherefore it should likewise be annulled.

3. Finally, the Claimant states that in compliance with the provisions of Article 169(2) of the CPPT and in order to suspend the executive proceeding resulting from the failure to pay the additional assessment relating to fiscal year 2010, suspension which was already obtained, in accordance with Office No. …, of July 10, 2015, the Claimant presented, on June 10, 2015, a bank guarantee, in the amount of EUR 412,864.95.

4. A guarantee that represents a significant cost for the Claimant, a cost that, until the filing of the action, amounted to EUR 2,807.35.

5. Thus, should the Claimant prevail in respect of the content of the present arbitration request (as hoped), the Claimant requests to be compensated for the damages caused by the establishment of said bank guarantee which it is obligated to provide, pursuant to Articles 53 of LGT and 171 of CPPT.

I.B In its Response, AT invoked the following:

Under the terms provided in Article 123 of CIRC, the Claimant was, in 2010, obliged to have organized accounting in accordance with commercial and fiscal law which, in addition to meeting the requirements indicated in Article 17(3), must allow for the control of taxable profit.

The Claimant was thus obliged to use the permanent inventory system as a way of accounting for inventories.

Within the scope of the inspection procedure, it was verified that the Claimant benefited from different tax benefits whose enjoyment is dependent, among other conditions, on the fact that the taxpayer has organized accounting in accordance with the current accounting standardization.

In the inspection procedure it was demonstrated that the Claimant did not use, in 2010, the permanent inventory system, therefore accounting was not organized in accordance with the SNC.

Thus, by not meeting this requirement, the Claimant could not benefit from the tax benefits provided in Article 43 of EBF, in Law No. 10/2009 of March 10 and in Article 116 of Law No. 3-B/2010 of April 28, whereupon its correction was proposed, as stated in the Administrative Process (PA).

According to the analysis carried out on the Claimant's statements, it was verified that it used the tax benefit provided in paragraph a) of Article 43(1) of the Tax Benefits Statute (EBF): reduction of IRC rate.

In this sense, and also under Article 39-B(7) of EBF (Article 43 of EBF in 2010), Decree-Law No. 55/2008 of March 26 was published, which established the regulatory standards necessary for the proper execution of tax benefits for inland regions, including the IRC rate reduction regime.

Article 2 of that legal instrument defines the conditions of access of beneficiary entities: "1 - Without prejudice to the provisions of Article 39-B of the Tax Benefits Statute, the beneficiary entities must meet the following access conditions:

a) Be legally constituted and comply with the legal conditions necessary for the exercise of their activity;

b) Be in a regularized situation before the tax administration, social security and the respective municipality;

c) Have organized accounting, in accordance with the Official Chart of Accounts;

d) Have their main activity located in the beneficiary areas;

(...)"

Thus, it is verified that one of the essential requirements for the Claimant to benefit from the reduced rate regime provided in Article 43 of EBF corresponds to the requirement to have organized accounting, in accordance with the Official Chart of Accounts, which, in 2010, was replaced by the Accounting Standardization System.

Article 43(1), paragraph c) of EBF allowed for the increase by 30% of the value of reinstatements and depreciation for investments made: "1. To companies that exercise, directly and as their main activity, an economic activity of an agricultural, commercial, industrial or service provision nature in the interior areas, hereinafter designated as "beneficiary areas," the following tax benefits are granted:

c) Reinstatements and depreciations relating to investment expenses up to €500,000, excluding those relating to the acquisition of land and light passenger vehicles, of IRC taxpayers who exercise their main activity in the beneficiary areas may be deducted, for purposes of determining taxable profit, with the increase of 30%;»

As already mentioned, one of the mandatory requirements for the Claimant to benefit from this tax benefit is to have organized accounting in accordance with the SNC, as provided in paragraph c) of Article 2(1) of Decree-Law No. 55/2008.

The taxpayer proceeded with a deduction from the collection, in the amount of €34,674.34, for investments made under the tax support regime for investment created by Law No. 10/2009 of March 10 (applying to investments made in 2009).

However, Article 2(3) of RFAI stipulates cumulative conditions for taxpayers to benefit from this regime: "The following IRC taxpayers who cumulatively meet the following conditions may benefit from the fiscal incentives provided in this regime:

a) Have regularly organized accounting, in accordance with current accounting standardization and other legal provisions in force for their respective sector of activity;(...)"

In order for the Claimant to benefit from the aforementioned tax benefits, it is necessary to verify whether it has regularly organized accounting in accordance with the SNC.

According to the provisions of paragraph b) of Article 12(1) of Decree-Law No. 158/2009, the entities to which the SNC is applicable are obliged to adopt the permanent inventory system in accounting for inventories, in order to be able to identify goods as to their nature, quantity and unitary and total costs, in order to allow verification, at any time, of the correspondence between physical counts and their respective accounting records.

Thus an entity must have organized accounting information about the movement of its inventories in such a way as to allow it to obtain at any time the quantities of each item in warehouse, as well as their movements.

This objective can only be achieved through the permanent inventory system, since it allows an entity to directly calculate the cost of merchandise sold and materials consumed.

In this inventory system, the cost of merchandise sold and materials consumed is calculated for each sale or consumption, allowing, at any time, identification of goods (existing in the warehouse) as to their nature, quantity and unitary and total costs.

In this manner, the Claimant did not meet the requirements referred to in Article 12(2) of Decree-Law No. 158/2009 of July 13, for the exemption from the use of the permanent inventory system.

Being thus obliged to its adoption.

From the consultation and analysis of the Claimant's accounting, it was verified that it did not use, for accounting purposes, the permanent inventory system, since the accounts relevant for purposes of assessing its use are only moved periodically, which, in the present case, is monthly.

Thus, after analysis of the accounting extracts of the sub-accounts of account "71 – Sales" and account "61 – CMVMC," and respective accounting movement, it was noted that there is a temporal gap between the recording of sales of inventories and the cost of inventory sold.

It is not possible to determine, at any time, the existing inventories, as well as the cost of each sale.

With respect to the question of whether the existence of complete documentation of purchases and consumption effected complies with the obligation to adopt permanent inventory, AT understands that it does not.

Nor can it be stated that, by the fact that only one entry is made at the end of each month, we are facing a simple delay in the Claimant's accounting.

Since the entry made does not allow verification, at any time, of the cost of products sold.

In these terms, it was demonstrated that the Claimant did not use, in 2010, the permanent inventory system.

Wherefore, accounting is not regularly organized in accordance with the SNC.

By not meeting this requirement, the Claimant cannot benefit from the tax benefits provided in Article 43 of EBF and in Law No. 10/2009 of March 10, and in Article 116 of Law No. 3-B/2010 of April 28, whereupon its correction was proposed, as stated in pages 135 and 136 of PA.

Within the scope of the inspection procedure at issue here, the benefit relating to SIFIDE 2010 in the amount of €130,499.32 was analyzed.

The expense here in question cannot be considered as having been made with a view to the acquisition of new scientific or technical knowledge or carried out by the company through the exploitation of the results of research work or other scientific or technical knowledge with a view to discovering or substantially improving raw materials, products, services or manufacturing processes.

The Claimant wants to make believe that the large-scale prototyping it develops is considered as R&D activity.

In reality the Claimant merely manufactures the products in accordance with the technical specifications transmitted to it.

From all that was ascertained about the company's operations, regarding the classification of charges recorded in accounts as R&D expenses, and on the basis of accounting documents, non-accounting documents and information provided within the scope of the inspection procedure, it was concluded that:

• The Claimant has no autonomy within the group, nor does it have material and human resources to develop tasks that correspond to the design of new products or the improvement of existing ones or any other activities that can be designated as research and development;

• The Claimant does not carry out product development at the laboratory level and the remaining tasks prior to the production phase;

• The choice and composition of raw materials are determined by Group B…, with the Claimant having no autonomy in their acquisition or negotiation of conditions or selection of the raw materials to be used;

• The Claimant, as stated in various accounting documents, uses knowledge resulting from services provided by Group companies, essentially at the level of rubber cooling tubes, as they are holders of the knowledge and accumulated know-how over the 130 years of operation in the rubber industry.

• The Claimant intervenes, only, in the operationalization process of prototyping and manufacturing in strict compliance with the technical specifications provided by C… UK or D… Inc. and in accordance with the product specifications that the customer requires; (And that, in this context, the Claimant performs some quality tests.)

• The Claimant does not define what to produce, nor does it have any contact with the customer;

Thus, the production activity developed by the Claimant, contrary to what is mentioned in the application, does not entail any research and development activity, therefore there are no charges relating to research and development activities.

To the tax benefit, in the amount of €130,499.32 (SIFIDE 2010), there are no associated expenses or charges that, accounting-wise, are recorded as R&D expenses.

Wherefore, such expense cannot be accepted, for tax purposes, as it does not fall within what is stipulated in Article 2 of Law No. 40/2005 of August 3.

II. PRELIMINARY MATTERS

The Tribunal is competent and regularly constituted, under the terms of Articles 2(1), paragraph a), 5 and 6, all of RJAT.

The parties have legal personality and capacity.

The parties are legitimate and legally represented, under the terms of Articles 4 and 10 of RJAT and Article 1 of Ordinance No. 112-A/2011 of March 22.

The proceeding is proper.

There are no other preliminary matters to be considered nor defects that invalidate the proceeding.

It is now incumbent to examine the merits of the request.

III. THEMA DECIDENDUM

The questions to be examined are as follows:

1. Is the Claimant's accounting not organized in accordance with the SNC by not having a permanent inventory system?

2. Does the Claimant perform R&D activities?

IV. MATERIAL FACTS

IV.1. Proven Facts

Before proceeding to the examination of the questions, it is necessary to present the factual matters relevant to their understanding and decision, which, having examined the documentary evidence, the administrative tax process attached and taking into account the facts alleged, are established as follows:

1. The Claimant is a commercial company that is engaged in the manufacture of rubber and plastic products for the automotive sector.

2. The Claimant is an IRC taxpayer and determines taxable profit under the general regime.

3. The Claimant declared a tax base in the amount of €1,883,067.87 in the Model 22 tax return for the period of 2010.

4. The Claimant marked in field 245 of table 08 of the said return the reduced rate regime associated with benefits relating to inland regions.

5. The Claimant calculated the IRC collection at €282,460.18, as a result of using the reduced rate (15%).

6. The Claimant benefited from tax benefits whose enjoyment is dependent, among other conditions, on the fact that the taxpayer has organized accounting in accordance with current accounting standardization.

7. The Claimant, in the preparation of the financial statements for fiscal year 2010, adopted the SNC, as established in paragraph a) of Article 3(1) of Decree-Law No. 158/2009 of July 13.

8. Following the inspection procedure carried out by the Tax and Customs Authority ("AT"), with reference to fiscal year 2010, the Claimant was notified of the additional assessment No. 2015 …, which set as the date for the end of voluntary payment of tax installments legally notified to the taxpayer June 12, 2015, and which was based on an inspection procedure, in the scope of which it was notified, on March 11, 2015, of the Draft Tax Inspection Report, which proposed the following corrections:

i) Tax benefit for inland regions

a) Reduction of IRC rate

Correction of IRC collection through application of the normal IRC rate, instead of the reduced rate of 15% defined in paragraph a) of Article 43(1) of the Tax Benefits Statute ("EBF") – as written at the time – in the amount of EUR 186,744.29;

b) Increase in depreciation

Correction to the taxable profit of IRC for fiscal year 2010, corresponding to the increase by 30% of depreciation/amortization associated with investments made, in the amount of EUR 26,739.70;

ii) Tax benefits by deduction from IRC collection

a) Tax support regime for investment ("RFAI")

Disregard of the amount entered by A… Portugal as a deduction from collection regarding the tax benefit arising from RFAI, with reference to fiscal year 2010, in the amount of EUR 34,674.34;

b) System of tax incentives for research and development business ("SIFIDE")

Disregard of the amount entered by the Claimant as a deduction from collection regarding the tax benefit arising from SIFIDE, with reference to fiscal year 2010, in the amount of EUR 130,499.32;

c) Excess of the amount entered in field 355 of table 10 of the Periodic Tax Return Declaration (Model 22) of IRC relating to 2010

Disregard of the amount corresponding to the difference between the amount of tax benefits considered deductible from 2010 IRC collection and that which AT understands was considered by A… Portugal in the amount of EUR 85,013.83.

iii) Expenses from prior fiscal years

Correction to the taxable profit of IRC for fiscal year 2010, under Article 18(1) of the IRC Code, relating to the expense considered in fiscal year 2010 relating to an invoice dated 2009 in the amount of EUR 11,117.74

1. Not agreeing with the proposed corrections, the Claimant exercised the right of written hearing.

2. On March 26, 2015, the Claimant was notified of the Final Tax Inspection Report, which maintained the corrections proposed in the Draft Tax Inspection Report, with the exception of the correction mentioned in point iii) of Article 2 of the present case, which AT granted.

3. The Claimant's financial statements were audited and certified without reservations by a certified public accountant (ROC) who attested that the Claimant had adopted the SNC as of January 1, 2010.

4. The Claimant exceeded during fiscal years 2008 and 2009 the three limits indicated in Article 262(2) of the Commercial Companies Code, a fact that prevents the exemption from the obligation to adopt the permanent inventory system.

1. The Claimant moved a set of accounts (with SNC codes) relevant for purposes of assessing the use of the permanent inventory system, namely accounts 33 to 36 and "61 – CMVMC" were only moved once per month:

a. Account "331 – Raw Materials" is only moved monthly, in the diverse operations journal, as a counter-entry of account "6121 – CMVMC – Raw Materials," transferring the purchases of raw materials (not consumption) to debit, the opening stock to debit and the closing stock to credit.

b. Accounts "341 – Finished Products" and "361 – Products and Work in Progress" are only moved monthly, in the diverse operations journal, as a counter-entry of account "73 Variation of production" transferring the opening stock to debit and the closing stock to credit.

c. Sub-accounts "6121 – Raw Materials" and "6123 – Miscellaneous Materials," which are intended to ascertain the cost of sales and materials consumed, are moved only at the end of the month.

d. Sub-accounts "7112 – Merchandise Intra-Community Market," "7122 – Finished Products Intra-Community Market," "7123 – Finished Products Other Markets" and "719 – Sales Adjustments" were moved for each sale made, that is, on the date of invoice issuance and respective inventory outflow.

1. C… UK Holdings ("C… UK") and D…, Inc. ("D… USA") are responsible for the following phases of the R&D process: i) definition and negotiation of the technical specifications of the solution; ii) design and technical drawing of the solution; and iii) development of chemical formulations and performance of tests and trials at laboratory scale.

2. In the experimental development process, A… Portugal develops the following tasks:

• Theoretical conception and development of prototypes – In this phase, A… Portugal develops prototypes for the formulation of rubber, plastics and/or other components resulting from the prior phase (which is the responsibility of C… UK or D… USA) and in accordance with the customer's technical specifications at the level of the final product and/or needs at the level of new processes.

• Realization of "basic" and "complex" tests and trials and subsequent (re)definition of process parameters – This phase is embodied in the pursuit of a set of "basic" functionality tests to the product and materials (namely, burst, expansion and layer separation tests) and "complex trials" (namely, rapid aging tests, pressure tests, vibration and temperature tests) and subsequent (re)definition of process parameters based on the results of the trials obtained, aiming to enable or obtain improvements at the level of technical performance of the solution.

• Final technical validation – Lastly, final technical validations of the solution are performed by the A… Portugal's engineering and development technicians (with special emphasis on the prototyping phase) and by the R&D technicians of C… UK or D… USA (with special emphasis on the laboratory phase), dictating the approval of the project and/or the performance of retroactive R&D, that is, returning to the initial phases of laboratory, prototyping and (re)definition of process parameters.

1. With respect to A… Portugal's application to SIFIDE, relating to fiscal year 2010, the Certifying Commission issued a declaration with the notification of the decision granting a tax credit in the amount of EUR 130,499.32, which considers that the activities carried out by A… Portugal in the projects considered in the application correspond to R&D actions.

2. The Claimant presented, within the scope of the inspection procedure, application No. … sent to IAPMEI on May 24, 2012 and the declaration issued by the certifying commission for business R&D tax incentives obtained on April 1, 2013 that recommends the attribution to the company of a tax credit of €130,499.32.

3. The Claimant presented, on June 10, 2015, a bank guarantee, in the amount of EUR 412,864.95 to suspend the executive proceeding resulting from the failure to pay the assessment sub judice.

IV.2. Facts Deemed Not Proven

There are no facts deemed not proven, since all facts relevant to the examination of the request were deemed proven.

IV.3. Reasoning of the Factual Matters

The Tribunal based its conviction as to the proven and not proven facts on all the evidence produced at the hearing examined in accordance with the rules of common experience and standards of normality.

The testimony of the witnesses heard at the hearing and the documentary evidence attached to the case were relevant.

The facts stated in numbers 1 to 14 and 17 to 19 are considered established by the analysis of the Administrative Process, by the documents submitted by the Claimant (documents 1 to 13 of the request for constitution of the Arbitral Tribunal) and by the position assumed by the parties.

The facts stated in numbers 15 and 16 resulted from the testimony of witnesses E… (consultant to the Claimant) and F… (manager of the Claimant), who confirmed, with impartiality and objectivity, the factuality in question. The testimonies were clarifying in that they had direct knowledge regarding the stages and tasks developed by the Claimant.

V. MATTER OF LAW

1. Is the Claimant's accounting not organized in accordance with the SNC by not having a permanent inventory system?

One of the essential requirements for the Claimant to benefit from the reduced rate regime provided in Article 43 of EBF corresponds to the requirement to have organized accounting, in accordance with the Official Chart of Accounts (POC).[1]

The question at hand consists in determining whether the Claimant complied with this requirement[2] in order to be able to benefit from such tax benefits, namely:

• Is the Claimant's accounting not organized in accordance with the SNC by not having a permanent inventory system?

• What is meant by accounting organized in accordance with the SNC?

The SNC is an accounting model that resulted from the transposition of accounting directives of the European Union and the adaptation of international accounting standards. It is comprised of a set of normative instruments that are restricted to external or financial accounting, but not to internal, analytical or cost accounting.

Accounting will be organized in accordance with the SNC when it respects and applies the instruments that comprise this system and which are set forth in point 1.3 of the Annex to Decree-Law No. 158/2009 of July 13, 2009, namely:

• The Conceptual Framework, which is the set of accounting concepts underlying the SNC (Notice No. 15652/2009 of September 7);

• The Bases for the Presentation of Financial Statements, that is, the basic principles that a complete set of financial statements should respect (Annex to Decree-Law No. 158/2009 of July 13, 2009);

• The Models of Financial Statements, which allow the appropriate presentation of the financial position, economic performance and cash flows of an entity (Ordinance No. 986/2009 of September 7);

• The Chart of Accounts, a document that includes the summary table of accounts, a coded list of accounts and notes on the framing of some of those accounts (Ordinance No. 1011/2009 of September 9);

• The Accounting and Financial Reporting Standards (NCRF) (Notice No. 15655/2009 of September 7);

• The Accounting and Financial Reporting Standard for Small Entities (Notice No. 15654/2009 of September 7);

• The Interpretative Standards (Notice No. 15653/2009 of September 7).

Immediately it is noted that the permanent inventory system is not an instrument of the SNC. Rather it is a process of organizing the accounting for inventories, which is of particular interest to internal management and is considered an element of good organization and control.

The NCRF are a central instrument of the SNC: they enunciate the methods to be adopted in the recognition, measurement, presentation and disclosure of the economic and financial realities of an entity. As indicated in point 2.1.6 of the Annex to the SNC, "in most circumstances, appropriate presentation is achieved by compliance with the applicable NCRF."

NCRF 18 is the standardization instrument that refers specifically to the recognition and measurement of inventories[3] (paragraphs 9 to 33). NCRF 18, referring to the measurement of inventories, indicates that "inventories shall be measured at cost or net realizable value, whichever is lower." (NCRF 18, paragraph 9). And further, it states that "the cost of inventories shall include all purchase costs, conversion costs and other costs incurred to bring the inventories to their present location and condition." (NCRF 18, paragraph 10). As for recognition, NCRF 18 expresses that "the amount of inventories recognized as an expense during the period, which is often referred to as cost of sales, consists of costs previously included in the measurement of inventory now sold, overhead production costs not allocated and abnormal amounts of inventory production costs. The entity's circumstances may also permit the inclusion of other amounts, such as distribution costs." (NCRF 18, paragraph 38). NCRF 18 is silent on the permanent inventory system.

Another instrument of the SNC is the Chart of Accounts[4], whose application is mandatory for entities subject to that accounting standard. With respect to inventories, the SNC has established the titles and codes of accounts for the recording of inventory purchases, the types or categories of inventories and the cost of materials consumed, namely the accounts of class 3 Inventories and biological assets, which will be presented in the balance sheet asset, account 61 Cost of merchandise sold and materials consumed and account 73 Variations in production inventories. The two latter, which appear in the statement of results, are accounts that the Claimant used in accounting for inventories, as observed in the trial balances analyzed.

The instruments that form the SNC accounting model do not contain explicit references to inventory systems, except in Ordinance No. 1011/2009 of September 9, in the framework notes related to inventories. This accounting instrument refers to account 73 — Variations in production inventories, mentioning that "in case the permanent inventory system is adopted, it is deemed advisable to subdivide each of its divisional accounts into rubrics of "Production" and "Cost of Sales," which will be moved as a counter-entry of the respective accounts of class 3." This is, therefore, the only place where the instruments of the SNC refer to the permanent inventory system. Note that, however, it mentions it in the conditional, as it reads "in case it is adopted," which leads to the conclusion that the SNC admits that such an inventory system may not, in fact, be adopted.

It is worth noting that this framework note was removed in the recent revision undergone by the SNC, with the approval of Decree-Law No. 98/2015 of June 2, 2015. As José Pinheiro Pinto and Cristina Pinto state[5], "It is certainly symptomatic that this framework note was recently eliminated through Ordinance No. 218/2015 of July 23. In fact, although the account 73 is maintained in the chart of accounts, the framework note initially provided for it was purely and simply eliminated, with no reference now being dedicated to it. Everything suggests that it was concluded - very rightly, in our view - that the reference in that note to the permanent inventory system had no reason to exist, and hence its natural suppression."

In account 73 Variations in production inventories, it is not concluded that the Claimant proceeded with the aforementioned subdivision, since the General Trial Balance (monthly and cumulative) does not evidence sub-accounts relating to variations in production inventories, but neither can it be stated that that subdivision was indispensable or even necessary in the case under analysis.

Ordinance No. 986/2009 of September 7 contains another instrument of the SNC: the models of financial statements, namely the balance sheet, the statement of results, the cash flow statement, the statement of changes in equity and the notes to the financial statements. With respect to inventories, Ordinance No. 986/2009 enumerates in point 19 entitled 'Inventories,' that the notes to the financial statements should, at a minimum, disclose "19.1 — Accounting policies adopted in the measurement of inventories and costing formula used; 19.2 — Total amount of inventories written up and amount written up in appropriate classifications; 19.3 — Amount of inventories written up at fair value less costs to sell (in the case of dealers/merchants); 19.4 — Amount of inventories recognized as an expense during the period; 19.5 — Amount of inventory adjustment recognized as an expense of the period; 19.6 — Amount of reversal of adjustment recognized as a reduction in the amount of inventories recognized as an expense of the period; 19.7 — Circumstances or events that led to the reversal of an inventory adjustment; 19.8 — Amount of inventories written up as pledged security for liabilities." There is no reference in this or other points of the notes to the financial statements to inventory systems.

Indeed, we understand that the permanent inventory system is not an element of the SNC, but rather a system of internal organization of accounting which the legislator made mandatory in the accounting of inventories "for entities to which the SNC is applicable." The legislator also intended that entities to which the international accounting standards of the European Union are applicable be obliged to adopt permanent inventory, in addition to accounting standardization which in these entities is not already the SNC.

But the legislator also provided that certain entities with organized accounting in accordance with accounting standardization should not be obliged to adopt permanent inventory, having exempted them, as provided in Article 12 itself of Decree-Law No. 158/2009 of September 13, 2009, in numbers 2 and following. And that is exactly the case of companies subject to the SNC with smaller size or that operate in certain activities.

Furthermore, the obligation to adopt permanent inventory is not a characteristic required to qualify accounting subject to the SNC as regularly organized in accordance with accounting standardization, nor is it a characteristic exclusive to accountings that adopt or should adopt the SNC.

It is not the fact of having permanent inventory that allows one to conclude that a company has accounting organized in accordance with legal accounting standardization, just as in the case of not having permanent inventory one can infer that accounting is not organized in accordance with legal accounting standardization. An entity may adopt the periodic inventory system and have accounting organized in accordance with legal accounting standardization. See the case of micro-entities, which may adopt permanent inventory in the organization of their accounting, but may also use the intermittent inventory system, and in both situations, they present accounting organized in accordance with legal accounting standardization.

According to the law, the permanent inventory system is not part of the SNC. Rather, the permanent inventory system is an obligation applicable to certain entities covered by that accounting standardization system. The requirement to adopt permanent inventory is an additional and external obligation to accounting standardization.

Accounting standards do not and rightly do not refer to inventory systems, since adopting a permanent inventory system is a decision of management and organization of accounting, but not of the SNC itself.

The Accounting Standardization Commission expressed its understanding on the meaning of the expression "regularly organized accounting" through Office No. 052/15, issued on November 12, 2015[6], in the following terms:

a) "It follows from point 1.3 of Annex I to Decree-Law No. 158/2009 of July 13 that the permanent inventory system is not an accounting instrument that is part of the Accounting Standardization System (SNC), constituting rather, in accordance with the terms provided in Article 12.0 of that legal instrument, an obligation of entities to which the SNC or the international accounting standards adopted by the EU apply.

b) The fact that an entity does not adopt the permanent inventory system when it is obliged to do so does not allow one to conclude, by itself, that the SNC was not adopted and does not prevent its financial statements from presenting truly and fairly its financial position, financial performance and changes in financial position."

And thus, the fact that the Claimant adopted the permanent inventory system would not allow one to conclude that it has accounting organized in accordance with the Accounting Standardization System. But also the non-adoption of permanent inventory system is not a sufficient condition to allow one to state and conclude that an entity's accounting is not organized in accordance with the SNC.

One could not conclude that the Claimant does not have accounting organized in accordance with the Accounting Standardization System by the fact of not adopting the permanent inventory system.

The exemptions that the law provides lead to the conclusion that the legislator admitted the coexistence of accounting organized in accordance with the SNC and non-adoption of permanent inventory. It is therefore accepted that accounting may, within the scope of the SNC, be organized without a permanent inventory system[7].

Article 12(1) of Decree-Law No. 158/2009 of July 13 does not state that the permanent inventory system is part of the SNC, but rather that "entities to which the SNC is applicable are obliged to adopt the permanent inventory system when they are not exempted from it."

But one cannot say that accounting without permanent inventory will, for that reason alone, be disorganized accounting, since with intermittent inventory, accounting can also be organized. Indeed, an entity can still have organized accounting and maintain inventory records organized according to one of two methods: permanent inventory system and periodic inventory system, without it being possible to infer from this that it is disorganized in the latter and only organized in the former. Micro-entities, for example, may adopt the periodic inventory system, and that does not mean they are not organized in accordance with standardization, nor that they should be subject to indirect taxation methods.

The very legal instrument that approved the SNC provides for fines in cases of accounting not organized in accordance with the SNC, by enumerating the irregularities in the application of this standardization model, which may occur for three reasons, under Article 14 of Decree-Law No. 158/2009 of July 13, namely:

i) if the entity does not apply any of the provisions contained in the accounting and financial reporting standards whose application is required of it and by doing so distorts the individual or consolidated financial statements that it is legally required to present;

ii) if the entity fills gaps in a manner different from that provided in the SNC and by doing so distorts the individual or consolidated financial statements that it is legally required to present;

iii) if the entity does not present any of the financial statements that it is legally required to present.

Now, even if the Claimant did not have accounting organized in accordance with the SNC, one would be facing an unlawful act of mere social ordering, for which the legislator provided for fines[8]. But one cannot accept the conclusion that the Claimant does not have accounting organized in accordance with the SNC merely by the fact of not adopting the permanent inventory system.

Possession of organized accounting translates into compliance by the taxpayer with the obligations imposed by commercial, fiscal, and SNC legislation. What the SNC requires of the Claimant, as to the recording of inventories, in order for it to have accounting organized in accordance with the SNC, is that it adopts the legislative instruments that comprise it, that is, it respects the conceptual framework of accounting, adopts the codes of accounts provided for the recording of inventory movements, recognizes and measures inventories in accordance with NCRF 18 and presents them in the financial statements so that it is possible to know the financial position, the performance of the activity and the changes in financial position, in a manner that is true and fair.

It was the expressed understanding of the Board of Directors of the Institute of Statutory Auditors (OROC), having heard the Technical Commission of Non-Financial Entities, when it issued Circular No. 08/01 of January 25, 2001[9], as follows:

"b) The non-adoption of the permanent inventory system is, however, not determinative for the auditor/auditor's opinion formation, since, in various circumstances, the control of inventories and the reasonable determination of balances relating to them can be assured by other means. An opinion may therefore be expressed without reservations or emphasizes despite the adoption of such system not taking place."

c) When the entity does not adopt the permanent inventory system and the auditor/auditor believes that it would be necessary for the purpose of his work, the auditor/auditor shall express a reservation due to scope limitation;

d) The non-adoption of the permanent inventory system by a company/entity obliged to do so should also be disclosed in the respective components of reports and opinions issued by the auditor/auditor, regardless of whether a reservation is justified under paragraph c);"

The legal certification of accounts for 2010 issued by the Claimant's certified public accountant does not contain a reservation or emphasis mentioning the absence of permanent inventory or mentioning that accounting is not organized in accordance with the SNC. Certainly it would have done so, if such irregularities existed.

Even if it were concluded that the Claimant did not have permanent inventory and that this were grounds for legal non-compliance, one could not therefrom extract that it does not have accounting organized in accordance with the Accounting Standardization System (SNC). And far less would there be any reason to deny it access to tax benefits on that basis.

In a letter addressed to APECA – Portuguese Association of Accounting and Administration Companies, and received by it on December 22, 2015, Office … of DSIRC, dated December 17, 2015, states "In response to the letter sent to the State Secretary for Tax Affairs regarding the loss of tax benefits by the non-adoption of the permanent inventory system, DSIRC has informed that instructions have been given to the Services to the effect that the fact that an entity does not adopt the permanent inventory system, being obliged to do so, is not by itself reason to conclude that the SNC was not adopted and that accounting is not regularly organized, whereupon the outcome of the proceeding should be awaited." [underscore ours].

Having not implemented the permanent inventory system does not justify that the company does not have organized accounting in accordance with the SNC. Determining that not adopting the permanent inventory system means that there is no accounting organized in accordance with the SNC is an unacceptable position by AT.

In summary, even if one could not conclude or there were doubts as to whether the Claimant has or does not have permanent inventory in the 2010 accounts, in relation to some category or type of inventory, the absence of permanent inventory is no reason to conclude that the Claimant does not have organized accounting or that it does not have it organized in accordance with the SNC.

It is repeated that, even if there were doubts as to whether the Claimant had or did not have permanent inventory, the inference of the Tax Authority is illegitimate when it concludes that not having permanent inventory determines that the Claimant does not have accounting organized in accordance with the SNC. And thus, the implications of the non-adoption of the permanent inventory system, albeit mandatory, cannot be the withdrawal of tax benefits from the Claimant.

Wherefore, the argumentation of AT does not hold, and judgment is given in favor of the Claimant.

2. Does the Claimant perform R&D activities?

In view of the factuality under analysis in the present case and the arguments of the parties, the question that must be determined is as follows: "Does the Claimant perform R&D activities?"

The case at hand relates to fiscal year 2010, and therefore the legislation in force at that time should be considered. The system of tax incentives for research and development (R&D) business (SIFIDE) was enshrined in Law No. 40/2005 of August 3.

The SIFIDE was created by Law No. 40/2005 of August 3, and allowed IRC taxpayers resident in Portuguese territory who exercised, as their principal activity, an activity of agricultural, industrial, commercial and service nature and non-residents with a stable establishment to deduct from the collection, and up to its limit, the amount corresponding to expenses with research and development to the extent that it was not the subject of financial assistance by the State, in a double percentage: a) base rate – 32.5% of expenses incurred in that period; and b) incremental rate - 50% of expenses incurred in that period in relation to the arithmetic mean of the two prior fiscal years, up to the limit of €1,500,000.

Under Article 2 of the said legal instrument, R&D expenses are considered:

a) "Research expenses" those incurred by the IRC taxpayer with a view to the acquisition of new scientific or technical knowledge;

b) "Development expenses" those incurred by the IRC taxpayer through the exploitation of results of research work or other scientific or technical knowledge with a view to discovering or substantially improving raw materials, products, services or manufacturing processes.

The Respondent alleges that the activity of the Claimant does not fall within the concept of R&D and that it presents no charges relating to this activity.

Eligible expenses are indicated in Article 3(1):

1 - The following categories of expenses are considered deductible, provided they refer to research and development activities, as defined in the previous article:

a) Acquisition of fixed assets, except buildings and land, provided they are created or acquired in new condition and directly allocated to the performance of R&D activities;

b) Expenses with personnel directly involved in R&D tasks;

c) Expenses relating to the participation of managers and officers in the management of R&D institutions;

d) Operating expenses, up to a maximum of 55% of expenses with personnel directly involved in R&D tasks accounted for as remuneration, salaries or wages, relating to the fiscal period;

e) Expenses relating to the hiring of R&D activities with public entities or beneficiaries of the status of public utility or entities whose suitability in research and development is recognized by joint order of the Ministers of Economy and Innovation and Science, Technology and Higher Education;

f) Participation in the capital of R&D institutions and contributions to investment funds, public or private, intended to finance companies dedicated mainly to R&D, including the financing of the valorization of their results, whose suitability in research and development is recognized by joint order of the Ministers of Economy and Innovation and Science, Technology and Higher Education;

g) Costs with the registration and maintenance of patents;

h) Expenses relating to the acquisition of patents that are predominantly intended for the performance of R&D activities;

i) Expenses with audits on R&D.

Under Article 3(1), paragraph b) of Law No. 40/2005, expenses with personnel are deductible.

As for the non-existence of any charge relating to R&D activity, AT itself refers that the eligible charges in the SIFIDE application are relating to charges with personnel (See p. 28 of RIT). Since inevitably the Claimant does not have other charges than those of personnel that are reflected in the accounts.

In view of the foregoing, we cannot but conclude that the Claimant presents expenses, namely with personnel, which it allocates to R&D activity.

The SIFIDE is a tax relief measure "of an exceptional character instituted for the protection of relevant extra-fiscal public interests superior to that of taxation itself which prevent" (Article 2(1) of the Tax Benefits Statute).

Taking into account the respective prerequisites, SIFIDE is an automatic tax benefit (Article 5(1) of EBF), as it does not require prior recognition, and has mixed nature, since it incorporates not only objective requirements relating to the type and nature of eligible expenses (Articles 3 and 4 of Law No. 40/2005) but also subjective requirements that attend to the conditions and nature of beneficiaries (Articles 5 to 7 of the same Law).

In order to benefit from this tax incentive, taxpayers must comply with the conditions and obligations provided in Articles 5 to 7, among others, the non-taxation by indirect methods, the non-existence of debts to the State and the process of tax documentation. This should contain the certifying statement, that the activities carried out correspond effectively to actions of research or development, the respective amounts involved, the calculation of the increase in expenses in relation to the average of the two prior fiscal years and other elements considered relevant. The certifying declaration is issued by an entity appointed by order of the Minister of Science, Technology and Higher Education, to be incorporated into the tax documentation process of the taxpayer to which Article 121 of the IRC Code refers. This documentation must also contain a document evidencing the calculation of the benefit.

As to the nature of the decision of the certifying entity, the STA through the Award handed down on September 10, 2014 in proceedings No. 01960/13 asserted the following:

"Notwithstanding that the entity referred to there must also examine whether the activities carried out or to be carried out effectively correspond to actions of research or development, the legal purpose of this certifying act is satisfied in the ascertainment and certification that the expense meets the condition of deductibility for that tax purpose and, consequently, in the certification, ultimately, of whether or not that taxpayer is attributed the condition of subject of the tax benefit in question here."

The said Award continues, with respect to SIFIDE: "(…) the competence of the declaring/certifying entity is attributed with a view to a verificative act directed, in any of its respective aspects (declaration of the nature of the expense and declaration of the eligibility of the expense) only to the attribution of the tax benefit regulated there."

The fact that the taxpayer does not have a department with the designation of R&D, nor contact directly with customers does not mean that it does not develop R&D activities. The determining fact consists in ascertaining whether the taxpayer effectively develops or does not develop R&D activities.

With respect to the activity of the taxpayer, the parties agree that the activity of the Claimant develops essentially in the prototyping of the product and the performance of trials. This activity was performed and was sufficiently described by witnesses E… and F….

However, AT understands that this activity does not fall within the qualification of R&D. One of the disagreements is this. Should prototyping and trials be qualified as R&D or not?

The certifying commission for tax incentives on business R&D qualified this activity as being R&D. The certifying entity not only qualified the activity of the Claimant as being R&D but declared the eligibility of the expenses presented.

After certification it falls to AT to inspect the attribution of the tax benefit.

To this effect, the STA in proceedings No. 1960/13 of September 10, 2014 referred that:

"Indeed, although only for purposes of subsequent inspection by AT (which not for constitutive purposes of the right to the benefit in question), the declaration of the certifying entity becomes part of the tax documentation process provided in Article 121 of the CIRC (a process which, with respect to each fiscal year, IRC taxpayers must maintain for 10 years) (…)"

The attribution of the tax benefit is not dependent on recognition by AT. It is an automatic tax benefit. The verification of the prerequisites for the granting of the tax benefit must be inspected by AT (Article 7 of EBF).

However, AT's inspection is a quantitative and not qualitative inspection, since this has already been analyzed and in the present case approved by the certifying entity. In this sense, see arbitral decision No. 489/2014, handed down on March 19, 2015, in which it was decided that: "It is understood, thus, that a given set of values, relating to expenses deemed eligible by the Certifying Commission, does not cease, for that circumstance, to be able to be assessed (quantitatively, not qualitatively) by AT within the scope of the powers conferred on it, namely, by the provisions of the Tax Benefits Statute."

Notwithstanding the understanding now supported, we cannot but take into account the studies developed within the scope of the OECD and EU on the analysis and evaluation of R&D expenses. In this regard, the studies developed there include prototyping and trials in the concept of R&D.

Let us look at the study contained in the Frascati Manual, developed within the scope of the OECD:

"115. Applying the NSF criterion, the design, construction and testing of prototypes normally fall within the definition of R&D. This is true whether only one prototype is manufactured or several, regardless of whether they are built consecutively or simultaneously." (Frascati Manual, Translated, Edition: F-Initiatives, 2007, p. 59).

In the same vein the Oslo Manual, also developed within the scope of the OECD, European Commission and Eurostat asserts: "183. Construction and testing of a prototype is often the most important phase of experimental development. A prototype is an original model (or test situation) which includes all the technical characteristics and performances of the new product or process. The acceptance of a prototype often means that the experimental development phase ends and the other phases of the innovation process begin."[10]

Therefore, this Tribunal understands that prototyping and trials are development expenses incurred by the taxpayer through the exploitation of technical knowledge with a view to discovering or improving products or manufacturing processes (Article 2, paragraph b) of Law No. 40/2005 of August 3).

In this manner, it appears to us that the expenses sub judice fall within the concept of R&D, and should therefore be considered eligible for purposes of SIFIDE.

AT's argumentation does not hold here either.

3. Charges relating to provision of guarantee

The arbitration process is an appropriate means for the recognition of the right to compensation for a guarantee improperly provided, as Article 171 of CPPT is applicable subsidiarily, by force of the provision of Article 29(1), paragraph c) of RJAT.

What is established in that Article 171 is that "compensation in case of bank guarantee or equivalent improperly provided shall be requested in the proceeding in which the legality of the collectible debt is contested."

The regime of the right to compensation for undue guarantee is provided in Article 53 of LGT, which establishes the following:

Article 53

Guarantee in case of undue provision

1. The debtor who, to suspend execution, offers bank guarantee or equivalent, shall be compensated in full or in part for the damages resulting from its provision, if it has maintained it for a period exceeding three years in proportion to the award in administrative appeal, challenge or opposition to execution that have as object the debt guaranteed.

2. The period referred to in the previous number does not apply when it is verified, in amicable settlement or judicial challenge, that there was error attributable to the services in the collection of the tax.

3. The compensation referred to in no. 1 has as maximum limit the amount resulting from the application to the guaranteed value of the rate of indemnity interest provided in the present law and may be requested in the proper proceeding of settlement or judicial challenge, or autonomously.

4. Compensation for undue provision of guarantee shall be paid by deduction from the revenue of the tax in the year in which payment is made.

In the case at hand, the error of the correction that underlies the IRC assessment is attributable to the Tax and Customs Authority, since the correction it made was of its own initiative and the Claimant in no way contributed to that error being committed.

Thus, the Claimant is entitled to be compensated for the damages that arose from the provision of guarantee to suspend the tax execution No. …2015…, instituted for the collection of the amounts assessed, in the part that relates to the IRC assessment (point 19 of proven facts).

Wherefore the Claimant's request proceeds to be compensated for the charges it incurred with the provision of such bank guarantee, necessarily to be determined in execution of judgment, up to the limit provided in Article 53(3) of LGT.

VI. DECISION

In view of all that has been set forth, it is decided:

1. To grant the arbitration request regarding the illegality of the additional assessment No. 2015 … of IRC, relating to 2010, and, in consequence, to annul the assessment;

2. To condemn the Respondent, AT, to compensate the Claimant for the charges that it incurred with the provision of bank guarantee to prevent the execution of the disputed assessments, in an amount to be determined in execution of judgment, up to the limit provided in Article 53(3) of LGT.

The value of the proceeding is set at €325,791.51 in accordance with Article 97-A(1), a) of CPPT, applicable by force of paragraph a) of Article 29(1) of RJAT and number 2 of Article 3 of the Regulation of Costs in Tax Arbitration Proceedings.

The value of the arbitration fee is set at €5,814.00, in accordance with Table I of the Regulation of Costs of Tax Arbitration Proceedings, to be paid in full by the Respondent, since the request was granted in full, in accordance with Articles 12(2) and 22(4), both of RJAT, and Article 4(4) of the said Regulation.

Notify thereof.

Lisbon, May 6, 2016

The Arbitrators

(Dr. Maria Fernanda dos Santos Maças - Arbitrator President)

(Prof. Doctor Leonor Fernandes Ferreira)

(Dr. André Festas da Silva)

[1] The approval of the Accounting Standardization System (SNC), through Decree-Law No. 158/2009 of July 13, introduced a new national accounting standard and repealed the Official Chart of Accounts (POC), with effect from fiscal year 2010.

[2] One of the essential requirements for the Claimant to benefit from the reduced rate regime provided in Article 43 of EBF corresponds to the requirement to have organized accounting, in accordance with the Official Chart of Accounts (POC.).

[3] Common classifications of inventories include merchandise, raw materials, production consumables, materials, work in progress and finished goods (NCRF 18, paragraph 37).

[4] Ordinance No. 1011/2009 of September 9 published the chart of accounts. A codified and standardized account structure presents advantages: it addresses the needs of diverse users and allows the development of databases.

[5] Pinheiro Pinto, José Alberto and Cristina Pinto (2016)., "Permanent Inventory System – Accounting and Tax Aspects," Accountant, No. 190, January 2016, pp. 57-58.

[6] Office No. 052/15, of the Accounting Standardization Commission, of November 12, 2015.

[7] Article 12(2) of Decree-Law No. 158/2009 provides that "The obligation provided in the previous number does not apply to the entities referred to therein that do not exceed, during two consecutive fiscal years, two of the three limits indicated in Article 262(2) of the Commercial Companies Code, that exemption ceasing to produce effects in the fiscal year following the end of that period."

Article 12 itself provides for exceptions to the mandatory adoption, based on the size of the entity and the activity developed. Entities below the limits indicated in Article 262(2) of the Commercial Companies Code are outside the obligation to adopt permanent inventory in accounting for inventories (see nos. 2 and 3 of Article 12 referred to) and entities are exempted that pursue the following activities: a) agriculture, animal production, beekeeping and hunting; b) forestry and forestry operation; c) fishing industry and aquaculture; d) retail sales points that, in their aggregate, do not present, in the period of one fiscal year, sales exceeding €300,000 or 10% of the global sales of the respective entity and also certain entities subject to the SNC whose predominant activity consists of the provision of services, as defined in nos. 4 and 5 of Article 12 of the said Decree-Law No. 158/2009.

[8] The SNC provides for fines up to €15,000, in the fixing of which account is taken of the values of equity and total revenues of the entity, the values associated with the violation and the economic condition of the offender. The legislator provided that fines be reduced by half if violations are committed through negligence.

[9] Circular No. 08/01 of January 25, 2001 of the Institute of Statutory Auditors.

[10] See Oslo Manual, 2nd edition, at www.oecd.org, accessed on March 18, 2016.