IRC Costs Deduction: Impairment Losses and the Accrual Principle in CAAD Case 588/2015-T

ARBITRAL DECISION

I. REPORT

1. On September 9, 2015, the commercial company A…, Lda., NIPC…, with registered office at Rua…, …, …, Marinha Grande, (hereinafter, Claimant), filed a request for constitution of an arbitral tribunal, pursuant to the combined provisions of articles 2, no. 1, subparagraph a), and 10, nos. 1, subparagraph a), and 2, of Decree-Law no. 10/2011, of January 20, which approved the Legal Framework for Arbitration in Tax Matters, as amended by article 228 of Law no. 66-B/2012, of December 31 (hereinafter, abbreviated as RJAT), seeking the declaration of illegality and consequent annulment[1] of the additional Corporate Income Tax (IRC) assessment no. 2015…, of June 24, 2015, relating to the fiscal year 2012, in the total amount of € 4,664.28.

The Claimant submitted 8 (eight) documents and called one witness, having requested no other evidence.

The Respondent is the AT – Tax and Customs Authority (hereinafter, Respondent or AT).

1.1. In essence and in brief summary, the Claimant alleged the following (which we mention mostly by transcription):

• The Tax Inspection Services of the Finance Department of … conducted a partial scope tax inspection on the Claimant, focusing on Corporate Income Tax, which examined the impairment losses declared in fiscal year 2012, as well as autonomous taxation for fiscal years 2012 and 2013;

• Within the scope of the aforementioned inspection, the amount of € 95,591.00 was not accepted as an expense for fiscal year 2012 due to non-compliance with the principle of specialization of fiscal years regarding the Claimant's client, "B…, S. A.";

• The Claimant was notified of the draft corrections and exercised the right of hearing, which it did in writing by means of a request submitted on May 4, 2015, demonstrating therein that it was a creditor of company B for the value claimed as impairment;

• The AT is wrong in its decision not to accept the deduction of impairment losses constituted in 2012 with respect to client "B…, S. A.";

• The invoices issued by the Claimant to company B… ranged from March 2010 to the end of January 2011, the claim for recovery brought by the Claimant against its client for recovery of its debt was filed in Court in September 2011, and the Claimant considered such amount as impairment in the fiscal year 2012;

• The Claimant obtained no gain, nor did the AT suffer any loss;

• The time difference is justified by the fact that, due to the vast majority of the invoices in question, company B… made various partial payments;

• Furthermore, company B… made various and repeated promises of payment of the aforementioned invoices to the Claimant;

• Moreover, the Claimant's administrative services delayed both in communicating to accounting, which is carried out externally, the filing of the said lawsuit, and in delivering the respective documentation;

• The Claimant not only never intended to harm the AT, but effectively generated no tax loss for it, being able only to be imputed the negligence resulting from the delay in delivery of documents to the accountant;

• Even this delay in recording the impairment generated no loss to the AT, because the Claimant paid the tax (IRC) in the previous year without taking into account this cost that should have reduced it;

• Thus, such deferral of accounting for the respective fiscal cost only represented losses for the Claimant itself because, had it recorded the impairment as a cost earlier, the reduction in taxable profit would have occurred sooner;

• Article 18, no. 1, of the IRC Code establishes the binding obligation of the AT to apply the principle of specialization of fiscal years; however, in cases where flagrant injustice results, the principle of justice enshrined in article 266, no. 2, of the CRP and article 55 of the LGT must apply;

• In this specific case, the principle of specialization of fiscal years must yield to the flagrant injustice resulting from the non-correction of the excessive taxation in the fiscal year in which the said cost should have been charged and, consequently, the additional IRC assessment here challenged should be annulled, in so far as the correction made by the AT generates an unjust and unwarranted patrimonial advantage in favor of the AT;

• In that it is not now possible for the Claimant to correct the error relating to fiscal year 2011 and record the respective impairment therein, the AT succeeded, on the one hand, in receiving in fiscal year 2011 an IRC amount higher than what would be due if the impairment had been recorded, and, on the other hand, also in receiving in fiscal year 2012 an IRC amount higher than due by reason of excluding this same impairment from such fiscal year;

• This results in a loss for the Claimant because the impairment is never recorded in either fiscal year 2011 or fiscal year 2012;

• The Claimant, on August 23, 2015, made full payment of the amount of € 14,187.98, arising from compensation no. 2015…, which includes the value of the additional IRC assessment challenged, and such amount should therefore be refunded to it, together with default interest calculated from that date until full and complete payment;

• The aforementioned compensation note should also be annulled.

The Claimant concludes its initial pleading petitioning the following:

"Therefore, on these and on the best of law, which Your Excellency shall knowingly supply, proceeding to constitution of an arbitral tribunal, the present objection should be judged meritorious and, consequently, under the grounds set forth, the challenged act of assessment as well as the respective compensation note submitted to arbitral pronouncement should be revoked, further condemning the respondent to pay to the claimant the sum of € 14,187.98 (fourteen thousand one hundred and eighty-seven euros and ninety-eight cents), plus the payment of default interest from 23.08.2015 until full and complete payment"

1. The request for constitution of an arbitral tribunal was accepted and automatically notified to the AT on September 23, 2015.

2. The Claimant did not nominate an arbitrator, therefore, pursuant to article 6, no. 1 and article 11, no. 1, subparagraph a) of the RJAT, the President of the CAAD Ethical Council appointed the undersigned as arbitrator of the singular Arbitral Tribunal, who communicated acceptance of the charge within the applicable time period.

3. On November 5, 2015, the parties were duly notified of this appointment and did not manifest any intention to challenge the appointment of the arbitrator, in accordance with the combined provisions of article 11, no. 1, subparagraphs b) and c) of the RJAT and articles 6 and 7 of the CAAD Code of Ethics.

4. Thus, in conformity with the provision in subparagraph c) of no. 1 of article 11 of the RJAT, the singular Arbitral Tribunal was constituted on November 20, 2015.

5. On January 5, 2016, the Respondent, duly notified for such purpose, submitted its Response in which it specifically disputed the arguments raised by the Claimant and concluded for the lack of merit of the present action, with its consequent absolution from the claim.

On the same occasion, the Respondent submitted to the record its respective administrative process (hereinafter, abbreviated as PA).

6.1. In essence and also briefly, it is important to extract the most relevant arguments on which the Respondent grounded its Response (which we mention mostly by transcription):

• The challenged IRC assessment originated from corrections of an arithmetic nature resulting from legal requirement, which proceeded from a tax inspection, which resulted in corrections to taxable income of € 107,034.04, for the year 2012, and € 4,250.00 for fiscal year 2013;

• Those corrections to taxable income resulted from disregarding as a fiscal expense those amounts, relating to impairment losses constituted and depreciations and amortizations not accepted for tax purposes, under the applicable legal terms;

• From the corrections made proceeded the assessment act and the corresponding compensation note against which the Claimant presents the present arbitral objection;

• The Claimant only contests the corrections relating to impairment losses not accepted for tax purposes from its client "B…, S. A.", in the amount of € 95,591.00, because regarding impairment losses not accepted for tax purposes from its client "C…, Unipessoal, Lda.", in the amount of € 7,193.09, and also regarding depreciations not accepted as fiscal expense, in the amount of € 4,250.00, it contradicts nothing;

• Thus, it is not the entirety of the additional IRC assessment challenged that is at issue here, but only a part, albeit the substantial part;

• The constitution of impairment losses for receivables is a discretionary matter of the taxpayer, accounting-wise mandatory in light of the prudence principle, but which cannot be understood as unlimited discretion, in the sense of being exercised whenever it sees fit;

• It cannot be said that the deferral of costs made is absolutely neutral from the tax point of view and will bring no losses to the AT, because the fact that the cost is considered in 2012 and not in 2011 projects forward by one year a potential deductibility of tax losses;

• Only credits resulting from the normal activity of the company, which at the end of the fiscal year may be considered doubtful of collection and are as such evidenced in the accounting records, are capable of constitution of impairment losses with relevance for tax purposes;

• Moreover, the amount of impairment losses to be constituted is associated with the manner in which the risk of uncollectibility is considered justified;

• The documents that the Claimant presented both in the course of the inspection procedure and in this arbitral action, which evidence the credits over its client "B…, S. A.", all date from the fiscal years 2010 and 2011 and the date of filing of ordinary proceeding no. …/11…. TGMGR on September 9, 2011 proves that on that date the risk of uncollectibility of these credits was already fully demonstrated;

• From the tax point of view, the obligation to consider expenses and income in the fiscal year in which they are generated/incurred also prevents taxpayers from deferring expenses and income for purposes of fiscal management different from those which the tax legislator intended to privilege in the Portuguese tax system;

• The principle of justice must be balanced with others, such as the principles of equality and certainty and security of consolidated legal situations (the finality of the IRC assessments for the years 2010 and 2011);

• The Claimant has not demonstrated that the errors and omissions made in completing the IRC declarations for prior years were not voluntary and/or intentional, and it knew that on the date of closing of fiscal year 2011 was pending a judicial action for payment of a determined sum against its client "B…, S. A.", such that the risk of uncollectibility was then fully demonstrated;

• The mere invocation of the principle of justice cannot, by itself and in light of all the circumstances of this specific case, be sufficient to consider the additional 2012 IRC assessment illegal, and from this principle does not arise a legal duty to remedy or correct acts or omissions of taxpayers, unless such occurs involuntarily or unintentionally;

• The corrections made by the AT thus allow respect for the provisions of articles 18, 23, 35 and 36 of the IRC Code.

The Respondent thus concludes its pleading:

"In these terms, and in any others that Your Excellency shall knowingly supply, the present request for arbitral pronouncement should be judged without merit, maintaining in the legal order the challenged tax assessment acts and thus absolving the respondent entity from the claim, with all due and legal consequences."

1. On February 16, 2016, the meeting referred to in article 18 of the RJAT took place – in which, among other matters dealt with therein and recorded in the respective minutes which are hereby reproduced, the Claimant was invited to clarify the request for arbitral pronouncement (having regard to the delimitation of the object of the proceeding and the respective claim and value) – and the witness called by the Claimant was examined.

2. Following the invitation to clarify the request for arbitral pronouncement, the Claimant submitted, on February 26, 2016, a request in which it stated the following that is important to extract here:

"In the present record of objection, the claim filed consists of the revocation of the assessment act as well as that of the respective compensation note, both submitted to arbitral pronouncement, condemning then the respondent to pay to the claimant the sum of EUR 14,187.98, plus payment of default interest from 23.08.2015 until full and complete payment.

The tax act subject to arbitral pronouncement and which constitutes the cause of action in the present record is the decision of the impugned Finance Department Service of … which determined that the claimant pay the global sum of EUR 14,187.98 through the additional IRC assessment for income from 2012 to which corresponds the assessment numbered 2015 … of 24.06.2015 together with the compensation note no. 2015 … of 24.06.2015 (…).

Whereby it is clearly apparent that the procedural value of the record amounts to EUR 14,187.98, which sum corresponds to that which the claimant actually disbursed in consequence of assessment no. 2015…, which makes express mention of compensation note no. 2015… .

(…)

Whereby it is apparent that such assessment resulted in a tax charge for the claimant in the global value of EUR 14,187.98, value which corresponds to the economic benefit that the claim assumes for the claimant."

1. Both parties submitted written pleadings, in which they reiterated the positions previously taken in their respective statements.

II. PROCEDURAL MATTERS

The Arbitral Tribunal was regularly constituted and is competent.

The proceeding does not suffer from any defects.

The parties have legal capacity and legal standing, are properly represented, and are legitimate parties.

There are no exceptions or preliminary questions that preclude knowledge of the merits and which must be addressed.

III. REASONING

III.1. FACTUAL GROUNDS

§1. FACTS PROVEN

With regard to factual matters, it is important, first of all, to note that the Tribunal does not have to rule on everything that was alleged by the parties; rather, it has the duty to select the facts that are important to the decision and distinguish the proven facts from the unproven facts (cf. article 123, no. 2, of the CPPT and article 607, nos. 3 and 4, of the CPC, applicable pursuant to article 29, no. 1, subparagraphs a) and e), of the RJAT). In this manner, the facts relevant to the adjudication of the case are chosen and defined according to their legal relevance, which is established in light of the various plausible solutions to the question(s) of law.

Within this framework, the following facts relevant to the decision are considered proven:

a) The Claimant is engaged in the activity of manufacturing metal molds (CAE…), having begun its activity on 28/08/1996, being covered by the normal monthly VAT regime and the general taxation regime for Corporate Income Tax. [cf. PA attached to the record]

b) The Claimant issued the following invoices to its client "B…, S. A.", in the total amount of € 258,450.00:

1. During the year 2010:

• Invoice no. …, dated 29/03/2010, in the amount of € 27,700.00;

• Invoice no. …, dated 10/05/2010, in the amount of € 44,900.00;

• Invoice no. …, dated 10/05/2010, in the amount of € 44,900.00;

• Invoice no. …, dated 10/05/2010, in the amount of € 620.00;

• Invoice no. …, dated 08/11/2010, in the amount of € 5,420.00;

• Invoice no. …, dated 06/12/2010, in the amount of € 51,500.00;

• Invoice no. …, dated 06/12/2010, in the amount of € 52,500.00;

• Invoice no. …, dated 06/12/2010, in the amount of € 2,500.00;

• Invoice no. …, dated 13/12/2010, in the amount of € 1,700.00;

• Invoice no. …, dated 13/12/2010, in the amount of € 330.00.

1. During the year 2011:

• Invoice no. …, dated 10/01/2011, in the amount of € 14,150.00;

• Invoice no. …, dated 10/01/2011, in the amount of € 350.00;

• Invoice no. …, dated 17/01/2011, in the amount of € 11,880.00.

c) With respect to these invoices, on dates not specifically determined but prior to 09/09/2011, "B…, S. A." made the following partial payments to the Claimant, in a total of € 162,859.00 [cf. document no. 5 attached with the P. I.]:

• For invoice no. …, it paid the sum of € 19,390.00;

• For invoice no. …, it paid the sum of € 31,430.00;

• For invoice no. …, it paid the sum of € 31,430.00;

• For invoice no. …, it paid the sum of € 36,050.00;

• For invoice no. …, it paid the sum of € 36,750.00;

• For invoice no. …, it paid the sum of € 4,245.00;

• For invoice no. …, it paid the sum of € 3,564.00.

d) On February 7, 2011, "B…, S. A.", through electronic mail, communicated to the Claimant its intention to pay amounts relating to invoices nos. …, … – which it would do on March 1, 2011 –, …, … and … – which it would do on April 1, 2011. [cf. document no. 7 attached with the P. I.]

e) On September 9, 2011, the Claimant instituted a declarative action for payment, in ordinary proceedings, against its client "B…, S. A.", petitioning for payment of the sum of € 95,591.00, plus default interest, still in debt with respect to the aforementioned invoices, which proceeded under no. …/11…TBMGR, in the then ….º Court of the Judicial Court of Marinha Grande. [cf. document no. 5 attached with the P. I.]

f) In that judicial action, on 02/01/2013, a judgment was rendered that decided "for the competence of the French Courts for the present dispute, declaring the Portuguese Court internationally incompetent (absolute incompetence) and, thus, ruling on such dilatory exception, absolved the Defendant from the Instance". [cf. document no. 5 attached with the P. I.]

g) Disagreeing with that decision, the Claimant filed an appeal to the Court of Appeals of Coimbra, which, by judgment rendered in …/07/2013 and having become final on 18/09/2013, judged the appeal without merit, confirming the appealed judgment. [cf. document no. 5 attached with the P. I.]

h) "B…, S. A." was an important client of the Claimant and had always paid all invoices relating to commercial transactions conducted with the Claimant, although sometimes it did so with some delay or in a fractional/installment manner.

i) To that extent, there existed between the Claimant and "B…, S. A." a relationship of mutual trust, and it was not reasonably foreseeable for the Claimant that "B…, S. A." would not make full payment of the invoices referred to in b).

j) The Claimant only notified its official accounting technician/accountant of the pendency of the aforementioned judicial action in September 2012.

k) The Claimant recorded the aforementioned amount of € 95,591.00 as an impairment loss on receivables in its annual Corporate Income Tax declaration relating to fiscal year 2012.

l) Under Service Orders nos. OI2014… and OI2014…, the Claimant was subjected to an internal tax inspection of partial scope – Corporate Income Tax – covering fiscal years 2012 and 2013, specifically aimed at analyzing the impairment losses declared in 2012 and autonomous taxation for 2012 and 2013, which was conducted by the Tax Inspection Division II of the Finance Department of…, which began on 10/11/2014 and ended on 24/02/2015. [cf. PA attached to the record]

m) Within the scope of said inspection procedure, a notification was sent to the Claimant on 10/11/2014 requesting that it send the following information/clarifications [cf. PA attached to the record]:

[Content omitted as it appears to be detailed administrative details]

n) As a result of this request for information/clarifications, the Claimant sent various documents to the Tax Inspection Services, from the analysis of which the following aspects were highlighted [cf. PA attached to the record]:

[Content omitted as it appears to be detailed administrative details]

o) Subsequently, the Tax Inspection Services reinforced the request for supporting documents of impairment losses on receivables, namely, invoices or other documents supporting the amounts in credit and accounting records of these supporting documents in the accounts of revenue and third parties of the company (accounting statements). [cf. PA attached to the record]

p) In response to this request for documentation, the Claimant sent extracts from the accounts of customers #... – C… Lda. and #... – B… (FR…), relating to fiscal years 2011 and 2012, and copies of the following documents [cf. PA attached to the record]:

[Content omitted as it appears to be detailed administrative details]

q) Through a notice from the Tax Inspection Services of the Finance Department of…, dated 15/04/2015, sent by registered mail with return receipt (RF…PT) and received on 17/04/2015, the Claimant was notified of the Draft Corrections of the Tax Inspection Report and to, if it wished, exercise the right of hearing, with the following corrections being proposed in Corporate Income Tax [cf. PA attached to the record and document no. 3 attached with the P. I.]:

[Content omitted as it appears to be detailed administrative details]

r) On May 4, 2015, the Claimant exercised the right of hearing on that Draft of Corrections, in the scope of which, among other things, it stated the following that is important to extract here [cf. PA attached to the record and documents nos. 4 and 5 attached with the P. I.]:

"6.

It is demonstrated and proven by documentary evidence, through external documents sufficient to prove that A… was a creditor of B…, when and in what amount of the credit considered in impairment, which results as follows:

a) On the date of September 9, 2011, the claimant instituted an ordinary proceeding which under no. …/11… TBMGR was proceeded in the then 2º Court of the Judicial Court of the District of Marinha Grande (…).

b) In those records the condemnation of the company "B…, S. A." was petitioned for payment to A… of the following invoices (…):

1. Invoice no. … of 29.03.2010 in the amount of EUR 27,700.00;

2. Invoice no. … of 10.05.2010 in the amount of EUR 44,900.00;

3. Invoice no. … of 10.05.2010 in the amount of EUR 44,900.00;

4. Invoice no. … of 10.05.2010 in the amount of EUR 620.00;

5. Invoice no. … of 08.11.2010 in the amount of EUR 5,420.00;

6. Invoice no. … of 06.12.2010 in the amount of EUR 51,500.00;

7. Invoice no. … of 06.12.2010 in the amount of EUR 52,500.00;

8. Invoice no. … of 06.12.2010 in the amount of EUR 2,500.00;

9. Invoice no. … of 13.12.2010 in the amount of EUR 1,700.00;

10. Invoice no. … of 13.12.2010 in the amount of EUR 330.00;

11. Invoice no. … of 10.01.2011 in the amount of EUR 14,150.00;

12. Invoice no. … of 10.01.2011 in the amount of EUR 350.00;

13. Invoice no. … of 17.01.2011 in the amount of EUR 11,880.00.

(…)

c) The debtor B…, S. A. contested the aforementioned action for payment (…);

d) The debtor B…, S. A. succeeded in obtaining absolution from the instance based on international incompetence of the Portuguese courts to hear the action in question, as per the judgment of first instance (…);

e) From that judgment A… appealed, without success, the same having been confirmed by Judgment of the Court of Appeals of Coimbra which, thus, became final (…);

f) In conformity with the above, given the absolution of the defendant B…, S. A., no sum was paid to A…, Lda.

(…)

And, regarding the credit over client B…, proof is produced that the action instituted by A… was aimed exactly at the condemnation thereof to pay the credit that constitutes the impairment loss constituted and fiscally deductible.

Accordingly, the impairment losses constituted (…) are fiscally deductible pursuant to the provisions of articles 18, 23, 35 and 36 of the IRC Code."

s) The corrections to the Claimant's Corporate Income Tax for fiscal years 2012 and 2013, mentioned in q), were entirely maintained in the Tax Inspection Report, with the Claimant's exercise of the right of hearing being evaluated by the Tax Inspection Services, in the following terms [cf. PA attached to the record]:

[Content omitted as it appears to be detailed administrative details]

t) In the Tax Inspection Report the following reasoning is presented for the aforementioned merely arithmetic corrections made to the Claimant's Corporate Income Tax, relating to fiscal years 2012 and 2013 [cf. PA attached to the record]:

[Content omitted as it appears to be detailed administrative details]

u) The Claimant was notified of the Tax Inspection Report, through notice no. …, dated 12/06/2015, from the Tax Inspection Services of the Finance Department of…, sent by registered mail with return receipt (RF1…PT) and received on 16/06/2015. [cf. document no. 6 attached with the P. I. and PA attached to the record]

v) The aforementioned corrections, with respect to the taxable income of Corporate Income Tax for fiscal year 2012, had as their basis the disregarding for tax purposes of impairment losses relating to the Claimant's clients, "B…, S. A.", in the amount of € 95,591.00, and "C…, Unipessoal, Lda.", in the amount of € 7,193.09, as well as depreciations not accepted as fiscal expense, in the amount of € 4,250.00. [cf. PA attached to the record]

w) As a result of the aforementioned corrections, the additional Corporate Income Tax assessment no. 2015…, dated 24/06/2015, relating to fiscal year 2012, in the amount of € 4,664.28, were issued, as well as compensatory interest assessments no. 2015…, in the amount of € 666.91 and no. 2015…, in the amount of € 289.70, as well as compensation no. 2015…, dated 29/06/2015, and the statement of account settlement no. 2015…, in which a total amount to be paid of € 14,187.98 was determined, with a voluntary payment deadline of 27/08/2015. [cf. documents nos. 1 and 2 attached with the P. I.]

x) The Claimant made full payment of the aforementioned amount of € 14,187.98, which it did timely on 23/08/2015. [cf. document no. 8 attached with the P. I.]

y) On September 9, 2015, the Claimant submitted the request for constitution of an arbitral tribunal that gave rise to the present proceeding. [cf. CAAD case management computer system]

§2. FACTS NOT PROVEN

With respect to the material relevant to the examination and decision of the case, there are no facts that were not proven.

§3. REASONING REGARDING FACTUAL MATTERS

With respect to proven factual matters, the Tribunal's conviction was based on the facts alleged by the parties, whose adherence to reality was not questioned, on the documents and respective administrative process attached to the record, and also on the testimonial evidence produced.

Regarding the testimony given by D…– a witness who testified in a clear, objective, and impartial manner on the facts to which he was questioned, revealing unequivocal direct knowledge thereof, such that his testimony merited our total credibility – it is important to provide here a very brief summary thereof, referring to its essential aspects:

He has been the official accounting technician/accountant of the Claimant for more than 20 years, an activity which he conducts autonomously and externally to the company, in his own office.

"B…, S. A." was an important client of the Claimant and had always paid all invoices relating to commercial transactions conducted with the Claimant, although sometimes it did so with some delay or in a fractional/installment manner.

For that reason, there existed between the Claimant and "B…, S. A." a relationship of mutual trust, and it was not reasonably foreseeable for the Claimant that "B…, S. A." would not make full payment of the aforementioned invoices issued in 2010 and 2011. All the more so given that there were contacts between both parties in that regard, with "B…, S. A." manifesting, on various occasions, the purpose of paying what it owed to the Claimant.

The Claimant only notified him of the pendency of the aforementioned judicial action instituted against "B…, S. A." in September 2012.

III.2. LEGAL GROUNDS

§1. THE QUESTION TO BE DECIDED

The question presented to the Tribunal is essentially centered on ascertaining whether the impairment losses that the Claimant accounted for in fiscal year 2012 and recorded in the respective Corporate Income Tax declaration should or should not be fiscally accepted and, consequently, whether the challenged additional Corporate Income Tax assessment was or was not correctly and legally issued and, therefore, whether it should or should not be maintained.

The Claimant maintains that, although such provisions relate to credits that became due in fiscal years 2010 and 2011 and were not paid, they should be accepted for tax purposes since, despite the formal non-observance of the principle of specialization of fiscal years, no loss resulted to the State. On the contrary, according to the Claimant, it was only prejudiced by proceeding to record the respective impairment only in the fiscal year immediately following. The Claimant further maintains that, in situations such as the one before us, the principle of justice enshrined in no. 2 of article 266 of the CRP and article 55 of the LGT must apply.

For its part, the Respondent takes the opposite position, contending that the impairment losses constituted by the Claimant in fiscal year 2012 should not be accepted for tax purposes as they constitute a violation of articles 18, 23, 35 and 36 of the IRC Code. The Respondent further states that the mere invocation of the principle of justice cannot, by itself and in light of all the circumstances of the situation in question, be sufficient to consider the challenged additional Corporate Income Tax assessment illegal; in fact, says the Respondent, it was a right of the Claimant to constitute the aforementioned impairments in the periods of 2010 and 2011; however, it did not do so in light of the principle of specialization of fiscal years, and such omission did not result from any impediment or lack of knowledge but solely because it did not wish to do so. Thus, concludes the Respondent, if the Claimant did not use the aforementioned right (duty) at the proper time and manner, sibi imputat.

§2. THE LEGAL FRAMEWORK

§2.1. THE APPLICABLE NORMATIVE FRAMEWORK

The legal-tax appraisal of the situation sub judice must necessarily begin with the delimitation of the applicable normative framework, which requires convening the legal norms that appear concretely relevant, which must be considered in the version applicable ratione temporis.

Thus, from the IRC Code, the following norms must be considered:

"Article 17

Determination of taxable profit

1. The taxable profit of legal persons and other entities mentioned in subparagraph a) of no. 1 of article 3 is constituted by the algebraic sum of the net result of the period and the positive and negative patrimonial variations verified in the same period and not reflected in such result, determined on the basis of accounting and possibly corrected pursuant to this Code.

(…)

1. In order to permit the appraisal referred to in no. 1, the accounting must:

a) Be organized in accordance with accounting standardization and other legal provisions in force for the respective sector of activity, without prejudice to compliance with the provisions set forth in this Code;

b) Reflect all operations carried out by the taxpayer and be organized such that the results of the operations and patrimonial variations subject to the general IRC regime can clearly be distinguished from the remainder."

"Article 18

Periodization of taxable profit

1. Income and expenses, as well as other positive or negative components of taxable profit, are attributable to the taxation period in which they are obtained or incurred, independently of their receipt or payment, in accordance with the regime of economic periodization.

2. The positive or negative components considered as relating to prior periods are only attributable to the taxation period when on the date of closure of the accounts of the period to which they should have been attributed they were unforeseeable or manifestly unknown.

(…)"

"Article 23

Expenses

1. Expenses are those which are proven to be indispensable for the realization of income subject to tax or for the maintenance of the productive source, namely:

(…)

h) Adjustments to inventories, impairment losses and provisions;

(…)"

"Article 35

Fiscally deductible impairment losses

1. The following impairment losses accounted for in the same taxation period or in prior taxation periods may be deducted for tax purposes:

a) Those related to credits resulting from normal activity which, at the end of the taxation period, may be considered doubtful of collection and are evidenced as such in the accounting records;

(…)"

"Article 36

Impairment losses on credits

1. For purposes of determining the impairment losses provided for in subparagraph a) of no. 1 of the preceding article, doubtful collection credits are those in which the risk of uncollectibility is duly justified, which occurs in the following cases:

a) The debtor has pending insolvency and business recovery proceedings or execution proceedings;

b) The credits have been judicially claimed or in arbitral tribunal;

c) The credits are in default for more than six months from the date of their respective maturity and there is objective evidence of impairment and diligence has been undertaken for their collection.

(…)"

For its part, from the General Tax Law, the following norm is important to cite:

"Article 55

Principles of tax procedure

The tax authority exercises its responsibilities in pursuit of the public interest, in accordance with the principles of legality, equality, proportionality, justice, impartiality and dispatch, with respect for the guarantees of taxpayers and other obligated parties."

It is also important to note the following provision of the Constitution of the Portuguese Republic:

"Article 266

Fundamental principles

(…)

1. Administrative bodies and agents are subordinate to the Constitution and the law and must act, in the exercise of their functions, with respect for the principles of equality, proportionality, justice, impartiality and good faith."

§2.2. THE PRINCIPLE OF SPECIALIZATION OF FISCAL YEARS: DEFINITION AND APPLICATION

The principle of specialization of fiscal years is positively established in no. 1 of article 18 of the IRC Code and is expressed in the rule that income and expenses should be considered as gains or losses of a particular fiscal year, as well as other positive or negative components of taxable profit that relate to that fiscal year, regardless of the fiscal year in which they are actually realized. In no. 2 of that same article 18, an exception is provided for positive or negative components of taxable profit which, on the date of closure of accounts of a particular fiscal year, were unforeseeable or manifestly unknown.

The principle of specialization of fiscal years derives from the periodization of results which is imposed by management and information needs, being "characterized by the division of the company's life into temporal intervals and the attribution given to each of the components, positive and negative, which make it possible to determine the result corresponding to it", such specialization imposing "the carrying out of an inventory at the end of the fiscal year, which results in the need to attribute to each fiscal year all the revenues and expenses that are inherent to it and only those"[2].

The same author, referring to the importance and reason for the principle of specialization of fiscal years, states that "the temporal specialization of the components of profit is even more important for tax purposes than for accounting purposes, given the constraints under which the determination of the tax to be paid occurs, in order to avoid deviations of results between different fiscal years with purposes of minimizing the tax burden, (…). In fact, such temporal attribution can be an instrument of result manipulation, in order to, namely:

a) Defer profits in time;

b) Fractionate profits, distributing them among different fiscal years, with the objective of avoiding, in a tax with progressive rates, taxation at higher rates;

c) Concentrate profit in a fiscal year where more substantial deductions can be made (e.g. through loss carryforward or tax incentives)."[3]

In fact, there are, "in the abstract, two types of fiscal errors related to the temporal attribution of the positive and negative components of income to the competent fiscal year:

• the omission or oversight (voluntary or involuntary error): one knows the rule, which is indisputable, but for some reason (illegitimate or justified) one does not record the income or expense in the year due;

• the chance or interpretative opening: erroneous temporal inscription of an income or an expense, effected, however, on the basis of a plausible interpretation of the fiscal rule (general or specific) of specialization of fiscal years, a rule which has an equivocal (or non-conclusive) application content before the specific case."[4]

It is, therefore, prohibited for taxpayers to define as they see fit or according to criteria of opportunity or, still, in conformity with their commercial or management strategy, the timing for declaring the income and expenses arising from their commercial or industrial activity, since they are legally imposed limits and rules for such purposes, namely in the sense of obliging them to attribute such income and expenses to the fiscal year to which they relate.

Thus, all expenses and income that are recognized on a certain date must be recorded in the fiscal year to which they correspond so that they produce a faithful picture of the company's position for that period; that is, they must be attributed "to the fiscal year the expenses that emerge from operations carried out therein, even if not supported therein, just as the income resulting from operations done in a fiscal year must be attributed to a fiscal year even if collected in another" (judgment of the STA, rendered on 02/04/2008, in proceeding no. 0807/07, available at www.dgsi.pt).

Nonetheless, as Tomás Cantista Tavares points out, the national courts have already confronted "the problem of reconciling the tax interest and the accounting and fiscal errors of specialization of fiscal years. With the question of the hypothetical fiscal acceptance (and, if affirmative, under what conditions) of an erroneous accounting inscription, in violation of the formal principle of specialization of fiscal years; with the admissibility of the fiscal recording of an expense or income in a year other (prior or subsequent) to its correct temporal attribution.

The jurisprudence revolves around two antagonistic theses:

a) the primitive current, of formal and legalist character, does not admit any violations of the principle of specialization of fiscal years;

b) the current thesis, of material character, accepts the formal violation of the principle of specialization, provided that such erroneous inscriptions are not attributable to voluntary and intentional behaviors aimed at operating the transfer of results between fiscal years.

(…)

This jurisprudential current [the primitive thesis] does not agree with the violation of the legal rule of specialization of fiscal years. It does not accept the inscription of a heading (positive or negative) of income in a fiscal year other than the one to which it is competent. One stays with the mere statement of the principle. It overvalues it vis-à-vis the consideration of other factors of material justice, such as the interference in a fiscal year other than the object of the proceeding or the consideration of exculpatory reasons (good-faith action, sustained on a plausible interpretation of a complex command).

(…)

The jurisprudence [c]onsents, currently, to the formal violation of the principle of specialization of fiscal years, provided that they are not attributable to voluntary and intentional behaviors aimed at operating the transfer of results between fiscal years. It accepts the inscription of an expense or income in a fiscal year other than the one to which it was competent, by intervention of exculpatory reasons (good-faith action, sustained on a serious and plausible interpretation of a complex command, based on open and dubious interpretations of its enactment).

(…)

The current thesis (…) [b]reaks with the ease of legal formalism. It seeks the material and fair solution. It makes a structural principle (tax capacity) prevail over an operational rule (specialization of fiscal years). Its starting point is irreproachable: if the company incurred a true expense, this decline must necessarily shape the fiscal income. The formal convention of specialization has no power to prevent the material effect, nor to make it excessively burdensome or complex. The same occurs, mutatis mutandis, with income. They contribute only once to profit (…)"[5]

It constitutes, in fact, repeated jurisprudence of the Supreme Administrative Court that the rigidity of the principle of specialization of fiscal years must be tempered with the invocation of the principle of justice – namely, in situations where, all revision periods for the tax act have already passed and there is no loss to the State, one must avoid falling into an unjustified injustice to the taxpayer – which will then function as a relief valve. In this sense, it was stated laconically in the judgment rendered on 19/11/2008, in proceeding no. 0325/08 (available at www.dgsi.pt)[6]:

"The principle of justice is a fundamental principle that should inform all activity of the Tax Authority, as results from the provision of articles 266, no. 2, of the CRP and 55 of the LGT.

Although these constitutional principles have a primary domain of application with respect to acts practiced in the exercise of discretionary powers, introducing therein aspects of a bound nature whose non-observance is susceptible of constituting a vice of violation of law, their relevance is not exhausted in acts practiced in the exercise of such discretionary powers.

In fact, on the one hand, the text of article 266 of the CRP does not hint at any restriction of its application to any type of administrative activity, whereby, in principle, such application should be made, unless its unfeasibility is demonstrated.

On the other hand, in the application of legality, both by the Administration and by the courts, each norm that frames a particular activity of the Administration cannot be viewed in isolation; rather, the entirety of the legal system must be considered, with primacy given to constitutional law, as required by the principle of unity of the legal system, which is the primary element of legal interpretation (article 9, no. 1, of the CC).

It cannot be stated that, in cases of exercise of bound powers, compliance with a particular ordinary law is superimposed on the aforementioned constitutional principles, because these principles are also part of the applicable normative framework, they are also definers of legality, and, as constitutional norms, they are of priority application in relation to ordinary law.

Both are the legal norms in the first part of no. 2 of article 266 of the CRP, which imposes on the Administration compliance with the principle of legality provided for in the principle of legality (…), as in its second part in which other principles are provided and which generally impose models of action of all administrative activity, as well as the legal norm which, in a particular situation, provides for a particular activity of the Administration, namely, in the case in question, the application of the principle of specialization of fiscal years (article 18, no. 1, of the IRC Code).

Therefore, to define the legality to which the Administration is bound, all such norms must be taken into account and a weighing and choice made between them if their global application, abstractly compatible, proves unfeasible in a particular concrete situation.

Thus, (…), from article 18, no. 1, of the IRC Code results a binding obligation for the Administration, which, as a rule, must apply the principle of specialization of fiscal years in its activity of monitoring the declarations presented by taxpayers.

But the exercise of this predominantly bound monitoring power can lead to a flagrantly unjust situation, and in such situations the principle of justice, enshrined in articles 266, no. 2, of the CRP and 55 of the LGT, must be made to operate to prevent such injustice flagrantly repudiated by the Constitution from occurring.

In weighing the values at issue (on the one hand the principle of specialization of fiscal years which is a legislatively arbitrary rule of temporal separation, for tax purposes, of a tax fact of prolonged duration and on the other hand the principle of justice, which reflects one of the nuclear concerns of a State based on the rule of law), it is manifest that, in a situation of incompatibility the latter principle should be given preference."

In the same sense, the Central Administrative Court South had previously ruled as follows[7]:

"I - The principle of specialization or autonomy of fiscal years imposes that the income and expenses economically attributable to a particular fiscal year be considered only in that fiscal year, only these being able thus to influence its result.

II - Such principle is subject to exceptions provided for in law, namely: in cases where there is unforeseeable or manifest ignorance of the positive or negative components and multi-year works (articles 18, nos. 2 and 5 and 19 of the IRC Code); in situations where the tax administration suffered no loss from the error committed by the taxpayer and when such error does not result from voluntary or intentional omissions aimed at operating transfers of results between fiscal years."

In the arbitral tax jurisprudence of the CAAD, we also observe the same decisional sense, among others, in the judgments rendered on 24/11/2014, in proceeding no. 367/2014-T and on 22/01/2016, in proceeding no. 262/2015-T (available at www.caad.org.pt/tributário/decisoes).

Following this jurisprudential understanding, Diogo Leite de Campos, Benjamim Silva Rodrigues and Jorge Lopes de Sousa[8] advocate the following position as to the application of the principle of specialization of fiscal years:

"When there is a divergence between the taxpayer's and the tax authority's criterion on the attribution of a particular gain or loss to a particular fiscal year, the latter must proceed to correct the taxable matter, causing the income or expense to be increased in the year which it understands it should relate to and, correspondingly, should strike such income or expense from the taxable matter of the year to which the taxpayer attributed it.

With this procedure, there will be no situation of injustice, because to the increase in tax in a particular year, there will correspond a decrease tending to be similar in another, and there will thus be no taxation of the same income in two fiscal years or non-deduction in any of them of an expense that should be considered.

However, in certain situations where the correction is made in the last year in which it can be made and has as its object an expense that should have been considered in the prior fiscal year, it is no longer (or may no longer be) possible to correct the taxable matter of that prior year because the period in which corrections could be made has already passed. The same occurs when, although at the time the tax authority makes the change to the taxable matter it would have been possible to make the corresponding correction in the year to which it understands the expenses should be attributed, it does not do so and, with the passage of time, it becomes impossible to do so.

In these conditions, if the tax authority was right in the correction it made, the taxpayer, in principle, would have been prejudiced by its own error in declaring the taxable matter, because, by deducting an expense in the year following that in which it should have deducted it, it failed to see the tax amount corresponding thereto reduced in the year in which such reduction should have occurred, to only see such reduction occur in the following year and, in parallel, the tax authority suffered no loss, as it had received in the prior year the tax without taking into account this expense which should have reduced it.

Thus, if the correction cannot now be made with respect to the prior year, the taxpayer, which was already the sole person prejudiced by its error, would see its situation further aggravated, finding itself unable to make the deduction of this expense in either of the years. The tax authority would thus retain in its power a tax to which it manifestly had no right.

This is a situation in which the exercise of a bound power (correction of the taxable matter in the face of a violation of the principle of specialization of fiscal years) leads to a flagrantly unjust situation and in which, therefore, the question of making the principle of justice, enshrined in articles 266, no. 2, of the CRP and 55 of the LGT, operate to prevent the possibility of making the aforementioned correction arises.

There are, in this situation, two duties to be weighed, both with legal coverage: one is to restore the truth about the determination of the taxable matter of the fiscal years referred to, giving effect to the principle of specialization, such restoration which the tax authority must effect even if it brings it no advantage; another is to prevent administrative activity from resulting in the creation of a situation of injustice.

Between these two values, namely in cases where the tax authority suffered no loss from the error committed by the taxpayer, the option should be to not make the correction, limiting that duty of correction by force of the principle of justice.

On the other hand, it should be noted that in a situation of this type there is not even any public interest in the action of the tax authority, as it is not a matter of obtaining a debt tax, whereby, given that all administrative activity should be guided by the pursuit of this interest, the administration should refrain from acting.

Consequently, correction acts relating to the taxable matter that lead to situations of injustice of this type should be considered annulable, by vice of violation of law."

In the same vein, Tomás Cantista Tavares[9] advocates the following understanding:

"The formal violation of specialization of fiscal years causes the temporal anticipation of the debt tax, with deferral of fiscal cost or anticipation of tax income (in profitable years). Here, the self-declaring party of the tax prejudices itself. The same tax is paid – the effective rate is maintained in both years. But it does so earlier. It anticipates it, by comparison with the result of the rigorous application of the rules of specialization of fiscal years.

(…) the subject interprets and applies the principle of specialization to its detriment. It delivers the tax earlier. It anticipates it temporally. This outcome confirms the non-existence of a fraudulent or culpable intention of the agent and imposes total acceptance of the taxpayer's conduct, although in formal violation of specialization.

(…) in the legal vacuum, (…), jurisprudence must impose (…), for reasons of justice:

a) the temporal anticipation of the debt tax confirms the good faith of the taxpayer – who acted on a plausible interpretation of the rule of specialization;

b) the asymmetric correction of a sole fiscal year runs the risk of transforming a temporal question into a material problem – with an undesired double taxation, given the difficulty in achieving the double inverse fiscal correction of the balance.

In summary: in the case of temporal anticipation of the debt tax, the formal violation of specialization of fiscal years should be accepted, independently of judgments on the censurability of the agent (whether its action is attributable to an intentional or exculpatory error). Such thesis is further supported by two other accessory nuances:

• to the temporal anticipation of the tax is not associated the granting of a right to interest in favor of the taxpayer. The subject took the attitude that it took, by its free and exclusive will. (…)

• the taxpayer, to benefit from this regime, must allege and prove in which fiscal year it accounted for (or will account for) the income or expense."

§3. THE CASE SUB JUDICE: SUBSUMPTION TO THE APPLICABLE NORMATIVE FRAMEWORK

After the excursion we have made through the applicable normative framework and the doctrine and jurisprudence on the meaning and scope of the principle of specialization of fiscal years, it is now necessary to appraise the situation sub judice by way of its subsumption to those legal norms.

As a starting point, it is important to stress that, as the Tax Inspection Services themselves made express in the Tax Inspection Report, the reasoning for non-acceptance of impairment losses resulting from uncollected credits from the Claimant's client, "B…, S. A.", does not lie in the lack of presentation of documents demonstrating either the existence of such credits or that these credits were subject to judicial claim. Effectively, the reasoning for non-acceptance of the impairment losses constituted in fiscal year 2012 lies in violation of the principle of specialization of fiscal years; a violation which, it must be stressed, was undeniably committed by the Claimant. In fact, as was proven (cf. fact e)), on September 9, 2011, the Claimant instituted a declarative action for payment in ordinary proceedings against its client "B…, S. A.", petitioning for payment of the sum of € 95,591.00, plus default interest, still in debt with respect to the aforementioned invoices; thus, at least from that point forward, the decision to constitute the impairment losses should have been taken, which could have been done in the subsequent income tax declaration relating to fiscal year 2011 (filed in 2012).

However, given the circumstances that inform the specific case and having regard to the factuality considered proven (cf., in particular, facts d), h), i) and j)), there is sufficient evidence in the record to conclude that non-compliance with the principle of specialization of fiscal years did not result from voluntary and intentional omissions of the Claimant, resulting from deliberate strategies (commercial, management or other), aimed at manipulating results or operating their transfer between fiscal years, thereby circumventing the purposes sought by law with the establishment of the principle of specialization of fiscal years.

On the other hand, it is also evident that the State was not prejudiced by the Claimant's action, as what happened is that the Claimant accounted for the expenses in question (impairment losses), but did not do so correctly; that is, the respective amounts, although certain, were not charged to the corresponding fiscal years.

But from this, as stated, no loss results for the State. On the contrary, it is the Claimant that was prejudiced by non-observance of the principle of specialization of fiscal years. In fact, the attribution of expenses to a particular fiscal year has as its corollary the reduction of taxable matter and, therefore, payment of less tax. Thus, by delaying in the attribution of expenses, the Claimant also delayed the entry into its legal sphere of the patrimonial advantage which is embodied in the corresponding reduction in tax for that year, which is attributable to a prejudice for itself, as it will enjoy such advantage one or two years later than those in which it should have benefited, losing the availability of the respective sums during these periods. And, obviously, this delay benefited the Public Treasury, as it had in its possession during these years in which there was delay in the attribution of expenses, the amounts of tax paid in excess, in the years in which the expenses should have been attributed and were not.

Within this framework, if the AT's view were to be followed, the Claimant would be intolerably prejudiced, as it would not be able to now account as expenses what it actually bore, and the Claimant will no longer be able to avail itself of the revision of the tax act, as the period for doing so has passed.

Having said this, concurring with the jurisprudence and doctrine cited above, we understand that, as the principle of specialization of fiscal years is not an absolute principle, the same, as an accounting and fiscal norm, cannot be interpreted and applied to the prejudice of the principles of material truth, tax capacity and justice. Whereby, between a solution, such as the one we here adopt, in which there are neither losses nor gains, and another that would be found by strict and absolute application of the principle of specialization of fiscal years, which would benefit some (Public Treasury) and prejudice others (taxpayer), it is surely to be opted for the first, for which, as we have seen, there is legal foundation.

In these terms, the correction made to the taxable matter of Corporate Income Tax, relating to fiscal year 2012, embodied in the disregarding of the fiscal expense relating to impairment losses recorded in that fiscal year, relating to the Claimant's client, "B…, S. A.", in the amount of € 95,591.00, suffers from the vice of violation of law, by violation of the principle of justice; from this necessarily results the illegality of the challenged additional Corporate Income Tax assessment act and its consequent annulment, to the extent that it had as its basis this correction.

§4. OF THE REFUND OF THE AMOUNT PAID AND DEFAULT INTEREST

The Claimant petitions for the refund of the amount of € 14,187.98, paid by it on August 23, 2015, relating to the aforementioned statement of account settlement no. 2015 … (cf. facts w) and x)).

In addition to the refund of that amount, the Claimant petitions for payment of default interest, calculated from the date of payment (23.08.2015) until its full and complete refund.

In harmony with the provision in subparagraph b) of article 24 of the RJAT, the arbitral decision on the merits of the claim which is not subject to appeal or objection binds the tax authority from the end of the period provided for appeal or objection, and it must, in the exact terms of the success of the arbitral decision in favor of the taxpayer and until the end of the period provided for the voluntary execution of judgments of the tax courts, "reestablish the situation that would have existed if the tax act subject to the arbitral decision had not been practiced, adopting the acts and operations necessary for such purpose", which is in harmony with the provision in article 100 of the LGT (applicable by virtue of the provision in subparagraph a) of no. 1 of article 29 of the RJAT).

It is therefore necessary to examine the request for refund of the amount unduly paid.

As was proven (cf. fact v)), the aforementioned merely arithmetic corrections made to the taxable matter of Corporate Income Tax for fiscal year 2012 had as their basis the disregarding for tax purposes of impairment losses relating to the Claimant's clients, "B…, S. A.", in the amount of € 95,591.00, and "C…, Unipessoal, Lda.", in the amount of € 7,193.09, as well as depreciations not accepted as fiscal expense, in the amount of € 4,250.00.

Now, the Claimant only came to contest the correction relating to impairment losses not accepted for tax purposes relating to its client "B…, S. A.", in the amount of € 95,591.00, having further contradicted nothing.

Therefore, the Arbitral Tribunal only had knowledge of this matter and above has already made express its judgment to the effect that such correction suffers from the vice of violation of law, by violation of the principle of justice, from which results the illegality of the challenged additional Corporate Income Tax assessment act and its consequent annulment, to the extent that it had as its basis this correction.

Thus, the Claimant does not have the right to the full refund of the amount of € 14,187.98, paid by it – as this would be equivalent to considering the challenged additional Corporate Income Tax assessment wholly illegal and, therefore, annulling it entirely – but only to a part of that value, to be determined and fixed in execution of judgment.

Having said this, it is now necessary to examine the request for payment of default interest.

In this regard, it is important to note the provision in no. 5 of article 24 of the RJAT, which establishes that "payment of interest, regardless of its nature, is due, pursuant to the terms provided in the general tax law and the Code of Tax Procedure and Process".

This norm should be understood as permitting recognition of the right to indemnifiable interest in the arbitral proceeding. In fact, although article 2, no. 1, subparagraphs a) and b), of the RJAT uses the expression "declaration of illegality" to define the competence of the arbitral tribunals operating in the CAAD, making no reference to condemnatory decisions, it should be understood that the powers assigned to tax courts in an impugnation proceeding are included in its competencies, this being the interpretation that accords with the sense of the legislative authorization on which the Government based itself for approving the RJAT, in which the first guideline is proclaimed, namely that "the arbitral tax proceeding must constitute an alternative procedural means to the judicial impugnation proceeding and the action for recognition of a right or legitimate interest in tax matters".

The judicial impugnation proceeding, although essentially a proceeding for annulment of tax acts, admits condemnation of the Tax Authority in payment of indemnifiable interest, as can be inferred from article 43, no. 1, of the LGT, in which it is established that "indemnifiable interest is due when it is determined, in amicable reclamation or judicial objection, that there was an error attributable to the services from which resulted payment of the tax debt in an amount higher than that legally due" and from article 61, no. 4, of the CPPT, which provides that "if the decision recognizing the right to indemnifiable interest is judicial, the period for payment is counted from the beginning of the period of voluntary execution".

It happens that the Claimant petitions for payment of default interest.

The law in fact provides for two types of interest in favor of taxpayers: indemnifiable interest and default interest (cf. articles 43 and 102, no. 2, of the LGT).

The distinction between these two figures lies in the following: indemnifiable interest seeks to compensate the taxpayer for the deprivation of the capital corresponding to an unduly assessed tax; default interest seeks to compensate the taxpayer for delay in payment of its credit resulting from annulment of the act.

Given two types of interest in favor of taxpayers, it is important to establish the time periods relevant for their respective calculation, and on this point, jurisprudence is unanimous: indemnifiable interest is due until the end of the period for voluntary execution of the judgment and default interest is due from then onwards until full and complete payment.

Thus, once the period for voluntary execution of the judgment has passed that has become final by the Tax and Customs Authority without it being complied with, the interested party may request execution of the judgment and, as a creditor of restitution of (unduly) paid tax, will have the right to default interest, whose payment it must expressly petition.

It happens that, in the absence of any legal provision allowing a contrary conclusion, the scope of arbitral proceedings is restricted to questions of the legality of acts of the types referred to in article 2 of the RJAT which are covered by the binding undertaken by the Tax and Customs Authority in Ordinance no. 112-A/2011, of March 22, pursuant to article 4, no. 1, of the RJAT, and the arbitral tribunals operating in the CAAD cannot, in particular, define the terms in which annulment judgments that may be rendered should be executed.

In fact, the competence to execute the judgments rendered by the arbitral tribunals operating in the CAAD falls, in the first instance, to the Tax and Customs Authority itself, as results from the express tenor of no. 1 of article 24 of the RJAT by saying that "the arbitral decision on the merits of the claim which is not subject to appeal or objection binds the tax authority from the end of the period provided for appeal or objection, and it must...".

On the other hand, should there be disagreement between the Tax and Customs Authority and the taxpayers on how to execute judgments, the tax courts are competent for their examination, since arbitral tribunals operating in the CAAD are not assigned competencies in proceedings for execution of judgments and the arbitral tribunals dissolve following the arbitral decision, as results from article 23 of the RJAT.

Given the foregoing, and since the examination of the assumptions of the (possible) right of the Claimant to default interest can only be carried out in proceedings for execution of judgment, it is concluded that this Arbitral Tribunal is materially incompetent to examine the request for condemnation of the Respondent in payment of default interest, which constitutes a dilatory exception resulting in absolution of the instance of the Tax and Customs Authority with respect to this request (cf. articles 576, nos. 1 and 2, 577, subparagraph a) and 578 of the CPC applicable pursuant to article 29, no. 1, subparagraph e), of the RJAT).

IV. DECISION

Given the foregoing, this Arbitral Tribunal decides:

a) To judge partially meritorious the request for arbitral pronouncement and, consequently:

• to declare illegal the merely arithmetic correction made to the taxable matter of Corporate Income Tax, relating to fiscal year 2012, embodied in the disregarding of the fiscal expense relating to impairment losses recorded in that fiscal year, relating to the Claimant's client, "B…, S. A.", in the amount of € 95,591.00;

• to declare, in this exact measure, partially illegal the challenged additional Corporate Income Tax assessment, with its consequent partial annulment, the same occurring with the corresponding compensatory interest assessments;

b) To condemn the Tax Authority to refund to the Claimant the amount unduly paid by it, in the value to be fixed in execution of judgment;

c) To judge the Arbitral Tribunal materially incompetent to examine the request for condemnation of the Respondent in payment of default interest to the Claimant and, consequently, to absolve the Tax and Customs Authority from the instance with respect to this request;

d) To absolve the Tax and Customs Authority from the claim to the extent that annulment of the challenged assessments is not decided;

e) To condemn both parties in payment of the costs of the proceeding, in proportion to the failure.

VALUE OF THE PROCEEDING

In conformity with the provision in articles 306, no. 2, of the CPC, 97-A, no. 1, subparagraph a), of the CPPT and 3, no. 2, of the Regulations of Costs in Tax Arbitration Proceedings, the proceeding is assigned the value of € 4,664.28.

COSTS

Pursuant to the provision in articles 12, no. 2, and 22, no. 4, of the RJAT and in article 4, no. 4, and in Table I attached to the Regulations of Costs in Tax Arbitration Proceedings, the amount of costs is fixed at € 612.00 (six hundred and twelve euros), to be borne by Claimant and Respondent, respectively in the proportion of 11.00% and 89.00%.

Lisbon, April 29, 2016.

The Arbitrator,

(Ricardo Rodrigues Pereira)

[1] The Claimant petitions for revocation of the challenged tax act, which, with all due respect, appears to be incorrect.

The revocation of the tax act whose illegality was raised is the responsibility of the highest administrator of the AT service (cf. article 13, no. 1, of the RJAT) and not the Arbitral Tribunal.

The arbitral tax proceeding is structured as a pure annulment proceeding and, as such, is aimed at ascertaining the (il)legality of acts of the types provided in subparagraphs a) and b) of no. 1 of article 2 of the RJAT and annulling them or declaring their non-existence or nullity.

However, we understand that such "conceptual" imprecision should not prevent knowledge of the request for arbitral pronouncement, as it is perceivable what is the actual claim of the Claimant, which, moreover, is proven by the tenor of the Response presented by the Respondent.

[2] Manuel Henrique de Freitas Pereira, "The periodization of taxable profit", Tax Science and Technique, 1988, no. 349, pp. 77 et seq.

[3] Ob. cit., pp. 80-81.

[4] Tomás Cantista Tavares, IRC and accounting: from realization to fair value, Coimbra, Almedina, 2011, p. 63.

[5] Ob. cit., pp. 63-66.

[6] In the same sense, see, among others, the judgments rendered on 02/04/2008, in proceeding no. 0807/07, on 25/06/2008, in proceeding no. 0291/08 and on 09/05/2012, in proceeding no. 0269/12.

[7] Judgment rendered on 28/03/2007, in proceeding no. 01551/06, available at www.dgsi.pt.

[8] General Tax Law, Annotated and Commented, 4th Edition, Lisbon, Encontro da Escrita, 2012, pp. 452-454.

[9] Ob. cit, pp. 67-69.