Summary
Full Decision
ARBITRAL DECISION
The arbitrators designated to form the Arbitral Tribunal, constituted on 24 January 2018, Dr. Alexandra Coelho Martins (arbitrator president), Dr. Raquel Franco and Dr. Amândio Silva (arbitrator members), hereby agree as follows:
REPORT
A... SGPS, S.A., hereinafter "Claimant", taxpayer identification number..., with registered office at..., no...., ..., ..., has requested the constitution of a Collective Arbitral Tribunal, in accordance with the provisions of articles 2, no. 1, subparagraph a), 5, no. 3, subparagraph a), 6, no. 2, and articles 10, no. 1, subparagraph a) and no. 2, all of the Legal Regime of Tax Arbitration ("RJAT"), approved by Decree-Law no. 10/2011, of 20 January.
The Claimant makes a request for an arbitral pronouncement to assess the illegality and consequent annulment of the tax assessments for Corporate Income Tax ("IRC") and interest relating to the 2013 fiscal year, in the total amount of €884,056.78, with the Tax Authority and Customs Authority ("AT") as Respondent. It further petitions for compensation for the provision of undue security.
The request for constitution of the Arbitral Tribunal was accepted by the President of CAAD and followed its normal procedural course, notably with notification to the AT.
The Deontological Council designated the signatories as arbitrators of the Collective Arbitral Tribunal, who communicated their acceptance of the appointment within the applicable period, in accordance with article 6, no. 2, subparagraph a) and article 11, no. 1, subparagraph a), both of the RJAT.
The parties, duly notified, did not manifest any intention to challenge the designations, and the Collective Arbitral Tribunal was constituted on 24 January 2018, in accordance with article 11, no. 1, subparagraphs b) and c) of the RJAT and articles 6 and 7 of the Code of Ethics.
The Claimant alleges that the AT committed material errors due to incorrect assumptions by not accepting, for tax purposes, financial expenses on the grounds of article 32, no. 2 of the Tax Benefits Statute ("EBF"). The alleged defects concern, in summary:
A. Expenses for banking services and Stamp Tax, which, in its view, are not covered by the aforementioned article 32, no. 2 EBF;
B. The amount recorded as a debit in account 69183 – "Intra-group interest", in the amount of €2,656,964.45, for the reason that it did not serve (as a cost) for the formation of the taxable profit determined by the Claimant, since by virtue of the treasury management centralization system, denominated cash pooling zero balance, the determination of intra-group interest effected at internal level did not imply a true expenditure. In fact, since the values of intra-group interest recorded as a debit in one company and as a credit in another of the same group, they offset each other, not affecting the determination of the group's taxable profit. Thus, the AT could not increase the taxable profit on the basis of non-deductible financial expenses by an amount that the Claimant did not deduct;
C. The absence of the necessary connection between the financial expenses in question and the acquisition of shareholdings, as these were not allocated to the latter, but rather used to effect payments resulting from the operational activity of the subsidiaries, within the framework of centralized management of treasury surpluses and deficits;
D. The application of the indirect method provided for in Circular no. 7/2004, without the AT having established any relationship between the financial expenses incurred and the acquisition of shares of capital, or even invoking any difficulty or impossibility of proceeding to a direct allocation of the financial expenses related to the acquisition of shares of capital;
E. The "inflation" of financial expenses by incorrect application of the formula of Circular no. 7/2004 to the specific case, namely (and in addition to the situations referred to above):
i. By considering only the portion relating to liabilities, disregarding the portion relating to assets (balances relating to treasury management operations);
ii. By considering a value of acquisition of shareholdings held by the Claimant that is higher than the actual value;
iii. By including financial expenses relating to loans obtained from banking entities, used solely in the operational activity of the Group.
The Claimant contends that the AT did not demonstrate, as was incumbent upon it, that the financial expenses are effectively connected to the acquisition of shares of capital, and that in the absence of such demonstration, their non-deductibility violates the principle of taxation of companies on the basis of actual profit. Finally, it argues that if it is understood that the method of Circular no. 7/2004 is mandatory in all situations, such interpretation violates the principles of legality and tax capacity.
The Respondent invokes, in its response, that the application of the method provided for in Circular no. 7/2004 only arises when it is not possible to effect the specific or direct allocation of the loans contracted – a circumstance which it considers to be verified in the specific case – and that the application of its formula to all similar situations is the guarantee of uniformity in taxation.
It disagrees with the arguments invoked by the Claimant, on the grounds that:
A. With regard to the classification of expenses for banking services and Stamp Tax as financial expenses, it considers that they should be covered by the provision of article 32, no. 2 of the EBF;
B. It considers that no compensation should operate between debits of intragroup interest in the Claimant's expense account by credits in other companies of the group, by virtue of the AT's analysis having been limited to the activity of the Claimant as an individual company and not as a group, with the treatment given by associated companies to such interest being irrelevant;
C. The values that served as reference for the calculation of interest to be corrected were purged of balances relating to the operational activities of the subsidiaries;
D. It is legitimate for the AT, in the face of the impossibility of specific or direct allocation, to apply the indirect or non-specific method contained in Circular no. 7/2004, which ensures that financial expenses are not fiscally deducted and simultaneously capital gains from the alienation of shareholdings are exempt (an exceptional tax benefit), which circumstance, if occurring, would violate the principle of equality and tax neutrality;
E. The disregard of financial expenses does not result from the Circular, but from the current normative framework, with that Circular limited to interpreting the law, in the sense of taxation closer to actual profit;
F. The interpretation defended by the Claimant that non-deductible expenses are only those that are directly and unequivocally proven as such is unconstitutional by violation of the principles of equality, tax capacity, and taxation of actual income (cf. articles 13, 103 and 104, no. 2 of the Constitution of the Portuguese Republic - "CRP").
At the request of the Respondent, the meeting referred to in article 18 of the RJAT was waived. Both parties, notified to that effect, submitted written allegations in which they essentially maintain the positions assumed in their pleadings, the Claimant having proceeded to attach two documents.
PRELIMINARY EXAMINATION
The Tribunal was regularly constituted and is competent ratione materiae (cf. articles 2, no. 1, subparagraph a) and 5 of the RJAT).
The request for an arbitral pronouncement is timely, as it was presented within the period provided in subparagraph a), no. 1, of article 10 of the RJAT.
The parties have legal personality and capacity, have standing, and are regularly represented (cf. articles 4 and 10, no. 2 of the RJAT and article 1 of Ordinance no. 112-A/2011, of 22 March).
The case does not suffer from nullities, and no preliminary issues have been raised.
MATTER OF FACT
Relevant to the decision, the following facts must be considered:
A... SGPS, S.A., hereinafter Claimant, is a company managing shareholdings, which heads the "Group B...", as the parent company or holding company, and has as its sole object the management of shareholdings (CAE 64202) – cf. Tax Inspection Report relating to this company as the parent company of Group B... ("RIT Group") and "RIT", relating to A... SGPS, S.A., individually considered, attached as Annex 1 thereto, contained in the Administrative Procedure ("PA") and attached by the Claimant as Document 1.
Almost all of the shareholdings held by the Claimant were acquired in 2004 and 2005, and the acquisition value reported by the Claimant to the General Tax Inspectorate, with reference to the end of the 2011 fiscal year, amounted to €26,836,856.00 – cf. RIT (annex 4) contained in the PA and Documents 1 and 11 attached with the p.i..
The acquisition value of the shareholdings held by the Claimant includes the amounts of €1,758,067.50 and €1,479,877.50, corresponding to the nominal value of the shares of company C..., with which part of the capital of the Claimant was constituted, in accordance with the deed of constitution thereof, executed on 15 July 2004 – cf. Document 2 attached with the Claimant's allegations.
Since 1 January 2007, the Claimant has been classified for IRC purposes under the special tax regime for groups of companies ("RETGS"), in accordance with articles 69 et seq. of the Code of this tax. The following companies are part of the group's scope:
D..., S.A.
E..., S.A.
F..., Lda.
C..., S.A.
G..., SGPS, S.A.
H..., S.A.
I..., Lda.
J..., S.A.
– cf. RIT Group contained in the PA and attached with the p.i. as Document 1.
In April 2011, Group B... began the integration and centralization of the current management of treasury of all companies in the parent company, now Claimant, through the method known as cash pooling zero balance, with the objective of optimizing financial resources and simplifying treasury administrative tasks. With this integration, the Claimant began to ensure the management of current financial flows of all companies in the group, directly effecting collections and payments resulting from the operational activity of the subsidiaries, including suppliers and personnel of the subsidiaries, being generally transferred the debts of customers and suppliers thereof – cf. Report and Accounts for the 2011 fiscal year, attached with the p.i. as Document 5, with the accounts being subject to legal certification by an auditor, and RIT contained in the PA and attached with the p.i. as Document 1, pp. 8-9.
In 2013, Group B... maintained this treasury management centralization system (with surpluses being transferred to the parent company and deficits being covered by it) and recorded customer and supplier balances of its subsidiaries in its accounts, in the "Other amounts receivable and payable" items. The values of intragroup interest recorded as a debit in the Claimant were, in the same amount, recorded as a credit in the accounting of the subsidiary to which they relate – cf. Report and Accounts for the 2013 fiscal year, attached with the p.i. as Document 6, and RIT contained in the PA and attached with the p.i as Document 1, pp. 8-9.
In the same period (2013), the Claimant incurred expenses of €110,234.71, relating to banking services expenses, and €24,167.34, relating to Stamp Tax on interest – cf. RIT contained in the PA and attached with the p.i. as Document 1.
The Claimant's financial statements for the 2013 fiscal year show that account #69183 – Intra-group interest was debited by the interest determined as due to the subsidiaries, with the debit balance, on 31.12.2013, of €2,656,964.45, and credited by intra-group interest, with the credit balance, on 31.12.2013, of €1,038,046.29 – cf. RIT, table 9, contained in the PA and attached with the p.i. as Document 1.
At the date of the facts, the Claimant held liabilities relating to loans obtained from banking entities (secured current account contracts), used in financing punctual treasury needs and the operational activity of Group B..., in the amounts of €4,355,000.00 at K...; €1,580,000.00 at L... and €1,783,652.13 at Bank M..., the latter contracted in September 2011 – cf. Document 9 attached with the p.i. and document 1 attached with the Claimant's allegations.
In 2015 and 2016, the Claimant was the subject of inspection activities carried out by the Tax Inspection Services of the Finance Department of Lisbon, covering the year 2013, as an individual company, under service order OI2015..., and as the parent company of Group B..., under service order OI2017... – cf. RIT and RIT Group contained in the PA and attached with the p.i. as Document 1.
The Tax Inspection Services corrected the Claimant's taxable profit, in the amount of €1,598,022.54, with an impact on the Group's fiscal result, which changed from the declared result of €7,151,208.14 to the corrected result of €8,749,230.68, notifying the Claimant for purposes of the right to a hearing, which was not exercised – cf. Draft RIT, RIT and RIT GROUP contained in the PA, including documents relating to notification (communications and postal records).
As grounds for the correction of the Claimant's taxable profit in the 2013 fiscal year, the Tax Inspection Services invoke the legal framework of article 32, no. 2 of the EBF, complemented by the clarification in Circular no. 7/2004, of 30 March, of the IRC Services Directorate, disregarding as an expense of the fiscal year the financial expenses that, in accordance with the indirect method provided for in the Circular and applying its respective calculation formula, they understood to be allocable to the acquisition of shares of capital, in the terms transcribed below (pp. 5-13 of the RIT):
"III.1 – Financial expenses not accepted for tax purposes in light of article 32, no. 2 of the Tax Benefits Statute (EBF)
III.1.1 – Legal framework of article 32, no. 2 of the EBF
Article 32, no. 2 of the EBF provides, in the wording in force at the date of the facts now analyzed by the Tax Inspection (given by Decree-Law no. 108/2008, of 26 June), that: 'the capital gains and capital losses realized by SGPS and SCR through the onerous transfer, whatever the title under which it takes place, of shares of capital of which they are holders, provided that they are held for a period not less than one year, and likewise, the financial expenses borne with their acquisition, do not contribute to the formation of the taxable profit of these companies.'
With this provision the legislator wished to establish the general rule of exclusion from taxation of capital gains realized in the onerous transfer of shareholdings held by SGPS, for a period equal to or greater than one year, whatever the title under which it takes place, and concurrently, the legislator understood that, as the capital gains do not contribute to taxable profit, the financial expenses borne with the acquisition of such shareholdings should cease to contribute.
Through Circular no. 7/2004 of 30 March of the IRC Services Directorate, the Tax Administration clarifies that:
- The new regime, with respect to financial expenses, is applicable 'in periods initiated after 1 January 2003, even though they relate to financing contracted before that date' (point 5).
- The fiscal year in which the financial expenses should be disregarded as costs, for tax purposes, 'should proceed, in the fiscal year to which they relate, to the fiscal correction of those that have been borne with the acquisition of shareholdings that are susceptible to benefiting from the special regime established in no. 2 of article 31 of the EBF, regardless of whether all conditions for application of the special regime for taxation of capital gains have already been met…' (point 6). [1 Article 32 of the EBF at the date of the facts analyzed here]
- With regard to the method of calculation and allocation to be used for the purpose of allocating financial expenses to shareholdings, point 7 provides that 'given the extreme difficulty in using… a method of direct or specific allocation and given the possibility of manipulation that the same would allow, such allocation should be effected on the basis of a formula, which takes into account the following: the remunerated liabilities of the SGPS and SCR should be imputed, firstly, to remunerated loans granted by these to the subsidiary companies and to other interest-generating investments, allocating the remainder to other assets, in particular, shareholdings, proportionally to their respective cost of acquisition' (emphasis and bold ours).
III.1.2 – Implementation of the legal framework
Having established the tax framework relating to interest borne by an SGPS, with relevance to the method of calculation of the portion of interest to be allocated to financial shareholdings, we will set out in the following paragraphs how this same method is implemented.
(…)
III.3 – Calculations Effected
III.3.1 – Values of assets, liabilities and financial expenses
For the determination of the expenses imputable to the shareholdings held by A..., we will follow the description in point III.1.2, highlighting items nos. 1, 2, 3, 4 and 8 of table 3, essential to such determination, taking into account the following point:
PRELIMINARY POINT
From the analysis carried out on the accounting it was possible to determine that A... concentrates in itself the current treasury management of its subsidiaries through the method known as cash pooling zero balance.
In addition to concentrating treasury, it also concentrates the balances of customers and suppliers of its subsidiaries in its accounts.
This information can be confirmed by reading point 2.2 of the Annex to the Balance Sheet and Statement of Results contained in the Report and Accounts for the year 2012 (annex 6, of 1 page): 'Group B... carried out the integration of the current treasury management of all companies in the group in company A... SGPS, SA, with the objective of optimizing financial resources and simplifying treasury administrative tasks.
With this integration, the parent company ensures the management of current financial flows of all companies in the group, directly effecting collections and payments resulting from the operational activity of the subsidiaries.
By virtue of this operation the debts of customers and suppliers are, in their generality, transferred to it. Those that in 2011 were recorded in the items of customers and suppliers were, in 2012, reclassified to the item of other amounts receivable and payable, these items not being comparable to the previous fiscal year. The values recorded in these items do not result from purchases or sales effected directly by A... SGPS.
With regard to payments made to personnel, by the holding company and on account of operational companies, in 2011 these were evident in the Cash Flow Statement in the item Payments to Personnel. In 2012 this item refers only to the holding company's own personnel; the values paid on account of operational companies are recorded in the item of other financing operations.
The amount relating to current active debts of operational companies is €37,049 million, of which €23,453 million relate to companies in the group. The amount relating to current passive debts of operational companies is €38,967 million, of which €20,842 million relate to companies in the group'.
In the Report and Accounts for the year 2013, point 2.2 contained in the Annex to the Consolidated Balance Sheet and Statement of Results (annex 7, of 1 page), the company clarifies that 'The debts of customers and suppliers, assumed by the holding company by virtue of the concentration of treasury, were recorded in the items of other amounts receivable and other amounts payable'.
By virtue of this management assumed by the holding company with implications regarding the balances of third parties (which will be higher than their actual values since they include values that are not their own, but rather of their subsidiaries), the values that will serve as reference for the calculation of the interest to be corrected will be those resulting from the purging of the balances contained in the accounting of balances relating to the operational activities of the subsidiaries.
Having made this preamble, we will now list the values that will serve as the basis for the calculations to be made (all tables are presented in euros).
1 – Of remunerated assets
From the analysis of the accounting and ancillary documentation sent by the company (annexes 8 and 9, of 3 pages each) and which we consider valid for this determination, the following remunerated assets are listed:
Table 4
REMUNERATED ASSETS | 2012 | 2013
---|---|---
131405 – Time Deposit-N... | General - USD | | 725,110.58
268 – H...SA | 1,391,325.04 | 1,393,693.33
268 – G…SGPS | 14,239,969.89 | 10,463,783.42
268 – F... LDA | 300,491.00 | 1,213,491.00
268 – I... LDA | | 37,650.76
TOTAL | 15,931,785.93 | 13,833,729.09
Based on the schedules sent by the taxpayer (intragroup interest calculation), which do not coincide with the values of the trial balances, but which served as the basis for the calculation of active as well as passive interest, the values considered for purposes of the corrections made are those shown in the table above.
2 – Of the acquisition value of shareholdings
Based on the elements sent by the taxpayer to the General Tax Inspectorate pursuant to article 9, no. 2 of Decree-Law no. 495/88, of 30 December (annex 4), the following table is prepared:
Table 5
SHARES OF CAPITAL | 2012 | 2013
---|---|---
J... SA | 1,696,596.00 | 1,696,596.00
E... SA | 343,101.00 | 343,101.00
C... SA | 4,786,563.00 | 4,786,563.00
G... SGPS SA | 2,631,703.00 | 2,631,703.00
I... LDA | 22,498.00 | 22,498.00
O... LDA | 56,674.00 | 56,674.00
D... SA | 13,785,502.00 | 13,785,502.00
F... LDA | 5,000.00 | 5,000.00
P... SGPS SA | 2,438,219.00 | 2,438,219.00
Q... SGPS SA | 1,071,000.00 | 1,071,000.00
TOTAL | 26,836,856.00 | 26,836,856.00
3 – Other non-remunerated assets
For the calculation of non-deductible financial expenses, once the amounts relating to remunerated assets (remunerated loans granted) have been determined, it is now necessary to determine the total of non-remunerated assets (annexes 10 and 11, of 2 and 3 pages respectively).
The value of other non-remunerated assets is €7,618,262.76 and €13,093,405.98, respectively, as follows:
Table 6
OTHER ASSETS (non-remunerated) | 2012 | 2013
---|---|---
11 – Cash | 1,868.01 | 2,083.87
12 – Demand deposits | 996,441.02 | 388,039.28
21 – General customers | 1,677,589.67 | 2,472,194.92
2281 – Supplier advances | 236,199.65 | 135,277.54
23 – Personnel | 11,716.04 | 1,391.46
24 – E.O.E.P. | 496,894.84 | 566,865.38
265 – Available Profits | 4,110,000.00 | 9,440,000.00
43 – Tangible Fixed Assets | 87,553.53 | 87,553.53
TOTAL | 7,618,262.76 | 13,093,405.98
These values were taken from the trial balances of the respective fiscal years after purging the balances of accounts relating to subsidiary companies, as proposed in the preliminary point to this determination.
4 – Of remunerated loans obtained
From the analysis of the accounting and ancillary documentation sent by the taxpayer (annexes 8 and 10 for the 2012 fiscal year and annexes 9 and 11 for the 2013 fiscal year), the following remunerated loans obtained are listed in the table below:
Table 7
REMUNERATED LOANS OBTAINED | 2012 | 2013
---|---|---
12 – BANK DEPOSITS | 2,622.70 | 2,171.43
2511 – K... | 4,370,000.00 | 4,355,000.00
2511 – L... | 1,603,000.00 | 1,580,000.00
2513 – FINANCIAL LEASES | 10,576.75 | 0.00
2515 – K... | 0.04 | 0.00
2515 – M... | 2,729,360.37 | 1,783,652.13
| |
268 – D... SA | 12,294,373.44 | 10,198,737.39
268 – C... SA | 6,834,174.16 | 6,912,641.65
268 – E... SA | 21,493,261.40 | 24,508,378.75
268 – I... LDA | 102,349.24 | 0.00
268 – O... LDA | 1,854.99 | 0.00
268 – J... SA | 142,001.32 | 260,560.47
TOTAL | 49,583,574.41 | 49,601,141.82
Based on the schedules sent by the taxpayer with debit and credit balances of accounts 26 of the group, which do not coincide with the values of the trial balances, the values considered for purposes of the corrections made are those shown in tables 7, 8 and 9.
8 – Of financial expenses borne
The taxpayer recorded in its accounting financial expenses, imputing them to expenses, in accordance with the analytical trial balance and detailed in the table below, which integrate for the purposes of this calculation the concept of financial expenses, totaling €3,140,917.94 in 2012 and €3,297,293.24 in 2013 (annexes 8 and 9).
Table 8
FINANCIAL EXPENSES | 2012 | 2013
---|---|---
6911 Interest on financing obtained | 585,946.45 | 505,770.08
69181 Lease interest | 674.12 | 156.66
69183 Intra-group interest | 2,393,999.04 | 2,656,964.45
69881 Banking services expenses | 132,955.20 | 110,234.71
69883 Stamp tax on interest | 27,343.13 | 24,167.34
TOTAL | 3,140,917.94 | 3,297,293.24
The amounts of interest included in account 69183 – Intra-group interest shown in the table above do not correspond with the amounts shown in the trial balances of 2012 and 2013.
This is due to the fact that the taxpayer recorded in such account the positive and negative balances of intragroup interest instead of recording in an expense account the interest borne and in a revenue account the interest obtained, contrary to the principle of non-offsetting of balances embodied in point 2.6 of the Annex to Decree-Law no. 158/2009, of 13 July (regulation approving the SNC):
'2.6 – Offsetting
2.6.1 – Assets and liabilities, and revenues and expenses, must not be offset except when such is required or permitted by an NCRF.
2.6.2 – It is important that assets and liabilities, and revenues and expenses, are separately reported.'
Taking into account the intragroup calculation maps (annexes 8 and 9) which served as the basis for the calculations of the taxpayer and respective recording of interest contained in account 69183, the values contained in table 8 were determined, which reflect the actual interest expenses of the taxpayer, values that were calculated as shown in the following table.
Intra-group financing interest
Table 9
| Name | Debit balance 31/12/2012 | Credit balance 31/12/2012 | Debit balance 31/12/2013 | Credit balance 31/12/2013 |
|---|---|---|---|---|
| J... | 2,150.70 | | 13,780.59 | |
| C... | 343,307.25 | | 440,004.54 | |
| E... | 1,211,707.63 | | 1,610,044.20 | |
| I... | 7,164.45 | | | 909.53 |
| O... | 245.85 | | 46.81 | |
| D... | 829,423.17 | | 593,088.31 | |
| G... SGPS | | 1,150,213.44 | | 875,334.54 |
| H… SA | | 97,203.47 | | 97,451.08 |
| F… | | 6,608.25 | | 64,351.14 |
| TOTAL | (a) 2,393,999.05 | (b) 1,254,025.16 | (c) 2,656,964.45 | (d) 1,038,046.29 |
| BALANCE | (a)-(b) = 1,139,973.89 | (c)-(d) 1,618,918.16 |
III.3.2 – Determination of values to be corrected
In determining the value of financial expenses to be disregarded in the determination of taxable profit, (in line 779 of table 07 of the Model 22 declaration), taking into account the values determined in the preceding tables of this report, that is, remunerated assets, acquisition value of shares of capital, other assets, remunerated loans obtained and financial expenses, we have the determination contained in the table on the following page:
Table 10
| NIPC: ... | |
|---|---|
| Name: A... SGPS SA | |
| Periods: 2012 and 2013 | |
| No. | Description | 2012 | 2013 | Calculation |
|---|---|---|---|---|
| 1 | Remunerated assets | €15,931,785.93 | €13,833,729.09 | |
| 2 | Shares of capital (acquisition cost) | €26,836,856.00 | €26,836,856.00 | |
| 3 | Other assets | €7,618,262.76 | €13,093,405.98 | |
| 4 | Liabilities | | | |
| | Remunerated loans obtained | €49,583,574.41 | €49,601,141.82 | |
| 5 | Remunerated liabilities imputable to remunerated loans granted | €15,931,785.93 | €13,833,729.09 | 1 |
| 6 | Remunerated liabilities imputable to other assets | €33,651,788.48 | €35,767,412.73 | 4 - 1 |
| 7 | Remunerated liabilities imputable to shares of capital | €26,211,147.55 | €24,039,033.49 | (6 * 2) / (2+3) |
| 8 | Financial expenses | €3,140,917.94 | €3,297,293.24 | |
| 9 | Expenses imputable to shares of capital | €1,660,369.68 | €1,598,022.54 | 7*8/4 |
| 10 | Expenses imputed by the taxpayer | €0.00 | €0.00 | |
| 11 | Expenses imputable to shares of capital not added to taxable income | €1,660,369.68 | €1,598,022.54 | 9 – 10 |
Analyzing table 07 of the Model 22 IRC declaration, field 779, it is verified that the taxpayer did not add any value of financial expenses, in accordance with what is established in article 32, no. 2 of the EBF.
Having reached this point, the corrections listed in table 10 are proposed, to the determination of Taxable Profit, and to add to table 07 of the Model 22 IRC declaration, the expenses borne, which do not contribute to the determination thereof.
In this sense, the value to be added to the fiscal result declared by A... is €1,660,369.68 for the 2012 fiscal year and €1,598,022.54 for the 2013 fiscal year, in accordance with the table above. (…)'"
Following the corrections proposed in the RIT and RIT Group, the Claimant was notified:
- Of the IRC and interest assessment act, issued under no. 2017..., of 21 July 2017, contained in the IRC Assessment Demonstration document (no. 2017...);
- Of the Interest Assessment Demonstration (no. 2017...); and
- Of the Accounts Settlement Demonstration (no. 2017...),
all with reference to the 2013 fiscal year, with the total amount payable for IRC and interest amounting to €884,056.78, whose deadline for (voluntary) payment ended on 21 September 2017 – as shown in Document 2 attached with the p.i.
On 9 November 2017, the Claimant submitted a request for constitution of the Arbitral Tribunal in the CAAD computer system.
UNPROVEN FACTS AND REASONING
The pertinent facts for judgment of the case were selected and extracted based on their legal relevance, in light of the plausible solutions to questions of law, in accordance with article 596 of the Civil Procedure Code, applicable by remission of article 29, no. 1, subparagraph e), of the RJAT.
In this scope, the Claimant failed to prove that it provided a bank guarantee to support any tax enforcement proceedings.
With relevance to the decision, there are no other facts that should be considered as unproven.
With regard to the proven facts, the arbitrators' conviction was based on critical analysis of the documentary evidence submitted with the case file.
ON THE MERITS
Delimitation of Main Issues to be Decided
The fundamental question that must be addressed concerns the inquiry into the legal error in the application of the regime of article 32, no. 2 of the EBF, on the grounds that the respective normative prerequisites are not met, in particular due to the absence of a nexus of allocation between the financial expenses borne by the Claimant in the 2013 fiscal year and the acquisition of shareholdings, with the consequent illegality of the determination of non-deductible financial expenses through the indirect evaluation procedure determined by Circular no. 7/2004.
It is also appropriate to evaluate, should the response to the first question be negative, whether the measure of allocation of non-deductible expenses was correctly determined.
Tax-Legal Framework: Article 32, no. 2 of the EBF and Circular no. 7/2004
Article 32, no. 2 of the EBF constitutes the legal basis invoked by the AT to disregard the fiscal deduction, in IRC, of a part of the financial expenses incurred by the Claimant. This provision, which was subsequently repealed by the State Budget Law for 2014, provided at the date of the facts:
"Article 32
Companies managing shareholdings (SGPS)
1 – [Repealed by Law no. 55-A/2010, of 31 December]
2 – Capital gains and capital losses realized by SGPS from shares of capital of which they are holders, provided that they are held for a period not less than one year, and likewise, the financial expenses borne with their acquisition do not contribute to the formation of the taxable profit of these companies.
3 – (…)"
The provision under analysis establishes a solution of balance and correspondence between, on the one hand, the exclusion of taxation of capital gains, and on the other, the fiscal irrelevance of the financial expenses associated with the acquisition of the shareholdings generating such gains. As Tomás Cantista Tavares notes: "The legislator did not want two benefits to accumulate. The SGPS already sees its capital gains from shares being exempt from tax; but when that occurs, it cannot accumulate with the benefit of fiscal acceptance of interest borne with financing for the acquisition of such shares." (decision rendered in case no. 12/2013-T, of CAAD, on 8 July 2013).
In the same sense, the Constitutional Court clarifies that: "As stated in Decision no. 42/2014, which makes the historical analysis of the tax regime of SGPS regarding the taxation of capital gains and the deductibility of financial costs, as well as the grounds that over time have justified their separate tax treatment, the legislator decided to provide a more favorable tax regime for such companies, disregarding, for the determination of taxable profit in IRC, the capital gains realized with the alienation of shares of capital held for more than one year, to which was associated, in order to prevent obtaining a double advantage based on the same economic assumption, the exclusion of deductibility of the financial costs incurred with such acquisition.
(…)
Such concern for matching between gains and costs of SGPS, and the refusal of the accumulation of advantages, which resumes the rules issued in Law no. 32-B/2002, of 20 December, is highlighted by Luís Graça Moura: 'the legislator will have aimed at the attribution of a benefit – total exclusion from taxation of capital gains – which, however, would be "offset by the non-contribution of certain financial expenses borne", creating an environment of "neutrality" between potential gains with certain assets (certain financial fixed assets) and the liability necessary to create the conditions for obtaining such gains, that is, the liability related to the acquisition of such shareholdings. The underlying construction would be that the contraction of such loans represented, potentially, an element capable of placing the SGPS in the position of realizing capital gains that it excluded from taxation (...)' (The "new" Taxation of Income of SGPS: Reflections on the Taxation of Capital Gains in the Framework of the Principle of Legal Certainty, in Legal Journal of the Portucalense Infante D. Henrique University, no. 10, March 2003, p. 122)"." – Decision of the Constitutional Court, no. 750/2017, of 15 November 2017.
Indeed, an identical principle of correlativity underlies the general regime of fiscal deduction of expenses and losses contained in article 23, no. 1 of the IRC Code, which conditions deductibility to the causal nexus that must be found between the expense and the income subject to taxation, concluding that, in the absence of such connection, the expense will not be fiscally deductible.
Following the introduction of the legal regime referred to by the 2003 State Budget Law, the tax administration, invoking difficulties in quantifying the financial expenses borne with the acquisition of the shareholdings, issued Circular no. 7/2004, of 30 March, which defined the method of allocation of financial expenses, creating a specific and exclusive method for its distribution.
In this regard, point 7 of the referred Circular provides that: "[a]s for the method to be used for the purpose of allocating financial expenses borne for the acquisition of shareholdings, given the extreme difficulty in using, in this matter, a method of direct or specific allocation and given the possibility of manipulation that the same would allow, such allocation should be effected on the basis of a formula that takes into account the following: the remunerated liabilities of the SGPS and SCR should be imputed, firstly, to remunerated loans granted by these to the subsidiary companies and to other interest-generating investments, allocating the remainder to other assets, in particular shareholdings, proportionally to their respective cost of acquisition."
It should be noted that there is considerable case law that has already addressed the question of the conditions of validity of the interpretive dimension of article 32, no. 2 of the EBF achieved by Circular no. 7/2004, which establishes a method universally recognized as "indirect and presumptive," with regard to the allocation of financial expenses for the purpose of calculating taxable profit. By way of illustration, reference is made to the decisions of the Administrative Court of Lisbon and Porto (STA) nos. 0745/15, of 24 January, 0227/16, of 8 March 2017, 01229/15, of 31 May 2017, 0364/14, of 21 June 2017, 01292/16, of 29 November 2017, 01157/17, of 31 January 2018, and 01111/16, of 18 April 2018, the latter from the Plenary of the Tax Dispute Section.
As has been consensually stated by the STA, the administrative provision issued by the AT "cannot be considered, of itself, in isolation, without any relation to a concrete situation of a particular taxpayer, as if it were an illegal and prohibited allocation method; if there are reasons justifying its application, it may be a suitable method for effecting the respective allocation, but if such reasons are not present, it is an inadequate method of proceeding to such allocation."
It is not therefore appropriate to accept the thesis of the prima facie invalidity of the method of Circular no. 7/2004 or its incompatibility with what is provided in article 32, no. 2 of the EBF. However, the qualification of such method as presumptive implies its framing within the indirect evaluation regime which, in accordance with the system in force, is subsidiary to that of direct evaluation, with the tax administration only able to proceed to indirect evaluation in the cases and conditions expressly provided for in law, in accordance with the constitutional principle of taxation of companies fundamentally based on their actual income (cf. articles 81, no. 1, 83, 85 and 87, no. 1 b) of the General Tax Law ("LGT") and article 104, no. 2 of the Constitution of the Portuguese Republic).
Thus, and following the STA, the prevalence of the direct evaluation procedure is unequivocal, such that recourse to the formula of Circular no. 7/2004 depends on concluding, in the specific case, that it is impossible to prove and quantify directly and exactly the tax matter (article 90, no. 1 of the LGT).
In this sense, the Decision of the STA no. 0745/15, of 24 January, which states: "it not having been expressly invoked by the AT that in the specific case of the applicant it is necessary to resort to a method of indirect evaluation, which was incumbent upon it in accordance with article 74, no. 3 of the LGT, in the event of determination of tax matters by indirect methods the burden of proof of verification of the prerequisites for its application falls on the tax administration, the burden falling on the taxpayer to prove excess in the respective quantification, it cannot avail itself of the said 'administrative norm' of the Circular under analysis to maintain the self-assessment carried out in accordance with it."
The abstract illegality of the method provided for in point 7 of the referred Circular is not therefore affirmed, provided it is understood as only applicable subsidiarily, as an indirect method, in cases where it is not feasible to determine directly the amount of expenses relating to financing used in the acquisition of shareholdings, a prerequisite whose proof is the responsibility of the AT, in accordance with the rules governing the burden of proof.
As concluded in Decision no. 69/2016-T of CAAD, of 29 September 2016, "to taxpayers in relation to whom it has not been proven that they allocated financing to the acquisition of shares of capital cannot be given the legal treatment that is given to those in which such allocation has been proven, for the purpose of article 32, no. 2 of the EBF, since allocation is the necessary prerequisite of its application."
Thus, the interpretation that "ensures" legal validity of the Circular and the method of quantification (indirect) provided therein, which was applied in the present case, is one that makes its application dependent on the prior condition that direct quantification is not viable. In view of the foregoing, the concrete assessment to be undertaken below involves a successive analysis of three levels. At a first level, it is necessary to ascertain whether the financial expenses whose deductibility has been called into question are attributable, wholly or in part, to the acquisition of shareholdings by the Claimant. If so, and only in that case, one proceeds to a second level, that of direct and specific quantification of such expenses (relating to the acquisition of shareholdings). Finally, it is at the third stage, in the eventuality that the determination of the specific quantum is not possible, that the legitimate invocation of Circular no. 7/2004 and the calculation procedure provided therein takes place.
Assessment of the Specific Case
On the non-verification of the conditions for application of the indirect method provided for in point 7 of Circular no. 7/2004
The Claimant centralizes and exercises the treasury management function of the Group it heads, Group B..., in which several companies whose operational activity falls within the pharmaceutical sector are prominent. In exercising this function, it records in its accounting operations relating to collections and payments which, in fact, belong to the subsidiary companies, and receives the treasury surpluses of these, covering, when applicable, the corresponding deficits.
The procedure adopted follows the model known as cash pooling zero balance, a solution which, according to financial literature, allows for greater efficiency in managing the liquidity of groups, the use of surpluses, and better control and monitoring of the group's treasury.
In this regard, the clarifying description of the Claimant's activity contained in Arbitral Decision no. 581/2016-T, of 26 April 2017, which addressed an identical question regarding the 2011 fiscal year, is transcribed:
"(…) the group of companies dominated by A... adopts the 'cash pooling zero balance' system. This means that the treasury surpluses of the subsidiary companies are sent to the centralizing entity, which also includes all collections and payments (from customers and suppliers), by transmission of the respective credits. The centralized treasury management of a group (even if a bank is not involved in this process, whose involvement is customary, leads to economies of scale and better negotiation of conditions in operations with suppliers, customers and other entities).
That is to say: instead of each company considered, moving a smaller volume of monetary means – financing needs or treasury surpluses – obtaining individually negotiated financing conditions or application of funds, the joining (pooling) of such amounts in a centralizing entity, multiplying the resources at its disposal or the financing needs to be negotiated, produces financing or remuneration conditions for surpluses that benefit from the scale or volume factor. (It is a similar logic, though with its own contours, to that of purchasing centers, which obtain better conditions for the acquisition of goods or services based on aggregated and then negotiated volumes).
In the specific case, in light of the documentary evidence available in the case file, the determination of interest effected at the internal level of the Group with respect to said treasury operations does not imply an actual expenditure of such amounts relating to interest, given the nature of the treasury management operations of the cash pooling centralized by A…."
A substantial portion of the total financial expenses considered by the AT in the application of the Circular formula no. 7/2004 concerns precisely intra-group interest recorded as expenses by the Claimant (#69183), the value of which, in the year in question (2013), was €2,656,964.45, out of a total of financial expenses that amounted to €3,297,293.24.
The intra-group interest imputed by the Claimant to expenses in 2013 obviously derives from the cash pooling and the centralized treasury management of the group, which, when applicable, channels the surpluses of the subsidiaries to the parent company (the Claimant) and concentrates in it the payments due to them, ensuring them even in cases where these have treasury deficits.
In addition to intra-group interest, the next most significant portion, in the value of €550,770.08, relates to the use of bank credit provided by various credit institutions, under credit facility contracts (current account) used in financing punctual treasury needs in the context of the operational activity of the group, as, according to common experience, happens with a character of normality in multiple companies. Finally, three remaining items remain, one of €110,234.71, of banking services expenses, another of €24,167.34, of stamp tax on interest, and finally, a residual value of €156.66 relating to lease interest. The last one is allocated to the acquisition of the goods or equipment taken on lease, and the other two cannot but relate to the operations referred to above.
In this context, it appears reasonable to conclude that the central corporate function that the Claimant performs of centralizing treasury management for the entire Group B..., in the terms briefly described above, provides a plausible and indeed comprehensive explanation for the financial expenses borne, allowing a direct and specific allocation of their use to the operational activity of the companies in the group that generate the surpluses and, simultaneously, the cash outflows.
The AT, despite admitting and mentioning in its own inspection report that the Claimant performs such functions, does not draw consequences from the same and, after transcribing point 7 of Circular no. 7/2004, merely applies its calculation formula to the balances of various sub-accounts relating to financial expenses, not scrutinizing "how these balances are formed, their operational, financial or mixed nature, and their relationship with the form of treasury management adopted in the group," that is, it is omissive and uncritical regarding the prerequisites for application of the Circular to the specific case.
This means that the AT not only failed to effect direct allocation of the financial expenses (interest) incurred by the Claimant to the actual use by the activities conducted, use which follows with clear evidence from the factual framework contextualized above, but also failed to explain or endeavor to justify for what concrete reason it could not perform the direct evaluation, or rather, the allocation of such financial expenses to the real and effective activities or assets financed. Only in that circumstance, of impossible or infeasible allocation, could it resort to the subsidiary method that the Circular contemplates.
Thus, the necessary connection of the financial expenses incurred in 2013 to the acquisition of shareholdings is not achieved, which, it should be noted, had already been acquired 8 or 9 years previously, and equally, it is not understood why the AT "took it for granted that a certain amount of recorded financial expenses were borne with the acquisition of shares of capital, but demonstrated nothing in that regard. It did not identify the financing used for that purpose, nor the shares of capital that would have been acquired with them, completely failing in the fulfillment of its burden of proof. We can say that the AT failed in the prerequisites of taxation and in the quantification method used." (cf. Decision of the North Administrative Court of Appeal no. 00946/09.0BEPRT, of 15 January 2015).
It is appropriate to recall that the provision of article 32, no. 2 of the EBF excludes the fiscal deduction of financial expenses incurred with the acquisition of shareholdings and only these. Regardless of the type of holding, pure or mixed, as the law makes no distinction in this regard, it is a condition of incidence (or non-deduction) that such expenses be limited to those borne with financing directly related to the acquisition of shares of capital, a normative interpretation which, contrary to what is sustained by the AT, is not unconstitutional due to violation of the principle of equality in various dimensions, as recently judged by the Constitutional Court in Decision no. 750/2017, of 15 November 2017.
In view of the foregoing, it is necessary to conclude that there is illegality in the application of the indirect evaluation methodology provided for in Circular no. 7/2004, as the indispensable prerequisites for its application are not met. For that reason, the IRC and interest assessment acts are voidable due to a defect of violation of law due to error in the prerequisites.
Banking Services Expenses and Stamp Tax
Contrary to what is advocated by the Claimant, it appears that the term "financial expenses borne," contained in the definition of the normative situation of article 32, no. 2 of the EBF, encompasses banking expenses that are not interest, and likewise, the Stamp Tax due on interest charged. In addition to the fact that these are expenses qualified, from an economic and accounting perspective, as financing expenses (recorded as such in account #69 or in sub-accounts thereof), with Stamp Tax being an ancillary and inseparable expense of the financing/interest to which it relates, the ratio legis of the very exclusion of the deductibility of interest applies to them.
Given this, it is understood that this type of expense should receive the fiscal classification that is due to the financing operations and the interest to which they relate, only not being fiscally deductible if connected with the acquisition of shareholdings, which is not the case.
Specifically Regarding Intra-group Interest
According to the Claimant, the determination of interest effected between group entities did not imply a true expenditure, as the movements offset each other, not affecting the determination of the group's taxable profit.
In this regard, we follow what is stated in Arbitral Decision no. 581/2016-T: "the system [of cash pooling] by definition produces intra-group interest that is generally associated with the centralized management of treasury surpluses and deficits, and not with the acquisition of shares of capital. That is to say, companies with operational treasury surpluses that "provide" them, for that reason, to the cash pooling, receive interest, and those that have treasury deficits resort to financing via the cash pooling and pay interest. Thus, this tribunal understands that the documentary evidence submitted to the case leads to concluding that the Claimant has proven that such interest is not related to the acquisition of shareholdings and is therefore outside the scope of article 32 of the EBF.
(…)
Being financial movements that are not associated with the financing of acquisitions of shares of capital, but rather with the centralized treasury management of the group, and being the group's fiscal profit the mere algebraic sum of the individual taxable results, the values offset each other.
(…)
The Claimant shows that the correction effected by the AT is based on intragroup expenses paid to the subsidiaries (this correction ignoring the values of the same column of the table above with negative values, relating to interest received), not therefore relating to financing for the acquisition of shares of capital, but rather to the normal debit and credit in the functioning of cash pooling, whose modus operandi is documented in the company's annual report for 2011," and in the situation at hand, in the annual report for 2013 that the Claimant attached to the case file.
Barred Issues: Defects Relating to the Implementation of the Calculation Formula of Circular no. 7/2004
Since the arbitral request is well-founded due to legal error regarding the meaning and scope of article 32, no. 2 of the EBF, which prevents the renewal of the disputed act, the full protection of the Claimant's rights is ensured. In this regard, this Tribunal knew and assessed the relevant issues submitted for its consideration, not having considered those whose resolution was barred by the solution given to others.
Concluding that the Circular's formula is inapplicable to the situation under review, it is not appropriate to consider the defects relating to its determination, as well as the violation of the constitutional principles of legality and tax capacity, which were conditionally invoked in the interpretive hypothesis, which did not occur, of the application of the Circular's formula being mandatory.
Regarding the Request for Compensation for Provision of Undue Security
The Claimant petitions, as a consequence of the voidability of the assessment acts, for the condemnation of the AT to payment of compensation for the provision of undue security, in the manner in which such obligation is defined by article 53 of the LGT. However, it failed to prove the alleged tax enforcement proceeding, nor the provision of any security, which constituted its burden.
Thus, this request is dismissed, due to lack of proof of the corresponding prerequisites, without prejudice to it being able to take place in the execution of this Decision.
DECISION
In view of the foregoing, the arbitrators of this Arbitral Tribunal agree to:
Judge entirely well-founded the request for annulment of the IRC and interest assessments for the 2013 fiscal year;
Judge dismissed, as unproven, the request for condemnation of the AT to payment of compensation for the provision of undue security.
* * *
The value of the case is fixed at €581,731.84 in accordance with article 3, no. 2 of the Regulation of Costs in Tax Arbitration Proceedings ("RCPAT"), article 97-A, no. 1, subparagraph a) of the Tax Dispute Code ("CPPT") and article 306, nos. 1 and 2 of the Civil Procedure Code, the latter ex vi article 29, no. 1, subparagraph e) of the RJAT.
Court costs in the amount of €8,874.00, being €8,697.00 to be borne by the Respondent and €177.00 to be borne by the Claimant, in accordance with Table I attached to the RCPAT, and in accordance with article 12, no. 2 of the RJAT, article 4, no. 5 of the RCPAT and article 527, nos. 1 and 2 of the Civil Procedure Code, ex vi article 29, no. 1, subparagraph e) of the RJAT.
Lisbon, 19 June 2018
[Text prepared by computer, in accordance with article 131, no. 5 of the Civil Procedure Code, applicable by remission of article 29, no. 1, subparagraph e) of the RJAT]
The Arbitrators,
Alexandra Coelho Martins
Raquel Franco
Amândio Silva
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