IRC Tax Deductibility of Costs: CAAD Arbitral Decision 591/2017-T on Fiscal Corrections

ARBITRAL DECISION

They agree in Arbitral Tribunal

I – Report

1. A…, LDA., legal entity no. …, with registered office in …—…, …-…, …, …, requested the constitution of an arbitral tribunal, pursuant to the provisions of articles 2, no. 1, paragraph a), and 10 of Decree-Law no. 10/2011, of 20 January, to assess the legality of the tax assessment acts nos. 2016… and 2016…, in the amount of € 309,702.28 and € 31,936.69, relating to Corporate Income Tax (IRC), for the fiscal years 2012 and 2013, and the consequent assessment of compensatory interest no. 2016…, in the amount of € 34,528.63, following the rejection of the administrative appeal presented against these tax acts.

The arbitral request concerns corrections made by the Tax Authority following an inspection procedure that focused on expenses relating to prior years, impairment losses, payment of kilometres to employees and manager, implications on the accounting net result, tangible fixed assets recognized in sub-accounts of account 62, supplies and external services and an invoice recorded in duplicate.

The Claimant bases its request on grounds of lack of grounds and error in the legal presuppositions.

As to this first ground, the Claimant alleges, in summary, that the tax inspection report imposes corrections without demonstratively demonstrating the facts that determine them, limiting itself to mere generalities and indeterminate concepts, without identifying the origin of the entries and the reasons justifying the corrections.

Regarding the defect of violation of law, the Claimant supports its position on the following grounds.

As for expenses relating to prior years, consisting of the payment in 2012 of invoices issued in 2011, it should be understood, in accordance with the principle of specialization, that these charges are attributable to the fiscal year in which the obligation matured, whereby, such expenses not being deductible from the 2012 result, there is an excess taxation in violation of the principle of justice.

Regarding the recognition of impairment losses on the customers account in the fiscal years 2012 and 2013, the documentation submitted by the Claimant identifies the debtor customers with doubtful collection receivables, as the amount of the receivable on the date of the respective fiscal year and the maturity date of the receivable, in compliance with the provisions of no. 2 of article 36 of the IRC Code, according to which receivables of doubtful collection are considered those that "are overdue for more than six months from the date of their respective maturity and there exist objective evidence of impairment and that efforts have been made for their collection".

The payments made by the Claimant relating to trips made by the employees and its manager were duly recorded in accounts 6251 (trips and stays), 63205 (subsistence allowances) and 63211 (transport subsidy), as costs effectively borne on account of its activity, and in view of the principle of presumption of veracity of organized accounting, the burden of rebutting this presumption falls on the Tax Authority, demonstrating that the recorded facts are not true.

On the other hand, the payments relating to suppliers B…, C…, D…, E…, F…, G… cannot be understood as advances for purchases, and even if the issue was unreceipted raw materials, account would have to be taken of the fact that ownership was transferred by virtue of the contract, and should accordingly, and given the principle inherent in article 18, the expense be considered at the moment of contracting. Being thus charges assumed by the Claimant in 2012, they should be considered deductible costs in that fiscal year.

Furthermore, supplies of goods and the provision of external services, subject to corrections by the Tax Authority, should be considered as deductible expenses under article 23 of the CIRC, as these are accounting expenses borne by the company that are indispensable to the achievement of income or gains subject to tax or to the maintenance of the source of income production, not to be confused with depreciations and amortizations resulting from "losses of value associated with their use, the passage of time, technical progress or any other cause".

If not understood in this way, the impugned tax acts violate the principles of legality, capacity to contribute and taxation according to real income.

The Tax Authority, in its response, defended itself by exception, considering that, due to the untimeliness of the administrative appeal presented against the tax act relating to the fiscal year 2013, that tax act was consolidated in the legal order, and could not be the subject of a request for arbitral pronouncement, due to the passage of the corresponding period, but only of judicial challenge by means of administrative action.

With regard to challenge, the Tax Authority contends that, as at the date of closure of accounts for the fiscal year 2011, the taxable person already had knowledge of the machine maintenance expenses that occurred in the previous year and that were invoiced, these expenses could not be accepted for tax purposes in the fiscal year 2012, since, in view of the principle of specialization, interpreted in accordance with the principle of justice, only costs from prior fiscal years that do not result from voluntary and intentional omissions may be considered.

Regarding impairment losses, the Tax Authority considers that, under article 35, no. 1, paragraph a), of the CIRC, only impairment losses recorded in the same taxation period or in prior taxation periods that may be considered doubtful collection and meet the requirements defined in article 36, may be deducted for tax purposes, especially in cases where the receivables are overdue for more than six months from the date of their respective maturity and there exist objective evidence of impairment and that efforts have been made for their collection, situations which are not evident in the Claimant's accounting.

As to the payment of trips made by the Claimant's employees, the Tax Authority argues that these expenses are recorded in accounts 6251 (trips and stays), 63205 (subsistence allowances) and 63211 (transport subsidy), but without supporting documents for the respective accounting entries, the Claimant having failed to comply with paragraph f) of no. 1 of article 45 of the CIRC.

It is further concluded that the Claimant did not effect the appropriate accounting treatment in relation to purchases made from various suppliers, having not received the merchandise/raw materials, nor having recognized advances for purchases, and thereby negatively influenced the accounting net result for tax purposes.

During the fiscal year 2013, the Claimant also recorded invoices relating to the acquisition of equipment and repair of buildings as if they were supplies of goods or provision of external services when they should be understood as tangible fixed assets intended to be used in the production of goods and which could not be recorded as expenses of the fiscal year in their entirety.

The Tax Authority further contests that the assessment acts are tainted by lack of grounds or that they affront the principles of legality, capacity to contribute or taxation according to real income.

It concludes for the lack of merit of the request.

1. Following the proceedings, the meeting referred to in article 18 of the RJAT was dispensed with and the production of witness evidence.

Notified to respond regarding the matter of exception raised in the defense, the Claimant said nothing.

An order was made for notification to present supplementary arguments, a faculty which the parties did not use.

1. The request for the constitution of the arbitral tribunal was accepted by the President of CAAD and automatically notified to the Tax Authority in accordance with regulatory terms.

Pursuant to the provisions of paragraph a) of no. 2 of article 6 and paragraph b) of no. 1 of article 11 of the RJAT, as amended by article 228 of Law no. 66-B/2012, of 31 December, the Deontological Council designated as arbitrators of the collective arbitral tribunal the undersigned, who communicated acceptance of the task within the applicable period.

The parties were duly and timely notified of this designation and did not express an intention to refuse it, under the combined provisions of article 11, no. 1, paragraphs a) and b), of the RJAT and articles 6 and 7 of the Deontological Code.

Thus, in compliance with the provisions of paragraph c) of no. 1 of article 11 of the RJAT, as amended by article 228 of Law no. 66-B/2012, of 31 December, the collective arbitral tribunal was constituted on 24 January 2018.

The arbitral tribunal was duly constituted and is materially competent, in light of the provisions of articles 2, no. 1, paragraph a), and 30, no. 1, of Decree-Law no. 10/2011, of 20 January.

The parties have legal personality and capacity, are parties with standing and are represented (articles 4 and 10, no. 2, of the same decree-law and 1 of Ordinance no. 112-A/2011, of 22 March).

The proceedings do not suffer from nullities.

It is appropriate to assess and decide.

II - Grounds

Factual Matter

1. The facts relevant to the decision of the case which may be considered as established are as follows.

A) The Claimant was notified of the Corporate Income Tax assessment acts relating to amounts of € 309,702.28, relating to the fiscal year 2012, and € 31,936.69, relating to the fiscal year 2013, and of the assessment of compensatory interest in the amount of € 34,528.63.

B) The assessment notes were dated 25 July 2016 and had a payment deadline of 26 September 2016.

C) The assessment acts were issued following the external inspection procedure relating to the fiscal years 2012 and 2013, initiated by Service Order no. … and extended by Service Orders nos. … and …, commencing on 27 July 2015.

D) The Claimant filed an administrative appeal of these assessment acts on 3 January 2017, which was rejected by decision of the head of division of the Finance Directorate of …, of 17 August 2017, notified the next day.

E) The rejection decision considered the administrative appeal timely as to the 2012 assessment and untimely as to the 2013 assessment.

F) The Claimant presented a request for the constitution of an arbitral tribunal to assess the legality of the tax acts on 9 November following.

G) The additional assessment acts were based on corrections made to the taxable matter proposed by the Tax Inspection Report, as follows:

Fiscal Year 2012

Fiscal Year 2013

H) Pursuant to the said Tax Inspection Report, the Tax Authority considered that the taxable person recorded as expenses of the fiscal year in 2012 machine maintenance expenses whose invoices were issued on 30 May and 23 July 2011, in the total amount of € 7,627.98, and of which the taxable person had knowledge as at the date of closure of accounts in 2011, and which was added to the accounting net result of the fiscal year 2012.

I) In the same Report, "impairment losses" were recognized, relating to the fiscal years 2012 and 2013, in account 6511 – Customers, whose evidence is not apparent in the accounting records, and which resulted in an increase in the net result of € 245,872.21, in the fiscal year 2012, and € 274,032.98, in the fiscal year 2013.

J) Expenses were also recognized with trips of the manager, in account 6251 - trips and stays, and in account 63205 – subsistence allowances, in the fiscal year 2012, and with trips of employees, in account 63211 — transport subsidy, in the fiscal year 2013, which do not comply with the provisions of paragraph f) of no. 1 of article 45 of the CIRC and which could not be accepted as expenses for tax purposes, resulting in a global increase in net result of € 43,973.36, in the fiscal year 2012, and € 69,670.44, in the fiscal year 2013.

L) In 2012, accounting entries were made relating to advances to suppliers in cases where the merchandise/raw materials were not received, resulting in an increase to the net result in the amount of € 744,850.85, and in 2013 purchase entries were reversed that had already been considered in the previous year, resulting in an expense in the amount of € 561,378.07.

M) In the fiscal year 2013 invoices were recorded relating to the acquisition of equipment and construction works and repairs in sub-accounts of account 62 (supplies and external services) which should only be considered as fiscal year expenses in the amount corresponding to depreciation, resulting in the increase to the net result of the amount of € 77,085.98.

The Tribunal formed its conviction as to the facts established based on the documents attached to the petition and those contained in the administrative file accompanying the Tax Authority's response.

Matter of Exception

1. The Tax Authority contends that the administrative appeal filed against the tax assessment act relating to 2013 was considered untimely, the legality of the assessment act not having been assessed for that reason, whereby the appropriate procedural remedy to challenge would be judicial challenge before the state courts and not the request for the constitution of an arbitral tribunal, thereby verifying the dilatory exception that leads to absolution from the instance.

To reach this conclusion, the Tax Authority considered as the starting point for calculating the period of administrative appeal the date of the tax assessment (12 August 2016) and relies, apparently, on the provisions of article 97, no. 1, paragraph d), of the CPPT, by which judicial tax proceedings comprise the "challenge of administrative acts in tax matters that involve the assessment of the legality of the assessment act".

As results, however, from the provisions of article 70, no. 1, of the CPPT, the administrative appeal "shall be filed within 120 days counted from the facts provided for in no. 1 of article 102" and, according to that provision, one of those facts corresponds to the "end of the period for voluntary payment of tax obligations legally notified to the taxpayer" (paragraph a).

Demonstrating through the assessment note relating to the year 2013 that the deadline for payment was 26 September 2016, on the date of filing of the administrative appeal (on 3 January 2017) the said period of 120 days had not yet elapsed, and it cannot be considered that the decided case or case resolved due to lack of timely administrative challenge has been verified.

On the other hand, even if the Administration has not assessed the legality of the assessment act due to alleged untimeliness of the administrative appeal, it has been understood that judicial challenge is always available against decisions rejecting administrative appeals, regardless of whether they assessed the legality of the assessment act, basing this understanding on the provisions of article 97, no. 1, paragraph c), of the CPPT, which allows, through judicial tax proceedings, the "challenge of the total or partial rejection of administrative appeals of tax acts" (in this sense, judgment of the STA of 2 April 2009, Case no. 0125/09).

Furthermore, the subject matter of the proceedings of the request for arbitral pronouncement or judicial challenge regarding a tax assessment act, even if presented following an administrative appeal, is that tax act itself, and not the decision of the Tax Authority that has dealt with the administrative challenge, nothing preventing, therefore, the arbitrability of the dispute raised in the present proceedings in light of the provisions of article 2, no. 1, paragraph a), of the RJAT (cfr. Serena Cabrita Neto/Carla Castelo Trindade, Tax Litigation, vol. II, Coimbra, 2017, p. 434).

The invoked exception is therefore without merit.

Substantive Matter

Lack of Grounds

1. The Claimant bases the illegality of the tax assessment acts on the defect of form due to lack of grounds and defect of violation of law due to error in the legal presuppositions.

As to the defect of form, it alleges, in summary, that the Tax Authority merely presented a result without substantiating and proving the corrections made, limiting itself to the use of expressions such as "expected", "supposed", "normally" and "entries without nexus".

It has been understood that the grounds for administrative acts is a relative concept that varies according to the type of act and the circumstances of the specific case, but the grounds is only sufficient when it allows a normal recipient to appreciate the cognitive and evaluative path followed by the author of the act to make the decision, that is, when that person can know the reasons why the author of the act decided as it did and not differently, so as to be able to trigger the administrative or contentious mechanisms for challenge. In that line of orientation, an administrative act is sufficiently grounded provided that a normal recipient can become aware of the meaning of that same decision and the reasons that support it, allowing them to consciously choose between acceptance of the act or activation of legal remedies for challenge (judgment of the STA of 14 July 2008, Case no. 024/08) and of 11 September 2008, Case no. 0112/07).

In the present case, the Tax Authority, in the tax inspection report, makes a detailed analysis of the situations that were subject to the inspection procedure, describing the accounting entries and expenses that could not be accepted for tax purposes, identifying the supporting documents and the accounts in which the entries were made, and indicating with precision the amounts which, in each case, were considered to be subject to correction and effecting the legal framework through the indication of the legal rules considered to be infringed.

The Tax Authority did not have to interpret and apply any indeterminate concepts that would require greater demands in terms of grounds, and the qualification of indeterminate concepts cannot be attributed to the expressions mentioned by the Claimant, which were used punctually with a common linguistic sense and in a verbal context entirely understandable to a normal recipient. Nor did it limit itself to formulating generic, vague or conclusive considerations, instead effecting a very detailed description of the facts relevant to the proposed corrections, being entirely irrelevant, from the point of view of the grounds for the administrative act, whether the facts can or cannot be proven, since that is a question that could only give rise to an error as to the factual presuppositions.

In view of the terms in which the tax inspection report is prepared, which served as the basis for the tax assessment acts, it cannot be said in any way that the interested party was prevented from discussing the proposed solutions and rebutting the facts described or that they were even prevented from accepting or reacting procedurally against the act.

The indicated defect of form due to lack of grounds is therefore without merit.

Error in the Legal Presuppositions

Expenses Relating to Prior Years

1. The Tax Authority disregarded as an expense relating to the fiscal year 2012, the total amount of two invoices issued on 30 May 2011 and 23 July 2011, of which the Claimant was already aware as at the date of closure of accounts for the fiscal year 2011, invoking the principle arising from article 18, no. 2, of the IRC Code.

The Claimant argues that the invoices were effectively paid in March 2012 and, in accordance with the principle of specialization, the charge should be attributed to the fiscal year in which the obligation matured, and in any case, that principle must be interpreted in conjunction with the principle of justice, since the expense was effectively borne even though it should have been reported to another fiscal year.

The cited article 18 of the IRC Code, in the part that is most relevant to consider, provides as follows:

"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, regardless of their receipt or payment, in accordance with the economic periodization regime.

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 accounts of that period to which they should have been attributed they were unforeseeable or manifestly unknown."

(…).

No. 1 establishes the accounting principle of economic specialization of fiscal years, which consists in including in the tax results the income and costs corresponding to each economic year, regardless of their effective receipt or payment. No. 2 allows that income or costs relating to prior fiscal years are attributable to another fiscal year only when on the date of closure of accounts of that year were unforeseeable or manifestly unknown.

Which means that the cost or income is tendentially associated with the moment of issuance of the document.

It is an accounting criterion that reflects the principle of annual periodization of tax.

However, there is no reason to interpret that principle in a strictly literal sense when the attribution of the income or cost to a fiscal year different from that to which it related does not result in prejudice to the National Treasury and the correction may translate into a tax increase for the taxpayer.

As is stated in the judgment of the STA of 13 October 1996 (Case no. 20404), without calling into question the tax relevance of the principle of specialization of fiscal years, it is permissible to attribute costs to prior fiscal years when this has not resulted from voluntary and intentional omissions, with a view to effecting a transfer of results between fiscal years, as is the case when a period of exemption is about to end or begin, when there is an interest in reducing losses of a certain fiscal year or obtaining benefits from its carryforward and when it is intended to reduce the amount of taxable profits.

And that interpretative sense can be adopted – as was also considered in the judgment of the STA of 5 February 2003 (Case no. 01648/02) - by means of the articulation of the principle of specialization of fiscal years with the principle of justice to which the Tax Authority is equally bound (article 55 of the LGT).

In the case, the correction to the accounting net result of the fiscal year 2012 of the amount corresponding to expenses that should have been attributed to the prior fiscal year prevents, in practice, the taxable person from deducting expenses that can be considered as necessary for the generation of income and leads to an unacceptable result from the point of view of tax justice and the principle of capacity to contribute.

It appears to be, in these terms, to accept the reasoning of the Claimant.

Impairment Losses

1. The Tax Authority further disregarded as deductible expenses for tax purposes the impairment losses relating to the fiscal years 2012 and 2013, on the grounds that they do not meet the requirements of article 36, 1, paragraph c), of the IRC Code.

It alleges that, following information requested from the Claimant in the course of the inspection procedure, customers with doubtful collection debts were identified, the total amounts owed on the maturity date and the percentage of the constitution of the impairment loss, but the invoices to which the receivables relate were not identified, nor were objective evidence of impairment presented nor evidence of the steps taken for collection of the receivables.

Article 35, no. 1, paragraph a), of the IRC Code, as worded at the date of the facts, provides that the following may be deducted for tax purposes as impairment losses recorded in the same taxation period or prior taxation periods: "related to receivables resulting from normal activity that, at the end of the taxation period, may be considered doubtful collection and are evidenced as such in the accounting".

For the purposes of determining the impairment losses provided for in that provision, the subsequent article 36, in the part that is most relevant to consider, provided as follows:

"1 - For IRC purposes, receivables of doubtful collection are those in which the risk of non-collectability is duly justified, which occurs in the following cases:

a) When the debtor has a pending enforcement proceeding, insolvency proceedings, special revitalization proceedings or extrajudicial company recovery procedures (SIREVE);

b) When the receivables have been claimed judicially or in arbitral tribunal;

c) When the receivables are overdue for more than 6 months from the date of their respective maturity and there exist objective evidence of impairment and that steps have been taken for their collection.

(…)

1. The following are not considered receivables of doubtful collection:

a) Receivables against the State, autonomous regions, local authorities and public entities in general or receivables in which these have provided a guarantee;

b) Receivables covered by insurance;

c) Receivables against natural or legal persons that hold, directly or indirectly, more than 10% of the capital;

d) Participations held, directly or indirectly, in more than 10% of the capital".

In the present case, it is essentially a matter of the criterion of non-collectability established in paragraph c) of no. 1 of article 36, by which it is necessary to prove that there are receivables overdue for more than 6 months and there exist objective evidence of impairment and that steps have been taken for their collection, which brings the question back to a question of burden of proof.

It is also important to bear in mind, in this context, the material evidence rules arising from articles 74 and 75 of the LGT. It is the responsibility of the Tax Authority to prove the facts constituting the right to assess or the practice of the act of correction of the taxable matter, while the challenger only bears the burden of proof of the facts that are preventive, modificative or extinctive of that right, and not that of proving the facts constituting the claim for annulment of the impugned act, and the requirement of the burden of proof regarding the impugning claim would translate, in practice, into the recognition of a presumption of the legality of the tax act (article 74, no. 1). It is further the case that the data and calculations recorded in the accounting of the taxable person are presumed to be true and only when the accounting contains omissions, errors, inaccuracies or founded indications that do not reflect or prevent knowledge of the taxable matter does that presumption cease, implying that the burden of proof of the facts contained in the account falls on the taxable person (article 75, no. 1, and no. 2, paragraph a)).

As none of the situations justifying the cessation of the presumption of veracity of the taxpayer's declaration was invoked, the accounting entries contained in the account should be taken as true. The Tax Authority, to proceed to the correction of the taxable matter, in this particular matter, based itself solely on the non-presentation of certain elements that were requested from the subject in the course of the inspection procedure, such as the invoices to which the receivables relate and the evidence of impairment – presupposing the indication of the payment periods and of notice – and the demonstration of the means used by the taxable person to claim payment.

But that was not a proof that it was the responsibility of the taxpayer to make, since it was the Authority that intended to demonstrate that the interested party failed to meet the requirements on which the deduction for tax purposes of impairment losses depended.

The argument is equally well-founded in this respect.

Payment of Kilometres to Employees and Managers

1. The Tax Authority further proceeded to correct the taxable income by considering non-deductible for tax purposes, under article 45, no. 1, paragraph f), charges and subsistence allowances recorded as compensation for trips by employees and managers in the service of the employing entity, relating to the fiscal years 2012 and 2013.

As results from the inspection report, the Administration requested the taxpayer, in the course of the inspection procedure, to present the schedule signed by the worker justifying the trips, including regarding the purpose of the trip and its indispensability for the achievement of the income, the identification of the vehicle and proof of the charge to the customer, if applicable.

Analyzing the elements provided by the taxable person, following that instructory measure, the Administration considers that the schedules presented identify the worker, as well as the kilometres traveled and the reason for the trip, but do not indicate in all cases the vehicle registration and present inconsistencies regarding the kilometres traveled and the destination of the trip. In other situations, the schedules do not indicate the purpose of the trip and its justification, nor the information on whether the trip was charged to the customer, in addition to which they are not signed by the worker or manager.

The rule that justifies the non-deductibility of the costs is that of article 45, no. 1, paragraph f), of the IRC Code, which provides as follows:

"1 - The following charges are not deductible for the purposes of determining taxable profit, even when recorded as expenses of the taxation period:

(…)

h) Subsistence allowances and charges for compensation for trips in the worker's own vehicle, in the service of the employing entity, not charged to customers, recorded under any heading, whenever the employing entity does not possess, for each payment made, a schedule through which it is possible to control the trips to which such charges refer, namely the respective places, time spent, purpose and, in the case of trips in the worker's own vehicle, identification of the vehicle and of its respective owner, as well as the number of kilometres traveled, except insofar as there is taxation under IRS in the sphere of the respective beneficiary;

(…)".

Unlike what occurs regarding the previous question, the deductibility for tax purposes of allowances and charges for compensation for trips depends on the demonstration by accounting, on the charge of the taxable person, by means of the preparation of a schedule containing the information elements mentioned in the said paragraph h) of no. 1 of article 45.

In the case, the Tax Authority points to the schedule presented by the Claimant omissions and inaccuracies that call into question, in light of the provisions of the cited article 75, no. 2, of the CPPA, the presumption of veracity of the statements regarding charges with trips. Note that what is at issue is not the burden of proof that the trips occurred and that they had a business purpose, but the very fulfillment by the taxable person of the requirements on which the deductibility of the charges depends.

No doubt that, had the taxpayer properly recorded in the accounting schedule the data relating to the trips, the Tax Authority was not prevented, even so, from demonstrating that one or some of those trips did not occur or do not correspond to the distances that were considered or do not fit in the commercial process, and in that circumstance, the burden of proof would be incumbent on the Tax Authority in accordance with the general criteria of material evidence law.

The question arises, however, at another level which is that of the very failure by the taxable person to meet the accounting requirements on which the law makes the deductibility of the charges depend.

The tax inspection report notes that the schedules sent by the taxable person, and intended to demonstrate the fulfillment of those requirements, do not always identify the vehicle and, in no case, are signed by the worker or by management or contain the information on whether the recorded value was charged to a customer. For that very reason, the Tax Authority concluded that the trips cannot be accepted as an expense for tax purposes under the provisions of article 45, no. 1, paragraph f), of the IRC Code.

In the initial petition, the Claimant does not question the legal requirement, nor does it discuss the grounds invoked by the Administration for the non-deduction of the charges, and only alleges - in addition to other considerations regarding the burden of proof, which are not applicable to the case – that the expenses were indispensable for the achievement of the income subject to tax. However, as was clarified, the question does not arise at that level and what it is incumbent to ascertain is not whether the expenses were incurred in the business interest but whether, regarding them, and taking into account their specific nature, the accounting control parameters especially required may be considered to be met.

Certainly the inspection report also points out certain inconsistencies regarding trips recorded in the schedules presented, which could shift the question to the burden of proof regarding the actual existence of the facts. However, it does not appear that those considerations are sufficient to put in doubt the realization of the trips in the terms described by the taxable person. And, in any case, the decisive aspect lies in the failure to comply with the said provision of article 45, no. 1, paragraph f), of the IRC Code.

It is necessary to conclude, in the terms set out above, for the lack of merit of this segment of the challenge.

Analysis of Account 60 – Implications on the Accounting Net Result

1. The Tax Authority further determined the correction of entries as costs, in the fiscal year 2012, of amounts corresponding to the acquisition of goods that were not received and should have been recognized as advances to suppliers or advances for purchases and which, in this way, negatively influenced the accounting net result relating to that fiscal year.

The Claimant argues that even if the raw materials had not been received, account would have to be taken of the transfer of ownership by virtue of the contract, in view of the principle of periodization of taxable profit, according to the understanding that expenses incurred in a given economic fiscal year are tax-deductible regardless of payment.

The fact is that, in view of the elements on the record, there is no evidence that invoices have been issued relating to those amounts and that the effective transmission of goods has occurred during the course of the fiscal year 2012. And in that sense the Inspection Report points when it notes that the Claimant, in January 2013, came to reverse accounting the debtor balance of various suppliers by not recording in sub-account 31- purchases the acquisitions of merchandise or raw materials made during the fiscal year 2013. Thus it is understood that the Tax Authority had determined an increase in the net result in 2012 in the amount of € 744,850.85, relating to advances to suppliers and, simultaneously, admitted as a tax cost relating to the year 2013 the amount of € 561,378.07 relating to purchases effectively made during that year.

Recall that according to the principle of annual periodization arising from the transcribed rule of article 18 of the IRC Code, only expenses that have been recorded in the year in which they were incurred, regardless of their effective payment, are tax-deductible, which presupposes that the cost is associated with the moment of issuance of the expense document.

Having there been no issuance of invoices by the supplier, nor is the transmission of goods proven, it is to be understood that the invoked principle of annual periodization has not been observed.

Tangible Fixed Assets

1. The Tax Authority determined an increase in the net result for 2013 of the amount of € 77,085.98 by considering that the acquisition of equipment, the realization of construction works and repairs and the acquisition of goods that should be considered as tangible fixed assets could not be deducted in their entirety, but as depreciable or amortizable items, according to the regime of article 30 of the IRC Code and Regulatory Decree no. 25/2009, of 14 September.

The Claimant essentially argues that the expenses in question are indispensable for the achievement of the income or gains subject to tax and for the maintenance of the source of income production and that deductibility under depreciation or amortization could only take place when the elements of the company's fixed assets suffer losses of value resulting from their use, the passage of time, technical progress or any other cause.

This is the question that must now be clarified.

According to the provisions of article 29 of the IRC Code, in force at the date of the facts, "depreciations and amortizations of elements of assets subject to deterioration are accepted as expenses, such being considered tangible fixed assets, intangible assets, biological assets that are not consumable and investment properties recorded at historical cost which, systematically, suffer losses of value resulting from their use or the passage of time" (no. 1). Further according to no. 3, as a rule, "the elements of assets are only considered subject to deterioration after they come into operation or use".

As tangible fixed assets, to which no. 1 refers, should be understood those that are held for use in the production or supply of goods or services, for lease or for administrative purposes and are expected to be used for more than one period.

As a general principle, it should be understood that assets subject to deterioration are those that, systematically, suffer losses of value resulting from their use or the passage of time, and may be included in the category of intangible fixed assets, for that purpose, the acquisition of equipment, repairs and improvements and betterments that may be recognized as elements of assets.

The assets identified in the Tax Inspection Report fall within any of those situations. It cannot fail to be recognized that basic equipment such as a welding machine and a washing machine, applied in the normal activity of the company, are subject to depreciation as a result of their continued use. And even if it were considered, given the corporate purpose of the company, that the machines could be intended for resale or any other purpose, still there could not be place for the amortization of the total acquisition value as an expense of the company tax-deductible. The installation of a gate, as well as the betterments resulting from the execution of repair works, are equally subject to losses of value through use or the passage of time, and what may be accepted as a tax expense in each taxation period is the annual share of depreciation or amortization and not its full cost.

The Claimant understands, however, that any of those expenses should be qualified as a cost for the purposes of article 23 of the IRC Code, insofar as it is an expense borne by the company that is indispensable (using the concept of deductible cost legally provided at the time) to the achievement of taxable income and that, in this way, contributes negatively to the formation of profit.

But that is not so.

The elements of fixed assets constitute the tendentially permanent part of the company's assets and are acquired or produced to serve as an instrument to its normal activity and only when they are subject to deterioration through wear or the passage of time do they give rise to an expense that is tax-deductible by the gradual loss of value.

The acquisition of an asset, recorded in the accounting balance at the value of acquisition, fully compensates for the disbursement made, and for that reason does not have to be considered as a tax-deductible expense. It is the very acquisition of the asset that is regarded as compensation for the business expense, being distinguished from other expenses that do not have immediate productivity, and are more directly related to the achievement of profits, such as those listed in article 23 of the IRC Code (cfr. Saldanha Sanches, Manual of Tax Law, 3rd edition, Coimbra, p. 397-398).

As is not at issue, in the situation of the case, a tax-deductible cost according to the provisions of article 23 of the IRC Code, but expenses resulting from the depreciation or amortization of elements of assets, it is evident that deduction could only be effected by way of this legal regime, which leads to the lack of merit of the claim submitted by the Claimant.

Constitutional Issues

1. The Claimant further invokes, on a subsidiary basis, the violation of the constitutional principles of tax legality, capacity to contribute and taxation according to real income.

The principle of tax legality, which arises essentially from the provisions of article 103, nos. 2 and 3, of the Constitution, presupposes the formal requirement of parliamentary legal reserve in tax matters and the requirement of typicality and determinability of the tax law, from which it follows that the discretion of the administration in the specification of the essential elements of taxes should be limited, as well as the use of indeterminate concepts.

As a presupposition and criterion of taxation, the principle of capacity to contribute is associated with the general idea of equality, and aims to assess the existence and maintenance of an effective connection between the tax obligation and the economic presupposition that is the object of the tax, so as to ensure an appropriate criterion for the distribution of taxes, excluding situations of inequality or lacking rational foundation (cfr. judgments of the Constitutional Court nos. 306/2010 and 695/2014).

Taxation according to real profit presupposes that the determination of taxable profit is made in accordance with the company's accounting, based on the documentation and verification of the income and costs of the taxable person, and therefore requires a reliable system of information on business results. Not being possible to determine the actual income of the company through accounting methods, the basis of taxation will have to be defined, not through the profits actually achieved, but through the profits presumably realized, thus understanding that the constitutional rule specifies that taxation is fundamentally based on its real income (in this sense, Gomes Canotilho/Vital Moreira, Annotated Constitution of the Portuguese Republic, vol. I, 4th edition, Coimbra, p. 1100).

On the other hand, taxation according to real profit does not prevent the Tax Authority from making administrative corrections to the declaration of the taxable person that may lead to the disregard of costs proven as tax costs and to the consequent alteration of the quantification of taxable profit (judgment of the Constitutional Court no. 753/2014).

In the circumstances of the case, there is no reason to see how the IRC assessment, insofar as it remains unfavorable to the Claimant, violates any of the constitutional principles mentioned.

As far as the payment of kilometres to workers and managers is concerned, the disregard for tax purposes of the expenses incurred is due only to the fact that the taxable person did not meet the burden of accounting demonstration that results directly from the provisions of article 45, no. 1, paragraph f), of the IRC Code, an omission which the taxpayer did not remedy even after being invited by the Tax Authority to present the schedules with the information that became necessary.

As for the correction of entries as tax costs of amounts corresponding to the acquisition of goods that were not received, that is also a consequence of the failure by the interested party to comply with the principle of periodization or specialization of fiscal years referred to in article 18 of the IRC Code, which requires that only expenses that have been recorded in the year in which they were incurred be tax-deductible.

Also in relation to the acquisition of equipment and the realization of repair works and betterments, the disregard of the full cost for tax purposes has to do with the inappropriate qualification of those expenses as a deductible cost under the provisions of article 23 of the IRC Code, when it comes to tangible fixed assets that could only be deducted as depreciable or amortizable items, according to the regime of article 30 of the IRC Code and Regulatory Decree no. 25/2009, of 14 September.

It is not therefore the case – as becomes evident – a violation of constitutional principles, but solely the failure by the taxable person to comply with the legal provisions that govern, according to general criteria, the deductibility of expenses for the purposes of determining the taxable matter.

III – Decision

It is decided as follows:

a) To find the request for arbitral pronouncement well-founded and to annul the IRC assessments nos. 2016…, in the total amount of € 253,500.19, relating to the fiscal year 2012, the assessment no. 2016…, in the total amount of € 274,032.98, relating to the fiscal year 2013, and the assessment of compensatory interest no. 2016…, as to the corresponding part;

b) To find the request for arbitral pronouncement without merit as to the IRC assessments nos. 2016…, in the total amount of € 788,824.21, relating to the fiscal year 2012, and assessment no. 2016…, in the total amount of € 146,756.42, relating to the fiscal year 2013;

c) In accordance therewith, to partially annul the decision of the head of division of the Finance Directorate of…, of 17 August 2017, which rejected the administrative appeal filed against the assessment acts.

Value of the Case

The Claimant indicated as the value of the case the amount of € 376,167.60, which was not contested by the Respondent, and corresponds to the value of the assessment that was intended to be challenged (article 97, no. 1, paragraph a), of the CPPT).

Costs

Pursuant to articles 12, no. 2, and 24, no. 4, of the RJAT, and 3, no. 2, of the Regulation of Costs in Tax Arbitration Proceedings and Table I attached to that Regulation, the amount of costs is fixed at € 6,426.00, which is the responsibility of the Claimant and the Respondent, in the proportion of 2/5 and 3/5, respectively.

Notify.

Lisbon, 11 October 2018

President of the Arbitral Tribunal

Carlos Fernandes Cadilha

Arbitrator

Maria do Rosário Anjos

Arbitrator

Cristiana Leitão Campos