CAAD 60/2017-T: Can SIFIDE II Tax Credits Be Deducted From IRC Autonomous Taxation?

ARBITRAL DECISION

I. REPORT:

A…, S.A., a company with registered office at …, nº…, …, …-… Algés, holder of the unique registration number and identification number of legal person …, hereinafter simply referred to as the Claimant, filed a request for the constitution of an arbitral tribunal in tax matters and a request for an arbitral ruling, pursuant to the provisions of subparagraph a) of paragraph 1 of Article 2 and subparagraph a) of paragraph 1 of Article 10, both of Decree-Law no. 10/2011, of 20 January (Legal Regime of Arbitration in Tax Matters, hereinafter abbreviated as RJAT), petitioning for a declaration of illegality of the dismissal of the gracious complaint filed regarding the self-assessment of Corporate Income Tax (IRC) for the tax year 2013 and consequent partial declaration of illegality of the respective self-assessment, in respect of the amount of autonomous taxation rates in IRC of €94,609.68, as well as the condemnation of the Tax Authority to reimburse the Claimant for the tax paid and corresponding compensatory interest.

Subsidiarily, in the event that it is determined that Article 90 of the CIRC (Corporate Income Tax Code) is not applicable to autonomous taxation, the Claimant also petitioned for a declaration of illegality of the assessment of autonomous taxation due to the absence of legal basis for its implementation, with the consequent reimbursement of the respective amount to the Claimant and payment of corresponding compensatory interest.

To substantiate its request, the Claimant alleges, in summary:

a) On 29/05/2014, it filed Form 22 IRC tax return for 2013, having determined an amount of autonomous taxation in IRC in the amount of €94,609.68;

b) In calculating the tax resulting from the application of autonomous taxation rates in IRC, the computer system does not permit the entry of the value relating to autonomous taxation rates in IRC deducted from the amounts of tax benefits recognized to the company under SIFIDE II, in the form of a tax credit deductible from IRC collection;

c) The amount of SIFIDE II recognized to the Claimant for use at the end of the 2013 tax year amounted to €5,237,839.35, whereby the Claimant has IRC credits for offset against its collection in an amount far superior to the collection of autonomous taxation in IRC in the 2013 tax year;

d) The taxable profit of the Claimant was not determined by indirect methods;

e) In the years relevant for the purpose of assessing the issue in question in the present proceedings, the Claimant's tax and contribution situation was in order;

f) Autonomous taxation in IRC is IRC, and the rules for IRC assessment contained in Article 90 of the CIRC apply to it;

g) Therefore, there is no reason why the tax benefit recognized to the company under SIFIDE II should not be deducted from the part of IRC collection produced by autonomous taxation rates in IRC;

h) The provision contained in the second part of Article 88, paragraph 21 of the CIRC, introduced by Law no. 7-A/2016, of 30 March, does not have a true interpretative nature;

i) Even if this provision is understood to have an interpretative nature, it cannot be applied to the case sub judice, as such application would constitute recognition of retroactive effect to tax law, in manifest contradiction with Article 103, paragraph 3 of the CRP (Portuguese Constitution).

The Claimant attached 11 documents and did not call any witnesses.

In the request for arbitral ruling, the Claimant elected not to appoint an arbitrator, whereby, pursuant to Article 6, paragraph 2, subparagraph a) of the RJAT, the signatories were appointed by the Deontological Council of the Administrative Arbitration Centre, with the appointment being accepted in accordance with legal provisions.

The arbitral tribunal was constituted on 28 March 2017.

Notified in accordance with Article 17 of the RJAT, the Respondent filed its answer, alleging, in summary, the following:

a) The autonomous character of autonomous taxation requires, in certain fields, the departure from or adaptation of the general rules applicable to IRC;

b) Being the determination of the respective collections made in a different manner, there being not a single IRC assessment but rather two types of calculations, that is, two distinct calculations;

c) The SIFIDE II regime, when referring to the amount determined in accordance with Article 90 of the CIRC and up to its limit, is referring to IRC collection proper, for whose determination autonomous taxation does not contribute, which do not enter into the determination of either taxable profit or taxable matter;

d) This was precisely clarified by the interpretative nature conferred by Article 135 of Law no. 7-A/2016, of 30 March, to the provision contained in paragraph 21 of Article 88 of the CIRC;

e) Any interpretation that does not apply the provision contained in Article 133 of Budget Law 2016, which added paragraph 21 to Article 88 of the CIRC, with the effects provided in Article 135 of that law, will be materially unconstitutional due to violation of the principles of legality, separation of powers, protection of legitimate expectations, and equality, provided in Articles 103, paragraph 2, 2 and 13, all of the CRP.

The Respondent attached a copy of the administrative file, did not attach any documents, and did not call any witnesses.

Given the position assumed by the parties and the absence of any need for additional production of evidence, the meeting referred to in Article 18 of the RJAT was dispensed with, and the parties were notified to submit, within a concurrent period of 15 days, written arguments on matters of fact and law, with both parties submitting arguments within the set period.

II. PROCEDURAL SANITATION:

The Arbitral Tribunal was regularly constituted and is materially competent.

The proceedings do not suffer from defects that affect their validity.

The parties have legal standing and capacity and are legitimate, with no defects of representation.

There are no nullities, exceptions, or preliminary questions that prevent the tribunal from ruling on the merits, and there are none that the tribunal is required to address ex officio.

III. ISSUES TO BE DECIDED:

Given the positions assumed by the Parties, the issue to be decided in the present proceedings is reduced to determining whether the tax credits recognized to the Claimant under SIFIDE II may be deducted from the collection produced by autonomous taxation, in the part in which they cannot be deducted from the remaining IRC collection.

IV. FACTUAL FINDINGS:

a. Proven Facts

Relevant to the decision to be rendered in the present proceedings, the following facts are established as proven:

1. The Claimant filed, on 29/05/2014, Form 22 IRC tax return for the 2013 tax year, having determined an amount of autonomous taxation of €94,609.68;

2. In the 2013 tax year, the Claimant held SIFIDE II credits available for use in the amount of €5,237,839.35;

3. The Claimant filed a gracious complaint against the self-assessment of IRC for the 2013 tax year, in accordance with the terms and within the time period provided in Article 131 of the Code of Tax Procedure and Process (CPPT);

4. By official communication dated 17/10/2016, the Claimant was notified of the decision to dismiss the gracious complaint filed;

5. The taxable profit of the Claimant for the 2013 tax year was not determined by indirect methods;

6. In the years relevant for the purpose of assessing the issue in question in the present proceedings, the Claimant's tax and contribution situation was in order;

7. The request for constitution of the arbitral tribunal in tax matters and for arbitral ruling was filed on 16 January 2017.

b. Unproven Facts

No other facts of interest to the proceedings were proven.

c. Basis for the Factual Findings

The conviction regarding the facts established as proven was formed on the basis of documentary evidence attached to the file, whose conformity with reality was not contested, as well as on the basis of allegations that were not impugned.

V. LAW:

Having established the factual findings, it is now necessary, by reference to them, to determine the applicable law.

In 2013, the System of Tax Incentives for Research and Development in Business Activities II, abbreviated as SIFIDE II, approved by Law no. 55-A/2010, of 31 December, and amended by Article 163 of Law no. 64-B/2011, of 30 December, was in effect.

Pursuant to Article 4 of this statute, "IRC taxpayers resident in Portuguese territory who carry out, as their principal activity, an agricultural, industrial, commercial or service activity, and non-residents with a permanent establishment in that territory may deduct from the amount determined in accordance with Article 90 of the Corporate Income Tax Code, and up to its limit, the value corresponding to research and development expenses, in the part that has not been the subject of financial assistance from the State on a non-refundable basis, incurred in the tax periods from 1 January 2011 to 31 December 2015, at a double rate: (…)".

For its part, Article 5 of the same statute prescribes, as cumulative requirements for the possibility of the deduction provided in the preceding article:

a) That the taxable profit of IRC taxpayers not be determined by indirect methods;

b) That IRC taxpayers are not debtors to the State or Social Security of any taxes or contributions, or have their payment duly secured.

In the present case, it was proven that the taxable profit of the Claimant was not determined by indirect methods and that it is not a debtor to the State or Social Security of any taxes or contributions – see proven facts 5 and 6 – whereby there is no doubt that this company meets the requirements provided in Article 5 of the cited Law.

Indeed, the Respondent did not even question the fulfillment of these assumptions by the Claimant.

The issue concerns only the possibility of deducting the benefits recognized to the Claimant under SIFIDE II from the collection produced by autonomous taxation.

The Claimant defends this possibility, alleging, in summary, that autonomous taxation rates in IRC are IRC, being determined in accordance with Article 90 of the CIRC, whereby no foundation exists for the tax benefits resulting from SIFIDE II not to be deductible from the collection produced by autonomous taxation.

For its part, the Respondent argues that the autonomous character of autonomous taxation requires, in certain fields, the departure from or adaptation of the general rules applicable to IRC, with the determination of the respective collections being effected differently.

Now, as to the nature of autonomous taxation in IRC, there is no longer any doubt today that the tax collected on the basis of these has the nature of IRC, which is accepted in a form, we believe, overwhelmingly, both by doctrine and by case law, including arbitral case law.

This is confirmed, moreover, by the wording of Articles 12 and 23-A, paragraph 1, subparagraph a) of the CIRC, the latter introduced by Law no. 2/2014, of 16 January.

But for an IRC taxpayer to be able to deduct from the collection produced by autonomous taxation rates in IRC the credit that has been recognized to it under SIFIDE II, it is necessary that the IRC resulting from such autonomous taxation be determined in accordance with Article 90 of the CIRC, as expressly follows from Article 4 of the Law that instituted SIFIDE II.

The manner and procedure for the assessment of IRC are provided in Article 90 of the CIRC, which regulates this matter.

The cited provision does not distinguish, for this purpose, the procedure and manner of assessment of IRC resulting from autonomous taxation from the remainder of IRC, merely indicating the manner and procedure for assessment of IRC.

On the other hand, reviewing the CIRC, no other provision is found that provides a specific manner and procedure for assessment of autonomous taxation, with the only provisions of the CIRC specifically relating to autonomous taxation not being inserted in the chapter relating to assessment of the respective tax.

Absent any specific procedure for assessment of IRC from autonomous taxation, these must necessarily be determined and assessed in accordance with Article 90 of the CIRC, with the autonomy of autonomous taxation being reduced only to the applicable rates and the taxable matter.

Moreover, although the Respondent argues that the assessment of autonomous taxation is effected differently, it does not specify in what manner this assessment is made, which is symptomatic of the non-existence of any difference in regimes.

The Respondent also invokes, in this regard, correctly, that for the determination of the collection resulting from autonomous taxation and for determination of the collection resulting from the remainder of IRC, two distinct calculations are made.

This is so, as is clear to see, because autonomous taxation rates are different from those of the remainder of IRC. Indeed, among the autonomous taxation rates themselves there are distinct rates, which does not interfere with their classification as autonomous taxation.

But the existence of this difference and the need to make two or more distinct calculations does not determine that their determination is made in a different manner.

The determination is made in exactly the same manner, in the same assessment, although distinct calculations are made.

Any other interpretation would lead to the existence of a gap in the law, which could not be filled, given the fact that it concerns tax law, covered by the reservation of law of the Parliament of the Portuguese Republic, which would determine the illegality of the assessment of autonomous taxation, due to violation of Article 103, paragraph 3 of the CRP and Article 8, paragraph 2, subparagraph a) of the General Tax Law (LGT).

On the other hand, since it does not result expressly from Article 4 of SIFIDE II that it does not apply to IRC collection produced by autonomous taxation, its exclusion could only occur through restrictive interpretation of this norm.

However, it cannot be overlooked that SIFIDE II is a tax benefit, and pursuant to Article 2, paragraph 1 of the Tax Benefit Statute (EBF), the norms that create tax benefits have an exceptional nature.

Having an exceptional nature, their interpretation should be made, in the absence of a special rule, in their precise terms, and these norms cannot be interpreted in a restrictive manner.

It should not be said that the possibility of deducting tax benefits from the collection produced by autonomous taxation has the effect of neutralizing the very reason for being of these taxation rates, that is, to discourage certain behaviors of taxpayers aimed at reducing tax revenue through the reduction of taxable profit.

This is because, as argued in the arbitral judgment rendered in case 536/2016-T, which we adopt, "the discouragement of these behaviors is justified only by concerns for the protection of tax revenue, and the tax benefits granted are, by definition, 'measures of an exceptional character instituted for the protection of relevant extra-fiscal public interests that are superior to those of the taxation itself that prevents them' (Article 2, paragraph 1, of the EBF)."

Now, as stated in the indicated decision, in the case of tax benefits instituted by SIFIDE II, "the reasons of an extra-fiscal nature that justify their override of tax revenues are, in the legislative perspective, of enormous importance, as can be inferred from the reasoning in the Report of the State Budget for 2011 (…)".

Such legislative importance and consequent necessity for the override of tax benefits under SIFIDE II over tax revenues are confirmed by the fact that the CIRC itself excludes, in Article 92, paragraph 2 of the CIRC, this specific benefit from the general limitation to the relevance of tax benefits in IRC, provided in paragraph 1 of that same article.

From which it must necessarily be concluded that the tax credits recognized to the Claimant under SIFIDE II may be deducted from the collection produced by autonomous taxation.

This was the understanding predominantly defended by the case law.

However, the issue gained new contours with the publication of Law no. 7-A/2016, of 30 March.

This is because the cited law added to Article 88 of the CIRC paragraph 21, with an interpretative character conferred by the legislator, with the following wording:

"The assessment of autonomous taxation in IRC is effected in accordance with the terms provided in Article 89 and is based on the values and rates that result from the provisions in the preceding paragraphs, with no deductions being made to the total amount determined."

With the introduction of this provision, the Respondent argues, the doubts previously existing were resolved, since, according to its allegation, with this new paragraph the possibility of making any deductions to the amount determined under autonomous taxation was definitively ruled out, here including credits resulting from SIFIDE II.

However, the thesis defended by the Respondent is without merit, specifically with regard to the impossibility of deducting credits resulting from SIFIDE II from IRC produced by autonomous taxation.

This is because one cannot overlook that the CIRC is a general law, whereas the law that instituted SIFIDE II is a special law.

Now, as results from Article 7, paragraph 3 of the Civil Code, "the general law does not repeal the special law."

This would not be otherwise except if, as stated in Article 7, paragraph 3 cited, there were an "unequivocal intention of the legislator" to the contrary.

Having analyzed the content of the new provision contained in paragraph 21 of Article 88 of the CIRC and its preparatory works, no "unequivocal intention of the legislator" is found therein to alter the provision contained in Article 4 of the law that instituted SIFIDE II.

And if, in fact, such intention existed, it is certain that the legislator would not have failed to make express reference to it.

Finding no "unequivocal intention of the legislator" with the addition of paragraph 21 to Article 88 of the CIRC to alter the provision contained in Article 4 of the law that instituted SIFIDE II, Article 4 of this law could never be repealed by the provision contained in paragraph 21 of Article 88 of the CIRC.

In any case, even if it were understood that this general norm did in fact repeal the special norm contained in Article 4 of the law that instituted SIFIDE II, thus making it no longer possible to deduct from IRC produced by autonomous taxation the tax benefits resulting from SIFIDE II, as we shall see, this norm cannot be applied to facts that occurred before its entry into force, as is the case in the proceedings sub judice.

This, note well, notwithstanding the interpretative nature conferred by the legislator to the provision contained in Article 88, paragraph 21 of the CIRC.

This issue came to be assessed in a recent judgment rendered by the Constitutional Court, which, although relating to the impossibility of deducting from the amount of autonomous taxation levied in a given year under IRC the values paid as special payments on account in that same year, has full application here.

In the indicated judgment, the Constitutional Court held unconstitutional, due to violation of the prohibition on the creation of retroactive taxes established in Article 103, paragraph 3 of the CRP, the provision of Article 135 of Law no. 7-A/2016, of 30 March, insofar as, due to the effect of the merely interpretative character attributed to it, it determines that the provision of Article 88, paragraph 21, second part, of the CIRC, according to which, from the total amount resulting from autonomous taxation levied in a given year under IRC, the values paid as special payments on account in that same year cannot be deducted, applies to tax years prior to 2016.

As argued in this judgment, the legislator can, "in the exercise of its own powers, alter or clarify the meaning of a prior legal norm and, by way of this, determine a possible correction or modification of the case law relating to such norm. The concept of interpretative law precisely embraces this possibility. However, in doing so, the legislator must act within the framework of the constitutional order, respecting the constitutional limits resulting from the principle of legal certainty and the protection of legitimate expectations regarding substantial retroactivity.

Moreover, the legislator cannot exceed such limits or neutralize or empty the corresponding power of review of the courts provided in Article 204 of the Constitution, through the assertion, as the formal author, that the legal norm approved by it has merely a declarative or clarifying scope and not an innovative one. The Constitution does not recognize the legislator competence for authentic interpretation of legal norms. Recalling the teaching of Batista Machado, the law legally qualified as interpretative remains a manifestation of the same legislative power that is the source in an organic sense of the interpreted law. Because this is so, the final decision on the constitutive or declarative scope of a certain interpretative law belongs to the courts. It is they who, in the exercise of jurisdiction, interpret the "interpretative law" and determine whether it innovates in relation to pre-existing law or whether it merely clarifies it.

Competence being, moreover, attributed to the courts for the jurisdictional function – the iurisdictio – it is clear that the exclusion or imposition of one or more jurisdictional interpretations of a certain legal norm already made – or clearly admissible – by determination of a later law limits the scope of the former: among the multiple declarations of law of which such law was susceptible, some cease ex vi legis to be admissible. To the extent of such limitation, an alteration of the law that the courts "can state" occurs. And, if it is so, the interpretation or clarification formally established by the new law cannot but have a constitutive nature and the retroactivity inherent to such law have a substantial character.

It can therefore be said that, from the perspective of the Constitution, for a normative discipline self-qualified as merely interpretative to be considered constitutive (of new law) and, as such, substantially retroactive, verification of the fact that the norm interpreted in its primitive version could have been imputed by the courts with a meaning which, following the interpretative norm, was necessarily excluded is sufficient (see the decisions of the German Constitutional Court of 2.5.2012 and 17.12.2013, in BVerfGE 131, 20 [37-38] and 135, 1 [16-17], respectively). With effect:

'The clarifying discipline is constitutive from the outset in cases in which it aims to exclude the interpretation [of the pre-existing law] made by a common court – even if it is not a superior court – regarding past situations. The legislator confers a retroactive effect on the law a constitutive efficacy, to the extent that it seeks to clarify for the past, through a law with a univocal meaning, a certain assertion that generated, as to applicable law, an apparently non-univocal understanding or, at least, a non-uniform application of it. [...] Decisive is that the legislator intends to correct or exclude a given interpretation [made by the courts].' (see BVerfGE 135, 1 [18-19])

It is concluded, thus, in the indicated judgment, that, "given the burdensome content for taxpayers of the new legal solution – since it tends to increase the amount due under IRC – the claim that it applies to tax years prior to that of the beginning of its validity is flagrantly incompatible with the constitutional prohibition of retroactive taxes (see Article 103, paragraph 3, of the Constitution)."

What has been expounded regarding the impossibility of deducting from the collection from autonomous taxation the values paid as special payments on account has entire application to the impossibility of deducting tax benefits in light of the new paragraph 21 of Article 88 of the CIRC.

In fact, whereas under the prior law such deduction was possible, being moreover in the sense of the possibility of such deduction the majority of the case law, under the new paragraph 21 of Article 88 of the CIRC, if it were understood that this law is apt to repeal the special law instituting SIFIDE II, such deduction would no longer be possible.

Whereby no doubt remains that this new paragraph 21 came to exclude the possibility of the courts attributing to the law that this norm purportedly came to interpret a meaning that, in light of the interpreted norm, was admissible (as supported in diverse decisions of the CAAD, namely rendered in the context of proceedings nos. 769/2014-T, 163/2014-T, 219/2015-T and 370/2015).

Whereby this tribunal cannot apply to the facts in the proceedings sub judice the new Article 88, paragraph 21 of the CIRC, which applies only to the future, with such non-application not representing any violation of the constitutional principles of legality, separation of powers, protection of legitimate expectations and equality, as alleged by the Respondent.

Thus, no legal foundation is seen for departing from the deductibility of the tax benefit granted by SIFIDE II from IRC collection produced by autonomous taxation.

Accordingly, the annulment, as illegal, of the decision dismissing the gracious complaint is necessary, as well as the partial annulment of the respective self-assessment, in respect of the amount of autonomous taxation rates in IRC of €94,609.68, with the consequent reimbursement to the Claimant of the amount corresponding to the amount of autonomous taxation rates on which the tax benefit of SIFIDE II may be deducted.

Finally, the Claimant also petitions for the condemnation of the Respondent to the payment of compensatory interest.

As to compensatory interest, paragraph 1 of Article 43 of the LGT prescribes:

"Compensatory interest is due when it is determined, in a gracious complaint or judicial impugnation, that there was an error attributable to the services from which results payment of the tax debt in an amount superior to that legally owed."

In the case at hand, it is verified that, due to an error attributable to the services, the Claimant was prevented from deducting from the amount of IRC produced by autonomous taxation the tax credits it held under SIFIDE II.

Thus, there is no doubt that the Claimant is entitled to receive compensatory interest.

Such interest is due from 1 September 2014, given the fact that the reimbursement of IRC, to which the Claimant would be entitled, should be effected within three months following its sending (which occurred in May 2014) and until effective and full reimbursement by the Respondent.

The request is thus granted regarding the annulment of the decision dismissing the gracious complaint, with the consequent partial annulment of the self-assessment of IRC for the 2013 tax year, in respect of the amount of autonomous taxation rates in IRC of €94,609.68, with the Respondent required to reimburse the Claimant for the amount unduly paid and to pay corresponding compensatory interest, calculated at the legal rates, from 1 September 2014 and until effective and full reimbursement by the Respondent.

In view of the merit of the main request filed by the Claimant, the tribunal is precluded from ruling on the subsidiary request.

VI. OPERATIVE PART

In light of the foregoing, it is decided:

a) That the request for annulment of the decision dismissing the gracious complaint is granted, with the consequent partial annulment of the self-assessment of IRC for the 2013 tax year, in respect of the amount of autonomous taxation rates in IRC of €94,609.68;

b) That the Respondent is condemned to reimburse the Claimant for the amount unduly paid;

c) That the Respondent is condemned to pay to the Claimant compensatory interest, calculated at the legal rates, from 1 September 2014 and until effective and full reimbursement by the Respondent.

– The value of the case is fixed at €94,609.68, pursuant to subparagraph a) of paragraph 1 of Article 97-A of the Code of Tax Procedure and Process, applicable by virtue of subparagraphs a) and b) of paragraph 1 of Article 29 of the RJAT and paragraph 2 of Article 3 of the Regulation of Costs in Tax Arbitration Proceedings.

– The value of the arbitration fee is fixed at €2,754.00, pursuant to Table I of the Regulation of Costs in Tax Arbitration Proceedings, as well as paragraph 2 of Article 12 and paragraph 4 of Article 22, both of the RJAT, and paragraph 4 of Article 4 of the cited Regulation, to be paid by the Respondent, as the unsuccessful party.

Register and notify.

Lisbon, 10 August 2017

The Arbitral Tribunal

José Poças Falcão
(President)
Dissenting, as per attached declaration.

Alberto Amorim Pereira
(Member)

Nuno Miguel Morujão
(Member)

Text prepared by computer, pursuant to paragraph 5 of Article 131 of the Code of Civil Procedure, applicable by referral of subparagraph e) of paragraph 1 of Decree-Law no. 10/2011, of 20/01.

DISSENTING OPINION OF ARBITRATOR PRESIDENT OF THE TRIBUNAL CONSTITUTED IN CASE NO. 60/2017-T

(Article 22-5 of the RJAT)

I do not agree with the decision regarding the judgment of merit of the main request filed by the Claimant, Company A…, S.A., against the Respondent, the Tax and Customs Authority.

SIFIDE II permits companies to obtain a tax benefit, under IRC, proportional to the expense of investment in research and development (at the level of processes, products and organizational matters) that they can evidence, in the part that has not been the subject of financial assistance from the State on a non-refundable basis (See Law no. 55-A/2010 of 31 December, Decree-Law no. 82/2013 of 17 June and Law no. 83-C/2013 of 31 December).

The benefit to be obtained with SIFIDE II translates into the possibility of deducting from IRC collection determined in the tax year, an amount of tax credit that results from the sum of the following items:

• Base rate: 32.5% of expenses incurred in the tax year;

• Incremental rate: 50% of the increase in expenses incurred in the tax year compared to the simple arithmetic average of expenses incurred in the two preceding years, up to the limit of €1,500,000.

The benefit translates, in essence, into the possibility of deducting from IRC collection determined in the tax year the amount of tax credit determined. Expenses that, due to insufficient collection, cannot be deducted in the year in which they were incurred may be deducted up to the eighth following year.

The essential preliminary issue is, in our view, to know how to calculate the amount referred to in Article 90 of the CIRC to which should then be deducted the value corresponding to research and development expenses, in the part that has not been the subject of financial assistance from the State on a non-refundable basis, at a double rate:

a) Base rate – 32.5% of expenses incurred in the tax period and

b) Incremental rate – 50% of the increase in expenses incurred in the tax period in relation to the simple arithmetic average of the two preceding years, up to the limit of 1,500,000 euros.

The claimant wishes the tax credit that, in the year 2013, was recognized to it under SIFIDE to be deducted from the collection produced by autonomous taxation rates that burdened it in that tax year.

Having examined the norms that governed the system of tax incentives for research and development in business activities, commonly called SIFIDE, in the time circumstances that are relevant for the present proceedings, we find that, pursuant to Article 4 (Scope of deduction) of the statute:

'IRC taxpayers resident in Portuguese territory who carry out, on a principal or secondary basis, an agricultural, industrial, commercial or service activity, and non-residents with a permanent establishment in that territory may deduct from the amount determined in accordance with Article 90 of the Corporate Income Tax Code, and up to its limit, the value corresponding to research and development expenses, in the part that has not been the subject of financial assistance from the State on a non-refundable basis, incurred in the tax periods from 1 January 2011 to 31 December 2015, at a double rate:

a) Base rate – 32.5% of expenses incurred in that period;

b) Incremental rate – 50% of the increase in expenses incurred in that period in relation to the simple arithmetic average of the two preceding years, up to the limit of 1,500,000 euros.

2 – (...)

3 - The deduction is made, in accordance with Article 90 of the Corporate Income Tax Code, in the assessment relating to the tax period mentioned in the preceding paragraph.

4 - Expenses that, due to insufficient collection, cannot be deducted in the year in which they were incurred may be deducted up to the 6th following year.'

For its part, Article 90 of the CIRC provides:

'1. The assessment of IRC is processed in the following terms:

a) When the assessment is to be made by the taxpayer in the returns referred to in Articles 120 and 122, it is based on the taxable matter contained therein;

b) (...)

c) In the absence of assessment in accordance with the preceding subparagraphs, it is based on the elements available to the tax administration.

2 – To the amount determined in accordance with the preceding paragraph the following deductions are made, in the order indicated:

a) That corresponding to international double taxation;

b) That relating to tax benefits;

c) That relating to the special payment on account referred to in Article 106;

d) That relating to withholdings at source not susceptible to compensation or reimbursement under the applicable legislation.

(...)

1. When the special regime for the taxation of groups of companies is applicable, the deductions referred to in paragraph 2 relating to each of the companies are made on the amount determined in relation to the group, in accordance with paragraph 1.

(...)'.

That is, in summary: the values that represent the tax benefit under SIFIDE are deducted "from the amounts determined in accordance with Article 90 of the Corporate Income Tax Code, and up to its limit" (underlined) and in the assessment relating to the tax period in which the expenses for that purpose eligible are incurred and that, in the absence or insufficiency of collection determined under those terms, the expenses that cannot be deducted in the year in which they are incurred 'may be deducted up to the 6th following year'.

Well, the collection to which Article 90 refers when the assessment is to be made by the taxpayer (the situation that occurs in the proceedings) is determined on the basis of the taxable matter contained in that assessment/self-assessment [see Article 90, paragraph 1, subparagraph a) of the CIRC]. The credit in which SIFIDE translates being deducted only from collection so determined, that is, from collection determined on the basis of taxable matter [it is what is provided in Article 5, subparagraph a), of the Law regulating SIFIDE, expressly preventing credits resulting therefrom from being deducted when taxable profit is determined by indirect methods].

With regard to autonomous taxation, let it be stated that these are determined autonomously and distinctly from determination processed in accordance with Article 90 of the CIRC.

In the case of IRC, we are dealing with an annual tax, in which each income received is not taxed individually, but rather the totality of all income obtained in a given year is aggregated, the law considering that the taxable event is verified on the last day of the tax period (see Article 8, paragraph 9, of the CIRC); whereas, with regard to autonomous taxation in IRC, the taxable event is the performance of the expense itself, we are not dealing with a complex fact of successive formation over a year, but with an instantaneous taxable event.

This characteristic of autonomous taxation refers us, thus, to the distinction between periodic taxes (whose taxable event is produced in a successive manner, through the passage of a determined period of time, as a rule annual, and tends to repeat itself in time, generating for the taxpayer the obligation to pay tax on a regular basis) and taxes of single obligation (whose taxable event is produced instantaneously, appears isolated in time, generating for the taxpayer an obligation to pay with an occasional character).

In autonomous taxation, the taxable event that gives rise to the tax is instantaneous: it is exhausted in the act of realization of a certain expense that is subject to taxation (although the determination of the amount of tax resulting from the application of the various autonomous taxation rates to the various acts of realization of expense considered is to be made at the end of a certain tax period). But the fact that the assessment of the tax is made at the end of a certain period does not transform it into a periodic tax, of successive formation or of a lasting character. This operation of assessment translates only into the aggregation, for collection purposes, of the set of operations subject to this autonomous taxation, to which the rate is applied to each expense, with no influence of the volume of expenses made in determining the rate. In this case we are dealing with a tax of single obligation, applying to operations that are produced and exhausted instantaneously, in which the taxable event appears isolated in time, originating, for the taxpayer, an obligation to pay with an occasional character.

That is, the autonomous taxation rates here under analysis do not relate to a period of time, but to a moment: that of the isolated operation subject to the rate, without prejudice to the fact that determination of the amount owed by the economic agents subject to the said "rate" is made periodically, at a determined moment, together with other similar operations, without the joint assessment affecting its result.

For this reason, Sérgio Vasques (see Manual of Tax Law, Almedina, 2011, p. 293, note 470) calls attention to the circumstance that income taxes contemplate elements of single obligation, such as the liberatory rates of Personal Income Tax or the autonomous taxation rates of IRC.

Autonomous taxation, in accordance with its original regulation, constituted a sort of substitute for the non-deductibility regime previously provided in the CIRC.

Indeed, in its genesis was the non-acceptance for tax purposes of a percentage of certain expenses, with autonomous taxation constituting an alternative and more effective form of correction of costs whenever it concerns areas more prone to tax evasion (allowances, representation expenses, vehicle expenses, etc.).

Thus, it would not be reasonable, indeed it would be contrary to the reason that led the legislator to autonomously tax those expenses that, through their deduction from taxable profit as expenses, the foundation for the existence of autonomous taxation would be eliminated.

Arbitral case law has decided in the sense that autonomous taxation belongs, as a rule, systematically, to IRC, and not to VAT, to Personal Income Tax, or to any other tax of the Portuguese tax system (see decisions in arbitral proceedings nos. 166/2014-T, 246/2013-T, 260/2013-T, 282/2013-T, 6/2014-T and 36/2014-T, among several others).

They are, therefore, strongly linked to the taxpayers of the respective income tax, and, more specifically, to the economic and business activity carried out by them. What is at issue, in autonomous taxation, is, with effect, to tax certain expenses or charges (costs), seen in their relation with the general idea of real and effective profit and the taxation of income.

Indeed, it seems to us beyond doubt that the mechanism of autonomous taxation of the set of realities provided in Article 88 of the CIRC aims, primarily, to safeguard the general equilibria of the tax system itself, the specific equilibria of IRC and the revenue of the tax itself. That is, it aims to prevent that through significant recognition of charges such as those provided in Article 88, distortions affecting the system are not introduced and the expectation regarding what should be the "normal" revenue of the tax and that this is not frustrated. In the case, as is equally well known, what is at issue is to discourage the realization/recognition of these expenses, firstly because, by their nature and purposes, they can be more easily subject to diversion to consumption that, in essence, is private or corresponds to charges that do not cease to have, also, as specific and ultimate purpose, the avoidance of tax. Realities that present some degree of culpability in that, while not directly violating the law, they generate sensible and important imbalances on the general idea of justice, on the fundamental duty to contribute in proportion to one's resources, of equality, of sacrifice, of proportionality of the measure of tax in face of possible manifestations of wealth, of taxation of real income and of justice.

Functioning in a manner different from what constitutes the essential scope of IRC – which taxes income – autonomous taxation, it is reaffirmed, taxes certain expenses or specific charges – and constitutes an instrumental reality, accessory to this tax, in the just measure in which it is in function of it that they were instituted and are, therefore, capable of being recognized as having an instrumentality or accessoriness of purposes, rooted in the safeguard of the purposes of the very tax in which they manifest.

In conclusion: we consider it certain that autonomous taxation does not constitute IRC in the strict sense but are imbricated to it (IRC), and should be contained in the "other taxes" of which the final part of subparagraph a) of paragraph 1 of Article 45 of the CIRC (wording in force in 2011 and current Article 23-A/1-a of the CIRC) informs us (underlined).

Revelations of this link of functionality, and within the framework of the legislator's intention as a whole, stand out, for example, from the discipline of Article 12 of the CIRC regarding entities subject to the regime of fiscal transparency, upon not taxing them in IRC, "except as regards autonomous taxation," a relationship which equally manifests itself in view of paragraph 14 of Article 88 of the CIRC, in the sense that autonomous taxation rates take into account the fact that the taxpayer presents or does not present a tax loss.

Analyzed further from another perspective, autonomous taxation should be considered in the context of specific anti-abuse norms and their similarity to the regime provided in paragraph 1 of Article 65 of the CIRC, in the 2011 wording ("sums paid or owed, in any capacity, to natural or legal persons resident outside Portuguese territory and therein subject to a clearly more favorable tax regime are not deductible for purposes of taxable profit, unless the taxpayer can prove that such charges correspond to actually performed operations and do not have an abnormal character or an exaggerated amount").

Concluding: autonomous taxation, which applies to charges deductible in IRC, integrates the regime and are owed under this tax, with expenses for payment of such autonomous taxation not constituting deductible charges for purposes of determining taxable profit.

This understanding was moreover clarified by Article 3 of Law no. 2/2014, of 16 January, which added Article 23-A to the CIRC (while its Article 13 repealed Article 45) with the following wording:

Article 23-A) – Charges not deductible for tax purposes

'1. The following charges are not deductible for purposes of determining taxable profit, even when accounted for as expenses of the tax period:

a) IRC, including autonomous taxation, and any other taxes that directly or indirectly apply to profits.'

There being no doubt as to the interpretative character of the provision transcribed, in accordance with the rules of legal hermeneutics, in practice, such norm comes to express what the legislator always understood and continues to understand, that is, that the charges resulting from the cost associated with autonomous taxation do not matter for purposes of determining taxable profit.

Thus, in the case sub judice, no violation appears by the Tax Authority of the procedure and/or form rules for assessment provided in Article 90 of the CIRC with the disregard, for this purpose, of autonomous taxation assessed and paid by the claimant and from which the desired illegality in the calculation of the collection relating to IRC in the claimant's 2013 tax year does not occur for purposes of deducting the above-mentioned eligible expenses in the context of SIFIDE.

It is true that, by application of SIFIDE rules, even if there were no taxable profit, the tax credit could be deducted up to the amount of autonomous taxation, which is why the self-assessment in question appeared to suffer from a defect of violation of law which would justify its annulment.

However, Article 133 of Law no. 7-A/2016, of 30 March, came to alter the wording of Article 88 CIRC clarifying that autonomous taxation collection is made in accordance with Article 89 CIRC – with no reference to Article 90 CIRC – with no deductions being admissible.

Pursuant to Article 135 of this law, the new wording of paragraph 21 of Article 88 CIRC has an interpretative nature. This means that, in light of what paragraph 1 of Article 13 of the Civil Code determines, '(...) the interpretative law integrates itself into the law interpreted, the effects already produced by the fulfillment of the obligation, by judgment passed in res judicata, by transaction, although not homologated, or by acts of analogous nature being preserved (...)'. That is, this norm, having an interpretative character, is of immediate application, integrating the interpreted norm as if such legal provision had always existed.

In face of this alteration and given the interpretative character of the norm, there must be analyzed the implications for the case in question.

It stands out, from the start, that the alteration introduced came to determine, for these situations, the distinction and autonomy of processing of IRC in the strict sense. Two clearly distinct and individualized procedures come to be determined: one for IRC collection and another for collection in autonomous taxation. They equally came to be determined, and in an interpretative manner, limits to the manner of understanding the tax benefit in question.

It becomes the law, and its literal interpretation, that does not permit the deduction to be made. All the more so when it is a regime, that of autonomous taxation, which is exceptional in the legal-constitutional framework, and which therefore has determinations that should be interpreted in a restricted manner and in respect for the letter of the law. Having altered the wording of Article 88 CIRC with interpretative effects, the tax interpreter has no alternative but to apply the norm as it exists today, as if such wording had always existed. This would not be so only if this solution were incompatible with norms of superior hierarchy, namely constitutional norms. This not being the case, in accordance with the principle of the primacy of law, the interpretative rule should be applied, with no constitutional objection to such application.

On this aspect, it should be noted that, although in tax matters the constitutional principles of legality and the prohibition of retroactivity of law, provided in Article 103 of the CRP, impose some restrictions on the legislator, I consider that there is no generic constitutional prohibition of interpretative tax laws.

I do not agree, in this particular, with the position defended by J.L Saldanha Sanches when he concludes that '(...) and for this reason it does not seem to us that the interpretative law can have a place in tax matters: if what was at issue up to now were falsely interpretative laws, the constitutional revision came to prevent the retroactive effects of any norm in tax matters. Including those provoked by interpretative law (...)'.

In the same manner that it is considered that, in face of the jurisprudence of the Constitutional Court on the matter of interpretation and delimitation of the amplitude of the principle of the prohibition of tax retroactivity, the conclusions of judgment no. 172/2000, of 22-03-2000, rendered in proceedings 762/98, of this Court would not justify an absolute prohibition of interpretative laws.

The constitutional admissibility of interpretative laws in tax matters – as with any fiscal norms – should be assessed in function of the matters they address and their respective normative content, since the constitutional prohibition of retroactivity of tax law is limited to matters of incidence (objective, subjective, temporal and territorial) of the tax.

Indeed, as writes Casalta Nabais, from the wording of paragraph 3 of Article 103 of the CRP results '(...) the prohibition of retroactive fiscal norms of incidence that are burdensome or that worsen the legal situation of taxpayers (...)' (underlined).

And the same is defended by Diogo Leite de Campos, Benjamim Silva Rodrigues and Jorge Lopes de Sousa: '(...) The constitutionality of retroactive tax norms must be assessed in different terms depending on whether they concern the material elements that concur for the definition of the tax norm type (incidence, exemptions and rate) or other matters (guarantee of taxpayers, procedure for assessment and collection). The prohibition contained in Article 103, paragraph 3, of the CRP concerns only the former. The constitutional conformity of the latter must be assessed in light of the material principles of legal certainty and protection of legitimate expectations that inform the rule of law (Article 2 of the CRP)'.

And the truth is that practical case law, examples of which are the judgments of the Supreme Administrative Court of 21-03-2012, proceedings no. 830/11, and of 16-05-2012, proceedings no. 675/11, have admitted the existence of interpretative laws of a fiscal scope.

Starting, thus, from the theoretical admissibility of interpretative laws in tax matters, it is necessary to analyze whether, in the case in question, despite the express declaration of the legislator, we are truly before an interpretative law.

For Ferrer Correia, '(...) in the absence of other elements that permit giving interpretative value to a norm, the fundamental criterion to be used for such purpose is 'that the principle contained in the new law can be considered inherent in the prior law. Now, this requirement should be considered satisfied whenever it can be said that the courts would normally decide, in the field of prior legislation, in accordance with such principle. (...) For, verifying this presupposition, the reasons that are at the base of the principle of non-retroactivity of law, which consist in the protection of acquired rights and expectations conceived by individuals in acting under the norms of the preceding law cease. If the case law was clearly favorable to a certain understanding of the prior legislation, and the new law comes to confirm it expressly, no reason is seen for not defining this law as interpretative and as such applicable even to the past. In substance, no one can complain of violations of subjective rights or frustration of expectations, since the interested parties, had they resorted to the courts to assert a supposed right or to have a certain situation clarified, would probably not have obtained a result different from that which is now become certain.'

And this is also the understanding of Baptista Machado when he concludes that '(...)the reason why the interpretative law applies to facts and situations prior to it lies fundamentally in that it, coming to establish one of the possible interpretations of the old law which the interested parties could and should rely on, is not susceptible to violating certain and legitimately founded expectations (...)'. In these cases, there is no true retroactivity in the application of the interpretative law because the interpretation of the original norm effected in light of the legal framework in force would lead to the same solution as that established by the legislator in a later norm.

It is considered, thus, that, to qualify a law as interpretative, the following requirements should be verified:

(i) there is a controversial or uncertain issue in the law in force; and

(ii) the legislator establishes an interpretative solution that resolves the uncertainty to which the interpreter or judge would arrive based on the normative prior to the legislative alteration.

Applying these criteria to the situation in question, we are led to conclude that we are, truly, before an interpretative law. In truth, the matter regulated by the new paragraph 21 of Article 88 of the CIRC was controversial and uncertain (having given rise to the arbitral proceedings listed by the Claimant and by the Respondent), with the solution established corresponding to one of the plausible interpretations to which the judge would arrive, as effectively he arrived, for example, in the arbitral decisions rendered in proceedings nos. 697-2014-T and 722/2015-T.

Against this understanding would not proceed the allegation that, to be before an effective interpretative law, it would be necessary that a line of case law impose a determined solution on the legislator, which would not be verified in the present situation given that there are diverse decisions to the contrary, as detailed by the Claimant.

And this allegation does not proceed because, as states Baptista Machado, '(...) it is not necessary that the law come to establish one of the prior lines of case law or a strong prior line of case law. All the more so since the interpretative law often emerges before such lines of case law manage to form. (...) For a new law to be truly interpretative, two requirements are therefore necessary: that the solution of prior law be controversial or at least uncertain; and that the solution defined by the new law be within the framework of the controversy and be such that the judge or interpreter could arrive at it without exceeding the limits normally imposed on interpretation and application of law. If the judge or interpreter, in face of old texts, could not feel authorized to adopt the solution that the new law comes to establish, then this is decidedly innovative.' (underlined).

Essential is, thus, that the solution established by the legislator could be determined by the interpreter or judge within the normative framework in force and within the scope of the controversy or uncertainty generated by the norm. As already stated, despite the solution established by the legislator not being that to which this tribunal could arrive, the truth is that it corresponds to a possible interpretation within the framework of the controversy, sustained logically in other (arbitral) prior decisions.

Moreover, this conclusion regarding the interpretative character of the new paragraph 21 of Article 88 of the CIRC, with inherent application thereof pursuant to Article 13 of the Civil Code, does not violate the principle of the prohibition of retroactivity of tax law resulting from paragraph 3 of Article 103 of the CRP because, as stated above, the constitutional principle in question prohibits the creation of retroactive taxes, thus limiting its scope of application to matters of subjective, objective, temporal and territorial incidence. Now, in the case in question, what is being discussed is not the incidence, the rate or the amount of collection owed under autonomous taxation, which remains unchanged; what is being discussed is the obligation to make a disbursement of this collection in favor of the State, preventing compensation with a tax credit resulting from the SIFIDE regime. The tax obligation is exactly the same, what could differ would be the payment obligation and, as stated above, this matter does not enjoy any special constitutional protection.

Finally, it is reaffirmed that one cannot conclude that the attribution of an interpretative nature to the norm under analysis calls into question the principle of legal certainty because, adopting the norm one of the possible interpretations (which is manifestly the case), one is not violating founded expectations. The interpretation that is now admitted was viable before the emergence of the interpretative law. For these reasons, with this solution no constitutional principles are violated, either the prohibition of constitutionally retroactive fiscal norms, or the principle of legal certainty.

In light of the foregoing, I would consider that, in the case sub judice, the desired illegality of the act of self-assessment of IRC for 2013 does not occur and, in the same essential line as the arbitral judgments rendered by Collegiate Tribunals which I presided in proceedings nos. 697/2014-T, 727/2015-T and 605/2016-T, I would judge the Claimant's request to be entirely without merit.

Lisbon and CAAD, 10 August 2017

José Poças Falcão