Summary
Full Decision
ARBITRAL DECISION
I – Report
1. A..., S.A., with registered office in ..., ..., ..., with collective person number..., filed a request for the constitution of an arbitral tribunal, pursuant to article 2, no. 1, paragraph a), and articles 10 et seq. of Decree-Law no. 10/2011, of 20 January, to assess the legality of the act of additional assessment of Corporate Income Tax and compensatory interest for the fiscal year 2012, in the amount of € 96,509.52, which was subject to an application for administrative reconsideration that was tacitly dismissed.
The request is justified in the following terms.
The Applicant is a company whose principal activity consists of providing tyre management services for companies engaged in passenger and freight transport, with remuneration determined based on the value of kilometres travelled by each vehicle.
This activity was developed, for years, by its principal shareholder, the company B..., S.A. (hereinafter referred to as B...), which, by contract executed on 31 May 2010, transferred its contractual position to the Applicant with regard to the various service provision contracts.
With regard to the fiscal year 2012, B... charged to the Applicant the financial costs of bank credit obtained to finance the project, in the amount of € 60,586.03, and late payment interest relating to accumulated debts for tyre supplies with reference to current account balances, in the amount of € 92,527.53.
And, on the other hand, in the years following the transfer of the contractual position, the Applicant continued to use in its activity the services of workers assigned to B..., assuming the costs relating to travel, meals and accommodation.
Pursuant to the tyre management service provision contracts, designated "cost-per-kilometre" contracts, the Applicant undertook to acquire tyres already installed in the vehicle fleet from its client, conducting an initial valuation for this purpose, which also occurred when clients proceeded to purchase new vehicles, and which constituted the reference value for determining the amount to be paid to the Applicant in case of transfer of the vehicle to third parties or termination of the contract.
Following an inspection procedure carried out by the Tax Inspection Services, the Applicant was notified of corrections to taxable profit for the fiscal year 2012, with reference to late payment and compensatory interest, in the amount of € 153,113.56, gains calculated upon termination of the contract with C..., S.A., in the amount of € 136,057.86, and expenses with diesel, accommodation and meals attributable to workers not belonging to the staff of the taxpayer, in the amount of € 19,055.55.
The Tax Administration's non-acceptance as tax deductible expenses of late payment interest was due to the absence of provision for late payment interest in the supply contracts and the fact that the expenses related to previous fiscal years and the decision to record the expenses was taken after the account closing deadline.
However, the Applicant considers that the obligation to pay late payment interest is contained in the general conditions of the contracts, is not subject to prior notification to the debtor and is imposed by article 63 of the Corporate Income Tax Code, and, as regards the costs of financing the bank loan, these are expenses essential for the generation of income from productive activity.
Also not in question is the principle of specialisation of the fiscal year since the late payment interest concerns the year 2012 and the non-recognition of interest expenses in previous fiscal years does not prevent the deduction of expenses attributable to subsequent fiscal years, and recognition of the expense is required by the principle of taxation according to real profit in application of articles 17 and 23 of the Corporate Income Tax Code.
As regards the proceeds resulting from the termination of the contract with C..., S.A., the Tax Administration considered an increase to taxable profit of € 86,154.12 by not considering the deduction from the final valuation value at the date of termination of the contracts (€ 306,972.15) of the valuation value at the date the contracts commenced (€ 203,309.81), when it is certain that the substantive regime of the contract presupposes that there is compensation in favour of the entity providing the services or the user corresponding to the difference between the initial and final valuation.
Also at issue is the non-acceptance as tax-deductible expense of operational expenses for fuel, accommodation and meals on the part of workers not belonging to the staff of the Applicant.
However, these expenses were effectively incurred for the benefit of the Applicant and are attributable to the generation of income that produces taxable profit, and the deduction of expenses is not prevented by the fact that the supporting documents were issued directly by the Applicant and not by the entity to which these workers were assigned, and besides, the allowance of cost allowances only occurred on days when no expenses were submitted, with the burden of proof of non-fulfilment of the assumptions of payment of these allowances lying with the Tax Administration.
The Tax Authority, in its response, considers that the contract for the cession of the contractual position does not clarify the consequences of non-performance nor the moment from which the debtor enters into default, nor was there in the case any demand on the debtor for delay in performance, and there can be no deduction of late payment interest when they were not due nor demonstrably essential for the realisation of the income subject to tax.
On the other hand, in accordance with the principle of specialisation, only expenses incurred in prior periods are attributable to the taxation period when, at the date of account closing, they were unforeseeable or manifestly unknown.
The Tax Authority also finds no explanation for the deduction from the final valuation value of the tyres at the moment of termination of the contract with C... of the value of the valuations effected at the start of the contract when that value was not even incurred by the Applicant.
And as regards expenses such as fuel, accommodation and meals, the Respondent maintains the understanding that they relate to workers not assigned to the Applicant and, in some cases, these expenses were likewise paid as cost allowances, implying a duplication of expenses.
It concludes that the request is unfounded.
2. Following the proceedings, a meeting was held as referred to in article 18 of the RJAT [Rules of Procedure of the Tax Arbitration Court] at which the legal counsel of the Applicant requested the recording of witness testimony and submitted a substitution of authority, and the parties agreed to submit written submissions for successive periods of 10 days.
Witness testimony requested by the Applicant was subsequently produced.
In submissions, the parties reiterated their previous positions.
3. The request for the constitution of the arbitral tribunal was accepted by the President of the CAAD [Administrative Tax Arbitration Court] and notified to the Tax and Customs Authority in accordance with applicable regulations.
Pursuant to paragraph b) of no. 2 of article 6 of the RJAT, in the wording introduced by article 228 of Law no. 66-B/2012, of 31 December, the parties designated the arbitrators and the Deontological Council designated the third arbitrator, who communicated their acceptance of the duty within the applicable period.
The parties were duly and timely notified of this designation and did not manifest any wish to challenge it, pursuant to the combined terms of article 11, no. 1, paragraphs a) and b) of the RJAT and articles 6 and 7 of the Deontological Code.
Thus, in accordance with the provisions of paragraph c) of no. 1 of article 11 of the RJAT, in the wording introduced by article 228 of Law no. 66-B/2012, of 31 December, the collective arbitral tribunal was constituted on 19 March 2018.
The arbitral tribunal was regularly constituted and is materially competent, in accordance with 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 legitimate and are represented (articles 4 and 10, no. 2, of the same statute and 1 of Order no. 112-A/2011, of 22 March).
No exceptions were raised and the proceedings are not affected by any nullity.
It falls to us to assess and decide.
II – Grounds
4. The material facts relevant to the decision of the case are as follows:
a) The Applicant was notified of the act of additional assessment of Corporate Income Tax and compensatory interest, in the total amount of € 96,509.52, relating to the taxation period 2012.
b) It filed an application for administrative reconsideration against this tax act on 17 April 2017, which was not decided within the legally prescribed period.
c) The additional assessment was determined following an inspection procedure which examined the accounting and tax situation of the taxpayer in the fiscal year 2012 and had its origin in service order OI 2016... .
d) The principal activity of the Applicant consists of the supply and provision of tyre management services for companies engaged in passenger and freight transport, with remuneration determined based on the value of kilometres travelled by each vehicle.
e) By contract executed on 31 May 2010, B..., S.A., which held 50% of the share capital of the Applicant, transferred its contractual position to the Applicant with regard to the supply and tyre management service provision contracts identified in Annex II to this document, with effect from 1 January of that year, for the value of € 1,039,077.22.
f) All workers of B... assigned to the business unit that was the subject of the contractual transfer moved to the Applicant.
g) After the cession of the contractual position, the Applicant continued to use the services of workers of B... in the activity of tyre supply and management.
h) The provision of workers by B... was not subject to a written agreement.
i) B... debited to the Applicant late payment interest on invoices and debit notes already due, in the total amount of € 153,113.56, which were recorded by the Applicant as tax expenses for the fiscal year 2012.
j) The decision to record the late payment interest as tax expenses was adopted after the date of account closing for that fiscal year.
l) B... executed contracts for the provision of tyre management services with C..., S.A. on 14 March 2008 and 17 March 2009, which were transferred, by virtue of the contract for the cession of the contractual position, to the Applicant.
m) At the termination of these contracts, which occurred in 2012, the Applicant calculated a gain of € 103,662.34 which resulted from the difference between the valuation value of the tyres of the fleet, at the date of contract termination, calculated at € 306,972.15, and the valuation value of the tyres at the date the contracts commenced in 2008 and 2009.
n) The Applicant recorded in the fiscal year 2012 expenses for fuel, accommodation and meals which were presented by workers of B....
o) According to the contractual terms in the contracts for the supply of tyres and for the provision of tyre management services, the Applicant undertook to supply tyres to the user and provide tyre management services in exchange for monthly payment of a sum corresponding to the number of kilometres travelled by each vehicle in accordance with the cost/km contained in the annex to the contract.
p) The tyres were valued at the beginning and end of the contract in accordance with a formula in which the original tread depth, the remaining tread depth and the value of the tyre in accordance with the list price are considered.
q) At the end of the contract, the difference between the initial and final valuation is calculated and the account is settled by issuing a debit or credit note.
r) In the event that the client's vehicles or those used by the client are sold or transferred to third parties, the tyres are acquired and paid to the service provider at the value resulting from the application of the formula referred to in the preceding paragraph l).
s) D..., E... and F... are workers of the Applicant.
The Tribunal formed its conviction regarding the proven facts on the basis of the documents attached to the petition and those contained in the administrative file presented by the Tax Authority with its response and on the basis of witness testimony produced. The factuality contained in paragraph j), relied upon by the Tax Authority, was not challenged by the Applicant in the request.
Questions of law
5. The Applicant disputes the legality of the tax act of additional assessment of Corporate Income Tax for the fiscal year 2012, which concerned three different tax situations: the non-acceptance as a tax deductible expense of the amount of € 153,113.56 recorded as late payment interest for delay in payment of invoices and debit notes issued by B...; an increase to the net result for the fiscal year in the amount of € 86,154.12 resulting from the difference between the valuation value of the tyres at the date of termination of the contract for supply and tyre management with C..., fixed at € 306,972.15, and the expense incurred during the fiscal year, in the total of € 220,818.03; the non-acceptance as tax deductible expenses of expenses incurred for fuel, accommodation and meals, in the total of € 19,055.55, presented by workers not belonging to the staff of the Applicant and which, in some cases, corresponded to expenses paid as cost allowances.
Late payment interest
6. As regards late payment interest, the understanding of the Tax Authority is based on two sets of considerations: the supply contracts and contracts for purchase and sale executed between B... and the Applicant do not contain any specification as to the consequences of non-performance or delay in payment, and therefore the requirement for late payment interest has no legal or contractual basis; moreover, the recording of these expenses does not comply with the principle of specialisation of the fiscal year since they relate to the periods 2010 and 2012 and were attributed to the economic year 2012, without any justification, at a moment after the date of account closing.
The Applicant argues that the possibility of applying commercial late payment interest arises solely from delay in payment and does not depend on any prior obligation to notify the debtor, and that the fact that the Applicant did not recognise as expenses the interest it should have paid in previous years does not prevent the attribution of these expenses to subsequent fiscal years, and it is irrelevant that the decision to record the late payment interest was taken after the account closing deadline.
However, the question cannot be viewed with such linearity.
A debtor is considered to be in default when, as a result of a cause attributable to him, the performance, being still possible, was not made at the due time, with the effects of debtor default translating into the obligation to repair the damage caused to the creditor (article 804 of the Civil Code). The damages that may be considered for the purpose of compensation payable by the debtor are those that arise to the creditor from the fact of the retardation of performance and must be calculated in accordance with the general principles of civil liability. However, where it concerns a pecuniary obligation, the compensation corresponds to statutory interest from the date of the debtor entering into default (article 806).
In any case, the provision of article 806 regarding late payment interest does not exclude the general principles relating to debtor default, either as regards fault in the retardation of performance or as regards the need for demand.
As a general rule, as follows from article 805 of the Civil Code, a debtor only enters into default after having been judicially or extrajudicially demanded to perform, except only in cases where the obligation has a fixed deadline or arises from unlawful act or still if the debtor himself prevents the demand, in which case he shall be deemed to have been demanded on the date on which he would normally have been.
In the present case, the Applicant charged late payment interest on merchandise supply debts on the basis of the supplier's current account (€ 92,527.53) and also for delay in payment of the price fixed by the cession of B...'s contractual position in the tyre management contracts of which it was the holder (€ 60,586.03). And, as we have noted, according to the general rules applicable to the moment of default, the requirement for payment of late payment interest could only have taken place – excluding the possibility of unlawfulness or impossibility of demand – when the obligation has a fixed deadline or the debtor has been demanded to perform. It so happens that the agreement for the transfer of the business unit does not contain any express clause relating to the deadline for payment of the price, and the mere current account of the supplies made by B... does not show that the Applicant had a determined period to make the payment, making it therefore necessary, in order for the debtor's default to be considered verified, that there be a demand to perform, this being the moment from which the debtor has knowledge of the delay in payment and becomes subject to late payment interest.
The Tax Administration also disregarded late payment interest as expenses relating to the fiscal year 2012 because they were recorded as expenses attributable to previous taxation periods and at a moment when the accounts for that fiscal year should already have been closed, questioning the principle of specialisation arising from article 18, no. 2 of the Corporate Income Tax Code.
The cited article 18 of the Corporate Income Tax Code, in the part most relevant to consider, provides as follows:
1 – Income and expenses, as well as the other positive or negative components of taxable profit, are attributable to the taxation period in which they are obtained or incurred, independently of their receipt or payment, in accordance with the regime of economic accrual.
2 – Positive or negative components considered as relating to prior periods are only attributable to the taxation period when, on the date of account closing of that to which they should have been attributed, they were unforeseeable or manifestly unknown.
(…).
No. 1 establishes the accounting principle of economic specialisation of fiscal years, which consists in including in tax results the income and expenses corresponding to each economic year, independently of their actual receipt or payment. No. 2 allows income or expenses relating to previous fiscal years to be attributable to another fiscal year only when, at the date of account closing of that to which they should have been attributed, they were unforeseeable or manifestly unknown.
This means that the expense or income is inherently associated with the moment of issuance of the document.
This is an accounting criterion that reflects the principle of annual periodisation of the tax.
At times, this principle appears to be mitigated by articulation with the principle of fairness when the attribution of expenses to prior fiscal years did not result from voluntary and intentional omissions, designed to bring about a transfer of results between fiscal years, and where the attribution of the expense to a fiscal year other than that to which it related does not result in prejudice to the National Treasury (judgements of the Supreme Administrative Court of 13 October 1996, Case no. 20404, and of 5 February 2003, Case no. 01648/02).
However, this does not appear to be the case.
On the one hand – as has been said – the condition that justifies the requirement for late payment interest is not met, and on the other hand, the decision to record these expenses was already adopted after account closing, which to some extent suggests that there was an intention to reduce the taxable result by incorporating expenses associated with prior fiscal years in order to obtain tax relief.
For all the foregoing, the arbitral request is unfounded in this respect.
Termination of the contract with C..., S.A.
6. Following the transfer of the business unit assigned to B..., the Applicant assumed, from 1 January 2010, the contractual position of that entity in the contracts for supply of tyres and provision of services with C..., which had been executed on 14 March 2008, for the branch in ... and 17 March 2009, for the remaining branches. At the termination of the contract, in April 2012, the Applicant issued a debit note in the amount of € 103,662.34 corresponding to the compensation due for the difference between the final valuation of the tyres (€ 306,972.15) and the initial valuation of the tyres (€ 203,309.81), in accordance with clause 5 of the contract. The result of € 203,309.81 was obtained by adding the amounts of € 49,903.74 and € 153,496.07, which correspond to the initial valuation of the tyres carried out in 2008 and 2009.
The Tax Authority understands, however, that there is an increase to the net result for the fiscal year in the amount of € 86,154.12 by considering that the value of € 306,972.15 corresponds to the gain of the fiscal year and to it there is only to be deducted the "cost of inventories sold", in the total of € 220,818.03.
Such a conclusion does not appear to have duly taken into account the true nature of the contractual relationship and the terms in which the account settlement at the end of the contract is provided for.
The contract has as its subject the supply of tyres and the provision of tyre management services, remunerated per kilometre travelled, and presupposes the acquisition of tyres that equip the vehicles and their replacement when they reach the end of their useful life.
At the termination of the contract, the difference between the initial and final valuation is calculated, in accordance with the formula that is contractually provided for, and which shall determine compensation in favour of either of the contracting parties depending on whether there is a positive or negative variation relating to the condition of the tyres.
In this case, the calculation of the compensation took into account the initial valuation effected in 2008 and 2009 because partial contracts were executed on those dates (see clause 15).
In this context, the value of € 306,972.15, corresponding to the final valuation of the tyres, does not constitute an income of the fiscal year but only one of the items to be taken into account for the purpose of determining the amount of compensation due as a result of the termination of the contract and which has as its counterpoint the value of the initial valuation (€ 203,309.81). The gain to be considered is, therefore, the difference between these two items and this is an income that is specifically associated with the termination of the contract itself. For the case, the costs related to the acquisition of tyres or their replacement or with any of the other services that the Applicant undertakes to provide to road transport companies do not have to be taken into account, since these costs are only deductible, as general expenses, in relation to the income that the Applicant derives from its contractual performance.
The arbitral request is well-founded at this point.
Expenses for fuel, accommodation and meals
7. The Tax Administration did not accept as tax deductible costs, in application of article 23 of the Corporate Income Tax Code, expenses for fuel entered in account 624203, in the total of € 4,438.61, which were presented by workers of B..., who, as such, did not belong to the staff of the taxpayer. Expenses relating to accommodation, recorded in account 625101, in the amount of € 3,713.30, and expenses relating to meals, recorded in accounts 625102 and 625103, in the amount of € 10,903.64, were likewise not considered, either because they were presented by workers without an employment relationship with the Applicant, or because, having been incurred by workers of the Applicant, they are covered by the payment of cost allowances, implying a duplication of expenses.
As to these aspects, the Applicant argues that only some of the workers identified by the tax inspection services were not, in fact, workers of the Applicant, and, in any case, these are expenses which, even though they were not subject to adequate accounting treatment, were effectively incurred for the benefit of the Applicant and would always be deductible, on the grounds of their essentiality for the generation of income subject to tax, if the same expenses had been incurred through invoices issued by B.... The Applicant further denies that the expenses were recorded on days when cost allowances were paid.
What is mainly at issue is the concept of a deductible cost. According to article 23 of the Corporate Income Tax Code, tax-relevant costs are those which are demonstrably essential for the realisation of income or gains subject to tax or for the maintenance of the source of income. The requirement of essentiality of costs must be assessed according to criteria of economic rationality. It is essential that the expense be incurred in the specific interest of the company and not be destined to satisfy the interest of a shareholder or a group of shareholders or be solely intended to artificially reduce the tax to be paid.
The need for proof of the essentiality of costs does not mean that the burden of such proof lies with the taxpayer. The rules of substantive evidence law apply here, which result from articles 74 and 75 of the General Tax Law. It is incumbent upon the Tax Administration to prove the facts constitutive of the non-deductibility of costs (article 74, no. 1). Moreover, the data and findings recorded in the accounting of the taxpayer 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 recorded in the accounting falls upon the taxpayer (article 75, no. 1, and no. 2, paragraph a)).
In the present case, the existence of any of the situations that justify the cessation of the presumption as to the truthfulness of accounting records is not invoked, nor is the causal nexus of essentiality that must exist between the costs and the obtaining of gains or income disputed. To conclude that the expenses in question are not deductible, the Tax Administration relies solely on the fact that the expense documents were presented by workers not assigned to the taxpayer and, also, in the case of accommodation and meal expenses, on the occurrence of double deduction of costs due to the concurrent payment of cost allowances.
As results from the matters agreed upon, the Applicant is the assignee of the business unit relating to the supply and provision of tyre management services, which was previously developed by B..., and continued to use in this activity, in subsequent years, workers who remained bound to the cedent, through the assumption of the costs corresponding to travel, meals and accommodation.
These expenses appear recorded in the accounting of the Applicant alongside other expenses of the same kind which were incurred by its own workers. The fact that the taxpayer included as fiscal year costs expenses inherent to its economic activity but which were incurred with the collaboration of workers dependent on another entity with which the Applicant maintains special relationships does not mean that the costs are incurred outside the business sphere or should be attributed for tax purposes only to that other entity.
The question that arises is that of non-compliance with ancillary obligations designed to facilitate tax inspection and which are sanctioned by administrative breach, either by violation of the obligation to issue invoices for the provision of services, or by failure to organise accounting in accordance with the rules of accounting standardisation (articles 121 and 123 of the General Tax Regulations). There is, in any case, no clear reason to exclude from the determination of taxable profit expenses that were effectively incurred by the company, find plausible justification, and with respect to which the relationship with business activity is not even questioned.
Furthermore, the Tax Administration included in the global amounts calculated as non-deductible costs, as can be inferred from the tables contained in the Tax Inspection Report (points 1.4, 1.5 and 1.6), expenses that were presented by workers of the taxpayer, who, as such, are identified in document no. 12 attached to the initial petition and whose accuracy is not questioned.
It is further alleged as grounds for the non-deduction of costs the payments made for accommodation and meals in the case where these expenses were covered by the payment of cost allowances. On this point, the Applicant contests that cost allowances were processed and paid for workers' travel with respect to which expense documents were issued for the purpose of tax deduction. And the documentary evidence carried into the proceedings, including that contained in the Tax Inspection Report, also does not specify which expenses were deducted as costs and simultaneously reimbursed as cost allowances, nor does it distinguish, for the purpose of the correction of taxable profit, between expenses presented by the taxpayer's workers and those attributed to workers of B....
In any case, as was considered in the judgement of the Supreme Administrative Court of 29 March 2006 (Case no. 1236/05), in a similar situation, payments made for the supply of accommodation and meals to workers transferred from the headquarters of the company for labour reasons constitute tax-deductible costs for the purposes of article 23 of the Corporate Income Tax Code, independently of whether these transfers can still be compensated through another remuneration supplement for purely business management reasons. What is relevant for the purpose of deductibility of costs is that the expenses be documented and be essential for the realisation of income or the maintenance of the source of income, and it does not fall to the Tax Administration to interfere, on this pretext, with the criteria by which the company defines the remuneration regime of its workers.
The arbitral request is well-founded in this respect.
III – Decision
For these reasons it is decided:
a) To uphold the arbitral request and annul the act of additional assessment of Corporate Income Tax no. 2016..., for the fiscal year 2012, in the part relating to the termination of the contract with C..., S.A., which determined an increase to taxable profit of € 86,154.12, and to expenses for fuel, accommodation and meals, which determined the non-acceptance of tax-deductible costs in the amount of € 19,055.55.
b) To dismiss the arbitral request and maintain the impugned act of additional assessment, in the part relating to late payment and compensatory interest, which were recorded in € 153,113.56.
c) To condemn the payment of indemnity interest from the payment of the tax until the date of issuance of the credit note, in accordance with articles 43 of the General Tax Law and 61 of the Code of Tax Procedure, in the part corresponding to the partial annulment of the tax act.
Value of the case
The Applicant indicated as the value of the case the amount of € 96,509.52, which was not contested by the Respondent, and corresponds to the value of the assessment sought to be opposed (article 97, no. 1, paragraph a), of the Code of Tax Procedure).
Notify.
Lisbon, 24 September 2018
The President of the Arbitral Tribunal
Carlos Fernandes Cadilha
The Arbitrator Member
João Espanha
The Arbitrator Member
Jorge Carita
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