Autonomous Taxation (Tributações Autónomas) and IRC Deductibility: CAAD Arbitral Decision 602/2015-T

ARBITRATION DECISION

The arbitrators Fernanda Maçãs (arbitrator president), Fernando de Jesus Amado dos Santos and Maria Forte Vaz, appointed as arbitrators at the Administrative Arbitration Centre, to form the Arbitral Tribunal, agree as follows:

I. REPORT

1. A.– Company for the Management of Social Interests, S.A., NIPC…, with headquarters at Av…, …-… …, … (hereinafter referred to only as the Claimant), submitted, on 16-09-2015, a request for the constitution of the arbitral tribunal, in accordance with Articles 2 and 10 of Decree-Law No. 10/2011, of 20 January (Legal Regime for Arbitration in Matters of Taxation, hereinafter referred to only as RJAT), in conjunction with Article 102 of the CPPT, in which the Tax and Customs Authority is the Respondent (hereinafter referred to only as the Respondent).

2. The Claimant seeks a declaration of illegality of the corporate income tax (IRC) assessment for the year 2011, with number 2012…, relating to the group of companies of which the Claimant is the dominant company, on the grounds that it was determined based on individual taxable income to which the amounts due as autonomous taxation were not deducted. Subsidiarily, it requests a declaration of illegality of the tax assessment for autonomous taxation, in the amount of €256,216.17, on the grounds that it relates to actual business expenses, duly justified. Should the request for arbitral pronouncement be granted, the Respondent should be ordered to reimburse the Claimant of the amount wrongfully paid, plus compensatory interest.

3. On 18-09-2015 the request for constitution of the arbitral tribunal was accepted by the President of the CAAD and automatically notified to the Tax and Customs Authority.

3.1. The Claimant did not proceed with the appointment of an arbitrator, whereby, under the provisions of subparagraph (a) of Article 6(2) and subparagraph (b) of Article 11(1) of the RJAT, the President of the Deontological Council appointed the undersigned as arbitrators of the collective arbitral tribunal, who communicated acceptance of their appointment within the deadline.

3.2. On 13-11-2015, the parties were notified of the appointment of the arbitrators and raised no impediment.

3.3. In accordance with the provisions of subparagraph (c) of Article 11 of the RJAT, the collective arbitral tribunal was constituted on 30-11-2015.

3.4. In these terms, the Arbitral Tribunal is regularly constituted to hear and decide the subject matter of the proceedings.

1. To substantiate the request for arbitral pronouncement, the Claimant alleges, in summary, the following:

a) In view of the constant jurisprudence of the Constitutional Court[1] and the Supreme Administrative Court[2], autonomous taxation should be qualified as a fiscal imposition on expenditure and not on income, constituting actual indirect taxes that penalize certain expenses incurred by the taxpayer.

b) Thus, given its qualification as a (indirect) tax on expenditure, autonomous taxation should receive equal treatment to that given to other indirect taxes for purposes of determining taxable profit under IRC, by constitutional mandate and as a consequence of the principle of taxation of real income enshrined in Article 104(2) of the CRP.

c) As autonomous taxation does not constitute a tax that directly or indirectly affects profits, its deductibility for IRC purposes is not excluded by virtue of Article 45(1)(a) of the IRC Code (as in force at the time).

d) The deductibility as a cost of autonomous taxation paid with reference to the year 2011 cannot be refused on the basis of an alleged disguised distribution of profits, in particular dividends, since, as demonstrated by the Claimant in the hierarchical appeal, such autonomous taxation related to expenses with light passenger vehicles, representation expenses and subsistence allowances, and no monetary attribution to shareholders and/or administrators was involved.

e) The acceptance of autonomous taxation as a fiscal cost does not compromise the objectives of combating tax fraud and evasion, since the autonomous tax payable by the taxpayer does not undergo any reduction by this means.

f) Subsidiarily, the Claimant requests a declaration of illegality of part of the autonomous taxation paid in 2011, in the total amount of €256,216.17.

g) The expenses on the basis of which the autonomous taxation was calculated are essential to the activity carried out by the companies that make up the group of companies of which the Claimant is the dominant company.

h) Indeed, such companies carry out activities in the commercialization and/or distribution of coffee, tea, cocoa and other products, or alternatively, the sale of technical equipment, alienation of machines and coffee mills and their maintenance.

i) To that extent, the vehicles whose expenses gave rise to autonomous taxation are used by "sales representatives" or "salesmen" in the context of their commercialization, advertising and presentation activity of the commercialized products, enabling contact with customers and suppliers, whereby they have a causal nexus with the pursuit of profitable objectives and are connected with the activity carried out by the various companies.

j) Such expenses contribute exclusively to the obtaining of income in the business sphere of the companies, and not in the private sphere of their respective employees, since no benefit accrues to them.

k) Thus, with any doubt removed as to the purpose of such expenses, concluding by their connection with the activity of the group companies, the application of the anti-abuse norm that provides for autonomous taxation must be rejected.

l) The Claimant therefore concludes by the illegality of autonomous taxation in the amount of €256,216.17.

1. The Tax and Customs Authority submitted a response and attached an instructing file, invoking in summary, the following:

a) The fiscal non-deductibility of autonomous taxation results directly from Article 45(1)(a) of the IRC Code, since autonomous taxation has always been considered a component of IRC, integrating the legal regime of IRC and being due by virtue of IRC. This same result follows from the wording of Article 12 of the IRC Code and the current wording of Article 23-A of the IRC Code which will have an interpretative character.

b) Furthermore, "from a systematic perspective and reconstruction of the legislator's intention, it remains contrary to the intention that presided over the creation of autonomous taxation to admit its deductibility for purposes of determining taxable profit, since such deductibility would have a reducing effect on the deterrent effect that the legislator intended to achieve, by associating a fiscal advantage to a reality that it intended to worsen or burden" (see Article 25 of the Response).

c) The legislator has broad discretionary power in determining what constitutes deductible and non-deductible expenses, without this implying a violation of any constitutional principle, in particular the principle of taxation of real income. Examples of such discretionary power are the anti-abuse rules provided for in Articles 63 to 67 of the IRC Code or the provision of increased tax rates for certain types of income.

d) The Claimant failed to meet its burden of proof, not having demonstrated "in a demonstrated manner, through its respective accounting records, the nature of the expenses that gave rise to the autonomous taxation supported by each of the Group companies, as well as the itemized indication of the taxable income determined by each of the Group companies" (see Article 41 of the Response). It remains to be demonstrated that the amount to be reimbursed is €129,993.24, as referred to by the Claimant, whereby, in case of allowance of the request for arbitral pronouncement, the amount to be reimbursed should be determined in the execution of judgment.

e) With regard to the alleged illegality of autonomous taxation in the amount of €265,216.17, the Claimant's position has no legal support since the regime for autonomous taxation does not depend on any proof or demonstration of connection with the activity carried out by the taxpayer, with no possibility of exclusion of incidence being provided.

g) Autonomous taxation seeks to diminish the impact of certain expenses on the erosion of taxable income under IRC regardless of whether they can, demonstrably, be indispensable for the maintenance of the source of production and contribute to the obtaining of income. We are not, therefore, in the presence of any presumption, under Article 349 of the Civil Code.

h) With reference to this request, and as a complement, the Claimant failed to meet its burden of proof, not having demonstrated and proved that the expenses in question are incurred in the maintenance of the source of production.

i) The Respondent therefore concludes by the legality of the IRC assessment for 2011 contested by the Claimant which should, thus, be maintained.

1. By order of 27-01-2016, the Claimant, notified to exercise, if it so wished, the right of contradiction, submitted a new procedural document, intending thereby to pronounce itself on an alleged invocation of an exception by the Respondent. However, as the content to which the Claimant referred did not constitute a matter of exception, the joinder of such articulation to the proceedings was not admitted, and, consequently, its withdrawal was ordered, by order of 20-02-2016. In this same order, the Claimant was given an opportunity to, in an autonomous application, attach the documents it considered relevant.

2. By order of 23-02-2016, the meeting provided for in Article 18 of the RJAT was dispensed with and 30 May was set as the deadline for the pronouncement of the arbitral decision.

3. The Parties did not submit pleadings.

II. SANCTIONS

8.1. The Parties have personality and legal capacity, show themselves to be legitimately entitled and are regularly represented (Articles 4 and 10(2) of the RJAT and Article 1 of Ordinance No. 112-A/2011, of 22 March).

8.2. The tribunal is competent and is regularly constituted.

8.3. The proceedings do not suffer from nullities.

8.4. No exceptions were raised.

8.5. There are no other circumstances that prevent the examination of the merits of the case.

III. MERITS

III.1. Statement of Facts

1. Proven Facts

9.1. With relevance for the assessment and decision of the issues raised, prior and of merit, the following facts are established and proven:

a) In 2011, the Claimant was the dominant company of a group of companies subject to the special taxation regime provided for in Article 69 of the IRC Code.

b) In addition to the Claimant, the group of companies included the following companies:

• B…, Lda (NIF:…)
• C…S.A. (NIF:…)
• D…, Lda (NIF:…)
• E…, Lda (NIF:…)
• F…, Lda (NIF:…)
• G…S.A. (NIF:…)
• H…, Lda (NIF:…)
• I…, Lda (NIF:…)
• J…, Lda (NIF:…)
• K… Company for the Management of Social Interests S.A. (NIF:…)
• L…, Lda (NIF:…)
• M…, Lda (NIF:…).

c) On 31-05-2012, the Claimant submitted the Mod. 22 declaration of the group of companies referring to the fiscal year 2011, to which the number …-… -… was assigned.

d) In the said Mod. 22, the Claimant declared the following amounts:

• in field 311 of Table 9, the amount of €23,912,147.30, as taxable income;
• in field 358 of Table 10, the amount of €5,976,474.33, as IRC assessed;
• in field 365 of Table 10, the amount of €451,319.36, as autonomous taxation.

e) The value of autonomous taxation declared was based on the expenses declared by the Claimant, on behalf of the group of companies, in fields 420, 421, 414 and 415 of Table 11.

f) On 27-08-2012, the Tax Authority made the IRC assessment No. 2012… for the fiscal year 2011 in which it determined an amount to be refunded of €1,304,016.78.

g) In the assessment issued, a total of €451,319.36 was considered as the amount to pay by virtue of autonomous taxation.

h) The Claimant submitted a gracious claim against the 2011 IRC assessment, on the grounds of error in self-assessment by not deducting from the calculated taxable income the amount paid as autonomous taxation.

i) The gracious claim was denied by order of the Director of Finance of…, of 15-12-2014, notified to the Claimant by letter of 16-12-2014.

j) The Claimant filed a hierarchical appeal against the decision denying the gracious claim.

k) By order of 29-05-2015, issued by the Director of the IRC Services, the hierarchical appeal was denied.

l) The Claimant was notified of the decision denying the hierarchical appeal by letter of 08-04-2015, sent by registered mail with proof of receipt issued on 15-06-2015.

m) On 16-09-2015, the Claimant filed the request for arbitral pronouncement.

9.2. Substantiation of the Statement of Facts

The statement of facts established is based on the documentary evidence presented and not contested, as well as on the administrative procedure attached by the Respondent.

9.3. There are no other facts with relevance for assessment of the merits of the case that have not been proven.

III.2. Statement of Law

As we have seen, the Claimant requests, as the main claim, a declaration of partial illegality of IRC, contained in the aforementioned self-assessment of IRC, relating to the year 2011, with the consequent "refund (…) of the amount of €129,993.24 corresponding to Autonomous Taxation included in the taxable income of the various companies making up the consolidated tax group, relating to the taxation period of 2011, plus compensatory interest;".

As a subsidiary claim, the Claimant requests "the refund of the amount of €256,216.17 relating to Autonomous Taxation that related to expenses with light passenger vehicles, in the taxation period of 2011".

A) Regarding the Main Claim

The problem of the deductibility of expenses under IRC revolved, at the time of the facts, around the interpretation of Article 45 of the IRC, which had the following wording:

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

a) IRC and any other taxes that, directly or indirectly, affect profits".

Subsequently, Law No. 2/2014, of 16 January, came to revoke subparagraph (a) of Article 45(1) of the IRC, through Article 23-A(1)(a) of the IRC, which now provided that the following are not deductible:

"IRC, including autonomous taxation, and any other taxes that, directly or indirectly, affect profits".

The major difference results from the fact that Article 45 of the IRC, in the wording at the time of the facts in question, did not make express reference to autonomous taxation, which is now made explicit in Article 23-A(1)(a) of the IRC.

The answer to the question posed revolves around the meaning and scope of Article 45(1)(a) of the IRC, before that amendment, imposing, thus, the question of whether:

a) What is the nature of the tax category "Autonomous Taxation" (AT) and, by that means, determine whether or not it is a tax on income;

b) And, in that conformity, after its qualification, assess its eligibility or not as fiscally deductible expenses, provided for in Articles 23 and 23-A of the IRC (the latter revoked the former Article 45 of the IRC).

Let us see.

A) 1. Deductibility or Not as Fiscal Expenses of Expenses Subject to Autonomous Taxation

It is important, in summary, to verify whether autonomous taxation on expenses with vehicles, representation expenses, subsistence allowances and compensation for displacement in the employee's own vehicle and undocumented confidential expenses are deductible from taxable profit.

The Claimant alleges that, being autonomous taxation an indirect tax, which affects expenditure, it should be deducted from taxable profit. Such conclusion apparently follows from the literal interpretation itself, a contrario, of Article 45(1)(a) of the IRC Code, which established, recall, that the following are not deductible: "IRC and any other taxes that, directly or indirectly, affect profits".

In a different sense, the Respondent argues that it is a non-deductible expense, under Article 45(1)(a) of the IRC Code, as it is a tax on income.

For the proper framing of the issue, it is necessary to clarify the nature of autonomous taxation and, once its framework is defined, verify whether this category fits within the set of expenses deductible in the determination of taxable profit under IRC.

A) 1.1. The Nature and Operation of Autonomous Taxation

The analysis of the nature and fiscal treatment of autonomous taxation should, from the outset, take into account its historical antecedents of creation and successive amendments.

A) 1.1.2. Background

The figure of autonomous taxation appears, for the first time, in Law No. 2/88, of 26 January, which gives a new wording to Article 4 of Decree-Law No. 375/74, and aimed at the application of a rate on undisclosed expenses, and which determines that Article 27 of Decree-Law No. 375/74, of 20 August, should have the following wording: "Article 27 - 1 - Commercial or industrial companies, as well as companies with properly organized records that are engaged in agricultural, forestry or livestock operations, which incur undisclosed or undocumented expenses are subject, for this type of expenses, to an increased industrial contribution rate of 20%.

2 - The realization of expenses referred to in the preceding paragraph which exceed 2% of total turnover constitutes an offense punished with a fine of the same amount".

The legislator made clear a punitive spirit in the face of the contraction of these expenses, while at the same time increasing fiscal revenue.

With the entry into force of the IRC Code, approved by Decree-Law No. 442-B/88, of 30 November, that provision was revoked.

In the following year, autonomous taxation of undisclosed expenses is reintroduced into our legal system by Article 4 of Decree-Law No. 192/90, of 9 June and which provides: Article 4 Undisclosed or undocumented expenses carried out in the context of the exercise of commercial, industrial or agricultural activities by personal income tax (IRS) taxpayers who have or should have organized accounting or by corporate income tax (IRC) taxpayers not covered by Articles 8 and 9 of the respective Code are taxed autonomously in IRS or IRC, as the case may be, at a rate of 10% without prejudice to the provisions of subparagraph (h) of Article 41(1) of the CIRC (which consisted of not being fiscally deductible).

Subsequently, Law No. 39-B/94, of 27 December, increased the taxation rate to 25%, in addition to maintaining its non-deductibility.

In the following year, Law No. 52-C/96, of 27 December, increased the autonomous taxation rate to 30% and added paragraph 2 with the following wording: "The rate referred to in the preceding paragraph shall be raised to 40% in cases where such expenses are incurred by IRC taxpayers, totally or partially exempt, or who do not engage, as a main activity, in activities of a commercial, industrial or agricultural nature."

With the State Budget Law for 1999 (Law 87-B/98, of 31 December), the rates were increased from 30% to 32% and from 40% to 60%.

In 2000, Law No. 3-B/2000, of 4 April, expanded the scope of application of autonomous taxation to representation expenses and charges relating to light passenger vehicles, in the following terms:

"Article 4

1 – ...

2 - ...

3 - Representation expenses and charges relating to light passenger vehicles carried out by IRS taxpayers who have or should have organized accounting in the context of the exercise of commercial, industrial or agricultural activities, or by non-exempt IRC taxpayers who engage, as a main activity, in activity of a commercial, industrial or agricultural nature, are taxed autonomously in IRS or IRC, as appropriate, at a rate of 6.4% …..".

With the so-called Tax Reform Law, Law No. 30-G/2000, of 29 December, the legislator decided to revoke Article 4 of Decree-Law No. 192/90, of 9 June, and introduce Article 69-A to the IRC Code, with the following wording:

"1 - Undisclosed or undocumented expenses are taxed autonomously, at the rate of 50%, without prejudice to the provisions of subparagraph (h) of Article 41(1).

2 - The rate referred to in the preceding paragraph is raised to 70% in cases where such expenses are incurred by taxpayers totally or partially exempt, or who do not engage, as a main activity, in activities of a commercial, industrial or agricultural nature.

3 - Representation expenses and charges relating to light passenger vehicles, pleasure boats, tourist aircraft, motorcycles and motor scooters, carried out or supported by non-exempt taxpayers who engage, as a main activity, in activity of a commercial, industrial or agricultural nature, are taxed autonomously, at a rate corresponding to 20% of the highest normal rate."

In the following years, the rates and basis of incidence of expenses with vehicles and representation expenses were successively amended by Laws No. 109-B/2001, of 27 December, 32-B/2002, of 30 September and 107-B/2003, of 31 December.

Law No. 55-B/2004, of 30 December, subjects autonomous taxation to subsistence allowances and expenses for displacement in the employee's own vehicle.

Decree-Law No. 192/2005, of 7 November, added paragraphs 11 and 12 which subject to autonomous taxation profits distributed to entities totally or partially exempt from IRC.

Law No. 64/2008, of 5 December, amended the wording of paragraphs 3 and 4 which now provide as follows: "3- The following are taxed autonomously, excluding vehicles powered exclusively by electric energy:

a) At the rate of 10%, deductible expenses relating to representation expenses and those related to light passenger or mixed vehicles, motorcycles or motor scooters, carried out or supported by subjectivity non-exempt taxpayers who engage, as a main activity, in activity of a commercial, industrial or agricultural nature; [Amended by Law No. 64/2008, of 5 December]

b) At the rate of 5%, deductible expenses, supported by the taxpayers mentioned in the preceding paragraph, relating to light passenger or mixed vehicles whose approved emission levels of CO2 are less than 120g/km, in the case of those powered by gasoline, and less than 90g/km, in the case of those powered by diesel, provided that, in both cases, a certificate of conformity has been issued. [Amended by Law No. 64/2008, of 5 December]

4 - Deductible expenses, supported by the taxpayers mentioned in the preceding paragraph, relating to light passenger or mixed vehicles whose acquisition cost exceeds €40,000, are taxed autonomously, at the rate of 20%, when the taxpayers have tax losses in the two fiscal years preceding the year to which the said expenses relate.

Law No. 3-B/2010, of 28 April, amended paragraph 4, eliminating the reference to acquisition cost exceeding €40,000.00 and now indicating the acquisition cost exceeding the amount fixed in subparagraph (e) of Article 34(1) of the IRC Code.

The evolution of the autonomous taxation regime up to 2010 allows us, from now on, to draw some conclusions.

From the retrospective carried out it can be concluded that, in its genesis, the autonomous taxation regime aimed only to tax undisclosed expenses which, by their nature, are expenses not deductible under IRC, the implicit intention being an evident punitive and deterrent intent.

Subsequently, autonomous taxation came to affect deductible or partially deductible charges, such as light passenger vehicles or subsistence allowances.

It is thus concluded that there have been significant changes in this tax category "Autonomous Taxation" over time, observing a significant increase both in the type of expenses and in the applicable rates. As CASALTA NABAIS concludes[3], "as time went by, the function of those autonomous taxation which, in the meantime had diversified extraordinarily and increased in value, changed progressively becoming progressively that of obtaining (more) fiscal revenue."

Once the historical evolution has been analyzed, it is important to verify whether autonomous taxation is part of income tax or presents another nature.

A) 1.1.3. The Nature of Autonomous Taxation in Jurisprudence and Doctrine

It should be noted that on this subject there is abundant jurisprudence and doctrine, although, in relation to various aspects, as it is a controversial matter, there are orientations in different directions.

For example, the Supreme Administrative Court (2nd section, case 830/11, of 21-03-2012), although not addressing the problem of the deductibility of autonomous taxation, pronounced itself in the sense that with the same, expenditure and not income is taxed, with it being stated in that judgment, among others, "that under the designation of autonomous taxation hide very diverse realities, including, under the terms of paragraph (1) of (then) Article 81 of the CIRC, undisclosed or undocumented expenses, which are taxed autonomously, at the rate of 50%, which shall be increased to 70%, in cases of expenses incurred by taxpayers totally or partially exempt, or who do not engage, as a main activity, in activities of a commercial, industrial or agricultural nature (paragraph (2) of [then] Article 81) and which are not considered as a cost in the calculation of taxable income under IRC.

It should be noted, however, that representation expenses and those related to light passenger vehicles, under the provisions of (then) Article 81(3) of the CIRC and subsistence allowances are affected to business activity and "indispensable" whereby they are fiscally accepted in some cases, albeit within certain limits.

In the same sense, the Constitutional Court, in its Judgment No. 310/12, of 20 June, reformulating the doctrine of Judgment No. 18/11, holds that: "Unlike what happens in the taxation of income under IRS and IRC, in which the set of income earned in a given year is taxed (which implies that only at the end of the same can the tax rate and the bracket in which the taxpayer is inserted be determined), in this case each expense incurred is taxed, considered in itself, and subject to a determined rate, with autonomous taxation being determined independently of the IRC that is due in each fiscal year, since it is not directly related to the obtaining of a positive result, and therefore, subject to taxation.

Thus, and in the case of IRC, we are facing an annual tax, in which each income received is not taxed per se, but rather the aggregation of all income obtained in a given year, the law considering that the taxable event occurs on the last day of the taxation period (see Article 8(9) of the CIRC). Whereas, with regard to autonomous taxation in IRC, the taxable event is the very realization of the expense, not being in the presence of a complex fact, of successive formation over a year, but in the presence of an instantaneous tax fact. This characteristic of autonomous taxation thus refers us to the distinction between periodic taxes (whose taxable event occurs successively, by the passage of a given period of time, as a rule annual, and tends to repeat itself over time, creating for the taxpayer the obligation to pay tax on a regular basis) and single-obligation taxes (whose taxable event occurs instantaneously, arises isolated in time, creating on the taxpayer an obligation to pay with an occasional character). In autonomous taxation, the tax fact that gives rise to the tax is instantaneous: it is exhausted in the act of realization of 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, will be effected at the end of a given taxation period). But the fact that the liquidation of the tax is carried out at the end of a given period does not transform it into a periodic tax, of successive formation or of a lasting character. This operation of liquidation translates only in the aggregation, for purposes of collection, of the set of operations subject to this autonomous taxation, whose rate is applied to each expense, with no influence of the volume of expenses incurred in the determination of the rate." This jurisprudence was reiterated by the Plenary, in Judgment No. 617/2012, case No. 150/12, of 19/12/2012.

In relation to doctrine, as RUI MORAIS states, "this is a taxation that affects certain expenses of taxpayers, which are held to constitute tax facts. It is difficult to discern the nature of this form of taxation and, even more so, the reason why it appears provided for in income tax codes" (see Notes on IRC, Almedina, 2009, pp. 202-203).

Also CASALTA NABAIS considers that "this is a taxation on expenditure and not on income" (see Fiscal Law, 6th Ed., p. 614. In the same sense, see ANA PAULA DOURADO, Fiscal Law, Lessons, 2015, p. 237).

In summary, some doctrine and the above-mentioned jurisprudence of the Supreme Administrative Court and the Constitutional Court consider that autonomous taxation are autonomous tax facts, which affect expenditure. Thus, following this orientation, autonomous taxation, despite being formally inserted in the IRC Code, relates to a taxation distinct from income tax.

It should be noted, however, that this orientation, in addition to not being uniform, does not exhaust the problems that this figure raises, in particular regarding the determination of taxable profit and the question of the deductibility under IRC of the amounts paid as autonomous taxation.

A) 1.2. The Deductibility under IRC of Autonomous Taxation

Under Article 17(1) of the CIRC, "taxable profit corresponds to the algebraic sum of the net result of the period, with the positive and negative patrimonial variations verified in the same period and not reflected in that result, determined on the basis of accounting and possibly corrected, under the Code).

In the definition of the rules for determining taxable profit, currently in force, the requirement of indispensability was eliminated, but strengthened the material and formal conditions for the eligibility of expenses, in particular regarding the documentary requirement of Article 23.

However, at the time of the facts in question, the wording of Article 23 (in force at that date) only accepted as expenses those that demonstrably are indispensable for the realization of income subject to tax or for the maintenance of the source of production.

Thus, it is conceded that autonomous taxation can only be deducted if the respective fiscal expenses are also deductible. Otherwise, we are faced with an expense that is not indispensable for the obtaining of profits. Moreover, Article 45 systematizes a set of limitations of diverse origins and reasons – whether by the very configuration of the tax or by the verification of frequent or abusive practices that distort results and which, in this way, are intended to be prevented.

First, recall that subparagraph (a) of Article 45(1) of the CIRC, at the time of the facts, stated that IRC is not deductible and any other taxes that directly or indirectly affect profits. That is, IRC is not deductible, which seems logical: the tax to be paid should not be deducted from the same tax.

The question will be whether autonomous taxation constitutes a tax that directly or indirectly affects profits. If the thesis that we are faced with a tax on expenditure is accepted, the answer would be negative. Thus, as a corollary of this orientation, and from a perspective of strict literal interpretation of the tax norm, it would be concluded that autonomous taxation would be deductible from taxable profit.

To understand that expenses with autonomous taxation relating to charges deductible under IRC are not taxation on income, they should be able to be deducted for purposes of determining taxable profit, under Articles 17 and 23 of the IRC Code, in particular charges with vehicles, representation expenses, subsistence allowances and compensation for displacement in own vehicle.

However, it is possible to identify various arbitral decisions that conclude in the sense of the fiscal non-deductibility of autonomous taxation, as a result of the interpretation of the aforementioned Article 45(1)(a) of the CIRC, either because it has always been considered a component of IRC, integrating its legal regime, or because it is due by virtue of IRC. In the sense of non-deductibility of autonomous taxation, we have, in particular, the following cases: Nos. 187/2013-T, 209/2013-T, 210/2013-T, 246/2013-T, 255/2013-T, 260/2013-T, 282/2013-T, 292/2013-T, 298/13-T, 6/2014-T, 36/2014-T, 37/2014-T, 59/2014-T, 79/2014-T, 80/2014-T, 93/2014-T, 94/2014-T, 163/2014-T, 166/2014-T, 167/2014-T and 211/2014-T, 659/2014-T, 697/2014-T and 769/2014-T.

From the aforementioned jurisprudence, it is extracted, first, that autonomous taxation relating, at least, to charges with vehicles, subsistence allowances and representation expenses, is a substitute (or complement) to the non-deductibility of costs under IRC, hence the nature of IRC of the collection produced by this autonomous taxation.

To this end, in the Arbitral Judgment, Case No. 59/2014-T, it was stated, among others, that "if it is true that autonomous taxation constitutes a different way of making taxes affect businesses, which could be contained in autonomous regulation or be arranged in the Stamp Duty Code, it is equally true that the legislative option to include such taxation in the CIRC reveals an intention to consider such taxation as inserted in IRC, which can be justified by being an indirect way, but, in the legislative perspective, equitable, simple and efficient, of taxing business income that escapes the regime of direct taxation on income.

It is thus concluded that both in the light of Article 4 of Decree-Law No. 192/90, of 9 June, in which, in all its versions, it was stated that autonomous taxation was in «IRS or IRC» and not another tax, as after its inclusion in CIRC, autonomous taxation of which persons are taxpayers collective are considered IRC, whereby the norms of CIRC shall be applicable to them that do not conflict with their special form of incidence and applicable rates."

Equally, it should be highlighted what was stated in the Arbitral Judgment, issued in case No. 187/2013-T, equally relating to autonomous taxation relating to charges with vehicles, representation expenses and subsistence allowances: "In this sense, one should pay attention, in addition to everything else, to the fact that the legal regime of autonomous taxation in question only makes sense in the context of taxation under IRC. That is, disconnected from the legal regime of this tax, they would, completely, lack meaning. Its existence, its purpose, its explanation, in short, its juridical character, is only comprehensible and acceptable within the framework of the legal regime of IRC. [p 21]. (…) That is, the autonomous taxation of the kind that now occupies us are strongly linked to the subjects of the respective income tax, and, more specifically, to the economic activity carried out by them. This aspect becomes even more evident, if one pays attention to another fundamental fact: the circumstance that the autonomous taxation that now occupy us [charges with vehicles, representation expenses and subsistence allowances] only affect deductible expenses. (…)

Nevertheless, the aforementioned modus operandi by way of expenditure, typical of autonomous taxation under analysis, will still thus be materially connectable with income which, ultimately, legitimates the IRC.

(…). In light of all that has been stated, considering that autonomous taxation affecting deductible charges under IRC integrate the regime, and are due by virtue, of this tax, and, as such are covered by the provision of subparagraph (a) of Article 45(1) of the CIRC (…)."

From the aforementioned jurisprudence, on the other hand, it is extracted that, regardless of the nature attributed to autonomous taxation, and the controversy that revolves around that same nature, the uniform and reiterated orientation of the CAAD jurisprudence goes in the direction of the non-deductibility of autonomous taxation. It should be emphasized, furthermore, that this jurisprudence is that followed recently by the Supreme Administrative Court itself.

Indeed, that is the direction of the judgments issued in cases Nos. 1613/15 and 363/15, of 31/3/2016. In the latter Judgment it can be read, at one point, that "(…) As analyzed in the Judgment of the Plenary of the Constitutional Court, No. 617/2012, of 19 December 2012, the autonomous taxation of representation expenses and expenses with vehicles: "(…) it was intended, on the one hand, to encourage the taxpayers subject to it to reduce as much as possible the expenses that negatively affect the fiscal loss and, on the other hand, to prevent that, through these expenses, companies carry out a disguised distribution of profits, (…) as well as to combat the tax fraud and evasion that such expenses occasion".

"Autonomous taxation of these expenses occurs when simultaneously all or part of these expenses – representation and vehicle expenses – are fiscally accepted as fiscal costs of the company. It is understood, for example, that the acquisition of a vehicle by a company for it to be used by its employees or administrators constitutes a cost of the company because necessary to the realization of profit, but the legislator presumes that there is an advantage to these users of the same vehicles that exceeds what is necessary to the realization of the profit of the company and constitutes patrimonial advantage of the user to be taxed by the mechanism of autonomous taxation of the expense, except when the advantage that exceeds what is necessary to the realization of the profit of the company is taxed as dependent employment income of the respective beneficiary of the use of such vehicle. Similarly, if we even think of vehicles, the rates applicable to acquisition costs rise, by steps, as the acquisition cost of the vehicle rises, because there is a presumption that the acquisition of vehicles of higher value indicates choices more close to "luxury" than to "utility or efficiency".

(…) Thus, in the determination of taxable profit, such expenses – representation, vehicle acquisition – are held as fiscal cost, but the value of autonomous taxation that on these same expenses is determined by law is not, in itself, held as fiscal cost for purposes of determination of taxable profit, under penalty of completely annulling the purpose of autonomous taxation of these expenses, because the part of these expenses that presumptively exceed the needs of the company, assure necessary needs of its administrators and employees, do not contribute to the formation of the taxable profit of the company taxpayer.(…) Autonomous taxation seeks, as we have said, for the company to make an adjustment between its financial resources and its business objectives, discouraging it from adopting behaviors that, benefiting persons other than the company, increasing either the patrimony or well-being or the social reputation of these, lead to a diminution of its tax capacity of the company."

Finally, it should be emphasized that the reiterated and uniform jurisprudence above mentioned led the legislator, in the recent amendment to the IRC Code, carried out by Law No. 2/2014, of 16 January, to establish that autonomous taxation is not a fiscal cost [Article 23-A(1)(a)]. In fact, as we have seen, it results from the express tenor of said Article 23-A of the CIRC that "IRC, including autonomous taxation…", are not deductible for purposes of determining taxable profit. In doing so, the legislator merely gave literal expression to the uniform and reiterated jurisprudential understanding that had been adopted, clarifying the provision in question.

For all that has been stated, accepting the aforementioned majority jurisprudence, the Claimant's understanding is unfounded, giving reason to the Respondent.

B) Regarding the Subsidiary Claim

As stated, the Claimant requests that, should the deductibility of autonomous taxation not be considered appropriate, it be deemed proven that expenses with light passenger vehicles have a business purpose and should therefore not be subject to autonomous taxation (Article 76 of the Petition).

The Claimant alleges, among others, that, in the Hierarchical Appeal, it demonstrated the business nature of expenses with light passenger vehicles since the Respondent cited Judgment 209/2013-T in the substantiation of the decision denying the gracious claim. According to the Claimant, the Respondent indirectly accepts the absence of autonomous taxation on such expenses if it is proven that such expenses have a business nature and were taxed in the sphere of the employee.

The Claimant, after approaching various considerations on the problematic nature of the business character of the expenses in question, comes in Article 87 of the Petition to assume the elimination of the presumption of "partial business character" invoking for this purpose, among others, the proven nature of the expenses and their necessity for operational activity and the proven business character and indispensability of the said expenses for the obtaining of income and the non-existence of any other beneficiaries.

The Claimant concludes that, in subsidiary terms, €256,216.17 should be refunded resulting from the self-assessment of autonomous taxation determined and paid at the time of the delivery of Model Declaration 22 in May 2012 because it was proven that the business nature of these charges.

Let us see.

On autonomous taxation provided for in Article 88 of the CIRC, in the wording given by Law No. 55-A/2010, of 31 December – State Budget for 2011, the various rates applicable to various expenses. Thus for light passenger or mixed vehicles it provides the following:

"…..

3 - Deductible charges relating to representation expenses and those related to light passenger or mixed vehicles whose acquisition cost is equal to or less than ….. are taxed autonomously at the rate of 10%…

4 - Deductible charges relating to representation expenses and those related to light passenger or mixed vehicles whose acquisition cost is …" are taxed autonomously at the rate of 20%…

5 - Charges relating to light passenger vehicles, motorcycles and motor scooters are considered, in particular, depreciations, rents or leases, insurance, maintenance and conservation, fuels and taxes affecting their possession or use."

From what has been stated and taking into account the wording of this norm, it is clear that it provides for autonomous taxation for those expenses and there is no apparent literal reference that allows one to infer dependence on conditions or any proof of business character. Furthermore, such taxation is provided for all charges supported whether they are fiscally deductible or not.

In view of the literal tenor of Article 88 of the IRC Code, we can conclude, with some doctrine, that this is an anti-abuse norm of an irrefutable nature. Indeed, from the legal precepts, it does not result that the taxpayer is admitted to proof of the full business character of expenses or of a practice that did not have as its main objective the obtaining of a fiscal advantage. These are norms that function without any administrative intervention in which the law, in a clear and imperative manner, establishes the effects of certain facts or acts carried out by the taxpayer.

Consequently, the Claimant's argument has no minimum support in law regarding the possibility of the alleged elimination of the presumption of business character of the expenses in question.

Furthermore, even if the Claimant's thesis were to be accepted, the truth is that as the Respondent points out, the facts invoked are vague and generic with no minimal concretization in the records for purposes of proving the said business character of the expenses in question. In fact, if it were as the Claimant intends, it was up to the Claimant to prove the indispensability of the expenses for the activity produced, under Article 23 of the IRC. Proof considered even more essential when it is expenses which, by their nature, do not exclude both business purposes and merely private purposes.

It is thus unfounded, equally, the subsidiary request for non-autonomous taxation of charges with light passenger vehicles.

In these terms, the main and subsidiary request of the Claimant for a declaration of partial illegality of IRC contained in the self-assessment of IRC relating to the year 2011 is unfounded.

C) Compensatory Interest

As results from what has been stated, the IRC assessment for the year 2011 subject of the present appeal does not suffer from the defects imputed to it, since the amount corresponding to autonomous taxation was not deductible from taxable profit.

In these terms, as the main request and the subsidiary one deduced by the Claimant for a declaration of illegality of the IRC assessment, relating to the period of 2011, are unfounded and the impugned tax act should be maintained, the request for compensatory interest, which is presented by the Claimant as a corollary of the alleged illegality, is necessarily unfounded.

IV. DECISION

In the terms stated, this Arbitral Tribunal decides:

a) To judge unfounded the request of the Claimant (main and subsidiary) for a declaration of partial illegality of IRC contained in the self-assessment of IRC relating to the year 2011;

b) To absolve the Tax and Customs Authority of that request;

c) To judge unfounded the request for compensatory interest, absolving the Tax and Customs Authority of the respective request, and, in this sequence,

d) To maintain the denial of the hierarchical appeal and the impugned assessment.

V. VALUE OF THE PROCEEDINGS

In accordance with the provisions of Articles 306(2) and 297(2) of the CPC, Article 97-A(1)(a) of the CPPT and Article 3(2) of the Regulation of Costs in Tax Arbitration Proceedings, the value of the proceedings is fixed at €129,993.24.

VI. COSTS

In accordance with the provisions of Articles 22(4) and 12(2) of the Legal Regime for Arbitration, Article 2, paragraph (1) of Article 3 and paragraphs 1 to 4 of Article 4 of the Regulation of Costs in Tax Arbitration Proceedings, as well as in Table I attached to this instrument, the total value of costs is fixed at €3,060.00, to be borne by the Claimant.

Let it be notified.

Lisbon, 20 May 2016.

The arbitrators,

Fernanda Maçãs (President)

Fernando de Jesus Amado dos Santos

Maria Forte Vaz

[1] See Judgments No. 310/2012, of 20 June, No. 382/2012, of 12 July, No. 617/2012, of 19 December, and No. 85/2013, of 5 February.

[2] See Judgments of 21-03-2012, case No. 0b830/11, and of 21-01-2015, case No. 0470/14.

[3] CASALTA NABAIS, "Investing and Taxing: a Symbiotic Relationship? In Studies in Homage to Professor Doctor Alberto Xavier, Vol. I, Almedina, 2013, p. 761.