Summary
Full Decision
ARBITRAL DECISION
The arbitrators appointed by the Ethics Council of the Centre for Administrative Arbitration to form the Arbitral Tribunal, constituted on 6 February 2018, Dr. Alexandra Coelho Martins (president), Professor Doctor Rui Duarte Morais and Dr. Sofia Ricardo Borges, hereby agree as follows:
REPORT
A..., S.A., hereinafter designated as "Claimant", legal entity number..., with registered office at..., n.º..., ...-... Lisbon, has requested the constitution of a Collective Arbitral Tribunal, in accordance with the provisions of articles 2, paragraph 1, subsection a), 6, paragraph 2, subsection a) and 10, paragraph 1, subsection a), all of the Legal Framework for Tax Arbitration ("RJAT"), approved by Decree-Law no. 10/2011, of 20 January, and of articles 1 and 2 of Regulation no. 112-A/2011, of 22 March.
The Claimant seeks the assessment and declaration of illegality, and consequent annulment, of the tax acts imposing Corporate Income Tax ("IRC") and the inherent interest, for the tax years 2013 and 2016, in the total amount of €120,728.22, with the Tax and Customs Authority ("AT") as the Respondent. It further petitions the reimbursement of the tax improperly paid, increased by compensatory interest, calculated from the date of payment until the respective reimbursement, in accordance with the provisions of article 43, paragraph 1 of the General Tax Law ("LGT").
The request for constitution of the Arbitral Tribunal was accepted by the President of CAAD and followed its normal procedures, namely with notification to the AT.
The Ethics Council appointed as arbitrators of the Collective Arbitral Tribunal the undersigned signatories, who communicated their acceptance of the appointment within the applicable time limit, in accordance with the provisions of article 6, paragraph 2, subsection a) and article 11, paragraph 1, subsection a), both of the RJAT.
The parties, duly notified, did not manifest any intention to challenge the appointments and the Collective Arbitral Tribunal was constituted on 6 February 2018, in accordance with article 11, paragraph 1 of the RJAT and articles 6 and 7 of the Code of Ethics.
The Claimant alleges, in summary, two defects, one procedural and another substantive.
First, it raises the formal defect relating to the allegedly excessive duration of the inspection procedure that preceded the issuance of the additional assessments that are the subject of this action. According to the Claimant, the inspection was prolonged for more than a year, a period counted from the date of commencement of the inspection action against the controlled company B..., S.A., on 24 February 2016, until the "transposition" of the corrections made in the parent company of the group (the Claimant herein), with the notification of the additional assessments on 10 August 2017.
Thus, the Claimant frames as a single continued inspection action the inspection action to which the controlled company was subject, with reference to the tax year 2013, which ended on 29 March 2016, and the inspection action carried out against the Claimant, in its capacity as parent company of the group, which began on 1 February 2017 and ended on 31 July 2017.
This exceeding of the six-month time limit provided for in article 36, paragraph 2 of the Supplementary Regime for Tax and Customs Inspection Procedures ("RCPITA"), in the version applicable at the date of the facts, compromises, in the Claimant's view, the right to assessment.
It further argues that an interpretive nature cannot be attributed to the addition of paragraph 7 to the aforementioned article 36 of the RCPITA, operated by Law no. 75-A/2014, of 30 September, which came to prescribe that "[t]he expiry of the time limit for the inspection procedure determines the end of external inspection acts, but does not affect, however, the right to assessment of taxes". The said addition cannot be applicable to tax relating to taxation periods already concluded when it came into force, as it is contrary to the principle of legal certainty and the protection of confidence inherent in article 2 of the Constitution of the Portuguese Republic ("CRP").
On the other hand, it invokes the substantive defect for error (in the premises) of law, due to breach of the principle of specialization of tax years and violation of the principle of justice, arising from the non-acceptance by the AT of the tax deduction for negative patrimonial variation, in the amount of €324,097.73, which aimed to correct an improper duplication of income recognized in excess in the sphere of the Claimant in prior tax years (from 2009 to 2011).
According to the Claimant, this duplication derives from invoicing the Fund E... for a management commission, when the same services had already been invoiced to the subsidiaries of that Fund E..., a situation which only in 2013 could the Claimant regularize. It frames the case at hand within the provisions of article 18, paragraph 2 of the IRC Code, which constitutes an exception to the principle of specialization.
Furthermore, it sustains that an interpretation of article 18, paragraph 2 of the IRC Code in the sense that would enable the AT to ensure an improper patrimonial advantage through the duplication of taxation on income earned in singular form would be unconstitutional, due to violation of the principles of justice and taxation of actual income enshrined in article 104, paragraph 2 of the CRP.
Finally, it invokes the principles of investigation, justice, proportionality and impartiality (articles 58 and 55 of the LGT), on which it bases the duty of the AT to effect the correlative adjustment, had the adjustment [which the AT implemented] to the deduction made in 2013 been due, in the tax year to which that [deduction] was imputable.
The AT presented a reply and joined the administrative file. It advocates the non-existence of the "defect of expiry" of the right to assessment, which it understands derives from an erroneous argumentative construction by the Claimant, due to lack of distinction between the sphere of the controlled and controlling company, the concepts of external and internal inspection action and between the closure of an inspection action and the issuance of assessments resulting from it. With respect to the tax year 2013, there were two distinct inspection actions, one inspection action against the controlled company and one inspection action against the controlling company (now Claimant), neither of which exceeded the six-month time limit.
The Respondent argues for the non-applicability of article 18, paragraph 2 of the IRC Code, due to failure to satisfy its respective prerequisites. It considers, in this context, that the non-recognition of income recorded in tax years prior to 2013 did not aim to correct a bookkeeping error, since no irregularity was detected in the recording or classification of operations, nor was it triggered by external uncontrollable factors, as the reasons that originated it are found in the relationships between the participating entities and their management.
It concludes that the request for arbitral pronouncement is unfounded, with the consequent dismissal of the Respondent from all claims.
There was no place for evidence production proceedings and no exceptions were raised, whereby the Arbitral Tribunal dispensed with the meeting provided for in article 18 of the RJAT, given the principle of tribunal autonomy in the conduct of the proceedings (article 16, subsection c) of the RJAT) and the principle of procedural economy, which requires that it is not permissible to perform useless acts (article 130 of the CPC applicable by virtue of article 29, paragraph 1, subsection e) of the RJAT).
The Claimant presented allegations on 30 April 2018, reiterating the position contained in the arbitral request to the effect that the tax acts for IRC assessment be annulled, which were followed by the Respondent's allegations on 9 May 2018, which maintains, in full, the content of the Reply initially presented.
DETERMINATION OF MATTERS
The Tribunal was regularly constituted and is competent ratione materiae (see articles 2, paragraph 1, subsection a) and 5 of the RJAT).
The request for arbitral pronouncement is timely, as it was submitted within the time limit provided for in subsection a), paragraph 1, of article 10 of the RJAT.
The parties have legal personality and capacity, have standing and are regularly represented (see articles 4 and 10, paragraph 2 of the RJAT and article 1 of Regulation no. 112-A/2011, of 22 March).
The proceedings do not suffer from any nullities, and no preliminary questions have been raised.
III. REASONING
DELIMITATION OF ISSUES TO BE DECIDED
Two fundamental questions arise in the present arbitral action. The first concerns the alleged procedural defect of exceeding the legal time limit for the duration of the inspection action and the intended invalidating effect on the disputed assessment acts. The second concerns the error of law in the application of the principle of specialization of tax years set out in article 18 of the IRC Code, in not framing the case under consideration within the exception of its paragraph 2, or, in the hypothesis of considering that this does not entail the interpretation advocated, in not disapplying it in the specific case, due to substantive unconstitutionality, arising from violation of the principles of justice, proportionality and impartiality.
Finally, it is important to assess the prerequisites for the request for compensatory interest given the provisions of article 43, paragraph 1 of the LGT.
FACTS
With relevance for the decision, the following facts should be considered:
The company A..., S.A., herein Claimant, designated in the economic year 2013, to which the facts refer, as C..., S.A, with tax identification number..., heads, in its capacity as dominant company or parent company, an economic group classified, for IRC purposes, under the Special Regime for Group Taxation ("RETGS"), in accordance with articles 69 and following of the Code of this tax – see Tax Inspection Report relating to this company as dominant company of the Group ("RIT Group") and "individual RIT", referring to the controlled company, B..., S.A., attached as Annex I thereto, contained in the Administrative File ("PA") and attached by the Claimant as Document 4.
In the tax year 2013 the fiscal scope of the Group consisted of three companies, the Claimant (parent company) and two wholly-owned subsidiaries, D..., S.A. and B..., S.A., with the group declaring in that year a fiscal result of €7,584,716.04 – see RIT Group and Document 4 attached with the request for arbitral pronouncement (rpa).
During the years 2009 to 2011 B..., S.A. (company controlled by the Claimant), in its capacity as administrator of Fund E... ("Fund E..."), provided management services relating to companies F..., S.A. and G..., S.A., held (subsidiary companies) of Fund E.... The remuneration for these management services was covered by invoicing regularly issued to this Fund under the description of "management commission of 1.8% of Fund E...", provided for in clause 23, paragraph 2 of the Regulations for Administration of Fund E... – see Regulations for Administration of Fund E... referred to in the RIT (http://web3.cmvm.pt/sdi/fundos/docs/983RG19062008.pdf) and Document 7 attached with the rpa.
At the same time, and still with reference to the years 2009 to 2011, B..., S.A. invoiced the same management services to F..., S.A. and G..., S.A. (subsidiary companies of Fund E...) – see Individual RIT, including Annexes.
Since 14 September 2009, Fund E... had assumed the provision of management services to the companies it held (subsidiary companies) F..., S.A. and G..., S.A. – see Document 5 attached with the rpa.
The provision of management services by Fund E... to its holdings originated from a management services agreement ("Management Services Agreement"), concluded on 23 April 2008, between the Belgian company H... and the Portuguese company F..., S.A., under which the provision of management services was envisaged on the part of H... to F..., S.A. with the purpose of reducing the latter's costs – see Document 5 attached with the rpa.
On 14 September 2009, H... executed the "Assignment of Management Services Agreement", a contract through which it partially transferred its contractual position (as service provider in the Management Services Agreement mentioned in the previous subsection), to Fund E... and I... ("I..."). Thus, from this date, Fund E... assumed the obligation to partially provide management services to the subsidiary company (of the Fund) F..., S.A. – see Document 5 attached with the rpa.
H... and the two assignees (Fund E... and I...) were, directly or indirectly, shareholders of F..., S.A., the latter through subscription of the capital increase of company J..., SGPS, S.A. – see Document 5 attached with the rpa.
In accordance with this contract for partial assignment of contractual position, the apportionment of the remuneration for management services was fixed in the proportion of 30% for H..., 51% for Fund E... and 19% for I... – see Document 5 attached with the rpa.
On 4 December 2009, H..., Fund E..., and I..., on the one hand; F..., S.A. and G..., S.A., on the other hand, concluded a second contract for assignment of contractual position ("Assignment of Management Services Agreement") relating to the provision of management services at issue. With this contract, F..., S.A. partially transferred the position of beneficiary of management services to G..., S.A. (assignee) which became also the recipient of the same services – see Document 6 attached with the rpa.
In accordance with this second contract for assignment of contractual position, the apportionment of the charges for management services was fixed in the proportion of 70% for G..., S.A. and 30% for F..., S.A – see Document 6 attached with the rpa.
The company B..., S.A. did not recognize, in 2013, as a counterpart to Carried Forward Results, income in the amount of €324,097.73, as a result of the correction of management commissions invoiced to Fund E... which, due to a framing lapse, were recorded as revenue/income in the years 2009 to 2011. Alongside this accounting movement, the credits of which this company (controlled) was the holder over the subsidiary companies of the Fund were transferred to Fund E... under a Credit Assignment Agreement – see Individual RIT and proved by agreement (article 49 of the reply).
The non-recognition of income generated, in the sphere of company B..., S.A., a negative patrimonial variation in the amount of €324,097.73, which was deducted for tax purposes in box 07 of model 22 IRC of the year 2013, in field 704 "Negative patrimonial variations not reflected in the net result of the period (art. 24)" – see Individual RIT.
Following the service order OI2016..., with dispatch of 18 February 2016, an inspection procedure of limited scope – IRC, for the tax year 2013, was initiated on 24 February 2016, relating to company B..., S.A., tax number..., as an individual company, for analysis of the amount of €324,097.73, declared in field 704 – "Negative patrimonial variations not reflected in the net result of the period", of model 22 – see Individual RIT.
In this context, B..., S.A. was notified by office..., of 24 February 2016, to submit elements and justifications regarding the tax deduction for negative patrimonial variation in the amount of €324,097.73, having proceeded with its delivery on 7 March 2016, including copies of the accounting movements, list of invoices issued by it to companies F..., S.A. and G..., S.A., and extracts of the accounts of these customers. As justification for the deduction, it states that:
"The amount reflected in field 704 of model 22 of 2013, of entity K... relates to the correction of management commissions made to F... and G..., S.A., held by Fund E..., where the entity in question is the managing company, since 2007 to the present date.
The origin of this income relates to commissions invoiced and not received from Fund E..., which initially should have been invoiced by Fund E... itself and not by K.... In view of the foregoing, in 2013 the respective correction was carried out, via equity. Thus, the reversal of the amounts in question was proceeded with, referring to the years 2009, 2010 and 2011 (...)". – see Individual RIT and Annexes.
On 16 March 2016, additional elements were requested with the objective of validating the operations by the inspection team, and the company proceeded to satisfy this request on 22 March 2016 – see Individual RIT and Annexes.
This inspection action ended on 29 March 2016, and gave rise to a proposal to correct the assessable income for IRC, on the ground that the negative patrimonial variation in the said amount of €324,097.73 is not tax-deductible, under article 18, paragraphs 1 and 2 of the Code of this tax, being consolidated in the final inspection report notified to B..., S.A. and to the Claimant, on the basis of the grounds described as follows:
"III. 1.1.3. Proposed Correction
The case under analysis concerns the deduction, in box 07 of model 22 of the year 201[3], of a negative patrimonial variation in the amount of 324,097.73 €.
This variation, on the basis of the elements provided by the taxpayer, results from corrections made to revenue/income (commissions) which, due to a framing lapse, were recognized in the years 2009, 2010 and 2011.
Indeed, it is stated that "The origin of this income relates to commissions invoiced and not received from Fund E..., which initially should have been invoiced by Fund E... itself and not by K...", that is, A... considered in its accounts income that was not its own.
Having detected such a situation in 2013, it proceeded in this year to regularize the error by the non-recognition of the revenue in the carried forward results account (accounts 561004, 561005 and 561006). However, by virtue of the principle of specialization provided for in article 18 of the CIRC, revenue should be (not) recognized in the period(s) to which it relates (article 18, paragraph 1 of the CIRC).
Paragraph 2 of the cited article provides for an exception to that principle, however it imposes that the facts – revenue – are manifestly unknown or unforeseeable. Now, since Fund E..., in accordance with its administration regulations1, is a venture capital fund administered by A..., the income earned by it is not unknown to the latter, which is why it should be reported to the respective years. (1 Administration regulations of the venture capital fund called "Fund E..." available at http://web3.cmvm.pt/sdi/fundos/docs/983RG19062008.pdf)
Indeed, in the electronic correspondence attached to the second request for elements, and as a result of the company's request for an opinion from its lawyer on which solution to adopt, two scenarios were presented (Pages 36 and 37 of Annex I):
"Framework
As I understand it, since 2009 A... has been invoicing a company partially held by Fund E..., for various services (e.g., management services, consulting, technical support), insofar as it is A...'s human resources that effectively provide them and, at that date, it was concluded that it would not be appropriate for Fund E... to proceed with such invoicing (...)
Possible Solutions
- Reconstitution of the hypothetical situation
A first alternative would be to reconstitute the situation that would hypothetically have existed had the invoicing been processed by Fund E... from the beginning, thus assuming that the services provided by A...'s human resources were included in the management services already properly remunerated by the respective commission.
This alternative would imply, in addition to other ancillary obligations:
- annul the invoices issued by A... since 2009 (with the inherent correction of financial statements);
- issue invoices from Fund E... attributable to the year 2009 and onwards (with the inherent correction of financial statements);
- replace the VAT declarations of A... since 2009; and
- replace the IRC declarations of A... since 2009.
Regardless of the complexity and difficulty inherent in reopening and correcting accounts already closed, I believe that the impossibility of carrying out the last two procedures will be sufficient to discard this alternative. Since in both cases the correction to be made would be favorable to A... (reducing the tax base in both taxes in question, the filing of replacement declarations is only possible
-
in the case of IRC, within one year from the end of the legal deadline, making the replacement of IRC declarations for 2009, 2010 and 2011 impossible;
-
in the case of VAT, whether it is assumed to have been inaccurate invoices, or if it is considered that there is room for the correction of material errors or miscalculations in periodic declarations, within two years, also making the replacement of VAT declarations for 2009, 2010 and 2011 impossible (if not in total, at least as to the majority) and the consequent recovery of the tax assessed and paid to the State.
-
Compensation by latent credit
An alternative solution is to note that the invoicing which A... has been proceeding with since 2009 is not necessarily "wrong" and should not be annulled, but results from a faculty that Fund E... granted to A... without having been properly compensated. That is, the parties noted that, although they decided in 2009 that, for administrative, practical or other reasons, it should be A... to invoice the services effectively received by the company, they never proceeded to compensate the Fund for this fact – although it was not possible (for regulatory reasons) to directly reflect this invoicing in the management commission charged to the Fund (reducing it proportionally), the Fund should have been compensated for having ceded to A... the right to invoice the company for services that it would be appropriate for the Fund to invoice insofar as it would have already paid for them through the management commission, A... clearly cannot have a duplication of income. A duplication that, after all, ended up existing and being evident accounting and tax wise.
As such, the reconstitution of the situation could be achieved through the conclusion of a contract for assignment of the credits over the company of which A... is the holder, in return for compensation to the Fund that was not paid in 2009 when A... acquired, without any payment, the right to invoice the company for services for which, indirectly, it was already remunerated through the management commission.
The credit assignment contract would expose the situation in its recitals and, with respect to the form of payment of the price of the transferred credits, would clarify that the same would be processed by offsetting with the Fund's credit over A... (still to be recognized in the respective accounts, but arising from the 2009 operation).
Although not being entirely free from the risk that the Tax and Customs Authority ("AT") could consider that the principle of specialization of tax years does not permit the full recognition in 2013 or 2014 of the expense corresponding to the recognition of the account payable to the Fund for the 2009 operation, it would imply that the AT itself would reopen to past years (having no limitations for doing so, since the corrections to prior years would be favorable to A..., in return for the additional assessment they would make on the year 2013 or 2014. Similarly, it is plausible that no correction would be made for VAT purposes, insofar as no tax would have been improperly deducted or insufficiently assessed."
From what is described it is clear that A... opted for the second solution, given that by the principle of specialization of tax years, the tax deadlines for replacement of declarations (IRC and VAT) were already exhausted.
However, and as already mentioned, the CIRC establishes its own rules regarding the periodization of the positive and negative components of taxable income. In this sense, and based on paragraphs 1 and 2 of article 18 of the CIRC, the negative patrimonial variation, in the amount of 324,097.73 €, deducted in box 07 of model 22 of the year 201[3] is not accepted for tax purposes" – see Individual RIT, Document 4 attached with the rpa.
Since the correction of €324,097.73 made to B..., S.A. had an effect on the Group's result given the applicability of RETGS, a procedure of limited scope inspection – IRC, was carried out in the sphere of the parent or dominant company (the Claimant), in compliance with the internal service order no. OI2017..., with dispatch of 1 February 2017, covering the tax year 2013, which resulted in the pass-through to the taxable result declared by the Group (calculated by the dominant company) which from €7,584,716.04 was corrected to €7,908,813.77 – see RIT Group and Document 4 attached with the rpa.
On the Tax Inspection Report relating to the Group, a concordant dispatch from the Chief of Division IV (by subdelegation from DFA), dated 31 July 2017, fell, of which the Claimant became aware on 1 August 2017 – see RIT Group and Document 4 attached with the rpa.
On 11 August 2017, the Claimant was notified of the additional IRC assessment no. 2017..., of 7 August 2017, of the assessments of compensatory interest nos. 2017... and 2017..., and of the account settlement statement no. 2017..., of 9 August 2017, all relating to the tax year 2013, determining the amount of €120,728.22 to be paid, with the payment deadline on 6 October 2017 – see Document 1 attached with the rpa and PA.
As a consequence of the corrections made to the fiscal result for the tax year 2013, the AT also issued the assessment act no. 2017..., of 12 July 2017, relating to the tax year 2016, notified to the Claimant on 20 August 2017 – see Document 3 attached with the rpa and PA.
The total amount of €120,728.22 resulting from the aforementioned tax assessment acts for IRC and compensatory interest was paid by the Claimant on 29 September 2017 – see Document 2 attached with the rpa.
On 20 November 2017, not accepting the additional assessments above identified, for IRC and compensatory interest, the Claimant submitted a request for constitution of the Arbitral Tribunal in the CAAD computer system.
UNPROVEN FACTS AND REASONING
For the purposes of the decision, there are no other facts that should be considered unproven.
With respect to the proven facts, the arbitrators' conviction was based on critical analysis of the documentary evidence attached to the file, the content of which is given as fully reproduced.
The facts relevant to the judgment of the case were selected and defined according to their legal relevance, in light of the plausible solutions to the legal questions, in accordance with article 596 of the CPC, applicable by virtue of article 29, paragraph 1, subsection e), of the RJAT.
ON THE LAW
Formal defect: duration of tax inspection procedure
The administrative procedure for tax inspection is part of the creditor's supervisory function. Such procedure has a preparatory and ancillary character of tax acts and aims at observing tax realities with the purpose of verifying compliance with obligations by taxpayers (articles 54 of the LGT and 2 and 11 of the RCIPTA).
The duration of the inspection procedure, given the potential for harm to the rights and guarantees of taxpayers inherent in its intrusive nature, is temporally limited, in consonance with the principle of proportionality, with the legislator intending to prevent long and unnecessary interventions. In accordance with article 36, paragraph 2 of the RCPITA: "[t]he inspection procedure is continuous and must be completed within a maximum period of six months from notification of its commencement", being renewable for two further periods of three months in the special circumstances set out in the hypothesis of paragraph 3 of the same provision.
The Claimant starts from the premise of the continuity and unitary character of the inspection procedure carried out at B..., S.A. (controlled company) and at A..., S.A. (dominant or parent company), from which it concludes that, since this procedure commenced on 24 February 2016, at the controlled company, and the additional assessments were notified to the dominant company on 10 August 2017, more than one year and five months would have elapsed, a period considerably greater than the maximum six-month limit provided for in article 36, paragraph 2 of the RCPITA, with the consequent invalidity of the disputed tax acts.
This argument, however, suffers from multiple defects.
First, the taxation of the aforementioned entities under RETGS, in accordance with the discipline contained in articles 69 to 71 of the IRC Code, does not give rise to any phenomenon of disregard of legal or tax personality, constituting a special regime for determining taxable income that does not prejudice the individuality and legal-tax autonomy of the companies within the scope of the Group.
In the specific case, we are dealing with two companies that were each subject to an inspection procedure, in the context of the specific and individually established legal-tax relationship with the tax administration. Thus, two distinct tax audit actions occurred, carried out on two distinct companies, vested with legal-tax personality, so the time limit for each of the procedures should be counted independently.
With respect to the controlled company, the inspection procedure lasted just over a month, from 24 February 2016 to 29 March 2016 (subsections N and O of the facts). With respect to the Claimant, as parent company of the group, the internal inspection procedure commenced on 1 February 2017, with the RIT of the Group being notified on 1 August, precisely six months after its commencement (subsections R and S of the proven facts). In neither of these situations was the legal time limit of six months determined by the aforementioned article 36, paragraph 2 of the RCPITA exceeded.
Moreover, the conclusion of the inspection procedure does not occur with the issuance or notification of additional tax assessment acts, but with the notification to the taxpayer of the final report, as provided for in article 62, paragraph 2 of the RCPITA. In this manner, the method of counting proposed by the Claimant could never be admitted, which takes as dies ad quem the date of notification of the additional IRC and interest assessments.
Since the six-month time limit has not been exceeded, the other questions raised are prejudiced, in particular that of the possible interpretive nature (and retroactive effect) of the addition of paragraph 7 to article 36 of the RCPITA, operated by Law no. 75-A/2014, of 30 September (article 608, paragraph 2 of the Code of Civil Procedure – "CPC" – by virtue of article 29, paragraph 1, subsection e) of the RJAT). In any case, it should be noted that even before this legislative amendment, exceeding the time limit for the duration of the inspection procedure did not imply the annulment of the subsequent assessment act, as stated, among others, in the Rulings of the Supreme Court of Administrative Justice (STA) in cases no. 103/08, of 4 June 2008; 112/10, of 20 October 2010, and in the Ruling of the Administrative Court of the South (TCA South) in case no. 04311/10, of 24 May 2011.
Thus, it is concluded that the Claimant's argument regarding the procedural defect invoked is without merit.
Substantive defect: error of law
The application of the principle of specialization of tax years and the framing of the correction made in 2013 by B..., S.A., regarding operations which, by error, were invoiced in duplicate in prior tax years (from 2009 to 2011), a correction with an effect on the taxable profit declared by the Claimant in its capacity as dominant company of the fiscal group to which both companies belong, is discussed in these proceedings.
The aforementioned duplication arose from the fact that the same management services provided to the subsidiary companies of Fund E... were invoiced to those companies (F..., S.A. and G..., S.A.) and, at the same time, to Fund E... itself, the latter case being comprised in the 1.8% management commission charged.
It should be noted that, in accordance with article 24, paragraph 1 of the IRC Code, negative patrimonial variations not reflected in the net result of the taxation period contribute to the formation of taxable income under the same conditions provided for expenses and losses, that is, provided that the requirements of article 23 of the same statute are observed.
As results from the proven factuality, this correction gave rise to a negative patrimonial variation in the amount of €324,097.73, which was considered deductible by B..., S.A., which recorded it in box 07 of model 22 of IRC for the year 2013, in field 704, as a negative component of taxable income, such deduction referring, uncontestedly, to prior tax years than that in which it was carried out, so the problem that arises is one of periodization.
In this regard, Freitas Pereira notes that "[t]he objective of taxation of the actual profit of companies – which received constitutional recognition in Portugal (article 107, paragraph 2 of the Constitution [currently 104, paragraph 2]) – is confronted with complex problems, of which the nuclear one stands out, that of its periodization. Indeed, if it is always difficult to determine actual profit, this difficulty is increased when – in consonance with the principle of annual taxes – one seeks to segment the life of companies into periods that are in some way independent of each other and assign to each of them a certain profit for the purpose of calculating a tax" – see The Periodization of Taxable Income, Notebooks of Science and Tax Technique (152), Tax Science Center, Lisbon, 1988, p. 11.
In this matter, article 18, paragraphs 1 and 2 of the IRC Code applies, which provides:
"Article 18
Periodization of taxable income
1 – Income and expenses, as well as the other positive or negative components of taxable income, are attributable to the taxation period in which they are earned or incurred, regardless of their receipt or payment, in accordance with the economic periodization regime.
2 – The positive or negative components considered as concerning prior periods are only attributable to the taxation period when, at the date of closure of the accounts of the period to which they should have been attributed, they were unforeseeable or manifestly unknown.
(...)"
Established that we are dealing with a negative component concerning prior annual periods to 2013, its deductibility depends on the satisfaction of the prerequisites of paragraph 2 of article 18, that is, its unforeseeable nature or its manifest non-recognition. In the case under consideration, the operations and movements to be corrected derived from an error of the taxpayer itself, so a strict interpretation of the norm would tend towards a result coinciding with the position adopted by the AT, in the sense of not covering bookkeeping errors or acts of the taxpayer itself that the latter may control.
However, both doctrine and the settled case law of the STA have not adopted this "rigid" interpretation, due to its non-conformity with the principle of justice, enshrined in articles 266, paragraph 2, of the CRP.
In this context, the Ruling of the STA of 25 June 2008, case no. 0291/08, states that, without calling into question the tax relevance of the principle of specialization of tax years, it should permit "the imputation of costs to prior tax years, when it has not resulted from voluntary and intentional omissions, with a view to operating the transfer of results between tax years".
It considers, in line with the commentary by Diogo Leite Campos, Benjamin Rodrigues and Jorge de Sousa, in Annotated General Tax Law, 3rd edition, pp. 242-243, that "the taxpayer, in principle, would have been prejudiced by his own error in declaring the taxable income, since, by deducting a cost in the year following the one in which it should have deducted it, it failed to see the amount of the corresponding tax diminished in the year in which such diminution should have occurred, only seeing such diminution occur in the following year and, in parallel, the tax administration had not suffered any prejudice, as it had received in the prior year the tax without accounting for this cost that should diminish it (...) the taxpayer, who was already the sole party prejudiced by his error, would see his situation still aggravated, finding himself unable to effect the deduction of such cost in any of the years. The tax administration, thus, would retain in its power a tax to which it manifestly would not be entitled".
The cited Ruling continues in the sense that: "This is a situation in which the exercise of a bound power (correction of taxable income in the face of a violation of the principle of specialization of tax years) leads to a situation that is flagrantly unjust and in which, therefore, the question arises of having the principle of justice, enshrined in articles 266, paragraph 2, of the Constitution, and 55 of the General Tax Law, operate, to prevent the possibility of effecting the said correction.
On the other hand, it should be noted that in a situation of this type there is not even any public interest in the action of the tax administration, as the obtaining of a due tax is not at issue, so, as all administrative activity should be guided by the pursuit of this interest, the administration should refrain from acting."
This understanding was reiterated on multiple occasions, with emphasis on the Ruling of the STA, of 19 November 2008, in case no. 0325/08, and the recent Ruling of the STA, of 14 March 2018, in case no. 0716/13.
The latter states: "[i]n order to prevent practices of manipulation of the calculation of taxable income, in particular the postponement of taxation or its concentration in tax years where taxation may result more favorable, fiscal law enshrines with great rigidity this principle of specialization of tax years (Rui Duarte Morais, Notes to IRC, Ed. Almedina, p. 69).
Testimony to this rigidity is, as Rui Duarte Morais underlines (Op. cit., p. 70), paragraph 2 of article 18 of the CIRC which provides that the positive or negative components considered as concerning prior years are only attributable to the year when, at the date of closure of the accounts of the year to which they should have been attributed, they were unforeseeable or manifestly unknown.
It is, however, settled case law of this Supreme Court that the rigidity of this principle must be alleviated or tempered by invoking the principle of justice, in situations where, with all review periods already having passed for the tax act and there being no prejudice to the State, one should avoid falling into an unjustified injustice for the citizen – see, in this sense, rulings of the Tax Contentious Section of 19.11.2008, appeal 325/08, of 02.04.2008, appeal 807/07, of 19.05.2010, appeal 214/07, of 25.06.2008, appeal 291/08, of 09.052012, appeal 269/12 and of 02.03.2016, appeal 1204/13.
(...)
In fact, as was emphasized in the aforementioned Ruling 214/07, «in the case of article 18, paragraph 1, of the CIRC, there results a binding obligation for the Administration, which, as a general rule, should apply the principle of specialization of tax years in its activity of monitoring the declarations presented by taxpayers.
But the exercise of this monitoring power, predominantly bound, can lead to a situation that is flagrantly unjust and, in such situations, the principle of justice, enshrined in articles 266, paragraph 2, of the CRP and 55 of the LGT, must be made to operate, to prevent such a situation of injustice repudiated by the Constitution from being realized.
In weighing the values at issue (on the one hand the principle of specialization of tax years which is a legislatively arbitrary rule of temporal separation, for tax purposes, of a prolonged tax fact and, on the other hand, the principle of justice, which reflects one of the nuclear concerns of a State based on the rule of law), it is manifest that, in a situation of incompatibility, the latter principle should prevail.
In this context, we must conclude that correction acts of taxable income should be considered voidable, for violation of law, which, as in the case sub judice, lead to unjust situations of this type.
Whereby it is to be accepted, for tax purposes, the accounting treatment effected by the respondent since there are not alleged or proven facts through which it is demonstrated that there was the deliberate intention to proceed with the transfer of results between tax years or tax evasion.
The appealed judgment, which moved within these parameters, therefore merits no censure."
Tomás Cantista Tavares applauds this jurisprudential construction: "The current thesis (...) [b]reaks with the facilism of legal formalism. It seeks the material and just solution. It causes a structural principle (taxable capacity) to prevail over an operational rule (specialization of tax years). Its point of departure is irreproachable: if the company incurred a true cost, this decline must necessarily shape the tax profit. The formal convention of specialization does not have the power to prevent the material effect, nor to make it excessively burdensome or complex. The same occurs, mutatis mutandis, with revenues. They contribute only once to profit (...)" – see IRC and Accounting: from Realization to Fair Value, Coimbra, Almedina, 2011, p. 63.
Arbitral jurisprudence also echoes this conception, as can be seen from reading Rulings nos. 28/2012-T, of 30 October 2012; 367/2014-T, of 24 November 2014; 262/2015-T, of 22 January 2016; 588/2015-T, of 29 April 2016, and 609/2015, of 2 May 2016.
In this framework, it is important to return to the analysis of the specific case. Income was recorded and given to taxation in duplicate during the years 2009 to 2011. This circumstance occurred in the sphere of the company controlled by the Claimant which was dedicated to providing management services to the companies (subsidiaries) held by Fund E.... Upon detecting the lapse, its rectification was necessary, which was done by the controlled company (naturally with an effect on the determination of the taxable income of the Group of which the Claimant is the parent company).
In light of the circumstances, not admitting the tax deduction for the duplicate invoicing which had contributed to the taxable profit of the years 2009 to 2011 of the Group to which the Claimant belongs, would imply the incidence (and a tax obligation) of tax on income that does not exist, a circumstance which, from the outset, confronts the principles of taxable capacity and, also, legality, as it determines a tax obligation or charge that is devoid of an incidence base.
Furthermore, the action described, had it benefited one of the parties to the legal-tax relationship, was favorable to the AT which, for a considerable period of time, had at its disposal tax revenue to which, strictly speaking, it had no right, since the same was incurred on a base which proved not to exist, there being no situation that suggests that the taxpayer intended to transfer results or manipulation, nor such being alleged.
Moreover, the AT not having proceeded, in conjunction with the non-acceptance of the deduction in the tax year 2013, to correct the situation in any other tax year (i.e., to the non-recognition of the income in question, which it verified had been declared and given to taxation in duplicate by the taxpayer) makes it evident the substantive illegality arising from the interpretation it makes of paragraph 2 of article 18 of the IRC Code.
In this manner, the AT's interpretation – and corresponding application which it makes of the law – do not prove to be in conformity with the constitutional parameters of justice and taxable capacity. Indeed, since it is not available, due to the expiry of the legal time limit provided for this purpose, the possibility of revising the self-assessment (see article 78 of the LGT), the prevalence of such an understanding would represent an improper patrimonial advantage contrary to the principles of justice and taxation of actual income enshrined, respectively, in articles 266, paragraph 2 and 104, paragraph 2 of the CRP.
In light of the foregoing, and given the advocated interpretation in conformity with the Constitution of article 18, paragraph 2 of the IRC Code, it is concluded that the disputed tax acts suffer from a substantive defect, for error in the legal premises, and therefore should be annulled, in accordance with the provisions of article 135 of the Code of Administrative Procedure, in the version applicable at the date of the facts (current article 163), applicable by remission of article 29, paragraph 1, subsection d) of the RJAT.
Reimbursement of amounts paid with compensatory interest
When an incorrect interpretation and application by the Respondent of a tax incidence norm is at issue, it has been consistently understood that Tax Arbitral Tribunals have competence to make condemnatory pronouncements in forms identical to those admitted in judicial challenge proceedings, thus including those that derive from the recognition of the right to compensatory interest, under the provisions of articles 24, paragraph 1, subsection b) and paragraph 5 of the RJAT and 43 and 100 of the LGT.
The Claimant proved payment of the amount contained in the tax acts subject to this action, and petitions, as a consequence of the invoked annulability of the IRC and compensatory interest assessment acts, the reimbursement of the amounts paid increased by compensatory interest, for error attributable to the administration, in accordance with paragraph 1 of article 43 of the LGT which provides that "compensatory interest is owed when it is determined, in gracious reclamation or judicial challenge, that there was error attributable to the administration as a result of which the tax debt was paid in an amount greater than that legally due".
In the situation of the present case, it was concluded that the Claimant bore a tax obligation greater than that legally due, in light of the norm contained in article 18, paragraph 2 of the IRC Code, in the interpretation advocated, which permits achieving a result in conformity with the constitutional principles analyzed above.
The AT's error of interpretation had the effect of collecting, with an improper character, being unlawful, the tax obligation at issue, and cannot but be attributed to it, conflicting with the contrary interpretation which is the prevailing one.
It is thus considered that the legal prerequisites demanded in the provision of article 43, paragraph 1 of the LGT are met, with compensatory interest being owed by the AT to the Claimant.
Finally, it should be noted that the relevant questions submitted to the appraisal of this Tribunal were known and assessed, as were not those whose decision was prejudiced by the solution given to others.
DECISION
In light of the foregoing, the arbitrators of this Arbitral Tribunal hereby agree:
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To judge the request for annulment of the tax acts for IRC assessment and interest relating to the tax year 2013 to be well-founded, with the consequent reimbursement of the amount paid of €120,728.22;
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To judge the request for condemnation of the AT to payment of compensatory interest well-founded, to be calculated on the aforementioned amount of €120,728.22, counted from the date on which the respective payment was made, on 29 September 2017, until complete reimbursement of the same.
The value of the proceedings is fixed at €120,728.22 in accordance with the provisions of articles 3, paragraph 2 of the Regulation of Costs in Tax Arbitration Proceedings ("RCPAT"), 97-A, paragraph 1, subsection a) of the CPPT and 306, paragraphs 1 and 2 of the CPC, the latter by virtue of article 29, paragraph 1, subsection e) of the RJAT.
Costs in the amount of €3,060.00 at the charge of the Respondent, in accordance with Table I attached to the RCPAT, and with the provisions of articles 12, paragraph 2 of the RJAT, 4, paragraph 5 of the RCPAT and 527, paragraphs 1 and 2 of the CPC, by virtue of article 29, paragraph 1, subsection e) of the RJAT.
Lisbon, 27 July 2018
Text prepared by computer, in accordance with article 131, paragraph 5 of the CPC, applicable by remission of article 29, paragraph 1, subsection e) of the RJAT.
The Arbitrators,
Alexandra Coelho Martins
Rui Duarte Morais
Sofia Ricardo Borges
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