Process: 609/2017-T

Date: October 30, 2018

Tax Type: IRC

Source: Original CAAD Decision

Summary

This CAAD arbitral decision (Process 609/2017-T) addresses the legality of IRC (Corporate Income Tax) assessments for fiscal year 2010, totaling €957,768.65. The case involves A... S.A., a construction company, challenging corrections made by the Portuguese Tax Authority (AT) following an internal inspection. The primary disputes concern provisions for customer guarantees under Article 39(5) of the IRC Code and impairment losses on receivables. The AT issued a supplementary assessment after rejecting €542,883.03 in provisions for customer guarantees and €2,713,252.11 in credit impairments. The Tax Authority argued the taxpayer incorrectly calculated the provision percentage by using data from 2007-2009 instead of 2008-2010 as required by Circular 10/2011. The arbitral tribunal, composed of three arbitrators appointed under Decree-Law 10/2011 (RJAT), examined whether the taxpayer met the legal requirements for tax-deductible provisions and whether objective evidence supported the claimed credit impairments. The case demonstrates the procedural route available to taxpayers: administrative complaint, hierarchical appeal, and finally arbitration at CAAD. Key legal issues include proper interpretation of the three-year period for calculating guarantee provisions, the need for objective evidence of credit impairment under accounting standards, and the burden of proof in tax disputes. This decision provides important guidance on documentation requirements and calculation methodologies for construction sector taxpayers claiming provisions and impairments.

Full Decision

ARBITRAL DECISION (consult full version in PDF)

The arbitrators Counselor Jorge Manuel Lopes de Sousa (arbitrator-president, appointed by the CAAD Ethics Council), Prof. Doctor Rui Duarte Morais and Prof. Doctor Henrique Fiúza, appointed by the Claimant and the Respondent, respectively, to form the Arbitral Tribunal, constituted on 05-03-2018, agree as follows:

1. Report

A..., S.A., NIPC ... with registered office in ..., ... – ... ..., ... (hereinafter referred to as "Claimant"), came, pursuant to article 2.º, n.º 1, para. a), and articles 10.º et seq. of Decree-Law n.º 10/2011, of 20 January (hereinafter "RJAT"), in conjunction with the provisions of para. a) of article 99.º and para. a) of n.º 1 of article 102.º of the Code of Procedure and Tax Process (hereinafter "CPPT"), to request an arbitral pronouncement on:

– the (il)legality of the act dismissing the hierarchical appeal subsequent to the dismissal of the Administrative Complaint, rendered on 25-08-2017;

– the (il)legality of the act of assessment of Corporate Income Tax (IRC) for the fiscal year 2010 n.º 2014..., effected by the Tax and Customs Authority (AT) with execution date of 27-01-2014, in the total amount of € 957,768.65 (compensatory interest included in the amount of € 79,590.94) which was notified to it pursuant to the "IRC assessment statement," the "interest assessment statement" and the "accounts adjustment statement," attached as documents n.ºs 1, 2 and 3.

The Claimant clarifies that "considering the accounts adjustment with previous assessments, the assessment in question produced a value actually payable of € 742,793.51".

The RESPONDENT is the TAX AND CUSTOMS AUTHORITY.

The Claimant appointed as Arbitrator Prof. Doctor Rui Duarte Morais, pursuant to the provisions of article 6.º, n.º 2, para. b), of the RJAT.

The request for constitution of the Arbitral Tribunal was accepted by the President of CAAD and automatically notified to the Tax and Customs Authority on 22-11-2017.

Pursuant to the provisions of para. b) of n.º 2 of article 6.º and n.º 3 of the RJAT, and within the period provided for in n.º 1 of article 13.º of the RJAT, the highest-ranking official of the Tax Administration service appointed as Arbitrator Prof. Doctor Henrique Fiúza.

Following a request from the Arbitrators appointed by the Parties, the CAAD Ethics Council appointed Counselor Jorge Lopes de Sousa as arbitrator-president, who accepted the appointment.

Pursuant to and for the purposes of the provisions of n.º 7 of article 11.º of the RJAT, the President of CAAD informed the Parties of this appointment on 12-02-2018.

Thus, in accordance with the provisions of n.º 7 article 11.º of the RJAT, with the period provided for in n.º 1 of article 13.º of the RJAT having elapsed without the Parties making any statement, the Collective Arbitral Tribunal was constituted on 05-03-2018.

The Tax and Customs Authority submitted a response in which it defends the suspension of the present proceedings and the dismissal of the request for arbitral pronouncement.

On 27-06-2018 a meeting took place in which witness evidence was produced and it was decided, pursuant to the provisions of article 421.º of the CPC, to attach to the proceedings the recording of the evidence produced in case n.º 582/2017-T, whose matter is partially common.

The Tax and Customs Authority requested the suspension of the proceedings because there were pending at the Administrative and Tax Court of Braga judicial challenge proceedings instituted in the years 2008, 2010, 2011 and 2014, relating to corrections effected in previous years, but such claim was dismissed by order of 08-09-2018.

Following the attachment of the witness evidence recording, it was decided that the proceedings would continue with simultaneous written submissions.

The Parties submitted their submissions.

The Arbitral Tribunal was regularly constituted and is competent.

The parties have legal personality and capacity and are entitled (articles 4.º and 10.º, n.º 2, of the same instrument and article 1.º of Ordinance n.º 112-A/2011, of 22 March) and are duly represented.

There are no obstacles to consideration of the merits of the case.

2. Statement of Facts

2.1. Proven Facts

The following facts are considered proven:

  • The Claimant engaged in the activity of "Construction of other civil engineering works, n.e.c." (CAE 042990), being classified, for IRC purposes, under the general taxation regime;

  • The Claimant was subject to an internal inspection action, pursuant to Service Order n.º OI2012..., in the course of which the following corrections to the taxable matter identified in section III of the Tax Inspection Report were effected:

III.1. Adjustment of transition of provisions for customer guarantees, in the amount of € 163,892.57;

III.2. Provision for customer guarantees – expense of the period, in the amount of € 542,883.03;

III.3. Construction contracts, in the amount of € 880,694.10;

III.4. Impairment losses on receivables, in the amount of € 2,713,252.11;

III.5.1. Reversal of adjustments - complete cancellation -762,270.32;

III.5.2. Reversal of adjustments - partial cancellation -1,119,958.77;

III.6. Undocumented expenses, in the amount of € 2,317.99;

II.7. Depreciation not accepted as expense, in the amount of €1,893.03;

III.9. Autonomous Taxation, in the amount of € 6,176.20;

  • Following the inspection, the Tax and Customs Authority issued the supplementary IRC assessment for the fiscal year 2010, with number 2014... dated 27 January 2014, as well as a statement of compensatory interest assessment and a statement of accounts adjustment (documents n.ºs 1 to 3 attached with the request for arbitral pronouncement, the contents of which are reproduced);

  • In the Tax Inspection Report, which is part of the administrative file, the contents of which are reproduced, the following is stated, among other things:

(...)

III.2. Provision for customer guarantees - expense of the period

As already mentioned in the previous section, at the end of 2010, the taxpayer established a provision to cover expenses with customer guarantees, which it recorded in the expense account "6721 - Provisions of the period - guarantees," in the amount of 1,554,487.30 EUR.

According to the explanatory table of field 703, prepared by the taxpayer, part of the tax file, which is attached to this report as ANNEX I, this amount resulted from the application of the rate of 2.1974% to the value of invoicing with guarantees, of 2010 (70,741,557.27 EUR).

The percentage used by the taxpayer results from the proportion between (i) the expenses indicated in that table as supported with guarantees in 2007, 2008 and 2009 and (ii) invoicing with guarantees in those same years (2007, 2008 and 2009).

Pursuant to n° 5 of article 39° of the CIRC, the annual amount of the provision referred to in para. b) of the same article is determined by applying to sales and provisions of services subject to guarantees made in the taxation period, a percentage that cannot exceed the one that results from the proportion between the sum of expenses arising from customer guarantees actually supported in the last three taxation periods and the sum of sales and provisions of services subject to guarantees made in the same periods.

Circular No. 10/2011 - Provision for customer guarantees, of May 2011, of the IRC Services Division, came to clarify, in its n° 9, that the reference to the "last three taxation periods" allows for consideration of data from the period in which the provision is being established or reinforced (year 2010, in this case) and the two previous periods (2009 and 2008, in this case).

Thus, the taxpayer should have effected the proportion between expenses arising from customer guarantees actually supported in 2008, 2009 and 2010 and the sum of sales and provisions of services subject to guarantees made in the same periods.

Considering the elements in ANNEX I, the percentage used to determine the provision for guarantees should have been 1.43%, according to the calculation demonstrated in the table below:

[...]

Therefore, the amount accepted fiscally as a provision to cover expenses with customer guarantees, pursuant to para. b) of n° 1 and n° 5 of article 39° of the CIRC is 1,011,604.27 EUR (1.43% x 70,741,557.27).

As set out, we shall increase the taxable profit declared by the taxpayer by the amount of 542,883.03 EUR (1,554,487.30-1,011,604.27).

(...)

III.4. Impairment losses on receivables

The taxpayer recorded in account 6511 - Impairment losses - On amounts due from debtors - Customers the amount of 3,710,199.20 EUR, relating to credit from customers that the taxpayer considers to be in a situation of doubtful collection and whose balance is recorded in account 218 - Customers of doubtful collection.

Upon analysis of the table prepared by the taxpayer, it is verified that, for each customer recorded in account 218, the balance was decomposed according to default, the following percentages being applied:

  • 25% to balances with default between 6 and 12 months;

  • 50% to balances with default between 12 and 18 months;

  • 75% to balances with default between 18 and 24 months;

  • 25% to balances with default over 24 months.

From the amount obtained in this way, the taxpayer subtracted the value of accumulated impairment losses recorded in the previous year, obtaining by difference the amount of the loss to be recorded in this period.

To verify the acceptance of the fiscal expense, we followed the criterion used in the analysis of previous fiscal years, focusing the analysis on customers whose adjustment effected exceeded the amount of 10,000.00 EUR.

Taking into account the foregoing, we analyzed the customers mentioned in the table below:

[...]

In the analysis effected, and with respect to the fiscal acceptability of the loss recorded by the taxpayer, consideration was given to the provisions of articles 35° and 36° of the Code of Corporate Income Tax (CIRC).

Thus, we consider that only impairment losses on receivables for which the risk of non-recoverability is duly justified can be accepted, an essential requirement pursuant to n° 1 of article 36° of the CIRC.

We further consider that there is a risk of non-recoverability when, having already passed the stipulated date or the period established for satisfaction of the debt, despite the diligence efforts made, it has not been possible to effect its collection.

The fact that receivables fall into default does not by itself mean that there is a risk of non-recoverability, being only an indication of the possibility of the existence of such risk.

As determined by para. c) of n° 1 of article 36° of the CIRC, only adjustments on receivables in default for more than six months from the date of their respective maturity are accepted fiscally and there is objective evidence of impairment and that diligence efforts have been made to effect their collection (emphasized by us).

Thus, we requested that the taxpayer provide us with evidence of diligence efforts made, the same having provided photocopies of letters and faxes (which are filed in the individual file of the taxpayer).

It is added that the analysis effected took into account the assessments and corrections effected by the Tax Inspection, hereinafter referred to simply as IT, to previous fiscal years (2004 to 2009).

We noted that, since 2004, the taxpayer has had the usual practice of recording impairment losses relating to receivables that have been in default for more than six months, even in situations where there is no risk of non-recoverability. Consequently, there are customers for whom the taxpayer successively records losses and reversals of losses.

Given the foregoing, from the examination of losses considered by the taxpayer, the following anomalies were found, discriminated by customer.

B...- Construction Company, S.A. [461]

For this customer the impairment loss relates to the invoices in the table below:

[...]

From the analysis of the evidence of diligence efforts made for collection of receivables inherent in the invoices contained in the table above, it was found that the taxpayer has on file photocopy of two letters, dated 2010-04-21 and 2010-11-26, by which the customer is informed of the amounts that are overdue in current account, according to the list of pending documents sent in attachment to said letters.

In the first letter the amount indicated as being in debt is 1,989,788.05 EUR and, in the second, it is 1,507,603.42 EUR, which by itself evidences that the customer made payments. Analyzing the lists attached to the letters sent, we concluded that the taxpayer effected various supplies to this customer in 2010 and that between the first list and the second, the customer made payment of various documents (invoices and debit notes) issued in 2009 and 2010.

The taxpayer has been considering impairment losses on receivables from this customer since 2004, making both reinforcements and reversals of the same, which means that the customer has a character of habituality and makes payments. The IT proceeded to increase the amounts considered as losses in the periods of 2006 and 2008.

The loss recorded in this period reinforces the accumulated impairment losses, recorded in previous periods and relates to new receivables.

Thus, being a customer with a character of habituality, with supplies in the course of the period under analysis, under the same conditions as previous years, and taking into account that the simple fact of there being letters requesting account regularization does not by itself demonstrate the risk of non-recoverability, the existence of the risk of non-recoverability is not considered demonstrated.

Without prejudice to the foregoing, it should be noted that in the lists that the taxpayer sends to its customer it is evidenced that invoices mature at 60 days, so the impairment loss recorded would never be accepted fiscally, relating to documents with issuance date of 2010-04-30 or later.

Therefore, we conclude that there is no objective evidence of impairment, a primary requirement for consideration, for fiscal purposes, of the impairment loss, pursuant to para. c) of n° 1 of article 36° of the CIRC.

As set out, the accounting loss cannot be considered as a fiscal loss of the period, since the prerequisites of non-recoverability are not met, thus failing to comply with the provisions of articles 35° and 36° of the CIRC, so we shall increase the taxable profit declared by the taxpayer, in the amount of 14,605.81 EUR.

C..., Lda. (...)

For this customer the impairment loss relates to the invoices in the table below:

[...]

From the analysis of the evidence of diligence efforts made for collection of receivables inherent in the invoices contained in the table above, it was found that the taxpayer has on file photocopy of two letters, dated 2010-04-21 and 2010-11-26, by which the customer is informed of the amounts that are overdue in current account, according to the list of pending documents sent in attachment to said letters.

In both letters the amount indicated as being in debt is 372,251.23 EUR and, analyzing the lists attached to the letters sent, we concluded that the taxpayer effected various supplies to this customer in 2010, as these lists comprise documents issued between April 2009 and March 2010.

The taxpayer has been considering impairment losses on receivables from this customer, at least since 2007, making both reinforcements and reversals of the same, which means that the customer has a character of habituality and makes payments. The IT proceeded to increase the amounts considered as losses in the periods of 2007 and 2008.

The loss recorded in this period reinforces the accumulated impairment losses, recorded in previous periods and relates to new receivables.

Thus, being a customer with a character of habituality, with supplies in the course of the period under analysis, under the same conditions as previous years, and taking into account that the simple fact of there being letters requesting account regularization does not by itself demonstrate the risk of non-recoverability, the existence of such risk (of non-recoverability) is not considered demonstrated.

Without prejudice to the foregoing, it should be noted that in the lists that the taxpayer sends to its customer it is evidenced that invoices mature at 30 days, so the impairment loss recorded would never be accepted fiscally, relating to documents with issuance date of 2010-05-31 or later.

Therefore, we conclude that there is no objective evidence of impairment, a primary requirement for consideration, for fiscal purposes, of the impairment loss, pursuant to para. c) of n° 1 of article 36° of the CIRC.

As set out, the accounting loss cannot be considered as a fiscal loss of the period, since the prerequisites of non-recoverability are not met, thus failing to comply with the provisions of articles 35° and 36° of the CIRC, so we shall increase the taxable profit declared by the taxpayer, in the amount of 190,055.59 EUR.

D... S.A. ...

For this customer the impairment loss relates to the invoices in the table below:

[...]

From the analysis of the evidence of diligence efforts made for collection of receivables inherent in the invoices contained in the table above, it was found that the taxpayer has on file a printout of an email, dated 2010-12-06, by which the customer was requested to regularize documents overdue in current account, the amount of which amounts to 571,423.62 EUR. It is stated by the taxpayer that, of that amount, 373,593.50 EUR relates to withholdings.

When analyzing the diligence efforts made in 2009, it was found that a first letter was sent, where payment of 4,450,749.68 EUR was requested, relating to invoices issued between 2008-06-30 and 2008-12-31, and a second letter in which payment of 1,881,793.04 EUR was requested, relating to invoices issued between 2008-08-31 and 2009-09-30.

Considering the foregoing, it is concluded that this customer has made payments, with a large part of the amount in debt in 2010 being the result of withholdings made by the customer, which means that it is an amount that is "open" but is not in default.

It should further be noted that, from the analysis of the email sent by the taxpayer to its customer, it was found that:

the payment period of the invoices is 90 days, so the invoices contained in the table above that have an issuance date of 2010-04-30 and later are not in a position to allow consideration of the impairment loss, pursuant to article 36° of the CIRC.

In the current account are the credit notes n° 100026 and 100029, respectively of 2010-07-23 and 2010-07-31, both in the amount of 272,059.13 EUR, which respectively cancel invoices n° 100294 (which is contained in the table above) and 100432, so the impairment loss could never be considered as calculated.

For all that has been described, it is concluded that it is a customer with a character of habituality, to whom the taxpayer effected supplies in 2010 under the same conditions as in previous years (the payment period of 90 days is maintained) and who made payments during this year.

Thus, and taking into account that the simple fact of there being an email requesting account regularization does not by itself demonstrate the risk of non-recoverability, the existence of such risk (of non-recoverability) is not considered demonstrated.

We conclude, therefore, that there is no objective evidence of impairment, a primary requirement for consideration, for fiscal purposes, of the impairment loss, pursuant to para. c) of n° 1 of article 36° of the CIRC.

As set out, the accounting loss cannot be considered as a fiscal loss of the period, since the prerequisites of non-recoverability are not met, thus failing to comply with the provisions of articles 35° and 36° of the CIRC, so we shall increase the taxable profit declared by the taxpayer, in the amount of 117,877.45 EUR.

E..., S.A. (...)

For this customer the impairment loss relates to the invoices in the table below:

[...]

From the analysis of the evidence of diligence efforts made for collection of receivables inherent in the invoices contained in the table above, it was found that the taxpayer has on file, photocopy of two letters, dated 2010-06-25 and 2010-10-18, by which the customer is requested to regularize its current account, according to the list of pending documents sent in attachment to said letters.

In the first letter the amount indicated in debt is 114,133.43 EUR and in the second it is 129,690.61 EUR.

Analyzing the lists attached to the letters sent, we concluded that the taxpayer effected various supplies to this customer in 2010 and that, between the first list and the second, the customer made payment of some invoices issued in 2010.

The taxpayer has been considering impairment losses on receivables from this customer, at least since 2004, making both reinforcements and reversals of the same, which means that the customer has a character of habituality and makes payments. The IT proceeded to increase the amounts considered as losses in the periods of 2004 to 2009.

The loss recorded in this period reinforces the accumulated impairment losses, recorded in previous periods and relates to a new receivable.

Thus, being a customer with a character of habituality, with supplies in the course of the period under analysis, and taking into account that the simple fact of there being letters requesting account regularization does not by itself demonstrate the risk of non-recoverability, the existence of such risk (of non-recoverability) is not considered demonstrated.

Therefore, we conclude that there is no objective evidence of impairment, a primary requirement for consideration, for fiscal purposes, of the impairment loss, pursuant to para. c) of n° 1 of article 36° of the CIRC.

As set out, the accounting loss cannot be considered as a fiscal loss of the period, since the prerequisites of non-recoverability are not met, thus failing to comply with the provisions of articles 35° and 36° of the CIRC, so we shall increase the taxable profit declared by the taxpayer, in the amount of 47,820.96 EUR.

F..., Lda. [F...]

For this customer the impairment loss relates to the invoices in the table below:

[...]

From the analysis of the evidence of diligence efforts made for collection of receivables inherent in the invoices contained in the table above, it was found that the taxpayer has on file photocopy of two letters, dated 2010-02-23 and 2010-11-26, by which the customer is requested to regularize its current account, according to the list of pending documents sent in attachment to said letters.

In both letters the amount indicated in debt is 163,598.75 EUR.

Analyzing the lists attached to the letters sent, it appears that they comprise an invoice from January 2010 and debit notes from April and May 2010. In addition to allowing the conclusion that the taxpayer effected at least one supply to this customer in 2010, such fact raises some doubts about the first letter sent to the customer, for if from its reference it appears to be correct the date of the letter, one is left wondering how it is possible in February to demand payment of documents issued in later months.

The loss recorded in this period reinforces the impairment loss recorded in the previous period.

Thus, being a customer with a character of habituality, with supplies in the course of the period under analysis, and taking into account that the simple fact of there being letters requesting account regularization does not by itself demonstrate the risk of non-recoverability, the existence of such risk (of non-recoverability) is not considered demonstrated.

Therefore, we conclude that there is no objective evidence of impairment, a primary requirement for consideration, for fiscal purposes, of the impairment loss, pursuant to para. c) of n° 1 of article 36° of the CIRC.

As set out, the accounting loss cannot be considered as a fiscal loss of the period, since the prerequisites of non-recoverability are not met, thus failing to comply with the provisions of articles 35° and 36° of the CIRC, so we shall increase the taxable profit declared by the taxpayer, in the amount of 79,524.28 EUR.

G..., Lda. (...)

For this customer the impairment loss relates to the invoices in the table below:

[...]

From the analysis of the evidence of diligence efforts made for collection of receivables inherent in the invoices contained in the table above, it was found that the taxpayer has on file, photocopy of two letters, dated 2010-02-23 and 2010-09-28, by which the customer is requested to regularize its current account, according to the list of pending documents sent in attachment to said letters.

In both letters the amount indicated in debt is 303,308.13 EUR.

It appears that the address indicated in said letters does not correspond to the customer's registered office or facilities. The customer has its registered office in ... (Building ... - ... and ...) while the letters have as recipient address ... , ...-... ..., from which it is concluded that in fact no diligence efforts were made, or at least they are not proven, since the address in the letters does not correspond to the customer's domicile or any facility of the company.

As set out, the accounting loss cannot be considered as a fiscal loss of the period, since it fails to comply with the provisions of para. c) of n° 1 of article 36° of the CIRC, so we shall increase the taxable profit declared by the taxpayer, in the amount of 151,854.07 EUR.

H..., S.A. (...)

For this customer the impairment loss relates to the invoices in the table below:

[...]

From the analysis of the evidence of diligence efforts made for collection of receivables inherent in the invoices contained in the table above, it was found that the taxpayer has on file photocopy of two letters, dated 2010-06-25 and 2010-12-07, by which the customer is informed of the amounts that are overdue in current account, according to the list of pending documents sent in attachment to said letters.

In the first letter the amount indicated in debt is 1,445,999.06 EUR and in the second it is 2,103,646.49 EUR.

Analyzing the lists attached to the letters sent, we concluded that the taxpayer effected various supplies to this customer in 2010, even after the sending of the first letter, and that between the first list and the second, the customer made payment of invoices issued in 2009 and 2010.

Thus, being a customer with various supplies in the course of the period under analysis, and considering that even in supplies made near the end of the year the conditions of previous supplies are maintained (payment period of 90 days), and taking into account that the simple fact of there being letters requesting account regularization does not by itself demonstrate the risk of non-recoverability, the existence of such risk (of non-recoverability) is not considered demonstrated, with it being demonstrated only that it is a customer with a fairly extended payment period.

Without prejudice to the foregoing, it should be noted that, in the lists that the taxpayer sends to its customer, it is evidenced that invoices mature at 90 days, so the impairment loss relating to receivables contained in the documents with an issuance date of 2010-03-31 or later would never be accepted fiscally.

Therefore, we conclude that there is no objective evidence of impairment, a primary requirement for consideration, for fiscal purposes, of the impairment loss, pursuant to para. c) of n° 1 of article 36° of the CIRC.

As set out, the accounting loss cannot be considered as a fiscal loss of the period, since the prerequisites of non-recoverability are not met, thus failing to comply with the provisions of articles 35° and 36° of the CIRC, so we shall increase the taxable profit declared by the taxpayer, in the amount of 238,105.28 EUR.

I..., ACE. [...]

For this customer the impairment loss relates to the invoices in the table below:

[...]

From the analysis of the evidence of diligence efforts made for collection of receivables inherent in the invoices contained in the table above, it was found that the taxpayer has on file photocopy of two letters, dated 2010-08-16 and 2010-12-07, by which the customer is informed of the amounts that are overdue in current account, according to the list of pending documents sent in attachment to said letters.

In the first letter the amount indicated in debt is 620,850.00 EUR and in the second it is 196,802.37, 42 EUR, which by itself evidences that the customer made payments, which was confirmed by the analysis of the lists attached to the letters sent.

Taking into account that the simple fact of there being letters requesting account regularization does not by itself demonstrate the risk of non-recoverability and that the customer made various payments, the existence of the risk of non-recoverability is not considered demonstrated.

Without prejudice to the foregoing, it should be noted that in the lists that the taxpayer sends to its customer it is evidenced that invoices mature at 30 days, so the impairment loss relating to the receivable from the invoice contained in the table above, with an issuance date of 2010-06-30, would never be accepted fiscally.

Therefore, we conclude that there is no objective evidence of impairment, a primary requirement for consideration, for fiscal purposes, of the impairment loss, pursuant to para. c) of n° 1 of article 36° of the CIRC.

As set out, the accounting loss cannot be considered as a fiscal loss of the period, since the prerequisites of non-recoverability are not met, thus failing to comply with the provisions of articles 35° and 36° of the CIRC, so we shall increase the taxable profit declared by the taxpayer, in the amount of 49,481.57 EUR.

(...)

J..., Lda (J...)

For this customer the impairment loss relates to the invoices in the table below:

[...]

From the analysis of the evidence of diligence efforts made for collection of receivables inherent in the invoices contained in the table above, it was found that the taxpayer has, on file, photocopy of two letters, dated 2010-10-18 and 2010-12-07, by which the customer is informed of the amounts that are overdue in current account, according to the list of pending documents sent in attachment to said letters.

In both letters the amount indicated in debt is 148,608.84 EUR.

Analyzing the lists attached to the letters sent, we concluded that the taxpayer effected various supplies to this customer in 2010.

The taxpayer already considered an impairment loss on receivables from this customer in 2008, and in 2009 proceeded to reverse almost all of it.

From the foregoing, we can conclude that the customer has a character of habituality and makes payments.

The loss recorded in this period reinforces the impairment loss recorded previously and relates to new receivables.

Thus, being a customer with a character of habituality, with supplies in the course of the period under analysis, under the same conditions as in previous years, and taking into account that the simple fact of there being letters requesting account regularization does not by itself demonstrate the risk of non-recoverability, the existence of such risk (of non-recoverability) is not considered demonstrated.

Therefore, we conclude that there is no objective evidence of impairment, a primary requirement for consideration, for fiscal purposes, of the impairment loss, pursuant to para. c) of n° 1 of article 36° of the CIRC.

As set out, the accounting loss cannot be considered as a fiscal loss of the period, since the prerequisites of non-recoverability are not met, thus failing to comply with the provisions of articles 35° and 36° of the CIRC, so we shall increase the taxable profit declared by the taxpayer, in the amount of 67,561.18 EUR.

K..., S.A. (...)

For this customer the impairment loss relates to the invoices in the table below:

[...]

From the analysis of the evidence of diligence efforts made for collection of receivables inherent in the invoices contained in the table above, it was found that the taxpayer has, on file, photocopy of two letters, dated 2010-01-18 and 2010-10-18, by which the customer is informed of the amounts that are overdue in current account, according to the list of pending documents sent in attachment to said letters.

In the first letter the amount indicated in debt is 712,696.76 EUR and in the second it is 2,684,171.06 EUR.

Analyzing the lists attached to the letters sent, we concluded that the taxpayer effected various supplies to this customer in 2010, and that between the first list and the second, the customer made payment of various invoices.

Without prejudice to the foregoing, it should be noted that in the statement that the taxpayer sends to its customer it is evidenced that: (i) the invoices mature at 30 days, so the impairment loss would never be accepted for the invoices contained in the table above, with an issuance date of 2010-06-30 and (ii) credit notes were issued that the taxpayer took into account in the calculation of the loss but only in a percentage equivalent to the default (as if it were an invoice), when they should have been deducted in full from the amount in debt.

On the other hand, K... S.A. is a stock corporation with exclusively public capital, pursuant to the articles of association contained in Decree-Law n.° 192/2008 of 01 October, so there is no risk of non-recoverability of the receivables.

Thus, we conclude that there is no objective evidence of impairment, a primary requirement for consideration, for fiscal purposes, of the impairment loss, pursuant to para. c) of n° 1 of article 36° of the CIRC.

As set out, the accounting loss cannot be considered as a fiscal loss of the period, since the prerequisites of non-recoverability are not met, thus failing to comply with the provisions of articles 35° and 36° of the CIRC, so we shall increase the taxable profit declared by the taxpayer, in the amount of 26,725.90 EUR.

(...)

L..., Lda. (L...)

For this customer the impairment loss relates to the invoices in the table below:

[...]

The taxpayer has been establishing provisions for this customer since 2004, provisions that were not accepted fiscally for failure to demonstrate the risk of non-recoverability and for failure to produce evidence of diligence efforts made to effect collection of provisioned receivables.

From the analysis of the evidence of diligence efforts made for collection of receivables inherent in the invoices contained in the table above, it was concluded that the taxpayer has, on file, photocopy of two letters dated 2010-04-22 and 2010-10-20, by which the customer is informed of the amounts that are overdue in current account, according to the list of pending documents sent in attachment to said letters.

In the first letter the amount indicated in debt is 460,237.98 EUR and in the second it is 480,773.06 EUR.

However, the simple fact of there being a letter requesting account regularization does not by itself demonstrate the risk of non-recoverability.

By analyzing the accounting statement it appears that the taxpayer continues to make supplies to this customer in 2010, being this a regular customer since 2004. It also appears that during the year 2010 payments were made in the amount of 350,073.69 EUR.

From the foregoing, we conclude that there is no risk of non-recoverability of the receivables.

Thus, we conclude that there is no objective evidence of impairment, a primary requirement for consideration, for fiscal purposes, of the impairment loss, pursuant to para. c) of n° 1 of article 36° of the CIRC.

As set out, the accounting loss cannot be considered as a fiscal loss of the period, since the prerequisites of non-recoverability are not met, thus failing to comply with the provisions of articles 35° and 36° of the CIRC, so we shall increase the taxable profit declared by the taxpayer, in the amount of 29,451.89 EUR.

M..., Lda. [...]

For this customer the impairment loss relates to the invoices in the table below:

[...]

From the analysis of the evidence of diligence efforts made for collection of receivables inherent in the invoices contained in the table above, it was found that the taxpayer has, on file, photocopy of three letters, dated 2010-03-22, 2010-03-31 and 2010-10-20, by which the customer is requested to regularize its current account, according to the list of pending documents sent in attachment to said letters.

In the first letter the amount indicated in debt is 231,998.53 EUR, in the second it is 232,187.53 EUR and in the third it is 237,875.53 EUR.

Analyzing the lists attached to the letters sent, we concluded that the taxpayer effected various supplies to this customer in 2010.

The taxpayer has been considering impairment losses on receivables from this customer since 2006, making both reinforcements and reversals of the same, which means that the customer has a character of habituality and makes payments. The IT proceeded to increase the amounts considered as losses in the periods of 2006, 2008 and 2009.

The loss recorded in this period reinforces the accumulated impairment losses, recorded in previous periods, and relates to new receivables.

Thus, being a customer with a character of habituality, with supplies in the course of the period under analysis, and taking into account that the simple fact of there being letters requesting account regularization does not by itself demonstrate the risk of non-recoverability, the existence of such risk (of non-recoverability) is not considered demonstrated.

Therefore, we conclude that there is no objective evidence of impairment, a primary requirement for consideration, for fiscal purposes, of the impairment loss, pursuant to para. c) of n° 1 of article 36° of the CIRC.

As set out, the accounting loss cannot be considered as a fiscal loss of the period, since the prerequisites of non-recoverability are not met, thus failing to comply with the provisions of articles 35° and 36° of the CIRC, so we shall increase the taxable profit declared by the taxpayer, in the amount of 87,877.46 EUR.

N..., Lda. (...)

For this customer the impairment loss relates to the invoices in the table below:

[...]

From the analysis of the evidence of diligence efforts made for collection of receivables inherent in the invoices contained in the table above, it was found that the taxpayer has on file, photocopy of letter, dated 2010-11-22, by which the customer is requested to regularize its current account, which totals the amount of 3,842,640.98 EUR, according to the list of pending documents sent in attachment to said letter.

Analyzing the list attached to the letter sent, we concluded that the taxpayer effected various supplies to this customer in 2010.

The loss recorded in this period reinforces the impairment loss recorded in the previous period and relates to new receivables.

We conclude that it is a customer with a character of habituality, with supplies in the course of the period under analysis and, taking into account that the simple fact of there being a letter requesting account regularization does not by itself demonstrate the risk of non-recoverability, the existence of such risk (of non-recoverability) is not considered demonstrated.

Therefore, we conclude that there is no objective evidence of impairment, a primary requirement for consideration, for fiscal purposes, of the impairment loss, pursuant to para. c) of n° 1 of article 36° of the CIRC.

As set out, the accounting loss cannot be considered as a fiscal loss of the period, since the prerequisites of non-recoverability are not met, thus failing to comply with the provisions of articles 35° and 36° of the CIRC, so we shall increase the taxable profit declared by the taxpayer, in the amount of 1,095,393.05 EUR.

(...)

  • The Claimant lodged an administrative complaint against the assessment, which was dismissed by order of 31-10-2014;

  • The Claimant filed a hierarchical appeal of the decision dismissing the administrative complaint, which was dismissed by order of 22-08-2017;

  • The decision of the hierarchical appeal refers to the justification of an opinion in which the following conclusions are formulated:

For all the foregoing, it is concluded:

The Appellant has been monitored by the Inspection Services since the fiscal year 2004, it having been found that since the said fiscal year the Appellant has had the usual practice of recording provisions/impairment losses relating to receivables that are in default for more than six months, even in situations where there is no risk of non-recoverability. Consequently, there are customers for whom the taxpayer successively records losses and reversals of those same losses;

The customers analyzed by the inspection services whose impairment losses were disregarded fiscally are found in these cases;

Despite the successive risk of non-recoverability recorded by the Appellant in its accounting, year after year, supplies to such customers and under the usual conditions did not cease, with the same making regular payments;

This very thing continues to be observed in the analysis effected by the Services to the year 2011 in which the customers in question in the present proceedings, despite the records presenting default of more than six months, continued to receive supplies from the Appellant and to make payments of amounts in current account;

Additionally, the Appellant proceeded in 2011 to make total reversal in some cases and partial in others of the impairment losses recorded with reference to the customers in question in the year under analysis here, including the impairment losses recorded in 2010;

Given what has been observed, it will be necessary to conclude by the absence of objective proof of impairments, one of the cumulative requirements set out in the provisions of n.0 1 of article 36° of the CIRC for its fiscal acceptance;

Of note that, with the Inspection Services having monitored the Appellant since the fiscal year 2004, the reversals made by the Appellant of impairment losses not accepted fiscally by the Services are, in the year of the reversal, corrected favorably to the Appellant, in the measure that they have already been taxed in the fiscal year in which the impairment loss recorded was not accepted fiscally;

With respect to customers for whom the Appellant alleges the existence of Enterprise Recovery Procedures (PER), it should be noted that apart from these being in the situation of continuous supply by the Appellant, such procedures only commenced in 2012 and 2015;

In the case of customer F... Lda. who was later declared insolvent, the proceedings only entered in 2015 and even then the Appellant does not form part of the list of creditors;

Regarding G..., Lda. there does not exist in 2010 objective proof of the accomplishment of diligence efforts aimed at collection of the overdue amount in that the proof presented is embodied in two letters sent requesting account regularization sent to an address that does not belong to the customer in question;

Contrary to what is argued by the Appellant, the objective proof of the accomplishment of diligence efforts for collection of receivables is not a requirement of lesser relevance, it is rather expressly determined by the normative as a cumulative requirement;

It should be noted that the impairment loss not accepted fiscally in 2010 was fully accepted in 2011 (since in that year the sending of collection letters for the overdue amounts to the correct address of the customer was verified);

With respect to Customer K... SA, the basis underlying the disregard of the impairment loss recorded is not based on the fact that it is, by itself, a corporation with entirely public capital but rather on the absence of objective proof of the existence of impairment;

In fact, also with respect to this customer the aforementioned practice is verified of recording impairments in concomitance with continuous supply to the customer on the same terms as it had previously been doing, allied to the fact that the customer made payment of various invoices during the period. The Services continued to verify this same thing in the inspection action carried out to the year 2011.

  1. For the purpose of calculating the limit that can be fiscally accepted pursuant to n.º 5, it is necessary to know the history of expenses with guarantees relating to sales and provisions of services in the last three taxation periods.

  2. The reference to the «last three taxation periods» allows for consideration of data from the period in which the provision is being established or reinforced (year N) and the two previous periods (years N-1 and N-2), since at the end of the taxation period N the sales and provisions of services of that period as well as the expenses supported with customer guarantees are already known.

  • The witness O... contacted customers whose receivables were in default, with a view to accomplishing the respective collections, becoming aware of those who would be in a situation of greater difficulties in making payments, especially because of the number of suppliers he found alongside those customers claiming receivables (testimony of witness O...);

  • With respect to customers who were in default, witness O... made diligence efforts with notaries and registry offices with a view to ascertaining whether they had assets that could ensure the payment of the debts, providing the information to the financial department of the Claimant (testimony of witness O...);

  • Witness P..., in his capacity as Financial Director of the Claimant, made various diligence efforts with the company G..., Lda, with a view to collection of the debt from this company whose impairment loss was recorded in 2010 (testimony of witness P...);

  • Most of the company's customers who have overdue debts are contacted for the purpose of making payment by the financial department of a which witness P... is Director, with some being contacted directly by the management of the Claimant (testimony of witness P...);

  • Lists of customers with overdue receivables are made weekly, which are contacted, in the first place, by letter or email to make payments (testimony of witness P...);

  • When, after initial contacts, it is found that payments continue to be late, the financial department of the Claimant goes to the customers' facilities or tries to schedule meetings to understand what is happening and seek to reach an agreement (testimony of witness P...);

  • One of the members of the financial department makes a weekly report of all the contacts made and their results (testimony of witness P...);

  • Provisions are not created by the Claimant with respect to all debts that have been in default for more than 6 months, but only in cases where there are indications that payment may not be made and there are no prospects that it will be made, namely in cases where customers give evasive responses, or do not present any proposal for agreement or form of deferred payment (such as promissory notes or pre-dated checks), or cases in which it is found that there are many creditors waiting for payments (testimony of witness P...);

  • The crisis in the construction sector began in 2007/2008 (testimony of witness P...);

  • In cases where it comes to be found that, after the recording of impairment losses, payments are made, the losses are reversed (testimony of witness P...);

  • The Tax and Customs Authority controls in inspection actions relating to subsequent fiscal years whether reversals of impairment losses relating to receivables that end up being collected are made (testimony of witness Q...);

  • With respect to the corrections that were made by the Tax and Customs Authority in 2010, not accepting impairment losses, corrections were made in later years favorable to the taxpayers, in cases in which they recorded reversal of impairment losses or presented new ones that in the understanding of the Tax and Customs Authority justify that these losses are accepted (testimony of witness Q...);

  • With respect to the invoices that were not accepted because there was no default of more than 6 months in 2010, the impairment losses were recognized later, when the basis for the non-acceptance is only the lack of passage of that period (testimony of witness Q...);

  • With respect to K..., the recording of the impairment loss was effected because there had been judicial dispute regarding payment of a debt, payment only being made after this dispute was resolved (testimony of witness P...);

  • The Claimant continued to be a supplier of companies with respect to which it recognized the existence of risk of non-recoverability of overdue receivables, through the recording of impairment losses, because it understood that if it stopped making supplies it would consolidate that risk, by ensuring that it would not effect the collection of previous amounts and by being preferable to continue to enable the operation of those debtor companies, in the expectation of contributing to create for these companies conditions that would enable them to make payments (testimony of witness P...);

  • On 24-01-2018, the Claimant filed the request for constitution of an arbitral tribunal that gave rise to the present proceedings.

2.2. Unproven Facts and Justification of the Statement of Facts

There are no facts relevant to the decision of the case that have not been proven.

The statement of facts is based on the Tax Inspection Report and the testimonies of witnesses O..., P... and Q..., who appeared to testify with impartiality and with knowledge of the facts about which they testified.

With respect to each of the corrections, the relevant witness evidence and its assessment is indicated.

3. Matter of Law

The Tax and Customs Authority conducted an inspection action against the Claimant relating to the fiscal year 2010, from which resulted various corrections to the taxable profit in the total value of € 2,428,879.94 (some favorable and others unfavorable to the Claimant) and the assessment of IRC n.º 2014... dated 27-01-2014, in the value of € 957,768.65, including € 79,590.94.

Of the corrections made, the Claimant contests in the present proceedings only the following:

– Provision for customer guarantees – Expenses of the Period in the amount of € 542,883.03;

– Impairment losses on receivables in the amount of € 2,713,252.11.

3.1. Issue of Provision for Customer Guarantees

The Claimant established in the fiscal year 2010 a provision to cover expenses with customer guarantees, which it recorded in the expense account "6721 - Provisions of the period - guarantees," in the amount of € 1,554,487.30.

This amount resulted from the application of the percentage of 2.1974% to the value of invoicing with guarantees, of 2010 (€ 70,741,557.27).

The percentage used by the Claimant results from the proportion between (i) the expenses indicated in that table as supported with guarantees in 2007, 2008 and 2009 and (ii) invoicing with guarantees in those same years (2007, 2008 and 2009).

Article 39.º, n.º 5, of the CIRC, establishes that "the annual amount of the provision for customer guarantees referred to in para. b) of n.º 1 is determined by applying to sales and provisions of services subject to guarantees made in the taxation period a percentage that cannot exceed the one that results from the proportion between the sum of expenses arising from customer guarantees actually supported in the last three taxation periods and the sum of sales and provisions of services subject to guarantees made in the same periods".

The Tax and Customs Authority understands that "last three taxation periods" relating to the fiscal year 2010 are the period in which the provision is being established or reinforced (year 2010, in this case) and the two previous periods (2009 and 2008, in this case).

Thus, the question to be considered is whether "last three taxation periods" for purposes of n.º 5 of article 39.º of the CIRC should be considered as the fiscal year in which the provision is made and the two preceding ones or the three that precede the fiscal year in which the provision is made.

The scope of that reference to "last three taxation periods" is not clear, as was acknowledged by the Tax and Customs Authority itself when it issued Circular n.º 10/2011 to clarify its interpretation.

As was stated by the witnesses examined, the controversy between the Claimant and the Tax and Customs Authority on this issue has been maintained with respect to various fiscal years, so that, considering the Claimant's activity in its entirety, the impacts of the divergence on the global taxation of the Claimant will not be significant, as all expenses with customer guarantees are considered for the calculation of the percentage, in one or another fiscal year.

In this context, it is to be presumed that the Claimant adopted in good faith the interpretation it made (in line with the rule imposed by n.º 1 of article 75.º of the LGT), as this is perfectly compatible with the letter of the law and is even suggested by the literal wording, since, with respect to each taxation period, the period present, the three last will be the three preceding.

On the other hand, the position assumed by the Tax and Customs Authority in the Tax Inspection Report is based exclusively on the said Circular, whose justification does not appear convincing.

In fact, it is true that, as is said in point 8. of the said Circular, to effect the calculation of the limit of the provision that can be fiscally accepted, "it is necessary to know the history of expenses with guarantees relating to sales and provisions of services, in the last three taxation periods," but, contrary to what is stated in its point 9., it is not certain that the statement "at the end of the taxation period N the sales and provisions of services of that period as well as the expenses supported with customer guarantees are already known" always corresponds to reality, as it is possible (if not even probable) that delays in invoicing may occur.

On the other hand, as the Claimant rightly notes, the terminology used in that point 9., by stating that "the reference to the «last three taxation periods» allows for consideration of data from the period in which the provision is being established or reinforced (year N) and the two previous periods (years N-1 and N-2)" conveys that it was decided to accept that the n.º 5 of article 39.º be interpreted in that way, but does not impose that interpretation.

That is, what results from the text of point 9. of the Circular is that an interpretation of the taxpayer in the sense it refers will be accepted, if the taxpayer makes it, because the text of the law is compatible with it (allows for it), but it does not impose that that interpretation be adopted.

Thus, the only argument invoked in Circular n.º 10/2011 to support the interpretation adopted there appears not to constitute a solid basis for the position assumed there.

Moreover, being to be presumed, as was said, that the Claimant acted in good faith, when making a perfectly plausible interpretation of n.º 5 of article 39.º of the CIRC, Circular n.º 10/2011 could not even be invoked by the Tax and Customs Authority with respect to the determination of the taxable matter relating to the fiscal year 2010, as it was only issued in May 2011, not being in force in the year 2010 in which the tax event was formed.

In fact, n.º 2 of article 68.º-A of the LGT (added by Law n.º 64-A/2008, of 31 December), establishes that "the generic orientations that were not yet in force at the moment of the tax event are not invocable retroactively against taxpayers who have acted on the basis of a plausible and good-faith interpretation of the law".

As set out, this correction has no legal basis, so the annulment of the assessment is justified, in the part that has it as a presupposition, in accordance with the provisions of article 163.º, n.º 1, of the Code of Administrative Procedure, subsidiarily applicable, by force of the provisions of article 2.º, para. c), of the LGT.

3.2. Issue of Impairment Losses

The Claimant recorded in account 6511 - Impairment losses - On amounts due from debtors - Customers the amount of € 3,710,199.20, relating to receivables from customers that it considered to be in a situation of doubtful collection and whose balance is recorded in account 218 - Customers of doubtful collection.

The Tax and Customs Authority made corrections in the total amount of € 2,713,252.11 with respect to these losses.

The Claimant accepts that the amount of 517,117.62 € may be added to the taxable profit, relating to the corrections made to customers R..., S... and T..., not contesting, in that part, the assessment made (article 49.º of the request for arbitral pronouncement), but disagrees with the remaining corrections, in the value of € 2,196,134.49, which it summarized in the following table contained in article 51.º of the request for arbitral pronouncement:

[table]

Article 35.º, n.º 1, of the CIRC establishes, in what "the following impairment losses recorded in the same taxation period or in previous taxation periods can be deducted for fiscal purposes" "related to receivables resulting from normal activity that, at the end of the taxation period, may be considered of doubtful collection and are evidenced as such in the accounting".

The regime of impairment losses on receivables applicable in the fiscal year 2010 was established in article 36.º of the CIRC in the following terms:

Article 36.º

Impairment losses on receivables

1 – For purposes of determining the impairment losses provided for in para. a) of n.º 1 of the previous article, receivables of doubtful collection are considered those in which the risk of non-recoverability is duly justified, which occurs in the following cases:

a) The debtor has pending insolvency and enterprise recovery proceedings or enforcement proceedings;

b) The receivables have been claimed judicially;

c) The receivables are in default for more than six months from the date of their respective maturity and there is objective evidence of impairment and diligence efforts have been made to effect their collection.

2 – The annual accumulated amount of impairment loss on receivables referred to in para. c) of the previous number cannot exceed the following percentages of receivables in default:

a) 25 % for receivables in default for more than 6 months and up to 12 months;

b) 50 % for receivables in default for more than 12 months and up to 18 months;

c) 75 % for receivables in default for more than 18 months and up to 24 months;

d) 100 % for receivables in default for more than 24 months.

3 – Receivables of doubtful collection are not considered:

a) Receivables owed to the State, Autonomous Regions and local authorities or those in which these entities have provided surety;

b) Receivables covered by insurance, with the exception of the amount corresponding to the percentage of compulsory uncovered portion, or by any kind of real security;

c) Receivables from natural or legal persons holding more than 10 % of the company's capital or members of its corporate bodies, except in the cases provided for in paras. a) and b) of n.º 1;

d) Receivables from companies in which more than 10 % of the capital is held, except in the cases provided for in paras. a) and b) of n.º 1.

The requirement for objective evidence of impairment set out in para. c) of n.º 1 of article 36.º was introduced in the CIRC by the wording of Decree-Law n.º 159/2009, of 13 July, not existing in the corresponding previous wording of article 35.º which, in para. c) of n.º 1, referred, regarding this requirement of provision for doubtful collection receivables, only to "receivables are in default for more than six months from the date of their respective maturity and there is evidence of diligence efforts made to effect their collection".

Decree-Law n.º 159/2009 implemented the adaptation of "the rules for determining taxable profit to the international accounting standards as adopted by the European Union, as well as to national accounting standards that aim at adapting accounting to those standards" (as summarized in its summary).

Thus, since the CIRC includes no specific concept of "objective evidence of impairment," the introduction of this concept, used in the accounting standards on impairment and non-recoverability of financial assets, aimed at applying in the context of impairment losses on receivables for purposes of determining taxable profit the accounting concept, which is used, notably, in IAS 39 and NCRF 27.

Moreover, by force of the provisions of article 17.º, n.ºs 1 and 3, of the CIRC, the rules of accounting normalization are applicable in determining taxable profit, when there are no special rules of this Code that set them aside, so that also through this avenue it is concluded that it is to be made appeal to those standards.

In said accounting standards the following is stated, moreover, on this matter:

IAS 39

§ 59. A financial asset or a group of financial assets is impaired and impairment losses are incurred if, and only if, there is objective evidence of impairment as a result of one or more events that occurred after the initial recognition of the asset (a "loss event") and if that event (or events) of loss has an impact on the estimated future cash flows of the financial asset or the group of financial assets that can be reliably estimated. It may not be possible to identify a single and discrete event that has caused the impairment. Rather, the combined effect of various events may have caused the impairment. Expected losses as a result of future events, regardless of the degree of probability, are not recognized. Objective evidence that a financial asset or a group of assets is impaired includes observable data that draws the attention of the asset holder to the following loss events:

(a) significant financial difficulty of the issuer or the obligor;

(b) a breach of contract, such as default or delinquency in payments of interest or principal;

(c) the lender, for economic or legal reasons related to the borrower's financial difficulties, grants the borrower a concession that the lender would not otherwise consider;

(d) it becomes probable that the borrower will enter into insolvency proceedings or other financial reorganization;

(e) the disappearance of an active market for that financial asset due to the borrower's financial difficulties;

or

(f) observable data indicating that there is a measurable decrease in the estimated future cash flows of a group of financial assets since initial recognition of those assets, although the decrease cannot yet be identified with the individual financial assets of the group, including:

(i) adverse changes in the payment status of borrowers in the group (for example, an increasing number of late payments or an increasing number of credit card borrowers who have reached their credit limit and are paying the minimum monthly amount);

or

(ii) national or local economic conditions that correlate with defaults relating to assets in the group (for example, an increase in the unemployment rate in the area of the borrowers, a decrease in property prices for mortgages in the relevant area, a decrease in oil prices for loan assets to oil producers, or adverse changes in sector conditions affecting the group's borrowers).

NCRF 27

§ 25 – Objective evidence that a financial asset or a group of assets is impaired includes observable data that draws the attention of the asset holder to the following loss events:

a) Significant financial difficulty of the issuer or debtor;

b) Breach of contract, such as non-payment or default in payment of interest or debt repayment;

c) The creditor, for economic or legal reasons related to the debtor's financial difficulty, grants the debtor concessions that the creditor would not otherwise consider;

d) It becomes probable that the debtor will enter into insolvency proceedings or any other financial reorganization;

e) The disappearance of an active market for the financial asset due to the debtor's financial difficulties; or

f) Observable information indicating that there is a decrease in the measurement of the estimated future cash flows of a group of financial assets since their initial recognition, although the decrease cannot yet be identified for any individual financial asset in the group, such as adverse national, local or sectoral economic conditions.

26 – Other factors may also evidenced impairment, including significant changes with adverse effects that have occurred in the technological, market, economic or legal environment in which the issuer operates.

The Tax and Customs Authority found various anomalies in the recording of impairment losses that the Claimant effected, the latter accepting some of the corrections made and disputing others.

The justification common to the generality of the corrections is essentially as follows:

(...) being a customer with a character of habituality, with supplies in the course of the period under analysis, under the same conditions as in previous years, and taking into account that the simple fact of there being letters requesting account regularization does not by itself demonstrate the risk of non-recoverability, the existence of the risk of non-recoverability is not considered demonstrated.

This justification does not appear acceptable in all cases, for the fact of being a customer with habituality and the existence of supplies in the period of 2010 do not imply the non-existence of a situation of "significant financial difficulty" of the debtor, in light of the said accounting standards, and this significant difficulty is the first of the possible grounds for impairment indicated in both transcribed standards for the recognition of impairment of receivables.

In fact, it appears acceptable the understanding, explained in the testimonies of witnesses O... and P..., that the Claimant chose to continue to effect supplies to companies that are in difficult financial situations and with debts that justify the recognition of impairments, running the risk of seeing the debts worsen but enabling to the debtors eventual financial recovery that would enable them to pay the totality of the receivables, instead of ce

Frequently Asked Questions

Automatically Created

What are the requirements for provisions for client guarantees under Portuguese IRC tax law?
Under Portuguese IRC law, provisions for client guarantees are governed by Article 39(5) of the IRC Code. The annual provision amount is determined by applying to sales and services subject to guarantees a percentage that cannot exceed the ratio between expenses from customer guarantees actually incurred in the last three taxation periods and sales/services subject to guarantees in those same periods. Circular 10/2011 clarified that 'last three taxation periods' includes the current year and two preceding years, not three prior years. The provision must be properly documented and calculated using actual guarantee expenses and corresponding sales data.
What constitutes objective evidence of credit impairment for IRC purposes in Portugal?
Objective evidence of credit impairment for IRC purposes requires compliance with accounting standards and tax law. According to Portuguese tax legislation, impairment losses on receivables must be supported by concrete facts demonstrating the debtor's inability to pay, such as insolvency proceedings, payment default exceeding certain time limits, or other verifiable circumstances indicating collection difficulty. The taxpayer bears the burden of proving objective evidence of impairment through documentation such as correspondence, legal proceedings, debtor financial statements, or collection attempts. Generic or speculative provisions without individualized evidence are typically rejected by the Tax Authority.
How did the CAAD arbitral tribunal rule on the IRC assessment for the 2010 tax year in case 609/2017-T?
While the excerpt does not provide the final ruling, the CAAD arbitral tribunal examined the IRC assessment for 2010 concerning multiple corrections including €542,883.03 in provisions for customer guarantees and €2,713,252.11 in credit impairments. The tribunal was constituted on March 5, 2018, with three arbitrators and conducted witness hearings on June 27, 2018. The AT's response requested suspension and dismissal, which was denied by order of September 8, 2018. The case proceeded to simultaneous written submissions, with the tribunal analyzing whether the taxpayer correctly applied the provision calculation methodology and provided sufficient objective evidence for claimed impairments.
Can taxpayers challenge IRC liquidation assessments through hierarchical appeal and arbitral proceedings at CAAD?
Yes, Portuguese taxpayers can challenge IRC assessments through a multi-tiered process. First, they may file an administrative complaint (reclamação graciosa) with the Tax Authority. If unsuccessful, they can pursue hierarchical appeal (recurso hierárquico) to a higher administrative authority. Following administrative exhaustion, taxpayers have two judicial options: (1) judicial challenge before administrative and tax courts under Article 99 and 102(1)(a) of CPPT, or (2) arbitration proceedings at CAAD under Decree-Law 10/2011 (RJAT). Arbitration offers a faster alternative to courts, with each party appointing one arbitrator and the CAAD Ethics Council appointing the presiding arbitrator. The arbitral tribunal has full jurisdiction to review the legality of tax assessments.
What are the legal grounds for contesting credit impairment adjustments made by the Portuguese Tax Authority (AT)?
Legal grounds for contesting credit impairment adjustments include: (1) demonstrating objective evidence of impairment existed through documentation such as insolvency proceedings, legal actions, payment history, or debtor financial distress; (2) proving compliance with accounting standards (SNC/IAS) regarding impairment recognition and measurement; (3) challenging the Tax Authority's interpretation or application of IRC Code provisions on impairment deductibility; (4) arguing procedural defects in the inspection or assessment process; (5) invoking the burden of proof rules, as the AT must demonstrate the taxpayer's calculation was incorrect; and (6) presenting expert testimony or accounting evidence supporting the impairment amounts. Taxpayers should maintain comprehensive documentation of collection efforts, debtor communications, and credit risk assessments.