Process: 610/2014-T

Date: February 19, 2015

Tax Type: IRC

Source: Original CAAD Decision

Summary

This arbitral case (Process 610/2014-T) concerns the calculation of Derrama Estadual (State Surcharge) on corporate income tax (IRC) for a retail company operating in the Autonomous Regions of Azores and Madeira. The applicant challenged a 2011 self-assessment, seeking a refund of EUR 1,102,354.93, after the Tax Authority rejected their administrative complaint (Reclamação Graciosa). The core dispute centers on whether the State Surcharge applies to taxable profits attributable to activities in the Autonomous Region of Azores. The company argued that the State Surcharge should not apply to profits from Azores operations, and that the taxable profit allocation should be determined proportionally based on the ratio between annual turnover from facilities located in the Azores versus total annual turnover. Additionally, the applicant claimed calculation errors in the assessment process and argued that Azores regional legislation does not provide for State Surcharge application. The Tax Authority defended the assessment and raised a preliminary exception challenging the validity of the initial petition for alleged defects. The applicant countered that any defects were cured when the Tax Authority demonstrated understanding by filing a substantive reply. The arbitral tribunal at CAAD was constituted in October 2014 to resolve the dispute. The case illustrates the complexity of applying mainland tax provisions to businesses operating across different Portuguese jurisdictions with distinct fiscal regimes, particularly regarding whether autonomous regions' special tax status exempts them from certain state-level surcharges and how multi-jurisdictional profits should be allocated for tax purposes.

Full Decision

ARBITRAL DECISION

  1. Report

A, S.A. (registered in the Tax Authority's taxpayer registry as B UNIPESSOAL LDA, hereinafter APPLICANT), holder of tax identification number …, filed a petition for establishment of a collective arbitral tribunal, in accordance with the combined provisions of articles 2 and 10 of Decree-Law no. 10/2011, of 20 January (Legal Framework for Tax Arbitration, hereinafter referred to as LFTA), in which the Tax and Customs Authority is the respondent.

The petition for establishment of the arbitral tribunal was accepted by the President of CAAD and automatically notified to the Tax and Customs Authority on 07-08-2014.

Since the Applicant did not manifest the intention to appoint an arbitrator, in accordance with the provisions of paragraph (a) of section 2 of article 6 and paragraph (b) of section 1 of article 11 of the LFTA, the Ethics Council designated the arbitrator, after prior acceptance, the undersigned, Dr. Maria da Graça Martins, and notified the parties of this designation on 24.09.2014.

Thus, in accordance with the provisions of paragraph (c) of section 1 of article 11 of the LFTA, the collective arbitral tribunal was constituted on 09.10.2014.

To substantiate its petition, the APPLICANT requests, in essence, a declaration of illegality of the self-assessed corporate income tax act dated 12 July 2012, with the number 2012 …, relating to the tax year 2011, with the amount to be refunded of EUR. 1,102,354.93 (one million, one hundred and two thousand, three hundred and fifty-four euros and ninety-three cents), following the notification of the express rejection of the Gracious Complaint previously filed by the Applicant filed under number …, on 05 March 2014, in accordance with and for the purposes of articles 68 and 131, both of the Code of Tax Procedure, under Official Letter no. 1585, of 07 May 2014, of the Tax Management and Assistance Division of the Large Taxpayers Unit.

In summary, the Applicant alleges that:

  1. The self-assessment suffers from incorrect quantification regarding the amounts of the State Surtax calculated by the Applicant, and pertaining to the Autonomous Regions of the Azores and Madeira (hereinafter designated as ARA and ARM respectively), since, in the Applicant's view, the State Surtax cannot apply to the taxable profit attributable to activities carried on in the Autonomous Region of the Azores, which should be determined by the proportion, in the respective taxation period, between the annual turnover relating to facilities located in the ARA and the total annual turnover of the Applicant, and the State Surtax assessment procedure in the said Autonomous Regions suffers from calculation errors.

  2. In addition to the declaration of illegality of the aforementioned tax assessment act, the Applicant requests, in accordance with and for the purposes of article 100 of the General Tax Law (hereinafter referred to as GTL), the refund of the amount of EUR. 29,167.09 (twenty-nine thousand, one hundred and sixty-seven euros and nine cents), given that this is the amount of the State Surtax collected in excess, or, if this is not accepted, the Applicant nonetheless has the right to a refund of the amount of EUR. 6,222.46 (six thousand, two hundred and twenty-two euros and forty-six cents), on the ground that there is no provision in the legal system of the Autonomous Region of the Azores for a tax provision establishing the application of the State Surtax in that Autonomous Region, plus, in any case, the respective compensatory interest, in accordance with and for the purposes of articles 43 and 100, both of the GTL, and article 61 of the Code of Tax Procedure.

The Tax and Customs Authority replied on 11.11.2014, within the time granted to it, and for the reasons then cited, fully maintaining the tax act under challenge, contrary to what was petitioned by the APPLICANT, with the grounds set out in the respective pleading.

The Tax Authority thus pleads for the dismissal of the Petition for Arbitral Pronouncement, and consequently absolution of all claims formulated by it, invoking and, as a preliminary matter, by Exception, the nullity of the proceedings due to defectiveness of the Initial Petition presented by the APPLICANT, as results from articles 6 to 23 of the Reply.

The APPLICANT replies, stating that "(…) The Initial Petition presented is not, nor should be considered defective, given that, and although the Tax Authority has invoked such Exception (based on article 186 sections 1 and 2 paragraph (a) of the Code of Civil Procedure), it has demonstrated, unequivocally, to have understood the factual and legal grounds mentioned in such pleading, presenting, for that purpose, its Reply in the manner indicated above, curing, in accordance with and for the purposes of article 186 section 3 of the Code of Civil Procedure, applicable by virtue of article 29 section 1 paragraph (e) of the LFTA, the alleged defect. It should be noted, finally, that where there is merely a deficiency in the identification of the order of the claims formulated by the Applicant in the Petition for Arbitral Pronouncement, it is requested of Your Excellency that the order thereof be altered, so as to reflect the various grounds invoked throughout the aforementioned Petition for Arbitral Pronouncement, whereby the claim currently contained in paragraph (a) shall now constitute paragraph (b), while the claim currently indicated in paragraph (b) shall now constitute paragraph (a), with the claim for condemnation of the Tax Authority to pay compensatory interest being maintained (…)."

The respective administrative file is attached.

Since the Parties did not request the production of any evidence (the Applicant declared to waive oral evidence by ruling), the meeting provided for in article 18 of the LFTA was dispensed with and it was determined that the proceedings continue with written submissions.

The parties presented written submissions.

Preliminary Determination of Validity

The parties possess legal personality and capacity and are entitled to party status (articles 4 and 10, section 2, of the same instrument and article 1 of Ordinance no. 112-A/2011, of 22 March).

The Arbitral Tribunal was regularly constituted.

No nullity is apparent.

As a matter of priority, consideration must be given to the preliminary issue of the exception raised by the Tax and Customs Authority, upon the resolution of which depends the possibility of determining the merits of the Applicant's claim.

  1. Factual Matter

2.1. Established facts relevant to the assessment of the exception

The following facts are considered established:

(a) The Applicant is a commercial entity with registered office in Portuguese territory, whose business is the retail sale of clothing for adults, babies and children, and as such is a taxpayer for corporate income tax purposes, in accordance with section 1 of article 2, combined with the provisions of articles 3 to 5 of the Corporate Income Tax Code.

(b) Unlike the vast majority of corporate income tax taxpayers, the Applicant does not adopt the normal taxation period coinciding with the calendar year, that is, from 1 January to 31 December, as the provision of article 8 section 1 of the Corporate Income Tax Code generally provides.

(c) In fact, the Applicant, for reasons of reporting its financial information to its Parent Company in Spain, adopted, in accordance with and for the purposes provided for in article 8 section 2 of the Corporate Income Tax Code, a taxation period running from 01 February to 31 January of the following year, and thus distinct from the rule indicated above. – See Document no. 1 attached to the Gracious Complaint.

(d) With reference to the tax year 2011, and as provided for in articles 117 section 1 paragraph (b) and 120 section 2, both of the Corporate Income Tax Code, the Applicant submitted, by electronic means on 29 June 2012, its respective Tax Declaration Form 22 (Corporate Income Tax). – See Document no. 1 attached to the Gracious Complaint.

(e) It follows from its content (see Field 368 of Table 10) that the Applicant determined a total amount of corporate income tax to be recovered of EUR. 1,102,354.91 (one million, one hundred and two thousand, three hundred and fifty-four euros and ninety-one cents). – See cited Document no. 1 attached to the Gracious Complaint.

(f) Although the Tax Authority corrected the amount to be refunded by 2 cents of Euro, thereby bringing the refund to EUR. 1,102,354.93 (one million, one hundred and two thousand, three hundred and fifty-four euros and ninety-three cents), the aforementioned amount to be refunded was, in fact, confirmed, as results from the notification of the Corporate Income Tax Assessment Statement, relating to the tax year 2011, with the number 2012 …, of 12 July 2012. – See Document no. 2 attached to the Gracious Complaint, attached as cited Document no. 3.

(g) Although the Applicant obtained the refund of the amount of EUR. 1,102,354.93 (one million, one hundred and two thousand, three hundred and fifty-four euros and ninety-three cents), – See Document no. 2 attached to the Gracious Complaint, as results from the aforementioned tax assessment act, the amount of EUR. 369,023.71 (three hundred and sixty-nine thousand and twenty-three euros and seventy-one cents) was determined as State Surtax, in accordance with and for the purposes of article 87-A of the Corporate Income Tax Code, in the version in force at the time of the events. – See Document no. 2 attached to the Gracious Complaint, attached as cited Document no. 3.

(h) By not agreeing with the tax act now under challenge, in particular as to the amount of State Surtax determined, the Applicant, on 05 March, filed, in accordance with and for the purposes of articles 68 and 131, both of the Code of Tax Procedure, a Gracious Complaint with the Tax Office of Lisbon 10 where it set forth its factual and legal arguments supporting its claims. – See cited Document no. 3.

(i) Following the filing of the aforementioned response procedure, the Applicant, under official letter no. …, of 09 April 2014, was notified of the Draft Rejection of the Gracious Complaint filed, as well as, to, within 15 days, and if it wished, exercise the Right to be Heard. – See Document no. 4.

(j) As it did not exercise such right, the Draft Rejection was converted into a final rejection and notified to the Applicant, through official letter no. 1585, of 07 May 2014. – See cited Document no. 1.

2.2. Unproven facts

There are no facts relevant to the assessment of the exception that have not been proved.

2.3. Grounds for the decision on the facts

The determination of the facts was based on the documents indicated for each point and on the CAAD information system.

  1. Legal Matter

3.1. The Preliminary Issue. Exception: Nullity of proceedings due to defectiveness of the Initial Petition

In its REPLY, the Tax Authority states that the APPLICANT elects as the subject matter of the petition for arbitral pronouncement presented "the legality of the self-assessed corporate income tax act of 12 July 2012, with the number 2012 …, relating to the tax year 2011, with the amount to be refunded of EUR. 1,102,354.93 (one million, one hundred and two thousand, three hundred and fifty-four euros and ninety-three cents)..." (as stated in article 1 of the initial petition).

As regards the identification of the claim, the Tax Authority emphasizes that "(…) with the present Petition for Arbitral Pronouncement, the APPLICANT intends the declaration of illegality of the aforementioned tax act, in accordance with and for the grounds to be described in the following points, given that, and in summary, the self-assessment suffers from incorrect quantification regarding the amounts of the State Surtax calculated by the Applicant, and pertaining to the Autonomous Regions of the Azores and Madeira (hereinafter designated as ARA and ARM respectively), since, in the perspective of the APPLICANT, the State Surtax cannot apply to the taxable profit attributable to activities carried on in the Autonomous Region of the Azores, which should be determined by the proportion, in the respective taxation period, between the annual turnover relating to facilities located in the ARA and the total annual turnover of the APPLICANT, and the State Surtax assessment procedure in the said Autonomous Regions suffers from calculation errors.

That is, according to the Tax Authority "In addition to the declaration of illegality of the aforementioned tax assessment act, the APPLICANT requests, in accordance with and for the purposes of article 100 of the General Tax Law (hereinafter designated as GTL), the refund of the amount of EUR. 29,167.09 (twenty-nine thousand, one hundred and sixty-seven euros and nine cents), given that this is the amount of State Surtax collected in excess, or, if this is not accepted, the Applicant nonetheless has the right to a refund of the amount of EUR. 6,222.46 (six thousand, two hundred and twenty-two euros and forty-six cents), on the ground that there is no provision in the legal system of the Autonomous Region of the Azores for a tax provision establishing the application of the State Surtax in that Autonomous Region, plus, in any case, the respective compensatory interest, in accordance with and for the purposes of articles 43 and 100, both of the GTL, and article 61 of the Code of Tax Procedure."

It is here that the Tax Authority contends that from reading the petition as a whole it is not possible to discern what will be the possible main claim and what will be the hypothetical subsidiary claim.

The Tax Authority argues that in "the petition the Applicant must set forth the essential facts that constitute the cause of action and the legal grounds that serve as the basis for the action and formulate the claim, in accordance with the provisions of paragraphs (d) and (e) of section 1 of article 552 of the Code of Civil Procedure (CCP), applicable by virtue of paragraph (e) of section 1 of article 29 of the LFTA.

As regards the claim, section 1 of article 554 of the CCP provides that:

"1 – Subsidiary claims may be formulated. A subsidiary claim is one presented to the court to be taken into consideration only in the event that a previous claim does not succeed."

It concludes that "although it may be reasonably safe to assert that the Applicant proposes a main claim and a subsidiary claim [note, once again, article 50 of the initial petition, as well as the expression 'If this is not accepted', used in paragraph (b) of the claim].

One could, indeed, speculate about the nature of one and the other claims formulated, however, such exercise cannot be required of the Respondent, nor is it within the competence of the Arbitral Tribunal.

To the extent that such express determination constitutes, as was referred to above, a legal obligation of the Applicant, and one that only the Applicant could (should) fulfil, so as to allow the Tribunal to determine: a) which claim to decide and; b) which claim to take into consideration in the event of non-success of the first claim. Failing to do so, the initial petition is defective due to unintelligibility of the indication of the claim, which generates the nullity of the proceedings, in accordance with section 1 and paragraph (a) of section 2 of article 186 of the CCP, which is to be known ex officio, in accordance with the provisions of article 196 of the CCP, both applicable by virtue of paragraph (e) of section 1 of article 29 of the LFTA.

The nullity of the proceedings constitutes a dilatory exception that impedes determination of the merits of the case, and should result in the absolution of the Respondent from the instance, having regard to the provisions of articles 278, section 1, 576, sections 1 and 2, and 577, paragraph (b) of the CCP, applicable by virtue of article 29, section 1, paragraph (e) of the LFTA. (…)."

In the REPLY to the Dilatory Exception raised by the Tax Authority, the APPLICANT opposes the arguments presented by the Tax Authority.

The APPLICANT states that what the Tax Authority simply invokes to support the defectiveness of the Initial Petition presented by the Applicant is the fact that it, although throughout the Petition for Arbitral Pronouncement it has set forth the essential facts that constitute the cause of action and the legal grounds that serve as the basis for the action, at the end, and inadvertently, inverted the order of the claims.

It argues that a simple lapse or mere deficiency of the Initial Petition "did not prevent the Tax Authority from understanding and contesting the factual and legal grounds that support the Applicant's claims, if it is subsumed under a putative, but always non-existent, defectiveness of the Initial Petition presented by the Applicant. For an Initial Petition to be considered defective, it is necessary that there be a contradiction of such grave and insurmountable nature between the claim and the cause of action that prevents not only the Tribunal, but also the opposing party from interpreting and contesting what was set forth in the Initial Petition presented.

With all due respect, it must be acknowledged that the Initial Petition presented by the APPLICANT presents some deficiencies or lapses.

However, it is equally true and, as results from the manner in which the Tax Authority contests through its REPLY, that despite the formulation of the claims by the APPLICANT having been manifestly unskillful, the fact is that the Initial Petition is sufficiently clear to the point of setting forth the essential facts that constitute the cause of action and the legal grounds that serve as the basis for the action, or the Tax Authority would not have expended all its argumentation in points 24 to 74 of its REPLY with a view to demonstrating that the assessment act as it was determined does not suffer from any defects and, as such, should not be revoked.

The APPLICANT may pronounce on the aforementioned dilatory exception pleading for its dismissal. Upon having the opportunity to make corrections, it then corrected the order of the claims formulated so as to reflect the grounds invoked throughout the Initial Petition.

Thus, first the APPLICANT requests the refund of € 6,222.46, on the alleged non-existence of a tax provision establishing the application of the State Surtax in the Autonomous Region of the Azores. Alternatively, it requests the refund of the amount of. Having clarified the ordering of the claims and their grounds, it cannot be forgotten that they have as their basis the alleged violation of the provisions of article 87-A of the Corporate Income Tax Code.

Having clarified the order of the claims and their grounds, the dilatory exception is deemed dismissed.

Consequently, it falls to the Tribunal to pronounce on the petition for arbitral pronouncement, in particular on whether or not there was a violation of the provisions of article 87-A of the Corporate Income Tax Code, and to draw the legal consequences therefrom.

3.2. First Claim: The refund of the amount of EUR. € 6,222.46

To support the claim for refund of the amount of € 6,222.46, the APPLICANT argues that the assessment in question violates the provisions of article 87-A of the Corporate Income Tax Code, "given that the amount of the State Surtax could never, in the perspective of the Applicant, apply to the profit attributable to activities carried on in the Autonomous Region of the Azores and Madeira, but rather determined proportionally between the annual turnover relating to facilities located in the ARA and the total annual turnover of business."

To justify such a position, the Tax Authority states that "(…). 18. As results from the argumentative route developed by the claimant in its petition, there are two essential issues that arise in the present case, namely:

(i) In the year 2011, was the taxable profit attributable to facilities located in the ARA, of entities with head office or effective place of management on the Continent, subject to the State Surtax, as provided for in article 87-A of the Corporate Income Tax Code?

(ii) May taxpayers based on the Continent and holding facilities in the Autonomous Regions determine the objective incidence of the State Surtax by reference to the taxable profit attributable to each of the said territorial jurisdictions, determined in a manner similar to that provided for in Annex C of Form 22 of the Corporate Income Tax Declaration? (…).

In setting forth a description of the tax jurisdiction of the Autonomous Regions, the Tax Authority states, to justify the aforementioned Decision of Rejection, and as regards the first issue it enunciated, that "(…). 40. At this point, after stating the main legal provisions regarding tax jurisdiction and the distribution of tax revenues, in the context of relations between the State and the Autonomous Regions, we believe we are in a position to answer the issues raised here by the Claimant. 41. Beginning with the first issue, there is no doubt, given everything we have stated above, that the taxable profit attributable to the Claimant's facilities located in the ARA is subject to the State Surtax, as provided for in article 87-A of the Corporate Income Tax Code. 42. To remove it from the incidence of the State Surtax would be a tax jurisdiction that is not within the sphere of the Autonomous Regions, as we have made very clear above. 43. The principle of legality of taxation would also oppose this, insofar as only a parliamentary law (or a decree-law authorized by parliament) can create taxes, determine their incidence and rate, and establish tax benefits and taxpayer guarantees. 44. For this reason, the understanding supported by the Claimant, to the effect that the lack of provision of a Regional Surtax in the budget of the Azores has the effect of excluding the incidence of the State Surtax on the taxable profits generated in that Region, clearly violates article 165, section 1, paragraph (i) of the Constitution of the Portuguese Republic. 45. Finally, it should be noted that we believe the Claimant's inference drawn from the lack of provision of a Regional Surtax in the Regional Budget of the Azores to be devoid of any legal support. 46. In fact, the only issue that could be raised in this regard would be whether the State Surtax attributable to that Region would not constitute its revenue. (…)." – See cited Documents no. 1 and 4.

As regards the second issue, and also to justify the aforementioned Decision of Rejection, the Tax Authority states that "(…). 47. Having stated this, and addressing the second issue, we can, from the outset, state that our position is equally in the sense of the non-success of the Claimant's claim. 48. As we have seen, the Claimant argues that in the calculation of the State Surtax the procedure should be identical to that used in Annex C of Form 22 of the Corporate Income Tax Declaration, that is, determining a value of taxable profit for each territorial jurisdiction, and then, taking as reference the value of each jurisdiction, its objective subjection to the Surtax. 49. Applying this form of assessment suggested by the Claimant, we would find, then, that the taxable profit generated by its establishment in ARM would not be subject to State Surtax, given that it is below the threshold of wealth outlined in the objective incidence of the norm. 50. It is evident that the basis of this understanding lies a clear confusion between two completely distinct planes, the plane of the incidence of the tax and the plane of the determination of the tax revenues belonging to the Autonomous Regions. 51. The incidence of the State Surtax is provided for in article 87-A of the Corporate Income Tax Code. Thus, it is in this norm that the prerequisites are provided, whose conjunction results in the birth of the tax obligation, as well as the elements of that obligation. 52. Therefore, in this norm it is determined who are, in the abstract, the taxpayers subject to the tax obligation, what is the taxable matter, that is, the wealth, the economic values, on which taxation falls, what is the tax rate, and what is the dynamizing fact, the generating fact, which, by coming together, bringing into contact the tax prerequisites, will allow a tax obligation to be born. 53. Now, since the Claimant determined, in the tax year in question, a taxable profit of EUR. 16,760,948.54, naturally a tax obligation for payment of the State Surtax arose in its legal sphere. 54. For its part, in Annex C of Form 22, as has already been noted, we are in the presence of operations for determining the tax revenues of the Autonomous Regions, through the application of regional rates to the taxable matter attributable to the Autonomous Regions, this being determined on the basis of the proportion between the annual turnover of the tax year corresponding to facilities located in each Autonomous Region and the annual total turnover of the tax year. 55. In this annex, we can say, properly speaking, that we are faced with operations for assessing the revenues of the autonomous regions, therefore, in an area well downstream of the issue of tax incidence. 56. As we clearly see, the Claimant's position is not based on any valid premise, quite the contrary, and we therefore maintain, once again, the understanding that its claim should be entirely rejected. (…)." – See cited Documents no. 1 and 4.

The Applicant argues that State Surtax should not have been levied on the taxable profit attributable to its activities carried on in the ARA, which, as indicated above, should be determined by the proportion, in the taxation period of 2011, between the annual turnover relating to facilities located in the ARA and the total annual turnover of the now Claimant in that same tax year, requesting forthwith the refund of EUR. 6,222.46 (six thousand, two hundred and twenty-two euros and forty-six cents), the calculation of which is reproduced below:

We do not agree with the APPLICANT.

In fact, from the various provisions on the tax jurisdiction of the Autonomous Regions of the Azores and Madeira as enshrined in particular in the Constitution of the Portuguese Republic and in the Law on the Finances of the Autonomous Regions, it is not possible to conclude that the non-existence in the legal system of the Autonomous Region of the Azores of a special instrument aimed at adapting the State Surtax, as is the case with the Autonomous Region of Madeira, can have as a consequence the exclusion of the incidence of that same State Surtax as it is provided for in article 87-A of the Corporate Income Tax Code, from the taxable profits attributable to facilities in the Azores.

To admit such an interpretation would be to call into question the principles of legality and the exclusive jurisdiction of the Assembly of the Republic to legislate on the creation of taxes and the tax system as enshrined in articles 103 and 165, section 1, paragraph (i) of the Constitution.

It is unquestionable that the Autonomous Regions have their own tax jurisdiction and an entitlement to revenues.

However, as stated by the Tax Authority in the decision rejecting the gracious complaint filed and reiterated in its REPLY, "the power of regional adaptation of the national tax system has limits both of an internal nature, having regard to the higher value of national tax rules, and of a community nature, namely the community system of state aid.

Article 165, section 1, paragraph (i) of the Constitution of the Portuguese Republic [1] establishes unequivocally that the Assembly of the Republic has an exclusive competence, that is, an unshared one, for the creation of tax rules. These rules are intended to apply throughout the national territory.

In accordance with the Constitution of the Portuguese Republic, the Autonomous Regions of the Azores and Madeira exercise "their own tax jurisdiction, in accordance with the law", also have the "power to adapt the national tax system to regional specificities, in accordance with a framework law of the Assembly of the Republic", have, in accordance with the statutes and the law on the finances of the autonomous regions, "the tax revenues collected or generated therein, as well as a share in the tax revenues of the State" (see paragraphs (i) and (j) of section 1 of article 227 of the Constitution).

Such competencies must be guided by the principle of coherence between the national tax system and the regional tax systems, provided for in paragraph (a) of article 52 of the Law on the Finances of the Autonomous Regions [2] and the principle of sufficiency (see paragraph (f) of article 52 of the Law on the Finances of the Autonomous Regions), with strict compliance with constitutional and statutory limits and, of course, the principle of legality.

As the Tax Authority emphasizes regarding the power to create regional taxes, "articles 1 and 2 of article 54 of the Law on the Finances of the Autonomous Regions provided that taxes could be created only effective in the Autonomous Regions provided that they do not apply to a matter subject to the incidence provided for any of the taxes of national scope, even if exempted or not subject thereto, or that could integrate that incidence, and that their application does not result in obstacles to trade with different points of the national territory. For its part, the recognition of regional specificities justified the attribution of the power to adapt the national tax system to the circumstances of the Autonomous Regions, which was provided for, in particular, in article 56 of the Law on the Finances of the Autonomous Regions.

In this way, the competence attributed to the Autonomous Regions to adapt the national system to regional specificities consists of the reduction of the rates of personal income tax, corporate income tax, value added tax and special consumption taxes, in the granting of deductions from the assessment and in the granting of tax benefits. It does not consist of derogating from general rules of incidence.

In particular, the Political-Administrative Statute of the Autonomous Region of the Azores, approved by Law no. 39/80, of 5 August, amended and reissued by Law no. 2/2009, of 12 January, provides in section 1 of article 20: "1- The Region exercises its own tax jurisdiction, in accordance with the law, and may adapt the national tax system to regional specificities, in accordance with a framework law of the Assembly of the Republic."

From the legal framework it can be inferred that the Autonomous Region of the Azores (as well as the Autonomous Region of Madeira) has the option to exercise the power to adapt the tax system to regional reality. However and, no less importantly, the omission of the exercise of that option cannot have as a consequence the derogation of a rule of incidence validly approved by the Assembly of the Republic in the exercise of its legislative competence and applicable to all taxpayers resident in Portuguese territory.

The State Surtax or additional rate covered by the general rule of article 87-A of the Corporate Income Tax Code constitutes a tax, applying to a part of taxable profit. It was created by law, in compliance with the principle of legality enshrined in article 103 of the Constitution and in article 8 of the General Tax Law.

The fact that the regional legislator has not legislated in the sense of adapting the State Surtax to the Autonomous Region of the Azores does not imply an exclusion of its application to profits obtained therein. This is what results from the rule of incidence of article 87-A of the Corporate Income Tax Code, since it applies to the profits of taxpayers resident in Portugal, except for the exceptions provided for in the law. The case at bar does not constitute an exception.

The tax jurisdiction of the Autonomous Regions is in this regard restricted to the creation of taxes related to a specific interest of the Autonomous Regions and to the adaptation of the national tax system. This competence does not include an intrinsic power to repeal or waive general laws on tax matters whenever it is not exercised.

In this regard and as mentioned by the Tax Authority, it should be noted the understanding of the Constitutional Court expressed in Decision no. 91/84 on the admissibility of regional tax jurisdiction including the power to alter the tax system of the Republic (by eliminating or modifying a tax): considering that regional tax jurisdiction "applies solely to the possibility of creating regional taxes, not encompassing the possibility of introducing changes or making adaptations to general taxes, in their essential elements".

In that sense, the APPLICANT's claim cannot be accepted. The non-existence of a special rule of incidence in the legal system of the Region of the Azores does not operate to exclude the application of article 87-A of the Corporate Income Tax Code to profits obtained in facilities located in that jurisdiction.

3.2. Second Claim: The refund of the amount of EUR. € 29,167.09

In this claim, the Applicant contends that the calculation of the State Surtax suffers from defects that result in an incorrect assessment of the tax.

Alternatively to the claim stated above, the Applicant maintains that in any event the calculation of the surtax suffers from defects and cannot be assessed in the manner processed:

As previously mentioned, it is provided for in paragraph (b) of section 1 of article 20 of the Law on the Finances of the Autonomous Regions that, revenue of the ARA and ARM includes the corporate income tax owed by "legal entities or equivalent entities which have their head office or effective place of management in Portuguese territory and have branch offices, delegations, agencies, offices, facilities or any form of permanent representation without separate legal personality in more than one jurisdiction", with section 2 of that provision establishing that, "the revenues of each jurisdiction are determined by the proportion between the annual turnover of the tax year corresponding to facilities located in each Autonomous Region and the annual total turnover of the tax year".

Now, based on this fact, corporate income tax taxpayers who, like the Applicant, obtain income attributable to the Autonomous Regions, regardless of whether or not regional rates are applied, are required to complete Annex C (Autonomous Regions) to Form 22 of the Corporate Income Tax Declaration of the taxation period in question.

It should be noted, therefore, that, by completing the aforementioned Annex C, the implementation of what is provided for in article 20 of the Law on the Finances of the Autonomous Regions is effected, since taxpayers, like the Applicant, indicate in Annex C to Form 22 of the Corporate Income Tax Declaration, the annual turnover corresponding to facilities located in the ARM and ARA, thus allowing the Tax Authority to obtain the elements necessary for the correct calculation of the tax.

Note that the attribution of taxable profit, as well as the respective taxable matter, to each of the Autonomous Regions is effected before the application of the corresponding tax rate.

This amounts to saying that the calculation of the tax is broken down into 3 individual calculations, one for each jurisdiction in which the taxpayer is present.

Therefore, it is not understood why the same understanding is not followed for the determination of the State Surtax.

In fact, there is no individualized calculation of the State Surtax, based on the turnover figures verified in each of the Autonomous Regions and taking into account the specificities of regional taxation.

That calculation, when individualized (as occurs in the determination of the tax), leads to the inevitable conclusion that the State Surtax was assessed in excess, in the amount of EUR. 29,167.09 (twenty-nine thousand, one hundred and sixty-seven euros and nine cents), as is demonstrated below:

In summary, the Applicant argues that the State Surtax should be determined by reference to the taxable profit attributable to each of the jurisdictions, in a manner similar to the determination effected in Annex C of Form 22 of the Corporate Income Tax Declaration;

Now, according to this reasoning, as in the 2011 tax year the taxable profit attributed to facilities located in the Autonomous Region of the Azores does not exceed the limit of € 2,000,000, it would for that reason be excluded from subjection to State Surtax.

The Tribunal does not support the APPLICANT's understanding.

With all due respect, the interpretation given to the aforementioned rule is not compatible with the rules of objective incidence which are on a different plane from the method of determining the revenues attributed to the Autonomous Regions.

In accordance with section 2 of article 20 of the Law on the Finances of the Autonomous Regions, it constitutes revenue of each Autonomous Region the corporate income tax owed by legal entities or equivalent entities which have their head office or effective place of management in Portuguese territory and have branch offices, delegations, agencies, offices, facilities or any form of permanent representation without separate legal personality in more than one jurisdiction. These revenues are determined by proportion between the annual turnover of the tax year corresponding to facilities located in each Autonomous Region and the annual total turnover of the tax year; annual turnover being understood as the value of the transfer of goods and provision of services, excluding value added tax.

As the Tax Authority emphasized in the statement that supported the decision rejecting the gracious complaint, "what is regulated in this regard are the operations for determining the tax revenues attributed to the Autonomous Regions".

Article 87-A of the Corporate Income Tax Code defines who are the taxpayers, the taxable matter, the tax rate and the fact that generates the tax obligation in question.

As to the objective incidence, the rule establishes that the tax applies to "... the part of taxable profit exceeding € 2,000,000 subject to and not exempt from corporate income tax...".

Accordingly, in the case at bar, if the APPLICANT declared, in the 2011 tax year, a taxable profit of € 16,760,948.54, the same is subject, as to the part that exceeds € 2,000,000, by application of the provisions of article 87-A of the Corporate Income Tax Code, and cannot be excluded the part of profits obtained in facilities located in the Autonomous Regions as the APPLICANT intends.

For all the reasons set out, the claim for annulment of the assessment act in question cannot succeed.

The claim for annulment of the assessment of compensatory or default interest is also unwarranted, since this claim is based on the alleged illegality of the corporate income tax assessment.

  1. Decision

On the grounds of fact and law stated above, this Tribunal decides:

(a) To dismiss as unwarranted the claim for annulment of the corporate income tax assessment no. 2012 … and, consequently, to absolve the Tax and Customs Authority of that claim;

(b) To dismiss as unwarranted the claim for annulment of the assessment of compensatory or default interest and to absolve the Tax and Customs Authority of that claim;

(c) To condemn the Applicant to the costs of the proceedings, taking into account the payments made in the interim.

  1. Value of the Case

In accordance with the provisions of article 306, section 2, of the Code of Civil Procedure and article 97-A, section 1, paragraph (a), of the Code of Tax Procedure and article 3, section 2, of the Regulation of Costs in Tax Arbitration Proceedings, the value of the case is fixed at € EUR. 29,167.09 (twenty-nine thousand, one hundred and sixty-seven euros and nine cents).

  1. Costs

In accordance with article 22, section 4, of the LFTA, the amount of costs is fixed at €1,530.00, in accordance with Table I annexed to the Regulation of Costs in Tax Arbitration Proceedings, to be borne by the Applicant.

Notify.

Lisbon, 19-02-2015

The Arbitrator

(Maria da Graça Martins)

(Text prepared by computer, in accordance with article 138, section 5, of the Code of Civil Procedure, applicable by virtue of article 29, section 1, paragraph (e), of the Legal Framework for Tax Arbitration. The wording of this decision follows the orthography preceding the Orthographic Agreement of 1990.)

[1] Article 165 of the Constitution

  1. The exclusive competence of the Assembly of the Republic is to legislate on the following matters, except with authorization to the Government:

i) Creation of taxes and tax system and general regime of rates and other financial contributions in favor of public entities;

[2] Approved by Organic Law no. 1/2007, of 19 February and amended by Organic Law no. 1/2010 of 29 March.

Frequently Asked Questions

Automatically Created

How is the Derrama Estadual (State Surcharge) calculated for companies operating in the Autonomous Regions of Azores and Madeira?
The Derrama Estadual for companies operating in the Autonomous Regions of Azores and Madeira is calculated based on proportional allocation of taxable profit. According to the legal framework, the allocation should be determined by the ratio between annual turnover from facilities located in each autonomous region and the company's total annual turnover during the taxation period. However, there is ongoing debate about whether the State Surcharge applies at all to profits attributable to activities in these regions, particularly the Azores, where regional legislation may not provide for such application. The calculation methodology requires distinguishing between mainland operations and autonomous region operations, with potential different tax treatment for each jurisdiction.
Can a company challenge the IRC self-assessment regarding Derrama Estadual through tax arbitration at CAAD?
Yes, a company can challenge IRC self-assessments regarding Derrama Estadual through tax arbitration at CAAD (Centro de Arbitragem Administrativa). This case demonstrates the proper procedure: after the Tax Authority rejects an administrative complaint (Reclamação Graciosa), the taxpayer can file a petition for arbitral tribunal establishment under the Legal Framework for Tax Arbitration (Decree-Law 10/2011). The petition must be filed within the legal deadlines established in articles 68 and 131 of the Tax Procedure Code. CAAD has jurisdiction to review the legality of self-assessment acts, including disputes over State Surcharge calculations, allocation methodologies, and the application of tax provisions to operations in autonomous regions.
Does the Derrama Estadual apply to taxable profits attributed to activities in the Autonomous Region of the Azores?
The application of Derrama Estadual to taxable profits attributed to activities in the Autonomous Region of Azores is disputed. The applicant in this case argues that the State Surcharge cannot apply to taxable profit attributable to activities carried out in the Azores, claiming there is no provision in the Azores regional legal system establishing the application of this state-level tax. This reflects the constitutional and fiscal autonomy of Portuguese autonomous regions. The argument centers on whether mainland tax provisions, such as the State Surcharge, automatically extend to autonomous regions or whether specific regional legislation is required to implement such taxes. The resolution of this question depends on interpreting the interplay between national tax law and regional fiscal autonomy.
What is the procedure for contesting IRC self-assessments after a rejected Reclamação Graciosa (administrative complaint)?
After a rejected Reclamação Graciosa (administrative complaint), taxpayers can contest IRC self-assessments by filing a petition for arbitral tribunal at CAAD within the legal deadline. The process follows articles 2 and 10 of the Legal Framework for Tax Arbitration (LFTA). The petition must identify the challenged tax act, state the factual and legal grounds for the challenge, and specify the relief sought (declaration of illegality and/or refund). Once accepted, the Tax Authority is notified and must file a reply. The arbitral tribunal is constituted with appointed arbitrators, and proceedings continue with written submissions unless oral evidence is requested. Taxpayers can claim refunds of amounts paid in excess plus compensatory interest under articles 43 and 100 of the General Tax Law.
How is the proportional allocation of taxable profit determined between mainland Portugal and the Autonomous Regions for Derrama Estadual purposes?
The proportional allocation of taxable profit between mainland Portugal and the Autonomous Regions for Derrama Estadual purposes is determined using a turnover-based formula. The methodology calculates the ratio between annual turnover relating to facilities located in each autonomous region (Azores or Madeira) and the company's total annual turnover during the respective taxation period. This proportion is then applied to determine what portion of taxable profit is attributable to each jurisdiction. For companies with non-standard taxation periods (like February to January instead of calendar year), the calculation must cover the entire 12-month taxation period. The allocation method aims to reflect the economic reality of where value is generated, though disputes arise over calculation errors and whether the underlying legal basis for applying State Surcharge exists in autonomous regions.