CAAD 611/2018-T: IRC Tax Assessment Annulment - Loss Carryforward, Financial Charges Deductibility & Right of Assessment Expiry

ARBITRAL DECISION (consult full version in PDF)

The arbitrators Counselor Jorge Lopes de Sousa (arbitrator-president), Dr. Augusto Vieira and Dr. José Nunes Barata (arbitrator-members), appointed by the Ethics Council of the Centre for Administrative Arbitration to form the Arbitral Tribunal, constituted on 13-02-2019, agree as follows:

1. Report

A..., S.A. (hereinafter referred to as "Claimant"), with registered office at Rua ..., no. ..., ...-... Cascais, holder of tax identification number ..., submitted, pursuant to Decree-Law no. 10/2011, of 20 January (hereinafter "RJAT"), a request for arbitral opinion with a view to:

(i) the declaration of illegality and annulment of the decisions rejecting gracious appeals nos. ...2017..., ...2017..., ...2017... and ...2017...;

(ii) the declaration of illegality and annulment of the Corporate Income Tax assessments no. 2017 ... (2009), no. 2016 ... (2012), no. 2017 ... (2013) and no. 2017 ... (2014);

(iii) the condemnation of the Tax and Customs Authority in the payment of compensatory interest.

The defendant is the TAX AND CUSTOMS AUTHORITY.

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 04-12-2018.

Pursuant to the provisions of subsection a) of no. 2 of article 6 and subsection b) of no. 1 of article 11 of the RJAT, as amended by article 228 of Law no. 66-B/2012, of 31 December, the Ethics Council appointed as arbitrators of the collective arbitral tribunal the signatories, who communicated acceptance of the assignment within the applicable period.

On 24-01-2019 the parties were duly notified of this appointment and did not express a desire to refuse the appointment of the arbitrators, in accordance with the combined provisions of article 11 no. 1 subsections a) and b) of the RJAT and articles 6 and 7 of the Ethics Code.

Thus, in accordance with the provisions of subsection c) of no. 1 of article 11 of the RJAT, as amended by article 228 of Law no. 66-B/2012, of 31 December, the collective arbitral tribunal was constituted on 13-02-2019.

The Tax and Customs Authority filed a reply in which it argued that the request should be ruled unfounded.

On 30-04-2019, a hearing was held in which witness testimony was produced and it was decided that the case would proceed with simultaneous written submissions.

The parties submitted written statements.

The arbitral tribunal was duly constituted, in accordance with the provisions of articles 2, no. 1, subsection a), and 10, no. 1, of Decree-Law no. 10/2011, of 20 January, and is competent.

The parties are duly represented, enjoy legal personality and capacity, and have standing (articles 4 and 10, no. 2, of the same statute and article 1 of Ordinance no. 112-A/2011, of 22 March).

The case does not suffer from defects of nullity.

2. Statement of Facts

2.1. Proven Facts

The following facts are considered proven:

A) On 08-07-2015, following the change in the ownership of more than 50% of its share capital, the Claimant submitted to the Tax Authority a request for authorization of deduction of tax losses determined in the taxation periods of 2008, 2009 and 2012;

B) Following the submission of the aforesaid request, the Tax and Customs Authority carried out an external partial-scope tax inspection audit, in the context of Corporate Income Tax, covering the aforementioned taxation periods of 2008, 2009 and 2012, pursuant to Service Orders no. OI2016..., no. OI2016... and no. OI2016...;

C) The aforesaid inspection commenced on 23-05-2016 and was completed on 23-11-2016 (page 4 of the Tax Inspection Report relating to this inspection);

D) In that inspection, the Tax Inspection Report was prepared, which is contained in document no. 5 attached with the request for arbitral opinion, whose contents are hereby reproduced, in which, among other things, the following is stated:

III. - DESCRIPTION OF FACTS AND BASIS OF PURELY ARITHMETIC CORRECTIONS TO TAXABLE MATTER - 2009 tax year

III-1- Expenses for financial charges not accepted tax-wise in accordance with article 23 of the Corporate Income Tax Code

The taxpayer recorded expenses in POC account 681-interest borne, in the amount of €128,564.41, (annex III), as detailed:

The aforesaid financial charges are directly related to loans obtained through various banking institutions and are intended for treasury support of the taxpayer.

POC account 231 - bank loans showed, on 31.12.2009, a credit balance of €3,365,450.31, (annex III) as follows:

It is verified that the taxpayer is financing the entity B... SGPS SA, tax number ..., through treasury support.

This company held 79.95% of the taxpayer's share capital in the fiscal year.

The amount of the debit balance recorded in POC account 2525 - B... SGPS loans on 31.12.2009 was €1,646,680.20 (annex III):

Thus, it is verified that the taxpayer, while bearing financial charges, namely interest on bank financing, resulting from loans contracted, granted loans to the related company B... SGPS SA, and was not remunerated for the value of the loans granted.

Tax treatment of financial expenses

Given that the taxpayer is bearing financial charges, namely interest, resulting from loans contracted and, at the same time, is granting unremunerated loans to the related company, it is necessary to assess whether these charges are or are not accepted tax-wise, in light of article 23 of the Corporate Income Tax Code.

Under no. 1 of the aforesaid article, in its wording at the date of the facts "... Expenses are those that are demonstrably indispensable for the realization of income subject to taxation or for the maintenance of the income-producing source, in particular: (...) c) Of a financial nature, such as interest on borrowed capital applied in operations..."

It is thus required that such expenses, in order to be accepted tax-wise as a tax expense, be substantiated (documentary evidence) and that their indispensability be verified with a view to realizing income subject to taxation or for the maintenance of the income-producing source.

It follows from the general principle of article 23 of the Corporate Income Tax Code that expenses incurred by the taxpayer, in order to be tax deductible, must be connected either to the obtaining of income subject to taxation or to the maintenance of the income-producing source.

In the case under analysis, it is verified that the taxpayer contracted loans, bearing charges with them, and, simultaneously, "grants" unremunerated financing to the related company B... SGPS SA.

From this it results that part of the aforesaid charges are not directly related to the activity of the taxpayer, whose corporate purpose, as previously stated, consists in the management and exploitation of the hotel and catering industry, an activity that falls under CAE-055111 - Hotels with restaurant.

As they are not related to the taxpayer's activity, the requirement of indispensability of all financial charges recorded is not fulfilled, as established in article 23 of the Corporate Income Tax Code.

Given all the foregoing, the Refinancing expenses recorded in POC accounts 681-interest borne, in the amount of €62,905.24, are not accepted tax-wise. thus determined:

Interest rate determined (3);

(3) Interest rate determined = (2) financial charges /(1) loans obtained

0.03820125 = €128,564.41 / €3,365,450.13

Non-accepted charges (5) = loans granted (4) * Interest rate determined (3)
62,905.241 = €1,646,680.20 * 0.03820125

Attached in annex III are the statements of SNC accounts-23101, 231031, 231051, 231061, 231062, 231072, 231074, 231075, 231081, 231082, 231091, 2525, 6811, 6815, and 6817.

(...)

VIII- Conclusions of inspection actions

In the context of Corporate Income Tax - 2009 tax year:

The proposed corrections, purely arithmetic, resulting from legal requirement, in the context of Corporate Income Tax, amount to €62,905.24 as mentioned in point III-1, whereby the tax loss declared of €872,612.36 is corrected to the adjusted tax loss of €809,707.12;

E) On 06-01-2017, the Claimant was notified of the Corporate Income Tax assessment act for the 2009 period, identified through the Corporate Income Tax assessment statement no. 2017... and the corresponding account adjustment statement no. 2017 ... (associated with compensation no. 2017 ...) (document no. 6 attached with the request for arbitral opinion, whose contents are hereby reproduced);

F) The correction regarding the deductibility of financial charges, by reference to the 2009 period, determined a change in the tax loss initially determined by the Claimant, in the amount of €872,612.36, to an amount of €809,707.12;

G) On 05-05-2017, the Claimant submitted a gracious appeal against the Corporate Income Tax assessment act for the 2009 period (document no. 7 attached with the request for arbitral opinion, whose contents are hereby reproduced);

H) On 28-09-2018, the Claimant was notified of the final rejection decision issued in the gracious appeal procedure no. ...2017..., which had as its object the Corporate Income Tax assessment and the respective account adjustment statement for the 2009 period (document no. 4 attached with the request for arbitral opinion, whose contents are hereby reproduced);

I) In the opinion on which the rejection of the gracious appeal relating to the 2009 tax year was based, the following is stated, among other things:

III-ANALYSIS OF THE REQUEST

Following the exposition of arguments brought in the gracious appeal petition, in point I, the following should be stated:

1. First, it should be clarified to the appellant that there is no alleged extinction of the right to assessment in the present case.

Let us see:

1. As mentioned in point 1 above, the service order at issue here was initiated by the appellant herself, based on the request of 2015-07-08 (at p. 146) provided for in the procedure of no. 8 of article 52 of the Corporate Income Tax Code, with a view to confirming the carryforward of tax losses.

2. In fact, this rule aims to give the appellant the possibility of, through a request, circumventing the non-deductibility of tax losses provided for therein as an anti-abuse rule, in cases of change in ownership of more than 50% of the share capital or the majority of voting rights.

3. Naturally, for this purpose, the Tax Authority needs to analyze the accounts of the interested parties in order to respond to the request and to count the tax losses considered fiscally deductible. And that is what it did.

4. It should also be noted that the appellant, despite indicating in its request as the value of tax losses deductible for 2009 €793,824.53 (at p. 146), was considered the amount of €872,612.36 (at p. 142),

5. subsequently corrected by the service order mentioned herein to the amount of €809,707.12 (at p. 142), still above the value initially requested by the appellant.

6. Indeed, and as concluded by the inspection report, "In light of the examination of the taxpayer's books for the 2009, 2009 and 2012 tax years, with a view to prior confirmation of the reality & justification of tax losses, within the scope of the request of the right to their carryforward, under article 52, no. 8 of the Corporate Income Tax Code (...)" (p. 21 of the report, at p. 51).

7. It is now necessary to analyze the substantive issue under discussion in this proceeding, which is limited to determining whether the financial charges borne with financing obtained subsume themselves or not under subsection c) of no. 1 of article 23 of the Corporate Income Tax Code.

8. Now, following the inspection and also in the context of gracious appeal, the appellant fails to contradict what was produced in the inspection conclusions report.

9. It appears indisputable that these financing obtained are not directly related to the appellant's activity and should not, as such, benefit from the general deductibility clause.

10. As for the formula applied by the Tax Authority, the appellant contests its ratio. However, it should be clarified to the appellant that precisely because there is no express formula in the letter of the law, the formula deemed most reliable to represent the reality in question will be used.

11. There is no excess of technical discretion or interpretive autonomy, but rather to make applicable and executable the terms intended by the legal rule.

12. Naturally, the relationship between loans obtained and loans granted must be at issue, and these are the items being compared.

13. Financial charges are considered not only interest, but all elements considered compensation for external financial funds, whatever form they assume.

14. In summary, the tax inspection services list the contracting of bank loans in the amount of €3,365,450.31 in 2009-12-31, referring, in parallel, that the appellant "(...) is financing the entity B... SGPS, S.A., tax number ..., through treasury support", specifically in the amount of €1,646,680.20 (pp. 14 and 15 of the report, at pp. 44 and 45).

15. Thus, the appellant bears financing charges (interest on bank loans) and grants, simultaneously, loans to that company, without being remunerated for it.

16. The reasoning is completed by making reference to the corporate purpose of the appellant, which is very different from the nature of these operations. Specifically, its scope is the management and exploitation of the hotel and catering industry, in no way related to the contracting of loans and subsequent granting of loans.

J) Pursuant to service order no. OI2015..., the Tax Authority conducted an internal inspection action against the Claimant, of partial scope and in the context of Corporate Income Tax, relating to the 2012 taxation period;

K) In that inspection relating to the 2012 tax year, the Tax Inspection Report was prepared, which is contained in document no. 8 attached with the request for arbitral opinion, whose contents are hereby reproduced, in which, among other things, the following is stated:

III. DESCRIPTION OF FACTS AND BASES OF PURELY ARITHMETIC CORRECTIONS

III.1. Financing Obtained

As shown in the Financial and Accounting Information (IES), the company under analysis had a turnover (sales and services) in 2012 of €3,326,042.16. In historical terms, its operational activity has presented values in the order of €3.2 million (2011 – €3,603,333.64; 2013 – €3,187,323.80; 2014 – €3,129,565.01).

The company has presented in recent years positive net results for the period, whose amount in the year under analysis amounts to €3,074.54, however, the result determined for tax purposes is negative, in the amount of €37,235.36. However, in 2014, it determined a negative net result of €552,515.57 and a result for tax purposes of €176,938.27.

From the analysis carried out on the accounting elements of the 2012 tax year, it was verified that the taxpayer resorts to financing through external capital, which are recorded in the various sub-accounts of SNC account 25 (Financing Obtained) (Annex 1), as detailed below.

III.1. Charges borne with bank loans

Having analyzed the expense accounts, it is verified that company A... S.A. bore the following charges relating to the financing obtained (Annex 2):

III.1.2. Loan Granted

In addition to the loans it obtained, and in relation to which the taxpayer bore the financial charges mentioned above, A... S.A. presents in the 2012 tax year a debit balance in account 2681 - Shareholders/Partners/Other Operations (Annex 3) as detailed below:

III.1.3. Analysis of the elements submitted

The loans obtained through the various banking institutions were intended for treasury support of the taxpayer. And they were executed in accordance with the legislation in force and are governed by the general credit conditions of the bank.

With respect to financing obtained through financial leasing, whose contracts were executed in years prior to the year of analysis, they were intended for the acquisition of assets and equipment to be used/installed in the facilities where the taxpayer exercises its activity. The financing has a total value of €97,340.67.

However, it is verified that A... S.A. is financing the taxpayer B... (SGPS) S.A. (tax number -...), through treasury support. B... (SGPS) S.A. in the year under analysis was the holder of 79.95% of the share capital of taxpayer A... S.A.

Information provided by email and contained in table 05062 - A of the Financial and Accounting Information, having at the end of the 2012 tax year an accumulated debit balance of €8,887,788.96.

In the General Trial Balance of taxpayer A..., there is no evidence of any remuneration for the loan granted to taxpayer B... (SGPS) S.A.,

III.1.4. Tax Treatment of Financial Expenses

Given the fact that the taxpayer is bearing financial charges, namely interest, resulting from loans contracted, it is necessary to evaluate the tax treatment of these financial expenses.

Under no. 1 of article 32 of the Corporate Income Tax Code, in its wording at the date of the facts:

".... Expenses are those that are demonstrably indispensable for the realization of income subject to taxation or for the maintenance of the income-producing source, in particular: (...)

c) Of a financial nature, such as interest on borrowed capital applied in operations...

(...)

Three essential requirements are thus necessary for the financial charges borne to be valued and accepted as a tax expense: proof (substantiation), indispensability, and the connection to income subject to taxation.

The first requirement relates to the effectiveness of the realization of costs, which consists in various forms of documentary support to accounting entries, that is, to documentary evidence thereof.

The second requirement makes the tax deductibility of the cost dependent on a justified relationship with the company's productive activity, and this indispensability is verified insofar as these charges are connected with the obtaining of profit.

The third requirement that makes up the general deductibility clause for expenses, in the legal formulation introduced by the Corporate Income Tax Code, is that of the requirement of a connection to "income subject to taxation or for the maintenance of the income-producing source". It follows from the general principle of article 23 of the Corporate Income Tax Code that expenses incurred by the taxpayer, in order to be tax deductible, must be connected either to the obtaining of income subject to taxation or to the maintenance of the income-producing source.

In the case under analysis, it is verified that the taxpayer contracted loans and bore charges with them, and simultaneously, grants unremunerated financing to the related company – B... (SGPS) S.A.

From this it results that the charges are not directly related to the taxpayer's activity, whose corporate purpose consists in the management and exploitation of the hotel and catering industry.

As they are not related to the taxpayer's activity, the requirement of indispensability of all financial charges recorded by the taxpayer is not fulfilled, as established in article 23 of the Corporate Income Tax Code.

Accordingly, the entirety of the financial charges borne by the taxpayer will not be accepted tax-wise.

III.1.5. Determination of Financially Non-Accepted Charges

In the case under analysis, we confirm that loans made to associates (€8,887,788.96) exceed loans obtained (€3,610,317.66), which is why the financial charges borne by the taxpayer in relation to the financing obtained, in the amount of €329,990.54 are expenses not indispensable to the obtaining of income or maintenance of income-producing source, due to infringement of article 23 of the Corporate Income Tax Code.

III.2. Investment Properties / Cession of the Beach ... Concession

Taxpayer A..., S.A. in 2006 through public tender acquired the concession of the maritime public domain of Beach ..., with the execution of the works in charge of the taxpayer.

On 19/01/2012 taxpayer A... cedes the concession of Beach ... to taxpayer C..., Lda for the amount of €1,380,000.00, as per point no. 2 of clause five (Entry into force and price) of the contract-promise of cession of concession title. (Annex 4)

The cession of the Beach ... concession, designated by the taxpayer as D..., will only take place if the competent entity authorizes such cession. Which came to happen on 10/02/2012 and was communicated to each of the parties on 13/02/2012, as per point no. 4 of the final contract signed on 8/06/2012. (Annex 5).

The taxpayer, at the time of the cession; considers as acquisition value the amount of €1,380,000.00, being this the value by which it transfers the concession to C... The justification made by the taxpayer for considering this value is based on the application of the fair value method.

III.2.1. Framework for the Application of the Fair Value Method

For tax purposes, adjustments resulting from the application of the fair value revaluation method do not contribute to the formation of taxable profit.

Under no. 9 of article 18 of the Personal Income Tax Code for Collective Entities (Corporate Income Tax Code), "...Adjustments resulting from the application of fair value do not contribute to the formation of taxable profit, being imputed as income or expenses in the taxation period in which the elements or rights that gave rise to them are sold, exercised, extinguished or liquidated...".

Since adjustments resulting from the application of the fair value method do not contribute to the formation of taxable profit, the acquisition value that the taxpayer declares in the year of the sale is not correct. In accordance with elements made available by the taxpayer and annual statements submitted to the Tax Authority, a summary of which is shown in the table below, the amount of €1,380,000.00 is presented as overvalued in relation to fair value variations. From its analysis we confirm that this amount is subdivided in the amounts of €157,000.00 corresponding to the value of the adjudication of the D... concession, as per candidacy which was paid in installments, in 3 tranches2, €922,225.37 (21,590.00 + 115,724.02 + 784,911.35) corresponding to charges for obtaining the concession title and works carried out which, according to the considering 2 of the concession title promise contract, was agreed that these would be carried out by the taxpayer under analysis and, the amount of €300,774.63 (929,385.51 - 628,610.88) which corresponds to fair value variations,

Summary Table:

Therefore, the value to be considered as acquisition value is €1,079,225.37. The consideration of this value as acquisition value is based on the fact that the taxpayer only at the end of 2010 recorded this value as an investment value of the D... concession. (Annex 6)

In this way, it becomes necessary to determine the gain or loss associated with the sale of the D... concession.

Fiscal gains/losses as per no. 2 of article 46 of the Corporate Income Tax Code, "...are given by the difference between the realization value, net of charges inherent to it, and the acquisition value, deducted from depreciation and amortization accepted tax-wise, impairment losses and other value adjustments...". The acquisition value is updated through the application of currency devaluation coefficients (Coef), as per article 47 of the Corporate Income Tax Code.

This coefficient is only applied in the calculation of gains/losses if, at the date of realization, at least two years have elapsed since the date of acquisition.

In the case under analysis, since the taxpayer considered the acquisition at the end of 2010 and the sale took place in June 2012, not completing two full years, the currency devaluation coefficient is not applied.

III.2.2. Determination of Fiscal Gain/Loss

III.3. Proposed Correction

Given what is stated in points III.1 and III.2, the proposed correction to the result for tax purposes is €630,765.17 (€329,990.54 of Financial Charges and €300,774.63 of Gain on the sale of the D... concession).

L) These corrections relating to the 2012 tax year resulted in a change in the tax loss initially determined by the Claimant, in the amount of €37,235.36, to a taxable profit of €593,529.81, as well as compensatory interest in the total amount of €6,005.22;

M) In November 2016, the Claimant was notified of the Corporate Income Tax assessment act for the 2012 period, identified through the Corporate Income Tax assessment statement no. 2016..., the compensatory interest assessment statement no. 2016... and the account adjustment statement no. 2016... (associated with compensation no. 2016...) - see assessment and account adjustment statements, which are contained in Document no. 9, attached with the request for arbitral opinion, whose contents are hereby reproduced, from which resulted a tax liability payable in the amount of €50,519.95;

N) The Claimant effected payment of the debt relating to the 2012 tax year under the Special Program for Reduction of Indebtedness to the State ("PERES"), provided for in Decree-Law no. 67/2016, of 3 November, with the waiver of the corresponding default interest and compensatory interest, in the total amount of €44,514.73, on 19 December 2016 (Document no. 10, attached with the request for arbitral opinion, whose contents are hereby reproduced);

O) On 15-03-2017, the Claimant submitted a gracious appeal against these acts relating to the 2012 tax year (document no. 11 whose contents are hereby reproduced);

P) On 28-09-2018, the Claimant was notified of the final rejection decision on the gracious appeal (no. ...2017...), in the terms stated in document no. 3 attached with the request for arbitral opinion, whose contents are hereby reproduced, in which, among other things, the following is stated:

Following the exposition of arguments brought in the gracious appeal petition, in point I, the following should be stated:

1. The substantive issue under discussion in this proceeding is limited to determining whether financial charges borne with financing obtained subsume themselves or not under subsection c) of no. 1 of article 23 of the Corporate Income Tax Code.

2. Now, following the inspection and also in the context of gracious appeal, the appellant fails to contradict what was produced in the inspection conclusions report.

3. As is well stated therein, to substantiate the deductibility of financial charges, the substantiation (namely justification) of these charges, their indispensability, and the connection of these charges to income subject to taxation must be verified.

4. The tax inspection services list the contracting of various bank loans, with charges associated therewith in the amount of €329,990.54; stating, in parallel, that the appellant grants unremunerated financing to the related company (of which the appellant holds 79.95% of the share capital) B... SGPS, S.A..NIF..., through treasury support.

5. And this fact is independent of the type of loan obtained, whether from various banking institutions or through the financial leasing mechanism.

6. Inclusively and by the values involved, we verify that "loans made to associates (€8,887,738.96) exceed loans obtained (€3,610,317.66), which is why the financial charges borne by the taxpayer (...) in the amount of €329,990.54, are expenses not indispensable to the obtaining of income or maintenance of income-producing source, due to infraction of article 23 of the Corporate Income Tax Code" (p. 10 of the inspection report, at p. 42).

7. Thus, the appellant bears financing charges (interest on bank loans) and grants, simultaneously, loans to that company, without being remunerated for it - there is no evidence of any remuneration in the general trial balance.

Q) On 02-03-2017, the Tax Authority initiated an external tax inspection action, of partial scope, in the context of Corporate Income Tax and Value-Added Tax, relating to the 2013 and 2014 periods, through service orders no. OI2016... and no. OI2016..., respectively, being on that date the notification made to the Certified Accountant with power of attorney, E...;

R) In the Tax Inspection Report relating to these inspections it is stated that «the Service Orders mentioned were opened with the activity code 1222110228 - "Declarative Control" provided for in the National Plan of Activities of Tax and Customs Inspection (PNAITA), for the 2013 and 2014 tax years. It was an external scope inspection, under the terms of subsection b) of no. 1 of article 14 of the Supplementary Regime of Tax and Customs Inspection Procedure (RCPITA), having as its object the assessment of compliance with the tax obligations of the entity under analysis».

S) The inspection action relating to the 2013 and 2014 tax years was subsequently extended to "general scope", to the same tax years and notified to the taxpayer on 10-05-2017 through the signing of a new service order (page 5 of the Tax Inspection Report contained in document no. 12 attached with the request for arbitral opinion, whose contents are hereby reproduced);

T) In the notifications made on 10-05-2017, it is stated as «grounds» for the «alteration of the aims, scope and extent of the procedure» the following: «In the course of the inspection procedure, it was found necessary to extend the analysis to the global tax situation of the taxpayer» (document no. 12);

U) On 13-07-2017, the Claimant was notified of the tax inspection report, prepared following the extension of the inspection referred to, pursuant to which the following favorable and unfavorable corrections were proposed to the taxpayer, by reference to the 2013 period:

a) on the one hand, a favorable correction was proposed, in the context of the determination of autonomous taxation, in the total amount of €55.08;

b) on the other hand, unfavorable corrections were proposed to the taxable matter of Corporate Income Tax in the total amount of €280,365.20 and in the context of tax withholding in the total amount of €10,025.54; (document no. 12);

V) The corrections made to the Corporate Income Tax taxable matter for 2013 (service order no. OI2016...) include a correction of €415.05 relating to the non-deductibility of vehicle expenses and a correction of €279,950.15 relating to the non-deductibility of financial charges borne with bank loans, which the Tax and Customs Authority considered not related to the Claimant's activity;

W) The corrections to the Corporate Income Tax taxable matter for 2013 in question resulted in a change in the taxable profit initially determined by the Claimant, in the amount of €105,050.44, to a taxable profit of €385,415.64, whereby, in accordance with the analysis carried out by the Tax Authority, and considering the limitation of 75% of taxable profit in the deduction of available tax losses, the Claimant's taxable matter increased from €26,262.61 to €96,353.91;

X) The corrections to the Corporate Income Tax taxable matter for 2013 in question resulted not only in an increase in the determined taxable matter in the amount of €70,091.30, but also in a reduction of available tax losses for deduction in the amount of €210,273.90;

Y) On 25 July 2017, the Claimant was notified of the Corporate Income Tax assessment act for the 2013 period, identified through the Corporate Income Tax assessment statement no. 2017..., the compensatory interest and default interest assessment statement no. 2017... and no. 2017... and the account adjustment statement no. 2017... (associated with compensation no. 2017...);

Z) From the aforesaid assessment and account adjustment statements relating to the 2013 tax year resulted a tax liability payable in the amount of €18,007.62;

AA) On 12-12-2017, the Claimant submitted a gracious appeal of the Corporate Income Tax assessment act for the 2013 period;

BB) On 07-09-2018, the Claimant was notified of the rejection of gracious appeal no. ...2017..., relating to Corporate Income Tax for 2013 (document no. 1 attached with the request for arbitral opinion, whose contents are hereby reproduced);

CC) In the opinion on which the decision on gracious appeal relating to the 2013 tax year was based, the following is stated, among other things:

III-ANALYSIS OF THE REQUEST

Following the exposition of arguments brought in the gracious appeal petition, in point I, the following should be stated:

1. First, regarding the extension of the scope of the inspection action in question, from which the assessment here in dispute arose, it must be clarified that the applicable legal rules were complied with.

2. The appellant was duly notified of this extension. This notification was embodied, naturally, in the service order, signed on 2017-05-10 (at p. 30).

3. Now, in this notification are contained all the essential elements for the appellant to be apprised of the object of the notification, which are, namely: the identification of the appellant, the service order in force, as well as the content of the alteration of the scope of the inspection, with the reason stated.

4. At this point, it is only possible for the Tax Authority to acknowledge the need for analysis of the entire tax situation of the appellant, for thorough understanding of the facts and the correct assessment of the applicable tax matter.

5. It thus appears that the provisions of no. 1 of article 15 of the RCPITA have been complied with, and all the inspection procedure resulting therefrom is legal and valid.

6. The substantive issue under discussion in this proceeding is limited to determining whether financial charges borne with financing obtained subsume themselves or not under subsection c) of no. 1 of article 23 of the Corporate Income Tax Code.

7. Now, following the inspection and also in the context of gracious appeal, the appellant fails to contradict what was produced in the inspection conclusions report.

8. As is well stated therein, to substantiate the deductibility of financial charges, the following must be verified: (i) the substantiation (namely justification) of these charges, in particular through documentary evidence, (ii) their indispensability for the obtaining of profit, and also (iii) the connection of these charges to income subject to taxation.

9. The tax inspection services list the contracting of various bank loans, with charges associated therewith in the amount of €279,950.15; stating, in parallel, that the appellant grants unremunerated financing to the related company (of which the appellant holds 79.95% of the share capital) B... SGPS, S.A..NIF..., through treasury support.

10. And this fact is independent of the type of loan obtained, whether from various banking institutions or through the financial leasing mechanism.

11. Inclusively and by the values involved, we verify that "loans made to associates (€9,271,872.48) exceed loans obtained (€3,514,829.43), which is why the financial charges borne by the taxpayer (...) in the amount of €279,950.15 are expenses not indispensable to the obtaining of income or maintenance of income-producing source, due to infraction of article 23 of the Corporate Income Tax Code" (p. 11 of the inspection report, at p. 43).

12. Thus, the appellant bears financing charges (interest on bank loans) and grants, simultaneously, loans to that company, without being remunerated for it - there is no evidence of any remuneration in the general trial balance.

13. This line of reasoning is completed by making reference to the corporate purpose of the appellant, which is different from the nature of these operations and consists in the management and exploitation of the hotel and catering industry.

14. Specifically, its aim is related to the "hotels with restaurant" activity to which the CAE 55111 corresponds (at p. 113), in no way related to the contracting of loans and subsequent granting of loans.

15. Moreover, the Tax Authority is not bound by judicial or arbitral decisions, nor by doctrine on the matter, exercising its own understanding.

16. Thus, we verify that the expenses presented are not, in fact, related to the appellant's activity nor were they incurred to obtain or guarantee the income generated in 2013.

IV - CONCLUSION

In these terms, in light of the evidence in the record that supports the request, I propose the rejection thereof.

DD) In the inspection relating to the 2014 period, corrections were made to the Corporate Income Tax taxable matter, in the total of €205,287.53, which includes a correction of €950.51, relating to the non-deductibility of vehicle expenses, and a correction of €204,337.02, relating to the tax non-deductibility of financial charges borne with bank loans that the Tax and Customs Authority understood were not related to the Claimant's activity (document no. 13 attached with the request for arbitral opinion, whose contents are hereby reproduced);

EE) The corrections to the Corporate Income Tax taxable matter for 2014 in question (totaling €205,287.53) resulted in a change in the taxable profit initially determined by the Claimant, in the amount of €176,938.27, to a taxable profit of €382,225.80, whereby, considering the limitation of 70% of taxable profit in the deduction of available tax losses (which amounted to €239,726.83 at the date), the Claimant's taxable matter increased from €53,081.48 to €142,498.97;

FF) The corrections in question determined the use of all available tax losses for deduction as of 31-12-2014 and, even so, an increase in the determined taxable matter in this tax year, in the amount of €89,417.49;

GG) On 03-08-2017, the Claimant was notified of the Corporate Income Tax assessment act for the Corporate Income Tax period, identified through the Corporate Income Tax assessment statement no. 2017..., the respective compensatory interest assessment statement no. 2017..., no. 2017... and no. 2017..., and the corresponding account adjustment statement no. 2017... (associated with compensation no. 2017...) (document no. 16 attached with the request for arbitral opinion, whose contents are hereby reproduced), from which resulted a tax liability payable in the amount of €30,229.90, of which €27,796.98 corresponds to additional Corporate Income Tax and €2,432.92 to compensatory interest;

HH) On 29-12-2017, the Claimant submitted a gracious appeal of the Corporate Income Tax assessment act for the 2014 period (document no. 17 attached with the request for arbitral opinion, whose contents are hereby reproduced);

II) On 07-09-2018, the Claimant was notified of the rejection of gracious appeal no. ...2017..., relating to Corporate Income Tax for 2014 (document no. 2 attached with the request for arbitral opinion, whose contents are hereby reproduced);

JJ) In the opinion on which the decision on gracious appeal relating to the 2014 tax year was based, the following is stated, among other things:

III - ANALYSIS OF THE REQUEST

Following the exposition of arguments brought in the gracious appeal petition, in point I, the following should be stated:

1. First, regarding the extension of the scope of the inspection action in question, from which the assessment here in dispute arose, it must be clarified that the applicable legal rules were complied with.

2. The appellant was duly notified of this extension. This notification was embodied, naturally, in the service order, signed on 2017-05-10 (at p. 40).

3. Now, in this notification are contained all the essential elements for the appellant to be apprised of the object of the notification, which are, namely: the identification of the appellant, the service order in force, as well as the content of the alteration of the scope of the inspection, with the reason stated.

4. At this point, it is only possible for the Tax Authority to acknowledge the need for analysis of the entire tax situation of the appellant, for thorough understanding of the facts and the correct assessment of the applicable tax matter.

5. It thus appears that the provisions of no. 1 of article 15 of the RCPITA have been complied with, and all the inspection procedure resulting therefrom is legal and valid.

6. The substantive issue under discussion in this proceeding is limited to determining whether financial charges borne with financing obtained subsume themselves or not under subsection c) of no. 1 of article 23 of the Corporate Income Tax Code.

7. Now, following the inspection and also in the context of gracious appeal, the appellant fails to contradict what was produced in the inspection conclusions report.

8. As is well stated therein, to substantiate the deductibility of financial charges, the following must be verified: (i) the substantiation (namely justification) of these charges, in particular through documentary evidence, (ii) their indispensability for the obtaining of profit, and also (iii) the connection of these charges to income subject to taxation.

9. The tax inspection services list the contracting of various bank loans, with charges associated therewith in the amount of €204,337.02; stating, in parallel, that the appellant grants unremunerated financing to the related company B... SGPS, S.A..NIF..., through treasury support.

10. And this fact is independent of the type of loan obtained, whether from various banking institutions or through the financial leasing mechanism.

11. Thus, the appellant bears financing charges (interest on bank loans) and grants, simultaneously, loans to that company, without being remunerated for it - there is no evidence of any remuneration in the general trial balance.

12. Since the values of loans were meanwhile returned to the appellant, to meet the correct values of charges not considered tax-wise, the inspection calculated, taking into account the interest recorded in accounts 6911, 6913, 6914, 6917, 6981 and 6982, a monthly ratio as already indicated by the appellant in its request (p. 11 of the inspection report, at p. 58).

13. The value of these charges of €433,350.10 exceeds the charges actually borne, which is why the latter value of €204,337.02 will be the one to be taken into account.

14. This is in no way incompatible with the reform of Corporate Income Tax and the legislative amendment of article 23 of the Corporate Income Tax Code, which, while clarifying the concept of a tax-accepted expense, does not change the correction made by the inspection.

15. This line of reasoning is completed by making reference to the corporate purpose of the appellant, which is different from the nature of these operations and consists in the management and exploitation of the hotel and catering industry.

16. Specifically, its aim is related to the "hotels with restaurant" activity to which the CAE 55111 corresponds (at p. 131), in no way related to the contracting of loans and subsequent granting of loans.

17. Moreover, the Tax Authority is not bound by judicial or arbitral decisions, nor by doctrine on the matter, exercising its own understanding.

18. Thus, we verify that the expenses presented are not, in fact, related to the appellant's activity nor were they incurred to obtain or guarantee the income generated in 2014.

IV- BRIEF INFORMATION

1. The appellant was notified of the draft rejection decision of the request, by electronic means, in accordance with CTT, being considered notified on 2018-07-13 (at p. 137), to which, if it wished to exercise the right to prior hearing, under the terms of article 60 of the General Tax Law, within 15 days.

2. However, the appellant said nothing. As such, having not exercised the right to prior hearing, the draft decision should be converted into a final decision.

KK) By reference to the 2009 period, the Claimant presented a liability related to loans obtained in the total amount of €3,365,450.31 and an asset, under the heading of Shareholders, in the total amount of €1,646,680.20 (document no. 18 attached with the request for arbitral opinion, whose contents are hereby reproduced);

LL) In the course of the 2009 period, the Claimant bore financial charges, resulting from bank financing obtained, financial leasing interest and promissory note interest, total amount of €128,564.41;

MM) The balance of the Shareholders heading decreased in the 2009 period, which was largely due to the reimbursement, by B..., of the credits granted to it in previous periods:

NN) The balance of the financing obtained by the Claimant increased in the 2009 period, insofar as, despite being substantially reimbursed for the credit granted to the related company, it had the need to contract additional bank loans in the context of its activity:

OO) The bank loans obtained by the Claimant in the total amount of €3,365,450.31 were contracted at different times and with distinct purposes, having no direct connection with the loans granted;

PP) The financing obtained increased substantially in the 2009 period, in view of the contracting of new financing by the Claimant with F... and with G..., in the context of the normal investment of its activity;

QQ) The amount of financial charges borne by the Claimant in 2009 (i.e., €128,564.41) includes not only interest resulting from bank loans obtained, but also financial leasing interest and promissory note interest;

RR) The financial leasing contracts entered into by the Claimant are related to the obtaining of light passenger vehicles, air conditioning equipment and electronic equipment, in the context of its activity;

SS) The Tax Authority disregarded, from the total amount of financing obtained in the 2009 period, the liability captions related to financial leasing transactions carried out, considering only the total amount of €3,365,450.31;

TT) In the 2012 period, the Claimant presented a liability, related to financing obtained, in the total amount of €3,610,317.66, and an asset, under the heading of Shareholders, in the total amount of €8,887,788.96 (Report and Accounts for the 2012 period, which is contained in Document no. 19, attached with the request for arbitral opinion, whose contents are hereby reproduced);

UU) In the course of the 2012 period, the Claimant bore financial charges, resulting from bank financing obtained, in the total amount of €329,990.54;

VV) In the 2012 period, the Shareholders heading, in the total amount of €8,887,788.96 (caption #2681 of the trial balance – B... (SGPS) S.A. Treasury Op.), includes a debit balance (asset), in the amount of €6,500,000.00, with a maturity of 7 years, and a balance of €2,387,788.96 with a maturity of 4 years (note 6.2 of Document no. 19);

WW) The balance of the Shareholders heading increased in the 2011 period, which was largely due to the credit extended to the related company, B... (SGPS), in that period, in the amount of €6,500,000.00. As evidenced by the final balances of the taxation periods:

XX) Despite the increase in credit granted to the related company, the Claimant did not contract any additional bank loans to grant unremunerated financing to the related company, on the contrary, it even reduced the financing contracted;

YY) As of 31-12-2012, the financing contracted by the Claimant with banking entities were divided into the following captions:

(i) #2511 - Bank loans: €3,519,222.35;

(ii) #2513 - Financial leasing: €91,095.31 (account statements, attached as document no. 20 attached with the request for arbitral opinion, whose contents are hereby reproduced);

ZZ) The financial charges resulting from financial leasing contracts in force in the 2012 period are related to the obtaining of light passenger vehicles, air conditioning equipment and electronic equipment, which are used in the context of the Claimant's activity (note 12.6 of document no. 19);

AAA) The contracts relating to such financial leasing were executed in years prior to 2012 and were intended for the acquisition of assets and equipment to be used/installed in the facilities where the Claimant exercises its activity;

BBB) Such financial leasing transactions are not related to the financing granted to company B... (SGPS);

CCC) The bank loans obtained in 2012, in the total amount of €3,519,222.35, were contracted at different times and with distinct purposes;

DDD) The balance of bank loans obtained varied, in a different way, throughout the years, in accordance with the economic decisions of the management of the Claimant in each period:

EEE) The loans in force in the 2012 period were contracted in 1999 and in the period between 2007 and 2012, depending on the financing conditions presented by banking entities, the treasury needs and the investment objectives of the Claimant in each period;

FFF) As of 31-12-2013, the Claimant presented a liability, related to financing obtained, in the total amount of €3,514,829.43, and an asset, under the heading of Shareholders, in the total amount of €9,271,872.48 (Report and Accounts relating to the 2013 period, which is contained in document no. 21 attached with the request for arbitral opinion, whose contents are hereby reproduced);

GGG) In the course of the 2013 period, the Claimant bore financial charges, resulting from bank financing obtained and financial leasing interest, in the total amount of €279,950.15;

HHH) In the Shareholders heading, the balance increased in 2013 compared to the prior taxation period, which was largely due to the credit extended to the related company, B... (SGPS), as can be seen from the analysis of the final balances of this heading in the various taxation periods:

III) Despite the increase in credit granted to the related company, the Claimant did not contract any additional bank loans in 2013 to grant financing to the related company, on the contrary, it reduced the loans contracted;

JJJ) As of 31-12-2013, the financing contracted by the Claimant with banking entities, as can be verified through the respective statements, were divided into the following captions:

(i) #2511 - Bank loans: €3,464,792.84;

(ii) #2513 - Financial Leasing: €50,036.59 (account statements contained in document no. 22 attached with the request for arbitral opinion, whose contents are hereby reproduced);

KKK) In the financial charges resulting from financial leasing contracts in force in the 2013 period are financial leasing contracts related to the obtaining of light passenger vehicles, air conditioning equipment and electronic equipment, which are used in the context of the Claimant's activity (note 11.6 of document no. 21);

LLL) The financial leasing transactions referred to relating to the 2013 period are not related to the financing granted to company B... (SGPS);

MMM) The balance of bank loans obtained by the Claimant varied, in a different way, throughout the years, in accordance with the economic decisions of the management of the Claimant in each period:

NNN) The funds raised through bank loans were not directly channeled to provide financing to the related entity, B... (SGPS);

OOO) The bank loans obtained in 2013 in the total amount of €3,464,792.84, were contracted at different times and with distinct purposes;

PPP) The bank financing obtained was decreasing in the periods 2010 to 2013, since the Claimant did not contract new loans from the 2011 period onwards, limiting itself to contracting loans to replace previous ones (testimony of witness E...);

QQQ) Conversely, the financing granted to the related entity increased substantially in the 2011 period, and were increasing gradually until the 2013 period, namely as a result of the amount of €6,500,000 granted to B... (SGPS), for a period of 7 years (document no. 21)

RRR) At the beginning of the 2014 period, B... (SGPS) and H..., S.A. were the majority shareholder companies of the Claimant, holders of 99.95% of its share capital;

SSS) In the course of 2014, 49.95% of the Claimant's share capital was acquired by a new shareholder, with B... (SGPS) remaining with the remaining 50.05%;

TTT) In 2015, the new shareholder acquired the remaining share capital, thus coming to hold the entirety of the Claimant's share capital;

UUU) Within the scope of the projected alteration of the Claimant's shareholder structure, and as a decision of shareholder management, the Claimant proceeded to repay all bank financing obtained and B... (SGPS) proceeded to return the amounts obtained from the Claimant.

VVV) As of 31-12-2014, the Claimant presented no liability under financing obtained, nor any asset under the heading of Shareholders - see Report and Accounts for the 2014 period;

WWW) On 13-12-2018, the Claimant submitted the request for arbitral opinion that gave rise to this case.

2.2. Unproven Facts and Justification of Determination of Statement of Facts

It was not proven what the Claimant's alleged interest was in making unremunerated loans to B... SGPS S.A.

It was not proven that there is a connection between the loans obtained by the Claimant and the financing it made to B... SGPS S.A. In fact, the values indicated by the Claimant, whose correspondence to reality is not questioned by the Tax and Customs Authority, allow one to conclude that there are even years in which this relationship is the opposite, that is, financing obtained increased compared to the prior year while loans granted decreased compared to the prior year, and other years in which the opposite occurred. Thus, between 2008 and 2009, between 2009 and 2010 and between 2011 and 2012, financing obtained increased, but loans granted decreased; between 2010 and 2011 and between 2013 and 2014, financing obtained decreased, but loans granted increased.

The absence of any relationship was confirmed by witness E..., certified accountant of the Claimant, who appeared to testify with impartiality and with perfect knowledge of the operations carried out by the Claimant.

The proven facts are based on documents submitted by the Claimant and which are also contained in the administrative file, on statements made by the Claimant that are not questioned by the Tax and Customs Authority, and on the testimony referred to.

3. Matter of Law

The Claimant attributes the following defects to the assessments under challenge, relating to the 2009, 2012, 2013 and 2014 periods:

– extinction of the right to assessment, as regards that relating to the 2009 tax year;

– illegality of the inspection procedure relating to the 2013 and 2014 periods;

– illegality of the corrections to the matter relating to the deductibility of financial charges, both by reason of the nature of the financing obtained and granted and by reason of the criterion used for determining non-deductible financial charges.

3.1. Question of Extinction of the Right to Assessment as to the 2009 Tax Year

The Claimant submitted to the Tax and Customs Authority on 08-07-2015, following the change in ownership of more than 50% of its share capital, a request for authorization of deduction of tax losses determined in the taxation periods of 2008, 2009 and 2012.

Following an inspection, the Tax and Customs Authority corrected the tax losses declared relating to the 2009 tax year: «the declared tax loss of €872,612.36 is corrected to the adjusted tax loss of €809,707.12» (point VIII of the Tax Inspection Report relating to the 2009 tax year).

Under article 45, no. 3, of the General Tax Law, in the version of Law no. 55-B/2004, of 30 December (in force in 2009), «in case carryforward of losses has been effected, as well as any other deduction or tax credit, the period of extinction is that of the exercise of that right».

In accordance with the provisions of article 47, no. 1, of the Corporate Income Tax Code, in the version prior to the republication effected by Decree-Law no. 159/2009, of 13 July, «tax losses determined in a given tax year (...) are deducted from taxable profits, if any, of one or more of the six subsequent tax years».

Thus, the period of extinction of the right to assessment with respect to Corporate Income Tax for 2009 was 6 years, counted from the beginning of the following calendar year (article 45, no. 4, of the General Tax Law), which terminated on 31-12-2015, without prejudice to causes of suspension that may have occurred.

In the case in question, no cause of suspension of the period of extinction occurred, in particular arising from the carrying out of the inspection, as it commenced on 23-05-2016, after the period of extinction had been exhausted.

Being thus, it must be concluded that the right to assessment has become extinct in relation to the 2009 tax year, whereby the Tax and Customs Authority could not effect any correction to the tax losses that had been previously declared.

In fact, as understood by the Supreme Administrative Court in the judgment of 100-07-2017, handed down in case no. 0699/16, «the reasons of certainty and legal security underlying the institution of extinction prevent the Tax Authority from being able to legally proceed to corrections to the taxable profit of a tax year in relation to which the extinction of the right to assessment is already verified, even if it refrains from assessing a tax relating to that period, in order to draw consequences from them for subsequent tax years – in the present case, by way of alteration of the taxpayer's framework from the simplified regime for determination of taxable profit to the general regime -, as this would allow it to draw new legal tax consequences from situations that the law, for reasons of social peace, intends to definitively consolidate in the tax field».

Accordingly, the assessment relating to the 2009 tax year suffers from a defect of violation of law, which justifies its annulment, in accordance with the provisions of article 163, no. 1, of the Code of Administrative Procedure subsidiarily applicable under the terms of article 2, subsection c), of the General Tax Law.

Knowledge of the remaining defects attributed to this assessment is rendered moot, being useless, under articles 130 and 608, no. 2, of the Code of Civil Procedure subsidiarily applicable by force of the provisions of article 29, no. 1, subsection e), of the RJAT.

3.2. Question of Illegality of the Inspection Procedure Relating to the 2013 and 2014 Periods

The Claimant attributes to the inspection procedure relating to the 2013 and 2014 tax years a defect due to violation of article 15, no. 1, of the Supplementary Regime of Tax Inspection Procedure, which establishes that «the aims, scope and extent of the inspection procedure may be altered during its execution by an order with reasons from the entity that ordered it, which must be notified to the inspected entity».

It is stated in the Tax Inspection Report relating to these tax years:

II.2. Reason, Scope and Temporal Coverage

The Service Orders mentioned were opened with activity code 1222110228 - "Declarative Control" provided for in the National Plan of Activities of Tax and Customs Inspection (PNAITA), for the 2013 and 2014 tax years. It was an external scope inspection, under the terms of subsection b) of no. 1 of article 14 of the Supplementary Regime of Tax and Customs Inspection Procedure (RCPITA), having as its object the assessment of compliance with the tax obligations of the entity under analysis.

The present inspection action, which initially presented itself as "partial scope for Corporate Income Tax and Value-Added Tax" of the 2013 and 2014 tax years, was subsequently extended to "general scope", to the same tax years, and notified to the taxpayer on 10/05/2017 through the signing of a new service order.

It is clear that this extension of the scope of the inspection could only be effected in compliance with the provisions of article 15 of the Supplementary Regime of Tax Inspection Procedure, inclusive "by an order with reasons from the entity that ordered it, which must be notified to the inspected entity".

In the case in question, the «reasons» notified to the Claimant were the following, as regards both Service Orders:

«In the course of the inspection procedure, it was found necessary to extend the analysis to the global tax situation of the taxpayer».

It is manifest that this «reasons» does not satisfy the legal requirement of reasons for administrative acts.

Where one is faced with a special situation of legal requirement of reasons for a type of acts that does not fall directly under any of the situations provided for in article 77 of the General Tax Law, the rules of the Code of Administrative Procedure are subsidiarily applicable, by force of the provisions of article 2, subsection c), of the General Tax Law.

Thus, «reasons must be expressed, through a brief exposition of the grounds of fact and law of the decision, and may consist in mere declaration of concurrence with the grounds of earlier opinions, information or proposals, which constitute, in this case, an integral part of the respective act» and «the adoption of grounds which, by obscurity, contradiction or insufficiency, do not concretely clarify the motivation of the act is equivalent to lack of reasons» (article 153, nos. 1 and 2 of the Code of Administrative Procedure).

As the Supreme Administrative Court has consistently understood, the reasons for an administrative or tax act are a relative concept that varies according to the type of act and the circumstances of the specific case, but that reasons are sufficient when they allow a normal addressee to perceive the cognitive and evaluative course followed by the author of the act to make the decision, that is, when he may know the reasons why the author of the act decided as it decided and not differently, so as to be able to trigger administrative or contentious mechanisms for challenging it. ( )

In the case in question, the reasons could not fail to reveal to the Claimant which were the reasons by which the extension of the scope of the inspection was decided, in particular which were the reasons why the entity that issued the service orders, the Tax and Customs Authority, understood that there was «the necessity to extend the analysis to the global tax situation of the taxpayer».

As referred, «the adoption of grounds which, by obscurity, contradiction or insufficiency, do not concretely clarify the motivation of the act is equivalent to lack of reasons» (article 153, no. 2, of the Code of Administrative Procedure), whereby it must be concluded that one is faced with a situation in which the duty of reasons was not fulfilled.

Indeed, precisely on an identical situation, the Supreme Administrative Court has already pronounced itself in the judgment of 15-06-2016, case no. 01101/15: in which it understood that «there is lack of reasons for the decision that determined the extension of the inspection action when the scope of the inspection action was extended, without this being made known to the taxpayer, as it states «there was necessity to extend its scope».

This lack of reasons, expressly required by article 15, no. 2, of the Supplementary Regime of Tax Inspection Procedure, necessarily has the effect of invalidity of the inspection procedure, as has been the jurisprudence of the Supreme Administrative Court:

– «Having in mind that the taxpayer was not duly notified through a reasoned order of the alteration of the aims, scope and extent of the inspection procedure by the entity that ordered it, all conclusions relating to the inspection report, relating to such extension are illegal and may not have tax validity, nor may they serve to ground any assessment act» (cited judgment of 15-06-2016, case no. 01101/15);

– «Not being a question of an inspection procedure in which, under the terms of article 50 of the RCPIT, there is waiver of prior notification of the inspection procedure, the absence of notification of the correct scope of the tax inspection is reflected in the omission of an essential formality of the inspection procedure, which invalidates the subsequent procedural steps, in particular the subsequent assessment that rests upon them» (judgment of 19-09-2018, handed down in case no. 01460/17).

As stated in the cited judgment of 15-06-2016, «such formalities are formalities provided for in law as essential formalities, in the absence of legal provision to the contrary, structuring the inspection procedure, which, if not observed, will invalidate the subsequent procedural steps, in particular the subsequent assessment that rests upon them, as it cannot be concluded, based on the evidence produced, with a reasonable degree of certainty, that the result to be achieved would always be the same, had the formality been complied with, or that the taxpayer rendered its collaboration with the inspection act in this extended scope without calling into question the absence of such order».

One is thus faced with a defect of violation of law, comparable to error regarding the factual premises, as valid conclusions cannot be drawn from the factual premises on which the assessments relating to 2013 and 2014 rested.

Accordingly, the assessments relating to the 2013 and 2014 tax years suffer from a defect that justifies their annulment, under the terms of article 163, no. 1, of the Code of Administrative Procedure subsidiarily applicable under the terms of article 2, subsection c), of the General Tax Law.

3.3. Question of Corrections to the Matter Relating to the Deductibility of Financial Charges

In light of the grant of the request for arbitral opinion as to the assessments relating to the 2009, 2013 and 2014 tax years, for the reasons referred to, it remains to assess the legality of the assessment relating to the 2012 tax year