IRC Deduction of Book Theft Losses as Tax Costs – CAAD Arbitral Decision 615/2014-T

TRANSLATION OF CAAD TAX ARBITRATION DECISION

Tax Arbitration Jurisprudence

Case No. 615/2014-T

Date of Decision:
2019-10-17

Value of Claim:
€ 93,637.00

Subject Matter:
Corporate Income Tax (IRC) – Deductible costs; deduction; book thefts. Responsibility for costs – Reform of the arbitration decision (attached to the decision).
Replaces the arbitration decision of 24 June 2015

DECISION ON COSTS

Following the learned judgment of the Venerable Central-South Administrative Court, the present case was reopened.

The Arbitral Tribunal notified the parties to make statements before pronouncing a new decision.

The Tax Authority stated, in summary:

The Taxpayer stated, in summary:

A new decision must be pronounced on the matter of responsibility for costs in this tax arbitration process:

The Tax Authority raised the question of its non-condemnation to costs given the late submission of documentary evidence by the taxpayer, and, consequently, the revocation of the decision rendered in these proceedings that condemned it to 3/4 of the costs.

As the basis for its request, the Tax Authority argued, in summary, that the Taxpayer was "the one who gave rise to the proceedings, with its constant refusal to present the actual documents that would have allowed the Tax Authority to prove the facts at issue," maintaining that it did not give rise to the proceedings.

It follows from the case file that:

1. On 20 February 2012, the Taxpayer filed an administrative petition on the basis of an error in the self-assessment.

2. The administrative petition was dismissed by order of 6 September 2012.

3. The Taxpayer filed a hierarchical appeal which was dismissed by order of 30 April 2014.

4. The Taxpayer requested the Arbitral Tribunal to annul the order dismissing the hierarchical appeal.

5. The Taxpayer attached, in support of its statements, certain documents.

6. The Tax Authority opposed the attachment of the documents by the Taxpayer, requesting that:

a. They not be valued for purposes of evidence given the untimeliness of their attachment and doubts about their veracity;

b. It also concluded that with their attachment "the Petitioner has not demonstrated the existence of inventory shortfalls that are tax deductible in the amount of € 353,345.25";

1. In its statements in the arbitral proceedings, the Tax Authority continues to oppose the admission of such documents and reaffirms that they did not demonstrate that the Taxpayer had inventory shortfalls in the amount of € 353,345.25.

2. From the foregoing, it is concluded that the Tax Authority dismissed all requests by the Taxpayer, contested the petition for annulment before this Arbitral Tribunal, and opposed, from the outset, the attachment of the documents and their valuation.

3. It ruled on the attached documents considering that they did not prove the alleged inventory shortfall. From this it drew the consequence that it should be absolved of the condemnation to costs because it was the Taxpayer who gave rise to the proceedings.

4. The general principle regarding costs is their allocation according to the principle of success and failure: the unsuccessful party pays costs.

5. If the decision is not entirely unfavorable to one of the litigants, each of them shall bear costs in proportion to the extent to which they were unsuccessful.

6. The claimant pays costs when the defendant did not cause the action and does not contest it.

7. If the Defendant contested but was unsuccessful, it can be said, in a certain sense, that it gave cause to the action by its procedural conduct (unfounded resistance) and pays costs as a partially unsuccessful party, and also in cases where it gave cause to the action by its pre-procedural conduct. See on points (9) to (12). M. Andrade, Elementary Notions of Civil Procedure, 1956, p. 325 et seq.

8. The Tax Authority gave cause, by having dismissed the administrative petition and the hierarchical appeal, to the present proceedings, and because it contested therein all the Taxpayer's claims, specifically, with regard to the attachment of evidence and its valuation.

9. In the administrative tax proceeding, the Tax Authority must respect the inquisitorial principle, and cannot immediately shield itself behind the allocation of the burden of proof.

10. As a consequence of the inquisitorial principle, the Tax Authority may take steps to demonstrate the reality of the facts. The inquisitorial principle precedes the burden of proof. (Supreme Administrative Court Judgment of 21-10-2009, Case No. 583/09).

11. The pre-procedural and procedural conduct of the Tax Authority justifies its responsibility for costs – Articles 527 and 535, subsection 1 (by implication) of the Code of Civil Procedure.

In consequence, this arbitral tribunal decides to condemn the Tax Authority in the payment of 3/4 (three quarters) of the costs and the Taxpayer in the payment of 1/4 (one quarter) (Art. 22, subsection 4 RJAT)

Lisbon, 17 October 2019

Manuel M. Malheiros
Maria Manuela do Nascimento Roseiro
Armindo Fernandes Costa

ARBITRATION DECISION

I – Report

1. On 7 August 2014, the Petitioner, A..., with Tax Identification Number..., with headquarters at Rua ..., ..., ...-... LISBON, came, pursuant to Articles 10 et seq. of the Legal Regime for Arbitration in Tax Matters (hereinafter "RJAT"), to request the constitution of an arbitral tribunal for the appraisal of the legality and annulment of the order dismissing the hierarchical appeal filed against the decision of the administrative petition that requested the correction of the self-assessment of Corporate Income Tax (IRC) for the fiscal year 2009, which, allegedly, suffers from a defect of violation of law, due to error regarding the factual and legal requirements.

2. Pursuant to the provisions of subparagraph a) of subsection 2 of Article 6 and subparagraph b) of subsection 1 of Article 11 of the RJAT, the Deontological Council designated as arbitrators of the collective tribunal Judge Manuel Macaísta Malheiros, Dr. José Vieira dos Reis, and Dr. Maria Manuela do Nascimento Roseiro, who communicated their acceptance within the applicable period.

3. The Parties were notified of this designation on 24 September 2014 and made no statements, so, pursuant to subparagraph c) of subsection 1 of Article 11 of the RJAT, the collective arbitral tribunal was constituted on 9 October 2014.

4. After the Respondent submitted its reply and the administrative file on 14 November 2014, the meeting provided for in Article 18 of the RJAT was held on 2 December 2014, where the Petitioner requested authorization to attach supplementary documentation to prove its claim.

5. The Tribunal authorized and granted a time period for this, as well as for the Tax Authority's response thereto, scheduling a meeting for witness examination on 15 January 2015.

6. As a consequence of the attachment referred to in the previous number, the Respondent filed, on 2 February 2015, a request asking for the inadmissibility and non-valuation of the documents attached by the Petitioner.

7. Dr. José Vieira dos Reis renounced his duties as arbitrator, for health reasons, and the President of the Deontological Council, by order of 12 January 2015, designated in his place Dr. Armindo Fernandes da Costa.

8. The witness examination meeting took place on 20 February 2015, and the witnesses presented by the Petitioner were heard: C...; C...; D...; E... and F.... The Petitioner waived two witnesses: G... and H....

9. The Petitioner submitted statements on 2 March 2015, reiterating the legal arguments adduced in the initial Request regarding the existence, in the tax assessment, of a defect of violation of law, due to error regarding the factual and legal requirements.

10. On 6 March 2015, the Respondent submitted a request, following the Tribunal's order authorizing the Petitioner to attach documents, in which it alleged that procedural issues arose, on the one hand, from the Petitioner's request having been notified at a later date than the witness examination and, on the other hand, from a violation of the principle of contradictory process.

11. By order of 16 March from the Tribunal's President, the Respondent was granted a 10-day period to respond, with its period for submitting statements beginning to run from the end of that period.

12. On 20 March, the Petitioner attached to the file Opinion No. 63/92 from the Tax Studies Center.

13. On 26 March 2015, the Respondent submitted the request in response to the Tribunal's order that authorized the attachment of documents, in which it reiterates the position previously expressed.

14. On 29 March 2015, the Tribunal decided that it would finally rule on the issues raised by the Respondent.

15. The Respondent submitted statements on 15 April 2015, where, in addition to maintaining the arguments contained in its reply, it criticized the value of the evidence produced, arguing that even if it accepted the inevitability and reasonableness of the alleged shortfalls, it was still incumbent upon the Petitioner to demonstrate the reality invoked, and it should not be presumed that a certain percentage of goods, purchased and incorporated into inventories, had been eliminated, under pain of violation of the constitutional principle of taxation according to real income.

16. On 13 April 2015, the Petitioner submitted a request to respond to the Respondent's requests.

17. On 4 May 2015, the Respondent responded to the Petitioner's request, maintaining its position regarding the devaluation of documentary evidence attached by the Petitioner.

18. On 30 May 2015, the tribunal extended the pronouncement of the decision by two months.

19. Statement of Issues

19.1. The Petitioner's Position

The Petitioner maintains, in summary, that:

• "A..., SA" intervenes as the dominant company of the group of companies subject to tax under the Special Tax Regime for Groups of Companies (hereinafter designated "Group I...") of which the company J..., SA ("J...") is an integral part;

• In the self-assessment for the fiscal year 2009, "J..., SA" determined in its individual Model 22 Declaration a taxable profit of € 888,880.77, registering in field 225 of Table 07, as an amount not deductible for tax purposes, €1,934,892.57;

• Following an internal analysis, it was found that this amount included the sum of € 353,345.25, relating to shortfalls in inventories (books) that were objects of theft or loss, and, therefore, the Petitioner, considering that such amount should be considered fully tax deductible, filed a petition for reconsideration of the said self-assessment, and subsequently a hierarchical appeal against its dismissal.

• Although it was not possible to individually and precisely identify the effective dates of the inventory shortfalls that occurred (the ending inventories did not correspond to those recorded), it is unequivocal that they result from theft and loss of books;

• Books are objects of small dimensions, light and flexible, easy to transport, and are exposed in areas of large dimensions, with free access to the general public, which facilitates contact with the books and makes it difficult to detect theft or loss thereof;

• Despite security measures (security guards and private security personnel, surveillance cameras, alarms on book spines and "alarm antennas" in stores to detect books leaving without prior payment), it is not possible to avoid or eliminate all theft, so inventory shortfalls are inherent to the nature of the entire retail business, even if caused by external factors, designated "unknown shortfalls";

• Insurance does not cover these situations because these are thefts of reduced value, individually lower than the insurance deductible, and because the date of their occurrence is unknown, being detected only during periodic inventory;

• The Multi-risk policy of A... excludes, at the insurer's discretion, from protection and respective coverage "Unexplained disappearance, losses or thefts, as well as subtractions of any kind";

• Whenever the authors of the theft are identified, store managers file a complaint with the competent police authorities, but when they are unknown (majority of cases), it has no effect;

• Studies and statistics confirm that inventory shortfalls are a direct and inevitable consequence of the retail business, particularly the book business, and the Tax Authority itself admits the inevitability of theft of inventories in retail sales areas (Opinion No. 63/92 of the Tax Studies Center and Binding Information in Case No. A5092009009, of 26 June 2009), and also admits the proportionality of the average rate of shortfalls verified and recognizes that the ratio of inventory shortfalls registered in the sphere of A... is reasonable, in line with what is recognized on average in the sector;

• Recognizing that inventory shortfalls from unknown causes (namely, theft, robbery, loss) are an inevitability of the business, one cannot require any type of concrete, rigorous, and circumstantial proof for this purpose, and "unknown losses" should be admitted;

• For the Group, this is a relevant loss/expense, an actual financial loss, naturally affecting its respective capacity to contribute to taxes, and cannot fail to be considered as tax deductible under the general terms, taking into account subsections 1 and 2 of Article 23 of the CIRC, in view of its disregard contrary to the principle of taxation according to real income (Article 104, subsection 2, of the Portuguese Constitution) and based on capacity to contribute (Article 4, subsection 1, of the General Tax Law);

• Full acceptance for tax purposes (in reasonable and justifiable values) would comply with the principles of justice, proportionality, and material truth, to which the Tax Authority is bound in the exercise of its duties, as provided in Articles 55 and 58 of the General Tax Law;

• The correction of this position is recognized by legal scholarship (Vítor Faveiro, Tomás Cantita Esteves) and case law (Judgments of the Supreme Administrative Court of 11 June 1997, case 12,610; of the Central-South Administrative Court, of 02/07/2002, case 6540/02) and by the Tax Authority itself (Opinion of the Tax Studies Center No. 63/92 and Binding Information in letter No. 12937, of 22/06/2009);

• Given the situation of group taxation, corrections should be made that will lead, in A... (field 225 of model 22), to the alteration of taxable profit in its favor from € 888,880.77 to € 535,535.52, without "tax payable" due to the deduction of accumulated tax losses, and consequently the value of the municipal surcharge altered from € 13,334.13 to € 8,033.95;

• With respect to the Special Tax Regime for Groups of Companies (RETGS), due to the effect of the regime applicable to the fiscal group in which it is integrated, the correction of the individual result mentioned above will imply the correction of field 380 of the Model 22 declaration submitted by the Petitioner, relating to the determination of the consolidated result of the Group, which amounted, in the fiscal year 2009, to €1,693,648.74, whose tax payable amounted to €102,596.35 (docs nos. 8 and 9);

• Indeed, since Group I... had accumulated tax losses available for carryforward, the said correction presents no impact at the level of tax payable by the Petitioner (dominant company) due to the "use" of tax losses by the individual company, although it will prejudice its utilization or availability for carryforward in subsequent fiscal years;

• Account should also be taken of the impact at the level of the Municipal Surcharge (field 364), since its determination depends directly on taxable profit which, in the case of J..., decreased by € 353,345.25, so the application of the rate of 1.5% on the said amount results in a decrease of the Municipal Surcharge (individual and aggregated) of € 5,300.54, which should be reimbursed to the Petitioner for having been paid unduly;

• Thus, the assessment act suffers from a defect of violation of law due to error regarding the factual and legal requirements, and should therefore be annulled, with reimbursement of tax and payment of compensatory interest;

• The order dismissing the hierarchical appeal should be annulled and the tax assessment act for IRC/2009 should be partially annulled, to be corrected as explained, with the Tax Authority being condemned to officially correct the assessments of A... and the Petitioner for the following fiscal years, taking into account the corrections made, regarding the procedure for carryforward of losses and to reimburse the Municipal Surcharge paid unduly in excess, in the amount of € 5,300.54 relating to the year 2009.

19.2. The Respondent's Position

The Respondent states, in summary, that:

• The Petitioner's claim, initially sustained in the administrative petition filed against the self-assessment, was rejected through a decision that considered that the cost in the amount of € 353,345.25 would have to be anchored in solid and clear evidence, and that the request for compensatory interest would always be inadmissible, pursuant to Article 43, subsection 1 or subsection 2, as there was no lapse attributable to any Tax Authority service, since the taxpayer did not follow, with respect to the increase made in Table 07 of the Model 22, any general guidelines of the Tax Authority duly published;

• The Petitioner, which did not exercise the right to be heard when the draft decision on the administrative petition was notified, filed, against the final decision thereof, a hierarchical appeal addressed to the Minister of Finance, invoking lack of reasoning, pursuant to Article 77, subsection 1 of the General Tax Law, but immediately agreeing that compensatory interest was not due;

• In the administrative petition, it was concluded that the acceptance as a cost of the amount of € 353,345.25 would have to be anchored in solid, clear, unequivocal, and evident evidence that only the then Petitioner would have the ability and capacity to provide, not having, however, managed to substantiate the evidence of what was alleged, because the elements submitted by it were of insignificant relevance, as they related to a small number of occurrences;

• The Respondent defends the position of dismissal of the hierarchical appeal filed against the decision of the administrative petition, understanding that the legal requirements of reasoning (Article 77 of the General Tax Law) were met and that the Petitioner had not managed to demonstrate (Article 74, subsection 1 of the General Tax Law) the facts constitutive of the right to deduction of the costs at issue, nor their essentiality (Article 23 of the CIRC), and that the invoked Information from the Corporate Income Tax Department to the Portuguese Book Association (letter No. ... of 22.06.2009) also required from taxpayers, for purposes of acceptance of their deductibility in the determination of tax results, evidence of the values of expenses, which had not been achieved.

• As to the essentiality of the cost for tax purposes, the Respondent reiterates that, although it is acceptable to acknowledge the inevitability and reasonableness of the alleged shortfalls, nevertheless they would have to be proven, and that the burden of demonstrating the reality invoked falls entirely on the then appellant because "it is not possible to presume that a certain percentage of goods, purchased and incorporated into inventories, is considered removed from these, by circumstances inherent to the business. For such a presumption could result in an absence of taxation on income actually obtained, which, as the appellant mentions, would constitute a violation of the constitutional principle of taxation according to real income."

• The documentary evidence submitted to the present file are those already submitted with the hierarchical appeal and in the administrative petition, as well as theft reports filed with police authorities, of which "only 2 reports relate to occurrences in the year 2009, and it is also noted that the company withdrew one of the complaints";

• The case identified by the Petitioner (and previously Petitioner and Appellant) by No. .../08...PBVIS corresponds to an occurrence that took place in the year 2008 (whereas what is at issue is the year/fiscal year 2009); in the case also invoked by the Petitioner that ran under No. .../09... PJPRT, A... withdrew the complaint, which presupposes that the situation was resolved with return or payment of the stolen object (book), and in the case still referred to by the Petitioner and identified by No. .../09...PVLSB, charges were brought, however, the allegedly stolen books were valued at 98.00 euros, which is absolutely incapable of demonstrating losses/shortfalls of €353,345.25, as the Petitioner claims.

• It is not sufficient to merely allege that as a result of the physical inventory, it was found that "the ending inventories did not correspond to those recorded," making it necessary, at least, to have evidence of how the value claimed was determined (by indicating the quantity of goods that may have been lost/stolen, its unit value).

• Now, the documentary evidence submitted to the petition that constituted the hierarchical appeal were the same as those that had been submitted in the administrative petition: i) copy of the Corporate Income Tax Model 22 Declaration for the fiscal year 2009, submitted by J... (on 19 May 2010); ii) copy of the Corporate Income Tax Model 22 Declaration for the fiscal year 2009 of the Fiscal Group taxed in accordance with the Special Tax Regime for Groups of Companies, submitted by A... SGPS (on 26 May 2010); and iii) copies of theft complaint forms submitted by J... to police authorities;

• The Petitioner did not exercise the right to be heard with respect to the draft decisions dismissing the decisions of the administrative petition and the hierarchical appeal - the evidentiary elements therein were not adequate to the demonstration that was required, that in the fiscal year 2009 it had inventory shortfalls in the claimed amount, and now the attachment of documents tending to demonstrate that "the managers of J... have made their best efforts to intensify security measures, always with the objective of reducing shortfalls to the maximum and minimizing losses" cannot alter the nature of things;

• With respect to the provisions of Article 23, subsection 1, of the CIRC, the Petitioner's defense that inventory shortfalls should peacefully be accepted as a cost, with no need for their "proof," is not in accordance with the positions of the cited authors (Vítor Faveiro and Tomás Castro Tavares) who point to the necessity of such proof;

• Not having proven the invoked costs, the constitutional principles invoked of taxation according to real income based on capacity to contribute are not violated, and the acceptance of the cost by the Tax Authority without such proof is what would result in a violation of these principles, since "(…) the recognition of the tax deductibility of any expense/cost and, more specifically in the present case, losses in inventories, must be based on precise and unavoidable objective elements that make it possible to assess which goods have actually been removed from the commercial circuit and, for that reason, the income underlying them should not be subject to (…) it is not possible to presume that a certain percentage of goods, purchased and incorporated into inventories, is considered removed from these, by circumstances inherent to the business. For such a presumption could result in an absence of taxation on income actually obtained, which, as the appellant mentions, would constitute a violation of the constitutional principle of taxation according to real income. (…)";

• As to the supposed understanding of the courts and of the Tax Authority itself, the case law cited by the Petitioner does not dispense with the necessary proof/demonstration, by taxpayers, of the situations in which inventory/inventory shortfalls resulted and the understandings conveyed by the Tax Administration (opinion of the Tax Studies Center and binding information) admit that merchandise shortfalls are normal and inherent to the development of any commercial activity, but that, nevertheless, it is necessary, in strict compliance with tax rules, to prove the situations invoked;

• With respect to compensatory interest, they are not due in the case of inadmissibility of the claim, nor would they be due in the case of admissibility, because the Petitioner conformed itself to what the Tax Authority decided on the subject in the administrative petition, having expressly declared (Article 13 of the hierarchical appeal petition) that it did not agree with the Tax Authority's decision "except as to compensatory interest, in which the Appellant accepts the understanding conveyed," thereby establishing res judicata on the question;

• The possibility of recognition of the right to compensatory interest is ruled out, pursuant to subsections 1 and 2 of Article 43 of the General Tax Law, because the error invoked existed in the self-assessment and had its origin in the Petitioner itself (cf. Jorge Lopes de Sousa On the Civil Liability of the Tax Administration for Illegal Acts, Areas Publisher, Lisbon 2010, p. 52);

• The Tax Authority was not, when assessing the self-assessment, in the presence of all the elements now attached, but even if it were concluded that it had such elements, compensatory interest would always have to be calculated from the date the Tax Authority took a position on the taxpayer's situation;

• That is, regarding the matter of compensatory interest, it can be concluded that: the Petitioner itself conformed itself to the Tax Authority, in the hierarchical appeal, that they would not be due; there is no error attributable to the Respondent's services (but rather to the Petitioner's), nor did the Petitioner follow any general guidelines published by the Tax Authority in completing the Declaration; the Petitioner did not provide the Respondent with sufficient analytical elements to assess the essentiality of the cost; even if this were not understood, any payment of compensatory interest could only occur from the date the Tax Authority took a position on the taxpayer's situation;

• The claim should be judged inadmissible for lack of proof, and consequently the Respondent absolved of all claims, all with the due legal consequences.

20. Case Management

20.1. The Collective Arbitral Tribunal is materially competent, pursuant to the provisions of Articles 2, subsection 1, subparagraph a) of the RJAT;

20.2. The parties have judicial personality and capacity, have standing pursuant to Articles 4 and 10, subsection 2, of the RJAT and Article 1 of Order No. 112-A/2011, of 22 March, and are legally represented;

20.3. The proceedings do not suffer from any defect, nor were any exceptions raised by the parties that prevent appraisal of the merits of the case, so the conditions are met for the pronouncement of the arbitration decision;

20.4. Prior Questions

• The Respondent raised prior questions regarding the documents and CD presented by the Petitioner, respectively, on 17 and 23 December (2009 inventories), in two requests (of 2 February 2015 and 30 March 2015). It contested the Tribunal's acceptance thereof, since these are not supervening documents, raising doubts about the veracity of inventories presented three years after the date of the filing of the administrative petition. Moreover, according to the Respondent, the files/documents presented could have been validated and signed by the respective officials, which did not occur, further adding that in those files/documents there is no reference to their extraction from any computer program, in order to minimally identify the information, especially as to its origin and date. In these terms, the Respondent alleges, it is not possible to validate, from the amount indicated by the Petitioner, which value relates to shortfalls (which might be a cost), from the value relating to books that are returned to suppliers (supplied under consignment), or from the value relating to books transferred to other stores.

• The Respondent raises doubts about the veracity of inventories presented three years after the date of the administrative petition, considering the presumption of veracity provided in Article 75 of the General Tax Law inapplicable, and defending the untimeliness of the attachment.

• It further raises the respondent various other questions about the sufficiency of the description contained in the different documents, so that the alleged shortfalls would not be proven.

• The Respondent challenges, in particular, the evidentiary effect of the documents contained in files 05555VF and 58446VF, relating, respectively, to the Bookstore of ... and to ....

• The Respondent concludes by requesting the Arbitral Tribunal not to value the attached documentation.

The Tribunal analyzed the said prior questions and considers that:

• Subparagraph c) of Article 16 of the RJAT provides that an autonomous principle of the arbitral process is the tribunal's autonomy in conducting the proceedings, the essential being to obtain a ruling on the merits within a reasonable time, respecting fundamental principles;

• The request and documentation presented by the Petitioner must be considered in light of the principle of material truth. Article 411 of the Code of Civil Procedure provides that it is incumbent on the judge to carry out or order all steps necessary to establish the truth and to achieve fair settlement of the dispute;

• With respect to Respondent evidence production, it seems appropriate to consider, with due adaptation, the commentary by Counselor Lopes de Sousa to Article 114 of the Code of Administrative Procedure: "regarding steps that have been requested, waiver should only occur when it is certain that those steps are useless and not also when there is merely doubt about their usefulness."

• The questions regarding which the Petitioner proposed to produce evidence through the attachment of files/documents and other documents may be relevant to the appraisal of this dispute.

• In the conduct of tax arbitral proceedings, the pursuit of material truth should take precedence over procedural formalism.

• Furthermore, the Petitioner's accounting enjoys the presumption of veracity pursuant to Article 75 of the General Tax Law. It was incumbent on the Tax Authority to demonstrate the lack of correspondence between the content of the accounting and reality. The Tax Authority failed to demonstrate that there were omissions, errors, inaccuracies, or founded indications that the Petitioner's accounting does not materially reflect reality.

In consequence, the Tribunal decides to admit the attachment of said documents, which will be appraised together with the other evidence produced.

21. Issue to be Decided

The central issue to be decided is whether the theft or loss of merchandise is subsumable to the provision of Article 23 of the CIRC, that is, whether it can be considered a cost or loss for purposes of taxation and, further, whether it can be established in the proceedings that there is evidence of this theft or loss.

22. Proven Facts

Based on the facts alleged by the parties and not contested, as well as on the documentation submitted to the proceedings (including the administrative file) and on the statements of the witnesses, the Tribunal establishes the following relevant facts:

22.1. The Petitioner is engaged in the sale of books in 55 establishments distributed throughout the Country;

22.2. At times, the Petitioner holds sales events outside its establishments;

22.3. In the fiscal year 2009, the Petitioner, A..., SGPS, SA, was the dominant company of a group of companies, taxed under the Special Tax Regime for Groups of Companies (RETGS), designated "Group I...," composed of the following companies:

22.4. For the fiscal year 2009, the companies referred to in the previous number individually filed their respective Income Tax Return Forms Model 22, determining the following results:

22.5. The sum of the individual results of the group identified in the previous number corresponds to the fiscal result of the Group declared by the Petitioner in the Income Tax Return Form Model 22 of the Group of Companies, submitted on 26.05.2010, to which the number ... was assigned.

22.6. For purposes of determining Taxable Profit, all companies that compose the Group registered values in line 225 (blank line) of Table 07, as discriminated below:

22.7. On 20 February 2012, A... SGPS filed an administrative petition on the basis of an error in the self-assessment, requesting corrections to the declarations of Model 22 of A... and of the Fiscal Group I... SGPS (PA, RG, fls. 1 to 65).

22.8. The administrative petition (case no. ...2012...) was the subject of a report proposing dismissal that received a favorable superior order on 18 July 2012, being notified by letter dated 20 July 2012 for exercise of the right to prior hearing, which it did not exercise. The order of dismissal was converted to final by order of 6 September 2012 of the Deputy Director of Finance of the Finance Department of Lisbon, notified on 10 September 2012 (PA, RG, fls. 73 to 83).

22.9. From the decision dismissing the administrative petition, on 4 October 2012, a Hierarchical Appeal was filed which, after reports from the Finance Department of Lisbon and the Corporate Income Tax Services Department, was dismissed by order of the Director of Services for Corporate Income Tax, of 30 April 2014, notified to the Petitioner on 15 May 2014 (PA, RH, fls. 1 to 105).

22.10. In the scope of its activity, as a customary procedure, A... carries out inventory and cataloging of books (i.e., inventories/stock) in the various stores, proceeding, semi-annually or annually, to compare the books.

22.11. Similar to prior fiscal years, in 2009, a shortfall was found in the physical inventory (given that the ending inventories did not correspond to those recorded), so, in order to fairly represent the results of its activity, an expense was recorded in accounting in the amount of EUR 353,345.25, although it is not possible to identify individually and precisely the effective dates of the inventory shortfalls that occurred, and it is unequivocal that they result from theft and loss of books.

22.12. Books are objects of small dimensions, light and flexible, easy to transport, and are exposed in areas of large dimensions, with free access to the general public, facts that facilitate contact with the books and make it difficult to detect theft or loss thereof.

22.13. The managers of A... have made their best efforts to intensify security measures, always with the objective of reducing shortfalls to the maximum and minimizing losses.

22.14. Such efforts were accomplished in the implementation of various security measures, which entail substantial immediate and maintenance expenses:

• Hiring of security guards and private security personnel, which are placed in street-level stores (since stores located in shopping centers already have their own security);

• Installation of surveillance cameras;

• Installation of alarms on book spines and "alarm antennas" in stores, which detect books leaving when prior payment has not been made. (Cfr. Docs. 2 to 4)

22.15. Notwithstanding the aforementioned steps, it is not possible to avoid or eliminate all theft, which implies, consequently, that inventory shortfalls are considered an intrinsic reality of the activity itself, inherent to the nature of the retail business itself (whatever it may be), even if caused by external factors thereto (these are called "unknown shortfalls").

22.16. It is possible to remove the alarms from books with relative ease and to conceal them so as not to be detected when leaving the stores.

22.17. On the other hand, more ingenious methods are also possible that could involve the switching of labels and/or bar codes of a book of higher value for others belonging to books of lower value, implying an incorrect record in the removal of merchandise.

22.18. Insurance itself does not cover the situations at issue here, either because these are thefts of reduced value (if considered individually), below the insurance deductible, or because the date of their occurrence is unknown and are only detected during periodic inventory.

22.19. The Multi-risk policy of A..., given what is stated in Article 5, subsection 7, subparagraph e) (page 23 of the general conditions), are, at the unilateral discretion of the Insurer, expressly excluded from protection and respective coverage "Unexplained disappearance, losses or thefts, as well as subtractions of any kind," a provision into which the situations at issue in these proceedings fit. (Cfr. doc. no. 5).

22.20. Whenever the authors of the theft are identified, store managers file a complaint with the competent police authorities (Doc. no. 3, attached with the Petition), and practical experience has shown that such procedure is ineffectual when the authors of crimes are unknown, which happens in the majority of situations.

22.21. The Tax Authority itself agrees with the Appellant regarding the proportionality of the average rate of shortfalls verified, stating that "it is believed that, as reported, the average rate of losses in Portugal is 1.26% and that in J..., SA, this ratio was 0.94%."

22.22. The "The Global Retail Barometer 2009" report of the Centre for Retail Research - an independent entity dedicated to analyzing the impact of theft in the retail sector at the European level - concluded, in reference to the fiscal year 2009, that the rate of unknown losses in Portugal in the retail sector was 1.26% of sales.

22.23. The same study notes that books are in the top 5 of items or products most frequently stolen and those with the greatest growth from 2008 to 2009.

22.24. A... presents a ratio of 0.94% of total sales volume (given that the total value of sales made by A... in the fiscal year 2009 amounted to EUR 37,556,964.58).

22.25. In 2009, the Petitioner had a turnover of €37,556,964.58;

22.26. For the control and accounting of inventories (books), the Petitioner adopts a computerized inventory management system (SAP), which integrates the permanent inventory system, mandatory under Decree-Law 44/99 of 12 February, with a view to the fair determination of its results, for which the value of the cost of goods sold and consumed and its determinants are decisive;

22.27. The use of the said inventory system allows one to know at every moment the number of theoretical units of each book existing in each bookstore, with each bookstore able to know the theoretical inventories of the other stores, of each title, and thus satisfy in the short term any request without availability in the store where the request is made but perhaps existing in another store in the group. All in real time, since books leaving update the stock immediately when they pass through the cash register;

22.28. Stolen books continue to appear in accounting as existing, since they do not pass through the cash register;

22.29. It is the permanent inventory system that allows the Petitioner to show in accounting the losses by store and by type of book, losses from unexplained shortfalls verified in 2009;

22.30. It is impractical to continuously control the physical stock of each book, and it is also impractical to detect theft and other shortfalls in a timely manner;

22.31. It can also happen that there is a book in the accounting inventory and it is not detected by the employee at the time of a request, but the shortage is not immediately reported as the book in question may be out of its proper location;

22.32. Shortages are only confirmed in annual (or biennial) inventories, where existing books are entered one by one (including recount), and only after the physical inventory is completed, when it is electronically compared with the theoretical stock and shortages are identified. These are the so-called maps showing the determination of inventory differences by stores and products, which serve as the basis for the accounting entry or alternatively could have justified an increase in the cost of goods consumed without separate reporting;

22.33. The Petitioner separately reported these losses in accounting, but did not recognize them for IRC purposes, adding them in Table 07 of the tax declaration;

22.34. Later, alerted by an opinion from one of its consultants, the Petitioner decided to change the criteria for accepting this cost as tax deductible and filed an administrative petition;

22.35. This listing of "inventory differences" which includes the summary of books stolen by store, and store by store, the titles stolen and their respective value, being the basis of the accounting entry showing the losses of stock elements (inventory) is extracted from the computer system, which allows formatting "outputs according to needs;

22.36. Usually, summaries of these formatted outputs are printed, which in the concrete case only the listings of inventory differences by store, received in computer files, would include many thousands of printed pages;

22.37. The true supporting document is the computer system itself from which formatted listings are extracted upon request for the various purposes in view;

22.38. The physical evidence in the accounting of the record of losses in stock due to unknown causes in a separate account would have been the summary of shortfalls by store (one page) contained in the proceedings;

22.39. The Petitioner chose to record in accounting the inventory differences in a separate account, which was possible because it has a computer system that allows it to show by store and by product the shortfalls;

22.40. In 2009, the value of shortfalls reported in accounting totaled 353,345.25;

22.41. That value corresponds to 0.94% of sales in the same year (37,556,964.58 €);

22.42. Filing a complaint with authorities occurs whenever the authors of theft are detected, which occurs in very rare occasions. This is another established deterrent procedure;

22.43. Inventory shortfalls of this type are an inevitability in the retail business, particularly in bookstores, to which A... is engaged;

22.44. The Respondent acknowledges the inevitability referred to in the previous number, as evidenced by Opinion No. 63/92 of the Tax Studies Center and the Binding Information A5092009009 of 26 June 2009, where the same opinion is referenced;

22.45. The Tax Authority admits that the acceptance for tax purposes of losses from "unknown shortfalls" depends on a case-by-case and circumstantial analysis of the specific situation;

23. Legal Reasoning

23.1. The Petitioner formulated the following claims:

• Revocation of the order dismissing the hierarchical appeal, in order to partially annul the corporate income tax assessment act for 2009, correcting it as explained, restituting to the Petitioner the amount of tax resulting from such corrections plus the respective interest;

• Consequent condemnation of the Respondent to officially correct the assessments of A... relating to subsequent fiscal years, taking into account the corrections made regarding the procedure for loss carryforward;

• Reimbursement of the Municipal Surcharge paid unduly in excess, in the amount of €5,300.54 relating to the year 2009.

23.2. The Respondent, for its part, considers:

• That the tribunal cannot fail to judge the Petitioner's claim inadmissible, since it failed to demonstrate that it had inventory shortfalls in the amount of € 353,345.25, and, consequently, the essentiality of the expenses underlying that amount, being therefore to confirm the legality of the hierarchical appeal decision and declare the mentioned amount non-deductible for tax purposes, for not complying with the requirements provided in Article 23 of the CIRC;

• That with respect to compensatory interest, it reiterates that, in case the elements attached by the Petitioner on 17.12.2014 and on 06.02.2015 are to be considered for purposes of the facts alleged by it, the Respondent shall always have to be absolved of such claim, since the decision of the administrative petition and the hierarchical appeal were issued without it having knowledge of such elements;

• The same holding true with respect to procedural costs, since it was the Petitioner who gave rise to the proceedings, with its constant refusal to present the actual documents that would have allowed the Tax Authority to prove the facts at issue.

23.3. The central issue to be decided is whether the theft or loss of merchandise can be considered a cost or loss for purposes of taxation provided it is proven in the concrete case.

23.4. It is important, in order to frame the legal issue, to consider Opinion No. 63/92 of the Tax Studies Center.

23.5. In that Opinion No. 63/92 of the Tax Studies Center of 13 July 1992, on page 13, it states:

"b) Inventories

In cases already mentioned above of small thefts of inventories found in retail sales areas, the company may request, upon request and regardless of police report, the corresponding loss for purposes of determining taxable profit, with the taxpayer demonstrating that such losses are within reasonable limits for its respective sector of activity and conditions of exercise thereof and indicating what control and accounting systems, namely of a computerized nature, have been established in connection with the verification of these events."

23.6. Now, from the factual matter it follows:

• The existence of control systems to ensure the minimization of thefts as well as the computerized system of recording inventory shortfalls and control.

• The accounting recording of the shortfalls that occurred, which has as support internal documents, with prevalence of computerized ones, translating in detail the different phases of control.

• That the losses from unidentified shortfalls present values within reasonable limits for the distribution and retail commerce sector, taking into account the study elaborated.

From which we can conclude that the company has implemented systems to ensure the minimization of thefts, as well as systems for computerized recording of inventory shortfalls and internal control, prerequisites established so that losses from unidentified shortfalls (inventory theft) are considered an eligible cost for IRC purposes.

The inevitability of these losses was demonstrated in A...'s business and that assuming the risk of these is one of the conditions inherent to the business, being indispensable to the business, and therefore eligible for IRC purposes.

The company's accounting and computerized system provides reliability and transparency to inventory control and the reporting of these occurrences.

The internal control system established, in a cost-benefit analysis, is organized in such a way as to minimize these shortfalls, with considerable rigor.

The percentage of 0.94% of sales verified from the losses detected by physical inventory is within reasonable limits for the sector not contested.

The evidence presented, gradually deepened to respond to doubts raised, appears to us adequate, with the true supporting evidence being of a computerized and human nature and was assessed and proven by the descriptions of the system and procedures and by the testimony.

The Petitioner's accounting is duly organized in accordance with fiscal and commercial legislation. The systems for ensuring the minimization of thefts, as well as the computerized recording system for inventory shortfalls and internal control implemented by the Petitioner meet the required criteria.

The accounting system provides reliability to the recording of these occurrences.

The losses from unidentified shortfalls (namely inventory thefts) recorded in accounting and supported by the internal documentation previously mentioned meet the requirement of essentiality, a condition necessary for the deductibility of the cost under IRC.

It is proven that in the fiscal year 2009, the company "J...," a company forming part of the Petitioner's fiscal group perimeter, determined in its respective individual Model 22 Declaration a taxable profit of EUR 888,880.77, with in the determination of the aforementioned result being considered as non-deductible for tax purposes the amount of 1,934,892.57, which was added in field 225 of Table 07 of said income declaration.

Part of that amount, the sum of EUR 353,345.25, relates to inventory shortfalls resulting, essentially, from theft or loss.

The Petitioner's object is the retail sale of books, an activity that is carried out in various bookstores, located either in street-level stores or in shopping centers, which carry out annual inventory with physical count of all items existing in each of the stores and respective support warehouses and which always presents shortfalls.

Both in the administrative petition and in the hierarchical appeal, the accounting support of inventories was never presented, which was taken as established, only referring to the origin of the shortfalls, since it was understood that there was never any question about the existence thereof, but rather their qualification or not as a fiscal cost.

This fact was, moreover, attested to in the legal certification of accounts (attached to the proceedings at the initiative of this Tribunal), which would have to include a reference to the shortfalls, as was confirmed by witness Mr. F..., if these were not properly documented and supported.

In fact, the practice of Legal Certifications of Accounts issued by a Statutory Auditor consists only of disclosing materially relevant non-conformities, through reservations on the accounts or scope limitations.

The Legal Certification of Accounts for the year in question was issued without any reservations.

This proves that in the opinion of the Statutory Auditor, the financial statements of "A..." present fairly and appropriately, in all materially relevant aspects, expressly stating that the supporting documents for the amounts contained in the financial statements were verified, which means that the supporting documents for the shortfalls at issue were verified and accepted (cfr. legal certifications attached to the present proceedings).

The Petitioner's accounting enjoys the presumption of veracity, pursuant to Article 75 of the General Tax Law.

The Tax Authority did not in any way demonstrate the lack of correspondence between such accounting and reality.

The manner in which the Tax Authority may assess the reasonableness of these shortfalls in each case is influenced by the manner in which the company recognizes this cost and the manner in which it reports it in the income declaration for IRC purposes.

Constituting the substance of our case and being perhaps the most generalized, we address inventory differences, differences between the expected inventory according to the accounting system and the physical count of stock.

There are two forms of accounting treatment of this expense, both leading to the same end result.

The more common one involves reducing the accounting stock by adjusting it to the final stock existence resulting from the inventory, which implicitly affects the cost of goods consumed (increasing it) and, consequently, affects (decreasing) the gross operating margin.

This form of accounting (in which differences directly influence the cost of goods sold and indirectly the gross operating margin) is the typical form when companies use the permanent inventory system and is also used by many taxpayers who utilize the permanent inventory system.

The accounting does not record in a separate account the value of inventory differences, which should be supported in the inventory process and in the justification of the stock regularization entry.

In this system, the comparison of this gross margin with data of the group or the sector, and between prior years and the current year, is one of the first and most significant indicators of the reasonableness of the gross margin determined, of the cost of goods sold, and of the shortfalls, and indirectly of any implicit inventory differences in the gross margin, according to the equation:

Gross Margin = Sales – Cost of Sales and

Cost of Sales = Purchases + Opening Inventory - Ending Inventory

The comparison of gross margins is the most common way to detect levels of shortfalls (among which are inventory differences, excessive consumption and waste, etc.), and it is not possible to isolate the causes, as some may have nothing to do with thefts, and may even result from strategic choices: for example, selling at a lower price was an aggressive discount policy, not consistent with prior practices or with the competition.

This form of accounting treatment, without any tax correction in Table 07 of Model 22 declaration, is the most common form of accounting and tax treatment of the inventory differences at issue.

The taxpayer does not isolate the inventory differences. The Tax Authority tests in the first instance the reasonableness of the gross margin. The Tax Authority, in case of doubt, audits the company by inquiring explanations for the apparent excessive consumption of merchandise or raw materials.

However, some companies (the most organized ones, among which the Petitioner) have a more sophisticated accounting treatment, taking the application of the permanent inventory system to the limit.

Such is the case of the Petitioner.

Each sale triggers the corresponding decrease of stock, thus making it possible to always detect the existence of a particular book in the Store. In the case of the Petitioner, having the integrated system of all stores, it allows one to immediately know if the book not existing in the store where the customer requests it exists perhaps available in another store in the group.

At year-end, the physical control system for inventories, extending to all stores, with counting of books (entry into the computer system, there are no longer manual count lists), results in the real existence that, by comparison with the accounting existence, translates the inventory differences.

The inventory difference listings, summary by stores, store by store, book by book, or others can be formatted upon user request, since the evidence is primarily computerized.

Although the net accounting result in the two systems is equal, the Petitioner determined item by item the inventory differences in each of the stores, accounted for this expense separately, and, as a first step, added this value to the accounting result, considering that this amount would not be accepted fiscally.

An understanding that it later changed, hence the petition that gave rise to these proceedings.

These inventory differences, differences for less between accounting inventory and that resulting from the count at year-end, are mostly resulting from unavoidable theft, and when recorded in a separate account, generate gross margin calculations higher than those of the alternative accounting method. The net result is equal in the two accounting methods.

That is what happened in the case at hand.

Leading to the same net result, it generates value differences in gross margin, and for purposes of comparisons, the method of accounting for these inventory differences should be considered.

If the Petitioner had not made this correction in Table 7, the criterion for validating the reasonableness of the declared shortfalls (separately or not), if it were not evident this reasonableness, would trigger an inspection where this reasonableness would be questioned and the existing accounting and control system analyzed, namely the computerized system that made possible the determination of the shortfalls.

Now, in these proceedings, the Tax Authority failed to call into question the reasonableness of the inventory differences declared by the Petitioner.

With respect to evidence, this consists, first and foremost, in the reliability of the computerized system and in the assessment of the control and accounting environment of each entity.

The Tax Authority did not directly appreciate the Petitioner's computerized, accounting, and control system, nor did it call into question the reasonableness of the losses. The main argument for refusing the regularization seems to be the lack, inadequacy, or untimeliness of the evidence presented.

Which does not appear reasonable to us.

The documentary evidence elements brought to the proceedings successively by the Petitioner, the description of the stock control system, and the testing of its compliance, namely through the examination of witnesses are such as to validate the adequacy of the computerized system and the supporting documents obtained from it.

The evolution of computerized systems makes it impractical to systematically require evidence in physical format, with outputs being formatted according to the requirements of various users and the most solid evidence being in the validation of the system itself.

The transformation of the inventory difference maps brought to the proceedings into computerized files into printed listings would, in itself, provide support of several thousand pages that in substance add nothing to the matter at hand.

"The circumstances of each case are determinant for the acceptance for tax purposes of shortfalls for unknown reasons," cf. technical sheet A509 2009009, and the analysis of these in the concrete case under examination leads us to consider that the conditions for their acceptance are met.

The value referred to above of EUR 353,345.25 was, in fact, incorrectly added by the Petitioner, since it should have been considered fully tax deductible.

The goods at issue - books - being objects of small dimensions, light and flexible, easy to transport and being exposed in areas of large dimensions, with free access to the general public, are easily stolen, with theft being difficult to detect.

The Petitioner established security measures, always with the objective of reducing shortfalls to the maximum and minimizing losses. Specifically, the existence of:

• security guards and private security personnel regarding street-level stores, with stores located in shopping centers already having their own security;

• surveillance systems in all stores, and their maintenance;

• alarms on book spines and "alarm antennas" in stores, which detect books leaving when prior payment has not been made.

It is impossible, in this type of activity, to avoid or eliminate all theft or loss, which implies, consequently, that inventory shortfalls are considered an intrinsic reality of the activity itself.

From the Multi-risk policy of A..., given what is stated in Article 5, subsection 7, subparagraph e) (page 23 of the general conditions), there are expressly excluded from protection and respective coverage the unexplained disappearance, losses or thefts, as well as subtractions of any kind.

Whenever the authors of theft are identified, store managers file a complaint with the competent police authorities. Such procedure, however, is devoid of practical efficacy when the authors of theft are unknown, which occurs in the majority of situations.

From the factual matter taken as established, it follows that inventory shortfalls are a direct and inevitable consequence of the retail business, particularly the book business.

The inevitability of theft of inventories in retail sales areas is admitted by the Tax Authority itself, as evidenced by Opinion No. 63/92 of the Tax Studies Center.

This Opinion states that the corresponding loss may be accepted for tax purposes, with the taxpayer demonstrating that the losses are within reasonable limits for its sector of activity (...)."

The Tax Authority, in the decision of the administrative petition, states that "the Taxpayer will certainly be imbued with truth when it assures that (...) inventory shortfalls are an inevitable consequence of the retail business, particularly the book business."

The Tax Authority also states: "it is believed that, as reported, the average rate of losses in Portugal is 1.26% and that in A... SA, this ratio was 0.94%."

Recognizing the economic inevitability of inventory shortfalls and the reasonableness thereof, such shortfalls cannot fail to be considered as tax deductible under the general terms.

As stated in the Binding Information referred to above, "that small inventory thefts are inherent to the company's normal business activity, clearly meeting the requirement of essentiality," establishing as a condition that (i) the controls established ensure the minimization of the occurrence of theft and that (ii) the system provides reliability to the accounting translation of occurrences.

"Under IRC, inventory shortfalls identified and unidentified (small thefts) in large retail sales areas are considered occurrences inherent to the company's business activity itself, as mentioned in Opinion No. 63/92 of the Tax Studies Center, so they generally come within the principle of essentiality, taking into account the circumstances of each specific situation."

In addition to control systems that companies should implement to minimize shortfalls, there should be a duly organized computerized system for recording inventory shortfalls and internal control, which the Petitioner did not demonstrate it possessed, as it merely attached computerized inventory documents, which also do not comply with the requirements provided in the technical sheet as we shall see below, because:

"II) This organizational system of inventory shortfalls must encompass both identified shortfalls and unidentified shortfalls (inventory thefts). For identified shortfalls, an internal document should be prepared showing all identifying elements of the product (description, code, quantity, reason for shortfall, and destination of product), signed by the section manager and the store manager. This internal document should serve as support for the regularization of the stock management system, with this system issuing a stock regularization listing that will support the accounting entries for inventory shortfalls."

From the case law it follows that there is no waiver of the necessary proof/demonstration, by taxpayers, of the situations in which inventory/inventory shortfalls resulted, proof that was made in the present case.

The theft or loss of merchandise can, thus, be considered a fiscal cost.

As follows from the judgment of the Supreme Administrative Court of 11 June 1997, rendered in the appeal with No. 12,610 and from whose doctrinal summary the following assertion is contained: "The value of the theft of money or merchandise constitutes a cost or loss attributable to the respective fiscal year, with provision in Article 26 of the Corporations Income Tax Code." Judgment published in the Appendix to the Official Gazette of 9 October 2000, pp. 1739 to 1745. This understanding corresponds to the concept of inventories and the impact of positive and negative variations thereof. The disappearance of merchandise caused by exogenous causes, that is, external to the company's activity, should therefore be deemed a loss.

This understanding is the one that best adapts to the accounting treatment to be given to merchandise that disappeared illicitly, as well as to the constitutional principle of taxation of companies according to real profit.

As to the impossibility of insuring the risk of theft of stored merchandise, despite the fact that in the abstract nothing would prevent the contractual transfer of this risk to an insurance company, it is certain that in practice insurance companies do not accept it.

Although there is no legal obstacle to the execution of an insurance contract covering the risk of theft or loss of merchandise, in business practice insurance companies do not accept this risk.

Pursuant to Article 17, subsection 1, of the CIRC, "The taxable profit of collective entities and other entities mentioned in subparagraph a) of subsection 1 of Article 3 is constituted by the algebraic sum of the net result for the fiscal year and the positive and negative patrimonial variations verified in the same period and not reflected in that result, determined on the basis of accounting and eventually corrected pursuant to this code."

In Article 23 of the CIRC, are enumerated, by way of example, the situations that may form part of the group of negative elements to be considered for purposes of determining taxable profit, establishing as a defining criterion, that are considered as costs or losses "those that are demonstrably indispensable for the realization of income or gains subject to taxation or for the maintenance of the income-producing source."

Since it is unequivocal that the existence of merchandise is a positive value, because it is intended to perform transactions resulting in the inflow of positive values to the company's income, the material loss of merchandise, regardless of the manner, particularly through theft, cannot fail to be considered as a reality that was "indispensable for the realization of income or gains subject to taxation or for the maintenance of the income-producing source."

The conditions are thus met to consider the deductible the amount recorded as inventory shortfalls of the Petitioner in 2009 in the amount of EUR 353,345.25.

23.7. As to the request for condemnation of the Tax Authority to officially correct the assessments of A... and the Appellant, taking into account the corrections made regarding the procedure for loss carryforward in subsequent fiscal years:

The Appellant raises in these proceedings a tax act relating to 2009, the request transcribed above is too vague and insufficiently specified, being accompanied by no factual reasoning.

It was incumbent on the Petitioner to allege and prove the existence of losses in subsequent years, demonstrating what the concrete effects would be, duly founded, of a possible favorable decision regarding 2009. The Petitioner merely alleges that "its utilization for carryforward in subsequent fiscal years is prejudiced."

It makes no demonstration capable of justifying, in fact or in law, this assertion. There being in the file no elements that would allow the Tribunal to consider what repercussions the decision possibly would have in subsequent years, the claim fails.

23.8. As to Compensatory Interest

The Respondent contests this claim arguing, in summary, that:

• The Petitioner conformed itself to what, in the administrative petition, the Tax Authority decided on the subject, having expressly declared (cf. Article 13 of the hierarchical appeal petition) that it did not agree with the Tax Authority's decision except as to compensatory interest, in which the Appellant accepts the understanding conveyed."

• Pursuant to Article 43, subsection 1 of the General Tax Law: "compensatory interest is due when it is determined, in an administrative petition or judicial challenge, that there was error attributable to the services as a result of which the tax debt was paid in an amount greater than legally due," considering it, pursuant to subsection 2 of the same article, that there also exists "error attributable to the services in cases where, although the assessment is made on the basis of the taxpayer's declaration, the latter has followed, in completing it, general guidelines of the tax administration duly published."

The Petitioner filed, on 20.02.2012, an administrative petition relating to the self-assessment act for Corporate Income Tax for the fiscal year 2009, from which it is deduced that it is the Petitioner itself that believes there was an error regarding the Corporate Income Tax assessment act, not having deduced, through its own oversight, the amounts relating to the alleged inventory shortfalls.

Thus, the possibility of recognition of the right to compensatory interest is ruled out, pursuant to subsections 1 and 2 of Article 43 of the General Tax Law, since the error allegedly existing in the self-assessment has its origin in the Petitioner itself, and the Petitioner itself accepts, in the hierarchical appeal, the Respondent's decision regarding the claim for interest filed in the administrative petition.

II - Decision

For the reasons set forth, this Arbitral Tribunal decides:

(1) to judge the petition to annul the order dismissing the hierarchical appeal (RH), filed against the decision of the administrative petition seeking correction of the self-assessment of Corporate Income Tax relating to the fiscal year 2009, to be admissible, and to annul partially the tax assessment act in the part in which it did not consider deductible the amount of €353,345.25, recorded as inventory shortfalls (books) of the Petitioner in that year.

(2) to judge inadmissible the request for condemnation of the Tax Authority to officially correct the assessments of A... and the Petitioner, taking into account the corrections made regarding the procedure for loss carryforward in subsequent fiscal years.

(3) to judge admissible the petition to partially annul the Municipal Surcharge in the amount of €5,300.54 relating to the year 2009.

(4) to judge inadmissible the request for compensatory interest.

(5) Considering that both parties were partially unsuccessful in their arguments and claims, to condemn the Respondent in 2/3 of the costs and the Petitioner in 1/3.

Value: € 93,637.00 (ninety-three thousand, six hundred and thirty-seven euros)

Costs: € 2,754.00 (two thousand, seven hundred and fifty-four euros)

Lisbon, 24 June 2015

The Arbitrators,

Judge Manuel Luís Macaísta Malheiros
Dr. Maria Manuela do Nascimento Roseiro
Dr. Armindo Fernando Costa