Summary
Full Decision
TAX ARBITRATION JURISPRUDENCE
Case No. 615/2018-T
Decision Date: 2019-10-21
IRC
Value of Claim: € 19,709.32
Subject Matter: IRC – Autonomous Taxation – SIFIDE – Deduction from Tax Liability
ARBITRAL DECISION
Nuno Maldonado Sousa, arbitrator from the CAAD panel appointed by the Ethics Council of the Administrative Arbitration Centre to constitute the sole arbitrator tribunal, constituted on 18-02-2019, hereby issues the arbitral decision in the identified case as follows.
I. Report
- A..., S.A., collective person number ..., with registered office at Rua ..., no. ... A, ..., ...-... Lisbon, requested the constitution of an arbitral tribunal pursuant to Articles 2, no. 1, paragraph a), and 10 of the legal regime for arbitration in tax matters contained in Decree-Law no. 10/2011, of 20 January (RJAT), to examine the legality of the acts denying the administrative appeal and the prior act of self-assessment of IRC relating to the fiscal year 2015, insofar as it corresponds to the non-deduction from the IRC tax liability arising from autonomous taxation rates for tax incentives, namely the tax benefits calculated under the System of Tax Incentives for Business Research and Development – ("SIFIDE"). It declares that the amount it considers was unduly assessed resulted from the submission on 31 May 2016 of the IRC income statement Model 22 for the fiscal year 2015. It subsequently submitted, on 1 August 2016, an amended statement, having calculated an amount of autonomous taxation in IRC of € 19,709.32 €.
The AUTHORITY FOR TAX AND CUSTOMS is respondent in these proceedings.
- The request for constitution of the arbitral tribunal was accepted by the President of CAAD on 06-12-2018 and on that same day it was notified to the Authority for Tax and Customs (AT).
Pursuant to Article 6, no. 1 and Article 11, no. 1, paragraph b) of RJAT, the Ethics Council appointed as arbitrator of the arbitral tribunal with sole arbitrator the undersigned, who expressed acceptance of the appointment within the legal deadline. On 28-01-2019 the parties were notified of this appointment and did not manifest intention to refuse the arbitrator's appointment, as provided for in the rules of Article 11, no. 1, paragraphs a) and b) of RJAT and in the rules of Articles 6 and 7 of the Deontological Code. In accordance with the discipline contained in Article 11, no. 1, paragraph c), of RJAT, the arbitral tribunal was constituted on 18-02-2019. The deadline for rendering the decision was extended by two months on 26-08-2019.
- The Claimant petitions in these proceedings for the declaration of illegality of the self-assessment of IRC for the fiscal year 2015 with respect to the amount of autonomous taxation rates of € 19,709.32, with the consequent annulment, in that part, of the identified assessment. To support its claim it invoked that the tax liability resulting from autonomous taxation is itself income tax on collective persons and that for this reason nothing prevents the SIFIDE benefit from being deducted from its respective tax liability. It invokes the jurisprudence issued by CAAD, which it considers to be in the direction it espouses.
It concludes that the assessment produced by the respondent's computer system is illegal and should not prevail.
- The Authority for Tax and Customs sustained that the integration of autonomous taxation into the IRC Code conferred a dualistic nature on the assessment of the tax, embodied in separate calculations of their respective tax liabilities, because they follow different rules. It therefore considers that the calculations of the two natures are autonomous, with no requirement to deduct in the part of autonomous taxation the benefit that the law attributes for income tax, strictly speaking, and concludes for the dismissal of the claims.
II. Sanitation
The arbitral tribunal was regularly constituted, in subordination to the rules of Articles 2, no. 1, paragraph a), and 10, no. 1, of RJAT and is in office, in obedience to the rules in Article 21, no. 1 of the same diploma.
The request for arbitral pronouncement is timely, because it was submitted within the deadline provided for in Article 10, no. 1, paragraph a), of the aforementioned regime.
The parties are duly represented, have legal standing and capacity and possess legitimacy (Articles 4 and 10, no. 2, of the same regime and Article 1 of Ordinance no. 112-A/2011, of 22 March).
The case is not affected by nullities and no prior questions were raised.
III. Grounds
III (a) – Factual Matters
With relevance for the decision, the following facts are to be considered as established:
A. The Claimant submitted on 31 May 2016 the IRC income statement Model 22 for the fiscal year 2015, having submitted on 1 August 2016 an amended statement, having calculated an amount of autonomous taxation in IRC of € 19,709.32.
B. The amount of SIFIDE available for use at the end of fiscal year 2015 amounted to € 3,006,708.51, as certified by declarations from the SIFIDE Certification Commission.
C. The AT's computer system did not allow the Claimant to deduct from the autonomous taxation IRC tax liability the benefits granted through SIFIDE in fiscal year 2015.
D. The taxable profit of the Claimant was calculated through the submission of the Model 22 income statement.
E. The Claimant was not a debtor to the State or Social Security of taxes or contributions.
F. On 08-02-2017 the Claimant filed an administrative appeal against the IRC self-assessment for fiscal year 2015, made in the income statement mod. 22 submitted on 31-05-2016, which was replaced by a 2nd mod. 22 statement on 01-08-2016.
G. By letter dated 07-09-2018 the Claimant was notified of the denial of the administrative appeal filed.
Facts Considered Not Proven
No facts were considered as not proven that have actual relevance to the proper determination of the case.
Grounds for the Factual Matters Proven and Not Proven
The tribunal does not have to pronounce on all details of the factual matters alleged by the parties; it is its duty to select the facts that matter for the decision and discriminate the factual matters it considers proven and declare those it considers not proven (cf. Article 123, no. 2, of CPPT and Article 607, no. 3 of CPC, applicable by virtue of Article 29, no. 1, paragraphs a) and e), of RJAT).
Thus, the relevant facts for the judgment of the case are selected and conformed according to their legal relevance, which is established in attention to the various solutions for the subject matter of the dispute in applicable law (Article 596, no. 1 of CPC, applicable pursuant to Article 29, no. 1, paragraph e), of RJAT).
Thus, having regard to the positions assumed by the parties, in light of Article 110, nos. 6 and 7 of the Code of Tax Procedure and Process (CPPT) and the documentary evidence, the facts listed above were considered proven, with relevance for the decision.
Allegations made by the parties that were merely conclusive in nature were neither considered proven nor not proven, even though they were presented as facts, because they are incapable of proof, and their correctness can only be assessed in contrast with the grounds of the decision on the legal matters, contained in the following section.
III (b) – The Law
The Object of the Dispute
It is believed that the Claimant posed with clarity the question that matters to resolve and which is ultimately the object of the dispute, namely whether or not the Claimant has the right to proceed with the deduction from the IRC tax liability produced by the application of autonomous taxation rates of the benefit it enjoys under SIFIDE.
The Applicable Legal Regime
The two theses in confrontation can be summarized in the following lines. The Claimant argues that IRC is a single tax and if it is granted the right to deduct the SIFIDE benefit from its tax liability, then there is no basis for distinction; the benefit should be deducted from all IRC assessed. For its part, AT contends that in determining IRC there is not a single assessment, but rather two distinct calculations that, although both are processed pursuant to Article 90, no. 1, paragraph a) of CIRC and in the statements referred to in Articles 120 and 122 of the same code, are performed on the basis of different parameters, since each materializes in the application of its own rates, provided for in Articles 87 or 88 of CIRC, to the respective taxable bases determined equally in accordance with specific rules; under this dual regime, SIFIDE should not be deducted from the amounts of autonomous taxation tax liabilities.
The question has been successively discussed in cases that have been conducted in CAAD, with decisions that have pronounced in one and another direction. It is believed that there have been weighty arguments sustaining both orientations and it is certainly not the greater or lesser number of decisions supporting each thesis that will make either of them have more legal rationality than the other. The analysis that can be made of these deliberations will lead to the conclusion of the non-existence of a dominant tendency since, considering only the decided and published rulings, in 2019 there were eight decisions in the sense of non-deductibility of the SIFIDE benefit from the IRC tax liability and four rulings in the sense of deductibility, being that in their almost entirety and in both groups one of the arbitrators voted against the orientation that prevailed.
There is, therefore, a need to take a position, in light of the facts brought and the applicable law.
It does not appear that the question can be decided by questioning whether autonomous taxation is or is not part of IRC. It seems evident that autonomous taxation is part of the Income Tax on Collective Persons, but it is not apparent that this assertion should necessarily lead to the tax assessed by application of the respective rates to the clusters of items to which they apply having the same treatment as the tax liability obtained through standard assessment (adjusted income less adjusted expenses times rate).
It is believed that the discipline of the tax calculated through autonomous taxation rates is that which governs the tax in general, except in situations where its application conflicts with the discipline specified for "autonomous taxation". The general IRC regime is thus applicable to it, namely what applies to deadlines for submission of statements, competence for assessment, creditor privileges, means of appeal, etc. But beyond the application of general rules, it must be verified in concrete terms whether the application of the general regime does not conflict with the special rules provided for autonomous taxation. We believe that this is precisely the situation in the case at hand.
Let us briefly examine the genesis of the general regime and the specific regime of autonomous taxation to try to identify the points of conflict.
As is well known, the income tax on collective persons arose by objectively affecting taxable profit, which corresponded to the difference between net assets at the end and at the beginning of the tax period (see §5 of the preamble of CIRC). To determine this taxable profit, recourse to accounting was privileged, whose techniques and concepts were considered suitable means for this purpose. Thus, in the original conceptual structure of IRC, the calculation of taxable profit takes as its starting point the result of the exercise obtained through the technical rules of accounting, subsequently introducing some corrections of positive or negative import, so that this final result would correspond to taxable profit, i.e. to the actual income it was intended to tax (see §10 of the preamble of CIRC). It is this line of guidance that has expression in Article 17-1 of CIRC which states that taxable profit "is constituted by the algebraic sum of the net result of the exercise and the positive and negative changes in assets verified in the same period and not reflected in that result, determined on the basis of accounting and possibly corrected under the terms of this Code". These corrections "to be deducted" or "to be added" to the net result of the exercise determined by the accounting method, provided for in CIRC, were of diverse nature. Among these corrections were not found the "autonomous taxation".
The tax was then calculated by applying the general rate of 36.5% to the taxable profit of entities with effective management or permanent establishment in Portuguese territory (Article 69 CIRC.1989). The assessment was made, in terms analogous to those in force today, through the following steps (Articles 71-1 and 2 CIRC.1989): (i) calculation of the taxable base in the annual statement, taking as its starting point the accounting result of the exercise, through the corrections "to be deducted" and "to be added"; (ii) calculation of the tax liability by application of the applicable rates; (iii) deductions corresponding to the economic double taxation of distributed profits and international double taxation and relating to municipal tax liability, relating to tax benefits and relating to withholding taxes. Of course, the treatment to be given to "autonomous taxation" was neither regulated nor could be regulated, as it did not form part of the system, which was conceived in this simple structure: take as a starting point the accounting result (Article 17-1 of CIRC.1989), correct it so as to reflect the income one intends to tax through rules qualitatively similar to those that applied in the official accounting plan then in force (Article 18 et seq. CIRC.1989), apply to it the general rate (Article 69-1 CIRC.1989) and to the product thus obtained make the deductions of taxation that in some way had already been borne or would need to be borne through another tax system (Article 71-2 CIRC.1989).
The introduction in the complex of income taxes of the application of autonomous taxation rates was done through Decree-Law no. 192/90 of 9 June (DL 192/90), which stipulated that undisclosed or undocumented expenses would henceforth be subject to autonomous taxation in IRS and IRC, as appropriate, at a rate of 10%" (Article 4 of the Decree-Law cited). To understand what constituted this new rate one must note some peculiarities of the amendment: (i) Article 25 of Law no. 101/89 of 29 December, which contains the respective legislative amendment, although it bears the heading Income Tax on Collective Persons (IRC) and in its no. 1 provides for amendments to CIRC, conceived from the start this new figure in an extraordinary way relative to the structure provided for in CIRC, opting not to consider it ab initio as an amendment to the Code; (ii) although DL 192/90 justifies in its preamble the amendments it introduces to CIRC, it presents no grounds whatsoever for the new discipline that it regulates in its Article 4, to be in force independently of the Code; (iii) the burden of undisclosed or undocumented expenses that would henceforth be subject to autonomous taxation in IRC at a rate of 10%, did not prejudice the treatment that CIRC imposed for this type of expenses in its Article 41-1-h).
All elements indicate that the introduction of the method of taxing expenses in IRC initially constituted an extraordinary measure, outside the conceptual structure of IRC, created to honor the principle of taxation on actual income, rebalanced through the corrections regulated in CIRC. The said autonomy of this rate thus appears with great intensity; although it is undeniably considered that its product is income tax on collective persons, the income is no longer what is directly taxed (as IRC regulated) but rather expenses (even though they may not be costs or outlays). The intent to combat the accounting of unrevealed expenses appears here clearly evident, in contrast with the specific objectives of CIRC.
The regime instituted by DL 192/90 was successively updated in the laws approving State Budgets in the chapter dealing with direct taxes, under the heading "undisclosed or undocumented expenses", but no longer in subordination to IRC, which is the subject of treatment in independent articles. These updates consisted of the progressive increase in the rate at which those expenses were subject to autonomous taxation. The values assumed by the rate were 25% in the period 1995-1996 (Article 29 of Law no. 39-B/94 of 27 September), 30% in 1997-1998 (Article 31 of Law no. 52-C/96 of 27 December) and 32% in 1999 and 2000 (Article 31 of Law no. 87-B/98, of 31 December for 32%). This first regime of "autonomous taxation" ended up being repealed on 01-01-2001 (Articles 7-11 and 21-2 of Law no. 30-G/2000 of 29 December).
As a first approach to the stated objective – determine what are the points of conflict that result from the application of the general regime of IRC to the discipline of "autonomous taxation" – it is believed that the general regime of IRC intended to tax the actual income of collective persons; the regime of "autonomous taxation" in the period between 1990 and 2000 intended to prevent undisclosed and undocumented expenses. The system constituted by the rules of CIRC must be directed, prima facie, toward the stated purpose. Now since "autonomous taxation" is wholly unrelated to the pursuit of the conceptual objective of CIRC, it is necessary to conclude that there will be situations where the general rules will not be suitable to regulate the situation, because they pursue a different purpose. It is precisely in these situations where the pre-existing rules of CIRC contribute to the determination of actual income that their inadequacy to govern "autonomous taxation" will be verified, which, it is repeated, pursued totally different purposes. It is in these cases of dissonance that it is considered there will be such conflicts that matter to resolve.
These conflicts are resolved through legal interpretation. Ultimately, there must be resolution of the apparent conflict when the legislative thought underlying the norm of the general regime of the tax on one hand and the norm of the special regime that regulates autonomous taxation on the other hand are not reconcilable, i.e. its application will achieve a purpose not pursued by the norm in question.
This conflict in the purposes to be achieved by each of the norms is evident when so-called "autonomous taxation" was introduced into the Portuguese tax system. In its genesis, the taxation of undisclosed and undocumented expenses arises with complete autonomy vis-à-vis IRC since it is regulated outside CIRC and will use only its formal rules that do not prejudice the ratio legis of the rule of Article 4 of DL 192/90, which was the combat against such type of expenses. It seems clear in light of these commands that in the period 1990-2000 it was not conceivable to use potential tax credits to satisfy the obligation of tax assessed under this heading, under penalty of perverting the intent of the law.
In a second stage, "autonomous taxation" was introduced into the systematic framework of CIRC in the reform of income taxation in 2001. This reform was carried out through Law no. 30-G/2000 of 29 December, which by its Article 5 introduced amendments to IRC, especially at the level of exemptions for public collective persons (Article 8), of tax-deductible provisions (Article 32), of costs with social utility initiatives (Article 38), of the enumeration of non-deductible expenses for tax purposes (Article 41), of the concept of losses and gains and their reinvestment (Articles 42 and 44), of the elimination of economic double taxation of distributed profits (Article 45), of the deduction of tax losses (Article 46), of transfer pricing (Article 57) of the regime applicable to non-residents subject to a privileged tax regime (Articles 57-A to 57-C), to the taxation of groups of companies (Articles 59 to 60), of the concept of permanent establishment (Article 4-A) and of the simplified regime for determination of taxable profit (Article 46-A) and of various declarative obligations, without introducing substantive changes to the philosophy of IRC. In its general line of guidance, post-reform CIRC maintained the principles that are at its genesis; starting from the accounting result and correcting it according to the established rules, now improved by 12 years of experience, to achieve taxable profit.
In what is being examined, the CIRC resulting from the 2001 reform now contained its Article 69-A, with the heading "Autonomous Taxation Rate", where it was regulated that undisclosed or undocumented expenses (no. 1) and representation expenses and costs related to light passenger vehicles, pleasure boats, tourist aircraft, motorcycles and mopeds (no. 2), would henceforth be subject to autonomous taxation at the rates, respectively, of 50% and 20%. Relative to the past regime of DL 192/90 there is only to note (i) that the burden of the "autonomous taxation rate" now also encompasses representation expenses and costs related to tourist vehicles; (ii) that the value of the rate was updated; (iii) that the rules relating to procedure and form of assessment did not undergo any adaptation to the introduction of this figure into CIRC, although they were altered in connection with the simplified regime for determination of taxable profit (Article 71). It is not apparent that the reform of CIRC conducted in 2000-2001 introduced any significant change in the functioning of the mechanisms of IRC and the relationship of its rules with autonomous taxation. There was only introduced the mechanism to combat expenses considered undesirable that already appeared in extraordinary legislation, the spectrum of application was slightly expanded, but the assessment procedure was not adapted in any way. It is therefore believed that the characterization of the regime already in force was maintained, continuing to require interpretation of the rules so as to prevent effects contrary to the ratio legis.
The successive amendments to this article did not affect in any way the balance of the system, which has been maintained to the present day.
It is noted that both doctrine and jurisprudence have clearly stated the scope of autonomous taxation, in its formulation contained in CIRC. SALDANHA SANCHES stated that through the method of autonomous taxation it is sought to prevent the transfer to the business sphere of expenses that have an underlying remunerative intent, so as to improve the tax treatment of income in the personal sphere, or to prevent costs that do not have a business cause from being accounted for. For its part, in the ruling of the Constitutional Court no. 617/2012 it is stated with regard to "autonomous taxation" that:
With this type of taxation it was intended, on the one hand, to encourage taxpayers subject to it to reduce as much as possible the expenses that negatively affect tax revenue and, on the other hand, to prevent, through these expenses, companies from proceeding with disguised distribution of profits, especially dividends which would thus only be subject to IRC as company profits, as well as to combat fraud and tax evasion that such expenses occasion not only in relation to IRS or IRC, but also in relation to the corresponding contributions, both of employers and workers, to social security.
But more than affirming the ratio of the imposition of autonomous taxation rates, the grounds of the cited ruling express well the way in which its calculation is understood, by comparison with the assessment of income tax in accordance with the general rate:
In contrast to what happens in the taxation of income under IRS and IRC, in which the set of income earned in a given year is taxed (which implies that only at the end of the same can the tax rate be calculated, as well as the bracket into which the taxpayer falls), in this case each expense incurred is taxed, considered in itself, and subject to a given rate, autonomous taxation being calculated independently of the IRC that is owed in each fiscal year, because it is not directly related to obtaining a positive result, and is therefore subject to taxation.
The mentioned ruling further expresses clearly the instantaneous manner in which the taxable event occurs and the non-existence of a periodic, lasting or successive character in its formation. Therefore it thus characterizes the assessment operation:
This assessment operation translates merely into the aggregation, for purposes of collection, of the set of operations subject to this autonomous taxation, whose rate is applied to each expense, with no influence of the volume of expenses incurred in the determination of the rate.
Through the historical analysis, systematic framework and doctrinal and jurisprudential positions, it is considered that the ratio legis of the norms that make autonomously taxed tax apply is perfectly distinct from the objectives that animate the general structure of CIRC. Consequently, the application of the general regime of deductions from the tax liability cannot constitute an obstacle to the objective underlying autonomous taxation being achieved, whenever the provision of the rule – existence of certain classes of expenses or occurrence of certain circumstances – is fulfilled. It is judged that interpreting the rules relating to IRC assessment contrary to the objectives of the institute of autonomous taxation contradicts the fundamental principle of interpretation in accordance with the ratio legis, privileges the application of the general rule (Article 90 CIRC) over the special rule (Articles 88, nos. 1, 3, 7, 8, 9, 11, 13 CIRC) and grants prevalence to instrumental rules (of assessment) relative to substantive rules (of incidence). It is therefore understood that the assessment of autonomous taxation is done autonomously, applying to each individualized expense the rate determined for the class into which that expense falls. In this way the calculation of autonomous taxation is not confused with the IRC of the fiscal year, which is calculated taking into account the already stated objective: to tax the actual adjusted income, including in these corrections the specific benefits that the law determines. The calculation of the tax is autonomous and everything that follows is mere documentary organization, which has to do with the design of the printed forms or the computer applications that support the operations, and which obviously do not have sufficient normative nature to determine what the assessment model in force is.
This doctrine, applied to the case at hand, recognizes that the self-assessment parameterized in the Respondent's system results from the correct application of the law and does not merit criticism, as it produced the assessment that the applicable law advocates, in Article 88 of CIRC.
Also not meriting criticism is the decision that denied the administrative appeal, based on an understanding that is identified with that which has been expounded.
Beyond the declaration of illegality of the decision and the illegality of the assessment itself, the Claimant petitions, subsidiarily, the declaration of illegality of the assessment of autonomous taxation due to absence of legal basis for its effectuation. The Claimant essentially intends that there is no rule of incidence that permits taxation of the items that fall within the concept of autonomous taxation, which it disclosed in its Model 22 statement.
It has already become clear that the understanding that is considered adequate for treatment of autonomous taxation. Certain realities, most of them expenses, provided for in the rules of Article 88 of CIRC must be subject to taxation. That is the rule of incidence or, if you prefer, it is the "legal basis for the effectuation" of the assessment. The taxation is done on "each expense incurred, considered in itself, and subject to a given rate, autonomous taxation being calculated independently of the IRC that is owed in each fiscal year". For its part, the assessment proper "translates merely into the aggregation, for purposes of collection, of the set of operations subject to this autonomous taxation, whose rate is applied to each expense".
The subsidiary claim formulated by the Claimant does not have support and will therefore be dismissed.
The dismissal of the claims formulated and examined prejudices the request for indemnity interest, due to lack of requirements for this purpose, making its judgment devoid of sense.
V – Decision
Based on the foregoing, the Arbitral Tribunal decides:
a) To judge as wholly without merit the main claims and the subsidiary claim formulated in this instance and to absolve the respondent of those claims.
b) To condemn the Claimant to pay the costs of this proceeding in the amount of € 1,224.00.
VI - Value of the Proceeding
In the present proceeding the Claimant declared the value of the action as 19,709.32 €, which is considered adequate and is fixed, pursuant to Article 97-A, no. 1, paragraph a) of CPPT, applicable by virtue of Article 29, no. 1, paragraphs a) and b) of RJAT and Article 3, no. 2, of the Regulation of Costs in Tax Arbitration Proceedings.
VII - Costs
The value of the arbitration fee is fixed at € 1,224.00, pursuant to Table I of the Regulation of Costs in Tax Arbitration Proceedings, to be paid by the Claimant, pursuant to Articles 12, no. 2, and 22, no. 4, both of RJAT, and Article 4, no. 4, of the said Regulation.
Let it be notified.
Lisbon, 21 October 2019
The Arbitrator,
(Nuno Maldonado Sousa)
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