Autonomous Taxation on Vehicle Expenses Under IRC: Rebutting Legal Presumptions in CAAD Case 628/2014-T

ENGLISH TRANSLATION

ARBITRAL DECISION

The Arbitrators Jorge Lopes de Sousa (Presiding Arbitrator), José Pedro Carvalho and Manuela Roseiro, convened at the Administrative Arbitration Centre to form an Arbitral Tribunal hereby issue the following

ARBITRAL DECISION

I – REPORT

On 21 August 2014, A..., S.A., (hereinafter abbreviated as "A..." or "Claimant"), with legal entity number …, with registered office at Rua …, Lisbon, registered in the Commercial Registry of Lisbon, filed a request for constitution of an arbitral tribunal, pursuant to the combined provisions of Articles 2 and 10 of Decree-Law No. 10/2011, of 20 January, which approved the Legal Framework for Arbitration in Tax Matters, as amended by Article 228 of Law No. 66-B/2012, of 31 December (hereinafter, abbreviated as RJAT), seeking a declaration of illegality of the acts dismissing the gracious complaint and, partially, of self-assessment of Corporate Income Tax ("IRC") for the taxation year 2009, in the part corresponding to autonomous taxation applied to vehicle expenses, subject to that action.

The Claimant seeks a declaration of partial illegality of the IRC self-assessment tax act for the taxation year 2009, in the part corresponding to autonomous taxation applied to vehicle expenses, arguing, in summary, that a taxpayer may, in accordance with Articles 73 and 74 of the General Tax Law, rebut the presumptions underlying the rules that determine autonomous taxation of certain expenses, and that, in the present case, the Claimant succeeded in doing so.

On 25 August, the request for constitution of the arbitral tribunal was accepted and automatically notified to the Tax Authority (AT).

The Claimant appointed an arbitrator, indicating the present Rapporteur, in accordance with Article 11(2) of RJAT. In accordance with paragraph 3 of the same article, the AT appointed Ms. Dr. Manuela Roseiro as arbitrator. By agreement, the arbitrators appointed by the parties designated Mr. Counsellor Dr. Jorge Lopes de Sousa to preside over this Arbitral Tribunal, who accepted the appointment within the applicable deadline.

On 14 October 2014, the parties were notified of these appointments, in accordance with Article 11(7) of RJAT, and raised no objections or requests.

In compliance with the provisions of Article 11(8) of RJAT, the collective Arbitral Tribunal was constituted on 29 October 2014.

On 27 November 2014, the Respondent, within the legal deadline, presented its response, reporting that the decision initially issued in the context of the gracious complaint proceedings was revoked on 30/09/2014, and the Claimant was notified by official letter with registered mail and receipt confirmation on 03/10/2014. Furthermore, the Respondent defended itself by opposition, arguing, in summary, that it does not "appear to it that the use of motorcycles and motorbikes in the delivery service falls within the scope of the exclusion provided for in Article 88, paragraph 6, subparagraph a) of the CIRC, since such vehicles are not allocated to the operation of public transport services, nor are they intended to be hired in the exercise of the Claimant's normal activity" and that "it appears clear to us that the Tax Authority's interpretation is indeed the one that effectively pursues the objectives intended by the law, avoiding in particular abuses such as those that will occur should the Claimant's interpretation prevail."

By decision of 27/11/2014, it was decided:

"Since the Parties do not request the production of any evidence, no purpose is served in holding the meeting provided for in Article 18 of RJAT.

Thus, in light of the principles of the Arbitral Tribunal's autonomy in conducting the proceedings, expedition, and procedural simplification and informality (Articles 19(2) and 29(2) of RJAT), the meeting provided for in Article 18 is dispensed with and it is determined that the proceedings continue with optional written submissions for a period of 10 days, beginning with notification of this decision for the Claimant's submissions deadline and with notification of the presentation of the Claimant's submissions or with the expiration of the deadline for their presentation, without having been presented, the deadline for the AT's submissions."

26 January 2015 was also set as the date for issuing the arbitral decision.

Subsequently, the Claimant and the Respondent presented, in succession, their respective written submissions, in which, in addition to maintaining and developing the positions previously assumed and defended in their pleadings, the Claimant declared that although "the foundational acts of the decision in the gracious complaint proceedings under challenge" had been revoked, it "maintains interest in a ruling, on the terms and with the grounds originally formulated in the Initial Request."

By decision of 23/01/2015, the deadline for submission of the final decision in the present case was extended until 05/02/2015.

The Arbitral Tribunal is materially competent and is regularly constituted, in accordance with Articles 2(1)(a), 5 and 6(1) of RJAT.

The parties have legal personality and capacity, are legitimate and are legally represented, in accordance with Articles 4 and 10 of RJAT and Article 1 of Administrative Order No. 112-A/2011, of 22 March.

The proceedings are not affected by any nullities.

Thus, there is no obstacle to examining the merits of the case.

Having considered all matters, it is necessary to issue

II. DECISION

A. FACTS

A.1. Facts established as proven

1. Within the scope of Service Order No. OI2013..., the DSIT conducted a partial scope external tax inspection of the present Claimant, concerning IRC for the taxation period 2009.

2. As a result of this inspection action, the Claimant was notified, on 17 July 2013, of the Draft Tax Inspection Conclusions ("Draft Conclusions"), which proposed various corrections, as described in the table below:

3. On 12 August 2013, the Claimant proceeded to regularize the amount of unpaid tax, which totaled €49,021.74 (an amount that already includes compensatory interest).

4. The Claimant did not exercise the right to prior hearing on the Draft Conclusions, and, having proceeded with voluntary regularization of the proposed corrections, was notified on 23 August 2013 of the results of the inspection action, which reflected no additional corrections.

5. The Claimant did not accept the correction made by DSIT concerning autonomous taxation applied to vehicle expenses, in the amount of €45,262.07, and therefore on 10 December 2013 filed a gracious complaint against the IRC self-assessment act for 2009, in the corresponding part.

6. The arguments presented by the Claimant were not accepted by the Tax Authority, and the Claimant was notified, on 1 April 2014, of the draft dismissal of the gracious complaint and exercised its right to prior hearing on 16 April 2014.

7. The arguments of the Claimant were not accepted by the Tax Inspection Services, and therefore on 14 May 2014 the Claimant was notified of the final decision dismissing the gracious complaint filed, in which the Administrative Justice Division ("DJA") upheld the corrections made by the Tax Inspection Services.

8. The Claimant's business activity is the manufacture, transformation, distribution and commercialization of food products.

9. For the development of its food product commercialization and distribution activity, the Claimant needs to make vehicles available to its employees for delivering its products to customers.

10. In the pursuit of its food product distribution service activity, the Claimant owns various motorcycles that are properly registered in its accounting as tangible assets and to which various expenses are associated, namely depreciation, insurance, maintenance and conservation, and fuel.

11. The correction to the tax payable in the total amount of €45,262.07, indicated in the table in point 3 above, relates to expenses incurred by the Claimant in 2009 with the motorcycles referred to in the preceding point.

12. The aforementioned motorcycles are solely used for the delivery of food items and only during A...'s operating hours, and employees are not permitted to use them for personal purposes.

13. The Claimant's internal Procedures Manual for motorcycle use provides that employee use of motorcycles is limited, exclusively and solely, to the exercise of their activity, expressly stating that the motorcycles "are intended for home delivery."

14. The same Manual provides that it is the responsibility of each employee to whom a motorcycle has been assigned, at the beginning and end of each work period, to collect and park it in the garage or parking areas assigned to the respective Store, and must also return the motorcycle keys and garage/parking keys to the Store management team.

15. It is also provided in the Procedures Manual that any abusive use of motorcycles (namely for purposes unrelated to the Claimant's activity) constitutes a disciplinary violation.

16. The use of commercial vehicles would prove inadequate for the home delivery activity, since it would hamper employee circulation during deliveries, when compared with the use of motorcycles, which, due to ease of circulation, allow a greater number of deliveries in less time, increasing invoicing.

17. Analyzing the Claimant's monthly invoicing in 2009, according to the Claimant's accounting, the invoicing from home deliveries has the weight in invoicing shown in the table below:

[TABLE: Monthly breakdown showing Local sales, Home delivery sales, Total sales, and Weight of home delivery in monthly invoicing, with data for all 12 months of 2009, totaling 11,521,684.41 euros in local sales, 16,405,199.26 euros in home delivery sales, and 27,926,883.67 euros total, with home delivery representing 59% of total invoicing]

1. According to the Claimant's accounting, invoicing at points of sale in 2009 was as set forth in the table below:

2. The Claimant owns its own and exclusive workshops intended for the repair and maintenance of A...'s motorcycles, certified and approved by a recognized motorcycle brand (Honda), benefiting from the same conditions that any brand concessionaire enjoys.

3. In accordance with the Claimant's commercial policy, there is no amount to be added to the meal value, in the event the same is delivered to the home, and the amount corresponding to the delivery service is not expressly itemized in the invoices it issues.

A.2. Facts established as not proven

For purposes of the decision, there are no facts that should be considered as not proven.

A.3. Substantiation of proven and not proven facts

Regarding the facts, the Tribunal need not pronounce on everything alleged by the parties; rather, it has the duty to select the facts that matter for the decision and distinguish proven from not proven matters (see Article 123(2) of CPPT and Article 607(3) of CPC, applicable by virtue of Article 29(1)(a) and (e) of RJAT).

Thus, the facts relevant to adjudication of the case are selected and delimited in light of their legal relevance, which is established in view of the various plausible solutions to the legal question(s) involved (see former Article 511(1) of CPC, corresponding to current Article 596, applicable by virtue of Article 29(1)(e) of RJAT).

Thus, having regard to the positions assumed by the parties, the documentary evidence and the factual report attached to the case, the above-listed facts were considered proven, with relevance to the decision, and were moreover not contested by the parties.

In particular, in assessing the proof of the facts referred to in points 9, 10, 16 and 19, particular consideration was given to the lack of contestation, assessed in accordance with Article 110(7) of CPPT, in light of common experience, including the public notoriety of the Claimant's activity and the manner in which it is conducted.

Beyond the above, in assessing the proof of the fact referred to in point 12, consideration was also given to the content of the Claimant's internal Procedures Manual for motorcycle use, which, although internal, was not questioned as to its authenticity and application, and it is therefore normal that the use of motorcycles occur in accordance with the terms prescribed therein.

B. LAW

The questions that arise in the present case, as indeed were expressly formulated by the Claimant, are whether, first, the rule underlying the autonomous taxation that it contests has a presumption underlying it, whether, if so, it is legally possible to rebut such presumption, and finally, whether, in the present case, the Claimant succeeded in doing so.

Let us consider this then.

The autonomous taxation in question in the present case applied to the Claimant's expenses, with depreciation, insurance, maintenance and conservation, and fuel, relating to motorcycles.

In this regard, Article 81 of the CIRC in effect at the time of the tax event in question in the case (current Article 88) provided, as relevant here, that:

"3 - The following are taxed autonomously, excluding vehicles powered exclusively by electric energy:

a) At the rate of 10%, deductible expenses relating to representation expenses and those related to light passenger vehicles or mixed-use vehicles, motorcycles or motorbikes, incurred or borne by taxable persons not subject to exemption and engaged primarily in commercial, industrial or agricultural activity;

(...)

5 - Expenses related to light passenger vehicles, motorcycles and motorbikes shall be considered to include, in particular, depreciation allowances, rent or leases, insurance, maintenance and conservation expenses, fuel, and taxes levied on their ownership or use.

6 - The provisions of paragraph 3 exclude expenses related to light passenger vehicles, motorcycles and motorbikes, allocated to the operation of public transport services, intended to be hired in the exercise of the taxpayer's normal activity, as well as depreciation allowances related to vehicles with respect to which the agreement provided for in subparagraph b), paragraph 3, Article 2 of the Personal Income Tax Code has been concluded."

Before proceeding further, it should be stated that, notwithstanding the parties having spent part of their submissions on the matter, paragraph 6 as just transcribed is not at issue in the case.

Indeed, it is not verified, nor does the Claimant even allege it, that the vehicles – motorcycles – in question in the case are intended to be hired in the exercise of the Claimant's normal activity.

Therefore, from the outset, for the discussion to be undertaken, both the Doctrinal Note relating to the process …/2005 and the circumstances that the Claimant does not add the value of transport to the value invoiced to its residential customers, nor include it in the invoice, are irrelevant.

Thus, in summary, the matter at hand is to determine the ratio legis of the provision of Article 81(3)(a) transcribed above, verify whether it is based on a presumption and, if so, whether it was or was not rebutted in the present case.

When discussing autonomous taxation, as is the case, it is appropriate to note from the outset that this concerns a set of disparate situations, which will include at least three distinct types, namely:

• Autonomous taxation of certain income (e.g., paragraphs 3, 5 and 6 of the CIRS);
• Autonomous taxation of certain deductible expenses (e.g., paragraphs 3 and 4 of Article 88 of the CIRC);
• Autonomous taxation of other expenses regardless of their deductibility (e.g., Articles 1 and 2 of Article 88 of the CIRC).

This distinction is important because it is understood that, given the disparity and heterogeneity of situations subject to autonomous taxation, it would be not only unnecessary but even counterproductive to attempt to synthesize and seek a common legal nature shared by all those situations.

The nature of the specific autonomous taxation in question in the case has been the subject of extensive discussion in recent doctrine and jurisprudence.

A strong current has viewed such taxation as a tax on expenditure, which would tax certain types of expenses, in a manner completely detached from income, such that some even argue that it constitutes its own tax, which only incidentally would be integrated into the IRS and IRC codes.

Nonetheless, it has obtained recurring acceptance in the jurisprudence of the CAAD that autonomous taxation on deductible expenses, such as those at issue in the present case, is still integrated in the tax regime regulated by the codes in which they are included, aiming, albeit in a convoluted manner, at the income taxed by those codes.

Naturally, those who consider the autonomous taxation at issue as a tax directly levied on expenditure would conclude that the rule under interpretation, Article 81(3)(a) of the CIRC in effect at the time of the tax event, does not include any presumption, directly formulating the object of its application – the expenditure.

It is not considered, however, that this is the most correct understanding; rather, it is understood that the autonomous taxation in question could be characterized as a "hybrid" tax, levied on the income of individuals and legal entities, and not on consumption or expenditure, as they do not present the principal characteristics of this form of taxation, nor do they apply to assets, and they fall within the issue of income taxation regarding which the legislator chose to act at two levels (separately or simultaneously): not accepting the deductibility of certain expenses, in whole or in part, and/or taxing them autonomously.

In this framework, the autonomous taxation in question in the case will form part, among other things, of the array of specific anti-abuse rules, and the similarity is apparent, for example, with the rule of current Article 65(1) of the CIRC, which provides that:

"The following are not deductible for purposes of determining taxable profit: amounts paid or owed, in any capacity, to individuals or legal entities resident outside Portuguese territory and subject therein to a clearly more favorable tax regime, unless the taxpayer can prove that such expenses correspond to operations actually performed and do not have an abnormal character or an excessive amount."

In other words, in the cases to which the autonomous taxation borne by the Claimant in the case applies, the legislator could have chosen a regime similar to that established in the transcribed rule, purely and simply prohibiting the respective deductibility, or conditioning it on the same terms of that rule, or other terms it deemed appropriate. Instead, the legislator chose not to go that far, leaving the legal regime of IRC on the expenses in question at a level below that, by allowing the deductibility of the expenses in question, against the immediate payment of a portion of the taxable profit that will be, presently or in the future, affected by such deduction.

Nonetheless, the similarity of the regimes, as well as the concerns and purposes underlying them, will still be undeniable.

What has just been said thus rests on the recognition that autonomous taxation, including that in question in the case, owes a great deal of its raison d'être to the fact that it would be, objectively, impractical to tax fully on a rigorous basis, in the context of personal income tax, among the potential beneficiaries of the expenses subject to such taxation (which would be equivalent to a taxation of fringe benefits as conceived and applied in Australia and New Zealand). It is thus not overlooked that autonomous taxation of the type that concerns us here has a dimension directly aimed at the income of individuals. Just as it has, moreover, a sanctionary dimension – in the sense of imposing unfavorable treatment – with respect to the type of expenses that trigger it. However, these dimensions do not empty, nor, much less, prevent, another dimension, equally (if not more) relevant, inextricably linked to income, in the case of legal entities.

It is thus understood that, through the impositions in question, there is also intended, at least to the same extent, to regulate the use by enterprises of expenses that may be necessary, in part, to the pursuit of normal activity, but which – based on a judgment of normality – will also be for the benefit of individuals who ultimately enjoy them in a private rather than professional capacity. However, since the Tax Administration has no "measuring stick" to make such a separation, the legislator has been choosing, for quite some time, to introduce into the IRC Code this component that was already considered, objectively, at the time of the case, an imposition, at minimum, similar to the IRC, even if such a provision may be questioned (as well as the current wording, regarding the inclusion in the IRC, of autonomous taxation in Article 23-A of the IRC Code).

There are thus recognized here those characteristics that doctrine has been pointing to autonomous taxation in question for some years now, such as:

a) autonomous taxation only makes sense because costs/expenses serve as negative components of the taxable profit of the IRC. This is what motivates IRC taxpayers to report as high a value as possible of such expenses to reduce the IRC taxable base, collection, and consequently the tax to pay;

b) it is intended to discourage such expenses in taxpayers that show negative results but which, regardless, continue to evidence consumption structures barely or not at all compatible with the financial health of their enterprises;

c) it is, in more general theory, a matter of structuring the tax system so that it reveals a certain balance in view of a better distribution of the effective tax burden among taxpayers and types of income;

d) certain expenses are considered unfavorably in which, admittedly, it is not easy to determine the exact measure of the component that corresponds to private consumption, and with respect to which the general practice of abuse in their reporting is known.

For better or worse, the autonomous taxation in question should thus be understood as a means of preventing certain abusive actions that the "normal" functioning of the taxation system was unable to prevent, and other means of combating such actions, including more burdensome means for the taxpayer, were possible.

This anti-abuse character of the autonomous taxation in question will be not only coherent with its "anti-systemic" nature (as happens with all rules of this kind), but with a presumptive nature, pointed out both by Professor Saldanha Sanches and by jurisprudence, which often cites it.

From the perspective just set forth, the autonomous taxation in question will thus have materially underlying a presumption of "partial" entrepreneurial character of the expenses on which it applies, based on the above-noted circumstance that such expenses are situated in a gray area that separates what is entrepreneurial, productive expenditure from what is private, consumption expenditure, and notably, in many cases, the expenditure will in reality have a dual nature (part entrepreneurial, part private).

Confronted with such difficulty, the legislator, rather than simply excluding its deductibility, or reversing the burden of proof of the entrepreneurial character of the expenses in question (imposing, for example, demonstration that "they do not have an abnormal character or an excessive amount," as it does in Articles 65(1) and 88(8) of the CIRC), chose to establish the regime currently in force, which, nonetheless, has precisely the same foundation, the same purpose, and the same type of result as other forms used in other typical situations of the (in this case) IRC regime.

Thus, from the known fact that certain types of expenses are incurred, the legislator draws the unknown fact, which is the assessment of the degree of entrepreneurial allocation of the benefit of such expenses.

And it will be this unknown fact, presumed by the legislator, that triggers and justifies the autonomous taxation in question in the present process. Indeed, it was by presuming that the expenses on which that autonomous taxation applies have, as a rule, a mixed allocation, and therefore there is an unjustified benefit in their full deduction, that the legislator began, in an initial phase, by limiting the percentage of those that it admitted as deductible. Subsequently, for reasons that matter little for the case, but which will involve budgetary constraints, on the one hand, and the need to ensure taxation of possible benefits that individuals could draw from such expenses, the legislator adopted the current model of autonomous taxation of the expenses in question. But this did not exclude, but rather complemented, that primitive motivation to tax, adequately, the income of legal entities, distorted by the deduction of expenses that the legislator presumes to have non-wholly entrepreneurial allocation. That is: the budgetary and, possibly, fringe benefit taxation purposes that may underlie the current autonomous taxation regime at issue do not exclude, but rather rest on, the aforementioned presumption of "partial entrepreneurship" of the expenses on which they apply (and, complementarily, on the distortion of the taxation of the income of legal entities resulting therefrom).

In light of the conclusion just reached, it is necessary to determine whether the presumption identified is, or is not, capable of being rebutted.

In this regard, Article 350(2) of the Civil Code provides:

"Legal presumptions may, however, be rebutted by contrary proof, except where the law prohibits it."

In coherence, Article 73 of the LGT provides:

"Presumptions established in tax incidence rules always admit contrary proof."

Given the legal framework indicated, it must be concluded that the presumption of "partial entrepreneurship" in question should, in coherence, be considered as covered by the possibility of rebuttal generally established in Article 350(2) of the Civil Code and Article 73 of the LGT, both by the taxpayer and by the Tax Administration, which moreover appears consistent with a proportional and appropriate distribution of the burden of proof, insofar as, with the autonomous taxation in question applying to expenses of not obviously entrepreneurial character, it will be the taxpayer who is best positioned to demonstrate that such requirement is verified in the specific case.

For its part, the Tax Administration itself, if it so wishes and considers that the case justifies the inherent expenditure of resources, may always demonstrate that, with respect to the expenses in question, and even though autonomous taxation applies to them, the general requirement of Article 23(1) of the CIRC is not verified, in particular its indispensability for the realization of taxable income or for the maintenance of the income-producing source.

Thus, in summary, the autonomous taxation of which the Claimant seeks to have the burden removed from its taxable profit may be viewed as a kind of consensual anti-abuse rule, in which the legislator proposes to the taxpayer one of three alternatives, namely:

a) not deduct the expense;

b) deduct but pay the autonomous taxation, dispensing with itself and with the Tax Administration from discussing the issue of the entrepreneurial character of the expense;

c) prove the full entrepreneurial character of the expense, and deduct it fully, not bearing the autonomous taxation.

The recognition of this presumptive nature of the autonomous taxation in question in the case, in the terms set forth above, will be, among other things, a safeguard of its constitutionality, insofar as it will ensure both the possibility of its full deduction by the taxpayer and its non-deduction, depending on which side of the presumption underlying it is, concretely and in each case, contradicted, thus ensuring, duly, the compliance of the legal regime in question with the principles of tax equality and taxpaying capacity, which would be unnecessarily (and, occasionally, as is the case, disproportionately) impaired by the establishment of an irrebuttable presumption of the partiality of the entrepreneurial allocation of the expenses in question.

Having reached this point, it becomes necessary to assess whether, concretely, the presumption of the rule of Article 81(3) of the CIRC in effect at the time of the tax event, above determined, was or was not rebutted.

Motorcycles are, in general, a means of transport that is not used in commercial or industrial activity, as it is more profitable for a worker to drive a vehicle with greater transport capacity.

But in the matter at hand, the use of motorcycles is perfectly explained as being "vehicles that best adapt to its activity and that most effectively allow an increase in the number of deliveries, through the speed of their movement, and in turn increase the taxable profit generated by the increase in sales."

Notably, there is no other way to deliver hot pizzas to customers' homes, during rush hour traffic, and the delivery of pizzas under those conditions is obviously important for the business, as, moreover, the Claimant's accounting, which is not questioned by the AT, evidences. On the other hand, it is equally notably well known that motorcycles are more economical vehicles in terms of acquisition cost, fuel consumption and maintenance, attending the use of motorcycles, when intended for the transport of only one person and light cargo, an undeniable economic rationality.

In the present case, there are no doubts whatsoever as to the use of motorcycles in the exercise of the Claimant's activity, and it can even be considered a notorious fact, of general knowledge. Moreover, the assessment is not even contested as to the determination of the taxable base, and given the wording of the CIRC in 2009, autonomous taxation applies only to deductible expenses, the Tax Authority and Customs Authority's own position on the application of autonomous taxation already implies acceptance of deductibility and, implicitly, the characterization of the expenses within Article 23(1).

It would thus remain to verify whether, in fact, as set forth above, such use of motorcycles in the exercise of the Claimant's activity is demonstrated, beyond any reasonable doubt, as occurring in a context exclusively entrepreneurial, with no room for its employees, corporate officers or partners to draw benefits from its availability for personal purposes.

In light of the facts established as proven, it must then be considered that, in the case, this is what occurs.

Indeed, it is verified that the motorcycles in question are used solely for the delivery of food items and only during A...'s operating hours, and employees are not permitted to use them for personal purposes.

Now, while it is true that in small, family-sized enterprises, with greater personalization of managers and workers and knowledge by the former of the latter's particular needs, it is likely there is some blurring in the use of motorcycles for company purposes and private purposes, left to the discretion of managers with respect to vehicle use, it is understood that this should be considered a remote possibility when a company of national and multinational dimension is at issue, in which employees and their personal transport needs are presumably unknown to a remote board of directors and it is credible that it has internal regulations on general matters, not leaving to the discretion of anonymous employees the use of goods for their private purposes.

In this context, it is thus concluded that the presumption of Article 81(3) of the CIRC in effect at the time of the tax event shall be considered as rebutted, and therefore, upon demonstration that the motorcycles to which the expenses on which the autonomous taxation in question applied in the present arbitral proceedings are related have 100% entrepreneurial allocation, they should not be subject to that taxation.

In light of the foregoing, the present arbitral action should be judged well-founded and, consequently, the assessment that is the subject of the present proceedings should be annulled, in the terms requested.

Given that the AT's response contains the tabulated allegation that "Finally, we must state that the interpretation of the rule, as presented by the Claimant, constitutes a flagrant and serious violation of the principles of equality and taxpaying capacity, in accordance with Article 13, Article 103(1) and Article 104(1), all of the Constitution of the Portuguese Republic (CRP)," it is hereby noted that it is considered that such allegation does not raise any concrete constitutional question that would create an obligation for this Tribunal to rule, insofar as it is a mere generic formulation of a supposed unspecified understanding, where, moreover, no specific rule or normative segment is indicated to which interpretation it refers (and the systematic placement appears to suggest it is the rule on which the Claimant bases its request for compensatory interest), nor how, to what extent and why the supposed interpretation presented by the Claimant violates each of the constitutional rules it lists.

The Claimant cumulates with the request for annulment of the tax act that is the subject of the present case the request for condemning the AT to pay compensatory interest on the amount paid by it following notification of the assessment now annulled.

It is a prerequisite for the award of compensatory interest that the error in which the AT labored be imputable to it.

In the case at hand, it is manifest that, following the illegality of the assessment act, for the reasons indicated previously, there is grounds for reimbursement of the tax paid by the Claimant, by virtue of the provisions of the aforementioned Articles 24(1)(b) of RJAT and 100 of the LGT, as this is essential to "restore the situation that would exist if the tax act that is the subject of the arbitral decision had not been performed."

It is also clear in the case that the illegality of the tax assessment act contested is directly attributable to the Respondent, which, on its own initiative, performed it without legal support, suffering from a mistaken assessment of the legally relevant facts and consequent application of the legal rules to the specific case.

Thus, the Claimant is entitled to receive compensatory interest, in accordance with the provisions of Articles 43(1) of the LGT and 61 of the CPPT.

Compensatory interest is due to the Claimants from the date on which they made payment of the tax obligation in question in the case, until full reimbursement of the amount paid, at the legal rate.

C. DECISION

In this sense, this Arbitral Tribunal decides:

a) To judge the request for arbitral ruling well-founded and, in consequence, to partially annul the IRC self-assessment tax act for the 2009 taxation year of the Claimant, in the part corresponding to autonomous taxation applied to vehicle expenses, in the amount of €45,262.07, as well as the act of decision in the gracious complaint proceedings that applied to it;

b) To condemn the AT to pay compensatory interest to the Claimant;

D. Value of proceedings

The value of the proceedings is set at €45,262.07, in accordance with Article 97-A(1)(a) of the Code of Procedure and Tax Proceedings, applicable by virtue of subparagraphs (a) and (b) of paragraph 1 of Article 29 of RJAT and paragraph 2 of Article 3 of the Regulation of Costs in Tax Arbitration Proceedings.

Let it be notified.

Lisbon

02 February 2015

The Presiding Arbitrator

(Jorge Lopes de Sousa)

The Arbitrator

(José Pedro Carvalho - Rapporteur)

The Arbitrator

(Manuela Roseiro - Dissenting)

Dissenting Opinion

I did not vote in favor of the decision that was decided because my interpretation of Article 73 of the LGT does not entirely coincide with that adopted by my Distinguished Colleague Arbitrators. On the other hand, even if I admitted that an irrebuttable presumption underlies the autonomous taxation in question in the case, I would consider more in-depth evidence production necessary regarding its factual situation.

Elaborating in greater detail:

1. The provisions of Article 73 of the LGT and presumptions

The judgment approved by majority adopts an interpretation of the provisions of Article 73 of the LGT that requires the possibility of rebutting any presumptive assessment underlying tax incidence rules, understood in broad sense.

To this view I oppose another that admits that Article 73 of the LGT should be interpreted, in conjunction with Article 104(1) and (2) of the CRP, as a recommendation to the legislator to use presumptions juris tantum as much as possible, avoiding irrebuttable presumptions and fictions, so that, combining Articles 73 and 74 of the LGT, to distinguish, within the set of presumptions juris et de jure, the wholly prohibited (cases of those that presume the existence of income in itself), the not recommended (relating to tax incidence rules that burden the taxpayer) and the not prohibited (relating to tax incidence rules in broad sense that allow arriving at net income or considering expenses that diminish taxpaying capacity).

If this type of distinction is adopted, "incidence rules that imply deduction of expenses, costs and other charges, for the determination of net income or related to taxpaying capacity, and also tax benefits, as rules that ease the tax burden," are not covered by Article 73 of the LGT, nor do they violate the Constitution, provided that the typifications do not depart from reality. The typification of derogatory incidence rules "whose individual supervision is very difficult to ensure" would even be "recommended by the principles of practicability and equality."

1. The ratio legis of autonomous taxation and vehicle expenses

Legislative evolution reveals how autonomous taxation in IRC, just as in IRS, aims to combat forms of tax evasion or business behaviors that the legislator considers susceptible of causing unjustifiable erosion of the tax base of those taxes.

With respect to expenses with vehicles allocated to the company's activity, the legislator would have sought, in a situation identified as difficult to define precisely, and susceptible to tax evasion, a solution based on the following balance:

• autonomously tax, as a general rule, deductible expenses relating to expenses related to light passenger vehicles or mixed-use vehicles, motorcycles or motorbikes incurred or borne by taxable persons not subject to exemption and engaged primarily in commercial, industrial or agricultural activity (paragraph 3 of Article 81 of the CIRC), leaving out charges relating to heavy and light cargo vehicles;

• except from the taxation contained in the rule defined in paragraph 3, expenses related to light passenger vehicles, motorcycles or motorbikes, allocated to the operation of public transport services, intended to be hired in the exercise of the taxpayer's normal activity (...) (paragraph 6 of Article 81).

The reason for the legislator's choice would have been, as the Claimant itself indicates, to consider that this type of vehicle is, in abstract, susceptible to indiscriminate use, simultaneously private and entrepreneurial.

Making it extremely difficult to determine reality, the legislator already foresees autonomous taxation that means, in practice, because applied jointly with the deductibility of the charge, a limitation on the deduction of these activity costs.

From the difficulty of performing proof of the actual distribution between entrepreneurial and private allocation are excluded cases in which vehicles are, indisputably, used as an instrument of the development of an activity, being described in law as allocated to the operation of "public transport service, intended to be hired in the exercise of the taxpayer's normal activity" (paragraph 6 of Article 81).

Being so, it does not appear proper that the "rule" (Article 81, paragraph 3) should be disapplied in cases other than those provided for in the "exception" (paragraph 6 of Article 81), making the application of paragraph 3 of the same article dependent on the production of evidence, to be performed case by case and in any business sector, on the actual allocation of the use of vehicles covered by the rule.

For if the legislator designed the balance solution identified above because it understood that these are situations very difficult to control rigorously (the truthfulness, despite the existence of accounting, of the distribution of expenses attributed to different types of vehicles, the difficulty of controlling actual use, etc.), admitting only the exception provided for in paragraph 6, an interpretation that accepts the admissibility of evidence, to be made case by case, that vehicles are exclusively allocated to the company's activity appears to render the adopted wording pointless.

Thus, and in accordance with what was said above (in point 1 of this opinion), I maintain that Article 81 (later 88) of the CIRC does not contain a presumption capable of rebuttal by application of Article 73 of the LGT. It is rather a rule that, having underlying a presumptive assessment of the difficulty of rigorous control of certain cases, chooses to typify situations of application of autonomous taxation, translated, in practice, in the reduction of the amount of deductible costs in determining the taxable base.

1. The situation of the Claimant in light of the principles of taxpaying capacity and tax equality and non-discrimination

But, if Article 81 of the CIRC is an incidence rule in broad sense (with implication in the deduction of expenses, costs or other charges, for the determination of net income), will this interpretation call into question the principles of taxpaying capacity and tax equality?

As Ana Paula Dourado also observes (above cited, pp. 621 and 633), one may doubt whether it is justified to currently maintain the prejudices regarding legal presumptions, linked among us to the taxation of "normal" income within the framework of categorical taxes. And, paying attention to the current characterization of the tax codes, she considers: "typifications, including quantitative ones, are not contrary but rather essential to the realization of equality in the Rule of Law. The only constitutional question that can be raised concerns absolute presumptions in objective incidence rules (absolute presumptions that the taxpayer obtained a certain income)" (idem, ibidem, p. 622).

The matter of irrebuttable typifications does not imply unconstitutionality provided that they are "within the spaces of legislative conformity and linked to reality," as happens with many of the limits on deductible expenses provided for business or professional activity. The legislator has a space of freedom for "generalizing, typifying and even forfeitous regulations," serving the principle of equality, insofar as it does not put at risk the equal execution of law that could be lost in the maze of individual details," and one could even say that "individual taxpaying capacity can only be apprehended in a typified form," meaning typification that "the legislator encompasses in a Tatbestand the average case and treats different cases equally, according to this average case."

Returning to the case at hand, and adhering to the doctrinal considerations referred to above, I understand that this involves the application of a rule (then Article 81 of the CIRC) that typifies situations for which it determines, in practice, reduction of deductible costs, and for the reasons set forth, is not violative of the principles of equality and taxpaying capacity.

But is the scope of the exclusion (paragraph 6 of Article 81) too narrow? Being able to admit that, it nonetheless appears that the Claimant will not have raised its doubts and suggestions to the tax administration (as other companies did, with respect to the exclusion of the application of paragraph 3 of Article 81 to passenger transport services provided by hotels and travel agencies, which resulted in the decision of 14/09/2006 in the process 2879/2005).

As it is a question at least open to doubt, it seems reasonable that the admissibility of application of the exclusion regime be accompanied by special care in verifying the factual situation.

That is, even admitting the thesis of the possibility of rebutting the presumptive assessment underlying the provisions of paragraph 3 of Article 81 of the CIRC, I believe that the type of evidence the company invokes (accounting for expenses with the motorcycles, internal regulations for use, supervisory competencies of each store's managers) raises doubts about its sufficiency for rebuttal, and it is certain that in the case of application of paragraph 6 of the same article, the verification of this type of assumptions is not sufficient, requiring the invoicing of services provided with the vehicles.

As to the question, also raised by the Claimant, of violation of the principle of non-discrimination by not being able to give it the same tax treatment as taxable persons using heavy vehicles and/or light cargo vehicles, could gain relevance if it were actually verified that the possibility of the competition invoked (comparison between businesspersons who produce and distribute pizzas or other food service products operating with different types of vehicles) existed. But it does not appear to be the case, the suggestion of use of heavy vehicles being, it is believed, quite unrealistic.

On the other hand, the admissibility of the case-by-case rebuttal defended in the judgment, without reinforced control requirements, can render pointless the objective pursued by the law that reduced, with exception of situations of very limited scope, the amount deductible with certain types of costs due to the difficulty of their effective control (existence of presumptive assessment of easy evasion).

And I do not consider decisive the argument that the case at hand concerns a company of national and multinational dimension endowed with great discipline in cost control, different from what would happen with a small family-sized enterprise facilitating greater confusion in the use for business and private purposes. For this criterion of case-by-case decision is susceptible of raising other problems (and doubts, since in acting locally through franchise, franchised companies may have other characteristics that lead to non-rigid compliance with general rules), originating litigation, precisely what the legislator would have intended to avoid with the typification effected. Whose perfection and suitability are certainly debatable, and even possibly to be reconsidered, but by virtue of its de jure constitutionem power.

For the reasons set forth, I would consider the request not well-founded.

2 February 2015

Maria Manuela Roseiro