CAAD 629/2016-T: Can SIFIDE R&D Tax Credits Offset IRC Autonomous Taxation Charges?

ARBITRAL DECISION

The arbitrators Judge Counsellor Dr. Maria Fernanda dos Santos Maças (arbitrator president), Dr. Artur Maria da Silva and Dr. André Festas da Silva (arbitrator panel members), appointed by the Deontological Council of the Administrative Arbitration Centre (CAAD) to form the Arbitral Tribunal, constituted on 5 January 2017, agree as follows:

I. REPORT

I.1

1. On 20.10.2016 the taxpayer A..., S.A. with registered office at Street ..., ..., ...-..., ..., with the collective person number and tax identification number..., requested, pursuant to the terms and effects of the provisions of paragraph a) of no. 1 of article 2 and article 10, both of Decree-Law no. 10/2011, of 20 January, the constitution of an Arbitral Tribunal with appointment of a panel of three arbitrators by the Deontological Council of the Administrative Arbitration Centre, pursuant to the provisions of paragraph a), no. 2 of article 6 of the said decree.

2. The request for constitution of the Arbitral Tribunal was accepted by the President of CAAD and was notified to the Tax and Customs Authority (hereinafter referred to as TA or "Respondent") on 21 December 2016.

3. The Claimant did not proceed with the appointment of arbitrators, therefore, under the provisions of article 5, no. 3, paragraph a) and article 6, no. 2, paragraph a) of the RJAT, the signatories were appointed by the President of the Deontological Council of CAAD to integrate the present Collective Arbitral Tribunal, having accepted pursuant to the legally provided terms.

4. The TA presented its response on 2 February 2017.

5. By order of 03.02.2017, the holding of the meeting provided for in article 18 of RJAT was waived and the date for delivery of the decision was set for 5 July 2017.

6. The Claimant presented arguments on 24.02.2017.

7. The Respondent presented its arguments on 01 March 2017.

8. The Claimant requests that the Arbitral Tribunal declare the illegality of the dismissal of the administrative complaint, the illegality of the self-assessments of CIT, relating to the fiscal year 2013 (assessment no. 2015...) and 2014 (assessment no. 2015...) and, likewise, the condemnation of the Respondent to payment of compensatory interest.

I.A. The Claimant sustains its request, in summary, in the following terms:

• As a consequence of the approval of applications to the System of Tax Incentives for Research and Business Development (SIFIDE), the Claimant was granted tax credits in the amounts of €65,938.28 with reference to the fiscal year 2012 and €552,570.13 with reference to the fiscal year 2013.

• The Claimant used in the fiscal years under analysis (2013 and 2014) part of the available tax credits.

• Similarly, in the periods of taxation in question (2013 and 2014), the Claimant incurred expenses that were subject to autonomous taxation, pursuant to article 88 of the CIT Code in the amount of €119,080.77 in 2013 and €123,999.81 in 2014.

• Form 22 Declaration and the computer system of the Tax and Customs Authority did not permit, at the date when the self-assessments of CIT whose annulment is requested were made, that the Claimant deduct the entire amounts of SIFIDE attributable to the tax collection calculated in the taxation periods of 2013 and 2014, which includes the amounts calculated by way of autonomous taxation.

• In the Claimant's understanding, the calculation of the collection of autonomous taxation is carried out pursuant to the said article 90 of the CIT Code, therefore there should be no obstacles to the deduction of the tax credit resulting from SIFIDE to the collection arising from autonomous taxation.

• Moreover, the introduction of the new article 23-A of the CIT Code clarifies that autonomous taxation should be contained in the "CIT" part of the said article and not in the "other taxes" part, since the reference to other taxes is maintained, with autonomous taxation included as an integral part of CIT, which is clear in the wording of paragraph a) of no. 1 of that provision in the part that refers to "CIT, including autonomous taxation".

• The simple performance of a certain expense does not instantaneously determine the amount of autonomous taxation to be borne, as it is intimately related to the result calculated in the taxation period in question.

• It becomes clear for the Claimant that autonomous taxation, like the remainder of CIT, is an imposto of successive formation, being able the calculation of both, dependent on the final result of a certain fiscal year, to be traced back to taxable profit or fiscal loss.

• Furthermore, the Claimant contends that the calculation of autonomous taxation is not carried out independently, but rather with some differences, namely the applicable rate and the incidence, all these differences being expressly provided for in the CIT Code.

• In these terms, it is manifest that there is only one norm throughout the CIRC that regulates the assessment of CIT, being that norm article 90 of the CIT Code.

• It is, in these terms, absolutely clear for the Claimant that the assessment of autonomous taxation is not carried out in a separate, independent or different manner from that provided for in article 90 of the CIRC, since accepting this fact would mean accepting the existence of an assessment carried out without normative basis, and as such would be affected by illegality and, in this case, unconstitutionality (art. 103, no. 3 of the CRP).

• It should be recognized that the calculation of the collection of autonomous taxation is carried out pursuant to the said article 90 of the CIT Code, therefore the deduction of the tax credit resulting from SIFIDE to the collection arising from autonomous taxation should be admitted.

• In light of the foregoing, the Claimant understands that recognition should be given in the present proceedings to its right to deduct its tax credit granted via SIFIDE to the collection of autonomous taxation, in the value of €119,080.77 in 2013 and €123,999.81 in 2014.

• Furthermore, the Claimant alleges that fiscal benefits are derogatory of the principles of generality and equality of taxation and are incapable of application to cases that have not been expressly contemplated in the benefit granted, and should be subject to strict or declaratory interpretation.

• "An interpretation of the law, not expressly imposed by the legal text, that restricts the "benefit" of the fiscal benefits in question would harm the credibility of the "legislative promises" in fiscal matters, would be, in short, contrary to the principle of trust, inherent in the idea of a Rule of Law."

• Beyond the amount relating to improperly assessed tax, the Claimant petitions for its compensation through the payment of compensatory interest calculated from the date of the improper payment of tax until full and complete payment, at the rate of 4% per annum, pursuant to articles 35, no. 10, 43, no. 4 of the LGT, 559 of the Civil Code and Ordinance no. 291/03, of 8 April.

I.B. In its response the TA invoked the following:

• The amounts to which SIFIDE translates are deducted "to the amounts calculated pursuant to article 90 of the CIT Code, and up to its concurrence" and in the assessment relating to the taxation period in which the eligible expenses are incurred.

• For the Respondent the collection to which article 90 refers, when the assessment should be made by the taxpayer (situation occurring in the present case), is calculated based on the taxable income that appears in that self-assessment. (cf. article 90, no. 1, paragraph a) of the CIRC).

• Illustrative of the circumstance that the credit to which SIFIDE translates is deducted, and only, to the collection thus calculated, that is, to the collection calculated based on the taxable income, is the provision of article 5, paragraph a), of the law regulating SIFIDE, which prevents that the credits resulting from it are deducted when the taxable profit is determined by indirect methods.

• And even less with respect to the consideration of autonomous taxation, which, as is known, is determined autonomously and distinctly from the calculation carried out pursuant to the terms that flow from article 90 of the CIRC.

• Thus, it would not be reasonable for the Respondent, rather contrary to the reason that led the legislator to autonomously tax those expenses that, through their deduction to taxable profit as expenses, the basis for the existence of autonomous taxation would be eliminated.

• The Respondent continues alleging that the situation that became clearer in the new wording of paragraph a) of no. 1 of article 23-A of the CIRC, which expressly refers that the following are not deductible for purposes of determining taxable profit: "CIT, including autonomous taxation, and any other taxes that directly or indirectly affect profits" having been limited to making explicit what already resulted from the legal order by application of the rules of interpretation.

• In that sense, it would be contrary to the spirit of the system to permit that, by virtue of the deductions to which no. 2 of article 90 of the CIRC refers, the anti-abusive character of autonomous taxation that presided over its implementation in the CIT system would be removed, or at least distorted.

• This being the case, it results clear that autonomous taxation should not be considered for purposes of the deductions referred to in no. 2 of article 90 of the CIRC.

II. CASE MANAGEMENT

The Tribunal is competent and regularly constituted, pursuant to articles 2, no. 1, paragraph a), 5 and 6, all of the RJAT.

The parties have legal personality and capacity.

The parties are legitimate and legally represented, pursuant to articles 4 and 10 of the RJAT and article 1 of Ordinance no. 112-A/2011, of 22 March.

The case is properly before the Tribunal.

There are no other preliminary issues to be considered nor defects that invalidate the proceedings.

It is therefore necessary to now assess the merits of the claim.

III. THEMA DECIDENDUM

The central question to be decided, as posed by the Claimant, is whether the self-assessments of CIT (including autonomous taxation) relating to the fiscal years 2013 and 2014 are affected by the material vice of violation of law, object of challenge because, in its view, the deduction of SIFIDE should not be barred from the part of the CIT collection corresponding to autonomous taxation.

IV. FACTUAL MATTER

IV.1. Facts Proved

Before proceeding to the consideration of the questions, it is necessary to present the factual matter relevant to its respective understanding and decision, which, having examined the documentary evidence, the attached administrative tax proceedings and having regard to the facts alleged, is established as follows:

• The Claimant applied to the System of Tax Incentives for Research and Business Development (SIFIDE).

• As a consequence of the approval of applications, it was granted tax credits in the amounts of €65,938.28 with reference to the fiscal year 2012 and €552,570.13 with reference to the fiscal year 2013.

• The Claimant is an entity subject to and not exempt from CIT, having made the corresponding self-assessments of CIT for 2013 (assessment no. 2015...) and 2014 (assessment no. 2015...) by submitting the respective Form 22 Declarations.

• The 2013 declaration was filed on 13.03.2015 and the 2014 declaration was filed on 21.05.2015.

• The Claimant used in the fiscal years 2013 and 2014 part of the available tax credits, in the amount of €167,190.25 in 2013 and in the amount of €102,145.48 in 2014.

• The Claimant had its tax situation regularized with the State.

• The Claimant included in the tax documentation process how the declared tax credit was calculated.

• After the partial deduction of the granted tax credit, the Claimant was left with a tax credit in the amount of €350,417.15, to be deducted in subsequent fiscal years.

• In the taxation periods of 2013 and 2014, the Claimant incurred expenses that were subject to autonomous taxation, in the amount of €119,080.77 in 2013 and €123,999.81 in 2014.

• Form 22 Declaration and the computer system of the Tax and Customs Authority do not permit the Claimant to deduct the entire amounts of SIFIDE to the amounts calculated by way of autonomous taxation.

• The Claimant presented, on 17 May 2016, an Administrative Complaint against the self-assessments of CIT for 2013 and 2014.

• The Administrative Complaint was not decided.

IV.2. Facts Found Not Proved

There are no facts found as not proved, since all facts relevant to the assessment of the claim were found as proved.

IV.3. Rationale for the Factual Matter

The facts contained in numbers 1 to 12 are accepted as established by the analysis of the administrative proceedings, by the documents submitted by the Claimant (docs. 1 to 9 of the request for constitution of the Arbitral Tribunal) and by the position assumed by the parties.

V. APPLICATION OF LAW TO FACTS

V.1.1. The Nature of Autonomous Taxation in Jurisprudence and Doctrine

In the sense that with autonomous taxation the expense and not the income is taxed, it is pointed out, among other things, the dissenting vote of His Excellency Counsellor Vítor Gomes, appended to the Judgment no. 204/2010 of the Constitutional Court, in which he states, referring to Autonomous Taxation:

"Although formally inserted in the CIRC and the amount that permits collection is assessed within its scope and as CIT, the norm in question concerns a tax imposition that is materially distinct from taxation in this schedule, (....). Indeed, we are dealing with autonomous taxation, as the very wording of the provision states. And that makes all the difference. This is not about taxing an income at the end of the taxation period, but certain types of expenses in themselves, for the understandable reasons of fiscal policy that the judgment points out.

In this way, the fact revealing tax capacity that is intended to be achieved is the simple performance of that expense, at a given moment. Each expense is, for this purpose, an autonomous tax fact, to which the taxpayer is subject, whether or not the taxpayer comes to have taxable income under CIT at the end of the period, being irrelevant that this portion of tax is only assessed at a later moment and jointly with CIT".

It was likewise recognized by the jurisprudence of the SAT (2nd section, proceedings 830/11, of 21-03-2012) "that under the designation of autonomous taxation are hidden very diverse realities, including, pursuant to no. 1 of (then) art. 81 of the CIRC, undisclosed or undocumented expenses, which are taxed autonomously, at the rate of 50%, which will be raised to 70%, in cases of expenses incurred by taxpayers that are wholly or partially exempt, or that do not engage, as their main activity, in commercial, industrial or agricultural activities (no. 2 of [then] art. 81) and which are not considered as a cost in the calculation of taxable income under CIT.

It should be noted, however, that representation expenses and those related to light vehicles, pursuant to the provision of (then) art. 81, no. 3 of the CIRC and subsistence allowances are related to business activity and "indispensable" therefore are fiscally accepted in some cases although within certain limits.

In turn, the Constitutional Court, in its Judgment no. 18/11, tells us that there are facts subject to autonomous taxation, which correspond to "expenses demonstrably indispensable to the realization of income" and that therefore the prohibition of retroactive application of the new law does not apply, as such expenses would have been incurred regardless of the applicable fiscal regime: this means that autonomous taxation also falls on expenses that correspond to the core of the concept of real income, net income and compliance with accounting obligations. This argument of the Constitutional Court, regarding the retroactive application of fiscal law to autonomous taxation (and this matter of the application of law over time does not fall within the scope of this decision), is relevant to us only to emphasize that the Court recognizes that this regime constitutes a limitation on the taxation of real income (which is guaranteed by art. 104, no. 2 of the CRP).

In a recent Judgment (no. 310/12, of 20 June, Rapporteur Counsellor João Cura Mariano), the Constitutional Court reformulates the doctrine of Judgment no. 18/11, moving closer to the then dissenting vote of Counsellor Vítor Gomes and to the Judgment of the SAT no. 830/11, all cited in the preceding paragraphs, in the following terms: "Contrary to what happens in the taxation of income under IRS and CIT, in which the set of income obtained in a given year is taxed (which implies that only at the end of it can the tax rate be determined, as well as the bracket in which the taxpayer is inserted), in this case each expense incurred is taxed, considered in itself, and subject to a certain rate, autonomous taxation being calculated independently of the CIT that is due in each fiscal year, for not being directly related to the obtaining of a positive result, and therefore, susceptible to taxation.

Thus, and in the case of CIT, we are dealing with an annual tax, in which each income received is not taxed per se, but rather the combination of all income obtained in a given year, with the law considering that the tax event occurs on the last day of the taxation period (cf. article 8, no. 9 of the CIRC). Now as regards autonomous taxation under CIT, the tax event is the very performance of the expense, we are not dealing with a complex fact, of successive formation over a year, but with an instantaneous tax fact. This characteristic of autonomous taxation refers us, therefore, to the distinction between periodic taxes (whose tax event is produced successively, by the passage of a certain period of time, usually annual, and tends to repeat itself over time, generating for the taxpayer the obligation to pay tax with a regular character) and single obligation taxes (whose tax event is produced instantaneously, appears isolated in time, generating on the taxpayer an obligation to pay with an avulsive character). In autonomous taxation, the tax fact that gives rise to tax is instantaneous: it is exhausted in the act of performance of a certain expense that is subject to taxation (although, the calculation of the amount of tax, resulting from the application of the various tax rates to the various acts of performance of expense considered, is carried out at the end of a certain taxation period). But the fact that the assessment of the tax is carried out at the end of a certain period does not transform it into a periodic tax, of successive formation or of a durable character. This operation of assessment translates itself only into the aggregation, for purposes of collection, of the set of operations subject to that autonomous taxation, whose rate is applied to each expense, with no influence whatsoever from the volume of expenses incurred in the determination of the rate."

Jurisprudence reiterated by the Plenary Judgment, in Judgment no. 617/2012, proceedings no. 150/12, of 31/1/2013 and in Judgment no. 197/2016, proceedings no. 465/2015.

With respect to doctrine we find that, in essence, the concept and nature of autonomous taxation does not substantially depart from the understanding of the jurisprudence produced by the Constitutional Court.

As RUI MORAIS states, "what is at issue is a taxation that falls on certain expenses of taxpayers, which are had as constituting tax facts. It is difficult to discern the nature of this form of taxation and, even more so, the reason why it appears provided for in the codes of taxes on income." (RUI DUARTE MORAIS, Notes on CIT, Almedina, 2009, pp. 202-203).

In the same sense, JOSÉ ALBERTO PINHEIRO PINTO states that "this is not strictly CIT – which aims to tax the income of legal entities and not expenses incurred by them –, but the replacement of a taxation of "implicit" income of natural persons, which is considered not directly enforceable". Also CASALTA NABAIS considers that it is "a taxation on expense and not on income" (CASALTA NABAIS, Fiscal Law, 6th Ed., p. 614. In the same sense, cf. ANA PAULA DOURADO, Fiscal Law, Lessons, 2015, p. 237).

In summary, some doctrine and the jurisprudence of the higher courts and the Constitutional Court consider that autonomous taxation are autonomous tax facts, which fall on the expense. Thus, despite being formally inserted in the CIT Code, they concern a taxation distinct from the tax on income.

It is further accepted by the generality of doctrine and jurisprudence that autonomous taxation aims to prevent abusive practices of remuneration of workers, managers and partners/shareholders of the company. As SALDANHA SANCHES states, "In this type of taxation, the legislator seeks to respond to the admittedly difficult question of the fiscal regime of expenses that are found in the zone of intersection of the personal sphere and the business sphere, so as to avoid remuneration in kind more attractive for exclusively fiscal reasons or the concealed distribution of profits. The norm has a characteristic similar to what we will find in the legal sanction against undocumented costs, with a rate increase when the situation of the taxpayer does not correspond to a situation of normal fiscal health." (SALDANHA SANCHES, Manual of Fiscal Law, 3rd Ed., Coimbra Editor, 2007, p. 406). "This is a taxation that is explained by the need to prevent and avoid that, through these expenses, companies proceed to the camouflaged distribution of profits, especially dividends which would thus be subject to CIT as profits of the company, as well as to combat the fraud and tax evasion that such expenses cause…"(CASALTA NABAIS, Idem, p. 614).

V.1.2. Evolution of the Figure of Autonomous Taxation

In the initial wording of the CIT Code, approved by Decree-Law no. 442-B/88, of 30 November, no express or implicit reference was made to autonomous taxation, within the scope of CIT. It was only with Law no. 101/89, of 29 December, which approved the State Budget for 1990, that a first reference to autonomous taxation was made within the scope of CIT, through the legislative authorization contained in no. 3 of its article 15, which provides as follows:

3 - The Government is authorized to autonomously tax at an increased rate of 10% and without prejudice to the provision of paragraph h) of no. 1 of article 41 of the CIRC, undisclosed or undocumented expenses incurred within the exercise of commercial, industrial or agricultural activities by IRS taxpayers that possess or should possess organized accounting or by CIT taxpayers not covered by articles 8 and 9 of the respective Code.

As is well known, the origin in the Portuguese fiscal legal order of autonomous taxation dates back to 1990, with the publication of Decree-Law no. 192/90, of 9 June, where specifically in its article 4, with regard to undisclosed or undocumented expenses, autonomous taxation was established at the rate of 10% and, with respect to representation expenses and charges related to light passenger vehicles, a rate of 6.4%. Implementing this legislative authorization, the Government approved Decree-Law no. 192/90, in which it included, outside the codes of IRS and CIT, a norm on autonomous taxation in which the following is established:

Decree-Law no. 192/90, of 9 June

Article 4

Undisclosed or undocumented expenses incurred within the exercise of commercial, industrial or agricultural activities by IRS taxpayers that possess or should possess organized accounting or by CIT taxpayers not covered by articles 8 and 9 of the respective Code are taxed autonomously under IRS or CIT, as the case may be, at a rate of 10% without prejudice to the provision of paragraph h) of no. 1 of article 41 of the CIRC.

This norm and, in a general way, the regime of autonomous taxation, was subject to various amendments (e.g. Law no. 52-C/96, of 27 December; Law no. 87-B/97, of 31 December; Law no. 3-B/2000, of 4 April; Law no. 30-G/2000, of 29 December) namely through successive modifications, both of the rates and of the systematization and wording given to them, in the respective codes on taxes on income, that is, both in the CIRC and in the CIRS.

With the approval of Law no. 30-G/2000, of 29 December, the Decree that enshrined "autonomous taxation" was repealed, adding to the CIRC article 69-A – corresponding to the date of the facts underlying (2012 and 2013) to article 88, where beyond the maintenance of the incidence of these to undocumented expenses, to representation expenses and to vehicle expenses, it was extended to other situations of diverse nature.

We can thus draw two principle conclusions:

(i) The first is that autonomous taxation falls on both deductible expenses and non-deductible expenses under CIT;

(ii) The second is that autonomous taxation aims to prevent erosion of the tax base under CIT, by taxing expenses that can be deducted by CIT taxpayers, but which, if they are, transform into an increase in taxation, therefore seeking to serve as a disincentive for expenses with such charges.

With respect to autonomous taxation on non-deductible expenses, if one were to admit their deductibility, one would be admitting the deductibility of a charge not indispensable for the realization of the income subject to tax or for the maintenance of the source of production.

Being able to be taken as established, and for what will be relevant to the sense of the decision to be delivered within the scope of the present proceedings, the following assumptions:

(i) autonomous taxation of CIT anchored in the various numbers and paragraphs of article 88 of the CIRC translate diverse situations, to which different taxation rates also apply;

(ii) autonomous taxation of CIT falling on certain charges of CIT taxpayers should be understood as payments independent of the existence or not of taxable income;

(iii) interpreted as payments, associated with CIT, or at least related to it, being able to be understood as an exception with respect to the principle of taxation of legal entities according to the real and effective profit calculated (article 3 of the CIRC),

(iv) in autonomous taxation, the tax fact that gives rise to taxation is instantaneous: it is exhausted in the act of performance of certain expenses that are subject to taxation (although the calculation of the amount of tax resulting from the various tax rates to the various acts of performance of expenses considered, is carried out at the end of a certain taxation period);

(v) the fact that the assessment of the tax is carried out at the end of a certain period does not transform it into a periodic tax, of successive formation or of a durable character. This operation of assessment translates itself only into the aggregation, for purposes of collection, of the set of operations subject to that taxation, whose rate is applied to each expense, with no influence whatsoever from the volume of expenses incurred in the determination of the rate;

(vi) autonomous taxation is not equivalent to the non-deductibility of the expenses incurred by the CIT taxpayer.

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

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

b) It is intended to discourage this type of expense in taxpayers that show negative results but which, regardless of this, continue to evidence structures of consumption little or not at all compatible with the financial health of their companies;

c) It is, in a more general sense, to model the fiscal system so that it reveals a certain balance with a view to 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.

V.1.3. The Cause and Function of Autonomous Taxation under CIT

It is settled that autonomous taxation is rooted, as has been touched upon, in the need to prevent abuses regarding the reporting of certain charges or expenses and which can be easily subject to diversion to private consumption or which, in some way, are susceptible to formally configuring an expense of the legal entity, but which, substantially, represent or may configure abuses in order to minimize the real measure of the tax.

Aware of this difficulty, many times, of carrying out a rigorous separation of these two realities, was successively "grafted", as described above, into the regime of taxation of real and effective profit established in the CIRC, as a general standard, an autonomous regime of taxation of certain expenses, in whole or in part unwanted and undesirable which contaminate the terms of the duty of tax, which thus appears configured below the real contributive capacity of the entity that reports it as such.

In these terms, in the ontology of things it can be stated that autonomous taxation appears integrated into the CIT regime, are calculated and owed within the scope of the legal relationship of tax on the income of legal entities and it is within that framework that their calculation is carried out. But they are not "CIT", tout court as the Claimant lapidariously and definitively states. For them to be they would, first of all, have to tax income, and that is not what happens, at any moment, so that, in this respect, it does not seem necessary to us to ponder more deeply. Although there exists – it is not denied –, an evident instrumentality between CIT and the model of taxation of income in Portugal and autonomous taxation, a fact moreover well evidenced in the jurisprudence of the Superior Courts and, in particular, of the Constitutional Court, the understanding prevails that autonomous taxation taxes expenses.

In fact, they are an instrument which, moving away from and introducing some measure of distortion in a system that declares to tax real and effective incomes, also taxes expenses, deductible or not under CIT. Without thereby violating constitutional dictates since the applicable norm (art. 104, no. 2 of the CRP) declares it imperative that companies be taxed "fundamentally" on their real income, without prejudice to either the situations of taxation according to profits or real income when calculated by indirect methods, or the situations of taxation of expenses subject to autonomous taxation by express choice of law, the establishment of technical solutions such as the special payment on account and the rules specific to its return.

It is worth remembering, by the way, that neither fiscal systems nor concrete models of taxation correspond to pure models, free from elements of strangeness to the system itself foundational values, or to the general regime of any tax abstractly considered. All taxes have characteristics or solutions which, when viewed in isolation, may objectively represent a decharacterization of the model as it was conceived in the purity of concepts, but which, when articulated with the model, it is verified that they contribute to its effectiveness, and give or reinforce its coherence.

These solutions, more pragmatic or specific, do not infringe such essential valuational dictates, whether they are for revenue protection or densification of general value ideals (of the tax order) or specific to the tax, such as the need to avoid abuses. As long as they themselves are not of such relevance that they abjure the model of taxation-rule or structurally falsify the values on which it is based.

Although, in this case, the option of fundamental law and of ordinary law, as a consequence, has been clearly in the sense of taxing the income of legal entities and, in the possible forms of calculation of this, fundamental law has chosen the taxation of real and effective income as a manifestation of the highest standard of fiscal justice, the truth is that the system has always known more or less relevant deviations. Whether because certain expenses are not considered as such by fiscal law, although objectively they can be attributable to commercial activity, or because fiscal law, recognizing this essentiality, fears the occurrence of abuses, as is the case with autonomous taxation, generically speaking.

In part this departure from the purity of concepts is an inevitable consequence of the complexity of life's relations, whether because pure fiscal imposition models are more costly to implement and manage as they require much more refined relevant information, or because in the field of taxes, as in other fields of life, one must temper the ideal of justice enshrined with solutions of normative reasonableness in the qualification of relevant facts and technique in the solutions and requirements to be established. All to avoid that fiscal models are excessively complex and costly ceasing to reach the realities and practices that mitigate the tax burden or contribute to a poor distribution of the same.

Now, from this balancing of the values that support the duty to establish / support tax with the realities of life can result the need to establish limits (fiscal or other) to the behavior of taxpayers, in order to keep within general standards of balance, the legal solutions of the system.

On the other hand, it is important to bear in mind, because this is relevant for purposes of the decision to be taken, that autonomous taxation configures anti-abuse norms aimed at rationalizing specific behaviors of taxpayers with respect to the duty of tax, through which they traditionally managed to achieve a measure of tax lower than what was evidenced by their effective revealed contributive capacity but which, by virtue of these abusive behaviors was susceptible to be mitigated or eliminated. And with evident violation or neglect of the principle of justice, of just distribution of the tax burden by those who reveal contributive capacity.

Consequently, it makes sense to admit that general deductions are made to the tax collection, which are permitted by law to give effective meaning to the principle of taxation of real and effective income. But that, with respect to the collection owed by autonomous taxation, that deduction no longer makes sense because, not taxing profits, but expenses, the question of justice in the distribution of the general tax burden does not arise with respect to them, therefore it would be illogical to permit the deduction of charges when such deduction, in practice, would destroy the anti-abusive sense that imbues them; the disincentive of deviant behaviors that its institution represses or eliminates.

Now, autonomous taxation, as seems clear, does not have a primarily revenue-generating purpose, that is, it does not aim, primarily, at obtaining (more) fiscal revenue, although this may not be a negligible aspect, verifiable. They aim to dissuade behaviors, practices or choices of companies rooted in reasons essentially of a fiscal, revenue-saving nature. On the other hand, they preserve the balances inherent to the regime of taxation of legal entities, avoiding distortions not only at the level of taxable results, as waves of deviant behaviors, affecting the legal expectation of revenue, in each economic year.

And force, through these general anti-abuse clauses, the maintenance of a healthy correlation between the volumes of business, taxable profits and the tax ultimately due by the entities subject to CIT, in line with the levels of average effective tax burden that falls on the different groups of taxpayers, within the Portuguese fiscal system and, even, comparatively with that of the OECD member states or outside it.

Autonomous taxation, including those provided for in paragraph b) of no. 13 of art. 88 of the CIRC have, therefore, a general disciplinary function that is not alien to the systemic purposes of the tax. And this because they – autonomous taxation – as an anti-abuse mechanism, are not alien to the general purposes of the fiscal system.

The adoption of legal regimes that limit the harmful effects that result from behaviors affecting the balanced distribution of the tax burden among the different groups of taxpayers does not constitute merely an option of the legislator, but is rather a strict obligation, as a result of the obligation to devise and make the system function as a whole in a balanced manner. Autonomous taxation introduces, certainly, taxation mechanisms which, naturally, will displease their recipients, but prevent or limit the harmful effects of abusive practices that would harm others and are, therefore, necessary to preserve the system's balances. Now, companies, just like natural persons, are also subject and with the same intensity to the general duty to pay taxes and, in this measure, fiscal law cannot fail to enshrine mechanisms that limit deviant procedures. Exactly because each one must support the tax according to what they can, that is, according to their revealed contributive capacities.

It is important to note that in our time it has been adopted, as a general rule, the regime of taxation according to real and effective income for legal entities. Now, this is not merely an option of the operation of the fiscal system, from among several other possible ones. It is rather a concrete manifestation of the modernity and maturity of a fiscal system that demands of its recipients / beneficiaries a maturity of the same stature as it also represents a new form of ethical and social responsibility towards the phenomenon of tax (regarding the questions about the limits of morality with respect to tax see SUSANNE LANDREY, STEF VAN WEEGHEL and FRANK EMMERINK). For there is a deep and indisputable interconnection between law and morality (JOÃO BAPTISTA MACHADO, Introduction to Law and Legitimizing Discourse, Almedina, 9th Reprint pp. 50 et seq.).

As SALDANHA SANCHES aptly noted, cited in Arbitral Decision 187/2013-T, pp. 28, that autonomous taxation constitutes a form of preventing abusive actions: "... that the "normal" functioning of the taxation system was incapable of preventing, being that other, including forms more burdensome for the taxpayer, were possible. This anti-abuse character of autonomous taxation, will be not only coherent with its "anti-systemic" nature (as happens with all norms of that kind), as with a presumptive nature, pointed out both by Prof. Saldanha Sanches and by the jurisprudence that cites it. They "will then materially underlie a presumption of 'partial' entrepreneurship of the expenses on which they fall, based on the above-mentioned circumstance that such expenses are situated on a gray line separating what is entrepreneurial, productive expense, from what is private, consumption expense, being that, notoriously, in many cases, the expense will even in reality have a dual nature (part entrepreneurial, part private)" (Arbitral Decision of CAAD 210/13-T speaks of "expenses that share among themselves a risk of non-entrepreneurship, that is, a risk of not being carried out for entrepreneurial purposes, but rather extra-entrepreneurial or private."

All these considerations invoke what we consider to be the true sententia legis, since the discovery of the true meaning of the law constitutes an imperative, for it is important to ensure that the activity of the interpreter achieves an interpretive sense by which the law exteriorizes its most beneficial, most fruitful and most salutary meaning, in the words of FRANCESCO FERRARA, in his Interpretation and Application of Laws, Arménio Amado, editors, 1978, p. 137 et seq. On the other hand, the logical sense of interpretation leads us only in the sense that autonomous taxation is based on a logic according to which the law intends to prevent or discourage such legal entities from (abusively) reporting as expenses amounts relating to bonuses or variable remuneration. It is the reporting as an expense for purposes of CIT, in its entirety, that is intended to be discouraged.

Invoking the ratio legis it becomes clear that autonomous taxation are assessed within the process of assessment of CIT in accordance with a root and a dogmatic proper to them that lead to the total collection of the tax not being a unitary reality but a composite one (MANUEL DE ANDRADE, Essay on the Theory of Interpretation of Laws). Thus, it is possible in it to discern the tax collection proper, resulting from the general mechanics of CIT calculation, which is owed with constitutional foundation based on the general duty of each one (in which legal entities are included) to contribute to public expenses according to their means (art. 103, no. 1 of the CRP). All in respect and in compliance with the principles of justice, equality and the duty to pay tax according to the revealed contributive capacity. And to which the amounts referred to in article 90 of the CIRC are deducted in the terms and manner referenced there.

To this general collection, rooted in this foundational order basis, is added the specific collection, owed by autonomous taxation, which has, as has been made clear, a root, a sense and a foundation of its own, which is to discourage the adoption of behaviors taxed by them, listed in art. 88 of the CIT Code, which constitutes, as is settled doctrine, an anti-abuse norm, which allows us to invoke here all the dogmatic proper in which it is based. Being that, in this case, because it is a matter of fulfilling purposes that go beyond the purely revenue-generating purposes of the tax, to be situated in the field of behaviors that the law considers abusive and / or undesired, it seems clear to us that it does not make sense that deductions be made to it, under penalty of emptying, in practice, of any meaning the anti-abusive regime created.

Mindful of what has been set out, we are now in a position to analyze the Claimant's request, regarding the legality of the deduction of SIFIDE to the part of the CIT collection corresponding to autonomous taxation.

V.2. As to Non-Deductibility of SIFIDE

It was concluded that the collection of autonomous taxation has a different root, which cannot, under penalty of subversion of the order of values, permit the deduction of fiscal benefits, under penalty of decharacterization of the principles that are specifically intended to be pursued.

In fact, as the regime of autonomous taxation has a deterrent function for abusive behaviors, there is no apparent logical reason why that deterrent could, afterwards, fade away, which would happen if it were possible to deduct fiscal incentives, such as the Claimant seeks, to the collection of autonomous taxation. That possibility would result in a strange double effect: on the one hand it could, at the limit, eliminate the collection resulting from autonomous taxation and, on the other, would provide the deduction of a certain fiscal benefit (in this case, SIFIDE is at issue, by the fulfillment of the objectives or adoption of the conduct set in the norm granting the right to the fiscal benefit) to tax that has a specifically anti-abuse function, of mitigation of fiscally and socially undesired behaviors.

From the combination of these possibilities would result a contradictory, illegal and unethical result, precisely because the same fiscal law would permit, within the framework of the same fiscal system, to relieve the taxpayer of the burden of payment of a tax that is exactly owed by the adoption of abusive, undesired and discouraged conduct (reporting as expenses of the expenses provided for in art. 88 of the CIRC).

It is concluded, in this way, by the illegality of the deductibility of SIFIDE to the collection of autonomous taxation, without the need to make use of the interpretative character given by article 135 of Law no. 7-A/2016, of 30 March (State Budget for 2016), to no. 21) of article 88 of the CIRC, which now has the following content: "21 - The assessment of autonomous taxation under CIT is carried out pursuant to the provisions of article 89 and is based on the values and rates that result from the provisions of the preceding numbers, with no deductions being made to the global amount calculated."

In sum, the legislator in adding this no. 21 to article 88 of the CIRC with the aforementioned content limited itself to adopting and reinforcing the interpretative sense that already resulted from the existing norms as was demonstrated by the reasoning set out above.

Thus being, by all that has been set out, the argument invoked by the Claimant is also without merit, in the sense of the illegality of the assessments, for lack of legal basis for their implementation, based on articles 8, no. 2, paragraph a), of the LGT and 103, no. 3, of the Constitution, this latter provision establishing that "no one can be obliged to pay taxes that have not been created pursuant to the Constitution, that have a retroactive nature or whose assessment and collection are not made pursuant to the law".

In fact, the solution found by this panel finds clear legal basis without even needing to apply the norm of no. 21 of article 88 of the CIRC, as was demonstrated by the reasoning set out above.

In these terms, the Claimant's argument is without merit, for the reasons and on the grounds invoked, with respect to the possibility of deduction of the fiscal benefit relating to SIFIDE to the collection of autonomous taxation.

V.3 Compensatory Interest

The assessment of the condemnation of the Respondent to payment of compensatory interest is prejudiced by the solution reached above.

With the tax acts examined remaining valid, as a consequence, the request for compensatory interest should also be judged without merit.

VI. DECISION

In light of all that has been stated, it is decided:

1. To judge entirely without merit the request for declaration of illegality of the act of dismissal of the administrative complaint and of the consequent self-assessments of CIT, relating to fiscal year 2013 (assessment no. 2015...) and 2014 (assessment no. 2015...);

2. To maintain entirely the tax acts that are the subject of this proceeding;

3. To condemn the Claimant to payment of the costs of the proceeding, as follows.

The value of the proceeding is fixed at €243,080.58 pursuant to article 97-A, no. 1, a), of the CPPT, applicable by virtue of paragraph a) of no. 1 of article 29 of the RJAT and of no. 2 of article 3 of the Regulation of Costs in Tax Arbitration Proceedings.

The value of the arbitration fee is fixed at €4,284.00 pursuant to Table I of the Regulation of Costs of Tax Arbitration Proceedings to be paid entirely by the Claimant, since the claim was entirely dismissed, pursuant to articles 12, no. 2, and 22, no. 4, both of the RJAT, and article 4, no. 4, of the cited Regulation.

Notify accordingly.

Lisbon, 15 March 2017

The Arbitrators

Dr. Maria Fernanda dos Santos Maças - Arbitrator President

Dr. Artur Maria da Silva

Dr. André Festas da Silva - (Rapporteur)

[1] The System of Tax Incentives for Research and Business Development aims to increase the competitiveness of companies, supporting their Research and Development effort through deduction to the CIT collection of the respective expenses.

SIFIDE was created in 1997 as a measure to stimulate the participation of the business sector in the overall R&D effort. The experience resulting from its application allows us to conclude that this mechanism has contributed to an effective increase in R&D activity by Portuguese companies. The incentive system has undergone several revisions. SIFIDE II became effective from 2011 with the introduction of some amendments to the legislation that make it even more attractive for companies. The State Budget Law for 2011 – Law no. 55-A/2010, of 31 December, subsequently amended by Law 83-C/2013 of 31 December, instituted SIFIDE II, which replaced SIFIDE, with the objective of continuing to increase the competitiveness of companies, supporting their efforts in R&D. The System of Tax Incentives for Research and Business Development II, in effect for the period 2013 to 2020, aims to support Research and Development activities, related to the creation or improvement of a product, a process, a program or equipment, which present a substantial improvement and do not result merely from a simple use of the current state of existing techniques.