Wind Turbine Depreciation IRC Tax Dispute: CAAD Arbitration on Amortization Rates and Useful Life

ARBITRAL DECISION

The Arbitrators José Pedro Carvalho (Presiding Arbitrator), Paulo Lourenço and Henrique Fiúza, designated by the Ethics Council of the Administrative Arbitration Centre to form an Arbitral Tribunal, hereby agree:

I – REPORT

On 24 October 2016, Parque Eólico A…, SA., with registered office …, …, …, holder of Tax ID …, 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 Regime for Arbitration in Tax Matters, as amended by Article 228 of Law no. 66-B/2012, of 31 December (hereinafter, abbreviated as RJAT), seeking the declaration of illegality of the corporate income tax (IRC) assessment act no. 2015…, the interest assessment no. 2015… and the account settlement statement no. 2015…, relating to the 2011 tax period, insofar as they considered the values relating to the depreciation of wind turbines of Parque Eólico A… as fiscally non-deductible costs for that period.

To substantiate its request, the Applicant alleges, in summary, that:

The depreciation rate applied by the Applicant falls within the legally permitted range.

If the 20-year term corresponded to a minimum useful life period, it would place the maximum term at 40 or 50 years.

That given the concrete characteristics of the wind turbines that were purchased, the useful life period of 15 years is the most reasonable.

That the interpretation of the law made by the Tax Authority is unconstitutional, as it violates the principle of equality and taxpaying capacity.

On 26 October 2016, the request for constitution of the arbitral tribunal was accepted and automatically notified to the Tax Authority.

The Applicant did not proceed with the appointment of an arbitrator, therefore, pursuant to paragraph (a) of paragraph 2 of Article 6 and paragraph (a) of paragraph 1 of Article 11 of the RJAT, the President of the Ethics Council of the CAAD designated the signatories as arbitrators of the collective arbitral tribunal, who communicated acceptance of the appointment within the applicable time period.

On 28 December 2016, the parties were notified of these designations, having manifested no intention to oppose any of them.

In accordance with the provisions of paragraph (c) of paragraph 1 of Article 11 of the RJAT, the collective Arbitral Tribunal was constituted on 12 January 2017.

On 13 February 2017, the Respondent, duly notified for this purpose, filed its defence based solely on refutation.

On 27 March 2017, the hearing referred to in Article 18 of the RJAT took place, during which the witnesses presented by the Applicant were heard.

A deadline having been granted for the submission of written submissions, these were submitted by the parties, pronouncing on the evidence produced and reiterating and developing their respective legal positions.

A deadline of 30 days was set for the issuance of the final decision, following the submission of submissions by the Respondent, which deadline was extended by a further 30 days.

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

The parties have legal standing and capacity, are legitimate and are properly represented, in accordance with Articles 4 and 10 of the RJAT and Article 1 of Ministerial Order no. 112-A/2011, of 22 March.

The proceedings do not suffer from any nullities.

Accordingly, there is no obstacle to the adjudication of the case.

Having considered all of the foregoing, it is appropriate to deliver the decision.

II. DECISION

A. MATTERS OF FACT

A.1. Facts Found as Proven

With respect to matters of fact, it is first important to note that the tribunal is not required to pronounce on everything alleged by the parties; rather, it has the duty to select the facts relevant to the decision and to distinguish proven facts from those not proven, in accordance with Article 123, paragraph 2, of the Code of Tax Procedure and Process and Articles 607, paragraphs 2, 3 and 4 of the Code of Civil Procedure, applicable by virtue of Article 29, paragraph 1, subparagraphs (a) and (e), of the RJAT. In this manner, the facts pertinent to the judgment of the case are chosen and delimited according to their legal relevance, which is established in consideration of the various plausible solutions to the legal question(s) (see Article 596 of the Code of Civil Procedure, applicable by virtue of Article 29, paragraph 1, subparagraph (e), of the RJAT).

In light of the positions assumed by the parties and the documentary evidence attached to the file, the following facts with relevance to the decision are considered proven:

1. The Applicant has as its business purpose the production, distribution and sale of electrical energy using renewable sources, namely wind energy, through the construction and operation of wind parks and electrical energy transmission lines, and is classified under the general corporate income tax system for IRC purposes.

2. In the context of its activity, the Applicant owns wind park A…, in which it has 16 wind turbines with a total installed capacity of 32 MW.

3. The Applicant carries out its activity of production, distribution and sale of electrical energy in this wind park through the use of wind power.

4. Following service order no. OI2014…, the Applicant was subject to a partial-scope inspection procedure regarding IRC for the 2011 tax period.

5. Following that inspection procedure, the Applicant was notified of the Draft Corrections to the Inspection Report proposed by the Tax Inspection Division of the Finance Directorate …, in which the following correction was proposed for IRC purposes:

1. The Applicant recorded in account 6423000001 - WIND TURBINE DEPRECIATION, depreciation amounts of €1,630,474.19, which correspond to a percentage of 6.75% on the amount of €24,154,942.55, recorded in account 4330000001 - FIXED ASSETS – WIND TURBINES.

2. From the analysis of the depreciation and reinstatement schedules, the Tax Services verified that the Applicant applied depreciation on Wind Turbines at the rate of 6.75%.

3. Pursuant to paragraph 2 of Article 30 of the IRC Code and paragraph 3 of Article 5 of Regulatory Decrees 2/90 and 25/09, the Tax Services considered, for purposes of reinstatement and depreciation, that the acceptable useful life period for wind parks (fixed tangible assets as a whole) would be 20 years, which corresponds to a reinstatement/depreciation rate of 5%.

4. Thus, the Tax Inspection considered a book depreciation not accepted fiscally, in accordance with Article 34 of the IRC Code, which it considered should have been added in table 07 of the periodic declaration model 22 of IRC for the 2011 fiscal year, for purposes of calculating taxable profit, in the total amount of €422,727.96.

5. The Applicant did not exercise the right to be heard on the above-mentioned draft corrections.

6. Through official letter no. …, of 18 December 2015, the Tax Inspection Services issued the final version of the tax inspection report, having made a correction to the fiscal result declared in the amount of €422,727.96.

7. The Applicant was notified of the IRC assessment statements, compensatory interest assessments and account settlement statements that are the subject of this arbitral action, from which resulted a total amount of tax and compensatory interest to be paid amounting to €132,760.89, with the voluntary payment deadline ending on 19 February 2016.

8. The Applicant made payment of the above-mentioned amount on 28 December 2015.

9. The Applicant filed a Gracious Complaint against the said tax acts.

10. On 16 June 2016, the Applicant was notified by Official Letter no. …, of 15 June 2016, from the Director of Finance of the Finance Directorate of …, of the draft decision to dismiss the Gracious Complaint filed.

11. Having not exercised its right to a prior hearing, the Applicant was notified on 25 July 2016 by Official Letter no. …, of 22 July 2016, confirming the total dismissal of the Gracious Complaint filed, which is why it presents this request for arbitral decision.

12. The Tax Authority made several informal consultations on the internet websites of the main manufacturers present in Portugal, namely B… (currently C…), D…, E… and F…, and concluded that the generality of those manufacturers assume that the expected useful life time (Life Time Cycle) of each machine they produce is 20 years.

13. Standard 61400-1 of the International Committee of Electronics states on its page 24: "The design lifetime for wind turbines classes I to III shall be at least 20 years".

14. In the Technical Study "Expected Useful Life Period of Wind Energy Conversion Equipment" of the National Laboratory for Energy and Geology (LNEG), of December 2013, one can read:

a. on page 3: "The methodology developed by LNEG made it possible to conclude that the maximum useful life period of a wind turbine is between 20 and 25 years";

b. on page 5: "(…) Thus, the warranty period of a wind turbine is similar to that attributed to any equipment acquired through a commercial transaction. In the case of wind turbines this period corresponds to 2-5 years after its entry into operation. Normally this warranty period refers not only to the operation and maintenance of the equipment, but also to production warranty, being directly related to the period for which maintenance contracts are written. Initially these contracts had a duration of 2 to 5 years; however, in more recent years there have been cases in which these contracts are written for longer periods, reaching the expected useful life period for wind turbines (approximately 20 years).";

c. on page 6: "if the minimum operating life period of a wind turbine (guaranteed by manufacturers) were 20 years, the maximum useful life period would be assumed, automatically, as being twice the minimum period, i.e., 40 years, which in no way corresponds to the reality of the current wind sector";

d. on page 20: that "According to the results previously presented in figure 18, this reduction value corresponds to a maximum useful life period of between 20 and 25 years".

1. The dissertation "Methodologies for Assessing the Performance of Wind Parks" by Nuno Cardoso, conducted as part of the Integrated Master's in Mechanical Engineering, under the coordination of Professor Álvaro Henriques Rodrigues of the Department of Mechanical Engineering and Industrial Management of the Faculty of Engineering of the University of Porto, states on page 12 the following:

"(…) the operation phase of a wind park is what extends over a longer period of time. The 20-year time horizon is the one habitually considered, since it represents the expected useful life for the wind turbines around which the activities carried out are centered: exploitation, maintenance and conservation of the park."

1. The environmental impact study prepared by the French "Ministère de l'Écologie et du Développement Durable" (2005) states on its page 52 an estimated useful life period of wind turbines of 20 to 30 years, at the end of which the operator has the responsibility to dismantle the wind park and restore the location to its original state.

2. The "Renewable Energy Fact Sheet: Wind Turbines" prepared by the "United States Environmental Protection Agency" mentions on its page 2 a typical useful life of 20 years.

A.2. Facts Found as Not Proven

As stated, with respect to matters of fact established as certain, the tribunal is not required to pronounce on everything alleged by the parties; rather, it has the duty to select the facts relevant to the decision and to discriminate between proven and unproven matter, as provided in Article 123, paragraph 2, of the CPPT, applicable by virtue of Article 29, paragraph 1, subparagraphs (a) and (e), of the RJAT. In this manner, the facts pertinent to the judgment of the case were, as stated above, chosen and delimited according to their legal relevance, with no other factual matter alleged being relevant for the correct composition of the procedural dispute.

B. ON THE LAW

As appears from the facts found as proven, the Tax Authority disregarded the depreciation rate corresponding to a useful life period of 15 years, applied by the Applicant, because it understood that 20 years would, in its view, be the reasonable period for this purpose.

The Tax Authority's decision is based on paragraph 2 of Article 31 of the IRC Code and paragraph 3 of Article 5 of Regulatory Decree no. 25/2009, of 14 September, which provide, respectively:

• "With respect to assets for which depreciation or amortization rates are not fixed, those considered reasonable by the Tax Authority are accepted, taking into account the expected useful life period."

• "With respect to assets not mentioned in the preceding paragraph for which depreciation or amortization rates are not fixed in the tables referred to in paragraph 1, those considered reasonable by the Tax Authority are accepted, taking into account the expected useful life period."

The issue to be resolved in the present proceedings has already been the subject of consideration in other tax arbitral proceedings, as indicated by the parties, and, generally speaking, the decisions rendered have gone in the direction of replacing the judgment made by the Tax Authority, considering the shorter period used by the taxpayers to be reasonable.

With all due respect for such decisions, it is considered pertinent and correct the criticism made in the dissenting opinion rendered in arbitral proceedings no. 593/2015T[1], which, with the appropriate deference, is transcribed:

"It should be noted that, pursuant to Article 31, paragraph 2 of the IRC Code and Article 5 of Regulatory Decree no. 25/2009, of 14 September, those depreciation rates became the applicable ones 'ex lege', insofar as those provisions granted the Tax Authority a discretionary power to fix the rates – within a specific framework of 'technical discretion', as we shall see in more detail below.

This is sufficient to close the issue specifically raised by the omission of express depreciation rates for the equipment in question: those provisions point the way to resolve this issue, and that was the path followed. Depreciation rates defined in accordance with the law became available, and those were the ones applied. (...)

Let us now clarify our understanding, both as to the existence, in this case, of 'technical discretion' in the strict sense, and as to its implications regarding the susceptibility to judicial review of decisions taken, in this area, by the Tax Authority.

Administrative discretion is more a power-duty than a pure freedom of choice, since everything is subordinated to the pursuit of the concrete public interest, although as to the content, object, or form of the administrative solution a multiplicity of equally valid paths may be admitted – that is, those that do not collide with any other principle guiding administrative activity.

In cases where the law intended to grant discretion, it is no longer legitimate for the Tribunal in charge of controlling the legality of an act of administration to enter into the definition of a content, object or form as the only ones compatible with the purpose to be pursued, in order, based on them, to assess the act in question – which in practice would mean admitting that the Tribunal would replace the Public Administration in drawing up the elements of the act performed by it, denying the very existence of the discretion established by law.

The margin of free administrative decision thus constitutes a functional limit to administrative jurisdiction, insofar as that margin centers on spheres of merit, convenience or opportunity in the allocation of competence, without implications for the validity of administrative conduct, and is therefore outside the scope of judicial review, which can only apply to the violation of the external limits of discretionary power (although there remains the possibility of merit review through administrative channels, which is still compatible with the autonomy of public administration).

In other words, in pure administrative discretion, Courts must limit themselves to verifying whether the legal limits of discretion, the positive limits of competence, purpose, impartiality and proportionality were or were not respected – and cannot review whatever resulted from the administrative decision taken in observance of those limits. (...)

Since the Tribunal cannot replace the Administration in formulating a judgment that strictly belongs to the merit and opportunity of its action, technical discretion is in principle also removed from judicial review, unless it shows gross, manifest, crass error.

In the strict sense, technical discretion is that in which, where questions requiring specialized scientific knowledge are at issue, the Administration is required to make decisions supported by technical and professional information and studies, with the Administration thus bound by the conclusive expression of the professionals consulted, and not being able to adopt any solution other than the one indicated by the specialists – and administrative decisions of this nature can only be challenged judicially or administratively if there is a lack of support in those technical information corroborated by specialists in the matter, or if the decision departs ostensibly from the conclusions contained in those information and studies.

In technical discretion the prerequisites that form part of the provision of the rule configure technical concepts relating to facts that are only verifiable or assessable on the basis of knowledge and instruments proper to sciences other than legal science.

What is involved, therefore, is an administrative activity translated into technical judgments of existence, technical value judgments or technical probability judgments, by which the law grants the Administration a power of technical valuation, which, not entailing a comparative balancing of secondary interests, involves the valuation of facts and circumstances of a technical character.

Hence, the doctrine has sometimes, over the century and a half of development of the concept (which apparently emerged in the mid-nineteenth century), used the expression 'improper discretion' as a genus of which 'technical discretion' would be a species, seeking thereby to emphasize the absence of judgments of opportunity and convenience that prevail over judgments of a strictly technical character (the 'technical discretion' would be allied with 'freedom of proof' and with 'bureaucratic justice' within this family of 'improper discretions'). (...)

On the other hand, in technical discretion 'in the strict sense' there is no room for a valuation judgment based on indeterminate legal or legal-technical concepts, a judgment that has nothing to do with the margin of free assessment and decision that characterize genuine discretionary judgment, rather being recduced to the rules proper to legal interpretation in a purely subsumptive mode of application and, therefore, subject to judicial control.

With the technique of the indeterminate legal concept there is no discretion: the law refers to a sphere of reality whose limits do not appear clearly set out, but which can be determined in the concrete case, through interpretation, not admitting more than one solution, more than one 'specification' of the concept.

In technical discretion 'in the strict sense', there is indeed room for a valuation judgment based on knowledge and rules proper to the science or non-legal technique in question, being certain that it is not for the Tribunal to control the good science or good technique employed by the administrative entity, due to manifest lack of competence in the non-legal matters necessary for such purposes.

These are cases where assessment by the Administration requires the use of technical criteria, and the solution of technical questions must be accomplished in accordance with the rules and knowledge proper to them – and the law not only recognizes this but imposes it on all operators of Law (and not only on the Administration, its primary recipient).

Where technical discretion 'in the strict sense' is present, judicial review must, therefore, be limited to the zones of vinculation adjacent thereto, or, again, limit itself to verification of respect, or not, for the legal limits of discretion, the positive limits that presided over the legal allocation of discretionary power and corresponding prerogatives – and can specifically review, on the boundaries of the 'margin of free assessment', (1) a gross or manifest error of assessment (2) an error in the factual presuppositions (3) a deviation of power or (4) a manifest violation of the general principles of impartiality, equality, proportionality, justice and good faith as principles conforming administrative activity.

More specifically, if the law entrusts the Administration with the power to specify a valuation not previously fixed by the law itself, a Tribunal cannot proceed to reweigh the judgments made by the Administration in that area, unless it is demonstrated that there exists a gross or manifest error – namely the lack of support in technical and professional information and studies corroborated by specialists and required by the specification of non-legal concepts. (...)

We are here very close to the area in which, in the USA, the theme of 'technical discretion' has developed, there very focused on delimiting the competence of regulatory agencies, both to define the limits of their rule-making function and to establish the limits of the corresponding judicial review.

There emerged the technique of 'standards', by which the law limits itself to establishing parameters, principles, indeterminate concepts, leaving it to the agencies to function to specify regulatory norms, guidelines – specialized and decentralized rules, based on technical knowledge that cannot be encompassed, in its specificity, either by the legislature itself or by judicial review.

A Tribunal cannot review those judgments, it is insisted, no matter how much they diverge from the understanding of the parties or the understanding of the judge himself – a Tribunal having to limit itself to the zones of vinculation adjacent thereto, and at most demonstrate, through other technical and professional information corroborated by specialists, that the information and studies used by the Administration in support of its judgments were glaringly false, capricious or inadequate, or that they were ostensibly, grossly, disregarded in the very judgments made by the Administration for the intended specification of non-legal concepts.

Let us insist that the mere divergence of judgments between the Administration and the parties, or even between the Administration and the Tribunal, does not constitute proof of any error or defect in the impugned act that is subject to judicial review, and in no way legitimates the Tribunal replacing the Administration in formulating a judgment that strictly belongs to the merit and opportunity of its action.

And such is the case that, in cases of gross error where it can be concluded that the Administration has exceeded its powers and openly departed from the field of technical discretion to enter that of illegality, to the point where the Tribunal can annul the administrative decision in question, it is settled that the Tribunal can never replace the annulled administrative decision with another that it deems more appropriate – that is, it cannot, without violation of the constitutional principle of separation of powers, assume that technical discretion.

A Tribunal cannot review those judgments, in sum, except under those strict presuppositions, except when a crass, glaring, ostensible error is evident, translated into serious maladjustment of the decision to the concrete situation and the pursuit of the public interest, in terms where the exclusion of judicial review by non-technical means could be considered arbitrary – for otherwise, without all these safeguards, technical discretion 'in the strict sense' would be dead letter, everything failing in strict vinculation, and the invocation of a margin of free assessment and technical valuation entrusted to the Administration would become a bizarre legal fiction. (...)

Returning to the case, and summarizing.

If we accept that there is discretionary power established in favor of the Tax Authority, we cannot fall into the temptation of proceeding to a 'comparison of reasonableness' between depreciation periods, the one proposed by the Applicant and the one proposed by the Tax Authority: the law expressly prohibited it by establishing discretionary power in favor of the Tax Authority.

Thus, to reject as 'not reasonable' a period proposed by the Applicant, it was sufficient for the Tax Authority to develop a diligence to demonstrate that that period does not result from the concept of 'expected useful life' that it, the Tax Authority, itself embraces. The Tax Authority did so; and in doing so did not violate ostensibly, grossly, any of the general principles of law to which it is subject.

Given the technical discretion, it is not for any Tribunal to enter into the substantive merit of the assessment, and even less for an arbitral tribunal, which must limit itself to issues of legality (Article 2 of the RJAT).

This Tribunal, or any other, may find that the period proposed by the Applicant is more reasonable, or conversely may find that the period proposed by the Tax Authority is more reasonable – but that evaluation is, and must be, irrelevant in this case, because, it is insisted, the establishment by law of discretionary power, such as that which was exercised, precludes any possibility of 'comparison of reasonableness' between depreciation periods, as it precludes any other judgment of merit.

What would remain for this Tribunal, or any other Tribunal, would be to review the zones of vinculation adjacent to the exercise of said technical discretion, demonstrating that the Tax Authority adopted a procedure that is glaringly, grossly, incorrect, to the point of leaving no doubt as to whether it might be affected by illegality in the exercise of discretionary power – to the point of permitting that, based on a non-technical judgment, it be evident that the anti-legal nature of the results of the Tax Authority's action.

This understanding is subscribed to, that is, that the norms in question grant the Tax Authority technical discretion, with the result that the Tribunal can only 'review the zones of vinculation adjacent to the exercise of said technical discretion, demonstrating that the Tax Authority adopted a procedure that is glaringly, grossly, incorrect, to the point of leaving no doubt as to whether it might be affected by illegality in the exercise of discretionary power – to the point of permitting that, based on a non-technical judgment, it be evident that the anti-legal nature of the results of the Tax Authority's action.'"

Notwithstanding the findings in the recent decision rendered in arbitral proceedings 238/2016T of the CAAD[2], which understood that, in a case analogous to the present one, discretionary power to the Administration would not be at issue, this understanding is maintained.

Indeed, it is considered that the said judgment was anchored essentially in jurisprudence and doctrine that is considered not directly transposable to the concrete case, since they relate to a type of technical discretion based exclusively on the use by the legislature of eminently technical terms or that, in any way, imply a judgment of such a nature.

In the case at hand, not only does the judgment underlying the norms in question have, in fact, an eminently technical nature, but, furthermore, the said norms refer to a judgment of reasonableness specifically granted to the Tax Authority, using the expression 'those considered reasonable by the Tax Authority are accepted', leaving no doubt that one is in the domain of the discretionary powers of the Administration, which, moreover, by force of the principle of separation of powers, must be respected, as it continues to be recognized by recent jurisprudence[3], it being the case that the matter to which the said discretionary powers refer is of an eminently technical nature.

It is concluded, thus, without doubt, that the legislature granted a margin of freedom to the Tax Authority, by using the expression transcribed above, and being the decision of the Tax Authority subject to review, it is, uniquely, within the limits that respect the deferred margin of free assessment legitimately granted by the legislature to the Tax Authority.

Nevertheless, in this case, it is judged that what occurs is that the discretionary power was, in view of the law, incorrectly exercised, which one will seek to demonstrate by two routes.

Let us see.

Although, in this case, one is in the field of technical discretion, the considerations set forth in the Decision of the Supreme Administrative Court of 27 November 2013, rendered in proceedings 01159/09[4], regarding the application of indeterminate concepts, shall be directly applicable, understanding that:

"Thus, when encountering indeterminate concepts, it falls to the decision-making body, first of all, to apprehend their meaning and scope through an interpretative operation of the rule in which they are inserted, for the law must provide, in large measure, a sufficiently clear standard for their interpretation. An interpretative operation that, being bound, also falls to the tribunal to review.

In that measure, and as noted by ANTÓNIO FRANCISCO DE SOUSA (In 'Indeterminate Concepts in Administrative Law', Almedina, 1994, p. 18 and 60.), 'indeterminate legal concepts' have peculiarities within the scope of Administrative Law, since there the judge has the function of supervising whether the administration gave the correct interpretation and application to those concepts. The interpretation and application of indeterminate legal concepts by the administration constitutes, therefore, an activity strictly bound to the law. To admit any margin of assessment in favor of the Administration 'would mean enlarging the field of discretion to the legal presupposition and thereby a serious blow would be struck at the guarantees of the citizen that the Rule of Law does not admit.'."

That is: the rule conferring technical discretionary powers on the Tax Authority remains a legal rule, requiring, prior to application (where discretion is exercised), interpretation, interpretation that is, naturally, judicially reviewable.

This is not, therefore, a matter of transposing to the domain of technical discretion the special duty of reasoning that applies to the Administration when it applies indeterminate concepts, but rather of affirming, as happens with rules that contain these, that with respect to rules conferring that it is necessary to 'apprehend their meaning and scope through an interpretative operation of the rule in which they are inserted, for the law must provide, in large measure, a sufficiently clear standard for their interpretation. An interpretative operation that, being bound, also falls to the tribunal to review.'"

In other words, the rule conferring discretionary powers on the Administration requires itself to be interpreted, first of all in the sense of determining what concrete powers are conferred – in short, what the task is that the legislature intends to be entrusted to the discretion of the Administration, it being the case that such hermeneutical operation, as it cannot fail to be, is judicially reviewable.

Thus, first of all, and in this case, it appears that the interpretation that the Tax Authority made of the legal rules in question, indicated above, is not the correct one, the Tax Authority having erroneously determined what the task incumbent upon it was in accordance therewith.

Indeed, the Tax Authority, as appears from the inspection report and the factual matter ascertained, limited itself to indicating a value corresponding to the number of years it considers reasonable for the amortization of the equipment in question.

Well, with all due respect to better opinion, that is not the meaning of the applied rules.

Indeed, both rules refer to situations where, for a given asset, depreciation or amortization rates are not fixed, providing that, in that case, those considered reasonable by the Tax Authority are accepted.

Now, the use of the plural cannot fail to be significant, and the significance should not fail to be that it is not incumbent upon the Tax Authority to fix a single depreciation rate as being reasonable, but rather to fix a range of rates that are considered reasonable.

Thus, in the hermeneutical labor to be performed, one cannot fail to note that the rules in question do not prescribe that the Tax Authority replace the legislature in the indication of a percentage, analogous to those fixed in the table that is silent with respect to the asset to be amortized, but in the indication of depreciation or amortization rates that are reasonable.

In this manner, the acceptable depreciation or amortization rates, under the current system, are comprised within a range resulting between the minimum and maximum periods of useful life of an asset, as defined in Article 3, paragraph 2 of Regulatory Decree no. 25/2009, of 14 September.

Hence, being a matter of filling the omissions of the table annexed to the said Regulatory Decree, the Tax Authority should proceed in the same terms, fixing, not a fixed depreciation or amortization rate, based on a concept of 'expected useful life', filled by a judgment of 'average value of expected utility', but, as results from the regime of that same Regulatory Decree and annexed table, a range of reasonable depreciation or amortization rates, comprised between a reasonable minimum useful life period and a reasonable maximum useful life period (tending to be equivalent to twice the minimum useful life period)[5] as, for the assets contained in the said table, occurs, it being, precisely, that which is the meaning of the use of the plural of the word 'rate', and respective concordances, in the norms of Articles 31, paragraph 2 of the IRC Code and 5, paragraph 3 of Regulatory Decree no. 25/2009, of 14 September.

Otherwise, that is, if it were understood that the Tax Authority could, in each concrete case where it were called upon to pronounce itself, fix for the same type of asset element a concrete amortization rate, and, consequently, a single useful life period, on the basis of what, in that concrete case, it deemed reasonable, one would fall into an unacceptable lack of generality in the decisions of the Administration, referring to a 'casuistry' that is precisely the opposite of what the legal system requires to happen in the filling of legal gaps through the exercise of discretionary power.

The values of security and justice require that, when the Administration is legally entrusted with the discretionary power to fill gaps in the law itself, the Administration must act on the same plane of abstraction and generality that ideally preside over the fixing of legal criteria, when these exist.

In the case of the rules in question, when the law alludes to the fact that they are 'accepted', it cannot fail to refer to the admissibility of a range of rates, which henceforth become applicable to a universe of omitted equipment, whether or not they have already been the subject of amortization or depreciation, of tax assessment or of litigation with the Administration itself.

The Administration has, awakened or not by the declarative initiative of some taxpayer, to attempt to ascertain, with impartiality, generality, abstraction and congruence, the rates that henceforth become the 'accepted' ones for that case and for all others.

Were it not so, the very guarantees that result, for taxpayers, from impartiality and generality would be put at risk: a taxpayer would see its rate of 5% be or not be accepted – but what would guarantee that another taxpayer, with the same type of equipment but could not manage to see 'accepted' a rate of 7 or 8%?

On the other hand, only the fixing of a set of reasonable rates, corresponding to the range of minimum and maximum useful life of an element of omitted assets, fixed from a point of view of generality and abstraction, makes it possible to avoid that a taxpayer with equipment analogous to another to which the Tax Authority had fixed a specific depreciation or amortization rate, but who used it in different circumstances, influential of its respective useful life period, not be irremediably prejudiced, by the circumstances valued by the Tax Authority, proper to the first case it assessed.

In this manner, as it is believed, the understanding now sustained not only does not go against the principles of security, equality and generality of law, nor against the generic duty of impartiality that rests upon the Administration, but, on the contrary, shall be imposed by them.

Thus, only depreciation rates corresponding to a minimum and maximum useful life period, accepted by the Tax Authority, and becoming the same applicable to all similar cases, in terms expressed by the legal regime, is the gap filled and the rate in force ceases to be the Tax Authority's rate to become the law's own rate. Only in that manner, it is judged, is effect given to the legal command to fix 'rates' (in the plural) of amortization or depreciation, it not being possible to conceive how the fixing of a single depreciation rate could correspond to legislative intent, when, precisely, that is not the modus operandi of the legislature when treating the same matter, on the one hand, and the legislative command is clear in prescribing the acceptance of 'reasonable' rates, on the other.

Moreover, this interpretation would always be imposed by the principle of equality, insofar as no material justification exists for taxpayers to be able to use depreciation rates comprised between the minimum and maximum period of useful life of assets, in the case that they are contained in the table annexed to Regulatory Decree no. 25/2009, of 14 September, and only to be able to use a single rate (precisely the one considered reasonable by the Tax Authority), in the case that they are not.

And, note, just as in the case of assets comprising the table annexed to Regulatory Decree no. 25/2009, of 14 September, there is no difficulty whatsoever with the range of depreciation or amortization rates resulting from the combination of the table with the regime of that decree, in the case of omissions, fixing by the Tax Authority of the range of admissible reasonable rates, there will be none. Indeed, the subsequent procedure will be precisely the same, that is, within the range fixed, whether by the combination of the regime of the Regulatory Decree and its annexed table, or by the Tax Authority, the taxpayer shall choose the rate most appropriate to his concrete situation, without there being, in either situation, any melindres, casuistry or arbitrariness, or, for those who do not so understand, there being the same in both situations.

Hence, in indicating, in accordance with Articles 31, paragraph 2 of the IRC Code and 5, paragraph 3 of Regulatory Decree no. 25/2009, of 14 September, a single amortization rate, corresponding to a fixed useful life period, the Tax Authority erred in the application of those rules and, consequently, in an erroneous exercise of the technical discretionary power that they confer on it.

In reviewing an illegality prior to the exercise of the discretionary power that the rules in question confer on the Tax Authority, one is naturally not entering into the matter of the substance of the exercise of such power, not discussing, therefore, the technical correctness of the solution to which it discreetely arrived, insofar as what is concluded is that the solution to which it arrived was not the one that the normative commands that confer discretionary power on it prescribed that it produce.

Nor does the incorrect intervention of the Tax Authority in the case at hand end here. Indeed, the situation in question is not one in which a taxpayer, confronted with the absence of an asset in the table annexed to Regulatory Decree no. 25/2009, of 14 September, requests of the Tax Authority the indication of depreciation or amortization rates that it considers reasonable.

Rather, in the case, the Applicant, in accordance with the law, filed its tax return[6], with its accounting properly organized, and the Tax Authority intended to proceed, and did proceed, to make corrections thereto, being a case in which 'It is for the Tax Authority that the obligation of proof of the verification of the legal presuppositions (binding) of its action, in particular if aggressive (positive and unfavorable)' falls[7].

That is, faced with the return of the Applicant, it fell to the Tax Authority, in the first instance, to demonstrate that it was wrong, such burden arising not from the rules of paragraphs 2 of Article 31 of the IRC Code and 3 of Article 5 of Regulatory Decree no. 25/2009, of 14 September, but from Article 74, paragraph 1 of the LGT, combined with Article 75, paragraph 1 of that same Law[8].

Now, with all due respect to other opinions, to demonstrate that the depreciation rate used by the Applicant, corresponding to a useful life period of 15 years, was incorrect – i.e., was not 'reasonable' – is not the same as to demonstrate that the depreciation rate corresponding to a useful life period of 20 years is correct – i.e., 'reasonable' – which is what the Tax Authority did.

Put differently, the circumstance that the depreciation rate corresponding to a useful life period of 20 years is reasonable says nothing about whether the depreciation rate corresponding to a useful life period of 15 years is, or is not, reasonable[9].

Thus, being, as stated, the burden of the Tax Authority to demonstrate the verification of the presuppositions of the legality of its action, and being part of such presuppositions the incorrectness of what was declared by the Applicant, it is concluded that the Tax Authority did not fully demonstrate such presuppositions, since, instead of demonstrating that the depreciation or amortization rate underlying what was declared by the Applicant was not reasonable, it limited itself to demonstrating that the depreciation or amortization rate corresponding to a useful life period of 20 years was reasonable, from which it does not follow, in either a necessary or direct manner, that the depreciation or amortization rate corresponding to a useful life period of 15 years, used by the Applicant, was not reasonable.

In this manner, the Tax Authority not having demonstrated the legality of its corrective intervention, it should, also by this route, be considered illegal.

Finally, although in the arbitral proceedings the Respondent comes to maintain that the judgment of reasonableness relating to the 20-year period is relating to a minimum durability period of the asset in question, it is judged that such argument shall not be accepted.

Indeed, first and foremost, it is considered that the said argument incorporates an ex post facto justification, since, with all due respect to other opinions, it is not discernible in the justification for the corrections made and now contested by the Applicant, textual support for such an interpretation.

Thus, as written in the Decision of the Supreme Administrative Court of 23 September 2015, rendered in proceedings 0134/11[10], 'It is exclusively in light of the justification externated by the Tax Authority when making the additional VAT assessment that the legality of that tax act must be assessed.'"

On the other hand, the fact is that the Respondent's own argument ends up contradicting such thesis, affirming, for example, that the rates determined by the Respondent correspond to 'average indices'[11], and that 'the most accurate and reasonable measure and rule will be those that are considered as the average'[12], from which it results, clearly, what is the reality, that is, that what was fixed in the corrections made was a single rate, and not a range of rates, corresponding to an average value, and not to a minimum value.

Furthermore, the consideration of the 20-year period as a minimum period is contradictory with the essentials of the elements on which the Respondent's position rests, which, as the Respondent itself acknowledges and results from the transcribed elements, refer, in general, to an average or, indeed, to a maximum, as happens with the LNEG study, to which point 19 of the proven facts refers.

Hence, as stated above, it is considered that the arbitral request should be judged to be well-founded.

The Applicant petitions accessorily, finally, payment of compensation derived from the provision of undue guarantee and compensatory interest for payment – via compensation – of tax illegally assessed.

With respect to the first of the aforementioned requests – payment of compensation derived from the provision of undue guarantee – it is not demonstrated in the file that the Applicant has provided any guarantee nor, consequently, that it has thereby incurred any charges. Hence, such request must necessarily not be granted.

As to the request for compensatory interest formulated by the Applicant, Article 43, paragraph 1, of the LGT provides that compensatory interest is due when it is determined that there was error attributable to the services from which there results payment of the tax debt in an amount exceeding what is legally due. In this case, the errors affecting the assessment are attributable to the Tax Authority, which made the illegal assessment act on its own initiative.

The Applicant thus has the right to be reimbursed for the amount that was paid in excess (in accordance with the provisions of Articles 100 of the LGT and 24, paragraph 1, of the RJAT) and, further, to be compensated for the excess payment through the payment of compensatory interest by the Respondent, from the date of payment of the amount until reimbursement, at the legal supplementary rate, in accordance with Articles 43/1 and 4, and 35/10, of the LGT, Article 559 of the Civil Code and Ministerial Order no. 291/2003, of 8 April.

C. DECISION

On these grounds, this Arbitral Tribunal decides to judge the arbitral request filed as well-founded and, in consequence:

a) Annul the corporate income tax assessment act no. 2015…, the interest assessment no. 2015… and the account settlement statement no. 2015…, relating to the 2011 tax period, insofar as they considered as fiscally non-deductible costs for that period the values relating to the depreciation of wind turbines of Eolic Park A…;

b) Dismiss the accessory requests for a ruling condemning the Tax Authority to pay compensation derived from the provision of undue guarantee;

c) Condemn the Respondent to pay compensatory interest;

d) Condemn the Respondent to pay the costs of the proceedings, fixed below.

D. Value of the Proceedings

The value of the proceedings is fixed at €132,760.89, in accordance with Article 97-A, paragraph 1, (a), of the Code of Tax Procedure and Process, applicable by force of subparagraphs (a) and (b) of paragraph 1 of Article 29 of the RJAT and paragraph 2 of Article 3 of the Regulation of Costs in Tax Arbitration Proceedings.

E. Costs

The arbitration fee is fixed at €3,060.00, in accordance with Table I of the Regulation of Costs in Tax Arbitration Proceedings, to be paid by the Respondent, since the request was well-founded, in accordance with Articles 12, paragraph 2, and 22, paragraph 4, both of the RJAT, and Article 4, paragraph 4, of the cited Regulation.

Let notice be given.

Lisbon, 22 June 2017

The Presiding Arbitrator

(José Pedro Carvalho)

The Arbitrator Member

(Paulo Lourenço)

The Arbitrator Member

(Henrique Fiúza – Dissenting, in accordance with declaration of dissenting vote)

DISSENTING OPINION

I concur with the findings in the matter of law of the present arbitral decision, when it states that the legislature conferred upon the Tax Authority technical discretion… and that 'there being, therefore, no doubt that one is in the domain of the discretionary powers of the Administration…'

This declaration of dissenting vote is made by adherence to the findings in the matter of law of the dissenting votes rendered by Professor Fernando Araújo in proceedings no. 593/2015-T and by Dr. Nuno M. Morujão in proceedings no. 233/2016-T, both of the CAAD.

Article 31, paragraph 2 of the IRC Code establishes that 'With respect to assets for which depreciation or amortization rates are not fixed, those considered reasonable by the Tax Authority are accepted, taking into account the expected useful life period.'

In turn, Article 5, paragraph 3 of Regulatory Decree 25/2009 of 14 September provides: 'With respect to assets not mentioned in the preceding paragraph for which depreciation and amortization reinstatement rates are not fixed in the tables referred to in paragraph 1, those considered reasonable by the Tax Authority will be accepted, taking into account the expected useful life period.'

This means that, in cases where depreciation or amortization rates have not been established in Regulatory Decree 25/2009 for certain elements of fixed tangible or intangible assets, it falls to the Tax Authority and Customs Authority (Tax Authority) to fix the rates that may be applied to each depreciable or amortizable asset and accepted as an expense for tax purposes, because they are considered reasonable, taking into account the expected periods of useful life.

The rules in question confer upon the Tax Authority a technical discretion that grants it the power/duty to fix the rates it considers reasonable for the depreciation or amortization of assets whose rates are not contained in Regulatory Decree 25/2009, thereby resolving the gaps in the law with respect to the determination of rates.

In this regard, we emphasize the paragraph of the arbitral decision where one can read: 'It is concluded, thus, without doubt, that the legislature granted a margin of freedom to the Tax Authority, by using the expression transcribed above, and being the decision of the Tax Authority subject to review, it is, uniquely, within the limits that respect the deferred margin of free assessment legitimately granted by the legislature to the Tax Authority.'

And having the law attributed to the Tax Authority the power/duty to fix depreciation and amortization rates not provided for in Regulatory Decree 25/2009, the tribunal cannot challenge the exercise of that power, being able only to confirm whether the administrative act of fixing the depreciation rate, in the case of wind turbines, complied with all the formalities of the law, in particular whether its reasoning was express and accessible, clear, sufficient and congruent, or whether, by obscurity, contradiction or insufficiency, it does not clarify the concrete motivation of the act, which shall be equivalent to lack of reasoning.

The right/duty attributed by law to the Tax Authority to fix depreciation and amortization rates applicable to assets not provided for in the tables annexed to Regulatory Decree 25/2009 is not subject to review by action of the claimant or by this tribunal. The law attributes to the Tax Authority, and to it alone, the technical discretion necessary to fill the gaps detected in the tables of Regulatory Decree 25/2009.

Contestable may be, however, the administrative acts of fixing the respective rates, which give substance to the technical discretion provided for by law, if gross or manifest errors are committed in them.

Indeed, for a long time the jurisprudence of the Supreme Administrative Court has uniformly admitted judicial review of questions of a technical nature, in cases where gross or manifest error is detected, but only in that case.

Nevertheless, it will be necessary to bear in mind that, although the tribunal may review the fixing of the rates under the conditions indicated, it is not for the tribunal to determine a depreciation rate 'better' than that determined by the Tax Authority or to find that the rate fixed by the Tax Authority is 'worse' than that used by the claimant. Because the law attributed to the Tax Authority, and not to the claimant or the tribunal, the power/duty to fix it.

Thus, the tribunal can only decide on the dismissal of the rate fixed by the Tax Authority if it demonstrates clearly and unequivocally that the latter committed a gross or manifest error in the determination and fixing of the 5% depreciation rate.

It falls to the tribunal to accept that the depreciation rate fixed by the Tax Authority is the appropriate one because the law was complied with, or to consider that the act of fixing the rate by the Tax Authority suffers from illegality, demonstrating that a gross or manifest error was committed, in particular by considering its decision not to be reasoned.

Now, it was amply demonstrated that the Tax Authority reasoned the act of fixing the depreciation rate of wind turbines, relying, among others, on technical study by the National Laboratory for Energy and Geology (LNEG), on diverse technical information published by wind turbine manufacturers, on a master's dissertation, on standard 61400-1 of the International Committee of Electronics.

The Tax Authority acted in accordance with what the legal provisions imposed on it: pursuant to the law, it falls to the Tax Authority to fix the depreciation rate of wind turbines that it considers reasonable, taking into account the period of expected useful life.

And that is what the Tax Authority did, resorting to independent technical and scientific information, to arrive at the determination of reasonableness in the case, and in accordance with the law fixed the maximum depreciation rate of 5%, which corresponds to the minimum useful life period of 20 years, thereby rejecting the 6.75% depreciation rate that would correspond to a minimum useful life period of 14.8 years.

But the arbitral decision, not alleging illegality in the reasoning of the Administrative act of fixing the depreciation rate of wind turbines, comes to allege that 'Nevertheless, in this case, it is judged that what occurs is that the discretionary power was, in view of the law, incorrectly exercised, which one will seek to demonstrate by two routes.'

To then affirm that:

'Thus, first of all, and in this case, it appears that the interpretation that the Tax Authority made of the legal rules in question, indicated above, is not the correct one, the Tax Authority having erroneously determined what the task incumbent upon it was in accordance therewith.

Indeed, the Tax Authority, as appears from the inspection report and the factual matter ascertained, limited itself to indicating a value corresponding to the number of years it considers reasonable for the amortization of the equipment in question.

Well, with all due respect to better opinion, that is not the meaning of the applied rules.

Indeed, both rules refer to situations where, for a given asset, depreciation or amortization rates are not fixed, providing that, in that case, those considered reasonable by the Tax Authority are accepted.

Now, the use of the plural cannot fail to be significant, and the significance should not fail to be that it is not incumbent upon the Tax Authority to fix a single depreciation rate as being reasonable, but rather to fix a range of rates that are considered reasonable.

Thus, in the hermeneutical labor to be performed, one cannot fail to note that the rules in question do not prescribe that the Tax Authority replace the legislature in the indication of a percentage, analogous to those fixed in the table that is silent with respect to the asset to be amortized, but in the indication of depreciation or amortization rates that are reasonable.'

With all due respect to the opinion, I understand that the meaning of the rules in question is the fixing of only one rate for each element of fixed assets, since the law refers to 'rates' (in the plural) by reference to 'assets' (in the plural) omitted in the rules to be indicated below.

Article 31, paragraph 2 of the IRC Code establishes that 'With respect to assets (plural) for which depreciation or amortization rates (plural) are not fixed, those (rates) considered reasonable by the Tax Authority are accepted, taking into account the expected useful life period (of the assets).'

In turn, Article 5, paragraph 3 of Regulatory Decree 25/2009 of 14 September provides: 'With respect to assets (plural) not mentioned in the preceding paragraph for which depreciation and amortization reinstatement rates (plural) are not fixed in the tables referred to in paragraph 1, those (rates) considered reasonable by the Tax Authority will be accepted, taking into account the expected useful life period (of the assets).' (in parentheses ours)

If not, let us see.

The legislature, in fixing a depreciation rate applicable to a certain fixed tangible asset in Regulatory Decree no. 25/2009 of 14 September, is indeed not fixing only one depreciation rate but a range of rates. Rather, the legislature, in fixing a rate, fixes several realities simultaneously and in one single act, because they are a consequence of the same, in accordance with the applicable law: it fixes the maximum depreciation rate, it fixes the minimum useful life period, it fixes the minimum depreciation rate, it fixes the maximum useful life period and it fixes a set of other rates, comprised between the maximum rate and the minimum rate, which taxable subjects can use to better adapt the depreciation rate to their business reality.

Now, if the legislature did not need to fix all those rates in the law (Regulatory Decree 25/2009), it being sufficient for it to fix one, so that taxable subjects could use any of them and see the expenses thus accounted for accepted for tax purposes, one cannot require the Tax Authority to fix a range of rates in order for its decision not to be challenged by the tribunal.

In fact, the Tax Authority, in reasoning its act, fixed the rate of 5% for the depreciation of wind turbines and did everything that was required of it. In fixing the 5% rate for the depreciation of wind turbines, all taxable subjects came to know, pursuant to the law, that any depreciation rate comprised between 5% and 2.5% would be accepted as a tax expense for the depreciation of wind turbines.

What I mean by this is that, having the Tax Authority scrupulously complied with the law in the act of fixing the depreciation rate of wind turbines at 5%, which corresponds to the useful life period of 20 years, it will not be possible to demonstrate that the Tax Authority committed an illegality by not fixing a range of rates and thus consider the act not reasoned and therefore be declared null by the tribunal.

In the part in which the arbitral decision refers to tax corrections for the determination of taxable profit, they are only a consequence of the fixing of a depreciation rate (5%) lower than that used by the claimant (6.75%). Article 34 of the IRC Code provides that depreciation and amortization that exceed the limits established by law are not accepted as expenses. In this manner, the excess ascertained gives rise to a tax correction to be added to the net result for the determination of taxable profit.

Conclusion

For all that has been said, it is to be concluded that the Tax Authority did not err in the exercise of the technical discretion conferred on it by paragraph 2 of Article 31 of the IRC Code and by Article 5 of Regulatory Decree no. 25/2009, of 14 September.

It is further concluded, even less so, that the Tax Authority erred gravely, in terms that would permit the contention review of the exercise of its legal discretionary power.

Thus, pursuant to paragraph 2 of Article 31 of the IRC Code and Article 5 of Regulatory Decree no. 25/2009, of 14 September, the depreciation rate legally applicable to wind turbines is 5%, which corresponds to the useful life period of 20 years.

The Tax Authority is correct; the Applicant is not.

In these terms, the Respondent Tax Authority should have been absolved and the present arbitral action should have been judged unfounded.

Henrique Fiúza

(Economist)