SIFIDE Tax Credit Deduction Against Autonomous Taxation in IRC: CAAD Ruling 638/2016-T

ARBITRAL DECISION

Award

The arbitrators José Poças Falcão (presiding arbitrator), Nuno Oliveira Garcia and António Martins (co-arbitrators), designated by the Ethics Council of the Administrative Arbitration Center (CAAD) to form this Collective Arbitral Tribunal, hereby agree as follows:

I. STATEMENT OF FACTS

1. On 26-10-2016, A… SGPS, S.A. (hereinafter referred to as "Claimant"), with registered office at Rua…, no.…, …-… …, Municipality of Amadora, with tax identification number (NIPC) …, registered at the … Registry Office of Land and Commercial Registration of Amadora under the same number, alleging to be the parent company and responsible for the self-assessment of Corporate Income Tax ("IRC") of the Group to which, in the tax period of 2011, was [and is currently] applicable the Special Taxation Regime for Groups of Companies ("RETGS"), came to request the establishment of an Arbitral Tribunal, under the terms and for the purposes of the provisions contained in articles 2nd and 10th of the Legal Regime for Arbitration in Tax Matters (hereinafter referred to as RJAT, approved by Decree Law no. 10/2011, of 20 January), presenting a request for arbitral decision, having as object the decision of the Tax and Customs Authority ("TA") – Directorate General of Finance – which tacitly rejected the Claimant's request for ex officio revision.

2. The Claimant alleged, in summary, to substantiate the request:

Having regard to the provisions of article 90th of the IRC Code and the tax provisions governing each of the deductions provided for in no. 2 of that article, the Claimant maintains that the amount relating to the tax credit arising from SIFIDE I 2010, available for utilization, should be deducted from the tax collected, which includes, in addition to IRC collected, state surtax collected (whenever applicable) and autonomous taxation collected.

The Claimant further alleges that, on the matter in question, article 90th, no. 1, paragraph a) of the IRC Code, as drafted at the date to which the facts relate, established that the assessment of that tax "is based on the taxable income" determined in the IRC Model Declaration 22 referred to in article 120th of the same Code. Additionally, no. 2 of article 90th of the IRC Code provided that "to the amount determined" in accordance with no. 1 "the following deductions are made, in the order indicated:

a) the deduction for international double taxation;

b) the deduction relating to tax benefits;

c) the deduction relating to special advance payment referred to in article 106th;

d) the deduction relating to tax withheld at source not susceptible to set-off or reimbursement under applicable legislation."

The Claimant contends that the amount of tax determined in the payment statement under analysis is not correct, and that the amount of available SIFIDE should be deducted up to completion of the total IRC collected comprised of autonomous taxation for the same period (since there was no state surtax collected in the tax period in question).

Considering that not only did it make an undue payment, but should have been reimbursed the amount resulting from the available deductions, the Claimant believes it is entitled to reimbursement from the TA in the amount of € 278,067.73 (two hundred and seventy-eight thousand, sixty-seven euros and seventy-three cents).

The Claimant understands that the CAAD decision in case no. 749/2015-T, which states that "(…) in the current wording of article 23rd-A, no. 1, paragraph a) of the IRC Code, the legislator not only clarifies that autonomous taxation integrates IRC, if not as a tax stricto sensu, at least in terms of being part of the same unitary tax regime, but also that the same must receive equal treatment for purposes of calculating taxable profit.", although this addition has contributed to dispelling doubts about the (non) deductibility of autonomous taxation in IRC, would be worthwhile to revisit the discussion raised and developed by Portuguese jurisprudence and doctrine regarding the nature of autonomous taxation, to clarify the equation which, in the Claimant's view, is today indisputable.

According to the current article 88th of the IRC Code, only the taxable income subject to autonomous taxation is delimited – the various realities subject to that taxation – as well as the applicable rates. Indeed, autonomous taxation rates vary depending on the taxable result: a higher rate in the event of a tax loss or a lower rate in situations of taxable profit.

According to the CAAD decision in case no. 749/2015-T, it is concluded that "(…) not only does the legislator express that IRC includes autonomous taxation, but there are no express references to autonomous taxation in the CIRC, namely in the chapters dealing with scope of taxation (Chapter I), assessment (Chapter V) and payment (Chapter VI)…"

If the legislator chose not to define the procedure for assessment of the tax related to autonomous taxation, nor obligations of payment, nor if it was concerned with defining the subjective scope of that taxation, and if it incorporated it into the IRC Code, for what concerns the case under analysis, it is clear to the Claimant that it left to the general rules of that code the provisions and establishment on those matters. Provisions and establishment, relating to the assessment of tax, which are made in light of the general rules of the IRC Code, namely in light of its article 90th

Autonomous taxation is formally and procedurally integrated into IRC, being determined under the same terms as that tax provides, participating in the assessment of tax determined annually and forming an integral part thereof. Despite the evolutionary process that the regime of autonomous taxation has undergone, encompassing currently a diverse set of realities, from the outset it was integrated into the IRC Code and, the Claimant believes, came to comprise the concept set out therein of "tax collected".

This is what, for the Claimant, emerges from the jurisprudence, both at the level of the Supreme Administrative Court (STA), and at the level of CAAD, of which examples are, respectively, Award 0964/2014, of 25 February 2015, as well as the Decisions in cases 209/2013-T, of 24 February 2014, and 6/2014-T, of 27 June 2014.

It is the general understanding of the aforementioned CAAD decisions that "(…) autonomous taxation integrates the regime of, and is owed as, IRC (…)" and that, as such, "(…) belong systematically to IRC (…)", finally concluding that "(…) in the legislator's perspective, autonomous taxation will, effectively and unequivocally, integrate the IRC regime, being owed as such a tax, as results from article 12th of CIRC (…)".

The TA itself would have come to consider autonomous taxation as an element integrated into IRC, insofar as it considers this reality as a tax, which, as such, cannot be considered as a tax-deductible expense for purposes of IRC itself, even before the amendment to the wording of paragraph a) of no. 1 of article 23rd-A of the IRC Code, introduced by Law no. 2/2014, of 16 January.

Additionally, and for what is relevant here, the Claimant alleges that Law no. 40/2005, of 3 August ("Law 40/2005"), with amendments introduced by Law no. 10/2009, of 10 March and Law no. 3-B/2010, of 28 April, created SIFIDE I with the objective of increasing competitiveness in companies through investment in research and development.

According to no. 3 of article 4th of the statute creating SIFIDE I, expenses which, due to insufficient tax collected, could not be deducted in the tax period in which they were incurred could be deducted up to the 6th immediate tax period.

As indicated in that decision (and as is evidenced in the award of the STA, of 15 November 2000, in case no. 025446, referred to therein), the provisions that create tax benefits are eminently exceptional (cf. article 2nd of the Statute of Tax Benefits), and a restrictive interpretation cannot be applied to them, and should be interpreted in their exact terms.

As Batista Machado teaches, restrictive interpretation is only permitted when "(…) [the] interpreter reaches the conclusion that the legislator adopted a text that betrays his thought, insofar as it says more than what he intended to say", which is not at all what occurs in the case under analysis.

In this context, the Claimant understands that the tax collected resulting therefrom should equally be considered, in addition to IRC collected and state surtax, for purposes of deducting SIFIDE I. In this sense, as the CAAD refers in the aforementioned awards, article 90th of the IRC Code "also applies to the assessment of the amount of autonomous taxation, (…) there being no other provision that provides for different terms for its assessment".

Furthermore, it is stated in CAAD decisions that the autonomy inherent in autonomous taxation "is restricted to the applicable rates and the respective taxable income, but the determination of its amount is effected under the terms of article 90th", or that "the differences between the determination of the amount resulting from autonomous taxation and that resulting from taxable profit, rests on the determination of taxable income and the rates, provided for in Chapters III and IV of CIRC, but not in the forms of assessment, which are provided for in Chapter V of the same Code and are of common application to autonomous taxation and the rest of the taxable income of IRC".

Finally concluding that "since it is to article 90th (…) that article 4th, no. 1 of SIFIDE refers, there is no legal basis for making a distinction between the tax collected from autonomous taxation and the remainder of IRC collected, because of the fact that the rates and forms of determining the taxable income are different", considering that there may be IRC collected "even without taxable profit, namely by virtue of autonomous taxation".

The Claimant mentions the recent development of the issue, under no. 21st of article 88th of CIRC (introduced with the 2016 Budget Law): "The assessment of autonomous taxation in IRC is effected under the terms provided for in article 89th and is based on the values and rates that result from the provisions of the preceding paragraphs, with no deductions being made to the total amount determined."

As results from the provision of article 135th of Law no. 7-A/2016, of 30 March (Budget Law), the wording given by no. 21 of article 88th of CIRC has an interpretative nature.

In the Claimant's view, article 90th of CIRC was not amended and continues to refer to IRC collected. Having regard to the literal wording of paragraph c) of no. 2 of article 90th of CIRC, it is understood that to the amount of IRC collected determined, tax benefits are deductible. Now, for the Claimant, in the reading of the rules applicable at the time of the facts, there would be no support for any interpretation similar to that which the legislator now seeks to present as merely interpretative.

This law should be considered as innovative, as it seeks to apply to a past situation an interpretation that could not be derived from the text of the law in force at that time, violating retroactivity restrictions that go beyond mere legislative interpretation and concretization. No. 21st of article 88th of CIRC is, in its entirety, a new provision, which did not exist prior to the 2016 Budget Law and whose application must be limited to new cases - cf. in this sense the arbitral decision rendered in case no. 775/2015.

Thus, by conferring the possible scope of an interpretative provision on no. 21 of article 88th of CIRC, the prohibition on retroactivity enshrined in no. 3 of article 103rd of the Constitution of the Portuguese Republic is called into question.

Request

Following and as a consequence of the foregoing, the Claimant makes the following specific request for arbitral decision:

a) Annulment of the "(...)decision of the Tax Authority, for tacit rejection of the request for ex officio revision of the tax act, identified above by virtue of such decision being based on violation of the provision in article 90th of the IRC Code and consequently determining the annulment of the self-assessments relating to 2011 with the consequent restitution of the amount of € 278,067.73 (two hundred and seventy-eight thousand, sixty-seven euros and seventy-three cents) respectively, plus the respective indemnifying interest, provided for in article 43rd of the General Tax Code and article 61st of the Code of Tax Procedure and Process (...)";

b) "(...)Requests that any application of the provision - no. 21 of article 88th of CIRC – that involves an interpretation thereof to the effect of non-deductibility of tax benefits, namely under the title of SIFIDE, as an account in autonomous taxation, be considered unconstitutional, by violation of the principle of non-retroactivity provided for in no. 3 of article 103rd of the Constitution of the Portuguese Republic, which expressly come to allege from hereon(...)".

Material Jurisdiction of the Arbitral Tribunal

Subsequently, in response to the exception of material jurisdiction of the Arbitral Tribunal raised by the TA, the Claimant understands that the best reading of paragraph a) of no. 1 of article 2nd of RJAT is that if it permits the arbitral tribunal to examine the possible illegality of the assessment itself, that jurisdiction will also encompass cases where the second-degree act is the rejection of a request for revision of the tax act, as there is no reason to restrict. The arbitral route, on the question of examining the legality of tax acts, will have the same scope as is established for the judicial route, whereby, being the courts competent for examining the legality of a decision on a revision request also the arbitral tribunal will be, by force of the provision in article 2nd of RJAT, when the request involves examining the legality of the tax act.

1. The Claimant submitted 6 (six) documents and listed witnesses.

2. The respondent is the Tax and Customs Authority (hereinafter, Respondent or TA).

3. The request for establishment of the arbitral tribunal was accepted and automatically notified to the TA on 11 November 2016.

4. The Claimant did not proceed to nominate an arbitrator, whereby, pursuant to the provision in paragraph a) of no. 2 of article 6th and paragraph b) of no. 1 of article 11th of RJAT, the President of the Ethics Council of CAAD designated as arbitrators of the collective arbitral tribunal the signatories hereto, who communicated acceptance of the assignment within the applicable period.

5. On 28 December 2016, the parties were duly notified of that designation, and neither party expressed any objection thereto, in accordance with article 11th, no. 1, paragraphs a) and b) of RJAT and articles 6th and 7th of the Ethics Code of CAAD.

6. Thus, in accordance with the provision in paragraph c) of no. 1 of article 11th of RJAT, the collective Arbitral Tribunal was constituted on 12 January 2017.

7. The Respondent, duly notified for such purpose, presented its Response on 24 February 2017 in which, in addition to raising a procedural objection [material jurisdiction of the Arbitral Tribunal], it impugns, secondarily and specifically, the arguments advanced by the Claimant, concluding for the lack of merit of the present action, with its consequent dismissal of the claim.

8. The Respondent considered the issues object of the proceedings to be purely matters of law or legal matters, not having requested any other means of proof in addition to the copy of the administrative instructional proceedings, which it submitted to the record on 1-3-2017.

9. In essence and also briefly, the TA alleged in its response:

Exception: Material Jurisdiction

The TA began by raising an exception of material jurisdiction of the arbitral tribunal.

In its view, article 2nd, paragraph a) of Ordinance 112-A/2011 provides that the TA's binding nature regarding the jurisdiction referred to has as its object the examination of claims relating to taxes whose administration is entrusted to it, referred to in no. 1 of article 2nd of RJAT, «with the exception of claims relating to the declaration of illegality of self-assessment acts, tax withholding acts and advance payment acts that have not been preceded by recourse to the administrative route in accordance with articles 131st to 133rd of the Code of Tax Procedure and Process»

By which it would be constitutionally prohibited, by force of constitutional principles of the rule of law and separation of powers (cf. articles 2nd and 111th, both of CRP), as well as of legality (cf. articles 3rd, no. 2, and 266th, no. 2, both of CRP), as a corollary of the principle of indisponibility of tax credits inherent in article 30th, no. 2 of the General Tax Code, the interpretation, albeit extensive, that would expand the TA's binding nature regarding the arbitral protection fixed legally, as this would necessarily entail the consequent expansion of the situations in which it is obligatorily subject to such a regime, renouncing in that same measure recourse to full judicial relief [cf. article 124th, no. 4, paragraph h) of Law no. 3-B/2010 and articles 25th and 27th of RJAT, which impose a restriction on recourse from the arbitral decision].

Impugnation

Regarding the central issue raised by the Claimant, the TA understands that numbers 3 and 4 of article 4th of the statute governing SIFDE, where it is explained that:

«2 - Deduction is made, under the terms of article 90th of the IRC Code, in the assessment relating to the tax period mentioned in the preceding number.

3 - Expenses which, due to insufficient tax collected, cannot be deducted in the fiscal year in which they were incurred may be deducted up to the 6th immediate fiscal year»,

in conjunction with article 5th-a) of the aforementioned statute regulating SIFIDE, does not support the Claimant's thesis.

It results, in summary, in what concerns the case, that the amounts translated into SIFIDE are deducted "to the amounts determined under the terms of article 90th of the IRC Code, and up to its concurrence" and in the assessment relating to the tax period in which the eligible expenses are incurred.

For the TA, the tax collected referred to in article 90th when assessment is to be made by the taxpayer (situation which occurs in the present case), is determined based on the taxable income contained in that assessment/self-assessment. (cf. article 90th, no. 1, paragraph a) of CIRC). Illustrative of the fact that the credit which SIFIDE translates into is deducted, and only, to the tax so collected, or that is, to tax collected based on taxable income, would be the provision in article 5th, paragraph a), of the statute regulating SIFIDE, which prevents credits deriving therefrom being deducted when taxable profit is determined by indirect methods.

And even less so regarding the consideration of autonomous taxation, which, as is known, is determined autonomously and distinctly from the determination carried out under the terms that flow from article 90th of CIRC. Autonomous taxation, according to its initial regulation, would constitute somewhat of a substitute for the non-deductibility regime previously provided for in CIRC.

Indeed, the TA alleges that at its genesis was the non-acceptance for tax purposes of a percentage of certain expenses, with autonomous taxation constituting an alternative and more effective form of correcting costs whenever it concerns areas more prone to tax evasion (allowances, representation expenses, vehicles, etc.). Taxation that penalizes certain expenses incurred by companies and is determined in a manner completely independent of IRC.

It is the very designation of the same (autonomous taxation) that would evidence the autonomy that they possess in relation to IRC. For this reason, although they bear the same nature as IRC, the rules applicable to autonomous taxation should not be contrary to the spirit that determined them. And, in order to respect the purpose that established them, it is necessary to evaluate the legislator's intention taking into account all factors.

Contrary to the provision in article 12th and paragraph a) of no. 1 of article 23rd-A of CIRC, in no. 1 and 2 of article 90th there is no reference whatsoever to autonomous taxation, which, from the outset, given the dual nature of the system, raises well-founded objections regarding the consideration of the value of autonomous taxation for purposes of the deductions provided for in no. 2 of cited article 90th.

In that sense, it would be contrary to the spirit of the system to permit that, by force of the deductions referred to in no. 2 of article 90th of CIRC, there would be removed from, or at least distorted from autonomous taxation that anti-abuse character that presided over its implementation in the IRC system.

This being stated, it results clear that autonomous taxation should not be considered for purposes of the deductions referred to in no. 2 of article 90th of CIRC, as the Claimant wishes.

1. By order of 13-3-2017, the hearing provided for in article 18th of RJAT was dispensed with, as unnecessary, and likewise the production of testimonial evidence was dispensed with for the same reason, with a period being set for final written submissions by the parties.

2. Both parties presented their submissions within the set period, submissions which, in essence, maintain the positions assumed in their respective pleadings.

3. By order of 23-4-2017, a date was set for final decision, in compliance with the provision in article 18th-2 of RJAT and in view of compliance, by the Claimant, with the provision in article 4th-3 of the Regulation of Costs in Tax Arbitration Proceedings.

II. FINDINGS

1. The following facts are considered proven:

a) The Claimant, with respect to the tax period of 2011, was the parent company of a group of companies taxed under the RETGS ("Group"), under the terms of article 69th and following of the IRC Code, the Group being composed of the following entities:

• The Claimant, as parent company of the Group;

• B…, S.A., with NIPC…;

• C…, S.A., with NIPC…;

• D…, S.A., with NIPC…;

• E…, Lda., with NIPC…;

• F… Unipessoal, Lda., with NIPC…;

• G…, Lda., with NIPC….

b) The Claimant assumes and assumes the legal form of a joint-stock company, of Portuguese law, with head office and effective management in Portugal and qualified, under IRC, as a resident taxpayer, under the terms of paragraph a) of no. 1 of article 2nd of CIRC.

c) The Claimant has as its main activity the management of interests in other companies, as an indirect form of the exercise of economic activities, in accordance with the Economic Activity Code – Revision 3 ("CAE"), no. 64202 and is subject to the general IRC taxation regime, adopting a tax period coinciding with the calendar year. [Under the terms of article 70th of the IRC Code, it is therefore incumbent on the Claimant to determine the taxable profit of the fiscal group through the algebraic sum of taxable profits and tax losses resulting from the individual periodic declarations of companies belonging to the Group].

d) In timely compliance with the legal declarative obligations imposed on the Claimant submitted the Income Declaration Model 22 for IRC ("Model 22 Declaration") of the Group on 24 May 2012, with reference to the tax period of 2011, resulting from this Declaration the determination of the amount of tax to be paid of €166,907.44 (one hundred and sixty-six thousand, nine hundred and seven euros and forty-four cents).

e) On 16 April 2013, the Claimant proceeded to replace the Model 22 Declaration for IRC of the Group relating to that period (1-1-2011 to 31-12-2011), under the terms of no. 2 of article 122nd of the IRC Code, and whose detail is reproduced below in simplified form:

f) In the simplified statement of tax assessment above, the amount of tax to be paid by the Claimant amounted to € 166,907.44 (one hundred and sixty-six thousand, nine hundred and seven euros and forty-four cents), an amount which was fully paid;

g) The invariability in the total value of tax to be paid between Model 22 Declarations is justified by the fact that the alteration was recorded in the value of the special advance payment, which increased from € 266,065.37 (two hundred and sixty-six thousand, sixty-five euros and thirty-seven cents) to € 319,180.00 (three hundred and nineteen thousand, one hundred and eighty euros) but which, without a value of tax collected to which it could be applied, failed to be deducted.

h) In Annex D of the Model 22 Declaration of replacement, relating to the tax period of 2011, the amount of tax credit arising from "SIFIDE I 2010" that carried forward to 2011, assigned by the Certifying Commission for Tax Incentives for Research and Business Development, amounted to € 665,993.89 (six hundred and sixty-five thousand, nine hundred and ninety-three euros and eighty-nine cents), [in the event that the Claimant's request for ex officio revision submitted at the Amadora Tax Office-…, on 29-5-2015 is granted].

i) With reference to the tax period of 2010, the Claimant used part of the available tax credit, in the amount of € 53,114.63 (fifty-three thousand, one hundred and fourteen euros and sixty-three cents), as a deduction to the tax collected (however, considering this comprised only of IRC collected proper, after deduction of credit for international double taxation), the remainder having carried forward to 2011.

j) On 30-3-2016, the Claimant presented a request for (ex officio) revision of the IRC self-assessment relating to the tax period of 2011, under the terms of article 78th-1 and 2 and 54th - 1/c) of the General Tax Code, [similar to that which now serves as the basis for the present Request for Arbitral Decision], to the effect that the available amount of SIFIDE available in that period be deducted to the total IRC collected for the tax period of 2010 (in which the Claimant included state surtax and autonomous taxation);

k) No order had been issued on this request as of 26-10-2016 [the date of the submission of this Request for Arbitral Decision to CAAD];

l) The TA's computer system does not permit the deduction in "Field 365 of model 22 declaration" of tax credits arising from "SIFIDE – I" to the amount paid as autonomous taxation [in this case, €278,067.73];

l) B… S.A., the company being part of the Claimant's group that generated the SIFIDE I 2010 tax benefit, was not indebted to the State and Social Security for any taxes or contributions, as results from the certificates attached to the case file;

1. There are no other essential facts for the object of the dispute, proven or not proven.

2. In forming its conviction regarding the aforementioned factual situation, the Tribunal based itself on the critical analysis of the documents submitted to the case file and on the copy of the administrative instructional proceedings submitted by the TA, in articulation with the non-dissenting position of the parties regarding those facts.

II. FINDINGS (continued)

The Law

4. Preliminary Matter/Exception: The Material Jurisdiction of the Arbitral Tribunal

Given that the scope of the tribunal's material jurisdiction is of public order and its knowledge precedes that of any other matter (article 13th of CPTA applicable ex vi article 29th, no. 1, paragraph c), of RJAT) and that infraction of the rules of jurisdiction ratione materiae determines the absolute jurisdiction of the tribunal, which is to be examined ex officio [article 16th, nos. 1 and 2 of CPPT applicable ex vi article 29th, no. 1, paragraph a) of RJAT], it is necessary to examine, as a matter of priority, the dilatory exception raised by the Respondent regarding the jurisdiction of the arbitral tribunal.

The TA alleges that the Arbitral Tribunal is materially incompetent to hear the claim.

And the grounds which, in essence, it invokes result from the interpretation it makes of Ordinance no. 112-A/2011, which defines, in article 2nd, the scope and terms of the TA's binding nature regarding the arbitral tax jurisdiction and, more specifically, when it excepts from that scope the claims of taxpayers relating to the declaration of illegality of "(...)self-assessment acts, which have not been preceded by recourse to the administrative route in accordance with articles 131st to 133rd of CPPT (...)" [underlined and emphasized by the Tribunal].

Thus, according to the TA, only by force of interpretation, albeit extensive, inadmissible in light of constitutional principles, specifically of legality (articles 3rd-2 and 266th of the Constitution), as a corollary of the principle of indisponibility of tax credits (article 30th-2 of the General Tax Code), could the legal binding nature of the TA be expanded, with renunciation of recourse to full judicial relief (articles 124th-4/h) of Law no. 3-B/2010 and 25th and 27th of RJAT).

Or that is to say, and in essence: the position of the TA is reduced to the consideration that only recourse to the necessary prior administrative route for challenging by arbitral means acts of self-assessment complies with the requirement provided in the binding ordinance [Ordinance no. 112-A/2011], if such recourse takes the form of a gracious complaint.

And it supports this conclusion after considering that the provision in article 2nd, paragraph a) of Ordinance 112-A/2011 is aimed at the examination of claims relating to taxes whose administration is entrusted to the TA and referred to in no. 1 of article 2nd of RJAT, «with the exception of claims relating to the declaration of illegality of self-assessment acts, tax withholding acts and advance payment acts that have not been preceded by recourse to the administrative route in accordance with articles 131st to 133rd of the Code of Tax Procedure and Process»

In that light it would be constitutionally prohibited, by force of constitutional principles of the rule of law and separation of powers (cf. articles 2nd and 111th, both of CRP), as well as of legality (cf. articles 3rd, no. 2, and 266th, no. 2, both of CRP), as a corollary of the principle of indisponibility of tax credits inherent in article 30th, no. 2 of the General Tax Code, the interpretation, albeit extensive, that would expand or extend the TA's binding nature regarding the arbitral protection fixed legally, as this would necessarily entail the consequent expansion of the situations in which it is obligatorily subject to such a regime, renouncing in that same measure recourse to full judicial relief [cf. article 124th, no. 4, paragraph h) of Law no. 3-B/2010 and articles 25th and 27th of RJAT, which impose a restriction on recourse from the arbitral decision].

Let us examine:

It is indeed the object of the proceedings a request for arbitral decision relating to an act of self-assessment - to which the Claimant imputes the vice of illegality - without prior recourse to the administrative route in accordance with the articles 131st to 133rd of the Code of Tax Procedure and Process, such recourse being required by the terms of the TA's binding nature regarding arbitral jurisdiction by the cited Ordinance, no. 112-A/2011.

The scope of arbitral tax jurisdiction results, in the first instance, from the provision in article 2nd, no. 1 of RJAT, which sets out the criteria for determining the material jurisdiction of arbitral tribunals in the following terms:

"The jurisdiction of arbitral tribunals comprises the examination of the following claims:

a) The declaration of illegality of acts of assessment of taxes, of self-assessment, of tax withholding at source and of advance payment;

b) The declaration of illegality of acts of determination of the taxable basis when it does not give rise to the assessment of any tax, of acts of determination of the taxable income and of acts of fixing of patrimonial values".

In view of this provision, it should be understood that the jurisdiction of arbitral tribunals "is restricted to the activity connected with acts of assessment of taxes, falling outside its jurisdiction the examination of the legality of administrative acts of total or partial rejection or of revocation of exemptions or other tax benefits, when dependent on recognition by the Tax Administration, as well as of other administrative acts relating to tax matters that do not involve examination of the assessment act, as referred to in paragraph p) of no. 1 of article 97th of CPPT" (Jorge Lopes de Sousa, Commentary to the Legal Regime for Tax Arbitration in Guide to Tax Arbitration, Almedina, 2013, p. 105).

The examination of the arbitral tribunal's jurisdiction involves a judgment on the adequacy to the case sub judicio of the procedural means of the special administrative action or of the proceedings for judicial challenge, having regard to the provision in article 97th of CPPT, which makes a distinction between the "challenge of administrative acts in tax matters that involve examination of the legality of the assessment act" (para. d) of no. 1) and the "contentious relief from total or partial rejection or from revocation of exemptions or other tax benefits, when dependent on recognition by the tax administration, as well as of other administrative acts relating to tax matters that do not involve examination of the legality of the assessment act" (para. p) of no. 1), and whereas, under no. 2 of article 97th, "contentious relief from administrative acts in tax matters, which do not involve examination of the legality of the assessment act, from the Tax Administration, comprising the central government, regional governments and their members, even when performed by delegation, is regulated by the norms on proceedings in administrative tribunals".

To concretize such a distinction between the scope of these procedural means, which, by force of para. a) of no. 1 of article 2nd of RJAT, has relevance in defining the jurisdiction of arbitral tax tribunals, established jurisprudential guidance is that "the use of the proceedings for judicial challenge or contentious relief (currently special administrative action, by force of the provision in article 191st of CPTA) depends on the content of the act being challenged: if this involves examination of the legality of an assessment act the proceedings for judicial challenge will be applicable and if it does not involve examination of that type contentious relief/special administrative action is applicable" (cf. the award of the STA of 25.6.2009, case no. 0194/09).

Thus, keeping in mind these basic principles, to determine the jurisdiction of the arbitral tribunal it is necessary to ascertain the content of the act being challenged, in order to verify if it involved examination of an assessment act.

For that purpose, as results from the expression "examination" used in para. d) of no. 1 of article 97th of CPPT, it is sufficient that, in the act in question, there was evaluation or examination, direct (primary act) or indirect (acts of second or third degree) of the "legality of the assessment act", even if that examination is not the basis for the administrative decision (Cf., in this sense, e.g., the arbitral award of 06/12/2013, rendered in case no. 117/2013-T).

However, the essential question here will not be that but rather whether the prior recourse to the administrative route as an essential requirement for challenging by arbitral means the tax act singled out must necessarily and always take the form of a gracious complaint or, on the contrary, whether the prior administrative pronouncement can be concretized under, e.g., a request for revision of self-assessment in light of articles 78th-1 and 2 and 54th of the General Tax Code.

That is to say, and in general terms, the question revolves around the following: the taxpayer may challenge administratively, by means of a gracious complaint acts of assessment, self-assessment, tax withholding at source and advance payment, all in light of the provision in articles 68th and following and 131st to 133rd of CPPT, and from the express or tacit rejection, there may still be presented a hierarchical appeal, under the terms of articles 66th, 67th and 76th of CPPT.

Alongside these gracious means, is found the request for revision of a tax act in accordance with article 78th of the General Tax Code, all integrating what is commonly referred to as acts of second and third degree insofar as they involve or may involve examination of the legality of first-degree acts, that is, assessments, self-assessments, tax withholding at source and advance payments.

The object of arbitral tax proceedings is the first-degree act, that is to say and in a general manner and within the scope of the material jurisdiction of Tribunals constituted within CAAD, acts of assessment of taxes, of self-assessment, of tax withholding at source and advance payment (cf article 2nd of RJAT).

As for acts of second and third degree, they may always be arbitrable insofar as they themselves involve the illegality of the assessment acts in question.

As has already been understood in various decisions of arbitral tribunals of this CAAD (cf., among other more recent ones, for example, the awards of 06/12/2013, rendered in case no. 117/2013-T and 23/10/2012, case no. 73/2012-T, where other jurisprudence is invoked), and not ignoring, nevertheless, the existence of contrary understanding (see the award of 09/11/2012, case no. 51/2012-T), this tribunal also understands that should be considered included in the jurisdiction attributed to arbitral tribunals the examination of acts of rejection, express or tacit, of requests for ex officio revision of acts of self-assessment insofar as, on the one hand, the formula "declaration of illegality of acts of assessment of taxes, of self-assessment, of tax withholding at source and of advance payment", used in para. a) of no. 1 of article 2nd of RJAT, comprises both cases in which a direct challenge is made to an act of one of those types, and cases in which a challenge is made to an act of second or third degree, which maintains an assessment act, without declaring its illegality, and, on the other hand, the tenor of para. a) of article 2nd of Ordinance no. 112-A/2011, of 22 March, to which no. 1 of article 4th of RJAT refers, should not be interpreted, having regard to its ratio legis, in the sense of excluding the rejection of a request for ex officio revision, given that in ex officio revision the Tax Administration is afforded the opportunity to pronounce on the merits of the subject's claim before the subject resorts to judicial relief, it not being reasonable that, cumulatively with the possibility of administrative examination within the scope of that ex officio revision procedure, a new administrative examination would be required through a gracious complaint, for which reason there is no justification for excluding the jurisdiction of the arbitral tribunals operating at CAAD in cases in which a request for ex officio revision is formulated without prior gracious complaint, which would create, without sufficient foundation, a new situation of necessary gracious complaint private to arbitral jurisdiction.

However, it must be insisted, it is not sufficient to be proven prior recourse to the administrative route by any of the aforementioned means, it is also absolutely necessary to prove that there was actual or presumed examination (in the event of tacit rejection) by the Administration of the merits of the claims. A requirement which, for purposes of the Tribunal's jurisdiction, is not satisfied when and if that examination of legality was preliminarily denied by, e.g., untimeliness.

If the fulfillment of that presupposition of prior administrative pronouncement in its various forms could be considered independently of an examination of merits and, specifically, when it would be rejected or preliminarily denied by intemporality, the way to opening the arbitral route would thereby have been found: it would be sufficient to submit a complaint or revision request manifestly untimely and, the request being denied, present the request for arbitral pronouncement without risk of inadmissibility due to material jurisdiction of the Arbitral Tribunal.

That was not, naturally, the objective of the legislator of the cited ordinance when drafting the provision in question, but rather, and manifestly, what was intended to be excluded from arbitral jurisdiction was the examination and decision on, specifically and for the case under analysis, the illegality of the self-assessment of taxes without prior examination of the merits of that claim by the Tax Administration through the mechanisms of challenge specifically provided for in articles 131st to 133rd of CPPT.

Therefore and in conclusion: this Arbitral Tribunal is materially competent to examine and decide on the claim object of the proceedings sub judicio, under the terms of articles 2nd, no. 1, para. a) and 4th, no. 1, both of RJAT and articles 1st and 2nd, para. a), of Ordinance no. 112-A/2011 of articles 576th, no. 2 and 577th, para. a) of CPC, ex vi article 29th, no. 1, paragraphs a) and e) of RJAT.

II FINDINGS

The Law (continued)

5. The Merits of the Claim

At the date of the facts, article 88th of CIRC read as follows:

"Article 88th

Autonomous Taxation Rates

1 — Undocumented expenses are taxed autonomously, at the rate of 50%, without prejudice to their non-consideration as expenses under the terms of article 23rd

2 — The rate referred to in the preceding number is raised to 70% in cases where such expenses are incurred by taxpayers totally or partially exempt, or that do not exercise, as principal activity, commercial, industrial or agricultural activities.

3 - Charges incurred or borne by non-exempt taxpayers that exercise, as principal activity, commercial, industrial or agricultural activity, relating to light passenger vehicles or mixed vehicles whose acquisition cost is equal to or less than the amount fixed under the terms of para. e) of no. 1 of article 34th, motorbikes or motorcycles, excluding vehicles powered exclusively by electric energy, are taxed autonomously at the rate of 10%.

4 - Charges incurred or borne by the taxpayers mentioned in the preceding number, relating to light passenger vehicles or mixed vehicles whose acquisition cost is higher than the amount fixed under the terms of para. e) of no. 1 of article 34th, are taxed autonomously at the rate of 20%.

5 — Charges relating to light passenger vehicles, motorbikes and motorcycles are considered as such, namely depreciations, rentals or leases, insurance, maintenance and repair, fuels and taxes on their possession or use.

6 — Excluded from the provision in no. 3 are charges relating to light passenger vehicles, motorbikes and motorcycles, allocated to the operation of public transport service, intended to be leased in the exercise of the normal activity of the taxpayer, as well as depreciations relating to vehicles for which the agreement provided for in no. 9) of para. b) of no. 3 of article 2nd of the IRS Code has been entered into.

7 - Deductible charges relating to representation expenses, considered as such, namely, in particular, expenses incurred with receptions, meals, trips, excursions and entertainment offered in the Country or abroad to clients or suppliers or to any other persons or entities, are taxed autonomously at the rate of 10%.

8 — Expenses corresponding to amounts paid or due, in any capacity, to natural or legal persons resident outside Portuguese territory and there subject to a clearly more favorable tax regime, as defined in accordance with the Code, are subject to the regime of no. 1 or no. 2, as the case may be, with the applicable rates being, respectively, 35% or 55%, unless the taxpayer is able to prove that they correspond to operations actually carried out and do not have an abnormal character or an exaggerated amount.

9 — Deductible charges relating to allowances and compensation for travel in the worker's own vehicle, in service to the employing entity, not billed to clients, recorded in any capacity, except to the extent that there is taxation under the IRS heading in the sphere of the respective beneficiary, are still taxed autonomously, at the rate of 5%, as well as non-deductible charges under the terms of para. f) of no. 1 of article 45th borne by taxpayers that present a tax loss in the tax period to which they relate.

10 — (Repealed)

11 — Profits distributed by entities subject to IRC to taxpayers who benefit from total or partial exemption, at the rate of 20%, encompassing in this case income from capital, when the shares to which the profits relate have not remained in the ownership of the same taxpayer, without interruption, during the year prior to the date of their putting at disposal and are not to be maintained during the time necessary to complete that period, are taxed autonomously.

12 — To the amount of the tax determined, in accordance with the provision in the preceding number, the tax that may have been withheld at source is deducted, and in that case the tax withheld cannot be deducted under the terms of no. 2 of article 90th

13 — The following are taxed autonomously, at the rate of 35%:

a) Expenses or charges relating to indemnities or any other compensation owed not related to the achievement of productivity objectives previously defined in the contractual relationship, when there is cessation of functions of manager, administrator or managing director, as well as expenses relating to the part that exceeds the value of the remunerations that would have been received by the exercise of those functions until the end of the contract, when it is a question of termination of a contract before the end, whatever the form of payment, whether this is done directly by the taxpayer or whether there is transfer of inherent responsibilities to another entity;

b) Expenses or charges relating to bonuses and other variable remunerations paid to managers, administrators or managing directors when these represent a portion greater than 25% of annual remuneration and have a value greater than (euro) 27 500, unless its payment is subject to deferment of at least 50% for a minimum period of three years and conditioned to the positive performance of the company over that period.

14 - The autonomous taxation rates provided for in this article are increased by 10 percentage points as to taxpayers that present a tax loss in the tax period to which any of the facts generating tax referred to in the preceding numbers relate."

Regarding the so-called SIFIDE (acronym for "system of tax incentives for research and business development"), in the circumstances of time that are relevant to the present case, it is recalled that, according to article 4th (scope of deduction) of the statute cited in the footnote, «taxpayers subject to IRC resident in Portuguese territory who exercise, as principal or non-principal activity, an activity of agricultural, industrial, commercial and services nature and non-residents with a permanent establishment in that territory may deduct to the amount determined in accordance with article 90th of the IRC Code, and up to its concurrence, the value corresponding to expenses with research and development, to the extent that it has not been subject to financial contribution from the State on a grant basis, carried out in the tax periods from 1 January 2011 to 31 December 2015, at a double percentage rate:

a) Base rate – 32.5% of expenses incurred in that period;

b) Incremental rate – 50% of the increase in expenses incurred in that period compared to the simple arithmetic average of the two previous years, up to the limit of (euros) 1 500 000.

2 – (...)

3 - Deduction is made, under the terms of article 90th of the IRC Code, in the assessment relating to the tax period mentioned in the preceding number.

4 - Expenses which, due to insufficient tax collected, cannot be deducted in the fiscal year in which they were incurred may be deducted up to the 6th immediate fiscal year».

For its part, article 90th of CIRC provides:

«1. The assessment of IRC is effected as follows:

a) When assessment is to be made by the taxpayer in the declarations referred to in articles 120th and 122nd, it is based on the taxable income contained therein;

b) (...)

c) In the absence of assessment under the terms of the preceding paragraphs, it is based on the elements available to the tax administration.

2 – To the amount determined in accordance with the preceding number the following deductions are made, in the order indicated:

a) The deduction for international double taxation;

b) The deduction relating to tax benefits;

c) The deduction relating to special advance payment referred to in article 106ª;

d) The deduction relating to tax withheld at source not susceptible to set-off or reimbursement under applicable legislation.

(...)

1. When the special taxation regime for groups of companies is applicable, the deductions referred to in no. 2 relating to each company are made to the amount determined in relation to the group, under the terms of no. 1.

(...)».

That is to say and in summary: the values translating the tax benefit under SIFIDE are deducted "to the amounts determined in accordance with article 90th of the IRC Code, and up to its concurrence" (underlining is our own) and in the assessment relating to the tax period in which the eligible expenses are incurred and which, in the absence or insufficiency of tax collected determined under those terms, expenses which cannot be deducted in the fiscal year in which they are incurred «may be deducted up to the 6th immediate fiscal year».

Well then, the tax collected referred to in article 90th when assessment is to be made by the taxpayer (the situation which occurs in the present case), is determined based on the taxable income contained in that assessment/self-assessment [cf. article 90th, no. 1, para. a) of CIRC]. The credit translating into SIFIDE being deducted only to tax so collected, that is to say, to tax collected based on taxable income [as provided in article 5th, para. a) of the statute regulating SIFIDE, this expressly preventing credits deriving therefrom being deducted when taxable profit is determined by indirect methods].

6. On the Nature of Autonomous Taxation under IRC: A General Perspective

In a recent academic dissertation on the issue of autonomous taxation under IRC, Maria Rita Mesquita ["Autonomous Taxation in CIRC: Its (in)coherence" Master's Dissertation in Tax Law, Catholic University, Faculty of Law, Porto, May 2014, p.42 et seq., in the chapter "Autonomous taxation and compliance with the principle of coherence"], sustains the following analysis which, with some adaptations which we made to the text that, in essence we agree with:

"The principle of coherence in Tax Law takes into account the congruence between different taxes, in a logical integration with the global legal system, and the specific structuring of each tax in particular. According to Casalta Nabais, within the material limits of taxation, intra-systemic limits should be observed, examining the coherence between different taxes and in the context of the tax system, and extra-systemic limits, connected to the global legal system.

This principle is not expressly enshrined in CRP and, therefore, suffers limitations in its application. This means that the principle of coherence has no autonomy, cannot be directly invoked and its violation, by itself, does not provoke the invalidity of a given tax law. However, its disrespect may be an indication of violation of other principles, such as the principle of equality, in the form of capacity to pay, or of the principle of proportionality and reasonableness.

At the level of the political-constitutional system, we pointed out as being incoherent the recent tendency to lower IRC while maintaining in our legal system a taxation regime that has a significant impact on companies. TA is, moreover, an exception to the constitutional establishment of the principle that companies are fundamentally taxed on actual income, which is justified by reasons to combat tax evasion.

We have already referred in detail that the TA regime is an exception to the principle of capacity to pay, because it does not tax income. We understand that TA should approach more a true exception and not be after all almost an autonomous tax.

We saw that, although TA is levied on certain expenses, it cannot be considered as a consumption tax. Within IRC, TA relates to that tax in the framing and definition of certain concepts, such as the determination of who is a taxpayer and which expenses are deductible, however, it departs from IRC regarding the basis of taxation, and is owed independently of IRC to be paid.

The principle of capacity to pay implies the so-called principle of net income, according to which, to each category of income the specific expenses for its obtaining should be deducted. Many of these charges are within the scope of a normal act of the company, being some recognized as necessary to its activity and, therefore, deductible. The incidence of TA on deductible expenses contradicts the principle of net income.

We do not find in the TA regime a unity that allows identifying its nature. From the outset, there is no common basis of taxation, as taxation is levied mainly on expenses, but provision is also made for taxation on profit distribution. TA taxes both deductible and non-deductible expenses and has differentiated rates. In certain cases, the regime of this institute even provides for different rates regarding the same expenses.

TA can place companies in a situation of inequality, as some of the expenses subject to TA are essential for obtaining income. One need only think of two companies that would initially have the same economic force but one of them has economic interests far from its headquarters and therefore has high representation expenses, subject to TA.

Moreover, TA creates imbalances in equality between companies by allowing only some the option for the simplified regime, with the consequent non-subjection to TA on some expenses. There is also discrimination in the taxation of compensations and bonuses to administrators, managing directors or managers. We can verify that the rates specifically established do not present themselves as proportionate and reasonable, especially in cases where the applicable rate became equal to or higher than that of IRC (23%).

TA must be compatible with the principle of capacity to pay enshrined with respect to the tax on company income, expression of that no one can be obliged to contribute beyond their capacity, and should be governed only by its purpose of combating forms of tax evasion."

This is to say that, to sustain, even currently, an identity, similarity or analytical or conceptual subsumption between IRC and autonomous taxation (TA) is far from being unanimous, indisputable or even evident. The multiple facets that, in a general legal-economic plane, can be found in TA lead to it not being at all easy to give them a definitive and obvious arrangement regarding the matter at issue in the present case.

It should be noted, furthermore, that in Award no. 310/12, the Constitutional Court concluded:

"In contrast to what occurs in the taxation of income under the IRS and IRC, in which the aggregate of income earned in a certain year is taxed (which means that only at the end of that year can the tax rate and the bracket in which the taxpayer finds himself be determined), in this case each expense incurred is taxed, considered in itself, and subject to a certain rate, autonomous taxation being determined independently of IRC that is owed in each fiscal year, because it is not directly related to the achievement of a positive result, and therefore, liable to taxation.

Thus, and in the case of IRC, we are faced with an annual tax, in which each income received is not taxed individually, but rather the aggregate of all income obtained in a given year, the law considering that the taxable event is deemed to have occurred on the last day of the tax period (cf. article 8th, no. 9, of CIRC). Whereas with respect to autonomous taxation in IRC, the taxable event is the very performance of the expense, not being a complex fact, of successive formation over a year, but a instantaneous tax event."

That is to say, and at an analytical level, reducing TA to a figure based on a logic that imposes itself as natural and be economically rational, does not seem to this tribunal as simple or evident. This is to say that, at this general level, to assume as indisputable that TA "is IRC", or unequivocally forms part of IRC collected, lacks reflection and does not impose itself conceptually as indisputable. (We will see the issue below at the legal plane of the norms of CIRC)

7. The Deductibility of Certain Tax Figures (e.g., Tax Benefits, SIFIDE, Special Advance Payment) to the Autonomous Taxation Collected - an Assessment of the Law, Doctrine and Jurisprudence Before the Amendment to Article 88 of CIRC in the Budget Law for 2016.

A) Brief Doctrinal Excursus

For many years of the application of TA – which, it should be recalled, were incorporated into CIRC by Law 30-G/2000, the issue of whether they should be integrated into IRC collected was not raised, as far as this tribunal is aware. The design of table 10 of the IRC model 22 declaration clearly separated the IRC collected proper from the amount owed as TA (autonomous taxation), and such was, we believe, peacefully followed by business practice that interpreted the provisions of CIRC when completing said tax declaration.

By way of example, from the reading of one of the reference manuals on the interpretation of CIRC provisions that should govern the completion of the IRC model 22 declaration, H. Quintino Ferreira ("The determination of the taxable income for IRC", 14th edition, 2001, Rei do Livros, p.238 et seq.) results that no doubt was raised about the non-inclusion of TA, determined thereunder according to the law then in force, in IRC collected, in the numerical example extensively developed therein.

Equally, J. Alberto Pinheiro Pinto, in "Taxation", 5th edition, 2011, Areal Editors, refers (p. 265) that "(...)IRC collected (resulting from the application of the rate to taxable income...)" Now, under IRC, given the internal organization of the Code, taxable income has a very precise sense, not crossing with TA.

This author further states, still in 2011, that "some expenses are subject to an autonomous taxation in IRC. In essence it is not really IRC – which aims to tax the income of legal persons and not expenses incurred by them..."

Also J. Ricardo Catarino and V. Guimarães (Lessons in Taxation, Almedina, 2012, p. 284), state that: "To the collected, determined through the application of the rate to taxable income the following deductions are made…". That is, once again, the collected is understood as resulting from the application of the IRC rate to taxable income, all concepts well-defined and distinct from TA.

Of note as well that J. Casalta Nabais and J. L. Saldanha Sanches, in their manuals of Tax Law, did not conceptually equate TA to components of IRC and which should therefore integrate the normally determined collected of this tax, that is to say that which derives from the taxation of income. Saldanha Sanches even emphasized the dual nature of IRC, as the field of TA expands.

Finally, it should be noted that Fernando Araújo and António Oliveira, already in 2014, argue that "it is not therefore possible to frame autonomous taxation either as a tax directly or indirectly levied on profit or (…) as a subspecies of IRC"

How then did we transition from these perspectives, still very recently sustained, to a jurisprudential current that came to consider that TA integrates IRC collected for purposes of deducting thereto amounts under tax benefits or special advance payment (PEC)? We will see this below.

B) Requests on How IRC Collected Should be Determined, CAAD Decisions, and Their Foundation, Before the Amendment to Article 88th of CIRC in the Budget Law for 2016

B.1 Dominant Perspective in the Decisions

In case no. 769/2014-T regarding the deduction of SIFIDE to the collected, the following was concluded (underlined by the tribunal):

"(…) the essential question that is the object of the present case is whether the tax credits which, in the year 2011, were recognized to the Claimant, under SIFIDE, can be deducted from the tax collected produced by the autonomous taxation that burdened it in that fiscal year, in the part in which they cannot be deducted from the rest of IRC collected.

There is autonomous taxation provided for in CIRC (article 88th of CIRC) and autonomous taxation provided for in CIRS (article 73rd of CIRS). The tax collected by them constitutes tax collected of the respective tax, being subject to the generality of provisions provided for in the codes referred to, potentially applicable.

As for IRC, in addition to the unanimity of jurisprudence, article 23rd-A, no. 1, para. a), of CIRC, as worded by Law no. 2/2014, of 16 January, leaves no margin for any reasonable doubt, corroborating what previously already resulted from the literal tenor of article 12th of the same Code.

(…) the statute that approved SIFIDE does not state that credits deriving therefrom are deductible to any and all IRC collected, but rather defines the scope of deduction by alluding, in its no. 1 of article 4th, «to the amount determined in accordance with article 90th of the IRC Code, and up to its concurrence». No. 3 of the same article confirms that it is to the amount that will be determined under the terms of article 90th of CIRC that is relevant to concretize the deduction by stating that «deduction is made, under the terms of article 90th of the IRC Code, in the assessment relating to the tax period mentioned in the preceding number».

Thus, the question that is relevant to resolve, is, independent of the nature of the tax to which autonomous taxation relates, whether the amount of autonomous taxation is «determined under the terms of article 90th of CIRC», because, if it is, it must be concluded that, to determine the limit of deduction, the tax collected deriving from autonomous taxation is taken into account.

Article 90th of CIRC refers to the forms of assessment of IRC, by the taxpayer or by the Tax Administration, applying to the determination of the tax owed in all situations provided for in the Code, including additional assessment (no. 10). For this reason, it also applies to the assessment of the amount of autonomous taxation, which is determined by the taxpayer or by the Tax Administration under the terms of article 90th of CIRC, there being no other provision providing for different terms for its assessment (underlined is our own).

Its autonomy is restricted to the applicable rates and the respective taxable income, but the determination of its amount is effected under the terms of article 90th. (…) For this reason, there is no legal foundation, specifically in light of the legislative intention that can be detected, to exclude the deductibility of the SIFIDE tax benefit to the tax collected from autonomous taxation that results directly from the letter of article 4th, no. 1 of its statute, conjugated with article 90th of CIRC."

And in the same sense pronounced the arbitral award rendered in case no. 219/2015-T.

As observed, and the cited decision emphasizes, "(...)the question relevant to resolve is, independent of the nature of the tax to which autonomous taxation relates, whether the amount of autonomous taxation is «determined under the terms of article 90th of CIRC".

In sum, the conclusion that the assessment of TA would have to be done under the terms of article 90th of CIRC – or else consider that there was no provision supporting them – led to this jurisprudential current that came to interpret the norms of CIRC as supporting deductions to the value collected (designated as collected) of TA. However, as will be seen below, there were decisions in the contrary sense, although clearly minority.

B.2 Other Perspectives in Arbitral Decision

While it is true that the perspective just transcribed, based on the examples of cases 769/2014-T and 219/2015-T (and others that could be added) presents itself as clearly dominant, it is also true that there were cases where, before the Budget Law for 2016 modified article 88th of CIRC, it was decided against the deductibility of PEC or SIFIDE to the amount collected by TA.

Thus, the decisions rendered in cases 697/2014-T and 722/2015-T reached the conclusion of non-deductibility.

The last of the aforementioned decisions bases it as follows:

"It was concluded that the tax collected from autonomous taxation has a different root, which cannot, under penalty of subversion of the order of values, permit the deduction of tax benefits, under penalty of decharacterization of the principles specifically intended to be pursued. Indeed, having the regime of autonomous taxation a disincentive function for abusive behavior, it is not clear by what logical reason such disincentive could, afterwards, vanish, which would occur if it were possible to deduct to the tax collected from autonomous taxation tax incentives, as the Claimant wishes.

That possibility would result in a double strange effect: on one hand it could, in the limit, eliminate the tax collected resulting from autonomous taxation and, on the other, would facilitate the deduction of certain tax benefit (in the case, SIFIDE is at issue, for compliance with objectives or adoption of conduct set in the provision establishing the right to the benefit) to a tax that has a specifically anti-abuse function, of mitigation of fiscal and socially undesired behavior. From the combination of these possibilities would result a contradictory, illegal and unethical result, precisely because the same tax law would permit, within the framework of the same tax system, to relieve the taxpayer of the burden of payment of a tax that is precisely owed by the adoption of abusive, undesired and disincentivized conduct (consideration as expenses of the expenses provided for in article 88th of CIRC).

It is concluded, in this manner, by the illegality of the deductibility of SIFIDE to the tax collected from autonomous taxation, without need to resort to the interpretative character given by article 135th of Law no. 7-A/2016, of 30 March (Budget Law for 2016), to article 21st of article 88th of CIRC, which comes to have the following content: "21 - The assessment of autonomous taxation in IRC is effected under the terms provided for in article 89th and is based on the values and rates that result from the provisions of the preceding numbers, with no deductions being made to the total amount determined." In sum, the legislator, in adding this no. 21 to article 88th of CIRC with the content mentioned merely embraced and reinforced the interpretative sense that already resulted from the norms in force as was demonstrated by the reasoning above stated.

Therefore, the Claimant has no merit, for the reasons and with the foundations invoked, with respect to the possibility of deduction of the tax benefit relating to SIFIDE to the tax collected from autonomous taxation."

7.5 The Impact of the Budget Law for 2016, and the Amendment to Article 88th of CIRC, in the Specific Case

A) The Budget Law for 2016

Law no. 7-A/2016, of 30 March (Budget Law for 2016), amended article 88th of CIRC, which now reads as follows:

"21 - The assessment of autonomous taxation in IRC is effected under the terms provided for in article 89th and is based on the values and rates that result from the provisions of the preceding numbers, with no deductions being made to the total amount determined."

Article 135th of the Budget Law attributes an interpretative character to such provision.

B) On the Interpretative Nature

The new no. 21 of article 88th of CIRC added by Law no. 7-A/2016, of 30 March, expressly establishes that to the amount determined from autonomous taxation «no deductions are made».

On the other hand, article 135th of Law no. 7-A/2016, of 30 March, in attributing an «interpretative» character to that new no. 21st of article 88th, in conjunction with article 13th of the Civil Code (which is the only provision that defines the concept of interpretative law), has incorporated a legislative intention to apply the new regime to situations prior to where there is «effects already produced by compliance with the obligation, by final judgment, by settlement, even if not approved, or by acts of similar nature».

Now Baptista Machado states, regarding interpretative laws, the following:

"The reason why the interpretative law applies to facts and situations prior to it resides fundamentally in that it, coming to establish and fix one of the possible interpretations of the old law with which the interested parties could and should count, is not susceptible to violating secure and legitimately grounded expectations. We can consequently say that those laws are interpretative in nature which, on points or questions in which the applicable legal rules are uncertain or their meaning is controversial, come to establish a solution that the courts could have adopted.

It is not necessary that the law come to establish one of the prior jurisprudential currents or a strong prior jurisprudential current. All the more so since the interpretative law often emerges before such jurisprudential currents manage to form themselves. But, if this is the case, and if in the meantime a uniform jurisprudential current has formed that made practically certain the meaning of the old rule, then the new law that comes to establish a different interpretation of the same rule can no longer be considered truly interpretative (although it may be so by determination of the legislator), but innovative.

For a new law to be truly interpretative, therefore, two requirements are necessary:

• That the solution of the prior right be controversial or at least uncertain;

• And that the solution defined by the new law be situated within the frames of the controversy and be such that the judge or interpreter could arrive at it without overstepping the limits normally imposed on interpretation and application of law. If the judge or interpreter, faced with old texts, could not feel authorized to adopt the solution that the new law comes to establish, then this is decidedly innovative."

In light of this position, and in light of the legislation in force in 2011, it can be accepted that the attribution of an interpretative character to no. 21 of article 88th of CIRC that is made in article 135th of Law no. 7-A/2016, of 30 March, since the solution provided therein of the impossibility of deduction of the benefit sought by the Claimant to the total amount of autonomous taxation passes the test set out by this Author:

– The solution that resulted from the literal tenor of article 90th, no. 1, of CIRC was controversial, as evidenced by the multiple disputes between the TA and taxpayers. Although there is a clearly majority sense of decision, for deductibility, it is also true that in arbitral decisions mentioned above (697/2014-T and 722/2015-T) the conclusion was for non-deductibility. (Also in decision 113-2015–T it is concluded for non-deductibility, although regarding PEC). The solution defined by the new law is situated within the frames of the controversy;

– The judge or interpreter could arrive at that solution without overstepping the limits normally imposed on interpretation and application of law, since restrictive interpretation is admissible when there are reasons to conclude that the scope of the legal text betrays the legislative thought or it is necessary to optimize the harmonization of conflicting interests that two norms seek to protect, as is referred to in the decision relating to case 722-T-2015.

In the case of the present proceedings it can be concluded that we are faced with an interpretative law, since the solution adopted in no. 21 of article 88th, could already have been adopted by the courts, as it was by the Arbitral Tribunals that rendered the decisions in cases 697/2014-T and 722/2015-T.

Still regarding the issue of interpretative law, we embrace what was written in the arbitral decision rendered in the case of CAAD no. 769/2015-T, (in the general part that is relevant for this case, since the issue decided in this case concerned PEC and the claim was judged to lack merit having regard to the interpretative nature, which the tribunal agreed to, of article 88th, no. 21, of CIRC): "By Law no. 7-A/2016, of 30 March, the legislator introduced no. 21 to article 88th of CIRC, with the following wording: "The assessment of autonomous taxation in IRC is effected under the terms provided for in article 89th and is based on the values and rates that result from the provisions of the preceding numbers, with no deductions being made to the total amount determined".

In article 135th of said Law no. 7-A/2016, of 30 March, the legislator determined that the provision in question would have an interpretative character.

Should it be verified that, in fact, the new no. 21 of article 88th of CIRC has an interpretative character, the dispositions contained therein will integrate the interpreted provision from the beginning of its effectiveness, whereby this tribunal will have to conclude for the non-deduction of PEC to the amounts owed under autonomous taxation, dismissing the Claimant's claim. This same would result from the application to the specific case of article 13th of the Civil Code which "An interpretative law is integrated into the interpreted law, with the effects already produced by compliance with the obligation, by final judgment, by settlement, even if not approved, or by acts of like nature, being safe, however".

Before anything else, it should be noted that, although in tax matters the constitutional principles of legality and prohibition of retroactivity of law, provided for in article 103rd of CRP, impose some restrictions on the legislator, this tribunal understands that there is no generic constitutional prohibition on interpretative tax laws.

The constitutional admissibility of interpretative laws in tax matters – just as regarding any tax provisions – should be assessed as a function of the matters on which they bear and their respective normative content since the constitutional prohibition of retroactivity of tax law is limited to the matters of scope (objective, subjective, temporal and territorial) of the tax.

As defended by Diogo Leite de Campos, Benjamim Silva Rodrigues and Jorge Lopes de Sousa, "The constitutionality of retroactive tax provisions must be assessed in different terms depending on whether they deal with the material elements that contribute to the definition of the normative tax type (scope, exemptions and rate) or other matters (guarantee of taxpayers, procedure for assessment and collection). The prohibition contained in article 103rd, no. 3 of CRP concerns only the former. The constitutional conformity of the latter must be equated in light of the material principles of legal certainty and trust protection that inform the rule of law (article 2nd of CRP)".

Starting from the theoretical admissibility of interpretative laws in tax matters, it is necessary to analyze whether, in the case in question, notwithstanding the express declaration of the legislator, we are effectively faced with an interpretative law.

It is thus considered that, to qualify a law as interpretative, the following requirements should be verified:

(i) There is a controversial or uncertain issue in the law in force; and,

(ii) The legislator establishes an interpretative solution that resolves the uncertainty that the interpreter or judge could reach based on the normative provisions prior to the legislative amendment.

Applying these criteria to the situation in question, we are led to conclude that we are, truly, faced with an interpretative law. In fact, the matter regulated by the new no. 21 of article 88th of CIRC was controversial and uncertain (having given rise to the arbitral cases listed by the Claimant itself), the solution established corresponding to one of the plausible interpretations that the judge could reach, as indeed it did, for example, in the arbitral decision rendered in case 113/2015-T, of 30-12-2015. The solution is still a plausible and reasoned solution that found adherence in prior jurisprudence.

Against this understanding the Claimant's allegation would not proceed that, for there to be an effective interpretative law it would be necessary to have a jurisprudential current that imposed a certain solution on the legislator. And this allegation does not proceed because, as Baptista Machado refers "(…) It is not necessary that the law come to establish one of the prior jurisprudential currents or a strong prior jurisprudential current. All the more so since the interpretative law often emerges before such jurisprudential currents manage to form themselves. (…) For a new law to be truly interpretative, therefore, two requirements are necessary: that the solution of the prior right be controversial or at least uncertain; and that the solution defined by the new law be situated within the frames of the controversy and be such that the judge or interpreter could arrive at it without overstepping the limits normally imposed on interpretation and application of law. If the judge or interpreter, faced with old texts, could not feel authorized to adopt the solution that the new law comes to establish, then this is decidedly innovative."

Given all that is stated above, it remains to conclude by the interpretative character of no. 21 of article 88th of CIRC, introduced by Law no. 7-A/2016, of 30 March, which, being directly applicable to the situation in question, in accordance with article 13th of the Civil Code, will imply the dismissal of the Claimant's claim by determining expressly the aforementioned provision that to the amount of autonomous taxation no deductions will be made."

As for the issue of legal certainty, of particular relevance because it concerns a tax benefit, it is this tribunal's understanding that the Claimant did not have, in light of the wording of the law at the date of the investments (2008, 2009 and 2010, cf. document 4 attached to the case file) that benefited from SIFIDE, a guarantee or expectation of high probability that, undertaking the investments, the deduction afforded by SIFIDE would be deductible to the value of TA.

Indeed, the wording of article 90th established:

"1 — The assessment of IRC is effected as follows:

a) When assessment is to be made by the taxpayer in the declarations referred to in articles 120th and 122nd, it is based on the taxable income contained therein;"

Now, as already referred to, taxable income is a concept with precise meaning in the context of CIRC, it being weakly credible the perspective that there would be expectations or guarantees of inclusion of the tax collected from TA in the amount assessed. At the date of undertaking the investment, and as was shown above in the doctrinal excursus, there was no settled doctrine or jurisprudence (the awards of the Constitutional Court on TA, although not dealing with the specific case of the present proceedings, were even of contrary sense regarding an identity between IRC and TA), that would suggest that this deduction would be possible.

Furthermore, the principle of legal certainty, while important in all fields of law, acquires special dimension in tax law, as it is a fundamental element of the rule of law. Nevertheless, as various jurisprudence affirms, legal certainty should not be confused with an absolute prohibition of law changes, but rather denies the possibility of retroactive application of substantially unfavorable rules to the taxpayer concerning the elements that define the material scope of the tax.

In the specific case, given that there was doctrinal diversity and jurisprudential controversy regarding whether the SIFIDE deduction could be effected to the tax collected from autonomous taxation, and given also that this issue only came to be clarified with the Budget Law for 2016, it cannot be held that there was a legitimate and well-founded expectation of high degree of certainty that would lead to the acquisition of rights.

Therefore, the application of the interpretative norm to situations prior to its legal establishment does not violate the principle of legal certainty, as the right to the deduction in question was not yet definitively and clearly established in the prior legal framework.

[Translation ends here due to length - the document continues with additional findings and legal analysis]