Can Special Advance Tax Payments (PEC) Be Deducted from Autonomous Taxation in IRC?

ARBITRAL DECISION

The members of this Arbitral Tribunal hereby agree:

I – REPORT

A…, S.A., legal person no. …, with registered office at …, …-… …, …, with registered capital of €71,776,160.00, hereinafter referred to as "A…" or "Claimant", which falls within the jurisdiction of the local peripheral services of the Tax Office of …,

has, under Articles 2, no. 1, paragraph a), and 10, nos. 1 and 2, of Decree-Law No. 10/2011 of 20 January, and Articles 1 and 2 of Ordinance No. 112-A/2011 of 22 March, requested the establishment of this Arbitral Tribunal.

The acts subject to the request for adjudication are the dismissal of the administrative review claim [identified below] and, consequently (and in final or ultimate terms), the acts of self-assessment of Corporate Income Tax (IRC) relating to the fiscal years 2012 and 2013, insofar as they correspond to the non-deduction from the collection of IRC resulting from the rates of autonomous taxation of the special payment on account made under IRC (cf. Docs. nos. 1 to 3).

More precisely, the present Claimant requests to "(...)submit for the appreciation of the Arbitral Tribunal (i) the legality of the dismissal of the administrative review claim, insofar as it disregards the recognition of illegality (by improper exclusion of deduction from the collection) of that part of the IRC self-assessments relating to the fiscal years 2012 and 2013 of A… and, likewise, (ii) the legality of that part of the IRC self-assessments relating to these fiscal years 2012 and 2013, more specifically the illegality with respect to the amounts of €43,250.49 and €27,733.08, respectively, in a total of €70,983.57(...)".

Grounds Presented by the Claimant

The Claimant alleged, in essence and in summary, that:

• It filed on 31 May 2013 and 2014 its IRC Declaration Model 22 relating to the fiscal years 2012 and 2013, and with respect to 2013 it further presented a replacement declaration (cf. Docs. nos. 1 to 3).

• In accordance with the tax return filed, in the fiscal year 2012 A… determined a tax loss of €13,597,760.53 and a total amount of tax to be paid of €38,034.68, which is paid (Doc. no. 5), and which resulted from a collection of autonomous taxation in the amount of €43,250.49, reduced by withholdings on income supported in the amount of €5,215.81, and to whose refund A… was entitled (Doc. no. 1).

• And with respect to the fiscal year 2013, in accordance with the tax return filed (see, in final terms, the replacement declaration), A… determined a tax loss of €2,470,328.83 and a total amount of tax to be paid of €1,299.95, which is paid (Doc. no. 6), and which resulted from a collection of autonomous taxation in the amount of €27,733.08, reduced by withholdings on income supported in the amount of €26,433.13, to whose refund A… was entitled (Doc. no. 3).

• On the other hand, in the context of special payments on account, there remains, for reference to 2013, an accumulated amount to be deducted from the collection of IRC amounting to €420,000 (and which for reference to 2012 was €350,000), as detailed in the special payments on account extracted from the tax authority portal attached as Doc. no. 7, with the following distribution per fiscal year (cf. Docs. nos. 7 and 8):

• It happens that, with respect to the tax resulting from the application of the autonomous taxation rates in IRC, the Tax Authority's computer system prevents the Claimant from recording the value relating to the aforementioned autonomous taxation rates in IRC, purged, i.e., deducted, within the ambit of the IRC collection resulting from the application of these rates, from the amounts of special payments on account still available (beginning with the oldest) for offset against the IRC collection, which were detailed above, which resulted in an excess of tax paid with reference to the fiscal years 2012 and 2013 at issue here.

• That is, the Tax Authority's computer system, through which IRC is self-assessed, does not allow taxpayers to deduct, for the purposes of determining the IRC owed by them, the IRC resulting from autonomous taxation determined at the special payment on account.

• That system does not therefore allow the deduction of a portion of advance payments made on account of the IRC that will be owed at the end – the special payments on account ("PEC") – from a part of the final IRC actually determined – autonomous taxation.

• It should be noted that, in the present case, it concerns taking into account €43,250.49 in special payments on account made for application (deduction) from the collection of autonomous taxation in IRC for the fiscal year 2012 of that same amount, and €27,733.08 in special payments on account made for application (deduction) from the collection of autonomous taxation in IRC for the fiscal year 2013 of that same amount, an application which was refused by the Tax Authority (Doc. no. 4).

• The Tax Authority's refusal to deduct the PEC from the collection of autonomous taxation in IRC is all the more surprising because recently the Tax Authority took a position on this matter having excluded only the deduction from the collection of autonomous taxation in IRC of the tax credits for international double taxation, which is now contradicted by this administrative review decision presented by A….

• As previously mentioned, it concerns the impossibility of reflecting in Model 22 declarations the deduction of special payments on account also with reference to the collection resulting from autonomous taxation rates in IRC, as detailed for fiscal years 2012 and 2013 attached hereto as Doc. no. 9.

• That is, intentionally or inadvertently, the Model 22 declaration for IRC and its articulation with the programming of the Tax Authority's computer system prevents the deduction from the collection related to autonomous taxation rates in IRC, recorded in field 365 of table 10 of the Model 22 declaration (cf. Docs. nos. 1 to 3), of the special payments on account still to be deducted from the IRC collection, beginning with the oldest.

• Thus, the question that is sought to be clarified is: does or does not A… have the right to proceed with the deduction, also from the IRC collection produced by the application of autonomous taxation rates, of the aforementioned special payments on account?

• Now, having regard to the overwhelming arbitral jurisprudence that today classifies autonomous taxation as IRC, the Claimant sees absolutely nothing in the law that excludes the offset of these special payments on account also to the part of the IRC collection produced by autonomous taxation.

• But in the year of filing of the Model 22 declaration at issue here the Tax Authority's computer system did not yet think so.

• And in the context of administrative review, the Tax Authority continued not to think so, contradicting its own previous opinion on this matter, as mentioned above.

• In the same way that jurisprudence has understood, in a practically unanimous manner, that the IRC collection provided for in (in force until 2013) Article 45, no. 1, paragraph a), of the IRC Code, comprises, without need for any additional specification, the collection of autonomous taxation in IRC, it must also be understood that the IRC collection provided for in the same code a few provisions further on (Article 90, no. 1, and no. 2, paragraph c), of the IRC Code, in the version in force in 2013) also covers the collection of autonomous taxation in IRC.

• Wherefore the denial of the deduction of PEC from the IRC collection of autonomous taxation violates paragraph c) of no. 2 of Article 90 of the IRC Code [previously before 2010, Article 83; and from 2014 became paragraph d) of the aforementioned no. 2 of Article 90 of the IRC Code].

• The Claimant further makes various considerations and conclusions and cites various arbitral decisions that it intends to justify its conclusions to the effect that both the dismissal of the above-mentioned administrative review and the IRC self-assessments (including its autonomous taxation rates) relating to the fiscal years 2012 and 2013 suffer from a material defect of violation of law, because the deduction of the special payment on account from the part of the IRC collection corresponding to autonomous taxation rates should not be prohibited, beginning with the oldest.

• Hence the formulation of the request in the following terms: (i) that the illegality be declared and annulled the dismissal of the administrative review insofar as it refused the annulment of the illegal part, in the terms discussed here, of the IRC self-assessments in the parts produced by autonomous taxation rates, of fiscal years 2012 and 2013, thereby violating the principle of legality; (ii) that the illegality of these self-assessments be declared (and consequently be annulled), in the parts corresponding to the amounts of €43,250.49 (2012) and €27,733.08 (2013); (iii) that, consequently, the right to the refund of these amounts be recognized and, likewise, the right to compensatory interest on the tax unduly assessed, calculated, until full refund, from 31 May 2013 as to €38,034.68, from 1 September 2013 as to €5,215.81, from 30 May 2014 as to €1,299.95, and from 1 September 2014 as to €26,433.13.

Constitution of the Tribunal

On 4 January 2016 the present Collective Arbitral Tribunal was established, after designation, in accordance with the regulatory terms, by the Ethics Council, of the arbitrators, Judge José Poças Falcão (President), Dr Jorge Carita and Dr Sara Barros, who accepted the appointment within the legal period and terms.

Response of the Tax and Customs Authority

In accordance with Article 17, no. 1, of the Arbitral Tribunal Regulations, the Tax Authority was cited, as the respondent party, to present a response, in accordance with the said article.

The Tax Authority presented its response on 11/4/2016, having argued, in summary, to the effect of the total lack of merit of the Claimant's request, attaching a copy of the administrative file.

By order dated 22/2/2016, the president of the Tribunal considered, without objection, that, essentially, since the evidence was of a documentary basis and the necessary documents were attached, there was no probative or investigative step to be carried out and considered, likewise, that the meeting provided for in Article 18 of the Arbitral Tribunal Regulations was dispensable given that there were no exceptions to be addressed and decided before ruling on the request nor apparent need for correction of procedural documents.

Final Submissions

Both parties submitted, in writing, their final submissions, on facts and law, after having been notified for this purpose by order of 22 February 2016.

In the learned submissions they presented, they reiterated and developed, essentially, the reasons and grounds previously presented in their respective pleadings.

Case Management

The Arbitral Tribunal was regularly established, is materially competent, the proceedings do not suffer from defects that would invalidate them and the parties have legal personality and capacity and have standing given their manifest interest in the dispute (cf. Article 30 of the Civil Procedure Code, applicable ex vi, Article 29 of the Arbitral Tribunal Regulations).

II – GROUNDS

Proven Facts

The following facts are considered proven:

a. On 31 May 2013 and on 30 May 2014, the present Claimant proceeded to file its Corporate Income Tax (IRC) Declaration Model 22 relating to fiscal years 2012 and 2013, and with respect to this latter year it further proceeded to file a replacement declaration, having at those times proceeded to self-assess autonomous taxation in IRC for those same years 2012 and 2013, in the amounts, respectively, of €43,250.49 and €27,733.08 (cf. the tax returns attached hereto as Docs. nos. 1 to 3);

b. On 28 May 2015 the Claimant filed an administrative review against the aforementioned self-assessments relating to fiscal years 2012 and 2013...

c. ...and on 21 July 2015 the Claimant was notified of the dismissal of the aforementioned administrative review claim (cf. Doc. no. 4)...

d. ...a decision that, in determining the dismissal of the claim then filed, denied the Claimant the right to annulment of the assessments subject to the present request, on the grounds that it was understood that the amounts paid as special payment on account are not deductible from the collection produced by autonomous taxation.

e. In accordance with the tax return filed, in fiscal year 2012 A… determined a tax loss of €13,597,760.53 and a total amount of tax to be paid of €38,034.68, which is paid (Doc. no. 5), and which resulted from a collection of autonomous taxation in the amount of €43,250.49, reduced by withholdings on income supported in the amount of €5,215.81, [to whose refund A… was entitled] (Doc. no. 1).

f. And with respect to fiscal year 2013, in accordance with the tax return filed (see, in final terms, the replacement declaration), A… determined a tax loss of €2,470,328.83 and a total amount of tax to be paid of €1,299.95, which is paid (Doc. no. 6), and which resulted from a collection of autonomous taxation in the amount of €27,733.08, reduced by withholdings on income supported in the amount of €26,433.13, [to whose refund A… was entitled] (Doc. no. 3).

g. In the context of special payments on account there remains, for reference to 2013, an accumulated amount amounting to €420,000 (and which for reference to 2012 was €350,000), as detailed in the special payments on account extracted from the tax authority portal (Doc. no. 7), with the following distribution per fiscal year (cf. Docs. nos. 7 and 8):

h. The Model 22 IRC declaration and its articulation with the programming of the Tax Authority's computer system prevents the deduction from the collection related to autonomous taxation rates in IRC, recorded in field 365 of table 10 of the Model 22 declaration (cf. Docs. nos. 1 to 3), of the special payments on account still to be deducted from the IRC collection, beginning with the oldest.

Unproven Facts

There are no facts not proven relevant to the decision of the case.

Reasoning

The facts considered pertinent and proven are based on the analysis of the positions exposed by the parties and the documentary evidence attached to the file, all permitting, essentially, the reduction of the controversy to questions of law, namely, the question of whether or not the Claimant has the right to proceed with the deduction, also from the IRC collection produced by the application of autonomous taxation rates, of the aforementioned special payments on account.

II – Grounds (cont.)

The Law

Questions to be Decided or Subject Matter of the Dispute

The Claimant requests that the amounts paid as Special Payment on Account (PEC) be deducted from the collection produced by autonomous taxation that burdened it in fiscal years 2012 and 2013.

It is necessary once again to recall what has been understood by Jurisprudence for years, namely, that the Courts are not required to address all arguments formulated by the parties (See inter alia, Decision of the Plenary of the 2nd Section of the Supreme Administrative Court, of 7 June 95, case 5239, in Official Gazette – Appendix of 31 March 97, pages 36-40 and Decision Supreme Administrative Court – 2nd Sec. – of 23 April 97, Official Gazette/AP of 9 October 97, p. 1094).

This jurisprudential understanding is currently based on the provisions of Articles 607-2 and 3 of the Civil Procedure Code and 123-1st part of the Tax Procedure Code, applicable in tax arbitral proceedings by force of Article 29 of the Arbitral Tribunal Regulations, when they impose only on the Judge (or Tribunal) that, after identifying the parties and the subject matter of the dispute and enunciating the questions to be decided, base the decision by discriminating proven and unproven facts and indicate, interpret and apply the corresponding norms for its final conclusion (decision).

Let us then proceed.

Autonomous Taxation (TA)

The figure of autonomous taxation has been used for the pursuit of diverse objectives, ranging from the original purpose of preventing tax evasion and fraud practices – through undisclosed or undocumented expenses, or payments to entities located in jurisdictions with privileged tax regimes, to the replacement of taxation of ancillary benefits in the form of representation expenses or assignment of vehicles to workers and members of corporate bodies, within the sphere of their respective beneficiaries – to the purpose of preventing the phenomenon designated as "dividend washing" (cf. no. 11 of Article 88 of the IRC Code) or of imposing, through taxation, the payment of earnings considered excessive (cf. no. 13 of the same provision).

In this regard, Professor Saldanha Sanches emphasized that, under the «(...) designation of "autonomous taxation", hide themselves very diverse realities (...)», adding further that, in terms of a common denominator, one could state that this type of taxation targets «expenses that are located in the zone of intersection of the personal sphere and the business sphere, so as to prevent remuneration in kind that is more attractive for purely tax reasons or the hidden distribution of profits.»

For his part, Professor Casalta Nabais qualifies autonomous taxation as «true taxes on (certain) expenses carried out by enterprises. Having begun by affecting undocumented and confidential expenses and, then, on representation expenses and vehicle expenses, they have meanwhile been extended to various expenses and, in the context of IRC, to certain income such as distributed profits and certain indemnities or compensations. What leads us to recognize that in the IRC we have autonomous taxation on certain income, on expenses that are not tax-deductible expenses and on expenses that are considered deductible expenses».

Being that, further on, as to the purpose of the same, adds that, if, in a first phase, «they aimed to prevent that, through these expenses, enterprises would proceed to the hidden distribution of profits, especially dividends, as well as to combat tax fraud and evasion that such expenses cause, not only in relation to personal income tax and IRC, but also in relation to contributions (of employer entities and workers) to social security».

Presently, the expansion and aggravation to which they have been subject reveal a «clear purpose of obtaining more tax revenues».

In line with the characterization of autonomous taxation carried out in the arbitral decision rendered in the context of process no. 80/2014-T – and in the expression, undoubtedly felicitous, used there that «autonomous taxation is nothing more than adjuvant mechanisms of the central axis of IRC, which is to tax profits (...)» – it becomes clear the recognition of the coexistence between, on one hand, the (special) regime of autonomous taxation and, on the other, the general system (pre-existing) of IRC.

And, as is further explained in the same arbitral decision, «the inclusion of autonomous taxation in its Code (...) has as a logical corollary the application of the general norms specific to this tax that do not clash with its special form of incidence».

It is recognized, thus, that the autonomous character of these taxation arising from the special configuration given to the material and temporal aspects of the taxable events, imposes, in certain domains, the exclusion or an adaptation of the general rules for application of the IRC.

In reality, the integration of autonomous taxation in the IRC Code (and personal income tax), conferred a dualistic nature, in certain aspects, to the normative system of this tax, which was embodied, namely, in the framework of paragraph a) of no. 1 of Article 90 of the IRC Code, in separate calculations of their respective collections, by force of compliance with different rules: in one case, it concerns the application of the rate(s) of Article 87 of the IRC Code to taxable material determined in accordance with the rules contained in Chapter III of that Code and, in another case, it concerns the application of rates to values of taxable material relating to different realities contemplated in Article 88 of the IRC Code.

That is: contrary to what is stated in point 9 of the concurring opinion of Ms. Professor Leonor Ferreira attached to the Arbitral Decision rendered in process no. 697/2014-T, there is not properly a single IRC assessment, but rather two calculations, that is, two distinct calculations which, although processed, in accordance with paragraph a) of no. 1 of Article 90 of the IRC Code, in the declarations referred to in Articles 120 and 122 of that Code, are carried out based on different parameters, because each materializes itself in the application of its own rates, provided for in Articles 87 or 88 of the IRC Code, to the respective taxable material determined likewise in accordance with its own rules.

And with respect to the admission of autonomous taxation as a tax-deductible expense, it would be said that accepting it would be to undo, after all, the dissuasive effect that with those (autonomous taxation) the legislator sought to achieve and to annul that same autonomous taxation, since the amount paid would be offset by the reduction of the same to taxable profit, thus, on the IRC to be paid or on losses to be carried forward.

Following the integration of autonomous taxation in the IRC Code, through Law No. 30-G/2010, of 29/12, the legislator does not seem to have felt the need to explicitly clarify, in a comprehensive manner – i.e., in all regulatory provisions where they are manifested – the consequences of the coexistence of two forms of taxation within the IRC system, limiting itself to safeguard situations in which the IRC exemption did not project itself onto autonomous taxation.

This was translated into the amendment made to the wording of Article 12 of the IRC Code, in order to clarify, with an interpretative character, that companies and other entities covered by the tax transparency regime are not taxed on IRC, except as to autonomous taxation.

In addition, it was further established (cf. the then no. 6 of Article 109 of the IRC Code [current Article 117/6] that the obligation to file periodic tax returns extends to entities exempt from IRC, when subject to autonomous taxation.

It was thus left to the care of the interpreter and applicant of the law the task of, faced with the need to, for certain purposes – namely of the deductions provided for in no. 2 of Article 90 of the IRC Code or of the calculation of payments on account –, identifying the relevant part of the IRC collection, extracting from the applicable regulatory provisions a useful sense, literally possible, that permits a coherent solution consistent with the nature and functions attributed to each component of the tax.

Well then, when it comes to the deductions provided for in no. 2 of Article 90 of the IRC Code, it seems the Claimant defends – anchoring itself, with all due respect, in a simplistic and decontextualized reading of this provision – that the expression "amount determined in accordance with the preceding number" should be understood as encompassing the sum of the IRC amount determined on taxable material determined in accordance with the rules of Chapter III and the rates provided for in Article 87 of that Code, and the amount of autonomous taxation, calculated on the basis of the rules provided for in Article 88.

Note that, moreover, the result of this interpretation would imply that, in the basis for calculation of payments on account defined in no. 1 of Article 105 of the IRC Code – and in terms identical to those used in no. 2 of Article 90 [«Payments on account are calculated on the basis of the tax assessed in accordance with no. 1 of Article 90 (...)»] –, autonomous taxation would be included.

Indeed, for the basis for calculation of payments on account only the IRC determined on the basis of taxable material determined in accordance with the rules of Chapter III and the rates of Article 87 of the respective Code is considered.

Now, it is important to note that the coherence and adequacy of this understanding is grounded in the very nature of payments on account of the tax due at the end, which, in accordance with the definition of Article 33 of the General Tax Law are «pecuniary deliveries made in advance that are carried out by taxpayers in the period of formation of the taxable event», constituting a «(...) form of approximation of the moment of collection to that of the perception of income so as to remedy situations in which such approximation cannot be effectuated through withholdings on income.»

Therefore, in good logic, it only makes sense to conclude that their respective basis for calculation corresponds to the amount of the IRC collection resulting from taxable material that is identified with the profit/income for the fiscal year of the taxpayer.

Thus, the delimitation of the content of the expression used by the legislator in no. 2 of Article 90 of the IRC Code, "amount determined in accordance with the preceding number", and in no. 1 of Article 105 of the IRC Code, "tax assessed in accordance with no. 1 of Article 90", should be done in a consistent manner, and consequently assigned to it (in both provisions), a univocal sense.

Which is equivalent to saying that it corresponds to the amount of IRC calculated by applying the rates of Article 87 to taxable material determined on the basis of profit and the rates of Article 87 of the IRC Code.

It should be noted that, this interpretation of the expression "amount determined in accordance with the preceding number" is also the only one consistent with the nature of the deductions referred to in the paragraphs of no. 2 of Article 90 of the IRC Code, relating to:

• tax credits for international legal and economic double taxation [current paragraphs a) and b)];
• tax benefits [current paragraph c)];
• special payment on account [current paragraph d)];
• and withholdings on income [current paragraph e)].

And this in face of the interconnection that, on a material level, should be established between the realities reflected by these deductions and the origin of the amount from which they are subtracted.

In reality, it should be noted that the common feature to all realities reflected in the deductions referred to in no. 2 of Article 90 of the IRC Code, lies in the fact that they relate to income or expenses incorporated in taxable material determined on the basis of profit of the taxpayer or advance payments of tax, and are therefore entirely unrelated to the realities that comprise the taxable events of autonomous taxation.

The essential question is not thus whether autonomous taxation is or is not IRC, it being clear that the assessment of autonomous taxation is carried out based on Articles 89 and 90 no. 1 of the IRC Code, but, in reality, applying different rules for the calculation of tax:

(1) in one case the assessment operates, through the application of the rates of Article 87 to taxable material determined in accordance with the rules of Chapter III of the Code and

(2) in the other case, various collections are determined according to the diversity of facts that give rise to autonomous taxation.

From this it follows that the amount determined in accordance with paragraph a) of no. 1 of Article 90 does not have a unitary character, since it comprises values calculated according to different rules, to which are associated also differentiated purposes, whereby the deductions provided for in the paragraphs can only be effected to the part of the IRC collection with which there is a direct correspondence, so as to maintain the coherence of the conceptual structure of the general regime of the tax.

It is concluded from this, if we understand correctly, that there is no even controversy between the parties as to the application of Article 90 of the IRC Code to the assessment of autonomous taxation, the divergence being limited to the manner of carrying out the assessment, since the Tax and Customs Authority understands that various collections are determined according to the diversity of facts that give rise to autonomous taxation and the deductions provided for in the paragraphs can only be effected to the part of the IRC collection with which there is a direct correspondence, understanding that this does not exist in relation to the IRC collection that results from autonomous taxation.

In any case, the aforementioned Articles 89 and 90 of the IRC Code, as well as other norms of this Code, such as those relating to the declarations provided for in Articles 120 and 122, are applicable to autonomous taxation.

From the outset – it is reaffirmed –, it is today settled, following extensive arbitral jurisprudence and the positions assumed by the Tax and Customs Authority, that the tax collected based on autonomous taxation provided for in the IRC Code has the nature of IRC.

Indeed, beyond the unanimity of the jurisprudence, Article 23-A no. 1, paragraph a), of the IRC Code, in the wording of Law No. 2/2014, of 16 January, leaves today no margin for any reasonable doubt, corroborating what previously already resulted from the literal tenor of Article 12 of that Code.

Now, Article 90 of the IRC Code 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).

Therefore, that Article 90 also applies to the assessment of the amount of autonomous taxation, which is determined by the taxpayer or by the Tax Administration, following the filing or non-filing of declarations, with no other provision providing for different terms for its assessment.

Thus, the differences between the determination of the amount resulting from autonomous taxation and that resulting from taxable profit are restricted to the determination of taxable material and the applicable rates, which are those provided for in Chapters III and IV of the IRC Code for IRC that is based on taxable profit and in Article 88 of the IRC Code for IRC that is based on taxable material of autonomous taxation and the respective rates.

But the forms of assessment provided for in Chapter V of that Code are of common application to autonomous taxation and to the remaining taxable matter of IRC.

However, the fact that a self-assessment of IRC, carried out in accordance with no. 1 of Article 90, can contain several partial calculations based on various rates applicable to certain taxable material, does not imply that there is more than one assessment, as results from the very terms of that norm when it makes reference to «assessment», in the singular, in all cases in which it is «made by the taxpayer in the declarations referred to in Articles 120 and 122», having «as its basis the taxable material that appears therefrom» (whether that determined in accordance with the rules of Articles 17 and following or that determined in accordance with the various situations provided for in Article 88).

Incidentally, it is not only the assessments provided for in Article 88 that can encompass various calculations of application of rates to certain taxable material, as the same may occur in the situations provided for in nos. 4 to 6 of Article 87.

In any case, whatever calculations are to be made, the self-assessment that the taxpayer or the Tax and Customs Authority must carry out in accordance with Articles 89, paragraph a), 90, no. 1, paragraphs a), b) and c), and 120 or 122, is unitary, and on the basis of it the global IRC is calculated, whatever the taxable materials relating to each of the types of taxation underlying it.

Incidentally, if this Article 90 were not applicable to the assessment of autonomous taxation provided for in the IRC Code, we would have to conclude that there would be no norm providing for its assessment, which would be reduced to illegality, by violation of Article 103, no. 3 of the Constitution, which requires that the assessment of taxes be done «in accordance with the law».

Now as has been stated above no violation appears to be found by the Tax Authority of the procedural and/or formal rules of assessment provided for in Article 90 of the IRC Code with the disregard, for this purpose, of autonomous taxation assessed and paid by the Claimant (...).

Special Payment on Account (Article 106 of the IRC Code)

We have now arrived at the moment to address, in particular, the question raised by the Claimant of the deduction from "the amount determined in accordance with the preceding number [no. 1 of Article 90]" of the special payment on account to which Article 106 refers, as provided for in paragraph c) of no. 2 of Article 90 (version of 2012, given by Law No. 3-B/2010, of 28-4).

The PEC was created with the purpose of guaranteeing a minimum collection of tax, and this was even its first designation in the discussion of the Budget Proposal for 1998. This requirement for minimum collection arose from the observation that the vast majority of companies did not present taxable profit and/or that this was in most cases insignificant.

Like TA, the PEC functions as a presumption of income and as a means of combating tax evasion, obligating certain companies to pay at least some tax. The PEC is also used as a "fiscal anesthesia mechanism", causing to reduce the period of time between the taxable event and the payment of the tax debt. Although the regime of Autonomous Taxation (TA) has as its basis the taxation of presumed income, this differs from the PEC regime, insofar as the payment of TA is definitive and is not subject to subsequent adjustments.

The PEC regime presents many specificities that it will not be relevant to point out for the object of the proceedings. We only emphasize that the possibility of the amount supported being able to be deducted from the collection, makes it much less burdensome for companies than TA. Furthermore, companies can, in certain circumstances, obtain a refund of the PEC supported, if they are unable to deduct the entire amount, thus functioning as a way to overcome the presumption of income that results from this institution.

The incidence of PEC is based on the turnover relating to the previous taxation period, in accordance with Article 106, no. 2 of the IRC Code. Although its relationship to contributive capacity is not obvious, the turnover criterion is closer to a notion of income than the expenses subject to TA.

Since the creation of PEC, constitutional problems have been raised, as it departs from the principle of contributive capacity. The fact is that, despite the heated debate, the PEC institution endures.

Now in this light and by simple consequence of the preceding considerations that led to the conclusion that the deductions referred to in paragraphs a) and b) of no. 2 of Article 90 of the IRC Code, are effected to "the amount determined in accordance with the preceding number", understood as the amount of IRC determined on the basis of taxable material determined in accordance with the rules contained in Chapter III and the rates of Article 87 of that Code, it is possible to extend such conclusion to the deduction relating to special payments on account.

It is sufficient, for this, to invoke the provision of no. 7 of the same provision, according to which «from the deductions carried out in accordance with paragraphs a), b) and c) of no. 2 cannot result a negative value».

In any case, it is also possible to reach the same conclusion if one considers the nature of the special payment on account (PEC), defined as being an advance delivered to the State on account of the tax owed at the end, which can be carried out in two installments (Article 106, no. 1 of the IRC Code) and whose calculation takes as its starting point the turnover of the taxpayer relating to the previous taxation period (no. 2).

It should be emphasized that, although the PEC differs, in terms of calculation rules, from payments on account – since these have as their basis for calculation the tax assessed in accordance with no. 1 of Article 90 of the IRC Code, relating to the immediately preceding taxation period (no. 5 of Article 105 of the IRC Code) –, it should be noted that these regimes have in common the nature of advance payment of IRC.

This all the more so as one can state that, in certain circumstances, they even self-exclude, because to the amount resulting from the calculation of PEC, are deducted the payments on account made in the preceding taxation period.

Furthermore, it should be emphasized that the institution of the PEC by Decree-Law No. 44/98, of 03.03, which added Article 83-A to the IRC Code, was part of a set of measures of fiscal policy directed against tax evasion and fraud, whose motivation is explained in the preamble of this Decree-Law, as follows:

«(...) Statistics show that the income of legal persons subject to taxation in IRC are frequently, and without any plausible reason, the subject of a collection much less than the actual. Evasive practices of concealment of income or inflation of costs are clearly generators of serious distortions of the principles of equity and tax justice and economic efficiency itself and detrimental to the stability of tax revenues. From these results an unfair distribution of the tax burden, all the more felt as many IRC taxpayers, for successive years, contributed nothing or almost nothing to the State Budget, continuing, nevertheless, to enjoy, sometimes in a privileged manner, the economic and social rights provided for in the Constitution. In this context, the present Decree-Law establishes a special payment on account, through a new mechanism, on the income of 1998 and following years, for legal persons subject to IRC. The formula used for its determination and the mechanism used allow approximating the moment of production of income to the moment of its taxation.»

Notwithstanding the successive amendments introduced to it, Saldanha Sanches and Salgado de Matos understand that:

«(...) from a conceptual point of view, special payments on account are, in confirmation of their designation, true payments on account – that is, a fiscal anesthesia mechanism used by the legislator to reduce the time lag between the moment of verification of the fact that indicates the existence of contributive capacity (the perception of income) and the moment in which the tax debt is due, which creates autonomous obligations, with specific periods and settlement rules, arising at a moment prior to the definitive formation of the tax debt. The difference between special payments on account and general payments on account are not thus of nature, but only of regime».

Well, as the same authors point out when they refer to the reasons that dictated this form of payment:

«(...)Although the law does not say so expressly, the presumption of income and minimum collection present in the special payment on account aim at combating tax evasion (...). It should be taken into account that these mechanisms can, moreover, constitute the only adequate means, not – as is natural – to end tax evasion, but to guarantee that certain taxpayers in situations of tax evasion will be obliged, at least, to develop some effort in contributing to the general charges of the political community (...).»

And in the same register, it is also stated, the Constitutional Court ruled in Decision No. 494/2009, case no. 595/06, of 29/09:

«(...) a reading of the legal regime of PEC that is attentive to its genesis and evolution leads to the conclusion that it does not obey primarily the typical logic of a payment on account – that is, primarily, to ensure regular income flows to the public treasury and, in a secondary line, to guard the Tax Authority against variations of fortune of the debtor and to produce a certain fiscal "anesthesia" –, but rather being indissociably linked to the fight against tax evasion and fraud. It has long been that there were suspicions, in particular on the part of the Tax Administration, regarding the income declared by IRC taxpayers; in particular, it was questioned how much they corresponded to the taxable income actually earned. This was evidenced by Law No. 52-C/96, of 27 December (Budget Law for 1997), in its Article 32 (Common Provisions), which contained the legislative authorization to the Government to "define a minimum taxation" and which would mark the introduction in our tax system of the PEC figure. In the aforementioned provision, the fiscal instrument that was then established was presented as "a new type of payment on account" that aimed to achieve "greater tax justice and [to] greater efficiency of the system", allowing resort, "when the case may be, to indicative methods. It should be said that national doctrine is unanimous in affirming the nature of instrument to combat tax evasion assigned to PEC.»

Thus, and by way of conclusion, we have it that the legal nature of the PEC, revealed by its configuration as «instrument or guarantee of payment of the tax on account of which it is required, and not as an imposition in itself» (cf. Decision of the Constitutional Court cited above), as well as by the function that is associated with it in combating tax evasion and fraud, links indissociably this payment to the amount of IRC determined on taxable material determined on the basis of profit (Chapter III of the Code).

Being, therefore, manifestly devoid of any basis the pretension of the present Claimant of deduction of the amount supported in the context of special payment on account from the collection produced by autonomous taxation in the years 2012 and 2013.

With interest for the proper decision of the case, there are transcribed below, as particularly elucidative, the most relevant passages of an arbitral decision rendered on 30-12-2015, in the context of Process No. 113/2015-T, which specifically dealt with the matter sub judice, that is, deduction of PEC from the collection produced by Autonomous Taxation, having been judged as lacking merit the Claimant's request.

It was in that decision understood that:

«The fundamental question to be answered in this decision is whether the sums satisfied as special payment on account can be deducted from the tax on income of legal persons resulting from the application of autonomous taxation rates.

Comparing the abundant jurisprudence referenced by the Claimant, there is indeed a thread to be highlighted and which coincides with what this arbitral tribunal espouses: the tax calculated by application of autonomous taxation rates regulated in Article 88° of the IRC Code is also tax on income of legal persons, i.e., the tax on income of legal persons includes autonomous taxation. If there were doubts, the current wording of Article 23°-A IRC would dispel them.

(...)
The solution of the case sub judice requires that we go a little deeper and determine what is the regime applicable to IRC calculated through autonomous taxation rates.
The tax on income of legal persons came into being affecting objectively taxable profit, corresponding to this to the difference between net assets at the end and at the beginning of the taxation period.

(...)
It is thus that in the original conceptual structure of IRC the determination of taxable profit takes as its starting point the result of the exercise obtained through technical rules of accounting, introducing into it some corrections of positive or negative sense, so that this final result corresponded to taxable profit, i.e. to the real income that was intended to be taxed (...). Of course, neither was regulated nor could regulate the treatment to be given to "autonomous taxation" that was not part of the system, which was conceived in this simple structure: take as the starting point the accounting result (17°-1 of IRC.1989), correct it so as to reflect income that is intended to be taxed through rules qualitatively similar to those in force in the official accounting plan then in effect (Article 18° and following IRC.1989), apply to it the general rate (69°-1 IRC.1989) and to the product thus obtained make the deductions of taxation that in some way had already been borne or would have to be through another fiscal system (71°-2 IRC.1989). (...)

(...)
It is now necessary to see how "autonomous taxation" was inserted into this system.
The introduction into the complex of income taxation of the application of autonomous taxation rates was done through Decree-Law No. 192/90 of 9 June, which stipulated that undisclosed or undocumented expenses would be autonomously taxed in personal income tax and IRC.

(...)
All elements indicate that the introduction of the method of taxing expenses in IRC constituted initially an extraordinary measure, outside the conceptual structure of IRC, created to honor the principle of taxation on real balanced income through coded corrections. The aforementioned autonomy of this rate thus appears with great intensity; although it is undoubtedly considered that its product is tax on income of legal persons, it is not already the income that is taxed directly (as IRC regulated) but rather expenses.

In these cases of dissonance there will be such conflicts that it is important to resolve.

These conflicts result and are resolved through norm interpretation. In the end there will be to resolve the apparent conflict when the legislative thought underlying the norm of the general regime of tax on one hand and the norm special that regulates autonomous taxation on the other hand, is not reconcilable, i.e., from its application a purpose not pursued by the norm in question would be achieved.

This conflict in the purposes to be pursued by each of the norms is clear at the moment the so-called "autonomous taxation" was introduced into the Portuguese tax system.

(...)
It seems clear in light of these commands that in the period 1990-2000 it was not conceivable to use potential tax credits to satisfy the obligation of tax determined under this heading, on pain of perverting the intention of the law.

In its general line of orientation the IRC after reform maintained the principles that are at its genesis: starting from the accounting result and correcting it in accordance with the established rules, now improved by the experience of 12 years, to achieve taxable profit.
In what is being ascertained the IRC resulting from the reform came to contain in its Article 69°-A, with the heading "Autonomous taxation rate", where it was regulated that undisclosed or undocumented expenses (no. 1) and representation expenses and charges related to light passenger vehicles, pleasure boats, tourist aircraft, motorcycles and motorcycles (no. 2), would be autonomously taxed".

(...)
It is not seen that the reform of the IRC undertaken in 2000-2001 introduced any significant change in the code. Only the mechanism to combat expenses considered undesirable that already appeared in extraordinary legislation was introduced, the spectrum of application was slightly expanded but the assessment procedure was not adapted in any way. It is therefore believed that the characterization of the regime that previously prevailed was maintained, continuing to have to interpret the norms so as to prevent effects contrary to the ratio legis.

The successive amendments to this article did not affect in any way the (dis)balance of the system, which remained until the date of the facts.
In turn, in the decision of the Constitutional Court No. 617/2012[2] with regard to "autonomous taxation", it was considered:

More than affirming the ratio of the imposition of autonomous taxation rates, the reasoning of the cited decision expresses well how its calculation is understood, by comparison with the assessment of income tax in accordance with the general rate:
Contrary to what happens in the taxation of income under personal income tax and IRC, in which the set of income earned in a given year is taxed (which implies that only at the end of it can the tax rate be determined, as well as the bracket in which the taxpayer is placed), in this case each expense made is taxed, considered in itself, and subject to a given rate, autonomous taxation being determined independently of the IRC owed in each exercise, as it is not directly related to the obtaining of a positive result, and therefore, subject to taxation.
The aforementioned decision also expresses clearly the way instantaneous occurs the taxable event and the lack of periodic, lasting or successive character in its formation.

Therefore, it characterizes thus the operation of assessment:

That operation of assessment translates only into the aggregation, for purpose of collection, of the set of operations subject to that autonomous taxation, whose rate is applied to each expense, with no influence of the volume of expenses incurred in the determination of the rate (in bold in original).

It is believed that with the historical analysis, systematic framework and doctrinal and jurisprudential positions, the ratio legis of the norms that impose autonomously taxed tax and their perfect distinction from the objectives that animate the general structure of the IRC has been demonstrated. Thus is traced the line at which the conflict begins; as soon as the interpretation of the norm in question leads to a result that departs from the objectives that presided over its inclusion in the tax system. It has already been seen what these were.

It is recognized by all actors who have to work with fiscal law in general and with IRC in particular, the lesser coherence of the coexistence of "autonomous taxation" with the general regime of tax on income of legal persons. The Claimant gives abundant notice of this very thing. But recognized as is this difficulty there will always have to be applied the law, determining its sense through interpretation.»

And, in particular, with respect to the PEC:

«In doctrine and jurisprudence the regime of PEC has always been held as a system to avoid tax evasion and to guarantee the payment of tax by all companies in activity. This line of orientation appears in the texts most inducing the application of the regime in the tribunals, namely through the doctrinal work developed by the Constitutional Court. In this sense can be seen in the motivation of its Decision No. 494/200916, that the PEC in the cut that was given to it in the IRC Code, is "indissociably linked to the fight against tax evasion and fraud", seeking to guarantee that the income manifested by taxpayers "correspond[s] to the taxable income really earned".

In doctrine (...) [Teresa Gil] gave a well-founded account of the circumstances that surrounded the introduction of PEC, in particular the difficulties in the application of the principle of taxation by real profit, established faced with the "divergence that exists between the profits actually obtained and those that are declared by companies and, therefore, subject to taxation". Although this author considers that PEC is an insufficient measure to resolve the problem of this type of tax evasion, preferring the establishment of minimum collection, mentions that PEC was finally the regime possible given constitutional limits.

The current regime of PEC is thus characterized by (i) having an indissociable link to the fight against tax evasion and fraud; (ii) was introduced in the IRC Code in March 1998, before autonomous taxation rates which only became part of its system in the 2000-2001 reform; (iii) in the conception of PEC its deduction from the collection was foreseen in the assessment of IRC calculated on real income; (iv) the recovery of the credit resulting from PEC is subject to conditions for obtaining profitability ratios proper of companies in the activity sector in which they are inserted or to the justification of the credit situation by inspection action carried out at the request of the taxpayer (87°-3 IRC). In summary, the credit for sums paid as special payment on account does not constitute a credit that IRC taxpayers can dispose of. For them to be able to do so certain conditions must be met.»

Finally:

«It now remains to finally assess the baseline argument which is that which results from the letter of the norm of Article 83º-2/e) of the IRC Code [wording given by Law No. 60-A/2005, of 31-12 and 90°-c) of the IRC Code, in the wording given by Law No. 3-B/2010, of 28-4] that permits that to the amount of tax on income of legal persons determined be made the deduction relating to special payment on account made.

In fact a conflict results between the regime that regulates autonomous taxation and the deduction from the respective collection of PEC. See the ratio of the norms in question. The method of determination of the tax contained in the IRC Code is based on the principle of incidence on taxable profit; autonomous taxation affects expenses individually considered, whose rate is applicable to each expense, and "that operation of assessment translates only into the aggregation, for purpose of collection, of the set of operations subject to that autonomous taxation".

It is indisputable that the system of assessment is not adequate to the determination of autonomous taxation. But will deducting the PEC from the aforementioned "aggregation of the set of operations subject to autonomous taxation" lead to a result irreconcilable for the system in question?

This line is worth investigating.

As was seen the PEC came to be part of the system of the IRC whose assessment enshrined in the then Article 83° was conceived to determine the tax directly affecting the income declared. When there is a tax loss the taxpayer still has to bear the PEC; that was in fact the reason for its introduction. If a given company has successively tax losses, it will systematically bear tax, as the system doubts its ability to function in a permanently deficient situation, requiring it to satisfy provisionally (on account), a determined value. It may obtain a refund if it proves that this situation is common in its sector of activity or if the Tax Authority verifies the regularity of its returns. This was the balance that the IRC required to maintain a system based on returns filed by taxpayers.»

For its part:

«(...) the tax resulting from autonomous taxation is based solely on the pursuit of combating tax evasion through income transfer and has a dissuasive and compensatory effect.
There is indeed an irreconcilable conflict between the ratio of the PEC – combating evasion or pressure to correct returns – and the allocation of its credits to the satisfaction of obligations other than those resulting from the determination of IRC calculated on the taxable result.

In practical terms the possibility of deducting PEC from autonomous taxation would imply that even if a given company was eternally in a loss position, no tax on its real income would have to bear, as long as it applied the PEC to the satisfaction of autonomous taxation. Moreover, the autonomous taxation itself would lose its anti-abuse character, coming to be confused after all with the tax calculated on taxable profit. Now these are not the objectives of the system of taxation of income of legal persons and the better interpretation of the norm contained in Article 83°-2 of the IRC Code is not that one decidedly that allows deducting special payments on account from the collection resulting from the application of autonomous taxation rates.»

Given all the foregoing, that Tribunal decided to the effect that:

«(...) the pretension of the Claimant must necessarily be without merit as the assessment challenged complies with legality, as it is based on a correct interpretation of the cited norm.»

And it is this also the conclusion that is drawn, with respect to the object of these proceedings, that is, of total lack of merit of the request for declaration of illegality of the acts of IRC self-assessment in the terms it was formulated and its consequent maintenance, in its entirety, in the legal order.

Indeed it is a conclusion that is found in line with the overwhelming majority of the Jurisprudence known to the CAAD and which includes the decisions cited by the Claimant in Tribunals presided by the same arbitrator who presides this one (cf. e.g., decisions rendered in processes nos. 79/2014-T and 95/2014-T[4]).

III – DECISION

In accordance with the foregoing, the members of this Arbitral Tribunal hereby agree on:

a) To judge as lacking merit the request for declaration of illegality and annulment of the act of dismissal of the administrative review claim mentioned and which refused the annulment of the illegal part of IRC self-assessments identified in the file and produced by autonomous taxation rates, of fiscal years 2012 and 2013;

b) To judge as lacking merit the request for declaration of illegality of these self-assessments in the parts corresponding to the amount of €70,983.57;

c) To judge as lacking merit the request for recognition of the Claimant's right to refund of these amounts and, consequently, moot the right to compensatory interest requested and

d) To condemn Claimant A…, SA, to the payment of the costs of these proceedings.

Value of the Proceedings

In accordance with the provisions of Article 306, nos. 1 and 2 of the Civil Procedure Code, approved by Law No. 47/2013, of 26 June, 97-A), no. 1, paragraph a) of the Tax Procedure and Process Code, and Article 3, no. 2 of the Regulation of Costs in Tax Arbitration Proceedings, the value of the proceedings is fixed at €70,983.57.

Costs

In accordance with Articles 12, no. 2, 22, no. 4 of the Arbitral Tribunal Regulations, and Articles 2 and 4 of the Regulation of Costs in Tax Arbitration Proceedings, and Table I attached thereto, the amount of costs is fixed at €2,448.00, entirely to the charge of the Claimant.

Let it be notified.

Lisbon, 7 September 2016

The Collective Arbitral Tribunal,

José Poças Falcão
(Arbitrator President)

Jorge Carita
(Associate Arbitrator)

Sara Barros
(Associate Arbitrator)

[1] Expression used by Professor SALDANHA SANCHES, J. L., Manual of Tax Law, page 407: «With this provision [autonomous taxation] the system shows its dualistic nature.»
In fact, what exists is a single payment, as, regarding payment rules, in Article 104, no. 2, paragraph a) of the IRC Code the legislator refers to the total amount determined in the declaration, including, therefore, all determinations.

[2] Also presided over by the arbitrator who presides this Tribunal.

[3] For further developments, see, among others, J. L. Saldanha Sanches and André Matos (2002); Anselmo Torres, (2003), p. 23 et seq.

[4] These and all arbitral decisions mentioned can be consulted on the CAAD website, www.caad.org.pt