Summary
Full Decision
ARBITRAL AWARD
The arbitrators, Fernanda Maçãs (President), Cristina Aragão Seia and Luís Pereira da Silva, designated by the Ethics Council of the Administrative Arbitration Centre to form the Arbitral Tribunal, hereby agree as follows:
I – Report
1. The taxpayer A…, Lda., with Tax Identification Number (NIPC) … and registered office at … …, nº…, … (hereinafter "A…" or "Claimant"), submitted a request for the establishment of a Collective Arbitral Tribunal, pursuant to the joint provisions of articles 2 and 10 of Decree-Law No. 10/2011, of 20 January (Legal Regime of Arbitration in Tax Matters, hereinafter "LRAT"), in which the Tax and Customs Authority (hereinafter "TCA" or "Respondent") is the Respondent.
2. In such request, the Claimant seeks arbitral pronouncement on:
- the illegality of the act of tacit dismissal that was formed following the absence of a response to the administrative claim presented on 11.05.2016, regarding the tax assessments for the fiscal years 2011 and 2012 and the acts of additional corporate income tax (IRC) assessment for the fiscal years 2011, 2012, 2013 and 2014, which will be identified below;
- consequently, the annulment of the said tax acts;
- the restitution of the amounts paid in the amount of € 1,696,140.34, of which € 1,687,686.50 relate to additional assessments and € 8,453.84 relate to court fees and surcharges paid in enforcement proceedings;
- the payment of indemnity interest.
3. The request for establishment of the Arbitral Tribunal was accepted by the Honourable President of CAAD and automatically notified to the TCA on 27.10.2016.
4. Pursuant to the provisions of paragraph (a) of section 2 of article 6 and paragraph (b) of section 1 of article 11 of the LRAT, as amended by article 228 of Law No. 66-B/2012, of 31 December, the Ethics Council designated the arbitrators of the Collective Arbitral Tribunal, who communicated their acceptance of the appointment within the applicable period, and notified the parties of such designation on 28.12.2016, and the parties did not raise any objection.
5. The Collective Arbitral Tribunal was constituted on 12.01.2017 in accordance with the provisions of articles 2, section 1, paragraph (a), 5, 6, section 1, and 11, section 1, of the LRAT (as amended by article 228 of Law No. 66-B/2012, of 31 December).
6. The Tax and Customs Authority responded, raising the exception of material incompetence of the Arbitral Tribunal regarding the request for restitution of court fees paid in enforcement proceedings and defending the lack of merit of the arbitral claim.
7. On 21.04.2017, a hearing on the merits took place, at which the witnesses summoned by the Claimant (B…, C…, D… and E…) were examined.
8. The Tribunal set 12.07.2017 as the deadline for rendering the Arbitral Decision.
9. The parties submitted their arguments, in which they essentially maintained the positions sustained in their initial pleadings.
10. The parties have personality and judicial capacity and benefit from procedural legitimacy, pursuant to articles 4 and 10, section 2, of the LRAT and article 1 of Regulation No. 112-A/2011, of 22 March.
11. The TCA proceeded to designate its representatives in the proceedings and the Claimant filed a power of attorney, with the Parties thus being duly represented.
12. The proceedings do not suffer from any nullities.
II - Factual Matters
1. Proven Facts
With respect to the factual matters relevant to the decision in this case, the following facts are considered proven:
a) The Claimant is a limited liability company whose corporate purpose is the operation of wind energy and other related activities.
b) For this purpose, it owns two wind farms (designated as … and …), comprising a total of 22 wind turbines (9+13), located in the municipalities of … and ….
c) The Claimant used, with respect to the wind turbines of its wind farm, a depreciation rate of 6.67% corresponding to a useful life period of 15 years.
d) The financing of the project for the installation of the Wind Parks of … and … was contracted for a period of 15 years.
e) The contractual conditions for connection to the national electricity grid only guarantee the electricity sales tariff for a period of 15 years, after which it enters the free market.
f) The equipment of the Parks of … and …, given its location in a maritime zone and exposure to mountains in the northwest, is subject to wear given the intensive regime of energy production in conditions of environmental resistance and difficult working conditions due to very strong maritime winds, intense fog and increasing salinity.
g) Given its location and wind potential, the Claimant's parks have the best production in the country.
h) Its number of operating hours is much higher than the national average, which implies inherent wear.
i) Due to intensive operation, they suffer from thermal fatigue since they do not operate under normal cooling conditions.
j) In recent years, the equipment has undergone major repairs, in the order of hundreds of thousands of euros, despite the Park of … only being in operation since 2006 and the Park of … since 2008.
k) In the Park of …, of 9 machines only one has the original gearbox and in the Park of … almost all the motors of the wind turbines have been replaced.
l) Once the 15-year period has elapsed, the residual value of the equipment is non-existent.
m) The company that supplied the equipment only ensures maintenance of the equipment for a period of 12 years.
n) As a result of a judgment delivered by the Supreme Court of Justice (SCJ) on 30.05.2013, within the scope of case no. …/08.0TBTVD.L1.S1, the Claimant constituted a provision of € 1,848,324.00 intended for the relocation of wind turbines 1, 2, 3 and 4 of the Wind Farm …, removed in compliance with said judgment.
o) The Claimant cannot present alternative budgets for the assembly of equipment because, in this area, there is no competition in the market: specific tools are needed that only the manufacturer possesses.
p) In compliance with Service Orders OI2015… and OI2015…, relating to the fiscal years 2011 and 2012, OI2015… for the period 2013 and OI2016…, referring to the fiscal year 2014, tax inspection procedures were instituted and carried out.
q) The said inspection actions were intended, as stated in their respective final reports, to control the depreciation rates practised by the Claimant in the said fiscal years and, with respect to the fiscal year 2013, the constitution of the provision mentioned above.
r) The TCA proposed the following corrections under corporate income tax (IRC):
- for fiscal year 2011: € 875,821.46 to be added to taxable profit;
- for fiscal year 2012: € 875,821.46 to be added to taxable profit;
- for fiscal year 2013: € 2,694,145.46 to be added to taxable profit; and
- for fiscal year 2014: € 872,343.37 to be added to taxable profit.
s) Subsequently, the Claimant was notified:
- of Assessment Note No. 2015…, Interest Calculation Statement No. 2015… and Account Settlement Statement No. … relating to fiscal year 2011 - See documents Nos. 1 to 3 attached to the arbitral request;
- of Assessment Note No. 2015…, Interest Calculation Statement No. 2015… and Account Settlement Statement No. 2015… relating to fiscal year 2012 - See documents Nos. 4 to 6 attached to the arbitral request;
- of Assessment Note No. 2016…, Interest Calculation Statement No. 2016… and Account Settlement Statement No. 2016… relating to fiscal year 2013 - See documents Nos. 7 to 9 attached to the arbitral request;
- of Assessment Note No. 2016…, Interest Calculation Statement No. 2016… and Account Settlement Statement No. 2016… relating to fiscal year 2014 - See documents Nos. 10 to 12 attached to the arbitral request.
t) On 6 and 9 March and 8 August 2016, respectively, the Claimant was served with the initiation of enforcement proceedings Nos. …2016…, …2016… and …2016… relating to collection, under tax enforcement, of the assessments relating to the years 2011, 2012 and 2013 - See documents Nos. 25 and 26 attached to the arbitral request.
u) On 30 March and 28 September 2016, the Claimant proceeded to pay the enforced amounts - See documents Nos. 28, 29 and 30 attached to the arbitral request.
v) In the same way, it made the payment of the amount stated in the assessment note relating to fiscal year 2014 - See document No. 31 attached to the arbitral request.
w) The Claimant filed an administrative claim regarding the assessments for fiscal years 2011 and 2012 by means of a request submitted to the Tax Office of … on 11.05.2016 - See document No. 24 attached to the arbitral request.
x) More than 4 months after that date, the TCA did not pronounce itself on said claim.
y) The request for establishment of an Arbitral Tribunal was filed on 26-10-2016.
2. Justification of the Factual Matters
With respect to the factual matters, the Tribunal does not need to pronounce itself on everything that was alleged by the parties; rather, it is its duty to select the facts that are relevant to the decision and to distinguish between proven and unproven matters (see art. 123, section 2, of CPPT and art. 607, section 3 of CPC, applicable by virtue of art. 29, section 1, paragraphs a) and e), of the LRAT).
In this manner, the facts relevant to the trial of the case are selected and determined in function of their legal relevance, which is established in consideration of the various plausible solutions of the question(s) of law (see former art. 511, section 1, of the CPC, corresponding to the current art. 596, applicable by virtue of art. 29, section 1, paragraph e), of the LRAT).
Thus, taking into account the positions assumed by the parties, in light of art. 110, section 7 of CPPT, the documentary evidence, the Administrative File attached to the proceedings and the testimony of the witnesses summoned by the Claimant, B…, C…, D… and E…, the facts listed above were considered proven, relevant to the decision.
The witnesses (B…, C…, D… and E…) testified, in essence, in a coherent manner, substantiated and demonstrating mastery of the reasons for knowledge relevant to the provision of information.
3. Unproven Facts
Among those alleged, relevant to the decision, none remained unproven.
III – On the Issue of Material Incompetence of the Arbitral Tribunal Regarding the Request for Restitution of the Amount of Court Fees and Surcharges Paid in Tax Enforcement Proceedings
As the Claimant requested the restitution of the amount of € 8,453.84, relating to court fees and surcharges paid in enforcement proceedings, the Respondent raised the exception of material incompetence of the Arbitral Tribunal to decide the request for restitution of said amount.
With respect to this matter, already dealt with previously by the CAAD courts, we will closely follow the established position in the CAAD Award of 14.12.2016, delivered in case no. 363/2016-T, which we reproduce:
"Although article 2, section 1, paragraphs a) and b), of the LRAT uses the expression "declaration of illegality" to define the competence of arbitral tribunals operating at CAAD, making no reference to condemnatory decisions, it should be understood that it encompasses the powers that in judicial review proceedings are attributed to tax tribunals, this being the interpretation that aligns with the sense of the legislative authorization on which the Government based itself in approving the LRAT, in which it proclaims, as the first directive, that "the tax arbitration procedure must constitute an alternative procedural means to the judicial review proceedings and to an action for the recognition of a right or legitimate interest in tax matters".
The judicial review procedure, although it is essentially a procedure for the annulment of tax acts, admits the condemnation of the Tax Administration to pay indemnity interest, as can be inferred from art. 43, section 1, of the General Tax Law (GTL), which establishes that "indemnity interest is owed when it is determined, in administrative claim or judicial review, that there was an error attributable to the services as a result of which the tax debt was paid in an amount greater than legally due" and from art. 61, section 4 of CPPT (as amended by Law No. 55-A/2010, of 31 December, corresponding to section 2 in the original wording), which states that "if the decision recognizing the right to indemnity interest is judicial, the payment period is counted from the beginning of the voluntary performance period".
Thus, section 5 of article 24 of the LRAT, by stating that "payment of interest is owed, regardless of its nature, in accordance with the terms provided in the General Tax Law and in the Tax Procedure and Process Code", should be understood as permitting the recognition of the right to indemnity interest in the arbitral procedure.
However, as the Tax and Customs Authority correctly contends, with respect to court fees in tax enforcement proceedings, there is no legal basis for their consideration in judicial review proceedings and, as a consequence, in arbitral proceedings.
In these terms, it is held that the exception of material incompetence raised by the Tax and Customs Authority regarding the consideration of the request for restitution of the amount of court fees paid in enforcement proceedings is well-founded."
IV – Matters of Law
The essential questions to be decided and raised by the commercial company A…, Lda., in its request for arbitral pronouncement are, in essence, to ascertain whether the corrections made by the Respondent were legally appropriate with respect to the depreciation rate applicable to the assets comprising tangible fixed assets (wind towers and corresponding related equipment – wind turbines - for the production of electrical energy) and with respect to the provision constituted, as a result of a judgment delivered by the Supreme Court of Justice on 30.05.2013, for the relocation of wind turbines 1, 2, 3 and 4 of the Wind Farm …, ordered to be removed by the same judgment from the place where they were installed.
1. On the Depreciation Rate
With respect to the corrections carried out by the TCA, relating to the non-acceptance by it of the application of the depreciation rate of 6.67% to the Claimant's wind turbines, its legality fundamentally depends on the determination of the useful life period of these assets.
As a preliminary matter, it is necessary to explain what depreciation rates entail.
Indeed, with respect to depreciations of certain tangible fixed assets, the accounting normative contained in the System of Normalisation of Accounting (SNA) addresses them extensively in Accounting Standard and Financial Reporting Standard (ASFRS) No. 7, designated "Tangible Fixed Assets".
Thus, in § 6 of ASFRS 7, the following definitions appear:
"- Depreciation: is the systematic allocation of the depreciable amount of an asset over its useful life;
- Residual value: is the estimated amount that an entity would currently obtain from the disposal of an asset, after deduction of estimated costs of disposal, if the asset already had the age and condition expected at the end of its useful life; (…)."
The result determined by the accounting of business entities results, as is known, from the comparison between revenues and the expenses necessary to obtain them.
At the accounting level, this result is inevitably influenced by a wide range of estimates, particularly with respect to the set of costs incurred. Thus, by way of example, provisions and depreciations constitute important portions of the costs evidenced in the accounts whose recording is based on forecasts or estimates.
Recognizing this inevitability - that the result depends, in large part, on estimates - the Conceptual Framework (CF) of the SNA, in § 37, provides that "the preparers of financial statements must, however, deal with the uncertainties that inevitably surround many events and circumstances, such as… the probable useful life of facilities and equipment…".
In the case sub judice, the TCA contends that from the consultation of Regulatory Decree 25/2009 of 14.9, it is verified that electricity production carried out through wind farms is not provided for in Table I and Table II, nor is there any reference therein to these parks or wind equipment. Only with Law No. 82-D/2014 of 31.12 (art. 23) was the rate to be applied from 2015 onwards defined, being stated there in the following terms: "Code 2250 – Solar energy equipment, including in particular solar energy equipment, photovoltaic equipment or wind energy equipment – rate of 8%".
The TCA also invokes section 3 of article 5 of Regulatory Decree 25/90 and section 2 (section 3 according to the amended wording) of article 31 of the Corporate Income Tax Code (CITC), which provide that "with respect to the elements for which no depreciation or amortization rates are fixed in the tables referred to in section 1 (of article 5), those considered reasonable by the Tax Authority are accepted, taking into account the period of expected usefulness".
The TCA further refers to the opinion of the Directorate of Services for Corporate Income Tax (DSCIT) of July 2015 (transcribed in the Inspection Reports) which states that, "with respect to depreciations of wind farms (tangible fixed assets as a whole), it appears to us that the maximum depreciation rate to accept for tax purposes will be 5%, in the periods of taxation that began before January 2015, under section 3 of article 5 of Regulatory Decree No. 25/2009, of 14.09.".
The TCA finally asserts that "everything points, in the elements concerning A… (namely, Environmental Impact Statement, lease contracts, protocol concluded between A… and the Municipal Council of …), to a period of operation of the respective wind farms of at least 20 years, and it may be concluded that an expected period of usefulness of the same duration" - See page 18 of the reports for the fiscal years 2011, 2012 and 2013 and page 15 of the report for the fiscal year 2014, attached to the Administrative File.
For which reason, the TCA understood that "the taxpayer improperly considered the deductibility for tax purposes of expenses that do not meet the requirements provided for in art. 34 of the CITC, embodied in the practice of depreciation rates higher than those permitted by law", proceeding consequently with the corrections here disputed.
The Claimant, for its part, alleges, in its analysis, that the TCA proceeds to the study of the duration "of the wind farm projects" as a whole (with the various components: high-voltage lines, substations, wind towers, etc.) and not of the equipment installed in them, and that, in the specific case of depreciation and amortization rates, what is under discussion are the rates applicable to wind turbines and not to the farms in their entirety.
It further confirms that, with respect to the wind turbines of its wind farms, it used the depreciation rate of 6.67%, corresponding to a useful life period of 15 years, which it contends respects the criterion of legally required "reasonableness". Further to the same effect, the Claimant states that Law 82-D/2014, of 31 December, came to include wind turbines (wind energy equipment) in the list of Table II to Regulatory Decree 25/2009, with a rate of 8% corresponding to a useful life of 12.5 years, less, therefore, than the useful life it estimated.
From the evidence produced, it resulted that it is reasonable to estimate the useful life of these wind turbines at 15 years taking into account the factors related to the production technology itself (intensive operating regime), external factors (namely, location, climatic conditions, winds, fog, salinity), economic factors (electricity sales tariff contracted for 15 years) and market factors (absence of residual value), legal factors and the potential or expected use under regular conditions in light of their actual use and also the contractual and technical conditions for connection to the national electricity grid.
It must be decided.
At the time of the facts, there was no legally fixed depreciation or amortization rate for this exact type of assets. Indeed, Regulatory Decree No. 25/2009, of 14 September (Regime of Depreciations and Amortizations), does not contemplate, in the tables contained therein, this type of assets.
Consequently, the regime provided for in section 2 (or section 3, according to the amended wording) of article 31 of the Corporate Income Tax Code applies to the situation under analysis. From this legal rule, it results, with imperative character, that the applicable amortization rate must derive from the reconciliation of two aspects.
On the one hand, as a base element, the notion of "period of expected usefulness" must be considered. On the other hand, once the period of usefulness of this type of assets is defined, it is important to ascertain an amortization rate that appears "reasonable" for such a period.
First, then, it is necessary to define what is meant by period of expected usefulness.
Useful life must thus be one of the central parameters in the quantification of the rates in question. However, article 30, section 4 of the Corporate Income Tax Code, when addressing useful life, does not explicitly define what it should be. It merely establishes that this should be calculated on the basis of the rates that article 30, sections 1 and 2 determine. This rule produces, tendentially, reasoning in a "closed circuit", with useful life resulting, by virtue of the provision in article 31, section 4, from the rates provided for in article 31, sections 1 and 2. However, we believe that from the combination of these rules with some provisions contained in Regulatory Decree 25/2009, a clearer reading key can be found for the question to be decided in this case.
Two interpretations appear, in the abstract, to be applicable.
The interpretation of this concept (period of expected usefulness) and the selection of one or the other of the interpretations must be made, in the case under analysis, in light of the principles and nature of tax law, since that is the subject matter at issue in the scope of this dispute.
According to a first interpretation, the expression in question (period of expected usefulness) corresponds to the notion of period of economic useful life. According to a second interpretation, it corresponds to the notion of period of expected physical or technical duration.
We are thus dealing with a polysemic concept.
Let us see.
In § 6 of ASFRS 7, the following definitions appear:
- Useful life is:
(a) The period during which an entity expects an asset to be available for use; or
(b) The number of units of production or similar that an entity expects to obtain from the asset.
For its part, §§ 56 and 57 of the same Standard establish:
"56 — The future economic benefits incorporated in an asset are consumed by an entity principally through its use. However, other factors, such as technical or commercial obsolescence and normal wear whilst an asset remains idle, often give rise to a decrease in the economic benefits that could have been obtained from the asset. Consequently, all of the following factors are considered in determining the useful life of an asset:
(a) Expected use of the asset. Use is assessed by reference to the expected capacity or physical production of the asset;
(b) Expected normal wear and tear, which depends on operational factors such as the number of shifts during which the asset will be used and the program of repair and maintenance, and the care and maintenance of the asset while idle;
(c) Technical or commercial obsolescence arising from changes or improvements in production, or from a change in market demand for the service or product produced by the asset; and
(d) Legal or similar limits on the use of the asset, such as the dates of expiration of leases related to it.
57 — The useful life of an asset is defined in terms of the expected utility of the asset to the entity. The asset management policy of the entity may involve the disposal of assets after a specified period or after consumption of a specified proportion of the future economic benefits incorporated in the asset. Therefore, the useful life of an asset may be shorter than its economic life. The estimation of the useful life of the asset is a matter of judgment based on the entity's experience with similar assets."
The cost arising from the quantification of depreciations must, therefore, have a systematic, or methodical, character, and should appear as the result of the application of a calculation rule that possesses internal logic. On the other hand, useful life and the residual value of the assets will be essential parameters in the determination of such a method of calculation, since the essence of the phenomenon that this cost seeks to represent is embodied in the allocation of the value of assets to various economic periods, during which they are applied to a given economic activity.
In fact, as well emphasized by António Borges, Azevedo Rodrigues and Rogério Rodrigues, in Elementos de Contabilidade Geral, Áreas Editora, 2010, pp. 697, "Fixed assets do not 'consume' in a single economic period, but rather in principle in the number of years provided for their economic life. (…) In summary, assets, as they are used in successive periods, will be depreciating, that is, they will lose value".
If this is the case at the accounting level, it is understandable that, also at the tax level, depreciations have, especially in the Corporate Income Tax Code and complementary legislation, an elaborate treatment based on an economic perspective. Depreciations are thus based on an estimate of loss of value, which is materialized in accounting and tax terms in a cost, which in turn affects the result.
It follows, on the other hand, from the reading of article 3 of Regulatory Decree 25/2009, that the useful life of an asset is the "period during which its value is fully restored or amortized" and because, according to the provision in article 29, section 1 of the Corporate Income Tax Code, restoration or amortization consists of losses in value that elements of tangible fixed assets suffer as a result of their use or the passage of time, then useful life, in a tax sense, should be assessed by the period during which such losses of value would be justified in function of the causes referred to in that article (use, technical progress or any other).
Reasons which, taken together, lead to the conclusion that the interpretation applicable here is thus one of period of economic useful life.
It will therefore be this notion of period of useful life that should be taken into account in the interpretation of the Corporate Income Tax Code, in the wording applicable to the case, in its articles 29 to 31, which provide for a broad set of rules directed to the tax treatment of restorations and amortizations.
In fact, what is set forth in article 29, implies that the phenomenon of depreciations, determined for tax purposes, is unequivocally based on the loss of value, with a character of repetition or regularity, that assets suffer by virtue of use or the passage of time. It is a central and decisive point to emphasize that it is not because an asset is characterized by a long period of technical or technological useful life that necessarily the duration of its economic useful life will also automatically extend to that period of time.
In the same vein, accounting law provides, with paragraph 57 of ASFRS 16 stating that "the useful life of an asset is defined in terms of the expected utility of the asset to the entity. (…) the useful life of an asset may be shorter than its economic life. The estimation of the useful life of the asset is a matter of judgment based on the entity's experience with similar assets."
The Claimant depreciated the assets in question, with reference to the fiscal years 2011, 2012, 2013 and 2014, considering a period of useful life of 15 years, and for this purpose, the Claimant correctly took as its criterion the notion of period of economic useful life.
The adequacy of the period of (economic) useful life defined by the Claimant is revealed in several respects.
First, this period is in harmony with the economic conditions (with respect to the period of sale of energy at a price that ensures the balanced exploitation of the activity) and market conditions (estimated residual value nil after the period of 15 years).
It was indeed proven that the Claimant is framed within the scope of a contractual regime of energy sales at a price previously fixed for a period of 15 years (the period during which the fixed and guaranteed remuneration of renewable energy production centers is established) at the end of which the wind turbines will have a negligible residual value, insofar as there is no market for used equipment of this type.
The proven factuality thus stands out of the Claimant having a very specific, legally contracted period for the sale of energy under profitable conditions. At the end of that period, the wind turbines will have no utility in an economic-financial sense (although they may have it, in theory, in terms of purely physical durability, which is not the case).
And, given that economic, financial, legal and obsolescence constraints will make themselves felt in this type of equipment, in view of the economic activity developed, the useful life relevant for tax purposes will, as a rule, be shorter than the purely physical (technical) life.
Having reached this first point in the trial, it is necessary to move on to the second, within which it will be ascertained whether the amortization rate fixed by the Claimant is or is not reasonable and, therefore, whether the rate correction made by the Respondent appears to be correct.
The Claimant considered, as the amortization rate, 6.67%.
Regulatory Decree 25/2009 established the tax rates to be used for a fairly broad and diverse set of assets.
With it, the tax legislator sought, by this means, to discipline the tax acceptance of depreciations.
Otherwise (in the absence of such provision), and constituting these accounting costs estimates of losses of value in long-duration assets, the granting to the taxpayer of total freedom in considering such costs as negative elements of taxable profit could result in undesirable situations of manipulation of the tax result.
In the case sub iudice, the Tribunal's judgment as to the reasonableness of the fixed rate is anchored in legal and financial factors (electricity sales contract at fixed prices), technological factors, external factors and market factors. Facts deemed to be proven.
That is, the reasonableness of the fixed depreciation rate must be assessed on a case-by-case basis, not following automatically from projections or estimates by companies. Such estimates must be supported by bases or grounds that possess an appreciable degree of objectivity and controllability.
Criteria which, contrary to what should have been the case, the TCA did not consider in the decision it delivered, nor consequently explain them in the justification of the correction of the assessment it made. It is thus considered that the reasonableness criterion which the TCA used is also not convincingly justified.
In view of all that has been set forth above, it is considered that, before the provisions of tax law, the TCA, by considering the wind farms as a whole and a merely technical or technological utility of the wind turbines/wind towers, disconnecting it, on the other hand, from the conditions of actual use by the Claimant, in the specific case, departed from the legally appropriate criterion of reasonableness.
The criterion of reasonableness, moderation or acceptability implies that more than mere technological or technical utility is taken into account and that other factors are also considered, which moreover were expressed in the (then) article 29, section 1 of the Corporate Income Tax Code, which contained the general rule on fiscally accepted depreciations.
The TCA did not thus comply with the criterion that results from the pertinent legal tax and accounting rules regarding the notion of useful life, as it made a weighing disconnected from the concrete conditions of the case. It thus disregarded the criteria that are required in light of the legal tax and accounting rules.
The judgment of reasonableness of the TCA thus suffers from error, not only because it chooses a parameter of useful life that is not adequate, but also because the concept of reasonableness is not assessed in light of the circumstances of the case.
In the case, in view of the justification invoked by the TCA, it is apparent that it commits an apparent error of interpretation, both of the facts and of the applicable legal rules, which, generating the voidability of the acts (corresponding to the tax corrections made), determines that the corrections in question are annulled as illegal.
Lastly, it should be noted that knowledge of this defect precludes the need to address the other defects.
As referred to in the Commentary to the Tax Procedure and Process Code, Almedina, 2005, Mário Aroso de Almeida and Carlos Cadilha, in annotation to article 95 of that law, p. 483 (applicable by referral of article 2, paragraph c) of CPPT and article 29, section 1, paragraphs a) and c) of the LRAT), "if the court ruled in favor of the main claim, the jurisdictional power regarding a subsidiary claim or one formulated as an alternative is precluded; and, in the same terms, if the pronouncement adopted regarding a question consumes or leaves prejudiced other aspects of the case that correlate with it."
In these terms, before the material interpretation recommended, it is precluded from addressing and appreciating the other defects attributed to the additional assessment acts, insofar as the corrections result from the non-acceptance by the TCA of the depreciation rate used by the Claimant.
Thus it is, for example, with respect to the alleged violation of the constitutional principles of equality and taxation of actual profit, invoked by the Claimant. Knowledge of such questions is, in sum, prejudiced by the declaration of illegality of the additional assessment act in question, based on the circumstances invoked, so that no decision will be rendered on them.
2. On the Provision Constituted
The TCA made, with respect to fiscal year 2013, a correction resulting from the non-acceptance of a provision constituted by the Claimant for relocation of the wind turbines ordered to be removed by the SCJ, in a judgment delivered on 30.05.2013.
With respect to this matter, we must recognize that the concept of provision has evolved greatly in Portugal over the last 50 years.
Professor Rogério Fernandes Ferreira, in the work entitled precisely Provisions (1970), clarified the concept: provisions are estimated current costs, or more in detail, are current costs (of the period) but relating to future processing of expenses (or of non-receipts), expenses of uncertain future proof.
If we were to pay attention to what the Industrial Contribution Code provided concerning provisions, since the nineteen sixties, the concept was much broader (and less precise) because it encompassed not only true provisions but also other realities that are currently designated as impairments ("provisions" for depreciation of certain assets such as inventories, etc.) or mere contingent liabilities (expenses of certain amount to be processed, but lacking binding external documentation), that is, mere charges to be paid by accruals (which should be recorded in Debtors and Creditors accounts, such as vacation and Christmas bonuses to be paid to employees in the following period – accruals in the Anglo-Saxon designation).
Later, already within the scope of the Official Chart of Accounts (POC, established in 1977), this excessive breadth was maintained and only more recently, with the entry into force of the SNA, inspired by international accounting standards, known as ASFRS, the concept has been refined, and which today is in effect, and which contains the following characteristics:
Provision is a liability, that is, it is a present obligation arising from past events, whose settlement is expected to result in an outflow of resources but which incorporates economic benefits (ASFRS 21, §8).
In our SNA, the legislator defines provision as a liability of uncertain timing or amount, which is distinguished from other liabilities – such as accounts payable and so-called accruals – by its peculiar characteristics: uncertainty regarding the timing or the amount of future expenditures necessary for its settlement. The notion of provision thus has (only) as its object the obligations ("responsibilities") whose nature is clearly defined and which, at the balance sheet date (now "financial position"), are of probable or certain occurrence, but uncertain as to their value or date of occurrence.
Thus, provisions cannot be excessive, nor have as a secondary purpose the creation of hidden reserves, lest the accounts fail to convey the true and fair view of the patrimony situation of the entity seeking to report.
It is also important to note that the obligations to which provisions relate may be of two types: legal obligations (arising from a contract, legal or similar) and constructive obligations (by which an entity has created a valid expectation that it will fulfill certain responsibilities, either by past practices, by result of public policies, or by assumption of a certain commitment in a public and notorious manner).
In summary, accounting legislation indicates that a provision should be recognized in the balance sheet (in the financial report) when the following three conditions are met:
a) There is a present obligation (legal or constructive) as a result of a past event; (thus excluding attempts to anticipate the recording of charges with future events, even if certain);
b) It is probable that an outflow of resources incorporating economic benefits will be required to satisfy that obligation; (it is considered probable when the probability of happening is higher than the probability of not happening);
c) It is possible to estimate the amount reliably (estimate of the amount that the entity would pay to settle the commitment or to transfer it to third parties).
Already from a tax point of view, the Corporate Income Tax Code, and with interest for the subject at hand, enshrines the acceptance as a cost for the purposes of determining the tax of the following provision:
- Provision intended to meet obligations and charges arising from court proceedings in progress, for facts that determine the inclusion of those (charges) among the expenses of the period of taxation (expenses of the fiscal year).
Then, the decision of the Claimant's management, to the effect of constituting, in 2013, a provision (charge of the fiscal year 2013) for the removal, transportation and reinstallation of the four wind towers (1, 2, 3 and 4 of the Wind Farm …), as a function of the final decision of the SCJ of suspension of operation and of proceeding to indemnify the authors of the proceedings against the Claimant, can be properly scrutinized in light of the definition above and of the framework that the CITC provides.
Such a provision should have been constituted in an earlier fiscal year and not only in the year in which the final decision of the proceedings is verified. In fact, the provision in article 39 of the CITC refers to court proceedings "in progress", and it is thus understood that it would have been possible to constitute the provision once the proceedings began. Strictly speaking, with the conclusion of the proceedings in mid-2013, at the moment the provision is constituted – at the closing of the accounts for 2013 - it is already in a sense untimely, because the obligation became certain and of a certain amount regarding the indemnity of 30,000 Euros, so that amount should have been recorded as a charge payable and not as a provision.
In the TCA's Response, in points 135 to 196, it is stated with crystalline clarity that nothing appears in the file and from the statements of the witnesses nothing results that indicates that the learned decision of the SCJ extends beyond the (immediate) suspension and subsequent removal of the activity of 4 wind turbines. Thus, once again it appears to us that the constitution of a provision after the suspension has occurred and when removal is already due is untimely, and budgets should have been obtained (despite witness C… having stated that no alternative budgets exist) for that purpose, or the charges for removal should have been recorded, in 2013, by means of a budget or invoice, even if partial, of the respective services.
But the fundamental question is indeed that of the scope to be given to the provision, as it seeks to include as a tax cost something that is a possible future event and that does not result from the judicial decision: the storage (over the years as appears from the evidence, resulting in the 4 towers still being stored in 2017, awaiting the carrying out of repairs) and especially the charge with the possible reinstallation of the same at another location authorized for that purpose.
Now, strictly speaking, it does not result from the decision of suspension and subsequent removal that the 4 towers must be reinstalled, as their dismantling, their sale to third parties, or even their disassembly and updating of a substantial part of their component parts may occur, which will even be probable given the detailed explanations provided by the witnesses, since technology has evolved very rapidly and the towers originally put into operation some 10 years ago may have already lost part of their economic efficiency.
Thus it is demonstrated that the provision, at least in the part intended for reinstallation, being a possible future event, may be a legitimate and sound management decision, but such future charge does not definitely fit the abstract concept of provision and, a fortiori, it cannot be accepted for the purposes of determining the taxable result for corporate income tax purposes.
It should also be recalled that a provision, to be framed in the CITC, must give rise to expenses that could be recorded, even in 2013, according to the principle of specialization of fiscal years and also according to the principle of prudence, which is not the case here.
Finally, the question of the measurement of the provision itself.
It is necessary, as we have stated above, that it be possible to estimate the amount of the provision reliably. Also, on this point, it appears to us that the Claimant did not make an effort to obtain a detailed estimate that properly segregated the cost of removal (disassembly, transportation to the storage space) in a manner separate from the potential cost with reinstallation at another location. If this had been the case, it would perhaps have been possibly for the TCA to have accepted the portion of the provision that was clearly indispensable in light of the content of the judicial decision.
Now, by taking a global value for the removal process and reinstallation at another location, with the same value taken by comparison with a previous reinstallation process that occurred more than four years earlier, it renders inadequate the determination of the amount of the provision that could have been considered under the CITC.
In summary, the TCA's decision to correct the amount of the provision constituted (except for the indemnity of 30,000 Euros) is in accordance with the CITC provisions concerning provisions for ongoing court proceedings with relevance to the determination of the Claimant's taxable result.
Therefore, the arbitral claim is not well-founded on this point.
3. On Indemnity Interest
The Claimant further requests reimbursement of the amounts paid and indemnity interest, it being proven that it paid the disputed assessments in the total amount of € 1,687,686.50 (docs. 28 to 31).
Article 43, section 1 of the General Tax Law establishes that "indemnity interest is owed when it is determined (…) that there was an error attributable to the services as a result of which tax debt was paid in an amount greater than legally due".
In the case at hand, the error that affected the assessments is attributable to the TCA.
Therefore, the Claimant is entitled to be reimbursed for the amounts paid as a result of the corrections considered illegal in these proceedings (articles 100 of the General Tax Law and 24, section 1 of the LRAT) and indemnity interest from the date of actual payment to reimbursement, at the legal suppletory rate, pursuant to articles 43, sections 1 and 4, and 35, section 10 of the General Tax Law, article 559 of the Civil Code and Regulation No. 291/2003 of 8 April.
V - Decision
In the terms set forth above, this Arbitral Tribunal decides:
a) To hold this Arbitral Tribunal materially incompetent to hear the claim for condemnation of the Tax and Customs Authority for payment of the amount relating to court fees in enforcement proceedings and to dismiss the Respondent from the claim on this point;
b) To hold the arbitral claim well-founded with respect to assessments Nos. 2015…, relating to the year 2011, 2015…, relating to the year 2012, and 2016 … relating to the year 2014, declaring them illegal and annulling them, with all the legally applicable tax consequences.
c) To hold the arbitral claim partially well-founded with respect to assessment No. 2016…, relating to the year 2013, partially annulling it, with all the legally applicable tax consequences.
d) To order the TCA to refund whatever amount is determined in execution of judgment, plus indemnity interest at the legal rate, with the due legal consequences.
e) To order Respondent and Claimant to bear the costs of the proceedings, in the proportion of 85% for the Respondent and 15% for the Claimant.
VI – Value of the Proceedings
The value of the proceedings is fixed at € 1,696,140.34, in accordance with the provision in art. 97-A of CPPT, applicable by virtue of art. 29, section 1, paragraph a), of the LRAT and art. 3, section 2, of the Regulation of Costs in Tax Arbitration Proceedings (RCPAT).
VII - Costs
Costs in the amount of € 22,338.00, pursuant to Table I of RCPAT, and in compliance with the provisions in articles 12, section 2 and 22, section 4, both of the LRAT, to be borne by the Respondent and Claimant in the proportion of 85% for the former and 15% for the latter.
Let it be notified.
Lisbon, 29 June 2017.
The Arbitrators,
Maria Fernanda dos Santos Maçãs
(President)
Cristina Aragão Seia
Luís Pereira da Silva
Frequently Asked Questions
Automatically Created