CAAD 643/2017-T: IRC Financing Costs Deductibility Under Article 23 CIRC and Related Parties Rules

ARBITRAL DECISION

The Arbitrators José Pedro Carvalho (President Arbitrator), Mariana Vargas and Manuel Alberto Soares, designated by the Ethics Council of the Centre for Administrative Arbitration to form an Arbitral Court, agree as follows:

ARBITRAL DECISION (consult full version in PDF)

I – REPORT

On 7 December 2017, A..., S.A., NIPC..., with registered office in ..., ..., ..., submitted a request for constitution of an arbitral court, under the combined provisions of Articles 2 and 10 of Decree-Law No. 10/2011, of 20 January, which approved the Legal Regime of Arbitration in Tax Matters, as amended by Article 228 of Law No. 66-B/2012, of 31 December (hereinafter, abbreviated as RJAT), seeking a declaration of illegality of the additional corporate income tax assessment act No. 2016..., of the statement of account reconciliation No. 2016... and of the compensatory interest assessments No. 2016..., No. 2016..., No. 2016... and No. 2016..., relating to the 2012 financial year, and in the part relating to corrections affecting "Expenses to be Charged" (in the amount of €254,266.49 [Point 1.1.1 of the RIT] and in the amount of €5,485.09 [Point 1.1.2 of the RIT]) in the value of €90,247.40, as well as of the decision denying the administrative review that had those corrections, and the tax levied on their basis, as its object.

To substantiate its request, the Claimant alleges, in summary, the occurrence of a defect of violation of law due to erroneous quantification and qualification of the taxable facts, under paragraphs a) and c) of Article 99 of the CPPT.

On 11-12-2017, the request for constitution of the arbitral court was accepted and automatically notified to the Tax Authority.

The Claimant did not proceed to appoint an arbitrator, therefore, under the provisions of paragraph a) of Article 6, paragraph 2, and paragraph a) of Article 11, paragraph 1, of the RJAT, the President of the Ethics Council of CAAD designated the undersigned as arbitrators of the collective arbitral court, who communicated their acceptance of the appointment within the applicable period.

On 01-02-2018, the parties were notified of these designations and did not express any refusal thereof.

In accordance with the provisions of paragraph c) of Article 11, paragraph 1, of the RJAT, the Collective Arbitral Court was constituted on 21-02-2018.

On 05-04-2018, the Respondent, duly notified for this purpose, presented its defence by way of exception and challenge.

On 16-04-2018, also duly notified, the Claimant expressed itself in writing on the matter of exception contained in the Respondent's defence.

On 06-06-2018, the meeting referred to in Article 18 of the RJAT took place, where the party statements presented by the Claimant were made.

Having been granted a deadline for the submission of written submissions, these were presented by the parties, expressing themselves on the evidence produced and reiterating and developing their respective legal positions.

The deadline set in Article 21, paragraph 1, of the RJAT was extended and it was indicated that the final decision would be notified by the end of that period.

The Arbitral Court has material competence and is regularly constituted, in accordance with Articles 2, paragraph 1, letter a), 5 and 6, paragraph 1, of the RJAT.

The parties have legal personality and capacity, are legitimate and are legally represented, in accordance with Articles 4 and 10 of the RJAT and Article 1 of Ordinance No. 112-A/2011, of 22 March.

The proceedings are free of nullities.

Thus, there is no obstacle to the examination of the case.

All considered, it is necessary to issue a ruling.

II. DECISION

A. MATTER OF FACT

A.1. Facts Established as Proven

The Claimant's business purpose is wholesale trade and commercial agency, dedicating itself mainly to the activity of international trading, consisting of the wholesale purchase of raw materials and goods which it then resells to its customers established in the Angolan (approximately 90% of business volume in 2013) and Mozambican markets.

The Claimant's customers B... and C..., were, in 2012, established in Angola and Mozambique, respectively.

The Claimant develops a procurement activity, within which:

• it proceeds to identify suppliers through continuous research by teams specialized in the global market;

• it negotiates prices and commercial conditions with suppliers;

• it enters into contracts with selected suppliers in order to guarantee service levels appropriate to its customers.

The Claimant further develops an export activity, within which:

• it contracts for maritime, air and land transport services, among others;

• it manages the circulation and storage of goods to be exported;

• it manages complaints resulting from non-conformity or losses occurring with the exported goods.

The Claimant has an organizational, logistical and functional structure that allows it in an optimized manner and taking advantage of economies of scale, to provide such services within a commercial relationship with its customers, at a relatively low cost.

B... was already the Claimant's principal customer before 2012, representing, until that year, 88% of the Claimant's invoicing, a situation that was maintained in subsequent financial years, with B... reaching approximately 69% of the Claimant's annual business volume.

For B... to be able to directly support expenses outside Angola, it had to be able to ordinarily transfer the necessary amounts to the recipients or to a bank account opened by the company with a credit institution in Portugal, so that from there it could organize the payments.

Given the exchange control restrictions in force in Angola, it was difficult to access the necessary foreign currency that would allow Angolan commercial banks to make payments abroad, since the local currency (Kwanza) had no convertibility in the international monetary market, and the process of settling exchange operations in Angola was complex, time-consuming and of uncertain viability.

The Angolan State took legislative measures restricting the outflow of capital and currency from that country.

The delay in acquiring foreign currency made it impossible to make payments from that country in a timely manner and within the contractually agreed deadlines with international suppliers.

The Angolan exchange regime in force at the time established that the majority of exchange operations were subject to prior approval by the National Bank of Angola, in accordance with the following legislation:

• Law No. 5/97, of 27 June, which approved the Exchange Law of Angola;

• Presidential Decree No. 265/10, of 26 November, relating to licensing procedures for imports, exports and re-exports;

• Decree No. 23/98, of 24 July which approved the Regulation of Capital Operations;

• Presidential Decree No. 273/11, of 27 October which approved the Regulation on the contracting of Technical and Foreign Assistance Services or Management;

• Notice of the BNA No. 13/13, of 6 August, establishing the rules and procedures to be observed in the settlement of various acts and contracts with an exchange nature.

The approval of the National Bank of Angola, when required, depended on the nature of the operation and the availability of foreign currency, and could take weeks, months or years.

At the time of the facts, there was an "institutional" delay in the approval of the contract or licensing of the operation, since the National Bank of Angola or the Ministries responsible for approval could not, as a rule, comply with the deadlines provided for by law.

At the time of the facts, there was a delay in the second part of the licensing and actual realization of payment outside Angola, namely when the commercial bank requested the License for Capital Export or the Authorization Bulletin for payment of Current Invisibles from the National Bank of Angola, and that request was refused on the basis of lack of foreign currency or, in most cases, frozen.

The centralization of payment of expenses outside Angola made it possible to mitigate the risk of exchange rate variation underlying the purchase of products denominated in Kwanzas.

The Claimant is a company established in Portugal, so it was never subject to the exchange limitations in force in the Angolan market.

The Claimant had the possibility of being able to advance to B... the necessary amounts to cover commercial expenses outside Angola.

Major Angolan clients typically required that the supply of products and services be based on a three-party structure through which the company not resident in Angola advanced expense values and/or acted as guarantor of some commercial commitments outside Angola.

A commercial agreement was established between the Claimant and B... to the effect that the Claimant would grant a special discount (rappel), with the counterpart being an increase in sales volume in subsequent years.

B... was already the Claimant's principal customer before 2012, representing 88% of invoicing volume.

The Claimant resorted to bank financing, in the form of secured accounts, loans, letters of credit, documentary credits and factoring, since the receipt of sales was subsequent to the dispatch of goods, which implied an initial investment on its part that required such financing.

The expenses incurred for the purpose of providing all procurement services or services associated with the export of goods were the subject of re-invoicing to B....

The profit margin practiced by the Claimant with respect to its customers in Angola and, in particular to B..., included the consideration of the following components:

• costs (fixed) of the Claimant's structure related to the service provided to the customer, which included, in addition to costs directly related to the development and performance of sales operations and transactions, the financial charges resulting from the financing of its activity;

• cost of merchandise sold;

• competitive conditions practiced in the Angolan market.

The Claimant made management choices and adopted identical business models with respect to C... that allowed it to ensure the continuity of the latter company's activity, by advancing the necessary amounts to cover commercial expenses outside Mozambique.

In 2011, the Claimant recorded in account 27213050 – Other accounts to receive and pay – Debtors and creditors for accruals – Debtors for Income Accruals – Other Income Accruals – Expenses to be Charged, the amount of €4,720,797.44 relating to expenses financed by the Claimant on behalf and for the account of B..., relating to meals and travel, which were still pending payment in the 2012 financial year.

Between the Claimant and B..., there were special relationships, under Article 63, paragraph 4, letter d) of the CIRC.

In 2011, the Claimant, at the same time as it advanced the necessary financial means for payment of expenses on behalf of B..., resorted to bank financing, bearing the respective financial charges.

The Claimant recorded in account 27830600 – Other accounts to receive and pay – Other Debtors and Creditors – Other operations with suppliers, the amount of €101,837.94, relating to financial expenses incurred by it in the proportion of the amount of sums spent paid on behalf of company C..., related to accounting expenses, lease contracts and vehicle acquisition.

Among the components included in the profit margin practiced to customers in Angola and Mozambique were the financial charges resulting from the financing of its activity.

The Claimant was the subject of a general scope tax inspection procedure, with reference to the 2012 financial year, promoted by the Tax Inspection Services of the Lisbon Finance Directorate, accredited by Service Order OI2015....

On 20-09-2016, the Claimant was notified via Official Letter No. ..., of the Draft Tax Inspection Report, which proposed the following corrections:

[Document reference in original]

The Claimant exercised its right to prior hearing, alleging in summary that:

• the expenses incurred on behalf of B... and C... are inserted within the scope of an important commercial relationship between the Claimant and the said companies, insofar as the said companies represent the Claimant's largest customers and the expenses incurred on behalf of the same are essential for the maintenance of the existing commercial relationship;

• there is no impediment to the deduction of costs incurred with airplane trips when carried out in the interest of the company, as was the case in the concrete matter according to the documentation that was attached;

• with respect to corrections of impairment losses, the Claimant accounted for as financial income in 2007, interest relating to the delay in the settlement of invoices dated 2004, 2005, 2006 and 2007. It was, however, an error, insofar as the values in question were estimates of interest to be received, which had no contractual support and for that reason, although accounted for, were not due;

• With respect to the alleged potential exchange differences, the said differences initially detected were due to an error in the information provided by the Claimant, which then proceeded to correct it.

On 04-11-2016, the Claimant was notified of the Final Tax Inspection Report, in which the Tax Inspection Services granted partial approval to the arguments presented in the right to hearing with reference to corrections in point 1.1.4.1 – displacement and stays (airplane) in the value of €462,858.00, and full approval of the arguments presented regarding the correction proposed in point 1.12 – potential exchange differences in the amount of €2,232,693.86, confirming all other proposed corrections made.

From the tax inspection report, in the part corresponding to the disallowance of the deductibility of the financial expenses proportional to the amounts of the "expenses to be charged" to Customers B... and C..., the following appears:

[Document reference in original]

The Claimant was notified of the corporate income tax assessment No. 2016..., as well as of the compensatory interest assessments No. 2016..., 2016..., 2016... and 2016... and of the statement of account reconciliation No. 2016..., in the total value of €2,170,721.04.

On 23-12-2016, the Claimant proceeded to pay the assessed amount in installments, under the Special Program for Reduction of Indebtedness to the State (PERES).

The Claimant submitted an administrative review seeking to challenge the said additional corporate income tax assessment act.

A.2. Facts Established as Not Proven

With relevance to the decision, there are no facts that should be considered as not proven.

A.3. Substantiation of the Proven and Unproven Matter of Fact

With respect to the matter of fact, the Court does not have to pronounce on everything that was alleged by the parties; rather, it has the duty to select the facts that matter for the decision and to discriminate between proven and unproven matter (cf. Article 123, paragraph 2, of the CPPT and Article 607, paragraph 3 of the CPC, applicable by virtue of Article 29, paragraph 1, letters a) and e), of the RJAT).

In this way, the facts pertinent to the determination of the case are chosen and outlined according to their legal relevance, which is established in attention to the various plausible solutions of the legal question(s) (cf. former Article 511, paragraph 1, of the CPC, corresponding to current Article 596, applicable by virtue of Article 29, paragraph 1, letter e), of the RJAT).

Thus, having regard to the positions assumed by the parties, in light of Article 110, paragraph 7 of the CPPT, the documentary evidence and the file attached to the record, and the party statements made, the facts listed above were considered proven, with relevance to the decision, taking into account that, as written in the Judgment of the TCA-South of 26-06-2014, issued in case 07148/13, "the probative value of the tax inspection report (...) may have probative force if the assertions contained therein are not challenged".

Not established as proven or unproven were allegations made by the parties, and presented as facts, consisting of strictly conclusive statements, incapable of proof and whose truthfulness must be assessed in relation to the specific matter of fact consolidated above.

B. ON THE LAW

i. On the Exception

The Respondent begins by raising, as a preliminary matter prior to the examination of the merits of the case, the lapse of the right to action, since, in its view, resulting clearly and unequivocally from the initial petition, the direct challenge of the corporate income tax assessment act No. 2016... and respective compensatory interest, the petition submitted (leading to the declaration of illegality of the act and, consequently, its proportional annulment) should be declared inadmissible for being untimely and, consequently, the sued entity should be absolved of the instance, under letter e), paragraph 1, Article 278 of the current Code of Civil Procedure, applicable by virtue of Article 29, paragraph 1, letter e) of Decree-Law No. 10/2011, of 20 January.

The Respondent's position is based on the understanding that the Claimant should have identified as the object of the arbitral ruling the act of denial of the administrative review it submitted.

With all due respect, it is understood that the Respondent is not correct on this matter. In fact, and firstly, necessarily, the petition for declaration of illegality of the assessment act has underlying it, the declaration of illegality of all subsequent acts and whose validity is affected by that declaration, which obviously includes, the act of denial of the administrative review.

Moreover, and besides, in the part relating to the denial, and to the extent that there are not in question defects of the administrative review decision act itself or its procedure, that act will be merely confirmatory, and, as such, not appealable in itself.

On the other hand, and as has been recognized by national case law, if, in cases such as those at issue, the immediate object of the proceedings is the act of decision of the administrative review, the mediate object will be the primary assessment act itself.

This situation, moreover, is perfectly clear in administrative litigation, as results from Article 50, paragraph 1 of the CPTA, duly combined with Article 59, paragraph 4 of the same Code. The regime of tax arbitral litigation also corroborates this understanding, since Article 2 of the RJAT takes as the reference point for the competence of arbitral courts, the primary acts, and secondary acts are relevant as reference points for the timeliness of the challenge petition, as results from Article 10, paragraph 1, a) of that Regime, where it is required that petitions for constitution of an arbitral court be presented within 90 days, counted from the facts provided for in paragraphs 1 and 2 of Article 102 of the Code of Tax Procedure and Process.

That is, in summary and in all accuracy, the Claimant's petition was correctly formulated, since it reports to letter a) of paragraph 1 of Article 2 of the RJAT (assessment act), and was presented within the deadline fixed by letter a) of paragraph 1 of Article 10 of the same statute (90 days counted from the administrative review decision).

Accordingly, the exception of lapse of the right to action, invoked by the Respondent, should be rejected.

On the Merits of the Case

As the Respondent itself recognizes, the essential question raised in the present proceedings is to determine whether the Claimant "incurred excessive financial expenses, insofar as they are associated with financing obtained from third parties not applied in the operation itself or in the activity developed", in violation of the provisions of Article 23 of the CIRC applicable.

The same legal question, with respect to the 2013 financial year, was examined and decided in the arbitral case 621/2017-T of CAAD, where the ground not invoked by the Tax Authority and Customs Authority in the substantiation of the tax acts now at issue was also examined, relating to the fact that the granting of financing is not included in the Claimant's corporate purpose.

With respect to the question which also arises in the present proceedings, that decision held that the Claimant's business model included the advancement of payment of expenses on behalf of its customers, established in countries where there are major difficulties in accessing foreign currency that prevent them from making timely payments of expenses necessary for their activity, and that the Claimant, by enabling its customers to develop such activities, increases its business with them.

It was also judged in that decision that, without the advancements of payments on behalf of its customers, these could not carry out with the Claimant all the business that they did, so these advancements are indirectly connected to the Claimant's activity, being payments made with business purpose, necessary and sufficient for the deductibility of expenses, and that for such a business purpose to exist, it is not necessary that the expenses have a direct relationship with the operational activity of the taxpayer, expenses with merely indirect relationship being also relevant, as long as they were motivated by the ultimate objective of obtaining profits.

With respect to the circumstance, also invoked there by the Tax Authority and Customs Authority, that "there is no remuneration underlying the delay in payment of the expenses supported on behalf" of the Claimant's customers, the above-cited decision considered that the Tax Authority had not identified any specific financing that had been specifically obtained to ensure the payment of expenses paid on behalf of its customers, basing the corrections made on an indirect method.

It was also considered to result from the evidence produced there and here, that the totality of financing charges were passed through to invoicing and that it would be outside the limits of reasonableness to require as a requirement of proof of the pass-through to invoicing of general nature expenses the specification in each invoice of the percentages of each of these types of expenses that proportionally were allocated to each operation.

It was concluded, then, in the cited decision that in the prices of the merchandise and services provided by the Claimant to its customers were included the remuneration of these general nature expenses of the Claimant's activity, which includes financing charges, so the assessment challenged there was affected by errors regarding the factual and legal presuppositions, which justify its partial annulment, in accordance with Article 163, paragraph 1, of the Administrative Procedure Code, subsidiarily applicable, by virtue of Article 2, letter c) of the LGT.

In the said decision a dissenting opinion was filed, which centered essentially on the question that the granting of financing is not included in the Claimant's corporate purpose, a question which, as seen, is not at issue in the present arbitral action.

With respect to the matter relevant to the present decision, the distinguished dissenting arbitrator in arbitral case 621/2017T judged that the Claimant failed to demonstrate the connection between the expenses incurred and the income.

With all due respect to this opinion, the understanding that prevailed in that same arbitral case, described above, is subscribed to here, in essence, holding in summary that the expenses in question, disallowed by the Tax Authority, were incurred with a business purpose, evidenced by the specific context of the relationship between the Claimant and the concrete customers in question.

Moreover, if the Tax Authority's position were accepted, one would reach, ultimately, that any company that invoiced to its customers, for example, at 90, 120 or 180 days, and incurred financial charges, would be penalized for practicing that (traditional in many sectors) commercial policy, seeing part of those charges disallowed for, supposedly, corresponding to non-remunerated financing to its customers.

All this apparently ends up being understood by the Respondent itself, which not only recognizes that the expenses supported by the Claimant not directly related to the sale of merchandise and services, will integrate expenses made on behalf of the customer, which are obviously still expenses with business purpose, but ends up referring that the disallowed charges "result from the special relationships existing" between the Claimant and the customers in question, and that it is for that reason "rather than benefiting its activity and the respective business interest, they benefit that entity or persons connected to it."

This is precisely the situation examined in the Judgment of the STA of 21-09-2016, issued in case 0571/13, where it can be read that:

"In truth, to give a full answer to the question raised, it is necessary to distinguish two planes: that of the relevance of the costs in question and their framework within the concept of indispensability linked to Article 23 of the CIRC and that of their relationship with transfer prices.

As to the indispensability of costs, as is affirmed by reference doctrine (António Moura Portugal, A Dedutibilidade dos Custos na Jurisprudência Fiscal Portuguesa and Tomás de Castro Tavares, Da Relação de Dependência Parcial entre a Contabilidade e o Direito Fiscal na Determinação do Rendimento Tributável das Pessoas Colectivas, Ciência e Técnica Fiscal No. 396, pages 7 to 180) and also the most significant case law, the concept to which Article 23 of the CIRC refers has been linked to costs incurred in the interest of the company or supported within the activities flowing from its corporate purpose.

Only when costs result from decisions that do not meet such requirements should they be disallowed. (...)

From this point of view, taking into account that (broad) concept of indispensability of Article 23 of the CIRC, these costs will always have to be considered indispensable to obtaining income, since we are dealing with a productive activity related to obtaining profits, and with the sale of the company's products.

The thesis of the Tax Administration according to which the costs of sales by the branch to the head office were not properly justified, as well as those resulting from the attribution of general administrative expenses of the head office to the branch, not proving its indispensability, cannot therefore be upheld.

A very different question is already that of the relationship of such costs with transfer prices.

As already mentioned, the expression "transfer price" is reflected in the price set by a given taxpayer when it sells or buys goods, or shares resources with a person with whom it has special relationships. In such situations, the prices used may not correspond to market prices, that is, to prices negotiated freely.

The correction of such transfer prices, in order to avoid that other countries obtain a part of the income generated in their territory, has as reference the prices that would have been set by companies without a special relationship, acting independently.

For this reason, in the case at hand, the issue was not to determine the indispensability of costs not admitted by the administration, but rather to clarify whether such costs, in light of what is normally current in the market in the face of equivalent transactions, would be excessive or would fall short of what is normally practiced.

Only an action by the Tax Administration in this sense would eventually allow adjusting the company's profit.

In the case at issue, however, the Tax Administration ended up invoking, as legal support for the challenged assessments, the regime of Article 23 of the CIRC, and the provisions of paragraphs 2 and 3 of Article 49 of the CIRC, in a situation where such provisions were not applicable, so the challenged assessments suffer, also here, from error in the legal presuppositions."

The doctrine expounded was reiterated in the Judgment of the same High Court of 27-06-2018, where it can also be read that:

"In truth, to give a full answer to the question raised, it is necessary to distinguish two planes: that of the relevance of the costs in question and their framework within the concept of indispensability linked to Article 23 of the CIRC and that of their admissibility in light of the transfer pricing regime (Article 58 of the CIRC, as then written).

As to the indispensability of costs, as is affirmed by reference doctrine (António Moura Portugal, A Dedutibilidade dos Custos na Jurisprudência Fiscal Portuguesa and Tomás de Castro Tavares, Da Relação de Dependência Parcial entre a Contabilidade e o Direito Fiscal na Determinação do Rendimento Tributável das Pessoas Colectivas, Ciência e Técnica Fiscal No. 396, pages 7 to 180) and also the most significant case law, the concept to which Article 23 of the CIRC refers has been linked to costs incurred in the interest of the company or supported within the activities flowing from its corporate purpose.

Only when costs result from decisions that do not meet such requirements, namely when they do not present any affinity with the company's activity, should they be disallowed.

As was stated in the Judgment of this Supreme Administrative Court of 28.06.2017, issued in appeal 627/16, "in the understanding that doctrine and case law have come to adopt for the purpose of ascertaining the indispensability of a cost (cf. Article 23 of the CIRC as written in 2001), the Tax Authority cannot judge the soundness and opportunity of the company's management economic decisions, under penalty of intruding into the freedom and autonomy of management of the company.

Thus, a cost or loss will be accepted fiscally if, in a judgment made at the time it was incurred, it is adequate to the productive structure of the company and to obtaining profits, even if it turns out to be an unfruitful or economically ruinous economic operation, and the Tax Authority can only disallow those that do not fall within the scope of the taxpayer's activity and were incurred, not in the interest of the latter, but for the pursuit of outside objectives (when it can be concluded, in light of the rules of common experience, that it had no potential to generate income)" - in this sense also see the Judgments of the Tax Litigation Division of this Supreme Administrative Court of 30 November 2011, appeal No. 107/11, and of 24.09.2014, appeal 779/12.

From this point of view, having regard to that (broad) concept of indispensability of Article 23 of the CIRC, and considering that the case at hand was not yet subject to the provisions of paragraph 7 of that statute, introduced in the writing of Law 32-B/2002 of 30 December, the costs in question will always have to be considered indispensable to obtaining income, since they fall within the scope of the company's activity.

A very different question is already that of the relationship of such costs with transfer prices.

The expression "transfer price" is reflected, as João Sérgio Ribeiro emphasizes (João Sérgio Ribeiro, Tributação Presuntiva do Rendimento, col. Theses, ed. Almedina, page 394.), "in the price set by a given taxpayer when it sells or buys goods, or shares resources with a person with whom it has special relationships. In such situations, the prices used may not correspond to market prices, that is, to prices negotiated freely".

The correction of such transfer prices, in order to avoid the manipulation of prices with the intention of transferring income (in the form of profit, for example) from one taxpayer to another, has as reference the prices that would have been set by entities without a special relationship, acting independently.

For this reason, in the case at hand, the issue was not to determine the indispensability of costs not admitted by the administration, but rather to clarify whether such costs, in light of what is normally current in the market in the face of equivalent transactions, would be excessive or would fall short of what is normally practiced.

Only an action by the Tax Administration in this sense would eventually allow adjusting the company's costs.

In the case at issue, however, the Tax Administration ended up invoking only, as legal support for the challenged assessments, the regime of Article 23 of the CIRC, in a situation where, as seen, there is no violation of such provision, so the challenged assessments suffer from error in the legal presuppositions."

An analogous situation occurs in the case sub iudice. The Claimant, with no doubt on this point to the Court, incurred the expenses marked by the Tax Authority in the table and because of the commercial relationships it maintained with its customers in question, and in its prices – the Respondent itself, as seen, acknowledges it – reflected the costs resulting from the delay in the reimbursement of the expenses it incurred.

Possibly, and as the Respondent also notes, such operations may have occurred because of the special relationships existing between those involved, and even in conditions different, to the detriment of the Claimant, from those that would be agreed between independent entities.

However, and as the cited case law points out, the proper venue for framing such possible circumstances fiscally, is located in the transfer pricing regime, and not, as the Tax Authority did, in the regime of necessity of expenses to obtain income or maintenance of the income-producing source.

By applying such regime, without the respective presuppositions being met, the corrections made and now challenged by the Claimant incurred in factual error, and consequent legal error, and should therefore be annulled, and the arbitral petition formulated accordingly proceeds.

As to the petition for compensatory interest filed by the Claimant, Article 43, paragraph 1, of the LGT establishes that compensatory interest are due when it is determined that there was error attributable to the services from which results payment of the tax debt in an amount greater than legally due.

In the case, the error affecting the annulled tax acts is attributable to the Tax Authority and Customs Authority, which made them, improperly, on its own initiative.

The Claimant therefore has the right to be reimbursed for the amount it paid (under the provisions of Articles 100 of the LGT and 24, paragraph 1, of the RJAT) by virtue of the annulled acts and further to be indemnified for the improper payment through the payment of compensatory interest by the Tax Authority, from the date of payment of the amount, until reimbursement, at the legal supplementary rate, under the terms of Articles 43, paragraphs 1 and 4, and 35, paragraph 10, of the LGT, Article 559 of the Civil Code and Ordinance No. 291/2003, of 8 April.

C. DECISION

On these grounds, this Arbitral Court decides to judge as entirely well-founded the arbitral petition filed and, consequently:

• To partially annul the additional corporate income tax assessment act No. 2016..., the statement of account reconciliation No. 2016... and the compensatory interest assessments No. 2016..., No. 2016..., No. 2016... and No. 2016..., relating to the 2012 financial year of the Claimant, in the part relating to corrections affecting "Expenses to be Charged" (in the amount of €254,266.49 [Point 1.1.1 of the RIT] and in the amount of €5,485.09 [Point 1.1.2 of the RIT]), as well as of the decision denying the administrative review that had those corrections, and the tax levied on their basis, as its object;

• To condemn the Tax Authority to refund the amount of improperly paid tax, and to the payment of compensatory interest, under the terms indicated above;

• To condemn the Respondent to pay the costs of the proceedings, in the amount fixed below.

D. Value of the Proceedings

The value of the proceedings is set at €90,247.40, under the terms of Article 97-A, paragraph 1, a), of the Code of Tax Procedure and Process, applicable by virtue of letters a) and b) of paragraph 1 of Article 29 of the RJAT and paragraph 2 of Article 3 of the Regulation of Costs in Tax Arbitration Proceedings.

E. Costs

The arbitration fee is set at €2,754.00, under the terms of Table I of the Regulation of Costs in Tax Arbitration Proceedings, to be paid by the Respondent, since the petition was entirely well-founded, under the terms of Articles 12, paragraph 2, and 22, paragraph 4, both of the RJAT, and Article 4, paragraph 4, of the said Regulation.

Let it be notified.

Lisbon, 21 October 2018

The President Arbitrator

(José Pedro Carvalho)

The Arbitrator Member

(Mariana Vargas)

The Arbitrator Member

(Manuel Alberto Soares)