Autonomous Taxation on Vehicle Expenses for SGPS Holding Companies – IRC Arbitration 649/2016-T

ARBITRAL AWARD

I – Report

1. The taxpayer company "Grupo A…, SGPS, S.A.", with Tax Identification Number … (hereinafter "Claimant"), submitted on 28 October 2016 a request for the constitution of a Collective Arbitral Court, in accordance with the combined provisions of articles 2 and 10 of Decree-Law no. 10/2011, of 20 January (Legal Regime of Arbitration in Tax Matters, hereinafter "LRATM"), in which the Tax and Customs Authority (hereinafter "TA" or "Respondent") is the respondent.

2. The Claimant seeks an arbitral ruling on the illegality of the Corporate Income Tax (IRC) assessments no. 2016…, with tax payable in the amount of €436,302.81, and no. 2016…, with tax payable in the amount of €312,081.55, as well as the corresponding account statement no. 2016…. The Claimant seeks the annulment of such tax acts and the reimbursement of the amounts unduly paid, plus indemnity interest. Cumulatively, it requests the annulment of the partial rejection decision on the Administrative Appeal no. …2016… filed against such tax acts, with regard to the autonomous taxation on expenses with light passenger vehicles, a correction in the amount of €87,182.00. It names a witness.

3. The request for constitution of the Arbitral Court was accepted by the Illustrious President of CAAD and automatically notified to the TA on 11 November 2016.

4. Pursuant to the provisions of paragraph a) of number 2 of article 6 and paragraph b) of number 1 of article 11 of the LRATM, as amended by article 228 of Law no. 66B/2012, of 31 December, the Ethics Council designated the arbitrators of the Collective Arbitral Court, who communicated their acceptance within the applicable timeframe, and notified the parties of such designation on 28 December 2016.

5. The Collective Arbitral Court was constituted on 16 January 2017; it was properly constituted and is materially competent, in accordance with articles 2, number 1, paragraph a), 5, 6, number 1, and 11, number 1, of the LRATM (as amended by article 228 of Law no. 66-B/2012, of 31 December).

6. Pursuant to numbers 1 and 2 of article 17 of the LRATM, the TA was notified on 16 January 2017 to submit its response.

7. The TA submitted its Response on 20 February 2017, and the Administrative File on 10 March 2017.

8. In that Response the TA alleges, in summary, the total lack of merit of the Claimant's request, and opposes the production of witness evidence, which it considers unnecessary.

9. In a request submitted on 24 February 2017, the Claimant took a position regarding articles 9 to 28 of the Respondent's Response, concerning the prohibition of an arbitral decision based on equity.

10. The Arbitral Order of 1 March 2017 dispensed with witness evidence and requested that the parties submit written arguments.

11. In a Request of 13 March 2017, the Claimant requested reconsideration of the Arbitral Order of 1 March 2017, insisting on the production of witness evidence – or, alternatively, the use of witness evidence already obtained in another proceeding.

12. The Claimant submitted its written arguments on 17 March 2017.

13. The Arbitral Order of 20 March 2017 granted the Claimant's request, determining the holding of an examination hearing for the witness named, and allowing for the production of supplementary oral arguments.

14. In a Request of 28 March 2017 the Claimant requested the rescheduling of the trial hearing date.

15. In a Request of 29 March 2017 the Respondent again expressed its opposition to the examination of the witness named by the Claimant, requesting that, in accordance with the Claimant's own suggestion, witness evidence already obtained in another proceeding be used.

16. The Respondent submitted its written counter-arguments on 30 March 2017.

17. By Arbitral Order of 31 March 2017 another date was set for the trial hearing, rejecting the possibility of using witness evidence already obtained in another proceeding, and maintaining the possibility of producing supplementary oral arguments.

18. In a Request of 12 April 2017 the Claimant requested that such supplementary arguments could be produced in writing.

19. By Arbitral Order of 12 April 2017 it was determined that the form to be followed in the supplementary arguments would be decided at the trial hearing.

20. By Arbitral Orders of 13 April and 26 April 2017 the date of 2 June 2017 was set for the trial hearing.

21. In a Request of 10 May 2017 the Respondent requested the attachment to the file of a copy of the decision rendered in arbitral proceeding no. 497/2016-T, which was granted by Arbitral Order of 10 May 2017.

22. In a Request of 18 May 2017 the Claimant, responding to the Arbitral Order of 10 May 2017, requested the addition of a name to the witness list.

23. By Arbitral Order of 18 May 2017 such addition to the witness list presented by the Claimant was admitted, invoking article 598, paragraph 2 of the CPC ex vi article 29, paragraph 1, e) of the LRATM.

24. In a Request of 23 May 2017 the Respondent opposed the terms of the Arbitral Order of 18 May 2017, particularly by considering article 598, paragraph 2 of the CPC inapplicable, due to the expiration of the deadlines provided in that rule.

25. By Arbitral Order of 26 May 2017 it was determined that the issue raised in the Respondent's Request of 23 May 2017 would be decided at the trial hearing.

26. On 2 June 2017 the trial hearing took place.

27. At the hearing, the Court decided to hear the second witness named by the Claimant, notwithstanding recognizing that the deadline provided in article 598, paragraph 2 of the CPC had been exceeded, considering that the interest in discovering material truth should prevail and invoking the freedom to determine the means of evidence granted to it by article 16, e) of the LRATM. Having heard the parties, the Court understood that article 598, paragraph 2 of the CPC grants any party the right to add to the witness list within the deadline indicated in the rule, but does not prevent that, beyond that deadline, such list be amended by initiative of the court itself – not by recognition of a faculty of the parties that still subsists beyond the deadline, but by initiative of the Court itself (supported by articles 99, paragraph 1 of the General Tax Law, 13, paragraph 1 of the Code of Administrative Tax Procedure, and 16, c) and e) of the LRATM).

28. At the trial hearing the examination of the first witness named, B…, was conducted. The examination was interrupted and its resumption was scheduled for 27 June 2017.

29. On 27 June 2017 the trial hearing continued with the examination of witnesses B… and C….

30. During the hearing the Claimant requested, with the express opposition of the Respondent, the undertaking of supplementary measures aimed at clarifying doubts raised by document no. 12 attached to the file. Such Request was rejected by Arbitral Order recorded in the hearing minutes.

31. The hearing continued with the production by both parties of supplementary oral arguments.

32. The Court set 15 September 2017 as the date for rendering the arbitral decision.

33. The proceeding is not affected by nullities and no prior or subsequent questions, whether preliminary, prejudicial or exceptions, were raised that would prevent the consideration of the merits of the case, with all conditions met for a final decision to be rendered.

34. The TA made the designation of its representatives in the file and the Claimant submitted a power of attorney, with the Parties thus being properly represented.

35. The Parties have legal personality and capacity and have legitimacy, in accordance with articles 4 and 10, number 2, of the LRATM and article 1 of Ordinance no. 112-A/2011, of 22 March.

II – Legal Reasoning: Matters of Fact

II. A. Facts Considered Proved and Relevant to the Decision

1. The Claimant, which is in the form of a Joint-Stock Company, has as its object the management of shareholdings.

2. The Claimant is the parent company of a group of companies to which the Special Regime for the Taxation of Groups of Companies (SRTGC) applies.

3. In its normal activity, the Claimant uses service vehicles that form part of its own vehicle fleet, and the expenses with these vehicles are related to the maintenance of its productivity and to the obtainment of taxable income.

4. The ownership and use of these vehicles result from an economic assessment that encompasses all alternatives (public transportation, rental, two-seater vehicles) – given the specific function of these vehicles in the development of activity and the obtainment of taxable income of some companies that are part of the business group headed by the Claimant.

5. In the fiscal year 2013, the expense with light passenger vehicles of the business group headed by the Claimant amounted to €2,739,891.00, resulting in autonomous taxation of €346,999.00, in accordance with the following table:

6. Of these vehicles, some are regularly used in the business activity of companies D…, E…, H…, G…, F… and I… – having their own characteristics (in particular in terms of capacity and trunk volumetry) and being, except in justified cases of de-characterization, identified externally with the logos of these companies.

7. Of the total amount of €2,739,891.00 in vehicle expenses, the Claimant chose to submit only €852,757.84 related to service vehicles, leaving out expenses with vehicles that did not evidence the necessary "business character" (because they were not kept in a private parking lot, because they did not have a logo or were used outside a written usage agreement), and it was on this basis that the calculation of €87,182.00 in autonomous taxation to be potentially disregarded resulted (approximately 25% of the total autonomous taxation with vehicles of the Claimant for fiscal year 2013).

8. In this group there are no vehicles for "exclusively personal" use, such as "mid-range" and "high-range" vehicles which are, by agreement, used by directors and administrators of the group companies.

9. The allocation of the vehicles in question by each of the companies is as shown in the following table:

10. The vehicles are subject to centralized management in terms of logistics, use, fuel consumption, billing, security, and those who use them are aware of the respective terms of use, which are explicit and documented.

11. The use of vehicles for private purposes, exceptionally authorized under those terms of use, was never requested nor granted in 2013.

12. A control procedure for entries and exits from the respective parking lots was designed for the majority of the "service vehicles".

13. Almost all vehicles are instrumental in the carrying out of productions rigidly planned in terms of locations and schedules, so the absence or delay of any one of them is easily noticed.

14. The Claimant submitted on 27 May 2014, regarding the IRC for fiscal year 2013, a tax return, paying the amount self-assessed on 30 May 2014.

15. On 21 July 2014 the corresponding assessment no. 2014… was issued.

16. Following inspection actions (Service Order OI2015…, of 9 November 2015), and in replacement of that first assessment, the Claimant received on 30 March 2016 the IRC assessment no. 2016…, with tax payable in the amount of €436,302.81, and on 26 September 2016 the assessment no. 2016…, with tax payable in the amount of €312,081.55, as well as the corresponding account statement no. 2016….

17. The Claimant submitted on 19 May 2016 an Administrative Appeal no. …2016… against these assessments, which Administrative Appeal was partially granted (regarding autonomous taxation on representation expenses, in the amount of €124,221.00) and partially rejected, regarding autonomous taxation on light passenger vehicle expenses, with a correction of €87,182.00.

18. The draft decision regarding the Administrative Appeal was notified to the Claimant on 17 June 2016, but the Claimant chose not to exercise its right to a prior hearing.

19. The rejection of the Administrative Appeal was notified to the Claimant on 3 August 2016.

20. The Claimant paid on 30 May 2014 the sum of €1,303,293.50, corresponding to the amounts assessed in the acts in question.

The facts given as proved result from the conviction of the court, based on critical examination of the case documents and consideration of the witness statements, who demonstrated knowledge of the facts and testified impartially.

II.B. Facts Considered Not Proved

Based on the documentary evidence made available in the file and consensually accepted by the parties, and based on the witness evidence presented at the trial hearing, it is verified that, of interest for the decision of the case, nothing further was proved.

III – Legal Reasoning: Matters of Law

III. A. Position of the Claimant

a) The Claimant maintains that it unduly bore the amount of €87,182.00 as autonomous taxation, relating to expenses incurred with light passenger vehicles that should not have been subject to such taxation, given the indispensability of these expenses for the obtainment of taxable income, and their exclusively business nature.

b) The Claimant begins by rebutting the argument that the TA had presented in its partial rejection of the Administrative Appeal, particularly the one concerning the question of the "business character" of the expenses and their alleged non-deductibility.

c) The Claimant emphasizes, in contrast, the "anti-abuse" nature of autonomous taxation, drawing from this the argument, already established in arbitral jurisprudence, that autonomous taxation establishes a rebuttable presumption of "partial" business character (which is equivalent to the concept of non-"full business character"), whereby expenses in respect of which proof of such full business character is provided may not be subject to autonomous taxation, thereby avoiding the normative scope of combating "abuse".

d) The Claimant maintains that the wording of article 88, paragraphs 3 and 5 of the Corporate Income Tax Code (CIRC), as written at the time of the facts, makes it unequivocal – for the majority of doctrine and jurisprudence – that the intention is to prevent from being presented as deductible expenses, as if they were indispensable for the formation of taxable profit, as if they were fully "business" or "productive", that which is nothing more than mere remuneration and benefits to employees of the taxpayer, and which therefore should be confined to the strictly "personal" sphere of actual beneficiaries (namely a "disguised" distribution of profits).

e) It would be, therefore, a matter of proceeding with a sorting within a nebulous boundary between business and personal spheres, so as to make clear what is that, contributing to the formation of taxable profit within a strict business logic, of direct relationship with the normal activity of the taxpayer, should be subject to taxation under IRC, and what should not be subject to IRC, that which illegitimately (by not having direct relationship with the normal activity of the taxpayer) would reduce tax revenue.

f) Autonomous taxation would thus apply to situations of "partial" business character, that is, situations in which, a purely business use not being discernible, taxation would primarily aim to dissuade abuse situations in the area of overlap between business expenses and private expenses (which would establish a parallel with the genesis of autonomous taxation, linked to confidential or undocumented expenses).

g) If this is so, the Claimant maintains, proof of the total business character of the expenses, namely proof of exclusively business use of the light passenger vehicles, would suffice to, in accordance with the legislative intent, avert autonomous taxation – with the presumption of "partial business character" on which such taxation is based being rebutted.

h) Moreover, the Claimant adds, the mere admission of the possibility of proof of the business character of the expenses – an admission that the Claimant maintains has already occurred repeatedly on the part of the TA – can only mean, and entail, that the rule of article 88, paragraph 3 of the CIRC is based on a presumption, that such presumption is rebuttable through such proof, and that the rebuttal of the presumption results in the non-application of autonomous taxation.

i) The Claimant further recalls that the rule in Portuguese law is that of susceptibility to rebuttal, in accordance with article 350 of the Civil Code or article 73 of the General Tax Law; and that the presumption underlying autonomous taxation makes perfect sense in that it would be difficult, if not impossible, for the TA to analyze the business character, or lack thereof, in all situations to which such autonomous taxation applies – obtaining, with such presumption, a distribution of the burden of proof that falls on the party best positioned to prove the nature of the expenses.

j) By contrast, the understanding underlying the rejection of the Administrative Appeal embodies, according to the Claimant's thesis, a peculiar comprehension of what this autonomous taxation is: it would be a simple tax on expenses, and a tax separate from IRC or Personal Income Tax, taxing the expense separately from income (notwithstanding the fact that it is systematically inserted in the Codes of those taxes, which shows that its regime should be interpreted within the broader framework of the regime of taxes on income).

k) In this other understanding there would be, therefore, not even a presumption, or even an irrebuttable presumption: when an expense is verified, it would be per se taxable, without more – which, in the Claimant's view, would violate the objectives of the taxation regime, of IRC, and even broader, constitutional objectives, of respect for tax equality and taxpaying capacity.

l) The Claimant argues in the direction of proving the essentiality of expenses with the light passenger vehicles referenced in the file, assessed from the business point of view of companies D…, E…, H…, G…, F… and I…, and also in the direction of there being effective control of the use of the vehicles, capable of ruling out possibilities of use thereof for private purposes – the Claimant insisting that the costs incurred with the vehicles in question did not constitute private advantage for those who used them.

m) Finally, arguing that the partial rejection of the Administrative Appeal is based on an error regarding the factual and legal presuppositions attributable to the TA services, the Claimant invokes its right to indemnity interest, in accordance with article 43, paragraph 1 of the General Tax Law.

n) In its request submitted on 24 February 2017, the Claimant opposed the allegation of the Respondent, presented in its response, that an implicit appeal was being made to a decision based on equity – a path forbidden to an arbitral court.

o) In its Arguments, the Claimant reiterates the arguments expounded in its Initial Petition.

III. B. Position of the Respondent

a) In its response, the TA maintains the understanding that the disputed assessments constitute a correct application of law, not suffering from any defect.

b) The Respondent maintains that the reading that the Claimant makes of article 88, paragraph 3 of the CIRC, in the version in force at the time of the facts, has no support whatsoever in the letter of the law – thereby violating minimum rules of interpretation, as they are established in article 9 of the Civil Code.

c) Indeed, the Respondent emphasizes that the reading of article 88, paragraphs 3 and 6 of the CIRC leaves no doubt, in enumerating types of vehicles, clearly identified, that are subject to autonomous taxation, and those that are excluded from such taxation: vehicles powered exclusively by electric energy, those allocated to the operation of public passenger transport services, and, of these, those intended to be rented in the exercise of the normal activity of the taxpayer.

d) The Respondent understands that, by constantly appealing to its commercial activity and the context of use of the vehicles within the scope of that activity, the Claimant suggests the application of article 88, paragraph 3 of the CIRC in terms completely detached from the letter of the rules, which do not admit these considerations in their provision, whereby substantially the Claimant would be making an appeal to equity, the adaptation of a rule to a specific case – a path that is expressly forbidden to an Arbitral Court.

e) On the other hand, the Respondent understands that the Claimant has not made minimal proof of the facts that, in the Claimant's own understanding (but not in the Respondent's), would rebut the presumption of "partial business character" – particularly with respect to "exclusively business" use of the vehicles; whereas, on the contrary, the Respondent understands that the limited evidence available does not rule out the possibility of partially private use of the vehicles.

f) Regarding the articulation of the rules, the Respondent does not accept that the criterion of essentiality of expenses, which would lead to the application of article 23 of the CIRC, be reinforced with a requirement of "integral" business character to avert autonomous taxation in accordance with article 88 of the CIRC.

g) Nor does it accept the extrapolation made from the anti-abuse clause to the regime of autonomous taxation, to argue for the existence of an alleged consideration of the concept of "partial business character" that would itself be an autonomous avenue for the commission of abuses – when, the Respondent maintains, autonomous taxation is today a polymorphic reality, oriented toward very diverse purposes, including extra-fiscal objectives (particularly environmental), and not a single purpose.

h) The Respondent insists on excluding from the interpretation of article 88, paragraphs 3 and 6 of the CIRC any idea of presumption or legal fiction, and even less any reference, direct or indirect, to the "business character" of expenses with vehicles; above all, the Respondent emphasizes, such a presumption would determine a probative redundancy on the part of the taxpayer: he would have to prove the indispensability of the expenses for purposes of the application of article 23 of the CIRC, and again the "business character" of the same expenses for the purpose of the regime of article 88 of the CIRC – while one of these characteristics (the "business character") is evidently presupposed in the other (indispensability).

i) The Respondent concludes its response by maintaining that witness evidence is useless, given the existing documentary evidence, and given the principle of article 393, paragraph 2 of the Civil Code which excludes witness evidence in circumstances in which complete proof is assured by documents, requesting, consequently, that such means of evidence be dispensed with.

j) In Counter-Arguments, the Respondent summarizes the arguments already expounded in its Response.

III.C. Questions to be Decided

I. Not having raised any matter of exception, the Court can consider the substantial question that is the object of the present dispute: that of autonomous taxation of expenses borne by the Claimant with light passenger vehicles.

II. It is essentially a matter of opting for one of two lines of interpretation of the applicable legal regime:

a) That which understands that the letter of the law, and the legislative intent itself, forbid any exclusion of autonomous taxation regarding expenses with vehicles of that type that is not provided for literally in article 88 of the CIRC, and namely any exclusion based on the exclusively business allocation of such vehicles;

b) That which understands that the exclusively business allocation of the vehicles, once proven, averts autonomous taxation, because the latter is intended only to apply:

i. Either to situations of "mixed" use of the vehicles;

ii. Either to situations in which, in the absence of proof of such exclusively business allocation, it may be presumed (and should be presumed, to prevent and dissuade abuses) that, given the nature of the referred vehicles, they are susceptible to "mixed" use, that is, both business and private.

III. Let us begin by focusing on the relevant numbers of article 88 of the CIRC, as written in 2013:

"3 – Expenses incurred or borne by taxpayers not subject-matter exempt and who exercise, as their main activity, commercial, industrial or agricultural activity, relating to light passenger vehicles or mixed-use vehicles whose acquisition cost is equal to or less than the amount fixed pursuant to paragraph e) of number 1 of article 34, motorcycles or mopeds, excluding vehicles powered exclusively by electric energy, shall be subject to autonomous taxation at the rate of 10%.

5 – Expenses relating to light passenger vehicles, motorcycles and mopeds are considered to include, namely, depreciations, rents or leases, insurance, maintenance and upkeep, fuel and taxes levied on their possession or use.

6 – Excluded from the provision in number 3 are expenses relating to light passenger vehicles, motorcycles and mopeds, allocated to the operation of a public passenger transport service, intended to be rented in the exercise of the normal activity of the taxpayer, as well as depreciations relating to vehicles for which the agreement provided for in number 9) of paragraph b) of number 3 of article 2 of the Personal Income Tax Code has been entered into."

This wording was amended in 2015, being worth transcribing to note the differences introduced:

"3 - Expenses incurred or borne by taxpayers not benefiting from subject-matter exemptions and who exercise, as their main activity, commercial, industrial or agricultural activity, relating to light passenger vehicles, light goods vehicles referred to in paragraph b) of number 1 of article 7 of the Vehicle Tax Code, motorcycles or mopeds, excluding vehicles powered exclusively by electric energy, shall be subject to autonomous taxation at the following rates:

a) 10% in the case of vehicles with an acquisition cost of less than €25,000;

b) 27.5% in the case of vehicles with an acquisition cost of €25,000 or more, and less than €35,000;

c) 35% in the case of vehicles with an acquisition cost of €35,000 or more.

5 - Expenses relating to light passenger vehicles, motorcycles and mopeds are considered to include, namely, depreciations, rents or leases, insurance, maintenance and upkeep, fuel and taxes levied on their possession or use.

6 - Excluded from the provision in number 3 are expenses relating to:

a) Light passenger vehicles, motorcycles and mopeds, allocated to the operation of a public passenger transport service, intended to be rented in the exercise of the normal activity of the taxpayer; and

b) Motor vehicles for which the agreement provided for in number 9) of paragraph b) of number 3 of article 2 of the Personal Income Tax Code has been entered into."

It is worthwhile to clarify what is referred to by this provision at the end of number 6, now extended to cover all expenses (and not only depreciations, as occurred in 2013). Article 2, paragraph 3, b), 9) of the Personal Income Tax Code, as written since 2002, establishes:

"3 - The following are also considered income from dependent work [Category A]: b) Accessory remuneration, understood to mean all rights, benefits or perquisites not included in main remuneration that are received due to the provision of work or in connection with it and constitute for the respective beneficiary an economic advantage, namely: 9) Those resulting from the personal use by the employee or member of corporate body of a motor vehicle that generates expenses for the employing entity, when there exists a written agreement between the employee or member of the corporate body and the employing entity regarding the allocation of such motor vehicle to him."

This is the matter, in this Personal Income Tax Code rule, of the taxation of what is designated "fringe benefits" or "employee benefits".

IV. There has been extensive consideration regarding the nature and scope of autonomous taxation, polarized around the two lines of interpretation already mentioned. From the analysis of the transcribed provisions we can draw some conclusions:

1. The private use of vehicles owned by a company is not a typical object of autonomous taxation under article 88, as such use is considered income from dependent work, taxed under Personal Income Tax, if it results from an agreement that – it is understood – assigns a vehicle permanently, or even exclusively, to an employee of the company.

2. Under the regime in force in 2013, that situation was somewhat complex and undefined, since the main subjection to Personal Income Tax of the "accessory remuneration", in which the use of those vehicles consisted, still apparently left subject to article 88 of the CIRC all expenses with them that were not those corresponding to their respective depreciation (article 88, paragraph 6, "a contrario", as written in 2013).

3. But those doubts would be dissipated with the complete separation achieved with the wording introduced in 2015, which expressly excludes from autonomous taxation the very "motor vehicles" – being understood, therefore, all expenses connected with such vehicles –: article 88, paragraph 6, b) of the CIRC.

4. This means, therefore, that, as regards the typical "fringe benefits" consisting of permanent use, by private individuals, of company vehicles, the congruence of the regime is now assured, dissipating pointless past ambiguities:

a. Private use, when permanent – and documented – should be taxed in accordance with article 2, paragraph 3, b), 9) of the Personal Income Tax Code, excluding in those cases autonomous taxation;

b. There will remain subject to autonomous taxation situations of non-permanent private use, or undocumented – that is, those situations in which private use, being possible (which means not being excluded by the nature of the vehicles or the circumstances of their business use), nevertheless was not the object of a permanent or documented non-business allocation.

1. Article 88 of the CIRC will thus serve to cut the "Gordian knot" of those undefined or undocumented situations, in which private use may occur so relevantly that it comes to constitute situations partially equivalent to "fringe benefits" of company employees, without there being able to be made sufficient proof, either of that situation, or of the opposite situation – of the situation in which such private use is excluded by the circumstances of use of the vehicles, or by the characteristics of those vehicles.

2. And, under the 2013 wording, article 88 also excluded from autonomous taxation certain vehicles which, by their characteristics (specifically by having an acquisition cost higher than an amount fixed by Ordinance, pursuant to paragraph e) of number 1 of article 34), no longer corresponded to the standard that abstractly the law took as adequate to admit that such vehicles had exclusively business use:

a. More concretely, by imposing a maximum value limit, the law, already as written in force in 2013, made clear that it would only admit such use, in generic terms, in so-called "low-range" vehicles;

b. Two categories were expressly excluded from this sorting by "ranges", for different reasons: 1) those of vehicles powered exclusively by electric energy – for extra-fiscal environmental policy reasons –; 2) those of light passenger vehicles allocated to the operation of a public passenger transport service and intended to be rented in the exercise of the normal activity of the taxpayer – because precisely there is illustrated the "ratio" of the rule, that of excluding from autonomous taxation those expenses relating to vehicles which, by their characteristics or the circumstances of their use, do not give rise to the "Gordian knot" of undefined situation that should be resolved by the "ad hoc" sword of this autonomous form of taxation –.

1. As we said, it was implicit, under the 2013 wording, that "mid-range" and "high-range" vehicles (understood as those with acquisition cost higher than an amount fixed by Ordinance, pursuant to paragraph e) of number 1 of article 34) no longer corresponded to the standard that abstractly the law had taken as adequate to admit that such vehicles had exclusively business use, and therefore such autonomous taxation did not apply: it was understood, at that moment, that the logic of the applicable regime would remit the expenses with such vehicles to the domains of taxation of "fringe benefits", that is to Personal Income Tax of the individuals to whom such vehicles were distributed.

2. In a bizarre evolution, not free from serious consequences for the legality and constitutionality of autonomous taxation, from 2015 onwards the regime of article 88 of the CIRC came to encompass "mid-range" vehicles (with acquisition cost equal to or greater than €25,000, and less than €35,000) and "high-range" vehicles (with acquisition cost equal to or greater than €35,000), in addition to "low-range" vehicles (with acquisition cost less than €25,000), which, among others, has two worrying consequences:

a. It destroys the "legislative intent" of the regime which, let us recall, was to resolve with a safe criterion the situations of persistent undefined use (private or business) of vehicles, circumventing the difficulties of proof and dissuading the related possibilities of abuse;

b. It transforms autonomous taxation into a true and proper tax on expenses, in that it attends solely to the acquisition value of the vehicles to, based on that value, establish tax brackets. But, in that transformation, it loses its systematic, legal and constitutional support. Indeed, one will ask:

i. What does a pure tax on expenses grafted onto the regime of a tax on income do?

ii. How can a tax on expenses survive the specificities resulting from its articulation with taxes on income – namely, how can it resist the fact that many expenses are exempt from autonomous taxation for those who opt for simplified taxation (articles 73, paragraph 2 of the Personal Income Tax Code and 88, paragraph 15 of the CIRC)?

iii. How can it become autonomous as a tax on expenses in the strict sense, if it is the Law itself that forbids it (articles 12, 23-A, paragraph 1, a) and 88, paragraph 21 of the CIRC)?

iv. How to avoid the conclusion that such a tax on expenses suffers from unconstitutionality for violating article 165, paragraph 1, i) of the Constitution, given that there has not been a law authorizing the creation of a new tax on expenses, but only, pursuant to article 25, paragraph 3 of Law no. 101/89, of 29 December, an authorization to the Government to "autonomously tax in Personal Income Tax and Corporate Income Tax" – which is, by all that we have seen, something quite distinct?

1. But let us return to the text of article 88 of the CIRC, as written in 2013 – before, therefore, that serious "legislative drift" of perversion and illegalization/unconstitutionalization of autonomous taxation.

V. Having excluded the idea that there was, in 2013, insinuated in article 88 of the CIRC any type of taxation of expenses in the strict sense relating to light passenger vehicles by the Claimant, it seems to us that the path, today dominant in doctrine and jurisprudence, particularly in arbitral jurisprudence[1], imposes itself, which is that the line of interpretation of the applicable normative framework is the one that concludes that it is a matter of taxing situations of potential "mixed" use of company vehicles, particularly situations in which the lack of adequate proof may encompass the actual "mixed" use of such vehicles, or even their exclusively private use, as undocumented pure "fringe benefit".

Which is equivalent to saying that proof that there was exclusively business use, that is, use that was neither "mixed" nor "exclusively private", particularly proof that the vehicles were not, by their nature nor by the circumstances of their actual use, susceptible to such "mixed" or "exclusively private" use, will suffice to avert autonomous taxation of expenses relating to that type of use.

That proof should be subordinated to the tax objective of taxes on income, in whose Codes the regime of autonomous taxation is completely integrated (there being no doubt today that such taxation is not a distinct tax from IRC, but merely an addition to it); that is, the "exclusively business use", the existence of which is to be determined, will have to consist in the unequivocal allocation of the vehicles, by their characteristics or by their actual use, to the activities that constitute the object of the taxpayer, to the activities that generate its taxable income.

"Exclusive" does not mean, in this context, a use that prevents any and all private employment of the vehicle, in absolute and mechanical terms, which would lead to a microscopic perusal, second by second, meter by meter, of the routines of use – a monitoring that, if it were not impossible, would certainly be harmful both to fundamental rights and to that margin of economic freedom that Tax Law is generally obliged to respect when it bears on business realities. "Exclusive" will be rather, and reasonably, the use that prevents that any and all private use, if and when it occurs, interferes with the allocation of the vehicles to the prominent economic interest of the company; and the Law cannot establish criteria of "exclusive allocation" that exceed those that the taxpayer itself, as a company, establishes and can claim in its own interest – because, if we reasonably admit that the typical business objective is that of profit maximization, no "tax gain" will justify the negligence in the application of the criteria of exclusively business use of the vehicles, when those criteria exist: it is not purely and simply logical, or reasonable, to incur extensive losses of efficiency simply to recover, in tax terms, a small percentage of those losses.

Indeed, however relevant the "exclusively business" use may be for the purpose of the incidence of autonomous taxation, it is nothing compared to the interest of the company itself in that use – and, let us not forget, it is within the broader context of the obtainment of business income that all this matter is framed.

That is an additional reason to abandon the micrometric scrutiny of vehicle fleet management, which, contrary to appearances, would be far from being the most rigorous and demanding form of proof of the business character of vehicle use – being, on the contrary, more rigorous if it corresponds to the normal forms of monitoring of business routine by the principal interested party in the knowledge of the activity of its agents, which is the company itself.

Everything is a matter of determining, therefore, whether there were criteria for assessment, by the company itself, of such "exclusively business" use of the vehicles – and, in case such criteria existed, whether the observance of them is proven in terms that can instill, in the adjudicator, the conviction that those criteria were genuine, and that there existed a prominent, and unequivocal, interest of the company, in the adherence to the conduct of its agents to that "exclusively business" use.

An observance that, in the case, will translate into evidence that some characteristics of the vehicles hindered "non-exclusively business" use (their external identification with business logos, for example), or that a multidimensional system for monitoring the regular and adequate use of vehicles was in place (for example, centralized fleet management, movement records, expense billing, coordinated displacements of groups of vehicles demanding temporal synchronization, usage schedules indicative of short and frequent displacements in daily routine, that is, of "intensive" employment of those factors of production).

If, by chance, those criteria do not exist – or, existing, there is no reasonable proof of their observance in terms of the functioning that tends to optimize and maximize the company –, then there will be nothing left but to admit, despite the company ownership of those assets, the possibility of "mixed" use, both private and business, in competition with one another in the use of each vehicle, given the aptitudes for such use that flow from its nature as a "low-range" light passenger vehicle.

And it is in that case, and only in that case, that the cutting of the "Gordian knot" of undefined situation (with its potential for abuse) through the employment of the "ad hoc" sword of autonomous taxation will be justified.

Thus, strictly speaking – and contrary to what much of doctrine and jurisprudence regarding autonomous taxation of article 88 of the CIRC has maintained – the legislator did not need to resort to any presumption, which was not necessary; but only to establish, in the provision of the rule, the restriction of the incidence of autonomous taxation to situations that are neither "exclusively private" use, nor "exclusively business" use, of light passenger vehicles acquired by the company – with the primary purpose of preventing undefined situations, or difficult proofs, from being able to obscure, in an abusive manner, private uses, particularly true undocumented "fringe benefits", from which resulted an inflating of costs to the detriment of an adequate and fair determination of taxable income.

The presumption was not necessary, therefore. We agree, on this point, with the dissenting vote formulated in the award rendered in Proceeding no. 628/2014, when therein it is stated: "It is rather a rule that, having underlying it a presumptive judgment of the difficulty of rigorous control of certain cases, opts for typifying situations of application of autonomous taxation, translated, in practice, in the reduction of the amount of deductible costs in the determination of taxable matter."

Autonomous taxation will thus apply supplementarily, in the absence of proof, whether of "exclusively private" use, or of "exclusively business" use – although it cannot be excluded that the taxpayer itself takes the initiative to prove a "mixed" or "non-exclusive" use, directly invoking the application of autonomous taxation. But the possibility of proof that averts the supplementary regime is essential so that a taxation which, it is insisted, is not – nor could it be without injury to the system, without illegality or unconstitutionality – a taxation on expenses, can be reconciled with the principles of tax equality and taxpaying capacity.

On the other hand, because it is of that indefinition of actual use that the foundation of the recourse to autonomous taxation is a matter, one cannot, nor should confuse the corresponding proof of "exclusive business character" with another proof, that of "essentiality" of expenses and losses which is demanded by article 23 of the CIRC, and which concerns, in another broader dimension, the determination of the taxable profit of the taxpayer[2].

VI. From all that precedes, and from the confrontation with the matters of fact that we have given as proved, the conclusion follows that the Claimant made sufficient proof that the expenses with light passenger vehicles that are in question in the present file should not have been subject to autonomous taxation, because such vehicles were, within the most strictly reasonably exigible criteria, the object of exclusively business use.

Let us insist that the concept of "exclusively business" does not demand, and certainly does not legitimate, a microscopic perusal of the use of the vehicles – and let us also insist that it is not reasonable for us to base ourselves on a definition of "business character" that deprives the users of the factors of production of a company of the slightest margin of autonomy in the performance of their tasks.

What was abundantly proved, and what is relevant here, is that, with regard to the group of vehicles that the Claimant chose as suitable to illustrate that "exclusively business" use, they were subject to various conditions that made private use that conflicted with business use impracticable: whether by their identification, or by their characteristics, or by their joint use in coordinated activities, or even by their relative scarcity in the face of operational demands, or even by a combination, in different proportions, of various of these conditions. The gaps detected in one form of monitoring (the recording of mileage on entries and exits from the garage) represent an insufficient proof more than offset by the overlapping of structural and circumstantial elements reported to the same vehicles and not contradicted by those gaps.

It was proved, in the case, that these were genuine "service vehicles", indispensable for the efficient functioning of the companies – and that, therefore, by direct implication, any use that was not "exclusively business" would significantly interfere with that efficiency, with the optimization of the functioning of the companies, with the maximization of their income and their profit.

From this follows, in the most elementary logic, that private use of vehicles destined for exclusively business use, in the measure that it would compete with such use, interfere with it, limit it, would result in losses for the companies themselves that would always far exceed any value that, with such employment, one would seek to recover in terms of "tax planning".

It is insisted that the tax advantage of non-incidence of autonomous taxation, however attractive it might seem, would always, by definition, be very much less than the direct self-mutilation as to the receipts of the company that would correspond to that negligence in the monitoring, by the company itself, of the use of its vehicles.

Which leads us, again, to the concept of "exclusive use" and to the corresponding "standard" of proof: not the rigid and mechanical use that refuses trust any role in the development of contractual relations; not the microscopic proof that not even the interested party itself is capable of promoting efficiently.

Nothing, in what was proved, demonstrates that, in the perspective of the Claimant itself, the system effectively established for the monitoring of "exclusively business" use of the vehicles in question brought harm to its functioning – not excluding that this may have happened with other vehicles that are not these, from among those that the Claimant chose to leave out of its Administrative Appeal, and now from the present file.

It does not appear fitting that, on the other hand, one could require of a company a type of monitoring that exceeds normal business criteria, and even less that one would require of it a "standard" of proof that, being so onerous, would convert such proof into impossible or "diabolical".

It is concluded that the Claimant made the possible proof, and therefore the exigible proof given the normative scope itself "anti-abuse", as to the "exclusively business" use of the vehicles in question; and that, such proof being made, therefrom follows, in accordance with the dominant line of interpretation (and, we believe, the only one compatible with legality and non-unconstitutionality of autonomous taxation), the non-subjection of the corresponding expenses to the regime of autonomous taxation provided, at the time of the facts, in article 88 of the CIRC.

VII. Beyond the declaration of illegality of the assessment, the Claimant further petitions that it be recognized as having the right to indemnity interest, a matter that falls within the scope of the competencies of this Court, as expressly provided in number 5 of article 24 of the LRATM.

This is an effect that flows from the success of the petition, in that the annulment of the assessment acts renders the previous payment, by the Claimant, of the entire amount assessed in those acts as undue.

IV. Decision

In light of all the foregoing, it is decided by majority:

a) To grant the petition for arbitral ruling, declaring illegal the Corporate Income Tax assessment acts no. 2016… and no. 2016…, as well as the corresponding account statement no. 2016…, relating to fiscal year 2013, annulling such assessment acts.

b) To grant the petition for annulment of the partial rejection decision on the Administrative Appeal no. …2016…, filed against such tax acts, regarding autonomous taxation on expenses with light passenger vehicles, condemning the Respondent to the reimbursement of the corresponding amount of €87,182.00.

c) To grant the petition for payment of indemnity interest, condemning the Respondent to the payment of the corresponding amount.

V. Value of the Proceeding

The value of the proceeding is set at €87,182.00, in accordance with the provision of article 97-A of the Code of Administrative Tax Procedure, applicable ex vi article 29, paragraph 1, paragraph a), of the LRATM and article 3, paragraph 2, of the Regulation of Costs in Tax Arbitration Proceedings (RCPAT).

VI. Costs

Costs shall be borne by the Tax and Customs Authority, given that the present petition was granted, in the amount of €2,754.00, in accordance with Table I of the RCPAT, and in compliance with the provisions of articles 12, paragraph 2, and 22, paragraph 4, both of the LRATM.

Lisbon, 14 September 2017

The Arbitrators

José Baeta de Queiroz

Fernando Araújo

Sofia Cardoso

(dissenting as per dissenting opinion)

Dissenting Opinion

I vote contrary to the other Illustrious Colleague Arbitrators, disagreeing with the direction of the line of interpretation of the applicable legal regime in the question considered, on the following grounds:

Autonomous taxation was introduced into Portuguese tax legislation, in the codes of taxes on income, by Law 30-G/2000, of 29 December.

According to the legislator, the creation of the figure of "autonomous taxation" and its maintenance in the Portuguese tax system was aimed at preventing abuses in certain types of expenses by companies and taxpayers, having as its main function/objective the obtainment of greater tax justice.

Autonomous taxation (AT) has been, in recent years, one of the most discussed topics by the fact that there are frequently amendments to this matter, but also by the fact that it taxes expenses and not the income of entities.

The rates of autonomous taxation are found provided in article 88 of the CIRC. This taxation applies to certain expenses borne by Corporate Income Tax taxpayers, which by their nature may present a more ambiguous connection in the realization of revenues subject to taxation or in the maintenance of the income-generating source. Increasingly it is sought, through autonomous taxation, to dissuade some excesses in the recurrence of this type of expenses. Contrary to what occurs with the philosophy inherent in the other provisions of this Code, it does not tax income but rather expenses or costs. In the above-mentioned article 88 of the CIRC autonomous taxation is provided, namely of expenses with light passenger vehicles or mixed-use vehicles.

According to number 3 of the mentioned article, this taxation applies to taxpayers not subject-matter exempt and who exercise, as their main activity, commercial, industrial or agricultural activity; and encompasses expenses incurred or borne, that is, costs recorded in the accounts and not only those that are tax-deductible.

With respect to autonomous taxation incidental to expenses relating to light passenger vehicles, the sole exception provided in the law concerns those relating to vehicles allocated to the operation of public passenger transport service, intended to be rented in the exercise of normal activity of the taxpayer, as well as depreciations relating to vehicles for which the agreement provided in number 9 of paragraph b) of number 3 of article 2 of the Personal Income Tax Code has been entered into.

This exception is found provided in number 6 of article 88 of the Corporate Income Tax Code. In this way, the legislator unequivocally identifies the exceptions that constitute strictly professional uses, as they are vehicles unquestionably used in the development of an activity.

Thus and in this way it does not seem reasonable to me, nor does it appear to me to be legitimizable, from a strictly fiscal point of view, that number 3 of article 88, not be applied to other situations that are not objectively excepted, whose circumstances of use do not rule out taxation, even if, allegedly, the vehicles are allocated to exclusively business use.

However and on the other hand, even if it is understood the possibility of rebutting the presumption contained in number 3 of article 88 of the CIRC, through proof of the business character of the expenses, which the Claimant alleges, I understand and contrary to the respective Illustrious Colleague Arbitrators, that the evidence presented does not prove to be adequate to demonstrate that the vehicles contribute exclusively to the maintenance of business activity, particularly because control tables of vehicle entries and exits are presented that are not adequately filled out, and also because, in the vehicle usage agreement itself, it is stated that: "the vehicle provided is intended exclusively to be used in the service of the company, and may, with authorization, be used for private purposes".

The proof of business character constitutes an expedient, not objectively verifiable, by itself to prove, as well as to control with rigor, and for that very reason, the spirit of the legislator will have been that of uniformization and balance in the drafting of numbers 3 and 6 of article 88 of the CIRC, being that, in the present case the documents presented do not evidence adequate reliability.

By way of conclusion, the subject of autonomous taxation, regardless of whether it can be considered unjust, or controversial, or even legislative abuse, is, however, a universal taxation, extensive to all taxpayers, with exceptions objectively provided in the applicable legislation, which imposes compliance whether the vehicles are a principal element to exercise the activity, or whether or not the business character of the expenses is verified. The fact is that such will be the normal situation of any Corporate Income Tax taxpayer who has vehicles of the type referred to, to which is added the fact that the sectors that can be "exempt" from this tax obligation are clearly identified.

For all the foregoing, I voted against the decision of the other arbitrators in the present proceeding.

(Sofia Cardoso)

[1] See the decisions of Proceedings nos. 187/2013-T, 209/2013-T, 246/2013-T, 260/2013-T, 292-2013-T, 37/2014-T, 94/2014-T, 242/2014-T or 497/2016-T.

[2] The conceptual and plane distinction is exemplarily established in the decision of proceeding no. 497/2016-T.