CAAD 652/2018-T: Autonomous Taxation Deductions for SIFIDE and CFEI Credits in IRC

ARBITRAL DECISION

The Arbitrators, Counselor Maria Fernanda dos Santos Maçãs (in the capacity of arbitrator-president), Dr. Rui Ferreira Rodrigues (in the capacity of arbitrator member) and Dr. Alexandre Andrade (in the capacity of arbitrator member), were designated by the Deontological Council of the Administrative Arbitration Centre (hereinafter referred to simply as CAAD) to form the Collective Arbitral Tribunal, which was constituted on 28 February 2019, hereby agree as follows:

I. Report

1. A..., S.A. (hereinafter referred to simply as Claimant), Tax Identification Number..., Collective Person No...., with registered office at..., ..., ..., ...-... Sintra, with share capital of € 86,962,868.00, filed on 21 December 2018 a request for constitution of an Arbitral Tribunal, pursuant to Decree-Law No. 10/2011 of 20 January (Legal Regime for Arbitration in Tax Matters, hereinafter referred to simply as RJAT), in which the AUTHORITY FOR TAXATION AND CUSTOMS (hereinafter referred to simply as Respondent) is the Respondent.

The Claimant hereby seeks that both the illegality of the rejection of the administrative complaint be declared and the partial illegality of the self-assessment acts identified above be declared – and that they be consequently annulled – pursuant to Article 2, Section 1, paragraph a), of Decree-Law No. 10/2011, more specifically with regard to the failure to deduct from the corporate income tax (IRC) collection produced by the autonomous taxation rates of SIFIDE and CFEI, which resulted in an amount of tax improperly assessed in the 2015 financial year in the amount of € 395,088.23, or, alternatively, to the extent that it reflects improper autonomous taxation in the same amount of € 395,088.23.

1. The request for constitution of the arbitral tribunal was accepted by the President of CAAD on 21 December 2018 and automatically notified to the Respondent.

The Claimant did not proceed to appoint an arbitrator, so, pursuant to Article 6, Section 2, paragraph a) of the RJAT (Decree-Law No. 10/2011, of 20 January), the President of the Deontological Council of CAAD designated the signatories as arbitrators of the Collective Arbitral Tribunal, all of whom communicated acceptance of the appointment within the applicable period.

On 8 February 2019, both Parties were duly notified of this designation, having manifested no intention to refuse the designation of the arbitrators, pursuant to the combined provisions of paragraphs a) and b) of Section 1 of Article 11 of the RJAT and Articles 6 and 7 of the CAAD Deontological Code.

In accordance with the provisions of paragraph c) of Section 1 of Article 11 of the RJAT, the Collective Arbitral Tribunal was constituted on 28 February 2019.

1. In support of the request, the Claimant sustains its claims, in essence, on the following grounds: i. extensive arbitral jurisprudence qualifies autonomous taxation as IRC, therefore it requests the offset of these IRC credits petitioned against the IRC collection produced by autonomous taxation rates, because, in its understanding, there is nothing in the law that rules out such offset; ii. if the IRC collection referred to in paragraph a) of Section 1 of Article 45 of the IRC Code comprises, without need for any additional specification, the collection of autonomous taxation, it must be understood that Sections 1 and 2 of Article 90 of the same Code also encompass the collection of autonomous taxation; iii. the AT has already established a favourable understanding of the possibility of the deductions provided for in Section 2 of Article 90 of the CIRC, with the exception of that relating to international double taxation, being made against the collection of autonomous taxation rates; iv. the AT's computer system prevents the Claimant from registering the value relating to autonomous taxation rates in IRC, not allowing the offset, for purposes of calculating the IRC owed by it, of the amount of autonomous taxation assessed for SIFIDE, RFAI and CFEI.

The Claimant further argues that, on 30 May 2016, it submitted the IRC Form 22 income statement of its Fiscal Group for the 2015 financial year, and also submitted a replacement statement, having proceeded to self-assess autonomous taxation in IRC for that same year 2015 in the final amount of € 395,088.23. It happens, however, that the claimant had available tax credits for use in that 2015 financial year and which, due to alleged insufficiency of collection, were not deducted. Specifically, credits were not deducted for the Tax Incentive System for Research & Development Enterprises ("SIFIDE") in the total amount of € 939,677.07, divided between credits determined and not deducted with reference to the 2013 tax period (€ 607,308.52), credits determined and not deducted with reference to the 2014 tax period (€ 210,594.06) and credits determined and not deducted with reference to the 2015 tax period (€ 121,774.49). Additionally, credits remain available for use in the 2015 fiscal year under the Extraordinary Tax Credit for Investment ("CFEI") generated in 2013 in the amount of € 414,661.12. Which, according to the claimant's understanding, could have been deducted against the collection of autonomous taxation in IRC assessed in that same year in the final amount of € 395,088.23. For this reason the claimant opted to file an administrative complaint against the self-assessment act of IRC of its Fiscal Group for the 2015 financial year. Following the filing of said administrative complaint, the claimant was legally notified of its rejection on 26 September 2018, by order of the Deputy Director of Finance, acting under delegation of powers, dated 19 September 2018. Having exhausted, unsuccessfully, the administrative route, in an attempt to deduct those SIFIDE credits (€ 939,677.07) and CFEI (€ 414,661.12) the claimant hereby appeals to other instances.

The Claimant further invokes in its favour the Decision of the Constitutional Court No. 267/2017, of 31 May 2017, "which ruled unconstitutional, for violation of the prohibition of creation of taxes with retroactive nature established in Article 103, Section 3, of the CRP, the norm of Article 135 of Law No. 7-A/2016, of 30 March, to the extent that, by effect of the merely interpretative character attributed to it, it determines that the norm of Article 88, No. 21, 2nd part, of the IRC Code – number added by Article 133 of said Law – according to which, to the overall amount resulting from autonomous taxation assessed in a given year under IRC, cannot be deducted the amounts paid as special payment on account in that same year, applies to fiscal years prior to 2016".

For the Claimant "it constitutes a material unconstitutionality of the aforementioned Article 135 of the 2016 State Budget Law, for violation of the prohibition of retroactivity in tax matters provided for in Article 103, Section 3, of the Constitution, whether one has concluded, or not (and it is understood that not), that one is dealing with a materially interpretative law.

"There is also violated the principle of separation between legislative and judicial powers and the principle of independence of the judicial power, reinforced as they are whenever one is dealing with matters subject to the constitutional prohibition of retroactivity of new laws, violation, therefore, also, in conjunction with the prohibition of retroactivity, of Article 2 (democratic rule of law, and separation and interdependence of powers, the latter aspect being the perspective of interdependence – and consequently denial of excesses and occupation of space that does not belong to it – of the political-legislative power vis-à-vis the judicial power), of Article 111, Section 1 (separation and interdependence of organs of sovereignty, which is still a material limit of revision – Article 288, paragraph j), of the Constitution), and of Article 203 (independence of courts, another material limit of revision – Article 288, paragraph m), of the Constitution), all of the Constitution."

The Claimant concludes by requesting:

a) that the illegality be declared and the rejection of the administrative complaint be annulled, to the extent that it refused the annulment, in the terms discussed here, of the IRC self-assessment in the parts produced by autonomous taxation rates for the 2015 financial year, thereby violating the principle of legality;

b) that the illegality of this self-assessment be declared (and be consequently annulled), in the part corresponding to the amount of € 395,088.23;

c) that, consequently, the right to reimbursement of this amount be recognized and, as well, the right to compensatory interest for payment of improperly assessed and paid tax, counted on € 395,088.23, until full reimbursement, from 1 September 2016 with respect to the amount of € 394,717.20 and from 1 February 2017 with respect to the remaining € 371.03;

d) alternatively, if it is understood that Article 90 of the CIRC does not apply to autonomous taxation, then the illegality of the assessments of autonomous taxation should be declared (and be consequently annulled) due to absence of legal basis for their implementation (cfr. Article 8, Section 2, paragraph a), of the LGT, and Article 103, Section 3, of the Constitution), which is also reflected in the reimbursement of the amount of € 395,088.23 and in the payment of compensatory interest counted from 1 September 2016 as to € 394,717.20 and from 1 February 2017 with respect to the remaining € 371.03.

1. On 2 April 2019, the Respondent filed a response in which it argued: the present request for arbitral ruling should be dismissed as not proven, and consequently the Respondent absolved of all claims, all with the due and legal consequences.

In its favour, the Respondent invokes jurisprudence of the Administrative Arbitration Centre, refuting the unconstitutionalities raised by the Claimant.

On the other hand, it argues, among other things, that "even though Article 10 of the EBF admits extensive interpretation and prohibits analogy in the interpretation of rules on tax benefits, it does not prohibit recourse to restrictive interpretation and, therefore, in objectively justified situations the use thereof is not ruled out".

"And, precisely in this case, restrictive interpretation would even find support and full justification in the preservation of the objectives and philosophy underlying tax benefits for investment in general and SIFIDE in particular, given the perverse effects that can be achieved with the possibility of deducting the tax credit against the collection of autonomous taxation in IRC.

"Being that restrictive interpretation is permitted whenever there are weighty reasons to conclude that the meaning and scope that would result from considering that the deductions referred to in Section 2 of Article 90, which includes SIFIDE, could be made to the sum of the collections of autonomous taxation, assessed in accordance with paragraph a) of Section 1 of the same article, would betray the ratio legis or that it is necessary to reconcile the conflicting interests that two norms intend to protect.

1. On 3 April 2019, the Arbitral Tribunal issued the following Arbitral Order: "1. In the absence of new evidence being produced and no exception being raised, the Tribunal dispenses with holding the meeting provided for in Article 18 of the RJAT, which it does under the principles of tribunal autonomy in conducting the process, and in order to promote speed, simplification and informality thereof. Cf. Articles 19, Section 2 and 29, Section 2 of the RJAT. 2. Both parties are notified to submit written submissions within fifteen days of notification of this order, with the Respondent being granted the option to, if it so wishes, attach its submissions with successive character to those submitted by the taxpayer. 3. 28 August 2019 is designated as the deadline for issuing the arbitral decision. (…)"

Only the Claimant submitted submissions, reiterating in essence the arguments raised in the Arbitral Request.

II. Sanitation

1. The Arbitral Tribunal was regularly constituted and is materially competent to hear and decide the request, in light of the provisions of paragraph a) of Section 1 of Article 2 and Section 1 of Article 10 of the RJAT.

The Parties are duly represented, enjoy legal personality and capacity and have standing (Article 4 and Section 2 of Article 10 of the RJAT and Article 1 of Ordinance No. 112-A/2011, of 22 March).

The process is not affected by any nullities, the request was timely filed and no exceptions were raised.

There are no other circumstances that prevent the tribunal from examining the merits of the case.

III. On the Merits

III.1. Matter of Fact

§1. Established Facts

With relevance to the assessment and decision of the questions raised, having analysed the documentary evidence produced in this Process, the Collective Arbitral Tribunal considers proven, with relevance to this Arbitral Decision, taking as established the following facts:

a) The Claimant is a Portuguese commercial corporation, with head office and effective management in national territory, having started the activity of "computer consultancy" (CAE 62020) on 11-12-1995, being the dominant company of the scope of the "Fiscal Group B..." company group, taxed according to the Special Regime for Taxation of Company Groups (RETGS), provided for in Articles 69 et seq. of the Code for Corporate Income Tax (CIRC) (cfr. document No. 6 attached to the request for arbitral ruling and as appears in the administrative file remitted to the case records pursuant to Section 2 of Article 17 of the RJAT which are taken to be fully reproduced);

b) With reference to the 2015 tax period, the scope of the Group consisted of the following companies (cfr. periodic income statements Form 22 attached to the request for arbitral ruling and taken to be fully reproduced):

Dominant company: NIPC

A..., SA ...

Dominated companies:

C... ...

D..., SA ...

E..., SA ...

F..., SA ...

G..., Ltd ...

H..., SA ...

c) Following the application by the dominated company "H..., SA" to the Tax Incentive System for Research and Business Development II (SIFIDE II), approved by Article 133 of Law No. 55-A/2010, of 31 December, the Certifying Commission for Tax Incentives granted the following tax credits: € 298,326.92 (relating to the 2013 financial year); € 131,700.96 (relating to the 2014 financial year); and € 121,774.49 (relating to the 2015 financial year), in the total amount of € 551,802.37 (cfr. document No. 3 attached to the request for arbitral ruling and fully reproduced);

d) Following the application by the dominated company "D..., S.A." to the Tax Incentive System for Research and Business Development II (SIFIDE II), approved by Article 133 of Law No. 55-A/2010, of 31 December, the Certifying Commission for Tax Incentives granted the following tax credits: € 308,981.60 (relating to the 2013 financial year) and € 78,893.10 (relating to the 2014 financial year), in the total amount of € 387,874.70 (cfr. document No. 3 attached to the request for arbitral ruling and fully reproduced);

e) To the aforementioned dominated companies were attributed tax credits under SIFIDE II, in the total amount of € 939,677.07, as follows itemized (cfr. document No. 3 attached to the request for arbitral ruling and fully reproduced):

Companies benefiting from SIFIDE II 2013 (€) 2014 (€) 2015 (€) TOTAL (€)

D…, SA 308,981.60 78,893.10 0 387,874.70

H…, SA 298,326.92 131,700.96 121,774.49 551,802.37

TOTAL (€) 607,308.52 210,594.06 121,774.49 939,677.07

f) In the 2015 financial year tax credits of SIFIDE II remain available for use in the amount of € 939,677.07 (cfr. document No. 3 attached to the request for arbitral ruling and fully reproduced);

g) In the 2013 financial year, the following tax credits were granted to the Claimant and to the dominated companies identified below as well as to companies "I..., SA" and "J..., SA", which in 2015 ceased to be part of the scope of application of the RETGS of which the Claimant is the dominant company, under the Extraordinary Tax Credit for Investment (CFEI), approved by Law No. 49/2013, of 16 July, in the amount of € 1,083,572.97, corresponding to 20% of the value of investment expenses incurred between 01-06-2013 and 31-12-2013 (cfr. document No. 4 attached to the request for arbitral ruling and fully reproduced):

Companies benefiting from CFEI Amount (€)

A…, SA 96,463.94

C..., Ltd 3,510.24

D..., SA 123,437.60

F..., SA 824,114.59

I…, SA 34,534.41

J…, SA 1,512.20

Total (€) 1,083,572.97

h) Following the execution of the decision issued in the context of arbitral process No. 216/2017-T, the amount of € 377,511.52 was deducted as CFEI in the 2013 financial year (cfr. document No. 4 attached to the request for arbitral ruling and fully reproduced);

i) In the year 2014, and in view of the criterion for deducting tax benefits reflected in the Doctrinal Note issued in the context of Process No. 2014..., the deduction of the amount of € 277,131.35 was requested, since the request is under examination in arbitral process No. 497/2018-T (cfr. document No. 4 attached to the request for arbitral ruling and fully reproduced);

j) In the 2015 financial year, tax credits of CFEI assessed in 2013 remain available for use in the amount of € 414,661.12, so determined (cfr. document No. 4 attached to the request for arbitral ruling and fully reproduced):

CFEI assessed in 2013, cfr. No. 7 above € 1,083,572.97

CFEI used in the 2013 financial year in execution of the decision issued in arbitral process No. 216/2017-T - € 377,511.52

CFEI to be used in the 2014 financial year, in the event of a favourable ruling in the arbitral process concerning process No. 497/2018-T - € 277,131.35

Estimate of CFEI that, in 2015, would be used by company "I..., SA" if, in that year, it had not ceased to be part of Fiscal Group B... - € 13,670.37

Estimate of CFEI that, in 2015, would be used by company "J..., SA" if, in that year, it had not ceased to be part of Fiscal Group B... - € 598.60

CFEI available for use in the 2015 financial year (1,083,572.97 € – 668,911.84 €) € 414,661.12

k) Fiscal Group B... has credits in the total amount of € 1,354,338.19, corresponding to:

Tax Benefit Financial Year Amount (€)

CFEI 2015 414,661.12

SIFIDE 2013 607,308.52

SIFIDE 2014 210,594.06

SIFIDE 2015 121,774.49

l) Pursuant to paragraph b) of Section 6 of Article 120 of the CIRC, the group companies submitted, electronically, the periodic income statement (Form 22), referred to in paragraph b) of Section 1 of Article 117 of the same code, for the 2015 financial year (cfr. document No. 9 attached to the request for arbitral ruling and fully reproduced).

m) On 30 May 2016, "A..., SA", as the dominant company, electronically submitted an IRC income statement Form 22 (statement No...) concerning the 2015 financial year, pursuant to paragraph a) of Section 6 of Article 120 of the CIRC, relating to the taxable profit of the group assessed pursuant to Section 1 of Article 70 of the same code, through the algebraic sum of taxable profits and tax losses assessed in the periodic statements of each of the companies belonging to the group (cfr. document No. 1 attached to the request for arbitral ruling and fully reproduced).

n) On 23 October 2016, the same company electronically submitted a replacement statement to the one previously submitted (statement No...) concerning the 2015 financial year, pursuant to Section 1 of Article 122 of the CIRC, relating to the taxable profit of the group assessed pursuant to Section 1 of Article 70 of the same code, through the algebraic sum of taxable profits and tax losses assessed in the periodic statements of each of the companies belonging to the group (cfr. document No. 2 attached to the request for arbitral ruling and fully reproduced).

o) In that statement the following amounts with relevance for the decision to be issued were entered:

Form 09, field 382 - Fiscal result of the group (REGS) - € 6,690,239.77 (Tax loss);

Form 10:

Field 355 - € 0.00 (Tax benefits);

Field 359 – € 16,661.20 (Withholdings at source):

Field 360 – € 432,986.00 (Payments on account – Article 105);

Field 374 – € 8,271.00 (Additional payments on account – Article 105-A);

Field 364 – € 4,764.44 (Municipal surtax);

Field 365 – € 395,088.23 (Autonomous taxation);

Annex D - Form 07:

Field 073 – SIFIDE-SYSTEM OF TAX INCENTIVES FOR RESEARCH AND BUSINESS DEVELOPMENT (Law No. 40/2005, of 3/8) AND SIFIDE II (Article 133 of Law No. 55-A/2010, of 31/12, Articles 33 and 40 of the repealed CFI and Articles 35 to 42 of the CFI approved by Decree-Law No. 162/2014, of 31/10)

Field 703 – € 932,571.90 (Undeducted balance from prior period);

Field 710 – € 210,594.06 (Period allocation);

Field 711 – € 0.00 (Period deduction);

Field 712 - € 1,143,165.96 (Balance carried forward to subsequent period(s))

Field 076 – EXTRAORDINARY TAX CREDIT FOR INVESTMENT (Law No. 49/2013, of 16/7)

Field 722 – € 1,047,526.37 (Undeducted balance from prior period);

Field 723 – € 0.00 (Period allocation);

Field 724 – € 0.00 (Period deduction);

Field 725 – € 1,047,526.37 (Balance carried forward to subsequent period(s)).

p) The assessment was effected by the declaring company in said statement (self-assessment), in accordance with paragraph a) of Article 89 and Section 6 of Article 90 of the CIRC, with tax recoverable determined in the amount of € 58,065.53, cfr. Form 10, field 368.

q) The autonomous taxation shown in the Form 22 statement (Form 10, field 365), in the amount of € 395,088.23, has the following origins (cfr. document No. 5 attached to the request for arbitral ruling and fully reproduced).

Nature Autonomous taxation (€)

Documented expenses 1,968.76

Motor vehicle expenses 106,178.32

Entertainment expenses 19,703.31

Allowances and travel compensation expenses 129,268.94

Indemnification expenses 137,968.91

TOTAL 395,088.23

r) Both the Claimant, as the dominant company of "Fiscal Group B...", and the dominated companies, at the time of the grant of tax credits under SIFIDE II, were not indebted to the State or social security for any taxes or contributions (cfr. document No. 10 attached to the request for arbitral ruling and fully reproduced);

s) The Claimant, on 30-05-2018, filed an administrative complaint addressed to the Director of Finance of Lisbon, whose process received the No...2018..., to annul the self-assessment of IRC, relating to the 2015 financial year, for not accepting the impossibility of deducting CFEI and SIFIDE against the IRC collection resulting from autonomous taxation (cfr. appears in the administrative file remitted to the case records pursuant to Section 2 of Article 17 of the RJAT);

t) The same being rejected, by order of the Deputy Director of Finance, dated 19-09-2018, in the exercise of powers delegated by the Director of Finance of Lisbon (cfr. document No. 6 attached to the request for arbitral ruling and fully reproduced);

u) Said order was notified to the Claimant through letter from the Directorate of Finance of Lisbon, dated 20-09-2018, stating that the counting of deadlines for filing an hierarchical appeal or judicial challenge begins on the business day following the day on which notification is completed, pursuant to Section 10 of Article 39 of the Code of Tax Procedure and Process, namely on the fifth day following the registration of availability of notification in the electronic mailbox of the recipient, which occurred on 21-09-2018 (cfr. document No. 6 attached to the request for arbitral ruling and fully reproduced);

v) On 20-12-2018 the Claimant filed a request for constitution of an arbitral tribunal, which gave rise to the present process.

§.2. Facts not established

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

§3. Justification of established and unestablished facts

With regard to factual matters, the Tribunal does not have the duty to rule on all the facts alleged, but rather has the duty to select those that are relevant to the decision, taking into account the cause (or causes) of action that grounds the claim filed by the plaintiff [(cfr. Articles 596, Section 1 and 607, Sections 2 to 4 of the CPC, applicable under Article 29, Section 1, paragraphs a) and e) of the RJAT)] and to state whether it considers it proven or not proven (cfr. Article 123, Section 2 of the CPPT).

According to the principle of free appraisal of evidence, the Tribunal bases its decision, in relation to the evidence produced, on its intimate conviction, formed from the examination and evaluation it makes of the means of evidence brought to the process and in accordance with its experience of life and knowledge of people (cfr. Article 607, Section 5 of the CPC). Only when the probative force of certain means is pre-established in law (e.g. full probative force of authentic documents, cfr. Article 371 of the Civil Code) does the principle of free appraisal of evidence not prevail in the assessment of the evidence produced.

Thus, taking into account the positions taken by the parties, in light of Article 110, Section 7, of the CPPT, and the documentary evidence attached to the case records, the facts enumerated above were considered proven, with relevance to this decision.

III.2. Matter of Law

III.2.1. Subject Matter of the Dispute

The question that constitutes the thema decidendum boils down to whether the Claimant should be recognized as having the right to deduct tax benefits, as SIFIDE and CFEI, against the collection produced by autonomous taxation.

Questions to be decided:

• The (il)legality of the assessed tax; and

• The request for payment of compensatory interest.

A) The (il)legality of the assessed tax

In analysing the question raised by the Claimant, it is necessary to begin by explaining the distinction between autonomous taxation and IRC. Then, to verify whether or not any deductions may be made in the calculation of autonomous taxation and how the respective assessment is effected. Finally, to verify whether the investment support schemes, which are made concrete in deductions from the collection, namely the CFEI and SIFIDE schemes, relate or not to the IRC collection strictly understood and for whose assessment autonomous taxation does not contribute.

Let us see.

Regarding the question to be decided as set out above, the Tribunal agrees with the position adopted by Arbitral Decision No. 111/2018-T, of 10 January 2019, a decision whose bench was chaired by the Arbitrator President also present here (and to whose tenor the decision we hereby refer).

As to the distinction in nature between autonomous taxation and IRC, this Tribunal reiterates the position uniformly adopted by the jurisprudence of the Constitutional Court and the Supreme Administrative Court and the Doctrine in the sense that autonomous taxation is a tax on expenditure different and distinct from IRC which is indisputably a tax on income.

In this regard, Arbitral Decision No. 111/2018-T states: "Autonomous taxation is a tax on expenditure different and distinct from IRC which, indisputably, is a tax on income. This without discussing whether autonomous taxation has or does not have nature – similarities – with IRC. The fact is that, regardless of possible similarities, there is no doubt that they are different taxes.

This jurisprudence was initiated seven years ago in the constitutional court with the dissenting vote of the Hon. Counselor Vítor Gomes, appended to Decision No. 204/2010. In Decision No. 310/12, of 20 June, the Constitutional Court reformulated the doctrine of Decision No. 18/11, moving closer to the then dissenting vote of Counselor Vítor Gomes.

This jurisprudence was later reaffirmed by the Full Bench, in Decision No. 617/2012, process No. 150/12, of 31/1/2013 and, recently, in Decision No. 197/2016, issued in the context of process No. 465/2015.

In the same sense the Supreme Administrative Court has proceeded as shall be confirmed, among others, in the Decision of 21/3/2012, process 830/11, of 21/3/2012.

Doctrine also follows this position.

From Sérgio Vasques, in footnote 60, page 342, of his Manual of Tax Law, Almedina, 2015, to Rui Morais in Notes on IRC, Almedina, 2009, pp. 202-203, passing through Professor Casalta Nabais in his Tax Law, 8th edn., Almedina, Coimbra, 2015, p. 542 and by Professor Ana Paula Dourado in Tax Law, Lectures, 2015, pp. 237 et seq., all reiterate the position already upheld by Portuguese courts. Autonomous taxation and IRC are different taxes.

This has been the understanding followed in various decisions, namely the arbitral decision issued by the bench chaired by Mr. Counselor Carlos Alberto Cadilha in the context of process No. 7/2018-T of 3 July 2018: "Autonomous taxation, although regulated normatively under corporate income tax, is materially distinct from taxation under IRC, to the extent that it does not directly affect the taxable profit of the company, but rather certain expenses which themselves constitute a new taxable event (referring not to the perception of income but to the realization of expenses)".

This thesis was transposed into law unequivocally by the legislator himself when in the amendment introduced to Article 23-A, Section 1, paragraph a), of the IRC Code by Law No. 2/2014, of 16 January, it comes to say that "are not deductible for purposes of determining taxable profit" "IRC, including autonomous taxation". What sense would it make to make clear in the law that autonomous taxation and IRC are not deductible from taxable profit if autonomous taxation were part of IRC? If that were so, the Agreements to Avoid Double Taxation would have autonomous taxation included where it refers to IRC which, as is known, does not happen. That is moreover the reason why Portugal has been including autonomous taxation in the list of covered taxes. Thus, in light of the above, one can from the outset simply conclude that if the tax legislator understood that IRC included autonomous taxation, it would have had no need to distinguish the two realities, since that IRC would already necessarily include autonomous taxation.

And it is not because autonomous taxation is inserted in the IRC Code that the two realities should be confused.

Recall that autonomous taxation was introduced by Article 4 of Decree-Law No. 192/90, of 9 June, not having been immediately inserted in the IRC Code. The legislator only 10 years after the emergence of autonomous taxation decided to introduce it into the IRC Code through Law No. 30-G/2000 of 29 December. What the legislator sought with this systematic approach was an anesthetic effect, since, although autonomous taxation is assessed independently of IRC, it is self-assessed together with the IRC declaration, through Form 22. As to this matter, the Constitutional Court considered, in Decisions Nos. 18/2009 and 85/2010, that autonomous taxation could be inserted in any other code or autonomous diploma.

And the realities are different from the start because the objectives are different.

In IRC, the aim is to tax income under the scrutiny of ability to pay.

Autonomous taxation, by contrast, had, at least originally, two very different objectives always under the legitimation of the principle of tax equality.

The first being to tax in the business sphere what cannot be taxed in the personal income tax sphere and the second being to discourage the realization of certain expenses or certain conduct. In this regard, Professor Saldanha Sanches even went so far as to state that "In this type of taxation, the legislator seeks to respond to the admittedly difficult question of the tax regime found in the zone of intersection between the personal sphere and the business sphere" adding further that in the "designation of "autonomous taxation", very diverse realities are hidden (...)» (Manual of Tax Law, 3rd edition (2007), Coimbra Publisher, pp. 406/7). Professor Guilherme de Oliveira Martins states that autonomous taxation "(…) essentially fulfils two functions: on the one hand, to prevent erosion of the tax base under IRC, imposing taxation on charges which may be deducted by IRC taxpayers, but which, being deducted, transform into an aggravation of taxation, thus seeking to serve as a disincentive to expenditure on such charges; other types of autonomous taxation aim, purely and simply, to penalize presumptively evasive or fraudulent conduct by taxpayers, embodying an anti-abuse mechanism.".

In this sense, the arbitral decision issued by the bench chaired by Mr. Counselor Carlos Alberto Cadilha in the context of process No. 641/2017-T: "autonomous taxation rates have the nature of anti-abuse norms and are intended to discourage certain special situations aimed at obtaining a reduction in the tax burden through the deduction of costs which are presumed not to be determined by a business cause".

Autonomous taxation targets only certain expenses typified in tax law, and not the taxation of business income that has been earned in the respective economic year, they aim rather to tax an advantage obtained, as a general rule, through the realization of these expenses and which is consequently reflected in the reduction of taxable profit. IRC, for its part, aims to tax the actual income of the taxpayer taking into account its ability to pay.

It must be recalled that it is unanimously accepted both by jurisprudence and by doctrine that autonomous IRC (and personal income tax) rates are a single-obligation tax distinct from IRC and personal income tax themselves, taxes of successive formation. It must also be recalled that the autonomy of autonomous rates results from their possessing a taxable event radically distinct from personal income tax/IRC, from being subject to their own rules of assessment and from serving very specific purposes.

The legislator has been expanding the scope of autonomous taxation, having come to include charges relating to indemnities paid to managers, administrators or directors when they cease functions, and, as well, charges relating to bonuses and other variable remuneration paid to managers, administrators or directors when these exceed certain thresholds. This is shown to be justified as a way to ensure "a more just distribution of tax burdens and progressive improvement of corporate remuneration policies".

In fact, the purposes of autonomous taxation are today varied but, in what is most important about them, it must be insisted, they serve to guarantee tax equality ensuring the subjection to tax of values which, being expenses in the business sphere, prefigure income in the sphere of third parties and preventing abusive planning through recourse to tax havens. These objectives are of paramount importance to ensure just distribution of income and wealth as called for by Article 103, Section 1, CRP."

Consequently, deduction from the collection is a reality inherent to IRC as a tax informed by the principles of ability to pay and taxation of actual income. The same does not happen with respect to the collection due by autonomous taxation, moreover the deduction of such charges, if it were to occur, would eliminate the anti-abusive sense that characterizes them.

Despite systematic insertion and functional connection to IRC, autonomous taxation is collected in the context of the assessment procedure of this tax without, however, losing its characterization and its own dogmatic root.

In summary, autonomous taxation, which affects certain expenses, operates differently from what constitutes the scope of IRC by taxing income.

In developing this position, Arbitral Decision No. 111/2018-T refers, in a pertinent manner, to the following: "Nothing is said in the law whether what is in Article 90 of the IRC Code, under the heading "Procedure and Form of assessment" applies to both realities – IRC and autonomous taxation – or to only one and which one. However, in the view of this Tribunal from a teleological and systematic interpretation of the law it is clear that Section 1 of Article 90 - which contains the assessment procedure - applies to both IRC and autonomous taxation. On the other hand, Section 2 of the same article – which contains the form of assessment – refers to cases of taxable matter referred to in Article 15 of the CIRC, namely IRC.

To better understand this conclusion it will be necessary to understand that it was established in the then Section 6 of Article 109 of the IRC Code, current Article 117, that the obligation to file the periodic income statement covers entities exempt from IRC, when subject to autonomous taxation. And for certain purposes – namely for purposes of the deductions provided for in Section 2 of Article 90 of the IRC Code or the calculation of payments on account or still the Assessment Result (Article 92) - it was left to the care of the interpreter and applicant of the law the task of identifying the relevant part of IRC collection. This extracting from the applicable regulations a useful sense, literally possible, that allows a coherent solution in accordance with the nature and functions attributed to each component of the tax. Well then, it is here that one must be cautious.

When it comes to the deductions provided for in Section 2 of Article 90 of the IRC Code, it appears that the Claimant argues that the expression "amount determined pursuant to the preceding section" should be understood as encompassing the sum of the amount of IRC determined on the taxable matter determined according to the rules of Chapter III and at the rates provided for in Article 87 of the same Code, and the amount of autonomous taxation, calculated based on the rules provided for in Article 88. Now, the result of this interpretation would immediately imply in a very simple way that on the basis for calculating payments on account defined in Section 1 of Article 105 of the IRC Code, and in terms identical to those used in Section 2 of Article 90, autonomous taxation were included. Indeed, for the basis for calculating payments on account, only IRC calculated based on taxable matter determined according to the rules of Chapter III and the rates of Article 87 of the respective Code is considered. And here there is no disagreement either in Doctrine or in jurisprudence. For it is worth noting that the coherence and suitability of this understanding is grounded in the very nature of payments on account of the tax due finally, which, according to the definition of Article 33 of the LGT are "advance cash remittances that are made by taxpayers in the period of formation of the taxable event", constituting a "(…) form of approximating the time of collection to that of perception of income so as to remedy situations in which this approximation cannot be realized through withholdings at source". Therefore, it only makes sense to conclude that the respective basis for calculation corresponds to the amount of IRC collection resulting from taxable matter which is identified with the profit/income of the taxpayer's year.

Here, this Tribunal agrees with what the Respondent argues insisting that the sole (and consistent) interpretation of the expression "amount determined pursuant to the preceding section" with the nature of the deductions referred to in the paragraphs of Section 2 of Article 90 of the IRC Code, relating to:

• tax credits for international legal and economic double taxation (current paragraphs a) and b));

• tax benefits (current paragraph c));

• special payment on account (current paragraph d));

• and withholdings at source (current paragraph e)).

In reality, it is noted that the common feature to all the realities reflected in the deductions referred to in Section 2 of Article 90 of the IRC Code resides in the fact that they concern income or expenses incorporated in taxable matter determined based on the taxpayer's profit or advance payments of the tax, being therefore entirely unrelated to the realities that integrate the taxable events of autonomous taxation."

To this Tribunal it seems clear that in the calculation of autonomous taxation no deductions are allowed and the respective assessment is effected pursuant to Articles 88 and 89 and Section 1 of Article 90 of the CIRC. The legislator in Section 2 of Article 90 of the CIRC refers only to taxable matter contained in Article 15 of the CIRC. The fact that the assessment procedure provided for in Section 1 of Article 90 of the CIRC also applies to autonomous taxation does not directly and necessarily imply that the same occurs with Section 2 of said Article 90.

Finally, it is now necessary to analyse whether the investment support schemes which are made concrete in deductions from the IRC collection, namely the CFEI and SIFIDE schemes, relate or not to the IRC collection strictly understood.

First, in terms of framework, it is important to note that Law No. 49/2013, of 16 July approved the CFEI with the aim of promoting investment and internationalization of national companies through the granting of a tax credit, in the form of a deduction from the collection, for the realization of certain investments. CFEI corresponded to a deduction from the IRC collection in the amount of 20% of investment expenses in assets dedicated to operations realized, up to 70% of that collection. The investment eligible for obtaining this tax credit had to be realized between 1 June 2013 and 31 December 2013, and the maximum amount of eligible investment expenses was € 5,000,000.00 per taxpayer. CFEI is not cumulative with respect to the same eligible investment expenses with any other tax benefits of the same nature.

SIFIDE II was first approved by Law No. 55-A/2010, of 31 December, and successively provided for in Articles 33 to 40 of the Tax Code for Investment approved by Decree-Law No. 249/2009, of 23 September and in Articles 35 to 42 of the Tax Code for Investment approved by Decree-Law No. 162/2014, of 31 October.

SIFIDE II allows companies to obtain a tax benefit, under IRC, proportional to research and development investment expenses that they can evidence, in the part that has not been the subject of financial participation by the State on a non-repayable basis. Thus, the benefit to be obtained with SIFIDE II is reflected in the possibility of deducting from the IRC collection assessed in the financial year, an amount of tax credit resulting from the sum of the following items: Base rate: 32.5% of expenses realized in the financial year; Incremental rate: 50% of the increase in expenses realized in the financial year compared to the simple arithmetic average of expenses realized in the two prior financial years, up to the limit of € 1,500,000. The values that reflect the tax benefit under SIFIDE are deducted "from the amounts determined pursuant to Article 90 of the IRC Code, and up to their concurrence" and in the assessment relating to the tax period in which the expenses eligible for such purpose are realized and, in the absence or insufficiency of collection assessed in those terms, the expenses that cannot be deducted in the financial year in which they are realized "may be deducted up to the 6th immediately following financial year".

As emphasized by the cited Arbitral Decision "(…) the legislator of the SIFIDE scheme, by making that express reference to the amount determined pursuant to Article 90 of the IRC Code, is referring to the IRC collection properly speaking for whose assessment autonomous taxation does not contribute precisely because they do not enter into the assessment neither of taxable profit nor of taxable matter, and, as a consequence, do not contribute to the assessed IRC.

It is clear that, although the SIFIDE article refers to Article 90 as a whole, it refers to the amount determined pursuant to Section 2 of Article 90, and this only applies, as is already known, to IRC.

The deduction relating to tax benefits (paragraph b) of Section 2 of Article 90), when it concerns investment benefits - as is the case with SIFIDE - has underlying the philosophy that the benefit constitutes a prize whose amplitude varies with the profitability of the investments, since the higher the profit/taxable matter of IRC, the greater the capacity to effect the deduction. And this is the logic of the SIFIDE tax benefit that justifies and legitimates the derogation from the principle of tax equality.

Thus, there is no conceptual error nor any contradiction between what has just been stated and the fact that the SIFIDE scheme establishes that the same are made concrete in deductions from the collections of amounts determined pursuant to Article 90 of the IRC Code, i.e., from IRC. It is because in the view of this tribunal both autonomous taxation and IRC are assessed pursuant to Section 1 of Article 90 of the IRC Code. However, of the two realities, the only one that is capable of deduction from the collection – that is, of realization of the benefit - is, whether for literal reasons (because Section 2 of Article 90 applies solely to IRC) or for substantive reasons (the benefit only takes effect if there is profit so as to reward the profitability of the investment), the IRC collection which, as we have seen, is different and distinct from autonomous taxation. The result of autonomous taxation, assessed in an autonomous/independent/separate manner does not contribute to IRC collection; on the contrary, it must accrue to the assessed IRC for purposes of determining the amount to be paid or recovered, which embodies a very different result. Note in this regard that autonomous taxation is immediately due (aggravated) in the case of taxpayers who present tax losses."

Given the nature and reason for existence of autonomous taxation, it is not possible to admit the deduction of tax benefits from autonomous taxation collection, under penalty of violation of the principle of tax equality.

If a taxpayer could effect a deduction as SIFIDE or other tax benefits from the amount of autonomous taxation affecting undocumented expenses, the function of such taxation in the prevention or avoidance of fiscally and socially undesirable conduct would be subverted.

Now, given that the autonomous taxation regime has a function of discouraging abusive conduct, this Tribunal finds no justifying reason for such disincentive to evaporate in favour of a tax benefit. It would be to admit that tax credits resulting from incentive or tax benefit could neutralize the sanctionary effect of autonomous taxation, distorting the very concept of tax benefit and the principles of ability to pay and just distribution of the tax burden.

As the aforementioned Arbitral Decision states "(...) the Tribunal does not perform a restrictive interpretation of Article 4 of SIFIDE II but only a teleological and systematic interpretation of what is provided both in SIFIDE and in the IRC Code so as to save the scheme from the conformity test constitutionally designated, namely what specifically concerns the violation of the principle of tax equality. The fact is that we can never forget that the norms that discipline benefits such as SIFIDE possess exceptional nature and can only be recognized as valid when the derogation they bring to the principle of equality is necessary, adequate and proportionate to the extrafiscal purpose underlying them.

It is therefore not worth discussing, as it is of no consequence, whether or not we are dealing with a tax benefit whose justification is legislatively considered more relevant than the obtaining of tax revenues. Of course we are; otherwise the SIFIDE scheme would not have been approved. The question is to know what tax revenue was ceded as a function of investment? Revenues resulting from a tax that admits deductions and which complies with the principle of ability to pay and which rewards those who invest, but who generates tax admitting that those who obtain greater profit can invest more. Or was what intended (and admitted) to cede revenue resulting from a tax on expenditure which under the principle of tax equality obliges those who have deviant conduct – such as payment through allowances or entertainment expenses, or even payments to entities resident in tax havens – to cease paying that tax by virtue of having investment expenses?

There is no doubt that it was the first.

So much so that the amendment introduced by the 2018 State Budget Law amended the wording of Article 88 of the IRC Code to the effect that no deductions are made from the amount due for autonomous taxation even though these come from special legislation such as SIFIDE. Now, even without resorting to the interpretative character given by the legislator again to Section 21 of Article 88 of the IRC Code, it is clear that the legislator – which, let it be recalled, is always the same, the Parliament –, wanted to clarify what, moreover, already resulted from the law.

And until now, if there was no sign, neither in Law No. 7-A/2016, nor in the Budget Report for 2016, nor in its discussion, that with the amendment in Article 88 of the CIRC of a general norm prohibiting deductions from the overall amount assessed for autonomous taxation, it was intended to interpret restrictively the expression «deduct from the amount determined pursuant to Article 90 of the IRC Code» which appears in a special norm of a separate diploma, such as SIFIDE II, it is now clear with the new wording of Section 21 of the article that no deductions are permitted from the collection of autonomous taxation even if these come from special legislation.

In the thesis that this Tribunal upholds, the legislator, by adding this Section 21 to Article 88 of the CIRC, with the content mentioned, merely proceeded to embrace and reinforce the interpretative sense that already resulted from the existing norms."

For all the foregoing, it makes no sense to invoke the unconstitutionality of Section 21 of Article 88 of the CIRC added by Law No. 7-A/2016, of 30 March, for violation of the principle of retroactivity of law, prohibited by Article 103, Section 3, of the CRP, to the extent that such rule is not even invoked in the resolution of the case at issue. For the same reason, the alleged unconstitutionalities for violations of the constitutional principles of democratic rule of law, separation of powers and independence of courts are not successful.

On the other hand, note that the Tribunal did not need to resort to any restrictive interpretation of the applicable rules, even those relating to tax benefits, in order to substantiate its decision, and if such were necessary the same is not prohibited as the Respondent entity correctly points out.

This Tribunal understands that with respect to the question of the deductibility of investment expenses provided for in CFEI applies the understanding that was left stated with respect to SIFIDE, there being no grounds that support a different position.

In the same sense arbitral decisions were issued in the following processes operating under the aegis of CAAD, which we follow in full: 406/2018, of 08-04-2019; 402/2018, of 19-02-2019; 242/2018, of 10-01-2019; 110/2018, of 20-09-2018; 41/2018, of 24-09-2018; 9/2018, of 03-10-2018; 542/2017, of 02-07-2018; 473/2017, of 08-04-2018; 241/2017, of 19-01-2018; 203/2017, of 30-11-2017; 192/2017, of 31-01-2018; 66/2017, of 11-09-2017; 638/2016, of 08-05-2017; 629/2016 of 15-03-2017; 605/2016, of 31-05-2017; 575/2016, of 21-04-2017; 443/2016, of 23-02-2017; 302/2016, of 28-03-2017; 174/2016, of 19-11-2016; 785/2015, of 09-08-2016; 752/2015, of 30-08-2016; 757/2015, of 07-10-2016; and 722/2018, of 28-06-2016.

Thus, for the reasons stated, this Tribunal denies the arbitral request for declaration of illegality of the IRC self-assessment, relating to the 2015 financial year, in the part produced by autonomous taxation, maintaining the rejection of the administrative complaint to which Process No...2018... pertains.

B. Alternative Request

Should the Arbitral Tribunal understand that the principal request, namely that Article 90 of the CIRC does not apply to autonomous taxation, the Claimant formulates an alternative request requesting the illegality and consequent annulment of the assessment of autonomous taxation due to absence of legal basis for its implementation, in accordance with the provisions of Article 8, Section 2, paragraph a), of the LGT, and Article 103, Section 3, of the Constitution, cfr. Article 234, paragraph d) of the request for arbitral ruling.

In fact, that precept of the LGT provides: "2. The principle of tax legality is also applicable to: a) The assessment and collection of taxes, including periods of limitation and expiry".

In turn, Article 103, Section 3 of the CRP provides: "No one may be required to pay taxes that have not been created in accordance with the Constitution, that have retroactive nature or whose assessment and collection are not made in accordance with the law".

According to Diogo Leite and Campos and others "The constitutional principle of legality in tax matters that prevails among us requires that its essential elements be defined by law (incidence, exemptions and rates included) and that such domains not be left to the mercy of Administrative Power, much less for it to define them through circular directed to the Services (decision of the STA of 14-6-95, issued in appeal No. 16651, published in Journal of Legislation and Jurisprudence, year 128, page 363 and in Doctrinal Decisions of the STA, No. 411, page 320).

As José Casalta Nabais states, "However, taking into account the provisions of paragraph a) of Section 2 of Article 8 of the LGT, which established the principle of tax legality to the assessment and collection of taxes, including periods of limitation and expiry, we must conclude that, by virtue of that legal requirement, the assessment and collection of taxes cannot have their legal discipline in regulations, with the exception, of course, of regulations of local authorities that may also concern the essential matter of taxes".

However, in light of what has just been stated, the Tribunal does not see how the principle of tax legality is shown to be violated, since autonomous taxation is provided for in paragraph a), Section 1 of Article 23-A; the rates in Article 88; and the competence and form of assessment in Articles 89 and 90, all of the CIRC, as has been demonstrated.

In Article 30 of the request for arbitral ruling the Claimant states: "The AT's computer system, through which IRC is self-assessed, does not allow taxpayers to deduct, for purposes of calculating the IRC owed by them, SIFIDE or CFEI credits from the IRC resulting from autonomous taxation assessed".

However, it is precisely because the Claimant is not recognized as having the right to deduct tax benefits, as SIFIDE and CFEI, from the collection produced by autonomous taxation, that such is shown to be impossible in self-assessment through the competent Form 22 statement.

Thus, for the reasons stated, this Tribunal denies the alternative request.

III.2.2 Moot Requests

The request for declaration of illegality of the self-assessed IRC at issue relating to the 2015 financial year being not successful, the requests made by the Claimant regarding the return of the amounts paid and the payment of compensatory interest are also rendered moot. (Article 608, Section 2 of the CPC).

IV. DECISION

Wherefore this Arbitral Tribunal agrees to:

a) Find not meritorious the arbitral request for declaration of illegality of the IRC self-assessment, relating to the 2015 financial year, with respect to the possibility of deducting the tax benefits relating to SIFIDE and CFEI from the collection of autonomous taxation;

b) Uphold the decision rejecting the administrative complaint issued in process No...2018..., by order of the Deputy Director of Finance, dated 19 September 2018, by delegation of powers of the Director of Finance of Lisbon;

c) Find not meritorious the alternative request set out in the pleading;

d) Find not meritorious the request for reimbursement of the amount of IRC under examination in the case records and paid by the Claimant, relating to the 2015 financial year plus compensatory interest, since this request is rendered moot by the non-merit of the arbitral request referred to in a), absolver the Respondent of the respective request and, consequently,

e) Condemn the Claimant to payment of the costs of the present process.

V. Value of the Process

The value of the process is set at € 395,088.23 (three hundred ninety-five thousand, eighty-eight euros and twenty-three cents), pursuant to Article 97-A, Section 1, paragraph a), of the Code of Tax Procedure and Process, applicable by virtue of paragraphs a) and b) of Section 1 of Article 29 of the RJAT and Section 2 of Article 3 of the Regulation of Costs in Tax Arbitration Processes.

VI. Costs

The value of the arbitration fee is set at € 6,426.00 (six thousand, four hundred twenty-six euros), pursuant to Table I of the Regulation of Costs of Tax Arbitration Processes, to be paid by the Claimant, since the request was entirely not meritorious, in accordance with the provisions of Articles 12, Section 2, and 22, Section 4, both of the RJAT, and Article 4, Section 4, of said Regulation.

Notify accordingly.

Lisbon, Administrative Arbitration Centre, 31 May 2019.

The Arbitrator President

(Counselor Fernanda Maçãs)

The Arbitrator Member

(Dr. Rui Rodrigues)

The Arbitrator Member

(Dr. Alexandre Andrade)