Wind Turbine Depreciation IRC Tax Dispute: CAAD Arbitration on Amortization Rates and Discretionary Powers

ARBITRAL DECISION

The Arbitrators José Pedro Carvalho (Presiding Arbitrator), Carla Castelo Trindade and José Manuel Aurélio dos Santos, appointed by the Deontological Council of the Administrative Arbitration Centre to form an Arbitral Tribunal, hereby agree:

I – REPORT

On 2 November 2016, A…, S.A., a company with registered office at …, Lot …, …-… Lisbon, legal entity with tax identification number …, filed a request for constitution of an arbitral tribunal, pursuant to the combined provisions of articles 2 and 10 of Decree-Law no. 10/2011, of 20 January, which approved the Legal Regime of Arbitration in Tax Matters, as amended by article 228 of Law no. 66-B/2012, of 31 December (hereinafter, abbreviated as LRAT), seeking a declaration of illegality of the corporate income tax assessment act no. 2016…, the interest assessment no. 2016 … and the settlement verification statement no. 2016…, all relating to the 2014 tax year, insofar as they considered fiscally non-deductible costs for that period the amounts relating to the depreciation of the wind turbines of B… .

To support its request, the Applicant alleges, in summary, that:

The depreciation rate applied by the Applicant is within the legally permitted range.

If the 20-year period corresponded to a minimum period of useful life, this would push the maximum period to 40 or 50 years.

That given the specific characteristics of the wind turbines that were purchased, the useful life period of 15 years is in fact the most reasonable.

The interpretation of the law made by the TA is unconstitutional, as it violates the principle of equality and taxpaying capacity.

On 03-11-2016, the request for constitution of the arbitral tribunal was accepted and automatically notified to the TA.

The Applicant did not proceed to appoint an arbitrator, wherefore, pursuant to the provisions of subparagraph a) of no. 2 of article 6 and subparagraph a) of no. 1 of article 11 of the LRAT, the President of the Deontological Council of the CAAD appointed the undersigned as arbitrators of the collective arbitral tribunal, who communicated acceptance of the appointment within the applicable period.

On 04-01-2017, the parties were notified of these appointments, and did not manifest any intention to object to any of them.

In accordance with the provisions of subparagraph c) of no. 1 of article 11 of the LRAT, the collective Arbitral Tribunal was constituted on 19-01-2017.

On 21-02-2017, the Respondent, duly notified for this purpose, submitted its response defending itself solely by way of objection.

Pursuant to the provisions of subparagraphs c) and e) of article 16, and no. 2 of article 29, both of the LRAT, the holding of the meeting referred to in article 18 of the LRAT was waived.

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

A period of 30 days was set for the rendering of the final decision, following the TA's submission of submissions.

The Arbitral Tribunal is materially competent and is regularly constituted, in accordance with articles 2, no. 1, subparagraph a), 5, and 6, no. 1, of the LRAT.

The parties have legal personality and capacity, are legitimately entitled and are legally represented, in accordance with articles 4 and 10 of the LRAT and article 1 of Ministerial Order no. 112-A/2011, of 22 March.

The proceedings are not vitiated by nullities.

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

Having reviewed everything, it is necessary to render

II. DECISION

A. MATTERS OF FACT

A.1. Facts Found to be Proven

With respect to matters of fact, it is important, first of all, to note that the tribunal does not have to pronounce upon everything that was alleged by the parties, but rather has the duty to select the facts that matter for the decision and to distinguish proven from unproven facts. All in accordance with article 123, no. 2, of the Tax Procedure and Process Code and article 607, nos. 2, 3 and 4 of the Civil Procedure Code, applicable by virtue of article 29, no. 1, subparagraphs a) and e), of the LRAT. In this manner, the facts relevant to the judgment of the case are selected and delimited according to their legal relevance, which is established in light of the various plausible solutions to the question(s) of Law (see article 596 Civil Procedure Code applicable by virtue of article 29, no. 1, subparagraph e), of the LRAT).

Now, having regard to the positions taken by the parties and the documentary evidence attached to the case file, the following facts with relevance to the decision are considered proven:

1. The Applicant's corporate purpose is the "exploitation of alternative energies, provision of services, sale of alternative energy production equipment" and is registered in the activity of "Production of electricity from wind, geothermal, solar and unspecified sources" (CAE 035.113), and is classified for corporate income tax purposes under the general taxation regime.

2. The Applicant engages in the operation of a set of wind turbines, located in the municipality of …, called B….

3. The company takes the legal form of a joint-stock company.

4. Its share capital is €60,000.00, held 89.98% by the Spanish company C… (C… group) and 10.02% by D…, Lda. (E… group).

5. The Applicant was subject to a tax inspection action authorized by service order no. OI2016…, of 12/04/2016, of general scope, relating to the 2014 fiscal year.

6. The action resulted from an inspection proposal no. PIP 2016….

7. In the course of tax inspection procedures carried out for previous fiscal years, the TA found that depreciation rates higher than those it considered legally established were being applied, and therefore the aforementioned inspection action was proposed for the Applicant's 2014 fiscal year.

8. The Tax Inspection Report contains, among other things, that:

"In the course of previous inspection procedures, which were aimed at monitoring the tax situation of the taxpayer, with reference to fiscal years 2011, 2012 and 2013, irregularities were identified relating to the non-acceptance of the deductibility for tax purposes of the expenses incurred relating to the application of depreciation rates higher than those legally provided for.

According to the information gathered, we verified that in 2014 there were no changes either in the manner of accounting for the aforementioned expenses or as to their nature, and therefore the facts and grounds cited in the following paragraphs will be coincident with those referred to in previous reports, with appropriate adaptations.

Following the analysis of the taxpayer's reintegration and depreciation schedules, sent following notification on 08/06/2016, it was verified that the wind towers, as well as other expenses connected with them, are being depreciated at a rate of 6.67% (useful life of 15 years).

By reading the lease agreements concluded with the owners of the land where the wind towers are located, we can verify that, generally, these were entered into for a period of 25 years.

The general rules of depreciations and amortizations are defined in the Corporate Income Tax Code (CIRC) in its articles 29 to 34, however the CIRC defers to regulatory legislation the development of this regime.

For the assets in question in this inspection procedure, Regulatory Decree 2/90 is applicable, to assets whose use began in fiscal year 2009, and Regulatory Decree 25/2009, to assets whose use began in 2010. In both cases, the tables appended to these Regulatory Decrees are silent on these assets.

In order to fill this legislative gap, no. 3 of article 5 of Regulatory Decree 2/90 provides that "with respect to elements not mentioned in the preceding article for which no reintegration and depreciation rates are established in the tables referred to in no. 12, those which the Directorate-General of Contributions and Taxes considers reasonable shall be accepted, taking into account the expected period of usefulness." Similarly, no. 3 of article 5 of Regulatory Decree 25/2009 provides that "with respect to elements for which no depreciation or amortization rates are established in the tables referred to in no. 13, those which the Directorate-General of Taxes considers reasonable shall be accepted, taking into account the expected period of usefulness."

In summary, with respect to elements for which no depreciation or amortization rates are established in the aforementioned tables, those which the Tax and Customs Authority considers reasonable shall be accepted, taking into account the expected period of usefulness, in accordance with no. 3 of article 31 of the CIRC, combined with no. 3 of article 5 of Regulatory Decree 2/90 and of Regulatory Decree 25/09.

In order to be able to assess the reasonableness of the expected useful life period for the equipment constituting the "wind farms", the Services carried out various informal contacts with various suppliers of such equipment such as F…(…), G…, H… and I…, in order to be able to reach the conclusion of a useful life period that is considered reasonable.

Following these contacts, it was verified by the Services that the suppliers assume that, with technological advances introduced and with the increasing increase in reliability, the equipment is designed so that, in situations of standard operation and maintenance, it has an expected useful life of more than twenty years. From this age onwards, it is likely that maintenance costs will be higher, due to the need to replace more expensive components, and that the operating plan becomes, over the years, economically less attractive/profitable. (annex 1 – example)

A technical study was also analyzed, carried out by the National Laboratory of Energy and Geology (LNEG), on the "expected useful life period of equipment for the conversion of wind energy".

This study had as its main objective to determine the expected useful life period for a wind turbine, in the scope of a service provision agreed between the LNEG and the Portuguese Association of Renewable Energy Producers (APREN). This determination of the expected useful life period for a wind turbine had as its framework the identification of the depreciation rate to be applied to wind farm projects, given that in Regulatory Decrees 2/90 and 25/09 the rate for these assets is omitted from their appended Tables. (annex 2)

The LNEG developed its study using a methodology based on two fundamental aspects: the identification of the reduction in energy production over time through the determination of the capacity factor trend, and the decrease in the economic profitability of a wind farm. This approach allowed them to define a time interval for the useful life of the turbine.

As a conclusion of its study, the LNEG estimates that the useful life period of a wind turbine is between 20 to 25 years. The LNEG considers that after this period it becomes necessary to carry out replacement of components, due to their deterioration, thus beginning the decline in the profitability of projects, due to increased maintenance costs and a consequent diminution of economic results which, over time, will make the project unfeasible.

The LNEG also concluded that its study achieves results consistent with those mentioned by wind turbine manufacturers, namely an expected useful life of around 20 years.

We thus have, in summary of what was stated above, that the estimated useful life of wind farms determined according to a set of physical/material and economic factors. The physical or material factors relate to the capacity/durability of equipment, which, as a result of what has been pointed out by manufacturers and by LNEG itself, we can conclude that these could operate normally beyond 20 years of age, potentially involving, however, repairs (greater or lesser) resulting from wear of their components. The economic factors relate to the optimal financial profitability of the project which, as a result of the age of the equipment, is expected to decrease in view of the expected increase in maintenance and repair expenses and their possible decrease in capacity, given the evolution of technology, which could imply productive losses.

This information and these conclusions are corroborated by the very projects presented by the various entities operating the wind farms. With respect to the case at hand, the taxpayer presented, for its B…, a project for 20 years. This information can be verified on page 24 of the Environmental Impact Study, relating to this wind farm, whose useful life is under examination. This study was prepared by the company "J... (annex 3)

In consultation with other studies prepared for other wind farms, it is noted that the projects presented are also for 20 years.

On this matter, the Directorate of Services for Corporate Income Tax (DSIRC) was also requested to comment.

In its opinion the DSIRC states that:

"(...) The depreciation rates for wind farms were not provided for in the Tables Appended to Regulatory Decree no. 25/2009, of 14 September, until the entry into force of Law no. 82-D/2014, of 31 December. The rates in the Tables were the same as the repealed Regulatory Decree no. 2/90, of 12 January, and at that time (1990), electricity was not yet being produced for commercialization based on this new technology.

Thus the Tax Authority accepted those it considered reasonable, based on no. 3 of art. 5 of Regulatory Decree no. 25/2009.";

"For taxpayers holding wind farms who requested authorization from the TA – Tax and Customs Authority for the application of an annual depreciation rate of 5%, based on an estimated useful life of 20 years, they were authorized by superior dispatch (...)".

"This Directorate of Services requested the applicants to send technical studies that permitted them to conclude that the estimated useful life of the 'Wind Farms' was 20 years.

We were sent, among others, the opinion from which the following excerpt is transcribed: '... Wind energy technology has seen remarkable advances in less than two decades. Thus one went from a situation of perfect technological ignorance to the existence of turbines of 6 MW with rotors of 120 m in diameter that can present levels of mechanical reliability above 95%. (...)

Now the entire industry refers to the useful life period of the project of 120,000 hours of operation, which with standard load factors means approximately 20 years. To confirm this value it is enough to consult on the WEB some reference institutions in this industry, independent and autonomous from manufacturers...'"

"In view of the above, with respect to the depreciation of wind farms (tangible fixed assets as a whole), it appears to us that the maximum depreciation rate to be accepted for tax purposes will be 5%, in the tax periods that began before 1 January 2015, under no. 3 of art. 5 of Regulatory Decree no. 25/2009 of 14 September.".

Thus, it results from all the above that there is unanimous position among the various entities consulted (equipment suppliers, LNEG study and TA) and the various companies operating wind farms, that wind farm projects have an expected useful life of 20 years, a period from which it is calculated that their profitability will decrease and the project will begin to lose economic interest, although it is acknowledged that wind turbines, the essential and highest-value element of wind farms, have a useful life of full operation (with proper maintenance) beyond the optimal economic useful life of the project. Furthermore, it is calculated that the maximum expected profitability occurs during the first 20 years of operation, but nothing prevents wind farms from continuing to convert wind energy into electricity in an economically sustainable and profitable manner for many more years.

Thus, and in accordance with the provisions of no. 2 of article 30 of the CIRC and no. 3 of article 5 of the aforementioned Regulatory Decrees (2/90 and 25/09), combined with what was stated above, we consider, for purposes of reintegrations and depreciations, that the period of useful life acceptable for wind farms (tangible fixed assets as a whole) is 20 years, which will correspond to a reintegration/depreciation rate of 5%."

1. The TA considered, based on the above, that, in accordance with the provisions of article 34 of the CIRC, the Applicant practiced excessive depreciations, and therefore proceeded to correct them.

2. The correction made was €1,121,018.80, as detailed in the following table:

3. In the course of the inspection procedure, the Applicant did not exercise its right to a hearing.

4. The corrections made in the course of the inspection action resulted in the issuance of the assessments that are the subject of the present arbitral action, relating to fiscal year 2014.

5. The TA carried out various informal consultations on the websites of the main manufacturers present in Portugal, namely F… (currently K…), G…, H… and I…, and concluded that the generality of those manufacturers assume that the expected useful life time (Life Time Cycle) of each machine they produce is 20 years.

6. International Electrotechnical Commission Standard 61400-1, states on its page 24, the following: "The design lifetime for wind turbines classes I to III shall be at least 20 years".

7. In the Technical Study "Expected Useful Life Period of Equipment for the Conversion of Wind Energy" of the National Laboratory of Energy and Geology (LNEG), of December 2013, it can be read on p. 5:

"(...) Thus, the warranty period of a wind turbine is similar to that granted to any equipment acquired through a commercial transaction. In the case of wind turbines this period corresponds to 2-5 years following its entry into operation. Normally this warranty period refers not only to the operation and maintenance of the equipment, but also to production warranty, and is directly related to the period for which maintenance contracts are drafted. Initially these contracts had a duration of 2 to 5 years, however, in more recent years there have been cases in which these contracts are drafted for longer periods, reaching the expected useful life period for wind turbines (approximately 20 years)."

1. The dissertation "Methodologies for Evaluating the Performance of Wind Farms" by Nuno Cardoso, carried out in the scope of the Integrated Master's in Mechanical Engineering, under the coordination of Professor Álvaro Henriques Rodrigues of the Department of Mechanical Engineering and Industrial Management of the Faculty of Engineering of the University of Porto, states, on p. 12, the following:

"(...) the operation phase of a wind farm is what extends over a longer period of time. The time horizon of 20 years is that usually considered, since it represents the expected useful life time for the wind turbines around which the activities carried out are centered: exploitation, maintenance and conservation of the farm."

1. The environmental impact study prepared by the French "Ministère de l'Écologie et du Développement Durable" (2005), indicates, on its page 52, a period of estimated useful life of wind turbines of 20 to 30 years, at the end of which the operator has the responsibility to dismantle the wind farm and return the location to its original state.

2. The "Renewable Energy Fact Sheet: Wind Turbines" prepared by the "United States Environmental Protection Agency", mentions, on its page 2, a typical useful life of 20 years.

A.2. Facts Found Not to be Proven

As referred to, with respect to the facts of fact found to be established, the tribunal does not have to pronounce upon everything alleged by the parties, but rather has the duty to select the facts that matter for the decision and to distinguish proven from unproven facts as provided in article 123, no. 2, of the TCPT applicable by virtue of article 29, no. 1, subparagraphs a) and e), of the LRAT. Thus, the facts relevant to the judgment of the case were, as referred to above, selected and delimited according to their legal relevance, and there is no other factual matter alleged that is relevant to the proper resolution of the procedural dispute.

B. MATTERS OF LAW

As follows from the facts found to be proven, the TA disregarded the depreciation rate corresponding to a useful life period of 15 years, applied by the Applicant, because it considered that 20 years would be, in its judgment, the reasonable period for this purpose.

The TA's decision is based on no. 2 of article 31 of the CIRC and no. 3 of article 5 of Regulatory Decree no. 25/2009, of 14 September, which provide, respectively:

• "With respect to elements for which depreciation or amortization rates are not established, those which the Directorate-General of Taxes considers reasonable shall be accepted, taking into account the expected period of usefulness.";

• "With respect to elements for which depreciation or amortization rates are not established in the tables referred to in no. 1, those which the Directorate-General of Taxes considers reasonable shall be accepted, taking into account the expected period of usefulness."

The question that presents itself for resolution in the present proceedings has already been subject to consideration in other tax arbitration proceedings, as indicated by the parties, and, in general, the decisions rendered have gone in the direction of substituting themselves for the assessment made by the TA, considering reasonable the shorter period used by the taxpayers.

Saving all due respect for such decisions, it is considered pertinent and correct the criticism made in the dissenting opinion rendered in arbitral proceedings no. 593/2015T[1], which, with all due respect, is transcribed as follows:

"Note that, pursuant to art. 31, 2 of the Corporate Income Tax Code and art. 5 of Regulatory Decree no. 25/2009, of 14 September, these depreciation rates came to be those applicable 'ex lege', insofar as those provisions attributed to the TA a discretionary power to set the rates – in a specific framework of "technical discretion", as we shall see below.

This is sufficient to close the question specifically raised by the omission of express depreciation rates for the equipment in question: those provisions point the way to resolve this question, and that path was followed. There came to be depreciation rates defined in accordance with law, and it was those that were applied. (...)

Let us now clarify our understanding, both as to the existence, in this case, of technical discretion 'stricto sensu', and as to the respective implications regarding the non-reviewability in contentious proceedings of the decisions taken, in this scope, by the TA.

Administrative discretion is more of a power-duty than a pure freedom of choice, since everything is subordinated to the pursuit of concrete public interest, even though as to the content, as to the object, or as to the form of the administrative solution a multiplicity of equally valid paths – that is, those that do not collide with any other guiding principle of administrative activity – may be admitted.

In cases where the law intended to confer discretion, it ceases to be legitimate for the Court charged with controlling the legality of an administrative act to enter into the definition of a content, an object or a form as the only compatible with the purpose to be pursued, in order, based on them, to assess the act in question – which in practice would mean admitting that the Court substituted itself for the Public Administration in the drawing of the elements of the act performed by it, denying the very existence of the discretion established in law.

The margin of free administrative decision thus constitutes a functional limit to administrative jurisdiction, insofar as that margin is centered on spheres of merit, convenience or opportunity in the reservation of competence, without implications for the validity of administrative conduct, thus situated outside the scope of contentious reviewability, which can only apply to the violation of external limits of discretionary power (although the possibility of merit control by the administrative procedure remains, this is compatible with public administrative autonomy).

In other words, in pure administrative discretion the Courts must limit themselves to verifying whether the legal limits of discretion, the positive limits of competence, purpose, impartiality and proportionality were or were not respected – and cannot review whatever resulted from the administrative decision taken in compliance with those limits.(...)

As the Court cannot substitute itself for the Administration in the formulation of a judgment that falls strictly within the merit and opportunity of the Administration's action, technical discretion is, in principle, also withdrawn from the Court's reviewability, unless it displays gross, manifest, egregious error.

In the strict sense, technical discretion is that in which, being in question the solution of questions that require specialized scientific knowledge, the Administration is forced to make decisions supported by technical-professional information and studies, the Administration thus being bound by the conclusive statement of the professionals consulted, and not being able in sum to adopt a solution different from that indicated by the specialists – and administrative decisions of this nature can only be challenged judicially or administratively if the support in these technical information and studies corroborated by specialists in the matter is lacking, or if the decision diverges ostensibly from the conclusions contained in these information and studies.

In technical discretion the presuppositions that integrate the foreseen in the norm configure technical concepts reported to facts only verifiable or valorizable on the basis of knowledge and instruments proper to sciences other than legal science.

What is in question, therefore, is an administrative activity translated into judgments of technical existence, judgments of technical valuation or judgments of technical probability, whereby the law confers upon the Administration a power of technical valuation, which, not implying comparative weighing of secondary interests, involves the valuation of facts and circumstances of a technical character.

Hence the doctrine has sometimes, in the century and a half of elaboration of the concept (which appears to have emerged in the mid-19th century), used the expression "improper discretion" as a genus of which "technical discretion" would be a species, thereby seeking to emphasize the absence of judgments of opportunity and convenience that prevail over judgments of a strictly technical character (the "technical discretion" would be linked with "probative freedom" and with "bureaucratic justice" within that family of "improper discretions"). (...)

On the other hand, in technical discretion 'stricto sensu' there is no room for judgment of valuation based on legal or legal-technical indeterminate concepts, a judgment that has nothing to do with the margin of free appreciation and decision that characterize genuine discretionary judgment, rather it recourses to the rules proper to legal interpretation via purely subsumptive application and, therefore, subject to judicial control.

With the technique of the indeterminate legal concept there is no discretion: the law refers to a sphere of reality whose limits do not appear well enunciated, but which can be determined in the concrete case, by way of interpretation, not admitting more than one solution, more than one "densification" of the concept.

In technical discretion 'stricto sensu' there is, indeed, room for judgment of valuation based on knowledge and rules proper to science or non-legal technique that is in question, and it is certain that it is not up to the Court to control the good science or good technique employed by the administrative entity, by manifest lack of competence in the extrajuridical matters necessary for this.

These are cases in which the assessment by the Administration requires the use of technical criteria, and the solution of technical questions must be carried out in accordance with the rules and knowledge proper – and the law not only recognizes this but imposes it on all legal operators (and not only to the Administration, its primary addressee).

When there is technical discretion 'stricto sensu', the jurisdictional control must, therefore, be limited to the adjacent areas of binding, or rather, again, limited to verifying respect, or lack thereof, for the legal limits of discretion, the positive limits that presided over the legal attribution of discretionary power and corresponding prerogatives – being able specifically to review, at the frontiers of the "margin of free appreciation", (1) a gross or manifest error of appreciation (2) an error in the factual presuppositions (3) a deviation of power or (4) manifest violation of the general principles of impartiality, equality, proportionality, justice and good faith as principles shaping administrative activity.

More specifically, if the law entrusts to the Administration the power to specify a valuation not previously fixed by the law itself, a Court cannot proceed to the re-weighing of the judgments made by the Administration in that scope, unless it is demonstrated that there exists a gross or manifest error – namely the lack of support in technical-professional information and studies corroborated by specialists and required by the densification of extrajuridical concepts. (...)

We are here very close to the scope in which the issue of "technical discretion" has developed in the USA, there very much centered on delimiting the competence of regulatory agencies, whether to define the limits of their normative function, or to establish the limits of the corresponding jurisdictional control.

There emerged the technique of "standards", whereby the law limits itself to establishing parameters, principles, indeterminate concepts, leaving to the agencies the function of specifying regulatory norms, directives – specialized and decentralized rules, based on technical knowledge that is beyond the scope, in its specificity, of both the legislature itself and judicial control.

A Court cannot review those judgments, it is insisted, no matter how much they diverge from the understanding of individuals or from the understanding of the judge himself – a Court having to limit itself to adjacent binding areas, and at most demonstrate, through other technical-professional information corroborated by specialists, that the information and studies used by the Administration in support of its judgments were glaringly false, capricious or inadequate, or that they were ostensibly, grossly, disregarded in the very judgments made by the Administration for the intended densification of extrajuridical concepts.

Let us insist that mere divergence of judgments between the Administration and individuals, or even between the Administration and the Court, does not constitute proof of any error or defect of the impugned act that is subject to contentious review, and in no way legitimizes the Court substituting itself for the Administration in the formulation of a judgment that falls strictly within the merit and opportunity of the Administration's action.

And it is precisely because that, in cases of gross error in which it can be concluded that the Administration has exceeded its powers and openly exited the field of technical discretion to enter that of illegality, to the point that the Court can annul the administrative decision in question, it is settled that the Court can never substitute the annulled administrative decision with another that it deems more adequate – that is, it cannot, without violation of the constitutional principle of separation of powers, usurp that technical discretion.

A Court cannot review those judgments, in sum, except under those strict presuppositions, except when there is apparent gross, flagrant, ostensible error, translated into serious maladjustment of the decision to the concrete situation and to the pursuit of public interest, in terms in which the exclusion of reviewability by non-technical means could be considered arbitrary – for if not so, without all these safeguards, technical discretion 'stricto sensu' would be dead letter, everything foundering in strict binding, and the invocation of a margin of free appreciation and technical valuation entrusted to the Administration would become a bizarre legal fiction. (...)

Returning to the case, and summarizing.

If we accept that there is a discretionary power established in favor of the TA, we cannot fall into the temptation of proceeding to a "comparison of reasonableness" between periods of depreciation, that proposed by the Applicant and that proposed by the TA: the law explicitly forbade it by establishing a discretionary power in favor of the TA.

Thus, to reject as "unreasonable" a period proposed by the Applicant, it sufficed for the TA to undertake a diligence in the sense of demonstrating that that period did not follow from the concept of "expected useful life" that it itself, the TA, professes. The TA did so; and in doing so it did not ostensibly, grossly, violate any of the general principles of law to which it is subject.

Given the technical discretion, it is not the function of any Court to enter into the substantive merit of the assessment, and even less so of an arbitral court, which must limit itself to questions of legality (art. 2 of the LRAT).

This Court, or any other, may find that the period proposed by the Applicant is more reasonable, or may instead find that the period proposed by the TA is more reasonable – but that evaluation is, and must be, irrelevant in this case, because, it is insisted, the establishment by law of a discretionary power, such as that exercised, forbids any possibility of "comparison of reasonableness" between periods of depreciation, as it forbids any other judgment of merit.

What would remain for this Court, or for any other Court, would be to review the adjacent binding areas of the exercise of the said technical discretion, demonstrating that the TA adopted a procedure that is glaringly, grossly, incorrect, to the point of leaving no doubt as to whether it could strike down the exercise of the discretionary power as illegal – to the point of allowing that, based on a non-technical judgment, it be evident that the anti-juridicity of the results of the TA's actions."

This understanding is subscribed to, that is, that the norms in question confer upon the TA a technical discretion, whereby the Tribunal can only "review the adjacent binding areas of the exercise of said technical discretion, demonstrating that the TA adopted a procedure that is glaringly, grossly, incorrect, to the point of leaving no doubt as to whether it could strike down the exercise of discretionary power as illegal – to the point of allowing that, based on a non-technical judgment, it be evident that the anti-juridicity of the results of the TA's actions.".

Notwithstanding what was set forth in the recent judgment rendered in arbitral proceedings 238/2016T[2], of the CAAD, which understood that, in a case analogous to the present, what is in question would not be the deferment of a discretionary power to the Administration, the aforementioned understanding is maintained.

Indeed, it is understood that the said judgment was anchored essentially in case law and doctrine that is considered not directly transposable to the concrete case, since they refer to a type of technical discretion, based exclusively on the use by the legislator of eminently technical terms or that, in any way, imply a judgment of such a nature.

Now, in this case, not only does the judgment underlying the norms in question have, in fact, an eminently technical nature, but, further, the said norms refer to a judgment of reasonableness specifically deferred to the TA, using the expression "those which the Directorate-General of Taxes considers reasonable", and there is no doubt, therefore, that we are in the domain of the discretionary powers of the Administration, which, moreover, by force of the principle of separation of powers, must be respected, as indeed continues to be recognized by recent case law[3], and the matter to which the said discretionary powers refer is of an eminently technical nature.

It is thus concluded, without doubt, that the legislator deferred a margin of freedom to the TA, by using the aforementioned expression, and therefore, being reviewable the decision of the TA, it is so, solely, within the limits that respect the deferred margin of free appreciation legitimately deferred by the legislator to the TA.

Nevertheless, in this case, it is judged that what occurs is that the discretionary power was, in view of the law, incorrectly exercised, which will be attempted to be demonstrated by two routes.

Let us see.

Although, in this case, we are in the field of technical discretion, the considerations made in the Judgment of the STA of 27-11-2013, rendered in proceedings 01159/09[4], regarding the application of indeterminate concepts, shall be directly applicable, understanding that:

"Thus, when faced with indeterminate concepts, it falls to the decision-making body, from the outset, to apprehend their meaning and scope through an interpretive operation of the norm in which they are inserted, for the law must provide, in large measure, a sufficiently clear standard for their interpretation. An interpretive operation that, being binding, also falls to the court to review.

In that measure, and as well observed by ANTÓNIO FRANCISCO DE SOUSA (In "Indeterminate Legal Concepts in Administrative Law", Almedina, 1994, p. 18 and 60.), the "indeterminate legal concepts" have peculiarities within the scope of Administrative Law, since there the judge has the function of monitoring whether the administration gave the correct interpretation and application to these concepts. The interpretation and application of indeterminate legal concepts by the administration constitute, therefore, an activity strictly bound by law. To admit any margin of appreciation in favor of the Administration 'would mean expanding the field of discretion to the legal facts and thereby striking a serious blow against the guarantees of the citizen that the Rule of Law does not allow.'.".

That is: the norm that confers the powers of technical discretion upon the TA is nonetheless a legal norm, lacking, before application (where discretion is exercised), interpretation, an interpretation which is, naturally, jurisdictionally reviewable.

This is not a question of transposing to the domain of technical discretion the special duty of reasoning that falls upon the Administration when it applies indeterminate concepts, but rather of affirming, as happens with norms that contain these, that with respect to norms that confer that it is necessary to "apprehend their meaning and scope through an interpretive operation of the norm in which they are inserted, for the law must provide, in large measure, a sufficiently clear standard for their interpretation. An interpretive operation which, being binding, also falls to the court to review.".

In other words, the norm that confers discretionary powers upon the Administration requires itself interpretation, from the outset in the sense of determining what concrete powers are conferred – basically, what task the legislator intends to be entrusted to the discretion of the Administration, and such a hermeneutical operation, as it cannot fail to be, is jurisdictionally reviewable.

Thus, from the outset, and in this case, it appears that the interpretation that the TA made of the legal norms in question, indicated above, is not the correct one, the TA having wrongly determined what task, in accordance with those, fell to it.

Indeed, the TA, as results from the inspection report and from the facts of fact established, limited itself to indicating a value corresponding to the number of years it considers reasonable for the depreciation of the equipment in question.

Now, saving all due respect to a better opinion, that is not the meaning of the norms applied.

Indeed, both of the norms refer to situations in which, for a given element, no depreciation or amortization rates are established, providing that, in that case, those which the Directorate-General of Taxes considers reasonable are accepted.

Now, the use of the plural cannot fail to be significant, and the meaning cannot fail to be that it is not incumbent upon the TA to fix a single depreciation rate as being the reasonable one, but rather to fix an interval of rates that are considered reasonable.

Indeed, in the hermeneutical work to be performed, one cannot fail to note that the norms in question do not prescribe that the TA substitute itself for the legislator in the indication of a percentage, analogous to those fixed in the table that is silent on the element to be depreciated, but in the indication of the depreciation or amortization rates that are reasonable.

Thus, the depreciation or amortization rates that are acceptable, in the system in force, are comprised within an interval arising between the minimum and maximum periods of useful life of an asset, as defined in article 3, no. 2 of Regulatory Decree no. 25/2009, of 14 September.

Hence, being in question the supply of omissions of the table appended to the said Regulatory Decree, the TA should proceed in the same terms, fixing, not a depreciation or amortization rate, in function of a concept of "expected useful life", filled by a judgment of "average value of expected utility", but, as follows from the regime of that same Regulatory Decree and appended table, an interval of depreciation or amortization rates considered reasonable, comprised between a reasonable minimum useful life period and a reasonable maximum useful life period (tending to be equivalent to twice the minimum useful life period)[5] as, for the elements contained in the said table, occurs, and is, precisely, that, the meaning of the use of the plural of the word "rate", and respective concordances, in the norms of articles 31, no. 2 of the CIRC and 5, no. 3 of Regulatory Decree no. 25/2009, of 14 September.

Otherwise, that is, by understanding that the TA could, in each concrete case where it were called upon to pronounce itself, fix for a same type of asset element, one concrete depreciation rate, and, consequently, a sole useful life period, depending on what, in that concrete case, would seem reasonable to it, one would fall into an unacceptable lack of generality in the decisions of the Administration, turning over to "case-by-case decisions" that is precisely the opposite of what the legal system imposes should happen in the filling of legal gaps through the exercise of discretionary power.

The values of security and justice demand that, when the Administration is legally entrusted with the discretionary power to fill gaps in the law itself, the Administration should act in the same plane of abstraction and generality that ideally preside over the fixing of the legal criteria, when these exist.

In the case of the norms in question, when the law alludes to the fact that "are accepted", it cannot fail to refer to the admissibility of an interval of rates, which come to be in effect for a universe of omitted equipment, whether or not they have been previously subject to depreciation or amortization, to tax assessment or to litigation with the Administration itself.

The Administration has, whether awakened or not by the declarative initiative of some taxpayer, to attempt to ascertain, with impartiality, with generality, abstraction and consistency, the rates that come to be the "accepted" ones for that case and for all the others.

If not so, the very guarantees that, for taxpayers, result from impartiality and generality would be brought into question: a taxpayer would see his 5% rate be or not be accepted – but who would guarantee him that another taxpayer, with the same type of equipment but could not manage to see a 7 or 8% rate "accepted"?

On the other hand, only the fixing of a set of reasonable rates, corresponding to the interval of minimum and maximum useful life of an omitted asset element, fixed from a point of view of generality and abstraction, permits avoiding that a taxpayer with equipment analogous to another to which the TA had fixed a certain precise depreciation or amortization rate, but who used it in different circumstances, influential of the respective useful life period, not be irremediably prejudiced, by the circumstances valued by the TA, proper to the first case it appraised.

In this manner, what is believed of the understanding now sustained, not only does not go against the principles of security, equality and legal generality, nor against the generic duty of impartiality that falls upon the Administration, but, on the contrary, is required by them.

Thus, only "accepted" depreciation rates corresponding to a minimum and maximum useful life period, by the TA, and these coming to be in effect for all similar cases, in accordance with the express terms of the legal regime, is the gap filled and the rate in effect ceases to be the "TA's" rate to be the rate of the Law itself. Only in that manner, it is believed, is the legal command executed to fix "rates" (in the plural) of depreciation or amortization, it not being conceivable how the fixing of a single depreciation rate could correspond to legislative intent, when, precisely, it is not that the modus operandi of the legislator in treating the same matter, on the one hand, and the legislative command is clear in prescribing the acceptance of "rates" considered reasonable, on the other.

For the rest, this interpretation would always be required by the principle of equality, inasmuch as no material justification exists for the fact that taxpayers can use depreciation rates comprised between the minimum and maximum periods of useful life of goods, in the case where the same are contained in the table appended to Regulatory Decree no. 25/2009, of 14 September, and can only use a sole rate (precisely the one considered reasonable by the TA), in the case where they are not.

And, note, as in the case of elements comprising the table appended to Regulatory Decree no. 25/2009, of 14 September, there is no difficulty whatsoever with the interval of depreciation or amortization rates resulting from the combination of the table with the regime of that decree, in the omitted cases, of fixing by the TA of the interval of reasonable admissible rates, there will not be. Indeed, the subsequent procedure will be precisely the same, that is, within the interval fixed, whether by the combination of the regime of the Regulatory Decree and its appended table, or by the TA, the taxpayer will choose the rate most suited to its concrete situation, without there being, in one situation as in the other, any qualms, case-by-case decisions or arbitrariness, or, for those who understand otherwise, having the same in both situations.

Hence that, in indicating, in accordance with articles 31, no. 2 of the CIRC and 5, no. 3 of Regulatory Decree no. 25/2009, of 14 September, a sole depreciation rate, corresponding to a fixed useful life period, the TA incurred in a mistaken application of those norms and, consequently, in a mistaken exercise of the power of technical discretion that they confer upon it.

Being here to review a legality prior to the exercise of the discretionary power that the norms in question confer upon the TA, it is naturally that one is not entering into the substance of the exercise of such power, not discussing, therefore, the technical correctness of the solution to which it discretionarily arrived, insofar as what is concluded is that the solution to which it arrived was not that which the normative commands that confer discretionary power upon it prescribed that it produce.

Nor is the matter closed here, however, with the incorrect intervention of the TA in the case at hand. Indeed, the situation in question is not one in which a taxpayer, confronted with the absence of an asset in the table appended to Regulatory Decree no. 25/2009, of 14 September, requests the TA to indicate depreciation or amortization rates that it considers reasonable.

Rather, in this case, the Applicant, in accordance with law, presented its tax return[6], having its accounting duly organized, and the TA intended to proceed, and did proceed, to corrections thereto, being a case in which "It is to the TA that falls the burden of proof of the verification of the legal (binding) presuppositions of its action, namely if aggressive (positive and unfavorable)"[7].

That is, confronted with the return of the Applicant, it fell upon the TA, in the first instance, to demonstrate that it was wrong, such burden not flowing from the norms of nos. 2 of article 31 of the CIRC and 3 of article 5 of Regulatory Decree no. 25/2009, of 14 September, but from article 74, no. 1 of the LGT, combined with article 75, no. 1 of the same Law[8].

Now, saving all due respect to other opinions, demonstrating that the depreciation rate used by the Applicant, corresponding to a useful life period of 15 years, was incorrect – i.e., not "reasonable" – is not the same as demonstrating that the depreciation rate corresponding to a useful life period of 20 years is correct – i.e., "reasonable" – which is what the TA did.

In other words, the circumstance that the depreciation rate corresponding to a useful life period of 20 years is reasonable says nothing about the depreciation rate corresponding to a useful life period of 15 years, being or not reasonable[9].

Thus, being, as referred to, the burden of the TA to demonstrate the verification of the presuppositions of the legality of its action, and making part of such presuppositions the incorrectness of what was declared by the Applicant, it is concluded that the TA did not fully demonstrate such presuppositions, since, instead of demonstrating that the depreciation or amortization rate underlying what was declared by the Applicant was not reasonable, it limited itself to demonstrating that the depreciation or amortization rate corresponding to a useful life period of 20 years was reasonable, from which it does not follow, either necessarily or directly, that the depreciation or amortization rate corresponding to a useful life period of 15 years, used by the Applicant, was not reasonable.

In this manner, the TA not having demonstrated the legality of its corrective action, should, also by this route, the same be considered illegal.

Finally, however, in the arbitral proceedings, the Respondent comes to contend that the judgment of reasonableness relating to the 20-year period is relative to a minimum period of durability of the asset in question, it is judged that such argumentation should not be accepted.

Indeed, and first of all, it is considered that the said argumentation integrates a post hoc justification, since, saving all due respect to other opinions, no textual support is to be found in the reasoning of the corrections carried out and now contested by the Applicant for such an interpretation.

Thus, as written in the Judgment of the STA of 23-09-2015, rendered in proceedings 0134/11[10], "It is exclusively in light of the reasoning expressed by the TA at the time of the practice of the additional VAT assessment that the legality of that tax act should be assessed.".

On the other hand, it is true that the Respondent's own argumentation ends up contradicting such a thesis, asserting, for example, that the rates determined by the Respondent correspond to "average indices"[11], and that "the most accurate and reasonable measure and rule will be those that are considered as the average"[12], from which it clearly results, what is the reality, that is, that what was fixed in the corrections made was a single rate, and not an interval of rates, corresponding to an average value, and not to a minimum value.

Hence it is considered, in accordance with the foregoing, that the arbitral request should be judged well-founded.

C. DECISION

To these terms, it is decided by this Arbitral Tribunal to judge the arbitral request presented to be well-founded and, in consequence,

a) To annul the corporate income tax assessment act no. 2016…, the interest assessment no. 2016 … and the settlement verification statement no. 2016…, all relating to the 2014 tax year, insofar as they considered as costs fiscally non-deductible for that period the amounts relating to the depreciation of the wind turbines of B…;

b) To condemn the Respondent in the costs of the proceedings, fixed below

D. Value of the Proceedings

The value of the proceedings is fixed at € 322,283.38, in accordance with article 97-A, no. 1, a), of the Tax Procedure and Process Code, applicable by force of subparagraphs a) and b) of no. 1 of article 29 of the LRAT and no. 2 of article 3 of the Regulation of Costs in Tax Arbitration Proceedings.

E. Costs

The value of the arbitration fee is fixed at €5,508.00, in accordance with Table I of the Regulation of Costs of Tax Arbitration Proceedings, to be paid by the Respondent, once the request was entirely well-founded, in accordance with articles 12, no. 2, and 22, no. 4, both of the LRAT, and article 4, no. 4, of the said Regulation.

Let it be notified.

Lisbon 20 April 2017

The Presiding Arbitrator

(José Pedro Carvalho - Rapporteur)

The Arbitrator Member

(Carla Castelo Trindade)

The Arbitrator Member

(José Manuel Aurélio dos Santos)

[1] Available at: https://caad.org.pt/tributario/decisoes/decisao.php?s_processo=593%2F2015&s_data_ini=&s_data_fim=&s_resumo=&s_artigos=&s_texto=&id=2047.

[2] Available at https://caad.org.pt/tributario/decisoes/decisao.php?listPage=217&id=2277.

[3] See, for example, the Judgment of the STA of 03-03-2016, rendered in proceedings 0768/15, available at www.dgsi.pt, where one can read:

"I - Discretion consists of a freedom of choice among several solutions considered equally possible [the Administration freely chooses one of the solutions pointed out in law, with any one of them being considered equally good]. On the other hand, the jurisdictional control of discretionary power is subject only to the control of legality and does not extend to the sphere of opportunity, where discretionary power occupies its space par excellence."

[4] Available at www.dgsi.pt.

[5] Without need, naturally, of any dialogue between TA and Taxpayer at the end of which it is concluded that "are accepted" or "are rejected" the depreciation or amortization rates "proposed" by the Taxpayer.

[6] Which is presumed to be true, in accordance with article 75, no. 1 of the LGT.

[7] See Judgment of the STA of 16-01-2007, rendered in proceedings 00911/03, available at www.dgsi.pt.

[8] Hence it is not being sustained the necessity for the TA to prove the unreasonableness of any and every rate that diverged from that which it was called upon to define, but, solely, that if it is understood that a duly declared rate is not correct, it falls upon it, as a condition of the legitimacy of its corrective action, to demonstrate its incorrectness.

[9] For the rest, the circumstance that both useful life periods fall within what the Legislator, when it so understood, considered acceptable, suggests, in view of the provisions of article 9, no. 3 of the Civil Code, that both will be reasonable.

[10] Available at www.dgsi.pt.

[11] See point 47 of the Response.

[12] See point 48 of the Response.