Process: 667/2014-T

Date: May 29, 2015

Tax Type: Valor do pedido:

Source: Original CAAD Decision

Summary

This CAAD arbitral decision (Process 667/2014-T) addresses a dispute between A... - DISTRIBUIÇÃO SA and the Portuguese Tax Authority regarding an additional IRC assessment of €148,339.39 for fiscal year 2010. The core issue concerns whether an impairment loss of €512,482.49 on a credit over debtor company B... qualifies for tax deduction. The Claimant argues that the loss meets the requirements for doubtful credits under Articles 35 and 36 of the Corporate Income Tax Code (CIRC), having initially added the amount as non-deductible in 2009 and seeking to reverse it in 2010 following the debtor's insolvency proceeding. The Tax Authority contends that the Claimant improperly treated the credit as an uncollectible debt by de-recognizing it from accounting, rather than maintaining it as unpaid, and that Article 41 CIRC requirements were not met since the insolvency proceeding had not closed. The dispute highlights the critical distinction in Portuguese tax law between provisions for doubtful credits (Articles 35-36 CIRC) and uncollectible debts (Article 41 CIRC), with different timing and recognition requirements. The Claimant also seeks compensation under Article 53 of the General Tax Law (LGT) and Article 171 of the Tax Procedure Code (CPPT) if the tax guarantee provided proves improper. The Collective Arbitral Tribunal was constituted in November 2014 under the Legal Framework for Tax Arbitration, with decision scheduled for May 2015.

Full Decision

ARBITRAL DECISION

THE PARTIES

Claimant: A… – DISTRIBUIÇÃO SA, TAX ID PT …, with registered office at …, Rua dos …, … – Floor …, Building …-"…", …-… – …, Oeiras;

Respondent: TAX AND CUSTOMS AUTHORITY (AT).

I. REPORT

a) On 08-09-2014, the Claimant filed with the CAAD a request seeking, under the Legal Framework for Tax Arbitration (LFTA), the constitution of a collective arbitral tribunal (CAT).

b) The request is signed by a lawyer representing the Claimant.

THE REQUEST

c) By way of the arbitral decision request presented within the scope of the proceeding in question, the Claimant hereby petitions: i) the declaration of illegality of the acts of additional IRC assessment no. 2014 … and compensatory interest assessment no. 2014 …, relating to fiscal year 2010, in the total amount of € 148,339.39; and ii) the recognition of the right to compensation provided for in articles 171 of the CPPT and 53 of the LGT, should the patrimonial guarantee provided for the purpose of suspending the tax enforcement proceeding instituted as a consequence of the tax debt whose legality is now being contested be deemed improper.

d) The AT, after becoming aware of the request for constitution of the Collective Arbitral Tribunal (CAT), by petition of 21.10.2014, communicated that it was maintaining in its precise terms the tax act indicated as the object of the arbitral decision request (article 13, no. 1 of the LFTA).

OF THE COLLECTIVE ARBITRAL TRIBUNAL (CAT)

e) The request for constitution of the CAT was accepted by the President of the CAAD and automatically notified to the AT on 09.09.2014.

f) By the Deontological Council of the CAAD, the arbitrators signatories of this decision were appointed, and the parties were notified thereof on 22.10.2014. The parties did not manifest any will to refuse the appointment, in accordance with the combined provisions of article 11, no. 1, paragraphs a) and b) of the LFTA and articles 6 and 7 of the Deontological Code.

g) Therefore, the Collective Arbitral Tribunal (CAT) has been, since 06.11.2014, duly constituted to appreciate and decide the object of this dispute.

h) Having occurred an omission in the indication of the alternate arbitrators in the "communication of the constitution of the CAT", the parties were notified of this correction by dispatch of 18-5-2015.

i) On 09.11.2014, the dispatch of article 17-1 of the LFTA was issued by the President of the CAT and notified to the Claimant and the Respondent on 10.11.2014.

j) The AT responded on 16.12.2014 and attached on 18.12.2014 the respective procedural file, composed of 5 volumes (PF, PF1, PF2, PF3 and PF4).

k) On 08.03.2015, a dispatch exempting from the meeting of article 18 of the LFTA was issued by the President of the CAT and a period of 10 days was granted for the presentation of written pleadings by the parties.

l) By petition of 16.03.2015, the Claimant requested the holding of the meeting of article 18 of the LFTA, production of witness evidence listed in the arbitral decision request and/or pleadings. By petition of 19.03.2015, the Respondent requested that no witness evidence be produced.

m) By dispatch of the President of the CAT of 21.03.2015, the production of witness evidence was denied on the ground that there were no disputed facts on which it could bear, the holding of the meeting of parties was dispensed with as unnecessary and a period of 10 days was granted for the presentation of written and successive pleadings. May 30, 2015 was scheduled for the adoption of the final decision.

n) On 10.04.2015, the Claimant presented its written pleadings and the Respondent presented its on 20.04.2015.

PROCEDURAL REQUIREMENTS

o) Legitimacy, capacity and representation - The parties have legal personality and capacity, are legitimate and are properly represented.

p) Adversarial principle – The AT was notified as provided in item k). All dispatches issued in the proceeding and all documents attached were made available to the respective counterparty and appear in the CAAD's procedural management system.

q) Dilatory exceptions - The proceeding does not suffer from procedural defects and the arbitral decision request is timely since it was presented within the period prescribed in paragraph a) of no. 1 of article 10 of the LFTA. The AT did not question the timeliness of the presentation of the arbitral decision request and in light of the deadline for payment of the tax assessment, the CAT does not conclude that it is untimely.

SUMMARY OF THE CLAIMANT'S POSITION

r) The Claimant understands that the assessment acts carried out by the AT are illegal because they are based on the understanding that the loss due to impairment deducted by the Claimant, relating to the credit held over the debtor company, can only be fiscally recognized after the closure of the insolvency proceeding of that company, in light of the regime established in article 41 of the CIRC.

s) It is precisely in the application of this regime that the Claimant understands that the "error of the AT" lies, when what is intended is that the impairment loss declared on company "B…" be fiscally accepted under the terms of articles 35 and 36 of the CIRC, regarding credits of doubtful collectibility.

t) In this regard, the Claimant alleges that: 1 - in fiscal year 2009, it added in field 270 of Table 7 of Model 22 - "adjustments of values of non-deductible assets or beyond legal limits" -, the amount of € 587,132.00, of which part - € 512,482.49 -, corresponded to the non-acceptance for tax purposes of the impairment loss from accounting relating to the credit it held over the debtor company "B…"; 2 - as a result of the insolvency proceeding of that company, it deducted in field 764, of Table 7, of Model 22 of fiscal year 2010 – "reversal of provisions taxed" -, the amount of € 512,482.49, corresponding to the amount relating to the credit on that company; 3 - with the requirements provided for in articles 35 and 36 of the CIRC being met regarding credits of doubtful collectibility, it was incumbent on the Claimant to deduct the amount of the impairment loss in fiscal year 2010 and, consequently, to attribute tax relevance to that impairment by the AT.

u) In these terms, by failing to consider the amount of € 512,482.49 as impairment, the Claimant understands that the AT acted in violation of the provisions of articles 17, 35 and 36 of the CIRC, which is why the assessment carried out is marred by manifest illegality and should therefore be annulled.

SUMMARY OF THE RESPONDENT'S POSITION

v) The AT contends that the tax treatment given by the Claimant to the credit sub judice was not merely the constitution of a provision under the terms provided for in article 36, no. 1, paragraph a) of the CIRC, but rather that of uncollectible debts. This is because, for a credit to be considered under the terms of article 36 it would be necessary for the debt to be evidenced in the accounting as "unpaid" and not as "uncollectible debt".

w) However, in the wake of the constitution of the aforementioned provision and knowledge of the insolvency proceeding of company B…, the Claimant "de-recognized the customer credit, so as to reflect that, as of the date of the close of fiscal year 2010, it was no longer in existence", treating it as an uncollectible debt, without the requirements provided for in article 41 of the CIRC being met – namely, the closure of the insolvency proceeding of that company.

x) Therefore, since such loss cannot be fiscally accepted in light of articles 18, 35, 36 and 45 of the CIRC and the principle of exercise specialization, the AT concludes, arguing for the maintenance in the legal order of the assessments in question.

II. PROVEN AND UNPROVEN FACTS. REASONING

With relevance to the decision to be adopted, these are the facts that are considered proven, indicating the respective documents (proof by documents), as reasoning.

Proven Facts

  1. The Claimant belongs to "GROUP A…1" and is registered in the tax register with the activity of "Wholesale trade in alcoholic beverages", CAE 46341 – article 11 of the arbitral decision request and pages 5 of the tax inspection report - part II.3.1.2 - attached with the PF regarding "company activity".

  2. By virtue of its integration in a Multinational Group, in fiscal year 2010, the Claimant assumed a special taxation period, beginning on 1 July 2010 and ending on 30 June 2011 – articles 12 and 13 of the arbitral decision request and pages 6 of the tax inspection report - part II.3.2 - attached with the PF regarding "tax treatment".

  3. In fiscal year 2009, the Claimant provisioned a debt it held over its customer "B…, S.A." in the amount of 587,132.00 euros, this value being added in field 270 of table 07 of Model 22 – article 18 of the arbitral decision request and second sheet of Document no. 8 attached with the same.

  4. On 07.11.2011, the Claimant submitted its annual income tax return of Model 22, relating to fiscal year 2010, in which a taxable profit of € 611,871.65 was calculated and resulted in the payment of a tax in the amount of € 151,010.72 – article 14 of the arbitral decision request and document no. 6 attached with the same.

  5. In the declaration referred to in the foregoing item (relating to fiscal year 2010), the Claimant entered the amount of € 512,482.49 in field 764 of table 7, relating to impairment losses on credits, by virtue of the debt of company "B…, S.A.", whose company was declared insolvent on 07.06.2011, by sentence pronounced within the scope of the insolvency proceeding that took place in the 3rd Court of the Commercial Court of Vila Nova de Gaia under no. …/11….TYVNG – articles 14 to 16 and 23 to 25 of the arbitral decision request and documents no. 6 and 9 attached with the same.

  6. As a result of the closure of the insolvency proceeding previously identified, the Claimant came to de-recognize from an accounting standpoint the aforementioned amount of €512,482.49 that it had entered in Field 764 of Table 7, of the annual income tax return (Model 22) relating to fiscal year 2010.

  7. The AT conducted an inspection procedure - Work Order OI2014 … - (internal nature of partial scope), directed to the analysis of IRC (paragraph a) of article 13 and paragraph b) of no. 1 of article 14, both of the RCPIT), with fiscal year 2010 being the object of analysis (article 14, no. 3 of the RCPIT) and had as its objective the validation of the items of adjustments and provisions entered in the simplified business statement (IES) and their respective tax effects of the declared amounts, as well as the validation of the values in the fields "721 – Provisions non-deductible or beyond legal limits and impairment losses on financial assets not deductible for tax purposes", "752 – Blank line" and "764 – Reversal of provisions taxed", of table 07 of the income tax return model 22 of fiscal year 2010 – Administrative proceeding attached, articles 1 to 6 of the arbitral decision request, article 20 of the AT's response.

  8. In the wake of the tax inspection conducted by the Tax Inspection Services of the Finance Directorate of Lisbon, the Claimant was notified, on an undetermined date, of the additional IRC assessment no. 2014 …, dated 19.04.2014 and of the compensatory interest assessment no. 2014 …, relating to the economic fiscal year 2010, which resulted in a balance payable of € 148,339.39, being € 135,807.86 of IRC collection and € 12,531.53 of compensatory interest, with a payment deadline of 09.06.2014 – Second paragraph of the preamble of the arbitral decision request, documents nos. 1 and 2 attached with the arbitral decision request and article first of the AT's response.

  9. The aforementioned assessments were carried out on the basis of the conclusion of the Tax Inspection Report that the amount of € 512,482.49, relating to impairment losses on credits "was improperly deducted in field 764 of table 07 of the income tax return model 22 of fiscal year 2010" – article 3 of the arbitral decision request, article 2 of the AT's response and PF.

  10. Such assessments resulted from the correction made by the AT regarding impairment losses on credits, giving rise to a corrected fiscal taxable profit in the amount of € 1,124,354.14, from which resulted a balance payable in the amount of € 148,339.39 – articles 4 to 5 of the arbitral decision request, pages 5 – initial part – of the AT's response and PF.

  11. The Claimant did not proceed with payment of the assessments in question in the present case, which is why the tax enforcement proceeding no. … 2014 … was instituted – Article 7 of the arbitral decision request and document no. 4 attached to the same.

  12. Within the scope of the aforementioned tax enforcement proceeding, the Claimant provided a bank guarantee in the amount of € 188,255.18, for the purpose of its suspension – article 8 of the arbitral decision request and document no. 5 attached with the same.

The agreed facts result, it is perceived, from the documents submitted by the Claimant and by the Respondent, whose authenticity, contents and probative valuations did not merit disagreement from the parties.

Unproven Facts

There is no other alleged factuality that configures itself as relevant for the proper composition of the procedural dispute, in the dimension of the decision to be adopted.

III - QUESTIONS FOR THE TRIBUNAL TO RESOLVE

The matter at issue is confined to the question of whether the impairment loss declared by the Claimant, in the amount of € 512,482.49, should or should not be considered fiscally accepted in fiscal year 2010, by meeting the legally established requirements for that purpose, in light of what is established in articles 18, 23, 35, 36 and 41 of the CIRC.

Indeed, the question here is whether the credit resulting from the activity of the Claimant should only be fiscally recognized at the time of the closure of the insolvency proceeding of the debtor company, on the basis of the legal regime relating to uncollectible credits, provided for in article 41 of the CIRC – as the AT understands -; or whether, instead, it should be fiscally recognized on the basis of articles 35 and 36 of the CIRC, regarding credits of doubtful collectibility.

IV - APPRECIATION OF THE QUESTIONS FOR THE CAT TO RESOLVE

As to the substantive matter

Let us see, after all, what the actual treatment given by the Claimant to the credit under discussion was.

Now, although it results from the factual framework outlined above that the Claimant constituted a provision in the amount of € 587,132.00, partially constituted by the credit relating to company B…, which it subsequently came to deduct in fiscal year 2010, following knowledge of the insolvency proceeding of that company, the truth is that, together with this, the Claimant de-recognized that same credit from an accounting standpoint – which cannot be ignored here.

Indeed, once this credit is de-recognized from an accounting standpoint, the impairment loss declared by the Claimant cannot be fiscally recognized in fiscal year 2010 in light of the regime provided for credits of doubtful collectibility. It could only be so if the debt had remained as "unpaid" in the respective accounting.

Accordingly, we subscribe to the understanding set forth in Arbitral Award no. 85/2012-T, of 20.12.2012, in which it is clarified that "with the accounting elimination of the referred credits [provisioned], they will definitely cease to be included in the balance sheet and have tax relevance (…). Therefore, not having legal support for the elimination of the credits from the balance sheet, it is justified that the correction to the taxable profit be made, considering the values of those credits for IRC taxation purposes, as if the annulment had not been carried out".

This understanding is equally conveyed in the Binding Ruling of the AT of 28.01.2014, through which it is clarified that if "the creditor entity decides to de-recognize the aforementioned credits, their amount must be increased in Table 07 of the Declaration Model 22, for the purpose of determining the taxable profit of the taxation period in which the de-recognition occurred, since the requirements provided for in article 41 of the CIRC for the consideration of the credit as uncollectible are not observed".

It is verified, therefore, that having the Claimant de-recognized the credit over company B…, without the requirements provided for in article 41 of the CIRC being met – as happens in the present case -, it had to be increased – and not deducted - for the purpose of determining the taxable profit.

In light of the above, we conclude by the legality of the correction made by the AT, judging, thus, the request for declaration of illegality of the assessments in question to be unfounded.

As to the recognition of the right to compensation for the provision of the guarantee and compensatory interest

The request for declaration of illegality formulated by the Claimant being unfounded, the recognition of the right to compensation provided for in articles 171 of the CPPT and 53 of the LGT, for the provision of patrimonial guarantee for the purpose of suspending the tax enforcement proceeding instituted against the Claimant as a consequence of the tax debt in question, is prejudiced.

It is important to note, as to this point, that the Claimant does not allege and much less does it demonstrate what damage (e.g., bank commissions) in which it incurred as a consequence of the provision of bank guarantee provided for the suspension of the tax enforcement proceeding.

"The Tribunal may, however, according to the rules of normality and common experience, presume the real existence of a damage from the provision of a bank guarantee.

Which moreover derives from article 53 of the LGT which determines that the debtor who "(...) offers bank guarantee or equivalent shall be compensated totally or partially for the damages resulting from its provision (...)". On the other hand, the compensation, according to the same article, "(...) has as its maximum limit the amount resulting from the application to the guaranteed value of the rate of compensatory interest (…)" – cf. Proceeding no. 10/2012-CAAD.

The amount of the commission paid on the guaranteed value is unknown, and the Arbitral Tribunal cannot ascertain – should the request formulated by the Claimant proceed - whether it is less than or greater than the maximum limit, being unable to quantify it.

So that even if the right of the Claimant to such compensation were admitted, the damages from the provision of the guarantee to be reimbursed by the AT should be liquidated in execution of judgment.

V. OPERATIVE PART

In accordance with and on the basis of the grounds set forth above, this Collective Arbitral Tribunal decides:

a) To judge completely unfounded the request for declaration of illegality of the acts of additional IRC assessment no. 2014 … and compensatory interest assessment no. 2014 …, relating to fiscal year 2010, in the total amount of € 148,339.39;

b) To absolve the Tax and Customs Authority (AT) from that request; and

c) To judge the appreciation of the other questions raised in the proceeding to be prejudiced.

Value of the proceeding: in accordance with the provisions of article 3, no. 2, of the Regulation of Costs in Tax Arbitration Proceedings (and paragraph a) of no. 1 of article 97A of the CPPT), the value of the proceeding is set at 148,339.39 euros.

Costs: in accordance with the provisions of article 22, no. 4, of the LFTA, the amount of costs is set at €3,060.00, according to Table I attached to the Regulation of Costs in Tax Arbitration Proceedings, at the charge of the Claimant.

Notify.

Lisbon, 29 May 2015

The Collective Arbitral Tribunal (CAT),

José Poças Falcão

(President)

Augusto Vieira

(Member)

Alberto Amorim Pereira

(Member)

Text prepared by computer in accordance with the provisions of article 131, no. 5, of the CPC, applicable by reference from article 29 of the LFTA.

The drafting of this decision is governed by the orthography prior to the 1990 Orthographic Agreement.

Frequently Asked Questions

Automatically Created

What are the rules for deducting impairment losses and bad debts under Portuguese IRC?
Under Portuguese IRC, impairment losses on receivables follow two distinct regimes: (1) Doubtful credits under Articles 35-36 CIRC, which allow provisions for credits that remain unpaid and meet specific conditions regarding age, documentation, and collection efforts; and (2) Uncollectible debts under Article 41 CIRC, which permits deduction only when debts become definitively uncollectible, such as after closure of insolvency proceedings. The key distinction lies in accounting treatment and timing: doubtful credits must remain in accounting as unpaid receivables, while uncollectible debts are de-recognized. The accrual principle (especialização dos exercícios) requires that losses be recognized in the appropriate fiscal year when conditions are met.
Can a taxpayer challenge an additional IRC assessment through tax arbitration at CAAD?
Yes, taxpayers can challenge additional IRC assessments through tax arbitration at CAAD (Centro de Arbitragem Administrativa) under the Legal Framework for Tax Arbitration (LFTA - Regime Jurídico da Arbitragem em Matéria Tributária). The process involves filing a request within the prescribed deadline (Article 10 LFTA), constitution of either a singular or collective arbitral tribunal, exchange of pleadings, and issuance of a binding arbitral decision. The tribunal has jurisdiction over legality challenges to tax acts including IRC assessments. In this case, the Collective Arbitral Tribunal was constituted following standard procedures, including appointment of arbitrators by the CAAD Deontological Council and notification to both parties.
What conditions must be met to recognize impairment losses on receivables for IRC purposes?
To recognize impairment losses on receivables for IRC purposes under Articles 35-36 CIRC, several conditions must be met: (1) the credit must remain in accounting as an unpaid receivable, not de-recognized as uncollectible; (2) specific time periods must elapse (generally 6 months for overdue credits to non-insolvency debtors, or 24 months for credits to entities in insolvency/recovery proceedings); (3) the debtor must show objective evidence of financial difficulty; (4) proper documentation and collection efforts must be demonstrated. Critically, the credit must be evidenced as 'not paid' rather than treated as an 'uncollectible debt,' which would require meeting the stricter requirements of Article 41 CIRC, including closure of insolvency proceedings.
How does the CAAD arbitral tribunal process work for corporate income tax disputes?
The CAAD arbitral tribunal process for corporate income tax disputes follows these stages: (1) Filing of arbitration request by taxpayer within legal deadline; (2) Acceptance by CAAD President and automatic notification to Tax Authority; (3) Constitution of tribunal (singular or collective) with appointment of arbitrators; (4) Tax Authority response indicating whether it maintains the contested act (Article 13 LFTA); (5) President's dispatch under Article 17 LFTA setting procedural calendar; (6) Exchange of pleadings and evidence (witnesses may be heard if relevant disputed facts exist); (7) Optional Article 18 meeting between parties; (8) Final decision within legal timeframe. The process ensures adversarial principle, with all dispatches and documents shared with both parties through the CAAD procedural management system.
Is a taxpayer entitled to indemnification under Article 53 of the LGT when a tax guarantee is deemed undue?
Yes, under Article 53 of the General Tax Law (LGT) and Article 171 of the Tax Procedure Code (CPPT), taxpayers are entitled to compensation when a tax guarantee provided to suspend tax enforcement proceedings is subsequently deemed improper or undue. This occurs when the underlying tax assessment is annulled or declared illegal, meaning the guarantee should never have been required. The indemnification covers costs and damages resulting from the provision of the guarantee, including bank fees, opportunity costs, and other financial burdens. In this case, the Claimant specifically requested recognition of this right to compensation as part of the arbitral decision request, contingent on the tribunal finding the IRC assessment illegal and the guarantee therefore improper.