IRC Tax Correction on Capital Gains Reinvestment & Job Creation – CAAD Case 68/2017-T

ARBITRAL DECISION

I – REPORT

1. A…, with headquarters at Rua …, no.…, …, …-… …, with the collective person and tax identification number … (hereinafter "Claimant"), having been notified of the decision dismissing the Hierarchical Appeal no. …2015…, presented, on 18-01-2017, pursuant to the provisions of paragraph a) of no. 1 of art. 2 and article 10 of Decree-Law no. 10/2011, of 20 January, which approves the Legal Regime of Arbitration in Tax Matters (RJAT), a request for arbitral decision, in which the TAX AND CUSTOMS AUTHORITY (AT) is named as Respondent, hereinafter also designated as Respondent, requesting the annulment of the act dismissing the Hierarchical Appeal filed and the partial annulment of the tax act for additional corporate income tax assessment no. 2014….

1.2. In exercise of the option for appointment of arbitrator provided in paragraph b) of no. 2 of article 6 of the RJAT and in compliance with the provisions of paragraph g) of no. 2 of article 10 and no. 2 of article 11 of the RJAT, the Claimant appointed as Arbitrator Her Excellency Prof. Nina Aguiar and the highest-ranking official of the Tax Administration appointed as Arbitrator His Excellency Dr. José Rodrigo de Castro. In turn, the Arbitrators appointed by the parties communicated to CAAD the appointment of Her Excellency Counsellor Maria Fernanda dos Santos Maçãs as President Arbitrator.

1.3. The request for constitution of the tribunal was accepted by His Excellency the President of CAAD and automatically notified to the Tax and Customs Authority on 19-01-2017.

1.4. The collective tribunal was constituted on 05-04-2017.

1. To substantiate the request, the Claimant alleges, in summary, the following:

On the omission of notification for the exercise of the prior hearing right

The impugned act is tainted by invalidity due to omission of essential formality, inasmuch as the Claimant was not notified to exercise the right of prior hearing, as was imposed upon it pursuant to article 60, no. 1 of the LGT, regarding the decision of the Respondent on the hierarchical appeal filed by the Claimant.

The right of prior hearing, pursuant to article 60, no. 3 of the LGT, could only be dispensed with if, having the taxpayer been previously heard in any phase of the procedure, new facts not previously addressed by the tax administration were not invoked.

However, in this case, following the expansion of the request in the context of the administrative review petition, there was a modification of the facts, and within the scope of the hierarchical appeal the Claimant brought new facts and elements.

The exercise of the right of prior hearing, having allowed the Claimant to demonstrate the relevance of such facts, would have had paramount importance to avoid the present judicial dispute, given that it would have permitted contravening the alleged absence of a net creation of 55 jobs.

On the alleged calculation error of gains from the sale of vehicles

The Respondent considered, as the basis for its decision, that the Claimant had calculated the tax gains relating to the disposal of light passenger or mixed vehicles incorrectly by considering that "for purposes of calculating tax gains and losses, one must consider not the amount of depreciations accepted fiscally but rather the amount of depreciations practiced in accounting."

Pursuant to no. 2 of article 46 of the CIRC, "gains and losses are given by the difference between the realization value (…) and the acquisition value minus (…) the depreciations or amortizations accepted fiscally (…)."

It is verified that the AT, by considering applicable "the depreciations and amortizations practiced in accounting (…)" – and not those fiscally accepted – performs an illegal interpretation of no. 2 of article 46 of the CIRC.

In seeking to legitimize its interpretation of no. 2 of article 46 of the CIRC "(…) in the instructions contained in form 31 (…)" as well as in the "(…) provisions of Circular no. 6/2011 of DSIRC," the AT is violating the principle of tax legality enshrined in articles 103, no. 2 and no. 3 and 165, no. 1, paragraph i) of the CRP.

On the adjustments corresponding to the net creation of jobs pursuant to article 19 of the EBF

The Claimant, in its Model 22 Declaration for Corporate Income Tax, concerning the fiscal year 2012, calculated and deducted the amount of €1,364,063.50, referring to the tax benefit of Net Job Creation ("CLPT"). The AT increased the amount by €6,790.00, because the Claimant had included, for purposes of the tax benefit of CLPT, "employees hired in the tax period of 2010 who, following an inspection procedure carried out for that tax period, were not considered 'eligible.'"

Such employees, as the AT refers in the Inspection Report, "are identified with "(a)" in Appendix III of this Report."

From the analysis of that appendix, it is verified that the AT is considering as "not eligible" the following two workers: B… and C….

With regard to the employee "C…," the Claimant accepted the respective adjustment.

With regard to the worker "B…," we conclude by the lack of substantiation of the present adjustment carried out by the AT.

As for employee "B…," the same does not appear – contrary to what the AT states – in the list of ineligible employees, as per "Appendix VII" of the Final Report of the inspection action for the fiscal year 2010.

Therefore, the AT's cognitive process for disregarding that employee cannot be discerned.

The stated lack of substantiation, undoubtedly, does not permit a proper (and legal) exercise of the right of defense and the right to be heard, whereby, as to that employee no adjustment can be made to the taxable matter in the amount of €6,790.00.

The mere reference by the AT that "(…) that worker was disregarded (appearing with the indication of 'NOT MAJORABLE')" does not meet such substantiation requirements.

The fact that a worker is eligible is completely distinct from a worker being "not majorable."

In fact, a worker eligible for the CLPT tax benefit will be one who meets the requirements of nos. 1 and 2 of article 19 of the EBF, i.e., a "young" or "long-term unemployed" worker who is hired on an indefinite-term contract.

However, the fact that the worker is eligible does not determine that charges are increased.

On the adjustments to the annual limit of the increase, provided for in article 19 of the EBF

According to the position adopted by the AT, the annual limit of the tax benefit provided for in no. 3 of article 19 of the EBF should be adjusted proportionally to the number of part-time working hours.

The interpretation made by the AT is restrictive of article 19 of the EBF, and this interpretation, within the scope of tax benefits, is prohibited, as was concluded, for example, in the Arbitral Decision issued within Proc. no. 3/2012-T1.

Following the conclusion of the Arbitral Tribunal in Arbitral Decision no. 212/2013-T, "(…) the rational or teleological element also does not point to an interpretation that restricts the scope of the tax benefit."

On the net creation of jobs in fiscal year 2012

The calculation of the net creation of jobs determined by the AT within the scope of the inspection action and impugned in the context of the administrative review petition for fiscal year 2012 did not appear to be correct.

In the context of preparing the Administrative Review Petition and obtaining supporting documentation, the Claimant concluded that in fiscal year 2012, there was, in fact, a net creation of 57 (fifty-seven) jobs, which, after subsequent analysis, was reduced to 55 (fifty-five).

As stated in the Request to expand the administrative review petition, the Claimant verified that, "in the list of departures provided during the tax inspection, by oversight, dates of commencement of indefinite-term contracts were identified that in reality were presumed dates, but which in truth never actually materialized."

That is, workers had been indicated who, by oversight, were identified as possessing an indefinite-term contract, but who in reality had a fixed-term labor relationship, whereby a new list – this one correct – was presented, as well as supporting documents of the actual existence of fixed-term work contracts.

Moreover, there were workers who had been considered by the AT as "eligible departures," because, in its view, the requirements of age (article 19, no. 2, paragraph a), 1st part of the EBF) or schooling (article 19, no. 2, paragraph a), 2nd part of the EBF) were met.

The AT, in its decision partially granting the hierarchical appeal, reduced the count of "eligible departures," for purposes of the tax benefit of CLPT, to 221, partially addressing the arguments of the Claimant.

The Claimant, however, as it had already reiterated in the context of the Hierarchical Appeal, understands that the number of "eligible departures" – for purposes of the CLPT tax benefit – is 174 and not 221.

In this arbitral proceeding it is in question to verify whether, for purposes of the CLPT tax benefit, the number of "eligible departures" should be 174 (position of the Claimant) or 221 (understanding of the AT).

The discussion focuses on Appendix I of the decision partially granting the Hierarchical Appeal and can be summarized in the following question: "are the workers qualified by the AT as 'eligible departures' in column 13 of Appendix I of the decision partially granting the Hierarchical Appeal correctly qualified as such?"

It is important to clarify that there are three workers in that list (D…, E… and F…) that the Claimant does not contest in this arbitral proceeding, whereby the discussion focuses on the remaining 47 (forty-seven) workers – erroneously – qualified by the AT as "eligible departures" for purposes of the CLPT tax benefit.

The AT understands that such workers would be qualified as "eligible departures" because (a) they had an indefinite-term labor relationship or (b) because they met the schooling requirement provided for in the 2nd part of paragraph a) of no. 2 of article 19 of the EBF (the latter question is reduced to employee "G…").

It happens, however, that, as stated in the request to expand the petition, the Claimant verified that "in the list of departures provided during the tax inspection [inspection], by oversight, dates of commencement of indefinite-term contracts were identified that in reality were presumed dates that never actually materialized."

Being that, in the context of the hierarchical appeal, the AT already had all the elements to verify that the workers listed in Appendix I of the decision dismissing the Hierarchical Appeal could not be qualified as "eligible departures."

It is verified, therefore, through the referred elements that those workers actually had a fixed-term labor relationship, and at no time were the referred fixed-term work contracts converted into indefinite-term work contracts.

In fact, such information is contained, from the outset, in Appendix B to the Single Report, which constitutes a declaratory obligation pursuant to the provisions of article 32 of Law no. 105/2009, of 14 September and Ordinance no. 55/2010, of 21 January.

As stated in their respective completion instructions, the referred Appendix B demonstrates the "employees who entered and/or left the same in that year."

Furthermore, in field 4 of the referred Single Report is the type of work contract, with the indefinite-term work contract identified with code no. 10.

The flows of departure of workers with fixed-term contracts are identified with code no. 20.

We verify that only two of the employees (E… and F…) listed in Appendix I to the decision partially granting the Hierarchical Appeal had an indefinite-term labor relationship.

We conclude that, in fact, 46 workers listed in that Appendix had a fixed-term work contract.

Consequently, pursuant to no. 1 and no. 2, paragraph d), both of article 19 of the EBF, these cannot be qualified as "eligible departures," whereby they should be excluded from the respective list, for purposes of calculating the net creation of jobs.

With regard to employee G…, note that the AT states that "the taxpayer met the requirement provided for in paragraph a) of no. 2 of article 19 of the EBF."

Now, the truth is that the employee did not meet such requirement.

On the date of hire, i.e., 25/12/2009, the employee in question (G…) did not meet the requirements of paragraph a) of no. 2 of article 19 of the EBF.

In fact, on that date the employee had not completed secondary education, as demonstrated by their respective education certificate.

For which reason, he also cannot be qualified as an "eligible departure" for purposes of the CLPT tax benefit.

Given the foregoing, in the presence of 226 "eligible entries," in light of what is demonstrated above, we verify that, erroneously, the AT qualified 47 departures as eligible.

Thus, the effective number of "eligible departures" should amount to 174 (i.e., 221 – 47), whereby, consequently, in fiscal year 2012, the Claimant calculated a net creation of 52 jobs and not 5, as advocated by the AT.

The Claimant concludes by requesting: a) The annulment of the act dismissing the hierarchical appeal filed; b) The partial annulment of the tax act for additional corporate income tax assessment no. 2014…; c) Reimbursement to the Claimant of the amount of €138,064.31; d) The payment to the Claimant of default interest, for the deprivation of the stated amount, pursuant to article 43 of the LGT.

1. In its Response, the Respondent alleges, briefly, the following:

3.1. By way of exception:

The Claimant requests that the Arbitral Tribunal verify: "whether for purposes of the CLPT tax benefit, effectively, the number of 'eligible departures' should amount to 174 or 221."

Now, even if such claim could eventually result from a hypothetical execution of judgments that might be carried out in the event that the arbitral decision issued is in favor of the claim, which is only raised as a mere academic hypothesis, what is certain is that such request exceeds the competence of this Tribunal.

In summary, given that the competence of arbitral tribunals derives from the provisions of no. 1 of article 2 of the RJAT, as well as from Ordinance no. 112-A/2011, of 22 March, pursuant to article 4 of the RJAT, we have that, as Jorge Lopes de Sousa correctly states: "the competence of Arbitral Tribunals includes the assessment of claims relating to the declaration of illegality: a) Of acts of assessment of taxes whose administration is entrusted to the Tax and Customs Authority (AT) [...];" b) Of acts of self-assessment, withholding at source and payment on account of taxes whose administration is entrusted to the AT, provided that they have been preceded by recourse to the necessary prior administrative remedy, provided for in accordance with articles 131 to 133 of the Code of Tax Procedure and Process (CPPT) [...]; c) Of acts establishing the taxable matter without recourse to indirect methods, when they do not give rise to the assessment of any tax [...]; d) Of acts of determination of the taxable matter without recourse to indirect methods [...]; e) Of acts establishing patrimonial values for tax purposes, whose administration is entrusted to the AT [...]; f) Of acts assessing customs duties and charges of equivalent effect on the export of goods [...]; g) Claims relating to export levies established under the common agricultural policy (CAP) or under specific regimes applicable to certain goods resulting from the transformation of agricultural products [...]; h) Of acts assessing value-added tax (VAT), special consumption taxes (IECs) and other indirect taxes on goods that are not subject to import duties [...]" – cf. JORGE LOPES DE SOUSA, Commentary on the Legal Regime of Tax Arbitration, Guide to Tax Arbitration, Almedina, 2013, pp. 105-108, our emphasis.

The material incompetence of the Tribunal to assess the claims identified above constitutes a dilatory exception that obstructs the continuation of the proceeding, leading to the dismissal of the instance as to the claim in question, in accordance with the provisions of articles 576, no. 2, 577, paragraph a) of the CPC, applicable pursuant to article 29, no. 1, paragraph e) of the RJAT.

3.2. By way of objection on the merits:

On the alleged omission of essential formality

Paragraph b) of no. 1 of art. 60 of the LGT, which is a concretization of what is provided for in no. 5 of art. 267 of the CRP, establishes the general principle of the right to hearing of taxpayers "before the total or partial dismissal of requests, complaints, appeals or petitions."

However, this general principle is departed from, dispensing with prior hearing, when the taxpayer has "been previously heard in any of the phases of the procedure referred to in paragraphs b) to e) of no. 1 (…), except in case of invocation of new facts on which it has not yet pronounced itself."

As stated in the Administrative Court decision, of 29/6/2011, Proc. 497/11, on art. 60 of the LGT (in the same wording in effect at the date of the facts): "What the legislator intended to safeguard was the hearing of taxpayers in any of the phases of the procedure culminating in assessment, not requiring the taxpayer to exercise that right in each of the different procedural phases, unless new facts on which they have not pronounced themselves are invoked.

Now, in the case of the present proceedings, the claimant was heard in the context of a draft decision on the request for official review, thereby participating in the formation of the act that was issued in that procedure.

In that context, R. was able to exercise the faculty of the right to hearing on the questions of fact and law that supported the draft decision, questions that are the same as those presented and resolved in the context of the hierarchical appeal.

For that reason, when deciding the hierarchical appeal filed against the dismissal of the administrative review petition, the AT decided to dispense with the hearing of R., as expressly substantiated in the act under challenge, making reference to circular no. 13/99, of 8 July, which is contained even in the collections of tax law legislation, and which reflects the legal regime established in art. 60 of the LGT, regarding prior hearing.

Therefore, contrary to what is contended by R., no formality was omitted, no defect being able to be attributed to this matter to the act subject to the present request for arbitral decision.

On the adjustment to tax gains with reinvestment intention

The Claimant alleges that, contrary to the AT's understanding, for purposes of calculating gains and losses, the depreciations accepted for tax purposes and not the accounting depreciations practiced should have been considered.

Furthermore, it advocates that, by basing its understanding on circular 6/2011 of DSIRC and in the instructions contained in form 31, the AT is violating the principle of tax legality.

As was well substantiated in the RIT, no. 1 of art. 46 of the CIRC refers to the concept of tax gains and losses, considering that they represent the gains acquired or losses suffered regarding assets of the fixed assets through their onerous transfer, as well as those resulting from accidents or the permanent allocation of such assets to purposes other than the activity carried out.

For its part, no. 2 of the above-mentioned article states that "gains and losses are given by the difference between the realization value (…) and the acquisition value minus (…) the depreciations or amortizations accepted fiscally (…)"

However, the instructions contained in form 31, relating to the calculation of tax gains and losses, state that in the case of light passenger vehicles or mixed vehicles, which are not used for the exercise of public transport services nor are intended to be rented in the normal course of the taxpayer's activities, the depreciations practiced in the determination of the tax gain or loss are relevant.

In the period of 2012, the taxpayer calculated, concerning the disposal of various fixed tangible assets, a positive difference between the tax gains (€101,167.48) and the tax losses (€26,029.68), having increased in field 740 of table 07 of the DRM22 the amount of €37,568.91 [(€101,167.48 - €26,029.68) x 50%], in accordance with the provisions of no. 1 of art. 48 of the CIRC, by reason of having expressly manifested the intention to proceed with the reinvestment of the realization value associated with them, reinvestment that was effected in the year 2012.

Following the analysis carried out on form 31 of tax gains and losses, it was found that the taxpayer disposed of 39 light passenger vehicles from its fixed tangible assets, acquired in the years 2002 to 2009, whose acquisition values exceeded €29,927.87. Following these disposals, it calculated on form 31 a positive difference between the tax gains (€18,516.19) and the tax losses (€6,957.96) in the amount of €11,558.23, as shown in the calculations evidenced in Appendix II of this report. However, for the calculation carried out, and for each of the 39 vehicles disposed of, the depreciations accepted for tax purposes were considered in column 10 of the respective form, instead of the accounting depreciations practiced, as results from the instructions contained in the said form and from what is stipulated in Circular no. 6/2011 of DSIRC.

Now, paragraph e) of no. 1 of art. 34 of the CIRC, no. 1 of art. 11 of DR 25/2009, of 14/09 and Ordinance no. 467/2010, of 07/07, in establishing a limitation on the fiscally depreciable value of light passenger vehicles or mixed (€29,928.87 in periods prior to 2010, €40,000.00 in the period of 2010 and €30,000.00 in the period of 2011 and €25,000.00 in the period of 2012), impels that the depreciations calculated above these limits do not contribute to the determination of the taxable result.

In order to obtain a result that is entirely coherent and rational, and solely in the case of the disposal of light passenger vehicles or mixed whose acquisition or revaluation value exceeds the legal limit, we will have to consider, for purposes of tax losses, not the amount of depreciations accepted fiscally but rather the amount of depreciations practiced in accounting.

In the specific situation, in which 38 of the 39 vehicles are fully depreciated at the time of their disposal, the respective accounting value is null (meaning that the asset was used by the Company during its entire useful life), whereby the value of the tax gain is exactly equal to that of the accounting gain, corresponding to the realization value.

Indeed, and in accordance with the values evidenced in Appendix II of this report, if for the calculation of the tax gain or loss we deduct from the acquisition value the amount of depreciations practiced and not that of depreciations accepted for tax purposes, we note that concerning the 39 vehicles disposed of a tax gain is calculated in the total amount of €375,552.47 and not €11,558.23, as had been calculated by the taxpayer, recording, in this manner, a difference of €363,994.24 (€375,225.47 - €11,558.23).

On the adjustments corresponding to net job creation

C.1) On the corrections made to the employee list for the period of 2010

The Claimant contends that the AT did not substantiate the adjustment relating to employee "B…" because it fails to discern the AT's cognitive process that determined the disregard, for tax benefit purposes, of said employee.

At issue is the result of the inspection action for fiscal year 2010, pursuant to which corrections were made to the list of employees hired in that year, with indefinite-term contracts and considered eligible for purposes of increase in the context of the tax benefit under review.

Now, in that the employee B… was not included in the list of net creation of jobs for 2010, it is only natural that such fact would have, and did have, an impact on the calculation of the increase for the period of 2012.

However, the Claimant does not put into question here whether the employee met or not the prerequisites for the tax benefit.

Here it only puts into question the substantiation of his disregard.

In this regard, the following is transcribed from Information no. I2016… of DSIRC page 18, which was the subject of the decision partially granting the hierarchical appeal now impugned: "Now in the matter at issue and as the appellant can verify from the appendix to the RIT of 2010 (Appendix VIII) duly communicated to the now appellant by personal notification made on 15 February 2013, in the calculation of the 2010 tax benefit, carried out by the Tax Inspection Services, relating to job creation occurring only in that tax period, that employee was disregarded for purposes of determining the tax benefit relating to job creation that occurred in 2010 as a consequence of the correction of the net creation of jobs, from 84 positions calculated and selected by the now appellant to 64 jobs obtained by the Tax Inspection Services. It is to be noted that this employee also was not included when, in the context of the administrative review petition procedure, the calculation of the net creation of jobs for 2010 changed from 64 to 66 positions as stated in the information supporting the decision on the administrative review petition notified to the now appellant on 2014-12-03 (office no. …), a decision maintained in the context of the hierarchical appeal."

Well then, already in the context of the administrative review petition, relating to fiscal year 2010, the employee in question was not considered eligible.

We are not, therefore, faced with a new situation for the Claimant, whereby it is not clear how she can now argue a lack of substantiation, arguing that "the AT's cognitive process to disregard that employee" reported to a fiscal year (2010) that had already been previously analyzed and that consolidated in the legal order cannot be discerned.

Thus, in the calculation of the 2012 increase, only the charges incurred with the employees included in the list of net creation of 2010 can be considered.

Given the foregoing, the Claimant's argument is without merit, being unfounded.

C.2) On the adjustments to the annual limit of the increase provided for in article 19 of the EBF

It follows from the provisions of no. 3 of art. 19 of the EBF that the maximum amount of the annual increase is the amount corresponding to 14 times the guaranteed minimum monthly remuneration.

This article, both in the version prior to 1/01/2013, as well as thereafter and up to the present, assesses the right to the increase, based, among others, and for purposes of calculating charges, on the indicator "minimum wage" and "guaranteed minimum monthly remuneration."

Now, the guaranteed minimum monthly remuneration/minimum wage, determined by law, has as its presupposition full-time work, which on the date relevant to these proceedings was 40 hours per week.

The increase referred to in art. 19 thus has in view the occupation of a full-time position.

It is not intended with this to argue that the article excludes the possibility of consideration, for purposes of this tax benefit, of workers with whom part-time work contracts were celebrated provided that the other legal prerequisites are met.

The part-time work contract corresponds to a normal weekly working period equal to or less than 75% of that practiced full-time in a comparable situation, with the part-time worker having the right to remuneration that will correspond, at minimum, to that earned by full-time workers in a comparable situation in proportion to their respective normal weekly working period.

Thus, as regards the calculation of the tax benefit, an adjustment must be made, creating proportionality between the total benefit/full-time contract and that of the "partial" benefit/part-time contract.

This is to say that, in the tax periods in which the conditions of eligibility of the worker for purposes of this tax benefit begin or end, the limit must be adjusted proportionally to the time in which the respective conditions are verified.

In other words, in the fiscal year in which the conditions of eligibility of the worker for the benefit begin or end, the maximum limit of the annual increase must be adjusted proportionally to the time in which those conditions are maintained.

Let us take once more the example demonstrated in the context of the hierarchical appeal: employee "A," who begins an indefinite-term full-time work contract (40 hours per week) on 01 March 2011, with annual majorable charges of €14,000.00 (€1,000.00/month), will correspond the annual limit of the tax benefit increase of €6,790.00.

Parallel to this, employees "B" and "C," eligible and selected for purposes of the tax benefit, who begin an indefinite-term part-time work contract (20 hours per week/weekends) on 01 March 2011, with majorable charges of €7,000.00 each (€500.00/month), will correspond, in the view of R., the annual limit of the tax benefit increase of €6,790.00 for each.

As is easily verified from the example above, the failure to adjust the guaranteed minimum monthly remuneration for purposes of no. 3 of article 19 would result in a skewing of the benefit amount in favor of the hiring of part-time workers to the detriment of the hiring of full-time workers, an effect that runs counter to the objectives pursued with the application of this measure.

Strangely, no violation of the principle of equality is invoked in this matter, when, paying particular attention to the example above, the application of the norm as advocated by R. would always result in unequal treatment.

In this regard, read what was expounded in the recent decision issued in the context of proceeding 129/2016-T.

1. On 9 June 2017, the administrative proceeding was joined to the arbitral proceeding by the Respondent.

5.1. By dispatch of 10 June 2017, the Tribunal extended the deadline granted to the Claimant to exercise the right to be heard regarding the matter of exception for ten days after the joining of the administrative proceeding.

On 28 June 2017, the Claimant presented a submission addressing the matter of exception.

1. By dispatch of 9 July 2017, the Tribunal determined the dispensation of the meeting provided for in article 18 of the RJAT and granted the Parties a deadline of 15 days, successively, to, if they so wished, present written submissions. The day 5 October was fixed as the deadline for issuing the arbitral decision, subsequently extended by dispatches of 28 September and 28 November to 5 February 2018.

2. On 28 September 2017, the Respondent presented written submissions, in which it reiterated all the arguments previously set forth in the response.

II – PRELIMINARY MATTERS

8.1. The collective Arbitral Tribunal was regularly constituted.

8.2. The Parties have legal personality and capacity, are legitimately before the tribunal and are regularly represented, pursuant to articles 4 and 10 of the RJAT and article 1 of Ordinance no. 112-A/2011, of 22 March.

8.3. The exception of material incompetence of the tribunal was raised, which must be assessed.

For the Respondent, the tribunal is incompetent because the Claimant directs to the tribunal a claim for recognition of rights, more properly requests of the Arbitral Tribunal that it verify: "whether for purposes of the CLPT tax benefit, effectively, the number of 'eligible departures' should amount to 174 or 221."

The Respondent concludes that the assessment of the claim for recognition of rights, specifically, that would result from the qualification of eligibility for purposes of granting a tax benefit, which the Claimant wishes to have recognized, does not fall within the competence of this Tribunal.

In exercise of the right to be heard, the Claimant alleged, among other things, that "It is unequivocal from the petition that the act impugned in the present request for arbitral decision is the decision dismissing the Hierarchical Appeal and naturally the substantiation (or lack thereof) underlying it. (…) [I]t is so clear that the impugned act is the decision partially dismissing – and not the claim for recognition of a right – that the very AT contests 'Following [the dismissal of the Administrative Review Petition], [it] filed a hierarchical appeal of the above-stated dismissal, which was partially granted, by dispatch of 2016-10-10 in light of the substantiation expended in Information no. I2016…, of 2016-06-02.' That is, it is clear, even for the AT, that we are dealing with the 'impugnation' of the decision dismissing (partially) the Hierarchical Appeal and not the claim for recognition of any right."

Let us examine.

Having analyzed the claim and the cause of action, what may be drawn from them is that the Claimant requests of the tribunal that, as regards the tax benefit for net creation of jobs, it assess the legality of the application made by the Tax Authority of the norms establishing the conditions under which the Claimant can deduct certain charges for purposes of determining taxable profit, which cannot but be considered an intrinsic aspect of the assessment of the tax.

The Claimant does not request of the tribunal the recognition of a right, but rather that the same take a position on the interpretation of the norms as is advocated by the Respondent and which the Claimant questions. To assess the competence of the Tribunal, what "is decisive are not the expressions used, but rather that the tribunal may, by interpretation of what is petitioned, in light of the concrete causes of action invoked, even by recourse to the figure of an implicit claim, ascertain the true claim for legal protection requested" (See Arbitral Decision issued in proceeding no. 245/2013-T).

In the case, it is clear from the Arbitral Petition that the Claimant requests the assessment of the illegality of the decision dismissing (partially) the hierarchical appeal (immediate object), as well as of the additional corporate income tax assessment (mediate object) – see articles 29 and 30.

Therefore, the alleged exception of material incompetence of the Tribunal is without merit.

8.4. No nullities were identified in the proceeding.

III – On the Merits

III.1 – Factual Matters

1. Facts Found Proven

The following are the facts found proven considered relevant for the decision:

1. The Claimant was the subject of an inspection action by the Tax Inspection Services of the Large Taxpayers Unit of the AT – Tax and Customs Authority, based on the service order no. OI2014…, having as its object the taxable income in Corporate Income Tax for 2012.

2. The inspection procedure took place during the period of 22-07-2014 to 17-12-2014.

3. Consequent to the inspection procedure, the respective Report was prepared, notified by the notice issued by the Tax Inspection Services/Large Taxpayers Units, with no. …, notified to the Claimant on 17-12-2014.

4. In the "Conclusions" of the "Inspection Report" appear (identified in point 1.4.1.) the "Adjustments to Taxable Result – Corporate Income Tax." These adjustments are described as follows:

"I.4.1.2. – Tax gains with express reinvestment intention. In the calculation of the tax gains and losses relating to 39 light passenger vehicles of the fixed tangible assets, the taxpayer deducted, improperly, from the acquisition value the amount of amortizations considered for tax purposes, when in reality it should have deducted the amount of depreciations practiced, as provided for in no. 2 of art. 46 of the CIRC. In fact, this understanding has already been enshrined by Circular no. 6/2011 of DSIRC, particularly regarding the question of whether accounting depreciations should be considered in the calculation of tax gains and losses for light passenger vehicles. In these terms, the result calculated (tax gain) is undervalued, for which reason an adjustment is made, for purposes of determining the taxable result, in the amount of €181,997.11 – point III.1.2 of this report.

I.4.1.3 – Tax benefit relating to job creation

The taxpayer improperly deducted, for purposes of calculating the taxable result, amounts relating to the increase of charges relating to job creation, by reason of not having met all the requirements inherent in art. 19 of the EBF, for which reason an adjustment is made to the taxable result in the amount of €163,825.81 – point III.1.3 of this report."

1. On 23-12-2014, the AT-Tax and Customs Authority issued additional Corporate Income Tax assessment no. 2014…, concerning fiscal year 2012, consequent to the inspection report and incorporating the adjustments proposed in the same.

2. The Claimant filed an administrative review petition of the Corporate Income Tax assessment act on 17-06-2015.

3. On 22-7-2015, the AT – Tax and Customs Authority sent a letter to the Claimant requesting additional clarifications.

4. On 03-08-2015, the Claimant sent a response to the request for clarifications.

5. On 31-07-2015, the Claimant directed to the Respondent a request to expand the administrative review petition.

6. The final dispatch dismissing the administrative review petition was notified to the Claimant through office no. … of 15-10-2015, with the Claimant presenting a hierarchical appeal of the decision on the administrative review petition.

7. In the hierarchical appeal, the Claimant invoked innovatively, among other things, the following matter (art. 90):

"The CLPT relating to fiscal year 2012, and stated in the Administrative Review Petition, was not definitive, inasmuch as the now Claimant had not yet finalized all supporting documentation of the number of jobs created in that fiscal year, given the complexity of the calculations to be validated taking into account the number of workers and the deadlines for filing the administrative review petition (art. 89).

For which reason, the now Appellant protested including a submission "concerning the expansion of the claim and cause of action" (hereinafter mentioned as "expansion") (cf. Doc no. 6) from which it concludes that contrary to what is stated in article 120 of the Administrative Review Petition, there was a creation of 57 (fifty-seven) jobs instead of 23."

1. With regard to eligible departures, the Claimant states (art. 100):

"In accordance with articles 16 and following of the 'expansion' (cf. doc 6) (…) the now appellant calculated 58 (fifty-eight) departures of employees whom in its view were erroneously qualified as eligible by the AT for purposes of calculating CLPT (and which therefore should be deducted from the 226), which by oversight appeared in the final list contained in the AT's inspection report."

1. And, further on, the Claimant invokes (art. 138):

"(…) those employees could not be considered as eligible departures for purposes of CLPT, by reason of the fact that on the date of their dismissal the 18-month period referred to in the law had not yet elapsed, joining as supporting documentation the contracts of the 55 employees in question on the date of their hire (cf. doc. no. 7), referring also to articles 17 and 18 of the 'Expansion' already referred to."

1. With the hierarchical appeal the Claimant joined eight documents, among which is document 7 (contracts of employees eligible for purposes of CLPT on the date of their hire on a fixed-term basis) and document 8 (CLPT of 2012, concerning the employees eligible in the calculation of 2012).

2. The hierarchical appeal was partially dismissed by dispatch of 10 October 2016.

§2 – Facts Not Proven

There are no other facts with relevance to the assessment of the merits of the case that have not been proven.

§3 – Substantiation of Proven and Unproven Factual Matters

The assessment of factual matters was based on the evaluation of the position assumed by the parties and the documentary evidence joined to the proceedings by the Claimant, as well as the administrative proceeding.

III – On the Law

The Claimant invokes as the basis of the arbitral claim filed against the dispatch dismissing the hierarchical appeal, of the Deputy Director-General of 2016-10-10, following the dispatch of 2015-10-15 which, in turn, dismissed the administrative review petition of the additional Corporate Income Tax assessment no. 2014… of 2014-12-19:

1. Omission of essential formality, by failure to notify for the exercise of the right of prior hearing of the decision dismissing the hierarchical appeal;

2. Violation of the principle of legality regarding the adjustment to tax gains with express reinvestment intention;

3. Illegalities regarding the calculation of the Tax Benefit relating to Net Job Creation (CLPT), within the scope of article 19 of the Tax Benefits Statute;

3.1. Error regarding factual premises in the determination of net creation of jobs in 2012;

3.2. Error regarding factual premises and insufficiency of substantiation regarding the disregard of the benefit corresponding to employee B…, in the amount of €6,790.00;

3.3. Violation of the principle of legality regarding the calculation of the tax benefit for employees considered ineligible.

Let us examine.

1. Omission of Essential Formality – Failure to Notify for Exercise of Prior Hearing Right, pursuant to Article 60 of the LGT

1.1. Right of Hearing in Second-Degree Proceedings

The principle of prior hearing, regulated in articles 124 et seq. of the CPA, within the scope of so-called first-degree procedures (or "general" procedures) represents compliance with the constitutional directive of "participation of citizens in the formation of decisions or determinations that concern them" (article 267, no. 5, of the CRP). Interested parties have the right to be heard in the procedure before the final decision is taken, and must be informed, in particular, of the probable sense of this decision (article 121, no. 1, of the CPA). In exercise of this right, interested parties may pronounce themselves on all questions of interest to the decision, in matters of fact and law, and may request supplementary steps and join documents (article 121, no. 2, of the CPA).

The exercise of this right is not, however, absolute, providing for, in no. 1 of article 124 of the CPA (to which corresponds the heading "Dispensing with Hearing of Interested Parties"), situations in which the person responsible for directing the procedure may not proceed with hearing, namely when "the interested parties have already pronounced themselves in the proceeding on the questions relevant to the decision and on the evidence produced" [paragraph e)].

The administrative review petition and the filing of administrative appeals are procedures at the initiative of private parties, which have as their object the reconsideration of an administrative act previously performed, with a view to obtaining its modification or revocation. Because they concern a primary or first-degree decision, through which the administrative authority defines the administrative effects for a specific concrete situation, they are included in the so-called second-degree procedures. Therefore, the facts and interests which are the prerequisites and motives of the administrative decision in the case are, in principle, analyzed and established in the instruction phase of the first-degree procedure, with the respective documentation being able to serve as the procedural support of the second-degree procedure.

It is in this sequence that jurisprudence, for example, has understood that this "fundamental formality of first-degree procedures" "(…)" "does not occur in appeal proceedings." In this sense, it was established in the Decision of the Supreme Administrative Court, of 7/12/94, that "(…) if the interested party must invoke, to institute the appeal procedure, all the grounds of his position, then there will be nothing more to say in support of it, with his hearing then being dispensed with" (cf. citation from PEDRO GONÇALVES and Others, Code of Administrative Procedure, 2nd ed., Almedina, Coimbra, 1997, p. 746).

In the same sense, it is established jurisprudence, particularly by the Plenary of the Administrative Law Section of the Supreme Administrative Court, that the principle of prior hearing provided for in article 100 of the Administrative Court Procedure Code "(…) is a general figure of first-degree decision procedure, not applying, in principle, to second-degree procedures, such as is the case with hierarchical appeals…." In relation to so-called second-degree procedures, the referred jurisprudence concludes that "(…) hearing of interested parties will only take place when the secondary act (…), being unfavorable to the party, is based on new factual matter not considered in the primary decision" (cf. the Decision of the Supreme Administrative Court, of 9/3/2006, proc. no. 789/2006, and the jurisprudence cited therein).

This judicial orientation is essentially followed by the doctrine, speaking to the same, particularly PEDRO GONÇALVES and Others, in the aforementioned work (pp. 746 and 781). Also PEDRO MACHETE, with reference to the administrative review petition procedure, considers that "the promotion of a second hearing of interested parties is only justified in the hypothesis of the existence of new elements, capable of leading the administrative body to modify the initial decision…." And the same Author concludes that "If this does not occur, and taking into account the essential unity between the primary procedure and the corresponding administrative review petition procedure, one falls into the situation provided for in art. 103, no. 2, paragraph a), whereby hearing of interested parties is not mandatory" (cf. The Hearing of Interested Parties in Administrative Procedure, Catholic University, Lisbon, 1995, pp. 484/85).

In a recent Decision (proc. no. 0406/13, of 04-10-2017), the Supreme Administrative Court goes further, clarifying the requirements of the scope of the exercise of the right of hearing in second-degree procedures. For that, it considers in the referred Decision, among other things, that although there is doctrine and jurisprudence "that restrict the exercise of the right of hearing in second-degree procedures to cases where there are new facts to motivate the decision, nothing in the law permits concluding that the right of hearing can be dispensed with when there is only a matter of law to be considered in the decision to be issued. As JORGE LOPES DE SOUSA says, 'it must be noted that it is not only when the decision is based on facts not affirmed by interested parties that justifies the right of hearing, as the right to participate in the formation of the decision constitutionally recognized applies to its entirety, encompassing therefore the right to pronounce oneself on any matter of law regarding which there is not agreement between his position and that which the tax authority intends to adopt in the tax procedure' (Code of Tax Procedure and Process annotated and commented, Areas Publisher, 6th edition, I volume, annotation 3 to art. 45, p. 426)."

For the Supreme Administrative Court, the doctrine defending that the hearing of the taxpayer in the context of second-degree procedures is only justified when the basis of the decision is based on new factual matter, that is, on facts not contained in the second-degree procedure, is based on the principle of unity of procedure and can only be valid if the decision to be issued in the second-degree procedure is substantially identical to the one issued in the first-degree procedure. "If this is not the case, that is, when the decision to be issued in the second-degree procedure is not identical, whether in its factual premises or in the legal solution or solutions of the questions under assessment, to that issued in the first-degree procedure, we do not find legal basis authorizing the restriction of the right (…) of participation…."

In this sense, and in summary, it may be read in the holding of the Decision we are following: "I. No. 3 of art. 60 of the LGT only dispenses with the hearing provided for in paragraph a) of no. 1 of the same article, that is, that which precedes the assessment act, and cannot serve as the basis for dispensing with the hearing before the decision on the hierarchical appeal, which must always take place, unless the decision to be issued is wholly favorable to the interested party (paragraph a) of no. 2 of art. 60 of the LGT) or is in the same sense as the decision of the administrative review petition and there are no new facts or legal questions to be considered."

1.2. Application to the Case at Hand

In the case at hand, the Claimant alleges that, following the expansion of the request in the context of the administrative review petition, there was a modification of the facts, and within the scope of the hierarchical appeal new facts and legal questions were brought.

The exercise of the right of prior hearing, having allowed the Claimant to demonstrate the relevance of such facts, would have been of paramount importance to avoid the present judicial dispute, given that it would have permitted contravening the alleged absence of a net creation of 55 jobs.

The Claimant refers in various articles of its submissions that it delivered to the tax inspection services, in the context of the inspection procedure, a list of eligible departures that was not correct.

As results from the factual matter proven as established, on 31-07-2015 the Claimant directed to the Respondent a request to expand the administrative review petition, where among other things it invoked that "The CLPT concerning fiscal year 2012, and stated in the administrative review petition (see article 120) was not definitive because the Claimant had not yet finalized all the supporting documentation of all jobs created in that fiscal year, given the complexity of the calculations to be validated, taking into account the number of workers and the deadlines for filing the administrative review petition."

And that in light of that situation "the Claimant protested, even including the referred supporting documentation.

As may be seen, the Claimant adds that "Upon compiling and finalizing the processing of the supporting documentation of the CLPT, the CLAIMANT verified that, in fiscal year 2012, contrary to what is stated in article 120 of the Administrative Review Petition, there was, in fact, a creation of 57 (fifty-seven) jobs (and not 23), resulting from what is set forth below, for which reason the present request is necessary.

To substantiate the allegation, the Claimant joined detailed calculation tables relating to the stated creation of jobs.

Thus, following the expansion of the request in the context of the administrative review petition, there was a modification of the facts and, within the scope of the hierarchical appeal, the Claimant invoked new facts and new elements for assessment by the Respondent.

It is important to note that, as is read in the inspection report and is reiterated by the Claimant in various articles of its submissions, the inspection services requested of the Claimant "a list of employees hired or who acquired permanency status in the period 2012 and with the employees whose contracts were terminated in 2012, so as to validate the net creation of jobs that the taxpayer calculated, pursuant to the provisions of art. 19 of the EBF. In response, the taxpayer provided three files, denominated 5.5 – Hires 2012, 5.5 – Staff 2012, and 5.5 – Terminations 2012, with it being found from the outset that 469 employees were hired or became permanent and that terminations amounted to 503."

Subsequently, according to the report, "for all 469 entries and 504 departures of employees, the elements necessary to validate the prerequisites listed in nos. 1 and 2 of art. 19 of the EBF were requested, specifically proof of permanency status, of the condition of 'young' or 'long-term unemployed' and in the case of workers under 23 years of age, assessed on the date of celebration of the work contract (indefinite-term) or on the date they became indefinite-term contract, proof that they had completed secondary education or were attending an education-training course that would allow raising the level of education or professional qualification to ensure completion of that level of education."

The Claimant contests 47 of the 504 departures contained in its own list, on the ground that the 47 employees in question did not, on the date of departure, have indefinite-term work contracts, joining documents (work contracts) tending to prove this fact only in the hierarchical appeal.

Thus, as results from the facts proven as established, in the hierarchical appeal, the Claimant joins, in order to invalidate the respective qualification as eligible departures, 47 work contracts. These are work contracts with employees who ceased working relationship with the Claimant in 2012 and, therefore, may or may not qualify as eligible departures. In order for them to qualify as eligible departures, it is necessary that they be indefinite-term contracts and the Claimant seeks to demonstrate that the contracts in question were fixed-term contracts at the time of departure.

By application of the doctrine set forth above, the Respondent was obligated: i) To assess these new elements by evaluating not only the value of the evidence presented in the proceedings but also the subsumption of the new facts to the law; ii) To hear the Claimant before deciding the hierarchical appeal.

The Respondent understands that it is not, arguing that the Claimant was heard in the context of a draft decision on the request for official review, thereby participating in the formation of the act that was issued in that procedure. For the Respondent, in that context, the Claimant was able to exercise the faculty of the right to hearing on the questions of fact and law that supported the draft decision, questions that are the same as those presented and resolved in the context of the hierarchical appeal.

For that reason, when deciding the hierarchical appeal filed against the dismissal of the administrative review petition, the AT decided to dispense with hearing of the Claimant, as expressly substantiated in the act under challenge, making reference to a circular, no. 13/99, of 8 July, which is contained even in collections of tax law legislation, and which reflects the legal regime established in art. 60 of the LGT, regarding prior hearing. (Cf. articles 30 to 33 of the arbitral petition).

First, it is not understood the reference to dispensing with prior hearing based on the fact that it was given the possibility to exercise it regarding the decision on the request for official review. Indeed, what is at issue is the failure to have been granted to the Taxpayer the possibility of exercising that right before the decision on the hierarchical appeal. Especially in a situation in which, as is demonstrated, there was at issue both the assessment of new facts and new legal questions.

Second, regarding the doctrine contained in Circular no. 13/99, as stated in the cited Decision of the Supreme Administrative Court, of 4-10-2017, a new circular has since been issued (17/2008, of 14 February 2008), in whose point 6 it is expressly stated that in the context of the hierarchical appeal governed by arts. 66 et seq. of the Code of Tax Procedure and Process, "prior hearing shall be made, even if new facts are not invoked regarding the decision appealed and the interested party has already been heard in prior hearing in a first-degree procedure, under penalty of nullity of the final act dismissing the appeal."

Therefore, it must be concluded that the failure to hear the Claimant before the decision dismissing partially the hierarchical appeal (obviously in the part adverse to it) constitutes an omission of essential formality with effects invalidating the said decision – but solely of this.

2. Violation of the Principle of Legality Regarding the Adjustment to Tax Gains with Express Reinvestment Intention

During the fiscal year of 2012, the Claimant proceeded to the disposal of thirty-nine light passenger vehicles, having carried out the calculation of the respective gains.

On these gains, the Claimant applied the tax benefit for reinvestment of gains established in article 48 of the CIRC.

The Claimant calculated, for the total of thirty-nine vehicles, gains in the amount of €18,516.19, and losses in the amount of €6,957.96. Therefore, the difference between the gains and losses calculated results in a positive balance of €22,558.23.

The Tax Authority contests the method of calculation of the gains and losses, arriving at a different, higher value for the positive balance of tax gains for tax purposes.

The following table shows, for each vehicle, the gain calculated by the taxpayer (column 2) and the gain calculated by the Tax Authority (column 3).

[Table with vehicle registrations and corresponding gains - exact format as in original]

The reason for the disparity in the values calculated by the Claimant and by the Tax Authority lies in the amortizations – accounting or tax – used to calculate the gains.

By accounting amortizations is understood the amortizations that the Claimant makes in its accounting for purposes of commercial law; by tax amortizations is understood the amortizations that the Claimant makes for tax purposes, that is for purposes of calculating taxable profit.

It is necessary to assess and conclude whether, for purposes of calculating tax gains for these thirty-nine vehicles, the amortizations carried out in commercial accounting or the amortizations carried out for tax purposes should be used.

Article 46, no. 2 of the CIRC, in the wording in effect on the date of disposal of the vehicles in question, was as follows: "Gains and losses are given by the difference between the realization value, net of charges inherent to it, and the acquisition value, minus the depreciations and amortizations accepted fiscally, the losses due to impairment and other value corrections provided for in articles 28-A, 31-B and also the amounts recognized as tax expense pursuant to article 45-A, without prejudice to what is provided for in the final part of no. 3 of article 31-A."

That is: Gain = (realization value – inherent charges) – (acquisition value – amortizations accepted fiscally).

In an interpretation that attends to the literal wording of the norm – "amortizations accepted fiscally" – it follows clearly from the law that the amortizations to be taken into account in calculating tax gains are – and were in 2012 – the amortizations practiced for tax purposes.

The Tax Authority, however, invokes in favor of the contrary understanding an administrative instruction – Circular 6/2011 DSIRC, which states in its point 32.1:

"The calculation of the tax gain or loss is also carried out in accordance with the provisions of no. 2 of art. 46 of the Corporate Income Tax Code and should be considered in the respective calculation formula the depreciations practiced. Given the ratio underlying the imposition of limits on the recognition of expenses with this type of assets when the respective acquisition value or revaluation exceeds a certain amount, the interpretation most consistent with that ratio is to consider that, for purposes of determining the respective gains or losses, the value of depreciations that is relevant is that of those practiced in accounting."

Administrative instructions issued by the Tax Authority, like any other administrative instructions emanated from organs of public administration, are norms endowed with merely internal efficacy. They are not sources of Tax Law "because the binding force of such diplomas is limited to a sector of the administrative order. And that same binding force results only from the hierarchical authority of the agents from which they emanate, and the duties of compliance of the subordinates to whom they are directed" (STA, decision of 21-06-2017, proc. no. 364/14; STA, decision of 12-10-2016, proc. no. 797/15; TCAS, decision of 23-04-2008, proc. no. 2312/08).

Lacking heteronomous binding force for private parties, administrative instructions emanated from the Tax Authority have value only by the doctrinal value they may possess (STA, decision of 21-06-2017, proc. no. 364/14).

Let us consider, then, the grounds invoked in the referred Circular 6/2011 DSIRC as to the matter of interest to us.

The Respondent states that: "Given the ratio underlying the imposition of limits on the recognition of expenses with this type of assets when the respective acquisition value or revaluation exceeds a certain amount, the interpretation most consistent with that ratio is to consider that, for purposes of determining the respective gains or losses, the value of depreciations that is relevant is that of those practiced in accounting."

This is a substantiation that is more than succinct, insufficient.

Indeed, it is questioned from the outset what the ratio underlying the imposition of limits on the recognition of expenses with this type of assets (vehicles) is. Being very different things the non-deductibility of part of the cost of acquisition of an immobilized asset and the calculation of the effective, real, gain that the taxpayer obtains with the disposal of that same asset, it remains unclear why the ratio of the norm on the first question must dictate the norm to be applied to the second question.

But more decisive in assessing the legality of the decision of the Respondent is the clear discordance of the interpretation of the Tax Authority conveyed through Circular 6/2011 DSIRC with the law.

No. 2 of art. 46 establishes a rule that offers no doubt, in the sense that the calculation of tax gains is effected on the basis of "amortizations fiscally accepted."

This norm has a ratio very clear which is to avoid that the tax falls twice on the same income. Until the reform of the Corporate Income Tax Code carried out by Decree-Law no. 159/2009, of 13/07, the concept of gains and its method of calculation appeared in art. 43, which stated, in its no. 2: Gains and losses are given by the difference between the realization value, net of charges inherent to it, and the acquisition value minus the depreciations or amortizations practiced, without prejudice to what is provided for in the final part of paragraph a) of no. 5 of article 29.

At that time, that is, until 2009, the law spoke of "amortizations practiced." The Tax Administration understood that it was the amortizations "practiced in commercial accounting," which was only a possible interpretation of the legal formula.

But already then the majority of doctrine considered that this interpretation was not correct. An example of that doctrine is Henrique Quintino Ferreira (former director of services of the Directorate-General for Contributions and Taxes), who in QUINTINO FERREIRA, Henrique, The Determination of Taxable Matter under the Corporate Income Tax, Kings of Books, Lisbon, 1995, pp. 114-115, illustrates with an example the calculation of tax gains and accounting gains, using for the calculation of tax gains the amortizations accepted fiscally.

In 2009, with the reform of the Corporate Income Tax Code by Decree-Law no. 159/2009, of 13/07, article 43 came to correspond to article 46 (Concept of Gains and Losses), with the current formula then being adopted: "Gains and losses are given by the difference between the realization value, net of charges inherent to it, and the acquisition value, minus the depreciations and amortizations accepted fiscally (...)."

There is, therefore, no doubt whatsoever, attending to the elements literal, rational, teleological and historical of the interpretation of legal norms, that tax gains for tax purposes are calculated on the basis of the amortizations fiscally accepted during the period of use of the asset.

This interpretation is, moreover, explicitly grounded in a recent manual on the Corporate Income Tax edited by the Tax Authority itself (Tax and Customs Authority, Corporate Income Tax (Manual of the Corporate Income Tax), Tax and Customs Authority, Lisbon, 2015, pp. 215-216).

In summary, what Circular 6/2011 DSIRC does is establish, by way of interpretation, a derogatory regime from this general regime for the specific case of gains resulting from the disposal of light passenger vehicles, a derogatory regime that, not being provided for in the law, cannot obviously be established through an administrative instruction contrary to law.

Therefore, illegal are the adjustments made by the Tax Inspection regarding "Tax gains with express reinvestment intention" (point I.4.1.2 of the Tax Inspection Report), and it follows that illegal, by error regarding the legal premises, is the additional Corporate Income Tax assessment no. 2014…, in the part concerning "Tax gains with express reinvestment intention," in the amount of €181,997.11.

3. Illegalities Regarding the Calculation of the Tax Benefit Relating to Net Job Creation ("CLPT"), within the scope of article 19 of the Tax Benefits Statute

Brief exposition is necessary on the meaning and scope of article 19 of the EBF.

Let us begin with the more general provision applicable, article 19, no. 1, of the EBF, which has the following content:

1 – For determining the taxable profit of Corporate Income Tax taxpayers and of Individual Income Tax taxpayers with organized accounting, the charges corresponding to the net creation of jobs for young people and for long-term unemployed, hired by indefinite-term work contracts, are considered at 150% of the respective amount, accounted for as a cost of the period.

In development of this general norm, no. 2 of article 19 specifies the content of the various categories and concepts mentioned therein.

Thus:

"Young people"

'Young people' workers with age greater than 16 and less than 35 years, inclusive, assessed on the date of celebration of the work contract, with the exception of young people under 23 years of age who have not completed secondary education, and who are not attending an education-training course that allows raising the level of education or professional qualification to ensure completion of that level of education;

"Long-term unemployed"

'Long-term unemployed' workers available for work, pursuant to Decree-Law no. 220/2006, of 3 November, who are unemployed and registered with employment centers for more than 9 months, without prejudice to having celebrated during that period fixed-term contracts for a period of less than 6 months, whose combined duration does not exceed 12 months;

"Charges"

"Charges" the amounts borne by the employing entity with the worker, by way of fixed remuneration and contributions to social security charged to the same entity;

"Net creation of jobs"

"Net creation of jobs" the positive difference, in a given economic period, between the number of eligible hiring, pursuant to no. 1, and the number of departures of workers who, on the date of their hiring, found themselves in the same conditions.

The "net creation of jobs" thus consists of an arithmetic difference between the number of young people and long-term unemployed hired by indefinite-term work contract in a determined period and the number of young people and long-term unemployed with indefinite-term work contracts whose contracts ceased in the same period.

Simplifying, we can express the same idea in the following formula:

CLPT = NEW ELIGIBLE CONTRACTS – ELIGIBLE CONTRACTS CEASED

Where:

CLPT means net creation of jobs

On the other hand, the tax benefit consists of a 150% increase in the value of charges with workers corresponding to the net creation of jobs.

Thus, if in year N, the taxpayer created fifteen new jobs, but in the same period five eligible work contracts ceased, the net creation of jobs (CLPT) is 10 jobs.

If the taxpayer, in the period in question, bore charges with those ten jobs in the amount of €70,000.00, it may deduct for purposes of determining its taxable profit: €70,000.00 * 150% = €105,000.00.

Finally, it is important to note that the tax benefit provided for in article 19, no. 1 applies for a five-year period from the beginning of the effectiveness of the work contract. This means that if an entity E hired in 2010 a worker (with net creation of jobs occurring in that year), if in 2011 it hired another worker (with net creation of jobs also occurring in that year), in 2014 it will be able to increase the charges it bears in that year with the worker hired in 2010 and with the worker hired in 2011 because both are still within the five-year period.

In the case at hand, for determining the net result for 2012 of the Claimant, the Tax Inspection Services took into account the years 2007, 2008, 2010 and 2012.

3.1. Regarding the Net Creation of Jobs in 2012

In the inspection report, the Tax Inspection considered to have existed, in fiscal year 2012:

• 189 new eligible contracts (entries or new jobs)
• 207 cessations of ceased indefinite-term contracts eligible (eligible departures)

Therefore, the net creation of jobs (CLPT) would be negative, since:

189 – 207 = –18

In the final decision on the hierarchical appeal filed by the Claimant, the AT corrects these numbers and now considers that 221 eligible departures (cessations of indefinite-term contracts) exist in 2012.

The Claimant, for its part, considers that there are in 2012 174 eligible departures.

There is, therefore, a disagreement regarding the qualification of 47 situations of cessation of work contract as eligible departures.

The disagreement regarding the qualification of these 47 workers has different reasons.

But all the situations questioned are related to the fulfillment of the requirements for the workers in question (possible eligible departures) to be considered "eligible entries," since only workers who may be considered "eligible entries" at the moment of hiring can be considered "eligible departures" at the moment the contract ceases.

The requirements at issue are the following:

• Age – for purposes of qualification as young people pursuant to paragraph a) of no. 2 of art. 19 of the EBF.

• Schooling – for purposes of qualification as young people pursuant to paragraph a) of no. 2 of art. 19 of the EBF, when it concerns young workers under 23 years of age.

• Situation as long-term unemployed – for purposes of paragraph b) of no. 2 of art. 19 of the EBF.

• Existence of indefinite-term work contract – for purposes of no. 1 of art. 19 of the EBF.

As we have seen, the Respondent, in the context of partially granting the hierarchical appeal, reduced the count of "eligible departures," for purposes of the CLPT tax benefit to 221. For the Claimant the decision partially granting the hierarchical appeal is not correct because the number of eligible departures should amount to 174, arguing that there subsist, thus, 47 workers erroneously qualified by the AT as eligible departures for purposes of the CLPT tax benefit.

As invoked by the Claimant, in the Request to expand the Administrative Review Petition, it verified in the list of departures provided during the inspection (tax inspection), that by oversight, dates of commencement of indefinite-term contract were identified, which in reality were presumed dates, but which in truth never materialized.

The Claimant argues that in the context of the hierarchical appeal it joined elements of factual evidence capable of demonstrating that the workers listed in Appendix I of the decision dismissing the Hierarchical Appeal could not be qualified as "eligible departures."

It happens, however, that the Tax Inspection qualified the cessations of work contracts as eligible departures on the basis of the list initially provided by the Claimant.

As results from the proceedings, in the hierarchical appeal, the Claimant joined, in order to invalidate the respective qualification as eligible departures, 47 work contracts. These are work contracts with workers who ceased working relationship with the Claimant in 2012 and, therefore, may or may not qualify as eligible departures.

Not being the Claimant prevented from presenting new facts and legal arguments in the context of appeals to administrative and judicial remedies, it was therefore incumbent upon the Respondent to assess the elements of evidence joined and draw its conclusions from them in the context of the decision on the hierarchical appeal.

Therefore, the Claimant is correct in contending that the Respondent incurred in error in the assessment of facts and law which vitiates the decision dismissing partially the hierarchical appeal, with its consequent annulment.

3.2. Regarding the Disregard of the Benefit Corresponding to Employee B…, in the amount of €6,790.00

In 2010, the Claimant hired employee B… (fact not contested).

The Claimant considered this worker to be eligible for counting toward the "net creation of jobs," proceeding in 2012 to increase the respective charges, which meant an increase of the deductible cost of €6,790.00.

The Respondent, in the adjustment to taxable profit for 2012, considered this procedure wrong and increased taxable profit by the sum of €6,790.00.

To substantiate this adjustment, the Respondent states as follows, on pages 16 of the inspection report that had as its temporal scope the year 2012:

"From the inspection action carried out on the taxpayer, relating to the period of 2010 (OI2012…), resulted corrections to the composition of the list of employees hired in that period, with indefinite-term work contract, considered eligible for purposes of increase in the context of this tax benefit.

For this reason, in the calculation of the increase in the period of 2012, only the charges incurred with the employees included in the list of net creation of 2010, corrected as a result of the inspection action carried out pursuant to the above-mentioned service order, will be capable of being considered.

The employees hired or who acquired permanency status in the course of the period of 2010 who, as a result of the inspection action, were considered not eligible for purposes of application of this benefit but whose charges were improperly increased by the taxpayer in 2012, are identified with (a) in appendix III of this report."

Up to this point, the reasoning of the Tax Authority is quite clear:

In 2010, employee B… was hired, who remained as an employee of the taxpayer in 2012.

In 2010, the taxpayer would have considered that employee eligible for purposes of calculating the net creation of jobs.

In the assumption that that employee were eligible for that calculation, the

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