Summary
Full Decision
ARBITRAL DECISION
1. REPORT
1.1 A…, LDA., legal entity number…, with registered office in …, …-… …, came, on 11.18.2016, to request the constitution of an arbitral tribunal, under the terms of Article 10 of Decree-Law No. 10/2011, of 20 January (hereinafter RJAT).
1.2. The Respondent in these proceedings is the TAX AND CUSTOMS AUTHORITY
1.3 The Deontological Council of the Administrative Arbitration Centre (CAAD) appointed the undersigned to constitute the Singular Arbitral Tribunal, notifying the parties, and the Tribunal was constituted on 1 February 2017.
1.4 The request for arbitral decision has as its immediate object the decision on the gracious claim presented by the Claimant with a view to:
"a) the acceptance by the Tax Authority of the deductibility for the purposes of calculating taxable income under IRC of expenses incurred in the amount of €510,431.00;
b) the refund of the amount paid, in the value of €1,836.92, plus accrued and accruing indemnitory interest;
c) the refund of the entire Instalment Payment in the amount of €21,644.42;"
The Claimant requests from the Arbitral Tribunal the "declaration of the illegality of the aforementioned adjustment, whose value amounts to €510,431.00, as well as (d) the assessment of additional IRC and compensatory interest resulting from this adjustment" and, consequently, "the refund of the amount of €1,836.92, plus accrued and accruing indemnitory interest", as well as "refund of the entire Instalment Payment in the amount of €21,644.42".
The Claimant objects to the fact that it was not permitted to deduct those Instalment Payments delivered in 2008, despite having presented "zero taxable income" in the four following years (2009 to 2012), and argues in favor of the deductibility of those costs corresponding to management fees for the reasons summarized hereinafter, further clarifying that, in addition to the additional IRC assessment resulting here, the adjustments made by the Tax Authority in the inspection proceedings resulted in other "adjustments", which were "contested" in the Arbitral Tribunal, in process 308/2015-T that took place in this CAAD, arguing that the decision rendered in that process was favorable to it.
With respect to management fees, the Claimant understands that they are deductible to the extent that it made "monthly an accounting entry relating to its provision for expenses associated with services provided by the Group, in accordance with the contract entered into between the parties" and that "at the end of each fiscal year an invoice for settlement was sent" and that "it proceeded to the recording of the respective income statement items", whereby it concludes that, contrary to the Tax Authority's understanding, the expenses are sufficiently documented.
The Claimant understands that the rules of burden of proof favor it and that it was therefore incumbent upon the Tax Authority to demonstrate that the expenses incurred with the management fees in question were not essential to the Claimant's activity.
It then expends vast argumentation in order to explain the essentiality of the cost, the effective documentation of the provision of services, the "methodological conformity" of its accounting, and the non-applicability of Article 63 and Article 45 of the IRC Code.
The Claimant understands, moreover, that the assessment notice, which is impugned in the context of this petition, also results from an act resulting from adjustments to the taxable income for the years 2005 to 2011, which influenced the value of the tax loss carryforward considered as deductible in the year 2012, since such adjustments were contested in arbitral process number 308/2015-T of this CAAD and it resulted from that process that the grounds of the herein Claimant merited, in its majority, favorable judgment, whereby illegally the consequences of that decision are not reflected, as of right, in the assessment notice respecting the year 2012.
It further alleges the "deficient, erroneous and contradictory" grounds of the tax act, which results, in its understanding, in a defect of lack of grounds, an independent ground for its annulment, to which is added, in its understanding, the lack of grounds for the decision denying the gracious claim.
It concludes by petitioning for the "annulment of the adjustments", the "annulment of the additional IRC assessment" and the "annulment of the assessment of compensatory interest", the "refund of the amount of €1,836.92", "plus accrued and accruing indemnitory interest" and the "refund of the entire instalment payment, in the value of €21,644.42".
1.5 The Tribunal rendered an order on 2 February 2017, inviting the Claimant to come before the Tribunal to provide the necessary clarifications for the determination of the correct value of the claim and the competence of this Tribunal, to correct the value of the request for arbitral decision, simultaneously supplementing the arbitration fee and/or requesting what it deemed appropriate in that regard.
1.6 The Claimant came before the Tribunal on 13 February 2017, to clarify that the annulment of the additional assessment that it petitions "will have an indirect effect on the restoration of the instalment payments in that additional assessment", whereby it is to that extent that it petitions for its refund, and comes to correct the value of the claim to €23,481.34, having shown on the same date that it paid the differential court fee corresponding.
1.7. On the same date, the Tribunal rendered an order for the Respondent to answer, if it so wished, and to attach the administrative file to the proceedings, as well as to render its opinion on the Claimant's clarifications and on the alteration of the value of the claim.
1.8 The Claimant came on 20 March 2017 to attach the administrative file and, on 21 of the same month, its response.
It defends itself by way of exception and by impugn.
By way of exception, it alleges that some of the facts alleged by the Claimant, as well as the effects petitioned, related to these, are outside the scope of the competence of this arbitral jurisdiction.
In that, even if they can be configured as connected with the adjustments resulting from the aforementioned inspection action, the concrete amounts to be paid by the claimant or to be refunded to it as a consequence of the assessment of the legality of the assessments here disputed cannot be determined within the scope of the present proceedings, since, even if the interconnected claims could eventually result from the execution of decided cases that would be carried out in case the arbitral decision rendered were to be granted - which is conceded on a merely academic basis – the knowledge of such consequences and quantifications is beyond the competence of this Tribunal, which is circumscribed to the matters indicated in No. 1 of Article 2 of the RJAT
Whereby it concludes that the material incompetence of the Tribunal for the assessment of the claim identified above constitutes a dilatory exception that impedes the continuation of the proceedings, leading to the dismissal of the instance as to the claims at issue, in accordance with the provisions of Articles 576, No. 2, 577, letter a) of the Code of Civil Procedure (CPC), applicable ex vi Article 29, No. 1, letter e) of the RJAT
By way of impugnation, the Respondent alleges that the decision rendered in the course of proc. 308/2015-T did not become final and, furthermore, does not concern the fiscal year 2012, here in discussion, binding in no way the action of the Tax Administration as to the present proceedings.
With respect to the defect of lack of grounds, the Respondent alleges that throughout the administrative proceedings, namely in the response to the exercise of prior hearing rights by the herein Claimant, are latent and explicit the reasons that ground the Tax Authority's position, reasons "which were fully understood and subsequently referenced and attacked by the Claimant in its request for arbitral decision since, otherwise, it would not have presented it in the terms in which it presented, namely by rebutting the final report in detail, ground by ground, but which, in any case, could always avail itself of the mechanism provided for in Article 37 of the Code of Tax Procedure and Process (CPPT) and request the respective notification or issuance of the certificate in conformity".
Furthermore, it alleges, "in the case at hand, the grounds are sufficiently clear and unequivocal, all the more so since the Claimant, by way of this request for arbitral decision, and, likewise, at a prior moment when presenting the gracious claim, demonstrates, in light of the arguments set forth throughout its pleadings, to have fully understood the factual and legal framework in which the Respondent's decision was based, attempting to rebut its action".
Thus, it continues, "even if the act sub judice suffered from deficiencies at the level of the grounding discourse – which is only admitted by mere academic hypothesis – such deficiencies would be degraded into merely non-essential irregularities, since, nonetheless, such deficiencies permit the full clarification of its recipient, enabling it to rise up against them, as, indeed, the Claimant did by way of this request for arbitral decision".
Now with respect to the contested adjustments, the Tax Authority, after generically confirming what is stated by the Claimant with respect to group relationships and the accounting methodology, alleges that, however, "From the formal analysis of the document supporting the aforementioned expenses, we find that the 'rectifying invoice', issued in December of the year 2012, refers to the services provided as 'Amount corresponding to the year 2012 according to the contract for provision of services between the parties', with the annual value of the provision of services in the amount of €510,431.00, whereby the document issued, despite referencing the contract for provision of services entered into between the 'parent company', does not comply with the contractual terms, namely as to the itemization of the services provided as well as their quantification and valuation."
It further defends, invoking various doctrine and case law, that the burden of proof of the essentiality of the expense falls on the Claimant, which did not meet it.
It further alleges that, the Claimant not having documented the costs nor "passed the test of indispensability", which presupposed, in any case, full documentation, the situation cannot be placed, as it claims, in terms of transfer pricing, which, it insists, constitutes a "second legal test" that further restricts deductibility.
It concludes by defending that, without conceding, the refund request should be restricted to the additional assessment and not to the Instalment Payments and, likewise, that no indemnitory interest is due, since no error of fact or law can be imputed to the services.
The Respondent further calls into question the value attributed by the Claimant to the request for arbitral decision following the Tribunal's notification.
1.9 The Tribunal rendered, on 21 March 2017, an order inviting the Claimant to respond to the matter of exception raised by the Respondent and both parties to state what they deemed appropriate as to the necessity of holding the meeting alluded to in Art. 18 of the RJAT, as well as to the necessity of presenting arguments.
1.10 The Respondent came on 24 March 2017 to declare that it understands dispensable the holding of a meeting, as well as the presentation of arguments, although requesting that it be granted a successive time period to present them, should the Respondent be admitted to present them.
1.11 The Claimant came on 04.04.2017 to respond to the matter of exception, arguing for the competence of this Tribunal by reason of the connection between the assessment in dispute and the refund of the Instalment Payments petitioned which, it says, the Respondent itself recognizes.
It concludes by defending the unnecessary of holding the meeting alluded to in Art. 18 of the RJAT, but requesting the setting of a date for the presentation of oral arguments.
1.12 The Tribunal, on 05.04.2017, rendered an order dispensing with the holding of the meeting alluded to in Art. 18 of the RJAT, and, dismissing the Claimant's request, also dispensing with arguments and setting a date for the rendering of the arbitral decision.
1.13. The parties did not render their opinion.
2. SANATION
2.1. The parties have legal personality and capacity and procedural standing, in accordance with Articles 4 and 10, No. 2, of the RJAT and Article 1 of Ordinance No. 112-A/2011, of 22 March, and are duly represented.
2.2 The Respondent came, however, to raise the incompetence of the Tribunal ratione materiae with respect to the claim formulated by the claimant for refund of the Instalment Payments, in the terms set forth above.
The Claimant argues, in the opposite sense, for the competence of the Tribunal for the assessment of this claim.
It is necessary to decide.
In accordance with the provision in letter b) of No. 1 of Article 24 of the RJAT (in line with what is provided in Article 100 of the CPPT), the tax administration, in the exact terms of the success of the arbitral decision in favor of the taxpayer and until the end of the period provided for the spontaneous execution of the sentences of the tax courts, "shall restore the situation that would have existed if the tax act that was the subject of the arbitral decision had not been taken, adopting the acts and operations necessary for that purpose".
This provision is in harmony with what is established in Article 100 of the LGT [applicable by force of the provision in letter a) of No. 1 of Article 29 of the RJAT], which establishes that "the tax administration is obligated, in case of total or partial success of a claim, judicial impugnation or appeal in favor of the taxpayer, to the immediate and full reconstitution of the legality of the act or situation that was the subject of the dispute, including the payment of indemnitory interest, if applicable, from the end of the period of the decision".
Although Article 2, No. 1, letters a) and b), of the RJAT uses the expression "declaration of illegality" to define the competence of the arbitral tribunals that function in the CAAD, making no reference to condemnatory decisions, it must be understood that the competencies comprehend the powers that in judicial impugnation proceedings are attributed to the tax courts, this being the interpretation that conforms to the meaning of the legislative authorization on which the Government based itself to approve the RJAT, where it is proclaimed, as the first guideline, that "the tax arbitral process must constitute an alternative procedural means to the judicial impugnation process and to the action for the recognition of a right or legitimate interest in tax matters."
As was stated, among others, in the Arbitral Award of 16 October 2013, issued in process No. 28/2013-T, "The judicial impugnation process, despite being essentially a process of annulment of tax acts, admits the condemnation of the Tax Administration in the payment of indemnitory interest, as can be inferred from Art. 43, No. 1, of the LGT, in which it is established that 'indemnitory interest is due when it is determined, in a gracious claim or judicial impugnation, that there was an error imputable to the services that results in payment of the tax debt in an amount greater than that legally due (…)'."
For all that has been set forth, if the contested additional assessment is annulled on the ground of illegality, the Claimant shall have the right to the restoration of the "(…) situation that would have existed if the tax act that was the subject of arbitral decision had not been taken" (in this sense, cf. the arbitral award of 24/11/2014, process No. 367/14-T).
Whether this restoration comprehends or not the refund of the Instalment Payments petitioned is a matter that will be analyzed further below. The question cannot, however, be placed at the level of the competence of the Tribunal.
Terms in which the alleged exception of material incompetence of the tribunal does not proceed.
Arriving here:
2.3 There are no nullities that invalidate the proceedings nor were other questions raised, prior or subsequent, prejudicial or by way of exception, that would prevent the assessment of the merits of the case, showing that the conditions are met for a final decision to be rendered.
3. MATTER OF FACT
With relevance for the decision on the merits, the Tribunal considers the following facts to be proven:
a) The herein Claimant was constituted by Group B…, in 1999, as a result of a partnership between Group B… and Group C…, operating in the sector of fabrics for automotive component upholstery.
b) Since 2007, all of the share capital of A… is held by Group B…, S.A., the "parent company";
c) Within the framework of the Group's diversification policy, in 2003, the Claimant introduced a new line of production of foamized fabric for automobile roofs.
d) In 2008, the separation of the company from Group C… occurs, with the Claimant assuming the business of production of foamized fabrics for the automobile roofing line;
e) The Claimant proceeds to the accounting entry, particularly in a large part of the expense and income items, based on monthly estimates supported by internal documents, proceeding to recording adjustments and/or corrections upon receipt of the original supporting document, which supports the entries in "third party" accounts;
f) Furthermore, at the end of the year, it proceeds to various corrective entries in third party accounts and expenses, in which the respective balances are transferred from some accounts to others;
g) During the fiscal year 2012 special relationships were identified, in accordance with the provisions of letters a) and b) of No. 4 of Article 63 of the IRC Code, between the CPT and the following entities:
| DESIGNATION | TAX ID | TAX DOMICILE |
|---|---|---|
| D… SA | … | PT |
| E… (E…) | … | ES |
| F… (F…) | … | ES |
| G… (G…) formerly B… (B…) | … | ES |
h) [blank in original]
i) During the fiscal year 2012, A… acquired services from G… and D… in the total value of €511,359 and €211,724, respectively;
j) The services acquired from G… correspond to computer assistance services and services of support at the level of financial, administrative and business management.
k) As described in the transfer pricing file, the methodology for setting the prices of services acquired from G… consists of the annual debiting of costs incurred with the provision of services plus a remuneration margin of 7%. The basis of costs considered for purposes of determining the debit takes into account: Costs with salaries and associated expenses; Allocation of costs with overheads (general expenses); Expenses with travel (including daily subsistence allowances); Costs incurred by third-party entities, to which B… resorts in order to make available the agreed-upon services; Computer expenses; Public relations expenses; and other expenses, although pertaining to operational activity;
l) The terms and conditions to be practiced in these operations are supported by the contracts for provision of services entered into between the "parent company" G… and the Claimant, on 20 October 1999, effective as of that date and valid for one year, tacitly renewable for annual periods; on 1 August 2009, with effect from 1 January 2009, which amends any Contract for Provision of Services and Assistance previously entered into between the parties, with effect from 1 January 2009 until 31 December 2009, and tacitly renewable for consecutive periods of 12 months, and on 1 January 2010, effective as of that date and valid for one year, tacitly renewable for like periods and revoking the previously existing contracts;
m) On 1 January 2012, an addendum to the prior contract is signed, whose modification with effects for A… consists of: "as of the date of this addendum A… becomes an integral part of the set of activities to which B… provides support in the services described in Annex 6 of the contract.";
n) In the fiscal year 2012 the Claimant recorded expenses in account 622501500 – "Group Commissions", the amount of which was transferred to account 622101500 – "Group B… Services" at the end of 2012, whose account extracts were attached as Annex 6 of the RIT (pp. 403 et seq.), relating to services provided by the "parent company" in the total value of €510,431.00;
o) The aforementioned expenses are supported by internal documents, recorded as a debit to the aforementioned expense item, with an average frequency of one per month, in the amount of €50,000.00, in counterpart of a credit in a third-party account 225601500 – "GROUP B…", under the designation "commissions";
p) The amounts recorded monthly are considered provisional, since they are subject to adjustment at the end of the fiscal year by means of a "rectifying invoice" issued by the "parent company" and provider of the aforementioned services;
q) In this document references are made to partial invoices issued throughout the fiscal year, this document serving as a corrective for adjustment in the amount of services to be debited annually;
r) The aforementioned partial invoices issued are located in the accounting entries recorded in third-party account, in this case, each invoice issued gives rise to an entry (debit of account 225601500 – Group B…, in counterpart of account 221201500 – H…), as set forth in the entry applied to the invoices themselves;
s) The "rectifying invoice", issued in December of the year 2012, refers to the services provided as "Amount corresponding to the year 2012 according to the contract for provision of services between the parties", the annual value of the provision of services corresponding to the amount of €510,431.00;
t) In the fiscal year 2008 A… proceeded to the delivery, in accordance with the terms provided in the IRC Code, of the Instalment Payments ("PEC") due in that fiscal year in the amount of EUR 21,664.42;
u) Notwithstanding, as the herein Claimant calculated zero taxable income in the aforementioned fiscal years, as well as in the four following fiscal years (i.e., 2009 to 2012), it was not possible for it to proceed to deduct the aforementioned amounts as Instalment Payments from the tax assessed in each fiscal year;
v) In conformity with the provision in letter b) of No. 3 of Article 93 of the IRC Code, Copo Têxtil requested from the Tax and Customs Authority ("Tax Authority") the refund of the aforementioned Instalment Payments not deducted from the taxable income through an inspection action to be carried out to the fiscal year 2012, taking into account that the preceding ones had already been subject to inspection procedures;
w) The herein Claimant was then subject to an inspection procedure by the Finance Office of …, which began on 26.01.2015 (Service Order) and ended on 27.07.2015 (notification of the audit report), with a view to giving effect to the request for refund of the instalment payment (PEC), made in the years 2009, 2010, 2011 and 2012, because it was not deducted in the four following fiscal years, an action that focused only on the fiscal year 2012;
x) In the final report of the inspection action, the Tax Administration considered that the amounts borne by the Claimant as management fees were not duly documented with respect to their indispensability (Art. 23 of the IRC Code) and that the costs that served as the basis for their calculation were not duly documented (Art. 45 of the IRC Code), whereby it understood the total value of the management fees borne by the herein Claimant as not accepted for tax purposes, in the amount of €510,431.00 (five hundred and ten thousand four hundred and thirty-one euros);
y) The inspection action resulted in the following adjustments to taxable income:
[original table reference]
z) The Claimant was, on 08.10.2015, notified of the demonstration of IRC assessment, supra identified, for the taxation period 2012, from which resulted an additional assessment of €1,836.92 (one thousand eight hundred and thirty-six euros and ninety-two cents);
aa) On 05.02.2016, the Claimant presented a gracious claim by not agreeing with the adjustments that constitute the tax act of additional assessment, also alleging the compatibility of the prices practiced with the provision of Art. 63 of the IRC Code (transfer pricing), as well as the lack of grounds and evidentiary basis of the conclusions of the final report;
bb) The aforementioned gracious claim came to be expressly denied, in its entirety, in a denial order notified to the Claimant on 01.09.2016.
Facts not proven
No other facts with relevance to the assessment of the merits of the case were alleged by the parties which were not proven.
Grounds for the Decision on the Matter of Fact
The conviction regarding the facts was based on the allegations of the Claimant and the Respondent not contradicted by the opposing party, supported in the documentary evidence submitted by them whose authenticity and correspondence to reality were also not questioned.
4. MATTER OF LAW - ISSUES TO BE DECIDED
The following are the contested issues submitted for the assessment of the Tribunal:
A) Value of the proceedings;
B) Illegality, and consequent annulment, of the IRC assessment for the fiscal year 2012, in the value of €1,836.92, resulting from the adjustments made in the course of tax inspection proceedings resulting from the non-acceptance by the tax administration of the deductibility for purposes of calculating taxable income under IRC of expenses incurred in the amount of €510,431.00;
C) Illegality, and consequent annulment, of the same IRC assessment, resulting from lack or deficient grounds;
D) Refund to the Claimant of that sum of €1,836.92;
E) Refund of the entire Instalment Payment in the amount of €21,644.42;
F) Condemnation of the Respondent to pay the Claimant indemnitory interest by reason of the improper payment of the aforementioned amounts;
It is necessary to assess.
A)
First, with respect to the value of the proceedings, Article 296, No. 1, of the CPC provides that "every action shall be assigned a certain value, expressed in legal currency, which represents the immediate economic utility of the claim".
It results, therefore, from this normative that the "economic utility" immediately of the claim, expressed in money, constitutes the general criterion for the determination of the value of the action [1].
Moreover, the provisions on the value of the action which establish special criteria represent the concrete specification and adaptation of this general criterion, in function of the type of claim formulated.
There is, however, the need to take into account that the claim is always based in the cause of action, which explains and delimits it.
The criterion of the immediate economic utility of the claim does not abstract from it, whereby this is not considered abstractly, but rather in confrontation with the cause of action, to determine the value of the action. Just as the claim detached from the cause of action is not sufficient for the determination of the value of the action, likewise the cause of action, by itself, does not determine it [2].
In turn, Article 297, No. 1, - under the heading "general criteria for setting the value" - provides that "if the action is intended to obtain any certain sum of money, that is the value of the action, and impugnation and agreement to the contrary are not admissible; if the action is intended to obtain a benefit other than that, the value of the action is the sum of money equivalent to that benefit". This normative thus explicates the general criterion defined in the cited Article 296.
Now, placing these considerations and subsuming them to the case at hand, we shall say that, in light of the claim formulated by the Claimant, the economic utility of the claim is that corresponding to the sum of the value relating to the assessment whose illegality it invokes, which amounts to €1,836.92, and of the amount of the Instalment Payments, €21,644.42, whose refund it understands to be a consequence of the annulment of the assessment and, as such, also petitions.
It was, moreover, in that measure that, following notification of the Tribunal, it came to specify the claim formulated and alter the value initially attributed.
The Respondent calls into question this value, by understanding that it is not the competence of this Tribunal to assess the request for refund of the Instalment Payments. On that, there was already above a pronouncement, to the effect of judging this invoked exception as without merit.
Reasons for which the value of the request for arbitral decision is set at the value of the proceedings in €23,481.34 (twenty-three thousand four hundred and eighty-one euros and thirty-four cents), in accordance with the provisions of Articles 3, No. 2 of the Regulation of Costs in Tax Arbitration Proceedings (RCPAT), 97-A, No. 1, letter a) of the CPPT and 296 of the C.P.C.
B)
The Claimant upholds the illegality based on the fact that the payments of the provisions of intra-group services ("management fees") were not considered deductible.
Let us see:
With respect to the "management fees" borne by the Claimant and by it understood as costs indispensable to the formation of income, the Respondent calls into question two essential issues to its acceptance as a tax cost. On the one hand, it says, for such expenses to be tax-deductible, they should meet the requirement of indispensability. On the other, it maintains, once the requirement of indispensability is surpassed, they should be documented with documents issued in accordance with legal terms.
Indeed, in accordance with what is stipulated in Article 23 of the IRC Code (in the version in force at the time of the facts), "expenses are those that are demonstrably indispensable for the realization of the income subject to tax or for the maintenance of the source of production."
The question of the indispensability of expenses underlying this norm has been widely debated, both by legal scholars and in the case law of the CAAD and higher courts. It has been uniformly understood [3] that such question should be seen within a framework of causal nexus between the expense incurred and the management and economic purpose of the company that bears it.
See to that effect what was decided by the TCA South [4], referring to technical and management services acquired by a taxpayer from a related company: "a cost, to be fiscally relevant, must be related to the operation, in the sense that there must be a causal relationship between such cost and the company's income. But this does not mean, as is emphasized in the decision whose reasoning we have been following, that such relationship is a relationship of necessary causality, a genuine conditio sine qua non or of concrete results obtained with the act, but rather taking into account the normal circumstances of the market, considering the normal risk of economic activity, in terms of economic adequacy of the act to the purpose of obtaining maximized results."
The decision further states that "it is in the concept of indispensability inherent in Art. 23 of the IRC Code that the essential question of the fiscal consideration of business costs lies and that the fundamental distinction between the cost effectively incurred in the collective interest of the company and what may result only from the individual interest of the partner, a group of partners or their aggregate, and which therefore cannot be considered a cost, is based. This is an expense with a business purpose which does not mean that it has from the outset a purpose immediately and directly lucrative, but that it has, in its origin and in its cause, a business purpose, the law granting the Tax Authority sufficient powers to refuse the acceptance as a tax cost of expenses that cannot be considered compatible with the purposes pursued by the company - cf. J. L. Saldanha Sanches, Os Limites do Planeamento Fiscal, p. 214."
Further on the same question the STA [5] decided that "the requirement of indispensability of a cost must be interpreted as an indeterminate concept requiring case-by-case completion, as a result of an analysis from an economic business perspective, in the perception of a relationship of economic causality between the assumption of a cost and its realization in the interest of the company, considering the corporate purpose of the business entity in question, being forbidden to the Tax Administration actions that place in crisis the principle of freedom of management and autonomy of will of the taxpayer".
In the case sub judice, the expenses whose indispensability was called into question by the Tax Authority refer to services duly itemized and provided in accordance with what was contractually established, materially supported in vast documentation.
Considering the group relationship established, the nature of the services provided and their concentration at the higher level of the Group's participation relationship is considered common and justified.
Indeed, in accordance with rules of experience, the management of companies requires currently, and by force of aggravated circumstances, in addition to permanent monitoring and control, a diverse set, broad and, to a certain extent, globalized complementary services.
It is not reasonable that in a group relationship, those ultimately responsible for management, which do not necessarily coincide with those responsible for a single legal entity, do not define, do not delimit, do not standardize, do not control, do not centralize a set of services that, in the final analysis, but of first importance are at the core of the economic success of the activity of the invested company.
The amount borne by the Claimant corresponded to the cost of the provision of services calculated by the Group plus an agreed margin, a practice that the Group applies with respect to other associates.
With the services effectively existing, which the Respondent never called into question, the question arises as to whether the same were provided in the interest of the shareholder of the Claimant or in the interest of the Claimant itself.
Now, as stated, the services in question aim at monitoring and controlling the activity of the CTA, optimizing its management, its economic success, and thus, in the final analysis, maximizing its results.
If they were not acquired by it from the parent company, they would have to be from external entities, subcontracting management consulting, or internalized, via hiring of qualified personnel for the purpose.
The administration of the company, exercising its right of autonomy and freedom of management, understood that such services would be provided by the Group, entering into a contract for that purpose.
The choice to contract the services necessary for proper management with the parent company does not mean that it is intended to deplete the Portuguese company's capital. Rather, it means that the company, and also the Group, which likewise aims at maximizing the profit of the companies that constitute it, chose a model of centralized management control, today commonly referred to as "shared services".
The Tax Administration cannot limit the contractual freedom of organization of taxpayers and interfere in the management and organizational decisions of companies, manifestly when, as in this case, there is no question of the economic substance of the tax facts [6].
Thus, the costs incurred with the maintenance of this model, being indispensable to the realization of income, since they are costs inherent in and necessary to management, particularly under the current economic circumstances, should be considered fiscally deductible.
With respect to the question of documentary support for expenses, letter h) of No. 1 of Article 45 of the IRC Code (wording at the time) states that "not deductible for purposes of determining taxable income are (…)" "charges not duly documented".
Courts have also pronounced themselves on this question, notably, to the effect that the document evidencing and justifying expenses for purposes of the IRC Code provisions is limited to a "written document, in principle external and with mention of the fundamental characteristics of the operation" [7].
The support for expenses relating to intra-group operations incurred by the Claimant is embodied in the Group's invoices, as well as in the aforementioned contracts entered into between the two entities which list the set of general management, financial, legal, tax, treasury and computer support services provided by the Group to the Claimant.
Notwithstanding, the invoices, as the Respondent alleges, do not comply with one of the requirements demanded by the contracts, which is the itemization of the services provided, the truth is that they refer to the contract for provision of services entered into between the parties, in such a way that it is, by confrontation with the agreements entered into, perfectly possible to identify the services to which they refer, and the truth of the provision of the invoiced services was not called into question.
The formal requirements in documenting expenses aim at enabling the Tax Administration an effective control of economic relations, a fact duly clarified in higher court decisions, such as the one cited above. Notwithstanding, such requirements cannot serve as a presumption of the non-occurrence of operations when further facts are sufficient to conclude for their observance.
Thus, the requirements of legality of the documents supporting the services provided are considered to be met.
Finally, it seems to us that it is also not possible to set aside the economic irrationality of the expenses borne in the context of transfer pricing.
Indeed, in accordance with what is provided in Article 63 of the IRC Code (at the time), the tax regime for transfer pricing is limited to ensuring that in commercial operations carried out between a taxpayer and any other entity with which it is in a situation of special relationships, terms or conditions should be contracted, accepted and practiced substantially identical to those which would normally be contracted, accepted and practiced between independent entities in comparable operations. Now, by what has been set forth above, what was practiced indicates exactly the contrary to what would be contracted between independent parties, in the normal exercise of the conditions associated with the purchase and sale.
We understand, therefore, that the costs borne by the Claimant with management fees are fiscally deductible, which imposes the illegality of the adjustments made and of the tax assessment in dispute, which resulted from them, ground for its annulment.
C)
The analysis of the defect of lack or deficient grounds of the assessment invoked by the Claimant is rendered moot.
D)
With respect to the request for refund of the amount borne by the Claimant by virtue of such illegal assessment, it is unavoidable that the consequence of the declaration of the illegality of the assessment is the condemnation of the Respondent to the refund of the respective value, when it has been paid by the Claimant, by force of the provisions of Articles 24, No. 1, letter b), of the RJAT and 100 of the LGT, since that is essential to "restore the situation that would have existed if the tax act that was the subject of the arbitral decision had not been taken".
It further results from No. 1 of Article 43 of the LGT that "when it is determined, in a gracious claim or judicial impugnation, that there was an error imputable to the services that resulted in payment of the tax debt in an amount greater than that legally due".
In the case at hand, with respect to indemnitory interest it results clearly that the partial illegality of the contested assessment act is directly imputable to the Respondent, which, on its own initiative, took it without legal support, suffering from a defect of erroneous interpretation of the law.
Consequently the Claimant likewise has the right to indemnitory interest, to be paid from the date on which it made the respective payment of the tax in question until the full refund of the amount paid, at the legal rates.
E)
Now with respect to the request for refund of the Instalment Payments, it does not appear possible for the Tribunal to order the condemnation of the Respondent sought by the Claimant.
Indeed, the illegality of the assessment declared here will, possibly, have consequences at the level of the assessment of the tax for that fiscal year and the possible refund of the Instalment Payments. The truth, however, is that the other concrete amounts to be refunded to the Claimant as a consequence of the assessment of the legality of the assessments here disputed, beyond the already assessed refund of the amount paid, cannot be determined by the Tribunal, with the determination and assessment thereof being incumbent on the services of the tax administration.
This circumstance determines the lack of merit of the request for refund of the Instalment Payments and indemnitory interest with respect to this value, naturally without prejudice to the rights that assist the Claimant in the execution of decided cases.
* * *
IV. DECISION
In these terms, the Tribunal decides:
a) To judge the invoked exception of material incompetence of the Tribunal without merit;
b) To judge the request for annulment of the acts of additional IRC assessment and respective compensatory interest, corresponding to the fiscal year 2012, in the value of €1,836.92, as having merit;
c) To judge as without merit the requests relating to the refund of the Instalment Payments, in the value of €21,644.42, and respective indemnitory interest, without prejudice to the rights that assist the Claimant in the execution of decided cases;
d) To condemn the respondent to restore the situation that would have existed if the tax act that was the subject of the arbitral decision had not been taken, namely, to refund to it that sum of €1,836.92, as well as any other amounts that, by virtue of the annulment of the illegal assessment, are shown to be owed to the Claimant, all increased by indemnitory interest calculated in accordance with the provision in Article 43 of the LGT, at the legal applicable rates.
* * *
As was set forth above, with the reasoning expended, the value of the proceedings at €23,481.34 (twenty-three thousand four hundred and eighty-one euros and thirty-four cents), in accordance with the provisions of Articles 3, No. 2 of the Regulation of Costs in Tax Arbitration Proceedings (RCPAT), 97-A, No. 1, letter a) of the CPPT and 306 of the CPC.
The amount of court costs is set at €1,224.00 (one thousand two hundred and twenty-four euros) under Article 22, No. 4 of the RJAT and Table I attached to the RCPAT, charged to the Claimant in the amount of €1,128.28 (one thousand one hundred and twenty-eight euros and twenty-eight cents) and to the Respondent in the amount of €95.72 (ninety-five euros and seventy-two cents), respecting the proportion of 92.18% and 7.82%, respectively, corresponding to their respective unfavorable verdicts and in accordance with the provisions of Articles 12, No. 2 of the RJAT and 4, No. 4 of the RCPAT.
Notify.
Lisbon, 19 May 2017,
The Arbitrator
(Eva Dias Costa)
Text prepared by computer, in accordance with Article 131, No. 5 of the Code of Civil Procedure, applicable by reference to Article 29, No. 1, letter e) of the RJAT.
[1] See FREITAS, Lebre de, in "Code of Civil Procedure annotated, Vol. I, p. 543.
[2] Ibid.
[3] See, among others, processes 91/2012T and 39/2013T of the CAAD and Awards 049/11 and 0779/12 of the STA, Award 03369/09 of the TCA South.
[4] Award 03369/09.
[5] In Award 049/11.
[6] Conviction which we have already expressed elsewhere. See The Economic Substance of Tax Facts: Anti-Abuse Rules and the Limits of the Lawfulness of Tax Planning, University of Porto, Research Center for Legal and Economic Research, Electronic Law Journal, 2015, No. 3, ISSN 2182-9845, URL: http://www.cije.up.pt/content/substância-económica-dos-factos-tributários-normas-anti-abuso-e-os-limites-da-licitude-do-pl
[7] See the Award of the STA No. 658/2011.
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