Process: 689/2017-T

Date: October 29, 2018

Tax Type: IRC

Source: Original CAAD Decision

Summary

This CAAD arbitration case (Process 689/2017-T) concerns an additional IRC (Corporate Income Tax) assessment of €46,282.73 for the 2014 tax year, including compensatory interest. The Portuguese Tax Authority (AT) issued the assessment after discovering that in November 2015, the company's Cash account balance of €87,435.32 was not supported by physical cash, coins, or equivalent values in the safe. The AT concluded this represented undocumented expenses incurred in 2014, subjecting the amount to both regular IRC correction under Article 23 CIRC and autonomous taxation under Article 88 CIRC. The taxpayer challenged this assessment on several grounds: (1) the AT illegally presumed that a cash discrepancy found in November 2015 related to the 2014 tax year, violating the economic accrual principle in Article 18 CIRC; (2) no proof existed that the cash balance on 31/12/2014 was unsupported; (3) the cash balance had remained stable since at least 2007, originating from a 1998 accounting error related to a capital increase; (4) all 2014 cash movements totaling €10,970.50 were properly documented and related to operational activity; and (5) no actual expenses affecting the 2014 net result were identified. The case raises fundamental questions about temporal attribution of tax corrections, the burden of proof in undocumented expense cases, and whether tax authorities can base assessments on facts discovered after the relevant tax year without establishing adequate causation to that specific period.

Full Decision

Arbitral Decision

1. Report

A... LD.ª, a legal entity no. ..., with registered office at ..., no. ..., ...-... ..., filed a request for arbitral pronouncement, pursuant to the provisions of articles 2, no. 1, paragraph a) and 10 of Decree-Law no. 10/2011, of 20 January, as amended (Legal Framework for Administrative and Tax Arbitration), against the additional corporate income tax (IRC) assessment no. 2016 ... in the total amount of € 46,282.73, including the assessment of compensatory interest, relating to the tax year 2014, with the Tax and Customs Authority (AT) as the respondent.

  1. With the present action, the claimant seeks a declaration of illegality of the decision to reject the administrative appeal in which the annulment of the tax acts for additional IRC assessment and compensatory interest were requested, relating to the tax year 2014, and, consequently, a declaration of illegality of those tax acts, with the subsequent annulment of the contested assessments.

  2. In accordance with articles 5, no. 3, paragraph a), 6, no. 2, paragraph a) and 11, no. 1, paragraph a) of the RJAT, the Ethics Council of the Administrative Arbitration Centre (CAAD) appointed the undersigned as arbitrator of the single arbitral tribunal on 14/02/2018, who accepted the appointment.

  3. On 14-02-2018, the parties were duly notified of this appointment and did not manifest any intention to refuse the arbitrator's appointment, having regard to the combined provisions of article 11, no. 1, paragraphs a) and b) of the RJAT and articles 6 and 7 of the Code of Ethics.

  4. The tribunal was constituted on 2018/03/06, in accordance with paragraph c) of no. 1 of article 11 of the RJAT.

  5. The Tax and Customs Authority submitted a response and attached the administrative file, defending the inadmissibility of the requests for annulment of the IRC assessments and compensatory interest.

  6. On 11/07/2018, a witness examination hearing took place at CAAD, called by the claimant, at which the parties were immediately notified to submit written submissions, if desired, which both did.

  7. On the same date, having regard to the judicial recess period and the provisions of article 17-A of the RJAT, pursuant to article 21, no. 2 of the same decree, the deadline referred to in no. 1 of the same article was extended by two months.

  8. The tribunal is competent and was regularly constituted.

  9. The parties have legal standing and capacity, are legitimately represented and are properly represented (articles 4 and 10, no. 2, of the RJAT and article 1 of Ordinance no. 112-A/2011, of 22 March).

  10. The case does not suffer from any defects, and there are no exceptions to consider.

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

2 - Position of the Parties

2.1 - The arbitral request is based on the following grounds, in summary:

I. The contested tax act for additional IRC assessment for the year 2014 arose following confirmation by the AT that, in November 2015, the balance of account 11-Cash (SNC) in the amount of €87,435.32 was not supported at that specific date by banknotes, metallic coins, or other equivalent values, such as cheques, postal orders, etc.

II. Based on this finding, the AT understood that, if at that specific date these funds were not found in the safe, it was because the claimant made expenses, specifically in the tax year 2014, which being unidentified, should be considered as "undocumented expenses".

III. And exclusively on the basis of this fact – the absence of values in the safe in November 2015 that would justify the accounting balance of the Cash account (SNC) – the contested tax act was enacted.

IV. The first question that arises, on which the AT did not pronounce itself, is whether it is legal and legitimate, in light of articles 3, 17, 18 et seq. of the CIRC, to sustain a correction to the fiscal result declared by the claimant in the tax year 2014, based on the fact that in November 2015, the accounting balance of Cash was not supported by banknotes, coins and other equivalent values.

V. To what extent does that finding, on the date of November 2015, presume, with the probability necessary to sustain the application of the contested act, that it impacts the tax year 2014?

VI. No. 1 of article 18 of the CIRC provides that: "Income and expenses, as well as other positive or negative components of taxable profit, are attributable to the taxation period in which they are obtained or incurred, regardless of their receipt or payment, in accordance with the regime of economic accrual".

VII. What relationship of adequate causality can be established between a fact verified in November 2015 and the net and fiscal results of the year 2014?

VIII. It being impossible to establish a causal relationship between the fact and the tax year 2014, the tax act is illegal due to violation of the provisions of article 18 of the CIRC.

IX. It is not proven that the Cash balance at 31/12/2014 was not supported by banknotes, coins and other equivalent values.

X. Cash balance that remains close to that existing on 31.12.2013 and on 31.12.2014, since at least 2007.

XI. The AT corrected the result declared in the tax year 2014, by adding the amount of €87,435.32 which it considered as undocumented expenses, pursuant to article 23 of the CIRC.

XII. And on the same basis subjected that amount to autonomous taxation in accordance with article 88 of the CIRC.

XIII. No. 1 of article 17 of the CIRC provides that: "The taxable profit of legal entities and other entities mentioned in paragraph a) of no. 1 of article 3 is constituted by the algebraic sum of the net result of the period and positive and negative variations in equity verified in the same period and not reflected in that result, determined on the basis of accounting and possibly corrected in accordance with this Code".

XIV. The basis for determining fiscal result must always be the net result, determined on the basis of accounting and possibly corrected in accordance with this Code.

XV. The net result of the period is given by the difference between the revenues and gains and the expenses or losses of the period in question.

XVI. From the accounting records it appears that the Cash account presented a balance of €97,803.26 on 01.01.2014 and a balance of €96,976.08 on 31.12.2014.

XVII. From the accounting records it appears that in the tax year 2014, the credit entries are supported by documents issued in legal form.

XVIII. From the accounting records it appears that the cash balance carries forward from prior years dating back to the year 1998, when a capital increase occurred without the partners having provided the company with liquid funds and the accountant by error did not record the amount receivable from the partners in the appropriate "receivables asset" account, having instead recorded it as "available liquid assets".

XIX. The credit movements recorded in the Cash Account in the year 2014 total the amount of €10,970.50.

XX. All movements are supported and related to the claimant's operational activity.

XXI. The contested tax act was not based on "expenses" or costs that were recorded in 2014 and that influenced the net result of that tax year.

XXII. In the AT's view, the accounting result determined in 2014 is influenced by expenses, by costs, which not being proven by documents, do not allow the identification of the beneficiary, and are therefore considered as undocumented expenses subject to autonomous taxation.

XXIII. For there to be "expenses" it is necessary that there be an outflow (exit) and that this be reflected in the results, that is, that it negatively influences the results.

XXIV. Expenses are negative elements of the results account, which are tax-deductible when, being properly supported, they were indispensable for the realization of income or for the maintenance of the productive source of the company in question".

XXV. It thus follows that an outflow will be considered as an expense or cost if it has negatively influenced the net result.

XXVI. In the case at hand, the specific movements of "cash outflows" that were recorded in 2014 are not identified, with expenses/costs accounts as counterparty, and consequently reduced the accounting net result of that 2014 tax year.

XXVII. That is, the entries that functioned as negative elements of the results account in the year 2014 are not identified.

XXVIII. If the movements recorded in credit in the Cash account – outflows – total in the tax year 2014 the amount of €10,970.50, the result of the tax year could not have been negatively influenced by outflows from the cash account in the amount of €87,435.32.

XXIX. The AT did not identify the specific outflows - exit of values – which it considered as expenses and costs, which had an impact on the result and reduced it.

XXX. The AT did not demonstrate which accounts (SNC) of "expenses or losses" served as counterparty to the "exits of values".

XXXI. The AT did not demonstrate when, how and where the "cash exits" occurred and what impact they had on the net result of the period of 2014.

XXXII. The AT did not express in a clear, sufficient and congruent manner the reasons why it concluded that the outflows recorded in the Cash account total in the year 2014 the amount of €87,435.32, when according to the entries made in that account they total the amount of €10,970.50.

XXXIII. The AT did not express in a clear, sufficient and congruent manner which entries made in the expense and loss accounts are not proven by documents.

XXXIV. The contested tax act is illegal due to violation of the legal duty of formal and substantive reasoning.

XXXV. It not being proven that the claimant affected the net result of the year 2014 with expenses and costs in the amount of €87,435.32, which should be corrected under the CIRC, the act is illegal due to error regarding the factual and legal presuppositions.

XXXVI. If the recorded expenses that influence the net result are proven documentally, there is no basis for application of the provisions of article 88 of the CIRC.

XXXVII. No. 1 of article 88 of the CIRC provides that: "Undocumented expenses are taxed autonomously, at the rate of 50%, without prejudice to their non-consideration as expenses in accordance with paragraph b) of no. 1 of article 23-A".

XXXVIII. From the literal wording of the law it results unequivocally that the presuppositions for application of the rule are:

  • The existence of expenses/costs (negative elements of the results account)

  • Which are not proven by documents

  • Which have been recorded in the period and influenced the net result

XXXIX. The contested tax act is illegal due to violation of the constitutional principles governing the AT's conduct within its duty to pursue the public interest;

XL. The tax act is illegal due to omission of essential formalities and illegal reversal of the burden of proof;

XLI. The tax act is illegal due to error regarding the factual and legal presuppositions;

XLII. The tax act is illegal due to non-existence of the tax fact.

2.2 - Notified of the presentation of the arbitral request, the Tax and Customs Authority submitted a response, in summary, in the following terms:

The fact that a tax inspection procedure is carried out on a taxpayer for a given tax year does not relieve the AT of, within its attributions and duties, proceeding to inspection of another taxation period.

Indeed, according to our legal order, there may be more than one external tax audit procedure concerning the same taxpayer or tax obligor, tax and taxation period through a reasoned decision by the highest-ranking official of the service.

The tax inspection procedure aims at observing tax realities, verifying compliance with tax obligations and preventing tax infractions, which the AT did.

It is demonstrated that the claimant understood perfectly the meaning and scope of the corrections made through the RIT and from which resulted the assessment on which the present arbitral request is made, as results from the claimant's own legal-argumentative exercise throughout its reasoning and in light of the foregoing, it was possible for the claimant to perceive the cognitive and evaluative path followed by the AT in enacting the act to make the decision.

Therefore, one cannot fail to conclude, as the most prudent case law concludes, that it is manifest and unquestionable that the claimant makes, throughout its arbitral request, an extensive discussion of the legal criteria and methods applicable from which flowed the corrections set out in the Final Report and concretized in the assessment in question.

In the present case, it is clear that the reasoning is sufficiently clear and unequivocal, all the more so because the claimant, through the present arbitral request and in light of the arguments set out throughout its pleading, demonstrates having fully understood the factual and legal framework on which the AT's decision was based, since it attempts to rebut, point by point, all of its actions.

Thus, even if the act sub judice suffered deficiencies at the level of the reasoning discourse – which is only by mere academic hypothesis admitted – such deficiencies would be degraded to mere non-essential irregularities.

And even if it were understood that the act suffered any omission of reasoning, which is not conceded, the claimant would always have at its disposal the procedure provided for in article 37 of the CPPT.

Now, the claimant not having availed itself of that power conferred by law, it is necessary to conclude that the acts under analysis contained, and contain, all the necessary elements for their full understanding and that the alleged defect which it might have suffered was remedied.

Moreover, the allegation of a purported reversal of the burden of proof is simply preposterous.

At the origin of the assessment now in dispute is the IT's understanding that the difference between the value of the accounting balance of the Cash account, at 31.12.2014, and the physical cash holdings, represents outflows of financial means not justified by documents, and therefore falls within the qualification of undocumented expenses subject to autonomous taxation in IRC, pursuant to no. 1 of article 88 of the respective Code.

The claimant attributes that discrepancy in the Cash accounting balance to a capital increase of €174,579.26, raising it to €249,398.95, formalized by a shareholders' resolution of 20.11.1998 and public deed of the same date, which states that the amount of the increase is wholly realized in cash and adds that "(…) Finally, the granters stated that the amount of the increase has already been received by the Company's Cash and that no other deposits are required, either by law or by contract."

Yet, despite what was stated, the claimant attached to the case a Statement signed by the accounting manager, B..., dated 13.05.2016, in which he states that "(…) in the year 1998, he carried out an accounting operation in order to increase the Company's Capital, in the amount of 174,579.26 euros, having by mistake moved the POC-Official Accounting Plan accounts, 11 (Cash) in debit, as counterparty of account 51 (Capital) in credit, when the correct operation should have been the movement of POC accounts, 25 (Shareholders-Partners) in debit, as counterparty of account 51 (Capital) in credit."

Therefore, giving full credibility to what is stated in the deed of capital increase, the amount of the increase had already been received in Cash and no other document exists that invalidates this fact.

If the partners declared under their responsibility that they had made the cash deposits in full, everything leads to the conclusion that subsequently there were withdrawals (in one moment or several moments) of the amounts previously delivered without it being possible to identify who were the beneficiaries and the reasons that determined them.

Indeed, as stated in point 13 of the RIT "(…) supporting documents were not found in the company's accounting, the destination was not determined, which in fiscal terms represents a situation designated as Undocumented Expenses to the extent that there was an effective outflow of monetary means from the company without supporting documents therefor."

If the partners had assumed the commitment of deferred cash deposits to realize the contributions, in accordance with accounting rules, the partners' debts would have been recorded and shown in appropriate asset accounts for that purpose.

And such debts could have been offset/extinguished partially with the reduction of capital, well before 2015, taking into account what is provided in Decree-Law no. 257/2007, of 16 July.

However, the accounting balances of the Cash account remained high and, given the absence of supporting documents for the cash outflows that would justify the discrepancies found, how could the AT proceed to verify the cash outflows in the amount of €87,435.24, if no material or written evidence exists?

Doctrine has defined "Undocumented Expenses" as those which do not present or are based on any supporting document that justifies them, being irrelevant for the purposes of subjection to autonomous taxation that they be accounted for as such.

Therefore, cash outflows in monetary form without the issuance of any justifying or supporting document constitute prima facie undocumented expenses which, in essence, mean the use of financial means generated by the activity carried out for purposes unrelated to it.

It is further worth clarifying that not all expenses translate into costs that contribute to the determination of the results of the taxation period and equally, as in this case, may not be reflected in accounting as such.

It should be noted that, not having been recorded in cost accounts, they also did not negatively influence the determination of taxable profit, which is why the AT did not promote any correction to that magnitude;

However, this does not prevent them from falling within autonomous taxation, because no. 1 of article 88 of the IRC Code does not make such subjection dependent on accounting as "expenses"; on the contrary, if they had been accounted for as "expenses", autonomous taxation does not preclude the non-deductibility of their non-consideration from taxable profit.

By which it is important to emphasize:

  • The material document - notarial deed of capital increase - presented by the claimant indicates that the partners realized the subscribed capital in cash and that it had already been delivered to the Company's Cash;

  • It was this document that served as the basis for the accounting entry of the capital increase amount and the corresponding debit in the Cash Account, in accordance with accounting and fiscal precepts;

  • The detection of divergences, at 31.12.2014, between the accounting balance of Cash and the physical cash holdings, in the absence of any plausible, consistent and documentally supported justification, enables the conclusion that there were outflows of undocumented and non-recorded financial means in accounting, thus meeting the concept of "undocumented expenses", subject to autonomous taxation, by force of the provisions of no. 1 of article 88 of the IRC Code;

  • Autonomous taxation of "undocumented expenses" does not presuppose that they be accounted for as such in an "expense" account, or that they have contributed to the determination of the net result of the tax year, the mere recognition of the expenditure for unknown purposes, undocumented, being sufficient, which embodies the use of company financial resources for the benefit of unidentified third parties, therefore the existence of the tax fact cannot be denied.

Thus, the impugned tax act does not suffer from any legal defect nor violates the constitutional principles of legality, proportionality, good faith and fairness.

3. The parties submitted submissions which, essentially, reiterated the arguments already contained in their respective first pleadings, also pronouncing themselves on the witness evidence produced at the hearing.

3. Factual Matters

3.1 Proven Facts

  • The claimant is a limited liability company with initial capital of PTE 15,000,000$00 (€74,819.68) for carrying out the activity of "Industry of transport, rental of passengers and cargo transport in light automobiles and cargo trucks", an activity which began on 18.12.1971.

  • The claimant's partners proceeded on 20.11.1998 to increase the capital to PTE 50,000,000$00 (€249,398.95) to be realized by cash contributions, as evidenced by the public deed attached to the case.

  • The capital increase was recorded in the accounting as a debit to account 11- Cash and a credit to account 51. Capital.

  • A statement was attached to the case signed by the accounting technician in office at the time of the capital increase, which was not disputed, in which he states having made an error in accounting for the contribution corresponding to the capital increase because the accounting entry should have been made as a debit to account 25-Partners c/subscription, as credit to account 51. Capital, since the capital increase should be realized over time given the unavailability of funds of the partners at the time of the increase.

  • From the Tax Inspection Service Report it is noted that: "Given that the taxpayer presented a cash balance on 31-12-2013 considered high compared with the declared activity, it was selected for purposes of physical cash count;

  • On 12/11/2015, covered by Service Order no. OI2015..., under withholding tax, a tax inspection procedure was initiated for the tax year 2015;

  • To verify the balance of the "111 – Cash" account, on 12-11-2015, a visit was made to the company's registered office, with the objective of performing a physical count of the funds, and it was found that there was no cash amount whatsoever;

  • The taxpayer was notified to present documents, namely the most recent possible Trial Balance, cash sheets for the period between the date of the aforementioned trial balance and the date of the cash count, accounting extracts of the Cash (11) and Bank (12) accounts, bank statements reflecting the financial movements of the company for the years 2013, 2014 and 2015, copies of minutes of all shareholders' meetings since the date of registration, the SAF-T file of 2015 accounting and other elements it deemed important to present to justify the divergence found;

  • It happens that, on the date of the visit (2015/11/12) there was no cash amount whatsoever, the date and manner of withdrawal of the money was not determined, but there should have been a value of 87,435.32 € in cash on this date;

  • It was not proven that this cash withdrawal occurred in the year 2015, either as a distribution of profits/advance on account of profits, or in any other way, as concluded by the cutoff made to the cash account, therefore the inspection procedure for the year 2015 was closed and the present inspection procedure for the year 2014 was opened.

  • On 2016-04-28, to analyze the tax year 2014, a new procedure was initiated (OI2015...), based on the facts found in the Tax Inspection Visit Report carried out under Service Order OI2015..., in which it expressly states the following:

"Having considered all the elements collected and described above, we draw the following conclusions:

  • We confirmed that on 2015-11-12 there was no cash amount whatsoever.

  • We were not presented with minutes indicating distribution of results;

  • The IES has no indication regarding the occurrence of distribution of results;

  • Article 75, no. 1 of the General Tax Law (LGT) provides for the legal presumption of truthfulness of declarations: "The declarations of taxpayers, submitted in accordance with the law, as well as the data and calculations entered in their accounting or records, are presumed to be true and in good faith, when these are organized in accordance with commercial and fiscal legislation".

  • On 2015-11-12, we carried out a cash inventory, and it was found on that date that the value was zero, it was not proven through the analysis of all accounting entries of the cash accounts and bank deposits and also the bank statements that were sent to us, that the money was withdrawn from the company during the year 2015, concluding that it was no longer in the company's cash at the beginning of the tax year. Then the outflow, payment and/or acquisition of goods and/or services or even gift or set of gifts occurred during the year 2014.

  • The destination given to the 87,435.32 € of the cash balance remained unknown.

  • The IRC Code only allows the presumption of profit distribution or advance on account of profits when they are found entered in any partners' current accounts (article 6 CIRS), which did not occur in the present case.

  • Thus the situation in question only has framework in the figure of undocumented expense, which translates into an effective outflow of monetary values existing in cash, namely, "banknotes or metallic coins of legal tender, cheques or national or foreign postal money orders", which embody the existence of payments, and/or the acquisition of goods and/or services, and/or also gifts or sets of gifts".

  • The partners on 16/11/2015 resolved, in 2015, unanimously, to proceed with the reduction of capital, and by this means extinguish the obligation to realize the subscribed and unrealized part up to that date.

  • With the capital reduction resolution, the accounting balance of the "Cash" account became coincident with the physical balance of the monetary means existing in cash (banknotes, coins, cheques and others) and the Cash balance became the amount of €1,004.63 on 30/11/2015.

3.2 Proven and Unproven Facts and Factual Decision Reasoning

One of the contested issues emerging from the case is whether or not there was actually an inflow of monetary means into cash as a result of the capital increase carried out in 1998, since the public deed states that the capital was entirely realized in cash and that the same, as of that date, had already been received in the Company's Cash.

The claimant has insisted from the beginning of the inspection procedures, both the one that occurred in 2015 and the one that occurred in 2016, that at that date of 1998, there was in reality no actual cash inflow due to the lack of available funds from the spouse partners, and what happened was a mere error by the accounting technician at the time of capital increase in recording the increase in the Cash Account when it should have been recorded in the Partners Account.

The claimant sustains this claim on (i) proof contained in the statement signed by the accountant at the time, who acknowledges having made a technical accounting error, precisely because there was no cash inflow due to lack of availability of the partners' funds, and that the increase would take place with contributions to be made over time, and (ii) proof resulting from the statements of the accounting technician in office at the time of the visits, but who was not in that position at the time of the capital increase, heard in substitution of the accounting technician who carried out the accounting operation at the time of the increase, who for reasons of age and illness could not be heard, and from whose testimony it results that he did not have direct knowledge of those facts but that from personal knowledge of the partners he knows that they were not persons of means to be able to deliver the entire value of the increase in cash and that such payment would be made over time, being therefore convinced that the capital was never received in the company's cash.

Now, as Pires de Lima and Antunes Varela state in their annotations to article 371 of the Annotated Civil Code, Vol I (ed. 1967), page 243, "the full evidentiary value of the authentic document does not apply to everything said or contained in the document, but only to the facts that relate to actions carried out by the competent authority or public official (e.g.: I proceeded to this or that examination) and regarding facts referred to in the authentic document based on the perceptions of the documenting entity. If in the document, for example, the notary states that before him the grantor said this or that, it is fully proven that the grantor said it, but it is not proven that the grantor's statement is true, or that it has not been vitiated by error, fraud or duress, or that the act is not simulated"

In this case, the reality that the AT insists is proven by authentic document – the cash inflow of capital on the date of execution of the deed – is called into question by the witness and by private document. But in reality what is proven by the authentic document is that the grantors declared before the notary that they had already delivered to the company's cash the cash value corresponding to the capital increase.

Both the statement signed by the accountant at the time of the capital increase and the testimony of the witness who became an accounting technician in 2005 and who was performing those duties at the time the inspection actions were carried out, are consistent in the fact that in reality the money did not come into the cash because the partners did not have personal available funds for that.

That is, the doubts, even by the testimony of the accounting technician heard in that he did not directly witness the facts, must be resolved by the public faith contained in the public deed certifying that the partners say they delivered the money to the company's cash. In reality, it is considered that the proof produced for setting aside the statement contained in the public deed is not sufficiently strong and indisputable to tip the decision in favor of the claimant, therefore it is considered not proven that the money was not received in the company's cash.

A different doubt, equally contested, is whether or not the cash amount that was determined by the RIT as needing to exist there actually existed on 31 December 2014.

To analyze this question it is important to establish that the following Cash balances are proven, according to accounting documents submitted by the claimant and which were not disputed:

2007- Cash balance on 31/12/2007 – 148,123.22 (Doc 5, p. 1/5)

2008 - Cash balance on 31/12/2008 – 137,661.18 (Doc 6, p. 1/5)

2009 - Cash balance on 31/12/2009 – 138,745.30 (Doc 7, p. 1/4)

2010 - Cash balance on 31/12/2010 – 124,146.36 (Doc 8, p. 1/5)

2011 – Cash balance on 31/12/2011 – 123,172.20 (Doc 9, p. 1/5)

2012 - Cash balance on 31/12/2012 – 104,005.57 (Doc 10, p. 1/5 and Doc 17, p. 2/2)

2013 – Cash Balance on 31/12/2013 – 97,803.26 (Doc 11, p. 1/5 and Doc 16, p. 4/4)

2014 – Cash Balance on 31/12/2014 – 96,976.08 (Doc 12, p. 1/5 and Doc 17, p. 2/2)

It is also proven by the RIT that on 16 December 2015 a capital reduction operation was carried out, with the cash balance becoming the amount of €1,004.63, as shown in document 18.

It is not considered proven, due to lack of conclusive proof, that at the end of 2014 the amount in question was no longer in cash. What is only proven is that "on 12-11-2015, a visit was made to the company's registered office with the objective of performing a physical count of the funds, and it was found that there was no cash amount whatsoever", on that date, as stated in the RIT, and also that "it was not possible to also identify who were the recipients of those monetary means, thus preventing taxation in the sphere of the beneficiaries of the operation". In reality, it cannot constitute proof that the tax act concerns the tax year 2014 based solely on the simple conclusion drawn in the RI that "… it was not proven that the money was withdrawn from the company during the year 2015, concluding that it was no longer in the company's cash at the beginning of the tax year. Then the outflow, payment and/or acquisition of goods and/or services or even gift or set of gifts occurred during the year 2014".

Finally, it is not considered proven that actual expenses occurred that should have been documented and which justified the absence of monetary values in cash, but only the presumption that due to the non-existence of values confirmed by physical check, the AT in the RI equated that absence to undocumented expenses when it states: "…the situation in question only has framework in the figure of undocumented expense …".

On the other hand, it is proven from the Report that the inspector who carried out the November 2015 visit was the one who carried out the physical cash count and found the discrepancy between the actual cash balance and the accounting balance of the Cash Account, and that the 2016 Report was prepared by a different inspector and that this inspector took advantage of the 2015 Report to, in 2016, state that on 31/12/2014 there was a shortfall in the cash of €87,435.32.

In this regard, considering the arguments and evidence adduced by the parties, and considering the evidentiary value of the RI, and having in mind what no. 7 of article 110 of the CPPT provides, the facts discriminated above were considered proven and unproven with relevance for the decision, therefore, as regards the factual matters declared as proven, the conviction of the Arbitral Tribunal was founded on the free appreciation of the positions assumed by the claimant and the respondent (on matters of fact) and on the content of the documents attached to the case, not contested by the parties, on the witness testimony, as well as on the analysis of the administrative file attached by the respondent.

4 . Matters of Law

The immediate object of the arbitral request is the declaration of illegality of the decision to reject the Administrative Appeal submitted with the request for annulment of the additional IRC assessment and compensatory interest, effected relating to the year 2014; and the mediate object is the declaration of illegality of the tax acts for additional IRC assessment effected by the AT relating to the year 2014, in the total amount of € 46,282.73 (forty-six thousand two hundred and eighty-two euros and seventy-three cents) which includes the assessment of compensatory interest in the amount of € 1,884.66.

The claimant imputes to the contested assessments the defects of violation of the tax principles of good faith, impartiality and proportionality; omission of essential legal formalities due to lack of reasoning and reversal of the burden of proof; defect due to error in the factual and legal presuppositions; improper use of the principle of truthfulness of declarations and accounting; and non-existence of the tax fact.

The claimant also requests, in case of doubts about the existence and quantification of the tax act, the application of article 100 of the CCPT.

The tribunal is not bound by the examination of the defects in the order in which they were invoked by the parties, but only to examine them in the order that ensures the best protection of the claimant and the greatest effectiveness and stability in the protection of the offended interests.

Let us see, then.

The claimant argues against the contested tax act the omission of essential formalities - absence of substantive reasoning, on the grounds that "… there is a violation of the duty of substantive reasoning insofar as the AT, specifically with reference to the tax year 2014, does not indicate the grounds, the factual and legal reasons why it concluded that in that tax year there is that specific "difference" between the "Accounting balance of cash" and the physical balance of monetary means (the quantum), that the same originated in "withdrawal" of funds and the time and manner in which it occurred".

And also because "AT did not make known the reasons why, having concluded that the "difference" detected in November 2015 was already reflected in the financial statements of the year 2014, it decided, notwithstanding the conclusions that "all records were analyzed" no "record nor any supporting document" was found, to consider that it was in the tax year 2014 that the "presumed" withdrawals occurred. All the more so as the "difference" was already reflected in the financial statements of the previous year – the tax year 2013, and thus successively".

In reality, from the consultation of the official documents attached to the case, it appears that the AT's decision, taken from a reality verified by it in November 2015, is not sufficiently strong to allow one to conclude with certainty, even after asserting that analyses were made of cash exits during the year 2015 and that in that year they did not occur, that the withdrawals will have occurred in the tax year 2014, after the RI states that "… in the scope of the present inspection procedure initiated on 2016-04-28 (OI2015…), we analyzed all entries made to the cash account during the year 2014, and no entries or supporting documents for the said cash withdrawal from the company were detected".

As it appears from the Inspection Report, the AT stated that:

"1) Given that the taxpayer presented a cash balance on 31-12-2013 considered high compared with the declared activity, it was selected for purposes of physical cash count;

  1. The procedure was initiated with the opening of Service Order no. OI2015..., under withholding tax, for the tax year 2015;

  2. To verify the balance of the "111 – Cash" account, on 12-11-2015, a visit was made to the company's registered office with the objective of performing a physical count of the funds, and it was found that there was no cash amount whatsoever;

  3. The taxpayer was notified to present documents, namely the most recent possible Trial Balance, cash sheets for the period between the date of the aforementioned trial balance and the date of the cash count, accounting extracts of the Cash (11) and Bank (12) accounts, bank statements reflecting the financial movements of the company for the years 2013, 2014 and 2015, copies of minutes of all shareholders' meetings since the date of registration, the SAF-T file of 2015 accounting and other elements it deemed important to present to justify the divergence found;

  4. Upon analysis of the elements that were sent to us, we verified that the "Cash" account as of 31-10-2015 had recorded a value of 88,334.22 € and the "Deposits on Demand" account had a balance of 31,391.08 €;

  5. The value recorded in the "Deposits on Demand" account as of 30-09-2015 is coincident with the value in the bank statement with the same date and subsequent entries were checked, with no discrepancies noted in this item;

  6. Regarding the "Cash" account, there is a significant divergence between the cash count performed and the values in the company's accounting records;

  7. During the month of November of the year 2015, payments were made through cash in the amount of 898.90 €;

  8. After analysis of the accounting entries made through the cash account up to the date of the visit (2015-11-12), it is concluded that there should have been a value of 87,435.32 € in cash on this date;

  9. It happens that on the date of the visit there was no cash amount whatsoever, the date and manner of withdrawal of the money was not determined;

  10. This cash withdrawal was not proven to have occurred in the year 2015, either as a distribution of profits/advance on account of profits, or in any other way, as concluded by the cutoff made to the cash account, therefore the inspection procedure for the year 2015 was closed and the present inspection procedure for the year 2014 was opened;

The Report informs us that Service Order no. OI2015... was opened under withholding tax for the tax year 2015, once these Cash divergences were found, a new procedure was opened beginning on 2016-04-28 (OI2015...), in which it states:

"12) ….we analyzed all entries made to the cash account during the year 2014, and no entries or supporting documents for the said cash withdrawal from the company were detected;

  1. It happens that we directly verified that there is no cash on the date of the visit made to the company's facilities, therefore it is concluded that in fact the money does not exist in the sphere of the company's assets and that it constituted a cash outflow for which no supporting documents were found in the company's accounting, the destination not having been determined, which in fiscal terms represents a situation designated as Undocumented Expenses to the extent that there was an effective outflow of monetary means from the company without supporting documents therefor;

  2. It was also not possible to identify who were the recipients of those monetary means, thus preventing taxation in the sphere of the beneficiaries of the operation."

It was thus confirmed in this 2016 Report that

"… on 2015-11-12 there was no cash amount whatsoever.

  1. We were not presented with minutes indicating distribution of results;

  2. The IES has no indication regarding the occurrence of distribution of results;

…

  1. On 2015-11-12, we carried out a cash inventory, and it was found on that date that the value was zero, it was not proven through the analysis of all accounting entries of the cash accounts and bank deposits and also the bank statements that were sent to us, that the money was withdrawn from the company during the year 2015, concluding that it was no longer in the company's cash at the beginning of the tax year. Then the outflow, payment and/or acquisition of goods and/or services or even gift or set of gifts occurred during the year 2014.

  2. The destination given to the 87,435.32 € of the cash balance remained unknown.

  3. The IRC Code only allows the presumption of profit distribution or advance on account of profits when they are found entered in any partners' current accounts (article 6 CIRS), which did not occur in the present case.

  4. Thus the situation in question only has framework in the figure of undocumented expense, which translates into an effective outflow of monetary values existing in cash, namely, "banknotes or metallic coins of legal tender, cheques or national or foreign postal money orders", which embody the existence of payments, and/or the acquisition of goods and/or services, and/or also gifts or sets of gifts.

… ".

The Tax Inspection attributed to the year 2014 the values which in 2015 it determined as non-existent in Cash because "… through the analysis of all accounting entries of the cash accounts and bank deposits and also the bank statements that were sent to us, that the money was withdrawn from the company during the year 2015, concluding that it was no longer in the company's cash at the beginning of the tax year".

On the other hand, it was stated in the first Report that the excessive cash balance already occurred in 2013, but it is now found that it could have occurred in all the nearest prior tax years which are documented if they had been audited, namely since 2012, to wit: 104,005.57€-2012; 97,803.26€ in 2013 and 96,976.08€ for 2014.

That is, given excessive cash balances in all the nearest prior years and even remote ones since the capital increase (see the balances of the years since 2007 mentioned above which are documented in the case), and it not having been ascertained in relation to them whether or not the values were in cash using the same criterion used for the tax year 2015, it is permissible to conclude that in 2015 there may be no undocumented outflows but it is also permissible to conclude that the outflows may have occurred in any of the prior years, as the respective cash balances would provide coverage for the amount of outflows considered for purposes of autonomous taxation.

On the other hand, as the claimant properly argues, the official who prepared the Report at the end of the execution of OI2015... in 2016 appropriated the statements contained in the other report prepared by another inspector, stating that he verified on 28/04/2016 that on 12 November 2015 there did not exist in the cash the monetary values corresponding to the accounting balance of the Cash Account in the amount of 87,435.32€, and that this absence already existed on 31 December 2014.

The attribution to the tax year 2014 happened, according to the AT, because it was not proven "… through the analysis of all accounting entries of the cash accounts and bank deposits and also the bank statements that were sent to us, that the money was withdrawn from the company during the year 2015, concluding that it was no longer in the company's cash at the beginning of the tax year. Then the outflow, payment and/or acquisition of goods and/or services or even gift or set of gifts occurred during the year 2014."

There is therefore an apparent contradiction, since the cash was verified in 2015 and the documentation of the exits was checked to conclude that the money did not exit in that year and that it will have exited in 2014, but at the same time it is said that in 2014 the same verification was also carried out and that no exit is recorded in that tax year, yet the exit is still attributed to 2014.

What results as established is that in neither year were documents justifying the absence of the monetary values that should have been there found by the inspection, but it does not clearly explain why the values exited in 2014 and not in 2013, for example, a tax year which according to the Report also presented "…a cash balance on 31-12-2013 considered high compared with the declared activity…" which was the opening balance of the tax year 2014 as appears in the document attached to the case.

It is therefore justified to doubt which tax year or years in which the fund withdrawals occurred because the AT does not demonstrate, in fact, the reason for its attribution to the year 2014 as being that in which the exit occurred as opposed to any other in which there would also be excessive cash balance, or even whether it exited in none of the years because it never entered the cash.

Against this background with which it was notified, and which is the basis for the assessment of autonomous taxation in IRC attributable to the IRC of the tax year 2014, the claimant argues that the assessment suffers from a defect of form due to lack of substantive reasoning.

If the AT's Response deserves the tribunal's agreement as to the non-existent lack of formal reasoning, as it is noted that the claimant demonstrates in the arbitral request to have understood unequivocally the reasons that founded the contested tax act, which case law and doctrine consider sufficient for the act to be considered sufficiently reasoned, it is noted, however, that regarding the non-existence of substantive reasoning, also alleged, the AT's Response is omitted in rebutting the arguments presented in the PI.

All considered, it is therefore concluded that the reasoning for the decision is deficient and insufficient to justify the attribution of the withdrawal of the amount of 87,435.32€ to the tax year 2014 because the withdrawal of values could have occurred in any of the prior years since the year of the capital increase, which contradicts the provisions of article 77 of the General Tax Law since the decision of the procedure must always be reasoned both factually and legally. The contested tax act thus suffers from illegality due to the defect of lack of reasoning, which justifies the annulment of the assessment.

Moreover, the factual basis for the assessment of the autonomous taxation at issue here is that the cash exit verified by the tax inspection "… takes the form of undocumented expense which is subject to the autonomous taxation rate of 50 %, provided for in no. 1 of article 88 of the CIRC, by virtue of the non-existence of a document that allows the identification of the beneficiaries of the money thus preventing taxation of the operation in the sphere of third parties".

Therefore, "in accordance with the foregoing, tax is due in the amount of 43,717.66 € (autonomous taxation of IRC), corresponding to 50 % of the cash divergence detected in the amount of 87,435.32 €"

Article 88, no. 1 of the IRC Code provides that "undocumented expenses are taxed autonomously at the rate of 50%, without prejudice to their non-consideration as expenses in accordance with article 23.

However, since autonomous taxation is assessed together with IRC, no. 1 of article 8 of the same Code is equally applicable to the case when it provides that "… tax is due for each taxation period which coincides with the calendar year".

Therefore, undocumented expenses that are taxed in 2014 must be those that were incurred in the same year.

The Tax Administration attributes to the year 2014 the values which in 2015 it determined as non-existent in Cash because "… through the analysis of all accounting entries of the cash accounts and bank deposits and also the bank statements that were sent to us, that the money was withdrawn from the company during the year 2015, concluding that it was no longer in the company's cash at the beginning of the tax year". However, the AT, carrying out the same verification exercise for the year 2014, concluded that it also found no undocumented outflows in that tax year.

On the other hand, it is stated in the first Report that the excessive cash balance already occurred in 2013, which can now also be verified for all the years that are documented since 2012, but the excessive balance in accounting, in this view, could have been verified in all prior tax years if they had been subject to audit.

That is, given excessive cash balances in all the prior years nearest to the year 2014, and it not having been ascertained in relation to them whether or not the values were in cash as it was not conducted the same verification exercise that was conducted for the tax year 2015 and for the tax year 2014, it is plausible to conclude that the exits may have occurred in any of the prior years given that the respective cash balances would provide coverage for the amount of the exits considered for purposes of autonomous taxation.

The attribution to the tax year 2014 happened simply because it was not proven "… through the analysis of all accounting entries of the cash accounts and bank deposits and also the bank statements that were sent to us, that the money was withdrawn from the company during the year 2015, concluding that it was no longer in the company's cash at the beginning of the tax year.

Then the outflow, payment and/or acquisition of goods and/or services or even gift or set of gifts occurred during the year 2014."

There is therefore an apparent contradiction because the cash was verified in 2015 and the documentation of the exits was checked in affirming that the money did not exit in that year, which is why it will have exited in 2014, but at the same time it is said that in 2014 the same verification was also conducted and that no exit is found recorded in that tax year, but yet the exit is attributed to that tax year.

What results is that in neither year did the AT find justifying documents in the company for the absence of the monetary values that should have existed there, such as withdrawals on account of profits, but the AT did not clearly justify what was the reason that presided over its decision to consider that the values exited in 2014 and not in 2013, a tax year which according to the Report also presented "…a cash balance on 31-12-2013 considered high compared with the declared activity…".

In fact, it is not proven unequivocally the nexus of causality between the existence of undocumented expenses and the tax year in which they were incurred. And by virtue of what is determined in no. 1 of article 74 of the General Tax Law "the burden of proof of the facts constitutive of the rights of the tax administration or of the taxpayers rests upon whoever invokes them".

Here we arrive at the necessary conclusion that there is error in the factual presuppositions in the assessment of autonomous taxation attributed to the tax year 2014 because it is not possible to determine in which tax year or years the withdrawal of funds that were considered as undocumented expenses in shortage occurred, and which in November 2015 totaled the amount of 87,435.32€. For the assessment to relate to 2014, the facts attributable to tax purposes uniquely to the tax year 2014 would have to be identified, by force of the cited article 8, no. 1 of the CIRC, and which could not in any circumstance be attributed to another tax year.

There is thus the defect of violation of law due to error in the factual presuppositions, which justifies the annulment of the contested assessment, in accordance with the provisions of article 163 of the CPA, applicable subsidiarily pursuant to article 2 of the LGT.

5. Matters Whose Knowledge Is Precluded

Given the verification of the defect of lack of reasoning of the act and the defect of violation of law due to error regarding the factual presuppositions, and considering equally the provision of article 124 of the CPPT regarding effective judicial protection of the interests of the claimant, the knowledge of the remaining defects alleged in the arbitral request is considered precluded as unnecessary.

6. Decision

In the terms set forth, the arbitral tribunal finds the arbitral request to be well-founded and orders the annulment of the assessment of autonomous taxation no. 2016..., as well as the assessment of compensatory interest effected together therewith, relating to the tax year 2014, in the total amount of 46,282.73€.

7. Economic Value of the Case and Costs

Considering the provisions of article 97-A of the CPPT and article 3, no. 2 of the Regulation of Costs in Tax Arbitration Procedures, the case is valued at 46,282.73€.

Having regard to what is provided for in no. 4 of article 22 of the RJAT, the amount of costs is fixed at 2,142.00€, pursuant to Table I attached to the Regulation of Costs in Tax Arbitration Procedures, to be borne by the Tax and Customs Authority.

Lisbon, 29/10/2018

The Arbitrator of the Single Tribunal

(José Ramos Alexandre)

Frequently Asked Questions

Automatically Created

What is autonomous taxation (tributação autónoma) on undocumented expenses under Portuguese IRC?
Autonomous taxation (tributação autónoma) on undocumented expenses under Portuguese IRC is a special tax regime established in Article 88 of the Corporate Income Tax Code (CIRC). It applies punitive tax rates to certain expenses that lack proper documentation to identify beneficiaries, independent of whether the company has taxable profits. Undocumented expenses are defined under Article 23-A CIRC as costs or losses not supported by invoices or equivalent documents that allow identification of suppliers or service providers. The autonomous taxation rate for undocumented expenses is significantly higher than standard IRC rates (typically 50% or 70%), serving as a deterrent against non-compliance. This taxation occurs in addition to any corrections to taxable profit, meaning the amount is both added back to taxable income and separately taxed at the autonomous rate, creating a double taxation effect intended to discourage inadequate documentation practices.
Can a taxpayer challenge an additional IRC assessment based on undocumented expenses at CAAD arbitration?
Yes, a taxpayer can challenge an additional IRC assessment based on undocumented expenses through CAAD (Centro de Arbitragem Administrativa) arbitration. According to Article 2(1)(a) and Article 10 of Decree-Law 10/2011 (RJAT - Legal Framework for Administrative and Tax Arbitration), taxpayers may file arbitration requests against tax assessments including IRC additional assessments and compensatory interest. The procedure requires submitting an arbitral claim (pedido de pronúncia arbitral) to CAAD, which appoints an arbitrator or arbitral panel. The case must fall within CAAD's material jurisdiction, which includes disputes over legality of tax acts, including additional assessments and autonomous taxation. The Tax Authority submits a response and administrative file, after which evidence hearings may occur. CAAD arbitration provides an alternative to judicial tax courts, typically offering faster resolution. Taxpayers maintain legal standing to contest both the substantive tax assessment and procedural irregularities, including challenges to the factual basis, legal interpretation, and temporal attribution of corrections.
What are the legal grounds for contesting IRC additional assessments and compensatory interest in Portugal?
The legal grounds for contesting IRC additional assessments and compensatory interest in Portugal include: (1) Violation of the economic accrual principle under Article 18 CIRC, which requires income and expenses to be attributed to the taxation period when obtained or incurred, not when discovered; (2) Improper application of Article 23 CIRC regarding tax-deductibility requirements, particularly when expenses are properly documented or when alleged expenses did not actually affect the net result; (3) Incorrect application of autonomous taxation under Article 88 CIRC when documentation exists or expenses are mischaracterized; (4) Violation of Article 17 CIRC concerning determination of taxable profit, which must be based on the net accounting result with corrections permitted only as specified in the Code; (5) Insufficient evidence or improper burden of proof allocation regarding the existence and timing of alleged undocumented expenses; (6) Procedural irregularities in the inspection or assessment process; (7) Inadequate causation between factual findings and the specific tax year assessed; and (8) Constitutional principles including legal certainty, proportionality, and protection of legitimate expectations when stable accounting balances exist over multiple years.
How does the Portuguese Tax Authority (AT) classify and tax undocumented expenses (despesas não documentadas) under IRC?
The Portuguese Tax Authority classifies and taxes undocumented expenses under IRC through a two-tier approach. First, under Article 23-A CIRC, expenses are classified as 'undocumented' (despesas não documentadas) when they lack invoices or equivalent documents conforming to legal requirements that permit identification of the supplier or service provider. Such expenses are non-deductible for IRC purposes and must be added back to taxable profit as a correction to the accounting result under Article 17 CIRC. Second, these undocumented expenses are simultaneously subject to autonomous taxation under Article 88(1) CIRC at punitive rates of 50% (or 70% for entities with losses or exempt/not subject to IRC), applied independently of the company's overall tax liability. The AT typically identifies undocumented expenses through tax inspections that examine accounting records, supporting documentation, and physical verification of assets like cash. When discrepancies are found—such as cash account balances unsupported by physical funds—the AT may presume these represent undocumented expenses. The taxpayer bears the burden of proving expenses are properly documented and tax-deductible, though the AT must establish adequate factual basis connecting findings to the specific tax year assessed.
What is the procedure for filing an arbitral claim (pedido de pronúncia arbitral) against an IRC tax assessment in Portugal?
The procedure for filing an arbitral claim against an IRC tax assessment in Portugal involves several steps under the RJAT (Decree-Law 10/2011). First, the taxpayer must exhaust administrative remedies by filing a hierarchical appeal (reclamação graciosa) or administrative appeal against the tax assessment, unless directly accessing arbitration is permitted. Second, the taxpayer submits a written arbitration request (pedido de pronúncia arbitral) to CAAD within the statutory deadline (generally 90 days from notification of the administrative decision). The request must identify the contested act, state the legal and factual grounds, specify the relief sought, and include supporting documents and the administrative file if available. Third, CAAD's Ethics Council appoints an arbitrator (single arbitrator for amounts under certain thresholds, three-arbitrator panel for higher amounts) within specified timeframes per Articles 5-6 RJAT. Fourth, parties may challenge arbitrator appointments within eight days (Article 11 RJAT). Fifth, the tribunal is formally constituted after the challenge period expires. Sixth, the Tax Authority submits its response and complete administrative file. Seventh, the tribunal conducts hearings if necessary and parties submit written arguments. Finally, the arbitrator issues a binding decision within six months (extendable), which has the same effect as a court judgment and can only be challenged on limited grounds through judicial appeal.