CAAD Ruling on IRC Autonomous Taxation and SIFIDE: Group Taxation Regime Challenge

ARBITRAL DECISION

The arbitrators Judge José Poças Falcão (presiding arbitrator), Dr. Nuno Maldonado de Sousa and Professor Leonor Fernandes Ferreira (arbitrator members), designated by the Deontological Council of the Administrative Arbitration Centre to form the Arbitral Tribunal, constituted on 3-12-2014, agree as follows:

I – REPORT

A, SGPS, S.A. (hereinafter abbreviated as "A" or "Applicant"), legal entity number …, registered in the Commercial Registry Office of … under the same number, covered by the local peripheral services of the Tax Authority of … …, with registered office at Avenue …, in the parish of …, in …, holding company of a group (Group B) subject to the special tax regime for groups of companies provided for in (since 2010 to date) article 69 et seq. of the IRC Code, submitted a request for arbitral ruling, pursuant to article 10 of Decree-Law No. 10/2011, of 20 January (Legal Regime for Arbitration in Tax Matters, hereinafter "LRAT").

The applicant makes the following requests:

"(...)

a) to declare the illegality and annul the rejection of the administrative appeal to the extent that it refused to annul the illegal part, in the terms discussed herein, of the IRC self-assessments in the part produced by autonomous taxation rates, for the tax years 2011 and 2012, thereby violating the principle of legality;

b) to declare the partial illegality of these self-assessments (and to consequently annul them), in the part corresponding to the amounts of € 811,209.88 relative to the tax year 2011, and of € 167,805.10 relative to the tax year 2012;

c) to consequently recognize the right to reimbursement of this amount and, as well, the right to compensatory interest for the payment of tax improperly assessed, counted from 31 May 2012 as to € 811,209.88 and counted from 1 September 2013 as to € 167,805.10 (...)".

The applicant did not appoint an arbitrator, and therefore, pursuant to the provisions of article 6, paragraph 2, subparagraph a), of the LRAT, the undersigned were designated by the President of the Deontological Council of the CAAC to form the present collective Arbitral Tribunal, having accepted in the terms legally provided.

On 18-11-2014 the parties were duly notified of this designation, and did not manifest a will to refuse it, in the combined terms of article 11, paragraph 1, subparagraphs a) and b) of the LRAT and articles 6 and 7 of the Code of Ethics.

Thus, in accordance with the provisions of subparagraph c) of paragraph 1 of article 11 of Decree-Law No. 10/2011, of 20 January, in the wording introduced by article 228 of Law No. 66-B/2012, of 31 December, the collective arbitral tribunal was constituted on 3-12-2014.

The Tax Authority and Customs Authority submitted a reply, arguing that the request for arbitral ruling should be judged to be without merit.

On 20-2-2015, the hearing provided for in article 18 of the LRAT was held, followed by the presentation of final oral arguments by both parties.

The arbitral tribunal was regularly constituted and is materially competent, in view of the provisions of articles 2, paragraph 1, subparagraph a), and 30, paragraph 1, of the LRAT.

The parties have legal personality and capacity and are legally entitled (arts. 4 and 10, paragraph 2, of the same act and art. 1 of Ordinance No. 112-A/2011, of 22 March).

The case does not suffer from nullities and no issues were raised that could prevent the appreciation of the merits of the case.

II – REASONING

Established Facts

Based on the elements in the case file and the administrative file attached to the record, the following facts are considered established, with relevance to assess the issues raised:

A. A[1] is a commercial company that carries out the activity of "management of social equity interests". [PA[2], p. 156].

B. The following companies form the tax group:

a. C SGPS, S.A.

b. D, S.A.

c. E S.A.

d. F, S.A.

e. G, Lda.

[23rd RI and its documents nos. 9 to 18 and PA, p. 157].

C. On 31-05-2012 A presented its IRC income return Form 22 under the taxation regime for group income, as holding company, for the tax year 2011, and at that moment proceeded with the self-assessment of IRC for that year, having in the respective calculation determined autonomous taxation amounts in the amount of 1,906,358.08€. [2nd RI[3] and its document no. 1, p. 5 and 4th R-AT[4]].

D. On 31-05-2012 A made an IRC payment in the amount of € 1,113,170.94 to the Tax Authority, referring to the self-assessment for the tax year 2011 through the document with identification number …. [19th of RI and its document no. 6].

E. On 31-05-2013 A presented its IRC income return Form 22 under the taxation regime for group income, as holding company, for the tax year 2012, and at that moment proceeded with the self-assessment of IRC for that year, having in the respective calculation determined autonomous taxation amounts in the amount of € 215,066.60. [2nd RI and its document no. 2, p. 5 and 4th R-AT].

F. The Tax Authority's computer system did not permit the applicant to enter the value relating to autonomous IRC taxation, deducted from the amounts of tax benefit under the System of Tax Incentives for Research and Business Development[5], in the form of income tax credit deductible from the IRC assessment, which A considered should be taken into account [21st RI and 42nd R-AT].

G. On 31-05-2013 A made to the Tax Authority the payment of IRC for the self-assessment for the tax year 2011. [19th of RI].

H. On 30-04-2014 the applicant filed an administrative appeal against the self-assessments mentioned in C. and in E. and relating to the tax years 2011 and 2012. [3rd RI and its document no. 3 and 5th R-AT].

I. In the administrative appeal a draft decision was issued which was communicated to the applicant by letter dated 25-06-2014, received on 27-06-2014, with the following content:

We propose that the request in the file be partially granted, accepting a deduction from the state surtax declared by the group, as a title of tax benefit granted under SIFIDE, in the amount of €38,593.82 and €34,720.81, respectively, in the tax periods 2011 and 2012, in accordance with the "summary table":

[Document no. 5 of RI and PA, p. 154]:

J. In the administrative appeal a decision was issued by dispatch, based on an opinion that was based on information, communicated to A by letter dated 10-07-2014, received on 22-07-2014, whose fundamental lines are reproduced[6] [4th RI, its document no. 4 and PA, p. 171]:

Information:

(…)

1. In view of the absence of new elements raised in the hearing, the validity of the assumptions that, in fact and in law, supported our previous draft decision remaining, we consider it appropriate to make it final, with all legal consequences.

2. In light of the above, the request in the file shall be partially granted, considering the deduction from the state surtax declared by the group, as a title of tax benefit granted under SIFIDE, in the amount of €38,593.82 and €34,720.81, respectively, in the tax periods 2011 and 2012, with all legal consequences.

(…)

Opinion: Confirming the content of this information, I propose the following:

The partial granting of the request filed in the case, notifying the Claimant thereof, in accordance with articles 35 and 41 of the Tax Procedure Code.

(…)

Dispatch: Agreeing with the foregoing, I determine the rejection of the request filed in the case, with all legal consequences, notifying the Claimant thereof for the purposes and effects of the provisions of articles 35 and 41 of the Tax Procedure Code, as per the Opinion below.

K. By certificates issued on the dates indicated and with reference to the year 2010, the Certifying Commission for Tax Incentives for Business R&D, of the Ministry of Science, Technology and Higher Education, certified that the designated companies carried out research and development activities, and could thus recommend the granting of a tax credit in the following amounts:

[23rd RI and its document no. 7].

L. By certificates issued on the dates indicated and with reference to the year 2011, the Certifying Commission for Tax Incentives for Business R&D of the Ministry of Economy and Employment, certified that the designated companies carried out research and development activities, and could thus recommend the granting of a tax credit in the following amounts:

[27th RI and its document no. 19].

M. By certificates issued on the dates indicated and with reference to the year 2012, the Certifying Commission for Tax Incentives for Business R&D, of the Ministry of Economy, certified that the designated companies carried out research and development activities, and could thus recommend the granting of a tax credit in the following amounts:

[31st RI and its document no. 20].

N. On 18-05-2011 the Head of Finance within the General Directorate of Taxes, exercising functions at the Tax Authority of …, certified that in light of the elements available in the computer system for management and control of tax enforcement proceedings, C, SGPS, S.A. had a regularized tax situation once it was not indebted to the National Treasury for any taxes or tax payments and their respective interest. [38th RI and its document no. 21].

O. On 18-05-2011 the Institute of Social Security, I.P., declared that C, SGPS, S.A. had a regularized contribution situation before Social Security. [38th RI and its document no. 21].

P. On 18-05-2011 the Head of Finance within the General Directorate of Taxes, exercising functions at the Tax Authority of …, certified that in light of the elements available in the computer system for management and control of tax enforcement proceedings, D, S.A. had a regularized tax situation once it was not indebted to the National Treasury for any taxes or tax payments and their respective interest. [38th RI and its document no. 21].

Q. On 20-05-2011 the Institute of Social Security, I.P., declared that D, S.A. had a regularized contribution situation before Social Security. [38th RI and its document no. 21].

R. On 18-05-2011 the Head of Finance within the General Directorate of Taxes, exercising functions at the Tax Authority of …, certified that in light of the elements available in the computer system for management and control of tax enforcement proceedings, E, S.A. had a regularized tax situation once it was not indebted to the National Treasury for any taxes or tax payments and their respective interest. [38th RI and its document no. 21].

S. On 23-05-2011 the Institute of Social Security, I.P., declared that E, S.A. had a regularized contribution situation before Social Security. [38th RI and its document no. 21].

T. On 18-05-2011 the Head of Finance within the General Directorate of Taxes, exercising functions at the Tax Authority of …, certified that in light of the elements available in the computer system for management and control of tax enforcement proceedings, F, S.A. had a regularized tax situation once it was not indebted to the National Treasury for any taxes or tax payments and their respective interest. [38th RI and its document no. 21].

U. On 20-05-2011 the Institute of Social Security, I.P., declared that F, S.A. had a regularized contribution situation before Social Security. [38th RI and its document no. 21].

V. On 18-05-2011 the Head of Finance within the General Directorate of Taxes, exercising functions at the Tax Authority of …, certified that in light of the elements available in the computer system for management and control of tax enforcement proceedings, G, LDA. had a regularized tax situation once it was not indebted to the National Treasury for any taxes or tax payments and their respective interest. [38th RI and its document no. 21].

W. On 18-05-2011 the Institute of Social Security, I.P., declared that G, LDA. had a regularized contribution situation before Social Security. [38th RI and its document no. 21].

X. On 23-05-2012 the Tax Authority, through its Tax Authority of …, certified that in light of the elements available in the computer system for management and control of tax enforcement proceedings, C, SGPS, S.A. had a regularized tax situation once it was not indebted to the National Treasury for any taxes or tax payments and their respective interest. [38th RI and its document no. 22].

Y. On 15-05-2012 the Institute of Social Security, I.P., declared that C, SGPS, S.A. had a regularized contribution situation before Social Security. [38th RI and its document no. 22].

Z. On 17-05-2012 the Head of Finance within the Tax Authority and Customs Authority exercising functions at the Tax Authority of …, certified that in light of the elements available in the computer system for management and control of tax enforcement proceedings, D, S.A. had its tax situation regularized once it was not indebted to the National Treasury for any taxes or tax payments and their respective interest. [38th RI and its document no. 22].

AA. On 11-04-2012 the Institute of Social Security, I.P., declared that D, S.A. had a regularized contribution situation before Social Security. [38th RI and its document no. 22].

BB. On 17-05-2012 the Head of Finance within the Tax Authority and Customs Authority, exercising functions at the Tax Authority of …, certified that in light of the elements available in the computer system for management and control of tax enforcement proceedings, E, S.A. had a regularized tax situation once it was not indebted to the National Treasury for any taxes or tax payments and their respective interest. [38th RI and its document no. 22].

CC. On 03-04-2012 the Institute of Social Security, I.P., declared that E, S.A. had a regularized contribution situation before Social Security. [38th RI and its document no. 22].

DD. On 14-03-2013 the Tax Authority and Customs Authority, through its Tax Authority of …, certified that in light of the elements available in the computer system for management and control of tax enforcement proceedings, C, SGPS, S.A. and H, S.A. had a regularized tax situation since there was no pending tax enforcement proceedings, nor should they owe the State any contribution or tax on that date and through that tax authority. [38th RI and its document no. 23].

EE. On 07-05-2013 the Institute of Social Security, I.P., declared that C, SGPS, S.A. had a regularized contribution situation before Social Security. [38th RI and its document no. 23].

FF. On 07-05-2013 the Head of Finance within the Tax Authority and Customs Authority, exercising functions at the Tax Authority of …, certified that in light of the elements available in the computer system for management and control of tax enforcement proceedings, D SA had its tax situation regularized once it was not indebted to the National Treasury for any taxes or tax payments and their respective interest. [38th RI and its document no. 23].

GG. On 31-01-2013 the Institute of Social Security, I.P., declared that D, S.A. had a regularized contribution situation before Social Security. [38th RI and its document no. 23].

HH. On 07-05-2013 the Head of Finance within the Tax Authority and Customs Authority, exercising functions at the Tax Authority of …, certified that in light of the elements available in the computer system for management and control of tax enforcement proceedings, E, S.A. had a regularized tax situation once it was not indebted to the National Treasury for any taxes or tax payments and their respective interest. [38th RI and its document no. 23].

II. On 07-05-2013 the Institute of Social Security, I.P., declared that E, S.A. had a regularized contribution situation before Social Security. [38th RI and its document no. 23].

Facts Considered Not Proven

No other facts of interest for the decision of the case were alleged.

Basis of the Proven Facts

The conviction of the arbitral tribunal was based on the documentary evidence in the record and the position taken by each Party regarding each fact in the pleadings, duly identified.

II – REASONING (cont.)

The Law

As the applicant alleges, "(…) the acts subject to the request for arbitral ruling of the Tribunal are the rejection of the administrative appeal above identified and, consequently (and in final or ultimate terms), the IRC self-assessment acts relating to the tax years 2011 and 2012, to the extent corresponding to the failure to deduct from the part of the IRC assessment produced by the application of autonomous tax rates for tax incentives available for this purpose (see Docs. nos. 1 and 2).

The applicant now wishes to submit to the appreciation of the Arbitral Tribunal (i) the legality of this rejection of the administrative appeal, to the extent that it disregards the recognition of the illegality (by improper rejection of deduction from the assessment) partial of that part of the IRC self-assessments relating to the tax years 2011 and 2012 of Tax Group B and, as well, (ii) the partial legality of that part of the IRC self-assessments relating to these tax years 2011 and 2012, more specifically illegality with respect to an amount of € 811,209.88 relative to the tax year 2011 and an amount of € 167,805.10 relative to the tax year 2012, in a total of € 979,014.98.

Let us then examine this.

SIFIDE II allows companies to obtain a tax benefit, under IRC, proportional to the expenditure invested in research and development (at the level of processes, products and organizational) that they can demonstrate, in the part that has not been subject to financial participation by the State on a non-refundable basis (See Law No. 55-A/2010 of 31 December, Decree-Law No. 82/2013 of 17 June and Law No. 83-C/2013 of 31 December.

The benefit to be obtained with SIFIDE II translates into the possibility of deducting from the IRC assessment determined in the tax year, an amount of tax credit that results from the sum of the following components:

• Base rate: 32.5% of expenses incurred in the tax year;

• Incremental rate: 50% of the increase in expenses incurred in the tax year compared to the simple arithmetic average of expenses incurred in the two previous tax years, up to the limit of € 1,500,000.

The benefit translates, in essence, into the possibility of deducting from the IRC assessment determined in the tax year, the amount of tax credit determined. Expenses that, due to insufficient assessment, cannot be deducted in the tax year in which they were incurred may be deducted up to the eighth immediately following tax year.

The essential preliminary issue is, in our view, to know how to calculate the amount referred to in article 90 of the CIRC to which the value corresponding to research and development expenses should then be deducted, in the part that has not been subject to financial participation by the State on a non-refundable basis, in a dual percentage:

a) Base rate – 32.5% of expenses incurred in the tax period and

b) Incremental rate – 50% of the increase in expenses incurred in the tax period in relation to the simple arithmetic average of the two previous tax years, up to the limit of 1,500,000 euros.

The applicant claims that the tax credits that, in the years 2011 and 2012, were recognized in the context of SIFIDE should be deducted from the assessment produced by the autonomous taxation rates that burdened it in those tax years.

Having reviewed the provisions governing the system of tax incentives for business research and development[7], commonly known as SIFIDE, in the time circumstances relevant to the present case, we find that, according to article 4 (Scope of deduction) of the act:

"IRC taxpayers resident in Portuguese territory who engage, as a principal activity or not, in an activity of an agricultural, industrial, commercial and services nature and non-residents with permanent establishment in that territory may deduct from the amount determined in accordance with article 90 of the IRC Code, and up to its concurrence, the value corresponding to research and development expenses, in the part that has not been subject to financial participation by the State on a non-refundable basis, incurred in the tax periods from 1 January 2011 to 31 December 2015, in a dual percentage:

a) Base rate – 32.5% of expenses incurred in that period;

b) Incremental rate – 50% of the increase in expenses incurred in that period in relation to the simple arithmetic average of the two previous tax years, up to the limit of (euros) 1,500,000.

2 – (...)

3 - The deduction is made, in accordance with article 90 of the IRC Code, in the assessment relating to the tax period mentioned in the previous paragraph.

4 - Expenses that, due to insufficient assessment, cannot be deducted in the tax year in which they were incurred may be deducted up to the 6th immediately following tax year."

For its part, article 90 of the CIRC provides:

"1. IRC assessment is processed as follows:

a) When the assessment is to be made by the taxpayer in the returns referred to in articles 120 and 122, it is based on the taxable income shown therein;

b) (...)

c) In the absence of assessment in accordance with the preceding subparagraphs, it is based on the elements available to the tax administration.

2 – The following deductions are made to the amount determined in accordance with the preceding paragraph, in the order indicated:

a) That corresponding to international double taxation;

b) That relating to tax benefits;

c) That relating to the special payment on account referred to in article 106;

d) That relating to withholdings at source not susceptible to compensation or refund in accordance with applicable legislation.

(...)

1. When the special tax regime for groups of companies is applicable, the deductions referred to in paragraph 2 relating to each company are made on the amount determined relative to the group, in accordance with no. 1.

(...)".

That is, in summary: the amounts that represent the tax benefit under SIFIDE are deducted "from the amounts determined in accordance with article 90 of the IRC Code, and up to its concurrence" (our emphasis) and in the assessment relating to the tax period in which the expenses eligible for this purpose are incurred and that, in the absence or insufficiency of the assessment determined in these terms, the expenses that cannot be deducted in the tax year in which they were incurred "may be deducted up to the 6th immediately following tax year".

Well, the assessment referred to in article 90 when the assessment is to be made by the taxpayer (the situation that occurs in the case at hand), is determined on the basis of the taxable income shown in that assessment/self-assessment [cf. article 90, paragraph 1, subparagraph a) of the CIRC]. Being the credit in which SIFIDE translates deducted only from the assessment thus determined, that is, from the assessment determined on the basis of the taxable income [this is what is provided in article 5, subparagraph a), of the Law governing SIFIDE, expressly preventing the credits arising from it from being deducted when taxable profit is determined by indirect methods].

Regarding autonomous taxation, it should be noted that these are determined autonomously and distinctly from the determination processed in accordance with article 90 of the CIRC.

Developing further the issue of the nature of autonomous taxation and its degree of connection with the IRC:

We must go back to the year 1990 to find the first intervention by the legislature in the sense of subjecting certain expenses to autonomous taxation, which occurred with the publication of Decree-Law No. 192/90, of 9 June, whose article 4 provided that "confidential or undocumented expenses incurred in the context of the exercise of commercial, industrial or agricultural activities by IRC taxpayers who possess or should possess organized accounting or by IRC taxpayers not covered by articles 8 and 9 of the respective Code are taxed autonomously in IRC, as the case may be, at a rate of 10%, without prejudice to the provision of subparagraph h) of paragraph 1 of article 41 of the CIRC."

This provision was subject to several subsequent amendments which successively increased the tax rate provided therein.

With this type of taxation, the legislature intended, on the one hand, to encourage taxpayers subject to it to reduce as much as possible the expenses that negatively affect tax revenue and, on the other hand, to prevent, through these expenses, that companies proceed with the disguised distribution of profits, especially of dividends which would thus be subject only to IRC as company profits, as well as to combat the tax fraud and evasion that such expenses cause not only in relation to IRS or IRC, but also in relation to the corresponding contributions, both of employers and of workers, to social security.

Saldanha Sanches (see Manual of Tax Law, 3rd Edition, Coimbra Publisher, 2007, p. 407), regarding autonomous taxation provided for in article 81, paragraph 3, of the CIRC, wrote as follows: "In this type of taxation, the legislature seeks to respond to the admittedly difficult question of the tax regime of expenses that are found in the intersection of the personal sphere and the business sphere, so as to prevent remuneration in kind more attractive for purely fiscal reasons or the hidden distribution of profits. The provision presents a characteristic similar to what we will find in the legal sanction against undocumented costs, with an increase in the rate when the taxpayer's situation does not correspond to a situation of fiscal normality. If in the taxpayer's statement there is no profit, the cost may be subject to a negative valuation: for example, we have a rate of 15% applied when the taxpayer had losses in the two previous tax years and a passenger vehicle was purchased for more than € 40,000 (article 81, paragraph 4).

With this provision, the system shows its dual nature, with an increased autonomous tax rate for certain special situations that are sought to be discouraged, such as the acquisition of vehicles for business purposes or vehicles in principle too expensive when there are losses. A kind of presumption is created here that these costs do not have a business purpose and, for this reason, are subject to autonomous taxation. In summary, the cost is deductible, but the autonomous taxation reduces its tax advantage, since here the basis of incidence is not a net income, but rather a cost transformed – exceptionally – into an object of taxation." (our emphasis).

Contrary to what happens in the taxation of income under IRS and IRC, in which the set of income earned in a given year is taxed (which implies that only at the end of it can the tax rate be determined, as well as the bracket in which the taxpayer falls), in the case of autonomous taxation each expense incurred is taxed, in itself considered, and subject to a certain rate, with autonomous taxation being determined independently of the IRC due in each tax year, by not being directly related to obtaining a positive result, and therefore subject to taxation.

Thus, and in the case of IRC, we are dealing with an annual tax, in which each income received is not taxed per se, but rather the aggregation of all income obtained in a given year, the law considering that the tax event is deemed to have occurred on the last day of the tax period (see article 8, paragraph 9, of the CIRC).

Regarding autonomous taxation in IRC, the tax event is the very realization of the expense, and we are not dealing with a complex fact of successive formation over a year, but with an instantaneous tax fact.

This characteristic of autonomous taxation leads us to the distinction between periodic taxes (whose tax event is produced successively, by the passage of a given period of time, as a rule annual, and tends to repeat itself over time, generating for the taxpayer the obligation to pay tax on a regular basis) and single-obligation taxes (whose tax event is produced instantaneously, appears isolated in time, generating on the taxpayer an obligation to pay with an avulse character).

In autonomous taxation, the tax fact that gives rise to the tax is instantaneous: it is exhausted in the act of realization of a certain expense that is subject to taxation (although the determination of the amount of tax, resulting from the application of the various autonomous tax rates to the various acts of expense realization considered, will be carried out at the end of a given tax period). But the fact that the calculation of the tax is carried out at the end of a given period does not transform it into a periodic tax, of successive formation or lasting character. That operation of calculation translates only into the aggregation, for collection purposes, of the set of operations subject to that autonomous taxation, whose rate is applied to each expense, with no influence of the volume of expenses incurred on the determination of the rate.

In this case we are dealing with a single-obligation levy, inciding on operations that are produced and exhausted instantaneously, in which the tax event appears isolated in time, generating for the taxpayer an obligation to pay with an avulse character. That is, the autonomous tax rates here under analysis do not refer to a period of time, but to a moment: that of the isolated operation subject to the rate, without prejudice to the determination of the amount owed by economic agents subject to that "rate" being carried out periodically, at a given moment, jointly with other similar operations, without the joint calculation influencing its result.

For this reason, Sérgio Vasques (see Manual of Tax Law, Almedina, 2011, p. 293, note 470) calls attention to the fact that income taxes contemplate elements of single obligation, such as the liberatory rates of IRS or the autonomous taxation rates of IRC.

Autonomous taxation, in accordance with its initial regulation, constituted as it were a surrogate of the non-deductibility regime previously provided for in the CIRC.

Indeed, in its genesis was the non-acceptance for tax purposes of a percentage of certain expenses, with autonomous taxation being an alternative and more effective form of correction of costs whenever it is a matter of areas more prone to tax evasion (allowances, representation expenses, vehicle expenses, etc.).

Thus, it would not be reasonable, rather contrary to the reason that led the legislature to autonomously tax those expenses that, through their deduction from taxable profit as expenses, the basis for the existence of autonomous taxation would be eliminated.

Arbitral case law has decided that autonomous taxation belongs, as a rule, systematically, to the IRC, and not to VAT, IRS, or any other tax in the Portuguese tax system. This is the case in Arbitral proceedings Nos. 166/2014-T, 246/2013-T, 260/2013-T, 282/2013-T, 6/2014-T and 36/2014-T, among several others.

They are, therefore, strongly linked to the taxpayers of the respective income tax, and, more specifically, to the economic and business activity carried out by them. What is at issue, in autonomous taxation, is indeed taxing certain expenses or charges (costs), viewed in their relation with the general idea of actual and effective profit and the taxation of income.

Indeed, it seems to us beyond doubt that the mechanism of autonomous taxation of the set of situations provided for in article 88 of the CIRC aims, primarily, to safeguard the general equilibria of the tax system itself, the specific equilibria of the IRC and the revenue of the tax itself. That is, it aims to prevent that through the significant manifestation of charges such as those provided for in article 88, distortions affecting the system are not introduced and the expectation of what should be the "normal" revenue of the tax is not disappointed. In this case, as is equally well known, what is at issue is to discourage the realization/manifestation of these expenses, from the outset because, by their nature and purposes, they can be more easily subject to diversion to consumptions which, in essence, are private or correspond to charges which do not cease to have, also, as a specific and ultimate purpose, the avoidance of tax. Realities that present some degree of censurability since, while not directly violating the law, they generate sensible and important imbalances to the general idea of justice, to the fundamental duty to contribute in proportion to one's assets, of equality, of sacrifice, of the proportionality of the measure of tax in light of possible manifestations of wealth, of the taxation of actual income and of justice.

Functioning in a way different from what constitutes the essential scope of IRC – which taxes income – autonomous taxation, it is reaffirmed, taxes certain specific expenses or charges – and constitute an instrumental reality, accessory to that tax, to the extent that it is in function of it that they were instituted and are therefore susceptible of being recognized as having an instrumentality or accessoriness of purposes, rooted in the safeguard of the purposes of the tax itself where they manifest.

It is thus certain that autonomous taxation does not constitute IRC in the strict sense but is interwoven with this (IRC), and should be contained in the "other taxes" of which paragraph 1, subparagraph a) of article 45 of the CIRC gives us account (wording in force in 2011 and current article 23-A/1-a), of the CIRC) (our emphasis).

Revelations of this functional connection, and in the framework of the intention of the legislature as a whole, stand out, for example from the discipline of article 12 of the CIRC regarding entities subject to the tax transparency regime, in not taxing them in IRC, "except as to autonomous taxation", a relationship that equally manifests itself in light of no. 14 of article 88 of the CIRC, in the sense that autonomous taxation rates take into account whether or not the taxpayer presents a fiscal loss.

Analyzed from another perspective, autonomous taxation must be considered in the context of specific anti-abuse provisions and its similarity with the regime provided for in no. 1 of article 65 of the CIRC, in the 2011 wording ("sums paid or owed, in any capacity, to natural or legal persons resident outside Portuguese territory and there subject to a clearly more favorable tax regime are not deductible for purposes of taxable profit, unless the taxpayer can prove that such charges correspond to actually carried out operations and do not have an abnormal character or an exaggerated amount").

Since autonomous taxation aims to reduce the tax advantage achieved with the deduction from taxable profit of the costs on which it is levied and further combat the tax evasion that this type of expense, by its nature, fosters, it cannot itself through its deduction from taxable profit as an expense of the tax year constitute a factor in reducing that reduction of advantage intended and determined by the legislature.

Concluding: autonomous taxation, which incides on charges deductible in IRC, integrates the regime and is due under this tax, the expenses for the payment of those autonomous taxation rates not constituting deductible charges for purposes of determining taxable profit.

This understanding was recently and legally clarified by article 3 of Law No. 2/2014, of 16 January, which added article 23-A) to the CIRC (at the same time that its article 13 repealed article 45) with the following wording:

Article 23-A) - Charges Not Deductible for Tax Purposes

"1. The following charges are not deductible for purposes of determining taxable profit, even when accounted for as expenses of the tax period:

a) IRC, including autonomous taxation, and any other taxes that directly or indirectly incide on profits".

There being no doubt as to the interpretative character of the transcribed provision, in accordance with the rules of legal hermeneutics, in practice, this provision expresses what the legislature always understood and continues to understand, namely that charges resulting from the cost associated with autonomous taxation do not count for purposes of determining taxable profit.

Thus, in the case sub judice, there appears to be no violation by the Tax Authority of the procedural rules and/or formal requirements for assessment provided for in article 90 of the CIRC with the disregard, for this purpose, of the autonomous taxation calculated and paid by the applicant.

Hence, there is no intended illegality in the calculation of the IRC assessment in the applicant's tax years 2011 and 2012 for purposes of deduction of the aforementioned eligible expenses under SIFIDE.

III. DECISION

In accordance with the foregoing, the Arbitral Tribunal agrees to:

a) Judge completely without merit the requests made by the applicant ["(...) to declare the illegality and annul the rejection of the administrative appeal to the extent that it refused to annul the illegal part, in the terms discussed herein, of the IRC self-assessments in the part produced by autonomous taxation rates, for the tax years 2011 and 2012, thereby violating the principle of legality (...)" and "(...) to declare the partial illegality of these self-assessments (and to consequently annul them), in the part corresponding to the amounts of € 811,209.88 relative to the tax year 2011, and of € 167,805.10 relative to the tax year 2012 (...)"];

b) Judge the consideration of the request for recognition of the right to reimbursement of the amounts assessed and paid to be moot.

Value of the Case

In accordance with the provisions of art. 306, paragraphs 1 and 2, of the CPC and 97-A, paragraph 1, subparagraph a), of the CPPT and art. 3, paragraph 2, of the Regulation of Costs in Tax Arbitration Proceedings, the value of the case is set at € 979,014.98

Costs

In accordance with art. 22, paragraph 4, of the LRAT, the amount of costs is set at € 13,770.00, in accordance with Table I annexed to the Regulation of Costs in Tax Arbitration Proceedings, at the charge of the applicant, A, SGPS.

Lisbon and CAAC, 13-5-2015

The Arbitral Tribunal

José Poças Falcão

(President)

Nuno Maldonado Sousa

(Member)

Leonor Fernandes Ferreira

(Member)

[Dissenting vote in accordance with the attached statement (article 22-5, of the LRAT)]

[Document prepared by computer, in accordance with article 131, paragraph 5 of the Code of Civil Procedure (CPC), applicable by reference of article 29, paragraph 1, subparagraph e) of the LRAT, with blank lines and reviewed by the Collective of Arbitrators].

Dissenting Opinion

I set forth the reasons that distance my position from the one that prevailed.

1. The essential issue that is the object of the present Request for Arbitral Ruling is whether the tax credits that, in the years 2011 and 2012, were recognized to the Applicant, under SIFIDE, can, or cannot, be deducted from the part of the assessment produced by autonomous taxation rates of the companies in the Applicant's tax group.

2. In 2011 and 2012, the System of Tax Incentives for Business Research and Development II (SIFIDE II) was in force, which had been approved by article 133 of Law No. 55-A/2010, of 31 December. This act establishes, for IRC taxpayers covered by the SIFIDE incentive system, that the scope of deductions from the IRC assessment are made (article 4) as follows:

Article 4 - Scope of Deduction

1 - IRC taxpayers resident in Portuguese territory who engage, as a principal activity or not, in an activity of an agricultural, industrial, commercial and services nature and non-residents with permanent establishment in that territory may deduct from the amount determined in accordance with article 90 of the IRC Code, and up to its concurrence, the value corresponding to research and development expenses, in the part that has not been subject to financial participation by the State on a non-refundable basis, incurred in the tax periods from 1 January 2011 to 31 December 2015, in a dual percentage:

a) Base rate - 32.5% of expenses incurred in that period;

b) Incremental rate - 50% of the increase in expenses incurred in that period in relation to the simple arithmetic average of the two previous tax years, up to the limit of (euro) 1,500,000.

(...)

3 - The deduction is made, in accordance with article 90 of the IRC Code, in the assessment relating to the tax period mentioned in the previous paragraph.

1. Thus, the act regulating SIFIDE refers to article 90 of the CIRC, which contains the rule for IRC assessment, including the part that comes from autonomous taxation. This act, in article 4, defines the scope of deduction of the tax benefit when it states that this can be made to the amount determined in accordance with article 90 of the IRC Code, and up to its concurrence.

It is this provision whose reading permits answering the question stated, in summary, which states that the amounts in which SIFIDE translates are deducted "to the amounts determined in accordance with article 90 of the Code of Income Tax for Legal Entities (CIRC), and up to its concurrence (,...)".

1. The CIRC refers, in its current version, expressly to autonomous taxation only in five articles, namely in art. 12 (when excluding autonomous taxation from the IRC exemption applicable to entities covered by the tax transparency regime), in art. 23-A, para. 1 (when explaining that autonomous taxation is not deductible for purposes of determining taxable profit), in art. 88 (when establishing the rates and defining the taxable basis of autonomous taxation), in art. 117, para. 6 (regarding the disclosure obligation of entities exempt from IRC under art. 9, when autonomous taxation applies) and in art. 120, para. 9 (as to the periodic income return statement). There is no other express reference to autonomous taxation in the CIRC. There is not, therefore, in the CIRC, in the chapters dealing with scope (Chapter I), assessment (Chapter V) and payment (Chapter VI), any express reference to autonomous taxation. They are subject, in a generic manner, to the other provisions provided for in the CIRC.

2. The part of the IRC assessment that comes from autonomous taxation is calculated from the elements of the tax defined in article 88 of the CIRC inserted in 'Chapter IV – Rates'. This article defines the taxable basis of autonomous taxation, on one hand, and, on the other hand, enumerates the rates of autonomous taxation, which are several, depending on the nature of the taxable basis to which they apply; for depending on the type of taxpayer (e.g., non-profit entity, exempt entities, entity that engages as a principal activity in a commercial, industrial or agricultural activity), and are also dependent on the economic performance of the IRC taxpayer, assuming different percentages when fiscal profit or loss is determined. The assessment coming from autonomous taxation is a function of the taxable result, being calculated from two expressions which are the product of the taxable basis by a rate dependent on the taxable result: a higher rate when fiscal loss is determined and a lower one when the taxable result is positive.

Thus, the assessment coming from autonomous taxation cannot be determined instantaneously and immediately following the incurrence of the expense, as it depends on the result itself which is of successive formation and only known at the end of the tax period. It also happens that some costs which do not coincide with the expenses which they extinguish and which are subject to autonomous taxation, namely depreciations, are of continuous formation.

1. From the current wording of article 23-A, para. 1, subparagraph a), of the CIRC, which was given by Law No. 2/2014, of 16 January, it is concluded, by literal interpretation, that autonomous taxation is IRC (is a part of the IRC). Indeed, the positioning of the two commas in the letter of the law, one before and the other after the expression "including autonomous taxation" contained in the current wording of the cited article 23-A, para. 1, subparagraph a), of the CIRC, excludes the possibility of defending that autonomous taxation is not (part of) the IRC. Beyond the law, and in the same sense, jurisprudence also, as far as we can tell, holds that autonomous taxation is IRC. The same conclusion is drawn from the text of art. 12, when it provides that "entities to which, in accordance with article 6, the tax transparency regime applies are not taxed in IRC, except as to autonomous taxation", by presenting autonomous taxation as a subset of IRC.

2. The purpose of autonomous taxation is dual. They aim to tax actual income, thus correcting taxable income to bring it closer to that actual income, and at the same time seek to penalize taxpayers who through the realization of certain expenses end up reducing taxable income.

3. But it is not, however, the purpose, nature or incidence of the tax that is the essential question here. What matters in this case to know, in our opinion, refers exclusively to the manner in which the assessment (of the part of the tax that comes from) autonomous taxation is made and whether they are included in para. 1 of art. 90 of the CIRC, or whether they are outside it.

4. Now art. 90 of the CIRC applies to assessment made by the taxpayer (self-assessment). We find no article in the CIRC other than art. 90 that refers to the assessment of autonomous taxation and the rest of the IRC. And, in these terms, the assessment of both - autonomous taxation and the rest of the IRC - is single and has the same legal support. Autonomous taxation does not result from a distinct process of tax assessment. Understanding as it is that autonomous taxation is (part of) the IRC, it is understood that the assessment of IRC is single, including the part that comes from autonomous taxation. There is a single IRC assessment that comprises two parts: the assessment of autonomous taxation and that of the rest of the IRC, each with taxable basis determined in its own way and with its own tax rates, but both assessed in accordance with art. 90 of the CIRC. Being a single assessment, it is concluded that the part of the assessment that comes from autonomous taxation is an integral part of the IRC assessment.

Conversely, there is no reference in any other article of the CIRC to the assessment of autonomous taxation as a distinct process. To accept that the assessment of autonomous taxation is not included in art. 90 of the CIRC, would be to accept that there is a gap in the law and, this being a tax law, it does not permit integration. And thus, the Tax Authority and Customs Authority may have erred, in not permitting the deduction of the tax benefit generated by SIFIDE. It interpreted the law, overlaying on the purpose of tax benefits, perhaps following an intention to collect revenue and combat tax evasion, downplaying the "measures of exceptional character instituted for the protection of relevant extra-fiscal public interests that are superior to those of taxation itself that prevent" which are tax benefits.

1. And art. 92, para. 2 of the CIRC, underscores the exceptional character and primacy of the SIFIDE benefit, compared to other assessment reliefs that did not merit identical treatment, leading to the conclusion that the character is priority for the legislature of the deduction of this tax benefit. For ease of reading, this provision is transcribed:

1 - For entities that engage, as a principal activity, in an activity of a commercial, industrial or agricultural nature, (...) the tax assessed in accordance with para. 1 of article 90, net of the deductions provided for in subparagraphs a) to c) of para. 2 of that article, cannot be less than 90% of the amount that would be determined if the taxpayer did not enjoy tax benefits and the regime provided for in para. 13 of article 43. [Wording given by Law No. 2/2014, of 16 January]

2 - The following tax benefits are excluded from the provision of the previous paragraph: [Wording given by Law No. 55-A/2010, of 31 December - Budget Act]

(...)

b) The system of tax incentives for business research and development II (SIFIDE II), provided for in the Tax Investment Code;

1. To accept that the assessment of autonomous taxation is outside art. 90, para. 1 of the CIRC, would oblige the taxpayer to pay a tax whose assessment is not made in accordance with the law, contrary to para. 3 of art. 103 of the Constitution of the Portuguese Republic and the principle of tax legality that the General Tax Law, in its art. 8, para. 2, subparagraph a), establishes.

If the Tax Authority and Customs Authority assumed that the assessment of autonomous taxation was calculated outside art. 90 of the CIRC, it should indicate on what basis of assessment it did so. There being no separate provision on assessment of autonomous taxation, it seems it must be accepted that the IRC assessment includes it, falling within art. 90, para. 1 of the CIRC. It is verified, however that the computer system does not permit the deduction of SIFIDE credits from the part of the IRC assessment coming from autonomous taxation. The fact that the forms of determining the taxable basis and the rates of autonomous taxation of IRC are established separately and are different from those of the rest of the IRC does not seem to be sufficient reason, nor to have legal support, for the existing computer solution.

1. References to the provision of art. 16 of the CIRC seem to add nothing to the resolution of the question under review. This article does not contain the elements that permit drawing the form 22 statement, choosing which lines appear in that statement, nor the order in which they should be presented, nor how the various lines are related, that is, it does not permit establishing the formulas underlying the taxpayer's completion of the cells of the statement which the Tax Authority and Customs Authority through its services created therein. We would have to look in other articles of the CIRC for such elements that would permit drawing the form and establishing the calculations that would lead to the knowledge of the assessment of the tax.

2. To consider that the assessment of autonomous taxation is outside the assessment calculated by art. 90, para. 1 of the CIRC, is to accept that such understanding would be provided for in another legal provision and, as this does not exist, the assessment cannot fail to be made within the scope of art. 90 of the CIRC. Thus, the deduction of SIFIDE tax credits from the IRC assessment must be accepted, necessarily including the portion coming from autonomous taxation.

3. It is important to recall that tax benefits are "measures of exceptional character instituted for the protection of relevant extra-fiscal public interests that are superior to those of taxation itself that prevent", as indicated in article 2, para. 1, of the Statute of Tax Benefits. In the case of SIFIDE, it was the intention of the legislature to overlay the reasons of an extra-fiscal nature of the tax benefit on the collection of the IRC revenue itself that would be foregone. This understanding is confirmed by the provision of art. 92 of the CIRC, when it excludes SIFIDE benefits from the limit on deduction referred to in that article.

CONCLUSION

Combining the provision of article 4 of the act that approved SIFIDE with the provision of article 90 of the CIRC, it is concluded that there is no legal basis for excluding the deductibility of the SIFIDE tax benefit from the IRC assessment, including the part that comes from autonomous taxation.

Lisbon, 13 May 2015

Leonor Fernandes Ferreira

[1] For ease of reading this decision, the applicant A, SGPS, S.A., is also referred to as "A".

[2] In this document, the acronym PA is used to reference the Tax Authority's administrative file.

[3] In this document, the acronym RI is used to reference the Initial Request of the applicant.

[4] In this document, the acronym R-AT is used to reference the Tax Authority's Reply to the Initial Request of the applicant.

[5] Also referred to in the abbreviated form "SIFIDE".

[6] The reproduction of certain excerpts of the elements in the file is intended only to facilitate the reading and understanding of this decision, with a reduction in the need to consult other documents and does not permit attributing to such passages greater importance relative to others that are not transcribed.

[7] Law No. 40/2005, of 3 August to be in force between 2006 and 2010, Law No. 55-A/2010, of 31 December (article 133) establishes SIFIDE II to be in force between 2011 and 2015, amended by Law No. 64-B/2011, of 30 December.