IRC Depreciation Rate for Wind Turbines (Aerogeradores) – CAAD Arbitral Decision 698/2016-T

ARBITRAL DECISION

REPORT

A…, LDA., taxpayer no. …, with registered office at Street …, …, …, …-… …, (hereinafter "A…" or "Petitioner"), having been notified of the rejection of the administrative appeal filed against Corporate Income Tax (IRC) Assessment No. 2015…, Interest Assessment No. 2015…, and Statement of Account Adjustment No. 2015…, relating to the tax period of 2011, came on 24/11/2016, pursuant to the provisions of section (a) of Article 2, No. 1 and Articles 10, 15 et seq., all of Decree-Law No. 10/2011, of 20 January (which approved the Legal Framework for Tax Arbitration - "RJAT") to file a request for arbitral pronouncement against the aforementioned IRC assessments, interest and statement of account adjustment.

The Tax and Customs Authority (hereinafter referred to as "AT") is the respondent party.

The request for constitution of the arbitral tribunal was accepted by His Excellency the President of CAAD and automatically notified to the Tax and Customs Authority on 07-12-2016. Pursuant to the provisions of section (a) of Article 6, No. 2 and section (b) of Article 11, No. 1 of Decree-Law No. 10/2011, of 20 January, as amended by Article 228 of Law No. 66-B/2012, of 31 December, the Deontological Council appointed the undersigned arbitrators of the collective arbitral tribunal, who communicated acceptance of the appointment within the applicable time period. The parties were notified of this appointment on 07-12-2016.

Following the communication effected in accordance with the provisions of section (c) of Article 11, No. 1 of Decree-Law No. 10/2011, of 20 January, as amended by Article 228 of Law No. 66-B/2012, of 31 December, the collective arbitral tribunal was constituted on 06-02-2017.

Description of the Situation

A… holds the … wind farm, with a total installed capacity of 114 MW, through which it carries out the activity of production and commercialization of electrical energy using wind force.

In the absence, at the date of the facts, of an express provision in the table annexed to Regulatory Decree No. 25/2009, of 14 September, establishing the manner in which depreciation of wind turbines (included in the tangible fixed assets category) should be applied, A… understood that the useful life period associated with such equipment would correspond to 16 years, applying the corresponding depreciation rate of 6.25%.

Through this method, A… recorded, for the tax period of 2011, the annual depreciation of the wind turbines acquired, which amounted to a total amount of €6,964,496.49.

Following the inspection procedure carried out pursuant to Service Order No. OI2014…, of partial scope, relating to IRC and for the tax period of 2011, A… was notified of the draft inspection report proposed by the Tax Inspection Division II, of the Finance Directorate of … (hereinafter "Tax Inspection Services"), in which the following correction was proposed, in the context of IRC:

The Tax Inspection Services, taking as reference the provisions of Article 31, No. 2 of the Corporate Income Tax Code, and Article 5, No. 3 of Regulatory Decree No. 25/2009, deemed inappropriate the depreciation rate of 6.25% applied by A… with respect to the wind turbines of the … Wind Farm, as they did not consider reasonable the useful life period defined by the inspected company.

To reach this conclusion, they relied on information provided by equipment supplier "B…", according to which the minimum expected useful life period for such equipment would be 20 years. Consequently, the Tax Inspection Services argued that the maximum depreciation rate permitted for such equipment would be 5%. Thus they justified the correction to the declared tax result in the amount of €1,392,899.30, as shown in the third column of the table above. As A… did not exercise its right to be heard, Office No. … of 09.11.2015 from the Tax Inspection Services issued the final version of the tax inspection report, which maintained the correction proposed in the exact terms contained in the draft report.

Subsequently, A… was notified of statements of IRC assessment, compensatory interest and statement of account adjustment, from which resulted a total amount of tax and compensatory interest to be paid amounting to €277,228.92, whose voluntary payment deadline ended on 8 January 2016.

As the claimant did not make payment of the aforementioned tax acts, the corresponding tax enforcement proceeding was initiated by the Finance Service of …-… (Process No. …2016…), and a bank guarantee was presented in the amount of €351,091.23 for purposes of legal suspension of the proceeding (ref. document no. 3).

Arguments of the Parties

On the matter, the petitioner and respondent parties presented the following arguments.

In substantiation of its request for arbitral pronouncement, the arguments advanced by A… center on the economic viability of wind farms in light of the regulatory framework that serves as the basis for the exercise of renewable energy production activity using wind force. These were, in summary, the fundamental arguments advanced by A…:

a) With regard to the correction mentioned in the Inspection Report, the AT based itself on an incorrect interpretation of the applicable legal norms, failing to understand the economic rationale underlying the adoption of a useful life period corresponding to 16 years for depreciation of wind turbines installed in the … Wind Farm.

b) It is necessary to take into account the specific characteristics of the activity it carries out and its respective regulatory framework to understand the criterion followed for that purpose.

c) Looking at the provisions of Annex II to Decree-Law No. 189/88, of 27 May (in its current wording), it appears that renewable energy facilities licensed under this Decree-Law and Decree-Law No. 312/2001, of 10 December, will be remunerated for the supply of electricity delivered to the national distribution grid in medium and high voltage ("RND") through a mathematical formula set out in that Annex.

d) Such formula makes it possible that, in a clear and objective manner, all economic agents involved in the renewable energy production sector have exact and complete knowledge of what remuneration they will receive over a certain period of time.

e) According to § 20 of the aforementioned Annex II of Decree-Law No. 189/88, of 27 May, the remuneration amount set for wind farms guaranteed by the State for the first 33 gigawatts delivered to the RND, per megawatt of injection capacity therein, will be granted up to the maximum limit of the first 15 years counting from the commencement of electricity supply to the grid.

f) Once those 15 years have passed in which the State ensures certain and predictable remuneration to economic agents (including the claimant), there are no guarantees about how the energy that may be produced by renewable energy production facilities using wind force will be remunerated.

g) It has no knowledge of whether political options in effect at the time when the "guaranteed remuneration period" ends will tend to maintain an investment in energy production through wind force.

h) After the 15-year period in which the state-mandated remuneration tariff is guaranteed, the market tariff that may eventually be applicable at that time may not be sufficient to safeguard the profitability of its Wind Farm.

i) It is possible to foresee a marked decline in economic profitability of investments made once that period ends, with the transition from the guaranteed tariff to the liberalized market potentially putting at risk A…'s ability to generate sufficient returns to meet the costs inherent to the maintenance of the respective wind farm.

j) Information found on the online portals of OMIP – Iberian Electricity Market Operator (www.omip.pt) and MIBEL - Iberian Electricity Market (www.mibel.com), show that the remuneration currently practiced in a liberalized market context is significantly lower than the amount of guaranteed remuneration.

k) A decline in profitability (reduction in revenue that could amount to between 6 to 11 times compared to remuneration received under the guaranteed tariff) would be – according to A…'s projections – of such an order that such renewable energy production centers would cease to be capable – after the 15 years of receiving legally guaranteed remuneration – of generating sufficient returns to cover the costs inherent to their maintenance and, in that sense, would have to proceed with their dismantling.

l) This is further compounded by the fact that the residual value of wind turbines is nil, in that there is no market for selling a used wind turbine, nor is the residual value as scrap sufficient to cover dismantling costs. Therefore A… has no way to ensure that, from that moment on, it will continue to operate the … Wind Farm for much longer.

m) According to its projections, the Wind Farm is economically and financially viable only during the guaranteed tariff period, and this was the criterion defined for the depreciation of wind turbines.

n) The acceptance of a useful life period of 16 years and not 15, as would be expected in a logic aligned with the "guaranteed remuneration period", as explained above, is justified because it will not be at the moment immediately following the end of the "guaranteed remuneration period" that the Wind Farm will be dismantled.

o) The additional period of approximately 1 year after the end of the "guaranteed remuneration period" will allow assessment of the continued existence and profitability of the … Wind Farm, with market conditions that will prevail at that time being then assessed, in the tariff domain. This period will be sufficient to allow a conscious, responsible decision to be made that best serves the interests of the company and its shareholders.

p) The determination of the useful life period of wind turbines for purposes of respective depreciation in the tax context must depend above all on an economic analysis, centered on the economic utility of wind turbines and not its technical durability, even if correctly certified by the supplier of the equipment in question.

q) The meaning of the concept of "expected useful life," to which the law refers, specifically Article 31 of the Corporate Income Tax Code and Article 5 of Regulatory Decree No. 25/2009, should neither be nor can correspond to the period of durability of a given asset, and should be determined according to its legal ratio.

r) As Table I nor Table II annexed to Regulatory Decree No. 25/2009 contain express provision regarding the depreciation rate that should be practiced in the case of wind turbines, in the period to which the facts relate, the provisions of Article 31, No. 2 of the Corporate Income Tax Code apply, according to which, as to "elements for which depreciation or amortization rates are not fixed, those considered reasonable by the Tax Administration are accepted, taking into account the period of expected useful life." (underlining and bolding are the claimant's)

s) The fact that wind turbines, individually considered, have a minimum expected useful life period of 20 years, is irrelevant in this context, rejecting the association of the fiscal concept of useful life or expected utility of wind turbines with their durability, in a logic of guaranteeing proper operation given by the respective supplier.

t) The prevailing utility should be economic utility and not the "durability" of the asset.

u) The Accounting Normalization System, where it is highlighted that the reason for amortizations and depreciations is that assets have "a limited useful life," should be depreciated according to their use, in the context of a correlation of the costs of use of an asset with the income it generates.

v) In the same sense point the rates and depreciation periods expressly provided for in Tables I and II annexed to Regulatory Decree No. 25/2009, presenting as examples stipulated in Table II for mobile phones (20% and 5 years), light or mixed motor vehicles (25% and 4 years) and computers (33.33% and 3 years). In all these cases depreciation periods are fixed not in function of the durability of the equipment, but of its economic utility, with the criterion of economic value being decisive – a concept that correlates the use of an asset with the income it generates.

w) The business plan it outlined, which presided over the definition of a depreciation rate of 6.25%, was intended to allow a reconciliation of accounts between the returns generated by the wind turbines and the costs associated with their installation and maintenance.

x) In favor of the position adopted it invokes the provisions of Article 28 of the Corporate Income Tax Code, where it reads that "1 - Reinvestments and amortizations of elements of assets subject to depreciation are accepted as costs, considering as such those elements of fixed assets which, on a recurring basis, suffer losses in value resulting from their use, technical progress or any other causes." (highlighted by the Claimant).

y) The legislator appealed to the reasonableness of the applied depreciation rate (Article 31, No. 2 of the Corporate Income Tax Code and Article 5 of Regulatory Decree No. 25/2009), subsequently emphasizing that it not only attended to the actual period of useful (economic) life of the wind turbines, but did so taking into consideration objective elements – the alignment of the depreciation rate practiced with the period of guaranteed tariff – that could support the admissibility and reasonableness of the applied rate.

z) It concludes, not without first invoking abundant CAAD jurisprudence, that the criterion used by the AT did not take into account the legal criterion of reasonableness, as it was based exclusively on technical elements of a merely theoretical nature, divorced from the concrete and effective conditions in which the Claimant operates.

aa) The Commission for the Reform of Green Taxation, appointed by the XIX Constitutional Government, had recommended in its proposal – in the part relating to the fixing of the amortization period of wind and photovoltaic equipment – the fixing of the amortization period of wind and photovoltaic equipment between 12.5 years and 25 years, which was not far from a study carried out by LNEG (document 5).

bb) Having this position been later followed by the legislator in Law No. 82-D/2014, of 31 December ("Green Taxation Law"), which came to accept a maximum depreciation rate of 8% (document 1), the reasonableness of the 16-year period, already previously applied by A…, is sustained.

cc) It is invoked, by way of comparison, the example of hydroelectric projects. With a durability far superior to any other electricity-generating installation, which can range between 30 and 80 years, it has been understood by the AT that hydroelectric power plants have a reasonable and expected useful life of 16 years – according to the Table I (Specific Rates), Division V (Electricity, gas and water), of Group I (Production, transport and distribution of electrical energy) of Regulatory Decree No. 2/90 – so that, a fortiori, wind turbines that are in operation 15 years can never have an expected useful life exceeding 16 years.

dd) If in the case of hydroelectric plant equipment the depreciation and reinvestment period of 16 years is accepted as "reasonable," an identical conclusion will necessarily be applicable to the amortization and reinvestment period of wind turbines.

ee) The amortization regime for wind turbines must follow the set of all norms provided by the legislator in the Corporate Income Tax Code and Regulatory Decree No. 25/2009 regarding this matter, such as: (i) the general conditions for acceptance of amortizations; (ii) the valuation of fixed asset elements; (iii) the minimum and maximum period of useful life; (iv) the methods of calculating amortizations; (v) Amortizations by twelfths; etc., and the application of the legal norms (e.g., Articles 3 and 18, No. 2 of Regulatory Decree No. 25/2009 and 30, No. 6 of the Corporate Income Tax Code), would lead to fixing the minimum useful life period of such equipment at around 10 years to which would correspond a maximum amortization rate of approximately 10%.

ff) The Corporate Income Tax Services Directorate of the AT has already expressed itself to the effect that the "time limit for useful life of the (photovoltaic) facility" corresponds to the period in which the guaranteed tariff is in effect, having recognized that the depreciation rate applicable to photovoltaic panels should correspond to that period, so as to allow a reconciliation of accounts between returns and expenses, and similar understanding should be applied, for reasons of equality, to wind turbines, on penalty of violation of the principle of equality.

gg) The application of the amortization and depreciation rate proposed by the AT for wind turbines is clearly unconstitutional, in that it violates the principles of equality, proportionality and material justice, implying its penalization as against other energy-producing entities, such as hydroelectric power plants.

hh) In summary, the circumstances of an economic and management nature are duly and fully justified that determined that – in the specific case of wind turbines acquired by A… – a maximum useful life period of 16 years be assigned and that, consequently, the amortization rate correctly to be applied should be 6.25%, pleading for the illegality and unconstitutionality of the correction and consequent additional assessment made by the AT, and the consequent restoration of the situation that would have existed if the tax act subject to arbitral decision had not been taken, including indemnification for undue provision of guarantee, in accordance with legal provisions.

The arguments presented by the AT seek to emphasize the legal and technical basis for its consideration of the 5% rate as reasonable and acceptable for the depreciation of wind turbines, corresponding to an expected useful life of 20 years, this being determinative for the concretization of the concept of "period of expected utility." Indeed, the following are essentially the arguments of the AT:

a) During the inspection action, it was detected that A… had classified and recorded certain expenses as costs which, for IRC purposes, do not assume that nature, as provided in Article 34, No. 1, section (c) of the Corporate Income Tax Code, and therefore cannot be considered for purposes of determining taxable income.

b) In the case sub judice, wind turbines are used for energy production but are not provided for in the tables annexed to Regulatory Decree No. 25/2009 of 14 September.

c) The law does not determine the depreciation or amortization rate to be applied to wind turbines intended for energy production, but rather refers to rates that the AT considers reasonable taking into account the period of expected useful life.

d) Notwithstanding the absence of this type of wind turbine in the tables annexed to Regulatory Decree No. 25/2009 of 14 September – in effect at the date to which the facts refer – they were improperly classified as comprising the category "1230 - Equipment of hydroelectric power plants" – their depreciation at the rate provided in that instrument for such equipment (6.25%) corresponds to accepting that, for tax purposes, wind turbines intended for electricity production have an expected useful life period of 16 years.

e) With respect to elements for which depreciation or amortization rates are not fixed, those that the Directorate-General of Contributions and Taxes considers reasonable are accepted, taking into account the expected useful life period, in accordance with the provisions of No. 2 of Article 31 of the Corporate Income Tax Code.

f) The AT had to resort to the criterion provided in Article 31, No. 2 of the Corporate Income Tax Code and Article 5, No. 3 of Regulatory Decree No. 25/2009 to determine the said rate.

g) Notwithstanding – in the absence of fixed depreciation or amortization rates – the AT accepts rates it considers reasonable, taking into account the expected useful life period, in accordance with No. 3 of Article 31 of the Corporate Income Tax Code, combined with No. 3 of Article 5 of Regulatory Decrees No. 2/90, of 12/01 and No. 25/09, of 14/09, it has accepted, for the goods in question, an amortization rate of 5% corresponding to 20 years of useful life, as per the opinion of the Corporate Income Tax Services Directorate, issued in information no. 922/15, where technical studies are invoked sustaining that the entire industry refers as useful life time of the project the value of 120,000 hours of operation, which with standard load factors means approximately 20 years.

h) The law determines that only depreciation or amortization rates that the AT considers reasonable taking into account the expected useful life period will be accepted, being the only legally acceptable criterion, as Article 31, No. 2 of the Corporate Income Tax Code, in the wording in effect at the date to which the facts relate, does not use the expressions "namely" or "in particular".

i) Regarding depreciation of wind farms (tangible fixed assets as a whole), the maximum depreciation rate to accept for tax purposes will be 5% in tax periods that commenced before 1 January 2015, under No. 3 of Article 5 of Regulatory Decree No. 25/2009 of 14 September.

j) The corrections made have as legal basis the provisions of Article 31, No. 2 and 34, No. 1 of the Corporate Income Tax Code, in conjunction with No. 3 of Article 5 of Regulatory Decree No. 25/2009, of 14/09.

k) The reasonableness imposed there will result directly from the "period of expected useful life," a concept that will have determinative weight in the determination of the depreciation or amortization rate, and should be understood as "period of expectable, probable useful life" and not "period of absolutely exact, precise and certain useful life".

l) The AT proceeded to consult various suppliers of such equipment goods, having verified the practices of other companies with the same corporate purpose, with the objective of ascertaining the best information on the matter under study, in this case the time of expected useful life for wind turbines.

m) The Tax Inspection Report understood that "as regards the issue of useful life period of the basic equipment, by consulting technical data made available by the supplier of the equipment in question – B..., with NIPC …, following the request for clarification made by the Finance Directorate of …, regarding another company in the C… Group, namely D… Ltd., it was found that the useful life period for such equipment is 20 years, and therefore the goods should have been amortized at a rate of 5% (which corresponds to the percentage of amortization to be practiced each year, over 20 years, for the asset to be fully amortized). This 20-year period is consistent with the information provided by the manufacturer of the equipment, as well as with the intention of operating the parks for which surface rights have been established with the owners of the land where the wind farms incorporating the equipment in question are implanted, as referred to above."

n) All companies that commercialize and/or manufacture wind turbines, whose information the AT had the opportunity to consult and analyze, indicate the 20-year period as their useful life period and, therefore, their period of expected utility.

o) The 20-year minimum useful life period is the period recommended for wind turbine projection by the International Committee of Electronics, in its standard 61400-1, with a study by LNEG and other academic studies indicated having adopted the same conclusion.

p) The environmental impact study prepared by the French "Ministère de l'Écologie et du Développement Durable" (2005), available on the Web, points out, on page 52, to a period of estimated useful life of wind turbines of 20 to 30 years, at the end of which the operator has the responsibility to dismantle the wind farm and restore the site to its original condition.

q) The "Renewable Energy Fact Sheet: Wind Turbines" prepared by the "United States Environmental Protection Agency", also available on the Web, mentions, on page 2, a typical useful life of 20 years.

r) The Corporate Income Tax Services Directorate, based on its methodology of knowledge acquisition and assessment, reached the same conclusion (Information no. 922/15 of 2015-07-15, relating to Proc. 1530/15).

s) The AT did not err in exercising the technical discretion committed to it by Art. 31, No. 2 of the Corporate Income Tax Code and Article 5 of Regulatory Decree No. 25/2009, of 14 September.

t) Following a dissenting opinion given in the context of Process 593/2015, courts should manifest deference toward the administration when it exercises technical discretion "stricto sensu" to the extent that this supposes an assessment judgment based on knowledge and rules proper to science or non-legal technique that are at stake, it not being within the courts' purview to control the good science or good technique employed by the administrative entity, due to manifest lack of competence in the extrajuridical matters necessary therefor.

u) In the face of technical discretion, judicial control will have to limit itself to verifying the observance, or not, of the legal limits of discretion, of the positive limits that presided over the legal attribution of discretionary power and corresponding prerogatives – being able specifically to challenge, at the "borders of the 'margin of free appreciation'," (1) a gross or manifest error of assessment (2) an error in the factual assumptions (3) an abuse of power or (4) a manifest violation of the general principles of impartiality, equality, proportionality, justice and good faith as principles shaping administrative activity.

v) The Court cannot challenge those judgments, no matter how much they diverge from the understanding of private parties or the understanding of the judge himself – the Court having to confine itself to the zones of binding adjacent to them, and at most demonstrate, through other corroborated technical and professional information by specialists, that the information and studies used by the Administration for the purported densification of extrajuridical concepts, insisting thereafter that mere divergence of judgments between the Administration and private parties, or even between the Administration and the Court does not constitute proof of any error or defect of the impugned act that is subject to contentious review, not legitimizing the court to substitute itself for the administration in the formulation of a judgment that falls strictly within the merits and opportunity of its action.

w) Only in cases of gross error in which it can be concluded that the Administration exceeded its powers and openly departed from the field of technical discretion to enter that of illegality, to the point that the court can annul the administrative decision in question, is it settled that this cannot substitute the annulled administrative decision for another that it deems more appropriate – that is, it cannot, without violating the constitutional principle of separation of powers, assume for itself that technical discretion.

x) A Court may find that the time period proposed by A… is more reasonable, or may instead find that the time period proposed by the AT is more reasonable – but that evaluation is irrelevant in the case, to the extent that the 5% depreciation rate advocated by the AT and the corresponding 20-year period of expected useful life of the turbines reflect an understanding that results from and converges with the opinion of independent scientists and updated scientific literature, as well as with the opinion of companies referred to above that commercialize and/or manufacture wind turbines.

y) The useful life of wind turbines presents a strong connection to the economic viability of the wind farm, and in some studies periods of operation of 35 to 40 years are mentioned. The weight of maintenance and repairs increases with the age and use of equipment, so the maximum profitability of a wind farm is situated between 20 and 25 years.

z) The AT did not err in exercising the technical discretion committed to it by Art. 31, No. 2 of the Corporate Income Tax Code and Article 5 of Regulatory Decree No. 25/2009, of 14 September, and even less did the AT err grossly, in terms that would allow the contentious challenge of the exercise of its legal discretionary power.

aa) The Claimant has at its disposal the possibility enshrined in Article 31-B of the Corporate Income Tax Code, which provides that when the facts that determined exceptional depreciations (ex: exceptionally rapid technical innovations or significant changes) of assets and the physical removal, dismantling, abandonment or disuse occur in the same tax period, the net fiscal value of the assets can be accepted as an expense of the period.

bb) The concept of economic utility has no legal basis, nor does A… present a legal support that permits it to argue that the fiscal concept of period of expected useful life corresponds to its interpretation, the reference to the word "economic" being an addition attributable to the "legislative and innovative spirit" of that company.

cc) From the legal norms analyzed it is clear that we are talking about the useful life of an asset, and not any economic life.

dd) The useful life of an asset, according to NCRF 7 (NCRFs published by Notice no. 15,655/2009, D.R. no. 173, Series II, of 2009-09-07) is the period during which an entity expects the asset to be available for its use, and cannot depend on the economic performance of a given taxpayer or the project in which the asset to be amortized is inserted.

ee) Tangible fixed assets normally have a limited useful life and, as such, should be depreciated according to their use by each entity.

ff) The determination of the depreciation or amortization rate is not, and cannot be, in direct relation with the profits or losses that the activity of A…, or any other taxpayer, may generate.

gg) The criterion pointed to by Article 31, No. 2 of the Corporate Income Tax Code is not that of "reasonableness of the rate, taking into account the profits or losses of the taxpayer's activity…", but rather that of "reasonableness of the rate, taking into account the period of expected useful life".

hh) The criterion of the period of expected useful life as used by the AT is objective, contrary to that used by A…, which is subjective in meaning by depending on the economic performance of taxpayers.

ii) The interpretation defended by A… will necessarily cause situations of inequality between different taxpayers that carry out the same activity as the company here in question and that use the same goods, as it defends a dependence of the determination of amortization rates on the economic performance of each taxpayer.

jj) We are dealing with a simple unregulated case and not a lacuna, the legislator assuming, in Article 31, No. 2 of the Corporate Income Tax Code, the intention not to exhaustively regulate in this matter and the availability not to fix depreciation or amortization rates for certain goods and to remit to the useful life period of the asset to be amortized and to the technical discretion (bounded by "reasonableness") of the AT.

kk) The study carried out by H… (H…), mobilized by A…, is intended for States, having a merely guiding character for state investments and carrying out an analysis of costs and benefits that hydroelectric energy may entail for a State, not dealing with energy produced by wind turbines.

ll) From Division V of Group I - Production, transport and distribution of electrical energy of Table I annexed to Regulatory Decree No. 25/2009 it follows that there are other equipment that have rates lower than the 6.25% provided for hydroelectric facilities.

mm) For fixed hydraulic works a rate of 3.33% is provided, for substations and transformation stations and for AT Lines and supports a rate of 5% is provided (Table I annexed to Regulatory Decree No. 25/2009), so that A… cannot assert that there are no other equipment and/or installations to which a rate lower than 6.25% applies.

nn) A… cannot use a mere study on Hydroelectric facilities to determine the depreciation or amortization rate applicable to wind turbines, as they constitute entirely distinct realities.

oo) The 6.25% rate cannot be justified through the regime established in Decree-Law No. 189/88, of 27 May – which regulates the activity of electricity production that integrates, according to Decree-Law No. 182/95, of 27 July, repealed by Decree-Law No. 29/2006, of 15 February, in the Independent Electric System, through the use of renewable resources or industrial, agricultural or urban waste – since it only regulates the remuneration in question, never referring to any period of expected useful life, and its respective norms suggest that the equipment in question has a duration exceeding 15 years by using the expression "the first 15 years".

pp) In this way, if the license to which the DSIRC office (document 6) refers has a limited duration of 20 years, it is amortizable during that time period, and that document does not make the determination of the depreciation/amortization rate of wind turbines dependent on the existence of a guaranteed tariff.

qq) The AT acted in conformity with the provisions of Article 31, No. 2 of the Corporate Income Tax Code, having determined the depreciation or amortization rate that results from the periods of expected useful life of 20 years expressly indicated by the entities supplying wind turbines with specialized knowledge in the matter in question, as well as by technical-scientific studies.

rr) The application of the 5% rate to wind turbines is not unjustified or disproportionate, since it results directly from the aforementioned period of expected useful life.

ss) The AT is bound by the principle of material truth (Articles 5 and 6 of RCPIT) and in that measure adopted all diligences that were required of it and appropriate to the discovery of material truth, that is, to determine with objectivity, rigor and certainty the amortization rate, as provided in Article 31, No. 2 of the Corporate Income Tax Code.

tt) The fixing of an amortization rate applicable to said equipment of 5% has basis in Article 31, No. 2 of the Corporate Income Tax Code and Article 5, No. 3 of Regulatory Decree No. 25/2009.

Meeting pursuant to Article 18 RJAT

In the proceeding, E…, Wind Energy Technician, with professional domicile at …, n…, …, …-… Lisbon; and F…, Director of Accounting, with professional domicile at …, no. …, …, … …-… Lisbon, were called as witnesses and heard.

The first witness, named E…, notwithstanding having acknowledged a functional relationship with the A… group, stated that this did not prevent him from testifying with independence and truthfulness. When questioned by counsel, by the tax authority and by the arbitrators, he said:

a) Regarding the useful life of wind turbines and the meaning of the tax inspection report (see CAAD audio recording), he stated that the relevant international standard requires that wind turbines be designed by manufacturers for a useful life of twenty years. This applies to the generators in question, from G…, and to all others, as they must follow that same standard. This technical projection of useful life is made in advance, before confirmation of its actual useful life in the field.

b) According to the witness, the guarantee of the equipment is only 1 year and not 20 years. After one year, technical problems are the responsibility of the wind turbine owner company and not the manufacturer. The 20-year period is important for obtaining bank financing.

c) The 20 years are a tendential time period, not susceptible to empirical verification, and what is most important is the observance of the quality verification procedures imposed by the international standard.

d) The witness stated that wind turbines have been subject to renovation and replacement of the various component parts, which represents a substantial replacement of the wind turbine. In practice, says the witness, wind turbines only withstand the passage of time through replacement of their elements, without prejudice to the gradual diminution of their respective economic utility.

e) According to E…, the expiration of the 15-year guaranteed tariff period may economically render many wind farms inviable. In his view, the 15-year period for that tariff cannot be dissociated from an expectation about its useful life, which LNEG placed between a minimum of 12.5 years and a maximum of 20 to 25 years, a study that was the basis for the green taxation reform.

f) The A… park has been in operation since 2008, and its wind turbines have seen many of their original elements (e.g., hubs, blades, transformers) replaced, which corresponds, in practice, to a re-equipping of the park.

g) For him, 15 to 16 years is a longevity above which the wind turbine loses utility and incurs increased maintenance costs, losing competitiveness even with the guaranteed tariff.

h) Obsolescence increases from 10 or 12 years of useful life, as acknowledged by the LNEG study, with greater maintenance costs and difficulty in finding suitable parts, making it impracticable to keep the park in service and destroying any residual value of wind turbines even after the wind farm is dismantled, as there is no market for second-hand wind turbines.

i) After 15 years the only option is to acquire new and more efficient wind turbines, making no sense to keep the existing ones.

j) The useful life period of 20 years is not reasonable, because there is no way to guarantee its longevity during that time without operations to replace its main components (e.g., hubs, blades), operations that do not amount to mere maintenance.

k) When suppliers speak of a useful life of 20 years, they do so in the abstract and without empirical verification.

l) The technical and functional longevity of wind turbines is inseparable from the tariff practiced, and the economic viability of wind turbines cannot be assessed in the abstract. This viability, presupposing a cost-benefit analysis, always depends on the tariff practiced, whether regulated or defined by the market.

m) The operations and maintenance contracts entered into by A… with the wind turbine manufacturer have a duration of 15 years and impose a price review at 5 and 10 years, in that the verification of wind turbine operations and maintenance entails costs with inspections, repairs and replacement of parts that will increase.

n) Many wind farms involve maintenance costs that result in losses for manufacturers, who must be compensated with gains in other parks.

o) Every year, for the past 40 years, new wind turbines have emerged, and their technical evolution is a gradual process.

p) Replacement of blades and other components of wind turbines is frequently indispensable for assurance of the originally designed and contracted power for the wind turbine.

q) After a few years, given the obsolescence of the machines, it becomes economically more advantageous and competitive to proceed with the replacement of the entire wind machine with a new one that is technically more advanced and energetically more effective and efficient. This was the option for A…'s first park.

r) In the analysis of wind energy companies attention is paid to acquisition costs (e.g., €900,000/MW, in 2MW machines), access costs, maintenance costs and expectation of return.

s) He is not able to estimate with precision the percentage of maintenance costs in total costs.

t) The 20 years contained in the certificate has little value, except for banks, serving no guarantee.

u) In his view, one must agree with the assertion of the LNEG study, according to which a minimum period of 20 years of expected useful life, as accepted by the AT, would correspond to a maximum period of 40 years, which is not sustainable.

The second witness, named F…, Director of Accounting of company A… and of the group companies, when questioned regarding the period of guaranteed tariff and the estimated duration of wind turbines and the conditions for operating the wind farms, stated:

1. It is not a coincidence that a period of 15 years was determined for the guaranteed tariff and the economic useful life of wind turbines.

2. Wind turbines represent a weight of 70% to 80% of state investment, and their amortization at 20 years, beyond the guaranteed tariff, makes the operation of wind turbines economically unviable.

3. The amortization of wind turbines with reference to hydroelectric plants appears reasonable, a fortiori, to the extent that these are amortizable in 16 years despite having a much superior physical durability.

4. Another company in the group is in dismantling after 14 years due to the obsolescence of the machines and the convenience of their replacement with others.

5. Wind turbines have no residual value after the cessation of their use, and the cost of dismantling and removal must be accounted for.

6. The license for operating the park has no time limit, having no relationship with the issue of useful life of wind turbines.

7. The contracting of the use of land for operating wind farms takes into account other factors (e.g., technical studies; economic interests of owners; possible continuation of operation with new wind turbines) beyond the concrete issue of useful life of the specific wind turbines used.

8. The tax inspection carried out had an internal nature, never having manifested openness to consider an interval between minimum and maximum limits of useful life.

9. Even if the period of guaranteed tariff were 20 years, it would not be certain that the operation of wind turbines would be compatible with their amortization in 20 years, depending on an analysis of the costs incurred, particularly in maintenance, and the actual availability of supplying companies to enter into economically viable maintenance contracts throughout that time.

After the hearing concluded, the parties manifested their intention to submit written arguments, which only the AT did, on 4 May 2017, invoking the doctrinal and jurisprudential supports considered relevant and reiterating the arguments advanced in the response. The main topics of its argumentative rhetoric are synthesized:

1. The calculation of depreciations and amortizations should be made, as a rule, by the straight-line method (Article 30, No. 1 of the Corporate Income Tax Code). With respect to elements for which depreciation or amortization rates are not fixed, those that the Directorate-General of Contributions and Taxes considers reasonable are accepted, taking into account the period of expected useful life, in accordance with the provisions of No. 2 of Article 31 of the Corporate Income Tax Code. The AT had to resort to the criterion provided in Article 31, No. 2 of the Corporate Income Tax Code and Article 5, No. 3 of Regulatory Decree No. 25/2009 to determine the said rate.

2. The law does not determine the depreciation or amortization rate to be applied to wind turbines intended for energy production, but rather refers to rates that the AT considers reasonable, taking into account the period of expected useful life. The only criterion that the law imposes on the AT is that, in determining the depreciation or amortization rate, it observe the "period of expected useful life".

3. The AT sought, in every way, information about wind turbines, namely technical studies of mechanical reliability, whether from manufacturers or suppliers, or on the web pages of institutions linked to renewable energies. And as all companies that commercialize and/or manufacture wind turbines, whose information the AT had the opportunity to consult and analyze, indicate the 20-year period as being its useful life period. The AT, at the date of the facts, equipped with the technical information it had gathered, determined the depreciation rate based on reasonableness criteria. From E…'s own testimony it can be concluded that the criterion applied by the AT cannot be considered unreasonable.

4. With regard to the useful life period of wind turbines in Portugal we find ourselves in the realm of suppositions, as no wind farm has been dismantled to date on the basis of wind turbine obsolescence. The main concern of the Claimant has underlying purely economic motives and not the real durability of the equipment in question, whereas the AT employed the criteria imposed on it by law. Under No. 3 of Article 5 of Regulatory Decree No. 25/2009, the AT considered as reasonable the useful life period of 20 years and the percentage of 5% depreciation for wind farms, considered as a single element of Tangible Fixed Assets. All companies that commercialize and/or manufacture wind turbines, whose information the AT had the opportunity to consult and analyze, indicate the 20-year period as being its useful life period.

5. The AT's understanding results from and converges with the opinion of independent scientists and updated scientific literature, as well as with the opinion of companies that commercialize and/or manufacture wind turbines. The AT did not err in exercising the technical discretion committed to it by Art. 31, No. 2 of the Corporate Income Tax Code and Article 5 of Regulatory Decree No. 25/2009, of 14 September. It cannot be concluded that the Respondent did not act with reasonableness, as it was incumbent upon it, in determining the rates here in question.

6. The useful life of wind turbines presents a strong connection to the economic viability of the wind farm, and in some studies periods of operation of 35 to 40 years are mentioned. The weight of maintenance and repairs increases with the age and use of equipment, so the maximum profitability of a wind farm is situated between 20 and 25 years. The AT acted in conformity with the provisions of Article 31, No. 2 of the Corporate Income Tax Code, having determined the depreciation or amortization rate that results from the periods of expected useful life of 20 years expressly indicated by the entities supplying wind turbines with specialized knowledge in the matter in question, as well as by technical-scientific studies. The application of the 5% rate to wind turbines is not unjustified or disproportionate, since it results directly from the expected useful life period of 20 years. The AT's conduct fully respects the principles of equality, proportionality and taxation of real profit.

SCREENING

2.1. The tribunal is competent and is regularly constituted.

2.2. The parties have legal personality and capacity, show themselves as legitimate and are regularly represented (Articles 4 and 10, No. 2, of the RJAT and Article 1 of Order No. 112-A/2011, of 22 March).

2.3. The proceeding does not suffer from nullities.

2.4. No exceptions were raised.

2.5. There are no other circumstances that prevent the tribunal from knowing the merits of the case.

MERITS

Facts

Proven Facts

The following facts are considered established and proven, with relevance for the appreciation and decision of the issues raised, based on the documents submitted and indicated – to which we refer and hereby reproduce for all legal purposes, limiting ourselves here to listing the relevant facts – and on the meeting between the parties promoted by this arbitral tribunal in accordance with the provisions of Article 18 of the RJAT:

1. A… is a limited liability company whose purpose is the production and commercialization of energy through the exploitation of renewable energy projects, as well as any other activities complementary or ancillary to that which may eventually be necessary or have relation to the main purpose.

2. The Claimant began its activity in July 2002, which consists of "Production of electricity of wind, geothermal and solar origin" (CAE 35113), being classified for VAT purposes under the normal monthly periodicity regime and for IRC purposes under the general taxation regime.

3. In the context of its activity, A… holds the … wind farm, in which it has wind turbines with a total installed capacity of 114 MW, where it carries out the activity of production and commercialization of electrical energy using wind force.

4. For tax purposes, A… understood – in the absence, at the date of the facts, of an express provision in the table annexed to Regulatory Decree No. 25/2009, of 14 September, establishing how the amortization of wind turbines (included in the tangible fixed assets field) should proceed – that the useful life period associated with such equipment would correspond to 16 years, applying the corresponding amortization rate of 6.25%.

5. Following this procedure, A… recorded, for the tax period of 2011, the annual amortization of the wind turbines acquired, which amounted to a total amount of €6,964,496.49.

6. In compliance with Service Order No. OI2014…, of 12/03/2014, an internal inspection action was carried out at company A… now claimant in arbitration – of partial scope – IRC – and relating to the 2011 fiscal year, following which the impugned assessment came to be issued.

7. The AT's action was based on the consideration that the useful life period of the wind turbine equipment of the Claimant is twenty years, to which corresponds an amortization rate of 5%.

8. The administrative appeal filed by the Claimant was rejected on the merits.

9. The Claimant did not proceed to voluntary payment of the assessed tax, so the respective tax enforcement proceeding was initiated under no. …2016…, in which it presented a bank guarantee in the amount of €351,091.23 for purposes of legal suspension of the proceeding (ref. document no. 3).

10. The relevant international standard requires that wind turbines be designed by manufacturers for a useful life of 20 years. (ref. testimony of E…).

11. The AT has understood that hydroelectric power plants have a reasonable and expected useful life of 16 years – according to Table I (Specific Rates), Division V (Electricity, gas and water), of Group I (Production, transport and distribution of electrical energy) of Regulatory Decree No. 2/90.

12. A study by LNEG, which was the basis for the green taxation reform, points to a useful life of wind turbines between a minimum of 12.5 and a maximum of 20 to 25 years. (ref. document 5)

13. Obsolescence increases from 10 or 12 years of useful life, as acknowledged by the LNEG study, with greater maintenance costs and difficulty in finding suitable parts. (ref. document 5 and testimony of E…)

14. Replacement of blades and other components of wind turbines is frequently indispensable for assurance of the originally designed and contracted power for the wind turbine. (ref. testimony of E…).

15. The operations and maintenance contracts entered into by A… with the wind turbine manufacturer have a duration of 15 years and impose a price review at 5 and 10 years. (ref. testimony of E…).

16. Wind turbines have no residual value after the cessation of their use, and the cost of dismantling and removal must be accounted for.

17. The contracting of the use of land for operating wind farms takes into account other factors (e.g., technical studies; economic interests of owners; possible continuation of operation with new wind turbines) beyond the concrete issue of useful life of the specific wind turbines used (ref. testimony of F…).

The tribunal's conviction about the proven facts resulted from the examination of the documents attached to the file, from the acknowledgment of facts made by the Claimant, from the testimony of the witnesses indicated, who revealed direct knowledge of the matter reported, all as specified in the points of the factual matter outlined above.

Motivation

This Tribunal will appreciate and decide on the merits of the case, which consists of appreciating whether the useful life period of 20 years defined by the Respondent in the context of arithmetic corrections at the basis of the IRC Assessment No. 2015…, Interest Assessment No. 2015…, and Statement of Account Adjustment No. 2015…, relating to the tax period of 2011, for wind turbines of the … Wind Farm is considered as reasonable, taking into account the applicable regulation, as resulted, at the date relevant to the facts, from No. 2 of Article 31 of the Corporate Income Tax Code and No. 3 of Article 5 of Regulatory Decree No. 25/2009, of 14 September.

It is for us to resolve, in the issues raised by the Claimant with respect to the arithmetic corrections determining the impugned assessments regarding the consideration of the expected useful life period of wind turbines of the … Wind Farm of 20 years, corresponding to a depreciation rate of 5%, instead of the 16-year period adopted by the Claimant, corresponding to a depreciation rate of 6.25%, as well as regarding the violation of constitutional principles of equality and taxation of real profit.

Law

Issue to be Decided

The issue to be decided consists fundamentally in determining whether it was legally adequate the correction made by the Respondent to the depreciation rate of wind turbines adopted by A…. More specifically, it is important to inquire whether, from the perspective of a regulatory-economic analysis, the criterion adopted by the AT for the determination of wind turbine depreciation rates – under Articles 31/2 of the Corporate Income Tax Code and 5/3 of Regulatory Decree No. 25/2009, in the wording then in effect – can be considered reasonable and acceptable, taking into account the "period of expected useful life".

The calculation of depreciations and amortizations should be made, as a rule, by the straight-line method (Article 30/1 of the Corporate Income Tax Code). The law in effect at the time of the facts did not determine the depreciation or amortization rate to be applied to wind turbines intended for energy production. Article 31/2 of the Corporate Income Tax Code therefore applied, which provided that "With respect to elements for which depreciation or amortization rates are not fixed, those considered reasonable by the Tax Administration are accepted, taking into account the period of expected useful life." As results from the literal tenor of this provision, the legislator decided to refer to depreciation or amortization rates that the AT considers reasonable, taking into account the period of expected useful life.

This option is governed by Article 5/3 of Regulatory Decree No. 25/2009, of 4 September, which establishes the regime for depreciations. There it is provided that "with respect to elements for which depreciation or amortization rates are not fixed in the tables referred to in No. 1, those considered reasonable by the Tax and Customs Authority are accepted, taking into account the period of expected useful life of such elements."

The exegesis of the provision permits the conclusion that the normative option followed was not in the sense of obliging the AT to accept the depreciation rates adopted by the taxpayer as long as they were reasonable, but rather that the taxpayer must accept the rates that the Tax Administration considers reasonable, taking into account the period of expected useful life. That is, the legislator delegated to the AT the competence to authoritatively resolve the issues raised by the regulatory parsimony of depreciation and amortization tables.

Administrative Discretion

In its gap-filling function for tabular lacunae, Article 5/3 of Regulatory Decree No. 25/2009 confers on the AT a dual incumbency. On the one hand, it must densify the concept of period of expected useful life, which appears, from the theoretical-legal standpoint, as an indeterminate concept. On the other hand, it is required to proceed from there to the identification of a depreciation rate that it considers reasonable and that is susceptible to being so considered in judicial review. This dual incumbency circumscribes a space of technical discretion for the AT, relative to which courts should manifest a significant measure of deference, within constitutional and legal limits.

Discretionary administrative decisions, like all other administrative decisions, must be made within the limits of competence legally attributed, within the framework of a reasonable interpretation of the margin of maneuver contemplated by the legislator. Technical discretion does not constitute a space free of law and judicial control. It is circumscribed by fundamental rights, by constitutionally structuring principles and by other principles of the legal order.

It is by reference to these principles that indeterminate concepts, such as that of period of expected useful life or of reasonable depreciation rate, should be made concrete, on penalty of error in the interpretation of the law. The use of this margin of appreciation should be guided by the principles of equality, adequacy, proportionality and legal certainty, on penalty of error in the application of the law.

In any case, technical discretion imposes some limits on the level of scrutiny to be exercised by courts. Discretionary administrative decisions can only be judicially reviewed on limited grounds, such as error in the factual assumptions, manifest error in the interpretation and application of law, bad faith of the decision-makers, pursuit of improper purposes or consideration of irrelevant factors.

Period of Expected Useful Life

The concept of period of expected useful life corresponds, essentially, to the useful life period of the asset. The concept is referred to in Article 30/4 of the Corporate Income Tax Code, although it is not accompanied by a definition. Normally it is understood as the period of time in which the asset is capable of being used, in accordance with the normal rules of experience in the sector of activity in question. The concretization of the concept of useful life, or of period of expected useful life, requires that the specific operational conditions in which the asset is normally used be observed.

What is decisive for the determination of the time of expected utility is not the duration of operational use by the individual taxpayer, but the objective utility of an asset, taking into account the specific operational stress typical of the asset. This should be determined taking into account all relevant circumstances.

As an aid to the determination of the useful life of assets, the Government, with the participation of professional associations of different sectors of activity, has approved the tables with specific and general rates of economic depreciation and amortization for goods of general use and for different sectors of the economy, annexed to Regulatory Decree No. 25/2009, of which they form an integral part. They have underlying them a presumption of legal-economic correctness, although they are not binding on courts.

The resort to general and specific tables of depreciation and amortization and to reasonableness criteria to be densified by the AT appears adequate, necessary and proportionate, in view of the need to weigh and harmonize the constitutional principles of taxation of real income and capacity to pay, on the one hand, with the guarantee of the efficiency of tax administration, on the other hand, considering the need to simplify procedures and relieve the AT of the high costs of transaction and information that a precise and fine attention to the concrete economic situation of each taxpayer individually considered would inevitably end up entailing. Without forgetting that this normative technique has the merit of ensuring respect for the principles of equality, legal certainty and protection of legitimate confidence in taxation, while ensuring fair and undistorted competition among the various companies within each sector of activity.

By duration of use is understood the period in which the asset can be used in accordance with common experience. For the determination of "useful life" the specific operational conditions in which the asset is used should be observed. What is decisive for the delimitation of the useful life period is not the operational use by the individual taxpayer, but the objectively expected useful life, considering the normal loads of specific functioning. Useful life is determined on the basis of the following factors: a) technical wear; 2) economic depreciation and 3) relevant legal framework. The concept of useful life acquires, by this means, a three-dimensional configuration, as we summarize.

Technical useful life comprises the period of time during which the asset can be technically consumed or used. This is an important aspect for the determination of expected useful life, although not the only one. Economic useful life is the period during which the asset can be used profitably, including possible sale for other purposes after original use. Legal useful life comprises the relevant regulatory framework (e.g., duration of authorizations; duration of lease contracts), pointing to greater or lesser stabilization of expectations and protection of legitimate confidence. These criteria should be applied to various sectors of activity. Their relevance should be assessed contextually. For example, for the determination of the useful life period of wind turbines, the contracts entered into between owners and lessors of the land where the wind farm will be installed are not necessarily decisive, to the extent that their content depends on other variables beyond the characteristics of the wind turbines.

In the event of no absolute coincidence between technical duration, economic utility and legal stability, different solutions are conceivable in the abstract. One would be to opt for that which best protected the tax base and the public treasury. Alternatively, one could adopt the understanding more favorable to the taxpayer, using the economic criterion as decisive for the determination of the depreciation rate.

A third possibility, adopted by the Portuguese tax legislator, is to permit the AT to operate a synoptic, integrated and holistic reading of the three dimensions of the concept of useful life, or of period of expected useful life, based on a balanced weighing of the interests at stake and a reasonable and non-arbitrary evaluation of the relevant technical, economic and legal data. It is against this backdrop that Article 5/3 of Regulatory Decree No. 25/2009 should be interpreted and applied, when it refers to "depreciation or amortization rates are accepted those that the Tax and Customs Authority considers reasonable, taking into account the period of expected useful life of such elements".

The provision in question states that it is for the AT to decide on the reasonableness of depreciation rates. The same reflects the adoption of a theory of deference, recognizing that at issue is the search, by the AT, for an acceptable answer to complex technical questions. This referral to the idea of reasonableness confers on the AT a space of technical discretion that translates into a significant margin of appreciation. Naturally this is not a space of unlimited and unexaminable decision-making, compatible with arbitrariness and subjectivism.

Reasonableness

The concept of reasonableness is used, in the legal-normative field, when one is faced with problematic situations in which the answer is not susceptible of being reached in logical-binary terms (e.g., 0,1; all, nothing), that is, in which it does not present itself as axiomatic, obvious, clear, patent, uncontroversial, unequivocal and indisputable. The use of the concept of reasonableness evidences a considerable measure of pluralism in legal discourse, signaling from the outset the principle that for some problems – in which empirical evidence is not conclusive or in which being conclusive it is not susceptible of being interpreted in only one way – different, plausible and acceptable alternative answers are possible.

When evidence is inconclusive, a determined and precise decision appears epistemologically impossible. But even when evidence is conclusive, lapses in technical reasoning are possible and tolerated as long as the error is not manifest and the result is not absurd. In these cases, the law admits a margin of reasonable disagreement between members of the same epistemic community having the same empirical data (e.g., technical, economic and legal) to the extent that it is not always possible to determine clearly who is reasoning correctly and who is erring.

Reasonable disagreement, among equally technically competent parties, can subsist even after deliberation argued in good faith. Because this is so, the law does not always insist on the identification of a single correct answer at all times and places, satisfying itself with a reasonable or acceptable approach to the problem. If a reflexive suspension is not possible or viable, several possible decisions within a continuum must be admitted. The concept of reasonableness permits delimiting the space of admissible disagreement and resolving it in the direction of balanced adjustment.

Wind Turbine Depreciation Rate

In the field of wind turbine depreciation, comparative law analysis shows that the application of technical, economic and legal criteria to the determination of expected utility of wind turbines has proved compatible with different results, being frequent to encounter distinct concretizations of the concept of useful life. This, even without mentioning the existence of tax regimes favorable to renewable energy investment, which govern the depreciation of assets independently of their respective period of expected useful life.

There are cases, for example, where attention is paid to the useful life of each of the wind turbine elements and its separate depreciation is admitted. In another sense, which appears more sustainable, wind turbines, or wind turbines, are considered to be assets composed of different elements that can only be used in their whole after assembly. Individual parts have no economic utility separately. The period of expected utility can be determined only by technical coordination among themselves.

Over the past decades the expected useful life of wind turbines, for depreciation purposes, has been fixed, in various States, at 12, 15, 16 or 20 years, and may coexist with legal regimes of accelerated depreciation of 5 or 10 years. Within this framework, the issue that arises is whether the fixing of the expected utility of a wind turbine at 20 years can be considered reasonable. Naturally the space of reasonableness must be delimited by the ideas of justice, adequacy, proportion, equity and moderation. It is incompatible with results that can be considered arbitrary, anomalous and absurd.

The reasonableness of an administrative decision depends, for its legitimation, on an analysis in two stages, procedural and substantive. From a procedural standpoint, it is relevant to ascertain whether the AT based itself on all the relevant information to which it could reasonably access and consider or whether it took into account factors (e.g., improper purposes; private interests) that it should not have even considered. In this context, it should be recognized that, adopting a relatively formal procedure, the AT sought, in a diverse and reliable set of sources, to aggregate information about wind turbines, namely resorting to technical studies of mechanical reliability, whether from manufacturers or suppliers, or on the web pages of institutions linked to renewable energies.

In the various sources of information consulted by the AT it is relatively frequent to find the ascription to wind turbines of a period of expected useful life of 20 years. In fact, that period is presented several times in specialized literature as being typical and conventional, as opposed to accelerated depreciation regimes. Therefore, the AT, by building on the normal, typical and conventional, averts any suspicion of having been arbitrary, unreasonable or excessive. Its understanding was reached through a diligent and serious procedure of gathering and analysis of relevant scientific, technical, economic and legal information, being far from corresponding to an irruption of arbitrariness, subjectivism or an eidetic intuition of essences. The mode of proceeding adopted is favorable to a manifestation of deference toward the AT by judicial control bodies.

From a substantive standpoint, it is important to ascertain whether the period of expected useful life and the amortization rate at which the AT arrived are manifestly erroneous, anomalous or absurd, to such an extent that it can be concluded that no other informed and reasonable administrative authority could have reached such a decision. What is at issue, in the proceeding in question, is whether the expected useful life period and the corresponding 5% depreciation rate are outside the margin of appreciation that the concepts of period of expected useful life and of reasonableness necessarily confer on the AT.

To arrive at a depreciation rate that it considered reasonable (5%), the AT took into account an expected useful life period of 20 years, which is situated within the bounds set by minimum periods (e.g., 12.5 years) and maximum (e.g., 25 to 30) years, frequently referred to in international standards and in technical and economic studies on the subject, and is also used by other tax authorities (e.g., Denmark) for the depreciation of wind turbines. Indeed, in specialized literature, the depreciation of wind turbines over twenty years of expected utility is considered a reasonable solution. The AT sought to ground its ratio decidendi

Naturally the criterion of reasonableness admits a margin of reasonable disagreement in the face of inconclusive evidence or evidence not susceptible of unequivocal valuation, the divergence between the AT and A… being situated within that margin of disagreement. But even if one considers that the evidence is conclusive, still the concept of reasonableness admits a margin of reasonable error, which also does not appear to have been exceeded by the AT.

Evidently nothing prevents the legislator, for political, economic or environmental reasons, from adopting other criteria and arriving at other depreciation rates, following the example of those that admit depreciation of wind turbines in 16, 14, 10 or even 6 or 5 years, in the case of accelerated depreciation regimes. The promotion of growth and employment, rapid technological development and the need to invest in renewable energies can fully justify that option. The legislator can at any time adopt a different criterion for depreciation of wind turbines, as it did, in this domain, when, through Law No. 82-D/2014, of 31 December, which approves the Reform of Green Taxation. There are many reasonable possibilities for proceeding to the depreciation of wind turbines. But this does not mean that the criterion adopted by the AT can be considered unreasonable.

Attending to the same procedural and substantive criteria, the solution advocated by A…, of a rate of 6.25% at 16 years, can be considered, not only entirely reasonable, but even, possibly, more reasonable than that sustained by the AT. It was certainly not without careful deliberation that German jurisprudence fixed a period of expected useful life for the depreciation of wind turbines of 16 years.

But the reasonableness of the Claimant is irrelevant to the outcome of the case at issue and cannot be used against the position adopted by the AT. Article 5/3 of Regulatory Decree No. 25/2009 refers to the depreciation rate that the AT considers reasonable, which does not open space for a "comparison of reasonablenesses" (e.g., dissenting opinion at CAAD Decision of Process 593/2015-T, 29-7-2016), however interesting and intellectually stimulating that exercise may be.

In other words, what is at issue is not the question of whether the rate adopted and defended by the taxpayer is reasonable or not, or even whether it is more reasonable than that proposed by the AT, but rather whether the expected useful life period of 20 years advocated by the AT, and the corresponding depreciation rate of 5%, are susceptible to being considered reasonable and acceptable. Insisting, Article 5/3 of Regulatory Decree No. 25/2009, determines that in cases not provided for in the depreciation and amortization tables the rates that the AT considers reasonable, taking into account the period of expected useful life of such elements, should be accepted.

It should be noted, moreover, that the possibility of downward correction of depreciation rates (write-down) is provided for in Article 5/2 of Regulatory Decree No. 25/2009, where some cases are expressly excepted in which "depreciation or amortization rates are calculated on the basis of the corresponding period of expected useful life, which can be corrected when it is considered to be less than what should have been objectively estimated." But that possibility is not mentioned in No. 3, in which reference is made to a criterion of reasonableness to be concretized by the AT, that reasonableness extending to the filling of the indeterminate concept of period of expected useful life, with 20 years not corresponding to a singular and idiosyncratic reading by the AT, as it is adopted by other tax authorities.

An evaluation of the empirical basis and the procedural and substantive aspects of the AT's position supports the majority understanding of this collective arbitral body in the sense that the densification of the concept of period of expected useful life of 20 years and the fixing of a depreciation rate of 5% is still sustainable, from the technical, economic and legal standpoint, within the space of technical discretion of the AT, and cannot be considered anomalous, absurd or disproportionate.

It is concluded, thus, that the AT did not err and that, even if it had erred, which is granted only for the sake of argument, it would never have exceeded the margin of error that is tolerable in cases of technical discretion. Hence, in light of the provisions of Article 31 of the Corporate Income Tax Code and Article 5/3 of Regulatory Decree 25/2009, of 14 September, the applicable depreciation rate is 5%.

Decision

In light of the foregoing, this Arbitral Tribunal decides, by majority, to uphold the position of the AT and, consequently, to judge the request filed by the Claimant as wholly without merit, condemning it to pay the costs of the proceeding.

Value of the Proceeding

The value of the proceeding is fixed at €277,228.92 in accordance with the provisions of Article 97-A/1/a) of the Code of Tax Procedure, applicable by force of Article 29/1/a) of the RJAT and Article 3/2 of the Regulation of Costs in Tax Arbitration Proceedings.

Costs

Under Article 22/4 of the RJAT, costs are fixed at €5,202.00

Lisbon, 7 June 2017

José Baeta de Queiroz

Jónatas Eduardo Mendes Machado

Ricardo Gomes Pedro

(dissenting in accordance with annexed dissenting opinion)

Dissenting Opinion

I do not concur in the sense of this arbitral decision, for the following reasons which I now expound:

I. Introduction and Legal Framework

As is peaceably accepted by both Claimant and Respondent, the issue that arises in the present proceedings concerns determining what depreciation rate is applicable, from the tax perspective, to wind turbines producing electrical energy in the tax period of 2011.

At the date to which the facts relate, in the context of IRC, the matter of depreciations and amortizations was governed by Article 29 et seq. of the Corporate Income Tax Code, as well as by Regulatory Decree No. 25/2009, of 14 September (hereinafter referred to as "DR 25/2009").

It is not a disputed fact that the equipment in question are elements making up the claimant's tangible fixed assets subject to depreciation, and are therefore generators of depreciation relevant for tax purposes, under No. 1 of Article 29 of the Corporate Income Tax Code.

DR 25/2009 contains, like its predecessor (DR 2/90, of 12 January), a set of tables – one specific, which determines depreciation or amortization rates depending on the sector of activity to which such asset elements are assigned – and one generic.

The use of one or the other table is determined in accordance with the provisions of No. 1 of Article 5 of DR 25/2009: the "specific depreciation or amortization rates fixed in table I (…)" apply to "elements of assets of the corresponding branches of activity" and "when these are not fixed" in that table, "the generic rates mentioned in table II" apply (emphasis mine).

That is, if wind turbines are expressly listed in the specific table referred to in DR 25/2009, the annual depreciation quota that can be accepted for tax purposes is determined based on the maximum rate provided therein. Otherwise, the rate from the generic table applies.

In the event that it is not possible to apply either a rate from the specific table or a rate from the generic table, the Corporate Income Tax Code provides, in No. 2 of Article 31 of the Corporate Income Tax Code, that "with respect to elements for which depreciation or amortization rates are not fixed, those considered reasonable by the Tax Administration are accepted, taking into account the period of expected useful life."

A similar norm is found in No. 3 of Article 5 of DR 25/2009, in providing that "with respect to elements for which depreciation or amortization rates are not fixed in the tables referred to in No. 1, those considered reasonable by the Directorate-General of Taxes are accepted, taking into account the period of expected useful life."

II. Position of the Claimant

It was within this normative framework that the Claimant decided to depreciate, both in accounting and tax terms, the wind turbines...