CAAD 7/2018-T: IRC Autonomous Taxation Deductions and Special Advance Payments on Corporate Tax

ARBITRAL DECISION

I – Report

1. A..., S.A., taxpayer identification number..., with registered office at..., has filed a request for the constitution of an arbitral tribunal, pursuant to Article 2, No. 1, paragraph a), and Articles 10 et seq. of Decree-Law No. 10/2011, of 20 January, to assess the legality of the implicit rejection of the administrative appeal lodged against the self-assessment act of Corporate Income Tax (IRC), relating to the fiscal year 2014, insofar as it does not admit the deduction from the IRC collection produced by the rates of autonomous taxation of tax benefits calculated within the scope of the System of Tax Incentives for Business Research and Development (SIFIDE) and special payments on account (PEC), in the amount of € 161,299.22.

The applicant grounds its request as follows.

The Applicant holds fiscal credits relating to the fiscal years 2009, 2014 and 2015 within the scope of SIFIDE, in the total amount of € 362,839.61 and made special payments on account in all fiscal years since 2010, in the total amount of € 418,746.00, which were never deducted because it had negative fiscal results between 2010 and 2013.

In the fiscal year 2014, the Applicant calculated a total amount of tax payable of € 171,333.40, but to which it was not possible to deduct the fiscal credits in the part relating to the IRC collection produced by autonomous taxation, resulting in the undue payment of € 161,299.22.

However, autonomous taxation, although subject to a distinct form of calculation with regard to the taxable base and the applicable rates, follows an identical procedure for the settlement of tax according to Article 90 of the Corporate Income Tax Code (CIRC).

And if it is understood that Article 90 of the Corporate Income Tax Code does not apply to autonomous taxation, the illegality of the settlement of autonomous taxation should then be declared for lack of legal basis for its implementation, given the provisions of Article 103, No. 3, of the Constitution.

Furthermore, the anti-abuse purpose of autonomous taxation does not exclude the IRC settlement procedure nor frustrate the intended legal effect, since the taxpayer effects the payment of autonomous taxation through the offsetting of fiscal credits of which it is entitled by way of tax benefits or special payments on account.

Otherwise, the provision of Article 90, No. 2, of the CIRC would be contrary to the principle of tax equality insofar as it introduces limits to deductions in IRC that are not applicable to all taxpayers.

The provision of Article 88, No. 21, of the CIRC, introduced by Law No. 7-A/2016, of 30 March, does not prevent the deduction from the IRC collection of autonomous taxation, since it only results therefrom that specific deductions from the collection of autonomous taxation cannot be effected, and, in any case, the provision, by virtue of its interpretative nature, would be contrary to the principle of prohibition of retroactivity of tax law when applied to the fiscal year 2014.

It should further be considered that the tax benefit created by SIFIDE, by virtue of its exceptional nature, cannot be the subject of a restrictive interpretation, in light of the provisions of Article 10 of the Tax Benefits Statute, so that it is not possible to circumvent, by effect of the interpretation of law, the legislative intention to grant a tax advantage to the taxpayer.

In the same manner, the Applicant may deduct from the IRC collection resulting from autonomous taxation the amounts disbursed as special payments on account because these are fiscal credits that may permit the offsetting of the tax due.

Consequently, it requests the declaration of illegality of the decision to reject the administrative appeal and the partial annulment of the self-assessment of IRC relating to 2014, insofar as it did not permit the deduction from the collection produced by autonomous taxation of the tax benefit and special payments on account.

The Tax Authority, in its response, considers that the inclusion of autonomous taxation in the Corporate Income Tax Code, by virtue of its nature and purpose, has as a logical corollary the application of the general rules specific to that tax that are not inconsistent with its special form of incidence, conferring a dualistic nature on the normative system of the tax that is embodied in the separate calculation of the respective collections in accordance with different rules.

There being thus two distinct calculations, which, although processed according to paragraph a) of No. 1 of Article 90, are effected on the basis of the application of different rates to the respective taxable bases that are determined equally in accordance with their own rules.

The settlement of IRC operates through the application of the rates of Article 87 to the taxable base determined according to Chapter III of the Code, whereas in relation to the settlement of autonomous taxation various collections are calculated in accordance with the rates provided for in Article 87, resulting from the provisions of Articles 88 and 89, depending on the diversity of facts that give rise to the settlement of autonomous taxation, and therefore one cannot speak of a unitary system of IRC taxation.

And in that sense the amount calculated according to paragraph a) of Article 90 of the CIRC comprises values calculated according to different rules, to which different purposes are associated, so that the deductions provided for in No. 2 of that article can only be effected to that part of the collection of IRC with which there is direct correspondence.

Otherwise, the deduction of tax benefits from the collection resulting from autonomous taxation would have a contradictory effect, permitting that the achievement of tax incentive objectives would come to eliminate autonomous taxation in relation to expenses that the legislator intends to discourage.

In the same manner, for the basis of calculation of payments on account, defined in Article 105, No. 1, of the CIRC, only the IRC calculated from the taxable base determined according to the rules of Chapter III and the rates of Article 87 is considered, which is identified with the profit/income of the taxpayer.

Given that the legal nature of the special payment on account, as an instrument or guarantee of payment of the tax with a function associated with combating tax evasion and fraud, excludes that the amounts delivered under that heading may be applied to the extinction of the debt resulting from autonomous taxation.

It concludes for the rejection of the request.

1. Following the proceedings, the meeting referred to in Article 18 of the Arbitration Rules was dispensed with, as was the production of witness evidence.

In their submissions, the parties reiterated their previous positions.

1. The request for constitution of the arbitral tribunal was accepted by the President of CAAD and notified to the Tax Authority in accordance with regulatory requirements.

Pursuant to paragraph b) of No. 2 of Article 6 of the Arbitration Rules, as amended by Article 228 of Law No. 66-B/2012, of 31 December, the parties appointed the arbitrators and the Ethics Council appointed the third arbitrator, who communicated their acceptance of the assignment within the applicable period.

The parties were duly and timely notified of this appointment and did not express any wish to challenge it, in accordance with the combined provisions of Article 11, No. 1, paragraphs a) and b), of the Arbitration Rules and Articles 6 and 7 of the Ethics Code.

Thus, in accordance with the provisions of paragraph c) of No. 1 of Article 11 of the Arbitration Rules, as amended by Article 228 of Law No. 66-B/2012, of 31 December, the collective arbitral tribunal was constituted on 19 March 2018.

The arbitral tribunal was regularly constituted and is materially competent, in accordance with the provisions of Articles 2, No. 1, paragraph a), and 30, No. 1, of Decree-Law No. 10/2011, of 20 January.

The parties possess legal personality and capacity, are legitimate and are represented (Articles 4 and 10, No. 2, of the same decree and Article 1 of Regulation No. 112-A/2011, of 22 March).

The proceedings are not affected by any vices.

It falls to us to examine and decide.

II – Grounds

1. The material facts relevant to the decision of the case are as follows:

a) The Applicant filed a Model 22 IRC return, relating to the fiscal year 2014, proceeding to the self-assessment of autonomous taxation in the amount of € 161,299.22;

b) The amount of tax calculated as payable was € 171,333.40;

c) The Applicant holds fiscal credits relating to the fiscal years 2009, 2014 and 2015 within the scope of SIFIDE in the total amount of € 362,839.61.

d) And made special payments on account in all fiscal years since 2010 in the total amount of € 418,746.00 that were not deducted because it had negative fiscal results between 2010 and 2013;

e) The computer system did not permit the deduction from the IRC collection, including that resulting from autonomous taxation, of the amounts of tax benefit recognized under SIFIDE and special payments on account.

f) The Applicant filed an administrative appeal against the self-assessment of autonomous taxation of the said fiscal year 2014, which was not examined by the Tax Authority within the legally prescribed period.

The Tribunal formed its conviction regarding the proven facts on the basis of the documents attached to the petition and those contained in the administrative file presented by the Tax Authority with its response.

Matters of Law

Deduction of Tax Benefit from the Collection of Autonomous Taxation

1. The questions to be decided concern whether there is a place, in IRC proceedings, for the deduction from the collection produced by the rates of autonomous taxation of tax benefits calculated within the scope of the System of Tax Incentives for Business Research and Development (SIFIDE), as well as the deduction of special payments on account.

The first of these questions has been decided by the majority arbitral jurisprudence in the affirmative sense, using as the principal argument the fact that autonomous taxation is subject to the common procedure for the settlement of IRC. The collection provided by autonomous taxation – it is asserted – constitutes IRC collection and the deduction of tax benefits is effected in relation to the amount calculated according to Article 90 of the CIRC, which leads to the conclusion that the processing of the settlement of the tax, as results from the said Article 90, applies to all situations provided for in the Code, including with regard to autonomous taxation. Starting from this central idea, it is concluded that the autonomy of this type of taxation is restricted to the applicable rates and the respective taxable base, there being no legal support, given the provisions of Article 90, to distinguish between the collection resulting from autonomous taxation and that which results from income subject to IRC.

The analysis of the question justifies, in any case, a more precise characterization of the so-called autonomous taxation.

It should first be said that autonomous taxation constitutes the principal exception to taxation of income according to the principle of net income or real income, whereby the income of natural persons is calculated after deduction of expenses incurred for its generation and the taxation of corporations is determined in accordance with profit calculated by accounting (Saldanha Sanches, Manual of Tax Law, 3rd edition, Coimbra, p. 406).

As has frequently been noted, autonomous taxation initially concerned confidential and undocumented expenses (Article 4 of Decree-Law No. 192/90, of 9 June), subsequently extending to vehicle expenses, amounts paid to persons with more favorable tax treatment and representation expenses, and later to expenses for allowances or travel expenses.

With the State Budget Law of 2010 (Law No. 3-B/2010, of 28 April), autonomous taxation also came to include expenses relating to indemnities paid to managers, administrators or partners due to cessation of duties, and also expenses relating to bonuses and other variable remuneration paid to managers, administrators or partners when these represent a portion exceeding 25% of annual remuneration and have a value exceeding € 27,500. Meanwhile, Law No. 55-A/2010, of 31 December, added a No. 14 to Article 88, providing for an increase in the rates of autonomous taxation provided for in that article of 10 percentage points as regards taxpayers who present a fiscal loss in the taxation period to which any of the tax facts referred to in the preceding numbers pertain.

The introduction of the autonomous taxation mechanism is justified, on the other hand, by the fact that it concerns expenses whose tax treatment is difficult to discern because they are found in a "zone of intersection between the private sphere and the business sphere" and is aimed at preventing and avoiding that, through these expenses, companies proceed to the concealed distribution of profits or attribute income that may not be taxed in the sphere of their respective beneficiaries, also having the objective of combating tax fraud and evasion (Saldanha Sanches, op. cit., p. 407).

Furthermore, autonomous taxation, although regulated by law in the context of income tax, is materially distinct from IRC taxation, insofar as it does not directly affect the taxable profit of the company, but rather certain expenses that constitute, in themselves, a new tax fact (which concerns not the perception of income but the incurrence of expenses). And, in this way, autonomous taxation has inherent in it the idea of discouraging a practice that, in addition to affecting equality in the distribution of public charges, may involve situations of lesser tax transparency, and is explained by a legislative intention to encourage companies to reduce as much as possible expenses that negatively affect tax revenue.

In those special situations listed in law, the legislator opted, therefore, to subject expenses to autonomous taxation as an alternative and more effective form to the non-deductibility of the expense for purposes of determining taxable profit, all the more so that when the company comes to suffer a fiscal loss, there will be no place for the payment of tax, frustrating the objective that is intended to be achieved, which is to discourage the very implementation of this type of expense.

However, through successive legislative amendments, the legislator has come to broaden the scope of autonomous taxation, having come to include expenses relating to indemnities paid to managers, administrators or partners when they cease duties, and also expenses relating to bonuses and other variable remuneration paid to managers, administrators or partners when these exceed certain thresholds. This shows itself to be justified as a way to ensure "a fairer distribution of tax burdens and a progressive moralization of corporate remuneration policies". As doctrine has recognized, these are autonomous taxation mechanisms that depart from the initial design of combating tax fraud and evasion – as occurred with undocumented expenses – but that may still be framed within the objective of limiting expenses that may be reflected in the collectible income of companies.

In this context, analyzing the issue of autonomous taxation in light of the principle of taxation of companies according to real income and the principle of contributive capacity, the Constitutional Court, in Decision No. 197/2016, subscribed to the following understanding:

"(...) IRC and autonomous taxation are distinct taxes, with different bases of incidence and subject to specific rates. IRC applies to income obtained and profits directly attributable to the exercise of a certain economic activity, by reference to the annual period, and thus taxes the aggregation of all income obtained in the taxation period. By contrast, in autonomous taxation in IRC – according to the constitutional jurisprudence itself – the fact generating the tax is the very implementation of the expense, characterizing itself as an instantaneous tax fact that arises isolated in time and generates a payment obligation with a sporadic character. This is why it is understood that we are dealing with a single-obligation tax, as opposed to periodic taxes, whose tax fact is produced successively over time, generating the obligation to pay tax with a regular character.

As can be concluded, autonomous taxation, although provided for in the CIRC and settled jointly with IRC for purposes of collection, has nothing to do with the taxation of income and profits attributable to the economic exercise of the company, since they apply to certain expenses that constitute autonomous tax facts that the legislator, for reasons of tax policy, wished to tax separately by subjecting them to a predetermined rate that has no relationship whatsoever with the volume of business of the company".

In the same sense, Decision of the Constitutional Court No. 310/2012, which found unconstitutional, by violation of the principle of non-retroactivity of tax law, the provision of Article 5, No. 1, of Law No. 64/2008, of 5 December, insofar as it makes retroactive to 1 January 2008 the effects of the increase in autonomous taxation rates, drew attention to the materially distinct nature of autonomous taxation in relation to tax on the income of corporate entities, although this tax imposition is formally inserted in the Corporate Income Tax Code.

In this regard, that decision stressed:

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

Thus, 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 fact generating the tax is deemed to occur on the last day of the taxation period (cf. Article 8, No. 9, of the CIRC).

Whereas with respect to autonomous taxation in IRC, the fact generating the tax is the very implementation of the expense, not being faced with a complex fact of successive formation over a year, but faced with an instantaneous tax fact.

This characteristic of autonomous taxation thus refers us to the distinction between periodic taxes (whose tax fact is produced successively, by the passage of a given period of time, typically annual, and tends to repeat itself over time, generating for the taxpayer the obligation to pay tax with a regular character) and single-obligation taxes (whose tax fact is produced instantaneously, arises isolated in time, generating upon the taxpayer a payment obligation with a sporadic character).

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

It is understood, in the terms just set forth, that the basis of incidence of autonomous taxation does not translate into a net income, but into a deductible cost transformed exceptionally into an object of taxation, corresponding to a legal penalty intended to reduce the tax advantage that could result from unjustified or excessive expenses. And, in this framework, it would be entirely contrary to the unity of the legal system that tax benefits to be granted to taxpayers under IRC come to be deducted from the collection resulting from the application of autonomous taxation rates.

As was noted, autonomous taxation rates have the nature of anti-abuse rules and are intended to discourage certain special situations aimed at obtaining a reduction in tax burden through the deduction of costs that are presumed not to be determined by a business cause. Furthermore, the normative system of the tax has a dualistic nature insofar as it integrates, on the one hand, the taxable base based on taxable profit, and on the other hand, the taxable base resulting from the application of autonomous taxation rates applied to a certain type of expenses.

Although the settlement of the tax is effected in an aggregated manner, on the basis of these two different components, it does not make sense that the general deductions to be made with respect to the calculated amount of tax apply to the collection owed by the application of autonomous taxation rates. In fact, deductions from the collection constitute one of the forms of embodying the principle of contributive capacity, one of whose corollaries is taxation according to real income. In the case of income taxes, the objective deductions to be contemplated are those corresponding to expenses that may reasonably be considered necessary for the generation of income and that are appropriate to the nature of each category of income, it being understood, in the case of business activities, the expenses or losses incurred or borne by the taxpayer to obtain or secure income subject to IRC (Sérgio Vasques, Manual of Tax Law, Coimbra, 2015, p. 299).

It is true that the law also admits deductions to taxable profit and, among them, those relating to tax benefits (Article 90, No. 2, paragraph c)). It does not, however, make sense that these deductions can occur in relation to the collection of autonomous taxation.

However, it must be understood from the outset that the law says nothing about whether what is in Article 90 of the Corporate Income Tax Code, under the heading "Procedure and Form of Settlement" applies to the two realities – IRC and autonomous taxation – or to only one and which. However, in our view, from a teleological and systematic interpretation of the law it is clear that No. 1 of Article 90 – which contains the settlement procedure – applies to both IRC and autonomous taxation. However, No. 2 of the same article – which contains the form of settlement – concerns the cases of the taxable base referred to in Article 15 of the CIRC, that is to say IRC.

To better understand this conclusion it will be necessary to understand that it was established in the then No. 6 of Article 109 of the Corporate Income Tax Code, current Article 117, that the obligation to submit the periodic income return encompasses entities exempt from IRC, when they are subject to autonomous taxation. And for certain purposes – namely for purposes of the deductions provided for in No. 2 of Article 90 of the Corporate Income Tax Code or the calculation of payments on account or even the Result of Settlement (Article 92) – it was left to the care of the interpreter and applicant of the law the task of identifying the relevant part of IRC collection. That is, extracting from the applicable regulations a useful sense, literally possible, that permits a coherent solution in accordance with the nature and functions attributed to each component of the tax. Well, it is here that care must be taken. When it comes to the deductions provided for in No. 2 of Article 90 of the Corporate Income Tax Code, everyone agrees, namely the Applicant, that the expression "amount calculated according to the preceding number" should be understood as encompassing the sum of the amount of IRC, calculated on the taxable base determined according to the rules of Chapter III and the rates provided for in Article 87 of the same Code, and the amount of autonomous taxation, calculated on the basis of the rules provided for in Article 88. Now, the result of this interpretation would immediately imply, in a very simple way, that in the basis of calculation of payments on account defined in No. 1 of Article 105 of the Corporate Income Tax Code, and in terms identical to those used in No. 2 of Article 90, autonomous taxation were included. Indeed, for the basis of calculation of payments on account only the IRC calculated on the basis of the taxable base determined according to the rules of Chapter III and the rates of Article 87 of the respective Code is considered. And here there is no disagreement either in Doctrine or in jurisprudence. For it is to be noted that the coherence and adequacy of this understanding is founded on the very nature of payments on account of the tax due finally, which, according to the definition of Article 33 of the General Tax Law are "monetary advance payments made by taxpayers during the period of formation of the tax fact", constituting a "(...) form of bringing the moment of collection closer to that of the perception of income so as to fill situations in which this approximation cannot be effectuated through withholdings at source". Therefore, it only makes sense to conclude that the respective basis of calculation corresponds to the amount of IRC collection resulting from the taxable base that is identified with the profit/income of the taxpayer's fiscal year.

Here the only (and consistent) interpretation of the expression "amount calculated according to the preceding number" with the nature of the deductions referred to in the subparagraphs of No. 2 of Article 90 of the Corporate Income Tax Code, relating to:

• tax credits for double international taxation legal and economic (current subparagraphs a) and b));

• tax benefits (current subparagraph c));

• special payment on account (current subparagraph d));

• and withholdings at source (current subparagraph e)).

In reality, it is noted that the common feature to all the realities reflected in the deductions referred to in No. 2 of Article 90 of the Corporate Income Tax Code resides in the fact that they concern income or expenses incorporated in the taxable base determined on the basis of the taxpayer's profit or advance payments of the tax, being therefore entirely foreign to the realities that integrate the tax facts generating autonomous taxation.

And we say this because it is clear to us that the settlement to which the legislator wished to refer in No. 2 is to the taxable base referred to in Article 15 of the Corporate Income Tax Code. Or, in other words, the "original sin", never well resolved it is true, lies in the fact that (one must) understand, interpreting teleologically and systematically the law, that No. 1 of Article 90 applies to autonomous taxation, a situation that persists even with the most recent amendment that merely established that there will be no deduction from the amount of settlement resulting from autonomous taxation. The most appropriate solution would have been ab initio for the legislator to exclude the application of No. 2 of Article 90 of the Corporate Income Tax Code to cases of autonomous taxation, but as that did not happen, the legislator ended up making patches, falling to the interpreter to arrive at the most appropriate solution through a teleological and systematic interpretation like the one left above.

Thus, in the calculation of autonomous taxation no deductions are admissible, autonomous taxation being settled according to Articles 88 and 89 of the Corporate Income Tax Code and No. 1 of Article 90 of the Code. Never according to No. 2. The provision of No. 2 of Article 90 applies to the sole tax whose operation and theoretical-constitutional substrate permits its application – IRC. One agrees, therefore, with the position that admits that the settlement procedure provided for in No. 1 of Article 90 of the Corporate Income Tax Code also applies to autonomous taxation. However, saying this does not mean accepting that the same applies to No. 2 of the same article. No. This provision applies solely to IRC.

Having said this and looking at the schemes of SIFIDE and RFAI it is necessary to conclude then what was left said above, that is, that support schemes for investment that are implemented in deductions from IRC collection concern IRC collection strictly speaking for the calculation of which autonomous taxation does not contribute. They do not contribute nor could they contribute because although Article 4, No. 1 of the respective decree refers to the amount of tax calculated according to Article 90 of the Corporate Income Tax Code it is referring to amounts calculated according to No. 2 of Article 90 of the Corporate Income Tax Code. And in these we have, as we know, the cases of the taxable base referred to in Article 15 of the same Code, i.e. IRC.

It should also be recalled that autonomous taxation applies to certain expenses typified in tax law that have been incurred by the company, and only to those expenses, and does not aim at the taxation of business income that has been earned in the respective economic fiscal year. And the legislator's objective – as has been noted – is to discourage the implementation of expenses that may negatively affect tax revenue and artificially reduce the company's own contributive capacity.

The logic of autonomous taxation seems to be this. The company reveals financial availability to incur expenses that involve situations of lesser tax transparency and negatively affect tax revenue. In that circumstance, the taxpayer should be in a position to bear an additional tax burden relative to those same expenses (which could be avoided) and which is intended to compensate for the tax advantage that results from the reduction of the taxable base by effect of the implementation of those expenses.

The expense constitutes an autonomous tax fact, generating a tax to which the taxpayer is subject independently of whether or not it has obtained taxable income under IRC in the same taxation period. And, thus, the fact revealing contributive capacity is the very implementation of the expense.

To admit that fiscal credits resulting from situations of incentive or tax benefit could neutralize the sanctionary effect of autonomous taxation would be to distort the very concept of tax benefit and the principles of contributive capacity and fair distribution of tax burden.

By their very nature, tax benefits are measures of an exceptional character instituted for the protection of extrafiscal public interests of relevance superior to that of taxation itself, which prevent them, corresponding to situations in which the tax legislator provides relief, for technical or tax policy reasons, certain manifestations of wealth that it intends to exclude from normal taxation (Article 2, No. 1, of the Tax Benefits Statute). Tax benefit is also considered as a tax expenditure insofar as it applies to a situation subject to taxation and is equivalent, in quantitative terms, to uncollected tax revenue.

It makes no sense whatsoever, in this conditioning, that deductions from the collection of the tax resulting from tax benefits apply not only to taxable profit but to expenses that the legislator intended to tax for reasons of tax transparency. What would lead to allowing the tax benefit to be used to frustrate the objective intended to be achieved with autonomous taxation, which is precisely to discourage the very implementation of this type of expense.

This possibility would further contradict the principle of tax equality.

In fact, one of the corollaries of the principle of contributive capacity in the structuring of income taxes lies in the taxation of net income, which justifies that objective deductions corresponding to expenses that may reasonably be considered necessary for the generation of income, and among them, deductions that specifically suit the nature of each category of income, should be subtracted from the collection. The principle of contributive capacity is also a requirement of tax equality in the sense that the duty to pay taxes must be assessed according to a uniform criterion so that taxpayers having equal contributive capacity pay equal tax and taxpayers having different contributive capacity pay different tax, in the measure of the difference.

To interpret the provision of Article 90, No. 2, paragraph c), of the CIRC in the sense that deductions arising from tax benefits apply not only to taxable profit but also to expenses subject to autonomous taxation would be precisely to distort the principle of tax equality, allowing the effective contributive capacity of the company to be negatively influenced by expenses that have no direct relationship with the source of income.

1. In the present case, the Applicant imputes to the decision of implicit rejection of the administrative appeal and to the self-assessment act of IRC the vice of violation of law insofar as they do not admit the deduction from the IRC collection produced by the rates of autonomous taxation of tax benefits calculated within the scope of SIFIDE.

At issue is the system of tax incentives in business research and development II, briefly designated SIFIDE II, in effect for the taxation periods from 2011 to 2015, approved by Article 133 of Law No. 55-A/2010, of 31 December. The law permits taxpayers subject to IRC resident in Portuguese territory who engage, as main or secondary activity, an economic activity of agricultural, industrial, commercial or services nature and non-residents with permanent establishment in that territory to deduct from the amount calculated according to Article 90 of the CIRC, and up to its concurrence, the value corresponding to expenses with research and development, in the part that has not been the subject of financial contribution from the State as a grant, incurred in the taxation 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 of expenses incurred in that period relative to the simple arithmetic average of the two preceding fiscal years, up to the limit of € 1,500,000. In certain situations there is also place for an increase of that rate.

As results from the legal regime, the deduction is made according to Article 90 of the CIRC, it being to be understood that the reference is made to the settlement procedure to which that same provision of the Code refers. The specific norms that regulate the tax incentive do not contain, as such, a special regime with regard to the method by which the deduction from the collection should proceed, so that there shall be place for the deduction of tax benefits from the amount of tax calculated as provided for in Article 90, No. 2, paragraph c).

The point is that this provision, as has been glimpsed, cannot be interpreted to extend to the collection resulting from autonomous taxation since we are there dealing with a taxation distinct from IRC and deductions as a tax benefit, by their very nature, can only apply to the taxable base that is identified with taxable profit.

It should be recalled, in this regard, that the norms that grant tax benefits are of an exceptional character, insofar as they involve the derogation of the principle of tax equality, and as restrictive norms cannot but be interpreted in accordance with the principle of proportionality in its triple aspect of appropriateness, necessity and fair measure. And it would be difficult to conceive, in an interpretation in accordance with the Constitution, that these norms, by their nature, have the extrafiscal purpose of reducing or excluding the collection produced by autonomous taxation rates when these are characterized by their clearly anti-abuse function.

1. The Applicant further argues that, if it is understood that Article 90 of the CIRC does not apply to autonomous taxation, there is place for unconstitutionality by violation of Article 103, No. 3, of the Constitution since there ceases to exist legal basis for the implementation of settlement in relation to that type of taxation, in addition to which such an interpretation leads to a result not in accordance with the Constitution, by violation of the principle of equality, insofar as the same amount of tax calculated according to No. 1 of Article 90 can give rise to different tax burdens when it is forbidden to taxpayers who settle autonomous taxation deductions that are provided for in No. 2 of that Article 90.

If rightly understood, the Applicant starts from the assumption that, there being no place for deduction from the IRC collection produced by the rates of autonomous taxation of tax benefits, there is also no legal basis for implementing autonomous taxation, since the collection is calculated through the procedure for settlement of IRC defined in the said Article 90 of the CIRC.

The argument is based on an evident misunderstanding.

The rates of autonomous taxation are provided for in Article 88 of the CIRC and it is that provision that permits the settlement of the corresponding tax, although the calculation of the collection arises aggregated to the settlement of IRC. In considering that tax benefits are not deductible from the amount of tax calculated that results from the application of autonomous taxation rates, the tribunal is not affirming that the provision of Article 90 is not applicable to autonomous taxation, but rather effecting an interpretation of Article 90, No. 2, paragraph c), in the sense that deduction from the collection of tax benefits does not apply to autonomous taxation.

Being certain that autonomous taxation does not thereby cease to have legal support.

And as is clearly the case, the non-deduction of tax benefits from the collection of autonomous taxation does not raise any problem of tax equality.

As the Constitutional Court has stressed, the principle of tax equality, in summary, can be concretized through diverse aspects: a first, lies in the generality of the tax law, in its application to all without exception; a second, in the uniformity of the tax law, in treating equally taxpayers who find themselves in equal situations and differently those who find themselves in different situations, in the measure of the difference, assessed by contributive capacity; a last, lies in the prohibition of arbitrariness, in preventing the introduction of discriminations among taxpayers that are devoid of rational foundation (cf. decisions No. 306/2010 and 695/2014).

And as has been expounded, with autonomous taxation, the legislator merely sought to respond to those special situations that may conceal the distribution of profits or schemes of tax evasion and fraud and which, in any case, do not correspond to situations of normal tax practice. There is thus sufficient material foundation to reduce, through autonomous taxation, the tax advantage that the taxpayer could obtain through expenses that the legislator precisely wishes to discourage, and there is a good reason, from the point of view of legislative policy, to prevent the legal penalty from being neutralized through the deduction of tax benefits, when these benefits are only justified by an extrafiscal interest of an exceptional nature.

It is patent, by all that has been expounded, that taxpayers subject to autonomous taxation do not find themselves in a situation comparable to any taxpayer that is taxed solely on the basis of their real income and to whom it is legitimate that costs that are valued positively from the point of view of tax law can be deducted.

1. The Applicant also alludes to the provision of Article 88, No. 21, of the CIRC, as amended by Article 134 of Law No. 7-A/2016, of 30 March, to which the law conferred an interpretative nature, to extract two different conclusions: the provision can only be interpreted in the sense of prohibiting specific deductions from the collection of autonomous taxation, not preventing the general deductions provided for in Article 90 from the overall collection of the tax; the provision also has an innovative nature, despite its express qualification as an interpretative norm, making it inapplicable to the situation of the case by effect of the principle of prohibition of retroactivity of tax law.

The said provision came to establish that "the settlement of autonomous taxation in IRC is effected according to the terms provided for in Article 89 and is based on the values and rates that result from the provisions of the preceding numbers, with no deductions being effected from the total amount calculated". And the subsequent Article 135 of the same Law grants the cited provision of Article 88, No. 21, of the CIRC an interpretative nature.

The invoked provision could raise the question of whether the norm, in the conditioning of the case, could be qualified as interpretative and whether the retroactive effect of that qualification could call into question the principle of prohibition of retroactivity of tax law, and also that other question as to its very interpretative sense to the point that it could be understood that it does not interfere with the deductions of tax benefits to which Article 90, No. 2, paragraph c), refers, but with specific deductions that are not now in question.

However, the tribunal, to arrive at the solution of the case, limited itself to interpreting the provision of Article 90, No. 2, paragraph c), of the CIRC according to the general rules of legal hermeneutics, refraining from applying the provision of the said Article 88, No. 21, of the CIRC, which could only occur if it attributed to it an interpretative character so as to make it applicable to a tax act verified at a moment prior to the entry into force of the new law.

Not having been applied as a basis for the decision, not only is it not of interest to consider the hermeneutic postulate that results from the provision, but it is not even invokable for purposes of considering that the violation of any parameter of constitutionality has been verified that refers to the supposed interpretative character of the law, since the constitutional review always has as an essential presupposition the effective application of the norm in the decision of the concrete case (among many, the Constitutional Court decisions No. 319/94 and 524/98).

1. The Applicant further brings into discussion the exceptional nature of tax benefits invoking the provision of Article 10 of the Tax Benefits Statute, according to which "the norms that establish tax benefits are not susceptible of analogical interpretation, but admit extensive interpretation". It seems to draw from there the conclusion that the deduction of the tax benefit from the collection resulting from autonomous taxation cannot be forbidden under penalty of effecting a restrictive interpretation that is prohibited by law.

The provision of that Article 10 says no more than the general rule of Article 11 of the Civil Code, applicable in general to exceptional norms, and what it seeks to distinguish is between integration by analogy and extensive interpretation. The existence of a lacuna presupposes that a certain situation is not comprised either in the letter or in the spirit of the law, whereas extensive interpretation permits that, within the general criteria of interpretation, the words of the law be extended so as to give it a scope in accordance with the legislative thought. The principle that is sought to be established in relation to exceptional norms is not to admit analogy, but to admit recourse to extensive interpretation. What does not mean that these norms can only be the subject of a strict or declarative interpretation. The law prohibits recourse to analogy, but does not prevent the norm from being interpreted according to the same legal methodology of any other norm (Luís Menezes Leitão, "Interpretation of Tax Benefits", Tax Journal, 1992, No. 45, pp. 27-35).

In any case, the norms that fix the benefit that is here in question are not being interpreted restrictively. The benefit was recognized and the Applicant can deduct it partially from the IRC collection. The norm that can be understood as being the subject of a restrictive interpretation is that of Article 90, No. 2, paragraph c), insofar as it limits the deductions relating to tax benefits to IRC collection and not to the collection of autonomous taxation, an understanding that – as has been seen – is based on the systematic and teleological element of interpretation and is the only one consistent with the unity of the legal system.

The argument therefore has no foundation whatsoever, it being to be concluded, by all that has been expounded, that there is no place for the deduction of the benefit from the collection of autonomous taxation.

Deduction of Special Payments on Account from the Collection of Autonomous Taxation

1. Based essentially on the same order of considerations, the Applicant further argues the illegality of the self-assessment of the tax insofar as it does not admit the deduction of special payments on account from the collection of autonomous taxation. The special payment on account constitutes – according to its assertion – a forced loan or an autonomous tax and the anti-abuse purpose of autonomous taxation does not prevent the possibility of deducting these payments from the IRC collection, including that resulting from autonomous taxation, through the offsetting of the fiscal credits that such advance payments represent.

Also in this case it is of interest to begin by characterizing the figure of the special payment on account, following the consolidated orientation of arbitral jurisprudence.

The special payment on account was instituted by Decree-Law No. 44/98, of 3 March, by adding Article 83-A to the CIRC, showing itself to be justified through its respective preamble as a measure to combat "evasive practices of concealment of income or inflation of costs" understood as "manifestly generating serious distortions of the principles of equity and tax justice and of economic efficiency itself and harmful to the stability of tax revenues" and from which "results an unjust distribution of the tax burden".

The provisional nature of the payment of the tax resided in the possibility of deducting the amounts paid as PEC from IRC, calculated according to the general terms, fixed in Article 71 of the then-effective CIRC, although that deduction was only possible if, despite that operation, the value of the tax to be paid was positive (Article 71, No. 6 of the 1998 CIRC).

With no tax to pay according to the general terms, the value of PEC satisfied could be carried forward to the following fiscal year (Article 74-A, No. 1) or reimbursed later (Article 74-A, No. 2). It was sought to ensure that the generality of taxpayers satisfied value on account of IRC, calculated provisionally on the volume of business of the preceding fiscal year (Article 83-A).

In fact, it was fictioned that all companies would have by tendency a taxable profit, calculated according to general parameters, equivalent to 1% of their volume of business of the previous year, settling the account later if this were not the case.

The reform of IRC effected in 2000-2001, through Law No. 30-G/2000, of 29 December, reduced the character of payment on account that the tax had, preventing its reimbursement while the taxpayer remained in activity and imposed that the carry-forward of the amounts satisfied was to be made only up to the fourth following fiscal year (Article 74-A, No. 1, of the 2001 CIRC).

From this restrictive norm results, for the first time, the possibility of PEC being transformed into a minimum collection when it was not possible to deduct the amounts satisfied, by exhausting the carry-forward period (in this sense, Teresa Gil, "Special Payment on Account", Tax Review, Year XIV (March 2003) No. 107-108, p. 12).

In summary, it is possible to affirm that the amendments introduced in this reform not only maintained but accentuated the emphasis on combating tax evasion that had motivated the introduction of PEC. However, despite that autonomous taxation already existed at that time, no mechanism for articulation between the two instruments was provided for.

The third configuration of PEC was introduced by Law No. 32-B/2002, of 30 December, which in its Article 27 established a new regime for the deductibility of PEC in Article 87, No. 3, of the CIRC, restoring the possibility of reimbursement of amounts delivered as PEC and not deducted in the annual IRC settlement. The character of a measure to combat tax evasion was also maintained here, although the taint of a minimum collection was lightened, without abolishing it completely, given the tight conditions imposed for reimbursement.

In the effective regime, Article 106 of the CIRC, as amended by Law No. 2/2014, of 16 January, with effect from 1 January 2014, provides that "without prejudice to the provision of paragraph a) of No. 1 of Article 104, the taxpayers mentioned therein are subject to a special payment on account, to be made during the month of March or in two installments, during the months of March and October of the year to which it relates or, in the case of adopting a taxation period not coincident with the calendar year, in the 3rd and 10th months of the respective taxation period".

The caveat contained in the initial segment of the provision seeks to refer to the rules of tax payment applicable to entities that engage, as main activity, economic activity of commercial, industrial or agricultural nature, as well as non-residents with permanent establishment in Portuguese territory, and which, pursuant to that Article 104, No. 1, paragraph a), must proceed to the payment of the tax (...) in three payments on account, due in July, September and 15 December of the own year to which the taxable profit relates or, in the cases of Nos 2 and 3 of Article 8, in the 7th month, in the 9th month and on the 15th day of the 12th month of the respective taxation period (...)".

Again referring to the special payment on account, Article 93 clarifies that the "deduction to which paragraph d) of No. 2 of Article 90 refers is effected from the amount calculated in the return to which Article 120 of the same taxation period to which it relates refers or, if insufficient, up to the 6th following taxation period, after the deductions referred to in paragraphs a) to c) of No. 2 and with observance of No. 9, both of Article 90".

That is, the deduction relating to the special payment on account – like the deduction relating to tax benefits – is effected on the amount of IRC calculated according to that Article 90, being based on the return of the taxpayer's income. And, on the other hand, the deductions relating to the special payment on account are only considered after the deductions corresponding to international legal double taxation, international economic double taxation and tax benefits, and, in any case, a negative result cannot result therefrom, that being the caveat that precisely results from No. 9 of Article 90 of the CIRC.

As is seen, in the effective regime – applicable to the situation at hand – the special payment on account maintains its anti-abuse function. Not only is the deduction effected subsidiarily, but it is also only considered – after other deductions are deducted – up to the limit of IRC collection calculated in the taxation period, implying that deductions can occur up to six following economic fiscal years.

In ultimate analysis, the special payment on account may not be reimbursed either because the taxpayer demonstrates negative fiscal results or because it successively presents insufficient results to absorb the deduction, this because – as has been said – the deduction cannot dispense the taxpayer from a payment of tax that, at a minimum, is embodied in the proper special payment on account.

1. As is known, payments on account correspond to a mechanism of anticipation of the tax that comes to be due finally, permitting the bringing closer of the moment of perception of income to the moment of payment of tax and avoiding the financial advantage that would result for the taxpayer if payment only occurred after the closing of the economic fiscal year. And independently of proceeding to payments on account throughout the year to which the tax relates, which constitutes the common model of payment, the taxpayer is also subject to the special payment on account in the amount corresponding to 1% of the volume of business relating to the preceding taxation period, with a minimum limit of €1,000 and a maximum limit of €70,000, in accordance with the rules of No. 2 of Article 106.

Although payments on account correspond to a tax technique of anticipation of tax revenue, it is important to bear in mind – as has already been set forth – the specific purpose of the special payment on account as a means of preventing tax evasion and ensuring payment of tax by companies in activity.

This purpose was noted in the Decision of the Tribunal No. 494/2009, where it was recorded:

"Notwithstanding that generic matrix, a reading of the legal regime of PEC that is attentive to its genesis and evolution leads to the conclusion that it does not primarily obey the typical logic of a payment on account – that is, primarily, to ensure the public treasury regular entries of funds and, in the second place, to protect the Tax Administration against variations of fortune of the debtor and produce a certain 'tax anesthesia' – but is rather indissociably linked to the fight against tax evasion and fraud."

In that same sense, doctrine points that appears widely referenced in that decision: Teresa Gil, "Special payment on account", Tax Journal, No. 107-108, Year XIV, March 2003, p. 11; Luís Marques, "The special payment on account in the context of the special regime for taxation of corporate groups", Tax Journal, No. 107-108, Year XIV, March 2003, p. 3; José João de Avillez Ogando, "The constitutionality of the special payment on account regime", Journal of the Bar Association, vol. 62, Tome III, 2002, pp. 806 and further 821); Saldanha Sanches/André Salgado de Matos, "The special payment on account of IRC: questions of constitutional conformity, Review of Tax Law and Management, July 2003, p. 10.

The question that arises, in all this context, is whether special payments on account can be deducted from the IRC collection produced by autonomous taxation, in application of the provision of Article 90, No. 2, paragraph d), of the CIRC.

And the answer appears not to be able to be different from that considered with respect to the deduction of tax benefits.

Indeed, the method of calculation of IRC is based on the principle of incidence on taxable profit, whereas autonomous taxation applies to expenses individually considered to which the rate is applicable to each expense, the settlement operation being merely the aggregation, for purposes of collection, of the set of operations subject to autonomous taxation.

As impressively stated in the Constitutional Court Decision No. 617/2012, "contrary to what happens in the taxation of income under Personal Income Tax (IRS) and Corporate Income Tax (IRC), in which the aggregate of income earned in a given year is taxed (which implies that only at the end of that year can the rate of tax be determined, as well as the bracket into which the taxpayer falls), in this case each expense incurred is taxed, considered in itself, and subject to a determined rate, autonomous taxation being calculated independently of the IRC that is due in each fiscal year, because it is not directly related to obtaining a positive result, and therefore subject to taxation."

Furthermore, autonomous taxation, which was initially contemplated separately in extraordinary legislation (Decree-Law No. 192/90) and came later to be integrated in IRC for reasons of tax practicability (Law No. 30-G/2000, which added Article 69-A to the CIRC), constitutes, itself, an anti-abuse measure insofar as it aims to encourage companies to reduce expenses that do not have economic rationale and that may favor tax evasion and fraud.

And, on the other hand, the introduction of the special payment on account through Decree-Law No. 44/98, which added Article 83-A to the CIRC, had the parallel effect of preventing "evasive practices of concealment of income or inflation of costs", subjecting companies to a minimum collection and limiting the possibility of reimbursing the advance payment of taxes through the presentation of negative or insufficient fiscal results.

And, as was weighed in the arbitral decision rendered in Case No. 113/2015, followed by various other arbitral jurisprudence (among others, the decisions rendered in Cases No. 535/2015, 504/2016 and 704/2016), admitting the deduction of special payments on account from the collection of autonomous taxation corresponded to frustrating the ratio legis that inspired the legislator to fix that particular legal regime, permitting that the amounts delivered to the Public Treasury under that heading, to ensure the collection of a minimum collection, were applied to the extinction of the tax debt resulting from autonomous taxation, neutralizing the legislative purpose that underlies the introduction of the new mechanism of special payment on account.

And – it is added now – that possibility would also have the negative effect of annulling the interests of tax policy that presided over the creation of autonomous taxation, which – as has been seen – had in view reducing the tax advantage that the taxpayer could obtain through excessive or economically irrational expenses. That is, the taxpayer could make the legal penalty that autonomous taxation represents cease by applying to the satisfaction of the tax obligation resulting therefrom the special payments on account that were supposed to integrate the amount of tax calculated on taxable profit.

It is therefore justified to effect a restrictive interpretation of the provisions of Articles 90, No. 2, paragraph d), and 93, No. 1, of the CIRC so as to consider that the deductions relating to special payments on account apply to the amount of tax directly calculated on the declared income, with the exclusion of costs that are subject to autonomous taxation.

To this purpose the Applicant further refers to the provision of Article 88, No. 21, of the CIRC, as amended by Article 134 of Law No. 7-A/2016, of 30 March, arguing that such provision is innovative and is not susceptible to retroactive application despite the law having conferred on it an interpretative nature.

As has been said, however, at an earlier moment, with respect to the provision of Article 90, No. 2, paragraph c), which was also the subject of analysis (cf. supra point 8.), the tribunal limits itself to interpreting these other provisions of Articles 90, No. 2, paragraph d), and 93, No. 1, of the CIRC according to the general rules of legal hermeneutics, refraining from applying the provision of the said Article 88, No. 21, of the CIRC, there being no need to discuss whether that provision has or does not have an interpretative character.

For all the reasons stated, the arbitral request also appears unfounded in this regard.

V – Other Requests

Inasmuch as the request for declaration of illegality of the settlement acts that are the subject of challenge is unfounded, the requests made by the Applicant in view of the reimbursement of the amounts paid and the payment of indemnifying interest are prejudiced.

VI – Decision

It is hereby decided:

• To fully reject the arbitral request for declaration of illegality of the self-assessment of IRC relating to fiscal year 2014;

• To dismiss as prejudiced the requests for reimbursement of the amount of € 161,299.22 and for payment of indemnifying interest;

• To uphold the decision to reject the administrative appeal concerning the tax act of self-assessment of IRC relating to fiscal year 2014.

Value of the Cause

The Applicant indicated as the value of the cause the amount of € 161,299.22, which was not contested by the Respondent and corresponds to the value of the settlement that was intended to be opposed, and therefore the value of the cause is fixed at that amount.

Let it be notified.

Lisbon, 3 July 2018

The President of the Arbitral Tribunal

Carlos Fernandes Cadilha

The Arbitrator Member

João Taborda da Gama, dissenting in accordance with the dissenting opinion

The Arbitrator Member

Carla Castelo Trindade

Dissenting Opinion

Dissenting, as to the matter of merit, in accordance with and on the grounds of the decisions previously subscribed to by me, namely in Cases 193/2017-T and 216/2017-T.

The Arbitrator Member

(João Taborda da Gama)

6 July 2018