CAAD Arbitration 704/2015-T: Autonomous Taxation on Vehicle and Representation Expenses Under IRC

ARBITRAL DECISION

The Arbitrators José Pedro Carvalho (Presiding Arbitrator), Paulino Brilhante Santos and Henrique Fiúza, appointed by the Deontological Council of the Administrative Arbitration Centre to form an Arbitral Tribunal, hereby agree:

I – REPORT

On 26 November 2015, A… S.A., taxpayer no. …, with registered office at …, P.O. Box …, …-… …, filed a request for constitution of an arbitral tribunal, pursuant to the combined provisions of Articles 2 and 10 of Decree-Law no. 10/2011, of 20 January, which approved the Legal Regime for Arbitration in Tax Matters, as amended by Article 228 of Law no. 66-B/2012, of 31 December (hereinafter, abbreviated as RJAT), seeking the declaration of illegality of the act of self-assessment of Corporate Income Tax (IRC), for the tax year 2010, in the amount of €209,268.70, as well as of the decision dismissing the request for revision of the tax act, which had the aforementioned act as its subject matter.

To substantiate its request, the Claimant alleges, in summary, that it improperly computed and bore, as Autonomous Taxation, the amount of €209,268.70, relating to expenses incurred with light passenger vehicles or mixed-use vehicles and representation expenses, which should not have been subject to taxation given their essential and indispensable nature for obtaining the Claimant's taxable income and their "business" character, as they were incurred with the purpose of promoting and generating increased sales of the Claimant's brand.

On 27 November 2015, the request for constitution of the arbitral tribunal was accepted and automatically notified to the Tax Administration (AT).

The Claimant did not appoint an arbitrator, and therefore, pursuant to the provisions of paragraph (a) of Article 6(2) and paragraph (a) of Article 11(1) of the RJAT, the President of the Deontological Council of the CAAD appointed the undersigned arbitrators to the collective arbitral tribunal, who communicated acceptance of the appointment within the applicable period.

On 21 January 2016, the parties were notified of such appointments and did not express any intention to refuse any of them.

In accordance with the provisions of paragraph (c) of Article 11(1) of the RJAT, the collective Arbitral Tribunal was constituted on 08 February 2016.

On 15 March 2016, the Respondent, having been duly notified for that purpose, filed its response defending itself by exception and by objection.

On 06 June 2016, the hearing referred to in Article 18 of the RJAT was held, at which the witnesses presented by the Claimant were heard.

Having been granted a period for submission of written submissions, the same were presented by the parties, pronouncing themselves on the evidence produced and reiterating and developing their respective legal positions.

A period of 30 days was set for the issuance of a final decision, following the submission of submissions by the Tax Administration.

The period referred to in Article 21(1) of the RJAT was extended, pursuant to Article 21(2) thereof.

The Arbitral Tribunal has material competence and is regularly constituted, pursuant to Articles 2(1)(a), 5 and 6(1) of the RJAT.

The parties have legal personality and capacity, are legitimate and are legally represented, pursuant to Articles 4 and 10 of the RJAT and Article 1 of Regulation no. 112-A/2011, of 22 March.

The proceedings are free from nullities.

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

Having considered all the foregoing, it is necessary to issue this decision:

II. DECISION

A. MATTER OF FACT

A.1. Facts Established as Proven

1. The present Claimant is a company whose main activity consists, among others, in the trade of motor vehicles.

2. The present Claimant is subject to the General Regime for Taxation of Groups of Companies ("RETGS"), being the parent company of the scope of entities and comprising the following companies:

a. B…, S.A. (NIPC:…);

b. C… – Financial Credit Institution, S.A. (NIPC:…);

c. D…, Unipersonal Limited Liability Company (NIPC:…);

d. E…, Unipersonal Limited Liability Company (NIPC:…).

1. With respect to the 2010 tax period, as the parent company, the present Claimant filed the corresponding substitute income tax return (IRC Form 22).

2. Following the submission of the substitute income tax return, tax assessment no. … was issued, which resulted in a corporate income tax amount due of €0.00 and a total amount due of €594,562.14, paid by the Claimant.

3. The total amount due includes the amount of €226,063.52 relating to autonomous taxation, as shown in field 365 of Form 22 IRC, which related to:

a. €53,926.05 – relating to representation expenses; and

b. €155,342.65 – corresponding to expenses with light passenger vehicles.

1. And further autonomous taxation in the amount of €15,440.39 and €1,354.43, which relate, respectively, to undocumented expenses and expenses with allowances and compensation for travel in personal vehicles of workers in the service of the employer entity.

2. Subsequently, the Claimant considered that, with respect to the amounts of autonomous taxation, an amount higher than what was effectively due was computed and borne, in the amount of €209,268.70, relating to expenses incurred with light passenger vehicles or mixed-use vehicles and representation expenses, and therefore the Claimant filed a request for revision of the tax act, which was dismissed.

3. The decision dismissing such request states, among other things, that:

"The type of charges that the legislator, in that provision, set forth as deductible demonstrates from the outset that this does not concern a matter of presumption of the non-business character of charges subject to autonomous taxation, since these, when subject to autonomous taxation under the terms of the law, have precisely as their prerequisite their prior deductibility and concrete contribution to the formation of the tax base still within the strict sphere of corporate income tax";

"as of the date of the facts (…) are from the outset autonomously taxed by virtue of their ab initio deductibility and, consequently, mitigation of the taxable profit ascertained still within the strict sphere of corporate income tax itself".

1. The representation expenses, as well as the charges with vehicles that were subject to taxation, fall within the communications and marketing strategy previously defined and scheduled by the Group to which the present Claimant belongs.

2. The organization of events and the use of vehicles aim to consolidate the values of the F… brand.

3. Likewise, with respect to the G… brand, the use of vehicles, the promotion and organization of events and test drives also aim at the dissemination of the brand and its respective values.

4. The Claimant had a focus on building and promoting the images of the brand, and the ultimate objectives of such strategies were to enhance contact between the brands and the public, attract customers and make sales.

5. The events held pursued previously defined objectives and followed previously established parameters, aiming at an effective positioning in relation to customers and potential customers, with importance given to the message to be conveyed to customers, gifts to be offered, aspects such as space organization, necessary logistical requirements, so that the best possible image of the brand would be disseminated.

6. In the organization of events (whose dissemination occurred through various means: invitations, press advertising, social media, etc.), it was potential customers who traveled to such events.

7. The automotive sector was one of the most affected by the financial crisis that began in 2008.

8. In 2010, the Group to which the present Claimant belongs sold 9,010 units of the F... brand, which represented a market share of 4.03%, being the 11th automotive brand in terms of market share in Portugal.

9. With respect to the G… brand (also sold by the Claimant), 2,544 vehicles were sold, representing a market share of 1.14%.

10. In 2011, the number of sales of the F… brand was 7,083, and the market share rose to 4.62%, having been the 9th automotive brand in terms of market share in Portugal.

11. According to documents relating to the brand's communications strategy, the objectives of the campaigns were as follows:

a. Campaign H…: "to show that the offering is an opportunity not to be missed (support sales)" and "take the opportunity to boost demand for N…";

b. Campaign I…: "support sales of the I… range";

c. Test drive campaigns: "commercial action to support sales";

d. Campaign J…: "Generate buzz around the product and brand";

e. Monitoring campaigns: "Multiplier effect for the entire F… range";

f. Campaign K…: "Reposition the price and promote product contact" and "increase sales volume";

g. Campaigns L… and M…: "Reinforce fascination with the brand".

1. During the tax year under examination, the Claimant bore autonomous taxation relating to representation expenses in the amount of €53,926.05.

2. Such expenses refer, among others, to the rental of spaces, advertising expenses, as well as catering expenses, related to the holding of promotional actions for products sold by the present Claimant, which aim at the dissemination of brands and models sold by the group, taking into account the marketing plan defined for each of the models sold.

3. The Claimant held two significant promotional events during the year 2010.

4. The event designated "Presentation of New I… … in ..." (cf. Doc. 8), resulted in an investment made by the present Claimant, with such event having been attended by various customers and potential customers, allowing the public to become acquainted with a new model sold by the Group, and the obtaining of contacts of potential customers.

5. The event designated "…" was an event held in the same year and directed at promoting products of another brand sold by the Group O…, the G….

6. The aforementioned events were subject to media coverage by the press.

7. These events aimed to promote the brand and increase market share, by disseminating new models sold by the Group to the public, both directly (with event participants) and indirectly (through the dissemination of events and brand models to the press), such events being fundamental for the dissemination of the brands.

8. Through the aforementioned events, the Claimant advertised the brand and its products and, on the other hand, made contacts with potential customers and achieved actual sales, both in real time and through subsequent contacts.

9. The Claimant, in the tax year in question, bore autonomous taxation relating to charges with vehicles in the amount of €155,342.65, with the understanding being that expenses with vehicles are hereby included under Article 88(3)(a) and (b) (as worded on the date of the facts).

10. All expenses with light passenger vehicles were incurred in vehicles of the brands and models sold by the Claimant.

11. The use of vehicles of all brands and models sold by the Claimant emphasized branding and aimed at the promotion of the brand.

12. The Claimant aimed to rotate the assignment of all types of brands and models among its employees, from the perspective of promoting all existing brands and models for sale on the market.

13. The vehicles assigned to the Claimant's employees were subject to requisition for demonstration events.

14. The combined fleet of Companies D… ("D…") and A… ("A…") represents €129,045.94, compared to the total amount of autonomous taxation with vehicles, in the amount of €155,342.65.

15. The fleets of said Companies had the following allocation:

[Table with vehicle distribution by employee category:]

1. The items identified with (*) represent 71.43% of the vehicle fleet of the Group Companies, and correspond to functions requiring displacements on a daily basis, which would be impossible to carry out without a vehicle.

2. The vehicles identified as "pool/demonstration/loans", used in a "pool" arrangement, were:

a. used by potential customers (in test drives);

b. used at events as demonstration vehicles; or

c. were loaned to be used and circulate with advertising purpose (for example, vehicles loaned to public figures for specific events).

1. The Claimant's commercial employees, to whom the functions of visits to dealerships fell, could not carry them out in vehicles of competing brands.

2. The Claimant's employees promoted the I… and G… brands and contacted customers and potential customers located in the most varied geographic areas of the Country.

3. The use of I… and G… vehicles by employees with other functions also made it possible to enhance the exposure of the brand to the market.

4. The assignment of vehicles to these employees was defined by the Commercial Department based on the desired positioning and the promotion envisioned for the brands/ranges of vehicles, with that department defining, for example, colors of vehicles, extras, upholstery, etc. for vehicles assigned to employees based on the business/promotional parameters in effect for a given period/campaign.

5. Vehicles were only assigned from the Claimant's brands because the granting of I… and G… brand vehicles to its employees was considered important for reinforcing the institutional image of the brands.

6. The light passenger vehicles used by the Claimant's employees were working instruments that allowed such workers to move within the national territory, thus fulfilling the functions to which they were assigned within the scope of their employment relationship with the Claimant.

A.2. Facts Established as Not Proven

1. That the Claimant's employees who used the light passenger vehicles did not also use them for purposes of their personal life.

A.3. Substantiation of Proven and Not Proven Facts

With respect to factual matters, the Tribunal need not pronounce itself on everything alleged by the parties; rather, it has the duty to select the facts that matter for the decision and discriminate between proven and not proven facts (cf. Article 123(2) of the CPPT and Article 607(3) of the CPC, applicable by virtue of Article 29(1)(a) and (e) of the RJAT).

In this manner, the relevant facts for judgment of the case are chosen and delimited according to their legal relevance, which is established in light of the various plausible solutions of the legal question(s) at issue (cf. former Article 511(1) of the CPC, corresponding to current Article 596, applicable by virtue of Article 29(1)(e) of the RJAT).

Thus, having regard to the positions assumed by the parties, in light of Article 110(7) of the CPPT, the documentary and witness evidence and the administrative procedure file attached to the record, the facts listed above were considered proven as relevant to the decision.

For the establishment of the facts contained in items 9 to 14, 19, 22 to 24, 26, 27, 29 to 32 and 35 to 42, the testimony of the witnesses examined was considered, who testified thereon revealing direct knowledge and in a coherent manner, with no reason to question their veracity.

In particular, the fact established under item 21 derives from what was alleged by the Claimant itself in point 93 of its initial Request, where it states that the representation expenses in question refer "in particular" to the type of expenses listed in the item in question. The testimony of the witnesses examined was also considered, who, although they tried to explain that the expenses in question relate exclusively to marketing and brand promotion events, excluding any other expenses of the same nature incurred in other contexts, ultimately acknowledged that the Claimant also incurred expenses relating to meals offered by administrators and directors to customers and others, expenses which, according to the witness P…, director of finance and accounting of the Claimant, would not be covered by the amount of €53,926.05, whose cancellation is petitioned, having been accounted for and subject to autonomous taxation separately, which, however, does not prove to correspond to reality, as from the analysis of documentation available in the case, it is verified that in the tax year in question, the total value of autonomous taxation assessed and paid by the Claimant is broken down as follows: vehicle expenses - €155,342.65; representation expenses - €53,926.05; undocumented expenses - €15,440.39; allowance expenses - €1,354.43. Therefore, it is manifest that the value of €53,926.05 includes not only expenses related to the situations listed in item 21, but others, such as those mentioned, relating to meals offered by administrators and directors to customers and others.

The fact established as not proven also derives from the witness evidence produced, which acknowledged that personal use of the vehicles in question was not prohibited, although its use was restricted to national territory, which, moreover, is admitted by the Claimant itself in its submissions (item 42), where it states that "In practice there is a 'pool' of vehicles that are used by employees, journalists, customers, potential customers, public figures, dealerships or, simply, displayed at events" (emphasis ours).

B. ON THE LAW

i. On the Exception

Prior to the discussion of the merits of the case, the Tax Administration raises the question of the lack of material competence of the arbitral tribunal arising from the fact that the request for arbitral determination was formulated following dismissal of a request for official revision.

The Respondent argues, then, that the request for arbitral determination sub judice is formulated following the dismissal of a request for official revision of the act of self-assessment of corporate income tax (IRC) for the year 2010, filed on 29 May 2015, that is, in circumstances of time in which the period for administrative objection referred to in Article 131 of the CPPT had already expired, and therefore, given the provisions of Articles 2(1)(a) and 4(1), both of the RJAT, and Articles 1 and 2(a), both of Regulation no. 112-A/2011, of 22 March, the lack of material competence of the present Arbitral Tribunal would verify to examine and decide the request.

The Tax Administration bases its understanding essentially on the provision of Article 2(a) of Regulation 112-A/2011, of 22 March, which excludes from the disputes cognizable by arbitral tribunals operating at the CAAD, the "claims relating to the declaration of illegality of acts of self-assessment, withholding at source and payment on account that have not been preceded by resort to the administrative proceedings under Articles 131 to 133 of the Code of Tax Procedure and Process".

The Respondent understands, in light of this provision, that the same should be understood in the literal sense in which it reads it, excluding from the scope of tax arbitral jurisdiction claims relating to the declaration of illegality of self-assessment acts that have not been preceded by administrative objection under the cited provisions of the CPPT.

All of the Respondent's argument on the matter, however, ends up being reduced to sustaining that it was the legislator's intention to restrict the competence of tax arbitral jurisdiction with respect to knowledge of illegalities of self-assessment acts solely to situations in which there exists an administrative objection filed under Articles 131 to 133 of the CPPT, as that is what, in its reading, the text of the provision being interpreted says.

With all due respect, no substantial reason is discerned among those offered by the Respondent that explains the rationale of the position it sustains. Indeed, no substantial reason is apparent – and the Respondent offers nothing to that effect – for why, given the conditions and specificities inherent to each of the administrative remedies in question, in the same manner in which tax tribunals are bound, the legality of self-assessment acts subject to a request for official revision, filed beyond the period for administrative objection, should not be cognizable in arbitral proceedings.

Furthermore, even a literalistic reading of the provision in question, insofar as it is properly contextualized, does not inevitably lead to the result advocated by the Respondent in the present case.

In effect, the expression used by the provision of Article 2(a) of Regulation 112-A/2011, of 22 March is parallel to the provision of Article 131(1) of the CPPT, which should be understood as a specification of the acknowledged, and peacefully recognized, legislative intention that the arbitral tax process constitute an alternative procedural means to the process of judicial challenge.

The provision in question should also be understood as being explained by the circumstance that, absent its express statement – and given the content of Article 2 of the RJAT – it would be possible to directly challenge self-assessment acts, without precedence of prior administrative determination.

That is, given that under the RJAT it was not configured as necessary any administrative intervention prior to arbitral challenge of a self-assessment, the content of the Regulation should be interpreted as equating – in this matter – the arbitral tax process to the judicial challenge process and not, as would follow from the position sustained by the Respondent, moving from 80 to 8, taking a challengeability broader than possible in Tax Tribunals, and transmuting it into a more restricted one.

Thus, no reason is seen – and, once again, no assistance does the Respondent provide in that sense – for interpreting one and the other provision differently, all the more so since the letter of the provision of Regulation 112-A/2011, of 22 March, ends up being less restrictive than that of the CPPT, insofar as it does not integrate the word "necessarily" nor does it refer to "administrative objection" but to "administrative proceedings". Therefore, a reading of the very letter of the law is possible that confines itself to the sense that only excluded from the scope of tax arbitral jurisdiction is the knowledge of claims relating to the declaration of illegality of self-assessment acts, withholding at source and payment on account that have not been preceded by resort to administrative proceedings in terms compatible with Articles 131 to 133 of the CPPT.

And it is this reading that is subscribed to, following the Decision rendered in case 48/2012T of the CAAD, and subsequent arbitral jurisprudence, as well as the doctrine that has been forming, not discerning, insofar as the interpretation effected is contained in the letter of the law, that any breach of a constitutional provision may follow therefrom, notably, of the cited Articles 2, 3(2), 111 and 266(2), all of the Constitution of the Portuguese Republic (CRP).

Thus, and in light of all that has been set forth, the Respondent having no reason on this matter, the exception regarding lack of competence of the Arbitral Tribunal should be adjudged unsubstantiated.

ii. On the Merits of the Case

The questions that arise in the present case, as they were explicitly formulated by the Claimant are to determine, first, whether the provision on which the autonomous taxation that it contests is based has an underlying presumption, if in the affirmative, whether it will be legally possible to rebut such presumption, and finally, whether in the present case, the Claimant succeeded in doing so.

Let us proceed then.

The autonomous taxation in question in the present case concerned expenses of the Claimant with vehicles and representation expenses.

In this regard, Article 81 of the CIRC in force on the date of the taxable facts in question in the case (current Article 88), insofar as relevant here, provided that:

"3 - The following are subject to autonomous taxation, excluding vehicles powered exclusively by electrical energy:

a) At the rate of 10%, deductible charges relating to representation expenses and those related to light passenger or mixed-use vehicles, motorcycles or mopeds, incurred or borne by taxpayers not subject to exemption and that carry on, as their main activity, a commercial, industrial or agricultural nature activity;

b) At the rate of 5%, deductible charges borne by taxpayers mentioned in the preceding item, relating to light passenger or mixed-use vehicles whose certified homologated levels of CO2 emissions are below 120 g/km, in the case of vehicles powered by gasoline, and below 90 g/km, in the case of vehicles powered by diesel, provided that, in both cases, a certificate of conformity has been issued. (...)

5 - Charges related to light passenger vehicles, motorcycles and mopeds are considered to include, in particular, depreciation allowances, rents or leases, insurance, maintenance and conservation expenses, fuel and taxes levied on their possession or use. (...)

7 - Deductible charges relating to representation expenses are subject to autonomous taxation at the rate of 10%, being considered as such, in particular, expenses borne with receptions, meals, trips, outings and entertainment offered in the Country or abroad to customers or suppliers or to any other persons or entities."

Thus, and in sum, what is at issue is to determine the ratio legis of the provisions transcribed above, verify whether the same is based on a presumption and, if the answer is affirmative, whether the same was, or was not, in this case, rebutted.

These questions have already been addressed in case 628/2014T of the CAAD, whose arguments will be followed closely here.

When one speaks of autonomous taxation, as is the case, it is convenient from the outset to bear in mind that what is at issue is a set of disparate situations, which will encompass, at least, three distinct types, namely:

• Autonomous taxation of certain income (e.g., nos. 3, 5 and 6 of the PIT);

• Autonomous taxation of certain deductible charges (e.g., nos. 3 and 4 of Article 88 of the CIRC);

• Autonomous taxation of other charges regardless of their deductibility (e.g., Articles 1 and 2 of Article 88 of the CIRC).

This precision becomes important since it is understood that, given the disparity and heterogeneity of situations subject to autonomous taxation, it will be in this context not only unnecessary but even counterproductive the effort to synthesize and seek an own legal nature and a unified one, common to all such situations.

The nature of the specific autonomous taxation in question in the present case has been the subject of extensive discussion in recent doctrine and jurisprudence.

A strong current has viewed them as a tax on expenditure, which would tax certain types of expenses, in a manner totally disconnected from income, to the point that some argue that they constitute a tax in itself, which would only casually be integrated into the IRS and IRC codes.

Nevertheless, the understanding that autonomous taxation on deductible charges, as are those at issue in the present case, still integrate the regime of taxes regulated by the codes in which they are integrated, recurring acceptance has been obtained in the jurisprudence of the CAAD, aiming, albeit in a convoluted manner, at the income taxed by those.

Naturally, those who consider the autonomous taxation now occupying us a tax directly incident upon expenditure, would conclude that the provisions under interpretation, Article 81, nos. 3(a) and 7 of the CIRC in force on the date of the taxable facts, will not integrate any presumption, directly formulating the object of its incidence – the expenditure.

It is not considered, however, that this is the most correct understanding, instead understanding that the autonomous taxation in question could be configured as a "hybrid" tax, incident upon the income of natural and legal persons, and not on consumption or expenditure, as they do not present the main characteristics of this form of taxation, nor do they equally impact upon patrimony, and fitting within a problematic of taxation of income with respect to which the legislator understood to act at two levels (separately or simultaneously): not to accept the deductibility of some expenses, in whole or in part, and/or to tax them autonomously.

Within this framework, the autonomous taxation now in question in the case will integrate, among other things, the list of specific anti-abuse provisions, with the similarity being apparent, for example, with the provision of current Article 65(1) of the CIRC, which provides that:

"Amounts paid or owing, on any account, to natural or legal persons resident outside Portuguese territory and there subject to a clearly more favorable tax regime are not deductible for purposes of determining taxable profit, unless the taxpayer can prove that such charges correspond to actually performed operations and do not have an abnormal character or an exaggerated amount."

That is, in the cases to which the autonomous taxation borne by the Claimant in the case refers, the legislator could have opted for a regime similar to that set out in the provision transcribed, simply barring their deductibility, or conditioning it in the same terms of that provision, or in other terms it deemed appropriate. Instead, the legislator opted not to go so far, with the IRC legal regime on the expenses in question remaining at a level below that, by allowing the deductibility of the charges in question, against the immediate payment of a portion of the taxable profit that, present or future, will be affected by such deduction.

Nevertheless, the similarity of the regimes, as well as the concerns and purposes underlying them, will still be undeniable.

What has just been said thus has underlying it the finding that autonomous taxation, including those in question in the case, owes much of its reason for existence to the circumstance that it will, objectively, be unviable to fully tax on a strict basis, under the PIT, the potential beneficiaries of the expenses subject to it (which would be equivalent to taxation of fringe benefits as it was conceived and applied in Australia and New Zealand). It is not therefore ignored that autonomous taxation of the type that concerns us here has a facet directly directed toward the income of natural persons. Just as they have, moreover, a sanctioning facet – in the sense of imposing unfavorable treatment – with respect to the type of expenses that trigger them. However, these facets do not empty, nor least of all, prevent, another facet, equally (if not more) relevant, indissociably interlinked with income, in this case, of legal persons.

It is therefore understood that, by way of the impositions in question, it is also aimed, at least to the same extent, to discipline the use by companies of expenses that may be necessary, in part, for the pursuit of normal activity, but which – on the basis of a judgment of normalcy – will also be for the benefit of natural persons who end up enjoying them in a personal and not professional capacity. Only that, not having the Tax Administration any "measuring tape" to make such separation, the legislator has been opting, for quite some time now, for the introduction into the IRC Code of this portion that it already considered objectively, on the date of the case, an imposition, at minimum, similar to the IRC, even if such arrangement can be questioned (as can the current wording, regarding the inclusion in the IRC, of autonomous taxation in Article 23-A of the IRC Code).

It is recognized here, thus, those characteristics that doctrine has been pointing to autonomous taxation in question for some years now, such as:

a) autonomous taxation only makes sense because costs/expenses are relevant as negative components of IRC taxable profit. This is what motivates IRC taxpayers to report as high a value as possible of such expenses to decrease the taxable basis of IRC, the tax collection, and consequently the tax to pay;

b) it is intended to discourage this type of expenses in taxpayers that present negative results but which, regardless thereof, continue to evidence structures of consumption little or not at all compatible with the financial health of their businesses;

c) it is, in more general terms, to shape the tax system so that it reveals a certain balance with a view to a better distribution of the actual tax burden among taxpayers and types of income;

d) certain expenses are regarded unfavorably where, admittedly, it is not easy to determine the exact measure of the component that corresponds to private consumption, and with respect to which the general practice of abuse in their reporting is known.

Better or worse, the autonomous taxation now occupying us should thus be understood as a means of preventing certain actions considered abusive, which the "normal" functioning of the taxation system was unable to prevent, and other means of combating such actions, including more burdensome means for the taxpayer, were possible.

This anti-abuse character of the autonomous taxation now occupying us will be not only consistent with its "anti-systemic" nature (as happens with all provisions of the genre), as well as with a presumptive nature, pointed out both by Professor Saldanha Sanches and by the jurisprudence that often cites him.

From the perspective that has just been set forth, the autonomous taxation in analysis will then materially have underlying a presumption of "partial" business character of the expenses on which they impact, based on the above-pointed circumstance that such expenses are situated in a gray area that separates what is business expense, productive, from what is private expense, consumption, and that, notoriously, in many cases, the expense will effectively in reality have a dual nature (part business, part personal).

Confronted with such difficulty, the legislator, instead of simply setting aside its deductibility, or inverting the burden of proof of the business character of the expenses in question (imposing, for example, the demonstration that "they do not have an abnormal character or an exaggerated amount", as it does in Articles 65(1) and 88(8) of the CIRC), opted to establish the regime currently in force, which, nevertheless, has precisely the same foundation, the same purpose, and the same type of result, as other forms used in other typical situations of the regime (in this case) of the IRC.

Thus, from the known fact that is the realization of certain types of expenses, the legislator draws the unknown fact, which is the assessment of the degree of business affectation of the product of such expenses.

And it will be this unknown fact, presumed by the legislator, that triggers and justifies the autonomous taxation in question in the present process. In effect, it was because it presumed that the expenses on which such autonomous taxation bears have, as a rule, mixed affectation, and therefore there is an unjustified benefit in their full deduction, that the legislator began, in a first phase, to limit the percentage of those it admitted as deductible. Subsequently, for reasons that will matter little to the case, but which may pass through budgetary constraints, on the one hand, and the necessity to ensure the taxation of eventual benefits that private parties might derive from such expenses, the legislator adopted the current model of autonomous taxation of the expenses now occupying us. But this did not exclude, but rather complemented, that primitive motivation to tax, adequately, the income of legal persons, distorted by the deduction of expenses, which the legislator presumes of affectation not wholly business. That is: the budgetary and, eventually, fringe benefits taxation purposes, which may assist the current regime of autonomous taxation occupying us, do not exclude, but rather rest on, the aforesaid presumption of "partial business character" of the expenses on which they bear (and, complementarily, on the distortion of the taxation of the income of legal persons resulting therefrom).

In light of the conclusion that has just been reached, it is then necessary to determine whether the presumption that has been identified is, or is not, susceptible to being rebutted.

In this regard, Article 350(2) of the Civil Code provides:

"Legal presumptions may, however, be rebutted by contrary evidence, except in cases where the law prohibits it."

In coherence, Article 73 of the LGT provides:

"Presumptions enshrined in provisions on tax incidence always admit contrary evidence."

In light of the legal framework pointed out, it must be concluded that the presumption of "partial business character" in question should, in coherence, be considered as covered by the possibility of rebuttal generically enshrined in Articles 350(2) of the Civil Code and 73 of the LGT, either by the taxpayer or by the Tax Administration, which, moreover, appears to be consistent with a proportionate and adequate distribution of the burden of proof, insofar as the autonomous taxation in question bears upon expenses of business character not from the start evident, it will be the taxpayer that will be better positioned to demonstrate that such requirement is verified in concreto.

For its part, the Tax Administration itself, if it so wishes and considers that the case justifies the inherent expenditure of resources, may always demonstrate that, with respect to the expenses in question, and even though autonomous taxation has been imposed on them, the general requirement of Article 23(1) of the CIRC is not verified, namely its indispensability for the realization of income subject to tax or for the maintenance of the productive source.

Thus, and in sum, the autonomous taxation whose burden the Claimant seeks to have subtracted from its taxable profit may be viewed as a sort of consensual anti-abuse provision, in which the legislator proposes to the taxpayer one of three alternatives, namely:

a) not to deduct the expense;

b) to deduct but pay the autonomous taxation, dispensing itself, both itself and the Tax Administration, from discussing the question of the business character of the expense;

c) to prove the full business character of the expense, and deduct it fully, not bearing the autonomous taxation.

The recognition of this presumptive nature of the autonomous taxation in question in the case, in the terms set out above, will, apart from everything else, be a safeguard for its constitutionality, in that it will be guaranteed both the possibility of its full deduction by the taxpayer, and its non-deduction, depending on which side the presumption underlying it is, concretely and in each case, rebutted, thus ensuring, duly, the conformity of the legal regime in question with the principles of tax equality and taxpaying capacity, which would be unnecessarily (and, occasionally, as is the case, disproportionately) truncated, by the establishment of an irrebuttable presumption of the partiality of the business affectation of the expenses in question.

Having arrived here, it becomes necessary, then, to assess whether, in concreto, the presumption of the provision of Article 81, nos. 3(a) and 7, of the CIRC in force on the date of the taxable facts, above determined, was, or was not, rebutted.

Beginning with no. 3, paragraph (a), what is at issue is, as the Claimant itself recognizes, vehicles that indistinctly "are used by employees, journalists, customers, potential customers, public figures, dealerships or, simply, displayed at events".

It was further verified, resulting expressly from the testimony of the witnesses examined, that the use of the vehicles in question by the Claimant's employees is not limited, exclusively, to professional purposes, with such use being permitted in their personal lives.

Therefore, it was not proven that the Claimant's employees who used the light passenger vehicles did not also use them for purposes of their personal life, a circumstance that prevents the presumption of partial business character of the expenses in question from being considered rebutted, which in the case is seen to be confirmed.

Effectively, and notwithstanding the Claimant's allegation that, by enabling its employees the use of vehicles it allocates to advertising and brand promotion purposes, it intends to pursue such purpose, the fact is that, concurrently, it is enabling them to receive in-kind income, that is, genuinely conferring on them fringe benefits.

It is thus understood that the judgment of business character underlying the presumptions in question is of an objective nature, that is, formulated in the face of the situation of fact as it is configured in its entirety legally relevant, and not of a subjective nature, attending solely to the purpose(s) of the taxpayer(s) involved.

From the perspective that is understood to be correct, it will thus be inescapable that by enabling the use of the vehicles in question to its employees in their private lives, it was also deferring to them a non-taxed patrimonial benefit, a fact it could not ignore, and placing thus, albeit partially, the product of the expenses in question, at the service of private purposes and, as such and to that extent, not exclusively business.

And it is not to be said, as the Claimant attempts, that the particular use by its employees aims further at business purposes of advertising and brand promotion.

In effect, and first of all, within the scope of their private lives – by principle – the Claimant's employees will be as suited to promote the brands of the latter by means of the circulation of vehicles, as, from the start, any other person, all the more so that if, in many contexts, the said employees may be recognized as such, in many others they will not be.

On the other hand, and always within the scope of the use of the vehicles within the scope of the private lives of the Claimant's employees, while it is possible that, in certain circumstances, the use of the Claimant's vehicles may have for it a positive return at the level of image, it will be far more normal that, in the majority of circumstances, such use has a neutral effect, nor failing to be possible that it might have, at times, a negative effect, such as if they were parties to a traffic accident, if they were used in means and socially negatively valued situations, or if they were used in the commission of illicit acts.

In light of all that has been set forth, it must be adjudged that the Claimant has not fulfilled the burden incumbent upon it to rebut the presumption of partial business character of the expenses in question, and therefore the arbitral request should, in this part, be adjudged unsubstantiated.

With respect to the expenses subject to autonomous taxation under no. 7 of Article 81 of the applicable CIRC, it was proven that they refer to the rental of spaces, advertising expenses, as well as catering expenses, related to the holding of promotional actions for products sold by the present Claimant, among others.

In other words, it was not proven, in the terms better discriminated in the substantiation of the factual matter, that the expenses in question concerned solely expenses arising from events exclusively directed at promoting the image and brands of the Claimant, inserted in a properly structured marketing strategy and proportional to the economic context of the operator in question, so that it could be considered demonstrated, beyond any reasonable doubt, as occurring in an exclusively business context, with no room for its employees, corporate bodies, partners or third parties to derive benefits from the expenses in question for personal purposes.

In this context, it is therefore concluded that the presumption of Article 81(7) of the CIRC in force on the date of the taxable facts shall not be considered rebutted, and therefore, not being demonstrated that the expenses on which the autonomous taxation in question bears had 100% business affectation, they may not fail to be subject to the incidence of such taxation.

In light of the foregoing, the present arbitral action should, also in the part in question, be adjudged unsubstantiated and, consequently, the tax act subject to the present arbitral process maintained.

C. DECISION

The Tribunal therefore decides to adjudge unsubstantiated the arbitral request formulated and, in consequence, to maintain the tax act subject to the present arbitral tax process, and to condemn the Claimant in the costs of the process.

D. Value of the Case

The value of the case is fixed at €209,268.70, pursuant to Article 97-A(1)(a) of the Code of Tax Procedure and Process, applicable by force of paragraphs (a) and (b) of Article 29(1) of the RJAT and of Article 3(2) of the Regulation of Costs in Tax Arbitration Proceedings.

E. Costs

The value of the arbitration fee is fixed at €4,284.00, pursuant to Table I of the Regulation of Costs in Tax Arbitration Proceedings, to be paid by the Claimant, since the request was entirely unsubstantiated, pursuant to Articles 12(2) and 22(4), both of the RJAT, and Article 4(4) of the cited Regulation.

Let notice be given.

Lisbon, 8 October 2016

The Presiding Arbitrator

(José Pedro Carvalho - Rapporteur)

The Vogal Arbitrator

(Paulino Brilhante Santos – Dissenting with Declaration of Vote)

The Vogal Arbitrator

(Henrique Fiúza)

Declaration of Vote

Following Professor Doctor J. Saldanha Sanches, the best doctrine accompanying him and the jurisprudence of the CAAD, I agree with the possibility of rebutting the presumption contained in Article 81 of the Code of Corporate Income Tax (IRC) in force on the date of the taxable facts as in the arbitral decision that obtained the majority. Additionally, I emphasize that the establishment in this legal provision of an irrebuttable presumption considered as a kind of tax on expenditure would violate the Directives of the European Union on Value Added Tax (VAT), which do not permit the introduction of any other general tax on expenditure nor this eventual type of special tax on consumption relating to expenses subject to VAT, and therefore autonomous taxation bearing on representation expenses and on motor vehicle expenses, among others, can only be regarded as part of a mechanism for taxation on income albeit something imperfect or somewhat skewed as the arbitral decision that obtained the majority aptly clarifies. More decisively yet, any contrary understanding would violate the provisions of Article 104(2) of the Constitution of the Portuguese Republic which enshrines the principle and legislative command determining that the taxation of companies shall be by actual profit. I believe, therefore, that no interpretation of the provision of Article 81 of the IRC Code in force on the date relevant to the present case – current Article 88 – could fail to recognize the susceptibility of rebutting the presumption of business character of the expenses provided for in such provision, under penalty of an interpretation that would violate the Constitution and European tax law, which prevails over Portuguese domestic tax law.

However, it is my understanding that the Claimant, in this case, actually succeeded in fulfilling the burden of proof to which it was obliged, thus having succeeded in rebutting the presumption of the then current Article 81 of the IRC Code that was in force at the time of the taxable facts of this case, contrary to the learned arbitral decision that obtained the majority.

Regarding the vehicles used by the Claimant, it was proven that employees are not authorized to use any brands or models of any kind other than those sold by the Claimant or companies of the Group. Given the considerably higher prices of such vehicles compared to similar brands and models available on the market and the frequent exchanges of vehicles that the Claimant's employees are required to make according to the Claimant's commercial interests at each moment, on the occasion of the launch or promotion of one or another brand or model, it does not appear to leave much doubt that such automobiles are used for the promotion of such brands or models. Added to this is the fact that there is no allocation of a given vehicle to any given employee of the Claimant specifically and concretely identified, so one cannot speak of a clearly personal and identifiable economic benefit, contrary to the common situation of assignment of automobile as part of remuneration (in kind) to workers.

According to my understanding, in modern marketing, the principle and practice prevails that each employee of a company is the face of the company before the public, and therefore it is well understood that it is the Claimant's employees who are first called upon to promote and exhibit the vehicles sold by the Claimant and companies of its Group. The learned arbitral decision that obtained the majority sustains that in some cases, such efforts, with respect to less zealous employees might have a neutral result or even negative result, in the case of employees with deviant professional and or personal behavior or even criminal. It is certain that even a company and business group such as that led by the Claimant cannot be sheltered from one or other less zealous employee and even from one or other sporadic employee with improper, negative and or, at the limit, criminal behavior. But if this case is situated, in this manner, in the field of behavior, it should also be recognized that the Claimant, being the great multinational company that it is, certainly places great attention and care in the selection of its employees to prevent less zealous persons and especially persons with propensity toward negative, deviant and criminal behavior from being hired and will certainly promote their removal from the few who have managed to pass through the sieve of its rigorous human resources selection. In any case, it must be conceded that in terms of management we would certainly be considering the exception and surely not the rule. In the planning and management of the Claimant, the obligation of its employees consists in the promotion and dissemination of the brands and models of automobiles sold by its business group and by the greater visibility of such vehicles and the highly professional structure of the Claimant ensures that in rule such will occur, except for inherent mishaps always inherent in human unpredictability and life. I do not believe, therefore, that this single argument of the fallibility inherent in all plans and in the best management can serve, by itself, as an argument to demonstrate that the Claimant did not succeed in satisfying the burden of proof incumbent upon it.

Moreover, the main use of the automobiles registered by the Claimant and other companies of its Group are not even, as witness testimony which is deemed reliable would indicate, related to employees of the Claimant or of Group companies. Rather they relate to test drives for customers or potential customers ("test drives"), brand and model promotion events, vehicle demonstrations, vehicles used in after-sales and technical assistance services, events at racetracks and loan of vehicles to journalists for purposes of promoting them in media outlets. In this regard, the learned arbitral decision that obtained the majority is entirely silent. Now, these other uses of the vehicles are essential and the business character of the inherent expenses, widely proven by the Claimant both documentally and through testimonies that were not called into question is indisputable.

It is my conviction that the Claimant demonstrated that consisting of its commercial activity in the sale of vehicles, the use it makes of light automobiles cannot help but, in the present case, fail to be considered as having a clearly business objective, nor can it be confused with personal use of vehicles even if accessorily such may benefit its employees, for the reasons invoked above. In deciding otherwise only on the ground that the "pool" of vehicles allocated to such purposes of promoting the brands and models of automobiles sold by the Claimant and companies of its Group, the learned decision that obtained the majority did not attend to this specificity of the Claimant's main commercial activity.

As I further consider that the Claimant clarified that the item of representation expenses, having been purged of amounts that could be subject to autonomous taxation, referred to expenses with events, including rental of spaces and catering expenses at events, all duly budgeted in marketing plans, accounted for with rigor and whose results in commercial terms were even evaluated by its marketing department. At the time of the hearing, no doubts or relevant questions were raised at the appropriate time in this regard, it being certain that it would be incumbent on the arbitral tribunal to clarify them. The facts alleged by the Claimant regarding these representation expenses were, moreover, admitted by agreement, given that at no moment, from the administrative process to the present case, were they ever challenged by the Respondent Authority. Thus and in the absence both of objection and of the exercise of the arbitral tribunal's investigatory power, it is not understood how the testimony, moreover, judged suitable, produced as evidence at the hearing is not accepted.

I formed the conviction that the Claimant in using the expression "in particular" or "among others" merely wished to express that among the expenses with test drives, trips to make known the automobiles sold by the Claimant, promotion of events for disclosure of new models of automobiles and other similar marketing actions, it included, among the most significant expenses, the rental or lease of spaces, catering expenses and costs associated with the automobiles involved in such actions and events, with there still being other minor expenses accounted for that may not have been detailed. However, I believe that the Claimant treated such other expenses as of the same type or nature and not as typical representation expenses subject to autonomous taxation that it should discriminate and subject to this specific taxation.

But even if this portion of representation expenses could be considered as more difficult to prove, the expenses with motor vehicles in an amount corresponding to about two-thirds of the request formulated by the Claimant in its learned Initial Request should always be considered as substantiated as proved, and therefore, at least partially, in light of what was stated above, the Claimant's request, even if partially, should have been adjudged substantiated as proved (albeit, in my understanding, it should have been in its entirety).

It is admitted that in the future the Claimant should have greater rigor in the analytic accounting of expenses that, as the learned decision that obtained the majority seems to recognize, may, notwithstanding their characterization as expenses relating to motor vehicles and representation expenses, admit proof to the contrary regarding their business character, especially in light of the specificity of the economic activity of the Claimant and of the companies of its Group consisting precisely in the trade of motor vehicles. However, I believe that it offered documentary and witness evidence sufficient to satisfy the burden of proof incumbent upon the Claimant in order to rebut the presumption of Article 81 of the IRC Code in force on the date of the taxable facts - current Article 88 of the same legal provision.

The essential question of the present case has, however, deeply divided doctrine and jurisprudence, and therefore the learned decision that obtained the majority will certainly remain, as one more relevant contribution to the ongoing debate on this subject matter whose resolution is situated on a frontier both technically-legal and of analysis of the satisfaction of the burden of proof admittedly arduous and of difficult resolution.

This was, saving always better opinion, my dissenting position on the matter of the present case.

(Paulino Brilhante Santos)
(Vogal Arbitrator)