Summary
Full Decision
TAX ARBITRATION DECISION
Case No. 706/2018-T
Decision Date: 2019-09-06
Tax Type: Corporate Income Tax (IRC)
Claim Value: € 2,618,492.01
Subject Matter: IRC – Deductibility of costs. Banking Sector Contribution. Principle of taxation according to actual income. Principle of equality. Lack of jurisdiction of the arbitral tribunal.
ARBITRAL DECISION
The arbitral tribunal agrees:
I – Report
- A..., S.A., a joint-stock commercial company with registered office in ..., ..., ...-... Lisbon, holder of the Single Identification Number ..., hereby requests the establishment of an arbitral tribunal, pursuant to the provisions of articles 2, paragraph 1, subsection a), and 10 of Decree-Law No. 10/2011, of 20 January, to assess the legality of the partial dismissal of the administrative complaint filed against the self-assessment in Corporate Income Tax (IRC) for the year 2015, with respect to the non-deductibility of the amounts incurred with the banking sector contribution.
The request is based on the following grounds.
The Claimant is a credit institution with registered office and effective management in Portuguese territory that, within the scope of its commercial activity, is fundamentally engaged in banking operations.
On 29 June 2015, the Claimant submitted Form 26 declaration intended for the self-assessment of the banking sector contribution (CSB), based on the results determined in the financial year 2014, having determined for this purpose the amount of € 2,618,492.01.
Subsequently, on 31 May 2016, the Claimant submitted the periodic income statement Form 22 for IRC relating to the financial year 2015, having entered the amount of € 4,418,492.01 as CSB.
The Claimant filed an administrative complaint against the self-assessment in IRC for 2015, alleging that the amount of € 1,800,000.00 was incorrectly added in field 780 of Table 07 of the income statement Form 22 for IRC as CSB, and simultaneously requested the correction of the self-assessment in IRC for the financial year 2015, considering the CSB deductible for tax purposes, in the amount of € 2,618,492.01, incurred by reference to that financial year.
However, the administrative complaint was subject to a partial dismissal decision, acknowledging that the amount of € 4,418,492.01 entered in the income statement "Form 22" submitted on 31 May 2016, corresponding to the CSB, is higher by € 1,800,000.00 than the amount actually incurred, but that the CSB is not deductible as a tax cost pursuant to subsection p) of paragraph 1 of article 23-A of the Corporate Income Tax Code (CIRC).
The Claimant contends that the interpretation of subsection p) of paragraph 1 of article 23-A of the CIRC, to the effect that the CSB incurred in the respective financial year is not tax-deductible, suffers from material unconstitutionality due to violation of the principles of taxation according to actual income and contributive capacity, provided for in articles 104, paragraph 2, and 13 of the Portuguese Constitution (CRP), in that the implementation of these constitutional principles implies recognition that all income components, whether positive or negative, have tax relevance within the scope of calculating the taxable profit attributable for IRC purposes.
Moreover, that rule violates the principle of equality by preventing, without sufficient material justification, that a cost arising from activity which would normally be tax-deductible, should not be when it relates to the CSB, negatively discriminating against entities that bear the payment of this tax in relation to the various other sectors of economic activity.
The Tax Authority, in its response, raises the exception of lack of jurisdiction of the arbitral tribunal, on the grounds that the Claimant intends to challenge the legality of the rule providing for the CSB, and not properly the self-assessment act in IRC, and furthermore that the CSB constitutes a financial contribution and not a tax, being excluded from tax arbitration by virtue of the provision of article 2 of Ordinance No. 112-A/2011, of 22 March, by which the binding of the Tax Authority to the jurisdiction of arbitral tribunals relates only to the assessment of claims relating to taxes, not encompassing taxes that must be qualified as contributions.
In its opposition, the Tax Authority argues that the CSB had the dual purpose of reinforcing the tax burden borne by the financial sector and of more effectively mitigating the systemic risks associated with it, constituting a revenue of the Resolution Fund. And, on the other hand, the non-deductibility as a tax expense, pursuant to subsection p) of paragraph 1 of article 23-A, fits within the objectives that guided the creation of this financial contribution, thus explaining why it was not given the same legislative treatment as other periodic contributions intended for the financing of the Resolution Fund.
As to the alleged violation of the principle of taxation of companies according to actual income, the Tax Authority invokes that article 104, paragraph 2, of the Constitution does not establish an absolute criterion for taxation, but rather a rule of approximate tendency between taxable matter and profits actually earned, without excluding that certain expenses may be disregarded for purposes of determining taxable matter, provided that it does not offend the principle of equality and material justice, and that, in this case, there exists an effective and real reason for preventing the CSB from being considered as a tax-deductible cost, which translates into the financing coverage of the Resolution Fund.
It concludes towards the acceptance of the dilatory exceptions and, if this is not accepted, towards the rejection of the arbitral request.
- Following the proceedings, the Claimant responded to the matter of exception, stating that the request for arbitral pronouncement relates to a specific tax act, namely the self-assessment in IRC for the financial year 2015, and that arbitral tribunals may refuse to apply rules on grounds of unconstitutionality, with no violation of the Binding Ordinance occurring since what is at issue is a claim relating to the declaration of illegality of self-assessment acts, to which article 2, subsection a), of that diploma refers.
As to the substantive matter, the Claimant reiterated what was alleged in the initial petition, concluding that the rule of subsection p) of paragraph 1 of article 23-A of the CIRC is unconstitutional, interpreted to the effect that the amount incurred as CSB is not deductible.
In submissions, the Tax Authority limited itself to reaffirming what was stated in the response, arguing for the acceptance of the exception of lack of material jurisdiction of the arbitral tribunal and the rejection of the arbitral request.
- The request for the establishment of the arbitral tribunal was accepted by the President of CAAD and notified to the Tax and Customs Authority in accordance with the applicable regulations.
Pursuant to the provision of subsection a) of paragraph 2 of article 6 and subsection b) of paragraph 1 of article 11 of the Tax Arbitration Rules (RJAT), in the wording introduced by article 228 of Law No. 66-B/2012, of 31 December, the Ethics Council designated as arbitrators of the collective arbitral tribunal the signatories hereto, who communicated their acceptance of the appointment within the applicable period.
The parties were duly and in good time notified of this appointment and did not manifest any intention to reject it, in accordance with the combined terms of article 11, paragraph 1, subsections a) and b), of the RJAT and articles 6 and 7 of the Code of Ethics.
Thus, in accordance with the provision of subsection c) of paragraph 1 of article 11 of the RJAT, in the wording introduced by article 228 of Law No. 66-B/2012, of 31 December, the collective arbitral tribunal was constituted on 8 March 2019.
The arbitral tribunal was regularly constituted and is materially competent in accordance with the provision of articles 2, paragraph 1, subsection a), and 30, paragraph 1, of Decree-Law No. 10/2011, of 20 January.
The parties have legal personality and capacity, are legitimate and are represented (articles 4 and 10, paragraph 2, of the same decree-law and 1 of Ordinance No. 112-A/2011, of 22 March).
The proceedings do not suffer from any defects and no exceptions were invoked.
It is appropriate to assess and decide.
II – Reasoning
Factual Matters
- The facts relevant to the decision of the case that may be considered established are as follows:
A) On 29 June 2015, the Claimant submitted Form 26 declaration intended for self-assessment of the banking sector contribution (CSB), based on the results determined in the financial year 2014, having recorded for this purpose the amount of € 2,618,492.01;
B) On 31 May 2016, the Claimant submitted the periodic income statement Form 22 for IRC relating to the financial year 2015, in which it entered in Field 780 of "Table 07 – Calculation of Taxable Profit" the amount of € 4,418,492.01 as CSB;
C) On 17 July 2018, the Claimant filed an administrative complaint against the self-assessment act in IRC for 2015, requesting, on the one hand, the correction of the amount entered in the income statement Form 22 corresponding to the CSB, since the amount actually incurred was € 2,618,492.01, and not € 4,418,492.01, and invoking, on the other hand, the unconstitutionality of the rule of subsection p) of paragraph 1 of article 23-A of the CIRC, when interpreted to the effect that the banking sector contribution is not tax-deductible, due to violation of the principles of taxation according to actual income and contributive capacity and equality;
D) By order of 1 October 2018, issued by the Head of Division of the Central Service, issued with delegated authority, and notified by official letter dated 3 October following, the administrative complaint was partially dismissed;
E) In that order, by reference to information No. 341-AIR1/2018, it was considered appropriate to correct the amount entered in field 780 of table 07 of Form 22 declaration, as there was a discrepancy of € 1,800,000.00 between the amount actually incurred as CSB (€ 2,618,492.01) and the amount entered for purposes of calculating taxable profit (€ 4,418,492.01). With regard to the constitutionality issue raised, the order states that it is not the responsibility of the Administration to refuse to apply rules on grounds of unconstitutionality, and therefore dismissed the complaint on that point, maintaining the understanding that the CSB, pursuant to subsection p) of paragraph 1 of article 23-A of the CIRC, is not deductible for tax purposes;
F) The Claimant proceeded to pay the CSB deemed to be due, in the amount of € 2,618,492.01.
The Tribunal formed its conviction regarding the established facts based on the documents attached to the petition and the administrative file submitted by the Tax Authority.
Matters of Law
Lack of Jurisdiction of the Arbitral Tribunal
- The Tax Authority raised the exception of lack of jurisdiction of the arbitral tribunal to hear this request on two different grounds: the Claimant intends to challenge the legality of the rule providing for the banking sector contribution and not properly the self-assessment act in IRC; being at issue a financial contribution and not a tax, the Claimant's claim is excluded from tax arbitration by virtue of the provision of article 2 of Ordinance No. 112-A/2011, of 22 March, by which the binding of the Tax Authority to the jurisdiction of arbitral tribunals relates only to the assessment of claims relating to taxes, not encompassing taxes that must be qualified as contributions.
The objection proves to be entirely unfounded.
The Claimant formulated a request for arbitral pronouncement on the legality of the self-assessment act in IRC for the financial year 2015 and the decision partially dismissing the administrative complaint filed against that act, ultimately requesting the annulment both of the self-assessment in IRC and the decision dismissing the administrative complaint.
As the cause of action, the Claimant invoked the unconstitutionality of the rule of subsection p) of paragraph 1 of article 23-A of the CIRC, when interpreted to the effect that the banking sector contribution is not tax-deductible, due to violation of the principles of taxation according to actual income and contributive capacity and equality.
The aforementioned rule of article 23-A of the CIRC, under the heading "Expenses not deductible for tax purposes," in the relevant part, provides as follows:
1 – The following expenses are not deductible for purposes of determining taxable profit, even when recorded as expenses of the tax period:
(...)
p) The banking sector contribution;
(...).
The rule is part of the general provisions relating to the determination of taxable profit of legal entities, specifically setting out which expenses are not deductible for tax purposes. Among those expenses is the banking sector contribution, and the question raised in the arbitral request is whether the non-deductibility of this type of expense is likely to violate the Constitution.
What is not at issue, as is clear, is the constitutionality of the banking sector contribution, but the constitutionality of a rule of the CIRC that regulates the calculation of taxable profit of legal entities.
For this very reason, the arbitral request is not directed against the legal requirement to pay the banking sector contribution, but against the self-assessment act in IRC and the decision dismissing the administrative complaint filed against that act, to the extent that they take into account the non-deductibility for tax purposes of the expense incurred with that contribution.
It is thus clear that the arbitral request relates to the legal conformity of a self-assessment act in IRC and a second-level act related to it, and is based on a rule of the CIRC and not on any of the provisions that regulate the banking sector contribution.
Since what is not at issue is the constitutionality or legality of the banking sector contribution, it has no relevance for the case to discuss whether the said contribution is a financial contribution or a tax. What matters is to note that arbitral tribunals are competent for the assessment of claims relating to the declaration of illegality of tax assessments, including as regards self-assessment acts (article 2, paragraph 1, subsection a), of the RJAT), and the Binding Ordinance only excludes from the jurisdiction of arbitral tribunals claims relating to the declaration of illegality of self-assessment acts that have not been preceded by recourse to the administrative remedy (article 2, subsection a)), knowing that this is obviously not the situation in the case.
The arbitral tribunal is, therefore, competent to hear the request.
Substantive Issue
- The Claimant contends that the rule of subsection p) of paragraph 1 of article 23-A of the CIRC, interpreted to the effect that the banking sector contribution incurred for the financial year 2015 is not tax-deductible, suffers from material unconstitutionality due to violation of the principles of taxation according to actual income and contributive capacity, as well as the principle of equality, enshrined in articles 104, paragraph 2, and 13 of the Constitution.
To reach this conclusion, the Claimant contends, in summary, that the implementation of the principles of taxation according to actual income and contributive capacity implies that all costs incurred that are related to the obtaining of income should be deductible for tax purposes and any deviation from this rule must be justified through a sufficiently rational basis. And, on the other hand, in application of the principle of equality, the deductibility of expenses and losses, generally enshrined in paragraph 1 of article 23 of the CIRC, should be applied uniformly to the various sectors of business activity, so that subsection p) paragraph 2 of article 23-A of the CIRC, by preventing the deduction of the expense with the banking sector contribution in relation to the entities on which this contribution is levied, violates this constitutional principle.
At a first level of analysis, it must be acknowledged that, pursuant to article 23 of the CIRC, in the wording resulting from Law No. 2/2014, of 16 January, effective as of 1 January 2014, "for the determination of taxable profit, all expenses and losses incurred or borne by the taxpayer to obtain or ensure income subject to IRC are deductible" (paragraph 1), with paragraph 2 specifying, by way of example, the expenses and losses that fall within the scope of that general clause.
This new wording, replacing the previous requirement of indispensability for the realization of the income and gains that are subject to the tax, aimed to implement a greater degree of certainty in the concrete application of deductibility criteria, coming to establish as a general principle that expenses related to the taxpayer's activity incurred or borne by it are deductible, reinforcing the idea that the mere connection with business activity is sufficient, regardless of the effective contribution to income subject to tax (cf. Final Report of the Commission for the Reform of the Tax on Income of Legal Entities, 30 June 2013).
This was, moreover, the understanding that had been followed by doctrine and case law, which pointed to the fact that the business activity that generates deductible costs must be one that translates into operations that have a purpose (and not a mandatory nexus of immediate causality) of obtaining income or the objective of maintaining the potential of a source producing income. And thus productive activity should not be understood in a restrictive sense, but in a broad sense, meaning activity related to a source of income generation of the entity that bears the expenses (cf. in this regard, with fuller discussion, SALDANHA SANCHES, The Limits of Tax Planning, Coimbra, 2006, p. 215, RUI MORAIS, Notes on IRC, Coimbra, 2007, pp. 86-87 and, among others, the judgment of the Supreme Administrative Court of 29 March 2006, Case No. 1236/05).
Article 23-A of the CIRC, added by the aforementioned Law No. 2/2014, of 16 January - corresponding to the former article 42 - came to list, through exhaustive enumeration, a set of expenses that, having been actually and duly borne by companies, cannot be taken into account for purposes of calculating taxable profit. Among these expenses are IRC, including autonomous assessments, undocumented expenses, expenses not supported by legally required documents, unlawful expenses, fines and penalties, taxes, fees and other taxes levied on third parties that the taxpayer is not legally obliged to bear, and, subject to certain conditions, allowances and expenses for compensation for business travel in the employee's own vehicle, expenses for rental without driver of light passenger vehicles or mixed, expenses for fuels, expenses relating to pleasure boats and passenger aircraft that are not assigned to the operation of public transport services nor intended to be rented in the normal business activity of the taxpayer, expenses relating to profit-sharing by members of corporate bodies and company employees, amounts paid or owed to natural or legal persons resident outside Portuguese territory and subject there to a more favorable tax regime.
Also included among the expenses not deductible for tax purposes are the banking sector contribution, created by article 141 of Law No. 55-A/2010, of 31 December, the energy sector contribution, created by article 228 of Law No. 83-C/2013, of 31 December, and the extraordinary contribution on the pharmaceutical industry, created by article 168 of Law No. 82-B/2014, of 31 December, to which subsections p), q) and s) of paragraph 1 of article 23-A refer, the latter added by Law No. 114/2017, of 29 December.
Referring to the corresponding provision of article 42 of the CIRC, SALDANHA SANCHES underscores that the non-deductibility of certain costs – such as those described in that provision – is a legislative choice that requires special justification, constituting "anti-systemic norms that can only be maintained on the basis of the special reasons that legitimate them."
In that sense, the various provisions of article 42 providing for the non-deductibility of expenses for tax purposes could be framed, in general theory, in three groups: (a) norms of mere technique for quantifying the tax, such as when the deduction of IRC collection is prohibited; (b) norms that seek to prevent the deduction of costs that correspond to acts that are reprehensible in light of the legal order, such as in the case of fines, penalties and unlawful expenses; (c) norms that seek to exclude costs that fall within the zone of confluence between the private sphere of shareholders and the business sphere, such as allowances and compensation for employee travel (op. cit., pp. 393-394).
In summary - as the same Author concludes - the specific legitimation for instituting exceptions to the rule of deductibility of costs proven and necessary for the development of business activity must be analyzed based on the teleological element of interpretation that permits taking into account the valuation and weighing of the various interests that the rule intends to regulate and can reveal the reason for the law (ibidem).
- The banking sector contribution was created by article 141 of the State Budget Law for 2011, subsequently amended by Law No. 7-A/2016, of 30 March, as an extraordinary contribution, having as passive subjects credit institutions with their principal and effective seat of management located in Portuguese territory, branches in Portugal of credit institutions that do not have their principal and effective seat of management in Portuguese territory, and branches in Portugal of credit institutions with principal and effective seat outside the European Union (article 2). Its objective scope of application covers the liabilities determined and approved by the passive subjects within the conditions provided for in subsection a) of article 3 (as amended by Law No. 7-A/2016) and the notional value of derivative financial instruments outside the balance sheet determined by the passive subjects (subsection b).
Assessment is carried out by the taxpayer itself, through a declaration in an official form approved by ordinance of the Government member responsible for the financial area, which must be sent annually by electronic data transmission, until the last day of June (article 5) and paid until the last day of the deadline set for sending the declaration, with payment made in accordance with paragraph 1 of article 40 of the General Tax Law (article 6).
It should also be noted that the CSB constitutes revenue of the Resolution Fund, created through the amendment introduced by Decree-Law No. 31-A/2012, of 10 February, to the Regime of Credit Institutions and Financial Companies (article 153-F, subsection a)) and defined as a legal entity under public law, endowed with administrative and financial autonomy, functioning with the Bank of Portugal (article 153-B). The Fund's object is to provide financial support for the application of resolution measures adopted by the Bank of Portugal and to perform all other functions conferred on it by law in the context of implementing such measures (article 153-C), and credit institutions with headquarters in Portugal are obligatory participants, among other entities (article 153-D).
The State Budget Report for 2011 itself explains the genesis of the banking sector contribution in sufficiently clear terms regarding the objectives to be achieved, stating there (p. 73):
"The Proposal for the State Budget for 2011 also proceeds with the creation of a contribution on the banking sector in line with those already introduced in other Member States, with the purpose of approximating the tax burden borne by the financial sector to that which burdens the rest of the economy and to have it contribute more intensely to the effort of consolidating public accounts and preventing systemic risks, also thus protecting the sector's workers and social security mechanisms.
The contribution thus applies to credit institutions with their principal and effective seat of management located in Portuguese territory, to branches of credit institutions that do not have their principal and effective seat of management in Portuguese territory, and to branches, established in Portuguese territory, of credit institutions with principal and effective seat of management in third countries."
In light of the legal regime briefly described, the CSB is based on a consideration of a group nature, in that it constitutes a public price to be paid by the set of regulated entities to the respective regulatory entity or agency.
It does not fall within the category of a fee strictly speaking, since it does not apply to a specific and individualized provision that the Administration directs to the respective taxpayers, nor is it characterized as a tax, since the requirement of unilaterality is not met: it does not have as its exclusive purpose the raising of revenue (it is not intended that "the participating institutions contribute to the expenses of the community, in fulfillment of any duty of solidarity"), rather the financial sector is intended to contribute to covering the systemic risk that is inherent to its activity.
And its nature is not removed by the circumstance that revenues from the CSB are allocated to the Resolution Fund, since the Fund's object is to provide financial support for the implementation of measures by the Bank of Portugal and aims at the prevention of systemic risks in the banking sector. This same objective is noted in the preamble of Ordinance No. 121/2011, which states that the essential elements of the CSB are defined "in terms similar to contributions already introduced by other Member States of the European Union, with the dual purpose of reinforcing the tax burden borne by the financial sector and of more effectively mitigating the systemic risks associated with it."
As concluded in the judgment of the Supreme Administrative Court of 19 June 2019 (Case No. 02340/13), the legislative motivation contained in the diplomas that regulated the contribution for the banking sector and the Resolution Fund legitimates the conclusion that the contribution aimed, first and foremost, to mitigate the consequences resulting from public interventions in the financial sector, given the financial crisis situation then unleashed within that sector, serving as an instrument of support in the prevention of the system's inherent risks, not intended to meet generic financing needs of the State.
This is thus a tax that, affecting a homogeneous group of recipients and aiming to prevent risks associated with this group, is implemented through the compensation of any public intervention by the regulatory entity to prevent increased risks resulting from the exercise of banking activity, thus assuming the legal nature of a financial contribution.
And in the same sense the arbitral decisions were pronounced in Cases Nos. 347/2017-T and 182/2019-T.
- Similarly, the energy sector contribution, created by the State Budget Law for 2014 (Law No. 83-C/2013, of 31 December), also included among the expenses not deductible for tax purposes, is equally treated as an extraordinary contribution that has "as its objective the financing of mechanisms that promote systemic sustainability of the energy sector, through the creation of a fund that aims to contribute to the reduction of tariff debt and to the financing of social and environmental policies of the energy sector," affecting natural or legal persons that are part of the national energy sector, with tax domicile or with headquarters, effective management, or permanent establishment in Portuguese territory, which, on 1 January 2015, were in one of the situations listed in article 2 of the regime that creates the contribution.
The revenue obtained is allocated to the Fund for Systemic Sustainability of the Energy Sector (FSSSE), created by Decree-Law No. 55/2014, of 9 April, with the objective of establishing mechanisms that contribute to systemic sustainability of the energy sector, namely through contribution to the reduction of debt and/or tariff pressure and the financing of sector energy policies of a social and environmental nature, measures related to energy efficiency, support measures for companies and the minimization of financial burdens for the National Electrical System (article 11).
On the other hand, it is article 12 itself of the energy sector contribution regime that declares the non-deductibility of the contribution for tax purposes, within the scope of the tax on income of legal entities, a rule that was transposed to subsection q) of paragraph 1 of article 23-A of the CIRC by Law No. 2/2014, of 16 January.
The State Budget Law for 2015 (Law No. 82-B/2014, of 31 December) subsequently created the extraordinary contribution on the pharmaceutical industry, which applies to the sales volume and has as its objective ensuring sustainability of the National Health Service in terms of expenditure on medicines, with passive subjects being entities that proceed with the first sale for valuable consideration, in national territory, of medicinal products for human use.
This contribution was also included among the expenses not deductible for tax purposes by Law No. 114/2017, of 29 December, through the addition of subsection s) to paragraph 1 of article 23-A of the CIRC.
What these contributions have in common, by contrast with the banking sector contribution, is that they are financial contributions, with specific purposes, and that are not deductible for tax purposes.
- Having established the framework of expenses not deductible for tax purposes in IRC and defined the scope, objectives, and legal nature of the banking sector contribution, it is now time to address the constitutionality issues raised by the Claimant.
The Claimant associates the principle of taxation according to actual income and the principle of contributive capacity, stating that the first of these principles requires that tax be levied on income actually earned and, as a necessary consequence, there must be a deduction for purposes of determining taxable profit of all costs incurred that are related to obtaining income, concluding that the banking sector contribution corresponds to a cost legally imposed on which the exercise of banking activity depends, so that its disregard for tax purposes leads to the violation of any of these constitutional principles.
These two principles are not, however, entirely equivalent.
The principle of taxation according to actual income is enshrined in article 104, paragraph 2, of the Constitution and from it stems that the determination of taxable profit of companies should be fundamentally based on their accounting, as a means of disclosing the economic situation of companies, and is aimed at ensuring that the tax system permits control of income in a measure approximately close to existing reality.
Taxation according to actual income corresponds to a typical or characterizing framework of the tax system that does not exclude the possibility of being subject to deviations that prove justified on the constitutional level, and which cannot fail to take into account the principles of practicability and operability of the system (judgment of the Constitutional Court No. 162/2004).
Taxable profit for IRC purposes is thus based on the accounting result, to which the tax legislator introduces the extra-accounting corrections necessary to take into account the objectives and conditions specific to tax law, and, as the Constitutional Court has recognized, fiscally relevant income does not constitute a reality of materially apprehensible value, but rather a concept normatively modeled and accountably measurable (cf. judgment No. 162/2004 and, in doctrine, SÉRGIO VASQUES, Manual of Tax Law, Coimbra, 2015, p. 301).
On the other hand, the principle of contributive capacity does not require a specific and direct constitutional provision. Its constitutional foundation is the principle of equality articulated with the other principles and provisions of the respective "fiscal constitution" and, in particular, those that follow from the structural principles of the tax system contained in articles 103 and 104 of the Constitution (CASALTA NABAIS, Tax Law, 5th edition, Coimbra, 2009, p. 152).
As this Author states, the principle of tax equality has inherent above all "the idea of generality or universality, in accordance with which all citizens are bound by the duty to pay taxes, and of uniformity, requiring that such duty be assessed by the same criterion - the criterion of contributive capacity. This thus implies equal tax for those who have equal contributive capacity (horizontal equality) and different tax (in qualitative or quantitative terms) for those who have different contributive capacity in proportion to that difference (vertical equality)" (op. cit., pp. 151-152).
As a presupposition and criterion of taxation, the principle of contributive capacity – within the same line of understanding - "removes the tax legislator from arbitrariness, obliging it to in the selection and articulation of the tax facts, adhere to manifestations of contributive capacity, that is, to erect as the object and taxable matter of each tax a certain economic presupposition that is a manifestation of that capacity and is present in the various legal hypotheses of the respective tax" (ibid., p. 154).
The Constitutional Court, more recently, has also analyzed the principle of tax equality from the perspective of contributive capacity, as can be seen in particular in judgment No. 142/2004, which states that "[t]he principle of contributive capacity expresses and concretizes the principle of tax or fiscal equality in its uniformity aspect – the duty of all to pay taxes according to the same criterion – with contributive capacity fulfilling the unitary criterion of taxation."
The recognition of the principle of contributive capacity as a criterion intended to assess the constitutional inadmissibility of certain solution or solutions adopted by the tax legislator has also led to the idea, expressed for example in the judgment of the Constitutional Court No. 348/97, that taxation in compliance with the principle of contributive capacity will imply "the existence and maintenance of an effective connection between the tax liability and the economic presupposition selected as the object of the tax, requiring therefore a minimum of logical consistency of the various concrete hypotheses of tax provided for in the law with the corresponding object of the same."
The Constitutional Court has thus moved away from merely negative control of tax equality, coming to adopt the principle of contributive capacity as an appropriate criterion for the distribution of taxes; but it does not cease to accept the prohibition of arbitrariness as an adjuvant element in verifying the constitutional validity of normative solutions in the tax field, particularly when these are dictated by considerations of legislative policy related to the rationalization of the system.
In summary, the principle of tax equality can be concretized through various aspects: a first, is 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 in equal situations and differently those in different situations, to the extent of the difference, to be assessed by contributive capacity; a final, is in the prohibition of arbitrariness, in prohibiting the legislator from introducing discriminations between taxpayers that are devoid of rational basis (cf. judgments of the Constitutional Court Nos. 306/2010 and 695/2014).
- Returning to the situation in the case, it should be noted that the banking sector contribution was created as an extraordinary contribution affecting credit institutions, aiming, similarly to other measures of identical nature already instituted by other Member States of the European Union, to approximate the tax burden borne by the financial sector to that which burdens the remaining business activity and to have it contribute more intensely to the consolidation of public accounts and to the prevention of systemic risks associated with it.
Thus it is understood that the revenues from the contribution are allocated to the Resolution Fund created with the Bank of Portugal to ensure the necessary financial support for the measures that this institution may need to implement in the context of sector regulation.
And as concluded in the cited judgment of the Supreme Administrative Court of 19 June 2019, the legislative purpose that underlay the diplomas that regulated the contribution for the banking sector and the Resolution Fund was above all aimed at mitigating the consequences resulting from public interventions in the financial sector, given the financial crisis situation then unleashed within the sector, not intended to satisfy generic financing needs of the State.
This is why it is understood – as previously stated – that the banking sector contribution has the legal nature of a financial contribution, with a scope of application limited to a defined group of recipients, and is intended to compensate for the intervention of the regulatory entity to prevent increased risks resulting from the exercise of banking activity, and, in that sense, is characterized as a contribution with an extra-fiscal purpose that also aims to model and guide the conduct of taxpayers (on this type of contributions, SUZANA TAVARES DA SILVA, Fees and the Coherence of the Tax System, Coimbra, 2008, pp. 48-53).
As suggested, the limitation on the deduction of expenses, as an exception to the general rule of deductibility of expenses and losses incurred or borne by the taxpayer, is based on various legislative criteria ranging from mere technique for quantifying the tax, such as when IRC collection is excluded from deduction, to measures of a sanctionary nature, when aiming to prevent the assignment to the result of the period of expenses resulting from the commission of violations, or to measures to combat tax fraud and evasion, when undocumented expenses or costs are disregarded that may correspond to an indirect form of payment of remuneration.
With respect to the banking sector contribution, nothing permits the conclusion that the legislator did not intend to follow the first of the legislative criteria indicated, already applicable to IRC collection, in order to prevent the actual expense of paying the contribution from being passed on to the detriment of the State through deduction for purposes of calculating taxable profit. In fact, as previously stated, the banking sector contribution has an extra-fiscal purpose, assuming not only a compensatory function with respect to the measures that the regulatory entity may be forced to adopt in the context of banking activity, but also a moderating function of the behavior of banking institutions, in addition to serving to ensure the approximation in terms of tax burden to other sectors of economic activity.
In this entire context, it must be recognized that there subsists a plausible justification for the non-deductibility of the expense as a means of preventing the reduction of the financial impact that the legislative measure intends to achieve. And it cannot be ignored that the legislator adopted identical legislative treatment with respect to the energy sector contribution, which also aims to finance mechanisms that promote systemic sustainability of the energy sector, and the extraordinary contribution on the pharmaceutical industry, which has as its objective ensuring sustainability of the National Health Service in terms of expenditure on medicines.
There is, therefore, no reason to consider that the unconstitutionality of the rule of subsection p) of paragraph 1 of article 23-A of the CIRC has been verified, due to violation of the principle of taxation according to actual income and the principle of contributive capacity.
- The Claimant further alleges that the rule of subsection p) of paragraph 1 of article 23-A of the CIRC, interpreted to the effect that the CSB incurred in the respective financial year is not tax-deductible, violates the principle of equality, discriminating without sufficient material justification the banking institutions that bear the payment of this tax in relation to the various other sectors of business activity that benefit from the regime of deductibility of expenses for tax purposes.
In the dimension now stated, the violation of the principle of equality comes down to unequal treatment of a group of recipients of the rule in relation to another group of recipients, despite the absence of any difference justifying the unequal treatment. The central problem translates into the choice and justification of the distinctive criterion that must serve as the basis for comparing the situations to be addressed by law. And, in this specific aspect, the principle of equality is identified with the prohibition of arbitrariness, that is, the legislator is prohibited from introducing discriminations between taxpayers that are devoid of rational basis or for which no evident objective justification is found or where no minimum coherence is detected between the objectives pursued and the foreseeable results (cf. judgments of the Constitutional Court Nos. 306/2010 and 695/2014, and, in doctrine, SÉRGIO VASQUES, Manual of Tax Law, Coimbra, 2015, pp. 290-291; REIS NOVAIS, Constitutional Principles Structuring the Portuguese Republic, Coimbra, 2004, p. 111).
Arbitrary differentiation is, in summary, that which cannot be substantiated in light of an intelligible or rationally apprehensible criterion, congruent with constitutionally relevant values (judgment of the Constitutional Court No. 166/2010).
Now, in the case under analysis, the legislator caused the banking sector contribution to affect a defined group of recipients and with clearly defined objectives that could only be reflected within the scope of banking activity (cf. supra 6.). The non-deductibility of the expense incurred with the contribution, on the other hand, corresponds to a legislative choice that is justified by the very legal nature and extra-fiscal purpose of the tax (cf. supra 8.).
It is not possible, therefore, to establish any term of comparison between the generality of business entities and the credit institutions that form part of the specific scope of subjective application of the banking sector contribution. And what is at issue is not the principle of deductibility of expenses incurred by the taxpayer to which article 23, paragraph 1, of the CIRC refers, which is equally applicable to the Claimant, but the non-deduction of certain expenses, such as those described in article 23-A, paragraph 1, and which in the case of the banking sector contribution is based on a sufficient material basis.
There does not occur, therefore, the alleged violation of the principle of equality.
III – Decision
For these reasons, it is decided to judge the arbitral request wholly unfounded.
Value of the Case
The Claimant indicated as the value of the case the amount of € 2,618,492.01, which was not contested by the Respondent and corresponds to the value of the assessment that was sought to be opposed, so the value of the case is fixed at that amount.
Costs
Pursuant to articles 12, paragraph 2, and 24, paragraph 4, of the RJAT, and article 3, paragraph 2, of the Regulation of Costs in Tax Arbitration Proceedings and Table I annexed to that Regulation, the amount of costs is fixed at € 33,660.00, which shall be borne by the Claimant.
Let it be notified.
Lisbon, 6 September 2019
The President of the Arbitral Tribunal
Carlos Fernandes Cadilha
The Arbitrator Member
Suzana Fernandes da Costa
The Arbitrator Member
A. Sérgio de Matos
Frequently Asked Questions
Automatically Created