Autonomous Taxation on Vehicle Expenses and Per Diem Allowances in IRC: CAAD Arbitration Case 719/2015-T

ARBITRAL DECISION

The arbitrators Councillor Jorge Manuel Lopes de Sousa (presiding arbitrator), Dr. Mariana Gouveia de Oliveira and Professor Doctor Leonor Fernandes Ferreira (member arbitrators), appointed by the Ethics Council of the Administrative Arbitration Centre to form the Arbitral Tribunal, constituted on 10-02-2016, agree as follows:

1. Report

A…, taxpayer no. …, with registered office at Rua …, … – … – …, …-… ..., hereinafter referred to as the Claimant, came, pursuant to the terms and for the purposes of the provisions of articles 2.º, no. 1, paragraph a), and 10.º, no. 1, paragraph a), both of Decree-Law no. 10/2011, of 20 January (Legal Framework for Arbitration in Tax Matters, hereinafter referred to only as LFATM), to request the constitution of an Arbitral Tribunal with a view to the annulment of the decision rejecting the gracious objection (administrative appeal) that it filed against the self-assessment of Corporate Income Tax (IRC) relating to the year 2012, as well as the partial annulment of such self-assessment in the amount of €807,224.94.

The Claimant further requests the payment of compensatory interest.

The Respondent is the TAX AND CUSTOMS AUTHORITY.

The request for constitution of the arbitral tribunal was accepted by the President of the CAAC and automatically notified to the Tax and Customs Authority on 10-12-2015.

Pursuant to the provisions of paragraph a) of no. 2 of article 6.º and paragraph b) of no. 1 of article 11.º of the LFATM, in the wording introduced by article 228.º of Law no. 66-B/2012, of 31 December, the Ethics Council appointed as arbitrators of the collective arbitral tribunal the signatories, who communicated acceptance of the appointment within the applicable period.

On 26-01-2016, the parties were duly notified of such appointment, having manifested no intent to refuse the appointment of the arbitrators, pursuant to the combined provisions of article 11.º no. 1 paragraphs a) and b) of the LFATM and articles 6.º and 7.º of the Ethics Code.

Thus, in accordance with the provision of paragraph c) of no. 1 of article 11.º of the LFATM, in the wording introduced by article 228.º of Law no. 66-B/2012, of 31 December, the collective arbitral tribunal was constituted on 10-02-2016.

The Tax and Customs Authority responded, arguing that the claim should be judged unfounded.

On 06-05-2016, a hearing was held in which witnesses were examined and it was decided that the proceedings would continue with written submissions.

The Parties presented submissions.

The arbitral tribunal was duly constituted and is materially competent, in light of the provisions of articles 2.º, no. 1, paragraph a), and 10.º, no. 1, of DL no. 10/2011, of 20 January.

The parties are duly represented, possess legal personality and capacity, are legally entitled, and are represented (articles 4.º and 10.º, no. 2, of the same decree and article 1.º of Order no. 112-A/2011, of 22 March).

The proceedings do not suffer from any nullities and no exceptions were invoked.

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

2. Facts

2.1. Established Facts

Based on the elements contained in the proceedings and the administrative proceedings filed with the record, the following facts are considered established:

a) The Claimant's main activity comprises the trade of food and consumer products, catering and beverages, as well as the prospection, purchase, sale, rental, management of own real estate, construction, renovation and management of properties, and further the publication, editing and distribution of newspapers and other press products, as well as the provision of customer support services;

b) Regarding the 2012 tax period, the Claimant filed a Form 22 corporate income tax return, a copy of which is contained in the administrative proceedings, the contents of which are taken as reproduced, in which field 365 shows the amount of €807,843.00 as autonomous taxation;

c) The autonomous taxation referred to was calculated on the basis of the elements contained in document no. 2 accompanying the request for arbitral decision, the contents of which are taken as reproduced, including the following amounts:

• €787,009.25 – corresponding to expenses with light passenger vehicles; and

• €20,215.69 – corresponding to charges relating to allowances for travel expenses and compensation for displacement – in service of the Claimant – in vehicles belonging to the employee;

d) Following the filing of the return, assessment no. 2013 …, dated 05-08-2013, was drawn up, the contents of which are taken as reproduced, which includes the amount of €807,843.00 relating to autonomous taxation and states that the Claimant made a "self-assessment payment" in the amount of €4,046,322.20 (administrative proceedings);

e) On 31-07-2015, the Claimant filed a gracious objection against the self-assessment made on the basis of said return, having attached copies of the Form 22 return and the assessment statement relating to the 2012 financial year, and a list containing vehicle registration numbers with an indication of the professional categories of its employees to whom they were assigned or an indication that they are used by various employees (documents contained in the administrative proceedings, the contents of which are taken as reproduced);

f) In that gracious objection, a Report no. …-…/2015 was drawn up, contained in the administrative proceedings, the contents of which are taken as reproduced, in which the following is stated, among other things:

§ IV.I.I. (Amounts Paid as Autonomous Taxation)

§ IV.I.I.I. From the Arguments of the Objecting Party

1. Not conforming to this, the Taxpayer, herein the Claimant, comes to contest the amount of €807,843.00 (eight hundred and seven thousand, eight hundred and forty-three euros) arising from the autonomous taxation of certain expenses that formed the basis for calculating such autonomous taxation.

2. The expenses and charges inherent to that autonomous taxation concern "representation expenses", expenses with light passenger vehicles and charges relating to travel allowances.

Now,

1. In the view of the Taxpayer, herein the Claimant, the expenses and charges that gave rise to the part of the assessment in question should not be autonomously taxed, on the grounds that they assume a character of being "strictly business-related", that is, they should be considered expenses that arise from the normal activity of the company, necessary for obtaining taxable income.

2. In purported support of its thesis, the Taxpayer, herein the Claimant, proceeds to develop an argument based on the most recent national case law, including arbitral decisions, to the effect of accepting the business character revealed in certain expenses, and their non-subjection to the autonomous taxation mechanism.

3. Although recognizing the anti-abuse nature of the provisions on such taxation, the Taxpayer manifests itself in favor of the possibility of defeating the presumption that such nature assumes in relation to expenses that fall within a kind of "gray area" between business activity and the private life of taxpayers, providing a detailed description and characterization of each group into which the expenses in question are subdivided, which is herein fully reproduced, bringing to bear the documents it deemed pertinent to support its understanding.

Therefore,

1. In consonance with its arguments, it then requests restitution of the amounts improperly subjected to autonomous taxation.

§ IV.I.I.II. From the Assessment

1. We begin by examining Autonomous Taxation by tracing its general character and the function it performs within Portuguese tax law.

2. As stated by the Taxpayer itself, herein the Claimant, the type of expenses considered subject to autonomous taxation are situated in a "gray area" between the business and personal life of taxpayers, that is, they are charges that may correspond either to situations occurring in the scope of the company's activity or in the scope of the private life of the respective employees and/or administrators thereof.

3. SALDANHA SANCHES states that through autonomous taxation "the legislator seeks to respond to the admittedly difficult question of the tax regime for expenses that are located in the intersection zone between the personal and business spheres, so as to prevent remuneration in kind that would be more attractive for purely tax reasons or the hidden distribution of profits."

4. In the same sense, for RUI MORAIS (See On the Personal Income Tax, Almedina, Coimbra, 2006, p. 138.) the objective would have been to try to prevent that, through these expenses, "(...) the taxpayer uses for non-business purposes assets that generated fiscally deductible costs (...); or that payments are made to third parties with evasion of taxes that would be owed by the latter (...). The realization of such expenses implies an additional tax burden for those who incurs them because the law presumes that, thus, another person ceases to pay tax".

5. In approaching the purpose that presided over the creation of this tax, it is held in the Decision of the Constitutional Court no. 617/2012, of 19 December 2012, that "(...) with this type of taxation it was intended, on the one hand, to encourage taxpayers subject to it to reduce as much as possible expenses that negatively affect tax revenue and, on the other hand, to prevent that, through these expenses, companies proceed to disguised distribution of profits, especially dividends, which would thus only be subject to IRC as company profits, as well as combat tax fraud and evasion that such expenses occasion not only in relation to personal income tax or corporate income tax, but also in relation to the corresponding contributions, both from employers and employees, to social security".

Thus,

From Expenses with Light Passenger Vehicles

1. Precisely because we are dealing with an anti-abuse rule whose purpose is to prevent taxable profit from being negatively influenced by amounts corresponding to charges with light vehicles that are not always related to obtaining income, the argument of the Taxpayer, herein the Objecting Party, does not proceed.

2. As stated by the Taxpayer itself, herein the Objecting Party, expenses of this nature are difficult to analyze and distinguish, always situated in a gray area which makes it practically impossible to determine with clarity except by following step by step all the business activity in question, which is manifestly impossible to carry out.

3. Although the Taxpayer, herein the Objecting Party, attempted to produce evidence to demonstrate that the charges incurred with vehicles are directly related to business activity, it is not possible to infer that this is so for the reason mentioned above. The fact is that the attempt to produce evidence is made through the presentation of exclusively internal documentation, without the necessary elements that, for example, should appear on invoices and other supporting documents, and without any other justifying elements of an external nature of said charges.

Now,

1. Such a situation is not acceptable since we are dealing with a rule whose objective is to limit abusive situations. It is not enough that the Taxpayer, herein the Objecting Party, declares that expenses corresponding to light vehicles are necessarily linked to business activity, for the Tax Administration to accept that this is so without proper proof.

2. In the case at hand, what is at issue is proof that the expenses incurred translate charges that are relevant for the purposes of article 23.º of the IRC, that is, that they relate to "maintenance of the income-producing source". This was not achieved due to lack of supporting documentation other than mere internally prepared lists.

3. We wish to emphasize that we are dealing with a situation requiring special care aimed at preventing and avoiding tax evasion through expenses that negatively affect taxable profit, therefore, the peculiarity of this situation requires particular attention in the presentation of evidence. To highlight this aspect, note that article 88.º presents rates of considerable value to be applied to situations where there is not even any supporting documentation (see no. 1 of the same legal provision).

Therefore,

1. We cannot accept that proof has been made that the expenses incurred by the Taxpayer, herein the Objecting Party, corresponding to light passenger vehicles, are related to the business activity developed, thus maintaining the tax acts that are the subject of objection in the present case.

From Representation Expenses and Travel Allowances

1. Let us examine the wording of article 88.º of the Corporate Income Tax Code in force at the date of the facts, which provides as follows:

"7- The deductible charges relating to representation expenses are autonomously taxed at the rate of 10%, being understood as such, in particular, expenses incurred with receptions, meals, trips, outings and shows offered in the country or abroad to clients or suppliers or any other persons or entities. (...)

9 – They are also autonomously taxed, at the rate of 5%, the deductible charges relating to allowances for travel expenses and compensation for displacement in the employee's own vehicle, in service of the employing entity, not invoiced to clients, recorded in any manner, except to the extent that there is taxation in the personal income tax sphere of the respective beneficiary, as well as non-deductible charges under the terms of paragraph f) of no. 1 of article 45.º incurred by taxpayers that present a tax loss in the tax period to which they relate."

1. The type of charges that the legislator, in that rule, designated as "deductible" immediately demonstrates that this is not a question of a presumption of the "non-business nature" of the charges subject to autonomous taxation, since these, when subject to autonomous taxation under the law, have precisely as their premise their prior deductibility and concrete contribution to the formation of the taxable base still within the strict framework of the corporate income tax itself.

2. Confirming this idea, the preamble of Law no. 30-G/2000, of 29 December, which carried out the reform of the tax system and inserted autonomous taxation in the corporate income tax, expresses the following: "Reforms the taxation of income and adopts measures to combat tax evasion and fraud, altering (...) the Corporate Income Tax Code (,..)."

Even more:

1. In its Decision no. 18/2011, the Constitutional Court itself postulates that "(...) nos. 3 and 4 of article 81º [article 88.º in the wording in force at the date of the facts] refer to deductible charges as costs for IRC purposes, that is, charges that have been proven indispensable for the realization of income, in light of what article 23º, no. 1, of the CITC establishes, and the taxation provided for in these provisions is explained by a legislative intent to encourage companies to reduce as much as possible expenses that negatively affect tax revenue. The new wording given to nos. 3 and 4 of article 81.º by Law no. 60/2008 came to reinforce this perspective, differentiating various possible situations, which are taxed, as the case may be, at the rate of 5%, 10% or 20%, with which it is intended not only to discourage the incurrence of expenses but also to encourage companies to opt for solutions that are more advantageous from the point of view of public interest. Thus is understood the exclusion of taxation in relation to the acquisition of vehicles exclusively powered by electrical energy, as appears in the 2nd part of the body of no. 3, and the provision for more favorable treatment for charges incurred with the acquisition of less polluting vehicles (paragraph b) of no. 3), and more serious treatment for the largest expenses, to which no. 4 of this article 81.º refers."

2. It is easily understood then that, given the objective to be achieved, it would make no sense to allow these deductible charges not to be autonomously taxed; we are thus dealing with an exceptional regime intended to achieve a specific purpose – i.e. to prevent companies from making abusive use of this type of charges and, consequently, to refrain from incurring them.

3. In the case at hand, for the purposes of autonomous taxation it is not relevant to determine whether these same expenses or charges assume or do not assume a business nature, since that aspect is already implicit in the definition of the taxable event that will be subject to an independent tax from the collection to be determined in the strict segment of the corporate income tax itself,

§ V. CONCLUSION

In conformity with everything previously stated, because it has been demonstrated that no other understanding is possible for this Large Taxpayers Unit than the one referred to herein, we propose that the request formulated in the proceedings be rejected in accordance with the "summary table" identified at the beginning of this report, with all legal consequences.

Further it is proposed that, likewise in case of Superior Approval, the notification of the Taxpayer, herein the Objecting Party, be promoted in accordance with the norms set forth in articles 35.º to 41.º, all of the Tax Procedure and Process Code, through an official communication to be sent by registered mail, so that, if so inclined, within the period of 15 (fifteen) days, it may exercise its right to participate, in the modality of prior hearing, in written form, pursuant to the provision of article 60.º of the General Tax Law, in turn combined with the rule contained in article 121.º, this of the Administrative Procedure Code, by virtue of paragraph c) of article 2.º also of the General Tax Law.

g) The Claimant was notified of the draft rejection of the gracious objection;

h) On 31-08-2015, the Head of the Large Taxpayers Unit rejected the gracious objection, manifesting agreement with Report no. …-…/2015, the contents of which are taken as reproduced, in which the following is stated, among other things:

§ I. INTRODUCTION

1. The Taxpayer, herein the Objecting Party, a company constituted under the commercial form operating under the name "A…", TAX ID …, with tax domicile at Rua … …, … – …, …-… ..., comes, in accordance with the provisions of paragraph f) of no. 1 of article 54.º of the General Tax Law, combined with the provisions of articles 68.º and 131.º of the Tax Procedure and Process Code, both by virtue of article 137.º of the Corporate Income Tax Code, to file a gracious objection against the tax act of "self-assessment" of corporate income tax relating to the tax period corresponding to the 2012 calendar year.

2. After consideration of the arguments invoked by the Taxpayer, herein the Objecting Party, in its initial petition, there was, by this Large Taxpayers Unit, the preparation of the competent "Draft Decision" filed with the record, substantiated in our earlier Report no. …-…/2015.

And

1. Through an official communication issued by this Large Taxpayers Unit, the Taxpayer, herein the Objecting Party, was duly notified to, if so inclined, exercise its right to participate, in the modality of prior hearing, in written form, in accordance with the provision of paragraph b) of no. 1 of article 60.º of the General Tax Law, in turn combined with the provision of article 122.º of the Administrative Procedure Code.

2. Following the period then granted for the exercise of its right to participate, in the modality of prior hearing, in written form, neither the Taxpayer, herein the Objecting Party, on the one hand, came to the record to add other elements that had not already been settled when our earlier "Draft Decision", nor this Large Taxpayers Unit, on the other hand, discovered any other elements capable of putting into question the conclusions previously proposed.

In these terms,

1. Considering the permanence of the validity of the premises that, in fact and in law, grounded our earlier "Draft Decision", we are then of the opinion regarding its definitiveness, with all legal consequences.

§ II. CONCLUSION

In conformity with what has been stated above and having examined all elements of the record, in particular our earlier "Draft Decision" and the procedural documents submitted by the Taxpayer, herein the Objecting Party, namely the initial petition and its request for right to hearing, because it has been demonstrated that no other understanding is possible for this Large Taxpayers Unit than the one referred to herein, it seems to us to reject the request contained in the record, in accordance with the "summary table" mentioned at the beginning of this report, with all legal consequences, namely, as the case may be, regarding the provision of article 163.º of the Administrative Procedure Code and, as well, compliance with what is required by article 100º of the General Tax Law.

It is further reported that, in case of Superior Approval, the notification of the Taxpayer, herein the Objecting Party, be promoted through official communication to be sent by registered mail, pursuant to the provisions of articles 35.º to 41º, all of the Tax Procedure and Process Code, with all legal consequences.

i) In the 2012 tax period, the Claimant had 243 establishments spread across much of the country;

j) The "service vehicles" referred to in document no. 4 accompanying the request for arbitral decision, the contents of which are taken as reproduced, as well as the travel allowances and compensation for the use of the employee's own vehicle in service of the employing entity under analysis are used by the employees of the Claimant's group, among others in the context of their retail activity, such as trips to the 243 establishments spread throughout the country;

k) Most of the functions exercised by the Claimant's executives require permanent displacements and thus the use of vehicles;

l) In the documents relating to vehicle expenses, the respective registration number is indicated;

m) Displacements are controlled through the completion of maps of the types contained in documents nos. 6 and 7 accompanying the request for arbitral decision, the contents of which are taken as reproduced, and external documents relating to expenses incurred by the Claimant's employees such as fuel, car washing and tolls;

n) The maps must contain, at a minimum, the place of displacement, who made it and its purpose, in addition to the distance traveled and the vehicle used;

o) The maps referred to in the previous paragraph, in order to be accepted as an expense, must be approved by another employee, who reviews and checks them, and then by the supervisor of the employee who made the displacement;

p) Displacements in the employee's own vehicle are paid per kilometer according to the values used in the public service;

q) Sometimes the Claimant's employees must travel to Germany for training actions or aimed at standardizing internal procedures of the group;

r) The Claimant's establishments operate every day of the week, normally around 361 days per year;

s) Vehicles are assigned to employees in accordance with the functions they perform;

t) Some employees do not require a vehicle full-time for their functions, but need it occasionally, for which the Claimant has a number of vehicles in a pool, located at the headquarters and at four company warehouses (depots);

u) The depots have employees who deliver the keys after completion of documents indicating the time the vehicle leaves, the time it will be returned;

v) If an employee needs to travel for more than one day to a location away from the locations where the depots are situated, the vehicle used by them is not returned to the depot;

w) There is no direct control that during the use of vehicles that are in the depots, they are not used for personal purposes;

x) The Claimant had more than 4,000 employees in 2012;

y) With the use of vehicles, the Claimant aims to obtain speed and flexibility with the smallest possible number of employees, which is incompatible with the use of public transportation;

z) Employees who have vehicles assigned to them and are exempt from work schedules do not have to leave them at the company depot and if they need to use them for personal purposes, they may do so, having no obligation to communicate such use to the Claimant;

aa) During holidays, employees who have vehicles assigned to them do not have to return them, as they may be called at any moment;

bb) There is no control by the Claimant regarding the use for personal purposes of vehicles assigned, particularly during holidays;

cc) Vehicles assigned are placed at the disposal of employees for their use in professional terms;

dd) It is not established in company rules that vehicles assigned to company employees may not be used for personal purposes;

ee) On 30-11-2015, the Claimant filed the request for constitution of the arbitral tribunal that gave rise to the present proceedings.

2.2. Unproven Facts

It was not proven that the "service vehicles" referred to by the Claimant were used exclusively in its business activities.

It was not proven that the compensation for the use of the employee's own vehicle in service of the Claimant relates only to the use of vehicles in the context of the Claimant's business activities.

2.3. Justification for the Establishment of the Facts

The established facts are based on the documents filed by the Claimant with the request for arbitral decision and on the testimony of witnesses, with greater relevance given to the testimony of witness B….

The witnesses, although having professional connection with the Claimant, appeared to testify with impartiality and with knowledge of the facts they referred to.

3. Law

The Claimant filed Form 22 return relating to the 2012 financial year, in which it argues that, in the self-assessment it made relating to corporate income tax for the 2012 financial year, it incurred an amount of autonomous taxation greater than what it believes to be due, the excess being €807,224.94, relating to displacements with light passenger vehicles, charges with travel allowances and compensation for displacements in vehicles of employees in service of the Claimant (the Claimant does not include in the request for arbitral decision the issue of autonomous taxation relating to representation expenses that it raised in the gracious objection).

3.1. Expenses with Light Passenger or Mixed Vehicles

The Tax and Customs Authority, in the decision on the gracious objection, argued in summary as follows, regarding expenses with light passenger vehicles:

– these are expenses difficult to analyze and distinguish;

– it was not demonstrated that the expenses in question are directly related to business activity;

– the attempt to produce evidence is made through the presentation of exclusively internal documentation, without the necessary elements that, for example, should appear on invoices and other supporting documents, and without any other justifying elements of an external nature of said expenses;

– we are dealing with a rule whose purpose is to limit abusive situations;

– it is not enough that the taxpayer declares that expenses corresponding to light vehicles are necessarily linked to business activity and presents as evidence mere internally prepared lists;

– no proof was made that the expenses incurred by the Claimant corresponding to light passenger vehicles are related to the business activity developed, thus maintaining the tax acts that are the subject of objection in the present case.

The autonomous taxation relating to expenses with light passenger or mixed vehicles is contained in nos. 3 to 6 of article 88.º of the CITC, which provide as follows, in the wording given by Law no. 55-A/2010, of 31 December:

"3 - Deductible charges incurred or borne by taxpayers not subjectively exempt and that exercise, as their principal activity, activity of a commercial, industrial or agricultural nature, related to light passenger vehicles or mixed vehicles the cost of acquisition of which is equal to or less than the amount fixed under the terms of paragraph e) of no. 1 of article 34.º, motorcycles or motorbikes, excluding vehicles exclusively powered by electrical energy, are autonomously taxed at the rate of 10%.

4 - Deductible charges incurred or borne by the taxpayers mentioned in the previous number, related to light passenger vehicles or mixed vehicles the cost of acquisition of which is greater than the amount fixed under the terms of paragraph e) of no. 1 of article 34.º, are autonomously taxed at the rate of 20%.

5 – Charges related to light passenger vehicles, motorcycles and motorbikes are considered, in particular, depreciation, rents or rentals, insurance, maintenance and conservation, fuels and taxes incidental to their possession or use.

6 – Excluded from the provision of no. 3 are charges related to light passenger vehicles, motorcycles and motorbikes, dedicated to the operation of a public transportation service, intended to be rented in the exercise of the normal activity of the taxpayer, as well as depreciation related to vehicles with respect to which an agreement has been concluded as provided in no. 9) of paragraph b) of no. 3 of article 2.º of the Personal Income Tax Code."

The "amount fixed under the terms of paragraph e) of no. 1 of article 34.º" is contained in Order no. 467/2010, of 7 July. ( [1] )

As can be seen from document no. 2 accompanying the request for arbitral decision, the Claimant presented expenses of €470,483.12 relating to vehicles of value equal to or less than that indicated in that Order and €3,699,804.68 relating to vehicles of value greater than that indicated therein.

As results from the content of said nos. 3 and 4 of article 88.º, these autonomous taxation measures do not have as their premise the non-business nature of vehicle expenses, being applicable regardless of whether the charges are or are not deductible under article 23.º of the CITC.

This conclusion, which results from the literal text of these rules, is confirmed by its comparison with the predecessor nos. 3 and 4 of article 81.º of the CITC, in the wording introduced by Law no. 64/2008, of 5 December, which made express reference to the fact that these autonomous taxation measures related to "deductible charges".

Thus, under the generic designation of "autonomous taxation" in article 88.º of the CITC, situations of various types are indicated, among which are situations of autonomous taxation of charges not deductible under article 23.º of the CITC (as is the case with articles 88.º, no. 1 and 2) and autonomous taxation of charges that may be deductible under that article 23.º (as is the case with the autonomous taxation provided in nos. 3 and 4 of article 88.º).

As referred to in the arbitral award rendered in case no. 628/2014-T:

"The nature of the specific autonomous taxation measures in question in the proceedings has been the subject of extensive discussion in recent doctrine and case law.

A strong current has looked at them as a tax on expenses, which would tax certain types of expenditures, in a manner completely disconnected from income, to the extent that some even argue that they constitute their own tax, only incidentally integrated into the personal income tax and corporate income tax codes.

Nevertheless, the understanding that autonomous taxation on deductible charges, such as those at issue in the present proceedings, integrate the regime of the taxes regulated by the codes where they are integrated, still focusing on income, albeit in a roundabout way, has obtained recurrent acceptance in the case law of the CAAC."[2]

In line with this arbitral case law, the autonomous taxation measures in question could configure themselves "as a 'hybrid' tax, affecting the income of individuals and legal entities, and not consumption or expenses, since they do not present the main characteristics of this form of taxation, nor do they affect property, and fitting into a problem of income taxation in relation to which the legislator chose to act at two levels (separately or simultaneously): not to accept the deductibility of certain expenses, in whole or in part and/or to tax them autonomously". ( [3] )

These autonomous taxation measures will constitute specific anti-abuse rules, which aim, primarily, "to regulate the use by companies of expenses that may be necessary, in part, for the pursuit of normal activity, but which – based on a judgment of normality – will also be for the benefit of individuals who ultimately benefit from them in a personal and not professional capacity". ( [4] )

As SALDANHA SANCHES refers, "a kind of presumption is created here that these costs do not have a business cause and, therefore, are subject to autonomous taxation.

In summary, the cost is deductible, but autonomous taxation reduces its tax advantage, since here the basis of taxation is not a net income, but rather a cost transformed – exceptionally – into an object of taxation".

As referred to in the arbitral award of case no. 628/2014-T:

"The autonomous taxation measures under analysis will thus have as their material basis a presumption of 'partial' business nature of the expenses on which they are imposed, based on the (...) circumstance that such expenses are situated in a gray line separating what is productive business expense from what is private consumption expense, it being notorious that in many cases, the expense will effectively in reality have a dual nature (part business, part personal).

Faced with such difficulty ( [5] ), the legislator, rather than simply excluding their deductibility, or reversing the burden of proof of the business nature 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.º/1 and 88.º/8 of the CITC), chose to establish the regime currently in force, which, nonetheless, has precisely the same basis, the same purpose, and the same type of result, as other forms used in other typical situations of the regime (in this case) of corporate income tax.

Thus, from the known fact, which is the realization of a certain type of expenses, the legislator draws the unknown fact, which is the assessment of the degree of business dedication 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 proceedings. Indeed, it was by presuming that the expenses on which that autonomous taxation is imposed have, as a rule, a mixed dedication, there being, therefore, an unjustified benefit in their full deduction, that the legislator began, in a first phase, by limiting the percentage of those that it admitted as deductible. Subsequently, for reasons that will matter little to the case, but that will include budgetary constraints, on the one hand, and the need to ensure taxation of any benefits that individuals might derive from those expenses, the legislator adopted the current model of autonomous taxation of the expenses now under examination. But this did not exclude, rather it complemented, that original motivation to adequately tax the income of legal entities, distorted by the deduction of expenses that the legislator presumes to have dedication not entirely business-related. That is: the budgetary and possibly fringe benefit taxation purposes that may underlie the current regime of autonomous taxation at issue do not exclude, rather they rest on, the aforementioned presumption of "partial business nature" of the expenses on which they fall (and, complementarily, on the distortion of corporate income taxation resulting therefrom)".

Thus, underlying the autonomous taxation provided for in nos. 3 and 4 of article 88.º is a presumption of non-business nature, albeit partial, of the expenses in question, which justifies that they be deductible with mitigation, the total relevance thereof as expenses being offset by autonomous taxation with the application of a rate lower than that of corporate income tax.

The understanding of the Tax and Customs Authority assumed in the decision on the gracious objection is, properly interpreted, essentially this, in understanding that the exclusion of autonomous taxation relating to vehicle expenses depends on "proof being made that the expenses incurred by the Taxpayer, herein the Objecting Party, corresponding to light passenger vehicles, are related to the business activity developed".

Being thus, there is, as to this point, no alleged invocation a posteriori of a presumption, since, on the one hand, the position of the Tax and Customs Authority embodies precisely the application of a presumption (based on the realization of expenses it concludes the partial non-business nature), only admitting its rebuttal in the face of positive proof that all of the expenses in question were incurred for business purposes.

Since the Tax and Customs Authority did not reject, rather explicitly accepted the possibility of proof being made of the business nature of the expenses (that is, the possibility of rebutting the presumption of partial non-business nature), it remains only to assess whether such proof was produced.

It is manifest that in the decision on the gracious objection the Claimant did not present any proof that the expenses in question have an exclusively business nature, since, in addition to copies of Form 22 return and the corporate income tax assessment statement relating to 2012, it presented only lists indicating registration numbers of vehicles and the professional category of its employees to whom they are assigned or reference that they are used by various employees.

Nothing is stated in these lists that would allow any inference regarding the exclusivity of the use of the indicated vehicles for business purposes.

On the other hand, the proof produced in the present proceedings supports the position of the Tax and Customs Authority, since it was not proven that there is effective control by the Claimant of the exclusivity of vehicle expenses to business activity and, on the contrary, it resulted directly from the proof produced that vehicles assigned to employees are used by them permanently, including in holiday periods, without necessary relation to business activity.

Therefore, given the proof produced, if it is true that it was proven that the majority of the said vehicle expenses have a business nature, it is also true that it was not proven that they have such nature in their entirety and that it was even proven that some thereof derived from the use of vehicles for purposes unrelated to company activity.

Thus, given that the exclusion of the autonomous taxation measures referred to depends on proof of the total business nature of the expenses, it must be concluded that the position assumed by the Tax and Customs Authority in the decision on the gracious objection was correct.

The request for arbitral decision is thus unfounded, in this part.

3.2. Expenses with Travel Allowances and Compensation for the Use of the Employee's Own Vehicle

With regard to representation expenses, the Claimant does not raise in the present proceedings the issue it raised in the gracious objection regarding their autonomous taxation, so only the autonomous taxation measures relating to travel allowances and compensation for displacements in employees' own vehicles are at issue, provided for in no. 9 of article 88.º of the CITC, which provides as follows:

"9 – They are also autonomously taxed, at the rate of 5%, the deductible charges relating to allowances for travel expenses and compensation for displacement in the employee's own vehicle, in service of the employing entity, not invoiced to clients, recorded in any manner, except to the extent that there is taxation in the personal income tax sphere of the respective beneficiary, as well as non-deductible charges under the terms of paragraph f) of no. 1 of article 45.º incurred by taxpayers that present a tax loss in the tax period to which they relate."

The position assumed by the Tax and Customs Authority in the decision on the gracious objection is as follows, in summary:

– the fact that the legislator makes reference to "deductible charges" reveals that this is not a question of a presumption of the "non-business nature" of the charges subject to autonomous taxation, since this has precisely as its premise their prior deductibility and concrete contribution to the formation of the taxable base still within the strict framework of corporate income tax itself;

– that provision refers to deductible charges as costs for corporate income tax purposes, that is, to charges that have been proven indispensable for obtaining income, in light of what article 23.º, no. 1, of the CITC establishes, and the taxation provided for in that provision is explained by a legislative intent to encourage companies to reduce as much as possible expenses that negatively affect tax revenue and encourage companies to opt for solutions that are more advantageous from the point of view of public interest;

– given the objective to be achieved, it would make no sense to allow these deductible charges not to be autonomously taxed; we are thus dealing with an exceptional regime intended to achieve a specific purpose – i.e. to prevent companies from making abusive use of this type of charges and, consequently, to refrain from incurring them;

– for the purposes of autonomous taxation it is not relevant to determine whether these same expenses or charges assume or do not assume a business nature, since that aspect is already implicit in the definition of the taxable event that will be subject to an independent tax from the collection to be determined in the strict segment of corporate income tax itself.

In the present proceedings, the Claimant sought to produce proof that the expenses in question constitute "expenses related to the pursuit of the company's activity and with a strictly business cause, since they do not constitute any benefit in the private sphere of employees".

It is manifest that in the gracious objection the Claimant did not present any proof regarding the business nature of travel allowances and compensation for displacements in employees' own vehicles, since it limited itself to presenting lists with identification of the company's vehicles and indication of its employees who use them, which have nothing to do with travel allowances and compensation for displacements in employees' own vehicles.

In any case, the position assumed by the Tax and Customs Authority is correct.

In truth, the autonomous taxation provided for in the first part of no. 9 of article 88.º of the CITC, relating to deductible charges, is not justified by any eventual lack of business nature of the expenses, since deductibility is a prerequisite for autonomous taxation, nor by the intention to tax disguised income earned by employees through travel allowances and compensation for the use of the employee's own vehicle, since the taxation of such hidden income is expressly provided for under the terms defined in article 2.º, no. 3, paragraph d), of the PITS.

Thus, the autonomous taxation provided for in the first part of no. 9 of article 88.º of the CITC is explicable by the legislative intent to discourage companies from incurring expenses of this type and to mitigate the loss of corporate income tax revenue resulting therefrom, when they are incurred.

Therefore, not being founded this autonomous taxation on any presumption of non-business nature, whether partial or otherwise, of the referred expenses, the taxation cannot be avoided by demonstrating the business nature of the expenses referred to.

On the other hand, only by applying this taxation to the generality of expenses of this type can the objectives sought with its creation be achieved.

In these terms, the request for arbitral decision is also unfounded in this part.

4. Compensatory Interest

The right to compensatory interest in cases of self-assessment depends on payment of the tax debt in an amount greater than that legally due, as results from nos. 1 and 2 of article 43.º of the CITC.

Therefore, since the payment made by the Claimant is not undue, the request for compensatory interest is unfounded.

5. Decision

Wherefore the members of this Arbitral Tribunal agree to:

– judge the request for arbitral decision unfounded;

– absolve the Tax and Customs Authority of the request to annul the decision rejecting the gracious objection, of the request to partially annul the self-assessment of corporate income tax for 2012 and of the request for payment of compensatory interest.

6. Case Value

In accordance with the provision of article 306.º, no. 2, of the CPC and 97.º-A, no. 1, paragraph a), of the CPPT and 3.º, no. 2, of the Regulation of Costs in Tax Arbitration Proceedings, the value of the case is fixed at €807,224.94.

7. Costs

Pursuant to article 22.º, no. 4, of the LFATM, the amount of costs is fixed at €11,628.00, in accordance with Table I attached to the Regulation of Costs in Tax Arbitration Proceedings, to be borne by the Claimant A….

Lisbon, 20-06-2016

The Arbitrators

(Jorge Lopes de Sousa)

(Mariana Gouveia de Oliveira)

(Leonor Fernandes Ferreira)

[1] This Order was subsequently amended by Law no. 82-D/2014, of 31 December.

[2] See, for example, decisions of cases 187/2013-T, 209/2013-T, 246/2013-T, 260/2013-T, 292-2013T, 37/2014-T, 94/2014-T and 242/2014-T.

[3] Arbitral award rendered in case no. 628/2014-T.

[4] Arbitral award rendered in case no. 628/2014-T.

[5] Note that it would hardly be justified that on the basis of this difficulty of proof, the same were prevented, essentially telling the interested party that because it will be very difficult for them to prove the measure/exclusivity of business use, they are prevented from doing so.