Summary
Full Decision
ARBITRAL DECISION
The arbitrators constituting this Arbitral Tribunal agree as follows:
I - REPORT
Constitution of the arbitral tribunal and procedure of the case
A…, S.A., NIPC…, with registered office at …, … – … …, …, has, in accordance with legal provisions, submitted a request for arbitral pronouncement, with the Tax and Customs Authority as Respondent.
The Claimant designated as arbitrator Prof. Doutor Rui Duarte Morais. The highest-ranking official of the Tax Administration designated as arbitrator Prof. Doutor Sérgio Pontes. The arbitrators designated by the Parties agreed to designate Prof. Doutor Tomás Cantista Tavares as presiding arbitrator. All arbitrators accepted their designation within the legal terms and timeframe.
The Collective Arbitral Tribunal was constituted on 21-03-2017.
The Tax and Customs Authority submitted its response, in which it raised, by way of exception, the untimeliness of the request for arbitral pronouncement.
On 2017-07-06, the meeting referred to in article 18 of the RJAT took place, where, in particular, the aforementioned exception was discussed, on which the Claimant had previously already pronounced itself.
On 31-07-2017, an interlocutory arbitral decision was issued concluding with the dismissal of such exception.
On 08-09-2017, the Respondent informed the Arbitral Tribunal that it had appealed the interlocutory arbitral decision to the TCA Sul.
On 11-09-2017, the examination of witnesses took place, whose statements were recorded – and where the first extension of the decision was decided, taking into account the appeal to the TCA Sul and the complexity of the matter.
By arbitral order of 2017-12-29, it was determined that the deadline for rendering the sentence would be successively extended so as to await the decision of the TCAS regarding the appeal filed by the Respondent, without prejudice to compliance with the maximum deadline provided in the RJAT (since the law did not confer on the appeal of an interlocutory decision the effect of suspending the continuation of the arbitral proceedings). The decision of the TCAS has not yet been rendered.
The parties submitted written submissions, in which they maintained their initial positions.
Request for arbitral pronouncement
The Claimant requests the annulment of the additional assessment of Corporate Income Tax (IRC), relating to the year 2011, with no. 2015…, as well as the interest assessments arising therefrom (assessments no. 2015…, 2015… and 2015…), in a total amount of € 3,663,018.11 (three million six hundred sixty-three thousand eighteen euros and eleven cents).
Subject matter of the dispute
C.1) Defects in the inspection procedure
The Claimant alleges, first, the existence of a procedural defect capable, in its view, of leading to the annulment of the contested assessment, given that the duration of the inspection procedure was extended without the reasoning for such decision having been notified to it, nor having been afforded the opportunity to exercise its right to prior hearing.
The Respondent counters by arguing: (i) the existence of an information, dated 01-10-2015, drawn up by the Inspection, proposing the extension of the inspective action for a period of three months, under article 36, nos. 3 and 4 of the RCPITA, which contains the indication of the facts that – in its view – justified the need for extension of the procedure; (ii) that such extension was duly authorized by superior order, as required by law; (iii) that the Claimant confuses the content of a notification with the reasoning of the notified act, and that, considering the content of the notification insufficient, it was incumbent upon it to make use of the provision in article 37 of the CPPT, under penalty of the defects of the notification being considered remedied; (iv) that there is no legal basis for defending the mandatory requirement of prior hearing with respect to interlocutory acts or merely preparatory acts of the final assessment act carried out in the course of an inspective action; (v) that the exercise of the right to prior hearing occurs (only) before the conclusion of the final report; (vi) that even if, by mere hypothesis, it were considered that the six-month deadline for conclusion of the procedure had been exceeded, the consequence would not be the annulment of the inspective procedure and, consequently, the annulment of the additional assessment in question.
C.2) Lack of reasoning of the contested assessment
The Claimant alleges that the Inspection Report, which grounds the contested assessment, is "almost entirely lacking in reasoning," with the TA merely listing mere conclusive judgments, without the Claimant being able to follow the cognitive process and understand why the decision was made as it was, concluding that exhaustive and adequate reasoning was required. It specifies by pointing out as examples: (i) point III.2.1III.2 of the RIT, in which the TA would have limited itself to making arithmetic corrections, removing certain values without, however, explaining the reason why it did so; (ii) point III.2.2 of the RIT, from which resulted an increase in taxable profit of € 4,193,027.80, justified only by the allegation that according to the measurement certificates the real degree of completion of the works is higher; (iii) point III.3 of the RIT, where the TA annuls totally or partially impairments on receivables "alleging in a simple manner and eminently conclusively that because commercial relationships with the debtors continue to exist, there is no credit loss risk."
The Respondent counters by stating that: (i) the Claimant did not demonstrate having any difficulty in understanding/grasping the cognitive pathway followed by the inspection services, having formulated a critical judgment on the same during the inspective procedure, when it exercised its right to hearing, and in the present arbitral action; (ii) that the sufficiency of the reasoning is evident from the fact that the Claimant decided to conform to the majority of the corrections made, contesting only those relating to construction contracts and impairment losses;
C.3) Corrections made by the Tax Inspection
The corrections made by the Tax Inspection, against which the Claimant now objects (having accepted the others) are as follows:
- Construction contracts – revenues to be added/deferred, in the amount of € 4,932,868.00;
- Construction contracts – degree of completion, in the amount of €4,193,027.80;
- Impairment losses on receivables, in the amount of €2,882,986.50;
C. 4) Relation of prejudiciality
In art. 235 of the PI, the Claimant states that "it does not specifically contest the assessment insofar as the same is affected by negative corrections to taxable profit (especially since these corrections result from other corrections, of a positive nature, that the TA made with respect to prior fiscal years)."
In reality, with respect to prior fiscal years, the TA did not accept certain impairments on receivables recorded by the Claimant, having proceeded with corrections (upward) to the taxable profit of such fiscal years and the consequent additional assessments, which were contested by the Claimant in proceedings that are still pending.
In the fiscal year in question, the Claimant proceeded with the reversal, in some cases total, in others partial, of some of those impairment losses recorded in prior years, considering the values contained in its accounting records, that is, it acted as if the corrections made by the TA with respect to the years in which such impairments had been recorded had not occurred. As a result, it increased the taxable profit of 2011 by values higher than those the TA considers to be relevant (since it understands that part of those values should be added to the taxable profit of prior fiscal years and not to the fiscal year in question).
The TA corrected the gains that, in 2011, resulted from such reversals (decreasing taxable profit) in accordance with the corrections it made with respect to prior fiscal years.
Accordingly, the value of the taxable profit of 2011 depends, on this point, on the decisions that will be taken in such appellate proceedings.
For this reason, the Respondent understands that there is a relationship of prejudiciality or dependence between the pending judicial challenges at the TAF of Braga and the present arbitral action, which should lead to the suspension of the present proceedings until such cases are decided.
C.5) Construction contracts – revenues to be added/deferred, in the amount of € 4,932,868.00.
The question at issue is whether, in the use of the percentage of completion method for construction contracts for determining the results of multi-year construction works in progress at the end of the period of 2011, the values recorded by the Claimant as "Other income" and "Price Adjustments" should or should not be considered as contract revenue.
In the first hypothesis (if included in the construction contracts, as the claimant advocates), they are not considered revenues of the fiscal year, but are included in the revenues of the construction contract (according to the rules of art. 19 of the CIRC); In the second hypothesis, as the respondent contends, these items should be considered as total revenue of the fiscal year (according to the rules of art. 18 of the CIRC), whereby the TA promotes an increase to the tax revenues of the fiscal year 2011, in the amount of € 4,932,868.00.
The Claimant further contends that if any correction is warranted, then the corresponding expenses should also be removed from the contract expenses and from all calculations pertaining to the case, since they affect the calculation of the percentage of completion. The Respondent contends not only the legality of such correction but also the absence of the "errors" pointed out by the Claimant.
C.6) Construction contracts – degree of completion
With respect to construction works CO 10/… and CO 11/…, the TA considered that the calculation of the degree of completion determined by the Claimant was incorrect, respectively 52.32% and 46.56%. The TA concluded that the revenues of such works should be recognized in proportion to the work executed, as assessed by measurement certificates: 100% in the first case and 92.71% in the second.
The TA's conclusion is based on what is contained in the measurement certificates of such works. The Claimant understands, to the contrary, that the degree of completion should be based on the provisional reception certificates of such works, on the argument that, after the measurement certificates were drawn up, "problems emerged concerning the execution of the works in question, from which resulted significant additional expenses with the same" (art. 198 PI), and consequently the estimated cost values do not incorporate such additional work.
C.7) Impairment losses on receivables
At issue here is a set of receivables of the claimant against third parties (individually identified below), subject to accounting and tax impairments by the claimant, which the Respondent does not accept, in its interpretation of art. 35 and 36, no. 1, al. c), of the CIRC (as drafted at the date of the facts), because it understands that there is no objective evidence of impairment nor have efforts been made for their collection.
II - PROVEN FACTS
The following facts are considered proven as being relevant to the decision:
General
- The Claimant was notified of the decision to extend the deadline for conclusion of the inspective procedure, with such notification containing only the legal provision that permits it but not the determining reasons for such extension.
- The tax inspection prepared an information, dated 01-10-2015, proposing the extension of the inspective action for a period of three months, under article 36, nos. 3 and 4 of the RCPITA, which contains the indication of the facts that justify the need for extension of the procedure, namely: the existence of situations of special complexity resulting from the high volume of operations and the interconnection with related entities, including a branch in France.
- Such extension was authorized by dispatch of the competent Deputy Finance Director endorsed in such "Information".
As regards construction contracts – revenues to be added/deferred
- The Claimant uses the percentage of completion method for determining the results of multi-year construction works in progress at the end of the period of 2011;
- For purposes of applying this method, the Claimant drew up a calculation map designated as works in progress map, where it determines the degree of completion, through the division between total costs incurred and total estimated costs; this degree is embodied in a percentage that is multiplied by the total contract revenue, thereby determining the period's revenue and, consequently, the revenue to be added in the period or deferred for subsequent periods (doc. no. 4 attached to the PI);
- The Claimant presented itself, at times, in bids for execution of works with prices equivalent to the estimated cost of the work, that is, without estimating any profit margin, in order to win the works to which it bid;
- The Claimant, despite bidding with prices equivalent to the estimated cost of the work, had as its objective to maximize profit or minimize expenses when executing the work, thus estimating the occurrence of a positive result;
- The estimated costs to complete the works contained in the works in progress map as of December 31, 2011 are, for various works, higher than such estimated cost in the prior period's works map;
- The Claimant included in the total contract revenue items designated as "additional work," "other income" and "price adjustments";
- "Other income" includes charges to entities other than the client, such as, scrap sales, amounts charged to consortium partners for work performed in consortium, with respect to amounts to be borne by the partner;
- The tax inspection (and the respondent) recalculates the map of construction contracts relating to 2011 made by the claimant, in the sense that the column of "other income" and "price adjustments" should not be inserted in the map of construction contracts (that is, they do not reflect in the revenues and margins of the construction contracts), but should instead be treated as revenue of the fiscal year, according to the general rules of art. 19 of the CIRC, whereby it understands that the revenue taxed in 2011 is higher than declared by the claimant by € 4,932,868.00 (cf. the maps of the inspection report on pages 10 to 16, with the identification of each and every work in question with "other income" and "price adjustments" subject to correction and doc. no. 4 attached to the PI).
- The amounts that the IT removes from the contract construction revenue (from the estimated cost and the billed value) relate to situations and work actually performed and executed and that reflected in the expenses incurred: the "other income" and "price adjustments" are true and correspond to operations actually carried out.
As regards Construction contracts – degree of completion
- In 2011, the Claimant, for purposes of calculating completion of construction contracts, considered that the works CO 10/… Mechanical and Biological Treatment Unit for Urban Solid Waste, of client B…, S.A. and CO 11/…, Wastewater Treatment Plant of …, of client C…, S.A. had a degree of completion of respectively 52.32% and 46.56%.
- The claimant made these calculations based on the percentage of completion at the end of that period (2011), based on the proportion between expenses incurred through the end of 2011 and the sum of such expenses with those estimated for completion of such works.
- The measurement certificates of such works at year-end 2011 (signed by representatives of the claimant and the clients) indicated that work CO10/… had a degree of completion of 100% and that work CO11/… had a degree of completion of 92.71%.
- In both cases, the measurement certificates are wrong: the works were less advanced than indicated by the measurement – and this was done to permit "advancement" of billing – testimony of witnesses D… and E….
- The claimant incurred expenses with work CO 10/… of 617,178.33€ in 2012 and of 107,777.85€ in 2013 (and it was in that year of 2013 that the provisional reception certificate of such work was drawn up).
- The claimant incurred expenses with work CO11/… of 957,399.29€ in 2012 – and it was in that year that the provisional reception certificate of such work was drawn up.
- The TA's assessment considered the calculation of the degree of completion determined by the Claimant to be incorrect and concluded that the revenues of such works should be recognized in proportion to the work executed – as indicated in the measurement certificates, that is 100% in the case of work CO 10/… and 92.71% in the case of work CO11/… – and increased the taxable profit of the taxpayer by the amounts of respectively 2,064,257.49€ and 2,128,770.31€.
As regards impairments
- The TA made positive corrections to the provisions/adjustments/impairment losses recorded by the Claimant in prior years, having proceeded with the consequent additional assessments.
- Such additional assessments are the subject of four judicial challenge proceedings that are pending before the Administrative and Tax Court of Braga.
- With respect to the fiscal year in question, the TA did not accept impairments on receivables recorded by the Claimant relating to the following clients[1]:
- F…, Lda. – € 20,260.96
- G…, Lda. - € 274,509.29
- H…, SA - € 312,008.99
- I…, Lda. – €1,989,787.69
- J…, S.A. – € 59,685.69
- K…, S.A. – € 344,782.17
- The Claimant has a department that handles collection of receivables whose payment is in default, and the respective employee contacted responsible parties of the four first-mentioned clients on several occasions personally, in order to obtain payment, even if phased, of the amounts referred to therein.
- Despite the default in payment of the amounts referred to and the fact that these clients, most of whom maintained regular commercial relationships with the Claimant, had a history of payment practices well beyond the agreed timeframes, the Claimant continued to maintain commercial relationships with F…, H… and I….
- Client F… was involved in the construction of a hotel in … and as a result of the crisis in 2010 began to have difficulties in collections and, consequently, in payment of its debts.
- Client H… was involved in the construction of the shopping center …, a major work involving very significant amounts. Such work was suspended due to lack of payments, only being fully resumed in 2013, after L… assumed its continuation.
- Client I… was involved in the construction of a geriatric hotel. The owner of the work had a contract with a third party that would operate such establishment. There were disagreements between the owner of the work and such third party, which were reflected in the payments owed by the owner of the work and, consequently, in I…'s ability to meet its obligations.
- The company G… participated, at 25%, in the consortium for construction of …, but, namely due to the aforementioned suspension of such work, entered into great difficulties in obtaining the financial resources necessary to make its share-of-the-work contribution.
- In 2011 the Claimant made an advance to G…, LDA. in the amount of € 622,737.32, despite this company owing it €647,541.01.
- The advance made by the Claimant aimed to permit the purchase of materials and equipment necessary for continuation of the aforementioned construction of …, in order to avoid the losses that would result for the Claimant, its partner in such consortium, from the non-completion of such work or a significant delay in its completion.
- In 2011, K…, S.A. refused payment of the amounts in question, invoiced by the Claimant.
- Which prompted the Claimant to file a judicial action, which terminated by settlement, on 31 May 2012, with the claimant agreeing to reduce the amounts claimed and K…, S.A., reduce the amounts of contractual penalties applied.
The generality of the facts given as proven is contained in the RIT and documents attached to the record, not contested by the parties, as well as facts and values indicated by one party and not contradicted by the other party.
The testimony of witnesses M… and D… was particularly relevant with respect to the subjects of "measurement certificates" and the decisions regarding the constitution of impairments, demonstrating direct knowledge of the facts and testifying in a manner that the arbitral tribunal considered clarifying and truthful.
III - EXCEPTIONS
The exception of untimeliness of the request for arbitral pronouncement invoked by the Respondent was dismissed by interlocutory decision of 31-07-2017, with this decision having been appealed to the TCA Sul in a proceeding that is still pending.
The tribunal understands that such interlocutory appeal does not have suspensive effect on this proceeding, for the following reasons: a) this solution (non-suspension) is dictated by the raison d'être of the tax arbitration process, where speed is a determining factor, as will be developed hereinafter – and whose corollaries apply here as well; b) the arbitral tribunal has no notice, was not notified, that such appeal was given suspensive effect, in the sense of suspending this arbitral decision until that decision of the TCA Sul; c) as a rule, appeals of this caliber (interlocutory decisions) do not automatically have suspensive effect on the continuation of the entire proceeding. In the concrete case, the appeal was processed separately and does not prevent the arbitral tribunal from deciding, as it will decide, the substantive questions in dispute, within the one-year deadline to which it is bound (art. 21 of the RJAT).
IV - SUSPENSION OF PROCEEDINGS
The Respondent invokes the existence of a "prejudicial question" resulting from the fact that the maintenance of the corrections (negative) it made in the calculation of taxable profit of 2011, with respect to the reversal of impairments on receivables, is dependent on the decision of the challenges brought by the Claimant with respect to additional assessments relating to prior fiscal years (cf. d) and e) of the proven facts).
In reality, in the event the such judicial actions are unsuccessful, the negative adjustments made by the TA with respect to impairments considered by the Claimant in 2011 will be maintained. But if such actions succeed, the corrections made by the TA with respect to 2011 will no longer have reason to exist, and, on this point, the values recorded by the taxpayer should be considered.
The question is, therefore, whether the fact that the assessment now contested may yet have to be altered in consequence of what is decided in other proceedings should determine the suspension of the present dispute.
Article 272 of the CPC, subsidiarily applicable, provides in its no. 1 that the tribunal may order suspension when the decision of the case is dependent on the judgment of another already filed or when another justified reason occurs.
The law clearly grants the judge a margin of discretion in deciding suspension of proceedings, which, in our view, should only be taken when the circumstances of the case show that the proper resolution of the case requires that suspension occur.
The systematic suspension of proceedings due to any relations of dependence of decisions to be taken in other proceedings would offend, from the outset, the principle of procedural speed. A principle whose observance assumes extraordinary importance in the context of tax arbitration, since, as is well known (cf. Preamble to the RJAT), the intent to achieve resolution of tax disputes in a shorter timeframe than that which state courts are generally able to accomplish was a determining factor in the creation of this alternative form of dispute resolution.
And observe, in this sense, that suspension of proceedings should not be decreed when a case (this case) is so advanced that the disadvantages of suspension exceed its advantages (art. 272, no. 1, in fine, of the CPC).
It is clear that the decision that this arbitral tribunal is called to make is in no way conditioned by the judgments to be issued in the other proceedings referred to, all the more so since the Claimant took care to, precisely to avert any relationship of prejudiciality, expressly state that "it does not specifically contest the assessment insofar as the same is affected by negative corrections to taxable profit (especially since these corrections result from other corrections, of a positive nature, that the TA made with respect to prior fiscal years)."
It will be said that, absent suspension, the question of the legality of the assessment now contested will not be definitively closed with the decision to be issued by this arbitral tribunal, since such assessment may have to be again altered in consequence of what is decided in other proceedings. It is a fact!
However, such can occur in other situations, namely those provided in no. 2 of art. 3 of the RJAT, that is, cases in which a taxpayer decides to contest the same assessment in a state court and, also, in an arbitral tribunal, invoking different facts and grounds. Then, only with the execution of what is decided in both proceedings will the tax situation in question (the legality of the contested assessment) result definitively stabilized.
Accordingly, it is understood that there are no reasons for suspension of the present proceedings, with the TA, in execution of what is now decided and, at later times, of what is decided in the proceedings pending before the TAF of Braga, having to draw the appropriate conclusions with respect to the reform of the assessments now in question.
V - SANITATION
The parties have legal personality and capacity, are legitimate parties, and are properly represented.
No other exceptions have been raised that require knowledge thereof.
There are no nullities that prevent knowledge of the merits.
VI - DECIDING
Procedural defect
Given what is established as proven in a), b) and c) of the proven facts, we find that the decision to extend the inspective procedure is reasoned, although such reasoning was not notified to the Claimant.
We agree with the TA when it states that, in these circumstances, the Claimant should have requested "notification of the requirements that were omitted," as provided in article 37 of the CPPT.
More important is the understanding of prevailing case law, expressed in numerous decisions, according to which the exceeding of the legally prescribed deadline for the duration of the inspection procedure does not entail any consequences other than those relating to the suspension of the period of limitation for the right to assess (which is not at issue in the present record) – for example, Decisions of the TCA Sul of 12/5/2009, proc. 02961/09, of 6/12/2007, proc. 01456/06 and of 30/4/2014, proc. no. 06580/13).
That is, if the exceeding of the legally prescribed deadline for the duration of the inspective procedure is of no consequence, all the more so will be a decision to extend notified without the corresponding reasoning.
We also share the TA's understanding that there is no legal basis for arguing that there exists a right to prior hearing with respect to interlocutory decisions made in an administrative proceeding. In reality, the decision to extend the duration of the inspective procedure is not included in the list of no. 1 of art. 60 of the LGT, which is well understood given that the participation of the interested party (only in decisions that may directly affect its rights and interests, which will not be the case with extension – we add) is assured by its hearing before the conclusion of the inspection report.
The Claimant's claim to see the contested assessment annulled on account of the invoked procedural defect is thus dismissed.
Lack of reasoning of the contested assessment
It is manifest that the contested assessment (more precisely, the corrections to taxable profit that gave rise to it) is reasoned.
The Claimant perfectly understood the facts and arguments on which the TA relied to proceed with corrections to the declared taxable profit, as it was able to decide which corrections it understood to conform to (the majority, it must be said) and those it understood to subject to a legal reappraisal in the present action.
This arbitral tribunal also (one of the recipients of such reasoning) had no difficulty in understanding the TA's motivation for the corrections it made.
What, in reality, the Claimant contests is the sufficiency of the reasoning not in the sense of allowing understanding of the cognitive process followed by the TA, but in the sense that the facts on which it relies to decide as it did are not sufficient to permit application of the norms it invokes.
But this is not a question of lack of reasoning (which it was now proper to appraise), but rather the sufficiency of the reasoning to permit reaching certain conclusions, which will be appraised next, in the proper places.
The Claimant's claim to see the contested assessment annulled on account of the defect of lack of reasoning is thus dismissed.
Construction contracts – revenues to be added/deferred, in the amount of € 4,932,868.00
This part of the decision, given the complexity of the matter, will be divided into three parts: the circumscription of the subject matter of the dispute; the explanation of the accounting and tax regime for construction contracts; and, finally, the resolution of the case.
Circumscription of the subject matter of the dispute
Both the Respondent and the Claimant agree on the following: a) the claimant was to apply the construction contracts regime to the operations in question, as it did; b) it had to use, as it did use, the percentage of completion method for determining the results of multi-year construction works in progress at the end of the period of 2011 (cf. art. 19, no. 1, of the CIRC); c) for the concrete application of this regime, the claimant had to draw up a map with the works in progress, with various information, such as expenses incurred, total estimated expenses, and other matters – as was done by the claimant; d) all works described in the map are genuine and the values inserted are quantitatively correct.
The Respondent alleges, only, that the inspective services detected the existence, in the aforementioned map, of some anomalous situations, namely, the existence of a broad set of works in which the estimated cost equals the total contract amount, as well as works in which the estimated costs in 2011 are higher than the estimated costs for the same work in the prior period. Concretely, it disagrees with the criterion used in determining the total value of contract revenues, which, according to its understanding, departs from the rules contained in paragraph 11 of NCRF 19.
It considers, in concrete terms, that the amounts billed under the work relating to "additional work" should be added to the contract amount, designated as total contract revenue – and here there is no disagreement with the claimant,
But, contrary to the claimant's advocate, that from such revenue should be removed the value of "Other income," which includes scrap sales and amounts charged to consortium partners for work performed in consortium, and "Price Adjustments," which should be considered, according to the TA, as revenue of the period in which it is billed.
Based on this consideration, the Respondent recalculated the works in progress map, removing from the "total contract amount" (total contract revenue) the amounts relating to "other income" and "price adjustments" and removing from the "estimated cost" (total estimated cost of the contract) such amount of "other income." Having performed the recalculation, the Respondent considers that because it respects revenues that, by force of no. 1 and al. c) of no. 3 of art. 18 and art. 19 of the Corporate Income Tax Code are attributable to the fiscal year 2011, the revenue is higher than declared by the claimant by € 4,932,868.00.
The accounting and tax regime for construction contracts
For the proper resolution of this question, it is important to begin by making the necessary contextual notes so that, armed with such knowledge, the concrete case can then be resolved.
It is well known that the determination of tax profit is based on accounting, with partial acceptance of the dictates of this science: after the acceptance in bulk of accounting law (accounting normalization rules), tax law (CIRC) contains partial and pointed divergences, expressly described in tax law, when it understands that the tax interest is not (fully) protected with the solution proposed by accounting. This is what is laconically stated in art. 3 and 17 of the CIRC.
One of the central issues for accounting and for the IRC is the definition of the temporally relevant moment for the recognition and measurement of negative and positive components of revenue – if only for the elementary reason of annualizing accounts for the fiscal year (for tax, accounting, and commercial law purposes). The tax legislator felt that this matter is so relevant that, in repetition of accounting dictates, it introduced a provision, art. 18 of the CIRC, where it details the general principles (and particular cases and exceptions) of the circumscription of the temporally relevant moment for the determination of revenues and expenses.
These rules are essentially two: a) positive and negative items are recognized at the moment of realization ("regardless of receipt and payment" [art. 18, no. 1, of the CIRC]), in accordance with the principle of economic periodization (accrual in current accounting terminology – cf. paragraph 22 of the conceptual framework); b) with this, the positive and negative components associated with the same revenue are recognized in the same fiscal year – concept of balancing. Art. 18, no. 3 of the CIRC is illustrative: "revenues relating to sales are generally considered realized, and the corresponding expenses incurred […] (al. a); revenues relating to provision of services are generally considered realized, and the corresponding expenses incurred […] (al. b) – the underscores are ours.
The rules described in art. 18 of the CIRC – and replicated from accounting standardization – function, in general, for all situations. However, art. 18 of the CIRC also takes care to regulate special and exceptional cases, but always in connection between the two referred concepts: realization – non-realization [and hence, for example, fair value and the equity method described in nos. 8 and 9 of this provision] and balancing [and hence, for example, the regulation of cases of multi-year forestry operations and determination of results of works performed on own account and sold piecemeal, cf. no. 6 and 7 of art. 18 of the CIRC].
However, there is a situation in which, by its material nature, the proper functioning of the rules for realization in article 18 of the CIRC (and the corresponding accounting principle) is not possible, even if readapted. This is precisely the case of construction contracts, in which, by definition, several years may elapse between the incurrence of expenses (immediate) and the obtaining of the corresponding revenues (only in the future). Paragraph 1 of NCRF 19 (relating to construction contracts) explains, clearly, the motivation of the accounting (and tax) issue underlying construction contracts: "Due to the nature of the activity underlying construction contracts, the date on which the activity of the contract is initiated and the date on which the activity is completed generally fall in different accounting periods."
Now, faced with a special case – an accounting rule (NCRF 19) and special tax rule (art. 19 of the CIRC) is required, whose objective is to assure balancing (but outside the general rule of realization in art. 18 of the CIRC): "the primary issue in accounting for construction contracts is the allocation of contract revenue and contract costs to the accounting periods in which the construction work is performed" (NCRF 19, paragraph 1).
The provision of article 19 of the CIRC applies to the taxation and periodization of taxable profit of multi-year construction contracts, which, at the date of the facts (2011) established in its number 1: "The determination of results of construction contracts whose production cycle or execution time exceeds one year is made according to the criterion of percentage of completion."
And, it clarifies in number 2 of the same provision, that, for tax purposes, the percentage at the end of each taxation period (2011) "corresponds to the proportion between the expenses incurred up to that date and the sum of such expenses with those estimated for completion of the work."
Three important interpretive elements for the resolution of the concrete case may be drawn from this provision, both from the analysis of the norm in concrete terms and, in general, taking into account the partial dependency model between accounting and the CIRC.
First: although accounting (NCRF 19) contains, which does contain, several methods for periodization of revenue from construction contracts – in tax terms, only the method expressed in the proportion between expenses incurred up to that year and the sum of such expenses with those estimated for completion of the work applies.
Indeed, NCRF 19 (paragraph 30) identifies three possible ways to accomplish the determination of the percentage of completion (and the result) in construction contracts, namely: "The stage of completion of a contract may be determined in various ways. The entity uses the method that allows it to measure with reliability the work performed. Depending on the nature of the contract, the methods may include: a) The proportion in which the costs of the contract incurred in the work performed up to the date are to the total estimated costs of the contract; b) Surveys of work performed; and c) Completion of a proportion of the physical work contracted" (cf. § 30). Among these three formulations for computing the percentage of completion, the tax legislator appropriated only one. It clearly opted for a more accounting-oriented formulation – proportion between expenses incurred up to that date and the sum of such expenses with those estimated for completion of the contract – to the detriment of others, not verifiable after the fact through accounting data.
Second: following the rule of dependency, the prescriptions and concepts of NCRF 19 relating to and compatible with the method described in art. 19, no. 2, of the CIRC are applicable in tax terms.
Third: the solutions of tax law (art. 19, no. 2, of the CIRC) and accounting law that replicates it always aim, as a general criterion of interpretation, to assure the necessary balancing (concordance in the same fiscal year) between expenses and revenues associated with the same construction contract, as a way to assure that all costs and revenues of the contract are subject to this special regime for taxation, as a way of determining the true result of each fiscal year.
In sum: the tax legislator, as far as the case under analysis is concerned, embraces the accounting rules contained in NCRF 19, with some limitations: i) it admits only the percentage of completion method; ii) it accepts as a way of determining such percentage only the proportion between expenses incurred up to the date of the Balance Sheet and the sum of such expenses with those estimated for completion of the contract and iii) in everything else, accounting standardization shall apply, if compatible with conclusions i) and ii) above.
Resolution of the case
In the case at hand, the Claimant used the percentage of completion method mandated by tax law and the Respondent does not challenge the use of the method, but rather its calculation – that is, whether the items "other income" and "price adjustments" are inserted (as the claimant advocates) or not (as the respondent contends) in the accounting and tax norm for construction contracts.
Now, let us state it from the outset, the proper interpretation of accounting and tax rules and principles leans toward the inclusion of "other income" and "price adjustments" in contract revenues – whereby the additional assessment is illegal, for violation and misinterpretation of art. 19 of the CIRC, of the paragraphs described below of NCRF 19 and of the pivotal principle of balancing inherent in construction contracts.
The accounting treatment of construction contracts, in accordance with NCRF 19, is one of the accounting matters in which the use of the concept of balancing between revenues and expenses is most evident, resulting in the utter irrelevance of form in favor of substance. Billing – form – is completely irrelevant for purposes of revenue recognition, with the latter recognized based on the actual production associated with the contract – substance of the work performed. All expenses and revenues relating to a work whose execution spans two accounting periods must be recognized in the results of one and the other period in function of their respective execution.
To assure such balancing, the accounting standard seeks to assure that all costs that in any way relate to the construction contract (work) are considered as costs of the contract and that all revenues that have any connection with the contract are likewise considered as revenue of the contract.
NCRF 19 (paragraph 20) excludes four types of costs, namely: "a) General administrative costs for which reimbursement is not specified in the contract; b) Selling costs (costs of selling); c) Research and development costs for which reimbursement is not specified in the contract; and d) Depreciation of idle tangible fixed assets that are not used in a particular contract." And it excludes them, these and only these, because they do not present any relationship with the construction contract.
However, and this is very relevant, NCRF 19 excludes no type of revenue – any types of revenues potentially associated with the construction contract, but that should be excluded therefrom (and be considered fiscal year revenues). To the contrary: NCRF 19 (paragraph 11 and 12), as a way to assure balancing between contract revenue and costs, orders that the following be considered as contract revenues: i) the initially agreed amount; ii) variations in the work; iii) claims and requests and iv) incentives.
The accounting and financial reporting standards (NCRF) result from a process of push down of the international accounting standards (Pacter, 2008)[2], whereby their language may be different from that used in everyday business dealings in Portugal and that established in other national legal texts. Filling in these concepts necessarily passes through the analysis of the NCRF in question, which generally defines them with economic language, which the legal professional will have to interpret.
Note, in this regard, the concept of "claim" contained in § 14 of NCRF 19: "a claim is an amount that the contracting entity seeks to recover from the client or another party as reimbursement for costs not included in the contract price. A claim may result, for example, from delays caused by clients, errors in specifications, or changes discussed in the work of the contract."
While, for example, variations in work include additional and deductive work (NCRF 19 paragraph 13), "claims" will include price adjustments, as, in the course of the contract (work), modifications to costs not considered in the contract price may occur.
The jurisprudence of the superior courts follows an identical line: "what underlies the price adjustment regime is the creation of a mechanism that aims to assure the economic-financial balance of the contract, inserted in the phase of contract execution, as, because the execution may be prolonged over time, the general economic circumstances on which the parties founded the decision to contract may change" (Decision of the Central Administrative and Tax Court South, in the context of proceeding 08906/12, of 06 May 2014).
It is true that the terms are divergent – on one side claim (accounting law) and, on the other, price adjustment (defined by the claimant, according to the designation from other legal sources, for example, art. 382 of the Code of Public Contracts). But the sense is the same – and that is what matters: the accounting standardizer aimed to integrate into the costs and revenue of the contract all those that present a relationship with it, including in this way price adjustments, which are nothing more than the assurance of the economic-financial balance of the contract and, consequently, intrinsically associated with the contract.
In sum: this interpretive result (price adjustments subsumed in construction contract revenues – and should follow such accounting and tax regime) is grounded in three cumulative arguments.
First, in the literal element: price adjustments are subsumed in the concept of claims in accounting (NCRF 19, paragraph 14), which in turn integrates the revenue of the construction contract (and therefore are not a total expense of the fiscal year).
Second, in the systematic element: the method for determining tax results of construction contracts in art. 19, no. 2 of the CIRC is compatible with the factual (and accounting) situations of claims and price adjustments. Tax law incorporates and accepts price adjustments.
And, third, in a dual teleological argument: the dependency between accounting and tax law also operates at the level of identity of concepts and their prescriptive contents; and, on the other hand, because the solution advocated is the one that best encompasses the idea of total and complete balancing between all revenues and all costs associated with construction contracts, with all receiving the same accounting treatment (insertion in art. 19 of the CIRC), in order to better and more perfectly determine the true result of each fiscal year (and of each construction contract).
Let us now turn to the subject of "other income" which, as was proven, includes charges relating to construction contracts, but made to entities other than the client, such as, scrap sales and amounts charged to consortium partners for work performed in consortium, with respect to amounts to be borne by the partner.
What was stated previously with respect to price adjustments also applies to these "other income," namely their compatibility with the proper interpretation of art. 19 of the CIRC and with the general principle of balancing and economic-financial equilibrium of the contract. All costs and revenues associated with construction contracts should be within the same accounting and tax regime (art. 19 of the CIRC), provided the revenues are still related to construction – albeit in a less direct manner, as in the case of "other income."
All expenses and revenues associated with the contract (work) are considered in the percentage of completion method. It is irrelevant in the determination of taxable profit of a construction contract the existence of amounts billed to entities other than the work owner. A conclusion that results from the matter relating to combination and segmentation of construction contracts which clearly places substance, the work, above form, documentation. If, within the scope of construction of a single work, amounts are billed to distinct entities, in substance those billings are relating to such same work, and therefore should be considered in the percentage of completion method of the same.
Consequently, billing issued in favor of consortium partners to balance their participation in the consortium, as well as, billing resulting from the sale of waste, commonly called scrap, resulting from the execution of those concrete works, should be considered in the calculation of the percentage of completion.
In sum: the tax act, by excluding from contract revenue the "other income" and "price adjustments" relating to the contracts, is not in accordance with the provision of art. 19 of the CIRC – and the applicable accounting standardization rules, whereby the annulment of this part of the contested assessment is required.
One final clarification: in annulment litigation (as occurs in tax arbitration) it suffices to consider that the assessment is illegal for having mistakenly interpreted the applicable law by not inserting "other income" and "price adjustments" in the tax treatment of construction contracts. It is irrelevant to ascertain whether the values identified by the Claimant as "price adjustments" and "other income" are correct and were well calculated, all the more so – and this aspect is relevant – because the correction defined by the Tax Authority was qualitative in nature (whether price adjustments and other income enter or not into construction contract revenues) and not quantitative (even if such amounts entered into construction contracts, they would be incorrectly calculated, for whatever reasons, calculation error, quantification error …).
Construction contracts – degree of completion, in the amount of €4,193,027.80;
Article 19 of the CIRC (in the version and wording at the date of the facts, 2011) states that the determination of results of multi-year construction contracts is made according to the criterion of percentage of completion (no. 1), which is determined, at the end of each year, by the proportion between, on one hand, the expenses incurred up to that date and, on the other hand, the sum of such expenses with those estimated for completion of the contract (no. 2).
The claimant, in its 2011 self-assessment, following its calculations based on the rules of percentage of completion, indicated that work CO 10/… had a degree of completion of 52.32% and that work CO 11/… had a degree of completion of 46.56%.
The TA considered that the calculation of the degree of completion determined by the Claimant was incorrect – based on measurement certificates of such works at year-end 2011, where it indicated that the percentage of completion was in one case 100% and in the other 92.71%.
The resolution of this case has two paths – that lead to the same result: one with the analysis of the proven facts and another based on applicable law.
It is clear to us that the TA, in introducing the evidence of the measurement certificates, was able, with this, to rebut the presumption of truthfulness that accounting enjoys as against the claimant – and its calculations of the percentage of completion of such works indicated in 2011, based on the accounting calculations of expenses incurred and expenses estimated (art. 75 of the LGT).
And, faced with this, it became incumbent on the taxpayer to prove that its accounting records were correct, notwithstanding this, or, alternatively, that the indicator introduced by the Tax Authority has no value, because it does not, in fact, correspond to reality.
And the claimant did make such proof: it proved, also through witnesses, that the measurement certificates did not correspond to reality; it was indicated in those extra-accounting documents a percentage of completion of such works higher than reality, only to permit an advancement of billing, with financial advantages for the claimant but without repercussions in the accounting and taxation of the construction contracts (at least in the situation in question). This practice of the company may be censured elsewhere and for other purposes, but not in tax terms: the tax aims to tax the taxpayer's true revenue, in an option for true profit. And, in reality, the percentage of completion of such works was not 100% and 92.71%.
Additionally, and this point is very relevant, the respondent introduces no accounting-based elements to alter the percentage of completion indicated by the claimant. The respondent does not prove that the actual expenses, determined from accounting, were higher than those indicated by the claimant in each of these works; or that the estimated expenses were different from those self-declared.
Wherefore, there is no basis for refusing the taxpayer's data – demonstrated as it is the reason for being of the measurement certificates, that is, that they do not correspond to the true percentage of completion of the works in question.
The second argument has a legal basis – and is explained for argumentative exhaustiveness, given that the argument thus far explained would suffice to consider illegal the tax assessment with respect to the percentage of completion of these two construction contracts.
The question is formulated as follows: if the respondent understood, based on the measurement certificates, that the percentage of completion was higher than indicated by the claimant (based on the calculations it made between expenses incurred and those estimated), then, in that scenario, could the tax correction (quantitative and qualitative) be based on the percentage indicated in the measurement certificates or, to the contrary, would the TA have to establish the proportion of expenses incurred up to the date of the Balance Sheet and the sum of such expenses with those estimated for completion of the contract? That is, could the correction (and definition of the percentage of completion) be made on a physical basis (measurement certificate) or would it have to be supported by an accounting basis (expenses incurred versus those estimated in and by the accounting)?
As was seen above, in point C, Tax law gives a clear answer to this question: for the CIRC – and regardless of other methods that may exist in accounting – the determination of results of construction contracts (and the umbilically linked question of the percentage of completion of the multi-year work) can only be done by "(...) the percentage of completion at the end of each taxation period corresponds to the proportion between expenses incurred up to that date and the sum of such expenses with those estimated for completion of the contract" (art. 19, no. 2, of the CIRC).
The CIRC only accepts that the revenues from construction contracts be calculated based on accounting (incurred and estimated costs) and therefore the assessment at this point would always be illegal because it is based on a percentage of completion that does not result from accounting (percentage of completion by accounting) but from the physical percentage of completion – assessed by measurement certificates.
And the reason for this choice of the tax legislator is perfectly understood: if the CIRC is based on accounting, if it has a presumption of truthfulness, not only for the scientific value of this science, but for the control mechanisms in its use for other purposes that drive toward reality (by the partner, creditor, investor, etc.) it is normal that the assessment of the percentage of completion be attributed to the dictates of accounting. Thereby, greater adherence to reality is achieved, greater verification over time (records are kept) – and note that construction contracts involve multi-year situations, by nature. That is and in sum: any other formulation for determining the percentage of completion (for example measurement certificates) would have lesser credibility and value and capacity for control and verification – and therefore, the CIRC only accepts that the percentage of completion be determined (and corrected) based on elements of accounting.
The respondent, for the correction to be legal, could invoke the measurement certificates (as a pretext or backdrop for the correction), but would then have always and necessarily to explain, by recourse to accounting, what the real and true percentage of completion of the works was, by recourse to accounting data. But, as is clear to see, none of this was done, in the case at hand.
For all these reasons, the contested assessment is annulled with respect to the corrections to the degree of completion of the works relating to the Mechanical and Biological Treatment Unit for Urban Solid Waste, of client B…, S.A. and the Wastewater Treatment Plant of …, of client C…, S.A.
Impairment losses on receivables, in the amount of €2,882,986.50;
What is at issue is the application of article 36 of the CIRC which, in the wording then in effect, prescribed that:
1 – For purposes of determining the impairment losses provided in al. a) of no. 1 of the preceding article, receivables of doubtful collection are considered those in which the risk of uncollectibility is deemed duly justified, which occurs in the following cases:
c) The receivables are in default more than six months from the date of their respective maturity and there is objective evidence of impairment and efforts have been made for their collection.
No controversy exists as to whether, with respect to all impairments in question in the present record, the first of the legal requirements is met: default exceeding 6 months.
It was proven that, in addition to collection efforts made in writing by the Claimant with the clients in question, of which account is given in the RIT, there were efforts made personally by an employee of the Claimant specially appointed to contact the Claimant's debtors in default and, in some cases, contacts at the administration level, all aimed at the regularization of such receivables.
It is thus considered that with respect to all such impairments the requirement of "efforts having been made for their collection" is met.
It remains only to determine whether there was objective evidence of impairment.
First, we find it proven that the Claimant's decisions to record impairments were made on a case-by-case basis.
It is important to note that tax law does not specify which facts are to be proven, that is, which are the indications that must be present for the risk of uncollectibility referred to in the body of the norm transcribed above to be considered verified.
Thus it is necessary to resort to the applicable accounting standards, by reason of the principle of partial dependency that presides over the application of accounting standards in the determination of taxable profit: to the extent that there is no tax norm providing differently, taxable profit is quantified by application of the pertinent accounting standards.
In this case, NCRF 27 - Financial Instruments – applies, which, as far as relevant here, provides as follows:
23 - As of each financial reporting date, an entity must assess the impairment of all financial assets that are not measured at fair value through results. If there is objective evidence of impairment, the entity must recognize an impairment loss in the statement of results.
24 - Objective evidence that a financial asset or a group of assets is impaired includes observable data that draw the attention of the holder of the asset to the following loss events:
(a) Significant financial difficulty of the issuer or debtor;
(b) Breach of contract, such as non-payment or default in payment of interest or principal of the debt;
(c) The creditor, for economic or legal reasons related to the financial difficulty of the debtor, offers the debtor concessions that the creditor would otherwise not consider;
(d) It becomes probable that the debtor will enter bankruptcy or any other financial reorganization;
(e) The disappearance of an active market for the financial asset due to financial difficulties of the debtor;
(f) Observable information indicating that there is a decrease in the measurement of the estimate of future cash flows of a group of financial assets since their initial recognition, although the decrease cannot yet be identified for a given individual financial asset of the group, such as adverse economic conditions national, local or sectoral.
25 - Other factors may equally evidence impairment, including significant changes with adverse effects that have occurred in the technological, market, economic or legal environment in which the issuer operates. A significant or prolonged decline in the fair value of an investment in a capital instrument below its cost also constitutes evidence of objective impairment.
Given that different contoured situations are involved, we will analyze separately the impairments relating to Clients I…, H…, G…, F…, on one hand, and those relating to clients K… and J… on the other.
With respect to the first group of clients, the evidence produced convinced this arbitral tribunal that these went through, in the period in question, significant financial difficulty (no. 24, al. b), of NCRF 27), largely due to adverse national economic conditions (no. 24, al. f), of NCRF 27) (we were at the "peak" of the economic and financial crisis that the country went through, with marked repercussions on the civil construction sector, which is a notorious fact), which obliged the Claimant to offer the debtor concessions that the creditor would otherwise not consider (no. 24, al. c), of NCRF 27), at least in the case of G…, Lda.
The receivables from G… received the following additional weighting. In 2011, the Claimant made it an advance of € 622,737.32, when this company already owed it €647,541.01. This operation has business rationale: G… participated, at 25%, in the consortium for construction of …; G… entered into difficulties in obtaining the financial resources necessary to make its share-of-the-work contribution (due, namely, to the suspension of such work). The Claimant granted this receivable to G… to permit the purchase of materials and equipment necessary for continuation of the aforementioned construction of …, thereby to avoid greater losses for the Claimant – from non-completion of such work (or a significant delay in its completion, with penalties) or having to assume it in its entirety.
Now, such receivable (in default) is integrated into an accounting and tax impairment: it results from the activity of the claimant, has business rationale (and the Court cannot interfere in the company's management options); given the situation of the debtor (in difficulties) and of the work (suspended and in difficulties), there was the possibility that the claimant would not receive such receivable, verified by external circumstances of the case (and could come to receive [an element of chance at the time in question, 2011] if the work was completed and the final client paid it); and this case falls within the impairments recognized by NCRF 27, paragraph 24 c) – with tax acceptance: "The creditor, for economic or legal reasons related to the financial difficulty of the debtor, offers the debtor concessions that the creditor would otherwise not consider."
These concessions are not, at least for tax purposes, reducible to payment agreements fixing new terms, as then there would cease to be default exceeding 6 months. They are rather, as occurs in the case at hand, financing of the debtor with the intent that it recover and be able to pay the commitments which, at the time being considered, it does not have the economic capacity to meet.
Some further considerations:
The fact that the Claimant continued to maintain commercial relationships with, at least, the majority of these clients, some of which had a history of payments beyond the agreed terms, does not necessarily preclude the risk of uncollectibility. Nor does the existence of partial payments of the amounts owed. All trade in which the rule is the granting of credit to clients involves a risk of collection; without assumption of such risk, purely and simply, there would be no business, notably in the civil construction sector. Whether to continue or not maintain commercial relationships with defaulting debtors is a business management decision that the TA cannot interfere with because - as is reaffirmed by extensive case law, albeit often for other purposes (eg. tax acceptance of expenses) – the principle operates among us, with constitutional dignity, of freedom of enterprise (see, by all, the recent Decision of the TCA Sul of 23/3/2017, proc. 06792/13).
What matters, in the decision to constitute impairments, is to evaluate whether the risk is "normal," or whether, at a given moment (when closing each fiscal year), it became "excessive." Existing facts that evidence the existence of an abnormally high risk, impairments must be created, as otherwise accounting would not reflect the true patrimonial reality of the company (this is a concretization of the accounting principle of (sound) prudence).
It is not for the judge (nor for the TA) to superimpose its "assessment of risk" on that made by the entrepreneur (taxpayer). It is only incumbent on it to evaluate whether, considering the facts – proven – on which the entrepreneur based its decision, the constitution of impairments, in each concrete case, appears reasonable because sufficiently reasoned. Which, in this arbitral tribunal's view, by reason of the evidence produced at the hearing, occurred with respect to these clients,
The contested assessment is therefore annulled with respect to the non-acceptance of the impairments recorded by the Claimant relating to clients I…, H…, G…, Lda., F…,
It is now important to analyze the case of Client J…, S.A.
Reading the initial pleading (no. 395 to 400), it is found that the Claimant maintains that "the TA begins by alleging that this is a corporation with exclusively public capital" and therefore, "concluded that the respective receivables offer no risk of uncollectibility." Subsequently, the Claimant sustains the inapplicability to private law entities, albeit with exclusively public capital, of the provision in no. 3, of article 36 of the CIRC.
Now, reading the RIT which in the part where the reasoning of this correction is found, we find that the TA does not directly invoke the application of such norm (it generically states "thus failing to comply with the provision in artt. 35 and 36 of the CIRC"), merely arguing that, because it is a company with public capital, there is no objective risk of non-collection.
Applying coherently the line of thought that we above left expressed as to the criteria that should preside over the acceptance of the recording of an impairment in receivables, it is found that the Claimant did not allege any facts on which it based its decision to constitute impairments relating to this client.
The witness testimony, although with some references to this question, was not conclusive.
Whereby the correction made by the TA is to be maintained, that is, the non-acceptance of the impairments recorded by the Claimant with respect to its receivables against J…, S.A.
Finally, we have the Claimant's receivables against K….
The TA grounds the decision of non-acceptance of the impairments relating to this client in the fact that it is a regular client of the Claimant "with a quite extended payment deadline."
Now, as was proven, what was at issue was not a question of the debtor's incapacity to fulfill its obligations to the Claimant, but rather K…'s refusal to accept, at least partially, the billed amounts and, further, the intent to offset part of the amounts it acknowledged being owed with the application of "contractual penalties."
One could question the recognition by the Claimant of such amounts as revenue given the non-acceptance, at least in part, of such debt by K….
The fact is that NCRF 20, in its point 33, is clear: Revenue is only recognized when it is probable that the economic benefits inherent in the transaction flow to the entity. However, when uncertainty arises as to the collectibility of an amount already included in revenue, the uncollectible amount, or the amount as to which recovery has ceased to be probable, is recognized as an expense, and not as an adjustment to the amount of the originally recognized revenue.
The recognition of such loss (impairment), in the circumstances given as proven, corresponded to what is required by accounting law. With no tax law provision to the contrary, it is considered applicable, by force of the aforementioned principle of the partial dependence of the determination of tax profit on the determination of accounting profit (the application of accounting rules), the impairment recorded by the taxpayer will have to be accepted also at the tax level, whereby, on this point, the correction made by the TA appears illegal.
The contested assessment is therefore annulled with respect to the non-acceptance of the impairments recorded by the Claimant relating to K…, SA.
Complete annulment of the assessments
Although the Arbitral Tribunal has not concluded that all of the corrections to taxable matter made by the TA are illegal (and there are numerous other corrections that were not the subject of the present challenge), the Tribunal, in the absence of elements that would permit it to decide otherwise (partial annulment), will have to annul the contested assessments in their entirety, with the TA, as required by law, having to draw the appropriate conclusions from this arbitral decision, notably with respect to the reform of the assessments now in question.
VI – DECISION
The following are annulled, as illegal: the additional assessment of Corporate Income Tax (IRC), relating to the year 2011, with no. 2015…, as well as the interest assessments arising therefrom (assessments no. 2015…, 2015… and 2015…).
VII - Value of the case
In accordance with the provision in art. 97-A, no. 1, al. a), of the Code of Tax Procedure and Process (CPPT) and 3, no. 2, of the Regulation of Costs in Tax Arbitration Proceedings, the case is valued at € 3,663,018.11
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Lisbon, March 16, 2018
The Presiding Arbitrator (Tomás Cantista Tavares)
The Arbitrator (Rui Duarte Morais)
The Arbitrator (Sérgio Pontes)
[1] Only the impairments whose disregard by the TA is the subject of challenge in the present proceeding are enumerated.
[2] Pacter, P. (2008), An IFRS for Private entities. International Journal of Disclosure and Governance, vol. 6, 1, 4-20.
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