IRC Cost Deductibility and Net Job Creation: CAAD Arbitral Decision 731/2014-T

PROCESS No. 731/2014-T

ARBITRAL DECISION

1. REPORT

1.1. A, S.A., taxpayer no. ..., having been notified of the additional IRC assessment no. ... (with compensation ...), for the year 2009, submitted on 21/10/2014 a request for arbitral ruling, wherein it petitions for the declaration of illegality of such assessment act, in the total amount of € 531.96.

1.2. The Honourable President of the Deontological Council of the Administrative Arbitration Centre (CAAD) appointed on 05/12/2014 as arbitrator Francisco Nicolau Domingos.

1.3. On 24/12/2014 the tribunal was constituted.

1.4. In compliance with the provision of art. 17, para. 1 of Decree-Law no. 10/2011, of 20 January (RJAT), the Respondent was notified on 08/01/2015 to, if it so wished, submit its response and request the production of additional evidence.

1.5. On 10/02/2015 the Respondent submitted its response.

1.6. The tribunal, on 26/05/2015, ordered the notification of the parties to state whether they intended to hold the meeting referred to in art. 18 of the RJAT, since no matter of exception was invoked by the Respondent that would prevent the immediate knowledge of the request for arbitral ruling.

1.7. The Claimant on 27/05/2015 submitted a petition, in which it argues that it has no objection to dispensing with the aforementioned meeting. In the same sense, the Respondent also on 29/05/2014 came before the tribunal to declare that it did not intend to hold the said meeting.

1.8. The tribunal on 29/05/2015 decided to dispense with the holding of the meeting to which art. 18, para. 1 of the RJAT refers, on the basis of the principle of autonomy of the arbitral tribunal in the conduct of the process and in the determination of the rules to be observed in order to obtain, within a reasonable time, a ruling on the merits of the claims formulated, cf. art. 16, al. c) of the RJAT. It likewise granted a time period to the parties to submit final arguments, if they so wished.

1.9. The Respondent submitted its written final arguments on 08/06/2015.

1.10. By order of 23/06/2015 and with the reasoning set forth therein, the tribunal extended the period for issuing the arbitral decision by a period of 2 months and scheduled for 09/06/2014 the pronouncement of such decision.

2. CASE MANAGEMENT

The process is not affected by any defects; no matters have been raised that would prevent the examination of the merits of the case; the arbitral tribunal is regularly constituted and is materially competent to know and decide the claim, and consequently the conditions are met for the final decision to be pronounced.

3. POSITIONS OF THE PARTIES

There are two positions in conflict: that of the Claimant, set out in the request for arbitral ruling, and that of the Respondent in its response.

Summarizing, the Claimant argues that:

a) "The Claimant did not agree nor could in any way accept the content of the aforementioned draft report, which is why it exercised, in accordance with articles 60, para. 1 al. e) of the General Tax Law (LGT) and 60 of the Supplementary Regime of Tax Inspection Procedure (RCPIT), its respective right of hearing...";

b) "It should be noted at this juncture that, in the exercise of the right of hearing, the Claimant did not dispute, considering it to be its own oversight, the corrections proposed to the Tax Benefit - Net Job Creation, in the amount of € 832.56 and the non-acceptance of the cost of tangible fixed assets transferred to specialized costs, in the amount of € 12,166.26.";

c) "However, because it did not conform to the legislation and the legal rules in force, it requested from the AT, given the demonstrated merit of the arguments presented in the exercise of the right of hearing, the annulment of the other corrections proposed in the draft tax inspection report...";

d) "The corrections in question resulted in the issuance of assessment note no. 2014 ... - doc. 4. (compensation no. ... - doc. 4-A), whose amount payable amounts to € 531.96, with the deadline for payment ending on 23 July 2014.";

e) With respect to the non-acceptance of the cost inherent in the development of the software implementation project ..., it argues that: "The Claimant cannot fail to express, at this juncture, its astonishment at the arguments put forward by the AT, in the draft tax inspection report and those now put forward in the final inspection report to justify the correction to taxable income, in the amount of € 50,956.07, relating to the non-acceptance of costs incurred by A with the development of the software implementation project (...), which cannot be understood, nor can in good faith, be accepted.";

f) "Thus, the AT, by reference to the matter under analysis, corrected the taxable income of the Claimant by considering that, since the software implementation project was not implemented, it would not, allegedly, be legally permissible under the terms of art. 23 of the CIRC.";

g) "The AT went even further, in response to the exercise of the right of hearing evident in the final inspection report, when it states that the inspection services limited themselves to making a 'logical deduction', because the implementation of inventory management software was not completed, and therefore the benefit that would result from its use, or which would be expected, did not materialize, because the software was not implemented, and therefore the cost cannot be accepted for tax purposes.";

h) "The AT should be aware, as is commonly accepted in Portuguese case law and doctrine, that the interpretation of art. 23 should not be made in the sense of accepting for tax purposes only those costs that actually realized profits or gains subject to tax, as the AT tried to suggest.";

i) "In reality, for a cost to be fiscally relevant, it must be able to be attributed to the operation, in the sense that there must be a causal relationship between such cost and the company's profits, taking into account normal market circumstances, considering the normal risk of economic activity, in terms of economic adequacy of the act to the purpose of profit maximization, which was verified in the case in question.";

j) "Contrary to what the AT wants to insinuate, not all investments made by companies in the development of new products, optimization of production lines, or any research aimed at improving and maximizing profits produce effects and result in actual profits for the companies or even come to be implemented.";

k) "In fact, not infrequently do the investments promoted by companies fail to achieve the intended effect; otherwise both the Portuguese business fabric and the national economy would be much more flourishing and would be in a better state than that which they currently display, without prejudice to other equally relevant considerations.";

l) "It would even be somewhat contrary to business logic and investment (and indeed rather naive) to even contemplate the possibility that all investments made in improvements (in the case in question software) actually result in improvements or even see the possibility of being able to be implemented.";

m) "Obviously, the logic of investment will always be this, and the Claimant would not have invested in the development of software if it did not think that this would, in an initial phase, be implemented, and that subsequently it would bring efficiencies capable of generating an increase in profits....";

n) "To consider that a cost cannot be fiscally accepted because it did not generate profits is at minimum reductive and contrary to what Portuguese doctrine and case law and the ultimate purpose of companies, profit, represent; moreover, it is not within the AT's role to judge the goodness of the management acts or strategy undertaken by companies!";

o) "In this sense, the AT clearly has no reason when it considers that the Claimant 'did not enjoy any benefit resulting from the use of that software because it was not implemented in the production process of the goods of the 4th range activity', as the development of the mentioned project constitutes a matter of internal management and strategy of the company, being a cost with actual connection to the activity of the Claimant and within its corporate purpose, to which the AT is unrelated, and therefore cannot intervene in what should be a decision of the company management bodies, making subjective judgments about the goodness of the management undertaken.'";

p) "Indeed, the fact that the 4th range market (to which the aforementioned software would be dedicated) suffered a considerably sharp decline, a situation which could not in reasonable terms be anticipated by A, and the fact that the continuation of the project under analysis could result in a loss greater than the profit it would generate, and as such further reduce the taxable profits which the AT accuses the Claimant of subverting, resulted in the decision not to implement the software and the reclassification of the recognition of the same as an asset (fixed asset in progress) to specialized costs.";

q) The AT maintains that the correction was made because the cost could not generate profits: "...because the implementation of the software was not completed by the decision of the taxpayer.";

r) "Now, this statement is not only untrue, but is fallacious, since only when the decline in business volume associated with the 4th range was noted was the decision taken not to implement the software in question, and until that moment the expenses inherent to such project had the potential to be profit-generating.";

s) "If this were not the case, what would be the economic rationale underlying the contracting of the development of such a project if, a priori, the Claimant did not have the expectation that it would result in an increase in efficiency and as such be able to increase profits?!";

t) "It is important to note further that the AT states that it was not the entity contracted to develop such software - ... – that decided not to implement it in Portugal, but the Group, which is why 'the expenses ... were not the subject of a study on whether this software should be implemented, or not, in A Portugal.'";

u) "In fact, the expenses relate to a software project and not to a judgment on the goodness of its implementation in Portugal, since ... was contracted by the Group to develop the software project, it does not fall to it to make any decision on its adequacy to the reality of A Portugal.";

v) "But what the Claimant does not understand is what relevance such an argument has in the context of disregarding such charges as 'fixed asset in progress' for 'specialized cost', with the respective reasoning being the finding, by A, that the project in progress would not bring the expected benefits and therefore should not be implemented in view of the anticipated discontinuation of the 4th range.";

w) "In light of the foregoing, the arguments invoked by the AT should be dismissed...";

x) With respect to the non-acceptance of the cost debited under the Master Service Agreement contract, it states that, since the AT: "...was not able, through the documents made available by the Claimant, to confirm the amount paid as group expenses, that amount should simply be disregarded and as such not accepted, without proceeding to an adjustment to taxable income in the amount of € 20,181.86.";

y) "The Claimant agrees with the AT on this point, and rightly so, as it has always shown itself willing to clarify all doubts and cooperate, in the spirit of good faith and the principle of cooperation with the AT in the inspection process.";

z) "It should be noted that only after notification by the Services of the final inspection report did the Claimant realize that by oversight it had provided them with an excel file with the estimate for the year 2009 (...) and not the final file proving the amount of € 1,901,575.67 debited by another entity of Group B (hereinafter B) to C (which contributes to the overall amount debited under the Master Services Agreement and rebilled to the Claimant in the proportion better explained below)...";

aa) "The Claimant also intends, in the spirit of cooperation with which it has always guided its actions, to attach as doc. 6 (...) a copy of a file composed of 12 sheets of excel that break down, by month, the values leading to the ascertainment of a value of € 1,901,660.68 (Total amount reporting) and € 1,901,575.67 (total amount invoice) which the AT allegedly was not able to determine...";

bb) "It will be important, first of all, to clarify the terms of the 'Master Services Agreement' contract under which such services were debited.";

cc) "Under the terms of the 'Master Services Agreement 2007', the holding of Group A, C, commits itself to provide services related to management, marketing, financial support and technical support, among others, to its subsidiaries, a category which includes the Claimant.";

dd) "The price of the services provided by C to its subsidiaries corresponds to the cost incurred by that company to be able to provide such service, plus a margin calculated on the value of the costs incurred.";

ee) "The allocation criterion among the various Group entities is proportional to its gross margin on budgeted sales and its respective EBITDA, corresponding, in the year 2009, to the Claimant, 1.06% of the total value of 'Group Expenses.'";

ff) "Depending on the type of service to be provided, C resorts to its own staff or uses third parties to provide the service in question, as happens, for example, when C contracts services from B.";

gg) "B performed, until the end of 2009, the role of entity responsible for the provision of services (e.g. financial support, legal and tax, human resources, IT) to the entire Group A, operating as a shared services center.";

hh) "As such, B passed on to the beneficiaries the costs incurred in the provision of the services rendered.";

ii) "By reference to 2009, C invoiced to the Claimant the amount of € 133,771 under 'Group Expenses', a value that corresponds to 1.06% of the total amount of € 12,604,172.64.";

jj) "The amount of € 12,604,172.64 includes the amount of € 5,849,931.47, which corresponds to expenses allocated as 'General Expenses' to C by B, which breaks down as follows: a) Fees – Other € 3,948,355.80 (relating to salaried personnel and external consultants); b) Services – ICO € 1,901,575.67 (relating to general expenses, which are not allocated to specific projects or entities, but used by all Group entities and relating to ordinary expenses).";

kk) "The AT came to question the aforementioned value relating to Services – ICO, stating that it was not possible to prove the method of its determination, without demonstrating, conclusively, the motivation for the doubts raised.";

ll) "The Claimant reiterates, above all, that the value of € 1,950,967.47 corresponds to an estimated value for the period 2009, as shown in the worksheet attached to the Inspection Report as annex 9 ('budget'), with the final value relating to the year 2009 being € 1,901,575.67, as shown in documents 5 and 6 previously attached.";

mm) "In that sense, the Claimant cannot accept that the AT comes to question the determination of the aforementioned amount and put into question the acceptance of the cost relating to its respective proportional allocation to A Portugal.";

nn) "It should be noted that the Claimant informed the AT that this included, in particular, expenses with IT services, but not only, which corresponds to the truth, as can be verified through the attached documents, without prejudice to containing expenses of another nature related to the general and operational services of coordination and administration provided by B.";

oo) "The AT also came to question whether the costs debited directly to the Claimant by B are included in the accounting of the Group holding – C – specifically in the line item relating to IT costs.";

pp) "It should be noted that in this consideration, B may provide occasional and/or specific services dedicated to a specific beneficiary, a situation in which they are charged directly to the respective recipient, which is what happened in this specific situation by reference to the amounts of € 29,660.00 and € 11,143.00, invoiced directly by B to the Claimant.";

qq) "Furthermore, the Financial Statements of the Claimant relating to the tax period under discussion were duly audited and no emphases or reservations were raised with respect to them.";

rr) "In that sense, the Claimant again emphasizes that it is inadmissible to accept the insinuation that the costs recorded in the Claimant's accounting could be duplicated.";

ss) "In this regard, it is also important to note that it is the AT that is burdened with the burden of proof to demonstrate that such cost would be duplicated or that it would have already been previously considered, which it failed to do.";

tt) "Nevertheless, the Claimant understands that the documentation now attached will be sufficient to conclusively prove the method of determination of the value of € 1,901,575.67 and remedy the alleged doubts generated and which are now duly substantiated, enabling the definitive proof of part of the value recorded as a cost and subject to correction by the AT, an amount calculated in the sum of € 20,181.86.";

uu) "Thus, in light of the foregoing and the elements now provided, also in this consideration it is not possible to accept the position sustained by the AT, and the correction made in this respect should equally be disregarded.";

vv) It states that the act in dispute suffers from the defect of lack of reasoning, since "...the AT, in this case, did not set out any substantial argument or sustained reason to justify the corrections made, which in itself constitutes the defect of obscure and incomplete reasoning, or in other words, lack thereof, which is expressly invoked.";

ww) "From the analysis of the alleged reasoning forwarded, it results that the same does not satisfy the requirements demanded by the tax laws, most notably in art. 77 of the LGT, in the sense that it does not allow the Claimant to understand the reason that justifies the tax act, nor its quantification.";

xx) "The reasoning is erroneous since, as has been demonstrated, there is no motivation capable of justifying the corrections notified to the Claimant.";

yy) "The Claimant does not understand, nor can understand, the reason why it is notified of the assessment act in question, which determines tax payable in the amount of € 531.96.";

zz) With regard to the lapse of the right to assess IRC, it states: "...the Claimant was notified, on 14 November 2013, of the opening of the external tax inspection procedure (...) of partial scope in the IRC sphere, which began on 20 November 2013.";

aaa) "Under the terms of art. 36 of the RCPIT, the tax inspection procedure may be initiated up to the end of the statute of limitations period for assessing taxes or the sanction procedure, which occurred in this case as the Claimant was notified on 14 November 2013, with the end of the statute of limitations period coinciding with 31 December 2013.";

bbb) "Now the Claimant finds it very strange that in a later phase (on 6 February 2014) the AT should alter the scope of the external tax inspection procedure from partial to general.";

ccc) "As such, the Claimant considers that there was an error in the application of law, in the sense that the statute of limitations period for assessment had already occurred, only suspended within the scope of the partial-scope inspection, when the notification of the extension of the scope from partial to general was made, and the alteration promoted is a cause of annulability of the act.";

ddd) "Thus, the AT came, already after the statute of limitations period for the right to assess taxes, to extend and alter the tax inspection procedure, which is why the present corrections are tainted, and should as such be annulled, which is hereby invoked...";

eee) "...the Claimant is entitled not only to the right to reimbursement of the amount already paid, but also to the payment of compensatory interest in the terms better provided for in the provisions of articles 43 of the LGT and 61 of the CPPT, which is hereby requested".

In a different way, the Respondent argues that:

a) "The AT hereby challenges the factual and legal reasons articulated by the Claimant in its petition, considering that the corrections now challenged result from a correct interpretation and application of law to the facts and the full compliance with the applicable procedural rules.";

b) With respect to the software implementation project "...": "The SIT never issued any opinion on whether to implement one software or another.";

c) "Nor issued any opinion on the decision to end or not the activity of the 4th range.";

d) "The SIT proceeded, instead, to an analysis of the accounting elements provided by the Claimant itself, with the purpose of verifying whether the accounting records and the determination of the declared taxable income complied with the provisions of tax law, in particular with the provisions of the CIRC.";

e) "Despite being criticized by the Claimant, the truth is that the conclusion of the reasoning set out in the inspection report is a logical deduction, but it is only the conclusion of something that was duly explained and substantiated...";

f) "That is related to the fact that these costs do not generate profits, but it is not at all correct to state plainly and simply that the AT disregarded the cost of € 50,956.07 relating to software ... because it did not generate profits.";

g) "In the actions of the AT there is no question of whether one or another management option is, or is not, correct; it is a matter of the fact that we are dealing with a cost that potentially could never generate profits.";

h) "This is because, with the end of the 4th range (in Portugal), the Claimant would not have the sector for which the software project was intended to be applied.";

i) "That is, in other words, it was not in a position to fulfill the objective of optimizing resource management and contributing to a better result in the performance of the activity of the 4th range (through inventory management of products used in the production process).";

j) "It should also be noted that what is verified in the specific case is that there is no causal relationship, that is, a relationship between the expense and advantages or future advantages for the Claimant, but rather, possibly, only for other group companies that still maintained the 4th range.";

k) "Moreover, the truth is that the software did not reach the stage of being assigned to the operation of the production activity, and therefore, in addition to the absence of a causal relationship between the cost and the profits, it is not possible to determine whether, if the software had been actually realized and implemented, it would have contributed to the obtainment of profits different from those actually occurred.";

l) "It is true that, when developing research whether software or tool/means of production, we can never know the final result, but, in the present case, that possibility was entirely precluded because the objective of that tool was the organization of the activity of the 4th range and, with the withdrawal of that activity from Portugal, the economic objective to which that project was intended was never achieved.";

m) "Therefore, what was always lacking was the ultimate motivation that each cost must bear, which is that of contributing to the achievement of the company's profit.";

n) "Nor should it be said that the fact that the production activity of the 4th range was discontinued is not relevant, because the truth is that it is very relevant, indeed, why develop studies when from the outset they are not going to bear fruit?!";

o) With respect to the indispensability of the costs: "Therefore the AT did not question the result, because it is not necessary to attribute fiscal relevance to charges to demonstrate that they actually produced a positive result.";

p) "It did question, and with full legitimacy, the fact that an expense was incurred that had no potential whatsoever, because the purpose/object before being achieved had already been eliminated from the market of the company's activity in question (abandonment of the 4th range).";

q) "Therefore, it was never a matter of acts of the type that a company carries out with the objective of increasing profits and with potential to generate an increase in gains.";

r) "...an expense made by the company, in order to be fiscally relevant, given its indispensability, must be potentially able to provide profits or gains regardless of the result that in practice they provide, and in the specific case at the moment of delivery of the income tax return (form 22) the Claimant had perfect and full knowledge that this potential did not exist.";

s) "Therefore, it had perfect knowledge that, fiscally, that cost was not relevant, given the fact that it was dispensable, which is why it should have added it to Schedule 7.";

t) "Now, in the present case, as appears from the Draft Inspection Report, see pages 28 to 33, the AT was able to substantively demonstrate that the expense associated with the implementation of software could never be part of the corporate scope of the Claimant, being instead a distribution of expenses from a group perspective which would only have taken into account motivations of a fiscal nature and which never had the potential to positively influence the achievement of profits or gains of the Claimant.";

u) "It is equally certain that the Claimant was also never able to rebut such judgment and demonstrate that the incurrence of the cost was always made in its interest and for the development of its economic activity.";

v) With respect to the cost debited under the Master Service Agreement contract, it argues that: "...the Claimant's exposition in this segment is in itself contradictory, because inexplicably only now does it seem to have 'found' document(s) that allegedly explain all the movements that, previously and duly requested to do so, it could not find in the inspection procedure phase.";

w) "Thus, being the case that the documents that the Claimant now intends to present were not and could not be analyzed in the inspection procedure phase by the AT, and being equally the case that they are not supervening (nor was this circumstance alleged by the Claimant) and that it was incumbent on the Claimant to present them in the proper forum before the AT, they cannot now be admitted for attachment, with a view to their examination for the purpose of controlling the (il)legality of the tax act.";

x) "Whereby, under penalty of violation of the principle of contradiction, the removal of the documents intended to be attached by the Claimant under nos. 5, 6 and 7 is requested.";

y) "With respect to the burden of proof, when the Claimant states that the AT questions the values, 'stating that it was not possible to prove the method of its determination, without demonstrating conclusively the motivation of the doubts raised.'.";

z) "It is also incomprehensible that the Claimant in art. 67 of the petition for arbitral ruling states that 'it informed the AT that such value included in particular expenses with IT services and not only...'";

aa) "Thereby admitting that it did not demonstrate the nature of the services in question.";

bb) "It is not sufficient to merely state that the services are IT services and not only (what would those 'not only' be) to meet a burden of proof regarding the correct accounting of costs.";

cc) With respect to the burden of proof: "...in this case, the party that invoked the right to the cost was the taxpayer, and the AT disregarded it, not because it was duplicated,";

dd) "but because certain situations were verified that raised doubts, which are duly substantiated, and which made it impossible to conclusively prove part of the value recorded as a cost.";

ee) "That amount corrected by the AT (of the amount of € 133,771.80 recorded as cost, the AT did not accept the amount of € 20,181.86), with the burden of proof lying on the taxpayer, now Claimant, regarding the proof of the cost.";

ff) "Since such proof or accounting justification was not verified in the inspection procedure phase or in the exercise of the right of hearing, knowing that the documentation that the Claimant presented there was not fit to prove the incurrence of the cost, the correction now under analysis made by the AT is legal and legitimate";

gg) As to the defect of lack of reasoning, it states that given the "...reading of the inspection report, a reasonable person placed in the position of recipient, would be able to grasp its meaning.";

hh) "...reasoning is a relative concept, which varies according to the specific legal type of administrative act, and the legal requirement must be understood in competent terms, given the functionality of the institute and the essential objectives to be pursued.";

ii) The reasons underlying the corrections "...were fully understood and subsequently referenced and attacked by the Claimant in its petition for arbitral ruling, which otherwise would not have submitted it, with the specific content...";

jj) But "...to the extent that a situation of lack or insufficiency of reasoning is verified, it was incumbent on the Claimant to make use of the mechanism provided for in art. 37 of the Code of Tax Procedure and Process (CPPT) and request its notification or issuance of the certificate in accordance.";

kk) "Now, as the Claimant did not use the faculty conferred by law, it must be concluded that the acts referred to contain, as they actually do contain, all the elements necessary for its full understanding and that the proclaimed defect that they might have been subject to was remedied.";

ll) With respect to the statute of limitations for the right to assess, it is maintained that: "The notice letter was delivered by hand, as evidenced by personal notification made to its Administrator Mr. D, TIN ..., on 2013/11/14.";

mm) "The Claimant argues the existence of a statute of limitations for the right to assess, in that the alteration of the scope of the external inspection from partial to general occurred after the lapse of the statute of limitations period, this alteration being a cause of annulability of the tax act.";

nn) "As for the extension of the service order, this was initiated as being of partial scope, that is, in the IRC sphere, however, a change was made to general scope, notified to the Claimant on 2014/02/06.";

oo) "Now, despite this change in scope from partial to general, the truth is that the corrections made only affected IRC...";

pp) "...the Claimant has not the slightest reason.";

qq) "In fact, as can be verified by a brief analysis of the documents contained in the administrative file, the service order, which determines the beginning of the external inspection procedure, was signed on 2013/11/20, thereby suspending the statute of limitations period.";

rr) "As for the need for a reasoned order referred to in art. 15 of the RCPIT, in this specific case it was expressly and effectively safeguarded and observed.";

ss) "Without further considerations, it is easily inferred that the case law is 'overwhelming' in considering that the end of the suspension of the statute of limitations period is verified with the notification of the final report of the inspection procedure (art. 62, para. 2, of the RCPIT), provided that the duration of the external inspection has not exceeded the period of 6 months after the notification to the taxpayer of the service order or order beginning the external inspection action...";

tt) Finally, with respect to the compensatory interest requested, "Given that the arbitration process, under the terms defined in the RJAT, has the sole purpose of a control of legality of the impugned assessment, it cannot therefore determine that there was 'error imputable to the services' when through a legally sustainable interpretation of a tax fact subject to IRC, costs were considered not accepted for tax purposes.";

4. FACTUAL MATTER

4.1. FACTS CONSIDERED PROVED

4.1.1. The Claimant designates itself as "A, SA.", legal entity no. ....

4.1.2. Its main CAE is "52101 – Cold storage" and its secondary CAEs are: "52102 – Cold storage", "46311 – wholesale of fruit and vegetables, except potatoes" and "35302 – ice production".

4.1.3. The corporate purpose of the Claimant, in 2009, was divided among 3 activities: logistics (distribution service for fresh products to recipients identified by its clients), production/4th range (purchase of vegetables and fruits which after washing are treated and packaged as ready-to-eat products) and commerce (purchase and sale of fruits and vegetables).

4.1.4. On 04/10/2013 the Claimant was notified of an internal inspection procedure, regarding the periodic declaration of IRC, IVA, RFIRC and RFIRS.

4.1.5. The Claimant was notified on 20/11/2013 of the opening of an external inspection procedure, relating to the IRC year - 2009, with the signing of the service order.

4.1.6. The Claimant was notified on 06/02/2014 of the alteration of the external inspection procedure from partial to general scope.

4.1.7. The Final Inspection Report was notified to the Claimant on 19/05/2014.

4.1.8. In such Report, purely arithmetical corrections are made in the amount of € 84,136.75.

4.1.9. In such corrections are included, notably: i) € 50,956.07 relating to "Development of the software implementation project '...'" and ii) € 20,181.86 "Cost debited by C, under the 'Master Service Agreement 2007' contract".

4.1.10. The project "..." related to the development of software applied to inventory management (production area) and also to a data interface with the accounting program.

4.1.11. Group A contracted ... to develop an ERP software to be implemented in all companies of the group that worked with the corporate activity of 4th range production.

4.1.12. The software implementation project was presented in 2008 by ....

4.1.13. In 2009, the software development and implementation project was already underway.

4.1.14. The Claimant in 2009 still engaged in the corporate activity of 4th range production, achieving a turnover of € 5,393,000.00.

4.1.15. The Claimant and other group companies entered into a "Master Service Agreement 2007" contract with C (C), the holding company.

4.1.16. From such contract results:

i) The obligation of C to provide all services related to Management, Marketing, financial support and technical support;

ii) The cost of the services provided is shared among each recipient proportionally to its gross margin on budgeted sales and its EBITDA (result before interest, taxes and depreciation);

iii) The amount to be paid by the recipient of the services shall be 50% of the amount allocated;

iv) Services requested by the recipient with occasional and specific nature are charged directly to it, without any allocation.

4.1.17. Further, in accordance with the Inspection Report, the doubt raised by the inspection services with respect to the "Master Service Agreement 2007" contract entered into by the Claimant centered on the amount debited to it, under "Group Expenses", in the amount of € 133,771.80. More specifically, regarding the method of its determination and the nature of the costs that comprise it, in the part concerning "Services – ICO (top)", which it justified as IT services and which were invoiced to the holding in € 1,901,575.67.

4.1.18. On 30/04/2014 the Claimant was notified to exercise the right of hearing in relation to the Draft Tax Inspection Report.

4.1.19. On 15/05/2014 the Claimant exercised its right of hearing with respect to the Draft Tax Inspection Report.

4.1.20. By document dated 26/05/2014 the Respondent made the additional IRC assessment no. ... and compensatory interest, as well as compensation no. 2014 11214336, which resulted in tax payable in the amount of € 531.96.

4.1.21. The Claimant made payment of € 531.96 on 20/06/2014.

4.2. FACTS NOT CONSIDERED PROVED

There are no facts with relevance to the arbitral decision that have not been given as proved.

4.3. JUSTIFICATION OF THE FACTUAL MATTER CONSIDERED PROVED

The factual matter given as proved has its origin in the documents used for each of the facts alleged and whose authenticity was not challenged.

5. PRELIMINARY MATTER

The Respondent argues in its response and in its allegations that the documents presented by the Claimant under numbers 5, 6, 7 with the request for arbitral ruling should be removed, for violation of the principle of contradiction, since they were not examined in the inspection procedure phase.

In the first place, there is no violation of the principle of contradiction, since the Respondent had knowledge of them upon being notified to submit its response. Strictly speaking, the Respondent itself, if it understood that the doubts it raised regarding the cost to which the documents relate were eliminated, could revoke the act in dispute in part, as art. 112, para. 3 of the Code of Tax Procedure and Process (CPPT) admits.

Moreover, the tribunal is bound by the principle of discovery of truth, and since the documents are, in theory, relevant to assess the indispensability of the cost in question that the Respondent challenged by not proceeding with its acceptance, there is no legal basis to remove them or, it is repeated, to conclude that their attachment upon submission of the request for arbitral ruling violates the principle of contradiction.

6. THE LAW

In the first place, given the position of the parties, the tribunal must decide the following questions: i) to determine whether the tax act in dispute suffers from the defect of lack of reasoning; ii) to determine whether the statute of limitations for the right to assess IRC for the year 2009 has run due to the alteration of the scope of the external inspection procedure from partial to general, and iii) to decide whether the costs incurred with the development of the software implementation project "..." and those debited under the "Master Service Agreement" contract are deductible for the purposes of art. 23 of the Code of Corporate Income Tax (CIRC), in the version in force at the time of the facts.

Now, as no provision on the order of knowledge of the defects is found in the RJAT, art. 29 of such statute refers the tribunal to the CPPT, more specifically to the legal regime of judicial challenge, a procedural means from which the legislator, as a rule, designed the arbitration process.

In such activity we arrive at art. 124, para. 1 of the CPPT which provides: "In the judgment, the court shall give priority consideration to the defects that lead to the declaration of non-existence or nullity of the act impugned and, thereafter, the defects argued that lead to its annulment". And it continues in para. 2 of such provision: "In the said groups the examination of the defects is made in the following order: a) In the first group, that of defects whose outcome determines, according to the prudent criterion of the judge, more stable or effective protection of the offended interests; b) In the second group, the one indicated by the challenger, whenever it establishes between them a relationship of subsidiarity and no other defects are alleged by the Public Prosecutor or, in the other cases, the one set out in the previous paragraph".

Although, in the case sub judice, the scope of the matters to be known does not exceed annulability, we cannot forget that the doctrine teaches: "Although the defect of lack of reasoning does not ensure the most effective protection of the rights of the challenger, its priority examination may be necessary, in situations where lack of reasoning affects the very possibility of the tribunal becoming aware of the real content of the impugned act, at the level of its factual or legal presuppositions."[1] In this way, it is necessary to know, in the first instance, the alleged lack of reasoning, so that, subsequently, the legality of the act may be assessed.

6.1. LACK OF REASONING

The Claimant argues that the reasoning of the act is insufficient because in its view, the Respondent does not set out any sufficient justification for proceeding with the corrections in question.

The case law sustains that as to reasoning: "The act will be sufficiently reasoned when the recipient, placed in the position of a normal recipient – the bonus pater familiae mentioned in art. 487, para. 2 of the Civil Code – can come to know the factual and legal reasons that underlie it, so as to enable them to choose, in an informed way, between acceptance of the act or the activation of the legal means of challenge, and so that, in this latter circumstance, the court may also exercise effective control of the legality of the act, assessing its legal correctness in light of its contextual reasoning".[2] Moreover, the doctrine argues that the reasoning should: "...provide the recipient of the act with the reconstitution of the cognitive and evaluative itinerary traveled by the authority that performed the act, in such a way that it can be clearly known the reasons for which it decided in the way it decided and not in a different way".[3] In summary, the reasoning must incorporate elements of fact and law that enable the recipient of the act to understand the decision-making process of the AT.

In the hypothesis in question, it is possible to discern an extensive factual and legal framework in the corrections made to the taxable income in the IRC assessment of the Claimant's request.

For this reason, the tribunal understands that the act is sufficiently reasoned, since it contains the minimum references to the factual and legal matter used by the AT for its performance. Moreover, the alleged lack of reasoning did not constitute any obstacle to the Claimant requesting its annulment in a motion in which it attributes to the act a list of defects and whose understanding is evident from the administrative phase with the exercise of the right of hearing. In summary, the act does not suffer from the defect of lack of reasoning that the Claimant attributes to it. In truth, it is not possible to confuse disagreement regarding the content of the act in dispute with lack of reasoning.

6.2. STATUTE OF LIMITATIONS FOR THE RIGHT TO ASSESS

In this area, the Claimant argues that the alteration of the scope of the (external) inspection from partial to general has the capacity to cause the statute of limitations for the right to assess IRC relating to the year 2009 to run.

In this way, it is necessary from the outset to mention the applicable legal framework. Now, art. 45, para. 1 of the General Tax Law (LGT) provides that: "The right to assess taxes lapses if the assessment is not validly notified to the taxpayer within a period of four years, when the law does not set another". And para. 4 of the same provision specifies that: "The statute of limitations period is counted, for periodic taxes, from the end of the year in which the tax fact occurred and, for taxes of single obligation, from the date on which the tax fact occurred, except for value added tax and income taxes when taxation is effected by withholding at source as final, in which case that period is counted from the beginning of the calendar year following that in which, respectively, the exigibility of the tax or the tax fact occurred".

However, such period is suspended namely: "...with the notification to the taxpayer, in accordance with the law, of the service order or order at the beginning of the external inspection action, ceasing, however, this effect, the period being counted from its beginning, if the duration of the external inspection has exceeded the period of 6 months after notification", as per art. 46, para. 1 of the LGT.

Now, the first observation to be made is that the suspension of the counting of the statute of limitations period establishes a close relationship with the Supplementary Regime of Tax Inspection Procedure (RCPIT), more specifically, with the external inspection procedure.

It is important from the outset to attempt to trace the general lines of distinction between external and internal inspection procedures. With respect to this, the doctrine sustains: "As we shall see, the classification of inspection procedures as internal or external is not limited to a mere distinction of spatial or locational order of the inspection acts, carrying, in truth, important consequences, in that the external inspection procedure may restrict the fundamental rights and freedoms of the taxpayers, beginning with (as we shall see below) in the matter relating to the statute of limitations for the right to assess taxes. The external inspection procedure – a procedure absolutely essential for the Tax Administration to discern the material truth underlying the tax facts on which an inspection may fall – may be initiated up to the end of the statute of limitations period for the right to assess the tax (para. 1 of art. 36 of the RCPIT) and is notified to the taxpayer – normally, in a personal manner (…) External inspection is considered to have begun on the date of signing, by the taxpayer, of the service order or order that determined the need for inspection...".[4]

However, as results from art. 46, para. 1 of the LGT in conjunction with the RCPIT, only the external inspection procedure suspends the statute of limitations period for the right to assess, with the "beginning" being determined through the signing of the service order by the taxpayer as expressly and specifically provided in art. 51, para. 2 of the RCPIT.[5] Thus, internal inspection procedures and those which, although external, are intended for consultation, collection and cross-checking of elements are excluded from such effect, since in these no service order is required or prior notification, as is required, as a rule, when the inspection is, it is repeated, external.[6]

Moreover, should the external inspection procedure last for a period exceeding 6 months from its commencement, the statute of limitations period should be counted as if there had been no suspension.

In the specific case, if the service order was delivered to the legal representative of the Claimant on 20/11/2013 on the basis of art. 14, para. 1 of the RCPIT, the suspension of the statute of limitations period for the right to assess IRC for the year 2009 occurred on that date and, concomitantly, if the final inspection report was notified to the taxpayer on 19/05/2014, the suspension of the statute of limitations period is verified.

For this sum of reasons, if the IRC assessment in dispute relates to the year of 2009, it cannot but be concluded that, in this case, the statute of limitations for the right to assess such tax does not run.

6.3. DEDUCTIBILITY OF COSTS

The wording of art. 23, para. 1 of the CIRC prior to Decree-Law no. 159/2009, of 13 July established the following: "1. Costs or losses are those that are demonstrably indispensable for the realization of profits or gains subject to tax or for the maintenance of the source of production (emphasis ours)...".

This statutory excerpt was a source of tax litigation regarding the determination of the meaning of the term "indispensable", given the degree of subjectivity necessary for its practical application. We say was, because, the legislator with Law no. 2/2014, of 16 January, altered such requirement, replacing the indispensability of the expenditure with the economic purpose thereof,[7] as some doctrine and case law had already previously maintained.

Returning to the regime applicable to the hypothesis under analysis, the first task that the tribunal must address consists in the interpretation of the aforementioned art. 23, para. 1 of the CIRC. In such activity and resorting to doctrine and case law we find a broad thesis and a restrictive one. As to the first, it considers that costs that have connection with the activity of the taxpayer are indispensable, that is, they must have a causal relationship and justified with the activity developed by the company. The second observes that only costs that have an objective relationship with profits are indispensable.

Following the doctrine of VÍTOR FAVEIRO,[8] the tribunal understands that the indispensability of the cost is not found in the necessity of the expenditure for the realization of profits or of any utility or convenience of the expenditure for the business organization in question. Relevant is, to assess the deductibility of the cost, that a causal relationship and justified with the activity of the company be established. Or, in other words, those costs incurred in the practice of acts not consistent with the interest of the company are not indispensable, because they are outside its corporate scope. In this line the case law states: "...the connection to the activity will be the nuclear element of the interpretive key of the concept of indispensability."[9] That is, relevant is the congruence of the cost incurred in the act with the interest of the company.

It is also important to add as to the appropriate time to assess the indispensability of the cost that it is that in which one acted, that is, as the case law observes: "The very wording of that para. 1 of art. 23 points decisively in that direction, with the use of the verb tense 'forem' [will be], instead of the past tense 'foram' [were]: the appropriate perspective for assessing the indispensability of expenses for the obtainment of profits is that of the economic agent at the moment when it acted, when there is only the possibility of the business options to be taken coming to produce profits…".[10]

But after the interpretation of the concept of "indispensability" it is necessary to formulate a question for the decision to be made in this process. More specifically: who bears the burden of proof to demonstrate the relationship that this cost establishes with the economic activity of the taxpayer?

To this question the case law responds when it argues that: "On the other hand, it is also certain to affirm that the burden of proof of the indispensability of its costs does not fall on the taxpayer. However, if the AT, acting subject to the principle of legality, groundedly, triggers doubt about the justified relationship of a certain expenditure with the activity of the taxpayer, necessarily and logically, because it is more qualified for that purpose, it is incumbent on the latter to provide an explanation of the economic congruence of the operation, which is not met by abstract assertion (…) that the expenditure falls within the corporate interest and/or the existence of a justified relationship with developed activity (emphasis ours), instead requiring that the taxpayer allege and prove concrete facts, which may be examined, capable of demonstrating the reality, veracity, of the business actions giving rise to the recorded expenses, in order that, among other things, the tax audit function of the AT is not rendered impossible".[11] In other words, when a judgment of doubt is formulated regarding certain costs, it is incumbent on the taxpayer to allege and prove that these have connection with the corporate activity of the taxpayer.

In truth, the obligation to quantitatively demonstrate the amount of expenses incurred on the basis of supporting documents results from art. 74 of the LGT. For that reason, if the taxpayer does not satisfy this burden, the AT may disregard such an expense, even if the activity of the latter justified a judgment of congruence of the expense with the economic purpose underlying the company's activity.

Let us now see the application of such provisions to the specific case.

Now, as results from the position of the Claimant, the costs disregarded by the Respondent have their source in: i) "..." contract and ii) "Master Service Agreement 2007" contract.

As to the "..." contract, it had as its object the development of software applied to inventory management and, likewise, a data interface with the accounting program. Moreover, such software would be intended to be applied in all companies of the group in which the Claimant is part, provided that its activity included 4th range. Now, if in the specific case, the invoice relates to the year 2009, the period during which the Claimant still engaged in the 4th range activity and the cost is intended for the implementation of the aforementioned software, it must be accepted, since there is a connection to the activity of the latter at the moment it was incurred. That is, at the moment of the incurrence of the cost, as the case law sustains, if it has a connection with the corporate activity of the Claimant it is imperative to accept it fiscally, which is here determined, especially since the requirement placed in question was solely and exclusively that of the indispensability of the cost.

Consequently, its use for the correction to the taxable income made by the Respondent must be considered illegal, by violation of art. 23, para. 1 of the CIRC.

On the other hand, with respect to the cost debited as a result of the celebration of the "Master Service Agreement 2007" contract, it is necessary to clarify that it bound C (C) to provide, in particular, services related to Management, Marketing, financial and technical support to the group companies, including the Claimant here. In order to provide these services, C also resorted to B (B).

The doubt raised by the inspection services of the Respondent centered on the amount debited to the Claimant, under "Group Expenses", in the amount of € 133,771.80. More specifically, regarding the method of its determination and the nature of the costs that comprise it, in the part concerning "Services – ICO (top)", which the Claimant justified as IT services and which were invoiced to the holding in € 1,901,575.67.

To support such conclusion, the tax inspection services argued in substance that: a) it was not possible to determine the method of determining the amount of € 1,901,575.67 relating to "Services – ICO (top)" because in the document presented (annex 9 of the inspection report) the value of € 1,950,967.47 is underlined but not that of € 1,901,575.67; b) from the document sent to support that value, the amount of € 1,950,967.47 is ascertained and, concomitantly, it includes costs that are not IT-related, as the taxpayer had justified them; c) with respect to expenses that relate to values of IT services, one of them under the designation "IT costs from account 61" are relating to services contracted to third parties; d) account "61" relates to services provided by third parties; e) in the accounting of the taxpayer are recorded in account "622369 – specialized work" to which correspond values relating to sums of various invoices issued by B to the taxpayer with a source in maintenance of IT services; f) there are expenses that are not IT services such as "deviations", "costs to be charged", "depreciations" and "allocation of human resources (part CC)".

In summary, it is not possible to prove the method of determining € 1,901,575.67.

As we have seen, when a cost recorded in the accounting is questioned by the AT, it is incumbent on the taxpayer to allege concrete facts, demonstrate the economic congruence of the operation to which the cost relates and the manner of its quantification, refraining from any abstract allegation.

The Claimant in item 67 of its request for arbitral ruling, alleges that it informed the Respondent that the value of € 1,901,575.67 comprised "...in particular expenses with IT services, but not only, which corresponds to the truth, as can be verified through the attached documents..." and by oversight did not provide to the inspection services of the Respondent the correct file.

While it is admissible in theory, given the activity engaged in and its scale, that the Claimant incurred costs of Management, Marketing and Strategy Coordination, it would always be necessary that it had presented a logical proof, documented and that would allow understanding the quantification of the cost challenged by the Respondent. Which did not happen, so much so that the Claimant, with the request for arbitral ruling, attached documents 5, 6 and 7. Which, in addition to the grounds described in the Inspection Report and above summarized, leads to the conclusion that the Claimant's claim is unfounded, regarding this expense.

And a different conclusion is not reached by the tribunal with the analysis of the documents now attached, as is the example of the doubt created as to whether the IT services debited directly by B are included in the line item "IT costs from account 61" and the nature of the expenses that are not IT services, when the Claimant justified them as such. In this way, the correction made to the taxable matter regarding this cost is maintained.

6.4. PARTIAL ANNULMENT OF THE ACT

In light of the partial failure of the Claimant in the present request for arbitral ruling, the question arises of the partial annulment of the assessment in dispute. On this subject, JORGE LOPES DE SOUSA teaches:[12] "Under the terms of art. 100 of the LGT, in case of total or partial success of a complaint, judicial challenge or appeal in favor of the taxpayer, the tax administration is obliged to the immediate and full reconstitution of the legality of the act or situation which is the subject of the dispute. From this norm it is inferred the possibility of partial annulment of tax acts. The STA has generally held that assessment acts, by defining an amount, are naturally divisible, and also juridically, because the law provides for the possibility of partial annulment of such acts, in the aforementioned art. 100, by providing for partial success of means of procedural challenge (as previously provided in art. 145 of the CPT). However, such partial annulment can only be legally admissible when the basis for the annulment applies only to a part of the act, that is, when there is an illegality only in part. This will be the case when an assessment act is based on a certain matter of taxation and it is found that part of it was calculated illegally, for not being to be considered. In these cases, there is no obstacle to the assessment act being annulled with respect to the part that corresponds to the matter of taxation whose consideration was illegal, with the assessment being maintained with respect to the part that corresponds to the matter of taxation that is not affected by any illegality.".

Now, it is precisely what happens in the present case in which the tribunal held that with respect to the cost incurred by the Claimant with the "..." contract, in the amount of € 50,956.07, considered in the assessment in dispute was determined illegally, by violation of art. 23, para. 1 of the CIRC. Thus, the assessment act is annulled, with respect to the part in which it considered the cost to which the tribunal refers in this paragraph.

6.5. COMPENSATORY INTEREST

Art. 43, para. 1 of the LGT provides that: "Compensatory interest is due, when it is determined, in a complaint or judicial challenge, that there was error imputable to the services from which results payment of the tax debt in an amount greater than that legally due". In other words, there are three requirements for the right to such interest: i) Existence of an error in an act of tax assessment imputable to the services; ii) Determination of such error in a complaint process or judicial challenge and iii) Payment of tax debt in an amount greater than that legally due.

In this way, it is possible to immediately formulate a question: is it admissible to determine the payment of compensatory interest in a tax arbitration process? The answer to the question is affirmative. In fact, art. 24, para. 5 of the RJAT provides that: "Payment of interest, regardless of its nature, is due in accordance with the terms provided for in the General Tax Law and in the Code of Tax Procedure and Process".

Knowing the question, the partial illegality of the assessment is imputable to the Respondent, given the lack of legal foundation when it was made. Consequently, the request for compensatory interest is granted, calculated at the rate ascertained, in accordance with what is provided for in art. 43, para. 4 of the LGT, between the date on which the undue payment was made and until full reimbursement, with respect to the part of the matter determined illegally.

7. DECISION

In these terms and with the reasoning above described it is decided to rule partially granted the request for arbitral ruling, with the consequent partial annulment of the act in dispute, considering for the purposes of art. 23 of the CIRC the cost of € 50,956.07.

8. VALUE OF THE PROCESS

The value of the process is set at € 531.96 in accordance with art. 97-A of the CPPT, applicable by virtue of the provisions of art. 29, para. 1, al. a) and b) of the RJAT and art. 3, para. 2 of the Regulation of Costs in Tax Arbitration Processes (RCPAT).

9. COSTS

Costs payable by the Claimant and the Respondent, in the amount of € 306, cf. art. 22, para. 4 of the RJAT and Table I attached to the Regulation of Costs in Tax Arbitration Processes, in the proportion of the failure (28.37% and 71.63%, respectively).

Notify.

Lisbon, 9 July 2015

The arbitrator,

Francisco Nicolau Domingos

[1] JORGE LOPES DE SOUSA, Code of Tax Procedure and Process – annotated and commented, Volume II, 6th edition, Áreas Editora, 2011, page 341.

[2] Decision of the Supreme Administrative Court of 23/04/2014, rendered in the scope of process no. 01690/13 and in which reporter was the councilor ASCENSÃO LOPES.

[3] DIOGO LEITE CAMPOS/BENJAMIM SILVA RODRIGUES/JORGE LOPES DE SOUSA, General Tax Law – annotated and commented, 4th edition, Encontro da escrita, 2012, page 675.

[4] NUNO DE OLIVEIRA GARCIA/RITA CARVALHO NUNES, External Tax Inspection and Relevance of Material Inspection Acts, in Review of Public Finances and Tax Law, no. 1, Year IV, March 2011, Coimbra, Almedina, pages 251 and 252.

[5] In this sense, NUNO DE OLIVEIRA GARCIA/RITA CARVALHO NUNES, External Tax Inspection and Relevance of Material Inspection Acts, in Review of Public Finances and Tax Law, no. 1, Year IV, March 2011, Coimbra, Almedina, page 252.

[6] See in this sense, NUNO DE OLIVEIRA GARCIA/RITA CARVALHO NUNES, External Tax Inspection and Relevance of Material Inspection Acts, in Review of Public Finances and Tax Law, no. 1, Year IV, March 2011, Coimbra, Almedina, pages 252 and JOÃO DAMIÃO CALDEIRA, The tax inspection procedure – a contribution to its understanding in light of fundamental rights, Master's Thesis – School of Law of the University of Minho – unpublished, page 216.

[7] ROSA BRANCO AREIAS/JAIME CARVALHO ESTEVES, IRC – Practical Notes, Porto Editora, 2014, page 53.

[8] Fundamental Notions of Portuguese Tax Law, Volume II, Coimbra Editora, 1984, page 601.

[9] Arbitral decision of the CAAD of 14/10/2013, rendered in the scope of process no. 39/2013-T and in which the arbitrator-president function was performed by the councilor JORGE LOPES DE SOUSA.

[10] Arbitral decision of the CAAD of 15/06/2012, rendered in the scope of process no. 29/2012-T and in which the arbitrator-president function was performed by the councilor JORGE LOPES DE SOUSA.

[11] Decision of the Central Administrative Court South of 27/03/2012, rendered in the scope of process no. 05312/12 and in which reporter was the judge ANÍBAL FERRAZ.

[12] Code of Tax Procedure and Process – annotated and commented, 6th edition, 2011, page 342.