CAAD 733/2016-T: Autonomous Taxation Deductions for CFEI and RFAI Investment Tax Credits Under IRC

ARBITRAL DECISION

The arbiters Fernanda Maçãs (president), Hugo Freire Gomes (member) and Raquel Franco (member) designated by the Ethics Council of the Administrative Arbitration Center (CAAD) to form the Arbitral Tribunal, agree on the following

I. Report

1. On 12-12-2016, the company "A…, S. A.", NIPC…, filed a request for constitution of a collective arbitral tribunal, in accordance with the combined provisions of articles 2 and 10 of Decree-Law No. 10/2011, of 20 January (Legal Regime for Arbitration in Tax Matters, hereinafter referred to only as LRAT), in which the Tax and Customs Authority is the Respondent.

The object of the Tribunal's ruling request is (i) the decision denying the gracious complaint filed by the Requesting Party and which was notified to it on 09.10.2016 and (ii) the self-assessment acts of Corporate Income Tax (IRC) of Fiscal Group B… relating to the fiscal years 2013 and 2014, to the extent corresponding to the non-deduction from IRC collection produced by autonomous taxation rates of fiscal incentives in IRC (Extraordinary Fiscal Credit for Investment – CFEI – and benefit under the Special Investment Support Regime – RFAI), in the amounts of € 61,168.87 (2013) and € 112,935.34 (2014), with the consequent annulment of these parts, by improper withdrawal of deductions from collection, and reimbursement of the amounts paid, accrued with indemnificatory interest calculated from 30.05.2014 and from 01.09.2015, respectively.

1. The request for constitution of the arbitral tribunal was accepted by the Honorable President of the CAAD and automatically notified to the Tax and Customs Authority on 27-12-2016.

2.1. Pursuant to the provisions of subsection a) of No. 2 of article 6 and subsection b) of No. 1 of article 11 of Decree-Law No. 10/2011, of 20 January, as amended by article 228 of Law No. 66-B/2012, of 31 December, the Ethics Council designated as arbiters of the collective arbitral tribunal the undersigned signatories and notified the parties of this designation on 08-02-2017.

2.2. Thus, in accordance with the provisions of subsection c) of No. 1 of article 11 of Decree-Law No. 10/2011, of 20 January, as amended by article 228 of Law No. 66-B/2012, of 31 December, the collective arbitral tribunal was constituted on 23-02-2017, following the pertinent legal procedures.

1. The Respondent submitted the instructory case and presented a response arguing, among other things, that:

a) The integration of autonomous taxation into the Corporate Income Tax Code (and Personal Income Tax Code) gave a dualistic nature to the normative system of this tax, which took shape, notably, in the framework of subsection a) of No. 1 of art. 90 of the IRC Code, in separate determinations of their respective collections, by force of obeying different rules. And this, because, in one case, it is the application of the rate(s) of art. 87 of the IRC Code to the taxable matter determined according to the rules contained in chapter III of the Code and, in another case, it is the application of the rates to the values of taxable matters relating to the different realities contemplated in art. 88 of the IRC Code.

b) That is, there is not a single IRC assessment, but rather two determinations; that is, two distinct calculations which, although processed, under the terms of subsection a) of No. 1 of art. 90 of the IRC Code, in the declarations referred to in articles 120 and 122 of the same code, are made on the basis of different parameters, as each is materialized in the application of its own rates, provided for in articles 87 or 88 of the IRC Code, to their respective taxable matters determined equally according to their own rules.

c) On the other hand, the regimes of RFAI and CFEI establish that they are concretized in deductions from IRC collection; in making this express reference the legislator is reporting to the IRC collection proper to whose determination autonomous taxation does not contribute, precisely because they do not enter into the determination of either taxable profit or taxable matter, and, as a consequence, do not contribute to IRC collection, nor even to assessed or payable/recoverable IRC (cf. CASALTA NABAIS, The General Duty to Pay Taxes, p. 541), on the contrary, it must be added to assessed IRC for the purpose of determining the amount to pay or recover.

d) Having the autonomous taxation regime a function of discouraging abusive behavior, the AT does not see by what logical reason this disincentive could then disappear, which would occur if it were possible to deduct from autonomous taxation collection fiscal incentives.

e) Following the doctrine of Arbitral Decision No. 722/2015-T, it should be concluded that the deductibility of RFAI and CFEI from autonomous taxation collection is illegal, without the need to resort to the interpretive character given by article 135 of Law No. 7-A/2016, of 30 March (Budget Law for 2016), to No. 21 of article 88 of the IRC Code.

f) As for the amendment made by the State Budget Law for 2016, the AT states that "regardless of the attribution of interpretive spirit [the interpretation of law] would always have to be done as was well decided in processes No. 785/2015-T: "(…) there it is established, regarding the form of assessment of autonomous taxation, that it «is effected under the terms provided in article 89 and is based on the values and rates that result from the provisions of the preceding numbers»". The AT understands that, if it is true that this new provision comes to explain how the amounts of autonomous taxation are calculated and that the competence belongs to the taxable person or the Tax Administration, it is also clear that the necessity to use the procedure provided in No. 9 of article 90 is not removed, notably in the cases provided in its subsection c) in which the assessment is the responsibility of the Tax and Customs Authority, with "base the elements available to the tax administration", which will encompass the possibility of assessing on the basis of autonomous taxation, if the Tax and Customs Authority has elements proving their assumptions. For this reason, both before and after Law No. 97-A/2016, of 30 March, article 90, No. 9, of the IRC Code is applicable to the assessment of autonomous taxation, that is, with determination in an autonomous and distinct manner from that processed under the terms of the cited article 90."

g) The AT also contests the right, invoked by the Requesting Party, to payment of indemnificatory interest, because in the situation of these proceedings the assessment of the tax was made by the Requesting Party, the Respondent being unaware of any generic guidelines and/or published indications that would lead the Requesting Party to act in this manner.

1. The Requesting Party supported its claim arguing, in summary, that:

a) It filed, on 30 May 2014, the Corporate Income Tax Declaration Model 22 for the fiscal year 2013 of its Fiscal Group, having determined an amount of autonomous taxation in IRC of € 108,597.73 and, on 31 May 2015 the Corporate Income Tax Declaration Model 22 of its Fiscal Group for the fiscal year 2014, having determined an amount of autonomous taxation in IRC of € 186,970.91.

b) The amount of CFEI available in the fiscal years 2013 and 2014 amounted to a total of € 303,373.55.

c) The amount of RFAI available in the fiscal year 2013 amounted to a total of € 74,101.07 and in the fiscal year 2014 to a total of € 543,642.78.

d) Upon filing the said declarations, the Requesting Party was confronted with the fact that the IT system of the AT did not allow the Requesting Party to enter the value relating to autonomous taxation rates in IRC, deducted, either (i) from the amounts of fiscal benefit recognized to the fiscal group companies under the Extraordinary Fiscal Credit for Investment (CFEI), or (ii) from the amounts of fiscal benefit recognized to the fiscal group companies under the Special Investment Support Regime (RFAI), which, in its view, resulted in an excess of tax paid by reference to the fiscal years 2013 and 2014.

e) Thus, applying the deduction limits of CFEI to the autonomous taxation collection in IRC of the fiscal years 2013 and 2014 with the double specific limit of the Special Taxation Regime for Groups of Companies (see, in particular, article 3, No. 5 of Law No. 49/2013 and the developments contained in AT Circular No. 6/2013) and also applying the specific deduction limits of RFAI which since 2013 are 50% of the collection[1], the Requesting Party understands that the following amounts were not deducted from IRC collection of autonomous taxation: 2013: € 27,149.43 in RFAI and € 34,019.43 as CFEI, for a total of € 61,168.87; 2014: € 42,860.20 in RFAI and € 70,075.14 as CFEI, for a total of € 112,935.34[2].

f) In sum, the Fiscal Group had IRC credits to offset against its respective collection, in an amount much higher than autonomous taxation collection in IRC of the fiscal years 2013 and 2014, this collection having amounted to € 108,597.73 in 2013 and € 186,970.91 in 2014, even though the Requesting Party only seeks to offset € 61,168.87 (2013) and € 112,935.34 (2014), an offset that the IT system of the AT does not permit.

g) IRC was not determined through indirect methods, but rather from the submission of declaration model 22.

h) The companies making up the fiscal group at the origin of RFAI were not then, nor are they currently, debtors to the State and to social security of any taxes or contributions (see certificates attached as doc. No. 9 with the request for arbitral ruling).

i) The question that the Requesting Party raises before this Tribunal is, therefore, whether or not the Fiscal Group B… has the right to proceed with the deduction - also, from IRC collection produced by the application of autonomous taxation rates - of the said RFAI and CFEI, taking into account that the programming of the AT IT system prevents the deduction from the collection related to autonomous taxation rates in IRC, entered in field 365 of table 10 of Declaration Model 22 (see docs. Nos. 1 to 4 attached with the request for arbitral ruling), CFEI and RFAI yet to be deducted from IRC collection, starting with the oldest.

j) In favor of the possibility of deduction, the Requesting Party presents the following arguments:

k) Case law has understood, in a practically unanimous manner, that IRC collection provided for in (in effect until 2013) article 45, No. 1, subsection a), of the IRC Code, comprises, without need of any additional specification, autonomous taxation collection in IRC, so it should be understood that the IRC collection provided for in article 90, Nos. 1 and 2, subsections b) and c) of the IRC Code, in the version in effect in 2013, also encompasses autonomous taxation collection in IRC.

l) Whence, in its view, the denial of the deduction of CFEI and RFAI from IRC collection of autonomous taxation violates subsection c) of No. 2 of article 90 of the IRC Code (before 2014 and until 2010, subsection b), and before 2010 article 83).

m) The Requesting Party also cites numerous case law to the effect that SIFIDE is deductible from autonomous taxation collection and alleges that there is no reason to conclude that the reasoning and rationale of the decision in process No. 769/2014-T (and the case law that followed) would only apply to SIFIDE, and not also to other fiscal benefit credits or other deductions from IRC collection.

n) Indeed, even if the provision of the tax credit is expressed in terms of "deduction from IRC collection", in opposition to "deduction from the amount determined under article 90 of the IRC Code", the final practical result is the same, because the amount determined under article 90 of the IRC Code is nothing other than IRC.

o) From the analysis of the various arbitral decisions issued on this matter (for example, processes No. 80/2014-T and No. 187/2013-T), the Requesting Party draws, summarily, the following conclusions:

· Autonomous taxation relating to vehicle expenses, representation expenses, allowances, management bonuses and indemnities to managers for cessation of functions are IRC;

· These taxation also tax income, as they are a substitute for the alternative measure of increasing taxable income via non-deductibility of the expense or charge on which autonomous taxation is levied (cf. in particular processes Nos. 80/2014-T and 187/2013-T);

· As they are IRC, the norm directed at IRC collection (determined tax) contained in subsection a) of No. 1 of article 45 of the IRC Code should be applied to them;

· Extracting a more general rule, as the decision issued in process No. 59/2014-T does, "autonomous taxation to which legal entities are subject is considered IRC, so the norms of the IRC Code that do not conflict with its special form of incidence and applicable rates will be applied to them."

· The norm directed at IRC collection contained in subsections c) and d) (until 2013, subsections b) and c)) of No. 2 of article 90 of the IRC Code is therefore also applied to them, as there is no obstacle to this in "its special form of incidence and applicable rates".

1. As no exceptions were invoked and there being no occasion for witness testimony, the Tribunal, by order of 29 March 2017, dispensed with the meeting provided for in art. 18 of the LRAT, which it did under the principles of autonomy in conducting the proceedings. The date of 23 August 2017 was also set for the issuance of the arbitral decision.

2. Both the Requesting Party and the Respondent presented arguments supporting, in essence, the arguments of the previous pleadings.

II. Remedying of Defects

1. The parties have legal personality and capacity, are shown to be legitimate and are regularly represented (articles 4 and 10, No. 2, of the LRAT and article 1 of Regulation No. 112-A/2011, of 22 March).

7.1. The tribunal is competent and regularly constituted.

7.2. The proceedings do not suffer from nullities.

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

III. Merits

III.1. Statement of Facts

1. Proved Facts

The following facts are considered proved:

a) The Requesting Party was, in 2013 and 2014, the parent company of a group of companies (Group B…) subject to the special regime for taxation of groups of companies (RETGS);

b) The Requesting Party filed, on 30-05-2014, its aggregate Corporate Income Tax Declaration Model 22 for the fiscal year 2013, having, at that time, proceeded with the self-assessment of autonomous taxation in IRC of that same year 2013, in the amount of € 108,597.73 (cf. the income declaration attached as doc. No. 1 with the request for arbitral ruling);

a) The Requesting Party filed, on 31.05.2015, the Corporate Income Tax Declaration Model 22 of its Fiscal Group for the fiscal year 2014, having at that time proceeded with the self-assessment of autonomous taxation in IRC of that same year 2014, in the amount € 186,970.91 (cf. the income declaration attached as doc. No. 4 with the request for arbitral ruling).

b) In the fiscal years 2013 and 2014, the Requesting Party had a CFEI credit amounting to a total of € 303,373.55 (cf. doc. No. 6 attached with the request for arbitral ruling);

c) In the fiscal years 2013 and 2014, the Requesting Party had an amount of RFAI of € 74,101.07 and € 543,642.78, respectively (cf. doc. No. 7 attached with the request for arbitral ruling);

d) Applying the deduction limits to the collection, either of CFEI or RFAI, the following amounts remained undeducted from IRC collection of autonomous taxation:

• 2013: € 27,149.43 in RFAI and € 34,019.43 as CFEI, for a total of € 61,168.87;

• 2014: € 42,860.20 in RFAI and € 70,075.14 as CFEI, for a total of € 112,935.34.

e) The Corporate Income Tax declaration model that was part of the AT IT system at the time of the facts did not allow the Requesting Party to offset € 61,168.87 (2013) and € 112,935.34 (2014) from autonomous taxation collection in IRC;

f) The Requesting Party filed a gracious complaint of the said self-assessment acts, which was denied by order notified to it on 09.10.2016 (cf. doc. No. 5 attached with the request for arbitral ruling);

g) The value of self-assessed IRC, including autonomous taxation, is paid (cf. docs. 1, 4 and 16 attached with the request for arbitral ruling);

h) The companies making up the fiscal group at the origin of RFAI were not, in the fiscal years in question, entities owing to the State or social security any taxes or contributions (cf. certificates attached as doc. No. 9 with the request for arbitral ruling).

8.1. Facts Given as Not Proved

There are no facts relevant to the decision that have not been proved.

8.2. Basis for Fixing the Statement of Facts

The facts were given as proved on the basis of the documents attached with the request for arbitral ruling, in the administrative proceedings and in the facts stated by the Parties in their respective procedural pleadings with respect to which there is no controversy.

III.2. Statement of Law

The central question to be decided in these proceedings is whether the Requesting Party is correct when it argues that the deduction of fiscal benefits, in particular, in this case, CFEI and RFAI should be made taking into account autonomous taxation since they are IRC.

The answer to the problem raised presupposes, first of all, that an analysis be made of the evolution of the figure of autonomous taxation in order to ascertain whether its legal regime (comprising nature and reason d'être) is compatible with the Requesting Party's claim or, if on the contrary, the Respondent's position is correct.

Let us see.

III.2.1.1. On the Nature of Autonomous Taxation in National Case Law and Doctrine

As the position adopted in Arbitral Decision No. 722/2015-T, of 28 June 2016 (reiterated, among others, in Arbitral Decision No. 443/2016-T), an award whose collective was presided over by the Arbitral President here present (and to whose content of the decision we hereby make reference), autonomous taxation taxes the expense and not the income, a position that is assumed by the Honorable Counselor Vítor Gomes (dissenting vote cast in Judgment No. 204/2010 of the Constitutional Court), in terms of which he states, referring to autonomous taxation, that "although formally inserted in the IRC Code and the amount it allows to be collected is assessed in its ambit and as IRC, the provision in question concerns a tax imposition that is materially distinct from taxation under this heading (….)".

"Indeed, we are faced with autonomous taxation (…) and that makes all the difference. It is not a question of taxing income at the end of the tax period, but certain types of expenses in themselves, for the understandable reasons of fiscal policy that the judgment points out".[3]

And he adds that "in this way, the fact revealing tax capacity that is intended to be achieved is the simple realization of such expense, at a given moment. Each expense is, for this purpose, an autonomous tax fact, to which the taxpayer is subject, whether or not he comes to have taxable income under IRC at the end of the period, being irrelevant that this portion of tax is only assessed at a later moment and together with IRC" (emphasis ours).

In the same sense, it has also been recognized by the case law of the Supreme Administrative Court (STA) "that under the designation of autonomous taxation are hidden very diverse realities, including, under the terms of No. 1 of the (then) art. 81 of the IRC Code, confidential or undocumented expenses, which are taxed autonomously, at the rate of 50%, which will be raised to 70%, in cases of expenses made by taxpayers totally or partially exempt, or who do not carry out, as a main title, activities of a commercial, industrial or agricultural nature (No. 2 of the [then] art. 81) and which are not considered as cost in the calculation of taxable income under IRC. It should be noted, however, that representation expenses and those relating to light vehicles, under the terms of the (then) art. 81 No. 3 of the IRC Code and travel allowances are affected by the business activity and indispensable so they are fiscally accepted in some cases even though within certain limits".[4]

Regarding the position assumed by the Constitutional Court, cite the Judgment No. 18/11, in terms of which it refers that "there are facts subject to autonomous taxation, which correspond to expenses proven to be indispensable for the realization of profits and (…) this means that autonomous taxation also falls on expenses that correspond to the core of the concept of real income, net income and compliance with accounting obligations" (emphasis ours).

"This argument of the Constitutional Court (…) interests us only to point out that the Court recognizes that this regime constitutes a limitation on the taxation of real income (which is guaranteed by art. 104, No. 2 of the Constitution".

More recently, the Constitutional Court comes to reformulate the doctrine of Judgment No. 18/11 (above mentioned), moving closer to the then dissenting vote of Counselor Vítor Gomes and the STA Judgment No. 830/11 (also cited above), in the sense of understanding that "contrary to what happens in the taxation of income under PIT and IRC, in which the totality of income received in a given year is taxed (which implies that only at the end thereof can the tax rate be calculated, as well as the bracket in which the taxpayer falls), in this case each expense made is taxed, considered in itself, and subject to a certain rate, with autonomous taxation determined independently of the IRC owed in each fiscal year, as it is not directly related to the attainment of a positive result, and for this reason, subject to taxation. Thus, and in the case of IRC, we are faced with an annual tax, in which each income received is not taxed per se, but rather the aggregation of all income obtained in a given year, the law considering that the tax-triggering fact is deemed to occur on the last day of the tax period (cf. article 8, No. 9, of the IRC Code). As for autonomous taxation under IRC, the tax-triggering fact is the actual realization of the expense, not being faced with a complex fact, of successive formation over a year, but with an instantaneous tax fact" (emphasis ours).

Now, still according to this Judgment of the Constitutional Court "this characteristic of autonomous taxation refers us, thus, to the distinction between periodic taxes (whose triggering fact is produced in a successive manner, by the passage of a given period of time, as a rule annual, and tends to repeat itself in time, creating for the taxpayer the obligation to pay tax on a regular basis) and single obligation taxes (whose triggering fact is produced instantaneously, appears isolated in time, creating upon the taxpayer an obligation of payment on an occasional basis). In autonomous taxation, the tax fact giving rise to tax is instantaneous: it is exhausted in the act of realization of a given expense that is subject to taxation (although the determination of the amount of tax, resulting from the application of the various rates of autonomous taxation to the various acts of expense realization considered, comes to be effected at the end of a given tax period). But the fact that the assessment of the tax is effected at the end of a given period does not transform it into a periodic tax, of successive formation or of lasting character. That operation of assessment amounts only to the aggregation, for the purpose of collection, of the set of operations subject to that autonomous taxation, to which the rate is applied to each expense, with no influence of the volume of expenses made in determining the rate" (emphasis ours). [5]

Regarding doctrine, we find that, essentially, the concept and nature of autonomous taxation does not depart substantially from the understanding of case law produced by the Constitutional Court (above briefly stated).

In fact, as RUI MORAIS points out, "there is a taxation that falls on certain expenses of taxpayers, which are held as constituting tax facts. It is difficult to discern the nature of this form of taxation and, even more, the reason why it appears provided for in the codes of taxes on income".[6]

In the same sense, JOSÉ ALBERTO PINHEIRO PINTO states that "it is not properly IRC – which aims to tax the income of legal entities and not expenses made by them - but rather the substitution of a taxation of "implicit" income of natural persons, which is considered not directly enforceable".[7]

In summary, some doctrine and the case law of national higher courts and the Constitutional Court consider that autonomous taxation consists of autonomous tax facts, which fall on the expense so that, despite being formally inserted in the IRC Code, they concern a taxation distinct from income tax.

Additionally, it should be noted that it is also accepted by the generality of doctrine and case law that autonomous taxation aims to prevent abusive practices in the remuneration of workers, managers and partners/shareholders of the company.

In fact, as SALDANHA SANCHES points out, "in this type of taxation, the legislator seeks to respond to the admittedly difficult question of the fiscal regime of expenses that are found in the zone of intersection between the personal sphere and the business sphere, so as to prevent remuneration in kind more attractive for exclusively fiscal reasons or the concealed distribution of profits. The provision presents a characteristic similar to what we will find in the legal sanction against undocumented costs, with a rate increase when the situation of the taxpayer does not correspond to a situation of fiscal normalcy."[8]

In these terms, "it is a taxation that is explained by the necessity to prevent and avoid that, through these expenses, companies proceed to the concealed distribution of profits, especially of dividends which would thus be subject to IRC as profits of the company, as well as to combat tax fraud and evasion that such expenses cause (…)".[9]

"It is settled that autonomous taxation is rooted, as touched upon, in the necessity to avoid abuses regarding the recognition of certain charges or expenses that may be easily subject to deviation to private consumption or that, in some way, are capable of configuring, formally, an expense of a legal entity, but that, substantively, represent or may configure abuses in order to minimize the real measure of the tax.

"Aware of this difficulty of, often, making a rigorous separation of these two realities, it was successively "grafted", as above described, into the real and actual income taxation regime established in the IRC Code, as a general standard, an autonomous regime for the taxation of certain expenses, wholly or partly undesired and undesirable which contaminate the terms of the tax obligation, which thus arises configured below the actual tax-paying capacity of the entity that recognizes it as such.

"In these terms, it can be stated that autonomous taxation arises integrated in the IRC regime, is determined and owed within the scope of the legal relationship of taxation of the income of legal entities and it is in this framework that its determination is effected.

"But they are not 'IRC', tout court as the Requesting Party laconically and definitively affirms.

"In fact, for them to be thus considered, they would, first of all, have to tax income and this, as we have seen, is not what occurs, at any time. In truth, although there is evident instrumentality between IRC and the income taxation model in Portugal and autonomous taxation (a fact moreover well evidenced in the case law of the Superior Courts and, in particular, of the Constitutional Court), the understanding prevails that autonomous taxation taxes expenses.

"In fact, autonomous taxation is an instrument that (departing from and introducing some measure of distortion in a system that declares taxing real and actual income), after all also taxes expenses, deductible or not under IRC, without thereby violating the constitutional precepts already in that the applicable provision (art. 104, No. 2 of the Constitution) declares imperative the taxation of companies "fundamentally" on their real income, without prejudice either to situations of taxation according to profits or real income (when determined by indirect methods), or to situations of taxation of expenses subject to autonomous taxation (by express choice of law), the establishment of technical solutions (such as is the case with special installment payment) and the specific rules governing their return.

"Within this scope, it is worth recalling that neither tax systems nor models of concrete taxation correspond to pure models, free from elements foreign to the system itself, of values, or to the general regime of any tax abstractly considered. In fact, all taxes have characteristics or solutions which, when viewed in isolation, may represent objectively a decharacterization of the model such as in the purity of concepts was conceived, but that, when articulated with the model, it appears that they contribute to its effectiveness, and impart or reinforce its coherence.

"These solutions, more pragmatic or specific, do not violate such essential valuative dictates, whether they be of revenue protection or densification of general valuative ideals (of the tax order) or specific to the tax (such as the necessity of avoidance of abuses) as long as they themselves are not so relevant that they reject the taxation-rule model or structurally falsify the values on which it is based.

"In the case under analysis, although the choice of fundamental law and ordinary law, as a consequence, has been clearly in the sense of taxing the income of legal entities and, in the possible forms of determination of this, the real and actual income taxation has been chosen as a manifestation of the highest standard of fiscal justice, the truth is that the system has always known more or less relevant deviations, either because certain expenses are not considered as such by tax law (although objectively they may be imputable to a commercial activity), either because tax law, recognizing this essentiality, fears the occurrence of abuses (as is the case with autonomous taxation, generically speaking).

"In part, this departure from the purity of concepts is an inevitable consequence of the complexity of life's relations, either because pure fiscal taxation models are more costly to implement and manage as they require much more precise relevant information, either because in the field of taxes, as in other fields of life, the ideal of justice embodied must be tempered with solutions of normative reasonableness in the qualification of relevant facts and technique in the solutions and requirements to be established, with the objective of preventing tax models from being excessively complex and costly ceasing to reach realities and practices that mitigate the tax burden or contribute to a poor distribution of it.

"Now, from this balancing of the values that support the duty to establish / bear tax with the realities of life may result the necessity to establish limits (fiscal or other) to the behavior of taxpayers, with the objective of maintaining, within general standards of equilibrium, the legal solutions of the system.

"On the other hand, it is important to note (because it is relevant for the purposes of the decision to be made) that autonomous taxation configures anti-abuse norms directed at rationalizing specific behaviors of taxpayers (facing the tax obligation) by which, traditionally, they have succeeded in achieving a measure of tax lower than what their actually revealed tax capacity evidenced, but that, owing to these abusive behaviors, was susceptible to being mitigated or eliminated, with evident violation or relegation of the principle of justice, of fair distribution of the fiscal burden by those who reveal tax capacity.

"Consequently, it makes sense to admit that general deductions from the collection of tax be made, which are permitted by law to give effective meaning to the principle of taxation of real and actual income. However, as for the collection due by autonomous taxation, this general deduction ceases to make sense because, not taxing profits, but expenses, the question of justice in the distribution of the general burden of tax does not arise with respect to them, so it would be illogical to permit the deduction of charges when such deduction, in practice, would destroy the anti-abuse sense that imbues them; the disincentive of deviant behaviors that its institution represses or resolves.

"Now, autonomous taxation, as appears clear, does not have a markedly profit-oriented purpose, that is, it does not aim, primarily, at the obtainment of (more) fiscal revenue, although this may not be a negligible aspect, verifiable.

"In fact, they aim to dissuade behaviors, practices or options of companies rooted in reasons essentially of a fiscal and profit-saving nature, and on the other hand, preserve the balances inherent to the regime of taxation of legal entities, avoiding distortions not only at the level of taxable results, as waves of deviant behaviors, affecting the legal expectation of revenue, in each economic year.

"And, through these general anti-abuse clauses, they force the maintenance of a healthy correlation between the volumes of business, taxable profits and the tax finally due by entities subject to IRC, in line with the levels of average effective tax burden falling on the different groups of taxpayers within the Portuguese tax system and, indeed, comparatively with that of OECD member states or otherwise.

Thus, autonomous taxation, including that provided for in subsection b), No. 13, of art. 88 of the IRC Code have, thus, a general disciplinary function that is not unrelated to the systemic purposes of the tax, especially because, as an anti-abuse mechanism, autonomous taxation is not unrelated to the general purposes of the tax system.

"In these terms, the adoption of legal regimes that limit the harmful effects resulting from behaviors affecting the balanced distribution of the fiscal burden among different groups of taxpayers does not constitute merely an option of the legislator but, rather, a strict obligation, as a result of the obligation to design and make the system function as a whole in a balanced manner.

"In fact, autonomous taxation introduces taxation mechanisms which, naturally, will displease their addressees, but prevent or limit the harmful effects of abusive practices that would prejudice others and are, for this reason, necessary for the preservation of the system's equilibria.

"Now, companies, just like natural persons, are also subject and with the same intensity to the general duty to pay taxes and, to this extent, tax law cannot fail to enshrine mechanisms that limit deviant procedures because each must bear tax according to what he can, that is, according to his revealed tax capacities.

"It is also important to note that, in our days, it has been adopted, as a general rule, the real and actual income taxation regime for legal entities, not being this merely an option for the functioning of the tax system among various other possible ones.

"In fact, it is, rather, a concrete manifestation of the modernity and maturity of a tax system that demands of its addressees/beneficiaries a maturity of the same stature as it also represents a new form of ethical and social accountability regarding the phenomenon of tax. [10]

"As SALDANHA SANCHES pointed out, opportunely (cited in Arbitral Decision 187/2013-T, pp. 28), autonomous taxation constitutes a way of preventing abusive actions: "(…) that the normal functioning of the taxation system was incapable of preventing, and others, including forms more burdensome for the taxpayer, were possible. This anti-abuse character of autonomous taxation will be not only coherent with its "anti-systemic" nature (as happens with all norms of this kind), but with a presumptive nature, pointed out both by Prof. Saldanha Sanches and by the case law citing it. They will then have materially underlying a presumption of partial entrepreneurship of the expenses on which they fall, as a function of the above-noted circumstance that such expenses are situated in a gray line separating what is business expense, productive, from what is private expense, consumption, and that, notoriously, in many cases, the expense will even in reality have a dual nature (part business, part private)". [11]

"All these considerations invoke what appears to us to be the true legislative intent, given that the discovery of the true meaning of the law constitutes an imperative, as it is important to ensure that the interpreter's activity achieves an interpretive sense by which the law exteriorizes its most beneficial, most fruitful and most salutary sense, in the words of FRANCESCO FERRARA.[12]

"On the other hand, the logical sense of interpretation only leads us in the sense that autonomous taxation is based on a logic according to which the law intends to prevent or discourage such legal entities from recognizing (abusively) as expenses values relating to bonuses or variable remuneration. Thus, it is the recognition as an expense for the purposes of IRC, in its entirety, that is intended to be discouraged.

"Appealing to the ratio legis it is clear that autonomous taxation is assessed in the context of the IRC assessment process according to a root and its own dogmatics that lead to the total collection of the tax not being a unitary reality but a composite one.[13]

Thus, it is possible to discern in it the collection of tax proper, resulting from the general mechanics of IRC determination, which is owed with a constitutional foundation based on the general duty of each (in which are included legal entities) to contribute to public expenses according to their means (art. 103, No. 1 of the Constitution). All in respect and compliance with the principles of justice, equality and the duty to pay tax according to revealed tax capacity. And from which the amounts referred to in article 90 of the IRC Code are deducted and in accordance with the terms and modes referenced therein.

"To this general collection, rooted in this foundational order basis, is added the specific collection, owed by autonomous taxation, which has, as has been made clear, a root, a sense and its own foundation, which is to discourage the adoption of the behaviors taxed by it, listed in art. 88 of the code, which configures an anti-abuse norm, which allows us to invoke here all the specific dogmatics on which it is based.

"In this case, as it is a matter of fulfilling purposes that go beyond the purely revenue purposes of the tax, to be situated in the field of behaviors that the law considers abusive and/or undesired, it seems clear that it makes no sense to make deductions from it, under penalty of emptying, in practice, of any sense the anti-abusive regime created."

Having reached this point, we are in a position to analyze the Requesting Party's claim, regarding the legality of the deduction of CFEI and RFAI from the part of IRC collection for the fiscal years 2013 and 2014 of the Group, in the part relating to autonomous taxation.

III.2.1.2. On the Possible Deductibility of CFEI and RFAI from Autonomous Taxation Collection

Law No. 49/2013 of 16 July approved the Extraordinary Fiscal Credit for Investment (CFEI) with the aim of promoting the investment and internationalization of national companies through the granting of a fiscal credit, in the form of a deduction from collection, for the realization of certain investments. The CFEI corresponded to a deduction from IRC collection in the amount of 20% of eligible investment expenses on assets used in the business undertaken, up to 70% of that collection. The eligible investment for obtaining this fiscal credit had to be realized between 1 June 2013 and 31 December 2013, with the maximum amount of eligible investment expenses being € 5,000,000.00 per taxpayer. CFEI is not cumulative, with respect to the same eligible investment expenses, with any other fiscal benefits of the same nature.

As for RFAI, the Investment Tax Code (originally approved by Decree-Law No. 249/2009, of 23 September and amended and republished by Decree-Law No. 162/2014, of 31 October), sought to synthesize a set of fiscal support measures for productive investment and also research and development, intending to contribute to the promotion of the competitiveness of the national economy and to the maintenance of a fiscal context favorable to investment, job creation and the strengthening of companies' own capital. Within that Code, various incentive / fiscal benefit regimes were established, namely the Special Investment Support Fiscal Regime (RFAI). This regime established a fiscal benefit to investment in tangible fixed assets and intangible assets, embodied in deductions from IRC collection (of the tax period in which the relevant applications are realized and, when it cannot be wholly effected, due to insufficiency of collection, it may be done in the assessments relating to the ten following periods, with certain limits), exemption from Stamp Duty and exemption or reduction of Property Transfer Tax and Municipal Property Transfer Tax with respect to real property acquired or constructed within this scope, and applicable to IRC taxpayers who carry out as a principal title an activity in certain sectors [classified in accordance with the Portuguese Classification of Economic Activities, Revision 3 (CAE-Rev.3), as defined in Regulation No. 282/2014 of 30 December]. RFAI is not cumulative with other benefits of the same nature, for the same relevant applications, except those provided for in the retained earnings and reinvestment deduction regime (DLRR), with the maximum limits applicable to aid with regional purpose.

We conclude above, following the aforementioned case law, that the collection of autonomous taxation has a different root, which cannot, under penalty of subversion of the order of values, permit the deduction of fiscal benefits, under penalty of decharacterization of the principles specifically intended to be pursued.

In fact, having the autonomous taxation regime a function of discouraging abusive behaviors, there is no logical reason why this disincentive could then disappear, which would occur if it were possible to deduct from autonomous taxation collection fiscal incentives, as the Requesting Party claims, because this possibility would result in a double strange effect, that is, on one hand it could, in the limit, eliminate the collection resulting from autonomous taxation and, on the other hand, it would propitiate the deduction of a certain fiscal benefit (in the specific case at issue, CFEI and RFAI are at issue for the fulfillment of the objectives or adoption of the conducts fixed in the provision bestowing the right to the fiscal benefit) to a tax that has a specifically anti-abuse function, of mitigation of behaviors fiscally and socially undesired.

From the conjunction of these possibilities would result a contradictory, illegal and unethical result, precisely because the same tax law would permit, within the framework of the same tax system, to relieve the taxpayer of the burden of payment of a tax that is justly owed by the adoption of abusive, undesired and discouraged conducts (recognition as expenses of the expenses provided for in art. 88 of the IRC Code).

Furthermore, as stated in the dissenting vote, attached to Arbitral Decision No. 5/2016-T, although referring to the SIFIDE and RFAI regimes, there is also no "any conceptual error nor any contradiction between what has just been exposed and the fact that the SIFIDE and RFAI regimes establish that they are concretized in deductions from IRC collection. In making this express reference the legislator is referring to IRC collection proper to whose determination autonomous taxation does not contribute, precisely because they do not enter into the determination of either taxable profit or taxable matter, and, as a consequence, do not contribute to IRC collection, nor even to assessed or payable/recoverable IRC (cf. CASALTA NABAIS, Idem p. 541). The result of autonomous taxation, it bears repeating, determined in an autonomous manner, does not contribute to IRC collection, on the contrary, it must be added to assessed IRC for the purpose of determining the amount to pay or recover, which embodies a quite different result."

The arbitral understanding now endorsed, in the direction of the guidance followed in Arbitral Decisions Nos. 722/2015-T and 443/2016-T, is in harmony with the new No. 21 of article 88 of the IRC Code added by Law No. 7-A/2016, of 30 March, in establishing that to the amount determined of autonomous taxation no "deductions are made".

Also in this case, the legislator merely adopted, clarifying it, a solution which the courts, using the applicable rules and by application of legal hermeneutics criteria were able to extract from the regime to apply, which is all that this collective did, in the case at hand.

In view of the above, it is concluded, in this manner, of the illegality of the deductibility of CFEI and RFAI from autonomous taxation collection, without the need to resort to the interpretive character given by article 135 of Law No. 7-A/2016, of 30 March (Budget Law for 2016), to article 21 of article 88 of the IRC Code, under the terms of which "the assessment of autonomous taxation in IRC is effected in accordance with the terms provided in article 89 and is based on the values and rates that result from the provisions of the preceding numbers, with no deductions being made to the global amount determined."

Thus, the invoked unconstitutionality of No. 21 of article 88 of the IRC Code added by Law No. 7-A/2016, of 30 March, for violation of the principle of non-retroactivity of law, prohibited by article 103, No. 3, of the Constitution, ceases to make sense, to the extent that such provision is not even invoked in the resolution of the case at hand. The same applies to the other unconstitutionalities alleged by the Requesting Party.

In these terms, this Arbitral Tribunal understands that the Requesting Party is not correct, for the reasons invoked above, with respect to the possibility of deduction of the fiscal benefits in question (relating to CFEI and RFAI) from autonomous taxation collection relating to IRC of the fiscal years 2013 and 2014.

Thus, the Requesting Party's claim is unfounded, and the dismissal of the gracious complaint now impugned is to be maintained.

III.2.2. On the Other Claims

As the claim for declaration of illegality of the impugned self-assessments for the fiscal years 2013 and 2014 is unfounded, the claims made by the Requesting Party for reimbursement of the amounts paid and respective interest are also prejudiced.

IV. Decision

Thus, it is decided by this Arbitral Tribunal:

a) To judge as wholly unfounded the arbitral claim for declaration of illegality of the self-assessments of IRC for 2013 and 2014, object of impugnation, absolving the Respondent of this claim;

b) To maintain the decision denying the gracious complaint;

c) To absolve the Respondent of the other claims.

V. Value of the Proceedings

The value of the proceedings is fixed at € 174,104.21 (one hundred seventy-four thousand, one hundred four euros and twenty-one cents) in accordance with the provisions of articles 3, No. 2 of the Regulation of Costs in Tax Arbitration Proceedings (RCPAT), 97-A, No. 1, subsection a) of the Civil Procedure Code and 306 of the Code of Civil Procedure.

VI. Costs

The amount of costs is fixed at € 3,672.00 (three thousand six hundred seventy-two euros), under the provisions of article 22, No. 4 of the LRAT and Table I attached to the RCPAT, borne by the Requesting Party, in accordance with the provisions of articles 12, No. 2, of the LRAT and 4, No. 4 of the RCPAT.

Notify.

Lisbon, 21 July 2017.

The Collective Arbitral Tribunal

Fernanda Maçãs

(Arbitral President)

Hugo Freire Gomes

(Arbitral Member)

Raquel Franco, dissenting as per attached dissenting opinion.

Raquel Franco

(Arbitral Member)

Text prepared by computer, under the terms of article 131, No. 5 of the Civil Procedure Code, applicable by referral of article 29, No. 1, subsection e) of the LRAT.

Dissenting Opinion

I disagree with the thesis that prevailed for the following reasons:

To give an answer to the questions raised before this Arbitral Tribunal, I deem it fundamental, first of all, to know whether, regardless of the nature of the tax to which autonomous taxation refers, its amount is "determined under article 90 of the IRC Code". If it is, I believe that it should be concluded that, to determine the limit of permissible deductions under this tax, consideration should be given to the collection resulting from autonomous taxation.

Article 90 of the IRC Code refers to the forms of IRC assessment, by the taxpayer or by the AT, applying to the determination of the tax owed in all situations provided for in the Code. Thus, it also applies to the assessment of the amount of autonomous taxation, since there is no other provision that provides for different terms for its assessment. Its autonomy is restricted, moreover, to the applicable rates and the respective taxable matter – which does not justify, in our view, that a distinction be made between the collection resulting from autonomous taxation and the remaining IRC collection.

The argument that the anti-abuse nature of autonomous taxation justifies the non-deductibility from its collection does not hold, in my view, for the simple, but decisive fact that such argument finds no support in any provision of the Portuguese tax legal system.

It seems to us, from the analysis of the IRC Code, that, regardless of the understanding one has regarding the nature of autonomous taxation under IRC – a discussion that does not have to be raised to give an answer to the concrete question that arises here – it is not doubted that the amount collected through autonomous taxation is so collected as IRC. Resorting to what is said, in this regard, in the Judgment issued in process 775/2015-T, "(…) autonomous taxation is inseparable from the subjects of the respective income tax, and, more specifically, from the economic activity carried out by them, which is even more evident when one thinks of the connection that, although it has varied in the successive legislative amendments, autonomous taxation had and still has some connection with deductibility – and the actual deduction – of taxed expenses. This circumstance, it is believed, is elucidative of the interweaving existing between them and IRC (in the case), and justificatory not only of its inclusion in the IRC Code, but, equally, of its integration, of full right, as part of the legal regime of IRC."

Considering – as is considered – that autonomous taxation is part of the IRC regime, it is important, then, to know what is deductible from its collection. Now, as to this aspect, one again resorts to the words used in the Arbitral Judgment issued in process 775-2015-T:

"Understanding that autonomous taxation is (part of) IRC, it is understood that there is a single IRC assessment, including the part that comes from autonomous taxation.

There is a single IRC assessment that comprises two parts: the assessment of autonomous taxation and that of the remaining IRC, each with taxable matter determined in its own way and with its own taxation rates, but both assessed under article 90 of the IRC Code. With a single assessment, it is concluded that the part of collection that comes from autonomous taxation is an integral part of IRC collection.

Conversely, in no other article of the IRC Code is the reference to autonomous taxation assessment found as a distinct process. To accept that autonomous taxation collection is not included in article 90 of the IRC Code would be to accept that there is a gap in the law and, this being a tax law, does not permit integration. And thus, the Tax and Customs Authority may have erred, in not permitting the deduction of the amounts relating to the PEC that the Requesting Party had the right to deduct from collection.

To accept that the assessment of autonomous taxation is outside article 90, No. 1 of the IRC Code and, therefore, to exclude from its collection the deductibility of the PEC provided for in subsection c) of No. 2, would be to obligate the taxpayer to pay a tax whose assessment is not done in accordance with the law, contrary to No. 3 of article 103 of the Constitution of the Portuguese Republic and the principle of tax legality that the General Tax Law, in its article 8, No. 2, subsection a), establishes."

From which follows the same conclusion: that, as there is no provision on the assessment of autonomous taxation distinct from that which regulates the general assessment of IRC, it must be accepted that IRC collection encompasses it, being included in article 90, No. 1 of the IRC Code and being, therefore, deductible, notably, the fiscal incentives at issue in the present proceedings. In the same sense points the absence of limits to the deductibility of these realities from the collection resulting from autonomous taxation – which the legislator could have done, just as it did in enumerating various exceptions and limits to the deductibility rules of No. 2 of article 90 of the IRC Code.

As for the amendment introduced by the Law approving the State Budget for 2016 (Law 7-A/2016, of 30 March), specifically as regards the introduction of No. 21 of article 88 of the IRC Code: several numbers were added to article 88 of the IRC Code by this Law, which refers to autonomous taxation, among them No. 21, according to which "The assessment of autonomous taxation in IRC is effected in accordance with the terms provided in article 89 and is based on the values and rates that result from the provisions of the preceding numbers, with no deductions being made to the global amount determined." In article 135, the legislator provides that "the wording given by this law to No. 6 of article 51, to No. 15 of article 83, to No. 1 of article 84, to Nos. 20 and 21 of article 88 and to No. 8 of article 117 of the IRC Code has an interpretive nature."

Article 90 was not amended, it continues to refer to IRC collection and, for all that has been said above, the collection that results from the application of the norms of article 88 is IRC collection. What No. 21 of article 88 now prohibits is that, to this collection, deductions be made up to the moment when, with the global IRC collection determined, the deductions of article 90 are made. Note that, if the legislator wanted, in fact, to prohibit that the deductions provided for in article 90 be made from the part of IRC collection that results from autonomous taxation, it could have done so directly rather than amending article 88 - but it did not.

In the present case, as it is a matter of the tax period corresponding to the year 2014, it is important to analyze the effect of the amendment introduced by the State Budget Law for 2016 and, above all, the interpretive character attributed to it.

Under the terms of article 13, No. 1, of the Civil Code (CC), "an interpretive law integrates itself into the law being interpreted, saving, however, the effects already produced by the performance of the obligation, by judgment passed in law, by transaction, even if not approved, or by acts of similar nature."

The most relevant effect that the legislator draws from the characterization of a provision as interpretive is, thus, that of its application in time, in particular, that of the non-application, in such cases, of the principle of non-retroactivity of law. Being that an effect, it is necessary, however, that first a process be carried out to identify the characteristics that make a given provision an interpretive provision and that, from that perspective, differentiate them from innovative provisions.

For a new law – as is, in the case at issue, No. 21 of article 88 of the IRC Code - to be truly interpretive, two requirements are necessary: (i) on one hand, that the solution of the prior law be controversial or at least uncertain; (ii) on the other hand, that the solution defined by the new law falls within the framework of the controversy and is such that the judge or the interpreter could arrive at it without exceeding the limits normally imposed on the interpretation and application of the law. Thus, if the judge or the interpreter, in the face of old texts, could not feel authorized to adopt the solution that the new law comes to establish, then this is decidedly innovative.

An interpretive provision, therefore, is one that does not alter any content or element of the provision being interpreted, comes only to express its meaning – being, consequently, obliged to respect the rights acquired under the validity of the provision being interpreted, particularly on questions to which the prohibition of retroactivity is especially provided for, as is the case with the principle of non-retroactivity in tax matters, provided for in No. 3 of article 103 of the Constitution.

Returning to the concrete case, it has already been said that it is understood that the text of the law before this amendment did not allow the conclusion that the deduction of RFAI and CFEI from the part of IRC collection resulting from autonomous taxation was prohibited. On the other hand, that solution does not yet clearly result from No. 21 of article 88 of the IRC Code. Thus, as to the scope of the deductions provided for in article 90, there is no reason to consider excluded the collection of autonomous taxation.

In sum, as to the effect of the amendment made by the State Budget Law for 2016, I believe that No. 21 of article 88 of the IRC Code does not have an interpretive character with respect to the issue under discussion, not applying to facts that occurred before its entry into force, namely, the tax period and relevant facts in the present proceeding.

For these reasons, I would judge as founded the claim for declaration of illegality of the self-assessments at issue in the present proceeding, in the part relating to the non-deduction of the amounts of RFAI and CFEI from autonomous taxation collection.

Lisbon, 21 July 2017

Raquel Franco