IRC Autonomous Taxation and PEC Deduction: CAAD Arbitration Decision 736/2015-T

ARBITRAL DECISION

I. REPORT

I.1

• On December 7, 2015, the taxpayer Company A..., S.A., legal entity no. ..., with registered office at …, no. ..., ...-..., requested, pursuant to the terms and conditions set out in Article 2 and Article 10, both of Decree-Law no. 10/2011, of January 20, the establishment of an Arbitral Tribunal with designation of a single arbitrator by the Ethics Council of the Administrative Arbitration Center, in accordance with the provisions in no. 1 of Article 6 of the aforementioned diploma.

• The request for establishment of the Arbitral Tribunal was accepted by the Honorable President of CAAD and was notified to the Tax and Customs Authority (hereinafter referred to as TA or "Respondent") on December 17, 2015.

• The Claimant did not proceed to appoint an arbitrator, and therefore, under the provisions of Article 5, no. 2, subparagraph b) and Article 6, no. 1, of the RJAT, the undersigned was designated by the President of the Ethics Council of CAAD to serve on this single Arbitral Tribunal, having accepted in accordance with legal provisions.

• The TA submitted its response on March 29, 2016.

• By order of April 4, 2016, the holding of the meeting provided for in Article 18 of the RJAT was waived.

• In the same order, as there was no controversy regarding the essential facts for the proper decision of the case, the request for production of witness evidence was denied and it was decided that the proceeding would continue with written final arguments.

• On April 12, 2016, the Claimant submitted its arguments.

• The Respondent submitted its arguments on April 21, 2016.

• The Claimant seeks that the Arbitral Tribunal declare the illegality of the dismissal of the administrative review no. ... 2015 ... and, likewise, the illegality of the self-assessment of corporate income tax (IRC), including autonomous taxation rates, for the fiscal year 2012, with respect to the amount of autonomous taxation in IRC of €47,016.23, with the consequent annulment in this part by improper exclusion of deductions from the tax due, with all legal consequences, namely the reimbursement to the claimant of this amount, plus compensatory interest at the legal rate counted, until full reimbursement, from May 9, 2013 regarding €31,202.59, and from September 1, 2013 regarding the remaining €15,813.64.

• Alternatively, should the tribunal consider that Article 90 of the CIRC does not apply to autonomous taxation, the Claimant requested that the illegality of the assessment of autonomous taxation be recognized due to the absence of legal basis for its effectuation, with the consequent reimbursement of the same amount and the payment of compensatory interest.

I.A. The Claimant supports its petition, in summary, in the following terms:

a) The IRC Model 22 declaration and its articulation with the programming of the TA's computer system prevents the deduction from the tax due related to the autonomous taxation rates in IRC, recorded in field 365 of table 10 of the Model 22 declaration, of special advance payments still to be deducted from the IRC tax due, starting with the oldest ones.

b) In the same way that case law has understood, in a practically unanimous manner, that the IRC tax due provided for in (in effect until 2013) Article 45, no. 1, subparagraph a), of the CIRC, comprises, without need for any additional specification, the tax due from autonomous taxation in IRC,

c) it must also be understood that the IRC tax due provided for in the same code a few meters further on (Article 90, no. 1, and no. 2, subparagraph c), of the CIRC, in the version in effect in 2013) also encompasses the tax due from autonomous taxation in IRC.

d) Whereby the denial of the deduction of the special advance payment from the IRC tax due of autonomous taxation violates subparagraph c) of no. 2 of Article 90 of the CIRC (prior to 2010, Article 83; and from 2014 it became subparagraph d) of the aforementioned no. 2 of Article 90 of the CIRC).

e) It has been systematically decided by tax tribunals, in this case in the form of arbitral tribunals, that autonomous taxation is IRC, from which it follows as a consequence that norms directed at IRC apply to them, such as that concerning the non-consideration of the IRC tax due for the computation of taxable profit in IRC (Article 45, no. 1, subparagraph a), of the IRC Code, in effect until 2013).

f) For the very same reason, this taxpayer requests that, if it is concluded that the IRC tax due constituted by these autonomous taxation rates is available, alongside the remaining IRC tax due, in the operation of the deductions from the tax due provided for in Article 90 of the CIRC, among which is the deduction of the special advance payment.

g) Regardless of whether one agrees or not with the designation of "combating tax evasion," such association should in no way modify the conclusion that the tax due of this portion of IRC directed (in the TA's thesis) against abuses is available for the purposes of IRC tax benefits that operate, precisely, at the level of the tax due.

h) Nowhere in the law is the tax due or portions of the tax due from IRC resulting from anti-tax evasion legislative measures excluded from these tax benefits.

i) Whereby, if it is understood that Article 90 of the CIRC does not include the IRC tax due resulting from autonomous taxation (determined in accordance with Article 88), but only the IRC tax due resulting from taxable profit (determined in accordance with Article 87), it would still have to be concluded in any case that, in fact, the assessment of the autonomous taxation itself is, in itself, illegal, by virtue of both Article 8, no. 2, subparagraph a), of the General Tax Law, and Article 103, no. 3, of the Portuguese Constitution.

j) The claimant concludes that it paid tax in an amount greater than that legally due, whereby the illegality of the (self-)assessment in the part petitioned must be declared, and the claimant has the right not only to the respective reimbursement, but also, under Article 43 of the General Tax Law ("LGT"), to compensatory interest.

k) Furthermore, the error affecting the (self-)assessment against which the claim is made results from an error by the Services regarding the legal assumptions that conditioned informatically the completion of the declaration (Model 22) of self-assessment.

I.B In its Response, the TA invoked the following:

i) The autonomous character of autonomous taxation, deriving from the special configuration given to the material and temporal aspects of the taxable events, imposes, in certain domains, the exclusion or an adaptation of the general rules of application of IRC.

ii) It is evident that the integration of autonomous taxation in the IRC Code (and IRS) conferred a dualistic nature, in certain aspects, to the normative system of this tax, which was embodied, namely, within the framework of subparagraph a) of no. 1 of Article 90 of the CIRC, in separate determinations of the respective tax due, by virtue of their being subject to different rules, for in one case it is a matter of the application of the rate(s) of Article 87 of the CIRC to the taxable matter determined according to the rules contained in Chapter III of the Code, that is, based on profit, and in another case, it is a matter of the application of the rates to the values of the taxable matters relating to the different realities contemplated in Article 88 of the CIRC.

iii) When it comes to the deductions provided for in no. 2 of Article 90 of the CIRC, the Claimant came forward in the Petition to argue that the expression "amount determined in accordance with the preceding number" should be understood as encompassing the sum of the amount of IRC, determined on the taxable matter determined according to the rules of Chapter III and the rates provided for in Article 87 of the same Code, and the amount of autonomous taxation, calculated on the basis of the rules provided for in Article 88.

iv) In fact, for the basis of calculation of advance payments, only the IRC determined on the basis of the taxable matter determined according to the rules of Chapter III and the rates of Article 87 of the respective Code is considered.

v) It only makes sense to conclude that the respective basis of calculation of advance payments corresponds to the amount of the IRC tax due resulting from the taxable matter that is identified with the profit/income of the fiscal year of the taxpayer.

vi) The common feature to all the realities reflected in the deductions referred to in no. 2 of Article 90 of the CIRC lies in the fact that they concern income or expenses incorporated in the taxable matter determined on the basis of the profit of the taxpayer or anticipated payments of the tax, and are therefore entirely unrelated to the realities that comprise the taxable events of autonomous taxation.

vii) With respect to tax credits intended to eliminate international double taxation (legal and economic), the normative provisions themselves (Articles 91 and 91-A of the CIRC), which regulate their method of calculation, specify that the income in question must have been included in the taxable matter, a magnitude that, for obvious reasons, can only be that determined on the basis of profit (Chapter III of the Code) which constitutes the central nucleus of IRC.

viii) Also, for deductions from the tax due as tax benefits, the amount to which they are made can only relate to the tax assessed on the basis of the taxable matter, determined in accordance with the rules of Chapter III and the rates provided for in Article 87 of the CIRC.

ix) The position defended by the TA has explicit support in the provision in no. 5 of Article 90 of the CIRC – through which the legislator provides a clear indication that the amount of the tax assessed, to which the deductions referred to in no. 2 of the same article are made, does not include the amount corresponding to autonomous taxation.

x) By simple consequence of the preceding considerations that led to the conclusion that the deductions referred to in subparagraphs a) and b) of no. 2 of Article 90 of the IRC Code are made to the "amount determined in accordance with the preceding number," understood as the amount of IRC determined on the basis of the taxable matter determined in accordance with the rules contained in Chapter III and the rates of Article 87 of the same Code, and going down to the specific case, it is possible to extend such conclusion to the deduction relating to special advance payments.

xi) The legal nature of the special advance payment, revealed by its configuration as "instrument or guarantee of payment of the tax by account of which it is required, and not as an imposition in itself," as well as by the function associated with it in combating tax evasion and fraud, inextricably links this payment to the amount of IRC determined on the taxable matter determined on the basis of profit (Chapter III of the Code).

xii) From this it results that the credit for the amounts paid as special advance payment does not constitute a claim that IRC taxpayers can enforce.

xiii) It is therefore manifestly devoid of any basis the pretension of the now Claimant to deduct the amount borne as special advance payment from the tax due produced by autonomous taxation in the years 2012 and 2013.

xiv) One cannot attribute to the TA a position in a certain direction – which, curiously, appears in the Petition as favorable to the Claimant's pretension – when, on the matter in question, there was no issuance of a pronouncement that would lead to the conclusion that the understanding expressed in the completion of the periodic income declaration, Model 22, was altered, which completely excludes the possibility of deduction of special advance payments from the amount of autonomous taxation.

xv) Even if compensatory interest could be configured in the situation at hand in this case – and it cannot, for all the foregoing about the propriety of the act challenged in this case – its calculation would always have as its starting date the date when notification of the decision denying the administrative review proceeding occurred, and never the moment indicated by the Claimant in its petition.

II. PRELIMINARY EXAMINATION

The Tribunal is competent and is regularly constituted, in accordance with Articles 2, no. 1, subparagraph a), 5, and 6, all of the RJAT.

The parties have legal capacity and standing.

The parties are legally capable and are legally represented, in accordance with Articles 4 and 10 of the RJAT and Article 1 of Ordinance no. 112-A/2011, of March 22.

The proceeding is proper.

There are no other preliminary matters to be considered nor defects that invalidate the proceeding.

It is now necessary to consider the merits of the petition.

III. THEMA DECIDENDUM

The essential question to be considered is as follows:

Does, or does not, the Claimant have the right to proceed with the deduction, also from the IRC tax due produced by the application of autonomous taxation rates, of special advance payments (PEC)?

IV. FACTUAL MATTER

IV.1. Proven Facts

Before entering into the consideration of the issues, it is necessary to present the factual matter relevant to their understanding and decision, which, examined in the light of documentary evidence, the administrative tax proceeding attached, and taking into account the facts alleged, is established as follows:

1. On May 9, 2013, the now claimant proceeded to submit the IRC Model 22 declaration for the fiscal year 2012, and at that moment proceeded to self-assess autonomous taxation for that same year 2012 in the amount of €47,016.23.

2. On May 8, 2015, the claimant submitted an administrative review against the aforementioned self-assessment relating to the fiscal year 2012.

3. The TA did not expressly pronounce on the administrative review.

4. In 2012, the claimant had an accumulated amount of €68,304.42 from special advance payments made in 2010, 2011, and 2012.

5. The TA's computer system, through which IRC is self-assessed, does not allow taxpayers to deduct, for the purposes of determining the IRC due by themselves, the special advance payment from the IRC resulting from autonomous taxation determined.

IV.2. Unproven Facts

There are no essential unproven facts, since all facts relevant to the consideration of the petition were found to be proven.

IV.3. Reasons for the Factual Findings

The proven facts comprise uncontested matter and matter demonstrated by documents in the record.

The facts set out in numbers 1 to 5 are accepted as established by the analysis of the administrative proceeding, by the documents submitted by the Claimant (docs. 1 to 8 of the request for establishment of the Tribunal) and by the position assumed by the parties.

V. THE LAW

The undersigned previously participated in this arbitration center as a member of the panel in proceeding no. 535/2015-T, which analyzed this legal question. Having no reason to alter my legal interpretation, in advance, I note that I find the deduction of the Special Advance Payment (PEC) from autonomous taxation inadmissible for the reasons that I shall set out and which are contained in the judgment delivered in the aforementioned proceeding.

"Preliminary Notes

Autonomous taxation rates apply to certain expenses borne by IRC taxpayers, which by their nature may present a more ambiguous connection to the realization of income subject to taxation or to the maintenance of the income-producing source. Increasingly, through the mechanism of autonomous taxation, it is sought to discourage certain excesses in the occurrence of this type of expense.

Unlike what occurs with the philosophy inherent in the remaining provisions of the IRC Code, income is not taxed but rather expenses or charges.

With autonomous taxation, it is intended, in a way, to penalize taxpayers for the realization of certain types of expenses or charges, in certain conditions, even if such taxpayers have suffered a tax loss and, therefore, in that fiscal year did not pay IRC.

The incidence of autonomous taxation is not limited to corporations and other IRC taxpayers with profit-making purposes, this taxation also being extensive to associations, foundations, non-profit institutions and other entities that do not exercise, as their principal activity, commercial, industrial or agricultural activities, and also to all entities that have exempt or IRC non-subject income.

With respect to autonomous taxation, it may be noted that this is determined independently and separately from the determination carried out in accordance with Article 90 of the CIRC (version in effect in 2012[1]).

Developing further the question of the nature of autonomous taxation and its degree of connection with IRC, it is necessary to go back to the year 1990 to find the first intervention by the legislator to subject certain expenses to autonomous taxation, which occurred with the publication of Decree-Law no. 192/90, of June 9, whose Article 4 provided that 'confidential or undocumented expenses incurred in the course of commercial, industrial or agricultural activities by IRS taxpayers who possess or must possess organized accounting or by IRC taxpayers not covered by Articles 8 and 9 of the respective Code are taxed autonomously under IRS or IRC, as appropriate, at a rate of 10%, without prejudice to the provisions of subparagraph h) of no. 1 of Article 41 of the CIRC.' This norm was subject to various subsequent alterations which successively proceeded to increase the rate of taxation provided therein.

With this type of taxation, on the one hand, it was intended to encourage taxpayers subject to it to reduce as much as possible expenses that adversely affect tax revenue, and on the other hand, to prevent that, through such expenses, companies proceed to camouflaged distribution of profits, especially dividends, which thus would only be subject to IRC as company profits, as well as to combat tax fraud and evasion that such expenses cause not only in relation to IRS or IRC, but also in relation to the corresponding contributions, both from employers and employees, to social security.

Saldanha Sanches (See Manual of Tax Law, 3rd Edition, Coimbra Publisher, 2007, p. 407), regarding autonomous taxation provided for in Article 81, no. 3, of the CIRC (version of 2005, corresponding, in substance, to Article 88, no. 3, no. 4, and no. 7, in the version of 2012), wrote the following: 'In this type of taxation, the legislator seeks to respond to the admittedly difficult question of the tax treatment of expenses that are located in the area of intersection between the personal sphere and the business sphere, in order to avoid remuneration in kind more attractive for exclusively fiscal reasons or the concealed distribution of profits. The provision presents a characteristic similar to that which we will find in the legal sanction against undocumented costs, with an increase in the rate when the situation of the taxpayer does not correspond to a situation of fiscal normality. If there is no profit in the taxpayer's declaration, the cost may be subject to negative valuation: for example, we have a rate of 15% applied when the taxpayer suffered losses in the two preceding fiscal years and a light passenger vehicle was purchased for more than €40,000 (Article 81, no. 4). With this provision, the system shows its dual nature, with an increased rate of autonomous taxation for certain special situations that it is sought to discourage, such as the acquisition of vehicles for business purposes or vehicles in principle too expensive when losses exist. This creates, here, a kind of presumption that these costs do not have a business purpose and, therefore, are subject to autonomous taxation. In summary, the cost is deductible, but autonomous taxation reduces its tax advantage, since, here, the basis of incidence is not net income, but rather a cost transformed – exceptionally – into an object of taxation.' (emphasis ours).

Contrary to what occurs in the taxation of income under IRS and IRC, in which the aggregate of income earned in a given year is taxed (which implies that only at the end of the same year the tax rate and the bracket in which the taxpayer falls can be determined), in the case of (autonomous taxation) each expense incurred is taxed, considered in itself, and subject to a certain rate, with autonomous taxation being determined independently of the IRC that is due in each fiscal year, by not being directly related to the attainment of a positive result, and therefore subject to taxation.

Thus, 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, with the law considering that the taxable event occurs on the last day of the taxation period (See Article 8, no. 9, of the CIRC).

As regards autonomous taxation under IRC, the taxable event is the very realization of the expense, and we are not faced with a complex fact, of successive formation over a year, but rather an instantaneous tax event.

This characteristic of autonomous taxation thus refers us to the distinction between periodic taxes (whose taxable event is produced in a successive manner, by the passage of a given period of time, usually annual, and tends to repeat itself in time, generating for the taxpayer the obligation to pay tax on a regular basis) and single-obligation taxes (whose taxable event is produced instantaneously, appears isolated in time, generating for the taxpayer an obligation to pay with an occasional character).

In autonomous taxation, the tax event that gives rise to the tax is instantaneous: it is exhausted in the act of realization of a certain 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 realization of expenses considered will be carried out at the end of a given taxation period). But the fact that the assessment of the tax is carried out at the end of a given period does not transform it into a periodic tax, of successive formation or of a continuous character. This operation of assessment amounts only to the aggregation, for the purpose of collection, of the aggregate of operations subject to this autonomous taxation, to which the rate is applied to each expense, with no influence of the volume of expenses incurred on the determination of the rate.

In this case we are faced with a tax of single obligation, inciding on operations that are produced and exhausted instantaneously, in which the taxable event of the tax appears isolated in time, giving rise, for the taxpayer, to an obligation to pay with an occasional character. That is, the autonomous taxation rates here in analysis do not refer to a period of time, but to a moment: that of the isolated operation subject to the rate, without prejudice to the fact that the determination of the amount owed by the economic agents subject to said "rate" is carried out periodically, at a given moment, together with other similar operations, without the joint assessment influencing its result.

For this reason, Sérgio Vasques (See Manual of Tax Law, Almedina, 2011, p. 293, note 470) calls attention to the fact that income taxes contemplate elements of single obligation, such as the liberatory rates of IRS or the autonomous taxation rates of IRC.

Autonomous taxation, according to its initial regulation, constituted as it were a substitute for the regime of non-deductibility previously provided for in the CIRC.

In fact, at its genesis was the non-acceptance for tax purposes of a percentage of certain expenses, with autonomous taxation constituting an alternative and more effective form of correction of costs whenever it is a matter of areas more prone to tax evasion (allowances, entertainment expenses, vehicle expenses, etc.).

Thus, it would not be reasonable (indeed, contrary to the reason that led the legislator to tax such expenses autonomously) that, through their deduction from taxable profit as expenses, the basis for the existence of autonomous taxation would be eliminated.

Arbitral case law has decided that autonomous taxation generally belongs, systematically, to IRC, and not to VAT, IRS, or any other tax in the Portuguese tax system. This is the case, among others, of the arbitral proceedings delivered within the framework of CAAD, nos. 166/2014-T, 246/2013-T, 260/2013-T, 282/2013-T, 6/2014-T and 36/2014-T, 697/2014-T.

Higher courts have also understood that "autonomous taxation, although formally inserted in the IRC Code, has always received its own treatment, since it does not incide on income, whose formation is taking place over the year, but rather on certain occasional expenses that represent autonomous taxable events subject to rates different from those of IRC"(…) "Although it is a form of taxation provided for in the CIRC, it has nothing to do with the taxation of income, but rather with the taxation of certain expenses, which the legislator understood, for the reasons set out above, to do so autonomously." (Judgment of the STA of March 21, 2012, proc. 830/11 and, in the same sense, Judgment of the STA of July 6, 2011, proc. no. 0281/11, Judgment of the STA of April 17, 2013, proc. no. 166/13, Judgment of the STA of January 21, 2015, proc. no. 04710/14 and Judgment of the TCAS of October 16, 2014, proc. no. 06754/13).

The Constitutional Court, in Judgment no. 617/2012 of January 31, 2013, held that in autonomous taxation, the tax event that gives rise to the tax is instantaneous, as it "is exhausted in the act of realization of a certain 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 realization of expenses considered will be carried out at the end of a given taxation period). But the fact that the assessment of the tax is carried out at the end of a given period does not transform it into a periodic tax, of successive formation or of a continuous character. This operation of assessment amounts only to the aggregation, for the purpose of collection, of the aggregate of operations subject to this autonomous taxation, to which the rate is applied to each expense, with no influence of the volume of expenses incurred on the determination of the rate."

And in Judgment no. 310/12, of June 20, the Constitutional Court considered that "(...) contrary to what occurs in the taxation of income under IRS and IRC, in which the aggregate of income earned in a given year is taxed (which implies that only at the end of the same year the tax rate and the bracket in which the taxpayer falls can be determined), in the case [here] each expense incurred is taxed, considered in itself, and subject to a certain rate, with autonomous taxation being determined independently of the IRC that is due in each fiscal year, by not being directly related to the attainment of a positive result, and therefore subject to taxation."

The generality of legal doctrine does not depart from the understanding of the higher courts. Thus, as Prof. RUI MORAIS teaches, "what is at issue is a taxation that incides on certain expenses of taxpayers, which are taken as constituting taxable events. It is difficult to discern the nature of this form of taxation and, more still, the reason why it appears provided for in the codes of income taxes." (RUI DUARTE MORAIS, Notes on IRC, Almedina, 2009, pp. 202-203). And also CASALTA NABAIS considers that it is "a taxation on expense and not on income" (CASALTA NABAIS, Tax Law, 6th Ed., p. 614). In the same vein, Professor Ana Paula Dourado asserts that "it is consensual that autonomous taxation affects the expense of the taxpayer-contributor and not their income." Tax Law, 2015, Almedina, p. 237.

It does not appear, therefore, questionable that the mechanism of autonomous taxation of the aggregate of realities provided for in Article 88 of the CIRC aims, primarily, to safeguard the general equilibria of the tax system itself, the specific equilibria of IRC, and the revenue of the tax itself. That is, to prevent that through the significant deduction of charges as those provided for in Article 88, distortions be introduced that affect the system and the expectation about what should be the "normal" revenue of the tax. In the case, as is equally well known, what is at issue is to discourage the realization/deduction of such expenses, especially because, by their nature and purposes, they may be more easily subject to diversion to consumption that, in essence, is private or corresponds to charges that do not fail to have, also, as a specific and final purpose, the avoidance of tax. These are realities that, as was previously noted, present some measure of culpability in that, without directly violating the law, they generate sensible and important imbalances on the general idea of justice, on the fundamental duty to contribute in proportion to one's means, of equality, of sacrifice, of proportionality of the measure of tax in the face of possible manifestations of wealth, of taxation of real income and of justice.

Operating in a manner different from what constitutes the essential scope of IRC – which taxes income – autonomous taxation, it is reaffirmed, taxes certain expenses or specific charges – and constitute an instrumental, accessory reality of that tax, in the fair measure in that it is in function of it that they were instituted and are, therefore, capable of being recognized as having an instrumentality or accessoriness of purposes, rooted in the safeguarding of the purposes of the tax itself in which they are manifested.

It is thus taken as established that autonomous taxation does not constitute IRC in the strict sense but is intertwined with it (IRC), and should be contained in the "other taxes" of which we are informed by the final part of subparagraph a) of no. 1 of Article 45 of the CIRC (version in effect in 2012).

Manifestations of this connection of functionality, and within the framework of the legislator's intention as a whole, stand out, for example, in the discipline of Article 12 of the CIRC regarding entities subject to the fiscal transparency regime, by not subjecting them to IRC tax, "except as to autonomous taxation," a relationship that is equally manifested in the face of no. 14 of Article 88 of the CIRC, in the sense that autonomous taxation rates take into account whether or not the taxpayer presents a tax loss.

Analyzed further from another perspective, it is necessary to consider autonomous taxation in the context of specific anti-abuse norms and its similarity with the regime provided for in no. 1 of Article 65 of the CIRC, ("the following amounts are not deductible for the purposes of taxable profit: sums paid or due, in any capacity, to natural or legal persons resident outside Portuguese territory and subject there to a clearly more favorable tax regime, unless the taxpayer can prove that such charges correspond to operations actually carried out and do not have an abnormal character or excessive amount"). Seeking autonomous taxation to reduce the tax advantage achieved with the deduction from taxable profit of the costs on which it incides and also to combat tax evasion that this type of expenses, by their nature, fosters, it cannot itself be through its deduction from taxable profit as a business expense constitute a factor reducing that reduction of advantage intended and determined by the legislator.

In conclusion, autonomous taxation, which incides on charges deductible under IRC, forms part of the regime and is owed by virtue of this tax, with the expenses of paying such autonomous taxation not constituting charges deductible for the purposes of determining taxable profit.

This understanding was recently clarified by law through Article 3 of Law no. 2/2014, of January 16, which added Article 23-A to the CIRC (while its Article 13 repealed Article 45) with the following wording:

Article 23-A) Charges not deductible for tax purposes

"1. The following charges are not deductible for the purposes of determining taxable profit, even when recorded as expenses of the taxation period:

a) IRC, including autonomous taxation, and any other taxes that directly or indirectly incide on profits".

There being no doubt about the interpretative character of the provision transcribed, according to the rules of legal hermeneutics, in practice, such provision comes to express what the legislator always understood and continues to understand, namely that the charges resulting from the cost associated with autonomous taxation do not count toward the purposes of determining taxable profit."

Furthermore, recently Law no. 7-A/2016 of March 30 brought a new wording to Article 88, no. 21 of the CIRC:

"21 - The assessment of autonomous taxation under IRC is carried out in accordance with the terms provided for in Article 89, and is based on the values and rates that result from the preceding numbers, with no deductions being made to the aggregate amount determined.

According to Article 88, no. 21 of the CIRC, it is evident that no deductions are made to autonomous taxation.

In Article 135 of the same diploma, the legislator decided to confer an interpretative character to the cited provision. As Profs. Pires de Lima and Antunes Varela state, an interpretative law should be considered as one that intervenes to decide a question of law whose solution is controversial or uncertain, consecrating an understanding to which case law by its own means could have arrived. See C.C. Annotated, Vol. I, Coimbra Publisher, 1987, p. 62.

An interpretative law is integrated with the law interpreted, with its effects retroacting to the entry into force of the old law, as if it had been published on the date on which the law interpreted was published, with the exception of effects already produced by the fulfillment of the obligation, by a final judgment, by settlement even if not approved, or by acts of analogous nature (Article 13, no. 1 of the Civil Code). In accordance with no. 1 of Article 13 of the Civil Code, interpretative law is considered integrated with the law interpreted. Thus, citing Profs. Pires de Lima and Antunes Varela: "This means that its effects retroact to the entry into force of the old law, all occurring as if it had been published on the date on which the law interpreted was published". In C.C. Annotated, Vol. I, Coimbra Publisher, 1987, p. 62.

As Prof. Baptista Machado states "(...) the reason why interpretative law applies to facts and situations prior [to it] resides fundamentally in that it, coming to consecrate and establish one of the possible interpretations of the LA [old law] with which the interested parties could and should have reckoned, is not susceptible to violating secure and legitimately founded expectations." In Introduction to Law and Legitimating Discourse, Almedina, 1996, p. 246. The Prof. further continues by stating: "In order for a new law to be truly interpretative, two requirements are therefore necessary: that the solution of prior law be controversial or at least uncertain; and that the solution defined by the new law be situated within the framework of the controversy and be such that the judge or interpreter could have arrived at it without exceeding the limits normally imposed on the interpretation and application of law. If the judge or interpreter, faced with old texts, could not have felt authorized to adopt the solution that the new law comes to consecrate, then the latter is decidedly innovative." In Introduction to Law and Legitimating Discourse, Almedina, 1996, p. 247.

In the case at hand, the solution resulting from a restrictive interpretation of Articles 88 and 93 of the CIRC was controversial, as revealed by the decision of CAAD delivered in proceeding no. 113/2015-T. Furthermore, the solution advocated by the legislator met with the only judicial decision known up to the time in question that analyzed the deductibility, or not, of the special advance payment from the value of autonomous taxation.

An interpretative law is distinguished from an innovative law by aiming to resolve a doubtful or controversial question in the law interpreted and by resolving it in a sense that would be possible for any interpreter. Since it is a controversial question and Law no. 7-A/2016 of March 30 adopted the interpretation followed by the only judicial decision handed down, it appears that the interpretative law is not innovative.

Furthermore, "(...) there is, with respect to the deductibility of special advance payments, no concern for the protection of legitimate expectations, for the special advance payments are connected with the volume of business, not depending on any specific conduct that the taxpayer might be led to adopt because it was created for them the expectation of obtaining in return a tax advantage." Proc. No. 673/2015-T of CAAD, April 28, 2016.

The non-deductibility of special advance payments cannot constitute any violation of any eventual expectation of the taxpayer because its value does not depend on specific conduct of the taxpayer that might have influenced them, but rather on the volume of business. Furthermore, even if such expectations existed, they could not be legitimate because the deduction of special advance payments from the value of autonomous taxation had never previously been admitted.

The claimant further argues, in its arguments, that the eventual application of interpretative law constitutes a violation of the prohibition of retroactive application of tax laws (Article 103, no. 3 of the CRP).

However, this argument cannot but fail, since the law is interpretative, not innovative. Thus, it is not a matter of the application of a new law to facts already consumed. In this sense, see CAAD proceeding no. 673/2015-T, April 28, 2016.

Therefore, I conclude that the interpretative character of Article 88, no. 21, imposed by Article 135 of Law 7-A/2016 of March 30, is not contrary to the provision in Article 103, no. 3 of the CRP.

"The Special Advance Payment (PEC)

This regime is provided for in Articles 106 of the CIRC and 33 of the LGT.

The special advance payment is an anticipated delivery on account of a fact that is in formation, that is, it presupposes a single-obligation tax event as opposed to periodic tax events.

The special advance payment was created with the purpose of guaranteeing a minimum tax collection, with this being even its first designation in the discussion of the Budget proposal for 1998. This requirement for minimum collection arose from the finding that the great majority of companies did not present taxable profit and/or that this was in the majority of cases insignificant.

Just as autonomous taxation, the special advance payment functions as a presumption of income and as a means of combating tax evasion, obliging some companies to pay at least some tax.

The special advance payment is also used as a "mechanism of fiscal anesthesia," serving to reduce the period of time between the taxable event and the payment of the tax. Although the regime of autonomous taxation has as its foundation the taxation of presumed income, this differs from the regime of special advance payments, in that the payment of autonomous taxation is definitive and is not subject to subsequent adjustments.

The special advance payment regime presents many other specificities that would now be inappropriate to refer to; it is only noted that the possibility of the amount borne being able to be deducted from the tax due, making it much less onerous for companies than autonomous taxation.

Furthermore, companies may, in certain circumstances, obtain the reimbursement of the special advance payment borne, if they cannot deduct the entire amount, thus functioning as a means of circumventing the presumption of income that results from this institute.

The incidence of the special advance payment is based on the volume of business relating to the preceding taxation period, in accordance with the aforementioned Article 106, no. 2, of the CIRC, and the payments are made during the period of formation of the taxable event. (In this sense, see António Lima Guerreiro, LGT Annotated, Rei dos Livros Publisher, p. 167).

Although its relationship with contributory capacity is not obvious, the criterion of volume of business is closer to a notion of income than the expenses subject to autonomous taxation.

Since the creation of the special advance payment, constitutional issues have been raised[2], on the grounds that it departs, notably, from the principle of contributory capacity. The fact is that, despite the heated debate, the institute of the special advance payment endures.

From the foregoing, it is evident that the payment of the special advance payment in 2012 is not deductible from the amount of autonomous taxation determined in the declaration submitted by the Claimant for the same period."

In conclusion, in the wake of the decisions previously delivered in CAAD (proc. no. 113/2015-T and proc. 673/2015-T), I decide for the non-deduction of the special advance payment from the amount of autonomous taxation as it is contrary to the provisions of Articles 88, 93, and 106 of the CIRC and Article 33 of the LGT.

As for the petition made alternatively, taking into account the foregoing, it should also fail because the legal basis of autonomous taxation results from the provision of Article 88 of the CIRC, with no deduction being admitted."

Compensatory Interest

The consideration of the Respondent's condemnation to the payment of compensatory interest is prejudiced by the solution reached above.

Maintaining the tax act reviewed, in consequence, the petition for compensatory interest should also be ruled improcedent.

III. DECISION

In light of all that has been stated, it is decided:

1. To rule completely improcedent the petition for a declaration of illegality of the act denying the administrative review no. ... 2015 ... and the consequent self-assessment of corporate income tax, including autonomous taxation rate, for the fiscal year 2012;

2. To maintain in full the tax act subject to this proceeding;

3. To condemn the Claimant to the payment of the costs of the proceeding, as follows.

The value of the proceeding is fixed at €47,016.23 in accordance with Article 97-A, no. 1, a), of the CPPT, applicable by virtue of subparagraph a) of no. 1 of Article 29 of the RJAT and no. 2 of Article 3 of the Regulation of Costs in Tax Arbitration Proceedings.

The value of the arbitration fee is fixed at €2,142.00, in accordance with Table I of the Regulation of Costs of Tax Arbitration Proceedings, to be paid in full by the Claimant, since the petition was completely improcedent, in accordance with Articles 12, no. 2, and 22, no. 4, both of the RJAT, and Article 4, no. 4, of the cited Regulation.

Notify the parties.

Lisbon, June 14, 2016

The Arbitral Tribunal

(André Festas da Silva)

[1] References in this text to the CIRC shall be to the CIRC in effect during the period in question in the case (2012), when no other specifications are provided.

[2] See on this matter, José João Avillez Ogando, The Constitutionality of the Special Advance Payment Regime, Supplement of the Journal of the Bar Association, Year 62, III, December 2012.