IRC Tax Deduction of Business Expenses Denied: CAAD Arbitration Case 747/2016-T

ARBITRAL DECISION (consult full version in PDF)

The Arbitrators José Pedro Carvalho (Presiding Arbitrator), Rui Ferreira Rodrigues and José Manuel Parada Ramos, appointed by the Deontological Council of the Centre for Administrative Arbitration to form an Arbitral Tribunal, hereby agree:

I – REPORT

On 20 December 2016, A…, S.A., NIPC…, with registered office at …, …, no.… …-… …, filed a request for constitution of an arbitral tribunal, pursuant to the combined provisions of Articles 2 and 10 of Decree-Law no. 10/2011, of 20 January, which approved the Legal Regime of Arbitration in Tax Matters, as amended by Article 228 of Law no. 66-B/2012, of 31 December (hereinafter, briefly referred to as RJAT), seeking the declaration of illegality of the acts of assessment of Corporate Income Tax (IRC) no. 2013… and no. 2016…, and of compensatory interest no. 2013… and 2016…, all relating to the fiscal year 2009, in the amount of € 147,166.06, as well as the decisions rejecting and partially rejecting, respectively, the administrative complaint and hierarchical appeal which had those as their subject matter.

To substantiate its request, the Applicant alleges, in summary:

• insufficiency of reasoning of the assessment acts;
• failure to comply with essential legal formalities;
• errors in the factual and legal assumptions regarding corrections relating to unrecognized income, disregard and non-acceptance of the deductibility of certain expenses for tax purposes and autonomous taxation of certain expenses;
• illegality of the assessment of compensatory interest;
• illegality of the order that denied the hierarchical appeal.

On 21-12-2016, the request for constitution of the arbitral tribunal was accepted and automatically notified to the Tax Administration (AT).

The Applicant did not proceed to appoint an arbitrator, wherefore, pursuant to the provisions of subparagraph a) of paragraph 2 of Article 6 and subparagraph a) of paragraph 1 of Article 11 of the RJAT, the President of the Deontological Council of CAAD appointed the undersigned as arbitrators of the collective arbitral tribunal, who communicated acceptance of the appointment within the applicable time limit.

On 10-02-2017, the parties were notified of these appointments and did not manifest any intent to refuse any of them.

In accordance with the provisions of subparagraph c) of paragraph 1 of Article 11 of the RJAT, the collective Arbitral Tribunal was constituted on 28-02-2017.

On 07-04-2017, the Respondent, duly notified for this purpose, presented its defense, defending solely by way of objection.

On 31-05-2017, the meeting referred to in Article 18 of the RJAT was held, at which the witness presented by the Applicant was examined.

A deadline having been granted for the presentation of written arguments, these were presented by the parties, pronouncing on the evidence produced and reiterating and developing their respective legal positions.

A deadline of 30 days was set for the delivery of the final decision, after the presentation of arguments by the Respondent.

Taking into account the judicial vacation period, and the provisions of Article 17-A of the RJAT, the deadline contained in Article 21/1 also of the RJAT was extended by two months, pursuant to paragraph 2 of this latter rule.

In view of the finding, during the preparation of the final decision, of the absence of documents essential to obtaining a decision on the merits regarding part of the substance of the case, the Tribunal determined, ex officio, the addition of supplementary documentation, which was complied with by request of the Applicant, dated 06-11-2017.

The right to be heard was granted to the Respondent regarding the documentation added and the date of 28/12/2017 was set for the purposes of Article 18/2 of the RJAT.

The Arbitral Tribunal is materially competent and is properly constituted, pursuant to Articles 2, paragraph 1, subparagraph a), 5 and 6, paragraph 1, of the RJAT.

The parties have legal personality and capacity, are properly interested and are legally represented, pursuant to Articles 4 and 10 of the RJAT and Article 1 of Regulatory Order no. 112-A/2011, of 22 March.

The proceedings are not subject to any nullities.

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

All having been considered, it is incumbent to deliver

II. DECISION

A. FACTUAL MATTER

A.1. Facts Found to be Proven

1. The present Applicant is a municipal company in the form of an anonymous commercial corporation supervised by the Municipal Council of … and constituted by public deed on 09 November 1995.

2. With a view to analyzing the tax situation of the APPLICANT, the Tax Administration initiated a tax inspection procedure, external and of general scope, with incidence over the fiscal year 2009, authorized by Service Order no. OI2O11…, of 1 July 2011, from which resulted corrections to the taxable matter and corrections to the calculation of corporate tax.

3. The Conclusions of the Tax Inspection Report, drawn up after the right to prior hearing was granted, were notified to the APPLICANT through office letter no. …, of 19 February 2013.

4. Regarding the IRC matter, the TIR contains the following:

[Table content with redacted information]

1. [Content with redacted information]

2. The corrections suggested were summarized in the Inspection Report in the following tables:

[Table content with redacted information]

1. Following the Tax Inspection Report referred to, the assessments which are the subject matter of the present arbitral action were issued, as well as the notes of assessment relating to compensatory interest, which contain the reason for their issuance and quantification, the tax on which the interest is calculated, the period to which they relate, the applicable interest rate and the amount of interest due.

2. The Applicant, on 27-07-2013, presented an administrative complaint regarding the aforementioned assessments, which was rejected.

3. The decision on the administrative complaint was received by the Applicant on 25/09/2015.

4. On 23/10/2015, the Applicant filed a hierarchical appeal of the aforementioned administrative complaint decision, which was partially granted, by order notified on 10/09/2016.

5. As the assessment acts which are the subject matter of the present arbitral proceedings were not paid within the respective voluntary payment period, the fiscal execution proceedings no. …2013… were instituted for coercive collection thereof.

6. On 24 April 2013, the Applicant provided security, which consisted of a voluntary mortgage on a real property, in the amount of € 805,286.62, which includes the amount relating to the debt of tax and Compensatory Interest, relating to the year 2009.

7. This security was subsequently increased, through the constitution, on 26 June 2013, of a new voluntary mortgage on the same real property.

8. Pursuant to Article 3 of its bylaws, the Applicant has, and had in 2009, the following corporate purpose:

a. Promotion of the construction of equipment and infrastructure appropriate to the development of tourism in the municipality of …;

b. Direct operation, or under a leasing and subleasing arrangement, of municipal equipment, namely units that have been constructed through its promotion, and of other equipment and infrastructure whose operation rights it has acquired and/or obtained;

c. Development of initiatives for promotion and tourism animation in the municipality of…;

d. Promotion of actions to implement the tourism development strategy of the municipality of … as defined by the Municipality;

e. Oversight of municipal concessions and concessions whose oversight falls to the Municipality, provided they relate to areas connected with the development of tourism in the municipality of … .

1. The activity of the Applicant centers on, and in 2009 centered on, the management and operation of spaces and equipment of the municipal public domain (Municipal Council of …-…) and the development of initiatives for promotion and tourism animation in the municipality of … .

2. Its respective income includes, and in 2009 included, in addition to own revenues resulting from the activity of operating commercial spaces, the Centre … and sports equipment - racecourse …-, operating subsidies granted by the Municipality of … and by Tourism of Portugal, aimed at the development of tourism and cultural animation activities.

3. During the taxation period of 2009, the Applicant entered into the following program agreements and financing contracts for the promotion of activities of cultural and tourism interest:

i. the Program Agreement –…;

ii. the Program Agreement – Casa…;

iii. the Program Agreement – Municipal Council of…;

iv. the Financing Contracts – Tourism of Portugal for the Promotion and Animation of … and for implementation of … .

1. On 20 November 2009, a financing contract was entered into between Tourism of Portugal and the Applicant pursuant to which it was provided that the "Financing Contract is intended for the provision by Tourism of Portugal of financial support to the Promoter in the minimum overall amount of 3,645,000.00 Euros, which is intended for the execution of a Promotion and Animation Plan of … for the year 2009".

2. The amount of € 1,785.09, corresponding to entry 26/9, of 31 October 2009, in account 74.1.1 of the Applicant's accounting, relates to the following account settlement with Tourism of Portugal, made on 04-09-2009:

[Content with redacted information]

1. In account 72.9 (TTT…) of the Applicant's accounting there is a credit entry of € 113,670.80.

2. For the aforementioned entry, the Applicant presented as supporting documents a receipt issued by it to Tourism of Portugal, in that amount and dated 22-06-2009, and the record of an accounting entry dated 15-05-2009, corresponding to a payment of € 113,670.80 to the company TTT…, Ltd., relating to prize money of USD 150,000.00, for the event … .

3. From the payment schedule for payments made in 2009, sent by Tourism of Portugal to AT during the inspection procedure, it appears that, for financing of the project "…", the amounts of € 1,512,500.00 and € 137,500.00 were paid to the Applicant, in 2009 and 2010, respectively, totaling the amount of € 1,650,000.00.

4. In the accounting of the Applicant, it appears from accounts 74.1.3 - Operating Subsidies (NNN…) and account 79.7.2 (NNN…), that income was recognized there in the amount of € 1,375,000.00 and € 137,500.00, respectively, totaling the overall amount of € 1,512,500.00.

5. From the accounting journal of the Applicant the following entries appear, dated 31-12-2009: debit of account 2719 in the amount of € 137,500.00 and credit of account 7413 (Operating Subsidies (NNN…)) in the amounts of € 137,500.00 and € 137,500.00, in a total of € 275,000.00.

6. For the aforementioned entries, the Applicant presented as supporting documents a receipt issued by it to Tourism of Portugal, in the amount of € 137,500.00 and dated 09-06-2010, and a payment schedule from Tourism of Portugal with the designation "PAL 50 –…2007-2009", where are mentioned, in 2009, receipts from that entity in the amounts of € 1,237,500.00 (06-04-2009) and € 137,500.00 (08-06-2010).

7. The expenses underlying invoice no. 42082, dated 25 August 2009, issued by Restaurant X… and invoice no. 144618, dated 20 August 2009, issued by NN…, in the amounts of € 3,750.00 and € 2,722.32, respectively, were incurred on the occasion of the event "…", which took place, between 28 and 30 August 2009, in the … .

8. The aforementioned invoice no. 144618 contains a reference to "…".

9. The event "…" was of enormous importance and magnitude in its kind in Portugal, and was intended for the tourism promotion of the region of … and …, with the participation of a broad panel of judges of various nationalities, responsible for classifying the best specimens in each category.

10. The expenses incurred by the Applicant contained in the invoices mentioned in point 25 relate to two dinners at which were present the judges who participated in the event.

11. The Applicant, in 2009, incurred expenses with the payment of supplementary membership dues to the Association …, in the amount of € 172,500.00 and to the Association of …, …, … and …, in the amount of € 68,500.00.

12. From the Promotion and Animation Plan …, for the fiscal year 2009, on which the Financing Contract – Tourism of Portugal for the Promotion and Animation of … for that same year, referred to above, is based, there appears the obligation to pay € 172,500.00 to the Association … .

13. The Applicant acquired the vehicles with registration … and …, with the respective invoice issued on 13-04-2010.

14. The Applicant acquired the vehicle with registration …, with the respective invoice issued on 05-05-2010.

15. The Applicant acquired the vehicles with registration …, with the respective invoice issued on 26-04-2010.

16. On 18 September 2007, the Municipality of …, the APPLICANT and the Association … entered into a cooperation protocol, pursuant to which it was agreed that the event … would be held, in the years 2007, 2008 and 2009, in the Municipality of… .

17. The event "…", in 2009, took place in the Citadel of … .

18. With the aforementioned initiative, it was sought to reinforce the gains of the Brand …, both nationally and internationally, and the promotion and internationalization of the image of … and of … .

19. To this end, it was determined in the Protocol entered into that (i) the event … would assume a new designation, including the expressions "…" and "…", and that (ii) the Association … would be responsible for the organization, in each event, of "a trip for foreign journalists, through its international press office, with a view to publicizing the events (...) and to promoting the Municipality of …".

20. Entries 70 and 27, of journal 4, of the Applicant's accounting relate to invoices nos. 46 and 54, issued on 2 September and 23 October 2009, respectively, by the Association…, recognized in account 62.1 (subcontracts), where the expense of € 250,000.00 (€ 125,000.00 + € 125,000.00) was recognized and in account 6.1.2.99 (VAT pro rata), where the expense of € 6,500.00 (€ 3,250.00 + € 3,250.00) was recognized.

21. The aforementioned entry in account 6.1.2.99 corresponds to the non-deductible percentage of VAT (13%), VAT calculated "by inside", with the deductible part corresponding, throughout the year 2009, to 87%, since the VAT borne on each of the invoices (20%) was € 25,000.00, and the Applicant considered non-deductible, also by reference to each invoice, the amount of € 3,250.00, equivalent to 13% of that amount, which it recorded as an expense of the fiscal year.

22. The Applicant considered deductible, also by reference to each invoice, the amount of € 21,750.00, equivalent to 87% of that amount, having been deducted, in the corresponding tax periods.

23. With the recalculation of the proportion of the definitive pro rata to 47% - there being a difference, for less, of 40% in relation to the pro-rata proportion used throughout the fiscal year (87%) —, the Applicant recorded as an additional expense the additional percentage of VAT not deductible associated with those invoices, in the proportion of 40% (53%-13%), increasing, in the same proportion, the amount of the expenses of the fiscal year that had been recognized.

24. On 16 June 2000, the Applicant, as lessee of the operation of the Centre …, entered into with the company EEE…, S.A. - a legal entity of Spanish law, whose corporate purpose consisted of the operation and development of the activity of organization and services of congresses and similar events - a Sub-Lease Agreement for Operation of the Centre … .

25. Pursuant to the second clause of the aforementioned Sub-Lease Agreement for Operation of …, the Applicant ceded to EEE…, S.A. all rights and obligations relating to the management and operation of the different zones of …, with the exception of the Zone intended for commercial establishments, services and offices.

26. For the purpose of proceeding with the operation of …, EEE…, S.A. constituted the company EEE…, Congress Organization …, Ltd., a legal entity of Portuguese law, to which were automatically transferred all the rights and obligations assumed by EEE…, S.A., in the aforementioned Sub-Lease Agreement for Operation of … .

27. The … was considered one of the crucial infrastructure for the development of Tourism in the Municipality and was constructed with the principal objective of promoting the local and regional development of the area.

28. On 20 February 2003, UUU…, Ltd. entered into with the company GGG…, S.A. (hereinafter "GGG…") a service provision contract, pursuant to which this company was charged with the accomplishment and development of activities related to the provision of audiovisual services in the… .

29. In the course of the execution of the aforementioned service provision contract entered into with UUU…, Ltd., this company incurred a debt to GGG…, in the amount of € 890,383.08.

30. This debt was assumed by EEE…, S.A., as the company that held 100% of the Company UUU…, Ltd.

31. On 8 December 2006, an Agreement of Revocation was entered into between the Applicant and EEE… S.A., pursuant to which was revoked the Sub-Lease Agreement for Operation of … signed between the two companies on 16 June 2000, with the Applicant beginning to operate directly the Congress Centre … .

32. In accordance with the Third Clause, paragraph 1, subparagraph b), of the aforementioned Agreement of Revocation, the Applicant undertook to pay, on the date of execution thereof, the sum of € 309,387.00, as compensation for the transfer of goods and equipment of EEE…, S.A., itemized in the Annex to the aforementioned Agreement.

33. For the purpose of proceeding with the evaluation of the intangible and tangible fixed assets, which were to be acquired, the Applicant hired the services of FFF… Company.

34. The acquisition value of the fixed assets appearing in the Balance Sheet of EEE…, S.A. was € 228,470.25.

35. In 2009, the Applicant, based on the acquisition value of € 309,387.00, recorded depreciation in the amount of € 53,074.63, relating to the acquisition of goods and equipment contained in the fixed assets of EEE…, S.A., following the revocation of the Sub-Lease Agreement for Operation, entered into between the Applicant and that company.

36. Pursuant to the Agreement of Revocation entered into on 8 December 2006, referred to above, the Applicant accepted to assume the singular transmission of the aforementioned debt that EEE…, S.A. held with GGG…, in the amount of € 890,383.08, corresponding to the invoices itemized in Annex 2 to the aforementioned Agreement.

37. Simultaneously, the Applicant and GGG… entered into a Payment Agreement, pursuant to which were defined the terms in which the payment of the assumed debt would be made.

38. In subparagraphs d) and e), of the First Clause, of the Payment Agreement, it states that "the sum of € 300,000.00 (three hundred thousand euros) (...) shall accrue interest at the Euribor rate for three months from the date of execution of this agreement until its actual payment", and that "The interest accrued pursuant to the preceding subparagraph shall be paid semi-annually on the first business day of the month following the semester to which they relate".

39. The aforementioned payment was made in accordance with what was stipulated in the First Clause of the Payment Agreement, pursuant to which the sum of € 590,383.08 would be paid by 31 January 2007, in accordance with the provisions of the respective subparagraphs a) and b), and the remainder, in the amount of € 300,000.00, would be paid in the period of time and with the conditions established in the respective subparagraphs c), d) and e).

40. The Applicant recorded as an expense of the fiscal year the non-deductible percentage (13%) of VAT charged on the credit notes issued by it, in the course of the 2009 fiscal year, in the overall amount of € 7,908.74.

A.2. Facts Found to be Not Proven

1. That the expenses incurred by the Applicant, identified in the summary table on p. 58 of the Inspection Report, relate exclusively to expenses with foreign journalists who accompanied events organized by it.

2. The vehicle with registration … was rented in the context of an event/promotion action developed by the Applicant.

A.3. Reasoning of the Proven and Not Proven Factual Matter

Regarding the factual matter, the Tribunal is not required to pronounce on everything that was alleged by the parties; rather, it has the duty to select the facts that matter for the decision and distinguish the proven matter from the not proven matter (cf. Article 123, paragraph 2, of the CPPT and Article 607, paragraph 3 of the CPC, applicable pursuant to Article 29, paragraph 1, subparagraphs a) and e), of the RJAT).

In this manner, the facts pertinent to the judgment of the case are chosen and delimited according to their legal relevance, which is established in attention to the various plausible solutions to the legal question(s) (cf. former Article 511, paragraph 1, of the CPC, corresponding to the current Article 596, applicable pursuant to Article 29, paragraph 1, subparagraph e), of the RJAT).

Thus, taking into account the positions assumed by the parties, in light of Article 110/7 of the CPPT, the documentary and testimonial evidence and the case file attached to the court record, the facts listed above were considered proven, with relevance for the decision, taking into account that, as stated in the Decision of the TCA-South of 26-06-2014, handed down in proceedings 07148/13[1], "the probative value of the tax inspection report (...) may have probative force if the assertions contained therein are not contested".

In particular, the facts found to be proven in points 25, 27, 28, 35, 43, 44, result from the combination of the documentary evidence available with the testimonial evidence produced, which presented coherent and demonstrating sufficient knowledge so as not to leave reasonable doubts regarding the verification of the facts in question.

The fact proven under point 26 does not refer to invoice no. 42082, since, contrary to what was alleged by the Applicant (point 90 of the initial application), this is not proven.

Indeed, the Applicant states: "However, as correctly noted in the order rejecting the Administrative Complaint, the invoices in question contain a reference to «… »".

However, this is not proven. Indeed, in the information that served as the basis for that order, it is stated: "As can be seen from pp. 420-v, the document (referring to invoice no. 42082) does not identify the taxpayer for which the service was provided, nor does the date of service provision coincide with the date of the event «Exposition …», that is, this document is not sufficient (…). As for the document at pp. 425v (referring to invoice no. 144618), despite mentioning «Exposition …», it does not identify the recipients thereof, nor is the date coincident (…)" (cf. doc. 1 (PA15, pp. 44/45 of the document recorded on computer).

Thus, it is verified that the expression "Exposition…" appears in invoice no. 144618, but not in no. 42082, which also results from the relationship contained in PA3 (pp. 12/14 – doc. 3) and docs. 4 (PA12-p. 54) and 5 (PA12-p. 63).

The reference that both invoices relate to dinners offered to various judges of the event «Exposition …» appears in the information provided in the administrative complaint, but only as an allegation by the Applicant, cf. doc. 2 (PA15-p. 38)

The fact proven under point 30 results from the documentation submitted by the Applicant on 06-11-2017, at the request of the arbitral tribunal.

The facts found to be not proven result from the insufficiency or absence of sufficient evidence regarding them.

The fact found to be not proven in point 1 takes into account that the testimonial evidence produced did not demonstrate nor express direct and substantiated knowledge to the effect that only the persons referred to there benefited from the expenses in question.

The fact found to be not proven in point 2 results from the total absence of evidence regarding it.

Allegations made by the parties and presented as facts consisting of strictly conclusive assertions, insusceptible of proof and whose veracity must be determined in relation to the concrete factual matter above established, were not found to be proven or not proven.

B. ON THE LAW

a. On the defect of reasoning

The Applicant begins by arguing the lack of reasoning of the assessments which are the subject matter of the present arbitral action, stating that in the assessment acts notified there are not explicitly set out the factual and legal grounds that determined their issuance, nor is there any reference to a possible explicit referral to a specific external document, such as the Tax Inspection Report, with only a set of values being indicated, incomprehensible to a normal recipient and also to the Applicant, and with the relevant means of recourse referred to.

Thus, according to the Applicant, such acts do not permit knowledge of the cognitive itinerary underlying them, being thus tainted with a defect of violation of law, pursuant to Article 268/3 of the Constitution of the Portuguese Republic (CRP) and Article 77 of the General Tax Law (LGT), with the consequence of their annulability.

According to the Respondent, it is the understanding of the STA, as per decision of 25-05-1993 (Proc. 27387), that: "Given the merely instrumental purpose pursued by the reasoning of administrative acts, one should understand that this will be assured whenever, despite the absence of an express reference to any legal provision or legal principle, the decision in question is indisputably situated within a specific legal framework perfectly cognizable from the point of view of the normal recipient" (in the same vein, see also the Decisions of 15.02.2007 handed down in the context of Proc. no. 1096/06 of 11.11.2004, Proc. no. 504/04 of 23.12.2003, Proc. no. 48.168-A (Full Court) of 30.04.2003, Proc. no. 46556 (Full Court) of 10.07.2002 and Proc. no. 274/2002 and of 29.10.2009 handed down in the context of Proc. no. 0778/09).

Also according to Freitas Pereira, what "is important to assure in the reasoning is that the recipient of the tax act – the taxpayer – placed before it, and being a normally diligent or reasonable person, is in a position to know the factual and legal reasons that led the tax administration to decide in one manner rather than another.".

According to the Respondent, in the concrete case, the reasoning is sufficiently clear and unequivocal, all the more so since the Applicant, by way of the request for arbitral pronouncement, demonstrates, in light of the arguments it has explained throughout its application, to have fully understood the factual and legal framework in which the AT's decision was based, since it attempts to rebut, point by point, all of its action.

As is known, and both parties recognize it, reasoning is a requirement of tax acts in general, being a constitutional requirement (Article 268 of the CRP) and legal requirement (Article 77 of the LGT).

In summary, it can be said that it is today settled in both doctrine and national jurisprudence that the required reasoning must have the following characteristics:

1. Official initiative: it must always proceed from the initiative of the administration, with reasoning upon request not being admissible;

2. Contemporaneity: it must be contemporaneous with the practice of the act, with no deferred reasoning being permissible;

3. Clarity: it must be comprehensible by an average recipient, avoiding polysemous concepts or deeply technical ones;

4. Completeness: it must contain all essential elements that were determinative of the decision taken. This characteristic unfolds into two requirements, namely: the duty of justification (legal norms and factuality – domain of legality) and of motivation (domain of discretion or opportunity, when an assessment is required).

Now, if reasoning is, as referred to, necessary and obligatory, it cannot and should not be understood in an abstract and/or absolute manner, that is to say, the reasoning required of a concrete tax act should be that which functionally is necessary so that the latter does not present itself before the taxpayer as a pure demonstration of arbitrariness. This will be – it is submitted – the touchstone for compliance with the duty of reasoning: when, before an average recipient placed in the position of the actual recipient, the tax act presents itself, from a point of view of reasonableness, as a product of pure arbitrariness by the Administration, because the factual and/or legal reasons on which it is based are not discernible, the act will suffer from lack of reasoning.

Article 77/1 of the LGT thus states that: "The decision of a procedure is always reasoned by means of a brief exposition of the factual and legal reasons that motivated it, and the reasoning may consist of mere declaration of agreement with the grounds of previous opinions, information or proposals, including those in the tax inspection report.".

Descending to the concrete case, it is verified that the assessment acts in question occurred following an inspection act and in conformity with the tax inspection report endorsed by order, a report in which are contained the grounds of the assessments in question, which the Applicant, since the administrative complaint, has demonstrated to understand, taking, in a substantiated manner, the decision not to accept.

Indeed, the Applicant itself ends up conceding precisely that – at least implicitly – by sustaining, also since the administrative complaint, that the referral to the inspection report should be explicit.

However, this understanding is, from the outset, contradicted by the STA Decision of 19-05-2004, handed down in proceedings 0228/03[2], where it reads that "As reasoning does not serve as reasoning the motivation presented subsequently to the practice of the act, nor that contained in instructional documents prior to which no express or implicit referral has been made.", thus allowing that the referral may be implicit, that is to say, arising from the context of the tax act itself, or from which this emerges.

In the same sense is oriented the jurisprudence of the STA which considers that "Despite the absence of an express indication of the applicable legal provision, the required reasoning of law in the tax act shall be sufficient with the reference to the relevant legal principles, to the applicable legal regime or to a determined normative framework, provided that, in any case, it can be concluded that these were known or cognizable by a normal recipient placed in the concrete position of the actual recipient."[3], and that "The legal and constitutional requirement of reasoning of the tax act, arising from Articles 268 of the CRP, 77 of the LGT and 125 of the CPA, is aimed, primarily, at permitting the interested parties the knowledge of the reasons that led the Administration to act, so as to make possible for them a conscious choice between the acceptance of the legality of the act and its contentious challenge."[4].

In this manner, it is understood that, considering the concrete context in which the assessment acts in question in these proceedings were produced, it will be perceptible, for an average recipient placed in the position of the actual recipient, that the grounds thereof are those contained in the inspection report that preceded them, it being certain that it further appears evident that the Applicant understood that as well.

This, moreover, has been the assessment of our superior courts in analogous cases, and in this regard reference can be made to the STA Decisions of 10-09-2014, handed down in proceedings 01226/13[5], of the TCA-North of 13-09-2012, handed down in proceedings 00334/05.8BEBRG[6], and of the TCA-South of 23-05-2006, handed down in proceedings 01156/06[7].

Thus, and in this manner, there will be nothing to criticize, in the perspective of the duty of reasoning, regarding the tax acts which are the subject matter of the present proceedings.

b. On the failure to comply with essential legal formalities

On this matter, the Applicant alleges, in summary, that it was not "notified in accordance with the provisions of subparagraph a), paragraph 1, of Article 60 of the General Tax Law".

The Respondent sustains the absence of any failure to comply with essential formality through violation of the right to participate, provided for in Article 60/1-a) of the LGT, given that paragraph 3 of this provision contemplates the dispensation of hearing before the assessment of the tax in cases in which the taxpayer has previously been afforded that right in the context of tax inspection

As is apparent from the facts found to be proven, it is certain that the Applicant was notified to exercise its right to prior hearing, which it did, in the context of the inspection procedure from which resulted the assessments against which it objects.

In this manner, and taking into account the provisions of Article 60/3 of the LGT, the hearing of the Applicant before the assessment was dispensed with, wherefore, also this defect should be found not to exist.

c. On the violations of law

In substantial terms, the Applicant contests the assessment of tax which is the subject matter of the present arbitral action, beginning by arguing that the corrections relating to subsidies paid by Tourism of Portugal, in the amount of € 3,644,714.62, intended for financing of the "Promotion and Animation Plan of…", sustaining that these show themselves to be completely accounted for so that no income was omitted.

In the course of the present arbitral proceedings, the Applicant submitted documents in the sense of sustaining doc. no. 4, corresponding to the extract of entries recorded in account 74.1.1 "Operating Subsidies",

According to the Applicant, the debit entry (debit) no. 174, of 04-09-2009, in the amount of € 1,785.09, relating to "Promotion and Animation 2008" (doc. no. 4.9.2), was recorded in account 74.1.1 for the fiscal year 2009 (entry 26/9 of 31-10-2009), when in reality it relates to the fiscal year 2008.

On the other hand, the amount of € 113,670.80 was not actually recorded in account 74.1.1, having been entered in account 72.9.02 – TTT…, Ltd. (doc. no. 5).

It also submitted receipt no. 1629, of 22-06-2009, in the amount of € 113,670.80, which corresponds to the amount paid to "TTT…, Ltd.", on 30-06-2009, entered in account 72.9.02 (entry no. 11/07) – TTT…, Ltd., as per doc. no. 5, timely submitted to the case file and a Cost Centre card relating to this project

For the Respondent, however, the subsidies paid by Tourism of Portugal, in the amount of € 3,644,714.62, intended for financing of the "Promotion and Animation Plan of…", show themselves to be recorded in account 74.1.1, only in the value of € 3,532,828.87, whereby income was omitted in the amount of € 111,885.75.

Further from the perspective of the Respondent, the amount of € 1,758.09 relating to "Promotion and Animation 2008", in light of the principle of specialization of fiscal years provided for in Article 18 of the CIRC, should have been recognized accounting-wise in that fiscal year, since the imputation of income to a certain fiscal year obeys an economic criterion, in which the operations effected therein affect the respective result, independent of the receipt or payment of the respective price.

For the Respondent, not having been recorded accounting-wise, as it should, in the year 2008, it should have been, alternatively, in 2009, which did not happen, considering that the Applicant, despite submitting a Debit Note 26/9 (as doc. 4) and alleging that the aforementioned amount of € 1,785.09 relates to the fiscal year 2008 and, therefore, should be disregarded, at no time proves that that amount contributed to the formation of the taxable profit of that fiscal year

Regarding the remainder of the difference (€ 113,670.80), the Respondent believes that, accounting-wise and in accordance with the Official Chart of Accounts (POC) in force at the time of the facts, account 72 relates to work and services provided that constitute the main object of the entity's activity, and should be based on invoicing issued by the entity or external documentation.

Given the elements of evidence presented, the Respondent considers that it is impossible to confirm that the amount recorded as income - although wrongly recorded in account 72.9.02 – actually corresponds to the operating subsidy granted by the Tourism Fund.

As for the documents presented by the Applicant on 09-06-2017, the Respondent understands that these are not apt to prove that, in the year 2009, they were accounted for as income, that is, that the amount of € 111,885.75, inserted in the financing provided by Tourism of Portugal to the Applicant, in the amount of € 3,645,000.00, was recorded as income for the year 2009.

The Respondent further sustains that the documents no. 4.1.1 to 4.13.8 submitted by the Applicant "do not identify which the number of the accounting entry in account 74.1.1 Operating Subsidies – Tourism of Portugal for the year 2009 (document no. 4) that they intend to justify, whereby it is not possible to conclude which of those amounts are recorded in the year 2009 not thus permitting to conclude that the amount of 111,885.75 € was considered as income in 2009".

The Applicant's argumentation in this matter is not very clear, which will have in some way induced the Respondent in error in its defense, since, if well understood, the Applicant does not intend that the debit entry no. 174, of 04-09-2009, in the amount of € 1,785.09, relating to "Promotion and Animation 2008" (doc. no. 4), recorded in account 74.1.1 for the fiscal year 2009 (entry 26/9 of 31-10-2009), should be disregarded for purposes of determining its taxable result.

The reference to that debit note, in the context of the Applicant's argumentation, will be merely explanatory, since the same justifies the recognition of additional income in 2009 of € 1,785.09, relating to the prior fiscal year, that is, that should have been recognized in 2008 but was only so in 2009.

Consequently, it is inferred that the total amount of operating subsidies from Tourism of Portugal to be recognized as income in 2009 (in light of the omission verified in 2008) would be € 3,646,499.71, with € 3,644,714.62 relating to the fiscal year 2009 and € 1,785.09 to the fiscal year 2008.

As the AT acknowledges that the Applicant recorded in account 74.1.1 the amount of € 3,532,828.87 (doc. no. 4), the amount of income pending confirmation will be € 113,670.84 and not € 111,885.75, as the AT claims:

From the argumentation presented by the Applicant, it is inferred that, according to it, the amount of subsidies obtained from Tourism of Portugal attributable to 2009 and recognized as income for that fiscal year, will total the amount of € 3,644,714.58:

Fundamental, then, is to determine whether, effectively and in the first place, it is possible, in light of the factual matter ascertained, to affirm that the entry of € 113,670.80, made in account 72.9.02 –TTT…, Ltd., corresponds to payments made to the Applicant as operating subsidies in the context of the PROMOTION AND ANIMATION PLAN 2009.

Now, having reviewed the proven and not proven facts, it is considered that the Applicant is correct.

Having analyzed the accounting, the following events are recognized therein:

i. Recognition as income, in the item 74.1.1 Operating Subsidies of a total amount of € 3,532,828.87, as per Doc. 4 and point 44 of the Inspection Report (IR);

ii. In this income, recognized in 2009, is included the amount of € 1,785.09 which, according to the description of the respective debit document to Tourism of Portugal (Debit Note No. 174) relates to the fiscal year 2008 and not to the fiscal year 2009;

iii. Of the total amount of subsidies recognized as income in account 74.1.1 Operating Subsidies, € 3,531,043.78 will then be attributable to 2009 and € 1,785.09 will relate to the fiscal year 2008. This amount of € 1,785.09 was not recognized as income in the year to which it relates and was only so in 2009;

iv. Recognition as income, in the item 729.01 Other service provision – TTT… of the amount of € 113,670.80, as per Receipt No. 1629, an amount that was to be intended for the organization of the event contracted to TTT…;

We are here faced with income relating to distinct realities that do not overlap: (i) the amount of € 1,785.09 was recorded (together with a further € 3,531,043.78) in the account for operating subsidies; and (ii) the amount of € 113,670.80 recorded in the account for service provision, totaling € 3,646,499.67. If from this amount we subtract the amount of € 1,785.09, which relates, as has been seen, to the fiscal year 2008, we have that the amount of subsidies relating to 2009 and recorded as income amounts to € 3,644,714.58.

This amount shows itself to be lower by € 0.04 to what the AT states to have been paid by Tourism of Portugal, which would be € 3,644,714.62 (cf. IR).

From the analysis of the amounts recorded in account 74.1.1, it is verified, however, that the difference of € 0.04 results from a discrepancy between the amount of receipt 1931 (€ 162,999.84) and the amount for which the same was recorded in accounting (€ 162,999.80), as can be verified by the analysis of DOC No. 4 and DOC No. 4.12.1 attached to the Application presented by the Applicant on 9 June.

In sum, verifying that the amount recorded as service provision in item 72.9.02 relates to amounts paid by Tourism of Portugal as operating subsidy, the omission of income reduces itself to € 0.04, since:

i. The overall amount accounted for as income by the Applicant is € 3,644,499.67, higher by € 1,787.05 than what AT says it should consider that should have been recognized as income;

ii. Disregarding the income of € 1,787.09 attributable to the prior fiscal year, it is verified that the difference between the income recognized by the Applicant and attributable to the fiscal year (€ 3,644,714.58) and those that the AT states should have been recognized (€ 3,644,714.62) translates into an omission of income of € 0.04, resulting from an error in the accounting record of receipt 1931.

The arguments of the AT regarding this matter are not accepted, which reduce to:

i. As to the amount of € 1,785.09, if it is indeed a portion of subsidy relating to the fiscal year 2008, should have been recognized accounting-wise in that fiscal year. Not having that amount been recorded "accounting-wise, as it should, in the year 2008, should it have been, alternatively, in 2009, which did not happen";

ii. Regarding the remainder of the difference (€ 113,670.80), "the evidence presented by the Applicant is merely an extract of a current account statement relating to account 72.9.02 –TTT…, Ltd., exempt, not having attached a copy of the corresponding support document to the alleged erroneous accounting record." … "Given the elements of evidence presented it is impossible to confirm that the amount recorded as income – although wrongly recorded in account 72.9.02 – actually correspond to the operating subsidy granted by the Tourism Fund, already considered as income for the taxation period of 2009.".

However, it is considered that:

i. The AT is not correct when it says that the amount of € 1,787.09 was not recognized as income either in 2008 or in 2009, since the documents submitted by the Applicant demonstrate this record in the extract of account 74.1.1 for the fiscal year 2009, with the respective support document referring to "Promotion and Animation 2008";

ii. It will be, however, a matter irrelevant to what is under examination, since this matter only matters for reconciliation between the amounts recorded in accounting and the declaration of subsidies paid by Tourism of Portugal.

Regarding the remainder of the difference (€ 113,670.80), in addition to the extract of current account statement relating to account 72.9.02 – TTT…, Ltd., the Applicant came to attach the respective support document, which consists of a receipt issued to Tourism of Portugal, to which it attached a Cost Centre card indicating as supplier "TTT…, Ltd." and as description of work "…2009 – 150,000 USD".

The amount of the subsidies granted by Tourism of Portugal and other amounts paid by this organization to the Applicant are contained in the letter that it sent to AT, totaling the amounts relating to "PROMOTION AND ANIMATION PLAN 2009" the sum of € 3,644,714.62.

That letter refers to this and the other payments made in 2009 to the Applicant by that entity, as well as the respective projects, namely: (i) rental of equipment; (ii) Congress and exhibition center; (iii) … 2007-2009; (iv) Technical Department of Secretariat; (v) … 2007; (vi) Promotion and Animation Plan 2008; and (vii) Promotion and Animation Plan 2009.

Having this in mind, it appears that: (i) the amount received by the Applicant from Tourism of Portugal must, necessarily, relate to one of those projects; (ii) from the typology of the different projects contributed by Tourism of Portugal, taking into account the description contained in the Cost Centre card and by process of elimination, everything points to the payment in question fitting within the project "PROMOTION AND ANIMATION PLAN".

The receipt issued by the Applicant to Tourism of Portugal makes no reference to the year 2008 and the Cost Centre card makes reference to "…–…2009".

In light of all the foregoing, it appears plausible that the amount in question is classifiable in the project "PROMOTION AND ANIMATION PLAN 2009", into which fits the sum of income that the AT considered not to have been fully recognized.

iii. Finally, it also matters the coincidence of amounts (to the cent, if we consider the error of € 0.04, resulting from the discrepancy identified above) between the amount that the AT states should be recognized (corresponding to what appears in the letter from Tourism of Portugal for the project PROMOTION AND ANIMATION PLAN 2009) and that recorded by the Applicant in accounts 71.1.4 and 72.9.03 (making the due adjustment as to the amount attributable to 2008 and as to the aforementioned error of four cents);

It is certain that the Applicant could have clarified the matter better and diligently pursued in the production of arguments and facts that would better explain the facts evidenced above. However, the Tribunal has the power/duty to articulate those facts and arguments that the Applicant could/should have adduced, provided they are contained in the case file, as is the case.

In this manner, and in summary, concluding that the accounting of € 113,670.80, contextualized in the terms set out above, relates to the € 111,885.75 whose omission was detected and corrected by AT, the arbitral request should proceed in this part.

The Applicant also alleges, as regards the amounts transferred by "Tourism of Portugal, IP", intended for financing of "…2007/2009" in the amount of € 137,500.00 (Articles 18/1 and 20/1-j) of the CIRC), that despite the aforementioned amount having been paid to the Applicant in the year 2010, the same is properly accounted for as results from the accounting extract (doc. no. 6), and in the course of the present arbitral action came to submit receipt no. 2180, of 09-06-2010, in the amount of € 137,500.00, aiming to sustain the aforementioned doc. no. 6.

The Respondent sustains that the subsidies paid by Tourism of Portugal, in the amount of € 1,650,000.00, intended for financing of "…2007/2009", show themselves to be accounted for in accounts 74.1.3 and 79.7.12, in the amounts of € 1,375,000.00 and € 137,500.00, respectively, whereby income was omitted in the amount of € 137,500.00 €, paid in 2010, but constituting commitment of 2009, in accordance with the financing schedule.

Thus, in accordance with paragraph 1 of Article 18 of the CIRC, in conjunction with the accounting principle of specialization of fiscal years, income and expenses, as well as other positive or negative components of taxable profit, are attributable to the taxation period in which they are obtained or incurred, independent of their receipt or payment, in accordance with the regime of economic accrual.

Regarding this matter, it was found in the factual plane that:

• From the payment schedule executed in 2009, sent by Tourism of Portugal to AT during the inspection procedure, it appears that, for financing of the project "…", the amounts of € 1,512,500.00 and € 137,500.00 were paid to the Applicant, in 2009 and 2010, respectively, totaling the amount of € 1,650,000.00;

• In the accounting of the Applicant, it appears from accounts 74.1.3 - Operating Subsidies (NNN…) and account 79.7.2 (NNN…), that income was recognized there in the amount of € 1,375,000.00 and € 137,500.00, respectively, totaling the overall amount of € 1,512,500.00;

• From the accounting journal of the Applicant the following entries appear, dated 31-12-2009: debit of account 27.1.9 in the amount of € 137,500.00 and credit of account 74.1.3 (Operating Subsidies (NNN…)) in the amounts of € 137,500.00 and € 137,500.00, in a total of € 275,000.00;

• For the aforementioned entries, the Applicant presented as supporting documents: a receipt issued by it to Tourism of Portugal, in the amount of € 137,500.00 and dated 09-06-2010, and a payment schedule from Tourism of Portugal with the designation "…2007-2009", where are mentioned, in 2009, receipts from that entity in the amounts of € 1,237,500.00 (06-04-2009) and € 137,500.00 (08-06-2010).

The correction in question, effected by AT, has a simple and linear basis: the Applicant had, pursuant to the contractual relationship with Tourism of Portugal, in 2009, right to payments in a total of € 1,650,000.00, which the Applicant does not contest, and in the respective account were only recorded gains in the value of € 1,512,500.00, being, therefore, missing in the amount of € 137,500.00, which, in accordance with the principle of specialization of fiscal years were added to the taxable result of the fiscal year.

The Applicant contests this correction, by mere referral to document 6, submitted with the initial Application, stating, simply, that from that, and from the respective supporting documentation "there remain no doubts that the amount allegedly not recognized in the accounting of the APPLICANT, was actually so", not justifying, however, in what manner and to what extent the documentation submitted by it makes the demonstration it intends.

Having analyzed such documentation, however, it is not possible to agree with the Applicant.

Indeed, the aforementioned doc. 6 consists of a copy of the accounting journal of the Applicant, reporting entries, dated 31-12-2009: debit of account 27.1.9 in the amount of € 137,500.00 and credit of account 74.1.3 (Operating Subsidies (NNN…)) in the amounts of € 137,500.00 and € 137,500.00, in a total of € 275,000.00.

As support documents for such entries, the Applicant presented a receipt issued by it to Tourism of Portugal, in the amount of € 137,500.00 and dated 09-06-2010, and a payment schedule from Tourism of Portugal with the designation "… 2007-2009", where are mentioned, in 2009, receipts from that entity in the amounts of € 1,237,500.00 (06-04-2009) and € 137,500.00 (08-06-2010).

Now, from the outset, the support documents presented do not constitute adequate support for the entries recorded, noting, moreover, that it is incomprehensible how the Applicant intends to justify an entry of 31-12-2009, with a receipt issued, subsequently, on 09-06-2010.

On the other hand, the payment schedule from Tourism of Portugal presented, to which corresponds the receipt of 09-06-2010, whose date is the same as that appearing alongside the receipt of € 137,500.00 contained in that schedule, is, also, compatible with the accounting records in account 74.1.3 - Operating Subsidies (NNN…), since the respective amount is equivalent (€ 1,375,000.00).

On the other hand, inexplicably – a doubt that the Applicant also failed to dispel - , in terms of accounting practice, in that entry the total of the amounts entered on the debit side is different from the total of the amounts recorded on the credit side: Debit of account 27.1.9 in the amount of € 137,500.00 and credit of account 74.1.3 in the amount of € 275,000.00 € (split into two amounts).

In this manner, it not being possible to conclude that the missing amount of € 137,000.00, was accounted for in the due fiscal year – 2009 – the arbitral request should, also in this part, be dismissed.

Continuing, the Applicant contests the corrections relating to expenses (i) with unidentified beneficiaries or relating to employees, customers or suppliers of the company, related to "meals/accommodations", (ii) "supplementary membership dues", (iii) "repairs of vehicles whose registration is not mentioned or does not belong to the Applicant" and (iv) "other expenses without identification of their respective beneficiaries", in the amount of € 265,863.71 (Article 23/1 of the CIRC), deemed by AT as costs or losses considered as dispensable for the accomplishment of income or gains subject to tax or for the maintenance of the productive source.

The Applicant sustains that invoices no.s 42,082, dated 25-08-2009, of € 3,750.00 and 144,618, dated 20-08-2009, of € 2,722.32, refer to two dinners offered to judges of the "…", held from 28 to 30 August 2009, and that other expenses with meals/accommodations, in the amount of € 14,204.55, comply with the indispensability of the costs, since the area of tourism development and promotion depends, essentially, on the public relations it develops.

Regarding the payment of supplementary membership dues, in the overall amount of € 241,000.00, to the Association of … of … and …, in the amounts of € 172,500.00 and € 68,500.00, respectively, the Applicant argues that such membership dues are provided for in the "Promotion and Animation Plan" for the fiscal year 2009.

As for the expenses with repairs of light passenger vehicles, in the amount of € 3,031.39, the Applicant further sustains that the vehicles, at the time of the facts, were its property, with the exception of the vehicle registered with registration no. …, which was rented in the context of an event/promotion action developed by it.

Let us examine each of these situations.

(i)

From the analysis of the documents supporting the disputed expenses (annex 32 to the tax inspection report - pages 582 to 722 of the administrative complaint case file), it is verified that they relate essentially to expenses with stays in hotels located in France, Spain, Portugal, food and beverages, purchases of gift items and Christmas hampers, with no additional element having been presented regarding these expenses.

Further, it is noted that the documents supporting the meal expenses fail to identify the recipient of the invoice (identification, tax address and tax identification number of the present Applicant), and there is also no evidence of the identification of its beneficiaries, of the objective, cause and necessity of those expenses for the maintenance of the productive source, so as to prove its business character and not merely private.

Regarding the expenses underlying invoice no. 42082, dated 25 August 2009, issued by Restaurant N… and invoice no. 144618, dated 20 August 2009, issued by NN…, in the amounts of € 3,750.00 and € 2,722.32, respectively, the Applicant alleges that the same were incurred on the occasion of the event "…", which took place, between 28 and 30 August 2009, in the … and that they refer to two dinners offered to the various judges who participated in the event, being however impossible for the respective identification in the invoices that came to be issued by the establishments that provided the meals.

Regarding the documents in question, the Respondent considers that:

• The cash sale no. 42082, issued on 25 August 2009 by Restaurant N…, in addition to not even identifying the invoice recipient (identification, tax address and tax identification number of the purchaser) only indicates an amount: € 3,750.00. It makes no mention of the product or service marketed/supplied, quantities, unit prices, beneficiaries, referring only generically that "The products invoiced were made available to the purchaser on 25-08-2009".

• Invoice no. 144618, dated 20 August 2009, issued by NN… in the amount of € 2,722.32 identifies the Applicant as recipient and contains the mention "…". It indicates only a supply of 21 packages relating to accommodation at € 77.52 each and 12 packages of accommodation at € 91.20 each, with arrival date of 20-08-2009 and departure on 25-08-2009. However, and as this is a provision of accommodation services, it contains no mention of the beneficiaries, of the objective, cause and necessity of those expenses so as to prove its business character and not merely private or municipal/public.

As for the other expenses with meals/accommodations, in the amount of € 14,204.55, the Respondent considers that the Applicant also did not produce for the procedure or for the arbitral proceedings any means of proof of the concrete beneficiaries of that cost, particularly exchange of correspondence prior to the booking of stays at the aforementioned Hotel, merely alleging that it concerns costs with judges who participated in the aforementioned event, whereby neither the support documents nor the present Applicant brought any novelty, any additional element of proof, capable of corroborating the alleged indispensability of these costs pursuant to and for the purposes of the provision of Article 23 of the CIRC.

Regarding the corrections now at issue, in the present arbitral proceedings the Applicant presents, as has been seen, two groups of argumentation, namely:

• that invoices no.s 42,082, dated 25-08-2009, of € 3,750.00 and 144,618, dated 20-08-2009, of € 2,722.32, refer to two dinners offered to judges of the "…", held from 28 to 30 August 2009; and that

• the other expenses with meals/accommodations, in the amount of € 14,204.55, comply with the indispensability of the costs, since the area of tourism development and promotion depends, essentially, on the public relations it develops.

Regarding these latter expenses, it is evident the lack of basis for the Applicant's argumentation. Indeed, there being no doubt that, as it states, "the area of tourism development and promotion depends, essentially, on the public relations it develops", this is manifestly not sufficient to conclude for the verification of the requirements of deductibility of the costs in question, infirming the grounds of the AT, underlying the corrections at issue.

For this to occur it was necessary that, in some manner, it be demonstrated that the concrete expenses in question were incurred with the purpose or intention indicated, which does not happen, since the Applicant presents no proof, or even alleges anything to that effect, noting, for example, that regarding accommodations in Madrid, no concrete explanation is advanced for the trips and stays there, nor for the use of double rooms, with indication of only one beneficiary.

As for invoices no.s 42,082, dated 25-08-2009, of € 3,750.00 and 144,618, dated 20-08-2009, of € 2,722.32, it is considered not to support the position of AT in the corrections it effected regarding the second of the aforementioned invoices.

The aforementioned invoice, as results from the proven facts, contains mention of the event "Exposition…", which is sufficient for it to be, in the aspect that now matters (assessment of the insertion of the expense in the context of the normal activity of the Applicant), the AT to be able to exercise the inspection functions incumbent upon it.

It is true that, as the Respondent sustains, the concrete beneficiaries of the expense in question are not ascertained, beyond the fact that they included judges of the animal competition in question.

However, this is inherent to the type of expenses in question, and it is precisely this that forms the basis of the autonomous taxation that is (and was, at the time) provided for regarding the same.

Hence, it is by that avenue, of autonomous taxation, and not by their non-deductibility, that such expenses should be fiscally treated, when, as is the case, an apparent connection with the normal activity of the company is evident, without however the concrete beneficiaries thereof being explicit.

The arbitral request should therefore proceed regarding the correction relating to invoice no. 144,618, dated 20-08-2009, of € 2,722.32, being without basis in the remaining part now examined.

(ii)

The Applicant, as has been seen, considered as a tax cost the payment of "supplementary membership dues" to the Association of … and to the Association of…, …, … and …, in the amounts of € 172,500.00 and € 68,500.00, respectively, in addition to those paid as regular membership dues provided for in its bylaws.

The AT considers that these associations have statutory objectives entirely similar to those of the Applicant and that such supplementary membership dues constitute true liberalities, not meeting the criteria of indispensability required by the CIRC to be considered as tax costs.

As results from the proven facts (point 30), from the Promotion and Animation Plan of … for the fiscal year 2009, on which the Financing Contract – Tourism of Portugal for the Promotion and Animation of … for that same year, referred to above, is based, there appears the obligation to pay to the Association of … referred to above.

It is thus verified that the payment of "supplementary membership dues" to the Association of …, in the amount of € 172,500.00, is directly related to income actually obtained by the Applicant, and subject to IRC, from the Financing Contract – Tourism of Portugal for the Promotion and Animation of …, being an obligation arising from this, whereby the payment in question is causally linked, in a direct manner, to the obtaining of the aforementioned income.

In this manner, in light of the error of fact, and consequent error of law, verified, the correction in question should be annulled, with the arbitral request proceeding in this part, and being without basis in the remainder.

(iii)

As regards the expenses with repairs of light passenger vehicles, in the amount of € 3,031.39, the Applicant sustains, as has also been seen, that the vehicles, at the time of the facts, were its property, with the exception of the vehicle registered with registration no.…, which was rented in the context of an event/promotion action developed by it.

Having reviewed the established factual matter, it is verified that the Applicant incurred various expenses with repair of light passenger vehicles, for which, in some cases, the registration is not identified[8] and, in others, with the registration identified, regarding the fiscal year in question (2009), did not belong to the Applicant's assets nor did there exist any contract justifying its use (registrations…, …, …, …), having, therefore, the services disregarded such expenses, which ceased to contribute to the determination of the taxable result.

The Applicant reiterates that the light passenger vehicles with the registrations…, …, …) were, effectively, its property and that the vehicle with registration … was rented in the context of an event/promotion action developed by the present Applicant.

However, from the analysis of the elements of evidence carried it is concluded exactly in the opposite sense, since, as per documents made available, the vehicles…, …, …only became its property on 2010-03-30, as per registration certificates, and, regarding the vehicle with registration…, no proof of the alleged rental was presented.

In this manner, there being nothing to criticize in the correction effected, the arbitral request should, in this part, be dismissed.

(iv)

The entries contained in the aforementioned relationship (pp. 37/38 of the TIR), and below related, in the amount of € 1,155.45, relate to various expenses without identification of the beneficiaries, whereby, in light of the provisions of paragraph 1 of Article 23 of the CIRC, cannot be accepted as tax costs:

Order no. 29– AA… ………..………… - 8 books literature …….. 96.45 €

  "         51– JJ…, Ltd. … - 1 Group ……...………..     117.00 €

  "         52– JJ…, Ltd. … - Idem …………………..     385.00 €

  "         59–Restaurant CC... - Various  …….………..    357.00 €

  "         66–Hotel OO… ………..  -5 SPA treatments …     200.00 €

In this manner, there being nothing to criticize in the correction effected, the arbitral request should, in this part, be dismissed.

The Applicant also contests the corrections relating to expenses incurred, in the amount of € 256,500.00, considered by AT as fiscally dispensable.

It alleges in this regard that, pursuant to paragraph 2 of Clause 3 of the Protocol Implementation of Editions of "…" in … – 2007, 2008 and 2009, entered into on 18-09-2007 (doc. no. 11), the Applicant issued invoices no.s 46, dated 02-09-2009 and 54, dated 23-10-2009, in the amounts of € 250,000.00 and € 6,500.00, respectively, in favor of "…", with a view to supporting the 32nd edition of "…", held in the Citadel of…, from 12 to 15 March 2009, namely in the reinforcement of the Brand …, both nationally and internationally, whereby it was essential to determine in the aforementioned Protocol that the Association … would be responsible for the organization in each event of a trip for foreign journalists, with a view to publicizing the events and promoting the municipality of … .

For the Applicant, the understanding of AT that proof was not made of the indispensability of the expenses associated with this initiative for the obtaining of income subject to tax, pursuant to Article 23 of the CIRC, should not be accepted, since proof was not made of the issuance of invoicing to third parties, as a result of the expenses incurred by the Applicant for financing the accomplishment of the event, since the legal notion of indispensability should be delimited from an economic-business perspective, through direct or indirect fulfillment of the ultimate motivation of contributing to the obtaining of profit, whereby the necessary costs are equivalent to expenses incurred in the interest of the company, or better, in all acts abstractly subsumable within a profit-making profile.

The Respondent sustains that notwithstanding the Applicant alleging that the costs are associated with its participation in the 32nd edition of the event "…", held in the Citadel of…, having assigned the amount of € 300,000.00 as provided for in paragraph 2, of Third Clause, of the cooperation protocol entered into on 18 September 2007, between the Municipality of …, the Applicant and that association, pursuant to which it was agreed that the event … would be held, in the years 2007, 2008 and 2009, in the Municipality of … and that, being linked to the tourism sector, it is verified that the 32nd Edition of … took place between 12 and 15 March 2009, in the Citadel of …, whereby none of the spaces operated (directly or indirectly) by the Applicant was used and that, having reviewed the aforementioned Protocol, it is verified that its parties are the Municipality of … with the NIPC…, the Association … with the NIPC … and the Tourism Board of … with the NIPC … and not the Applicant, having fallen upon the Tourism Board of … the obligation to assign to that association the amount of € 300,000.00, pursuant to paragraph 2, of Third Clause, of the Protocol.

The Respondent further states that, as the Applicant acknowledges in its application, this action had underlying it the promotion and development of tourism in the municipality of …, one of the activities that constitute its corporate purpose, not being known, however, any income subject to tax associated with this expense, and that, in business terms, it would be expected that this income would be assigned to it by the CM … .

Examining the matter.

Constituting the corporate purpose of the Applicant the promotion, accomplishment and development of activities in the domains of tourism development, cultural tourism and sports practice in the municipality of …, invoices no.s 46, dated 02-09-2009 and 54, dated 23-10-2009, in the amounts of € 250,000.00 € and € 6,500.00, respectively, issued in accordance with paragraph 2 of Clause 3 of the Protocol Implementation of Editions of "…" in …– 2007, 2008 and 2009, entered into on 18-09-2007 (doc. no. 11), aimed at supporting the 32nd edition of "…", held in the Citadel of …, from 12 to 15 March 2009, aiming at the reinforcement of the Brand … and of the municipality of…, both nationally and internationally.

Thus the aforementioned expenses, in light of the legally applicable criteria and recognized as such by the parties, should be considered provably indispensable for the accomplishment of income subject to tax or for the maintenance of the productive source of the Applicant, pursuant to paragraph 1 of Article 23 of the CIRC.

The circumstances mentioned in the TIR, and on which the corrections at issue are founded, do not infirm such conclusions, namely that:

a. none of the spaces operated (directly or indirectly) by the Applicant was used;

b. the aforementioned Protocol, it is verified that its parties are the Municipality of … with the NIPC…, the Association … with the NIPC … and the Tourism Board of … with the NIPC … and not the Applicant.

As to the first of the issues referred to, the same is totally irrelevant to the judgment of deductibility at issue, since, provided it is appropriate to the pursuit of its business objectives, the Applicant was free to choose the installations it deemed appropriate for the activities to be undertaken, it being certain that, from nowhere, does it result that the Applicant's own installations had the same characteristics and would serve exactly in the same terms for the activity now in question.

As to the second of the issues referred to, it should have – and should have had – the AT considered that the Tourism Board … was abolished by Decree-Law 67/2008 of 10 April 2008 (cf. Article 19/1), with the Protocol in reference having been entered into still in the period of existence thereof, and that the Applicant succeeded it in a series of activities that previously fell to that body, among which the accomplishment of the protocol in question.

Moreover, the AT does not place in question either the accomplishment of the event, or the framing of this in the normal activity of the Applicant, or the amount of the consideration for the use of the installations, or its actual payment, whereby no reason whatsoever will exist, in light of the error of fact, and consequently of law, to maintain the correction at issue, whereby in this part the arbitral request should proceed.

Regarding the corrections relating to expenses with gift items to customers (gift cards, toys, wines and Christmas hampers), in the amount of € 5,401.63, the Applicant alleges that all the requirements are met for fiscal relevance to be assigned to the costs at issue, with the correction to be annulled accordingly, as violating the provisions of Article 23 of the CIRC, while the Respondent sustains that the Applicant did not prove the indispensability as well as the purpose of the expenses incurred, nor even the identification of the beneficiaries of the gifts, whereby, in light of the provisions of Article 23 of the CIRC, the same should be disregarded as costs.

At issue in this respect are the following situations:

[Content with redacted information]

In this matter, as the AT sustains, it is verified that the Applicant not only failed to prove the indispensability and purpose of the expenses incurred, as it failed to identify the beneficiaries of the gifts.

It is true that experience and the normality of things evidences that in a large number of companies the offering of Christmas hampers and other gifts to its customers or suppliers (and even to collaborators) occurs, and that, taking into account the concrete activity of the Applicant, which involves the accomplishment of various promotional events, it could be assumed that the expenses at issue are intended for customers/suppliers/collaborators.

However, nothing in this regard is alleged, and much less proven by the Applicant, which merely affirms "that all the requirements are met for fiscal relevance to be assigned to the costs at issue", when it could, and should, even on the basis of internal documents, assure a minimum of elements that would permit a review with the necessary certainty of the destination of the expenses incurred.

It should be noted, moreover, that as there are at issue some situations of gift vouchers (gift cards; gift vouchers), we find ourselves already in a situation of analogy very close to another situation abundantly treated by the jurisprudence of the STA, relating to the so-called "auto-vouchers"[9].

Thus, in light of the provisions of Article 23 of the CIRC, the costs in question cannot be considered, as the AT judged, and in this part the arbitral request should be dismissed.

The Applicant also contests the corrections effected in the fiscal year in question, relating to expenses with settlement of VAT pro-rata on 31-12-2009 (53% - 13% = 40%) effected pursuant to Article 23/6 of the VAT Code, in the amount of € 20,000.00 (Article 23/1 of the CIRC).

In this regard, the Applicant sustains that, being deductible the amount of invoices no.s 46, dated 02-09-2009 and 54, dated 23-10-2009, in the amounts of € 250,000.00 and € 6,500.00, respectively, in favor of "…", in accordance with paragraph 2 of Clause 3 of the Protocol Implementation of Editions of "…" in …– 2007, 2008 and 2009, entered into on 18-09-2007, with a view to supporting the 32nd edition of "…", held in the Citadel of …from 12 to 15 March 2009, the pro rata settlement below calculated, in the amount of € 20,000.00, effected pursuant to Article 23/6 of the VAT Code, should also be deductible:

a. Invoice no. 46 –€ 125,000.00 x 20% (VAT) = € 25,000.00

i. € 25,000.00 x 13% (pro rata of 87% on 02-09-2009) = € 3,250.00

ii. € 25,000.00€ x 53% (pro rata of 47% on 31-12-2009) = € 13,250.00

iii. € 13,250.00€ - € 3,250.00€ = € 10,000.00.

b. Invoice no. 54 –€ 125,000.00 x 20% (VAT) = € 25,000.00

i. € 25,000.00€ x 13% (pro rata of 87% on 02-09-2009) = € 3,250.00

ii. € 25,000.00€ x 53% (pro rata of 47% on 31-12-2009) = € 13,250.00

iii. € 13,250.00€ - € 3,250.00€ = € 10,000.00

c. Total: € 10,000.00 + € 10,000.00 = € 20,000.00

For AT, as the amount of € 256,500.000, relating to invoices no.s 46, dated 02-09-2009 and 54, dated 23-10-2009, issued in favor of "…", was disregarded as a cost for purposes of determining the Applicant's taxable result, since proof was not made of its indispensability for the accomplishment of income subject to tax or for the maintenance of the productive source, as required by Article 23 of the CIRC, also the amount corresponding to the regularization of VAT in favor of the State (€ 20,000.00) that the Applicant effected on 31 December 2009 in compliance with the provision of paragraph 6 of Article 23 of the VAT Code, was disregarded as a tax cost for not proving to be indispensable for the productive source.

However, in light of the consideration of invoices no.s 46, dated 02-09-2009 and 54, dated 23-10-2009, in the amounts of € 250,000.00 and € 6,500.00, respectively, as expenses for purposes of IRC, also the pro rata settlement on 31-12-2009, in the amount of € 20,000.00, effected pursuant to Article 23/6 of the VAT Code, should be considered as an expense pursuant to subparagraph f), paragraph 1 of Article 23 of the CIRC, whereby in this part the arbitral request should proceed.

The Applicant also contests in the records the corrections relating to depreciation not accepted (fixed assets acquired from EEE…, SA), in the amount of € 53,074.63 (Article 34/1-c) of the CIRC).

The Applicant sustains that, on 16-06-2000, a sub-lease agreement for operation of the Congress Centre of … was entered into between the Applicant and EEE…, SA, which was revoked on 18-12-2006, with the Applicant proceeding to operate directly the aforementioned Congress centre.

In accordance with subparagraph b), paragraph 1, Third Clause of the aforementioned revoking agreement, the Applicant undertook to pay, on the date of execution thereof, the sum of € 309,387.00, as compensation for the transfer of goods and equipment of EEE…, SA, which were evaluated in that amount by FFF… company, thus representing a fair value.

Thus, the depreciation effected in the fiscal year in question (2009), in the amount of € 53,074.63, should be fiscally accepted, pursuant to Article

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