IRC Depreciation Rates for Photovoltaic Modules – CAAD Arbitration 75/2014-T

ARBITRAL DECISION

Claimant: A..., Unipersonal Company, Ltd.

Respondent: Tax and Customs Authority ("TCA")

ARBITRAL DECISION

The arbitrators, Jorge Lino Ribeiro Alves de Sousa, Henrique Nogueira Nunes, and António Martins, appointed by the Ethics Council of the Administrative Arbitration Center ("CAAD") to form the Arbitral Tribunal, hereby decide as follows:

1. REPORT

1.1. A..., Unipersonal Company, Ltd., with tax identification number ... (hereinafter abbreviated as "Claimant"), requested the constitution of the Arbitral Tribunal pursuant to Article 2, paragraph 1, item a) of Decree-Law No. 10/2011, of January 20 (hereinafter "RJAT").

1.2. The request for arbitral ruling concerns the declaration of illegality of the Corporate Income Tax (IRC) assessment embodied in the assessment statement No. ... and the statement of account reconciliation No. ..., referring to the tax year 2009, first instance tax act, as well as the express dismissal of the Administrative Appeal filed and processed under number ... (second instance tax act), seeking the annulment of the same assessment act.

1.3. The request for constitution of the Arbitral Tribunal was accepted by the President of CAAD and automatically notified to the Tax and Customs Authority (hereinafter abbreviated as "TCA") on February 3, 2014, with the above-mentioned arbitrators being appointed to the Collective Arbitral Tribunal, who accepted the assignment.

1.4. On March 21, 2014, both parties were duly notified of such appointment and expressed no objection to the appointment of the arbitrators, in accordance with the combined provisions of Article 11, paragraph 1, items a) and b) of RJAT and Articles 6 and 7 of the Code of Ethics.

1.5. The Arbitral Tribunal was constituted on April 7, 2014.

1.6. To support its claim, the Claimant alleges, in summary, the following:

(i) That the modification of the fiscal depreciation rate implemented by TCA at 4% lacks legality due to the absence of an enabling rule.

(ii) It defines as the central issue to be decided in the case the determination of what the reasonable depreciation or amortization rate should be, arguing that the expected useful life period should constitute one of the prevalent criteria to be considered for determining the legal amortization rate.

(iii) It maintains that it would be defining a reasonable expected useful life period if it amortized the photovoltaic modules at a rate that fell within the range of 3.125% - 6.25%.

(iv) It alleges that it is erroneous for TCA to assign to its photovoltaic modules a useful life period superior to that which the law established as reasonable for hydroelectric power plant equipment.

(v) That the procedure it determined has perfect support in the rules provided in the IRC Code and in Regulatory Decree 2/90, being reasonable and entirely adequate.

(vi) That TCA is not justified in deeming disproportionate the amortization rate applied by it in relation to its photovoltaic panels.

(vii) It argues that when there is doubt about the existence and quantification of the tax fact, the contested act should be annulled, as required by Article 100, paragraph 1 of the Code of Tax Procedure ("CPPT").

(viii) Finally, it stresses the clear violation of the constitutional principle of equality and taxation of actual profit, alleging that the application of the depreciation and reinstatement rate proposed by TCA is clearly unconstitutional, insofar as it is disproportionate, resulting in its penalization compared to other energy-producing entities operating in the market.

1.7. TCA responded, arguing that the claim should be dismissed, alleging summarily as follows:

(i) That pursuant to Article 30, paragraph 2 of the IRC Code and Article 5, paragraph 3 of Regulatory Decree 2/90, regarding items for which depreciation and amortization rates have not been established, as is the case here, those rates should be accepted that TCA deems reasonable, taking into account the expected useful life period.

(ii) That the rate applied by the Claimant cannot be considered reasonable, taking into account the expected useful life period.

(iii) That through consultation and analysis of technical data provided by various suppliers of photovoltaic panels, TCA was able to determine that the expected useful life period indicated for the photovoltaic panels is always 25 years, having for this purpose consulted various companies in the market engaged in the supply of photovoltaic panels.

(iv) That considering the expected useful life period of 25 years established for the assets in question in this case, the depreciation or amortization rate that should have been applied by the Claimant was 4%.

(v) Therefore, unable to accept the 6.25% rate determined by the Claimant.

(vi) That the reasonableness required will result directly from the expected useful life period, with only the rate established based on the expected useful life period being reasonable, since it invokes that Article 31, paragraph 2 of the IRC Code imposes on it the duty to consider the expected useful life period.

(vii) In the absence of statutory provision of the depreciation or amortization rate by law, it is bound to determine the same based on the expected useful life period.

(viii) Being this the only criterion, it maintains that it can determine such rate with objectivity, rigor, and certainty.

(ix) Responding to the allegation invoked by the Claimant that it would be violating the constitutional principles of equality and taxation of actual profit, it argued for the conformity of its action with Article 31, paragraph 2 of the IRC Code, having determined the depreciation or amortization rate that results from the expected useful life period of 25 years expressly indicated by entities with specialized knowledge in the matter in question and referenced in this case.

(x) It considers that the application of the 4% rate to the photovoltaic panels is neither unjustified nor disproportionate, since it results directly from the 25-year expected useful life period it upholds, with no violation of the aforementioned constitutional principles.

(xi) Concluding, to substantiate the fiscal correction at issue in this case, that there is an enabling rule for determining the depreciation or amortization rate, namely, Article 31, paragraph 2 of the IRC Code and Article 5, paragraph 3 of Regulatory Decree No. 2/90, and that through consultation with various companies in the market, it was able to determine that photovoltaic panels have an expected useful life period of 25 years, therefore the correct depreciation or amortization rate to apply is 4%.

1.8. On May 30, 2014, the first meeting of the Arbitral Tribunal took place at the headquarters of CAAD, in accordance with Article 18 of RJAT. No exceptions were identified, the Arbitral Tribunal accepted to hear the testimonial evidence indicated by the parties, the examination of witnesses indicated by the Claimant was conducted on June 20, 2014, and the Claimant requested the attachment to the record of a document presented by one of the witnesses, which was admitted, with notice being given to the Respondent, all in accordance with what is contained in the minutes attached to the record, and the examination of the witness indicated by TCA was conducted on June 27, 2014, with the Claimant waiving examination of the second witness it had indicated, also all in accordance with what is contained in the minutes attached to the record.

1.9. The Tribunal notified both parties to submit written pleadings within a period of 15 days, successively, beginning with the Claimant, both having chosen to exercise such right, and scheduled the pronouncement of the arbitral decision by October 7, 2014.

2.0. In the pleadings submitted, Claimant and Respondent maintained, in substance, the positions already defended in the petition for arbitral ruling and in the response, both attached to the record.

2.1. After TCA submitted its pleadings, the Claimant submitted a Request designated as a "clarification," seeking to clarify the scope of application of a Ruling of the IRC Services Department, admitted as a document to the record, which, despite its anomalous nature, was admitted by the Tribunal pursuant to Article 16, item c) of RJAT, and having, in obedience to the principle of due process, been granted a period of 10 days to TCA to pronounce on the same.

2.2. TCA responded within the allotted period, stating that the document presented by the Claimant does not apply to the case sub iudice, as there are evident differences between the subject matter of that document and what is at issue in this case, alleging it adds nothing to the subject matter of the proceeding and contending it is irrelevant to the same.

2.3. The Tribunal was regularly constituted and is competent ratione materiae, in accordance with Article 2 of RJAT.

2.4. The parties have legal personality and capacity, appear legitimate, and are regularly represented (cf. Articles 4 and 10, paragraph 2 of RJAT and Article 1 of Ordinance No. 112-A/2011, of March 22).

2.5. No defects in procedure, exceptions, or preliminary questions were identified, with no obstacle to the examination of the merits of the case.

2. ISSUE TO BE DECIDED

As is mutually accepted by both parties, the issue discussed in the present case concerns the determination, in light of the tax framework in effect on the date of the tax facts in question, of the tax treatment to be granted regarding the depreciation/amortization of the photovoltaic panels of the Claimant, identified in this case, specifically for purposes of determining their expected useful life period for tax purposes.

3. FACTUAL MATTERS

With relevance to the examination and decision of the merits, the following facts are deemed proven:

A) The Claimant is a limited liability company that has as its object the production and commercialization of energy through the operation of renewable energy projects, as well as any other activities complementary or accessory to that which may eventually prove necessary or related to the principal object. (cf. Document No. 2 attached with the petition for arbitral ruling)

B) The principal assets of the Claimant's fixed assets correspond to the photovoltaic panels (polycrystalline), which comprise its basic equipment in the amount of €37,233,446.66. (cf. Article 9 of TCA's Response, and not contested by the Claimant)

C) The Claimant invested the sum of €50,000,000.00 in the construction of a Solar Power Plant, located in .... (cf. Document No. 3 attached with petition for arbitral ruling)

D) The Claimant invested the sum of €31,121,224.14 in the acquisition of the photovoltaic panels at issue in this case. (cf. Document No. 4 attached with the petition for arbitral ruling)

E) The photovoltaic modules at issue in this case began to be amortized, in accordance with the straight-line method, as of 2009, the year in which these equipment became operational, with the Claimant assuming a useful life period of 16 years. (cf. Administrative File attached to the record and Document No. 4 attached with the petition for arbitral ruling)

F) The Claimant considered the application of an amortization rate of 6.25% applicable to hydroelectric power plant equipment, as provided in Table I (Specific Rates), Division V (Electricity, gas and water), of Group I (Production, transport and distribution of electrical energy).

G) In compliance with Service Order No. OI..., dated May 10, 2012, an external inspection action was determined regarding the Claimant, conducted by the Finance Department of ..., of partial scope, for IRC of the 2009 tax year. (cf. Administrative File attached to the record).

H) Which had as its objective the analysis, for tax purposes, of the amortizations practiced by the Claimant in the 2009 tax year (cf. Administrative File attached to the record).

I) The Claimant, with reference to the 2009 tax year, practiced, for tax purposes, the following amortizations, recorded as expenses in POC accounts 662 - Amortizations and Adjustments of the Year/Tangible Fixed Assets (cf. Administrative File attached to the record and Document No. 4 attached with the petition for arbitral ruling):

J) On August 16, 2012, the Claimant was notified of the Draft Report of the Tax Inspection which proposed the following correction (cf. Administrative File attached to the record):

K) TCA corrected the Claimant's taxable income by the amount of €700,227.54, by adding this amount to box 07 of Form 22 for the year 2009, having applied a depreciation rate of 4%, taking as the useful life period for the assets at issue in this case the period of 25 years. (cf. Administrative File attached to the record).

L) Which resulted in the following corrections (cf. Administrative File attached to the record):

M) The Claimant was notified on September 25, 2012 of the final report of the tax inspection. (cf. Document No. 5 attached with the petition for arbitral ruling)

N) On October 11, 2012, TCA services sent, by postal mail, the IRC Assessment Statement No. 2012 ... and the Statement of Account Reconciliation No. 2012 ..., reflecting the correction whose illegality the Claimant alleges. (cf. Document No. 1 attached with the petition for arbitral ruling).

O) On March 6, 2013, the Claimant filed an Administrative Appeal, which was processed under number ..., addressed to the Director of the Finance Department of ..., wherein it requested the annulment of the Assessment Statement No. 2012 ... and the Statement of Account Reconciliation No. 2012 ..., for the 2009 tax year. (cf. Administrative File attached to the record)

P) On September 23, 2013, the Claimant was notified of the draft decision on the Administrative Appeal filed, and was also notified that, if it wished, it could exercise its right of prior hearing. (cf. Administrative File attached to the record)

Q) The Claimant did not choose to exercise such right. (cf. Administrative File attached to the record)

R) On October 31, 2013, the Claimant was notified of the express dismissal of the Administrative Appeal filed. (cf. Administrative File attached to the record)

S) The average technical or technological life span of the photovoltaic panels at issue in this case, considering normal use, is 25 years. (Cf. Technical information provided by companies B...., Ltd; C..., S.A.; D..., Ltd and E..., S.A. and expressed in the tax inspection report attached to the record and testimony of the witness called by TCA)

T) The useful life period of a photovoltaic panel such as those at issue in this case depends on a diverse set of factors, not merely those of a purely technical or technological nature. (Cf. testimony of the witness called by TCA)

U) Upon the expiration of the guaranteed tariff period (in this case 15 years – provided for in Decree-Law 189/88, of May 27 – for the supply of electricity to the electrical grid), the profitability of the activity developed by the Claimant, in light of its economic-financial projections, will be reduced to a value much lower than that practiced during that period.

V) The fact that the profitability of the Claimant's activity becomes reduced to a value much lower, in light of its economic-financial projections, upon the expiration of the guaranteed tariff period for supply to the electrical grid, is primarily due to the circumstance that the tariff practiced in a liberalized market context is much lower.

X) Which jeopardizes the profitability of the activity developed, with the probability, furthermore, that the solar power plant itself may have to be dismantled due to a significant decline in profitability.

Z) The Claimant's business plan was prepared on this assumption.

[Cf., for what is based on U), V), X) and Z), the testimony of the witnesses called by the Claimant; and, as regards specifically the fact that the tariff in a liberalized market is much lower than that established in a guaranteed market, cf. the testimony of the witness called by TCA].

4. FACTS NOT PROVEN

It is not proven that the document attached to the record by the Claimant when the witness examination took place, which refers to a Ruling of the Head of the IRC Services Department, with subject matter "Methods for Calculating Depreciations and Amortizations," is applicable to the case.

There are no other facts not proven with interest for the decision of the case.

5. GROUNDS FOR THE DECISION ON THE FACTUAL MATTERS

As regards the essential facts, the established factual basis is shaped identically by both parties, and the Tribunal's conviction was formed based on the documentary (official) elements attached to the record and discriminated above, whose authenticity and veracity were not questioned by either party, as well as on the testimony of the witnesses heard who appeared impartial in their testimony and demonstrated knowledge of the facts they reported.

The witness called by TCA, Professor Doctor ..., testified, and we cite him as it is relevant to the grounds for deciding the factual matters: "the useful life period of a photovoltaic panel depends on various factors, the place where it is located, etc..."

And that the 25-year useful life period: "is not the maximum period, it is the average, considering normal use of the photovoltaic panel."

In turn, the witness called by the Claimant, Dr. ..., testified, and we cite based on her relevance to the case: "The profitability of the project upon expiration of the guaranteed tariff period is very reduced."

Dr. ... further stated that it would be "absurd to amortize the panels between years 15 and 25, with no returns resulting from guaranteed tariff."

This was corroborated by the other witness called by the Claimant, Engineer ..., who declared and we cite: "The residual value of the panels would be zero after 15 years, they have no value whatsoever, it is obsolete because there was major technological advancement."

This witness further added that "the costs of dismantling exist and are significant," and that "the second-hand market for these panels could be considered non-existent."

As for the document attached to the record by the Claimant when witness examination took place, referring to a Ruling of the Head of the IRC Services Department, with subject matter "Methods for Calculating Depreciations and Amortizations," it cannot certainly be applicable to the case, as the document is not dated, contains no addressee, and the circumstances under which it was issued are unknown.

The Claimant seeks to have the Tribunal accept that such document contains a position by TCA that the photovoltaic panels should be depreciated by reference to the time limit of the useful life of a power plant, which in that case appears to be 20 years, which the Claimant claims contradicts the position expressed by TCA in this proceeding, which the latter does not admit, contesting this position in its pleadings.

It is true that the document in question contains, apparently, some similarities with the case at issue, but, aside from not being dated, not containing any addressee, and the circumstances under which it was issued being unknown, the document in question is neither minimally essential for the Tribunal to form its conviction regarding the proper solution to the case.

6. LAW

6.1. On the Contextualization of the Issue to be Decided in This Case

As appears from the record, the Claimant, having acquired investment assets (in this case, photovoltaic panels for the production of electrical energy) amortized them, with reference to the 2009 tax year, at a rate of 6.25%.

This rate, implying a useful life period for the investment assets in question of 16 years, resulted, on one hand, from the fact that the Claimant had a contract for the sale of energy at a price fixed in advance for a period of 15 years, after which the panels would have negligible value, according to its allegation. On the other hand, according to the Claimant's position in this case, such rate would have some support in Regulatory Decree 2/90 ("RD 2/90"), a regulation in effect at the time of the tax facts in question in this case, where the applicable rate for hydroelectric power generation equipment was found.[1]

The Claimant argues that, with no rate being provided for in RD 2/90 for the depreciation of photovoltaic panels at issue in this case, and, considering, according to the same, that the useful life of equipment for hydroelectric power generation is the longest within the range of equipment for energy production, then the 6.25% rate, which it chose for the depreciation of the equipment, appears to be reasonable and should be accepted as such.

To this position, TCA objects, basing itself on information provided by a set of suppliers of photovoltaic panels of the type at issue in this case, with which it seeks to demonstrate that the expected useful life period for the equipment in question is always 25 years.

Given that the then Article 30, paragraph 2 of the IRC Code provided that regarding items for which depreciation rates had not been established (as is the case here), those rates were accepted that TCA considered reasonable, taking into account the expected useful life period of those items.

The tax inspection report proceeded to equate such expected useful life period with the useful life of the equipment in question,[2] with TCA arguing, therefore, that the correct depreciation rate to be considered should be 4% and not 6.25%, a position it maintains in this proceeding.

The Claimant comes to consider as inconsistent and illegal this position of TCA, invoking two arguments for such. First, because on a technical-economic level, and as attested by a study it presented in this case,[3] the useful life of photovoltaic panels could never be superior to that of hydroelectric power generation equipment.

Indeed, if RD 2/90 provided for such latter equipment the useful life period of 16 years, the Claimant considers it unreasonable that in relation to photovoltaic panels they would have to have a fiscal useful life of 25 years.

Second, because even accepting TCA's position, then the 6.25% rate would imply a minimum useful life of 16 years and a maximum useful life of 32 years, and the interval between these periods would include that very 25-year period that TCA has always maintained to be correct.

To this position, TCA responds, arguing that the 25-year period would be the minimum useful life and not the maximum useful life, therefore, it contends, all of the Claimant's reasoning is flawed.

In this manner, the issue to be resolved in this case is duly delimited, which is then to determine, in light of the tax framework in effect on the date of the tax facts in question, what tax treatment should be granted regarding the depreciation/amortization of the photovoltaic panels of the Claimant, identified in this case, specifically to determine their useful life period for tax purposes.

The decision to be rendered by the Tribunal must rest, in a first instance, on the examination of the concept of fiscal reasonableness when applied to the subject matter in question, that is, the reasonableness of depreciation rates, taking into account the expected useful life period for the equipment assets in question, equally valuing the technical elements brought to the proceeding by the parties, namely: the estimates of useful life of the photovoltaic panels that TCA introduced into the proceeding, and the study presented by the Claimant on the comparability of the useful life of equipment for hydroelectric power generation.

Finally, given the singular specificity of the issue being examined in this case, which does not comprise as sole elements of analysis those strictly of a fiscal and accounting nature, the Tribunal will not fail to consider the testimony of witnesses and the complementary elements (economic, technical, and other) that may be relevant for better deciding the issue sub iudice.

6.2. The Influence of Depreciations on the Formation of Accounting and Fiscal Results

The result ascertained by the accounting of business entities results, as is well known, from the confrontation between revenues and costs necessary to obtain them.[4] On the accounting level, such result is inevitably influenced by a vast set of estimates, especially with respect to the set of costs incurred. Thus, and by way of example, provisions and depreciations constitute important portions of the costs evidenced accounting-wise whose recording is based on forecasts or estimates.

Recognizing this inevitability - that the result depends, in large part, on estimates - the Conceptual Framework (CF) of the Accounting Standardization System (ASS), § 37 provides "Preparers of financial statements must, however, contend with the uncertainties that inevitably surround many events and circumstances, such as...the probable useful life of facilities and equipment...".

And already the POC – accounting regulations in force in 2009 – established that, in accordance with the principle of prudence, "it is possible to include in the accounts a degree of caution when making the estimates required under conditions of uncertainty without, however, allowing the creation of hidden reserves or excessive provisions...".

The depreciation to be recognized periodically as an expense related to the use of an asset depends thus on a set of estimates, namely, the useful life period and the residual value. But such estimates should converge on a primary objective: that of adequating the recorded depreciation to the actual wear of the asset.

The aim is thus to provide those who prepare financial information with a set of guidelines so that the process of determining depreciations leads to expense values that properly reflect the deterioration of assets.

The cost resulting from the quantification of depreciations should have a systematic, or methodical, character, and should arise as the result of the application of a calculation rule that possesses internal logic. On the other hand, the useful life and residual value of the assets will be essential parameters in determining such manner of calculation, since the essence of the phenomenon that this cost aims to represent is embodied in the allocation of the value of assets to various economic periods, during which they are devoted to a given economic activity.

In fact, as well emphasized by António Borges, Azevedo Rodrigues and Rogério Rodrigues, in Elements of General Accounting, Áreas Publisher, 2010, pp. 697, "Fixed assets are not 'consumed' in a single economic period, but rather, in principle, over the number of years provided for their economic life. (...) In summary, as assets are used in successive periods, they depreciate, that is, they lose value."

If this is the case on the accounting level, it is understandable that also on the fiscal level, depreciations have, especially in the IRC Code and other complementary legislation, developed treatment. This results from the fact that depreciations rest on an estimate of loss of value, which is materialized accounting-wise and fiscally in a cost. This, in turn, affects the result.

In this context, the IRC Code enshrined,[5] especially in its Articles 28 to 31, a broad set of rules directed at the tax treatment of depreciations and amortizations.

And, complementarily, RD 2/90 established the fiscal rates to be used for a quite broad and diverse set of assets.

It is well understood that the fiscal legislator sought to regulate the fiscal acceptance of depreciations. As has been seen, constituting these accounting costs estimates of losses of value in long-lived assets, the granting to the taxpayer of total freedom in considering such costs as negative elements of taxable profit could result in undesirable situations of manipulation of the fiscal result.

Having examined the general questions that, on an accounting and fiscal level, affect depreciations, let us now enter into the examination of the substantive issue raised by the Claimant and contested by TCA.

6.3. On the Meaning of Article 30, Paragraph 2 of the IRC Code – The Criterion of Reasonableness and the Interpretation to be Given to the Expression "Expected Useful Life Period" in Light of Fiscal and Accounting Rules

At the time of the tax facts in question in this case, Article 30, paragraph 2 of the IRC Code provided as follows:

"1- For purposes of application of the straight-line method, the annual depreciation quota that can be accepted as a cost of the year is determined by applying the depreciation and amortization rates defined in the regulatory decree that establishes the respective regime to the following values:

(...)

2 - Regarding items for which depreciation or amortization rates have not been established, those are accepted that by the General Tax Directorate are considered reasonable, taking into account the expected useful life period of those items." (emphasis by the Tribunal)

Now, as clearly appears from such provision, there are two concepts that deserve a detailed analysis and an adequate interpretation.

First, that of reasonableness.

According to the Universal Dictionary of the Portuguese Language, Texto Publisher, Lisbon, 1995, "reasonable" means: "in conformity with reason, with law; moderate; acceptable."

But this definition considered by itself alone does not allow us to reach the criterion that the fiscal legislator wished to define, that is, the solution to be adopted to the specific case must have support in the law, and will have to be acceptable in light of the set of factors that should be taken into account in pursuit of a decision.

However, the same provision of the IRC Code delimits the essential element of such reasonableness, limiting the scope of such criterion based on the concept of: expected useful life period.

The legislator not defining what should be understood by such concept for purposes of its substantive definition for fiscal purposes.

Therefore, for the proper decision of this case it will necessarily have to analyze what definition should be given, for fiscal purposes, and contained in the aforementioned paragraph 2 of Article 30 of the IRC Code, of the concept of "expected useful life period," based on the criterion used by TCA in the specific case to support the expected utility (or expected useful life) of the assets in question in this case – the photovoltaic panels.

Such analysis must take into proper account the necessary systematic perspective of relevant legal rules.

Fiscal rules must be interpreted as any others, the conception that they would have an exceptional character that was once assigned to them being now superseded. As the late Professor J.L. Saldanha Sanches states, "the unity of the legal system and the essentially common nature of the problems that arise in Fiscal Law and in other branches of Law mean that the adoption of interpretive principles with application only in the context of tax law relationships would hardly be compatible with systemic unity."[6]

Similarly, Sérgio Vasques tells us that "the interpretation of tax law has no special character, sufficing itself with the traditional criteria that are set forth in Article 9 of the Civil Code among us. The interpreter should not, therefore, confine itself to the letter of tax law, but reconstruct here also, from the texts, the legislative thought, taking into account the unity of the legal system, the circumstances in which the law was enacted and the specific conditions of the time in which it is applied. In short, 'the interpreter of tax laws, like that of any other legal rules, will have to establish its meaning, combining the 'grammatical element' with the 'logical' or 'teleological element,' including the rational, systematic and historical aspects.'"[7]

It should be noted in this regard that Article 9 of the Civil Code marks the prevalence of the spirit over the letter of the law, although it expressly placed the letter as a limit on the search for meaning.[8] Without prejudice to our view that the matter of interpretation of laws is not of a nature to be imprisoned by legislative means, we consider [similarly to what also appears to be the position of Sérgio Vasques] Article 9 of the Civil Code as the emanation of a general hermeneutical principle, which thereby possesses intrinsic validity. It provides:

"1. Interpretation must not confine itself to the letter of the law, but reconstruct from the texts the legislative thought, paying especial regard to the unity of the legal system, the circumstances in which the law was enacted and the specific conditions of the time in which it is applied.

1. The interpreter cannot, however, consider the legislative thought that does not have in the letter of the law a minimum of verbal correspondence, even if imperfectly expressed.

2. In establishing the meaning and scope of the law, the interpreter shall presume that the legislator established the most correct solutions and knew how to express its thought in adequate terms."

For its part, the General Tax Law ("GTL"), in its Article 11, came to establish, in the specific field of tax laws, a set of interpretation rules as follows:

"1. In determining the meaning of tax rules and in qualifying the facts to which they apply, the general rules and principles of interpretation and application of laws are observed.

1. Whenever technical terms of other branches of law are used in tax rules, they should be interpreted in the same sense as they have there, unless otherwise directly follows from the law.

2. Should doubt persist regarding the meaning of the rules of application in question, account should be taken of the economic substance of the tax facts.

3. Gaps resulting from tax rules covered by the legislative reserve of the Assembly of the Republic are not susceptible of analogical integration."

Let us proceed, then.

As we mentioned previously, Article 30, paragraph 2 of the IRC Code makes reference to two fundamental concepts, the first, to which we have already referred, of reasonableness, and the second to which we will now devote ourselves, related to the concept of "expected utility," essential for assessing the reasonableness of the depreciation rates to be used in the case sub iudice.

The clarification of this concept could, perhaps, be found by mere interpretation of tax law, namely, the provisions of the IRC Code and RD 2/90 regarding these matters.

Or, alternatively, it could even have to be combined with these fiscal rules with the provisions of the applicable accounting regulations, given the provision of Article 17 of the IRC Code regarding the model of partial dependence of taxable result on values ascertained in accounting, also considering the provision of Article 11 of the GTL.

At the time of the tax facts in question, Articles 28, 29, and 30, all of the IRC Code – in the provisions deemed relevant for this case – provided as follows:

"Article 28

1 - Depreciations and amortizations of elements of assets subject to deterioration are accepted as costs, such elements of fixed assets being those which, on a repetitive basis, will suffer losses of value resulting from their use, technical progress, or any other causes."

"Article 29

1 - The calculation of depreciations and amortizations of the year should be made, as a rule, by the straight-line method.

(...)

4 - In relation to each element of fixed assets, the same method of depreciation or amortization should be applied from its entry into service or use until its full depreciation or amortization, transfer or disposal.

5 - The provision of the previous number does not prejudice:

a) the variation of the depreciation or amortization quotas in accordance with the more or less intensive regime or with other conditions of use of the elements to which they apply, it being unable, however, for the minimum quotas attributable to the year to be deducted for purposes of determining the taxable profit of other years.

b) (...)

6 - For purposes of the provision of item a) of the previous number, the minimum depreciation or amortization quotas are those calculated based on rates equal to half of those established according to the straight-line method."

"Article 30

(...)

4 - The useful life period of the element of fixed assets is that which is deduced from the depreciation rates mentioned in paragraphs 1 and 2."

What should then be concluded from these provisions of the IRC Code?

In our view, four main points.

First, embodied in the aforementioned Article 28, implies that the phenomenon of depreciations, determined for fiscal purposes, is unequivocally based on the loss of value, with a character of repetition or regularity, that assets suffer by virtue of use, technical progress, or any other causes. Other causes could be, in particular, of an economic or legal nature.

Second, that the straight-line quotas – currently designated as the straight-line method – is the rule method used in quantifying depreciations.

Third, the flexibility admitted in considering as a fiscal cost values resulting from minimum and maximum quotas. As Rui Morais notes, "Even when the useful life period of an asset, for fiscal purposes, is fixed by law, there is not complete rigidity. Only is it mandatory, in fulfillment of the principle of specialization of tax years, the consideration of a cost, in each of the years corresponding to the useful life of the asset, of the value corresponding to the minimum depreciation quota. Such minimum quota is calculated by applying, to the depreciable value, a rate equal to half of that provided for in the applicable table. (...)

In an example: Table II (generic rates) provides that the depreciation quota for water and electricity installations is 10%. This is the same as saying that the law establishes that the depreciation period (minimum) of such installations is 10 years. However, the taxpayer can opt for a lower annual depreciation quota, down to 5% (half the rate provided in the table). This is the same as saying that the maximum depreciation period could go up to 20 years."[9]

Finally, in the fourth place, that Article 30, paragraph 4 of the IRC Code, in addressing useful life, does not define what it should be, explicitly. It merely establishes that it should be calculated from the rates that Article 30, paragraphs 1 and 2 determine.

That is, this rule tends to produce reasoning in a "closed circuit": useful life results, by means of Article 30, paragraph 4, from the rates provided in Article 30, paragraphs 1 and 2; but it is precisely the useful life that should be the central parameter in the quantification of the rates that the same article refers to.

However, we believe that from the combination of these rules with some provisions provided in RD 2/90, a clearer key of interpretation could be found for the issue to decide in this case.

Thus, Article 3 of that Decree provides:

"Article 3

Useful Life Period

1 - The useful life of an element of fixed assets is, for fiscal purposes, the period during which it is fully depreciated or amortized its value, excluding, when applicable, its residual value.

2 - Whatever the method of depreciation or amortization used, considers itself:

a) Minimum useful life period of an element of fixed assets that which is deduced from the rates that can be fiscally accepted according to the straight-line method;
b) Maximum useful life period of an element of fixed assets that which is deduced from a rate equal to half of those referred to in the previous item."

Now, it follows from the reading of Article 3 of RD 2/90, according to which the useful life of an asset is the "period during which it is fully depreciated or amortized its value," and because, according to Article 28, paragraph 1 of the IRC Code, depreciation or amortization consists of the losses of value that elements of fixed assets suffer resulting from their use, technical progress, or any other causes, then the useful life, in a fiscal sense, should be assessed by the period during which such losses of value would be justified based on the causes referred to in that article (use, technical progress, or otherwise).

At issue in this case are thus two opposing theses: the thesis invoked by TCA, according to which the useful life of the photovoltaic panels would be 25 years because this is the period referred to in the elements made available by the respective manufacturers of this type of equipment and which appear in the record; and the thesis of the Claimant – contained in the record and based on the facts related by the witnesses it called, according to which the 16-year period is that which, based on various factors, such as economic, legal, and the potential or expected use of the assets under regular conditions, most closely approaches the expected useful life for the asset in question.

In light of all that has been set forth above, it is the understanding of this Tribunal that, in light of the provision of tax law, TCA, in having considered a merely technical or technological utility of the photovoltaic panels, disconnecting it from the conditions of actual use by the Claimant in the specific case, departed from a criterion of reasonableness, as we have defined it in point 6.3, supra.

Such reasonableness must, therefore, respect the Law. Now, the first of the rules of the IRC Code that addressed depreciations – Article 28 – provided that depreciations derive from assets suffering losses of value resulting from and we cite: "their use, technical progress, or any other causes."

In this manner, the conditions of exploitation of the assets must influence their estimated useful life. It would be difficult to understand that, in such estimate, it would be otherwise.

Even the POC, which did not present an explicit definition of useful life, nevertheless established, in point 5.4.1 of the "Valuation Criteria," that and we cite: "when fixed assets have a limited useful life they are subject to systematic amortization during that period."

The accounting regulations in force at the date of the tax facts in question were clear about the need to allocate losses of value during the useful life.

Now "useful" means, again resorting to the Universal Dictionary of the Portuguese Language, Texto Publisher, Lisbon, 1995, something "profitable, advantageous." The same linguistic meaning should be adopted in an economic-legal context: that is, an asset will have a useful life to the extent it is economically profitable or advantageous. One can estimate a long technical life, but a shorter useful life.

This appears to be the case at issue.

Moreover, and clarifying this concept, accounting doctrine, at the time of the POC, was already consensual in the understanding that this useful life should take into account several aspects, as it was an estimate. Thus, J. Braz Machado, in Financial Accounting, Protocontas ed., 1998, p. 812, already stressed at the time that the useful life of an asset was influenced by such factors as:

• the use expected to be obtained from it;

• the intensity of use and the company's repair and maintenance policy;

• market or technological changes; and

• changes in the legal context that affect the actual expected use of the asset.

Having reached this point, it would not be necessary, on a level of strict legal reasoning, to invoke the rules of the ASS (Accounting Standardization System), in effect as of 2010, therefore not applicable at the date of the tax facts in question. What has already been said is deemed sufficient.

But since in this new accounting regime the concept of useful life was quite developed, it is worth referring to it, as a mere accessory or side element in support of the interpretation here defended.

As to the depreciations of certain tangible fixed assets, the accounting regulations contained in the ASS address them extensively in Accounting Standard and Financial Reporting Standard (ASRS) No. 7, designated "Tangible Fixed Assets."

To better illustrate what this regulation establishes regarding depreciations, some of its definitions and calculation rules are transcribed below.

Thus, in § 6 of ASRS 7 the following definitions appear:

"- Depreciation: is the systematic allocation of the depreciable amount of an asset during its useful life;

• Residual value: is the amount estimated that an entity would currently obtain from the disposal of an asset, after deduction of estimated disposal costs, if the asset had already reached the age and condition expected at the end of its useful life;

• Useful life is:

(a) The period during which an entity expects an asset to be available for use; or

(b) The number of units of production or similar that an entity expects to obtain from the asset.

In turn, §§ 56 and 57 of the same Standard establish:

"56 — The future economic benefits incorporated in an asset are consumed by an entity principally through its use. However, other factors, such as technical or commercial obsolescence and normal wear while an asset remains idle, often give rise to diminution of the economic benefits that could have been obtained from the asset. Consequently, all of the following factors are considered in determining the useful life of an asset:

(a) Expected use of the asset. Use is assessed by reference to the expected capacity or physical production of the asset;

(b) Normal expected wear, which depends on operational factors such as the number of shifts during which the asset will be used and the repair and maintenance program, and the care and maintenance of the asset while it is idle;

(c) Technical or commercial obsolescence arising from changes or improvements in production, or from a change in market demand for the service or product derived from the asset; and

(d) Legal or similar limits on the use of the asset, such as the expiration dates of leases related to it.

57 — The useful life of an asset is defined in terms of the expected utility of the asset to the entity. The asset management policy of the entity may involve the disposal of assets after a specified period or after consumption of a specified proportion of the future economic benefits incorporated in the asset. Therefore, the useful life of an asset may be shorter than its economic life. The estimate of the useful life of an asset is a matter of judgment based on the entity's experience with similar assets."

(Emphasis by the Tribunal)

Based on all that has been shown, the Tribunal considers that the criterion of reasonableness that TCA used is revealed to be unconvincingly founded.

Using a useful life "from the catalog," based on technical tests that assess a technologically efficient life, without taking into account the legal, economic, and financial conditions that a given entity faces in a given specific situation, represents a realization of the criterion of reasonableness that departs from what is inferred from the fiscal regulation, namely the IRC Code, specifically its Article 30, paragraph 2, and from RD 2/90, specifically its Article 5, paragraph 3, as we have seen, in the interpretation that the Tribunal makes of these regulations.

The useful life estimated by the Claimant has essentially to do with adequacy to economic conditions (regarding the period of sale of energy at a price that guarantees balanced operation of the activity) and market conditions (estimated residual value of zero after the 16-year period). This approach is more consonant with the legal provisions mentioned in this decision, more acceptable, and therefore more reasonable.

The proven factuality stands out here that the Claimant had a very specific period, legally contracted, for the sale of energy under profitable conditions. Upon expiration of that period, the panels will have no utility, in an economic-financial sense, although having it, admittedly, on a purely technical or technological level.

The relevance of economic conditions and the expectation that the residual value be negligible at the end of the useful life was invoked by the Claimant, and TCA neither refuted, either documentarily nor in witness testimony, sufficiently, such basis.

Additionally, in the understanding of this Tribunal, the conformity to the Law and to reason, which the criterion of reasonableness imposes on TCA, was also secondary to this in another aspect.

RD 2/90 does not define, it is true, the depreciation rate for photovoltaic panels. But in the various specific and generic rates of that Regulatory Decree, there are various values established for depreciation rates regarding productive equipment.

It is true that, for example, a hypothetical equipment for the production of shoes has nothing to do with equipment for the production of energy. But, restricting the rates therein provided for equipment for the production of "water, electricity and gas," we find rates such as 6.25%; 8.33% and 12.5%.

Seeking specifically for a 4% rate we only find it in equipment of the type of reservoirs and pipes which, as is known, have functions different from productive equipment, proper, such as those at issue in this case.

It is the understanding of this Tribunal, and this issue is central and decisive for the formation of its conviction, that it is not by virtue of an asset being characterized by a long period of technical or technological life that, necessarily, its useful life will also automatically extend.

The case of computers is illustrative in this regard. Its technical life today is certainly greater than it was 20 years ago, but its useful life (depending on economic aspects, obsolescence, etc.) will not accompany linearly the extension of its technical or technological life.

But there remains yet another reason for the Tribunal to understand that TCA did not apply the criterion of reasonableness in an appropriate manner.

Indeed, combining Articles 5 (Straight-Line Method) with Article 19 (Minimum Depreciation and Amortization Quotas) of RD 2/90, it is concluded that the rates established by TCA, by the criterion of reasonableness taking into account expected utility, function as maximum rates, thus implying a minimum fiscal life.

Now, in the case sub iudice, following TCA's position, the fiscal life would vary between 25 and 50 years. Either for reasons of comparability, or even due to reasons arising from some technical literature, such position also violates the reasonableness that TCA should observe.

As follows.

In the Inspection Report attached to the record (p. 12) it is stated:

"By amortizing the assets at a rate of 6.25%, the company is assuming an expected useful life period, for fiscal purposes, of 16 years. By consulting technical data available on the internet from the supplier of the equipment in question – UPSOLAR Co Ltd, as well as from C..., SA and D... - Electrical Remodeling, Ltd, it is verified that the expected useful life period is 25 years."

To which the Claimant argues that, being 25 years the maximum life, then 4% would be the minimum rate and 8% the maximum. Now, considering that the Claimant used the 6.25% rate, it would be within an interval of fiscally accepted values and no correction should be made.

In its Response, TCA states (respectively points 128 to 130):

"Following, in Article 78 of the p.i., the Claimant indicates the following: Indeed, in the scenario (referred to by the Inspection Services in the inspection report) in which the photovoltaic modules are assigned a maximum useful life period of 25 years, it would be possible for the challenger to practice annual amortizations at a rate between 4% and 8% (see Articles 3 and 19 paragraph 2 of Regulatory Decree 2/90 and 30 paragraph 6 of the IRC Code)."

It seems to us, with due respect, that the Claimant made an error on this point.

First, a 4% rate corresponds to a minimum useful life period, not a maximum useful life period."

That is, for TCA the minimum fiscal life would be 25 years (and the maximum would be 50 years).

The technical literature that the Tribunal consulted does in fact present 25 years as a reference point for the technical life for the type of assets at issue in this case.

In witness examination of the witness called by TCA, the latter stated the 25-year period as an "average value," which does not support TCA's position according to which 25 years would, in fact, be a minimum value, as is stated in its Response.

These perspectives also appear in excerpts from the specialized literature on this type of equipment that follow are transcribed.

See, in fact, the following position taken from K. Branker, M. J.M. Pathak, J. M. Pearce, "A Review of Solar Photovoltaic Levelized Cost of Electricity," Renewable & Sustainable Energy Reviews, 15, pp. 4470-4482 (2011):

"The finance-able life for a solar PV system is usually considered to be the manufacturer's guarantee period which is often 20 to 25 years. However, research has shown that the life of solar PV panels is well beyond 25 years; even for the older technologies, and current ones are likely to improve lifetime further. A 30 year lifetime or more is becoming expected." - (page 8)

Alexander Fromm, of the Fraunhofer Institute for Mechanics of Materials IWM, in Freiburg, emphasizes:

"Solar modules are exposed to many environmental influences that cause material to fatigue over the years. Researchers have developed a procedure to calculate effects of these influences over the long term. This allows reliable lifespan predictions.

People who invest in their own solar panels for the roof would like as a rule to profit from them over the long term -- but how long will this technology actually last for? While most manufacturers guarantee a lifetime of up to 25 years to their customers, the manufacturers themselves cannot make reliable predictions about the expected operating life. The modules must fulfill certain standards, of course, to be approved for operation. This involves exposing them in various trials to high temperatures and high mechanical loading. "However, the results only predict something about the robustness of a brand-new sample with respect to extreme, short-term loading. In contrast, aggregated effects that only appear over the course of time, such as material fatigue, are pertinent for the actual operating life."[10]

In turn, Allen Zielnik, in "PV Durability and Reliability Issues," Photovoltaics World Magazine, Nov/Dec 2009 - Volume 1 Issue 5, December 3, 2009, refers to the following:

"(…)There has been an evolution in the application of accelerated life testing (ALT) and accelerated environmental testing (AET) to the service life prediction (SLP) of photovoltaic modules and systems…(…) No test program can predict with 100% certainty that a module will properly perform in an environment for 25+ years (except for real-time 25 year testing, of course)."

Finally, consulting the Proposal by the Commission for the Reform of Green Tax Policy employed by the XIX Constitutional Government, the same pronounced itself on the depreciation rate that RD 25/2009 (which replaced RD 2/90) should contemplate in relation to photovoltaic panels, acknowledging its omission regarding this type of assets.

It is true that RD 25/2009 does not apply to the tax facts in question in this case, but the Tribunal considers it of great utility to mention the understanding endorsed by this commission of experts in a subject matter that, as we have seen, is not yet expressly regulated by the legislator.

In this manner, the Commission comes to recommend in its preliminary draft, which can be consulted at the following link[11] on page 110, a fiscal life of 12.5 years, as a minimum, up to 25 years, as a maximum, which would represent fiscal rates between 8% and 4%.

Reviewing the aforementioned preliminary draft, one notes the concern of this Commission, when, and we cite:

"It is generally considered that a photovoltaic system ceases to have interesting performance from an economic point of view (useful life) when its power falls below 80% of the initial power, even though depending on the type of system it may continue to be useful for the respective owner."

Suggesting that the Commission that "The rates to be used should follow technical reasonableness and economic efficiency."

(Emphasis by the Tribunal)

Also here it is seen that TCA acted badly when it seeks to establish a maximum rate of 4% and a minimum of 2%.

In sum, it is the understanding of this Tribunal that the fiscal useful life period established by TCA for the assets at issue in this case suffers from the defect of illegality, inasmuch as it finds no support in the applicable fiscal and accounting legislation, and as well in the very evidence produced in this case and in the international specialized literature on this subject.

It is true that the useful life of each generation of photovoltaic panels has been increasing, as technology dictates, but it does not necessarily follow therefrom, in the understanding of the Tribunal, that its economic utility, for a specific company, accompanies that technological life.

If the depreciation rate for this type of equipment were defined in law, all of this would be moot. However, as it is not, the criterion of reasonableness, moderation, or acceptability, implies that one take into account more than mere technical or technological utility and also attend to other factors, which moreover were expressed in the (then) Article 28, paragraph 1 of the IRC Code, which contained the general rule concerning fiscally accepted depreciations.

And, it being true that economic, financial, legal, and obsolescence constraints will make themselves felt in this type of equipment, in light of the economic activity developed, the useful life relevant for fiscal purposes will, as a rule, be shorter than the technical life.

There is still, however, a very relevant point that the Tribunal wishes to emphasize. This decision cannot be understood as giving support or sustaining that a given company, when faced with a fiscally depreciable asset for which no rate is provided in law, can use a useful life that flows from any business plan.

If, under such circumstances (absence of rate provided in law) a given company came to sustain that being, for example, two or five years the period provided for the exploitation of a given business, this would imply depreciation rates of assets of 50% or 20%, respectively, such would not, ipso facto, be a reasonable useful life, for the reasons set forth in this decision.

In the case sub iudice, the useful life that appears reasonable to the Tribunal is anchored in legal and financial factors (contract for the sale of energy at fixed prices), technological factors, and market factors (estimated residual value of zero at the end of that period). These facts were, moreover, deemed proven.

That is, the reasonableness of a useful life period resulting from economic, technical, or market factors will have to be assessed on a case-by-case basis, not flowing automatically from companies' projections or estimates. Such estimates must be anchored in bases or grounds that possess an appreciable degree of objectivity and controllability.

The Tribunal understands, thus, in obedience to the hermeneutical requirements of Article 9 of the Civil Code, combined with the provision of Article 11 of the GTL, that TCA did not correctly interpret the provision of paragraph 2 of Article 30 of the IRC Code, having, instead, determined the application to the specific case of a criterion that violates the interpretation for fiscal purposes that the Tribunal makes of the concepts of "reasonableness" and "expected utility," whereby the fiscal correction effected should be annulled, as illegal.

As regards the alleged violation of the constitutional principles of equality and taxation of actual profit, invoked by the Claimant, the examination of such issues is precluded by the declaration of illegality of the additional assessment act in question, by a substantive defect that prevents its re-edition or renewal.

As stated in the Commentary to the Code of Procedure in Administrative Courts, Almedina, 2005, by Mário Aroso de Almeida and Carlos Cadilha, in annotation to Article 95 of such statute, p. 483 (applicable by reference to Article 2, item c) of CPPT and Article 29, paragraph 1, items a) and c) of RJAT) "If the court ruled on the merits of the main claim, the jurisdictional power is barred as to a subsidiary or alternative claim; and, in the same terms, if the ruling adopted on one issue consumes or leaves prejudiced other aspects of the case that correlate with it."

In these terms, given the substantive interpretation espoused, the examination and consideration of the other defects attributed to the additional assessment act are precluded.

7. DECISION

In light of the foregoing, this Arbitral Tribunal decides:

• To grant the claim for declaration of illegality and annulment of the Corporate Income Tax assessment act identified in this case, and the consequent annulment of the express dismissal of the Administrative Appeal filed by the Claimant, with the legal consequences thereof.

The matter value is set at Euro 185,560.30, in accordance with the provisions of Articles 3, paragraph 2 of the Regulation of Costs in Tax Arbitration Proceedings (RCPAT), 97-A, paragraph 1, item a) of CPPT, and 306 of the Code of Civil Procedure (CPC).

The costs are set at Euro 3,672.00, pursuant to Article 22, paragraph 4 of RJAT and Table I attached to RCPAT, to be borne by the Tax and Customs Authority, in accordance with the provisions of Articles 12, paragraph 2 of RJAT and 4, paragraph 4 of RCPAT.

Let notification be made.

Lisbon, September 18, 2014

The Collective Tribunal,

Jorge Lino Ribeiro Alves de Sousa (President)

Henrique Nogueira Nunes

António Martins

Text prepared by computer in accordance with Article 131, paragraph 5 of the Code of Civil Procedure, applicable by reference to Article 29, paragraph 1, item e) of Decree-Law No. 10/2011, of January 20.

The drafting of this arbitral decision is governed by the orthography prior to the Orthographic Agreement of 1990.

[1] In Table I (Specific Rates); Division V (Electricity, gas and water), of Group I (Production, transport and distribution of electrical energy).

[2] The 25-year period

[3] Document No. 6 attached by the Claimant with its initial petition

[4] As the case under examination pertains to the 2009 tax year, in which the Official Accounting Plan (OAP) still applied but there was a transition to the Accounting Standardization System (ASS), we shall use, when the sense is equivalent, terms from the ASS and the OAP. Thus, for example, depreciations and amortizations shall be used terms in an identical sense. The same regarding costs and expenses.

[5] Hereinafter, and unless otherwise indicated, the rules invoked are those of the IRC Code in effect in 2009, applicable on the date of the tax facts being analyzed in this case.

[6] Cf. Manual of Tax Law, 3rd Edition, Coimbra Publisher, 2007, p. 135.

[7] Cf. Manual of Tax Law, Almedina, 2011, p. 307.

[8] See Oliveira Ascensão, "Interpretation of Laws. Integration of Gaps. Application of the Principle of Analogy," in Journal of the Bar Association, Year 57 – III, Lisbon, December 1997, pp. 913-941.

[9] Rui Morais, in Annotations to IRC, Coimbra, Almedina, 2007, pp. 110-111

[10] http://www.sciencedaily.com/releases/2013/10/131022091622.htm

[11] http://www.portugal.gov.pt/media/1475725/20140709 Anteprojecto Reforma fiscalidade verde.pdf